THE LIFECHOICE FUNDS
ANNUAL
REPORT
OCTOBER 31,
1999
LOGO (R)
Victory Funds
<PAGE>
Victory Funds
Risk/Reward Investment Spectrum
The Victory Funds offer a combined total of 32 money market, fixed income,
specialty and equity mutual funds for individuals and institutions.
LOW REWARD HIGH
Money Market
Ohio Municipal Money Market
Tax-Free Money Market
Institutional Money Market
Financial Reserves
Prime Obligations
Gradison Government Reserves
Federal Money Market
U.S. Government Obligations
Income
Taxable
Investment Quality Bond
Government Mortgage
Fund for Income
Intermediate Income
Limited Term Income
Tax-Free
Ohio Municipal Bond
New York Tax-Free
National Municipal Bond
Specialty
Real Estate Investment
Convertible Securities
Balanced
LifeChoice Growth Investor
LifeChoice Moderate Investor
LifeChoice Conservative Investor
Growth/Equity
International Growth
Small Co. Opportunity
Ohio Regional Stock
Special Value
Growth
Stock Index
Diversified Stock
Established Value
Lakefront
Value
LOW RISK HIGH
Source: Investment Product Group, Key Asset Management.
This report is authorized for distribution only when preceded or accompanied
by a current prospectus for the LifeChoice Funds. For more complete
information including a prospectus, which includes fees and ongoing expenses,
please call 1-800-539-FUND.(R) Please read it carefully before investing or
sending money.
<PAGE>
TABLE OF CONTENTS
Letter to our Shareholders 2
1999 Annual Report Commentary 3
Financial Statements
Schedules of Investments 5
Statements of Assets and Liabilities 8
Statements of Operations 9
Statements of Changes in Net Assets 10
Financial Highlights 11
Notes to Financial Statements 12
Report of Independent Accountants 16
NOT FDIC INSURED
Shares of the Victory Funds are not insured by the FDIC, are not deposits or
other obligations of, or guaranteed by, any KeyCorp bank, Key Asset Management
Inc., or their affiliates, and are subject to investment risks, including
possible loss of the principal amount invested.
Year 2000 Issues. Like all mutual funds, the Funds could be adversely
affected if the computer systems used by its service providers, including
shareholder servicing agents, are unable to recognize dates after 1999. The
risk of such a computer failure may be greater as it relates to investments
in foreign countries. The Funds' service providers have been actively
updating their systems to be able to process Year 2000 data. There can be no
assurance, however, that these steps will be adequate to avoid a temporary
service disruption or other adverse impact on the Funds. In addition, an
issuer's failure to process accurately Year 2000 data may cause that issuer's
securities to decline in value or delay the payment of interest to the Funds.
Key Asset Management Inc. (KAM), a subsidiary of KeyCorp, is the investment
adviser to The Victory Funds. The Victory Funds are sponsored and distributed
by BISYS Fund Services, which is not affiliated with KeyCorp or its
subsidiaries. KAM receives a fee for its services from The Victory Funds.
This report is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus for the Victory
LifeChoice Funds.
LOGO (R)
Victory Funds
1-800-539-FUND (R)
(1-800-539-3863)
1
<PAGE>
Letter to our Shareholders
On behalf of Victory Funds, thank you for your continued support and
confidence in using Victory Funds to help realize your investment goals! I am
pleased to present the Victory LifeChoice Funds' Annual Report for the period
ended October 31, 1999. I hope you find this report useful, easy to read, and
a valuable tool.
At Victory Funds, we recognize that you, our valued shareholder, are the key
to our continued success. Your ongoing investor confidence has enabled the
Funds, as a whole, to grow year-after-year. Victory Funds are now 32 mutual
funds strong with more than $18 billion in assets under management.
Because we believe that an informed investor is the best investor, I thought
it was important to share with you "What Makes Victory Funds Different?" I am
confident that after you review the following points of interest you will be
further reassured of your investment in Victory Funds and in a better
position to share the Victory story with your family, friends, and business
associates. So, "What Makes Victory Funds Different?"
Truth in Labeling. It's the essence of Victory Funds. Our portfolio managers
and teams are known for adhering to a fund's investment style and objective.
In simple terms, "we stick to our knitting."
A Disciplined Investment Process. Key Asset Management, the adviser to
Victory Funds, draws from over 100 years of investment management experience
and employs a structured and disciplined process of selecting securities for
Victory portfolios.
Team Approach to Investment Management. A knowledgeable team of investment
professionals backs the portfolio management of each Victory Fund. Although
each Victory Fund features one or two portfolio managers, you benefit from a
number of talented investment minds supporting their efforts.
Guidance. Victory strives to make sure you have the information you need to
make the best investment decisions. The guidance available through investment
consultants, "www.victoryfunds.com," our educational materials, and Victory
Funds Service Center (1-800-539-FUND) all come together for one purpose --
our shareholders.
Performance. The bottom-line -- results. At Victory Funds, we strive for
optimal investment returns at reasonable risk levels. We are committed to
managing the risk/return equation for Victory shareholders.
Again, thank you for choosing the Victory Funds to help you realize your
financial goals and, as always, we welcome your comments on this report.
/s/ Leigh A. Wilson
Leigh A. Wilson
President
Victory Funds
2
<PAGE>
1999 Portfolio Manager Commentary
For the period November 1, 1998 through October 31, 1999, the equity market
was again dominated by growth investing over the value style and by larger
stocks over smaller company stocks. The growth/value gap was widest with mid
sized stocks where the S&P 400 Mid-Cap Growth posted a hefty 40.39% gain
versus a measly 4.00% increase for the S&P 400 Mid-Cap Value Index. The
variance between large and small stocks can be seen by comparing the S&P 500
25.66% versus the Russell 2000 14.87%. Foreign equities were less volatile
for investors, with the MSCI All Country World Index posting positive figures
for each quarter and a 12-month return of 25.26%. The convertible securities
market had another above-average year, with the Lipper Convertible Securities
Fund Index up 20%. Unfortunately Real Estate continued to underperform, with
the Morgan Stanley REIT Index down 6.26% for the year. Rounding out the major
asset classes, bonds had a rough 12 months, with the Lehman Aggregate Bond
Index posting an unimpressive 0.53% increase.
Within the complex and sometimes confusing investment world, the Victory
LifeChoice Funds are designed to provide diversified, total portfolio
solutions with exposure to all major asset classes and to different
investment styles. During fiscal year 1999, the Conservative Investor Fund
8.24% at NAV crushed the performance of the Lehman Aggregate Bond Index 0.53%
and, as expected, came in short of the average balanced fund. The Moderate
Investor Fund 12.42% ended the fiscal year just shy of the Lipper Balanced
Fund Index 12.56%. And the more-aggressive Growth Investor Fund 15.33% was
well ahead of the Lipper Balanced Fund Index while, as expected, trailing the
S&P 500 Index 25.66%.
The LifeChoice Funds each performed as expected against the Lipper
Balanced Index and differences in performance can be traced to a few key
areas. Our allocation decisions were made with the long-term investor in mind
and with a close eye to the over-valued areas in the equity markets. Keeping
in line with the conservative nature of the product, the portfolios continued
to be overweight in value funds with respect to growth funds. The LifeChoice
Funds use real estate and convertible positions as fixed income substitutes
and, while slightly underperforming the Lehman Aggregate Bond Index, our
Victory Real Estate Investment Fund turned in a relatively strong performance
in an asset class that was otherwise negative. The 12-month return on the
Victory REIT Fund, at 0.03% at NAV, was more than 6% ahead of the Morgan
Stanley REIT Index at -6.26%. Our Victory Convertible Securities Fund, which
came in behind the Lipper Convertible Securities Fund Index, still made a
substantial contribution to our fixed income allocations, outperforming the
Lehman Aggregate Bond Index by over 12%.
The LifeChoice Investment Committee, led by Key Asset Management's Chief
Investment Officer, Tony Aveni and Chief Market Strategist, Charlie Crane,
maintains a long-term approach, with an emphasis on true asset allocation. In
fiscal year 2000 we expect to realize more modest returns from the stock
market. We continue to believe that the dominance of large equities will soon
run its course and think that mid-cap and smaller stocks are poised to
deliver better returns. Finally, a continued slight over-weight in bonds
appears to be a favorable position. In general we believe that a diversified,
asset allocation approach to portfolio management will properly position our
Funds to take advantage of the best, while minimizing the worst areas of the
market next year.
S&P 400 Mid-Cap Value is constructed by dividing the stocks in the S&P
Mid-Cap Index according to the price-to-book ratio. The lower ratios are in
the Value index.
S&P 400 Mid-Cap Growth is constructed by dividing the stocks in the S&P
Mid-Cap Index according to the price-to-book ratio. The higher ratios are in
the Growth index.
Russell 2000 measures the performance of the 2000 smallest companies of
the Russell 3000, which represents approximately 10% of the total market
capitalization of the Russell 3000. The median market cap is $394.6 million.
MSCI All Country World ex USA: Total return represent both the developed
and the emerging equity markets calculated with gross dividends reinvested.
Lipper Convertible Securities Fund Index invests its portfolio primarily
in convertible bonds and convertible preferred shares. Lipper Mutual Fund
Indices are equally weighted and composed of the largest mutual funds within
their respective investment objectives, adjusted for the reinvestment of
capital gains distributions and income dividends.
The Morgan Stanley REIT Index (MSREIT 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. The index was developed with a base value of 200 as of
December 31, 1994.
The Lipper Balanced Fund Index is a non-weighted index of the 30 largest
funds within the Lipper Balanced Fund (Lipper Balanced) investment category.
The Lehman Brothers Aggregate Bond Index (Lehman Aggregate) is a
broad-based unmanaged index that represents the general performance of
longer-term (greater than 1 year), investment-grade fixed-income securities.
The Standard & Poor's 500 Stock Index (S&P 500) is a broad-based
unmanaged index that represents the general performance of domestically
traded common stocks of mid- to large-size companies.
An investor cannot invest directly in an index.
3
<PAGE>
LifeChoice Conservative Investor Fund
Total Return
As of 10/31/99
One Year 8.24%
Since Inception 12/31/96 7.76%
Conservative S&P500 Lehman Aggregate
Dec-1996 10000 10000 10000
Jan-1997 10110 10613.16 10030.65
Feb-1997 10110 10676.07 10055.6
Mar-1997 9939.4 10221.12 9944.17
Apr-1997 10090.76 10818.09 10093.03
May-1997 10433.85 11455.02 10188.44
Jun-1997 10675.7 11949.12 10309.37
Jul-1997 11092.56 12882.92 10587.38
Aug-1997 10919.71 12142.85 10497.08
Sep-1997 11285.81 12788.28 10651.89
Oct-1997 11121.8 12347.37 10806.42
Nov-1997 11162.81 12897.9 10856.18
Dec-1997 11270.81 13100.81 10965.48
Jan-1998 11333.13 13233.78 11106.26
Feb-1998 11623.99 14166.09 11097.9
Mar-1998 11904.59 14873.63 11136.03
Apr-1998 11967.3 15008.63 11194.16
May-1998 11831.43 14726.07 11300.34
Jun-1998 11925.27 15306.84 11396.18
Jul-1998 11724.76 15129.86 11420.42
Aug-1998 10901.6 12923.28 11606.28
Sep-1998 11205.09 13730.31 11878.06
Oct-1998 11418.12 14832.05 11815.25
Nov-1998 11737.66 15709.01 11882.31
Dec-1998 11998.89 16594.61 11918.04
Jan-1999 12088.27 17275.14 12003.1
Feb-1999 11797.79 16717.46 11793.56
Mar-1999 11992.62 17366 11858.92
Apr-1999 12419.72 18024.93 11896.49
May-1999 12329.81 17574.71 11792.29
Jun-1999 12537.88 18531.59 11754.72
Jul-1999 12390.38 17937.72 11704.67
Aug-1999 12288.26 17825.54 11698.72
Sep-1999 12153.1 17316.59 11834.53
Oct-1999 12359.47 18399.56 11878.2
Past performance is not predictive of future results.
LifeChoice Moderate Investor Fund
Total Return
As of 10/31/99
One Year 12.42%
Since Inception 12/31/96 9.36%
Moderate S&P500 Lehman Aggregate
Dec-1996 10000 10000 10000
Jan-1997 10140 10613.16 10030.65
Feb-1997 10250 10676.07 10055.6
Mar-1997 9952.93 10221.12 9944.17
Apr-1997 10093.54 10818.09 10093.03
May-1997 10575.62 11455.02 10188.44
Jun-1997 10877.2 11949.12 10309.37
Jul-1997 11352.32 12882.92 10587.38
Aug-1997 11129.92 12142.85 10497.08
Sep-1997 11618.89 12788.28 10651.89
Oct-1997 11324.35 12347.37 10806.42
Nov-1997 11364.98 12897.9 10856.18
Dec-1997 11482.66 13100.81 10965.48
Jan-1998 11513.58 13233.78 11106.26
Feb-1998 11977.42 14166.09 11097.9
Mar-1998 12354.25 14873.63 11136.03
Apr-1998 12447.37 15008.63 11194.16
May-1998 12199.04 14726.07 11300.34
Jun-1998 12307.84 15306.84 11396.18
Jul-1998 11995.45 15129.86 11420.42
Aug-1998 10704.28 12923.28 11606.28
Sep-1998 11063.44 13730.31 11878.06
Oct-1998 11461.55 14832.05 11815.25
Nov-1998 11922.53 15709.01 11882.31
Dec-1998 12382.08 16594.61 11918.04
Jan-1999 12447.31 17275.14 12003.1
Feb-1999 12034.21 16717.46 11793.56
Mar-1999 12253.19 17366 11858.92
Apr-1999 12733.28 18024.93 11896.49
May-1999 12645.99 17574.71 11792.29
Jun-1999 13029.44 18531.59 11754.72
Jul-1999 12875.76 17937.72 11704.67
Aug-1999 12755.02 17825.54 11698.72
Sep-1999 12564.26 17316.59 11834.53
Oct-1999 12884.72 18399.56 11878.2
Past performance is not predictive of future results.
LifeChoice Growth Investor Fund
Total Return
As of 10/31/99
One Year 15.33%
Since Inception 12/31/96 10.84%
Growth S&P500 Lehman Aggregate
Dec-1996 10000 10000 10000
Jan-1997 10200 10613.16 10030.65
Feb-1997 10170 10676.07 10055.6
Mar-1997 9918.15 10221.12 9944.17
Apr-1997 10108.88 10818.09 10093.03
May-1997 10741.31 11455.02 10188.44
Jun-1997 11105.41 11949.12 10309.37
Jul-1997 11608.83 12882.92 10587.38
Aug-1997 11347.05 12142.85 10497.08
Sep-1997 11951.04 12788.28 10651.89
Oct-1997 11496.82 12347.37 10806.42
Nov-1997 11547.28 12897.9 10856.18
Dec-1997 11690.57 13100.81 10965.48
Jan-1998 11670 13233.78 11106.26
Feb-1998 12307.48 14166.09 11097.9
Mar-1998 12794.98 14873.63 11136.03
Apr-1998 12908.31 15008.63 11194.16
May-1998 12568.34 14726.07 11300.34
Jun-1998 12684.47 15306.84 11396.18
Jul-1998 12322.65 15129.86 11420.42
Aug-1998 10678.94 12923.28 11606.28
Sep-1998 11083.73 13730.31 11878.06
Oct-1998 11607.54 14832.05 11815.25
Nov-1998 12141.82 15709.01 11882.31
Dec-1998 12719.55 16594.61 11918.04
Jan-1999 12730.44 17275.14 12003.1
Feb-1999 12229.5 16717.46 11793.56
Mar-1999 12472.04 17366 11858.92
Apr-1999 13050.36 18024.93 11896.49
May-1999 12952.15 17574.71 11792.29
Jun-1999 13472.46 18531.59 11754.72
Jul-1999 13319.24 17937.72 11704.67
Aug-1999 13176.96 17825.54 11698.72
Sep-1999 12925.48 17316.59 11834.53
Oct-1999 13386.72 18399.56 11878.2
Past performance is not predictive of future results.
Graphs reflect investment growth of a $10,000 investment, since inception.
Total returns for more than one year are average total returns.
The Lehman Brothers Aggregate Bond Index (Lehman Aggregate) is a broad-based
unmanaged index that represents the general performance of longer-term
(greater than 1 year), investment-grade fixed-income securities.
The Standard & Poor's 500 Stock Index (S&P 500) is a broad-based unmanaged
index that represents the general performance of domestically traded common
stocks of mid- to large-size companies.
The total return figures set forth above may reflect the waiver of a portion
of certain fees for various periods since the Fund's inception date. In such
instances and without such waiver of fees, the total returns would have been
lower. Fee waivers are voluntary and may be modified or terminated at any
time.
4
<PAGE>
THE VICTORY PORTFOLIOS Schedule of Investments
LifeChoice Conservative Investor Fund October 31, 1999
(Amounts in Thousands, Except Shares)
Market
Security Description Shares Value
Mutual Funds (100.1%)
Equity Funds (32.7%):
Victory Value Fund 27,906 $ 526
Victory Diversified Stock Fund, Class A 31,573 566
Victory Special Value Fund, Class A 19,674 258
INVESCO Dynamics Fund (b) 10,506 225
Neuberger Berman Genesis Fund 8,868 121
Victory Small Company Opportunity Fund, Class A 5,820 123
Victory International Growth Fund, Class A (b) 22,475 370
2,189
Fixed Income/Specialty Funds (62.9%):
Victory Real Estate Investment Fund 38,711 375
Victory Convertible Securities Fund 75,719 984
Loomis Sayles Bond Fund, Institutional Class 61,479 705
Victory Investment Quality Bond Fund 99,705 933
Victory Intermediate Income Fund 57,362 535
Victory Fund For Income, Class A 36,847 471
Victory Government Mortgage Fund 19,100 203
4,206
Money Market Funds (4.5%):
Victory Financial Reserves Fund 298,526 299
Total Mutual Funds (Cost $6,703) 6,694
Total Investments (Cost $6,703) (a) -- 100.1% 6,694
Liabilities in excess of other assets -- (0.1)% (8)
TOTAL NET ASSETS -- 100.0% $6,686
(a) Represents cost for financial reporting purposes and differs from cost
basis for federal income tax purposes by the amount of losses recognized for
financial reporting purposes in excess of federal income tax reporting of
approximately $170. Cost for federal income tax purposes differs from value
by net unrealized depreciation of securities as follows (amounts in
thousands):
Unrealized appreciation $ 71
Unrealized depreciation (250)
Net unrealized depreciation $(179)
(b) Non-income producing securities.
See notes to financial statements.
5
<PAGE>
THE VICTORY PORTFOLIOS Schedule of Investments
LifeChoice Moderate Investor Fund October 31, 1999
(Amounts in Thousands, Except Shares)
Market
Security Description Shares Value
Mutual Funds (100.0%)
Equity Funds (53.1%):
Victory Value Fund 130,513 $ 2,459
Victory Diversified Stock Fund, Class A 156,925 2,819
Victory Special Value Fund, Class A 82,887 1,085
INVESCO Dynamics Fund (b) 71,108 1,523
Neuberger Berman Genesis Fund 76,883 1,047
Victory Small Company Opportunity Fund, Class A 29,107 614
Victory International Growth Fund, Class A (b) 155,514 2,567
12,114
Fixed Income/Specialty Funds (43.7%):
Victory Real Estate Investment Fund 132,366 1,284
Victory Convertible Securities Fund 190,831 2,479
Loomis Sayles Bond Fund, Institutional Class 94,242 1,081
Victory Investment Quality Bond Fund 273,148 2,557
Victory Intermediate Income Fund 175,385 1,635
Victory Fund For Income, Class A 17,688 226
Victory Government Mortgage Fund 66,361 704
9,966
Money Market Funds (3.2%):
Victory Financial Reserves Fund 720,429 720
Total Mutual Funds (Cost $22,327) 22,800
Total Investments (Cost $22,327) (a) -- 100.0% 22,800
Liabilities in excess of other assets -- 0.0% (2)
TOTAL NET ASSETS -- 100.0% $22,798
(a) Represents cost for financial reporting purposes and differs from cost
basis for federal income tax purposes by the amount of losses recognized for
financial reporting purposes in excess of federal income tax reporting of
approximately $265. Cost for federal income tax purposes differs from value
by net unrealized appreciation of securities as follows (amounts in
thousands):
Unrealized appreciation $ 621
Unrealized depreciation (413)
Net unrealized appreciation $ 208
(b) Non-income producing securities.
See notes to financial statements.
6
<PAGE>
THE VICTORY PORTFOLIOS Schedule of Investments
LifeChoice Growth Investor Fund October 31, 1999
(Amounts in Thousands, Except Shares)
Market
Security Description Shares Value
Mutual Funds (100.0%)
Equity Funds (74.8%):
Victory Value Fund 115,577 $ 2,177
Victory Diversified Stock Fund, Class A 134,537 2,417
Victory Special Value Fund, Class A 80,204 1,050
INVESCO Dynamics Fund (b) 65,909 1,412
Neuberger Berman Genesis Fund 64,189 874
Victory Small Company Opportunity Fund, Class A 40,692 858
Victory International Growth Fund, Class A (b) 197,719 3,264
12,052
Fixed Income/Specialty Funds (21.4%):
Victory Real Estate Investment Fund 94,404 916
Victory Convertible Securities Fund 72,104 937
Loomis Sayles Bond Fund, Institutional Class 26,882 308
Victory Investment Quality Bond Fund 138,159 1,293
3,454
Money Market Funds (3.8%):
Victory Financial Reserves Fund 612,383 612
Total Mutual Funds (Cost $15,545) 16,118
Total Investments (Cost $15,545) (a) -- 100.0% 16,118
Liabilities in excess of other assets -- 0.0% (4)
TOTAL NET ASSETS -- 100.0% $16,114
(a) Represents cost for financial reporting purposes and differs from cost
basis for federal income tax purposes by the amount of losses recognized for
financial reporting purposes in excess of federal income tax reporting of
approximately $234. Cost for federal income tax purposes differs from value
by net unrealized appreciation of securities as follows (amounts in
thousands):
Unrealized appreciation $ 619
Unrealized depreciation (280)
Net unrealized appreciation $ 339
(b) Non-income producing securities.
See notes to financial statements.
7
<PAGE>
THE VICTORY PORTFOLIOS Statements of Assets and Liabilities
LifeChoice Funds October 31, 1999
(Amounts in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
LifeChoice LifeChoice LifeChoice
Conservative Moderate Growth
Investor Fund Investor Fund Investor Fund
<S> <C> <C> <C>
ASSETS:
Investments, at value (Cost $6,703; $22,327 & $15,545) $6,694 $22,800 $16,118
Dividends receivable 1 3 2
Receivable from affiliates 9 13 13
Receivable for capital shares issued 1 1 3
Unamortized organization costs 21 21 21
Prepaid expenses and other assets 3 4 2
Total Assets 6,729 22,842 16,159
LIABILITIES:
Payable for organization costs 21 21 21
Accrued expenses and other payables:
Investment advisory fees 1 2 1
Transfer agent fees 3 3 5
Other 18 18 18
Total Liabilities 43 44 45
NET ASSETS:
Capital 6,778 21,789 15,079
Undistributed net investment income 27 48 12
Net unrealized appreciation/depreciation from investments (9) 473 573
Accumulated undistributed net realized gains (losses)
from investment transactions (110) 488 450
Net Assets $6,686 $22,798 $16,114
Outstanding units of beneficial interest (shares) 620 1,956 1,322
Net asset value
Redemption price per share $10.78 $ 11.66 $ 12.19
Maximum sales charge 5.75% 5.75% 5.75%
Maximum offering price per share (100%/(100%-maximum sales
charge) of net asset value adjusted to nearest cent) $11.44 $ 12.37 $ 12.93
</TABLE>
See notes to financial statements.
8
<PAGE>
THE VICTORY PORTFOLIOS Statements of Operations
LifeChoice Funds For the Year Ended October 31, 1999
(Amounts in Thousands)
<TABLE>
<CAPTION>
LifeChoice LifeChoice LifeChoice
Conservative Moderate Growth
Investor Fund Investor Fund Investor Fund
<S> <C> <C> <C>
Investment Income:
Dividend income $327 $ 625 $ 227
Total Income 327 625 227
Expenses:
Investment advisory fees 16 46 30
Administration fees 12 12 12
Accounting fees 42 42 38
Custodian fees 1 2 2
Legal and audit fees 5 9 7
Amortization of organization costs 10 10 10
Transfer agent fees 10 14 20
Registration and filing fees 16 20 18
Printing fees 2 5 11
Other 1 2 3
Total Expenses 115 162 151
Expenses voluntarily reduced (8) (23) (15)
Expenses before reimbursement from distributor 107 139 136
Expenses reimbursed (92) (93) (106)
Net Expenses 15 46 30
Net Investment Income 312 579 197
Realized/Unrealized Gains (Losses) from Investments:
Net realized gains (losses) from investment transactions (13) 499 463
Change in unrealized appreciation/depreciation from investments 315 1,379 1,220
Net realized/unrealized gains from investments: 302 1,878 1,683
Change in net assets resulting from operations $614 $2,457 $1,880
</TABLE>
See notes to financial statements.
9
<PAGE>
THE VICTORY PORTFOLIOS
LifeChoice Funds Statements of Changes in Net Assets
(Amounts in Thousands)
<TABLE>
<CAPTION>
LifeChoice LifeChoice
Conservative Moderate
Investor Fund Investor Fund
Eleven Eleven
Year Months Period Year Months Period
Ended Ended Ended Ended Ended Ended
October 31, October 31, November 30, October 31, October 31, November 30,
1999 1998<F1> 1997<F3> 1999 1998<F2> 1997<F3>
<S> <C> <C> <C> <C> <C> <C>
From Investment Activities:
Operations:
Net investment income $ 312 $ 254 $ 76 $ 579 $ 289 $ 86
Net realized gains/(losses)
from investment transactions (13) 92 95 499 457 137
Net change in unrealized
appreciation/depreciation
from investments 315 (223) (101) 1,379 (1,156) 250
Change in net assets resulting
from operations 614 123 70 2,457 (410) 473
Distributions to Shareholders:
From net investment income (411) (277) (31) (676) (283) (62)
From net realized gains from
investment transactions (162) (22) -- (434) (60) --
Change in net assets from
distributions to shareholders (573) (299) (31) (1,110) (343) (62)
Capital Transactions:
Proceeds from shares issued 2,737 3,682 9,405 11,834 14,522 8,443
Dividends reinvested 573 299 30 1,110 342 60
Cost of shares redeemed (4,298) (5,309) (337) (10,621) (2,711) (1,186)
Change in net assets from
capital transactions (988) (1,328) 9,098 2,323 12,153 7,317
Change in net assets (947) (1,504) 9,137 3,670 11,400 7,728
Net Assets:
Beginning of period 7,633 9,137 -- 19,128 7,728 --
End of period $ 6,686 $ 7,633 $9,137 $ 22,798 $19,128 $ 7,728
Share Transactions:
Issued 251 330 867 1,032 1,266 796
Reinvested 53 28 3 98 31 5
Redeemed (396) (485) (31) (923) (239) (110)
Change in shares (92) (127) 839 207 1,058 691
<FN>
<F1> Effective March 23,1998, the KeyChoice Income & Growth Fund became the Victory LifeChoice Conservative
Investor Fund. Changes in net assets prior to March 23, 1998 represent the KeyChoice Income & Growth Fund
<F2> Effective March 23, 1998, the KeyChoice Moderate Growth Fund became the Victory LifeChoice Moderate
Investor Fund. Changes in net assets prior to March 23, 1998 represent the KeyChoice Moderate Growth Fund
<F3> For the period December 31, 1996 (commencement of operations) through November 30, 1997.
</FN>
</TABLE>
<TABLE>
<CAPTION>
LifeChoice
Growth
Investor Fund
Eleven
Year Months Period
Ended Ended Ended
October 31, October 31, November 30,
1999 1998<F1> 1997<F2>
<S> <C> <C> <C>
From Investment Activities:
Operations:
Net investment income $ 197 $ 110 $ 25
Net realized gains/(losses)
from investment transactions 463 368 291
Net change in unrealized
appreciation/depreciation
from investments 1,220 (646) (1)
Change in net assets resulting
from operations 1,880 (168) 315
Distributions to Shareholders:
From net investment income (295) (117) (19)
From net realized gains from
investment transactions (338) (227) --
Change in net assets from
distributions to shareholders (633) (344) (19)
Capital Transactions:
Proceeds from shares issued 7,578 6,322 9,564
Dividends reinvested 633 340 19
Cost of shares redeemed (5,362) (1,647) (2,364)
Change in net assets from
capital transactions 2,849 5,015 7,219
Change in net assets 4,096 4,503 7,515
Net Assets:
Beginning of period 12,018 7,515 --
End of period $16,114 $12,018 $ 7,515
Share Transactions:
Issued 635 536 863
Reinvested 55 31 2
Redeemed (452) (139) (207)
Change in shares 238 428 658
<FN>
<F1> Effective March 23, 1998, the KeyChoice Growth Fund became the Victory LifeChoice Growth
Investor Fund. Changes in net assets prior to March 23, 1998 represent the KeyChoice Growth Fund
<F2> For the period December 31, 1996 (commencement of operations) through November 30, 1997.
</FN>
</TABLE>
See notes to financial statements.
10
<PAGE>
THE VICTORY PORTFOLIOS
LifeChoice Funds Financial Highlights
For a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
LifeChoice LifeChoice
Conservative Moderate
Investor Fund Investor Fund
Year Period Period Year Period Period
Ended Ended Ended Ended Ended Ended
October 31, October 31, November 30, October 31, October 31, November 30,
1999 1998<F3> 1997<F2> 1999 1998<F4> 1997<F2>
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $10.72 $10.89 $10.00 $ 10.94 $ 11.19 $10.00
Investment Activities
Net investment income 0.45 0.37 0.31 0.30 0.24 0.20
Net realized and
unrealized gains (losses)
from investments 0.41 (0.12) 0.84<F7> 1.03 (0.14) 1.16
Total from
Investment Activities 0.86 0.25 1.15 1.33 0.10 1.36
Distributions
Net investment income (0.58) (0.39) (0.26) (0.36) (0.26) (0.17)
Net realized gains (0.22) (0.03) -- (0.25) (0.09) --
Total Distributions (0.80) (0.42) (0.26) (0.61) (0.35) (0.17)
Net Asset Value,
End of Period $10.78 $10.72 $10.89 $ 11.66 $ 10.94 $11.19
Total Return 8.24% 2.29%<F5> 11.62%<F5> 12.42% 0.90%<F5> 13.64%<F5>
Ratios/Supplementary Data:
Net Assets at end of
period (000) $6,686 $7,633 $9,137 $22,798 $19,128 $7,728
Ratio of expenses to average
net assets 0.19% 0.23%<F6> 0.29%<F6> 0.20% 0.22%<F6> 0.27%<F6>
Ratio of net investment income
to average net assets 3.97% 3.72%<F6> 3.41%<F6> 2.53% 2.32%<F6> 2.26%<F6>
Ratio of expenses to average
net assets<F1> 1.46% 1.50%<F6> 5.18%<F6> 0.71% 0.93%<F6> 3.32%<F6>
Ratio of net investment income
to average net assets<F1> 2.70% 2.45%<F6> (1.48)%<F6> 2.02% 1.61%<F6> (.79)%<F6>
Portfolio Turnover 57% 78% 19% 69% 42% 50%
<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> For the period December 31, 1996 (commencement of operations) through
November 30, 1997.
<F3> Effective March 23, 1998, the KeyChoice Income & Growth Fund became the
Victory LifeChoice Conservative Investor Fund. Financial highlights prior to
March 23, 1998 represent the KeyChoice Income & Growth Fund.
<F4> Effective March 23, 1998, the KeyChoice Moderate Growth Fund became the
Victory LifeChoice Moderate Investor Fund. Financial highlights prior to
March 23, 1998 represent the KeyChoice Moderate Growth Fund.
<F5> Not annualized.
<F6> Annualized.
<F7> The amount shown for a share outstanding throughout the period does not
accord with the change in the aggregate gains and losses in the portfolio of
securities during the period because of the timing of sales and purchases of
fund shares in relation to fluctuating market values during the period.
</FN>
</TABLE>
<TABLE>
<CAPTION>
LifeChoice
Growth
Investor Fund
Year Period Period
Ended Ended Ended
October 31, October 31, November 30,
1999 1998<F3> 1997<F2>
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 11.08 $ 11.44 $10.00
Investment Activities
Net investment income 0.16 0.13 0.11
Net realized and
unrealized gains (losses)
from investments 1.51 (0.07) 1.43
Total from
Investment Activities 1.67 0.06 1.54
Distributions
Net investment income (0.25) (0.14) (0.10)
Net realized gains (0.31) (0.28) --
Total Distributions (0.56) (0.42) (0.10)
Net Asset Value,
End of Period $ 12.19 $ 11.08 $11.44
Total Return 15.33% 0.52%<F4> 15.46%<F4>
Ratios/Supplementary Data:
Net Assets at end of
period (000) $16,114 $12,018 $7,515
Ratio of expenses to average
net assets 0.20% 0.23%<F5> 0.30%<F5>
Ratio of net investment income
to average net assets 1.31% 1.19%<F5> 0.81%<F5>
Ratio of expenses to average
net assets<F1> 1.01% 1.16%<F5> 3.67%<F5>
Ratio of net investment income
to average net assets<F1> 0.50% 0.26%<F5> (2.56)%<F5>
Portfolio Turnover 52% 30% 106%
<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> For the period December 31, 1996 (commencement of operations) through
November 30, 1997.
<F3> Effective March 23, 1998, the KeyChoice Growth Fund became the Victory
LifeChoice Growth Investor Fund. Financial highlights prior to March 23, 1998
represent the KeyChoice Growth Fund.
<F4> Not annualized.
<F5> Annualized.
</FN>
</TABLE>
See notes to financial statements.
11
<PAGE>
THE VICTORY PORTFOLIOS Notes to Financial Statements
LifeChoice Funds October 31, 1999
1. Organization:
The Victory Portfolios (the "Trust") was organized on December 6, 1995 as a
successor to a company of the same name organized as a Massachusetts business
trust on February 5, 1986. The Trust is registered under the Investment
Company Act of 1940, as amended, (the "1940 Act") as an open-end investment
company established as a Delaware business trust. The Trust is authorized to
issue an unlimited number of shares which are units of beneficial interest
with a par value of $0.001. The Trust presently offers shares of 32 active
funds. Included are the financial statements and financial highlights of the
LifeChoice Conservative Investor Fund, LifeChoice Moderate Investor Fund, and
the LifeChoice Growth Investor Fund (collectively, the "Funds").
The LifeChoice Conservative Investor Fund seeks to provide current income
combined with moderate growth of capital by allocating its assets primarily
among registered investment companies that invest in fixed income securities
and, to a lesser extent, equity securities. The LifeChoice Moderate Investor
Fund seeks to provide growth of capital combined with a moderate level of
current income by allocating its assets primarily among registered investment
companies that invest in equity securities and, to a lesser extent, fixed
income securities. The LifeChoice Growth Investor Fund seeks to provide
growth of capital by allocating its assets primarily among registered
investment companies that invest in equity securities.
2. Reorganization:
The Trust entered an Agreement and Plan of Reorganization with The SBSF
Funds, Inc. d/b/a Key Mutual Funds pursuant to which all of the assets and
liabilities of each Key Mutual Fund transferred to a Fund of the Victory
Portfolios in exchange for shares of the corresponding Fund. The KeyChoice
Income & Growth Fund transferred its assets and liabilities to the Victory
LifeChoice Conservative Investor Fund. The KeyChoice Moderate Growth Fund
transferred its assets and liabilities to the Victory LifeChoice Moderate
Investor Fund. The KeyChoice Growth Fund transferred its assets and
liabilities to the Victory LifeChoice Growth Investor Fund. The
reorganization, which qualified as a tax-free exchange for federal income tax
purposes, was completed on March 23, 1998, following approval by shareholders
of SBSF Funds, Inc. d/b/a Key Mutual Funds at a special shareholder meeting
held on March 6, 1998. The following is a summary of shares outstanding, net
assets, net asset value per share and unrealized appreciation immediately
before and after the reorganization:
<TABLE>
<CAPTION>
Before Reorganization After Reorganization
Victory Victory
LifeChoice LifeChoice
KeyChoice Conservative Conservative
Income & Growth Investor Investor
Fund Fund Fund
<S> <C> <C> <C>
Shares (000) 578 -- 578
Net Assets (000) $6,590 -- $6,590
Net Asset Value $11.40 -- $11.40
Unrealized appreciation (000) $ 84 -- $ 84
</TABLE>
<TABLE>
<CAPTION>
Before Reorganization After Reorganization
Victory Victory
KeyChoice LifeChoice LifeChoice
Moderate Growth Moderate Investor Moderate Investor
Fund Fund Fund
<S> <C> <C> <C>
Shares (000) 983 -- 983
Net Assets (000) $11,698 -- $11,698
Net Asset Value $ 11.90 -- $ 11.90
Unrealized appreciation (000) $ 708 -- $ 708
</TABLE>
<TABLE>
<CAPTION>
Before Reorganization After Reorganization
Victory Victory
KeyChoice LifeChoice LifeChoice
Growth Growth Investor Growth Investor
Fund Fund Fund
<S> <C> <C> <C>
Shares (000) 800 -- 800
Net Assets (000) $9,859 -- $9,859
Net Asset Value $12.33 -- $12.33
Unrealized appreciation (000) $ 495 -- $ 495
</TABLE>
12
<PAGE>
3. Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Funds in the preparation of their financial statements. The policies are in
conformity with generally accepted accounting principles. The preparation of
financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses for the
period. Actual results could differ from those estimates.
Securities Valuation:
Investments in registered investment companies are valued at the closing net
asset value per share on the day of valuation. Short-term investments of the
Funds are valued at amortized cost, which approximates market value or at
original cost which, combined with accrued interest, approximates market
value.
Securities Transactions and Related Income:
Securities transactions are accounted for on the date the security is
purchased or sold (trade date). Interest income is recognized on the accrual
basis and includes, where applicable, the pro rata amortization of premium or
accretion of discount. Dividend income is recorded on the ex-dividend date.
Gains or losses realized on sales of securities are determined by comparing
the identified cost of the security lot sold with the net sales proceeds.
Repurchase Agreements:
The Funds may acquire repurchase agreements from financial institutions such
as banks and broker-dealers which the Funds' investment adviser deems
creditworthy under guidelines approved by the Board of Trustees, subject to
the seller's agreement to repurchase such securities at a mutually
agreed-upon date and price. The repurchase price generally equals the price
paid by a Fund plus interest negotiated on the basis of current short-term
rates, which may be more or less than the rate on the underlying Fund
securities. The seller, under a repurchase agreement, is required to maintain
the value of collateral held pursuant to the agreement at not less than the
repurchase price (including accrued interest). Securities subject to
repurchase agreements are held by the Funds' custodian or another qualified
custodian or in the Federal Reserve/Treasury book-entry system. Repurchase
agreements are considered to be loans by a Fund under the 1940 Act.
Dividends to Shareholders:
Dividends payable to shareholders are declared and distributed quarterly.
Distributable net realized capital gains, if any, are declared and
distributed at least annually.
The amounts of dividends from net investment income and of distributions from
net realized gains are determined in accordance with Federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the components of net assets based on their Federal
tax-basis treatment; temporary differences do not require reclassification.
Dividends and distributions to shareholders which exceed net investment
income and realized capital gains for financial reporting purposes but not
for tax purposes are reported as dividends in excess of net investment income
or distributions in excess of net realized gains. To the extent they exceed
net investment income and net realized gains for tax purposes, they are
reported as distributions of capital.
Federal Income Taxes:
It is the policy of each Fund to continue to qualify as a regulated
investment company by complying with the provisions available to certain
investment companies, as defined in applicable sections of the Internal
Revenue Code of 1986, as amended, and to make distributions of net investment
income and net realized capital gains sufficient to relieve it from all, or
substantially all, Federal income taxes.
Other:
Expenses that are directly related to one of the Funds are charged directly
to that Fund. Other operating expenses of the Funds are prorated to each Fund
on the basis of relative net assets or other appropriate basis.
Costs incurred in connection with the organization of the Funds are being
amortized on a straight-line basis over a period not to exceed sixty months
from the date the Funds commenced operations. Organization costs were paid by
the Distributor on behalf of the Funds and are being amortized over a
five-year period with a corresponding payable from the Funds to the
Distributor to repay such cost at the conclusion of the amortization period.
13
<PAGE>
4. Purchases and Sales of Securities:
Purchases and sales of securities (excluding short-term securities) for the
year ended October 31, 1999 were as follows (amounts in thousands):
Purchases Sales
LifeChoice Conservative Investor Fund $ 4,276 $ 5,336
LifeChoice Moderate Investor Fund 17,687 15,091
LifeChoice Growth Investor Fund 10,339 7,481
5. Related Party Transactions:
Investment advisory services are provided to the Funds by Key Asset
Management, Inc. ("the Advisor"), a wholly owned subsidiary of KeyCorp. Under
the terms of the investment advisory agreements, the Advisor is entitled to
receive fees based on a percentage of the average daily net assets of the
Funds. KeyTrust Company of Ohio, N.A., a subsidiary of KeyCorp and an
affiliate of the Advisor, serving as custodian for the Funds, receives
custodian fees in addition to reimbursement of actual out-of-pocket expenses
incurred.
Key and its affiliated brokerage and banking companies also serve as a
Shareholder Servicing Agent for the Funds. As such, Key and its affiliates
provide support services to their clients who are shareholders, which may
include establishing and maintaining accounts and records, processing
dividend and distribution payments, providing account information, assisting
in processing of purchase, exchange and redemption requests, and assisting
shareholders in changing dividend options, account designations and
addresses. For providing such services, Key and its affiliates may receive a
fee of up to 0.25% of the average daily net assets of the Funds.
BISYS Fund Services (the "Administrator"), an indirect, wholly-owned
subsidiary of The BISYS Group, Inc. ("BISYS") serves as the administrator and
distributor to the Funds. Certain officers of the Funds are affiliated with
BISYS. Such officers receive no direct payments or fees from the Funds for
serving as officers.
Under the terms of the administration agreement, the Administrator's fee is
computed at the annual rate of 0.01% of the average daily net asset of each
of the Funds with a minimum of $12,000 per fund per year.
BISYS Fund Services, Ohio Inc., an affiliate of BISYS, serves the Funds as
Mutual Fund Accountant. Under the terms of the Fund Accounting Agreement, the
fee is based on a percentage of the average daily net assets of the Funds
with a minimum monthly fee of $1,667 per Fund.
Fees may be voluntarily reduced to assist the Funds in maintaining
competitive expense ratios.
Additional information regarding related party transactions is as follows for
the year ended October 31, 1999:
Investment Advisory Fees
Percentage of Voluntary
Average Daily Fee
Net Assets Reductions
(000)
LifeChoice Conservative Investor Fund 0.20% $ 8
LifeChoice Moderate Growth Investor Fund 0.20% $23
LifeChoice Growth Investor Fund 0.20% $15
14
<PAGE>
6. Federal Income Tax Information (Unaudited):
For the year ended October 31, 1999, the Funds' most recent fiscal year end
for federal income tax purposes, the following percentages of income
dividends paid by the Funds qualify for the dividends received deduction
available to corporations:
Qualified Dividend Income
LifeChoice Conservative Investor Fund 33.71%
LifeChoice Moderate Growth Investor Fund 24.28%
LifeChoice Growth Investor Fund 25.61%
During the taxable year ended October 31, 1999, the following Funds paid
long-term capital gain distributions:
Capital Gain Distributions
(000)
LifeChoice Conservative Investor Fund $162
LifeChoice Moderate Growth Investor Fund 293
LifeChoice Growth Investor Fund 273
These amounts are included in distributions to shareholders from net realized
gains from investment transactions in the accompanying statements of changes
in net assets.
7. Subsequent Events:
Distributions of short-term and long-term capital gains were declared and
paid November 19 to shareholders of record on November 18, 1999, as follows:
Short-Term Long-Term
Capital Capital
Gain Gain Total
LifeChoice Conservative Investor Fund .0953 -- .0953
LifeChoice Moderate Growth Investor Fund .3101 .0793 .3894
LifeChoice Growth Investor Fund .4866 .0452 .5318
15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of The Victory Portfolios:
In our opinion, the accompanying statements of assets and liabilities,
including the schedules of investments, and the related statements of
operations and changes in net assets, and the financial highlights present
fairly, in all material respects, the financial position of the LifeChoice
Conservative Investor Fund, the LifeChoice Moderate Investor Fund, and the
LifeChoice Growth Investor Fund (three of the funds constituting The Victory
Portfolios) at October 31, 1999, the results of each of their operations for
the year then ended, the changes in each of their net assets for the periods
presented, and the financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Funds' management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation and verification by examination of securities at October 31,
1999 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Columbus, Ohio
December 16, 1999
16
<PAGE>
LOGO (R)
Victory Funds
Call Victory at: Visit our web site at:
800-539-FUND (800-539-3863) www.victoryfunds.com
1AR-LCHF 10/99
