October 31, 2000
Annual Report
Gradison Government Reserves Fund
Victory Funds
(LOGO) (R)
<PAGE>
Table of Contents
Shareholder Letter 2
Financial Statements
Schedule of Investments 3
Statement of Assets and Liabilities 4
Statement of Operations 5
Statements of Changes in Net Assets 6
Financial Highlights 7
Notes to Financial Statements 8
Report of Independent Accountants 11
The Victory Portfolios
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 fees 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 of 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.
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.
Victory Funds
(LOGO) (R)
Call Victory at:
800-539-FUND (800-539-3863)
Visit our web site at:
www.victoryfunds.com
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 meet your investment goals! We
strive on a daily basis to make sure you have the appropriate information you
need to remain confident in your choice to invest in Victory Funds. To that
end, I am pleased to present the Victory Gradison Government Reserves Fund
Annual Report for the period ending October 31, 2000. I hope you find this
report useful, easy to read, and a valuable tool.
The past year has been an exciting time for Victory Funds. Through the
combination of a new sales and marketing literature system, a new and
improved Internet presence, and the support of the many financial
intermediaries offering Victory Funds, we are now over 30 mutual funds strong
with more than $20 billion in assets under management.
Two of Victory Funds' core beliefs are guidance and education. We recognize
it can be a complex decision to invest in securities through mutual funds,
particularly when your hard-earned savings to fund a child's education, a new
home, or a comfortable retirement is on the line. That's why I feel it is
important for our shareholders to know "What Makes Victory Funds Different?"
I am confident that after you review the following points you will be
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. Dependability is the essence of Victory Funds. When you
entrust your money to a Victory Fund, you can rest assured that the portfolio
managers of the Funds are known for adhering to the fund's stated management
style and investment objective.
Discipline. A highly rigorous and disciplined investment process, refined
over decades by the wisdom of experienced money managers, guides the
selection of securities for Victory Funds. Key Asset Management, Inc., an
established firm with a 100-year heritage, meticulously implements this
proven process.
Teamwork. A knowledgeable team of investment professionals supports
Victory Fund portfolio managers, who have an average of 17 years of
experience.
Guidance. Victory strives to make sure you have the information you need to
make the best investment decisions. The guidance available through investment
professionals, "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 ultimate measure of your investment success is performance.
At Victory Funds, our long-term perspective leads us to pursue the optimal
return with a reasonable level of risk. We are committed to achieving
consistent, rewarding results over time.
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
October 31, 2000
Seven-Day Yield 5.87%
Seven-Day Effective Yield 6.04%
One Year Total Return 5.56%
Gradison Government Reserves Money Market Fund
Days to Maturity October 31, 2000
Less than 30 Days 54.8%
31 to 60 Days 20.2%
61 to 90 Days 6.4%
Greater than 90 Days 18.6%
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.
Fund holdings are subject to change.
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.
2
<PAGE>
THE VICTORY PORTFOLIOS Schedule of Investments
Gradison U.S. Government Reserves Fund October 31, 2000
(Amounts in Thousands)
Principal Amortized
Security Description Amount Cost
U.S. Government Agencies (103.1%)
Federal Farm Credit Bank (27.3%):
6.43%*, 11/1/00**....................... $ 37,500 $ 37,500
6.37%, 11/6/00.......................... 23,000 22,980
6.39%, 11/8/00.......................... 23,600 23,571
6.39%, 11/22/00......................... 20,000 19,925
4.90%, 11/16/00, MTN.................... 10,050 10,045
6.43%*, 11/17/00**...................... 50,000 49,996
6.48%*, 11/22/00**...................... 50,000 49,984
6.38%, 11/27/00......................... 17,975 17,892
6.47%, 12/1/00.......................... 19,000 18,998
6.36%, 12/5/00.......................... 14,000 13,916
6.34%, 12/11/00......................... 10,000 9,930
6.33%, 12/15/00......................... 25,000 24,807
6.34%, 12/18/00......................... 25,000 24,793
6.39%, 12/21/00......................... 15,000 14,867
6.36%, 12/28/00......................... 54,920 54,366
6.37%, 12/29/00......................... 55,359 54,790
5.88%, 1/2/01........................... 20,470 20,263
6.35%, 2/1/01........................... 20,000 19,997
6.35%, 2/8/01........................... 7,297 7,170
6.42%, 2/27/01.......................... 21,915 21,454
5.70%, 3/5/01........................... 10,000 9,954
6.71%, 5/11/01.......................... 25,000 24,110
7.16%, 6/1/01........................... 20,000 19,998
5.88%, 7/2/01........................... 12,313 12,241
583,547
Federal Home Loan Bank (58.8%):
6.39%, 11/1/00.......................... 2,530 2,530
6.41%*, 11/1/00**....................... 50,000 49,972
6.49%*, 11/1/00**....................... 30,000 29,987
6.69%*, 11/1/00**....................... 14,675 14,674
6.69%*, 11/1/00**....................... 50,000 50,000
6.20%, 11/3/00.......................... 25,000 25,000
6.46%, 11/10/00......................... 296,993 296,513
6.40%, 11/15/00......................... 50,000 49,876
6.43%*, 11/20/00**...................... 50,000 49,979
6.46%, 11/20/00......................... 50,000 49,830
5.00%, 12/1/00.......................... 10,000 9,990
6.43%, 12/8/00.......................... 14,000 13,907
6.41%, 12/13/00......................... 25,000 24,813
6.44%, 12/15/00......................... 36,202 35,917
6.39%, 12/27/00......................... 128,037 126,764
6.39%, 12/29/00......................... 15,000 14,846
6.38%, 1/3/01........................... 78,813 77,932
6.36%, 1/18/01.......................... 10,000 9,999
Principal Amortized
Security Description Amount Cost
6.48%*, 1/12/01**....................... $ 50,000 $ 49,975
6.36%, 1/30/01.......................... 75,000 73,808
6.35%, 2/6/01........................... 24,724 24,301
6.40%, 2/23/01.......................... 40,000 39,189
5.63%, 3/19/01.......................... 30,000 29,883
6.33%, 3/28/01.......................... 25,000 24,354
6.66%, 4/6/01........................... 25,000 25,006
6.80%, 4/17/01.......................... 10,000 9,995
6.70%, 5/25/01.......................... 21,769 20,938
7.08%, 6/29/01.......................... 25,000 25,054
1,255,032
Student Loan Marketing Assoc. (16.3%):
6.63%*, 11/7/00**....................... 11,500 11,492
6.65%*, 11/7/00**....................... 70,000 69,996
6.72%*, 11/7/00**....................... 30,000 30,000
6.77%*, 11/7/00**....................... 25,000 25,000
6.77%*, 11/7/00**....................... 70,000 70,001
6.80%*, 11/7/00**....................... 20,000 19,989
6.81%*, 11/7/00**....................... 60,000 59,990
6.81%*, 11/7/00**....................... 10,000 10,001
6.43%, 1/4/01........................... 32,000 31,634
6.55%, 2/14/01.......................... 20,000 19,999
348,102
Tennessee Valley Authority (0.7%):
6.00%, 11/1/00.......................... 14,279 14,279
Total U.S. Government Agencies 2,200,960
Total Investments
(Amortized Cost $2,200,960) (a) -- 103.1% 2,200,960
Liabilities in excess of other assets -- (3.1)% (65,433)
TOTAL NET ASSETS -- 100.0% $2,135,527
(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
10/31/00. The date reflects the next rate change date.
** Put and demand features exist allowing the fund to require the
repurchase of the investment within variable time periods less than one
year.
MTN -- Medium Term Note
See notes to financial statements.
3
<PAGE>
<TABLE>
Statement of Assets and Liabilities
THE VICTORY PORTFOLIOS October 31, 2000
(Amounts in Thousands, Except Per Share Amounts)
<CAPTION>
Gradison
Government
Reserves
Fund
<S> <C>
ASSETS:
Investments, at amortized cost $2,200,960
Interest receivable 12,095
Receivable for capital shares issued 11
Total Assets 2,213,066
LIABILITIES:
Cash overdraft 626
Payable to brokers for investments purchased 64,564
Dividends payable 10,600
Accrued expenses and other payables:
Investment advisory fees 543
Administration fees 19
Distribution fees 209
Transfer agent fees 877
Other 101
Total Liabilities 77,539
NET ASSETS:
Capital 2,135,526
Accumulated undistributed net realized gains from investment transactions 1
Net Assets $2,135,527
Outstanding units of beneficial interest (shares) 2,135,526
Net asset value
Offering and Redemption price per share $ 1.00
</TABLE>
See notes to financial statements.
4
<PAGE>
<TABLE>
Statement of Operations
THE VICTORY PORTFOLIOS For the Year Ended October 31, 2000
(Amounts in Thousands)
<CAPTION>
Gradison
Government
Reserves
Fund
<S> <C>
Investment Income:
Interest income $133,100
Total Income 133,100
Expenses:
Investment advisory fees 9,277
Administration fees 2,375
Distribution fees 2,165
Legal and audit fees 202
Custodian fees 399
Fund accounting fees 126
Printing fees 450
Registration and filing fees 57
Transfer agent fees 4,346
Trustees' fees and expenses 52
Other 121
Total Expenses 19,570
Expenses voluntarily reduced (3,866)
Total Expenses 15,704
Net Investment Income 117,396
Realized/Unrealized Gains/(Losses) from Investments:
Net realized gains/(losses) from investment transactions 1
Net realized/unrealized gains/(losses) from investments: 1
Change in net assets resulting from operations $117,397
</TABLE>
See notes to financial statements.
5
<PAGE>
<TABLE>
THE VICTORY PORTFOLIOS Statements of Changes in Net Assets
(Amounts in Thousands)
<CAPTION>
Gradison Government Reserves Fund
Year One Month Year
Ended Ended Ended
October 31, October 31, September 30,
2000 1999 1999
<S> <C> <C> <C>
From Investment Activities:
Operations:
Net investment income $ 117,396 $ 7,967 $ 91,884
Net realized gains/(losses) from
investment transactions 1 -- --
Change in net assets resulting from operations 117,397 7,967 91,884
Distributions to Shareholders:
From net investment income (117,396) (7,967) (91,884)
Change in net assets from distributions to shareholders (117,396) (7,967) (91,884)
Capital Transactions:
Proceeds from shares issued 9,873,278 655,277 8,742,822
Dividends reinvested 113,313 7,620 82,687
Cost of shares redeemed (9,879,085) (653,632) (8,740,578)
Change in net assets from
capital transactions 107,506 9,265 84,931
Change in net assets 107,507 9,265 84,931
Net Assets:
Beginning of period 2,028,020 2,018,755 1,933,824
End of period $ 2,135,527 $2,028,020 $ 2,018,755
Share Transactions:
Issued 9,873,262 655,277 8,742,822
Reinvested 113,313 7,620 82,687
Redeemed (9,879,069) (653,632) (8,740,578)
Change in shares 107,506 9,265 84,931
</TABLE>
See notes to financial statements.
6
<PAGE>
<TABLE>
THE VICTORY PORTFOLIOS Financial Highlights
(For a Share Outstanding Throughout Each Period)
<CAPTION>
Gradison Government Reserves Fund
Year Month Year Year Year Year
Ended Ended Ended Ended Ended Ended
October 31, October 31, September 30, September 30, September 30, September 30,
2000 1999 1999<F2> 1998 1997 1996
<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 0.054 0.004 0.044 0.049 0.047 0.047
Total from
Investment
Activities 0.054 0.004 0.044 0.049 0.047 0.047
Distributions
Net investment income (0.054) (0.004) (0.044) (0.049) (0.047) (0.047)
Total Distributions (0.054) (0.004) (0.044) (0.049) (0.047) (0.047)
Net Asset Value,
End of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Total Return 5.56% 0.39%<F3> 4.46% 4.98% 4.85% 4.86%
Ratios/Supplemental Data:
Net Assets,
End of Period (000) $2,135,527 $2,028,020 $2,018,755 $1,933,824 $1,610,058 $1,333,063
Ratio of expenses to
average net assets <F5> 0.72% 0.72%<F4> 0.71% 0.72% 0.72% 0.75%
Ratio of net investment
income to average
net assets <F5> 5.42% 4.61%<F4> 4.34% 4.86% 4.75% 4.72%
Ratio of expenses to
average net assets<F1> 0.90% 0.84%<F4> 0.77% 0.73% 0.73% 0.76%
Ratio of net investment
income to average
net assets<F1> 5.24% 4.49%<F4> 4.28% 4.85% 4.74% 4.71%
<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.
7
<PAGE>
Notes to Financial Statements
THE VICTORY PORTFOLIOS October 31, 2000
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
Delaware 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 October 31, 2000, the Trust offers shares of 30 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 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.
The following is a summary of shares outstanding, net assets and net
asset value per share immediately before and after the reorganization:
<TABLE>
<CAPTION>
Before After
Reorganization Reorganization
Victory Victory
Gradison Gradison Gradison
U.S. Government Government Government
Reserves Fund Reserves Fund Reserves Fund
<S> <C> <C> <C>
Shares (000)......................................... 2,190,366 -- 2,190,366
Net Assets (000)..................................... $2,190,366 -- $2,190,366
Net Asset Value...................................... $ 1.00 -- $ 1.00
</TABLE>
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 in the
United States. 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.
Continued
8
<PAGE>
Notes to Financial Statements--continued
THE VICTORY PORTFOLIOS October 31, 2000
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. Under the terms of the
investment advisory agreement, 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
Fund, 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 Dates of
the Reorganizations, 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 Fund Accountant and receives a fee for
these services under the terms of the Fund Accounting Agreement.
Continued
9
<PAGE>
Notes to Financial Statements--continued
THE VICTORY PORTFOLIOS October 31, 2000
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 October 31, 2000:
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% $2,647 0.15% $1,219
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 of the Funds' agreement.
Prior to the Effective Date of the Reorganization, officers of the
Gradison Fund were also officers of McDonald.
5. Federal Income Tax (Unaudited):
As of October 31, 2000, for Federal income tax purposes, the Fund has
the following capital loss carryforwards available to offset future
capital gains, if any (amounts in thousands):
Amount Expires
$223 2002
3 2006
10
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of
The Victory Portfolios:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of 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
Portfolios, hereafter referred to as the "Fund") at October 31, 2000, the
results of its operations for the year then ended, the changes in its net
assets for each of the periods presented, and the financial highlights for
each of the periods presented, in conformity with accounting principles
generally accepted in the United States of America. These 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 auditing standards generally accepted in the United States of
America, 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, 2000, by correspondence with the custodian and
brokers, provide a reasonable basis for our opinion. 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 three 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
December 14, 2000
11
<PAGE>
This page is intentionally left blank.
12
<PAGE>
The Victory Funds
127 Public Square
OH-01-27-1612
Cleveland, Ohio 44114
PRSRT STD
U.S. POSTAGE
PAID
Cleveland, OH
Permit No. 1535
Victory Funds
(LOGO) (R)
Call Victory at:
800-539-FUND (800-539-3863)
Visit our web site at:
www.victoryfunds.com
1VF-GGR-AR 11/00
