VICTORY VARIABLE INSURANCE FUNDS
ANNUAL REPORT
DECEMBER 31, 1999
(LOGO)(R)
Victory Variable Insurance Funds
<PAGE>
TABLE OF CONTENTS
Portfolio Commentaries 2
Financial Statements
Schedules of Investments 4
Statements of Assets and Liabilities 10
Statements of Operations 11
Statements of Changes in Net Assets 12
Financial Highlights 13
Notes to Financial Statements 16
Report of Independent Accountants 19
NOT FDIC INSURED
Shares of The Victory Variable Insurance 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.
Key Asset Management Inc. (KAM), a subsidiary of KeyCorp, is the investment
adviser to The Victory Variable Insurance Funds. The Victory Variable
Insurance 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 Variable Insurance Funds.
This report is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus for the Victory
Variable Insurance Funds.
(LOGO)(R)
Victory Variable Insurance Funds
1
<PAGE>
Portfolio Commentaries
Investment Quality Bond Fund
Liquidity became the Bond Market watchword throughout the year as the three
Federal Reserve eases in late 1998 were rescinded in 1999. This ebb and flow
of Federal Reserve policy had a direct impact on the portfolio and produced
one of the poorest performing bond markets in history.
The Bond Market did rally early in the year with corporate bonds leading
sector performance. During the second half of the year the market tumbled,
caused by a restrictive central bank policy, a jump in oil prices, and Y2K
driven supply pressures.
During the second half of the year performance was hampered by a modestly
longer market duration, and overweighted holdings in corporates, mortgage
backed and asset backed issues. Portfolio turnover reflected active trading
in the mortgage market and opportunistic use of new issuance in the corporate
market.
We believe a number of current constraints in the Bond Market should ease
during the upcoming year. Quality fixed income sectors such as corporates and
mortgages should benefit from a lighter supply calender. The eventual
conclusion to Federal Reserve interest rate increases should leave the market
attractively valued with fairer weather ahead.
Diversified Stock Fund
After a big surge in the spring of 1999, the stock market settled into a
trading range throughout the rest of the fiscal year. The fundamental forces
of good corporate earnings, low inflation, and strong money flows have
continued to provide positive support for equities, while rising interest
rates and concerns about valuation were offsetting factors. Overall, though,
the strength of this bull market continues to be impressive, as 1999
represents the ninth calendar year in a row of positive total returns for the
S&P 500.
The Fund lagged the S&P 500 Index for the second half of the year ending
December 31, 1999, returning 1.21% compared to the benchmark return of 7.71%.
The fund commenced operations on July 1, 1999 and some of the
underperformance was attributed to the initial influx of cash and the
continued uneven cash flows. The Fund's value driven methodology was out of
favor as growth stocks outperformed value stocks for an unprecedented sixth
consecutive year.
Our expectation is that the emerging worldwide economic recovery will broaden
in the year 2000 and that the technology, energy, and basic industry sectors
will be the beneficiaries of this development. These more cyclical areas
remain the areas of emphasis. The Fund is underweighted in the financial,
utility, and consumer related industries.
Small Company Opportunity Fund
Last year appeared to be a banner year for small cap investors as evidenced
return of the Russell 2000 Index of 10.96%. for the second half of the year
ending December 31, 1999. This marked the first time since 1993 that the
popular small cap index outperformed the S&P 500 Index. The performance of
the index was highly concentrated among relatively few stocks over the twelve
months. Market breadth in the small cap area did improve slightly during the
fourth quarter, however the staggering rally in the technology sector has
produced a two-tiered market. As a result, the return of the Russell 2000
Index is not representative of what is happening in the asset class.
In order to provide some perspective, here are some figures to consider. For
last half of 1999, the Russell 2000 Growth Index returned 26.83% while the
Russell 2000 Value Index had a negative return of 6.41%. Why is this
important? The Russell 2000 Value Index contains 1221 of the 1857 companies
that makeup the Russell 2000 Index. This gives you some idea of the
narrowness of the benchmark's return. Lastly, a mere 15 companies (less than
1% of the constituents) represented one-third (7.21% of the 21.26%) of the
return of the index.
The return of the Fund for the second half-year ended December 31, 1999, was
- -.43% versus 10.96% for the Russell 2000 Index. The underperformance is
attributable to several factors. The narrow scope of the market as discussed
above. Investors' insatiable appetite for Internet and telecommunications
stocks resulted in significant outperformance for those sectors of the
market. The Fund's exposure to these sectors was not adequate to offset the
poor performance of its holdings in financial services, consumer cyclical and
healthcare. Despite the inferior performance of the portfolio relative to the
benchmark, the vast majority of the companies held continue to execute and
deliver earnings. At the time of this writing, 71 of the 74 holdings have
either met or surpassed earnings expectations for the last reported quarter.
We think this is important as ultimately, earnings should drive stock price.
The Fund continues to be built around companies that have exhibited
consistent earnings growth that have favorable prospects for future growth
trading at attractive valuations. This methodology sometimes leads us to
sectors that are currently out-of-favor with investors due to macro-economic
factors despite favorable company specific fundamentals. Although short-term
performance has lagged recently, our focus on companies with compelling
valuations has benefited the Fund over the long-term.
2
<PAGE>
Investment Quality Bond Fund
Total Return
As of 12/31/99
Since Inception
7/1/99 0.21%
Investment
Quality Bond Lehman Aggregate
6/30/99 10000 10000
7/31/99 10030 9957
8/31/99 10020 9952
9/30/99 10102 10068
10/31/99 10092 10105
11/30/99 10072 10104
12/31/99 10021 10056
Past performance is not predictive of future results.
Diversified Stock Fund
Total Return
As of 12/31/99
Since Inception
7/1/99 1.21%
Diversified Stock S&P 500
6/30/99 10000 10000
7/31/99 9730 9688
8/31/99 9600 9640
9/30/99 9163 9376
10/31/99 9434 9969
11/30/99 9735 10172
12/31/99 10121 10771
Past performance is not predictive of future results.
Small Company Opportunity Fund
Total Return
As of 12/31/99
Since Inception
7/1/99 -0.43%
Small Co
Opportunity Russell 2000
6/30/99 10000 10000
7/31/99 9720 9726
8/31/99 9300 9366
9/30/99 9082 9368
10/31/99 9122 9406
11/30/99 9433 9756
12/31/99 9957 11095
Past performance is not predictive of future results.
Graphs reflect investment growth of a $10,000 investment, since inception.
The Lehman Brothers Aggregate Bond Index (Lehman Aggregate) is an unmanaged
index, generally representative of longer-term (greater than 1 year),
investment-grade fixed-income securities. An investor cannot invest directly
in an index.
The Russell 2000 Index (Russell 2000) is an unmanaged index,
generally representative of the general performance of domestically traded
common stocks of small- to mid-sized companies. An investor cannot invest
directly in an index.
The Standard & Poor's 500 Stock Index (S&P 500) is an
unmanaged index, generally representative of domestically traded common
stocks of mid- to large-size companies. An investor cannot invest directly in
an index.
Investment returns and principal values will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The total return figures set forth above may reflect the
waiver of a portion of certain fees 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.
Total returns are historical and include the change in share price and
reinvestment of dividends and capital gains distributions, if any.
3
<PAGE>
VICTORY VARIABLE INSURANCE FUNDS Schedule of Investments
Investment Quality Bond Fund December 31, 1999
(Amounts in Thousands)
Principal Market
Security Description Amount Value
Asset Backed Securities (2.9%)
First Union Bank,
7.18%, 12/15/31 $ 30 $ 30
MBNA Master Credit Card Trust,
Series 1997-I, Class A,
6.55%, 1/15/07 20 20
Total Asset Backed Securities (Cost $50) 50
Commercial Paper (14.9%)
Household Finance Co.,
4.25%, 1/3/00 258 258
Total Commercial Paper (Cost $258) 258
Corporate Bonds (13.8%)
Aerospace/Defense (1.2%):
Boeing Co.,
8.75%, 9/15/31 6 7
Lockheed Martin Corp.,
7.95%, 12/1/05 15 14
21
Airlines (0.3%):
Delta Air Lines, (b)
8.30%, 12/15/29 5 5
Automobiles (0.9%):
Daimler-Chrylser North
American Holdings Corp.,
6.63%, 9/21/01 15 15
Banks (1.4%):
Barclays Bank NY,
7.40%, 12/15/09 5 5
Nations Bank Corp.,
6.50%, 8/15/03 20 19
24
Brokerage Services (2.3%):
Merrill Lynch & Co., Inc.,
6.00%, 2/12/03 20 19
Morgan Stanley Dean Witter,
7.13%, 1/15/03 20 21
40
Chemicals -- General (1.4%):
Dow Chemical Company,
7.38%, 11/1/29 5 5
Dupont E.I. Nemour, Series G,
6.88%, 10/15/09 20 19
24
Consumer Products (1.4%):
Procter and Gamble,
6.88%, 9/15/09 25 24
Financial Services (1.5%):
Duke Capital Corp.,
8.00%, 10/1/19 20 21
Ford Motor Credit Corp.,
7.38%, 10/28/09 5 5
26
Insurance (1.1%):
Allstate Corp.,
7.20%, 12/1/09 20 19
Oil-Integrated Companies (1.3%):
Union Oil Co. of California,
7.50%, 2/15/29 25 23
Retail (1.0%):
Lowes Companies, Inc.,
6.50%, 3/15/29 20 17
Total Corporate Bonds (Cost $241) 238
U.S. Government Agencies (0.6%)
Federal Farm Credit Bank,
6.00%, 10/1/01 10 10
Total U.S. Government Agencies (Cost $10) 10
U.S. Government Mortgage Backed (27.2%)
Federal Home Loan
Mortgage Corp. (7.2%):
6.00%, 7/1/28-8/1/28 21 19
6.50%, 2/1/29 24 22
6.63%, 9/15/09 15 15
7.00%, 10/1/29-1/19/30 47 45
7.50%, 11/1/29 23 23
124
Federal National Mortgage
Assoc. (16.1%):
6.50%, 8/15/04-11/25/29 96 91
7.00%, 12/1/14-11/1/29 41 40
7.50%, 11/1/29-12/1/29 58 58
8.00%, 11/1/19 18 18
8.50%, 8/1/19-11/1/19 18 18
10.00%, 11/1/13 9 9
10.50%, 1/1/09-11/1/13 40 42
11.00%, 11/1/13 4 4
280
See notes to financial statements
4
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VICTORY VARIABLE INSURANCE FUNDS Schedule of Investments--continued
Investment Quality Bond Fund December 31, 1999
(Amounts in Thousands)
Principal Market
Security Description Amount Value
Government National Mortgage
Assoc. (3.9%):
7.00%, 11/15/23 $ 43 $ 41
6.50%, 7/15/28 10 10
7.50%, 11/15/28 16 16
67
Total U.S. Government Mortgage Backed
(Cost $478) 471
U.S. Treasury Obligations (41.3%)
U.S. Treasury Bonds (11.5%):
7.50%, 11/15/16 60 64
8.75%, 8/15/20 15 18
5.25%, 2/15/29 140 116
198
U.S. Treasury Notes (29.8%):
4.63%, 11/30/00 140 138
6.38%, 8/15/02 110 110
5.75%, 4/30/03 31 30
5.88%, 11/15/04 43 42
7.00%, 7/15/06 97 99
6.00%, 8/15/09 100 97
516
Total U.S. Treasury Obligations (Cost $731) 714
Total Investments (Cost $1,768) (a) -- 100.7% 1,741
Liabilities in excess of other assets -- (0.7)% (12)
TOTAL NET ASSETS -- 100.0% $1,729
(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 $1. Cost for federal income tax purposes
differs from value by net unrealized depreciation of securities as
follows:
Unrealized appreciation $ 0
Unrealized depreciation (28)
Net unrealized depreciation $(28)
(b) 144a security which is restricted as to resale to investors.
See notes to financial statements.
5
<PAGE>
VICTORY VARIABLE INSURANCE FUNDS Schedule of Investments
Diversified Stock Fund December 31, 1999
(Amounts in Thousands, Except Shares)
Shares or
Principal Market
Security Description Amount Value
Commercial Paper (15.5%)
Household Finance Co.,
4.25%, 1/3/00 $ 620 $ 620
Total Commercial Paper (Cost $620) 620
Common Stocks (92.2%)
Aerospace/Defense (2.6%):
Boeing Co. 550 23
Honeywell International, Inc. 525 30
Lockheed Martin Corp. 600 13
Raytheon Co., Class B 1,500 40
106
Aluminum (1.4%):
Alcoa, Inc. 700 58
Biotechnology (1.0%):
Chiron Corp. (b) 1,000 42
Chemicals -- General (2.1%):
Air Products & Chemicals, Inc. 1,300 44
Dow Chemical Co. 300 40
84
Commercial Services (1.1%):
McKesson HBOC, Inc. 2,000 45
Computers & Peripherals (10.0%):
Cisco Systems, Inc. (b) 400 43
Dell Computer Corp. (b) 700 36
Electronic Data Systems Corp. 1,000 66
Hewlett-Packard Co. 500 57
International Business Machines Corp. 1,500 161
Microsoft Corp. (b) 300 35
398
Conglomerates (0.8%):
Textron, Inc. 400 31
Containers (1.5%):
Newell Rubbermaid, Inc. 2,050 59
Cosmetics & Related (1.7%):
Avon Products, Inc. 1,200 39
Gillette Co. 750 31
70
Diversified (1.3%):
Tyco International Ltd. 1,300 51
Electrical Equipment (1.2%):
W.W. Grainger, Inc. 1,000 48
Electronic & Electrical --
General (0.8%):
Thermo Electron Corp. (b) 1,400 21
Vishay Intertechnology, Inc. (b) 350 11
32
Entertainment (1.1%):
Walt Disney Co. 1,500 44
Financial Services (4.9%):
Citigroup, Inc. 1,250 70
Franklin Resources, Inc. 250 8
Goldman Sachs Group, Inc. 650 61
MBNA Corp. 2,100 57
196
Food Processing & Packaging (2.7%):
General Mills, Inc. 1,500 54
Quaker Oats Co. 475 31
Ralston -- Ralston Purina Group 900 25
110
Forest Products --
Lumber & Paper (3.1%):
Bowater, Inc. 1,000 54
International Paper Co. 1,250 71
125
Health Care (0.6%):
Columbia HCA Healthcare Corp. 300 9
Tenet Healthcare Corp. (b) 600 14
23
Heavy Machinery (3.2%):
Caterpillar, Inc. 750 35
Deere & Co. 1,000 43
Ingersoll-Rand Co. 925 52
130
Insurance (1.6%):
Progressive Corp. 900 66
Insurance -- Multi-Line (1.7%):
American International Group, Inc. 418 45
Lincoln National Corp. 600 24
69
Insurance -- Property, Casualty,
Health (0.8%):
UNUMProvident Corp. 1,000 32
See notes to financial statements.
6
<PAGE>
VICTORY VARIABLE INSURANCE FUNDS Schedule of Investments--continued
Diversified Stock Fund December 31, 1999
(Amounts in Thousands, Except Shares)
Shares or
Principal Market
Security Description Amount Value
Media (1.4%):
News Corp. Ltd. ADR 1,500 $ 57
Medical Supplies (1.6%):
Biomet, Inc. 1,600 64
Metals (0.2%):
Reynolds Metal Co. 100 8
Metals -- Fabrication (0.6%):
Kennametal, Inc. 750 25
Oil & Gas Exploration,
Production & Services (2.0%):
Anadarko Petroleum Corp. 300 10
Exxon Mobil Corp. 396 32
Helmerich & Payne 175 4
Noble Affiliates, Inc. 1,275 27
Transocean Sedco Forex Inc. 232 8
81
Oil-Integrated Companies (4.0%):
Texaco, Inc. 1,725 93
Unocal Corp. 800 27
USX -- Marathon Group, Inc. 1,600 40
160
Oilfield Services & Equipment (2.9%):
Baker Hughes, Inc. 650 14
Halliburton Co. 850 34
Schlumberger Ltd. 1,200 67
115
Pharmaceuticals (8.6%):
Abbott Laboratories 1,825 66
American Home Products Corp. 2,500 100
Merck & Co., Inc. 300 20
Pfizer, Inc. 2,450 79
Smithkline Beecham PLC ADR 1,200 77
342
Radio & Television (4.0%):
AMFM, Inc. (b) 200 16
AT&T Corp. -- Liberty Media,
Class A (b) 325 18
CBS Corp. (b) 400 26
Charter Communications, Inc. 2,500 55
Comcast Corp., Class A Special Shares 850 43
158
Retail (1.4%):
AutoZone, Inc. (b) 900 30
Saks, Inc. (b) 1,700 26
56
Semiconductors (3.6%):
Altera Corp. (b) 800 40
Applied Materials, Inc. (b) 50 6
Intel Corp. 800 66
LSI Logic Corp. (b) 500 34
146
Software & Computer Services (5.8%):
America Online, Inc. (b) 750 57
Computer Associates International, Inc. 150 10
Compuware Corp. 1,500 56
Network Associates, Inc. (b) 600 16
Oracle Corp. (b) 800 90
229
Telecommunications --
Equipment (3.7%):
Motorola, Inc. 1,000 147
Utilities -- Natural Gas (0.9%):
Enron Corp. 800 36
Utilities -- Telecommunications
(6.3%):
AT&T Corp. 2,000 101
CenturyTel, Inc. 1,000 47
MCI Worldcom, Inc. (b) 900 48
Qwest Communications
International (b) 1,200 52
248
Total Common Stocks (Cost $3,512) 3,691
Total Investments (Cost $4,132) (a) -- 107.7% 4,311
Liabilities in excess of other assets -- (7.7)% (310)
TOTAL NET ASSETS -- 100.0% $4,001
(a) Represents aggregate cost for federal income tax purposes and is
substantially the same as the identified cost and differs from value by
net unrealized appreciation of securities as follows:
Unrealized appreciation $ 386
Unrealized depreciation (207)
Net unrealized appreciation $ 179
(b) Non-income producing security.
See notes to financial statements.
7
<PAGE>
VICTORY VARIABLE INSURANCE FUNDS Schedule of Investments
Small Company Opportunity Fund December 31, 1999
(Amounts in Thousands, Except Shares)
Shares or
Principal Market
Security Description Amount Value
Commercial Paper (12.9%)
Household Finance Co.,
4.25%, 1/3/00 $ 177 $ 177
Total Commercial Paper (Cost $177) 177
Common Stocks (88.4%)
Aerospace/Defense (0.9%):
Triumph Group, Inc. (b) 500 12
Apparel (1.8%):
Gildan Activewear, Inc.,
Class A (b) 950 18
UniFirst Corp. 500 6
24
Apparel -- Footwear (1.5%):
Timberland Co. (b) 400 21
Automotive Parts (3.4%):
Borg-Warner Automotive, Inc. 500 20
Tower Automotive, Inc. (b) 1,100 17
Wynn's International, Inc. 700 10
47
Banks (6.9%):
Chittenden Corp. 600 18
HUBCO, Inc. 515 13
Mercantile Bankshares Corp. 400 13
Mesaba Holdings Inc. (b) 1,750 20
Provident Bankshares Corp. 900 16
Provident Financial Group 375 13
93
Building Materials (2.3%):
NCI Building Systems, Inc. (b) 800 15
Southdown, Inc. 325 17
32
Chemicals (1.2%):
Cambrex Corp. 500 17
Commercial Services (3.6%):
ABM Industries, Inc. 825 17
Mail-Well, Inc. (b) 1,500 20
NCO Group, Inc. (b) 400 12
49
Computers & Peripherals (5.9%):
Affiliated Computer Services, Inc. (b) 450 21
Computer Network Technology
Corp. (b) 1,200 28
InterVoice-Brite, Inc. (b) 900 21
National Computer Systems, Inc. 250 9
79
Construction & Housing (2.4%):
Coachmen Industries, Inc. 700 11
D.R. Horton, Inc. 950 13
Toll Brothers, Inc. (b) 500 9
33
Distribution/Wholesale (4.7%):
Advanced Marketing Services 900 26
Hughes Supply, Inc. 600 13
Savoir Technology Group, Inc. (b) 1,700 12
Watsco, Inc. 1,150 13
64
Electronic & Electrical --
General (3.1%):
CTS Corp. 400 30
LSI Industries, Inc. 600 13
43
Electronic Components/
Instruments (3.0%):
C&D Technologies, Inc. 500 21
Technitrol, Inc. 450 20
41
Engineering, Industrial
Construction (1.2%):
URS Corp. (b) 750 16
Financial Services (2.1%):
AmeriCredit Corp. (b) 900 17
DVI, Inc. (b) 800 12
29
Food Products (2.7%):
Michael Foods, Inc. 500 12
Pilgrims Pride Corp., Class B 1,300 11
Smithfield Foods, Inc. (b) 590 14
37
See notes to financial statements.
8
<PAGE>
VICTORY VARIABLE INSURANCE FUNDS Schedule of Investments--continued
Small Company Opportunity Fund December 31, 1999
(Amounts in Thousands, Except Shares)
Shares or
Principal Market
Security Description Amount Value
Health Care (4.1%):
Cooper Cos., Inc. 600 $ 18
Hanger Orthopedic Group Inc (b) 1,100 11
Prime Medical Services, Inc. (b) 1,800 16
Universal Health Services, Inc. (b) 300 11
56
Home Furnishings (1.2%):
Furniture Brands International, Inc. (b) 750 17
Insurance -- Multi-Line (2.0%):
HCC Insurance Holdings, Inc. 700 9
Protective Life Corp. 550 18
27
Machinery -- Diversified (2.3%):
Gehl Co. (b) 900 17
Thomas Industries, Inc. 700 14
31
Metals -- Fabrication (2.7%):
Mueller Industries, Inc. (b) 500 18
Reliance Steel & Aluminum 800 19
37
Pharmaceuticals (4.7%):
Alpharma, Inc., Class A 600 18
Barr Laboratories, Inc. (b) 500 16
Medicis Pharmaceutical, Class A (b) 600 25
Pharmaceutical Product
Development, Inc. (b) 400 5
64
Real Estate Investment Trusts (0.9%):
National Golf Properties, Inc. 650 13
Restaurants (0.9%):
O'Charley's, Inc. (b) 1,000 13
Retail (2.9%):
Barnes & Noble, Inc. 700 14
BJ's Wholesale Club, Inc. (b) 700 26
40
Retail -- Drug Stores (0.8%):
Duane Reade, Inc. (b) 400 11
Savings & Loans (2.9%):
Andover Bancorp, Inc. 500 14
ITLA Capital Corp. (b) 900 11
Roslyn Bancorp, Inc. 800 15
40
Software & Computer
Services (5.6%):
BindView Development Corp. (b) 300 15
Keane, Inc. (b) 600 19
Progress Software Corp. (b) 450 25
Shared Medical Systems Corp. 350 18
77
Staffing (2.5%):
On Assignment, Inc. (b) 500 15
Personnel Group of America, Inc. (b) 1,900 19
34
Telecommunications (1.3%):
Dycom Industries Inc. (b) 400 18
Telecommunications --
Equipment (2.3%):
Anaren Microwave, Inc. (b) 600 32
Tools & Hardware
Manufacturing (1.3%):
Applied Power Inc., Class A 500 18
Transportation Leasing
& Trucking (3.3%):
Forward Air Corp. (b) 600 26
USFreightways Corp. 400 19
45
Total Common Stocks (Cost $1,170) 1,210
Total Investments (Cost $1,347) (a) -- 101.3% 1,387
Liabilities in excess of other assets -- (1.3)% (18)
TOTAL NET ASSETS -- 100.0% $1,369
(a) Represents aggregate cost for federal income tax purposes and is
substantially the same as the identified cost and differs from value by
net unrealized appreciation of securities as follows:
Unrealized appreciation $ 162
Unrealized depreciation (122)
Net unrealized appreciation $ 40
(b) Non-income producing security.
See notes to financial statements.
9
<PAGE>
Statements of Assets and Liabilities
Victory Variable Insurance Funds December 31, 1999
(Amounts in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Investment Diversified Small Company
Quality Stock Opportunity
Bond Fund Fund Fund
<S> <C> <C> <C>
ASSETS:
Investments, at value (cost $1,768; $4,132 & $1,347) $1,741 $4,311 $1,387
Cash 3 4 --
Interest and dividends receivable 21 3 --
Receivable from brokers for investments sold 47 39 --
Total Assets 1,812 4,357 1,387
LIABILITIES:
Payable to brokers for investments purchased 63 330 --
Accrued expenses and other payables:
Contract owner servicing fees 1 2 1
Custodian fees 6 6 6
Fund accounting fees 2 -- 3
Transfer agency fees 3 3 2
Other 8 15 6
Total Liabilities 83 356 18
NET ASSETS:
Capital 1,762 3,841 1,355
Undistributed net investment income 3 -- --
Accumulated undistributed net realized
gain (loss) on investments (9) (19) (26)
Net unrealized appreciation/depreciation on investments (27) 179 40
Net Assets $1,729 $4,001 $1,369
Outstanding units of beneficial interest (shares) 176 397 138
Net asset value
Redemption and offering price per share $ 9.80 $10.07 $ 9.90
</TABLE>
See notes to financial statements.
10
<PAGE>
Statements of Operations
Victory Variable Insurance Funds For the Period Ended December 31, 1999 (a)
(Amounts in Thousands)
<TABLE>
<CAPTION>
Investment Diversified Small Company
Quality Stock Opportunity
Bond Fund Fund Fund
<S> <C> <C> <C>
Investment Income:
Interest Income $ 38 $ 13 $ 5
Dividend income -- 10 3
Total Income 38 23 8
Expenses:
Investment advisory fees 1 3 2
Contract owner servicing fees 1 2 1
Legal and audit fees 19 33 17
Custodian fees 6 6 6
Fund accounting fees 17 19 18
Printing fees 2 4 1
Transfer agency fees 3 3 3
Trustees' fees 4 5 4
Miscellaneous expenses 1 1 --
Total expenses 54 76 52
Expenses voluntarily reduced (1) (3) (2)
Expenses before reimbursement from distributor 53 73 50
Expenses reimbursed by distributor (49) (64) (46)
Net Expenses 4 9 4
Net Investment Income 34 14 4
Realized/Unrealized Gains (Losses) from Investments:
Net realized gains (losses) from investment transactions (9) (19) (26)
Change in unrealized appreciation/depreciation
from investments (27) 179 40
Net realized/unrealized gains (losses) from investments (36) 160 14
Change in net assets resulting from operations $ (2) $174 $ 18
</TABLE>
(a) For the period from July 1, 1999 (commencement of operations) through
December 31, 1999.
See notes to financial statements.
11
<PAGE>
Statements of Changes in Net Assets
Victory Variable Insurance Funds For the periods ended December 31, 1999 (a)
(Amounts in Thousands)
<TABLE>
<CAPTION>
Investment Diversified Small Company
Quality Stock Opportunity
Bond Fund Fund Fund
<S> <C> <C> <C>
From Investment Activities:
Operations:
Net investment income $ 34 $ 14 $ 4
Net realized gains/(losses) from
investment transactions (9) (19) (26)
Net change in unrealized appreciation/
depreciation from investments (27) 179 40
Change in net assets resulting
from operations (2) 174 18
Distributions to Shareholders:
From net investment income (31) (14) (4)
Tax return of capital -- -- (2)
Change in net assets from
distributions to shareholders (31) (14) (6)
Capital Transactions:
Proceeds from shares issued 1,749 3,906 1,351
Dividends reinvested 31 14 6
Cost of shares redeemed (18) (79) --
Change in net assets from
capital transactions 1,762 3,841 1,357
Change in net assets 1,729 4,001 1,369
Net Assets:
Beginning of period -- -- --
End of period $1,729 $4,001 $1,369
Share Transactions:
Issued 175 404 137
Reinvested 3 1 1
Redeemed (2) (8) --
Change in shares 176 397 138
</TABLE>
(a) For the period from July 1, 1999 (commencement of operations) through
December 31, 1999.
See notes to financial statements.
12
<PAGE>
Victory Variable Insurance Funds Financial Highlights
(For a Share Outstanding Throughout Each Period)
Investment
Quality
Bond Fund
Period Ended
December 31,
1999 (a)
Net Asset Value, Beginning of Period $10.00
Investment Activities
Net investment income 0.24
Net realized and unrealized gains
(losses) from investments (0.22)
Total from Investment Activities 0.02
Distributions:
Net investment income (0.22)
Net realized gains --
Total Distributions (0.22)
Net Asset Value, End of Period $ 9.80
Total Return 0.21%(b)
Ratios/Supplemental Data:
Net Assets, End of Period (000) $1,729
Ratio of expenses to average net assets 0.60%(c)
Ratio of net investment income to average net assets 5.41%(c)
Ratio of expenses to average net assets* 8.90%(c)
Ratio of net investment income to average net assets* (2.89)%(c)
Portfolio turnover rate 191%
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
(a) For the period from July 1, 1999 (commencement of operations) through
December 31, 1999.
(b) Not annualized.
(c) Annualized.
See notes to financial statements.
13
<PAGE>
Victory Variable Insurance Funds Financial Highlights
(For a Share Outstanding Throughout Each Period)
Diversified
Stock
Fund
Period Ended
December 31,
1999 (a)
Net Asset Value, Beginning of Period $10.00
Investment Activities
Net investment income 0.05
Net realized and unrealized gains
(losses) from investments 0.07
Total from Investment Activities 0.12
Distributions:
Net investment income (0.05)
Net realized gains --
Total Distributions (0.05)
Net Asset Value, End of Period $10.07
Total Return 1.21%(b)
Ratios/Supplemental Data:
Net Assets, End of Period (000) $4,001
Ratio of expenses to average net assets 0.78%(c)
Ratio of net investment income to average net assets 1.30%(c)
Ratio of expenses to average net assets* 6.98%(c)
Ratio of net investment income to average net assets* (4.90)%(c)
Portfolio turnover rate 10%
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) For the period from July 1, 1999 (commencement of operations) through
December 31, 1999.
(b) Not annualized.
(c) Annualized.
See notes to financial statements.
14
<PAGE>
Victory Variable Insurance Funds Financial Highlights
(For a Share Outstanding Throughout Each Period)
Small Company
Opportunity
Fund
Period Ended
December 31,
1999 (a)
Net Asset Value, Beginning of Period $10.00
Investment Activities
Net investment income 0.03
Net realized and unrealized gains
(losses) from investments (0.08)
Total from Investment Activities (0.05)
Distributions:
Net investment income (0.03)
Return of capital (0.02)
Net realized gains --
Total Distributions (0.05)
Net Asset Value, End of Period $ 9.90
Total Return (0.43)%(b)
Ratios/Supplemental Data:
Net Assets, End of Period (000) $1,369
Ratio of expenses to average net assets 0.75%(c)
Ratio of net investment income to average net assets 0.72%(c)
Ratio of expenses to average net assets* 9.63%(c)
Ratio of net investment income to average net assets* (8.16)%(c)
Portfolio turnover rate 9%
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) For the period from July 1, 1999 (commencement of operations) through
December 31, 1999.
(b) Not annualized.
(c) Annualized.
See notes to financial statements.
15
<PAGE>
Notes to Financial Statements
Victory Variable Insurance Funds December 31, 1999
1. Organization:
The Victory Variable Insurance Funds (the "Trust") was organized as a
Delaware business trust on February 11, 1998. The Trust is a diversified
open-end management investment company registered under the Investment
Company Act of 1940, as amended. 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 three active funds: the
Investment Quality Bond Fund, the Diversified Stock Fund and the Small
Company Opportunity Fund (collectively, the "Funds"). Each of these Funds
offers a single class of shares: Class A Shares.
The Investment Quality Bond Fund seeks to provide a high level of income. The
Diversified Stock Fund seeks to provide long term growth of capital. The
Small Company Opportunity Fund seeks to provide capital appreciation.
2. 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 the Funds are valued at their market values determined on the
basis of the latest available bid prices in the principal market (closing
sales prices if the principal market is an exchange) in which such securities
are normally traded or on the basis of valuation procedures approved by the
Board of Trustees. Investments in investment companies are valued at their
respective net asset values as reported by such companies. The differences
between the cost and market values of investments held by the Funds are
reflected as either unrealized appreciation or depreciation.
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:
Each Fund may acquire repurchase agreements from financial institutions such
as banks and broker-dealers which the Trust'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 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 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.
Futures Contracts:
The Diversified Stock Fund and the Small Company Opportunity Fund may enter
into contracts for the future delivery of securities or foreign currencies
and futures contracts based on a specific security, class of securities,
foreign currency or an index, purchase or sell options on any such futures
contracts and engage in related closing transactions. A futures contract on a
securities index is an agreement obligating either party to pay, and
entitling the other party to receive, while the contract is outstanding, cash
payments based on the level of a specified securities index. The Trust may
enter into futures contracts in an effort to hedge against market risks. The
acquisition of put and call options on futures contracts will give the Trust
the right (but not the obligation), for a specified price, to sell or to
purchase the underlying futures contract, upon exercise of the option, at any
time during the option period. Futures transactions involve brokerage costs
and require the Trust to segregate assets to cover contracts that would
require it to purchase securities or currencies. A Fund may lose the expected
benefit of futures transactions if interest rates, exchange rates or
securities prices change in an unanticipated manner. Such unanticipated
changes may also result in lower overall performance than if the Fund had not
entered into any futures transactions. In addition, the value of a Fund's
futures positions may not prove to be perfectly or even highly correlated
with the value of its portfolio securities or foreign currencies, limiting a
Fund's ability to hedge effectively against interest rate, exchange rate
and/or market risk and giving rise to additional risks. There is no assurance
of liquidity in the secondary market for purposes of closing out futures
positions.
16
<PAGE>
Notes to Financial Statements--continued
Victory Variable Insurance Funds December 31, 1999
Securities Purchased on a When-Issued Basis:
Each Fund may purchase securities on a "when-issued" basis. When-issued
securities are securities purchased for delivery beyond the normal settlement
date at a stated price and/or yield, thereby involving the risk that the
price and/or yield obtained may be more or less than those available in the
market when delivery takes place. At the time a Fund makes the commitment to
purchase a security on a when-issued basis, the Fund records the transaction
and reflects the value of the security in determining net asset value. No
interest accrues to the Fund until the transaction settles and payment takes
place. Normally, the settlement date occurs within one month of the purchase.
A segregated account is established and the Fund maintains cash and
marketable securities at least equal in value to commitments for when-issued
securities. There were no securities purchased on a when-issued basis at
December 31, 1999.
Securities Lending:
Each Fund may, from time to time, lend securities from their portfolio to
broker-dealers, banks, financial institutions and other institutional
borrowers approved by the Board of Trustees. The Trust will limit its
securities lending activity to 33 1/3% of the total assets of each Fund. Key
Trust Company of Ohio, N.A. ("Key Trust"), an affiliate of the Adviser,
serves as the lending agent for the Trust pursuant to a Securities Lending
Agency Agreement (the "Lending Agreement"). Under guidelines established by
the Board of Trustees, Key Trust must maintain the loan collateral at all
times in an amount equal to at least 100% of the current market value of the
loaned securities in the form of cash or U.S. Government obligations, to
secure the return of the loaned securities. Key Trust, at the direction of
the Adviser, may invest the collateral in short-term debt instruments that
the Adviser has determined present minimal credit risks. There is a risk of
delay in receiving collateral or in receiving the securities loaned or even a
loss of rights in the collateral should the borrower of the securities fail
financially. By lending its securities, a Fund can increase its income by
continuing to receive interest or dividends on the loaned securities as well
as investing the cash collateral in short-term U.S. Government securities,
repurchase agreements, or other short-term securities. The cash collateral,
or short-term investments purchased with such collateral, is recorded as
assets of the Funds, offset by a corresponding liability to return all
collateral as cash at the termination of the loan. In addition, the
short-term securities purchased with the cash collateral are included in the
accompanying Schedules of Investments. Fixed income securities received as
collateral are not recorded as an asset or liability of the Trust because the
lending Fund does not have effective control of such securities. Loans are
subject to termination by the Trust or the borrower at any time. In
accordance with GAAP, a statement of cash flows is presented if a Fund
recorded collateral assets exceeding 10% of average net assets during the
year. There were no securities on loan at December 31, 1999.
Dividends to Contract Owners:
Dividends from net investment income are declared and paid monthly for the
Investment Quality Bond Fund. Dividends from net investment income are
declared and paid quarterly for the Diversified Stock Fund and the Small
Company Opportunity 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 contract owners 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 tax returns 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.
All costs incurred by the Trust in connection with the organization of the
Funds and the initial public offering of shares of the Funds, principally
professional fees and printing, were paid on behalf of the Trust by an
affiliate of The BISYS Group, Inc. ("BISYS").
3. Purchases and Sales of Securities:
Purchases and sales of securities (excluding short-term securities) for the
six months ended December 31, 1999 were as follows (amounts in thousands):
17
<PAGE>
Notes to Financial Statements--continued
Victory Variable Insurance Funds December 31, 1999
Purchases Sales
Investment Quality Bond Fund.......................... $3,556 $2,094
Diversified Stock Fund................................ 3,706 187
Small Company Opportunity Fund........................ 1,282 86
4. Related Party Transactions:
Investment advisory services are provided to the Funds by Key Asset
Management, Inc. ("the Adviser"), a wholly owned subsidiary of KeyCorp. Under
the terms of the investment advisory agreements, the Adviser 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 Adviser, 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
Contract Owner 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 0.20% of the average daily net assets of the Funds.
BISYS Fund Services (the "Administrator" or the "Distributor"), 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 0.05% of each Fund's average daily net assets.
Pursuant to a Sub-Administration agreement, the Administrator, and not the
Trust, pays the Advisor a fee of up to 0.05% of each Fund's average daily net
assets to perform some of the administrative duties of the Funds.
BISYS Fund Services, Ohio Inc., an affiliate of BISYS, serves the Funds as
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 $2,500 per Fund.
Fees may be voluntarily reduced or reimbursed to assist the Funds in
maintaining competitive expense ratios.
Additional information regarding related party transactions is as follows for
the six months ended December 31, 1999:
Investment Advisory Fees
Maximum
Percentage
of Average Voluntary
Daily Fee
Net Assets Reductions
Investment Quality Bond Fund....................... 0.20% $1
Diversified Stock Fund............................. 0.30% 3
Small Company Opportunity Fund..................... 0.30% 2
5. Federal Income Tax Information (unaudited):
For the six months ended December 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
Diversified Stock Fund............................... 64.99%
Small Company Opportunity Fund....................... 82.63%
As of December 31. 1999, for Federal income tax purposes, the Funds have the
following capital loss carryforwards available to offset future capital gains
(amounts in thousands):
Amount Expires
Investment Quality Bond Fund.......................... $6 2007
Diversified Stock Fund................................ 3 2007
Small Company Opportunity Fund........................ 6 2007
Capital losses incurred after October 31, within a Fund's fiscal year are
deemed to arise on the first business day of the following fiscal year for
tax purposes. The following Funds have incurred and will elect to defer such
capital losses (amounts in thousands):
Amount
Investment Quality Bond Fund.......................... $ 2
Diversified Stock Fund................................ 16
Small Company Opportunity Fund........................ 20
18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To Shareholders and Trustees of
the Victory Variable Insurance Funds:
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 Investment
Quality Bond Fund, Diversified Stock Fund, and Small Company Opportunity Fund
(three portfolios constituting Victory Variable Insurance Funds) at December
31, 1999, and the results of each of their operations, the changes in each of
their net assets, and the financial highlights for the period July 1,1999,
through December 31, 1999, in conformity with accounting principles generally
accepted in the United States. 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 auditing standards
generally accepted in the United States, 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 December 31,
1999, by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Columbus, Ohio
February 15, 2000
19
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20
<PAGE>
Bulk Rate
U.S. Postage
PAID
Cleveland, OH
Permit No. 1535
(LOGO)(R)
Victory Variable Insurance Funds
Call Victory at: Visit our web site at:
800-539-FUND (800-539-3863) www.victoryfunds.com
1AR-VVIF 1/00
