THE GRADISON GOVERNMENT RESERVES FUND
ANNUAL
REPORT
OCTOBER 31,
1999
(LOGO)(R)
Victory Funds
<PAGE>
Victory Funds
Risk/Reward Investment Spectrum
The Victory Funds offer a combined total of 33 money market, fixed income,
specialty and equity mutual funds for individuals and institutions.
LOW REWARD HIGH
Money Market
Ohio Municipal Money Market
New York Daily Tax-Free Income
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
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 Gradison Government Reserves Fund. 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
Financial Statements
Schedules of Investments 3
Statements of Assets and Liabilities 5
Statements of Operations 6
Statements of Changes in Net Assets 7
Financial Highlights 8
Notes to Financial Statements 9
Report of Independent Accountants 13
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 Fund 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 Fund's 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 Fund. 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 Fund.
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
Gradison Government Reserves Fund.
An investment in the Fund is not insured or guaranteed by the FDIC or any
other government agency. Although the Fund seeks to preserve the value of
your investment at $1.00 per share, it is possible to lose money by investing
in the Fund.
(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 Gradison Government Reserves Fund's Annual
Report for the periods ended September 30,1999 and 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
Gradison Government Reserves Money Market Fund
9/30/99 10/31/99
Seven-Day Yield 4.57% 4.66%
Seven-Day Effective Yield 4.67% 4.77%
One Year Total Return 4.46% 4.44%
Gradison Government Reserves Money Market Fund
Days to Maturity 9/30/99 10/31/99
Less than 30 Days 41.9% 57.7%
31 to 60 Days 26.5% 16.5%
61 to 90 Days 13.4% 3.0%
Greater than 90 Days 18.2% 22.8%
An investment in the Fund is not insured or guaranteed by the FDIC or any
other Government Agency. Although the Fund seeks to preserve the value of
your investment at $1.00 per share, it is possible to lose money by investing
in the Fund.
2
<PAGE>
THE VICTORY PORTFOLIOS Schedule of Investments
Gradison Government Reserves Fund October 31, 1999
(Amounts in Thousands)
Principal Amortized
Security Description Amount Cost
U.S. Government Agencies (99.8%)
Federal Farm Credit Bank (18.9%):
5.16%, 11/1/99 $ 50,000 $ 49,999
5.21%*, 11/1/99, MTN 25,000 24,997
5.22%*, 11/1/99 60,600 60,599
5.14%, 11/2/99 19,500 19,497
5.25%, 11/15/99 19,500 19,460
5.24%, 11/17/99 535 534
5.25%*, 11/20/99 45,000 44,979
5.24%, 11/22/99 10,567 10,535
5.15%, 11/29/99 15,000 14,940
5.00%, 12/15/99 25,000 25,000
5.00%, 12/30/99 10,000 10,000
4.76%, 1/18/00 25,000 24,988
5.53%, 1/28/00 24,000 23,676
5.02%, 3/1/00 25,000 24,940
5.46%, 3/1/00 19,907 19,542
5.56%, 4/3/00 10,000 9,988
383,674
Federal Home Loan Bank (52.6%):
5.58%*, 11/1/99 25,000 25,000
5.13%*, 11/3/99 30,000 29,996
5.20%, 11/3/99 50,200 50,185
5.85%*, 11/3/99 20,000 19,999
4.74%, 11/5/99 15,043 15,035
5.24%, 11/10/99 93,055 92,933
5.27%*, 11/12/99 25,000 24,992
5.15%, 11/15/99 25,000 24,950
5.23%, 11/17/99 50,823 50,705
5.17%, 11/19/99 111,500 111,212
4.90%, 12/1/99 25,000 25,003
5.24%, 12/1/99 16,200 16,129
5.25%, 12/3/99 88,648 88,234
5.21%, 12/8/99 129,720 129,026
5.26%, 12/15/99 25,000 24,839
5.01%, 12/20/99 11,000 10,925
4.86%, 1/14/00 25,000 24,997
5.39%, 2/2/00 25,000 24,652
5.54%, 2/15/00 81,952 80,616
4.95%, 2/22/00 12,700 12,698
5.54%, 2/22/00 24,400 23,976
5.53%, 3/1/00 25,000 24,535
5.08%, 3/3/00 26,000 25,954
5.52%, 3/8/00 35,000 34,313
5.60%, 4/7/00 18,000 17,557
5.50%, 7/21/00 25,000 24,993
5.48%, 7/28/00 15,015 14,398
5.88%, 9/7/00 10,000 9,998
6.20%, 10/27/00,
Callable 1/27/00 @100 10,000 10,000
1,067,850
Student Loan Marketing Assoc. (28.3%):
5.30%*, 11/1/99 10,000 10,000
5.42%*, 11/2/99 50,000 50,000
5.42%*, 11/2/99 25,000 25,000
5.55%*, 11/2/99 50,000 50,002
5.57%*, 11/2/99 50,000 50,000
5.71%*, 11/2/99 20,000 20,000
5.74%*, 11/2/99, MTN 50,000 49,997
5.75%*, 11/2/99 27,500 27,500
5.78%*, 11/2/99 20,000 20,000
5.80%*, 11/2/99 9,300 9,301
5.85%*, 11/2/99 50,000 49,981
5.17%*, 11/7/99, MTN 50,000 49,993
5.89%, 11/17/99, MTN 60,230 60,258
4.93%, 2/8/00, MTN 25,000 24,995
4.90%, 2/10/00, MTN 15,000 14,998
5.05%, 3/10/00, MTN 30,000 29,997
5.57%, 3/17/00 11,000 10,992
5.80%*, 11/2/00 20,000 20,000
573,014
Total U.S. Government Agencies
(Amortized Cost $2,024,538) 2,024,538
Total Investments
(Amortized Cost $2,024,538) (a) -- 99.8% 2,024,538
Other assets in excess of liabilities -- 0.2% 3,482
TOTAL NET ASSETS -- 100.0% $2,028,020
(a) Cost and value for federal income tax and financial reporting purposes
are the same.
* Variable rate securities, having interest rates that will change
periodically, are based upon an index of market interest rates. The rate
reflected on the Schedule of Investments is the rate in effect at 10/31/99.
The date reflects the next rate change date.
MTN -- Medium Term Note
See notes to financial statements.
3
<PAGE>
THE VICTORY PORTFOLIOS Schedule of Investments
Gradison Government Reserves Fund September 30, 1999
(Amounts in thousands)
Principal Amortized
Security Description Amount Cost
U.S. Government Agencies (99.9%)
Federal Farm Credit Bank (13.8%):
5.24%*, 10/1/99 $ 37,500 $ 37,500
5.18%*, 10/1/99, MTN 25,000 24,996
5.05%, 10/6/99 15,000 14,989
5.19%, 10/21/99 19,870 19,813
5.11%, 10/25/99 20,000 19,932
5.12%, 10/28/99 11,525 11,481
5.25%, 11/15/99 19,500 19,372
5.24%, 11/17/99 535 531
5.25%, 11/22/99 10,567 10,487
5.15%, 11/29/99 15,000 14,873
5.00%, 12/15/99 25,000 25,000
5.00%, 12/30/99 10,000 10,000
4.76%, 1/18/00 25,000 24,983
5.02%, 3/1/00 25,000 24,925
5.46%, 3/1/00 19,907 19,448
278,330
Federal Home Loan Bank (60.1%):
5.17%, 10/1/99 26,195 26,195
5.26%*, 10/1/99 50,000 50,000
5.22%, 10/6/99 60,000 59,956
5.56%*, 10/6/99 20,000 19,998
5.21%, 10/8/99 19,000 18,981
5.21%, 10/12/99 44,925 44,853
5.23%*, 10/12/99 25,000 24,992
5.08%, 10/13/99 32,084 32,030
5.15%, 10/22/99 38,000 37,886
5.19%, 10/27/99 25,000 24,906
5.00%, 10/28/99 21,000 20,999
5.10%, 10/29/99 9,650 9,612
5.13%*, 11/3/99 30,000 29,995
5.19%, 11/3/99 25,200 25,080
4.74%, 11/5/99 15,043 14,974
5.24%, 11/10/99 100,000 99,418
5.21%, 11/12/99 62,700 62,319
5.23%, 11/17/99 50,823 50,476
5.17%, 11/19/99 111,500 110,715
4.90%, 12/1/99 25,000 25,006
5.26%, 12/3/99 58,648 58,108
5.21%, 12/8/99 113,355 112,239
5.26%, 12/15/99 25,000 24,726
5.01%, 12/20/99 11,000 10,878
4.86%, 1/14/00 25,000 24,995
5.39%, 2/2/00 25,000 24,536
4.95%, 2/22/00 15,000 14,997
5.53%, 3/1/00 25,000 24,416
5.08%, 3/3/00 26,000 25,942
5.52%, 3/8/00 35,000 34,146
5.50%, 7/21/00 25,000 24,992
5.48%, 7/28/00 15,015 14,327
5.88%, 9/7/00 10,000 9,998
6.10%, 10/12/00 20,000 20,001
1,212,692
Student Loan Marketing Assoc. (26.0%):
5.27%*, 10/1/99 10,000 10,000
5.13%*, 10/5/99 50,000 50,000
5.14%*, 10/5/99 25,000 25,000
5.26%*, 10/5/99 50,000 50,004
5.29%*, 10/5/99 50,000 50,000
5.43%*, 10/5/99 20,000 20,000
5.45%*, 10/5/99, MTN 50,000 49,996
5.46%*, 10/5/99 20,000 20,000
5.49%*, 10/5/99 20,000 20,000
5.56%*, 10/5/99 50,000 49,978
5.16%*, 11/7/99, MTN 50,000 49,991
5.89%, 11/17/99, MTN 60,230 60,313
4.93%, 2/8/00, MTN 25,000 24,993
4.90%, 2/10/00, MTN 15,000 14,997
5.05%, 3/10/00, MTN 30,000 29,996
525,268
Total U.S. Government Agencies
(Amortized Cost $2,016,290) 2,016,290
Total Investments
(Amortized Cost $2,016,290) (a) -- 99.9% 2,016,290
Other assets in excess of liabilities -- 0.1% 2,465
TOTAL NET ASSETS -- 100.0% $2,018,755
(a) Cost and value for federal income tax and financial reporting purposes
are the same.
* Variable rate securities, having interest rates that will change
periodically, are based upon an index of market interest rates. The rate
reflected on the Schedule of Investments is the rate in effect at 9/30/99.
The date reflects the next rate change date.
MTN -- Medium Term Note
See notes to financial statements.
4
<PAGE>
THE VICTORY PORTFOLIOS Statements of Assets and Liabilities
(Amounts in Thousands, Except Per Share Amounts)
Gradison Government
Reserves Fund
October 31, September 30,
1999 1999
ASSETS:
Investments, at amortized cost $2,024,538 $2,016,290
Cash 38 --
Interest receivable 12,454 11,254
Total Assets 2,037,030 2,027,544
LIABILITIES:
Dividends payable 7,967 7,724
Accrued expenses and other payables:
Investment advisory fees 630 624
Administration fees 15 12
Distribution fees 183 178
Other 215 251
Total Liabilities 9,010 8,789
NET ASSETS:
Capital 2,028,020 2,018,755
Net Assets $2,028,020 $2,018,755
Net Assets
Class G $2,028,020 $2,018,755
Total $2,028,020 $2,018,755
Outstanding units of beneficial interest (shares)
Class G 2,028,020 2,018,755
Total 2,028,020 2,018,755
Net asset value
Redemption price per share -- Class G $ 1.00 $ 1.00
See notes to financial statements.
5
<PAGE>
THE VICTORY PORTFOLIOS Statements of Operations
(Amounts in Thousands)
Gradison Government
Reserves Fund
One Month Year
Ended Ended
October 31, September 30,
1999 1999
Investment Income:
Interest Income $9,207 $106,979
Expenses:
Investment advisory fees 750 9,105
Administration fees 191 1,148
Distribution fees 173 2,109
Legal and audit fees 14 172
Custodian fees 31 203
Fund accounting fees 11 164
Printing fees 6 227
Registration fees 2 140
Transfer agent fees 276 3,026
Trustees' fees and expenses 4 34
Miscellaneous expenses 1 37
Total Expenses 1,459 16,365
Expenses voluntarily reduced (219) (1,016)
Expenses before reimbursement from distributor 1,240 15,349
Expenses reimbursed by distributor -- (254)
Net Expenses 1,240 15,095
Net Investment Income 7,967 91,884
Change in net assets resulting from operations $7,967 $ 91,884
See notes to financial statements.
6
<PAGE>
THE VICTORY PORTFOLIOS Statements of Changes in Net Assets
(Amounts in Thousands)
Gradison Government
Reserves Fund
One Month Year Year
Ended Ended Ended
October 31, September 30, September 30,
1999 1999 1998
From Investment Activities:
Operations:
Net investment income $ 7,967 $ 91,884 $ 87,166
Change in net assets resulting
from operations 7,967 91,884 87,166
Distributions to Shareholders:
From net investment income
Class G (7,967) (91,884) (87,166)
Change in net assets from
distributions to shareholders (7,967) (91,884) (87,166)
Capital Transactions:
Proceeds from shares issued 655,277 8,742,822 9,220,289
Dividends reinvested 7,620 82,687 85,372
Cost of shares redeemed (653,632) (8,740,578) (8,981,895)
Change in net assets from
capital transactions 9,265 84,931 323,766
Change in net assets 9,265 84,931 323,766
Net Assets:
Beginning of period 2,018,755 1,933,824 1,610,058
End of period $2,028,020 $ 2,018,755 1,933,824
Share Transactions:
Issued 655,277 8,742,822 9,220,289
Reinvested 7,620 82,687 85,372
Redeemed (653,632) (8,740,578) (8,981,895)
Change in shares 9,265 84,931 323,766
See notes to financial statements.
7
<PAGE>
THE VICTORY PORTFOLIOS Financial Highlights
<TABLE>
<CAPTION>
One Month Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
October 31, September 30, September 30, September 30, September 30, September 30,
1999 1999<F2> 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Investment Activities
Net investment income 0.004 0.044 0.049 0.047 0.047 0.050
Total from Investment Activities 0.004 0.044 0.049 0.047 0.047 0.050
Distributions
Net investment income (0.004) (0.044) (0.049) (0.047) (0.047) (0.050)
Total Distributions (0.004) (0.044) (0.049) (0.047) (0.047) (0.050)
Net Asset Value,
End of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Total Return 0.39%<F3> 4.46% 4.98% 4.85% 4.86% 5.10%
Ratios/Supplemental Data:
Net Assets,
End of Period (000) $2,028,020 $2,018,755 $1,933,824 $1,610,058 $1,333,063 $1,224,129
Ratio of expenses to
average net assets<F5> 0.72%<F4> 0.71% 0.72% 0.72% 0.75% 0.78%
Ratio of net investment
income to average
net assets<F5> 4.61%<F4> 4.34% 4.86% 4.75% 4.72% 5.00%
Ratio of expenses to
average net assets<F1> 0.84%<F4> 0.77% 0.73% 0.73% 0.76% 0.80%
Ratio of net investment
income to average
net assets<F1> 4.49%<F4> 4.28% 4.85% 4.74% 4.71% 4.98%
<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 April 1, 1999, the Gradison U.S. Government Reserves became the Victory Gradison Government Reserves
Fund. Financial highlights prior to April 1, 1999 represent the Gradison U.S. Government Reserves.
<F3> Not Annualized
<F4> Annualized
<F5> Effective April 1, 1999, the Advisor 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 0.72% until at least April 1, 2001.
</FN>
</TABLE>
See notes to financial statements.
8
<PAGE>
THE VICTORY PORTFOLIOS Notes to Financial Statements
1. Organization:
The Victory Portfolios (the "Trust") was organized on February 5, 1986 as a
Massachusetts Trust and reorganized on December 6, 1995 as a Deleware
Business Trust. The Trust is registered under the Investment Company Act of
1940, as amended, (the "1940 Act") as an open-end investment company. The
Trust is authorized to issue an unlimited number of shares, which are units
of beneficial interest with a par value of $0.001. As of September 30, 1999,
the Trust offers shares of 32 active funds. The accompanying financial
statements and financial highlights are those of the Victory Gradison
Government Reserves Fund (the "Fund"). The Fund is authorized to issue Class
G Shares. The Fund seeks to maximize current income to the extent consistent
with the preservation of capital and the maintenance of liquidity.
2. Reorganization:
The Trust entered an Agreement and Plan of Reorganization and Termination
(the "Agreement") with The Gradison McDonald Cash Reserves Trust, also
registered as an open-end investment management company under the 1940 Act,
pursuant to which all of the assets and liabilities of the Gradison U.S.
Government Reserves Fund (the "Gradison Fund") were transferred to the
Victory Gradison Government Reserves Fund of the Trust in exchange for Class
G shares, a new class of shares issued in connection with the reorganization,
of that Fund. The reorganization, which qualified as a tax-free exchange for
federal income tax purposes, was completed on April 1, 1999 (the "Effective
Date of the Reorganization"), following approval by shareholders of The
Gradison McDonald Cash Reserves Trust, at a special shareholder meeting held
on March 5, 1999.
For accounting purposes as a result of the reorganization, the historical
basis of assets and liabilities of the Victory Gradison Government Reserves
Fund is that of the Gradison U.S. Government Reserves Fund. In conjunction
with the reorganization, the Fund changed its year end from September 30 to
October 31, therefore, the accompanying financial statements and financial
highlights of the Victory Gradison Government Reserves Fund reflect the
operations of the Gradison Government Reserves Fund for the year ended
September 30, 1999 and the one month ended October 31, 1999. The following is
a summary of shares outstanding, net assets and net asset value per share
immediately before and after the reorganization:
Before Reorganization After Reorganization
Gradison U.S. Victory Gradison Victory Gradison
Government Government Government
Reserves Fund Reserves Fund Reserves Fund
Shares (000) 2,190,366 -- 2,190,366
Net Assets (000) $2,190,366 -- $2,190,366
Net Asset Value $ 1.00 -- $ 1.00
3. Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles. The preparation of
financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses for the
period. Actual results could differ from those estimates.
Securities Valuation:
Investments of the Fund are valued at either amortized cost, which
approximates market value, or at original cost which, combined with accrued
interest, approximates market value. Under the amortized cost valuation
method, discount or premium is amortized on a constant basis to the maturity
of the security. In addition, the Funds may not (a) purchase any instrument
with a remaining maturity greater than 397 days unless such instrument is
subject to a demand feature, or (b) maintain a dollar-weighted-average
portfolio maturity which exceeds 90 days.
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.
9
<PAGE>
Repurchase Agreements:
The Fund may acquire repurchase agreements from financial institutions such
as banks and broker-dealers which the Fund's 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 the Fund plus interest negotiated on the basis of current short-term
rates, which may be more or less than the rate on the underlying securities.
The seller, under a repurchase agreement, is required to maintain the value
of collateral held pursuant to the agreement at not less than the repurchase
price (including accrued interest). Securities subject to repurchase
agreements are held by the Fund's custodian or another qualified custodian or
in the Federal Reserve/Treasury book-entry system. Repurchase agreements are
considered to be loans by the Funds under the 1940 Act.
Dividends to Shareholders:
Dividends from net investment income are declared daily and paid monthly by
the Fund. 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 the 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,
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 the Fund are charged directly to the
Fund. Other operating expenses of the Trust are prorated on the basis of
relative net assets of all funds included in the Trust or other appropriate
basis. Fees paid under the Fund's shareholder servicing or distribution plans
are borne by the specific class of shares to which they apply.
4. Related Party Transactions:
As of the Effective Date of the Reorganization, investment advisory services
are provided to the Fund by Key Asset Management Inc. ("the Adviser"), a
wholly-owned subsidiary of KeyCorp. On February 28, 1997, Key Asset
Management Inc. became the surviving corporation after the reorganization of
four indirect investment adviser subsidiaries of KeyCorp, including KeyCorp
Mutual Fund Advisers. Under the terms of the investment advisory agreements,
the Adviser is entitled to receive fees computed daily and paid monthly based
on the Fund's average daily net assets, at an annual rate of 0.50% on the
first $400 million, 0.45% on the next $600 million, 0.40% on the next $1
billion, and 0.35% in excess of $2 billion. KeyTrust Company of Ohio, serving
as custodian for the Funds as of the Effective Dates of the Reorganization,
receives custodian fees in addition to reimbursement of actual out-of-pocket
expenses incurred.
Bisys Fund Services (the "Administrator or the "Distributor" as applicable),
an indirect, wholly owned subsidiary of the Bisys Group, Inc. ("BISYS")
serves as the administrator and distributor to the Fund and, during the
period October 23, 1998 through the Effective Date of the Reorganization, as
distributor for the Fund. Under the terms of the administration agreement the
Administrator's fee is computed at the annual rate of 0.15% of the Fund's
average daily net assets up to $300 million, 0.12% of the Fund's average
daily net assets between $300 million and $600 million and 0.10% of each
Fund's average daily net assets greater than $600 million. Under a
Sub-Administration agreement, BISYS pays the Adviser a fee of up to 0.05% of
the Fund's average daily net assets to perform some of the administrative
duties for the Fund. Pursuant to the Trust's 12b-1 Plan, the Distributor may
receive a monthly service fee at an annual rate of 0.10% of the average daily
net assets of the Fund. The service fee is paid to securities broker dealers
or other financial intermediaries for providing personal services to
shareholders of the Funds, including responding to inquiries, providing
information to shareholders about their Fund accounts, establishing and
maintaining accounts and records, processing dividend and distribution
payments, arranging for bank wires, assisting in transactions, and changing
account information. McDonald Investments Inc. provides certain shareholder
services for the Fund under the terms of an administrative services agreement
with the Fund, and receives a monthly fee at an annual rate of $23.50 per
shareholder non-zero balance account and $5.00 per closed shareholder
account, as defined. Effective March 1, 1999, BISYS also serves as the Fund's
mutual fund accountant and receives a fee for these services under the terms
of the Fund Accounting Agreement.
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Certain officers of the Trust are affiliated with BISYS. Such officers
receive no direct payments or fees from the Funds for serving as officers of
the Trust.
Fees may be voluntarily reduced or reimbursed to assist the Funds in
maintaining competitive expense ratios. The Adviser has agreed to waive its
management fee or to reimburse expenses, as allowed by law, to the extent
necessary to maintain the net operating expenses of the Class G shares of the
Fund at a maximum of 0.72% until at least April 1, 2001.
Additional information regarding related party transactions is as follows for
the year ended September 30, 1999 and the one month ended October 31, 1999:
September 30, 1999:
Investment Advisory Fees Administration Fees
Percentage Percentage
of Average Voluntary of Average Voluntary
Daily Fee Daily Fee
Net Assets Reductions Net Assets Reductions
0.50% $617 0.15% $399
October 31, 1999:
Investment Advisory Fees Administration Fees
Percentage Percentage
of Average Voluntary of Average Voluntary
Daily Fee Daily Fee
Net Assets Reductions Net Assets Reductions
0.50% $120 0.15% $ 99
Prior to the Effective Date of the Reorganization, investment advisory
services were provided by McDonald & Company Securities, Inc. ("McDonald"),
pursuant to an investment advisory agreement between the Gradison Fund and
McDonald under substantially the same terms as the Fund's investment advisory
agreement described above. Transfer agent services, including dividend
disbursing, fund accounting services and administrative services were
provided by McDonald prior to the Effective Date of the Reorganization,
pursuant to the terms of a Transfer Agency, Accounting Services and
Administrative Services agreement between the Gradison fund and McDonald.
Under the terms of that agreement, the Gradison Fund paid McDonald a monthly
fee for transfer agent and administrative services at an annual rate of
$23.50 per shareholder non-zero balance account and $5.00 per closed
shareholder account, as defined, plus out-of-pocket costs for statement
paper, statement and reply envelopes and reply postage. The Gradison Fund
paid fund accounting fees to McDonald under substantially the same terms as
the Fund. Distribution fees, prior to the Effective Date of the
Reorganization, were paid by the Gradison Fund to McDonald pursuant to an
agreement under substantially the same terms a the Funds' agreement. Prior to
the Effective Date of the Reorganization, officers of the Gradison Fund were
also officers of McDonald.
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5. Voting Results of a Special Meeting of Gradison U.S. Government Reserves
Fund Shareholders:
A Special Meeting of Shareholders of the Gradison U.S. Government Reserves
Fund was held on March 5, 1999. At the meeting, shareholders voted on the
following matters with the following results as indicated below:
Proposal 1
To approve an Agreement and Plan of Reorganization and Termination pursuant
to which the Gradison U.S. Government Reserves Fund will transfer all of its
assets and liabilities solely in exchange (the "Exchange") for Class G Shares
of the Victory Gradison Government Reserves Fund. The Gradison U.S.
Government Reserves Fund will distribute Class G shares of the Victory
Gradison Government Reserves Fund received in the Exchange to its
shareholders in an amount equal in net asset value to the shares of the
Gradison U.S. Government Reserves Fund held by such shareholders as of the
date of the Exchange, after which the Gradison U.S. Government Reserves Fund
will be terminated.
For Against Abstain
Gradison U.S. Government
Reserves Fund 1,103,846,562 32,553,832 63,522,119
Proposal 2
To approve a new Investment Advisory Agreement between each Gradison Trust,
on behalf of the Fund, and McDonald Investments, Inc. because the merger of
McDonald's corporate parent with KeyCorp caused the previous agreement to
terminate.
For Against Abstain
Gradison U.S. Government
Reserves Fund 1,107,712,491 29,425,603 62,784,420
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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, 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 Gradison Government
Reserves Fund (one of the Funds constituting the Victory Portfolio) at
September 30, 1999 and October 31, 1999, the results of operations, the
changes in net assets, and the financial highlights for each of the periods
presented in conformity with general accepted accounting principles. The
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's 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 September 30,
1999 and October 31, 1999 by correspondence with the custodian and brokers,
provided reasonable basis for the opinion expressed above. The Gradison
Government Reserves Fund's Statement of Changes in Net Assets for the year
ended September 30, 1998 and the financial highlights for each of the four
years in the period ended September 30, 1998, were audited by other auditors,
whose report dated October 23, 1998 expressed an unqualified opinion on those
statements and financial highlights.
PricewaterhouseCoopers LLP
Columbus, Ohio
November 19, 1999
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Bulk Rate
U.S. Postage
PAID
Cleveland, OH
Permit No. 1535
(LOGO)(R)
Victory Funds
Call Victory at: Visit our web site at:
800-539-FUND (800-539-3863) www.victoryfunds.com
1VF-GGR-AR 10/99
