Prospectus
Equity Funds
Value Fund
Class A and G Shares
Established Value Fund
Class A and G Shares
Diversified Stock Fund
Class A and G Shares
Stock Index Fund
Class A and G Shares
Growth Fund
Class A and G Shares
Special Value Fund
Class A and G Shares
Small Company Opportunity Fund
Class A and G Shares
International Growth Fund
Class A and G Shares
February 28, 2000
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved any Fund's securities or determined whether this
Prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
Victory Funds
LOGO (R)
Call Victory at:
800-539-FUND
(800-539-3863)
or visit the Victory Funds' website at:
www.victoryfunds.com
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The Victory Portfolios
Table of Contents
Introduction 1
Risk/Return Summary for each of the Funds An analysis which includes the
investment objective, principal strategies, principal risks, performance, and
expenses of each Fund
Value Fund
Class A and G Shares 2
Established Value Fund
Class A and G Shares 4
Diversified Stock Fund
Class A and G Shares 6
Stock Index Fund
Class A and G Shares 8
Growth Fund
Class A and G Shares 10
Special Value Fund
Class A and G Shares 12
Small Company Opportunity Fund
Class A and G Shares 14
International Growth Fund
Class A and G Shares 16
Investments 18
Risk Factors 19
Share Price 21
Dividends, Distributions, and Taxes 21
Investing with Victory
- - Choosing a Share Class 23
- - How to Buy Shares 26
- - How to Exchange Shares 28
- - How to Sell Shares 29
Organization and Management of the Funds 31
Additional Information 34
Financial Highlights
Value Fund 35
Established Value Fund 36
Diversified Stock Fund 37
Stock Index Fund 38
Growth Fund 39
Special Value Fund 40
Small Company Opportunity Fund 41
International Growth Fund 42
Key to Financial Information
Objective and Strategies
The goals and the strategies that a Fund plans to use to pursue its investment
objective.
Risk Factors
The risks you may assume as an investor in a Fund.
Performance
A summary of the historical performance of a Fund in comparison to an unmanaged
index.
Expenses
The costs you will pay, directly or indirectly, as an investor in a Fund,
including sales charges and ongoing expenses.
Shares of the Funds are:
- - Not insured by the FDIC;
- - Not deposits or other obligations of, or guaranteed by KeyBank, any of
its affiliates, or any other bank;
- - Subject to possible investment risks, including possible loss of the amount
invested.
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Introduction
This Prospectus explains the objectives, policies, risks, performance,
strategies, and expenses of the Shares of the Victory Funds described in this
Prospectus (the Funds).
Investment Objective and Strategy
Each Fund pursues its investment objective by investing primarily in equity
securities. Each Fund generally seeks to provide long-term growth of capital. In
addition, the Value Fund and Special Value Fund each seeks to provide dividend
income. The Stock Index Fund seeks to achieve its investment performance by
attempting to match the investment performance of the Standard & Poor's 500
Composite Stock Index. However, each Fund has unique investment strategies and
its own risk/reward profile. Please review the "Risk/Return Summary" for each
Fund and the "Investments" section for an overview.
Risk Factors
Each Fund invests primarily in equity securities. The value of equity securities
may fluctuate in response to the activities of an individual company, or in
response to general market or economic conditions. There are other potential
risks discussed in each "Risk/Return Summary" and in "Risk Factors."
Who May Want to Invest in the Funds
* Investors who want a diversified portfolio
* Investors willing to accept the risk of price and dividend fluctuations
* Investors willing to accept higher short-term risk along with higher
potential long-term returns
* Long-term investors with a particular goal, like saving for retirement or a
child's education
Share Classes
Each Fund offers Class A and G Shares. See "Choosing a Share Class."
Key Asset Management Inc., which we will refer to as the "Adviser" or "KAM"
throughout this Prospectus, manages the Funds.
Please read this Prospectus before investing in the Funds and keep it for future
reference.
The following pages provide you with an overview of each of the Funds. Please
look at the objective, policies, strategies, risks, and expenses to determine
which Fund will suit your risk tolerance and investment needs.
1
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Risk/Return Summary
VALUE FUND
CLASS A SHARES
Cusip#: 926464868
SVLSX
CLASS G SHARES
Cusip#: 926464249
Investment Objective
The Value Fund seeks to provide long-term growth of capital and dividend income.
Principal Investment Strategies
The Value Fund pursues its investment objective by investing primarily in a
diversified group of equity securities with an emphasis on companies with above
average total return potential. The securities in the Value Fund usually are
listed on a national exchange.
KAM seeks equity securities of under-valued companies that are inexpensive in
light of the following measurements: below-average price-to-earnings ratios,
below-average price-to-book ratios, lower-than-average price-to-cash-flow ratios
and above-average dividend yields. KAM may consider factors such as a company's
earnings growth, return on equity, stock price volatility relative to the
market, management, the general business cycle, the company's position within a
specific industry and the company's responsiveness to changing conditions.
Under normal market conditions, the Value Fund will invest at least 80% of its
total assets in equity securities and securities convertible or exchangeable
into common stock.
There is no guarantee that the Value Fund will achieve its objectives.
Principal Risks
You may lose money by investing in the Value Fund. The Value Fund is subject to
the following principal risks, more fully described in "Risk Factors." The Value
Fund's net asset value, yield and/or total return may be adversely affected if
any of the following occurs:
* The market value of securities acquired by the Value Fund declines.
- Value stocks fall out of favor relative to growth stocks.
* The portfolio manager does not execute the Value Fund's principal investment
strategies effectively.
* A company's earnings do not increase as expected.
An investment in the Value Fund is not a deposit of KeyBank or any of its
affiliates and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
By itself, the Value Fund does not constitute a complete investment plan and
should be considered a long-term investment for investors who can afford to
weather changes in the value of their investment.
2
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Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Value Fund by showing changes in its performance for various
time periods ending December 31st. The figures shown in the bar chart and table
assume reinvestment of dividends and distributions.
The bar chart shows returns for Class A Shares of the Value Fund. Sales loads
are not reflected on the bar chart (or highest and lowest returns below) and if
they were reflected, returns would be lower than those shown.
1994 0.26%
1995 33.73%
1996 22.40%
1997 27.51%
1998 26.33%
1999 11.07%
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter was
18.21% (quarter ending December 31, 1998) and the lowest return for a quarter
was - 9.06% (quarter ending September 30, 1999).
The table shows how the average annual total returns for Class A Shares of the
Value Fund for one year, five years and since inception, including maximum sales
charges, compare to those of a broad-based market index.
Average Annual Total Returns Since
(for the Periods ended Past Past Inception
December 31, 1999)(1) One Year 5 Years (12/3/93)
Class A 4.70% 22.52% 18.45%
S&P 500 Index(2) 21.04% 28.55% 23.30%
1 The Value Fund did not offer Class G Shares prior to December 15, 1999.
2 The Standard & Poor's 500 Stock Index is a broad-based unmanaged index that
represents the general performance of domestically traded common stocks of mid-
to large-size companies. Index returns do not include any brokerage commissions,
sales charges, or other fees. It is not possible to invest directly in an index.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Value Fund.
Shareholder Transaction Expenses
(paid directly from your investment)(1) Class A Class G
Maximum Sales Charge
Imposed on Purchases 5.75% NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE(2) NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees(3) 0.75% 0.75%
Distribution (12b-1) Fees 0.00% 0.50%
Other Expenses (includes a
Shareholder servicing fee of 0.25%
applicable to Class A Shares) 0.45% 0.26%
Total Fund Operating Expenses 1.20%(4) 1.51%(5)
Fee Waiver/Expense Reimbursement (0.00)% (0.06)%
Net Expenses 1.20% 1.45%(6)
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 Except for non-IRA tax deferred retirement accounts, there is no initial sales
charge on purchases of $1 million or more for Class A Shares. However, if you
sell any of such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any of such Class
A Shares within two years, you will be charged a CDSC of 0.50%.
3 Management fees have been restated to reflect reduction from 1.00% to 0.75%.
4 The Adviser may waive its management fee and reimburse expenses , as allowed
by law, so that the net operating expenses of Class A Shares do not exceed
1.15%. The Adviser may terminate this waiver/reimbursement at any time to the
extent allowed by law.
5 Other expenses of Class G Shares are based on estimated amounts for the
current fiscal year.
6 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 Class G Shares of the Value Fund at a maximum of 1.45% until at
least February 28, 2001.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Value Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Value Fund for the time
periods shown and then sell all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that the
Value Fund's operating expenses remain the same.(1) Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $690 $934 $1,197 $1,946
Class G $148 $471 $ 818 $1,796
1 This Example assumes that net annual operating expenses for Class G Shares of
the Value Fund will equal 1.45% until February 28, 2001 and will equal 1.51%
thereafter.
3
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Risk/Return Summary
ESTABLISHED VALUE FUND
CLASS A SHARES
Cusip#: 926464231
CLASS G SHARES
Cusip#: 926464371
GETGX
Investment Objective
The investment objective of the Established Value Fund is long-term capital
growth by investing primarily in common stocks.
Principal Investment Strategies
The Established Value Fund pursues its investment objective by investing
primarily in equity securities of companies with market capitalization, at the
time of purchase, of $2 billion or more. The companies are usually selected from
those in the Standard & Poor's Composite Stock Price Index (S&P 500).
In making investment decisions, the Adviser looks for companies whose stock is
trading at prices below what the Adviser believes represent their true value.
When selecting investments for the Established Value Fund's portfolio, the
Adviser looks for the following characteristics, among others: consistent
earnings growth; stable earnings growth combined with dividend yield, rising
earnings prospects; price-to-book ratios and price-to-earnings ratios that are
generally lower than those prevalent in the market; and the rate at which a
stock's price is rising. The Adviser uses a computer model that examines the
characteristics described above, among others, to assist in selecting securities
that appear favorably priced.
Under normal market conditions, the Established Value Fund :
* Will invest at least 80% of its total assets in equity securities of
companies with market capitalization of $2 billion or more.
There is no guarantee that the Established Value Fund will achieve its
objectives.
Principal Risks
You may lose money by investing in the Established Value Fund. The Established
Value Fund is subject to the following principal risks, more fully described in
"Risk Factors." The Established Value Fund's net asset value, yield and/or total
return may be adversely affected if any of the following occurs:
* The market value of securities acquired by the Established Value Fund
declines.
* Value stocks decline in price faster than growth stocks.
* The portfolio manager does not execute the Established Value Fund's principal
investment strategies effectively.
* A company's earnings do not increase as expected.
An investment in the Established Value Fund is not a deposit of KeyBank or any
of its affiliates and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
By itself, the Established Value Fund does not constitute a complete investment
plan and should be considered a long-term investment for investors who can
afford to weather changes in the value of their investment.
4
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Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Established Value Fund by showing changes in its performance
for various time periods ending December 31st. The figures shown in the bar
chart and table assume reinvestment of dividends and distributions.
The bar chart shows returns for Class G Shares of the Established Value Fund.
1990 -8.11%
1991 22.23%
1992 10.20%
1993 20.78%
1994 0.32%
1995 26.44%
1996 19.32%
1997 22.65%
1998 6.12%
1999 17.07%
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter was
14.12% (quarter ending December 31, 1998) and the lowest return for a quarter
was - 13.22% (quarter ending September 30, 1998).
The table shows how the average annual total returns for Class G Shares of the
Established Value Fund for one year, five years and ten years compared to those
of a broad-based market index.
Average Annual Total Returns
(for the Periods ended Past Past Past
December 31, 1999) One Year 5 Years 10 Years
Class G(1) 17.07% 18.12% 13.18%
S&P 500 Index(2) 21.04% 28.55% 18.21%
1 The Established Value Fund did not offer Class A Shares as of December 31,
1999. Performance prior to March 26, 1999 reflects performance of the Gradison
Established Value Fund.
2 The Standard & Poor's 500 Stock Index is a broad-based unmanaged index that
represents the general performance of domestically traded common stocks of mid-
to large-size companies. Index returns do not include any brokerage commissions,
sales charges, or other fees. It is not possible to invest directly in an index.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Established Value Fund.
Shareholder Transaction Expenses
(paid directly from your investment)(1) Class A Class G
Maximum Sales Charge
Imposed on Purchases 5.75% NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE(2) NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees 0.51% 0.51%
Distribution (12b-1) Fees 0.00% 0.50%
Other Expenses (includes a
Shareholder servicing fee of 0.25%
applicable to Class A Shares) 0.54% 0.26%
Total Fund Operating Expenses 1.05% 1.27%
Fee Waiver/Expense Reimbursement (0.17)% (0.17)%
Net Expenses 0.88%(3) 1.10%(4)
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 Except for non-IRA tax deferred retirement accounts, there is no initial sales
charge on purchases of $1 million or more for Class A Shares. However, if you
sell any of such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any of such Class
A Shares within two years, you will be charged a CDSC of 0.50%.
3 Other expenses of Class A Shares are based on estimated amounts for the
current fiscal year. KAM was agreed to waive its management fee or to reimburse
expenses, as allowed by law, to the extent necessary to maintain the net
operating expenses of Class A Shares of the Established Value Fund at a maximum
of 0.88% until at least February 28, 2001.
4 KAM 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 Class G Shares of the Established Value Fund at a maximum of 1.10% until at
least April 1, 2001.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Established Value Fund with the cost of investing in other
mutual funds. The Example assumes that you invest $10,000 in the Established
Value Fund for the time periods shown and then redeem all of your shares at the
end of those periods. The Example also assumes that your investment has a 5%
return each year and that the Established Value Fund's operating expenses remain
the same.(1) Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $660 $874 $1,106 $1,769
Class G $112 $386 $ 681 $1,519
1 This Example assumes that net annual operating expenses for Class A Shares of
the Established Value Fund will equal 0.88% until February 28, 2001 and will
equal 1.05% thereafter and that net annual operating expenses for Class G Shares
of the Established Value Fund will equal 1.10% until April 1, 2001 and will
equal 1.27% thereafter.
5
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Risk/Return Summary
DIVERSIFIED STOCK FUND
CLASS A SHARES
Cusip#: 926464603
SRVEX
CLASS G SHARES
Cusip#: 926464421
GRINX
Investment Objective
The Diversified Stock Fund seeks to provide long-term growth of capital.
Principal Investment Strategies
The Diversified Stock Fund pursues its investment objective by investing
primarily in equity securities and securities convertible into common stocks
traded on U.S. exchanges and issued by large, established companies.
The Adviser seeks to invest in both growth and value securities. In making
investment decisions, the Adviser may consider cash flow, book value, dividend
yield, growth potential, quality of management, adequacy of revenues, earnings,
capitalization, relation to historical earnings, the value of the issuer's
underlying assets, and expected future relative earnings growth. The Adviser
will pursue investments that provide above average dividend yield or potential
for appreciation.
Under normal market conditions, the Diversified Stock Fund will invest at least
80% of its total assets in equity securities of large, established companies and
securities convertible or exchangeable into common stock, including:
* Growth stocks, which are stocks of companies that the Adviser believes will
experience earnings growth; and
* Value stocks, which are stocks that the Adviser believes are intrinsically
worth more than their market value.
There is no guarantee that the Diversified Stock Fund will achieve its
objectives.
Principal Risks
You may lose money by investing in the Diversified Stock Fund. The Diversified
Stock Fund is subject to the following principal risks, more fully described in
"Risk Factors." The Diversified Stock Fund's net asset value, yield and/or total
return may be adversely affected if any of the following occurs:
* The market value of securities acquired by the Diversified Stock Fund
declines.
- Growth stocks fall out of favor because the companies' earnings growth does
not meet expectations.
* Value stocks fall out of favor relative to growth stocks.
* The portfolio manager does not execute the Diversified Stock Fund's principal
investment strategies effectively.
* A company's earnings do not increase as expected.
An investment in the Diversified Stock Fund is not a deposit of KeyBank or any
of its affiliates and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
By itself, the Diversified Stock Fund does not constitute a complete investment
plan and should be considered a long-term investment for investors who can
afford to weather changes in the value of their investment.
6
<PAGE>
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Diversified Stock Fund by showing changes in its performance
for various time periods ending December 31st. The figures shown in the bar
chart and table assume reinvestment of dividends and distributions.
The bar chart shows returns for Class A Shares of the Diversified Stock Fund.
Sales loads are not reflected on the bar chart (or highest and lowest returns
below) and if they were reflected, returns would be lower than those shown.
1990 0.57%
1991 23.98%
1992 9.43%
1993 9.97%
1994 3.96%
1995 35.37%
1996 24.72%
1997 28.28%
1998 23.15%
1999 20.96%
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter was
17.60% (quarter ending December 31, 1998) and the lowest return for a quarter
was - 12.43% (quarter ending September 30, 1990).
The table shows how the average annual total returns for Class A Shares of the
Diversified Stock Fund for one year, five years and ten years, including maximum
sales charges, compare to those of a broad-based market index.
Average Annual Total Returns
(for the Periods ended Past Past Past
December 31, 1999)(1) One Year 5 Years 10 Years
Class A 14.02% 24.91% 16.84%
S&P 500 Index(2) 21.04% 28.55% 18.21%
(1) The Diversified Stock Fund did not offer Class G Shares prior to March
29, 1999.
2 The Standard & Poor's 500 Stock Index is a broad-based unmanaged index that
represents the general performance of domestically traded common stocks of mid-
to large-size companies. Index returns do not include any brokerage commissions,
sales charges, or other fees. It is not possible to invest directly in an index.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Diversified Stock Fund.
Shareholder Transaction Expenses
(paid directly from your investment)(1) Class A Class G
Maximum Sales Charge
Imposed on Purchases 5.75% NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE(2) NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees 0.65% 0.65%
Distribution (12b-1) Fees 0.00% 0.50%
Other Expenses (includes a
shareholder servicing fee of 0.25%
applicable to Class A Shares) 0.45% 0.23%
Total Fund Operating Expenses(3) 1.10% 1.38%
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 Except for non-IRA tax deferred retirement accounts, there is no initial sales
charge on purchases of $1 million or more for Class A Shares. However, if you
sell any of such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any of such Class
A Shares within two years, you will be charged a CDSC of 0.50%.
3 The Adviser may waive its management fee and reimburse expenses, as allowed by
law, so that the net operating expenses of Class A and Class G Shares of the
Diversified Stock Fund will equal 1.07% and 1.29% respectively. The Adviser may
terminate these waivers/reimbursements at any time to the extent allowed by law.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Diversified Stock Fund with the cost of investing in other
mutual funds. The Example assumes that you invest $10,000 in the Diversified
Stock Fund for the time periods shown and then sell all of your shares at the
end of those periods. The Example also assumes that your investment has a 5%
return each year and that the Diversified Stock Fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $681 $905 $1,146 $1,838
Class G $140 $437 $ 755 $1,657
7
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Risk/Return Summary
STOCK INDEX FUND
CLASS A SHARES
Cusip#: 926464850
SSTIX
CLASS G SHARES
Cusip#: 926464355
VINGX
Investment Objective
The Stock Index Fund seeks to provide long-term capital appreciation by
attempting to match the investment performance of the Standard & Poor's 500
Composite Stock Index (S&P 500 Index).(1)
Principal Investment Strategies
The Stock Index Fund pursues its investment objective by attempting to duplicate
the capital performance and dividend income of the S&P 500 Index. The Stock
Index Fund primarily invests in many of the equity securities that are in the
S&P 500 Index, including American Depository Receipts (ADRs), and secondarily in
related futures and options contracts.
The S&P 500 Index is comprised of 500 common stocks. To minimize small positions
and transactions expenses, the Stock Index Fund need not invest in every stock
included in the S&P 500 Index. The Stock Index Fund may purchase stocks that are
not included in the S&P 500 Index if the Adviser believes that these investments
will reduce "tracking error" (the difference between the Stock Index Fund's
investment results, before expenses, and that of the S&P 500 Index).
The Stock Index Fund is not managed in the traditional sense using economic,
financial, and market analysis. Therefore, the Stock Index Fund will not sell a
stock that is underperforming as long as it remains in the S&P 500 Index.
Brokerage costs, fees, operating expenses, and tracking errors will normally
result in the Stock Index Fund's total return being lower than that of the S&P
500 Index.
There is no guarantee that the Stock Index Fund will achieve its objectives.
Principal Risks
You may lose money by investing in the Stock Index Fund. The Stock Index Fund is
subject to the following principal risks, more fully described in "Risk
Factors." The Stock Index Fund's net asset value, yield and/or total return may
be adversely affected if any of the following occurs:
* The market value of securities acquired by the Stock Index Fund declines.
* The portfolio manager does not execute the Stock Index Fund's principal
investment strategies effectively.
* Hedges created by using derivative instruments, including futures or options
contracts, do not respond to economic or market conditions as expected.
In addition, the Stock Index Fund may purchase, retain, and sell securities when
such transactions would not be consistent with traditional investment criteria.
The Stock Index Fund generally will remain fully invested in common stocks even
when stock prices generally are falling. Accordingly, an investor is exposed to
a greater risk of loss (or conversely, a greater prospect of gain) from
fluctuations in the value of such securities than would be the case if the Stock
Index Fund was not fully invested, regardless of market conditions.
An investment in the Stock Index Fund is not a deposit of KeyBank or any of its
affiliates and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
By itself, the Stock Index Fund does not constitute a complete investment plan
and should be considered a long-term investment for investors who can afford to
weather sudden and sometimes substantial changes in the value of their
investment .
1 "Standard & Poor's 500" is a registered service mark of Standard and Poor's,
which does not sponsor and is in no way affiliated with the Stock Index Fund.
8
<PAGE>
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Stock Index Fund by showing changes in its performance for
various time periods ending December 31st. The figures shown in the bar chart
and table assume reinvestment of dividends and distributions.
The bar chart shows returns for Class A Shares of the Stock Index Fund. Sales
loads are not reflected on the bar chart (or highest and lowest returns below)
and if they were reflected, returns would be lower than those shown.
1994 0.92%
1995 36.47%
1996 22.18%
1997 32.40%
1998 27.70%
1999 20.23%
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter was
21.11% (quarter ending December 31, 1998) and the lowest return for a quarter
was - 10.01% (quarter ending September 30, 1998).
The table shows how the average annual total returns for Class A Shares of the
Stock Index Fund for one year, five years and since inception, including maximum
sales charges, compare to those of a broad-based market index.
Average Annual Total Returns Since
(for the Periods ended Past Past Inception
December 31, 1999)(1) One Year 5 Years (12/3/93)
Class A 13.30% 26.16% 21.35%
S&P 500 Index(2) 21.04% 28.55% 23.30%
(1) The Stock Index Fund did not offer Class G Shares prior to June 30, 1999.
(2) The Standard & Poor's 500 Stock Index is a broad-based unmanaged index that
represents the general performance of domestically traded common stocks of mid-
to large-size companies. Index returns do not include any brokerage commissions,
sales charges, or other fees. It is not possible to invest directly in an index.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Stock Index Fund.
Shareholder Transaction Expenses
(paid directly from your investment)(1) Class A Class G
Maximum Sales Charge
Imposed on Purchases 5.75% NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE(2) NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees 0.60% 0.60%
Distribution (12b-1) Fees 0.00% 0.00%
Other Expenses (includes a
shareholder servicing fee of 0.25%
applicable to Class G Shares) 0.21% 1.13%
Total Fund Operating Expenses 0.81% 1.73%
Fee Waiver/Expense Reimbursement (0.00)% (0.91)%
Net Expenses 0.81%(3) 0.82%(4)
(1) You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
(2) Except for non-IRA tax deferred retirement accounts, there is no initial
sales charge on purchases of $1 million or more for Class A Shares. However, if
you sell any of such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any of such Class
A Shares within two years, you will be charged a CDSC of 0.50%.
(3) The Adviser may waive its management fee and reimburse expenses , as allowed
by law, so that the net operating expenses of Class A Shares of the Stock Index
Fund will equal 0.57%. The Adviser may terminate this waiver/reimbursement at
any time to the extent allowed by law.
(4) The Adviser has contractually agreed to waive its management fees and to
reimburse expenses, as allowed by law, to the extent necessary to maintain the
net operating expenses of Class G Shares of the Stock Index Fund at a maximum of
0.82% until at least February 28, 2001. Other expenses of Class G Shares are
based on estimated amounts for the current fiscal year.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Stock Index Fund with the cost of investing in other mutual
funds. The Example assumes that you invest $10,000 in the Stock Index Fund for
the time periods shown and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Stock Index Fund's operating expenses remain the same.(1) Although
your actual costs may be higher or lower, based on these assumptions your costs
would be:
1 Year 3 Years 5 Years 10 Years
Class A $653 $819 $999 $1,519
Class G $ 84 $456 $853 $1,965
1 This Example assumes that Net Annual Fund Operating Expenses for Class G
Shares will equal 0.82% until February 28, 2001 and will equal 1.73% thereafter.
9
<PAGE>
Risk/Return Summary
GROWTH FUND
CLASS A SHARES
Cusip#: 926464793
SGRSX
CLASS G SHARES
Cusip#: 926464256
Investment Objective
The Growth Fund seeks to provide long-term growth of capital .
Principal Investment Strategies
The Growth Fund pursues its investment objective by investing primarily in
equity securities of companies with superior prospects for long-term earnings
growth and price appreciation. The issuers usually are listed on a nationally
recognized exchange.
In making investment decisions, the Adviser will look for above average growth
rates, high return on equity, issuers that reinvest their earnings in their
business, and strong balance sheets.
Under normal market conditions, the Growth Fund will invest at least 80% of its
total assets in common stocks and securities convertible into common stocks.
There is no guarantee that the Growth Fund will achieve its objectives.
Principal Risks
You may lose money by investing in the Growth Fund. The Growth Fund is subject
to the following principal risks, more fully described in "Risk Factors." The
Growth Fund's net asset value, yield and/or total return may be adversely
affected if any of the following occurs:
* The market value of securities acquired by the Growth Fund declines.
- Growth stocks fall out of favor because the companies' earnings growth does
not meet expectations.
* The portfolio manager does not execute the Growth Fund's principal investment
strategies effectively.
* A company's earnings do not increase as expected.
An investment in the Growth Fund is not a deposit of KeyBank or any of its
affiliates and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
By itself, the Growth Fund does not constitute a complete investment plan and
should be considered a long-term investment for investors who can afford to
weather changes in the value of their investment and do not require significant
current income from their investments.
10
<PAGE>
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Growth Fund by showing changes in its performance for various
time periods ending December 31st. The figures shown in the bar chart and table
assume reinvestment of dividends and distributions.
The bar chart shows returns for Class A Shares of the Growth Fund. Sales loads
are not reflected on the bar chart (or highest and lowest returns below) and if
they were reflected, returns would be lower than those shown.
1994 -0.50%
1995 31.47%
1996 24.95%
1997 31.35%
1998 37.18%
1999 17.90%
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter was
22.84% (quarter ending December 31, 1998) and the lowest return for a quarter
was - 6.70% (quarter ending September 30, 1998).
The table shows how the average annual total returns for Class A Shares of the
Growth Fund for one year, five years and since inception, including maximum
sales charges, compare to those of a broad-based market index.
Average Annual Total Returns Since
(for the Periods ended Past Past Inception
December 31, 1999)(1) One Year 5 Years (12/3/93)
Class A 11.13% 26.88% 21.62%
S&P 500 Index(2) 21.04% 28.55% 23.30%
(1) The Growth Fund did not offer Class G Shares prior to December 15, 1999.
(2) The Standard & Poor's 500 Stock Index is a broad-based unmanaged index that
represents the general performance of domestically traded common stocks of mid-
to large-size companies. Index returns do not include any brokerage commissions,
sales charges, or other fees. It is not possible to invest directly in an index.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Growth Fund.
Shareholder Transaction Expenses
(paid directly from your investment)(1) Class A Class G
Maximum Sales Charge
Imposed on Purchases 5.75% NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE(2) NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees(3) 0.75% 0.75%
Distribution (12b-1) Fees 0.00% 0.50%
Other Expenses (includes a
shareholder servicing fee of 0.25%
applicable to Class A Shares) 0.49% 0.27%
Total Fund Operating Expenses 1.24% 1.52%(4)
Fee Waiver/Expense Reimbursement (0.04)% (0.07)%
Net Expenses(5) 1.20% 1.45%
(1) You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
(2) Except for non-IRA tax deferred retirement accounts, there is no initial
sales charge on purchases of $1 million or more for Class A Shares. However, if
you sell any of such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any of such Class
A Shares within two years, you will be charged a CDSC of 0.50%.
(3) Management fees have been restated to reflect reduction from 1.00% to 0.75%.
(4) Other expenses of Class G Shares are based on estimated amounts for the
current fiscal year.
(5) The Adviser has contractually agreed to waive its management fee and to
reimburse expenses, as allowed by law, to the extent necessary to maintain the
net operating expenses of Class A and Class G Shares of the Growth Fund at a
maximum of 1.20% and 1.45%, respectively, until at least February 28, 2001.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Growth Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Growth Fund for the time
periods shown and then sell all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that the
Growth Fund's operating expenses remain the same.(1) Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $690 $942 $1,213 $1,985
Class G $148 $473 $ 822 $1,807
(1) This Example assumes that Net Annual Fund Operating Expenses for Class A
Shares will equal 1.20% until February 28, 2001 and will equal 1.24% thereafter
and that Net Annual Fund Operating Expenses for Class G Shares will equal 1.45%
until February 28, 2001 and will equal 1.52% thereafter.
11
<PAGE>
Risk/Return Summary
SPECIAL VALUE FUND
CLASS A SHARES
Cusip#: 926464843
SSVSX
CLASS G SHARES
Cusip#: 926464264
Investment Objective
The Special Value Fund seeks to provide long-term growth of capital and dividend
income.
Principal Investment Strategies
The Special Value Fund pursues its investment objective by investing primarily
in equity securities of small- and medium-sized companies listed on a national
exchange. Small-sized companies are defined as those having market
capitalization of less than $1 billion at the time of purchase, and medium-size
companies are defined as those having a market capitalization of between $1
billion and $5 billion at the time of purchase.
The Adviser looks for companies with above average total return potential whose
equity securities are under-valued. KAM looks for equity securities that have
relatively low price-to-book ratios, low price-to-earnings ratios or
lower-than-average price-to-cash-flow ratios. KAM may consider factors such as a
company's earnings growth, dividend payout ratio, return on equity, stock price
volatility relative to the market, new management and upcoming corporate
restructuring, the general business cycle, the company's position within a
specific industry and the company's responsiveness to changing conditions.
Under normal market conditions the Special Value Fund will invest at least 80%
of its total assets in common stocks and securities convertible into common
stock of small- and medium-sized companies.
There is no guarantee that the Special Value Fund will achieve its objectives.
Principal Risks
You may lose money by investing in the Special Value Fund. The Special Value
Fund is subject to the following principal risks, more fully described in "Risk
Factors." The Special Value Fund's net asset value, yield and/or total return
may be adversely affected if any of the following occurs:
* The market value of securities acquired by the Special Value Fund declines.
- Smaller, less seasoned companies lose market share or profits to a greater
extent than larger, established companies as a result of deteriorating
economic conditions.
- Value stocks fall out of favor relative to growth stocks.
* The portfolio manager does not execute the Special Value Fund's principal
investment strategies effectively.
* A company's earnings do not increase as expected.
An investment in the Special Value Fund is not a deposit of KeyBank or any of
its affiliates and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
By itself, the Special Value Fund does not constitute a complete investment plan
and should be considered a long-term investment for investors who can afford to
weather changes in the value of their investment.
12
<PAGE>
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Special Value Fund by showing changes in its performance for
various time periods ending December 31st. The figures shown in the bar chart
and table assume reinvestment of dividends and distributions.
The bar chart shows returns for Class A Shares of the Special Value Fund. Sales
loads are not reflected on the bar chart (or highest and lowest returns below)
and if they were reflected, returns would be lower than those shown.
1994 1.27%
1995 26.80%
1996 19.22%
1997 27.79%
1998 -9.08%
1999 -1.26%
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter was
14.13% (quarter ending December 31, 1998) and the lowest return for a quarter
was - 20.87% (quarter ending September 30, 1998).
The table shows how the average annual total returns for Class A Shares of the
Special Value Fund for one year, five years and since inception, including
maximum sales charges, compare to those of a broad-based market index.
Average Annual Total Returns Since
(for the Periods ended Past Past Inception
December 31, 1999)(1) One Year 5 Years (12/3/93)
Class A -6.96% 10.34% 9.17%
S&P 400 Mid-Cap Index(2) 14.72% 23.05% 17.90%
(1) The Special Value Fund did not offer Class G Shares prior to December 15 ,
1999.
(2) The Standard & Poor's 400 Mid-Cap Index is a broad-based unmanaged index
that represents the general performance of domestically traded common stocks of
mid-size companies. Index returns do not include any brokerage commissions,
sales charges, or other fees. It is not possible to invest directly in an index.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Special Value Fund.
Shareholder Transaction Expenses
(paid directly from your investment)(1) Class A Class G
Maximum Sales Charge
Imposed on Purchases 5.75% NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE(2) NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees(3) 0.80% 0.80%
Distribution (12b-1) Fees 0.00% 0.50%
Other Expenses (includes a
shareholder servicing fee of 0.25%
applicable to Class A Shares) 0.53% 0.33%
Total Fund Operating Expenses 1.33% 1.63%(4)
Fee Waiver/Expense Reimbursement (0.00)% (0.03)%
Net Expenses 1.33%(5) 1.60%(6)
(1) You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
(2) Except for non-IRA tax deferred retirement accounts, there is no initial
sales charge on purchases of $1 million or more for Class A Shares. However, if
you sell any of such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any of such Class
A Shares within two years, you will be charged a CDSC of 0.50%.
(3) Management fees have been restated to reflect the reduction from 1.00% to
0.80%.
(4) Other expenses of Class G Shares are based on estimated amounts for the
current fiscal year.
(5) The Adviser may waive its management fee and reimburse expenses, as allowed
by law, so that the net operating expenses of Class A Shares will equal 1.30%.
The Adviser may terminate this waiver/reimbursement at any time to the extent
allowed by law.
(6) 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 Class G Shares of the Special Value Fund at a maximum of 1.60% until
at least February 28, 2001.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Special Value Fund with the cost of investing in other mutual
funds. The Example assumes that you invest $10,000 in the Special Value Fund for
the time periods shown and then sell all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Special Value Fund's operating expenses remain the same.(1)
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $703 $972 $1,262 $2,084
Class G $163 $511 $ 884 $1,930
(1) This Example assumes that net operating expenses for Class G Shares of the
Value Fund will equal 1.60% until February 28, 2001 and will equal 1.63%
thereafter.
13
<PAGE>
Risk/Return Summary
SMALL COMPANY OPPORTUNITY FUND
CLASS A SHARES
Cusip#: 926464835
SSGSX
CLASS G SHARES
Cusip#: 926464389
GOGFX
Investment Objective
The Small Company Opportunity Fund seeks to provide capital appreciation.
Principal Investment Strategies
The Small Company Opportunity Fund invests primarily in common stocks of smaller
companies that show the potential for high earnings growth in relation to their
price-earnings ratio. The Adviser considers small companies to be companies with
capitalizations of $2 billion or less. The Small Company Opportunity Fund may
continue to hold an investment made in a small company after its market
capitalization exceeds this level. The Adviser uses a computer model to select
securities that appear favorably priced.
Under normal market conditions, the Small Company Opportunity Fund:
* Will invest at least 80% of its total assets in equity securities of small
companies. These equity investments include:
- Common stock
- Convertible preferred stock
- Debt convertible or exchangeable into equity securities
There is no guarantee that the Small Company Opportunity Fund will achieve its
objectives.
Principal Risks
You may lose money by investing in the Small Company Opportunity Fund. The Small
Company Opportunity Fund is subject to the following principal risks, more fully
described in "Risk Factors." The Small Company Opportunity Fund's net asset
value, yield and/or total return may be adversely affected if any of the
following occurs:
* The market value of securities acquired by the Small Company Opportunity Fund
declines.
- Value stocks fall out of favor relative to growth stocks.
- Smaller, less seasoned companies lose market share or profits to a greater
extent than larger, established companies as a result of deteriorating
economic conditions.
* The portfolio manager does not execute the Small Company Opportunity Fund's
principal investment strategies effectively.
* A company's earnings do not increase as expected.
An investment in the Small Company Opportunity Fund is not a deposit of KeyBank
or any of its affiliates and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
By itself, the Small Company Opportunity Fund does not constitute a complete
investment plan and should be considered a long-term investment for investors
who can afford to weather changes in the value of their investment.
14
<PAGE>
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Small Company Opportunity Fund by showing changes in its
performance for various time periods ending December 31st. The figures shown in
the bar chart and table assume reinvestment of dividends and distributions.
The bar chart shows returns for Class G Shares of the Small Company Opportunity
Fund.
1990 -13.05%
1991 35.92%
1992 14.31%
1993 11.07%
1994 -2.18%
1995 26.76%
1996 19.47%
1997 31.18%
1998 -6.93%
1999 -1.08%
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter was
20.24% (quarter ending March 31, 1991) and the lowest return for a quarter was
- -19.96% (quarter ending September 30, 1998).
The table shows how the average annual total returns for Class A and Class G
Shares of the Small Company Opportunity Fund for one year, five years and ten
years compare to those of a broad-based market index.
Average Annual Total Returns
(for the Periods ended Past Past Past
December 31, 1999) One Year 5 Years 10 Years
Class G(1) -1.08% 12.83% 10.38%
Russell 2000 Index(2) 21.26% 16.69% 13.40%
(1) The Small Company Opportunity Fund did not offer Class A Shares prior to
March 26, 1999. Performance prior to March 26, 1999 reflects performance of the
Gradison Opportunity Value Fund.
(2) The Russell 2000 Index is a broad-based unmanaged index that represents the
general performance of domestically traded common stocks of small companies.
Index returns do not include any brokerage commissions, sales charges, or other
fees. It is not possible to invest directly in an index.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Small Company Opportunity Fund.
Shareholder Transaction Expenses
(paid directly from your investment)(1) Class A Class G
Maximum Sales Charge
Imposed on Purchases 5.75% NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE(2) NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees 0.62% 0.62%
Distribution (12b-1) Fees 0.00% 0.50%
Other Expenses (includes a
shareholder servicing fee of 0.25%
applicable to Class A Shares) 0.55% 0.35%
Total Fund Operating Expenses 1.17% 1.47%
Fee Waiver/Expense Reimbursement (0.00)% (0.17)%
Net Expenses 1.17%(3) 1.30%(4)
(1) You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
(2) Except for non-IRA tax deferred retirement accounts, there is no initial
sales charge on purchases of $1 million or more for Class A Shares. However, if
you sell any of such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any of such Class
A Shares within two years, you will be charged a CDSC of 0.50%.
(3) The Adviser may waive its management fee and reimburse expenses, as allowed
by law, so that the net operating expenses of Class A Shares of the Small
Company Opportunity Fund will equal 1.15%. The Adviser may terminate this
waiver/reimbursement at any time to the extent allowed by law.
(4) KAM has contractually agreed to waive its management fee or to reimburse
expenses, as allowed by law, to the extent necessary to maintain the net
operating expenses of Class G Shares of the Small Company Opportunity Fund at a
maximum of 1.30% until at least April 1, 2001.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Small Company Opportunity Fund with the cost of investing in
other mutual funds. The Example assumes that you invest $10,000 in the Small
Company Opportunity Fund for the time periods shown and then redeem all of your
shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Small Company Opportunity
Fund's operating expenses remain the same.(1) Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $687 $925 $1,182 $1,914
Class G $132 $426 $ 756 $1,690
(1) This Example assumes that net annual operating expenses for Class G Shares
will equal 1.30% until April 1, 2001 and will equal 1.47% thereafter.
15
<PAGE>
Risk/Return Summary
INTERNATIONAL GROWTH FUND
CLASS A SHARES
Cusip#: 926464702
SIDSX
CLASS G SHARES
Cusip#: 926464439
INTFX
Investment Objective
The International Growth Fund seeks to provide capital growth consistent with
reasonable investment risk.
Principal Investment Strategies
The International Growth Fund pursues its objective by investing primarily in
equity securities of foreign corporations, most of which are denominated in
foreign currencies.
The International Growth Fund will invest most of its assets in securities of
companies traded on exchanges outside of the U.S., including developed and
emerging countries. In making investment decisions, KAM and Indocam
International Investment Services, S.A., the International Growth Fund's
sub-adviser, may analyze the economies of foreign countries and the growth
potential for individual sectors and securities.
Under normal market conditions, the International Growth Fund:
* Will invest at least 65% of its total assets in:
- Securities (including "sponsored" and "unsponsored" ADRs) of companies that
derive more than 50% of their gross revenues from, or have more than 50% of
their assets, outside the United States; and
- Securities for which the principal trading markets are located in at least
three different countries (excluding the United States); and
* The International Growth Fund may invest up to 20% of its total assets in
securities of companies located in emerging countries.
There is no guarantee that the International Growth Fund will achieve its
objectives.
Principal Risks
You may lose money by investing in the International Growth Fund. The
International Growth Fund is subject to the following principal risks, more
fully described in "Risk Factors." The International Growth Fund's net asset
value, yield and/or total return may be adversely affected if any of the
following occurs:
* Foreign securities experience more volatility than their domestic
counterparts, in part because of higher political and economic risks, lack of
reliable information, fluctuations in currency exchange rates, and the risks
that a foreign government may take over assets, restrict the ability to exchange
currency or restrict the delivery of securities.
* The prices of foreign securities issued in emerging countries experience more
volatility because the securities markets in these countries may not be well
established.
* The market value of securities acquired by the International Growth Fund
declines.
* The portfolio manager does not execute the International Growth Fund's
principal investment strategies effectively.
An investment in the International Growth Fund is not a deposit of KeyBank or
any of its affiliates and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
The International Growth Fund may be appropriate for investors who are
comfortable with assuming the added risks associated with stocks that do not pay
out significant portions of their earnings as dividends. It also may be
appropriate for investors who are comfortable with assuming the added risks
associated with investments in foreign countries and investments denominated in
foreign currencies. By itself, the International Growth Fund does not constitute
a complete investment plan and should be considered a long-term investment for
investors who can afford to weather changes in the value of their investment and
do not require significant current income from their investments.
16
<PAGE>
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the International Growth Fund by showing changes in its performance
for various time periods ending December 31st. The figures shown in the bar
chart and table assume reinvestment of dividends and distributions.
The bar chart shows returns for Class A Shares of the International Growth Fund.
Sales loads are not reflected on the bar chart (or highest and lowest returns
below) and if they were reflected, returns would be lower than those shown.
1991 9.75%
1992 -6.41%
1993 35.91%
1994 2.72%
1995 7.71%
1996 6.29%
1997 2.33%
1998 17.48%
1999 41.92%
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter was
29.84% (quarter ending December 31, 1999) and the lowest return for a quarter
was -15.23% (quarter ending September 30, 1998).
The table shows how the average annual total returns for Class A Shares of the
International Growth Fund for one year, five years and since inception,
including maximum sales charges, compare to those of a broad-based market index.
Average Annual Total Returns Since
(for the Periods ended Past Past Inception
December 31, 1999)(1) One Year 5 Years (5/18/90)
Class A 33.72% 12.98% 9.84%
MSACWI Free ex US Index(2) 30.90% 12.31% 8.98%
(1) The International Growth Fund did not offer Class G Shares prior to March
29, 1999.
(2) The Morgan Stanley All Country World Index Free ex US is a widely recognized
unmanaged index of common stock prices with country weightings of international
companies. Index returns do not include any brokerage commissions, sales
charges, or other fees. It is not possible to invest directly in an index.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the International Growth Fund.
Shareholder Transaction Expenses
(paid directly from your investment)(1) Class A Class G
Maximum Sales Charge
Imposed on Purchases 5.75% NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE(2) NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees 1.10% 1.10%
Distribution (12b-1) Fees 0.00% 0.50%
Other Expenses (includes a
shareholder servicing fee of 0.25%
applicable to Class A Shares) 0.78% 0.64%
Total Fund Operating Expenses 1.88% 2.24%
Fee Waiver/Expense Reimbursement (0.00)% (0.24)%
Net Expenses 1.88%(3) 2.00%(4)
(1) You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
(2) Except for non-IRA tax deferred retirement accounts, there is no initial
sales charge on purchases of $1 million or more for Class A Shares. However, if
you sell any of such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any of such Class
A Shares within two years, you will be charged a CDSC of 0.50%.
(3) The Adviser may waive fees and reimburse expenses, as allowed by law, so
that the net operating expenses of the International Growth Fund will equal
1.75% for Class A Shares. The Adviser may terminate this waiver/reimbursement at
any time to the extent allowed by law.
(4) The Adviser has contractually agreed to waive its management fee or to
reimburse expenses, as allowed by law, to the extent necessary to maintain the
net operating expenses of Class G Shares of the International Growth Fund at a
maximum of 2.00% until at least April 1, 2001.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the International Growth Fund with the cost of investing in other
mutual funds. The Example assumes that you invest $10,000 in the International
Growth Fund for the time periods shown and then sell all of your shares at the
end of those periods. The Example also assumes that your investment has a 5%
return each year and that the International Growth Fund's operating expenses
remain the same.(1) Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $755 $1,132 $1,533 $2,649
Class G $203 $ 677 $1,178 $2,556
(1) This Example assumes that Net Annual Fund Operating Expenses for Class G
Shares will equal 2.00% until April 1, 2001 and will equal 2.24% thereafter.
17
<PAGE>
Investments
The following describes some of the types of securities the Funds may purchase
under normal market conditions to achieve their investment objectives. All Funds
will not buy all of the securities listed below.
For cash management or for temporary defensive purposes in response to market
conditions, each Fund may hold all or a portion of its assets in cash or
short-term money market instruments. This may reduce the benefit from any
upswing in the market and may cause a Fund to fail to meet its investment
objective.
For a more complete description of which Funds can invest in certain types of
securities, see the Statement of Additional Information (SAI).
U.S. Equity Securities.
Can include common stock and securities that are convertible or exchangeable
into common stock of U.S.
corporations.
Equity Securities of Companies Traded on Foreign Exchanges.
Can include common stock and securities convertible into stock of non-U.S.
corporations.
Equity Securities of Foreign Companies Traded on U.S. Exchanges.
Can include common stock, and convertible preferred stock of non-U.S.
corporations. Also may include American
Depository Receipts (ADRs) and Global Depository Receipts (GDRs).
*Futures Contracts and Options on Futures Contracts.
Contracts involving the right or obligation to deliver or receive assets or
money depending on the performance of one or more assets or an economic index.
To reduce the effects of leverage, liquid assets equal to the contract
commitment are set aside to cover the commitment. A Fund may invest in futures
in an effort to hedge against market risk, or as a temporary substitute for
buying or selling securities, foreign currencies or for temporary cash
management purposes. The Stock Index Fund invests in futures as a substitution
for S&P 500 stock.
* Derivative Instruments: Indicates a "derivative instrument" whose value
is linked to or derived from another security, instrument, or index.
18
<PAGE>
Risk Factors
This Prospectus describes the principal risks that you may assume as an
investor in the Funds.
This table summarizes the principal risks, described in the following pages, to
which the Funds are subject.
<TABLE>
<CAPTION>
Small
Established Diversified Stock Special Company International
Value Value Stock Index Growth Value Opportunity Growth
Fund Fund Fund Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market risk and X X X X X X X X
manager risk
Equity risk X X X X X X X X
Currency risk
and/or foreign
issuer risk X X
Correlation risk X
</TABLE>
General Risks:
* Market risk is the risk that the market value of a security may fluctuate,
depending on the supply and demand for that type of security. As a result of
this fluctuation, a security may be worth more or less than the price a Fund
originally paid for the security, or more or less than the security was worth at
an earlier time. Market risk may affect a single issuer, an industry, a sector
of the economy, or the entire market and is common to all investments.
* Manager risk is the risk that a Fund's portfolio manager may implement its
investment strategy in a way that does not produce the intended result.
Risk associated with investing in equity securities:
* Equity risk is the risk that the value of the security will fluctuate in
response to changes in earnings or other conditions affecting the issuer's
profitability. Unlike debt securities, which have preference to a company's
assets in case of liquidation, equity securities are entitled to the residual
value after the company meets its other obligations. For example, in the event
of bankruptcy, holders of debt securities have priority over holders of equity
securities to a company's assets.
By matching your investment objective with an acceptable level of risk, you can
create your own customized investment plan.
19
<PAGE>
Risk Factors (continued)
It is important to keep in mind one basic principle of investing: the greater
the risk, the greater the potential reward. The reverse is also generally
true: the lower the risk, the lower the potential reward.
An investment in a Fund is not a complete investment program.
Risks associated with investing in foreign securities:
* Currency risk is the risk that fluctuations in the exchange rates between the
U.S. dollar and foreign currencies may negatively affect an investment. Adverse
changes in exchange rates may erode or reverse any gains produced by foreign
currency denominated investments and may widen any losses. Political and
economic risks, along with other factors, could adversely affect the value of
the International Growth Fund's securities.
* Foreign issuer risk. Compared to U.S. companies, there generally is less
publicly available information about foreign companies and there may be less
governmental regulation and supervision of foreign stock exchanges, brokers, and
listed companies. Foreign issuers may not be subject to the uniform accounting,
auditing, and financial reporting standards and practices prevalent in the U.S.
In addition, foreign securities markets may be more volatile and subject to less
governmental supervision than their counterparts in the U.S. Investments in
foreign countries could be affected by factors not present in the U.S.,
including expropriation, confiscation of property, and difficulties in enforcing
contracts. All of these factors can make foreign investments, especially those
in developing countries, more volatile than U.S. investments.
Risk associated with futures and options contracts:
* Correlation risk. Futures and options contracts can be used in an effort to
hedge against certain risks. Generally, an effective hedge generates an offset
to gains or losses of other investments made by a Fund. Correlation risk is the
risk that a hedge created using futures or options contracts (or any derivative,
for that matter) does not, in fact, respond to economic or market conditions in
the manner the portfolio manager expected. In such a case, the futures or
options contract hedge may not generate gains sufficient to offset losses and
may actually generate losses.
20
<PAGE>
Share Price
Each Fund calculates its share price, called its "net asset value" (NAV), each
business day at 4:00 p.m. Eastern Time or at the close of trading on the New
York Stock Exchange Inc. (NYSE), whichever time is earlier. You may buy,
exchange, and sell your shares on any business day at a price that is based on
the NAV that is calculated after you place your order. A business day is a day
on which the NYSE is open.
A Fund's NAV may change on days when shareholders will not be able to purchase
or redeem the Fund's shares if the Fund has portfolio securities that are
primarily listed on foreign exchanges that trade on weekends or other days when
a Fund does not price its shares.
The Funds value their investments based on market value. When market quotations
are not readily available, the Funds value their investments based on fair value
methods approved by the Board of Trustees of the Victory Portfolios. Each Class
of each Fund calculates its NAV by adding up the total value of its investments
and other assets, subtracting its liabilities, and then dividing that figure by
the number of outstanding shares of the Class.
Total Assets- Liabilities
NAV = ----------------------------
Number of Shares Outstanding
You can find a Fund's net asset value each day in The Wall Street Journal and
other newspapers. Newspapers do not normally publish fund information until a
Fund reaches a specific number of shareholders or level of assets.
The daily NAV is useful to you as a shareholder because the NAV, multiplied by
the number of Fund shares you own gives you the value of your investment.
Dividends, Distributions, and Taxes
As a shareholder, you are entitled to your share of net income and capital gains
on a Fund's investments. The Funds pass their earnings along to investors in the
form of dividends. Dividend distributions are the net income earned on
investments after expenses. A Fund will distribute short-term gains, as
necessary, and if a Fund makes a long-term capital gain distribution, it is
normally paid once a year. As with any investment, you should consider the tax
consequences of an investment in a Fund.
Ordinarily, each Fund described in this Prospectus declares and pays dividends
quarterly. Each class of shares declares and pays dividends separately.
Distributions can be received in one of the following ways.
REINVESTMENT OPTION
You can have distributions automatically reinvested in additional shares of a
Fund. If you do not indicate another choice on your Account Application, you
will be assigned this option automatically.
CASH OPTION
A check will be mailed to you no later than seven days after the dividend
payment date.
INCOME EARNED OPTION
You can automatically reinvest your dividends in additional shares of a Fund and
have your capital gains paid in cash, or reinvest capital gains and have your
dividends paid in cash.
Buying a Dividend. You should check a Fund's distribution schedule before you
invest. If you buy shares of a Fund shortly before it makes a distribution, some
of your investment may come back to you as a taxable distribution.
21
<PAGE>
Dividends , Distributions, and Taxes (continued)
Your choice of distribution should be set up on the original Account
Application. If you would like to change the option you selected, please call
800-539-FUND.
DIRECTED DIVIDENDS OPTION
In most cases, you can automatically reinvest distributions in shares of another
fund of the Victory Group. If you reinvest your distributions in a different
class of another fund, you may pay a sales charge on the reinvested
distributions.
DIRECTED BANK ACCOUNT OPTION
In most cases, you can automatically transfer distributions to your bank
checking or savings account. Under normal circumstances, the Transfer Agent will
transfer your distributions within seven days of the dividend payment date. The
bank account must have a registration identical to that of your Fund account.
Important Information about Taxes
Each Fund pays no federal income tax on the earnings and capital gains it
distributes to shareholders.
* Ordinary dividends from a Fund are taxable as ordinary income; dividends from
a Fund's long-term capital gains are taxable as long-term capital gain.
* Dividends are treated in the same manner for federal income tax purposes
whether you receive them in cash or in additional shares. They also may be
subject to state and local taxes.
* Dividends from a Fund that are attributable to interest on certain U.S.
government obligations may be exempt from certain state and local income taxes.
The extent to which ordinary dividends are attributable to these U.S. government
obligations will be provided on the tax statements you receive from a Fund.
* An exchange of a Fund's shares for shares of another fund will be treated as a
sale. When you sell or exchange shares of a Fund, you must recognize any gain or
loss.
* Certain dividends paid to you in January will be taxable as if they had been
paid to you the previous December.
* Tax statements will be mailed from each Fund every January showing the amounts
and tax status of distributions made to you.
* Under certain circumstances, the International Growth Fund may be in a
position to (in which case it would) "pass through" to you the right to a credit
or deduction for income or other tax credits earned from foreign investments.
* Because your tax treatment depends on your purchase price and tax position,
you should keep your regular account statements for use in determining your tax.
* You should review the more detailed discussion of federal income tax
considerations in the SAI.
The tax information in this Prospectus is provided as general information. You
should consult your own tax adviser about the tax consequences of an investment
in a Fund.
22
<PAGE>
INVESTING WITH VICTORY
If you are looking for a convenient way to open an account or to add money to an
existing account, Victory can help. The sections that follow will serve as a
guide to your investments with Victory. "Choosing a Share Class" will help you
decide whether it would be more to your advantage to buy Class A or Class G
Shares of a Fund. The following sections will describe how to open an account,
how to access information on your account, and how to buy, exchange and sell
shares of a Fund.
We want to make it simple for you to do business with us. If you have questions
about any of this information, please call your Investment Professional or one
of our customer service representatives at 800-539-FUND. They will be happy to
assist you.
All you need to do to get started is to fill out an application.
Choosing a Share Class
Each Fund offers Class A and G Shares. Each class has its own cost structure,
allowing you to choose the one that best meets your requirements. Your
Investment Professional also can help you decide.
CLASS A
* Front-end sales charge, as described on the next page. There are several ways
to reduce this charge.
* Lower annual expenses, generally, than Class G Shares.
CLASS G
* No front-end sales charge. All your money goes to work for you right away.
* Class G Shares are sold only by certain broker-dealers.
An Investment Professional is an investment consultant, salesperson, financial
planner, investment adviser, or trust officer who provides you with investment
information.
Calculation of Sales Charges -- Class A
Class A Shares are sold at their public offering price, which is the NAV plus
the applicable initial sales charge. The sales charge as a percentage of your
investment decreases as the amount you invest increases. The current sales
charge rates are listed below:
Sales Charge Sales Charge
as a % of as a % of
Your Investment in the Fund Offering Price Your Investment
Up to $49,999 5.75% 6.10%
$50,000 up to $99,999 4.50% 4.71%
$100,000 up to $249,999 3.50% 3.63%
$250,000 up to $499,999 2.50% 2.56%
$500,000 up to $999,999 2.00% 2.04%
$1,000,000 and above* 0.00% 0.00%
*Except as indicated in the last sentence of this note, there is no initial
sales charge on purchases of $1 million or more. However, a contingent deferred
sales charge (CDSC) of up to 1.00% will be charged to the shareholder if any of
such shares are redeemed in the first year after purchase, or at 0.50% within
two years of the purchase. This charge will be based on either the cost of the
shares or net asset value at the time of redemption, whichever is lower. There
will be no CDSC on reinvested distributions. The initial sales charge exemption
for investments of $1 million or more does not apply to tax deferred retirement
accounts (except IRA accounts); the sales charge on investments by such tax
deferred retirement accounts of $1 million or more is the same as for
investments between $500,000 and $999,999.
For historical expense information on Class A and G Shares, see the "Financial
Highlights" at the end of this Prospectus.
23
<PAGE>
Choosing a Share Class (continued)
There are several ways you can combine multiple purchases in the Victory Funds
and take advantage of reduced sales charges.
Sales Charge Reductions and Waivers for Class A Shares
You may qualify for reduced sales charges in the following cases:
1. A Letter of Intent lets you buy Class A Shares of a Fund over a 13-month
period and receive the same sales charge as if all shares had been purchased at
one time. You must start with a minimum initial investment of 5% of the total
amount.
2. Rights of Accumulation allow you to add the value of any Class A Shares you
already own to the amount of your next Class A investment for purposes of
calculating the sales charge at the time of purchase.
3. You can combine Class A Shares of multiple Victory Funds, (excluding funds
sold without a sales charge) for purposes of calculating the sales charge. The
combination privilege also allows you to combine the total investments from the
accounts of household members of your immediate family (spouse and children
under 21) for a reduced sales charge at the time of purchase.
4. Waivers for certain investors:
a. Current and retired Fund Trustees, directors, trustees, employees, and family
members of employees of KeyCorp or "Affiliated Providers,"* and dealers who have
an agreement with the Distributor and any trade organization to which the
Adviser or the Administrator belong.
b. Investors who purchase shares for trust or other advisory accounts
established with KeyCorp or its affiliates.
c. Investors in Class A Shares who reinvest the proceeds from a liquidation
distribution of Class A Shares held in deferred compensation plan, agency,
trust, or custody account that was maintained by KeyBank National Association
and its affiliates, the Victory Group, or invested in a fund of the Victory
Group.
d. Investment Professionals who purchased Fund shares for fee-based investment
products or accounts, and selling brokers and their sales representatives.
e. Purchase of shares in connection with financial institution sponsored bundled
omnibus retirement programs sponsored by financial institutions that have
entered into agreements with the Funds' Distributor in connection with the
operational requirements of such programs.
f. Participants in tax-deferred retirement plans who purchased shares pursuant
to waiver provisions in effect prior to December 15, 1999.
* Affiliated Providers are affiliates and subsidiaries of KeyCorp, and any
organization that provides services to the Victory Group.
24
<PAGE>
Choosing a Share Class (continued)
Shareholder Servicing Plan
Each Fund, other than the Stock Index Fund, has adopted a Shareholder Servicing
Plan for its Class A Shares. The Shareholder Servicing Plan also applies to
Class G Shares of the Stock Index Fund. The shareholder servicing agent performs
a number of services for its customers who are shareholders of the Funds. It
establishes and maintains accounts and records, processes dividend payments,
arranges for bank wires, assists in transactions, and changes account
information. For these services a Fund pays a fee at an annual rate of up to
0.25% of the average daily net assets of the appropriate class of shares
serviced by the agent. The Funds may enter into agreements with various
shareholder servicing agents, including KeyBank National Association and its
affiliates, other financial institutions, and securities brokers. The Funds may
pay a servicing fee to broker-dealers and others who sponsor "no transaction
fee" or similar programs for the purchase of shares. Shareholder servicing
agents may waive all or a portion of their fee periodically. Distribution Plan
Victory has adopted a Distribution and Service Plan for Class G Shares of each
Fund, other than the Stock Index Fund, under which these shares will pay to the
Distributor a monthly service fee at an annual rate of 0.25% of the average
daily net assets of each such Fund. The service fee is paid to securities
broker-dealers or other financial intermediaries for providing personal services
to shareholders of these Funds, including responding to inquiries, providing
information to shareholders about their fund accounts, establishing and
maintaining accounts and records, processing dividend and distribution payments,
arranging for bank wires, assisting in transactions, and changing account
information. Each such Fund may enter into agreements with various shareholder
servicing agents, including KeyCorp and its affiliates, and with other financial
institutions that provide such services.
Under the Class G Rule 12b-1 Distribution and Service Plan, Class G Shares of
the each Fund, other than the Stock Index Fund, also annually pay the
Distributor a monthly distribution fee in an additional amount of up to 0.25% of
each such Fund's average daily net assets. The distribution fee is paid to the
Distributor for general distribution services and for selling Class G Shares of
these Funds. The Distributor makes payments to agents who provide these
services.
Victory has adopted separate Rule 12b-1 Distribution and Service Plans for Class
A Shares of the Established Value Fund and Small Company Opportunity Fund and
Class G Shares of the Stock Index Fund. These share classes do not pay any
expenses under this plan.
Because Rule 12b-1 fees are paid out of a Fund's assets on an on-going basis,
over time these fees will increase the cost of your investment and may cost you
more than paying other types of sales charges.
25
<PAGE>
How to Buy Shares
You can buy shares in a number of different ways. All you need to do to get
started is to fill out an application. The minimum investment required to open
an account is $500 ($100 for IRAs), with additional investments of at least $25.
There is no minimum investment required to open an account for additional
investments for SIMPLE IRAs. You can send in your payment by check, wire
transfer, exchange from another Victory Fund, or through arrangements with your
Investment Professional. Sometimes an Investment Professional will charge you
for these services. This fee will be in addition to, and unrelated to, the fees
and expenses charged by a Fund.
If you buy shares directly from the Funds and your investment is received and
accepted by 4:00 p.m. Eastern Time or the close of trading on the NYSE
(whichever time is earlier), your purchase will be processed the same day using
that day's share price.
Make your check payable to: The Victory Funds
Keep the following addresses handy for purchases, exchanges, or redemptions:
BY REGULAR U.S. MAIL
Send completed Account Applications with your check, bank draft, or money order
to:
Class G Shares
The Victory Funds
c/o Gradison McDonald
580 Walnut Street
Cincinnati, OH 45202
Class A Shares
The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
BY OVERNIGHT MAIL
Use the following address ONLY for overnight packages.
Class G Shares
The Victory Funds
c/o Gradison McDonald
580 Walnut Street
Cincinnati, OH 45202
Phone: 800-539-FUND
Class A Shares
The Victory Funds
c/o Boston Financial Data Services
66 Brooks Drive
Braintree, MA 02184
Phone: 800-539-FUND
BY WIRE
The Transfer Agent does not charge a wire fee, but your originating bank may
charge a fee. Always call 800-539-FUND BEFORE wiring funds .
Class G Shares
The Victory Funds
Firstar Bank
ABA #042000013
For Credit to DDA
Account # 8355281
(insert Fund name,
account number and name)
Class A Shares
The Victory Funds
State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA
Account #9905-201-1
(insert account number,
name, and confirmation
number assigned by the
Transfer Agent)
BY TELEPHONE
800-539-FUND
(800-539-3863)
26
<PAGE>
How to Buy Shares (continued)
ACH
After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic member banks may be used. It takes
about 15 days to set up an ACH account. Currently, the Funds do not charge a fee
for ACH transfers.
Statements and Reports
You will receive a periodic statement reflecting any transactions that affect
the balance or registration of your account. You will receive a confirmation
after any purchase, exchange, or redemption. If your account has been set up by
an Investment Professional, Fund activity will be detailed in that account's
statements. Share certificates are not issued. Twice a year, you will receive
the financial reports of the Funds. By January 31 of each year, you will be
mailed an IRS form reporting distributions for the previous year, which also
will be filed with the IRS.
Systematic Investment Plan
To enroll in the Systematic Investment Plan, you should check this box on the
Account Application. We will need your bank information and the amount and
frequency of your investment. You can select monthly, quarterly, semi-annual, or
annual investments. You should attach a voided personal check so the proper
information can be obtained. You must first meet the minimum investment
requirement of $500 ($100 for IRA accounts), then we will make automatic
withdrawals of the amount you indicate ($25 or more) from your bank account and
invest it in shares of a Fund.
Retirement Plans
You can use the Funds as part of your retirement portfolio. Your Investment
Professional can set up your new account under one of several tax-deferred
retirement plans. Please contact your Investment Professional or the Funds for
details regarding an IRA or other retirement plan that works best for your
financial situation.
If you would like to make additional investments after your account is
established, use the Investment Stub attached to your confirmation statement and
send it with your check to the address indicated.
All purchases must be made in U.S. dollars and drawn on U.S. banks. The Transfer
Agent may reject any purchase order in its sole discretion. If your check is
returned for any reason, you will be charged for any resulting fees and/or
losses. Third party checks will not be accepted. You may only buy or exchange
into fund shares legally available in your state. If your account falls below
$500 ($100 for IRA accounts), we may ask you to re-establish the minimum
investment. If you do not do so within 60 days, we may close your account and
send you the value of your account.
27
<PAGE>
How to Exchange Shares
You can obtain a list of funds available for exchange by calling 800-539-FUND.
You can sell shares of one fund of the Victory Portfolios to buy shares of
the same class of any other. This is considered an exchange.
You can exchange shares of a Fund by writing the Transfer Agent or calling
800-539-FUND. When you exchange shares of a Fund, you should keep the following
in mind:
* Shares of the fund selected for exchange must be available for sale in your
state of residence.
* The Fund whose shares you want to exchange and the fund whose shares you want
to buy must offer the exchange privilege.
* If you acquire Class A Shares of a Fund as a result of an exchange you pay the
percentage point difference, if any, between the Fund's sales charge and any
sales charge that you previously paid in connection with the shares you are
exchanging. For example, if you acquire Class A Shares of a Fund as a result of
an exchange from another fund of the Victory Group that has a 2.00% sales
charge, you would pay the 3.75% difference in sales charge.
* On certain business days, such as Veterans Day and Columbus Day, the Federal
Reserve Bank of Cleveland is closed. On those days, exchanges to or from a money
market fund will be processed on the exchange date, with the corresponding
purchase or sale of the money market fund shares being effected on the next
business day.
* You must meet the minimum purchase requirements for the fund you purchase by
exchange.
* The registration and tax identification numbers of the two accounts must be
identical.
* You must hold the shares you buy when you establish your account for at least
seven days before you can exchange them; after the account is open seven days,
you can exchange shares on any business day.
* Each Fund may refuse any exchange purchase request if the Adviser determines
that the request is associated with a market timing strategy. Each Fund may
terminate or modify the exchange privilege at any time on 30 days' notice to
shareholders.
* Before exchanging, read the prospectus of the fund you wish to purchase by
exchange.
* An exchange of Fund shares constitutes a sale for tax purposes.
* Holders of Class G Shares who acquired their shares as a result of the
reorganization of the Gradison Funds into the Victory Funds can exchange into
Class A Shares of any Victory Fund that does not offer Class G Shares without
paying a sales charge.
28
<PAGE>
How to Sell Shares
If your request is received in good order by 4:00 p.m. Eastern Time or the close
of trading on the NYSE (whichever time is earlier), your redemption will be
processed the same day.
There are a number of convenient ways to sell your shares. You can use the same
mailing addresses listed for purchases.
BY TELEPHONE
The easiest way to sell shares is by calling 800-539-FUND. When you fill out
your original application, be sure to check the box marked "Telephone
Authorization." Then when you are ready to sell, call and tell us which one of
the following options you would like to use:
* Mail a check to the address of record;
* Wire funds to a domestic financial institution;
* Mail a check to a previously designated alternate address; or
* Electronically transfer your redemption via the Automated Clearing House
(ACH).
The Transfer Agent records all telephone calls for your protection and takes
measures to verify the identity of the caller. If the Transfer Agent properly
acts on telephone instructions and follows reasonable procedures to ensure
against unauthorized transactions, neither Victory, its servicing agents, the
Adviser, nor the Transfer Agent will be responsible for any losses. If the
Transfer Agent does not follow these procedures, it may be liable to you for
losses resulting from unauthorized instructions.
If there is an unusual amount of market activity and you cannot reach the
Transfer Agent or your Investment Professional by telephone, consider placing
your order by mail.
BY MAIL
Use the Regular U.S. Mail or Overnight Mail Address to redeem shares. Send us a
letter of instruction indicating your Fund account number, amount of redemption,
and where to send the proceeds. A signature guarantee is required for the
following redemption requests:
* Redemptions over $10,000;
* Your account registration has changed within the last 15 days;
* The check is not being mailed to the address on your account;
* The check is not being made payable to the owner of the account;
* The redemption proceeds are being transferred to another Victory Group
account with a different registration; or
* The check or wire is being sent to a different bank account.
You can get a signature guarantee from a financial institution such as a bank,
broker-dealer, credit union, clearing agency, or savings association.
BY WIRE
If you want to receive your proceeds by wire, you must establish a Fund account
that will accommodate wire transactions. If you call by 4:00 p.m. Eastern Time
or the close of trading on the NYSE (whichever time is earlier), your funds will
be wired on the next business day.
BY ACH
Normally, your redemption will be processed on the same day , but will be
processed on the next day if received after 4:00 p.m. Eastern Time or the close
of trading on the NYSE (whichever time is earlier). It will be transferred by
ACH as long as the transfer is to a domestic bank.
29
<PAGE>
How to Sell Shares (continued)
Systematic Withdrawal Plan
If you check this box on the Account Application, we will send monthly,
quarterly, semi-annual, or annual payments to the person you designate. The
minimum withdrawal is $25, and you must have a balance of $5,000 or more. If the
payment is to be sent to an account of yours, we will need a voided check to
activate this feature. If the payment is to be made to an address different from
your account address, we will need a signature guaranteed letter of instruction.
You should be aware that your account eventually may be depleted. However, you
cannot automatically close your account using the Systematic Withdrawal Plan. If
your balance falls below $500, we may ask you to bring the account back to the
minimum balance. If you decide not to increase your account to the minimum
balance, your account may be closed and the proceeds mailed to you.
Additional Information about Redemptions
* Redemption proceeds from the sale of shares purchased by a check may be held
until the purchase check has cleared, which may take up to 15 days.
* A Fund may suspend your right to redeem your shares in the following
circumstances:
- During non-routine closings of the NYSE;
- When the Securities and Exchange Commission (SEC) determines either that
trading on the NYSE is restricted or that an emergency prevents the sale or
valuation of the Fund's securities; or
- When the SEC orders a suspension to protect the Fund's shareholders.
* Each Fund will pay redemptions by any one shareholder during any 90-day period
in cash up to the lesser of $250,000 or 1% of a Fund's net assets. Each Fund
reserves the right to pay the remaining portion "in kind," that is, in portfolio
securities rather than cash.
30
<PAGE>
Organization and Management of the Funds
About Victory
Each Fund is a member of the Victory Portfolios, a group of over 30 distinct
investment portfolios. The Board of Trustees of Victory has the overall
responsibility for the management of the Funds.
The Investment Adviser and Sub-Administrator
Each Fund has an Advisory Agreement which is one of its most important
contracts. Key Asset Management Inc. (KAM), a New York corporation registered as
an investment adviser with the SEC, is the Adviser to each of the Funds. KAM, a
subsidiary of KeyCorp, oversees the operations of the Funds according to
investment policies and procedures adopted by the Board of Trustees. Affiliates
of the Adviser manage approximately $76 billion for individual and institutional
clients. KAM's address is 127 Public Square, Cleveland, Ohio 44114.
For the fiscal year ended October 31, 1998, KAM was paid advisory fees based on
a percentage of the average daily net assets of each Fund (after waivers) as
shown in the following table.
Value Fund 0.96%
Established Value 0.49%
Diversified Stock Fund 0.61%
Stock Index Fund 0.51%
Growth Fund 0.93%
Special Value Fund 0.90%
Small Company Opportunity Fund 0.57%
International Growth Fund 0.98%
Under a Sub-Administration Agreement, BISYS Fund Services Ohio, Inc. pays KAM
a fee at the annual rate of up to 0.05% of each Fund's average daily net
assets to perform some of the administrative duties for the Funds.
We want you to know who plays what role in your investment and how they are
related. This section discusses the organizations employed by the Funds to
provide services to their shareholders. Each of these organizations is paid a
fee for its services.
Portfolio Management
Neil A. Kilbane is the portfolio manager of the Value Fund. Mr. Kilbane, a
Certified Financial Analyst, has been the portfolio manager of the Value Fund
since April 1998. He is a Portfolio Manager and Managing Director of KAM and has
been in the investment business since 1986.
William J. Leugers, Jr., Daniel R. Shick and Gary H. Miller have been the co-
portfolio managers of the Established Value Fund and its predecessor, the
Gradison Established Value Fund since 1984, 1993 and 1998, respectively, and
together are primarily responsible for the day-to-day management of the
Established Value Fund's portfolio. Messrs. Leugers and Shick are Portfolio
Managers and Managing Directors of Gradison McDonald. Mr. Miller has been a
Vice President and Portfolio Manager of Gradison McDonald since 1998; prior
to which he was a Portfolio Trader with Gradison McDonald since 1993. Messrs.
Leugers, Shick and Miller are also co-portfolio managers of the Small
Company Opportunity Fund and together are primarily responsible for that
Fund's portfolio.
Lawrence G. Babin is the portfolio manager of the Diversified Stock Fund, a
position he has held since its inception in 1989. A Chartered Financial Analyst,
Mr. Babin is a Portfolio Manager and Managing Director of KAM.
Ernest C. Pelaia is the portfolio manager of the Stock Index Fund, a position he
has held since July 1999. He is a Portfolio Manager, and has been with KAM since
July 1991 as an Analyst, Trader, Investment Officer and most recently Assistant
Vice President of Funds Management.
William F. Ruple is the portfolio manager of the Growth Fund, a position he has
held since June 1995. He is a Portfolio Manager and Director of KAM, and has
been associated with KAM or an affiliate since 1970.
31
<PAGE>
Organization and Management of the Funds (cont.)
Anthony Aveni and Paul D. Danes are the portfolio managers of the Special Value
Fund and together are primarily responsible for the day-to-day management of the
Fund's portfolio. Mr. Aveni has been a portfolio manager of the Special Value
Fund since its inception in December 1993. He is the Chief Investment Officer
and a Senior Managing Director with KAM, and has been associated with KAM or an
affiliate since 1981. Mr. Danes has been a portfolio manager of the Special
Value Fund since October 1995. He is a Portfolio Manager and Director with KAM,
and has been associated with KAM or an affiliate since 1987.
Conrad R. Metz and Leslie Globits are primarily responsible for the management
of the International Growth Fund. Mr. Metz is a Managing Director of KAM, and
formerly served as the sole portfolio manager of the International Growth Fund.
He previously was Senior Vice President, International Equities, at Bailard
Biehl & Kaiser, and has over 20 years experience in global equity research and
portfolio management. Mr. Globits, a Director of KAM, was previously a Senior
Financial Analyst and Assistant Vice President in KeyCorp's Corporate Treasury
Department, and has been with KAM or an affiliate since 1987.
The Investment Sub-Adviser to the International Growth Fund
Manager of Managers. KAM, the investment adviser, serves as a Manager of
Managers of the International Growth Fund. As Manager of Managers, KAM may
select one or more sub-advisers to manage the International Growth Fund's
assets. KAM evaluates each sub-adviser's skills, investment styles and
strategies in light of KAM's analysis of the international securities markets.
Under its Advisory Agreement with Victory, KAM oversees the investment advisory
services that a sub-adviser provides to the International Growth Fund. If KAM
engages more than one sub-adviser, KAM may reallocate assets among sub-advisers
when it believes it is appropriate. KAM provides investment advice regarding
short-term debt securities. KAM has the ultimate responsibility for the
International Growth Fund's investment performance because it is responsible for
overseeing all sub-advisers and recommending to the Fund's Board of Trustees
that it hire, terminate or replace a particular sub-adviser.
Victory and KAM have obtained an order from the Securities and Exchange
Commission that allows KAM, subject to certain conditions, to select additional
sub-advisers with the approval of the Funds' Board of Trustees, without
obtaining shareholder approval. The order also allows KAM to change the terms of
agreements with the sub-advisers or to keep a sub-adviser even if certain events
would otherwise require that sub-advisory agreement to terminate. The Funds will
notify shareholders of any sub-adviser change. Shareholders, however, also have
the right to terminate an agreement with a particular sub-adviser. If KAM hires
more than one sub-adviser, the order also allows the International Growth Fund
to disclose only the aggregate amount of fees paid to all sub-advisers.
Indocam International Investment Services, S.A. KAM currently has a Portfolio
Management Agreement with Indocam International Investment Services, S.A.
(IIIS), a French corporation located in Paris, France. IIIS has served as
Sub-adviser for all of the International Growth Fund's assets (other than
short-term debt instruments) since June 1998. IIIS and its advisory affiliates
(Indocam) are the global asset management component of the Credit Agricole
banking and financial services group. As of June 30, 1999, Indocam managed
approximately $145 billion for its clients.
Ayaz Ebrahim, Didier Le Conte, Jean-Claude Kaltenbach and Miren Etcheverry
together are primarily responsible for the day-to-day management of the Fund's
portfolio. Mr. Ebrahim has been employed by IIIS (or an affiliate) since 1991.
Mr. Le Conte is the Senior Portfolio Manager responsible for European Equities
at IIIS and has been employed by IIIS (or an affiliate) since 1966. Mr.
Kaltenbach is the Head of Equity Management at IIIS and has been employed by
IIIS (or an affiliate) since 1994. Ms. Etcheverry has been a Senior Portfolio
Manager with IIIS since January 2000. From 1996 until January 2000, Ms.
Etcheverry was a Senior Vice President at John Hancock Funds and prior to that
was a Senior Vice President with Baring Asset Management.
Indocam International Investment Services, S.A. is the Sub-adviser for the
International Growth Fund.
32
<PAGE>
Organization and Management of the Funds (cont.)
The Funds are supervised by the Board of Trustees, which monitors the services
provided to investors.
OPERATIONAL STRUCTURE OF THE FUNDS
TRUSTEES ADVISER
SHAREHOLDERS
FINANCIAL SERVICES FIRMS AND
THEIR INVESTMENT PROFESSIONALS
Advise current and prospective shareholders on their Fund
investments.
TRANSFER AGENT/SERVICING AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
Handles services such as record-keeping, statements,
processing of buy and sell requests, distribution of
dividends, and servicing of shareholder accounts.
ADMINISTRATOR, DISTRIBUTOR,
AND FUND ACCOUNTANT CUSTODIAN
BISYS Fund Services Key Trust Company of Ohio, N.A.
and its affiliates 127 Public Square
3435 Stelzer Road Cleveland, OH 44114
Columbus, OH 43219
Markets the Funds, distributes shares Provides for safekeeping of the
through Investment Professionals, and Funds' investments and cash, and
calculates the value of shares. settles trades made by the Funds.
As Administrator, handles the day-to-
day activities of the Funds.
SUB-ADMINISTRATOR
Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114
Performs certain sub-administrative services.
33
<PAGE>
Additional Information
Some additional information you should know about the Funds.
Share Classes
The Funds currently offer only the classes of shares described in this
Prospectus. At some future date, the Funds may offer additional classes of
shares.
Performance
The Victory Funds may advertise the performance of each Fund by comparing it to
other mutual funds with similar objectives and policies. Performance information
also may appear in various publications. Any fees charged by Investment
Professionals may not be reflected in these performance calculations.
Advertising information will include the average annual total return of each
Fund calculated on a compounded basis for specified periods of time. Total
return information will be calculated according to rules established by the SEC.
Such information may include performance rankings and similar information from
independent organizations, such as Lipper, Inc., and industry publications such
as Morningstar, Inc., Business Week, or Forbes. You also should see the
"Investment Performance" section for the Fund in which you would like to invest.
Shareholder Communications
In order to eliminate duplicate mailings to an address at which two or more
shareholders with the same last name reside, the Funds will send only one copy
of any shareholder reports, prospectuses and their supplements, unless you have
instructed us to the contrary. You may request that the Funds send these
documents to each shareholder individually by calling the Funds at 800-539-FUND
(800-539-3863).
If you would like to receive additional copies of any materials, please call the
Funds at 800-539-FUND.
34
<PAGE>
Financial Highlights
VALUE FUND
The Financial Highlights table is intended to help you understand the Value
Fund's financial performance for the past five years. Certain information shows
the results of an investment in one share of the Value Fund. The total returns
in the table represent the rate that an investor would have earned on an
investment in the Value Fund (assuming reinvestment of all dividends and
distributions).
These financial highlights reflect historical information about Class A Shares
of the Value Fund. The financial highlights for the five fiscal years ended
October 31, 1999 were audited by PricewaterhouseCoopers LLP, whose report, along
with the financial statements of the Value Fund, are included in the Fund's
annual report, which is available by calling the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1999 1998 1997 1996 1995< F2>
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 18.81 $ 17.07 $ 14.18 $ 11.87 $ 10.13
Investment Activities
Net investment income 0.04 0.09 0.15 0.20 0.27
Net realized and unrealized
gains (losses) from investments 3.16 3.16 3.57 2.65 1.92
Total from Investment Activities 3.20 3.25 3.72 2.85 2.19
Distributions
Net investment income (0.04) (0.10) (0.16) (0.20) (0.27)
In excess of net investment income -- -- -- -- (0.01)
Net realized gains (3.13) (1.41) (0.67) (0.34) (0.17)
Total Distributions (3.17) (1.51) (0.83) (0.54) (0.45)
Net Asset Value, End of Period $ 18.84 $ 18.81 $ 17.07 $ 14.18 $ 11.87
Total Return (excludes sales charges) 20.02% 20.46% 27.24% 24.66% 22.28%
Ratios/Supplemental Data:
Net Assets, End of Period (000) $611,483 $517,313 $472,047 $382,083 $295,871
Ratio of expenses to
average net assets 1.40% 1.34% 1.32% 1.33% 0.99%
Ratio of net investment income
to average net assets 0.20% 0.54% 0.93% 1.56% 2.55%
Ratio of expenses to
average net assets(1) 1.45% 1.46% (3) 1.35% 1.30%
Ratio of net investment income
to average net assets(1) 0.15% 0.42% (3) 1.54% 2.24%
Portfolio turnover 36% 40% 25% 28% 23%
- ---------------
(1)
During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(2)
Effective June 5, 1995, the Victory Equity Income Portfolio merged into the
Value Fund. Financial highlights for the periods prior to June 5, 1995 represent
the Value Fund.
(3)
There were no voluntary fee reductions during the period.
</TABLE>
35
<PAGE>
Financial Highlights
ESTABLISHED VALUE FUND
The Financial Highlights table is intended to help you understand the
Established Value Fund's financial performance for the past five years. Certain
information shows the results of an investment in one share of the Established
Value Fund. The total returns in the table represent the rate that an investor
would have earned on an investment in the Established Value Fund (assuming
reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Class G Shares
of the Established Value Fund. The financial highlights for the period from
April 1, 1999 to October 31, 1999 were audited by PricewaterhouseCoopers LLP,
whose report, along with the financial statements of the Established Value Fund,
are included in the Fund's annual report, which is available by calling the Fund
at 800-539-FUND. The financial highlights for the four fiscal years and one
period ended March 31, 1999 were audited by Arthur Andersen LLP.
<TABLE>
<CAPTION>
Apr. 1, 1999 Year Year Year Year 11 Months
to Ended Ended Ended Ended Ended
Oct. 31, Mar. 31, Mar. 31, Mar. 31, Mar. 31, Mar. 31,
1999(2) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 31.34 $ 33.94 $ 28.83 $ 27.57 $ 23.38 $ 22.52
Investment Activities
Net investment income (loss) 0.02 0.29 0.46 0.44 0.44 0.37
Net realized and unrealized gains
(losses) from investments 2.98 (0.71) 7.70 3.62 5.19 1.52
Total from Investment Activities 3.00 (0.42) 8.16 4.06 5.63 1.89
Distributions
Net investment income (0.03) (0.30) (0.48) (0.45) (0.43) (0.37)
Net realized gains -- (1.88) (2.57) (2.35) (1.01) (0.66)
Total Distributions (0.03) (2.18) (3.05) (2.80) (1.44) (1.03)
Net Asset Value, End of Period $ 34.31 $ 31.34 $ 33.94 $ 28.83 $ 27.57 $ 23.38
Total Return 9.59%(3) (1.01)% 29.67% 15.14% 24.84% 8.85%(3)
Ratios/Supplemental Data:
Net Assets, End of Period (000) $469,288 $478,984 $567,255 $429,726 $366,417 $277,370
Ratio of expenses to
average net assets (5) 1.10%(4) 1.09% 1.10% 1.12% 1.15% 1.20%(4)
Ratio of net investment income
to average net assets (5) 0.03%(4) 0.92% 1.44% 1.57% 1.70% 1.87%(4)
Ratio of expenses to
average net assets(1) 1.27%(4) (6) (6) (6) (6) (6)
Ratio of net investment income
to average net assets(1) (0.14)%(4) (6) (6) (6) (6) (6)
Portfolio turnover 11% 37% 20% 31% 18% 24%
- ---------------
(1)During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratios would have been as indicated.
(2) Effective April 1, 1999, the Gradison Established Value Fund became the
Victory Established Value Fund. Financial highlights prior to April 1, 1999
represent the Gradison Established Value Fund.
(3)Not annualized.
(4)Annualized.
(5)On April 1, 1999, the Adviser agreed to waive its management fee or to
reimburse expenses, as allowed by law, to the extent necessary to maintain the
net operating expenses of the Class G shares of the Established Value Fund at a
maximum of 1.10% until at least April 1, 2001.
(6)There were no fee reductions during the period.
</TABLE>
36
<PAGE>
Financial Highlights
DIVERSIFIED STOCK FUND
The Financial Highlights table is intended to help you understand the
Diversified Stock Fund's financial performance for the past five years. Certain
information shows the results of an investment in one share of the Diversified
Stock Fund. The total returns in the table represent the rate that an investor
would have earned on an investment in the Diversified Stock Fund (assuming
reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Class A and
Class G Shares of the Diversified Stock Fund. The financial highlights for the
five fiscal years ended October 31, 1999 were audited by PricewaterhouseCoopers
LLP, whose report, along with the financial statements of the Diversified Stock
Fund, are included in the Fund's annual report, which is available by calling
the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Prior to
designation
as Class A Class G
Class A Shares Shares Shares
Year Year Year Year Year Mar. 26, 1999
Ended Ended Ended Ended Ended through
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1999 1998(5) 1997 1996(2) 1995 1999(7)(8)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 18.85 $ 17.76 $ 15.75 $ 13.62 $ 12.68 $ 17.14
Investment Activities
Net investment income (loss) 0.06 0.11 0.16 0.20 0.27 (0.01)
Net realized and unrealized
gains (losses) from investments 2.92 3.07 3.84 3.21 2.33 0.82
Total from
Investment Activities 2.98 3.18 4.00 3.41 2.60 0.81
Distributions
Net investment income (0.06) (0.11) (0.16) (0.19) (0.27) --
In excess of net investment income -- -- -- -- (0.01) --
Net realized gains (3.81) (1.98) (1.83) (1.09) (1.38) --
Total Distributions (3.87) (2.09) (1.99) (1.28) (1.66) --
Net Asset Value, End of Period $ 17.96 $ 18.85 $ 17.76 $ 15.75 $ 13.62 $ 17.95
Total Return (excludes sales charges) 19.39% 19.60% 27.96% 27.16% 23.54% 4.73%(9)
Ratios/Supplemental Data
Net Assets, End of Period (000) $957,001 $933,158 $762,270 $571,153 $409,549 $106,592
Ratio of expenses to
average net assets (10) 1.06% 1.02% 1.03% 1.05% 0.92% 1.35%(3)
Ratio of net investment income
(loss) to average net assets (10) 0.34% 0.64% 0.97% 1.40% 2.11% (0.07)%(3)
Ratio of expenses to
average net assets(1) 1.10% 1.13% (4) 1.08% 0.95% 1.38%(3)
Ratio of net investment income
(loss) to average net assets(1) 0.30% 0.53% (4) 1.37% 2.07% (0.10)%(3)
Portfolio turnover (6) 83% 84% 63% 94% 75% 83%
- ---------------
(1)During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(2)Effective March 1, 1996, the Fund designated the existing shares as Class A
Shares.
(3)Annualized.
(4)There were no voluntary fee reductions during the period.
(5)Effective March 16, 1998, the SBSF Fund merged into the Victory Diversified
Stock Fund. Financial highlights for the period prior to March 16, 1998
represent the Victory Diversified Stock Fund.
(6) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(7)Period from commencement of operations.
(8)Effective March 26, 1999, the Gradison Growth and Income Fund merged into
the Victory Diversified Stock Fund.
(9)Not Annualized.
(10)On March 26, 1999, the adviser agreed to waive its management fee or to
reimburse expenses, as allowed by law, to the extent necessary to maintain the
net operating expenses of the Class G Shares of the Fund at a maximum of 1.44%
until at least April 1, 2001. The Adviser has also agreed to waive its
management fee for Class A Shares to the same extent the fee is waived for Class
G Shares until at least April 1, 2001.
</TABLE>
37
<PAGE>
Financial Highlights
STOCK INDEX FUND
The Financial Highlights table is intended to help you understand the Stock
Index Fund's financial performance for the past five years. Certain information
shows the results of an investment in one share of the Stock Index Fund. The
total returns in the table represent the rate that an investor would have earned
on an investment in the Stock Index Fund (assuming reinvestment of all dividends
and distributions).
These financial highlights reflect historical information about Class A and G
Shares of the Stock Index Fund. The financial highlights for the five fiscal
years ended October 31, 1999 were audited by PricewaterhouseCoopers LLP, whose
report, along with the financial statements of the Stock Index Fund, are
included in the Fund's annual report, which is available by calling the Fund at
800-539-FUND.
<TABLE>
<CAPTION>
Class A Shares Class G Shares
July 2,
Year Year Year Year Year 1999
Ended Ended Ended Ended Ended through
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1999 1998(5) 1997 1996 1995 1999(2)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 21.03 $ 18.75 $ 14.85 $ 12.50 $ 10.18 $23.96
Investment Activities
Net investment income 0.28 0.37 0.29 0.28 0.27 0.06
Net realized and unrealized gains
(losses) from investments 4.47 3.37 4.23 2.58 2.31 (0.50)
Total from Investment Activities 4.75 3.74 4.52 2.86 2.58 (0.44)
Distributions
Net investment income (0.29) (0.36) (0.29) (0.28) (0.26) (0.06)
Net realized gains (2.03) (1.10) (0.33) (0.23) -- --
Total Distributions (2.32) (1.46) (0.62) (0.51) (0.26) (0.06)
Net Asset Value, End of Period $ 23.46 $ 21.03 $ 18.75 $ 14.85 $ 12.50 $23.46
Total Return (excludes sales charges) 24.91% 20.99% 31.16% 23.38% 25.72% (1.83)%(3)
Ratios/Supplemental Data:
Net Assets, End of Period (000) $858,235 $627,147 $465,015 $277,124 $160,822 $9,382
Ratio of expenses to
average net assets 0.58% 0.57% 0.56% 0.57% 0.55% 0.82%(4)
Ratio of net investment income
to average net assets 1.28% 1.83% 1.74% 2.14% 2.53% 0.85%(4)
Ratio of expenses to
average net assets(1) 0.81% 0.84% 0.86% 0.89% 0.87% 1.73%(4)
Ratio of net investment income
to average net assets(1) 1.05% 1.56% 1.44% 1.82% 2.21% (0.06)%(4)
Portfolio turnover (6) 3% 8% 11% 4% 12% 3%
- ---------------
(1)During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(2)
Period from commencement of operations.
(3)
Not annualized.
(4)
Annualized.
(5)
Effective March 16,1998, the Key Stock Index Fund merged into the Victory
Stock Index Fund. Financial highlights for the period prior to March 16, 1998
represent the Victory Stock Index Fund.
(6) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
</TABLE>
38
<PAGE>
Financial Highlights
GROWTH FUND
The Financial Highlights table is intended to help you understand the Growth
Fund's financial performance for the past five years. Certain information shows
the results of an investment in one share of the Growth Fund. The total returns
in the table represent the rate that an investor would have earned on an
investment in the Growth Fund (assuming reinvestment of all dividends and
distributions).
These financial highlights reflect historical information about Class A Shares
of the Growth Fund. The financial highlights for the five fiscal years ended
October 31, 1999 were audited by PricewaterhouseCoopers LLP, whose report, along
with the financial statements of the Growth Fund, are included in the Fund's
annual report, which is available by calling the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1999 1998 1997 1996 1995(2)
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 21.62 $ 18.01 $ 14.57 $ 12.15 $ 10.23
Investment Activities
Net investment income (loss) (0.04) (0.03) 0.03 0.08 0.11
Net realized and unrealized
gains (losses) on investments 4.90 4.88 4.07 2.93 1.97
Total from Investment Activities 4.86 4.85 4.10 3.01 2.08
Distributions
Net investment income -- -- (0.04) (0.08) (0.11)
Net realized gains (1.77) (1.24) (0.62) (0.51) (0.05)
Total Distributions (1.77) (1.24) (0.66) (0.59) (0.16)
Net Asset Value, End of Period $ 24.71 $ 21.62 $ 18.01 $ 14.57 $ 12.15
Total Return (excludes sales charges) 24.25% 28.59% 29.08% 25.66% 20.54%
Ratios/Supplemental Data:
Net Assets, End of Period (000) $417,417 $269,476 $185,533 $147,753 $108,253
Ratio of expenses to
average net assets 1.41% 1.35% 1.34% 1.33% 1.07%
Ratio of net investment income
(loss) to average net assets (0.21)% (0.13)% 0.19% 0.64% 1.00%
Ratio of expenses to
average net assets(1) 1.49% 1.49% < F3> 1.39% 1.42%
Ratio of net investment income
(loss) to average net assets(1) (0.29)% (0.27)% < F3> 0.58% 0.65%
Portfolio turnover 33% 29% 21% 27% 107%
- ---------------
(1)During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(2)Effective June 5, 1995, the Victory Equity Portfolio merged into the Growth
Fund. Financial highlights for the periods prior to June 5, 1995 represent the
Growth Fund.
(3)There were no voluntary fee reductions during the period.
</TABLE>
39
<PAGE>
Financial Highlights
SPECIAL VALUE FUND
The Financial Highlights table is intended to help you understand the Special
Value Fund's financial performance for the past five years. Certain information
shows the results of an investment in one share of the Special Value Fund. The
total returns in the table represent the rate that an investor would have earned
on an investment in the Special Value Fund (assuming reinvestment of all
dividends and distributions).
These financial highlights reflect historical information about Class A Shares
of the Special Value Fund. The financial highlights for the five fiscal years
ended October 31, 1999 were audited by PricewaterhouseCoopers LLP, whose report,
along with the financial statements of the Special Value Fund, are included in
the Fund's annual report, which is available by calling the Fund at
800-539-FUND.
<TABLE>
<CAPTION>
Prior to
Designation
as Class A
Class A Shares Shares
Year Year Year Year Year
Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1999 1998 1997 1996(2) 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 13.64 $ 16.68 $ 14.15 $ 12.15 $ 10.49
Investment Activities
Net investment income (loss) 0.07 0.09 0.10 0.12 0.15
Net realized and unrealized
gains (losses) on investments 0.04 (1.79) 3.50 2.33 1.71
Total from Investment Activities 0.11 (1.70) 3.60 2.45 1.86
Distributions
Net investment income (0.08) (0.09) (0.12) (0.11) (0.15)
In excess of net investment income -- -- -- -- --
Net realized gains (0.58) (1.25) (0.95) (0.34) (0.05)
Total Distributions (0.66) (1.34) (1.07) (0.45) (0.20)
Net Asset Value, End of Period $ 13.09 $ 13.64 $ 16.68 $ 14.15 $ 12.15
Total Return (excludes sales charges) 0.80% (11.22)% 27.05% 20.60% 18.01%
Ratios/Supplemental Data:
Net Assets, End of Period (000) $232,272 $346,962 $420,020 $289,460 $194,700
Ratio of expenses to
average net assets 1.43% 1.40% 1.37% 1.37% 1.04%
Ratio of net investment income
(loss) to average net assets 0.51% 0.56% 0.65% 0.88% 1.35%
Ratio of expenses to
average net assets(1) 1.53% 1.51% (4) 1.40% 1.30%
Ratio of net investment income
(loss) to average net assets(1) 0.41% 0.45% (4) 0.85% 1.09%
Portfolio turnover 43% 44% 39% 55% 39%
- ---------------
(1)During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratios would have been as indicated.
(2)Effective March 1, 1996, the Fund designated the existing shares as Class A
Shares and commenced offering Class B Shares.
(3) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(4)There were no voluntary fee reductions during the period.
</TABLE>
40
<PAGE>
Financial Highlights
SMALL COMPANY OPPORTUNITY FUND
The Financial Highlights table is intended to help you understand the Small
Company Opportunity Fund's financial performance for the past five years.
Certain information shows the results of an investment in one share of the Small
Company Opportunity Fund. The total returns in the table represent the rate that
an investor would have earned on an investment in the Small Company Opportunity
Fund (assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Class A and
Class G Shares of the Small Company Opportunity Fund. The financial highlights
for the period from April 1, 1999 to October 31, 1999 were audited by
PricewaterhouseCoopers LLP, whose report, along with the financial statements of
the Small Company Opportunity Fund, are included in the Fund's annual report,
which is available by calling the Fund at 800-539-FUND. The financial highlights
for the four fiscal years and one period ended March 31, 1999, and the one year
ended April 30, 1994, were audited by Arthur Andersen LLP.
<TABLE>
<CAPTION>
Class A Shares Class G Shares
Apr. 1, Mar. 26, Apr. 1, Year Year Year Year 11 Months Year
1999 to 1999 to 1999 to Ended Ended Ended Ended Ended Ended
Oct. 31, Mar. 31, Oct. 31, Mar. 31, Mar. 31, Mar. 31, Mar. 31, Mar. 31, Apr. 30,
1999 1999(2)(3) 1999 1999(3) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 20.71 $ 20.23 $ 20.71 $ 27.89 $ 22.77 $ 22.26 $ 18.10 $ 18.35 $ 17.55
Investment
Activities
Net investment
income (0.01) -- (0.06) 0.10 0.23 0.20 0.19 0.13 0.08
Net realized and
unrealized
gains (losses)
on investments 0.38 0.48 0.39 (6.06) 8.72 2.52 4.73 0.18 1.59
Total from
Investment
Activities 0.37 0.48 0.33 (5.96) 8.95 2.72 4.92 0.31 1.67
Distributions
Net investment
income -- -- -- (0.14) (0.27) (0.17) (0.18) (0.12) (0.07)
In excess of net
realized gains -- -- -- -- -- -- -- -- --
Net realized gains -- -- -- (1.08) (3.56) (2.04) (0.58) (0.44) (0.80)
Total
Distributions -- -- -- (1.22) (3.83) (2.21) (0.76) (0.56) (0.87)
Net Asset Value,
End of Period $ 21.08 $ 20.71 $ 21.04 $ 20.71 $ 27.89 $ 22.77 $ 22.26 $ 18.10 $ 18.35
Total Return
(excludes sales
charges) 1.79%(5) 2.37%(5) 1.59%(5) (22.08)% 42.02% 12.46% 28.00% 1.75%(5) 9.75%
Ratios/Supplemental
Data:
Net Assets,
End of Period (000) $51,599 $64,587 $105,415 $125,761 $175,684 $114,451 $102,979 $84,738 $83,297
Ratio of expenses
to average net
assets (4) 0.98%(6) 0.98%(6) 1.29%(6) 1.30% 1.31% 1.36% 1.41% 1.37%(6) 1.38%
Ratio of net
investment income
(loss) to average
net assets (4) 0.09%(6) 1.50%(6) 0.39%(6) 0.41% 0.86% 0.90% 0.95% 0.84%(6) 0.47%
Ratio of expenses to
average net assets(1) 1.17%(6) 1.19%(6) 1.47%(6) 1.30%(8) (8) (8) (8) (8) (8)
Ratio of net
investment income
(loss) to average
net assets(1) (0.28)%(6) 1.29%(6) (0.58)%(6) 0.41%(8) (8) (8) (8) (8) (8)
Portfolio turnover 16% 30% 16% 30% 42% 35% 24% 32% 40%
- ---------------
(1) During the period, certain fees were voluntarily reduced . If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
(2) Period from commencement of operations.
(3)Effective March 26, 1999, the Gradison Opportunity Value Fund merged into
the Victory Special Growth Fund. Concurrent with the merger the Fund was renamed
Victory Small Company Opportunity Fund. Financial highlights prior to March 26,
1999 represent the Gradison Opportunity Value Fund.
(4)Effective March 26, 1999, the Adviser agreed to waive its management fee or
to reimburse expenses, as allowed by law, to the extent necessary to maintain
the net operating expenses of the Class G shares of the Small Company
Opportunity Fund at a maximum of 1.30% until at least April 1, 2001. The Adviser
has also agreed to waive its management fee for Class A shares to the same
extent the fee is waived for Class G shares until at least April 1, 2001.
(5)Not annualized
(6)Annualized
(7) Portfolio turnover is calculated on the basis of the Small Company
Opportunity Fund as a whole without distinguishing between the classes of shares
issued.
(8)There were no fee reductions during the period.
</TABLE>
41
<PAGE>
Financial Highlights
INTERNATIONAL GROWTH FUND
The Financial Highlights table is intended to help you understand the
International Growth Fund's financial performance for the past five years.
Certain information shows the results of an investment in one share of the
International Growth Fund. The total returns in the table represent the rate
that an investor would have earned on an investment in the International Growth
Fund (assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Class A and
Class G Shares of the International Growth Fund. The financial highlights for
the five fiscal years ended October 31, 1999 were audited by
PricewaterhouseCoopers LLP, whose report, along with the financial statements of
the International Growth Fund, are included in the Fund's annual report, which
is available by calling the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Prior to
designation
as Class A Class G
Class A Shares Shares Shares
Year Year Year Year Year Mar. 26, 1999
Ended Ended Ended Ended Ended through
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1999 1998 1997 1996(3) 1995(4) 1999(8)(9)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 13.19 $ 13.31 $ 13.01 $ 12.33 $ 13.32 $ 13.73
Investment Activities
Net investment income (loss) (0.05) 0.07(2) 0.09 0.08 0.05 (0.03)
Net realized and unrealized
gains(losses) from
investments and
foreign currencies 3.85 0.65 0.67 0.62 (0.42) 2.78
Total from
Investment Activities 3.80 0.72 0.76 0.70 (0.37) 2.75
Distributions
Net investment income -- (0.06) (0.01) (0.02) -- --
Net realized gains (0.48) (0.78) (0.45) -- (0.55) --
Tax return of capital -- -- -- -- (0.07) --
Total Distributions (0.48) (0.84) (0.46) (0.02) (0.62) --
Net Asset Value, End of Period $ 16.51 $ 13.19 $ 13.31 $ 13.01 $ 12.33 $ 16.48
Total Return
(excludes sales charges) 29.43% 5.79% 6.04% 5.65% (2.50)% 20.03%(7)
Ratios/Supplemental Data:
Net Assets, End of Period (000) $149,193 $134,491 $106,189 $121,517 $106,477 $37,322
Ratio of expenses to
average net assets (10) 1.75% 1.71% 1.69% 1.73% 1.53% 2.00%(5)
Ratio of net investment income
(loss) to average net assets (0.32)% 0.55% 0.63% 0.64% 0.75% (1.79)%(5)
Ratio of expenses to
average net assets(1) 1.88% 1.82% 1.69% 1.75% 1.65% 2.24%(5)
Ratio of net investment income
(loss) to average net assets(1) (.45)% 0.44% 0.63% 0.62% 0.63% (2.03)%(5)
Portfolio turnover (6) 106% 86% 116% 178% 68% 106%
- ---------------
(1)During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratios would have been as indicated.
(2)Calculated using average shares for the period.
(3)Effective March 1, 1996, the Fund designated the existing shares as Class A
Shares.
(4)Effective June 5, 1995, the Victory Foreign Markets Portfolio merged into
the International Growth Fund. Financial highlights for the periods prior to
June 5, 1995 represent the International Growth Portfolio.
(5)Annualized.
(6) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(7)Not Annualized.
(8)Period from commencement of operations.
(9)Effective March 26, 1999, the Gradison International Fund merged into the
Victory International Growth Fund.
(10)On March 26, 1999, the adviser agreed to waive its management fee or to
reimburse expenses, as allowed by law, to the extent necessary to maintain the
net operating expenses of the Class G Shares of the Fund at a maximum of 2.00%
until at least April 1, 2001. The Adviser has also agreed to waive its
management fee for Class A Shares to the same extent the fee is waived for Class
G Shares until at least April 1, 2001.
</TABLE>
42
<PAGE>
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43
<PAGE>
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44
<PAGE>
The Victory Funds
127 Public Square
OH-01-27-1612
Cleveland, Ohio 44114
Bulk Rate
U.S. Postage
PAID
Cleveland, OH
Permit No. 469
If you would like a free copy of any of the following documents or would like to
request other information regarding the Funds, you can call or write the Funds
or your Investment Professional.
Statement of Additional Information (SAI)
Contains more details describing the Funds and their policies. The SAI has been
filed with the Securities and Exchange Commission (SEC), and is incorporated by
reference in this Prospectus.
Annual and Semi-annual Reports
Describes each Fund's performance, lists portfolio holdings, and discusses
market conditions and investment strategies that significantly affected a Fund's
performance during its last fiscal year.
If you would like to receive copies of the annual and semi-annual reports and/or
the SAI at no charge, please call the Funds at 800-539-FUND (800-539-3863).
How to Obtain Information
By telephone: Call Victory Funds at 800-539-FUND (800-539-3863).
By mail: The Victory Funds
P. O. Box 8527
Boston, MA 02266-8527
You also may obtain copies of materials from the SEC's Public Reference Room in
Washington, D.C. (Call 1-202-942-8090 for information on the operation of the
SEC's Public Reference Room.) Copies of this information may be obtained, after
paying a duplicating fee, by electronic request at the following e-mail address:
[email protected], or by writing the SEC's Public Reference Section,
Washington, D.C. 20459-0102.
On the Internet: Text only versions of Fund documents can be viewed on-line or
downloaded from the SEC at http://www.sec.gov or from the Victory Funds' website
at http://www.victoryfunds.com.
The securities described in this Prospectus and the SAI are not offered in any
state in which they may not lawfully be sold. No sales representative, dealer,
or other person is authorized to give any information or make any representation
other than those contained in this Prospectus and the SAI.
Victory Funds
LOGO (R) Investment Company Act File Number 811-4852 VF-EQTY-PRO (2/00)
<PAGE>
Prospectus
February 28, 2000
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved any Fund's securities or determined whether this
Prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
Fixed Income Funds
Limited Term Income Fund
Class A Shares
Intermediate Income Fund
Class A and G Shares
Fund for Income
Class A and G Shares
Investment Quality Bond Fund
Class A and G Shares
Victory Funds
(LOGO)(R)
Call Victory at:
800-539-FUND
(800-539-3863)
or visit the Victory Funds' website at:
www.victoryfunds.com
<PAGE>
The Victory Portfolios
Key to Financial Information
Objective and Strategies
The goals and the strategies that a Fund plans to use to pursue its investment
objective.
Risk Factors
The risks you may assume as an investor in a Fund.
Performance
A summary of the historical performance of a Fund in comparison to one or more
unmanaged indices.
Expenses
The costs you will pay, directly or indirectly, as an investor in a Fund,
including sales charges and ongoing expenses.
Shares of the Funds are:
* Not insured by the FDIC;
* Not deposits or other obligations of, or
guaranteed by KeyBank, any of its affiliates, or any other bank;
* Subject to possible investment risks, including possible loss of the amount
invested.
Table of Contents
Introduction 1
Risk/Return Summary for each of the Funds
An analysis which includes the investment objective, principal strategies,
principal risks, performance, and expenses of each Fund.
Limited Term Income Fund
Class A Shares 2
Intermediate Income Fund
Class A and G Shares 4
Fund for Income
Class A and G Shares 6
Investment Quality Bond Fund
Class A and G Shares 8
Investments 10
Risk Factors 11
Share Price 12
Dividends, Distributions, and Taxes 13
Investing with Victory
* Choosing a Share Class 15
* How to Buy Shares 18
* How to Exchange Shares 20
* How to Sell Shares 21
Organization and Management of the Funds 23
Additional Information 25
Financial Highlights
Limited Term Income Fund 26
Intermediate Income Fund 27
Fund for Income 28
Investment Quality Bond Fund 29
<PAGE>
Introduction
This Prospectus explains the objectives, policies, risks, performance,
strategies, and expenses of the Shares of the Victory Funds described in this
Prospectus (the Funds).
Key Asset Management Inc., which we will refer to as the "Adviser" or "KAM"
throughout this Prospectus, manages the Funds.
Please read this Prospectus before investing in the Funds and keep it for future
reference.
Investment Strategy
Each of the Funds pursues its objective by investing primarily in debt
securities. However, each of the Funds has unique investment strategies and its
own risk/reward profile. Please review the "Risk/Return Summary" for each Fund
and the "Investments" section for an overview.
Risk Factors
Certain Funds may share many of the same risk factors. For example, all of the
Funds are subject to interest rate inflation, reinvestment, and credit risks.
The Funds are not insured by the FDIC. In addition, there are other potential
risks, discussed in each "Risk/Return Summary" and in "Risk Factors."
Who May Want to Invest in the Funds
* Investors seeking income
* Investors seeking higher potential returns than provided by money
market funds
* Investors willing to accept the risk of price and dividend
fluctuations
Share Classes
Each Fund offers Class A Shares. The Intermediate Income Fund, Fund for Income
and the Investment Quality Bond Fund also offer Class G Shares. See
"Choosing a Share Class."
The following pages provide you with an overview of each of the Funds. Please
look at the objective, policies, strategies, risks, and expenses to determine
which Fund will suit your risk tolerance and investment needs.
1
<PAGE>
Risk/Return Summary
LIMITED TERM INCOME FUND
CLASS A SHARES
Cusip#: 926464405
SSFIX
Investment Objective
The Limited Term Income Fund seeks to provide income consistent with limited
fluctuation of principal.
Principal Investment Strategies
The Limited Term Income Fund pursues its investment objective by investing in a
portfolio of high grade, fixed income securities with a dollar-weighted average
maturity of one to five years, based on remaining maturities.
Under normal conditions, the Limited Term Income Fund primarily invests in:
* Investment-grade corporate securities, asset-backed securities,
convertible securities and exchangeable debt securities;
* Obligations issued or guaranteed by the U.S. government or its
agencies or instrumentalities;
* Mortgage-backed securities issued by government agencies and
non-governmental entities; and
* Commercial paper.
Important Characteristics of the Limited Term Income Fund's Investments:
* Quality: The Limited Term Income Fund will only invest in high-grade debt
securities rated in one of the top four rating categories at the time of
purchase by Standard & Poor's (S&P), Fitch IBCA International (Fitch IBCA),
Moody's Investors Service (Moody's), or another NRSRO,* or if unrated, of
comparable quality. For more information on ratings, see the Appendix to the
Statement of Additional Information (SAI).
* Maturity: The dollar-weighted effective average maturity of the Limited Term
Income Fund will generally range from 1 to 5 years. Under certain market
conditions, the Limited Term Income Fund's portfolio manager may go outside
these boundaries.
* An NRSRO is a nationally recognized statistical ratings organization that
assigns credit ratings to securities based on the borrower's ability to meet
its obligation to make principal and interest payments.
The Limited Term Income Fund's high portfolio turnover may result in higher
expenses and taxable gain distributions.
There is no guarantee that the Limited Term Income Fund will achieve its
objectives.
Principal Risks
You may lose money by investing in the Limited Term Income Fund. The Limited
Term Income Fund is subject to the following principal risks, more fully
described in "Risk Factors." The Limited Term Income Fund's net asset value,
yield and/or total return may be adversely affected if any of the following
occurs:
* The market value of securities acquired by the Limited Term Income Fund
declines.
* The portfolio manager does not execute the Limited Term Income Fund's
principal investment strategies effectively.
* Interest rates rise.
* An issuer's credit quality is downgraded.
* The Limited Term Income Fund must reinvest interest or sale proceeds at lower
rates.
* The rate of inflation increases.
* The average life of a mortgage-related security is shortened or
lengthened.
An investment in the Limited Term Income Fund is not a deposit of KeyBank
or any of its affiliates and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
2
<PAGE>
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Limited Term Income Fund by showing changes in its performance
for various time periods ending December 31st. The figures shown in the bar
chart and table assume reinvestment of dividends and distributions.
The bar chart shows returns for Class A Shares of the Limited Term Income
Fund. Sales loads are not reflected on the bar chart (or highest and lowest
returns below) and if they were reflected, returns would be lower than those
shown.
1990 8.74%
1991 11.49%
1992 5.36%
1993 6.12%
1994 -1.26%
1995 10.97%
1996 4.02%
1997 5.75%
1998 5.96%
1999 1.79%
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter was
3.79% (quarter ending December 31, 1991) and the lowest return for a quarter was
- -1.19% (quarter ending March 31, 1994).
The table shows how the average annual total returns for Class A Shares of the
Limited Term Income Fund for one year, five years and ten years, including
maximum sales charges, compare to those of two broad-based market indices.
Average Annual Total Returns
(for the Periods ended December 31,
1999)
Past Past Past
One Year 5 Years 10 Years
Class A -0.21% 5.23% 5.62%
Merrill Lynch 1-3
Year Treasury Index(1),(3) 3.06% 6.51% 6.59%
Lehman 1-3 Year
Government Index(2),(3) 2.96% 6.48% 6.68%
1 The Merrill Lynch 1-3 Year Treasury Index is a broad-based unmanaged index
that represents the general performance of short-term (one to three year) U.S.
Treasury securities.
2 The Lehman Brothers 1-3 Year Government Index is an unmanaged index comprised
of U.S. government agency debt securities that mature in one to three years.
3 Index returns do not include any brokerage commissions, sales charges, or
other fees. It is not possible to invest directly in an index.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Limited Term Income Fund.
Shareholder Transaction Expenses
(paid directly from your investment)(1) Class A
Maximum Sales Charge Imposed on Purchases 2.00%
(as a percentage of offering price)
Maximum Deferred Sales Charge
(as a percentage of the lower of purchase or sale price) NONE(2)
Maximum Sales Charge Imposed on Reinvested Dividends NONE
Redemption Fees NONE
Exchange Fees NONE
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees 0.50%
Distribution (12b-1) Fees 0.00%
Other Expenses
(includes a shareholder servicing fee of 0.25%) 0.60%
Total Fund Operating Expenses 1.10%
Fee Waiver/Expense Reimbursement (0.20)%
Net Expenses 0.90%(3)
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 Except for non-IRA tax deferred retirement accounts, there is no initial sales
charge on purchases of $1 million or more for Class A Shares. However, if you
sell any of such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any of such
Class A Shares within two years, you will be charged a CDSC of 0.50%.
3 The Adviser has contractually agreed to waive its management fee and to
reimburse expenses, as allowed by law, to the extent necessary to maintain the
net operating expenses of the Limited Term Income Fund at a maximum of 0.90%
until at least February 28, 2001.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Limited Term Income Fund with the cost of investing in other
mutual funds. The Example assumes that you invest $10,000 in the Limited Term
Income Fund for the time periods shown and then sell all of your shares at the
end of those periods. The Example also assumes that your investment has a 5%
return each year and that the Limited Term Income Fund's operating expenses
remain the same.(1) Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $290 $523 $775 $1,496
1 This Example asumes that Net Annual Fund Operating Expenses will equal 0.90%
until February 28, 2001 and will equal 1.10% thereafter.
3
<PAGE>
Risk/Return Summary
INTERMEDIATE INCOME FUND
CLASS A SHARES
Cusip#: 926464819
SIMIX
CLASS G SHARES
Cusip#: 926464314
Investment Objective
The Intermediate Income Fund seeks to provide a high level of income.
Principal Investment Strategies
The Intermediate Income Fund pursues its investment objective by investing in
debt securities. Some of these debt securities are issued by corporations, the
U.S. Government and its agencies and instrumentalities. "Investment grade"
obligations are rated within the top four rating categories by an NRSRO.
Under normal conditions, the Intermediate Income Fund will invest at least 65%
of its total assets in:
* Investment grade corporate securities, asset-backed securities,
convertible securities, or exchangeable debt securities;
* Obligations issued or guaranteed by the U.S. government or its
agencies or instrumentalities;
* Mortgage-related securities issued by government agencies and
non-governmental entities; and
* Commercial paper.
Important characteristics of the Intermediate Income Fund's investments:
* Quality: Investment grade corporate securities rated in the top four rating
categories at the time of purchase by S&P, Fitch IBCA, Moody's or another NRSRO,
or if unrated, of comparable quality.
* Maturity: The dollar-weighted effective average maturity of the Intermediate
Income Fund generally will range from 3 to 10 years. Under certain market
conditions, the portfolio manager may go outside these boundaries.
The Intermediate Income Fund's high portfolio turnover may result in higher
expenses and taxable gain distributions.
There is no guarantee that the Intermediate Income Fund will achieve its
objectives.
Principal Risks
You may lose money by investing in the Intermediate Income Fund. The
Intermediate Income Fund is subject to the following principal risks, more fully
described in "Risk Factors." The Intermediate Income Fund's net asset value,
yield and/or total return may be adversely affected if any of the following
occurs:
* The market value of securities acquired by the Intermediate Income Fund
declines.
* The portfolio manager does not execute the Intermediate Income Fund's
principal investment strategies effectively.
* Interest rates rise.
* An issuer's credit quality is downgraded.
* The Intermediate Income Fund must reinvest interest or sale proceeds at lower
rates.
* The rate of inflation increases.
* The average life of a mortgage-related security is shortened or lengthened.
An investment in the Intermediate Income Fund is not a deposit of KeyBank
or any of its affiliates and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
4
<PAGE>
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Intermediate Income Fund by showing changes in its performance
for various time periods ending December 31st. The figures shown in the bar
chart and table assume reinvestment of dividends and distributions.
The bar chart shows returns for Class A Shares of the Intermediate Income
Fund. Sales loads are not reflected on the bar chart (or highest and lowest
returns below) and if they were reflected, returns would be lower than those
shown.
1994 -2.39%
1995 14.03%
1996 3.06%
1997 7.05%
1998 7.51%
1999 -0.74%
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter was
4.72% (quarter ending June 30, 1995) and the lowest return for a quarter was
- -1.81% (quarter ending March 31, 1994).
The table shows how the average annual total returns for Class A Shares of the
Intermediate Income Fund for one year, five years and since inception, including
maximum sales charges, compare to those of a broad-based market index.
Average Annual Total Returns Since
(for the Periods ended Past Past Inception
December 31, 1999) One Year 5 Years (12/10/93)
Class A(1) -6.48% 4.81% 3.51%
Lehman Int. Gov't/Corp
Bond Index(2) 0.39% 7.09% 5.53%
1 The Intermediate Income Fund did not offer Class G Shares prior to December
15, 1999.
2 The Lehman Brothers Intermediate Government/Corporate Bond Index is an
unmanaged index comprised of investment-grade corporate debt securities and
U.S. Treasury and U.S. government agency debt securities that mature in one to
ten years. Index returns do not include any brokerage commissions, sales
charges, or other fees.It is not possible to invest directly in an index.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Intermediate Income Fund.
Shareholder Transaction Expenses
(paid directly from your investment)(1) Class A Class G
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 5.75% NONE
Maximum Deferred Sales Charge (as a percentage of NONE(2) NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees 0.75% 0.75%
Distribution (12b-1) Fees 0.00% 0.25%
Other Expenses (includes a shareholder
servicing fee of 0.25% applicable to Class A Shares) 0.51% 0.31%
Total Fund Operating Expenses 1.26% 1.31%
Fee Waiver/Expense
Reimbursement (0.36)% (0.31)%
Net Expenses 0.90%(3) 1.00%(3)
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 Except for non-IRA tax deferred retirement accounts, there is no initial sales
charge on purchases of $1 million or more for Class A Shares. However, if you
sell any of such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any of such
Class A Shares within two years, you will be charged a CDSC of 0.50%.
3 Other expenses of Class G Shares are based on estimated amounts for the
current fiscal year . The Adviser has contractually agreed to waive its
management fee and to reimburse expenses, as allowed by law, to the extent
necessary to maintain the net operating expenses of Class A Shares and Class G
Shares of the Intermediate Income Fund at a maximum of 0.90% and 1.00%,
respectively, until at least February 28, 2001.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Intermediate Income Fund with the cost of investing in other
mutual funds. The Example assumes that you invest $10,000 in the Intermediate
Income Fund for the time periods shown and then sell all of your shares at the
end of those periods. The Example also assumes that your investment has a 5%
return each year and that the Intermediate Income Fund's operating expenses
remain the same.(1) Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $662 $918 $1,194 $1,980
Class G $102 $385 $ 688 $1,552
1 This Example assumes that Net Annual Fund Operating Expenses for Class A
Shares will equal 0.90% until February 28, 2001 and will equal 1.26%
thereafter and that Net Annual Fund Operating Expenses for Class G Shares will
equal 1.00% until February 28, 2001 and will equal 1.31% thereafter.
5
<PAGE>
Risk/Return Summary
FUND FOR INCOME
CLASS A SHARES
Cusip#: 926464751
IPFIX
CLASS G SHARES
Cusip#: 926464397
GGIFX
Investment Objective
The Fund for Income seeks to provide a high level of current income consistent
with preservation of shareholders' capital.
Principal Investment Strategies
The Fund for Income pursues its investment objective by investing primarily in
securities issued by the U.S. government and its agencies or instrumentalities.
The Fund for Income currently invests only in securities that are guaranteed by
the full faith and credit of the U.S. government, and repurchase agreements
collateralized by such securities.
Under normal market conditions, the Fund for Income primarily invests in:
* Mortgage-backed obligations and collateralized mortgage obligations (CMOs)
issued by the Government National Mortgage Association (GNMA). The Fund for
Income will invest at least 65% of its total assets in GNMA securities.
* Obligations issued or guaranteed by the U.S. government or by its agencies
or instrumentalities with maturities generally in the range of 2 to 30 years.
There is no guarantee that the Fund for Income will achieve its objectives.
Principal Risks
You may lose money by investing in the Fund for Income. The Fund for Income is
subject to the following principal risks, more fully described in "Risk
Factors." The Fund for Income's net asset value, yield and/or total return may
be adversely affected if any of the following occurs:
* The market value of securities acquired by the Fund for Income declines
* The portfolio manager does not execute the Fund for Income's principal
investment strategies effectively * Interest rates rise
* The Fund for Income must reinvest interest or sale proceeds at lower rates
* The rate of inflation increases
* The average life of a mortgage-related security is shortened or lengthened
An investment in the Fund for Income is not a deposit of KeyBank or any of
its affiliates and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
6
<PAGE>
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Fund for Income by showing changes in its performance for
various time periods ending December 31st. The figures shown in the bar chart
and table assume reinvestment of dividends and distributions.
The bar chart shows returns for Class G Shares of the Fund for Income .
Sales loads on these shares imposed prior to July 7, 1997 are not reflected on
the bar chart (or highest and lowest returns below) and if they were reflected,
returns would be lower than those shown.
1990 8.76%
1991 14.07%
1992 6.29%
1993 7.58%
1994 -3.67%
1995 17.19%
1996 3.50%
1997 8.35%
1998 7.37%
1999 0.77%
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter was
5.49% (quarter ending June 30, 1995) and the lowest return for a quarter was
- -3.04% (quarter ending March 31, 1994).
The table shows how the average annual total returns for Class A and G Shares of
the Fund for Income for one year, five years and ten years, including maximum
sales charges, compare to those of a broad-based market index.
Average Annual Total Returns
(for the Periods ended Past Past Past
December 31, 1999) One Year 5 Years 10 Years
Class A(1) -1.31% 6.84% 6.65%
Class G(2) 0.77% 7.30% 6.87%
Lehman GNMA Index(3) 1.93% 8.07% 7.87%
1 Performance prior to March 26, 1999, the Class A Shares inception date,
reflects the performance of Class G Shares, which has not been adjusted for
the expenses of Class A Shares.
2 The performance data does not reflect the deduction of a maximum 2% sales
charge which was in effect for the Gradison Government Income Fund, the Fund
for Income's predecessor, from its inception until July 7, 1997.
3 The Lehman GNMA Index is a broad-based unmanaged index that represents the
general performance of GNMA securities. Index returns do not include any
brokerage commissions, sales charges, or other fees. It is not possible to
invest directly in an index.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Fund for Income.
Shareholder Transaction Expenses
(paid directly from your investment)(1) Class A Class G
Maximum Sales Charge
Imposed on Purchases 2.00% NONE
(as a percentage of offering price)
Maximum Deferred Sales Charge (as a percentage of NONE(2) NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees 0.50% 0.50%
Distribution (12b-1) Fees 0.00% 0.25%
Other Expenses (includes a shareholder servicing
fee of 0.25% applicable to Class A Shares) 0.72% 0.29%
Total Fund Operating Expenses 1.22% 1.04%
Fee Waiver/Expense Reimbursement (0.22)% (0.15)%
Net Expenses 1.00%(3) 0.89%(4)
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 Except for non-IRA tax deferred retirement accounts, there is no initial sales
charge on purchases of $1 million or more for Class A Shares. However, if you
sell any of such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any of such
Class A Shares within two years, you will be charged a CDSC of 0.50%.
3 The Adviser has contractually agreed to waive its management fee and to
reimburse expenses, as allowed by law, to the extent necessary to maintain the
net operating expenses of Class A Shares of the Fund for Income at a maximum
of 1.00% until at least February 28, 2001.
4 The Adviser has contractually agreed to waive its management fee and to
reimburse expenses, as allowed by law, to the extent necessary to maintain the
net operating expenses of Class G Shares of the Fund for Income at a maximum
of 0.89% until at least April 1, 2001. Other expenses of Class G Shares are
based on estimated amounts for the current fiscal year.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Fund for Income with the cost of investing in other mutual
funds. The Example assumes that you invest $10,000 in the Fund for Income for
the time periods shown and then sell all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund for Income's operating expenses remain the same.(1) Although
your actual costs may be higher or lower, based on these assumptions your costs
would be:
1 Year 3 Years 5 Years 10 Years
Class A $300 $558 $836 $1,629
Class G $ 91 $316 $559 $1,257
1 This Example assumes that Net Annual Fund Operating Expenses for Class A
Shares will equal 1.00% until February 28, 2001 and will equal 1.22%
thereafter and that Net Annual Fund Operating Expenses for Class G Shares will
equal 0.89% until April 1, 2001 and will equal 1.04% thereafter.
7
<PAGE>
Risk/Return Summary
INVESTMENT QUALITY BOND FUND
CLASS A SHARES
Cusip#: 926464827
SIQBX
CLASS G SHARES
Cusip#: 926464322
Investment Objective
The Investment Quality Bond Fund seeks to provide a high level of income.
Principal Investment Strategies
The Investment Quality Bond Fund pursues its investment objective by investing
primarily in investment-grade bonds issued by corporations and the U.S.
government and its agencies or instrumentalities. "Investment grade" obligations
are rated within the top four rating categories by an NRSRO.
Under normal market conditions, the Investment Quality Bond Fund will invest at
least 80% of its total assets in the following securities:
* Investment grade corporate securities, asset-backed securities, convertible
securities and exchangeable debt securities;
* Mortgage-related securities issued by governmental agencies and
non-governmental entities;
* Obligations issued or guaranteed by the U.S. government or its agencies or
instrumentalities; and
* Commercial paper.
Important characteristics of the Investment Quality Bond Fund's investments:
* Quality: All instruments will be rated, at the time of purchase, within the
four highest rating categories by S&P, Fitch IBCA, Moody's, or another NRSRO,
or, if unrated, be of comparable quality. For more information on ratings, see
the Appendix to the SAI.
* Maturity: The dollar-weighted effective average maturity of the Investment
Quality Bond Fund will range from 5 to 15 years. Individual assets held by the
Investment Quality Bond Fund may vary from the average maturity of the Fund.
Under certain market conditions, the portfolio manager may go outside these
boundaries.
The Investment Quality Bond Fund's high portfolio turnover may result in
higher expenses and taxable gain distributions.
There is no guarantee that the Investment Quality Bond Fund will achieve
its objectives.
Principal Risks
You may lose money by investing in the Investment Quality Bond Fund. The
Investment Quality Bond Fund is subject to the following principal risks, more
fully described in "Risk Factors." The Investment Quality Bond Fund's net asset
value, yield and/or total return may be adversely affected if any of the
following occurs:
* The market value of securities acquired by the Investment Quality Bond Fund
declines.
* The portfolio manager does not execute the Investment Quality Bond Fund's
principal investment strategies effectively.
* Interest rates rise.
* An issuer's credit quality is downgraded.
* The Investment Quality Bond Fund must reinvest interest or sale proceeds at
lower rates.
* The rate of inflation increases.
* The average life of a mortgage-related security is shortened or lengthened.
An investment in the Investment Quality Bond Fund is not a deposit of
KeyBank or any of its affiliates and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
8
<PAGE>
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Investment Quality Bond Fund by showing changes in its
performance for various time periods ending December 31st. The figures shown in
the bar chart and table assume reinvestment of dividends and distributions.
The bar chart shows returns for Class A Shares of the Investment Quality Bond
Fund. Sales loads are not reflected on the bar chart (or highest and lowest
returns below) and if they were reflected, returns would be lower than those
shown.
1994 -2.62%
1995 16.66%
1996 2.46%
1997 8.45%
1998 7.51%
1999 -2.45%
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter was
5.85% (quarter ending June 30, 1995) and the lowest return for a quarter was
- -2.51% (quarter ending March 31, 1994).
The table shows how the average annual total returns for Class A Shares of the
Investment Quality Bond Fund for one year, five years and since inception,
including maximum sales charges, compare to those of a broad-based market index.
Average Annual Total Returns Since
(for the Periods ended Past Past Inception
December 31, 1999) One Year 5 Years (12/10/93)
Class A(1) -8.09% 5.09% 3.65%
Lehman
Aggregate Index(2) -0.82% 7.73% 5.88%
1 The Investment Quality Bond Fund did not offer Class G Shares prior to
December 15, 1999.
2 The Lehman Brothers Aggregate Bond Index is a broad-based unmanaged index that
represents the general performance of longer-term (greater than one year),
investment-grade fixed-income securities. Index returns do not include any
brokerage commissions, sales charges, or other fees. It is not possible to
invest directly in an index.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Investment Quality Bond Fund.
Shareholder Transaction Expenses
(paid directly from your investment)(1) Class A Class G
Maximum Sales Charge
Imposed on Purchases 5.75% NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE(2) NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees 0.75% 0.75%
Distribution (12b-1) Fees 0.00% 0.25%
Other Expenses (includes a shareholder servicing fee
of 0.25% applicable to Class A Shares) 0.59% 0.34%
Total Fund Operating Expenses 1.34% 1.34%
Fee Waiver/Expense Reimbursement (0.24)% (0.24)%
Net Expenses 1.10%(3) 1.10%(3)
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 Except for non-IRA tax deferred retirement accounts, there is no initial sales
charge on purchases of $1 million or more for Class A Shares. However, if you
sell any of such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any of such
Class A Shares within two years, you will be charged a CDSC of 0.50%.
3 Other expenses of Class G Shares are based on estimated amounts for the
current fiscal year . The Adviser has contractually agreed to waive its
management fee and to reimburse expenses, as allowed by law, to the extent
necessary to maintain the net operating expenses of Class A Shares and Class G
Shares of the Investment Quality Bond Fund at a maximum of 1.10% until at
least February 28, 2001. The Adviser may waive its management fee and
reimburse expenses, as allowed by law, so that the net operating expenses of
Class A Shares do not exceed 1.00%. The Adviser may terminate this
waiver/reimbursement at any time to the extent allowed by law.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Investment Quality Bond Fund with the cost of investing in
other mutual funds. The Example assumes that you invest $10,000 in the
Investment Quality Bond Fund for the time periods shown and then sell all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Investment Quality Bond Fund's
operating expenses remain the same.(1) Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $681 $953 $1,247 $2,075
Class G $112 $401 $ 711 $1,592
1 This Example assumes that Net Annual Fund Operating Expenses for Class A
Shares and Class G Shares will equal 1.10% until February 28, 2001 and will
equal 1.34% thereafter.
9
<PAGE>
Investments
The following describes some of the types of securities the Funds may purchase
under normal market conditions. All Funds will not buy all of the securities
listed below.
For cash management or for temporary defensive purposes in response to
market conditions, each Fund may hold all or a portion of its assets in cash or
short-term money market instruments. This may reduce the benefit from any
upswing in the market and may cause a Fund to fail to meet its investment
objective.
For more information on ratings and a more complete description of which
Funds can invest in certain types of securities, see the SAI.
U.S. Government Securities.
Notes and bonds issued or guaranteed by the U.S. government, its agencies or
instrumentalities. Some are direct obligations of the U.S. Treasury; others
are obligations only of the U.S. agency.
Corporate Debt Obligations.
Debt instruments issued by public corporations. They may be secured or
unsecured.
Asset Backed Securities.
Debt securities backed by loans or accounts receivable originated by banks,
credit card companies, student loan issuers, or other providers of credit. These
securities may be enhanced by a bank letter of credit or by insurance coverage
provided by a third party.
Convertible or Exchangeable Corporate Debt Obligations.
Debt instruments that may be exchanged or converted to other securities.
Mortgage-Backed Securities.
Instruments secured by a mortgage or pools of mortgages.
When-Issued and Delayed-Delivery Securities.
A security that is purchased for delivery at a later time. The market value may
change before the delivery date, and the value is included in the net asset
value of a Fund.
Zero Coupon Bonds.
These securities are purchased at a discount from face value. The bond's face
value is received at maturity, with no interest payments before then.
Yankee Securities.
Debt instruments issued by non-domestic issuers and traded in U.S. dollars.
Receipts.
Separately traded interest or principal components of U.S. government
securities.
Dollar-Weighted Effective Average Maturity.
Based on the value of a Fund's investments in securities with different maturity
dates. This measures the sensitivity of a debt security's value to changes in
interest rates. The value of a long- term debt security is more sensitive to
interest rate changes than the value of a short-term security.
10
<PAGE>
Risk Factors
By matching your investment objective with an acceptable level of risk, you can
create your own customized investment plan.
This Prospectus describes the principal risks that you may assume as an
investor in the Funds.
Each Fund is subject to the principal risks described below.
General Risks:
* Market risk is the risk that the market value of a security may fluctuate,
depending on the supply and demand for that type of security. As a result of
this fluctuation, a security may be worth more or less than the price a Fund
originally paid for the security, or more or less than the security was worth at
an earlier time. Market risk may affect a single issuer, an industry, a sector
of the economy, or the entire market and is common to all investments.
* Manager risk is the risk that a Fund's portfolio manager may implement its
investment strategy in a way that does not produce the intended result.
Risks associated with investing in debt securities:
* Interest rate risk. The value of a debt security typically changes in the
opposite direction from a change in interest rates. When interest rates go up,
the value of a debt security typically goes down. When interest rates go down,
the value of a debt security typically goes up. Generally, the market values of
securities with longer maturities are more sensitive to changes in interest
rates.
* Inflation risk is the risk that inflation will erode the purchasing power of
the cash flows generated by debt securities held by a Fund. Fixed-rate debt
securities are more susceptible to this risk than floating-rate debt securities
or equity securities that have a record of dividend growth.
* Reinvestment risk is the risk that when interest rates are declining a Fund
that receives interest income or prepayments on a security will have to reinvest
these moneys at lower interest rates. Generally, interest rate risk and
reinvestment risk tend to have offsetting effects, though not necessarily of the
same magnitude.
* Credit (or default) risk is the risk that the issuer of a debt security will
be unable to make timely payments of interest or principal. Although the Funds
generally invest in only high-quality securities, the interest or principal
payments may not be insured or guaranteed on all securities. Credit risk is
measured by NRSROs such as S&P, Fitch IBCA, or Moody's.
11
<PAGE>
Risk Factors (continued)
It is important to keep in mind one basic principle of investing: the greater
the risk, the greater the potential reward. The reverse is also generally
true: the lower the risk, the lower the potential reward.
Risks associated with investing in mortgage-related securities:
* Prepayment risk. Prepayments of principal on mortgage-related securities
affect the average life of a pool of mortgage-related securities. The level of
interest rates and other factors may affect the frequency of mortgage
prepayments. In periods of rising interest rates, the prepayment rate tends to
decrease, lengthening the average life of a pool of mortgage-related securities.
In periods of falling interest rates, the prepayment rate tends to increase,
shortening the average life of a pool of mortgage-related securities. Prepayment
risk is the risk that, because prepayments generally occur when interest rates
are falling, a Fund may have to reinvest the proceeds from prepayments at lower
interest rates.
* Extension risk is the risk that the rate of anticipated prepayments on
principal may not occur, typically because of a rise in interest rates, and the
expected maturity of the security will increase. During periods of rapidly
rising interest rates, the effective average maturity of a security may be
extended past what a Fund's portfolio manager anticipated that it would be. The
market value of securities with longer maturities tend to be more volatile.
An investment in a Fund is not a complete investment program.
Share Price
Each Fund calculates its share price, called its "net asset value" (NAV), each
business day at 4:00 p.m. Eastern Time or at the close of trading on the New
York Stock Exchange Inc. (NYSE), whichever time is earlier. You may buy,
exchange, and sell your shares on any business day at a price that is based on
the NAV that is calculated after you place your order. A business day is a day
on which the NYSE is open.
A Fund's NAV may change on days when shareholders will not be able to
purchase or redeem a Fund's shares if a Fund has portfolio securities that are
listed on foreign exchanges that trade on weekends or other days when a Fund
does not price its shares.
The Funds value their investments based on market value. When market
quotations are not readily available, the Funds value their investments based on
fair value methods approved by the Board of Trustees of the Victory Portfolios.
Each Class of each Fund calculates its NAV by adding up the total value of its
investments and other assets, subtracting its liabilities, and then dividing
that figure by the number of outstanding shares of the Class.
Total Assets-Liabilities
NAV = ----------------------------
Number of Shares Outstanding
You can find a Fund's net asset value each day in The Wall Street Journal
and other newspapers. Newspapers do not normally publish fund information until
a Fund reaches a specific number of shareholders or level of assets.
The daily NAV is useful to you as a shareholder because the NAV, multiplied
by the number of Fund shares you own gives you the value of your investment.
12
<PAGE>
Dividends, Distribution, and Taxes
Your choice of distribution should be set up on the original Account
Application. If you would like to change the option you selected, please call
800-539-FUND.
Buying a Dividend.
You should check a Fund's distribution schedule before you invest. If you buy
shares of a Fund shortly before it makes a distribution, some of your investment
may come back to you as a taxable distribution.
As a shareholder, you are entitled to your share of net income and capital gains
on a Fund's investments. The Funds pass their earnings along to investors in the
form of dividends. Dividend distributions are the net income earned on
investments after expenses. Each Fund will distribute short-term gains, as
necessary, and if a Fund makes a long-term capital gain distribution, it is
normally paid once a year. As with any investment, you should consider the tax
consequences of an investment in a Fund.
Ordinarily, the Funds declare and pay dividends monthly. Each class of
shares declares and pays dividends separately.
Distributions can be received in one of the following ways.
REINVESTMENT OPTION
You can have distributions automatically reinvested in additional shares of a
Fund. If you do not indicate another choice on your Account Application, you
will be assigned this option automatically.
CASH OPTION
A check will be mailed to you no later than seven days after the dividend
payment date.
INCOME EARNED OPTION
You can automatically reinvest your dividends in additional shares of a Fund and
have your capital gains paid in cash, or reinvest capital gains and have your
dividends paid in cash.
DIRECTED DIVIDENDS OPTION
You can automatically reinvest distributions in the same class of shares of
another fund of the Victory Group. If you reinvest your distributions in a
different class of another fund, you may pay a sales charge on the reinvested
distributions.
DIRECTED BANK ACCOUNT OPTION
In most cases, you can automatically transfer distributions to your bank
checking or savings account. Under normal circumstances, the Transfer Agent will
transfer your distributions within seven days of the dividend payment date. The
bank account must have a registration identical to that of your Fund account.
13
<PAGE>
Dividends, Distribution, and Taxes (continued)
The tax information in this Prospectus is provided as general information. You
should consult your own tax adviser about the tax consequences of an investment
in a Fund.
Important Information about Taxes
The Fund pays no federal income tax on the earnings and capital gains it
distributes to shareholders.
* Ordinary dividends from a Fund are taxable as ordinary income; dividends from
a Fund's long-term capital gains are taxable as long-term capital gain.
* Dividends are treated in the same manner for federal income tax purposes
whether you receive them in cash or in additional shares. They also may be
subject to state and local taxes.
* Dividends from a Fund that are attributable to interest on certain U.S.
government obligations may be exempt from certain state and local income taxes.
The extent to which ordinary dividends are attributable to U.S. government
obligations will be provided with tax statements you receive from a Fund.
* An exchange of a Fund's shares for shares of another fund will be treated as a
sale. When you sell or exchange shares of a Fund, you must recognize any gain or
loss.
* Certain dividends paid to you in January will be taxable as if they had been
paid to you the previous December.
* Tax statements will be mailed from a Fund every January showing the amounts
and tax status of distributions made to you.
* Because your tax treatment depends on your purchase price and tax position,
you should keep your regular account statements for use in determining your tax.
* You should review the more detailed discussion of federal income tax
considerations in the SAI.
14
<PAGE>
INVESTING WITH VICTORY
All you need to do to get started is to fill out an application.
If you are looking for a convenient way to open an account or to add money to an
existing account, Victory can help. The sections that follow will serve as a
guide to your investments with Victory. "Choosing a Share Class" will help you
decide whether it would be more to your advantage to buy Class A or Class G
Shares of a Fund. The following sections will describe how to open an account,
how to access information on your account, and how to buy, exchange, and sell
shares of a Fund.
We want to make it simple for you to do business with us. If you have
questions about any of this information, please call your Investment
Professional or one of our customer service representatives at 800-539-FUND.
They will be happy to assist you.
Choosing a Share Class
An Investment Professional is an investment consultant, salesperson, financial
planner, investment adviser, or trust officer who provides you with investment
information.
For historical expense information on Class A and G Shares, see the "Financial
Highlights" at the end of this Prospectus.
Each Fund described in this prospectus offers Class A Shares, which have a
front-end sales charge of 2.00% to 5.75%, depending upon the Fund in which you
invest. Please look at the "Fund Expenses" section of the Fund in which you are
investing to find the sales charge.
The Intermediate Income Fund, Fund for Income and Investment Quality Bond
Fund also offer Class G Shares.
Each class has its own cost structure, allowing you to choose the one that
best meets your requirements. Your Investment Professional also can help you
decide.
CLASS A
* Front-end sales charge, as described on the next page. There are several
ways to reduce this charge.
* Lower annual expenses, generally, than Class G Shares.
CLASS G
* No front-end sales charge. All your money goes to work for you right away.
* Class G Shares are sold only by certain broker-dealers.
15
<PAGE>
Choosing a Share Class (continued)
Calculation of Sales Charges -- Class A
Class A Shares are sold at their public offering price, which is the NAV plus
the applicable initial sales charge. The sales charge as a percentage of your
investment decreases as the amount you invest increases. The current sales
charge rates are listed in the following tables.
Your Investment in: Sales Charge Sales Charge
- - Intermediate Income Fund as a % of as a % of
- - Investment Quality Bond Fund Offering Price Your Investment
Up to $49,999 5.75% 6.10%
$50,000 up to $99,999 4.50% 4.71%
$100,000 up to $249,999 3.50% 3.63%
$250,000 up to $499,999 2.50% 2.56%
$500,000 up to $999,999 2.00% 2.04%
$1,000,000 and above* 0.00% 0.00%
Your Investment in: Sales Charge Sales Charge
- - Limited Term Income Fund as a % of as a % of
- - Fund for Income Offering Price Your Investment
Up to $49,999 2.00% 2.04%
$50,000 up to $99,999 1.75% 1.78%
$100,000 up to $249,999 1.50% 1.52%
$250,000 up to $499,999 1.25% 1.27%
$500,000 up to $999,999 1.00% 1.01%
$1,000,000 and above* 0.00% 0.00%
* Except as indicated in the last sentence of this note, there is no initial
sales charge on purchases of $1 million or more. However, a contingent
deferred sales charge (CDSC) of up to 1.00% will be charged to the shareholder
if any of such shares are redeemed in the first year after purchase, or at
0.50% within two years of the purchase. This charge will be based on either
the cost of the shares or net asset value at the time of redemption, whichever
is lower. There will be no CDSC on reinvested distributions. The initial sales
charge exemption for investments of $1 million or more does not apply to tax
deferred retirement accounts (except IRA accounts); the sales charge on
investments by such tax deferred retirement accounts of $1 million or more is
the same as for investments between $500,000 and $999,999.
There are several ways you can combine multiple purchases in the Victory Funds
and take advantage of reduced sales charges.
Sales Charge Reductions and Waivers
You may qualify for reduced sales charges in the following cases:
1. A Letter of Intent lets you buy Class A Shares of a Fund over a
13-month period and receive the same sales charge as if all shares had
been purchased at one time. You must start with a minimum initial
investment of 5% of the total amount.
2. Rights of Accumulation allow you to add the value of any Class A
Shares you already own to the amount of your next Class A investment
for purposes of calculating the sales charge at the time of purchase.
3. You can combine Class A Shares of multiple Victory Funds (excluding
funds sold without a sales charge) for purposes of calculating the
sales charge. The combination privilege also allows you to combine the
total investments from the accounts of household members of your
immediate family (spouse and children under 21) for a reduced sales
charge at the time of purchase.
16
<PAGE>
Choosing a Share Class (continued)
4. Waivers for certain investors:
a. Current and retired Fund Trustees, directors, trustees,
employees, and family members of employees of KeyCorp or
"Affiliated Providers"*, and dealers who have an agreement with
the Distributor and any trade organization to which the Adviser
or the Administrator belong.
b. Investors who buy shares for trust or other advisory accounts
established with KeyCorp or its affiliates.
c. Investors who reinvest the proceeds from a liquidation
distribution of Class A Shares held in a deferred compensation
plan, agency, trust, or custody account that was maintained by
KeyBank National Association or its affiliates, or invested in a
fund of the Victory Group.
d. Investment Professionals who purchased Fund shares for fee-based
investment products or accounts, selling brokers, and their sales
representatives.
e. Purchase of shares in connection with financial institution
sponsored bundled omnibus retirement programs sponsored by
financial institutions that have entered into agreements with the
Funds' Distributor in connection with the operational
requirements of such programs.
f. Participants in tax-deferred retirement plans who purchased
shares pursuant to waiver provisions in effect prior to December
15, 1999.
* Affiliated Providers are affiliates and subsidiaries of KeyCorp, and any
organization that provides services to the Victory Group.
Shareholder Servicing Plan
Each Fund has adopted a Shareholder Servicing Plan for its Class A Shares . The
shareholder servicing agent performs a number of services for its customers who
are shareholders of a Fund. It establishes and maintains accounts and records,
processes dividend payments, arranges for bank wires, assists in transactions,
and changes account information. For these services a Fund pays a fee at an
annual rate of up to 0.25% of the average daily net assets of Class A Shares
serviced by the agent. The Funds may enter into agreements with various
shareholder servicing agents, including KeyBank National Association and its
affiliates, other financial institutions, and securities brokers. The Funds may
pay a servicing fee to broker-dealers and others who sponsor "no transaction
fee" or similar programs for the purchase of shares. Shareholder servicing
agents may waive all or a portion of their fee periodically.
Distribution Plan
In accordance with Rule 12b-1 under the Investment Company Act of 1940, Victory
has adopted a Distribution and Service Plan for Class A Shares of the Funds.
These shares do not pay any expenses under this Plan.
Victory has also adopted a Distribution and Service Plan for Class G Shares
of the Intermediate Income Fund, Fund for Income and Investment Quality Bond
Fund, under which these shares will pay to the distributor a monthly service fee
at an annual rate of 0.25% of the average daily net assets of each such Fund.
The service fee is paid to securities broker-dealers or other financial
intermediaries for providing personal services to shareholders of these Funds,
including responding to inquiries, providing information to shareholders about
their fund accounts, establishing and maintaining accounts and records,
processing dividend and distribution payments, arranging for bank wires,
assisting in transactions, and changing account information. Each such Fund may
enter into agreements with various shareholder servicing agents, including
KeyCorp and its affiliates, and with other financial institutions that provide
such services.
Because Rule 12b-1 fees are paid out of a Fund's assets on an ongoing
basis, over time, these fees will increase the cost of your investment and may
cost you more than paying other types of sales charges.
17
<PAGE>
How to Buy Shares
You can buy shares in a number of different ways. All you need to do to get
started is to fill out an application. The minimum initial investment required
to open an account is $500 ($100 for IRAs), with additional investments of at
least $25. There is no minimum investment required to open an account or for
additional investments for SIMPLE IRAs. You can send in your payment by check,
wire transfer, exchange from another Victory Fund, or through arrangements with
your Investment Professional. Sometimes an Investment Professional will charge
you for these services. Their fee will be in addition to, and unrelated to, the
fees and expenses charged by a Fund.
If you buy shares directly from the Funds and your investment is received
and accepted by 4:00 p.m. Eastern Time or the close of trading on the NYSE
(whichever time is earlier), your purchase will be processed the same day using
that day's share price.
Make your check payable to: The Victory Funds
Keep the following addresses handy for purchases, exchanges, or redemptions:
BY REGULAR U.S. MAIL
Send completed Account Applications with your check, bank draft, or money order
to:
Class G Shares
The Victory Funds
c/o Gradison McDonald
580 Walnut Street
Cincinnati, OH 45202
Class A Shares
The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
BY OVERNIGHT MAIL
Use the following address ONLY for overnight packages.
Class G Shares
The Victory Funds
c/o Gradison McDonald
580 Walnut Street
Cincinnati, OH 45202
Phone: 800-539-FUND
Class A Shares
The Victory Funds
c/o Boston Financial Data Services
66 Brooks Drive
Braintree, MA 02184
Phone: 800-539-FUND
BY WIRE
The Transfer Agent does not charge a wire fee, but your originating bank may
charge a fee. Always call the Transfer Agent at 800-539-FUND BEFORE wiring
funds.
Class G Shares
The Victory Funds
Firstar Bank
ABA #042000013
For Credit to DDA
Account # 8355281
(insert Fund name, account number and name)
Class A Shares
The Victory Funds
State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA
Account #9905-201-1
(insert account number, name, and confirmation number assigned by
the Transfer Agent)
BY TELEPHONE
800-539-FUND
(800-539-3863)
18
<PAGE>
How to Buy Shares (continued)
If you would like to make additional investments after your account is
established, use the Investment Stub attached to your confirmation statement and
send it with your check to the address indicated.
ACH
After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic member banks may be used. It takes
about 15 days to set up an ACH account. Currently, the Funds do not charge a fee
for ACH transfers.
Statements and Reports
You will receive a periodic statement reflecting any transactions that affect
the balance or registration of your account. You will receive a confirmation
after any purchase, exchange, or redemption. If your account has been set up by
an Investment Professional, Fund activity will be detailed in that account's
statements. Share certificates are not issued. Twice a year, you will receive
the financial reports of the Funds. By January 31 of each year, you will be
mailed an IRS form reporting distributions for the previous year, which also
will be filed with the IRS.
Systematic Investment Plan
To enroll in the Systematic Investment Plan, you should check this box on the
Account Application. We will need your bank information and the amount and
frequency of your investment. You can select monthly, quarterly, semi-annual, or
annual investments. You should attach a voided personal check so the proper
information can be obtained. You must first meet the minimum investment
requirement of $500 ($100 for IRA accounts), then we will make automatic
withdrawals of the amount you indicate ($25 or more) from your bank account and
invest it in shares of a Fund.
Retirement Plans
You can use the Funds as part of your retirement portfolio. Your Investment
Professional can set up your new account under one of several tax-deferred
retirement plans. Please contact your Investment Professional or the Funds for
details regarding an IRA or other retirement plan that works best for your
financial situation.
All purchases must be made in U.S. dollars and drawn on U.S. banks. The Transfer
Agent may reject any purchase order in its sole discretion. If your check is
returned for any reason, you will be charged for any resulting fees and/or
losses. Third party checks will not be accepted. You may only buy or exchange
into fund shares legally available in your state. If your account falls below
$500 ($100 for IRA accounts), we may ask you to re-establish the minimum
investment. If you do not do so within 60 days, we may close your account and
send you the value of your account.
19
<PAGE>
How to Exchange Shares
You can obtain a list of funds available for exchange by calling 800-539-FUND.
You can sell shares of one fund of the Victory Portfolios to buy shares of
the same class of any other. This is considered an exchange.
You can exchange shares of a Fund by writing the Transfer Agent or calling
800-539-FUND. When you exchange shares of a Fund, you should keep the following
in mind:
* Shares of the Fund selected for exchange must be available for sale in your
state of residence.
* The Fund whose shares you would like to exchange and the fund whose shares you
want to buy must offer the exchange privilege.
* If you acquire Class A Shares of a Fund as a result of an exchange you pay the
percentage point difference, if any, between the Fund's sales charge and any
sales charge that you previously paid in connection with the shares you are
exchanging. For example, if you acquire Class A Shares of a Fund with 5.75%
sales load as a result of an exchange from another fund of the Victory Group
that has a 2.00% sales charge, you would pay the 3.75% difference in sales
charge.
* On certain business days, such as Veterans Day and Columbus Day, the Federal
Reserve Bank of Cleveland is closed. On those days, exchanges to or from a money
market fund will be processed on the exchange date, with the corresponding
purchase or sale of the money market fund shares being effected on the next
business day.
* You must meet the minimum purchase requirements for the fund you buy by
exchange.
* The registration and tax identification numbers of the two accounts must be
identical.
* You must hold the shares you buy when you establish your account for at least
seven days before you can exchange them; after the account is open seven days,
you can exchange shares on any business day.
* Each Fund may refuse any exchange purchase request if the Adviser determines
that the request is associated with a market timing strategy. Each Fund may
terminate or modify the exchange privilege at any time on 30 days' notice to
shareholders.
* Before exchanging, read the prospectus of the fund you wish to purchase by
exchange.
* An exchange of Fund shares constitutes a sale for tax purposes.
* Holders of Class G Shares who acquired their shares as a result of the
reorganization of the Gradison Funds into the Victory Funds can exchange into
Class A Shares of any Victory Fund that does not offer Class G Shares without
paying a sales charge.
20
<PAGE>
How to Sell Shares
There are a number of convenient ways to sell your shares. You can use the same
mailing addresses listed for purchases.
If your request is received in good order by 4:00 p.m. Eastern Time or the close
of trading on the NYSE (whichever time is earlier), your redemption will be
processed the same day.
BY TELEPHONE
The easiest way to sell shares is by calling 800-539-FUND. When you fill out
your original application, be sure to check the box marked "Telephone
Authorization." Then when you are ready to sell, call and tell us which one of
the following options you would like to use:
* Mail a check to the address of record;
* Wire funds to a domestic financial institution;
* Mail a check to a previously designated alternate address; or
* Electronically transfer your redemption via the Automated Clearing House
(ACH).
The Transfer Agent records all telephone calls for your protection and
takes measures to verify the identity of the caller. If the Transfer Agent
properly acts on telephone instructions and follows reasonable procedures to
ensure against unauthorized transactions, neither Victory, its servicing agents,
the Adviser, nor the Transfer Agent will be responsible for any losses. If the
Transfer Agent does not follow these procedures, it may be liable to you for
losses resulting from unauthorized instructions.
If there is an unusual amount of market activity and you cannot reach the
Transfer Agent or your Investment Professional by telephone, consider placing
your order by mail.
BY MAIL
Use the Regular U.S. Mail or Overnight Mail Address to sell shares. Send us a
letter of instruction indicating your Fund account number, amount of redemption,
and where to send the proceeds. A signature guarantee is required for the
following redemption requests:
* Redemptions over $10,000;
* Your account registration has changed within the last 15 days;
* The check is not being mailed to the address on your account;
* The check is not being made payable to the owner of the account;
* The redemption proceeds are being transferred to another Victory Group
account with a different registration; or
* The check or wire is being sent to a different bank account.
You can get a signature guarantee from a financial institution such as a
bank, broker-dealer, credit union, clearing agency, or savings association.
BY WIRE
If you want to receive your proceeds by wire, you must establish a Fund account
that will accommodate wire transactions. If you call by 4:00 p.m. Eastern Time
or the close of trading on the NYSE (whichever time is earlier), your funds will
be wired on the next business day.
BY ACH
Normally, your redemption will be processed on the same day , but will be
processed on the next day if received after 4:00 p.m. Eastern Time or the close
of trading on the NYSE (whichever time is earlier). It will be transferred by
ACH as long as the transfer is to a domestic bank.
21
<PAGE>
Systematic Withdrawal Plan
If you check this box on the Account Application, we will send monthly,
quarterly, semi-annual, or annual payments to the person you designate. The
minimum withdrawal is $25, and you must have a balance of $5,000 or more. If the
payment is to be sent to an account of yours , we will need a voided check to
activate this feature. If the payment is to be made to an address different from
your account address, we will need a signature guaranteed letter of instruction.
You should be aware that your account eventually may be depleted and that each
withdrawal will be a taxable transaction. However, you cannot automatically
close your account using the Systematic Withdrawal Plan. If your balance falls
below $500, we may ask you to bring the account back to the minimum balance. If
you decide not to increase your account to the minimum balance, your account may
be closed and the proceeds mailed to you.
Additional Information about Redemptions
* Redemption proceeds from the sale of shares purchased by a check may be held
until the purchase check has cleared, which may take up to 15 days.
* A Fund may suspend your right to redeem your shares in the following
circumstances:
* During non-routine closings of the NYSE;
* When the Securities and Exchange Commission (SEC) determines
either that trading on the NYSE is restricted or that an
emergency prevents the sale or valuation of the Fund's
securities; or
* When the SEC orders a suspension to protect a Fund's
shareholders.
* Each Fund will pay redemptions by any one shareholder during any 90-day period
in cash up to the lesser of $250,000 or 1% of the Fund's net assets. Each Fund
reserves the right to pay the remaining portion "in kind," that is, in portfolio
securities rather than cash.
22
<PAGE>
Organization and Management of the Funds
About Victory
Each Fund is a member of the Victory Portfolios, a group of more than 30
distinct investment portfolios. The Board of Trustees of Victory has the overall
responsibility for the management of the Funds.
The Investment Adviser and Sub-Administrator
Each Fund has an Advisory Agreement which is one of its most important
contracts. Key Asset Management Inc. (KAM), a New York corporation registered as
an investment adviser with the SEC, is the Adviser to each of the Funds. KAM, a
subsidiary of KeyCorp, oversees the operations of the Funds according to
investment policies and procedures adopted by the Board of Trustees. Affiliates
of the Adviser manage approximately $76 billion for a limited number of
individual and institutional clients. KAM's address is 127 Public Square,
Cleveland, Ohio 44114.
During the fiscal year ended October 31, 1999, KAM was paid an advisory fee
at an annual rate based on a percentage of the average daily net assets of each
Fund (after waivers) as follows:
Limited Term Income Fund 0.48%
Intermediate Income Fund 0.52%
Fund for Income 0.44%
Investment Quality Bond Fund 0.62%
Under a Sub-Administration Agreement, BISYS Fund Services Ohio, Inc., the
Funds' administrator, pays KAM a fee at the annual rate of up to 0.05% of each
Fund's average daily net assets to perform some of the administrative duties for
the Funds.
We want you to know who plays what role in your investment and how they are
related. This section discusses the organizations employed by the Funds to
provide services to their shareholders. Each of these organizations is paid a
fee for its services.
Portfolio Management
Deborah Svoboda has been the portfolio manager of the Limited Term Income Fund
since September 1998. Ms. Svoboda has been Portfolio Manager and Managing
Director of KAM since 1998, prior to which she was a Senior Vice President
responsible for asset-backed securities syndication and marketing for McDonald &
Company Investments Inc.
Matthew D. Meyer is the portfolio manager of the Intermediate Income Fund, a
position he has held since May 1, 1999. He has been a Senior Portfolio Manager
and Director in the Taxable Fixed Income Group of KAM since January 25, 1999.
Prior to this position, he was employed by McDonald & Company as a First Vice
President, Senior Mortgage-Backed Securities Trader since 1995. Prior to this
position, he was a Mortgage-Backed and Agency Securities Trader with First
Tennessee National Corporation from February 1993 to December 1995. He has been
in the fixed income securities business since 1987.
Thomas M. Seay has been the portfolio manager of the Fund for Income since
January 1999, and is primarily responsible for the day-to-day management of the
Fund's portfolio. Mr. Seay, a Senior Vice President of McDonald Investments
Inc., also served as portfolio manager of the Gradison Government Income Fund
from April, 1998 until March, 1999, when the Fund for Income acquired the
Gradison Fund's assets. From March 1987 until April 1998, he served as Vice
President and Fixed Income Portfolio Manager, Lexington Management Corporation.
Richard T. Heine is the portfolio manager of the Investment Quality Bond Fund, a
position he has held since its inception in 1993. A Portfolio Manager and
Director with KAM, he has been in the investment advisory business since 1977.
23
<PAGE>
Organization and Management of the Funds (cont.)
OPERATIONAL STRUCTURE OF THE FUNDS
Each Fund is supervised by the Board of Trustees, which monitors the services
provided to investors.
TRUSTEES
ADVISER
SHAREHOLDERS
FINANCIAL SERVICES FIRMS AND THEIR INVESTMENT PROFESSIONALS
Advise current and prospective shareholders on their Fund investments.
TRANSFER AGENT/SERVICING AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
Handles services such as record-keeping, statements, processing of buy and sell
requests, distribution of dividends, and servicing of shareholder accounts.
ADMINISTRATOR, DISTRIBUTOR, AND FUND ACCOUNTANT
BISYS Fund Services
and its affiliates
3435 Stelzer Road
Columbus, OH 43219
Markets the Funds, distributes shares through Investment Professionals, and
calculates the value of shares. As Administrator, handles the day-to-day
activities of the Funds.
CUSTODIAN
Key Trust Company of Ohio, N.A.
127 Public Square
Cleveland, OH 44114
Provides for safekeeping of the Funds' investments and cash, and settles trades
made by the Funds.
SUB-ADMINISTRATOR
Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114
Performs certain sub-administrative services.
24
<PAGE>
Additional Information
Some additional information you should know about the Funds.
Share Classes
The Funds currently offer only the classes of shares described in this
Prospectus. At some future date, the Funds may offer additional classes of
shares.
Performance
The Victory Funds may advertise the performance of each Fund by comparing it to
other mutual funds with similar objectives and policies. Performance information
also may appear in various publications. Any fees charged by Investment
Professionals may not be reflected in these performance calculations.
Advertising information may include the yield and average annual total return of
each Fund calculated on a compounded basis for specified periods of time. Yield
and total return information will be calculated according to rules established
by the SEC. Such information may include performance rankings and similar
information from independent organizations, such as Lipper, Inc., and industry
publications such as Morningstar, Inc., Business Week, or Forbes. You also
should see the "Investment Performance" section for the Fund in which you would
like to invest.
Shareholder Communications
In order to eliminate duplicate mailings to an address at which two or more
shareholders with the same last name reside, the Funds will send only one copy
of any shareholder reports, prospectuses, and their supplements, unless you have
instructed us to the contrary. You may request that the Funds send these
documents to each shareholder individually by calling the Funds at 800-539-FUND
(800-539-3863).
If you would like to receive additional copies of any materials, please call the
Funds at 800-539-FUND.
25
<PAGE>
Financial Highlights
LIMITED TERM INCOME FUND
The Financial Highlights table is intended to help you understand the Limited
Term Income Fund's financial performance for the past five years. Certain
information shows the results of an investment in one share of the Limited Term
Income Fund. The total returns in the table represent the rate that an investor
would have earned on an investment in the Limited Term Income Fund (assuming
reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Class A
Shares of the Limited Term Income Fund. The financial highlights for the five
fiscal years ended October 31, 1999 were audited by PricewaterhouseCoopers LLP,
whose report, along with the financial statements of the Limited Term Income
Fund, are included in the Fund's annual report, which is available by calling
the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1999 1998 1997 1996 1995(2)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.06 $ 9.94 $ 10.01 $ 10.15 $ 9.88
Investment Activities
Net investment income 0.50 0.54 0.61 0.63 0.57
Net realized and unrealized
gains (losses) from investments (0.33) 0.12 (0.07) (0.14) 0.27
Total from Investment Activities 0.17 0.66 0.54 0.49 0.84
Distributions
Net investment income (0.50) (0.54) (0.61) (0.62) (0.57)
In excess of net investment income -- -- -- (0.01) --
Net realized gains -- -- -- -- --
Total Distributions (0.50) (0.54) (0.61) (0.63) (0.57)
Net Asset Value, End of Period $ 9.73 $ 10.06 $ 9.94 $ 10.01 $ 10.15
Total Return (excludes sales charges) 1.72% 6.86% 5.57% 4.94% 8.77%
Ratios/Supplemental Data:
Net Assets, End of Period (000) $47,488 $81,343 $81,913 $90,019 $172,002
Ratio of expenses to average net assets 0.96% 0.87% 0.85% 0.86% 0.78%
Ratio of net investment income
to average net assets 5.03% 5.44% 6.06% 5.90% 5.77%
Ratio of expenses to average net assets(1) 1.09% 1.02% 0.87% 0.89% 0.79%
Ratio of net investment income
to average net assets(1) 4.90% 5.29% 6.04% 5.87% 5.76%
Portfolio turnover 220% 177% 139% 221% 97%
- ---------------
(1)During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(2)Effective June 5, 1995, the Victory Short-Term Government Income Portfolio
merged into the Limited Term Income Fund. Financial highlights for the
periods prior to June 5, 1995 represent the Limited Term Income Fund.
</TABLE>
26
<PAGE>
Financial Highlights
INTERMEDIATE INCOME FUND
The Financial Highlights table is intended to help you understand the
Intermediate Income Fund's financial performance for the past five years.
Certain information shows the results of an investment in one share of the
Intermediate Income Fund. The total returns in the table represent the rate that
an investor would have earned on an investment in the Intermediate Income Fund
(assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Class A
Shares of the Intermediate Income Fund. The financial highlights for the five
fiscal years ended October 31, 1999 were audited by PricewaterhouseCoopers LLP,
whose report, along with the financial statements of the Intermediate Income
Fund, are included in the Fund's annual report, which is available by calling
the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 9.85 $ 9.61 $ 9.56 $ 9.69 $ 9.25
Investment Activities
Net investment income 0.50 0.53 0.56 0.56 0.60
Net realized and unrealized gains
(losses) from investments (0.52) 0.24 0.05 (0.13) 0.44
Total from Investment Activities (0.02) 0.77 0.61 0.43 1.04
Distributions
Net investment income (0.50) (0.53) (0.56) (0.56) (0.60)
Net realized gains (0.01) -- -- -- --
Total Distributions (0.51) (0.53) (0.56) (0.56) (0.60)
Net Asset Value, End of Period $ 9.32 $ 9.85 $ 9.61 $ 9.56 $ 9.69
Total Return (excludes sales charges) (0.18)% 8.30% 6.62% 4.56% 11.65%
Ratios/Supplemental Data:
Net Assets, End of Period (000) $224,190 $256,267 $248,841 $272,087 $163,281
Ratio of expenses to
average net assets 1.00% 0.96% 0.96% 0.94% 0.82%
Ratio of net investment income
to average net assets 5.26% 5.48% 5.87% 5.81% 6.32%
Ratio of expenses to
average net assets(1) 1.26% 1.24% 1.09% 1.11% 1.06%
Ratio of net investment income
to average net assets(1) 5.00% 5.20% 5.74% 5.64% 6.08%
Portfolio turnover 303% 318% 195% 164% 98%
- ---------------
(1)During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
</TABLE>
27
<PAGE>
Financial Highlights
FUND FOR INCOME
The Financial Highlights table is intended to help you understand the Fund for
Income's financial performance for the past five years. Certain information
shows the results of an investment in one share of the Fund for Income. The
total returns in the table represent the rate that an investor would have earned
on an investment in the Fund for Income (assuming reinvestment of all dividends
and distributions).
These financial highlights reflect historical information about Class A and
Class G Shares of the Fund for Income. The financial highlights for the period
from January 1, 1999 to October 31, 1999 were audited by PricewaterhouseCoopers
LLP, whose report, along with the financial statements of the Fund for Income,
are included in the Fund's annual report, which is available by calling the Fund
at 800-539-FUND. The financial highlights for the five fiscal years ended
December 31, 1998 were audited by Arthur Andersen LLP.
<TABLE>
<CAPTION>
Class A
Shares Class G Shares
Mar. 26, Jan. 1, Year Year Year Year Year
1999 to 1999 to Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1999(4)(7) 1999(4) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 13.14 $ 13.32 $ 13.14 $ 12.88 $ 13.21 $ 12.02 $ 13.37
Investment Activities
Net investment income 0.46 0.66 0.77 0.78 0.78 0.79 0.76
Net realized and unrealized
gains (losses) on investments (0.36) (0.54) 0.17 0.26 (0.34) 1.23 (1.25)
Total from Investment Activities 0.10 0.12 0.94 1.04 0.44 2.02 (0.49)
Distributions
Net investment income (0.45) (0.66) (0.76) (0.78) (0.77) (0.79) (0.78)
In excess of net investment income -- -- -- -- -- -- (0.01)
Net realized gains -- -- -- -- -- -- (0.05)
Tax return of capital -- -- -- -- -- (0.04) (0.02)
Total Distributions (0.45) (0.66) (0.76) (0.78) (0.77) (0.83) (0.86)
Net Asset Value, End of Period $ 12.79 $ 12.78 $ 13.32 $ 13.14 $ 12.88 $ 13.21 $ 12.02
Total Return (excludes sales charges) 0.72%(2) 0.94%(2) 7.37% 8.36% 3.51% 17.20% (3.69)%
Ratios/Supplemental Data:
Net Assets, End of Period (000) $40,270 $192,422 $159,712 $155,072 $162,874 $185,434 $184,029
Ratio of expenses to
average net assets (5) 1.00%(3) 0.88%(3) 0.89% 0.90% 0.90% 0.92% 0.90%
Ratio of net investment income
to average net assets (5) 6.02%(3) 6.12%(3) 5.79% 6.04% 6.06% 6.19% 6.03%
Ratio of expenses to
average net assets(1) 1.22%(3) 1.04%(3) 0.90% (6) (6) (6) (6)
Ratio of net investment income
to average net assets(1) 5.80%(3) 5.96%(3) 5.78% (6) (6) (6) (6)
Portfolio turnover (8) 24% 24% 36% 12% 13% 16% 21%
- ---------------
(1)During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred,
the ratios would have been as indicated.
(2)Not annualized.
< F3> Annualized.
(4)Effective March 26, 1999, the Gradison Government Income Fund merged into
the Victory Fund For Income. Financial highlights prior to March 26, 1999
represent the Gradison Government Income Fund.
(5)Effective March 26, 1999, the Adviser agreed to waive its management fee or
to reimburse expenses, as allowed by law, to the extent necessary to
maintain the net operating expenses of the Class G Shares of the Fund at a
maximum of 0.89% until at least April 1, 2001. The Adviser has also agreed
to waive its management fee for Class A Shares to the same extent the fee
is waived for Class G Shares until at least April 1, 2001.
(6)There were no voluntary fee reductions during the period.
(7)Period from commencement of operations.
(8)Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
</TABLE>
28
<PAGE>
Financial Highlights
INVESTMENT QUALITY BOND FUND
The Financial Highlights table is intended to help you understand the Investment
Quality Bond Fund's financial performance for the past five years. Certain
information shows the results of an investment in one share of the Investment
Quality Bond Fund. The total returns in the table represent the rate that an
investor would have earned on an investment in the Investment Quality Bond Fund
(assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Class A
Shares of the Investment Quality Bond Fund. The financial highlights for the
five fiscal years ended October 31, 1999 were audited by PricewaterhouseCoopers
LLP, whose report, along with the financial statements of the Investment Quality
Bond Fund, are included in the Fund's annual report, which is available by
calling the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1999 1998 1997< F3> 1996 1995< F2>
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.00 $ 9.78 $ 9.63 $ 9.76 $ 9.10
Investment Activities
Net investment income 0.54 0.55 0.57 0.57 0.62
Net realized and unrealized gains
(losses) from investments (0.64) 0.22 0.14 (0.13) 0.67
Total from Investment Activities (0.10) 0.77 0.71 0.44 1.29
Distributions
Net investment income (0.53) (0.55) (0.56) (0.56) (0.62)
In excess of net investment income -- -- -- -- (0.01)
Tax return of capital -- -- -- (0.01) --
Total Distributions (0.53) (0.55) (0.56) (0.57) (0.63)
Net Asset Value, End of Period $ 9.37 $ 10.00 $ 9.78 $ 9.63 $ 9.76
Total Return (excludes sales charges) (1.18)% 8.06% 7.67% 4.65% 14.63%
Ratios/Supplemental Data:
Net Assets, End of Period (000) $140,962 $169,932 $181,007 $150,807 $125,248
Ratio of expenses to
average net assets 1.09% 1.06% 1.04% 1.01% 0.88%
Ratio of net investment income
to average net assets 5.44% 5.49% 5.90% 5.99% 6.59%
Ratio of expenses to
average net assets(1) 1.34% 1.31% 1.17% 1.14% 1.10%
Ratio of net investment income
to average net assets(1) 5.19% 5.24% 5.77% 5.86% 6.37%
Portfolio turnover 398% 492% 249% 182% 160%
- ---------------
(1)During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(2)Effective June 5, 1995, the Victory Corporate Bond Portfolio merged into
the Investment Quality Bond Fund. Financial highlights for the periods
prior to June 5, 1995 represent the Investment Quality Bond Fund.
(3)Effective June 13, 1997, the Victory Government Bond Fund merged into
the Investment Quality Bond Fund. Financial highlights for the periods
prior to June 13, 1997 represent the Investment Quality Bond Fund.
</TABLE>
29
<PAGE>
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30
<PAGE>
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31
<PAGE>
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32
<PAGE>
The Victory Funds
127 Public Square
OH-01-27-1612
Cleveland, Ohio 44114
Bulk Rate
U.S. Postage
PAID
Cleveland, OH
Permit No. 469
If you would like a free copy of any of the following documents or would like to
request other information regarding the Funds, you can call or write the Funds
or your Investment Professional.
Statement of Additional Information (SAI)
Contains more details describing the Funds and their policies. The SAI has been
filed with the Securities and Exchange Commission (SEC), and is incorporated by
reference in this Prospectus.
Annual and Semi-annual Reports
Describes each Fund's performance, lists portfolio holdings, and discusses
market conditions and investment strategies that significantly affected a Fund's
performance during its last fiscal year.
If you would like to receive copies of the annual and semi-annual reports and/or
the SAI at no charge, please call the Funds at 800-539-FUND (800-539-3863).
How to Obtain Information
By telephone: Call Victory Funds at 800-539-FUND (800-539-3863).
By mail: The Victory Funds
P. O. Box 8527
Boston, MA 02266-8527
You also may obtain copies of materials from the SEC's Public Reference Room in
Washington, D.C. (Call 1-202-942-8090 for information on the operation of the
SEC's Public Reference Room.) Copies of this information may be obtained, after
paying a duplicating fee, by electronic request at the following e-mail address:
[email protected], or by writing the SEC's Public Reference Section,
Washington, D.C. 20459-0102.
On the Internet: Text only versions of Fund documents can be viewed on-line or
downloaded from the SEC at http://www.sec.gov or from the Victory Funds' website
at http://www.victoryfunds.com.
The securities described in this Prospectus and the SAI are not offered in any
state in which they may not lawfully be sold. No sales representative, dealer,
or other person is authorized to give any information or make any representation
other than those contained in this Prospectus and the SAI.
Victory Funds
(LOGO)(R) Investment Company Act File Number 811-4852 VF-TXFI-PRO (2/00)
<PAGE>
Prospectus
Specialty Funds
Balanced Fund
Class A and G Shares
Convertible Securities Fund
Class A and G Shares
Real Estate Investment Fund
Class A and G Shares
February 28, 2000
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved any Fund's securities or determined whether this
Prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
Victory Funds
LOGO (R)
Call Victory at:
800-539-FUND
(800-539-3863)
or visit the Victory Funds' website at:
www.victoryfunds.com
<PAGE>
The Victory Portfolios
Table of Contents
Introduction 1
Risk/Return Summary for each of the Funds An analysis which includes the
investment objective, principal strategies, principal risks, performance, and
expenses of each Fund .
Balanced Fund
Class A and G Shares 2
Convertible Securities Fund
Class A and G Shares 4
Real Estate Investment Fund
Class A and G Shares 6
Investments 8
Risk Factors 9
Share Price 12
Dividends, Distributions, and Taxes 12
Investing with Victory
* Choosing a Share Class 14
* How to Buy Shares 17
* How to Exchange Shares 19
* How to Sell Shares 20
Organization and Management of the Funds 22
Additional Information 24
Financial Highlights
Balanced Fund 25
Convertible Securities Fund 26
Real Estate Investment Fund 27
Appendix 28
Key to Financial Information
Objective and Strategies
The goals and the strategies that a Fund plans to use to pursue its investment
objective.
Risk Factors
The risks you may assume as an investor in a Fund.
Performance
A summary of the historical performance of a Fund in comparison to an unmanaged
index, and, in some cases, the average performance of a category of mutual
funds.
Expenses
The costs you will pay, directly or indirectly, as an investor in a Fund,
including sales charges and ongoing expenses.
Shares of the Funds are:
* Not insured by the FDIC;
* Not deposits or other obligations of, or guaranteed by KeyBank, any of its
affiliates, or any other bank;
* Subject to possible investment risks, including possible loss of the amount
invested.
<PAGE>
Introduction
This Prospectus explains the objectives, policies, risks, performance,
strategies, and expenses of the Shares of the Victory Funds described in this
Prospectus (the Funds).
Investment Strategy
Each Fund pursues its investment objectives by investing primarily in equity
securities. The Balanced Fund also invests a portion of its assets in debt
securities and the Convertible Securities Fund invests primarily in fixed-income
securities convertible into common stock. However, each Fund has unique
investment strategies and its own risk/reward profile. Please review the
"Risk/Return Summary" for each Fund and the "Investments" section for an
overview.
Risk Factors
Each Fund invests primarily in equity securities. The value of equity securities
may fluctuate in response to the activities of an individual company, or in
response to general market or economic conditions. The Balanced Fund and the
Convertible Securities Fund are subject to the risks of both equity and debt
securities, since both Funds are permitted to invest in both types of
securities. There are other potential risks discussed in each "Risk/Return
Summary" and in "Risk Factors."
Who May Want to Invest in the Funds
* Investors who want a diversified portfolio
* Investors willing to accept the risk of price and dividend fluctuations
* Investors willing to accept higher short-term risk along with higher
potential long-term returns
* Long-term investors with a particular goal, like saving for retirement or a
child's education
Share Classes
Each Fund offers Class A and Class G Shares. See "Choosing a Share Class."
Key Asset Management Inc., which we will refer to as the "Adviser" or "KAM"
throughout this Prospectus, manages the Funds.
Please read this Prospectus before investing in the Funds and keep it for future
reference.
The following pages provide you with an overview of each of the Funds. Please
look at the objective, policies, strategies, risks, and expenses to determine
which Fund will suit your risk tolerance and investment needs.
1
<PAGE>
Risk/Return Summary
BALANCED FUND
CLASS A SHARES
Cusip#: 926464876
SBALX
CLASS G SHARES
Cusip#: 926464272
Investment Objective
The Balanced Fund seeks to provide income and long-term growth of capital.
Principal Investment Strategies
The Balanced Fund pursues its investment objective by investing in equity
securities and fixed income securities. The Balanced Fund may invest in any type
or class of security, including foreign securities.
Under normal market conditions, the Balanced Fund will:
* Invest 40% to 75% of its total assets in equity securities and securities
convertible or exchangeable into common stock; and
* Invest at least 25% of its total assets in debt securities and preferred
stocks. The debt securities in which the Balanced Fund may invest include asset
backed securities, mortgage backed securities, corporate bonds and U.S.
government securities.
Important Characteristics of the Balanced Fund's Investments:
In making investment decisions involving Equity Securities, the Adviser
considers:
* The growth and profitability prospects for the economic sector and markets in
which the company operates and for the products or services it provides;
* The financial condition of the company; and
* The price of the security and how that price compares to historical price
levels, to current price levels in the general market, and to prices of
competing companies; projected earnings estimates; and the earnings growth rate
of the company.
In making investment decisions involving Debt Securities, the Adviser considers:
* Quality: The Balanced Fund primarily purchases investment-grade debt
securities.
* Maturity: The average weighted maturity of the Balanced Fund's fixed income
securities will range from 5 to 15 years. This range may be changed in response
to changes in market conditions.
In making investment decisions involving Preferred Stock, the Adviser considers:
* The issuer's financial strength, including its historic and current
financial condition;
* The issuer's projected earnings, cash flow, and borrowing requirements; and
* The issuer's continuing ability to meet its obligations.
The Balanced Fund's higher portfolio turnover rate may result in higher expenses
and taxable gain distributions.
There is no guarantee that the Balanced Fund will achieve its objectives.
Principal Risks
You may lose money by investing in the Balanced Fund. The Balanced Fund is
subject to the following principal risks, more fully described in "Risk
Factors." The Balanced Fund's net asset value, yield and/or total return may be
adversely affected if any of the following occurs:
* The market value of securities acquired by the Balanced Fund declines.
* The portfolio manager does not execute the Balanced Fund's principal
investment strategies effectively.
* A company's earnings do not increase as expected.
* Foreign securities experience more volatility than their domestic
counterparts, in part because of higher political and economic risks, lack of
reliable information, fluctuations in currency exchange rates, and the risks
that a foreign government may take over assets, restrict the ability to exchange
currency or restrict the delivery of securities.
* Interest rates rise.
* An issuer's credit quality is downgraded.
* The Balanced Fund must reinvest interest or sale proceeds at lower rates.
* The rate of inflation increases.
* The average life of a mortgage-related security is shortened or lengthened.
An investment in the Balanced Fund is not a deposit of KeyBank or any of its
affiliates and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
By itself, the Balanced Fund does not constitute a complete investment plan and
should be considered a long-term investment for investors who can afford to
weather changes in the value of their investment and in the level of income they
receive from their investment.
2
<PAGE>
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Balanced Fund by showing changes in its performance for various
time periods ending December 31st. The figures shown in the bar chart and table
assume reinvestment of dividends and distributions.
The bar chart shows returns for Class A Shares of the Balanced Fund. Sales loads
are not reflected on the bar chart (or highest and lowest returns below) and if
they were reflected, returns would be lower than those shown.
1994 -1.73%
1995 26.11%
1996 14.55%
1997 19.51%
1998 17.91%
1999 6.85%
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter was
10.17% (quarter ending December 31, 1998) and the lowest return for a quarter
was - 4.32% (quarter ending September 30, 1999).
The table shows how the average annual total returns for Class A Shares of the
Balanced Fund for one year, five years and since inception, including maximum
sales charges, compare to those of a broad-based market index and an index of
mutual funds with similar investment objectives.
Average Annual Total Returns Since
(for the Periods ended Past Past Inception
December 31, 1999) One Year 5 Years (12/10/93)
Class A(1) 0.68% 15.43% 12.33%
S&P 500 Index(2),(4) 21.04% 28.55% 23.30%
Lipper Balanced Fund Index(3),(4) 8.98% 16.33% 13.15%
1 The Balanced Fund did not offer Class G Shares prior to December 15, 1999.
2 The Standard & Poor's 500 Index is a broad-based unmanaged index that
represents the general performance of domestically traded common stocks of mid-
to large-size companies.
3 The Lipper Balanced Fund Index is a non-weighted index of the 30 largest funds
within the Lipper Balanced Fund investment category.
4 Index returns do not include any brokerage commissions, sales charges, or
other fees. It is not possible to invest directly in an index.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Balanced Fund.
Shareholder Transaction Expenses
(paid directly from your investment)(1) Class A Class G
Maximum Sales Charge
Imposed on Purchases 5.75% NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE(2) NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees(3) 0.80% 0.80%
Distribution (12b-1) Fees 0.00% 0.50%
Other Expenses (includes a shareholder
servicing fee of 0.25% applicable to
Class A Shares) 0.50% 0.31%
Total Fund Operating Expenses 1.30% 1.61%(4)
Fee Waiver/Expense Reimbursement (0.00)% (0.06)%
Net Expenses 1.30%(5) 1.55%(6)
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 Except for non-IRA tax deferred retirement accounts, there is no initial sales
charge on purchases of $1 million or more for Class A Shares. However, if you
sell any of such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any of such Class
A Shares within two years, you will be charged a CDSC of 0.50%.
3 Management fees have been restated to reflect reduction from 1.00% to 0.80%.
4 Other expenses of Class G Shares are based on estimated amounts for the
current fiscal year.
5 The Adivser may waive its management fee and reimburse expenses, as allowed by
law, so that the net operating expenses of Class A Shares do not exceed 1.25%.
The Adviser may terminate this waiver/reimbursement at any time to the extent
allowed by law.
6 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 Class G Shares of the Balanced Fund at a maximum of 1.55% until at
least February 28, 2001.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Balanced Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Balanced Fund for the time
periods shown and then sell all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that the
Balanced Fund's operating expenses remain the same.(1) Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $700 $963 $1,247 $2,053
Class G $158 $502 $ 870 $1,906
1 This Example assumes that net operating expenses for Class G Shares of the
Balanced Fund will equal 1.55% until February 28, 2001 and will equal 1.61%
thereafter.
3
<PAGE>
Risk/Return Summary
CONVERTIBLE SECURITIES FUND
CLASS A SHARES
Cusip#: 926464538
SBFCX
CLASS G SHARES
Cusip#: 926464280
Investment Objective
The Convertible Securities Fund seeks a high level of current income together
with long-term capital appreciation.
Principal Investment Strategies
The Convertible Securities Fund pursues its investment objective by investing at
least 65% of its total assets in convertible securities. Investments in
securities are not limited by credit quality. Lower quality or
below-investment-grade debt securities are sometimes referred to as "junk
bonds."
Under normal market conditions, the Convertible Securities Fund will invest at
least 65% of its total assets in:
* Securities convertible into common stocks, such as convertible bonds,
convertible notes, and convertible preferred stocks; and
* Synthetic convertible securities, which are created by combining fixed income
securities with the right to acquire equity securities.
There is no guarantee that the Convertible Securities Fund will achieve its
objectives.
Principal Risks
You may lose money by investing in the Convertible Securities Fund. The
Convertible Securities Fund is subject to the following principal risks, more
fully described in "Risk Factors." The Convertible Securities Fund's net asset
value, yield and/or total return may be adversely affected if any of the
following occurs:
* The market value of securities acquired by the Convertible Securities Fund
declines.
* The portfolio manager does not execute the Convertible Securities Fund's
principal investment strategies effectively.
* A company's earnings do not increase as expected.
* Interest rates rise.
* An issuer's credit quality is downgraded.
* The rate of inflation increases.
An investment in the Convertible Securities Fund is not a deposit of KeyBank or
any of its affiliates and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. In addition, the
Convertible Securities Fund is subject to the risks related to investments in
below-investment-grade debt securities.
By itself, the Convertible Securities Fund does not constitute a complete
investment plan and should be considered a long-term investment for investors
who can afford to weather changes in the value of their investment.
4
<PAGE>
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Convertible Securities Fund by showing changes in its
performance for various time periods ending December 31st. The figures shown in
the bar chart and table assume reinvestment of dividends and distributions.
The bar chart shows returns for Class A Shares of the Convertible Securities
Fund. Sales loads are not reflected on the bar chart (or highest and lowest
returns below) and if they were reflected, returns would be lower than those
shown.
1990 -4.96%
1991 27.69%
1992 11.30%
1993 20.09%
1994 -6.45%
1995 24.30%
1996 19.14%
1997 16.35%
1998 - 0.78%
1999 11.75%
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter was
9.38% (quarter ending March 31, 1994) and the lowest return for a quarter was
- -10.67% (quarter ending September 30, 1998).
The table shows how the average annual total returns for Class A Shares of the
Convertible Securities Fund for one year, five years and ten years, including
maximum sales charges, compare to those of a broad-based market index and an
index of mutual funds with similar investment objectives.
Average Annual Total Returns
(for the Periods ended Past Past Past
December 31, 1999) One Year 5 Years 10 Years
Class A(1) 5.35% 12.47% 10.58%
S&P 500 Index(2),(4) 21.04% 28.55% 10.58%
Lipper Convertible Securities Fund Index(3),(4) 28.30% 16.44% 12.39%
1 The Convertible Securities Fund did not offer Class G Shares prior to December
15, 1999.
2 The Standard & Poor's 500 Stock Index is a broad-based unmanaged index that
represents the general performance of domestically traded common stocks of mid-
to large-size companies.
3 Mutual funds listed in the Lipper Convertible Securities Fund Index invest
primarily in convertible bonds and convertible preferred shares.
4 Index returns do not include any brokerage commissions, sales charges, or
other fees. It is not possible to invest directly in an index.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Convertible Securities Fund.
Shareholder Transaction Expenses
(paid directly from your investment)(1) Class A Class G
Maximum Sales Charge
Imposed on Purchases 5.75% NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE(2) NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees 0.75% 0.75%
Distribution (12b-1) Fees 0.00% 0.50%
Other Expenses (includes a shareholder
servicing fee of 0.25% applicable
to Class A Shares) 0.49% 0.39%
Total Fund Operating Expenses 1.24% 1.64%(3)
Fee Waiver/Expense Reimbursement (0.00)% (0.09)%
Net Expenses 1.24%(3) 1.55%(3)
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 Except for non-IRA tax deferred retirement accounts, there is no initial sales
charge on purchases of $1 million or more for Class A Shares. However, if you
sell any of such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any of such Class
A Shares within two years, you will be charged a CDSC of 0.50%.
3 Other expenses of Class G Shares are based on estimated amounts for the
current fiscal year . The Adviser has contractually agreed to waive its
management fee and reimburse expenses, as allowed by law, so that the net
operating expenses of Class A and Class G Shares of the Convertible Securities
Fund will equal 1.24% and 1.55%, respectively, until at least February 28, 2001.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Convertible Securities Fund with the cost of investing in other
mutual funds. The Example assumes that you invest $10,000 in the Convertible
Securities Fund for the time periods shown and then redeem all of your shares at
the end of those periods. The Example also assumes that your investment has a 5%
return each year and that the Convertible Securities Fund's operating expenses
remain the same.(1) Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $694 $946 $1,217 $1,989
Class G $158 $508 $ 883 $1,936
1 This Example assumes that net operating expenses for Class G Shares of the
Convertible Securities Fund will equal 1.55% until February 28, 2001 and will
equal 1.64% thereafter.
5
<PAGE>
Risk/Return Summary
REAL ESTATE INVESTMENT FUND
CLASS A SHARES
Cusip#: 926464579
VREIX
CLASS G SHARES
Cusip#: 926464298
Investment Objective
The Real Estate Investment Fund seeks to provide total return through
investments in real estate-related securities.
Principal Investment Strategies
The Real Estate Investment Fund pursues its investment objective by investing at
least 80% of the Fund's total assets in real estate-related companies.
Under normal market conditions, the Real Estate Investment Fund will invest
substantially all of its assets in:
* Equity securities (including equity and mortgage real estate investment
trusts (REITs));
* Rights or warrants to purchase common stocks;
* Securities convertible into common stocks when the Adviser thinks that the
conversion will be profitable; and
* Preferred stocks.
There is no guarantee that the Real Estate Investment Fund will achieve its
objectives.
Principal Risks
You may lose money by investing in the Real Estate Investment Fund. The Real
Estate Investment Fund is subject to the following principal risks, more fully
described in "Risk Factors." The Real Estate Investment Fund's net asset value,
yield and/or total return may be adversely affected if any of the following
occurs:
* The market value of securities acquired by the Real Estate Investment Fund
declines.
* The portfolio manager does not execute the Real Estate Investment Fund's
principal investment strategies effectively.
An investment in the Real Estate Investment Fund is not a deposit of KeyBank or
any of its affiliates and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
The Real Estate Investment Fund is a non-diversified fund. As a non-diversified
fund, the Real Estate Investment Fund may devote a larger portion of its assets
to the securities of a single issuer than if it were diversified. This could
make the Real Estate Investment Fund more susceptible to economic or credit
risks. In addition, the Real Estate Investment Fund is subject to the risks
related to direct investment in real estate.
By itself, the Real Estate Investment Fund does not constitute a complete
investment plan and should be considered a long-term investment for investors
who can afford to weather changes in the value of their investment.
6
<PAGE>
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Real Estate Investment Fund by showing changes in its
performance for various time periods ending December 31st. The figures shown in
the bar chart and table assume reinvestment of dividends and distributions.
The bar chart shows returns for Class A Shares of the Real Estate Investment
Fund. Sales loads are not reflected on the bar chart (or highest and lowest
returns below) and if they were reflected, returns would be lower than those
shown.
1998 - 14.43%
1999 0.58%
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter was
8.70% (quarter ending June 30, 1999) and the lowest return for a quarter was
- -10.51% (quarter ending September 30, 1998).
The table shows how the average annual total returns for Class A Shares of the
Real Estate Investment Fund for one year and since inception, including maximum
sales charges, compare to those of a broad-based market index.
Average Annual Total Returns Since
(for the Periods ended Past Inception
December 31, 1999) One Year (4/30/97)
Class A(1) -5.22% 1.20%
Morgan Stanley REIT Index(2) - 4.55% -1.14%
1 The Real Estate Investment Fund did not offer Class G Shares prior to December
15, 1999.
2 The Morgan Stanley REIT Index is a capitalization-weighted index with
dividends reinvested of the most actively traded real estate investment trusts
and is designed to be a measure of real estate equity performance. Index returns
do not include any brokerage commissions, sales charges, or other fees. It is
not possible to invest directly in an index.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Real Estate Investment Fund.
Shareholder Transaction Expenses
(paid directly from your investment)(1) Class A Class G
Maximum Sales Charge
Imposed on Purchases 5.75% NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE(2) NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees(3) 0.80% 0.80%
Distribution (12b-1) Fees 0.00% 0.50%
Other Expenses (includes a shareholder
servicing fee of 0.25% applicable to
Class A Shares) 0.91% 0.60%
Total Fund Operating Expenses 1.71% 1.90%(4)
Fee Waiver/Expense Reimbursement (0.31)% (0.25)%
Net Expenses(5) 1.40% 1.65%
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 Except for non-IRA tax deferred retirement accounts, there is no initial sales
charge on purchases of $1 million or more for Class A Shares. However, if you
sell any of such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any of such Class
A Shares within two years, you will be charged a CDSC of 0.50%.
3 Management fees have been restated to reflect reduction from 1.00% to 0.80%.
4 Other expenses of Class G Shares are based on estimated amounts for the
current fiscal year.
5 The Adviser has contractually agreed to waive its management fee and to
reimburse expenses, as allowed by law, to the extent necessary to maintain the
net operating expenses of Class A Shares and Class G Shares of the Real Estate
Investment Fund at a maximum of 1.40% and 1.65%, respectively, until at least
February 28, 2001.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Real Estate Investment Fund with the cost of investing in other
mutual funds. The Example assumes that you invest $10,000 in the Real Estate
Investment Fund for the time periods shown and then sell all of your shares at
the end of those periods. The Example also assumes that your investment has a 5%
return each year and that the Real Estate Investment Fund's operating expenses
remain the same.(1) Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $709 $1,054 $1,422 $2,454
Class G $168 $ 573 $1,003 $2,202
1 This Example assumes that Net Annual Fund Operating Expenses for Class A
Shares will equal 1.40% until February 28, 2001 and will equal 1.71% thereafter
and that Net Annual Fund Operating Expenses for Class G Shares will equal 1.65%
until February 28, 2001 and will equal 1.90% thereafter.
7
<PAGE>
Investments
The following describes some of the types of securities the Funds may purchase
under normal market conditions. All Funds will not buy all of the securities
listed below.
For cash management or for temporary defensive purposes in response to market
conditions, each Fund may hold all or a portion of its assets in cash or
short-term money market instruments. This may reduce the benefit from any
upswing in the market and may cause a Fund to fail to meet its investment
objective.
For more information on ratings and a more complete description of which Funds
can invest in certain types of securities, see the Statement of Additional
Information (SAI).
U.S. Equity Securities.
Can include common stock, preferred stock, and securities that are convertible
or exchangeable into common stock of U.S. corporations.
U.S. Government Securities.
Notes and bonds issued or guaranteed by the U.S. government, its agencies
or instrumentalities. Some are direct obligations of the U.S. Treasury;
others are obligations only of the U.S. agency or instrumentality.
Corporate Debt Obligations.
Debt instruments issued by public corporations. They may be secured or
unsecured.
Convertible or Exchangeable Corporate Debt Obligations.
Debt instruments that may be exchanged or converted to other securities.
Asset-Backed Securities.
Debt securities backed by loans or accounts receivable originated by banks,
credit card companies, student loan issuers, or other providers of credit. These
securities may be enhanced by a bank letter of credit or by insurance coverage
provided by a third party.
Mortgage-Backed Securities.
Instruments secured by a mortgage or pools of mortgages.
Preferred Stock.
A class of stock that pays dividends at a specified rate and that has preference
over common stock in the payment of dividends and the liquidation of assets.
Real Estate Investment Trusts.
Shares of ownership in real estate investment trusts or mortgages on real
estate.
8
<PAGE>
Risk Factors
This Prospectus describes the principal risks that you may assume as an
investor in the Funds.
This table summarizes the principal risks, described below, to which the Funds
are subject.
Convertible Real Estate
Balanced Securities Investment
Fund Fund Fund
Market risk and X X X
manager risk
Equity risk X X X
Foreign security
and currency risk X
Debt security risk X X
Below-investment-grade
security risk X
Real estate
security risk X
Concentration and
diversification risk X
Mortgage-related
security risk X
General Risks:
* Market risk is the risk that the market value of a security may fluctuate,
depending on the supply and demand for that type of security. As a result of
this fluctuation, a security may be worth more or less than the price a Fund
originally paid for the security, or more or less than the security was worth at
an earlier time. Market risk may affect a single issuer, an industry, a sector
of the economy, or the entire market and is common to all investments.
* Manager risk is the risk that a Fund's portfolio manager may implement its
investment strategy in a way that does not produce the intended result.
By matching your investment objective with an acceptable level of risk, you can
create your own customized investment plan.
9
<PAGE>
Risk Factors (continued)
It is important to keep in mind one basic principle of investing: the greater
the risk, the greater the potential reward. The reverse is also generally
true: the lower the risk, the lower the potential reward.
Risks associated with investing in equity securities:
* Equity risk is the risk that the value of the security will fluctuate in
response to changes in earnings or other conditions affecting the issuer's
profitability. Unlike debt securities, which have preference to a company's
assets in case of liquidation, equity securities are entitled to the residual
value after the company meets its other obligations. For example, in the event
of bankruptcy, holders of debt securities have priority over holders of equity
securities to a company's assets.
Risks associated with investing in foreign securities:
* Currency risk is the risk that fluctuations in the exchange rates between the
U.S. dollar and foreign currencies may negatively affect an investment. Adverse
changes in exchange rates may erode or reverse any gains produced by foreign
currency denominated investments and may widen any losses. Political and
economic risks, along with other factors, could adversely affect the value of
the Balanced Fund's securities.
* Foreign issuer risk. Compared to U.S. companies, there generally is less
publicly available information about foreign companies and there may be less
governmental regulation and supervision of foreign stock exchanges, brokers, and
listed companies. Foreign issuers may not be subject to the uniform accounting,
auditing, and financial reporting standards and practices prevalent in the U.S.
In addition, foreign securities markets may be more volatile and subject to less
governmental supervision than their counterparts in the U.S. Investments in
foreign countries could be affected by factors not present in the U.S.,
including expropriation, confiscation of property, and difficulties in enforcing
contracts. All of these factors can make foreign investments more volatile than
U.S. investments.
Risks associated with investing in debt securities:
* Interest rate risk. The value of a debt security typically changes in the
opposite direction from a change in interest rates. When interest rates go up,
the value of a debt security typically goes down. When interest rates go down,
the value of a debt security typically goes up. Generally, the market values of
securities with longer maturities are more sensitive to changes in interest
rates.
* Inflation risk is the risk that inflation will erode the purchasing power of
the cash flows generated by debt securities held by a Fund. Fixed-rate debt
securities are more susceptible to this risk than floating-rate debt securities
or equity securities that have a record of dividend growth.
* Reinvestment risk is the risk that when interest rates are declining, a Fund
that receives interest income or prepayments on a security will have to reinvest
these moneys at lower interest rates. Generally, interest rate risk and
reinvestment risk tend to have offsetting effects, though not necessarily of the
same magnitude.
* Credit (or default) risk is the risk that the issuer of a debt security will
be unable to make timely payments of interest or principal. Although a Fund may
invest in high-quality securities, the interest or principal payments may not be
insured or guaranteed on all securities. Credit risk is measured by nationally
recognized statistical rating organizations (NRSROs) such as Standard & Poor's
(S&P), Fitch IBCA International, or Moody's Investors Service (Moody's)
10
<PAGE>
Risk Factors (continued)
Risks associated with investing in below-investment-grade securities:
* Below-investment-grade securities ("junk bonds") are subject to certain risks
in addition to those risks associated with higher-rated securities.
Below-investment-grade securities may be more susceptible to real or perceived
adverse economic conditions, less liquid, and more difficult to evaluate than
investment-grade securities.
Risks associated with investing in mortgage-related securities:
* Prepayment risk. Prepayments of principal on mortgage-related securities
affect the average life of a pool of mortgage-related securities. The level of
interest rates and other factors may affect the frequency of mortgage
prepayments. In periods of rising interest rates, the prepayment rate tends to
decrease, lengthening the average life of a pool of mortgage-related securities.
In periods of falling interest rates, the prepayment rate tends to increase,
shortening the average life of a pool of mortgage-related securities. Prepayment
risk is the risk that, because prepayments generally occur when interest rates
are falling, a Fund may have to reinvest the proceeds from prepayments at lower
interest rates.
* Extension risk is the risk that the rate of anticipated prepayments on
principal may not occur, typically because of a rise in interest rates, and the
expected maturity of the security will increase. During periods of rapidly
rising interest rates, the effective average maturity of a security may be
extended past what a Fund's portfolio manager anticipated that it would be. The
market value of securities with longer maturities tend to be more volatile.
Risks associated with investing in real estate securities:
* Real estate risk is the risk that the value of a security will fluctuate
because of changes in property values, vacancies of rental properties,
overbuilding, changes in local laws, increased property taxes and operating
expenses, and other risks associated with real estate. While the Real Estate
Investment Fund will not invest directly in real estate, it may be subject to
the risks associated with direct ownership. Equity REITs(1) may be affected by
changes in property value, while mortgage REITs(2) may be affected by credit
quality and interest rates.
1 Equity REITs may own property, generate income from rental and lease payments,
and offer the potential for growth from property appreciation and periodic
capital gains from the sale of property.
2 Mortgage REITs earn interest income and are subject to credit risks, like the
chance that a developer may fail to repay a loan. Mortgage REITs are also
subject to interest rate risk, described above.
* Regulatory risk. Certain REITs may fail to qualify for pass-through of income
under federal tax law, or to maintain their exemption from the registration
requirements under federal securities laws.
An investment in a Fund is not a complete investment program.
11
<PAGE>
Share Price
Each Fund calculates its share price, called its "net asset value" (NAV), each
business day at 4:00 p.m. Eastern Time or at the close of trading on the New
York Stock Exchange, Inc. (NYSE), whichever time is earlier. You may buy,
exchange, and sell your shares on any business day at a price that is based on
the NAV that is calculated after you place your order. A business day is a day
on which the NYSE is open.
The Funds value their investments based on market value. When market quotations
are not readily available, the Funds value their investments based on fair value
methods approved by the Board of Trustees of the Victory Portfolios. Each Class
of each Fund calculates its NAV by adding up the total value of its investments
and other assets, subtracting its liabilities, and then dividing that figure by
the number of outstanding shares of the Class.
Total Assets- Liabilities
NAV = ----------------------------
Number of Shares Outstanding
You can find a Fund's net asset value each day in The Wall Street Journal and
other newspapers. Newspapers do not normally publish fund information until a
Fund reaches a specific number of shareholders or level of assets.
The daily NAV is useful to you as a shareholder because the NAV, multiplied by
the number of Fund shares you own gives you the value of your investment.
Dividends, Distributions, and Taxes
Buying a Dividend. You should check a Fund's distribution schedule before you
invest. If you buy shares of a Fund shortly before it makes a distribution, some
of your investment may come back to you as a taxable distribution.
As a shareholder, you are entitled to your share of net income and capital gains
on the Fund's investments. The Funds pass their earnings along to investors in
the form of dividends. Dividend distributions are the net income earned on
investments after expenses. A Fund will distribute short-term gains, as
necessary, and if a Fund makes a long-term capital gain distribution, it is
normally paid once a year. As with any investment, you should consider the tax
consequences of an investment in a Fund.
Ordinarily, the Balanced Fund declares and pays dividends monthly. The
Convertible Securities Fund and the Real Estate Investment Fund each declares
and pays dividends quarterly. Each class of shares declares and pays dividends
separately. Distributions can be received in one of the following ways.
REINVESTMENT OPTION
You can have distributions automatically reinvested in additional shares of a
Fund. If you do not indicate another choice on your Account Application, you
will be assigned this option automatically.
CASH OPTION
A check will be mailed to you no later than seven days after the dividend
payment date.
INCOME EARNED OPTION
You can automatically reinvest your dividends in additional shares of a Fund and
have your capital gains paid in cash, or reinvest capital gains and have your
dividends paid in cash.
12
<PAGE>
Dividends , Distributions, and Taxes (continued)
DIRECTED DIVIDENDS OPTION
In most cases, you can automatically reinvest distributions in shares of another
fund of the Victory Group. If you reinvest your distributions in a different
class of another fund, you may pay a sales charge on the reinvested
distributions.
DIRECTED BANK ACCOUNT OPTION
In most cases, you can automatically transfer distributions to your bank
checking or savings account. Under normal circumstances, a Fund will transfer
your distributions within seven days of the dividend payment date. The bank
account must have a registration identical to that of your Fund account.
Important Information about Taxes
Each Fund pays no federal income tax on the earnings and capital gains it
distributes to shareholders.
* Ordinary dividends from a Fund are taxable as ordinary income; dividends from
a Fund's long-term capital gains are taxable as long-term capital gain.
* Dividends are treated in the same manner for federal income tax purposes
whether you receive them in cash or in additional shares. They also may be
subject to state and local taxes.
* Dividends from a Fund that are attributable to interest on certain U.S.
government obligations may be exempt from certain state and local income taxes.
The extent to which ordinary dividends are attributable to these U.S. government
obligations will be provided on the tax statements you receive from a Fund.
* An exchange of a Fund's shares for shares of another fund will be treated as a
sale. When you sell or exchange shares of a Fund, you must recognize any gain or
loss.
* Certain dividends paid to you in January will be taxable as if they had been
paid to you the previous December.
* Tax statements will be mailed from each Fund every January showing the amounts
and tax status of distributions made to you.
* Because your tax treatment depends on your purchase price and tax position,
you should keep your regular account statements for use in determining your tax.
* You should review the more detailed discussion of federal income tax
considerations in the SAI.
The tax information in this Prospectus is provided as general information. You
should consult your own tax adviser about the tax consequences of an investment
in a Fund.
Your choice of distribution should be set up on the original Account
Application. If you would like to change the option you selected, please call
800-539-FUND.
13
<PAGE>
INVESTING WITH VICTORY
If you are looking for a convenient way to open an account or to add money to an
existing account, Victory can help. The sections that follow will serve as a
guide to your investments with Victory. "Choosing a Share Class" will help you
decide whether it would be more to your advantage to buy Class A or Class G
Shares of a Fund. The following sections will describe how to open an account,
how to access information on your account, and how to buy, exchange, and sell
shares of a Fund.
We want to make it simple for you to do business with us. If you have questions
about any of this information, please call your Investment Professional or one
of our customer service representatives at 800-539-FUND.
They will be happy to assist you.
All you need to do to get started is to fill out an application.
Choosing a Share Class
An Investment Professional is an investment consultant, salesperson, financial
planner, investment adviser, or trust officer who provides you with investment
information.
For historical expense information on Class A Shares, see the financial
highlights at the end of this Prospectus.
Each Fund offers Class A and Class G Shares. Each class has its own cost
structure, allowing you to choose the one that best meets your requirements.
Your Investment Professional also can help you decide.
CLASS A
* Front-end sales charge, as described on the next page. There are several
ways to reduce this charge.
* Lower annual expenses, generally, than Class G Shares.
CLASS G
* No front-end sales charge. All your money goes to work for you right away.
* Class G Shares are sold only by certain broker-dealers.
14
<PAGE>
Choosing a Share Class (continued)
Calculation of Sales Charges -- Class A
Class A Shares are sold at their public offering price, which is the NAV plus
the applicable initial sales charge. The sales charge as a percentage of your
investment decreases as the amount you invest increases. The current sales
charge rates are listed below:
Sales Charge Sales Charge
as a % of as a % of
Your Investment in the Fund Offering Price Your Investment
Up to $49,999 5.75% 6.10%
$50,000 up to $99,999 4.50% 4.71%
$100,000 up to $249,999 3.50% 3.63%
$250,000 up to $499,999 2.50% 2.56%
$500,000 up to $999,999 2.00% 2.04%
$1,000,000 and above* 0.00% 0.00%
* Except as indicated in the last sentence of this note, there is no initial
sales charge on purchases of $1 million or more. However, a contingent deferred
sales charge (CDSC) of up to 1.00% will be charged to the shareholder if any of
such shares are redeemed in the first year after purchase, or at 0.50% within
two years of the purchase. This charge will be based on either the cost of the
shares or net asset value at the time of redemption, whichever is lower. There
will be no CDSC on reinvested distributions. The initial sales charge exemption
for investments of $1 million or more does not apply to tax deferred retirement
accounts (except IRA accounts); the sales charge on investments by such tax
deferred retirement accounts of $1 million or more is the same as for
investments between $500,000 and $999,999.
Sales Charge Reductions and Waivers for Class A Shares
You may qualify for reduced sales charges in the following cases:
1. A Letter of Intent lets you buy Class A Shares of a Fund over a 13-month
period and receive the same sales charge as if all shares had been purchased at
one time. You must start with a minimum initial investment of 5% of the total
amount.
2. Rights of Accumulation allow you to add the value of any Class A Shares you
already own to the amount of your next Class A investment for purposes of
calculating the sales charge at the time of purchase.
3. You can combine Class A Shares of multiple Victory Funds, (excluding funds
sold without a sales charge) for purposes of calculating the sales charge. The
combination privilege also allows you to combine the total investments from the
accounts of household members of your immediate family (spouse and children
under 21) for a reduced sales charge at the time of purchase.
4. Waivers for certain investors:
a. Current and retired Fund Trustees, directors, trustees, employees, and family
members of employees of KeyCorp or "Affiliated Providers,"* and dealers who have
an agreement with the Distributor and any trade organization to which the
Adviser or the Administrator belong.
b. Investors who purchase shares for trust or other advisory accounts
established with KeyCorp or its affiliates.
*Affiliated Providers are affiliates and subsidiaries of KeyCorp, and any
organization that provides services to the Victory Group.
There are several ways you can combine multiple purchases in the Victory Funds
and take advantage of reduced sales charges.
15
<PAGE>
Choosing a Share Class (continued)
c. Investors who reinvest the proceeds from a liquidation distribution of Class
A Shares held in a deferred compensation plan, agency, trust, or custody account
that was maintained by KeyBank National Association and its affiliates, the
Victory Group , or invested in a fund of the Victory Group.
d. Investment Professionals who purchased Fund shares for fee-based investment
products or accounts, and selling brokers and their sales representatives.
e. Purchase of shares in connection with financial institution sponsored bundled
omnibus retirement programs sponsored by financial institutions that have
entered into agreements with the Funds' Distributor in connection with the
operational requirements of such programs.
f. Participants in tax-deferred retirement plans who purchased shares pursuant
to waiver provisions in effect prior to December 15, 1999.
Shareholder Servicing Plan
Each Fund has adopted a Shareholder Servicing Plan for its Class A Shares . The
shareholder servicing agent performs a number of services for its customers who
are shareholders of the Funds. It establishes and maintains accounts and
records, processes dividend payments, arranges for bank wires, assists in
transactions, and changes account information. For these services, a Fund pays a
fee at an annual rate of up to 0.25% of the average daily net assets of the
Class A Shares serviced by the agent. The Funds may enter into agreements with
various shareholder servicing agents, including KeyBank National Association and
its affiliates, other financial institutions, and securities brokers. The Funds
may pay a servicing fee to broker-dealers and others who sponsor "no transaction
fee" or similar programs for the purchase of shares. Shareholder servicing
agents may waive all or a portion of their fee periodically.
Distribution Plan
In accordance with Rule 12b-1 under the Investment Company Act of 1940, Victory
has adopted a Distribution and Service Plan for Class A Shares of the
Convertible Securities Fund and the Real Estate Investment Fund, but these Funds
do not pay expenses under this plan. See the SAI for more details regarding this
plan.
Victory has also adopted a Distribution and Service Plan for Class G Shares of
each Fund, under which these shares will pay to the Distributor a monthly
service fee at an annual rate of 0.25% of the average daily net assets of each
Fund. The service fee is paid to securities broker-dealers or other financial
intermediaries for providing personal services to shareholders of these Funds,
including responding to inquiries, providing information to shareholders about
their fund accounts, establishing and maintaining accounts and records,
processing dividend and distribution payments, arranging for bank wires,
assisting in transactions, and changing account information. Each Fund may enter
into agreements with various shareholder servicing agents, including KeyCorp and
its affiliates, and with other financial institutions that provide such
services.
Under the Class G Rule 12b-1 Distribution and Service Plan, Class G Shares of
each Fund also annually pay the Distributor a monthly distribution fee in an
additional amount of up to 0.25% of each Fund's average daily net assets. The
distribution fee is paid to the Distributor for general distribution services
and for selling Class G Shares of these Funds. The Distributor makes payments to
agents who provide these services.
Because Rule 12b-1 fees are paid out of a Fund's assets on an on-going basis,
over time these fees will increase the cost of your investment and may cost you
more than paying other types of sales charges.
16
<PAGE>
How to Buy Shares
You can buy shares in a number of different ways. All you need to do to get
started is to fill out an application. The minimum investment required to open
an account is $500 ($100 for IRAs), with additional investments of at least $25.
There is no minimum investment required to open an account or for additional
investments for SIMPLE IRAs. You can send in your payment by check, wire
transfer, exchange from another Victory Fund, or through arrangements with your
Investment Professional. Sometimes an Investment Professional will charge you
for these services. This fee will be in addition to, and unrelated to, the fees
and expenses charged by a Fund.
If you buy shares directly from the Funds and your investment is received and
accepted by 4:00 p.m. Eastern Time or the close of trading on the NYSE
(whichever time is earlier), your purchase will be processed the same day using
that day's share price.
Make your check payable to: The Victory Funds
Keep the following addresses handy for purchases, exchanges, or redemptions:
BY REGULAR U.S. MAIL
Send completed Account Applications with your check, bank draft, or money order
to:
Class G Shares
The Victory Funds
c/o Gradison McDonald
580 Walnut Street
Cincinnati, OH 45202
Class A Shares
The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
BY OVERNIGHT MAIL
Use the following address ONLY for overnight packages.
Class G Shares
The Victory Funds
c/o Gradison McDonald
580 Walnut Street
Cincinnati, OH 45202
Phone: 800-539-FUND
Class A Shares
The Victory Funds
c/o Boston Financial Data Services
66 Brooks Drive
Braintree, MA 02184
Phone: 800-539-FUND
BY WIRE
The Transfer Agent does not charge a wire fee, but your originating bank may
charge a fee. Always call the Transfer Agent at 800-539-FUND BEFORE wiring funds
.
Class G Shares
The Victory Funds
Firstar Bank
ABA #042000013
For Credit to DDA
Account # 8355281
(insert Fund name,
account number and name)
Class A Shares
The Victory Funds
State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA
Account #9905-201-1
(insert account number, name,
and confirmation number
assigned by the Transfer Agent)
BY TELEPHONE
800-539-FUND
(800-539-3863)
17
<PAGE>
How to Buy Shares (continued)
If you would like to make additional investments after your account is
established, use the Investment Stub attached to your confirmation statement and
send it with your check to the address indicated.
ACH
After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic member banks may be used. It takes
about 15 days to set up an ACH account. Currently, the Funds do not charge a fee
for ACH transfers.
Statements and Reports
You will receive a periodic statement reflecting any transactions that affect
the balance or registration of your account. You will receive a confirmation
after any purchase, exchange, or redemption. If your account has been set up by
an Investment Professional, Fund activity will be detailed in that account's
statements. Share certificates are not issued. Twice a year, you will receive
the financial reports of the Funds. By January 31 of each year, you will be
mailed an IRS form reporting distributions for the previous year, which also
will be filed with the IRS.
Systematic Investment Plan
To enroll in the Systematic Investment Plan, you should check this box on the
Account Application. We will need your bank information and the amount and
frequency of your investment. You can select monthly, quarterly, semi-annual, or
annual investments. You should attach a voided personal check so the proper
information can be obtained. You must first meet the minimum investment
requirement of $500 ($100 for IRA accounts), then we will make automatic
withdrawals of the amount you indicate ($25 or more) from your bank account and
invest it in shares of a Fund.
Retirement Plans
You can use the Funds as part of your retirement portfolio. Your Investment
Professional can set up your new account under one of several tax-deferred
retirement plans. Please contact your Investment Professional or the Funds for
details regarding an IRA or other retirement plan that works best for your
financial situation.
All purchases must be made in U.S. dollars and drawn on U.S. banks. The Transfer
Agent may reject any purchase order in its sole discretion. If your check is
returned for any reason, you will be charged for any resulting fees and/or
losses. Third party checks will not be accepted. You may only buy or exchange
into fund shares legally available in your state. If your account falls below
$500 ($100 for IRA accounts), we may ask you to re-establish the minimum
investment. If you do not do so within 60 days, we may close your account and
send you the value of your account.
18
<PAGE>
How to Exchange Shares
You can sell shares of one fund of the Victory Portfolios to buy shares of
the same class of any other. This is considered an exchange.
You can exchange shares of a Fund by writing the Transfer Agent or calling
800-539-FUND. When you exchange shares of a Fund, you should keep the following
in mind:
* Shares of the Fund selected for exchange must be available for sale in your
state of residence.
* The Fund whose shares you want to exchange and the fund whose shares you want
to buy must offer the exchange privilege.
* If you acquire Class A Shares of a Fund as a result of an exchange you pay the
percentage point difference, if any, between the Fund's sales charge and any
sales charge that you previously paid in connection with the shares you are
exchanging. For example, if you acquire Class A Shares of a Fund as a result of
an exchange from another fund of the Victory Group that has a 2.00% sales
charge, you would pay the 3.75% difference in sales charge.
* On certain business days, such as Veterans Day and Columbus Day, the Federal
Reserve Bank of Cleveland is closed. On those days, exchanges to or from a money
market fund will be processed on the exchange date, with the corresponding
purchase or sale of the money market fund shares being effected on the next
business day.
* You must meet the minimum purchase requirements for the fund you purchase by
exchange.
* The registration and tax identification numbers of the two accounts must
be identical.
* You must hold the shares you buy when you establish your account for at least
seven days before you can exchange them; after the account is open seven days,
you can exchange shares on any business day.
* Each Fund may refuse any exchange purchase request if the Adviser determines
that the request is associated with a market timing strategy. Each Fund may
terminate or modify the exchange privilege at any time on 30 days' notice to
shareholders.
* Before exchanging, read the prospectus of the fund you wish to purchase by
exchange.
* An exchange of Fund shares constitutes a sale for tax purposes.
* Holders of Class G Shares who acquired their shares as a result of the
reorganization of the Gradison Funds into the Victory Funds can exchange into
Class A Shares of any Victory Fund that does not offer Class G Shares without
paying a sales charge.
You can obtain a list of funds available for exchange by calling 800-539-FUND.
19
<PAGE>
How to Sell Shares
There are a number of convenient ways to sell your shares. You can use the same
mailing addresses listed for purchases.
If your request is received in good order by 4:00 p.m. Eastern Time or the close
of trading on the NYSE (whichever time is earlier), your redemption will be
processed the same day.
BY TELEPHONE
The easiest way to sell shares is by calling 800-539-FUND. When you fill out
your original application, be sure to check the box marked "Telephone
Authorization." Then when you are ready to sell, call and tell us which one of
the following options you would like to use:
* Mail a check to the address of record;
* Wire funds to a domestic financial institution;
* Mail a check to a previously designated alternate address; or
* Electronically transfer your redemption via the Automated Clearing House
(ACH).
The Transfer Agent records all telephone calls for your protection and takes
measures to verify the identity of the caller. If the Transfer Agent properly
acts on telephone instructions and follows reasonable procedures to ensure
against unauthorized transactions, neither Victory, its servicing agents, the
Adviser, nor the Transfer Agent will be responsible for any losses. If the
Transfer Agent does not follow these procedures, it may be liable to you for
losses resulting from unauthorized instructions.
If there is an unusual amount of market activity and you cannot reach the
Transfer Agent or your Investment Professional by telephone, consider placing
your order by mail.
BY MAIL
Use the Regular U.S. Mail or Overnight Mail Address to sell shares. Send us a
letter of instruction indicating your Fund account number, amount of redemption,
and where to send the proceeds. A signature guarantee is required for the
following redemption requests:
* Redemptions over $10,000;
* Your account registration has changed within the last 15 days;
* The check is not being mailed to the address on your account;
* The check is not being made payable to the owner of the account;
* The redemption proceeds are being transferred to another Victory Group
account with a different registration; or
* The check or wire is being sent to a different bank account.
You can get a signature guarantee from a financial institution such as a bank,
broker-dealer, credit union, clearing agency, or savings association.
BY WIRE
If you want to receive your proceeds by wire, you must establish a Fund account
that will accommodate wire transactions. If you call by 4:00 p.m. Eastern Time
or the close of trading on the NYSE (whichever time is earlier), your funds will
be wired on the next business day.
BY ACH
Normally, your redemption will be processed on the same day , but will be
processed on the next day if received after 4:00 p.m. Eastern Time or the close
of trading on the NYSE (whichever time is earlier). It will be transferred by
ACH as long as the transfer is to a domestic bank.
20
<PAGE>
How to Sell Shares (continued)
Systematic Withdrawal Plan
If you check this box on the Account Application, we will send monthly,
quarterly, semi-annual, or annual payments to the person you designate. The
minimum withdrawal is $25, and you must have a balance of $5,000 or more. If the
payment is to be sent to an account of yours, we will need a voided check to
activate this feature. If the payment is to be made to an address different from
your account address, we will need a signature guaranteed letter of instruction.
You should be aware that your account eventually may be depleted. However, you
cannot automatically close your account using the Systematic Withdrawal Plan. If
your balance falls below $500, we may ask you to bring the account back to the
minimum balance. If you decide not to increase your account to the minimum
balance, your account may be closed and the proceeds mailed to you.
Additional Information about Redemptions
* Redemption proceeds from the sale of shares purchased by a check may be held
until the purchase check has cleared, which may take up to 15 days.
* A Fund may suspend your right to redeem your shares in the following
circumstances:
- During non-routine closings of the NYSE;
- When the Securities and Exchange Commission (SEC) determines either that
trading on the NYSE is restricted or that an emergency prevents the sale or
valuation of the Fund's securities; or
- When the SEC orders a suspension to protect a Fund's shareholders.
* Each Fund will pay redemptions by any one shareholder during any 90-day period
in cash up to the lesser of $250,000 or 1% of the Fund's net assets. Each Fund
reserves the right to pay the remaining portion "in kind," that is, in portfolio
securities rather than cash.
21
<PAGE>
Organization and Management of the Funds
About Victory
Each Fund is a member of the Victory Portfolios, a group of more than 30
distinct investment portfolios. The Board of Trustees of Victory has the overall
responsibility for the management of the Funds.
The Investment Adviser and Sub-Administrator
Each Fund has an Advisory Agreement which is one of its most important
contracts. Key Asset Management Inc. (KAM), a New York corporation registered as
an investment adviser with the SEC, is the Adviser to each of the Funds. KAM, a
subsidiary of KeyCorp, oversees the operations of the Funds according to
investment policies and procedures adopted by the Board of Trustees. Affiliates
of the Adviser manage approximately $76 billion for a limited number of
individual and institutional clients. KAM's address is 127 Public Square,
Cleveland, Ohio 44114.
For the fiscal year ended October 31, 1999, KAM was paid advisory fees based on
a percentage of the average daily net assets of each Fund (after waivers) as
follows:
Balanced Fund 0.80%
Convertible Securities Fund 0.75%
Real Estate Investment Fund 0.40%
Under a Sub-Administration Agreement, BISYS Fund Services Ohio, Inc. pays KAM a
fee at the annual rate of up to 0.05% of each Fund's average daily net assets to
perform some of the administrative duties for the Funds.
We want you to know who plays what role in your investment and how they are
related. This section discusses the organizations employed by the Funds to
provide services to their shareholders. Each of these organizations is paid a
fee for its services.
Portfolio Management
Denise Coyne and Richard T. Heine are the portfolio managers of the Balanced
Fund, and together are primarily responsible for the day-to-day management of
the Fund's portfolio. Mr. Heine has been the portfolio manager of the Balanced
Fund since its inception in December 1993. He is a Portfolio Manager and
Director of KAM, and has been associated with KAM or its affiliates since 1976.
Ms. Coyne has been a portfolio manager of the Balanced Fund since January 1995.
She is a Portfolio Manager and Director for KAM, and has been associated with
KAM or its affiliates since 1985.
Richard A. Janus and James K. Kaesberg are the portfolio managers of the
Convertible Securities Fund, positions they have held since April 1996, and
together are primarily responsible for the day-to-day management of the Fund's
portfolio. Mr. Janus is a Senior Managing Director of KAM, and has been
associated with KAM or its affiliates since 1977. Mr. Kaesberg is a Portfolio
Manager and Managing Director of Convertible Securities Investments for KAM, and
has been associated with KAM or its affiliates since 1985.
Patrice Derrington and Richard E. Salomon are the Portfolio Managers of the Real
Estate Investment Fund, and together are primarily responsible for the
day-to-day management of the Fund's portfolio. They have been the Fund's
portfolio managers since its inception. Ms. Derrington is a Managing Director
and Portfolio Manager of KAM, and has been associated with KAM or its affiliates
since 1991. Mr. Salomon is a Director of, and a Senior Managing Director with,
KAM and has been associated with KAM or its affiliates since 1982.
22
<PAGE>
Organization and Management of the Funds (cont.)
OPERATIONAL STRUCTURE OF THE FUNDS
TRUSTEES ADVISER
SHAREHOLDERS
FINANCIAL SERVICES FIRMS AND
THEIR INVESTMENT PROFESSIONALS
Advise current and prospective shareholders on their Fund
investments.
TRANSFER AGENT/SERVICING AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
Handles services such as record-keeping, statements,
processing of buy and sell requests, distribution of
dividends, and servicing of shareholder accounts.
ADMINISTRATOR, DISTRIBUTOR,
AND FUND ACCOUNTANT
BISYS Fund Services
and its affiliates
3435 Stelzer Road
Columbus, OH 43219
Markets the Funds, distributes Investment shares through Professionals, and
calculates the value of shares. As Administrator, handles the day-to-day
activities of the Funds.
CUSTODIAN
Key Trust Company of Ohio, N.A.
127 Public Square
Cleveland, OH 44114
Provides for safekeeping of the Funds' investments and cash, and settles trades
made by the Funds.
SUB-ADMINISTRATOR
Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114
Performs certain sub-administrative services.
Each Fund is supervised by the Board of Trustees, which monitors the services
provided to investors.
23
<PAGE>
Additional Information
Some additional information you should know about the Funds.
Share Classes
The Funds currently offer only the classes of shares described in this
Prospectus. At some future date, the Funds may offer additional classes of
shares.
Performance
The Victory Funds may advertise the performance of each Fund by comparing it to
other mutual funds with similar objectives and policies. Performance information
also may appear in various publications. Any fees charged by Investment
Professionals may not be reflected in these performance calculations.
Advertising information will include the average annual total return of each
Fund calculated on a compounded basis for specified periods of time. Total
return information will be calculated according to rules established by the SEC.
Such information may include performance rankings and similar information from
independent organizations, such as Lipper, Inc., and industry publications such
as Morningstar, Inc., Business Week, or Forbes. You also should see the
"Investment Performance" section for the Fund in which you would like to invest.
Shareholder Communications
In order to eliminate duplicate mailings to an address at which two or more
shareholders with the same last name reside, the Funds will send only one copy
of any shareholder reports, prospectuses and their supplements, unless you have
instructed us to the contrary. You may request that the Funds send these
documents to each shareholder individually by calling the Funds at 800-539-FUND
(800-539-3863).
If you would like to receive additional copies of any materials, please call the
Funds at 800-539-FUND.
24
<PAGE>
Financial Highlights
BALANCED FUND
The Financial Highlights table is intended to help you understand the Balanced
Fund's financial performance for the past five years. Certain information shows
the results of an investment in one share of the Fund. The total returns in the
table represent the rate that an investor would have earned on an investment in
the Fund (assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Class A Shares
of the Balanced Fund. The financial highlights for the five fiscal years ended
October 31, 1999 were audited by PricewaterhouseCoopers LLP, whose report, along
with the financial statements of the Balanced Fund, are included in the Fund's
annual report, which is available by calling the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Prior to
Designation
as Class A
Class A Shares Shares
Year Year Year Year Year
Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1999 1998 1997 1996(2) 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 14.67 $ 13.87 $ 12.33 $ 11.01 $ 9.62
Investment Activities
Net investment income 0.32 0.37 0.36 0.36 0.41
Net realized and unrealized
gains (losses) from investments
and foreign currencies 1.34 1.54 1.90 1.39 1.40
Total from Investment Activities 1.66 1.91 2.26 1.75 1.81
Distributions
Net investment income (0.31) (0.37) (0.35) (0.36) (0.41)
In excess of net investment income -- -- -- -- (0.01)
Net realized gains (0.92) (0.74) (0.37) (0.07) --
Total Distributions (1.23) (1.11) (0.72) (0.43) (0.42)
Net Asset Value, End of Period $ 15.10 $ 14.67 $ 13.87 $ 12.33 $ 11.01
Total Return (excludes sales charges) 11.73% 14.55% 19.02% 16.27% 19.24%
Ratios/Supplemental Data:
Net Assets, End of Period (000) $422,586 $418,807 $342,933 $273,553 $201,073
Ratio of expenses to
average net assets 1.27% 1.27% 1.25% 1.27% 0.98%
Ratio of net investment
income to average net assets 2.13% 2.54% 2.69% 3.14% 4.05%
Ratio of expenses to average
net assets(1) 1.50% 1.50% 1.36% 1.43% 1.36%
Ratio of net investment income
to average net assets(1) 1.90% 2.31% 2.58% 2.98% 3.67%
Portfolio turnover (3) 177% 231% 109% 80% 69%
- ---------------
(1)During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratios would have been as indicated.
(2)Effective March 1, 1996, the Fund designated the existing shares as
Class A.
(3) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
</TABLE>
25
<PAGE>
Financial Highlights
CONVERTIBLE SECURITIES FUND
The Financial Highlights table is intended to help you understand the
Convertible Securities Fund's financial performance for the past five years.
Certain information shows the results of an investment in one share of the Fund.
The total returns in the table represent the rate that an investor would have
earned on an investment in the Fund (assuming reinvestment of all dividends and
distributions).
These financial highlights reflect historical information about Class A Shares
of the Convertible Securities Fund. The financial highlights for the fiscal year
ended October 31, 1999, the eleven months ended October 31, 1998 and the four
fiscal years ended November 30, 1997 were audited by PricewaterhouseCoopers LLP,
whose report, along with the financial statements of the Convertible Securities
Fund, are included in the Fund's annual report, which is available by calling
the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Eleven
Year Months Year Year Year Year
Ended Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Nov. 30, Nov. 30, Nov. 30, Nov. 30,
1999 1998< F1> 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 12.22 $ 14.33 $ 13.55 $ 12.16 $ 11.05 $ 12.48
Investment Activities
Net investment income 0.67 0.58 0.62 0.65 0.60 0.61
Net realized and unrealized gains
(losses) from investments 0.83 (1.08) 1.43 1.68 1.50 (1.12)
Total from Investment Activities 1.50 (0.50) 2.05 2.33 2.10 (0.51)
Distributions
Net investment income (0.70) (0.54) (0.65) (0.62) (0.61) (0.61)
Net realized gains (0.03) (1.07) (0.62) (0.32) (0.38) (0.31)
Total Distributions (0.73) (1.61) (1.27) (0.94) (0.99) (0.92)
Net Asset Value, End of Period $ 12.99 $ 12.22 $ 14.33 $ 13.55 $ 12.16 $ 11.05
Total Return (excludes sales charges) 12.46% (3.69)%< F2> 16.26% 20.28% 20.43% (4.36)%
Ratios/Supplementary Data:
Net Assets at end of period (000) $79,655 $108,069 $104,982 $81,478 $68,212 $58,845
Ratio of expenses to
average net assets 1.24% 1.20%< F3> 1.34% 1.31% 1.31% 1.30%
Ratio of net investment income
to average net assets 4.94% 4.60%< F3> 4.75% 5.17% 5.36% 5.20%
Portfolio turnover 73% 77% 77% 40% 52% 49%
- ---------------
(1)Effective March 23, 1998, the SBSF Convertible Securities Fund became the
Victory Convertible Securities Fund. Financial highlights prior to March 23,
1998 represent the SBSF Convertible Securities Fund.
(2)Not annualized.
(3)Annualized.
</TABLE>
26
<PAGE>
Financial Highlights
REAL ESTATE INVESTMENT FUND
The Financial Highlights table is intended to help you understand the Real
Estate Investment Fund's financial performance for the past two years. Certain
information shows the results of an investment in one share of the Real Estate
Investment Fund. The total returns in the table represent the rate that an
investor would have earned on an investment in the Real Estate Investment Fund
(assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Class A Shares
of the Real Estate Investment Fund. The financial highlights for the two fiscal
years ended October 31, 1999 and the period from April 30, 1997 to October 31,
1997 were audited by PricewaterhouseCoopers LLP, whose report, along with the
financial statements of the Real Estate Investment Fund, are included in the
Fund's annual report, which is available by calling the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Year Year Apr. 30,
Ended Ended 1997 to
Oct. 31, Oct. 31, Oct. 31,
1999 1998 1997(2)
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.19 $ 12.07 $10.00
Investment Activities
Net investment income 0.52 0.50 0.23
Net realized and unrealized gains
(losses) from investments (0.50) (1.90) 2.01
Total from Investment Activities 0.02 (1.40) 2.24
Distributions
Net investment income (0.51) (0.44) (0.17)
Net realized gains -- (0.04) --
Total Distributions (0.51) (0.48) (0.17)
Net Asset Value, End of Period $ 9.70 $ 10.19 $12.07
Total Return (excludes sales charges) 0.03% (11.91)% 22.42%(3)
Ratios/Supplemental Data:
Net Assets, End of Period (000) $14,205 $16,624 $4,376
Ratio of expenses to average net assets 1.16% 0.83% 0.00%(4)
Ratio of net investment income to
average net assets 4.92% 4.95% 5.11%(4)
Ratio of expenses to average
net assets(1) 1.91% 1.95% 2.93%(4)
Ratio of net investment income
to average net assets(1) 4.17% 3.83% 2.18%(4)
Portfolio turnover 62% 53% 21%
- ---------------
(1)During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratios would have been as indicated.
(2)The Real Estate Investment Fund commenced operations on April 30, 1997.
(3)Not annualized.
(4)Annualized.
</TABLE>
27
<PAGE>
Appendix Below-investment-grade Securities
The Convertible Securities Fund's investments in securities are not limited by
credit quality. Below-investment-grade debt securities are sometimes referred to
as "junk bonds." Below-investment-grade securities generally offer higher yields
than investment-grade securities with similar maturities, because the financial
condition of the issuers may not be as strong as issuers of investment-grade
securities. For this reason, below-investment-grade securities may be considered
"speculative," which means that there is a higher risk that the Convertible
Securities Fund may lose a substantial portion or all of its investment in a
particular below-investment-grade security.
The Convertible Securities Fund may purchase securities rated Baa, Ba, B, Caa,
or lower by Moody's and BBB, BB, B, CCC, or lower by S&P. The Convertible
Securities Fund also may purchase unrated securities with similar
characteristics. Generally, the Convertible Securities Fund will not purchase
securities rated Ba or lower by Moody's or BB or lower by S&P (or similar
unrated securities) unless KAM believes that the positive qualities of the
security justify the potential risk.
The following summarizes the characteristics of some of the
below-investment-grade ratings of Moody's and S&P:
Moody's:
Ba-rated securities have "speculative elements" and "their future cannot be
considered as well-assured." The protection of interest and principal payments
"may be very moderate, and thereby not well safeguarded."
B-rated securities "generally lack characteristics of the desirable investment,"
and the likelihood of payment of interest and principal over the long-term "may
be small."
Caa-rated securities are of "poor standing." These securities may be in default
or "there may be present elements of danger" with respect to principal or
interest.
Ca-rated securities "are speculative in a high degree."
S&P:
BB-rated securities and below are regarded as "predominantly speculative."
BB-rated securities have less near-term potential for default than other
securities, but may face "major ongoing uncertainties" to economic factors that
may result in failure to make interest and principal payments.
B-rated securities have "a greater vulnerability to default" but have the
current ability to make interest and principal payments.
CCC-rated securities have a "currently identifiable vulnerability to default."
CC-rated securities may be used to cover a situation where "a Bankruptcy
petition has been filed, but debt service payments are continued."
See the SAI for more information about ratings.
28
<PAGE>
The Victory Funds
127 Public Square
OH-01-27-1612
Cleveland, Ohio 44114
Bulk Rate
U.S. Postage
PAID
Cleveland, OH
Permit No. 469
If you would like a free copy of any of the following documents or would like to
request other information regarding the Funds, you can call or write the Funds
or your Investment Professional.
Statement of Additional Information (SAI)
Contains more details describing the Funds and their policies. The SAI has been
filed with the Securities and Exchange Commission (SEC), and is incorporated by
reference in this Prospectus.
Annual and Semi-annual Reports
Describes each Fund's performance, lists portfolio holdings, and discusses
market conditions and investment strategies that significantly affected a Fund's
performance during its last fiscal year.
If you would like to receive copies of the annual and semi-annual reports and/or
the SAI at no charge, please call the Funds at 800-539-FUND (800-539-3863).
How to Obtain Information
By telephone: Call Victory Funds at 800-539-FUND (800-539-3863).
By mail: The Victory Funds
P. O. Box 8527
Boston, MA 02266-8527
You also may obtain copies of materials from the SEC's Public Reference Room in
Washington, D.C. (Call 1-202-942-8090 for information on the operation of the
SEC's Public Reference Room.) Copies of this information may be obtained, after
paying a duplicating fee, by electronic request at the following e-mail address:
[email protected], or by writing the SEC's Public Reference Section,
Washington, D.C. 20459-0102.
On the Internet: Text only versions of Fund documents can be viewed on-line or
downloaded from the SEC at http://www.sec.gov or from the Victory Funds' website
at http://www.victoryfunds.com.
The securities described in this Prospectus and the SAI are not offered in any
state in which they may not lawfully be sold. No sales representative, dealer,
or other person is authorized to give any information or make any representation
other than those contained in this Prospectus and the SAI.
Victory Funds
LOGO (R) Investment Company Act File Number 811-4852 VF-SPEC-PRO (2/00)
<PAGE>
Prospectus
February 28, 2000
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved any Fund's securities or determined whether this
Prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
Fixed Income Funds
National Municipal Bond Fund
Class A and G Shares
New York Tax-Free Fund
Class A and G Shares
Ohio Municipal Bond Fund
Class A and G Shares
Victory Funds
(LOGO)(R)
Call Victory at:
800-539-FUND
(800-539-3863)
or visit the Victory Funds' website at:
www.victoryfunds.com
<PAGE>
The Victory Portfolios
Key to Financial Information
Objective and Strategies
The goals and the strategies that a Fund plans to use to pursue its investment
objective.
Risk Factors
The risks you may assume as an investor in a Fund.
Performance
A summary of the historical performance of a Fund in comparison to one or more
unmanaged indices.
Expenses
The costs you will pay, directly or indirectly, as an investor in a Fund,
including sales charges and ongoing expenses.
Shares of the Funds are:
* Not insured by the FDIC;
* Not deposits or other obligations of, or guaranteed by KeyBank, any of its
affiliates, or any other bank;
* Subject to possible investment risks, including possible loss of the amount
invested.
Table of Contents
Introduction 1
Risk/Return Summary for each of the Funds
An analysis which includes the investment objective, principal strategies,
principal risks, performance, and expenses of each Fund.
National Municipal Bond Fund
Class A and G Shares 2
New York Tax-Free Fund
Class A and G Shares 4
Ohio Municipal Bond Fund
Class A and G Shares 6
Investments 8
Risk Factors 9
Share Price 10
Dividends, Distributions, and Taxes 11
Investing with Victory
* Choosing a Share Class 13
* How to Buy Shares 16
* How to Exchange Shares 18
* How to Sell Shares 19
Organization and Management of the Funds 21
Additional Information 23
Financial Highlights
National Municipal Bond Fund 24
New York Tax-Free Fund 25
Ohio Municipal Bond Fund 26
<PAGE>
Introduction
Key Asset Management Inc., which we will refer to as the "Adviser" or "KAM"
throughout this Prospectus, manages the Funds.
Please read this Prospectus before investing in the Funds and keep it for future
reference.
This Prospectus explains the objectives, policies, risks, performance,
strategies, and expenses of the Shares of the Victory Funds described in this
Prospectus (the Funds).
Investment Strategy
Each of the Funds pursues its investment objective by investing primarily in
general obligation bonds and revenue bonds. However, each of the Funds has
unique investment strategies and its own risk/reward profile. Please review the
"Risk/Return Summary" for each Fund and the "Investments" section for an
overview.
Risk Factors
Certain Funds may share many of the same risk factors. For example, all of the
Funds are subject to interest rate inflation, reinvestment, and credit risks.
The Funds are not insured by the FDIC. In addition, there are other potential
risks, discussed in each "Risk/Return Summary" and in "Risk Factors."
Who May Want to Invest in the Funds
* Investors in higher tax brackets seeking tax-exempt income
* Investors seeking income over the long term
* Investors with moderate risk tolerance
* Investors seeking higher potential returns than are provided by money
market funds
* Investors willing to accept price and dividend fluctuations
Share Classes
Each Fund offers Class A and Class G Shares. See "Choosing a Share Class."
The following pages provide you with an overview of each of the Funds. Please
look at the objective, policies, strategies, risks, and expenses to determine
which Fund will suit your risk tolerance and investment needs.
1
<PAGE>
Risk/Return Summary
NATIONAL MUNICIPAL BOND FUND
CLASS A SHARES
Cusip#: 926464728
VNMAX
CLASS G SHARES
Cusip#: 926464330
Investment Objective
The National Municipal Bond Fund seeks to provide a high level of current
interest income exempt from federal income tax, as is consistent with the
preservation of capital.
Principal Investment Strategies
The National Municipal Bond Fund pursues its investment objective by primarily
investing in municipal bonds. The interest on these bonds is exempt from federal
income tax. Under normal circumstances, at least 80% of the National Municipal
Bond Fund's income distributions will be exempt from federal income taxes,
including the alternative minimum tax.
Under normal market conditions, the National Municipal Bond Fund primarily
invests in:
* Municipal securities, including mortgage-related securities, with fixed,
variable, or floating interest rates;
* Zero coupon, tax, revenue, and bond anticipation notes; and
* Tax-exempt commercial paper.
Important Characteristics of the National Municipal Bond Fund's Investments:
* Quality: Municipal securities rated A or above at the time of purchase by
Standard & Poor's (S&P), Fitch IBCA International (Fitch IBCA), Moody's
Investors Service (Moody's), or another NRSRO**, or if unrated, of comparable
quality. For more information on ratings, see the Appendix to the Statement
of Additional Information (SAI).
* Maturity: The dollar-weighted effective average maturity of the National
Municipal Bond Fund generally will range from 5 to 11 years. Under certain
market conditions, the National Municipal Bond Fund's portfolio manager may go
outside these boundaries.
** An NRSRO is a nationally recognized statistical ratings organization that
assigns credit ratings to securities based on the borrower's ability to meet its
obligation to make principal and interest payments.
Municipal securities are issued to raise money for public purposes. General
obligation bonds are backed by the taxing power of a state or municipality. This
means the issuing authority can raise taxes to cover the payments. Revenue bonds
are backed by revenues from a specific tax, project, or facility. Principal and
interest payments on some municipal securities are insured by private insurance
companies. The National Municipal Bond Fund's higher portfolio turnover may
result in higher expenses and taxable capital gain distributions.
There is no guarantee that the National Municipal Bond Fund will achieve
its objectives.
Principal Risks
You may lose money by investing in the National Municipal Bond Fund. The
National Municipal Bond Fund is subject to the following principal risks, more
fully described in "Risk Factors." The National Municipal Bond Fund's net asset
value, yield and/or total return may be adversely affected if any of the
following occurs:
* Economic or political events take place in a state which make the market value
of that state's obligations go down.
* The market value of securities acquired by the National Municipal Bond Fund
declines.
* The portfolio manager does not execute the National Municipal Bond Fund's
principal investment strategies effectively.
* Interest rates rise.
* An issuer's credit quality is downgraded.
* The National Municipal Bond Fund must reinvest interest or sale proceeds at
lower rates.
* The rate of inflation increases.
* The average life of a mortgage-related security is shortened or lengthened.
The National Municipal Bond Fund primarily invests in municipal securities
from several states, rather than from a single state. The National Municipal
Bond Fund is a non-diversified fund. As a non-diversified fund, the National
Municipal Bond Fund may devote a larger portion of its assets to the securities
of a single issuer than if it were diversified. This could make the National
Municipal Bond Fund more susceptible to economic, political, or credit risks.
The National Municipal Bond Fund also is subject to the risks associated with
investing in municipal debt securities, including the risk that certain
investments could lose their tax-exempt status.
An investment in the National Municipal Bond Fund is not a deposit of
KeyBank or any of its affiliates and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
2
<PAGE>
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the National Municipal Bond Fund by showing changes in its
performance for various time periods ending December 31st. The figures shown in
the bar chart and table assume reinvestment of dividends and distributions.
The bar chart shows returns for Class A Shares of the National Municipal
Bond Fund. Sales loads are not reflected on the bar chart (or highest and lowest
returns below) and if they were reflected, returns would be lower than those
shown.
1995 17.67%
1996 4.45%
1997 8.76%
1998 6.30%
1999 -0.89%
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter was
6.46% (quarter ending March 31, 1995) and the lowest return for a quarter was
- -1.80% (quarter ending June 30, 1999).
The table shows how the average annual total returns for Class A Shares of the
National Municipal Bond Fund for one year, five years, and since inception,
including maximum sales charges, compare to those of two broad-based market
indices.
Average Annual Total Returns Since
(for the Periods ended Past Past Inception
December 31, 1999) One Year 5 Years (2/3/94)
Class A(1) -6.60% 5.82% 4.00%
Lehman 7-Year
Municipal Bond Index(2),(4) -0.14% 4.49% 4.66%
Lehman 10-Year
Municipal Bond Index(3),(4) -1.25% 7.12% 4.91%
1 The National Municipal Bond Fund did not offer Class G Shares prior to
December 15, 1999.
2 The Lehman Brothers 7-Year Municipal Bond Index is an unmanaged index
comprised of investment grade municipal bonds with maturities of 6 to 8 years,
weighted according to the total market value of each bond in the Index.
3 The Lehman Brothers 10-Year Municipal Bond Index is a broad-based unmanaged
index that represents the general performance of investment-grade municipal
bonds with maturities of 8 to 12 years. The Fund will no longer compare its
performance to the Lehman 10-Year Municipal Bond Index. It believes that the
Lehman 7-Year Municipal Bond Index more accurately reflects the composition
and average maturity of the Fund's portfolio.
4 Index returns do not include any brokerage commissions, sales charges, or
other fees. It is not possible to invest directly in an index.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the National Municipal Bond Fund.
Shareholder Transaction Expenses
(paid directly from your investment)(1) Class A Class G
Maximum Sales Charge
Imposed on Purchases 5.75% NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE(2) NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees 0.55% 0.55%
Distribution (12b-1) Fees 0.00% 0.25%
Other Expenses (includes a shareholder
servicing fee of 0.25% applicable to Class A Shares) 0.69% 0.69%
Total Fund Operating Expenses 1.24%(3) 1.49%(4)
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 There is no initial sales charge on purchases of $1 million or more for Class
A Shares. However, if you sell any of such Class A Shares within one year, you
will be charged a contingent deferred sales charge (CDSC) of 1.00%. If you
sell any of such Class A Shares within two years, you will be charged a CDSC
of 0.50%.
3 The Adviser may waive its management fee and reimburse expenses, as allowed by
law, to the extent necessary to maintain the net operating expenses of Class A
Shares of the National Municipal Bond Fund at a maximum of 1.00% . The Adviser
may terminate this waiver/reimbursement at any time to the extent allowed by
law.
4 Other expenses of Class G Shares are based on estimated amounts for the
current fiscal year .
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the National Municipal Bond Fund with the cost of investing in
other mutual funds. The Example assumes that you invest $10,000 in the National
Municipal Bond Fund for the time periods shown and then sell all of your shares
at the end of those periods. The Example also assumes that your investment has a
5% return each year and that the National Municipal Bond Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $694 $946 $1,217 $1,989
Class G $152 $471 $ 813 $1,779
3
<PAGE>
Risk/Return Summary
NEW YORK TAX-FREE FUND
CLASS A SHARES
Cusip#: 926464694
IPNYX
CLASS G SHARES
Cusip#: 926464348
Investment Objective
The New York Tax-Free Fund seeks to provide a high level of current income
exempt from federal, New York State, and New York City income taxes, consistent
with the preservation of shareholders' capital.
Principal Investment Strategies
The New York Tax-Free Fund pursues its investment objective by investing at
least 80% of its total assets in securities that have interest income that is
exempt from federal income tax, including the federal alternative minimum tax.
At least 65% of the portfolio will be invested in insured municipal securities
that pay interest exempt from New York State and New York City income taxes.
Under normal market conditions, the New York Tax-Free Fund primarily invests in:
* Municipal securities, including mortgage-related securities, with fixed,
variable, or floating interest rates;
* Zero coupon, tax, and revenue anticipation notes; and
* Tax-exempt commercial paper.
Important Characteristics of the New York Tax-Free Fund's Investments:
* Quality: Municipal securities rated A or above at the time of purchase by S&P,
Fitch IBCA, Moody's, or another NRSRO, or if unrated, of comparable quality. For
more information on ratings, see the Appendix to the SAI.
* Maturity: The New York Tax-Free Fund will generally purchase securities with
original final maturities of 20 to 30 years at the time of purchase. Under
certain market conditions, the New York Tax-Free Fund's portfolio manager may go
outside these boundaries.
Insurance policies for the municipal securities held by the New York
Tax-Free Fund generally are obtained either by the issuer of the security or by
a third party from a private insurer. The insurance company guarantees timely
payments of principal and interest. This insurance reduces risk, but these high
quality bonds may yield less than uninsured bonds.
There is no guarantee that the New York Tax-Free Fund will achieve its
objectives.
Principal Risks
You may lose money by investing in New York Tax-Free Fund. The New York Tax-Free
Fund is subject to the following principal risks, more fully described in "Risk
Factors." The New York Tax-Free Fund's net asset value, yield and/or total
return may be adversely affected if any of the following occurs:
* Economic or political events take place in New York which make the market
value of New York's obligations go down.
* The market value of securities acquired by the New York Tax-Free Fund
declines.
* The portfolio manager does not execute the New York Tax-Free Fund's principal
investment strategies effectively.
* Interest rates rise.
* An issuer's credit quality is downgraded.
* The New York Tax-Free Fund must reinvest interest or sale proceeds at lower
rates.
* The rate of inflation increases.
* The New York Tax-Free Fund is a non-diversified fund. As a non-diversified
fund, the New York Tax-Free Fund may devote a larger portion of its assets to
the securities of a single issuer than if it were diversified.
* The New York Tax-Free Fund is subject to the risks associated with investing
in municipal debt securities, including the risk that certain investments could
lose their tax-exempt status.
* The New York Tax-Free Fund is subject to additional risks because it
concentrates its investments in a single geographic area. This could make the
New York Tax-Free Fund more susceptible to economic, political, or credit risks
than a fund that invests in a more diversified geographic area. The SAI explains
the risks specific to investments in New York municipal securities.
* The average life of a mortgage-related security is shortened or lengthened.
An investment in the New York Tax-Free Fund is not a deposit of KeyBank or
any of its affiliates and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
4
<PAGE>
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the New York Tax-Free Fund by showing changes in its performance
for various time periods ending December 31st. The figures shown in the bar
chart and table assume reinvestment of dividends and distributions.
The bar chart shows returns for Class A Shares of the New York Tax-Free
Fund. Sales loads are not reflected on the bar chart (or highest and lowest
returns below) and if they were reflected, returns would be lower than those
shown.
1992 8.26%
1993 12.34%
1994 -4.58%
1995 13.30%
1996 3.50%
1997 6.04%
1998 5.33%
1999 -1.99%
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter was
5.19% (quarter ending March 31, 1995) and the lowest return for a quarter was
- -3.64% (quarter ending March 31, 1994).
The table shows how the average annual total returns for Class A Shares of the
New York Tax-Free Fund for one year, five years and since inception, including
maximum sales charges, compare to those of a broad-based market index.
Average Annual Total Returns Since
(for the Periods ended Past Past Inception
December 31, 1999) One Year 5 Years (2/11/91)
Class A(1) -7.63% 3.88% 5.00%
Lehman 10-Year
Municipal Bond Index(2) -1.25% 7.12% 6.97%
1 The New York Tax-Free Fund did not offer Class G Shares prior to December 15,
1999.
2 The Lehman Brothers 10-Year Municipal Bond Index is a broad-based unmanaged
index that represents the general performance of investment-grade municipal
bonds with maturities of 8 to 12 years. Index returns do not include any
brokerage commissions, sales charges, or other fees. It is not possible to
invest directly in an index.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the New York Tax-Free Fund.
Shareholder Transaction Expenses
(paid directly from your investment)(1) Class A Class G
Maximum Sales Charge
Imposed on Purchases 5.75% NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE(2) NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees 0.55% 0.55%
Distribution (12b-1) Fees 0.00% 0.25%
Other Expenses (includes a shareholder
servicing fee of 0.25% applicable to Class A Shares) 0.87% 0.74%
Total Fund Operating Expenses 1.42%(3) 1.54%(3)
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 There is no initial sales charge on purchases of $1 million or more for Class
A Shares. However, if you sell any of such Class A Shares within one year, you
will be charged a contingent deferred sales charge (CDSC) of 1.00%. If you
sell any of such Class A Shares within two years, you will be charged a CDSC
of 0.50%.
3 Other expenses of Class G Shares are based on estimated amounts for the
current fiscal year . The Adviser may waive its management fee and reimburse
expenses, as allowed by law, so that the net operating expenses of Class A
Shares of the New York Tax-Free Fund will equal 0.95%. The Adviser may
terminate these waivers/reimbursements at any time to the extent allowed by
law.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the New York Tax-Free Fund with the cost of investing in other
mutual funds. The Example assumes that you invest $10,000 in the New York
Tax-Free Fund for the time periods shown and then sell all of your shares at the
end of those periods. The Example also assumes that your investment has a 5%
return each year and that the New York Tax-Free Fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $711 $998 $1,307 $2,179
Class G $157 $486 $ 839 $1,834
5
<PAGE>
Risk/Return Summary
OHIO MUNICIPAL BOND FUND
CLASS A SHARES
Cusip#: 926464801
SOHTX
CLASS G SHARES
Cusip#: 926464413
GMOTX
Investment Objective
The Ohio Municipal Bond Fund seeks to provide a high level of current interest
income which is exempt from both federal income tax and Ohio personal income
tax.
Principal Investment Strategies
The Ohio Municipal Bond Fund pursues its investment objective by investing at
least 80% of its total assets in investment grade obligations. The interest on
these obligations is exempt from federal income taxes, including the federal
alternative minimum tax. The Ohio Municipal Bond Fund expects to invest at least
65% of its total assets in bonds that pay interest that is also exempt from Ohio
personal income tax.
Under normal market conditions, the Ohio Municipal Bond Fund primarily invests
in:
* Municipal securities, including mortgage-related securities, with fixed,
variable, or floating interest rates;
* Zero coupon, tax, revenue, and bond anticipation notes; and
* Tax-exempt commercial paper.
Important Characteristics of the Ohio Municipal Bond Fund's Investments:
* Quality: Municipal securities rated A or above at the time of purchase by S&P,
Fitch IBCA, Moody's, or another NRSRO, or if unrated, of comparable quality. For
more information on ratings, see the Appendix to the SAI.
* Maturity: The dollar-weighted effective average maturity of the Ohio Municipal
Bond Fund generally will range from 5 to 15 years. Under certain market
conditions, the Ohio Municipal Bond Fund's portfolio manager may go outside
these boundaries.
Ohio's economic activity includes the service sector, durable goods
manufacturing, and agricultural industries. Manufacturing activity is
concentrated in cyclical industries; therefore, the Ohio economy may be more
cyclical than other states. The Ohio Municipal Bond Fund's high portfolio
turnover rate may result in higher expenses and taxable capital gain
distributions.
There is no guarantee that the Ohio Municipal Bond Fund will achieve its
objectives.
Principal Risks
You may lose money by investing in the Ohio Municipal Bond Fund. The Ohio
Municipal Bond Fund is subject to the following principal risks, more fully
described in "Risk Factors." The Ohio Municipal Bond Fund's net asset value,
yield and/or total return may be adversely affected if any of the following
occurs:
* Economic or political events take place in Ohio which make the market value of
Ohio obligations go down.
* The market value of securities acquired by the Ohio Municipal Bond Fund
declines.
* The portfolio manager does not execute the Ohio Municipal Bond Fund's
principal investment strategies effectively.
* Interest rates rise.
* An issuer's credit quality is downgraded.
* The Ohio Municipal Bond Fund must reinvest interest or sale proceeds at lower
rates.
* The rate of inflation increases.
* The Ohio Municipal Bond Fund is a non-diversified fund. As a non-diversified
fund, the Ohio Municipal Bond Fund may devote a larger portion of its assets to
the securities of a single issuer than if it were diversified.
* The Ohio Municipal Bond Fund is subject to the risks associated with investing
in municipal debt securities, including the risk that certain investments could
lose their tax-exempt status.
* The Ohio Municipal Bond Fund is subject to additional risks because it
concentrates its investments in a single geographic area. This could make the
Ohio Municipal Bond Fund more susceptible to economic, political, or credit
risks than a fund that invests in a more diversified geographic area. The SAI
explains the risks specific to investments in Ohio municipal securities.
* The average life of a mortgage-related security is shortened or lengthened.
An investment in the Ohio Municipal Bond Fund is not a deposit of KeyBank or any
of its affiliates and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
6
<PAGE>
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Ohio Municipal Bond Fund by showing changes in its performance
for various time periods ending December 31st. The figures shown in the bar
chart and table assume reinvestment of dividends and distributions.
The bar chart shows returns for Class A Shares of the Ohio Municipal Bond
Fund. Sales loads are not reflected on the bar chart (or highest and lowest
returns below) and if they were reflected, returns would be lower than those
shown.
1991 10.75%
1992 7.76%
1993 12.64%
1994 -4.46%
1995 17.72%
1996 4.32%
1997 7.87%
1998 6.56%
1999 -2.67%
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter was
6.68% (quarter ending March 31, 1995) and the lowest return for a quarter was
- -5.07% (quarter ending March 31, 1994).
The table shows how the average annual total returns for Class A Shares of the
Ohio Municipal Bond Fund for one year, five years and since inception, including
maximum sales charges, compare to those of a broad-based market index.
Average Annual Total Returns Since
(for the Periods ende d Past Past Inception
December 31, 1999) One Year 5 Years (5/18/90)
Class A(1) -8.25% 5.30% 5.98%
Lehman 10-Year
Municipal Bond Index(2) -1.25% 7.12% 7.39%
1 The Ohio Municipal Bond Fund did not offer Class G Shares prior to March 29,
1999.
2 The Lehman Brothers 10-Year Municipal Bond Index is a broad-based unmanaged
index that represents the general performance of investment-grade municipal
bonds with maturities of 8 to 12 years. Index returns do not include any
brokerage commissions, sales charges, or other fees. It is not possible to
invest directly in an index.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Ohio Municipal Bond Fund.
Shareholder Transaction Expenses
(paid directly from your investment)(1) Class A Class G
Maximum Sales Charge
Imposed on Purchases 5.75% NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE(2) NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees 0.60% 0.60%
Distribution (12b-1) Fees 0.00% 0.25%
Other Expenses (includes a shareholder
servicing fee of 0.25% applicable to Class A Shares) 0.54% 0.27%
Total Fund Operating Expenses 1.14% 1.12%
Fee Waiver/Expense
Reimbursement (0.00)% (0.21)%
Net Expenses 1.14%(3) 0.91%(4)
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 There is no initial sales charge on purchases of $1 million or more for Class
A Shares. However, if you sell any of such Class A Shares within one year, you
will be charged a contingent deferred sales charge (CDSC) of 1.00%. If you
sell any of such Class A Shares within two years, you will be charged a CDSC
of 0.50%.
3 The Adviser may waive its management fee and reimburse expenses, as allowed by
law, so that the net operating expenses of Class A Shares of the Ohio
Municipal Bond Fund will equal 0.94%. The Adviser may terminate this
waiver/reimbursement at any time to the extent allowed by law.
4 The Adviser has contractually agreed to waive its management fee and to
reimburse expenses, as allowed by law, to the extent necessary to maintain the
net operating expenses of Class G Shares of the Ohio Municipal Bond Fund at a
maximum of 0.91% until at least April 1, 2001.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Ohio Municipal Bond Fund with the cost of investing in other
mutual funds. The Example assumes that you invest $10,000 in the Ohio Municipal
Bond Fund for the time periods shown and then sell all of your shares at the end
of those periods. The Example also assumes that your investment has a 5% return
each year and that the Ohio Municipal Bond Fund's operating expenses remain the
same.(1) Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $685 $916 $1,167 $1,881
Class G $ 93 $335 $ 597 $1,344
1 This Example assumes that Net Annual Fund Operating Expenses for Class G
Shares will equal 0.91% until April 1, 2001 and will equal 1.12% thereafter.
7
<PAGE>
Investments
The following describes some of the types of securities the Funds may purchase
under normal market conditions. All Funds will not buy all of the securities
listed below.
For cash management or for temporary defensive purposes in response to
market conditions, each Fund may hold all or a portion of its assets in cash or
short-term money market instruments. This may reduce the benefit from any
upswing in the market and may cause a Fund to fail to meet its investment
objective.
For more information on ratings and a more complete description of which
Funds can invest in certain types of securities, see the SAI.
Revenue Bonds.
Payable only from the proceeds of a specific revenue source, such as the users
of a municipal facility.
General Obligation Bonds.
Secured by the issuer's full faith, credit, and taxing power for payment of
interest and principal.
When-Issued and Delayed-Delivery Securities.
A security that is purchased for delivery at a later time. The market value may
change before the delivery date, and the value is included in the NAV of a Fund.
Zero Coupon Bonds.
These securities are purchased at a discount from face value. The bond's face
value is received at maturity, with no interest payments before then.
Municipal Lease Obligations.
Issued to acquire land, equipment, or facilities. They may become taxable if the
lease is assigned. The lease could terminate, resulting in default.
Certificates of Participation.
A certificate that states that an investor will receive a portion of the lease
payments from a municipality.
Refunding Contracts.
Issued to refinance an issuer's debt. A Fund buys these at a stated price and
yield on a future settlement date.
Tax, Revenue, and Bond Anticipation Notes.
Issued in expectation of future revenues.
+ Variable & Floating Rate Securities.
Investment grade instruments, some of which may be derivatives or illiquid, with
interest rates that reset periodically.
Mortgage-Backed Securities, Tax-Exempt.
Tax-exempt investments secured by a mortgage or pools of mortgages.
Resource Recovery Bonds.
Issued to build waste-to-energy facilities and equipment.
Tax Preference Items.
Tax-exempt obligations that pay interest which is subject to the federal
"alternative minimum tax."
Industrial Development Bonds and Private Activity Bonds.
Secured by lease payments made by a corporation, these bonds are issued for
financing large industrial projects; i.e., building industrial parks or
factories.
Tax Exempt Commercial Paper.
Short-term obligations that are exempt from state and federal income tax.
+ Demand Features, or "Puts."
Contract for the right to sell or redeem a security at a predetermined price on
or before a stated date. Usually the issuer may obtain either a stand-by or
direct pay letter of credit or guarantee from banks as backup.
+ Derivative Instruments: Indicates a "derivative instrument," whose value is
linked to, or derived from another security, instrument, or index.
8
<PAGE>
Risk Factors
By matching your investment objective with an acceptable level of risk, you can
create your own customized investment plan.
This Prospectus describes the principal risks that you may assume as an investor
in the Funds.
Except as noted, each Fund is subject to the principal risks described
below.
General Risks:
* Market risk is the risk that the market value of a security may fluctuate,
depending on the supply and demand for that type of security. As a result of
this fluctuation, a security may be worth more or less than the price a Fund
originally paid for the security, or more or less than the security was worth at
an earlier time. Market risk may affect a single issuer, an industry, a sector
of the economy, or the entire market and is common to all investments.
* Manager risk is the risk that a Fund's portfolio manager may implement its
investment strategy in a way that does not produce the intended result.
Risks associated with investing in debt securities:
* Interest rate risk. The value of a debt security typically changes in the
opposite direction from a change in interest rates. When interest rates go up,
the value of a debt security typically goes down. When interest rates go down,
the value of a debt security typically goes up. Generally, the market values of
securities with longer maturities are more sensitive to changes in interest
rates.
* Inflation risk is the risk that inflation will erode the purchasing power of
the cash flows generated by debt securities held by a Fund. Fixed-rate debt
securities are more susceptible to this risk than floating-rate debt securities
or equity securities that have a record of dividend growth.
* Reinvestment risk is the risk that when interest rates are declining a Fund
that receives interest income or prepayments on a security will have to reinvest
at lower interest rates. Generally, interest rate risk and reinvestment risk
tend to have offsetting effects, though not necessarily of the same magnitude.
* Credit (or default) risk is the risk that the issuer of a debt security will
be unable to make timely payments of interest or principal. Although the Funds
generally invest in only high-quality securities, the interest or principal
payments may not be insured or guaranteed on all securities. Credit risk is
measured by NRSROs such as S&P, Fitch IBCA or Moody's.
Risks associated with investing in municipal debt securities:
* Tax-exempt status risk is the risk that a municipal debt security issued as a
tax-exempt security may be declared by the Internal Revenue Service to be
taxable.
Risks associated with investing in the securities of a single state (New York
Tax-Free Fund and Ohio Municipal Bond Funds only):
* Concentration and diversification risk is the risk that only a limited number
of high-quality securities of a particular type may be available. Concentration
and diversification risk is greater for funds that primarily invest in the
securities of a single state. Concentration risk may result in a Fund being
invested in securities that are related in such a way that changes in economic,
business, or political circumstances that would normally affect one security
also could affect other securities within that particular segment of the bond
market.
9
<PAGE>
Risk Factors (continued)
It is important to keep in mind one basic principle of investing: the greater
the risk, the greater the potential reward. The reverse is also generally
true: the lower the risk, the lower the potential reward.
Risks associated with investing in mortgage-related securities:
* Prepayment risk. Prepayments of principal on mortgage-related securities
affect the average life of a pool of mortgage-related securities. The level of
interest rates and other factors may affect the frequency of mortgage
prepayments. In periods of rising interest rates, the prepayment rate tends to
decrease, lengthening the average life of a pool of mortgage-related securities.
In periods of falling interest rates, the prepayment rate tends to increase,
shortening the average life of a pool of mortgage-related securities. Prepayment
risk is the risk that, because prepayments generally occur when interest rates
are falling, a Fund may have to reinvest the proceeds from prepayments at lower
interest rates.
* Extension risk is the risk that the rate of anticipated prepayments on
principal may not occur, typically because of a rise in interest rates, and the
expected maturity of the security will increase. During periods of rapidly
rising interest rates, the effective average maturity of a security may be
extended past what a Fund's portfolio manager anticipated that it would be. The
market value of securities with longer maturities tend to be more volatile.
An investment in a Fund is not a complete investment program.
Share Price
Each Fund calculates its share price, called its "net asset value" (NAV), each
business day at 4:00 p.m. Eastern Time or at the close of trading on the New
York Stock Exchange, Inc. (NYSE), whichever time is earlier. You may buy,
exchange, and sell your shares on any business day at a price that is based on
the NAV that is calculated after you place your order. A business day is a day
on which the NYSE is open.
The Funds value their investments based on market value. When market
quotations are not readily available, the Funds value their investments based on
fair value methods approved by the Board of Trustees of the Victory Portfolios.
Each Class of each Fund calculates its NAV by adding up the total value of its
investments and other assets, subtracting its liabilities, and then dividing
that figure by the number of outstanding shares of the Class.
Total Assets-Liabilities
NAV = ----------------------------
Number of Shares Outstanding
You can find a Fund's net asset value each day in The Wall Street Journal
and other newspapers. Newspapers do not normally publish fund information until
a Fund reaches a specific number of shareholders or level of assets.
The daily NAV is useful to you as a shareholder because the NAV, multiplied
by the number of Fund shares you own gives you the value of your investment.
10
<PAGE>
Dividends, Distribution, and Taxes
Your choice of distribution should be set up on the original Account
Application. If you would like to change the option you selected, please call
the Transfer Agent at 800-539-FUND.
Buying a Dividend.
You should check a Fund's distribution schedule before you invest. If you buy
shares of a Fund shortly before it makes a distribution, some of your investment
may come back to you as a taxable distribution.
As a shareholder, you are entitled to your share of net income and capital gains
on a Fund's investments. The Funds pass their earnings along to investors in the
form of dividends. Dividend distributions are the net income earned on
investments after expenses. A Fund will distribute short-term gains, as
necessary, and if a Fund makes a long-term capital gain distribution, it is
normally paid once a year. As with any investment, you should consider the tax
consequences of an investment in a Fund.
Ordinarily, the Funds declare and pay dividends monthly. Each class of
shares declares and pays dividends separately.
You can receive distributions in one of the following ways.
REINVESTMENT OPTION
You can have distributions automatically reinvested in additional shares of a
Fund. If you do not indicate another choice on your Account Application, you
will be assigned this option automatically.
CASH OPTION
A check will be mailed to you no later than seven days after the dividend
payment date.
INCOME EARNED OPTION
You can automatically reinvest your dividends in additional shares of a Fund and
have your capital gains paid in cash, or reinvest capital gains and have your
dividends paid in cash.
DIRECTED DIVIDENDS OPTION
In most cases, you can automatically reinvest distributions in the same class of
shares of another fund of the Victory Group. If you reinvest your distributions
in a different class of another fund, you may pay a sales charge on the
reinvested distributions.
DIRECTED BANK ACCOUNT OPTION
In most cases, you can automatically transfer distributions to your bank
checking or savings account. Under normal circumstances, the Transfer Agent will
transfer your distributions within seven days of the dividend payment date. The
bank account must have a registration identical to that of your Fund account.
11
<PAGE>
Dividends, Distributions, and Taxes (continued)
Important Information about Taxes
The tax information in this Prospectus is provided as general information. You
should consult your own tax adviser about the tax consequences of an investment
in a Fund.
Each Fund pays no federal income tax on the earnings and capital gains it
distributes to shareholders.
* Certain dividends from a Fund will be "exempt-interest dividends," which are
exempt from federal income tax. However, exempt-interest dividends are not
necessarily exempt from state or local taxes.
* Ordinary dividends from a Fund, if taxable, are treated as ordinary income;
dividends from a Fund's long-term capital gains are taxable as long-term capital
gain.
* Dividends are treated in the same manner for federal income tax purposes
whether you receive them in cash or in additional shares. They also may be
subject to state and local taxes.
* An exchange of a Fund's shares for shares of another fund will be treated as a
sale. When you sell or exchange shares of a Fund, you must recognize any gain or
loss.
* Certain dividends paid to you in January may be taxable as if they had been
paid to you the previous December.
* Tax statements will be mailed from a Fund every January showing the amounts
and tax status of distributions made to you.
* Certain dividends from the New York Tax-Free Fund will be exempt from certain
New York state and local taxes.
* Certain dividends from the Ohio Municipal Bond Fund will be exempt from
certain Ohio state and local taxes.
* Because your tax treatment depends on your purchase price and tax position,
you should keep your regular account statements for use in determining your tax.
* You should review the more detailed discussion of federal income tax
considerations in the SAI.
12
<PAGE>
INVESTING WITH VICTORY
All you need to do to get started is to fill out an application.
If you are looking for a convenient way to open an account or to add money to an
existing account, Victory can help. The sections that follow will serve as a
guide to your investments with Victory. "Choosing a Share Class" will help you
decide whether it would be more to your advantage to buy Class A or Class G
Shares of a Fund. The following sections will describe how to open an account,
how to access information on your account, and how to buy, exchange, and sell
shares of a Fund.
We want to make it simple for you to do business with us. If you have
questions about any of this information, please call your Investment
Professional or one of our customer service representatives at 800-539-FUND.
They will be happy to assist you.
Choosing a Share Class
An Investment Professional is an investment consultant, salesperson, financial
planner, investment adviser, or trust officer who provides you with investment
information.
For historical expense information on Class A and G Shares, see the "Financial
Highlights" at the end of this Prospectus. For historical expense information on
Class A and G Shares, see the "Financial Highlights" at the end of this
Prospectus.
Each Fund offers Class A and Class G Shares. Each class has its own cost
structure, allowing you to choose the one that best meets your requirements.
Your Investment Professional also can help you decide.
CLASS A
* Front-end sales charge, as described on the next page. There are several
ways to reduce this charge.
* Lower annual expenses, generally, than Class G Shares.
CLASS G
* No front-end sales charge. All your money goes to work for you right away.
* Class G Shares are sold only by certain broker-dealers.
13
<PAGE>
Choosing a Share Class (continued)
Calculation of Sales Charges -- Class A
Class A Shares are sold at their public offering price, which is the NAV plus
the applicable initial sales charge. The sales charge as a percentage of your
investment decreases as the amount you invest increases. The current sales
charge rates are listed below.
Sales Charge Sales Charge
as a % of as a % of
Your Investment in the Fund Offering Price Your Investment
Up to $49,999 5.75% 6.10%
$50,000 up to $99,999 4.50% 4.71%
$100,000 up to $249,999 3.50% 3.63%
$250,000 up to $499,999 2.50% 2.56%
$500,000 up to $999,999 2.00% 2.04%
$1,000,000 and above* 0.00% 0.00%
* There is no initial sales charge on purchases of $1 million or more. However,
a contingent deferred sales charge (CDSC) of up to 1.00% will be charged to the
shareholder if any of such shares are redeemed in the first year after purchase,
or at 0.50% within two years of the purchase. This charge will be based on
either the cost of the shares or net asset value at the time of redemption,
whichever is lower. There will be no CDSC on reinvested distributions.
Sales Charge Reductions and Waivers for Class A Shares
There are several ways you can combine multiple purchases in the Victory Funds
and take advantage of reduced sales charges.
You may qualify for reduced sales charges in the following cases:
1. A Letter of Intent lets you buy Class A Shares of a Fund over a 13-month
period and receive the same sales charge as if all shares had been
purchased at one time. You must start with a minimum initial investment of
5% of the total amount.
2. Rights of Accumulation allow you to add the value of any Class A Shares you
already own to the amount of your next Class A investment for purposes of
calculating the sales charge at the time of purchase.
3. You can combine Class A Shares of multiple Victory Funds, (excluding funds
sold without a sales charge) for purposes of calculating the sales charge.
The combination privilege also allows you to combine the total investments
from the accounts of household members of your immediate family (spouse and
children under 21) for a reduced sales charge at the time of purchase.
4. Waivers for certain investors:
a. Current and retired Fund Trustees, directors, trustees, employees, and
family members of employees of KeyCorp or "Affiliated Providers,"* and
dealers who have an agreement with the Distributor and any trade
organization to which the Adviser or the Administrator belong.
b. Investors who purchase shares for trust or other advisory accounts
established with KeyCorp or its affiliates.
*Affiliated Providers are affiliates and subsidiaries of KeyCorp, and any
organization that provides services to the Victory Group.
14
<PAGE>
Choosing a Share Class (continued)
c. Investors who reinvest the proceeds from a liquidation distribution of
Class A Shares held in a deferred compensation plan, agency, trust, or
custody account that was maintained by KeyBank National Association
and its affiliates, the Victory Group , or invested in a fund of the
Victory Group.
d. Investment Professionals who purchased Fund shares for fee-based
investment products or accounts, and selling brokers and their sales
representatives.
Shareholder Servicing Plan
Each Fund has adopted a Shareholder Servicing Plan for its Class A Shares . The
shareholder servicing agent performs a number of services for its customers who
are shareholders of the Funds. It establishes and maintains accounts and
records, processes dividend payments, arranges for bank wires, assists in
transactions, and changes account information. For these services a Fund pays a
fee at an annual rate of up to 0.25% of the average daily net assets of the
Class A Shares serviced by the agent. The Funds may enter into agreements with
various shareholder servicing agents, including KeyBank National Association and
its affiliates, other financial institutions, and securities brokers. The Funds
may pay a servicing fee to broker-dealers and others who sponsor "no transaction
fee" or similar programs for the purchase of shares. Shareholder servicing
agents may waive all or a portion of their fee periodically.
Distribution Plan
In accordance with Rule 12b-1 under the Investment Company Act of 1940, Victory
has adopted a Distribution and Service Plan for Class A Shares of the National
Municipal Bond Fund and the New York Tax-Free Fund. Class A Shares do not pay
expenses under this plan.
Victory has also adopted a Distribution and Service Plan for Class G Shares of
each Fund. Under the Class G Plan, each Fund will pay to the Distributor a
monthly service fee at an annual rate of 0.25% of its average daily net assets.
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. Each Fund may enter
into agreements with various shareholder servicing agents, including KeyCorp and
its affiliates, and with other financial institutions that provide such
services.
Because Rule 12b-1 fees are paid out of a Fund's assets on an on-going basis,
over time these fees will increase the cost of your investment and may cost you
more than paying other types of sales charges.
15
<PAGE>
How to Buy Shares
You can buy shares in a number of different ways. All you need to do to get
started is to fill out an application. The minimum initial investment required
to open an account is $500, with additional investments of at least $25. You can
send in your payment by check, wire transfer, exchange from another Victory
Fund, or through arrangements with your Investment Professional. Sometimes an
Investment Professional will charge you for these services. This fee will be in
addition to, and unrelated to, the fees and expenses charged by a Fund.
If you buy Shares directly from the Funds and your investment is received
and accepted by 4:00 p.m. Eastern Time or the close of trading on the NYSE
(whichever time is earlier), your purchase will be processed the same day using
that day's share price.
Make your check payable to: The Victory Funds
Keep the following addresses handy for purchases, exchanges, or redemptions:
BY REGULAR U.S. MAIL
Send completed Account Applications with your check, bank draft, or money order
to:
Class G Shares
The Victory Funds
c/o Gradison McDonald
580 Walnut Street
Cincinnati, OH 45202
Class A Shares
The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
BY OVERNIGHT MAIL
Use the following address ONLY for overnight packages.
Class G Shares
The Victory Funds
c/o Gradison McDonald
580 Walnut Street
Cincinnati, OH 45202
Phone: 800-539-FUND
Class A Shares
The Victory Funds
c/o Boston Financial Data Services
66 Brooks Drive
Braintree, MA 02184
Phone: 800-539-FUND
BY WIRE
The Transfer Agent does not charge a wire fee, but your originating bank may
charge a fee. Always call 800-539-FUND BEFORE wiring funds .
Class G Shares
The Victory Funds
Firstar Bank
ABA #042000013
For Credit to DDA
Account # 8355281
(insert Fund name, account number and name)
Class A Shares
The Victory Funds
State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA
Account #9905-201-1
(insert account number, name, and confirmation number assigned by the
Transfer Agent)
BY TELEPHONE
800-539-FUND
(800-539-3863)
16
<PAGE>
How to Buy Shares (continued)
If you would like to make additional investments after your account is
established, use the Investment Stub attached to your confirmation statement and
send it with your check to the address indicated.
ACH
After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic member banks may be used. It takes
about 15 days to set up an ACH account. Currently, the Funds do not charge a fee
for ACH transfers.
Statements and Reports
You will receive a periodic statement reflecting any transactions that affect
the balance or registration of your account. You will receive a confirmation
after any purchase, exchange, or redemption. If your account has been set up by
an Investment Professional, Fund activity will be detailed in that account's
statements. Share certificates are not issued. Twice a year, you will receive
the financial reports of the Funds. By January 31 of each year, you will be
mailed an IRS form reporting distributions for the previous year, which also
will be filed with the IRS.
Systematic Investment Plan
To enroll in the Systematic Investment Plan, you should check this box on the
Account Application. We will need your bank information and the amount and
frequency of your investment. You can select monthly, quarterly, semi-annual, or
annual investments. You should attach a voided personal check so the proper
information can be obtained. You must first meet the minimum investment
requirement of $500, then we will make automatic withdrawals of the amount you
indicate ($25 or more) from your bank account and invest it in Shares of a Fund.
All purchases must be made in U.S. dollars and drawn on U.S. banks. The Transfer
Agent may reject any purchase order in its sole discretion. If your check is
returned for any reason, you will be charged for any resulting fees and/or
losses. Third party checks will not be accepted. You may only buy or exchange
into fund shares legally available in your state. If your account falls below
$500, we may ask you to re-establish the minimum investment. If you do not do so
within 60 days, we may close your account and send you the value of your
account.
17
<PAGE>
How to Exchange Shares
You can obtain a list of funds available for exchange by calling 800-539-FUND.
You can sell shares of one fund of the Victory Portfolios to buy shares of
the same class of any other. This is considered an exchange.
You can exchange shares of a Fund by writing the Transfer Agent or calling
800-539-FUND. When you exchange shares of a Fund, you should keep the following
in mind:
* Shares of the fund selected for exchange must be available for sale in your
state of residence.
* The Fund whose shares you want to exchange and the fund whose shares you want
to buy must offer the exchange privilege.
* If you acquire Class A Shares of a Fund as a result of an exchange you pay the
percentage point difference, if any, between the Fund's sales charge and any
sales charge that you previously paid in connection with the shares you are
exchanging. For example, if you acquire Class A Shares of a Fund as a result of
an exchange from another fund of the Victory Group that has a 2.00% sales
charge, you would pay the 3.75% difference in sales charge.
* On certain business days, such as Veterans Day and Columbus Day, the Federal
Reserve Bank of Cleveland is closed. On those days, exchanges to or from a money
market fund will be processed on the exchange date, with the corresponding
purchase or sale of the money market fund shares being effected on the next
business day.
* You must meet the minimum purchase requirements for the fund you purchase by
exchange.
* The registration and tax identification numbers of the two accounts must be
identical.
* You must hold the shares you buy when you establish your account for at least
seven days before you can exchange them; after the account is open seven days,
you can exchange shares on any business day.
* Each Fund may refuse any exchange purchase request if the Adviser determines
that the request is associated with a market timing strategy. Each Fund may
terminate or modify the exchange privilege at any time on 30 days' notice to
shareholders.
* Before exchanging, read the prospectus of the fund you wish to purchase by
exchange.
* An exchange of Fund shares constitutes a sale for tax purposes.
* Holders of Class G Shares who acquired their shares as a result of the
reorganization of the Gradison Funds into the Victory Funds can exchange into
Class A Shares of any Victory Fund that does not offer Class G Shares without
paying a sales charge.
18
<PAGE>
How to Sell Shares
There are a number of convenient ways to sell your shares. You can use the same
mailing addresses listed for purchases.
If your request is received in good order by 4:00 p.m. Eastern Time or the close
of trading on the NYSE (whichever time is earlier), your redemption will be
processed the same day.
BY TELEPHONE
The easiest way to sell shares is by calling 800-539-FUND. When you fill out
your original application, be sure to check the box marked "Telephone
Authorization." Then when you are ready to sell, call and tell us which one of
the following options you would like to use:
* Mail a check to the address of record;
* Wire funds to a domestic financial institution;
* Mail a check to a previously designated alternate address; or
* Electronically transfer your redemption via the Automated Clearing House
(ACH).
The Transfer Agent records all telephone calls for your protection and
takes measures to verify the identity of the caller. If the Transfer Agent
properly acts on telephone instructions and follows reasonable procedures to
ensure against unauthorized transactions, neither Victory, its servicing agents,
the Adviser, nor the Transfer Agent will be responsible for any losses. If the
Transfer Agent does not follow these procedures, it may be liable to you for
losses resulting from unauthorized instructions.
If there is an unusual amount of market activity and you cannot reach the
Transfer Agent or your Investment Professional by telephone, consider placing
your order by mail.
BY MAIL
Use the Regular U.S. Mail or Overnight Mail Address to sell shares. Send us a
letter of instruction indicating your Fund account number, amount of redemption,
and where to send the proceeds. A signature guarantee is required for the
following redemption requests:
* Redemptions over $10,000;
* Your account registration has changed within the last 15 days;
* The check is not being mailed to the address on your account;
* The check is not being made payable to the owner of the account;
* The redemption proceeds are being transferred to another Victory Group
account with a different registration; or
* The check or wire is being sent to a different bank account.
You can get a signature guarantee from a financial institution such as a
bank, broker-dealer, credit union, clearing agency, or savings association.
BY WIRE
If you want to receive your proceeds by wire, you must establish a Fund account
that will accommodate wire transactions. If you call by 4:00 p.m. Eastern Time
or the close of trading on the NYSE (whichever time is earlier), your funds will
be wired on the next business day.
BY ACH
Normally, your redemption will be processed on the same day , but will be
processed on the next day if received after 4:00 p.m. Eastern Time or the close
of trading on the NYSE (whichever time is earlier). It will be transferred by
ACH as long as the transfer is to a domestic bank.
19
<PAGE>
How to Sell Shares (continued)
Systematic Withdrawal Plan
If you check this box on the Account Application, we will send monthly,
quarterly, semi-annual, or annual payments to the person you designate. The
minimum withdrawal is $25, and you must have a balance of $5,000 or more. If the
payment is to be sent to an account of yours, we will need a voided check to
activate this feature. If the payment is to be made to an address different from
your account address, we will need a signature guaranteed letter of instruction.
You should be aware that your account eventually may be depleted and that each
withdrawal may be a taxable transaction. However, you cannot automatically close
your account using the Systematic Withdrawal Plan. If your balance falls below
$500, we may ask you to bring the account back to the minimum balance. If you
decide not to increase your account to the minimum balance, your account maybe
closed and the proceeds mailed to you.
Additional Information about Redemptions
* Redemption proceeds from the sale of shares purchased by a check may be held
until the purchase check has cleared, which may take up to 15 days.
* A Fund may suspend your right to redeem your shares in the following
circumstances:
* During non-routine closings of the NYSE;
* When the Securities and Exchange Commission (SEC) determines either
that trading on the NYSE is restricted or that an emergency prevents
the sale or valuation of the Fund's securities; or
* When the SEC orders a suspension to protect a Fund's shareholders.
* Each Fund will pay redemptions by any one shareholder during any 90-day period
in cash up to the lesser of $250,000 or 1% of the Fund's net assets. Each Fund
reserves the right to pay the remaining portion "in kind," that is, in portfolio
securities rather than cash.
20
<PAGE>
Organization and Management of the Funds
About Victory
Each Fund is a member of the Victory Portfolios, a group of more than 30
distinct investment portfolios. The Board of Trustees of Victory has the overall
responsibility for the management of the Funds.
The Investment Adviser and Sub-Administrator
Each Fund has an Advisory Agreement which is one of its most important
contracts. Key Asset Management Inc. (KAM), a New York corporation registered as
an investment adviser with the SEC, is the Adviser to each of the Funds. KAM, a
subsidiary of KeyCorp, oversees the operations of the Funds according to
investment policies and procedures adopted by the Board of Trustees. Affiliates
of the Adviser manage approximately $76 billion for a limited number of
individual and institutional clients. KAM's address is 127 Public Square,
Cleveland, Ohio 44114.
During the fiscal year ended October 31, 1999, KAM was paid an advisory fee
at an annual rate based on a percentage of the average daily net assets of each
Fund (after waivers) as shown in the following table.
National Municipal Bond Fund 0.25%
New York Tax-Free Fund 0.30%
Ohio Municipal Bond Fund 0.38%
Under a Sub-Administration Agreement, BISYS Fund Services Ohio, Inc., the
Funds' Administrator, pays KAM a fee at the annual rate of up to 0.05% of each
Fund's average daily net assets to perform some of the administrative duties for
the Funds.
We want you to know who plays what role in your investment and how they are
related. This section discusses the organizations employed by the Funds to
provide services to their shareholders. Each of these organizations is paid a
fee for its services.
Portfolio Management
Paul A. Toft is the portfolio manager or co-portfolio manager of each of the
Funds. Mr. Toft, a Senior Portfolio Manager and Managing Director of KAM, has
served as the portfolio manager of each of the Funds since 1994.
Stephen C. Dilbone has been the co-portfolio manager of the Ohio Municipal Bond
Fund since March 1999. A Chartered Financial Analyst, he formerly served as
portfolio manager of the Gradison Ohio Tax-Free Income Fund from its inception
in 1992 until March 1999, when its assets were acquired by the Ohio Municipal
Bond Fund.
21
<PAGE>
Organization and Management of the Funds (cont.)
OPERATIONAL STRUCTURE OF THE FUNDS
The Funds are supervised by the Board of Trustees, which monitors the services
provided to investors.
TRUSTEES
ADVISER
SHAREHOLDERS
FINANCIAL SERVICES FIRMS AND THEIR INVESTMENT PROFESSIONALS
Advise current and prospective shareholders on their Fund investments.
TRANSFER AGENT/SERVICING AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
Handles services such as record-keeping, statements, processing of buy and sell
requests, distribution of dividends, and servicing of shareholder accounts.
ADMINISTRATOR, DISTRIBUTOR, AND FUND ACCOUNTANT
BISYS Fund Services
and its affiliates
3435 Stelzer Road
Columbus, OH 43219
Markets the Funds, distributes shares through Investment Professionals, and
calculates the value of shares. As Administrator, handles the day-to-day
activities of the Funds.
CUSTODIAN
Key Trust Company of Ohio, N.A.
127 Public Square
Cleveland, OH 44114
Provides for safekeeping of the Funds' investments and cash, and settles trades
made by the Funds.
SUB-ADMINISTRATOR
Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114
Performs certain sub-administrative services.
22
<PAGE>
Additional Information
Some additional information you should know about the Funds.
Share Classes
The Funds currently offer only the classes of shares described in this
Prospectus. At some future date, the Funds may offer additional classes of
shares.
Performance
The Victory Funds may advertise the performance of each Fund by comparing it to
other mutual funds with similar objectives and policies. Performance information
also may appear in various publications. Any fees charged by Investment
Professionals may not be reflected in these performance calculations.
Advertising information may include the yield, tax-effective yield, and the
average annual total return of each Fund calculated on a compounded basis for
specified periods of time. Yield and total return information will be calculated
according to rules established by the SEC. Such information may include
performance rankings and similar information from independent organizations,
such as Lipper, Inc., and industry publications such as Morningstar, Inc.,
Business Week, or Forbes. You also should see the "Investment Performance"
section for the Fund in which you would like to invest.
Shareholder Communications
In order to eliminate duplicate mailings to an address at which two or more
shareholders with the same last name reside, the Funds will send only one copy
of any shareholder reports, prospectuses, and their supplements, unless you have
instructed us to the contrary. You may request that the Funds send these
documents to each shareholder individually by calling the Funds at 800-539-FUND
(800-539-3863).
If you would like to receive additional copies of any materials, please call the
Funds at 800-539-FUND.
23
<PAGE>
Financial Highlights
NATIONAL MUNICIPAL BOND FUND
The Financial Highlights table is intended to help you understand the National
Municipal Bond Fund's financial performance for the past five years. Certain
information shows the results of an investment in one share of the National
Municipal Bond Fund. The total returns in the table represent the rate that an
investor would have earned on an investment in the National Municipal Bond Fund
(assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Class A
Shares of the National Municipal Bond Fund. The financial highlights for the
four fiscal years ended October 31, 1999 and the six months ended October 31,
1995 were audited by PricewaterhouseCoopers LLP, whose report, along with the
financial statements of the National Municipal Bond Fund, are included in the
Fund's annual report, which is available by calling the Fund at 800-539-FUND.
The financial highlights for the fiscal year ended April 30, 1995 were audited
by other auditors.
<TABLE>
<CAPTION>
Class A Shares
Year Year Year Year Six Months Year
Ended Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Apr. 30,
1999 1998 1997 1996 1995(4) 1995
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.92 $ 10.51 $ 10.16 $ 10.06 $ 9.59 $ 9.64
Investment Activities
Net investment income 0.41 0.43 0.45 0.44 0.24 0.44
Net realized and unrealized
gains (losses) from investments (0.51) 0.41 0.35 0.13 0.46 (0.05)
Total from Investment Activities (0.10) 0.84 0.80 0.57 0.70 0.39
Distributions
Net investment income (0.41) (0.43) (0.45) (0.44) (0.23) (0.44)
In excess of net realized gains -- -- -- (0.03) -- --
Net realized gains (0.24) -- -- -- -- --
Total Distributions (0.65) (0.43) (0.45) (0.47) (0.23) (0.44)
Net Asset Value, End of Period $ 10.17 $ 10.92 $ 10.51 $ 10.16 $ 10.06 $ 9.59
Total Return (excludes sales charges) (0.99)% 8.15% 8.10% 5.83% 7.39%(2) 4.21%
Ratios/Supplemental Data:
Net Assets, End of Period (000) $37,579 $47,296 $47,705 $36,958 $11,964 $5,118
Ratio of expenses to
average net assets 0.86% 0.67% 0.36% 0.29% 0.02%(3) 0.20%
Ratio of net investment income
(loss) to average net assets 3.80% 4.02% 4.43% 4.37% 5.11%(3) 5.01%
Ratio of expenses to
average net assets(1) 1.24% 1.22% 1.27% 1.35% 2.57%(3) 3.95%
Ratio of net investment income
to average net assets(1) 3.42% 3.47% 3.52% 3.31% 2.56%(3) 1.26%
Portfolio turnover 127% 152% 154% 143% 72% 52%
- ---------------
(1)During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred,
the ratios would have been as indicated.
(2)Not annualized.
(3)Annualized.
(4)Effective June 5, 1995, the Victory National Municipal Bond Portfolio became the National
Municipal Bond Fund.
</TABLE>
24
<PAGE>
Financial Highlights
NEW YORK TAX-FREE FUND
The Financial Highlights table is intended to help you understand the New York
Tax-Free Fund's financial performance for the past five years. Certain
information shows the results of an investment in one share of the New York
Tax-Free Fund. The total returns in the table represent the rate that an
investor would have earned on an investment in the New York Tax-Free Fund
(assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Class A
Shares of the New York Tax-Free Fund. The financial highlights for the five
fiscal years ended October 31, 1999 were audited by PricewaterhouseCoopers LLP,
whose report, along with the financial statements of the New York Tax-Free Fund,
are included in the Fund's annual report, which is available by calling the Fund
at 800-539-FUND.
<TABLE>
<CAPTION>
Class A
Year Year Year Year Year
Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1999 1998 1997 1996 1995(2)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 12.80 $ 12.68 $ 12.73 $ 12.85 $ 12.39
Investment Activities
Net investment income 0.61 0.61 0.68 0.68 0.87
Net realized and unrealized
gains (losses) from investments (0.81) 0.14 0.03 (0.11) 0.42
Total from Investment Activities (0.20) 0.75 0.71 0.57 1.29
Distributions
Net investment income (0.61) (0.61) (0.72) (0.68) (0.83)
In excess of net investment income -- -- -- -- --
Net realized gains -- (0.02) (0.04) (0.01) --
Total Distributions (0.61) (0.63) (0.76) (0.69) (0.83)
Net Asset Value, End of Period $ 11.99 $ 12.80 $ 12.68 $ 12.73 $ 12.85
Total Return (excludes sales charges) (1.74)% 6.12% 5.77% 4.53% 10.82%
Ratios/Supplemental Data:
Net Assets, End of Period (000) $14,084 $18,073 $15,335 $13,754 $15,374
Ratio of expenses to
average net assets 0.95% 0.94% 0.94% 0.93% 1.16%
Ratio of net investment income
to average net assets 4.82% 4.85% 5.32% 5.25% 5.50%
Ratio of expenses to
average net assets(1) 1.42% 1.35% 1.49% 1.58% 1.96%
Ratio of net investment income
to average net assets(1) 4.35% 4.44% 4.77% 4.60% 4.70%
Portfolio turnover 28% 38% 11% -- 18%
- ---------------
(1)During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred,
the ratios would have been as indicated.
(2)Effective June 5, 1995 the Victory New York Tax-Free Portfolio became the New York Tax-Free
Fund.
</TABLE>
25
<PAGE>
Financial Highlights
OHIO MUNICIPAL BOND FUND
The Financial Highlights table is intended to help you understand the Ohio
Municipal Bond Fund's financial performance for the past five years. Certain
information shows the results of an investment in one share of the Ohio
Municipal Bond Fund. The total returns in the table represent the rate that an
investor would have earned on an investment in the Ohio Municipal Bond Fund
(assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Class A and
Class G Shares of the Ohio Municipal Bond Fund. The financial highlights for the
five fiscal years ended October 31, 1999 were audited by PricewaterhouseCoopers
LLP, whose report, along with the financial statements of the Ohio Municipal
Bond Fund, are included in the Fund's annual report, which is available by
calling the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Class A Shares Class G Shares
March 26,
Year Year Year Year Year 1999
Ended Ended Ended Ended Ended through
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, October 31,
1999 1998 1997 1996 1995 1999(4)(5)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 12.04 $ 11.72 $ 11.43 $ 11.32 $ 10.33 $ 11.79
Investment Activities
Net investment income 0.49 0.51 0.53 0.54 0.52 0.28
Net realized and unrealized
gains (losses) from investments (0.75) 0.42 0.29 0.11 1.00 (0.70)
Total from Investment Activities (0.26) 0.93 0.82 0.65 1.52 (0.42)
Distributions
Net investment income (0.49) (0.51) (0.53) (0.54) (0.52) (0.28)
In excess of net investment income -- -- -- -- (0.01) --
Net realized gains (0.10) (0.10) -- -- -- --
In excess of net realized gains (0.08) -- -- -- -- --
Total Distributions (0.67) (0.61) (0.53) (0.54) (0.53) (0.28)
Net Asset Value, End of Period $ 11.11 $ 12.04 $ 11.72 $ 11.43 $ 11.32 $ 11.09
Total Return (excludes sales charges) (2.29)% 8.18% 7.37% 5.87% 15.03% (3.59)%(2)
Ratios/Supplemental Data:
Net Assets, End of Period (000) $74,984 $82,704 $78,043 $73,463 $60,031 $122,458
Ratio of expenses to
average net assets 0.92% 0.91% 0.89% 0.89% 0.66% 0.90%(3)
Ratio of net investment income
to average net assets 4.20% 4.31% 4.60% 4.72% 4.78% 4.18%(3)
Ratio of expenses to
average net assets(1) 1.14% 1.13% 0.99% 1.05% 0.94% 1.12%(3)
Ratio of net investment income
to average net assets(1) 3.98% 4.09% 4.50% 4.56% 4.49% 3.96%(3)
Portfolio turnover < F6> 112% 95% 74% 81% 125% 112%
- ---------------
(1)During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(2)Not annualized.
(3)Annualized.
(4)Period from commencement of operations.
(5)Effective March 26, 1999, the Gradison Ohio Tax-Free Fund merged into the
Victory Ohio Municipal Bond Fund.
(6)Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
</TABLE>
26
<PAGE>
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27
<PAGE>
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28
<PAGE>
The Victory Funds
127 Public Square
OH-01-27-1612
Cleveland, Ohio 44114
Bulk Rate
U.S. Postage
PAID
Cleveland, OH
Permit No. 469
If you would like a free copy of any of the following documents or would like to
request other information regarding the Funds, you can call or write the Funds
or your Investment Professional.
Statement of Additional Information (SAI)
Contains more details describing the Funds and their policies. The SAI has been
filed with the Securities and Exchange Commission (SEC), and is incorporated by
reference in this Prospectus.
Annual and Semi-annual Reports
Describes each Fund's performance, lists portfolio holdings, and discusses
market conditions and investment strategies that significantly affected a Fund's
performance during its last fiscal year.
If you would like to receive copies of the annual and semi-annual reports and/or
the SAI at no charge, please call the Funds at 800-539-FUND (800-539-3863).
How to Obtain Information
By telephone: Call Victory Funds at 800-539-FUND (800-539-3863).
By mail: The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
You also may obtain copies of materials from the SEC's Public Reference Room in
Washington, D.C. (Call 1-202-942-8090 for information on the operation of the
SEC's Public Reference Room.) Copies of this information may be obtained, after
paying a duplicating fee, by electronic request at the following e-mail address:
[email protected], or by writing the SEC's Public Reference Section,
Washington, D.C. 20459-0102.
On the Internet: Text only versions of Fund documents can be viewed on-line or
downloaded from the SEC at http://www.sec.gov or from the Victory Funds' website
at http://www.victoryfunds.com.
The securities described in this Prospectus and the SAI are not offered in any
state in which they may not lawfully be sold. No sales representative, dealer,
or other person is authorized to give any information or make any representation
other than those contained in this Prospectus and the SAI.
Victory Funds
(LOGO)(R) Investment Company Act File Number 811-4852 VF-TEFI-PRO (2/00)
<PAGE>
[GRAPHIC OMITTED]
Victory Funds
PROSPECTUS
Government Mortgage Fund
Class A Shares
As with all mutual funds, the Securities and Exchange Commission has
not approved or disapproved the Fund's securities or determined
whether this Prospectus is accurate or complete. Any representation to
the contrary is a criminal offense.
Call Victory at: 800-539-FUND (800-539-3863)
or visit the Victory Funds' website at: www.victoryfunds.com
February 28, 2000
<PAGE>
TABLE OF CONTENTS
RISK/RETURN SUMMARY FOR THE FUND 1
An analysis which includes the investment objective, principal strategies,
principal risks, performance and expenses of the Fund.
INVESTMENTS 4
RISK FACTORS 5
SHARE PRICE 6
DIVIDENDS, DISTRIBUTIONS, AND TAXES 7
INVESTING WITH VICTORY 9
o How to Buy Shares 11
o How to Exchange Shares 14
o How to Sell Shares 15
ORGANIZATION AND MANAGEMENT OF THE FUND 17
ADDITIONAL INFORMATION 19
FINANCIAL HIGHLIGHTS 20
Shares of the Fund are:
o Not insured by the FDIC;
o Not deposits or other obligations of, or guaranteed by KeyBank, any of
its affiliates, or any other bank;
o Subject to possible investment risks, including possible loss of the
amount invested.
<PAGE>
- --------------------------------------------------------------------------------
GOVERNMENT MORTGAGE FUND Risk/Return Summary
- --------------------------------------------------------------------------------
Investment Objective
The Fund seeks to provide a high level of current income consistent with safety
of principal.
Investment Policies And Strategies
The Fund pursues its investment objective by investing exclusively in
obligations issued or guaranteed by the U.S. government or its agencies or
instrumentalities. Under normal market conditions, at least 80% of the total
assets of the Fund will be invested in U.S. government mortgage-backed
securities.
Important characteristics of the Fund's investments:
o Quality: Securities purchased by the Fund are considered to be of the
highest quality.
o Maturity: The dollar-weighted effective average maturity of the Fund
generally will not exceed 12 years. Under certain market conditions,
the portfolio manager may go outside these boundaries.
The Fund's high portfolio turnover may result in higher expenses and taxable
gain distributions.
There is no guarantee that the Fund will achieve its objectives.
Proposed Reorganization
The Board of Trustees of the Victory Portfolios has approved a Plan of
Reorganization and Liquidation for the Fund. At a special meeting,
anticipated to be held in March 2000, shareholders of the Fund will be asked
to approve the transfer of the assets of their Fund into Class A Shares of the
Victory Fund for Income. If the reorganization of the Fund is approved,
shareholders will exchange their Fund shares for Class A shares of the Victory
Fund For Income, and the Fund will no longer be available for purchases,
exchanges or redemptions. Shareholders will receive shares of the Fund for
Income with the same value as the total value of their Fund shares. (In other
words, a shareholder who owns $1,000 worth of Class A Shares of the Fund will
receive $1,000 worth of Class A Shares of the Victory Fund for Income.) The
exchange will not be subject to any sales charges and will not be taxable. The
Victory Fund for Income has the same investment adviser, Key Asset Management
Inc. (KAM or the Adviser), and service providers as the Fund. If you do not
wish to participate in the reorganization, you must redeem your shares by 4:00
p.m. on May 5, 2000.
Principal Risks
You may lose money by investing in the Fund. The Fund is subject to the
following principal risks, more fully described in "Risk Factors." The Fund's
net asset value, yield and/or total return may be adversely affected if any of
the following occurs:
o The market value of securities acquired by the Fund declines.
o The portfolio manager does not execute the Fund's principal investment
strategies effectively.
<PAGE>
- --------------------------------------------------------------------------------
GOVERNMENT MORTGAGE FUND Risk/Return Summary
- --------------------------------------------------------------------------------
o Interest rates rise.
o An issuer's credit quality is downgraded.
o The Fund must reinvest interest or sale proceeds at lower rates.
o The rate of inflation increases.
o The average life of a mortgage-related security is shortened or
lengthened.
An investment in the Fund is not a deposit of KeyBank or any of its affiliates
and is not insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency.
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Fund by showing changes in its performance for various time
periods ending December 31st. The figures shown in the bar chart and table
assume reinvestment of dividends and distributions.
Sales loads are not reflected on the bar chart (or highest and lowest returns
below) and if they were reflected, returns would be lower than those shown.
1991 15.04%
1992 6.25%
1993 8.18%
1994 -2.06%
1995 15.21%
1996 4.19%
1997 8.76%
1998 6.70%
1999 0.03%
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter was
5.54% (quarter ending December 31, 1991) and the lowest return for a quarter was
- -2.37% (quarter ending March 31, 1994).
2
<PAGE>
- --------------------------------------------------------------------------------
GOVERNMENT MORTGAGE FUND Risk/Return Summary
- --------------------------------------------------------------------------------
The table shows how the average annual total returns for Class A Shares of the
Fund for one year, five years and since inception, including maximum sales
charges, compare to those of a broad-based market index.
- ------------------------------------------------------------------------------
Since
Average Annual Total Returns Past Past Inception
(for the Periods ended December 31, 1999) One Year 5 Years (5/18/90)
Class A -5.68% 5.61% 6.60%
Lehman Mortgage-Backed Index (1) 1.86% 7.98% 8.13%
- ------------------------------------------------------------------------------
1 The Lehman Brothers Mortgage-Backed Securities Index is a broad-based
unmanaged index that represents the general performance of fixed-rate
mortgage bonds. Index returns do not include any brokerage commissions, sales
charges, or other fees. It is not possible to invest directly in an index.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
<S> <C>
Shareholder Transaction Expenses (paid directly from your investment)(1) Class A
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) 5.75%
Maximum Deferred Sales Charge (as a percentage of the lower of purchase or
sale price) NONE (2)
Maximum Sales Charge Imposed on Reinvested Dividends NONE
Redemption Fees NONE
Exchange Fees NONE
Annual Fund Operating Expenses (deducted from Fund assets.)
Management Fees 0.50%
Distribution (12b-1) Fees 0.00%
Other Expenses (includes a shareholder servicing fee of 0.25%) 0.58%
Total Fund Operating Expenses 1.08%
- ------------------------------------------------------------------------------------------------
</TABLE>
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 Except for non-IRA tax deferred retirement accounts, there is no
initial sales charge on purchases of $1 million or more for Class A
Shares. However, if you sell any of such Class A Shares within one
year, you will be charged a contingent deferred sales charge (CDSC) of
1.00%. If you sell any of such Class A Shares within two years, you
will be charged a CDSC of 0.50%.
EXAMPLE
The following Example is designed to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods shown and then sell all
of your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
3
<PAGE>
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
Class A $679 $899 $1,136 $1,816
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Investments
- --------------------------------------------------------------------------------
The following describes some of the types of securities the Fund may purchase
under normal market conditions.
For cash management or for temporary defensive purposes in response to market
conditions, the Fund may hold all or a portion of its assets in cash or
short-term money market instruments. This may reduce the benefit from any
upswing in the market and may cause the Fund to fail to meet its investment
objective.
For a more complete description of the types of securities in which the Fund can
invest, see the Statement of Additional information (the SAI).
o U.S. Government Securities. Notes and bonds issued or guaranteed by the
U.S. government, its agencies or instrumentalities. Some are direct
obligations of the U.S. Treasury; others are obligations only of the
U.S. agency.
o Mortgage-Backed Securities. Instruments secured by a mortgage or pools
of mortgages.
o When-Issued and Delayed-Delivery Securities. A security that is
purchased for delivery at a later time. The market value may change
before the delivery date, and the value is included in the net asset
value of the Fund.
o Dollar-Weighted Effective Average Maturity. Based on the value of the
Fund's investments in securities with different maturity dates. This
measures the sensitivity of a debt security's value to changes in
interest rates. The value of a long term debt security is more
sensitive to interest rate changes than the value of a short-term
security.
5
<PAGE>
- --------------------------------------------------------------------------------
Risk Factors
- --------------------------------------------------------------------------------
This Prospectus describes the principal risks that you may assume as an investor
in the Fund.
---------------------------------------------------------------------------
By matching your investment objective with an acceptable level of risk, you
can create your own customized investment plan.
---------------------------------------------------------------------------
The Fund is subject to the following principal risks .
General risks:
o Market risk is the risk that the market value of a security may
fluctuate, depending on the supply and demand for that type of
security. As a result of this fluctuation, a security may be worth more
or less than the price the Fund originally paid for the security, or
more or less than the security was worth at an earlier time. Market
risk may affect a single issuer, an industry, a sector of the economy,
or the entire market and is common to all investments.
o Manager risk is the risk that the Fund's portfolio manager may
implement its principal investment strategy in a way that does
not produce the intended result.
Risks associated with investing in debt securities:
o Interest rate risk. The value of a debt security typically changes in
the opposite direction from a change in interest rates. When interest
rates go up, the value of a debt security typically goes down. When
interest rates go down, the value of a debt security typically goes up.
Generally, the market values of securities with longer maturities are
more sensitive to changes in interest rates.
o Inflation risk is the risk that inflation will erode the purchasing
power of the cash flows generated by debt securities held by the Fund.
Fixed-rate debt securities are more susceptible to this risk than
floating-rate debt securities or equity securities that have a record
of dividend growth.
o Reinvestment risk is the risk that when interest rates are declining
the Fund that receives interest income or prepayments on a security
will have to reinvest these moneys at lower interest rates. Generally,
interest rate risk and reinvestment risk tend to have offsetting
effects, though not necessarily of the same magnitude.
o Credit (or default) risk is the risk that the issuer of a debt security
will be unable to make timely payments of interest or principal.
Although the Fund generally invests in only high-quality securities,
the interest or principal payments may not be insured or guaranteed on
all securities.
- --------------------------------------------------------------------------------
It is important to keep in mind one basic principle of investing: the greater
the risk, the greater the potential reward. The reverse is also generally true:
the lower the risk, the lower the potential reward.
- --------------------------------------------------------------------------------
------------------------------------------------------------------
An investment in the Fund is not a complete investment program.
------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Risk Factors (continued)
- --------------------------------------------------------------------------------
Risks associated with investing in mortgage-related securities:
o Prepayment risk. Prepayments of principal on mortgage-related
securities affect the average life of a pool of mortgage-related
securities. The level of interest rates and other factors may affect
the frequency of mortgage prepayments. In periods of rising interest
rates, the prepayment rate tends to decrease, lengthening the average
life of a pool of mortgage-related securities. In periods of falling
interest rates, the prepayment rate tends to increase, shortening the
average life of a pool of mortgage-related securities. Prepayment risk
is the risk that, because prepayments generally occur when interest
rates are falling, the Fund may have to reinvest the proceeds from
prepayments at lower interest rates.
o Extension risk is the risk that the rate of anticipated prepayments on
principal may not occur, typically because of a rise in interest rates,
and the expected maturity of the security will increase. During periods
of rapidly rising interest rates, the effective average maturity of a
security may be extended past what the Fund's portfolio manager
anticipated that it would be. The market value of securities with
longer maturities tend to be more volatile.
- --------------------------------------------------------------------------------
Share Price
- --------------------------------------------------------------------------------
The Fund calculates its share price, called its "net asset value" (NAV),
each business day at 4:00 p.m. Eastern Time or at the close of trading on the
New York Stock Exchange Inc. (NYSE), whichever time is earlier. You may buy,
exchange, and sell your shares on any business day at a price that is based on
the NAV that is calculated after you place your order. A business day is a day
on which the NYSE is open.
The Fund values its investments based on market value. When market quotations
are not readily available, the Fund values its investments based on fair value
methods approved by the Board of Trustees of the Victory Portfolios. The Fund
calculates its NAV by adding up the total value of its investments and other
assets, subtracting its liabilities, and then dividing that figure by the number
of outstanding shares.
Total Assets-Liabilities
NAV = ----------------------
Number of Shares Outstanding
You can find the Fund's net asset value each day in The Wall Street Journal and
other newspapers. Newspapers do not normally publish fund information until a
fund reaches a specific number of shareholders or level of assets.
- --------------------------------------------------------------------------------
The daily NAV is useful to you as a shareholder because the NAV, multiplied by
the number of Fund shares you own gives you the value of your investment.
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes
- --------------------------------------------------------------------------------
Buying a Dividend. You should check the Fund's distribution schedule before you
invest. If you buy shares of the Fund shortly before it makes a distribution,
some of your investment may come back to you as a taxable distribution.
- --------------------------------------------------------------------------------
As a shareholder, you are entitled to your share of net income and capital gains
on the Fund's investments. The Fund passes its earnings along to investors in
the form of dividends. Dividend distributions are the net income earned on
investments after expenses. The Fund will distribute short-term gains, as
necessary, and if the Fund makes a long-term capital gain distribution, it is
normally paid once a year. As with any investment, you should consider the tax
consequences of an investment in the Fund.
Ordinarily, the Fund declares and pays dividends monthly.
Distributions can be received in one of the following ways.
o Reinvestment Option
You can have distributions automatically reinvested in additional
shares of the Fund. If you do not indicate another choice on your
Account Application, you will be assigned this option automatically.
o Cash Option
A check will be mailed to you no later than seven days after the
dividend payment date.
o Income Earned Option
You can automatically reinvest your dividends in additional shares of
the Fund and have your capital gains paid in cash, or reinvest capital
gains and have your dividends paid in cash.
o Directed Dividends Option
You can automatically reinvest distributions in the same class of
shares of another fund of the Victory Group. If you reinvest your
distributions in a different class of another fund, you may pay a sales
charge on the reinvested distributions.
o Directed Bank Account Option
In most cases, you can automatically transfer distributions to your
bank checking or savings account. Under normal circumstances, the
Transfer Agent will transfer your distributions within seven days of
the dividend payment date. The bank account must have a registration
identical to that of your Fund account.
8
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
Important Information about Taxes
---------------------------------------------------------------------------
The tax information in this Prospectus is provided as general information.
You should consult your own tax adviser about the tax consequences of an
investment in the Fund.
---------------------------------------------------------------------------
The Fund pays no federal income tax on the earnings and capital gains
it distributes to shareholders.
o Ordinary dividends from the Fund are taxable as ordinary income;
dividends from the Fund's long-term capital gains are taxable as
long-term capital gain.
o Dividends are treated in the same manner for federal income tax
purposes whether you receive them in cash or in additional shares. They
also may be subject to state and local taxes.
o Dividends from the Fund that are attributable to interest on certain
U.S. government obligations may be exempt from certain state and local
income taxes. The extent to which ordinary dividends are attributable
to U.S. government obligations will be provided with tax statements you
receive from the Fund.
o An exchange of the Fund's shares for shares of another fund will be
treated as a sale. When you sell or exchange shares of the Fund, you
must recognize any gain or loss.
o Certain dividends paid to you in January will be taxable as if they had
been paid to you the previous December.
o Tax statements will be mailed from the Fund every January showing the
amounts and tax status of distributions made to you.
o Because your tax treatment depends on your purchase price and tax
position, you should keep your regular account statements for use in
determining your tax.
o You should review the more detailed discussion of federal income tax
considerations in the SAI.
9
<PAGE>
- --------------------------------------------------------------------------------
Investing with Victory
- --------------------------------------------------------------------------------
All you need to do to get started is to fill out an application.
If you are looking for a convenient way to open an account or to add
money to an existing account, Victory can help. The sections that
follow will serve as a guide to your investments with Victory. The
following sections will describe how to open an account, how to access
information on your account, and how to buy, exchange, and sell shares
of the Fund. We want to make it simple for you to do business with us.
If you have questions about any of this information, please call your
Investment Professional or one of our customer service representatives
at 800-539-FUND. They will be happy to assist you.
------------------------------------------------------------------------
An Investment Professional is an investment consultant, salesperson,
financial planner, investment adviser, or trust officer who provides
you with investment information.
------------------------------------------------------------------------
Calculation of Sales Charges -- Class A
The Fund described in this prospectus offers Class A Shares, which have a
front-end sales charge of 5.75%. Please look at the "Fund Expenses" section to
find the sales charge.
Class A Shares are sold at their public offering price, which is the NAV plus
the applicable initial sales charge. The sales charge as a percentage of your
investment decreases as the amount you invest increases. The current sales
charge rates are listed below.
- --------------------------------------------------------------------------------
Your Investment in the Fund: Sales Charge as a % Sales Charge as a % of
of Offering Price Your Investment
Up to $49,999 5.75% 6.10%
$50,000 up to $99,999 4.50% 4.71%
$100,000 up to $249,999 3.50% 3.63%
$250,000 up to $499,999 2.50% 2.56%
$500,000 up to $999,999 2.00% 2.04%
$1,000,000 and above* 0.00% 0.00%
- --------------------------------------------------------------------------------
- ----------
*Except as indicated in the last sentence of this note, there is no
initial sales charge on purchases of $1 million or more. However, a
contingent deferred sales charge (CDSC) of up to 1.00% will be charged to
the shareholder if any of such shares are redeemed in the first year after
purchase, or at 0.50% within two years of the purchase. This charge will be
based on either the cost of the shares or NAV at the time of redemption,
whichever is lower. There will be no CDSC on reinvested distributions. The
initial sales charge exemption for investments of $1 million or more does
not apply to tax deferred retirement accounts (except IRA accounts); the
sales charge on investments by such tax deferred retirement accounts of $1
million or more is the same as for investments between $500,000 and
$999,999.
For historical expense information on Class A shares, see the "Financial
Highlights" at the end of this Prospectus.
10
<PAGE>
- --------------------------------------------------------------------------------
Investing with Victory (continued)
- --------------------------------------------------------------------------------
Sales Charge Reductions and Waivers
There are several ways you can combine multiple purchases in the Victory Funds
and take advantage of reduced sales charges.
You may qualify for reduced sales charges in the following cases:
1. A Letter of Intent lets you buy Class A Shares of the Fund over a
13-month period and receive the same sales charge as if all shares
had been purchased at one time. You must start with a minimum
initial investment of 5% of the total amount.
2. Rights of Accumulation allow you to add the value of any Class A
Shares you already own to the amount of your next Class A
investment for purposes of calculating the sales charge at the
time of purchase.
3. You can combine Class A Shares of multiple Victory Funds
(excluding funds sold withhout a sales charge) for purposes of
calculating the sales charge. The combination privilege also
allows you to combine the total investments from the accounts of
household members of your immediate family (spouse and children
under 21) for a reduced sales charge at the time of purchase.
4. Waivers for certain investors:
a. Current and retired Fund Trustees, directors, trustees,
employees, and family members of employees of KeyCorp or
"Affiliated Providers"1 , and dealers who have an
agreement with the Distributor and any trade organization
to which the Adviser or the Administrator belong.
b. Investors who buy shares for trust or other advisory
accounts established with KeyCorp or its affiliates.
c. Investors in Class A Shares who reinvest the proceeds
from a liquidation distribution of Class A shares held
in a deferred compensation plan, agency, trust, or custody
account that was maintained by KeyBank National
Association or its affiliates, the Victory Group, or
invested in a fund of the Victory Group.
d. Investment Professionals who purchased Fund shares for
fee-based investment products or accounts, selling
brokers, and their sales representatives.
e. Purchase of shares in connection with financial
institution sponsored bundled omnibus retirement programs
sponsored by financial institutions that have entered into
agreements with the Fund's Distributor in connection
with the operational requirements of such programs.
f. Participants in tax-deferred retirement plans who
purchased shares pursuant to waiver provisions in effect
prior to December 15, 1999.
- --------
1 Affiliated Providers are affiliates and subsidiaries of KeyCorp, and
any organization that provides services to the Victory Group.
11
<PAGE>
- --------------------------------------------------------------------------------
Investing with Victory (continued)
- --------------------------------------------------------------------------------
Shareholder Servicing Plan
The Fund has adopted a Shareholder Servicing Plan. The shareholder servicing
agent performs a number of services for its customers who are Fund shareholders.
It establishes and maintains accounts and records, processes dividend payments,
arranges for bank wires, assists in transactions, and changes account
information. For these services, the Fund pays a fee at an annual rate of up to
0.25% of its average daily net assets. The Fund may enter into agreements with
various shareholder servicing agents, including KeyBank National Association and
its affiliates, other financial institutions, and securities brokers. The Fund
may pay a servicing fee to broker-dealers and others who sponsor "no transaction
fee" or similar programs for the purchase of shares. Shareholder servicing
agents may waive all or a portion of their fee periodically.
Distribution Plan
In accordance with Rule 12b-1 under the Investment Company Act of 1940, Victory
has adopted a Distribution and Service Plan for the Fund under which the Fund
does not pay any expenses.
- --------------------------------------------------------------------------------
How to Buy Shares
- --------------------------------------------------------------------------------
You can buy shares in a number of different ways. All you need to do to get
started is to fill out an application. The minimum initial investment required
to open an account is $500 ($100 for IRAs), with additional investments of at
least $25. There is no minimum investment required to open an account or for
additional investments for SIMPLE IRAs. You can send in your payment by check,
wire transfer, exchange from another Victory Fund, or through arrangements with
your Investment Professional. Sometimes an Investment Professional will charge
you for these services. Their fee will be in addition to, and unrelated to, the
fees and expenses charged by the Fund.
If you buy shares directly from the Fund and your investment is received and
accepted by 4:00 p.m. Eastern Time or the close of trading on the NYSE
(whichever time is earlier), your purchase will be processed the same day using
that day's share price.
Make your check payable to: The Victory Funds
Keep the following addresses handy for purchases, exchanges, or redemptions:
By Regular U.S. Mail
Send completed Account Applications with your check, bank draft, or money order
to:
The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
12
<PAGE>
- --------------------------------------------------------------------------------
How to Buy Shares (continued)
- --------------------------------------------------------------------------------
By Overnight Mail
Use the following address ONLY for overnight packages.
The Victory Funds
c/o Boston Financial Data Services
66 Brooks Drive
Braintree, MA 02184
PHONE: 800-539-FUND
By Wire
The Transfer Agent does not charge a wire fee, but your originating bank may
charge a fee. Always call the Transfer Agent at 800-539-FUND BEFORE wiring
funds to obtain a confirmation number.
The Victory Funds
State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA Account #9905-201-1
(insert account number, name, and confirmation number assigned by the Transfer
Agent)
By Telephone: 800-539-FUND (800-539-3863)
If you would like to make additional investments after your account is
established, use the Investment Stub attached to your confirmation statement and
send it with your check to the address indicated.
ACH
After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic member banks may be used. It takes
about 15 days to set up an ACH account. Currently, the Fund does not charge a
fee for ACH transfers.
Statements and Reports
You will receive a periodic statement reflecting any transactions that affect
the balance or registration of your account. You will receive a confirmation
after any purchase, exchange, or redemption. If your account has been set up by
an Investment Professional, Fund activity will be detailed in that
account's statements. Share certificates are not issued. Twice a year, you will
receive the financial reports of the Fund. By January 31 of each year, you will
be mailed an IRS form reporting distributions for the previous year, which also
will be filed with the IRS.
13
<PAGE>
- --------------------------------------------------------------------------------
How to Buy Shares (continued)
- --------------------------------------------------------------------------------
Systematic Investment Plan
To enroll in the Systematic Investment Plan, you should check this box on the
Account Application. We will need your bank information and the amount and
frequency of your investment. You can select monthly, quarterly, semi-annual, or
annual investments. You should attach a voided personal check so the proper
information can be obtained. You must first meet the minimum investment
requirement of $500 ($100 for IRA accounts), then we will make automatic
withdrawals of the amount you indicate ($25 or more) from your bank account and
invest it in shares of the Fund.
Retirement Plans
You can use the Fund as part of your retirement portfolio. Your Investment
Professional can set up your new account under one of several tax-deferred
retirement plans. Please contact your Investment Professional or the Fund for
details regarding an IRA or other retirement plan that works best for your
financial situation.
- --------------------------------------------------------------------------------
All purchases must be made in U.S. dollars and drawn on U.S. banks. The
Transfer Agent may reject any purchase order in its sole discretion. If
your check is returned for any reason, you will be charged for any
resulting fees and/or losses. Third party checks will not be accepted.
You may only buy or exchange into fund shares legally available in your
state. If your account falls below $500 ($100 for IRA accounts), we may
ask you to re-establish the minimum investment. If you do not do so
within 60 days, we may close your account and send you the value of
your account.
- --------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
How to Exchange Shares
- --------------------------------------------------------------------------------
You can obtain a list of funds available for exchange by calling 800-539-FUND
You can sell shares of one fund of the Victory Portfolios to buy shares of the
same class of any other. This is considered an exchange.
You can exchange shares of the Fund by writing the Transfer Agent or calling
800-539-FUND. When you exchange shares of the Fund, you should keep the
following in mind:
o Shares of the Fund selected for exchange must be available for sale in
your state of residence.
o The Fund whose shares you would like to exchange and the fund whose
shares you want to buy must offer the exchange privilege.
o Holders of Class G Shares who acquired their shares as a result of the
reorganization of the Gradison Funds into the Victory Funds can
exchange into Class A Shares of any Victory Fund that does not offer
Class G Shares without paying a sales charge.
o If you acquire Class A Shares of the Fund as a result of an exchange,
you pay the percentage-point difference, if any, between the Fund's
sales charge and any sales charge you have previously paid in
connection with the shares you are exchanging. For example, if you
acquire Class A Shares of the Fund as a result of an exchange from
another fund in the Victory Group that has a 2.00% sales charge, you
would pay the 3.75% difference in sales charge.
o On certain business days, such as Veterans Day and Columbus Day, the
Federal Reserve Bank of Cleveland is closed. On those days, exchanges
to or from a money market fund will be processed on the exchange date,
with the corresponding purchase or sale of the money market fund shares
being effected on the next business day.
o You must meet the minimum purchase requirements for the fund you buy by
exchange.
o The registration and tax identification numbers of the two accounts
must be identical.
o You must hold the shares you buy when you establish your account for at
least seven days before you can exchange them; after the account is
open seven days, you can exchange shares on any business day.
o The Fund may refuse any exchange purchase request if the Adviser
determines that the request is associated with a market timing
strategy. The Fund may terminate or modify the exchange privilege at
any time on 30 days' notice to shareholders.
o Before exchanging, read the prospectus of the fund you wish to purchase
by exchange.
o An exchange of Fund shares constitutes a sale for tax purposes.
15
<PAGE>
- --------------------------------------------------------------------------------
How to Sell Shares
- --------------------------------------------------------------------------------
---------------------------------------------------------------------
There are a number of convenient ways to sell your shares. You can
use the same mailing addresses listed for purchases.
---------------------------------------------------------------------
If your request is received in good order by 4:00 p.m. Eastern Time or the close
of trading on the NYSE (whichever time is earlier), your redemption will be
processed the same day.
By Telephone
The easiest way to sell shares is by calling 800-539-FUND. When you fill out
your original application, be sure to check the box marked "Telephone
Authorization." Then when you are ready to sell, call and tell us which one of
the following options you would like to use:
o Mail a check to the address of record;
o Wire funds to a domestic financial institution;
o Mail a check to a previously designated alternate address; or
o Electronically transfer your redemption via the Automated Clearing
House (ACH).
The Transfer Agent records all telephone calls for your protection and takes
measures to verify the identity of the caller. If the Transfer Agent properly
acts on telephone instructions and follows reasonable procedures to ensure
against unauthorized transactions, neither Victory, its servicing agents, the
Adviser, nor the Transfer Agent will be responsible for any losses. If the
Transfer Agent does not follow these procedures, it may be liable to you for
losses resulting from unauthorized instructions.
If there is an unusual amount of market activity and you cannot reach the
Transfer Agent or your Investment Professional by telephone, consider placing
your order by mail.
By Mail
Use the Regular U.S. Mail or Overnight Mail Address to sell shares. Send us a
letter of instruction indicating your Fund account number, amount of redemption,
and where to send the proceeds. A signature guarantee is required for the
following redemption requests:
o Redemptions over $10,000;
o Your account registration has changed within the last 15 days;
o The check is not being mailed to the address on your account;
o The check is not being made payable to the owner of the account;
16
<PAGE>
- --------------------------------------------------------------------------------
How to Sell Shares (continued)
- --------------------------------------------------------------------------------
o The redemption proceeds are being transferred to another Victory Group
account with a different registration; or
o The check or wire is being sent to a different bank account.
You can get a signature guarantee from a financial institution such as a bank,
broker-dealer, credit union, clearing agency, or savings association.
By Wire
If you want to receive your proceeds by wire, you must establish a Fund
account that will accommodate wire transactions. If you call by 4:00 p.m.
Eastern time or the close of trading on the NYSE (whichever time is earlier),
your funds will be wired on the next business day.
By ACH
Normally, your redemption will be processed on the same day , but will be
processed on the next day if received after 4:00 p.m. Eastern Time or the close
of trading on the NYSE (whichever time is earlier). It will be transferred by
ACH as long as the transfer is to a domestic bank.
Systematic Withdrawal Plan
If you check this box on the Account Application, we will send monthly,
quarterly, semi-annual, or annual payments to the person you designate. The
minimum withdrawal is $25, and you must have a balance of $5,000 or more. If
the payment is to be sent to an account of yours, we will need a voided personal
check to activate this feature. If the payment is to be made to an address
different from your account address, we will need a signature guaranteed letter
of instruction. You should be aware that your account eventually may be depleted
and that each withdrawal will be a taxable transaction. However, you cannot
automatically close your account using the Systematic Withdrawal Plan. If your
balance falls below $500 ($100 for IRAs), we may ask you to bring the account
back to the minimum balance. If you decide not to increase your account to the
minimum balance, your account may be closed and the proceeds mailed to you.
Additional Information about Redemptions
o Redemption proceeds from the sale of shares purchased by a check may be
held until the purchase check has cleared, which may take up to 15
days.
o The Fund may suspend your right to redeem your shares in the following
circumstances:
o During non-routine closings of the NYSE;
o When the Securities and Exchange Commission (SEC)
determines either that trading on the NYSE is restricted
or that an emergency prevents the sale or valuation of the
Fund's securities; or
o When the SEC orders a suspension to protect the Fund's
shareholders.
o The Fund will pay redemptions by any one shareholder during any 90-day
period in cash up to the lesser of $250,000 or 1% of the Fund's net
assets. The Fund reserves the right to pay the remaining portion "in
kind," that is, in portfolio securities rather than cash.
17
<PAGE>
- --------------------------------------------------------------------------------
Organization and Management of the Fund
- --------------------------------------------------------------------------------
We want you to know who plays what role in your investment and how they are
related. This section discusses the organizations employed by the Fund to
provide services to their shareholders. Each of these organizations is paid a
fee for its services.
About Victory
The Fund is a member of the Victory Funds, a group of more than 30 distinct
investment portfolios. The Board of Trustees of Victory has the overall
responsibility for the management of the Fund.
The Investment Adviser and Sub-Administrator
The Fund has an Advisory Agreement which is one of its most important contracts.
Key Asset Management Inc. (KAM), a New York corporation registered as an
investment adviser with the SEC, is the Adviser to the Fund. KAM, a subsidiary
of KeyCorp, oversees the operations of the Fund according to investment policies
and procedures adopted by the Board of Trustees. Affiliates of the Adviser
manage approximately $76 billion for a limited number of individual and
institutional clients. KAM's address is 127 Public Square, Cleveland, Ohio
44114.
During the fiscal year ended October 31, 1999, KAM was paid an advisory fee
at an annual rate of 0.50% of the Fund's average daily net assets.
Under a Sub-Administration Agreement, BISYS Fund Services Ohio, Inc., the
Fund's administrator, pays KAM a fee at the annual rate of up to 0.05% of the
Fund's average daily net assets to perform some of the administrative duties for
the Fund.
Portfolio Management
Trenton T. Fletcher is the portfolio manager of the Fund, a position he has held
since January 1998. A Portfolio Manager and Director of KAM, he has been
working in the fixed income markets at KAM since 1989.
18
<PAGE>
Organization and Management of the Fund (continued)
OPERATIONAL STRUCTURE OF THE FUND
Trustees Adviser
----------------------------------------------------
Shareholders
Financial Services Firms and
their Investment Professionals
----------------------------------------------------
Advise current and prospective
shareholders on their Fund investments.
----------------------------------------------------
Transfer Agent/Servicing Agent
----------------------------------------------------
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
Handles services such as record-keeping,
statements, processing of buy and sell
requests, distribution of dividends,
and servicing of shareholder accounts.
----------------------------------------------------
- --------------------------------------------------------------------------------
Administrator, Distributor,
and Fund Accountant Custodian
- -------------------------------------------- -------------------------------
BISYS Fund Services Key Trust Company of Ohio, N.A.
and its affiliates 127 Public Square
3435 Stelzer Road Cleveland, OH 44114
Columbus, OH 43219
<PAGE>
Markets the Fund, distributes share Provides for the safekeeping of
Investment Professionals, calculates the Fund's investments and cash,
the value of shares. As Administrator, and settles through and
handles the day-to-day activities trades made by the Fund.
of the Fund.
- ------------------------------------------------
Sub-Administrator
- ------------------------------------------------
Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114
Performs certain
sub-administrative services.
- ------------------------------------------------
The Fund is supervised by the Board of Trustees, which monitor the services
provided to investors.
19
<PAGE>
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
Some additional information you should know about the Fund.
Share Classes
The Fund currently offers only the class of shares described in this Prospectus.
Performance
The Victory Funds may advertise the performance of the Fund by comparing it to
other mutual funds with similar objectives and policies. Performance information
also may appear in various publications. Any fees charged by Investment
Professionals may not be reflected in these performance calculations.
Advertising information may include the yield and average annual total return of
the Fund calculated on a compounded basis for specified periods of time. Yield
and total return information will be calculated according to rules established
by the SEC. Such information may include performance rankings and similar
information from independent organizations, such as Lipper, Inc., and industry
publications such as Morningstar, Inc., Business Week, or Forbes. You also
should see the Fund's "Investment Performance" section.
Shareholder Communications
In order to eliminate duplicate mailings to an address at which two or more
shareholders with the same last name reside, the Fund will send only one copy of
any shareholder reports, prospectuses, and their supplements, unless you have
instructed us to the contrary. You may request that the Fund send these
documents to each shareholder individually by calling the Fund at 800-539-FUND
(800-539-3863).
- --------------------------------------------------------------------------------
If you would like to receive additional copies of any materials, please call the
Fund at 800-539-FUND.
- --------------------------------------------------------------------------------
20
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights Government Mortgage Fund
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information shows the
results of an investment in one share of the Fund. The total returns in the
table represent the rate that an investor would have earned on an investment in
the Fund (assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Class A Shares
of the Fund. The financial highlights for the five fiscal years ended October
31, 1999 were audited by PricewaterhouseCoopers LLP, whose report, along with
the financial statements of the Fund, are included in the Fund's annual report,
which is available by calling the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
Oct. 31, 1999 Oct. 31, 1998 Oct. 31, 1997 Oct. 31, 1996 Oct. 31, 1995
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 11.07 $ 10.93 $ 10.76 $ 10.86 $ 10.33
- ---------------------------------------------------- -------------- -------------- -------------- -------------- --------------
Investment Activities
Net investment income 0.62 0.63 0.69 0.70 0.72
Net realized and unrealized gains (losses)
from investments (0.47) 0.14 0.16 (0.12) 0.62
- ---------------------------------------------------- -------------- -------------- -------------- -------------- --------------
Total from Investment Activities 0.15 0.77 0.85 0.58 1.34
- ---------------------------------------------------- -------------- -------------- -------------- -------------- --------------
Distributions
Net investment income (0.61) (0.63) (0.68) (0.67) (0.71)
In excess of net realized gains -- -- -- -- (0.08)
Tax return of capital -- -- (b) (0.01) (0.02)
- ---------------------------------------------------- -------------- -------------- -------------- -------------- --------------
Total Distributions (0.61) (0.63) (0.68) (0.68) (0.81)
- ---------------------------------------------------- -------------- -------------- -------------- -------------- --------------
Net Asset Value, End of Period $ 10.61 $ 11.07 $ 10.93 $ 10.76 $ 10.86
- ---------------------------------------------------- -------------- -------------- -------------- -------------- --------------
Total Return (excludes sales charges) 1.38% 7.23% 8.22% 5.54% 13.55%
Ratios/Supplemental Data:
Net Assets, End of Period (000) $99,326 $105,085 $103,761 $125,992 $136,103
Ratio of expenses to average net assets 0.99% 0.88% 0.85% 0.89% 0.77%
Ratio of net investment income to average net 5.67% 5.72% 6.32% 6.46% 6.81%
assets
Ratio of expenses to average net assets* 1.08% 1.01% (a) 0.90% 0.79%
Ratio of net investment income to average net 5.58% 5.59% (a) 6.45% 6.80%
assets*
Portfolio turnover 274% 296% 115% 127% 59%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) There were no voluntary fee reductions during the period.
(b) Amount rounds to less than $0.01.
21
<PAGE>
This page is intentionally left blank.
22
<PAGE>
The Victory Funds
127 Public Square
OH-01-27-1612
Cleveland, OH 44114
If you would like a free copy of any of the following documents or would like to
request other information regarding the Fund, you can call or write the Fund or
your Investment Professional.
Statement of Additional Information (SAI)
Contains more details describing the Fund and its policies. The SAI has been
filed with the Securities and Exchange Commission (SEC), and is incorporated by
reference in this Prospectus.
Annual and Semi-annual Reports
Describes the Fund's performance, lists portfolio holdings, and discusses market
conditions and investment strategies that significantly affected the Fund's
performance during its last fiscal year.
How to Obtain Information
By telephone: Call Victory Funds at 800-539-FUND (800-539-3863).
By mail: The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
You also may obtain copies of materials from the SEC's Public Reference Room in
Washington, D.C. (Call 1-202-942-8090 for information on the operation of the
SEC's Public Reference Room.)
Copies of this information may be obtained, after paying a duplicating fee,
by electronic request at the following e-mail address: [email protected], or by
writing the SEC's Public Reference Section, Washington, D.C.
20459-0102.
On the Internet: Text only versions of Fund documents can be viewed on-line or
downloaded from the SEC at http://www.sec.gov or from the Victory Funds' website
at http: //www.victoryfunds.com.
If you would like to receive copies of the annual and semi-annual reports and/or
the SAI at no charge, please call the Fund at 800-539-FUND (800-539-3863).
- --------------------------------------------------------------------------------
The securities described in this Prospectus and the SAI are not offered in any
state in which they may not lawfully be sold. No sales representative, dealer,
or other person is authorized to give any information or make any representation
other than those contained in this Prospectus and the SAI.
- --------------------------------------------------------------------------------
Investment Company Act File Number 811-4852
VF-GMF-PRO (2/00)
<PAGE>
[GRAPHIC OMITTED]
Victory Funds
PROSPECTUS
Ohio Regional Stock Fund
Class A Shares
As with all mutual funds, the Securities and Exchange
Commission has not approved or disapproved the Fund's
securities or determined whether this
Prospectus is accurate or complete. Any
representation to the contrary
is a criminal offense.
Call Victory at: 800-539-FUND (800-539-3863)
or visit the Victory Funds' website at: www.victoryfunds.com
February 28, 2000
<PAGE>
TABLE OF CONTENTS
RISK/RETURN SUMMARY FOR THE FUND 1
An analysis which includes the investment objective, principal strategies,
principal risks, performance and expenses of the Fund.
INVESTMENTS 4
RISK FACTORS 4
SHARE PRICE 5
DIVIDENDS, DISTRIBUTIONS, AND TAXES 6
INVESTING WITH VICTORY 8
o How to Buy Shares 10
o How to Exchange Shares 13
o How to Sell Shares 14
ORGANIZATION AND MANAGEMENT OF THE FUND 16
ADDITIONAL INFORMATION 18
FINANCIAL HIGHLIGHTS 19
Shares of the Fund are:
o Not insured by the FDIC;
o Not deposits or other obligations of, or guaranteed by KeyBank, any of
its affiliates, or any other bank;
o Subject to possible investment risks, including possible loss of the
amount invested.
<PAGE>
- --------------------------------------------------------------------------------
OHIO REGIONAL STOCK FUND Risk/Return Summary
- --------------------------------------------------------------------------------
Investment Objective
The Fund seeks to provide capital appreciation.
Principal Investment Strategies
The Fund pursues its investment objective by investing at least 80% of its total
assets in equity securities issued by companies headquartered in the State of
Ohio.
In making investment decisions, Key Asset Management Inc., the Fund's investment
adviser (KAM or the Adviser) analyzes cash flow, book value, dividend growth
potential, quality of management, earnings, and capitalization. The Fund looks
at any information that reflects the potential for future earnings growth. The
Fund invests in nationally recognized companies and lesser-known companies that
may have smaller capitalization, but also the potential for growth.
Under normal market conditions, the Fund will invest at least 80% of its total
assets in common stocks and securities convertible into common stocks.
There is no guarantee that the Fund will achieve its objectives.
Proposed Reorganization
The Board of Trustees of the Victory Portfolios has approved a Plan of
Reorganization and Liquidation for the Fund. At a special meeting, anticipated
to be held in March 2000, shareholders of the Fund will be asked to approve the
transfer of the assets of their Fund into Class A Shares of the Victory
Established Value Fund. If the Reorganization of the Fund is approved,
shareholders will exchange their Fund shares for Class A Shares of the Victory
Established Value Fund, and the Fund will no longer be available for purchases,
exchanges or redemptions. Shareholders will receive shares of the Established
Value Fund with the same value as the total value of their Fund shares. (In
other words, a shareholder who owns $1,000 worth of Class A Shares of the Fund
will receive $1,000 worth of Class A Shares of the Victory Established Value
Fund.) The exchange will not be subject to any sales charges and will not be
taxable. The Victory Established Value Fund has the same investment adviser and
service providers as the Fund. If you do not wish to participate in the
reorganization, you must redeem your shares by 4:00 p.m. on May 5, 2000.
Principal Risks
You may lose money by investing in the Fund. The Fund is subject to the
following principal risks, more fully described in "Risk Factors." The Fund's
net asset value, yield and/or total return may be adversely affected if any of
the following occurs:
o The market value of securities acquired by the Fund declines.
o Growth stocks fall out of favor because the companies' earnings growth
does not meet expectations.
o Value stocks fall out of favor relative to growth stocks.
<PAGE>
o The portfolio manager does not execute the Fund's principal investment
strategies effectively.
o A company's earnings do not increase as expected.
- --------------------------------------------------------------------------------
OHIO REGIONAL STOCK FUND Risk/Return Summary
- --------------------------------------------------------------------------------
Since the Fund concentrates its investments in the State of Ohio, its assets may
be at greater risk because of economic, political, or regulatory risks
associated with the state. The Fund is subject to additional risks because it
concentrates its investments in a single geographic area.
An investment in the Fund is not a deposit of KeyBank or any of its affiliates
and is not insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency.
By itself, the Fund does not constitute a complete investment plan and should be
considered a long-term investment for investors who can afford to weather
changes in the value of their investment.
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Fund by showing changes in its performance for various time
periods ending December 31. The figures shown in the bar chart and table assume
reinvestment of dividends and distributions.
Sales loads are not reflected on the bar chart (or highest and lowest returns
below) and if they were reflected, returns would be lower than those shown.
1990 -18.50%
1991 58.65%
1992 10.88%
1993 16.58%
1994 0.05%
1995 26.43%
1996 20.85%
1997 29.66%
1998 -1.76%
1999 -10.66%
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter was
26.20% (quarter ending March 31, 1991) and the lowest return for a quarter was
25.47% (quarter ending September 30, 1990).
3
<PAGE>
- --------------------------------------------------------------------------------
OHIO REGIONAL STOCK FUND Risk/Return Summary
- --------------------------------------------------------------------------------
The table shows how the average annual total returns for Class A Shares of the
Ohio Regional Stock Fund for one year, five years and ten years, including the
maximum sales charges, compare to those of two broad-based market indices.
- --------------------------------------------------------------------------------
Average Annual Total Returns
(for the Periods ended December 31,
1999) Past One Year Past 5 Years Past 10 Years
Class A -15.78% 10.39% 10.61%
S&P 500 Index (1)(3) 21.04% 28.55% 18.21%
S&P 400 Mid-Cap Index (2)(3) 14.72% 23.05% 17.32%
- --------------------------------------------------------------------------------
1 The Standard & Poor's 500 Stock Index is a broad-based unmanaged index
that represents the general performance of domestically traded common
stocks of mid- to large-size companies.
2 The Standard & Poor's 400 Mid-Cap Index is a broad-based unmanaged index
that represents the general performance of domestically traded common
stocks of mid-size companies.
3 Index returns do not include any brokerage commissions, sales charges, or
other fees. It is not possible to invest directly in an index.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
- --------------------------------------------------------------------------------
Shareholder Transaction Expenses (paid directly from your
investment) (1) Class A
Maximum Sales Charge Imposed on Purchases (as a percentage
of offering price) 5.75%
Maximum Deferred Sales Charge (as a percentage of the lower
of purchase or sale price) NONE (2)
Maximum Sales Charge Imposed on Reinvested Dividends NONE
Redemption Fees NONE
Exchange Fees NONE
Annual Fund Operating Expenses (deducted from Fund assets.)
Management Fees 0.75%
Distribution (12b-1) Fees 0.00%
Other Expenses (includes a shareholder servicing fee of 0.25%) 0.73%
Total Fund Operating Expenses 1.48%
- --------------------------------------------------------------------------------
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 Except for non-IRA tax deferred retirement accounts, there is no initial
sales charge on purchases of $1 million or more for Class A Shares.
However, if you sell any of such Class A Shares within one year, you will
be charged a contingent deferred sales charge (CDSC) of 1.00%. If you sell
any of such Class A Shares within two years, you will be charged a CDSC of
0.50%.
EXAMPLE
The following Example is designed to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods shown and then redeem
all of your shares at the end of those periods. The Example also assumes that
your investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
4
<PAGE>
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
Class A $717 $1,016 $1,336 $2,242
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
Investments
- --------------------------------------------------------------------------------
Under normal market conditions, the Fund purchases equity securities, including
common stock, preferred stock and securities that are convertible or
exchangeable into common stock of U.S. corporations.
For cash management or for temporary defensive purposes in response to market
conditions, the Fund may hold all or a portion of its assets in cash or
short-term money market instruments. This may reduce the benefit from any
upswing in the market and may cause the Fund to fail to meet its investment
objective.
For a more complete description of the types of securities in which the Fund can
invest, see the Statement of Additional Information (SAI).
- --------------------------------------------------------------------------------
Risk Factors
- --------------------------------------------------------------------------------
------------------------------------------------------------------
By matching your investment objective with an acceptable level of
risk, you can create your own customized investment plan.
------------------------------------------------------------------
This Prospectus describes the principal risks that you may assume as an investor
in the Fund.
The Fund is subject to the following principal risks.
General risks:
o Market risk is the risk that the market value of a security may fluctuate,
depending on the supply and demand for that type of security. As a result
of this fluctuation, a security may be worth more or less than the price
the Fund originally paid for the security, or more or less than the
security was worth at an earlier time. Market risk may affect a single
issuer, an industry, a sector of the economy, or the entire market and is
common to all investments.
o Manager risk is the risk that the Fund's portfolio manager may implement
its principal investment strategy in a way that does not produce the
intended result.
Risk associated with investing in equity securities:
o Equity risk is the risk that the value of the security will fluctuate in
response to changes in earnings or other conditions affecting the issuer's
profitability. Unlike debt securities, which have preference to a
company's assets in case of liquidation, equity securities are entitled to
the residual value after the company meets its other obligations. For
example, in the event of bankruptcy, holders of debt securities have
priority over holders of equity securities to a company's assets.
6
<PAGE>
Risk associated with investing in the securities of a single state:
o Concentration risk is the risk that only a limited number of high-quality
securities of a particular type may be available. Concentration risk is
greater for funds that primarily invest in the securities of a single
state. Concentration risk may result in the Fund being invested in
securities that are related in such a way that changes in economic,
business, or political circumstances that would normally affect one
security could also affect other securities within that particular segment
of the market.
-------------------------------------------------------------------------
It is important to keep in mind one basic principle of investing: the
greater the risk, the greater the potential reward. The reverse is also
generally true: the lower the risk, the lower the potential reward.
-------------------------------------------------------------------------
--------------------------------------------------------
An investment in the Fund is not a complete investment
program.
--------------------------------------------------------
- --------------------------------------------------------------------------------
Share Price
- --------------------------------------------------------------------------------
The Fund calculates its share price, called its "net asset value" (NAV), each
business day at 4:00 p.m. Eastern Time or at the close of trading on the New
York Stock Exchange Inc. (NYSE), whichever time is earlier. You may buy,
exchange, and sell your shares on any business day at a price that is based on
the NAV that is calculated after you place your order. A business day is a day
on which the NYSE is open.
The Fund values its investments based on market value. When market quotations
are not readily available, the Fund values its investments based on fair value
methods approved by the Board of Trustees of the Victory Portfolios. The Fund
calculates its NAV by adding up the total value of its investments and other
assets, subtracting its liabilities, and then dividing that figure by the number
of outstanding shares.
Total Assets- Liabilities
NAV = ------------------------
Number of Shares Outstanding
You can find the Fund's net asset value each day in The Wall Street Journal and
other newspapers. Newspapers do not normally publish fund information until a
fund reaches a specific number of shareholders or level of assets.
- --------------------------------------------------------------------------------
The daily NAV is useful to you as a shareholder because the NAV, multiplied by
the number of Fund shares you own gives you the value of your investment.
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes
Buying a Dividend. You should check the Fund's distribution schedule before you
invest. If you buy shares of the Fund shortly before it makes a distribution
some of your investment may come back to you as a taxable distribution.
- --------------------------------------------------------------------------------
As a shareholder, you are entitled to your share of net income and capital gains
on the Fund's investments. The Fund passes its earnings along to investors in
the form of dividends. Dividend distributions are the net income earned on
investments after expenses. The Fund will distribute short-term gains, as
necessary, and if the Fund makes a long-term capital gain distribution, it is
normally paid once a year. As with any investment, you should consider the tax
consequences of an investment in the Fund.
Ordinarily, the Fund declares and pays dividends quarterly.
Distributions can be received in one of the following ways.
o Reinvestment Option
You can have distributions automatically reinvested in additional shares
of the Fund. If you do not indicate another choice on your Account
Application, you will be assigned this option automatically.
o Cash Option
A check will be mailed to you no later than seven days after the dividend
payment date.
o Income Earned Option
You can automatically reinvest your dividends in additional shares
of the Fund and have your capital gains paid in cash, or reinvest
capital gains and have your dividends paid in cash.
o Directed Dividends Option
You can automatically reinvest distributions in the same class of
shares of another fund of the Victory Group. If you reinvest your
distributions in a different class of another fund, you may pay a
sales charge on the reinvested distributions.
o Directed Bank Account Option
In most cases, you can automatically transfer distributions to your
bank checking or savings account. Under normal circumstances, the
Transfer Agent will transfer your distributions within seven days of
the dividend payment date. The bank account must have a registration
identical to that of your Fund account.
8
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
Important Information about Taxes
-------------------------------------------------------------------
The tax information in this Prospectus is provided as general
information. You should consult your own tax adviser about the tax
consequences of an investment in the Fund.
-------------------------------------------------------------------
The Fund pays no federal income tax on the earnings and capital gains it
distributes to shareholders.
o Ordinary dividends from the Fund are taxable as ordinary income; dividends
from the Fund's long-term capital gains are taxable as long-term capital
gain.
o Dividends are treated in the same manner for federal income tax purposes
whether you receive them in cash or in additional shares. They also may be
subject to state and local taxes.
o Dividends from the Fund that are attributable to interest on certain U.S.
government obligations may be exempt from certain state and local income
taxes. The extent to which ordinary dividends are attributable to U.S.
government obligations will be provided with tax statements you receive
from the Fund.
o An exchange of the Fund's shares for shares of another fund will be
treated as a sale. When you sell or exchange shares of the Fund, you must
recognize any gain or loss.
o Certain dividends paid to you in January will be taxable as if they had
been paid to you the previous December.
o Tax statements will be mailed from the Fund every January showing the
amounts and tax status of distributions made to you.
o Because your tax treatment depends on your purchase price and tax
position, you should keep your regular account statements for use in
determining your tax.
o You should review the more detailed discussion of federal income tax
considerations in the SAI.
9
<PAGE>
- --------------------------------------------------------------------------------
Investing With Victory
- --------------------------------------------------------------------------------
All you need to do to get started is to fill out an application.
If you are looking for a convenient way to open an account or to add money to an
existing account, Victory can help. The sections that follow will serve as a
guide to your investments with Victory. The following sections will describe how
to open an account, how to access information on your account, and how to buy,
exchange, and sell shares of the Fund. We want to make it simple for you to do
business with us. If you have questions about any of this information, please
call your Investment Professional or one of our customer service representatives
at 800-539-FUND. They will be happy to assist you.
--------------------------------------------------------------------------
An Investment Professional is an investment consultant, salesperson,
financial planner, investment adviser, or trust officer who provides you
with investment information.
--------------------------------------------------------------------------
Calculation of Sales Charges -- Class A
The Fund described in this prospectus offers Class A Shares, which have a
front-end sales charge of 5.75%. Please look at the "Fund Expenses" section to
find the sales charge.
Class A Shares are sold at their public offering price, which is the NAV plus
the applicable initial sales charge. The sales charge as a percentage of your
investment decreases as the amount you invest increases. The current sales
charge rates are listed below.
- --------------------------------------------------------------------------------
Your Investment in the Fund: Sales Charge as a % of Sales Charge as a % of
Offering Price Your Investment
Up to $49,999 5.75% 6.10%
$50,000 up to $99,999 4.50% 4.71%
$100,000 up to $249,999 3.50% 3.63%
$250,000 up to $499,999 2.50% 2.56%
$500,000 up to $999,999 2.00% 2.04%
$1,000,000 and above* 0.00% 0.00%
- --------------------------------------------------------------------------------
* Except as indicated in the last sentence of this note, there is no initial
sales charge on purchases of $1 million or more. However, a contingent
deferred sales charge (CDSC) of up to 1.00% will be charged to the
shareholder if any of such shares are redeemed in the first year after
purchase, or at 0.50% within two years of the purchase. This charge will
be based on either the cost of the shares or NAV at the time of
redemption, whichever is lower. There will be no CDSC on reinvested
distributions. The initial sales charge exemption for investments of $1
million or more does not apply to tax deferred retirement accounts (except
IRA accounts); the sales charge on investments by such tax deferred
retirement accounts of $1 million or more is the same as for investments
between $500,000 and $999,999.
For historical expense information on Class A shares, see the "Financial
Highlights" at the end of this Prospectus.
10
<PAGE>
- --------------------------------------------------------------------------------
Investing with Victory (continued)
- --------------------------------------------------------------------------------
Sales Charge Reductions and Waivers
There are several ways you can combine multiple purchases in the Victory Funds
and take advantage of reduced sales charges.
You may qualify for reduced sales charges in the following cases:
1. A Letter of Intent lets you buy Class A Shares of the Fund over a
13-month period and receive the same sales charge as if all shares
had been purchased at one time. You must start with a minimum
initial investment of 5% of the total amount.
2. Rights of Accumulation allow you to add the value of any Class A
Shares you already own to the amount of your next Class A investment
for purposes of calculating the sales charge at the time of
purchase.
3. You can combine Class A Shares of multiple Victory Funds (excluding
funds sold without a sales charge) for purposes of calculating the
sales charge. The combination privilege also allows you to combine
the total investments from the accounts of household members of your
immediate family (spouse and children under 21) for a reduced sales
charge at the time of purchase.
4. Waivers for certain investors:
a. Current and retired Fund Trustees, directors, trustees,
employees, and family members of employees of KeyCorp or
"Affiliated Providers "2 , and dealers who have an agreement
with the Distributor and any trade organization to which the
Adviser or the Administrator belong.
b. Investors who buy shares for trust or other advisory accounts
established with KeyCorp or its affiliates.
c. Investors in Class A Shares who reinvest the proceeds from a
liquidation distribution of Class A shares held in a deferred
compensation plan, agency, trust, or custody account that was
maintained by KeyBank National Association or its affiliates,
the Victory Group, or invested in a fund of the Victory Group.
d. Investment Professionals who purchased Fund shares for
fee-based investment products or accounts, selling brokers,
and their sales representatives.
e. Purchase of shares in connection with financial institution
sponsored bundled omnibus retirement programs sponsored by
financial institutions that have entered into agreements with
the Fund's Distributor in connection with the operational
requirements of such programs.
f. Participants in tax-deferred retirement plans who purchased
shares pursuant to waiver provisions in effect prior to
December 15, 1999.
- --------
1 Affiliated Providers are affiliates and subsidiaries of KeyCorp, and any
organization that provides services to the Victory Group.
11
<PAGE>
- --------------------------------------------------------------------------------
Investing with Victory (continued)
- --------------------------------------------------------------------------------
Shareholder Servicing Plan
The Fund has adopted a Shareholder Servicing Plan. The shareholder servicing
agent performs a number of services for its customers who are Fund shareholders.
It establishes and maintains accounts and records, processes dividend payments,
arranges for bank wires, assists in transactions, and changes account
information. For these services, the Fund pays a fee at an annual rate of up to
0.25% of its average daily net assets. The Fund may enter into agreements with
various shareholder servicing agents, including KeyBank National Association and
its affiliates, other financial institutions, and securities brokers. The Fund
may pay a servicing fee to broker-dealers and others who sponsor "no transaction
fee" or similar programs for the purchase of shares. Shareholder servicing
agents may waive all or a portion of their fee periodically.
Distribution Plan
In accordance with Rule 12b-1 under the Investment Company Act of 1940, Victory
has adopted a Distribution and Service Plan for the Fund under which the Fund
does not pay any expenses.
- --------------------------------------------------------------------------------
How to Buy Shares
- --------------------------------------------------------------------------------
You can buy shares in a number of different ways. All you need to do to get
started is to fill out an application. The minimum initial investment required
to open an account is $500 ($100 for IRAs), with additional investments of at
least $25. There is no minimum investment required to open an account or for
additional investments for SIMPLE IRAs. You can send in your payment by check,
wire transfer, exchange from another Victory Fund, or through arrangements with
your Investment Professional. Sometimes an Investment Professional will charge
you for these services. Their fee will be in addition to, and unrelated to, the
fees and expenses charged by the Fund.
If you buy shares directly from the Fund and your investment is received and
accepted by 4:00 p.m. Eastern Time or the close of trading on the NYSE
(whichever time is earlier), your purchase will be processed the same day using
that day's share price.
Make your check payable to: The Victory Funds
Keep the following addresses handy for purchases, exchanges, or redemptions:
By Regular U.S. Mail
Send completed Account Applications with your check, bank draft, or money order
to:
The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
12
<PAGE>
- --------------------------------------------------------------------------------
How to Buy Shares (continued)
- --------------------------------------------------------------------------------
By Overnight Mail
Use the following address ONLY for overnight packages.
The Victory Funds
c/o Boston Financial Data Services
66 Brooks Drive
Braintree, MA 02184
PHONE: 800-539-FUND
By Wire
The Transfer Agent does not charge a wire fee, but your originating bank may
charge a fee. Always call the Transfer Agent at 800-539-FUND BEFORE wiring funds
to obtain a confirmation number.
The Victory Funds
State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA Account #9905-201-1
(insert account number, name, and confirmation number assigned by the Transfer
Agent)
By Telephone: 800-539-FUND (800-539-3863)
If you would like to make additional investments after your account is
established, use the Investment Stub attached to your confirmation statement and
send it with your check to the address indicated.
ACH
After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic member banks may be used. It takes
about 15 days to set up an ACH account. Currently, the Fund does not charge a
fee for ACH transfers.
Statements and Reports
You will receive a periodic statement reflecting any transactions that affect
the balance or registration of your account. You will receive a confirmation
after any purchase, exchange, or redemption. If your account has been set up by
an Investment Professional, Fund activity will be detailed in that account's
statements. Share certificates are not issued. Twice a year, you will receive
the financial reports of the Fund. By January 31 of each year, you will be
mailed an IRS form reporting distributions for the previous year, which also
will be filed with the IRS.
13
<PAGE>
- --------------------------------------------------------------------------------
How to Buy Shares (continued)
- --------------------------------------------------------------------------------
Systematic Investment Plan
To enroll in the Systematic Investment Plan, you should check this box on the
Account Application. We will need your bank information and the amount and
frequency of your investment. You can select monthly, quarterly, semi-annual, or
annual investments. You should attach a voided personal check so the proper
information can be obtained. You must first meet the minimum investment
requirement of $500 ($100 for IRA accounts), then we will make automatic
withdrawals of the amount you indicate ($25 or more) from your bank account and
invest it in shares of the Fund.
Retirement Plans
You can use the Fund as part of your retirement portfolio. Your Investment
Professional can set up your new account under one of several tax-deferred
retirement plans. Please contact your Investment Professional or the Fund for
details regarding an IRA or other retirement plan that works best for your
financial situation.
- --------------------------------------------------------------------------------
All purchases must be made in U.S. dollars and drawn on U.S. banks. The Transfer
Agent may reject any purchase order in its sole discretion. If your check is
returned for any reason, you will be charged for any resulting fees and/or
losses. Third party checks will not be accepted. You may only buy or exchange
into fund shares legally available in your state. If your account falls below
$500 ($100 for IRA accounts), we may ask you to re-establish the minimum
investment. If you do not do so within 60 days, we may close your account and
send you the value of your account.
- --------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
How to Exchange Shares
- --------------------------------------------------------------------------------
You can obtain a list of funds available for exchange by calling 800-539-FUND
You can sell shares of one fund of the Victory Portfolios to buy shares of the
same class of any other. This is considered an exchange.
You can exchange shares of the Fund by writing the Transfer Agent or calling
800-539-FUND. When you exchange shares of the Fund, you should keep the
following in mind:
o Shares of the Fund selected for exchange must be available for sale in
your state of residence.
o The Fund whose shares you would like to exchange and the fund whose shares
you want to buy must offer the exchange privilege.
o Holders of Class G Shares who acquired their shares as a result of the
reorganization of the Gradison Funds into the Victory Funds can exchange
into Class A Shares of any Victory Fund that does not offer Class G Shares
without paying a sales charge.
o If you acquire Class A Shares of the Fund as a result of an exchange, you
pay the percentage-point difference, if any, between the Fund's sales
charge and any sales charge you have previously paid in connection with
the shares you are exchanging. For example, if you acquire Class A Shares
of the Fund as a result of an exchange from another fund in the Victory
Group that has a 2.00% sales charge, you would pay the 3.75% difference in
sales charge.
o On certain business days, such as Veterans Day and Columbus Day, the
Federal Reserve Bank of Cleveland is closed. On those days, exchanges to
or from a money market fund will be processed on the exchange date, with
the corresponding purchase or sale of the money market fund shares being
effected on the next business day.
o You must meet the minimum purchase requirements for the fund you buy by
exchange.
o The registration and tax identification numbers of the two accounts must
be identical.
o You must hold the shares you buy when you establish your account for at
least seven days before you can exchange them; after the account is open
seven days, you can exchange shares on any business day.
o The Fund may refuse any exchange purchase request if the Adviser
determines that the request is associated with a market timing strategy.
The Fund may terminate or modify the exchange privilege at any time on 30
days' notice to shareholders.
o Before exchanging, read the prospectus of the fund you wish to purchase by
exchange.
o An exchange of Fund shares constitutes a sale for tax purposes.
15
<PAGE>
- --------------------------------------------------------------------------------
How to Sell Shares
- --------------------------------------------------------------------------------
---------------------------------------------------------------------
There are a number of convenient ways to sell your shares. You can
use the same mailing addresses listed for purchases.
---------------------------------------------------------------------
If your request is received in good order by 4:00 p.m. Eastern Time or the close
of trading on the NYSE (whichever time is earlier), your redemption will be
processed the same day.
By Telephone
The easiest way to sell shares is by calling 800-539-FUND. When you fill out
your original application, be sure to check the box marked "Telephone
Authorization." Then when you are ready to sell, call and tell us which one of
the following options you would like to use:
o Mail a check to the address of record;
o Wire funds to a domestic financial institution;
o Mail a check to a previously designated alternate address; or
o Electronically transfer your redemption via the Automated Clearing House
(ACH).
The Transfer Agent records all telephone calls for your protection and takes
measures to verify the identity of the caller. If the Transfer Agent properly
acts on telephone instructions and follows reasonable procedures to ensure
against unauthorized transactions, neither Victory, its servicing agents, the
Adviser, nor the Transfer Agent will be responsible for any losses. If the
Transfer Agent does not follow these procedures, it may be liable to you for
losses resulting from unauthorized instructions.
If there is an unusual amount of market activity and you cannot reach the
Transfer Agent or your Investment Professional by telephone, consider placing
your order by mail.
By Mail
Use the Regular U.S. Mail or Overnight Mail Address to sell shares. Send us a
letter of instruction indicating your Fund account number, amount of redemption,
and where to send the proceeds. A signature guarantee is required for the
following redemption requests:
o Redemptions over $10,000;
o Your account registration has changed within the last 15 days;
o The check is not being mailed to the address on your account;
o The check is not being made payable to the owner of the account;
o The redemption proceeds are being transferred to another Victory Group
account with a different registration; or
o The check or wire is being sent to a different bank account.
16
<PAGE>
- --------------------------------------------------------------------------------
How to Sell Shares (continued)
- --------------------------------------------------------------------------------
You can get a signature guarantee from a financial institution such as a bank,
broker-dealer, credit union, clearing agency, or savings association.
By Wire
If you want to receive your proceeds by wire, you must establish a Fund account
that will accommodate wire transactions. If you call by 4:00 p.m. Eastern time
or the close of trading on the NYSE (whichever time is earlier), your funds will
be wired on the next business day.
By ACH
Normally, your redemption will be processed on the same day , but will be
processed on the next day if received after 4:00 p.m. Eastern Time or the close
of trading on the NYSE (whichever time is earlier). It will be transferred by
ACH as long as the transfer is to a domestic bank.
Systematic Withdrawal Plan
If you check this box on the Account Application, we will send monthly,
quarterly, semi-annual, or annual payments to the person you designate. The
minimum withdrawal is $25, and you must have a balance of $5,000 or more. If
the payment is to be sent to an account of yours, we will need a voided personal
check to activate this feature. If the payment is to be made to an address
different from your account address, we will need a signature guaranteed letter
of instruction. You should be aware that your account eventually may be depleted
and that each withdrawal will be a taxable transaction. However, you cannot
automatically close your account using the Systematic Withdrawal Plan. If your
balance falls below $500 ($100 for IRA accounts), we may ask you to bring the
account back to the minimum balance. If you decide not to increase your account
to the minimum balance, your account may be closed and the proceeds mailed to
you.
Additional Information about Redemptions
o Redemption proceeds from the sale of shares purchased by a check may be
held until the purchase check has cleared, which may take up to 15 days.
o The Fund may suspend your right to redeem your shares in the following
circumstances:
o During non-routine closings of the NYSE;
o When the Securities and Exchange Commission (SEC) determines either
that trading on the NYSE is restricted or that an emergency prevents
the sale or valuation of the Fund's securities; or
o When the SEC orders a suspension to protect the Fund's shareholders.
o The Fund will pay redemptions by any one shareholder during any 90-day
period in cash up to the lesser of $250,000 or 1% of the Fund's net
assets. The Fund reserves the right to pay the remaining portion "in
kind," that is, in portfolio securities rather than cash.
17
<PAGE>
- --------------------------------------------------------------------------------
Organization and Management of the Fund
- --------------------------------------------------------------------------------
We want you to know who plays what role in your investment and how they are
related. This section discusses the organizations employed by the Fund to
provide services to their shareholders. Each of these organizations is paid a
fee for its services.
About Victory
The Fund is a member of the Victory Funds, a group of more than 30 distinct
investment portfolios. The Board of Trustees of Victory has the overall
responsibility for the management of the Fund.
The Investment Adviser and Sub-Administrator
The Fund has an Advisory Agreement which is one of its most important contracts.
Key Asset Management Inc. (KAM), a New York corporation registered as an
investment adviser with the SEC, is the Adviser to the Fund. KAM, a subsidiary
of KeyCorp, oversees the operations of the Fund according to investment policies
and procedures adopted by the Board of Trustees. Affiliates of the Adviser
manage approximately $76 billion for a limited number of individual and
institutional clients. KAM's address is 127 Public Square, Cleveland, Ohio
44114.
During the fiscal year ended October 31, 1999, KAM was paid an advisory fee at
an annual rate of 0.68% of the Fund's average daily net assets .
Under a Sub-Administration Agreement, BISYS Fund Services Ohio, Inc., the Fund's
administrator, pays KAM a fee at the annual rate of up to 0.05% of the Fund's
average daily net assets to perform some of the administrative duties for the
Fund.
Portfolio Management
Lynn S. Hamilton is the portfolio manager of the Fund, a position he has held
since October 1991. He is a Portfolio Manager and Managing Director of KAM, and
has been in the investment business since 1977.
18
<PAGE>
Organization and Management of the Fund (continued)
OPERATIONAL STRUCTURE OF THE FUND
Trustees Adviser
----------------------------------------------------
Shareholders
Financial Services Firms and
their Investment Professionals
----------------------------------------------------
Advise current and prospective
shareholders on their Fund investments.
----------------------------------------------------
Transfer Agent/Servicing Agent
----------------------------------------------------
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
Handles services such as record-keeping,
statements, processing of buy and sell
requests, distribution of dividends,
and servicing of shareholder accounts.
----------------------------------------------------
- --------------------------------------------------------------------------------
Administrator, Distributor,
and Fund Accountant Custodian
- -------------------------------------------- -------------------------------
BISYS Fund Services Key Trust Company of Ohio, N.A.
and its affiliates 127 Public Square
3435 Stelzer Road Cleveland, OH 44114
Columbus, OH 43219
<PAGE>
Markets the Fund, distributes share Provides for the safekeeping of
Investment Professionals, calculates the Fund's investments and cash,
the value of shares. As Administrator, and settles through and
handles the day-to-day activities trades made by the Fund.
of the Fund.
- ------------------------------------------------
Sub-Administrator
- ------------------------------------------------
Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114
Performs certain
sub-administrative services.
- ------------------------------------------------
The Fund is supervised by the Board of Trustees, which monitor the services
provided to investors.
19
<PAGE>
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
Some additional information you should know about the Fund.
Share Classes
The Fund currently offers only the class of shares described in this Prospectus.
Performance
The Victory Funds may advertise the performance of the Fund by comparing it to
other mutual funds with similar objectives and policies. Performance information
also may appear in various publications. Any fees charged by Investment
Professionals may not be reflected in these performance calculations.
Advertising information may include the yield and average annual total return of
the Fund calculated on a compounded basis for specified periods of time. Yield
and total return information will be calculated according to rules established
by the SEC. Such information may include performance rankings and similar
information from independent organizations, such as Lipper, Inc., and industry
publications such as Morningstar, Inc., Business Week, or Forbes. You also
should see the Fund's "Investment Performance" section.
Shareholder Communications
In order to eliminate duplicate mailings to an address at which two or more
shareholders with the same last name reside, the Fund will send only one copy of
any shareholder reports, prospectuses, and their supplements, unless you have
instructed us to the contrary. You may request that the Fund send these
documents to each shareholder individually by calling the Fund at 800-539-FUND
(800-539-3863).
- --------------------------------------------------------------------------------
If you would like to receive additional copies of any materials, please call the
Fund at 800-539-FUND.
- --------------------------------------------------------------------------------
20
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights Ohio Regional Stock Fund
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information shows the
results of an investment in one share of the Fund. The total returns in the
table represent the rate that an investor would have earned on an investment in
the Fund (assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Class A Shares
of the Fund. The financial highlights for the five fiscal years ended October
31, 1999 were audited by PricewaterhouseCoopers LLP, whose report, along with
the financial statements of the Fund, are included in the Fund's annual report,
which is available by calling the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Prior to
designation
Class A Shares as Class A
Shares
------------------------------------------------------------- --------------
Year Ended Year Ended Year Ended Year Ended Year Ended
Oct. 31, 1999 Oct. 31, 1998 Oct. 31, 1997 Oct. 31, 1996 Oct. 31, 1995
(a)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 20.67 $ 23.56 $ 17.95 $ 15.94 $ 14.56
- ---------------------------------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.18 0.18 0.14 0.14 0.17
Net realized and unrealized gains (losses)
from investments (1.26) (0.80) 5.96 2.62 2.13
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Activities (1.08) (0.62) 6.10 2.76 2.30
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.17) (0.17) (0.14) (0.14) (0.17)
In excess of net investment income -- -- -- -- (0.01)
Net realized gains (2.42) (2.10) (0.35) (0.36) (0.65)
In excess of net realized gains -- -- -- (0.25) (0.09)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (2.59) (2.27) (0.49) (0.75) (0.92)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 17.00 $ 20.67 $ 23.56 $ 17.95 $ 15.94
- ---------------------------------------------------- -------------- -------------- -------------- ---------------- --------------
Total Return (excludes sales charges) (6.31)% (3.13)% 34.61% 17.79% 16.93%
Ratios/Supplemental Data:
Net Assets, End of Period (000) $23,529 $41,653 $53,703 $45,294 $39,048
Ratio of expenses to average net assets 1.39% 1.26% 1.26% 1.39% 1.20%
Ratio of net investment income to average net
assets 0.92% 0.76% 0.67% 0.79% 1.13%
Ratio of expenses to average net assets* 1.48% 1.37% 1.26% 1.40% 1.24%
Ratio of net investment income to average net
assets* 0.83% 0.65% 0.67% 0.78% 1.09%
Portfolio turnover 2% 6% 8% 6% 11%
</TABLE>
* During the period, certain fees were voluntarily reduced and/or
reimbursed. If such voluntary fee reductions and/or reimbursements had
not occurred, the ratios would have been as indicated.
(a) Effective March 1, 1996, the Fund designated the existing shares as
Class A Shares.
21
<PAGE>
The Victory Funds
127 Public Square
OH-01-27-1612
Cleveland, OH 44114
If you would like a free copy of any of the following documents or would like to
request other information regarding the Fund, you can call or write the Fund or
your Investment Professional.
Statement of Additional Information (SAI)
Contains more details describing the Fund and its policies. The SAI has been
filed with the Securities and Exchange Commission (SEC), and is incorporated by
reference in this Prospectus.
Annual and Semi-annual Reports
Describes the Fund's performance, lists portfolio holdings, and discusses market
conditions and investment strategies that significantly affected the Fund's
performance during its last fiscal year.
How to Obtain Information
By telephone: Call Victory Funds at 800-539-FUND (800-539-3863).
By mail: The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
You also may obtain copies of materials from the SEC's Public Reference Room in
Washington, D.C. (Call 1-202-942-8090 for information on the operation of the
SEC's Public Reference Room.)
Copies of this information may be obtained, after paying a duplicating fee, by
electronic request at the following e-mail address: [email protected], or by
writing the SEC's Public Reference Section, Washington, D.C. 20459-0102.
On the Internet: Text only versions of Fund documents can be viewed on-line or
downloaded from the SEC at http://www.sec.gov or from the Victory Funds' website
at http: //www.victoryfunds.com.
If you would like to receive copies of the annual and semi-annual reports and/or
the SAI at no charge, please call the Fund at 800-539-FUND (800-539-3863).
- --------------------------------------------------------------------------------
The securities described in this Prospectus and the SAI are not offered in any
state in which they may not lawfully be sold. No sales representative, dealer,
or other person is authorized to give any information or make any representation
other than those contained in this Prospectus and the SAI.
- --------------------------------------------------------------------------------
Investment Company Act File Number 811-4852
VF-ORSF-PRO (2/00)
<PAGE>
Prospectus
February 28, 2000
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved any Fund's securities or determined whether this
Prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
Money Market Funds
Federal Money Market Fund
Investor and Select Shares
Institutional Money Market Fund
Investor and Select Shares
Victory Funds
(LOGO)(R)
Call Victory at:
800-539-FUND
(800-539-3863)
or visit the Victory Funds' website at:
www.victoryfunds.com
<PAGE>
Table of Contents
Introduction 1
Risk/Return Summary for each of the Funds
An analysis which includes the investment objective,
principal strategies, principal risks, performance,
and expenses.
Federal Money Market Fund
Investor and Select Shares 2
Institutional Money Market Fund
Investor and Select Shares 4
Investments 6
Risk Factors 8
Share Price 8
Dividends, Distributions, and Taxes 9
Investing with Victory 11
* How to Buy Shares 12
* How to Exchange Shares 14
* How to Sell Shares 15
Organization and Management of the Funds 17
Additional Information 19
Financial Highlights
Federal Money Market Fund 20
Institutional Money Market Fund 21
The Victory Portfolios
Key to Financial Information
Objective and Strategies
The goals and the strategies that a Fund plans to use to pursue its
investment objective.
Risk Factors
The risks you may assume as an investor in a Fund.
Performance
A summary of the historical performance of a Fund.
Expenses
The costs you will pay, directly or indirectly, as an investor in a
Fund, including ongoing expenses.
Shares of the Funds are:
* Not insured by the FDIC;
* Not deposits or other obligations of, or guaranteed by KeyBank, any of its
affiliates, or any other bank;
* Subject to possible investment risks, including possible loss of the
amount invested.
Although the Funds seek to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the Funds.
<PAGE>
Introduction
This Prospectus explains the objectives, policies, risks, performance,
strategies, and expenses of the Shares of the Victory Funds described in this
Prospectus (the Funds).
Key Asset Management Inc., which we will refer to as the "Adviser" or "KAM"
throughout this Prospectus, manages the Funds.
Please read this Prospectus before investing in the Funds and keep it for
future reference. An investment in a Fund is not a complete investment
program.
Investment Objective and Strategy
Each Fund seeks to provide high current income to the extent consistent
with preservation of capital. Each of the Funds pursues its investment
objective by investing in a diversified portfolio of high-quality, short-term
U.S. dollar-denominated money market instruments. However, each of the Funds
has unique investment strategies and its own risk/reward profile. The Funds
seek to maintain a constant net asset value of $1.00 per share, and shares
are offered at net asset value. Please review each Fund's "Risk/Return
Summary" and the "Investments" section for an overview.
Risk Factors
The following risk factors distinguish these Funds from other funds with
different investment policies and strategies.
* The Funds are not insured by the FDIC, and while each Fund attempts
to maintain a $1.00 per share price, there is no guarantee that it
will be able to do so.
* A major change in interest rates, a default on an investment held
by a Fund or a significant decline in the value of a Fund
investment could cause the value of your investment in the Fund, or
its yield, to decline.
Who May Want to Invest in the Funds
* Investors seeking relative safety and easy access to investments
* Investors with a low risk tolerance
* Investors seeking preservation of capital
* Investors willing to accept lower potential returns in return for
safety
* Investors seeking the ability to convert their investment to cash
quickly
Fees And Expenses
The minimum initial investment is $1,000,000. If you buy shares through
an Investment Professional, you may be subject to different minimums. An
Investment Professional is an investment consultant, salesperson, financial
planner, investment adviser, or trust officer who provides you with
investment information. No load or sales commission is charged to investors
in the Funds. You will, however, incur expenses for investment advisory,
administrative, and shareholder services, all of which are included in a
Fund's expense ratio. See "Investing with Victory." The Funds offers two
classes of shares: Investor Shares and Select Shares.
The following pages provide you with separate overviews of each of the Funds.
Please look at the objective, policies, strategies, risks, and expenses to
determine which Fund will best suit your risk tolerance and investment needs.
You also should review "Investments" for additional information about the
individual securities in which the Funds can invest.
1
<PAGE>
Risk/Return Summary
FEDERAL MONEY MARKET FUND
INVESTOR SHARES
Cusip#: 926464520
SBFXX
SELECT SHARES
Cusip#: 926464512
SBSXX
Investment Objective
The investment objective of the Federal Money Market Fund is to provide
high current income to the extent consistent with preservation of capital.
Principal Investment Strategies
The Federal Money Market Fund pursues its investment objective by
investing exclusively in securities issued or guaranteed by the U.S.
government or certain of its agencies and government-sponsored enterprises.
The Federal Money Market Fund also can invest in repurchase agreements
collateralized by these securities.
Under normal market conditions, the Federal Money Market Fund invests in:
* Treasury bills, notes, and other obligations issued or guaranteed
by the U.S. government.
* Obligations of the Government National Mortgage Association (GNMA),
Federal National Mortgage Association (FNMA), Federal Home Loan
Mortgage Corporation (FHLMC), Student Loan Marketing Association
(SLMA), Federal Farm Credit Bank (FFCB), Federal Home Loan Bank
(FHLB), Tennessee Valley Authority (TVA) and Federal Agricultural
Mortgage Association (FAMC).
* Repurchase agreements collateralized by any of the above
securities.
Important Characteristics of the Federal Money Market Fund's Investments:
* Quality: The Federal Money Market Fund invests only in securities
insured or guaranteed by the U.S. government, or certain of its
agencies or government-sponsored enterprises. These securities are
of the highest credit quality.
* Maturity: Weighted average maturity of 90 days or less. Individual
investments may be purchased with remaining maturities ranging from
one day to 397 days. The Federal Money Market Fund intends to
maintain a weighted average maturity of not more than 55 days.
Principal Risks
The Federal Money Market Fund is subject to the following principal
risks, more fully described in "Risk Factors." The Federal Money Market
Fund's yield or the stability of its $1.00 share price may be adversely
affected if any of the following occurs:
* The portfolio manager does not execute the Federal Money Market
Fund's principal investment strategies effectively.
* An agency or instrumentality defaults on its obligation and the
agency or U.S. government does not provide financial support.
* The market value of floating or variable rate securities falls to
such an extent that the Federal Money Market Fund's share price
declines below $1.00.
* Rapidly rising interest rates cause securities held by the Federal
Money Market Fund to decline in value and cause the Federal Money
Market Fund's share price to decline below $1.00.
* Interest rates decline, resulting in a lower yield for the Federal
Money Market Fund.
An investment in the Federal Money Market Fund is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. Although the Federal Money Market 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>
Investment Performance
The bar chart and table shown below give an indication of the risks of
investing in the Federal Money Market Fund by showing changes in its
performance for various time periods ending December 31st. The figures shown
in the bar chart and table assume reinvestment of dividends.
The bar chart shows returns for the Investor Class of the Federal Money
Market Fund.
1990 7.85%
1991 5.77%
1992 3.34%
1993 2.59%
1994 3.56%
1995 5.27%
1996 4.64%
1997 4.98%
1998 5.28%
1999 4.90%
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a
quarter was 1.96% (quarter ending June 30, 1990) and the lowest return for a
quarter was 0.63% (quarter ending June 30, 1993).
Average Annual Total Returns
(for the Periods ended Past Past Past
December 31, 1999) One Year 5 Years 10 Years
Investor Class 4.90% 5.01% 4.81%
Select Class(1) 4.64% N/A N/A
1 The average annual total return since inception (March 23, 1998) was 4.83%.
The "seven-day yield" is an annualized figure -- the amount you would earn if
you kept your investment in the Federal Money Market Fund and the Fund
continued to earn the same net interest income throughout the year.
The "seven-day effective yield" (also an annualized figure) assumes that
dividends are reinvested and compounded.
For the Federal Money Market Fund's current seven-day yields and
seven-day effective yields, call the Fund at 800-539-FUND (800-539-3863).
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Federal Money Market Fund.
Shareholder Transaction Expenses Investor Select
(paid directly from your investment)(1) Class Class
Maximum Sales Charge
Imposed on Purchases NONE NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees 0.25% 0.25%
Distribution (12b-1) Fees 0.00% 0.00%
Other Expenses (includes a shareholder servicing
fee of 0.25% applicable to Select Class Shares) 0.20% 0.46%
Total Fund Operating Expenses 0.45%2 0.71%(2)
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 The Adviser may waive its management fee and reimburse expenses, as
allowed by law, so that the net operating expenses of the Investor Class
and Select Class Shares of the Federal Money Market Fund do not exceed
0.27% and 0.52%, respectively. The Adviser may terminate this
waiver/reimbursement at any time to the extent allowed by law.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Federal Money Market Fund with the cost of investing in
other mutual funds. The Example assumes that you invest $10,000 in the
Federal Money Market Fund for the time periods shown and then sell all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Federal Money Market Fund's
operating expenses remain the same. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Investor Class $46 $144 $252 $567
Select Class $73 $227 $395 $883
3
<PAGE>
Risk/Return Summary
INSTITUTIONAL MONEY MARKET FUND
INVESTOR SHARES
Cusip#: 926464785
VICXX
SELECT SHARES
Cusip#: 926464777
VISXX
Investment Objective
The investment objective of the Institutional Money Market Fund is to
obtain as high a level of current income as is consistent with preserving
capital and providing liquidity.
Principal Investment Strategies
The Institutional Money Market Fund pursues its investment objective by
primarily investing in short-term, high-quality debt instruments.
Under normal market conditions, the Institutional Money Market Fund
primarily invests in:
* Negotiable certificates of deposit, time deposits, and bankers'
acceptances of U.S. banks and U.S. branches of foreign banks.
* Short-term corporate obligations, such as commercial paper, notes,
and bonds.
* Repurchase agreements.
* Other debt obligations such as master demand notes, short-term
funding agreements, variable and floating rate securities, and
private placement investments.
* U.S. Treasury obligations and obligations of government sponsored
agencies.
* When-issued or delayed-delivery securities.
* Eurodollar debt obligations.
Important Characteristics of the Institutional Money Market Fund's Investments:
* Quality: The Institutional Money Market Fund invests only in
instruments that are rated at the time of purchase in the highest
short-term category by two or more NRSROs,** or in the highest
short-term category if rated by only one NRSRO, or if unrated,
determined to be of equivalent quality. The Board of Trustees has
established policies to ensure that the Institutional Money Market
Fund invests in high quality, liquid instruments. For more
information on ratings, see the Appendix to the Statement of
Additional Information (SAI).
* Maturity: Weighted average maturity of 90 days or less. Individual
investments may be purchased with remaining maturities ranging from
one day to 397 days.
** An NRSRO is a nationally recognized statistical rating organization
such as Standard & Poor's, Fitch IBCA International, or Moody's
Investors Service (Moody's) which assigns credit ratings to
securities based on the borrower's ability to meet its obligation
to make principal and interest payments.
Principal Risks
The Institutional Money Market Fund is subject to the following principal
risks, more fully described in "Risk Factors." The Institutional Money Market
Fund's yield or the stability of its $1.00 share price may be adversely
affected if any of the following occurs:
* The portfolio manager does not execute the Institutional Money
Market Fund's principal investment strategies effectively.
* An issuer defaults on its obligation.
* An agency or instrumentality defaults on its obligation and the
agency or U.S. government does not provide financial support.
* The market value of floating or variable rate securities falls to
such an extent that the Institutional Money Market Fund's share
price declines below $1.00.
* Rapidly rising interest rates cause securities held by the
Institutional Money Market Fund to decline in value and cause the
Fund's share price to decline below $1.00.
* Interest rates decline, resulting in the Institutional Money Market
Fund achieving a lower yield.
* Adverse events affecting the banking industry cause the value of
the Institutional Money Market Fund's investments to decline.
* Political, economic, business or regulatory events occur in a
foreign country causing the value of a security to decline.
An investment in the Institutional Money Market Fund is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. Although the Institutional Money Market 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.
4
<PAGE>
Investment Performance
The bar chart and table shown below give an indication of the risks of
investing in the Institutional Money Market Fund by showing changes in its
performance for various time periods ending December 31st. The figures shown
in the bar chart and table assume reinvestment of dividends.
The bar chart shows returns for the Investor Class of the Institutional
Money Market Fund.
1990 8.27%
1991 5.66%
1992 3.69%
1993 2.77%
1994 4.11%
1995 5.84%
1996 5.34%
1997 5.50%
1998 5.45%
1999 5.10%
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter
was 2.04% (quarter ending June 30, 1990) and the lowest return for a quarter
was 0.66% (quarter ending June 30, 1993).
Average Annual Total Returns
(for the Periods ended Past Past Past
December 31, 1999) One Year 5 Years 10 Years
Investor Class 5.10% 5.45% 5.16%
Select Class(1) 4.80% N/A N/A
1 The average annual total return since inception (June 5, 1995) was 4.90%.
The "seven-day yield" is an annualized figure -- the amount you would earn if
you kept your investment in the Institutional Money Market Fund and the Fund
continued to earn the same net interest income throughout the year.
The "seven-day effective yield" (also an annualized figure) assumes that
dividends are reinvested and compounded.
For the Institutional Money Market Fund's current seven-day yields and
seven-day effective yields, call the Fund at 800-539-FUND (800-539-3863).
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Institutional Money Market Fund.
Shareholder Transaction Expenses Investor Select
(paid directly from your investment)(1) Class Class
Maximum Sales Charge
Imposed on Purchases NONE NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees(2) 0.20% 0.20%
Distribution (12b-1) Fees 0.00% 0.00%
Other Expenses (includes a shareholder servicing
fee of 0.25% applicable to Select Class Shares) 0.16% 0.46%
Total Fund Operating Expenses(3) 0.36% 0.66%
1 You may be charged additional fees if you buy, exchange, or sell
shares through a broker or agent.
2 Management fees have been restated to reflect reduction from 0.25% to 0.20%.
3 The Adviser may waive its management fee and reimburse expenses, as allowed
by law, so that the net operating expenses of the Investor Class and Select
Class Shares of the Institutional Money Market Fund do not exceed 0.27% and
0.52%, respectively. The Adviser may terminate this waiver/reimbursement at
any time to the extent allowed by law.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Institutional Money Market Fund with the cost of investing
in other mutual funds. The Example assumes that you invest $10,000 in the
Institutional Money Market Fund for the time periods shown and then sell all
of your shares at the end of those periods. The Example also assumes that
your investment has a 5% return each year and that the Institutional Money
Market Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Investor Class $37 $116 $202 $456
Select Class $67 $211 $368 $822
5
<PAGE>
Investments
The following describes some of the types of securities the Funds may
purchase under normal market conditions to achieve their investment
objectives. All Funds will not buy all of the securities listed below.
For cash management or for temporary defensive purposes in response to
market conditions, each Fund may hold all or a portion of its assets in cash.
This may reduce the Fund's yield and may cause the Fund to fail to meet its
investment objective.
For more information on ratings and a more complete description of which
Funds can invest in certain types of securities, see the SAI.
The Funds may invest in the following types of securities:
Commercial Paper.
Short-term obligations issued by banks, corporations, broker dealers and
other entities to finance their current operations.
Certificates of Deposit.
A commercial bank's obligations to repay funds deposited with it,
earning specified rates of interest over given periods.
Master Demand Notes.
Unsecured obligations that permit the investment of fluctuating amounts
by a Fund at varying interest rates.
Short-Term Funding Agreements.
Similar to guaranteed investment contracts, or "GIC's", and issued by
insurance companies. A Fund invests cash for a specified period and
guaranteed amount of interest as stated in the contract.
Time Deposits.
Non-negotiable deposits in banks that pay a specified rate of interest
over a set period of time.
U.S. Government Securities.
Notes and bonds issued or guaranteed by the U.S. government, its agencies, or
instrumentalities. Some are direct obligations of the U.S. Treasury; others
are obligations only of the U.S. agency or instrumentality such as SLMA and
FHLB.
Mortgage-Backed Securities.
Instruments secured by a mortgage or pools of mortgages.
* U.S. Government. Issued or guaranteed by the U.S. government or its
agencies and instrumentalities;**
* Non-U.S. Government. Secured by non-government entities.
Eurodollar Obligations.
Obligations of foreign branches of U.S. banks and domestic branches of
foreign banks.
** Obligations of entities such as the GNMA are backed by the full faith and
credit of the U.S. Treasury. Others, such as the FNMA are supported by the
right of the issuer to borrow from the U.S. Treasury. Still others, such as
the SLMA, FFCB, FHLB, the FHLMC, and FAMC are supported only by the credit of
the federal instrumentality.
6
<PAGE>
Investments (continued)
U.S. Government Instrumentalities.
Securities issued by U.S. government instrumentalities such as the
Student Loan Marketing Association, Federal Farm Credit Bank, Federal Home
Loan Bank, Federal Home Loan Mortgage Corporation, and the Federal
Agricultural Mortgage Corporation are supported only by the credit of the
federal instrumentality.
When-Issued and Delayed-Delivery Securities.
A security that is purchased for delivery at a later time. The market
value may change before the delivery date, and the value is included in the
net asset value of a Fund.
Repurchase Agreements.
An agreement involving a Fund's purchase of a security and the seller's
agreement to repurchase the same security at a stated price plus interest.
The seller's obligation to the Fund is secured by the instrument. Subject to
an exemptive order from the SEC, the Adviser may combine repurchase
transactions among one or more Victory funds into a single transaction.
+ Variable & Floating Rate Securities.
The interest rate offered by a variable rate security adjusts (resets)
on particular dates (such as the last day of a month or calendar quarter).
The interest rate offered by a floating rate security adjusts whenever a
specified interest rate (such as a bank's prime lending rate) changes. Upon
adjustment, the market value of a variable or floating rate security can
reasonably be expected to equal its amortized cost.
Zero Coupon Bonds.
These securities are purchased at a discount from face value. The bond's
face value is received at maturity, with no interest payments before then.
+ Derivative Instruments: Indicates a "derivative instrument," whose value is
linked to, or derived from another security, instrument, or index.
7
<PAGE>
Risk Factors
By matching your investment objective with an acceptable level of risk, you
can create your own customized investment plan.
It is important to keep in mind one basic principle of investing: the greater
the risk, the greater the potential reward. The reverse is also generally
true: the lower the risk, the lower the potential reward.
An investment in a Fund is not a complete investment program.
This Prospectus describes the principal risks that you may assume as an
investor in the Funds.
Each Fund is subject to the principal risks described below.
General Risks:
* Manager risk is the risk that a Fund's portfolio manager may
implement its investment strategy in a way that does not produce
the intended result.
Risks associated with investing in debt securities:
* Income risk. Declines in the general level of short-term interest
rates cause a Fund's income, and thus its total return, to decline.
* Adjustable rate security risk. The market price of an adjustable
rate security may, upon readjustment, fall below its cost.
* Credit risk is the risk that the issuer of a debt security will
fail to pay interest or principal in a timely manner.
Share Price
Each Fund calculates its share price, called its "net asset value" (NAV),
each business day at 2:00 p.m. Eastern Time. You may buy, exchange, and sell
your shares on any business day at a price that is based on the NAV that is
calculated after you place your order. A business day is a day on which the
Federal Reserve Bank of Cleveland and the New York Stock Exchange, Inc.
("NYSE") are open. You may not be able to buy or sell shares on Columbus Day
and Veterans Day, holidays when the Federal Reserve Bank of Cleveland is
closed, but the NYSE and other financial markets are open.
Each Fund seeks to maintain a $1.00 NAV, although there is no guarantee
that it will be able to do so. Each Fund uses the "Amortized Cost Method" to
value securities. You can read about this method in the SAI.
Each Fund's performance can be found once a week in The Wall Street
Journal and other newspapers.
8
<PAGE>
Dividends, Distributions, and Taxes
Your choice of distribution should be set up on the original account
application. If you would like to change the option you selected, please call
800-539-FUND.
As a shareholder, you are entitled to your share of net income and capital
gains on a Fund's investments. Each Fund passes its earnings along to
investors in the form of dividends. Dividend distributions are the net income
earned on investments after expenses. Money market funds usually do not
realize capital gains; however, a Fund will distribute short-term gains, as
necessary, and if the Fund makes a long-term capital gain distribution, it is
normally paid once a year. As with any investment, you should consider the
tax consequences of an investment in a Fund.
Ordinarily, each Fund declares dividends daily and pays them monthly.
Each class of shares declares and pays dividends separately.
Please check with your Investment Professional to find out if the
following options are available to you.
Distributions can be received in one of the following ways.
REINVESTMENT OPTION
You can have distributions automatically reinvested in additional shares
of your Fund. If you do not indicate another choice on your Account
Application, you will be assigned this option automatically.
CASH OPTION
A check will be mailed to you no later than seven days after the
dividend payment date.
DIRECTED DIVIDENDS OPTION
In most cases, you can automatically reinvest distributions in shares of
another fund of the Victory Group. If you reinvest your distributions in a
different class of another fund, you may pay a sales charge on the reinvested
distributions.
DIRECTED BANK ACCOUNT OPTION
In most cases, you can automatically transfer distributions to your bank
checking or savings account. Under normal circumstances, your Fund will
transfer your distributions within seven days of the dividend payment date.
The bank account must have a registration identical to that of your Fund
account.
9
<PAGE>
Dividends, Distributions, and Taxes (continued)
Important Information about Taxes
The tax information in this Prospectus is provided as general information.
You should consult your own tax adviser about the tax consequences of an
investment in a Fund.
The Funds pay no federal income tax on the earnings and capital gains they
distribute to shareholders.
* Ordinary dividends from a Fund are taxable as ordinary income;
dividends from any long-term capital gains would be taxable as
long-term capital gain.
* Dividends are treated in the same manner for federal income tax
purposes whether you receive them in cash or in additional shares.
They also may be subject to state and local taxes.
* Dividends from a Fund that are attributable to interest on certain
U.S. government obligations may be exempt from certain state and
local income taxes. The extent to which ordinary dividends are
attributable to these U.S. government obligations will be provided
on the tax statements you receive from the Fund.
* An exchange of a Fund's shares for shares of another fund will be
treated as a sale. When you sell or exchange shares of a Fund, you
must recognize any gain or loss. However, as long as the Fund's NAV
per share does not deviate from $1.00, there will be no gain or
loss.
* Certain dividends paid to you in January will be taxable as if they
had been paid to you the previous December.
* Tax statements will be mailed from your Fund every January showing
the amounts and tax status of distributions made to you.
* Because your tax treatment depends on your purchase price and tax
position, you should keep your regular account statements for use
in determining your tax.
* You should review the more detailed discussion of federal income
tax considerations in the SAI.
10
<PAGE>
INVESTING WITH VICTORY
All you need to do to get started is to fill out an application.
For historical expense information, see the financial highlights at the end
of this Prospectus.
If you are looking for a convenient way to open an account or to add
money to an existing account, Victory can help. The sections that follow will
serve as a guide to your investments with Victory. The following sections
will describe how to open an account, how to access information on your
account, and how to buy, exchange, and sell shares of the Funds.
We want to make it simple for you to do business with us. If you have
questions about any of this information, please call your Investment
Professional or one of our customer service representatives at 800-539-FUND.
They will be happy to assist you.
Shareholder Servicing Plan
The Funds have adopted a Shareholder Servicing Plan for their Select Class
Shares. The shareholder servicing agent performs a number of services for its
customers who are shareholders of a Fund. It establishes and maintains
accounts and records, processes dividend and distribution payments, arranges
for bank wires, assists in transactions, and changes account information. For
these services the Funds pay a fee at an annual rate of up to 0.25% of the
average daily net assets of the appropriate class of shares serviced by the
agent. The Funds may enter into agreements with various shareholder servicing
agents, including KeyBank National Association and its affiliates, other
financial institutions, and securities brokers. The Funds may pay a servicing
fee to broker-dealers and others who sponsor "no transaction fee" or similar
programs for the purchase of shares. Shareholder servicing agents may waive
all or a portion of their fee periodically.
Distribution Plan
According to Rule 12b-1 under the Investment Company Act of 1940, Victory has
adopted a Distribution and Service Plan for the Funds. The Funds do not pay
expenses under this plan.
11
<PAGE>
How to Buy Shares
When you buy shares of a Fund, your cost will normally be $1.00 per share.
You can buy shares in a number of different ways. All you need to do to
get started is to fill out an application. The minimum investment required to
open an account is $1,000,000. You can send in your payment by check, wire
transfer, exchange from another Victory Fund, or through arrangements with
your Investment Professional. Sometimes an Investment Professional will
charge you for these services. This fee will be in addition to, and unrelated
to, the fees and expenses charged by a Fund.
If you buy shares directly from a Fund and your investment is received
and accepted by 2:00 p.m. Eastern Time, your purchase will be processed the
same day.
Investor Shares are available to certain institutions or individuals
that meet minimum investment requirements, and are not subject to a
shareholder servicing fee. Select Shares are available through certain
financial institutions that provide additional services to their customers
who are shareholders of a Fund.
Make your check payable to: The Victory Funds
Keep the following addresses handy for purchases, exchanges, or redemptions:
BY REGULAR U.S. MAIL
Send completed Account Applications with your check, bank draft, or money
order to:
The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
BY OVERNIGHT MAIL
Use the following address ONLY for overnight packages.
The Victory Funds
c/o Boston Financial Data Services
66 Brooks Drive
Braintree, MA 02184
PHONE: 800-539-FUND
BY WIRE
The Transfer Agent does not charge a wire fee, but your originating bank
may charge a fee. Always call 800-539-FUND BEFORE wiring funds to obtain a
confirmation number.
The Victory Funds
State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA
Account #9905-201-1
(insert account number, name, and confirmation number assigned by the
Transfer Agent)
BY TELEPHONE
800-539-FUND
(800-539-3863)
12
<PAGE>
How to Buy Shares (continued)
If you would like to make additional investments after your account is
established, use the Investment Stub attached to your confirmation statement
and send it with your check to the address indicated.
ACH
After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic member banks may be used. It
takes about 15 days to set up an ACH account. Currently, the Fund does not
charge a fee for ACH transfers.
Statements and Reports
You will receive a periodic statement reflecting any transactions that
affect the balance or registration of your account. You will receive a
confirmation after any purchase, exchange, or redemption. If your account has
been set up by an Investment Professional, Fund activity will be detailed in
that account's statements. Share certificates are not issued. Twice a year,
you will receive the financial reports of the Fund. By January 31 of each
year, you will be mailed an IRS form reporting distributions for the previous
year, which also will be filed with the IRS.
Systematic Investment Plan
The Systematic Investment Plan is not available to shareholders of the
Institutional Money Market Fund or new shareholders of the Federal Money
Market Fund. If you have previously activated the Systematic Investment Plan,
the Transfer Agent will automatically withdraw a fixed amount ($25 or more)
from your bank account and invest it in shares of the Federal Money Market
Fund.
Retirement Plans
You can use a Fund as part of your retirement portfolio. Your Investment
Professional can set up your new account under one of several tax-deferred
retirement plans. Please contact your Investment Professional or the Funds
for details regarding an IRA or other retirement plan that works best for
your financial situation.
All purchases must be made in U.S. dollars and drawn on U.S. banks. The
Transfer Agent may reject any purchase order in its sole discretion. If your
check is returned for any reason, you will be charged for any resulting fees
and/or losses. Third party checks will not be accepted. You may only buy or
exchange into fund shares legally available in your state. If your account
falls below the minimum amount, we may ask you to re-establish the minimum
investment. If you do not do so within 60 days, we may close your account and
send you the value of your account.
13
<PAGE>
How to Exchange Shares
You can obtain a list of funds available for exchange by calling
800-539-FUND.
You can sell shares of one fund of the Victory Portfolios to buy shares of
the same class of any other. This is considered an exchange. If your request
is received and accepted by 2:00 p.m. Eastern Time, your exchange will be
processed the same day.
You can exchange shares of a Fund by writing the Transfer Agent or calling
800-539-FUND. When you exchange shares of a Fund, you should keep the
following in mind:
* Shares of the Fund selected for exchange must be available for sale
in your state of residence.
* The Fund whose shares you want to exchange and the fund whose
shares you want to buy must offer the exchange privilege.
* If you exchange into a fund with a sales charge, you pay the
percentage-point difference between that fund's sales charge and
any sales charge you have previously paid in connection with the
shares you are exchanging.
* On certain business days, such as Veterans Day and Columbus Day,
the Federal Reserve Bank of Cleveland is closed. On those days,
exchanges to or from a money market fund will be processed on the
exchange date, with the corresponding purchase or sale of the money
market fund shares being effected on the next business day.
* You must meet the minimum purchase requirements for the fund you
purchase by exchange.
* The registration and tax identification numbers of the two accounts
must be identical.
* You must hold the shares you buy when you establish your account
for at least seven days before you can exchange them; after the
account is open seven days, you can exchange shares on any business
day.
* A Fund may refuse any exchange purchase request if the Adviser
determines that the request is associated with a market timing
strategy. A Fund may terminate or modify the exchange privilege at
any time on 30 days' notice to shareholders.
* Before exchanging, read the prospectus of the fund you wish to
purchase by exchange.
* An exchange of Fund shares constitutes a sale for tax purposes.
14
<PAGE>
How to Sell Shares
There are a number of convenient ways to sell your shares. You can use the
same mailing addresses listed for purchases.
If your request is received in good order by 2:00 p.m. Eastern Time or
the close of trading on the NYSE (whichever time is earlier), your redemption
will be processed the same day.
BY TELEPHONE
The easiest way to sell shares is by calling 800-539-FUND. When you fill
out your original application, be sure to check the box marked "Telephone
Authorization." Then when you are ready to sell, call and tell us which one
of the following options you would like to use:
* Mail a check to the address of record;
* Wire funds to a domestic financial institution;
* Mail a check to a previously designated alternate address; or
* Electronically transfer your redemption via the Automated Clearing House
(ACH).
The Transfer Agent records all telephone calls for your protection and
takes measures to verify the identity of the caller. If the Transfer Agent
properly acts on telephone instructions and follows reasonable procedures to
ensure against unauthorized transactions, neither Victory, its servicing
agents, the Adviser, nor the Transfer Agent will be responsible for any
losses. If the Transfer Agent does not follow these procedures, it may be
liable to you for losses resulting from unauthorized instructions.
If there is an unusual amount of market activity and you cannot reach
the Transfer Agent or your Investment Professional by telephone, consider
placing your order by mail.
BY MAIL
Use the Regular U.S. Mail or Overnight Mail Address to redeem shares.
Send us a letter of instruction indicating your Fund account number, amount
of redemption, and where to send the proceeds. A signature guarantee is
required for the following redemption requests:
* Redemptions over $10,000;
* Your account registration has changed within the last 15 days;
* The check is not being mailed to the address on your account;
* The check is not being made payable to the owner of the account;
* The redemption proceeds are being transferred to another Victory Group
account with a different registration; or
* The check or wire is being sent to a different bank account.
You can get a signature guarantee from a financial institution such as a
bank, broker-dealer, credit union, clearing agency, or savings association.
BY WIRE
If you want to receive your proceeds by wire, you must establish a Fund
account that will accommodate wire transactions. If you call by 2:00 p.m.
Eastern Time, your funds will be wired on the next business day.
BY ACH
Normally, your redemption will be processed on the same day, but will be
processed on the next day if received after 2:00 p.m. Eastern Time. It will
be transferred by ACH as long as the transfer is to a domestic bank.
CHECK WRITING (Federal Money Market Fund only)
Shareholders of the Federal Money Market Fund may sell their Fund shares by
writing a check for $100.00 or more. The check writing feature is not offered
to new shareholders of the Federal Money Market Fund. There is no charge for
checks; however, you will pay a charge to stop payment of a check or if a
check is returned for insufficient funds. Shares continue to earn daily
dividends until checks are presented for payment. You may not close your
account by writing a check. You should call the Fund for a complete
redemption.
15
<PAGE>
How to Sell Shares (continued)
Systematic Withdrawal Plan
The Systematic Withdrawal Plan is not available to shareholders of the
Institutional Money Market Fund or to new shareholders of the Federal Money
Market Fund. If you have previously activated the Systematic Withdrawal Plan,
the Transfer Agent will automatically withdraw a fixed amount ($25 or more)
from the Federal Money Market Fund. You must have an account value of $5,000
or more to start withdrawals.
If you previously activated this feature, we will send monthly,
quarterly, semi-annual, or annual payments to you or the person you
designate. You should be aware that your account eventually may be depleted.
However, you cannot automatically close your account using the Systematic
Withdrawal Plan. If you decide not to increase your account to the minimum
balance, your account may be closed and the proceeds mailed to you.
Additional Information about Redemptions
* Redemption proceeds from the sale of shares purchased by a check
may be held until the purchase check has cleared, which may take up
to 15 days.
* If you request a complete redemption your Fund will include any
dividends accrued with the redemption proceeds.
* A Fund may suspend your right to redeem your shares in the
following circumstances:
* During non-routine closings of the NYSE;
* When the Securities and Exchange Commission (SEC) determines
either that trading on the NYSE is restricted or that an
emergency prevents the sale or valuation of the Fund's
securities; or
* When the SEC orders a suspension to protect the Fund's
shareholders.
* Each Fund will pay redemptions by any one shareholder during any
90-day period in cash up to the lesser of $250,000 or 1% of its net
assets. Each Fund reserves the right to pay the remaining portion
"in kind," that is, in portfolio securities rather than cash.
16
<PAGE>
Organization and Management of the Funds
About Victory
Each Fund is a member of the Victory Portfolios, a group of over 30
distinct investment portfolios. The Board of Trustees of Victory has the
overall responsibility for the management of the Funds.
The Investment Adviser and Sub-Administrator
Each Fund has an Advisory Agreement which is one of its most important
contracts. Key Asset Management Inc. (KAM), a New York corporation registered
as an investment adviser with the SEC, is the Adviser to each Fund. KAM, a
subsidiary of KeyCorp, oversees the operations of the Funds according to
investment policies and procedures adopted by the Board of Trustees.
Affiliates of the Adviser manage approximately $76 billion for a limited
number of individual and institutional clients. KAM's address is 127 Public
Square, Cleveland, Ohio 44114.
We want you to know who plays what role in your investment and how they are
related. This section discusses the organizations employed by the Funds to
provide services to their shareholders. Each of these organizations is paid a
fee for its services.
During the fiscal year ended October 31, 1999, KAM was paid a management
fee at an annual rate based on a percentage of the average daily net assets
of each Fund (after waivers) as shown in the following table.
Federal Money Market Fund 0.15%
Institutional Money Market Fund 0.18%
Under a Sub-Administration Agreement, BISYS Fund Services Ohio, Inc.
pays KAM a fee at the annual rate of up to 0.05% of each Fund's average daily
net assets to perform some of the administrative duties for the Funds.
17
<PAGE>
Organization and Management of the Funds (cont.)
Each Fund is supervised by the Board of Trustees, which monitors the services
provided to investors.
OPERATIONAL STRUCTURE OF THE FUNDS
TRUSTEES
ADVISER
SHAREHOLDERS
FINANCIAL SERVICES FIRMS AND THEIR INVESTMENT PROFESSIONALS
Advise current and prospective shareholders on their Fund investments.
TRANSFER AGENT/SERVICING AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
Handles services such as record-keeping, statements, processing of buy
and sell requests, distribution of dividends, and servicing of shareholder
accounts.
ADMINISTRATOR, DISTRIBUTOR, AND FUND ACCOUNTANT
BISYS Fund Services
and its affiliates
3435 Stelzer Road
Columbus, OH 43219
Markets the Funds, distributes shares through Investment Professionals,
and calculates the value of shares. As Administrator, handles the day-to-day
activities of the Funds.
CUSTODIAN
Key Trust Company of Ohio, N.A.
127 Public Square
Cleveland, OH 44114
Provides for safekeeping of the Funds' investments and cash, and settles
trades made by the Funds.
SUB-ADMINISTRATOR
Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114
Performs certain sub-administrative services.
18
<PAGE>
Additional Information
Some additional information you should know about the Funds.
Share Classes
The Funds currently offer only the classes of shares described in this
Prospectus. At some future date, the Funds may offer additional classes of
shares.
Performance
The Victory Funds may advertise the performance of a Fund by comparing
it to other mutual funds with similar objectives and policies. Performance
information also may appear in various publications. Any fees charged by
Investment Professionals may not be reflected in these performance
calculations. Advertising information may include the yield and effective
yield of a Fund, and the average annual total return of a Fund calculated on
a compounded basis for specified periods of time. Yield and total return
information will be calculated according to rules established by the SEC.
Such information may include performance rankings and similar information
from independent organizations, such as Lipper, Inc., and industry
publications such as Morningstar, Inc., Business Week, or Forbes.
Shareholder Communications
In order to eliminate duplicate mailings to an address at which two or
more shareholders with the same last name reside, a Fund will send only one
copy of any shareholder reports, prospectuses and their supplements, unless
you have instructed us to the contrary. You may request that the Funds send
these documents to each shareholder individually by calling the Funds at
800-539-FUND (800-539-3863).
If you would like to receive additional copies of any materials, please call
the Funds at 800-539-FUND.
19
<PAGE>
Financial Highlights
FEDERAL MONEY MARKET FUND
The Financial Highlights table is intended to help you understand the
Federal Money Market Fund's financial performance for the past five years.
Certain information shows the results of an investment in one share of the
Federal Money Market Fund. The total returns in the table represent the rate
that an investor would have earned on an investment in the Federal Money
Market Fund (assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Investor
and Select Shares of the Federal Money Market Fund. The financial highlights
for the fiscal year ended October 31, 1999, the eleven months ended October
31, 1998 and the four fiscal years ended November 30, 1997 were audited by
PricewaterhouseCoopers LLP, whose report, along with the financial statements
of the Federal Money Market Fund, are included in the Fund's annual report,
which is available by calling the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Investor Select Prior to Designation of Investor and
Shares Shares Select Shares
Year Eleven Months Year Period Year Year Year Year
Ended Ended Ended Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Nov. 30, Nov. 30, Nov. 30, Nov. 30,
1999 1998(2) 1999 1998(2) 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Investment Activities
Net investment income 0.047 0.048 0.045 0.031 0.048 0.047 0.051 0.034
Distributions
Net investment income (0.047) (0.048) (0.045) (0.031) (0.048) (0.047) (0.051) (0.034)
Net Asset Value,
End of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Total Return 4.82% 4.91%(3) 4.56% 3.14%(3) 4.94% 4.65% 5.26% 3.37%
Ratios/Supplementary Data:
Net Assets at end of period
(000) $834,055 $717,972 $283,625 $198,141 $243,499 $42,159 $21,848 $28,606
Ratio of expenses to
average net assets 0.28% 0.27%(4) 0.53% 0.43%(4) 0.53% 0.64% 0.63% 0.59%
Ratio of net investment income
to average net assets 4.72% 5.22%(4) 4.47% 5.06%(4) 4.91% 4.59% 5.15% 3.35%
Ratio of expenses to
average net assets(1) 0.45% 0.48%(4) 0.71% 0.54%(4) 0.90% 0.92% 0.91% 0.87%
Ratio of net investment income
to average net assets(1) 4.55% 5.01%(4) 4.29% 4.95%(4) 4.54% 4.31% 4.90% 3.10%
<FN>
(1) During the period, certain fees were voluntarily reduced and/or reimbursed. If such voluntary
fee reductions and/or expense reimbursements had not occurred, the ratios would have been as
indicated.
(2) Effective March 23, 1998, the Key Money Market Fund became the Victory Federal Money Market
Fund, and the Fund designated the existing shares of Key Money Market Fund as Investor Shares
and commenced offering Select Shares. Financial highlights prior to March 23, 1998 represent
the Key Money Market Fund.
(3) Not annualized.
(4) Annualized.
</FN>
</TABLE>
20
<PAGE>
Financial Highlights
INSTITUTIONAL MONEY MARKET FUND
The Financial Highlights table is intended to help you understand the
Institutional Money Market Fund's financial performance for the past five
years. Certain information shows the results of an investment in one share of
the Institutional Money Market Fund. The total returns in the table represent
the rate that an investor would have earned on an investment in the
Institutional Money Market Fund (assuming reinvestment of all dividends and
distributions).
These financial highlights reflect historical information about Investor
and Select Shares of the Institutional Money Market Fund. The financial
highlights for the four fiscal years ended October 31, 1999 and the six
months ended October 31, 1995 were audited by PricewaterhouseCoopers LLP,
whose report, along with the financial statements of the Institutional Money
Market Fund, are included in the Fund's annual report, which is available by
calling the Fund at 800-539-FUND. The financial highlights for the fiscal
year ended April 30, 1995 were audited by other auditors.
<TABLE>
<CAPTION>
Investor Shares
Year Year Year Year Six Months
Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1999 1998 1997 1996(5) 1995(4)
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Investment Activities
Net investment income 0.049 0.054 0.053 0.053 0.290
Distributions
Net investment income (0.049) (0.054) (0.053) (0.053) (0.290)
Net Asset Value,
End of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Total Return 5.03% 5.53% 5.46% 5.41% 2.90%(2)
Ratios/Supplemental Data:
Net Assets,
End of Period (000) $1,313,571 $1,068,521 $585,663 $671,575 $504,536
Ratio of expenses to
average net assets 0.27% 0.27% 0.28% 0.27% 0.26%(3)
Ratio of net investment income
to average net assets 4.91% 5.38% 5.32% 5.27% 5.69%(3)
Ratio of expenses to
average net assets(1) 0.41% 0.42% 0.48% 0.48% 0.49%(3)
Ratio of net investment income
to average net assets(1) 4.77% 5.23% 5.12% 5.06% 5.46%(3)
<FN>
(1) During the period, certain fees were voluntarily reduced. If such voluntary fee reductions
had not occurred, the ratios would have been as indicated.
(2) Not annualized.
(3) Annualized.
(4) Effective June 5, 1995, the Victory Institutional Money Market Portfolio became the
Institutional Money Market Fund, and the Fund designated the existing shares as Institutional
Shares and commenced offering Service Shares.
(5) Effective March 1, 1996, the Fund redesignated Institutional Shares as Investor Shares and
Service Shares as Select Shares.
</FN>
</TABLE>
21
<PAGE>
Financial Highlights
INSTITUTIONAL MONEY MARKET FUND (continued)
The Financial Highlights table is intended to help you understand the
Institutional Money Market Fund's financial performance for the past five
years. Certain information shows the results of an investment in one share of
the Institutional Money Market Fund. The total returns in the table represent
the rate that an investor would have earned on an investment in the
Institutional Money Market Fund (assuming reinvestment of all dividends and
distributions).
These financial highlights reflect historical information about Investor
and Select Shares of the Institutional Money Market Fund. The financial
highlights for the four fiscal years ended October 31, 1999 and the six
months ended October 31, 1995 were audited by PricewaterhouseCoopers LLP,
whose report, along with the financial statements of the Institutional Money
Market Fund, are included in the Fund's annual report, which is available by
calling the Fund at 800-539-FUND. The financial highlights for the fiscal
year ended April 30, 1995 were audited by other auditors.
<TABLE>
<CAPTION>
Prior to
Designation of
Select Shares Investor and
Select Shares
Year Year Year Year June 5, Year
Ended Ended Ended Ended 1995 to Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Apr. 30,
1999 1998 1997 1996(5) 1995(4)(6) 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 0.046 0.051 0.051 0.050 0.012 0.500
Distributions
Net investment income (0.046) (0.051) (0.051) (0.050) (0.012) (0.500)
Net Asset Value,
End of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Total Return 4.72% 5.22% 5.17% 5.16% 1.23%(2) 4.91%
Ratios/Supplemental Data:
Net Assets,
End of Period (000) $1,116,011 $572,033 $488,639 $373,090 $11,479 $449,814
Ratio of expenses to
average net assets 0.57% 0.56% 0.55% 0.52% 0.51%(3) 0.27%
Ratio of net investment income
to average net assets 4.63% 5.09% 5.06% 4.97% 5.33%(3) 4.91%
Ratio of expenses to
average net assets(1) 0.71% 0.71% 0.75% 0.73% 1.00%(3) 0.51%
Ratio of net investment income
to average net assets(1) 4.49% 4.94% 4.86% 4.77% 4.84%(3) 4.67%
(1) During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not occurred,
the ratios would have been as indicated.
(2) Not annualized.
(3) Annualized.
(4) Effective June 5, 1995, the Victory Institutional Money Market Portfolio became the Institutional
Money Market Fund, and the Fund designated the existing shares as Institutional Shares and commenced
offering Service Shares.
(5) Effective March 1, 1996, the Fund redesignated Institutional Shares as Investor Shares and Service Shares
as Select Shares.
(6) Period from commencement of operations.
</TABLE>
22
<PAGE>
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23
<PAGE>
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24
<PAGE>
The Victory Funds
127 Public Square
OH-01-27-1612
Cleveland, Ohio 44114
Bulk Rate
U.S. Postage
PAID
Cleveland, OH
Permit No. 469
If you would like a free copy of any of the following documents or would
like to request other information regarding the Funds, you can call or write
the Funds or your Investment Professional.
Statement of Additional Information (SAI)
Contains more details describing the Funds and their policies. The SAI
has been filed with the Securities and Exchange Commission (SEC), and is
incorporated by reference in this Prospectus.
Annual and Semi-annual Reports
Describes each Fund's performance, lists portfolio holdings, and
discusses market conditions and investment strategies that significantly
affected a Fund's performance during its last fiscal year.
If you would like to receive copies of the annual and semi-annual reports
and/or the SAI at no charge, please call the Funds at 800-539-FUND
(800-539-3863).
How to Obtain Information
By telephone: Call Victory Funds at 800-539-FUND (800-539-3863).
By mail: The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
You also may obtain copies of materials from the SEC's Public Reference Room
in Washington, D.C. (Call 1-202-942-8090 for information on the operation of
the SEC's Public Reference Room.) Copies of this information may be obtained,
after paying a duplicating fee, by electronic request at the following e-mail
address: [email protected], or by writing the SEC's Public Reference
Section, Washington, D.C. 20459-0102.
On the Internet: Text only versions of Fund documents can be viewed on-line
or downloaded from the SEC at http://www.sec.gov or from the Victory Funds'
website at http://www.victoryfunds.com.
The securities described in this Prospectus and the SAI are not offered in
any state in which they may not lawfully be sold. No sales representative,
dealer, or other person is authorized to give any information or make any
representation other than those contained in this Prospectus and the SAI.
Victory Funds
(LOGO)(R) Investment Company Act File Number 811-4852 VF-FIMMF-PRO (2/00)
<PAGE>
Prospectus
Specialty Funds
LifeChoice Conservative Investor Fund
Class A Shares
LifeChoice Moderate Investor Fund
Class A Shares
LifeChoice Growth Investor Fund
Class A Shares
February 28, 2000
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved any Fund's securities or determined whether this
Prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
Victory Funds
LOGO (R)
Call Victory at:
800-539-FUND
(800-539-3863)
or visit the Victory Funds' website at:
www.victoryfunds.com
<PAGE>
The Victory Portfolios
Table of Contents
Risk/Return Summary for each of the LifeChoice Funds
An analysis which includes the investment objective,
principal strategies, principal risks, performance,
and expenses of each LifeChoice Fund
Introduction 1
Investment Objective and Principal Investment Strategies 2
Principal Risks 4
Investment Performance 5
Fees and Expenses 6
Investments 7
Risk Factors 9
Important Considerations 11
Share Price 12
Dividends, Distributions, and Taxes 12
Investing with Victory 14
* How to Buy Shares 15
* How to Exchange Shares 17
* How to Sell Shares 18
Organization and Management of the LifeChoice Funds 20
Additional Information 22
Financial Highlights 23
Key to Financial Information
Objective and Strategies
The goals and the strategies that a LifeChoice Fund plans to use to pursue
its investment objective.
Risk Factors
The risks you may assume as an investor in a LifeChoice Fund.
Performance
A summary of the historical performance of a LifeChoice Fund in comparison to
unmanaged indices.
Expenses
The costs you will pay, directly or indirectly, as an investor in a
LifeChoice Fund, including ongoing expenses.
Shares of the LifeChoice Funds are:
* Not insured by the FDIC;
* Not deposits or other obligations of, or guaranteed by KeyBank, any of its
affiliates, or any other bank;
* Subject to possible investment risks, including possible loss of the
amount invested.
<PAGE>
Introduction
Each Victory LifeChoice Fund is a "fund of funds," which means that it
pursues its investment objective by allocating its investments among other
mutual funds. The LifeChoice Funds are a part of The Victory Portfolios, an
open-end investment management company. The LifeChoice Funds invest primarily
in shares of other funds that are part of The Victory Portfolios, referred to
as "Victory Funds." Each LifeChoice Fund also may invest a portion of its
assets in shares of "Other Funds" that are not VIctory Funds. In this
Prospectus, we will use the term "Underlying Portfolios" to refer to the
Victory Funds and the Other Funds in which a LifeChoice Fund may invest.
Investment Strategy
The three LifeChoice Funds invest primarily in the Victory Funds representing
different combinations of equity securities, fixed income and specialty
securities, and cash reserves. Each of the Victory Funds has varying degrees
of potential investment risk and reward. Generally, the LifeChoice Funds
invest between 80% and 85% of their total assets at the time of purchase in
shares of the Victory Funds. In addition, each LifeChoice Fund may invest up
to 20% of its total assets in "Other Funds" to fulfill a particular
investment niche.
Who May Want to Invest in the Funds
* Investors who are looking for an investment solution that may match their
goal (investment objective), stage in life (current age or time horizon), and
risk tolerance.
* Investors who would like a team of experienced investment professionals to
select and maintain a portfolio of mutual funds for them.
* Investors who would like to spread their investment among 10-15 different
mutual funds in one simple package.
* Investors who are seeking the benefits of asset allocation and multiple
levels of risk reducing diversification.
Fees and Expenses
You will bear indirect expenses for investment advisory,
administrative, custodian, and shareholder services. We summarize these
expenses in the "Risk/Return Summary."
Key Asset Management Inc., which we will refer to as the "Adviser" or "KAM"
throughout this Prospectus, manages the LifeChoice Funds.
Please read this Prospectus before investing in the LifeChoice Funds and keep
it for future reference.
The following pages provide you with an overview of each of the LifeChoice
Funds. Please look at the objective, policies, strategies, risks, and
expenses to determine which LifeChoice Fund will suit your risk tolerance and
investment needs.
1
<PAGE>
Risk/Return Summary
THE LIFECHOICE FUNDS
LIFECHOICE CONSERVATIVE INVESTOR FUND
Cusip#: 926464561
VLCCX
LIFECHOICE MODERATE INVESTOR FUND
Cusip#: 926464553
VLCMX
LIFECHOICE GROWTH INVESTOR FUND
Cusip#: 926464546
VLCGX
Investment Objective
The Conservative Investor Fund seeks to provide current income combined with
moderate growth of capital.
The Moderate Investor Fund seeks to provide growth of capital combined with
a moderate level of current income.
The Growth Investor Fund seeks to provide growth of capital.
Principal Investment Strategies
The three LifeChoice Funds invest primarily in the Victory Funds representing
different combinations of equity securities, fixed income and specialty
securities, and cash reserves. Each of the Victory Funds has varying degrees
of potential investment risk and reward. Generally, the LifeChoice Funds
invest between 80% and 85% of their total assets at the time of purchase in
shares of the Victory Funds.
In addition, each LifeChoice Fund may invest up to 20% of its total assets
in "Other Funds" to fill a particular investment niche. The Adviser may
select any mutual fund that it believes is appropriate, including, but not
limited to, the funds listed below, based upon its analysis of the Other
Fund's investment objective, policies, strategies, the quality of its
management, and other factors it believes are important.
How the Adviser Allocates the LifeChoice Funds' Investments
KAM allocates each LifeChoice Fund's investments in particular mutual funds
based on the investment objective of each Fund. Although some of the mutual
funds do not share the investment objective of the LifeChoice Funds, the
Adviser will select those funds based on various criteria. The Adviser
analyzes the underlying mutual fund's investment objective, policies, and
investment strategy and also evaluates the size, portfolio of securities, and
management of each underlying mutual fund before investing.
Continuous Monitoring
The Adviser continuously monitors the allocation of the LifeChoice Funds and
rebalances or reallocates its investments across the Underlying Portfolios
depending on market conditions.
Conservative Investor Fund
Under normal market conditions, the Conservative Investor Fund allocates its
assets as follows:
* 30%-50% of its assets in shares of mutual funds that invest in equity
securities;
* 50%-70% of its assets in shares of mutual funds that invest in fixed income
securities and specialty securities, that is, convertible securities and real
estate investment trusts (REITs); and
*0%-15% of its assets in shares of money market funds.
Moderate Investor Fund
Under normal market conditions, the Moderate Investor Fund allocates its
assets as follows:
* 50%-70% of its assets in shares of mutual funds that invest in equity
securities;
* 30%-50% of its assets in shares of mutual funds that invest in fixed income
and specialty securities; and
* 0%-15% of its assets in shares of money market funds.
Growth Investor Fund
Under normal market conditions, the Growth Investor Fund allocates its assets
as follows:
* 70%-90% of its assets in shares of mutual funds that invest in
equity securities;
* 10%-30% of its assets in shares of mutual funds that invest in fixed income
and specialty securities; and
* 0%-15% of its assets in money market funds.
2
<PAGE>
Risk/Return Summary (continued)
Allocation of Investments Among the Various Types of Mutual Funds
The tables below summarize the percentage range that each LifeChoice Fund may
invest in each type of underlying mutual fund.
Equity Funds
Percentage of Conservative Investor Fund's Total Investments 30-50%
Percentage of Moderate Investor Fund's Total Investments 50-70%
Percentage of Growth Investor Fund's Total Investments 70-90%
Underlying Portfolios Qualifying for Purchase
Victory Funds
Value Fund
Established Value Fund
Diversified Stock Fund
Growth Fund
Small Company Opportunity Fund
Special Value Fund
International Growth Fund
Other Funds*
INVESCO Dynamics Fund
Neuberger Berman Genesis Fund
Fixed Income and Specialty Funds
Percentage of Conservative Investor Fund's Total Investments 50-70%
Percentage of Moderate Investor Fund's Total Investments 30-50%
Percentage of Growth Investor Fund's Total Investments 10-30%
Underlying Portfolios Qualifying for Purchase
Victory Funds
Real Estate Investment Fund
Convertible Securities Fund
Investment Quality Bond Fund
Intermediate Income Fund
Fund for Income
Limited Term Income Fund
Other Funds*
Loomis Sayles Bond Fund
Money Market Fund**
Percentage of Conservative Investor Fund's Total Investments 0-15%
Percentage of Moderate Investor Fund's Total Investments 0-15%
Percentage of Growth Investor Fund's Total Investments 0-15%
Underlying Portfolios Qualifying for Purchase
Victory Funds
Financial Reserves Fund
*Total investments in Other Funds is expected to range between 15% and 20%
of total investments of each of the LifeChoice Funds.
**Total investments in the Money Market Fund may temporarily exceed the 15%
maximum due to daily investment of cash flows that are expected to be used
for next day settlement of variable fund purchases by each of the Funds.
For a brief description of each Underlying Portfolio, see the "Investments
Section" of this Prospectus.
3
<PAGE>
Risk/Return Summary (continued)
Principal Risks
You may lose money by investing in a LifeChoice Fund. Each LifeChoice Fund is
subject to the following principal risks, more fully described in "Risk
Factors." Each LifeChoice Fund's net asset value, yield and/or total return
may be adversely affected if any of the following occurs:
* The market value of securities acquired by a LifeChoice Fund, including
securities of the Underlying Portfolios, declines.
- Growth stocks fall out of favor because the companies' earnings growth
does not meet expectations.
- Value stocks fall out of favor relative to growth stocks.
* A company's earnings do not increase as expected.
* Interest rates rise.
* An issuer's credit quality is downgraded.
* A LifeChoice Fund or an Underlying Portfolio must reinvest interest or sale
proceeds at lower rates.
* The rate of inflation increases.
* Foreign securities experience more volatility than their domestic
counterparts, in part because of higher political and economic risks, lack of
reliable information, fluctuations in currency exchange rates, and the risks
that a foreign government may take over assets, restrict the ability to
exchange currency or restrict the delivery of securities.
* The price of foreign securities issued in emerging countries experience
more volatility because the securities markets in these countries may not be
well established.
An investment in a LifeChoice Fund is not a deposit of KeyBank or any of its
affiliates and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Certain risks are associated with the operation of a fund of funds:
* The LifeChoice Allocation Committee does not execute a LifeChoice Fund's
principal investment strategies effectively, for example, by emphasizing
investment in a market sector that underperforms others.
* KAM is subject to various conflicts of interest because of the fund of
funds structure of the LifeChoice Funds. The Victory Board of Trustees has
adopted policies to monitor those potential conflicts.
* Other Funds may follow some or all of the investment practices of the
Victory Funds and/or may follow other investment practices. The LifeChoice
Funds have little or no control over the investment activities of the Other
Funds. There may be additional investment practices, not discussed in this
Prospectus or in the Statement of Additional Information (SAI), that both
the Victory Funds and Other Funds may engage in from time to time.
* The Funds may invest in mutual funds that concentrate, (that is, invest
more than 25% of their total assets) in a single industry. Shares of these
mutual funds may fluctuate in value more than shares of funds that do not
concentrate their investments in a single industry.
* Some of the Other Funds may limit the ability of the LifeChoice Funds to
sell their investments in those funds at certain times. In this case, the
LifeChoice Funds' investment in those shares will be considered "illiquid"
and subject to the overall limitation on investment in illiquid securities.
* From time to time, an Underlying Portfolio in which a LifeChoice Fund
invests may choose to redeem the Fund's shares "in kind." That is, the
Underlying Portfolio may give the LifeChoice Fund securities from its
portfolio rather than the cash value of those securities. If the Adviser
determines that it is in the best interests of shareholders, a LifeChoice
Fund may keep those securities in its portfolio, even if the Fund could
not otherwise purchase those securities.
4
<PAGE>
Risk/Return Summary (continued)
Investment Performance
The bar charts and tables shown below give an indication of the risks of
investing in each LifeChoice Fund by showing changes in its performance for
various time periods ending December 31st. The bar charts, tables, and
highest and lowest returns do not include the effect of a sales charge of
5.75%, which was in effect from March 1, 1999 through November 30, 1999. If
the sales charge was reflected, returns would be less than those shown. The
figures shown assume reinvestment of dividends and distributions.
Conservative Investor Fund
1997 12.71%
1998 6.46%
1999 7.62%
Moderate Investor Fund
1997 14.83%
1998 7.83%
1999 11.30%
Growth Investor Fund
1997 16.91%
1998 8.80%
1999 15.41%
Past performance does not indicate future results.
During the periods shown in the bar chart, each Fund's highest and lowest
return for a quarter were as follows:
Highest Lowest
Conservative 7.41% -6.04%
Investor (Quarter ending 6/30/97) (Quarter ending 9/30/98)
Moderate 11.92% -10.11%
Investor (Quarter ending 12/31/98) (Quarter ending 9/30/98)
Growth 14.76% -12.62%
Investor (Quarter ending 12/31/98) (Quarter ending 9/30/98)
The table below shows how each LifeChoice Fund's average annual returns for
one year and since inception compare to the returns of two broad-based
securities market indices.
Average Annual Total Returns
(for the Periods ended Past Since
December 31, 1999) One Year Inception(1)
Conservative Investor Fund 7.62% 8.90%
Moderate Investor Fund 11.30% 11.28%
Growth Investor Fund 15.41% 13.65%
S&P 500 Index(2),(4) 21.04% 27.56%
Lehman Brothers Aggregate Bond Index(3),(4) (0.82)% 5.73%
1 Reflects performance since each LifeChoice Fund's inception on 12/31/96.
2 The Standard & Poor's 500 Stock Index is a broad-based unmanaged index that
represents the general performance of domestically traded common stocks of
mid to large-sized companies.
3 The Lehman Brothers Aggregate Bond Index is a broad-based unmanaged index
that represents the general performance of longer-term (greater than one
year), investment-grade fixed-income securities.
4 Index returns do not include any brokerage commissions, sales charges, or
other fees. It is not possible to invest directly in an index.
5
<PAGE>
Risk/Return Summary (continued)
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the LifeChoice Funds.
Shareholder Transaction Conservative Moderate Growth
Expenses (paid directly Investor Investor Investor
from your investment)(1) Fund Fund Fund
Maximum Sales
Charge Imposed
on Purchases (as a NONE NONE NONE
percentage of offering price)
Maximum Deferred
Sales Charge
(as a percentage of the lower NONE NONE NONE
of purchase or sale price)
Maximum Sales
Charge Imposed
on Reinvested NONE NONE NONE
Dividends
Redemption Fees NONE NONE NONE
Exchange Fees NONE NONE NONE
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees 0.20% 0.20% 0.20%
Distribution (12b-1) Fees 0.00% 0.00% 0.00%
Other Expenses (includes a
shareholder servicing fee
of 0.25%) 1.26% 0.51% 0.81%
Total Fund
Operating Expenses(2) 1.46% 0.71% 1.01%
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 The Adviser may waive its management fee and reimburse expenses, as
allowed by law, so that the net operating expenses of each LifeChoice Fund
will equal 0.20%. The Adviser may terminate these waivers/reimbursements at
any time.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in each LifeChoice Fund with the cost of investing in other mutual
funds. The Example assumes that you invest $10,000 in each LifeChoice Fund
for the time periods shown and then redeem all of your shares at the end of
those periods. The Example also assumes that your investment has a 5% return
each year and that each LifeChoice Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 Year 3 Years 5 Years 10 Years
Conservative Investor Fund $149 $462 $797 $1,746
Moderate Investor Fund $ 73 $227 $395 $ 883
Growth Investor Fund $103 $322 $558 $1,236
Total estimated expenses of the Conservative Investor Fund, the Moderate
Investor Fund, and the Growth Investor Fund, including expenses of the
Underlying Portfolios, are 1.28%, 1.34%, and 1.40%, respectively.
Expenses of the Underlying Portfolios
In addition to bearing the expenses incurred by the LifeChoice Funds, you
will indirectly bear a proportionate share of the expenses of the Underlying
Portfolios in which the LifeChoice Funds invest, including management fees,
administration fees, and custodian fees. The Victory Board of Trustees has
determined that the advisory fees that the LifeChoice Funds pay to the
Adviser are for services that add to, rather than duplicate, services
provided to the mutual funds by their service providers. Some of the
Underlying Portfolios may incur distribution plan expenses in the form of
"12b-1 fees."
6
<PAGE>
Investments
Each LifeChoice Fund invests primarily in the Underlying Portfolios described
below.
For cash management or for temporary defensive purposes in response to market
conditions, each LifeChoice Fund may hold all or a portion of its assets in
cash or short-term money market instruments. This may reduce the benefit from
any upswing in the market and may cause a LifeChoice Fund to fail to meet its
investment objective.
For more information on ratings and a more complete description of which
LifeChoice Funds can invest in certain types of securities, see the SAI.
The following is a summary of the investment objective and principal
strategies of each of the Victory Funds in which the LifeChoice Funds may
invest:
Funds that Invest Primarily in Equity Securities
Value Fund invests primarily in companies that have above average total
return potential and are historically inexpensive.
Established Value Fund invests primarily in equity companies with market
capitalizations of $2 billion or more.
Diversified Stock Fund invests primarily in large, established companies.
Growth Fund invests primarily in companies with superior prospects for
long-term earnings growth and price appreciation.
Special Value Fund invests primarily in small and medium size companies
with above average total return potential.
Small Company Opportunity Fund invests primarily in smaller companies
(currently up to $2 billion in market capitalization) that show the potential
for high earnings growth in relation to their price-earnings ratio.
International Growth Fund invests primarily in equity securities of foreign
corporations, most of which will be denominated in foreign currencies.
Funds that Invest Primarily in Specialty Securities
Real Estate Investment Fund invests at least 80% of its total assets in
real-estate related companies.
Convertible Securities Fund invests primarily in securities convertible into
common stock, including bonds, notes, and preferred stock.
7
<PAGE>
Investments (continued)
Funds that Invest Primarily in Fixed Income Securities
Investment Quality Bond Fund invests primarily in investment-grade corporate
bonds and obligations of the U.S. government and its agencies or
instrumentalities.
Intermediate Income Fund invests in debt securities issued by corporations
and the U.S. government and its agencies and instrumentalities.
Fund for Income invests primarily in securities issued by the U.S. government
and its agencies or instrumentalities.
Limited Term Income Fund invests in investment-grade, fixed income securities
with a dollar-weighted average maturity of one to five years.
Funds that Invest in Money Market Securities
Financial Reserves Fund invests primarily in high-quality U.S. dollar
denominated money market instruments.
As of February 28, 2000, one or more of the LifeChoice Funds invested in the
following Other Funds:
INVESCO Dynamics Fund invests primarily in mid-size U.S. companies (market
capitalization between $1 and $10 billion).
Neuberger Berman Genesis Fund invests primarily in companies with small
market capitalizations (up to $1.5 billion) at the time of investment as
small-cap companies.
Loomis Sayles Bond Fund invests primarily in fixed income securities. Up to
20% of its assets may be invested in preferred stocks.
LIMIT: The LifeChoice Funds, with other accounts managed by the Adviser and
its affiliates, may not invest in more than 3% of the outstanding shares of
any one Other Fund.
8
<PAGE>
Risk Factors
This Prospectus describes the principal risks that you may assume as an
investor in the LifeChoice Funds. Each LifeChoice Fund is subject to the
following principal risks.
General Risks:
* Market risk is the risk that the market value of a security may fluctuate,
depending on the supply and demand for that type of security. As a result of
this fluctuation, a security may be worth more or less than the price a
LifeChoice Fund originally paid for the security, or more or less than the
security was worth at an earlier time. Market risk may affect a single
issuer, an industry, a sector of the economy, or the entire market and is
common to all investments.
* Manager risk is the risk that a LifeChoice Fund's Investment Committee may
implement its investment strategy in a way that does not produce the intended
result.
Risks associated with investing in equity securities:
* Equity risk is the risk that the value of the security will fluctuate in
response to changes in earnings or other conditions affecting the issuer's
profitability. Unlike debt securities, which have preference to a company's
assets in case of liquidation, equity securities are entitled to the residual
value after the company meets its other obligations. For example, in the
event of bankruptcy, holders of debt securities have priority over holders of
equity securities to a company's assets.
Risks associated with investing in foreign securities:
* Currency risk is the risk that fluctuations in the exchange rates between the
U.S. dollar and foreign currencies may negatively affect an investment.
Adverse changes in exchange rates may erode or reverse any gains produced by
foreign currency denominated investments and may widen any losses. Political
and economic risks, along with other factors, could adversely affect the
value of a LifeChoice Fund's securities.
* Foreign issuer risk. Compared to U.S. companies, there generally is less
publicly available information about foreign companies and there may be less
governmental regulation and supervision of foreign stock exchanges, brokers,
and listed companies. Foreign issuers may not be subject to the uniform
accounting, auditing, and financial reporting standards and practices
prevalent in the U.S. In addition, foreign securities markets may be more
volatile and subject to less governmental supervision than their counterparts
in the U.S. Investments in foreign countries could be affected by factors not
present in the U.S., including expropriation, confiscation of property, and
difficulties in enforcing contracts. All of these factors can make foreign
investments more volatile than U.S. investments.
Risks associated with investing in debt securities:
* Interest rate risk. The value of a debt security typically changes in the
opposite direction from a change in interest rates. When interest rates go
up, the value of a debt security typically goes down. When interest rates go
down, the value of a debt security typically goes up. Generally, the market
values of securities with longer maturities are more sensitive to changes in
interest rates.
* Inflation risk is the risk that inflation will erode the purchasing power
of the cash flows generated by debt securities held by a LifeChoice Fund.
Fixed-rate debt securities are more susceptible to this risk than
floating-rate debt securities or equity securities that have a record of
dividend growth.
By matching your investment objective with an acceptable level of risk, you
can create your own customized investment plan.
9
<PAGE>
Risk Factors (continued)
It is important to keep in mind one basic principle of investing: the greater
the risk, the greater the potential reward. The reverse is also generally
true: the lower the risk, the lower the potential reward.
An investment in a LifeChoice Fund is not a complete investment program.
* Reinvestment risk is the risk that when interest rates are declining, a
Fund that receives interest income or prepayments on a security will have to
reinvest these moneys at lower interest rates. Generally, interest rate risk
and reinvestment risk tend to have offsetting effects, though not necessarily
of the same magnitude.
* Credit (or default) risk is the risk that the issuer of a debt security
will be unable to make timely payments of interest or principal. Interest
or principal payments may not be insured or guaranteed on all securities.
Credit risk is measured by nationally recognized statistical rating
organizations such as Standard & Poor's, Fitch IBCA International, or Moody's
Investors Service.
Risks associated with investing in below-investment-grade securities:
* Below-investment-grade securities ("junk bonds") are subject to certain
risks in addition to those risks associated with investment-grade securities.
Below-investment-grade securities may be more susceptible to real or
perceived adverse economic conditions, less liquid, and more difficult to
evaluate than investment-grade securities.
Risks associated with investing in mortgage-related securities:
* Prepayment risk. Prepayments of principal on mortgage-related securities
affect the average life of a pool of mortgage-related securities. The level
of interest rates and other factors may affect the frequency of mortgage
prepayments. In periods of rising interest rates, the prepayment rate tends
to decrease, lengthening the average life of a pool of mortgage-related
securities. In periods of falling interest rates, the prepayment rate tends
to increase, shortening the average life of a pool of mortgage-related
securities. Prepayment risk is the risk that, because prepayments generally
occur when interest rates are falling, a Fund may have to reinvest the
proceeds from prepayments at lower interest rates.
* Extension risk is the risk that the rate of anticipated prepayments on
principal may not occur, typically because of a rise in interest rates, and
the expected maturity of the security will increase. During periods of
rapidly rising interest rates, the effective average maturity of a security
may be extended past what a LifeChoice Fund's portfolio manager anticipated
that it would be. The market value of securities with longer maturities tend
to be more volatile.
Risks associated with investing in real estate securities:
* Real estate risk is the risk that the value of a security will fluctuate
because of changes in property values, vacancies of rental properties,
overbuilding, changes in local laws, increased property taxes and operating
expenses, and other risks associated with real estate. While a LifeChoice
Fund will not invest directly in real estate, it may be subject to the risks
associated with direct ownership. Equity REITs(1) may be affected by changes in
property value, while mortgage REITs(2) may be affected by credit quality and
interest rates.
1 Equity REITs may own property, generate income from rental and lease
payments, and offer the potential for growth from property appreciation and
periodic capital gains from the sale of property.
2 Mortgage REITs earn interest income and are subject to credit risks, like
the chance that a developer may fail to repay a loan. Mortgage REITs are also
subject to interest rate risk, described above.
* Regulatory risk. Certain REITs may fail to qualify for pass-through of
income under federal tax law, or to maintain their exemption from the
registration requirements under federal securities laws.
10
<PAGE>
Important Considerations
What is a Fund of Funds?
A fund of funds is an investment company that pursues its investment
objective by investing primarily in shares of other mutual funds. These
mutual funds themselves invest in different combinations of equity
securities, fixed income and specialty securities, or cash reserves.
What are the Benefits of Investing in a Fund of Funds?
There are thousands of mutual funds available for investment, with many
different objectives, strategies, and policies. Choosing the right balance
and mix of mutual funds to meet your needs can be difficult and
time-consuming. The LifeChoice Funds offer an efficient and cost-effective
alternative to achieving your long-term investment goals by providing access
to three different, yet comprehensive, portfolio mixes. You simply select the
LifeChoice Fund strategy that you think is right for your investment
objective, time horizon, and level of risk tolerance. KAM manages the
selection and allocation of underlying mutual funds consistent with the
overall strategy for each Fund.
The following examples show some possible characteristics of each investor
type and how the matching portfolio allocation might look. The allocation can
change within each designated range based on market conditions and will vary
over time.
Conservative Investor
Investment Objective: Income with a moderate level of growth
Current Age: Time Horizon:
Late 50s through retirement -OR- At least 6 years
Risk Tolerance: Low to moderate
If you seek income but are also concerned about protecting the value of your
investment and/or have a shorter time horizon and a lower tolerance for
volatility, you might find the Conservative Investor Fund to be a suitable
investment.
Equity 40%
Money Market 3%
Fixed Income/Specialty 57%
Ranges
Equity 30-50%
Fixed Income/Specialty 50-70%
Money Market 0-15%
Moderate Investor
Investment Objective: Growth with a moderate level of income
Current Age: Time Horizon:
Early 40s to late 50s -OR- At least 8 years
Risk Tolerance: Moderate to high
If you seek capital appreciation, with some income, have a longer time
horizon and moderate tolerance for volatility, you might find the Moderate
Investor Fund to be a suitable investment.
Equity 60%
Money Market 3%
Fixed Income/Specialty 37%
Ranges
Equity 50-70%
Fixed Income/Specialty 30-50%
Money Market 0-15%
Growth Investor
Investment Objective: Growth
Current Age: Time Horizon:
20s to early 40s -OR- At least 9 years
Risk Tolerance: High
If you seek potential for capital appreciation with a longer time horizon and
a higher tolerance for volatility, you might find the Growth Investor Fund to
be a suitable investment.
Equity 80%
Money Market 3%
Fixed Income/Specialty 17%
Ranges
Equity 70-90%
Fixed Income/Specialty 10-30%
Money Market 0-15%
You should consult with your Investment Professional to help determine your
investment objectives and risk tolerance.
11
<PAGE>
Share Price
Each LifeChoice Fund calculates its share price, called its "net asset value"
(NAV), each business day at 4:00 p.m. Eastern Time or at the close of trading
on the New York Stock Exchange, Inc. (NYSE), whichever time is earlier. You
may buy, exchange, and sell your shares on any business day at a price that
is based on the NAV that is calculated after you place your order. A business
day is a day on which the NYSE is open.
A LifeChoice Fund's NAV may change on days when shareholders will not be able
to purchase or redeem the Fund's shares if an Underlying Fund has portfolio
securities that are primarily listed on foreign exchanges that trade on
weekends or other days when a Fund does not price its shares.
The LifeChoice Funds value their investments based on market value. When
market quotations are not readily available, the LifeChoice Funds value their
investments based on fair value methods approved by the Board of Trustees of
the Victory Portfolios.
Each LifeChoice Fund calculates its NAV by adding up the total value of its
investments and other assets, subtracting its liabilities, and then dividing
that figure by the number of outstanding shares.
Total Assets-Liabilities
NAV = ----------------------------
Number of Shares Outstanding
You can find a LifeChoice Fund's net asset value each day in The Wall Street
Journal and other newspapers. Newspapers do not normally publish fund
information until a LifeChoice Fund reaches a specific number of shareholders
or level of assets.
The daily NAV is useful to you as a shareholder because the NAV, multiplied
by the number of LifeChoice Fund shares you own gives you the value of your
investment.
Dividends, Distributions, and Taxes
Buying a Dividend. You should check a LifeChoice Fund's distribution schedule
before you invest. If you buy shares of a Fund shortly before it makes a
distribution, some of your investment may come back to you as a taxable
distribution.
As a shareholder, you are entitled to your share of net income and capital
gains on the LifeChoice Funds' investments. The LifeChoice Funds pass their
earnings along to investors in the form of dividends. Dividend distributions
are the net income earned on investments after expenses. A LifeChoice Fund
will distribute short-term gains, as necessary, and if a LifeChoice Fund
makes a long-term capital gain distribution, it is normally paid once a year.
As with any investment, you should consider the tax consequences of an
investment in a LifeChoice Fund.
Ordinarily, each LifeChoice Fund declares and pays dividends quarterly.
Distributions can be received in one of the following ways.
REINVESTMENT OPTION
You can have distributions automatically reinvested in additional shares of
your LifeChoice Fund. If you do not indicate another choice on your Account
Application, you will be assigned this option automatically.
CASH OPTION
A check will be mailed to you no later than seven days after the dividend
payment date.
12
<PAGE>
Dividends, Distributions, and Taxes (continued)
INCOME EARNED OPTION
You can automatically reinvest your dividends in additional shares of a
LifeChoice Fund and have your capital gains paid in cash, or reinvest capital
gains and have your dividends paid in cash.
DIRECTED DIVIDENDS OPTION
In most cases, you can automatically reinvest distributions in shares of
another fund of the Victory Group. If you reinvest your distributions in a
different class of another fund, you may pay a sales charge on the reinvested
distributions.
DIRECTED BANK ACCOUNT OPTION
In most cases, you can automatically transfer distributions to your bank
checking or savings account. Under normal circumstances, a LifeChoice Fund
will transfer your distributions within seven days of the dividend payment
date. The bank account must have a registration identical to that of your
LifeChoice Fund account.
Important Information about Taxes
Each LifeChoice Fund pays no federal income tax on the earnings and capital
gains it distributes to shareholders.
* Ordinary dividends from a LifeChoice Fund are taxable as ordinary income;
dividends from a LifeChoice Fund's long-term capital gains are taxable as
long-term capital gain.
* Dividends are treated in the same manner for federal income tax purposes
whether you receive them in cash or in additional shares. They also may be
subject to state and local taxes.
* Dividends from a LifeChoice Fund that are attributable to interest on
certain U.S. government obligations may be exempt from certain state and
local income taxes. The extent to which ordinary dividends are attributable
to these U.S. government obligations will be provided on the tax statements
you receive from a LifeChoice Fund.
* An exchange of a LifeChoice Fund's shares for shares of another fund will be
treated as a sale. When you sell or exchange shares of a LifeChoice Fund, you
must recognize any gain or loss.
* Certain dividends paid to you in January will be taxable as if they had
been paid to you the previous December.
* Tax statements will be mailed from each LifeChoice Fund every January
showing the amounts and tax status of distributions made to you.
* Because your tax treatment depends on your purchase price and tax position,
you should keep your regular account statements for use in determining your
tax.
* You should review the more detailed discussion of federal income tax
considerations in the SAI.
The tax information in this Prospectus is provided as general information.
You should consult your own tax adviser about the tax consequences ofan
investment in a LifeChoice Fund.
13
<PAGE>
INVESTING WITH VICTORY
If you are looking for a convenient way to open an account or to add money to
an existing account, Victory can help. The sections that follow will serve as
a guide to your investments with Victory. The following sections will
describe how to open an account, how to access information on your account,
and how to buy, exchange, and sell shares of a LifeChoice Fund. We want to
make it simple for you to do business with us. If you have questions about
any of this information, please call your Investment Professional or one of
our customer service representatives at 800-539-FUND. They will be happy to
assist you.
All you need to do to get started is to fill out an application.
An Investment Professional is an investment consultant, salesperson,
financial planner, investment adviser, or trust officer who provides you with
investment information.
For historical expense information on Class A Shares, see the "Financial
Highlights" at the end of this Prospectus.
Shareholder Servicing Plan
The LifeChoice Funds have adopted a Shareholder Servicing Plan. The
shareholder servicing agent performs a number of services for its customers
who are shareholders of the LifeChoice Funds. It establishes and maintains
accounts and records, processes dividend payments, arranges for bank wires,
assists in transactions, and changes account information. For these services,
a LifeChoice Fund pays a fee at an annual rate of up to 0.25% of the average
daily net assets of the shares serviced by the agent. The LifeChoice Funds
may enter into agreements with various shareholder servicing agents,
including KeyBank National Association and its affiliates, other financial
institutions, and securities brokers. The LifeChoice Funds may pay a
servicing fee to broker-dealers and others who sponsor "no transaction fee"
or similar programs for the purchase of shares. Shareholder servicing agents
may waive all or a portion of their fee periodically.
Distribution Plan
In accordance with Rule 12b-1 under the Investment Company Act of 1940,
Victory has adopted a Distribution and Service Plan for the LifeChoice Funds,
but these Funds do not pay expenses under this plan.
14
<PAGE>
How to Buy Shares
You can buy shares in a number of different ways. All you need to do to get
started is to fill out an application. The minimum investment required to
open an account is $500 ($100 for IRAs), with additional investments of at
least $25. There is no minimum investment required to open an account or for
additional investments for SIMPLE~IRAs. You can send in your payment by
check, wire transfer, exchange from another Victory Fund, or through
arrangements with your Investment Professional. Sometimes an Investment
Professional will charge you for these services. This fee will be in addition
to, and unrelated to, the fees and expenses charged by a LifeChoice Fund. If
you buy shares directly from the LifeChoice Funds and your investment is
received and accepted by 4:00 p.m. Eastern Time or the close of trading on
the NYSE (whichever time is earlier), your purchase will be processed the
same day using that day's share price.
Make your check payable to: The Victory Funds
Keep the following addresses handy for purchases, exchanges, or redemptions:
BY REGULAR U.S. MAIL
Send completed Account Applications with your check, bank draft, or money
order to:
The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
BY OVERNIGHT MAIL
Use the following address ONLY for overnight packages.
The Victory Funds
c/o Boston Financial Data Services
66 Brooks Drive
Braintree, MA 02184
PHONE: 800-539-FUND
BY WIRE
The Transfer Agent does not charge a wire fee, but your originating bank may
charge a fee. Always call theTransfer Agent at 800-539-FUND BEFORE wiring
funds to obtain a confirmation number.
The Victory Funds
State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA
Account #9905-201-1
(insert account number, name, and
confirmation number assigned by the
Transfer Agent)
BY TELEPHONE
800-539-FUND
(800-539-3863)
15
<PAGE>
How to Buy Shares (continued)
If you would like to make additional investments after your account is
established, use the Investment Stub attached to your confirmation statement
and send it with your check to the address indicated.
ACH
After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic member banks may be used. It
takes about 15 days to set up an ACH account. Currently, the LifeChoice Funds
do not charge a fee for ACH transfers.
Statements and Reports
You will receive a periodic statement reflecting any transactions that affect
the balance or registration of your account. You will receive a confirmation
after any purchase, exchange, or redemption. If your account has been set up
by an Investment Professional, Fund activity will be detailed in that
account's statements. Share certificates are not issued. Twice a year, you
will receive the financial reports of the LifeChoice Funds. By January 31 of
each year, you will be mailed an IRS form reporting distributions for the
previous year, which also will be filed with the IRS.
Systematic Investment Plan
To enroll in the Systematic Investment Plan, you should check this box on the
Account Application. We will need your bank information and the amount and
frequency of your investment. You can select monthly, quarterly, semi-annual,
or annual investments. You should attach a voided personal check so the
proper information can be obtained. You must first meet the minimum
investment requirement of $500 ($100 for IRA accounts), then we will make
automatic withdrawals of the amount you indicate ($25 or more) from your bank
account and invest it in shares of a LifeChoice Fund.
Retirement Plans
You can use the LifeChoice Funds as part of your retirement portfolio. Your
Investment Professional can set up your new account under one of several
tax-deferred retirement plans. Please contact your Investment Professional or
the LifeChoice Funds for details regarding an IRA or other retirement plan
that works best for your financial situation.
All purchases must be made in U.S. dollars and drawn on U.S. banks. The
Transfer Agent may reject any purchase order in its sole discretion. If your
check is returned for any reason, you will be charged for any resulting fees
and/or losses. Third party checks will not be accepted. You may only buy or
exchange into fund shares legally available in your state. If your account
falls below $500 ($100 for IRA accounts), we may ask you to re-establish the
minimum investment. If you do not do so within 60 days, we may close your
account and send you the value of your account.
16
<PAGE>
How to Exchange Shares
You can sell shares of one fund of the Victory Portfolios to buy shares of
the same class of any other. This is considered an exchange.
You can exchange shares of a LifeChoice Fund by writing the Transfer Agent or
calling 800-539-FUND. When you exchange shares of a LifeChoice Fund, you
should keep the following in mind:
* Shares of the Fund selected for exchange must be available for sale in your
state of residence.
* The Fund whose shares you want to exchange and the fund whose shares you
want to buy must offer the exchange privilege.
* If you own Class A Shares of a LifeChoice Fund, you may have to pay a
sales charge if you exchange them for Class A Shares of another Victory
Fund; you pay the percentage point difference between that fund's sales
charge and any sales charge you previously paid in connection with the shares
you are exchanging.
* On certain business days, such as Veterans Day and Columbus Day, the
Federal Reserve Bank of Cleveland is closed. On those days, exchanges to or
from a money market fund will be processed on the exchange date, with the
corresponding purchase or sale of the money market fund shares being effected
on the next business day.
* You must meet the minimum purchase requirements for the fund you purchase
by exchange.
* The registration and tax identification numbers of the two accounts must be
identical.
* You must hold the shares you buy when you establish your account for at
least seven days before you can exchange them; after the account is open
seven days, you can exchange shares on any business day.
* Each Fund may refuse any exchange purchase request if the Adviser determines
that the request is associated with a market timing strategy. Each Fund may
terminate or modify the exchange privilege at any time on 30 days' notice to
shareholders.
* Before exchanging, read the prospectus of the fund you wish to purchase by
exchange.
* An exchange of Fund shares constitutes a sale for tax purposes.
You can obtain a list of funds available for exchange by calling
800-539-FUND.
17
<PAGE>
How to Sell Shares
There are a number of convenient ways to sell your shares. You can use the
same mailing addresses listed for purchases.
If your request is received in good order by 4:00 p.m. Eastern Time or the
close of trading on the NYSE (whichever time is earlier), your redemption
will be processed the same day.
BY TELEPHONE
The easiest way to sell shares is by calling 800-539-FUND. When you fill out
your original application, be sure to check the box marked "Telephone
Authorization." Then when you are ready to sell, call and tell us which one
of the following options you would like to use:
* Mail a check to the address of record;
* Wire funds to a domestic financial institution;
* Mail a check to a previously designated alternate address; or
* Electronically transfer your redemption via the Automated Clearing House
(ACH).
The Transfer Agent records all telephone calls for your protection and takes
measures to verify the identity of the caller. If the Transfer Agent properly
acts on telephone instructions and follows reasonable procedures to ensure
against unauthorized transactions, neither Victory, its servicing agents, the
Adviser, nor the Transfer Agent will be responsible for any losses. If the
Transfer Agent does not follow these procedures, it may be liable to you for
losses resulting from unauthorized instructions.
If there is an unusual amount of market activity and you cannot reach the
Transfer Agent or your Investment Professional by telephone, consider placing
your order by mail.
BY MAIL
Use the Regular U.S. Mail or Overnight Mail Address to redeem shares. Send us
a letter of instruction indicating your Fund account number, amount of
redemption, and where to send the proceeds. A signature guarantee is required
for the following redemption requests:
* Redemptions over $10,000;
* Your account registration has changed within the last 15 days;
* The check is not being mailed to the address on your account;
* The check is not being made payable to the owner of the account;
* The redemption proceeds are being transferred to another Victory Group
account with a different registration; or
* The check or wire is being sent to a different bank account.
You can get a signature guarantee from a financial institution such as a bank,
broker-dealer, credit union, clearing agency, or savings association.
BY WIRE
If you want to receive your proceeds by wire, you must establish a Fund
account that will accommodate wire transactions. If you call by 4:00 p.m.
Eastern Time or the close of trading on the NYSE (whichever time is earlier),
your funds will be wired on the next business day.
BY ACH
Normally, your redemption will be processed on the same day, but will be
processed on the next day if received after 4:00 p.m. Eastern Time or the
close of trading on the NYSE (whichever time is earlier). It will be
transferred by ACH as long as the transfer is to a domestic bank.
18
<PAGE>
How to Sell Shares (continued)
Systematic Withdrawal Plan
If you check this box on the Account Application, we will send monthly,
quarterly, semi-annual, or annual payments to the person you designate. The
minimum withdrawal is $25, and you must have a balance of $5,000 or more. If
the payment is to be sent to an account of yours, we will need a voided check
to activate this feature. If the payment is to be made to an address
different from your account address, we will need a signature guaranteed
letter of instruction. You should be aware that your account eventually may
be depleted. However, you cannot automatically close your account using the
Systematic Withdrawal Plan. If your balance falls below $500, we may ask you
to bring the account back to the minimum balance. If you decide not to
increase your account to the minimum balance, your account may be closed and
the proceeds mailed to you.
Additional Information about Redemptions
* Redemption proceeds from the sale of shares purchased by a check may be
held until the purchase check has cleared, which may take up to 15 days.
* A LifeChoice Fund may suspend your right to redeem your shares in the
following circumstances:
- During non-routine closings of the NYSE;
- When the SEC determines either that trading on the NYSE is restricted or
that an emergency prevents the sale or valuation of the Fund's securities;
or
- When the SEC orders a suspension to protect a Fund's shareholders.
* Each LifeChoice Fund will pay redemptions by any one shareholder during
any 90-day period in cash up to the lesser of $250,000 or 1% of a LifeChoice
Fund's net assets. Each LifeChoice Fund reserves the right to pay the
remaining portion "in kind," that is, in portfolio securities rather than
cash.
19
<PAGE>
Organization and Management of the LifeChoice Funds
About Victory
Each LifeChoice Fund is a member of the Victory Portfolios, a group of over
30 distinct investment portfolios. The Board of Trustees of Victory has the
overall responsibility for the management of the LifeChoice Funds.
The Investment Adviser and Sub-Administrator
Each LifeChoice Fund has an Advisory Agreement which is one of its most
important contracts. Key Asset Management Inc. (KAM), a New York corporation
registered as an investment adviser with the SEC, is the Adviser to each of
the LifeChoice Funds. KAM, a subsidiary of KeyCorp, oversees the operations
of the LifeChoice Funds according to investment policies and procedures
adopted by the Board of Trustees. Affiliates of the Adviser manage
approximately $76 billion for individual and institutional clients. KAM's
address is 127 Public Square, Cleveland, Ohio 44114.
For the fiscal year ended October 31, 1999, KAM was paid advisory fees based
on a percentage of the average daily net assets of each LifeChoice Fund as
shown in the following table.
LifeChoice Conservative Investor Fund 0.10%
LifeChoice Moderate Investor Fund 0.10%
LifeChoice Growth Investor Fund 0.10%
Under a Sub-Administration Agreement, BISYS Fund Services Ohio, Inc. pays KAM
a fee at the annual rate of up to 0.05% of each LifeChoice Fund's average
daily net assets to perform some of the administrative duties for the
LifeChoice Funds.
We want you to know who plays what role in your investment and how they are
related. This section discusses the organizations employed by the LifeChoice
Funds to provide services to their shareholders. Each of these organizations
is paid a fee for its services.
Portfolio Management
The LifeChoice Allocation Committee of KAM manages each Fund's investments.
No one person is primarily responsible for making investment recommendations.
The Committee is responsible for the selection of and allocation among the
Underlying Portfolios. Each individual listed below, other than Anthony
Aveni, has been a member of the Committee since the LifeChoice Funds'
inception. Mr. Aveni has been a member of the Committee since January 1999.
Victory LifeChoice Funds -- Asset Allocation Committee
Anthony Aveni is the Chief Investment Officer and a Senior Managing Director
with KAM and has been associated with KAM or an affiliate since 1981.
Christopher K. Dyer is a Managing Director with KAM and has been associated
with KAM or an affiliate since 1985. As Managing Director of Retirement
Product Development, Mr. Dyer is responsible for the product management of
mutual funds distributed to the retirement market as well as the management
of KeyCorp's retail retirement products.
Terry D. Taylor is a Director with KAM and has been associated with KAM or an
affiliate since 1974. As a Director of Portfolio Analysis at KAM, Mr. Taylor
is responsible for mutual fund evaluation and oversees the products used in
several distribution channels.
20
<PAGE>
Organization and Management of the LifeChoice Funds (cont.)
OPERATIONAL STRUCTURE OF THE LIFECHOICE FUNDS
TRUSTEES ADVISER
SHAREHOLDERS
FINANCIAL SERVICES FIRMS AND
THEIR INVESTMENT PROFESSIONALS
Advise current and prospective shareholders
on their LifeChoice Fund investments.
TRANSFER AGENT/SERVICING AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
Handles services such as record-keeping, statements,
processing of buy and sell requests, distribution of
dividends, and servicing of shareholder accounts.
ADMINISTRATOR, DISTRIBUTOR,
AND FUND ACCOUNTANT CUSTODIAN
Key Trust Company of Ohio, N.A.
BISYS Fund Services 127 Public Square
and its affiliates Cleveland, OH 44114
3435 Stelzer Road
Columbus, OH 43219 Provides for safekeeping of the
LifeChoice Funds' investments and
Markets the LifeChoice Funds, cash, and settles trades made by the
distributes shares through LifeChoice Funds.
Investment Professionals, and
calculates the value of shares.
As Administrator, handles the
day-to-day activities of
the Funds.
SUB-ADMINISTRATOR
Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114
Performs certain
sub-administrative services.
The LifeChoice Funds are supervised by the Board of Trustees, which monitors
the services provided to investors.
21
<PAGE>
Additional Information
Some additional information you should know about the LifeChoice Funds.
Share Classes
The LifeChoice Funds currently offer only the class of shares described in
this Prospectus. At some future date, the LifeChoice Funds may offer
additional classes of shares.
Performance
The Victory Funds may advertise the performance of each LifeChoice Fund by
comparing it to other mutual funds with similar objectives and policies.
Performance information also may appear in various publications. Any fees
charged by Investment Professionals may not be reflected in these performance
calculations. Advertising information will include the average annual total
return of each LifeChoice Fund calculated on a compounded basis for specified
periods of time. Total return information will be calculated according to
rules established by the SEC. Such information may include performance
rankings and similar information from independent organizations, such as
Lipper, Inc., and industry publications such as Morningstar, Inc., Business
Week, or Forbes. You also should see the "Investment Performance" section for
the LifeChoice Fund in which you would like to invest.
Shareholder Communications
In order to eliminate duplicate mailings to an address at which two or more
shareholders with the same last name reside, the LifeChoice Funds will send
only one copy of any shareholder reports, prospectuses and their supplements,
unless you have instructed us to the contrary. You may request that the
LifeChoice Funds send these documents to each shareholder individually by
calling the Funds at 800-539-FUND (800-539-3863).
If you would like to receive additional copies of any materials, please call
the LifeChoice Funds at 800-539-FUND.
22
<PAGE>
Financial Highlights
THE LIFECHOICE FUNDS
The Financial Highlights table is intended to help you understand each
LifeChoice Fund's financial performance for the past three fiscal periods.
Certain information shows the results of an investment in one share of a
LifeChoice Fund. The total returns in the table represent the rate that an
investor would have earned on an investment in a LifeChoice Fund (assuming
reinvestment of all dividends and distributions).
The financial highlights for the fiscal year ended October 31, 1999, the
period from December 1, 1997 to October 31, 1998, and the period from
December 31, 1996 to November 30, 1997 were audited by PricewaterhouseCoopers
LLP, whose report, along with the financial statements of the LifeChoice
Funds, are included in the Funds' annual report, which is available by
calling the Funds at 800-539-FUND.
<TABLE>
<CAPTION>
LifeChoice LifeChoice LifeChoice
Conservative Moderate Growth
Investor Fund Investor Fund Investor Fund
Year Period Period Year Period Period Year Period Period
Ended Ended Ended Ended Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Nov. 30, Oct. 31, Oct. 31, Nov. 30, Oct. 31, Oct. 31, Nov. 30,
1999 1998(3) 1997(2) 1999 1998(4) 1997(2) 1999 1998(5) 1997(2)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value,
Beginning
of Period $10.72 $10.89 $10.00 $ 10.94 $ 11.19 $10.00 $ 11.08 $ 11.44 $10.00
Investment
Activities
Net
investment
income 0.45 0.37 0.31 0.30 0.24 0.20 0.16 0.13 0.11
Net realized
and
unrealized
gains
(losses)
from
investments 0.41 (0.12) 0.84(8) 1.03 (0.14) 1.16 1.51 (0.07) 1.43
Total
from
Investment
Activities 0.86 0.25 1.15 1.33 0.10 1.36 1.67 0.06 1.54
Distributions
Net
investment
income (0.58) (0.39) (0.26) (0.36) (0.26) (0.17) (0.25) (0.14) (0.10)
Net
realized
gains (0.22) (0.03) -- (0.25) (0.09) -- (0.31) (0.28) --
Total
Distributions (0.80) (0.42) (0.26) (0.61) (0.35) (0.17) (0.56) (0.42) (0.10)
Net Asset Value,
End of Period $10.78 $10.72 $10.89 $ 11.66 $ 10.94 $11.19 $ 12.19 $ 11.08 $11.44
Total Return
(excludes sales
charges) 8.24% 2.29%(6) 11.62%(6) 12.42% 0.90%(6) 13.64%(6) 15.33% 0.52%(6) 15.46%(6)
Ratios/Supplementary
Data:
Net Assets at end
of period (000) $6,686 $7,633 $9,137 $22,798 $19,128 $7,728 $16,114 $12,018 $7,515
Ratio of expenses to
average net assets 0.19% 0.23%(7) 0.29%(7) 0.20% 0.22%(7) 0.27%(7) 0.20% 0.23%(7) 0.30%(7)
Ratio of net investment
income to average
net assets 3.97% 3.72%(7) 3.41%(7) 2.53% 2.32%(7) 2.26%(7) 1.31% 1.19%(7) 0.81%(7)
Ratio of expenses to
average net assets(1) 1.46% 1.50%(7) 5.18%(7) 0.71% 0.93%(7) 3.32%(7) 1.01% 1.16%(7) 3.67%(7)
Ratio of net investment
income to average
net assets(1) 2.70% 2.45%(7) (1.48)%(7) 2.02% 1.61%(7) (.79)%(7) 0.50% 0.26%(7) (2.56)%(7)
Portfolio turnover 57% 78% 19% 69% 42% 50% 52% 30% 106%
<FN>
(1) During the period, certain fees were voluntarily reduced and/or reimbursed. If such voluntary fee reductions
and/or expense reimbursements had not occurred, the ratios would have been as indicated.
(2) For the period December 31, 1996 (commencement of operations) through November 30, 1997.
(3) Effective March 23, 1998, the KeyChoice Income & Growth Fund became the Victory LifeChoice Conservative Investor
Fund. Financial highlights prior to March 23, 1998 represent the KeyChoice Income & Growth Fund.
(4) Effective March 23, 1998, the KeyChoice Moderate Growth Fund became the Victory LifeChoice Moderate Investor Fund.
Financial highlights prior to March 23, 1998 represent the KeyChoice Moderate Growth Fund.
(5) Effective March 23, 1998, the KeyChoice Growth Fund became the Victory LifeChoice Growth Investor Fund. Financial
highlights prior to March 23, 1998 represent the KeyChoice Growth Fund.
(6) Not annualized.
(7) Annualized.
(8) The amount shown for a share outstanding throughout the period does not accord with the change in the aggregate
gains and losses in the portfolio of securities during the period because of the timing of sales and purchases
of fund shares in relation to fluctuating market values during the period.
</FN>
</TABLE>
23
<PAGE>
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24
<PAGE>
The Victory Funds
127 Public Square
OH-01-27-1612
Cleveland, Ohio 44114
If you would like a free copy of any of the following documents or would like
to request other information regarding the Funds, you can call or write the
Funds or your Investment Professional.
Statement of Additional Information (SAI)
Contains more details describing the Funds and their policies. The SAI has
been filed with the Securities and Exchange Commission (SEC), and is
incorporated by reference in this Prospectus.
Annual and Semi-annual Reports
Describes each Fund's performance, lists portfolio holdings, and discusses
market conditions and investment strategies that significantly affected a
Fund's performance during its last fiscal year.
If you would like to receive copies of the annual and semi-annual reports
and/or the SAI at no charge, please call the Funds at 800-539-FUND
(800-539-3863).
How to Obtain Information
By telephone: Call Victory Funds at 800-539-FUND (800-539-3863).
By mail: The Victory Funds
P. O. Box 8527
Boston, MA 02266-8527
You also may obtain copies of materials from the SEC's Public Reference Room
in Washington, D.C. (Call 1-202-942-8090 for information on the operation of
the SEC's Public Reference Room.) Copies of this information may be obtained,
after paying a duplicating fee, by electronic request at the following e-mail
address: [email protected], or by writing the SEC's Public Reference
Section, Washington, D.C. 20459-0102.
On the Internet: Text only versions of Fund documents can be viewed on-line
or downloaded from the SEC at http://www.sec.gov or from the Victory Funds'
website at http://www.victoryfunds.com.
The securities described in this Prospectus and the SAI are not offered in
any state in which they may not lawfully be sold. No sales representative,
dealer, or other person is authorized to give any information or make any
representation other than those contained in this Prospectus and the SAI.
Victory Funds
LOGO (R) Investment Company Act File Number 811-4852 VF-VLCF-PRO (2/00)
<PAGE>
Prospectus
Equity Fund
Lakefront Fund
Class A Shares
February 28, 2000
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the Fund's securities or determined whether this
Prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
Victory Funds
LOGO (R)
Call Victory at:
800-539-FUND
(800-539-3863)
or visit the Victory Funds' website at:
www.victoryfunds.com
<PAGE>
The Victory Portfolios
Table of Contents
Risk/Return Summary of the Fund 2
An analysis which includes the investment objective,
principal strategies, principal risks, performance,
and expenses.
Investments 4
Risk Factors 4
Share Price 5
Dividends, Distributions, and Taxes 5
Investing with Victory 7
* How to Buy Shares 9
* How to Exchange Shares 11
* How to Sell Shares 12
Organization and Management of the Fund 14
Additional Information 16
Financial Highlights 17
Key to Financial Information
Objective and Strategies
The goals and the strategies that the Fund plans to use to pursue its
investment objective.
Risk Factors
The risks you may assume as an investor in the Fund.
Performance
A summary of the historical performance of the Fund in comparison to
unmanaged indices.
Expenses
The costs you will pay, directly or indirectly, as an investor in the Fund,
including sales charges and ongoing expenses.
Shares of the Fund are:
* Not insured by the FDIC;
* Not deposits or other obligations of, or guaranteed by KeyBank, any
of its affiliates, or any other bank;
* Subject to possible investment risks, including possible loss of the
amount invested.
1
<PAGE>
Risk/Return Summary
LAKEFRONT FUND
CLASS A SHARES
Cusip#: 926464587
VLAKX
Investment Objective
The Fund seeks to provide long-term growth of capital and income.
Principal Investment Strategies
The Fund pursues its objective by investing primarily in a diversified group
of equity securities of established companies which exemplify above average
total return potential.
The Fund's investment sub-adviser, Lakefront Capital Investors, Inc.,
(Lakefront) seeks to invest in equity securities that it considers
undervalued in relation to historical and projected earnings, cash flow and
the value of the issuer's underlying assets. Specifically, Lakefront focuses
on relative value investing within the universe of large capitalization
stocks and maintains a risk averse orientation with a bias toward quality and
capital preservation. Stock selection is a disciplined process emphasizing a
long-term perspective and bottom-up approach to selecting individual issues.
The identification process involves analyzing a universe of approximately
1,600 large capitalization stocks on the basis of a set of consistent
financial criteria. The process then relies heavily on fundamental analysis
which includes scrutinizing a company's capital structure and financial
strength, industry of operation, competitive position, quality of management,
and level of commitment to actualizing and enhancing shareholder value. In
addition, the Fund considers a company's ability to effectively manage its
human resources and its customer relationships. The Fund believes that the
changing nature of the workforce and the customer as well as the ongoing
globalization of the economy, requires that companies proactively develop
employee and customer strategies designed to profit from these changes. The
Fund's portfolio securities are usually listed on a nationally recognized
exchange.
Key Asset Management, Inc. (KAM or the Adviser) is the investment adviser to
the Fund and Lakefront is the sub-adviser to the Fund.
Under normal market conditions, the Fund:
* Will invest at least 80% of its total assets in equity securities or
securities convertible into common stock.
Principal Risks
You may lose money by investing in the Fund. The Fund is subject to the
following principal risks, more fully described in "Risk Factors." The Fund's
net asset value, yield and/or total return may be adversely affected if any
of the following occurs:
* The market value of securities acquired by the Fund declines.
- Value stocks fall out of favor relative to growth stocks.
* The portfolio manager does not execute the Fund's principal investment
strategies effectively.
* A company's earnings do not increase as expected.
An investment in the Fund is not a deposit of KeyBank or any of its
affiliates and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
By itself, the Fund does not constitute a complete investment plan and should
be considered a long-term investment for investors who can afford to weather
changes in the value of their investment.
2
<PAGE>
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Fund by showing changes in its performance for various time
periods ending December 31st. The figures shown in the bar chart and table
assume reinvestment of dividends and distributions.
The bar chart (and highest and lowest returns below) do not reflect any sales
charges that you may be required to pay when you buy or sell your shares. If
sales charges were reflected, returns would be lower than those shown.
1998 13.39%
1999 13.87%
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter
was 22.90% (quarter ending December 31, 1998) and the lowest return for a
quarter was -15.44% (quarter ending September 30, 1998).
The table shows how the average annual total returns of the Fund for one year
and since inception, including maximum sales charges, compare to those of two
broad-based market indices.
Average Annual Total Returns Since
(for the Periods ended Past Inception
December 31, 1999) One Year (3/3/97)
Class A 7.29% 13.55%
S&P 500 Index(1),(2) 21.04% 18.23%
S&P 500 Barra Value Index(2),(3) 12.72% 17.86%
1 The Standard & Poor's 500 Stock Index is a broad-based unmanaged index that
represents the general performance of domestically traded common stocks of
mid- to large-size companies.
2 Index returns do not include any brokerage commissions, sales charges, or
other fees. It is not possible to invest directly in an index.
3 The Barra Value Index is an unmanaged index containing S&P 500 firms with
lower price-to-book ratios.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
Shareholder Transaction Expenses
(paid directly from your investment)(1) Class A
Maximum Sales Charge
Imposed on Purchases 5.75%
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE(2)
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE
Redemption Fees NONE
Exchange Fees NONE
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees 1.00%
Distribution (12b-1) Fees 0.00%
Other Expenses
(includes a shareholder servicing fee of 0.25%) 5.79%
Total Fund Operating Expenses 6.79%
Fee Waiver/Expense Reimbursement (5.29)%
Net Expenses 1.50%(3)
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 Except for non-IRA tax deferred retirement accounts, there is no initial
sales charge on purchases of $1 million or more for Class A Shares. However,
if you sell any of such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any of such
Class A Shares within two years, you will be charged a CDSC of 0.50%.
3 The Adviser has contractually agreed to waive its management fee and to
reimburse expenses, as allowed by law, to the extent necessary to maintain
the Fund's annual net operating expenses at a maximum of 1.50% until February
28, 2001 and then 2.00% until at least February 28, 2010.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
shown and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that
the Fund's operating expenses remain the same.(1) Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $719 $1,121 $1,547 $2,731
1 This Example assumes that net annual operating expenses for the Fund will
equal 1.50% until February 28, 2001 and then 2.00% until February 28, 2010.
3
<PAGE>
Investments
Under normal market conditions, the Fund purchases equity securities,
including common stock and securities that are convertible or exchangeable
into common stock of U.S. corporations.
For cash management or for temporary defensive purposes in response to market
conditions, the Fund may hold all or a portion of its assets in cash or
short-term money market instruments. This may reduce the benefit from any
upswing in the market and may cause the Fund to fail to meet its investment
objective.
For a more complete description of the types of securities in which the Fund
can invest, see the Statement of Additional Information (SAI).
By matching your investment objective with an acceptable level of risk, you
can create your own customized investment plan.
It is important to keep in mind one basic principle of investing: the greater
the risk, the greater the potential reward. The reverse is also generally
true: the lower the risk, the lower the potential reward.
An investment in the Fund is not a complete investment program.
Risk Factors
This Prospectus describes the principal risks that you may assume as an
investor in the Fund.
The Fund is subject to the principal risks described below.
General Risks:
* Market risk is the risk that the market value of a security may
fluctuate, depending on the supply and demand for that type of security. As a
result of this fluctuation, a security may be worth more or less than the
price the Fund originally paid for the security, or more or less than the
security was worth at an earlier time. Market risk may affect a single
issuer, an industry, a sector of the economy, or the entire market and is
common to all investments.
* Manager risk is the risk that the Fund's portfolio manager may implement
the Fund's investment strategy in a way that does not produce the intended
result.
Risk associated with investing in equity securities:
* Equity risk is the risk that the value of the security will fluctuate in
response to changes in earnings or other conditions affecting the issuer's
profitability. Unlike debt securities, which have preference to a company's
assets in case of liquidation, equity securities are entitled to the residual
value after the company meets its other obligations. For example, in the
event of bankruptcy, holders of debt securities have priority over holders of
equity securities to a company's assets.
4
<PAGE>
Share Price
The Fund calculates its share price, called its "net asset value" (NAV), each
business day at 4:00 p.m. Eastern Time or at the close of trading on the New
York Stock Exchange, Inc. (NYSE), whichever time is earlier. You may buy,
exchange, and sell your shares on any business day at a price that is based
on the NAV that is calculated after you place your order. A business day is a
day on which the NYSE is open.
The Fund values its investments based on market value. When market quotations
are not readily available, the Fund values its investments based on fair
value methods approved by the Board of Trustees of the Victory Portfolios.
The Fund calculates its NAV by adding up the total value of its investments
and other assets, subtracting its liabilities, and then dividing that figure
by the number of outstanding shares.
Total Assets-Liabilities
NAV = ----------------------------
Number of Shares Outstanding
You can find the Fund's net asset value each day in The Wall Street Journal
and other newspapers. Newspapers do not normally publish fund information
until the Fund reaches a specific number of shareholders or level of assets.
The daily NAV is useful to you as a shareholder because the NAV, multiplied
by the number of Fund shares you own gives you the value of your investment.
Buying a Dividend. You should check the Fund's distribution schedule before
you invest. If you buy shares of the Fund shortly before it makes a
distribution, some of your investment may come back to you as a taxable
distribution.
Dividends, Distribution, and Taxes
As a shareholder, you are entitled to your share of net income and capital
gains on the Fund's investments. The Fund passes its earnings along to
investors in the form of dividends. Dividend distributions are the net income
earned on investments after expenses. The Fund will distribute short-term
gains as necessary, and if the Fund makes a long-term capital gain
distribution, it is normally paid once a year. As with any investment, you
should consider the tax consequences of an investment in the Fund.
Ordinarily, the Fund declares and pays dividends quarterly.
Distributions can be received in one of the following ways.
REINVESTMENT OPTION
You can have distributions automatically reinvested in additional shares of
the Fund. If you do not indicate another choice on your Account Application,
you will be assigned this option automatically.
CASH OPTION
A check will be mailed to you no later than seven days after the dividend
payment date.
INCOME EARNED OPTION
You can automatically reinvest your dividends in additional shares of the
Fund and have your capital gains paid in cash, or reinvest capital gains and
have your dividends paid in cash.
5
<PAGE>
Dividends, Distributions, and Taxes (continued)
Your choice of distribution should be set up on the original Account
Application. If you would like to change the option you selected, please call
800-539-FUND.
DIRECTED DIVIDENDS OPTION
In most cases, you can automatically reinvest distributions in shares of
another fund of the Victory Group. If you reinvest your distributions in a
different class of another fund, you may pay a sales charge on the reinvested
distributions.
DIRECTED BANK ACCOUNT OPTION
In most cases, you can automatically transfer distributions to your bank
checking or savings account. Under normal circumstances, the Fund will
transfer your distributions within seven days of the dividend payment date.
The bank account must have a registration identical to that of your Fund
account.
Important Information about Taxes
The Fund pays no federal income tax on the earnings and capital gains it
distributes to shareholders.
* Ordinary dividends from the Fund are taxable as ordinary income; dividends
from the Fund's long-term capital gains are taxable as long-term capital
gain.
* Dividends are treated in the same manner for federal income tax purposes
whether you receive them in cash or in additional shares. They also may be
subject to state and local taxes.
* Dividends from the Fund that are attributable to interest on certain U.S.
government obligations may be exempt from certain state and local income
taxes. The extent to which ordinary dividends are attributable to these U.S.
government obligations will be provided on the tax statements you receive
from the Fund.
* An exchange of the Fund's shares for shares of another fund will be
treated as a sale. When you sell or exchange shares of the Fund, you must
recognize any gain or loss.
* Certain dividends paid to you in January will be taxable as if they had
been paid to you the previous December.
* Tax statements will be mailed from the Fund every January showing the
amounts and tax status of distributions made to you.
* Because your tax treatment depends on your purchase price and tax
position, you should keep your regular account statements for use in
determining your tax.
* You should review the more detailed discussion of federal income tax
considerations in the SAI.
The tax information in this Prospectus is provided as general information.
You should consult your own tax adviser about the tax consequences of an
investment in the Fund.
6
<PAGE>
INVESTING WITH VICTORY
If you are looking for a convenient way to open an account or to add money to
an existing account, Victory can help. The sections that follow will serve as
a guide to your investments with Victory. The following sections will
describe how to open an account, how to access information on your account,
and how to buy, exchange and sell shares of the Fund.
We want to make it simple for you to do business with us. If you have
questions about any of this information, please call your Investment
Professional or one of our customer service representatives at 800-539-FUND.
They will be happy to assist you.
All you need to do to get started is to fill out an application.
An Investment Professional is an investment consultant, salesperson,
financial planner, investment adviser, or trust officer who provides you with
investment information.
There are several ways you can combine multiple purchases in the Victory
Funds and take advantage of reduced sales charges.
Calculation of Sales Charges -- Class A
Class A Shares are sold at their public offering price, which is the NAV plus
the applicable initial sales charge. The sales charge as a percentage of your
investment decreases as the amount you invest increases. The current sales
charge rates are as follows:
Sales Charge Sales Charge
as a % of as a % of
Your Investment in the Fund Offering Price Your Investment
Up to $49,999 5.75% 6.10%
$50,000 up to $99,999 4.50% 4.71%
$100,000 up to $249,999 3.50% 3.63%
$250,000 up to $499,999 2.50% 2.56%
$500,000 up to $999,999 2.00% 2.04%
$1,000,000 and above* 0.00% 0.00%
* Except as indicated in the last sentence of this note, there is no initial
sales charge on purchases of $1 million or more. However, a contingent
deferred sales charge (CDSC) of up to 1.00% will be charged to the
shareholder if any of such shares are redeemed in the first year after
purchase, or at 0.50% within two years of the purchase. This charge will be
based on either the cost of the shares or net asset value at the time of
redemption, whichever is lower. There will be no CDSC on reinvested
distributions. The initial sales charge exemption for investments of $1
million or more does not apply to tax deferred retirement accounts (except
IRA accounts); the sales charge on investments by such tax deferred
retirement accounts of $1 million or more is the same as for investments
between $500,000 and $999,999.
Sales Charge Reductions and Waivers for Class A Shares
You may qualify for reduced sales charges in the following cases:
1. A Letter of Intent lets you buy Class A Shares of the Fund over a
13-month period and receive the same sales charge as if all shares had been
purchased at one time. You must start with a minimum initial investment of 5%
of the total amount.
2. Rights of Accumulation allow you to add the value of any Class A Shares
you already own to the amount of your next Class A investment for purposes of
calculating the sales charge at the time of purchase.
3. You can combine Class A Shares of multiple Victory Funds, (excluding
funds sold without a sales charge) for purposes of calculating the sales
charge. The combination privilege also allows you to combine the total
investments from the accounts of household members of your immediate family
(spouse and children under 21) for a reduced sales charge at the time of
purchase.
7
<PAGE>
Investing with Victory (continued)
For historical expense information on Class A Shares, see the "Financial
Highlights" at the end of this Prospectus.
4. Waivers for certain investors:
a. Current and retired Fund Trustees, directors, trustees, employees, and
family members of employees of KeyCorp or "Affiliated Providers,"* and
dealers who have an agreement with the Distributor and any trade organization
to which the Adviser or the Administrator belong.
b. Investors who purchase shares for trust or other advisory accounts
established with KeyCorp or its affiliates.
c. Investors who reinvest the proceeds from a liquidation distribution of
Class A Shares held in a deferred compensation plan, agency, trust, or
custody account that was maintained by KeyBank N.A. and its affiliates, the
Victory Group, or invested in a fund of the Victory Group.
d. Investment Professionals who purchased Fund shares for fee-based
investment products or accounts, and selling brokers and their sales
representatives.
e. Purchases of shares in connection with financial institution sponsored
bundled omnibus retirement programs sponsored by financial institutions that
have entered into agreements with the Fund's Distributor in connection with
the operational requirements of such programs.
f. Participants in tax-deferred retirement plans who initially purchased
shares pursuant to waiver provisions in effect prior to December 15, 1999.
* Affiliated Providers are affiliates and subsidiaries of KeyCorp, and any
organization that provides services to the Victory Group.
Shareholder Servicing Plan
The Fund has adopted a Shareholder Servicing Plan for its Class A Shares. The
shareholder servicing agent performs a number of services for its customers
who are shareholders of the Fund. It establishes and maintains accounts and
records, processes dividend payments, arranges for bank wires, assists in
transactions, and changes account information. For these services the Fund
pays a fee at an annual rate of up to 0.25% of the average daily net assets
of Class A shares serviced by the agent. The Fund may enter into agreements
with various shareholder servicing agents, including KeyBank National
Association and its affiliates, other financial institutions, and securities
brokers. The Fund may pay a servicing fee to broker-dealers and others who
sponsor "no transaction fee" or similar programs for the purchase of shares.
Shareholder servicing agents may waive all or a portion of their fee
periodically.
Distribution Plan
According to Rule 12b-1 under the Investment Company Act of 1940, Victory has
adopted a Distribution and Service Plan for Class A Shares of the Fund. The
Fund does not pay expenses under this plan.
8
<PAGE>
How to Buy Shares
You can buy shares in a number of different ways. All you need to do to get
started is to fill out an application. The minimum investment required to
open an account is $500 ($100 for IRAs), with additional investments of at
least $25. There is no minimum investment required to open an account or for
additional investments in SIMPLE IRAs. You can send in your payment by check,
wire transfer, exchange from another Victory Fund, or through arrangements
with your Investment Professional. Sometimes an Investment Professional will
charge you for these services. This fee will be in addition to, and unrelated
to, the fees and expenses charged by the Fund.
If you buy shares directly from the Fund and your investment is received and
accepted by 4:00 p.m. Eastern Time or the close of trading on the NYSE
(whichever time is earlier), your purchase will be processed the same day
using that day's share price.
Make your check payable to: The Victory Funds
Keep the following addresses handy for purchases, exchanges, or redemptions.
BY REGULAR U.S. MAIL
Send completed Account Applications with your check, bank draft, or money
order to:
The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
BY OVERNIGHT MAIL
Use the following address
ONLY for overnight packages.
The Victory Funds
c/o Boston Financial Data Services
66 Brooks Drive
Braintree, MA 02184
PHONE: 800-539-FUND
BY WIRE
The Transfer Agent does not charge a wire fee, but your originating bank may
charge a fee. Always call theTransfer Agent at 800-539-FUND BEFORE wiring
funds to obtain a confirmation number.
The Victory Funds
State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA
Account #9905-201-1
(insert account number, name, and confirmation number assigned by the
Transfer Agent)
BY TELEPHONE
800-539-FUND
(800-539-3863)
9
<PAGE>
How to Buy Shares (continued)
If you would like to make additional investments after your account is
established, use the Investment Stub attached to your confirmation statement
and send it with your check to the address indicated.
ACH
After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic member banks may be used. It
takes about 15 days to set up an ACH account. Currently, the Fund does not
charge a fee for ACH transfers.
Statements and Reports
You will receive a periodic statement reflecting any transactions that affect
the balance or registration of your account. You will receive a confirmation
after any purchase, exchange, or redemption. If your account has been set up
by an Investment Professional, Fund activity will be detailed in that
account's statements. Share certificates are not issued. Twice a year, you
will receive the financial reports of the Fund. By January 31 of each year,
you will be mailed an IRS form reporting distributions for the previous year,
which also will be filed with the IRS.
Systematic Investment Plan
To enroll in the Systematic Investment Plan, you should check this box on the
Account Application. We will need your bank information and the amount and
frequency of your investment. You can select monthly, quarterly, semi-annual,
or annual investments. You should attach a voided personal check so the
proper information can be obtained. You must first meet the minimum
investment requirement of $500 ($100 for IRA accounts), then we will make
automatic withdrawals of the amount you indicate ($25 or more) from your bank
account and invest it in shares of the Fund.
Retirement Plans
You can use the Fund as part of your retirement portfolio. Your Investment
Professional can set up your new account under one of several tax-deferred
retirement plans. Please contact your Investment Professional or the Fund for
details regarding an IRA or other retirement plan that works best for your
financial situation.
All purchases must be made in U.S. dollars and drawn on U.S. banks. The
Transfer Agent may reject any purchase order in its sole discretion. If your
check is returned for any reason, you will be charged for any resulting fees
and/or losses. Third party checks will not be accepted. You may only buy or
exchange into fund shares legally available in your state. If your account
falls below $500 ($100 for IRA accounts), we may ask you to re-establish the
minimum investment. If you do not do so within 60 days, we may close your
account and send you the value of your account.
10
<PAGE>
How to Exchange Shares
You can obtain a list of funds available for exchange by calling
800-539-FUND.
You can sell shares of one fund of the Victory Portfolios to buy shares of
the same class of any other. This is considered an exchange.
You can exchange shares of the Fund by writing the Transfer Agent or calling
800-539-FUND. When you exchange shares of the Fund, you should keep the
following in mind:
* Shares of the Fund selected for exchange must be available for sale in
your state of residence.
* The Fund whose shares you want to exchange and the fund whose shares you
want to buy must offer the exchange privilege.
* If you acquire Class A Shares of the Fund as a result of an exchange you
pay the percentage point difference, if any, between the Fund's sales charge
and any sales charge that you previously paid in connection with the shares
you are exchanging. For example, if you acquire Class A Shares of the Fund as
a result of an exchange from another fund of the Victory Group that has a
2.00% sales charge, you would pay the 3.75% difference in sales charge.
* On certain business days, such as Veterans Day and Columbus Day, the
Federal Reserve Bank of Cleveland is closed. On those days, exchanges to or
from a money market fund will be processed on the exchange date, with the
corresponding purchase or sale of the money market fund shares being effected
on the next business day.
* You must meet the minimum purchase requirements for the fund you purchase
by exchange.
* The registration and tax identification numbers of the two accounts must
be identical.
* You must hold the shares you buy when you establish your account for at
least seven days before you can exchange them; after the account is open
seven days, you can exchange shares on any business day.
* The Fund may refuse any exchange purchase request if the Adviser
determines that the request is associated with a market timing strategy. The
Fund may terminate or modify the exchange privilege at any time on 30 days'
notice to shareholders.
* Before exchanging, read the prospectus of the fund you wish to purchase by
exchange.
* An exchange of Fund shares constitutes a sale for tax purposes.
* Holders of Class G Shares who acquired their shares as a result of the
reorganization of the Gradison Funds into the Victory Funds can exchange into
Class A Shares of any Victory Fund that does not offer Class G Shares without
paying a sales charge.
11
<PAGE>
There are a number of convenient ways to sell your shares. You can use the
same mailing addresses listed for purchases.
How to Sell Shares
If your request is received in good order by 4:00 p.m. Eastern Time or the
close of trading on the NYSE (whichever time is earlier), your redemption
will be processed the same day.
BY TELEPHONE
The easiest way to sell shares is by calling 800-539-FUND. When you fill out
your original application, be sure to check the box marked "Telephone
Authorization." Then when you are ready to sell, call and tell us which one
of the following options you would like to use:
* Mail a check to the address of record;
* Wire funds to a domestic financial institution;
* Mail a check to a previously designated alternate address; or
* Electronically transfer your redemption via the Automated Clearing House
(ACH).
The Transfer Agent records all telephone calls for your protection and takes
measures to verify the identity of the caller. If the Transfer Agent properly
acts on telephone instructions and follows reasonable procedures to ensure
against unauthorized transactions, neither Victory, its servicing agents, the
Adviser, nor the Transfer Agent will be responsible for any losses. If the
Transfer Agent does not follow these procedures, it may be liable to you for
losses resulting from unauthorized instructions.
If there is an unusual amount of market activity and you cannot reach the
Transfer Agent or your Investment Professional by telephone, consider placing
your order by mail.
BY MAIL
Use the Regular U.S. Mail or Overnight Mail Address to redeem shares. Send us
a letter of instruction indicating your Fund account number, amount of
redemption, and where to send the proceeds. A signature guarantee is required
for the following redemption requests:
* Redemptions over $10,000;
* Your account registration has changed within the last 15 days;
* The check is not being mailed to the address on your account;
* The check is not being made payable to the owner of the account;
* The redemption proceeds are being transferred to another Victory Group
account with a different registration; or
* The check or wire is being sent to a different bank account.
You can get a signature guarantee from a financial institution such as a
bank, broker-dealer, credit union, clearing agency, or savings association.
BY WIRE
If you want to receive your proceeds by wire, you must establish a Fund
account that will accommodate wire transactions. If you call by 4:00 p.m.
Eastern Time or the close of trading on the NYSE (whichever time is earlier),
your funds will be wired on the next business day.
BY ACH
Normally, your redemption will be processed on the same day, but will be
processed the next day if received after 4:00 p.m. Eastern Time or the close
of trading on the NYSE (whichever time is earlier). It will be transferred by
ACH as long as the transfer is to a domestic bank.
12
<PAGE>
How to Sell Shares (continued)
Systematic Withdrawal Plan
If you check this box on the Account Application, we will send monthly,
quarterly, semi-annual, or annual payments to the person you designate. The
minimum withdrawal is $25, and you must have a balance of $5,000 or more. If
the payment is to be sent to an account of yours, we will need a voided check
to activate this feature. If the payment is to be made to an address
different from your account address, we will need a signature guaranteed
letter of instruction. You should be aware that your account eventually may
be depleted. However, you cannot automatically close your account using the
Systematic Withdrawal Plan. If your balance falls below $500, we may ask you
to bring the account back to the minimum balance. If you decide not to
increase your account to the minimum balance, your account may be closed and
the proceeds mailed to you.
Additional Information about Redemptions
* Redemption proceeds from the sale of shares purchased by a check may be
held until the purchase check has cleared, which may take up to 15 days.
* The Fund may suspend your right to redeem your shares in the following
circumstances:
- During non-routine closings of the NYSE;
- When the Securities and Exchange Commission (SEC) determines either that
trading on the NYSE is restricted or that an emergency prevents the sale
or valuation of the Fund's securities; or
- When the SEC orders a suspension to protect the Fund's shareholders.
* The Fund will pay redemptions by any one shareholder during any 90-day
period in cash up to the lesser of $250,000 or 1% of its net assets. The Fund
reserves the right to pay the remaining portion "in kind," that is, in
portfolio securities rather than cash.
13
<PAGE>
Organization and Management of the Fund
About Victory
The Fund is a member of the Victory Portfolios, a group of over 30 distinct
investment portfolios. The Board of Trustees of Victory has the overall
responsibility for the management of the Fund.
The Investment Adviser and Sub-Administrator
The Fund has an Advisory Agreement which is one of its most important
contracts. Key Asset Management Inc. (KAM), a New York corporation registered
as an investment adviser with the SEC, is the Adviser to the Fund. KAM, a
subsidiary of KeyCorp, oversees the operations of the Fund according to
investment policies and procedures adopted by the Board of Trustees.
Affiliates of the Adviser manage approximately $76 billion for individual
and institutional clients. KAM's address is 127 Public Square, Cleveland,
Ohio 44114.
For the fiscal year ended October 31, 1999, KAM was paid an advisory fee at
an annual rate of 0.50% of the Fund's average daily net assets.
Under a Sub-Administration Agreement, BISYS Fund Services Ohio, Inc. pays KAM
a fee at the annual rate of up to 0.05% of the Fund's average daily net
assets to perform some of the administrative duties for the Fund.
We want you to know who plays what role in your investment and how they are
related. This section discusses the organizations employed by the Fund to
provide services to their shareholders. Each of these organizations is paid a
fee for its services.
The Sub-Adviser
Lakefront serves as Sub-Adviser to the Fund. Lakefront, located at 127 Public
Square, Cleveland, Ohio 44114, is a registered investment advisory firm that
has been providing equity investment services to public and corporate pension
funds since its founding in 1991.
Portfolio Management
Nathaniel E. Carter is the portfolio manager of the Fund, a position he has
held since the Fund's inception in March 1997. He has been the President and
Chief Investment Officer of Lakefront since 1991. Lakefront also manages
institutional accounts for corporate and public pension funds.
14
<PAGE>
Organization and Management of the Fund (cont.)
The Fund is supervised by the Board of Trustees, which monitors the services
provided to investors.
OPERATIONAL STRUCTURE OF THE FUND
TRUSTEES ADVISER
SHAREHOLDERS
FINANCIAL SERVICES FIRMS AND
THEIR INVESTMENT PROFESSIONALS
Advise current and prospective
shareholders on their Fund investments.
TRANSFER AGENT/SERVICING AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
Handles services such as record-keeping, statements,
processing of buy and sell requests, distribution of
dividends, and servicing of shareholder accounts.
ADMINISTRATOR, DISTRIBUTOR,
AND FUND ACCOUNTANT CUSTODIAN
BISYS Fund Services Key Trust Company of Ohio, N.A.
and its affiliates 127 Public Square
3435 Stelzer Road Cleveland, OH 44114
Columbus, OH 43219
Provides for safekeeping of the
Markets the Fund, distributes Fund's investments and cash,
shares through Investment and settles trades made by
Professionals, and calculates the the Fund.
value of shares. As Administrator,
handles the day-to-day activities
of the Fund.
SUB-ADMINISTRATOR
Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114
Performs certain
sub-administrative services.
15
<PAGE>
Some additional information you should know about the Fund.
Additional Information
Share Classes
The Fund currently offers only the class of shares described in this
Prospectus. At some future date, the Fund may offer additional classes of
shares.
Performance
The Victory Funds may advertise the performance of the Fund by comparing it
to other mutual funds with similar objectives and policies. Performance
information also may appear in various publications. Any fees charged by
Investment Professionals may not be reflected in these performance
calculations. Advertising information will include the average annual total
return of the Fund calculated on a compounded basis for specified periods of
time. Total return information will be calculated according to rules
established by the SEC. Such information may include performance rankings and
similar information from independent organizations, such as Lipper, Inc., and
industry publications such as Morningstar, Inc., Business Week, or Forbes.
You also should see "Investment Performance."
Shareholder Communications
In order to eliminate duplicate mailings to an address at which two or more
shareholders with the same last name reside, the Fund will send only one copy
of any shareholder reports, prospectuses and their supplements, unless you
have instructed us to the contrary. You may request that the Fund send these
documents to each shareholder individually by calling the Fund at
800-539-FUND (800-539-3863).
If you would like to receive additional copies of any materials, please call
the Fund at 800-539-FUND.
16
<PAGE>
Financial Highlights
LAKEFRONT FUND
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the past three years. Certain information shows the
results of an investment in one share of the Fund. The total returns in the
table represent the rate that an investor would have earned on an investment
in the Fund (assuming reinvestment of all dividends and distributions).
The financial highlights for the two fiscal years ended October 31, 1999 and
the period from March 3, 1997 to October 31, 1997 were audited by
PricewaterhouseCoopers LLP, whose report, along with the financial statements
of the Fund, are included in the Fund's annual report, which is available by
calling the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Year Year Mar. 3, 1997
Ended Ended through
Oct. 31, Oct. 31, Oct. 31,
1999 1998 1997(2)
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $11.52 $11.29 $10.00
Investment Activities
Net investment income 0.07 0.13 0.12
Net realized and unrealized gains
(losses) from investments 2.51 0.43 1.27
Total from Investment Activities 2.58 0.56 1.39
Distributions
Net investment income (0.08) (0.14) (0.10)
Net realized gains (1.44) (0.19) --
Total Distributions (1.52) (0.33) (0.10)
Net Asset Value, End of Period $12.58 $11.52 $11.29
Total Return (excludes sales charges) 25.02% 5.05% 13.87%(3)
Ratios/Supplemental Data:
Net Assets, End of Period (000) $1,661 $1,123 $1,255
Ratio of expenses to average net assets 1.10% 0.32% 0.00%(4)
Ratio of net investment income
to average net assets 0.51% 1.14% 1.67%(4)
Ratio of expenses to average
net assets(1) 6.79% 6.45% 7.27%(4)
Ratio of net investment income
to average net assets(1) (5.18)% (4.99)% (5.60)%(4)
Portfolio turnover 23% 36% 36%
(1) During the period, certain fees were voluntarily reduced and/or
reimbursed. If such voluntary fee reductions and/or reimbursements had not
occurred, the ratios would have been as indicated.
(2) Period from commencement of operations.
(3) Not annualized.
(4) Annualized.
</TABLE>
17
<PAGE>
The Victory Funds
127 Public Square
OH-01-27-1612
Cleveland, Ohio 44114
If you would like a free copy of any of the following documents or would like
to request other information regarding the Fund, you can call or write the
Fund or your Investment Professional.
Statement of Additional Information (SAI)
Contains more details describing the Fund and its policies. The SAI has been
filed with the Securities and Exchange Commission (SEC), and is incorporated
by reference in this Prospectus.
Annual and Semi-annual Reports
Describes the Fund's performance, lists portfolio holdings, and discusses
market conditions and investment strategies that significantly affected the
Fund's performance during its last fiscal year.
If you would like to receive copies of the annual and semi-annual reports
and/or the SAI at no charge, please call the Fund at
800-539-FUND
(800-539-3863).
How to Obtain Information
By telephone: Call Victory Funds at 800-539-FUND (800-539-3863).
By mail: The Victory Funds
P. O. Box 8527
Boston, MA 02266-8527
You also may obtain copies of materials from the SEC's Public Reference Room
in Washington, D.C. (Call 1-202-942-8090 for information on the operation of
the SEC's Public Reference Room.) Copies of this information may be obtained,
after paying a duplicating fee, by electronic request at the following e-mail
address: [email protected], or by writing the SEC's Public Reference
Section, Washington, D.C. 20459-0102.
On the Internet: Text only versions of Fund documents can be viewed on-line
or downloaded from the SEC at http://www.sec.gov or from the Victory Funds'
website at http://www.victoryfunds.com.
The securities described in this Prospectus and the SAI are not offered in
any state in which they may not lawfully be sold. No sales representative,
dealer, or other person is authorized to give any information or make any
representation other than those contained in this Prospectus and the SAI.
Victory Funds
LOGO (R) Investment Company Act File Number 811-4852 VF-VLF-PRO (2/00)
<PAGE>
Prospectus
February 28, 2000
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved any Fund's securities or determined whether this
Prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
Victory Funds
LOGO (R)
Money Market Funds
U.S. Government
Obligations Fund
Investor and Select Shares
Prime Obligations Fund
Class A Shares
Financial Reserves Fund
Class A Shares
Tax-Free
Money Market Fund
Class A Shares
Ohio Municipal
Money Market Fund
Class A Shares
Call Victory at:
800-539-FUND
(800-539-3863)
or visit the Victory Funds' website at:
www.victoryfunds.com
<PAGE>
The Victory Portfolios
Key to Financial Information
Objective and Strategies
The goals and the strategies that a Fund plans to use to pursue its
investment objective.
Risk Factors
The risks you may assume as an investor in a Fund.
Performance
A summary of the historical performance of a Fund.
Expenses
The costs you will pay, directly or indirectly, as an investor in a Fund,
including ongoing expenses.
Shares of the Funds are:
* Not insured by the FDIC;
* Not deposits or other obligations of, or guaranteed by KeyBank, any of its
affiliates, or any other bank;
* Subject to possible investment risks, including possible loss of the amount
invested.
Although the Funds seek to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the Funds.
Table of Contents
Introduction 1
Risk/Return Summary for each of the Funds
An analysis which includes the investment objective,
principal strategies, principal risks, performance,
and expenses.
U.S. Government Obligations Fund
Investor and Select Shares 2
Prime Obligations Fund
Class A 4
Financial Reserves Fund
Class A 6
Tax-Free Money Market Fund
Class A 8
Ohio Municipal Money Market Fund
Class A 10
Investments 12
Risk Factors 14
Share Price 15
Dividends, Distributions, and Taxes 15
Investing with Victory 17
* How to Buy Shares 18
* How to Exchange Shares 20
* How to Sell Shares 21
Organization and Management of the Funds 23
Additional Information 25
Financial Highlights
U.S. Government Obligations Fund 26
Prime Obligations Fund 27
Financial Reserves Fund 28
Tax-Free Money Market Fund 29
Ohio Municipal Money Market Fund 30
<PAGE>
Introduction
This Prospectus explains the objectives, policies, risks, performance,
strategies, and expenses of the Shares of the Victory Funds described in this
Prospectus (the Funds).
Investment Objective and Strategy
Each Fund seeks to provide current income consistent with liquidity and
stability of principal. Each of the Funds pursues its investment objective by
investing in a diversified portfolio of high-quality, short-term U.S.
dollar-denominated money market instruments. However, each of the Funds has
unique investment strategies and its own risk/reward profile. The Funds seek
to maintain a constant net asset value of $1.00 per share, and shares are
offered at net asset value. Please review each Fund's Risk/Return Summary and
the "Investments" section for an overview.
Risk Factors
The following risk factors distinguish these Funds from other funds with
different investment policies and strategies.
* The Funds are not insured by the FDIC, and while each Fund attempts
to maintain a $1.00 per share price, there is no guarantee that it
will be able to do so.
* A major change in interest rates, a default on an investment held
by a Fund or a significant decline in the value of a Fund
investment could cause the value of your investment in the Fund, or
its yield, to decline.
Who May Want to Invest in the Funds
* Investors seeking relative safety and easy access to investments
* Investors with a low risk tolerance
* Investors seeking preservation of capital
* Investors willing to accept lower potential returns in return for
safety
* Investors seeking the ability to convert their investment to cash
quickly
Fees And Expenses
No load or sales commission is charged to investors in the Funds. You will,
however, incur expenses for investment advisory, administrative, and
shareholder services, all of which are included in a Fund's expense ratio.
See "Investing with Victory." The U.S. Government Obligations Fund offers two
classes of shares: Investor Shares and Select Shares. Each other Fund offers
Class A Shares.
Key Asset Management Inc., which we will refer to as the "Adviser" or "KAM"
throughout this Prospectus, manages the Funds.
Please read this Prospectus before investing in the Funds and keep it for
future reference. An investment in a Fund is not a complete investment
program.
The following pages provide you with separate overviews of each of the Funds.
Please look at the objective, policies, strategies, risks, and expenses to
determine which Fund will best suit your risk tolerance and investment needs.
You also should review "Investments" for additional information about the
individual securities in which the Funds can invest.
1
<PAGE>
Risk/Return Summary
U.S. GOVERNMENT OBLIGATIONS FUND
INVESTOR SHARES
Cusip#: 926464611
VGOXX
SELECT SHARES
Cusip#: 926464207
SUGXX
Investment Objective
The U.S. Government Obligations Fund seeks to provide current income
consistent with liquidity and stability of principal.
Principal Investment Strategies
The U.S. Government Obligations Fund pursues its investment objective by
investing only in short-term U.S. government securities backed by the full
faith and credit of the U.S. Treasury, and repurchase agreements
collateralized by these securities.
Under normal market conditions, the U.S. Government Obligations Fund
primarily invests in:
* U.S. Treasury bills, notes, and other obligations issued or
guaranteed by the U.S. government.
* Repurchase agreements collateralized by obligations of the U.S.
government..
Important Characteristics of the U.S. Government Obligations Fund's Investments:
* Quality: The U.S. Government Obligations Fund invests only in
obligations of the U.S. government. The Board of Trustees has
established policies to ensure that the U.S. Government Obligations
Fund invests in high quality, liquid instruments and repurchase
agreements. For more information on ratings, see the Appendix to
the Statement of Additional Information (SAI).
* Maturity: Weighted average maturity of 90 days or less. Individual
investments may be purchased with remaining maturities ranging from
one day to 397 days. The U.S. Government Obligations Fund intends
to maintain a weighted average maturity of 60 days or less.
Principal Risks
The U.S. Government Obligations Fund is subject to the following principal
risks, more fully described in "Risk Factors." The U.S. Government
Obligations Fund's yield or the stability of its $1.00 share price may be
adversely affected if any of the following occurs:
* The portfolio manager does not execute the U.S. Government
Obligations Fund's principal investment strategies effectively.
* The market value of floating or variable rate securities falls to
such an extent that the U.S. Government Obligations Fund's share
price declines below $1.00.
* Rapidly rising interest rates cause securities held by the U.S.
Government Obligations Fund to decline in value and cause the
Fund's share price to decline below $1.00.
* Interest rates decline, resulting in a lower yield for the U.S.
Government Obligations Fund.
An investment in the U.S. Government Obligations Fund is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. Although the U.S. Government Obligations 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>
Investment Performance
The bar chart and table shown below give an indication of the risks of
investing in the U.S. Government Obligations Fund by showing changes in its
performance for various time periods ending December 31st. The figures shown
in the bar chart and table assume reinvestment of dividends.
The bar chart shows returns for the Select Class of the U.S. Government
Obligations Fund.
1990 7.74%
1991 5.71%
1992 3.31%
1993 2.61%
1994 3.69%
1995 5.45%
1996 4.89%
1997 4.76%
1998 4.78%
1999 4.32%
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter
was 1.90% (quarter ending June 30, 1990) and the lowest return for a quarter
was 0.64% (quarter ending June 30, 1993).
Average Annual Total Returns
(for the Periods ended Past Past Past
December 31, 1999) One Year 5 Years 10 Years
Investor Class(1) 4.59% N/A N/A
Select Class 4.32% 4.84% 4.72%
1 The average annual total return since inception (January 8, 1997) was 4.83%.
The "seven-day yield" is an annualized figure -- the amount you would earn if
you kept your investment in the U.S. Government Obligations Fund and the Fund
continued to earn the same net interest income throughout the year. The
"seven-day effective yield" (also an annualized figure) assumes that
dividends are reinvested and compounded.
For the U.S. Government Obligations Fund's current seven-day yield and
seven-day effective yield, call the Fund at 800-539-FUND (800-539-3863).
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the U.S. Government Obligations Fund.
Shareholder Transaction Expenses Investor Select
(paid directly from your investment)(1) Class Class
Maximum Sales Charge
Imposed on Purchases NONE NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees 0.35% 0.35%
Distribution (12b-1) Fees 0.00% 0.00%
Other Expenses (includes a shareholder
servicing fee of 0.25% applicable to Select Class Shares) 0.17% 0.42%
Total Fund Operating Expenses 0.52% 0.77%
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the U.S. Government Obligations Fund with the cost of investing
in other mutual funds. The Example assumes that you invest $10,000 in the
U.S. Government Obligations Fund for the time periods shown and then sell all
of your shares at the end of those periods. The Example also assumes that
your investment has a 5% return each year and that the U.S. Government
Obligations Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Investor Class $53 $167 $291 $653
Select Class $79 $246 $428 $954
3
<PAGE>
Risk/Return Summary
PRIME OBLIGATIONS FUND
CLASS A SHARES
Cusip#: 926464108
SPOXX
Investment Objective
The Prime Obligations Fund seeks to provide current income consistent with
liquidity and stability of principal.
Principal Investment Strategies
The Prime Obligations Fund pursues its investment objective by investing
primarily in short-term, high-quality debt instruments.
Under normal market conditions, the Prime Obligations Fund invests in:
* Negotiable certificates of deposit, time deposits, and bankers'
acceptances issued by U.S. banks and U.S. branches of foreign
banks.
* Short-term corporate obligations, such as commercial paper, notes,
and bonds.
* Repurchase agreements.
* Other debt obligations such as master demand notes, short-term
funding agreements, variable and floating rate securities, and
private placement investments.
* U.S. Treasury obligations and obligations of U.S.
government-sponsored agencies.
* When-issued or delayed-delivery securities.
* Eurodollar debt obligations.
Important Characteristics of the Prime Obligations Fund's Investments:
* Quality: The Prime Obligations Fund invests only in instruments
that are rated at the time of purchase in the highest short-term
category by two or more NRSROs,(+) or in the highest short-term
category if rated by only one NRSRO, or if unrated, determined to
be of equivalent quality. The Board of Trustees has established
policies to ensure that the Prime Obligations Fund invests in high
quality, liquid instruments. For more information on ratings, see
the Appendix to the SAI.
* Maturity: Weighted average maturity of 90 days or less. Individual
investments may be purchased with remaining maturities ranging from
one day to 397 days.
+ An NRSRO is a nationally recognized statistical rating organization such as
Standard & Poor's (S&P), Fitch IBCA International (Fitch IBCA), or Moody's
Investor Service (Moody's), which assigns credit ratings to securities based
on the borrower's ability to meet its obligation to make principal and
interest payments.
Principal Risks
The Prime Obligations Fund is subject to the following principal risks, more
fully described in "Risk Factors." The Prime Obligations Fund's yield or the
stability of its $1.00 share price may be adversely affected if any of the
following occurs:
* The portfolio manager does not execute the Prime Obligations Fund's
principal investment strategies effectively.
* An issuer defaults on its obligation.
* An agency or instrumentality defaults on its obligation and the
agency or the U.S. government does not provide financial support.
* The market value of floating or variable rate securities falls to
such an extent that the Prime Obligations Fund's share price
declines below $1.00.
* Rapidly rising interest rates cause securities held by the Prime
Obligations Fund to decline in value and cause the Fund's share
price to decline below $1.00.
* Interest rates decline, resulting in a lower yield for the Prime
Obligations Fund.
* Adverse events affecting the banking industry cause the value of
the Prime Obligations Fund's investments to decline.
An investment in the Prime Obligations Fund is not insured or guaranteed by
the Federal Deposit Insurance Corporation or any other government agency.
Although the Prime Obligations 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.
4
<PAGE>
Investment Performance
The bar chart and table shown below give an indication of the risks of
investing in the Prime Obligations Fund by showing changes in its performance
for various time periods ending December 31st. The figures shown in the bar
chart and table assume reinvestment of dividends.
1990 7.96%
1991 5.84%
1992 3.47%
1993 3.04%
1994 3.89%
1995 5.31%
1996 4.71%
1997 4.93%
1998 4.94%
1999 4.59%
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter
was 1.95% (quarter ending June 30, 1990) and the lowest return for a quarter
was 0.74% (quarter ending March 31, 1993).
Average Annual Total Returns
(for the Periods ended Past Past Past
December 31, 1999) One Year 5 Years 10 Years
Class A 4.59% 4.89% 4.86%
The "seven-day yield" is an annualized figure -- the amount you would earn if
you kept your investment in the Prime Obligations Fund and the Fund continued
to earn the same net interest income throughout the year. The "seven-day
effective yield" (also an annualized figure) assumes that dividends are
reinvested and compounded.
For the Prime Obligations Fund's current seven-day yield and seven-day
effective yield, call the Fund at 800-539-FUND (800-539-3863).
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Prime Obligations Fund.
Shareholder Transaction Expenses
(paid directly from your investment)(1) Class A
Maximum Sales Charge
Imposed on Purchases NONE
(as a percentage of offering price)
Maximum Deferred Sales Charge
(as a percentage of the lower of purchase or sale price) NONE
Maximum Sales Charge Imposed
on Reinvested Dividends NONE
Redemption Fees NONE
Exchange Fees NONE
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees 0.35%
Distribution (12b-1) Fees 0.00%
Other Expenses
(includes a shareholder servicing fee of 0.25%) 0.44%
Total Fund Operating Expenses 0.79%
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Prime Obligations Fund with the cost of investing in other
mutual funds. The Example assumes that you invest $10,000 in the Prime
Obligations Fund for the time periods shown and then sell all of your shares
at the end of those periods. The Example also assumes that your investment
has a 5% return each year and that the Prime Obligations Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $81 $252 $439 $978
5
<PAGE>
Risk/Return Summary
FINANCIAL RESERVES FUND
CLASS A SHARES
Cusip#: 926464678
FNRXX
Investment Objective
The Financial Reserves Fund seeks to provide as high a level of current
income as is consistent with preserving capital and providing liquidity.
Principal Investment Strategies
The Financial Reserves Fund pursues its investment objective by investing
primarily in a portfolio of high-quality U.S. dollar-denominated money market
instruments.
Under normal market conditions, the Financial Reserves Fund invests in:
* Negotiable certificates of deposit, time deposits, and bankers'
acceptances issued by U.S. banks and U.S. branches of foreign
banks.
* Short-term corporate obligations, such as commercial paper, notes,
and bonds.
* Repurchase agreements.
* Other debt obligations such as master demand notes, short-term
funding agreements, variable and floating rate securities, and
private placement investments.
* U.S. Treasury obligations and obligations of U.S.
government-sponsored agencies.
* When-issued or delayed-delivery securities.
* Eurodollar debt obligations.
Important Characteristics of the Financial Reserves Fund's Investments:
* Quality: The Financial Reserves Fund invests only in instruments
that are rated at the time of purchase in the highest short-term
category by two or more NRSROs, or in the highest short-term
category if rated by only one NRSRO, or if unrated, determined to
be of equivalent quality. The Board of Trustees has established
policies to ensure that the Financial Reserves Fund invests in high
quality, liquid instruments. For more information on ratings, see
the Appendix to the SAI.
* Maturity: Weighted average maturity of 90 days or less. Individual
investments may be purchased with remaining maturities ranging from
one day to 397 days.
The Financial Reserves Fund is only available to certain institutions or
individuals that meet minimum investment requirements and have trust or
advisory accounts set up through KeyCorp or its affiliates.
Principal Risks
The Financial Reserves Fund is subject to the following principal risks, more
fully described in "Risk Factors." The Financial Reserves Fund's yield or the
stability of its $1.00 share price may be adversely affected if any of the
following occurs:
* The portfolio manager does not execute the Financial Reserves
Fund's principal investment strategies effectively.
* An issuer defaults on its obligation.
* An agency or instrumentality defaults on its obligation and the
agency or the U.S. government does not provide financial support.
* The market value of floating or variable rate securities falls to
such an extent that the Financial Reserves Fund's share price
declines below $1.00.
* Rapidly rising interest rates cause securities held by the
Financial Reserves Fund to decline in value and cause the Fund's
share price to decline below $1.00.
* Interest rates decline, resulting in a lower yield for the
Financial Reserves Fund.
* Adverse events affecting the banking industry cause the value of
the Financial Reserves Fund's investments to decline.
An investment in the Financial Reserves Fund is not insured or guaranteed by
the Federal Deposit Insurance Corporation or any other government agency.
Although the Financial Reserves 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.
6
<PAGE>
Investment Performance
The bar chart and table shown below give an indication of the risks of
investing in the Financial Reserves Fund by showing changes in its
performance for various time periods ending December 31st. The figures shown
in the bar chart and table assume reinvestment of dividends.
1990 7.72%
1991 5.63%
1992 3.38%
1993 2.78%
1994 3.95%
1995 5.54%
1996 4.93%
1997 5.09%
1998 5.05%
1999 4.69%
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter
was 1.91% (quarter ending March 31, 1990) and the lowest return for a quarter
was 0.67% (quarter ending June 30, 1993).
Average Annual Total Returns
(for the Periods ended Past Past Past
December 31, 1999) One Year 5 Years 10 Years
Class A 4.69% 5.06% 4.87%
The "seven-day yield" is an annualized figure -- the amount you would earn if
you kept your investment in the Financial Reserves Fund and the Fund
continued to earn the same net interest income throughout the year. The
"seven-day effective yield" (also an annualized figure) assumes that
dividends are reinvested and compounded.
For the Financial Reserves Fund's current seven-day yield and seven-day
effective yield, call the Fund at 800-539-FUND (800-539-3863).
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Financial Reserves Fund.
Shareholder Transaction Expenses
(paid directly from your investment)(1) Class A
Maximum Sales Charge
Imposed on Purchases NONE
(as a percentage of offering price)
Maximum Deferred Sales Charge
(as a percentage of the lower of purchase or sale price) NONE
Maximum Sales Charge Imposed
on Reinvested Dividends NONE
Redemption Fees NONE
Exchange Fees NONE
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees 0.50%
Distribution (12b-1) Fees 0.00%
Other Expenses 0.18%
Total Fund Operating Expenses 0.68%
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Financial Reserves Fund with the cost of investing in other
mutual funds. The Example assumes that you invest $10,000 in the Financial
Reserves Fund for the time periods shown and then sell all of your shares at
the end of those periods. The Example also assumes that your investment has a
5% return each year and that the Financial Reserves Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $69 $218 $379 $847
7
<PAGE>
Risk/Return Summary
TAX-FREE MONEY MARKET FUND
CLASS A SHARES
Cusip#: 926464306
STOXX
Investment Objective
The Tax-Free Money Market Fund seeks to provide current interest income free
from federal income taxes consistent with relative liquidity and stability of
principal.
Principal Investment Strategies
The Tax-Free Money Market Fund pursues its investment objective by investing
at least 80% of its total assets in short-term, high-quality municipal
securities issued by or on behalf of U.S. states, territories, and
possessions. The interest income on these securities is exempt from federal
regular income tax and alternative minimum tax.
Under normal market conditions, the Tax-Free Money Market Fund invests in:
* Short-term municipal obligations such as commercial paper, notes,
and bonds.
* Tax, revenue, and bond anticipation notes.
* Variable rate demand notes and municipal bonds, and participation
interests in any of these obligations.
Important Characteristics of the Tax-Free Money Market Fund's Investments:
* Quality: The Tax-Free Money Market Fund invests only in instruments
that are rated at the time of purchase in the highest short-term
category by two or more NRSROs or in the highest short-term
category if rated by only one NRSRO, or if unrated, determined to
be of equivalent quality. The Board of Trustees has established
policies to ensure that the Tax-Free Money Market Fund invests in
high quality, liquid instruments. For more information on ratings,
see the Appendix to the SAI.
* Maturity: Weighted average maturity of 90 days or less. Individual
investments may be purchased with remaining maturities ranging from
one day to 397 days.
Principal Risks
The Tax-Free Money Market Fund is subject to the following principal risks,
more fully described in "Risk Factors." The Tax-Free Money Market Fund's
yield or the stability of its $1.00 share price may be adversely affected if
any of the following occurs:
* The portfolio manager does not execute the Tax-Free Money Market
Fund's principal investment strategies effectively.
* A municipality or instrumentality defaults on its obligation.
* The market value of floating or variable rate securities falls to
such an extent that the Tax-Free Money Market Fund's share price
declines below $1.00.
* Rapidly rising interest rates cause securities held by the Tax-Free
Money Market Fund to decline in value and cause the Fund's share
price to decline below $1.00.
* Interest rates decline, resulting in a lower yield for the Tax-Free
Money Market Fund.
* Adverse events affecting the banking industry cause the value of
the Tax-Free Money Market Fund's investments to decline.
* Political, economic, business or regulatory events occur in a city
or state causing the value of that municipality's securities to
decline.
An investment in the Tax-Free Money Market Fund is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
Although the Tax-Free Money Market 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.
8
<PAGE>
Investment Performance
The bar chart and table shown below give an indication of the risks of
investing in the Tax-Free Money Market Fund by showing changes in its
performance for various time periods ending December 31st. The figures shown
in the bar chart and table assume reinvestment of dividends.
1990 5.46%
1991 4.14%
1992 2.51%
1993 2.00%
1994 2.37%
1995 3.48%
1996 2.96%
1997 3.09%
1998 2.84%
1999 2.63%
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter
was 1.38% (quarter ending December 31, 1990) and the lowest return for a
quarter was 0.45% (quarter ending March 31, 1994).
Average Annual Total Returns
(for the Periods ended Past Past Past
December 31, 1999) One Year 5 Years 10 Years
Class A 2.63% 3.00% 3.14%
The "seven-day yield" is an annualized figure -- the amount you would earn if
you kept your investment in the Tax-Free Money Market Fund and the Fund
continued to earn the same net interest income throughout the year. The
"seven-day effective yield" (also an annualized figure) assumes that
dividends are reinvested and compounded.
For the Tax-Free Money Market Fund's current seven-day yield and seven-day
effective yield, call the Fund at 800-539-FUND (800-539-3863).
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Tax-Free Money Market Fund.
Shareholder Transaction Expenses
(paid directly from your investment)(1) Class A
Maximum Sales Charge
Imposed on Purchases NONE
(as a percentage of offering price)
Maximum Deferred Sales Charge
(as a percentage of the lower of purchase or sale price) NONE
Maximum Sales Charge Imposed
on Reinvested Dividends NONE
Redemption Fees NONE
Exchange Fees NONE
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees 0.35%
Distribution (12b-1) Fees 0.00%
Other Expenses
(includes a shareholder servicing fee of 0.25%) 0.44%
Total Fund Operating Expenses 0.79%
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Tax-Free Money Market Fund with the cost of investing in
other mutual funds. The Example assumes that you invest $10,000 in the
Tax-Free Money Market Fund for the time periods shown and then sell all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Tax-Free Money Market
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $81 $252 $439 $978
9
<PAGE>
Risk/Return Summary
OHIO MUNICIPAL
MONEY MARKET FUND
CLASS A SHARES
Cusip#: 926464769
AOHXX
Investment Objective
The Ohio Municipal Money Market Fund seeks to provide current income exempt
from federal regular income tax and the personal income taxes imposed by the
State of Ohio and Ohio municipalities consistent with stability of principal.
Principal Investment Strategies
The Ohio Municipal Money Market Fund pursues its investment objective by
investing at least 80% of its total assets in short-term municipal
securities. The interest income on these securities is exempt from federal
regular income tax. Federal regular income tax does not include the
individual or corporate federal alternative minimum tax. The Ohio Municipal
Money Market Fund expects to invest at least 65% of its total assets in debt
securities that pay interest which is also exempt from Ohio state income tax.
Under normal market conditions, the Ohio Municipal Money Market Fund invests
in:
* Short-term municipal obligations, such as commercial paper, notes,
and bonds.
* Tax, revenue, and bond anticipation notes.
* Variable rate demand notes, municipal bonds, and participation
interests in any of the above obligations.
Important Characteristics of the Ohio Municipal Money Market Fund's Investments:
* Quality: The Ohio Municipal Money Market Fund invests only in
instruments that are rated at the time of purchase in the highest
short-term category by two or more NRSROs, in the highest
short-term category if rated by only one NRSRO, or if unrated,
determined to be of equivalent quality. The Board of Trustees has
established policies to ensure that the Ohio Municipal Money Market
Fund invests in high quality, liquid instruments. For more
information on ratings, see the Appendix to the SAI.
* Maturity: Weighted average maturity of 90 days or less. Individual
investments may be purchased with remaining maturities ranging from
one day to 397 days.
Principal Risks
The Ohio Municipal Money Market Fund is subject to the following principal
risks, more fully described in "Risk Factors." The Ohio Municipal Money
Market Fund's yield or the stability of its $1.00 share price may be
adversely affected if any of the following occurs:
* The portfolio manager does not execute the Ohio Municipal Money
Market Fund's principal investment strategies effectively.
* A municipality or instrumentality defaults on its obligation.
* The market value of floating or variable rate securities falls to
such an extent that the Ohio Municipal Money Market Fund's share
price declines below $1.00.
* Rapidly rising interest rates cause securities held by the Ohio
Municipal Money Market Fund to decline in value and cause the
Fund's share price to decline below $1.00.
* Interest rates decline, resulting in a lower yield for the Ohio
Municipal Money Market Fund.
* There is a significant decline in the value of an investment.
* Adverse events affecting the banking industry cause the value of
the Ohio Municipal Money Market Fund's investments to decline.
* Political, economic, business or regulatory events occur in Ohio
causing the value of Ohio municipal securities to decline. The Ohio
Municipal Money Market Fund could be more susceptible to economic,
political, or credit risks than a fund that invests in a more
diversified geographic area. The SAI explains the risks specific to
investments in Ohio securities.
An investment in the Ohio Municipal Money Market Fund is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. Although the Ohio Municipal Money Market 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.
10
<PAGE>
Investment Performance
The bar chart and table shown below give an indication of the risks of
investing in the Ohio Municipal Money Market Fund by showing changes in its
performance for various time periods ending December 31st. The figures shown
in the bar chart and table assume reinvestment of dividends.
1990 5.33%
1991 4.06%
1992 2.60%
1993 1.99%
1994 2.42%
1995 3.47%
1996 3.00%
1997 3.04%
1998 2.85%
1999 2.56%
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter
was 1.35% (quarter ending December 31, 1990) and the lowest return for a
quarter was 0.46% (quarter ending March 31, 1994).
Average Annual Total Returns
(for the Periods ended Past Past Past
December 31, 1999) One Year 5 Years 10 Years
Class A 2.56% 2.99% 3.13%
The "seven-day yield" is an annualized figure -- the amount you would earn if
you kept your investment in the Ohio Municipal Money Market Fund and the Fund
continued to earn the same net interest income throughout the year. The
"seven-day effective yield" (also an annualized figure) assumes that
dividends are reinvested and compounded.
For the Ohio Municipal Money Market Fund's current seven-day yield and
seven-day effective yield, call the Fund at 800-539-FUND (800-539-3863).
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Ohio Municipal Money Market Fund.
Shareholder Transaction Expenses
(paid directly from your investment)(1) Class A
Maximum Sales Charge
Imposed on Purchases NONE
(as a percentage of offering price)
Maximum Deferred Sales Charge
(as a percentage of the lower of purchase or sale price) NONE
Maximum Sales Charge Imposed
on Reinvested Dividends NONE
Redemption Fees NONE
Exchange Fees NONE
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees 0.50%
Distribution (12b-1) Fees 0.00%
Other Expenses
(includes a shareholder servicing fee of 0.25%) 0.43%
Total Fund Operating Expenses 0.93%(2)
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 The Adviser may waive its management fee and reimburse expenses, as allowed
by law, so that the net operating expenses of the Fund do not exceed 0.85%.
The Adviser may terminate this waiver/reimbursement at any time to the extent
allowed by law.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Ohio Municipal Money Market Fund with the cost of investing
in other mutual funds. The Example assumes that you invest $10,000 in the
Ohio Municipal Money Market Fund for the time periods shown and then sell all
of your shares at the end of those periods. The Example also assumes that
your investment has a 5% return each year and that the Ohio Municipal Money
Market Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $95 $296 $515 $1,143
11
<PAGE>
Investments
The following describes some of the types of securities the Funds may
purchase under normal market conditions to achieve their investment
objectives. All Funds will not buy all of the securities listed below.
For cash management or for temporary defensive purposes in response to market
conditions, each Fund may hold all or a portion of its assets in cash. This
may reduce the Fund's yield and may cause the Fund to fail to meet its
investment objective.
For more information on ratings and a more complete description of which
Funds can invest in certain types of securities, see the SAI.
The Funds may invest in the following types of securities:
Commercial Paper.
Short-term obligations issued by banks, corporations, broker dealers and
other entities to finance their current operations.
Certificates of Deposit.
A commercial bank's obligations to repay funds deposited with it, earning
specified rates of interest over given periods.
Master Demand Notes.
Unsecured obligations that permit the investment of fluctuating amounts by a
Fund at varying interest rates.
Short-Term Funding Agreements.
Similar to guaranteed investment contracts, or "GIC's", and issued by
insurance companies. A Fund invests cash for a specified period and
guaranteed amount of interest as stated in the contract.
Time Deposits.
Non-negotiable deposits in banks that pay a specified rate of interest over a
set period of time.
U.S. Government Securities.
Notes and bonds issued or guaranteed by the U.S. government, its agencies, or
instrumentalities. Some are direct obligations of the U.S. Treasury; others
are obligations only of the U.S. agency or instrumentality.
Mortgage-Backed Securities.
Instruments secured by a mortgage or pools of mortgages.
* U.S. Government. Issued or guaranteed by the U.S. government or its
agencies and instrumentalities;(+)
* Non-U.S. Government. Secured by non-government entities.
Eurodollar Obligations.
Obligations of foreign branches of U.S. banks and domestic branches of
foreign banks.
+ Obligations of entities such as the Government National Mortgage
Association are backed by the full faith and credit of the U.S. Treasury.
Others, such as the Federal National Mortgage Association are supported by
the right of the issuer to borrow from the U.S. Treasury. Still others, such
as the Federal Farm Credit Bank, Federal Home Loan Bank, the Federal Home
Loan Mortgage Corporation, and Federal Agricultural Mortgage Corporation are
supported only by the credit of the federal instrumentality.
12
<PAGE>
Investments (continued)
U.S. Government Instrumentalities.
Securities issued by U.S. government instrumentalities such as the Student
Loan Marketing Association, Federal Farm Credit Bank, Federal Home Loan Bank,
Federal Home Loan Mortgage Corporation, and the Federal Agricultural Mortgage
Corporation are supported only by the credit of the federal instrumentality.
When-Issued and Delayed-Delivery Securities.
A security that is purchased for delivery at a later time. The market value
may change before the delivery date, and the value is included in the net
asset value of a Fund.
Repurchase Agreements.
An agreement involving a Fund's purchase of a security and the seller's
agreement to repurchase the same security at a stated price plus interest.
The seller's obligation to the Fund is secured by the instrument. Subject to
an exemptive order from the SEC, the Adviser may combine repurchase
transactions among one or more Victory funds into a single transaction.
+ Variable & Floating Rate Securities.
The interest rate offered by a variable rate security adjusts (resets) on
particular dates (such as the last day of a month or calendar quarter). The
interest rate offered by a floating rate security adjusts whenever a
specified interest rate (such as a bank's prime lending rate) changes. Upon
adjustment, the market value of a variable or floating rate security can
reasonably be expected to equal its amortized cost.
Zero Coupon Bonds.
These securities are purchased at a discount from face value. The bond's face
value is received at maturity, with no interest payments before then.
+ Derivative Instruments: Indicates a "derivative instrument," whose value is
linked to, or derived from another security, instrument, or index.
13
<PAGE>
Risk Factors
By matching your investment objective with an acceptable level of risk, you
can create your own customized investment plan.
It is important to keep in mind one basic principle of investing: the greater
the risk, the greater the potential reward. The reverse is also generally
true: the lower the risk, the lower the potential reward.
An investment in a Fund is not a complete investment program.
This Prospectus describes the principal risks that you may assume as an
investor in the Funds.
This table summarizes the principal risks, described in the following pages,
to which the Funds are subject.
<TABLE>
<CAPTION>
U.S. Ohio
Government Prime Financial Tax-Free Municipal
Obligations Obligations Reserves Money Market Money Market
Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C>
Manager risk,
income risk,
adjustable rate x x x x x
security risk, and
credit risk
Tax-exempt
status risk x x
Concentration risk x
</TABLE>
General Risks:
* Manager risk is the risk that a Fund's portfolio manager may
implement the Fund's investment strategy in a way that does not
produce the intended result.
Risks associated with investing in debt securities:
* Income risk. Declines in the general level of short-term interest
rates cause a Fund's income, and thus its total return, to decline.
* Adjustable rate security risk. The market price of an adjustable
rate security may, upon readjustment, fall below its cost.
* Credit risk is the risk that the issuer of a debt security will
fail to pay interest or principal in a timely manner. Credit risk
is measured by NRSROs such as S&P, Fitch IBCA, or Moody's.
Risks associated with investing in municipal debt securities:
* Tax-exempt status risk is the risk that a municipal debt security
issued as a tax-exempt security may be declared by the Internal
Revenue Service to be taxable.
Risks associated with investing in the securities of a single state:
* Concentration risk is the risk that only a limited number of
high-quality securities of a particular type may be available.
Concentration risk is greater for funds that primarily invest in
the securities of a single state. Concentration risk may result in
the Ohio Municipal Money Market Fund being invested in securities
that are related in such a way that changes in economic, business,
or political circumstances that would normally affect one security
could also affect other securities within that particular segment
of the bond market.
14
<PAGE>
Share Price
The Ohio Municipal Money Market Fund normally calculates its share price,
called its "net asset value" (NAV), each business day at 12:00 p.m. Eastern
Time. Each other Fund normally calculates its NAV each business day at 2:00
p.m. Eastern Time. You may buy, exchange, and sell your shares on any
business day at a price that is based on the NAV that is calculated after you
place your order. A business day is a day on which the Federal Reserve Bank
of Cleveland and the New York Stock Exchange, Inc. ("NYSE") are open. You may
not be able to buy or sell shares on Columbus Day and Veterans Day, holidays
when the Federal Reserve Bank of Cleveland is closed, but the NYSE and other
financial markets are open.
Each Fund seeks to maintain a $1.00 NAV, although there is no guarantee that
it will be able to do so. Each Fund uses the "Amortized Cost Method" to value
securities. You can read about this method in the SAI.
Each Fund's performance can be found once a week in The Wall Street Journal
and other newspapers.
Dividends, Distributions, and Taxes
As a shareholder, you are entitled to your share of net income and capital
gains on a Fund's investments. Each Fund passes its earnings along to
investors in the form of dividends. Dividend distributions are the net income
earned on investments after expenses. Money market funds usually do not
realize capital gains; however, a Fund will distribute short-term gains, as
necessary, and if the Fund makes a long-term capital gain distribution, it is
normally paid once a year. As with any investment, you should consider the
tax consequences of an investment in a Fund.
Ordinarily, each Fund declares dividends daily and pays them monthly. Each
class of shares declares and pays dividends separately.
Please check with your Investment Professional to find out if the following
options are available to you.
An Investment Professional is an investment consultant, salesperson,
financial planner, investment adviser, or trust officer who provides you with
investment information.
Distributions can be received in one of the following ways.
REINVESTMENT OPTION
You can have distributions automatically reinvested in additional shares of
your Fund. If you do not indicate another choice on your Account Application,
you will be assigned this option automatically.
CASH OPTION
A check will be mailed to you no later than seven days after the dividend
payment date.
DIRECTED DIVIDENDS OPTION
In most cases, you can automatically reinvest distributions in shares of
another fund of the Victory Group. If you reinvest your distributions in a
different class of another fund, you may pay a sales charge on the reinvested
distributions.
DIRECTED BANK ACCOUNT OPTION
In most cases, you can automatically transfer distributions to your bank
checking or savings account. Under normal circumstances, your Fund will
transfer your distributions within seven days of the dividend payment date.
The bank account must have a registration identical to that of your Fund
account.
Your choice of distribution should be set up on the original account
application. If you would like to change the option you selected, please call
800-539-FUND.
15
<PAGE>
Dividends, Distributions, and Taxes (continued)
The tax information in this Prospectus is provided as general information.
You should consult your own tax adviser about the tax consequences of an
investment in a Fund.
Important Information about Taxes
The Funds pay no federal income tax on the earnings and capital gains they
distribute to shareholders.
* Ordinary dividends from a Fund are taxable as ordinary income;
dividends from any long-term capital gains would be taxable as
long-term capital gain.
* Certain dividends from the Tax-Free Money Market Fund and the Ohio
Municipal Money Market Fund will be "exempt-interest dividends,"
which generally are exempt from federal income tax. However,
exempt-interest dividends are not necessarily exempt from state or
local taxes.
* Dividends are treated in the same manner for federal income tax
purposes whether you receive them in cash or in additional shares.
They also may be subject to state and local taxes.
* Dividends from a Fund that are attributable to interest on certain
U.S. government obligations may be exempt from certain state and
local income taxes. The extent to which ordinary dividends are
attributable to these U.S. government obligations will be provided
on the tax statements you receive from the Fund.
* An exchange of a Fund's shares for shares of another fund will be
treated as a sale. When you sell or exchange shares of a Fund, you
must recognize any gain or loss. However, as long as the Fund's NAV
per share does not deviate from $1.00, there will be no gain or
loss.
* Certain dividends paid to you in January will be taxable as if they
had been paid to you the previous December.
* Tax statements will be mailed from your Fund every January showing
the amounts and tax status of distributions made to you.
* Because your tax treatment depends on your purchase price and tax
position, you should keep your regular account statements for use
in determining your tax.
* You should review the more detailed discussion of federal income
tax considerations in the SAI.
16
<PAGE>
INVESTING WITH VICTORY
All you need to do to get started is to fill out an application.
For historical expense information, see the financial highlights at the end
of this Prospectus.
If you are looking for a convenient way to open an account or to add money to
an existing account, Victory can help. The sections that follow will serve as
a guide to your investments with Victory. The following sections will
describe how to open an account, how to access information on your account,
and how to buy, exchange, and sell shares of the Funds.
We want to make it simple for you to do business with us. If you have
questions about any of this information, please call your Investment
Professional or one of our customer service representatives at 800-539-FUND.
They will be happy to assist you.
Shareholder Servicing Plan
The following Funds have adopted a Shareholder Servicing Plan:
* U.S. Government Obligations Fund, Select Shares
* Prime Obligations Fund, Class A Shares
* Tax-Free Money Market Fund, Class A Shares
* Ohio Municipal Money Market Fund, Class A Shares
The shareholder servicing agent performs a number of services for its
customers who are shareholders of a Fund. It establishes and maintains
accounts and records, processes dividend and distribution payments, arranges
for bank wires, assists in transactions, and changes account information. For
these services, each such Fund pays a fee at an annual rate of up to 0.25% of
the average daily net assets of the appropriate class of shares serviced by
the agent. These Funds may enter into agreements with various shareholder
servicing agents, including KeyBank National Association and its affiliates,
other financial institutions, and securities brokers. These Funds may pay a
servicing fee to broker-dealers and others who sponsor "no transaction fee"
or similar programs for the purchase of shares. Shareholder servicing agents
may waive all or a portion of their fee periodically.
Distribution Plan
According to Rule 12b-1 under the Investment Company Act of 1940, Victory has
adopted a Distribution and Service Plan for the Financial Reserves Fund, the
Ohio Municipal Money Market Fund, and the Investor Shares of the U.S.
Government Obligations Fund. These Funds do not pay expenses under this plan.
17
<PAGE>
How to Buy Shares
When you buy shares of a Fund, your cost will normally be $1.00 per share.
You can buy shares in a number of different ways. All you need to do to get
started is to fill out an application. The minimum investment required to
open an account for Class A Shares of a Fund is $500 ($100 for IRAs), with
additional investments of at least $25. There is no minimum investment
required to open an account or for aditional investments for SIMPLE IRAs. You
can send in your payment by check, wire transfer, exchange from another
Victory Fund, or through arrangements with your Investment Professional.
Sometimes an Investment Professional will charge you for these services. This
fee will be in addition to, and unrelated to, the fees and expenses charged
by a Fund.
If you buy shares directly from a Fund and your investment is received and
accepted by 2:00 p.m. Eastern Time (12:00 p.m. Eastern Time for the Ohio
Municipal Money Market Fund), your purchase will be processed the same day.
The Financial Reserves Fund is only available to certain institutions or
individuals that meet minimum investment requirements and have trust or
advisory accounts set up through KeyCorp or its affiliates. The U.S.
Government Obligations Fund offers Investor Shares and Select Shares.
Investor Shares are available to certain institutions or individuals that
meet minimum investment requirements, and are not subject to a shareholder
servicing fee. Select Shares are available through certain financial
institutions that provide additional services to their customers who are
shareholders of the Fund.
Make your check payable to: The Victory Funds
Keep the following addresses handy for purchases, exchanges, or redemptions:
Tax-Free Money Market Fund
Ohio Municipal Money Market Fund
U.S. Government Obligations Fund
Prime Obligations Fund
Financial Reserves Fund
BY REGULAR U.S. MAIL
Send completed Account Applications with your check, bank draft, or money
order to:
The Victory Funds
c/o Gradison McDonald
580 Walnut Street
Cincinnati, OH 45202
The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
BY OVERNIGHT MAIL
Use the following address ONLY for overnight packages.
The Victory Funds
c/o Gradison McDonald
580 Walnut Street
Cincinnati, OH 45202
Phone: 800-539-FUND
The Victory Funds
c/o Boston Financial Data Services
66 Brooks Drive
Braintree, MA 02184
Phone: 800-539-FUND
BY WIRE
The Transfer Agent does not charge a wire fee, but your originating bank may
charge a fee. Always call the Transfer Agent at 800-539-FUND BEFORE wiring
funds.
The Victory Funds
c/o Gradison McDonald
ABA #042000013
Tax-Free Money Market Fund
For Credit to DDA
Account #8355083
Ohio Municipal Money Market Fund
For Credit to DDA
Account #8058364
(insert account number and name)
The Victory Funds
State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA
Account #9905-201-1
(insert account number, name, and confirmation number assigned by the
Transfer Agent)
BY TELEPHONE
800-539-FUND (800-539-3863)
18
<PAGE>
How to Buy Shares (continued)
If you would like to make additional investments after your account is
established, use the Investment Stub attached to your confirmation statement
and send it with your check to the address indicated.
ACH
After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic member banks may be used. It
takes about 15 days to set up an ACH account. Currently, the Fund does not
charge a fee for ACH transfers.
Statements and Reports
You will receive a periodic statement reflecting any transactions that affect
the balance or registration of your account. You will receive a confirmation
after any purchase, exchange, or redemption. If your account has been set up
by an Investment Professional, Fund activity will be detailed in that
account's statements. Share certificates are not issued. Twice a year, you
will receive the financial reports of the Fund. By January 31 of each year,
you will be mailed an IRS form reporting distributions for the previous year,
which also will be filed with the IRS.
Automatic and Systematic Investment Plan
To enroll in the Automatic or Systematic Investment Plan, you should complete
a separate Automatic Investment Plan Application. We will need your bank
information and the amount and frequency of your investment. You can select
monthly, quarterly, semi-annual, or annual investments. You should attach a
voided personal check so the proper information can be obtained. You must
first meet the minimum investment requirement of $500 ($100 for IRA
accounts), then we will make automatic withdrawals of the amount you indicate
($25 or more) from your bank account and invest it in shares of a Fund.
Retirement Plans
You can use a Fund as part of your retirement portfolio. Your Investment
Professional can set up your new account under one of several tax-deferred
retirement plans. Please contact your Investment Professional or the Funds
for details regarding an IRA or other retirement plan that works best for
your financial situation. Generally, Funds that pay tax-free dividends are
not appropriate investments for retirement accounts.
All purchases must be made in U.S. dollars and drawn on U.S. banks. The
Transfer Agent may reject any purchase order in its sole discretion. If your
check is returned for any reason, you will be charged for any resulting fees
and/or losses. Third party checks will not be accepted. You may only buy or
exchange into fund shares legally available in your state. If your account
falls below $500 ($100 for IRA accounts), we may ask you to re-establish the
minimum investment. If you do not do so within 60 days, we may close your
account and send you the value of your account.
19
<PAGE>
How to Exchange Shares
You can obtain a list of funds available for exchange by calling
800-539-FUND.
You may exchange shares of one Victory fund for shares of the same class of
any other. If your request is received and accepted by 2:00 p.m. Eastern Time
(12:00 p.m. Eastern Time for the Ohio Municipal Money Market Fund), your
exchange will be processed the same day.
You can exchange shares of a Fund by writing the Transfer Agent or calling
800-539-FUND. When you exchange shares of a Fund, you should keep the
following in mind:
* Shares of the Fund selected for exchange must be available for sale in
your state of residence.
* The Fund whose shares you want to exchange and the fund whose shares you
want to buy must offer the exchange privilege.
* If you exchange into a fund with a sales charge, you pay the
percentage-point difference between that fund's sales charge and any
sales charge you have previously paid in connection with the shares you
are exchanging.
* On certain business days, such as Veterans Day and Columbus Day, the
Federal Reserve Bank of Cleveland is closed. On those days, exchanges to
or from a money market fund will be processed on the exchange date, with
the corresponding purchase or sale of the money market fund shares being
effected on the next business day.
* You must meet the minimum purchase requirements for the fund you
purchase by exchange.
* The registration and tax identification numbers of the two accounts must
be identical.
* You must hold the shares you buy when you establish your account for at
least seven days before you can exchange them; after the account is open
seven days, you can exchange shares on any business day.
* A Fund may refuse any exchange purchase request if the Adviser
determines that the request is associated with a market timing strategy.
A Fund may terminate or modify the exchange privilege at any time on 30
days' notice to shareholders.
* Before exchanging, read the prospectus of the fund you wish to purchase
by exchange.
* An exchange of Fund shares constitutes a sale for tax purposes.
20
<PAGE>
How to Sell Shares
There are a number of convenient ways to sell your shares. You can use the
same mailing addresses listed for purchases.
If your request is received in good order by 2:00 p.m. Eastern Time (12:00
p.m. Eastern Time for the Ohio Municipal Money Market Fund), your redemption
will be processed the same day.
BY TELEPHONE
The easiest way to sell shares is by calling 800-539-FUND. When you fill out
your original application, be sure to check the box marked "Telephone
Authorization." Then when you are ready to sell, call and tell us which one
of the following options you would like to use:
* Mail a check to the address of record;
* Wire funds to a domestic financial institution;
* Mail a check to a previously designated alternate address; or
* Electronically transfer your redemption via the Automated Clearing House
(ACH).
The Transfer Agent records all telephone calls for your protection and takes
measures to verify the identity of the caller. If the Transfer Agent properly
acts on telephone instructions and follows reasonable procedures to ensure
against unauthorized transactions, neither Victory, its servicing agents, the
Adviser, nor the Transfer Agent will be responsible for any losses. If the
Transfer Agent does not follow these procedures, it may be liable to you for
losses resulting from unauthorized instructions.
If there is an unusual amount of market activity and you cannot reach the
Transfer Agent or your Investment Professional by telephone, consider placing
your order by mail.
BY MAIL
Use the Regular U.S. Mail or Overnight Mail Address to redeem shares. Send us
a letter of instruction indicating your Fund account number, amount of
redemption, and where to send the proceeds. A signature guarantee is required
for the following redemption requests:
* Redemptions over $10,000;
* Your account registration has changed within the last 15 days;
* The check is not being mailed to the address on your account;
* The check is not being made payable to the owner of the account;
* The redemption proceeds are being transferred to another Victory Group
account with a different registration; or
* The check or wire is being sent to a different bank account.
You can get a signature guarantee from a financial institution such as a
bank, broker-dealer, credit union, clearing agency, or savings association.
BY WIRE
If you want to receive your proceeds by wire, you must establish a Fund
account that will accommodate wire transactions. If you call by 2:00 p.m.
Eastern Time (12:00 p.m. Eastern Time for the Ohio Municipal Money Market
Fund), your funds will be wired on the next business day.
BY ACH
Normally, your redemption will be processed on the same day, but will be
processed on the next day if received after 2:00 p.m. Eastern Time (12:00
p.m. Eastern Time for the Ohio Municipal Money Market Fund). It will be
transferred by ACH as long as the transfer is to a domestic bank.
CHECK WRITING
Shareholders of the following Funds may withdraw funds by writing a check for
$100.00 or more:
* U.S. Government Obligations Fund
* Prime Obligations Fund
* Tax-Free Money Market Fund
* Ohio Municipal Money Market Fund
In order to activate the check writing option on your account, you must sign
a signature card. After your completed signature card is received, an initial
supply of checks will be mailed to you in about three weeks. There is no
charge for checks; however, you will be charged for stopping payment of a
check or for insufficient funds. You may not close your account by writing a
check. You should call the Fund for a complete redemption. Please call
800-539-FUND to request a signature card.
21
<PAGE>
How to Sell Shares (continued)
Systematic Withdrawal Plan
If you check this box on the Account Application, we will send monthly,
quarterly, semi-annual, or annual payments to the person you designate. The
minimum withdrawal is $25, and you must have a balance of $5,000 or more. If
the payment is to be sent to an account of yours, we will need a voided check
to activate this feature. If the payment is to be made to an address
different from your account address, we will need a signature guaranteed
letter of instruction. You should be aware that your account eventually may
be depleted. However, you cannot automatically close your account using the
Systematic Withdrawal Plan. If your balance falls below $500, we may ask you
to bring the account back to the minimum balance. If you decide not to
increase your account to the minimum balance, your account may be closed and
the proceeds mailed to you.
Additional Information about Redemptions
* Redemption proceeds from the sale of shares purchased by a check
may be held until the purchase check has cleared, which may take up
to 15 days.
* If you request a complete redemption your Fund will include any
dividends accrued with the redemption proceeds.
* A Fund may suspend your right to redeem your shares in the
following circumstances:
- During non-routine closings of the NYSE;
- When the Securities and Exchange Commission (SEC) determines either
that trading on the NYSE is restricted or that an emergency
prevents the sale or valuation of the Fund's securities; or
- When the SEC orders a suspension to protect the Fund's
shareholders.
* Each Fund will pay redemptions by any one shareholder during any
90-day period in cash up to the lesser of $250,000 or 1% of its net
assets. Each Fund reserves the right to pay the remaining portion
"in kind," that is, in portfolio securities rather than cash.
22
<PAGE>
Organization and Management of the Funds
About Victory
Each Fund is a member of the Victory Portfolios, a group of over 30 distinct
investment portfolios. The Board of Trustees of Victory has the overall
responsibility for the management of the Funds.
The Investment Adviser and Sub-Administrator
Each Fund has an Advisory Agreement which is one of its most important
contracts. Key Asset Management Inc. (KAM), a New York corporation registered
as an investment adviser with the SEC, is the Adviser to each Fund. KAM, a
subsidiary of KeyCorp, oversees the operations of the Funds according to
investment policies and procedures adopted by the Board of Trustees.
Affiliates of the Adviser manage approximately $76 billion for a limited
number of individual and institutional clients. KAM's address is 127 Public
Square, Cleveland, Ohio 44114.
We want you to know who plays what role in your investment and how they are
related. This section discusses the organizations employed by the Funds to
provide services to their shareholders. Each of these organizations is paid a
fee for its services.
During the fiscal year ended October 31, 1999, KAM was paid an advisory fee
at an annual rate based on a percentage of the average daily net assets of
each Fund (after waivers) as shown in the following table.
U.S. Government Obligations Fund 0.35%
Prime Obligations Fund 0.35%
Financial Reserves Fund 0.50%
Tax-Free Money Market Fund 0.35%
Ohio Municipal Money Market Fund 0.39%
Under a Sub-Administration Agreement, BISYS Fund Services Ohio, Inc. pays KAM
a fee at the annual rate of up to 0.05% of each Fund's average daily net
assets to perform some of the administrative duties for the Funds.
23
<PAGE>
Organization and Management of the Funds (cont.)
Each Fund is supervised by the Board of Trustees, which monitors the services
provided to investors.
OPERATIONAL STRUCTURE OF THE FUNDS
TRUSTEES ADVISER
SHAREHOLDERS
FINANCIAL SERVICES FIRMS AND THEIR INVESTMENT PROFESSIONALS
Advise current and prospective shareholders on their Fund investments.
TRANSFER AGENT/SERVICING AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
Handles services such as record-keeping, statements,
processing of buy and sell requests, distribution of
dividends, and servicing of shareholder accounts.
ADMINISTRATOR, DISTRIBUTOR,
AND FUND ACCOUNTANT CUSTODIAN
BISYS Fund Services
and its affiliates
3435 Stelzer Road Key Trust Company of Ohio, N.A.
Columbus, OH 43219 127 Public Square
Cleveland, OH 44114
Markets the Funds, distributes
shares through Investment Provides for safekeeping of the
Professionals, and calculates Funds' investments and cash, and
the value of shares. As settles trades made by the Funds.
Administrator, handles the
day-to-day activities of the Funds.
SUB-ADMINISTRATOR
Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114
Performs certain
sub-administrative services.
24
<PAGE>
Additional Information
Some additional information you should know about the Funds.
Share Classes
The Funds currently offer only the classes of shares described in this
Prospectus. At some future date, the Funds may offer additional classes of
shares.
Performance
The Victory Funds may advertise the performance of a Fund by comparing it to
other mutual funds with similar objectives and policies. Performance
information also may appear in various publications. Any fees charged by
Investment Professionals may not be reflected in these performance
calculations. Advertising information may include the yield and effective
yield of a Fund, and the average annual total return of a Fund calculated on
a compounded basis for specified periods of time. Yield and total return
information will be calculated according to rules established by the SEC.
Such information may include performance rankings and similar information
from independent organizations, such as Lipper, Inc., and industry
publications such as Morningstar, Inc., Business Week, or Forbes.
Shareholder Communications
In order to eliminate duplicate mailings to an address at which two or more
shareholders with the same last name reside, a Fund will send only one copy
of any shareholder reports, prospectuses and their supplements, unless you
have instructed us to the contrary. You may request that the Funds send these
documents to each shareholder individually by calling the Funds at
800-539-FUND (800-539-3863).
If you would like to receive additional copies of any materials, please call
the Funds at 800-539-FUND.
25
<PAGE>
Financial Highlights
U.S. GOVERNMENT OBLIGATIONS FUND
The Financial Highlights table is intended to help you understand the U. S.
Government Obligations Fund's financial performance for the past five years.
Certain information shows the results of an investment in one share of the
U.S. Government Obligations Fund. The total returns in the table represent the
rate that an investor would have earned on an investment in the U. S.
Government Obligations Fund (assuming reinvestment of all dividends and
distributions).
These financial highlights reflect historical information about Investor and
Select Shares of the U.S. Government Obligations Fund. The financial
highlights for the five fiscal years ended October 31, 1999 were audited by
PricewaterhouseCoopers LLP, whose report, along with the financial statements
of the U.S. Government Obligations Fund, are included in the Fund's annual
report, which is available by calling the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Prior to Designation
Investor Select of Investor
Shares Shares and Select Shares
Year Year Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1999 1998 1997(2) 1999 1998 1997(2) 1996 1995(3)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Investment Activities
Net investment income 0.044 0.050 0.041 0.042 0.048 0.047 0.049 0.052
Distributions
Net investment income (0.044) (0.050) (0.041) (0.042) (0.048) (0.047) (0.049) (0.052)
Net Asset Value, End of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Total Return 4.54% 5.12% 4.19%(4) 4.27% 4.86% 4.75% 4.96% 5.38%
Ratios/Supplemental Data:
Net Assets, End of Period (000) $386,264 $571,104 $456,133 $1,813,458 $1,601,920 $1,235,475 $1,357,817 $964,929
Ratio of expenses to
average net assets 0.52% 0.52% 0.56%(5) 0.77% 0.77% 0.74% 0.61% 0.58%
Ratio of net investment income
to average net assets 4.44% 5.03% 4.95%(5) 4.19% 4.78% 4.75% 4.84% 5.28%
Ratio of expenses to
average net assets(1) (6) (6) (6) (6) (6) (6) (6) 0.60%
Ratio of net investment income
to average net assets(1) (6) (6) (6) (6) (6) (6) (6) 5.26%
(1) During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not
occurred, the ratios would have been as indicated.
(2) Effective January 8, 1997, the Fund designated the existing shares as Select Shares and commenced
offering Investor Shares.
(3) Effective June 5, 1995, the Victory U.S. Treasury Money Market Portfolio merged into the U.S.
Government Obligations Fund. Financial highlights for the periods prior to June 5, 1995 represent
the U.S. Government Obligations Fund.
(4) Not annualized.
(5) Annualized.
(6) There were no voluntary fee reductions during the period.
</TABLE>
26
<PAGE>
Financial Highlights
PRIME OBLIGATIONS FUND
The Financial Highlights table is intended to help you understand the Prime
Obligations Fund's financial performance for the past five years. Certain
information shows the results of an investment in one share of the Prime
Obligations Fund. The total returns in the table represent the rate that an
investor would have earned on an investment in the Prime Obligations Fund
(assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about shares of the
Prime Obligations Fund. The financial highlights for the five fiscal years
ended October 31, 1999 were audited by PricewaterhouseCoopers LLP, whose
report, along with the financial statements of the Prime Obligations Fund,
are included in the Fund's annual report, which is available by calling the
Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Investment Activities
Net investment income 0.044 0.049 0.048 0.047 0.051
Distributions
Net investment income (0.044) (0.049) (0.048) (0.047) (0.051)
Net Asset Value,
End of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Total Return 4.52% 4.98% 4.89% 4.81% 5.26%
Ratios/Supplemental Data:
Net Assets, End of Period (000) $2,060,039 $1,378,713 $736,449 $496,019 $456,266
Ratio of expenses to
average net assets 0.79% 0.80% 0.85% 0.87% 0.74%
Ratio of net investment income
to average net assets 4.43% 4.89% 4.79% 4.72% 5.09%
</TABLE>
27
<PAGE>
Financial Highlights
FINANCIAL RESERVES FUND
The Financial Highlights table is intended to help you understand the
Financial Reserves Fund's financial performance for the past five years.
Certain information shows the results of an investment in one share of the
Financial Reserves Fund. The total returns in the table represent the rate
that an investor would have earned on an investment in the Financial Reserves
Fund (assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about shares of the
Financial Reserves Fund. The financial highlights for the five fiscal years
ended October 31, 1999 were audited by PricewaterhouseCoopers LLP, whose
report, along with the financial statements of the Financial Reserves Fund,
are included in the Fund's annual report, which is available by calling the
Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Year Year Year Year Period
Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1999 1998 1997 1996 1995(2)
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Investment Activities
Net investment income 0.045 0.050 0.049 0.049 0.054
Distributions
Net investment income (0.045) (0.050) (0.049) (0.049) (0.054)
Net Asset Value, End of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Total Return 4.62% 5.10% 5.04% 5.00% 5.50%
Ratios/Supplemental Data:
Net Assets, End of Period (000) $818,452 $785,520 $800,642 $767,990 $762,870
Ratio of expenses to
average net assets 0.68% 0.67% 0.67% 0.67% 0.60%
Ratio of net investment income
to average net assets 4.52% 5.01% 4.94% 4.89% 5.40%
Ratio of expenses to
average net assets(1) (3) 0.68% 0.71% 0.75% 0.76%
Ratio of net investment income
to average net assets(1) (3) 5.00% 4.90% 4.81% 5.24%
<FN>
(1) During the period, certain fees were voluntarily reduced. If such voluntary fee reductions
had not occurred, the ratios would have been as indicated.
(2) Effective June 5, 1995, the Victory Financial Reserves Portfolio became the Financial
Reserves Fund.
(3) There were no voluntary fee reductions during the period.
</FN>
</TABLE>
28
<PAGE>
Financial Highlights
TAX-FREE MONEY MARKET FUND
The Financial Highlights table is intended to help you understand the
Tax-Free Money Market Fund's financial performance for the past five years.
Certain information shows the results of an investment in one share of the
Tax-Free Money Market Fund. The total returns in the table represent the rate
that an investor would have earned on an investment in the Tax-Free Money
Market Fund (assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about shares of the
Tax-Free Money Market Fund. The financial highlights for the five fiscal
years ended October 31, 1999 were audited by PricewaterhouseCoopers LLP,
whose report, along with the financial statements of the Tax-Free Money
Market Fund, are included in the Fund's annual report, which is available by
calling the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Investment Activities
Net investment income 0.025 0.029 0.030 0.030 0.034
Distributions
Net investment income (0.025) (0.029) (0.030) (0.030) (0.034)
Net Asset Value, End of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Total Return 2.55% 2.91% 3.07% 3.04% 3.42%
Ratios/Supplemental Data:
Net Assets, End of Period (000) $697,633 $465,528 $412,224 $344,796 $307,726
Ratio of expenses to
average net assets 0.79% 0.80% 0.73% 0.78% 0.61%
Ratio of net investment income
to average net assets 2.51% 2.88% 3.03% 2.97% 3.36%
Ratio of expenses to
average net assets(1) (2) 0.80% 0.74% 0.80% 0.62%
Ratio of net investment income
to average net assets(1) (2) 2.88% 3.02% 2.95% 3.35%
<FN>
(1) During the period, certain fees were voluntarily reduced. If such voluntary fee reductions
had not occurred, the ratios would have been as indicated.
(2) There were no voluntary fee reductions during the period.
</FN>
</TABLE>
29
<PAGE>
Financial Highlights
OHIO MUNICIPAL
MONEY MARKET FUND
The Financial Highlights table is intended to help you understand the Ohio
Municipal Money Market Fund's financial performance for the past five years.
Certain information shows the results of an investment in one share of the
Ohio Municipal Money Market Fund. The total returns in the table represent
the rate that an investor would have earned on an investment in the Ohio
Municipal Money Market Fund (assuming reinvestment of all dividends and
distributions).
These financial highlights reflect historical information about shares of the
Ohio Municipal Money Market Fund. The financial highlights for the four
fiscal years ended October 31, 1999, the two months ended October 31, 1995,
and the fiscal year ended August 31, 1995 were audited by
PricewaterhouseCoopers LLP, whose report, along with the financial statements
of the Ohio Municipal Money Market Fund, are included in the Fund's annual
report, which is available by calling the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Year Year Year Year Two Months Year
Ended Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Aug. 31,
1999 1998 1997 1996 1995 1995(2)
<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 0.025 0.029 0.030 0.030 0.006 0.033
Distributions
Net investment income (0.025) (0.029) (0.030) (0.030) (0.006) (0.033)
Net Asset Value,
End of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Total Return 2.49% 2.94% 3.01% 3.11% 0.55%(3) 3.33%
Ratios/Supplemental Data:
Net Assets, End of Period (000) $934,744 $751,543 $650,978 $561,131 $510,632 $502,453
Ratio of expenses to
average net assets 0.82% 0.80% 0.75% 0.67% 0.64%(4) 0.63%
Ratio of net investment income
to average net assets 2.45% 2.90% 2.97% 3.03% 3.31%(4) 3.33%
Ratio of expenses to
average net assets(1) 0.93% 0.94% 0.94% 0.97% 0.92%(4) 0.94%
Ratio of net investment income
to average net assets(1) 2.34% 2.76% 2.78% 2.73% 3.03%(4) 3.02%
<FN>
(1) During the period, certain fees were voluntarily reduced. If such voluntary fee reductions
had not occurred, the ratios would have been as indicated.
(2) Effective June 5, 1995, the Victory Ohio Municipal Money Market Portfolio became the Ohio
Municipal Money Market Fund.
(3) Not annualized.
(4) Annualized.
</FN>
</TABLE>
30
<PAGE>
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31
<PAGE>
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32
<PAGE>
The Victory Funds
127 Public Square
OH-01-27-1612
Cleveland, Ohio 44114
Bulk Rate
U.S. Postage
PAID
Cleveland, OH
Permit No. 469
If you would like a free copy of any of the following documents or would like
to request other information regarding the Funds, you can call or write the
Funds or your Investment Professional.
Statement of Additional Information (SAI)
Contains more details describing the Funds and their policies. The SAI has
been filed with the Securities and Exchange Commission (SEC), and is
incorporated by reference in this Prospectus.
Annual and Semi-annual Reports
Describes each Fund's performance, lists portfolio holdings, and discusses
market conditions and investment strategies that significantly affected a
Fund's performance during its last fiscal year.
If you would like to receive copies of the annual and semi-annual reports
and/or the SAI at no charge, please call the Funds at 800-539-FUND
(800-539-3863).
How to Obtain Information
By telephone: Call Victory Funds at 800-539-FUND (800-539-3863).
By mail: The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
You also may obtain copies of materials from the SEC's Public Reference Room
in Washington, D.C. (Call 1-202-942-8090 for information on the operation of
the SEC's Public Reference Room.)Copies of this information may be obtained,
after paying a duplicating fee, by electronic request at the following e-mail
address: [email protected], or by writing the SEC's Public Reference
Section, Washington, D.C. 20459-0102.
On the Internet: Text only versions of Fund documents can be viewed on-line
or downloaded from the SEC at http://www.sec.gov or from the Victory Funds'
website at http://www.victoryfunds.com.
The securities described in this Prospectus and the SAI are not offered in
any state in which they may not lawfully be sold. No sales representative,
dealer, or other person is authorized to give any information or make any
representation other than those contained in this Prospectus and the SAI.
Victory Funds
LOGO (R) Investment Company Act File Number 811-4852 VF-MMMF-PRO (2/00)
<PAGE>
Part B
STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY PORTFOLIOS
Balanced Fund Intermediate Income Fund Ohio Municipal Money
Convertible Securities Fund International Growth Fund Market Fund
Diversified Stock Fund Investment Quality Bond Ohio Regional Stock
Established Value Fund Fund Fund
Federal Money Market Fund Lakefront Fund Prime Obligations Fund
Financial Reserves Fund LifeChoice Conservative Real Estate Investment
Fund for Income Investor Fund Fund
Government Mortgage Fund LifeChoice Moderate Small Company Opportun-
Gradison Government Investor Fund ity Fund
Reserves Fund LifeChoice Growth Investor Special Value Fund
Growth Fund Fund Stock Index Fund
Institutional Money Market Limited Term Income Fund Tax-Free Money Market
Fund National Municipal Bond Fund
Fund U.S. Government
New York Tax-Free Fund Obligations Fund
Ohio Municipal Bond Fund Value Fund
February 28, 2000
This Statement of Additional Information is not a prospectus, but should be read
in conjunction with the prospectuses of the Funds listed above, as amended or
supplemented from time to time (the "Prospectuses"). The Prospectus for the
Gradison Government Reserves Fund is dated January 31, 2000 and the Prospectus
of each other Fund is dated February 28, 2000. This Statement of Additional
Information is incorporated by reference in its entirety into the Prospectuses.
Copies of the Prospectuses may be obtained by writing The Victory Portfolios at
P.O. Box 8527, Boston, MA 02266-8527, or by calling toll free 800-539-FUND
(800-539-3863).
INVESTMENT ADVISER and SUB-ADMINISTRATOR DIVIDEND DISBURSING AGENT
Key Asset Management Inc. and SERVICING AGENT
Boston Financial Data Services, Inc.
ADMINISTRATOR and DISTRIBUTOR
BISYS Fund Services CUSTODIAN
Key Trust Company of Ohio, N.A.
TRANSFER AGENT
State Street Bank and Trust Company INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
COUNSEL
Kramer Levin Naftalis & Frankel LLP
Table of Contents
Investment Policies and Limitations..........................................2
Determining Net Asset Value for the Money Market Funds......................75
Valuation of Portfolio Securities...........................................76
Performance.................................................................77
Additional Purchase, Exchange, and Redemption Information...................85
Dividends and Distributions.................................................90
Taxes.......................................................................90
Trustees and Officers.......................................................98
Advisory and Other Contracts...............................................101
Additional Information.....................................................116
Appendix...................................................................A-1
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
The Victory Portfolios (the "Trust") is an open-end management investment
company. The Trust consists of 38 series (each a "Fund," and collectively, the
"Funds") of units of beneficial interest ("shares"). Currently, the outstanding
shares of the Trust represent interests in 32 separate investment portfolios.
The following six Funds have no outstanding shares: the Equity Income Fund,
Maine Municipal Bond Fund (Intermediate), Maine Municipal Bond Fund
(Short-Intermediate), Michigan Municipal Bond Fund, National Municipal Bond Fund
(Long) and National Municipal Bond Fund (Short-Intermediate). The following
Funds are non-diversified: the Ohio Municipal Bond Fund, New York Tax-Free Fund,
National Municipal Bond Fund and Real Estate Investment Fund. All other Funds
are diversified mutual funds.
This Statement of Additional Information (the "SAI") relates to the shares of 32
of the 38 Funds and their respective classes, and are listed below. Much of the
information contained in this SAI expands on subjects discussed in the
Prospectuses. Capitalized terms not defined herein are used as defined in the
Prospectuses. No investment in shares of a Fund should be made without first
reading that Fund's Prospectus.
The Victory Portfolios:
- --------------------------------------------------------------------------------
Balanced Fund Institutional Money Ohio Municipal Bond Fund
Class A Shares Market Fund Class A Shares
Class G Shares Select Shares Class G Shares
Investor Shares
Convertible Securities Ohio Municipal Money
Fund Intermediate Income Fund Market Fund
Class A Shares Class A Shares Class A Shares
Class G Shares Class G Shares
Ohio Regional Stock Fund
Diversified Stock Fund International Growth Fund Class A Shares
Class A Shares Class A Shares
Class G Shares Class G Shares Prime Obligations Fund
Class A Shares
Established Value Fund Investment Quality Bond
Class A Shares Fund Real Estate Investment
Class G Shares Class A Shares Fund
Class G Shares Class A Shares
Federal Money Market Fund Class G Shares
Select Shares Lakefront Fund
Investor Shares Class A Shares Small Company Opportunity
Fund
Financial Reserves Fund LifeChoice Conservative Class A Shares
Class A Shares Investor Fund Class G Shares
Class A Shares
Fund for Income Special Value Fund
Class A Shares LifeChoice Moderate Class A Shares
Class G Shares Investor Fund Class G Shares
Class A Shares
Government Mortgage Fund Stock Index Fund
Class A Shares LifeChoice Growth Class A Shares
Investor Fund Class G Shares
Gradison Government Class A Shares
Reserves Fund Tax-Free Money Market Fund
Class G Shares Limited Term Income Fund Class A Shares
Class A Shares
Growth Fund U.S. Government
Class A Shares National Municipal Bond Obligations Fund
Class G Shares Fund Select Shares
Class A Shares Investor Shares
Class G Shares
Value Fund
New York Tax-Free Fund Class A Shares
Class A Shares Class G Shares
Class G Shares
- --------------------------------------------------------------------------------
<PAGE>
Investment Policies and Limitations
Each Fund's investment objective is fundamental and may not be changed without a
vote of the holders of a majority of the Fund's outstanding voting securities.
There can be no assurance that a Fund will achieve its investment objective.
The LifeChoice Funds.
The LifeChoice Conservative Investor Fund, LifeChoice Moderate Investor Fund and
LifeChoice Growth Investor Fund (the "LifeChoice Funds") are separately managed,
diversified mutual funds, each with its own investment objective and policies.
Each LifeChoice Fund has been constructed as a "fund of funds," which means that
it pursues its investment objective primarily by allocating its investments
among funds of the Trust (the "Proprietary Portfolios"). The LifeChoice Funds
also may invest a portion of their assets in shares of investment companies that
are not part of the same group of investment companies as the Trust (the "Other
Portfolios"). (Proprietary Portfolios and Other Portfolios are sometimes
referred to herein as "Underlying Portfolios.") From time to time, Key Asset
Management Inc., each Fund's investment adviser ("KAM" or the "Adviser"), may
select other mutual funds that are not listed in the LifeChoice Prospectus.
The Investment Company Act of 1940, as amended (the "1940 Act"), permits the
LifeChoice Funds to invest without limitation in other investment companies that
are part of the same "group of investment companies" (as defined in the 1940
Act) as the Trust, provided that certain limitations are observed. Generally,
these limitations require that a fund of funds (a) limit its investments to
shares of other investment companies that are part of the same "group of
investment companies" (as defined in the 1940 Act) as the fund of funds,
government securities, and short-term paper; (b) observe certain limitations on
the amount of sales loads and distribution-related fees that are borne by
shareholders of the fund of funds; and (c) do not invest in other funds of
funds. Pursuant to an exemptive order issued by the Securities and Exchange
Commission (the "SEC"), the LifeChoice Funds may invest in investment portfolios
of the Proprietary Portfolios and in shares of the Other Portfolios that are not
part of the same group of investment companies as the LifeChoice Funds. A
LifeChoice Fund and its affiliates, collectively, may acquire no more than 3% of
the total outstanding stock of any Other Portfolio.
Because of their investment objectives and policies, the LifeChoice Funds will
concentrate (i.e., invest 25% or more of their total assets) in the mutual fund
industry. In addition, a LifeChoice Fund may invest in a Proprietary Portfolio
or Other Portfolio that concentrates 25% or more of its total assets in any one
industry. Investments by a LifeChoice Fund in securities issued or guaranteed by
the U.S. government or its agencies or instrumentalities or in repurchase
agreements collateralized by the foregoing equaling 25% or more of the Fund's
total assets will not be considered "concentration" by such Fund in the industry
of the issuer(s) of such securities.
The LifeChoice Funds' Prospectus more fully addresses the subject of each Fund's
and each Proprietary Portfolio's investment objectives, as well as the
investment policies that the Funds apply in seeking to meet those objectives.
"Additional Information Regarding Fund Investments," below, will supplement that
information more specifically by detailing the types of securities and other
instruments in which the Proprietary Portfolios may invest, the strategies
behind, and the risks associated with, such investing. Note that there can be no
assurance given that the respective investment objectives of the LifeChoice
Funds or the Proprietary Portfolios will be achieved.
The LifeChoice Funds may invest in the following Proprietary Portfolios, each of
which is described in this SAI: the Convertible Securities Fund, Diversified
Stock Fund, Financial Reserves Fund, Fund for Income, Growth Fund, Intermediate
Income Fund, International Growth Fund, Investment Quality Bond Fund, Limited
Term Income Fund, Real Estate Investment Fund, Small Company Opportunity Fund,
Special Value Fund and Value Fund.
Other Portfolios. The LifeChoice Funds do not pay any front end sales loads or
contingent deferred sales charges in connection with the purchase or redemption
of shares of the Other Portfolios. In addition, to the extent required by the
1940 Act or the terms of any exemptive order received by the Funds from the SEC,
the sales charges, distribution related fees and service fees related to shares
of the Funds will not exceed the limits set forth in the Conduct Rules of the
National Association of Securities Dealers, Inc. when aggregated with any sales
charges, distribution related fees and service fees that the Funds pay relating
to Other Portfolio shares.
2
<PAGE>
Each LifeChoice Fund may invest up to 20% of its total assets in the following
Other Portfolios: the INVESCO Dynamics Fund, the Neuberger Berman Genesis Fund
and the Loomis Sayles Bond Fund.
The Other Portfolios may follow some or all of the investment practices of the
Proprietary Portfolios and/or may follow other investment practices. The
LifeChoice Funds have little or no control over the investment activities of the
Other Portfolios. There may be additional investment practices, not discussed in
this SAI, that the Other Portfolios may engage in from time to time.
Some of the Other Portfolios may limit the ability of the LifeChoice Funds to
sell their investments in those Portfolios at certain times. In this case, the
LifeChoice Funds' investment in those shares will be considered "illiquid" and
subject to the overall limitation on investment in illiquid securities.
Other Investments -- Short-Term Obligations. Normally, each of the LifeChoice
Funds will be predominantly invested in shares of other mutual funds. Under
certain circumstances, however, a LifeChoice Fund may invest in short-term
obligations. To the extent that a LifeChoice Fund's assets are so invested, they
will not be invested so as to meet its investment objective. The instruments may
include high-quality liquid debt securities such as commercial paper,
certificates of deposit, bankers' acceptances, repurchase agreements with
maturities of less than seven days, and debt obligations backed by the full
faith and credit of the U.S. government. These instruments are described below
in the following section of this SAI describing the permissible investments of
the Proprietary Portfolios.
Expenses and Allocations. The table below summarizes the annual net operating
expenses for the fiscal year ended October 31, 1999 of the Underlying
Portfolios, as described in their current prospectuses. Some of these expense
ratios reflect waivers or reimbursements that are currently in effect but that
may be terminated at any time. The actual expenses that the Underlying
Portfolios pay may change from time to time. This table also shows how the
LifeChoice Funds allocate their investments among specific mutual funds. Total
investments in the money market fund may temporarily exceed the 15% maximum due
to daily investment of cash flows that are expected to be used for next day
settlement of fund purchases by each of the LifeChoice Funds.
- --------------------------------------------------------------------------------
Victory Funds Expense Ratios Conservative Moderate Growth
(Class A only) (after Waivers) Investor Fund Investor Fund Investor Fund
- --------------------------------------------------------------------------------
Value 1.20% 0%-25% 0%-35% 0%-45%
- --------------------------------------------------------------------------------
Diversified Stock 1.13% 0%-30% 0%-40% 0%-50%
- --------------------------------------------------------------------------------
Growth 1.20% 0%-15% 0%-20% 0%-25%
- --------------------------------------------------------------------------------
Small Co. Opp'ty 1.02% 0%-10% 0%-15% 0%-20%
- --------------------------------------------------------------------------------
Special Value 1.35% 0%-20% 0%-25% 0%-30%
- --------------------------------------------------------------------------------
International Growth 1.83% 0%-20% 0%-25% 0%-30%
- --------------------------------------------------------------------------------
Real Estate 1.40% 0%-20% 0%-20% 0%-20%
Investment
- --------------------------------------------------------------------------------
Convertible Securities 1.35% 0%-30% 0%-30% 0%-30%
- --------------------------------------------------------------------------------
Investment Quality 1.10% 0%-50% 0%-40% 0%-30%
Bond
- --------------------------------------------------------------------------------
Fund for Income 1.00% 0%-35% 0%-25% 0%-15%
- --------------------------------------------------------------------------------
Intermediate Income 0.90% 0%-35% 0%-25% 0%-15%
- --------------------------------------------------------------------------------
Limited Term Income 0.96% 0%-10% 0%-10% 0%-10%
- --------------------------------------------------------------------------------
Financial Reserves 0.69% 0%-15% 0%-15% 0%-15%
- --------------------------------------------------------------------------------
Other Funds
- --------------------------------------------------------------------------------
INVESCO Dynamics 1.04% 0%-20% 0%-20% 0%-20%
- --------------------------------------------------------------------------------
Neuberger Berman 1.17% 0%-20% 0%-20% 0%-20%
Genesis
- --------------------------------------------------------------------------------
Loomis Sayles Bond 0.75% 0%-20% 0%-20% 0%-20%
- --------------------------------------------------------------------------------
Average Weighted
Expense Ratios 1.12% 1.18% 1.24%
- --------------------------------------------------------------------------------
3
<PAGE>
The average weighted expense ratios for the LifeChoice Funds' investments in
mutual funds are based on a hypothetical portfolio mix that reflects expected
investments under current market conditions. These figures are approximations of
the LifeChoice Funds' indirect expense ratios associated with their investments
in the Underlying Portfolios. The percentage of the LifeChoice Funds'
investments in each of the Victory Funds will vary within the ranges shown above
and investment in Other Funds will total 15% to 20% of each LifeChoice Fund's
total investments.
Performance of Underlying Funds. The table below summarizes the "average annual
total returns" of the mutual funds in which the LifeChoice Funds may invest for
the one, five and ten-year periods, where applicable, and since inception,
through December 31, 1999. The information reflects fund operating expenses
after waivers, but does not reflect sales charges that other investors would pay
, but which the LifeChoice Funds do not.
- --------------------------------------------------------------------------------
Victory Funds Inception Since
Class A Date One Year Five Years Ten Years Inception
- --------------------------------------------------------------------------------
Value 12/3/93 11.07% 23.97% N/A 19.61%
- --------------------------------------------------------------------------------
Established Value 8/16/83 17.07% 18.12% 13.18% 14.48%
- --------------------------------------------------------------------------------
Diversified Stock 10/20/89 20.96% 26.40% 17.54% 17.60%
- --------------------------------------------------------------------------------
Growth 12/3/93 17.90% 28.40% N/A 22.81%
- --------------------------------------------------------------------------------
Small Co. Opportunity 8/16/83 -0.86% 12.88% 10.40% 10.10%
- --------------------------------------------------------------------------------
Special Value 12/3/93 -1.26% 11.64% N/A 10.24%
- --------------------------------------------------------------------------------
International Growth 5/18/90 41.92% 14.33% N/A 10.52%
- --------------------------------------------------------------------------------
Real Estate 4/30/97 0.58% N/A N/A 3.47%
Investment
- --------------------------------------------------------------------------------
Convertible 4/14/88 11.75% 13.82% 11.23% 11.34%
Securities
- --------------------------------------------------------------------------------
Investment Quality 12/10/93 -2.45% 6.33% N/A 4.67%
Bond
- --------------------------------------------------------------------------------
Fund for Income 9/16/87 0.69% 7.28% 6.86% 7.62%
- --------------------------------------------------------------------------------
Intermediate Income 12/10/93 -0.74% 6.07% N/A 4.53%
- --------------------------------------------------------------------------------
Limited Term Income 10/20/89 1.79% 5.66% 5.83% 5.88%
- --------------------------------------------------------------------------------
Financial Reserves 4/4/83 4.69% 5.06% 4.87% 6.02%
- --------------------------------------------------------------------------------
Other Funds
- --------------------------------------------------------------------------------
Loomis Sayles Bond 5/31/91 4.50% 12.41% N/A 11.80%
- --------------------------------------------------------------------------------
INVESCO Dynamics 9/15/67 4.04% 16.64% 12.71% 13.12%
- --------------------------------------------------------------------------------
Neuberger Berman 9/27/88 4.04% 16.64% 12.71% 13.12%
Genesis
- --------------------------------------------------------------------------------
The SEC has imposed certain limitations on how the LifeChoice Funds may invest
and the fees that they may charge. Whenever you see information on a mutual
fund's performance, do not consider its past performance to be an indication of
the performance you could expect by investing in that mutual fund today. The
past is an imperfect guide to the future. History does not always repeat itself.
Additional Information Regarding Fund Investments.
The following policies and limitations supplement the Funds' investment policies
set forth in the Prospectuses. The Funds' investments in the following
securities and other financial instruments are subject to the other investment
policies and limitations described in the Prospectuses and this SAI.
Unless otherwise noted in the Prospectuses or this SAI, a Fund may invest no
more than 5% of its total assets in any of the securities or financial
instruments described below (unless the context requires otherwise).
Unless otherwise noted, whenever an investment policy or limitation states a
maximum percentage of a Fund's assets that may be invested in any security or
other asset, or sets forth a policy regarding quality standards, such standard
or percentage limitation will be determined immediately after and as a result of
the Fund's acquisition of such security or other asset except in the case of
borrowing (or other activities that may be deemed to result in the
4
<PAGE>
issuance of a "senior security" under the 1940 Act). Accordingly, any subsequent
change in values, net assets, or other circumstances will not be considered when
determining whether the investment complies with a Fund's investment policies
and limitations. If the value of a Fund's holdings of illiquid securities at any
time exceeds the percentage limitation applicable at the time of acquisition due
to subsequent fluctuations in value or other reasons, the Trustees will consider
what actions, if any, are appropriate to maintain adequate liquidity.
The investment policies of a Fund may be changed without an affirmative vote of
the holders of a majority of that Fund's outstanding voting securities unless
(1) a policy expressly is deemed to be a fundamental policy of the Fund or (2) a
policy expressly is deemed to be changeable only by such majority vote. A Fund
may, following notice to its shareholders, take advantage of other investment
practices which presently are not contemplated for use by the Fund or which
currently are not available but which may be developed to the extent such
investment practices are both consistent with the Fund's investment objective
and legally permissible for the Fund. Such investment practices, if they arise,
may involve risks which exceed those involved in the activities described in a
Fund's Prospectus.
The following sections list each Fund's investment policies, limitations, and
restrictions. The securities in which the Funds can invest and the risks
associated with these securities are discussed in the section "Investment
Policies."
Defined Terms. All capitalized terms listed in the "Investment Policies
and Limitations" section referring to permissible investments are
described in the section "Investment Policies."
The following terms are used throughout the "Investment Policies and
Limitations" section and elsewhere in this SAI.
S&P: Standard & Poor's
Moody's: Moody's Investors Service
NRSRO: Nationally recognized statistical ratings organization
Fundamental Restrictions of the Funds
1. Senior Securities.
No Fund (except the Convertible Securities Fund, Established Value Fund, Federal
Money Market Fund and Gradison Government Reserves Fund) may:
Issue any senior security (as defined in the 1940 Act), except that (a) each
Fund may engage in transactions that may result in the issuance of senior
securities to the extent permitted under applicable regulations and
interpretations of the 1940 Act or an exemptive order; (b) each Fund may acquire
other securities, the acquisition of which may result in the issuance of a
senior security, to the extent permitted under applicable regulations or
interpretations of the 1940 Act; (c) subject to the restrictions set forth
below, the Fund may borrow money as authorized by the 1940 Act.
The Gradison Government Reserves Fund will not:
Issue senior securities as defined in the 1940 Act, except to the extent that
such issuance might be involved with respect to borrowings subject to
fundamental restriction no. 3 below or with respect to transactions involving
futures contracts or the writing of options and provided that the Trust may
issue shares of additional series or classes that the Trustees may establish.
2. Underwriting.
The Funds (other than the Established Value Fund and Gradison Government
Reserves Fund) may not:
Underwrite securities issued by others, except to the extent that a Fund (or,
with respect to the LifeChoice Funds, an Underlying Portfolio) may be considered
an underwriter within the meaning of the Securities Act of 1933, as amended (the
"Securities Act"), in the disposition of restricted securities.
5
<PAGE>
The Established Value Fund and Gradison Government Reserves Fund each will not:
Underwrite the securities of other issuers, except insofar as each such Fund may
technically be deemed an underwriter under the Securities Act, in connection
with the disposition of portfolio securities.
3. Borrowing.
The Balanced Fund, Convertible Securities Fund, Diversified Stock Fund,
Government Mortgage Fund, Growth Fund, Intermediate Income Fund, International
Growth Fund, Investment Quality Bond Fund, Lakefront Fund, Limited Term Income
Fund, New York Tax-Free Fund, Ohio Municipal Bond Fund, Ohio Regional Stock
Fund, Prime Obligations Fund, Real Estate Investment Fund, Small Company
Opportunity Fund, Special Value Fund, Stock Index Fund, Tax-Free Money Market
Fund, U.S. Government Obligations Fund and Value Fund may not:
Borrow money, except that (a) each Fund may enter into commitments to purchase
securities in accordance with its investment program, including delayed-delivery
and when-issued securities and reverse repurchase agreements, provided that the
total amount of any such borrowing does not exceed 33 1/3% of the Fund's total
assets; and (b) each Fund may borrow money for temporary or emergency purposes
in an amount not exceeding 5% of the value of its total assets at the time when
the loan is made. Any borrowings representing more than 5% of a Fund's total
assets must be repaid before the Fund may make additional investments.
The Financial Reserves Fund, Institutional Money Market Fund and the LifeChoice
Funds may not:
Borrow money, except (a) from a bank for temporary or emergency purposes (not
for leveraging or investment) or (b) by engaging in reverse repurchase
agreements, provided that (a) and (b) in combination ("borrowings") do not
exceed an amount equal to one third of the current value of its total assets
(including the amount borrowed) less liabilities (not including the amount
borrowed) at the time the borrowing is made.
This fundamental limitation is construed in conformity with the 1940 Act, and if
at any time Fund borrowings exceed an amount equal to 33 1/3 of the current
value of the Fund's total assets (including the amount borrowed) less
liabilities (other than borrowings) at the time the borrowing is made due to a
decline in net assets, such borrowings will be reduced within three days (not
including Sundays and holidays) to the extent necessary to comply with the 33
1/3% limitation.
The Established Value Fund will not:
Borrow money, except as a temporary measure for extraordinary or emergency
purposes, and then only in amounts not exceeding 5% of the total assets of the
Fund, taken at the lower of acquisition cost or market value.
The Fund for Income may not:
Borrow money, except for temporary or emergency purposes and not for investment
purposes, and then only in an amount not exceeding 5% of the value of its total
assets at the time of the borrowing.
The Gradison Government Reserves Fund will not:
Borrow money, except from banks as a temporary measure or for extraordinary or
emergency purposes such as to enable the Fund to satisfy redemption requests
where liquidation of portfolio securities is considered disadvantageous, and not
for leverage purposes, and then only in amounts not exceeding 15% of the total
assets of the Fund at the time of the borrowing. While any borrowing of greater
than 5% of the assets is outstanding, the Fund will not purchase additional
portfolio securities.
The National Municipal Bond Fund may not:
Borrow money, except that the Fund may borrow money from banks for temporary or
emergency purposes (not for leveraging or investment) and engage in reverse
repurchase agreements in an amount not exceeding 33 1/3% of the
6
<PAGE>
value of its total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that come to exceed this amount will be
reduced within three days (exclusive of Sundays and holidays) to the extent
necessary to comply with the 33 1/3% limitation.
The Ohio Municipal Money Market Fund may:
(a) Borrow money and engage in reverse repurchase agreements in amounts up to
one-third of the value of the Fund's net assets including the amounts borrowed,
and (b) purchase securities on a when-issued or delayed delivery basis. The Fund
will not borrow money or engage in reverse repurchase agreements for investment
leverage, but rather as a temporary, extraordinary, or emergency measure or to
facilitate management of the Fund by enabling the Fund to meet redemption
requests when the liquidation of Fund securities would be inconvenient or
disadvantageous. The Fund will not purchase any securities while any such
borrowings (including reverse repurchase agreements) are outstanding.
4. Real Estate.
The Balanced Fund, Diversified Stock Fund, Government Mortgage Fund, Growth
Fund, Intermediate Income Fund, International Growth Fund, Investment Quality
Bond Fund, Lakefront Fund, the LifeChoice Funds, Limited Term Income Fund, Ohio
Municipal Bond Fund, Ohio Regional Stock Fund, Prime Obligations Fund, Small
Company Opportunity Fund, Special Value Fund, Stock Index Fund, Tax-Free Money
Market Fund and Value Fund may not:
Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent each Fund from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business). Investments by the Funds in
securities backed by mortgages on real estate or in marketable securities of
companies engaged in such activities are not hereby precluded.
The Established Value Fund will not:
Purchase or sell real estate, except that it is permissible to purchase
securities secured by real estate or real estate interests or issued by
companies that invest in real estate or real estate interests.
The Financial Reserves Fund may not:
Buy or sell real estate, commodities, or commodities (futures) contracts.
The Gradison Government Reserves Fund will not:
Purchase or sell real estate. The purchase of securities secured by real estate
which are otherwise allowed by the Fund's investment objective and other
investment restrictions shall not be prohibited by this restriction.
The Institutional Money Market Fund may not:
Buy or sell real estate, commodities, or commodity (futures) contracts or invest
in oil, gas or other mineral exploration or development programs.
The National Municipal Bond Fund may not:
Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent each Fund from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business).
7
<PAGE>
The Ohio Municipal Money Market Fund will not:
Purchase or sell real estate, although it may invest in Ohio municipal
securities secured by real estate or interests in real estate.
The U.S. Government Obligations Fund may not:
Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments.
The Real Estate Investment Fund may not:
Purchase or sell real estate, except that the Fund may purchase securities
issued by companies in the real estate industry and will, as a matter of
fundamental policy, concentrate its investments in such securities.
The Convertible Securities Fund and the Federal Money Market Fund may not:
Purchase or hold any real estate, including real estate limited partnerships,
except that the Funds may invest in securities secured by real estate or
interests therein or issued by persons which deal in real estate or interests
therein.
5. Lending.
Each of the Balanced Fund, Diversified Stock Fund, Government Mortgage Fund,
Growth Fund, Intermediate Income Fund, International Growth Fund, Investment
Quality Bond Fund, Lakefront Fund, Limited Term Income Fund, National Municipal
Bond Fund, Ohio Municipal Bond Fund, Ohio Regional Stock Fund, Prime Obligations
Fund, Real Estate Investment Fund, Small Company Opportunity Fund, Special Value
Fund, Stock Index Fund, Tax-Free Money Market Fund, U.S. Government Obligations
Fund and Value Fund may not:
Lend any security or make any other loan if, as a result, more than 33 1/3% of
its total assets would be lent to other parties, but this limitation does not
apply to purchases of publicly issued debt securities or to repurchase
agreements.
The Established Value Fund will not:
Make loans, except (a) through the purchase of publicly distributed corporate
securities, U.S. government obligations, certificates of deposit, high-grade
commercial paper and other money market instruments, and (b) loans of portfolio
securities to persons unaffiliated with the Trust not in excess of 20% of the
value of the Fund's total assets (taken at market value) made in accordance with
the guidelines of the SEC and with any standards established from time to time
by the Trust's Board of Trustees, including the maintenance of collateral from
the borrower at all times in an amount at least equal to the current market
value of the securities loaned.
The Financial Reserves Fund and Institutional Money Market Fund may not:
Make loans to other persons, except (a) by the purchase of debt obligations in
which the Fund is authorized to invest in accordance with its investment
objective, and (b) by engaging in repurchase agreements. In addition, each Fund
may lend its portfolio securities to broker-dealers or other institutional
investors, provided that the borrower delivers cash or cash equivalents as
collateral to the Fund and agrees to maintain such collateral so that it equals
at least 100% of the value of the securities loaned. Any such securities loan
may not be made if, as a result thereof, the aggregate value of all securities
loaned exceeds 33 1/3% of the total assets of the Fund.
The Fund for Income may not:
Make loans to other persons except through the use of repurchase agreements or
the purchase of commercial paper. For these purposes, the purchase of a portion
of an issue of debt securities which is part of an issue to the public shall not
be considered the making of a loan.
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The Gradison Government Reserves Fund will not:
Make loans, except that the purchase of debt securities as allowed by the Fund's
investment objective and other investment restrictions, entering into repurchase
agreements, and the lending of portfolio securities in an amount not to exceed
30% of the value of its total assets with the collateral value of loaned
securities marked-to-market daily and in accordance with applicable regulations
or guidelines established by the SEC shall not be prohibited by this
restriction.
The New York Tax-Free Fund may not:
Make loans to other persons except through the use of repurchase agreements, the
purchase of commercial paper or by lending portfolio securities. For these
purposes, the purchase of a portion of an issue of debt securities which is part
of an issue to the public shall not be considered the making of a loan.
The Ohio Municipal Money Market Fund will not:
Lend any of its assets, except through the purchase of a position of publicly
distributed debt instruments or repurchase agreements and through the lending of
its portfolio securities. The Fund may lend its securities if collateral values
are continuously maintained at no less than 100% of the current market value of
such securities by marking to market daily.
The Convertible Securities Fund and the Federal Money Market Fund may not:
Lend any cash except in connection with the acquisition of a portion of an issue
of publicly distributed bonds, debentures, notes or other evidences of
indebtedness or in connection with the purchase of securities subject to
repurchase agreements, except as outlined under "Additional Information on Fund
Investments" and the sub-section, "Securities Lending." The Funds will not lend
any other assets except as a special investment method. See "Investment
Objectives and Policies" herein and "Investment Objectives" in the Prospectus.
Each of the Convertible Securities Fund and the Federal Money Market Fund
may not:
Make a loan of its portfolio securities if, immediately thereafter and as a
result thereof, portfolio securities with a market value of 10% or more of its
total assets would be subject to such loans.
The LifeChoice Funds may not:
Lend any security or make any other loan if, as a result, more than 33-1/3% of a
Fund's total assets would be lent to other parties, except that a Fund may
invest in Underlying Portfolios that lend portfolio securities consistent with
their investment objectives and policies, but this limitation does not apply to
purchases of publicly issued debt securities or to repurchase agreements.
6. Commodities.
The Diversified Stock Fund, Government Mortgage Fund, Intermediate Income Fund,
International Growth Fund, Investment Quality Bond Fund, Lakefront Fund, the
LifeChoice Funds, Limited Term Income Fund, Ohio Municipal Bond Fund, Ohio
Regional Stock Fund, Prime Obligations Fund, Real Estate Investment Fund, Small
Company Opportunity Fund, Stock Index Fund and Tax-Free Money Market Fund may
not:
Purchase or sell physical commodities unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the Funds from
purchasing or selling options and futures contracts or from investing in
securities or other instruments backed by physical commodities).
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The Balanced Fund, Growth Fund, Special Value Fund, U.S. Government Obligations
Fund and Value Fund may not:
Purchase or sell physical commodities unless acquired as a result of ownership
of securities or other instruments.
The Convertible Securities Fund and the Federal Money Market Fund may not:
Deal in commodities or commodity contracts.
The Established Value Fund will not:
Purchase or sell commodities, commodity contracts, or interests in oil, gas or
other mineral exploration or development programs, except that it is permissible
to purchase securities issued by companies that hold interests in oil, gas or
other mineral exploration or development programs.
The Fund for Income may not:
Purchase or sell commodities or commodity contracts, oil, gas or other mineral
exploration or development programs.
The Gradison Government Reserves Fund will not:
Purchase or sell commodities, commodity contracts or interests in oil, gas or
other mineral exploration or development programs or leases, except that the
purchase or sale of financial futures contracts or options on financial futures
contracts is permissible.
The National Municipal Bond Fund may not:
Purchase or sell physical commodities (but this shall not prevent the Fund from
purchasing or selling futures contracts and options on futures contracts or from
investing in securities or other instruments backed by physical commodities).
The New York Tax-Free Fund and Ohio Municipal Money Market Fund may not:
Purchase or sell commodities or commodity contracts.
7. Joint Trading Accounts.
The Balanced Fund, Diversified Stock Fund, Government Mortgage Fund, Growth
Fund, Intermediate Income Fund, International Growth Fund, Investment Quality
Bond Fund, Limited Term Income Fund, Ohio Municipal Bond Fund, Ohio Regional
Stock Fund, Prime Obligations Fund, Small Company Opportunity Fund, Special
Value Fund, Stock Index Fund, Tax-Free Money Market Fund and Value Fund may not:
Participate on a joint or joint and several basis in any securities trading
account.
8. Diversification.
The Balanced Fund, Diversified Stock Fund, Government Mortgage Fund, Growth
Fund, Intermediate Income Fund, International Growth Fund, Investment Quality
Bond Fund, Lakefront Fund, Limited Term Income Fund, Ohio Regional Stock Fund,
Small Company Opportunity Fund, Special Value Fund, Stock Index Fund, U.S.
Government Obligations Fund and Value Fund may not:
With respect to 75% of a Fund's total assets, purchase the securities of any
issuer (other than securities issued or guaranteed by the U.S. government or any
of its agencies or instrumentalities) if, as a result, (a) more than 5% of the
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<PAGE>
Fund's total assets would be invested in the securities of that issuer, or (b)
the Fund would hold more than 10% of the outstanding voting securities of that
issuer.
The Established Value Fund will not:
Purchase any securities (other than obligations issued or guaranteed by the U.S.
government or its agencies or instrumentalities) if immediately after such
purchase, more than 5% of the Fund's total assets would be invested in
securities of any one issuer or more than 10% of the outstanding securities of
any one issuer would be owned by the Trust and held by the Fund. The Established
Value Fund will not concentrate more than 25% of its total assets in any one
industry.
The Prime Obligations Fund may not:
With respect to 75% of a Fund's total assets, purchase the securities of any
issuer (other than securities issued or guaranteed by the U.S. government or any
of its agencies or instrumentalities) if, as a result, (a) more than 5% of the
Fund's total assets would be invested in the securities of that issuer, or (b)
the Fund would hold more than 10% of the outstanding voting securities of that
issuer. (Note: In accordance with Rule 2a-7 under the 1940 Act, the Fund may
invest up to 25% of its total assets in securities of a single issuer for a
period of up to three days.)
The New York Tax-Free Fund may not:
Purchase the securities of any issuer (except the U.S. government, its agencies
and instrumentalities, and the State of New York and its municipalities) if as a
result more than 25% of its total assets are invested in the securities of a
single issuer, and with regard to 50% of total assets, if as a result more than
5% of its total assets would be invested in the securities of such issuer. In
determining the issuer of a tax-exempt security, each state and each political
subdivision, agency, and instrumentality of each state and each multi-state
agency, of which such state is a member, is a separate issuer. Where securities
are backed only by assets and revenues of a particular instrumentality, facility
or subdivision, such entity is considered the issuer. With respect to
non-municipal bond investments, in addition to the foregoing limitations, the
Fund will not purchase securities (other than securities of the U.S. government,
its agencies or instrumentalities), if as a result of such purchase 25% or more
of the total Fund's assets would be invested in any one industry, or enter into
a repurchase agreement if, as a result thereof, more than 10% of its total
assets would be subject to repurchase agreements maturing in more than seven
days.
The National Municipal Bond Fund:
To meet federal tax requirements for qualification as a "regulated investment
company," the Fund limits its investments so that at the close of each quarter
of its taxable year: (a) with regard to at least 50% of total assets, no more
than 5% of total assets are invested in the securities of a single issuer, and
(b) no more than 25% of total assets are invested in the securities of a single
issuer. Limitations (a) and (b) do not apply to "Government Securities" as
defined for federal tax purposes. (For such purposes, municipal obligations are
not treated as "Government Securities," and consequently they are subject to
limitations (a) and (b).)
The Ohio Municipal Money Market Fund will limit:
With respect to 75% of the Fund's total assets, investments in one issuer to not
more than 10% of the value of its total assets. The total amount of the
remaining 25% of the value of the Fund's total assets could be invested in a
single issuer if the Adviser believes such a strategy to be prudent. Under Rule
2a-7 under the 1940 Act, the Fund also is subject to certain diversification
requirements.
The Tax-Free Money Market Fund may not:
Purchase securities of any one issuer, other than obligations issued or
guaranteed by the U.S. government or its agencies or instrumentalities if,
immediately after such purchase, more than 5% of the value of its total assets
would be invested in such issuer, except that up to 25% of the value of the
Tax-Free Money Market Fund's total assets may be invested without regard to such
5% limitation. For purposes of this limitation, a security is considered to be
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<PAGE>
issued by the government entity (or entities) whose assets and revenues
guarantee or back the security; with respect to a private activity bond that is
backed only by the assets and revenues of a non-governmental issuer, a security
is considered to be issued by such non-governmental issuer.
The Fund for Income may not:
Purchase the securities of any issuer (except the U.S. government, its agencies
and instrumentalities), with regard to 75% of total assets, if as a result more
than 5% of its total assets would be invested in the securities of such issuer.
In determining the issuer of a tax-exempt security, each state and each
political subdivision, agency, and instrumentality of each state and each
multi-state agency of which such state is a member is a separate issuer. Where
securities are backed only by assets and revenues of a particular
instrumentality, facility or subdivision, such entity is considered the issuer.
Each of the Convertible Securities Fund and the Federal Money Market Fund
may not:
As to 75% of its total assets, invest more than 5% in the securities of any one
issuer except securities of the U.S. government, its agencies or its
instrumentalities.
9. Concentration.
The Balanced Fund, Diversified Stock Fund, Growth Fund, Intermediate Income
Fund, International Growth Fund, Investment Quality Bond Fund, Lakefront Fund,
Limited Term Income Fund, Ohio Regional Stock Fund, Special Value Fund, Stock
Index Fund and Value Fund may not:
Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities,
or repurchase agreements secured thereby) if, as a result, more than 25% of the
Fund's total assets would be invested in the securities of companies whose
principal business activities are in the same industry. In the utilities
category, the industry shall be determined according to the service provided.
For example, gas, electric, water and telephone will be considered as separate
industries.
The Gradison Government Reserves Fund will not:
Invest more than 25% of its total assets in the securities of issuers in any
single industry, provided that there shall be no limitation on investments in
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
The Prime Obligations Fund may not:
Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities,
or repurchase agreements secured thereby) if, as a result, more than 25% of the
Fund's total assets would be invested in the securities of companies whose
principal business activities are in the same industry. Notwithstanding the
foregoing, there is no limitation with respect to certificates of deposit and
banker's acceptances issued by domestic banks, or repurchase agreements secured
thereby. In the utilities category, the industry shall be determined according
to the service provided. For example, gas, electric, water and telephone will be
considered as separate industries.
The Tax-Free Money Market Fund may not:
Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities,
or repurchase agreements secured thereby) if, as a result, more than 25% of the
Fund's total assets would be invested in the securities of companies whose
principal business activities are in the same industry; provided that this
limitation shall not apply to municipal securities or governmental guarantees of
municipal securities; but for these purposes only, industrial development bonds
that are backed by the assets and revenues of a non-governmental user shall not
be deemed to be municipal securities.
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<PAGE>
Notwithstanding the foregoing, there is no limitation with respect to
certificates of deposit and banker's acceptances issued by domestic banks, or
repurchase agreements secured thereby. In the utilities category, the industry
shall be determined according to the service provided. For example, gas,
electric, water and telephone will be considered as separate industries.
The Ohio Municipal Bond Fund may not:
Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities,
or repurchase agreements secured thereby) if, as a result, more than 25% of the
Fund's total assets would be invested in the securities of companies whose
principal business activities are in the same industry; provided that this
limitation shall not apply to municipal securities or governmental guarantees of
municipal securities; but for these purposes only, industrial development bonds
that are backed only by the assets and revenues of a non-governmental user shall
not be deemed to be municipal securities. In the utilities category, the
industry shall be determined according to the service provided. For example,
gas, electric, water and telephone will be considered as separate industries.
The National Municipal Bond Fund may not:
Purchase securities (other than those issued or guaranteed by the U.S.
government or any securities of its agencies or instrumentalities or tax-exempt
obligations issued or guaranteed by a U.S. territory or possession or a state or
local government, or a political subdivision of the foregoing) if, as a result,
more than 25% of the Fund's total assets would be invested in securities of
companies whose principal business activities are in the same industry; for the
purpose of this restriction, utility companies will be divided according to
their services, for example, gas, gas transmission, electric and gas and
telephone will each be considered a separate industry. Industrial development
revenue bonds which are issued by non-governmental entities within the same
industry shall be subject to this industry limitation.
The Ohio Municipal Money Market Fund will not:
Purchase securities (other than securities issued or guaranteed by the U.S.
government, its agencies, or instrumentalities) if, as a result of such
purchase, 25% or more of the value of the Fund's total assets would be invested
in any one industry. The Fund will not invest 25% or more of its assets in
securities, the interest upon which is paid from revenues of similar type
projects. The Fund may invest 25% or more of its assets in industrial
development bonds.
The Financial Reserves Fund and Institutional Money Market Fund may not:
Purchase the securities of any issuer (other than obligations issued or
guaranteed as to principal and interest by the U.S. government, its agencies or
instrumentalities) if, as a result thereof: (i) more than 5% of its total assets
would be invested in the securities of such issuer, provided, however, that in
the case of certificates of deposit, time deposits and bankers' acceptances, up
to 25% of the Fund's total assets may be invested without regard to such 5%
limitation, but shall instead be subject to a 10% limitation; (ii) more than 25%
of its total assets would be invested in the securities of one or more issuers
having their principal business activities in the same industry, provided,
however, that it may invest more than 25% of its total assets in the obligations
of domestic banks. Neither finance companies as a group nor utility companies as
a group are considered a single industry for purposes of this policy (i.e.,
finance companies will be considered a part of the industry they finance and
utilities will be divided according to the types of services they provide).
The Real Estate Investment Fund may not:
Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities,
or repurchase agreements secured thereby) if, as a result, more than 25% of the
Fund's total assets would be invested in the securities of companies whose
principal business activities are in the same industry. In the utilities
category, the industry shall be determined according to the service provided.
For example,
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<PAGE>
gas, electric, water and telephone will be considered as separate industries.
Notwithstanding the foregoing, the Fund will concentrate its investments in
securities in the real estate industry.
The New York Tax-Free Fund may not:
With respect to non-municipal investments, purchase securities (other than
securities of the U.S. government, its agencies or instrumentalities), if as a
result of such purchase 25% or more of the Fund's total assets would be invested
in any one industry, or enter into a repurchase agreement if, as a result
thereof, more than 15% of its net assets would be subject to repurchase
agreements maturing in more than seven days.
The Small Company Opportunity Fund may not:
Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities,
or repurchase agreements secured thereby) if, as a result, more than 25% of the
Fund's total assets would be invested in the securities of companies whose
principal business activities are in the same industry.
The Fund for Income and New York Tax-Free Fund may not:
Invest more than 25% of the Fund's total assets in securities whose interest
payments are derived from revenue from similar projects.
The Convertible Securities Fund and the Federal Money Market Fund may not:
Purchase securities if such purchase would cause more than 25% of any of the
Funds' total assets to be invested in the securities of issuers in any one
industry, provided however that the Federal Money Market Fund reserves the right
to concentrate in securities issued or guaranteed as to principal and interest
by the U.S. government, its agencies or instrumentalities or U.S. bank
obligations. The Federal Money Market Fund, however, will not exercise its right
to concentrate in U.S. bank obligations.
10. Miscellaneous.
a. Tax-exempt income.
The Ohio Municipal Money Market Fund may not:
Invest its assets so that less than 80% of its annual interest income is exempt
from the federal income tax and Ohio taxes.
b. Use of assets as security.
The Fund for Income may not:
Pledge, mortgage, or hypothecate its assets, except that, to secure borrowings
permitted by its fundamental restriction on borrowing, it may pledge securities
having a market value at the time of pledge not exceeding 10% of the value of
its total assets.
c. Investing to influence management or to exercise control.
The Convertible Securities Fund and the Federal Money Market Fund may not:
Invest in companies for the purpose of influencing management or exercising
control, and will not purchase more than 10% of the voting securities of any one
issuer. This will not preclude the management of the Funds from voting proxies
in their discretion.
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<PAGE>
The LifeChoice Funds may not:
Make investments for the purpose of exercising control or management (but this
shall not prevent a Fund from purchasing a controlling interest in one or more
Underlying Portfolios consistent with its investment objectives and policies).
d. Margin purchases and short selling.
The Convertible Securities Fund and the Federal Money Market Fund may not
purchase securities on margin or sell securities short.
The Established Value Fund will not make short sales of securities, or purchase
securities on margin, except for short-term credit as is necessary for the
clearance of transactions.
e. Securities of other investment companies.
The Convertible Securities Fund and the Federal Money Market Fund may not
purchase the securities of other investment companies except in the open market
and at the usual and customary brokerage commissions or except as part of a
merger, consolidation or other acquisition.
The Established Value Fund will not purchase the securities of other investment
companies, except in connection with a merger, consolidation, reorganization or
acquisition of assets, and except by purchase in the open market of securities
of closed-end investment companies involving only customary broker's
commissions, and then only if immediately after such purchase, no more than 10%
of the value of the total assets of the Fund would be invested in such
securities.
f. Restricted Securities.
The Convertible Securities Fund and the Federal Money Market Fund may not:
Invest more than 15% of any of the Convertibles Securities Funds' net assets or
more than 10% of the Federal Money Market Fund's net assets in (i) securities
restricted as to disposition under the Federal securities laws, (ii) securities
as to which there are no readily available market quotations, or (iii)
repurchase agreements with a maturity in excess of 7 days.
The Established Value Fund will not purchase securities subject to restrictions
on disposition under the Securities Act.
g. Mortgage, Pledge or Hypothecation of Securities.
The Established Value Fund will not mortgage, pledge or hypothecate securities,
except in connection with a permissible borrowing as set forth in fundamental
investment restriction no. 2 above, and then only in amounts not exceeding 10%
of the value of the assets of a Fund (taken at the lower of acquisition cost or
market value).
h. Control.
The Established Value Fund will not invest in companies for the purpose of
exercising control or management.
i. Illiquid Securities.
The Established Value Fund will not purchase securities for which no readily
available market quotation exists, if at the time of acquisition more than 5% of
the total assets of the Fund would be invested in such securities (repurchase
agreements maturing in more than seven days are included within this
restriction).
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<PAGE>
j. Joint Trading.
The Established Value Fund will not participate on a joint, or a joint and
several, basis in any securities trading account.
k. Options.
The Established Value Fund will not write, purchase or sell puts, calls or
combinations thereof.
l. Ownership of Portfolio Securities by Trustees or Officers.
The Established Value Fund will not purchase or retain the securities of any
issuer if any Trustee or officer of the Trust is or becomes a director or
officer of such issuer and owns beneficially more than 1/2 of 1% of the
securities of such issuer, or if those directors, trustees and officers of the
Trust and its investment adviser who are directors or officers of such issuer
together own or acquire more than 5% of the securities of such issuer.
m. Unseasoned Issuers.
The Established Value Fund will not purchase any securities of companies which
have (with their predecessors) a record of less than three years of continuous
operation, if at the time of acquisition more than 5% of a Fund's total assets
would be invested in such securities.
NON-FUNDAMENTAL RESTRICTIONS OF THE FUNDS
1. Illiquid Securities.
Each of the Balanced Fund, Diversified Stock Fund, Fund for Income, Government
Mortgage Fund, Growth Fund, Intermediate Income Fund, International Growth Fund,
Investment Quality Bond Fund, Lakefront Fund, the LifeChoice Funds, Limited Term
Income Fund, National Municipal Bond Fund, New York Tax-Free Fund, Ohio
Municipal Bond Fund, Ohio Regional Stock Fund, Real Estate Investment Fund,
Small Company Opportunity Fund, Special Value Fund, Stock Index Fund and Value
Fund may not:
Invest more than 15% of its net assets in illiquid securities. Illiquid
securities are securities that are not readily marketable or cannot be disposed
of promptly within seven days and in the usual course of business at
approximately the price at which the Fund has valued them. Such securities
include, but are not limited to, time deposits and repurchase agreements with
maturities longer than seven days. Securities that may be resold under Rule
144A, securities offered pursuant to Section 4(2) of, or securities otherwise
subject to restrictions or limitations on resale under the Securities Act
("Restricted Securities") shall not be deemed illiquid solely by reason of being
unregistered. The Adviser determines whether a particular security is deemed to
be liquid based on the trading markets for the specific security and other
factors.
Each of the Financial Reserves Fund, Institutional Money Market Fund, Ohio
Municipal Money Market Fund, Prime Obligations Fund, Tax-Free Money Market Fund
and U.S. Government Obligations Fund may not:
Invest more than 10% of its net assets in illiquid securities. Illiquid
securities are securities that are not readily marketable or cannot be disposed
of promptly within seven days and in the usual course of business at
approximately the price at which the Fund has valued them. Such securities
include, but are not limited to, time deposits and repurchase agreements with
maturities longer than seven days. Restricted Securities shall not be deemed
illiquid solely by reason of being unregistered. The Adviser determines whether
a particular security is deemed to be liquid based on the trading markets for
the specific security and other factors.
2. Short Sales and Purchases on Margin.
The Balanced Fund, Diversified Stock Fund, Government Mortgage Fund, Growth
Fund, Intermediate Income Fund, International Growth Fund, Investment Quality
Bond Fund, the LifeChoice Funds, Limited Term Income
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<PAGE>
Fund, Ohio Municipal Bond Fund, Ohio Regional Stock Fund, Prime Obligations
Fund, Small Company Opportunity Fund, Special Value Fund, Stock Index Fund,
Tax-Free Money Market Fund, U.S. Government Obligations Fund and Value Fund may
not:
Make short sales of securities, other than short sales "against the box," or
purchase securities on margin except for short-term credits necessary for
clearance of portfolio transactions, provided that this restriction will not be
applied to limit the use of options, futures contracts and related options, in
the manner otherwise permitted by the investment restrictions, policies and
investment program of the Fund, and, with respect to the International Growth
Fund, provided that this restriction shall not limit that Fund's ability to make
margin payments in connection with transactions in currency future options.
The Financial Reserves Fund and Institutional Money Market Fund may not:
1. Purchase securities on margin (but the Fund may obtain such credits as may be
necessary for the clearance of purchases and sales of securities).
2. Make short sales of securities.
The Fund for Income and New York Tax-Free Fund may not:
Make short sales of securities or purchase any securities on margin, except for
such short-term credits as are necessary for the clearance of transactions.
The Gradison Government Reserves Fund will not:
Make short sales of securities, or purchase securities on margin, except for
short-term credit as is necessary for the clearance of transactions.
The National Municipal Bond Fund may not:
1. Sell securities short, unless it owns or has the right to obtain securities
equivalent in kind and amount to the securities sold short.
2. Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions.
The Ohio Municipal Money Market Fund may not:
Sell any securities short or purchase any securities on margin but may obtain
such short-term credits as may be necessary for clearance of purchases and sales
of securities.
The LifeChoice Funds and the Small Company Opportunity Fund:
Do not currently intend to purchase securities on margin, except that the Funds
may obtain such short-term credits as are necessary for the clearance of
transactions and provided that margin payments in connection with futures
contracts shall not constitute purchasing securities on margin.
3. Other Investment Companies.
Each of the Balanced Fund, Convertible Securities Fund, Diversified Stock Fund,
Financial Reserves Fund, Fund for Income, Government Mortgage Fund, Growth Fund,
Institutional Money Market Fund, Intermediate Income Fund, International Growth
Fund, Investment Quality Bond Fund, Lakefront Fund, Limited Term Income Fund,
National Municipal Bond Fund, New York Tax-Free Fund, Ohio Municipal Bond Fund,
Ohio Municipal Money Market Fund, Ohio Regional Stock Fund, Prime Obligations
Fund, Real Estate Investment Fund, Small Company Opportunity
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<PAGE>
Fund, Special Value Fund, Stock Index Fund, Tax-Free Money Market Fund, U.S.
Government Obligations Fund and Value Fund may:
Invest up to 5% of its total assets in the securities of any one investment
company, but may not own more than 3% of the securities of any one investment
company or invest more than 10% of its total assets in the securities of other
investment companies. Pursuant to an exemptive order received by the Trust from
the SEC, the Funds may invest in the other money market funds of the Trust. Each
Fund will waive the portion of its fee attributable to the assets of each Fund
invested in such money market funds to the extent required by the laws of any
jurisdiction in which shares of the Funds are registered for sale.
The Funds (except for the LifeChoice Funds) may not:
Purchase the securities of any registered open-end investment company or
registered unit investment trust in reliance on Section 12(d)(1)(G) or Section
12(d)(1)(F) of the 1940 Act, which permits operation as a "fund of funds."
The Gradison Government Reserves Fund will not:
Purchase securities of other investment companies except in connection with a
reorganization, merger, or consolidation with another open-end investment
company.
The National Municipal Bond Fund may not:
Purchase securities of other investment companies, except in the open market
where no commission except the ordinary broker's commission is paid. Such
limitation does not apply to securities received as dividends, through offers of
exchange, or as a result of a reorganization, consolidation, or merger.
The Ohio Municipal Money Market Fund will not:
Invest any of its assets in the securities of other investment companies, except
by purchase in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than the customary broker's commission,
or except when the purchase is part of a plan of merger, consolidation,
reorganization or acquisition.
4. Miscellaneous.
a. Investment grade obligations.
Each of the National Municipal Bond Fund, New York Tax-Free Fund and Ohio
Municipal Bond Fund may not:
Hold more than 5% of its total assets in securities that have been downgraded
below investment grade.
b. Concentration.
The Fund for Income may not:
With respect to non-municipal bond investments, purchase securities (other than
securities of the U.S. government, its agencies or instrumentalities), if as a
result of such purchase 25% or more of the total Fund's assets would be invested
in any one industry.
c. Diversification.
The Convertible Securities Fund and the Federal Money Market Fund may not:
With respect to 75% of a Fund's total assets, purchase the securities of any one
issuer (except in securities of the U.S. government, its agencies or its
instrumentalities) if as a result (a) more than 5% of the Fund's total assets
would be invested in the securities of that issuer, or (b) the Fund would hold
more than 10% of the outstanding voting
18
<PAGE>
securities of that issuer. Rule 2a-7 of the 1940 Act permits the Federal Money
Market Fund to invest up to 25% of its total assets in securities of a single
issuer for a period of up to three days.
d. Foreign issuers.
The Convertible Securities Fund may not invest in excess of 10% of its total
assets in the securities of foreign issuers, excluding from such limitation
securities listed on any United States securities exchange.
The Federal Money Market Fund may not invest in foreign securities.
e. Unseasoned issuers.
Each of the Convertible Securities Fund and the Federal Money Market Fund
may not:
Invest in excess of 5% of its total assets in securities of issuers which,
including predecessors, do not have a record of at least three years' operation.
The LifeChoice Funds may not:
Invest more than 5% of its total assets in the securities of issuers which,
together with any predecessors, have a record of less than three years of
continuous operation (except for the Proprietary Portfolios, but a LifeChoice
Fund may invest in Underlying Portfolios that do so invest).
f. Pledge of assets.
Each of the Convertible Securities Fund and the Federal Money Market Fund
may not:
Pledge or hypothecate any of its assets. For the purpose of this limitation,
collateral arrangements with respect to stock options are not deemed to be a
pledge of assets.
g. Mortgage, Pledge or Hypothecation of Securities
The Gradison Government Reserves Fund will not:
Mortgage, pledge or hypothecate securities except in connection with permitted
borrowings. The Fund has no current intention of engaging in the lending of
portfolio securities.
h. Federal Money Market Fund.
The Federal Money Market Fund may not (a) lend portfolio securities, (b) borrow
money, or (c) invest in shares of other investment companies.
i. Joint Trading Accounts.
The LifeChoice Funds may not:
Participate on a joint or joint and several basis in any securities trading
account.
Investment Restrictions of Certain Underlying Portfolios of the LifeChoice Funds
Notwithstanding the foregoing restrictions, the Other Portfolios in which the
Funds may invest have adopted certain investment restrictions which may be more
or less restrictive than those listed above, thereby allowing a Fund to
participate in certain investment strategies indirectly that are prohibited
under the fundamental and non-fundamental investment restrictions listed above.
The investment restrictions of the Proprietary Portfolios are set forth in this
19
<PAGE>
SAI and the investment restrictions of the Other Portfolios are set forth in
their respective statements of additional information.
Investment Policies
The following tables describe the Funds' investment policies and list some of
the types of transactions that a Fund may engage in under normal market
conditions. Unless otherwise stated, the indicated percentage relates to a
Fund's total assets that may be committed to the stated investment. A checkmark
[an "x"] indicates that a Fund may engage in the stated transaction without
limit. "None" or "N/A" indicates that the Fund may not engage in the stated
transaction or that no policy has been stated with respect to the investment
category.
Where applicable, a Fund that may engage in futures contracts and options on
futures contracts may invest up to 5% of its total assets in margins and
premiums and may hold up to 33 1/3% of its total assets subject to futures
contracts or options thereon. To the extent that a Fund (other than a LifeChoice
Fund) invests in investment company securities, the Fund may (i) invest up to 5%
in any one investment company, (ii) acquire up to 3% of the total assets of any
one investment company, and (iii) hold up to 10% of its total assets in
securities issued by investment companies.
Permissible investments for the three LifeChoice Funds will correspond to the
Underlying Portfolios comprising the particular LifeChoice Fund, some of which,
the Proprietary Portfolios, are described in this SAI. For information on the
Underlying Portfolios, see the LifeChoice Funds' Prospectus.
20
<PAGE>
Money Market Funds
- --------------------------------------------------------------------------------
Federal Gradison Institutional
Money Financial Government Money
Investment Market Reserves Reserves Market
- --------------------------------------------------------------------------------
Bank deposit instruments None x None x
- --------------------------------------------------------------------------------
Borrowing from banks None 5% 15% 5%
- --------------------------------------------------------------------------------
Commercial paper None x None x
- --------------------------------------------------------------------------------
Dollar weighted average 90 days or 90 days or 90 days or 90 days or
maturity less less less less
- --------------------------------------------------------------------------------
Eurodollar obligations None 25% None 25%
- --------------------------------------------------------------------------------
Illiquid securities None 10% net 10% net * 10% net
- --------------------------------------------------------------------------------
Investment company securities None 5% None 5%
- --------------------------------------------------------------------------------
Master demand notes None x None x
- --------------------------------------------------------------------------------
Maturity of securities at 1 - 397 1 - 397 1 - 397 days 1 - 397
time of purchase days days days
- --------------------------------------------------------------------------------
Mortgage-backed securities x x x * x
- --------------------------------------------------------------------------------
Repurchase agreements x x x x
- --------------------------------------------------------------------------------
Restricted securities 10% x None x
- --------------------------------------------------------------------------------
Reverse repurchase agreements None 33 1/3% None 33 1/3%
- --------------------------------------------------------------------------------
Securities lending None 33 1/3% 30% 33 1/3%
- --------------------------------------------------------------------------------
Short-term funding agreements None 10% net None 10% net
- --------------------------------------------------------------------------------
Tax-exempt commercial paper None x None x
- --------------------------------------------------------------------------------
Time deposits None x None x
- --------------------------------------------------------------------------------
U.S. government securities x x x x
- --------------------------------------------------------------------------------
Variable and floating rate x x x x
notes
- --------------------------------------------------------------------------------
When-issued and delayed None 33 1/3% 33 1/3% * 33 1/3%
delivery
- --------------------------------------------------------------------------------
Zero coupon bonds None x x * x
- --------------------------------------------------------------------------------
- ----------
* Only U.S. government securities.
21
<PAGE>
Money Market Funds (continued)
- --------------------------------------------------------------------------------
Ohio
Municipal Tax-Free U.S.
Money Prime Money Government
Investment Market Obligations Market Obligations
- --------------------------------------------------------------------------------
Asset-backed securities None 25% None None
- --------------------------------------------------------------------------------
Bank deposit instruments 20% x 20% None
- --------------------------------------------------------------------------------
Borrowing from banks 5% 5% 5% 5%
- --------------------------------------------------------------------------------
Commercial paper 20% x 20% None
(taxable) (taxable)
- --------------------------------------------------------------------------------
Dollar weighted average 90 days or 90 days or 90 days or 90 days or
maturity less less less less
- --------------------------------------------------------------------------------
Eurodollar obligations 20% 25% 20% None
- --------------------------------------------------------------------------------
Illiquid securities 10% net 10% net 10% net 10% net
- --------------------------------------------------------------------------------
Investment company securities 5% 5% 5% 5%
- --------------------------------------------------------------------------------
Master demand notes 20% x 20% None
- --------------------------------------------------------------------------------
Maturity of securities at 1 - 397 1 - 397 1 - 397 1 - 397
time of purchase days days days days
- --------------------------------------------------------------------------------
Mortgage-backed securities x x x x *
- --------------------------------------------------------------------------------
Real estate investment trusts None None 25% None
- --------------------------------------------------------------------------------
Repurchase agreements 20% x 20% x **
- --------------------------------------------------------------------------------
Restricted securities 20% x 20% None
(taxable) (taxable)
- --------------------------------------------------------------------------------
Reverse repurchase agreements 33 1/3% 33 1/3% 33 1/3% 33 1/3%
- --------------------------------------------------------------------------------
Securities lending None 33 1/3% 33 1/3% 33 1/3%
- --------------------------------------------------------------------------------
Short-term debt obligations None 10% net None None
- --------------------------------------------------------------------------------
Short-term funding agreements None 10% net None None
- --------------------------------------------------------------------------------
Tax, revenue and bond x None x None
anticipation notes
- --------------------------------------------------------------------------------
Taxable obligations None None 20% None
- --------------------------------------------------------------------------------
Tax-exempt commercial paper x x x None
- --------------------------------------------------------------------------------
Time deposits 20% x 20% None
- --------------------------------------------------------------------------------
U.S. government securities 20% x 20% x #
- --------------------------------------------------------------------------------
Variable and floating rate x x x x
notes
- --------------------------------------------------------------------------------
When-issued and delayed 33 1/3% 33 1/3% 33 1/3% 33 1/3%
delivery
- --------------------------------------------------------------------------------
Yankee securities None x None None
- --------------------------------------------------------------------------------
Zero coupon bonds x (tax x x (tax x *
exempt) exempt)
- --------------------------------------------------------------------------------
- ----------
* Only U.S. government securities.
** Collateralized by U.S. Treasury securities.
# Only direct U.S. Treasury securities.
22
<PAGE>
Municipal Funds
- --------------------------------------------------------------------------------
National
Municipal New York Ohio
Investment Bond Tax-Free Municipal
Bond
- --------------------------------------------------------------------------------
Asset-backed securities 35% 35% 35%
- --------------------------------------------------------------------------------
Below-investment-grade municipal 5% 5% 5%
securities
- --------------------------------------------------------------------------------
Borrowing from banks 5% 5% 5%
- --------------------------------------------------------------------------------
Certificates of participation 20% 20% 20%
- --------------------------------------------------------------------------------
Collateralized mortgage obligations 25% 25% 25%
(tax exempt)
- --------------------------------------------------------------------------------
Commercial paper (tax exempt) x x x
- --------------------------------------------------------------------------------
Demand features or "puts" x x x
- --------------------------------------------------------------------------------
Dollar weighted average maturity 5 to 11 years N/A 5 to 15 years
- --------------------------------------------------------------------------------
Futures contracts and options on 5%/33 1/3% 5%/33 1/3% 5%/33 1/3%
futures contracts
- --------------------------------------------------------------------------------
General obligations x x x
- --------------------------------------------------------------------------------
Illiquid securities 15% net 15% net 15% net
- --------------------------------------------------------------------------------
Industrial development bonds and 25% 25% 25%
private activity bonds
- --------------------------------------------------------------------------------
Investment company securities 5% 5% 5%
- --------------------------------------------------------------------------------
Master demand notes 20% 20% 20%
- --------------------------------------------------------------------------------
Maturity of securities at time of N/A 20 to 30 years N/A
purchase
- --------------------------------------------------------------------------------
Mortgage-backed securities (tax 35% 35% 35%
exempt)
- --------------------------------------------------------------------------------
Municipal lease obligations 30% 30% 30%
- --------------------------------------------------------------------------------
Refunding contracts x x x
- --------------------------------------------------------------------------------
Repurchase agreements 20% 20% 20%
- --------------------------------------------------------------------------------
Resource recovery bonds x x x
- --------------------------------------------------------------------------------
Restricted securities x x x
- --------------------------------------------------------------------------------
Revenue bonds x x x
- --------------------------------------------------------------------------------
Reverse repurchase agreements 33 1/3% 33 1/3% 33 1/3%
- --------------------------------------------------------------------------------
Securities lending 33 1/3% None 33 1/3%
- --------------------------------------------------------------------------------
Tax preference items 20% 20% 20%
- --------------------------------------------------------------------------------
Tax, revenue and bond anticipation x x x
notes
- --------------------------------------------------------------------------------
Taxable obligations 20% 20% 20%
- --------------------------------------------------------------------------------
U.S. government securities 20% 20% 20%
- --------------------------------------------------------------------------------
Variable and floating rate notes x x x
- --------------------------------------------------------------------------------
When-issued and delayed delivery 33 1/3% 33 1/3% 33 1/3%
- --------------------------------------------------------------------------------
Zero coupon bonds x x x
- --------------------------------------------------------------------------------
23
<PAGE>
Taxable Bond Funds
- --------------------------------------------------------------------------------
Investment Limited
Fund for Government Intermediate Quality Term
Investment Income Mortgage Income Bond Income
- --------------------------------------------------------------------------------
Asset-backed securities 35% 20% 35% 35% 35%
- --------------------------------------------------------------------------------
Borrowing from banks 5% 5% 5% 5% 5%
- --------------------------------------------------------------------------------
Collateralized mortgage 65% - 100% 80% - 100% x x x
obligations *
- --------------------------------------------------------------------------------
Convertible or None 20% 20% x x
exchangeable corporate
debt obligations
- --------------------------------------------------------------------------------
Corporate debt None 20% x x x
obligations
- --------------------------------------------------------------------------------
Dollar weighted average 2 to 30 Up to 12 3 to 10 5 to 15 1 to 5
maturity years years years years years
- --------------------------------------------------------------------------------
Foreign debt securities None None 20% 20% 20%
- --------------------------------------------------------------------------------
Futures contracts and 5%/ 5%/ 5%/ 5%/ 5%/
options on futures 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
contracts
- --------------------------------------------------------------------------------
Illiquid securities 15% net 15% net 15% net 15% net 15% net
- --------------------------------------------------------------------------------
Investment company 5% 5% 5% 5% 5%
securities
- --------------------------------------------------------------------------------
Maturity of securities 2 to 30 N/A N/A N/A N/A
at time of purchase years
- --------------------------------------------------------------------------------
Mortgage-backed 65% - 100% 80% - 100% x x x
securities *
- --------------------------------------------------------------------------------
Options 5%/25% * * None None None None
- --------------------------------------------------------------------------------
Preferred securities None None 20% 20% 20%
- --------------------------------------------------------------------------------
Receipts 20% * 20% 20% 20% 20%
- --------------------------------------------------------------------------------
Repurchase agreements 35% 20% 35% 35% 35%
- --------------------------------------------------------------------------------
Restricted securities None 20% x x x
- --------------------------------------------------------------------------------
Reverse repurchase None 33 1/3% 33 1/3% 33 1/3% 33 1/3%
agreements
- --------------------------------------------------------------------------------
Securities lending 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
- --------------------------------------------------------------------------------
Short-term debt 35% * 20% 35% 35% x
obligations
- --------------------------------------------------------------------------------
Tax, revenue and bond None 20% x x x
anticipation notes
- --------------------------------------------------------------------------------
Variable and floating 35% * 20% * x x x
rate notes
- --------------------------------------------------------------------------------
When-issued and delayed 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
delivery
- --------------------------------------------------------------------------------
Yankee securities None None 20% 20% 20%
- --------------------------------------------------------------------------------
Zero coupon bonds 20% * 20% * 20% 20% 20%
- --------------------------------------------------------------------------------
* Only U.S. government securities.
** The Fund for Income may write covered calls on up to 25% of its total
assets and may invest up to 5% of its total assets to purchase options or
to close out open options transactions.
24
<PAGE>
Equity Funds
- --------------------------------------------------------------------------------
Investment Balanced Convertible Diversified Established Growth
Securities Stock Value
- --------------------------------------------------------------------------------
Asset-backed securities 20% None None None None
- --------------------------------------------------------------------------------
Borrowing from banks 5% 5% 5% 5% 5%
- --------------------------------------------------------------------------------
Collateralized mortgage 40% None None None None
obligations
- --------------------------------------------------------------------------------
Convertible or 40% x x None x
exchangeable corporate
debt obligations
- --------------------------------------------------------------------------------
Corporate debt 60% 35% 20% None 20%
obligations
- --------------------------------------------------------------------------------
Dollar weighted average 5 to 15 N/A N/A N/A N/A
maturity years
- --------------------------------------------------------------------------------
Foreign debt securities 10% 10% None None None
- --------------------------------------------------------------------------------
Foreign equity 10% 10% None None None
securities traded on a
foreign exchange
- --------------------------------------------------------------------------------
Foreign equity 10% 10% 10% None 10%
securities traded on
U.S. exchanges
- --------------------------------------------------------------------------------
Futures contracts and 5%/ 5%/ 5%/ None 5%/
options on futures 33 1/3% 33 1/3% 33 1/3% 33 1/3%
contracts
- --------------------------------------------------------------------------------
Illiquid securities 15% net 15% net 15% net 5% 15% net
- --------------------------------------------------------------------------------
Investment company 5% 5% 5% 10% closed 5%
securities end
- --------------------------------------------------------------------------------
Mortgage-backed 20% None None None None
securities
- --------------------------------------------------------------------------------
Options 25% 25% 25% None 25%
(covered (calls) (covered (covered
calls) calls) calls)
- --------------------------------------------------------------------------------
Preferred securities 25% 35% 20% None 20%
- --------------------------------------------------------------------------------
Real estate investment 25% 25% 25% 25% 20%
trusts
- --------------------------------------------------------------------------------
Receipts 10% None 20% 20% 20%
- --------------------------------------------------------------------------------
Repurchase agreements 35% 35% 20% 20% 20%
- --------------------------------------------------------------------------------
Restricted securities 35% 15% 20% None 20%
- --------------------------------------------------------------------------------
Reverse repurchase 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
agreements
- --------------------------------------------------------------------------------
Securities lending 33 1/3% 10% 33 1/3% 20% 33 1/3%
- --------------------------------------------------------------------------------
Short-term debt 35% 35% 20% 20% 20%
obligations
- --------------------------------------------------------------------------------
U.S. equity securities 40% - 75% 35% 80% - 100% 80% - 100% 80% - 100%
- --------------------------------------------------------------------------------
U.S. government 60% 35% 20% 20% 20%
securities
- --------------------------------------------------------------------------------
Variable and floating None 35% None 20% None
rate notes
- --------------------------------------------------------------------------------
Warrants 10% 5% 10% 10% 10%
- --------------------------------------------------------------------------------
When-issued and delayed 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
delivery
- --------------------------------------------------------------------------------
25
<PAGE>
Equity Funds (continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Ohio
International Regional Real Estate
Investment Growth Lakefront Stock Investment
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Borrowing from banks 5% 5% 5% 5%
- -------------------------------------------------------------------------------------
Convertible or exchangeable 35% x 80% x
corporate debt obligations
- -------------------------------------------------------------------------------------
Corporate debt obligations 35% 20% 20% None
- -------------------------------------------------------------------------------------
Foreign debt securities 20% None None None
- -------------------------------------------------------------------------------------
Foreign equity securities traded on 65% - 100% 10% None 20%
a foreign exchange
- -------------------------------------------------------------------------------------
Foreign equity securities traded on 65% - 100% 10% None 20%
U.S. exchanges
- -------------------------------------------------------------------------------------
Futures contracts and options on 5%/33 1/3% 5%/33 1/3% 5%/33 1/3% 5%/33 1/3%
futures contracts
- -------------------------------------------------------------------------------------
Illiquid securities 15% net 15% net 15% net 15% net
- -------------------------------------------------------------------------------------
Investment company securities 5% 5% 5% 5%
- -------------------------------------------------------------------------------------
Options 25% 25% 25% 25%*
(covered (covered (covered
calls) calls) calls)
- -------------------------------------------------------------------------------------
Preferred securities 35% 20% 20% 20%
- -------------------------------------------------------------------------------------
Real estate investment trusts 25% None 25% x
- -------------------------------------------------------------------------------------
Receipts 20% 20% 20% 20%
- -------------------------------------------------------------------------------------
Repurchase agreements 35% 20% 20% 20%
- -------------------------------------------------------------------------------------
Restricted securities 35% 20% 20% 15%
- -------------------------------------------------------------------------------------
Reverse repurchase agreements 33 1/3% 33 1/3% 33 1/3% 33 1/3%
- -------------------------------------------------------------------------------------
Securities lending 33 1/3% 33 1/3% 33 1/3% 33 1/3%
- -------------------------------------------------------------------------------------
Short-term debt obligations 35% 20% 20% 20%
- -------------------------------------------------------------------------------------
U.S. equity securities None 80% - 100% 80% - 100% 80% - 100%
- -------------------------------------------------------------------------------------
U.S. government securities 35% 20% 20% 20%
- -------------------------------------------------------------------------------------
Variable and floating rate notes 20% None None
- -------------------------------------------------------------------------------------
Warrants 10% 10% 10% 10%
- -------------------------------------------------------------------------------------
When-issued and delayed delivery 33 1/3% 33 1/3% 33 1/3% 33 1/3%
- -------------------------------------------------------------------------------------
</TABLE>
- ----------
* In covered call and put options.
26
<PAGE>
Equity Funds (continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Small
Company Special
Investment Opportunity Value Stock Index Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Borrowing from banks 5% 5% 5% 5%
- -------------------------------------------------------------------------------------
Convertible or exchangeable None x None x
corporate debt obligations
- -------------------------------------------------------------------------------------
Corporate debt obligations 20% 20% None 20%
- -------------------------------------------------------------------------------------
Foreign equity securities traded on 10% 10% x 10%
U.S. exchanges
- -------------------------------------------------------------------------------------
Futures contracts and options on 5%/33 1/3% 5%/33 1/3% 5%/33 1/3% 5%/33 1/3%
futures contracts
- -------------------------------------------------------------------------------------
Illiquid securities 15% net 15% net 15% net 15% net
- -------------------------------------------------------------------------------------
Investment company securities 5% 5% 5% 5%
- -------------------------------------------------------------------------------------
Options 25%/5% * 25% 25% 25%
(covered (covered (covered
calls) calls) calls)
- -------------------------------------------------------------------------------------
Preferred securities 20% 20% None 20%
- -------------------------------------------------------------------------------------
Real estate investment trusts 25% 25% 20% 25%
- -------------------------------------------------------------------------------------
Receipts 20% 20% 20% 20%
- -------------------------------------------------------------------------------------
Repurchase agreements 20% 20% 20% 20%
- -------------------------------------------------------------------------------------
Restricted securities 35% 20% 20% 20%
- -------------------------------------------------------------------------------------
Reverse repurchase agreements 33 1/3% 33 1/3% 33 1/3% 33 1/3%
- -------------------------------------------------------------------------------------
Securities lending 33 1/3% 33 1/3% 33 1/3% 33 1/3%
- -------------------------------------------------------------------------------------
Short-term debt obligations 20% 20% 33 1/3% 20%
- -------------------------------------------------------------------------------------
U.S. equity securities 80% - 100% 80% - 100% 80% - 100% 80% - 100%
- -------------------------------------------------------------------------------------
U.S. government securities 20% 20% 20% * * 20%
- -------------------------------------------------------------------------------------
Warrants 10% 10% 10% 10%
- -------------------------------------------------------------------------------------
When-issued and delayed delivery 33 1/3% 33 1/3% 33 1/3% 33 1/3%
- -------------------------------------------------------------------------------------
</TABLE>
LifeChoice Funds
- ----------------------------------------------------------------------
Investment Each LifeChoice Fund
- ----------------------------------------------------------------------
Borrowing from banks 33 1/3%
- ----------------------------------------------------------------------
Illiquid securities 15% net
- ----------------------------------------------------------------------
Investment company securities x
- ----------------------------------------------------------------------
Reverse repurchase agreements 33 1/3%
- ----------------------------------------------------------------------
Securities lending 33 1/3%
- ----------------------------------------------------------------------
When-issued and delayed delivery 33 1/3%
- ----------------------------------------------------------------------
- ----------
* 25% in covered calls and 5% in call or put options.
** Only U.S. Treasury obligations. The Stock Index Fund may hold short-term
debt obligations and may enter into repurchase agreements for liquidity.
27
<PAGE>
Secondary Investment Strategies. In addition to the principal strategies
described in the Prospectuses, certain Funds may engage in the secondary
investment strategies outlined below.
- --------------------------------------------------------------------------------
Balanced o May, but is not required to, use derivative instruments.
- --------------------------------------------------------------------------------
Convertible o May invest up to 35% of its total assets in corporate debt
Securities securities, common stock, U.S. government securities and
high-quality short-term debt obligations, preferred stock and
repurchase agreements.
o May invest up to 10% of its total assets in foreign debt and
equity securities.
- --------------------------------------------------------------------------------
Diversified o May invest up to 20% of its total assets in preferred stocks,
Stock investment grade corporate debt securities, short-term debt
obligations and U.S. government obligations.
o May, but is not required to, use derivative instruments.
- --------------------------------------------------------------------------------
Established o May invest up to 20% of its total assets in short-term U.S.
Value government obligations, repurchase agreements, other
money market obligations and investment grade debt securities.
- --------------------------------------------------------------------------------
Fund for o May, but is not required to, use derivative instruments.
Income
- --------------------------------------------------------------------------------
Government o May invest in receipts and separately traded registered
Mortgage interest and principal securities (STRIPS), which are sold as
zero coupon; collateralized mortgage obligations; futures
contracts and put and call options on futures contracts;
Treasury notes and agencies and interest only (IO), and
principal only (PO) securities. IOs and POs are derivatives of
bonds. Securities dealers separate the interest or principal
payments from a bond or mortgage-backed security and sell only
that portion as one of the above securities.
o May, but is not required to, use derivative instruments.
- --------------------------------------------------------------------------------
Growth o May invest up to 20% of its total assets in preferred
stocks, investment-grade corporate debt securities, short-
term debt obligations and U.S. government obligations.
o May, but is not required to, use derivative instruments.
- --------------------------------------------------------------------------------
Intermediate o May invest up to 35% of its total assets in high-quality,
Income short-term debt.
o May invest up to 20% of its total assets in preferred and
convertible preferred securities and separately traded interest
and principal component parts of U.S. Treasury obligations.
o May invest in international bonds, foreign securities, and
derivative instruments, such as futures contracts, options and
securities that may have warrants or options attached.
- --------------------------------------------------------------------------------
International o May invest up to 35% of its total assets in cash equivalents
Growth and fixed income securities, including U.S. government
obligations.
o May, but is not required to, use derivative instruments.
- --------------------------------------------------------------------------------
Investment o May invest up to 20% of its total assets in preferred and
Quality convertible preferred securities, and separately traded
Bond interest and principal component parts of U.S. Treasury
obligations.
o May invest up to 35% of its total assets in high quality,
short-term debt.
o May, but is not required to, use derivative instruments.
- --------------------------------------------------------------------------------
Lakefront o May invest up to 20% of its total assets in preferred stocks,
investment-grade corporate debt securities; short-term debt
obligations; and U.S. government obligations.
- --------------------------------------------------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
LifeChoice o Each LifeChoice Fund may invest a limited portion of its
Funds assets directly in high quality short-term debt obligations,
commercial paper, certificates of deposit, bankers' acceptances,
repurchase agreements with maturities of less than seven days,
debt obligations backed by the full faith and credit of the U.S.
government, and demand time deposits of domestic and foreign
banks and savings and loan associations.
- --------------------------------------------------------------------------------
Limited o May invest up to 20% of its total assets in preferred and
Term Income convertible preferred securities, and separately traded
Fund interest and principal component parts of U.S. Treasury
obligations.
o May invest in international bonds, foreign securities, and
derivative instruments, such as futures contracts and securities
that may have warrants or options attached.
- --------------------------------------------------------------------------------
National o May, but is not required to, use derivative instruments.
Muni Bond
- --------------------------------------------------------------------------------
New York o May, but is not required to, use derivative instruments.
Tax-Free
- --------------------------------------------------------------------------------
Ohio Muni o May, but is not required to, use derivative instruments.
Bond
- --------------------------------------------------------------------------------
Ohio o May invest up to 20% of its total assets in short-term debt
Regional obligations, investment-grade corporate debt securities and
Stock U.S. government obligations.
o May, but is not required to, use derivative instruments.
- --------------------------------------------------------------------------------
Real Estate o May invest up to 20% of its total assets In securities of
Investment foreign real estate companies and American Depositary Receipts
(ADRs).
o May, but is not required to, use derivative instruments.
- --------------------------------------------------------------------------------
Small o May invest up to 20% of its total assets in: equity
Company securities of larger companies (those with market
Opportunity capitalizations in the top 20% of the 5,000 largest U.S.
companies); investment-grade securities; preferred stocks;
short-term debt obligations; and repurchase agreements.
- --------------------------------------------------------------------------------
Special o May invest up to 20% of its total assets in investment-grade
Value debt securities and preferred stocks.
o May, but is not required to, use derivative instruments.
- --------------------------------------------------------------------------------
Value o May invest up to 20% of its total assets in investment-grade
corporate debt securities, short-term debt obligations and U.S.
government obligations.
o May, but is not required to, use derivative instruments.
- --------------------------------------------------------------------------------
The instruments in which the Funds can invest, according to their investment
policies and limitations are described below.
The following paragraphs provide a brief description of some of the types of
securities in which the Funds may invest in accordance with their investment
objective, policies, and limitations, including certain transactions the Funds
may make and strategies they may adopt. The following also contains a brief
description of the risk factors related to these securities. The Funds may,
following notice to their shareholders, take advantage of other investment
practices which presently are not contemplated for use by the Funds or which
currently are not available but which may be developed, to the extent such
investment practices are both consistent with a Fund's investment objective and
are legally permissible for the Fund. Such investment practices, if they arise,
may involve risks which exceed those involved in the activities described in a
Fund's Prospectus and this SAI.
Eligible Securities for Money Market Funds. High-quality investments are those
obligations which, at the time of purchase, (i) possess one of the two highest
short-term ratings from an NRSRO or (ii) possess, in the case of multiple-rated
securities, one of the two highest short-term ratings by at least two NRSROs; or
(iii) do not possess a rating (i.e. are unrated) but are determined by the
Adviser to be of comparable quality to the rated instruments
29
<PAGE>
described in (i) and (ii). For purposes of these investment limitations, a
security that has not received a rating will be deemed to possess the rating
assigned to an outstanding class of the issuer's short-term debt obligations if
determined by the Adviser to be comparable in priority and security to the
obligation selected for purchase by a Fund. (The above described securities
which may be purchased by the Money Market Funds are referred to as "Eligible
Securities.")
A security subject to a tender or demand feature will be considered an Eligible
Security only if both the demand feature and the underlying security possess a
high quality rating, or, if such do not possess a rating, are determined by the
Adviser to be of comparable quality; provided, however, that where the demand
feature would be readily exercisable in the event of a default in payment of
principal or interest on the underlying security, this obligation may be
acquired based on the rating possessed by the demand feature or, if the demand
feature does not possess a rating, a determination of comparable quality by the
Adviser. A security which at the time of issuance had a maturity exceeding 397
days but, at the time of purchase, has remaining maturity of 397 days or less,
is not considered an Eligible Security if it does not possess a high quality
rating and the long-term rating, if any, is not within the two highest rating
categories.
Pursuant to Rule 2a-7 under the 1940 Act, the Money Market Funds maintain a
dollar-weighted average portfolio maturity which does not exceed 90 days.
The weighted average maturity of the U.S. Government Obligations Fund will
usually be 60 days or less since rating agencies normally require shorter
maturities. However, the permitted weighted average maturity for the U.S.
Government Obligations Fund is 90 days.
The Appendix of this SAI identifies each NRSRO which may be utilized by the
Adviser with regard to portfolio investments for the Funds and provides a
description of relevant ratings assigned by each such NRSRO. A rating by an
NRSRO may be utilized only where the NRSRO is neither controlling, controlled
by, or under common control with the issuer of, or any issuer, guarantor, or
provider of credit support for, the instrument.
U.S. Corporate Debt Obligations. U.S. corporate debt obligations include bonds,
debentures, and notes. Debentures represent unsecured promises to pay, while
notes and bonds may be secured by mortgages on real property or security
interests in personal property. Bonds include, but are not limited to, debt
instruments with maturities of approximately one year or more, debentures,
mortgage-related securities, stripped government securities, and zero coupon
obligations. Bonds, notes, and debentures in which the Funds may invest may
differ in interest rates, maturities, and times of issuance. The market value of
a Fund's fixed income investments will change in response to interest rate
changes and other factors. During periods of falling interest rates, the values
of outstanding fixed income securities generally rise. Conversely, during
periods of rising interest rates, the values of such securities generally
decline. Moreover, while securities with longer maturities tend to produce
higher yields, the price of longer maturity securities also are subject to
greater market fluctuations as a result of changes in interest rates.
Changes by NRSROs in the rating of any fixed income security and in the ability
of an issuer to make payments of interest and principal also affect the value of
these investments. Except under conditions of default, changes in the value of a
Fund's securities will not affect cash income derived from these securities but
will affect the Fund's net asset value per share ("NAV").
Temporary Defensive Measures. For temporary defensive purposes in response to
market conditions, each Fund may hold up to 100% of its assets in cash or high
quality, short-term obligations such as domestic and foreign commercial paper
(including variable-amount master demand notes), bankers' acceptances,
certificates of deposit and demand and time deposits of domestic and foreign
branches of U.S. banks and foreign banks, and repurchase agreements. (See
"Foreign Securities" for a description of risks associated with investments in
foreign securities.) These temporary defensive measures may result in
performance that is inconsistent with a Fund's investment objective.
Short-Term Corporate Obligations. Corporate obligations are bonds issued by
corporations and other business organizations in order to finance their
long-term credit needs. Corporate bonds in which a Fund may invest generally
consist of those rated in the two highest rating categories of an NRSRO that
possess many favorable
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investment attributes. In the lower end of this category, credit quality may be
more susceptible to potential future changes in circumstances.
Demand Features. A Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period (usually
seven days) following a demand by the Fund. The demand feature may be issued by
the issuer of the underlying securities, a dealer in the securities or by
another third party, and may not be transferred separately from the underlying
security. A Fund uses these arrangements to obtain liquidity and not to protect
against changes in the market value of the underlying securities. The
bankruptcy, receivership or default by the issuer of the demand feature, or a
default on the underlying security or other event that terminates the demand
feature before its exercise, will adversely affect the liquidity of the
underlying security. Demand features that are exercisable even after a payment
default on the underlying security may be treated as a form of credit
enhancement.
Bankers' Acceptances. Bankers' acceptances are negotiable drafts or bills of
exchange typically drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Bankers' acceptances will be those guaranteed by domestic and foreign banks, if
at the time of purchase such banks have capital, surplus, and undivided profits
in excess of $100,000,000 (as of the date of their most recently published
financial statements).
Bank Deposit Instruments. Certificates of deposit ("CDs") are negotiable
certificates issued against funds deposited in a commercial bank or a savings
and loan association for a definite period of time and earning a specified
return. CDs and demand and time deposits invested in by a Fund will be those of
domestic and foreign banks and savings and loan associations, if (a) at the time
of purchase such financial institutions have capital, surplus, and undivided
profits in excess of $100,000,000 (as of the date of their most recently
published financial statements) or (b) the principal amount of the instrument is
insured in full by the Federal Deposit Insurance Corporation (the "FDIC") or the
Savings Association Insurance Fund.
Eurodollar Certificates of Deposit ("ECDs") are U.S. dollar-denominated
certificates of deposit issued by branches of foreign and domestic banks located
outside the United States.
Yankee Certificates of Deposit ("Yankee CDs") are certificates of deposit
issued by a U.S. branch of a foreign bank denominated in U.S. dollars and
held in the United States.
Eurodollar Time Deposits ("ETDs") are U.S. dollar-denominated deposits in
a foreign branch of a U.S. bank or a foreign bank.
Canadian Time Deposits ("CTDs") are U.S. dollar-denominated certificates of
deposit issued by Canadian offices of major Canadian Banks.
Commercial Paper. Commercial paper is comprised of unsecured promissory notes,
usually issued by corporations. Except as noted below with respect to variable
amount master demand notes, issues of commercial paper normally have maturities
of less than nine months and fixed rates of return. In addition to corporate
issuers, tax-exempt commercial paper also may be issued by borrowers that issue
municipal securities. See "Municipal Securities" below.
The Funds will purchase only commercial paper rated in one of the two highest
categories at the time of purchase by an NRSRO or, if not rated, found by the
Trustees to present minimal credit risks and to be of comparable quality to
instruments that are rated high quality (i.e., in one of the two top ratings
categories) by an NRSRO that is neither controlling, controlled by, or under
common control with the issuer of, or any issuer, guarantor, or provider of
credit support for, the instruments. For a description of the rating symbols of
each NRSRO see the Appendix to this SAI.
International Bonds. International bonds include Euro and Yankee obligations,
which are U.S. dollar-denominated international bonds for which the primary
trading market is in the United States ("Yankee Bonds"), or for which the
primary trading market is abroad ("Eurodollar Bonds"). International bonds also
include Canadian and
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supranational agency bonds (e.g., those issued by the International Monetary
Fund). (See "Foreign Debt Securities" for a description of risks associated with
investments in foreign securities.)
Foreign Debt Securities. Investments in securities of foreign companies
generally involve greater risks than are present in U.S. investments. Compared
to U.S. companies, there generally is less publicly available information about
foreign companies and there may be less governmental regulation and supervision
of foreign stock exchanges, brokers and listed companies. Foreign companies
generally are not subject to uniform accounting, auditing, and financial
reporting standards, practices, and requirements comparable to those prevalent
in the U.S. Securities of some foreign companies are less liquid, and their
prices more volatile, than securities of comparable U.S. companies. Settlement
of transactions in some foreign markets may be delayed or may be less frequent
than in the U.S., which could affect the liquidity of a Fund's investment. In
addition, with respect to some foreign countries, there is the possibility of
nationalization, expropriation, or confiscatory taxation; limitations on the
removal of securities, property, or other assets of a Fund; there may be
political or social instability; there may be increased difficulty in obtaining
legal judgments; or diplomatic developments which could affect U.S. investments
in those countries. The Adviser will take such factors into consideration in
managing a Fund's investments. A Fund will not hold foreign currency in amounts
exceeding 5% of its assets as a result of such investments.
Repurchase Agreements.
General. Securities held by a Fund may be subject to repurchase agreements.
Under the terms of a repurchase agreement, a Fund would acquire securities from
financial institutions or registered broker-dealers deemed creditworthy by the
Adviser pursuant to guidelines adopted by the Trustees, subject to the seller's
agreement to repurchase such securities at a mutually agreed upon date and
price. The seller is required to maintain the value of collateral held pursuant
to the agreement at not less than the repurchase price (including accrued
interest).
If the seller were to default on its repurchase obligation or become insolvent,
a Fund would suffer a loss to the extent that the proceeds from a sale of the
underlying portfolio securities were less than the repurchase price, or to the
extent that the disposition of such securities by the Fund is delayed pending
court action.
Convertible Securities Fund and Federal Money Market Fund. With respect to
repurchase agreement transactions entered into by the Convertible Securities
Fund, the underlying securities are ordinarily U.S. Treasury or other
governmental obligations or high quality money market instruments. With respect
to repurchase agreement transactions entered into by the Federal Money Market
Fund, the underlying securities are bonds, notes or other obligations of or
guaranteed by the United States, or those for which the faith of the United
States is pledged for the payment of principal and interest thereon, and bonds,
notes, debentures or any other obligations or securities in which the Fund may
invest.
A Fund will not enter into repurchase agreements with maturities of more than
seven days if, taken together with illiquid securities and other securities for
which there are no readily available quotations, more than 10% of its total
assets would be so invested. Repurchase agreements are considered to be loans by
the Funds collateralized by the underlying securities.
Reverse Repurchase Agreements. A Fund may borrow funds for temporary purposes by
entering into reverse repurchase agreements. Reverse repurchase agreements are
considered to be borrowings under the 1940 Act.
Pursuant to such an agreement, a Fund would sell a portfolio security to a
financial institution, such as a bank or a broker-dealer, and agree to
repurchase such security at a mutually agreed-upon date and price. At the time a
Fund enters into a reverse repurchase agreement, it will place in a segregated
custodial account assets (such as cash or liquid securities) consistent with the
Fund's investment restrictions having a value equal to the repurchase price
(including accrued interest). The collateral will be marked-to-market on a daily
basis, and will be monitored continuously to ensure that such equivalent value
is maintained. Reverse repurchase agreements involve the risk that the market
value of the securities sold by a Fund may decline below the price at which the
Fund is obligated to repurchase the securities.
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Short-Term Funding Agreements. A Fund may invest in short-term funding
agreements (sometimes referred to as guaranteed interest contracts or "GICs")
issued by insurance companies. Pursuant to such agreements, a Fund makes cash
contributions to a deposit fund of the insurance company's general account. The
insurance company then credits the Fund, on a monthly basis, guaranteed interest
which is based on an index. The short-term funding agreement provides that this
guaranteed interest will not be less than a certain minimum rate. Because the
principal amount of a short-term funding agreement may not be received from the
insurance company on seven days notice or less, the agreement is considered to
be an illiquid investment and, together with other instruments in a Fund which
are not readily marketable, will not exceed, for Money Market Funds, 10% of the
Fund's net assets and for all other Funds, 15% of the Fund's net assets. In
determining dollar-weighted average portfolio maturity, a short-term funding
agreement will be deemed to have a maturity equal to the period of time
remaining until the next readjustment of the guaranteed interest rate.
Variable Amount Master Demand Notes. Variable amount master demand notes are
unsecured demand notes that permit the indebtedness thereunder to vary and
provide for periodic adjustments in the interest rate according to the terms of
the instrument. Although there is no secondary market for these notes, a Fund
may demand payment of principal and accrued interest at any time and may resell
the notes at any time to a third party. The absence of an active secondary
market, however, could make it difficult for a Fund to dispose of a variable
amount master demand note if the issuer defaulted on its payment obligations,
and the Fund could, for this or other reasons, suffer a loss to the extent of
the default. While the notes typically are not rated by credit rating agencies,
issuers of variable amount master demand notes must satisfy the same criteria as
set forth above for unrated commercial paper, and the Adviser will monitor
continuously the issuer's financial status and ability to make payments due
under the instrument. Where necessary to ensure that a note is of "high
quality," a Fund will require that the issuer's obligation to pay the principal
of the note be backed by an unconditional bank letter or line of credit,
guarantee or commitment to lend. For purposes of a Fund's investment policies, a
variable amount master demand note will be deemed to have a maturity equal to
the longer of the period of time remaining until the next readjustment of its
interest rate or the period of time remaining until the principal amount can be
recovered from the issuer through demand.
Variable Rate Demand Notes. Variable rate demand notes are tax-exempt
obligations containing a floating or variable interest rate adjustment formula,
together with an unconditional right to demand payment of the unpaid principal
balance plus accrued interest upon a short notice period, generally not to
exceed seven days. The Funds also may invest in participation variable rate
demand notes, which provide a Fund with an undivided interest in underlying
variable rate demand notes held by major investment banking institutions. Any
purchase of variable rate demand notes will meet applicable diversification and
concentration requirements.
Variable and Floating Rate Notes. A variable rate note is one whose terms
provide for the readjustment of its interest rate on set dates and which, upon
such readjustment, reasonably can be expected to have a market value that
approximates its par value. A floating rate note is one whose terms provide for
the readjustment of its interest rate whenever a specified interest rate changes
and which, at any time, reasonably can be expected to have a market value that
approximates its par value. Such notes frequently are not rated by credit rating
agencies; however, unrated variable and floating rate notes purchased by the
Fund will only be those determined by the Adviser, under guidelines established
by the Trustees, to pose minimal credit risks and to be of comparable quality,
at the time of purchase, to rated instruments eligible for purchase under the
Fund's investment policies. In making such determinations, the Adviser will
consider the earning power, cash flow and other liquidity ratios of the issuers
of such notes (such issuers include financial, merchandising, bank holding and
other companies) and will continuously monitor their financial condition.
Although there may be no active secondary market with respect to a particular
variable or floating rate note purchased by a Fund, the Fund may resell the note
at any time to a third party. The absence of an active secondary market,
however, could make it difficult for a Fund to dispose of a variable or floating
rate note in the event that the issuer of the note defaulted on its payment
obligations and a Fund could, for this or other reasons, suffer a loss to the
extent of the default. Variable or floating rate notes may be secured by bank
letters of credit.
The maturities of variable or floating rate notes are determined as follows:
1. A variable or floating rate note that is issued or guaranteed by the U.S.
government or any agency thereof and which has a variable rate of interest
readjusted no less frequently than annually will be deemed to have a maturity
equal to the period remaining until the next readjustment of the interest rate.
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2. A variable or floating rate note, the principal amount of which is scheduled
on the face of the instrument to be paid in one year or less, will be deemed by
the Fund to have a maturity equal to the period remaining until the next
readjustment of the interest rate.
3. A variable or floating rate note that is subject to a demand feature
scheduled to be paid in one year or more will be deemed to have a maturity equal
to the longer of the period remaining until the next readjustment of the
interest rate or the period remaining until the principal amount can be
recovered through demand.
4. A variable or floating rate note that is subject to a demand feature will be
deemed to have a maturity equal to the period remaining until the principal
amount can be recovered through demand.
As used above, a note is "subject to a demand feature" where a Fund is entitled
to receive the principal amount of the note either at any time on no more than
30 days' notice or at specified intervals not exceeding one year and upon no
more than 30 days' notice.
Extendible Debt Securities. Extendible debt securities are securities that can
be retired at the option of a Fund at various dates prior to maturity. In
calculating average portfolio maturity, a Fund may treat Extendible Debt
Securities as maturing on the next optional retirement date.
Receipts. Receipts are separately traded interest and principal component parts
of bills, notes, and bonds issued by the U.S. Treasury that are transferable
through the federal book entry system, known as "separately traded registered
interest and principal securities" ("STRIPS") and "coupon under book entry
safekeeping" ("CUBES"). These instruments are issued by banks and brokerage
firms and are created by depositing Treasury notes and Treasury bonds into a
special account at a custodian bank; the custodian holds the interest and
principal payments for the benefit of the registered owners of the certificates
or receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
Treasury receipts ("TRs"), Treasury investment growth receipts ("TIGRs"), and
certificates of accrual on Treasury securities ("CATS").
Zero-Coupon Bonds. Zero-coupon bonds are purchased at a discount from the face
amount because the buyer receives only the right to a fixed payment on a certain
date in the future and does not receive any periodic interest payments. The
effect of owning instruments which do not make current interest payments is that
a fixed yield is earned not only on the original investment but also, in effect,
on accretion during the life of the obligations. This implicit reinvestment of
earnings at the same rate eliminates the risk of being unable to reinvest
distributions at a rate as high as the implicit yields on the zero-coupon bond,
but at the same time eliminates the holder's ability to reinvest at higher
rates. For this reason, zero-coupon bonds are subject to substantially greater
price fluctuations during periods of changing market interest rates than are
comparable securities which pay interest currently. This fluctuation increases
in accordance with the length of the period to maturity.
High-Yield Debt Securities. High-yield debt securities are below-investment
grade debt securities, commonly referred to as "junk bonds" (those rated Ba to C
by Moody's or BB to C by S&P), that have poor protection with respect to the
payment of interest and repayment of principal, or may be in default. These
securities are often considered to be speculative and involve greater risk of
loss or price changes due to changes in the issuer's capacity to pay. The market
prices of high-yield debt securities may fluctuate more than those of
higher-rated debt securities and may decline significantly in periods of general
economic difficulty, which may follow periods of rising interest rates.
While the market for high-yield debt securities has been in existence for many
years and has weathered previous economic downturns, the 1980s brought a
dramatic increase in the use of such securities to fund highly-leveraged
corporate acquisitions and restructurings. Past experience may not provide an
accurate indication of future performance of the high yield bond market,
especially during periods of economic recession. In fact, from 1989 to 1991, the
percentage of high-yield debt securities that defaulted rose significantly above
prior levels, although the default rate decreased in 1992.
The market for high-yield debt securities may be thinner and less active than
that for higher-rated debt securities, which can adversely affect the prices at
which the former are sold. If market quotations are not available, high-yield
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debt securities will be valued in accordance with procedures established by the
Trust's Board of Trustees, including the use of outside pricing services.
Judgment plays a greater role in valuing high-yield debt securities than is the
case for securities for which more external sources for quotations and last-sale
information are available. Adverse publicity and changing investor perceptions
may affect the ability of outside pricing services to value high-yield debt
securities and a Fund's ability to sell these securities.
Since the risk of default is higher for high-yield debt securities, the
Adviser's research and credit analysis are an especially important part of
managing securities of this type held by a Fund. In considering investments for
a Fund, the Adviser will attempt to identify those issuers of high-yielding debt
securities whose financial condition is adequate to meet future obligations, has
improved, or is expected to improve in the future. Analysis by the Adviser
focuses on relative values based on such factors as interest or dividend
coverage, asset coverage, earnings prospects, and the experience and managerial
strength of the issuer.
A Fund may choose, at its expense or in conjunction with others, to pursue
litigation or otherwise exercise its rights as security holder to seek to
protect the interests of security holders if it determines this to be in the
best interest of the Fund's shareholders.
The Convertible Securities Fund. The Convertible Securities Fund will purchase
convertible securities that may or may not be rated by an NRSRO. When purchasing
rated securities, the Convertible Securities Fund may make substantial
investments in securities rated Baa, Ba B or Caa by Moody's and BB, BB, B or CCC
by S&P.
The Convertible Securities Fund is not restricted from investing in
below-investment grade securities. However, the Fund will not invest in
securities rated Ba or lower by Moody's or BB or lower by S&P or unrated
securities, unless the Adviser believes that positive factors mitigate or reduce
the investment risks and that the investment is expected to provide a return
commensurate with such risks. Positive factors would include operating strengths
or improvements, such as growing market share or improved cost structure or
margins, that would enable a company to service its debt with a wider margin of
comfort than anticipated by rating agencies.
Loans and Other Direct Debt Instruments. Loans and other direct debt instruments
are interests in amounts owed by a corporate, governmental, or other borrower to
another party. They may represent amounts owed to lenders or lending syndicates
(loans and loan participations), to suppliers of goods or services (trade claims
or other receivables), or to other parties. Direct debt instruments involve a
risk of loss in case of default or insolvency of the borrower and may offer less
legal protection to a Fund in the event of fraud or misrepresentation. In
addition, loan participations involve a risk of insolvency of the lending bank
or other financial intermediary. Direct debt instruments also may include
standby financing commitments that obligate a Fund to supply additional cash to
the borrower on demand.
Securities of Other Investment Companies. A Fund (other than the LifeChoice
Funds) may invest up to 5% of its total assets in the securities of any one
investment company, but may not own more than 3% of the securities of any one
investment company or invest more than 10% of its total assets in the securities
of other investment companies. Pursuant to an SEC exemptive order, a Fund may
invest in the money market funds of the Trust. The Adviser will waive its
investment advisory fee with respect to assets of a Fund invested in any of the
Money Market Funds of the Trust, and, to the extent required by the laws of any
state in which a Fund's shares are sold, the Adviser will waive its investment
advisory fee as to all assets invested in other investment companies. The
LifeChoice Funds may invest in the Proprietary Portfolios without limitation.
See "Investment Policies and Limitations -- The LifeChoice Funds" in this SAI.
U.S. Government Obligations. U.S. government obligations are obligations issued
or guaranteed by the U.S. government, its agencies, and instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. government are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the U.S. Treasury; others
are supported by the discretionary authority of the U.S. government to purchase
the agency's obligations; and still others are supported only by the credit of
the agency or instrumentality. No assurance can be given that the U.S.
government will provide financial support to U.S. government-sponsored agencies
or instrumentalities if it is not obligated to do so by law.
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Municipal Securities. Municipal securities are obligations, typically bonds and
notes, issued by or on behalf of states, territories, and possessions of the
United States and the District of Columbia and their political subdivisions,
agencies, authorities, and instrumentalities, the interest on which, in the
opinion of the issuer's bond counsel at the time of issuance, is both exempt
from federal income tax and not treated as a preference item for individuals for
purposes of the federal alternative minimum tax.
Two specific types of municipal securities are "Ohio Tax-Exempt Obligations" and
"New York Tax-Exempt Obligations." Ohio Tax-Exempt Obligations are municipal
securities issued by the State of Ohio and its political subdivisions, the
interest on which is, in the opinion of the issuer's bond counsel at the time of
issuance, excluded from gross income for purposes of both regular federal income
taxation and Ohio personal income tax. New York Tax-Exempt Obligations are
municipal securities issued by the State of New York and its political
subdivisions, the interest on which is, in the opinion of the issuer's bond
counsel at the time of issuance, excluded from gross income for purposes of both
regular federal income taxation and New York personal income tax.
Generally, municipal securities are issued by governmental entities to obtain
funds for various public purposes, such as the construction of a wide range of
public facilities, the refunding of outstanding obligations, the payment of
general operating expenses, and the extension of loans to other public
institutions and facilities. Municipal securities may include fixed, variable,
or floating rate obligations. Municipal securities may be purchased on a
when-issued or delayed-delivery basis (including refunding contracts).
The two principal categories of municipal securities are "general obligation"
issues and "revenue" issues. Other categories of municipal securities are "moral
obligation" issues, private activity bonds, and industrial development bonds.
The prices and yields on municipal securities are subject to change from time to
time and depend upon a variety of factors, including general money market
conditions, the financial condition of the issuer (or other entities whose
financial resources are supporting the municipal security), general conditions
in the market for tax-exempt obligations, the size of a particular offering, the
maturity of the obligation, and the rating(s) of the issue. There are variations
in the quality of municipal securities, both within a particular category of
municipal securities and between categories. Current information about the
financial condition of an issuer of tax-exempt bonds or notes usually is not as
extensive as that which is made available by corporations whose securities are
publicly traded.
The term "municipal securities," as used in this SAI, includes private activity
bonds issued and industrial development bonds by or on behalf of public
authorities to finance various privately-operated facilities if the interest
paid thereon is both exempt from federal income tax and not treated as a
preference item for individuals for purposes of the federal alternative minimum
tax. The term "municipal securities" also includes short-term instruments issued
in anticipation of the receipt of tax funds, the proceeds of bond placements, or
other revenues, such as short-term general obligation notes, tax anticipation
notes, bond anticipation notes, revenue anticipation notes, tax-exempt
commercial paper, construction loan notes, and other forms of short-term
tax-exempt loans. Additionally, the term "municipal securities" includes project
notes, which are issued by a state or local housing agency and are sold by the
Department of Housing and Urban Development.
An issuer's obligations under its municipal securities are subject to the
provisions of bankruptcy, insolvency, and other laws affecting the rights and
remedies of creditors, such as the federal bankruptcy code. Congress or state
legislatures may enact laws extending the time for payment of principal or
interest, or both, or imposing other constraints upon the enforcement of such
obligations or upon the ability of municipalities to levy taxes. The power or
ability of an issuer to meet its obligations for the payment of interest on and
principal of its municipal securities may be materially adversely affected by
litigation or other conditions. There also is the possibility that, as a result
of litigation or other conditions, the power or ability of certain issuers to
meet their obligations to pay interest on and principal of their tax-exempt
bonds or notes may be materially impaired or their obligations may be found to
be invalid or unenforceable. Such litigation or conditions may, from time to
time, have the effect of introducing uncertainties in the market for tax-exempt
obligations or certain segments thereof, or may materially affect the credit
risk with respect to particular bonds or notes. Adverse economic, business,
legal, or political developments might affect all or a substantial portion of
the Fund's tax-exempt bonds and notes in the same manner.
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From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on tax-exempt bonds, and similar proposals may be introduced in the
future. The U.S. Supreme Court has held that Congress has the constitutional
authority to enact such legislation. It is not possible to determine what effect
the adoption of such proposals could have on the availability of tax-exempt
bonds for investment by the Fund and the value of its portfolio. Proposals also
may be introduced before state legislatures that would affect the state tax
treatment of municipal securities. If such proposals were enacted, the
availability of municipal securities and their value would be affected.
The Internal Revenue Code of 1986, as amended (the "Code"), imposes certain
continuing requirements on issuers of tax-exempt bonds regarding the use,
expenditure and investment of bond proceeds and the payment of rebate to the
United States of America. Failure by the issuer to comply with certain of these
requirements subsequent to the issuance of tax-exempt bonds could cause interest
on the bonds to become includable in gross income retroactive to the date of
issuance.
General obligation issues are backed by the full taxing power of a state or
municipality and are payable from the issuer's general unrestricted revenues and
not from any particular fund or source. The characteristics and method of
enforcement of general obligation bonds vary according to the law applicable to
the particular issuer. Revenue issues or special obligation issues are backed
only by the revenues from a specific tax, project, or facility. "Moral
obligation" issues are normally issued by special purpose authorities.
Private activity bonds and industrial development bonds generally are revenue
bonds and not payable from the resources or unrestricted revenues of the issuer.
The credit and quality of industrial development revenue bonds is usually
directly related to the credit of the corporate user of the facilities. Payment
of principal of and interest on industrial development revenue bonds is the
responsibility of the corporate user (and any guarantor).
Private activity bonds, as discussed above, may constitute municipal securities
depending on their tax treatment. The source of payment and security for such
bonds is the financial resources of the private entity involved; the full faith
and credit and the taxing power of the issuer normally will not be pledged. The
payment obligations of the private entity also will be subject to bankruptcy as
well as other exceptions similar to those described above. Certain debt
obligations known as "industrial development bonds" under prior federal tax law
may have been issued by or on behalf of public authorities to obtain funds to
provide certain privately operated housing facilities, sports facilities,
industrial parks, convention or trade show facilities, airport, mass transit,
port or parking facilities, air or water pollution control facilities, sewage or
solid waste disposal facilities, and certain local facilities for water supply
or other heating or cooling facilities. Other private activity bonds and
industrial development bonds issued to fund the construction, improvement or
equipment of privately-operated industrial, distribution, research or commercial
facilities also may be municipal securities, but the size of such issues is
limited under current and prior federal tax law. The aggregate amount of most
private activity bonds and industrial development bonds is limited (except in
the case of certain types of facilities) under federal tax law by an annual
"volume cap." The volume cap limits the annual aggregate principal amount of
such obligations issued by or on behalf of all government instrumentalities in
the state. Such obligations are included within the term "municipal securities"
if the interest paid thereon is, in the opinion of bond counsel, at the time of
issuance, excluded from gross income for purposes of both federal income
taxation (including any alternative minimum tax) and state personal income tax.
Funds that invest in private activity bonds may not be a desirable investment
for "substantial users" of facilities financed by private activity bonds or
industrial development bonds or for "related persons" of substantial users.
Project notes are secured by the full faith and credit of the United States
through agreements with the issuing authority which provide that, if required,
the U.S. government will lend the issuer an amount equal to the principal of and
interest on the project notes, although the issuing agency has the primary
obligation with respect to its project notes.
Some municipal securities are insured by private insurance companies, while
others may be supported by letters of credit furnished by domestic or foreign
banks. Insured investments are covered by an insurance policy applicable to a
specific security, either obtained by the issuer of the security or by a third
party from a private insurer. Insurance premiums for the municipal bonds are
paid in advance by the issuer or the third party obtaining such insurance. Such
policies are noncancellable and continue in force as long as the municipal bonds
are outstanding and the respective insurers remain in business.
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The insurer generally unconditionally guarantees the timely payment of the
principal of and interest on the insured municipal bonds when and as such
payments become due but shall not be paid by the issuer, except that in the
event of any acceleration of the due date of the principal by reason of
mandatory or optional redemption (other than acceleration by reason of a
mandatory sinking fund payment), default, or otherwise, the payments guaranteed
will be made in such amounts and at such times as payments of principal would
have been due had there not been such acceleration. The insurer will be
responsible for such payments less any amounts received by the bondholder from
any trustee for the municipal bond issuers or from any other source. The
insurance does not guarantee the payment of any redemption premium, the value of
the shares of a Fund, or payments of any tender purchase price upon the tender
of the municipal bonds. With respect to small issue industrial development
municipal bonds and pollution control revenue municipal bonds, the insurer
guarantees the full and complete payments required to be made by or on behalf of
an issuer of such municipal bonds if there occurs any change in the tax-exempt
status of interest on such municipal bonds, including principal, interest, or
premium payments, if any, as and when required to be made by or on behalf of the
issuer pursuant to the terms of such municipal bonds. This insurance is intended
to reduce financial risk, but the cost thereof will reduce the yield available
to shareholders of a Fund.
The ratings of NRSROs represent their opinions as to the quality of municipal
securities. In this regard, it should be emphasized that the ratings of any
NRSRO are general and are not absolute standards of quality, and municipal
securities with the same maturity, interest rate, and rating may have different
yields, while municipal securities of the same maturity and interest rate with
different ratings may have the same yield. Subsequent to purchase by a Fund, an
issue of municipal securities may cease to be rated or its rating may be reduced
below the minimum rating required for purchase by the Fund. The Adviser will
consider such an event in determining whether the Fund should continue to hold
the obligation.
The Adviser believes that it is likely that sufficient municipal securities will
be available to satisfy investment objective and policies of each Fund that
invests in municipal securities ("Municipal Funds"). In meeting its investment
policies, a Municipal Fund may invest part of its total assets in municipal
securities which are private activity bonds. Moreover, although no Municipal
Fund currently intends to do so on a regular basis, each such Fund may invest
more than 25% of its total assets in municipal securities which are related in
such a way that an economic, business or political development or change
affecting one such security would likewise affect the other municipal
securities. Examples of such securities are obligations, the repayment of which
is dependent upon similar types of projects or projects located in the same
state. Such investments would be made only if deemed necessary or appropriate by
the Adviser.
Risk Factors Associated with Certain Issuers of Municipal Securities. A number
of factors could impair a municipal issuer's ability to service its debt.
General Obligation. The following may negatively affect a general
obligation issuer's debt service ability: reduced voter support for taxes;
statutory tax limits; a reduction in state and/or federal support; adverse
economic, demographic and social trends; and loss of a significant taxpayer,
such as the closing of a major manufacturing plant in a municipality that is
heavily dependent on that facility.
Hospital and Health Care Facilities. The following may negatively affect
hospital and health care facilities that issue municipal securities: changes in
federal and state statutes, regulations, and policies affecting the health care
industry; changes in policies and practices of major managed care providers,
private insurers, third party payors and private purchasers of health care
services; reductions in federal Medicare and Medicaid payments; insufficient
occupancy; large malpractice lawsuits.
Housing. The following may diminish these issuers' ability to service
debt: accelerated prepayment of underlying mortgages; insufficient mortgage
origination due to inadequate supply of housing or qualified buyers; higher than
expected default rates on the underlying mortgages; losses from receiving less
interest from escrowed new project funds than is payable to bondholders
Utilities. The following may impair the debt service ability of utilities:
deregulation; environmental regulations; and adverse population trends, weather
conditions and economic developments.
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Mass Transportation. The following could negatively affect airport
facilities: a sharp rise in fuel prices; reduced air traffic; closing of
smaller, money-losing airports; adverse local economic and social trends;
changes in environmental, Federal Aviation Administration and other regulations.
The following could affect ports: natural hazards, such as drought and flood
conditions; reliance on a limited number of products or trading partners;
changes in federal policies on trade, currency and agriculture. The debt service
ability of toll roads is affected by: changes in traffic demand resulting from
adverse economic and employment trends, fuel shortages, and sharp fuel price
increases; dependence on tourist-oriented economies; and declines in motor fuel
taxes, vehicle registration fees, license fees, and penalties and fines.
Higher Education. The following could diminish a higher education issuer's
debt service ability: legislative or regulatory actions; local economic
conditions; reduced enrollment; increased competition with other universities or
colleges; reductions in state financial support and the level of private grants.
Ohio Tax-Exempt Obligations. As used in the Prospectuses and this SAI, the term
"Ohio Tax-Exempt Obligations" refers to debt obligations issued by or on behalf
of the State of Ohio and its political subdivisions, the interest on which is,
in the opinion of the issuer's bond counsel, rendered on the date of issuance,
excluded from gross income for purposes of both federal income taxation and Ohio
personal income tax (as used herein the terms "income tax" and "taxation" do not
include any possible incidence of any alternative minimum tax). Ohio Tax-Exempt
Obligations are issued to obtain funds for various public purposes, including
the construction of a wide range of public facilities such as bridges, highways,
roads, schools, water and sewer works, and other utilities. Other public
purposes for which Ohio Tax-Exempt Obligations may be issued include refunding
outstanding obligations and obtaining funds to lend to other public institutions
and facilities. In addition, certain debt obligations known as "private activity
bonds" may be issued by or on behalf of municipalities and public authorities to
obtain funds to provide certain water, sewage and solid waste facilities,
qualified residential rental projects, certain local electric, gas and other
heating or cooling facilities, qualified hazardous waste facilities, high-speed
inter-city rail facilities, government-owned airports, docks and wharves and
mass commuting facilities, certain qualified mortgages, student loan and
redevelopment bonds and bonds used for certain organizations exempt from federal
income taxation. Certain debt obligations known as "industrial development
bonds" under prior federal tax law may have been issued by or on behalf of
public authorities to obtain funds to provide certain privately operated housing
facilities, sports facilities, industrial parks, convention or trade show
facilities, airport, mass transit, port or parking facilities, air or water
pollution control facilities, sewage or solid waste disposal facilities, and
certain local facilities for water supply or other heating or cooling
facilities. Other private activity bonds and industrial development bonds issued
to fund the construction, improvement or equipment of privately-operated
industrial, distribution, research or commercial facilities also may be Ohio
Tax-Exempt Obligations, but the size of such issues is limited under current and
prior federal tax law. The aggregate amount of most private activity bonds and
industrial development bonds is limited (except in the case of certain types of
facilities) under federal tax law by an annual "volume cap." The volume cap
limits the annual aggregate principal amount of such obligations issued by or on
behalf of all government instrumentalities in the state. Such obligations are
included within the term Ohio Tax-Exempt Obligations if the interest paid
thereon is, in the opinion of bond counsel, rendered on the date of issuance,
excluded from gross income for purposes of both federal income taxation
(including, in certain cases, any alternative minimum tax) and Ohio personal
income tax. A Fund which invests in Ohio Tax-Exempt Obligations may not be a
desirable investment for "substantial users" of facilities financed by private
activity bonds or industrial development bonds or for "related persons" of
substantial users. See "Dividends, Distributions, and Taxes" in the
Prospectuses.
Prices and yields on Ohio Tax-Exempt Obligations are dependent on a variety of
factors, including general money market conditions, the financial condition of
the issuer, general conditions in the market for tax-exempt obligations, the
size of a particular offering, the maturity of the obligation and ratings of
particular issues, and are subject to change from time to time. Current
information about the financial condition of an issuer of tax-exempt bonds or
notes is usually not as extensive as that which is made available by
corporations whose securities are publicly traded.
Obligations of subdivision issuers of tax-exempt bonds and notes may be subject
to the provisions of bankruptcy, insolvency and other laws, such as the Federal
Bankruptcy Reform Act of 1978, as amended, affecting the rights and remedies of
creditors. Congress or state legislatures may seek to extend the time for
payment of principal or interest, or both, or to impose other constraints upon
enforcement of such obligations. There also is the possibility that, as a result
of litigation or other conditions, the power or ability of certain issuers to
meet their obligations to pay
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interest on and principal of their tax-exempt bonds or notes may be materially
impaired or their obligations may be found to be invalid or unenforceable. Such
litigation or conditions may, from time to time, have the effect of introducing
uncertainties in the market for tax-exempt obligations or certain segments
thereof, or may materially affect the credit risk with respect to particular
bonds or notes. Adverse economic, business, legal or political developments
might affect all or a substantial portion of the Funds' tax-exempt bonds and
notes in the same manner.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on tax-exempt bonds, and similar proposals may be introduced in the
future. A 1988 decision of the U.S. Supreme Court held that Congress has the
constitutional authority to enact such legislation. It is not possible to
determine what effect the adoption of such proposals could have on the
availability of tax-exempt bonds for investment by a Fund and the value of its
portfolio.
The Code imposes certain continuing requirements on issuers of tax-exempt bonds
regarding the use, expenditure and investment of bond proceeds and the payment
of rebate to the United States of America. Failure by the issuer to comply
subsequent to the issuance of tax-exempt bonds with certain of these
requirements could cause interest on the bonds to become includable in gross
income, including retroactively to the date of issuance.
A Fund may invest in Ohio Tax-Exempt Obligations either by purchasing them
directly or by purchasing certificates of accrual or similar instruments
evidencing direct ownership of interest payments or principal payments, or both,
on Ohio Tax-Exempt Obligations, provided that, in the opinion of counsel to the
initial seller of each such certificate or instrument, any original issue
discount accruing on such certificate or instrument that is purchased at a yield
not greater than the coupon rate of interest on the related Ohio Tax-Exempt
Obligations will be exempt from federal income tax and Ohio personal income tax
to the same extent as interest on such Ohio Tax-Exempt Obligations. A Fund also
may invest in Ohio Tax-Exempt Obligations by purchasing from banks participation
interests in all or part of specific holdings of Ohio Tax-Exempt Obligations.
Such participations may be backed in whole or in part by an irrevocable letter
of credit or guarantee of the selling bank. The selling bank may receive a fee
from the Fund in connection with the arrangement. A Fund will not purchase
participation interests unless it receives an opinion of counsel or a ruling of
the Internal Revenue Service that interest earned by it on Ohio Tax-Exempt
Obligations in which it holds such a participation interest is exempt from
federal income tax and Ohio personal income tax.
Municipal Lease Obligations. A Fund may invest a portion of its assets in
municipal leases and participation interests therein. These obligations, which
may take the form of a lease, an installment purchase, or a conditional sale
contract, are issued by state and local governments and authorities to acquire
land and a wide variety of equipment and facilities. Generally, Funds will not
hold such obligations directly as a lessor of the property, but will purchase a
participation interest in a municipal obligation from a bank or other third
party. A participation interest gives a Fund a specified, undivided interest in
the obligation in proportion to its purchased interest in the total amount of
the obligation.
Municipal leases frequently have risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set forth
requirements that states or municipalities must meet to incur debt. These may
include voter referenda, interest rate limits, or public sale requirements.
Leases, installment purchases, or conditional sale contracts (which normally
provide for title to the leased asset to pass to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting their constitutional and statutory requirements for the issuance
of debt. Many leases and contracts include "non-appropriation clauses" providing
that the governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for such purposes by the
appropriate legislative body on a yearly or other periodic basis.
Non-appropriation clauses free the issuer from debt issuance limitations.
Below-Investment Grade Municipal Securities. No Municipal Fund currently intends
to invest in below-investment grade municipal securities. However, each
Municipal Fund may hold up to 5% of its assets in municipal securities that have
been downgraded below investment grade. While the market for municipal
securities is considered to be substantial, adverse publicity and changing
investor perceptions may affect the ability of outside pricing services used by
the Fund to value portfolio securities, and the Fund's ability to dispose of
below-investment grade securities. Outside pricing services are consistently
monitored to assure that securities are valued by a method that the Board of
Trustees believes accurately reflects fair value. The impact of changing
investor perceptions may be especially pronounced in markets where municipal
securities are thinly traded.
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A Municipal Fund may choose, at its expense, or in conjunction with others, to
pursue litigation seeking to protect the interests of security holders if it
determines this to be in the best interest of shareholders.
Federally Taxable Obligations. No Municipal Fund intends to invest in securities
whose interest is federally taxable; however, from time to time, a Municipal
Fund may invest a portion of its assets on a temporary basis in fixed-income
obligations whose interest is subject to federal income tax. For example, a
Municipal Fund may invest in obligations whose interest is federally taxable
pending the investment or reinvestment in municipal securities of proceeds from
the sale of its shares of portfolio securities.
Should a Municipal Fund invest in federally taxable obligations, it would
purchase securities which in the Adviser's judgment are of high quality. This
would include obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities; obligations of domestic banks; and repurchase
agreements. The Municipal Funds' standards for high quality taxable obligations
are essentially the same as those described by Moody's in rating corporate
obligations within its two highest ratings of Prime-1 and Prime-2, and those
described by S&P in rating corporate obligations within its two highest ratings
of A-1 and A-2. In making high quality determinations a Municipal Fund also may
consider the comparable ratings of other NRSROs.
The Supreme Court has held that Congress may subject the interest on municipal
obligations to federal income tax. Proposals to restrict or eliminate the
federal income tax exemption for interest on municipal obligations are
introduced before Congress from time to time. Proposals also may be introduced
before the New York legislature that would affect the state tax treatment of the
Municipal Funds' distributions. If such proposals were enacted, the availability
of municipal obligations and the value of the Municipal Funds' holdings would be
affected and the Trustees would reevaluate the Funds' investment objective and
policies.
The Municipal Funds anticipate being as fully invested as practicable in
municipal securities; however, there may be occasions when, as a result of
maturities of portfolio securities, sales of Fund shares, or in order to meet
redemption requests, a Municipal Fund may hold cash that is not earning income.
In addition, there may be occasions when, in order to raise cash to meet
redemptions, a Municipal Fund may be required to sell securities at a loss.
Refunded Municipal Bonds. Investments by a Fund in refunded municipal bonds that
are secured by escrowed obligations issued or guaranteed by the U.S. government
or its agencies or instrumentalities are considered to be investments in U.S.
government obligations for purposes of the diversification requirements to which
the Funds is subject under the 1940 Act. As a result, more than 5% of a Fund's
total assets may be invested in such refunded bonds issued by a particular
municipal issuer. The escrowed securities securing such refunded municipal bonds
will consist exclusively of U.S. government obligations, and will be held by an
independent escrow agent or be subject to an irrevocable pledge of the escrow
account to the debt service on the original bonds.
When-Issued Securities. A Fund may purchase securities on a when-issued basis
(i.e., for delivery beyond the normal settlement date at a stated price and
yield). When a Fund agrees to purchase securities on a when issued basis, the
custodian will set aside cash or liquid securities equal to the amount of the
commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy the purchase commitment, and in such a case, the
Fund may be required subsequently to place additional assets in the separate
account in order to assure that the value of the account remains equal to the
amount of the Fund's commitment. It may be expected that a Fund's net assets
will fluctuate to a greater degree when it sets aside portfolio securities to
cover such purchase commitments than when it sets aside cash. When a Fund
engages in when-issued transactions, it relies on the seller to consummate the
trade. Failure of the seller to do so may result in the Fund incurring a loss or
missing the opportunity to obtain a price considered to be advantageous. The
Funds do not intend to purchase when-issued securities for speculative purposes,
but only in furtherance of their investment objectives.
Delayed-Delivery Transactions. A Fund may buy and sell securities on a
delayed-delivery basis. These transactions involve a commitment by the Fund to
purchase or sell specific securities at a predetermined price or yield, with
payment and delivery taking place after the customary settlement period for that
type of security (and more than seven days in the future). Typically, no
interest accrues to the purchaser until the security is delivered. The Fund may
receive fees for entering into delayed delivery transactions.
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When purchasing securities on a delayed-delivery basis, a Fund assumes the
rights and risks of ownership, including the risks of price and yield
fluctuations in addition to the risks associated with the Fund's other
investments. Because a Fund is not required to pay for securities until the
delivery date, these delayed-delivery purchases may result in a form of
leverage. When delayed-delivery purchases are outstanding, the Fund will set
aside cash and appropriate liquid assets in a segregated custodial account to
cover its purchase obligations. When a Fund has sold a security on a
delayed-delivery basis, it does not participate in further gains or losses with
respect to the security. If the other party to a delayed-delivery transaction
fails to deliver or pay for the securities, the Fund could miss a favorable
price or yield opportunity or suffer a loss.
A Fund may renegotiate delayed-delivery transactions after they are entered into
or may sell underlying securities before they are delivered, either of which may
result in capital gains or losses.
Mortgage-Backed Securities--In General. Mortgage-backed securities are backed by
mortgage obligations including, among others, conventional 30-year fixed rate
mortgage obligations, graduated payment mortgage obligations, 15-year mortgage
obligations, and adjustable-rate mortgage obligations. All of these mortgage
obligations can be used to create pass-through securities. A pass-through
security is created when mortgage obligations are pooled together and undivided
interests in the pool or pools are sold. The cash flow from the mortgage
obligations is passed through to the holders of the securities in the form of
periodic payments of interest, principal, and prepayments (net of a service
fee). Prepayments occur when the holder of an individual mortgage obligation
prepays the remaining principal before the mortgage obligation's scheduled
maturity date. As a result of the pass-through of prepayments of principal on
the underlying securities, mortgage-backed securities are often subject to more
rapid prepayment of principal than their stated maturity indicates. Because the
prepayment characteristics of the underlying mortgage obligations vary, it is
not possible to predict accurately the realized yield or average life of a
particular issue of pass-through certificates. Prepayment rates are important
because of their effect on the yield and price of the securities. Accelerated
prepayments have an adverse impact on yields for pass-throughs purchased at a
premium (i.e., a price in excess of principal amount) and may involve additional
risk of loss of principal because the premium may not have been fully amortized
at the time the obligation is repaid. The opposite is true for pass-throughs
purchased at a discount. A Fund may purchase mortgage-backed securities at a
premium or at a discount. Among the U.S. government securities in which a Fund
may invest are Government mortgage-backed securities (or government guaranteed
mortgage-related securities). Such guarantees do not extend to the value of
yield of the mortgage-backed securities themselves or of the Fund's shares.
Federal Farm Credit Bank Securities. A U.S. government-sponsored institution,
the Federal Farm Credit Bank consolidates the financing activities of the
component banks of the Federal Farm Credit System, established by the Farm
Credit Act of 1971 to provide credit to farmers and farm-related enterprises.
The Federal Farm Credit Bank sells short-term discount notes maturing in 1 to
365 days, short-term bonds with three- and six-month maturities, and adjustable
rate securities through a national syndicate of securities dealers. Several
dealers also maintain an active secondary market in these securities. Federal
Farm Credit Bank Securities are not guaranteed by the U.S. government and no
assurance can be given that the U.S. government will provide financial support
to this instrumentality.
Federal Home Loan Bank Securities. Similar to the role played by the Federal
Reserve System with respect to U.S. commercial banks, the Federal Home Loan Bank
System (the "FHLB"), created in 1932, supplies credit reserves to savings and
loans, cooperative banks and other mortgage lenders. The FHLB sells short-term
discount notes maturing in one to 360 days and variable rate securities, and
lends the money to mortgage lenders based on the amount of collateral provided
by the institution. FHLB securities are not guaranteed by the U.S. government
and no assurance can be given that the U.S. government will provide financial
support to this instrumentality.
U.S. Government Mortgage-Backed Securities. Certain obligations of certain
agencies and instrumentalities of the U.S. government are mortgage-backed
securities. Some such obligations, such as those issued by GNMA are supported by
the full faith and credit of the U.S. Treasury; others, such as those of FNMA,
are supported by the right of the issuer to borrow from the Treasury; others are
supported by the discretionary authority of the U.S. government to purchase the
agency's obligations; still others, such as those of the Federal Farm Credit
Banks or FHLMC, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. government would provide financial support
to U.S. government-sponsored agencies and instrumentalities if it is not
obligated to do so by law.
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The principal governmental (i.e., backed by the full faith and credit of the
U.S. government) guarantor of mortgage-backed securities is GNMA. GNMA is a
wholly owned U.S. government corporation within the Department of Housing and
Urban Development. GNMA is authorized to guarantee, with the full faith and
credit of the U.S. government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks, and mortgage bankers) and pools of FHA-insured
or VA-guaranteed mortgages. Government-related (i.e., not backed by the full
faith and credit of the U.S. government) guarantors include FNMA and FHLMC. FNMA
and FHLMC are government-sponsored corporations owned entirely by private
stockholders. Pass-through securities issued by FNMA and FHLMC are guaranteed as
to timely payment of principal and interest, but are not backed by the full
faith and credit of the U.S. government.
GNMA Certificates. GNMA Certificates are mortgage-backed securities which
evidence an undivided interest in a pool or pools of mortgages. GNMA
Certificates that a Fund may purchase are the "modified pass-through" type,
which entitle the holder to receive timely payment of all interest and principal
payments due on the mortgage pool, net of fees paid to the "issuer" and GNMA,
regardless of whether or not the mortgagor actually makes the payment.
The National Housing Act authorizes GNMA to guarantee the timely payment of
principal and interest on securities backed by a pool of mortgages insured by
the Federal Housing Administration ("FHA") or guaranteed by the Veterans
Administration ("VA"). The GNMA guarantee is backed by the full faith and credit
of the U.S. government. GNMA also is empowered to borrow without limitation from
the U.S. Treasury if necessary to make any payments required under its
guarantee.
The estimated average life of a GNMA Certificate is likely to be substantially
shorter than the original maturity of the underlying mortgages. Prepayments of
principal by mortgagors and mortgage foreclosures usually will result in the
return of the greater part of principal investment long before the maturity of
the mortgages in the pool. Foreclosures impose no risk to principal investment
because of the GNMA guarantee, except to the extent that a Fund has purchased
the certificates above par in the secondary market.
FHLMC Securities. FHLMC was created in 1970 to promote development of a
nationwide secondary market in conventional residential mortgages. FHLMC issues
two types of mortgage pass-through securities ("FHLMC Certificates"), mortgage
participation certificates, and collateralized mortgage obligations ("CMOs").
Participation Certificates resemble GNMA Certificates in that each Participation
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FHLMC guarantees timely monthly payment of
interest on PCs and the ultimate payment of principal. FHLMC Gold Participation
Certificates guarantee the timely payment of both principal and interest.
FHLMC CMOs are backed by pools of agency mortgage-backed securities and the
timely payment of principal and interest of each tranche is guaranteed by the
FHLMC. The FHLMC guarantee is not backed by the full faith and credit of the
U.S. government.
FNMA Securities. FNMA was established in 1938 to create a secondary market in
mortgages insured by the FHA, but has expanded its activity to the secondary
market for conventional residential mortgages. FNMA primarily issues two types
of mortgage-backed securities, guaranteed mortgage pass-through certificates
("FNMA Certificates") and CMOs. FNMA Certificates resemble GNMA Certificates in
that each FNMA Certificate represents a pro rata share of all interest and
principal payments made and owed on the underlying pool. FNMA guarantees timely
payment of interest and principal on FNMA Certificates and CMOs. The FNMA
guarantee is not backed by the full faith and credit of the U.S. government.
SLMA Securities. Established by federal decree in 1972 to increase the
availability of education loans to college and university students, the Student
Loan Marketing Association ("SLMA") is a publicly traded corporation that
guarantees student loans traded in the secondary market. SLMA purchases student
loans from participating financial institutions that originate these loans and
provides financing to state education loan agencies. SLMA issues short- and
medium-term notes and floating rate securities. SLMA securities are not
guaranteed by the U.S. government and no assurance can be given that the U.S.
government will provide financial support to this instrumentality.
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Collateralized Mortgage Obligations. Mortgage-backed securities in which a Fund
may invest also may include CMOs. CMOs are securities backed by a pool of
mortgages in which the principal and interest cash flows of the pool are
channeled on a prioritized basis into two or more classes, or tranches, of
bonds.
Non-Government Mortgage-Backed Securities. A Fund may invest in mortgage-related
securities issued by non-government entities. Commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and other
secondary market issuers also create pass-through pools of conventional
residential mortgage loans. Such issuers also may be the originators of the
underlying mortgage loans as well as the guarantors of the mortgage-related
securities. Pools created by such non-government issuers generally offer a
higher rate of interest than government and government-related pools because
there are not direct or indirect government guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools is
supported by various forms of insurance or guarantees, including individual
loan, title, pool, and hazard insurance. The insurance and guarantees are issued
by government entities, private insurers and the mortgage poolers. Such
insurance and guarantees and the creditworthiness of the issuers, thereof will
be considered in determining whether a non-government mortgage-backed security
meets a Fund's investment quality standards. There can be no assurance that the
private insurers can meet their obligations under the policies. A Fund may buy
non-government mortgage-backed securities without insurance or guarantees if,
through an examination of the loan experience and practices of the poolers, the
Adviser determines that the securities meet the Fund's quality standards.
Although the market for such securities is becoming increasingly liquid,
securities issued by certain private organizations may not be readily
marketable. A Fund will not purchase mortgage-related securities or any other
assets which in the opinion of the Adviser are illiquid if, as a result, more
than 15% of the value of the Fund's net assets will be invested in illiquid
securities.
A Fund may purchase mortgage-related securities with stated maturities in excess
of 10 years. Mortgage-related securities include CMOs and participation
certificates in pools of mortgages. The average life of mortgage-related
securities varies with the maturities of the underlying mortgage instruments,
which have maximum maturities of 40 years. The average life is likely to be
substantially less than the original maturity of the mortgage pools underlying
the securities as the result of mortgage prepayments. The rate of such
prepayments, and hence the average life of the certificates, will be a function
of current market interest rates and current conditions in the relevant housing
markets. The impact of prepayment of mortgages is described under "Government
Mortgage-Backed Securities." Estimated average life will be determined by the
Adviser. Various independent mortgage-related securities dealers publish
estimated average life data using proprietary models, and in making such
determinations, the Adviser will rely on such data except to the extent such
data are deemed unreliable by the Adviser. The Adviser might deem data
unreliable which appeared to present a significantly different estimated average
life for a security than data relating to the estimated average life of
comparable securities as provided by other independent mortgage-related
securities dealers.
Asset-Backed Securities. Asset-backed securities are debt securities backed by
pools of automobile or other commercial or consumer finance loans. The
collateral backing asset-backed securities cannot be foreclosed upon. These
issues are normally traded over-the-counter and typically have a short to
intermediate maturity structure, depending on the paydown characteristics of the
underlying financial assets which are passed through to the security holder.
Futures and Options
Futures Contracts. A Fund may enter into futures contracts, options on futures
contracts, and stock index futures contracts and options thereon for the
purposes of remaining fully invested and reducing transaction costs. Futures
contracts provide for the future sale by one party and purchase by another party
of a specified amount of a specific security, class of securities, or an index
at a specified future time and at a specified price. A stock index futures
contract is a bilateral agreement pursuant to which two parties agree to take or
make delivery of an amount of cash equal to a specified dollar amount times the
difference between the stock index value at the close of trading of the
contracts and the price at which the futures contract is originally struck.
Futures contracts which are standardized as to maturity date and underlying
financial instrument are traded on national futures exchanges. Futures exchanges
and trading are regulated under the Commodity Exchange Act by the Commodity
Futures Trading Commission (the "CFTC"), a U.S. government agency.
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A Fund may enter into contracts for the future delivery of securities and
futures contracts based on a specific security, class of securities or an index,
purchase or sell options on any such futures contracts and engage in related
closing transactions. A futures contract on a securities index is an agreement
obligating either party to pay, and entitling the other party to receive, while
the contract is outstanding, cash payments based on the level of a specified
securities index.
Although futures contracts by their terms call for actual delivery and
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position (buying a
contract which has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. The acquisition
of put and call options on futures contracts will, respectively, give a Fund the
right (but not the obligation), for a specified price, to sell or to purchase
the underlying futures contract, upon exercise of the option, at any time during
the option period. Brokerage commissions are incurred when a futures contract is
bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Initial margin deposits on futures contracts are customarily set at
levels much lower than the prices at which the underlying securities are
purchased and sold, typically ranging upward from less than 5% of the value of
the contract being traded.
After a futures contract position is opened, the value of the contract is
marked-to-market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Funds
expect to earn interest income on their margin deposits.
When interest rates are expected to rise or market values of portfolio
securities are expected to fall, a Fund can seek through the sale of futures
contracts to offset a decline in the value of its portfolio securities. When
interest rates are expected to fall or market values are expected to rise, a
Fund, through the purchase of such contracts, can attempt to secure better rates
or prices for a Fund than might later be available in the market when it effects
anticipated purchases.
A Fund will only sell futures contracts to protect securities it owns against
price declines or purchase contracts to protect against an increase in the price
of securities it intends to purchase. A Fund also may enter into futures
contracts as a temporary substitute to maintain exposure to a particular market
or security pending the purchase or sale of that security.
A Fund's ability to use futures trading effectively depends on several factors.
First, it is possible that there will not be a perfect price correlation between
a futures contract and its underlying stock index. Second, it is possible that a
lack of liquidity for futures contracts could exist in the secondary market,
resulting in an inability to close a futures position prior to its maturity
date. Third, the purchase of a futures contract involves the risk that a Fund
could lose more than the original margin deposit required to initiate a futures
transaction.
Futures transactions involve brokerage costs and require a Fund to segregate
assets to cover contracts that would require it to purchase securities or
currencies. A Fund may lose the expected benefit of futures transactions if
interest rates, exchange rates or securities prices move in an unanticipated
manner. Such unanticipated changes also may result in poorer overall performance
than if a Fund had not entered into any futures transactions. In addition, the
value of a Fund's futures positions may not prove to be perfectly or even highly
correlated with the value of its portfolio securities, limiting a Fund's ability
to hedge effectively against interest rate and/or market risk and giving rise to
additional risks. There is no assurance of liquidity in the secondary market for
purposes of closing out futures positions.
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Restrictions on the Use of Futures Contracts. A Fund will not enter into futures
contract transactions for purposes other than bona fide hedging purposes to the
extent that, immediately thereafter, the sum of its initial margin deposits on
open contracts exceeds 5% of the market value of a Fund's total assets. In
addition, a Fund will not enter into futures contracts to the extent that the
value of the futures contracts held would exceed 1/3 of the Fund's total assets.
Futures transactions will be limited to the extent necessary to maintain a
Fund's qualification as a regulated investment company.
The Trust has undertaken to restrict their futures contract trading as follows:
first, the Trust will not engage in transactions in futures contracts for
speculative purposes; second, the Trust will not market its Funds to the public
as commodity pools or otherwise as vehicles for trading in the commodities
futures or commodity options markets; third, the Trust will disclose to all
prospective shareholders the purpose of and limitations on its Funds' commodity
futures trading; fourth, the Trust will submit to the CFTC special calls for
information. Accordingly, registration as a Commodities Pool Operator with the
CFTC is not required.
In addition to the margin restrictions discussed above, transactions in futures
contracts may involve the segregation of funds pursuant to requirements imposed
by the SEC. Under those requirements, where a Fund has a long position in a
futures contract, it may be required to establish a segregated account (not with
a futures commission merchant or broker) containing cash or liquid securities
equal to the purchase price of the contract (less any margin on deposit). For a
short position in futures or forward contracts held by the Fund, those
requirements may mandate the establishment of a segregated account (not with a
futures commission merchant or broker) with cash or liquid securities that, when
added to the amounts deposited as margin, equal the market value of the
instruments underlying the futures contracts (but are not less than the price at
which the short positions were established). However, segregation of assets is
not required if a Fund "covers" a long position. For example, instead of
segregating assets, a Fund, when holding a long position in a futures contract,
could purchase a put option on the same futures contract with a strike price as
high or higher than the price of the contract held by a Fund. In addition, where
a Fund takes short positions, or engages in sales of call options, it need not
segregate assets if it "covers" these positions. For example, where a Fund holds
a short position in a futures contract, it may cover by owning the instruments
underlying the contract. A Fund also may cover such a position by holding a call
option permitting it to purchase the same futures contract at a price no higher
than the price at which the short position was established. Where a Fund sells a
call option on a futures contract, it may cover either by entering into a long
position in the same contract at a price no higher than the strike price of the
call option or by owning the instruments underlying the futures contract. A Fund
also could cover this position by holding a separate call option permitting it
to purchase the same futures contract at a price no higher than the strike price
of the call option sold by a Fund.
In addition, the extent to which a Fund may enter into transactions involving
futures contracts may be limited by the Code's requirements for qualification as
a registered investment company and a Fund's intention to qualify as such.
Risk Factors in Futures Transactions. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Fund would continue to be required to make daily cash payments to
maintain the required margin. In such situations, if a Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, a Fund may be
required to make delivery of the instruments underlying the futures contracts
that it holds. The inability to close options and futures positions also could
have an adverse impact on the ability to effectively hedge them. A Fund will
minimize the risk that it will be unable to close out a futures contract by only
entering into futures contracts which are traded on national futures exchanges
and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. Because the deposit
requirements in the futures markets are less onerous than margin requirements in
the securities markets, there may be increased participation by speculators in
the futures market which also may cause temporary price distortions. A
relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before
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any deduction for the transaction costs, if the account were then closed out. A
15% decrease would result in a loss equal to 150% of the original margin deposit
if the contract were closed out. Thus, a purchaser or sale of a futures contract
may result in losses in excess of the amount invested in the contract. However,
because the futures strategies engaged in by the Funds are only for hedging
purposes, the Adviser does not believe that the Funds are subject to the risks
of loss frequently associated with futures transactions. The Funds would
presumably have sustained comparable losses if, instead of the futures contract,
it had invested in the underlying financial instrument and sold it after the
decline.
Use of futures transactions by the Funds involves the risk of imperfect or no
correlation where the securities underlying futures contract have different
maturities than the portfolio securities being hedged. It also is possible that
the Funds could both lose money on futures contracts and also experience a
decline in value of its portfolio securities. There also is the risk of loss by
the Funds of margin deposits in the event of bankruptcy of a broker with whom
the Funds have open positions in a futures contract or related option.
Options. Each Equity Fund may sell (write) call options that are traded on
national securities exchanges with respect to common stock in its portfolio. The
Fund for Income also may write covered call options on securities in its
portfolio. A Fund must at all times have in its portfolio the securities which
it may be obligated to deliver if the option is exercised, except that the Small
Company Opportunity Fund may write uncovered calls, that is, call options on
securities that it does not own. The risk of writing uncovered call options is
that the writer of the option may be forced to acquire the underlying security
at a price in excess of the exercise price of the option, that is, the price at
which the writer has agreed to sell the underlying security to the purchaser of
the option. A Fund may write call options in an attempt to realize a greater
level of current income than would be realized on the securities alone. A Fund
also may write call options as a partial hedge against a possible stock market
decline. In view of its investment objective, a Fund generally would write call
options only in circumstances where the Adviser does not anticipate significant
appreciation of the underlying security in the near future or has otherwise
determined to dispose of the security. As the writer of a call option, a Fund
receives a premium for undertaking the obligation to sell the underlying
security at a fixed price during the option period, if the option is exercised.
So long as a Fund remains obligated as a writer of a call option, it forgoes the
opportunity to profit from increases in the market price of the underlying
security above the exercise price of the option, except insofar as the premium
represents such a profit. A Fund retains the risk of loss should the value of
the underlying security decline. A Fund also may enter into "closing purchase
transactions" in order to terminate its obligation as a writer of a call option
prior to the expiration of the option. Although the writing of call options only
on national securities exchanges increases the likelihood of a Fund's ability to
make closing purchase transactions, there is no assurance that a Fund will be
able to effect such transactions at any particular time or at any acceptable
price. The writing of call options could result in increases in a Fund's
portfolio turnover rate, especially during periods when market prices of the
underlying securities appreciate.
The Convertible Securities Fund. The Convertible Securities Fund may purchase
and write (i.e., sell) call options that are traded on U.S. securities
exchanges, such as the Chicago Board Options Exchange, the American Stock
Exchange, the Philadelphia Stock Exchange and the Pacific Stock Exchange. The
Convertible Securities Fund may write call options only if they are covered, and
the options must remain covered so long as the Fund is obligated as a writer.
Puts. A put is a right to sell a specified security (or securities) within a
specified period of time at a specified exercise price. A Fund may sell,
transfer, or assign a put only in conjunction with the sale, transfer, or
assignment of the underlying security or securities. The amount payable to a
Fund upon its exercise of a "put" is normally (i) a Fund's acquisition cost of
the securities (excluding any accrued interest which a Fund paid on the
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period a Fund owned the securities, plus (ii)
all interest accrued on the securities since the last interest payment date
during that period.
Puts may be acquired by a Fund to facilitate the liquidity of its portfolio
assets. Puts also may be used to facilitate the reinvestment of a Fund's assets
at a rate of return more favorable than that of the underlying security. Puts
may, under certain circumstances, also be used to shorten the maturity of
underlying variable rate or floating rate securities for purposes of calculating
the remaining maturity of those securities and the dollar-weighted average
portfolio maturity of a Fund's assets. See "Variable and Floating Rate Notes"
and "Valuation" in this SAI.
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A Fund generally will acquire puts only where the puts are available without the
payment of any direct or indirect consideration. However, if necessary or
advisable, a Fund may pay for puts either separately in cash or by paying a
higher price for portfolio securities which are acquired subject to the puts
(thus reducing the yield to maturity otherwise available for the same
securities). The Funds intends to enter into puts only with dealers, banks, and
broker-dealers which, in the Adviser's opinion, present minimal credit risks.
The Special Value Fund may write put options from time to time. Such options may
be listed on a national securities exchange and issued by the Options Clearing
Corporation or traded over-the-counter. The Small Company Opportunity Fund may
seek to terminate its position in a put option it writes before exercise by
closing out the option in the secondary market at its current price. If the
secondary market is not liquid for a put option the Small Company Opportunity
Fund has written, however, the Small Company Opportunity Fund must continue to
be prepared to pay the strike price while the option is outstanding, regardless
of price changes, and must continue to set aside assets to cover its position.
Upon the exercise of an option, the Fund is not entitled to the gains, if any,
on securities underlying the options. The Small Company Opportunity Fund also
may purchase index put and call options and write index options. Through the
writing or purchase of index options, the Small Company Opportunity Fund can
achieve many of the same objectives as through the use of options on individual
securities. Utilizing options is a specialized investment technique that entails
a substantial risk of a complete loss of the amounts paid as premiums to writers
of options.
Illiquid Investments. Illiquid investments are investments that cannot be sold
or disposed of, within seven business days, in the ordinary course of business
at approximately the prices at which they are valued.
Under the supervision of the Trust's Board of Trustees, the Adviser determines
the liquidity of the Funds' investments and, through reports from the Adviser,
the Trustees monitor investments in illiquid instruments. In determining the
liquidity of a Fund's investments, the Adviser may consider various factors,
including (1) the frequency of trades and quotations, (2) the number of dealers
and prospective purchasers in the marketplace, (3) dealer undertakings to make a
market, (4) the nature of the security (including any demand or tender
features), and (5) the nature of the marketplace for trades (including the
ability to assign or offset the Funds' rights and obligations relating to the
investment).
Investments currently considered by a Fund to be illiquid include repurchase
agreements not entitling the holder to payment of principal and interest within
seven days, over the counter options and non-government stripped fixed-rate
mortgage-backed securities.
Also, the Adviser may determine some securities to be illiquid.
However, with respect to over-the-counter options a Fund writes, all or a
portion of the value of the underlying instrument may be illiquid depending on
the assets held to cover the option and the nature and terms of any agreement a
Fund may have to close out the option before expiration.
In the absence of market quotations, illiquid investments are priced at fair
value as determined in good faith by a committee appointed by the Trustees.
If through a change in values, net assets, or other circumstances, a Fund were
in a position where more than 15% of its net assets were invested in illiquid
securities, the Fund would seek to take appropriate steps to protect liquidity.
Each of the Money Market Funds may invest up to 10% of its net assets in
illiquid securities.
Restricted Securities. Restricted securities generally can be sold in privately
negotiated transactions, pursuant to an exemption from registration under the
Securities Act, or in a registered public offering. The Convertible Securities
Fund may invest up to 15% of its net assets in restricted securities.
Where registration is required, a Fund may be obligated to pay all or part of
the registration expense and a considerable period may elapse between the time
it decides to seek registration and the time the Fund may be permitted to sell a
security under an effective registration statement.
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If, during such a period, adverse market conditions were to develop, a Fund
might obtain a less favorable price than prevailed when it decided to seek
registration of the shares.
Securities Lending Transactions. The Funds (with the exception of the tax-exempt
funds) may from time to time lend securities from their portfolio to
broker-dealers, banks, financial institutions and institutional borrowers of
securities and receive collateral in the form of cash or U.S. government
obligations. Key Trust Company of Ohio, N.A., an affiliate of the Adviser,
serves as lending agent for the Funds, except the tax-exempt funds, pursuant to
a Securities Lending Agency Agreement that was adopted by the Trustees of the
Funds. Under the Funds' current practices (which are subject to change), a Fund
must receive initial collateral equal to 102% of the market value of the loaned
securities, plus any interest due in the form of cash or U.S. government
obligations. The Funds will not lend portfolio securities to: (a) any
"affiliated person" (as that term is defined in the 1940 Act) of any Fund; (b)
any affiliated person of the Adviser; or (c) any affiliated person of such an
affiliated person. This collateral must be valued daily and should the market
value of the loaned securities increase, the borrower must furnish additional
collateral to a Fund sufficient to maintain the value of the collateral equal to
at least 100% of the value of the loaned securities. During the time portfolio
securities are on loan, the borrower will pay the Fund any dividends or interest
paid on such securities plus any interest negotiated between the parties to the
lending agreement. Loans will be subject to termination by the Funds or the
borrower at any time. While a Fund will not have the right to vote securities on
loan, they intend to terminate loans and regain the right to vote if that is
considered important with respect to the investment. A Fund will only enter into
loan arrangements with broker-dealers, banks or other institutions that the
Adviser has determined are creditworthy under guidelines established by the
Trustees. The Funds will limit their securities lending to 33 1/3% of total
assets.
Short Sales Against-the-Box. The Funds will not make short sales of securities,
other than short sales "against-the-box." In a short sale against-the-box, a
Fund sells a security that it owns, or a security equivalent in kind and amount
to the security sold short that the Fund has the right to obtain, for delivery
at a specified date in the future. A Fund will enter into short sales
against-the-box to hedge against unanticipated declines in the market price of
portfolio securities. If the value of the securities sold short increases prior
to the scheduled delivery date, a Fund loses the opportunity to participate in
the gain.
Investment Grade and High Quality Securities. The Funds may invest in
"investment grade" obligations, which are those rated at the time of purchase
within the four highest rating categories assigned by an NRSRO or, if unrated,
are obligations that the Adviser determines to be of comparable quality. The
applicable securities ratings are described in the Appendix. "High-quality"
short-term obligations are those obligations which, at the time of purchase, (1)
possess a rating in one of the two highest ratings categories from at least one
NRSRO (for example, commercial paper rated "A-1" or "A-2" by S&P or "P-1" or
"P-2" by Moody's) or (2) are unrated by an NRSRO but are determined by the
Adviser to present minimal credit risks and to be of comparable quality to rated
instruments eligible for purchase by the Funds under guidelines adopted by the
Board of Trustees.
Participation Interests. The Funds may purchase interests in securities from
financial institutions such as commercial and investment banks, savings and loan
associations and insurance companies. These interests may take the form of
participation, beneficial interests in a trust, partnership interests or any
other form of indirect ownership. The Funds invest in these participation
interests, in order to obtain credit enhancement or demand features that would
not be available through direct ownership of the underlying securities.
Warrants. Warrants are securities that give a Fund the right to purchase equity
securities from the issuer at a specific price (the strike price) for a limited
period of time. The strike price of warrants typically is much lower than the
current market price of the underlying securities, yet they are subject to
greater price fluctuations. As a result, warrants may be more volatile
investments than the underlying securities and may offer greater potential for
capital appreciation as well as capital loss. The Convertible Securities Fund
will use only warrants that are attached to the underlying securities.
Convertible Securities. A convertible security is typically a bond or preferred
stock that may be converted at a stated price within a specified period of time
into a specified number of shares of common stock of the same or a different
issuer. Convertible securities are usually senior to common stock in a
corporation's capital structure, but usually are subordinate to similar
non-convertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from a common stock but lower than
that afforded by a similar non-
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convertible security), a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation of the common stock into which it is convertible.
In general, the market value of a convertible security is at least the higher of
its "investment value" (i.e., its value as a fixed income security) or its
"conversion value" (i.e., the value of the underlying share of common stock if
the security is converted). As a fixed-income security, a convertible security
tends to increase in market value when interest rates decline and tends to
decrease in value when interest rates rise. However, the price of a convertible
security also is influenced by the market value of the security's underlying
common stock. Thus, the price of a convertible security tends to increase as the
market value of the underlying stock increases, and tends to decrease as the
market value of the underlying stock declines. While no securities investment is
without some risk, investments in convertible securities generally entail less
risk than investments in the common stock of the same issuer.
Securities received upon conversion of convertible securities or upon exercise
of call options or warrants forming elements of synthetic convertibles
(described below) may be retained temporarily to permit orderly disposition or
to defer realization of gain or loss for federal tax purposes, and will be
included in calculating the amount of the Fund's total assets invested in true
and synthetic convertibles.
Synthetic Securities. The Convertible Securities Fund also may invest in
"synthetic convertibles". A synthetic convertible is create by combining
separate securities which possess the two principal characteristics of a true
convertible security, i.e., fixed income ("fixed-income component") and the
right to acquire equity securities ("convertibility component"). The
fixed-income component is achieved by investing in non-convertible bonds,
preferred stocks and money market instruments. The convertibility component is
achieved by investing in warrants or exchange listed call options or stock index
call options granting the holder the right to purchase a specified quantity of
securities within a specified period of time at a specified price or to receive
cash in the case of stock index options.
A holder of a synthetic convertible faces the risk of a decline in the price of
the stock or the level of the index involved in the convertibility component,
causing a decline in the value of the option or warrant. Should the price of the
stock fall below the exercise price and remain there throughout the exercise
period, the entire amount paid for the call option or warrant would be lost.
Since a synthetic convertible includes the fixed-income component as well, the
holder of a synthetic convertible also faces the risk that interest rates will
rise, causing a decline in the value of the fixed-income instrument.
Refunding Contracts. A Fund generally will not be obligated to pay the full
purchase price if it fails to perform under a refunding contract. Instead,
refunding contracts generally provide for payment of liquidated damages to the
issuer (currently 15-20% of the purchase price). A Fund may secure its
obligations under a refunding contract by depositing collateral or a letter of
credit equal to the liquidated damages provisions of the refunding contract.
When required by SEC guidelines, a Fund will place liquid assets in a segregated
custodial account equal in amount to its obligations under refunding contracts.
Standby Commitments. A Fund may enter into standby commitments, which are puts
that entitle holders to same-day settlement at an exercise price equal to the
amortized cost of the underlying security plus accrued interest, if any, at the
time of exercise. The Funds may acquire standby commitments to enhance the
liquidity of portfolio securities.
Ordinarily, the Funds may not transfer a standby commitment to a third party,
although they could sell the underlying municipal security to a third party at
any time. The Funds may purchase standby commitments separate from or in
conjunction with the purchase of securities subject to such commitments. In the
latter case, the Funds would pay a higher price for the securities acquired,
thus reducing their yield to maturity.
Standby commitments are subject to certain risks, including the ability of
issuers of standby commitments to pay for securities at the time the commitments
are exercised; the fact that standby commitments are not marketable by the
Funds; and the possibility that the maturities of the underlying securities may
be different from those of the commitments.
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Foreign Investments. A Fund may invest in securities issued by foreign branches
of U.S. banks, foreign banks, or other foreign issuers, including sponsored and
unsponsored American Depositary Receipts ("ADRs") and securities purchased on
foreign securities exchanges. Such investment may subject a Fund to significant
investment risks that are different from, and additional to, those related to
investments in obligations of U.S. domestic issuers or in U.S. securities
markets. Unsponsored ADRs may involve additional risks.
The value of securities denominated in or indexed to foreign currencies, and of
dividends and interest from such securities, can change significantly when
foreign currencies strengthen or weaken relative to the U.S. dollar.
Foreign securities markets generally have less trading volume and less liquidity
than U.S. markets, and prices on some foreign markets can be highly volatile.
Many foreign countries lack uniform accounting and disclosure standards
comparable to those applicable to U.S. companies, and it may be more difficult
to obtain reliable information regarding an issuer's financial condition and
operations. In addition, the costs of foreign investing, including withholding
taxes, brokerage commissions, and custodial costs, are generally higher than for
U.S. investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, which
may result in substantial delays. It also may be difficult to enforce legal
rights in foreign countries.
Investing abroad also involves different political and economic risks. Foreign
investments may be affected by actions of foreign governments adverse to the
interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be a greater possibility of
default by foreign governments or foreign government-sponsored enterprises.
Investments in foreign countries also involve a risk of local political,
economic, or social instability, military action or unrest, or adverse
diplomatic developments. There is no assurance that the Advisers will be able to
anticipate these potential events or counter their effects.
The considerations noted above generally are intensified for investments in
developing countries. Developing countries may have relatively unstable
governments, economies based on only a few industries, and securities markets
that trade a small number of securities.
A Fund may invest in foreign securities that impose restrictions on transfer
within the U.S. or to U.S. persons. Although securities subject to transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such restrictions.
The International Growth Fund currently invests in the securities of issuers
based in a number of foreign countries. The Adviser and IIIS, the sub-adviser of
the International Growth Fund, continuously evaluate issuers based in countries
all over the world. Accordingly, the Fund may invest in the securities of
issuers based in any country, subject to approval by the Trustees, when such
securities meet the investment criteria of the Adviser and IIIS and are
consistent with the investment objective and policies of the Fund.
Miscellaneous Securities. The Funds can invest in various securities issued by
domestic and foreign corporations, including preferred stocks and investment
grade corporate bonds, notes, and warrants. Bonds are long-term corporate debt
instruments secured by some or all of the issuer's assets, debentures are
general corporate debt obligations backed only by the integrity of the borrower,
and warrants are instruments that entitle the holder to purchase a certain
amount of common stock at a specified price, which price is usually higher than
the current market price at the time of issuance. Preferred stocks are
instruments that combine qualities both of equity and debt securities.
Individual issues of preferred stock will have those rights and liabilities that
are spelled out in the governing document. Preferred stocks usually pay a fixed
dividend per quarter (or annum) and are senior to common stock in terms of
liquidation and dividends rights, and preferred stocks typically do not have
voting rights.
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Additional Information Concerning Ohio Issuers
The Ohio Municipal Bond Fund and Ohio Municipal Money Market Fund will each
invest most of its net assets in securities issued by or on behalf of (or in
certificates of participation in lease - purchase obligations of) the State of
Ohio, political subdivisions of the State, or agencies or instrumentalities of
the State or its political subdivisions ("Ohio Obligations"). The Ohio Municipal
Bond Fund and Ohio Municipal Money Market Fund are therefore susceptible to
general or particular economic, political or regulatory factors that may affect
issuers of Ohio Obligations. The following information constitutes only a brief
summary of some of the many complex factors that may have an effect. The
information does not apply to "conduit" obligations on which the public issuer
itself has no financial responsibility. This information is derived from
official statements of certain Ohio issuers published in connection with their
issuance of securities and from other publicly available information, and is
believed to be accurate. No independent verification has been made of any of the
following information.
Generally, the creditworthiness of Ohio Obligations of local issuers is
unrelated to that of obligations of the State itself, and the State has no
responsibility to make payments on those local obligations.
There may be specific factors that at particular times apply in connection with
investment in particular Ohio Obligations or in those obligations of particular
Ohio issuers. It is possible that the investment may be in particular Ohio
Obligations, or in those of particular issuers, as to which those factors apply.
However, the information below is intended only as a general summary, and is not
intended as a discussion of any specific factors that may affect any particular
obligation or issuer.
Ohio is the seventh most populous state. The 1990 Census count of 10,847,000
indicated a 0.5% population increase from 1980. The Census estimate for 1998 is
11,209,000.
While diversifying more into the service and other non-manufacturing areas, the
Ohio economy continues to rely in part on durable goods manufacturing largely
concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. As a result, general economic activity, as in many other
industrially-developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Agriculture is an important segment of the
economy, with over half the State's area devoted to farming and approximately
16% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly somewhat
higher than the national figure. For example, the reported 1990 average monthly
State rate was 5.7%, compared to the 5.5% national figure. However, in recent
years, the State rates were below the national rates (4.3% versus 4.5% in 1998).
The unemployment rate and its effects vary among geographic areas of the State.
There can be no assurance that future national, regional or state-wide economic
difficulties, and the resulting impact on State or local government finances
generally, will not adversely affect the market value of Ohio Obligations held
in the Ohio Municipal Bond Fund and Ohio Municipal Money Market Fund or the
ability of particular obligors to make timely payments of debt service on (or
lease payments relating to) those Obligations.
The State operates on the basis of a fiscal biennium for its appropriations and
expenditures, and is precluded by law from ending its July 1 to June 30 fiscal
year ("FY") or fiscal biennium in a deficit position. Most State operations are
financed through the General Revenue Fund ("GRF"), for which the personal income
and sales-use taxes are the major sources. Growth and depletion of GRF ending
fund balances show a consistent pattern related to national economic conditions,
with the ending FY balance reduced during less favorable and increased during
more favorable economic periods. The State has well-established procedures for,
and has timely taken, necessary actions to ensure resource/expenditure balances
during less favorable economic periods. Those procedures included general and
selected reductions in appropriations spending.
The 1992-93 biennium presented significant challenges to State finances,
successfully addressed. To allow time to resolve certain budget differences an
interim appropriations act was enacted effective July 1, 1991; it included GRF
debt service and lease rental appropriations for the entire biennium, while
continuing most other appropriations for a month. Pursuant to the general
appropriations act for the entire biennium, passed on July 11, 1991, $200
million
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was transferred from the Budget Stabilization Fund ("BSF," a cash and budgetary
management fund) to the GRF in FY 1992.
Based on updated results and forecasts in the course of that FY, both in light
of a continuing uncertain nationwide economic situation, there was projected and
then timely addressed an FY 1992 imbalance in GRF resources and expenditures. In
response, the Governor ordered most State agencies to reduce GRF spending in the
last six months of FY 1992 by a total of approximately $184 million; the $100.4
million BSF balance and additional amounts from certain other funds were
transferred late in the FY to the GRF, and adjustments were made in the timing
of certain tax payments.
A significant GRF shortfall (approximately $520 million) was then projected for
FY 1993. It was addressed by appropriate legislative and administrative actions,
including the Governor's ordering $300 million in selected GRF spending
reductions and subsequent executive and legislative action (a combination of tax
revisions and additional spending reductions). The June 30, 1993 ending GRF fund
balance was approximately $111 million, of which, as a first step to
replenishment, $21 million was deposited in the BSF.
None of the spending reductions were applied to appropriations needed for debt
service or lease rentals relating to any State obligations.
The 1994-95 biennium presented a more affirmative financial picture. Based on
June 30, 1994 balances, an additional $260 million was deposited in the BSF. The
biennium ended June 30, 1995 with a GRF ending fund balance of $928 million, of
which $535.2 million was transferred into the BSF. The significant GRF fund
balance, after leaving in the GRF an unreserved and undesignated balance of $70
million, was transferred to the BSF and other funds including school assistance
funds and, in anticipation of possible federal program changes, a human services
stabilization fund.
From a higher than forecast 1996-97 mid-biennium GRF fund balance, $100 million
was transferred for elementary and secondary school computer network purposes
and $30 million to a new State transportation infrastructure fund. Approximately
$400.8 million served as a basis for temporary 1996 personal income tax
reductions aggregating that amount. The 1996-97 biennium-ending GRF fund balance
was $834.9 million. Of that, $250 million went to school building construction
and renovation, $94 million to the school computer network, $44.2 million for
school textbooks and instructional materials and a distance learning program,
and $34 million to the BSF, and the $263 million balance to a State income tax
reduction fund.
The 1998-99 biennium ending GRF balances were $1.5 billion (cash) and $976
million (fund). Of that fund balance, $325.7 million has been transferred to
school building assistance, $46.3 million to the BSF, $90 million to supply
classroom computers and for interactive video distance learning, and the
remaining amount to the State income tax reduction fund.
The BSF had a September 30, 1999 balance of over $953 million.
The GRF appropriations acts for the current 2000-01 biennium (one for all
education purposes, and one for general GRF purposes) passed on June 24 and June
28, 1999, respectively, and promptly signed (after selective vetoes) by the
Governor. Those acts provided for total GRF biennial expenditures of over $39.8
billion. Necessary GRF debt service and lease-rental appropriations for the
entire biennium were requested in the Governor's proposed budget and
incorporated in the appropriations bills as introduced, and were included in the
bills versions as passed by the House and the Senate and in the acts as passed
and signed.
The State's incurrence or assumption of debt without a vote of the people is,
with exceptions noted below, prohibited by current State constitutional
provisions. The State may incur debt, limited in amount to $750,000, to cover
casual deficits or failures in revenues or to meet expenses not otherwise
provided for. The Constitution expressly precludes the State from assuming the
debts of any local government or corporation. (An exception is made in both
cases for any debt incurred to repel invasion, suppress insurrection or defend
the State in war.)
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By 16 constitutional amendments approved from 1921 to date (the latest adopted
in 1999) Ohio voters authorized the incurrence of State debt and the pledge of
taxes or excises to its payment. At September 30, 1999 over $1.2 billion
(excluding certain highway bonds payable primarily from highway use receipts) of
this debt was outstanding or awaiting delivery. The only such State debt at that
date still authorized to be incurred were portions of the highway bonds, and the
following: (a) up to $100 million of obligations for coal research and
development may be outstanding at any one time ($22.3 million outstanding); (b)
$240 million of obligations previously authorized for local infrastructure
improvements, no more than $120 million of which may be issued in any calendar
year (over $1.06 billion outstanding or awaiting delivery) and (c) up to $200
million in general obligation bonds for parks, recreation and natural resources
purposes which may be outstanding at any one time ($112.7 million outstanding,
with no more than $50 million to be issued in any one year).
The electors in 1995 approved a constitutional amendment extending the local
infrastructure bond program (authorizing an additional $1.2 billion of State
full faith and credit obligations to be issued over 10 years for the purpose),
and authorizing additional highway bonds (expected to be payable primarily from
highway use receipts). The latter supersedes the prior $500 million outstanding
authorization, and authorizes not more than $1.2 billion to be outstanding at
any time and not more than $220 million to be issued in a fiscal year.
A constitutional amendment approved by the voters at the November 1999 general
election authorizes State general obligation debt to pay costs of facilities for
a system of common schools throughout the State and facilities for state
supported and assisted institutions of higher education. That, and other debt
represented by direct obligations of the State (such as that authorized by the
Ohio Public Facilities Commission and Ohio Building Authority, and some
authorized by the Treasurer), may not be issued if future FY total debt service
on those direct obligations to be paid from the GRF or net lottery proceeds
exceeds 5% of total estimated revenues of the State for the GRF and from net
State lottery proceeds during the FY of issuance.
The Constitution also authorizes the issuance of State obligations for certain
purposes, the owners of which do not have the right to have excises or taxes
levied to pay debt service. Those special obligations include obligations issued
by the Ohio Public Facilities Commission and the Ohio Building Authority, and
certain obligations issued by the State Treasurer, over $5.5 billion of which
were outstanding at September 30, 1999.
In recent years, State agencies have participated in transportation and office
building projects that may have some local as well as State use and benefit, in
connection with which the State enters into lease purchase agreements with terms
ranging from 7 to 20 years. Certificates of participation, or special obligation
bonds of the State or a local agency, are issued that represent fractionalized
interests in or are payable from the State's anticipated payments. The State
estimates highest future FY payments under those agreements (as of September 30,
1999) to be approximately $31.9 million (of which $27 million is payable from
sources other than the GRF, such as federal highway money distributions). State
payments under all those agreements are subject to biennial appropriations, with
the lease terms being two years subject to renewal if appropriations are made.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing. The
General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of State
revenues or receipts (but not by a pledge of the State's full faith and credit).
A 1994 constitutional amendment pledges the full faith and credit and taxing
power of the State to meeting certain guarantees under the State's tuition
credit program which provides for purchase of tuition credits, for the benefit
of State residents, guaranteed to cover a specified amount when applied to the
cost of higher education tuition. (A 1965 constitutional provision that
authorized student loan guarantees payable from available State moneys has never
been implemented, apart from a "guarantee fund " approach funded essentially
from program revenues.)
State and local agencies issue obligations that are payable from revenues from
or relating to certain facilities (but not from taxes). By judicial
interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment obligations under lease -purchase agreements of
Ohio public agencies (in which certificates of participation may be issued) are
limited in duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
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Local school districts in Ohio receive a major portion (state - wide aggregate
approximately 46% in recent years) of their operating moneys from State
subsidies, but are dependent on local property taxes, and in 126 districts (as
of November 3, 1999) on voter-authorized income taxes, for significant portions
of their budgets. Litigation, similar to that in other states, has been pending
questioning the constitutionality of Ohio's system of school funding. The Ohio
Supreme Court has concluded that aspects of the system (including basic
operating assistance and the loan program referred to below) are
unconstitutional, and ordered the State to provide for and fund a system
complying with the Ohio Constitution, staying its order to permit time for
responsive corrective actions. After a further hearing, the trial court has
decided that steps taken to date by the State to enhance school funding have not
met the requirements of the Supreme Court decision. The State has appealed to
the Supreme Court, before which oral arguments were heard on November 16, 1999.
That Court has issued a stay, pending appeal, of the implementation of the trial
court's order. A small number of the State's 612 local school districts have in
any year required special assistance to avoid year-end deficits. A now
superseded program provided for school district cash need borrowing directly
from commercial lenders, with diversion of State subsidy distributions to
repayment if needed. Recent borrowings under this program totaled $87.2 million
for 20 districts in FY 1996 (including $42.1 million for one), $113.2 million
for 12 districts in FY 1997 (including $90 million to one for restructuring its
prior loans), and $23.4 million for 10 districts in FY 1998.
Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes for their operations. With other subdivisions, they also
receive local government support and property tax relief moneys distributed by
the State.
For those few municipalities and school districts that on occasion have faced
significant financial problems, there are statutory procedures for a joint
State/local commission to monitor the fiscal affairs and for development of a
financial plan to eliminate deficits and cure any defaults. (Similar procedures
have recently been extended to counties and townships.) Since inception for
municipalities in 1979, these "fiscal emergency" procedures have been applied to
26 cities and villages; for 20 of them the fiscal situation was resolved and the
procedures terminated (no municipality is currently in preliminary "fiscal
watch" status). As of September 24, 1999, a school district "fiscal emergency"
provision was applied to eight districts, and 10 were on preliminary "fiscal
watch" status.
At present the State itself does not levy ad valorem taxes on real or tangible
personal property. Those taxes are levied by political subdivisions and other
local taxing districts. The Constitution has since 1934 limited to 1% of true
value in money the amount of the aggregate levy (including a levy for unvoted
general obligations) of property taxes by all overlapping subdivisions, without
a vote of the electors or a municipal charmer provision, and statutes limit the
amount of that aggregate levy to 10 mills per $1 of assessed valuation (commonly
referred to as the "ten-mill limitation"). Voted general obligations of
subdivisions are payable from property taxes that are unlimited as to amount or
rate.
Additional Information Concerning New York Issuers
The New York Tax-Free Fund will invest substantially all of its assets in New
York municipal securities. In addition, the specific New York municipal
securities in which the New York Tax-Free Fund will invest will change from time
to time. The New York Tax-Free Fund is therefore susceptible to political,
economic, regulatory or other factors affecting issuers of New York municipal
securities. The following information constitutes only a brief summary of a
number of the complex factors which may affect issuers of New York municipal
securities and does not purport to be a complete or exhaustive description of
all adverse conditions to which issuers of New York municipal securities may be
subject. Such information is derived from official statements utilized in
connection with the issuance of New York municipal securities, as well as from
other publicly available documents. Such information has not been independently
verified by the New York Tax-Free Fund, and the New York Tax-Free Fund assumes
no responsibility for the completeness or accuracy of such information.
Additionally, many factors, including national, economic, social and
environmental policies and conditions, which are not within the control of such
issuers, could have a material adverse impact on the financial condition of such
issuers. The New York Tax-Free Fund cannot predict whether or to what extent
such factors or other factors may affect the issuers of New York municipal
securities, the market value or marketability of such securities or the ability
of the respective issuers of such securities acquired by the Fund to pay
interest on or principal of such securities. The creditworthiness of obligations
issued by local New York issuers may be unrelated to the creditworthiness of
obligations issued by the State of New York, and there is no responsibility on
the part of the State of New York to make payments on such local obligations.
There may be
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specific factors that are applicable in connection with investment in the
obligations of particular issuers located within New York, and it is possible
the Fund will invest in obligations of particular issuers as to which such
specific factors are applicable. However, the information set forth below is
intended only as a general summary and not as a discussion of any specific
factors that may affect any particular issuer of New York municipal securities.
The New York Tax-Free Fund may invest in municipal securities issued by New York
State (the "State"), by its various public bodies (the "Agencies") and/or by
other entities located within the State, including the city of New York (the
"City") and political subdivisions thereof and/or their agencies.
New York State. The State's current fiscal year commenced on April 1, 1999, and
ends on March 31, 2000 and is referred to herein as the State's 1999-2000 fiscal
year. The Legislature adopted the debt service component of the State budget for
the 1999-2000 fiscal year on March 31, 1999 and the remainder of the budget on
August 4, 1999. Prior to adoption of the budget, the Legislature enacted
appropriations for disbursements considered to be necessary for State operations
and other purposes. The State Financial Plan for the 1999-2000 fiscal year was
released on August 20, 1999 and is based on the State's budget as enacted by the
Legislature and signed into law by the Governor. The update to the State's
financial projections based upon General Accepted Accounting Principles was
dated November 5, 1999.
1999-2000 Fiscal Year State Financial Plan. The 1999-2000 State Financial Plan
is projected to be balanced on a cash basis. General Fund disbursements,
including transfers to support capital projects, debt service and other funds,
are estimated at $37.35 billion. Projected spending under the 1999-2000 budget
is $215 million above the Governor's Executive Budget recommendations, including
30-day amendments. This change is the net result of spending actions that
occurred during negotiations on the Budget. The increase in General Fund
spending is comprised of $1.1 billion in legislative additions to the Executive
budget (primarily in education), offset by various actions, including
reestimates of required spending based on year-to-date results and the
identification of certain other resources that offset spending, such as $250
million from commencing the process of privatizing the Medical Malpractice
Insurance Association (MMIA), $250 million from the retention of the Debt
Reduction Reserve Fund within the General Fund and about $100 million in excess
fund balances. The State's enacted budget provides for $831 million in new
funding for private schools, the largest year-to-year increase in State history.
The budget also enacts several new tax cuts valued at $375 million when fully
phased in by 2003-04. None of the $1.82 billion cash surplus from 1998-99 is
assumed to support spending in 1999-2000, but instead is reserved to help offset
the costs of previously enacted tax cuts that take effect after 1999-2000.
The 1999-2000 State Financial Plan projects a closing balance in the General
Fund of $2.87 billion that is comprised of the $1.82 billion surplus from
1998-99 that has been set aside to finance already-enacted tax cuts, $473
million in the Tax Stabilization Reserve Fund (TSRF), $250 million in the Debt
Reduction Reserve Fund (DRRF), $132 million in the Contingency Reserve Fund (CRF
) (after the proposed deposit of $25 million) and $200 million in the Community
Projects Fund (CPF), which finances legislative initiatives. The State expects
to close 1999-2000 with cash balances in these funds at their highest level
ever.
The State ended the first six months of the 1999-2000 fiscal year with a General
Fund cash balance of $5.42 billion. Total receipts, including transfers from
other funds, were approximately $11 million less than expected, with the
decrease comprised of lower tax revenues ($25 million) and transfers from other
funds ($8 million) offset in part by $22 million in higher miscellaneous
receipts. Total disbursements through the first six months of the fiscal year
were $16.88 billion. The Division of the Budget expects that most of these
variances are timing-related and are not likely to affect total disbursements
for the fiscal year.
The economic and financial condition of the State may be affected by various
financial, social, economic and political factors. Those factors can be very
complex, may vary from fiscal year to fiscal year, and are frequently the result
of actions taken not only by the State and its agencies and instrumentalities,
but also by entities, such as the federal government, that are not under the
control of the State. In addition, the State Financial Plan is based upon
forecasts of national and State economic activity. Economic forecasts have
frequently failed to predict accurately the timing and magnitude of changes in
the national and the State economies. The Division of Budget believes that its
projections of receipts and disbursements relating to the current State
Financial Plan, and the assumptions on which they are based, are reasonable.
Actual results, however, could differ materially and adversely from the
projections set forth in this SAI and those projections may be changed
materially and adversely from time to time.
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The four governmental fund types that comprise the State Financial Plan are the
General Fund, the Special Revenue Funds, the Capital Projects Funds, and the
Debt Service Funds. This fund structure adheres to accounting standards of the
Governmental Accounting Standards Board. This section discusses first the
General Fund and then the other governmental funds.
General Fund. The General Fund is the principal operating fund of the State and
is used to account for all financial transactions, except those required to be
accounted for in another fund. It is the State's largest fund and receives
almost all State taxes and other resources not dedicated to particular purposes.
In the State's 1999-2000 fiscal year, the General Fund is expected to account
for approximately 47.1% of total Governmental Funds disbursements and 69.3% of
total State Funds disbursements. General Fund moneys are also transferred to
other funds, primarily to support certain capital projects and debt service
payments in other fund types. The following are the projected shares of General
Fund receipts and disbursements: Receipts: Personal Income Tax - 58.4%; User
Taxes and Fees - 18.7%; Business Taxes - 11.8%; Other Taxes - 2.5%;
Miscellaneous Receipts/Transfers- 8.6%; Disbursements: Local Assistance - 68.5%;
State Operations - 18.4%; Debt Service - 6.1%; General State Charges - 5.5%;
Capital/Other - 1.5%.
State Fiscal Year 1999-2000. The General Fund is projected to be balanced on a
cash basis for the 1999-2000 fiscal year. Total receipts and transfers from
other funds are projected to reach $39.32 billion in 1999-2000. This total
includes $35.94 billion in tax receipts, $1.36 billion in miscellaneous
receipts, and over $2.02 billion in transfers from other funds. Total General
Fund disbursements are projected to be $37.35 billion.
Projected General Fund Receipts
The discussion below summarizes the State's projections of General Fund tax
revenues and other revenues for the 1999-2000 fiscal year.
The Personal Income Tax is imposed on the income of individuals, estates and
trusts and is based on federal definitions of income and deductions with certain
modifications. The projected yield of the tax for the 1999-2000 fiscal year is
$23 billion, more than $2.9 billion above the amount reported for 1998-99. The
current estimate reflects continued modest growth in financial sector bonuses
with the resultant impact on withholding.
While gross collections of the personal income tax are expected to grow 8.7%
from 1998-99, the exceptional year-to-year change in the estimate of receipts
from this sources is still significantly attributable to the movement into the
current fiscal year of the General Fund surplus available at the end of 1998-99
(through a tax refund reserve transaction). The approximately $1.7 billion
impact on the year-over-year change that results from the movement of the
surplus is only partially offset by the planned diversion of almost $700 million
in additional receipts to the School Tax Relief Fund (STAR) Fund in the current
year. In its second year, STAR now provides statewide school property tax relief
to all homeowners for their primary residence.
User taxes and fees are comprised of three-quarters of the State's four percent
sales and use tax, cigarette, alcoholic beverage, container, and auto rental
taxes, and a portion of the motor fuel excise levies. Also included in this
category are receipts from the motor vehicle registration fees and alcoholic
beverage license fees. A portion of the motor fuel tax and motor vehicle
registration fees and all of the highway use taxes are earmarked for dedicated
transportation funds.
Receipts in this category in the State's 1999-2000 fiscal year are expected to
total $7.35 billion, an increase of $105 million from reported results in the
prior year. The sales tax component of this category accounts for virtually all
of the 1999-2000 growth, as receipts from user taxes and fees are estimated to
decline $177 million. The growth in yield of the sales tax in 1999-2000, after
adjusting for tax law and other changes, is projected at 5.6%. The yield of
other excise taxes in this category show a long-term declining trend,
particularly cigarette and alcoholic beverage taxes. General Fund declines in
1999-2000 motor vehicle fee receipts, in contrast, reflect statutory fee
reductions and an increased amount of collections earmarked to the Dedicated
Highway and Bridge Trust Fund.
Business taxes include franchise taxes based generally on net income of general
business, bank and insurance corporations, as well as gross-receipts-based taxes
on utilities and gallonage-based petroleum business taxes.
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Beginning in 1994, the surcharge rate has been phased out and, for most
taxpayers, there will be no surcharge liability for taxable periods ending in
1997 and thereafter.
Total business tax collections in the State's 1998-99 fiscal year are projected
at $4.60 billion, a decline of almost $260 million since the prior fiscal year.
The year-over-year decline in projected receipts in this category is largely
attributable to statutory changes. These include the first year of a scheduled
corporation franchise tax rate reduction, the alternative minimum tax rate
reduction, the fixed dollar minimum rate reduction, and the expansion of the
investment tax credit to financial service companies. Ongoing tax reductions
include the second year of the "Power of Jobs" utility tax credit program, the
gross receipts tax rate reduction, and scheduled additional diversion of General
Fund petroleum business and utility tax receipts to dedicated transportation
funds.
Other taxes include estate, gift and real estate transfer taxes, a tax on gains
from the sale or transfer of certain real estate, a pari-mutuel tax and other
minor levies. They are now projected to total $1.0 billion, $137 million below
last year's amount. The primary factors accounting for most of the expected
decline include: an adverse tax tribunal decision resulting in significant
refunds of the now repealed real property gains tax; pari-mutuel tax reductions
enacted with the 1999-2000 budget; and the effects of the already enacted
reductions in the estate and gift taxes.
Significant legislation passed with the 1999-2000 enacted budget affecting these
sources include both the extension of and an increase in certain temporary tax
reductions at the State's race tracks and conformity with new federal estate tax
provisions.
Miscellaneous receipts include investment income, abandoned property receipts,
medical provider assessments, minor federal grants, receipts from public
authorities, and certain other license and fee revenues. Receipts in this
category in the State's 1999-2000 fiscal year are expected to total $1.36
billion, down $142 million from the prior year, reflecting the loss of
non-recurring receipts in 1998-99 and the growing effects of the phase-out of
the medical provider assessments, now scheduled to be eliminated in January
2000.
Transfer from other funds to the General Fund consist primarily of tax revenues
in excess of debt service requirements, particularly the one percent sales tax
used to support payments to Local Government Assistance Corporation (LGAC).
Transfers from other funds are expected to total $2.02 billion, or $99 million
more than total receipts from this category during 1998-99. Total transfers of
sales taxes in excess of LGAC debt service requirements are expected to increase
by approximately $93 million, while transfers from all other funds are expected
to increase by $6 million.
Projected General Fund Disbursements
The State projects General Fund disbursements and transfers to other fund to
total $37.35 billion. Following the pattern of the last two fiscal years,
education programs receive the largest share of new funding contained the
1999-2000 Financial Plan. School aid is expected to grow by $831 million or
8.58% over 1998-99 levels (on a State fiscal year basis). Outside of education,
the largest growth in spending is for Debt Services ($183 million); State
Operations ($181 million); and mental hygiene programs, including funding for a
cost of living increase for care providers ($114 million). These increases were
offset, in part, by spending reductions or actions in health and social welfare
($280 million), and in general State charges ($222 million).
Grants to Local Governments is the largest category of General Fund
disbursements and includes financial assistance to local governments and
not-for-profit corporations, as well as entitlement benefits to individuals. The
largest areas of spending in this category are for aid to elementary and
secondary schools ($10.52 billion) and for the State's share of Medicaid
payments to providers ($5.53 billion). Grants to Local Governments are projected
at $25.62 billion in 1999-2000, an increase of $926 million over 1998-99.
The budget provides additional funding for operating aid, building aid, and
several other targeted aid programs. It also funds the balance of aid payable
for the 1998-99 school year that is due primarily in the first quarter of the
1999-2000 fiscal year. For all other educational programs, disbursements are
projected to grow by $78 million to $2.99 billion.
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State Operations pays for the costs of operating the Executive, Legislative, and
Judicial branches of government, including the prison system, mental hygiene
institutions, and the State University system (SUNY). The State estimates that
disbursements for State Operations in 1999-2000 will total $6.85 billion, an
increase of $181 million since the prior fiscal year. The growth reflects $100
million in projected spending for new collective bargaining agreements that the
State expects to be ratified in the current year. Funding for this expense will
come from the Collective Bargaining Reserve. The annualized costs of current
collective bargaining agreements, growth in the Legislative and Judiciary
budgets, and staffing costs for the State's Year 2000 compliance programs also
contribute to the year-to-year growth in spending. The State's overall workforce
is expected to remain stable at around 191,300 employees.
General State Charges account for the costs of providing fringe benefits to
State employees and retirees of the Executive, Legislature, and Judiciary. These
payments, many of which are mandated by statute and collective bargaining
agreements, include employer contributions for pensions, social security, health
insurance, workers' compensation, and unemployment insurance. General State
charges also cover State payments-in-lieu-of-taxes to local governments for
certain State-owned lands, and the costs of defending lawsuits against the State
and its public officers.
Disbursements in this category are estimated at $2.04 billion, a decrease of
$222 million from the prior year. The change primarily reflects projected growth
of $28 million in a variety of programs offset by the use of proceeds from the
privatization of the Medical Malpractice Insurance Association, which is
expected to offset certain General Fund fringe benefit costs over the next two
fiscal years by approximately $250 million annually.
Debt Service, including short and long-term debt service, is projected at $2.28
billion in 1999-2000, an increase of $185 million over 1998-99. The growth
reflects debt service costs from bond sales in prior years and certain sales
planned for 1999-2000.
Transfers to Other Portfolios from the General Fund are made primarily to
finance certain portions of State capital projects spending and debt service on
long-term bonds where these costs are not funded from other sources.
Transfers for capital projects provide General Fund support for projects that
are not financed with bond proceeds, dedicated taxes, other revenues, or federal
grants. Transfers in this category are projected to total $168 million in
1999-2000. The decline of $78 million from the prior year is primarily due the
delay of the receipt of payment of certain reimbursements in 1998-99.
Receipts of $50 million transferred to DRRF in 1998-99 will be used in the
Capital Projects Fund in 1999-2000 to provide pay-as-you-go funding for five
capital programs that were previously funded with bond proceeds. The 1999-2000
enacted budget also reserves $250 million in new resources for DRRF.
All other transfers (excluding DRRF), which reflect the remaining transfers from
the General Fund to other funds, are estimated to total $385 million in
1999-2000, a decline of $84 million from 1998-99, primarily because of certain
non-recurring transfers that occurred last year.
Non-recurring Resources. The DOB estimates that the 1999-2000 State Financial
Plan contains actions that provide non-recurring resources or savings totaling
approximately $500 million, or 1.3% of General Fund resources, the largest of
which is the first phase of the privatization of MMIA. To the greatest extent
possible, one-time resources are expected to be utilized to finance one-time
costs, including Year 2000 compliance costs and certain capital spending.
General Fund Closing Balance. The 1999-2000 Financial Plan projects a closing
balance of $2.87 billion in the General Fund. The balance is comprised of the
$1.82 billion cash surplus from 1998-99 that is planned to be reserved for
financing already-enacted tax cuts, $473 million in the TSRF, $250 million in
the DRRF, $132 million in the CRF, and $200 million in the CPF, which finances
legislative initiatives.
Other Governmental Funds. In addition to the General Fund, the State Financial
Plan includes Special Revenue Funds, Capital Projects Funds and Debt Service
Funds which are discussed below. Total spending from all
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governmental funds is projected at $73.28 billion in 1999-2000. Amounts below do
not include other sources and uses of funds transferred to or from other fund
types.
Special Revenue Funds. Total disbursements for programs supported by Special
Revenue Funds are projected at $30.94 billion, an increase of $1.29 billion or
4.35% over the prior year. Special Revenue Funds include federal grants and
State special revenue funds.
Federal grants are projected to comprise 72% of all Special Revenue spending in
1999-2000, comparable to prior years. Disbursements from federal funds are
estimated at $22.17 billion, an increase of $741 million or 3.46%. Medicaid is
the largest program within federal funds, accounting for 56% of total spending
in this category. In 1999-2000, Medicaid spending is projected at $14.32
billion, an increase of $711 million over 1998-99. The remaining growth in
federal funds is primarily for the Child Health Plus program, which is estimated
at $117 million in 1999-2000. This growth is offset by decreased spending in
certain social services programs resulting from more recent spending
reestimates.
State special revenue spending is projected to be $8.77 billion, an increase of
$550 million or 6.69% from last year. The spending growth is primarily due to
$661 million for the next phrase of the STAR program and $250 million in
additional general State charges funded by proceeds from the MMIA transaction,
offset by a decrease of $185 million in projected educational spending as a
result of lower projected Lottery proceeds and a decline of $112 million in
transportation disbursements. The remainder reflects the net impact of spending
reestimates.
Capital Projects Funds. Spending from Capital Project Funds in 1999-2000 is
projected at $4.18 billion, an increase of $114 million or 2.80% from last year.
Transportation, environmental, education and mental hygiene programs are the
major sources of year-to-year spending growth in this category.
Debt Service Fund. Spending from Debt Service Funds are estimated at $3.64
billion in 1999-2000, up $370 million or 11.31% from 1998-99. Transportation
purposes, including debt service on bonds issued for State and local highway and
bridge programs financed through the New York Thruway Authority and supported by
the Dedicated Highway and Bridge Trust Fund, account for $124 million of the
year-to year growth. Debt service for educational purposes, including State and
City University programs financed through the Dormitory Authority, will increase
by $80 million. The remaining growth is for a variety of programs in mental
health and corrections, and for general obligation financings.
1999-2000 GAAP-Basis Financial Plan. Statutory reporting requirements provide
for updates to the State's projected financial results when presented on a GAAP
basis on or before September first of each year.
The GAAP-basis results for the 1998-99 fiscal year produced an increase in the
accumulated GAAP-basis surplus in the General Fund from $567 million to $1.65
billion, reflecting continued improvement in the State's fiscal health over the
last several years. At March 31, 1995, the accumulated deficit in the State's
General Fund was $3.3 billion.
In 1999-2000, the General Fund GAAP-basis Financial Plan shows total revenues of
$37.47 billion, total expenditures of $37.59 billion and net other financing
sources of $27 million. The projected accumulated General Fund GAAP-basis
surplus at the close of 1999-2000 is $1.55 billion.
Special Considerations. Many complex political, social and economic forces
influence the State's economy and finances, which may in turn affect the State's
Financial Plan. These forces may affect the State unpredictably from fiscal year
to fiscal year and are influenced by governments, institutions, and events that
are not subject to the State's control. The Financial Plan is also necessarily
based upon forecasts of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and magnitude of changes
in the national and State economies.
The State Financial Plan is based upon forecasts of national and State economic
activity developed through both internal analysis and review of national and
State economic forecasts prepared by commercial forecasting services and other
public and private forecasters. Economic forecasts have frequently failed to
predict accurately the timing and magnitude of changes in the national and State
economies. Mary uncertainties exist in forecasts of both the
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national and State economies, including consumer attitudes toward spending, the
extent of corporate and governmental restructuring, the condition of the
financial sector, federal fiscal and monetary policies, the level of interest
rates, and the condition of the world economy, which could have an adverse
effect on the State. There can be no assurance that the State economy will not
experience results in the current fiscal year that are worse than predicted,
with corresponding material and adverse effects on the State's projections of
receipts and disbursements.
Projections of total State receipts in the Financial Plan are based on the State
tax structure in effect during the fiscal year and on assumptions relating to
basic economic factors and their historical relationships to State tax receipts.
In preparing projections of State receipts, economic forecasts relating to
personal income, wages, consumption, profits and employment have been
particularly important. The projection of receipts from most tax or revenue
sources is generally made by estimating the change in yield of such tax or
revenue source caused by economic and other factors, rather than by estimating
the total yield of such tax or revenue source from its estimated tax base. The
forecasting methodology, however, ensures that State fiscal year collection
estimates for taxes that are based on a computation of annual liability, such as
the business and personal income taxes, are consistent with estimates of total
liability under such taxes.
Projections of total State disbursements are based on assumptions relating to
economic and demographic factors, potential collective bargaining agreements,
levels of disbursements for various services provided by local governments
(where the cost is partially reimbursed by the State), and the results of
various administrative and statutory mechanisms in controlling disbursements for
State operations. Factors that may affect the level of disbursements in the
fiscal year include uncertainties relating to the economy of the nation and the
State, the policies of the federal government, collective bargaining
negotiations and changes in the demand for and use of State services.
An additional risk to the State Financial Plan arises from the potential impact
of certain litigation and of federal disallowances now pending against the
State, which could adversely affect the State's projections of receipts and
disbursements. The State Financial Plan assumes no significant litigation or
federal disallowance or other federal actions that could affect State finances,
but has significant reserves in the event of such an action.
Additional risks to the Financial Plan arise out of potential actions at the
federal level. Potential changes to federal tax law currently under discussion
as part of the federal government's efforts to enact a multi-year tax reduction
package could alter the federal definitions of income on which certain State
taxes rely. Certain proposals, if enacted, could have a significant impact on
State revenues in the future.
The Health Care Reform Act (HCRA), effective as of January 1, 1997, moved the
hospital industry into a competitive market system by allowing most
non-governmental payors to negotiate reimbursement directly with hospitals. HCRA
continued the New York Prospective Hospital Reimbursement Methodology rate
setting system for Medicaid. HCRA legislation is scheduled to expire on December
31, 1999. It is anticipated that the State Legislature will convene a special
session prior to that date to enact successor HCRA legislation.
The Personal Responsibility and Work Opportunity Reconciliation Act of 1996
created a new Temporary Assistance to Needy Families program (TANF) partially
funded with a fixed federal block grant to states. This law also imposes (with
certain exceptions) a five-year durational limit on TANF recipients, requires
that virtually all recipients be engaged in work or community service activities
within two years of receiving benefits, and limits assistance provided to
certain immigrants and other classes of individuals. States are required to meet
work activity participation targets for their TANF caseload and conform with
certain other federal standards or face potential sanctions in the form of a
reduced federal block grant and increased State/local funding requirements. Any
future reduction could have an adverse impact on the State's Financial Plan.
However, the State has been able to demonstrate compliance with TANF work
requirements to date and does not now expect to be subject to associated federal
fiscal penalties.
The Division of the Budget believes that its projections of receipts and
disbursements relating to the current State Financial Plan, and the assumptions
on which they are based, are reasonable. Actual results, however, could differ
materially and adversely from these projections. In the past, the State has
taken management actions to address potential Financial Plan shortfalls, and DOB
believes it could take similar actions should adverse variances occur in its
projections for the current fiscal year.
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Despite recent budgetary surpluses recorded by the State, actions affecting the
level of receipts and disbursements, the relative strength of the State and
regional economy, and actions by the federal government could impact projected
budget gaps for the State. These gaps would result from a disparity between
recurring revenues and the costs of increasing the level of support for State
programs. For example, the fiscal effects of tax reductions adopted in the last
several fiscal years are projected to grow more substantially in the forecast
period, continuing to restrain receipts levels and placing pressure on future
spending levels. To address a potential imbalance in any given fiscal year, the
State would be required to take actions to increase receipts and/or reduce
disbursements as it enacts the budget for that year, and, under the State
Constitution, the Governor is required to propose a balanced budget each year.
There can be no assurance, however, that the Legislature will enact the
Governor's proposals or that the State's actions will be sufficient to preserve
budgetary balance in a given fiscal year or to align recurring receipts and
disbursements in future fiscal years.
The State has projected reserves of $2.4 billion in 1999-2000 to help guard
against these risks.
Year 2000 Compliance. New York State is currently addressing Year 2000 ("Y2K")
data processing compliance issues. Since its inception, the computer industry
has used a two-digit date convention to represent the year. In the year 2000,
the date field will contain "00" and, as a result, many computer systems and
equipment may not be able to process dates properly or may fail since they may
not be able to distinguish between the years 1900 aid 2000. The Year 2000 issue
not only affects computer programs, but also the hardware, software and networks
on which they operate. In addition, any system or equipment that is dependent on
an embedded chip, such as telecommunication equipment and security systems, may
also be adversely affected.
In April 1999 the State Comptroller released an audit on the State's Year 2000
compliance. The audit which reviewed the State's Y2K compliance activities
through October 1998, found that the State had made progress in achieving Y2K
compliance, but needed to improve its activities in several areas, including
data interchanges and contingency planning.
The Office for Technology (OFT) will continue to monitor compliance progress for
the States mission-critical and high-priority systems. OFT submitted a final
quarterly compliance progress report to the Governor's Office for the quarter
ending September 30, 1999. The 1999-2000 enacted budget allocates $19 million
for priority embedded systems and $20 million for unanticipated expenses related
to bringing technology into Y2K compliance. OFT reports that as of September
1999, the State's mission-critical systems are 100% compliant; 93% of the
overall compliance effort on the high-priority systems has been completed with
269 systems now Year 2000 compliant. The State has also procured independent
validation and verification services from a qualified vendor to perform an
automated review of code for all mission-critical system which was completed in
October 1999. Overall, the vendor noted that New York State agencies had
followed and implemented several best practices.
The State is also addressing a number of issues related to bringing its mission
critical systems into compliance, including: testing throughout 1999 of over 800
data exchange interfaces with federal, state, local and private data partners;
completion of an inventory of priority equipment and systems that may depend on
embedded chips and may therefore need remediation in 1999; and contacting
critical vendors and supply partners to obtain Year 2000 compliance status
information and assurances. Since problems could be identified during the
compliance testing phase that could produce compliance delays, the State
agencies were required to complete contingency plans for priority systems and
business processes by the first quarter of calendar year 1999. As of June 1999,
these plans have been completed and tested and are being integrated into the
State Emergency Response Plan under the direction of the State Emergency
Management Office. As of September 1999, 46 agencies have filed their
contingency plans with the State Emergency Management Office. In addition, State
agencies that regulate industries, such as the Public Service Commission, the
Banking Department and others are closely monitoring the few regulated companies
that are not yet compliant. The Public Service Commission reports that as of
September 1999, all State-regulated utilities, with the exception of a few small
water and cable companies, are ready for the Year 2000, including the existence
of comprehensive contingency plans.
The State has also been working with local governments since December 1996 to
raise awareness, promote action and provide assistance with Year 2000
compliance. This has included assisting local governments in addressing their
local Y2K issues, guiding local governments in holding Citizen Forums to inform
citizens of compliance and contingency activities in their community, and
guiding citizens in their individual preparations for the Year 2000.
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Presentations, teleconferences, written guidance materials, videotapes, a
comprehensive web site and brochures have been made available and widely
distributed.
While the State is taking what it believes to be appropriate action to address
Year 2000 compliance, there can be no guarantee that all of the State's systems
and equipment will be Year 2000 compliant and that there will not be an adverse
impact upon State operations or finances as a result. Since Year 2000 compliance
by outside parties is beyond the State's control to remediate, the failure of
outside parties to achieve Year 2000 compliance could have an adverse impact on
State operations and finances.
Tax Refund Reserve Account. Personal income tax net collections in recent years
have been affected by the pattern of refund payments made and reflect
transactions in the tax refund reserve account. The tax refund reserve account
is used to hold moneys available to pay tax refunds. The Comptroller deposits
into this account tax moneys in the amounts and at the times determined in the
discretion of the Commissioner of Taxation and Finance. The deposit of moneys in
the account during a fiscal year reduces receipts for such fiscal year, and the
withdrawal of moneys from the account increases receipts in the fiscal year of
withdrawal. The tax refund reserve account also includes amounts made available
as a result of the LGAC financing program that are required to be on deposit in
this account. Beginning in 1998-99, a portion of personal income tax collections
was deposited directly in the School Tax Reduction (STAR) Fund to be used to
make payments to reimburse local governments for their revenue decreases due to
the STAR program.
Cash-Basis Results for Prior Fiscal Years. The State reports its financial
results on two bases of accounting: the cash basis, showing receipts and
disbursements and the modified accrual basis, prescribed by Generally Accepted
Accounting Principles (GAAP), showing revenues and expenditures.
General Fund 1996-97 through 1998-99. The General Fund is the principal
operating fund of the State and is used to account for all financial
transactions, except those required to be accounted for in another fund. It is
the State's largest fund and receives most State taxes and other resources not
dedicated to particular purposes. General Fund moneys are also transferred to
other funds, primarily to support certain capital projects and debt service
payments in other fund types.
New York State's financial operations have improved during recent fiscal years.
During its last seven fiscal years, the State has recorded balanced budgets on a
cash basis, with positive year-end fund balances.
1998-99 Fiscal Year. The State ended its 1998-99 fiscal year on March 31, 1999
in balance on a cash basis, with a General Fund cash surplus as reported by the
DOB of $1.82 billion. The cash surplus was derived primarily from
higher-than-projected tax collections as a result of continued economic growth,
particularly in the financial markets and the securities industries.
The State reported a General Fund closing cash balance of $892 million, an
increase of $254 million from the prior fiscal year. The balance is held in
three accounts within the General Fund: the TSRF, the CRF and the CPF. The TSRF
closing balance was $473 million, following an additional deposit of $73 million
in 1998-99. The CRF closing balance was $107 million, following a deposit of $39
million in 1998-99. The CPF, which finance legislative initiatives, closed the
fiscal year with a balance of $312 million.
The closing fund balance excludes $2.31 billion that the State deposited into
the tax refund reserve account at the close of 1998-99 to pay for tax refunds in
1999-2000 of which $521 million was made available as a result of the Local
Government Assistance Corporation (LGAC) financing program and was required to
be on deposit as of March 31, 1999. The tax refund reserve account transaction
has the effect of decreasing reported personal income tax receipts in 1998-99,
while increasing reported receipts in 1999-2000
General Fund receipts and transfers from other funds (net of tax refund reserve
account activity) for the 1998-99 fiscal year totaled $36.74 billion, an
increase of 6.34% from 1997-98 levels. General Fund disbursements and transfers
to other funds totaled $36.49 billion for the 1998-99 fiscal year, an increase
of 6.23% from 1997-98 levels.
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1997-98 Fiscal Year. The State ended its 1997-98 fiscal year in balance on a
cash basis, with a General Fund cash surplus as reported by DOB of approximately
$2.04 billion. The cash surplus was derived primarily from
higher-than-anticipated receipts and lower spending on welfare, Medicaid, and
other entitlement programs.
The General Fund had a closing balance of $638 million, an increase of $205
million from the prior fiscal year. The TSRF closing balance was $400 million,
following a required deposit of $15 million (repaying a transfer made in
1991-92) and an additional deposit of $68 million made from the 1997-98 surplus.
The CRF closing balance was $68 million, following a $27 million deposit from
the surplus. The CPF closed the fiscal year with a balance of $170 million. The
General Fund closing balance did not include $2.39 billion in the tax refund
reserve account, of which $521 million was made available as a result of the
LGAC financing program and was required to be on deposit on March 31, 1998.
General Fund receipts and transfers from other funds (net of tax refund reserve
account activity) for the 1997-98 fiscal year totaled $34.55 billion, an annual
increase of 4.57% over 1996-97. General Fund disbursements and transfers to
other funds were $34.35 billion, an annual increase of 4.41%.
1996-97 Fiscal Year. The State ended its 1996-97 fiscal year on March 31, 1997
in balance on a cash basis, with a General Fund cash surplus as reported by DOB
of approximately $1.42 billion. The cash surplus was derived primarily from
higher-than-expected receipts and lower-than-expected spending for social
services programs.
The General Fund closing balance was $433 million, an increase of $146 million
from the 1995-96 fiscal year. The balance included $317 million in the TSRF,
after a required deposit of $15 million (repaying a transfer made in 1991-92)
and an additional deposit of $65 million in 1996-97. 1n addition, $41 million
remained on deposit in the CRF. The remaining $75 million reflected amounts then
on deposit in the CPF. The General Fund closing balance did not include $1.86
billion in the tax refund reserve account, of which $521 million was made
available as a result of the LGAC financing program and was required to be on
deposit as of March 31, 1997.
General Fund receipts and transfers from other funds (net of tax refund reserve
account activity) for the 1996-97 fiscal year totaled $33.04 billion, an
increase of 0.7% from the previous fiscal year. General Fund disbursements and
transfers to other funds totaled $32.90 billion for the 1996-97 fiscal year, an
increase of 0.7% from the 1995-96 fiscal year.
Other Governmental Funds (1996-97 through 1998-99). Activity in the three other
governmental funds has remained relatively stable over the last three fiscal
years, with federally-funded programs comprising approximately two-thirds of
these funds. The most significant change in the structure of these funds has
been the direction of a portion of transportation-related revenues from the
General Fund to two dedicated funds in the Special Revenue and Capital Projects
fund types. These revenues are used to support the capital programs of the
Department of Transportation, the Metropolitan Transportation Authority (MTA)
and other transit entities.
In the Special Revenue Funds, disbursements increased from $26.02 billion to
$29.65 billion over the last three years, primarily as a result of increased
costs for the federal share of Medicaid and the initial costs of the STAR
program. Other activity reflected dedication of taxes for mass transportation
purposes, new lottery games, and new fees for criminal justice programs.
Disbursements in the Capital Projects Funds increased over the three-year period
from $3.54 billion to $4.06 billion, primarily for education, environment,
public protection and transportation programs. The composition of this fund
type's receipts has also changed as dedicated taxes, federal grants and
reimbursements from public authority bonds increased, while general obligation
bond proceeds declined.
Activity in the Debt Service Funds reflected increased use of bonds during the
three-year period for improvements to the State's capital facilities and the
ongoing costs of the LGAC fiscal reform program. The increases were moderated by
the refunding savings achieved by the State over the last several years using
strict present value savings criteria. Disbursements in this fund type increased
from $2.53 billion to $3.27 billion over the three-year period.
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GAAP-Basis Results for Prior Fiscal Years. The Comptroller prepares a
comprehensive annual financial report on a GAAP basis for governments as
promulgated by the Governmental Accounting Standards Board. The report,
generally released in July each year, contains general purpose financial
statements with a Combined Balance Sheet and its Combined Statement of Revenues,
Expenditures and Changes in Fund Balances. These statements are audited by
independent certified public accountants
1998-99 Fiscal Year. The State completed its 1998-99 fiscal year with a combined
governmental funds operating surplus of $1.32 billion, which included operating
surpluses in the General Fund of $1.078 billion, in Debt Service Funds $209
million, and in Capital Projects Funds $154 million offset, in part, by an
operating deficit in Special Revenue Funds of $117 million.
General Fund. The State reported a General Fund operating surplus of $1.078
billion for the 1998-99 fiscal year, as compared to an operating surplus of
$1.562 billion for the 1997-98 fiscal year. As a result, the State reported an
accumulated fund balance of $1.645 billion in the General Fund. The 1998-99
fiscal year operating surplus resulted, in part, from an increase in taxes
receivable of $516 million, a decrease in payables to local government of $262
million, a decrease in accrued liabilities of $129 million and a decrease in
deferred revenues of $69 million. These gains were partially offset by a
decrease in other assets of $117 million and an increase in tax refunds payable
of $102 million.
Revenues increased $1.969 billion (5.7%) over the prior fiscal year with
increases in personal income, consumption and use and other taxes, and
miscellaneous revenues. Business tax revenues fell from the prior fiscal year.
Personal income taxes grew $1.733 billion, an increase of nearly 9.3%. The
increase in personal income taxes was caused by strong employment and wage
growth and the continued strong performance by the financial markets during
1998. Consumption and use taxes increased $269 million, or 3.8%, due to
increased consumer confidence. Other taxes increased $73 million, or 6.9%.
Miscellaneous revenues increased $145 million, a 5.6% increase, primarily
because of an increase in reimbursements from regulated industries (e.g.,
banking and insurance) to fund the State's administrative costs. Business taxes
decreased nearly $252 million, or 4.9%, because of prior year refunds and carry
forwards which were applied against the current year (1998) liabilities.
Expenditures increased $1.826 billion (5.5%) from the prior fiscal year, with
the largest increases occurring in State aid for education and general purpose
aid spending. Education expenditures grew $1.014 billion (9.1%) due mainly to an
increase in spending for support for public schools, handicapped pupil education
and municipal and community colleges. General purpose aid increased nearly $329
million (56.5%) due to statutory changes in the payment schedule. Personal
service and fringe benefit costs increased due to increases in wages and
continuing fringe benefits required by collective bargaining agreements.
Net other financing sources decreased $626 million (159.3%) primarily because
appropriated transfers from the Special Revenue Funds declined by over $230
million with increases of $265 million in appropriated transfers to Special
Revenue, Debt Service and College and University Funds. In addition, transfers
to public benefit corporations increased over $170 million primarily because of
a change in reporting for Roswell Park Cancer Institute.
Special Revenue, Debt Service and Capital Projects Fund Types. An operating
deficit of $117 million was reported for the Special Revenue Funds for the
1998-99 fiscal year which decreased the accumulated fund balance to $464
million. Revenues increased $1.108 billion over the prior fiscal year (4.0%) as
a result of increases in tax and federal grants revenues. Expenditures increased
$1.308 billion (5.3%) as a result of increased costs for local assistance
grants. Net other financing uses increased $34 million (1.0%).
Debt Service Funds ended the 1998-99 fiscal year with an operating surplus of
$209 million and, as a result, the accumulated fund balance increased to $2.07
billion. Revenues increased $160 million (6.3%) primarily because of increases
in dedicated taxes. Debt service expenditures increased $162 million (6.0%). Net
other financing sources increased $253 million (227.4%) due primarily to
increases in transfers from the General Fund, patient revenue transfers and the
establishment of the Debt Reduction Reserve Fund.
An operating surplus of $154 million was reported in the Capital Projects Funds
for the State's 1998-99 fiscal year and, as a result, the accumulated deficit
fund balance decreased to $228 million. Revenues increased $242 million
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(10.6%) primarily because tax revenues increased $101 million and federal grant
revenues increased $94 million for transportation projects. Expenditures
increased $355 million (10.5%) primarily because of increased capital
construction spending for transportation and correctional services projects. Net
other financing sources increased by $35 million.
1997-98 Fiscal Year. The State completed its 1997-98 fiscal year with a combined
Governmental Funds operating surplus of $1.80 billion, which included an
operating surplus in the General Fund of $1.56 billion, in Capital Projects
Funds of $232 million and in Special Revenue Funds of $49 million, offset in
part by an operating deficit of $43 million in Debt Service Funds.
General Fund. The State reported a General Fund operating surplus of $1.56
billion for the 1997-98 fiscal year as compared to an operating surplus of $1.93
billion for the 1996-97 fiscal year. As a result, the State reported an
accumulated surplus of $567 million in the General Fund for the first time since
it began reporting its operations on a GAAP-basis. The 1997-98 fiscal year
operating surplus reflects several major factors including the cash-basis
operating surplus resulting from the higher-than-anticipated personal income tax
receipts, an increase in taxes receivable of $681 million, an increase in other
assets of $195 million and a decrease in pension liabilities of $144 million.
This was partially offset by an increase in payables to local governments of
$270 million and tax refunds payable of $147 million.
Revenues increased $617 million (1.8%) over the prior fiscal year, with
increases in personal income, consumption and use, and business taxes, and
decreases reported for other taxes, federal grants and miscellaneous revenues.
Personal income taxes grew $746 million, an increase of nearly 4.2%. The
increase in personal income taxes resulted from strong employment and wage
growth and the strong performance by the financial markets during 1997.
Consumption and use taxes increased $334 million or 50% as a result of increased
consumer confidence. Business taxes grew $28 million, an increase of 0.5%. Other
taxes fell primarily because revenues for estate and gift taxes decreased.
Miscellaneous revenues decreased $380 million, or a 12.7% decrease, due to a
decline in receipts from the Medical Malpractice Insurance Association and
medical provider assessments.
Expenditures increased $137 million (0.4%) from the prior fiscal year, with the
largest increases occurring in State aid for education and social services
spending. Education expenditures grew $391 million (3.6%) due mainly to an
increase in spending for support for public schools. This growth was offset in
part, by a reduction in spending for municipal and community colleges. Social
services expenditures increased $233 million (2.6%) due mainly to program
growth. Increases in other State aid spending were offset by a decline in
general purpose aid of $235 million (27.8%) due to statutory changes in the
payment schedule. Increases in personal and non-personal service costs were
offset by a decrease in pension contributions of $660 million, a result of the
refinancing of the State's pension amortization that occurred in 1997.
Net other financing sources decreased $841 million (68.2%) due to the
non-recurring use of bond proceeds ($769 million) provided by the Dormitory
Authority of the State of New York (DASNY) to pay the outstanding pension
amortization liability incurred in 1997.
Special Revenue, Debt Service and Capital Projects Fund Types. An operating
surplus of $49 million was reported for the Special Revenue Funds for the
1997-98 fiscal year, which increased the accumulated fund balance to $581
million. Revenues rose by $884 million over the prior fiscal year (3.3%) as a
result of increases in tax and federal grant revenues. Expenditures increased
$795 million (3.3%) as a result of increased costs for local assistance grants.
Net other financing uses decreased $105 million (3.3%).
Debt Service Funds ended the 1997-98 fiscal year with an operating deficit of
$43 million and, as a result the accumulated fund balance declined to $1.86
billion. Revenues increased $246 million (10.6%) as a result of increases in
dedicated taxes. Debt service expenditures increased $341 million (14.4%). Net
other financing sources increased $89 million (401.3%) due primarily to savings
achieved through advance refundings of outstanding bonds.
An operating surplus of $232 million was reported in the Capital Projects Funds
for the State's 1997-98 fiscal year and, as a result, the accumulated deficit in
this fund type decreased to $381 million. Revenues increased $180 million (8.6%)
primarily as a result of a $54 million increase in dedicated tax revenues and an
increase of $101 million in federal grants for transportation and local waste
water treatment projects. Expenditures increased $146
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million (4.5%) primarily as a result of increased capital construction spending
for transportation and local waste water treatment projects. Net other financing
sources increased by $100 million primarily as a result of a decrease in
transfers to certain public benefit corporations engaged in housing programs.
1996-97 Fiscal Year. The State completed its 1996-97 fiscal year with a combined
Governmental Funds operating surplus of $2.1 billion, which included an
operating surplus in the General Fund of $1.9 billion, in the Capital Projects
Funds of $98 million and in the Special Revenue Funds of $65 million, offset in
part by an operating deficit of $37 million in the Debt Service Funds.
General Fund. The State reported a General Fund operating surplus of $1.93
billion for the 1996-97 fiscal year, as compared to an operating surplus of $380
million for the prior fiscal year. The 1996-97 fiscal year GAAP operating
surplus reflects several major factors, including the cash basis operating
surplus, the benefit of bond proceeds which reduced the State's pension
liability, an increase in taxes receivable of $493 million, and a reduction in
tax refund liabilities of $196 million. This was offset by an increased payable
to local government of $244 million.
Revenues increased S 1.91 billion (nearly 6.0%) over the prior fiscal year with
increases in all revenue categories. Personal income taxes grew $620 million, an
increase of nearly 3.6%, despite implementation of scheduled tax cuts. The
increase in personal income taxes was caused by moderate employment and wage
growth and the strong financial markets during 1996. Consumption and use taxes
increased $179 million or 2.7% as a result of increased consumer confidence.
Business taxes grew $268 million, an increase of 5.6%, primarily as a result of
the strong financial markets during 1996. Other taxes increased primarily
because revenues from estate and gift taxes increased. Miscellaneous revenues
increased $743 million, a 33.1% increase, because of legislated increases in
receipts from the Medical Malpractice Insurance Association and from medical
provider assessments.
Expenditures increased $830 million (2.6%) from the prior fiscal year, with the
largest increase occurring in pension contributions and State aid for education
spending. Pension contribution expenditures increased $514 million (198.2%)
primarily because the State paid off its 1984-85 and 1985-86 pension
amortization liability. Education expenditures grew $351 million (3.4%) due
mainly to an increase in spending for support for public schools and physically
handicapped children offset by a reduction in spending for municipal and
community colleges. Modest increases in other State aid spending was offset by a
decline in social services expenditures of $157 million (1.7%). Social services
spending continues to decline because of cost containment strategies and
declining caseloads.
Net other financing sources increased $475 million (62.6%) due mainly to bond
proceeds provided by DASNY to pay the outstanding pension amortization, offset
by elimination of prior year LGAC proceeds.
Special Revenue, Debt Service and Capital Projects Fund Types. An operating
surplus of $65 million was reported for the Special Revenue Funds for the
1996-97 fiscal year, increasing the accumulated fund balance to $532 million.
Revenues increased $583 million over the prior fiscal year (2.2%) as a result of
increases in tax and lottery revenues. Expenditures increased $384 million
(1.6%) as a result of increased costs for departmental operations. Net other
financing uses decreased $275 million (8.0%) primarily because of declines in
amounts transferred to other funds.
Debt Service Funds ended the 1996-97 fiscal year with an operating deficit of
$37 million and, as a result the accumulated fund balance declined to $1.90
billion. Revenues increased $102 million (4.6%) because of increases in both
dedicated taxes and mental hygiene patient fees. Debt service expenditures
increased $47 million (2.0%). Net other financing sources decreased $277 million
(92.6%) due primarily to an increase in payments on advance refundings.
An operating surplus of $98 million was reported in the Capital Projects Funds
for the State's 1996-97 fiscal year and, as a result, the accumulated fund
deficit decreased to $614 million. Revenues increased $100 million (5.0%)
primarily because a larger share of the real estate transfer tax was shifted to
the Environmental Protection Fund and federal grant revenues increased for
transportation and local waste water treatment projects. Expenditures decreased
$359 million (10.0%) because of declines in capital grant for education, housing
and regional development programs and capital construction spending. Net other
financing sources decreased by $637 million as a result of a decrease in
proceeds from financing arrangements.
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Economics and Demographics. This section presents economic information about the
State which may be relevant in evaluating the future prospects of the State.
However, the demographic information and statistical data, which have been
obtained from the sources indicated, do not present all factors which may have a
bearing on the State's fiscal and economic affairs. Further, such information
requires economic and demographic analysis in order to assess the import of the
data presented. The data and analysis may be interpreted differently, according
to the economist or other expert consulted.
Current Economic Outlook. Many uncertainties exist in any forecast of the
national and State economies, particularly in light of the recent volatility in
the international economy and domestic financial markets. The timing and impact
of changes in economic conditions are difficult to estimate with a high degree
of accuracy. Unforeseeable events occur. The actual rate of change in any, or
all, of the concepts that are forecasted may differ substantially and adversely
from the outlook described below.
U.S. Economy. Economic growth during both 1999 and 2000 is expected to be slower
than in 1998. Growth in domestic consumption, which as been a major driving
force behind the nation's strong economic performance in recent years, is
expected to slow in 2000 as consumer confidence retreats from historic highs and
the stock market ceases to provide large amounts of extra discretionary income.
The forecast projects real GDP growth of 3.8% in 1999, slightly below the 1998
growth rate. In 2000, the rate of growth in real GDP growth is expected to fall
further to 3.1%. The growth of nominal GDP is projected to increase from 4.9% in
1998 to 5.2% in 1999 and fall to 4.7% in 2000. The inflation rate as measured by
the Consumer Price Index is expected to increase to 2.3% in 1999 and rise to
2.8% in 2000. The annual rate of job growth is expected to be 2.2% in 1999,
lower than the strong growth rate experienced in 1998. In 2000, employment
growth is forecast to slow further, to 2.0%. Growth in personal income and wages
is expected to remain fairly strong in 1999 and 2000.
The New York Economy. New York is the third most populous state in the nation
and has a relatively high level of personal wealth The State's economy is
diverse, with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small share
of the nation's farming and mining activity. The State's location and its
excellent air transport facilities and natural harbors have made it an important
link in international commerce. Travel and tourism constitute an important part
of the economy. Like the rest of the nation, New York has a declining proportion
of its workforce engaged in manufacturing and an increasing proportion engaged
in service industries.
The growth of personal income is projected to decrease from 5.2% in 1998 to 4.8%
in 1999, and then grow 4.9% in 2000. The growth in average wages is expected to
outpace the inflation rate in both 1999 and 2000. Overall employment growth is
expected to be 2.0% in 1999, almost the same as in 1998, but is expected to drop
to 1.7% in 2000, reflecting the slowing growth of the national economy,
continued spending restraint in government, constraints in labor supply, and
continued restructuring in the manufacturing, health care, and banking sectors.
Services. The services sector, which includes entertainment, personal services,
such as health care and auto repairs, and business-related services, such as
information processing, law and accounting, is the State's leading economic
sector. The services sector accounts for more than three of every ten
nonagricultural jobs in New York and has a noticeably higher proportion of total
jobs than does the rest of the nation.
Manufacturing. Manufacturing employment continues to decline in importance in
New York, as in most other states, and New York's economy is less reliant on
this sector than is the nation. The principal manufacturing industries in recent
years produced printing and publishing materials, instruments and related
products, machinery, apparel and finished fabric products, electronic and other
electric equipment, food and related products, chemicals and allied products,
and fabricated metal products.
Trade. Wholesale and retail trade is the second largest sector in terms of
nonagricultural jobs in New York but is considerably smaller when measured by
income share. Trade consists of wholesale businesses and retail businesses, such
as department stores and eating and drinking establishments.
Finance, Insurance and Real Estate. New York City is the nation's leading center
of banking and finance and, as a result this is a far more important sector in
the State than in the nation as a whole. Although this sector accounts for
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under one-tenth of all non-agricultural jobs in the State, it contributes about
one-fifth of all non-farm labor and proprietors' income.
Agriculture. Farming is an important part of the economy of large regions of the
State, although it constitutes a very minor part of total State output.
Principal agricultural products of the State include milk and dairy products,
greenhouse and nursery products, apples and other fruits, and fresh vegetables.
New York ranks among the nation's leaders in the production of these
commodities.
Government. Federal, State and local government together are the third largest
sector in terms of nonagricultural jobs, with the bulk of the employment
accounted for by local governments. Public education is the source of nearly
one-half of total State and local government employment.
Relative to the nation, the State has a smaller share of manufacturing and
construction and a larger share of service-related industries. The State's
finance, insurance, and real estate share, as measured by income, is
particularly large relative to the nation. The State is likely to be less
affected than the nation as a whole during an economic recession that is
concentrated in manufacturing and construction, but likely to be more affected
during a recession that is concentrated in the service-producing sector.
Economic and Demographic Trends. In the calendar years 1987 through 1998, the
State's rate of economic growth was somewhat slower than that of the nation. In
particular, during the 1990-91 recession and post-recession period, the economy
of the State, and that of the rest of the Northeast, was more heavily damaged
than that of the nation as a whole and has been slower to recover. The total
employment growth rate in the State has been below the national average since
1987. The unemployment rate in the State dipped below the national rate in the
second half of 1981 and remained lower until 1991; since then, it has been
higher. According to data published by the US Bureau of Economic Analysis,
personal income in the State has risen more slowly since 1988 than personal
income for the nation as a whole, although preliminary data suggests that, in
1998, personal income in the State rose more rapidly.
Legal Categories of State Debt and Other Financings. State financing activities
include general obligation debt of the State and State-guaranteed debt, to which
the full faith and credit of the State has been pledged, as well as
lease-purchase and contractual-obligation financings, moral obligation
financings and other financings through public authorities and municipalities,
where the State's legal obligation to make payments to those public authorities
and municipalities for their debt service is subject to annual appropriation by
the Legislature.
General Obligation and State-Guaranteed Financing. There are a number of methods
by which the State itself may incur debt. The State may issue general obligation
bonds. Under the State Constitution, the State may not, with limited exceptions
for emergencies, undertake long-term general obligation borrowing (i.e.,
borrowing for more than one year) unless the borrowing is authorized in a
specific amount for a single work or purpose by the Legislature and approved by
the voters. There is no limitation on the amount of long-term general obligation
debt that may be so authorized and subsequently incurred by the State. With the
exception of general obligation housing bonds (which must be paid in equal
annual installments or installments that result in substantially level or
declining debt service payments, within 50 years after issuance, commencing no
more than three years after issuance), general obligation bonds must be paid in
equal annual installments or installments that result in substantially level or
declining debt service payments, within 40 years after issuance, beginning not
more than one year after issuance of such bonds.
The State may undertake short-term borrowings without voter approval (i) in
anticipation of the receipt of taxes and revenues, by issuing tax and revenue
anticipation notes (TRANs), and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued general obligation bonds, by
issuing bond anticipation notes (BANs). TRANs must mature within one year from
their dates of issuance and may not be refunded or refinanced beyond such
period. However, since 1990, the State's ability to issue TRANs has been limited
due to enactment of the fiscal reform program which created LGAC. BANs may only
be issued for the purposes and within the amounts for which bonds may be issued
pursuant to voter authorizations. Such BANs must be paid from the proceeds of
the sale of bonds in anticipation of which they were issued or from other
sources within two years of the date of issuance or, in the case of BANs for
housing purposes, within five years of the date of issuance. In order to provide
flexibility within these maximum term limits, the State utilizes the BANs
authorization to conduct a commercial paper program to fund disbursements
eligible for general obligation bond financing.
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Pursuant to specific constitutional authorization, the State may also directly
guarantee certain public authority obligations. The State Constitution provides
for the State guarantee of the repayment of certain borrowings for designated
projects of the New York State Thruway Authority, the Job Development Authority
(JDA) and the Port Authority of New York and New Jersey. The State has never
been called upon to make any direct payments pursuant to such guarantees. State
guaranteed bonds of the Thruway Authority and the Port Authority of New York and
New Jersey were fully retired on July 1, 1995 and December 31, 1996,
respectively.
In February 1997, the JDA issued approximately $85 million of State-guaranteed
bonds to refinance certain of its outstanding bonds and notes in order to
restructure and improve JDA's capital finances. Due to concerns regarding the
economic viability of its programs, JDA's loan and loan guarantee activities wee
suspended in 1995. JDA resumed its lending activities in 1997 under a revised
set of lending programs and underwriting guidelines. As a result of the
structural imbalances in JDA's capital structure, and defaults in its loan
portfolio and loan guarantee program incurred between 1991 and 1996, JDA would
have experienced a debt service cash flow shortfall had it not completed the
1997 refinancing. JDA anticipates that it will transact additional refinancings
in 2000 and 2003 to complete its long-term plan of finance and further alleviate
cash flow imbalances which are likely to occur in future years. The State does
not anticipate that it will be called upon to make any payments pursuant to the
State guarantee in the 1999-2000 fiscal year.
Payments of debt service on State general obligation and State-guaranteed bonds
and notes are legally enforceable obligations of the State.
Lease-Purchase and Contractual-Obligation Financing. The State employs
additional long-term financing mechanisms, lease-purchase and
contractual-obligation financings, which involve obligations of public
authorities or municipalities that are State-supported but not general
obligations of the State. Under these financing arrangements, certain public
authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a financing
arrangement with LGAC to restructure the way the State makes certain local aid
payments.
The State also participates in the issuance of certificates of participation
(COPs) in a pool of leases entered into by the State's Office of General
Services on behalf of several State departments and agencies interested in
acquiring operational equipment, or in certain cases, real property. Legislation
enacted in 1986 established restrictions upon and centralized State control,
through the Comptroller and the Director of the, Budget, over the issuance of
COPs representing the State's contractual obligation, subject to annual
appropriation by the Legislature and availability of money, to make installment
or lease-purchase payments for the State's acquisition of such equipment or real
property.
The State has never defaulted on any of its general obligation indebtedness or
its obligations under lease-purchase or contractual-obligation financing
arrangements and has never been called upon to make any direct payments pursuant
to its guarantees.
Moral Obligation and Other Financing. Moral obligation financing generally
involves the issuance of debt by a public authority to finance a
revenue-producing project or other activity. The debt is secured by project
revenues and includes statutory provisions requiring the State, subject to
appropriation by the Legislature, to make up any deficiencies which may occur in
the issuer's debt service reserve fund. There has never been a default on any
moral obligation debt of any public authority. The State does not intend to
increase statutory authorizations for moral obligation bond programs. From 1976
through 1987, the State was called upon to appropriate and make payments
totaling $162.8 million to make up deficiencies in the debt service reserve
funds of the Housing Finance Agency (HFA) pursuant to moral obligation
provisions. In the same period, the State also expended additional funds to
assist the Project Finance Agency, the Urban Development Corporation (UDC) and
other public authorities which had moral obligation debt outstanding. The State
has not been called upon to make any payments pursuant to any moral obligations
since the 1986-87 fiscal year and no such requirements are anticipated during
the 1999-2000 fiscal year.
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In addition to the moral obligation financing arrangements described above,
State law provides for the creation of State municipal assistance corporations,
which are public authorities established to aid financial troubled localities.
The Municipal Assistance Corporation for the City of New York (NYC MAC) was
created in 1975 to provide financing assistance to New York City. To enable NYC
MAC to pay debt service on its obligations, NYC MAC receives, subject to annual
appropriation by the Legislature, receipts from the four percent New York State
sales tax for the benefit of New York City, the State-imposed stock transfer tax
and, subject to certain prior liens, certain local assistance payments otherwise
payable to New York City. The legislation creating NYC MAC also includes a moral
obligation provision. Under its enabling legislation, NYC MAC's authority to
issue moral obligation bonds and notes (other than refunding bonds and notes)
expired on December 31, 1984 and no such bonds are outstanding. In 1995, the
State created the Municipal Assistance Corporation for the City of Troy (Troy
MAC). The bonds issued by Troy MAC do not include moral obligation provisions.
The State also provides for contingent contractual-obligation financing for the
Secured Hospital Program pursuant to legislation enacted in 1985. Under this
financing method, the State entered into service contracts which obligate the
State to pay debt service, subject to annual appropriations, on bonds either
formerly issued by the New York State Medical Care Facilities Finance Agency
(MCFFA) and now included as debt of the Dormitory Authority of the State of New
York (DASNY), or bonds issued directly by DASNY, in the event there are
shortfalls of revenues from other sources. The State has never been required to
make any payments pursuant to this financing arrangement, nor does it anticipate
being required to do so during the 1999-2000 fiscal year. The statutory
authorization to issue bonds under this program expired on March 1, 1998.
Local Government Assistance Corporation. In 1990, as part of a State fiscal
reform program, legislation was enacted creating LGAC, a public benefit
corporation empowered to issue long-term obligations to fund certain payments to
local governments that had been traditionally funded through the State's annual
seasonal borrowing. The legislation authorized LGAC to issue its bonds and notes
in an amount to yield net proceeds not in excess of $4.7 billion (exclusive of
certain refunding bonds). Over a period of years, the issuance of these
long-term obligations, which are to be amortized over no more than 30 years, was
expected to eliminate the need for continued short-term seasonal borrowing. The
legislation also dedicated revenues equal to one percent of the four percent
State sales and use tax to pay debt service on these bonds. The legislation also
imposed a cap on the annual seasonal borrowing of the State at $4.7 billion,
less net proceeds of bonds issued by LGAC and bonds issued to provide for
capitalized interest, except in cases where the Governor and the legislative
leaders have certified the need for additional borrowing and provided a schedule
for reducing it to the cap. If borrowing above the cap is permitted in any
fiscal year, it is required by law to be reduced to the cap by the fourth fiscal
year after the limit was first exceeded. This provision capping the seasonal
borrowing was included as a covenant with LGAC's bondholders in the resolution
authorizing such bonds.
As of June 1995, LGAC had issued bonds and notes to provide net proceeds of $4.7
billion, completing the program. The impact of LGAC's borrowing, as well as
other changes in revenue and spending patterns, is that the State has been able
to meet its cash flow needs throughout the fiscal year without relying on short
term seasonal borrowings.
1999-2000 Borrowing Plan. Section 22-c of the State Finance Law, as amended by
Chapter 389 of the Laws of 1997, requires the Governor to submit the five-year
Capital Program and Financing Plan (the "Plan") with the Executive Budget. The
proposed 1999-2000 through 2003-04 Capital Program and Financing Plan was
released with the Executive Budget on January 27, 1999 and updated to reflect
the 30-Day Amendments on February 12, 1999. The Plan is required to be updated
by the later of July 30 or 90 days after the enactment of the State Budget. The
DOB expects to issue the updated Plan to reflect actions taken in the 1999-2000
enacted budget by the end of November 1999. A copy of the updated Plan, when
available can be obtained by contacting the DOB, State Capitol, Albany, NY
12224, (518) 473-8705, or by visiting its website at www.state.ny.us/dob.
The State's 1999-2000 borrowing plan projects issuances of $235 million in
general obligation bonds (including $140 million for purposes of redeeming
outstanding BANs) and $113 million in general obligation BANs. The State expects
to issue up to $366 million in Certificates of Participation to finance
equipment purchases (including costs of issuance, reserve funds, and other
costs) during the 1999-2000 fiscal year. Of this amount, it is anticipated that
approximately $138 million will be used to finance agency equipment acquisitions
and to reimburse State special revenue funds for prior year disbursements for
Y2K compliance services. Approximately $228 million is expected
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to finance the purchase of new welfare computer systems designed to improve case
management, fraud detection and child support collection capabilities.
Borrowings by public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total approximately $2.93 billion, including costs of issuance,
reserve funds, and other costs, net of anticipated refundings and other
adjustments in 1999-2000. Included therein are borrowings by: (i) DASNY for the
State University of New York (SUNY); the City University of New York (CUNY);
other education purposes; and mental health facilities; (ii) the Thruway
Authority for the Dedicated Highway and Bridge Trust Fund and Consolidated
Highway Improvement Program; (iii) UDC (doing business as the Empire State
Development Corporation) for prisons, youth facilities and economic development
purposes; (iv) the Environmental Facilities Corporation (EFC) for environmental
projects; and (v) HFA for housing programs. These borrowings include the
Community Enhancement Facilities Assistance Program (CEFAP) for economic
development purposes. Four public authorities (Thruway Authority, DASNY, UDC and
HFA) are authorized to issue bonds under this program. The projections of State
borrowings for the 1999-2000 fiscal year are subject to change as market
conditions, interest rates and other facts vary throughout the fiscal year.
Outstanding Debt of the State and Certain Authorities. For purposes of analyzing
the financial condition of the State, debt of the State and of certain public
authorities may be classified as State-supported debt, which includes general
obligation debt of the State and lease-purchase and contractual obligations of
public authorities (and municipalities) where debt service is paid from State
appropriations (including dedicated tax sources, and other revenues such as
patient charges and dormitory facilities rentals). In addition, a broader
classification, referred to as State-related debt, includes State-supported
debt, as well as certain types of contingent obligations, including moral
obligation financings, certain contingent contractual-obligation financing
arrangements, and State-guaranteed debt, where debt service is expected to be
paid from other sources and State appropriations are contingent in that they may
be made and used only under certain circumstances.
State-Supported Debt Outstanding
General Obligation Bond Programs. The first type of State-supported debt,
general obligation debt, is currently authorized for three programmatic
categories: transportation, environmental and housing. The amount of general
obligation bonds and BANs issued in the 1996-97 through 1998-99 fiscal years
(excluding bonds issued to redeem BANs) were $439 million, $486 million, and
$249 million, respectively. Transportation-related bonds are issued for State
highway and bridge improvements, aviation, highway and mass transportation
projects and purposes, and rapid transit, rail, canal, port and waterway
programs and projects. Environmental bonds are issued to fund
environmentally-sensitive land acquisitions, air and water quality improvements,
municipal non-hazardous waste landfill closures and hazardous waste site cleanup
projects. As of March 31, 1999, the total amount of outstanding general
obligation debt was $4.8 billion, including $185 million in BANs.
Lease-Purchase and Contractual- Obligation Financing Programs. The second type
of State-supported debt, lease-purchase and contractual-obligation financing
arrangements with public authorities and municipalities, has been used primarily
by the State to finance the States' highway and bridge program, SUNY and CUNY
buildings, health and mental hygiene facilities, prison construction and
rehabilitation, and various other State capital projects.
The State has utilized and expects to continue to utilize lease-purchase and
contractual-obligation financing arrangements to finance its capital programs,
in addition to authorized general obligation bonds. Some of the major capital
programs financed by lease-purchase and contractual obligation agreements are
highlighted below.
Transportation. The State Department of Transportation is primarily responsible
for maintaining and rehabilitating the State's system of highways and bridges,
which includes 40,000 State highway lane miles and 7,500 State bridges. The
Department also oversees and funds programs for rail and aviation projects and
programs that help defray local capital expenses associated with road and bridge
projects.
Legislation enacted in 1991 established the Dedicated Highway and Bridge Trust
Fund to provide for the dedication of a portion of the petroleum business tax
and certain other transportation-related taxes and fees for transportation
improvements. Legislation enacted in 1996 authorized a five-year, $12.7 billion
plan for State and local highways and bridges through 1999-2000, to be financed
by a combination of federal grants, pay-as you-go capital and bond
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proceeds supported by the Dedicated Highway and Bridge Trust Fund, and a small
amount of general obligation bonds remaining under previous authorizations. The
1998-99 enacted budget increased this plan to $13 billion, which was maintained
with the 1999-2000 enacted budget.
The State has supported the capital plans of the MTA in part by entering into
service contracts relating to certain bonds issued by the MTA. Legislation
adopted in 1992 and 1993 also authorized payments, subject to appropriation, of
a portion of the petroleum business tax from the State's Dedicated Mass
Transportation Trust Fund to the MTA and authorized it to be used as a source of
payment for bonds to be sold by the MTA to support its capital program.
Education. The State finances the physical infrastructure of SUNY and CUNY and
their respective community colleges and the State Education Department through
direct State capital spending and through financing arrangements with DASNY,
paying all capital costs of the senior colleges and sharing equally with local
governments for the community colleges, except that SUNY dormitories are
financed through dormitory fees.
The 34 SUNY campuses include more than 2,300 buildings, including classrooms,
dormitories, libraries, athletic and student facilities and other buildings of
which 84% are over 20 years of age. Together with the 30 SUNY community
colleges, the SUNY system serves nearly 290,000 full-time students. The CUNY
system is comprised of 11 senior colleges and 6 community colleges that serve
approximately 150,000 full-time students.
Mental Hygiene/Health. The State provides care for its citizens with mental
illness, mental retardation and developmental disabilities, and for those with
chemical dependencies, through the Office of Mental Health (OMH), the Office of
Mental Retardation and Developmental Disabilities (OMRDD) and the Office of
Alcoholism and Substance Abuse Services (OASAS). Historically, this care has
been provided at large State institutions. Beginning in the 1980s, the State
adopted policies to provide institutional care to those most in need and to
expand care in community residences. OMRDD has closed 12 of its 20 developmental
centers. OMH has reduced its adult institutional population from 22,000 in 1982
to 5,101 at the end of 1998-99.
In 1997, OMH released a "Statewide Comprehensive Plan for Mental Health Services
1997-2001." The plan presents the programmatic and fiscal strategy of
implementing an integrated community-based system of care, de-emphasizing State
adult inpatient hospitalization. It estimates that the State-operated adult
inpatient census will decline to a range of 3,700 to 4,700 by the end of the
decade. As OMH approaches its long-term census targets and inpatient bed needs
diminish, plans are underway to develop alternative uses for surplus facilities.
Capital investments for these programs are primarily supported by patient
revenues through financing arrangements with DASNY.
Various capital programs for Department of Health facilities have also been
financed by DASNY using contractual-obligation financing arrangements.
Corrections. During the 10-year period 1983 through 1992, the State's prison
system more than doubled in size due to the unprecedented increase in demand for
prison space. Today, the system houses approximately 71,000 inmates in 71
facilities with 3,400 buildings. Although the Department of Correctional
Services (DOCS) capital program was focused primarily on rehabilitation of
existing facilities in the early 1990s, continued inmate population growth and
projected future growth indicate the need for both expansion of existing
facilities and new facilities. The 1997-98 and 1998-99 enacted budgets
authorized the addition of approximately 4,600 beds in response to this
population growth.
Other Programs. The State also uses lease-purchase and contractual-obligation
financing arrangements for the institutional facilities of the Office of
Children and Family Services (formerly known as the Division for Youth), and
Youth Opportunity Centers; the State's housing programs; and various
environmental, economic development, and State building programs. In addition,
DASNY has issued taxable pension bonds to refinance the balance of a
pre-existing State pension, liability, for the purpose of achieving present
value savings.
73
<PAGE>
State Government Employment. The State has approximately 191,000 full-time
equivalent employees funded from all funds, including part-time and temporary
employees but excluding seasonal, legislative and judicial employees.
The current size of the State workforce reflects continuing efforts to
streamline operations and improve efficiency. The workforce is now 17.2% smaller
than it was nine years ago, when it peaked at 230,600 positions and the State
began its workforce reduction efforts. Between 1994-95 and 1996-97, the State
implemented concerted workforce initiatives that resulted in a reduction of
about 20,000 positions (more than one half of the overall reduction since 1990),
with levels stabilized in the last two fiscal years.
Negotiating units for State employees are defined by the State Public Employment
Relations Board. Collective bargaining negotiations are conducted by the
Governor's Office of Employee Relations except for employees of the Judiciary,
public authorities and the Legislature. Such negotiations include terms and
conditions of employment, except grade classification policies and certain
pension benefits. Approximately 93% of the State workforce is unionized. The
remainder of the workforce (about 12,000) is designated as managerial or
confidential and is excluded from collective bargaining. In practice, however,
the results of collective bargaining negotiations are generally applied to all
State employees within the executive agencies. The State is currently
negotiating with various unions to establish new agreements as most of the
existing contracts expired on March 31, 1999.
Under the State's Taylor Law, the general statute governing public
employee-employer relations in the State, employees are prohibited from
striking. A strike against the State last occurred in 1979 by employees of the
Department of Correctional Services.
State Retirement Systems. The New York State and Local Retirement Systems (the
"Systems") provide coverage for public employees of the State and its localities
(except employees of New York City and teachers, who are covered by separate
plans). The Systems comprise the New York State and Local Employees Retirement
System and the New York State and Local Police and Fire Retirement System. The
Comptroller is the administrative head of the Systems. State employees made up
about 37% of the membership during the 1998-99 fiscal year. There were 2,842
other public employers participating in the Systems, including all cities
(except New York City), all counties, most towns, villages and school districts
(with respect to non-teaching employees) and a large number of local authorities
of the State.
As of March 31, 1999, 593,188 persons were in membership and 289,046 pensioners
and beneficiaries were receiving benefits. The State Constitution considers
membership in any State pension or retirement system to be a contractual
relationship, the benefits of which shall not be diminished or impaired. Members
cannot be required to begin making contributions or make increased contributions
beyond what was required when membership began.
Contributions. Funding is provided in large part by employer and employee
contributions. Employers contribute on the basis of the plan or plans they
provide for members. Members joining since mid-1976, other than police and fire
members, have been required to contribute 3% of their salaries.
By law, the State makes its annual payment to the Systems on or before March 1
for the then current fiscal year ending on March 31 based on an estimate of the
required contribution prepared by the Systems. The Director of the Budget is
authorized to revise and amend the estimate of the Systems' bill for purposes of
preparing the State's budget for a fiscal year. Legislation also provides that
any underpayments by the State (as finally determined by the Systems) must be
paid, with interest at the actuarially assumed interest earnings rate, in the
second fiscal year following the year of the underpayment. Similarly, any
overpayment for a fiscal year serves as a credit against the Systems' estimated
bill for the second fiscal year following the fiscal year in which the
overpayment is made.
During the 1998-99 fiscal year, the State paid the Systems' 1998-99 estimated
bill of $122.3 million. The difference between the amounts paid on the estimated
bill and the final bill with interest results in an underpayment of the final
bill in the amount of $2.0 million and will be billed on March 1, 2001 ($1.9
million if paid on September 1, 2000).
Assets and Liabilities. Assets are held exclusively for the benefit of members,
pensioners and beneficiaries. Investments for the Systems are made by the
Comptroller as trustee of the Common Retirement Fund,
74
<PAGE>
a pooled investment vehicle. The net assets available for benefits as of March
31, 1999 were $112.7 billion (including $2.2 billion in receivables). The
present value of anticipated benefits for current members, retirees, and
beneficiaries as of March 31, 1999 was $92.5 billion. For current retirees and
beneficiaries alone the amount was $29.4 billion. Under the funding method used
by the Systems, the net assets, plus future actuarially determined
contributions, are expected to be sufficient to pay for the anticipated benefits
of current members, retirees and beneficiaries.
Determining Net Asset Value for the Money Market Funds
The Money Market Funds use the amortized cost method to determine their NAV.
Use of the Amortized Cost Method. The Money Market Funds' use of the amortized
cost method of valuing their instruments depends on their compliance with
certain conditions contained in Rule 2a-7 of the 1940 Act. Under Rule 2a-7, the
Trustees must establish procedures reasonably designed to stabilize the NAV, as
computed for purposes of distribution and redemption, at $1.00 per share, taking
into account current market conditions and the Money Market Funds' investment
objectives.
The Money Market Funds have elected to use the amortized cost method of
valuation pursuant to Rule 2a-7. This involves valuing an instrument at its cost
initially and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. This method may result in periods during
which value, as determined by amortized cost, is higher or lower than the price
a Money Market Fund would receive if it sold the instrument. The value of
securities in a Money Market Fund can be expected to vary inversely with changes
in prevailing interest rates.
Pursuant to Rule 2a-7, the Money Market Funds will maintain a dollar-weighted
average portfolio maturity appropriate to its objective of maintaining a stable
NAV provided that a Money Market Fund will not purchase any security with a
remaining maturity of more than 397 days (securities subject to repurchase
agreements may bear longer maturities) nor maintain a dollar-weighted average
portfolio maturity which exceeds 90 days. Should the disposition of a Money
Market Fund's security result in a dollar weighted average portfolio maturity of
more than 90 days, the Money Market Fund will invest its available cash to
reduce the average maturity to 90 days or less as soon as possible.
The Trust's Trustees also have established procedures reasonably designed,
taking into account current market conditions and the Trust's investment
objectives, to stabilize the NAV of the Money Market Funds for purposes of sales
and redemptions at $1.00. These procedures include review by the Trustees, at
such intervals as they deem appropriate, to determine the extent, if any, to
which the NAV of the Money Market Funds calculated by using available market
quotations deviates from $1.00 per share. In the event such deviation exceeds
one-half of one percent, Rule 2a-7 requires that the Board promptly consider
what action, if any, should be initiated. If the Trustees believe that the
extent of any deviation from a Money Market Fund's $1.00 amortized cost price
per share may result in material dilution or other unfair results to new or
existing investors, they will take such steps as they consider appropriate to
eliminate or reduce to the extent reasonably practicable any such dilution or
unfair results. These steps may include selling portfolio instruments prior to
maturity, shortening the dollar-weighted average portfolio maturity, withholding
or reducing dividends, reducing the number of a Money Market Fund's outstanding
shares without monetary consideration, or using a NAV determined by using
available market quotations.
Monitoring Procedures
The Trustee's procedures include monitoring the relationship between the
amortized cost value per share and the NAV based upon available indications of
market value. The Trustees will decide what, if any, steps should be taken if
there is a difference of more than 0.5% between the two values. The Trustees
will take any steps they consider appropriate (such as redemption in kind or
shortening a Money Market Fund's average maturity) to minimize any material
dilution or other unfair results arising from differences between the two
methods of determining NAV.
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<PAGE>
Investment Restrictions
Rule 2a-7 requires that the Money Market Funds limit their investments to
instruments that, in the opinion of the Trustees, present minimal credit risks
and are "Eligible Securities" as defined in Rule 2a-7. See "Investments in Which
the Funds Can Invest." An Eligible Security generally must be rated by at least
one NRSRO. Such rating may be of the particular security or of a class of debt
obligations or a debt obligation in that class that is comparable in priority
and security issued by that issuer. If the instruments are not rated, the
Trustees or their delegate must determine that they are of comparable quality.
The Money Market Funds will limit the percentage allocation of their investments
so as to comply with Rule 2a-7, which generally (except in the case of the Ohio
Municipal Money Market Fund) limits to 5% of total assets the amount which may
be invested in the securities of any one issuer. Rule 2a-7 provides an exception
to this 5% limit: certain money market funds may invest up to 25% of their total
assets in the First-Tier Securities (as that term is defined by Rule 2a-7
(generally, a First-Tier Security is a security that has received a rating in
the highest short-term rating category)) of a single issuer for a period of up
to three days after the purchase of such a security. This exception is available
to all Money Market Funds other than the Ohio Municipal Money Market Fund.
Additionally, under Rule 2a-7 the Ohio Municipal Money Market Fund, as a single
state money market fund, must limit the amount which it invests in the
securities of any one issuer to 5% of its total assets only with respect to 75%
of its total assets; provided, however, that no more than 5% of its total assets
may be invested in the securities of any one issuer unless those securities are
First-Tier Securities.
The Money Market Funds will purchase only First-Tier Securities. However, a
Money Market Fund will not necessarily dispose of a security if it ceases to be
a First-Tier Security, although if a First-Tier Security is downgraded to a
Second-Tier Security (as that term is defined by Rule 2a-7) the Adviser will
reassess promptly whether such security continues to present minimal credit
risks and will cause the Money Market Fund to take such action as it determines
is in the best interests of the Money Market Fund and its shareholders.
Rule 2a-7 imposes special diversification requirements on puts. Generally, with
respect to 75% of its total assets, immediately after the acquisition of a put,
a money market fund may have no more than 10% of its total assets invested in
securities issued by, or subject to puts from, the same institution. With
respect to the remaining 75% of its total assets, a money market fund may invest
more than 10% of its assets in puts issued by a non-controlled person so long as
the puts are First-Tier Securities. Where a put is a Second-Tier Security, no
more than 5% of the money market fund's total assets may be invested in
securities issued by, or subject to puts from, the same institution.
The Money Market Funds may attempt to increase yield by trading portfolio
securities to take advantage of short-term market variations. This policy may,
from time to time, result in high portfolio turnover. Under the amortized cost
method of valuation, neither the amount of daily income nor the NAV is affected
by any unrealized appreciation or depreciation of the portfolio.
In periods of declining interest rates, the indicated daily yield on shares of
the Money Market Funds computed by dividing the annualized daily income on a
Money Market Fund's portfolio by the NAV computed as above may tend to be higher
than a similar computation made by using a method of valuation based upon market
prices and estimates.
In periods of rising interest rates, the indicated daily yield on shares of the
Money Market Funds computed the same way may tend to be lower than a similar
computation made by using a method of calculation based upon market prices and
estimates.
Valuation of Portfolio Securities
The NAV of each Fund is determined and the shares of each Fund are priced as of
the valuation time(s) indicated in the Prospectuses on each Business Day. A
"Business Day" is a day on which the New York Stock Exchange, Inc. (the "NYSE")
is open. With respect to the Money Market Funds, a "Business Day is a day on
which the NYSE and the Federal Reserve Bank of Cleveland are open. The NYSE will
not open in observance of the following holidays: New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving, and Christmas.
76
<PAGE>
Valuation of Portfolio Securities for the Taxable Bond Funds and the Tax-Free
Bond Funds.
Investment securities held by the Fund for Income, the Government Mortgage Fund,
the Intermediate Income Fund, the Investment Quality Bond Fund, and the Limited
Term Income Fund (the "Taxable Bond Funds") and the National Municipal Bond
Fund, the New York Tax-Free Fund, and the Ohio Municipal Bond Fund (the
"Tax-Free Bond Funds") are valued on the basis of security valuations provided
by an independent pricing service, approved by the Trustees, which determines
value by using information with respect to transactions of a security,
quotations from dealers, market transactions in comparable securities, and
various relationships between securities. Specific investment securities which
are not priced by the approved pricing service will be valued according to
quotations obtained from dealers who are market makers in those securities.
Investment securities with less than 60 days to maturity when purchased are
valued at amortized cost which approximates market value. Investment securities
not having readily available market quotations will be priced at fair value
using a methodology approved in good faith by the Trustees.
Valuation of Portfolio Securities for the Equity Funds.
Each equity security held by a Fund is valued at the last sales price on the
exchange where the security is principally traded or, lacking any sales on a
particular day, the security is valued at the last available bid quotation on
that day. Exchange listed convertible debt securities are valued at the bid
obtained from broker-dealers or a comparable alternative, such as Bloomberg or
Reuters, based upon pricing procedures approved by the Board of Trustees. Each
security traded in the over-the-counter market (but not including securities
reported on the Nasdaq National Market System) is valued at the bid based upon
quotes furnished by market makers for such securities. Each security reported on
the Nasdaq National Market System is valued at the sales price on the valuation
date or absent a last sales price, at the mean between the closing bid and asked
prices on that day. Non-convertible debt securities are valued on the basis of
prices provided by independent pricing services. Prices provided by the pricing
service may be determined without exclusive reliance on quoted prices, and may
reflect appropriate factors such as institution-sized trading in similar groups
of securities, developments related to special securities, yield, quality,
coupon rate, maturity, type of issue, individual trading characteristics and
other market data. Securities for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
supervision of The Victory Portfolios' officers in a manner specially authorized
by the Board of Trustees. Short-term obligations having 60 days or less to
maturity are valued on the basis of amortized cost. For purposes of determining
NAV, futures and options contracts generally will be valued 15 minutes after the
close of trading of the NYSE.
Generally, trading in foreign securities, corporate bonds, U.S. government
securities and money market instruments is substantially completed each day at
various times prior to the close of the NYSE. The values of such securities used
in computing the NAV of each Fund's shares are determined at such times. Foreign
currency exchange rates are also generally determined prior the close of the
NYSE. Occasionally, events affecting the values of such securities and such
exchange rates may occur between the times at which such values are determined
and the close of the NYSE which will not be reflected in the computation of a
Fund's NAV. If events materially affecting the value of such securities occur
during such period, then these securities will be valued at their fair value as
determined in good faith by or under the supervision of the Board of Trustees.
Performance
Performance of the Money Market Funds.
Performance for a class of shares of a Money Market Fund depends upon such
variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates on money market instruments;
o changes in Fund (class) expenses; and
o the relative amount of Fund (class) cash flow.
From time to time the Money Market Funds may advertise the performance of each
class compared to similar funds or portfolios using certain indices, reporting
services, and financial publications.
77
<PAGE>
Yield. The Money Market Funds calculate the yield for a class daily, based upon
the seven days ending on the day of the calculation, called the "base period."
This yield is computed by:
o determining the net change in the value of a hypothetical account
with a balance of one share at the beginning of the base period,
with the net change excluding capital changes but including the
value of any additional shares purchased with dividends earned from
the original one share and all dividends declared on the original
and any purchased shares;
o dividing the net change in the account's value by the value of the
account at the beginning of the base period to determine the base
period return; and
o multiplying the base period return by (365/7).
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with the Money Market Funds,
the yield for a class will be reduced for those shareholders paying those fees.
The seven-day yields of the Money Market Funds for the seven-day period ending
October 31, 1999 are listed in the following table.
- --------------------------------------------------------------------------------
Federal Money Market: 5.07% Ohio Municipal Money Market 2.69%
Investor
- --------------------------------------------------------------------------------
Federal Money Market: Select 4.81% Prime Obligations 4.81%
- --------------------------------------------------------------------------------
Financial Reserves 4.88% Tax-Free Money Market 2.76%
- --------------------------------------------------------------------------------
Gradison Government Reserves 4.66% U.S. Government Obligations: 4.71%
Investor
- --------------------------------------------------------------------------------
Institutional Money Market: 5.28% U.S. Government Obligations: 4.45%
Investor Select
- --------------------------------------------------------------------------------
Institutional Money Market: 4.95%
Select
- --------------------------------------------------------------------------------
Effective Yield. The Money Market Funds' effective yields are computed by
compounding the unannualized base period return by:
o adding 1 to the base period return;
o raising the sum to the 365/7th power; and
o subtracting 1 from the result.
The effective yields of Money Market Funds for the seven-day period ending
October 31, 1999 are listed below.
- --------------------------------------------------------------------------------
Federal Money Market: Investor 5.20% Ohio Municipal Money Market 2.73%
- --------------------------------------------------------------------------------
Federal Money Market: Select 4.93% Prime Obligations 4.92%
- --------------------------------------------------------------------------------
Financial Reserves 4.99% Tax-Free Money Market 2.80%
- --------------------------------------------------------------------------------
Gradison Government Reserves 4.77% U.S. Government Obligations: 4.82%
Investor
- --------------------------------------------------------------------------------
Institutional Money Market: 5.42% U.S. Government Obligations: 4.55%
Investor Select
- --------------------------------------------------------------------------------
Institutional Money Market: 5.08%
Select
- --------------------------------------------------------------------------------
Total Return Calculations. Total returns quoted in advertising reflect all
aspects of a Fund's return, including the effect of reinvesting dividends and
net capital gain distributions (if any), and any change in the NAV of a Fund
over the period. Average annual total returns are calculated by determining the
growth or decline in value of a hypothetical historical investment in a Fund
over a stated period, and then calculating the annually compounded percentage
rate that would have produced the same result if the rate of growth or decline
in value had been constant over the period. For example, a cumulative total
return of 100% over ten years would produce an average annual total return of
7.18%, which is the steady annual rate of return that would equal 100% growth on
an annually compounded basis in ten years. While average annual total returns
(or "annualized total return") are a convenient means of comparing investment
alternatives, investors should realize that performance for a Fund is not
constant over time, but changes from year to year, and that average annual total
returns represent averaged figures as opposed to the actual year-to-year
performance of a Fund. When using total return and yield to compare a Fund with
other mutual funds, investors should take into consideration permitted portfolio
composition methods used to value
78
<PAGE>
portfolio securities and computing offering price. The total returns of the
Money Market Funds for the one year, five year, and ten year periods ending
October 31, 1999 and the period since inception are as follows:
- --------------------------------------------------------------------------------
Inception Since
Date One-Year Five-Year Ten-Year Inception
- --------------------------------------------------------------------------------
Federal Money Market Fund: 3/23/88 4.82% 4.99% 4.85% 5.30%
Investor
- --------------------------------------------------------------------------------
Federal Money Market Fund: 3/23/98 4.56% N/A N/A 4.81%
Select
- --------------------------------------------------------------------------------
Financial Reserves Fund 4/4/83 4.62% 5.06% 4.92% 6.03%
- --------------------------------------------------------------------------------
Gradison Government Reserves 4/26/76 4.44% 4.85% 4.71% 7.13%
Fund
- --------------------------------------------------------------------------------
Institutional Money Market 1/10/83 5.03% 5.44% 5.22% 6.42%
Fund: Investor
- --------------------------------------------------------------------------------
Institutional Money Market 6/5/95 4.72% N/A N/A 4.88%
Fund: Select
- --------------------------------------------------------------------------------
Ohio Municipal Money Market 7/3/85 2.49% 2.99% 3.17% 3.60%
- --------------------------------------------------------------------------------
Prime Obligations Fund 11/18/86 4.52% 4.89% 4.91% 5.48%
- --------------------------------------------------------------------------------
Tax-Free Money Market 8/24/88 2.55% 3.00% 3.19% 3.48%
- --------------------------------------------------------------------------------
U.S. Government Obligations: 1/8/97 4.27% 4.85% 4.77% 5.26%
Investor
- --------------------------------------------------------------------------------
U.S. Government Obligations: 11/18/86 4.54% N/A N/A 4.94%
Select
- --------------------------------------------------------------------------------
In addition to average annual total returns, the Money Market Funds, on behalf
of a class, may quote unaveraged or cumulative total returns reflecting the
total income over a stated period. Average annual and cumulative total returns
may be quoted as a percentage or as a dollar amount, and may be calculated for a
single investment, a series of investments, or a series of redemptions, over any
time period. Total returns may be broken down into their components of income
and capital (including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions to total
return. Total returns, yields, and other performance information may be quoted
numerically or in a table, graph, or similar illustration. The cumulative total
returns of the Money Market Funds for the five year and ten year periods ending
October 31, 1999 and the period since inception are as follows:
- --------------------------------------------------------------------------------
Inception Since
Date Five-Year Ten-Year Inception
- --------------------------------------------------------------------------------
Federal Money Market Fund: 3/23/88 27.58% 60.65% 82.12%
Investor
- --------------------------------------------------------------------------------
Federal Money Market Fund: 3/23/98 N/A N/A 7.84%
Select
- --------------------------------------------------------------------------------
Financial Reserves Fund 4/4/83 27.98% 61.60% 164.01%
- --------------------------------------------------------------------------------
Gradison Government Reserves Fund 4/26/76 26.72% 58.42% 404.70%
- --------------------------------------------------------------------------------
Institutional Money Market Fund: 1/10/83 30.34% 66.29% 184.64%
Investor
- --------------------------------------------------------------------------------
Institutional Money Market Fund: 6/5/95 N/A N/A 23.36%
Select
- --------------------------------------------------------------------------------
Ohio Municipal Money Market Fund 7/3/85 15.90% 36.66% 66.03%
- --------------------------------------------------------------------------------
Prime Obligations Fund 11/18/86 26.95% 61.55% 99.59%
- --------------------------------------------------------------------------------
Tax-Free Money Market Fund 8/24/88 15.93% 36.85% 46.58%
- --------------------------------------------------------------------------------
U.S. Government Obligations 1/8/97 26.72% 59.39% 94.21%
Fund: Investor
- --------------------------------------------------------------------------------
U.S. Government Obligations 11/18/86 N/A N/A 14.52%
Fund: Select
- --------------------------------------------------------------------------------
Performance of the Non-Money Market Funds.
From time to time, the "standardized yield," "distribution return," "dividend
yield," "average annual total return," "total return," and "total return at NAV"
of an investment in each class of Non-Money Market Fund shares may be
advertised. An explanation of how yields and total returns are calculated for
each class and the components of those calculations are set forth below.
Yield and total return information may be useful to investors in reviewing the
Non-Money Market Fund's performance. A Non-Money Market Fund's advertisement of
its performance must, under applicable SEC rules, include the average annual
total returns for each class of shares of a Non-Money Market Fund for the 1, 5,
and 10-year period (or the life of the class, if less) as of the most recently
ended calendar quarter. This enables an investor to compare the Non-Money Market
Fund's performance to the performance of other funds for the same periods.
79
<PAGE>
However, a number of factors should be considered before using such information
as a basis for comparison with other investments. Investments in a Non-Money
Market Fund are not insured; their yield and total return are not guaranteed and
normally will fluctuate on a daily basis. When redeemed, an investor's shares
may be worth more or less than their original cost. Yield and total return for
any given past period are not a prediction or representation by the Trust of
future yields or rates of return on its shares. The yield and total returns of
the Class A shares of the Non-Money Market Funds are affected by portfolio
quality, portfolio maturity, the type of investments the Non-Money Market Fund
holds, and operating expenses.
Performance -- Class G Shares. The Diversified Stock Fund, Established Value
Fund, Fund for Income, Gradison Government Reserves Fund, International Growth
Fund, Ohio Municipal Bond Fund, and Small Company Opportunity Fund offer Class G
shares. This class was established to facilitate the reorganization of the
Gradison Funds, a family of mutual funds advised by the Gradison Division of
McDonald & Company Securities, Inc. See "Purchasing Shares -- Class G Shares" in
this SAI. The following table lists each Gradison Fund and its corresponding
Victory Fund.
Gradison Fund: Victory Fund (Class G):
U.S. Government Reserves -> Gradison Government Reserves Fund
Government Income Fund -> Fund for Income
Ohio Tax-Free Income Fund -> Ohio Municipal Bond Fund
Established Value Fund -> Established Value Fund
Growth & Income Fund -> Diversified Stock Fund
Opportunity Value Fund -> Small Company Opportunity Fund
International Fund -> International Growth Fund
In addition, the Stock Index Fund began offering Class G Shares on June 30, 1999
and the Intermediate Income Fund, Investment Quality Bond Fund, National
Municipal Bond Fund, New York Tax-Free Fund, Value Fund, Growth Fund, Special
Value Fund, Balanced Fund, Convertible Securities Fund and Real Estate
Investment Fund began offering Class G Shares on December 15, 1999.
Standardized Yield. The "yield" (referred to as "standardized yield") of the
Non-Money Market Funds for a given 30-day period for a class of shares is
calculated using the following formula set forth in rules adopted by the SEC
that apply to all funds that quote yields:
Standardized Yield = 2 [(a-b + 1)6 - 1]
----
cd
The symbols above represent the following factors:
a = dividends and interest earned during the 30-day period.
b = expenses accrued for the period (net of any expense
reimbursements).
c = the average daily number of shares of that class outstanding
during the 30-day period that were entitled to receive dividends.
d = the maximum offering price per share of the class on the last day
of the period, adjusted for undistributed net investment income.
The standardized yield of a class of shares for a 30-day period may differ from
its yield for any other period. The SEC formula assumes that the standardized
yield for a 30-day period occurs at a constant rate for a six-month period and
is annualized at the end of the six-month period. This standardized yield is not
based on actual distributions paid by a Fund to shareholders in the 30-day
period, but is a hypothetical yield based upon the net investment income from a
Fund's portfolio investments calculated for that period. The standardized yield
may differ from the "dividend yield" of that class, described below.
Additionally, because each class of shares of a Fund is subject to different
expenses, it is likely that the standardized yields of the share classes of the
Funds will differ. The yields on the Funds for the 30-day period ended October
31, 1999 were as follows:
- ---------------------------------------------------------------------------
Balanced Fund: A 2.29% LifeChoice Growth 1.45%
- ---------------------------------------------------------------------------
Convertible Securities 4.50% LifeChoice Moderate 2.48%
Fund
- ---------------------------------------------------------------------------
80
<PAGE>
- ---------------------------------------------------------------------------
Diversified Stock Fund: A 0.26% Limited Term Income Fund 5.31%
- ---------------------------------------------------------------------------
Diversified Stock Fund: G 0.05% National Muni Bond Fund: A 3.55%
- ---------------------------------------------------------------------------
Established Value Fund: G 0.17% New York Tax-Free Fund: A 3.84%
- ---------------------------------------------------------------------------
Fund for Income: A 5.77% Ohio Municipal Bond Fund: A 4.15%
- ---------------------------------------------------------------------------
Fund for Income: G 6.00% Ohio Municipal Bond Fund: G 4.45%
- ---------------------------------------------------------------------------
Government Mortgage Fund 5.44% Ohio Regional Stock Fund: A 1.06%
- ---------------------------------------------------------------------------
Growth Fund (0.19)% Real Estate Investment Fund 4.88%
- ---------------------------------------------------------------------------
Intermediate Income Fund 5.57% Small Co. Opp'ty Fund: A (0.09)%
- ---------------------------------------------------------------------------
International Growth Fund: A N/A Small Co. Opp'ty Fund: G (0.33)%
- ---------------------------------------------------------------------------
International Growth Fund: G N/A Special Value Fund: A 0.58%
- ---------------------------------------------------------------------------
Investment Quality Bond 5.66% Stock Index Fund: A 1.08%
Fund
- ---------------------------------------------------------------------------
Lakefront Fund 0.14% Stock Index Fund: G 0.90%
- ---------------------------------------------------------------------------
LifeChoice Conservative 3.56% Value Fund 0.35%
- ---------------------------------------------------------------------------
Dividend Yield and Distribution Returns. From time to time a Non-Money Market
Fund may quote a "dividend yield" or a "distribution return" for each class.
Dividend yield is based on the dividends of a class of shares derived from net
investment income during a one-year period. Distribution return includes
dividends derived from net investment income and from net realized capital gains
declared during a one-year period. The distribution return for a period is not
necessarily indicative of the return of an investment since it may include
capital gain distributions representing gains not earned during the period.
Distributions, since they result in the reduction in the price of fund shares,
do not, by themselves, result in gain to shareholders. The "dividend yield" is
calculated as follows:
Dividend Yield of the Class = Dividends of the Class for a Period of One-Year
-----------------------------------------------
Max. Offering Price of the Class (last day of
period
For Class A shares, the maximum offering price includes the maximum front-end
sales charge.
From time to time similar yield or distribution return calculations may also be
made using the Class A NAV (instead of its respective maximum offering price) at
the end of the period. The dividend yields on Class A shares at maximum offering
price and NAV, and distribution returns on Class A shares at maximum offering
price and NAV for the one year period ended October 31, 1999 were as follows:
- -------------------------------------------------------------------------------
Dividend Distribution
Yield at Dividend Return at Distribution
Maximum Yield at Maximum Return at
Offering Net Asset Offering Net Asset
Price Value Price Value
- -------------------------------------------------------------------------------
Balanced Fund 1.96% 2.08% 7.69% 8.16%
- -------------------------------------------------------------------------------
Convertible Securities Fund 5.09% 5.40% 5.27% 5.59%
- -------------------------------------------------------------------------------
Diversified Stock Fund 0.30% 0.32% 20.32% 21.56%
- -------------------------------------------------------------------------------
Fund for Income 5.97% 6.09% 5.97% 6.09%
- -------------------------------------------------------------------------------
Government Mortgage Fund 5.41% 5.74% 5.41% 5.74%
- -------------------------------------------------------------------------------
Growth Fund 0.00% 6.75% 0.00% 7.16%
- -------------------------------------------------------------------------------
Intermediate Income Fund 5.06% 5.37% 5.18% 5.49%
- -------------------------------------------------------------------------------
International Growth Fund 0.00% 0.00% 2.72% 2.89%
- -------------------------------------------------------------------------------
Investment Quality Bond Fund 5.29% 5.61% 5.29% 5.61%
- -------------------------------------------------------------------------------
Lakefront Fund 0.59% 0.63% 11.39% 12.08%
- -------------------------------------------------------------------------------
LifeChoice Conservative N/A 5.37% N/A 7.43%
Investor Fund
- -------------------------------------------------------------------------------
LifeChoice Growth Investor N/A 2.03% N/A 4.55%
Fund
- -------------------------------------------------------------------------------
LifeChoice Moderate Investor N/A 3.07% N/A 5.25%
Fund
- -------------------------------------------------------------------------------
Limited Term Income Fund 5.00% 5.10% 5.00% 5.10%
- -------------------------------------------------------------------------------
National Municipal Bond Fund 3.77% 4.00% 6.01% 6.38%
- -------------------------------------------------------------------------------
New York Tax-Free Fund 4.79% 5.09% 4.79% 5.09%
- -------------------------------------------------------------------------------
81
<PAGE>
- -------------------------------------------------------------------------------
Dividend Distribution
Yield at Dividend Return at Distribution
Maximum Yield at Maximum Return at
Offering Net Asset Offering Net Asset
Price Value Price Value
- -------------------------------------------------------------------------------
Ohio Municipal Bond Fund 4.13% 4.38% 5.68% 6.03%
- -------------------------------------------------------------------------------
Ohio Regional Stock Fund 0.92% 0.98% 14.32% 15.20%
- -------------------------------------------------------------------------------
Real Estate Investment Fund 4.98% 5.29% 4.98% 5.29%
- -------------------------------------------------------------------------------
Small Company Opportunity Fund 0.22% 0.24% 0.45% 0.47%
- -------------------------------------------------------------------------------
Special Value Fund 0.58% 0.62% 4.79% 5.09%
- -------------------------------------------------------------------------------
Stock Index Fund 1.18% 1.25% 9.34% 9.91%
- -------------------------------------------------------------------------------
Value Fund 0.20% 0.22% 15.87% 16.83%
- -------------------------------------------------------------------------------
The dividend yield and distribution returns on Class G shares for the period
from commencement of operations to October 31, 1999 were as follows.
- -------------------------------------------------------------------------------
Commencement Date Dividend Yield Distribution
Returns
- -------------------------------------------------------------------------------
Diversified Stock Fund March 29, 1999 0.23% 21.47%
- -------------------------------------------------------------------------------
Established Value April 5, 1999 0.33% 2.96%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Fund for Income March 29, 1999 6.16% 6.16%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
International Growth Fund March 29, 1999 0.00% 2.90%
- -------------------------------------------------------------------------------
Ohio Municipal Bond Fund March 29, 1999 4.40% 6.06%
- -------------------------------------------------------------------------------
Small Company Opportunity March 29, 1999 0.24% 0.48%
Fund
- -------------------------------------------------------------------------------
Stock Index Fund June 30, 1999 1.21% 9.87%
- -------------------------------------------------------------------------------
Total Returns. The "average annual total return" of a Fund, or of each class of
a Fund, is an average annual compounded rate of return for each year in a
specified number of years. It is the rate of return based on the change in value
of a hypothetical initial investment of $1,000 ("P" in the formula below) held
for a number of years ("n") to achieve an Ending Redeemable Value ("ERV"),
according to the following formula:
(ERV/P)1/n-1 = Average Annual Total Return
The cumulative "total return" calculation measures the change in value of a
hypothetical investment of $1,000 over an entire period greater than one year.
Its calculation uses some of the same factors as average annual total return,
but it does not average the rate of return on an annual basis. Total return is
determined as follows:
ERV - P = Total Return
-------
P
In calculating total returns for Class A shares of the Funds, the current
maximum sales charge (as a percentage of the offering price) is deducted from
the initial investment ("P") (unless the return is shown at NAV, as discussed
below). Total returns also assume that all dividends and net capital gains
distributions during the period are reinvested to buy additional shares at NAV,
and that the investment is redeemed at the end of the period.
The average annual total return and cumulative total return on Class A and G
shares, for the period from the commencement of operations to October 31, 1999
(life of fund) at maximum offering price is shown on the table that follows. The
average annual total return for the one and five year periods (when applicable)
ended October 31, 1999 also are shown on this table.
82
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Average
Annual Cumulative
Total Total One-Year Five-Year Ten-Year
Return for Return for Average Average Average
the Life the Life Annual Annual Annual
of the of the Total Total Total
Fund at Fund at Return at Return at Return at
Maximum Maximum Maximum Maximum Maximum Maximum
Inception Sales Offering Offering Offering Offering Offering
Fund -- Class Date Charge Price Price Price Price Price
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balanced -- A 12/10/93 5.75% 12.29% 97.89% 5.34% 14.75% N/A
- -----------------------------------------------------------------------------------------------------
Convertible 4/14/88 5.75% 10.59% 219.61% 5.96% 10.59% 10.27%
Sec's -- A
- -----------------------------------------------------------------------------------------------------
Diversified 10/20/89 5.75% 16.08% 346.14% 12.52% 22.03% 16.25%
Stock -- A
- -----------------------------------------------------------------------------------------------------
Diversified 3/26/99 None N/A 4.73% N/A N/A N/A
Stock - G
- -----------------------------------------------------------------------------------------------------
Established 8/16/83 None 14.26% 767.19% 17.63% 16.54% 12.80%
Value -- G
- -----------------------------------------------------------------------------------------------------
Fund for Income 9/16/87 2.00% 7.57% 142.13% (0.25)% 6.99% 6.83%
- -- A
- -----------------------------------------------------------------------------------------------------
Fund for Income 3/26/99 None N/A 0.72% N/A N/A N/A
- -- G
- -----------------------------------------------------------------------------------------------------
Government 5/18/90 5.75% 6.78% 85.87% (4.49)% 5.85% N/A
Mortgage
- -----------------------------------------------------------------------------------------------------
Growth -- A 12/3/93 5.75% 20.70% 203.93% 17.10% 24.12% N/A
- -----------------------------------------------------------------------------------------------------
Intermediate 12/10/93 5.75% 3.67% 23.65% (5.91)% 4.87% N/A
Inc. -- A
- -----------------------------------------------------------------------------------------------------
Int'l Growth -- A 5/18/90 5.75% 7.73% 102.24% 22.03% 7.11% N/A
- -----------------------------------------------------------------------------------------------------
Int'l Growth -- G 3/26/99 None N/A 20.03% N/A N/A N/A
- -----------------------------------------------------------------------------------------------------
Inv. Quality 12/10/93 5.75% 3.84% 24.87% (6.86)% 5.37% N/A
Bond
- -----------------------------------------------------------------------------------------------------
Lakefront 3/3/97 5.75% 13.76% 40.96% 17.85% N/A N/A
- -----------------------------------------------------------------------------------------------------
LifeChoice Cons. 12/31/96 None 7.76% 23.59% 8.24% N/A N/A
- -----------------------------------------------------------------------------------------------------
LifeChoice 12/31/96 None 10.84% 33.87% 15.33% N/A N/A
Growth
- -----------------------------------------------------------------------------------------------------
LifeChoice 12/31/96 None 9.36% 28.85% 12.42% N/A N/A
Moderate
- -----------------------------------------------------------------------------------------------------
Limited Term 10/20/89 2.00% 5.76% 75.32% (0.36)% 5.12% 5.73%
Income
- -----------------------------------------------------------------------------------------------------
Nat'l Muni Bond 2/3/94 5.75% 4.04% 25.55% (6.72)% 5.64% N/A
- -- A
- -----------------------------------------------------------------------------------------------------
NY Tax-Free -- A 2/11/91 5.75% 5.07% 53.90% (7.38)% 3.78% N/A
- -----------------------------------------------------------------------------------------------------
Ohio Muni Bond 5/18/90 5.75% 6.07% 74.53% (7.88)% 5.42% N/A
- -- A
- -----------------------------------------------------------------------------------------------------
Ohio Muni Bond 3/26/99 None N/A (3.59)% N/A N/A N/A
- -- G
- -----------------------------------------------------------------------------------------------------
Ohio Reg. Stock 10/20/89 5.75% 10.20% 164.94% (11.69)% 9.67% 10.55%
- -- A
- -----------------------------------------------------------------------------------------------------
Real Estate Inv. 4/30/97 5.75% 0.66% 1.67% (5.70)% N/A N/A
- --A
- -----------------------------------------------------------------------------------------------------
Small Co. Opp'ty 3/26/99 5.75% N/A 4.20% N/A N/A N/A
- -- A
- -----------------------------------------------------------------------------------------------------
Small Co. Opp'ty 8/16/83 None 9.62% 342.84% (3.14)% 10.37% 9.73%
- -- G
- -----------------------------------------------------------------------------------------------------
Special Value -- 12/3/93 5.75% 8.46% 61.59% (4.98)% 8.81% N/A
A
- -----------------------------------------------------------------------------------------------------
Stock Index -- A 12/3/93 5.75% 20.46% 200.43% 17.74% 23.72% N/A
- -----------------------------------------------------------------------------------------------------
Stock Index -- G 6/30/99 None N/A (0.46)% N/A N/A N/A
- -----------------------------------------------------------------------------------------------------
Value -- A 12/3/93 5.75% 18.52% 172.90% 13.10% 21.45% N/A
- -----------------------------------------------------------------------------------------------------
</TABLE>
From time to time the Non-Money Market Funds also may quote an "average annual
total return at NAV" or a cumulative "total return at NAV." It is based on the
difference in NAV at the beginning and the end of the period for a hypothetical
investment in that class of shares (without considering front-end or contingent
deferred sales charges) and takes into consideration the reinvestment of
dividends and capital gains distributions. The average annual total return and
cumulative total return on Class A shares of the Funds, at NAV for the period
from the commencement of operations to October 31, 1999 (life of fund) are shown
in the table that follows.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Average Cumulative Average Cumulative
Annual Total Annual Total
Total Return at Total Return at
Return at Net Asset Return at Net Asset
Net Asset Value Net Asset Value
Value Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balanced 13.42% 109.96% LifeChoice 9.36% 28.85%
Moderate
- -------------------------------------------------------------------------------------
Convertible Sec's 11.15% 239.10% Limited Term 5.97% 78.83%
Income
- -------------------------------------------------------------------------------------
Diversified Stock 16.77% 373.36% Nat'l Muni Bond 5.12% 33.21%
- -------------------------------------------------------------------------------------
Fund for Income 7.75% 147.17% NY Tax-Free 5.78% 63.26%
- -------------------------------------------------------------------------------------
Government 7.45% 97.21% Ohio Muni Bond 6.73% 85.18%
Mortgage
- -------------------------------------------------------------------------------------
Growth 21.91% 222.47% Ohio Reg. Stock 10.85% 181.10%
- -------------------------------------------------------------------------------------
Intermediate 4.72% 31.19% Real Estate Inv. 3.07% 7.87%
Income
- -------------------------------------------------------------------------------------
Int'l Growth 8.41% 114.58% Small Co. Opp'ty 9.63% 343.68%
- -------------------------------------------------------------------------------------
Inv. Quality Bond 4.89% 32.49% Special Value 9.55% 71.44%
- -------------------------------------------------------------------------------------
Lakefront 16.32% 49.55% Stock Index 21.67% 218.75%
- -------------------------------------------------------------------------------------
LifeChoice Cons. 7.76% 23.59% Value 19.71% 189.55%
- -------------------------------------------------------------------------------------
LifeChoice Growth 10.84% 33.84%
- -------------------------------------------------------------------------------------
</TABLE>
83
<PAGE>
Other Performance Comparisons.
From time to time a Fund may publish the ranking of its performance or the
performance of a particular class of Fund shares by Lipper, Inc. ("Lipper"), a
widely-recognized independent mutual fund monitoring service. Lipper monitors
the performance of regulated investment companies, including the Non-Money
Market Funds, and ranks the performance of the Funds and their classes against
all other funds in similar categories, for both equity and fixed income funds.
The Lipper performance rankings are based on total return that includes the
reinvestment of capital gains distributions and income dividends but does not
take sales charges or taxes into consideration.
From time to time a Fund may publish the ranking of its performance or that of a
particular class of Fund shares by Morningstar, Inc., an independent mutual fund
monitoring service that ranks mutual funds, including the Non-Money Market
Funds, in broad investment categories (domestic equity, international equity
taxable bond, municipal bond or other) monthly, based upon each fund's three,
five, and ten-year average annual total returns (when available) and a risk
adjustment factor that reflects fund performance relative to three-month U.S.
Treasury bill monthly returns. Such returns are adjusted for fees and sales
loads. There are five ranking categories with a corresponding number of stars:
highest (5), above average (4), neutral (3), below average (2), and lowest (1).
Ten percent of the funds, series or classes in an investment category receive
five stars, 22.5% receive four stars, 35% receive three stars, 22.5% receive two
stars, and the bottom 10% receive one star.
The total return on an investment made in a Fund or in a particular class of
Fund shares may be compared with the performance for the same period of one or
more of the following indices: the Consumer Price Index, the Salomon Smith
Barney World Government Bond Index, the S&P 500 Index, the Russell 2000 Index,
the Lehman Brothers Government/Corporate Bond Index, the Lehman Brothers
Aggregate Bond Index, the Lehman Brothers Mortgage-Backed Securities Index, the
Lehman GNMA Index, the J.P. Morgan Government Bond Index and the Morgan Stanley
All Country World Index Free ex US. Other indices may be used from time to time.
The Consumer Price Index generally is considered to be a measure of inflation.
The Salomon Smith Barney World Government Bond Index generally represents the
performance of government debt securities of various markets throughout the
world, including the United States. The S&P 500 Index is a composite index of
500 common stocks generally regarded as an index of U.S. stock market
performance. The Russell 2000 Index is a broad-based unmanaged index that
represents the general performance of domestically traded common stock of small-
to mid-sized companies. The Lehman Brothers Government/Corporate Bond Index
generally represents the performance of intermediate and long-term government
and investment grade corporate debt securities. The Lehman Brothers
Mortgage-Backed Securities Index is a broad-based unmanaged index that
represents the general performance of fixed-rate mortgage bonds. The Lehman
Brothers Aggregate Bond Index measures the performance of U.S. corporate bond
issues, U.S. government securities and mortgage-backed securities. The J.P.
Morgan Government Bond Index generally represents the performance of government
bonds issued by various countries including the United States. The Morgan
Stanley All Country World Index is a widely recognized, unmanaged index of
common stock prices with country weightings of international companies. The
foregoing indices are unmanaged indices of securities that do not reflect
reinvestment of capital gains or take investment costs into consideration, as
these items are not applicable to indices.
From time to time, the yields and the total returns of the Funds or of a
particular class of Fund shares may be quoted in and compared to other mutual
funds with similar investment objectives in advertisements, shareholder reports
or other communications to shareholders. A Fund also may include calculations in
such communications that describe hypothetical investment results. (Such
performance examples are based on an express set of assumptions and are not
indicative of the performance of any Fund.) Such calculations may from time to
time include discussions or illustrations of the effects of compounding in
advertisements. "Compounding" refers to the fact that, if dividends or
84
<PAGE>
other distributions on a Fund's investment are reinvested by being paid in
additional Fund shares, any future income or capital appreciation of a Fund
would increase the value, not only of the original Fund investment, but also of
the additional Fund shares received through reinvestment. As a result, the value
of a Fund investment would increase more quickly than if dividends or other
distributions had been paid in cash.
A Fund also may include discussions or illustrations of the potential investment
goals of a prospective investor (including but not limited to tax and/or
retirement planning), investment management techniques, policies or investment
suitability of a Fund, economic conditions, legislative developments (including
pending legislation), the effects of inflation and historical performance of
various asset classes, including but not limited to stocks, bonds and Treasury
bills.
From time to time advertisements or communications to shareholders may summarize
the substance of information contained in shareholder reports (including the
investment composition of a Fund, as well as the views of the investment adviser
as to current market, economic, trade and interest rate trends, legislative,
regulatory and monetary developments, investment strategies and related matters
believed to be of relevance to a Fund.) A Fund may also include in
advertisements, charts, graphs or drawings which illustrate the potential risks
and rewards of investment in various investment vehicles, including but not
limited to stock, bonds, and Treasury bills, as compared to an investment in
shares of a Fund, as well as charts or graphs which illustrate strategies such
as dollar cost averaging, and comparisons of hypothetical yields of investment
in tax-exempt versus taxable investments. In addition, advertisements or
shareholder communications may include a discussion of certain attributes or
benefits to be derived by an investment in a Fund. Such advertisements or
communications may include symbols, headlines or other material which highlight
or summarize the information discussed in more detail therein. With proper
authorization, a Fund may reprint articles (or excerpts) written regarding a
Fund and provide them to prospective shareholders. Performance information with
respect to the Funds is generally available by calling the Funds at
800-539-FUND.
Investors also may judge, and a Fund may at times advertise, the performance of
a Fund or of a particular class of Fund shares by comparing it to the
performance of other mutual funds or mutual fund portfolios with comparable
investment objectives and policies, which performance may be contained in
various unmanaged mutual fund or market indices or rankings such as those
prepared by Dow Jones & Co., Inc., S&P, Lehman Brothers, Merrill Lynch, and
Salomon Smith Barney, and in publications issued by Lipper and in the following
publications: IBC's Money Fund Reports, Value Line Mutual Fund Survey,
Morningstar, CDA/Wiesenberger, Money, Forbes, Barron's, The Wall Street Journal,
The New York Times, Business Week, American Banker, Fortune, Institutional
Investor, Ibbotson Associates, and U.S.A. Today. In addition to yield
information, general information about a Fund that appears in a publication such
as those mentioned above may also be quoted or reproduced in advertisements or
in reports to shareholders.
Advertisements and sales literature may include discussions of specifics of a
portfolio manager's investment strategy and process, including, but not limited
to, descriptions of security selection and analysis. Advertisements may also
include descriptive information about the investment adviser, including, but not
limited to, its status within the industry, other services and products it makes
available, total assets under management, and its investment philosophy.
When comparing yield, total return, and investment risk of an investment in
shares of a Fund with other investments, investors should understand that
certain other investments have different risk characteristics than an investment
in shares of a Fund. For example, certificates of deposit may have fixed rates
of return and may be insured as to principal and interest by the FDIC, while a
Fund's returns will fluctuate and its share values and returns are not
guaranteed. Money market accounts offered by banks also may be insured by the
FDIC and may offer stability of principal. U.S. Treasury securities are
guaranteed as to principal and interest by the full faith and credit of the U.S.
government. Money market mutual funds may seek to maintain a fixed price per
share.
Additional Purchase, Exchange, and Redemption Information
The NYSE holiday closing schedule indicated in this SAI under "Valuation of
Portfolio Securities" is subject to change.
85
<PAGE>
When the NYSE is closed (and, in the case of the Money Market Funds, when the
Federal Reserve Board of Cleveland is closed), or when trading is restricted for
any reason other than its customary weekend or holiday closings, or under
emergency circumstances as determined by the SEC to warrant such action, the
Funds may not be able to accept purchase or redemption requests. A Fund's NAV
may be affected to the extent that its securities are traded on days that are
not Business Days.
The Trust has elected, pursuant to Rule 18f-1 under the 1940 Act, to redeem
shares of the Balanced Fund, Convertible Securities Fund, Diversified Stock
Fund, Federal Money Market Fund, Fund for Income, Government Mortgage Fund,
Growth Fund, Intermediate Income Fund, International Growth Fund, Investment
Quality Bond Fund, Lakefront Fund, the LifeChoice Funds, Limited Term Income
Fund, National Municipal Bond Fund, New York Tax-Free Fund, Ohio Municipal Bond
Fund, Ohio Regional Stock Fund, Small Company Opportunity Fund, Real Estate
Investment Fund, Special Value Fund, Stock Index Fund and Value Fund solely in
cash up to the lesser of $250,000 or 1% of the NAV of the Fund during any 90-day
period for any one shareholder. The remaining portion of the redemption may be
made in securities or other property, valued for this purpose as they are valued
in computing the NAV of each class of the Fund. Shareholders receiving
securities or other property on redemption may realize a gain or loss for tax
purposes and may incur additional costs as well as the associated inconveniences
of holding and/or disposing of such securities or other property.
Pursuant to Rule 11a-3 under the 1940 Act, the Funds are required to give
shareholders at least 60 days' notice prior to terminating or modifying a Fund's
exchange privilege. The 60-day notification requirement may, however, be waived
if (1) the only effect of a modification would be to reduce or eliminate an
administrative fee, redemption fee, or deferred sales charge ordinarily payable
at the time of exchange or (2) a Fund temporarily suspends the offering of
shares as permitted under the 1940 Act or by the SEC or because it is unable to
invest amounts effectively in accordance with its investment objective and
policies.
The Funds reserve the right at any time without prior notice to shareholders to
refuse exchange purchases by any person or group if, in the Adviser's judgment,
a Fund would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise be adversely affected.
Purchasing Shares.
Alternative Sales Arrangements - Class A and Class G Shares. The alternative
sales arrangements permit an investor to choose the method of purchasing shares
that is more beneficial depending on the amount of the purchase, the length of
time the investor expects to hold shares and other relevant circumstances. When
comparing Class A and Class G shares, investors should understand that the
purpose and function of the asset-based sales charge with respect to Class G
shares are the same as those of the initial sales charge with respect to Class A
shares. Any salesperson or other person entitled to receive compensation for
selling Fund shares may receive different compensation with respect to one class
of shares in comparison to another class of shares on behalf of a single
investor (not including dealer "street name" or omnibus accounts). Generally,
Class A shares have lower ongoing expenses than Class G shares, but are subject
to an initial sales charge. Which class would be advantageous to an investor
depends on the number of years the shares will be held. Over very long periods
of time, the lower expenses of Class A shares may offset the cost of the Class A
initial sales charge. Some of the Funds also offer Class G shares, which are
described in "Class G Shares" below. Investors also should evaluate the benefits
of investing in Class G shares.
Each class of shares represents interests in the same portfolio investments of a
Fund. However, each class has different shareholder privileges and features. The
net income attributable to a particular class and the dividends payable on these
shares will be reduced by incremental expenses borne solely by that class,
including any asset-based sales charge to which these shares may be subject.
Effective December 15, 1999, the Trust discontinued offering Class B shares of
the Funds. Holders of Class B shares may continue to reinvest their dividends in
additional Class B shares of their Funds. Each of the Funds that offered Class B
shares prior to December 15, 1999, except Diversified Stock Fund, expects to
convert its outstanding Class B shares to Class A shares at some time in the
future.
86
<PAGE>
The methodology for calculating the NAV, dividends and distributions of the
share classes of each Fund recognizes two types of expenses. General expenses
that do not pertain specifically to a class are allocated to the shares of each
class, based upon the percentage that the net assets of such class bears to a
Fund's total net assets, and then pro rata to each outstanding share within a
given class. Such general expenses include (1) management fees, (2) legal,
bookkeeping and audit fees, (3) printing and mailing costs of shareholder
reports, prospectuses, statements of additional information and other materials
for current shareholders, (4) fees to the Trustees who are not affiliated with
the Adviser, (5) custodian expenses, (6) share issuance costs, (7) organization
and start-up costs, (8) interest, taxes and brokerage commissions, and (9)
non-recurring expenses, such as litigation costs. Other expenses that are
directly attributable to a class are allocated equally to each outstanding share
within that class. Such expenses include (1) Rule 12b-1 distribution fees and
shareholder servicing fees, (2) incremental transfer and shareholder servicing
agent fees and expenses, (3) registration fees, and (4) shareholder meeting
expenses, to the extent that such expenses pertain to a specific class rather
than to a Fund as a whole.
Class G Shares. As a result of the 1998 acquisition of McDonald & Company
Securities Inc., a major regional broker-dealer ("McDonald"), by KeyCorp, the
parent of Key Asset Management Inc., each Fund's investment adviser ("KAM" or
the "Adviser"), seven funds previously managed by McDonald's Gradison Division
reorganized into Class G shares of seven series of the Trust. These seven Funds
and their Gradison fund predecessor are listed in a table under "Performance --
Class G Shares" in this SAI. This reorganization took place on March 26, 1999.
In addition, the Stock Index Fund began offering Class G Shares on June 30, 1999
and the Intermediate Income Fund, Investment Quality Bond Fund, National
Municipal Bond Fund, New York Tax-Free Fund, Value Fund, Growth Fund, Special
Value Fund, Balanced Fund, Convertible Securities Fund and Real Estate
Investment Fund began offering Class G Shares on December 15, 1999.
Sales Charges. No sales charge is imposed on the purchase of Class G shares.
McDonald Investments Inc., an affiliate of the Adviser, compensates its own
employees, and may compensate its affiliates, for Class G share sales, some of
which compensation may be recouped in the event of share redemptions made during
the first nine months after sale. See "How to Sell Shares" in the Prospectuses.
Rule 12b-1 Fees. Class G shares of the Gradison Government Reserves Fund are
subject to an annual Rule 12b-1 fee of up to 0.10% of its average daily net
assets. Class G shares of the Fund for Income, Intermediate Income Fund,
Investment Quality Bond Fund, National Municipal Bond Fund, New York Tax-Free
Fund and the Ohio Municipal Bond Fund are subject to an annual Rule 12b-1 fee of
up to 0.25% of average daily net assets and Class G Shares of the Value Fund,
Diversified Stock Fund, Established Value Fund, Growth Fund, Special Value Fund,
International Growth Fund and Small Company Opportunity Fund are subject to an
Rule 12b-1 fee of up to 0.50% of average daily net assets. There is no
conversion feature applicable to Class G shares. Distributions paid to holders
of a Fund's Class G shares may be reinvested in additional Class G shares of
that Fund or Class G shares of a different Fund.
Dealer Reallowances. The following table shows the amount of the front end sales
load that is reallowed to dealers as a percentage of the offering price of Class
A Shares of the Balanced Fund, Convertible Securities Fund, Diversified Stock
Fund, Government Mortgage Fund, Growth Fund, Intermediate Income Fund,
Investment Quality Bond Fund, International Growth Fund, Lakefront Fund,
National Municipal Bond Fund, New York Tax-Free Fund, Ohio Municipal Bond Fund,
Ohio Regional Stock Fund, Real Estate Investment Fund, Small Company Opportunity
Fund, Special Value Fund, Stock Index Fund and Value Fund.
Initial Sales Charge: Concession to Dealers:
Amount of Purchase % of Offering Price % of Offering Price
------------------ ------------------- -------------------
Up to $49,999 5.75% 5.00%
$50,000 to $99,999 4.50% 4.00%
$100,000 to $249,999 3.50% 3.00%
$250,000 to $499,999 2.50% 2.00%
$500,000 to $999,999 2.00% 1.75%
$1,000,000 and above 0.00% *
87
<PAGE>
The following table shows the amount of the front end sales load that is
reallowed to dealers as a percentage of the offering price of the Class A Shares
of the Fund for Income and Limited Term Income Fund
Initial Sales Charge: Concession to Dealers:
Amount of Purchase % of Offering Price % of Offering Price
------------------ ------------------- -------------------
Up to $49,999 2.00% 1.50%
$50,000 to $99,999 1.75% 1.25%
$100,000 to $249,999 1.50% 1.00%
$250,000 to $499,999 1.25% 0.75%
$500,000 to $999,999 1.00% 0.50%
$1,000,000 and above 0.00% *
* Except as indicated in the last sentence of this note, there is no initial
sales charge on purchases of $1 million or more. However, a CDSC of up to
1.00% will be imposed on any of such shares redeemed within the first year
after purchase, or a 0.50% CDSC will be charged on any of such shares
redeemed within two years of purchase. This charge will be based on the lower
of the cost of the shares or net asset value at the time of redemption. No
CDSC is imposed on reinvested distributions. Investment professionals may be
paid at a rate of 1.00% of the purchase price on amounts from $1 million to
$2,999,999; 0.75% on amounts from $3 million to $4,999,999; and 0.50% on
amounts of $5 million or more. The initial sales charge exemption for
investments of $1 million or more does not apply to tax deferred retirement
accounts (except IRA accounts); the sales charge on investments by such tax
deferred retirement accounts of $1 million or more is the same as for
investments between $500,000 and $999,999.
The Trust's distributor reserves the right to pay the entire commission to
dealers. If that occurs, the dealer may be considered an "underwriter" under
federal securities laws.
In addition to the LifeChoice Funds, none of the Money Market Funds imposes
sales charges on its shares.
Reduced Sales Charge. Reduced sales charges are available for purchases of
$50,000 or more of Class A shares of a Fund alone or in combination with
purchases of other Class A shares of the Trust (except Funds that do not impose
a sales charge). To obtain the reduction of the sales charge, you or your
Investment Professional must notify the transfer agent at the time of purchase
whenever a quantity discount is applicable to your purchase. An "Investment
Professional" is an investment consultant, salesperson, financial planner,
investment adviser, or trust officer who provides investment information.
In addition to investing at one time in any combination of Class A shares of the
Trust's in an amount entitling you to a reduced sales charge, you may qualify
for a reduction in the sales charge under the following programs:
Combined Purchases. When you invest in Class A shares of the Trust, excluding
Funds that do not impose a sales charge, for several accounts at the same time,
you may combine these investments into a single transaction if the total is
$50,000 or more in order to pay the lower sales loads applicable to these
amounts. The following may qualify for this privilege: an individual, or
"company" as defined in Section 2(a)(8) of the 1940 Act; an individual, spouse,
and their children under age 21 purchasing for his, her, or their own account; a
trustee, administrator or other fiduciary purchasing for a single trust estate
or single fiduciary account or for a single or a parent-subsidiary group of
"employee benefit plans" (as defined in Section 3(3) of ERISA); and tax-exempt
organizations under Section 501(c)(3) of the Code.
Rights of Accumulation. "Rights of Accumulation" permit reduced sales charges on
future purchases of Class A shares after you have reached a new breakpoint. You
can add the value of existing Trust's Class A shares held by you, your spouse,
and your children under age 21, determined at the previous day's NAV at the
close of business, to the amount of your new purchase valued at the current
offering price to determine your reduced sales charge.
Letter of Intent. If you anticipate purchasing $50,000 or more of shares of a
Fund alone or in combination with Class A shares of certain other Funds
(excluding Funds that do not impose a sales charge) within a 13-month period,
you may obtain shares of the portfolios at the same reduced sales charge as
though the total quantity were invested
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in one lump sum, by filing a non-binding Letter of Intent (the "Letter") within
90 days of the start of the purchases. Each investment you make after signing
the Letter will be entitled to the sales charge applicable to the total
investment indicated in the Letter. For example, a $2,500 purchase toward a
$60,000 Letter would receive the same reduced sales charge as if the $60,000 had
been invested at one time. To ensure that the reduced price will be received on
future purchases, you or your Investment Professional must inform the transfer
agent that the Letter is in effect each time shares are purchased. Neither
income dividends nor capital gain distributions taken in additional shares will
apply toward the completion of the Letter.
You are not obligated to complete the additional purchases contemplated by a
Letter. If you do not complete your purchase under the Letter within the
13-month period, your sales charge will be adjusted upward, corresponding to the
amount actually purchased, and if after written notice, you do not pay the
increased sales charge, sufficient escrowed shares will be redeemed to pay such
charge.
If you purchase more than the amount specified in the Letter and qualify for a
further sales charge reduction, the sales charge will be adjusted to reflect
your total purchase at the end of 13 months. Surplus funds will be applied to
the purchase of additional shares at the then current offering price applicable
to the total purchase.
Exchanging Shares.
Shares of any Victory Money Market Fund may be exchanged for Class A shares of
any of the Funds and may be subject to payment of a sales charge.
Shares of a Fund may be exchanged for the same class of shares of any other Fund
of the Trust. For example, an investor can exchange Class A shares of a Fund
only for Class A shares of another Fund. At present, not all Funds of the Trust
offer multiple classes of shares. Shareholders owning shares of more than one
class of shares must specify the class that they intend to exchange. If you do
not make a selection, your exchange will be made in Class A shares.
You may only exchange your shares for shares of a Fund that is currently
offering shares.
Class G shares of any Fund may be exchanged for Class G shares, Select shares,
or any single class money market shares of a Fund offered by the Trust.
Shareholders who owned Class G shares on the closing date of the Gradison Fund
reorganization, can exchange into Class A shares of any Fund that does not offer
Class G Shares without paying a sales charge.
An exchange of a Fund's shares for shares of another Fund will be treated as a
sale for federal income tax purposes. A shareholder must recognize any gain or
loss in connection with any such exchange.
Redeeming Shares.
Reinstatement Privilege. Within 90 days of a redemption, a shareholder may
reinvest all or part of the redemption proceeds of Class A shares in Class A
shares of a Fund or any of the other Funds into which shares of the Fund are
exchangeable as described above, at the NAV next computed after receipt by the
transfer agent of the reinvestment order. No service charge is currently made
for reinvestment in shares of the Funds. The shareholder must ask the
Distributor for such privilege at the time of reinvestment. Any capital gain
that was realized when the shares were redeemed is taxable, and reinvestment
will not alter any capital gains tax payable on that gain. If there has been a
capital loss on the redemption, some or all of the loss may not be tax
deductible, depending on the timing and amount of the reinvestment. Under the
Code, if the redemption proceeds of Fund shares on which a sales charge was paid
are reinvested in shares of the same Fund or another Fund offered by the Trust
within 90 days of payment of the sales charge, the shareholder's basis in the
shares of the Fund that were redeemed may not include the amount of the sales
charge paid. That would reduce the loss or increase the gain recognized from
redemption. The Funds may amend, suspend, or cease offering this reinvestment
privilege at any time as to shares redeemed after the date of such amendment,
suspension, or cessation. The reinstatement must be into an account bearing the
same registration.
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Dividends and Distributions
The Funds distribute substantially all of their net investment income and net
capital gains, if any, to shareholders within each calendar year as well as on a
fiscal year basis to the extent required for the Funds to qualify for favorable
federal tax treatment. The Funds ordinarily declare and pay dividends separately
for each class of shares, from their net investment income as follows. Each Fund
declares and pays capital gains annually.
- -------------------------------------------------------------------------------
Income Balanced, Fund for Income, Government Mortgage, Intermediate
Dividends Income, Investment Quality Bond, Limited Term Income,
Declared and National Municipal Bond, New York Tax-Free, Ohio Municipal
Paid Monthly Bond
- -------------------------------------------------------------------------------
Income Convertible Securities, Diversified Stock, Established
Dividends Value, Growth, International Growth, Lakefront, the
Declared and LifeChoice Funds, Ohio Regional Stock, Real Estate
Paid Quarterly Investment, Small Company Opportunity, Special Value, Stock
Index, Value
- -------------------------------------------------------------------------------
Declared Daily Money Market Funds
and Paid Monthly
- -------------------------------------------------------------------------------
The amount of a class's distributions may vary from time to time depending on
market conditions, the composition of a Fund's portfolio, and expenses borne by
a Fund or borne separately by a class. Dividends are calculated in the same
manner, at the same time and on the same day for shares of each class. However,
dividends attributable to a particular class will differ in amount as a
consequence of any differences in NAV among the classes due to differences in
distribution expenses and other class-specific expenses.
For this purpose, the net income of a Fund, from the time of the immediately
preceding determination thereof, shall consist of all interest income accrued on
the portfolio assets of the Fund, dividend income, if any, income from
securities loans, if any, and realized capital gains and losses on the Fund's
assets, less all expenses and liabilities of the Fund chargeable against income.
Interest income shall include discount earned, including both original issue and
market discount, on discount paper accrued ratably to the date of maturity.
Expenses, including the compensation payable to the Adviser, are accrued each
day. The expenses and liabilities of a Fund shall include those appropriately
allocable to the Fund as well as a share of the general expenses and liabilities
of the Trust in proportion to the Fund's share of the total net assets of the
Trust.
Taxes
Information set forth in the Prospectuses and this SAI that relates to federal
taxation is only a summary of certain key federal tax considerations generally
affecting purchasers of shares of the Funds. The following is only a summary of
certain additional tax considerations generally affecting each Fund and its
shareholders that are not described in the Prospectuses. No attempt has been
made to present a complete explanation of the federal tax treatment of the Funds
or the implications to shareholders, and the discussions here and in each Fund's
prospectus are not intended as substitutes for careful tax planning.
Accordingly, potential purchasers of shares of the Funds are urged to consult
their tax advisers with specific reference to their own tax circumstances.
Special tax considerations may apply to certain types of investors subject to
special treatment under the Code (including, for example, insurance companies,
banks and tax-exempt organizations). In addition, the tax discussion in the
Prospectuses and this SAI is based on tax law in effect on the date of the
Prospectuses and this SAI; such laws and regulations may be changed by
legislative, judicial, or administrative action, sometimes with retroactive
effect.
Qualification as a Regulated Investment Company
Each Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Code. As a regulated investment company, a Fund is not
subject to federal income tax on the portion of its net investment income (i.e.,
taxable interest, dividends, and other taxable ordinary income, net of expenses)
and capital gain net income (i.e., the excess of capital gains over capital
losses) that it distributes to shareholders, provided that it
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distributes at least 90% of its investment company taxable income (i.e., net
investment income and the excess of net short-term capital gain over net
long-term capital loss) and at least 90% of its tax-exempt income (net of
expenses allocable thereto) for the taxable year (the "Distribution
Requirement"), and satisfies certain other requirements of the Code that are
described below. Distributions by a Fund made during the taxable year or, under
specified circumstances, within twelve months after the close of the taxable
year, will be considered distributions of income and gains for the taxable year
and will therefore count toward satisfaction of the Distribution Requirement.
If a Fund has a net capital loss (i.e., an excess of capital losses over capital
gains) for any year, the amount thereof may be carried forward up to eight years
and treated as a short-term capital loss which can be used of offset capital
gains in such future years. As of October 31, 1999, the Prime Obligations Fund
had capital loss carryforwards of approximately $11,000 which expire in 2007;
the Tax-Free Money Market Fund had capital loss carryforwards of approximately
$4,000 and $27,000 which expire in 2006 and 2007, respectively; the Ohio
Municipal Money Market Fund had capital loss carryforwards of approximately
$5,000 which expire in 2007; the Limited Term Income Fund had capital loss
carryforwards of approximately $1,335,000, $553,000, $906,000 and $1,116 which
expire in 2002, 2003, 2005 and 2007, respectively; Intermediate Income Fund had
capital loss carryforwards of approximately $5,229 which expire in 2007; the
Fund for Income had capital loss carryforwards of approximately $585,000,
$5,491,000, $864,000, $62,000 and $606,000 which expire in 2001, 2002, 2003,
2004 and 2007, respectively; the Government Mortgage Fund had capital loss
carryforwards of approximately $698,000, $109,000 and $2,523,000, which expire
in 2002, 2005, and 2007, respectively; the Investment Quality Bond Fund had
capital loss carryforwards of approximately $3,961,000 and $6,428,000 which
expire in 2002 and 2007; respectively; the New York Tax-Free Fund had capital
loss carryforwards of approximately $2,000 and $16,000 which expire in 2006 and
2007, respectively; the Ohio Municipal Bond Fund had capital loss carryforwards
of approximately $497,000 which expire in 2007; the Real Estate Investment Fund
had capital loss carryforwards of approximately $497,000 and $1,400 which expire
in 2006 and 2007, respectively; and the Small Company Opportunity Fund had
capital loss carryforwards of approximately $6,164,000 and $701,000 which expire
in 2006 and 2007, respectively. The Investment Quality Bond Fund has additional
capital loss carryforwards of $2,498,000, $2,760,000, $755,000 and $6,000 for
2001, 2002, 2003 and 2004, respectively, as the successor to the Government Bond
Fund; however, as explained below, such carryforwards are subject to limitations
on availability. Under Code Sections 382 and 383, if a Fund has an "ownership
change," then the Fund's use of its capital loss carryforwards in any year
following the ownership change will be limited to an amount equal to the NAV of
the Fund immediately prior to the ownership change multiplied by the long-term
tax-exempt rate (which is published monthly by the Internal Revenue Service (the
"IRS")) in effect for the month in which the ownership change occurs (the rate
for December, 1999 is 5.72%). The Funds will use their best efforts to avoid
having an ownership change. However, because of circumstances which may be
beyond the control or knowledge of a Fund, there can be no assurance that a Fund
will not have, or has not already had, an ownership change. If a Fund has or has
had an ownership change, then the Fund will be subject to federal income taxes
on any capital gain net income for any year following the ownership change in
excess of the annual limitation on the capital loss carryforwards unless
distributed by the Fund. Any distributions of such capital gain net income will
be taxable to shareholders as described under "Distributions" below.
In addition to satisfying the Distribution Requirement, a regulated investment
company must derive at least 90% of its gross income from dividends, interest,
certain payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies (to the extent such
currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities) and other income
(including but not limited to gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities, or
currencies (the "Income Requirement").
In general, gain or loss recognized by a Fund on the disposition of an asset
will be a capital gain or loss. In addition, gain will be recognized as a result
of certain constructive sales, including short sales "against the box." However,
gain recognized on the disposition of a debt obligation (including municipal
obligations) purchased by a Fund at a market discount (generally, at a price
less than its principal amount) will be treated as ordinary income to the extent
of the portion of the market discount which accrued while the Fund held the debt
obligation. In addition, under the rules of Code Section 988, gain or loss
recognized on the disposition of a debt obligation denominated in a foreign
currency or an option with respect thereto, and gain or loss recognized on the
disposition of a foreign currency forward contract, futures contract, option or
similar financial instrument, or of foreign currency itself, except for
regulated futures contracts or non-equity options subject to Code Section 1256
(unless a Fund elects otherwise),
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generally will be treated as ordinary income or loss to the extent attributable
to changes in foreign currency exchange rates.
Further, the Code also treats as ordinary income a portion of the capital gain
attributable to a transaction where substantially all of the expected return is
attributable to the time value of a Fund's net investment in the transaction
and: (1) the transaction consists of the acquisition of property by the Fund and
a contemporaneous contract to sell substantially identical property in the
future; (2) the transaction is a straddle within the meaning of Section 1092 of
the Code; (3) the transaction is one that was marketed or sold to the Fund on
the basis that it would have the economic characteristics of a loan but the
interest-like return would be taxed as capital gain; or (4) the transaction is
described as a conversion transaction in the Treasury Regulations. The amount of
such gain that is treated as ordinary income generally will not exceed the
amount of the interest that would have accrued on the net investment for the
relevant period at a yield equal to 120% of the applicable federal rate, reduced
by the sum of: (1) prior inclusions of ordinary income items from the conversion
transaction and (2) the capitalized interest on acquisition indebtedness under
Code Section 263(g), among other amounts. However, if a Fund has a built-in loss
with respect to a position that becomes a part of a conversion transaction, the
character of such loss will be preserved upon a subsequent disposition or
termination of the position. No authority exists that indicates that the
character of the income treated as ordinary under this rule will not pass
through to the Funds' shareholders.
In general, for purposes of determining whether capital gain or loss recognized
by a Fund on the disposition of an asset is long-term or short-term, the holding
period of the asset may be affected (as applicable, depending on the type of the
Fund involved) if (1) the asset is used to close a "short sale" (which includes
for certain purposes the acquisition of a put option) or is substantially
identical to another asset so used, (2) the asset is otherwise held by the Fund
as part of a "straddle" (which term generally excludes a situation where the
asset is stock and Fund grants a qualified covered call option (which, among
other things, must not be deep-in-the-money) with respect thereto), or (3) the
asset is stock and the Fund grants an in-the-money qualified covered call option
with respect thereto. In addition, a Fund may be required to defer the
recognition of a loss on the disposition of an asset held as part of a straddle
to the extent of any unrecognized gain on the offsetting position.
Any gain recognized by a Fund on the lapse of, or any gain or loss recognized by
a Fund from a closing transaction with respect to, an option written by the Fund
will be treated as a short-term capital gain or loss.
Certain transactions that may be engaged in by a Fund (such as regulated futures
contracts, certain foreign currency contracts, and options on stock indexes and
futures contracts) will be subject to special tax treatment as "Section 1256
Contracts." Section 1256 Contracts are treated as if they are sold for their
fair market value on the last business day of the taxable year, even though a
taxpayer's obligations (or rights) under such Section 1256 Contracts have not
terminated (by delivery, exercise, entering into a closing transaction, or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 Contracts is taken into account for
the taxable year together with any other gain or loss that was recognized
previously upon the termination of Section 1256 Contracts during that taxable
year. Any capital gain or loss for the taxable year with respect to Section 1256
Contracts (including any capital gain or loss arising as a consequence of the
year-end deemed sale of such Section 1256 Contracts) generally is treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. A Fund,
however, may elect not to have this special tax treatment apply to Section 1256
Contracts that are part of a "mixed straddle" with other investments of the Fund
that are not Section 1256 Contracts.
A Fund may enter into notional principal contracts, including interest rate
swaps, caps, floors, and collars. Treasury Regulations provide, in general, that
the net income or net deduction from a notional principal contract for a taxable
year is included in or deducted from gross income for that taxable year. The net
income or deduction from a notional principal contract for a taxable year equals
the total of all of the periodic payments (generally, payments that are payable
or receivable at fixed periodic intervals of one year or less during the entire
term of the contract) that are recognized from that contract for the taxable
year and all of the non-periodic payments (including premiums for caps, floors,
and collars) that are recognized from that contract for the taxable year. No
portion of a payment by a party to a notional principal contract is recognized
prior to the first year to which any portion of a payment by the counterparty
relates. A periodic payment is recognized ratably over the period to which it
relates. In general, a non-periodic payment must be recognized over the term of
the notional principal contract in a manner that reflects the economic substance
of the contract. A non-periodic payment that relates to an interest rate swap,
cap, floor, or collar is recognized over the term of the contract by allocating
it in accordance with the values of a series of cash-
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settled forward or option contracts that reflect the specified index and
notional principal amount upon which the notional principal contract is based
(or under an alternative method provided in Treasury Regulations).
A Fund may purchase securities of certain foreign investment funds or trusts
which constitute passive foreign investment companies ("PFICs") for federal
income tax purposes. If a Fund invests in a PFIC, it has three separate options.
First, it may elect to treat the PFIC as a qualified electing fund (a "QEF"), in
which event the Fund will each year have ordinary income equal to its pro rata
share of the PFIC's ordinary earnings for the year and long-term capital gain
equal to its pro rata share of the PFIC's net capital gain for the year,
regardless of whether the Fund receives distributions of any such ordinary
earnings or capital gains from the PFIC. Second, a Fund that invests in stock of
a PFIC may make a mark-to-market election with respect to such stock. Pursuant
to such election, the Fund will include as ordinary income any excess of the
fair market value of such stock at the close of any taxable year over the Fund's
adjusted tax basis in the stock. If the adjusted tax basis of the PFIC stock
exceeds the fair market value of the stock at the end of a given taxable year,
such excess will be deductible as ordinary loss in an amount equal to the lesser
of the amount of such excess or the net mark-to-market gains on the stock that
the Fund included in income in previous years. The Fund's holding period with
respect to its PFIC stock subject to the election will commence on the first day
of the first taxable year beginning after the last taxable year in which the
mark-to-market election applied. If the Fund makes the mark-to-market election
in the first taxable year it holds PFIC stock, it will not incur the tax
described below under the third option.
Finally, if a Fund does not elect to treat the PFIC as a QEF and does not make a
mark-to-market election, then, in general, (1) any gain recognized by the Fund
upon the sale or other disposition of its interest in the PFIC or any excess
distribution received by the Fund from the PFIC will be allocated ratably over
the Fund's holding period of its interest in the PFIC stock, (2) the portion of
such gain or excess distribution so allocated to the year in which the gain is
recognized or the excess distribution is received shall be included in the
Fund's gross income for such year as ordinary income (and the distribution of
such portion by the Fund to shareholders will be taxable as an ordinary income
dividend, but such portion will not be subject to tax at the Fund level), (3)
the Fund shall be liable for tax on the portions of such gain or excess
distribution so allocated to prior years in an amount equal to, for each such
prior year, (i) the amount of gain or excess distribution allocated to such
prior year multiplied by the highest tax rate (individual or corporate) in
effect for such prior year, plus (ii) interest on the amount determined under
clause (i) for the period from the due date for filing a return for such prior
year until the date for filing a return for the year in which the gain is
recognized or the excess distribution is received, at the rates and methods
applicable to underpayments of tax for such period, and (4) the distribution by
the Fund to its shareholders of the portions of such gain or excess distribution
so allocated to prior years (net of the tax payable by the Fund thereon) will be
taxable to the shareholders as an ordinary income dividend.
Treasury Regulations permit a regulated investment company, in determining its
investment company taxable income and net capital gain (i.e., the excess of net
long-term capital gain over net short-term capital loss) for any taxable year,
to elect (unless it has made a taxable year election for excise tax purposes as
discussed below) to treat all or any part of any net capital loss, any net
long-term capital loss or any net foreign currency loss (including, to the
extent provided in Treasury Regulations, losses recognized pursuant to the PFIC
mark-to-market election) incurred after October 31 as if it had been incurred in
the succeeding year.
In addition to satisfying the requirements described above, a Fund must satisfy
an asset diversification test in order to qualify as a regulated investment
company. Under this test, at the close of each quarter of a Fund's taxable year,
at least 50% of the value of the Fund's assets must consist of cash and cash
items, U.S. Government securities, securities of other regulated investment
companies, and securities of other issuers (provided that, with respect to each
issuer, the Fund has not invested more than 5% of the value of the Fund's total
assets in securities of each such issuer and the Fund does not hold more than
10% of the outstanding voting securities of each such issuer), and no more than
25% of the value of its total assets may be invested in the securities of any
one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which the Fund
controls and which are engaged in the same or similar trades or businesses.
Generally, an option (call or put) with respect to a security is treated as
issued by the issuer of the security, not the issuer of the option. For purposes
of asset diversification testing, obligations issued or guaranteed by certain
agencies or instrumentalities of the U.S. Government, such as the Federal
Agricultural Mortgage Corporation, the Farm Credit System Financial Assistance
Corporation, a Federal Home Loan Bank, the Federal Home Loan Mortgage
Corporation, the Federal National
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Mortgage Association, the Government National Mortgage Association, and the
Student Loan Marketing Association, are treated as U.S. Government securities.
If for any taxable year a Fund does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions may be eligible for the
dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment company that
fails to distribute in each calendar year an amount equal to 98% of its ordinary
taxable income for the calendar year and 98% of its capital gain net income for
the one-year period ended on October 31 of such calendar year (or, with respect
to capital gain net income, at the election of a regulated investment company
having a taxable year ending November 30 or December 31, for its taxable year (a
"taxable year election")). (Tax-exempt interest on municipal obligations is not
subject to the excise tax.) The balance of such income must be distributed
during the next calendar year. For the foregoing purposes, a regulated
investment company is treated as having distributed any amount on which it is
subject to income tax for any taxable year ending in such calendar year.
For purposes of calculating the excise tax, a regulated investment company: (1)
reduces its capital gain net income (but not below its net capital gain) by the
amount of any net ordinary loss for the calendar year and (2) excludes foreign
currency gains and losses and ordinary gains or losses arising as a result of a
PFIC mark-to-market election (or upon the actual disposition of the PFIC stock
subject to such election) incurred after October 31 of any year (or after the
end of its taxable year if it has made a taxable year election) in determining
the amount of ordinary taxable income for the current calendar year (and,
instead, includes such gains and losses in determining the company's ordinary
taxable income for the succeeding calendar year).
Each Fund intends to make sufficient distributions or deemed distributions of
its ordinary taxable income and capital gain net income prior to the end of each
calendar year to avoid liability for the excise tax. However, investors should
note that a Fund may in certain circumstances be required to liquidate portfolio
investments to make sufficient distributions to avoid excise tax liability.
Fund Distributions
Each Fund anticipates distributing substantially all of its investment company
taxable income for each taxable year. Such distributions will be taxable to
shareholders as ordinary income and treated as dividends for federal income tax
purposes. Distributions attributable to dividends received by a Fund from
domestic corporations will qualify for the 70% dividends-received deduction
("DRD") for corporate shareholders only to the extent discussed below.
Distributions attributable to interest received by a Fund will not, and
distributions attributable to dividends paid by a foreign corporation generally
should not, qualify for the DRD. In general, dividends paid on the various
Funds' share classes are calculated at the same time and in the same manner. In
general, dividends may differ among classes as a result of differences in
distribution expenses and other class specific expenses.
Ordinary income dividends paid by a Fund with respect to a taxable year may
qualify for the 70% DRD generally available to corporations (other than
corporations such as S corporations, which are not eligible for the deduction
because of their special characteristics, and other than for purposes of special
taxes such as the accumulated earnings tax and the personal holding company tax)
to the extent of the amount of dividends received by the Fund from domestic
corporations for the taxable year. No DRD will be allowed with respect to any
dividend (1) if it has been received with respect to any share of stock that the
Fund has held for less than 46 days (91 days in the case of certain preferred
stock) during the 90-day period (180-day period in the case of certain preferred
stock) beginning on the date which is 45 days (90 days in the case of certain
preferred stock) before the date on which such share becomes ex-dividend with
respect to such dividend, excluding for this purpose under the rules of Code
Section 246(c) any period during which the Fund has an option to sell, is under
a contractual obligation to sell, has made and not closed a short sale of, is
the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or
has otherwise diminished its risk of loss by holding other positions with
respect to, such (or substantially identical) stock; (2) to the extent
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that the Fund is under an obligation (pursuant to a short sale or otherwise) to
make related payments with respect to positions in substantially similar or
related property; or (3) to the extent the stock on which the dividend is paid
is treated as debt-financed under the rules of Code Section 246A. Moreover, the
DRD for a corporate shareholder may be disallowed or reduced (1) if the
corporate shareholder fails to satisfy the foregoing requirements with respect
to its shares of the Fund or (2) by application of Code Section 246(b), which in
general limits the DRD to 70% of the shareholder's taxable income (determined
without regard to the DRD and certain other items). With respect to the
International Growth Fund, only an insignificant portion of the Fund will be
invested in stock of domestic corporations; therefore the ordinary dividends
distributed by that Fund will not qualify for the DRD for corporate
shareholders.
A Fund may either retain or distribute to shareholders its net capital gain for
each taxable year. Each Fund currently intends to distribute any such amounts.
If net capital gain is distributed and designated as a capital gain dividend, it
will be taxable to shareholders as long-term capital gain, regardless of the
length of time the shareholder has held his shares or whether such gain was
recognized by the Fund prior to the date on which the shareholder acquired his
shares. The Code provides, however, that under certain conditions only 50% of
the capital gain recognized upon a Fund's disposition of domestic qualified
"small business" stock will be subject to tax.
Conversely, if a Fund elects to retain its net capital gain, the Fund will be
subject to tax thereon (except to the extent of any available capital loss
carryovers) at the 35% corporate tax rate. If a Fund elects to retain its net
capital gain, it is expected that the Fund also will elect to have shareholders
of record on the last day of its taxable year treated as if each received a
distribution of his pro rata share of such gain, with the result that each
shareholder will be required to report his pro rata share of such gain on his
tax return as long-term capital gain, will receive a refundable tax credit for
his pro rata share of tax paid by the Fund on the gain, and will increase the
tax basis for his shares by an amount equal to the deemed distribution less the
tax credit.
Each of the New York Tax-Free Fund, National Municipal Bond Fund, Ohio Municipal
Bond Fund, Ohio Municipal Money Market Fund, and Tax-Free Money Market Fund (the
"Tax Exempt Funds") intends to qualify to pay exempt-interest dividends by
satisfying the requirement that at the close of each quarter of the Tax-Exempt
Fund's taxable year at least 50% of its total assets consists of tax-exempt
municipal obligations. Distributions from a Tax-Exempt Fund will constitute
exempt-interest dividends to the extent of such Fund's tax-exempt interest
income (net of expenses and amortized bond premium). Exempt-interest dividends
distributed to shareholders of a Tax-Exempt Fund are excluded from gross income
for federal income tax purposes. However, shareholders required to file a
federal income tax return will be required to report the receipt of
exempt-interest dividends on their returns. Moreover, while exempt-interest
dividends are excluded from gross income for federal income tax purposes, they
may be subject to alternative minimum tax ("AMT") in certain circumstances and
may have other collateral tax consequences as discussed below. Distributions by
a Tax-Exempt Fund of any investment company taxable income or of any net capital
gain will be taxable to shareholders as discussed above.
AMT is imposed in addition to, but only to the extent it exceeds, the regular
income tax and is computed at a maximum marginal rate of 28% for non-corporate
taxpayers and 20% for corporate taxpayers on the excess of the taxpayer's
alternative minimum taxable income ("AMTI") over an exemption amount.
Exempt-interest dividends derived from certain "private activity" municipal
obligations issued after August 7, 1986 will generally constitute an item of tax
preference includable in AMTI for both corporate and non-corporate taxpayers. In
addition, exempt-interest dividends derived from all municipal obligations,
regardless of the date of issue, must be included in adjusted current earnings,
which are used in computing an additional corporate preference item (i.e., 75%
of the excess of a corporate taxpayer's adjusted current earnings over its AMTI
(determined without regard to this item and the AMT net operating loss
deduction)) includable in AMTI. For purposes of the corporate AMT, the corporate
dividends- received deduction is not itself an item of tax preference that must
be added back to taxable income or is otherwise disallowed in determining a
corporation's AMTI. However, corporate shareholders will generally be required
to take the full amount of any dividend received from a Fund into account
(without a dividends-received deduction) in determining their adjusted current
earnings.
Exempt-interest dividends must be taken into account in computing the portion,
if any, of social security or railroad retirement benefits that must be included
in an individual shareholder's gross income and subject to federal income tax.
Further, a shareholder of a Tax-Exempt Fund is denied a deduction for interest
on indebtedness incurred or continued to purchase or carry shares of a
Tax-Exempt Fund. Moreover, a shareholder who is (or is related to) a
95
<PAGE>
"substantial user" of a facility financed by industrial development bonds held
by a Tax-Exempt Fund will likely be subject to tax on dividends paid by the
Tax-Exempt Fund which are derived from interest on such bonds. Receipt of
exempt-interest dividends may result in other collateral federal income tax
consequences to certain taxpayers, including financial institutions, property
and casualty insurance companies, and foreign corporations engaged in a trade or
business in the United States. Prospective investors should consult their own
advisers as to such consequences.
Investment income that may be received by the International Growth Fund from
sources within foreign countries may be subject to foreign taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which entitle the Fund to a reduced rate of, or exemption from, taxes
on such income. It is impossible to determine the effective rate of foreign tax
in advance since the amount of the Fund's assets to be invested in various
countries is not known. If more than 50% of the value of the Fund's total assets
at the close of its taxable year consist of the stock or securities of foreign
corporations, the Fund may elect to "pass through" to the Fund's shareholders
the amount of foreign taxes paid by the Fund. If the Fund so elects, each
shareholder would be required to include in gross income, even though not
actually received, his pro rata share of the foreign taxes paid by the Fund, but
would be treated as having paid his pro rata share of such foreign taxes and
would therefore be allowed to either deduct such amount in computing taxable
income or use such amount (subject to various Code limitations) as a foreign tax
credit against federal income tax (but not both). For purposes of the foreign
tax credit limitation rules of the Code, each shareholder would treat as foreign
source income his pro rata share of such foreign taxes plus the portion of
dividends received from the Fund representing income derived from foreign
sources. No deduction for foreign taxes could be claimed by an individual
shareholder who does not itemize deductions. Each shareholder should consult his
own tax adviser regarding the potential application of foreign tax credit rules.
Distributions by a Fund that do not constitute ordinary income dividends,
exempt-interest dividends, or capital gain dividends will be treated as a return
of capital to the extent of (and in reduction of) the shareholder's tax basis in
his shares; any excess will be treated as gain from the sale of his shares, as
discussed below.
Distributions by a Fund will be treated in the manner described above regardless
of whether such distributions are paid in cash or reinvested in additional
shares of the Fund (or of another fund). Shareholders receiving a distribution
in the form of additional shares will be treated as receiving a distribution in
an amount equal to the fair market value of the shares received, determined as
of the reinvestment date. In addition, if the NAV at the time a shareholder
purchases shares of a Fund reflects undistributed net investment income,
recognized net capital gain, or unrealized appreciation in the value of the
assets of the Fund, distributions of such amounts will be taxable to the
shareholder in the manner described above, although such distributions
economically constitute a return of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by a Fund into
account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and paid by a Fund) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
Each Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of ordinary income dividends and capital gain dividends, and the
proceeds of redemption of shares, paid to any shareholder (1) who has failed to
provide a correct taxpayer identification number, (2) who is subject to backup
withholding for failure to report the receipt of interest or dividend income
properly, or (3) who has failed to certify to the Fund that it is not subject to
backup withholding or is an "exempt recipient" (such as a corporation).
Sale or Redemption of Shares
The Money Market Funds seek to maintain a stable NAV of $1.00 per share;
however, there can be no assurance that the Money Market Funds will do this. In
such a case, and for all the Funds other than the Money Market Funds, a
shareholder will recognize gain or loss on the sale or redemption of shares of a
Fund (including an exchange of shares of a Fund for shares of another Fund) in
an amount equal to the difference between the proceeds of the sale or redemption
and the shareholder's adjusted tax basis in the shares. All or a portion of any
loss so recognized may be
96
<PAGE>
disallowed if the shareholder purchases other shares of the same Fund within 30
days before or after the sale or redemption. In general, any gain or loss
arising from (or treated as arising from) the sale or redemption of shares of a
Fund will be considered capital gain or loss and will be long-term capital gain
or loss if the shares were held for longer than one year. However, any capital
loss arising from the sale or redemption of shares held for six months or less
will be disallowed to the extent of the amount of exempt-interest dividends
received on such shares and (to the extent not disallowed) will be treated as a
long-term capital loss to the extent of the amount of capital gain dividends
received on such shares. For this purpose, the special holding period rules of
Code Section 246(c) (discussed above in connection with the dividends-received
deduction for corporations) generally will apply in determining the holding
period of shares. Capital losses in any year are deductible only to the extent
of capital gains plus, in the case of a noncorporate taxpayer, $3,000 of
ordinary income.
If a shareholder (1) incurs a sales load in acquiring shares of a Fund, (2)
disposes of such shares less than 91 days after they are acquired and (3)
subsequently acquires shares of the Fund or another fund at a reduced sales load
pursuant to a right acquired in connection with the acquisition of the shares
disposed of, then the sales load on the shares disposed of (to the extent of the
reduction in the sales load on the shares subsequently acquired) shall not be
taken into account in determining gain or loss on such shares but shall be
treated as incurred on the acquisition of the subsequently acquired shares.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a nonresident alien
individual, foreign trust or estate, foreign corporation, or foreign partnership
("foreign shareholder"), depends on whether the income from a Fund is
"effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from a Fund is not effectively connected with a U.S. trade or
business carried on by a foreign shareholder, ordinary income dividends paid to
such foreign shareholder will be subject to U.S. withholding tax at the rate of
30% (or lower applicable treaty rate) upon the gross amount of the dividend.
Furthermore, such a foreign shareholder in the International Growth Fund may be
subject to U.S. withholding tax at the rate of 30% (or lower applicable treaty
rate) on the gross income resulting from the Fund's election to treat any
foreign taxes paid by it as paid by its shareholders, but may not be allowed a
deduction against such gross income or a credit against the U.S. withholding tax
for the foreign shareholder's pro rata share of such foreign taxes which it is
treated as having paid. Such a foreign shareholder would generally be exempt
from U.S. federal income tax on gains realized on the sale of shares of a Fund,
capital gain dividends and exempt-interest dividends, and amounts retained by
the Fund that are designated as undistributed capital gains.
If the income from a Fund is effectively connected with a U.S. trade or business
carried on by a foreign shareholder, then ordinary income dividends, capital
gain dividends, and any gains realized upon the sale of shares of the Fund will
be subject to U.S. federal income tax at the rates applicable to U.S. citizens
or domestic corporations.
In the case of foreign noncorporate shareholders, a Fund may be required to
withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the Fund with proper notification of their
foreign status.
The tax consequences to a foreign shareholder entitled to claim the benefits of
an applicable tax treaty may be different from those described herein. Foreign
shareholders are urged to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in a Fund, including the
applicability of foreign taxes.
Effect of Future Legislation, Local Tax Considerations
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect on
the date of this SAI. Future legislative or administrative changes or court
decisions may significantly change the conclusions expressed herein, and any
such changes or decisions may have a retroactive effect.
97
<PAGE>
Rules of state and local taxation of ordinary income dividends, exempt-interest
dividends, and capital gain dividends from regulated investment companies may
differ from the rules for U.S. federal income taxation described above.
Shareholders are urged to consult their tax advisers as to the consequences of
these and other state and local tax rules affecting investment in a Fund.
Trustees and Officers
Board of Trustees.
Overall responsibility for management of the Trust rests with the Trustees. The
Trust is managed by the Trustees in accordance with the laws of the State of
Delaware. There are currently seven Trustees, five of whom are not "interested
persons" of the Trust within the meaning of that term under the 1940 Act
("Independent Trustees"). The Trustees, in turn, elect the officers of the Trust
to supervise actively its day-to-day operations. There are also two Advisory
Trustees who attend meetings and serve on committees but do not vote.
The Trustees and the Advisory Trustees of the Trust, their ages, addresses, and
their principal occupations during the past five years are as follows. Each of
the following individuals, except Theodore H. Emmerich, Frankie D. Hughes and
Donald E. Weston, holds the same position with The Victory Variable Insurance
Funds, a registered investment company in the same fund complex as the Trust.
Whereas Mr. Emmerich, Ms. Hughes and Mr. Weston serve as Advisory Trustees of
the Trust, each of them serves as a Trustee of The Victory Variable Insurance
Funds.
Position(s)
Held with
Name, Age and Address the Trust Principal Occupation During Past 5 Years
- --------------------- --------- ----------------------------------------
Roger Noall,* 64 Chairman Since 1996, Executive of KeyCorp; from 1995
c/o Brighton Apt. 1603 Trustee and to 1996, General Counsel and Secretary of
8231 Bay Colony Drive KeyCorp; from 1994 to 1996, Senior Executive
Naples, FL 34108 Vice President and Chief Administrative
Officer of KeyCorp.
Leigh A. Wilson,** 55 President Since 1989, Chairman and Chief Executive
New Century Care, Inc. and Officer, New Century Care, Inc. (merchant
53 Sylvan Road North Trustee bank); since 1995, Principal of New Century
Westport, CT 06880 Living, Inc.; since 1989, Director of
Chimney Rock Vineyard and Chimney Rock
Winery.
Dr. Harry Gazelle, 72 Trustee Retired radiologist, Drs. Hill and Thomas
17822 Lake Road Corporation.
Lakewood, OH 44107
Eugene J. McDonald, 67 Trustee Since 1990, Executive Vice President and
Duke Management Company Chief Investment Officer for Asset Management
2200 West Main Street of Duke University and President and CEO of
Suite 1000 Duke Management Company; Director of CCB
Durham, NC 27705 Financial Corporation, Flag Group of Mutual
Funds,DP Mann Holdings, Greater Triangle
Community Foundation, and NC Bar Association
Investment Committee.
- ----------
* Mr. Noall is an "interested person" and an "affiliated person" of the
Trust.
** Mr. Wilson is deemed to be an "interested person" of the Trust under the
1940 Act solely by reason of his position as President.
98
<PAGE>
Position(s)
Held with
Name, Age and Address the Trust Principal Occupation During Past 5 Years
- --------------------- --------- ----------------------------------------
Dr. Thomas F. Trustee Since 1970, Professor, Weatherhead School of
Morrissey, 66 Management, Case Western Reserve University;
Weatherhead School of from 1989 to 1995, Associate Dean of
Management Weatherhead School of Management; from 1987
Case Western Reserve to December 1994, Member of the Supervisory
Univ. Committee of Society's Collective Investment
10900 Euclid Avenue Retirement Fund.
Cleveland, OH
44106-7235
H. Patrick Swygert, 56 Trustee Since 1995, President, Howard University;
Howard University since May 1996, Director, Hartford Financial
2400 6th St. N.W., Services Group; since May 1997, Director,
Ste. 402 Hartford Life Insurance Company; from 1990 to
Washington, DC 20059 1995, President, State University of New York
at Albany.
Frank A. Weil, 69 Trustee Since 1984, Chairman and Chief Executive
Abacus & Associates Officer of Abacus & Associates, Inc. (private
147 E. 47th Street investment firm); Director and President of
New York, NY 10017 the Norman and Hickrill Foundations;
Director, Trojan Industries; from 1977 to
1979, United States Assistant Secretary of
Commerce for Industry and Trade.
Advisory Trustees
Theodore H. Emmerich, Advisory Retired; until 1986, managing partner
74 Trustee (Cincinnati office) Ernst & Young LLP;
1201 Edgecliff Place Director of Carillon Fund, Inc.(investment
Cincinnati, Ohio company), American Financial Group
45206 (insurance), and Cincinnati Milacron
Commercial Corporation (financing arm of a
machine tool manufacturer); Trustee of Summit
Investment Trust and Carillon Investment
Trust.
Frankie D. Hughes, 47 Advisory Since 1993, Principal and Chief Investment
Hughes Capital Trustee Officer of Hughes Capital Management, Inc.
Management, Inc. (fixed income asset management firm).
315 Cameron Street,
2nd Fl.
Alexandria, Virginia
22314
Donald E. Weston, 63* Advisory Since October 1998, Chairman of Gradison
McDonald Investments Trustee McDonald Investments, a division of McDonald
Inc. Investments Inc.; until October 1998,
580 Walnut Street Chairman of the Gradison Division of McDonald
Cincinnati, Ohio & Company Securities, Inc. and a Director of
45202 McDonald & Company Investments Inc.; Director
of Cincinnati Milacron Commercial
Corporation.
The Board currently has an Investment Committee, a Business, Legal, and Audit
Committee, and a Board Process and Nominating Committee. The members of the
Investment Committee are Messrs. Weil (Chairman), Morrissey, Weston and Wilson.
The function of the Investment Committee is to review the existing investment
policies of the Trust, including the levels of risk and types of funds available
to shareholders, and make recommendations to the Trustees regarding the revision
of such policies or, if necessary, the submission of such revisions to the
Trust's shareholders for their consideration. The members of the Business, Legal
and Audit Committee are Messrs. Gazelle (Chairman), Emmerich, McDonald and
Swygert. The function of the Business, Legal, and Audit Committee is to
recommend independent auditors and monitor accounting and financial matters and
to review compliance and contract matters. Mr. Swygert is the Chairman of the
Board Process and Nominating Committee (consisting of all the Trustees and
Advisory Trustees), which nominates persons to serve as Independent Trustees and
Trustees to serve on committees of the Board. This Committee also reviews
Trustee performance and compensation issues. The Board Process and Nominating
Committee has a Nominating Subcommittee, composed of Messrs. Swygert,
* Mr. Weston is an "interested person" and an "affiliated person" of the
Trust.
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<PAGE>
Emmerich, McDonald and Weil and Drs. Gazelle and Morrissey. This Subcommittee
makes recommendations to the Board Process and Nominating Committee concerning
candidates to serve as trustees.
Remuneration of Trustees and Certain Executive Officers.
The Trust pays each Trustee (other than Messrs. Wilson, Noall and Weston) an
annual fee of $31,500 for serving as Trustee of all the Funds of the Trust, and
an additional per meeting fee ($3,500 in person and $1,500 per telephonic
meeting). Mr. Wilson receives an annual fee of $37,500 for serving as President
and Trustee for all of the Funds of the Trust, and an additional per meeting fee
($4,100 in person and $1,800 per telephonic meeting). The Adviser pays the
expenses of Messrs. Noall and Weston, who receive no payment from the Trust.
The following table indicates the estimated compensation received by each
Trustee from the Victory "Fund Complex"(1) for the fiscal year ended October 31,
1999.
Pension or
Retirement Aggregate
Benefits Estimated Aggregate Compensation
Accrued as Annual Compensation from Victory
Portfolio Benefits Upon from Victory "Fund
Expenses Retirement Portfolios Complex"
-------- ---------- ---------- --------
Roger Noall........... -0- -0- None None
Leigh A. Wilson....... -0- -0- $56,000 $61,500
Edward P. Campbell*... -0- -0- $9,150 $10,275
Theordore H. Emmerich# -0- -0- $32,750 $35,635
Frankie D. Hughes+.... -0- -0- None None
Harry Gazelle......... -0- -0- $43,400 $47,900
Eugene J. McDonald.... -0- -0- $46,400 $50,900
Thomas F. Morrissey... -0- -0- $46,400 $50,900
H. Patrick Swygert.... -0- -0- $41,400 $46,400
Frank A. Weil......... -0- -0- $46,400 $50,900
Donald E. Weston...... -0- -0- None None
(1) There are currently 41 mutual funds in the Victory "Fund Complex" for
which the above-named Trustees are compensated, but not all of these
Trustees serve on the board of each fund of the "Fund Complex."
* Mr. Campbell resigned as of December 31, 1998.
# Mr. Emmerich commenced service on the Board as of January 1, 1999.
+ Ms. Hughes commenced service on the Board as of January 1, 2000.
Officers.
The officers of the Trust, their ages, and principal occupations during the past
five years, are as follows:
Position(s)
with
Name and Age the Trust Principal Occupation During Past 5 Years
- ------------ --------- ----------------------------------------
Leigh A. Wilson, President See biographical information under "Board of
54 and Trustees" above.
Trustee
J. David Huber, 53 Vice President of BISYS Fund Services Inc.
President ("BISYS"); officer of BISYS since June 1987.
Robert D. Secretary Since November 1998, Vice President of BISYS;
Hingston, 47 from January 1995 to October 1998, founder and
principal of RDH Associates (mutual fund
management consulting firm).
Joel B. Engle, 34 Treasurer Since September 1998, Vice
President of BISYS; from March 1995 to September
1998, Vice President, Northern Trust Company.
100
<PAGE>
The mailing address of each officer of the Trust is 3435 Stelzer Road, Columbus,
Ohio 43219-3035.
The officers of the Trust (other than Mr. Wilson) receive no compensation
directly from the Trust for performing the duties of their offices. BISYS
receives fees from the Trust as Administrator.
As of November 30, 1999, the Trustees and officers as a group owned beneficially
less than 1% of all classes of outstanding shares of the Funds.
The LifeChoice Funds -- Conflicts of Interest. The Trustees and officers of the
Trust are subject to conflicts of interest in managing both the LifeChoice Funds
described here and some of the underlying Proprietary Portfolios. This conflict
is most evident in the Board's supervision of KAM. KAM and certain of its
affiliates may provide services to, and receive fees from, not just the Funds,
but also some of the Proprietary and Other Portfolios. Their selection of
investments and allocation of Fund assets will be continuously and closely
scrutinized by the Board in order to avoid even the appearance of improper
practices. It is possible, however, that a situation might arise where one
course of action for a LifeChoice Fund would be detrimental to a Proprietary
Portfolio, or vice versa. In that unlikely event, the Trustees and officers of
the Trust will exercise good business judgment in upholding their fiduciary
duties to each set of Funds, thus minimizing such conflicts, if any should
arise.
Advisory and Other Contracts
The following sections describe each Fund's material agreements for investment
advisory, administration, distribution, transfer agency and fund accounting
services. Generally, this SAI presents payments made pursuant to these
agreements for the three fiscal years ended October 31, 1999. This SAI also
describes Fund portfolio turnover for the two fiscal years ended October 31,
1999 and distribution expenses for the fiscal year ended October 31, 1999.
However, for certain Funds, service fee, portfolio turnover and distribution
expense information related to 1999, 1998 and 1997 reflects periods other than
the 12 month periods ended October 31, as shown in the following table.
- --------------------------------------------------------------------------------
Service fees, portfolio turnover and distribution
expenses shown reflect information for the following
periods
-----------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Convertible Securities Fiscal year Ten months ended Fiscal year
and ended October October 31, 1998. November 30, 1997.
Federal Money Market 31, 1999.
- --------------------------------------------------------------------------------
Established Value and Seven months Fiscal year Fiscal year ended
Small Company ended October ended March 31, March 31, 1998.
Opportunity 30, 1999. 1999.
- --------------------------------------------------------------------------------
Fund for Income Ten months Fiscal year Fiscal year ended
ended October ended December December 31, 1997.
31, 1999. 31, 1998.
- --------------------------------------------------------------------------------
Gradison Government Fiscal year Fiscal year Fiscal year ended
Reserves ended September ended September September 30, 1997.
30, 1999. 30, 1998.
- --------------------------------------------------------------------------------
LifeChoice Funds Fiscal year Eleven months Eleven months
ended October ended October ended November 30,
31, 1999. 31, 1998. 1997.
- --------------------------------------------------------------------------------
With respect to the Fund for Income and the Small Company Opportunity Fund,
payments made prior to March 29, 1999 for investment advisory, administration,
distribution, transfer agency and fund accounting services reflect payments to
other service providers made by these Funds' predecessors, Gradison Income Fund
and Gradison Opportunity Value Fund, respectively. Similarly, with respect to
the Established Value Fund and Gradison Government Reserves Fund, payments made
prior to April 5, 1999 for investment advisory, administration, distribution,
transfer agency and fund accounting services reflect payments to other service
providers made by these Funds' predecessors, Gradison Established Value Fund and
Gradison U.S. Government Reserves, respectively.
101
<PAGE>
Investment Adviser.
One of the Fund's most important contracts is with its investment adviser, KAM,
a New York corporation registered as an investment adviser with the SEC. KAM, a
wholly owned subsidiary of KeyCorp. Affiliates of the Adviser manage
approximately $79 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals, and mutual funds.
KeyCorp, a financial services holding company, is headquartered at 127 Public
Square, Cleveland, Ohio 44114. As of September 30, 1999, KeyCorp had an asset
base of $83 billion, with banking offices in 13 states from Maine to Alaska, and
trust and investment offices in 14 states. KeyCorp's McDonald Investments Inc.,
a registered broker dealer, is located primarily in the midwestern United
States. KeyCorp's major business activities include providing traditional
banking and associated financial services to consumer, business and commercial
markets. Its non-bank subsidiaries include investment advisory, securities
brokerage, insurance, bank credit card processing, and leasing companies.
The following schedule lists the advisory fees for each Fund, as an annual
percentage of its average daily net assets.
- --------------------------------------------------------------------------------
0.20% Each LifeChoice Fund, Institutional Money Market
- --------------------------------------------------------------------------------
0.25% Federal Money Market
- --------------------------------------------------------------------------------
0.35% Prime Obligations, Tax-Free Money Market, U.S. Government
Obligations
- --------------------------------------------------------------------------------
0.50% Financial Reserves, Fund for Income, Government Mortgage,
Limited Term Income, Ohio Municipal Money Market
- --------------------------------------------------------------------------------
0.50% of the Gradison Government Reserves
first $100
million, 0.45%
of the next
$600 million,
0.40% of the
next $1 billion
and 0.35%
thereafter
- --------------------------------------------------------------------------------
0.55% National Municipal Bond, New York Tax-Free
- --------------------------------------------------------------------------------
0.60% Ohio Municipal Bond, Stock Index
- --------------------------------------------------------------------------------
0.65% Diversified Stock
- --------------------------------------------------------------------------------
0.65% of the Established Value, Small Company Opportunity *
first $100
million, 0.55%
of the next
$100 million,
and 0.45% in
excess of $200
million
- --------------------------------------------------------------------------------
0.80% Balanced, Real Estate Investment, Special Value
- --------------------------------------------------------------------------------
0.75% Convertible Securities, Growth, Intermediate Income,
Investment Quality Bond, Ohio Regional Stock, Value
- --------------------------------------------------------------------------------
1.00% Lakefront
- --------------------------------------------------------------------------------
1.10% International Growth
- --------------------------------------------------------------------------------
- ----------
* Prior to March 29, 1999, the Small Company Opportunity Fund paid an
advisory fee equal to 1.00% of its average daily net assets.
102
<PAGE>
Investment Advisory Services to the LifeChoice Funds
KAM continuously monitors the allocation of each Fund's investment in Underlying
Portfolios in three distinct investment categories according to certain
percentage ranges predetermined by the Trustees as follows:
- ---------------------------------------------------------------------------
Conservative Growth Moderate
Investor Fund Investor Fund Investor Fund
- ---------------------------------------------------------------------------
Equity Funds 30-50% 70-90% 50-70%
- ---------------------------------------------------------------------------
Bond/Fixed Funds Income 50-70% 10-30% 30-50%
- ---------------------------------------------------------------------------
Money Funds/Cash Market 0-15% 0-15% 0-15%
- ---------------------------------------------------------------------------
KAM rebalances or reallocates the LifeChoice Funds' investments across
Underlying Portfolios as market conditions warrant. All reallocations are
expected to occur within the above-described ranges.
The selection of the Proprietary Portfolios in which the LifeChoice Funds will
invest, as well as the percentage of assets which can be invested in each type
of underlying mutual fund, are not fundamental investment policies and can be
changed without the approval of a majority of the respective Fund's
shareholders. Any changes to the percentage ranges shown above for allocation
across types of Underlying Portfolios or for allocation in Proprietary
Portfolios and Other Portfolios requires the approval of the Trust's Board of
Trustees. Investors desiring more information on a Proprietary Portfolio listed
above may call the Trust at 800-539-FUND to request a prospectus, which is
available without charge. The selection of the Other Portfolios also is within
the Adviser's discretion.
The Portfolio Managers of the Proprietary Portfolios
As a shareholder in the Proprietary Portfolios, the LifeChoice Funds will bear
their proportionate share of the investment advisory fees paid by the
Portfolios. Set forth below is a description of the investment advisory
agreements for each Proprietary Portfolio. The persons primarily responsible for
the investment management of the Proprietary Portfolios are as follows (unless
otherwise noted, a portfolio manager has managed the Portfolio since
commencement of the Fund's operations):
<TABLE>
<CAPTION>
- ----------------- --------------------------- -----------------------------------------------------------------------
Victory Fund Portfolio Manager Experience
- ----------------- --------------------------- -----------------------------------------------------------------------
<S> <C> <C>
Convertible Richard A. Janus Senior Managing Director of KAM, and has been in the investment
Securities (since April 1996) advisory business since 1977.
- ----------------- --------------------------- -----------------------------------------------------------------------
James K. Kaesberg Portfolio Manager and Managing Director of Convertible Securities
(since April 1996) Investments for KAM, and has been in the investment advisory business
since 1985.
- ----------------- --------------------------- -----------------------------------------------------------------------
Diversified Lawrence G. Babin Senior Portfolio Manager and Managing Director of KAM, and has been
Stock in the investment business since 1982.
- ----------------- --------------------------- -----------------------------------------------------------------------
Established William J. Leugers, Jr. Mr. Leugers is a Portfolio Manager and Managing Director of Gradison
Value and Small (since November 1998) McDonald and has been associated with Gradison McDonald since 1975.
Company
Opportunity
- ----------------- --------------------------- -----------------------------------------------------------------------
Daniel R. Shick Mr. Shick is a Portfolio Managers and Managing Directors of Gradison
(since November 1998) McDonald and has been associated with McDonald since 1972.
- ----------------- --------------------------- -----------------------------------------------------------------------
Gary H. Miller Mr. Miller is a Vice-President and Portfolio Manager of Gradison
(since November 1998) McDonald and been associated with Gradison McDonald since 1987.
- ----------------- --------------------------- -----------------------------------------------------------------------
Fund for Income Thomas M. Seay Mr. Seay served as portfolio manager of the Gradison Government
(since April 1998) Income Fund since April 1998, prior to which he served as vice
president and fixed income portfolio manager of Lexington Management
Corporation.
- ----------------- --------------------------- -----------------------------------------------------------------------
Trenton Fletcher Mr. Fletcher is a Portfolio Manager and Director of KAM, and has been
(since January 1998) associated with KAM or its affiliates since 1989.
- ----------------- --------------------------- -----------------------------------------------------------------------
</TABLE>
103
<PAGE>
<TABLE>
<CAPTION>
- ----------------- --------------------------- -----------------------------------------------------------------------
<S> <C> <C>
Growth William F. Ruple Senior Portfolio Manager and Director of KAM, and has been in the
(since June 1995) investment advisory business since 1970.
- ----------------- --------------------------- -----------------------------------------------------------------------
Intermediate Matthew D. Meyer Senior Portfolio Manager and Director in the Taxable Fixed Income
Income (since May 1999) Group of KAM since January 1999, prior to which he was employed by
McDonald & Company as a First Vice President, Senior Mortgage-Backed
Securities Trader from January 1996 to January 1999 and a
Mortgage-Backed and Agency Securities Trader with First
Tennessee National Corporation from February 1993 to December 1995.
- ----------------- --------------------------- -----------------------------------------------------------------------
International Conrad Metz Senior Portfolio Manager and Managing Director of KAM since October
Growth (since October 1995) 1995; from 1993 to 1995 he was Senior Vice President, International
Equities, at Bailard Biehl & Kaiser. He has been in the investment
business since 1978.
- ----------------- --------------------------- -----------------------------------------------------------------------
Leslie Globits Portfolio Manager and Managing Director of KAM. He has been employed
(since June 1998) by KAM or an affiliate since 1987.
- ----------------- --------------------------- -----------------------------------------------------------------------
Ayaz Ebrahim Director and Portfolio Manager of IIIS, Hong Kong, and has been
(since June 1998) employed by IIIS or an affiliate since 1991.
- ----------------- --------------------------- -----------------------------------------------------------------------
Didier LeConte Senior Portfolio Manager - European Equities at IIIS, and has been
(since June 1998) employed by IIIS or an affiliate since 1996.
- ----------------- --------------------------- -----------------------------------------------------------------------
Jean-Claude Kaltenbach Head of Equity Management at IIIS, and has been employed by IIIS or
(since June 1998) an affiliate since 1994.
- ----------------- --------------------------- -----------------------------------------------------------------------
Miren Etcheverry Senior Portfolio Manager at IIIS since January 2000. From 1996 until
(since January 2000) January 2000, Senior Vice President, John Hancock Funds, prior to
which, she was a Senior Vice President with Baring Asset Management.
- ----------------- --------------------------- -----------------------------------------------------------------------
Investment Richard T. Heine Vice President and Portfolio Manager with KAM, and has been in the
Quality Bond investment advisory business since 1977
- ----------------- --------------------------- -----------------------------------------------------------------------
Limited Term Deborah Svoboda Ms. Svoboda has been a Portfolio Manager and Managing Director of KAM
Income (since September 1998) since September 1998, prior to which she was a Senior Vice President
responsible for asset-backed securities syndication and marketing for
McDonald & Company Investments Inc.
- ----------------- --------------------------- -----------------------------------------------------------------------
Real Estate Patrice Derrington Managing Director and Portfolio Manager of KAM, and has been in the
Investment real estate,investment, and finance business since 1991.
- ----------------- --------------------------- -----------------------------------------------------------------------
Richard E. Salomon Director of, and a Senior Managing Director with KAM, and has been in
the investment advisory business since 1982.
- ----------------- --------------------------- -----------------------------------------------------------------------
Special Anthony Aveni Senior Managing Director with KAM, and has been in the investment
Value (since December 1993) business since 1981.
- ----------------- --------------------------- -----------------------------------------------------------------------
Paul Danes Portfolio Manager and Director of KAM, and has been in the investment
(since October 1995) business since 1987.
- ----------------- --------------------------- -----------------------------------------------------------------------
Value Neil A. Kilbane Portfolio Manager and Managing Director of KAM, and has been in the
(since April 1998) investment business since 1986.
- ----------------- --------------------------- -----------------------------------------------------------------------
</TABLE>
Investment Sub-Advisers.
The Lakefront Fund. Lakefront Capital Investors, Inc. ("Lakefront") serves as
sub-adviser to the Lakefront Fund. Pursuant to an agreement with the Adviser
dated as of March 1, 1997, the Adviser pays Lakefront from its advisory fee a
monthly fee at an annual rate of 0.50% of the Lakefront Fund's average daily net
assets.
Lakefront is a registered investment adviser with the SEC. As of November 30,
1999, Lakefront managed approximately $20 million for its clients.
The International Growth Fund -- Manager of Managers. As the "Manager of
Managers" of the International Growth Fund, KAM may select one or more
sub-advisers to manage the Fund's assets. KAM evaluates each sub-
104
<PAGE>
adviser's skills, investment styles and strategies in light of KAM's analysis of
the international securities markets. Under its Advisory Agreement with the
Trust, KAM oversees the investment advisory services that a sub-adviser provides
to the International Growth Fund. If KAM engages more than one sub-adviser, KAM
may reallocate assets among sub-advisers when it believes it is appropriate. KAM
provides investment advice with respect to short-term debt securities. KAM has
the ultimate responsibility for the International Growth Fund's investment
performance because it is responsible for overseeing all sub-advisers and
recommending to the Trust's Board of Trustees that it hire, terminate or replace
a particular sub-adviser.
The Trust and KAM have obtained an order from the SEC that allows KAM to serve
as a Manager of Managers. The order lets KAM, subject to certain conditions,
select new sub-advisers with the approval of the Board, without obtaining
shareholder approval. The order also allows KAM to change the terms of
agreements with the sub-advisers or to keep a sub-adviser even if certain events
would otherwise require that a sub-advisory agreement terminate. The Trust will
notify shareholders of any sub-adviser change. Shareholders, however, also have
the right to terminate an agreement with a particular sub-adviser. If KAM hires
more than one sub-adviser, the order also allows the International Growth Fund
to disclose only the aggregate amount of fees paid to all sub-advisers.
IIIS (collectively with Lakefront, the "Sub-Advisers") serves as sub-adviser to
the International Growth Fund. Pursuant to an agreement with the Adviser dated
as of June 1, 1998, the Adviser pays IIIS a monthly fee of 0.55% of the
International Growth Fund's average daily net assets from its advisory fee.
IIIS is a registered investment adviser with the SEC. As of June 30, 1999, IIIS
and its affiliates managed approximately $145 billion for their clients. IIIS
also serves as investment adviser to the France Growth Fund and sub-adviser to
the BNY Hamilton International Equity Fund and the John Hancock European Equity
Fund.
The Investment Advisory and Investment Sub-Advisory Agreements.
Unless sooner terminated, the Investment Advisory Agreement between the Adviser
and the Trust, on behalf of the Funds (the "Investment Advisory Agreement"),
provides that it will continue in effect as to the Funds for an initial two-year
term and for consecutive one-year terms thereafter, provided that such renewal
is approved at least annually by the Trustees or by vote of a majority of the
outstanding shares of each Fund (as defined under "Additional Information -
Miscellaneous"), and, in either case, by a majority of the Trustees who are not
parties to the Agreement or interested persons (as defined in the 1940 Act) of
any party to the Agreement, by votes cast in person at a meeting called for such
purpose. The Investment Advisory Agreement is terminable as to any particular
Fund at any time on 60 days' written notice without penalty by vote of a
majority of the outstanding shares of the Fund, by vote of the Board, or by the
Adviser. The Investment Advisory Agreement also terminates automatically in the
event of any assignment, as defined in the 1940 Act.
The Investment Advisory Agreement provides that the Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Funds in connection with the performance of services pursuant thereto, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith, or gross negligence on the part of the Adviser in the performance of its
duties, or from reckless disregard by the Adviser of its duties and obligations
thereunder.
For the three fiscal years ended October 31, 1999, KAM earned the following
advisory fees with respect to each Fund. The amount of fees paid to the Adviser
is shown net of the amount of fee reduction.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------------------------------------------------------------
Fees Paid Fee Reduction Fees Paid Fee Reduction Fees Paid Fee Reduction
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balanced $3,446,546 $1,041,454 $3,019,535 $943,992 $2,810,294 $353,372
---------------------------------------------------------------------------------------------------------------------
Convertible 696,000 0 794,188 0 595,753 0
Securities
---------------------------------------------------------------------------------------------------------------------
Diversified Stock 6,855,681 503,319 5,039,529 1,022,826 4,560,843 0
---------------------------------------------------------------------------------------------------------------------
Established Value 1,224,467 246,533 2,580,124 0 2,093,562 0
---------------------------------------------------------------------------------------------------------------------
Federal Money Market 1,413,628 1,136,372 589,340 732,604 0 277,326
---------------------------------------------------------------------------------------------------------------------
Financial Reserves 4,192,000 0 3,761,563 123,455 3,786,668 301,812
---------------------------------------------------------------------------------------------------------------------
</TABLE>
105
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------------------------------------------------------------
Fees Paid Fee Reduction Fees Paid Fee Reduction Fees Paid Fee Reduction
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------
Fund for Income 698,399 128,601 16,446 103,873 5,722 92,630
---------------------------------------------------------------------------------------------------------------------
Government Mortgage 417,129 97,871 380,810 134,385 565,656 0
---------------------------------------------------------------------------------------------------------------------
Gradison Gov't Res.# 9,118,000 737,000 7,875,357 0 6,956,236 0
---------------------------------------------------------------------------------------------------------------------
Growth 3,260,024 280,976 1,936,780 304,983 1,709,722 0
---------------------------------------------------------------------------------------------------------------------
Inst. Money Market 3,442,030 1,887,970 2,051,053 1,279,243 1,638,661 855,791
---------------------------------------------------------------------------------------------------------------------
Intermediate Income 1,183,269 640,731 1,159,701 681,558 1,622,286 340,846
---------------------------------------------------------------------------------------------------------------------
International Growth 1,572,373 160,373 1,082,604 123,169 1,317,383 0
---------------------------------------------------------------------------------------------------------------------
Inv. Quality Bond 779,464 389,732 880,262 436,244 993,289 208,773
---------------------------------------------------------------------------------------------------------------------
Lakefront 6,839 6,839 6,293 6,293 2,144 5,022
---------------------------------------------------------------------------------------------------------------------
LifeChoice Cons. 7,869 7,869 9,198 4,473 4,311 139
---------------------------------------------------------------------------------------------------------------------
LifeChoice Growth 14,973 14,973 11,797 5,708 6,130 128
---------------------------------------------------------------------------------------------------------------------
LifeChoice Moderate 22,903 22,902 15,484 9,367 6,565 1,024
---------------------------------------------------------------------------------------------------------------------
Limited Term Income 275,101 97,708 271,020 123,743 418,588 15,636
---------------------------------------------------------------------------------------------------------------------
National Muni Bond 82,964 179,176 0 295,779 0 239,815
---------------------------------------------------------------------------------------------------------------------
New York Tax-Free 56,745 47,287 54,279 60,020 23,901 73,540
---------------------------------------------------------------------------------------------------------------------
Ohio Municipal Bond 590,452 340,548 301,873 174,387 376,962 79,594
---------------------------------------------------------------------------------------------------------------------
Ohio Muni Mon. Mkt 3,865,335 1,109,110 2,513,242 1,026,186 2,281,185 833,236
---------------------------------------------------------------------------------------------------------------------
Ohio Regional Stock 226,063 29,139 334,000 61,447 375,231 0
---------------------------------------------------------------------------------------------------------------------
Prime Obligations 6,046,488 0 3,673,976 0 1,870,850 0
---------------------------------------------------------------------------------------------------------------------
Real Estate 39,999 118,156 14,049 111,672 0 15,464
Investment
---------------------------------------------------------------------------------------------------------------------
Small Co. 551,294 95,047 881,658 0 699,336 0
Opportunity
---------------------------------------------------------------------------------------------------------------------
Special Value 2,553,867 283,759 3,814,898 443,848 3,525,053 0
---------------------------------------------------------------------------------------------------------------------
Stock Index 3,847,517 842,483 2,681,381 798,447 1,715,703 574,290
---------------------------------------------------------------------------------------------------------------------
Tax-Free Money Mkt 2,428,741 0 1,829,130 29,470 1,283,064 37,520
---------------------------------------------------------------------------------------------------------------------
U.S. Gov't Obl's 7,639,953 0 6,864,953 0 5,387,642 0
---------------------------------------------------------------------------------------------------------------------
Value 5,595,907 280,784 4,505,880 613,276 4,396,880 0
---------------------------------------------------------------------------------------------------------------------
</TABLE>
Sub-Advisory Agreements. Under the Investment Advisory Agreement, the Adviser
may delegate a portion of its responsibilities to a sub-adviser. In addition,
the Investment Advisory Agreement provides that the Adviser may render services
through its own employees or the employees of one or more affiliated companies
that are qualified to act as an investment adviser of the Funds and are under
the common control of KeyCorp as long as all such persons are functioning as
part of an organized group of persons, managed by authorized officers of the
Adviser.
Each Sub-Adviser's Agreement with KAM is terminable at any time, without
penalty, by the Board of Trustees, by the Adviser or by vote of a majority of
the respective Fund's outstanding voting securities on 60 days' written notice
to the Adviser. Unless sooner terminated, each Sub-Advisory Agreement shall
continue in effect from year to year if approved at least annually by a majority
vote of the Board of Trustees, including a majority of the Trustees who are not
interested persons of the Adviser or the respective Sub-Adviser, cast in person
at a meeting called for the purpose of voting on the relevant Sub-Advisory
Agreement.
Glass-Steagall Act.
In 1971 the United States Supreme Court held in Investment Company Institute v.
Camp that the federal statute commonly referred to as the Glass-Steagall Act
prohibits a national bank from operating a fund for the collective investment of
managing agency accounts. Subsequently, the Board of Governors of the Federal
Reserve System (the "Board") issued a regulation and interpretation to the
effect that the Glass-Steagall Act and such decision:
- ----------
# For the one month ended October 31, 1999, the Gradison Government Reserves
Fund paid $630,000 to the Adviser, after a fee reduction of $120,000.
106
<PAGE>
(a) forbid a bank holding company registered under the Federal Bank Holding
Company Act of 1956 (the "Holding Company Act") or any non-bank affiliate
thereof from sponsoring, organizing, or controlling a registered, open-end
investment company continuously engaged in the issuance of its shares, but (b)
do not prohibit such a holding company or affiliate from acting as investment
adviser, transfer agent, and custodian to such an investment company. In 1981
the United States Supreme Court held in Board of Governors of the Federal
Reserve System v. Investment Company Institute that the Board did not exceed its
authority under the Holding Company Act when it adopted its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to registered closed-end investment companies. In
the Board of Governors case, the Supreme Court also stated that if a national
bank complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
On November 12, 1999, President Clinton signed a bill repealing the
Glass-Steagall Act. As a result, the Adviser may in the future perform certain
functions for the Funds that previously were not permitted under federal law.
From time to time, advertisements, supplemental sales literature and information
furnished to present or prospective shareholders of the Funds may include
descriptions of Key Trust Company of Ohio, N.A. and the Adviser including, but
not limited to, (1) descriptions of the operations of Key Trust Company of Ohio,
N.A. and the Adviser; (2) descriptions of certain personnel and their functions;
and (3) statistics and rankings related to the operations of Key Trust Company
of Ohio, N.A. and the Adviser.
Code of Ethics.
The Funds, the Adviser, and the Sub-advisers have each adopted a Code of Ethics
to which all investment personnel and all other access persons of the Funds must
conform. Investment personnel must refrain from certain trading practices and
are required to report certain personal investment activities. Violations of the
Code of Ethics can result in penalties, suspension, or termination of
employment.
Portfolio Transactions.
The Money Market Funds. Pursuant to the Investment Advisory Agreement between
the Adviser and the Trust, on behalf of the Money Market Funds, the Adviser
determines, subject to the general supervision of the Trustees of the Trust, and
in accordance with each Money Market Fund's investment objective, policies and
restrictions, which securities are to be purchased and sold by the Money Market
Funds, and which brokers are to be eligible to execute its portfolio
transactions. Since purchases and sales of portfolio securities by the Money
Market Funds are usually principal transactions, the Money Market Funds incur
little or no brokerage commissions. For the three fiscal years ended October 31,
1999, the Money Market Funds paid no brokerage commissions. Securities of the
Money Market Funds are normally purchased directly from the issuer or from a
market maker for the securities. The purchase price paid to dealers serving as
market makers may include a spread between the bid and asked prices. The Money
Market Funds also may purchase securities from underwriters at prices which
include the spread retained by the underwriter from the proceeds of the offering
to the issuer.
The Money Market Funds do not seek to profit from short-term trading, and will
generally (but not always) hold portfolio securities to maturity, but the
Adviser may seek to enhance the yield of the Funds by taking advantage of yield
disparities or other factors that occur in the money markets. For example,
market conditions frequently result in similar securities trading at different
prices. The Adviser may dispose of any portfolio security prior to its maturity
if such disposition and reinvestment of proceeds are expected to enhance yield
consistent with the Adviser's judgment as to desirable portfolio maturity
structure or if such disposition is believed to be advisable due to other
circumstances or conditions. The investment policies of the Money Market Funds
require that investments mature in 90 days or less. Thus, there is likely to be
relatively high portfolio turnover, but since brokerage commissions are not
normally paid on money market instruments, the high rate of portfolio turnover
is not expected to have a material effect on the net income or expenses of the
Money Market Funds.
107
<PAGE>
The Adviser's primary consideration in effecting a security transaction is to
obtain the best net price and the most favorable execution of the order.
Allocation of transactions, including their frequency, among various dealers is
determined by the Adviser in its best judgment and in a manner deemed fair and
reasonable to shareholders.
Income and Equity Funds. Pursuant to the Investment Advisory Agreement (and for
the Lakefront Fund and the International Growth Fund, the Sub-Advisory
Agreements), the Adviser* determines, subject to the general supervision of the
Trustees of the Trust, and in accordance with each Fund's investment objective
and restrictions, which securities are to be purchased and sold by the Funds,
and which brokers are to be eligible to execute its portfolio transactions.
Purchases from underwriters and/or broker-dealers of portfolio securities
include a commission or concession paid by the issuer to the underwriter and/or
broker-dealer and purchases from dealers serving as market makers may include
the spread between the bid and asked price. While the Adviser generally seeks
competitive spreads or commissions, each Fund may not necessarily pay the lowest
spread or commission available on each transaction, for reasons discussed below.
Allocation of transactions to dealers is determined by the Adviser in its best
judgment and in a manner deemed fair and reasonable to shareholders. The primary
consideration is prompt execution of orders in an effective manner at the most
favorable price. Subject to this consideration, dealers who provide supplemental
investment research to the Adviser may receive orders for transactions by the
Trust. Information so received is in addition to and not in lieu of services
required to be performed by the Adviser and does not reduce the investment
advisory fees payable to the Adviser by the Funds. Such information may be
useful to the Adviser in serving both the Trust and other clients and,
conversely, such supplemental research information obtained by the placement of
orders on behalf of other clients may be useful to the Adviser in carrying out
its obligations to the Trust. The Trustees have authorized the allocation of
brokerage to affiliated broker-dealers on an agency basis to effect portfolio
transactions. The Trustees have adopted procedures incorporating the standards
of Rule 17e-1 of the 1940 Act, which require that the commission paid to
affiliated broker-dealers must be "reasonable and fair compared to the
commission, fee or other remuneration received, or to be received, by other
brokers in connection with comparable transactions involving similar securities
during a comparable period of time." At times, the Funds may also purchase
portfolio securities directly from dealers acting as principals, underwriters or
market makers. As these transactions are usually conducted on a net basis, no
brokerage commissions are paid by the Funds.
All Funds. The Trust will not execute portfolio transactions through, acquire
portfolio securities issued by, make savings deposits in, or enter into
repurchase or reverse repurchase agreements with the Adviser, the Sub-Advisers,
Key Trust Company of Ohio, N.A. ("Key Trust") or their affiliates, or BISYS or
its affiliates, and will not give preference to Key Trust's correspondent banks
or affiliates, or BISYS with respect to such transactions, securities, savings
deposits, repurchase agreements, and reverse repurchase agreements.
Investment decisions for each Fund are made independently from those made for
the other Funds of the Trust or any other investment company or account managed
by the Adviser. Such other investment companies or accounts may also invest in
the securities and may follow similar investment strategies as the Funds. When a
purchase or sale of the same security is made at substantially the same time on
behalf of a Fund and any other Fund, investment company or account, the
transaction will be averaged as to price, and available investments allocated as
to amount, in a manner which the Adviser believes to be equitable to such Funds,
investment company or account. In some instances, this investment procedure may
affect the price paid or received by a Fund or the size of the position obtained
by the Fund in an adverse manner relative to the result that would have been
obtained if only that particular Fund had participated in or been allocated such
trades. To the extent permitted by law, the Adviser may aggregate the securities
to be sold or purchased for a Fund with those to be sold or purchased for the
other Funds of the Trust or for other investment companies or accounts in order
to obtain best execution. In making investment recommendations for the Trust,
the Adviser will not inquire or take into consideration whether an issuer of
securities proposed for purchase or sale by a Fund is a customer of the Adviser,
their parents or subsidiaries or affiliates and, in dealing with their
commercial customers, the Adviser, its parents, subsidiaries, and affiliates
will not inquire or take into consideration whether securities of such customers
are held by the Trust.
* For purposes of the following discussion, the term "Adviser" refers to the
Adviser and any sub-advisers.
108
<PAGE>
Brokerage commissions paid by each of the Funds listed below were as follows for
the three fiscal years ended October 31, 1999.
------------------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------------------
Balanced 244,757.56 $197,179.88 $212,666.31
------------------------------------------------------------------------------
Convertible Securities 50,636.98 73,375.17 46,738
------------------------------------------------------------------------------
Diversified Stock 883,933.41 1,533,314.33 906,124.85
------------------------------------------------------------------------------
Established Value 255,565.92 512,565.00 200,205.00
------------------------------------------------------------------------------
Growth 294.718.62 150,360.66 68,970.96
------------------------------------------------------------------------------
Intermediate Income 48,267.61 1,271.88 3,242.20
------------------------------------------------------------------------------
International Growth Fund 860,704.76 619,297.58 1,103,488.08
------------------------------------------------------------------------------
Investment Quality Bond 285.95 773.44 1,734.39
------------------------------------------------------------------------------
Lakefront 1,513.52 1,927.90 2,513.90
------------------------------------------------------------------------------
Limited Term Income 0 0 468.75
------------------------------------------------------------------------------
Ohio Regional Stock 25,067.74 23,932.34 21,805.75
------------------------------------------------------------------------------
Real Estate Investment 45,149.04 46,584.80 0
------------------------------------------------------------------------------
Small Company Opportunity 137,765.82 136,378 92,853
------------------------------------------------------------------------------
Special Value 564,320.18 581,672.43 428,514.23
------------------------------------------------------------------------------
Stock Index 97,107.95 107,718.60 43,190.22
------------------------------------------------------------------------------
Value 369,846.12 391,275.21 218,946.60
------------------------------------------------------------------------------
Portfolio Turnover.
The portfolio turnover rates stated in the Prospectuses are calculated by
dividing the lesser of each Fund's purchases or sales of portfolio securities
for the year by the monthly average value of the portfolio securities. The
calculation excludes all securities whose maturities, at the time of
acquisition, were one year or less. Portfolio turnover is calculated on the
basis of the Fund as a whole without distinguishing between the classes of
shares issued. As indicated below, the Limited Term Income Fund experienced
higher-than-usual portfolio turnover for the fiscal year ended October 31, 1999
due to extraordinarily volatile market conditions. The portfolio turnover rates
for each of the Funds listed below were as follows for the two fiscal years
ended October 31, 1999.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balanced 177% 231% LifeChoice Growth 52% 30%
- -----------------------------------------------------------------------------------------------------------------------
Convertible Securities 73% 77% LifeChoice Moderate 69% 42%
- -----------------------------------------------------------------------------------------------------------------------
Diversified Stock 83% 84% Limited Term Income 220% 177%
- -----------------------------------------------------------------------------------------------------------------------
Established Value 11% 37% National Muni Bond 127% 152%
- -----------------------------------------------------------------------------------------------------------------------
Fund for Income 24% 36% New York Tax-Free 28% 38%
- -----------------------------------------------------------------------------------------------------------------------
Government Mortgage 274% 296% Ohio Municipal Bond 112% 95%
- -----------------------------------------------------------------------------------------------------------------------
Growth 33% 29% Ohio Regional Stock 2% 6%
- -----------------------------------------------------------------------------------------------------------------------
Intermediate Income 303% 318% Real Estate Inv. 62% 53%
- -----------------------------------------------------------------------------------------------------------------------
International Growth 106% 86% Small Co. Opp'ty 16% 42%
- -----------------------------------------------------------------------------------------------------------------------
Inv. Quality Bond 398% 492% Special Value 43% 44%
- -----------------------------------------------------------------------------------------------------------------------
Lakefront 23% 36% Stock Index 3% 8%
- -----------------------------------------------------------------------------------------------------------------------
LifeChoice Cons. 57% 78% Value 36% 40%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Administrator.
BISYS Fund Services Ohio, Inc. (the "Administrator") serves as administrator to
the Funds pursuant to an administration agreement dated October 1, 1999 (the
"Administration Agreement"). The Administrator assists in supervising all
operations of the Funds (other than those performed by the Adviser or the
Sub-Advisers under their respective agreements), subject to the supervision of
the Board of Trustees.
109
<PAGE>
For the services rendered to the Funds and related expenses borne by the
Administrator, each Fund pays the Administrator an annual fee, computed daily
and paid monthly, at the following annual rates based on each Fund's average
daily net assets: 0.15% for portfolio assets of $300 million and less, 0.12% for
the next $300 million through $600 million of portfolio assets, and 0.10% for
portfolio assets greater than $600 million. The Administrator may periodically
waive all or a portion of its fee with respect to any Fund in order to increase
the net income of one or more of the Funds available for distribution to
shareholders.
Unless sooner terminated, the Administration Agreement will continue in effect
as to each Fund for a period of two years, and for consecutive two-year terms
thereafter, provided that such continuance is ratified by the Trustees or by
vote of a majority of the outstanding shares of each Fund, and in either case by
a majority of the Trustees who are not parties to the Administration Agreement
or interested persons (as defined in the 1940 Act) of any party to the
Agreement, by votes cast in person at a meeting called for such purpose.
The Administration Agreement provides that the Administrator shall not be liable
for any error of judgment or mistake of law or any loss suffered by the Trust in
connection with the matters to which the Agreement relates, except a loss
resulting from willful misfeasance, bad faith, or negligence in the performance
of its duties, or from the reckless disregard of its obligations and duties
thereunder.
Under the Administration Agreement, the Administrator assists in each Fund's
administration and operation, including providing statistical and research data,
clerical services, internal compliance and various other administrative
services, including among other responsibilities, forwarding certain purchase
and redemption requests to the transfer agent, participation in the updating of
the prospectus, coordinating the preparation, filing, printing and dissemination
of reports to shareholders, coordinating the preparation of income tax returns,
arranging for the maintenance of books and records and providing the office
facilities necessary to carry out the duties thereunder. Under the
Administration Agreement, the Administrator may delegate all or any part of its
responsibilities thereunder.
The following table reflects the aggregate administration fees earned after fee
reductions by the Administrator in connection with the sale of shares of each
Fund for the three fiscal years ended October 31, 1999.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Fee Fee Fee
Fees Reductions Fees Reductions Fees Reductions
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balanced $628,622 $0 $565,625 $0 $472,961 $0
- ---------------------------------------------------------------------------------------------------------------------------
Convertible Sec's 139,306 0 174,181 0 169,130 0
- ---------------------------------------------------------------------------------------------------------------------------
Diversified Stock 1,342,629 0 1,142,672 0 1,034,997 0
- ---------------------------------------------------------------------------------------------------------------------------
Established Value 217,967 172,809 384,111 0 336,673 0
- ---------------------------------------------------------------------------------------------------------------------------
Federal Money Market 611,922 618,007 429,784 0 213,167 0
- ---------------------------------------------------------------------------------------------------------------------------
Financial Reserves 1,048,129 0 987,007 0 1,209,552 0
- ---------------------------------------------------------------------------------------------------------------------------
Fund for Income 70,556 135,575 14,438 21,658 11,799 17,707
- ---------------------------------------------------------------------------------------------------------------------------
Government Mortgage 154,461 0 154,559 0 169,697 0
- ---------------------------------------------------------------------------------------------------------------------------
Gradison Gov't Res. * 841,000 498,000 2,799,248 0 2,408,388 0
- ---------------------------------------------------------------------------------------------------------------------------
Growth 514,406 0 336,265 0 256,459 0
- ---------------------------------------------------------------------------------------------------------------------------
Inst. Money Mkt 1,279,335 1,063,780 799,361 742,945 340,471 1,156,193
- ---------------------------------------------------------------------------------------------------------------------------
Intermediate Inc. 364,835 0 368,253 0 392,489 0
- ---------------------------------------------------------------------------------------------------------------------------
Int'l Growth 236,458 0 164,424 0 179,643 0
- ---------------------------------------------------------------------------------------------------------------------------
Inv. Quality Bond 233,840 0 263,302 0 240,312 0
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
* For the one month ended October 31, 1999, the Gradison Government Reserves
Fund paid $92,000 in administration fees, after a fee reduction of
$99,000.
110
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Fee Fee Fee
Fees Reductions Fees Reductions Fees Reductions
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Lakefront 2,052 0 1,888 0 1,045 0
- ---------------------------------------------------------------------------------------------------------------------------
LifeChoice Cons. 12,001 0 11,015 0 0 0
- ---------------------------------------------------------------------------------------------------------------------------
LifeChoice Growth 12,001 0 11,015 0 0 0
- ---------------------------------------------------------------------------------------------------------------------------
LifeChoice Moderate 12,001 0 11,015 0 0 0
- ---------------------------------------------------------------------------------------------------------------------------
Limited Term Income 115,008 0 118,429 0 130,222 0
- ---------------------------------------------------------------------------------------------------------------------------
National Muni Bond 71,493 0 80,667 0 65,363 0
- ---------------------------------------------------------------------------------------------------------------------------
New York Tax-Free 11,349 17,023 12,437 18,656 10,626 15,949
- ---------------------------------------------------------------------------------------------------------------------------
Ohio Municipal Bond 229,950 0 119,065 0 114,083 0
- ---------------------------------------------------------------------------------------------------------------------------
Ohio Muni Money Mkt 1,204,892 0 917,889 0 548,673 375,708
- ---------------------------------------------------------------------------------------------------------------------------
Ohio Regional Stock 51,041 0 79,090 0 75,046 0
- ---------------------------------------------------------------------------------------------------------------------------
Prime Obligations 1,937,569 0 1,259,710 0 790,839 0
- ---------------------------------------------------------------------------------------------------------------------------
Real Estate Inv. 23,723 0 11,216 7,642 0 2,320
- ---------------------------------------------------------------------------------------------------------------------------
Small Co. Opp'ty 57,100 103,295 160,216 0 138,080 0
- ---------------------------------------------------------------------------------------------------------------------------
Special Value 422,304 0 601,051 0 525,357 0
- ---------------------------------------------------------------------------------------------------------------------------
Stock Index 1,327 990,722 0 782,953 0 567,979
- ---------------------------------------------------------------------------------------------------------------------------
Tax-Free Money Mkt 900,367 0 726,665 0 562,890 0
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Gov't Obl's 2,392,790 0 2,171,416 0 2,258,117 0
- ---------------------------------------------------------------------------------------------------------------------------
Value 794,321 0 704,301 0 654,663 0
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Sub-Administrator.
KAM serves as sub-administrator to the Trust pursuant to a sub-administration
agreement dated October 1, 1997 (the "Sub-Administration Agreement"). As
sub-administrator, KAM assists the Administrator in all aspects of the
operations of the Trust, except those performed by KAM under its Investment
Advisory Agreement.
For services provided under the Sub-Administration Agreement, the Administrator
pays KAM a fee, with respect to each Fund, calculated at the annual rate of up
to five one-hundredths of one percent (0.05%) of such Fund's average daily net
assets. Except as otherwise provided in the Administration Agreement, KAM shall
pay all expenses incurred by it in performing its services and duties as
sub-administrator. Unless sooner terminated, the Sub-Administration Agreement
will continue in effect as to each Fund for a period of two years, and for
consecutive one-year terms thereafter, unless written notice not to renew is
given by the non-renewing party.
Under the Sub-Administration Agreement, KAM's duties include maintaining office
facilities, furnishing statistical and research data, compiling data for various
state and federal filings by the Trust, assist in mailing and filing the Trust's
annual and semi-annual reports to shareholders, providing support for board
meetings, and arranging for the maintenance of books and records and providing
the office facilities necessary to carry out the duties thereunder.
Distributor.
BISYS Fund Services Limited Partnership serves as distributor (the
"Distributor") for the continuous offering of the shares of the Funds pursuant
to a Distribution Agreement between the Distributor and the Trust. Unless
otherwise terminated, the Distribution Agreement will remain in effect with
respect to each Fund for two years, and will continue thereafter for consecutive
one-year terms, provided that the renewal is approved at least annually (1) by
the Trustees or by the vote of a majority of the outstanding shares of each
Fund, and (2) by the vote of a majority of the Trustees of the Trust who are not
parties to the Distribution Agreement or interested persons of any such party,
cast in person at a meeting called for the purpose of voting on such approval.
The Distribution Agreement will terminate in the event of its assignment, as
defined under the 1940 Act.
111
<PAGE>
The following table reflects the total underwriting commissions earned and the
amount of those commissions retained by the Distributor in connection with the
sale of shares of each Fund for the three fiscal years ended October 31, 1999.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
Underwriting Amount Underwriting Amount Underwriting Amount
Commissions Retained Commissions Retained Commission Retained
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balanced $305,269 $192,988 $148,456 $5,744 $96,700 $4,600
- ------------------------------------------------------------------------------------------------------------------
Conv't Securities $29,522 0 48,035 6,080 N/A N/A
- ------------------------------------------------------------------------------------------------------------------
Diversified Stock 1,105,926 660,339 1,362,247 83,232 1,412,000 448,000
- ------------------------------------------------------------------------------------------------------------------
Fund for Income 20,060 0 11,928 3,160 30,601+/- 0
- ------------------------------------------------------------------------------------------------------------------
Gov't Mortgage 16,337 0 9,293 1,145 17,200 2,000
- ------------------------------------------------------------------------------------------------------------------
Growth 211,016 0 45,898 5,927 15,300 2,200
- ------------------------------------------------------------------------------------------------------------------
Intermediate Income 18,376 0 665 89 2,600 300
- ------------------------------------------------------------------------------------------------------------------
International Growth 12,434 8,430 19,553 1,565 11,600 1,300
- ------------------------------------------------------------------------------------------------------------------
Inv. Quality Bond 16,083 0 3,437 448 15,700 2,200
- ------------------------------------------------------------------------------------------------------------------
Lakefront 633 0 2,620 380 3,000 500
- ------------------------------------------------------------------------------------------------------------------
Ltd. Term Income 746 0 406 100 400 100
- ------------------------------------------------------------------------------------------------------------------
National Muni Bond 42,241 23,673 37,577 2,273 30,200 1,300
- ------------------------------------------------------------------------------------------------------------------
New York Tax-Free 38,993 24,397 19,708 1,281 51,300 3,900
- ------------------------------------------------------------------------------------------------------------------
Ohio Municipal Bond 42,050 0 29,884 3,834 26,000 3,500
- ------------------------------------------------------------------------------------------------------------------
Ohio Regional Stock 2,058 663 15,644 1,031 19,800 1,500
- ------------------------------------------------------------------------------------------------------------------
Real Estate Investment 6,946 0 12,709 1,631 16,600 2,300
- ------------------------------------------------------------------------------------------------------------------
Small Co. Opp'ty 6,334 0 14,615 2,156 18,200 2,800
- ------------------------------------------------------------------------------------------------------------------
Special Value 21,072 7,437 58,381 3,770 76,000 4,600
- ------------------------------------------------------------------------------------------------------------------
Stock Index 198,404 0 123,439 17,022 91,700 12,800
- ------------------------------------------------------------------------------------------------------------------
Value 89,154 0 18,412 2,472 12,800 2,000
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table reflects miscellaneous service fees paid to an affiliate by
Gradison Government Income Fund, Gradison Established Value Fund and Gradison
Opportunity Value Fund, predecessor funds to the Victory Fund for Income,
Victory Established Value Fund and Victory Small Company Opportunity Fund,
respectively.
<TABLE>
<CAPTION>
- ---------------------------- ----------------------- --------------- --------------- --------------- ----------------
Expense Fiscal Year 1999 1998 1997
Ended
- ---------------------------- ----------------------- --------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Gradison Government Income Data processing December 31 N/A $39,970 $40,302
Fund services
- ---------------------------- ----------------------- --------------- --------------- --------------- ----------------
Gradison Government Income Shareholder servicing December 31 N/A $59,992 $53,667
Fund personnel costs
- ---------------------------- ----------------------- --------------- --------------- --------------- ----------------
Gradison Established Value Transfer agent and March 31 $418,827 $384,111 $333,673
Fund accounting services
- ---------------------------- ----------------------- --------------- --------------- --------------- ----------------
Gradison Opportunity Value Transfer agent and March 31 $195,530 $384,111 $154,756
Fund accounting services
- ---------------------------- ----------------------- --------------- --------------- --------------- ----------------
</TABLE>
Transfer Agent.
State Street Bank and Trust Company ("State Street") serves as transfer agent
for the Funds. Boston Financial Data Services, Inc. serves as the dividend
disbursing agent and shareholder servicing agent for the Funds, pursuant to a
Transfer Agency and Service Agreement. Under its agreement with the Trust, State
Street has agreed (1) to issue and redeem shares of the Funds; (2) to address
and mail all communications by the Funds to their shareholders, including
reports to shareholders, dividend and distribution notices, and proxy material
for its meetings of shareholders; (3) to respond to correspondence or inquiries
by shareholders and others relating to its duties; (4) to
- ----------
+/- Reflects sales charges paid by the Gradison Government Income Fund, the
predecessor to the Fund for Income, to McDonald Securities for the six
months ended July 1, 1997. (The Gradison Government Income Fund eliminated
its sales charge effective July 7, 1997.)
112
<PAGE>
maintain shareholder accounts and certain sub-accounts; and (5) to make periodic
reports to the Trustees concerning the Trust's operations.
Shareholder Servicing Plan.
Payments made under the Shareholder Servicing Plan to Shareholder Servicing
Agents (which may include affiliates of the Adviser and each Sub-Adviser) are
for administrative support services to customers who may from time to time
beneficially own shares, which services may include: (1) aggregating and
processing purchase and redemption requests for shares from customers and
transmitting promptly net purchase and redemption orders to our distributor or
transfer agent; (2) providing customers with a service that invests the assets
of their accounts in shares pursuant to specific or pre-authorized instructions;
(3) processing dividend and distribution payments on behalf of customers; (4)
providing information periodically to customers showing their positions in
shares; (5) arranging for bank wires; (6) responding to customer inquiries; (7)
providing sub-accounting with respect to shares beneficially owned by customers
or providing the information to the Funds as necessary for sub-accounting; (8)
if required by law, forwarding shareholder communications from us (such as
proxies, shareholder reports, annual and semi-annual financial statements and
dividend, distribution and tax notices) to customers; (9) forwarding to
customers proxy statements and proxies containing any proposals which require a
shareholder vote; and (10) providing such other similar services as we may
reasonably request to the extent you are permitted to do so under applicable
statutes, rules or regulations.
Distribution and Service Plan.
The Trust, on behalf of the Class A shares of the Financial Reserves Fund, Fund
for Income, Lakefront Fund, National Municipal Bond Fund, New York Tax-Free
Fund, Ohio Municipal Money Market Fund, Real Estate Investment Fund, Class G
shares of the Stock Index Fund and Investor and Select shares of the
Institutional Money Market Fund and U.S. Government Obligations Fund, has
adopted a Distribution and Service Plan (the "Plan") pursuant to Rule 12b-1
under the 1940 Act (the "Rule 12b-1"). Rule 12b-1 provides in substance that a
mutual fund may not engage directly or indirectly in financing any activity that
is primarily intended to result in the sale of shares of such mutual fund except
pursuant to a plan adopted by the fund under Rule 12b-1. The Board of Trustees
has adopted the Plan to allow the Adviser, any Sub-Adviser and the Distributor
to incur certain expenses that might be considered to constitute indirect
payment by the Funds of distribution expenses. No separate payments are
authorized to be made by the Funds pursuant to the Plan. Under the Plan, if a
payment to the Advisers or a Sub-Adviser of management fees or to the
Distributor of administrative fees should be deemed to be indirect financing by
the Trust of the distribution of their shares, such payment is authorized by the
Plan.
The Plan specifically recognizes that the Adviser, any Sub-Adviser or the
Distributor, directly or through an affiliate, may use its fee revenue, past
profits, or other resources, without limitation, to pay promotional and
administrative expenses in connection with the offer and sale of shares of the
Funds. In addition, the Plan provides that the Adviser, a Sub-Adviser and the
Distributor may use their respective resources, including fee revenues, to make
payments to third parties that provide assistance in selling the Funds' shares,
or to third parties, including banks, that render shareholder support services.
The Plan has been approved by the Board of Trustees. As required by Rule 12b-1,
the Trustees carefully considered all pertinent factors relating to the
implementation of the Plan prior to its approval, and have determined that there
is a reasonable likelihood that the Plan will benefit the Funds and their
shareholders. In particular, the Trustees noted that the Plan does not authorize
payments by the Funds other than the advisory and administrative fees authorized
under the investment advisory and administration agreements. To the extent that
the Plan gives the Adviser, a Sub-Adviser or the Distributor greater flexibility
in connection with the distribution of shares of the Funds, additional sales of
the Funds' shares may result. Additionally, certain shareholder support services
may be provided more effectively under the Plan by local entities with whom
shareholders have other relationships.
Class G Shares Rule 12b-1 Plan.
The Trust has adopted a Distribution and Service Plan pursuant to Rule 12b-1
under the 1940 Act for Class G shares of the Diversified Stock Fund, the Fund
for Income, the International Growth Fund, the Ohio Municipal Bond Fund and the
Small Company Opportunity Fund (the "Rule 12b-1 Plan.")
113
<PAGE>
Under the Rule 12b-1 Plan, Class G shares of each of the Fund for Income,
Intermediate Income Fund, Investment Quality Bond Fund, National Municipal Bond
Fund, New York Tax-Free Fund, Ohio Municipal Bond Fund, Diversified Stock Fund,
International Growth Fund and Small Company Opportunity Fund pays the
Distributor a service fee of up to 0.25% and Class G shares of each of the Value
Fund, Diversified Stock Fund, Growth Fund, Special Value Fund, International
Growth Fund and Small Company Opportunity Fund pays the Distributor a
distribution fee of up to 0.25%.
The Distributor may use Rule 12b-1 fees for: (a) costs of printing and
distributing each Fund's prospectus, statement of additional information and
reports to prospective investors in the Funds; (b) costs involved in preparing,
printing and distributing sales literature pertaining to the Funds; (c) an
allocation of overhead and other branch office distribution-related expenses of
the Distributor; (d) payments to persons who provide support services in
connection with the distribution of each Fund's Class G shares, including but
not limited to, office space and equipment, telephone facilities, answering
routine inquiries regarding the Funds, processing shareholder transactions and
providing any other shareholder services not otherwise provided by the Funds'
transfer agent; (e) accruals for interest on the amount of the foregoing
expenses that exceed the distribution fee and the CDSCs received by the
Distributor; and (f) any other expense primarily intended to result in the sale
of the Funds' Class G shares, including, without limitation, payments to
salesmen and selling dealers at the time of the sale of such shares, if
applicable, and continuing fees to each such salesmen and selling dealers, which
fee shall begin to accrue immediately after the sale of such shares.
The amount of the Rule 12b-1 fees payable by any Fund under the Rule 12b-1 Plan
is not related directly to expenses incurred by the Distributor and the Plan
does not obligate the Funds to reimburse the Distributor for such expenses. The
fees set forth in the Rule 12b-1 Plan will be paid by each Fund to the
Distributor unless and until the Plan is terminated or not renewed with respect
to such Fund; any distribution or service expenses incurred by the Distributor
on behalf of the Funds in excess of payments of the distribution fees specified
above which the Distributor has accrued through the termination date are the
sole responsibility and liability of the Distributor and not an obligation of
the Funds.
The Rule 12b-1 Plan specifically recognizes that either the Adviser or the
Distributor, directly or through an affiliate, may use its fee revenue, past
profits, or other resources, without limitation, to pay promotional and
administrative expenses in connection with the offer and sale of shares of the
Funds. In addition, the Rule 12b-1 Plan provides that the Adviser and the
Distributor may use their respective resources, including fee revenues, to make
payments to third parties that provide assistance in selling the Funds' Class G
shares, or to third parties, including banks, that render shareholder support
services.
The Rule 12b-1 Plan was approved by the Trustees, including the independent
Trustees, at a meeting called for that purpose. As required by Rule 12b-1, the
Trustees carefully considered all pertinent factors relating to the
implementation of the Rule 12b-1 Plan prior to its approval, and have determined
that there is a reasonable likelihood that the Plan will benefit the Funds and
their Class G shareholders. To the extent that the Rule 12b-1 Plan gives the
Adviser or the Distributor greater flexibility in connection with the
distribution of Class G shares of the Funds, additional sales of these shares
may result. Additionally, certain Class G shareholder support services may be
provided more effectively under the Rule 12b-1 Plan by local entities with whom
shareholders have other relationships. The following table reflects the payment
of Rule 12b-1 fees to the Distributor pursuant to the Rule 12b-1 Plan during the
fiscal year ended October 31, 1999.
- -------------------------------------- ----------------------- -----------------
1999
- -------------------------------------- ----------------------- -----------------
Fund -- Class G Shares Distribution Fees Service Fees
- -------------------------------------- ----------------------- -----------------
Diversified Stock Fund 141,443 141,444
- -------------------------------------- ----------------------- -----------------
Established Value Fund 599,449 599,450
- -------------------------------------- ----------------------- -----------------
- ----------
* For the one month ended October 31, 1999, the Gradison Government Reserves
Fund paid $172,892 in service fees pursuant to the Rule 12b-1 Plan.
114
<PAGE>
- -------------------------------------- ----------------------- -----------------
1999
- -------------------------------------- ----------------------- -----------------
Fund -- Class G Shares Distribution Fees Service Fees
- -------------------------------------- ----------------------- -----------------
Fund for Income 0 363,244
- -------------------------------------- ----------------------- -----------------
Gradison Government Reserves * 0 2,109,294
- -------------------------------------- ----------------------- -----------------
International Growth Fund 50,543 50,544
- -------------------------------------- ----------------------- -----------------
Ohio Municipal Bond Fund 0 181,761
- -------------------------------------- ----------------------- -----------------
Small Company Opportunity Fund 176,279 176,279
- -------------------------------------- ----------------------- -----------------
Fund Accountant.
BISYS Fund Services Ohio, Inc. serves as Fund Accountant for the all of the
Funds pursuant to a fund accounting agreement with the Trust dated June 1, 1999.
The Fund Accountant calculates each Fund's NAV, the dividend and capital gain
distribution, if any, and the yield. The Fund Accountant also provides a current
security position report, a summary report of transactions and pending
maturities, a current cash position report, and maintains the general ledger
accounting records for the Funds. With respect to each Fund other than the
LifeChoice Funds, the Fund Accountant is entitled to receive annual fees of
0.03% of the first $100 million of each Fund's daily average net assets, 0.02%
of the next $100 million of its daily average net assets, and 0.01% of the next
$300 million and 0.005% of daily average net assets over $500 million. These
annual fees are subject to a minimum monthly assets charge of $2,500 per taxable
Fund, $2,917 per tax-free Fund and $3,333 per international Fund. With respect
to the LifeChoice Funds, the Fund Accountant is entitled to receive annual fees
of 0.02% of the first $100 million of a LifeChoice Fund's average daily net
assets and 0.01% of assets over $100 million. Annual fund accounting fees for
the LifeChoice Funds are subject to a minimum monthly assets charge of $1,666.66
per LifeChoice Fund. With respect to each Fund (including the LifeChoice Funds),
the charges described above do not include out-of-pocket expenses or multiple
class charges of $833 per month assessed for each class of shares after the
first class.
For the three fiscal years ended October 31, 1999, the Fund Accountant earned
the following fund accounting fees:
- -------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------
Balanced Fund $156,195 $134,087 $89,610
- -------------------------------------------------------------------------------
Convertible Securities Fund 44,702 38,972
- -------------------------------------------------------------------------------
Diversified Stock Fund 158,881 148,523 119,767
- -------------------------------------------------------------------------------
Established Value Fund 53,878
- -------------------------------------------------------------------------------
Federal Money Market Fund 104,540 65,217
- -------------------------------------------------------------------------------
Financial Reserves Fund 105,892 94,228 88,998
- -------------------------------------------------------------------------------
Fund for Income 69,375 56,497 48,449
- -------------------------------------------------------------------------------
Government Mortgage Fund 75,800 50,535 38,396
- -------------------------------------------------------------------------------
Gradison Government Reserves Fund* 137,587
- -------------------------------------------------------------------------------
Growth Fund 78,057 63,019 51,705
- -------------------------------------------------------------------------------
Institutional Money Market Fund 120,329 107,693 102,437
- -------------------------------------------------------------------------------
Intermediate Income Fund 98,898 77,887 67,260
- -------------------------------------------------------------------------------
International Growth Fund 77,447 66,653 70,707
- -------------------------------------------------------------------------------
Investment Quality Bond Fund 93,846 73,539 57,053
- -------------------------------------------------------------------------------
Lakefront Fund 35,918 35,620 24,280
- -------------------------------------------------------------------------------
LifeChoice Conservative Investor Fund 42,259 36,056 N/A
- -------------------------------------------------------------------------------
LifeChoice Growth Investor Fund 38,219 33,290 N/A
- -------------------------------------------------------------------------------
LifeChoice Moderate Investor Fund 42,209 36,454 N/A
- -------------------------------------------------------------------------------
Limited Term Income Fund 66,656 41,478 33,524
- -------------------------------------------------------------------------------
National Municipal Bond Fund 57,954 62,558 57,061
- -------------------------------------------------------------------------------
New York Tax-Free Fund 51,138 52,402 49,575
- -------------------------------------------------------------------------------
Ohio Municipal Bond Fund 74,043 51,323 46,445
- -------------------------------------------------------------------------------
- ----------
* For the one month ended October 31, 1999, the Gradison Government Reserves
Fund paid $10,843 in fund accounting fees
115
<PAGE>
- -------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------
Ohio Municipal Money Market Fund 104,079 96,726 99,579
- -------------------------------------------------------------------------------
Ohio Regional Stock Fund 45,650 48,723 45,783
- -------------------------------------------------------------------------------
Prime Obligations Fund 112,910 97,944 92,710
- -------------------------------------------------------------------------------
Real Estate Investment Fund 35,204 34,750 15,520
- -------------------------------------------------------------------------------
Small Company Opportunity Fund 42,588 41,005 39,041
- -------------------------------------------------------------------------------
Special Value Fund 81,552 97,582 87,704
- -------------------------------------------------------------------------------
Stock Index Fund 156,204 153,032 120,844
- -------------------------------------------------------------------------------
Tax-Free Money Market Fund 97,408 93,791 79,661
- -------------------------------------------------------------------------------
U.S. Government Obligations Fund 112,492 106,407 97,657
- -------------------------------------------------------------------------------
Value Fund 96,760 92,444 83,739
- -------------------------------------------------------------------------------
Custodian.
Cash and securities owned by each of the Funds are held by Key Trust as
custodian pursuant to a Custodian Agreement dated August 1, 1996. Cash and
securities owned by the Funds are also held by Morgan Stanley Trust Company
("Morgan Stanley") as sub-custodian, and certain foreign sub-custodians,
pursuant to a Sub-Custody Agreement. Under these Agreements, Key Trust and
Morgan Stanley each (1) maintains a separate account or accounts in the name of
each respective fund; (2) makes receipts and disbursements of money on behalf of
each Fund; (3) collects and receives all income and other payments and
distributions on account of portfolio securities; (4) responds to correspondence
from security brokers and others relating to its duties; and (5) makes periodic
reports to the Trustees concerning the Trust's operations. Key Trust may, with
the approval of a fund and at the custodian's own expense, open and maintain a
sub-custody account or accounts on behalf of a fund, provided that Key Trust
shall remain liable for the performance of all of its duties under the Custodian
Agreement.
Independent Accountants.
PricewaterhouseCoopers LLP, 100 East Broad Street, Columbus, Ohio 43215, serves
as the Trust's auditors.
Legal Counsel.
Kramer Levin Naftalis & Frankel LLP, 919 Third Avenue, New York, New York 10022,
is the counsel to the Trust.
Expenses.
The Funds bear the following expenses relating to its operations, including:
taxes, interest, brokerage fees and commissions, fees of the Trustees, SEC fees,
state securities qualification fees, costs of preparing and printing
prospectuses for regulatory purposes and for distribution to current
shareholders, outside auditing and legal expenses, advisory and administration
fees, fees and out-of-pocket expenses of the custodian and transfer agent,
certain insurance premiums, costs of maintenance of the Funds' existence, costs
of shareholders' reports and meetings, and any extraordinary expenses incurred
in the Funds' operation.
Additional Information
Description of Shares.
The Trust is a Delaware business trust. The Delaware Trust Instrument authorizes
the Trustees to issue an unlimited number of shares, which are units of
beneficial interest, without par value. The Trust currently has six series of
shares, which represent interests in the Funds and their respective classes
listed below (described in separate Statements of Additional Information) in
addition to those listed on the first page of this SAI. These Funds are not
currently in operation.
1. Equity Income Fund, Class A Shares
2. Maine Municipal Bond Fund (Intermediate), Class A Shares
3. Maine Municipal Bond Fund (Short-Intermediate), Class A Shares
4. Michigan Municipal Bond Fund, Class A Shares
5. National Municipal Bond Fund (Long), Class A Shares
116
<PAGE>
6. National Municipal Bond Fund (Short-Intermediate), Class A Shares
The Trust Instrument authorizes the Trustees to divide or redivide any unissued
shares of the Trust into one or more additional series by setting or changing in
any one or more aspects their respective preferences, conversion or other
rights, voting power, restrictions, limitations as to dividends, qualifications,
and terms and conditions of redemption.
Shares have no subscription or preemptive rights and only such conversion or
exchange rights as the Trustees may grant in their discretion. When issued for
payment as described in the Prospectuses and this SAI, the Trust's shares will
be fully paid and non-assessable. In the event of a liquidation or dissolution
of the Trust, shares of a Fund are entitled to receive the assets available for
distribution belonging to the Fund, and a proportionate distribution, based upon
the relative asset values of the respective Funds, of any general assets not
belonging to any particular Fund that are available for distribution.
Principal Holders of Securities.
To the best knowledge of the Trust, the names and addresses of the holders of 5%
or more of the outstanding shares of each class of the Funds Class A, Class G,
Investor Class and Select Class equity securities as of November 30, 1999, and
the percentage of the outstanding shares held by such holders are set forth in
the table below.
<TABLE>
<CAPTION>
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Percent Owned of Percent Owned
Victory Fund Name and Address of Owner Record Beneficially
- ---------------------------- --------------------------------------------- ------------------- ---------------------
<S> <C> <C>
Balanced Fund - Class A SNBOC and Company 96.62%
4900 Tiedeman Road
Cleveland, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Convertible Securities Charles Schwab & Co. 27.37%
Fund - Class A Special Custody Account #2
FOB Customers
Attn: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94104-4122
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Key Trust 37.28%
Attn: Jim Osborne, OH-01-49-0330
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Norman Foundation Inc 5.01%
147 E 48th Street
New York NY 10017-1223
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Diversified Stock Fund - SNBOC and Company 73.86%
Class A Attn: Jim Osborne, OH-01-49-0330
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Diversified Stock Fund - McDonald & Co. Securities 98.53%
Class G The Exclusive Benefit of Customers
Attn: Jeff Carter
c/o Gradison Division
580 Walnut Street
Cincinnati, Ohio 45202-3110
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Established Value Fund - McDonald & Co. Securities 98.65%
Class G The Exclusive Benefit of Customers
Attn: Jeff Carter
c/o Gradison Division
580 Walnut Street
Cincinnati, OH 45202
- ---------------------------- --------------------------------------------- ------------------- ---------------------
</TABLE>
117
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Percent Owned of Percent Owned
Victory Fund Name and Address of Owner Record Beneficially
- ---------------------------- --------------------------------------------- ------------------- ---------------------
<S> <C> <C>
Federal Money Market Fund KeyCorp Investment Products 85.78%
- - Investor Class Attn: Jennifer Ryan
127 Public Square
Cleveland, OH 44114-1216
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Federal Money Market Fund KeyCorp Investment Products 97.02%
- - Select Class Attn: Jennifer Ryan
127 Public Square
Cleveland, OH 44114-1216
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Financial Reserves Fund SNBOC and Company 92.19%
Attn: Jim Osborne OH-01-49-0330
4900 Tiedeman Road
Cleveland, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Fund for Income -- Class A Key Trust Cleveland 57.11%
PO Box 93971
4900 Tiedeman Road
Cleveland, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Metalex Manufacturing Inc 8.27%
Profit Sharing Plan
5750 Cornell Road
Cincinnati OH 45242-2083
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Fund for Income -- McDonald & Co. Securities 95.78%
Class G The Exclusive Benefit of Customers
Attn: Jeff Carter
c/o Gradison Division
580 Walnut Street
Cincinnati, Ohio 45202-3110
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Government Mortgage Fund SNBOC and Company 95.21%
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Gradison Government McDonald & Co. Securities 98.69%
Reserves - Class G The Exclusive Benefit of Customers
Attn: Jeff Carter
c/o Gradison Division
580 Walnut Street
Cincinnati, OH 45202
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Growth Fund SNBOC and Company 88.64%
PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Institutional Money Market KeyCorp Investment Products 6.19%
Fund - Attn: Jennifer Ryan
Investor Shares 127 Public Square
Cleveland, OH 44114-1216
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Liefke & Co. 72.22%
c/o KeyCorp Trust Services
PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
</TABLE>
118
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Percent Owned of Percent Owned
Victory Fund Name and Address of Owner Record Beneficially
- ---------------------------- --------------------------------------------- ------------------- ---------------------
<S> <C> <C>
McDonald & Co. Securities 7.41%
The Exclusive Benefit of Customers
Attn: Jeff Carter
c/o Gradison Division
580 Walnut Street
Cincinnati, Ohio 45202-3110
- ---------------------------- --------------------------------------------- ------------------- ---------------------
American Axel & Manufacturing Inc 6.45%
Attn Mark Umlauf
1840 Holbrook Avenue
Detroit MI 48212-3442
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Institutional Money Market KeyCorp Investment Products 6.82%
Fund - Attn: Jennifer Ryan
Select Shares 127 Public Square
Cleveland, OH 44114-1216
- ---------------------------- --------------------------------------------- ------------------- ---------------------
BISYS Fund Services Ohio Inc. 92.72%
The Benefit of our Customers
Attn: Victory Cash Control Dept.
3435 Stelzer Road
Columbus, OH 43219-6004
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Intermediate Income Fund SNBOC and Company 96.85%
PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
International Growth Fund SNBOC and Company 87.39%
- - Class A PO Box 93971
4900 Tiedeman Road
Cleveland, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
International Growth Fund McDonald & Co. Securities 95.81%
- - Class G The Exclusive Benefit of Customers
Attn: Jeff Carter
c/o Gradison Division
580 Walnut Street
Cincinnati, Ohio 45202-3110
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Investment Quality Bond SNBOC and Company 82.87%
Fund -- Class A PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Lakefront Fund SNBOC and Company 41.02%
PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
BISYS Fund Services 26.04%
Attn: Fund Administration & Reg. Serv.
3435 Stelzer Road
Columbus, OH 43219-6004
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Merrill Lynch Pierce Fenner & Smith 23.10%
For Sole Benefit of its Customers
Attn: Fund Admin Team
4800 Deer Lake Drive East 3rd Floor
Jacksonville FL 32246-6484
- ---------------------------- --------------------------------------------- ------------------- ---------------------
LifeChoice - Conservative SNBOC and Company 93.86%
Investor 4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
</TABLE>
119
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Percent Owned of Percent Owned
Victory Fund Name and Address of Owner Record Beneficially
- ---------------------------- --------------------------------------------- ------------------- ---------------------
<S> <C> <C>
LifeChoice - SNBOC and Company 91.67%
Growth Investor 4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
CoreLink Financial Inc. 6.30%
PO Box 4054
Concord, CA 94524-4054
- ---------------------------- --------------------------------------------- ------------------- ---------------------
LifeChoice - SNBOC and Company 92.85%
Moderate Investor 4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
CoreLink Financial Inc. 6.60%
PO Box 4054
Concord, CA 94524-4054
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Limited Term SNBOC and Company 96.78%
Income Fund PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
National Muni Bond Fund - Key Trust Cleveland 29.76%
Class A PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Estate of Richard B Salomon 6.16%
Park Square Station
PO BOX 15490
Stamford CT 06901-0490
- ---------------------------- --------------------------------------------- ------------------- ---------------------
New York Tax-Free Key Trust Cleveland 18.79%
Fund - Class A PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Ohio Muni Bond Fund SNBOC and Company 83.15%
PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Ohio Muni Bond Fund Class G McDonald & Co. Securities 98.85%
The Exclusive Benefit of Customers
Attn: Jeff Carter
c/o Gradison Division
580 Walnut Street
Cincinnati, OH 45202
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Ohio Municipal McDonald & Co. Securities 31.90%
MMKT Fund The Exclusive Benefit of Customers
Attn: Jeff Carter
c/o Gradison Division
580 Walnut Street
Cincinnati, OH 45202
- ---------------------------- --------------------------------------------- ------------------- ---------------------
SNBOC and Company 17.71%
PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Private Banking 41.87%
c/o Society National Bank
Attn: Joe Caroscio
2025 Ontario Street
Cleveland, OH 44115-1022
- ---------------------------- --------------------------------------------- ------------------- ---------------------
</TABLE>
120
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Percent Owned of Percent Owned
Victory Fund Name and Address of Owner Record Beneficially
- ---------------------------- --------------------------------------------- ------------------- ---------------------
<S> <C> <C>
Ohio Regional Stock Fund - SNBOC and Company 80.97%
Class A PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Prime Obligations Fund Private Banking 39.65%
c/o Society National Bank
Attn: Joe Caroscio
2025 Ontario Street
Cleveland, OH 44115-1022
- ---------------------------- --------------------------------------------- ------------------- ---------------------
McDonald & Co. Securities 21.53%
The Exclusive Benefit of Customers
Attn: Jeff Carter
c/o Gradison Division
580 Walnut Street
Cincinnati, Ohio 45202-3110
- ---------------------------- --------------------------------------------- ------------------- ---------------------
KeyCorp Investment Products 33.48%
Attn: Jennifer Ryan
127 Public Square
Cleveland, OH 44114-1216
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Real Estate Investment SNBOC and Company 87.37%
Fund -- Class A PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Small Company Opportunity SNBOC and Company 93.01%
Fund - Class A PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Small Company Opportunity McDonald & Co. Securities 99.42%
Fund - Class G The Exclusive Benefit of Customers
Attn: Jeff Carter
c/o Gradison Division
580 Walnut Street
Cincinnati, Ohio 45202-3110
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Special Value Fund - Class SNBOC and Company 94.59%
A PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Stock Index Fund SBNOC and Company 95.48%
4900 Tiedeman Road
Cleveland, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Stock Index Fund Class G McDonald & Co. Securities 99.86%
The Exclusive Benefit of Customers
Attn: Jeff Carter
c/o Gradison Division
580 Walnut Street
Cincinnati, OH 45202
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Tax-Free MMKT Fund SNBOC and Company 25.65%
PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
</TABLE>
121
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Percent Owned of Percent Owned
Victory Fund Name and Address of Owner Record Beneficially
- ---------------------------- --------------------------------------------- ------------------- ---------------------
<S> <C> <C>
Private Banking 34.48%
c/o Society National Bank
Attn: Joe Caroscio
2025 Ontario Street
Cleveland, OH 44115-1022
- ---------------------------- --------------------------------------------- ------------------- ---------------------
McDonald & Co. Securities 34.28%
The Exclusive Benefit of Customers
Attn: Jeff Carter
c/o Gradison Division
580 Walnut Street
Cincinnati, OH 45202
- ---------------------------- --------------------------------------------- ------------------- ---------------------
US Gov't Obligations Fund SNBOC and Company 99.49%
- - Investor PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
US Gov't Obligations Fund SNBOC and Company 14.27%
- - Select PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Private Banking 30.92%
c/o Society National Bank
Attn: Joe Caroscio
2025 Ontario Street
Cleveland, OH 44115-1022
- ---------------------------- --------------------------------------------- ------------------- ---------------------
KeyCorp Investment Products 40.49%
Attn: Jennifer Ryan
127 Public Square
Cleveland, OH 44114-1216
- ---------------------------- --------------------------------------------- ------------------- ---------------------
McDonald & Co. Securities 7.10%
The Exclusive Benefit of Customers
Attn: Jeff Carter
c/o Gradison Division
580 Walnut Street
Cincinnati, Ohio 45202-3110
- ---------------------------- --------------------------------------------- ------------------- ---------------------
Value Fund -- Class A SNBOC and Company 95.83%
PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ---------------------------- --------------------------------------------- ------------------- ---------------------
</TABLE>
Shares of the Funds are entitled to one vote per share (with proportional voting
for fractional shares) on such matters as shareholders are entitled to vote.
Shareholders vote as a single class on all matters except (1) when required by
the 1940 Act, shares shall be voted by individual series or class, and (2) when
the Trustees have determined that the matter affects only the interests of one
or more series, then only shareholders of such series shall be entitled to vote
thereon. There will normally be no meetings of shareholders for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees have been elected by the shareholders, at which time the Trustees then
in office will call a shareholders' meeting for the election of Trustees. A
meeting shall be held for such purpose upon the written request of the holders
of not less than 10% of the outstanding shares. Upon written request by ten or
more shareholders meeting the qualifications of Section 16(c) of the 1940 Act,
(i.e., persons who have been shareholders for at least six months, and who hold
shares having a NAV of at least $25,000 or constituting 1% of the outstanding
shares) stating that such shareholders wish to communicate with the other
shareholders for the purpose of obtaining the signatures necessary to demand a
meeting to consider removal of a Trustee, the Trust will provide a list of
shareholders or disseminate appropriate materials (at the expense of the
requesting shareholders). Except as set forth above, the Trustees shall continue
to hold office and may appoint their successors.
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<PAGE>
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
to the holders of the outstanding voting securities of an investment company
such as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each Fund of
the Trust affected by the matter. For purposes of determining whether the
approval of a majority of the outstanding shares of a Fund will be required in
connection with a matter, a Fund will be deemed to be affected by a matter
unless it is clear that the interests of each Fund in the matter are identical,
or that the matter does not affect any interest of the Fund. Under Rule 18f-2,
the approval of an investment advisory agreement or any change in investment
policy would be effectively acted upon with respect to a fund only if approved
by a majority of the outstanding shares of such Fund. However, Rule 18f-2 also
provides that the ratification of independent accountants, the approval of
principal underwriting contracts, and the election of Trustees may be
effectively acted upon by shareholders of the Trust voting without regard to
series.
Shareholder and Trustee Liability.
The Trust is organized as a Delaware business trust. The Delaware Business Trust
Act provides that a shareholder of a Delaware business trust shall be entitled
to the same limitation of personal liability extended to shareholders of
Delaware corporations, and the Delaware Trust Instrument provides that
shareholders of the Trust shall not be liable for the obligations of the Trust.
The Delaware Trust Instrument also provides for indemnification out of the trust
property of any shareholder held personally liable solely by reason of his or
her being or having been a shareholder. The Delaware Trust Instrument also
provides that the Trust shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Trust, and shall
satisfy any judgment thereon. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered to be extremely
remote.
The Delaware Trust Instrument states further that no Trustee, officer, or agent
of the Trust shall be personally liable in connection with the administration or
preservation of the assets of the funds or the conduct of the Trust's business;
nor shall any Trustee, officer, or agent be personally liable to any person for
any action or failure to act except for his own bad faith, willful misfeasance,
gross negligence, or reckless disregard of his duties. The Declaration of Trust
also provides that all persons having any claim against the Trustees or the
Trust shall look solely to the assets of the Trust for payment.
Financial Statements.
The audited financial statements of the Trust, with respect to all the Funds,
for the fiscal period or year ended October 31, 1999 are incorporated by
reference herein. The audited financial statements of the Trust, with respect to
the Gradison Government Reserves Fund, for the fiscal year ended September 30,
1999 are also incorporated by reference herein. These financial statements have
been audited by PricewaterhouseCoopers LLP as set forth in their report
incorporated by reference herein, and are included in reliance upon such report
and on the authority of such firm as experts in auditing and accounting.
The audited financial statements of Gradison U.S. Government Reserves and
Gradison Government Income Fund for the fiscal years ended September 30, 1998
and December 31, 1998, respectively, and the audited financial statements of the
Established Value Fund and Small Company Opportunity Fund for the fiscal year
ended March 31, 1999 are incorporated by reference herein. These financial
statements have been audited by Arthur Andersen L.L.P. as set forth in their
report incorporated by reference herein, and are included in reliance upon such
report and on the authority of such firm as experts in auditing and accounting.
Arthur Andersen LLP's address is 425 Walnut Street, Cincinnati, Ohio 45202.
Year 2000 Issues.
Although the Trust did not experience any disruption in its operations as a
result of computer system failures related to the January 1, 2000 date change,
the Trust is continuing to monitor developments in this area. There is a
continuing possibility that computer systems used by the Trust's service
providers may experience adverse effects relating from their inability to
recognize dates after December 31, 1999. The risk of such a computer failure may
be greater as it relates to investments in foreign countries. The Trust'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
123
<PAGE>
adequate to avoid a temporary service disruption or other adverse impact on the
Trust. 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 Trust.
Miscellaneous.
As used in the Prospectuses and in this SAI, "assets belonging to a fund" (or
"assets belonging to the Fund") means the consideration received by the Trust
upon the issuance or sale of shares of a Fund, together with all income,
earnings, profits, and proceeds derived from the investment thereof, including
any proceeds from the sale, exchange, or liquidation of such investments, and
any funds or payments derived from any reinvestment of such proceeds and any
general assets of the Trust, which general liabilities and expenses are not
readily identified as belonging to a particular Fund that are allocated to that
Fund by the Trustees. The Trustees may allocate such general assets in any
manner they deem fair and equitable. It is anticipated that the factor that will
be used by the Trustees in making allocations of general assets to a particular
fund of the Trust will be the relative NAV of each respective fund at the time
of allocation. Assets belonging to a particular Fund are charged with the direct
liabilities and expenses in respect of that Fund, and with a share of the
general liabilities and expenses of each of the Funds not readily identified as
belonging to a particular Fund, which are allocated to each Fund in accordance
with its proportionate share of the NAVs of the Trust at the time of allocation.
The timing of allocations of general assets and general liabilities and expenses
of the Trust to a particular fund will be determined by the Trustees and will be
in accordance with generally accepted accounting principles. Determinations by
the Trustees as to the timing of the allocation of general liabilities and
expenses and as to the timing and allocable portion of any general assets with
respect to a particular fund are conclusive.
As used in the Prospectuses and in this SAI, a "vote of a majority of the
outstanding shares" of the Fund means the affirmative vote of the lesser of (a)
67% or more of the shares of the Fund present at a meeting at which the holders
of more than 50% of the outstanding shares of the Fund are represented in person
or by proxy, or (b) more than 50% of the outstanding shares of the Fund.
The Trust is registered with the SEC as an open-end management investment
company. Such registration does not involve supervision by the SEC of the
management or policies of the Trust.
The Prospectuses and this SAI omit certain of the information contained in the
Registration Statement filed with the SEC. Copies of such information may be
obtained from the SEC upon payment of the prescribed fee.
The Prospectuses and this SAI are not an offering of the securities described in
these documents in any state in which such offering may not lawfully be made. No
salesman, dealer, or other person is authorized to give any information or make
any representation other than those contained in the Prospectuses and this SAI.
124
<PAGE>
Appendix
Description of Security Ratings.
The nationally recognized statistical rating organizations (individually, an
"NRSRO") that may be utilized by the Adviser or the Sub-Advisers with regard to
portfolio investments for the Funds include Moody's Investors Service
("Moody's"), Standard & Poor's ("S&P"), Duff & Phelps Credit Rating Co.
("Duff"), Thomson Financial BankWatch ("Thomson") and Fitch IBCA International.
Set forth below is a description of the relevant ratings of each such NRSRO. The
NRSROs that may be utilized by the Adviser or a Sub-Adviser and the description
of each NRSRO's ratings is as of the date of this SAI, and may subsequently
change.
Long-Term Debt Ratings (may be assigned, for example, to corporate and municipal
bonds).
Description of the five highest long-term debt ratings by Moody's (Moody's
applies numerical modifiers (e.g., 1, 2, and 3) in each rating category to
indicate the security's ranking within the category):
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements - their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times in the future. Uncertainty of position
characterizes bonds in this class.
Description of the five highest long-term debt ratings by S&P (S&P may apply a
plus (+) or minus (-) to a particular rating classification to show relative
standing within that classification):
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
A-1
<PAGE>
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB. Debt rated BB is regarded, on balance, as predominately speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposure to adverse conditions.
Description of the three highest long-term debt ratings by Duff:
AAA. Highest credit quality. The risk factors are negligible being only slightly
more than for risk-free U.S. Treasury debt.
AA+, AA, AA-. High credit quality Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A+. Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
Short-Term Debt Ratings (may be assigned, for example, to commercial paper,
master demand notes, bank instruments, and letters of credit).
Moody's description of its three highest short-term debt ratings:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a superior
capacity for repayment of senior short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by many of the following
characteristics:
- - Leading market positions in well-established industries. - High rates of
return on funds employed.
- - Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
- - Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- - Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a strong
capacity for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1. This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to have extremely strong safety
characteristics are denoted with a plus sign (+).
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
A-3. Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
A-2
<PAGE>
Duff's description of its five highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
Duff 1+. Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
Duff 1. Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
Duff 1-. High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
Duff 2. Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
Duff 3. Satisfactory liquidity and other protection factors qualify issue as to
investment grade.
Risk factors are larger and subject to more variation. Nevertheless, timely
payment is expected.
Short-Term Loan/Municipal Note Ratings
Moody's description of its two highest short-term loan/municipal note ratings:
MIG-1/VMIG-1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
S&P's description of its two highest municipal note ratings:
SP-1. Very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a plus
(+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
Short-Term Debt Ratings
Thomson ratings ("TBW") are based upon a qualitative and quantitative analysis
of all segments of the organization including, where applicable, holding company
and operating subsidiaries.
Thomson Ratings do not constitute a recommendation to buy or sell securities of
any of these companies. Further, Thomson does not suggest specific investment
criteria for individual clients.
The TBW Short-Term Ratings apply to commercial paper, other senior short-term
obligations and deposit obligations of the entities to which the rating has been
assigned.
The TBW Short-Term Ratings apply only to unsecured instruments that have a
maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an untimely
payment of principal or interest.
TBW-1. The highest category; indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
A-3
<PAGE>
TBW-2. The second highest category; while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1."
TBW-3. The lowest investment grade category; indicates that while more
susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in a
timely fashion is considered adequate.
TBW-4. The lowest rating category; this rating is regarded as non-investment
grade and therefore speculative.
Fitch IBCA International Credit Ratings
Fitch IBCA's international credit ratings are applied to the spectrum of
corporate, structured, and public finance. They cover sovereign (including
supranational and subnational), financial, bank, insurance, and other corporate
entities and the securities they issue, as well as municipal and other public
finance entities, and securities backed by receivables or other financial
assets, and counterparties. When applied to an entity, these long- and
short-term ratings assess its general creditworthiness on a senior basis. When
applied to specific issues and programs, these ratings take into account the
relative preferential position of the holder of the security and reflect the
terms, conditions, and covenants attaching to that security.
International credit ratings assess the capacity to meet foreign currency or
local currency commitments. Both "foreign currency" and "local currency" ratings
are internationally comparable assessments. The local currency rating measures
the probability of payment within the relevant sovereign state's currency and
jurisdiction and therefore, unlike the foreign currency rating, does not take
account of the possibility of foreign exchange controls limiting transfer into
foreign currency.
Fitch IBCA International Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. `AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA Very high credit quality. `AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A High credit quality. `A' ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB Good credit quality. `BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade
BB Speculative, "BB' ratings indicate that there is a possibility of credit risk
developing particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not investment
grade.
B Highly speculative, `B' ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
A-4
<PAGE>
CCC, CC, C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A `CC' rating indicates that default of some
king appears probable. `C' ratings signal imminent default.
DDD, DD, and D Default. The ratings of obligations in this category are based on
their prospects for achieving partial or full recovery in a reorganization or
liquidation of the obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision, the following serve as
general guidelines. `DDD' obligations have the highest potential for recovery,
around 90%-100% of outstanding amounts and accrued interest. `DD' indicates
potential recoveries in the range of 50%-90%, and `D' the lowest recovery
potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated `DDD' have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated `DD' and `D' are generally undergoing a formal
reorganization or liquidation process; those rated `DD' are likely to satisfy a
higher portion of their outstanding obligations, while entities rated `D' have a
poor prospect for repaying all obligations.
Fitch IBCA International Short-Term Credit Ratings
A short term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; they may have an added "+" to denote any exceptionally
strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial commitments
is adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
obligations.
C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
D Default. Denotes actual or imminent payment default.
Notes:
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the `AAA' long-term rating
category, to categories below `CCC', or to short-term ratings other than `F1'.
`NR' indicates that Fitch IBCA does not rate the issuer or issue in question.
`Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors that there is
a reasonable probability of a rating change and the likely direction of such
change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. RatingAlert is typically resolved over a relatively short
period.
A-5