As filed with the Securities and Exchange Commission on December 27, 2005
File No. 33-8982
ICA No. 811-4852
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. _____ [ ]
Post-Effective Amendment No. 75 |X|
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 76
The Victory Portfolios
(Exact name of Registrant as Specified in Trust Instrument)
3435 Stelzer Road
Columbus, Ohio 43219
(Address of Principal Executive Office)
(800) 362-5365
(Area Code and Telephone Number)
Copy to:
George Stevens Jay G. Baris
BISYS Fund Services Ohio, Inc. Kramer Levin Naftalis & Frankel LLP
3435 Stelzer Road 919 Third Avenue
Columbus, Ohio 43219 New York, New York 10022
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable after this
registration statement becomes effective.
|
It is proposed that this filing will become effective:
[ ] Immediately upon filing pursuant [ ] on ___________
to paragraph (b) pursuant to paragraph (b)
[ | 60 days after filing pursuant [X] on February 28, 2006 pursuant to
to paragraph (a)(1) paragraph (a)(1)
[ ] 75 days after filing pursuant to [ ] on (date) pursuant to
paragraph (a)(2) paragraph (a)(2) of rule 485.
|
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
PROSPECTUS
MARCH 1, 2006
EQUITY FUNDS
VALUE FUND
CLASS A, C AND R SHARES
DIVERSIFIED STOCK FUND
CLASS A, C AND R SHARES
STOCK INDEX FUND
CLASS A AND R SHARES
ESTABLISHED VALUE FUND
CLASS A AND R SHARES
SPECIAL VALUE FUND
CLASS A, C AND R SHARES
SMALL COMPANY OPPORTUNITY FUND
CLASS A AND R SHARES
FOCUSED GROWTH FUND
CLASS A, C AND R SHARES
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(R) LOGO]
www.VictoryConnect.com
800-539-FUND
(800-539-3863)
THE VICTORY PORTFOLIOS
TABLE OF CONTENTS
RISK/RETURN SUMMARY 1
An analysis which includes the investment objective, principal strategies, principal risks,
performance, and expenses of each Fund.
Value Fund 2
CLASS A, C AND R SHARES
Diversified Stock Fund 4
CLASS A, C AND R SHARES
Stock Index Fund 6
CLASS A AND R SHARES
Established Value Fund 8
CLASS A AND R SHARES
Special Value Fund 10
CLASS A, C AND R SHARES
Small Company Opportunity Fund 12
CLASS A AND R SHARES
Focused Growth Fund 14
CLASS A, C AND R SHARES
INVESTMENTS 16
RISK FACTORS 18
SHARE PRICE 21
DIVIDENDS, DISTRIBUTIONS, AND TAXES 22
INVESTING WITH VICTORY
- Choosing a Share Class 25
- How to Buy Shares 30
- How to Exchange Shares 32
- How to Sell Shares 33
ORGANIZATION AND MANAGEMENT OF THE FUNDS 35
ADDITIONAL INFORMATION 38
FINANCIAL HIGHLIGHTS
Value Fund 39
Diversified Stock Fund 41
Stock Index Fund 43
Established Value Fund 45
Special Value Fund 47
Small Company Opportunity Fund 49
Focused Growth Fund 51
|
KEY TO FUND INFORMATION
[GRAPHIC]
OBJECTIVE AND STRATEGIES
The goals and the strategies that a Fund plans to use to pursue its investment objective.
[GRAPHIC]
RISK FACTORS
The risks you may assume as an investor in a Fund.
[GRAPHIC]
PERFORMANCE
A summary of the historical performance of a Fund in comparison to one or more unmanaged indices.
[GRAPHIC]
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.
RISK/RETURN SUMMARY
INTRODUCTION
This Prospectus explains what you should know about the Victory Funds described in this Prospectus (the Funds), before you invest. Please read it carefully.
[GRAPHIC]
INVESTMENT OBJECTIVES
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 also attempts to match the investment performance of the Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index). Each Fund has unique investment strategies and its own risk/reward profile. Please review the information in the Risk/Return Summary for each Fund and the "Investments" section later in the Prospectus.
[GRAPHIC]
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 later in the Prospectus. You may lose money by investing in a Fund. The likelihood of loss is greater if you invest for a shorter period of time.
WHO MAY WANT TO INVEST IN THE FUNDS
- Investors willing to accept the risk of price and dividend fluctuations
- Investors willing to accept higher risk in return for higher potential returns
- Long-term investors with a particular goal, like saving for retirement or a child's education
SHARE CLASSES
Each Fund offers Class A Shares and Class R Shares. Class C Shares are also offered by the Value, Diversified Stock, Special Value and Focused Growth Funds. 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.
[SIDENOTE]
Victory Capital Management Inc., which we will refer to as the "Adviser" throughout this Prospectus, manages the Funds.
Please read this Prospectus before investing in the Funds and keep it for future reference.
VALUE FUND
CLASS A SHARES
Cusip#: 926464868
Ticker: SVLSX
CLASS C SHARES
Cusip#: 926464132
Ticker: V VFCX
CLASS R SHARES
Cusip#: 926464249
Ticker: V VFGX
[GRAPHIC]
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term growth of capital and dividend income.
[GRAPHIC]
PRINCIPAL INVESTMENT STRATEGIES
The 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 Fund usually are listed on a national exchange.
The Adviser seeks equity securities primarily of under-valued companies that are inexpensive relative to their respective industry groups 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. The Adviser also may consider factors such as a company's projected future cash flows, 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 circumstances, the Fund will invest at least 80% of its net assets in equity securities and securities convertible or exchangeable into common stock. For purposes of this policy, "net assets" includes any borrowings for investment purposes.
There is no guarantee that the Fund will achieve its objectives.
[GRAPHIC]
PRINCIPAL RISKS
You may lose money by investing in the Fund. 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 the Fund's portfolio securities 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.
The principal risks summarized above are more fully described in "Risk Factors."
An investment in the Fund is not a deposit of KeyBank National Association ("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.
[GRAPHIC]
INVESTMENT PERFORMANCE
The bar chart and table below indicate the risks of investing in the Fund. We assume reinvestment of dividends and distributions. The Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future.
[CHART]
CALENDAR YEAR RETURNS FOR CLASS A SHARES
(Results do not include a sales charge.
If one was included, results would be lower.)
1996 22.40% 1997 27.51% 1998 26.33% 1999 11.07% 2000 4.31% 2001 -8.64% 2002 -22.54% 2003 27.13% 2004 12.44% 2005 |
Highest/lowest quarterly results during this time period were:
HIGHEST
LOWEST
The table below shows how the average annual total returns for Class A, Class C and Class R Shares of the Fund, including applicable maximum sales charges, compare to those of a broad-based market index. We calculate after-tax returns using the historical highest individual federal marginal income tax rates and we do not reflect the effect of state and local taxes. Actual after-tax returns depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant if you own your Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for only one class and after-tax returns for other classes will vary.
AVERAGE ANNUAL TOTAL RETURNS 10 YEARS (FOR THE PERIODS ENDED (OR LIFE DECEMBER 31, 2005) 1 YEAR 5 YEARS OF FUND) CLASS A Before Taxes % % %(1) After Taxes on Distributions % % %(1) After Taxes on Distributions and Sale of Fund Shares % % %(1) Russell 1000(R) Value Index(2) % % %(1) (Index returns reflect no deduction for fees, expenses, or taxes) CLASS C Before Taxes % N/A %(3) Russell 1000(R) Value Index(2) % N/A %(3) (Index returns reflect no deduction for fees, expenses, or taxes) CLASS R Before Taxes % % %(4) Russell 1000(R) Value Index(2) % % %(4) (Index returns reflect no deduction for fees, expenses, or taxes) |
(1) Ten year performance.
(2) The Russell 1000(R) Value Index is an unmanaged index which measures the
performance of those Russell 1000 companies with generally lower
price-to-book and price-earnings ratios, higher dividend yields and lower
forecasted growth values than the growth universe. It is not possible to
invest directly in an index.
(3) Performance is from March 1, 2003, inception date of Class C Shares.
(4) Performance is from December 15, 1999, inception date of Class R Shares.
[GRAPHIC]
FUND EXPENSES
This section describes the fees and expenses that you may pay if you invest in shares of the Fund.
SHAREHOLDER TRANSACTION EXPENSES (PAID DIRECTLY FROM YOUR INVESTMENT)(1) CLASS A CLASS C CLASS R Maximum Sales Charge 5.75% NONE NONE Imposed on Purchases (as a percentage of offering price) Maximum Deferred Sales Charge NONE(2) 1.00%(3) NONE (as a percentage of the lower of purchase or sale price) Maximum Sales Charge Imposed on Reinvested Dividends NONE NONE NONE Redemption or Exchange Fees NONE NONE NONE ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS) Management Fees 0.75% 0.75% 0.75% Distribution (12b-1) Fees 0.00% 1.00% 0.50% Other Expenses(4) % % % (includes a shareholder servicing fee of 0.25% applicable to Class A Shares) Total Fund Operating Expenses % % %(5) Fee Waiver/ Expense Reimbursement (0.00)% (3.00)% (0.00)% Net Expenses(6) 1.30% 2.00%(7) 1.81% |
(1) You may be charged additional fees if you buy, exchange, or sell shares through a broker or agent.
(2) A deferred sales charge of up to 0.75% may be imposed on certain redemptions of Class A Shares purchased without an initial sales charge. See "Choosing a Share Class -- Calculation of Sales Charges -- Class A."
(3) The deferred sales charge is imposed on shares redeemed in the first 12
months.
(4) Restated to reflect current fees.
(5) The Adviser intends to voluntarily waive its fees and/or reimburse expenses
so that the net operating expenses (excluding certain items) of the Class R
Shares of the Fund for any period during which this waiver or reimbursement
is in effect does not exceed 1.60%. This voluntary waiver/reimbursement may
be terminated at any time.
(6) In addition to any voluntary or contractual fee waivers or expense reimbursements by the Adviser to limit the Fund's total operating expenses, BISYS Fund Services, Inc., the Fund's co-administrator (BISYS), or any of the Fund's other service providers may voluntarily waive its fees or reimburse expenses, as permitted by law, in order to reduce the Fund's total operating expenses.
(7) The Adviser has contractually agreed to waive its management fee or to reimburse expenses, as allowed by law, so that the net operating expenses of Class C Shares of the Fund do not exceed 2.00% until at least February 28, 2014.
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:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Class A $ $ $ $
Class C* $ $ $ $
Class C** $ $ $ $
Class R $ $ $ $
|
* If you sell your shares at the end of the period. ** If you do not sell your shares at the end of the period.
DIVERSIFIED STOCK FUND
CLASS A SHARES
Cusip#: 926464603
Ticker: SRVEX
CLASS C SHARES
Cusip#: 926464157
Ticker: VDSCX
CLASS R SHARES
Cusip#: 926464421
Ticker: GRINX
[GRAPHIC]
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term growth of capital.
[GRAPHIC]
PRINCIPAL INVESTMENT STRATEGIES
The 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.
- Growth stocks are stocks of companies that the Adviser believes will experience earnings growth; and
- Value stocks are stocks that the Adviser believes are intrinsically worth more than their market value.
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 circumstances, the Fund will invest at least 80% of its net assets in equity securities and securities convertible or exchangeable into common stock. The Fund will not change this policy unless it notifies shareholders at least 60 days in advance. For purposes of this policy, "net assets" includes any borrowings for investment purposes.
There is no guarantee that the Fund will achieve its objectives.
[GRAPHIC]
PRINCIPAL RISKS
You may lose money by investing in the Fund. 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 the Fund's portfolio securities 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 Fund's principal investment strategies effectively.
- A company's earnings do not increase as expected.
The principal risks summarized above are more fully described in "Risk Factors."
An investment in the Fund is not a deposit of KeyBank National Association ("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.
[GRAPHIC]
INVESTMENT PERFORMANCE
The bar chart and table below indicate the risks of investing in the Fund. We assume reinvestment of dividends and distributions. The Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future.
[CHART]
CALENDAR YEAR RETURNS FOR CLASS A SHARES
(Results do not include a sales charge.
If one was included, results would be lower.)
1996 24.72% 1997 28.28% 1998 23.15% 1999 20.96% 2000 1.35% 2001 0.93% 2002 -22.78% 2003 35.60% 2004 10.23% 2005 |
Highest/lowest quarterly results during this time period were:
HIGHEST
LOWEST
The table below shows how the average annual total returns for Class A, Class C and Class R Shares of the Fund, including applicable maximum sales charges, compare to those of a broad-based market index. We calculate after-tax returns using the historical highest individual federal marginal income tax rates and we do not reflect the effect of state and local taxes. Actual after-tax returns depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant if you own your Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for only one class and after-tax returns for other classes will vary.
AVERAGE ANNUAL TOTAL RETURNS 10 YEARS (FOR THE PERIODS ENDED (OR LIFE DECEMBER 31, 2004) 1 YEAR 5 YEARS OF FUND) CLASS A Before Taxes % % %(1) After Taxes on Distributions % % %(1) After Taxes on Distributions and Sale of Fund Shares % % %(1) S&P 500 Index(2) % % %(1) (Index returns reflect no deduction for fees, expenses, or taxes) CLASS C Before Taxes % N/A %(3) S&P 500 Index(2) % N/A %(3) (Index returns reflect no deduction for fees, expenses, or taxes) CLASS R Before Taxes % % %(4) S&P 500 Index(2) % % %(4) (Index returns reflect no deduction for fees, expenses, or taxes) |
(1) Ten year performance.
(2) The S&P 500 Index is a broad-based unmanaged index that measures the
performance of large capitalization domestically traded common stocks. It is
not possible to invest directly in an index.
(3) Performance is from March 1, 2002, inception date of Class C Shares.
(4) Performance is from March 26, 1999, inception date of Class R Shares.
[GRAPHIC]
FUND EXPENSES
This section describes the fees and expenses that you may pay if you invest in shares of the Fund.
SHAREHOLDER TRANSACTION EXPENSES (PAID DIRECTLY FROM YOUR INVESTMENT)(1) CLASS A CLASS C CLASS R Maximum Sales Charge 5.75% NONE NONE Imposed on Purchases (as a percentage of offering price) Maximum Deferred Sales Charge NONE(2) 1.00%(3) NONE (as a percentage of the lower of purchase or sale price) Maximum Sales Charge Imposed on Reinvested Dividends NONE NONE NONE Redemption or Exchange Fees NONE NONE NONE ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS) Management Fees 0.62% 0.62% 0.62% Distribution (12b-1) Fees 0.00% 1.00% 0.50% Other Expenses(4) % % % (includes a shareholder servicing fee of 0.25% applicable to Class A Shares) Total Fund Operating Expenses(5) % %(6) % |
(1) You may be charged additional fees if you buy, exchange, or sell shares through a broker or agent.
(2) A deferred sales charge of up to 0.75% may be imposed on certain redemptions of Class A Shares purchased without an initial sales charge. See "Choosing a Share Class -- Calculation of Sales Charges -- Class A."
(3) The deferred sales charge is imposed on shares redeemed in the first 12
months.
(4) Restated to reflect current fees.
(5) In addition to any voluntary or contractual fee waivers or expense reimbursements by the Adviser to limit the Fund's total operating expenses, BISYS, the Fund's co-administrator, or any of the Fund's other service providers may voluntarily waive its fees or reimburse expenses, as permitted by law, in order to reduce the Fund's total operating expenses.
(6) The Adviser has contractually agreed to waive its management fee or to reimburse expenses, as allowed by law, so that the net operating expenses of Class C Shares of the Fund do not exceed 1.90% until at least February 28, 2006 and 2.00% thereafter until at least February 28, 2014.
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 except that it assumes expense levels provided by contractual expense caps set forth in the notes to the Fund Expenses table appearing above. 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 $ $ $ $
Class C* $ $ $ $
Class C** $ $ $ $
Class R $ $ $ $
|
* If you sell your shares at the end of the period. ** If you do not sell your shares at the end of the period.
STOCK INDEX FUND
CLASS A SHARES
Cusip#: 926464850
Ticker: SSTIX
CLASS R SHARES
Cusip#: 926464355
Ticker: VINGX
[GRAPHIC]
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital appreciation by attempting to match the investment performance of the S&P 500 Index.
[GRAPHIC]
PRINCIPAL INVESTMENT STRATEGIES
The Fund pursues its investment objective by attempting to duplicate the performance of the S&P 500 Index. The Fund primarily invests in the equity securities that are in the S&P 500 Index, including American Depositary Receipts (ADRs), and secondarily in related futures and options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets in securities, or equivalents, that are included in the S&P 500 Index. The Fund will not change this policy unless it notifies shareholders at least 60 days in advance. For purposes of this policy, "net assets" includes any borrowings for investment purposes.
The Fund normally will invest substantially all of its assets in all stocks that comprise the Index in roughly the same proportions as their weightings in the Index. For example, if 5% of the Index is made up of a stock of a particular company, the Fund normally will invest approximately 5% of its assets in that company. To minimize small positions and transactions expenses, the Fund need not invest in every stock included in the S&P 500 Index and invests in Index futures contracts as a substitute for purchasing securities that comprise the Index. The 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." Tracking error refers to the difference between the Fund's investment results, before expenses, and that of the S&P 500 Index.
The Fund is not managed in the traditional sense of using economic, financial, and market analysis. Therefore, the 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 Fund's total return being lower than that of the S&P 500 Index.
There is no guarantee that the Fund will achieve its objectives.
[GRAPHIC]
PRINCIPAL RISKS
You may lose money by investing in the Fund. 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 the Fund's portfolio securities declines.
- The portfolio manager does not execute the Fund's principal investment strategies effectively.
- Derivative instruments, including futures or options contracts used for asset substitution, do not perfectly replicate direct investment in the Index.
The principal risks summarized above are more fully described in "Risk Factors."
In addition, the Fund may purchase, retain, and sell securities when such transactions would not be consistent with traditional investment criteria. The 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 from fluctuations in the value of such securities than would be the case if the Fund was not fully invested, regardless of market conditions.
An investment in the Fund is not a deposit of KeyBank National Association ("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 sudden and sometimes substantial changes in the value of their investment.
See page 20 for additional information about the Fund.
[GRAPHIC]
INVESTMENT PERFORMANCE
The bar chart and table below indicate the risks of investing in the Fund. We assume reinvestment of dividends and distributions. The Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future.
[CHART]
CALENDAR YEAR RETURNS FOR CLASS A SHARES
(Results do not include a sales charge.
If one was included, results would be lower.)
1996 22.18% 1997 32.40% 1998 27.70% 1999 20.23% 2000 -9.62% 2001 -12.74% 2002 -22.70% 2003 27.92% 2004 10.29% 2005 |
Highest/lowest quarterly results during this time period were:
HIGHEST
LOWEST
The table below shows how the average annual total returns for Class A and Class R Shares of the Fund, including applicable maximum sales charges, compare to those of a broad-based market index. We calculate after-tax returns using the historical highest individual federal marginal income tax rates and we do not reflect the effect of state and local taxes. Actual after-tax returns depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant if you own your Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for only one class and after-tax returns for other classes will vary.
AVERAGE ANNUAL TOTAL RETURNS 10 YEARS (FOR THE PERIODS ENDED (OR LIFE DECEMBER 31, 2004) 1 YEAR 5 YEARS OF FUND) CLASS A Before Taxes % % %(1) After Taxes on Distributions % % %(1) After Taxes on Distributions and Sale of Fund Shares % % %(1) S&P 500 Index(2) % % %(1) (Index returns reflect no deduction for fees, expenses, or taxes) CLASS R Before Taxes % % %(3) S&P 500 Index(2) % % %(3) (Index returns reflect no deduction for fees, expenses, or taxes) |
(1) Ten year performance.
(2) The S&P 500 Index is a broad-based unmanaged index that measures the
performance of large capitalization domestically traded common stocks. It is
not possible to invest directly in an index.
(3) Performance is from July 2, 1999, inception date of Class R Shares.
[GRAPHIC]
FUND EXPENSES
This section describes the fees and expenses that you may pay if you invest in shares of the Fund.
SHAREHOLDER TRANSACTION EXPENSES (PAID DIRECTLY FROM YOUR INVESTMENT)(1) CLASS A CLASS R Maximum Sales Charge 5.75% NONE Imposed on Purchases (as a percentage of offering price) Maximum Deferred Sales Charge NONE(2) NONE (as a percentage of the lower of purchase or sale price) Maximum Sales Charge Imposed on Reinvested Dividends NONE NONE Redemption or 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(3) % % (includes a shareholder servicing fee of 0.25% applicable to Class R Shares and a shareholder servicing fee of 0.15% applicable to Class A Shares) Total Fund Operating Expenses(4) % % |
(1) You may be charged additional fees if you buy, exchange, or sell shares through a broker or agent.
(2) A deferred sales charge of up to 0.75% may be imposed on certain redemptions of Class A Shares purchased without an initial sales charge. See "Choosing a Share Class -- Calculation of Sales Charges -- Class A."
(3) Restated to reflect current fees.
(4) The Adviser intends to voluntarily waive its fees and/or reimburse expenses so that the net operating expenses (excluding certain items) of the Class A and Class R Shares of the Fund for any period during which this waiver or reimbursement is in effect do not exceed 0.70% and 0.90%, respectively. These voluntary waivers/reimbursements may be terminated at any time. In addition to any voluntary or contractual fee waivers or expense reimbursements by the Adviser to limit the Fund's total operating expenses, BISYS, the Fund's co-administrator, or any of the Fund's other service providers may voluntarily waive its fees or reimburse expenses, as permitted by law, in order to reduce the Fund's total operating expenses.
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:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Class A $ $ $ $
Class R $ $ $ $
|
ESTABLISHED VALUE FUND
CLASS A SHARES
Cusip#: 926464231
Ticker: VETAX
CLASS R SHARES
Cusip#: 926464371
Ticker: GETGX
[GRAPHIC]
INVESTMENT OBJECTIVE
The investment objective of the Fund is long-term capital growth by investing primarily in common stocks.
[GRAPHIC]
PRINCIPAL INVESTMENT STRATEGIES
The Fund pursues its investment objective by investing primarily in equity securities of companies with market capitalizations, at the time of purchase, within the range of companies comprising the Russell MidCap(R) Index. As of December 31, 2005, the Russell MidCap(R) Index included companies with approximate capitalizations between $million and $billion. The size of companies in the index changes with market conditions and the composition of the index.
In making investment decisions, the Adviser looks primarily for companies whose stock is trading at prices below what the Adviser believes represent their true value. When selecting investments for the 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 primarily relies on a quantitative model that examines the characteristics described above, among others, to select securities.
Under normal circumstances, the Fund will invest at least 80% of its net assets in equity securities of companies with market capitalizations within the range of companies comprising the Russell MidCap(R) Index. For purposes of this policy, "net assets" includes any borrowings for investment purposes.
There is no guarantee that the Fund will achieve its objective.
[GRAPHIC]
PRINCIPAL RISKS
You may lose money by investing in the Fund. 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 the Fund's portfolio securities declines.
- Value stocks fall out of favor relative to growth stocks.
- Midcap stocks fall out of favor relative to stocks of larger or smaller companies.
- The portfolio manager does not execute the Fund's principal investment strategies effectively.
- A company's earnings do not increase as expected.
The principal risks summarized above are more fully described in "Risk Factors."
An investment in the Fund is not a deposit of KeyBank National Association ("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.
[GRAPHIC]
INVESTMENT PERFORMANCE
The bar chart and table below indicate the risks of investing in the Fund. We assume reinvestment of dividends and distributions. The Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future.
[CHART]
CALENDAR YEAR RETURNS FOR CLASS R SHARES
1996 19.32% 1997 22.65% 1998 6.12% 1999 17.07% 2000 8.28% 2001 -6.54% 2002 -9.95% 2003 33.18% 2004 16.29% 2005 |
Highest/lowest quarterly results during this time period were:
HIGHEST
LOWEST
The table below shows how the average annual total returns for Class R and Class A Shares of the Fund, including applicable maximum sales charges, compare to those of a broad-based market index. We calculate after-tax returns using the historical highest individual federal marginal income tax rates and we do not reflect the effect of state and local taxes. Actual after-tax returns depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant if you own your Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for only one class and after-tax returns for other classes will vary.
AVERAGE ANNUAL TOTAL RETURNS 10 YEARS (FOR THE PERIODS ENDED (OR LIFE DECEMBER 31, 2004) 1 YEAR 5 YEARS OF FUND) CLASS R Before Taxes % % %(1) After Taxes on Distributions % % %(1) After Taxes on Distributions and Sale of Fund Shares % % %(1) Russell MidCap(R) Index(2) % % %(1) (Index returns reflect no deduction for fees, expenses, or taxes) CLASS A Before Taxes % N/A %(3) Russell MidCap(R) Index(2) % N/A %(3) (Index returns reflect no deduction for fees, expenses, or taxes) |
(1) Ten year performance.
(2) The Russell MidCap(R) Index is a broad-based unmanaged index, measuring the
performance of medium capitalization domestically traded common stocks. It
is not possible to invest directly in an index.
(3) Performance is from May 5, 2000, inception date of Class A Shares.
[GRAPHIC]
FUND EXPENSES
This section describes the fees and expenses that you may pay if you invest in shares of the Fund.
SHAREHOLDER TRANSACTION EXPENSES (PAID DIRECTLY FROM YOUR INVESTMENT)(1) CLASS A CLASS R Maximum Sales Charge 5.75% NONE Imposed on Purchases (as a percentage of offering price) Maximum Deferred Sales Charge NONE(2) NONE (as a percentage of the lower of purchase or sale price) Maximum Sales Charge Imposed on Reinvested Dividends NONE NONE Redemption or Exchange Fees NONE NONE ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS) Management Fees 0.55% 0.55% Distribution (12b-1) Fees 0.00% 0.50% Other Expenses(3) % % (includes a shareholder servicing fee of 0.25% applicable to Class A Shares) Total Fund Operating Expenses %(4) % |
(1) You may be charged additional fees if you buy, exchange, or sell shares through a broker or agent.
(2) A deferred sales charge of up to 0.75% may be imposed on certain redemptions of Class A Shares purchased without an initial sales charge. See "Choosing a Share Class -- Calculation of Sales Charges -- Class A."
(3) Restated to reflect current fees.
(4) The Adviser intends to voluntarily waive its fees and/or reimburse expenses so that the net operating expenses (excluding certain items) of the Class A Shares of the Fund for any period during which these waivers or reimbursements are in effect do not exceed 1.25%. These voluntary waivers/reimbursements may be terminated at any time. In addition to any voluntary or contractual fee waivers or expense reimbursements by the Adviser to limit the Fund's total operating expenses, BISYS, the Fund's co-administrator, or any of the Fund's other service providers may voluntarily waive its fees or reimburse expenses, as permitted by law, in order to reduce the Fund's total operating expenses.
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:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Class A $ $ $ $
Class R $ $ $ $
|
SPECIAL VALUE FUND
CLASS A SHARES
Cusip#: 926464843
Ticker: SSVSX
CLASS C SHARES
Cusip#: 926464116
Ticker: VSVCX
CLASS R SHARES
Cusip#: 926464264
Ticker: VSVGX
[GRAPHIC]
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term growth of capital and dividend income.
[GRAPHIC]
PRINCIPAL INVESTMENT STRATEGIES
The Fund pursues its investment objective by investing primarily in equity securities of companies with market capitalizations at the time of purchase within the range of companies comprising the Russell MidCap(R) Index. As of December 31, 2005, the Russell MidCap(R) Index included companies with capitalizations between $million and $billion. The size of companies in the index changes with market conditions and the composition of the index.
The Adviser looks for companies with above average total return potential whose equity securities are under-valued. The Adviser 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. The Adviser 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 circumstances, the Fund will invest at least 80% of its net assets in equity securities of companies with market capitalizations within the range of companies comprising the Russell MidCap(R) Index. For purposes of this policy, "net assets" includes any borrowings for investment purposes.
There is no guarantee that the Fund will achieve its objectives.
[GRAPHIC]
PRINCIPAL RISKS
You may lose money by investing in the Fund. 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 the Fund's portfolio securities declines.
- Midcap stocks fall out of favor relative to stocks of larger or smaller companies.
- 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.
The principal risks summarized above are more fully described in "Risk Factors."
An investment in the Fund is not a deposit of KeyBank National Association ("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.
[GRAPHIC]
INVESTMENT PERFORMANCE
The bar chart and table below indicate the risks of investing in the Fund. We assume reinvestment of dividends and distributions. During the periods shown in the bar chart and table, the Fund invested primarily in companies with market capitalizations within the range of capitalizations of companies in the S&P MidCap Index (in contrast to its current policy of investing primarily in companies with market capitalizations within the range of capitalizations of the Russell MidCap(R) Index). If the Fund had been managed according to its current policy during these periods, the performance information might have differed from that shown below. The Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future.
[CHART]
CALENDAR YEAR RETURNS FOR CLASS A SHARES
(Results do not include a sales charge.
If one was included, results would be lower.)
1996 19.22% 1997 27.79% 1998 -9.08% 1999 -1.26% 2000 24.72% 2001 5.92% 2002 -9.61% 2003 29.25% 2004 17.59% 2005 |
Highest/lowest quarterly results during this time period were:
HIGHEST 14.93% (quarter ended December 31, 2001) LOWEST -20.87% (quarter ended September 30, 1998) |
The table below shows how the average annual total returns for Class A, Class C and Class R Shares of the Fund, including applicable maximum sales charges, compare to those of a broad-based market index. We calculate after-tax returns using the historical highest individual federal marginal income tax rates and we do not reflect the effect of state and local taxes. Actual after-tax returns depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant if you own your Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for only one class and after-tax returns for other classes will vary.
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIODS ENDED LIFE DECEMBER 31, 2005) 1 YEAR 5 YEARS OF FUND CLASS A Before Taxes % % %(1) After Taxes on Distributions % % %(1) After Taxes on Distributions and Sale of Fund Shares % % %(1) S&P 400 MidCap Index(2) % % %(1) Russell MidCap(R) Index(3) % % %(1) (Index returns reflect no deduction for fees, expenses, or taxes) CLASS C Before Taxes % N/A %(4) S&P 400 MidCap Index(2) % N/A %(4) Russell MidCap(R) Index(3) % N/A %(4) (Index returns reflect no deduction for fees, expenses, or taxes) CLASS R Before Taxes % % %(5) S&P 400 MidCap Index(2) % % %(5) Russell MidCap(R) Index(3) % % %(5) (Index returns reflect no deduction for fees, expenses, or taxes) |
(1) Ten year performance.
(2) The S&P 400 MidCap Index is a broad-based unmanaged index that measures the
performance of medium capitalization domestically traded common stocks. It
is not possible to invest directly in an index.
(3) The Russell MidCap(R) Index is a broad-based unmanaged index, measuring the
performance of medium capitalization domestically traded common stocks. It
is not possible to invest directly in an index.
(4) Performance is from March 1, 2003, inception date of Class C Shares.
(5) Performance is from December 21, 1999, inception date of Class R Shares.
[GRAPHIC]
FUND EXPENSES
This section describes the fees and expenses that you may pay if you invest in shares of the Fund.
SHAREHOLDER TRANSACTION EXPENSES (PAID DIRECTLY FROM YOUR INVESTMENT)(1) CLASS A CLASS C CLASS R Maximum Sales Charge 5.75% NONE NONE Imposed on Purchases (as a percentage of offering price) Maximum Deferred Sales Charge NONE(2) 1.00%(3) NONE (as a percentage of the lower of purchase or sale price) Maximum Sales Charge Imposed on Reinvested Dividends NONE NONE NONE Redemption or Exchange Fees NONE NONE NONE ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS) Management Fees 0.75% 0.75% 0.75% Distribution (12b-1) Fees 0.00% 1.00% 0.50% Other Expenses(4) % % % (includes a shareholder servicing fee of 0.25% applicable to Class A Shares) Total Fund Operating Expenses % %(5) %(5) Fee Waiver/ Expense Reimbursement % (2.22)% % Net Expenses(6) % 2.20%(7) 2.00%(7) |
(1) You may be charged additional fees if you buy, exchange, or sell shares through a broker or agent.
(2) A deferred sales charge of up to 0.75% may be imposed on certain redemptions of Class A Shares purchased without an initial sales charge. See "Choosing a Share Class -- Calculation of Sales Charges -- Class A."
(3) The deferred sales charge is imposed on shares redeemed in the first 12
months.
(4) Restated to reflect current fees.
(5) The Adviser intends to voluntarily waive its fees and/or reimburse expenses
so that the net operating expenses (excluding certain items) of the Class C
and Class R Shares of the Fund for any period during which these waivers or
reimbursements are in effect do not exceed 2.10% and 1.60%, respectively.
These voluntary waivers/reimbursements may be terminated at any time.
(6) In addition to any voluntary or contractual fee waivers or expense reimbursements by the Adviser to limit the Fund's total operating expenses, BISYS, the Fund's co-administrator, or any of the Fund's other service providers may voluntarily waive its fees or reimburse expenses, as permitted by law, in order to reduce the Fund's total operating expenses.
(7) The Adviser has contractually agreed to waive its management fee or to reimburse expenses, as allowed by law, so that the net operating expenses (excluding certain items) of Class C and Class R Shares of the Fund do not exceed 2.20% and 2.00%, respectively, until at least February 28, 2014 and February 28, 2012, respectively.
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:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Class A $ $ $ $
Class C* $ $ $ $
Class C** $ $ $ $
Class R $ $ $ $
|
* If you sell your shares at the end of the period. ** If you do not sell your shares at the end of the period.
SMALL COMPANY OPPORTUNITY FUND
CLASS A SHARES
Cusip#: 926464835
Ticker: SSGSX
CLASS R SHARES
Cusip#: 926464389
Ticker: GOGFX
[GRAPHIC]
INVESTMENT OBJECTIVE
The Fund seeks to provide capital appreciation.
[GRAPHIC]
PRINCIPAL INVESTMENT STRATEGIES
The Fund invests primarily in common stocks of smaller companies that the Adviser believes to be undervalued relative to their underlying earnings potential.
Under normal circumstances, the Fund will invest at least 80% of its net assets in equity securities of small companies. "Small companies" are companies that at the time of purchase, have market capitalizations within the range of companies comprising the Russell 2000 Index. The Fund will not change this policy unless it notifies shareholders at least 60 days in advance. For purposes of this policy, "net assets" includes any borrowings for investment purposes. As of December 31, 2005, the largest company in the Index had an approximate market capitalization of $billion and the smallest company currently had an approximate market capitalization of $million.
In making investment decisions, the Adviser may consider, among other things, the following characteristics: price-to-earnings, earnings growth, cash flow, book value, market capitalization, debt levels, dividend yield, revenues, capital expenditures and trading liquidity. The Adviser relies on a quantitative model to assist in the evaluation of companies relative to the universe.
The equity securities in which the Fund invests include:
- Common stock
- Convertible preferred stock
- Debt convertible or exchangeable into equity securities
There is no guarantee that the Fund will achieve its objective.
[GRAPHIC]
PRINCIPAL RISKS
You may lose money by investing in the Fund. 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 the Fund's portfolio securities 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.
- The portfolio manager does not execute the Fund's principal investment strategies effectively.
- A company's earnings do not increase as expected.
The principal risks summarized above are more fully described in "Risk Factors."
An investment in the Fund is not a deposit of KeyBank National Association ("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 is not 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.
[GRAPHIC]
INVESTMENT PERFORMANCE
The bar chart and table below indicate the risks of investing in the Fund. We assume reinvestment of dividends and distributions. The Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future.
[CHART]
CALENDAR YEAR RETURNS FOR CLASS R SHARES
1996 19.47% 1997 31.18% 1998 -6.93% 1999 -1.08% 2000 22.69% 2001 -7.25% 2002 -5.55% 2003 30.31% 2004 24.60% 2005 |
Highest/lowest quarterly results during this time period were:
HIGHEST
LOWEST
The table below shows how the average annual total returns for Class R and Class A Shares of the Fund, including applicable maximum sales charges, compare to those of a broad-based market index. We calculate after-tax returns using the historical highest individual federal marginal income tax rates and we do not reflect the effect of state and local taxes. Actual after-tax returns depend on your situation and may differ from those shown. After-tax returns shown are not relevant if you own your Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for only one class and after-tax returns for other classes will vary.
AVERAGE ANNUAL TOTAL RETURNS 10 YEARS (FOR THE PERIODS ENDED (OR LIFE DECEMBER 31, 2004) 1 YEAR 5 YEARS OF FUND) CLASS R Before Taxes % % %(1) After Taxes on Distributions % % %(1) After Taxes on Distributions and Sale of Fund Shares % % %(1) Russell 2000 Index(2) % % %(1) (Index returns reflect no deduction for fees, expenses, or taxes) CLASS A Before Taxes % % %(3) Russell 2000 Index(2) % % %(3) (Index returns reflect no deduction for fees, expenses, or taxes) |
(1) Ten year performance.
(2) The Russell 2000 Index is a broad-based unmanaged index that measures the
performance of small capitalization domestically traded common stocks. It is
not possible to invest directly in an index.
(3) Performance is from March 26, 1999, inception date of Class A Shares.
[GRAPHIC]
FUND EXPENSES
This section describes the fees and expenses that you may pay if you invest in shares of the Fund.
SHAREHOLDER TRANSACTION EXPENSES (PAID DIRECTLY FROM YOUR INVESTMENT)(1) CLASS A CLASS R Maximum Sales Charge 5.75% NONE Imposed on Purchases (as a percentage of offering price) Maximum Deferred Sales Charge NONE(2) NONE (as a percentage of the lower of purchase or sale price) Maximum Sales Charge Imposed on Reinvested Dividends NONE NONE Redemption or 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(3) % % (includes a shareholder servicing fee of 0.25% applicable to Class A Shares) Total Fund Operating Expenses % % |
(1) You may be charged additional fees if you buy, exchange, or sell shares through a broker or agent.
(2) A deferred sales charge of up to 0.75% may be imposed on certain redemptions of Class A Shares purchased without an initial sales charge. See "Choosing a Share Class -- Calculation of Sales Charges -- Class A."
(3) Restated to reflect current fees.
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:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Class A $ $ $ $
Class R $ $ $ $
|
FOCUSED GROWTH FUND
CLASS A SHARES
Cusip#: 92646A500
Ticker: VFGAX
CLASS C SHARES
Cusip#: 92646A708
Ticker: VFGCX
CLASS R SHARES
Cusip#: 92646A609
Ticker: VFGRX
[GRAPHIC]
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital appreciation.
[GRAPHIC]
PRINCIPAL INVESTMENT STRATEGIES
The Fund pursues its investment objective by investing primarily in U.S. equity securities of companies whose growth prospects appear to exceed those of the overall market. The issuers usually are listed on a nationally recognized exchange. The Fund may invest a portion of its assets in equity securities of foreign companies traded on U.S. exchanges, including American and Global Depositary Receipts, and equity securities of foreign securities traded on foreign exchanges.
Under normal market conditions, the Fund will invest primarily in large capitalization stocks that are so classified at the time of purchase. Large capitalization stocks are those issued by companies with capitalizations of $7 billion and above. The Fund may also invest in mid-capitalization stocks.
In making investment decisions for the Fund, the Adviser will invest the Fund's assets in stocks of approximately 20-35 companies that have exhibited faster-than-average earnings growth over the past few years and are expected to continue to show high levels of profit growth. The Adviser analyzes the price, earnings, price histories, balance sheet characteristics, perceived management skills and perceived prospects for earnings growth when deciding which stocks to buy and sell for the Fund.
There is no guarantee that the Fund will achieve its objective.
[GRAPHIC]
PRINCIPAL RISKS
You may lose money by investing in the Fund. 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 the Fund's portfolio securities declines.
- Growth stocks fall out of favor because the companies' earnings growth does not meet expectations.
- The portfolio manager does not execute the Fund's principal investment strategies effectively.
- A company's earnings do not increase as expected.
Mid-sized companies may lose market share or profits to a greater extent than larger, established companies as a result of deteriorating economic conditions. In addition, the securities of foreign companies acquired by the Fund tend to 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 Fund is non-diversified. As such, the 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 Fund more susceptible to economic or credit risks.
The principal risks summarized above are more fully described in "Risk Factors."
An investment in the Fund is not a deposit of KeyBank National Association ("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 and do not require significant current income from their investments.
[GRAPHIC]
INVESTMENT PERFORMANCE
The bar chart and table below indicate the risks of investing in the Fund. We assume reinvestment of dividends and distributions. The Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future.
[CHART]
CALENDAR YEAR RETURNS FOR CLASS A SHARES
(Results do not include a sales charge.
If one was included, results would be lower.)
2004 11.80% 2005 |
Highest/lowest quarterly results during this time period were:
HIGHEST
LOWEST
The table below shows how the average annual total returns for Class A, Class C and Class R Shares of the Fund, including applicable maximum sales charges, compare to those of a broad-based market index. We calculate after-tax returns using the historical highest individual federal marginal income tax rates and we do not reflect the effect of state and local taxes. Actual after-tax returns depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant if you own your Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for only one class and after-tax returns for other classes will vary.
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIODS ENDED LIFE DECEMBER 31, 2005) 1 YEAR 5 YEARS OF FUND(1) CLASS A Before Taxes % N/A % After Taxes on Distributions(2) % N/A % After Taxes on Distributions(2) and Sale of Fund Shares % N/A % Russell 1000 Growth Index(R)(3) % N/A % (Index returns reflect no deduction for fees, expenses, or taxes) CLASS C Before Taxes % N/A % Russell 1000 Growth Index(R)(3) % N/A % (Index returns reflect no deduction for fees, expenses, or taxes) CLASS R Before Taxes % N/A % Russell 1000 Growth Index(R)(3) % N/A % (Index returns reflect no deduction for fees, expenses, or taxes) |
(1) Performance is from December 31, 2003, inception date of Class A, Class C
and Class R Shares.
(2) There were no distributions for the Fund during the period.
(3) The Russell 1000 Growth Index(R) is a broad-based unmanaged index that
measures the performance of large capitalization domestically traded common
stocks. It is not possible to invest directly in an index.
[GRAPHIC]
FUND EXPENSES
This section describes the fees and expenses that you may pay if you invest in shares of the Fund.
SHAREHOLDER TRANSACTION EXPENSES (PAID DIRECTLY FROM YOUR INVESTMENT)(1) CLASS A CLASS C CLASS R Maximum Sales Charge 5.75% NONE NONE Imposed on Purchases (as a percentage of offering price) Maximum Deferred Sales Charge NONE(2) 1.00%(3) NONE (as a percentage of the lower of purchase or sale price) Maximum Sales Charge Imposed on Reinvested Dividends NONE NONE NONE Redemption or Exchange Fees NONE NONE NONE ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS) Management Fees 0.75% 0.75% 0.75% Distribution (12b-1) Fees 0.00% 1.00% 0.50% Other Expenses(4) % % % (includes a shareholder servicing fee of 0.25% applicable to Class A Shares) Total Fund Operating Expenses(5) % % % Fee Waiver/ Expense Reimbursement % % % Net Expenses(6) % % % |
(1) You may be charged additional fees if you buy, exchange, or sell shares through a broker or agent.
(2) A deferred sales charge of up to 0.75% may be imposed on certain redemptions of Class A Shares purchased without an initial sales charge. See "Choosing a Share Class -- Calculation of Sales Charges -- Class A."
(3) The deferred sales charge is imposed on shares redeemed in the first 12
months.
(4) Restated to reflect current fees.
(5) The Adviser intends to voluntarily waive its fees and/or reimburse expenses so that the net operating expenses (excluding certain items) of the Class A, Class C and Class R Shares of the Fund for any period during which these waivers or reimbursements are in effect do not exceed 1.40%, 2.10% and 1.65%, respectively. These voluntary waivers/reimbursements may be terminated at any time. In addition to any voluntary or contractual fee waivers or expense reimbursements by the Adviser to limit the Fund's total operating expenses, BISYS, the Fund's co-administrator, or any of the Fund's other service providers may voluntarily waive its fees or reimburse expenses, as permitted by law, in order to reduce the Fund's total operating expenses.
(6) The Adviser has contractually agreed to waive its management fee or to reimburse expenses, as allowed by law, so that the net operating expenses (excluding certain items) of Class A, Class C and Class R Shares of the Fund do not exceed 1.65%, 2.35% and 1.90%, respectively, until at least February 28, 2006. The contractual fee waiver will be reviewed annually for competitiveness.
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.(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 $ $ $ $
Class C(2) $ $ $ $
Class C(3) $ $ $ $
Class R $ $ $ $
|
(1) The Example for one year reflects the contractual expense limitations
described above. The Examples for the remaining periods reflect the Fund's
gross expenses.
(2) If you sell your shares at the end of the period.
(3) If you do not sell your shares at the end of the period.
INVESTMENTS
The following describes some of the types of securities the Funds may purchase under normal circumstances to achieve their investment objectives. A Fund will not necessarily 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 Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs).
** FORWARD CURRENCY CONTRACTS.
A Fund may enter into forward foreign currency contracts to attempt to eliminate currency exposure between the time of a securities transaction and settlement of that transaction. A forward foreign currency contract is an agreement to buy or sell a country's currency at a specific price on a specific date, usually 30, 60, or 90 days in the future. In other words, the contract guarantees an exchange rate on a given date.
** 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 may invest in futures and options on futures contracts as a substitute for stocks in its index. There is no assurance that any Fund will engage in any hedging transactions.
INVESTMENT COMPANIES.
A Fund may invest in securities of other investment companies, including unit investment trusts and exchange traded funds, if those companies invest in securities consistent with the Fund's investment objective and policies.
** Derivative Instruments: Indicates an instrument whose value is linked to or derived from another security, instrument, or index.
ABOUT THE STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX
The S&P 500 Index is made up of 500 stocks chosen based on capitalization, liquidity, and industry representation. The portion of the Index made up of each stock in the Index is based on the relative capitalization of each company, so that the largest capitalization companies make up the largest portions of the Index. As of December 31, 2004, the capitalization of the largest company in the Index was $385.8 billion and the capitalization of the smallest company in the Index was $646 million.
"Standard & Poor's,(R)" "S&P,(R)" "S&P 500,(R)" "Standard & Poor's 500," and "500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by the Adviser. The Stock Index Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor's makes no representation regarding the advisability of investing in the Fund.
PORTFOLIO HOLDINGS DISCLOSURE
Each Fund discloses its complete portfolio holdings as of the end of its second fiscal quarter (April 30th) and its fiscal year (October 30th) in its reports to shareholders. The Funds send reports to their existing shareholders no later than 60 days after the relevant fiscal period, and files these reports with the SEC by the 70th day after the end of the relevant fiscal period. You can find these reports on the Funds' website, www.VictoryConnect.com, and on the SEC's website, www.sec.gov.
Each Fund files its complete portfolio holdings as of the end of its first and third fiscal quarters (January 31 and July 31, respectively) with the SEC on Form N-Q no later than 60 days after the relevant fiscal period. You can find these filings on the SEC's website, www.sec.gov.
Each Fund also discloses its complete portfolio holdings each calendar quarter on the Funds' website, www.VictoryConnect.com, on approximately the 15th day of the following calendar month.
The Statement of Additional Information describes the policies and procedures that relate to the disclosure of the Funds' portfolio holdings.
RISK FACTORS
[GRAPHIC]
The following 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.
SMALL
DIVERSIFIED STOCK ESTABLISHED SPECIAL COMPANY FOCUSED
VALUE STOCK INDEX VALUE VALUE OPPORTUNITY GROWTH
FUND FUND FUND FUND FUND FUND FUND
Market risk and manager risk /X/ /X/ /X/ /X/ /X/ /X/ /X/
Equity risk /X/ /X/ /X/ /X/ /X/ /X/ /X/
Currency risk and/or
foreign investments risk /X/
Correlation risk /X/
Small capitalization company risk /X/
Non-diversification 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.
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.
RISKS ASSOCIATED WITH NON-DIVERSIFICATION:
- A non-diversified fund may invest more of its assets in fewer companies than if it were a diversified fund. Because each investment has a greater effect on the Fund's performance, it may be more susceptible to a single economic, political or regulatory occurrence than a diversified fund.
[SIDENOTE]
By matching your investment objective with an acceptable level of risk, you can create your own customized investment plan.
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 Fund's securities.
- FOREIGN INVESTMENTS RISK. Foreign investments involve certain special risks. For example, 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. Foreign settlement procedures may also involve additional risks. These factors can make foreign investments, especially those in developing countries, more volatile than U.S. investments.
Certain of these risks may also apply to some extent to U.S. investments that are denominated in foreign currencies and investments in U.S. companies that have significant foreign operations.
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. There is no assurance that any Fund will engage in any hedging transactions. Futures contracts and options can also be used as a substitute for the securities to which they relate. For example, if a Fund seeks to participate in the performance of the S&P 500 Index prior to purchasing the component securities or is unable to acquire a sufficient amount of a particular security that is represented in the index, the Fund may enter into a futures contract or a related option in order to minimize the Fund's tracking error. Correlation risk is the risk that the market value of the futures contracts or options does not correspond to the market value of the underlying securities. In this case, the Fund's investment in the futures contracts or options may actually increase tracking error rather than reduce it.
[SIDENOTE]
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 INVESTMENT IN SMALL CAPITALIZATION STOCKS:
- SMALL CAPITALIZATION RISK is the risk that a company will be adversely affected or fail as a result of its small size. Smaller companies are more likely than larger companies to have limited product lines, markets, or financial resources, or to depend on a small, inexperienced management group. Stocks of these companies often trade less frequently and in limited volume, and their prices may fluctuate more than stocks of larger companies. Stocks of small companies may, therefore, be more vulnerable to adverse developments than those of larger companies.
PARTICULAR RISKS OF THE STOCK INDEX FUND:
- TRACKING ERROR. The Stock Index Fund may not track its index perfectly because differences between the index and the Fund's portfolio can cause differences in performance. The Adviser purchases securities and other instruments, including futures contracts and options, in an attempt to replicate the performance of the index. However, the tools that the Adviser uses to replicate the index are not perfect and the Stock Index Fund's performance is affected by factors such as the size of its portfolio, transaction costs, the extent and timing of cash flows in and out of the Stock Index Fund and changes in the index. In particular, the market value of futures contracts and options used as a substitute for their underlying securities may not correspond to the market value of the underlying securities. In this case, the Stock Index Fund's investment in these derivative instruments may actually increase tracking error rather than reduce it.
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 regular trading on the New York Stock Exchange (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 value of a Fund's securities 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 price their investments based on market value when market quotations are readily available. When these quotations are not readily available, the Funds will price their investments at fair value according to procedures approved by the Board of Trustees. A Fund will fair value a security when:
- trading in the security has been halted;
- the market quotation for the security is clearly erroneous due to a clerical error;
- the security's liquidity decreases such that, in the Adviser's opinion, the market quotation has become stale; or
- an event occurs after the close of the trading market (but before the Fund's NAV is calculated) that, in the Adviser's opinion, materially affects the value of the security.
The use of fair value pricing may minimize arbitrage opportunities that attempt to exploit the differences between a security's market quotation and its fair value. Also, the use of fair value pricing may not reflect a security's actual market value in light of subsequent relevant information, such as the security's opening price on the next trading day. 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. You may also find each Fund's net asset value by calling 800-539-3863 or by visiting the Funds' website at www.VictoryConnect.com.
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.
MARKET TIMING
The Victory Funds discourage frequent purchases and redemptions of Fund shares ("market timing"). We will deny your request to purchase or exchange your shares if we believe that the transaction is part of a market timing strategy. In identifying market timing activity, we consider, among other things, the frequency of your trades, whether you combine your trades with a group of shareholders, or whether you placed your order through a securities dealer or financial intermediary.
Market timing allows investors to take advantage of market inefficiencies, sometimes to the disadvantage of other shareholders. Market timing increases Fund expenses to all shareholders as a result of increased portfolio turnover. In addition, market timing could potentially dilute share value for all other shareholders by requiring the Fund to hold more cash than it normally would.
The Funds' Board of Trustees has adopted policies and procedures with respect to market timing. In order to prevent or minimize market timing, the Funds will:
- Employ "fair value" pricing, as described in this prospectus under "Share Price," to minimize the discrepancies between a security's market quotation and its perceived market value, which often gives rise to market timing activity; and
- Monitor for suspected market timing activity based on "round trip" transaction history, that is, the exchange of one Victory Fund's shares for those of another Victory Fund and subsequent exchange back to the original Victory Fund or the redemption of a Victory Fund and subsequent purchase of the same Fund. Any account with a history of round trips is suspected of market timing.
With respect to suspected market timing by investors who acquire Fund shares directly through the Transfer Agent or for whom sufficient identifying information is disclosed to the Funds, the Funds will suspend the trading privileges (other than redemption of Fund shares) of:
- Any account with a single round trip within a 30-day period; or
- Any account with two round trips within 90 days.
With respect to suspected market timing by investors who acquire shares through omnibus accounts at financial intermediaries (such as investment advisers, broker-dealers, third-party administrators and insurance companies), different purchase and exchange limitations may apply. These limitations may be may be more or less restrictive than those imposed on direct and fully disclosed accounts. The Adviser will determine whether a financial intermediary's purchase and exchange limitations are reasonably designed to detect and prevent frequent purchases and redemptions of Fund shares. Investors who hold Fund shares through a financial intermediary are advised to consult the intermediary to determine what purchase and exchange limitations apply to their accounts.
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 from dividends and interest 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.
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 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.
[SIDENOTE]
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.
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 shares of another fund of the Victory Funds. If you reinvest your distributions in a different 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
No Fund pays federal income tax on the earnings and capital gains it distributes to shareholders.
- Qualified dividends received from a Fund by noncorporate shareholders will be taxed at long-term capital gain rates to the extent attributable to qualified dividends received by such Fund. Nonqualified dividends, dividends received by corporate shareholders and dividends from a Fund's short-term capital gains are taxable as ordinary income. Dividends from a Fund's long-term capital gains are taxable as long-term capital gains.
- 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 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.
- A Fund may be required to withhold tax from taxable distributions if you fail to give your correct social security or taxpayer identification number, fail to make required certifications, or a Fund is notified by the Internal Revenue Service that backup withholding is required.
- 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.
[SIDENOTE]
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.
INVESTING WITH VICTORY
If you are looking for a convenient way to open an account or to add money to an existing account, Victory Portfolios ("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, Class C or Class R Shares of a Fund. Class R Shares, however, are available for purchase only by eligible shareholders. The following sections 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.
CUSTOMER IDENTIFICATION PROGRAM
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens a new account, and to determine whether such person's name appears on government lists of known or suspected terrorists and terrorist organizations.
As a result, the Funds must obtain the following information for each person who opens a new account:
- Name;
- Date of birth (for individuals);
- Residential or business street address (although post office boxes are still permitted for mailing); and
- Social security number, taxpayer identification number, or other identifying number.
You may also be asked for a copy of your driver's license, passport or other identifying document in order to verify your identity. In addition, it may be necessary to verify your identity by cross-referencing your identification information with a consumer report or other electronic database. Additional information may be required to open accounts for corporations and other entities. Federal law prohibits the Funds and other financial institutions from opening a new account unless they receive the minimum identifying information listed above. After an account is opened, the Funds may restrict your ability to purchase additional shares until your identity is verified. The Funds may close your account or take other appropriate action if it is unable to verify your identity within a reasonable time. If your account is closed for this reason, your shares will be redeemed at the NAV next calculated after the account is closed.
CHOOSING A SHARE CLASS
Each Fund offers Class A and R Shares. Class C Shares are also offered by the Value, Diversified Stock, Special Value and Focused Growth Funds. 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 CLASS C CLASS R
- Front-end sales - No front-end sales - No front-end sales
charge, as described charge. All your money charge. All your money
on the next page. goes to work for you goes to work for you
There are several ways right away. right away.
to reduce or eliminate
this charge. - Higher expenses than - Class R Shares are
Class A or Class R only available to
- Lower annual expenses Shares. certain investors.
than Class R Shares.
- A deferred sales charge - Higher expenses than
if you sell your shares Class A Shares.
within twelve months of
their purchase.
|
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 of Class A Shares of a Fund. Currently, a CDSC of 0.75% is imposed on redemptions of any such shares redeemed in the first year after 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. No CDSC is imposed on shares representing reinvested distributions. You may be eligible for reduction or waiver of this CDSC under certain circumstances. See the Statement of Additional Information for details.
[SIDENOTE]
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, see the "Financial Highlights" at the end of this Prospectus.
SALES CHARGE REDUCTIONS AND WAIVERS FOR CLASS A SHARES
You may reduce or eliminate the sales charge in the following cases:
1. A Letter of Intent allows you to 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 at least 5% of the total amount you intend to purchase. A portion of the shares purchased under the nonbinding Letter of Intent will be held in escrow until the total investment has been completed. In the event the Letter of Intent is not completed, sufficient escrowed shares will be redeemed to pay any applicable front-end sales charges.
2. Rights of Accumulation allow you to add the value of any Class A Shares you already own (excluding Funds sold without a sales charge) to the amount of your next Class A investment to determine if your added investment will qualify for a reduced sales charge. The value of the Class A Shares you already own will be calculated by using the greater of the current value or the original investment amount.
3. The Combination Privilege allows you to combine the value of Class A Shares you own in accounts of multiple Victory Funds (excluding Funds sold without a sales charge) and in accounts of household members of your immediate family (spouse and children under 21) to achieve a reduced sales charge on your added investment.
4. The Reinstatement Privilege permits an investor, within 90 days of a redemption of Class A Shares of a Fund, to reinvest all or part of the redemption proceeds in the Class A Shares of any Victory Fund at the NAV next computed after receipt by the transfer agent of the reinvestment order. No service charge is currently imposed on reinvestment in shares of the Funds.
In order to obtain a sales charge reduction or waiver, you must provide
your financial intermediary or the Transfer Agent, at the time of purchase,
current information regarding shares of the Funds held in other accounts. Such
information must include account statements or other records (including written
representations from the intermediary holding the shares) THAT INDICATE THAT A
SALES CHARGE WAS PAID regarding shares of the Funds held in: (i) all accounts
(e.g. retirement accounts) with the Funds and your financial intermediary; (ii)
accounts with other financial intermediaries; and (iii) accounts in the name of
immediate family household members (spouse and children under 21).
This section includes all the information you need to determine whether you are eligible for any Class A sales charge reduction. This prospectus is posted on the Funds' website at www.VictoryConnect.com.
5. Victory will completely waive the sales charge (for Class A Shares) in the following cases:
a. Purchases by:
i. current and retired Fund Trustees or officers;
ii. directors, trustees, employees, and family members of employees of KeyCorp or "Affiliated Providers;"* and
*Affiliated Providers are affiliates and subsidiaries of KeyCorp, and any organization that provides services to the Victory Family of Funds.
[SIDENOTE]
There are several ways you can combine multiple purchases in the Victory Funds and take advantage of reduced sales charges and, in some cases, eliminate the sales charges.
iii. brokers (and their sales representatives) where those brokers have agreements with the Distributor to sell shares of a Fund.
b. Purchases for trust or other advisory accounts established with KeyBank or its affiliates.
c. Reinvestment of proceeds from a liquidation distribution of Class A Shares of a Victory Fund held in a deferred compensation plan, agency, trust, or custody account.
d. Purchases for fee-based investment products or accounts.
e. Purchases by retirement plans, including Section 401 and 457 Plans sponsored by a Section 501(c)(3) organization and certain non-qualified deferred compensation arrangements that operate in a similar manner to qualified plans with plan assets greater than $5,000,000, and IRA rollovers from such plans, if a Victory Class A Share was offered. If the Distributor pays a concession to the dealer of record, a CDSC of 0.75% will be charged to the shareholder if any of those shares are redeemed in the first year after 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. You may be eligible for reduction or waiver of this CDSC under certain circumstances. See the SAI for details.
f. Purchases by participants in the Victory Investment Program.
g. Shareholders who qualified under Fund rules previously in effect, except for NAV transfer rules.
CALCULATION OF SALES CHARGES -- CLASS C
You will pay a 1% contingent deferred sales charge (CDSC) on any Class C Shares you sell within 12 months of purchase. The CDSC is based on the current value of the shares being sold or their net asset value when purchased, whichever is less. There is no CDSC on shares you acquire by reinvesting your dividends or capital gains distributions. You may be eligible for reduction or waiver of this CDSC under certain circumstances. See the Statement of Additional Information for details. There is no CDSC when you exchange your shares for Class C Shares of another Victory Fund.
An investor may, within 90 days of a redemption of Class C Shares, reinvest all or part of the redemption proceeds in the Class C shares of any Victory Fund at the NAV next computed after receipt by the transfer agent of the reinvestment order. No service charge is currently imposed on reinvestment in shares of the Funds. Class C Share proceeds reinstated do not result in a refund of any CDSC paid by the shareholder, but the reinstated shares will be treated as CDSC exempt upon reinstatement. The shareholder must ask the Distributor for such privilege at the time of reinvestment.
To keep your CDSC as low as possible, each time you sell shares we will first sell shares in your account that are not subject to CDSC. If there are not enough of these to meet your sale, we will sell the shares in the order they were purchased.
Purchases of $1,000,000 and above will automatically be made in Class A Shares of the Fund.
ELIGIBILITY REQUIREMENTS TO PURCHASE CLASS R SHARES
Class R Shares may only be purchased by:
- Retirement plans, including Section 401 and 457 plans, section 403 plans sponsored by a section 501(c)(3) organization and certain non-qualified deferred compensation arrangements that operate in a similar manner to qualified plans;
- IRA rollovers from such plans if a Victory Class R Shares was offered; or
- Shareholders who owned Class R Shares (formerly Class G Shares) on December 31, 2002.
CONVERTIBILITY OF CLASS R SHARES TO CLASS A
Class R shareholders may convert their Class R Shares to an equal dollar amount of Class A Shares of the same Fund at any time. No front-end sales charges will be imposed on the Class A Shares acquired through a conversion of Class R Shares. The Adviser believes (based on an opinion from PricewaterhouseCoopers LLP, the Funds' independent registered accounting firm) that the conversion of Class R Shares of a Fund for Class A Shares of the same Fund should not constitute a taxable event for federal income tax purposes.
Additional purchases of Class A Shares of a Fund, other than dividend reinvestments, may be subject to a front-end sales charge. In addition, you may incur additional fees if you buy, exchange or sell shares through a broker or agent.
SHAREHOLDER SERVICING PLAN FOR CLASS A SHARES
Each Fund has adopted a Shareholder Servicing Plan for its Class A Shares. The Shareholder Servicing Plan also applies to Class R Shares of the Stock Index Fund. Shareholder servicing agents provide administrative and support services to their customers which may include establishing and maintaining accounts and records relating to shareholders, processing dividend and distribution payments from the Funds on behalf of shareholders, responding to routine inquiries from shareholders concerning their investments, assisting shareholders in changing dividend options, account designations and addresses, and other similar services. 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 Class A Shares of the Stock Index Fund pays a fee of 0.15% of average daily net assets. The Funds may enter into agreements with various shareholder servicing agents, including KeyBank 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 PLANS
In accordance with Rule 12b-1 of the Investment Company Act of 1940, Victory has adopted a Distribution and Service Plan for Class R Shares of each Fund, other than the Stock Index Fund, and for those Funds that offer Class C Shares.
Under the Class R Distribution and Service Plan, each Fund will pay to the Distributor a monthly fee at an annual rate of up to 0.50% of each Fund's average daily net assets. The fee is paid for general distribution services, for selling Class R Shares of
each of these Funds and for providing personal services to shareholders of each of these Funds. Distribution and selling services are provided by the Distributor or by agents of the Distributor and include those services intended to result in the sale of a Fund's shares. Personal services to shareholders are generally provided by broker-dealers or other intermediaries, including KeyBank and its affiliates, and consist of responding to inquiries, providing information to shareholders about their Fund accounts, establishing and maintaining accounts and records, providing dividend and distribution payments, arranging for bank wires, assisting in transactions and changing account information.
Under the Class C Distribution and Service Plan, each Fund will pay to the Distributor a monthly fee at an annual rate of 1.00% of the average daily net assets of its Class C Shares. Of this amount, 0.75% of the Fund's Class C Shares average daily net assets will be paid for general distribution services and for selling Class C Shares. Each Fund will pay 0.25% of its Class C Shares average daily net assets to compensate financial institutions that provide personal services to Class C shareholders of each of these Funds. Distribution and selling services are provided by the Distributor or by agents of the Distributor and include those services intended to result in the sale of a Fund's Class C Shares. Personal services to shareholders are generally provided by broker-dealers or other financial intermediaries, including KeyBank and its affiliates, and consist of responding to inquiries, providing information to shareholders about their Fund accounts, establishing and maintaining accounts and records, providing dividend and distribution payments, arranging for bank wires, assisting in transactions and changing account information.
Because Rule 12b-1 fees are paid out of a Fund's assets and 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. Class R and Class C Shares do not convert into any other class of shares.
Victory has adopted a separate Rule 12b-1 Distribution and Service Plan for Class A Shares of each Fund and Class R Shares of the Stock Index Fund. These share classes do not make any payments under this plan. See the SAI for more details regarding this plan.
The Adviser (and its affiliates) may make substantial payments to affiliated and unaffiliated dealers or other financial intermediaries and service providers, including McDonald Investments Inc. (an affiliate of the Adviser), for distribution, administrative and/or shareholder servicing activities, out of its own resources, including the profits from the advisory fees the Adviser receives from the Funds. The Adviser also may reimburse the Distributor (or the Distributor's affiliates) for making these payments. Some of these distribution-related payments may be made to dealers or financial intermediaries for marketing, promotional or related expenses; these payments are often referred to as "revenue sharing." In some circumstances, those types of payments may create an incentive for a dealer or financial intermediary or its representatives to recommend or offer shares of the Funds or other Victory Funds to its customers. More information about these payments is contained in the SAI. You should ask your dealer or financial intermediary for more details about any such payments it receives.
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 IRA accounts), with additional investments of at least $25. There is no minimum investment required to open an account or for additional investments in Victory Simple IRAs. The minimum investment required to open an account will be waived for employees of the Adviser and the Administrator, and their affiliates. 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 in good order and accepted by 4:00 p.m. Eastern Time or the close of regular 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 THESE ADDRESSES HANDY FOR PURCHASES, EXCHANGES, OR REDEMPTIONS.
[GRAPHIC]
BY REGULAR U.S. MAIL
Send completed Account Applications with your check or bank draft to:
The Victory Funds
P.O. Box 182593
Columbus, OH 43218-2593
[GRAPHIC]
BY OVERNIGHT MAIL
Use the following address ONLY for overnight packages:
The Victory Funds
c/o BISYS TA Operations
3435 Stelzer Road
Columbus, OH 43219
PHONE: 800-539-FUND
[GRAPHIC]
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 money to notify the Fund that you intend to purchase shares by wire and to verify wire instructions.
[GRAPHIC]
BY TELEPHONE
800-539-FUND (800-539-3863)
[GRAPHIC]
ON THE INTERNET
www.VictoryConnect.com
To open an account, you must mail a completed account application to Victory at the above mail address. You can download the account application form from www.VictoryConnect.com by clicking on Mutual Funds, Account Application and Forms. For more information on how to access account information and/or applications electronically, please call Victory Funds Customer Service at 800-539-3863 between 8:00 a.m. and 6:00 p.m. (Eastern Time), Monday through Friday. Your account must be set up for Automated Clearing House payment in order to execute online purchases.
[SIDENOTE]
When you invest through an investment professional, the procedures for buying, selling, and exchanging shares and the account features and policies may differ.
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 or on the Account Maintenance Form. 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. A Fund may reject any purchase order in its sole discretion. If your check is returned as uncollectible for any reason, you will be charged for any resulting fees and/or losses. The Funds do not accept cash, money orders, traveler's checks, credit card convenience checks, and third party checks. Additionally, bank starter checks are not accepted for the shareholder's initial investment into the Funds. 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.
[SIDENOTE]
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.
HOW TO EXCHANGE SHARES
You may exchange shares of one Victory Fund to buy shares of the same class of any other. You may also exchange your Class A or Class R Shares of any Victory Fund for shares of any Victory money market fund. You may also exchange your shares of any Victory money market fund for Class A or Class R Shares of any Victory Fund. All exchanges are subject to the conditions described below. If your request is received and accepted by 4:00 p.m. Eastern Time, or the close of regular trading on the NYSE, whichever is earlier, your exchange will be processed the same day.
YOU CAN EXCHANGE SHARES OF A FUND BY CALLING 800-539-FUND, AT
www.VictoryConnect.com, OR BY WRITING VICTORY. 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 shares you want to exchange and the Fund shares you want to buy must be subject to 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 that has a 5.75% sales charge as a result of an exchange from another Victory Fund that has a 2.00% sales charge, you would pay the 3.75% difference in sales charge.
- On certain business days, such as Columbus Day and Veterans 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 and any other eligibility 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 ten business days before you can exchange them; after the account is open ten business 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 60 days' notice to shareholders.
- Before exchanging, read the prospectus of the Fund you wish to purchase by exchange, which may be subject to different risks, fees and expenses.
- An exchange of Fund shares constitutes a sale for tax purposes, unless the exchange is made within an IRA or other tax-deferred account.
[SIDENOTE]
You can obtain a list of funds available for exchange by calling 800-539-FUND or by visiting www.VictoryConnect.com.
HOW TO SELL SHARES
If your request is received in good order by 4:00 p.m. Eastern Time or the close of regular trading on the NYSE (whichever time is earlier), your redemption will be processed the same day. You cannot redeem your shares at www.VictoryConnect.com.
[GRAPHIC]
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 previously designated domestic financial institution;
- Mail a check to a previously designated alternate address; or
- Electronically transfer your redemption via the Automated Clearing House (ACH) to a previously designated domestic financial institution.
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.
[GRAPHIC]
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:
- 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 Fund account with a different registration; or
- The check or wire is being sent to a different bank account than was previously designated.
You can get a signature guarantee from a financial institution such as a bank, broker-dealer, credit union, clearing agency, or savings association.
[GRAPHIC]
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.
[GRAPHIC]
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.
[SIDENOTE]
THERE ARE A NUMBER OF CONVENIENT WAYS TO SELL YOUR SHARES. YOU CAN USE THE SAME MAILING ADDRESSES LISTED FOR PURCHASES.
SYSTEMATIC WITHDRAWAL PLAN
If you check this box on the Account Application or on the Account Maintenance Form, 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 will be held until the purchase check has cleared, which may take up to 10 business days.
- A Fund may postpone payment of redemption proceeds for up to seven calendar days at any time.
- 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.
ORGANIZATION AND MANAGEMENT OF 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.
ABOUT VICTORY
Each Fund is a member of The Victory Portfolios, a group of 20 distinct investment portfolios. The Board of Trustees of Victory has the overall responsibility for the management of the Funds.
THE INVESTMENT ADVISER AND CO-ADMINISTRATOR
Each Fund has an Advisory Agreement with Victory Capital Management Inc. (the Adviser) or its affiliates. The Adviser is a New York corporation registered as an investment adviser with the SEC. The Adviser, a second-tier subsidiary of KeyCorp, oversees the operations of the Funds according to investment policies and procedures adopted by the Board of Trustees. As of December 31, 2005, the Adviser and its affiliates managed assets totaling in excess of $billion for individual and institutional clients. The Adviser's address is 127 Public Square, Cleveland, Ohio 44114.
For the fiscal year ended October 31, 2005, the Adviser was paid advisory fees, after waivers, based on a percentage of the average daily net assets of each Fund as shown in the following table.
Value Fund % Diversified Stock Fund % Stock Index Fund % Established Value % Special Value Fund % Small Company Opportunity Fund % Focused Growth Fund % |
Under a Co-Administration Agreement, the Trust will pay Victory Capital Management Inc. a fee at the annual rate of 0.058% on the first $10 billion in total assets in the Trust, and 0.055% on total Trust assets in excess of $10 billion, for providing certain administrative services to the Funds.
PORTFOLIO MANAGEMENT
ARVIND K. SACHDEVA has been the lead portfolio manager, and NEIL A. KILBANE, RICHARD J. TURGEON and JASON E. PUTNAM are the co-portfolio managers of VALUE FUND. A Chartered Financial Analyst Charter Holder, Mr. Sachdeva is a Chief Investment Officer--Intrinsic Value and Deep Value and a Senior Managing Director of Victory Capital Management Inc. ("the Adviser"), and has been with a division of the Adviser since 2000. Prior to 2000, he was the Deputy Chief Investment Officer and Director of Research at Dean Investments. A Chartered Financial Analyst Charter Holder, Mr. Kilbane is a Senior Portfolio Manager and Managing Director of the Adviser, and has been with the Adviser or an affiliate since 1995. He is a senior portfolio manager for corporate and tax-free portfolios invested in the intrinsic large cap value style. Mr. Kilbane had previously been a portfolio manager for the Value Fund from April 1998 to March 2003. A Chartered Financial Analyst Charter Holder, Mr. Turgeon is the Director of Equity Research, a Senior Portfolio Manager and a Senior Managing Director of the Adviser. He has been with a division of the Adviser since 1994. Messrs. Sachdeva, Kilbane and Turgeon have been the portfolio managers of the Fund since August 2005. A Chartered Financial Analyst Charter Holder, Mr. Putnam is a Research Analyst and Managing Director of the Adviser, and has been with the Adviser or an affiliate since 2004. Prior to 2004, he was a research analyst with Credit Suisse First Boston. He has been a portfolio manager of the Fund since March 2006.
LAWRENCE G. BABIN is the lead portfolio manager, PAUL D. DANES is the portfolio manager and CAROLYN M. RAINS is the associate portfolio manager of the Diversified Stock Fund. Mr. Babin has been the portfolio manager of the DIVERSIFIED STOCK FUND since its inception in 1989. A Chartered Financial Analyst Charter Holder, Mr. Babin is a Chief Investment Officer and Senior Managing Director of the Adviser and has been with the Adviser or an affiliate since 1982. Mr. Danes has been a portfolio manager of the Fund since July 2000. He is a Senior Portfolio Manager and Managing Director with the Adviser and has been associated with the Adviser or an affiliate since 1987. Ms. Rains is a Portfolio Manager and a Managing Director of the Adviser and has been with the Adviser or an affiliate since 1998. She has been portfolio manager or associate portfolio manager of the Fund since June 2000.
ERNEST C. PELAIA is the portfolio manager and TRENTON TIPTON-FLETCHER is the co-portfolio manager of the STOCK INDEX FUND. Mr. Pelaia has managed the Stock Index Fund since July 1999. He is a Senior Portfolio Manager and Director, and has been with the Adviser since July 1991 as an Analyst, Trader, Investment Officer and most recently Assistant Vice President of Funds Management. Mr. Tipton-Fletcher has been co-portfolio manager of the Fund since March 2005. He is a Senior Portfolio Manager and Managing Director for the Adviser and has been associated with it since 1988.
GARY H. MILLER and GREGORY CONNERS are co-portfolio managers of the ESTABLISHED VALUE FUND and the SMALL COMPANY OPPORTUNITY FUND. Mr. Miller has been co-portfolio manager of the Funds since 1998. He is a Portfolio Manager and Managing Director of VictoryGradison Capital Management (a division of Victory Capital Management) and has been with VictoryGradison Capital Management since 1993. Mr. Conners has been associate portfolio manager or co-portfolio manager of the Funds since March 1, 2002. He is a Portfolio Manager and Director of VictoryGradison Capital Management and has been with VictoryGradison Capital Management since March 1999.
PATRICK DUNKERLEY is the lead portfolio manager and LESLIE Z. GLOBITS is the portfolio manager of the SPECIAL VALUE FUND. A Chartered Financial Analyst Charter Holder, Mr. Dunkerley has been a portfolio manager of the Fund since April 2001. He is a Senior Portfolio Manager and Managing Director of the Adviser and has been associated with the Adviser since 2001. Prior to that, from September 1996, he was vice president and director of equity research at Securities Corporation of Iowa. Mr. Globits, a Portfolio Manager and Director of the Adviser, was previously a Senior Financial Analyst and Assistant Vice President in KeyCorp's Corporate Treasury Department, and has been with the Adviser or an affiliate since 1987. He has been a portfolio manager of the Fund since June 2003.
PORTFOLIO MANAGER(S) listed for each Fund are, together, primarily responsible for the day-to-day management of the Fund's portfolio.
The Funds' Statement of Additional Information provides additional information about the portfolio managers' method of compensation, other accounts managed by the portfolio managers and the portfolio managers' ownership of securities in the Funds.
PORTFOLIO MANAGEMENT OF THE FOCUSED GROWTH FUND
A committee of Victory NewBridge Capital Management ("Victory NewBridge"), a division of the Adviser, manages the Focused Growth Fund's investments. No one person is primarily responsible for making investment recommendations. Each individual listed below has served on this Committee since the Fund's inception.
COMMITTEE
ERICK F. MARONAK has been a Senior Managing Director and Chief Investment Officer of Victory NewBridge since July 2003. In his capacity as CIO, Mr. Maronak oversees the investment decisions for the Victory NewBridge large capitalization growth product. From 1999 to July 2003, he was the Director of Research for NewBridge Partners, LLC.
JAMES B. COWPERTHWAIT, SR. has been a Senior Managing Director of Victory NewBridge since July 2003. From 1999 to July 2003, he served as Chairman and CIO of NewBridge Partners, LLC.
WILLIAM G. KENNEY has been a Managing Director of Victory NewBridge since July 2003. From 1999 to July 2003, Mr. Kenney was a Portfolio Manager/Analyst of NewBridge Partners, LLC.
JASON E. DAHL, a Chartered Financial Analyst Charter Holder, has been a Managing Director of Victory NewBridge since July 2003. From 1999 to July 2003, Mr. Dahl was a Portfolio Manager/Analyst of NewBridge Partners, LLC.
SCOTT R. KEFER, a Chartered Financial Analyst Charter Holder, has been a Managing Director of Victory NewBridge since July 2003. From 1999 to July 2003, Mr. Kefer was a Portfolio Manager/Analyst of NewBridge Partners, LLC.
MICHAEL B. KOSKUBA has been a Managing Director of Victory NewBridge since July 2003. From 1999 to July 2003, Mr. Koskuba was a Portfolio Manager/Analyst of NewBridge Partners, LLC.
CYNTHIA J. STARKE has been a Managing Director of Victory NewBridge since July 2003. From 1999 to July 2003, Ms. Starke was a Portfolio Manager/Analyst of NewBridge Partners, LLC.
ADDITIONAL INFORMATION
FUND CLASSES
At some future date, the Funds may offer additional classes of shares. A Fund or any class may be terminated at any time for failure to achieve an economical level of assets or for other reasons.
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 and publications. 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 may send only one copy of any shareholder reports, proxy statements, 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), and they will be delivered promptly.
OTHER SERVICE PROVIDERS
Victory Capital Advisers, Inc. (the Distributor), an affiliate of BISYS Fund Services, Inc., 100 Summer Street, Suite 1500, Boston, Massachusetts 02110, serves as distributor for the continuous offering of the Funds' shares. The Distributor is not affiliated with the Adviser.
KeyBank National Association, 127 Public Square, Cleveland, Ohio 44114, serves as the custodian of the Funds' investments and cash and settles trades made by the Funds.
BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio 43219, serves as the co-administrator, transfer agent, fund accountant and dividend disbursing agent for the Funds.
PricewaterhouseCoopers LLP, 100 East Broad Street, Columbus, OH 43215, serves as the Independent Registered Public Accounting Firm for the Funds.
Kramer Levin Naftalis & Frankel LLP, 1177 Avenue of the Americas, New York, NY 10036, serves as legal counsel to the Funds.
IF YOU WOULD LIKE TO RECEIVE ADDITIONAL COPIES OF ANY MATERIALS,
PLEASE CALL THE FUNDS AT
800-539-FUND
OR PLEASE VISIT www.VictoryConnect.com.
[SIDENOTE]
Some additional information you should know about the Funds.
FINANCIAL HIGHLIGHTS
VALUE 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 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 and in the Request Literature section of www.VictoryConnect.com.
CLASS A SHARES
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.41 $ 9.65 $ 12.93 $ 18.06
-------------------------------------------------------------------------------------------------------------
Investment Activities:
Net investment income 0.10 0.10 0.10 0.10
Net realized and unrealized
gains (losses) on investments 1.45 1.75 (2.04) (2.58)
-------------------------------------------------------------------------------------------------------------
Total from Investment Activities 1.55 1.85 (1.94) (2.48)
-------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.11) (0.09) (0.09) (0.09)
Net realized gains -- -- (1.25) (2.56)
-------------------------------------------------------------------------------------------------------------
Total Distributions (0.11) (0.09) (1.34) (2.65)
-------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.85 $ 11.41 $ 9.65 $ 12.93
=============================================================================================================
Total Return (excludes sales charges) 13.70% 19.23% (17.21)% (15.61)%
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $ 227,185 $ 227,586 $ 319,613 $ 451,545
Ratio of expenses to
average net assets 1.25% 1.25% 1.17% 1.15%
Ratio of net investment income
to average net assets 0.80% 0.95% 0.84% 0.66%
Ratio of expenses to
average net assets* (a) (a) 1.20% 1.21%
Ratio of net investment income
to average net assets* (a) (a) 0.81% 0.60%
Portfolio turnover (b) 86% 97% 40% 51%
|
* During the period, certain fees were reduced and/or reimbursed. If such fee
reductions and/or reimbursements had not occurred, the ratios would have
been as indicated.
(a) There were no fee reductions during the period.
(b) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
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 C and Class R Shares of the Fund. The financial highlights 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 and in the Request Literature section of www.VictoryConnect.com.
CLASS C SHARES
MARCH 1,
YEAR YEAR 2003
ENDED ENDED THROUGH
OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003(a)
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.40 $ 9.13
--------------------------------------------------------------------------------
Investment Activities:
Net investment income 0.05 0.06
Net realized and unrealized
gains (losses) on investments 1.44 2.27
--------------------------------------------------------------------------------
Total from Investment Activities 1.49 2.33
--------------------------------------------------------------------------------
Distributions
Net investment income (0.06) (0.06)
Net realized gains -- --
--------------------------------------------------------------------------------
Total Distributions (0.06) (0.06)
--------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.83 $ 11.40
================================================================================
Total Return (excludes contingent
deferred sales charges) 13.13% 25.65%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $ 334 $ 92
Ratio of expenses to
average net assets 1.75% 1.72%(c)
Ratio of net investment income
to average net assets 0.36% 0.32%(c)
Ratio of expenses to
average net assets* 4.63% 3.74%(c)
Ratio of net investment income
(loss) to average net assets* (2.52)% (1.70)%(c)
Portfolio turnover (d) 86% 97%
CLASS R SHARES
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.39 $ 9.64 $ 12.93 $ 18.06
----------------------------------------------------------------------------------------------------------
Investment Activities:
Net investment income 0.06 0.06 0.06 0.05
Net realized and unrealized
gains (losses) on investments 1.45 1.76 (2.04) (2.57)
----------------------------------------------------------------------------------------------------------
Total from Investment Activities 1.51 1.82 (1.98) (2.52)
----------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.07) (0.07) (0.06) (0.05)
Net realized gains -- -- (1.25) (2.56)
----------------------------------------------------------------------------------------------------------
Total Distributions (0.07) (0.07) (1.31) (2.61)
----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.83 $ 11.39 $ 9.64 $ 12.93
==========================================================================================================
Total Return (excludes contingent
deferred sales charges) 13.32% 19.00% (17.50)% (15.87)%
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $ 7,267 $ 9,398 $ 10,777 $ 4,981
Ratio of expenses to
average net assets 1.50% 1.50% 1.50% 1.49%
Ratio of net investment income
to average net assets 0.54% 0.70% 0.57% 0.32%
Ratio of expenses to
average net assets* 1.90% 1.89% 1.91% 1.89%
Ratio of net investment income
(loss) to average net assets* 0.14% 0.31% 0.16% (0.08)%
Portfolio turnover (d) 86% 97% 40% 51%
|
* During the period, certain fees were reduced and/or reimbursed. If such fee
reductions and/or reimbursements had not occurred, the ratios would have
been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
DIVERSIFIED 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 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 and in the Request Literature section of www.VictoryConnect.com.
CLASS A SHARES
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.74 $ 10.94 $ 13.56 $ 17.85
--------------------------------------------------------------------------------------------------------------
Investment Activities:
Net investment income 0.09** 0.08 0.05 0.04
Net realized and unrealized
gains (losses) on investments 1.62 2.80 (2.22) (1.87)
--------------------------------------------------------------------------------------------------------------
Total from Investment Activities 1.71 2.88 (2.17) (1.83)
--------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.09) (0.08) (0.04) (0.03)
Net realized gains -- -- (0.41) (2.43)
--------------------------------------------------------------------------------------------------------------
Total Distributions (0.09) (0.08) (0.45) (2.46)
--------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 15.36 $ 13.74 $ 10.94 $ 13.56
==============================================================================================================
Total Return (excludes sales charges) 12.46% 26.48% (16.76)% (11.43)%
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $ 1,834,238 $ 1,149,997 $ 905,116 $ 1,005,730
Ratio of expenses to
average net assets 1.10% 1.16% 1.12% 1.09%
Ratio of net investment income
to average net assets 0.59% 0.45% 0.39% 0.28%
Ratio of expenses to
average net assets* 1.11% (a) (a) 1.11%
Ratio of net investment income
to average net assets* 0.58% (a) (a) 0.26%
Portfolio turnover (b) 86% 95% 85% 88%
|
* During the period, certain fees were reduced and/or reimbursed. If such fee
reductions and/or reimbursements had not occurred, the ratios would have
been as indicated.
** Calculated using average shares for the period.
(a) There were no fee reductions during the period.
(b) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
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 C and Class R Shares of the Fund. The financial highlights 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 and in the Request Literature section of www.VictoryConnect.com.
CLASS C SHARES
MARCH 1,
YEAR YEAR YEAR 2002
ENDED ENDED ENDED THROUGH
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002(a)
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.66 $ 10.90 $ 14.31
--------------------------------------------------------------------------------------------
Investment Activities:
Net investment income (loss) (0.01)** 0.03 --(b)
Net realized and unrealized
gains (losses) on investments 1.62 2.77 (3.40)
--------------------------------------------------------------------------------------------
Total from
Investment Activities 1.61 2.80 (3.40)
--------------------------------------------------------------------------------------------
Distributions
Net investment income (0.03) (0.04) (0.01)
Net realized gains -- -- --
--------------------------------------------------------------------------------------------
Total Distributions (0.03) (0.04) (0.01)
--------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 15.24 $ 13.66 $ 10.90
============================================================================================
Total Return (excludes contingent
deferred sales charges) 11.77% 25.71% (23.76)%(c)
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $ 74,036 $ 11,068 $ 2,193
Ratio of expenses to
average net assets 1.75% 1.75% 1.90%(d)
Ratio of net investment income
(loss) to average net assets (0.09)% 0.08% (0.16)%(d)
Ratio of expenses to
average net assets* 1.93% 2.13% 2.25%(d)
Ratio of net investment income
(loss) to average net assets* (0.27)% (0.30)% (0.51)%(d)
Portfolio turnover (e) 86% 95% 85%
CLASS R SHARES
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.64 $ 10.86 $ 13.51 $ 17.83
----------------------------------------------------------------------------------------------------------
Investment Activities:
Net investment income (loss) 0.03 0.04 (0.01) (0.02)
Net realized and unrealized
gains (losses) on investments 1.60 2.78 (2.23) (1.87)
----------------------------------------------------------------------------------------------------------
Total from
Investment Activities 1.63 2.82 (2.24) (1.89)
----------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.03) (0.04) --(b) --(b)
Net realized gains -- -- (0.41) (2.43)
----------------------------------------------------------------------------------------------------------
Total Distributions (0.03) (0.04) (0.41) (2.43)
----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 15.24 $ 13.64 $ 10.86 $ 13.51
==========================================================================================================
Total Return (excludes contingent
deferred sales charges) 11.95% 26.04% (17.30)% (11.81)%
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $ 229,361 $ 203,830 $ 158,742 $ 140,794
Ratio of expenses to
average net assets 1.52% 1.57% 1.69% 1.51%
Ratio of net investment income
(loss) to average net assets 0.19% 0.31% (0.16)% (0.14)%
Ratio of expenses to
average net assets* 1.52% 1.67% (f) 1.51%
Ratio of net investment income
(loss) to average net assets* 0.19% 0.21% (f) (0.14)%
Portfolio turnover (e) 86% 95% 85% 88%
|
* During the period, certain fees were reduced and/or reimbursed. If such fee
reductions and/or reimbursements had not occurred, the ratios would have
been as indicated.
** Calculated using average shares for the period.
(a) Period from commencement of operations.
(b) Less than $0.01 per share.
(c) Not annualized.
(d) Annualized.
(e) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
(f) There were no fee reductions during the period.
STOCK INDEX 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 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 and in the Request Literature section of www.VictoryConnect.com.
CLASS A SHARES
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.59 $ 13.12 $ 17.10 $ 23.72
-----------------------------------------------------------------------------------------------------------
Investment Activities:
Net investment income 0.16 0.13** 0.14 0.14
Net realized and unrealized
gains (losses) on investments 1.19 2.49 (2.49) (6.08)
-----------------------------------------------------------------------------------------------------------
Total from Investment Activities 1.35 2.62 (2.35) (5.94)
-----------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.16) (0.15) (0.14) (0.14)
Net realized gains -- -- (1.49) (0.54)
-----------------------------------------------------------------------------------------------------------
Total Distributions (0.16) (0.15) (1.63) (0.68)
-----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 16.78 $ 15.59 $ 13.12 $ 17.10
===========================================================================================================
Total Return (excludes sales charges) 8.69% 20.11% (15.75)% (25.57)%
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $ 88,330 $ 89,619 $ 338,588 $ 521,754
Ratio of expenses to
average net assets 0.69% 0.79% 0.66% 0.62%
Ratio of net investment income
to average net assets 0.96% 0.98% 0.90% 0.72%
Ratio of expenses to
average net assets* 0.86% 0.96% 0.81% 0.84%
Ratio of net investment income
to average net assets* 0.79% 0.81% 0.75% 0.50%
Portfolio turnover (a) 3% 12% 8% 10%
|
* During the period, certain fees were reduced and/or reimbursed. If such fee
reductions and/or reimbursements had not occurred, the ratios would have
been as indicated.
** Calculated using average shares for the period.
(a) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
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 R Shares of the Fund. The financial highlights 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 and in the Request Literature section of www.VictoryConnect.com.
CLASS R SHARES
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.57 $ 13.12 $ 17.09 $ 23.72
-----------------------------------------------------------------------------------------------------------
Investment Activities:
Net investment income 0.11 0.09 0.11 0.10
Net realized and unrealized
gains (losses) on investments 1.21 2.49 (2.49) (6.09)
-----------------------------------------------------------------------------------------------------------
Total from Investment Activities 1.32 2.58 (2.38) (5.99)
-----------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.12) (0.13) (0.10) (0.10)
Net realized gains -- -- (1.49) (0.54)
-----------------------------------------------------------------------------------------------------------
Total Distributions (0.12) (0.13) (1.59) (0.64)
-----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 16.77 $ 15.57 $ 13.12 $ 17.09
===========================================================================================================
Total Return 8.50% 19.82% (15.88)% (25.79)%
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $ 18,282 $ 20,526 $ 18,868 $ 24,831
Ratio of expenses to
average net assets 0.94% 0.98% 0.86% 0.84%
Ratio of net investment income
to average net assets 0.70% 0.71% 0.70% 0.50%
Ratio of expenses to
average net assets* 1.38% 1.71% 1.58% 1.31%
Ratio of net investment income
(loss) to average net assets* 0.26% (0.02)% (0.02)% 0.03%
Portfolio turnover (a) 3% 12% 8% 10%
|
* During the period, certain fees were reduced and/or reimbursed. If such fee
reductions and/or reimbursements had not occurred, the ratios would have
been as indicated.
(a) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
ESTABLISHED VALUE 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 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 and in the Request Literature section of www.VictoryConnect.com.
CLASS A SHARES
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 26.67 $ 21.28 $ 26.84 $ 33.65
----------------------------------------------------------------------------------------------------------
Investment Activities:
Net investment income 0.09 0.12 0.16 0.17
Net realized and unrealized
gains (losses) on investments 3.40 5.37 0.07 (4.25)
----------------------------------------------------------------------------------------------------------
Total from Investment Activities 3.49 5.49 0.23 (4.08)
----------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.05) (0.10) (0.17) (0.18)
In excess of net investment income -- -- -- --
Net realized gains (2.20) -- (5.62) (2.55)
----------------------------------------------------------------------------------------------------------
Total Distributions (2.25) (0.10) (5.79) (2.73)
----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 27.91 $ 26.67 $ 21.28 $ 26.84
==========================================================================================================
Total Return (excludes sales charges) 14.17% 25.90% (0.32)% (13.07)%
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $ 23,505 $ 21,370 $ 35,586 $ 30,931
Ratio of expenses to
average net assets 1.11% 1.12% 0.99% 0.99%
Ratio of net investment income
to average net assets 0.33% 0.57% 0.66% 0.45%
Ratio of expenses to
average net assets* 1.13% 1.16% 1.06% 1.14%
Ratio of net investment income
(loss) to average net assets* 0.31% 0.53% 0.59% 0.30%
Portfolio turnover (a) 45% 43% 74% 58%
|
* During the period, certain fees were reduced and/or reimbursed. If such fee reductions and/or reimbursements had not occurred, the ratios would have been as indicated.
(a) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of shares issued.
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 R Shares of the Fund. The financial highlights 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 and in the Request Literature section of www.VictoryConnect.com.
CLASS R SHARES
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 26.61 $ 21.24 $ 26.80 $ 33.63
-----------------------------------------------------------------------------------------------------------
Investment Activities:
Net investment income 0.02 0.06 0.07 0.09
Net realized and unrealized
gains (losses) on investments 3.41 5.38 0.07 (4.26)
-----------------------------------------------------------------------------------------------------------
Total from Investment Activities 3.43 5.44 0.14 (4.17)
-----------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.04) (0.07) (0.08) (0.11)
In excess of net investment income -- -- -- --
Net realized gains (2.20) -- (5.62) (2.55)
-----------------------------------------------------------------------------------------------------------
Total Distributions (2.24) (0.07) (5.70) (2.66)
-----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 27.80 $ 26.61 $ 21.24 $ 26.80
===========================================================================================================
Total Return 13.93% 25.69% (0.67)% (13.35)%
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $ 290,445 $ 285,747 $ 246,200 $ 301,103
Ratio of expenses to
average net assets 1.34% 1.35% 1.33% 1.19%
Ratio of net investment income
to average net assets 0.10% 0.29% 0.33% 0.32%
Ratio of expenses to
average net assets* 1.37% 1.43% 1.46% 1.35%
Ratio of net investment income
to average net assets* 0.07% 0.21% 0.20% 0.16%
Portfolio turnover (a) 45% 43% 74% 58%
|
* During the period, certain fees were reduced and/or reimbursed. If such fee
reductions and/or reimbursements had not occurred, the ratios would have
been as indicated.
(a) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
SPECIAL VALUE 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 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 and in the Request Literature section of www.VictoryConnect.com.
CLASS A SHARES
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.12 $ 11.44 $ 12.98 $ 16.02
----------------------------------------------------------------------------------------------------------------
Investment Activities:
Net investment income 0.03 0.06 0.02 0.03
Net realized and unrealized
gains (losses) on investments 2.05 2.67 (0.13) (0.60)
----------------------------------------------------------------------------------------------------------------
Total from Investment Activities 2.08 2.73 (0.11) (0.57)
----------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.04) (0.05) (0.02) (0.04)
Net realized gains (3.01) -- (1.41) (2.43)
Tax return of capital -- -- --(a) --
----------------------------------------------------------------------------------------------------------------
Total Distributions (3.05) (0.05) (1.43) (2.47)
----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 13.15 $ 14.12 $ 11.44 $ 12.98
================================================================================================================
Total Return (excludes sales charges) 14.89% 23.90% (1.57)% (3.79)%
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $ 104,324 $ 187,640 $ 204,547 $ 201,734
Ratio of expenses to
average net assets 1.27% 1.24% 1.26% 1.30%
Ratio of net investment income
to average net assets 0.19% 0.43% 0.15% 0.22%
Ratio of expenses to
average net assets* (c) (c) (c) (c)
Ratio of net investment income
to average net assets* (c) (c) (c) (c)
Portfolio turnover (b) 200% 94% 82% 89%
|
* During the period, certain fees were reduced and/or reimbursed. If such fee
reductions and/or reimbursements had not occurred, the ratios would have
been as indicated.
(a) Less than $0.01 per share.
(b) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
(c) There were no fee reductions during the period.
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 C and Class R Shares of the Fund. The financial highlights 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 and in the Request Literature section of www.VictoryConnect.com.
CLASS C SHARES
MARCH 1,
YEAR YEAR 2003
ENDED ENDED THROUGH
OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003(a)
Net Asset Value, Beginning of Period $ 14.08 $ 11.21
--------------------------------------------------------------------------------
Investment Activities:
Net investment income (loss) (0.08)** 0.01
Net realized and unrealized
gains (losses) on investments 2.04 2.88
--------------------------------------------------------------------------------
Total from Investment Activities 1.96 2.89
--------------------------------------------------------------------------------
Distributions
Net investment income (0.02) (0.02)
Net realized gains (3.01) --
--------------------------------------------------------------------------------
Total Distributions (3.03) (0.02)
--------------------------------------------------------------------------------
Net Asset Value, End of Period $ 13.01 $ 14.08
================================================================================
Total Return (excludes contingent
deferred sales charges) 14.02% 25.84%(c)
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $ 440 $ 314
Ratio of expenses to
average net assets 1.95% 1.95%(d)
Ratio of net investment income
(loss) to average net assets (0.51)% (0.26)%(d)
Ratio of expenses to
average net assets* 3.97% 2.60%(d)
Ratio of net investment loss
to average net assets* (2.53)% (0.91)%(d)
Portfolio turnover (e) 200% 94%
CLASS R SHARES
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
Net Asset Value, Beginning of Period $ 14.02 $ 11.37 $ 12.93 $ 15.97
----------------------------------------------------------------------------------------------------------------
Investment Activities:
Net investment income (loss) (0.02)** 0.01 (0.01) (0.02)**
Net realized and unrealized
gains (losses) on investments 2.03 2.66 (0.14) (0.58)
----------------------------------------------------------------------------------------------------------------
Total from Investment Activities 2.01 2.67 (0.15) (0.60)
----------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.02) (0.02) --(b) (0.01)
Net realized gains (3.01) -- (1.41) (2.43)
----------------------------------------------------------------------------------------------------------------
Total Distributions (3.03) (0.02) (1.41) (2.44)
----------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 13.00 $ 14.02 $ 11.37 $ 12.93
================================================================================================================
Total Return (excludes contingent
deferred sales charges) 14.50% 23.50% (1.90)% (3.99)%
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $ 2,318 $ 2,039 $ 1,646 $ 674
Ratio of expenses to
average net assets 1.60% 1.60% 1.60% 1.60%
Ratio of net investment income
(loss) to average net assets (0.14)% 0.05% (0.19)% (0.16)%
Ratio of expenses to
average net assets* 2.80% 3.16% 3.67% 5.34%
Ratio of net investment loss
to average net assets* (1.34)% (1.51)% (2.26)% (3.90)%
Portfolio turnover (e) 200% 94% 82% 89%
|
* During the period, certain fees were reduced and/or reimbursed. If such fee
reductions and/or reimbursements had not occurred, the ratios would have
been as indicated.
** Calculated using average shares for the period.
(a) Period from commencement of operations.
(b) Less than $0.01 per share.
(c) Not annualized.
(d) Annualized.
(e) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
SMALL COMPANY OPPORTUNITY 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 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 and in the Request Literature section of www.VictoryConnect.com.
CLASS A SHARES
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 26.39 $ 20.99 $ 22.92 $ 26.34
----------------------------------------------------------------------------------------------------------
Investment Activities:
Net investment income (loss) 0.04 0.04 0.09 0.07
Net realized and unrealized
gains (losses) on investments 5.11 5.39 0.04 (2.09)
----------------------------------------------------------------------------------------------------------
Total from Investment Activities 5.15 5.43 0.13 (2.02)
----------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.05) (0.03) (0.01) (0.03)
Net realized gains (1.40) -- (2.05) (1.37)
----------------------------------------------------------------------------------------------------------
Total Distributions (1.45) (0.03) (2.06) (1.40)
----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 30.09 $ 26.39 $ 20.99 $ 22.92
==========================================================================================================
Total Return (excludes sales charges) 20.50% 25.91% 0.29% (8.01)%
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $ 52,169 $ 42,933 $ 43,769 $ 36,312
Ratio of expenses to
average net assets 1.15% 1.14% 1.09% 0.96%
Ratio of net investment income
(loss) to average net assets 0.16% 0.16% 0.34% 0.30%
Ratio of expenses to
average net assets* 1.20% 1.22% 1.17% 1.18%
Ratio of net investment income
(loss) to average net assets* 0.11% 0.08% 0.26% 0.08%
Portfolio turnover (a) 68% 49% 60% 58%
|
* During the period, certain fees were reduced and/or reimbursed. If such fee
reductions and/or reimbursements had not occurred, the ratios would have
been as indicated.
(a) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
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 R Shares of the Fund. The financial highlights 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 and in the Request Literature section of www.VictoryConnect.com.
CLASS R SHARES
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 26.06 $ 20.77 $ 22.80 $ 26.26
------------------------------------------------------------------------------------------------------------
Investment Activities:
Net investment loss (0.01) (0.02) (0.05) (0.01)
Net realized and unrealized
gains (losses) on investments 5.03 5.33 0.07 (2.08)
------------------------------------------------------------------------------------------------------------
Total from Investment Activities 5.02 5.31 0.02 (2.09)
------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.02) (0.02) -- --(a)
Net realized gains (1.40) -- (2.05) (1.37)
------------------------------------------------------------------------------------------------------------
Total Distributions (1.42) (0.02) (2.05) (1.37)
------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 29.66 $ 26.06 $ 20.77 $ 22.80
============================================================================================================
Total Return 20.26% 25.59% (0.21)% (8.32)%
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $ 95,653 $ 85,037 $ 70,481 $ 81,815
Ratio of expenses to
average net assets 1.35% 1.38% 1.61% 1.31%
Ratio of net investment loss
to average net assets (0.04)% (0.09)% (0.20)% (0.05)%
Ratio of expenses to
average net assets* 1.54% 1.64% 1.70% 1.52%
Ratio of net investment loss
to average net assets* (0.23)% (0.35)% (0.29)% (0.26)%
Portfolio turnover (b) 68% 49% 60% 58%
|
* During the period, certain fees were reduced and/or reimbursed. If such fee
reductions and/or reimbursements had not occurred, the ratios would have
been as indicated.
(a) Less than $0.01 per share.
(b) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
FOCUSED GROWTH 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, Class C and Class R Shares of the Fund. The financial highlights 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 and in the Request Literature section of www.VictoryConnect.com.
CLASS A SHARES CLASS C SHARES CLASS R SHARES
DECEMBER 31, DECEMBER 31, DECEMBER 31,
YEAR 2003 YEAR 2003 YEAR 2003
ENDED THROUGH ENDED THROUGH ENDED THROUGH
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004(a) 2005 2004(a) 2005 2004(a)
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00 $ 10.00
------------------------------------------------------------------------------------------------------------------------------
Investment Activities:
Net investment loss (0.04) (0.12) (0.07)
Net realized and unrealized gains
on investments 0.23 0.23 0.24
------------------------------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.19 0.11 0.17
------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.19 $ 10.11 $ 10.17
==============================================================================================================================
Total Return (excludes sales charges
and contingent deferred sales charges) 1.90%(b) 1.10%(b) 1.70%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $ 731 $ 34 $ 37
Ratio of expenses to average net assets 1.15%(c) 1.90%(c) 1.40%(c)
Ratio of net investment loss to
average net assets (0.68)%(c) (1.43)%(c) (0.93)%(c)
Ratio of expenses to average net assets* 14.35%(c) 28.56%(c) 27.47%(c)
Ratio of net investment loss to
average net assets* (13.88)%(c) (28.09)%(c) (27.00)%(c)
Portfolio turnover (d) 26% 26% 26%
|
* During the period, certain fees were reduced and/or reimbursed. If such fee
reductions and/or reimbursements had not occurred, the ratios would have
been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
This page is intentionally left blank.
The Victory Funds PRSRT STD
P.O. Box 182593 U.S. POSTAGE
Columbus, OH 43218-2593 PAID
Cleveland, OH
Permit No. 1535
|
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
Provide additional information about the Funds' investments. The annual report discusses market conditions and investment strategies that significantly affected a Fund's performance during its last fiscal year.
To obtain copies of the SAI, Annual or Semi-Annual Reports, or more information 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 182593
Columbus, OH 43218-2593
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:
publicinfo@sec.gov, or by writing the SEC's Public Reference Section,
Washington, D.C. 20459-0102.
ON THE INTERNET: Fund documents can be viewed on-line or downloaded at www.VictoryConnect.com or from the SEC at http://www.sec.gov (text only).
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(R) LOGO]
Investment Company Act File Number 811-4852
VF-EQTY-PRO (3/06)
PROSPECTUS
MARCH 1, 2006
MONEY MARKET FUNDS
FEDERAL MONEY MARKET FUND
INVESTOR AND SELECT SHARES
INSTITUTIONAL MONEY MARKET FUND
INVESTOR AND SELECT SHARES
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(R) LOGO]
www.VictoryConnect.com
800-539-FUND
(800-539-3863)
THE VICTORY PORTFOLIOS
TABLE OF CONTENTS
RISK/RETURN SUMMARY 1
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 9
DIVIDENDS, DISTRIBUTIONS, AND TAXES 9
INVESTING WITH VICTORY
- How to Buy Shares 13
- How to Exchange Shares 15
- How to Sell Shares 16
ORGANIZATION AND MANAGEMENT OF THE FUNDS 18
ADDITIONAL INFORMATION 19
FINANCIAL HIGHLIGHTS
Federal Money Market Fund 20
Institutional Money Market Fund 22
|
KEY TO FINANCIAL INFORMATION
[GRAPHIC]
OBJECTIVE AND STRATEGIES
The goals and the strategies that a Fund plans to use to pursue its investment objective.
[GRAPHIC]
RISK FACTORS
The risks you may assume as an investor in a Fund.
[GRAPHIC]
PERFORMANCE
A summary of the historical performance of a Fund.
[GRAPHIC]
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.
RISK/RETURN SUMMARY
INTRODUCTION
This Prospectus explains what you should know about the Victory Funds described in this Prospectus (the Funds), before you invest. Please read it carefully.
[GRAPHIC]
INVESTMENT OBJECTIVES
Each Fund pursues its investment objective by investing in a diversified portfolio of high-quality, short-term U.S. dollar-denominated money market instruments. Each Fund 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 the information in each Fund's Risk/Return Summary and the "Investments" section later in the Prospectus.
[GRAPHIC]
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
[GRAPHIC]
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.
[SIDENOTE]
Victory Capital Management Inc., which we will refer to as the "Adviser" 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.
FEDERAL MONEY MARKET FUND
INVESTOR SHARES
Cusip#: 926464520
Ticker: SBFXX
SELECT SHARES
Cusip#: 926464512
Ticker: SBSXX
[GRAPHIC]
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide high current income to the extent consistent with preservation of capital.
[GRAPHIC]
PRINCIPAL INVESTMENT STRATEGIES
The Fund pursues its investment objective by investing exclusively in securities issued or guaranteed by the U.S. government or certain of its agencies and instrumentalities. Securities issued by U.S. government instrumentalities are supported only by the credit of the federal instrumentality. See the "Investments" section for a description of these securities. The Fund also can invest in repurchase agreements collateralized by these securities.
Under normal circumstances, the 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), Resolution Funding Corporation (REFCORP) and Federal Agricultural Mortgage Association (FAMC).
- Repurchase agreements collateralized by any of the above securities.
Under normal circumstances, the Fund will invest at least 80% of its net assets in short-term U.S. government debt instruments. The Fund will not change this policy unless it notifies shareholders at least 60 days in advance. The Fund expects to invest substantially all of its assets in these instruments. For purposes of this policy, "net assets" includes any borrowings for investment purposes.
Important characteristics of the Fund's investments:
- QUALITY: The Fund invests only in U.S. government securities, including those issued by agencies and instrumentalities of the U.S. government. The Board of Trustees has established policies to ensure that the Fund invests in high quality, liquid instruments.
- MATURITY: The Fund maintains a weighted average maturity of 90 days or less. Individual investments may be purchased with remaining maturities ranging from one day to 397 days.
The Fund will limit its investments to those obligations and securities enumerated in 12 U.S.C. section 1757 (7)(B) and (E) of the United States Code as permissible investments by federal credit unions (including "wholly owned Government corporations" enumerated in 31 U.S.C. section 9101(3), and as interpreted by 12 C.F.R. Part 703).
[GRAPHIC]
PRINCIPAL RISKS
The 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 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 Fund's share price declines below $1.00.
- Interest rates rise rapidly, causing the Fund's investment securities to decline in value and the Fund's share price to decline below $1.00.
- Interest rates decline, resulting in a lower yield for the Fund.
The principal risks summarized above are more fully described in "Risk Factors."
An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.
[GRAPHIC]
INVESTMENT PERFORMANCE
The bar chart and table below indicate the risks of investing in the Fund. We assume reinvestment of dividends and distributions. The Fund's past performance does not necessarily indicate how the Fund will perform in the future.
[CHART]
CALENDAR YEAR RETURNS FOR INVESTOR SHARES
1996 4.64% 1997 4.98% 1998 5.28% 1999 4.90% 2000 6.14% 2001 3.88% 2002 1.59% 2003 0.90% 2004 1.07% 2005 |
HIGHEST
LOWEST
AVERAGE ANNUAL TOTAL RETURNS 10 YEARS (FOR THE PERIODS ENDED PAST PAST (OR LIFE DECEMBER 31, 2005) 1 YEAR 5 YEARS OF FUND) Investor Shares % % %(1) Select Shares % % %(2) |
(1) Ten year performance.
(2) Performance is from March 23, 1998, inception date of Select Shares.
The "seven-day yield" is an annualized figure -- the amount you would earn if you kept your investment in the 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 Fund's current seven-day yields and seven-day effective yields, call the Fund at 800-539-FUND (800-539-3863) or visit www.VictoryConnect.com and select Money Market Funds under Daily Prices.
[GRAPHIC]
FUND EXPENSES
This section describes the fees and expenses that you may pay if you invest in shares of the Fund.
SHAREHOLDER TRANSACTION EXPENSES INVESTOR SELECT (PAID DIRECTLY FROM YOUR INVESTMENT)(1) SHARES SHARES Maximum Sales Charge Imposed on Purchases NONE NONE (as a percentage of offering price) Maximum Deferred Sales Charge NONE NONE (as a percentage of the lower of purchase or sale price) Maximum Sales Charge Imposed on Reinvested Dividends NONE NONE Redemption or 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(2) % % (includes a shareholder servicing fee of 0.25% applicable to Select Shares) Total Fund Operating Expenses(3) % % |
(1) You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
(2) Restated to reflect current fees.
(3) The Adviser intends to voluntarily waive its fees and/or reimburse expenses so that the net operating expenses (excluding certain items) of the Investor and Select Shares of the Fund do not exceed 0.42% and 0.67%, respectively, for any period during which these waivers or reimbursements are in effect. These waivers/reimbursements may be terminated at any time. In addition to any voluntary or contractual fee waivers or expense reimbursements by the Adviser to limit the Fund's total operating expenses, BISYS Fund Services Ohio, Inc., the Fund's co-administrator ("BISYS"), or any of the Fund's other service providers may voluntarily waive its fees or reimburse expenses, as permitted by law, in order to reduce the Fund's total operating expenses.
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:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Investor Shares $ $ $ $
Select Shares $ $ $ $
|
INSTITUTIONAL MONEY MARKET FUND
INVESTOR SHARES
Cusip#: 926464785
Ticker: VICXX
SELECT SHARES
Cusip#: 926464777
Ticker: VISXX
[GRAPHIC]
INVESTMENT OBJECTIVE
The investment objective of the Fund is to obtain as high a level of current income as is consistent with preserving capital and providing liquidity.
[GRAPHIC]
PRINCIPAL INVESTMENT STRATEGIES
The Fund pursues its investment objective by primarily investing in short-term, high-quality debt instruments.
Under normal circumstances, the 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.
- Securities issued or guaranteed by the U.S. government or certain of its agencies and instrumentalities. Securities issued by certain U.S. government instrumentalities are supported only by the credit of the federal instrumentality. See the "Investments" section for a description of these securities.
- When-issued or delayed-delivery securities.
- Eurodollar debt obligations.
Important characteristics of the Fund's investments:
- QUALITY: The 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 Fund invests in high quality, liquid instruments. For more information on ratings, see the Appendix to the Statement of Additional Information (SAI).
- MATURITY: The Fund maintains a 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, Inc., 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.
[GRAPHIC]
PRINCIPAL RISKS
The 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 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 Fund's share price declines below $1.00.
- Interest rates rise rapidly, causing the Fund's investment securities to decline in value and the Fund's share price to decline below $1.00.
- Interest rates decline, resulting in a lower yield for the Fund.
- Adverse events affecting the banking industry cause the value of the Fund's investments to decline.
- Political, economic, business or regulatory events occur in a foreign country causing the value of a security to decline.
The principal risks summarized above are more fully described in "Risk Factors."
An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.
[GRAPHIC]
INVESTMENT PERFORMANCE
The bar chart and table below indicate the risks of investing in the Fund. We assume reinvestment of dividends and distributions. The Fund's past performance does not necessarily indicate how the Fund will perform in the future.
[CHART]
CALENDAR YEAR RETURNS FOR INVESTOR SHARES
1996 5.34% 1997 5.50% 1998 5.45% 1999 5.10% 2000 6.32% 2001 4.03% 2002 1.62% 2003 0.94% 2004 1.11% 2005 |
HIGHEST
LOWEST
AVERAGE ANNUAL TOTAL RETURNS 10 YEARS (FOR THE PERIODS ENDED PAST PAST (OR LIFE DECEMBER 31, 2005) 1 YEAR 5 YEARS OF FUND) Investor Shares % % %(1) Select Shares % % %(2) |
(1) Ten year performance.
(2) Performance is from June 5, 1995, inception date of Select Shares.
The "seven-day yield" is an annualized figure -- the amount you would earn if you kept your investment in the 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 Fund's current seven-day yields and seven-day effective yields, call the Fund at 800-539-FUND (800-539-3863) or visit www.VictoryConnect.com and select Money Market Funds under Daily Prices.
[GRAPHIC]
FUND EXPENSES
This section describes the fees and expenses that you may pay if you invest in shares of the Fund.
SHAREHOLDER TRANSACTION EXPENSES INVESTOR SELECT (PAID DIRECTLY FROM YOUR INVESTMENT)(1) SHARES SHARES Maximum Sales Charge Imposed on Purchases NONE NONE (as a percentage of offering price) Maximum Deferred Sales Charge NONE NONE (as a percentage of the lower of purchase or sale price) Maximum Sales Charge Imposed on Reinvested Dividends NONE NONE Redemption or Exchange Fees NONE NONE ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS) Management Fees 0.20% 0.20% Distribution (12b-1) Fees 0.00% 0.00% Other Expenses(2) % % (includes a shareholder servicing fee of 0.25% applicable to Select Shares) Total Fund Operating Expenses(3) % % |
(1) You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
(2) Restated to reflect current fees.
(3) In addition to any voluntary or contractual fee waivers or expense reimbursements by the Adviser to limit the Fund's total operating expenses, BISYS, the Fund's co-administrator, or any of the Fund's other service providers may voluntarily waive its fees or reimburse expenses, as permitted by law, in order to reduce the Fund's total operating expenses.
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:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Investor Shares $ $ $ $
Select Shares $ $ $ $
|
INVESTMENTS
The following describes some of the types of securities the Funds may purchase under normal market conditions to achieve their investment objectives. A Fund will not necessarily 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 Statement of Additional Information (SAI).
BANKERS' ACCEPTANCES.
Negotiable drafts or bills of exchange, in which a bank unconditionally agrees to pay the face value of the instrument upon maturity.
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 CORPORATE OBLIGATIONS.
Bonds issued by corporations and other business organizations to finance their short-term credit needs.
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. There is no guarantee that the U.S. government will provide support to U.S. agencies or instrumentalities if they are unable to meet their obligations.
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, SLMA, FHLB, FHLMC, and FMAC are supported by the right of the issuer to borrow from the U.S. Treasury. FFCB is supported only by the credit of the federal instrumentality.
U.S. GOVERNMENT INSTRUMENTALITIES.
Securities issued by U.S. government instrumentalities such as: the Student Loan Marketing Association (SLMA or Sallie Mae), The Federal Farm Credit Bank, and Federal Home Loan Banks. Certain instrumentalities are "wholly owned Government corporations," such as the Tennessee Valley Authority.* See the SAI for more information about investments in obligations of U.S. government instrumentalities and "wholly owned Government corporations."
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.
** 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. The Funds consider these securities to mature on the date that the interest rate adjusts or resets or the date the Fund can demand the payment of principal.
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 an instrument whose value is linked to, or
derived from another security, instrument, or index.
* TVA is supported by the right of the issuer to borrow from the U.S. Treasury.
PORTFOLIO HOLDINGS DISCLOSURE
Each Fund discloses its complete portfolio holdings as of the end of its second fiscal quarter (April 30th) and its fiscal year (October 30th) in its reports to shareholders. The Funds send reports to their existing shareholders no later than 60 days after the relevant fiscal period, and files these reports with the SEC by the 70th day after the end of the relevant fiscal period. You can find these reports on the Funds' website, www.VictoryConnect.com, and on the SEC's website, www.sec.gov.
Each Fund files its complete portfolio holdings as of the end of its first and third fiscal quarters (January 31 and July 31, respectively) with the SEC on Form N-Q no later than 60 days after the relevant fiscal period. You can find these filings on the SEC's website, www.sec.gov.
Each Fund also discloses its complete portfolio holdings each calendar quarter on the Funds' website, www.VictoryConnect.com, on approximately the 15th day of the following calendar month.
The Statement of Additional Information describes the policies and procedures that relate to the disclosure of the Funds' portfolio holdings.
RISK FACTORS
[GRAPHIC]
The following 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 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 fall below its cost.
- CREDIT RISK. The issuer of a debt security may fail to pay interest or principal in a timely manner.
- INTEREST RATE RISK. If interest rates rapidly rise, the decline in value could cause the share price to decline below $1.00 and if interest rates decline, the Fund will reinvest maturing instruments in lower yielding securities.
REPURCHASE AGREEMENT RISK:
- If the seller were to default or become insolvent, the Fund would suffer a loss if the proceeds of the sale of the underlying security were less than the repurchase price, or if the disposition of the security is delayed.
An investment in a Fund is not a complete investment program.
[SIDENOTE]
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.
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 and it is accepted. A business day is a day on which the Federal Reserve Bank of Cleveland, the New York Stock Exchange (NYSE), and the bond market 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 daily at www.VictoryConnect.com and once a week in THE WALL STREET JOURNAL and other newspapers.
MARKET TIMING
The Victory Funds generally discourage frequent purchases and redemptions of Fund shares ("market timing"). The Victory Funds' Board of Trustees has adopted a policy to identify and deter market timing activity in the Victory Equity and Fixed-Income Funds. Because many investors acquire shares of money market funds as short-term investments, however, this policy does not apply to investments in shares of the Victory Money Market Funds. Nevertheless, you should review the prospectus of any Victory Equity or Fixed-Income Fund into which you are considering an exchange for information about that Fund's market timing policy. In addition, if it is determined that an investor has engaged in market timing activity with respect to a Victory Equity or Fixed-Income Fund, the investor will be barred from purchasing additional shares of any Victory Money Market Fund.
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.
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.
[SIDENOTE]
An Investment Professional is an investment consultant, salesperson, financial planner, investment adviser, or trust officer who provides you with investment information.
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 Funds. If you reinvest your distributions in a different 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.
IMPORTANT INFORMATION ABOUT TAXES
Neither Fund pays federal income tax on the earnings and capital gains it distributes to shareholders.
- Dividends from a Fund's net income and short-term capital gains 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 of the Fund. 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 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.
- A Fund may be required to withhold tax from taxable distributions if you fail to give your correct social security or taxpayer identification number, fail to make required certifications, or a Fund is notified by the Internal Revenue Service that backup withholding is required.
- 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.
[SIDENOTE]
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.
INVESTING WITH VICTORY
If you are looking for a convenient way to open an account or to add money to an existing account, Victory Portfolios ("Victory") can help. The sections that follow will serve as a guide to your investments with Victory. The following sections 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.
ALL YOU NEED TO DO TO GET STARTED IS TO FILL OUT AN APPLICATION.
CUSTOMER IDENTIFICATION PROGRAM
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens a new account, and to determine whether such person's name appears on government lists of known or suspected terrorists and terrorist organizations.
As a result, the Funds must obtain the following information for each person who opens a new account:
- Name;
- Date of birth (for individuals);
- Residential or business street address (although post office boxes are still permitted for mailing); and
- Social security number, taxpayer identification number, or other identifying number.
You may also be asked for a copy of your driver's license, passport or other identifying document in order to verify your identity. In addition, it may be necessary to verify your identity by cross-referencing your identification information with a consumer report or other electronic database. Additional information may be required to open accounts for corporations and other entities. Federal law prohibits the Funds and other financial institutions from opening a new account unless they receive the minimum identifying information listed above. After an account is opened, the Funds may restrict your ability to purchase additional shares until your identity is verified. The Funds may close your account or take other appropriate action if it is unable to verify your identity within a reasonable time. If your account is closed for this reason, your shares will be redeemed at the NAV next calculated after the account is closed.
SHAREHOLDER SERVICING PLAN
Shareholder servicing agents provide administrative and support services to their customers which may include establishing and maintaining accounts and records relating to shareholders, processing dividend and distribution payments from the Funds on behalf of shareholders, responding to routine inquiries from shareholders concerning their investments, assisting shareholders in changing dividend options, account designations and addresses, and other similar services. For these services, the Select Shares of the Funds pay a fee at an annual rate of up to 0.25% of the average daily net assets of this class. The Funds may enter into agreements with various shareholder
[SIDENOTE]
Account features and services may differ for shares not held directly with the Fund. Check with your Investment Professional.
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 Rule 12b-1 Distribution and Service Plan for Investor and Select Shares of each Fund. These share classes do not make any payments under this plan. See the SAI for more details regarding this plan.
The Adviser (and its affiliates) may make substantial payments to affiliated and unaffiliated dealers or other financial intermediaries and service providers, including McDonald Investments Inc. (an affiliate of the Adviser), for distribution, administrative and/or shareholder servicing activities, out of its own resources, including the profits from the advisory fees the Adviser receives from the Funds. The Adviser also may reimburse the Distributor (or the Distributor's affiliates) for making these payments. Some of these distribution-related payments may be made to dealers or financial intermediaries for marketing, promotional or related expenses; these payments are often referred to as "revenue sharing." In some circumstances, those types of payments may create an incentive for a dealer or financial intermediary or its representatives to recommend or offer shares of the Funds or other Victory Funds to its customers. More information about these payments is contained in the SAI. You should ask your dealer or financial intermediary for more details about any such payments it receives.
[SIDENOTE]
For historical expense information, see the financial highlights at the end of this Prospectus.
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 $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 in good order and accepted by 2:00 p.m. Eastern Time, your purchase will be processed on 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 THESE ADDRESSES HANDY FOR PURCHASES, EXCHANGES, OR REDEMPTIONS.
[GRAPHIC]
BY REGULAR U.S. MAIL
Send completed Account Applications with your check or bank draft to:
The Victory Funds
P.O. Box 182593
Columbus, OH 43218-2593
[GRAPHIC]
BY OVERNIGHT MAIL
Use the following address ONLY for overnight packages:
The Victory Funds
c/o BISYS TA Operations
3435 Stelzer Road
Columbus, OH 43219
PHONE: 800-539-FUND
[GRAPHIC]
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 money to notify the Fund that you intend to purchase shares by wire and to verify wire instructions.
[GRAPHIC]
BY TELEPHONE
800-539-FUND (800-539-3863)
[GRAPHIC]
ON THE INTERNET
www.VictoryConnect.com
To open an account, you must mail a completed account application to Victory at the above mail address. You can download the account application form from www.VictoryConnect.com by clicking on Mutual Funds, Account Application and Forms. For more information on how to access account information and/or applications electronically, please call Victory Funds Customer Service at 800-539-3863 between 8:00 a.m. and 6:00 p.m. (Eastern Time), Monday through Friday. Your account must be set up for Automated Clearing House payment in order to execute online purchases.
[SIDENOTE]
When you buy shares of a Fund, your cost will normally be $1.00 per share.
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. A Fund may reject any purchase order in its sole discretion. If your check is returned as uncollectible for any reason, you will be charged for any resulting fees and/or losses. The Funds do not accept cash, money orders, traveler's checks, credit card convenience checks, and third party checks. Additionally, bank starter checks are not accepted for the shareholder's initial investment into the Funds. 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.
[SIDENOTE]
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.
HOW TO EXCHANGE SHARES
You may exchange shares of one Victory Fund for shares of the same class of any other. You may also exchange Class A or Class R Shares of any Victory Fund for shares of any Victory money market fund. You may also exchange your shares of any Victory money market fund for Class A or Class R Shares of any Victory Fund. All exchanges are subject to the conditions described below. If your request is received in good order 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 CALLING 800-539-FUND, AT
www.VictoryConnect.com, OR BY WRITING VICTORY. 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 shares you want to exchange and the Fund shares you want to buy must be subject to 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 Columbus Day and Veterans 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 and any other eligibility 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 ten business days before you can exchange them; after the account is open ten business 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. Each Fund may terminate or modify the exchange privilege at any time on 60 days' notice to shareholders.
- Before exchanging, read the prospectus of the Fund you wish to purchase by exchange, which may be subject to different risks, fees and expenses.
- An exchange of Fund shares constitutes a sale for tax purposes, unless the exchange is made within an IRA or other tax-deferred account.
[SIDENOTE]
You can obtain a list of funds available for exchange by calling 800-539-FUND or by visiting www.VictoryConnect.com.
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. You cannot redeem your shares at www.VictoryConnect.com.
[GRAPHIC]
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 previously designated domestic financial institution;
- Mail a check to a previously designated alternate address; or
- Electronically transfer your redemption via the Automated Clearing House (ACH) to a previously designated domestic financial institution.
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.
[GRAPHIC]
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:
- 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 Fund account with a different registration; or
- The check or wire is being sent to a different bank account than was previously designated.
You can get a signature guarantee from a financial institution such as a bank, broker-dealer, credit union, clearing agency, or savings association.
[GRAPHIC]
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.
[GRAPHIC]
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.
[GRAPHIC]
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.
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. 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 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 will be held until the purchase check has cleared, which may take up to 10 business days.
- A Fund may postpone payment of redemption proceeds for up to seven calendar days at any time.
- 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.
ORGANIZATION AND MANAGEMENT OF 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.
ABOUT VICTORY
Each Fund is a member of The Victory Portfolios, a group of 20 distinct investment portfolios. The Board of Trustees of Victory has the overall responsibility for the management of the Funds.
THE INVESTMENT ADVISER AND CO-ADMINISTRATOR
Each Fund has an Advisory Agreement with Victory Capital Management Inc. (the Adviser). The Adviser is a New York corporation registered as an investment adviser with the SEC. The Adviser, a second-tier subsidiary of KeyCorp, oversees the operations of the Funds according to investment policies and procedures adopted by the Board of Trustees. As of December 31, 2005, the Adviser and its affiliates managed assets totaling in excess of $__ billion for individual and institutional clients. The Adviser's address is 127 Public Square, Cleveland, Ohio 44114.
During the fiscal year ended October 31, 2005, the Adviser was paid an advisory fee, after waivers, at an annual rate based on a percentage of the average daily net assets of each Fund, as shown in the following table:
Federal Money Market Fund % Institutional Money Market Fund % |
Under a Co-Administration Agreement, the Victory Portfolios will pay Victory Capital Management Inc. a fee at the annual rate of 0.058% on the first $10 billion in total Fund assets, and 0.055% on total Fund assets in excess of $10 billion, for providing certain administrative services to the Funds.
ADDITIONAL INFORMATION
FUND CLASSES
At some future date, the Funds may offer additional classes of shares. Each Fund or any class may be terminated at any time for failure to achieve an economical level of assets or for other reasons.
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 and publications. You also should see the "Investment Performance" section in the Prospectus 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, a Fund may send only one copy of any shareholder reports, proxy statements, 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), and they will be delivered promptly.
OTHER SERVICE PROVIDERS
Victory Capital Advisers, Inc. (the Distributor), an affiliate of BISYS Fund Services, Inc., 100 Summer Street, Suite 1500, Boston, Massachusetts 02110, serves as distributor for the continuous offering of the Funds' shares. The Distributor is not affiliated with the Adviser.
KeyBank National Association, 127 Public Square, Cleveland, Ohio 44114, serves as the custodian of the Funds' investments and cash and settles trades made by the Funds.
BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio 43219, serves as the co-administrator, transfer agent, fund accountant and dividend disbursing agent for the Funds.
PricewaterhouseCoopers LLP, 100 East Broad Street, Columbus, OH 43215, serves as the Independent Registered Public Accounting Firm for the Funds.
Kramer Levin Naftalis & Frankel LLP, 1177 Avenue of the Americas, New York, NY 10036, serves as legal counsel to the Funds.
IF YOU WOULD LIKE TO RECEIVE ADDITIONAL COPIES OF ANY MATERIALS,
PLEASE CALL THE FUNDS AT
800-539-FUND
OR PLEASE VISIT www.VictoryConnect.com.
[SIDENOTE]
Some additional information you should know about the Funds.
FINANCIAL HIGHLIGHTS
FEDERAL MONEY MARKET FUND
The Financial Highlights table is intended to help you understand the Funds' financial performance for the past five years. Certain information shows the results of an investment in one share of a Fund. The total returns in the table represent the rate that an investor would have earned on an investment in a Fund (assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about shares of the Funds. The financial highlights were audited by PricewaterhouseCoopers LLP, whose report, along with the financial statements of the Funds, are included in the Funds' annual report, which is available by calling the Funds at 800-539-FUND and in the Request Literature section of www.VictoryConnect.com.
INVESTOR SHARES
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000
----------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.009 0.010 0.017 0.045
Distributions from net investment income (0.009) (0.010) (0.017) (0.045)
----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000
==================================================================================================================================
Total Return 0.92% 0.98% 1.72% 4.62%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (000) $ 994,342 $ 1,052,414 $ 1,048,065 $ 930,075
Ratio of expenses to
average net assets 0.35% 0.34% 0.33% 0.32%
Ratio of net investment income
to average net assets 0.92% 0.97% 1.70% 4.42%
Ratio of expenses to
average net assets* 0.44% 0.43% 0.42% 0.42%
Ratio of net investment income
to average net assets* 0.83% 0.88% 1.61% 4.32%
|
* During the period, certain fees were reduced and /or reimbursed. If such fee reductions and/or reimbursements had not occurred, the ratios would have been as indicated.
The Financial Highlights table is intended to help you understand the Funds' financial performance for the past five years. Certain information shows the results of an investment in one share of a Fund. The total returns in the table represent the rate that an investor would have earned on an investment in a Fund (assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about shares of the Funds. The financial highlights were audited by PricewaterhouseCoopers LLP, whose report, along with the financial statements of the Funds, are included in the Funds' annual report, which is available by calling the Funds at 800-539-FUND and in the Request Literature section of www.VictoryConnect.com.
SELECT SHARES
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000
----------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.007 0.007 0.015 0.043
Distributions from net investment income (0.007) (0.007) (0.015) (0.043)
----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000
==================================================================================================================================
Total Return 0.67% 0.72% 1.48% 4.37%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (000) $ 509,721 $ 567,573 $ 505,679 $ 554,880
Ratio of expenses to
average net assets 0.60% 0.59% 0.57% 0.56%
Ratio of net investment income
to average net assets 0.66% 0.72% 1.47% 4.21%
Ratio of expenses to
average net assets* 0.69% 0.68% 0.67% 0.67%
Ratio of net investment income
to average net assets* 0.57% 0.63% 1.37% 4.10%
|
* During the period, certain fees were reduced and /or reimbursed. If such fee reductions and/or reimbursements had not occurred, the ratios would have been as indicated.
FINANCIAL HIGHLIGHTS
INSTITUTIONAL MONEY MARKET FUND
The Financial Highlights table is intended to help you understand the Funds' financial performance for the past five years. Certain information shows the results of an investment in one share of a Fund. The total returns in the table represent the rate that an investor would have earned on an investment in a Fund (assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about shares of the Funds. The financial highlights were audited by PricewaterhouseCoopers LLP, whose report, along with the financial statements of the Funds, are included in the Funds' annual report, which is available by calling the Funds at 800-539-FUND and in the Request Literature section of www.VictoryConnect.com.
INVESTOR SHARES
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000
----------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.009 0.010 0.017 0.047
Distributions from net investment income (0.009) (0.010) (0.017) (0.047)
----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000
==================================================================================================================================
Total Return 0.95% 1.02% 1.75% 4.78%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (000) $ 1,368,821 $ 1,239,415 $ 1,531,831 $ 1,621,951
Ratio of expenses to
average net assets 0.35% 0.32% 0.32% 0.33%
Ratio of net investment income
to average net assets 0.95% 1.02% 1.73% 4.56%
Ratio of expenses to
average net assets* 0.39% 0.37% 0.37% 0.36%
Ratio of net investment income
to average net assets* 0.91% 0.97% 1.68% 4.53%
|
* During the period, certain fees were reduced and /or reimbursed. If such fee reductions and/or reimbursements had not occurred, the ratios would have been as indicated.
The Financial Highlights table is intended to help you understand the Funds' financial performance for the past five years. Certain information shows the results of an investment in one share of a Fund. The total returns in the table represent the rate that an investor would have earned on an investment in a Fund (assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about shares of the Funds. The financial highlights were audited by PricewaterhouseCoopers LLP, whose report, along with the financial statements of the Funds, are included in the Funds' annual report, which is available by calling the Funds at 800-539-FUND and in the Request Literature section of www.VictoryConnect.com.
SELECT SHARES
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000
----------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.007 0.008 0.015 0.044
Distributions from net investment income (0.007) (0.008) (0.015) (0.044)
----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000
==================================================================================================================================
Total Return 0.69% 0.77% 1.51% 4.50%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (000) $ 132,775 $ 207,046 $ 236,071 $ 1,356,608
Ratio of expenses to
average net assets 0.60% 0.56% 0.55% 0.58%
Ratio of net investment income
to average net assets 0.65% 0.77% 1.63% 4.69%
Ratio of expenses to
average net assets* 0.64% 0.61% 0.60% 0.63%
Ratio of net investment income
to average net assets* 0.61% 0.72% 1.58% 4.64%
|
* During the period, certain fees were reduced and /or reimbursed. If such fee reductions and/or reimbursements had not occurred, the ratios would have been as indicated.
This page is intentionally left blank.
This page is intentionally left blank.
The Victory Funds PRSRT STD
P.O. Box 182593 U.S. POSTAGE
Columbus, OH 43218-2593 PAID
Cleveland, OH
Permit No. 1535
|
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
Provide additional information about the Funds' investments.
To obtain copies of the SAI, Annual or Semi-Annual Reports, or more information 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 182593
Columbus, OH 43218-2593
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:
publicinfo@sec.gov, or by writing the SEC's Public Reference Section,
Washington, D.C. 20459-0102.
ON THE INTERNET: Fund documents can be viewed online or downloaded at www.VictoryConnect.com or from the SEC at http://www.sec.gov (text only).
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(R) LOGO]
Investment Company Act File Number 811-4852
VF-FIMMF-PRO (3/06)
PROSPECTUS
MARCH 1, 2006
SPECIALTY FUNDS
BALANCED FUND
CLASS A, C AND R SHARES
CONVERTIBLE FUND
CLASS A SHARES
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(R) LOGO]
www.VictoryConnect.Com
800-539-FUND
(800-539-3863)
THE VICTORY PORTFOLIOS
TABLE OF CONTENTS
RISK/RETURN SUMMARY 1
An analysis which includes the investment objective,
principal strategies, principal risks, performance, and
expenses of each Fund.
Balanced Fund
CLASS A, C AND R SHARES 2
Convertible Fund
CLASS A SHARES 4
INVESTMENTS 6
RISK FACTORS 8
SHARE PRICE 10
DIVIDENDS, DISTRIBUTIONS, AND TAXES 11
INVESTING WITH VICTORY
- Choosing a Share Class 14
- How to Buy Shares 19
- How to Exchange Shares 21
- How to Sell Shares 22
ORGANIZATION AND MANAGEMENT OF THE FUNDS 24
ADDITIONAL INFORMATION 25
FINANCIAL HIGHLIGHTS
Balanced Fund 26
Convertible Fund 28
APPENDIX 29
|
KEY TO FUND INFORMATION
[GRAPHIC]
OBJECTIVE AND STRATEGIES
The goals and the strategies that a Fund plans to use to pursue its investment objective.
[GRAPHIC]
RISK FACTORS
The risks you may assume as an investor in a Fund.
[GRAPHIC]
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.
[GRAPHIC]
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.
RISK/RETURN SUMMARY
INTRODUCTION
This Prospectus explains what you should know about the Victory Funds described in this Prospectus (the Funds), before you invest. Please read it carefully.
[GRAPHIC]
INVESTMENT OBJECTIVES
The Balanced Fund pursues its investment objective by investing in equity securities and debt securities. The Convertible Fund invests primarily in fixed-income securities convertible into common stock. Each Fund has unique investment strategies and its own risk/reward profile. Please review the information in each Fund's Risk/Return Summary and the "Investments" section later in the Prospectus.
[GRAPHIC]
RISK FACTORS
Each Fund invests 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 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 later in the Prospectus.
WHO MAY WANT TO INVEST IN THE FUNDS
- Investors willing to accept the risk of price and dividend fluctuations
- Investors willing to accept higher risk along with potentially higher returns
- Long-term investors with a particular goal, like saving for retirement or a child's education
SHARE CLASSES
Each Fund offers Class A Shares. The Balanced Fund also offers Class C and Class R 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.
[SIDENOTE]
Victory Capital Management Inc., which we will refer to as the "Adviser" throughout this Prospectus, manages the Funds.
Please read this Prospectus before investing in the Funds and keep it for future reference.
BALANCED FUND
CLASS A SHARES
Cusip#: 926464876
Ticker: SBALX
CLASS C SHARES
Cusip#: 92646A104
Ticker: VBFCX
CLASS R SHARES
Cusip#: 926464272
Ticker: VBFGX
[GRAPHIC]
INVESTMENT OBJECTIVE
The Fund seeks to provide income and long-term growth of capital.
[GRAPHIC]
PRINCIPAL INVESTMENT STRATEGIES
The Fund pursues its investment objective by investing in equity securities and fixed income securities. The Fund may invest in any type or class of security.
Under normal circumstances, the 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 Fund may invest include asset backed securities, mortgage backed securities, corporate bonds and securities issued or guaranteed by the U.S. government or certain of its agencies and instrumentalities. Securities issued by U.S. government instrumentalities are supported only by the credit of the federal instrumentality. See the "Investments" section for a description of these securities.
Important characteristics of the 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 Fund primarily purchases investment-grade debt securities.
- MATURITY: The average weighted maturity of the 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 Fund's higher portfolio turnover rate may result in higher expenses and taxable gain distributions.
There is no guarantee that the Fund will achieve its objectives.
[GRAPHIC]
PRINCIPAL RISKS
You may lose money by investing in the Fund. 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 the Fund's portfolio securities declines.
- The portfolio manager does not execute the 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 or an issuer defaults.
- The Fund reinvests at lower interest rates amounts that the Fund receives as interest, sale proceeds or amounts received as a result of prepayment of mortgage-related securities.
- The rate of inflation increases.
- The average life of a mortgage-related security is shortened or lengthened.
- A U.S. government agency or instrumentality defaults on its obligation and the U.S. government does not provide support.
The principal risks summarized above are more fully described in "Risk Factors."
An investment in the Fund is not a deposit of KeyBank National Association ("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 and in the level of income they receive from their investment.
[GRAPHIC]
INVESTMENT PERFORMANCE
The bar chart and table below indicate the risks of investing in the Fund. We assume reinvestment of dividends and distributions. The Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future.
[CHART]
CALENDAR YEAR RETURNS FOR CLASS A SHARES
(Results do not include a sales charge. If one was included, results would be
lower.)
1996 14.55% 1997 19.51% 1998 17.91% 1999 6.85% 2000 5.02% 2001 -4.17% 2002 -10.45% 2003 14.78% 2004 8.30% 2005 |
Highest/lowest quarterly results during this time period were:
HIGHEST
LOWEST
The table below shows how the average annual total returns for Class A, Class C and Class R Shares of the Fund, including applicable maximum sales charges, compare to those of a broad-based market index and an index of mutual funds with similar investment objectives. We calculate after-tax returns using the historical highest individual federal marginal income tax rates and we do not reflect the effect of state and local taxes. Actual after-tax returns depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant if you own your Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for only one class and after-tax returns for other classes will vary.
AVERAGE ANNUAL TOTAL RETURNS 10 YEARS (FOR THE PERIODS ENDED (OR LIFE DECEMBER 31, 2005) 1 YEAR 5 YEARS OF FUND) CLASS A Before Taxes % % %(1) After Taxes on Distributions % % %(1) After Taxes on Distributions and Sale of Fund Shares % % %(1) S&P 500 Index(2) % % %(1) Lipper Balanced Fund Index(2) % % %(1) (Index returns reflect no deduction for fees, expenses, or taxes) CLASS C Before Taxes % %(3) S&P 500 Index(2) % %(3) Lipper Balanced Fund Index(2) % %(3) (Index returns reflect no deduction for fees, expenses, or taxes) CLASS R Before Taxes % % %(4) S&P 500 Index(2) % % %(4) Lipper Balanced Fund Index(2) % % %(4) (Index returns reflect no deduction for fees, expenses, or taxes) |
(1) Ten year performance.
(2) The Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index) is a
broad-based unmanaged index that represents the general performance of
domestically traded common stocks of mid- to large-size companies. The
Lipper Balanced Fund Index is a non-weighted index of the 30 largest funds
within the Lipper Balanced Fund investment category. It is not possible to
invest directly in an index.
(3) Performance is from March 1, 2003, inception date of Class C Shares.
(4) Performance is from December 15, 1999, inception date of Class R Shares.
[GRAPHIC]
FUND EXPENSES
This section describes the fees and expenses that you may pay if you invest in shares of the Fund.
SHAREHOLDER TRANSACTION EXPENSES (PAID DIRECTLY FROM YOUR INVESTMENT)(1) CLASS A CLASS C CLASS R Maximum Sales Charge Imposed on Purchases 5.75% NONE NONE (as a percentage of offering price) Maximum Deferred Sales Charge NONE(2) 1.00%(3) NONE (as a percentage of the lower of purchase or sale price) Maximum Sales Charge Imposed on Reinvested Dividends NONE NONE NONE Redemption or Exchange Fees NONE NONE NONE ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS) Management Fees(4) 0.60% 0.60% 0.60% Distribution (12b-1) Fees 0.00% 1.00% 0.50% Other Expenses(5) % % % (includes a shareholder servicing fee of 0.25% applicable to Class A Shares) ------------------------------------------------------------------------------------------------------ Total Fund Operating Expenses %(6) % %(6) ------------------------------------------------------------------------------------------------------ Fee Waiver/Expense Reimbursement (0.00)% % (0.00)% ------------------------------------------------------------------------------------------------------ Net Expenses 1.23% 2.00%(7) 2.00%(7) ====================================================================================================== |
(1) You may be charged additional fees if you buy, exchange, or sell shares through a broker or agent.
(2) A deferred sales charge of up to 0.75% may be imposed on certain redemptions of Class A Shares bought without an initial sales charge. See "Choosing a Share Class -- Calculation of Sales Charges -- Class A."
(3) The deferred sales charge is imposed on shares redeemed in the first 12
months.
(4) Effective January 1, 2005, the maximum annual advisory fee for this Fund is
0.60% of the Fund's average daily net assets. Prior to this date, the
maximum fee had been 0.70%.
(5) Restated to reflect current fees.
(6) The Adviser intends to voluntarily waive its fees and/or reimburse expenses so that the net operating expenses (excluding certain items) of the Class A and R Shares of the Fund for any period during which these waivers or reimbursements are in effect do not exceed 1.20% and 1.60%, respectively. These voluntary waivers/reimbursements may be terminated at any time. In addition to any voluntary or contractual fee waivers or expense reimbursements by the Adviser to limit the Fund's total operating expenses, BISYS Fund Services Ohio, Inc., the Fund's co-administrator ("BISYS"), or any of the Fund's other service providers may voluntarily waive its fees or reimburse expenses, as permitted by law, in order to reduce the Fund's total operating expenses.
(7) The Adviser has contractually agreed to waive its management fee or to reimburse expenses, as allowed by law, so that the net operating expenses (excluding certain items) of Class C Shares of the Fund will not exceed 2.00% until at least February 28, 2014 and those of Class R Shares will not exceed 2.00% until at least February 28, 2012.
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:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Class A $ $ $ $
Class C* $ $ $ $
Class C** $ $ $ $
Class R $ $ $ $
|
* If you sell your shares at the end of the period. ** If you do not sell your shares at the end of the period.
CONVERTIBLE FUND
CLASS A SHARES
Cusip#: 926464538
Ticker: SBFCX
[GRAPHIC]
INVESTMENT OBJECTIVE
The Fund seeks a high level of current income together with long-term capital appreciation.
[GRAPHIC]
PRINCIPAL INVESTMENT STRATEGIES
The Fund pursues its investment objective by investing primarily in securities convertible into common stocks, such as convertible bonds, convertible notes, and convertible preferred stocks.
Under normal circumstances, the Fund will invest at least 80% of its net assets in securities convertible into common stock and synthetic convertible securities. The Fund will not change this policy unless it notifies shareholders at least 60 days in advance. For purposes of this policy, "net assets" includes any borrowings for investment purposes.
The Fund may invest up to 20% of its total assets in un-rated or below-investment-grade securities. Lower quality or below-investment-grade debt securities are sometimes referred to as "junk bonds." See "Risks associated with investing in below-investment-grade securities" and the Appendix.
In making investment decisions, the Adviser may consider some or all of the following characteristics of potential investments, among others: attractiveness of the underlying common stock, financial condition of the issuer including the overall credit rating (S&P or Moody's), effect on portfolio diversification, equity sensitivity or delta, current income or yield, upside/downside analysis (how the Adviser expects the convertible security to perform over a given time period given a change in the underlying common stock), convertible valuation (convertible price relative to its theoretical value), and the liquidity of the security.
There is no guarantee that the Fund will achieve its objectives.
[GRAPHIC]
PRINCIPAL RISKS
You may lose money by investing in the Fund. 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 the Fund's portfolio securities declines.
- The portfolio manager does not execute the 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 or an issuer defaults.
- 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, and the risks that a foreign government may take over assets, restrict the ability to exchange currency or restrict the delivery of securities.
The principal risks summarized above are more fully described in "Risk Factors."
An investment in the Fund is not a deposit of KeyBank National Association ("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 Fund is subject to the risks related to investments in below-investment-grade debt securities.
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.
[GRAPHIC]
INVESTMENT PERFORMANCE
The bar chart and table below indicate the risks of investing in the Fund. We assume reinvestment of dividends and distributions. The Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future.
[CHART]
CALENDAR YEAR RETURNS FOR CLASS A SHARES
(Results do not include a sales charge. If one was included, results would be
lower.)
1996 19.14% 1997 16.35% 1998 -0.78% 1999 11.75% 2000 14.21% 2001 -3.84% 2002 -8.18% 2003 20.00% 2004 6.60% 2005 |
Highest/lowest quarterly results during this time period were:
HIGHEST
LOWEST
The table below shows how the average annual total returns for Class A Shares of the Fund, including applicable maximum sales charges, compare to those of a broad-based market index and an index of mutual funds with similar investment objectives. We calculate after-tax returns using the historical highest individual federal marginal income tax rates and we do not reflect the effect of state and local taxes. Actual after-tax returns depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant if you own your Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIODS ENDED DECEMBER 31, 2005)(1) 1 YEAR 5 YEARS 10 YEARS CLASS A Before Taxes % % % After Taxes on Distributions % % % After Taxes on Distributions and Sale of Fund Shares % % % Merrill Lynch Investment Grade US Convertibles Ex Mandatory Index(2) % % % Merrill Lynch All Convertibles/ All Qualities Index(2) % % % (Index returns reflect no deduction for fees, expenses, or taxes) |
(1) Performance data is calculated based on the current maximum sales load of
2.00%. Prior to December 31, 2002, the maximum sales load was 5.75%.
(2) The Merrill Lynch Investment Grade US Convertibles Ex Mandatory Index is an
unmanaged index measuring the performance of all high investment grade
(rated BBB to AAA) convertible preferred and convertible bonds of all
maturities, with at least $50 million issued. The issues also must be
ex-mandatory in conversion character. The Merrill Lynch All Convertibles/
All Qualities Index is a widely used, unmanaged index that measures the
performance of U.S. dollar-denominated convertible securities not currently
in bankruptcy with a total market value greater than $50 million at
issuance. It is not possible to invest directly in an index.
[GRAPHIC]
FUND EXPENSES
This section describes the fees and expenses that you may pay if you invest in shares of the 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 NONE(2) (as a percentage of the lower of purchase or sale price) Maximum Sales Charge Imposed on Reinvested Dividends NONE Redemption or Exchange Fees NONE ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS) Management Fees 0.75% Distribution (12b-1) Fees 0.00% Other Expenses(3) % (includes a shareholder servicing fee of 0.25% applicable to Class A Shares) ---------------------------------------------------------------- Total Fund Operating Expenses(4) % ================================================================ |
(1) You may be charged additional fees if you buy, exchange, or sell shares through a broker or agent.
(2) A deferred sales charge of up to 0.75% may be imposed on certain redemptions of Class A Shares bought without an initial sales charge. See "Choosing a Share Class -- Calculation of Sales Charges -- Class A."
(3) Restated to reflect current fees.
(4) In addition to any voluntary or contractual fee waivers or expense reimbursements by the Adviser to limit the Fund's total operating expenses, BISYS, the Fund's co-administrator, or any of the Fund's other service providers may voluntarily waive its fees or reimburse expenses, as permitted by law, in order to reduce the Fund's total operating expenses.
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:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Class A $ $ $ $
|
INVESTMENTS
The following describes some of the types of securities the Funds may purchase under normal market conditions. A Fund will not necessarily 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. There is no guarantee that the U.S. government will provide support to U.S. agencies or instrumentalities if they are unable to meet their obligations.
U.S. GOVERNMENT INSTRUMENTALITIES.
Securities issued by U.S. government instrumentalities such as: the Student Loan Marketing Association (SLMA or Sallie Mae), The Federal Farm Credit Bank, and Federal Home Loan Banks. Certain instrumentalities are "wholly owned Government corporations," such as the Tennessee Valley Authority.** See the SAI for more information about investments in obligations of U.S. government instrumentalities and wholly owned Government corporations.
CORPORATE DEBT OBLIGATIONS.
Debt instruments issued by 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.
CONVERTIBLE 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, and is convertible into common stock.
***CREDIT DEFAULT SWAPS.
A swap in which one counterparty receives a premium at pre-set intervals in consideration for guaranteeing to make a specific payment should a negative credit event take place. A negative credit event occurs for the underlying reference obligation in instances of bankruptcy, insolvency, restructuring, or failure to make payment. In the event a negative credit event occurs, the buyer receives the full notional value, or "par value," of the reference obligation in exchange for the reference obligation. In the absence of a negative credit event, the seller receives fixed payments throughout the term of the contract. A Fund may be either the buyer or the seller in a credit default swap transaction.
* 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, SLMA, FHLB, FHLMC,
and FMAC are supported by the right of the issuer to borrow from the U.S.
Treasury. FFCB is supported only by the credit of the federal
instrumentality.
** TVA is supported by the right of the issuer to borrow from the U.S.
Treasury.
*** Derivative Instruments: Indicates an instrument whose value is linked to or derived from another security, instrument or index.
PORTFOLIO HOLDINGS DISCLOSURE
Each Fund discloses its complete portfolio holdings as of the end of its second fiscal quarter (April 30th) and its fiscal year (October 30th) in its reports to shareholders. The Funds send reports to their existing shareholders no later than 60 days after the relevant fiscal period, and files these reports with the SEC by the 70th day after the end of the relevant fiscal period. You can find these reports on the Funds' website, www.VictoryConnect.com, and on the SEC's website, www.sec.gov.
Each Fund files its complete portfolio holdings as of the end of its first and third fiscal quarters (January 31 and July 31, respectively) with the SEC on Form N-Q no later than 60 days after the relevant fiscal period. You can find these filings on the SEC's website, www.sec.gov.
Each Fund also discloses its complete portfolio holdings each calendar quarter on the Funds' website, www.VictoryConnect.com, on approximately the 15th day of the following calendar month.
The Statement of Additional Information describes the policies and procedures that relate to the disclosure of the Funds' portfolio holdings.
RISK FACTORS
[GRAPHIC]
The following 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.
BALANCED CONVERTIBLE
FUND FUND
Market risk and manager risk /X/ /X/
Equity risk /X/ /X/
Debt security risk /X/ /X/
Below-investment-grade
security risk /X/
Mortgage-related security risk /X/
Credit default swap 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.
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 DEBT SECURITIES:
- INTEREST RATE RISK is the risk that the value of a security will decline if interest rates rise. 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
[SIDENOTE]
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.
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. Credit risk is measured by nationally recognized statistical rating organizations (NRSROs) such as Standard & Poor's (S&P), Fitch, Inc., or Moody's Investors Service (Moody's).
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, which may cause them to be downgraded or default, 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.
ADDITIONAL RISKS ASSOCIATED WITH INVESTING IN CREDIT DEFAULT SWAPS:
- If a Fund is a buyer and no negative credit event occurs, the Fund will lose its investment and recover nothing.
- If a Fund is a seller and a negative credit event occurs, the Fund must pay the buyer the full notional value of the reference obligation.
- The Fund also incurs greater risk by investing in swaps than if the Fund had invested in the obligation directly.
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 regular 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 price their investments based on market value when market quotations are readily available. When these quotations are not readily available, the Funds will price their investments at fair value according to procedures approved by the Board of Trustees. A Fund will fair value a security when:
- trading in the security has been halted;
- the market quotation for the security is clearly erroneous due to a clerical error;
- the security's liquidity decreases such that, in the Adviser's opinion, the market quotation has become stale; or
- an event occurs after the close of the trading market (but before the Fund's NAV is calculated) that, in the Adviser's opinion, materially affects the value of the security.
The use of fair value pricing may minimize arbitrage opportunities that attempt to exploit the differences between a security's market quotation and its fair value. Also, the use of fair value pricing may not reflect a security's actual market value in light of subsequent relevant information, such as the security's opening price on the next trading day. 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.
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. You may also find each Fund's net asset value by calling 800-539-3863 or by visiting the Funds' website at www.VictoryConnect.com.
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.
MARKET TIMING
The Victory Funds discourage frequent purchases and redemptions of Fund shares ("market timing"). We will deny your request to purchase or exchange your shares if we believe that the transaction is part of a market timing strategy. In identifying market timing activity, we consider, among other things, the frequency of your trades, whether you combine your trades with a group of shareholders, or whether you placed your order through a securities dealer or financial intermediary.
Market timing allows investors to take advantage of market inefficiencies, sometimes to the disadvantage of other shareholders. Market timing increases Fund expenses to all shareholders as a result of increased portfolio turnover. In addition, market timing could potentially dilute share value for all other shareholders by requiring the Fund to hold more cash than it normally would.
The Funds' Board of Trustees has adopted policies and procedures with respect to market timing. In order to prevent or minimize market timing, the Funds will:
- Employ "fair value" pricing, as described in this prospectus under "Share Price," to minimize the discrepancies between a security's market quotation and its perceived market value, which often gives rise to market timing activity; and
- Monitor for suspected market timing activity based on "round trip" transaction history, that is, the exchange of one Victory Fund's shares for those of another Victory Fund and subsequent exchange back to the original Victory Fund or the redemption of a Victory Fund and subsequent purchase of the same Fund. Any account with a history of round trips is suspected of market timing.
With respect to suspected market timing by investors who acquire Fund shares directly through the Transfer Agent or for whom sufficient identifying information is disclosed to the Funds, the Funds will suspend the trading privileges (other than redemption of Fund shares) of:
- Any account with a single round trip within a 30-day period; or
- Any account with two round trips within 90 days.
With respect to suspected market timing by investors who acquire shares through omnibus accounts at financial intermediaries (such as investment advisers, broker-dealers, third-party administrators and insurance companies), different purchase and exchange limitations may apply. These limitations may be may be more or less restrictive than those imposed on direct and fully disclosed accounts. The Adviser will determine whether a financial intermediary's purchase and exchange limitations are reasonably designed to detect and prevent frequent purchases and redemptions of Fund shares. Investors who hold Fund shares through a financial intermediary are advised to consult the intermediary to determine what purchase and exchange limitations apply to their accounts.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
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 from dividends and interest 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 Fund declares and pays dividends quarterly. 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 a Fund. If you do not indicate another choice on your Account Application, you will be assigned this option automatically.
[SIDENOTE]
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.
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 shares of another fund of the Victory Funds. If you reinvest your distributions in a different 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
Neither Fund pays federal income tax on the earnings and capital gains it distributes to shareholders.
- Qualified dividends received from a Fund by noncorporate shareholders will be taxed at long-term capital gain rates to the extent attributable to qualified dividends received by such Fund. Nonqualified dividends, dividends received by corporate shareholders and dividends from a Fund's short-term capital gains are taxable as ordinary income. Dividends from a Fund's long-term capital gains are taxable as long-term capital gains.
- Dividends are treated in the same manner for federal income tax purposes whether you receive them in cash or in additional shares of the Fund. 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 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 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.
- A Fund may be required to withhold tax from taxable distributions if you fail to give your correct social security or taxpayer identification number, fail to make required certifications, or a Fund is notified by the Internal Revenue Service that backup withholding is required.
- 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.
[SIDENOTE]
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.
INVESTING WITH VICTORY
If you are looking for a convenient way to open an account or to add money to an existing account, Victory Portfolios ("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, Class C or Class R Shares of a Fund. Not all Funds offer all classes of shares and Class R Shares are available for purchase only by eligible shareholders. The following sections 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.
CUSTOMER IDENTIFICATION PROGRAM
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens a new account, and to determine whether such person's name appears on government lists of known or suspected terrorists and terrorist organizations.
As a result, the Funds must obtain the following information for each person who opens a new account:
- Name;
- Date of birth (for individuals);
- Residential or business street address (although post office boxes are still permitted for mailing); and
- Social security number, taxpayer identification number, or other identifying number.
You may also be asked for a copy of your driver's license, passport or other identifying document in order to verify your identity. In addition, it may be necessary to verify your identity by cross-referencing your identification information with a consumer report or other electronic database. Additional information may be required to open accounts for corporations and other entities. Federal law prohibits the Funds and other financial institutions from opening a new account unless they receive the minimum identifying information listed above. After an account is opened, the Funds may restrict your ability to purchase additional shares until your identity is verified. The Funds may close your account or take other appropriate action if it is unable to verify your identity within a reasonable time. If your account is closed for this reason, your shares will be redeemed at the NAV next calculated after the account is closed.
CHOOSING A SHARE CLASS
Each Fund offers Class A Shares. The Balanced Fund also offers Class C and Class R 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 or eliminate this charge.
- Lower annual expenses than Class R Shares.
CLASS C
- No front-end sales charge. All your money goes to work for you right away.
- Higher expenses than Class A or Class R Shares.
- A deferred sales charge if you sell your shares within twelve months of their purchase.
CLASS R
- No front-end sales charge. All your money goes to work for you right away.
- Class R Shares are only available to certain investors.
- Higher expenses than Class A Shares.
CALCULATION OF SALES CHARGES FOR BALANCED FUND -- 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 of Class A Shares of a Fund. Currently, a CDSC of 0.75% is imposed on redemptions of any such shares redeemed in the first year after 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. No CDSC is imposed on shares representing reinvested distributions. You may be eligible for reduction or waiver of this CDSC under certain circumstances. See the Statement of Additional Information for details.
[SIDENOTE]
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, see the financial highlights at the end of this Prospectus.
CALCULATION OF SALES CHARGES FOR CONVERTIBLE FUND -- CLASS A
SALES CHARGE SALES CHARGE
AS A % OF AS A % OF
YOUR INVESTMENT IN THE FUND 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%
|
* There is no initial sales charge on purchases of $1 million or more of Class A Shares of a Fund. Currently, a CDSC of 0.75% is imposed on redemptions of any such shares redeemed in the first year after 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. No CDSC is imposed on shares representing reinvested distributions. You may be eligible for reduction or waiver of this CDSC under certain circumstances. See the Statement of Additional Information for details.
SALES CHARGE REDUCTIONS AND WAIVERS FOR CLASS A SHARES
You may reduce or eliminate the sales charge in the following cases:
1. A Letter of Intent allows you to 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 at least 5% of the total amount you intend to purchase. A portion of the shares purchased under the nonbinding Letter of Intent will be held in escrow until the total investment has been completed. In the event the Letter of Intent is not completed, sufficient escrowed shares will be redeemed to pay any applicable front-end sales charges.
2. Rights of Accumulation allow you to add the value of any Class A Shares you already own (excluding Funds sold without a sales charge) to the amount of your next Class A investment to determine if your added investment will qualify for a reduced sales charge. The value of the Class A Shares you already own will be calculated by using the greater of the current value or the original investment amount.
3. The Combination Privilege allows you to combine the value of Class A Shares you own in accounts of multiple Victory Funds (excluding Funds sold without a sales charge) and in accounts of household members of your immediate family (spouse and children under 21) to achieve a reduced sales charge on your added investment.
4. The Reinstatement Privilege permits an investor, within 90 days of a redemption of Class A Shares of a Fund, to reinvest all or part of the redemption proceeds in the Class A Shares of any Victory Fund at the NAV next computed after receipt by the transfer agent of the reinvestment order. No service charge is currently imposed on reinvestment in shares of the Funds.
In order to obtain a sales charge reduction or waiver, you must provide your financial intermediary or the Transfer Agent, at the time of purchase, current information regarding shares of the Funds held in other accounts. Such information
[SIDENOTE]
There are several ways you can combine multiple purchases in the Victory Funds and take advantage of reduced sales charges and, in some cases, eliminate the sales charges.
must include account statements or other records (including written
representations from the intermediary holding the shares) THAT INDICATE THAT A
SALES CHARGE WAS PAID regarding shares of the Funds held in: (i) all accounts
(e.g. retirement accounts) with the Funds and your financial intermediary; (ii)
accounts with other financial intermediaries; and (iii) accounts in the name of
immediate family household members (spouse and children under 21).
This section includes all the information you need to determine whether you are eligible for any Class A sales charge reduction. This prospectus is posted on the Funds' website at www.VictoryConnect.com.
5. Victory will completely waive the sales charge (for Class A Shares) in the following cases:
a. Purchases by:
i. current and retired Fund Trustees or officers;
ii. directors, trustees, employees, and family members of employees of KeyCorp or "Affiliated Providers;"* and
iii. brokers (and their sales representatives) where those brokers have agreements with the Distributor to sell shares of a Fund.
b. Purchases for trust or other advisory accounts established with KeyBank or its affiliates.
c. Reinvestment of proceeds from a liquidation distribution of Class A Shares of a Victory Fund held in a deferred compensation plan, agency, trust, or custody account.
d. Purchases for fee-based investment products or accounts.
e. Purchases by retirement plans, including Section 401 and 457 Plans sponsored by a Section 501(c)(3) organization and certain non-qualified deferred compensation arrangements that operate in a similar manner to qualified plans with plan assets greater than $5,000,000, and IRA rollovers from such plans, if a Victory Class A Share was offered. If the Distributor pays a concession to the dealer of record, a CDSC of up to 0.75% will be charged to the shareholder if any of such shares are redeemed in the first year after 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. You may be eligible for reduction or waiver of this CDSC under certain circumstances. See the SAI for details.
f. Purchases by participants in the Victory Investment Program.
g. Shareholders who qualified under Fund rules previously in effect, except for NAV transfer rules.
h. Purchases of Class A Shares of the Convertible Fund by shareholders of the Convertible Fund who had previously owned Class G Shares.
* Affiliated Providers are affiliates and subsidiaries of KeyCorp, and any organization that provides services to the Victory Family of Funds.
CALCULATION OF SALES CHARGES -- CLASS C
You will pay a 1% contingent deferred sales charge (CDSC) on any Class C Shares you sell within 12 months of purchase. The CDSC is based on the current value of the shares being sold or their net asset value when purchased, whichever is less. There is no CDSC on shares you acquire by reinvesting your dividends or capital gains distributions. You may be eligible for reduction or waiver of this CDSC under certain circumstances. See the Statement of Additional Information for details. There is no CDSC when you exchange your shares for Class C Shares of another Victory Fund.
An investor may, within 90 days of a redemption of Class C Shares, reinvest all or part of the redemption proceeds in the Class C shares of any Victory Fund at the NAV next computed after receipt by the transfer agent of the reinvestment order. No service charge is currently imposed on reinvestment in shares of the Funds. Class C Share proceeds reinstated do not result in a refund of any CDSC paid by the shareholder, but the reinstated shares will be treated as CDSC exempt upon reinstatement. The shareholder must ask the Distributor for such privilege at the time of reinvestment.
To keep your CDSC as low as possible, each time you sell shares we will first sell shares in your account that are not subject to CDSC. If there are not enough of these to meet your sale, we will sell the shares in the order they were purchased.
Purchases of $1,000,000 and above will automatically be made in Class A Shares of the Fund.
ELIGIBILITY REQUIREMENTS TO PURCHASE CLASS R SHARES
Class R Shares may only be purchased by:
- Retirement plans, including Section 401 and 457 plans, section 403 plans sponsored by a section 501(c)(3) organization and certain non-qualified deferred compensation arrangements that operate in a similar manner to qualified plans;
- IRA rollovers from such plans if a Victory Class R was offered; or
- Shareholders who owned Class R Shares (formerly Class G Shares) on December 31, 2002.
CONVERTIBILITY OF CLASS R SHARES TO CLASS A
Class R shareholders may convert their Class R Shares to an equal dollar amount of Class A Shares of the same Fund at any time. No front-end sales charges will be imposed on the Class A Shares acquired through a conversion of Class R Shares. The Adviser believes (based on an opinion from PricewaterhouseCoopers LLP, the Funds' independent registered accounting firm) that the conversion of Class R Shares of a Fund for Class A Shares of the same Fund should not constitute a taxable event for federal income tax purposes.
Additional purchases of Class A Shares of a Fund, other than dividend reinvestments, may be subject to a front-end sales charge. In addition, you may incur additional fees if you buy, exchange or sell shares through a broker or agent.
SHAREHOLDER SERVICING PLAN FOR CLASS A SHARES
Each Fund has adopted a Shareholder Servicing Plan for its Class A Shares. Shareholder servicing agents provide administrative and support services to their customers which may include establishing and maintaining accounts and records relating to shareholders, processing dividend and distribution payments from the Funds on behalf of shareholders, responding to routine inquiries from shareholders concerning their investments, assisting shareholders in changing dividend options, account designations and addresses, and other similar services. 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 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 PLANS
In accordance with Rule 12b-1 of the Investment Company Act of 1940, Victory has adopted a Distribution and Service Plan for Class C and Class R Shares of the Balanced Fund.
Under the Class R Distribution and Service Plan, the Balanced Fund will pay to the Distributor a monthly fee at an annual rate of up to 0.50% of its average daily net assets. The fee is paid for general distribution services, for selling Class R Shares of the Fund and for providing personal services to their shareholders. Distribution and selling services are provided by the Distributor or by agents of the Distributor and include those services intended to result in the sale of the Fund's shares. Personal services to shareholders are generally provided by broker-dealers or other intermediaries, including KeyBank and its affiliates, and consist of responding to inquiries, providing information to shareholders about their Fund accounts, establishing and maintaining accounts and records, providing dividend and distribution payments, arranging for bank wires, assisting in transactions and changing account information.
Under the Class C Distribution and Service Plan, Class C Shares of the Balanced Fund will pay to the Distributor a monthly fee at an annual rate of 1.00% of the Fund's average daily net assets. Of this amount, 0.75% of the Fund's average daily net assets will be paid for general distribution services and for selling Class C Shares of the Fund. The Fund will pay 0.25% of its average daily net assets to compensate financial institutions that provide personal services to their shareholders. Distribution and selling services are provided by the Distributor or by agents of the Distributor and include those services intended to result in the sale of the Fund's shares. Personal services to shareholders are generally provided by broker-dealers or other financial intermediaries, including KeyBank and its affiliates, and consist of responding to inquiries, providing information to shareholders about their Fund accounts, establishing and maintaining accounts and records, providing dividend and distribution payments, arranging for bank wires, assisting in transactions and changing account information.
Because Rule 12b-1 fees are paid out of the Balanced Fund's assets and 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. Class R and Class C Shares do not convert into any other class of shares.
Victory has adopted a separate Rule 12b-1 Distribution and Service Plan for Class A Shares of each Fund. This share class does not make any payments under this plan. See the SAI for more details regarding this plan.
The Adviser (and its affiliates) may make substantial payments to affiliated and unaffiliated dealers or other financial intermediaries and service providers, including McDonald Investments Inc. (an affiliate of the Adviser), for distribution, administrative and/or shareholder servicing activities, out of its own resources, including the profits from the advisory fees the Adviser receives from the Funds. The Adviser also may reimburse the Distributor (or the Distributor's affiliates) for making these payments. Some of these distribution-related payments may be made to dealers or financial intermediaries for marketing, promotional or related expenses; these payments are often referred to as "revenue sharing." In some circumstances, those types of payments may create an incentive for a dealer or financial intermediary or its representatives to recommend or offer shares of the Funds or other Victory Funds to its customers. More information about these payments is contained in the SAI. You should ask your dealer or financial intermediary for more details about any such payments it receives.
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 IRA accounts), with additional investments of at least $25. There is no minimum investment required to open an account or for additional investments in Victory Simple IRAs. The minimum investment required to open an account will be waived for employees of the Adviser and the Administrator, and their affiliates. 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 in good order and accepted by 4:00 p.m. Eastern Time or the close of regular 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
[GRAPHIC]
BY REGULAR U.S. MAIL
Send completed Account Applications with your check or bank draft to:
The Victory Funds
P.O. Box 182593
Columbus, OH 43218-2593
[GRAPHIC]
BY OVERNIGHT MAIL
Use the following address ONLY for overnight packages:
The Victory Funds
c/o BISYS TA Operations
3435 Stelzer Road
Columbus, OH 43219
PHONE: 800-539-FUND
KEEP THESE ADDRESSES HANDY FOR PURCHASES, EXCHANGES, OR REDEMPTIONS.
[GRAPHIC]
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 money to notify the Fund that you intend to purchase shares by wire and to verify wire instructions.
[GRAPHIC]
BY TELEPHONE
800-539-FUND (800-539-3863)
[GRAPHIC]
ON THE INTERNET
www.VictoryConnect.com
To open an account, you must mail a completed account application to Victory at the above mail address. You can download the account application form from www.VictoryConnect.com by clicking on Mutual Funds, Account Application and Forms. For more information on how to access account information and/or applications electronically, please call Victory Funds Customer Service at 800-539-3863 between 8:00 a.m. and 6:00 p.m. (Eastern Time), Monday through Friday. Your account must be set up for Automated Clearing House payment in order to execute online purchases.
[SIDENOTE]
When you invest through an investment professional, the procedures for buying, selling, and exchanging shares and the account features and policies may differ.
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 or on the Account Maintenance Form. 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. A Fund may reject any purchase order in its sole discretion. If your check is returned as uncollectible for any reason, you will be charged for any resulting fees and/or losses. The Funds do not accept cash, money orders, traveler's checks, credit card convenience checks, and third party checks. Additionally, bank starter checks are not accepted for the shareholder's initial investment into the Funds. 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.
[SIDENOTE]
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.
HOW TO EXCHANGE SHARES
You may exchange shares of one Victory Fund to buy shares of the same class of any other. You may also exchange your Class A or Class R Shares of any Victory Fund for shares of any Victory money market fund. You may also exchange your shares of any Victory money market fund for Class A or Class R Shares of any Victory Fund. All exchanges are subject to the conditions described below. If your request is received and accepted by 4:00 p.m. Eastern Time, or the close of regular trading on the NYSE, whichever is earlier, your exchange will be processed the same day. Third party plan administrators may impose different limitations or exchange privileges, and are not responsible for monitoring or complying with exchange privileges of the Victory Funds.
YOU CAN EXCHANGE SHARES OF A FUND BY CALLING 800-539-FUND, AT
www.VictoryConnect.com, or BY WRITING VICTORY. 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 shares you want to exchange and the Fund shares you want to buy must be subject to 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 that has a 5.75% sales charge as a result of an exchange from another Victory fund that has a 2.00% sales charge, you would pay the 3.75% difference in sales charge.
- On certain business days, such as Columbus Day and Veterans 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 and any other eligibility 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 ten business days before you can exchange them; after the account is open ten business 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 60 days' notice to shareholders.
- Before exchanging, read the prospectus of the Fund you wish to purchase by exchange, which may be subject to different risks, fees and expenses.
- An exchange of Fund shares constitutes a sale for tax purposes, unless the exchange is made within an IRA or other tax-deferred account.
- Owners of Class A Shares of the Convertible Fund that had been classified as Class G Shares prior to January 17, 2003, may exchange their shares for Class R Shares of any Victory Fund or for Class A Shares of any Victory Fund that does not offer Class R Shares without paying a sales charge.
[SIDENOTE]
You can obtain a list of funds available for exchange by calling 800-539-FUND or by visiting www.VictoryConnect.com.
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. You cannot redeem your shares at www.VictoryConnect.com.
[GRAPHIC]
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 previously designated domestic financial institution;
- Mail a check to a previously designated alternate address; or
- Electronically transfer your redemption via the Automated Clearing House (ACH) to a previously designated domestic financial institution.
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.
[GRAPHIC]
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:
- 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 Fund account with a different registration; or
- The check or wire is being sent to a different bank account than was previously designated.
You can get a signature guarantee from a financial institution such as a bank, broker-dealer, credit union, clearing agency, or savings association.
[GRAPHIC]
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.
[GRAPHIC]
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 or on the Account Maintenance Form, 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 will be held until the purchase check has cleared, which may take up to 10 business days.
- A Fund may postpone payment of redemption proceeds for up to seven calendar days at any time.
- 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.
ORGANIZATION AND MANAGEMENT OF 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.
ABOUT VICTORY
Each Fund is a member of The Victory Portfolios, a group of 20 distinct investment portfolios. The Board of Trustees of Victory has the overall responsibility for the management of the Funds.
THE INVESTMENT ADVISER AND CO-ADMINISTRATOR
Each Fund has an Advisory Agreement with Victory Capital Management Inc. (the Adviser). The Adviser is a New York corporation registered as an investment adviser with the SEC. The Adviser, a second-tier subsidiary of KeyCorp, oversees the operations of the Funds according to investment policies and procedures adopted by the Board of Trustees. As of December 31, 2005, the Adviser and its affiliates managed assets totaling in excess of $ billion for individual and institutional clients. The Adviser's address is 127 Public Square, Cleveland, Ohio 44114.
For the fiscal year ended October 31, 2005, the Adviser was paid advisory fees, after waivers, based on a percentage of the average daily net assets of each Fund as follows:
Balanced Fund % Convertible Fund % |
Under a Co-Administration Agreement, BISYS Fund Services Ohio, Inc. pays Victory Capital Management Inc. an additional fee at the annual rate of up to 0.04% of each Fund's average daily net assets to perform some of the administrative duties for the Funds.
Under a Co-Administration Agreement, the Trust will pay Victory Capital Management Inc. a fee at the annual rate of 0.058% on the first $10 billion in total assets in the Trust, and 0.055% on total Trust assets in excess of $10 billion, for providing certain administrative services to the Funds.
PORTFOLIO MANAGEMENT
CYNTHIA G. KOURY is the portfolio manager, LAWRENCE G. BABIN is the lead portfolio manager of the equity investments and THOMAS M. SEAY is the lead portfolio manager of the fixed income investments of the BALANCED FUND. Together, they are primarily responsible for the day-to-day management of the Fund's portfolio. Ms. Koury is a Senior Portfolio Manager and Senior Managing Director with the Adviser and has been associated with the Adviser or an affiliate since 1996. She has been a portfolio manager of the Fund since November 2004. A Chartered Financial Analyst Charter Holder, Mr. Babin is a Chief Investment Officer and Senior Managing Director of the Adviser and has been associated with the Adviser or an affiliate since 1982. Mr. Babin has been a portfolio manager of the Fund since December 2003. Mr. Seay is a Chief Investment Officer and Senior Managing Director with the Adviser. He is responsible for all fixed income portfolio management of the Adviser, including mutual funds, commingled funds, and separately managed accounts. He has been managing investments since 1979. Mr. Seay has been a portfolio manager of the Fund since November 2004 and has been associated with the Adviser or an affiliate since 1998.
RICHARD A. JANUS, JAMES K. KAESBERG, and AMY E. BUSH are the portfolio managers of the CONVERTIBLE FUND. Mr. Janus and Mr. Kaesberg have held that position since April 1996, and Ms. Bush since January 2000. Together they are primarily responsible for the day-to-day management of the Fund's portfolio. Mr. Janus is a Chief Investment Officer and Senior Managing Director of the Adviser, and has been associated with the Adviser or its affiliates since 1977. Mr. Kaesberg is a Portfolio Manager and Managing Director of Convertible Securities Investments for the Adviser, and has been associated with the Adviser or its affiliates since 1985. Ms. Bush is a Director of the Adviser and has been associated with the Adviser or an affiliate since 1993.
The Funds' Statement of Additional Information provides additional information about the portfolio managers' method of compensation, other accounts managed by the portfolio managers and the portfolio managers' ownership of securities in the Funds.
ADDITIONAL INFORMATION
FUND CLASSES
At some future date, the Funds may offer additional classes of shares. Each Fund or any class may be terminated at any time for failure to achieve an economical level of assets or for other reasons.
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 and publications. 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 may 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), and they will be delivered promptly.
OTHER SERVICE PROVIDERS
Victory Capital Advisers, Inc. (the Distributor), an affiliate of BISYS Fund Services, Inc., located at 100 Summer Street, Suite 1500, Boston, Massachusetts 02110, serves as distributor for the continuous offering of the Funds' shares. The Distributor is not affiliated with the Adviser.
KeyBank National Association, 127 Public Square, Cleveland, Ohio 44114, serves as the custodian of the Funds' investments and cash and settles trades made by the Funds.
BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio 43219, serves as the co-administrator, transfer agent, fund accountant and dividend disbursing agent for the Funds.
PricewaterhouseCoopers LLP, 100 East Broad Street, Columbus, OH 43215, serves as the Independent Registered Public Accounting Firm for the Funds.
Kramer Levin Naftalis & Frankel LLP, 1177 Avenue of the Americas, New York, NY 10036, serves as legal counsel to the Funds.
IF YOU WOULD LIKE TO RECEIVE ADDITIONAL COPIES OF ANY MATERIALS,
PLEASE CALL THE FUNDS AT
800-539-FUND
OR PLEASE VISIT www.VictoryConnect.com.
[SIDENOTE]
Some additional information you should know about the Funds.
FINANCIAL HIGHLIGHTS
BALANCED 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 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 and in the Request Literature section of www.VictoryConnect.com.
CLASS A SHARES
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.24 $ 10.48 $ 12.35 $ 14.47
-------------------------------------------------------------------------------------------------------------------------------
Investment Activities:
Net investment income 0.17 0.17 0.26 0.30
Net realized and unrealized
gains (losses) on investments 0.88 0.81 (1.17) (1.17)
-------------------------------------------------------------------------------------------------------------------------------
Total from Investment Activities 1.05 0.98 (0.91) (0.87)
-------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.21) (0.22) (0.28) (0.30)
In excess of net investment income -- -- -- --
Net realized gains -- -- (0.68) (0.95)
-------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.21) (0.22) (0.96) (1.25)
-------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.08 $ 11.24 $ 10.48 $ 12.35
===============================================================================================================================
Total Return (excludes sales charges) 9.37% 9.45% (8.05)% (6.50)%
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $ 124,494 $ 133,959 $ 298,643 $ 386,284
Ratio of expenses to
average net assets 1.26% 1.23% 1.17% 1.25%
Ratio of net investment income
to average net assets 1.42% 1.82% 2.25% 2.30%
Ratio of expenses to
average net assets* 1.30% 1.24% 1.24% 1.32%
Ratio of net investment income
to average net assets* 1.38% 1.81% 2.18% 2.23%
Portfolio turnover (a) 134% 112% 103% 116%
|
* During the period, certain fees were reduced and/or reimbursed. If such fee
reductions and/or reimbursements had not occurred, the ratios would have
been as indicated.
(a) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
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 C and Class R Shares of the Fund. The financial highlights 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 and in the Request Literature section of www.VictoryConnect.com.
CLASS C SHARES
MARCH 1,
YEAR YEAR 2003
ENDED ENDED THROUGH
OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003(a)
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.22 $ 10.12
----------------------------------------------------------------------------
Investment Activities:
Net investment income 0.12 0.09
Net realized and unrealized gains
(losses) on investments 0.88 1.10
----------------------------------------------------------------------------
Total from Investment
Activities 1.00 1.19
----------------------------------------------------------------------------
Distributions
Net investment income (0.16) (0.09)
In excess of net investment income -- --
Net realized gains -- --
----------------------------------------------------------------------------
Total Distributions (0.16) (0.09)
----------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.06 $ 11.22
============================================================================
Total Return (excludes contingent
deferred sales charges) 8.86% 11.89%(c)
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $ 457 $ 49
Ratio of expenses to average net
assets 1.70% 1.69%(d)
Ratio of net investment income to
average net assets 0.94% 1.04%(d)
Ratio of expenses to average net
assets* 4.29% 3.64%(d)
Ratio of net investment income
(loss) to average net assets* (1.65)% (0.91)%(d)
Portfolio turnover (e) 134% 112%
CLASS R SHARES
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.25 $ 10.49 $ 12.36 $ 14.49
-------------------------------------------------------------------------------------------------------------
Investment Activities:
Net investment income 0.13 0.16 0.20 0.26
Net realized and unrealized gains
(losses) on investments 0.89 0.79 (1.15) (1.18)
-------------------------------------------------------------------------------------------------------------
Total from Investment
Activities 1.02 0.95 (0.95) (0.92)
-------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.18) (0.19) (0.24) (0.26)
In excess of net investment income -- -- -- --
Net realized gains -- -- (0.68) (0.95)
-------------------------------------------------------------------------------------------------------------
Total Distributions (0.18) (0.19) (0.92) (1.21)
-------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.09 $ 11.25 $ 10.49 $ 12.36
=============================================================================================================
Total Return (excludes contingent
deferred sales charges) 9.09% 9.17% (8.40)% (6.86)%
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $ 4,247 $ 4,425 $ 3,541 $ 2,195
Ratio of expenses to average net
assets 1.50% 1.50% 1.58% 1.59%
Ratio of net investment income to
average net assets 1.17% 1.48% 1.87% 1.95%
Ratio of expenses to average net
assets* 2.11% 2.06% 2.21% 2.42%
Ratio of net investment income
(loss) to average net assets* 0.56% 0.92% 1.24% 1.12%
Portfolio turnover (e) 134% 112% 103% 116%
|
* During the period, certain fees were reduced and/or reimbursed. If such fee
reductions and/or reimbursements had not occurred, the ratios would have
been as indicated.
(a) Period from commencement of operations.
(b) Less than $0.01 per share.
(c) Not annualized.
(d) Annualized.
(e) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
CONVERTIBLE 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 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 and in the Request Literature section of www.VictoryConnect.com.
CLASS A SHARES
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.48 $ 10.04 $ 11.34 $ 14.29
--------------------------------------------------------------------------------------------------------------------------------
Investment Activities:
Net investment income 0.25 0.32 0.34 0.33
Net realized and unrealized
gains (losses) on investments 0.49 1.45 (1.31) (1.40)
--------------------------------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.74 1.77 (0.97) (1.07)
--------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.26) (0.33) (0.33) (0.35)
Net realized gains -- -- -- (1.53)
--------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.26) (0.33) (0.33) (1.88)
--------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 11.96 $ 11.48 $ 10.04 $ 11.34
================================================================================================================================
Total Return (excludes sales charges) 6.42% 17.89% (8.74)% (8.22)%
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $ 68,448 $ 94,496 $ 58,115 $ 74,930
Ratio of expenses to
average net assets 1.34% 1.35% 1.32% 1.26%
Ratio of net investment income
to average net assets 2.10% 2.98% 3.08% 2.76%
Ratio of expenses to
average net assets* (a) (a) 1.34% 1.32%
Ratio of net investment income
to average net assets* (a) (a) 3.06% 2.70%
Portfolio turnover 52% 59% 50% 72%
|
* During the period, certain fees were reduced and/or reimbursed. If such fee
reductions and/or reimbursements had not occurred, the ratios would have
been as indicated.
(a) There were no voluntary fee reductions during the period.
APPENDIX Below-investment-grade Securities
The Convertible 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 Fund may lose a substantial portion or all of its investment in a particular below-investment-grade security.
The Convertible Fund may purchase securities rated Ba, B, Caa, or lower by Moody's and BB, B, CCC, or lower by S&P. The Convertible Fund also may purchase unrated securities with similar characteristics. Generally, the Convertible Fund will not purchase securities rated Ba or lower by Moody's or BB or lower by S&P (or similar unrated securities) unless the Adviser 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.
This page is intentionally left blank.
This page is intentionally left blank.
This page is intentionally left blank.
The Victory Funds PRSRT STD
P.O. Box 182593 U.S. POSTAGE
Columbus, OH 43218-2593 PAID
Cleveland, OH
Permit No. 1535
|
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
Provide additional information about the Funds' investments. The annual report discusses market conditions and investment strategies that significantly affected a Fund's performance during its last fiscal year.
To obtain copies of the SAI, Annual or Semi-Annual Reports, or more information 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 182593
Columbus, OH 43218-2593
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:
publicinfo@sec.gov, or by writing the SEC's Public Reference Section,
Washington, D.C. 20459-0102.
ON THE INTERNET: Fund documents can be viewed on-line or downloaded at www.VictoryConnect.com or from the SEC at http://www.sec.gov (text only).
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(R) LOGO]
Investment Company Act File Number 811-4852
VF-SPEC-PRO (3/06)
PROSPECTUS
MARCH 1, 2006
TAX-EXEMPT FIXED INCOME FUNDS
NATIONAL MUNICIPAL BOND FUND
CLASS A SHARES
OHIO MUNICIPAL BOND FUND
CLASS A SHARES
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(R) LOGO]
www.VictoryConnect.com
800-539-FUND
(800-539-3863)
THE VICTORY PORTFOLIOS
TABLE OF CONTENTS
RISK/RETURN SUMMARY 1
An analysis which includes the investment objective, principal strategies,
principal risks, performance, and expenses of each Fund.
National Municipal Bond Fund
CLASS A SHARES 2
Ohio Municipal Bond Fund
CLASS A SHARES 4
INVESTMENTS 6
RISK FACTORS 7
SHARE PRICE 9
DIVIDENDS, DISTRIBUTIONS, AND TAXES 10
INVESTING WITH VICTORY
- Investing in Class A Shares 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 22
FINANCIAL HIGHLIGHTS
National Municipal Bond Fund 23
Ohio Municipal Bond Fund 24
|
KEY TO FUND INFORMATION
[GRAPHIC]
OBJECTIVE AND STRATEGIES
The goals and the strategies that a Fund plans to use to pursue its investment objective.
[GRAPHIC]
RISK FACTORS
The risks you may assume as an investor in a Fund.
[GRAPHIC]
PERFORMANCE
A summary of the historical performance of a Fund in comparison to one or more unmanaged indices.
[GRAPHIC]
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.
RISK/RETURN SUMMARY
INTRODUCTION
This Prospectus explains what you should know about the Victory Funds described in this Prospectus (the Funds), before you invest. Please read it carefully.
[GRAPHIC]
INVESTMENT OBJECTIVES
Each Fund pursues its investment objective by investing primarily in general obligation bonds and revenue bonds. Each Fund has unique investment strategies and its own risk/reward profile. Please review the information in the Risk/Return Summary for each Fund and the "Investments" section later in the Prospectus.
[GRAPHIC]
RISK FACTORS
The 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 later in the Prospectus.
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 Shares. See "Investing in Class A Shares."
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.
[SIDENOTE]
Victory Capital Management Inc., which we will refer to as the "Adviser" throughout this Prospectus, manages the Funds.
Please read this Prospectus before investing in the Funds and keep it for future reference.
NATIONAL MUNICIPAL BOND FUND
CLASS A SHARES
Cusip#: 926464728
Ticker: VNMAX
[GRAPHIC]
INVESTMENT OBJECTIVE
The Fund seeks to provide a high level of current interest income exempt from federal income tax, as is consistent with the preservation of capital.
[GRAPHIC]
PRINCIPAL INVESTMENT STRATEGIES
The Fund pursues its investment objective by investing primarily 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.
Under normal circumstances, the Fund will invest at least 80% of its net assets in securities issued by or on behalf of various states or municipalities, the interest on which is exempt from federal income tax. Federal income taxation includes the alternative minimum tax. The Fund will not change this policy without shareholder approval. For purposes of this policy, "net assets" includes any borrowings for investment purposes.
Important characteristics of the Fund's investments:
- QUALITY: Municipal securities rated A or above at the time of purchase by Standard & Poor's (S&P), Fitch, Inc. (Fitch), 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.
- MATURITY: The average effective maturity of the Fund generally will range from 3 to 12 years. Under certain market conditions, the 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.
In making investment decisions, the Adviser looks for securities that provide interest income exempt from federal income tax and offer above average total return potential. Our strategy involves purchasing market segments and individual issues that we believe are undervalued, while selling those that we believe have become overvalued.
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 Fund's higher portfolio turnover may result in higher expenses and taxable capital gain distributions.
There is no guarantee that the Fund will achieve its objectives.
[GRAPHIC]
PRINCIPAL RISKS
You may lose money by investing in the Fund. The 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 the Fund's portfolio securities declines.
- The portfolio manager does not execute the Fund's principal investment strategies effectively.
- Interest rates rise.
- An issuer's credit quality is downgraded or an issuer defaults.
- The Fund reinvests at lower interest rates amounts that the Fund receives as interest, sale proceeds or amounts received as a result of prepayment of mortgage-related securities.
- The rate of inflation increases.
- The average life of a mortgage-related security is shortened or lengthened.
The principal risks summarized above are more fully described in "Risk Factors."
The Fund primarily invests in municipal securities from several states, rather than from a single state. The Fund is a non-diversified fund. As a non-diversified fund, the 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 Fund more susceptible to the credit risk of a particular issuer. The 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 Fund is not a deposit of KeyBank National Association ("KeyBank") or any of its affiliates and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
[GRAPHIC]
INVESTMENT PERFORMANCE
The bar chart and table below indicate the risks of investing in the Fund. We assume reinvestment of dividends and distributions. The Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future.
[CHART]
CALENDAR YEAR RETURNS FOR CLASS A SHARES
(Results do not include a sales charge.
If one was included, results would be lower.)
1996 4.45% 1997 8.76% 1998 6.30% 1999 -0.89% 2000 11.81% 2001 5.46% 2002 9.45% 2003 4.04% 2004 3.24% 2005 |
Highest/lowest quarterly results during this time period were:
HIGHEST
LOWEST
The table below shows how the average annual total returns for Class A Shares of the Fund, including applicable maximum sales charges, compare to those of a broad-based market index. We calculate after-tax returns using the historical highest individual federal marginal income tax rates and we do not reflect the effect of state and local taxes. Actual after-tax returns depend on your tax situation and may differ from those shown.
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIODS ENDED DECEMBER 31, 2005) 1 YEAR 5 YEARS 10 YEARS CLASS A(1) Before Taxes % % % After Taxes on Distributions % % % After Taxes on Distributions and Sale of Fund Shares % % % Lehman 7-Year Municipal Bond Index(2) % % % (Index returns reflect no deduction for fees, expenses, or taxes) |
(1) Performance for the Class A Shares of the Fund was calculated based on the
current maximum sales charge of 2.00%. From the Fund's inception until
April 30, 2001, the maximum sales charge was 5.75%.
(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. It is not possible to invest directly in an index.
[GRAPHIC]
FUND EXPENSES
This section describes the fees and expenses that you may pay if you invest in shares of the 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 NONE(2) (as a percentage of the lower of purchase or sale price) Maximum Sales Charge Imposed on Reinvested Dividends NONE Redemption or Exchange Fees NONE ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS) Management Fees 0.55% Distribution (12b-1) Fees 0.00% Other Expenses(3) % (includes a shareholder servicing fee of 0.25%) Total Fund Operating Expenses(4) % |
(1) You may be charged additional fees if you buy, exchange, or sell shares through a broker or agent.
(2) A deferred sales charge of up to 0.75% may be imposed on certain redemptions of Class A Shares purchased without an initial sales charge. See "Choosing a Share Class -- Calculation of Sales Charges -- Class A."
(3) Restated to reflect current fees.
(4) The Adviser intends to voluntarily waive its fees and/or reimburse expenses so that the net operating expenses (excluding certain items) of the Class A Shares of the Fund for any period during which this waiver or reimbursement is in effect do not exceed 1.00%. This voluntary waiver/reimbursement may be terminated at any time. In addition to any voluntary or contractual fee waivers or expense reimbursements by the Adviser to limit the Fund's total operating expenses, BISYS Fund Services Ohio, Inc., the Fund's co-administrator ("BISYS"), or any of the Fund's other service providers may voluntarily waive its fees or reimburse expenses, as permitted by law, in order to reduce the Fund's total operating expenses.
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:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Class A $ $ $ $
|
OHIO MUNICIPAL BOND FUND
CLASS A SHARES
Cusip#: 926464801
Ticker: SOHTX
[GRAPHIC]
INVESTMENT OBJECTIVE
The Fund seeks to provide a high level of current interest income which is exempt from both federal income tax and Ohio personal income tax.
[GRAPHIC]
PRINCIPAL INVESTMENT STRATEGIES
The Fund pursues its investment objective by investing primarily 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.
Under normal circumstances, the Fund will invest at least 80% of its net assets in securities issued by or on behalf of the state of Ohio or its municipalities, or other jurisdictions such as Puerto Rico, the interest on which is exempt from federal and Ohio state income tax. Federal income taxation includes the alternative minimum tax. The Fund will not change this policy without shareholder approval. For purposes of this policy, "net assets" includes any borrowings for investment purposes.
Important characteristics of the Fund's investments:
- QUALITY: Municipal securities rated A or above at the time of purchase by S&P, Fitch, 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 average effective maturity of the Fund generally will range from 3 to 15 years. Under certain market conditions, the 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.
In making investment decisions, the Adviser looks for securities that provide interest income exempt from federal and Ohio state income tax and offer above average total return potential. Our strategy involves purchasing market segments and individual issues that we believe are undervalued, while selling those that we believe have become overvalued.
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 Fund's high portfolio turnover rate may result in higher expenses and taxable capital gain distributions.
There is no guarantee that the Fund will achieve its objectives.
[GRAPHIC]
PRINCIPAL RISKS
You may lose money by investing in the Fund. The 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 the Fund's portfolio securities declines.
- The portfolio manager does not execute the Fund's principal investment strategies effectively.
- Interest rates rise.
- An issuer's credit quality is downgraded or an issuer defaults.
- The Fund reinvests at lower interest rates amounts that the Fund receives as interest, sale proceeds or amounts received as a result of prepayment of mortgage-related securities.
- The rate of inflation increases.
- The average life of a mortgage-related security is shortened or lengthened.
The principal risks summarized above are more fully described in "Risk Factors."
The Fund is a non-diversified fund. As a non-diversified fund, the 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 Fund more susceptible to the credit risk of a particular issuer. The 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 Fund is subject to additional risks because it concentrates its investments in a single geographic area. 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 SAI explains the risks specific to investments in Ohio municipal securities.
An investment in the Fund is not a deposit of KeyBank National Association ("KeyBank") or any of its affiliates and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
[GRAPHIC]
INVESTMENT PERFORMANCE
The bar chart and table below indicate the risks of investing in the Fund. We assume reinvestment of dividends and distributions. The Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future.
[CHART]
CALENDAR YEAR RETURNS FOR CLASS A SHARES
(Results do not include a sales charge.
If one was included, results would be lower.)
1996 4.32% 1997 7.87% 1998 6.56% 1999 -2.67% 2000 11.72% 2001 4.14% 2002 9.08% 2003 3.80% 2004 2.41% 2005 |
Highest/lowest quarterly results during this time period were:
HIGHEST
LOWEST
The table below shows how the average annual total returns for Class A Shares of the Fund, including applicable maximum sales charges, compare to those of a broad-based market index. We calculate after-tax returns using the historical highest individual federal marginal income tax rates and we do not reflect the effect of state and local taxes. Actual after-tax returns depend on your tax situation and may differ from those shown.
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIODS ENDED DECEMBER 31, 2005) 1 YEAR 5 YEARS 10 YEARS CLASS A(1) Before Taxes % % % After Taxes on Distributions % % % After Taxes on Distributions and Sale of Fund Shares % % % Lehman 10-Year Municipal Bond Index(2) % % % (Index returns reflect no deduction for fees, expenses, or taxes) |
(1) Performance for the Class A Shares of the Fund was calculated based on the
current maximum sales charge of 2.00%. From the Fund's inception until
April 30, 2001, the maximum sales charge was 5.75%.
(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. It is not possible to invest
directly in an index.
[GRAPHIC]
FUND EXPENSES
This section describes the fees and expenses that you may pay if you invest in shares of the 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 NONE(2) (as a percentage of the lower of purchase or sale price) Maximum Sales Charge Imposed on Reinvested Dividends NONE Redemption or Exchange Fees NONE ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS) Management Fees(3) 0.55% Distribution (12b-1) Fees 0.00% Other Expenses(4) % (includes a shareholder servicing fee of 0.25%) Total Fund Operating Expenses(5) % |
(1) You may be charged additional fees if you buy, exchange, or sell shares through a broker or agent.
(2) A deferred sales charge of up to 0.75% may be imposed on certain redemptions of Class A Shares purchased without an initial sales charge. See "Choosing a Share Class -- Calculation of Sales Charges -- Class A."
(3) Effective January 1, 2005, the maximum annual advisory fee for this Fund is
0.55% of the Fund's average daily net assets. Prior to this date, the
maximum fee had been 0.60%.
(4) Restated to reflect current fees.
(5) In addition to any voluntary or contractual fee waivers or expense reimbursements by the Adviser to limit the Fund's total operating expenses, BISYS, the Fund's co-administrator, or any of the Fund's other service providers may voluntarily waive its fees or reimburse expenses, as permitted by law, in order to reduce the Fund's total operating expenses.
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:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Class A $ $ $ $
|
INVESTMENTS
The following describes some of the types of securities the Funds may purchase under normal market conditions. A Fund will not necessarily 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).
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.
[GRAPHIC]
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.
[GRAPHIC]
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 obtains either a stand-by or direct pay letter of credit or guarantee from banks as backup.
AVERAGE EFFECTIVE MATURITY.
Based on the value of a Fund's investments in securities with different maturity dates. This measures the sensitivity of the Fund 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.
[GRAPHIC]
Derivative Instruments: Indicates an instrument whose value is linked to, or derived from another security, instrument, or index.
PORTFOLIO HOLDINGS DISCLOSURE
Each Fund discloses its complete portfolio holdings as of the end of its second fiscal quarter (April 30th) and its fiscal year (October 30th) in its reports to shareholders. The Funds send reports to their existing shareholders no later than 60 days after the relevant fiscal period, and files these reports with the SEC by the 70th day after the end of the relevant fiscal period. You can find these reports on the Funds' website, www.VictoryConnect.com, and on the SEC's website, www.sec.gov.
Each Fund files its complete portfolio holdings as of the end of its first and third fiscal quarters (January 31 and July 31, respectively) with the SEC on Form N-Q no later than 60 days after the relevant fiscal period. You can find these filings on the SEC's website, www.sec.gov.
Each Fund also discloses its complete portfolio holdings each calendar quarter on the Funds' website, www.VictoryConnect.com, on approximately the 15th day of the following calendar month.
The Statement of Additional Information describes the policies and procedures that relate to the disclosure of the Funds' portfolio holdings.
RISK FACTORS
[GRAPHIC]
The following 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 risk is the risk that the value of a security will decline if interest rates rise. 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
[SIDENOTE]
By matching your investment objective with an acceptable level of risk, you can create your own customized investment plan.
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. Credit risk is measured by NRSROs such as S&P, Fitch 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
(OHIO MUNICIPAL BOND FUND ONLY):
- CONCENTRATION AND NON-DIVERSIFICATION RISK is the risk that only a limited number of high-quality securities of a particular type may be available. Concentration and non-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.
RISKS ASSOCIATED WITH NON-DIVERSIFICATION
(NATIONAL MUNICIPAL BOND FUND ONLY):
- A non-diversified fund may invest more of its assets in fewer companies than if it were a diversified fund. Because each investment has a greater effect on the Fund's performance, it may be more susceptible to a single economic, political or regulatory occurrence than a diversified fund.
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.
[SIDENOTE]
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.
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 regular trading on the New York Stock Exchange, Inc. (NYSE), whichever time is earlier (the Valuation Point). 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 and the bond market are open. On any business day when the Bond Market Association (BMA) recommends that the securities markets close early, each Fund reserves the right to refuse any purchase order received after the BMA recommended closing time (the Alternative Closing Time). If a Fund does so, it will continue, however, to process redemption orders received after the Alternative Closing Time but no later than the Valuation Point.
The Funds price their investments based on market value when market quotations are readily available. When these quotations are not readily available, the Funds will price their investments at fair value according to procedures approved by the Board of Trustees.
A Fund will fair value a security when:
- trading in the security has been halted;
- the market quotation for the security is clearly erroneous due to a clerical error;
- the security's liquidity decreases such that, in the Adviser's opinion, the market quotation has become stale; or
- an event occurs after the close of the trading market (but before the Fund's NAV is calculated) that, in the Adviser's opinion, materially affects the value of the security.
The use of fair value pricing may minimize arbitrage opportunities that attempt to exploit the differences between a security's market quotation and its fair value. Also, the use of fair value pricing may not reflect a security's actual market value in light of subsequent relevant information, such as the security's opening price on the next trading day. 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 Fund.
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. You may also find each Fund's net asset value by calling 800-539-3863 or by visiting the Funds' website at www.VictoryConnect.com.
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.
MARKET TIMING
The Victory Funds discourage frequent purchases and redemptions of Fund shares ("market timing"). We will deny your request to purchase or exchange your shares if we believe that the transaction is part of a market timing strategy. In identifying market timing activity, we consider, among other things, the frequency of your trades, whether you combine your trades with a group of shareholders, or whether you placed your order through a securities dealer or financial intermediary.
Market timing allows investors to take advantage of market inefficiencies, sometimes to the disadvantage of other shareholders. Market timing increases Fund expenses to all shareholders as a result of increased portfolio turnover. In addition, market timing could potentially dilute share value for all other shareholders by requiring the Fund to hold more cash than it normally would.
The Funds' Board of Trustees has adopted policies and procedures with respect to market timing. In order to prevent or minimize market timing, the Funds will:
- Employ "fair value" pricing, as described in this prospectus under "Share Price," to minimize the discrepancies between a security's market quotation and its perceived market value, which often gives rise to market timing activity; and
- Monitor for suspected market timing activity based on "round trip" transaction history, that is, the exchange of one Victory Fund's shares for those of another Victory Fund and subsequent exchange back to the original Victory Fund or the redemption of a Victory Fund and subsequent purchase of the same Fund. Any account with a history of round trips is suspected of market timing.
With respect to suspected market timing by investors who acquire Fund shares directly through the Transfer Agent or for whom sufficient identifying information is disclosed to the Funds, the Funds will suspend the trading privileges (other than redemption of Fund shares) of:
- Any account with a single round trip within a 30-day period; or
- Any account with two round trips within 90 days.
With respect to suspected market timing by investors who acquire shares through omnibus accounts at financial intermediaries (such as investment advisers, broker-dealers, third-party administrators and insurance companies), different purchase and exchange limitations may apply. These limitations may be may be more or less restrictive than those imposed on direct and fully disclosed accounts. The Adviser will determine whether a financial intermediary's purchase and exchange limitations are reasonably designed to detect and prevent frequent purchases and redemptions of Fund shares. Investors who hold Fund shares through a financial intermediary are advised to consult the intermediary to determine what purchase and exchange limitations apply to their accounts.
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 from dividends and distributions 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.
Please check with your Investment Professional to find out if the following options are available to you.
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.
[SIDENOTE]
An Investment Professional is an investment consultant, salesperson, financial planner, investment adviser, or trust officer who provides you with investment information.
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 Funds. If you reinvest your distributions in a different 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
No Fund pays 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.
- Any dividends from a Fund's net income which are not "exempt-interest dividends" and any short-term capital gains 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 of the Fund. 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 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.
- A Fund may be required to withhold tax from taxable distributions if you fail to give your correct social security or taxpayer identification number, fail to make required certifications, or a Fund is notified by the Internal Revenue Service that backup withholding is required.
- 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.
[SIDENOTE]
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.
INVESTING WITH VICTORY
If you are looking for a convenient way to open an account or to add money to an existing account, Victory Portfolios ("Victory") can help. The sections that follow will serve as a guide to your investments with Victory. "Investing in Class A Shares" contains important information about the cost structure of Class A Shares of the Funds. The following sections 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.
CUSTOMER IDENTIFICATION PROGRAM
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens a new account, and to determine whether such person's name appears on government lists of known or suspected terrorists and terrorist organizations.
As a result, the Funds must obtain the following information for each person who opens a new account:
- Name;
- Date of birth (for individuals);
- Residential or business street address (although post office boxes are still permitted for mailing); and
- Social security number, taxpayer identification number, or other identifying number.
You may also be asked for a copy of your driver's license, passport or other identifying document in order to verify your identity. In addition, it may be necessary to verify your identity by cross-referencing your identification information with a consumer report or other electronic database. Additional information may be required to open accounts for corporations and other entities. Federal law prohibits the Funds and other financial institutions from opening a new account unless they receive the minimum identifying information listed above. After an account is opened, the Funds may restrict your ability to purchase additional shares until your identity is verified. The Funds may close your account or take other appropriate action if it is unable to verify your identity within a reasonable time. If your account is closed for this reason, your shares will be redeemed at the NAV next calculated after the account is closed.
INVESTING IN CLASS A SHARES
Each Fund offers Class A Shares.
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 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%
|
*There is no initial sales charge on purchases of $1 million or more. However, a contingent deferred sales charge (CDSC) of up to 0.75% may be charged to the shareholder if any of such shares are redeemed in the first year after 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. You may be eligible for reduction or waiver of this CDSC under certain circumstances. See the Statement of Additional Information for details.
SALES CHARGE REDUCTIONS AND WAIVERS FOR CLASS A SHARES
You may reduce or eliminate sales charges in the following cases:
1. A Letter of Intent allows you to 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 at least 5% of the total amount you intend to purchase. A portion of the shares purchased under the nonbinding Letter of Intent will be held in escrow until the total investment has been completed. In the event the Letter of Intent is not completed, sufficient escrowed shares will be redeemed to pay any applicable front-end sales charges.
2. Rights of Accumulation allow you to add the value of any Class A Shares you already own (excluding Funds sold without a sales charge) to the amount of your next Class A investment to determine if your added investment will qualify for a reduced sales charge. The value of the Class A Shares you already own will be calculated by using the greater of the current value or the original investment amount.
3. The Combination Privilege allows you to combine the value of Class A Shares you own in accounts of multiple Victory Funds (excluding Funds sold without a sales charge) and in accounts of household members of your immediate family (spouse and children under 21) to achieve a reduced sales charge on your added investment.
4. The Reinstatement Privilege permits an investor, within 90 days of a redemption of Class A Shares of a Fund, to reinvest all or part of the redemption proceeds in the Class A Shares of any Victory Fund at the NAV next computed after receipt by the transfer agent of the reinvestment order. No service charge is currently imposed on reinvestment in shares of the Funds.
[SIDENOTE]
For historical expense information on Class A Shares, see the "Financial Highlights" at the end of this Prospectus.
There are several ways you can combine multiple purchases in the Victory Funds and take advantage of reduced sales charges, and, in some cases, eliminate the sales charge.
In order to obtain a sales charge reduction or waiver, you must provide
your financial intermediary or the Transfer Agent, at the time of purchase,
current information regarding shares of the Funds held in other accounts. Such
information must include account statements or other records (including written
representations from the intermediary holding the shares) THAT INDICATE THAT A
SALES CHARGE WAS PAID regarding shares of the Funds held in: (i) all accounts
(e.g. retirement accounts) with the Funds and your financial intermediary; (ii)
accounts with other financial intermediaries; and (iii) accounts in the name of
immediate family household members (spouse and children under 21).
This section includes all the information you need to determine whether you are eligible for any Class A sales charge reduction. This prospectus is posted on the Funds' website at www.VictoryConnect.com.
5. Victory will completely waive the sales charge (for Class A Shares) in the following cases:
a. Purchases by:
i. current and retired Fund Trustees or officers;
ii. directors, trustees, employees, and family members of employees of KeyCorp or "Affiliated Providers;"* and
iii. brokers (and their sales representatives) where those brokers have agreements with the Distributor to sell shares of a Fund.
b. Purchases for trust or other advisory accounts established with KeyBank or its affiliates.
c. Reinvestment of proceeds from a liquidation distribution of Class A Shares of a Victory Fund held in a deferred compensation plan, agency, trust, or custody account.
d. Purchases for fee-based investment products or accounts.
e. Purchases by participants in the Victory Investment Program.
f. Purchases of Class A Shares of the National Municipal Bond Fund and the Ohio Municipal Bond Fund, individually by shareholders of these Funds who had previously owned Class G Shares.
SHAREHOLDER SERVICING PLAN FOR CLASS A SHARES
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 Class A Shares pay a fee at an annual rate of up to 0.25% of the average daily net assets serviced by the agent. The Funds may enter into agreements with various shareholder servicing agents, including KeyBank 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.
*Affiliated Providers are affiliates and subsidiaries of KeyCorp, and any organization that provides services to the Victory Family of Funds.
DISTRIBUTION PLAN
Victory has adopted a Rule 12b-1 Distribution and Service Plan for Class A Shares of each Fund. These share classes do not make any payments under this plan. See the SAI for more details regarding this plan.
The Adviser (and its affiliates) may make substantial payments to affiliated and unaffiliated dealers or other financial intermediaries and service providers, including McDonald Investments Inc. (an affiliate of the Adviser), for distribution, administrative and/or shareholder servicing activities, out of its own resources, including the profits from the advisory fees the Adviser receives from the Funds. The Adviser also may reimburse the Distributor (or the Distributor's affiliates) for making these payments. Some of these distribution-related payments may be made to dealers or financial intermediaries for marketing, promotional or related expenses; these payments are often referred to as "revenue sharing." In some circumstances, those types of payments may create an incentive for a dealer or financial intermediary or its representatives to recommend or offer shares of the Funds or other Victory Funds to its customers. More information about these payments is contained in the SAI. You should ask your dealer or financial intermediary for more details about any such payments it receives.
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. The minimum investment required to open an account will be waived for employees of the Adviser and the Administrator, and their affiliates. 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 in good order and accepted by the Valuation Point, your purchase order will be processed the same day using that day's share price. Your purchase order will not be processed if received after the Alternative Closing Time.
Make your check payable to: THE VICTORY FUNDS
KEEP THESE ADDRESSES HANDY FOR PURCHASES, EXCHANGES, OR REDEMPTIONS.
[GRAPHIC]
BY REGULAR U.S. MAIL
Send completed Account Applications with your check or money order to:
The Victory Funds
P.O. Box 182593
Columbus, OH 43218-2593
[GRAPHIC]
BY OVERNIGHT MAIL
Use the following address ONLY for overnight packages:
The Victory Funds
c/o BISYS TA Operations
3435 Stelzer Road
Columbus, OH 43219
PHONE: 800-539-FUND
[GRAPHIC]
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 money to notify the Fund that you intend to purchase shares by wire and to verify wire instructions.
[GRAPHIC]
BY TELEPHONE
800-539-FUND (800-539-3863)
[GRAPHIC]
ON THE INTERNET
www.VictoryConnect.com
To open an account, you must mail a completed account application to Victory at the above mail address. You can download the account application form from www.VictoryConnect.com by clicking on Mutual Funds, Account Application and Forms. For more information on how to access account information and/or applications electronically, please call Victory Funds Customer Service at 800-539-3863 between 8:00 a.m. and 6:00 p.m. (Eastern Time), Monday through Friday. Your account must be set up for Automated Clearing House payment in order to execute online purchases.
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 or on the Account Maintenance Form. 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. A Fund may reject any purchase order in its sole discretion. If your check is returned as uncollectible for any reason, you will be charged for any resulting fees and/or losses. The Funds do not accept cash, money orders, traveler's checks, credit card convenience checks and third party checks. Additionally, bank starter checks are not accepted for the shareholder's initial investment into the Funds. 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.
[SIDENOTE]
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.
HOW TO EXCHANGE SHARES
You may exchange shares of one Victory Fund to buy shares of the same class of any other. You may also exchange your Class A Shares of any Victory Fund for shares of any Victory money market fund. You may also exchange your shares of any Victory money market fund for Class A Shares of any Victory Fund. All exchanges are subject to the conditions described below. If your request is received and accepted by 4:00 p.m. Eastern Time, or the close of regular trading on the NYSE, whichever is earlier, your exchange will be processed the same day. Your exchange will be processed on the next business day if received after the Alternative Closing Time.
YOU CAN EXCHANGE SHARES OF A FUND BY CALLING 800-539-FUND, AT
www.VictoryConnect.com, OR BY WRITING VICTORY. 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 shares you want to exchange and the Fund shares you want to buy must be subject to 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 that has a 5.75% sales charge as a result of an exchange from another Victory fund that has a 2.00% sales charge, you would pay the 3.75% difference in sales charge.
- On certain business days, such as Columbus Day and Veterans 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 and any other eligibility 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 ten business days before you can exchange them; after the account is open ten business 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 60 days' notice to shareholders.
- Before exchanging, read the prospectus of the Fund you wish to purchase by exchange, which may be subject to different risks, fees and expenses.
- An exchange of Fund shares constitutes a sale for tax purposes, unless the exchange is made within an IRA or other tax-deferred account.
- Owners of Class A Shares of the National Municipal Bond Fund and the Ohio Municipal Bond Fund that had been classified as Class G Shares prior to January 17, 2003, may exchange their shares for Class R Shares of any Victory Fund or for Class A Shares of any Victory Fund that does not offer Class R Shares, without paying a sales charge.
[SIDENOTE]
You can obtain a list of funds available for exchange by calling 800-539-FUND or by visiting www.VictoryConnect.com
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. Your redemption will be processed on the next business day if received after the Alternative Closing Time. You cannot redeem your shares at www.VictoryConnect.com.
[GRAPHIC]
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 previously designated domestic financial institution;
- Mail a check to a previously designated alternate address; or
- Electronically transfer your redemption via the Automated Clearing House (ACH) to a previously designated domestic financial institution.
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.
[GRAPHIC]
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:
- 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 Fund account with a different registration; or
- The check or wire is being sent to a different bank account than was previously designated.
You can get a signature guarantee from a financial institution such as a bank, broker-dealer, credit union, clearing agency, or savings association.
[GRAPHIC]
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) or before the Alternative Closing Time, your funds will be wired on the next business day.
[GRAPHIC]
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) or after the Alternative Closing Time. 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 or on the Account Maintenance Form, 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 may be closed and the proceeds mailed to you.
ADDITIONAL INFORMATION ABOUT REDEMPTIONS
- Redemption proceeds from the sale of shares purchased by a check will be held until the purchase check has cleared, which may take up to 10 business days.
- A Fund may postpone payment of redemption proceeds for up to seven calendar days at any time.
- 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.
ORGANIZATION AND MANAGEMENT OF 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.
ABOUT VICTORY
Each Fund is a member of The Victory Portfolios, a group of 20 distinct investment portfolios. The Board of Trustees of Victory has the overall responsibility for the management of the Funds.
THE INVESTMENT ADVISER AND CO-ADMINISTRATOR
Each Fund has an Advisory Agreement with Victory Capital Management Inc. (the Adviser). The Adviser is a New York corporation registered as an investment adviser with the SEC. The Adviser, a second-tier subsidiary of KeyCorp, oversees the operations of the Funds according to investment policies and procedures adopted by the Board of Trustees. As of December 31, 2005, the Adviser and its affiliates managed assets totaling in excess of $ billion for individual and institutional clients. The Adviser's address is 127 Public Square, Cleveland, Ohio 44114.
During the fiscal year ended October 31, 2005, the Adviser was paid an advisory fee, after waivers, at an annual rate based on a percentage of the average daily net assets of each Fund as shown in the following table:
National Municipal Bond Fund % Ohio Municipal Bond Fund % |
Under a Co-Administration Agreement, the Victory Portfolios will pay Victory Capital Management Inc. a fee at the annual rate of 0.058% on the first $10 billion in total Fund assets, and 0.055% on total Fund assets in excess of $10 billion, for providing certain administrative services to the Funds.
PORTFOLIO MANAGEMENT
PAUL A. TOFT and SEAN M. ROCHE are the portfolio managers of each of the Funds. Mr. Toft has served as the portfolio manager of each of the Funds since 1994. A Chartered Financial Analyst Charter Holder, Mr. Toft is a Senior Portfolio Manager and Managing Director of the Adviser. Mr. Roche has been a portfolio manager of the Funds since March 2005. A Senior Portfolio Manager and Director of the Adviser, he joined the Adviser in 2002, prior to which he served as a Vice President at The Muni Center and as a municipal bond Product Manager at Merrill Lynch, where he designed, implemented and managed municipal bond portfolios.
ADDITIONAL INFORMATION
FUND CLASSES
The Funds currently offer only the class of shares described in this Prospectus. At some future date, the Funds may offer additional classes of shares. The Fund or any class may be terminated at any time for failure to achieve an economical level of assets or for other reasons.
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 and publications. 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 may send only one copy of any shareholder reports, prospectuses, proxy statements, 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), and they will be delivered promptly.
OTHER SERVICE PROVIDERS
Victory Capital Advisers, Inc. (the Distributor), an affiliate of BISYS Fund Services, Inc., 100 Summer Street, Suite 1500, Boston, Massachusetts 02110, serves as distributor for the continuous offering of the Funds' shares. The Distributor is not affiliated with the Adviser.
KeyBank National Association, 127 Public Square, Cleveland, Ohio 44114, serves as the custodian of the Funds' investments and cash and settles trades made by the Funds.
BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio 43219, serves as the co-administrator, transfer agent, fund accountant and dividend disbursing agent for the Funds.
PricewaterhouseCoopers LLP, 100 East Broad Street, Columbus, OH 43215, serves as the Independent Registered Public Accounting Firm for the Funds.
Kramer Levin Naftalis & Frankel LLP, 1177 Avenue of the Americas, New York, NY 10036, serves as legal counsel to the Funds.
IF YOU WOULD LIKE TO RECEIVE ADDITIONAL COPIES OF ANY MATERIALS,
PLEASE CALL THE FUNDS AT
800-539-FUND
OR PLEASE VISIT www.VictoryConnect.com.
[SIDENOTE]
Some additional information you should know about the Funds.
FINANCIAL HIGHLIGHTS
NATIONAL MUNICIPAL BOND 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 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 and in the Request Literature section of www.VictoryConnect.com.
CLASS A SHARES
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.03 $ 10.96 $ 11.19 $ 10.52
--------------------------------------------------------------------------------------------------------------------------------
Investment Activities:
Net investment income 0.29 0.28 0.29 0.36
Net realized and unrealized
gains on investments 0.18 0.21 0.25 0.87
--------------------------------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.47 0.49 0.54 1.23
--------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.29) (0.28) (0.29) (0.36)
Net realized gains (0.15) (0.14) (0.48) (0.20)
--------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.44) (0.42) (0.77) (0.56)
--------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 11.06 $ 11.03 $ 10.96 $ 11.19
================================================================================================================================
Total Return (excludes sales charges) 4.35% 4.54% 5.10% 12.09%
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $ 67,583 $ 82,889 $ 65,976 $ 55,279
Ratio of expenses to
average net assets 0.85% 0.85% 0.88% 1.05%
Ratio of net investment income
to average net assets 2.61% 2.54% 2.70% 3.28%
Ratio of expenses to
average net assets* 1.17% 1.16% 1.18% 1.21%
Ratio of net investment income
to average net assets* 2.29% 2.23% 2.40% 3.12%
Portfolio turnover 155% 173% 330% 472%
|
* During the period, certain fees were reduced and/or reimbursed. If such fee reductions and/or reimbursements had not occurred, the ratios would have been as indicated.
OHIO MUNICIPAL BOND 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 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 and in the Request Literature section of www.VictoryConnect.com.
CLASS A SHARES
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.10 $ 12.06 $ 12.14 $ 11.45
-------------------------------------------------------------------------------------------------------------------------------
Investment Activities:
Net investment income 0.38 0.37 0.41 0.50
Net realized and unrealized
gains on investments 0.07 0.12 0.14 0.69
-------------------------------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.45 0.49 0.55 1.19
-------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.38) (0.37) (0.40) (0.50)
Net realized gains (0.10) (0.08) (0.23) --
-------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.48) (0.45) (0.63) (0.50)
-------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.07 $ 12.10 $ 12.06 $ 12.14
===============================================================================================================================
Total Return (excludes sales charges) 3.80% 4.16% 4.77% 10.55%
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $ 172,041 $ 199,060 $ 74,453 $ 74,705
Ratio of expenses to
average net assets 1.13% 1.10% 1.11% 1.03%
Ratio of net investment income
to average net assets 3.17% 3.08% 3.47% 4.15%
Ratio of expenses to
average net assets* (a) (a) (a) 1.11%
Ratio of net investment income
to average net assets* (a) (a) (a) 4.07%
Portfolio turnover 68% 62% 83% 96%
|
* During the period, certain fees were reduced and/or reimbursed. If such fee
reductions and/or reimbursements had not occurred, the ratios would have
been as indicated.
(a) There were no fee reductions during the period.
The Victory Funds PRSRT STD
P.O. Box 182593 U.S. POSTAGE
Columbus, OH 43218-2593 PAID
Cleveland, OH
Permit No. 1535
|
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
Provide additional information about the Funds' investments. The annual report discusses market conditions and investment strategies that significantly affected a Fund's performance during its last fiscal year.
To obtain copies of the SAI, Annual or Semi-Annual Reports, or more information 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 182593
Columbus, OH 43218-2593
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:
publicinfo@sec.gov, or by writing the SEC's Public Reference Section,
Washington, D.C. 20459-0102.
ON THE INTERNET: Fund documents can be viewed online or downloaded at www.VictoryConnect.com or from the SEC at http://www.sec.gov (text only).
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(R) LOGO]
Investment Company Act File Number 811-4852
VF-TEFI-PRO (3/06)
PROSPECTUS
MARCH 1, 2006
FIXED INCOME FUNDS
CORE BOND FUND
CLASS A SHARES
FUND FOR INCOME
CLASS A, C AND R SHARES
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(R) LOGO]
www.VictoryConnect.com
800-539-FUND
(800-539-3863)
THE VICTORY PORTFOLIOS
TABLE OF CONTENTS
RISK/RETURN SUMMARY 1
An analysis which includes the investment objective,
principal strategies, principal risks, performance,
and expenses of each Fund.
Core Bond Fund
CLASS A SHARES 2
Fund for Income
CLASS A, C AND R SHARES 4
INVESTMENTS 6
RISK FACTORS 7
SHARE PRICE 9
DIVIDENDS, DISTRIBUTIONS, AND TAXES 10
INVESTING WITH VICTORY
- Choosing a Share Class 13
- How to Buy Shares 18
- How to Exchange Shares 20
- How to Sell Shares 21
ORGANIZATION AND MANAGEMENT OF THE FUNDS 23
ADDITIONAL INFORMATION 24
FINANCIAL HIGHLIGHTS
Core Bond Fund 25
Fund for Income 26
|
KEY TO FUND INFORMATION
[GRAPHIC]
OBJECTIVE AND STRATEGIES
The goals and the strategies that a Fund plans to use to pursue its investment objective.
[GRAPHIC]
RISK FACTORS
The risks you may assume as an investor in a Fund.
[GRAPHIC]
PERFORMANCE
A summary of the historical performance of a Fund in comparison to one or more unmanaged indices.
[GRAPHIC]
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.
RISK/RETURN SUMMARY
INTRODUCTION
This Prospectus explains what you should know about the Victory Funds described in this Prospectus (the Funds), before you invest. Please read it carefully.
[GRAPHIC]
INVESTMENT OBJECTIVES
Each Fund pursues its objective by investing primarily in debt securities. Each Fund has unique investment strategies and its own risk/reward profile. Please review the information in the Risk/Return Summary for each Fund and the "Investments" section later in the Prospectus.
[GRAPHIC]
RISK FACTORS
The Funds may share many of the same risk factors. For example, both 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 later in the Prospectus.
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
The Core Bond Fund offers Class A Shares. The Fund for Income offers Class A, Class C and Class R 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.
[SIDENOTE]
Victory Capital Management Inc., which we will refer to as the "Adviser" throughout this Prospectus, manages the Funds.
Please read this Prospectus before investing in the Funds and keep it for future reference.
CORE BOND FUND
CLASS A SHARES
Cusip#: 926464819
Ticker: SIMIX
[GRAPHIC]
INVESTMENT OBJECTIVE
The Fund seeks to provide a high level of income.
[GRAPHIC]
PRINCIPAL INVESTMENT STRATEGIES
The Fund pursues its investment objective by investing in debt securities, generally issued by corporations, the U.S. government and its agencies or instrumentalities.
Under normal circumstances, the Fund invests primarily 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. Securities issued by U.S. government instrumentalities are supported only by the credit of the federal instrumentality. See the "Investments" section for a description of these securities;
- Mortgage-related securities issued by government agencies and non-governmental entities; and
- Commercial paper.
Important characteristics of the Fund's investments:
- QUALITY: Investment grade corporate securities are rated in the top four rating categories at the time of purchase by Standard & Poor's ("S&P"), Fitch, Inc. ("Fitch"), 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 average effective maturity of the Fund generally will range from 3 to 10 years. Under certain market conditions, the 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.
Under normal circumstances, the Fund will invest at least 80% of its net assets in income producing securities with an average effective maturity between 3-10 years. The Fund will not change this policy unless it notifies shareholders at least 60 days in advance. For purposes of this policy, "net assets" includes any borrowings for investment purposes.
In making investment decisions, the Fund considers the current economic environment and any underlying market trends. In addition, the Advisor establishes strategic investment views that reflect, in its judgment, the best relative value among the major fixed income sectors. The Fund invests in high-grade investments that are consistent with these views and that attempt to preserve an acceptable range of performance expectations. 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.
[GRAPHIC]
PRINCIPAL RISKS
You may lose money by investing in the Fund. 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 the Fund's portfolio securities declines.
- The portfolio manager does not execute the Fund's principal investment strategies effectively.
- Interest rates rise.
- An issuer's credit quality is downgraded or an issuer defaults on its securities.
- The Fund reinvests at lower interest rates amounts that the Fund receives as interest, sale proceeds or amounts received as a result of prepayment of mortgage-related securities.
- The rate of inflation increases.
- The average life of a mortgage-related security is shortened or lengthened.
- A U.S. government agency or instrumentality defaults on its obligation and the U.S. government does not provide support.
The principal risks summarized above are more fully described in "Risk Factors."
An investment in the Fund is not a deposit of KeyBank National Association ("KeyBank") or any of its affiliates and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
[GRAPHIC]
INVESTMENT PERFORMANCE
The bar chart and table below indicate the risks of investing in the Fund. We assume reinvestment of dividends and distributions. The Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future.
[CHART]
CALENDAR YEAR RETURNS FOR CLASS A SHARES
(Results do not include a sales charge.
If one was included, results would be lower.)
1996 3.06% 1997 7.05% 1998 7.51% 1999 -0.74% 2000 9.99% 2001 8.46% 2002 8.16% 2003 2.99% 2004 2.22% 2005 |
Highest/lowest quarterly results during this time period were:
HIGHEST
LOWEST
The table below shows how the average annual total returns for Class A Shares of the Fund, including applicable maximum sales charges, compare to those of a broad-based market index. We calculate after-tax returns using the historical highest individual federal marginal income tax rates and we do not reflect the effect of state and local taxes. Actual after-tax returns depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant if you own your Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts.
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIODS ENDED DECEMBER 31, 2005) 1 YEAR 5 YEARS 10 YEARS CLASS A(1) Before Taxes % % % After Taxes on Distributions % % % After Taxes on Distributions and Sale of Fund Shares % % % Lehman Intermediate Gov't/Credit Index(2) % % % (Index returns reflect no deduction for fees, expenses, or taxes) Lehman Brothers Aggregate Bond Index(2) % % % (Index returns reflect no deduction for fees, expenses, or taxes) |
(1) Performance for the Class A Shares of the Fund was calculated based on the current maximum sales charge of 2.00%. From the fund's inception until April 30, 2001, the maximum sales charge was 5.75%.
(2) Effective November 1, 2005, the Fund changed its benchmark index to the Lehman Brothers Aggregate Bond Index. The Adviser believes that this index better reflects the Fund's ability to invest in a broader universe of investment grade issues. The Lehman Brothers Aggregate Bond Index is an unmanaged market value-weighted performance index for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. The Lehman Brothers Intermediate Government/Credit 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. It is not possible to invest directly in an index.
[GRAPHIC]
FUND EXPENSES
This section describes the fees and expenses that you may pay if you invest in shares of the 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 NONE(2) (as a percentage of the lower of purchase or sale price) Maximum Sales Charge Imposed on Reinvested Dividends NONE Redemption or Exchange Fees NONE ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS) Management Fees 0.50%(3) Distribution (12b-1) Fees 0.00% Other Expenses(4) % (includes a shareholder servicing fee of 0.25%) Total Fund Operating Expenses %(5) |
(1) You may be charged additional fees if you buy, exchange, or sell shares through a broker or agent.
(2) A deferred sales charge of up to 0.75% may be imposed on certain redemptions of Class A Shares purchased without an initial sales charge. See "Choosing a Share Class -- Calculation of Sales Charges -- Class A."
(3) Effective January 1, 2005, the maximum annual advisory fee for this Fund is
0.50% of the Fund's average daily net assets. Prior to this date, the
maximum fee had been 0.75%.
(4) Restated to reflect current fees.
(5) The Adviser intends to voluntarily waive its fees and/or reimburse expenses so that the net operating expenses (excluding certain items) of the Class A Shares of the Fund for any period during which this waiver or reimbursement is in effect do not exceed 0.80%. This voluntary waiver/reimbursement may be terminated at any time. In addition to any voluntary or contractual fee waivers or expense reimbursements by the Adviser to limit the Fund's total operating expenses, BISYS Fund Services Ohio, Inc., the Fund's co-administrator ("BISYS"), or any of the Fund's other service providers may voluntarily waive its fees or reimburse expenses, as permitted by law, in order to reduce the Fund's total operating expenses.
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:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Class A $ $ $ $
|
FUND FOR INCOME
CLASS A SHARES
Cusip#: 926464751
Ticker: IPFIX
CLASS C SHARES
Cusip#: 926464173
Ticker: VFFCX
CLASS R SHARES
Cusip#: 926464397
Ticker: GGIFX
[GRAPHIC]
INVESTMENT OBJECTIVE
The Fund seeks to provide a high level of current income consistent with preservation of shareholders' capital.
[GRAPHIC]
PRINCIPAL INVESTMENT STRATEGIES
The Fund pursues its investment objective by investing primarily in securities issued by the U.S. government and its agencies or instrumentalities. The Fund 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 circumstances, the Fund primarily invests in:
- Mortgage-backed obligations and collateralized mortgage obligations
(CMOs) issued by the Government National Mortgage Association (GNMA)
with an average effective maturity ranging from 2 to 10 years. The Fund
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. Securities issued by certain U.S. government instrumentalities are supported only by the credit of the federal instrumentality. See the "Investments" section for a description of these securities.
In making investment decisions, the Adviser looks for GNMA securities that provide above average yield and have below average prepayment sensitivity. The Adviser purchases U.S. Treasury securities to manage the Fund's duration and to provide liquidity.
There is no guarantee that the Fund will achieve its objectives.
[GRAPHIC]
PRINCIPAL RISKS
You may lose money by investing in the Fund. 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 the Fund's portfolio securities declines.
- The portfolio manager does not execute the Fund's principal investment strategies effectively.
- Interest rates rise.
- The Fund reinvests at lower interest rates amounts that the Fund receives as interest, sale proceeds or amounts received as a result of prepayment of mortgage-related securities.
- The rate of inflation increases.
- The average life of a mortgage-related security is shortened or lengthened.
The principal risks summarized above are more fully described in "Risk Factors."
An investment in the Fund is not a deposit of KeyBank National Association ("KeyBank") or any of its affiliates and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
[GRAPHIC]
INVESTMENT PERFORMANCE
The bar chart and table below indicate the risks of investing in the Fund. We assume reinvestment of dividends and distributions. The Fund's past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future.
[CHART]
CALENDAR YEAR RETURNS FOR CLASS R SHARES
1996 3.50% 1997 8.35% 1998 7.37% 1999 0.77% 2000 9.95% 2001 7.23% 2002 8.06% 2003 0.84% 2004 2.66% 2005 |
Highest/lowest quarterly results during this time period were:
HIGHEST
LOWEST
The table below shows how the average annual total returns for Class A, C and R Shares of the Fund, including applicable maximum sales charges, compare to those of a broad-based market index. We calculate after-tax returns using the historical highest individual federal marginal income tax rates and we do not reflect the effect of state and local taxes. Actual after-tax returns depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant if you own your Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. After-tax returns are shown for only one class and after-tax returns for other classes will vary.
AVERAGE ANNUAL TOTAL RETURNS 10 YEARS (FOR THE PERIODS ENDED (OR LIFE DECEMBER 31, 2005) 1 YEAR 5 YEARS OF FUND) CLASS R Before Taxes % % %(1),(2) After Taxes on Distributions % % %(1),(2) After Taxes on Distributions and Sale of Fund Shares % % %(1),(2) Lehman GNMA Index(3) % % %(2) (Index returns reflect no deduction for fees, expenses, or taxes) Lehman Brothers 1-5 Year U.S. Gov't Bond Index(3) % % %(2) (Index returns reflect no deduction for fees, expenses, or taxes) CLASS A Before Taxes % % %(4) Lehman GNMA Index(3) % % %(4) (Index returns reflect no deduction for fees, expenses, or taxes) Lehman Brothers 1-5 Year U.S. Gov't Bond Index(3) % % %(4) (Index returns reflect no deduction for fees, expenses, or taxes) CLASS C Before Taxes % N/A %(5) Lehman GNMA Index(3) % N/A %(5) (Index returns reflect no deduction for fees, expenses, or taxes) Lehman Brothers 1-5 Year U.S. Gov't Bond Index(3) % N/A %(5) (Index returns reflect no deduction for fees, expenses, or taxes) |
(1) The performance data does not reflect the deduction of the maximum 2.00%
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.
(2) Ten Year Performance
(3) Effective November 1, 2005, the Fund will change its benchmark index to the
Lehman Brothers 1-to-5 Year U.S. Government Bond Index. The Adviser believes
that this index better reflects the Fund's investment objective to achieve
income. In addition, the Fund can invest in a broader, more diversified
universe of securities than the securities contained in the Lehman GNMA
Index. The Lehman Brothers 1-to-5 Year U.S. Government Bond Index is a
market-weighted index measuring the performance of treasury and agency
securities issued by the United States Government with maturities of one to
five years. The Lehman GNMA Index is a broad-based unmanaged index that
represents the general performance of GNMA securities. It is not possible to
invest directly in an index.
(4) Performance is from March 26, 1999, inception date of Class A Shares.
(5) Performance is from March 1, 2002, inception date of Class C Shares.
[GRAPHIC]
FUND EXPENSES
This section describes the fees and expenses that you may pay if you invest in shares of the Fund.
SHAREHOLDER TRANSACTION EXPENSES (PAID DIRECTLY FROM YOUR INVESTMENT)(1) CLASS A CLASS C CLASS R Maximum Sales Charge Imposed on Purchases % NONE NONE (as a percentage of offering price) Maximum Deferred Sales Charge NONE(2) %(3) NONE (as a percentage of the lower of purchase or sale price) Maximum Sales Charge Imposed on Reinvested Dividends NONE NONE NONE Redemption or Exchange Fees NONE NONE NONE ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS) Management Fees % % % Distribution (12b-1) Fees % % % Other Expenses % % % (includes a shareholder servicing fee of 0.25% applicable to Class A Shares) Total Fund Operating Expenses % %(4) % Fee Waiver/ Expense Reimbursement % % % Net Expenses(5) % %(6) % |
(1) You may be charged additional fees if you buy, exchange, or sell shares through a broker or agent.
(2) A deferred sales charge of up to 0.75% may be imposed on certain redemptions of Class A Shares purchased without an initial sales charge. See "Choosing a Share Class -- Calculation of Sales Charges -- Class A."
(3) The deferred sales charge is imposed on shares redeemed in the first 12
months.
(4) Restated to reflect current fees
(5) In addition to any voluntary or contractual fee waivers or expense reimbursements by the Adviser to limit the Fund's total operating expenses, BISYS, the Fund's co-administrator, or any of the Fund's other service providers may voluntarily waive its fees or reimburse expenses, as permitted by law, in order to reduce the Fund's total operating expenses.
(6) The Adviser has contractually agreed to waive its management fee or to reimburse expenses, as allowed by law, so that the net operating expenses of Class C Shares of the Fund do not exceed 1.70% until at least February 28, 2006 and 1.82%, thereafter until at least February 28, 2014.
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 except that it assumes expense levels provided by contractual expense caps set forth in the notes to the Fund Expenses table appearing above. 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 $ $ $ $
Class C* $ $ $ $
Class C** $ $ $ $
Class R $ $ $ $
|
* If you sell your shares at the end of the period. ** If you do not sell your shares at the end of the period.
INVESTMENTS
The following describes some of the types of securities the Funds may purchase under normal market conditions. A Fund will not necessarily 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. 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. There is no guarantee that the U.S. government will provide support to U.S. agencies or instrumentalities if they are unable to meet their obligations.
U.S. GOVERNMENT INSTRUMENTALITIES.
Securities issued by U.S. government instrumentalities such as: the Student Loan Marketing Association (SLMA or Sallie Mae), The Federal Farm Credit Bank, and Federal Home Loan Banks. Certain instrumentalities are "wholly owned Government corporations," such as the Tennessee Valley Authority.** See the SAI for more information about investments in obligations of U.S. government instrumentalities and wholly owned Government corporations.
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.
CORPORATE DEBT OBLIGATIONS.
Debt instruments issued by corporations. They may be secured or unsecured.
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.
INTERNATIONAL BONDS.
Debt instruments issued by non-domestic issuers and traded in U.S. dollars including Yankee Bonds and Eurodollar Bonds.
RECEIPTS.
Separately traded interest or principal components of U.S. government securities.
*CREDIT DEFAULT SWAPS.
A swap in which one counterparty receives a premium at pre-set intervals in consideration for guaranteeing to make a specific payment should a negative credit event take place. A negative credit event occurs for the underlying reference obligation in instances of bankruptcy, insolvency, restructuring, or failure to make payment. In the event a negative credit event occurs, the buyer receives the full notional value, or "par value," of the reference obligation in exchange for the reference obligation. In the absence of a negative credit event, the seller receives fixed payments throughout the term of the contract. A Fund may be either the buyer or the seller in a credit default swap transaction.
AVERAGE EFFECTIVE MATURITY.
Based on the value of a Fund's investments in securities with different maturity dates. This measures the sensitivity of the Fund 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.
* 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, SLMA, FHLB, FHLMC,
and FMAC are supported by the right of the issuer to borrow from the U.S.
Treasury. FFCB is supported only by the credit of the federal
instrumentality.
** TVA is supported by the right of the issuer to borrow from the U.S.
Treasury.
*** Derivative Instruments: Indicates an instrument whose value is linked to or derived from another security, instrument or index.
PORTFOLIO HOLDINGS DISCLOSURE
Each Fund discloses its complete portfolio holdings as of the end of its second fiscal quarter (April 30th) and its fiscal year (October 30th) in its reports to shareholders. The Funds send reports to their existing shareholders no later than 60 days after the relevant fiscal period, and files these reports with the SEC by the 70th day after the end of the relevant fiscal period. You can find these reports on the Funds' website, www.VictoryConnect.com, and on the SEC's website, www.sec.gov.
Each Fund files its complete portfolio holdings as of the end of its first and third fiscal quarters (January 31 and July 31, respectively) with the SEC on Form N-Q no later than 60 days after the relevant fiscal period. You can find these filings on the SEC's website, www.sec.gov.
Each Fund also discloses its complete portfolio holdings each calendar quarter on the Funds' website, www.VictoryConnect.com, on approximately the 15th day of the following calendar month.
The Statement of Additional Information describes the policies and procedures that relate to the disclosure of the Funds' portfolio holdings.
RISK FACTORS
[GRAPHIC]
The following 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 is the risk that the value of a security will decline if interest rates rise. 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.
[SIDENOTE]
By matching your investment objective with an acceptable level of risk, you can create your own customized investment plan.
- 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. Credit risk is measured by NRSROs such as S&P, Fitch, or Moody's.
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.
ADDITIONAL RISKS ASSOCIATED WITH INVESTING IN CREDIT DEFAULT SWAPS:
- If a Fund is a buyer and no negative credit event occurs, the Fund will lose its investment and recover nothing.
- If a Fund is a seller and a negative credit event occurs, the Fund must pay the buyer the full notional value of the reference obligation.
- The Fund also incurs greater risk by investing in swaps than if the Fund had invested in the obligation directly.
[SIDENOTE]
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.
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 regular trading on the New York Stock Exchange Inc. (NYSE), whichever time is earlier (the Valuation Point). 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 and it is accepted. A business day is a day on which the NYSE and the bond market are open. On any business day when the Bond Market Association (BMA) recommends that the securities markets close early, each Fund reserves the right to refuse any purchase order received after the BMA recommended closing time (the Alternative Closing Time). If a Fund does so, it will continue, however, to process redemption orders received after the Alternative Closing Time on the next business day but no later than the Valuation Point.
The Funds price their investments based on market value when market quotations are readily available. When these quotations are not readily available, the Funds will price their investments at fair value according to procedures approved by the Board of Trustees. A Fund will fair value a security when:
- trading in the security has been halted;
- the market quotation for the security is clearly erroneous due to a clerical error;
- the security's liquidity decreases such that, in the Adviser's opinion, the market quotation has become stale; or
- an event occurs after the close of the trading market (but before the Fund's NAV is calculated) that, in the Adviser's opinion, materially affects the value of the security.
The use of fair value pricing may minimize arbitrage opportunities that attempt to exploit the differences between a security's market quotation and its fair value. Also, the use of fair value pricing may not reflect a security's actual market value in light of subsequent relevant information, such as the security's opening price on the next trading day. 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. You may also find each Fund's net asset value by calling 800-539-3863 or by visiting the Funds' website at www.VictoryConnect.com.
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.
MARKET TIMING
The Victory Funds discourage frequent purchases and redemptions of Fund shares ("market timing"). We will deny your request to purchase or exchange your shares if we believe that the transaction is part of a market timing strategy. In identifying market timing activity, we consider, among other things, the frequency of your trades, whether you combine your trades with a group of shareholders, or whether you placed your order through a securities dealer or financial intermediary.
Market timing allows investors to take advantage of market inefficiencies, sometimes to the disadvantage of other shareholders. Market timing increases Fund expenses to all shareholders as a result of increased portfolio turnover. In addition, market timing could potentially dilute share value for all other shareholders by requiring the Fund to hold more cash than it normally would.
The Funds' Board of Trustees has adopted policies and procedures with respect to market timing. In order to prevent or minimize market timing, the Funds will:
- Employ "fair value" pricing, as described in this prospectus under "Share Price," to minimize the discrepancies between a security's market quotation and its perceived market value, which often gives rise to market timing activity; and
- Monitor for suspected market timing activity based on "round trip" transaction history, that is, the exchange of one Victory Fund's shares for those of another Victory Fund and subsequent exchange back to the original Victory Fund or the redemption of a Victory Fund and subsequent purchase of the same Fund. Any account with a history of round trips is suspected of market timing.
With respect to suspected market timing by investors who acquire Fund shares directly through the Transfer Agent or for whom sufficient identifying information is disclosed to the Funds, the Funds will suspend the trading privileges (other than redemption of Fund shares) of:
- Any account with a single round trip within a 30-day period; or
- Any account with two round trips within 90 days.
With respect to suspected market timing by investors who acquire shares through omnibus accounts at financial intermediaries (such as investment advisers, broker-dealers, third-party administrators and insurance companies), different purchase and exchange limitations may apply. These limitations may be may be more or less restrictive than those imposed on direct and fully disclosed accounts. The Adviser will determine whether a financial intermediary's purchase and exchange limitations are reasonably designed to detect and prevent frequent purchases and redemptions of Fund shares. Investors who hold Fund shares through a financial intermediary are advised to consult the intermediary to determine what purchase and exchange limitations apply to their accounts.
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 from dividends and interest 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.
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 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.
[SIDENOTE]
An Investment Professional is an investment consultant, salesperson, financial planner, investment adviser, or trust officer who provides you with investment information.
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 Funds. If you reinvest your distributions in a different 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
Neither Fund pays federal income tax on the earnings and capital gains it distributes to shareholders.
- Dividends from a Fund's net income and short-term capital gains 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 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.
- A Fund may be required to withhold tax from taxable distributions if you fail to give your correct social security or taxpayer identification number, fail to make required certifications, or a Fund is notified by the Internal Revenue Service that backup withholding is required.
- 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.
[SIDENOTE]
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.
INVESTING WITH VICTORY
If you are looking for a convenient way to open an account or to add money to an existing account, Victory Portfolios ("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, Class C or Class R Shares of the Fund for Income. Class R Shares, however, are available for purchase only by eligible shareholders. The following sections 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.
CUSTOMER IDENTIFICATION PROGRAM
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens a new account, and to determine whether such person's name appears on government lists of known or suspected terrorists and terrorist organizations.
As a result, the Funds must obtain the following information for each person who opens a new account:
- Name;
- Date of birth (for individuals);
- Residential or business street address (although post office boxes are still permitted for mailing); and
- Social security number, taxpayer identification number, or other identifying number.
You may also be asked for a copy of your driver's license, passport or other identifying document in order to verify your identity. In addition, it may be necessary to verify your identity by cross-referencing your identification information with a consumer report or other electronic database. Additional information may be required to open accounts for corporations and other entities. Federal law prohibits the Funds and other financial institutions from opening a new account unless they receive the minimum identifying information listed above. After an account is opened, the Funds may restrict your ability to purchase additional shares until your identity is verified. The Funds may close your account or take other appropriate action if it is unable to verify your identity within a reasonable time. If your account is closed for this reason, your shares will be redeemed at the NAV next calculated after the account is closed.
CHOOSING A SHARE CLASS
Each Fund offers Class A Shares. The Fund for Income also offers Class C and Class R 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 or eliminate this charge.
- Lower annual expenses than Class C or Class R Shares.
CLASS C
- No front-end sales charge. All your money goes to work for you right away.
- Higher expenses than Class A or Class R Shares.
- A deferred sales charge if you sell your shares within twelve months of their purchase.
CLASS R
- No front-end sales charge. All your money goes to work for you right away.
- Class R Shares are only available to certain investors.
- Higher expenses than Class A Shares.
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 table.
SALES CHARGE SALES CHARGE
AS A % OF AS A % OF
YOUR INVESTMENT IN THE FUND 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%
|
*There is no initial sales charge on purchases of $1 million or more. However, a contingent deferred sales charge (CDSC) of up to 0.75% may be charged to the shareholder if any of such shares are redeemed in the first year after 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. You may be eligible for reduction or waiver of this CDSC under certain circumstances. See the Statement of Additional Information for details.
[SIDENOTE]
For historical expense information, see the "Financial Highlights" at the end of this Prospectus.
SALES CHARGE REDUCTIONS AND WAIVERS FOR CLASS A SHARES
You may reduce or eliminate the sales charges in the following cases:
1. A Letter of Intent allows you to 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 at least 5% of the total amount you intend to purchase. A portion of the shares purchased under the nonbinding Letter of Intent will be held in escrow until the total investment has been completed. In the event the Letter of Intent is not completed, sufficient escrowed shares will be redeemed to pay any applicable front-end sales charges.
2. Rights of Accumulation allow you to add the value of any Class A Shares you already own (excluding Funds sold without a sales charge) to the amount of your next Class A investment to determine if your added investment will qualify for a reduced sales charge. The value of the Class A Shares you already own will be calculated by using the greater of the current value or the original investment amount.
3. The Combination Privilege allows you to combine the value of Class A Shares you own in accounts of multiple Victory Funds (excluding Funds sold without a sales charge) and in accounts of household members of your immediate family (spouse and children under 21) to achieve a reduced sales charge on your added investment.
4. The Reinstatement Privilege permits an investor, within 90 days of a redemption of Class A Shares of a Fund, to reinvest all or part of the redemption proceeds in the Class A Shares of any Victory Fund at the NAV next computed after receipt by the transfer agent of the reinvestment order. No service charge is currently imposed on reinvestment in shares of the Funds.
In order to obtain a sales charge reduction or waiver, you must provide
your financial intermediary or the Transfer Agent, at the time of purchase,
current information regarding shares of the Funds held in other accounts. Such
information must include account statements or other records (including written
representations from the intermediary holding the shares) THAT INDICATE THAT A
SALES CHARGE WAS PAID regarding shares of the Funds held in: (i) all accounts
(e.g. retirement accounts) with the Funds and your financial intermediary; (ii)
accounts with other financial intermediaries; and (iii) accounts in the name of
immediate family household members (spouse and children under 21).
This section includes all the information you need to determine whether you are eligible for any Class A sales charge reduction. This prospectus is posted on the Funds' website at www.VictoryConnect.com.
5. Victory will completely waive the sales charge (for Class A Shares) in the following cases:
a. Purchases by:
i. current and retired Fund Trustees or officers;
ii. directors, trustees, employees, and family members of employees of KeyCorp or "Affiliated Providers;"* and
*Affiliated Providers are affiliates and subsidiaries of KeyCorp, and any organization that provides services to the Victory Family of Funds.
[SIDENOTE]
There are several ways you can combine multiple purchases in the Victory Funds and take advantage of reduced sales charges and, in some cases, eliminate the sales charge.
iii. brokers (and their sales representatives) where those brokers have agreements with the Distributor to sell shares of a Fund.
b. Purchases for trust or other advisory accounts established with KeyBank or its affiliates.
c. Reinvestment of proceeds from a liquidation distribution of Class A Shares of a Victory Fund held in a deferred compensation plan, agency, trust, or custody account.
d. Purchases for fee-based investment products or accounts.
e. Purchases by retirement plans, including Section 401 and 457 Plans sponsored by a Section 501(c)(3) organization and certain non-qualified deferred compensation arrangements that operate in a similar manner to qualified plans with plan assets greater than $5,000,000, and IRA rollovers from such plans, if a Victory Class A Share was offered. If the Distributor pays a concession to the dealer of record, a CDSC of up to 0.75% will be charged to the shareholder if any of those shares are redeemed in the first year after 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. You may be eligible for reduction or waiver of this CDSC under certain circumstances. See the SAI for details.
f. Purchases by participants in the Victory Investment Program.
g. Shareholders who qualified under Fund rules previously in effect, except for NAV transfer rules.
h. Purchases of Class A Shares of the Intermediate Income Fund by shareholders of the Intermediate Income Fund who had previously owned Class G Shares.
CALCULATION OF SALES CHARGES -- CLASS C
You will pay a 0.75% contingent deferred sales charge (CDSC) on any Class C Shares you sell within 12 months of purchase. The CDSC is based on the current value of the shares being sold or their net asset value when purchased, whichever is less. There is no CDSC on shares you acquire by reinvesting your dividends or capital gains distributions. You may be eligible for reduction or waiver of this CDSC under certain circumstances. See the Statement of Additional Information for details. There is no CDSC when you exchange your shares for Class C Shares of another Victory Fund.
An investor may, within 90 days of a redemption of Class C Shares, reinvest all or part of the redemption proceeds in the Class C shares of any Victory Fund at the NAV next computed after receipt by the transfer agent of the reinvestment order. No service charge is currently imposed on reinvestment in shares of the Funds. Class C Share proceeds reinstated do not result in a refund of any CDSC paid by the shareholder, but the reinstated shares will be treated as CDSC exempt upon reinstatement. The shareholder must ask the Distributor for such privilege at the time of reinvestment.
To keep your CDSC as low as possible, each time you sell shares we will first sell shares in your account that are not subject to CDSC. If there are not enough of these to meet your sale, we will sell the shares in the order they were purchased.
Purchases of $1,000,000 and above will automatically be made in Class A Shares of the Fund.
ELIGIBILITY REQUIREMENTS TO PURCHASE CLASS R SHARES
Class R Shares may only be purchased by:
- Retirement plans, including Section 401 and 457 plans, section 403 plans sponsored by a section 501(c)(3) organization and certain non-qualified deferred compensation arrangements that operate in a similar manner to qualified plans;
- IRA rollovers from such plans if a Victory Class R was offered; or
- Shareholders who owned Class R Shares (formerly Class G Shares) on December 31, 2002.
CONVERTIBILITY OF CLASS R SHARES TO CLASS A
Class R shareholders may convert their Class R Shares to an equal dollar amount of Class A Shares of the same Fund at any time. No front-end sales charges will be imposed on the Class A Shares acquired through a conversion of Class R Shares. The Adviser believes (based on an opinion from PricewaterhouseCoopers LLP, the Funds' independent registered accounting firm) that the conversion of Class R Shares of a Fund for Class A Shares of the same Fund should not constitute a taxable event for federal income tax purposes.
Additional purchases of Class A Shares of a Fund, other than dividend reinvestments, may be subject to a front-end sales charge. In addition, you may incur additional fees if you buy, exchange or sell shares through a broker or agent.
SHAREHOLDER SERVICING PLAN FOR CLASS A SHARES
Each Fund has adopted a Shareholder Servicing Plan for its Class A Shares. Shareholder servicing agents provide administrative and support services to their customers which may include establishing and maintaining accounts and records relating to shareholders, processing dividend and distribution payments from the Funds on behalf of shareholders, responding to routine inquiries from shareholders concerning their investments, assisting shareholders in changing dividend options, account designations and addresses, and other similar services. For these services, Class A Shares pay a fee at an annual rate of up to 0.25% of the average daily net assets serviced by the agent. The Funds may enter into agreements with various shareholder servicing agents, including KeyBank 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 PLANS
In accordance with Rule 12b-1 of the Investment Company Act of 1940, Victory has adopted Distribution and Service Plans for Class R and Class C Shares of the Fund for Income.
Under the Class R Distribution and Service Plan, the Fund for Income will pay to the Distributor a monthly fee at an annual rate of up to 0.25% of the Fund's average daily
net assets of its Class R Shares. The fee is paid for general distribution services, for selling Class R Shares of the Fund for Income and for providing personal services to its shareholders. Distribution and selling services are provided by the Distributor or by agents of the Distributor and include those services intended to result in the sale of the Fund's shares. Personal services to shareholders are generally provided by broker-dealers or other intermediaries, including KeyBank and its affiliates, and consist of responding to inquiries, providing information to shareholders about their Fund accounts, establishing and maintaining accounts and records, providing dividend and distribution payments, arranging for bank wires, assisting in transactions and changing account information.
Under the Class C Distribution and Service Plan, the Fund for Income will pay to the Distributor a monthly fee at an annual rate of 1.00% of the Fund's average daily net assets of its Class C Shares. Of this amount, 0.75% of the Fund's Class C Shares' average daily net assets will be paid for general distribution services and for selling Class C Shares of the Fund. The Fund will pay 0.25% of its Class C Shares' average daily net assets to compensate financial institutions that provide personal services to Class C shareholders of the Fund. Distribution and selling services are provided by the Distributor or by agents of the Distributor and include those services intended to result in the sale of the Fund's Class C Shares. Personal services to shareholders are generally provided by broker-dealers or other financial intermediaries, including KeyBank and its affiliates, and consist of responding to inquiries, providing information to shareholders about their Fund accounts, establishing and maintaining accounts and records, providing dividend and distribution payments, arranging for bank wires, assisting in transactions and changing account information.
Because Rule 12b-1 fees are paid out of the Fund for Income's assets and 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. Class R and Class C Shares do not convert into any other class of shares.
Victory has adopted a separate Rule 12b-1 Distribution and Service Plan for Class A Shares of each Fund. These share classes do not make any payments under this plan. See the SAI for more details regarding this plan.
The Adviser (and its affiliates) may make substantial payments to affiliated and unaffiliated dealers or other financial intermediaries and service providers, including McDonald Investments Inc. (an affiliate of the Adviser), for distribution, administrative and/or shareholder servicing activities, out of its own resources, including the profits from the advisory fees the Adviser receives from the Funds. The Adviser also may reimburse the Distributor (or the Distributor's affiliates) for making these payments. Some of these distribution-related payments may be made to dealers or financial intermediaries for marketing, promotional or related expenses; these payments are often referred to as "revenue sharing." In some circumstances, those types of payments may create an incentive for a dealer or financial intermediary or its representatives to recommend or offer shares of the Funds or other Victory Funds to its customers. More information about these payments is contained in the SAI. You should ask your dealer or financial intermediary for more details about any such payments it receives.
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 IRA accounts), with additional investments of at least $25. The minimum investment required to open an account will be waived for employees of the Adviser and the Administrator, and their affiliates. There is no minimum investment required to open an account or for additional investments in Victory 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 in good order and accepted by the Valuation Point, your purchase order will be processed the same day using that day's share price. Your purchase order will not be processed if received after the Alternative Closing Time.
Make your check payable to: THE VICTORY FUNDS
KEEP THESE ADDRESSES HANDY FOR PURCHASES, EXCHANGES, OR REDEMPTIONS.
[GRAPHIC]
BY REGULAR U.S. MAIL
Send completed Account Applications with your check or bank draft to:
The Victory Funds
P.O. Box 182593
Columbus, OH 43218-2593
[GRAPHIC]
BY OVERNIGHT MAIL
Use the following address ONLY for overnight packages:
The Victory Funds
c/o BISYS TA Operations
3435 Stelzer Road
Columbus, OH 43219
PHONE: 800-539-FUND
[GRAPHIC]
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 money to notify the Fund that you intend to purchase shares by wire and to verify wire instructions.
[GRAPHIC]
BY TELEPHONE
800-539-FUND (800-539-3863)
[GRAPHIC]
ON THE INTERNET
www.VictoryConnect.com
To open an account, you must mail a completed account application to Victory at the above mail address. You can download the account application form from www.VictoryConnect.com by clicking on Mutual Funds, Account Application and Forms. For more information on how to access account information and/or applications electronically, please call Victory Funds Customer Service at 800-539-3863 between 8:00 a.m. and 6:00 p.m. (Eastern Time), Monday through Friday. Your account must be set up for Automated Clearing House payment in order to execute online purchases.
[SIDENOTE]
When you invest through an investment professional, the procedures for buying, selling, and exchanging shares and the account features and policies may differ.
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 or on the Account Maintenance Form. 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. A Fund may reject any purchase order in its sole discretion. If your check is returned as uncollectible for any reason, you will be charged for any resulting fees and/or losses. The Funds do not accept cash, money orders, traveler's checks, credit card convenience checks and third party checks. Additionally, bank starter checks are not accepted for the shareholder's initial investment into the Funds. 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.
[SIDENOTE]
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.
HOW TO EXCHANGE SHARES
You may exchange shares of one Victory Fund for shares of the same class of any other. You may also exchange your Class A or Class R Shares of any Victory Fund for shares of any Victory money market fund. You may also exchange your shares of any Victory money market fund for Class A or Class R Shares of any Victory Fund. All exchanges are subject to the conditions described below. If your request is received and accepted by 4:00 p.m. Eastern Time, or the close of regular trading on the NYSE, whichever is earlier, your exchange will be processed the same day. Your exchange will be processed on the next business day if received after the Alternative Closing Time. Third party plan administrators may impose different limitations or exchange privileges, and are not responsible for monitoring or complying with exchange privileges of the Victory Funds.
YOU CAN EXCHANGE SHARES OF A FUND BY CALLING 800-539-FUND, AT
www.VictoryConnect.com, OR BY WRITING VICTORY. 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 shares you would like to exchange and the Fund shares you want to buy must be subject to 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 that has a 5.75% sales charge as a result of an exchange from another Victory fund that has a 2.00% sales charge, you would pay the 3.75% difference in sales charge.
- On certain business days, such as Columbus Day and Veterans 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 and any other eligibility 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 ten business days before you can exchange them; after the account is open ten business 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 60 days' notice to shareholders.
- Before exchanging, read the prospectus of the Fund you wish to purchase by exchange, which may be subject to different risks, fees and expenses.
- An exchange of Fund shares constitutes a sale for tax purposes unless the exchange is made within an IRA or other tax-deferred account.
- Owners of Class A Shares of the Core Bond Fund that had been classified as Class G Shares prior to January 17, 2003, may exchange their shares for Class R Shares of any Victory Fund or for Class A Shares of any Victory Fund that does not offer Class R Shares, without paying a sales charge.
[SIDENOTE]
You can obtain a list of funds available for exchange by calling 800-539-FUND or by visiting www.VictoryConnect.com.
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. You cannot redeem your shares at www.VictoryConnect.com.
[GRAPHIC]
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 previously designated domestic financial institution;
- Mail a check to a previously designated alternate address; or
- Electronically transfer your redemption via the Automated Clearing House (ACH) to a previously designated domestic financial institution.
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.
[GRAPHIC]
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:
- 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 Fund account with a different registration; or
- The check or wire is being sent to a different bank account than was previously designated.
You can get a signature guarantee from a financial institution such as a bank, broker-dealer, credit union, clearing agency, or savings association.
[GRAPHIC]
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) or before the Alternative Closing Time, your funds will be wired on the next business day.
[GRAPHIC]
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) or after the Alternative Closing Time. 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 or on the Account Maintenance Form, 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 will be held until the purchase check has cleared, which may take up to 10 business days.
- A Fund may postpone payment of redemption proceeds for up to seven calendar days at any time.
- 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.
ORGANIZATION AND MANAGEMENT OF 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.
ABOUT VICTORY
Each Fund is a member of The Victory Portfolios, a group of 20 distinct investment portfolios. The Board of Trustees of Victory has the overall responsibility for the management of the Funds.
THE INVESTMENT ADVISER AND CO-ADMINISTRATOR
Each Fund has an Advisory Agreement with Victory Capital Management Inc. (the Adviser). The Adviser is a New York corporation registered as an investment adviser with the SEC. The Adviser, a second-tier subsidiary of KeyCorp, oversees the operations of the Funds according to investment policies and procedures adopted by the Board of Trustees. As of December 31, 2005, the Adviser and its affiliates managed assets totaling in excess of $___ billion for individual and institutional clients. The Adviser's address is 127 Public Square, Cleveland, Ohio 44114.
During the fiscal year ended October 31, 2005, the Adviser was paid an advisory fee, after waivers, at an annual rate based on a percentage of the average daily net assets of each Fund as follows:
Core Bond Fund ____% Fund for Income ____% |
Under a Co-Administration Agreement, the Victory Portfolios will pay Victory Capital Management Inc. a fee at the annual rate of 0.058% on the first $10 billion in total Fund assets, and 0.055% on total Fund assets in excess of $10 billion, for providing certain administrative services to the Funds.
PORTFOLIO MANAGEMENT
THOMAS M. SEAY is the lead portfolio manager, and TRENTON TIPTON-FLETCHER and CRAIG E. RUCH are co-portfolio managers of the CORE BOND FUND. Mr. Seay is a Chief Investment Officer and Senior Managing Director of Victory Capital Management Inc. (the "Adviser"). He is responsible for all fixed income portfolio management of the Adviser, including mutual funds, co-mingled funds, and separately managed accounts. He has been managing investments since 1979, and has been a portfolio manager of the Fund since November 2004. Mr. Tipton-Fletcher is a Senior Portfolio Manager and Managing Director of the Adviser, and has been associated with the Adviser since 1988. He is the Head of Securitized Bonds for the Adviser, and is responsible for all core fixed income strategies related to commercial mortgage, residential mortgage and asset-backed securities. Mr. Ruch is a Senior Portfolio Manager and Managing Director of the Adviser and has been associated with the Adviser since 2005. He is the Head of Corporate Bonds for the Adviser, and is responsible for corporate bond research, corporate bond portfolio management and trading. From February 2004 to April 2005, Mr. Ruch was a portfolio manager with Credit Suisse Asset Management, responsible for investment grade and crossover bond portfolios. From August 2003 to February 2004, Mr. Ruch was a senior high yield bond trader. Prior to August 2003, Mr. Ruch was a senior trader responsible for the telecom and utility sectors.
THOMAS M. SEAY is the lead portfolio manager, and TRENTON TIPTON-FLETCHER and HEIDI L. ADELMAN are the co-portfolio managers of the FUND FOR INCOME and are primarily responsible for the day-to-day management of the Fund's portfolio. Mr. Seay has been a portfolio manager of the Fund since January 1999. He is a Chief Investment Officer and Senior Managing Director of the Adviser and has been associated with the Adviser or an affiliate since 1998. He also had served as portfolio manager of the Gradison Government Income Fund from April 1998 until March 1999, when the Fund acquired the Gradison Fund's assets. Mr. Tipton-Fletcher has been co-portfolio manager of the Fund since March 2002. He is a Senior Portfolio Manager and Managing Director for the Adviser and has been associated with it since 1988. He is responsible for all mortgage-backed and asset-backed securities management for the Adviser. Ms. Adelman is a Portfolio Manager and Director with the Adviser. She has been with the Adviser or an affiliate since 1995 in various capacities including asset management compliance, money market trading and mortgage banking.
The Funds' Statement of Additional Information provides additional information about the portfolio managers' method of compensation, other accounts managed by the portfolio managers and the portfolio managers' ownership of securities in the Funds.
ADDITIONAL INFORMATION
FUND CLASSES
At some future date, the Funds may offer additional classes of shares. Each Fund or any class may be terminated at any time for failure to achieve an economical level of assets or other reasons.
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 and publications. 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 may send only one copy of any shareholder reports, prospectuses, proxy statements, 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), and they will be delivered promptly.
OTHER SERVICE PROVIDERS
Victory Capital Advisers, Inc. (the Distributor), an affiliate of BISYS Fund Services, Inc., 100 Summer Street, Suite 1500, Boston, Massachusetts 02110, serves as distributor for the continuous offering of the Funds' shares. The Distributor is not affiliated with the Adviser.
KeyBank National Association, 127 Public Square, Cleveland, Ohio 44114, serves as the custodian of the Funds' investments and cash and settles trades made by the Funds.
BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio 43219, serves as the co-administrator, transfer agent, fund accountant and dividend disbursing agent for the Funds.
PricewaterhouseCoopers LLP, 100 East Broad Street, Columbus, OH 43215, serves as the Independent Registered Public Accounting Firm for the Funds.
Kramer Levin Naftalis & Frankel LLP, 1177 Avenue of the Americas, New York, NY 10036, serves as legal counsel to the Funds.
IF YOU WOULD LIKE TO RECEIVE ADDITIONAL COPIES OF ANY MATERIALS,
PLEASE CALL THE FUNDS AT
800-539-FUND
OR PLEASE VISIT www.VictoryConnect.com.
[SIDENOTE]
Some additional information you should know about the Funds.
FINANCIAL HIGHLIGHTS
CORE BOND 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 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 and in the Request Literature section of www.victoryconnect.com.
CLASS A SHARES
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.95 $ 9.98 $ 10.02 $ 9.30
--------------------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.29 0.33 0.41 0.53
Net realized and unrealized
gains (losses) on investments 0.04 0.06 0.02 0.74
--------------------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.33 0.39 0.43 1.27
--------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.39) (0.42) (0.47) (0.55)
--------------------------------------------------------------------------------------------------------------------
Total Distributions (0.39) (0.42) (0.47) (0.55)
--------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.89 $ 9.95 $ 9.98 $ 10.02
====================================================================================================================
Total Return (excludes sales charges) 3.33% 3.98% 4.54% 14.07%
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $ 187,308 $ 216,904 $ 323,146 $ 322,312
Ratio of expenses to
average net assets 1.07% 1.10% 1.06% 0.92%
Ratio of net investment income
to average net assets 2.98% 3.38% 4.22% 5.44%
Ratio of expenses to
average net assets* 1.26% 1.24% 1.24% 1.26%
Ratio of net investment income
to average net assets* 2.79% 3.24% 4.04% 5.10%
Portfolio turnover 125% 217% 168% 278%
|
* During the period, certain fees were reduced. If such fee reductions had not occurred, the ratios would have been as indicated.
FUND FOR INCOME
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 and Class C Shares of the Fund. The financial highlights 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 and in the Request Literature section of www.VictoryConnect.com.
CLASS A SHARES
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.87 $ 13.44 $ 13.44 $ 12.77
--------------------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.35** 0.46 0.65 0.80
Net realized and unrealized
gains (losses) on investments 0.07 (0.30) 0.11 0.67
--------------------------------------------------------------------------------------------------------------------
Total from
Investment Activities 0.42 0.16 0.76 1.47
--------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.73) (0.73) (0.76) (0.80)
--------------------------------------------------------------------------------------------------------------------
Total Distributions (0.73) (0.73) (0.76) (0.80)
--------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.56 $ 12.87 $ 13.44 $ 13.44
====================================================================================================================
Total Return (excludes sales charges
and contingent deferred sales charges) 3.36% 1.15% 5.89% 11.84%
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $ 189,716 $ 221,181 $ 243,889 $ 194,914
Ratio of expenses to
average net assets 1.00% 1.00% 0.99% 0.96%
Ratio of net investment income
to average net assets 2.77% 3.36% 4.72% 6.07%
Ratio of expenses to
average net assets* 1.03% 1.01% 0.99% 1.04%
Ratio of net investment income
to average net assets* 2.74% 3.35% 4.72% 5.99%
Portfolio turnover (e) 34% 60% 53% 20%
CLASS C SHARES
MARCH 1,
YEAR YEAR YEAR 2002
ENDED ENDED ENDED THROUGH
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002(a)
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.84 $ 13.43 $ 13.22
Investment Activities
Net investment income 0.29** 0.48 0.42
Net realized and unrealized
gains (losses) on investments 0.06 (0.41) 0.25
------------------------------------------------------------------------------------------------------
Total from
Investment Activities 0.35 0.07 0.67
------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.66) (0.66) (0.46)
------------------------------------------------------------------------------------------------------
Total Distributions (0.66) (0.66) (0.46)
------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.53 $ 12.84 $ .13.43
======================================================================================================
Total Return (excludes sales charges
and contingent deferred sales charges) 2.79% 0.49% 5.17%(c)
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $ 24,187 $ 29,806 $ 1,155
Ratio of expenses to
average net assets 1.55% 1.55% 1.68%(d)
Ratio of net investment income
to average net assets 2.27% 2.23% 3.75%(d)
Ratio of expenses to
average net assets* 1.90% 1.88% 2.23%(d)
Ratio of net investment income
to average net assets* 1.92% 1.90% 3.20%(d)
Portfolio turnover (e) 34% 60% 53%
|
* During the period, certain fees were reduced. If such fee reductions had not
occurred, the ratios would have been as indicated.
** Calculated using average shares for the period.
(a) Period from commencement of operations.
(b) Less than $.01 per share.
(c) Not annualized.
(d) Annualized.
(e) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
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 R Shares of the Fund. Except for the fiscal year ended December 31, 1998, the financial highlights 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 and in the Request Literature section of www.VictoryConnect.com. The financial highlights for the fiscal year ended December 31, 1998 were audited by another independent public accountant.
CLASS R SHARES
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.87 $ 13.44 $ 13.44 $ 12.77
--------------------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.33** 0.42 0.64 0.79
Net realized and unrealized
gains (losses) on investments 0.08 (0.27) 0.11 0.68
--------------------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.41 0.15 0.75 1.47
--------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.72) (0.72) (0.75) (0.80)
--------------------------------------------------------------------------------------------------------------------
Total Distributions (0.72) (0.72) (0.75) (0.80)
--------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.56 $ 12.87 $ 13.44 $ 13.44
====================================================================================================================
Total Return 3.25% 1.08% 5.80% 11.84%
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $ 193,685 $ 295,597 $ 345,144 $ 242,716
Ratio of expenses to
average net assets 1.10% 1.07% 1.08% 0.97%
Ratio of net investment income
to average net assets 2.61% 3.34% 4.62% 6.05%
Ratio of expenses to
average net assets* (a) (a) 1.08% 1.07%
Ratio of net investment income
to average net assets* (a) (a) 4.62% 5.95%
Portfolio turnover (b) 34% 60% 53% 20%
|
* During the period, certain fees were reduced. If such fee reductions had not
occurred, the ratios would have been as indicated.
** Calculated using average shares for the period.
(a) There were no fee reductions during the period.
(b) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
This page is intentionally left blank.
The Victory Funds PRSRT STD
P.O. Box 182593 U.S. POSTAGE
Columbus, OH 43218-2593 PAID
Cleveland, OH
Permit No. 1535
|
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
Provide additional information about the Funds' investments. The annual report discusses market conditions and investment strategies that significantly affected a Fund's performance during its last fiscal year.
To obtain copies of the SAI, Annual or Semi-Annual Reports, or more information 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 182593
Columbus, OH 43218-2593
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:
publicinfo@sec.gov, or by writing the SEC's Public Reference Section,
Washington, D.C. 20459-0102.
ON THE INTERNET: Fund documents can be viewed on-line or downloaded at www.victoryconnect.com or from the SEC at http://www.sec.gov (text only).
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(R) LOGO]
Investment Company Act File Number 811-4852
VF-TXFI-PRO (3/06)
PROSPECTUS
MARCH 1, 2006
MONEY MARKET FUNDS
PRIME OBLIGATIONS FUND
CLASS A SHARES
FINANCIAL RESERVES FUND
CLASS A SHARES
GRADISON GOVERNMENT RESERVES FUND
TRUST SHARES AND SELECT SHARES
TAX-FREE MONEY MARKET FUND
CLASS A SHARES
OHIO MUNICIPAL MONEY MARKET FUND
CLASS A SHARES
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(R) LOGO]
www.VictoryConnect.com
800-539-FUND
(800-539-3863)
THE VICTORY PORTFOLIOS
TABLE OF CONTENTS
RISK/RETURN SUMMARY 1
An analysis which includes the investment objective, principal strategies,
principal risks, performance, and expenses.
Prime Obligations Fund
CLASS A SHARES 2
Financial Reserves Fund
CLASS A SHARES 4
Gradison Government Reserves Fund
TRUST SHARES AND SELECT SHARES 6
Tax-Free Money Market Fund
CLASS A SHARES 8
Ohio Municipal Money Market Fund
CLASS A SHARES 10
INVESTMENTS 12
RISK FACTORS 15
SHARE PRICE 16
DIVIDENDS, DISTRIBUTIONS, AND TAXES 16
INVESTING WITH VICTORY
- How to Buy Shares 21
- How to Exchange Shares 23
- How to Sell Shares 24
ORGANIZATION AND MANAGEMENT OF THE FUNDS 26
ADDITIONAL INFORMATION 27
FINANCIAL HIGHLIGHTS
Prime Obligations Fund 28
Financial Reserves Fund 29
Gradison Government Reserves Fund 30
Tax-Free Money Market Fund 32
Ohio Municipal Money Market Fund 33
|
KEY TO FUND INFORMATION
[GRAPHIC]
OBJECTIVE AND STRATEGIES
The goals and the strategies that a Fund plans to use to pursue its investment objective.
[GRAPHIC]
RISK FACTORS
The risks you may assume as an investor in a Fund.
[GRAPHIC]
PERFORMANCE
A summary of the historical performance of a Fund.
[GRAPHIC]
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.
RISK/RETURN SUMMARY
INTRODUCTION
This Prospectus explains what you should know about the Victory Funds described in this Prospectus (the Funds), before you invest. Please read it carefully.
[GRAPHIC]
INVESTMENT OBJECTIVES
Each Fund pursues its investment objective by investing in a diversified portfolio of high-quality, short-term U.S. dollar-denominated money market instruments. Each Fund 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 the information in each Fund's Risk/Return Summary and the "Investments" section later in the Prospectus.
[GRAPHIC]
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
[GRAPHIC]
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 Gradison Government Reserves Fund offers two classes of shares: Trust Shares and Select Shares. Each other Fund offers Class A 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.
[SIDENOTE]
Victory Capital Management Inc., which we will refer to as the "Adviser" 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.
PRIME OBLIGATIONS FUND
CLASS A SHARES
Cusip#: 926464108
Ticker: SPOXX
[GRAPHIC]
INVESTMENT OBJECTIVE
The Fund seeks to provide current income consistent with liquidity and stability of principal.
[GRAPHIC]
PRINCIPAL INVESTMENT STRATEGIES
The Fund pursues its investment objective by investing primarily in short-term, high-quality debt instruments.
Under normal market conditions, the 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. government securities.
- When-issued or delayed-delivery securities.
- Eurodollar debt obligations.
Important characteristics of the Fund's investments:
- QUALITY: The 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 Fund invests in high quality, liquid instruments. For more information on ratings, see the Appendix to the Statement of Additional Information (SAI).
- MATURITY: The Fund maintains a 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, Inc., 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.
[GRAPHIC]
PRINCIPAL RISKS
The 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 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 Fund's share price declines below $1.00.
- Interest rates rise rapidly, causing the Fund's investment securities to decline in value and the Fund's share price to decline below $1.00.
- Interest rates decline, resulting in a lower yield for the Fund.
- Adverse events affecting the banking industry cause the value of the Fund's investments to decline.
- Political, economic, business or regulatory events occur in a foreign country causing the value of a security to decline.
The principal risks summarized above are more fully described in "Risk Factors."
An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.
[GRAPHIC]
INVESTMENT PERFORMANCE
The bar chart and table below indicate the risks of investing in the Fund. We assume reinvestment of dividends and distributions. The Fund's past performance does not necessarily indicate how the Fund will perform in the future.
[CHART]
CALENDAR YEAR RETURNS FOR CLASS A SHARES
1996 4.71% 1997 4.93% 1998 4.94% 1999 4.59% 2000 5.83% 2001 3.56% 2002 1.14% 2003 0.48% 2004 0.65% 2005 |
Highest/lowest quarterly results during this time period were:
HIGHEST
LOWEST
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIODS ENDED PAST PAST PAST DECEMBER 31, 2005) 1 YEAR 5 YEARS 10 YEARS Class A % % % |
The "seven-day yield" is an annualized figure -- the amount you would earn if you kept your investment in the 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 Fund's current seven-day yield and seven-day effective yield, call the Fund at 800-539-FUND (800-539-3863) or visit www.VictoryConnect.com and select Money Market Funds under Daily Prices.
[GRAPHIC]
FUND EXPENSES
This section describes the fees and expenses that you may pay if you invest in shares of the 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 NONE (as a percentage of the lower of purchase or sale price) Maximum Sales Charge Imposed on Reinvested Dividends NONE Redemption or Exchange Fees NONE ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS) Management Fees 0.35% Distribution (12b-1) Fees 0.00% Other Expenses(2) % (includes a shareholder servicing fee of 0.25%) Total Fund Operating Expenses(3) % |
(1) You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
(2) Restated to reflect current fees.
(3) In addition to any voluntary or contractual fee waivers or expense reimbursements by the Adviser to limit the Fund's total operating expenses, BISYS Fund Services Ohio, Inc., the Fund's co-administrator ("BISYS"), or any of the Fund's other service providers may voluntarily waive its fees or reimburse expenses, as permitted by law, in order to reduce the Fund's total operating expenses.
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:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Class A $ $ $ $
|
FINANCIAL RESERVES FUND
CLASS A SHARES
Cusip#: 926464678
Ticker: FNRXX
NOTE: THIS FUND IS ONLY AVAILABLE TO CERTAIN FINANCIAL INSTITUTIONS. SEE "HOW TO BUY SHARES."
[GRAPHIC]
INVESTMENT OBJECTIVE
The Fund seeks to provide as high a level of current income as is consistent with preserving capital and providing liquidity.
[GRAPHIC]
PRINCIPAL INVESTMENT STRATEGIES
The 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 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. government securities.
- When-issued or delayed-delivery securities.
- Eurodollar debt obligations.
Important characteristics of the Fund's investments:
- QUALITY: The 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 Fund invests in high quality, liquid instruments. For more information on ratings, see the Appendix to the SAI.
- MATURITY: The Fund maintains a weighted average maturity of 90 days or less. Individual investments may be purchased with remaining maturities ranging from one day to 397 days.
The 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.
*An NRSRO is a nationally recognized statistical rating organization such as Standard & Poor's (S&P), Fitch, Inc., 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.
[GRAPHIC]
PRINCIPAL RISKS
The 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 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 Fund's share price declines below $1.00.
- Interest rates rise rapidly, causing the Fund's investment securities to decline in value and the Fund's share price to decline below $1.00.
- Interest rates decline, resulting in a lower yield for the Fund.
- Adverse events affecting the banking industry cause the value of the Fund's investments to decline.
- Political, economic, business or regulatory events occur in a foreign country causing the value of a security to decline.
The principal risks summarized above are more fully described in "Risk Factors."
An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.
[GRAPHIC]
INVESTMENT PERFORMANCE
The bar chart and table below indicate the risks of investing in the Fund. We assume reinvestment of dividends and distributions. The Fund's past performance does not necessarily indicate how the Fund will perform in the future.
[CHART]
CALENDAR YEAR RETURNS FOR CLASS A SHARES
1996 4.93% 1997 5.09% 1998 5.05% 1999 4.69% 2000 5.92% 2001 3.69% 2002 1.27% 2003 0.58% 2004 0.76% 2005 |
Highest/lowest quarterly results during this time period were:
HIGHEST
LOWEST
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIODS ENDED PAST PAST PAST DECEMBER 31, 2005) 1 YEAR 5 YEARS 10 YEARS Class A % % % |
The "seven-day yield" is an annualized figure -- the amount you would earn if you kept your investment in the 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 Fund's current seven-day yield and seven-day effective yield, call the Fund at 800-539-FUND (800-539-3863) or visit www.VictoryConnect.com and select Money Market Funds under Daily Prices.
[GRAPHIC]
FUND EXPENSES
This section describes the fees and expenses that you may pay if you invest in shares of the 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 NONE (as a percentage of the lower of purchase or sale price) Maximum Sales Charge Imposed on Reinvested Dividends NONE Redemption or Exchange Fees NONE ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS) Management Fees 0.50% Distribution (12b-1) Fees 0.00% Other Expenses(2),(3) % Total Fund Operating Expenses(4) % |
(1) You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
(2) Although the Fund has a Shareholder Servicing Plan that imposes an annual
fee of 0.25%, the Fund has no intention of paying such fee.
(3) Restated to reflect current fees.
(4) In addition to any voluntary or contractual fee waivers or expense reimbursements by the Adviser to limit the Fund's total operating expenses, BISYS, the Fund's co-administrator, or any of the Fund's other service providers may voluntarily waive its fees or reimburse expenses, as permitted by law, in order to reduce the Fund's total operating expenses.
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:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Class A $ $ $ $
|
GRADISON GOVERNMENT RESERVES FUND
TRUST SHARES
Cusip#: 926464181
Ticker: VGGXX
SELECT SHARES
Cusip#: 926464363
Ticker: GMUXX
[GRAPHIC]
INVESTMENT OBJECTIVE
The Fund seeks to maximize current income to the extent consistent with the preservation of capital and the maintenance of liquidity.
[GRAPHIC]
PRINCIPAL INVESTMENT STRATEGIES
The Fund pursues its investment objective by investing only in certain securities issued by the U.S. government, its agencies and/or instrumentalities. Securities issued by U.S. government instrumentalities are supported only by the credit of the federal instrumentality. See the "Investments" section for a description of these securities. The Fund intends to invest primarily, and may invest exclusively, in these obligations of U.S. government instrumentalities. The Fund plans, as much as possible, to invest in securities whose interest payments are exempt from state and local taxes.
Under normal circumstances, the Fund will invest at least 80% of its net assets in short-term U.S. government debt instruments. The Fund will not change this policy unless it notifies shareholders at least 60 days in advance. The Fund expects to invest substantially all of its assets in the instruments described above. For purposes of this policy, "net assets" includes any borrowings for investment purposes.
Important characteristics of the Fund's investments:
- QUALITY: The Fund invests only in U.S. government securities, including those issued by agencies and instrumentalities of the U.S. government. The Board of Trustees has established policies to ensure that the Fund invests in high quality, liquid instruments.
- MATURITY: The Fund maintains a weighted average maturity of 90 days or less. Individual investments may be purchased with remaining maturities ranging from one day to 397 days.
The Fund will limit its investments to those obligations and securities enumerated in 12 U.S.C. section 1757 (7)(B) and (E) of the United States Code as permissible investments by federal credit unions (including "wholly owned Government corporations" enumerated in 31 U.S.C. section 9101(3), and as interpreted by 12 C.F.R. Part 703).
[GRAPHIC]
PRINCIPAL RISKS
The 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 Fund's principal investment strategies effectively.
- The market value of floating or variable rate securities falls to the extent that the Fund's share price declines below $1.00.
- An agency or instrumentality defaults on its obligation and the U.S. government does not provide financial support. The Fund may be more seriously affected by such an event because it may concentrate its investments in the obligations of a small number of instrumentalities.
- Interest rates rise rapidly, causing the Fund's investment securities to decline in value and the Fund's share price to decline below $1.00.
- Interest rates decline, resulting in a lower yield for the Fund.
The principal risks summarized above are more fully described in "Risk Factors."
An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.
[GRAPHIC]
INVESTMENT PERFORMANCE
The bar chart and table below indicate the risks of investing in the Fund. We assume reinvestment of dividends and distributions. The Fund's past performance does not necessarily indicate how the Fund will perform in the future.
[CHART]
CALENDAR YEAR RETURNS FOR SELECT SHARES
1996 4.75% 1997 4.90% 1998 4.87% 1999 4.51% 2000 5.74% 2001 3.45% 2002 1.10% 2003 0.42% 2004 0.56% 2005 |
Highest/lowest quarterly results during this time period were:
HIGHEST
LOWEST
AVERAGE ANNUAL TOTAL RETURNS 10 YEARS (FOR THE PERIODS ENDED PAST PAST (OR LIFE DECEMBER 31, 2005) 1 YEAR 5 YEARS OF FUND) Select Shares % % %(1) Trust Shares % N/A %(2) |
(1) Ten year performance.
(2) Performance is from October 15, 2001, inception date of Trust Shares.
The "seven-day yield" is an annualized figure -- the amount you would earn if you kept your investment in the 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 Fund's current seven-day yields and seven-day effective yields, call the Fund at 800-539-FUND (800-539-3863) or visit www.VictoryConnect.com and select Money Market Funds under Daily Prices.
[GRAPHIC]
FUND EXPENSES
This section describes the fees and expenses that you may pay if you invest in shares of the Fund.
SHAREHOLDER TRANSACTION EXPENSES TRUST SELECT (PAID DIRECTLY FROM YOUR INVESTMENT)(1) SHARES SHARES Maximum Sales Charge Imposed on Purchases NONE NONE (as a percentage of offering price) Maximum Deferred Sales Charge NONE NONE (as a percentage of the lower of purchase or sale price) Maximum Sales Charge Imposed on Reinvested Dividends NONE NONE Redemption or Exchange Fees NONE NONE ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS) Management Fees(2) 0.40% 0.40% Distribution (12b-1) Fees 0.00% 0.00% Other Expenses(3) % % (includes a shareholder servicing fee of 0.25% applicable to Select Shares) Total Fund Operating Expenses(4) % % |
(1) You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
(2) Effective January 1, 2005, the maximum advisory fee for this Fund is 0.40%
of the Fund's average daily net assets. Prior to this date, the maximum fee
had been 0.50%.
(3) Restated to reflect current fees.
(4) In addition to any voluntary or contractual fee waivers or expense reimbursements by the Adviser to limit the Fund's total operating expenses, BISYS, the Fund's co-administrator, or any of the Fund's other service providers may voluntarily waive its fees or reimburse expenses, as permitted by law, in order to reduce the Fund's total operating expenses.
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:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Trust Shares $ $ $ $
Select Shares $ $ $ $
|
TAX-FREE MONEY MARKET FUND
CLASS A SHARES
Cusip#: 926464306
Ticker: STOXX
[GRAPHIC]
INVESTMENT OBJECTIVE
The Fund seeks to provide current interest income free from federal income taxes consistent with relative liquidity and stability of principal.
[GRAPHIC]
PRINCIPAL INVESTMENT STRATEGIES
The Fund pursues its investment objective by investing in short-term, high-quality municipal securities issued by or on behalf of U.S. states, territories, and possessions.
Under normal circumstances, the 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.
Under normal circumstances, the Fund will invest at least 80% of its net assets in short-term instruments, the interest on which is exempt from federal income tax (including the alternative minimum tax). The Fund will not change this policy except with shareholder approval. For purposes of this policy, "net assets" includes any borrowings for investment purposes.
Important characteristics of the Fund's investments:
- QUALITY: The 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 Fund invests in high quality, liquid instruments. A significant portion of the assets of the Fund may be invested in securities guaranteed by banks. For more information on ratings, see the Appendix to the SAI.
- MATURITY: The Fund maintains a 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, Inc., 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.
[GRAPHIC]
PRINCIPAL RISKS
The 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 Fund's principal investment strategies effectively.
- A municipality or instrumentality defaults on its obligation or its securities are downgraded.
- The market value of floating or variable rate securities falls to such an extent that the Fund's share price declines below $1.00.
- Interest rates rise rapidly, causing the Fund's investment securities to decline in value and the Fund's share price to decline below $1.00.
- Interest rates decline, resulting in a lower yield for the Fund.
- Adverse events affecting the banking industry cause the value of the Fund's investments guaranteed by banks to decline.
- Political, economic, business or regulatory events occur in a city or state causing the value of that municipality's securities to decline.
The principal risks summarized above are more fully described in "Risk Factors."
An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.
[GRAPHIC]
INVESTMENT PERFORMANCE
The bar chart and table below indicate the risks of investing in the Fund. We assume reinvestment of dividends and distributions. The Fund's past performance does not necessarily indicate how the Fund will perform in the future.
[CHART]
CALENDAR YEAR RETURNS FOR CLASS A SHARES
1996 2.96% 1997 3.09% 1998 2.84% 1999 2.63% 2000 3.48% 2001 2.16% 2002 0.85% 2003 0.37% 2004 0.47% 2005 |
Highest/lowest quarterly results during this time period were:
HIGHEST
LOWEST
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIODS ENDED PAST PAST PAST DECEMBER 31, 2005) 1 YEAR 5 YEARS 10 YEARS Class A % % % |
The "seven-day yield" is an annualized figure -- the amount you would earn if you kept your investment in the 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 Fund's current seven-day yield and seven-day effective yield, call the Fund at 800-539-FUND (800-539-3863) or visit www.VictoryConnect.com and select Money Market Funds under Daily Prices.
[GRAPHIC]
FUND EXPENSES
This section describes the fees and expenses that you may pay if you invest in shares of the 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 NONE (as a percentage of the lower of purchase or sale price) Maximum Sales Charge Imposed on Reinvested Dividends NONE Redemption or Exchange Fees NONE ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS) Management Fees 0.35% Distribution (12b-1) Fees 0.00% Other Expenses(2) % (includes a shareholder servicing fee of 0.25%) Total Fund Operating Expenses(3) % |
(1) You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
(2) Restated to reflect current fees.
(3) In addition to any voluntary or contractual fee waivers or expense reimbursements by the Adviser to limit the Fund's total operating expenses, BISYS, the Fund's co-administrator, or any of the Fund's other service providers may voluntarily waive its fees or reimburse expenses, as permitted by law, in order to reduce the Fund's total operating expenses.
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:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Class A $ $ $ $
|
OHIO MUNICIPAL MONEY MARKET FUND
CLASS A SHARES
Cusip#: 926464769
Ticker: AOHXX
[GRAPHIC]
INVESTMENT OBJECTIVE
The 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.
[GRAPHIC]
PRINCIPAL INVESTMENT STRATEGIES
The Fund pursues its investment objective by investing in short-term municipal securities.
Under normal circumstances, the 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.
Under normal circumstances, the Fund will invest its assets in short-term instruments so that at least 80% of the income it distributes will be exempt from federal regular income tax and Ohio state income tax. (Federal regular income tax does not include the individual or corporate federal alternative minimum tax.) The Fund will not change this policy except with shareholder approval. The Fund expects to invest substantially all of its assets in these instruments.
Important characteristics of the Fund's investments:
- QUALITY: The 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 Fund invests in high quality, liquid instruments. A significant portion of the assets of the Fund may be invested in securities guaranteed by banks. For more information on ratings, see the Appendix to the SAI.
- MATURITY: The Fund maintains a 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, Inc., 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.
[GRAPHIC]
PRINCIPAL RISKS
The 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 Fund's principal investment strategies effectively.
- A municipality or instrumentality defaults on its obligation or its securities are downgraded.
- The market value of floating or variable rate securities falls to such an extent that the Fund's share price declines below $1.00.
- Interest rates rise rapidly, causing the Fund's investment securities to decline in value and the Fund's share price to decline below $1.00.
- Interest rates decline, resulting in a lower yield for the Fund.
- There is a significant decline in the value of an investment.
- Adverse events affecting the banking industry cause the value of Fund's investments guaranteed by banks to decline.
- Political, economic, business or regulatory events occur in Ohio causing the value of Ohio municipal securities to decline. The 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.
The principal risks summarized above are more fully described in "Risk Factors."
An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.
[GRAPHIC]
INVESTMENT PERFORMANCE
The bar chart and table below indicate the risks of investing in the Fund. We assume reinvestment of dividends and distributions. The Fund's past performance does not necessarily indicate how the Fund will perform in the future.
[CHART]
CALENDAR YEAR RETURNS FOR CLASS A SHARES
1996 3.02% 1997 3.04% 1998 2.85% 1999 2.56% 2000 3.36% 2001 2.09% 2002 0.71% 2003 0.24% 2004 0.37% 2005 |
Highest/lowest quarterly results during this time period were:
HIGHEST
LOWEST
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PERIODS ENDED PAST PAST PAST DECEMBER 31, 2005) 1 YEAR 5 YEARS 10 YEARS Class A % % % |
The "seven-day yield" is an annualized figure -- the amount you would earn if you kept your investment in the 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 Fund's current seven-day yield and seven-day effective yield, call the Fund at 800-539-FUND (800-539-3863) or visit www.VictoryConnect.com and select Money Market Funds under Daily Prices.
[GRAPHIC]
FUND EXPENSES
This section describes the fees and expenses that you may pay if you invest in shares of the 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 NONE (as a percentage of the lower of purchase or sale price) Maximum Sales Charge Imposed on Reinvested Dividends NONE Redemption or Exchange Fees NONE ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS) Management Fees(2) 0.44% Distribution (12b-1) Fees 0.00% Other Expenses(3) % (includes a shareholder servicing fee of 0.25%) Total Fund Operating Expenses(4) % |
(1) You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
(2) Effective January 1, 2005, the maximum annual advisory fee for this Fund is
0.45% of the Fund's average daily net assets. Prior to this date, the
maximum fee had been 0.50%.
(3) Restated to reflect current fees.
(4) The Adviser intends to voluntarily waive its fees and/or reimburse expenses so that the net operating expenses (excluding certain items) of the Fund do not exceed 0.90% for any period during which this waiver or reimbursement is in effect. This waiver/reimbursement may terminate at any time. In addition to any voluntary or contractual fee waivers or expense reimbursements by the Adviser to limit the Fund's total operating expenses, BISYS, the Fund's co-administrator, or any of the Fund's other service providers may voluntarily waive its fees or reimburse expenses, as permitted by law, in order to reduce the Fund's total operating expenses.
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:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Class A $ $ $ $
|
INVESTMENTS
The following describes some of the types of securities the Funds may purchase under normal market conditions to achieve their investment objectives. A Fund will not necessarily 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 Statement of Additional Information (SAI).
The Funds may invest in the following types of securities:
BANKERS' ACCEPTANCES.
Negotiable drafts or bills of exchange, in which a bank unconditionally agrees to pay the face value of the instrument upon maturity.
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.
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.
TAX, REVENUE, AND BOND ANTICIPATION NOTES.
Issued in expectation of future revenues.
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. There is no guarantee that the U.S. government will provide support to U.S. agencies or instrumentalities if they are unable to meet their obligations.
EURODOLLAR OBLIGATIONS.
Obligations of foreign branches of U.S. banks and domestic branches of foreign banks.
CORPORATE DEBT OBLIGATIONS.
Debt instruments issued by corporations. They may be secured or unsecured.
*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, SLMA, FHLB, FHLMC, and FMAC are supported by the right of the issuer to borrow from the U.S. Treasury. FFCB is supported only by the credit of the federal instrumentality.
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.
U.S. GOVERNMENT INSTRUMENTALITIES.
Securities issued by U.S. government instrumentalities such as: the Student Loan Marketing Association (SLMA or Sallie Mae), The Federal Farm Credit Bank, and Federal Home Loan Banks. Certain instrumentalities are "wholly owned Government corporations," such as the Tennessee Valley Authority.* See the SAI for more information about investments in obligations of U.S. government instrumentalities and wholly owned Government corporations.
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.
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.
[GRAPHIC]
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. The Funds consider these securities to mature on the date that the interest rate adjusts or resets or the date the Fund can demand the payment of principal.
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.
[GRAPHIC]
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.
[GRAPHIC]
Derivative Instruments: Indicates an instrument whose value is linked to, or derived from another security, instrument, or index.
*TVA is supported by the right of the issuer to borrow from the U.S. Treasury.
PORTFOLIO HOLDINGS DISCLOSURE
Each Fund discloses its complete portfolio holdings as of the end of its second fiscal quarter (April 30th) and its fiscal year (October 30th) in its reports to shareholders. The Funds send reports to their existing shareholders no later than 60 days after the relevant fiscal period, and files these reports with the SEC by the 70th day after the end of the relevant fiscal period. You can find these reports on the Funds' website, www.VictoryConnect.com, and on the SEC's website, www.sec.gov.
Each Fund files its complete portfolio holdings as of the end of its first and third fiscal quarters (January 31 and July 31, respectively) with the SEC on Form N-Q no later than 60 days after the relevant fiscal period. You can find these filings on the SEC's website, www.sec.gov.
Each Fund also discloses its complete portfolio holdings each calendar quarter on the Funds' website, www.VictoryConnect.com, on approximately the 15th day of the following calendar month.
The Statement of Additional Information describes the policies and procedures that relate to the disclosure of the Funds' portfolio holdings.
RISK FACTORS
[GRAPHIC]
The following 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:
- 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 fall below its cost.
- CREDIT RISK. The issuer of a debt security may fail to pay interest or principal in a timely manner. Credit risk is measured by NRSROs such as S&P, Fitch, Inc., or Moody's.
- INTEREST RATE RISK. If interest rates rapidly rise, the decline in value of portfolio securities could cause the share price to decline below $1.00, and if interest rates decline, the Fund will reinvest maturing instruments in lower yielding securities.
REPURCHASE AGREEMENT RISK:
- If the seller were to default or become insolvent, the Fund would suffer a loss if the proceeds of the sale of the underlying security were less than the repurchase price, or if the disposition of the security is delayed.
RISKS ASSOCIATED WITH INVESTING IN MUNICIPAL DEBT SECURITIES
(TAX-FREE MONEY MARKET FUND AND OHIO MUNICIPAL MONEY MARKET FUND ONLY):
- 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.
CONCENTRATION RISKS
(OHIO MUNICIPAL MONEY MARKET FUND ONLY):
- 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 bond market.
An investment in a Fund is not a complete investment program.
[SIDENOTE]
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.
SHARE PRICE
The Ohio Municipal Money Market Fund and the Gradison Government Reserves Fund
each normally calculates its share price, called the "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 and it is accepted. A
business day is a day on which the Federal Reserve Bank of Cleveland, the New
York Stock Exchange, Inc. (NYSE), and the bond market are open. On any business
day when the Bond Market Association (BMA) recommends that the securities
markets close early, each Fund reserves the right to refuse any purchase order
received after the BMA recommended closing time (the Alternative Closing Time).
If a Fund does so, it will continue, however, to process redemption orders
received after the Alternative Closing Time but no later than 12:00 p.m. or 2:00
p.m., as applicable. 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 daily at www.VictoryConnect.com and once a week in THE WALL STREET JOURNAL or other newspapers, or media outlets.
MARKET TIMING
The Victory Funds generally discourage frequent purchases and redemptions of Fund shares ("market timing"). The Victory Funds' Board of Trustees has adopted a policy to identify and deter market timing activity in the Victory Equity and Fixed-Income Funds. Because many investors acquire shares of money market funds as short-term investments, however, this policy does not apply to investments in shares of the Victory Money Market Funds. Nevertheless, you should review the prospectus of any Victory Equity or Fixed-Income Fund into which you are considering an exchange for information about that Fund's market timing policy. In addition, if it is determined that an investor has engaged in market timing activity with respect to a Victory Equity or Fixed-Income Fund, the investor will be barred from purchasing additional shares of any Victory Money Market Fund.
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.
[SIDENOTE]
An Investment Professional is an investment consultant, salesperson, financial planner, investment adviser, or trust officer who provides you with investment information.
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 Funds. If you reinvest your distributions in a different 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.
[SIDENOTE]
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.
IMPORTANT INFORMATION ABOUT TAXES
No Fund pays federal income tax on the earnings and capital gains it distributes to shareholders.
- Dividends from a Fund's net income and short-term capital gains 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.
- A Fund may be required to withhold tax from taxable distributions if you fail to give your correct social security or taxpayer identification number, fail to make required certifications, or a Fund is notified by the Internal Revenue Service that backup withholding is required.
- 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.
INVESTING WITH VICTORY
If you are looking for a convenient way to open an account or to add money to an existing account, Victory Portfolios ("Victory") can help. The sections that follow will serve as a guide to your investments with Victory. The following sections 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.
ALL YOU NEED TO DO TO GET STARTED IS TO FILL OUT AN APPLICATION.
CUSTOMER IDENTIFICATION PROGRAM
To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens a new account, and to determine whether such person's name appears on government lists of known or suspected terrorists and terrorist organizations.
As a result, the Funds must obtain the following information for each person who opens a new account:
- Name;
- Date of birth (for individuals);
- Residential or business street address (although post office boxes are still permitted for mailing); and
- Social security number, taxpayer identification number, or other identifying number.
You may also be asked for a copy of your driver's license, passport or other identifying document in order to verify your identity. In addition, it may be necessary to verify your identity by cross-referencing your identification information with a consumer report or other electronic database. Additional information may be required to open accounts for corporations and other entities. Federal law prohibits the Funds and other financial institutions from opening a new account unless they receive the minimum identifying information listed above. After an account is opened, the Funds may restrict your ability to purchase additional shares until your identity is verified. The Funds may close your account or take other appropriate action if it is unable to verify your identity within a reasonable time. If your account is closed for this reason, your shares will be redeemed at the NAV next calculated after the account is closed.
SHAREHOLDER SERVICING PLAN
The following Funds have adopted a Shareholder Servicing Plan:
- Prime Obligations Fund, Class A Shares
- Financial Reserves Fund, Class A Shares
- Gradison Government Reserves Fund, Select Shares
- Tax-Free Money Market Fund, Class A Shares
- Ohio Municipal Money Market Fund, Class A Shares
Shareholder servicing agents provide administrative and support services to their customers which may include establishing and maintaining accounts and records relating to shareholders, processing dividend and distribution payments from the Funds on behalf of shareholders, responding to routine inquiries from shareholders concerning their investments, assisting shareholders in changing dividend options, account designations and addresses, and other similar services. 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 ("KeyBank") 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 PLANS
Victory has adopted a Rule 12b-1 Distribution and Service Plan for Class A Shares of the Financial Reserves Fund and the Ohio Municipal Money Market Fund and Trust Shares and Select Shares of the Gradison Government Reserves Fund. These share classes do not make any payments under this plan.
The Adviser (and its affiliates) may make substantial payments to affiliated and unaffiliated dealers or other financial intermediaries and service providers, including McDonald Investments Inc. (an affiliate of the Adviser), for distribution, administrative and/or shareholder servicing activities, out of its own resources, including the profits from the advisory fees the Adviser receives from the Funds. The Adviser also may reimburse the Distributor (or the Distributor's affiliates) for making these payments. Some of these distribution-related payments may be made to dealers or financial intermediaries for marketing, promotional or related expenses; these payments are often referred to as "revenue sharing." In some circumstances, those types of payments may create an incentive for a dealer or financial intermediary or its representatives to recommend or offer shares of the Funds or other Victory Funds to its customers. More information about these payments is contained in the SAI. You should ask your dealer or financial intermediary for more details about any such payments it receives.
[SIDENOTE]
Account features and services may differ for shares not held directly with the Fund. Check with your Investment Professional.
For historical expense information, see the financial highlights at the end of this Prospectus.
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 for Class A or Select Shares of a Fund, except for the Financial Reserves Fund, is $500 ($100 for IRA accounts), with additional investments of at least $25. There is no minimum investment required to open an account or for additional investments in Victory 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 in good order and accepted by 2:00 p.m. Eastern Time (12:00 p.m. Eastern Time for the Gradison Government Reserves Fund or the Ohio Municipal Money Market Fund), your purchase order will be processed the same day. On days on which a Fund establishes an Alternative Closing Time, your purchase order will not be processed if received after the Alternative Closing Time.
The Financial Reserves Fund is only available to certain financial institutions that meet minimum investment requirements and have trust or advisory accounts set up through KeyBank or its affiliates. The Gradison Government Reserves Fund offers Trust Shares in addition to Select Shares. Trust Shares are available to accounts for which KeyBank (or its affiliates), as a fiduciary, has sole or shared investment responsibility.
Make your check payable to: THE VICTORY FUNDS
KEEP THESE ADDRESSES HANDY FOR PURCHASES, EXCHANGES, OR REDEMPTIONS.
[GRAPHIC]
BY REGULAR U.S. MAIL
Send completed Account Applications with your check or bank draft to:
The Victory Funds
P.O. Box 182593
Columbus, OH 43218-2593
[GRAPHIC]
BY OVERNIGHT MAIL
Use the following address ONLY for overnight packages:
The Victory Funds
c/o BISYS TA Operations
3435 Stelzer Road
Columbus, OH 43219
PHONE: 800-539-FUND
[GRAPHIC]
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 money to notify the Fund that you intend to purchase shares by wire and to verify wire instructions.
[GRAPHIC]
BY TELEPHONE
800-539-FUND (800-539-3863)
[GRAPHIC]
ON THE INTERNET
www.VictoryConnect.com
To open an account, you must mail a completed account application to Victory at the above mail address. You can download the account application form from www.VictoryConnect.com by clicking on Mutual Funds, Account Application and Forms. For more information on how to access account information and/or applications electronically, please call Victory Funds Customer Service at 800-539-3863 between 8:00 a.m. and 6:00 p.m. (Eastern Time), Monday through Friday. Your account must be set up for Automated Clearing House payment in order to execute online purchases.
[SIDENOTE]
When you buy shares of a Fund, your cost will normally be $1.00 per share.
When you invest through an investment professional, the procedures for buying, selling, and exchanging shares and the account features and policies may differ.
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 or on the Account Maintenance Form. 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. A Fund may reject any purchase order in its sole discretion. If your check is returned as uncollectible for any reason, you will be charged for any resulting fees and/or losses. The Funds do not accept cash, money orders, traveler's checks, credit card convenience checks, and third party checks. Additionally, bank starter checks are not accepted for the shareholder's initial investment into the Funds. 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.
[SIDENOTE]
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.
HOW TO EXCHANGE SHARES
You may exchange shares of one Victory Fund for shares of the same class of any other. You may also exchange your Class A or Select Shares of any Victory Fund for shares of any Victory money market fund. You may also exchange your shares of any Victory money market fund for Class A or Class R Shares of any Victory Fund. All exchanges are subject to the conditions described below. If your request is received and accepted by the earlier of the Alternative Closing Time, or 2:00 p.m. Eastern Time (12:00 p.m. Eastern Time with respect to the Gradison Government Reserves Fund or the Ohio Municipal Money Market Fund), your exchange will be processed the same day. Your exchange will be processed on the next business day if received after the Alternative Closing Time.
YOU CAN EXCHANGE SHARES OF A FUND BY CALLING 800-539-FUND, AT
www.VictoryConnect.com, OR BY WRITING VICTORY. 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 shares you want to exchange and the Fund shares you want to buy must be subject to 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 Columbus Day and Veterans 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 and any other eligibility 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 ten business days before you can exchange them; after the account is open ten business 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. Each Fund may terminate or modify the exchange privilege at any time on 60 days' notice to shareholders.
- Before exchanging, read the prospectus of the Fund you wish to purchase by exchange, which may be subject to different risks, fees and expenses.
- An exchange of Fund shares constitutes a sale for tax purposes, unless the exchange is made within an IRA or other tax-deferred account.
[SIDENOTE]
You can obtain a list of funds available for exchange by calling 800-539-FUND or by visiting www.VictoryConnect.com.
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 Gradison Government Reserves Fund and the Ohio Municipal Money Market Fund), your redemption will be processed the same day. You cannot redeem your shares at www.VictoryConnect.com.
[GRAPHIC]
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 previously designated domestic financial institution;
- Mail a check to a previously designated alternate address; or
- Electronically transfer your redemption via the Automated Clearing House (ACH) to a previously designated domestic financial institution.
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.
[GRAPHIC]
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:
- 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 Fund account with a different registration; or
- The check or wire is being sent to a different bank account than was previously designated.
You can get a signature guarantee from a financial institution such as a bank, broker-dealer, credit union, clearing agency, or savings association.
[GRAPHIC]
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 Gradison Government Reserves Fund and the Ohio Municipal Money Market Fund), your funds will be wired on the next business day.
[GRAPHIC]
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 Gradison Government Reserves Fund and the Ohio Municipal Money Market Fund). It will be transferred by ACH as long as the transfer is to a domestic bank.
[GRAPHIC]
CHECK WRITING
Shareholders of the following Funds may withdraw funds by writing a check for $100.00 or more:
- Prime Obligations Fund
- Gradison Government Reserves Fund (Select Shares only)
- 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 or download the form by clicking on "Access Accounts, Victory Funds, General Forms" on www.VictoryConnect.com. A signature card is also included as part of the Account Application.
SYSTEMATIC WITHDRAWAL PLAN
If you check this box on the Account Application or on the Account Maintenance Form, 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 will be held until the purchase check has cleared, which may take up to 10 business days.
- A Fund may postpone payment of redemption proceeds for up to seven calendar days at any time.
- 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.
ORGANIZATION AND MANAGEMENT OF 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.
ABOUT VICTORY
Each Fund is a member of The Victory Portfolios, a group of 20 distinct investment portfolios. The Board of Trustees of Victory has the overall responsibility for the management of the Funds.
THE INVESTMENT ADVISER AND CO-ADMINISTRATOR
Each Fund has an Advisory Agreement with Victory Capital Management Inc. (the Adviser). The Adviser is a New York corporation registered as an investment adviser with the SEC. The Adviser, a second-tier subsidiary of KeyCorp, oversees the operations of the Funds according to investment policies and procedures adopted by the Board of Trustees. As of December 31, 2005, the Adviser and its affiliates managed assets totaling in excess of $ billion for individual and institutional clients. The Adviser's address is 127 Public Square, Cleveland, Ohio 44114.
During the fiscal year ended October 31, 2005, the Adviser was paid an advisory fee, after waivers, at an annual rate based on a percentage of the average daily net assets of each Fund, as shown in the following table:
Prime Obligations Fund % Financial Reserves Fund % Gradison Government Reserves Fund % Tax-Free Money Market Fund % Ohio Municipal Money Market Fund % |
Under a Co-Administration Agreement, the Victory Portfolios will pay Victory Capital Management Inc. a fee at the annual rate of 0.058% on the first $10 billion in total Fund assets, and 0.055% on total Fund assets in excess of $10 billion, for providing certain administrative services to the Funds.
ADDITIONAL INFORMATION
FUND CLASSES
At some future date, the Funds may offer additional classes of shares. Each Fund or any class may be terminated at any time for failure to achieve an economical level of assets or for other reasons.
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 and publications. You also should see the "Investment Performance" section in the Prospectus 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, a Fund may send only one copy of any shareholder reports, proxy statements, 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), and they will be delivered promptly.
OTHER SERVICE PROVIDERS
Victory Capital Advisers, Inc. (the Distributor), an affiliate of BISYS Fund Services, Inc., 100 Summer Street, Suite 1500, Boston, Massachusetts 02110, serves as distributor for the continuous offering of the Funds' shares. The Distributor is not affiliated with the Adviser.
KeyBank National Association, 127 Public Square, Cleveland, Ohio 44114, serves as the custodian of the Funds' investments and cash and settles trades made by the Funds.
BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio 43219, serves as the co-administrator, transfer agent, fund accountant and dividend disbursing agent for the Funds.
PricewaterhouseCoopers LLP, 100 East Broad Street, Columbus, OH 43215, serves as the Independent Registered Public Accounting Firm for the Funds.
Kramer Levin Naftalis & Frankel LLP, 1177 Avenue of the Americas, New York, NY 10036, serves as legal counsel to the Funds.
IF YOU WOULD LIKE TO RECEIVE ADDITIONAL COPIES OF ANY MATERIALS,
PLEASE CALL THE FUNDS AT
800-539-FUND
OR PLEASE VISIT www.VictoryConnect.com.
[SIDENOTE]
Some additional information you should know about the Funds.
FINANCIAL HIGHLIGHTS
PRIME OBLIGATIONS FUND
The Financial Highlights table is intended to help you understand the Funds' financial performance for the past five years. Certain information shows the results of an investment in one share of a Fund. The total returns in the table represent the rate that an investor would have earned on an investment in a Fund (assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about shares of the Funds. The financial highlights were audited by PricewaterhouseCoopers LLP, whose report, along with the financial statements of the Funds, are included in the Funds' annual report, which is available by calling the Funds at 800-539-FUND and in the Request Literature section of www.VictoryConnect.com.
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000
--------------------------------------------------------------------------------------------------------------------
Net investment income 0.005 0.006 0.013 0.042
Distributions from net investment income (0.005) (0.006) (0.013) (0.042)
--------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000
====================================================================================================================
Total Return 0.49% 0.56% 1.27% 4.31%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (000) $ 1,266,260 $ 1,632,174 $ 2,185,918 $ 3,046,490
Ratio of expenses to
average net assets 0.81% 0.79% 0.77% 0.76%
Ratio of net investment income
to average net assets 0.48% 0.57% 1.27% 4.17%
Ratio of expenses to
average net assets* (c) (c) (c) (c)
Ratio of net investment income
to average net assets* (c) (c) (c) (c)
|
* During the period, certain fees were reduced. If such fee reductions had
not occurred, the ratios would have been as indicated.
(c) There were no fee reductions during the period.
FINANCIAL RESERVES FUND
The Financial Highlights table is intended to help you understand the Funds' financial performance for the past five years. Certain information shows the results of an investment in one share of a Fund. The total returns in the table represent the rate that an investor would have earned on an investment in a Fund (assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about shares of the Funds. The financial highlights were audited by PricewaterhouseCoopers LLP, whose report, along with the financial statements of the Funds, are included in the Funds' annual report, which is available by calling the Funds at 800-539-FUND and in the Request Literature section of www.VictoryConnect.com.
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000
--------------------------------------------------------------------------------------------------------------------
Net investment income 0.006 0.007 0.014 0.043
Distributions from net investment income (0.006) (0.007) (0.014) (0.043)
--------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000
====================================================================================================================
Total Return 0.60% 0.67% 1.39% 4.44%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (000) $ 479,335 $ 533,613 $ 658,425 $ 754,612
Ratio of expenses to
average net assets 0.70% 0.69% 0.68% 0.68%
Ratio of net investment income
to average net assets 0.59% 0.67% 1.38% 4.36%
Ratio of expenses to
average net assets* (c) (c) (c) (c)
Ratio of net investment income
to average net assets* (c) (c) (c) (c)
|
* During the period, certain fees were reduced. If such fee reductions had
not occurred, the ratios would have been as indicated.
(c) There were no fee reductions during the period.
GRADISON GOVERNMENT RESERVES FUND
The Financial Highlights table is intended to help you understand the Funds' financial performance for the past five years. Certain information shows the results of an investment in one share of a Fund. The total returns in the table represent the rate that an investor would have earned on an investment in a Fund (assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about shares of the Funds. The financial highlights were audited by PricewaterhouseCoopers LLP, whose report, along with the financial statements of the Funds, are included in the Funds' annual report, which is available by calling the Funds at 800-539-FUND and in the Request Literature section of www.VictoryConnect.com.
TRUST SHARES
YEAR YEAR YEAR YEAR OCTOBER 15,
ENDED ENDED ENDED ENDED 2001 TO
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001(A)
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000
--------------------------------------------------------------------------------------------------------------------
Net investment income 0.007 0.008 0.015 0.001
Distributions from net investment income (0.007) (0.008) (0.015) (0.001)
--------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000
====================================================================================================================
Total Return 0.70% 0.76% 1.48% 0.11%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (000) $ 216,128 $ 260,102 $ 271,606 $ 290,861
Ratio of expenses to average net assets 0.55% 0.53% 0.50% 0.42%(d)
Ratio of net investment income to
average net assets 0.68% 0.75% 1.46% 2.30%(d)
Ratio of expenses to average net assets* 0.58% 0.57% 0.56% 10.12%(d)
Ratio of net investment income to
average net assets* 0.65% 0.71% 1.40% (7.40)%(d)
|
* During the period, certain fees were reduced. If such fee reductions had
not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(d) Annualized.
The Financial Highlights table is intended to help you understand the Funds' financial performance for the past five years. Certain information shows the results of an investment in one share of a Fund. The total returns in the table represent the rate that an investor would have earned on an investment in a Fund (assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about shares of the Funds. The financial highlights were audited by PricewaterhouseCoopers LLP, whose report, along with the financial statements of the Funds, are included in the Funds' annual report, which is available by calling the Funds at 800-539-FUND and in the Request Literature section of www.VictoryConnect.com.
SELECT SHARES
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000
--------------------------------------------------------------------------------------------------------------------
Net investment income 0.004 0.005 0.012 0.041
Distributions from net investment income (0.004) (0.005) (0.012) (0.041)
--------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000
====================================================================================================================
Total Return 0.43% 0.50% 1.21% 4.20%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (000) $ 2,744,971 $ 3,243,650 $ 3,555,362 $ 4,103,267
Ratio of expenses to
average net assets 0.81% 0.79% 0.77% 0.77%
Ratio of net investment income
to average net assets 0.41% 0.50% 1.21% 4.04%
Ratio of expenses to
average net assets* 0.85% 0.83% 0.82% 0.82%
Ratio of net investment income
to average net assets* 0.38% 0.46% 1.16% 3.99%
|
* During the period, certain fees were reduced. If such fee reductions had not occurred, the ratios would have been as indicated.
TAX-FREE MONEY MARKET FUND
The Financial Highlights table is intended to help you understand the Funds' financial performance for the past five years. Certain information shows the results of an investment in one share of a Fund. The total returns in the table represent the rate that an investor would have earned on an investment in a Fund (assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about shares of the Funds. The financial highlights were audited by PricewaterhouseCoopers LLP, whose report, along with the financial statements of the Funds, are included in the Funds' annual report, which is available by calling the Funds at 800-539-FUND and in the Request Literature section of www.VictoryConnect.com.
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000
--------------------------------------------------------------------------------------------------------------------
Net investment income 0.004 0.004 0.009 0.026
Distributions from net investment income (0.004) (0.004) (0.009) (0.026)
--------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000
====================================================================================================================
Total Return 0.39% 0.43% 0.92% 2.59%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (000) $ 598,662 $ 621,011 $ 654,011 $ 774,555
Ratio of expenses to
average net assets 0.81% 0.79% 0.78% 0.78%
Ratio of net investment income
to average net assets 0.38% 0.43% 0.92% 2.54%
Ratio of expenses to
average net assets* (c) (c) (c) (c)
Ratio of net investment income
to average net assets* (c) (c) (c) (c)
|
* During the period, certain fees were reduced. If such fee reductions had
not occurred, the ratios would have been as indicated.
(c) There were no fee reductions during the period.
OHIO MUNICIPAL MONEY MARKET FUND
The Financial Highlights table is intended to help you understand the Funds' financial performance for the past five years. Certain information shows the results of an investment in one share of a Fund. The total returns in the table represent the rate that an investor would have earned on an investment in a Fund (assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about shares of the Funds. The financial highlights were audited by PricewaterhouseCoopers LLP, whose report, along with the financial statements of the Funds, are included in the Funds' annual report, which is available by calling the Funds at 800-539-FUND and in the Request Literature section of www.VictoryConnect.com.
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000
--------------------------------------------------------------------------------------------------------------------
Net investment income 0.003 0.003 0.008 0.025
Distributions from net investment income (0.003) (0.003) (0.008) (0.025)
--------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000
====================================================================================================================
Total Return 0.28% 0.29% 0.78% 2.52%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (000) $ 558,066 $ 688,379 $ 851,037 $ 935,207
Ratio of expenses to
average net assets 0.91% 0.93% 0.93% 0.93%
Ratio of net investment income
to average net assets 0.27% 0.30% 0.78% 2.50%
Ratio of expenses to
average net assets* 0.96% (c) (c) (c)
Ratio of net investment income
to average net assets* 0.23% (c) (c) (c)
|
* During the period, certain fees were reduced. If such fee reductions had
not occurred, the ratios would have been as indicated.
(c) There were no fee reductions during the period.
The Victory Funds
P.O. Box 182593 PRSRT STD
Columbus, OH 43218-2593 U.S. POSTAGE
PAID
Cleveland, OH
Permit No. 1535
|
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
Provide additional information about the Funds' investments.
To obtain copies of the SAI, Annual or Semi-Annual Reports, or more information 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 182593
Columbus, OH 43218-2593
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:
publicinfo@sec.gov, or by writing the SEC's Public Reference Section,
Washington, D.C. 20459-0102.
ON THE INTERNET: Fund documents can be viewed on-line or downloaded at www.VictoryConnect.com or from the SEC at http://www.sec.gov (text only).
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(R) LOGO]
Investment Company Act File Number 811-4852
VF-MMMF-PRO (3/06)
PART B
STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY PORTFOLIOS
Balanced Fund Financial Reserves Fund Ohio Municipal Money Market Fund Convertible Fund Focused Growth Fund Prime Obligations Fund Core Bond Fund (formerly, Fund for Income Small Company Opportunity Fund Intermediate Income Fund) Gradison Government Reserves Fund Special Value Fund Diversified Stock Fund Institutional Money Market Fund Stock Index Fund Established Value Fund National Municipal Bond Fund Tax-Free Money Market Fund Federal Money Market Fund Ohio Municipal Bond Fund Value Fund |
March 1, 2006
This Statement of Additional Information ("SAI") is not a prospectus, but should be read in conjunction with the prospectuses of the Funds listed above, dated March 1, 2006, as amended or supplemented from time to time. This SAI is incorporated by reference in its entirety into the prospectuses. Copies of the prospectuses may be obtained by writing the Funds at P.O. Box 182593 Columbus, Ohio 43218-2593, or by calling toll free 800-539-FUND (800-539-3863).
The Funds' audited financial statements for the fiscal year ended October 31, _________ are incorporated in this SAI by reference to the Funds' ________ annual report to shareholders (File No. 811-4852). You may obtain a copy of the Funds' latest annual report at no charge by writing to the address or calling the phone number noted above.
INVESTMENT ADVISER and CO-ADMINISTRATOR CUSTODIAN
Victory Capital Management Inc. KeyBank National Association
CO-ADMINISTRATOR, TRANSFER AGENT, DIVIDEND
DISBURSING AGENT and SERVICING AGENT INDEPENDENT REGISTERED PUBLIC
BISYS Fund Services Ohio, Inc. ACCOUNTING FIRM
PricewaterhouseCoopers LLP
DISTRIBUTOR
Victory Capital Advisers, Inc. COUNSEL
Kramer Levin Naftalis & Frankel LLP
|
Table of Contents
Page
General Information.......................................................1
Investment Objectives, Policies and Limitations...........................2
Instruments in Which the Funds Can Invest.................................6
Debt Securities........................................................7
Foreign Investments...................................................32
Derivatives...........................................................33
Other Investments.....................................................38
Eligible Securities for the Money Market Funds........................40
Investment Strategies....................................................41
Determining Net Asset Value ("NAV") and Valuing Portfolio Securities.....43
Performance..............................................................46
Additional Purchase, Exchange and Redemption Information.................51
Dividends and Distributions..............................................58
Taxes....................................................................58
Trustees and Officers....................................................67
Advisory and Other Contracts.............................................72
Additional Information...................................................93
Appendix A -- Description of Security Ratings ..........................A-1
Appendix B -- Proxy Voting Policies and Procedures......................B-1
|
STATEMENT OF ADDITIONAL INFORMATION
GENERAL INFORMATION.
The Victory Portfolios (the "Trust") was organized as a Delaware statutory trust (formerly referred to as a "business trust") on December 6, 1995 as a successor to a company of the same name organized as a Massachusetts business trust on February 5, 1986. The Trust is an open-end management investment company. The Trust currently consists of 20 series (each a "Fund," and collectively, the "Funds") of units of beneficial interest ("shares").
During the fiscal year ended October 31, 2005, the Trust also included three other series: the Growth, New York Municipal Bond and Real Estate Funds: (i) shareholders of the Growth Fund approved the reorganization of their Fund with the Diversified Stock Fund, another series of the Trust, on January 5, 2005 (the reorganization closed on January 18, 2005); (ii) the New York Municipal Bond Fund was liquidated on January 28, 2005; and (iii) shareholders of the Real Estate Fund approved the reorganization of their Fund with the Kensington Real Estate Securities Fund, a series of The Kensington Funds, on March 15, 2005 (the reorganization closed on March 24, 2005).
This SAI relates to the shares of the 20 Funds and their respective classes, as 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:
Equity Funds: Diversified Stock Fund, Class A, C and R Shares
Established Value Fund, Class A and R Shares
Focused Growth Fund, Class A, C and R Shares
Small Company Opportunity Fund, Class A and R Shares
Special Value Fund, Class A, C and R Shares
Stock Index Fund, Class A and R Shares
Value Fund, Class A, C and R Shares
Specialty Funds: Convertible Fund, Class A Shares
Balanced Fund, Class A, C and R Shares
Fixed Income Funds: Taxable Fixed Income Funds:
Core Bond Fund, Class A Shares
Fund for Income, Class A, C and R Shares
Tax-Exempt Fixed Income Funds:
National Municipal Bond Fund, Class A Shares
Ohio Municipal Bond Fund, Class A Shares
Money Market Funds: Federal Money Market Fund, Select and Investor Shares
Financial Reserves Fund, Class A Shares
Gradison Government Reserves Fund, Trust and Select Shares
Institutional Money Market Fund, Select and Investor Shares
Ohio Municipal Money Market Fund, Class A Shares
Prime Obligations Fund, Class A Shares
Tax-Free Money Market Fund, Class A Shares
|
INVESTMENT OBJECTIVES, POLICIES AND LIMITATIONS.
Investment Objectives.
Each Fund's investment objective is fundamental, meaning it 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.
Investment Policies and Limitations of Each Fund.
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, employ other investment practices
that presently are not contemplated for use by the Fund or that currently are
not available but that 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 that
exceed those involved in the activities described in a Fund's prospectus.
A Fund's classification and sub-classification is a matter of fundamental policy. Each Fund is classified as an open-end investment company. Three Funds are sub-classified as non-diversified investment companies: the Focused Growth, National Municipal Bond and Ohio Municipal Bond Funds. All the other Funds are sub-classified as diversified investment companies.
The following policies and limitations supplement the Funds' investment policies set forth in the prospectuses. 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 issuance of a "senior security" under the Investment Company Act of 1940, as amended (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 Board of Trustees (the "Board" or the "Trustees") will consider what actions, if any, are appropriate to maintain adequate liquidity.
Fundamental Investment Policies and Limitations of the Funds. The following investment restrictions are fundamental and may not be changed without a vote of the holders of a majority of the Fund's outstanding voting securities.
1. Senior Securities.
None of the Funds may issue senior securities, except as permitted under the 1940 Act, and as interpreted or modified from time to time by regulatory authority having jurisdiction.
2. Underwriting.
None of the Funds may underwrite securities issued by others, except to the extent that a Fund may be considered an underwriter within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), when reselling securities held in its own portfolio.
3. Borrowing.
None of the Funds may borrow money, except that as permitted under the 1940 Act, or by order of the SEC and as interpreted or modified from time to time by regulatory authority having jurisdiction.
4. Real Estate.
The Ohio Municipal Bond Fund may not purchase or sell real estate unless acquired as a result of direct ownership of securities or other instruments. This restriction shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business, including real estate investment trusts. This restriction does not preclude the Fund from buying securities backed by mortgages on real estate or securities of companies engaged in such activities. This restriction shall not prevent the Fund from investing in real estate operating companies and shares of companies engaged in other real estate related businesses.
None of the Established Value, Federal Money Market, Gradison Government Reserves, Institutional Money Market, Prime Obligations, Small Company Opportunity or Tax-Free Money Market Funds may purchase or sell real estate unless acquired as a result of direct ownership of securities or other instruments. This restriction shall not prevent any of these Funds from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business, including real estate investment trusts. This restriction does not preclude any of these Funds from buying securities backed by mortgages on real estate or securities of companies engaged in such activities. This restriction shall not prevent any of these Funds from investing in real estate operating companies and shares of companies engaged in other real estate related businesses.
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.
5. Lending.
None of the Funds may make loans, except as permitted under the 1940 Act, and as interpreted or modified from time to time by regulatory authority having jurisdiction.
6. Commodities.
None of the Funds may purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments (but this shall not prevent a Fund from purchasing or selling options and futures contracts or from investing in securities or other instruments backed by physical commodities).
7. Concentration.
None of the Balanced, Convertible, Core Bond, Diversified Stock, Established Value, Financial Reserves, Focused Growth, Fund for Income, Small Company Opportunity, Special Value, Stock Index or Value Funds may concentrate their investments in a particular industry, as that term is used in the 1940 Act, and as interpreted or modified from time to time by regulatory authority having jurisdiction. This restriction shall not prevent any of these Funds from investing all of its assets in a "master" fund that has adopted similar investment objectives, policies and restrictions.
Neither of the Institutional Money Market or Prime Obligations Funds will concentrate its investments in a particular industry, as that term is used in the 1940 Act, and as interpreted or modified from time to time by regulatory authority having jurisdiction. Consistent with their investment objectives and policies, each of these Funds reserves the right to concentrate its investment in obligations issued by domestic banks. This restriction shall not prevent either of these Funds from investing all of its assets in a "master" fund that has adopted similar investment objectives, policies and restrictions.
None of the Ohio Municipal Bond, Ohio Municipal Money Market, National Municipal Bond or Tax-Free Money Market Funds will concentrate its investments in a particular industry, as that term is used in the 1940 Act, and as interpreted or modified from time to time by regulatory authority having jurisdiction. When investing in industrial development bonds, each of these Funds will look to the source of the underlying payments. None of these Funds will invest 25% or more of its total assets in industrial development bonds with underlying payments derived from similar projects. This restriction shall not prevent any of these Funds from investing all of its assets in a "master" fund that has adopted similar investment objectives, policies and restrictions.
8. 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 regular income tax and Ohio state income taxes.
Non-Fundamental Investment Policies and Limitations of the Funds. The following investment restrictions are non-fundamental and may be changed by a vote of a majority of the Trustees. Changing a non-fundamental restriction does not require a vote of the holders of a majority of the Fund's outstanding voting securities.
1. Illiquid Securities.
None of the Balanced, Convertible, Core Bond, Diversified Stock, Financial Reserves, Focused Growth, Fund for Income, Institutional Money Market, National Municipal Bond, Ohio Municipal Bond, Ohio Municipal Money Market, Prime Obligations, Small Company Opportunity, Special Value, Stock Index, Tax-Free Money Market or Value Funds may invest more than 15% (10% in the case of the Money Market Funds listed above) 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 a 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 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.
The Established Value Fund may not invest more than 15% of any of its net assets
in (i) securities restricted as to disposition under the federal securities
laws, except such restricted securities determined by the Adviser to be liquid
based on the trading markets for the particular security and other factors, (ii)
securities as to which there are no readily available market quotations, or
(iii) repurchase agreements with a maturity in excess of seven days.
The Federal Money Market Fund may not invest more than 10% of its 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 seven days.
Notwithstanding the foregoing, as a matter of investment policy, none of the Money Market Funds invests in illiquid securities.
2. Short Sales and Purchases on Margin.
None of the Balanced, Core Bond, Diversified Stock, Focused Growth, Ohio Municipal Bond, Prime Obligations, Small Company Opportunity, Special Value, Stock Index, Tax-Free Money Market or Value Funds may 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.
Neither the Financial Reserves Fund nor the Institutional Money Market Fund may
(1) purchase securities on margin (but each such Fund may obtain such credits as
may be necessary for the clearance of purchases and sales of securities) or (2)
make short sales of securities.
Neither the Fund for Income nor either of the Gradison Government Reserves or Ohio Municipal Money Market Funds may 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 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; or (2) purchase securities on margin, except that the Fund may obtain such short-term credits as are necessary for the clearance of transactions.
The Small Company Opportunity Fund does not currently intend to purchase securities on margin, except that the Fund 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.
No Funds may 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."
Each of the Balanced, Convertible, Core Bond, Diversified Stock, Financial Reserves, Focused Growth, Fund for Income, Institutional Money Market, National Municipal Bond, Ohio Municipal Bond, Ohio Municipal Money Market, Prime Obligations, Small Company Opportunity, Special Value, Stock Index, Tax-Free Money Market and Value Funds may invest up to 5% of its total assets in the securities of any one investment company, but none of these Funds may 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, each such Fund may invest in the other money market funds of the Trust. The Adviser will waive the portion of its fee attributable to the assets of each such Fund invested in such money market funds to the extent required by the laws of any jurisdiction in which shares of each such Fund are registered for sale.
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.
Neither of the National Municipal Bond or Ohio Municipal Bond Funds may hold more than 5% of its total assets in securities that have been downgraded below investment grade.
b. Concentration.
For purposes of calculating concentration of investments in the utility and finance categories, each Fund will operate as follows: neither finance companies as a group nor utility companies as a group are considered a single industry for purposes of a Fund's concentration 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).
c. Foreign Issuers.
The Convertible 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.
d. Unseasoned Issuers.
Neither the Convertible Fund nor the Federal Money Market Fund may 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.
e. Mortgage, Pledge or Hypothecation of Securities or Assets.
Neither the Convertible Fund nor the Federal Money Market Fund may 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.
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.
f. Lending or Borrowing.
The Fund for Income will not lend any of its portfolio securities. The Federal Money Market Fund may not (a) lend portfolio securities, (b) borrow money, or (c) invest in shares of other investment companies. |
No Fund intends to borrow money for leveraging purposes.
5. Other Restrictions
The Federal Money Market Fund may not invest in any instrument that is considered a "derivative" for purposes of the Ohio Uniform Depository Act, including a financial instrument or contract or obligation whose value or return is based upon or linked to another asset or index, or both, separate from the financial instrument, contract, or obligation itself. Any security, obligation, trust account, or other instrument that is created from an issue of the U.S. Treasury or is created from an obligation of a federal agency or instrumentality or is created from both is considered a derivative instrument. However, the Ohio Uniform Depository Act permits investment in eligible securities that have a variable interest rate payment based on (a) U.S. Treasury bills, notes, bonds, or any other obligation or security issued by the U.S. Treasury or any other obligation guaranteed as to principal or interest by the United States, including securities issued by the Government National Mortgage Association ("GNMA"); and (b) bonds, notes, debentures, or any other obligations or securities issued by any federal government agency or instrumentality, including but not limited to, the Federal National Mortgage Association ("FNMA"), Federal Home Loan Bank ("FHLB"), Federal Farm Credit Bank, Federal Home Loan Mortgage Corporation ("FHLMC") and Student Loan Marketing Association ("SLMA"). The Ohio Uniform Depository Act does not permit, however, investment in (a) stripped principal or interest obligations of such eligible securities and obligations, or (b) variable-rate securities with a maximum maturity that exceeds two years.
INSTRUMENTS IN WHICH THE FUNDS CAN INVEST.
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 Funds' investments in the following securities and other financial instruments are subject to the investment policies and limitations described in the prospectuses and this SAI. 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 that presently are not contemplated for use by the Funds or that currently are not available but that 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 that exceed those involved in the activities described in a Fund's prospectus and this SAI.
Debt Securities.
Corporate and Short-Term 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 nationally recognized statistical rating organizations ("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 NAV.
Convertible and Exchangeable Debt Obligations. A convertible debt obligation 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 debt obligations are usually senior to common stock in a corporation's capital structure, but usually are subordinate to similar non-convertible debt obligations. 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-convertible debt obligation), a convertible debt obligation 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.
An exchangeable debt obligation is debt that is redeemable in either cash or a specified number of common shares of a company different from the issuing company. Exchangeable debt obligations have characteristics and risks similar to those of convertible debt obligations and behave in the market place the same way as convertible debt obligations.
In general, the market value of a convertible debt obligation 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 debt obligation 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 debt obligation also is influenced by the market value of the security's underlying common stock. Thus, the price of a convertible debt obligation 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 debt obligations generally entail less risk than investments in the common stock of the same issuer.
Securities received upon conversion of convertible debt obligation 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 Convertibles. The Convertible Fund also may invest in "synthetic convertibles." A synthetic convertible is created by combining separate securities that 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.
Short-Term Corporate Obligations are bonds issued by corporations and other business organizations in order to finance their short-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 investment attributes. In the lower end of this category, credit quality may be more susceptible to potential future changes in circumstances. Each of the Balanced, Special Value and Stock Index Funds may invest up to 35%, 20% and 33-1/3%, respectively, of its total assets in short-term corporate debt obligations.
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. Each Tax-Exempt Fixed Income Fund may invest in demand features without limit. 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 are negotiable drafts or bills of exchange, typically drawn by an importer or exporter to pay for specific merchandise, that 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. 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. A Fund may invest in CDs and demand and time deposits 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. Each of the Ohio Municipal Money Market and Tax-Free Money Market Funds may invest up to 20% of its assets in bank deposit instruments.
Eurodollar Obligations. Eurodollar CDs are U.S. dollar-denominated CDs issued by branches of foreign and domestic banks located outside the United States. Eurodollar time deposits are U.S. dollar-denominated deposits in a foreign branch of a U.S. bank or a foreign bank. Each of the Financial Reserves, Institutional Money Market and Prime Obligations Funds may invest up to 25% of its total assets in Eurodollar obligations. Each of the Ohio Municipal Money Market and Tax-Free Money Market Funds may invest up to 20% of its total assets in these instruments.
Yankee CDs are issued by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the United States. The Prime Obligations Fund may invest in Yankee CDs without limit.
Canadian Time Deposits are U.S. dollar-denominated CDs issued by Canadian offices of major Canadian banks.
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. Each of the Ohio Municipal Money Market and Tax-Free Money Market Funds may invest up to 20% of its total assets in taxable commercial paper. In addition to corporate issuers,
borrowers that issue municipal securities also may issue tax-exempt commercial paper. 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 Board 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 Appendix A to this SAI.
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 that 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 that are not readily marketable, will not exceed 15% of the Fund's net assets. As a matter of investment policy, none of the Money Market Funds invests in illiquid securities. 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. Each of the Financial Reserves, Institutional Money Market and Prime Obligations Funds may invest up to 10% of its net assets in short-term funding agreements.
International and Foreign Debt Securities.
International Bonds include Yankee and Euro 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"). The Core Bond Fund may invest up to 20% of its total assets in Yankee Bonds. International bonds also include Canadian and 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 that 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. The Core Bond Fund may invest up to 20% of its total assets in foreign debt securities. The Balanced Fund may invest up to 10% of its total assets in these securities.
Variable and Adjustable Rate Debt Securities.
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. Each of the Balanced, Convertible and Core Bond Funds may invest up to 35% of its total assets in variable amount master demand notes. Each of the Diversified Stock, Focused Growth, Ohio Municipal Money Market, Special Value, Tax-Free Money Market and Value Funds and the Tax-Exempt Fixed Income Funds may invest up to 20% of its total assets in variable amount master 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 that, 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 that, 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 Board, 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. Bank letters of credit may secure variable or floating rate notes.
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 that 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.
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. The Convertible Fund may invest up to 35% of its total assets in variable and floating
rate notes and the Established Value Fund may invest up to 20% of its total assets in these securities. The Fund for Income may invest up to 35% of its total assets in variable and floating rate U.S. government 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 and Zero Coupon Bonds.
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"). The Fund for Income may invest up to 20% of its total assets in U.S. government security receipts. Each of the Core Bond, Diversified Stock, Established Value, Focused Growth, Small Company Opportunity, Stock Index and Value Funds may invest up to 20% of its total assets in receipts. The Balanced Fund may invest up to 10% of its total assets in these securities.
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 that 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 that pay interest currently. This fluctuation increases in accordance with the length of the period to maturity. The Financial Reserves, Institutional Money Market, Prime Obligations and Tax-Exempt Fixed Income Funds may invest in zero coupon bonds without limit, provided that these Funds satisfy the maturity requirements of Rule 2a-7 under the 1940 Act. The Gradison Government Reserves Fund may invest in zero coupon U.S. government securities without limit, provided that the Fund satisfies the maturity requirements of Rule 2a-7 under the 1940 Act. Each of the Ohio Municipal Money Market and Tax-Free Money Market Funds may invest in tax-exempt zero coupon bonds without limit, provided that these Funds satisfy the maturity requirements of Rule 2a-7 under the 1940 Act. Each of the Taxable Fixed Income Funds may invest up to 20% of its total assets in zero coupon bonds (the Fund for Income may only invest in zero coupon U.S. government securities).
Investment Grade and High Quality Securities.
The Funds may invest in "investment grade" obligations that 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 Appendix A to this SAI. "High-quality" short-term obligations are those obligations that, 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 Standard & Poor's ("S&P") or "P-1" or "P-2" by Moody's Investors Service ("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.
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.
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 debt securities will be valued in accordance with procedures established by the Board, 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 Fund. Under normal market conditions, the Convertible Fund invests at least 80% of its total assets in debt securities rated investment grade by at least one NRSRO. The Fund also may invest up to 20% in securities that are either not rated or rated below investment grade
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. Each Tax-Exempt Fixed Income Fund may invest up to 20% of its total assets in loan participations.
U.S. Government Securities.
U.S. Government Securities 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. The Balanced Fund may invest up to 60% of its total assets in U.S. government securities. The Convertible Fund may invest up to 35% of its total assets in these securities. Each of the Ohio Municipal Money Market Fund, the Tax-Exempt Fixed Income Funds, and the Diversified Stock,
Established Value, Focused Growth, Small Company Opportunity, Special Value, Stock Index (only U.S. Treasuries) and Value Funds may invest up to 20% of its total assets in U.S. government securities.
Wholly-Owned Government Corporations include: (A) the Commodity Credit Corporation; (B) the Community Development Financial Institutions Fund; (C) the Export-Import Bank of the United States; (D) the Federal Crop Insurance Corporation; (E) Federal Prison Industries, Incorporated; (F) the Corporation for National and Community Service; (G) GNMA; (H) the Overseas Private Investment Corporation; (I) the Pennsylvania Avenue Development Corporation; (J) the Pension Benefit Guaranty Corporation; (K) the Rural Telephone Bank until the ownership, control and operation of the Bank are converted under section 410(a) of the Rural Electrification Act of 1936 (7 U.S.C. 950(a)); (L) the Saint Lawrence Seaway Development Corporation; (M) the Secretary of Housing and Urban Development when carrying out duties and powers related to the Federal Housing Administration Fund; (N) the Tennessee Valley Authority ("TVA"); (O) the Panama Canal Commission; and (P) the Alternative Agricultural Research and Commercialization Corporation.
The Tennessee Valley Authority, a federal corporation and the nation's largest public power company, issues a number of different power bonds, quarterly income debt securities ("QUIDs") and discount notes to provide capital for its power program. TVA bonds include: global and domestic power bonds, valley inflation-indexed power securities, which are indexed to inflation as measured by the Consumer Price Index; and put-able automatic rate reset securities, which are 30-year non-callable securities. QUIDs pay interest quarterly, are callable after five years and are due at different times. TVA discount notes are available in various amounts and with maturity dates less than one year from the date of issue. Although TVA is a federal corporation, the U.S. government does not guarantee its securities, although TVA may borrow under a line of credit from the U.S. Treasury.
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.
"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.
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). Each Tax-Exempt Fixed Income Fund may invest in refunding contracts without limit.
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. The Core Bond Fund may invest in tax, revenue and bond anticipation notes without limit.
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. Litigation or other conditions may materially adversely affect the power or ability of an issuer to meet its obligations for the payment of interest on and principal of its municipal securities. 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.
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). Each Tax-Exempt Fixed Income Fund may invest in revenue bonds and resource recovery bonds without limit.
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 that 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 non-cancelable and continue in force as long as the municipal bonds are outstanding and the respective insurers remain in business.
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 the investment objective and policies of each Tax-Exempt Fixed Income Fund. In meeting its investment policies, such a Fund may invest part of its total assets in municipal securities that are private activity bonds. Moreover, although no such 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 that 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.
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.
Banking. In addition, there are certain risks associated with the concentration of investments in the banking industry when municipal securities are credit enhanced by bank letters of credit. or guaranteed by banks, which could occur in the Ohio Municipal Money Market Fund. These investments may be susceptible to adverse events affecting the banking industry.
Municipal Lease Obligations and participation interests therein, 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, a Fund 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. Each Tax-Exempt Fixed Income Fund may invest up to 30% of its total assets in municipal lease obligations.
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 Tax-Exempt Fixed Income Fund currently intends to invest in below-investment grade municipal securities. However, each Tax-Exempt Fixed Income 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 believes accurately reflects fair value. The impact of changing investor perceptions may be especially pronounced in markets where municipal securities are thinly traded.
A Tax-Exempt Fixed Income 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 Tax-Exempt Fixed Income Fund intends to invest in securities whose interest is federally taxable; however, from time to time, such a 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, such a 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. Each such Fund may invest up to 20% of its total assets in taxable obligations. In addition, the Tax-Free Money Market Fund may invest up to 20% of its total assets in taxable obligations.
Should a Tax-Exempt Fixed Income Fund invest in federally taxable obligations, it would purchase securities that 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. These 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 such a 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.
The Tax-Exempt Fixed Income 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, such a Fund may hold cash that is not earning income. In addition, there may be occasions when, in order to raise cash to meet redemptions, such a 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 Fund 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.
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 disposal 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 that 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 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 (the "IRS") 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.
Additional Information Concerning Ohio Issuers. The Ohio Municipal Bond Fund and the Ohio 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 the Ohio 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.
Much of this information is as of December 19, 2005, particularly debt figures and other statistics.
Ohio is the seventh most populous state. The Census count for 2000 was 11,353,140, up from 10,847,100 in 1990.
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 machinery, including electrical machinery. 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 a significant portion of total employment in agribusiness.
In earlier 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, then through 1998 the annual State rates were below the national rates (4.3% vs. 4.5% in 1998), were again slightly higher in 1999 (4.3% vs. 4.2%) and 2000 (4.0% vs. 4.0%), lower in 2001 (4.2% vs. 4.7%) and in 2002 (5.7% vs. 5.8%) and higher in 2003 (6.1% vs. 6.0%) and in 2004 (6.0% vs. 5.5%). In October 2005, the State unemployment rate was higher than the national rate (5.9% vs. 5.0%). 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 or the Ohio 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 effectively 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 such as the current fiscal biennium. Those procedures include general and selected reductions in appropriations spending.
Recent biennium ending GRF balances were:
------------------------- -------------------------- ------------------------- ----------------------------
Cash Fund Fund Balance less
Biennium Balance Balance(a) Designated Transfers(b)
========================= ========================== ========================= ============================
1994-95 $1,312,234,000 $928,019,000 $70,000,000
------------------------- -------------------------- ------------------------- ----------------------------
1996-97 1,367,750,000 834,933,000 149,033,000
------------------------- -------------------------- ------------------------- ----------------------------
1998-99 1,512,528,000 976,778,000 221,519,000
------------------------- -------------------------- ------------------------- ----------------------------
2000-01 817,069,000 219,414,000 206,310,000
------------------------- -------------------------- ------------------------- ----------------------------
2002-03 396,539,000 52,338,000 52,338,000
------------------------- -------------------------- ------------------------- ----------------------------
2004-05 1,209,200,000 682,632,000 127,800,000
------------------------- -------------------------- ------------------------- ----------------------------
|
(a) Reflects the ending cash balance less amounts encumbered to cover financial commitments made prior to the end of the fiscal year.
(b) Reflects the ending fund balance less amounts designated for transfer from that balance to the BSF and any other funds.
Actions have been and may be taken by the State during less favorable economic periods to ensure resource/expenditure balances (particularly in the GRF), some of which are described below. None of those actions were or are being applied to appropriations or expenditures needed for debt service or lease payments relating to any State obligations.
The appropriations acts for the 2006-07 biennium include all necessary appropriations for debt service on State obligations and for lease payments relating to lease rental obligations issued by the Ohio Building Authority and the Treasurer of State, and previously by the Ohio Public Facilities Commission.
The following is a selective general discussion of State finances, particularly GRF receipts and expenditures, for the recent and the current bienniums.
1994-95. Expenditures were below those authorized, primarily as the result of lower than expected Medicaid spending, and tax receipts (primarily auto sales and use) were significantly above estimates. Transfers from the biennium-ending GRF fund balance included $535,200,000 to the BSF and $322,800,000 to other funds, including a family services stabilization fund in anticipation of possible federal programs changes.
1996-97. From a higher than forecasted mid-biennium GRF fund balance, $100,000,000 was transferred for elementary and secondary school computer network purposes and $30,000,000 to a new State transportation infrastructure fund. Approximately $400,800,000 served as a basis for temporary 1996 personal income tax reductions aggregating that amount. Of the GRF biennium-ending fund balance, $250,000,000 was directed to school buildings, $94,400,000 to the school computer network, $44,200,000 to school textbooks and instructional materials and a distance learning program, $34,400,000 to the BSF, and $262,900,000 to the State Income Tax Reduction Fund (ITRF).
1998-99. GRF appropriations of approximately $36 billion provided for significant increases in funding for primary and secondary education. Of the first Fiscal Year (ended on June 30, 1998) ending fund balance of over $1.08 billion, approximately $701,400,000 was transferred to the ITRF, $200,000,000 into public school assistance programs, and $44,184,200 into the BSF. Of the GRF biennium-ending fund balance, $325,700,000 was transferred to school building assistance, $293,185,000 to the ITRF, $85,400,000 to SchoolNet (a program to supply computers for classrooms), $4,600,000 to interactive video distance learning, and $46,374,000 to the BSF.
2000-01. The State's financial situation varied substantially in the 2000-01 biennium. The first Fiscal Year of the biennium ended with a GRF cash balance of $1,506,211,000 and a fund balance of $855,845,000. A transfer of $49,200,000 from that balance increased the BSF to $1,002,491,000 (or 5% of GRF revenue for the preceding Fiscal Year). An additional $610,400,000 was transferred to the ITRF.
In the middle of the second year of the biennium, the State enacted supplemental appropriations of $645,300,000 to address shortfalls in its Medicaid and disability assistance programs. The State's share of this additional funding was $247,600,000, with $125,000,000 coming from Fiscal Year 2001 GRF spending reductions and the remainder from available GRF moneys. The reductions were implemented by OBM prior to March 1, 2001 by a 1 to 2% cut to most State departments and agencies. Expressly excluded from the reductions were debt service and lease rental payments relating to State obligations, and elementary and secondary education.
In March 2001, new lowered revenue estimates for Fiscal Year 2001 and for Fiscal Years 2002 and 2003 were announced. Based on indications that the Ohio economy continued to be affected by the national economic downturn, GRF revenue estimates for Fiscal Year 2001 were reduced by $288,000,000. In addition, OBM projected higher than previously anticipated Medicaid expenditures. Among the more significant steps taken to ensure the positive GRF ending fund balance at June 30, 2001 were further spending reductions (with the same exceptions mentioned above for debt service and education) and authorization to transfer from the BSF to the GRF amounts necessary to ensure an ending GRF fund balance of $188,200,000. The State ended Fiscal Year 2001 with a GRF fund balance of $219,414,000, making that transfer unnecessary.
2002-03. Ongoing and rigorous consideration was given by the Governor and the General Assembly to revenues and expenditures throughout Fiscal Years 2002-03, primarily as a result of continuing weak economic conditions. Budgetary pressures during this period were primarily due to continuing lower than previously anticipated levels of receipts from certain major revenue sources.
Consideration came in four general time frames - the June 2001 biennial appropriation act, late fall/early winter 2001, late spring and summer 2002, and late winter/spring 2003. Significant remedial steps included authorization to draw down and use the entire BSF balance, increased cigarette taxes, and use of tobacco settlement moneys previously earmarked for other purposes.
The biennial GRF appropriations act passed in June 2001 provided for biennial GRF expenditures of approximately $45.1 billion without increases in any major State taxes. That Act and the separate appropriations acts for the biennium included all necessary debt service and lease rental payments related to State obligations. That original appropriations act also provided for the following uses of certain reserves, aimed at achieving Fiscal Year and biennium ending positive GRF fund balances, based on then current estimates and projections:
o Transfer of up to $150,000,000 from the BSF to the GRF for increased
Medicaid costs.
o An additional $10,000,000 transfer from the BSF to an emergency
purposes fund.
o Transfer to the GRF in Fiscal Year 2002 of the entire $100,000,000
balance in the Family Services Stabilization Fund.
The Ohio economy continued to be negatively affected by the national economic downturn and by national and international events, and in October 2001 OBM lowered its GRF revenue estimates. Based on reduced revenue collections, particularly personal income and sales and use taxes, OBM then projected GRF revenue shortfalls of $709,000,000 for Fiscal Year 2002 and $763,000,000 for Fiscal Year 2003. Executive and legislative actions taken to address those shortfalls included:
o Spending reductions and limits on hiring and major purchases. Governor ordered spending reductions at the annual rate of 6% for most State agencies, with lesser reductions for correctional and other institutional agencies, and with exemptions for debt service related payments, primary and secondary education and the adjutant general.
o December 2001 legislation, the more significant aspects of which included:
o Authorizing transfer of up to $248,000,000 from the BSF to the
GRF during the current biennium. This was in addition to the
$160,000,000 in transfers from the BSF provided for in the
original appropriations act (and would reduce the BSF balance
to approximately $607,000,000).
o Reallocating to the GRF a $260,000,000 portion of tobacco
settlement receipts in Fiscal Years 2002 and 2003, intended to
be replenished from settlement receipts in Fiscal Years
2013-14.
o Authorizing Ohio's participation in a multi-state lottery
game, estimated to generate $40,000,000 annually beginning in
Fiscal Year 2003.
Continuing weak economic conditions, among other factors, then led OBM in the spring of 2002 to project a higher than previously estimated GRF revenue shortfall. Among areas of continuing concern were lower than anticipated levels of receipts from personal income and corporate franchise taxes. These additional GRF estimated shortfalls were approximately $763,000,000 in Fiscal Year 2002 and $1.15 billion in Fiscal Year 2003. Further executive and legislative actions were taken for Fiscal Year 2002 to ensure a positive GRF fund balance for Fiscal Year 2002 and the biennium. In addition to further appropriation reductions for certain departments and other management steps, those actions included legislation providing for among other things:
o Authorization of additional transfers to the GRF of the then remaining BSF balance ($607,000,000) as needed in Fiscal Years 2002 and 2003, and of $50,800,000 of unclaimed funds.
o $50,000,000 reduction in the Fiscal Year 2002 ending GRF balance (to $100,000,000 from its previously budgeted level of $150,000,000).
o Increased cigarette tax by 31(cent) per pack (to a total 55(cent) a pack), estimated by OBM to produce approximately $283,000,000 in Fiscal Year 2003.
o Transfers to the GRF of $345,000,000 from tobacco settlement moneys received in Fiscal Years 2002 and 2003 previously earmarked for construction of elementary and secondary school facilities, with moneys for that purpose replaced by $345,000,000 in additionally authorized general obligation bonds.
o Extension of the State income tax to Ohio-based trusts and exemption of certain Ohio business taxes from recent federal tax law economic stimulus changes by "decoupling" certain State statutes from federal tax law changes affecting business equipment depreciation schedules. The combination produced approximately $283,000,000 in Fiscal Year 2003.
Fiscal Year 2002 ended with positive GRF balances of $108,306,000 (fund) and $619,217,000 (cash). This was accomplished by the remedial steps described above, including significant transfers from the BSF ($534,300,000) and from tobacco settlement moneys ($289,600,000). The Fiscal Year 2002 ending BSF balance was $427,904,000, with that entire balance appropriated for GRF use if needed in Fiscal Year 2003.
On July 1, 2002, the Governor issued an executive order directing a total of approximately $375,000,000 in GRF spending cutbacks for Fiscal Year 2003 (based on prior appropriations) by agencies and departments in his administration, as well as limitations on hiring, travel and major purchases. This cutback order reflected prior budget balancing discussions between the Governor and General Assembly and reflected annual cutbacks ranging generally from 7.5% to 15%. Excluded from those cutbacks were elementary and secondary education, higher education, alcohol and drug addiction services, and the adjutant general. Also expressly excluded were debt service and lease rental payments relating to State obligations, and ad valorem property tax relief payments (made to local taxing entities).
Based on continuing reduced revenue collections (particularly, personal income taxes and sales tax receipts for the holidays) and projected additional Medicaid spending, OBM in late January 2003 announced an additional
GRF shortfall of $720,000,000 for Fiscal Year 2003. The Governor ordered immediate additional reductions in appropriations spending intended to generate an estimated $121,600,000 of GRF savings through the end of the Fiscal Year (expressly excepted were appropriations for or relating to debt service on State obligations).
The Governor also proposed for the General Assembly's enactment by March 1, 2003, the following additional revenue enhancements, transfers and expenditure reductions for Fiscal Year 2003 to achieve a positive GRF fund balance at June 30, 2003 as then estimated by OBM:
o A 2.5% reduction in local government fund distributions to most subdivisions and local libraries, producing an estimated $30,000,000 savings. This reduction is in addition to the prior local government fund distribution adjustments noted below.
o Transfers to the GRF from unclaimed funds ($35,000,000) and various rotary funds ($21,400,000).
o A one-month acceleration in sales tax collections by vendors filing electronically, to produce $286,000,000.
o An additional increase in the cigarette tax of 45 cents per pack (to a total of $1.00 a pack), to produce approximately $140,000,000.
o A doubling of the current taxes on spirituous liquor and beer and wine, to net an additional $18,700,000.
The General Assembly gave its final approval on February 25, 2003 to legislation authorizing the first three elements of the Governor's proposal, but that legislation did not include the proposed additional taxes on cigarettes and spirituous liquor and beer and wine. To offset the General Assembly's enactment of legislation that did not include the proposed additional taxes on cigarettes and liquor, beer and wine, the Governor on March 25 ordered additional reductions in GRF appropriations spending aggregating $142.5 million for the balance of Fiscal Year 2003. Included were reductions (generally at an annualized rate of 2.5%) of $90.6 million in State foundation and parity aid to school districts and an additional $9.3 million in Department of Education administration spending, $39.2 million in instructional support to higher education institutions, and other selected reductions totaling $3.4 million. The Governor also identified approximately $20 million in excess food stamp administration funds available to offset the need for further expenditure reductions. Expressly excepted from those reductions were appropriations for or relating to debt service on State obligations.
Based on the Administration's continuing monitoring of revenues, and as an anticipated step in the then ongoing 2004-05 biennial budget and appropriations process, OBM reported revised revenue estimates to the General Assembly on June 11, 2003. Those estimates revised Fiscal Year 2003 revenues downward by an additional $200,000,000 from OBM's January 2003 adjusted baseline, based primarily on updated income and sales tax receipts through May 31. The Governor and OBM addressed this additional Fiscal Year 2003 revenue shortfall through additional expenditure controls and by drawing upon $193,030,000 of federal block grant aid made available to the State prior to June 30 under a federal law effective on May 28, 2003.
The State ended the 2002-03 biennium with a GRF fund and cash balances of
$52,338,000 and $396,539,000, respectively, and a balance in the BSF of
$180,705,000.
|
Additional appropriations actions during the 2002-2003 biennium, affecting most subdivisions and local libraries in the State, relate to the various local government assistance funds. The original appropriations act capped the amount to be distributed in Fiscal Years 2002 and 2003 to essentially the equivalent monthly payment amounts in Fiscal Years 2000 and 2001. Subsequent legislation amended the level to the lesser of those prior Fiscal Year amounts or the amount that would have been distributed under the standard formula.
2004-05. The GRF appropriations act for the 2004-05 biennium was passed by the General Assembly and signed (with selective vetoes) by the Governor in June 2003. The Act provided for total GRF biennial revenue of approximately $48.95 billion and total GRF biennial expenditures of approximately $48.79 billion. That Act and the separate appropriations acts for the biennium included all necessary debt service and lease-rental payments related to State obligations.
Among other expenditure controls, the Act included Medicaid cost containment measures including pharmacy cost management initiatives, limited expenditure growth for institutional services and implementation of managed care for higher-cost populations; continued phase-out of certain tangible personal property tax relief payments to local governments; the closing by consolidation of three institutional facilities during the biennium; adjustments in eligibility guidelines for subsidized child care from 185% to 150% of the federal poverty level and freezing certain reimbursement rates; no compensation increases for most State employees in Fiscal Year 2004 and limited one-time increases in Fiscal Year 2005; and continued limitation on local government assistance fund distributions to most subdivisions and local libraries to the lesser of the equivalent monthly payments in Fiscal Year 2003 or the amount that would have been distributed under the standard formula.
The GRF expenditure authorizations for the 2004-05 biennium reflected and were supported by revenue enhancement actions contained in the Act including:
o A one-cent increase in the State sales tax (to six percent) for the
biennium (expiring June 30, 2005), projected to generate
approximately $1.25 billion in each Fiscal Year.
o Expansion of the sales tax base to include dry-cleaning/laundry
services, towing, personal care and other services, and satellite
television, projected in the aggregate to produce approximately
$69,000,000 annually. (The inclusion of satellite television in the
sales tax base, projected to produce approximately $21,000,000
annually, is subject to an ongoing legal challenge.)
o Moving local telephone companies from the public utility tax base to
the corporate franchise and sales tax, projected to produce
approximately $29,000,000 annually.
o Elimination of the sales tax exemption for WATS and 800 telecom
services coupled with the enactment of a more limited exemption for
call centers, projected to produce approximately $64,000,000
annually.
o Adjustments in the corporate franchise tax through the adoption of
the Uniform Division of Income for Tax Purposes Act (UDITPA) for
apportionment of business income among states, and an increase in
the corporate alternative minimum tax, projected in the aggregate to
produce approximately $35,000,000 annually.
The Act also authorized and OBM on June 30, 2004 transferred $234,700,000 of proceeds received from the national tobacco settlement into the GRF. In addition, the Act authorized the draw down during the biennium of federal block grant and Medicaid assistance aid made available to the State under a federal law effective May 28, 2003. OBM drew down $211,600,000 and $316,800,000 of those federal monies in Fiscal Years 2004 and 2005, respectively.
Based on regular monitoring of revenues and expenditures, OBM in March 2004 announced revised GRF revenue projections for Fiscal Years 2004 and 2005 based primarily on reduced revenue collections from personal income taxes. In response to OBM reducing its GRF revenue projection by $247,100,000 (1.02%) for Fiscal Year 2004 and by $372,700,000 (1.48%) for Fiscal Year 2005, the Governor ordered Fiscal Year 2004 expenditure reductions of approximately $100,000,000. On July 1, the Governor ordered additional Fiscal Year 2005 expenditure cuts of approximately $118,000,000 and a reduction of $50,000,000 in State spending on Medicaid reflecting an increased Federal share of certain Medicaid services. Expressly excluded from those reductions were debt service and lease rental payments relating to State obligations, State basic aid to elementary and secondary education, instructional subsidies and scholarships for public higher education, in-home care for seniors and certain job creation programs. The balance of those revenue reductions were offset by GRF expenditure lapses and, for Fiscal Year 2005, elimination of an anticipated $100,000,000 year-end transfer to the BSF while maintaining a one-half percent year-end GRF fund balance.
The State ended Fiscal Year 2004 with a GRF fund balance of $157,509,000.
Improving economic conditions had a positive effect on revenue in Fiscal Year
2005. With GRF revenue receipts modestly outperforming estimates for much of the
Fiscal Year, OBM in June 2005 increased its GRF revenue estimates by
$470,700,000. Final Fiscal Year 2005 GRF revenue came in $67,400,000 above that
revised estimate. With Fiscal Year 2005 spending close to original estimates,
the State made the following Fiscal Year-end allocations and transfers:
$60,000,000 to address a prior-year liability in the Temporary Assistance to
Needy Families program;
$40,000,000 to a disaster services contingency fund; $50,000,000 to the State's share of the school facilities construction program; and $394,200,000 to the BSF. After these and certain smaller transfers, the State ended Fiscal Year 2005 and the biennium with a GRF fund balance of $127,800,000 and a BSF balance of $574,205,000.
Current Biennium. Consistent with State law, the Governor's Executive
Budget for the 2006-07 biennium was released in February 2005 and introduced in
the General Assembly. After extended hearings and review, the GRF appropriations
Act for the 2006-07 biennium was passed by the General Assembly and signed (with
selective vetoes) by the Governor on June 30, 2005. That Act provides for total
GRF biennial revenue of approximately $51.5 billion (a 3.8% increase over the
2004-05 biennial revenue) and total GRF biennial appropriations of approximately
$51.3 billion (a 5.0% increase over the 2004-05 biennial expenditures). Spending
increases for major program categories over the 2004-05 actual expenditures are:
5.8% for Medicaid (the Act also included a number of Medicaid reform and cost
containment initiatives); 3.4% for higher education; 4.2% for elementary and
secondary education; 5.5% for corrections and youth services; and 4.8% for
mental health and mental retardation. The Executive Budget, the GRF
appropriations Act and the separate appropriations acts for the biennium
included all necessary debt service and lease rental payments related to State
obligations.
The GRF expenditure authorizations for the 2006-07 biennium reflect and are supported by a significant restructuring of major State taxes, including:
o A 21% reduction in State personal income tax rates phased in at 4.2%
per year over the 2005 through 2009 tax years.
o Phased elimination of the State corporate franchise tax at a rate of
approximately 20% per year over the 2006 through 2010 tax years
(except for its continuing application to financial institutions and
certain affiliates of insurance companies and financial
institutions).
o Implementation of a new commercial activities tax (CAT) on gross
receipts from doing business in Ohio that will be phased in over the
2005 through 2009 fiscal years. When fully phased in, the CAT will
be levied at a rate of 0.26% on gross receipts in excess of
$1,000,000.
o A 5.5% State sales and use tax (decreased from the 6.0% rate for the
2004-05 biennium).
o An increase in the cigarette tax from $0.55 per pack (of 20
cigarettes) to $1.25 per pack.
OBM continually monitors and analyzes revenues and expenditures and prepares a financial report summarizing its analyses at the end of each month. The most recent Monthly Financial Reports are accessible via OBM's home page on the Internet at http://www.obm.ohio.gov/finrep, and copies are available upon request to OBM.
Litigation pending in the Ohio Court of Claims contests the Ohio Department of Human Services (ODHS, now Ohio Department of Job and Family Services (ODJFS)) former Medicaid financial eligibility rules for married couples when one spouse is living in a nursing facility and the other resides in the community. ODHS promulgated new eligibility rules effective January 1, 1996. ODHS appealed an order of the federal court directing it to provide notice to persons potentially affected by the former rules from 1990 through 1995, the Court of Appeals ruled in favor of ODHS, and plaintiffs' petition for certiorari was not granted by the U.S. Supreme Court. As to the Court of Claims case, it is not possible to state the period (beyond the current Fiscal Year) during which necessary additional Medicaid expenditures would have to be made. Plaintiffs have estimated total additional Medicaid expenditures at $600,000,000 for the retroactive period and, based on current law, it is estimated that the State's share of those additional expenditures would be approximately $240,000,000. The Court of Appeals certified the class action and notice was sent to the members of the class. After trial for liability only was completed in the Court of Claims in January 2003, that Court in March 2004 issued a decision finding no ODJFS liability. The plaintiff class appealed that decision to the Franklin County Court of Appeals which in May 2005 held that the Court of Claims did not have jurisdiction over the case and remanded the case to the Court of Claims with instructions to vacate all prior proceedings and judgments. The plaintiff class has appealed the Court of Appeals decision to the Ohio Supreme Court and that appeal is currently pending.
Litigation is also currently pending in the Cuyahoga County Court of Appeals relating to the transfer to the GRF and use in Fiscal Year 2002 for general State purposes of $60,000,000 in earned federal reimbursement on Title XX (Social Services Block Grant) expenditures. Plaintiff Cuyahoga County filed an action contesting this
transfer and use of those monies for general State purposes, and the trial court ordered the State to return the monies to its Department of Job and Family Services. The State appealed the trial court's decision and order. In June 2005, the Court of Appeals upheld the trial court's decision. The State has appealed the Court of Appeals decision to the Ohio Supreme court and that appeal is currently pending.
The incurrence or assumption of debt by the State without a popular vote is, with limited exceptions, prohibited by the State Constitution. The State may incur debt to cover casual deficits or to address failures in revenues or to meet expenses not otherwise provided for, but limited in amount to $750,000. The Constitution expressly precludes the State from assuming the debts of any county, city, town or township, or of any corporation. (An exception in both cases is for debts incurred to repel invasion, suppress insurrection, or defend the State in war.) The Constitution provides that "Except the debts above specified . . . no debt whatever shall hereafter be created by, or on behalf of the state."
By 18 constitutional amendments approved from 1921 to present, Ohio voters have authorized the incurrence of State general obligation (GO) debt and the pledge of taxes or excises to its payment. All related to the financing of capital facilities, except for three that funded bonuses for veterans and one that funded coal technology research and development. Currently, tax supported general obligation debt of the State is authorized to be incurred for the following purposes: highways, local infrastructure, coal development, natural resources, higher education, common schools, and conservation. Although supported by the general obligation pledge, highway debt is backed by a pledge of and has always been paid from the State's motor fuel taxes and other highway user receipts that are constitutionally restricted in use to highway related purposes.
A 1999 constitutional amendment provides an annual debt service "cap" applicable to future issuances of State general obligations and other State direct obligations payable from the GRF or net State lottery proceeds. Generally, and except for the additional $650,000,000 of general obligation debt approved by the voters at the November 8, 2005 election for research and commercialization and the development of sites for industry, commerce, distribution and research and development, new bonds may not be issued if future Fiscal Year debt service on those new and the then outstanding bonds of those categories would exceed 5% of the total estimated GRF revenues plus net State lottery proceeds during the Fiscal Year of issuance. Those direct obligations of the State include, for example, special obligation bonds that are paid from GRF appropriations, but exclude bonds such as highway bonds that are paid from highway user receipts. Pursuant to the amendment and implementing legislation, the Governor has designated the OBM Director as the State official to make the 5% determinations and certifications. Application of the cap may be waived in a particular instance by a three-fifths vote of each house of the General Assembly and may be changed by future constitutional amendments.
In addition to its issuance of highway bonds, the State has financed selected highway infrastructure projects by issuing bonds and entering into agreements that call for debt service payments to be made from federal transportation funds allocated to the State, subject to biennial appropriations by the General Assembly. Annual State payments under those agreements reach a maximum of $77,800,448 in Fiscal Year 2006. In the event of any insufficiency in those anticipated federal allocations to make payments on State bonds, the payments are to be made from any lawfully available federal moneys appropriated to ODOT for the purpose, and in the case of continued insufficiency the ODOT Director is to request a General Assembly appropriation for the purpose.
State agencies also have participated in office building and non-highway transportation projects that have local as well as State use and benefit, in connection with which the State has entered into lease-purchase agreements with terms ranging from 7 to 20 years. Certificates of Participation (COPs) have been issued in connection with those agreements that represent fractionalized interests in and are payable from the State's anticipated payments. The maximum annual payment under those agreements, primarily made from GRF appropriations, is $11,718,700 in Fiscal Year 2017. Payments by the State are subject to biennial appropriations by the General Assembly with the lease terms subject to renewal if appropriations are made. Generally, the OBM Director's approval of such agreements is required, particularly if COPs are to be publicly-offered in connection with those agreements.
A statewide economic development program assists the financing of facilities and equipment for industry, commerce, research and distribution, including technology innovation, by providing loans and loan guarantees. The law authorizes the issuance of State bonds and notes secured by a pledge of portions of the State profits from liquor sales. The General Assembly has authorized the issuance of these obligations with a general maximum of
$500,000,000 to be outstanding at any one time. The aggregate amount from the liquor profits to be used in any Fiscal Year in connection with these bonds may not exceed $45,000,000. The total of unpaid guaranteed loan amounts and unpaid principal of direct loans may not exceed $800,000,000. A 1996 issue of $168,740,000 of taxable bonds refunded outstanding bonds and provided additional loan moneys for facilities and equipment (i.e., the State's direct loan program). $101,980,000 of taxable forward purchase bonds were issued in 1998 to refund, as of 2006, term bonds of the 1996 issue stated to mature in 2016 and 2021. In 2003, the State issued $50,000,000 in bonds for Innovation Ohio projects and $50,000,000 for research and development projects, followed by a 2004 issuance of $50,000,000 for its direct loan program and a 2005 issuance for research and development projects. Pursuant to a 2000 constitutional amendment, the State has issued a first series of $50,000,000 of bonds for revitalization purposes that are also payable from State liquor profits. The maximum annual debt service on all state bonds payable from State liquor profits is $34,813,358 in Fiscal Year 2007.
Certain State agencies issue revenue bonds that are payable from revenues from or relating to revenue producing facilities, such as those issued by the Ohio Turnpike Commission. By judicial interpretation, such revenue bonds do not constitute "debt" under the constitutional provisions described above. The Constitution authorizes State bonds for certain housing purposes (issued by the Ohio Housing Finance Agency) to which tax moneys may not be obligated or pledged.
Litigation was commenced in the Ohio courts in 1991 questioning the constitutionality of Ohio's system of school funding and compliance with the constitutional requirement that the State provide a "thorough and efficient system of common schools". On December 11, 2002, the Ohio Supreme Court, in a 4-3 decision on a motion to reconsider its own decision rendered in September 2001, concluded (as it had in its 1997 and 2000 opinions in that litigation) that the State did not comply with that requirement, even after again noting and crediting significant State steps in recent years.
In its prior decisions, the Ohio Supreme Court stated as general base threshold requirements that every school district have enough funds to operate, an ample number of teachers, sound and safe buildings, and equipment sufficient for all students to be afforded an educational opportunity.
With particular respect to funding sources, the Court concluded in 1997 and 2000 decisions that property taxes no longer may be the primary means of school funding in Ohio.
On March 4, 2003, the plaintiffs filed with the original trial court a motion to schedule and conduct a conference to address compliance with the orders of the court in that case, the State petitioned the Ohio Supreme Court to issue a writ prohibiting that conference on compliance, and the trial court subsequently petitioned the Ohio Supreme Court for guidance as to the proper course to follow. On May 16, 2003, the Ohio Supreme Court granted that writ and ordered the dismissal of the motion before the trial court. And on October 20, 2003 the United States Supreme Court declined to accept the plaintiffs subsequent petition requesting further review of the case.
The General Assembly has taken several steps, including significantly increasing State funding for public schools. In addition, at the November 1999 election electors approved a constitutional amendment authorizing the issuance of State general obligation debt for school buildings and for higher education facilities. December 2000 legislation addressed certain mandated programs and reserves, characterized by the plaintiffs and the Court as "unfunded mandates."
Under the current financial structure, Ohio's 613 public school districts and 49 joint vocational school districts receive a major portion (but less than 50%) of their operating moneys from State subsidy appropriations (the primary portion of which is known as the Foundation Program) distributed in accordance with statutory formulae that take into account both local needs and local taxing capacity. The Foundation Program amounts have steadily increased in recent years, including small aggregate increases even in those Fiscal Years in which appropriations cutbacks were imposed.
School districts also rely upon receipts from locally voted taxes. In part because of provisions of some State laws, such as that partially limiting the increase (without further vote of the local electorate) in voted property tax collections that would otherwise result from increased assessed valuations, some school districts have expressed varying degrees of difficulty in meeting mandated and discretionary increased costs. Local electorates have largely
determined the total moneys available for their schools. Locally elected boards of education and their school administrators are responsible for managing school programs and budgets within statutory requirements.
The State's present school subsidy formulas are structured to encourage both program quality and local taxing effort. Until the late 1970's, although there were some temporary school closings, most local financial difficulties that arose were successfully resolved by the local districts themselves by some combination of voter approval of additional property tax levies, adjustments in program offerings, or other measures. For more than 20 years, requirements of law and levels of State funding have sufficed to prevent school closings for financial reasons, which in any case are prohibited by current law.
To broaden the potential local tax revenue base, local school districts also may submit for voter approval income taxes on the district income of individuals and estates (and effective July 1, 2005, municipal income taxes that may be shared with school districts). Many districts have submitted the question, and income taxes are currently approved in 145 districts.
Original State basic aid appropriations for the 1992-93 biennium of $9.5 billion provided for 1.5% and 4.8% increases in the two Fiscal Years of the biennium over appropriations in the preceding biennium which were subject to State spending reductions for Fiscal Year 1992 of 2.5% of annual Foundation Program appropriations. There were no reductions for the 172 districts with the lowest per pupil tax valuations, and the reductions were in varying amounts with varying effects for the other districts. Foundation payments were excluded from the then Governor's spending reduction order for Fiscal Year 1993.
Biennial school funding State appropriations from the GRF and Lottery Profits Education Fund (but excluding federal and other special revenue funds) for recent biennia were:
o 1994-95 - $8.9 billion provided for 2.4% and 4.6% increases,
respectively, in State aid in the biennium's two Fiscal Years.
o 1996-97 - $10.1 billion representing a 13.6% increase over the
preceding biennium total.
o 1998-99 - $11.6 billion (18.3% over the previous biennium).
o 2000-01 - $13.3 billion (15% over the previous biennium).
o 2002-03 - $15.2 billion (17% over the previous biennium before the
expenditure reductions).
o 2004-05 - $15.7 billion (3.3% over the previous biennium before the
expenditure reductions).
State appropriations for the purpose made for the 2006-07 biennium are $16.3 billion (3.8% over the previous biennium), representing an increase of 2.0% in Fiscal Year 2006 over 2005 and 1.4% in Fiscal Year 2007 over 2006.
Those total State 2006-07 biennial appropriations exclude non-GRF and federal appropriations, but include appropriations from the GRF and the lottery profits education fund (LPEF). The amount of lottery profits transferred to the LPEF totaled $635,150,000 in Fiscal Year 2002, $671,352,000 in Fiscal Year 2003, and $648,106,000 in Fiscal Year 2004 and $645,137,000 in Fiscal Year 2005. Ohio's participation in the multi-state lottery commenced in May 2002. A constitutional provision requires that net lottery profits be paid into LPEF to be used solely for the support of elementary, secondary, vocational and special education purposes, including application to debt service on general obligation bonds to finance common school facilities.
In response to the 1997 Ohio Supreme Court decision holding certain provisions for local school district borrowing unconstitutional, the General Assembly created the school district solvency assistance program. Beginning in Fiscal Year 1999, local school districts in fiscal emergency status as certified by the Auditor of State could apply for an advancement of future year Foundation Program distributions. The amount advanced was then deducted, interest free, from the district's foundation payments over the following two-year period. Six school districts received a total of approximately $12,100,000 in solvency assistance advancements during Fiscal Year 1999, with another six districts receiving a total of approximately $8,657,000 in Fiscal Year 2000. This solvency assistance program was held to be not in compliance with the Constitution by the Supreme Court. In Fiscal Year 2001 four districts received approximately $3,800,000 under a restructured solvency assistance program. The program was further modified in December 2000 to allow districts that experience an unforeseen catastrophic event
to apply for a grant. In Fiscal Year 2002, three districts received catastrophic grants totaling $2,569,970 and one district received a solvency advance in the amount of $421,000. In Fiscal Year 2003, three districts received solvency advances in the amount of $8,742,000 and no districts received catastrophic grants.
Legislation was enacted in 1996 to address school districts in financial straits. It is similar to that for municipal "fiscal emergencies" and "fiscal watch", but is particularly tailored to certain school districts and their then existing or potential fiscal problems. There are currently ten school districts in fiscal emergency status and twelve in fiscal watch status. New legislation has created a third, more preliminary, category of "fiscal caution." A current listing of school districts in each status is on the Internet at http://www.auditor.state.oh.us.
Ohio's 943 incorporated cities and villages rely primarily on property and municipal income taxes to finance their operations. With other subdivisions, they also receive local government support and property tax relief moneys from State resources.
For those few municipalities and school districts that on occasion have faced significant financial problems, there are statutory procedures for a commission composed of State and local officials, and private sector members experienced in business and finance appointed by the Governor 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.) Fifteen municipalities and two townships are in "fiscal emergency" status and six municipalities in 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 local taxing districts. The Constitution has since 1934 limited the amount of the aggregate levy of ad valorem property taxes on particular property, without a vote of the electors or municipal charter provision, to 1% of true value in money, and statutes limit the amount of that aggregate levy without a vote or charter provision to 10 mills per $1 of assessed valuation -- commonly referred to in the context of Ohio local government finance as the "ten-mill limitation."
Mortgage- and Asset-Backed Securities.
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. Each Money Market Fund may invest in mortgage-backed securities without limit. The Balanced Fund may invest up to 40% of its total assets in mortgage-backed securities. Each Tax-Exempt Fixed Income Fund and the Convertible Fund may invest up to 35% of its total assets in tax-exempt mortgage-backed securities. The Diversified Stock Fund may invest up to 20% of its total assets in these securities.
Federal Farm Credit Bank Securities. A U.S. government-sponsored institution, the Federal Farm Credit Bank ("FFCB") 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 FFCB 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. FFCB 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, FHLB, created in 1932, supplies credit reserves to savings and loans, cooperative banks and other mortgage lenders. 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, although FHLB may borrow under a line of credit from the U.S. Treasury.
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 FFCB 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.
GNMA is the principal governmental (i.e., backed by the full faith and credit of the U.S. government) guarantor of mortgage-backed securities. 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, which 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 are mortgage-backed securities that 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.
A Fund may purchase construction loan securities, a form of GNMA certificate, that are issued to finance building costs. The funds are paid by a Fund and disbursed as needed or in accordance with a prearranged plan over a period as long as three years. The securities provide for the timely payment to the registered holder of interest at the specified rate plus scheduled installments of principal. Upon completion of the construction phase, the construction loan securities are terminated and project loan securities are issued. It is the Funds' policy to record these GNMA
certificates on the day after trade date and to segregate assets to cover its commitments on the day after trade date as well. When a Fund sells a construction loan security, the settlement of the trade is not completed as to any additional funds that are scheduled to be paid by the owner of the security until those payments are made, which may be as long as three years. During this period of time prior to settlement of the trade, the Fund's segregation of assets continues in the amount of the additional funds scheduled to be paid by the owner of the security. If the security fails to settle at any time during this period because the current owner fails to make a required additional payment of funds, the Fund could be subject to a loss similar to the loss that a seller normally is subject to upon the failed settlement of a security.
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. Although the FHLMC guarantee is not backed by the full faith and credit of the U.S. government, FHLMC may borrow under a line of credit from the U.S. Treasury.
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. Although the FNMA guarantee is not backed by the full faith and credit of the U.S. government, FNMA may borrow under a line of credit from the U.S. Treasury.
SLMA Securities. Established by federal decree in 1972 to increase the availability of education loans to college and university students, 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, although SLMA may borrow under a line of credit from the U.S. Treasury.
Collateralized Mortgage Obligations. Mortgage-backed securities 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. The Balanced Fund may invest up to 40% of its total assets in CMOs. The Convertible Fund may invest up to 35% of its total assets in CMOs. Each Tax-Exempt Fixed Income Fund may invest up to 25% of its total assets in CMOs. The Diversified Stock Fund may invest up to 20% of its total assets in these securities.
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 that 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. As a matter of investment policy, none of the Money Market Funds invests 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 that 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.
Forward Roll Transactions. A Fund can enter into "forward roll" transactions with respect to mortgage-related securities. In this type of transaction, the Fund sells a mortgage-related security to a buyer and simultaneously agrees to repurchase a similar security (the same type of security and having the same coupon and maturity) at a later date at a set price. The securities that are repurchased will have the same interest rate as the securities that are sold, but typically will be collateralized by different pools of mortgages (with different prepayment histories) than the securities that have been sold. Proceeds from the sale are invested in short-term instruments, such as repurchase agreements. The income from those investments, plus the fees from the forward roll transaction, are expected to generate income to the Fund in excess of the yield on the securities that have been sold. The Fund will only enter into "covered" rolls. To assure its future payment of the purchase price, the Fund will identify on its books liquid assets in an amount equal to the payment obligation under the roll. For financial reporting and tax purposes, the Fund treats each forward roll transaction as two separate transactions: one involving the purchase of a security and a separate transaction involving a sale. The Fund currently does not intend to enter into forward roll transactions that are accounted for as a financing.
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 that are passed through to the security holder. The Prime Obligations Fund may invest up to 25% of its total assets in asset-backed securities. Each of the Fixed Income Funds may invest up to 35% of its total assets in these securities and the Balanced Fund may invest up to 20% of its total assets in these securities.
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 Focused Growth Fund may invest up to 20% of its assets in ADRs and each of the Balanced, Convertible, Diversified Stock, Small Company Opportunity, Special Value and Value Funds may invest up to 10% of its assets in these securities.
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. The Focused Growth Fund may invest up to 20% of its total assets in foreign equity securities traded on a foreign exchange. The Balanced Fund may invest up to 10% of its total assets in these securities.
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 Adviser will be able to anticipate these potential events or counter their effects.
The considerations noted above generally are intensified for investments in developing countries. Emerging 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.
Derivatives.
Forward Contracts.
The Balanced Fund may enter into forward currency exchange contracts ("forward contracts"). A forward contract involves an obligation to buy or sell a specific currency at a future date, that may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks). The Fund may engage in cross-hedging by using forward contracts in one currency to hedge against fluctuations in the value of securities denominated in a different currency if the managers determine that there is a pattern of correlation between the two currencies. The Fund may also buy and sell forward contracts (to the extent they are not deemed "commodities") for non-hedging purposes when the managers anticipate that the foreign currency will appreciate or depreciate in value, but securities denominated in that currency do not present attractive investment opportunities and are not held in the funds' portfolio. The Fund's custodian bank will place cash or liquid high grade debt securities (securities rated in one of the top three ratings categories by Moody's or S&P or, if unrated, deemed by the managers to be of comparable quality) into a segregated account of the Fund maintained by its custodian bank in an amount equal to the value of the Fund's total assets committed to the forward foreign currency exchange contracts requiring the funds to purchase foreign currencies. If the value of the securities placed in the segregated account declines, additional cash or securities is placed in the account on a daily basis so that the value of the account equals the amount of the Fund's commitments with respect to such contracts. The segregated account is marked-to-market on a daily basis. Although the contracts are not presently regulated by the Commodity Futures Trading Commission (the "CFTC"), a U.S. governmental agency, the CFTC may in the future assert authority to regulate these contracts. In such event, the Fund's ability to utilize forward foreign currency exchange contracts may be restricted. The Fund generally will not enter into a forward contract with a term of greater than one year. The Fund will not enter into forward currency exchange contracts or maintain a net exposure to such contracts
where the completion of the contracts would obligate the Fund to deliver an amount of currency other than U.S. dollars in excess of the value of the Fund's portfolio securities or other assets denominated in that currency or, in the case of cross-hedging, in a currency closely correlated to that currency.
Futures and Options.
Futures Contracts. Any Fund, except the Established Value, Focused Growth, Federal Money Market, Gradison Government Reserves, Institutional Money Market, Ohio Municipal Money Market, Prime Obligations, or Tax-Free Money Market Funds, may enter into futures contracts, including stock index futures contracts and options on futures contracts 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. In a stock index futures contract, two parties agree to receive or deliver a specified amount of cash multiplied by 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. The CFTC regulates futures exchanges and trading under the Commodity Exchange Act.
Although futures contracts by their terms call for actual delivery and receipt of the underlying securities, in most cases these contracts are closed out before the settlement date without actual delivery or receipt. Closing out an open futures position is done by taking an offsetting position in an identical contract to terminate the position (buying a contract that has previously been "sold," or "selling" a contract previously purchased). Taking an offsetting position also can be accomplished by the acquisition of put and call options on futures contracts that will, respectively, give a Fund the right (but not the obligation), in return for the premium paid, 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, such as the Funds, are required to make a good faith margin deposit in cash or liquid 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 are subject to change. Brokers may establish deposit requirements that 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 investment in that market or security.
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.
In accordance with CFTC regulations, the Trust, as a registered investment company, has claimed an exclusion from the definition of the term "commodity pool operator" under the Commodity Exchange Act and, therefore, is not subject to registration or regulation as a pool operator under that Act. In connection with this exclusion, the Trust has undertaken to submit to any CFTC special calls for information.
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 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 is not less than the price at which the short position was 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, 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 that 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 that 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 that 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 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 purchase 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 a Fund 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.
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. Futures transactions involve brokerage costs and require a Fund to segregate assets to cover contracts that would require it to purchase securities or currencies.
The Funds may invest in futures contracts in a manner consistent with their policies for investing in derivative instruments, as established by the Board. The Funds may utilize futures contracts for speculative purposes (for example, to generate income), to hedge or as a substitute for investing directly in securities.
Options. The following Funds may write (i.e. sell) call options that are traded
on national securities exchanges with respect to common stock in its portfolio:
Balanced, Diversified Stock, Small Company Opportunity, Special Value, Stock
Index and Value Funds. Each of these Funds may write covered calls on up to 25%
of its total assets. In addition, the Fund for Income may write covered call
options on up to 25% of its total assets and may also invest up to 5% of its
total assets to purchase options or to close out open options transactions. A
Fund must at all times have in its portfolio the securities that it may be
obligated to deliver if the option is exercised, except that the Small Company
Opportunity Fund may write uncovered calls or puts on up to 5% of its total
assets, that is, put or 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 Fund. The Convertible Fund may purchase and write 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 Fund may write call options only if they are covered, on portfolio securities amounting to up to 25% of its total assets 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 that 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.
A Fund may acquire puts to facilitate the liquidity of its portfolio assets. A Fund also may use puts to facilitate the reinvestment of its assets at a rate of return more favorable than that of the underlying security. A Fund also may use puts, under certain circumstances, 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 the Fund's assets. See "Variable and Floating Rate Notes" and "Valuation" in this SAI.
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 that are acquired subject to the puts (thus reducing the yield to maturity otherwise available for the same securities). The Funds intend to acquire puts only from dealers, banks and broker-dealers that, in the Adviser's opinion, present minimal credit risks.
The Small Company Opportunity Fund may write uncovered 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 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 Fund has written, however, it 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 Fund also may purchase index put and call options and write index options. Through the writing or purchase of index options, the 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.
Credit Default Swap Agreements.
The Core Bond and Balanced Funds may engage in credit default swap transactions ("CDS"). Either Fund may enter into a CDS for any legal purpose consistent with its investment objective and policies, such as for the purpose of attempting to obtain or preserve a particular return or spread at a lower cost than obtaining a return or spread through purchases and/or sales of instruments in other markets, or to gain exposure to certain markets in the most economical way possible. In a CDS, the "buyer" in a credit default contract is obligated to pay the "seller" a periodic stream of payments over the term of the contract provided that no event of default on an underlying reference obligation has occurred. If an event of default occurs, the seller must pay the buyer the full notional value, or "par value," of the reference obligation in exchange for the reference obligation. A Fund may be either the buyer or the seller in a credit default transaction. If a Fund is a buyer and no event of default occurs, the Fund will lose its investment and recover nothing. However, if an event of default occurs, the Fund (if the buyer) will receive the full notional value of the reference obligation that may have little or no value. As a seller, a Fund receives a quarterly fixed rate of income throughout the term of the contract, the contract of which typically is between six months and ten years, provided that there is no default event. If an event of default occurs, the seller must pay the buyer the full notional value of the reference obligation. CDS involve greater risks than if a Fund had invested in the reference obligation directly. The Funds do not intend to use CDS for purposes of leverage. Neither Fund will enter into a CDS with any single party if the net amount owed or to be received under existing contracts with that party would exceed 10% of the Fund's total assets.
Whether a Fund's use of CDS agreements will be successful in furthering its investment objective of total return will depend on the Adviser's ability to predict correctly whether certain types of investments are likely to produce greater returns than other investments. Because they are two party contracts and because they may have terms of greater than seven days, CDS agreements may be considered to be illiquid. Moreover, a Fund bears the risk of loss of the amount expected to be received under a CDS agreement in the event of the default or bankruptcy of a CDS agreement counterparty. The Funds will enter into CDS agreements only with counterparties that meet certain standards of creditworthiness (generally, such counterparties would have to be eligible counterparties under the terms of the Funds' repurchase agreement guidelines). Certain restrictions imposed on the Funds by the Code may limit the Fund's ability to use CDS agreements. The swap market is a relatively new market and is largely unregulated. It is possible that developments in the swaps market, including potential government regulation, could
adversely affect a Fund's ability to terminate existing CDS agreements or to realize amounts to be received under such agreements.
Most swap agreements entered into by the Funds would calculate the obligations of the parties to the agreement on a "net basis." Consequently, a Fund's current obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the "net amount"). A Fund's current obligations under a swap agreement will be accrued daily (offset against any amounts owed to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by the segregation or "earmarking" of assets determined to be liquid by Victory Capital Management Inc., the Funds' investment adviser ("Victory Capital Management" or the "Adviser"), in accordance with procedures established by the Board, to avoid any potential leveraging of the Fund's portfolio. Obligations under swap agreements so covered will not be construed to be "senior securities" for purposes of either Fund's investment restriction concerning senior securities.
The Adviser has retained Bear, Stearns & Co. Inc. to value any CDSs held by these Funds.
Prime Rate Indexed Adjustable Rate Securities. Floating rate notes include prime rate-indexed adjustable rate securities, which are securities whose interest rate is calculated based on the prime rate, that is, the interest rate that banks charge to their most creditworthy customers. Market forces affecting a bank's cost of funds and the rates that borrowers will accept determine the prime rate. The prime rate tends to become standard across the banking industry when a major bank moves its prime rate up or down. Each of the Federal Money Market, Financial Reserves, Gradison Government Reserves, Institutional Money Market and Prime Obligations Funds may invest up to 10% of its total assets in prime rate indexed adjustable rate securities.
Other 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 Board, the Adviser determines the liquidity of the Funds' investments and, through reports from the Adviser, the Board monitors 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, non-government stripped fixed-rate mortgage-backed securities and securities that the Adviser determines 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 Board. 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. As a matter of investment policy, none of the Money Market Funds invests in illiquid 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. 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. 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. The Convertible, Core Bond and Prime
Obligations Funds may invest in restricted securities without limit. Each of the Balanced and Small Company Opportunity Funds may invest up to 35% of its total assets in these securities. Each of the Diversified Stock, Focused Growth, Special Value, Stock Index and Value Funds may invest up to 20% of its total assets in these securities. Each of the Ohio Municipal Money Market and Tax-Free Money Market Funds may invest 20% of its total assets in taxable restricted securities. The Federal Money Market Fund may invest up to 10% of its net assets in these securities.
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 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. Each Equity Fund and the Balanced Fund may invest up to 10% of its total assets in warrants. The Convertible Fund may invest up to 5% of its total assets in warrants that are attached to the underlying securities.
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.
Other Investment Companies. A 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 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 Established Value, Federal Money Market and Gradison Government Reserves Funds may not invest in other investment companies.
Exchange Traded Funds ("ETFs") are investment companies whose primary objective is to achieve the same rate of return as a particular market index while trading throughout the day on an exchange. ETF shares are sold initially in the primary market in units of 50,000 or more ("creation units"). A creation unit represents a bundle of securities that replicates, or is a representative sample of, a particular index and that is deposited with the ETF. Once owned, the individual shares comprising each creation unit are traded on an exchange in secondary market transactions for cash. The secondary market for ETF shares allows them to be readily converted into cash, like commonly traded stocks. The combination of primary and secondary markets permits ETF shares to be traded throughout the day
close to the value of the ETF's underlying portfolio securities. A Fund would purchase and sell individual shares of ETFs in the secondary market. These secondary market transactions require the payment of commissions.
Risk Factors Associated with Investments in ETFs. ETF shares are subject to the same risk of price fluctuation due to supply and demand as any other stock traded on an exchange, which means that a Fund could receive less from the sale of shares of an ETF it holds than it paid at the time it purchased those shares. Furthermore, there may be times when the exchange halts trading, in which case a Fund owning ETF shares would be unable to sell them until trading is resumed. In addition, because ETFs invest in a portfolio of common stocks, the value of an ETF could decline if stock prices decline. An overall decline in stocks comprising an ETF's benchmark index could have a greater impact on the ETF and investors than might be the case in an investment company with a more widely diversified portfolio. Losses could also occur if the ETF is unable to replicate the performance of the chosen benchmark index.
Other risks associated with ETFs include the possibility that: (i) an ETF's distributions may decline if the issuers of the ETF's portfolio securities fail to continue to pay dividends; and (ii) under certain circumstances, an ETF could be terminated. Should termination occur, the ETF could have to liquidate its portfolio securities when the prices for those securities are falling. In addition, inadequate or irregularly provided information about an ETF or its investments, because ETFs are passively managed, could expose investors in ETFs to unknown risks.
Convertible Preferred Stock. The Convertible Fund may invest in convertible preferred stock, which is 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 and it convertible into common stock.
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. Each of the Convertible, Core Bond, Diversified Stock, Focused Growth, Small Company Opportunity, Special Value and Value Funds may invest up to 35% of its total assets in preferred stocks.
Real Estate Investment Trusts ("REITs") are corporations or business trusts that invest in real estate, mortgages or real estate-related securities. REITs are often grouped into three investment structures: Equity REITs, Mortgage REITs and Hybrid REITs. Equity REITs invest in and own real estate properties. Their revenues come principally from rental income of their properties. Equity REITs provide occasional capital gains or losses from the sale of properties in their portfolio. Mortgage REITs deal in investment and ownership of property mortgages. These REITs typically loan money for mortgages to owners of real estate, or invest in existing mortgages or mortgage backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans. Hybrid REITs combine the investment strategies of Equity REITs and Mortgage REITs by investing in both properties and mortgages. Each of the Balanced, Convertible, Diversified Stock, Established Value, Small Company Opportunity, Special Value and Value Funds may invest up to 25% of its total assets in REITs. Each of the Focused Growth and Stock Index Funds may invest up to 20% of its total assets in REITs.
Eligible Securities for the Money Market Funds.
High-quality investments are those obligations that, at the time of purchase,
(i) possess one of the two highest short-term ratings from an NRSRO; (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 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 that 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 that 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 that does not exceed 90 days.
Appendix A of this SAI identifies each NRSRO that 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.
INVESTMENT STRATEGIES.
Each Fund's principal investment strategies are described in its prospectus. To carry out its investment strategy, a Fund may engage in one or more of the following activities:
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, CDs and demand and time deposits of domestic and foreign branches of U.S. banks and foreign banks and repurchase agreements. (See "Foreign Investments" 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.
Repurchase Agreements. 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 Board, 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). Each of the Balanced, Convertible and Core Bond Funds and the Fund for Income may invest up to 35% of its total assets in repurchase agreements. Each of the Ohio Municipal Money Market, Tax-Free Money Market, National Municipal Bond, Ohio Municipal Bond, Diversified Stock, Established Value, Focused Growth, Small Company Opportunity, Special Value, Stock Index and Value Funds may invest up to 20% of its total assets in repurchase agreements. Subject to the conditions of an exemptive order from the SEC, the Adviser may combine repurchase transactions among one or more Funds into a single transaction.
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 and Federal Money Market Funds. With respect to repurchase agreement transactions entered into by the Convertible 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. The Convertible 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 15% of its net assets would be so invested. As a matter of investment policy, none of the Money Market Funds invests in illiquid securities. 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 segregate 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.
Securities Lending Transactions. The Balanced, Core Bond, Diversified Stock, Established Value, Focused Growth, Small Company Opportunity, Special Value, Stock Index and Value Funds may from time to time lend securities from their portfolios to broker-dealers, banks, financial institutions and institutional borrowers of securities and receive collateral in the form of cash or U.S. government obligations. KeyBank National Association ("KeyBank"), an affiliate of the Adviser, serves as lending agent for these Funds, pursuant to a Securities Lending Agency Agreement that was approved by the Board. 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. 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. Pursuant to an SEC exemptive order, KeyBank has entered into an arrangement with the Funds whereby KeyBank receives a fee based on a percentage of the net returns generated by the lending transactions. Under the Securities Lending Agency Agreement, KeyBank receives a pre-negotiated percentage of the net earnings on the investment of the collateral. The Funds will not lend portfolio securities to: (a) any "affiliated person" (as that term is defined in the Investment Company Act of 1940, as amended) of any Fund; (b) any affiliated person of the Adviser; or (c) any affiliated person of such an affiliated person. 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 enter into loan arrangements only with broker-dealers, banks or other institutions that either the Adviser or KeyBank has determined are creditworthy under guidelines established by the Board. Each of the Funds listed above will limit its securities lending to 33-1/3% of its 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.
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 segregate additional assets in order to assure that the value of the segregated assets 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.
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 segregate cash and appropriate liquid assets 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.
Secondary Investment Strategies. In addition to the principal strategies described in the prospectuses, certain Funds may engage in the secondary investment strategies outlined below.
o The Balanced Fund may invest up to 5% of its total assets in investment-grade municipal obligations.
o Each of the Balanced, Fund for Income, National Municipal Bond and Ohio Municipal Bond Funds may, but is not required to, use derivative instruments.
o Each of the Diversified Stock and Value Funds 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; and may, but is not required to, use derivative instruments.
o The Focused Growth Fund 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 The Convertible Fund may invest up to 35% of its total assets in corporate debt securities, common stock, U.S. government securities and high-quality short-term debt obligations, preferred stock and repurchase agreements; and up to 10% of its total assets in foreign debt and equity securities.
o The Core Bond Fund may invest up to 35% of its total assets in high-quality, short-term debt obligations; 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; and in international bonds, foreign securities and derivative instruments, such as futures contracts, options and securities that may have warrants or options attached.
o The Established Value Fund may invest up to 20% of its total assets in short-term U.S. government obligations, repurchase agreements, short-term debt obligations and investment grade debt securities.
o The Small Company Opportunity Fund may invest up to 20% of its total assets in: equity securities of larger companies (those with market 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.
o The Special Value Fund may invest up to 20% of its total assets in investment-grade debt securities and preferred stocks; and may, but is not required to, use derivative instruments.
DETERMINING NET ASSET VALUE ("NAV") AND VALUING 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, the
Federal Reserve Bank of Cleveland and the bond market are open. The NYSE will not open in observance of the following holidays: New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas. The Federal Reserve Bank of Cleveland is closed on Columbus Day and Veterans Day.
Money Market Funds.
Use of the Amortized Cost Method. Each Money Market Fund uses the amortized cost method to determine its NAV. 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 Board 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 that 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.
Monitoring Procedures. The Board also has 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 Board, 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 0.5% ($0.005), Rule 2a-7 requires that the Board promptly consider what action, if any, should be initiated. If the Board believes 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.
Rule 2a-7 requires that the Money Market Funds limit their investments to instruments that, in the opinion of the Board, 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 Board or its delegate must determine that the instruments are of comparable quality.
The Money Market Funds will limit the percentage allocation of their investments so as to comply with Rule 2a-7, that generally (except in the case of the Ohio Municipal Money Market Fund) limits to 5% of total assets the amount that 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 that 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, any unrealized appreciation or depreciation of the portfolio affects neither the amount of daily income nor the NAV.
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.
Fixed Income Funds.
Investment securities held by the Fixed Income Funds are valued on the basis of security valuations provided by an independent pricing service, approved by the Board, that 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 that 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 that 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 Board.
Equity and Specialty Funds.
Each equity security held by a Fund is valued at the closing price on the exchange where the security is principally traded. Each security traded in the over-the-counter market (but not including securities the trading activity of which is reported on Nasdaq's Automated Confirmation Transaction ("ACT") System) is valued at the bid based upon quotes furnished by market makers for such securities. Each security the trading activity of which is reported on Nasdaq's ACT System is valued at the Nasdaq Official Closing Price ("NOCP"). Convertible debt securities are valued in the same manner as any equity security. 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 Trust's officers in a manner specially authorized by the Board. Short-term obligations having 60 days or less to maturity are valued on
the basis of amortized cost, except for convertible debt securities. 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 generally 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. If events affecting the value of securities occur during such a period, and a Fund's NAV is materially affected by such changes in the value of the securities, then these securities will be valued at their fair value as determined in good faith by or under the supervision of the Board.
PERFORMANCE.
Money Market Funds.
Performance for a class of shares of a Money Market Fund depends upon such
variables as: portfolio quality; average portfolio maturity; type of instruments
in which the portfolio is invested; changes in interest rates on money market
instruments; changes in Fund (class) expenses; and 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.
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.
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.
Tax Equivalent Yield and Tax Equivalent Effective Yield. The Tax-Free Money Market and Ohio Municipal Money Market Funds also may advertise a "tax equivalent yield" and a "tax equivalent effective yield." Tax equivalent yield will be computed by dividing that portion of a Fund's yield that is tax-exempt by the difference between one and a stated income tax rate and adding the quotient to that portion, if any, of the yield of a Fund that is not tax-exempt. The tax equivalent effective yield for a Fund is computed by dividing that portion of the effective yield of the Fund that is tax-exempt by the difference between one and a stated income tax rate and adding the quotient to that portion, if any, of the effective yield of a Fund that is not tax-exempt.
The yield and effective yield of each of the Money Market Funds and the tax equivalent yield and the tax equivalent effective yield of the Tax-Free Money Market and Ohio Municipal Money Market will vary in response to fluctuations in interest rates and in the expenses of the Fund. For comparative purposes, the current and effective yields should be compared to current and effective yields offered by competing financial institutions for that base period only and calculated by the methods described above.
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 portfolio securities and computing offering price.
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.
Equity, Specialty and Fixed Income Funds (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 a 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. 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 Non-Money Market Funds are affected by portfolio quality, portfolio maturity, the types of investments held and operating expenses.
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:
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.
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.
Tax Equivalent Yield. The Tax-Exempt Fixed Income Funds also may advertise a "tax equivalent yield." Tax equivalent yield will be computed by dividing that portion of a Fund's yield that is tax-exempt (assuming no deduction for state taxes paid) by the difference between one and a stated income tax rate and adding the product to that portion, if any, of the yield of the Fund that is not tax-exempt.
Total Returns -- General. Total returns 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. After-tax returns reflect the reinvestment of dividends and capital gains distributions less the taxes due on those distributions. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on your tax situation and may differ from those shown in the prospectuses.
Total Returns Before Taxes. The "average annual total return before taxes" of a Fund, or of each class of a Fund, is an average annual compounded rate of return before taxes 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 Before Taxes
The cumulative "total return before taxes" 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:
Total Returns After Taxes on Distributions. The "average annual total return after taxes on distributions" of a Fund, or of each class of a Fund, is an average annual compounded rate of return after taxes on distributions 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 value at the end of the periods shown ("ATVD"), according to the following formula:
(ATVD/P)1/n-1 = Average Annual Total Return After Taxes on Distributions
Total Returns After Taxes on Distributions and Redemptions. The "average annual total return after taxes on distributions and redemptions" of a Fund, or of each class of a Fund, is an average annual compounded rate of return after taxes on distributions and redemption 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 value at the end of the periods shown ("ATVDR"), according to the following formula:
(ATVDR/P)1/n-1 = Average Annual Total Return After Taxes on Distributions and Redemptions
The cumulative "total return after taxes on distributions and redemptions" 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 after taxes on distributions and redemptions, but it does not average the rate of return on an annual basis. Total return after taxes on distributions is determined as follows:
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 sales charges or CDSCs) and takes into consideration the reinvestment of dividends and capital gains distributions.
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 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 its rating or that of a particular class of Fund shares by Morningstar, Inc., an independent mutual fund monitoring service that rates mutual funds, in broad investment categories (domestic equity, international equity, taxable bond, or municipal bond) 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 rating categories with a corresponding number of stars: highest (5), above average (4), neutral (3), below average (2) and lowest (1).
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 broad-based securities market indices, as described in the prospectuses. These 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. The Funds' total returns also may be compared with the Consumer Price Index, a measure of change in consumer prices, as determined by the U.S. Bureau of Labor Statistics.
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 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 that 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 that 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 that 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 toll free 800-539-FUND (800-539-3863).
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, in publications. In addition to yield information, general information about a Fund that appears in a publication 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.
In addition, advertisements and sales literature may refer to the National Association of Insurance Commissioners approved list of direct obligations/full faith and credit exempt money market funds (the "NAIC List"). The Federal Money Market and Gradison Government Reserves Funds are on the NAIC List. Inclusion on the NAIC List reflects a Fund's ability to maintain at all times: (1) a rating of "Am" or better from S&P or a rating of "A" or better from Moody's or an equivalent or better rating from another NRSRO; (2) a constant NAV of $1.00 and the payment of redemption proceeds in no more than seven days; and (3) investments of at least 95% of its total assets in U.S. government securities, shorts term debt instruments, class 1 bonds and collateralized repurchase agreements comprised of such obligations. Each of these Funds is rated AAAm by S&P.
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, CDs 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 "Determining Net Asset Value ("NAV") And Valuing Portfolio Securities" is subject to change. When the NYSE is closed (and in the case of the Money Market Funds, when the Federal Reserve Bank of Cleveland or the bond market 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 Funds reserve the right to reject any purchase order in whole or in part.
The Trust has elected, pursuant to Rule 18f-1 under the 1940 Act, to redeem shares of each Fund, other than the Money Market Funds, 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.
Each Fund has authorized one or more brokers to accept on its behalf purchase and redemption orders. Such brokers are authorized to designate other intermediaries to accept purchase and redemption orders on a Fund's behalf. A Fund will be deemed to have received a purchase or redemption order when an authorized broker, or, if applicable, a broker's authorized designee, accepts the order. Customer orders will be priced at each Fund's NAV next computed after they are accepted by an authorized broker or the broker's authorized designee.
Purchasing Shares.
Alternative Sales Arrangements -- Class A, C and R Shares. 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 the classes of shares, when more than one is offered in the same Fund, investors should understand that the purpose and function of the Class C and Class R asset-based sales charge are the same as those of the Class A initial sales charge. 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. Generally, Class A shares have lower ongoing expenses than Class C or Class R 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. Not all Investment Professionals will offer all classes of 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.
No initial sales charge is imposed on Class C shares. Victory Capital Advisers, Inc., the Funds' distributor (the "Distributor"), may pay sales commissions to dealers and institutions who sell Class C shares of the Trust at the time of such sales. Payments with respect to Class C shares will equal 1% of the purchase price of the Class C shares sold by the dealer or institution. The Distributor will retain all payments received by it relating to Class C shares for the first year after they are purchased. After the first full year, the Distributor will make monthly payments in the amount of 0.75% for distribution services and 0.25% for personal shareholder services to dealers and institutions based on the average NAV of Class C shares, which are attributable to shareholders for whom the dealers and institutions are designated as dealers of record. Some of the compensation paid to dealers and institutions is recouped through the CDSC imposed on shares redeemed within 12 months of their purchase. Class C shares are subject to the Rule 12b-1 fees described in the SAI under "Advisory and Other Contracts -- Class C and Class R Shares Rule 12b-1 Plan." There is no conversion feature applicable to Class C shares. Any options with respect to the reinvestment of distributions made by the Funds to Class C shareholders are offered only by the broker through whom the shares were acquired.
No initial or deferred sales charges are imposed on Class R shares. Except for the Stock Index Fund, which does not pay any Rule 12b-1 fees, Class R shares are subject to the Rule 12b-1 fees described in this SAI under "Advisory and Other Contracts -- Class C and Class R Share Rule 12b-1 Plan." There is no conversion feature applicable to Class R shares. Distributions paid to holders of a Fund's Class R shares may be reinvested in additional Class R shares of that Fund or Class R shares of a different Fund.
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.
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, Diversified Stock, Established Value, Focused Growth, Small Company Opportunity, Special Value, Stock Index and Value Funds.
--------------------------------------------------------------------------------------------------------------------
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% **
--------------------------------------------------------------------------------------------------------------------
|
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 Convertible, Core Bond, National Municipal Bond and Ohio Municipal Bond Funds and the Fund for Income.
--------------------------------------------------------------------------------------------------------------------
Amount of Purchase Initial Sales Charge: Concession to Dealers:
% 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% **
--------------------------------------------------------------------------------------------------------------------
|
o There is no initial sales charge on purchases of $1 million or more; however a sales concession and/or advance of a shareholder service fee may be paid and such purchases are potentially subject to a CDSC, as set forth below.
** Investment Professionals may receive payment on purchases of $1 million or more of Class A shares that are sold at NAV as follows: 0.75% of the current purchase amount if cumulative prior purchases sold at NAV plus the current purchase is less than $3 million; 0.50% of the current purchase amount if the cumulative prior purchases sold at NAV plus the current purchase is $3 million to $4,999,999; and 0.25% on of the current purchase amount if the cumulative prior purchases sold at NAV plus the current purchase is $5 million or more. In addition, in connection with such purchases, the Distributor may advance Shareholder Servicing Fees of 0.25% of the purchase amount to Investment Professionals for providing services to shareholders.
Except as noted in this SAI, a CDSC of up to 0.75% is imposed on any such shares redeemed within the first year after purchase. CDSCs are based on the lower of the cost of the shares or NAV at the time of redemption. No CDSC is imposed on reinvested distributions.
The 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.
The Adviser (or its affiliates), from its own resources, may make substantial payments to various broker-dealers in connection with the sale or servicing of Fund shares sold or held through those broker-dealers. The Adviser also may reimburse the Distributor (or the Distributor's affiliates) for making these payments. The following table summarizes these arrangements as of October 31, 2005 and amounts paid during the fiscal year ended October 31, 2005.
------------------------------------------------------------ ---------------------------------- ----------------------------------
Maximum Annual Fee as a
Percentage of Fund Average Daily
Broker-Dealer Net Assets Aggregate Amount Paid during 2005
------------------------------------------------------------ ---------------------------------- ----------------------------------
Benefits Corp Equity 0.25%
------------------------------------------------------------ ---------------------------------- ----------------------------------
Charles Schwab & Co. 0.15%
------------------------------------------------------------ ---------------------------------- ----------------------------------
Charles Schwab & Co. (Retirement Plan Services) 0.25%
------------------------------------------------------------ ---------------------------------- ----------------------------------
Edgewood Services, Inc. 0.20%
------------------------------------------------------------ ---------------------------------- ----------------------------------
Fidelity Brokerage Services/National Financial Services 0.10%
Corp. (Fidelity Investments Advisors Group)
------------------------------------------------------------ ---------------------------------- ----------------------------------
Fidelity Brokerage Services/National Financial Services 0.15%
Corp. (Fidelity Investments Institutional Brokerage Group)
------------------------------------------------------------ ---------------------------------- ----------------------------------
Fifth Third Bank 0.25%
------------------------------------------------------------ ---------------------------------- ----------------------------------
Gold K 0.25%
------------------------------------------------------------ --------------------------------- ----------------------------------
Invesco 0.25%
------------------------------------------------------------ ---------------------------------- ----------------------------------
Legg Mason 0.10%
------------------------------------------------------------ ---------------------------------- ----------------------------------
53
|
------------------------------------------------------------ ---------------------------------- ----------------------------------
Maximum Annual Fee as a
Percentage of Fund Average Daily
Broker-Dealer Net Assets Aggregate Amount Paid during 2004
------------------------------------------------------------ ---------------------------------- ----------------------------------
Linsco Private Ledger 0.25%
------------------------------------------------------------ ---------------------------------- ----------------------------------
McDonald Investments 0.30%
------------------------------------------------------------ ---------------------------------- ----------------------------------
Merrill Lynch Pierce Fenner & Smith, Inc. (Institutional) 0.20%
------------------------------------------------------------ ---------------------------------- ----------------------------------
Merrill Lynch Pierce Fenner & Smith, Inc. (Retail) 0.25%
------------------------------------------------------------ ---------------------------------- ----------------------------------
Merrill Lynch -- Howard Johnson DT 0.35%
------------------------------------------------------------ ---------------------------------- ----------------------------------
Mid Atlantic Capital 0.25%
------------------------------------------------------------ ---------------------------------- ----------------------------------
MSCS Financial Services 0.25%
------------------------------------------------------------ ---------------------------------- ----------------------------------
Nationwide Investment Services Corp. 0.15%
------------------------------------------------------------ ---------------------------------- ----------------------------------
NY Life Investment Management Services 0.25%
------------------------------------------------------------ ---------------------------------- ----------------------------------
Pershing 0.15%
------------------------------------------------------------ ---------------------------------- ----------------------------------
PFPC Distributors Inc. 0.15%
------------------------------------------------------------ ---------------------------------- ----------------------------------
Prudential Investment Management Services, LLC/Prudential 0.05%
Investments, LLC (PruChoice)
------------------------------------------------------------ ---------------------------------- ----------------------------------
Raymond James* 0.10%
------------------------------------------------------------ ---------------------------------- ----------------------------------
SEI Investment Dist. (Treasury Point) 0.05%
------------------------------------------------------------ ---------------------------------- ----------------------------------
UBS Paine Webber 0.05%
------------------------------------------------------------ ---------------------------------- ----------------------------------
|
------------------------------------------------------------ ---------------------------------- ----------------------------------
Broker-Dealer Other Fee Arrangement Aggregate Amount Paid during 2004
------------------------------------------------------------ ---------------------------------- ----------------------------------
Associated Securities Corp. $20/trade for trades of $0
$5,000 or more
------------------------------------------------------------ ---------------------------------- ----------------------------------
Morgan Stanley DW Inc. 0.20% on initial 0
purchases and an annual
fee of 0.05% on
qualifying Fund shares
held at the
broker-dealer
------------------------------------------------------------ ---------------------------------- ----------------------------------
|
In addition to the payments described above, the Adviser (or its affiliates), from their own resources, may make substantial payments to various financial intermediaries who are not broker-dealers in connection with the sale or servicing of Fund shares sold or held through those intermediaries. The Adviser also may reimburse the Distributor (or the Distributor's affiliates) for making these payments. For the fiscal year ended October 31, 2005, the Adviser (or its affiliates) paid (or reimbursed the Distributor for paying) a total of $__________ to non-broker dealers in connection with the sale or servicing of Fund shares.
The Money Market Funds and Class R shares of the Funds do not impose initial or deferred sales charges on their shares. Class C shares impose a 1.00% deferred sales charge on shares redeemed within 12 months of being purchased.
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 in an amount entitling you to a reduced sales charge, you may qualify for a reduction in, or the elimination of, the sales charge under various programs described in the prospectuses. The following points provide additional information about these programs.
o Retirement Plans. Retirement plans (including Section 401 and 457 Plans sponsored by a Section 501(c)(3) organization and certain non-qualified deferred compensation arrangements that operate in a similar manner to qualified plans) with plan assets greater than $5,000,000 and IRA Rollovers from retirement plans with assets invested in Class A shares of the Victory Funds are eligible to buy Class A shares without an initial sales charge. (Retirement plans with assets invested in one or more Victory Funds prior to December 31, 2002 that were eligible to buy Class A shares without an initial sales charge based on the eligibility requirements then in effect may continue to buy Class A shares without an initial sales charge.)
Investment Professionals may receive payment on purchases of $1 million or more of Class A shares that are sold at NAV as follows: 0.75% of the current purchase amount if cumulative prior purchases sold at NAV plus the current purchase is less than $3 million; 0.50% of the current purchase amount if the cumulative prior purchases sold at NAV plus the current purchase is $3 million to $4,999,999; and 0.25% on of the current purchase amount if the cumulative prior purchases sold at NAV plus the current purchase is $5 million or more. In addition, in connection with such purchases, the Distributor may advance Shareholder Servicing Fees of 0.25% of the purchase amount to Investment Professionals for providing services to shareholders.
Investment Professionals may receive payment on purchases of $1 million or more of Class A shares that are sold at NAV as follows: 0.50% of the current purchase amount if cumulative prior purchases sold at NAV plus the current purchase is less than $5 million; and 0.25% of the current purchase amount if the cumulative prior purchases sold at NAV plus the current purchase is $5 million to $9,999,999. In addition, in connection with such purchases, the Distributor may advance Shareholder Servicing Fees of 0.25% of the purchase amount to Investment Professionals for providing services to shareholders. Except as noted in this SAI, a CDSC of up to 0.75% is imposed if the qualified retirement plan redeems 90% or more of its cumulative purchases of Class A shares within the first year after purchase. CDSCs are based on the lower of the cost of the shares or NAV at the time of redemption. No CDSC is imposed on reinvested distributions.
o Service Providers. Members of certain specialized groups that receive support services from service providers who enter into written agreements with the Trust are eligible, under the terms of the agreement, to purchase Class A shares at NAV without paying a sales load.
o Rights of Accumulation permit reduced sales charges on future purchases of Class A shares after you have reached a new breakpoint. To determine your reduced sales charge, you can add the value of your Class A shares (or those held by your spouse (including life partner) and your children under age 21), determined at the previous day's NAV, to the amount of your new purchase, valued at the current offering price.
o Letter of Intent. If you anticipate purchasing $50,000 or more of shares of one Fund, 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 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.
o General. For purposes of determining the availability of reduced initial sales charges through letters of intent, rights of accumulation and concurrent purchases, the Distributor, in its discretion, may aggregate certain related accounts.
Sample Calculation of Maximum Offering Price.
Each Money Market Fund is sold and redeemed at NAV (usually $1.00), without any initial sales charges or CDSCs. Class A shares of the Equity Funds and the Balanced Fund are sold with a maximum initial sales charge of 5.75% and Class A shares of the Fixed Income Funds and the Convertible Fund are sold with a maximum initial sales charge of 2.00%.* Class C shares of each relevant Fund are sold at NAV without any initial sales charges and with a 1.00% CDSC on shares redeemed within 12 months of purchase. Class R shares of each relevant Fund are sold at NAV without any initial sales charges or CDSCs. The following tables show the maximum offering price per share of each class of each Non-Money Market Fund, using the Fund's relevant NAV as of October 31, 2005.
Class A Shares of the Equity Funds and the Balanced Fund.
----------------------------------- -------------------------- ----------------------------- -------------------------
NAV and redemption price Maximum sales charge (5.75% Maximum offering price
Fund per Class A share of offering price) to public
----------------------------------- -------------------------- ----------------------------- -------------------------
Balanced
----------------------------------- -------------------------- ----------------------------- -------------------------
Diversified Stock
----------------------------------- -------------------------- ----------------------------- -------------------------
Established Value
----------------------------------- -------------------------- ----------------------------- -------------------------
Focused Growth
----------------------------------- -------------------------- ----------------------------- -------------------------
Small Company Opportunity
----------------------------------- -------------------------- ----------------------------- -------------------------
Special Value
----------------------------------- -------------------------- ----------------------------- -------------------------
Stock Index
----------------------------------- -------------------------- ----------------------------- -------------------------
Value
----------------------------------- -------------------------- ----------------------------- -------------------------
|
Class A Shares of the Convertible and the Fixed Income Funds.
----------------------------------- -------------------------- ----------------------------- -------------------------
NAV and redemption price Maximum sales charge (2.00% Maximum offering price
Fund per Class A share of offering price) to public
----------------------------------- -------------------------- ----------------------------- -------------------------
Convertible
----------------------------------- -------------------------- ----------------------------- -------------------------
Core Bond
----------------------------------- -------------------------- ----------------------------- -------------------------
Fund for Income
----------------------------------- -------------------------- ----------------------------- -------------------------
National Municipal Bond
----------------------------------- -------------------------- ----------------------------- -------------------------
Ohio Municipal Bond
----------------------------------- -------------------------- ----------------------------- -------------------------
|
Class C Shares of Certain Funds.
--------------------------------- ------------------------------------------
Class C NAV, offering price and
Fund redemption price per Class C share
--------------------------------- ------------------------------------------
--------------------------------- ------------------------------------------
Balanced
--------------------------------- ------------------------------------------
--------------------------------- ------------------------------------------
Diversified Stock
--------------------------------- ------------------------------------------
--------------------------------- ------------------------------------------
Focused Growth
--------------------------------- ------------------------------------------
--------------------------------- ------------------------------------------
Fund for Income
--------------------------------- ------------------------------------------
--------------------------------- ------------------------------------------
Special Value
--------------------------------- ------------------------------------------
--------------------------------- ------------------------------------------
Value
--------------------------------- ------------------------------------------
Class R Shares of Certain Funds.
--------------------------------- ------------------------------------------
Fund Class R NAV, offering price and
redemption price per Class R share
--------------------------------- ------------------------------------------
Balanced
--------------------------------- ------------------------------------------
Diversified Stock
--------------------------------- ------------------------------------------
Established Value
--------------------------------- ------------------------------------------
Focused Growth
--------------------------------- ------------------------------------------
Fund for Income
--------------------------------- ------------------------------------------
Small Company Opportunity
--------------------------------- ------------------------------------------
Special Value
--------------------------------- ------------------------------------------
Stock Index
--------------------------------- ------------------------------------------
Value
--------------------------------- ------------------------------------------
Redeeming Shares.
Contingent Deferred Sales Charge -- Class A and C Shares. No CDSC is
|
imposed on:
o the redemption of shares of any class subject to a CDSC to the extent that the shares redeemed (1) are no longer subject to the holding period for such shares, (2) resulted from reinvestment of distributions, or (3) were exchanged for shares of another Victory fund as allowed by the prospectus, provided that the shares acquired in such exchange or subsequent exchanges will continue to remain subject to the CDSC, if applicable, until the applicable holding period expires. In determining whether the CDSC applies to each redemption, shares not subject to a CDSC are redeemed first;
o redemptions following the death or post-purchase disability of (1) a registered shareholder on an account; or (2) a settlor of a living trust, of shares held in the account at the time of death or initial determination of post-purchase disability;
o certain distributions from individual retirement accounts, Section
403(b), Section 457 and Section 401 qualified plans, where
redemptions result from (1) required minimum distributions with
respect to that portion of such contributions that does not exceed
12% annually; (2) tax free returns of excess contributions or
returns of excess deferral amounts; (3) distributions on the death
or disability of the account holder; (4) distributions for the
purpose of a loan or hardship withdrawal from a participant plan
balance; or (5) distributions as a result of separation of service;
o distributions resulting as a result of a Qualified Domestic Relations Order or Domestic Relations Order required by a court settlement;
o redemptions of shares by the investor where the investor's dealer or institution waived its commission in connection with the purchase and notifies the Distributor prior to the time of investment;
o amounts from a Systematic Withdrawal Plan (including Dividends), of up to an annual amount of 12% of the account value on a per fund basis, at the time the withdrawal plan is established; or
o Participant-initiated distributions from employee benefit plans or participant-initiated exchanges among investment choices in employee benefit plans.
Reinstatement Privilege. Within 90 days of a redemption, a shareholder may reinvest all or part of the redemption proceeds of Class A or Class C shares in the same class of 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. Class C share proceeds reinstated do not result in a refund of any CDSC paid by the shareholder, but the reinstated shares will be treated as CDSC exempt upon reinstatement. 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.
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. Each Fund declares and pays capital gains dividends annually. The Money Market Funds declare dividends daily and pay them monthly. Each of the Balanced Fund and the Fixed Income Funds declares and pays dividends monthly. Each of the Equity Funds and the Convertible Fund declares and pays dividends quarterly.
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 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 that relates to federal income taxation is only a summary of certain key federal income tax considerations generally affecting purchasers of shares of the Funds. The following is only a summary of certain additional income and excise 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 intends to qualify 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 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 that can be used to offset capital gains in such future years. As explained below, however, 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 IRS in effect for the month in which the ownership change occurs (the rate for December 2005 is 4.40%). The Funds will use their best efforts to avoid having an ownership change. However, because of circumstances that 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 "Fund Distributions" below. The following table summarizes the approximate capital loss carryforwards for the applicable Funds as of October 31, 2005 (amount in thousands).
------------------------------------- ----------------------------------------- --------------------------------------
Fund Approximate Capital Loss Carryforward Year of Expiration
------------------------------------- ----------------------------------------- --------------------------------------
Balanced $2,615 2010
12,138 2011
------------------------------------- ----------------------------------------- --------------------------------------
Convertible Fund 3,273 2010
224 2011
------------------------------------- ----------------------------------------- --------------------------------------
Diversified Stock 10,539 2010
21,464 2011
------------------------------------- ----------------------------------------- --------------------------------------
Focused Growth 23 2012
------------------------------------- ----------------------------------------- --------------------------------------
Fund for Income 2,523 2006
2,882 2007
3,017 2008
691 2009
1,886 2010
6,735 2011
14,068 2012
------------------------------------- ----------------------------------------- --------------------------------------
59
|
------------------------------------- ----------------------------------------- --------------------------------------
Fund Approximate Capital Loss Carryforward Year of Expiration
------------------------------------- ----------------------------------------- --------------------------------------
Core Bond 921 2006
4,271 2007
1,915 2008
1,297 2010
------------------------------------- ----------------------------------------- --------------------------------------
Ohio Municipal Money Market 5 2007
------------------------------------- ----------------------------------------- --------------------------------------
Stock Index 64,267 2010
------------------------------------- ----------------------------------------- --------------------------------------
5,337 2011
------------------------------------- ----------------------------------------- --------------------------------------
Tax-Free Money Market 4 2006
27 2007
71 2008
3 2009
------------------------------------- ----------------------------------------- --------------------------------------
Value 10,519 2010
31,028 2011
------------------------------------- ----------------------------------------- --------------------------------------
|
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), 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 and (for Fund taxable years beginning after October 22, 2004) net income from interests in qualified publicly traded partnerships (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 that 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), 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-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 that 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 marketable 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. Solely for purposes of Code sections 1291 through 1298, 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 for 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 a 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 corporate tax rate 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 a 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 Income Requirement 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), two or more issuers that the Fund controls and that are engaged in the same or similar trades or businesses (other than securities of other regulated investment companies), or (for Fund taxable years beginning after October 22, 2004) the securities of one or more qualified publicly traded partnerships. 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 Federal Farm Credit System Financial Assistance Corporation, FHLB, FHLMC, FNMA, GNMA and SLMA, 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 dividends to the extent of the Fund's current and accumulated earnings and profits. Such distributions may be eligible for: (i) the dividends-received deduction, in the case of corporate shareholders; or (ii) treatment as "qualified dividend income," in the case of non-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 might 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 treated as dividends for federal income tax purposes and may be taxable to non-corporate shareholders as long-term capital gains (a "qualified dividend"), provided that certain requirements, as discussed below, are met. Dividends received by corporate shareholders and dividends that do not constitute qualified dividends are taxable as ordinary income. The portion of dividends received from a Fund that are qualified dividends generally will be determined on a look-through basis. If the aggregate qualified dividends received by the Fund are less than 95% of the Fund's gross income (as specially computed), the portion of dividends received from the Fund that constitute qualified dividends will be designated by the Fund and cannot exceed the ratio that the qualified dividends received by the Fund bears to its gross income. If the aggregate qualified dividends received by the Fund equal at least 95% of its gross income, then all of the dividends received from the Fund will constitute qualified dividends.
No dividend will constitute a qualified dividend (1) if it has been paid with respect to any share of stock that the Fund has held for less than 61 days (91 days in the case of certain preferred stock) during the 121-day period (181-day period in the case of certain preferred stock) beginning on the date that is 60 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) if the noncorporate shareholder fails to meet the holding period requirements set forth in (1) with respect to its shares in the Fund to which the dividend is attributable; or (3) to the extent that the Fund is under an obligation (pursuant to a short sale or otherwise) to make related payments with respect to positions in property substantially similar or related to stock with respect to which an otherwise qualified dividend is paid.
Dividends received by a Fund from a foreign corporation will be qualified dividends if (1) the stock with respect to which the dividend is paid is readily tradable on an established securities market in the U.S., (2) the foreign corporation is incorporated in a possession of the U.S. or (3) the foreign corporation is eligible for the benefits of a comprehensive income tax treaty with the U.S. that includes an exchange of information program (and that the Treasury Department determines to be satisfactory for these purposes). The Treasury Department has issued guidance identifying which treaties are satisfactory for these purposes. Notwithstanding the above, dividends received from a foreign corporation that for the taxable year of the corporation in which the dividend was paid, or the preceding taxable year, is (i) a PFIC, or (ii) a foreign personal holding company or a foreign investment company (for taxable years that begin on or before December 31, 2004), will not constitute qualified dividends.
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 91-day period (181-day period in the case of certain preferred
stock) beginning on the date that 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 (or an
in-the-money qualified call 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 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).
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 National Municipal Bond, Ohio Municipal Bond, Ohio Municipal Money Market and Tax-Free Money Market Funds (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 DRD 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 DRD) in determining their adjusted current earnings. Each Tax-Exempt Fixed Income Fund may invest up to 20% of its total assets in tax preference items.
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 "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 that 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.
Distributions by a Fund that do not constitute ordinary income dividends, qualified 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 backup withholding taxes at the applicable rate on ordinary income
dividends, qualified 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. If the NAV of a Money Market Fund varies from $1.00 per share 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 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, subject to the discussion below with respect to "interest-related dividends" and "short-term capital gain dividends," ordinary income dividends (including dividends that would otherwise be treated as qualified dividends to an applicable non-foreign shareholder) paid to such foreign shareholder will be subject to a 30% U.S. withholding tax (or lower applicable treaty rate) upon the gross amount of the dividend.
U.S. withholding tax generally would not apply to amounts designated by the Fund as an "interest-related dividend" or a "short-term capital gain dividend" paid with respect to years of the Fund beginning in 2005, 2006 or 2007. The aggregate amount treated as an interest-related dividend for a year is limited to the Fund's qualified net interest income for the year, which is the excess of the sum of the Fund's qualified interest income (generally, its U.S.-source interest income) over the deductions properly allocable to such income. The aggregate amount treated as a "short-term capital gain dividend" is limited to the excess of the Fund's net short-term capital gain over its net long-term capital loss (determined without regard to any net capital loss or net short-term capital loss attributable to transactions occurring after October 31; any such loss is treated as arising on the first day of the next tax year).
If the income from a Fund is effectively connected with a U.S. trade or business carried on by a foreign shareholder, then any dividends, and any gains realized upon the sale or redemption 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 backup withholding taxes at the applicable rate 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 might 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.
Rules of state and local taxation of ordinary income dividends, qualified 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 an investment in a Fund.
TRUSTEES AND OFFICERS.
Board of Trustees.
Overall responsibility for management of the Trust rests with the Board. The Trust is managed by the Board, in accordance with the laws of the State of Delaware. There are currently ten Trustees, nine 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.
The following tables list the Trustees, their ages, position with the Trust, length of time served, principal occupations during the past five years and any directorships of other investment companies or companies whose securities are registered under the Securities Exchange Act of 1934, as amended, or who file reports under that Act. Each Trustee oversees 20 portfolios in the Trust, one portfolio in The Victory Variable Insurance Funds and two portfolios in The Victory Institutional Funds, each a registered investment company that, together with the Trust, comprise the Victory Fund Complex. There is no defined term of office and each Trustee serves until the earlier of his or her resignation, retirement, removal, death, or the election of a qualified successor. Each Trustee's address is c/o The Victory Portfolios, 3435 Stelzer Road, Columbus, Ohio 43219.
Independent Trustees.
Position Date Principal Occupation Other
Held with Commenced Directorships Held in
Name and Age the Trust Service During Past 5 Years Public Companies
------------ --------- ------- ------------------- ----------------
Mr. David Brooks Adcock, 54 Trustee May 2005 General Counsel, Duke University Durham Casualty Co.,
and Duke University Health System. Ltd.
Mr. Nigel D. T. Adrews, 58 Vice Chair August 2002 Retired (since 2001); Managing Great Lakes Chemical
and Trustee Director (2000-2001), Internet Corporation; Old
Capital Group (venture capital); Mutual plc.
Executive Vice President
(1993-2000), GE Capital
(financial services).
Ms. E. Lee Beard, 54 Trustee May 2005 President/Owner (since 2003) ELB None.
Consultants; President, Chief
Executive Officer and Director
(1998-2003) Northeast Pennsylvania
Financial Corp. (full service
financial services); President,
Chief Executive Officer and
Director (1993-2003), First
Federal Bank (full service
financial services).
67
|
Position Date Principal Occupation Other
Held with Commenced Directorships Held in
Name and Age the Trust Service During Past 5 Years Public Companies
------------ --------- ------- ------------------- ----------------
Ms. Jakki L. Haussler, 48 Trustee May 2005 Chairman and Chief Executive None.
Officer, Opus Capital Management,
Inc. (asset management); Partner
(since 2002), Adena Ventures, LP
(venture capital); Managing
Director (since 2001), Capvest
Venture Fund, LP (venture capital).
Ms. Frankie D. Hughes, 53 Trustee March 2000 Principal and Chief Investment None.
Officer, Hughes Capital
Management, Inc. (fixed income
asset management).
Ms. Lyn Hutton, 56 Trustee March 2002 Executive Vice President and Chief Chittenden Corporation.
Investment Officer, The Commonfund
for Nonprofit Organizations (since
January 2003); Vice President and
Chief Financial Officer, John D. &
Catherine T. MacArthur Foundation
(grant making) (June 1998-December
2002).
Dr. Thomas F. Morrissey, 71 Trustee November 1994 Professor (Emeritus since 2004), None.
Weatherhead School of Management,
Case Western Reserve University.
Ms. Karen F. Shepherd, 65 Trustee August 2002 Member, Shepherd Properties, LC UBS Bank USA.
and Vincent Shepherd Investments,
LC (real estate investments);
EMILY's List (political action
committee) (2002-2003); U.S.
Executive Director (1996-2002),
European Bank for Reconstruction
and Development.
Mr. Leigh A. Wilson, 61 Chair and November 1994 Chief Executive Officer, New Chair, Old Mutual
Trustee Century Living, Inc. (full service Advisor Funds II (18
independent living for senior portfolios).
citizens); Director, The Mutual
Fund Directors Forum, since 2004.
|
Interested Trustee.*
Position Date Other
Held with Commenced Principal Occupation Directorships Held in
Name and Age the Trust Service During Past 5 Years Public Companies
------------ --------- ------- ------------------- ----------------
Mr. Roger Noall, 70 Trustee December 1997 Retired (since February 2000); Alleghany Corporation.
Executive (1997-2000), KeyCorp.
|
The following standing Committees of the Board are currently in operation:
Investment, Business and Legal, Audit, Board Governance and Nominating, Agenda,
and Oversight and Compliance. In addition to these standing Committees, the
Board may form temporary Special Committees to address particular areas of
concern. In addition, a Committee may form a Sub-Committee to address particular
areas of concern to that Committee.
The members of the Investment Committee are Ms. Shepherd (Chair), ____________ (Vice Chair), Mr. Andrews, Ms. Haussler, Ms. Hughes and Ms. Hutton. The function of this Committee is to oversee the Funds' compliance with investment objectives, policies and restrictions, including those imposed by law or regulation.
The members of the Business and Legal Committee are Ms. Beard (Chair), Mr. Adcock, Dr. Morrissey and Mr. Noall. The function of this Committee is to oversee the performance of service providers under agreements with the Funds (other than the investment adviser and independent auditor) and to oversee compliance with Fund policies and procedures (other than investment-related policies and procedures).
The members of the Audit Committee are Dr. Morrissey (Chair), Mr. Adcock, Ms. Beard and _________. The primary purpose of this Committee is to oversee the Trust's accounting and financial reporting policies, practices and internal controls, as required by the statutes and regulations administered by the SEC, including the 1940 Act.
The Board Governance and Nominating Committee consists of Mr. Andrews (Chair), Ms. Hughes, Ms. Hutton, Dr. Morrissey, Ms. Shepherd, ___________ and Mr. Wilson. The functions of this Committee are to oversee Fund governance, including the nomination and selection of Trustees; to evaluate and recommend to the Board the compensation and expense reimbursement policies applicable to Trustees; and periodically, to coordinate and facilitate an evaluation of the performance of the Board.
The Board Governance and Nominating Committee will consider nominee recommendations from Fund shareholders, in accordance with procedures established by the Committee. A Fund shareholder should submit a nominee recommendation in writing to the attention of the Chair of The Victory Portfolios, 3435 Stelzer Road, Columbus, Ohio 43219. The Committee (or a designated Sub-Committee) will screen shareholder recommendations in the same manner as it screens nominations received from other sources, such as current Trustees, management of the Funds or other individuals, including professional recruiters. The Committee need not consider any recommendations when no vacancy on the Board exists, but the Committee will consider any such recommendation if a vacancy occurs within six months after receipt of the recommendation. In administering the shareholder recommendation process, the Chair, in the Chair's sole discretion, may retain the services of counsel to the Trust or to the Independent Trustees, management of the Funds or any third party. The Committee will communicate the results of the evaluation of any shareholder recommendation to the shareholder who made the recommendation.
The Oversight and Compliance Committee consists of the Chair of the Board, the Chair of the Audit Committee and another Trustee, as determined annually on a rotating basis. Currently, Mr. Wilson, Dr. Morrissey and M_. ____________ serve on this Committee. The primary purpose of the Oversight and Compliance Committee is to address issues involving conflicts of interest, ethics or other issues that may involve more than one Board Committee. The Oversight and Compliance Committee also serves as the Qualified Legal Compliance Committee.
The Agenda Committee consists of the Chair of the Board and the Chair of each other Committee.
During the fiscal year ended October 31, 2005, the Board held five regular, ___ special and ___ telephonic meetings. Each of the Investment, Audit and Board Governance and Nominating Committees held ____ meetings, and the Business and Legal Committee held ____ meetings. The Oversight and Compliance Committee met ____ times during the year. The Agenda Committee did not meet during this period.
The following tables show the dollar ranges of Fund shares (and of shares of all series of the Victory Fund Complex) beneficially owned by the Trustees as of December 31, 2005. No Independent Trustee (or any immediate family member) owns beneficially or of record an interest in the Adviser or the Distributor or in any person directly or indirectly controlling, controlled by, or under common control with the Adviser or the Distributor. As of January 31,
2006, the Trustees and officers as a group owned beneficially less than 1% of all classes of outstanding shares of the Funds.
Independent Trustees.
Aggregate Dollar Range of Ownership of
Shares of All Series
Trustee Dollar Range of Beneficial Ownership of Fund Shares of the Victory Fund Complex
------- --------------------------------------------------- ---------------------------
Mr. Adcock None None
Mr. Andrews Diversified Stock: Over $100,000 Over $100,000
Ms. Beard Diversified Stock: $10,001 -- $50,000 $10,001 -- $50,000
Ms. Haussler None None
Ms. Hughes Prime Obligations: $50,001 -- $100,000 $50,001 -- $100,000
Ms. Hutton Prime Obligations: $10,001 -- $50,000 $10,001 -- $50,000
Diversified Stock: $1 -- $10,000
Value: $1 -- $10,000
Dr. Morrissey Diversified Stock: Over $100,000 Over $100,000
Federal Money Market: $1 -- $10,000
Ohio Municipal Money Market: $50,001 -- $100,000
Stock Index: $50,001 -- $100,000
Ms. Shepherd Diversified Stock: $1 -- $10,000 Over $100,000
Gradison Government Reserves: $50,001 -- $100,000
Prime Obligations: $50,001 -- $100,000
Mr. Wilson Convertible: Over $100,000 Over $100,000
Diversified Stock: Over $100,000
Special Value: Over $100,000
|
Interested Trustee.
Aggregate Dollar Range of Ownership of
Shares of All Series
Trustee Dollar Range of Beneficial Ownership of Fund Shares of the Victory Fund Complex
------- --------------------------------------------------- ---------------------------
Mr. Noall Small Company Opportunity: $50,001 -- $100,000 Over $100,000
Special Value: $50,001 - $100,000
Value: $10,001 -- $50,000
|
Remuneration of Trustees and the Chief Compliance Officer.
From November 1, 2004 through December 31, 2004, the Trust paid each Trustee an annual fee of $40,000 for overseeing the operations of each Fund of the Trust and an additional per meeting fee ($5,000 per in person and $2,500 per telephone meeting).
As of January 1, 2005, the Victory Fund Complex pays each Trustee an annual fee of $65,000 for overseeing the operations of each Fund in the Complex and an additional per-meeting fee. For each of the five regularly scheduled Board meetings, a Trustee will receive $5,000 if attended in person and $2,500 if attended by telephone. For each in-person Board meeting in excess of the five regularly scheduled meetings, the Complex pays each Trustee $3,000 if attended in person and $1,500 if attended by telephone. For each telephonic Board meeting in excess of the five regularly scheduled meetings, the Complex pays each attending Trustee $1,500, provided that the meeting has a written agenda and lasts at least 30 minutes. For any special Sub-Committee meetings or Special Committee
meetings, participating Trustees receive $1,000, provided that the meeting has a written agenda and lasts at least one hour. The Chair receives an additional annual retainer of $50,000.
The following table indicates the compensation received by each Trustee and the Chief Compliance Officer from the Trust and the Victory Fund Complex for the fiscal year ended October 31, 2005. As of October 31, 2005, there were 23 mutual funds in the Victory Fund Complex for which the Trustees listed below were compensated. The Trust does not maintain a retirement plan for its Trustees.
Independent Trustees.
Total Compensation from
Trustee Aggregate Compensation from the Trust the Victory Fund Complex
------- ------------------------------------- ------------------------
Mr. Adcock $________ $________
Mr. Andrews
Ms. Beard
Ms. Haussler
Ms. Hughes
Ms. Hutton
Dr. Morrissey
Ms. Shepherd
Frank A. Weil*
Mr. Wilson
-----------------
|
* Mr. Weil retired from service as a Trustee as of February 15, 2006.
Interested Trustee.
Total Compensation from
Trustee Aggregate Compensation from the Trust the Victory Fund Complex
------- ------------------------------------- ------------------------
Mr. Noall $________ (deferred) $________ (deferred)
|
Chief Compliance Officer.
Total Compensation from
Chief Compliance Officer Aggregate Compensation from the Trust the Victory Fund Complex
------------------------ ------------------------------------- ------------------------
Ms. Karen F. Haber(1) $________ $________
Mr. Edward J. Veilleux(2) Not applicable Not applicable
|
2. Mr. Veilleux was appointed to serve the Trusts' Chief Compliance Officer on October 26, 2005.
Deferred Compensation
In addition to the compensation detailed above, each Trustee may elect to defer a portion of his or her compensation from the Victory Fund Complex. Such amounts are invested in one or more Funds, as selected by the Trustee. Currently, only Mr. Noall has elected to defer a portion of his compensation as a Trustee under this program. As of December 31, 2005 the value of Mr. Noall's deferred compensation was equal to approximately $__________ invested in the Stock Index Fund and $________ invested in the Diversified Stock Fund.
Officers.
The officers of the Trust, their ages, the length of time served and their principal occupations during the past five years, are detailed in the following table. Each individual holds the same position with the other registered investment companies in the Victory Fund Complex, and each officer serves until the earlier of his or her resignation, removal, retirement, death, or the election of a successor. The mailing address of each officer of the Trust is 3435 Stelzer Road, Columbus, Ohio 43219-3035. Except for the Chief Compliance Officer, the officers of the Trust receive no compensation directly from the Trust for performing the duties of their offices. BISYS Fund Services Ohio, Inc. ("BISYS") receives fees from the Trust as Administrator.
Date
Position with Commenced
Name and Age the Trust Service Principal Occupation During Past 5 Years
------------ --------- ------- ----------------------------------------
Ms. Kathleen A. Dennis, 52 President May 2002 Senior Managing Director of the Adviser.
Ms. Irimga McKay, 46 Vice President December 1998 Senior Vice President, Client Services,
BISYS.
Ms. Cynthia Lee Lindsey, 48 Secretary December 2002 Director of Client Services (since October
2002) and Director of Securities Lending
(November 1997 to October 2002), BISYS.
Mr. Jay G. Baris, 52 Assistant December 1997 Partner, Kramer Levin Naftalis & Frankel LLP.
Secretary
Ms. Alaina Metz, 38 Assistant December 1996 Chief Administrative Officer, BISYS.
Secretary
Mr. David L. Hughes, 43 Treasurer May 2005 Vice President and Treasurer, Financial Services
Department, BISYS, since February 2005; Chief
Financial Officer, Evergreen Investments from 2000
to 2004.
Mr. Christopher E. Sabato, Assistant February 2005 Director of Financial
37 Treasurer Services, BISYS.
Mr. Martin R. Dean, 41 Assistant December 2003 Vice President, Compliance Services, BISYS.
Vice
President and
Anti-Money
Laundering
Compliance
Officer
Mr. Edward J. Veilleux, 62 Chief October 2005 President of EJV Financial Services (mutual fund
Compliance consulting) since 2002; Director of Deutsche Asset
Officer Management from 1987 to 2002.
|
ADVISORY AND OTHER CONTRACTS.
Investment Adviser.
One of the Fund's most important contracts is with the Adviser, a New York corporation registered as an investment adviser with the SEC. The Adviser is a wholly owned subsidiary of KeyBank National Association, which is the principal banking subsidiary of KeyCorp. As of December 31, 2005, the Adviser and its affiliates managed assets totaling in excess of $_____ 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 December 31, 2005, KeyCorp had an asset base of approximately $_____ billion, with banking and trust and investment offices throughout the United States. A subsidiary of KeyCorp, McDonald Investments Inc. ("McDonald"), 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 and leasing companies.
The following schedule lists the advisory fees for each Fund, as an annual percentage of its average daily net assets. As of January 1, 2005, certain Funds operated under more favorable "breakpoint schedules" with respect to the calculation of these fees, as noted in the following tables, which the Board approved on December 16, 2004. (As noted below, the Stock Index Fund's current breakpoint schedule became effective on March 1, 2004.)
Equity Funds
---------------------------------- ---------------------------------------- -----------------------------------------
Advisory Fee
Fund As of January 1, 2005 Prior Advisory Fee
---------------------------------- ---------------------------------------- -----------------------------------------
Diversified Stock 0.65% on the first $800 million, 0.60% 0.65% on the first $800 million and
on the next $1.6 billion and 0.55% on 0.60% on assets in excess of $800
assets in excess of $2.4 billion million
---------------------------------- ---------------------------------------- -----------------------------------------
Established Value 0.65% on the first $100 million, 0.55% No change
on the next $100 million and 0.45% on
assets in excess of $200 million
---------------------------------- ---------------------------------------- -----------------------------------------
Focused Growth 0.75% on the first $400 million, 0.65% No change
on the next $400 million and 0.60% on
assets in excess of $800 million
---------------------------------- ---------------------------------------- -----------------------------------------
Small Company Opportunity 0.65% on the first $100 million, 0.55% No change
on the next $100 million and 0.45% on
assets in excess of $200 million
---------------------------------- ---------------------------------------- -----------------------------------------
Special Value 0.75% on the first $400 million, 0.65% No change
on the next $400 million and 0.60% on
assets in excess of $800 million
---------------------------------- ---------------------------------------- -----------------------------------------
Stock Index 0.25% on the first $400 million, 0.20% No change
on the next $400 million and 0.15% on
assets in excess of $800 million
---------------------------------- ---------------------------------------- -----------------------------------------
Value 0.75% on the first $400 million, 0.65% No change
on the next $400 million and 0.60% on
assets in excess of $800 million
---------------------------------- ---------------------------------------- -----------------------------------------
|
Specialty Funds
---------------------------------- ---------------------------------------- -----------------------------------------
Advisory Fee
Fund As of January 1, 2005 Prior Advisory Fee
---------------------------------- ---------------------------------------- -----------------------------------------
Balanced 0.60% on the first $400 million, 0.55% 0.70% on the first $400 million, 0.65%
on the next $400 million and 0.50% on on the next $400 million and 0.60% on
assets in excess of $800 million assets in excess of $800 million
---------------------------------- ---------------------------------------- -----------------------------------------
Convertible 0.75% on the first $400 million, 0.65% 0.75% on all Fund assets
on the next $400 million and 0.60% on
assets in excess of $800 million
---------------------------------- ---------------------------------------- -----------------------------------------
|
Taxable Fixed-Income Funds
---------------------------------- ---------------------------------------- -----------------------------------------
Advisory Fee
Fund As of January 1, 2005 Prior Advisory Fee
---------------------------------- ---------------------------------------- -----------------------------------------
Core Bond 0.50% on the first $400 million, 0.45% 0.75% on all Fund assets
on the next $400 million and 0.40% on
assets in excess of $800 million
---------------------------------- ---------------------------------------- -----------------------------------------
Fund for Income 0.50% on the first $400 million, 0.45% 0.50% on all Fund assets
on the next $400 million and 0.40% on
assets in excess of $800 million
---------------------------------- ---------------------------------------- -----------------------------------------
|
Tax-Exempt Fixed-Income Funds
---------------------------------- ---------------------------------------- -----------------------------------------
Advisory Fee
Fund As of January 1, 2005 Prior Advisory Fee
---------------------------------- ---------------------------------------- -----------------------------------------
National Municipal Bond 0.55% on the first $400 million, 0.50% 0.55% on all Fund assets
on the next $400 million and 0.45% on
assets in excess of $800 million
---------------------------------- ---------------------------------------- -----------------------------------------
Ohio Municipal Bond 0.55% on the first $400 million, 0.50% 0.60% on all Fund assets
on the next $400 million and 0.45% on
assets in excess of $800 million
---------------------------------- ---------------------------------------- -----------------------------------------
|
Money Market Funds
---------------------------------- ---------------------------------------- -----------------------------------------
Advisory Fee
Fund As of January 1, 2005 Prior Advisory Fee
---------------------------------- ---------------------------------------- -----------------------------------------
Federal Money Market 0.25% on the first $1.5 billion, 0.20% 0.25% on all Fund assets
on the next $1.5 billion and 0.15% on
assets in excess of $3 billion
---------------------------------- ---------------------------------------- -----------------------------------------
Financial Reserves 0.50% No change
---------------------------------- ---------------------------------------- -----------------------------------------
Gradison Government Reserves 0.40% on the first $3 billion, 0.30% 0.50% on the first $400 million, 0.45%
on the next $500 million and 0.25% on on the next $600 million, 0.40% on the
assets in excess of $3.5 billion next $1 billion and 0.35% on assets in
excess of $2 billion
---------------------------------- ---------------------------------------- -----------------------------------------
Institutional Money Market 0.20% on the first $1.5 billion, 0.17% 0.20% on all Fund assets
on the next $1.5 billion and 0.15% on
assets in excess of $3 billion
---------------------------------- ---------------------------------------- -----------------------------------------
Ohio Municipal Money Market 0.45% on the first $600 million, 0.35% 0.50% on all Fund assets
on the next $600 million and 0.25% on
assets in excess of $1.2 billion
---------------------------------- ---------------------------------------- -----------------------------------------
Prime Obligations 0.35% on the first $1.5 billion, 0.30% 0.35% on all Fund assets
on the next $500 million, 0.25% on the
next $500 million and 0.20% on assets
in excess of $2.5 billion
---------------------------------- ---------------------------------------- -----------------------------------------
Tax-Free Money Market 0.35% on the first $600 million, 0.30% 0.35% on all Fund assets
on the next $600 million and 0.25% on
assets in excess of $1.2 billion
---------------------------------- ---------------------------------------- -----------------------------------------
|
The Advisory Agreement.
Unless sooner terminated, the investment advisory agreement between the Adviser and the Trust, on behalf of the Funds (the "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 Board 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 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 Agreement also terminates automatically in the event of any assignment, as defined in the 1940 Act.
The 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, 2005, the Adviser was paid the following advisory fees with respect to the Funds. The amount of fees paid to the Adviser is shown net of the amount of fee reduction.
------------------------------------------------------------------------------------------------------------------
Fund 2005 2004 2003
------------------------------------------------------------------------------------------------------------------
Fees Paid Fee Fees Paid Fee Fees Paid Fee
Reduction Reduction Reduction
------------------------------------------------------------------------------------------------------------------
Balanced $ $ $945,844 $31,902 $1,217,772 $0
------------------------------------------------------------------------------------------------------------------
Convertible 628,035 0 530,188 0
------------------------------------------------------------------------------------------------------------------
Core Bond 1,117,534 385,929 1,537,888 338,731
------------------------------------------------------------------------------------------------------------------
Diversified Stock 10,671,389 0 6,786,477 0
------------------------------------------------------------------------------------------------------------------
Established Value 1,719,383 0 1,535,367 0
------------------------------------------------------------------------------------------------------------------
Federal Money Market 3,141,568 428,366 3,193,692 599,092
------------------------------------------------------------------------------------------------------------------
Financial Reserves 2,534,534 0 2,925,853 0
------------------------------------------------------------------------------------------------------------------
Focused Growth 0 3,363 N/A N/A
------------------------------------------------------------------------------------------------------------------
Fund for Income 2,289,555 0 2,857,124 0
------------------------------------------------------------------------------------------------------------------
Gradison Gov't Reserves 12,997,485 0 14,714,363 0
------------------------------------------------------------------------------------------------------------------
Institutional Money 2,872,291 0 3,143,017 0
Mkt.
------------------------------------------------------------------------------------------------------------------
National Muni Bond 332,994 73,993 376,400 83,643
------------------------------------------------------------------------------------------------------------------
Ohio Municipal Bond 1,109,736 0 1,255,882 0
------------------------------------------------------------------------------------------------------------------
Ohio Muni Money Mkt. 3,262,690 0 4,131,116 0
------------------------------------------------------------------------------------------------------------------
Prime Obligations 5,133,111 0 6,423,843 0
------------------------------------------------------------------------------------------------------------------
Small Co. Opportunity 797,212 72,034 652,308 69,029
------------------------------------------------------------------------------------------------------------------
Special Value 1,480,176 0 1,320,747 0
------------------------------------------------------------------------------------------------------------------
Stock Index 373,208 0 691,054 70,280
------------------------------------------------------------------------------------------------------------------
Tax-Free Money Market 2,265,152 0 2,369,879 0
------------------------------------------------------------------------------------------------------------------
Value 1,769,232 0 1,848,990 0
------------------------------------------------------------------------------------------------------------------
|
Portfolio Managers.
This section includes information about the Funds' portfolio managers, including information concerning other accounts they manage, the dollar range of Fund shares they own and how they are compensated. For each Fund, the portfolio managers listed in the following table manage all of the other investment companies, other pooled investment vehicles and other accounts shown below as a team.
Other Accounts
------------------------------------------------- --------------------------------- ------------------------------------
Fund (Portfolio Management Team) Number of Other Accounts (Total Number of Other Accounts
(Total Assets)(1) Subject to a
Assets)(1) Performance Fee as
of October 31, 2005 as of
October 31, 2005
------------------------------------------------- --------------------------------- ------------------------------------
Balanced Fund (Ms. Cynthia G. Koury, Mr. Babin
and Mr. Thomas M. Seay)
Other Investment Companies None N/A
................................................. ................................. ....................................
Other Pooled Investment Vehicles ___ ($___ billion) None
................................................. ................................. ....................................
Other Accounts ___ ($___ billion) ___ ($___ million)
------------------------------------------------- --------------------------------- ------------------------------------
Convertible Fund (Ms. Amy E. Bush, Mr. Richard
A. Janus and Mr. James K. Kaesberg)
Other Investment Companies None N/A
................................................. ................................. ....................................
Other Pooled Investment Vehicles ___ ($___ million) None
................................................. ................................. ....................................
Other Accounts ___ ($___ million) None
------------------------------------------------- --------------------------------- ------------------------------------
Core Bond Fund (Mr. Seay, Mr. Trenton
Tipton-Fletcher and Craig E. Ruch)
Other Investment Companies None N/A
................................................. ................................. ....................................
Other Pooled Investment Vehicles ___ ($___ billion) N/A
................................................. ................................. ....................................
Other Accounts ___ ($___ million) N/A
------------------------------------------------- --------------------------------- ------------------------------------
Diversified Stock Fund (Mr. Lawrence G. Babin,
Mr. Paul D. Danes and Ms. Carolyn M. Rains)
Other Investment Companies ___ ($___ billion) None
................................................. ................................. ....................................
Other Pooled Investment Vehicles ___ ($___ million) None
................................................. ................................. ....................................
Other Accounts ___ ($___ billion) ___ ($___ million)
------------------------------------------------- --------------------------------- ------------------------------------
Established Value Fund (Mr. Gregory Conners and
Mr. Gary H. Miller)
Other Investment Companies ___ ($___ million) None
................................................. ................................. ....................................
Other Pooled Investment Vehicles ___ ($___ million) None
................................................. ................................. ....................................
Other Accounts ___ ($___ million) None
------------------------------------------------- --------------------------------- ------------------------------------
Focused Growth Fund (Mr. James B. Cowperthwait,
Sr.(2), Mr. Jason E. Dahl, Mr. Scott R.
Kefer, Mr. William G. Kenney, Mr. Michael
B. Koskuba, Mr. Erick F. Maronak and Ms.
Cynthia J. Starke)
Other Investment Companies None N/A
................................................. ................................. ....................................
Other Pooled Investment Vehicles None N/A
................................................. ................................. ....................................
Other Accounts ___ ($___ million) None
------------------------------------------------- --------------------------------- ------------------------------------
---------------
(1) Rounded to the nearest billion, or million, as relevant.
(2) Mr. Cowperthwait will retire as a portfolio manager of the Focused Growth
Fund effective June 30, 2006.
76
|
------------------------------------------------- --------------------------------- ------------------------------------
Fund (Portfolio Management Team) Number of Other Accounts (Total Number of Other Accounts
(Total Assets)(1) Subject to a
Assets)(1) Performance Fee as
of October 31, 2005 as of
October 31, 2005
------------------------------------------------- --------------------------------- ------------------------------------
Fund for Income (Mr. Seay, Mr. Tipton-Fletcher
and Ms. Heidi Adelman(3))
Other Investment Companies None N/A
................................................. ................................. ....................................
Other Pooled Investment Vehicles ___ ($___ million) None
................................................. ................................. ....................................
Other Accounts ___ ($___ million) None
------------------------------------------------- --------------------------------- ------------------------------------
National Municipal Bond Fund (Ms. Sean M.
Roche, Mr. Paul A. Toft)
Other Investment Companies None N/A
................................................. ................................. ....................................
Other Pooled Investment Vehicles ___ ($___ million) None
................................................. ................................. ....................................
Other Accounts ___ ($___ million) None
------------------------------------------------- --------------------------------- ------------------------------------
Ohio Municipal Bond Fund (Mr. Toft)
Other Investment Companies None N/A
................................................. ................................. ....................................
Other Pooled Investment Vehicles ___ ($___ million) None
................................................. ................................. ....................................
Other Accounts ___ ($___ million) None
------------------------------------------------- --------------------------------- ------------------------------------
Small Company Opportunity Fund (Mr. Conners and
Mr. Miller)
Other Investment Companies ___ ($___ million) None
................................................. ................................. ....................................
Other Pooled Investment Vehicles ___ ($___ million) None
................................................. ................................. ....................................
Other Accounts ___ ($___ million) None
------------------------------------------------- --------------------------------- ------------------------------------
Special Value Fund (Mr. Patrick Dunkerley and
Mr. Leslie Z. Globits)
Other Investment Companies None N/A
................................................. ................................. ....................................
Other Pooled Investment Vehicles ___ ($___ million) None
................................................. ................................. ....................................
Other Accounts ___ ($___ million) None
------------------------------------------------- --------------------------------- ------------------------------------
Stock Index Fund (Mr. Ernest C. Pelaia, Mr.
Tipton-Fletcher and Mr. Jason Putman(4))
Other Investment Companies None N/A
................................................. ................................. ....................................
Other Pooled Investment Vehicles ___ ($___ billion) None
................................................. ................................. ....................................
Other Accounts ___ ($___ million) None
------------------------------------------------- --------------------------------- ------------------------------------
Value Fund (Mr. Arvind K. Sachdeva, Mr. Neil A.
Kilbane and Mr. Richard J. Turgeon)
Other Investment Companies None N/A
................................................. ................................. ....................................
Other Pooled Investment Vehicles ___ ($___ million) N/A
................................................. ................................. ....................................
Other Accounts ___ ($___ million) N/A
------------------------------------------------- --------------------------------- ------------------------------------
|
In managing other investment companies, other pooled investment vehicles and other accounts, the Adviser may employ strategies similar to those employed by the Funds. As a result, these other accounts may invest in the same securities as the Funds. The SAI section entitled "Advisory and Other Contracts -- Portfolio Transactions" discusses the various factors that the Adviser considers in allocating investment opportunities among the Funds and other similarly managed accounts.
(4) Mr. Putman joined the Value Fund portfolio manager team on March 1, 2006.
Fund Ownership
------------------------------------------ ------------------------------------ ----------------------------------------
Dollar Range of Shares
Beneficially Owned
Portfolio Manager Fund as of October 31, 2005
------------------------------------------ ------------------------------------ ----------------------------------------
Ms. Adelman Fund for Income
------------------------------------------ ------------------------------------ ----------------------------------------
Mr. Babin Balanced Fund None
------------------------------------ ----------------------------------------
Diversified Stock Fund $100,001 to $500,000
------------------------------------------ ------------------------------------ ----------------------------------------
Ms. Bush Convertible Fund $10,001 to $50,000
------------------------------------------ ------------------------------------ ----------------------------------------
Mr. Conners Established Value Fund $10,001 to $50,000
------------------------------------ ----------------------------------------
Small Company Opportunity Fund $1 to $10,000
------------------------------------------ ------------------------------------ ----------------------------------------
Mr. Cowperthwait Focused Growth Fund $100,001 to $500,000
------------------------------------------ ------------------------------------ ----------------------------------------
Mr. Dahl Focused Growth Fund $10,001 to $50,000
------------------------------------------ ------------------------------------ ----------------------------------------
Mr. Danes Diversified Stock Fund $100,001 to $500,000
------------------------------------------ ------------------------------------ ----------------------------------------
Mr. Dunkerley Special Value Fund None
------------------------------------------ ------------------------------------ ----------------------------------------
Mr. Globits Special Value Fund $10,001 to $50,000
------------------------------------------ ------------------------------------ ----------------------------------------
Mr. Janus Convertible Fund $50,001 to $100,000
------------------------------------------ ------------------------------------ ----------------------------------------
Mr. Kaesberg Convertible Fund $10,001 to $50,000
------------------------------------------ ------------------------------------ ----------------------------------------
Mr. Kefer Focused Growth Fund None
------------------------------------------ ------------------------------------ ----------------------------------------
Mr. Kenney Focused Growth Fund None
------------------------------------------ ------------------------------------ ----------------------------------------
Mr. Kilbane Value Fund None
------------------------------------------ ------------------------------------ ----------------------------------------
Mr. Koskuba Focused Growth Fund None
------------------------------------------ ------------------------------------ ----------------------------------------
Ms. Koury Balanced Fund $10,001 to $50,000
------------------------------------------ ------------------------------------ ----------------------------------------
Mr. Maronak Focused Growth Fund None
------------------------------------------ ------------------------------------ ----------------------------------------
Mr. Miller Established Value Fund None
------------------------------------------ ------------------------------------ ----------------------------------------
Mr. Pelaia Stock Index Fund $10,001 to $50,000
------------------------------------------ ------------------------------------ ----------------------------------------
Mr. Putman Value Fund
------------------------------------------ ------------------------------------ ----------------------------------------
Ms. Rains Diversified Stock Fund $10,001 to $50,000
------------------------------------------ ------------------------------------ ----------------------------------------
Mr. Roche National Municipal Bond Fund None
------------------------------------ ----------------------------------------
Ohio Municipal Bond Fund None
------------------------------------------ ------------------------------------ ----------------------------------------
Mr. Ruch Core Bond Fund None
------------------------------------------ ------------------------------------ ----------------------------------------
Mr. Sachdeva Value Fund $10,001 to $50,000
------------------------------------------ ------------------------------------ ----------------------------------------
Mr. Seay Balanced Fund None
------------------------------------ ----------------------------------------
Core Bond Fund None
------------------------------------ ----------------------------------------
Fund for Income $1 to $10,000
------------------------------------ ----------------------------------------
Ms. Starke Focused Growth Fund $10,001 to $50,000
------------------------------------------ ------------------------------------ ----------------------------------------
Mr. Tipton-Fletcher Core Bond $1 to $10,000
------------------------------------ ----------------------------------------
Fund for Income $1 to $10,000
------------------------------------ ----------------------------------------
------------------------------------ ----------------------------------------
Stock Index Fund None
------------------------------------------ ------------------------------------ ----------------------------------------
Mr. Toft National Municipal Bond Fund $100,001 to $500,000
------------------------------------ ----------------------------------------
Ohio Municipal Bond Fund None
----------------------------------------- ------------------------------------ ----------------------------------------
Mr. Turgeon Value Fund None
------------------------------------------ ------------------------------------ ----------------------------------------
|
Compensation
Each Fund's portfolio managers each receives a base salary plus an annual incentive bonus for managing the Fund, other investment companies, other pooled investment vehicles and other accounts (including other accounts for
which the Adviser receives a performance fee). A manager's base salary is dependent on the manager's level of experience and expertise. The Adviser monitors each manager's base salary relative to salaries paid for similar positions with peer firms by reviewing data provided by various consultants that specialize in competitive salary information.
A portfolio manager's annual incentive bonus is based on the manager's individual and investment performance results. The Adviser establishes a "target" incentive for each portfolio manager based on the manager's level of experience and expertise in the manager's investment style. This target is set at a percentage of base salary, generally ranging from 40% to 150%. Individual performance is based on balanced scorecard objectives established annually during the first quarter of the fiscal year, and is assigned a 50% weighting. Individual performance metrics include portfolio structure and positioning as determined by a consultant, research, asset growth, client retention, presentation skills, marketing to prospective clients and contribution to KeyCorp's corporate philosophy and values, such as leadership and teamwork. Investment performance is based on investment performance of each portfolio manager's portfolio or Fund relative to a selected peer group(s), and is assigned a 50% weighting. The overall performance results of each Fund and all similarly-managed investment companies, pooled investment vehicles and other accounts are compared to the performance information of a peer group of similarly-managed competitors, as supplied by third party analytical agencies. The manager's performance versus the peer group then determines the final incentive amount, which generally ranges from zero to 150% of the "target," depending on results. For example, performance in an upper decile may result in an incentive bonus that is 150% of the "target" while below-average performance may result in an incentive bonus as low as zero. Performance results for a manager are based on the composite performance of all accounts managed by that manager on a combination of one and three year rolling performance. Composite performance is calculated on a pre-tax basis and does not reflect applicable fees.
The Funds' portfolio managers may participate either in the Adviser's long-term incentive plan, the results for which are based on the Adviser's business results (the "Adviser Incentive Plan"), or may receive options on KeyCorp common stock (the "KeyCorp Incentive Plan"). Eligibility for participation in these incentive programs depends on the manager's performance and seniority. The following portfolio managers participate in the Adviser Incentive Plan: Mr. Babin, Ms. Bush, Mr. Dahl, Mr. Danes, Mr. Dunkerley, Mr. Janus, Mr. Kaesberg, Mr. Kefer, Mr. Kenney, Mr. Kilbane, Mr. Koskuba, Ms. Koury, Mr. Maronak, Mr. Miller, Ms. Rains, Mr. Ruch, Mr. Sachdeva, Mr. Seay, Ms. Starke, Mr. Tipton-Fletcher and Mr. Toft. The following portfolio managers participate in the KeyCorp Incentive Plan: Mr. Conners, Mr. Dahl, Mr. Dunkerley, Mr. Globits, Mr. Kefer, Mr. Kenney, Mr. Koskuba, Mr. Maronak, Mr. Miller, Mr. Pelaia, Mr. Roche and Ms. Starke. Mr. Cowperthwait does not participate in either Incentive Plan.
In addition to the compensation described above, each of the Diversified Stock Fund's portfolio managers (Mr. Babin, Mr. Danes and Ms. Rains) and each of the Core Bond Fund's portfolio managers (Mr. Seay, Mr. Tipton-Fletcher and Mr. Ruch) may earn long-term incentive compensation based on a percentage of the incremental, year-over-year growth in revenue to the Adviser attributable to fees paid by all investment companies, other pooled investment vehicles and other accounts that employ strategies similar to those employed by the Diversified Stock Fund and the Core Bond Fund.
Code of Ethics.
Each of the Trust, the Adviser and the Distributor has adopted a Code of Ethics. The Adviser Code of Ethics applies to all Access Personnel (the Adviser's directors and officers and employees with investment advisory duties) and all Supervised Personnel (all of the Adviser's directors, officers and employees). Each Code of Ethics provides that Access Personnel must refrain from certain trading practices. Each Code also requires all Access Personnel (and, in the Adviser Code, all Supervised Personnel) to report certain personal investment activities, including, but not limited to, purchases or sales of securities that may be purchased or held by the Funds. Violations of any Code of Ethics can result in penalties, suspension, or termination of employment.
Proxy Voting Policies and Procedures.
In accordance with the 1940 Act, the Trust has adopted policies and procedures for voting proxies related to equity securities that the Funds hold (the "Proxy Voting Policy"). The Proxy Voting Policy is designed to: (i) ensure that the Trust votes proxies only with a view to the best interests of the Funds' shareholders; (ii) address conflicts of
interests between these shareholders, on the one hand, and affiliates of the Funds, the Adviser or the Distributor, on the other, that may arise regarding the voting of proxies; and (iii) provide for the disclosure of the Funds' proxy voting records and the Policy.
The Proxy Voting Policy delegates to the Adviser the obligation to vote the Trust's proxies and contains procedures designed to ensure that proxies are voted and to deal with conflicts of interests. The Board annually will review the Proxy Voting Policies of the Trust and the Adviser and determine whether to amend the Trust's Policy or to recommend to the Adviser any proposed amendment to its Policy. The Proxy Voting Policies of the Trust and of the Adviser are included in this SAI at Appendix B.
The Trust's Proxy Voting Policy provides that the Funds, in accordance with SEC rules, annually will disclose on Form N-PX each Fund's proxy voting record. Information regarding how each Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30, as well as that for all such periods ended June 30, 2004 or later, is available without charge, upon request, by calling toll free 800 539-FUND (800 539 3863) or by accessing the SEC's website at www.sec.gov.
Portfolio Transactions.
Fixed Income Trading. Fixed income and convertible securities are bought and sold through broker-dealers acting on a principal basis. These trades are not charged a commission, but rather are marked up or marked down by the executing broker-dealer. The Adviser does not know the actual value of the markup/markdown. However, the Adviser attempts to ascertain whether the overall price of a security is reasonable through the use of competitive bids. For the three fiscal years ended October 31, 2005, the Money Market and Fixed Income Funds paid no brokerage commissions. [confirm]
Orders to buy or sell convertible securities and fixed income securities are
placed on a competitive basis with a reasonable attempt made to obtain three
competitive bids or offers. Exceptions are: (1) where the bid/ask spread is 1/8
or less, provided the order is actually filled at the bid or better for
purchases and at the ask or better for sales; (2) securities for which there are
only one or two market makers; (3) block purchases considered relatively large;
(4) swaps, a simultaneous sale of one security and purchase of another in
substantially equal amounts for the same account, intended to take advantage of
an aberration in a spread relationship, realize losses, etc.; and (5) purchases
and/or sales of fixed income securities for which, typically, more than one
offering of the same issue is unobtainable; subject to a judgment by the trader
that the bid is competitive.
Money Market Funds. 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 these Funds require that investments mature in 397 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 these Funds.
All Other Markets. Subject to the consideration of obtaining best execution, brokerage commissions generated from client transactions may be used to obtain services and/or research from broker-dealers to assist in the Adviser's investment management decision-making process. These services and research are in addition to and do not replace the services and research that the Adviser is required to perform and do 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 Funds 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 Funds.
Brokerage commissions may never be used to compensate a third party for client referrals unless the client has directed such an arrangement. In addition, brokerage commissions may never be used to obtain research and/or services for the benefit of any employee or non-client entity.
It is the policy of the Adviser to obtain the "best execution" of its clients' securities transactions. The Adviser strives to execute each client's securities transactions in such a manner that the client's total costs or proceeds in each transaction are the most favorable under the circumstances. Commission rates paid on securities transactions for client accounts must reflect prevailing market rates. In addition, the Adviser will consider the full range and quality of a broker's services in placing brokerage including, but not limited to, the value of research provided, execution capability, commission rate, willingness and ability to commit capital and responsiveness. The lowest possible commission cost alone does not determine broker selection. The transaction that represents the best quality execution for a client account will be executed. Quarterly, the Adviser's research analysts and portfolio managers will participate in a broker vote. The Adviser's Equity Trading Desk will utilize the vote results during the broker selection process.
Investment decisions for each Fund are made independently from those made for the other Funds or any other investment company or account managed by the Adviser. Such other investment companies or accounts may also invest in the same securities and may follow similar investment strategies as the Funds. The Adviser may combine transaction orders ("bunching" or "blocking" trades) for more than one client account where such action appears to be equitable and potentially advantageous for each account (e.g., for the purpose of reducing brokerage commissions or obtaining a more favorable transaction price.) The Adviser will aggregate transaction orders only if it believes that the aggregation is consistent with its duty to seek best execution for its clients and is consistent with the terms of investment advisory agreements with each client for whom trades are being aggregated. Both equity and fixed-income securities may be aggregated. When making such a combination of transaction orders for a new issue or secondary market trade in an equity security, the Adviser adheres to the following objectives:
o Fairness to clients both in the priority of execution of orders for their account, and in the allocation of orders for the accounts of more than one client.
o Allocation of all orders in a timely and efficient manner.
In some cases, "bunching" or "blocking" trades 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.
The aggregation of transactions for advisory accounts and proprietary accounts (including partnerships and other accounts in which the Adviser or its associated persons are partners or participants, and managed employee accounts) is permissible. No proprietary account may be favored over any other participating account and such practice must be consistent with the Adviser's Code of Ethics.
Equity trade orders are executed based only on trade instructions received from portfolio managers by the trading desk. Orders are processed on a first-come, first-serve basis. At times, a rotation system may determine "first-come, first-serve" treatment when the trading desk receives the same order for multiple accounts simultaneously. The Adviser may not have two competing orders in the market. Therefore, if a client directed brokerage trade is first in the rotation, that trade must be executed before the next trade in the rotation can be processed. This trading process may help/hurt the Funds dependent upon market conditions. Any new trade that can be blocked with an existing open order will be added to the open order to form a larger block. The Adviser receives no additional compensation or remuneration of any kind as a result of the aggregation of trades.
If the order is filled in its entirety, securities purchased in the aggregate transaction will be allocated among accounts participating in the trade in accordance with an Allocation Statement prepared at the time of order entry. If the order is partially filled, the securities will be allocated pro rata based on the Allocation Statement. Portfolio managers may allocate executed trades in a different manner than indicated on the Allocation Statement (e.g. non-pro rata) only if all client accounts receive fair and equitable treatment.
All managed accounts participating in a block execution shall receive the same execution price, an average share price, for securities purchased or sold on a trading day. Execution prices may not be carried overnight. Any portion of an order that remains unfilled at the end of a given day shall be rewritten (absent contrary instructions) on the following day as a new order. Managed accounts with trades executed the next day will receive a new daily average price to be determined at the end of the following day.
In some instances, it may not be practical to complete the Allocation Statement prior to the placement of the order. In that case, the trading desk will complete the Allocation Statement as soon as practicable, but no later than the end of the same business day on which the securities have been allocated to the trading desk by the broker.
Where the full amount of a block execution is not executed, the partial amount
actually executed will be allocated on a pro rata basis whenever possible. The
following execution methods maybe used in place of a pro rata procedure:
relative size allocations, security position weighting, priority for specialized
accounts, or a special allocation based on compliance approval.
After the proper allocation has been completed, excess shares must be sold in the secondary market, and may not be reallocated to another managed account.
In making investment decisions for the Funds, 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, its parents, 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 Funds.
The following table shows the brokerage commissions that certain Equity and Specialty Funds paid during the last three fiscal years ended October 31.
----------------------------------------------------------------------------------------------------- Fund 2005 2004 2003 ----------------------------------------------------------------------------------------------------- Balanced $ $274,404 $231,941 ----------------------------------------------------------------------------------------------------- Convertible 36,804 23,176 ----------------------------------------------------------------------------------------------------- Diversified Stock 4,419,802 3,218,592 ----------------------------------------------------------------------------------------------------- Established Value 405,742 414,431 ----------------------------------------------------------------------------------------------------- Focused Growth 704 N/A ----------------------------------------------------------------------------------------------------- Small Company Opportunity 358,409 285,903 ----------------------------------------------------------------------------------------------------- Special Value 1,052,362 606,022 ----------------------------------------------------------------------------------------------------- Stock Index 7,973 245,523 ----------------------------------------------------------------------------------------------------- Value 701,959 916,488 ----------------------------------------------------------------------------------------------------- |
Affiliated Brokerage. The Board has authorized the allocation of brokerage to affiliated broker-dealers on an agency basis to effect portfolio transactions. The Board has adopted procedures incorporating the standards of Rule 17e-1 under 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 broker-dealers in connection with comparable transactions involving similar securities during a comparable period of time."
Except when necessary in the Stock Index Fund, the Trust will not acquire portfolio securities issued by, make savings deposits in, or enter into repurchase or reverse repurchase agreements with the Adviser, KeyBank or their affiliates, or BISYS or its affiliates and will not give preference to KeyBank's correspondent banks or affiliates, or BISYS with respect to such transactions, securities, savings deposits, repurchase agreements and reverse repurchase agreements. From time to time, when determined by the Adviser to be advantageous to the Funds, the Adviser may execute portfolio transactions through McDonald. McDonald is an affiliate of KeyBank. All transactions with McDonald must be completed in accordance with procedures approved by the Board. The percentage of trades executed through McDonald for a Fund may be higher relative to trades executed by unaffiliated dealers, so long as the trades executed by McDonald are consistent with best execution.
The following table shows the commissions that each relevant Fund paid to McDonald for the fiscal years ended October 31, 2003 and October 31, 2004.
-------------------------------------------------------------------------------------
Fund 2003 2004
-------------------------------------------------------------------------------------
Balanced $81,319 $
-------------------------------------------------------------------------------------
82
|
------------------------------------------------------------------------------------- Fund 2003 2004 ------------------------------------------------------------------------------------- Convertible 200 ------------------------------------------------------------------------------------- Diversified Stock 506,335 ------------------------------------------------------------------------------------- Established Value 32,560 ------------------------------------------------------------------------------------- Small Company Opportunity 1,500 ------------------------------------------------------------------------------------- Special Value 15,700 ------------------------------------------------------------------------------------- Value 215,941 ------------------------------------------------------------------------------------- |
The following table shows the following information for the fiscal year ended October 31, 2005: the commissions that each relevant Fund paid to McDonald; the percentage of each such Fund's aggregate brokerage commissions paid to McDonald; and the percentage of each such Fund's aggregate dollar amount of transactions involving the payment of commissions to McDonald.
---------------------------------------------------------------------------------------------------------------------
Commissions paid to Percentage of Commissions Percentage of Transactions involving
McDonald paid to McDonald Commissions paid to McDonald
---------------------------------------------------------------------------------------------------------------------
Balanced $ % %
---------------------------------------------------------------------------------------------------------------------
Convertible
---------------------------------------------------------------------------------------------------------------------
Diversified Stock
---------------------------------------------------------------------------------------------------------------------
Established Value
---------------------------------------------------------------------------------------------------------------------
Focused Growth
---------------------------------------------------------------------------------------------------------------------
Small Company Opportunity
---------------------------------------------------------------------------------------------------------------------
Special Value
---------------------------------------------------------------------------------------------------------------------
Value
---------------------------------------------------------------------------------------------------------------------
|
Allocation of Brokerage in Connection with Research Services. During the fiscal year ended October 31, 2005, the Adviser, through agreements or understandings with brokers, or otherwise through an internal allocation procedure, directed the brokerage transactions of certain Equity and Specialty Funds to brokers because of research services provided. The following table indicates the Funds that entered into these transactions, the amount of these transactions and related commissions paid during this period. These amounts represent transactions effected with, and related commissions paid to, brokers that provide third party research services. They do not include transactions and commissions involving brokers that provide proprietary research.
--------------------------------------------------------------------------------------------------------------------
Amount of Transactions to
Fund Brokers Providing Research Related Commissions
--------------------------------------------------------------------------------------------------------------------
Balanced $ $
--------------------------------------------------------------------------------------------------------------------
Convertible
--------------------------------------------------------------------------------------------------------------------
Diversified Stock
--------------------------------------------------------------------------------------------------------------------
Established Value
--------------------------------------------------------------------------------------------------------------------
Focused Growth
--------------------------------------------------------------------------------------------------------------------
Small Company Opportunity
--------------------------------------------------------------------------------------------------------------------
Special Value
--------------------------------------------------------------------------------------------------------------------
Value
--------------------------------------------------------------------------------------------------------------------
|
Securities of Regular Brokers or Dealers. The SEC requires the Trust to provide certain information for those Funds that held securities of their regular brokers or dealers (or their parents) during the Trust's most recent fiscal year. The following table identifies, for each applicable Fund, those brokers or dealers, the type of security and the value of the Fund's aggregate holdings of the securities of each such issuer as of October 31, 2005.
-------------------------------------------------------------------------------------------------------------------
Type of Security
Fund Broker-Dealer (Debt or Equity) Aggregate Value
-------------------------------------------------------------------------------------------------------------------
Balanced Bear Stearns Debt $
-------------------------------------------------------------------------------------------------------------------
Credit Suisse First Debt
Boston
-------------------------------------------------------------------------------------------------------------------
Goldman Sachs Debt
-------------------------------------------------------------------------------------------------------------------
Lehman Brothers Debt
-------------------------------------------------------------------------------------------------------------------
Merrill Lynch Debt
-------------------------------------------------------------------------------------------------------------------
Morgan Stanley Dean Debt
Witter
-------------------------------------------------------------------------------------------------------------------
Convertible Lehman Brothers Equity
-------------------------------------------------------------------------------------------------------------------
Morgan Stanley Dean Debt
Witter
-------------------------------------------------------------------------------------------------------------------
Core Bond Bear Stearns Debt
-------------------------------------------------------------------------------------------------------------------
Goldman Sachs Debt
-------------------------------------------------------------------------------------------------------------------
Lehman Brothers Debt
-------------------------------------------------------------------------------------------------------------------
Merrill Lynch Debt
-------------------------------------------------------------------------------------------------------------------
Morgan Stanley Dean Debt
Witter
-------------------------------------------------------------------------------------------------------------------
Federal Money Market Bear Stearns Debt
-------------------------------------------------------------------------------------------------------------------
Morgan Stanley Dean Debt
Witter
-------------------------------------------------------------------------------------------------------------------
Financial Reserves Bear Stearns Debt
-------------------------------------------------------------------------------------------------------------------
Credit Suisse First Debt
Boston
-------------------------------------------------------------------------------------------------------------------
Morgan Stanley Dean Debt
Witter
-------------------------------------------------------------------------------------------------------------------
Focused Growth Merrill Lynch Equity
-------------------------------------------------------------------------------------------------------------------
Institutional Money Market Bear Stearns Debt
-------------------------------------------------------------------------------------------------------------------
Credit Suisse First Debt
Boston
-------------------------------------------------------------------------------------------------------------------
Goldman Sachs Debt
-------------------------------------------------------------------------------------------------------------------
Morgan Stanley Dean Debt
Witter
-------------------------------------------------------------------------------------------------------------------
National Municipal Merrill Lynch Debt
-------------------------------------------------------------------------------------------------------------------
Prime Obligations Bear Stearns Debt
-------------------------------------------------------------------------------------------------------------------
Credit Suisse First Debt
Boston
-------------------------------------------------------------------------------------------------------------------
Deutsche Bank Debt
-------------------------------------------------------------------------------------------------------------------
Goldman Sachs Debt
-------------------------------------------------------------------------------------------------------------------
Morgan Stanley Dean Debt
Witter
-------------------------------------------------------------------------------------------------------------------
UBS Warburg Debt
-------------------------------------------------------------------------------------------------------------------
Stock Index Bear Stearns Equity
-------------------------------------------------------------------------------------------------------------------
Goldman Sachs Equity
-------------------------------------------------------------------------------------------------------------------
Lehman Brothers Equity
-------------------------------------------------------------------------------------------------------------------
Merrill Lynch Equity
-------------------------------------------------------------------------------------------------------------------
84
|
-------------------------------------------------------------------------------------------------------------------
Type of Security
Fund Broker-Dealer (Debt or Equity) Aggregate Value
-------------------------------------------------------------------------------------------------------------------
Morgan Stanley Dean Equity
Witter
-------------------------------------------------------------------------------------------------------------------
Prudential Securities Equity
-------------------------------------------------------------------------------------------------------------------
Value Goldman Sachs Equity
-------------------------------------------------------------------------------------------------------------------
|
Portfolio Turnover.
The portfolio turnover rates stated in the prospectuses are calculated by dividing the lesser of each Non-Money Market 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 a Non-Money Market Fund as a whole without distinguishing between the classes of shares issued. The following table shows the portfolio turnover rates for each Non-Money Market Fund for the two fiscal years ended October 31, 2005.
-------------------------------------------------------------------------------------------------------------------
2005 2004 2005 2004
-------------------------------------------------------------------------------------------------------------------
Balanced 134% National Muni Bond 155%
-------------------------------------------------------------------------------------------------------------------
Convertible 52% Ohio Municipal Bond 68%
-------------------------------------------------------------------------------------------------------------------
Core Bond 125% Small Co. Opportunity 68%
-------------------------------------------------------------------------------------------------------------------
Diversified Stock 86% Special Value 200%
-------------------------------------------------------------------------------------------------------------------
Established Value 45% Stock Index 3%
-------------------------------------------------------------------------------------------------------------------
Focused Growth 26% Value 86%
-------------------------------------------------------------------------------------------------------------------
Fund for Income 34%
-------------------------------------------------------------------------------------------------------------------
|
Disclosure of Portfolio Holdings
The Board has adopted policies with respect to the disclosure of each Fund's portfolio holdings by the Fund, the Adviser, or their affiliates. These policies provide that each Fund's portfolio holdings information generally may not be disclosed to any party prior to the information becoming public. Certain limited exceptions are described below. These policies apply to disclosures to all categories of persons, including individual investors, institutional investors, intermediaries who sell shares of a Fund, third parties providing services to the Fund (accounting agent, print vendors, etc.), rating and ranking organizations (Lipper, Morningstar, etc.) and affiliated persons of the Fund.
The Trust's Chief Compliance Officer is responsible for monitoring each Fund's compliance with these policies and for providing regular reports (at least annually) to the Board regarding the adequacy and effectiveness of the policy and recommend changes, if necessary.
Non-Public Disclosures
The Adviser may authorize the disclosure of non-public portfolio holdings
information under certain limited circumstances. The Funds' policies provide
that non-public disclosures of a Fund's portfolio holdings may only be made if:
(i) the Fund has a "legitimate business purpose" (as determined by the President
of the Trust) for making such disclosure; and (ii) the party receiving the
non-public information enters into a confidentiality agreement, which includes a
duty not to trade on the non-public information and describes any compensation
to be paid to the Fund or any "affiliated person" of the Adviser or Distributor,
including any arrangement to maintain assets in the Fund or in other investment
companies or accounts managed by the Adviser or by any "affiliated person" of
the Adviser or Distributor.
The Adviser will consider any actual or potential conflicts of interest between the Adviser and a Fund's shareholders and will act in the best interest of the Fund's shareholders with respect to any such disclosure of portfolio holdings information. If a potential conflict can be resolved in a manner that does not present detrimental effects to Fund
shareholders, the Adviser may authorize release of portfolio holdings information. Conversely, if the potential conflict cannot be resolved in a manner that does not present detrimental effects to Fund shareholders, the Adviser will not authorize such release.
Ongoing Arrangements to Disclose Portfolio Holdings
As previously authorized by the Board and/or the Trust's executive officers, a Fund periodically discloses non-public portfolio holdings on a confidential basis to various service providers that require such information in order to assist the Fund in its day-to-day operations, as well as public information to certain ratings organizations. These entities are described in the following table. The table also includes information as to the timing of these entities receiving the portfolio holdings information from a Fund. In none of these arrangements does a Fund or any "affiliated person" of the Adviser or Distributor receive any compensation, including any arrangement to maintain assets in the Fund or in other investment companies or accounts managed by the Adviser or by any "affiliated person" of the Adviser or Distributor.
----------------------------------------- -------------------------------------- --------------------------------------
Type of Service Provider Name of Service Provider Timing of Release of
Portfolio Holdings Information
----------------------------------------- -------------------------------------- --------------------------------------
Adviser Victory Capital Management Inc. Daily
----------------------------------------- -------------------------------------- --------------------------------------
Distributor Victory Capital Advisers, Inc. Daily
----------------------------------------- -------------------------------------- --------------------------------------
Custodian KeyBank National Association Daily
----------------------------------------- -------------------------------------- --------------------------------------
Fund Accountant BISYS Fund Services Ohio, Inc. Daily
----------------------------------------- -------------------------------------- --------------------------------------
Independent Registered Public PricewaterhouseCoopers LLP Annual Reporting Period: Within
Accounting Firm Accounting Firm, 15 business days of
end of reporting period.
Semiannual Reporting Period: within
31 business days of end of reporting
period.
----------------------------------------- -------------------------------------- --------------------------------------
Typesetting Word Management Firm for Financial Reports Up to
60 days before distribution to
shareholders.
----------------------------------------- -------------------------------------- --------------------------------------
Printer for FinancialReports Great Lakes Up to 30 days before distribution
to shareholders.
----------------------------------------- -------------------------------------- --------------------------------------
Legal Counsel, for EDGAR filings on Kramer Levin Naftalis & Frankel LLP Up to 30 days before filing with the
Forms N-CSR and Form N-Q SEC.
----------------------------------------- -------------------------------------- --------------------------------------
Ratings Agency Thompson Financial/Vestek Monthly, within 5 days after the
end of the previous month.
----------------------------------------- -------------------------------------- --------------------------------------
Ratings Agency Lipper/Merrill Lynch Monthly, within 6 days after the end
of the previous month.
----------------------------------------- -------------------------------------- --------------------------------------
Ratings Agency Lipper/general subscribers Monthly, 30 days after the end of
the previous month.
----------------------------------------- -------------------------------------- --------------------------------------
Ratings Agency Standard & Poor's Weekly.
----------------------------------------- -------------------------------------- --------------------------------------
|
These service providers are required to keep all non-public information confidential and are prohibited from trading based on the information or otherwise using the information, except as necessary in providing services to a Fund.
There is no guarantee that a Fund's policies on use and dissemination of holdings information will protect the Fund from the potential misuse of holdings by individuals or firms in possession of such information.
Co-Administrators.
Victory Capital Management
Victory Capital Management serves as co-administrator to the Trust pursuant to a co-administration agreement dated November 1, 2005 (the "VCM Co-Administration Agreement"). Prior to this date, Victory Capital Management had served as sub-administrator to the Trust pursuant to a sub-administration agreement with BISYS Fund Services Ohio, Inc. ("BISYS") dated April 1, 2002 (the "Previous VCM Sub-Administration Agreement").
As co-administrator, Victory Capital Management supervises the Trust's operations, excluding those that Victory Capital Management supervises as investment adviser or those that BISYS supervises as co-administrator, subject to the supervision of the Board. As sub-administrator, Victory Capital Management had assisted BISYS in supervising the Trust's operations, excluding those supervised by Victory Capital Management as the Fund's investment adviser, subject to the supervision of the Board.
Under the VCM Co-Administration Agreement, for the co-administration services that Victory Capital Management renders to the Funds, the Trust pays Victory Capital Management an annual fee, computed daily and paid monthly, at the following annual rates based on the aggregate average daily net assets of the Trust: 0.058% for the first $10 billion in assets, and 0.055% for all assets exceeding $10 billion.
Under the Previous VCM Sub-Administration Agreement, from April 1, 2004 to October 31, 2005, for services rendered to the Funds, BISYS had paid Victory Capital Management a fee, calculated at an annual rate of up to 0.04% of aggregate Trust average daily net assets. Prior to April 1, 2004, this fee had been 0.03%.
Except as otherwise provided in the VCM Co-Administration Agreement, Victory Capital Management shall pay all expenses incurred by it in performing its services and duties as co-administrator. Unless sooner terminated, the VCM Co-Administration Agreement will continue in effect as to each Fund for a period of two years and for consecutive one-year terms thereafter, provided that such continuance is ratified by the Board 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 Agreement or "interested persons" (as defined in the 1940 Act) of any party to the Agreement,. The VCM Co-Administration Agreement provides that Victory Capital Management 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 bad faith, willful misfeasance, negligence or reckless disregard of its obligations and duties under the Agreement.
Under the VCM Co-Administration Agreement, Victory Capital Management coordinates the preparation, filing and distribution of amendments to the Trust's registration statement on Form N-1A, supplements to prospectuses and SAIs, and proxy materials in connection with shareholder meetings; drafts shareholder communications, including annual and semi-annual reports; administers the Trust's other service provider contracts; monitors compliance with investment restrictions imposed by the 1940 Act, each Fund's investment objective, defined investment policies, and restrictions, tax diversification, and distribution and income requirements; coordinates the Funds' service arrangements with financial institutions that make the Funds' shares available to their customers; assists with regulatory compliance; supplies individuals to serve as Trust officers; prepares Board meeting materials; and annually determines whether the services provided by Victory Capital Management and BISYS as co-administrators are adequate and complete.
BISYS
BISYS serves as co-administrator to the Funds pursuant to a co-administration agreement dated November 1, 2005 (the "BISYS Co-Administration Agreement"). BISYS assists in supervising all operations of the Funds (other than those performed by the Victory Capital Management either as investment adviser or co-administrator), subject to the supervision of the Board. Prior to this date, BISYS had served as administrator to the Funds pursuant to an administration agreement dated April 1, 2002 (the "Previous BISYS Administration Agreement").
As co-administrator, BISYS supervises the Trust's operations, excluding those that Victory Capital Management supervises as either investment adviser or as co-administrator, subject to the supervision of the Board. As administrator, BISYS had supervised the Trust's operations, excluding those supervised by Victory Capital Management as the Fund's investment adviser, subject to the supervision of the Board.
Under the BISYS Co-Administration Agreement, for the co-administration services that BISYS renders to the Funds, the Trust pays BISYS an annual fee, computed daily and paid monthly, at the following annual rates based on the aggregate average daily net assets of the Trust: 0.032% for the first $10 billion in |
assets, and 0.025% for all assets exceeding $10 billion.
Under the Previous BISYS Administration Agreement, for the administration services rendered to the Funds and related expenses borne by BISYS, the Trust had paid BISYS an annual fee, computed daily and paid monthly, at the following annual rates based on the aggregate average daily net assets of the Trust: 0.14% for the first $8 billion in assets, 0.10% for the next $17 billion in assets and 0.08% for all assets exceeding $25 billion. As described above, prior to November 1, 2005, BISYS had paid Victory Capital Management an annual fee of 0.04% of the Trust's average daily net assets (0.03% prior to April 1, 2004) for performing sub-administration services for the Trust.
Under both Agreements, BISYS may periodically waive all or a portion of the amount of its fee that is allocated 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 BISYS Co-Administration Agreement will continue in effect as to each Fund for a period of two years and for consecutive one-year terms thereafter, provided that such continuance is ratified by the Board 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 Agreement or "interested persons" (as defined in the 1940 Act) of any party to the Agreement. The BISYS Co-Administration Agreement provides that BISYS 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 bad faith, willful misfeasance, negligence, or reckless disregard of its obligations and duties under the Agreement.
Under the BISYS Co-Administration Agreement, BISYS calculates Trust expenses and make disbursements; calculates capital gain and distribution information; registers the Funds' shares with the states; prepares shareholder reports and reports to the SEC on Forms N-SAR and N-Q; coordinates dividend payments; calculates the Funds' performance information; files the Trust's tax returns; supplies individuals to serve as Trust officers; monitors the Funds' status as regulated investment companies under the Code; assists in developing portfolio compliance procedures; reports to the Board amounts paid under shareholder service agreements; assists with regulatory compliance; obtains, maintains and files fidelity bonds and Trustees' and officers'/errors and omissions insurance policies for the Trust; and assists in the annual audit of the Funds.
The following table reflects fees that each Fund paid to BISYS under the Previous BISYS Administration Agreement and any fee reductions by BISYS for the last three fiscal years ended October 31.
---------------------------------------------------------------------------------------------------------------------------
2005 2004 2003
---------------------------------------------------------------------------------------------------------------------------
Fees Paid Fee Fees Paid Fee Fees Paid Fee
Reductions Reductions Reductions
---------------------------------------------------------------------------------------------------------------------------
Balanced $ $ $148,677 $23,837 $194,312 $16,781
---------------------------------------------------------------------------------------------------------------------------
Convertible 103,424 0 86,179 0
---------------------------------------------------------------------------------------------------------------------------
Core Bond 241,203 6,382 304,211 0
---------------------------------------------------------------------------------------------------------------------------
Diversified Stock 2,114,294 0 1,295,989 0
---------------------------------------------------------------------------------------------------------------------------
Established Value 301,576 87,992 235,044 99,229
---------------------------------------------------------------------------------------------------------------------------
Federal Money Market 867,075 896,633 1,054,217 793,016
---------------------------------------------------------------------------------------------------------------------------
Financial Reserves 626,083 0 712,117 0
---------------------------------------------------------------------------------------------------------------------------
Focused Growth 552 0 N/A N/A
---------------------------------------------------------------------------------------------------------------------------
Fund for Income 565,574 0 695,655 0
---------------------------------------------------------------------------------------------------------------------------
88
|
---------------------------------------------------------------------------------------------------------------------------
2005 2004 2003
---------------------------------------------------------------------------------------------------------------------------
Fees Paid Fee Fees Paid Fee Fees Paid Fee
Reductions Reductions Reductions
---------------------------------------------------------------------------------------------------------------------------
Gradison Gov't Res. 2,947,414 1,039,300 3,109,241 1,417,032
---------------------------------------------------------------------------------------------------------------------------
Inst. Money Mkt 1,182,463 591,203 1,106,985 804,555
---------------------------------------------------------------------------------------------------------------------------
National Muni Bond 91,395 0 101,876 0
---------------------------------------------------------------------------------------------------------------------------
Ohio Municipal Bond 228,436 0 254,819 0
---------------------------------------------------------------------------------------------------------------------------
Ohio Muni Money Mkt 537,111 268,847 1,005,160 0
---------------------------------------------------------------------------------------------------------------------------
Prime Obligations 1,811,431 0 2,232,958 0
---------------------------------------------------------------------------------------------------------------------------
Small Co. Opp'ty 172,743 0 118,055 19,579
---------------------------------------------------------------------------------------------------------------------------
Special Value 243,751 0 214,317 0
---------------------------------------------------------------------------------------------------------------------------
Stock Index 6,118 131,482 0 184,261
---------------------------------------------------------------------------------------------------------------------------
Tax-Free Money Mkt 799,344 0 824,329 0
---------------------------------------------------------------------------------------------------------------------------
Value 291,350 0 299,690 0
---------------------------------------------------------------------------------------------------------------------------
|
Distributor.
Victory Capital Advisers, Inc. (the "Distributor"), located at 100 Summer Street, Suite 1500, Boston, Massachusetts 02110, serves as distributor for the continuous offering of the shares of the Funds pursuant to a Distribution Agreement between the Distributor and the Trust dated March 1, 2004. The Distributor is not affiliated with the Adviser but is affiliated with BISYS Fund Services Limited Partnership, which had served as the Funds' distributor before March 1, 2004. 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 Board 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 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. The following table reflects the total underwriting commissions earned and the amount of those commissions retained by the Distributor (and its predecessors) in connection with the sale of shares of each Fund for the three fiscal years ended October 31, 2005.
----------------------------------------------------------------------------------------------------------------
2005 2004 2003
----------------------------------------------------------------------------------------------------------------
Underwriting Amount Underwriting Amount Underwriting Amount
Commissions Retained Commissions Retained Commissions Retained
----------------------------------------------------------------------------------------------------------------
Balanced $ $ $38,401 $15,938 $18,224 $9,586
----------------------------------------------------------------------------------------------------------------
Convertible 6,705 1,602 189,654 0
----------------------------------------------------------------------------------------------------------------
Core Bond 9,983 2,690 9,652 1,808
----------------------------------------------------------------------------------------------------------------
Diversified Stock 2,531,714 206,609 635,442 75,168
----------------------------------------------------------------------------------------------------------------
Established Value 7,954 1,588 11,624 1,286
----------------------------------------------------------------------------------------------------------------
Focused Growth 2,332 757 N/A N/A
----------------------------------------------------------------------------------------------------------------
Fund for Income 151,354 17,909 441,600 13,090
----------------------------------------------------------------------------------------------------------------
Gradison Gov't Reserves 276 19 17 10
----------------------------------------------------------------------------------------------------------------
National Muni Bond 7,931 3,161 73,009 0
----------------------------------------------------------------------------------------------------------------
Ohio Municipal Bond 35,534 5,698 63,240 28,198
----------------------------------------------------------------------------------------------------------------
Small Co. Opp'ty 17,811 1,631 9,401 0
----------------------------------------------------------------------------------------------------------------
Special Value 14,000 2,357 27,475 5,674
----------------------------------------------------------------------------------------------------------------
Stock Index 55,682 6,986 21,928 2,845
----------------------------------------------------------------------------------------------------------------
Value 7,860 927 6,984 971
----------------------------------------------------------------------------------------------------------------
|
Transfer Agent.
BISYS Fund Services Ohio, Inc. ("BISYS"), located at 3435 Stelzer Road, Columbus, Ohio 43219, serves as transfer agent for the Funds pursuant to a transfer agency agreement dated April 1, 2002. Under its agreement with the Funds, BISYS has agreed to (1) issue and redeem shares of the Funds; (2) 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) respond to correspondence or inquiries by shareholders and others relating to its duties; (4) maintain shareholder accounts and certain sub-accounts; and (5) make periodic reports to the Board concerning the Fund's operations.
Shareholder Servicing Plan.
Payments made under the Shareholder Servicing Plan to shareholder servicing agents (which may include affiliates of the Adviser) are for administrative support services to customers who may from time to time beneficially own shares. These 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 that require a shareholder vote; and (10) providing such other similar services as the Trust may reasonably request to the extent the Agent is permitted to do so under applicable statutes, rules or regulations.
Rule 12b-1 Distribution and Service Plans.
The Trust has adopted distribution and service plans in accordance with Rule 12b-1 under the 1940 Act (each a "Rule 12b-1 Plan") on behalf of Class A, C and R shares of various Funds. 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 the Rule.
"Defensive" Rule 12b-1 Plan. The Trust has adopted a "defensive" Rule 12b-1 Plan on behalf of the following: Class A shares of the Balanced, Convertible, Core Bond, Diversified Stock, Established Value, Financial Reserves, Federal Money Market, Focused Growth, Fund for Income, Institutional Money Market, National Municipal Bond, Ohio Municipal Bond, Ohio Municipal Money Market, Small Company Opportunity, Special Value and Value Funds; the Class A and Class R shares of the Stock Index Fund; and the Investor and Select shares of the Federal Money Market and Institutional Money Market Funds. The Board has adopted this Plan to allow the 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 these Funds pursuant to the Plan. Under this Plan, if a payment to the 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 Fund shares, such payment is authorized by the Plan.
This Plan specifically recognizes that 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 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' shares, or to third parties, including banks, that render shareholder support services.
This Plan has been approved by the Board. As required by Rule 12b-1, the Board 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 Board 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 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 which shareholders have other relationships.
Class C Rule 12b-1 Plan. The Trust has adopted a Rule 12b-1 Plan, pursuant to which Class C shares of each of the Fund for Income and the Balanced, Diversified Stock, Focused Growth, Special Value and Value Funds pay the Distributor a distribution and service fee of 1.00%. The Distributor may use Rule 12b-1 fees to pay for activities primarily intended to result in the sale of Class C shares, including but not limited to: (i) costs of printing and distributing a Fund's prospectus, statement of additional information and reports to prospective investors in the Fund; (ii) costs involved in preparing, printing and distributing sales literature pertaining to a Fund; and (iii) payments to salesmen and selling dealers at the time of the sale of shares, if applicable, and continuing fees to each such salesman and selling dealers, which fee shall begin to accrue immediately after the sale of such shares. Fees may also be used to pay persons, including but not limited to the Funds' transfer agent, any sub-transfer agents, or any administrators, for providing services to the Funds and their Class C shareholders, including but not limited to: (i) maintaining shareholder accounts; (ii) answering routine inquiries regarding a Fund; (iii) processing shareholder transactions; and (iv) providing any other shareholder services not otherwise provided by a Fund's transfer agent. In addition, the Distributor may use the Rule 12b-1 fees paid under this Plan for an allocation of overhead and other branch office distribution-related expenses of the Distributor such as office space and equipment and telephone facilities, and for accruals for interest on the amount of the foregoing expenses that exceed the Distribution Fee and the CDSC received by the Distributor. Of the 1.00% permitted under the Plan, no more than the maximum amount permitted by the NASD Conduct Rules will be used to finance activities primarily intended to result in the sale of Class C shares.
Class R Rule 12b-1 Plan. The Trust also has adopted a Rule 12b-1 Plan, pursuant to which Class R shares of (1) each of the Balanced, Diversified Stock, Established Value, Focused Growth, Small Company Opportunity, Special Value and Value Funds pay the Distributor a distribution and service fee of up to 0.50%; and (2) the Fund for Income pay the Distributor a distribution and service fee of up to 0.25%. Select Class shares (formerly Class G shares) of the Gradison Government Reserves Fund pay no distribution or service fees. Under this Rule 12b-1 Plan, the Distributor may use Rule 12b-1 fees for: (a) costs of printing and distributing each such Fund's prospectus, statement of additional information and reports to prospective investors in these Funds; (b) costs involved in preparing, printing and distributing sales literature pertaining to these 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 such Fund's Class R 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 R 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 Class R 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 Class R shares of these Funds. In addition, this 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 these Funds' Class R shares, or to third parties, including banks, that render shareholder support services.
Class C and Class R Rule 12b-1 Plans. The amount of the Rule 12b-1 fees payable by any Fund under either of these Rule 12b-1 Plans is considered compensation and is not related directly to expenses incurred by the Distributor and neither Plan obligates a Fund to reimburse the Distributor for such expenses. The fees set forth in either Rule 12b-1 Plan will be paid by each such 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 that the Distributor has accrued through the termination date are the sole responsibility and liability of the Distributor and not an obligation of any such Fund.
The Class C and Class R Rule 12b-1 Plans were approved by the Board, including the Independent Trustees, at a meeting called for that purpose. As required by Rule 12b-1, the Board carefully considered all pertinent factors relating to the implementation of the Plans prior to their approval and determined that there was a reasonable likelihood that the Plans would benefit the Funds and their Class C and Class R shareholders. To the extent that a Plan gives the Adviser or the Distributor greater flexibility in connection with the distribution of Class R shares of the Funds, additional sales of these shares may result. Additionally, certain support services covered under a Plan may be provided more effectively under the Plan by local entities with whom shareholders have other relationships or by the shareholder's broker. The following tables reflect the payment of Rule 12b-1 fees to the Distributor pursuant to the Plans during the fiscal year ended October 31, 2005. All such payments consisted of compensation to broker-dealers.
---------------------------------- ------------------ -------------------
Class C Class R
---------------------------------- ------------------ -------------------
Balanced $ $
---------------------------------- ------------------ -------------------
Diversified Stock
---------------------------------- ------------------ -------------------
Established Value
---------------------------------- ------------------ -------------------
Focused Growth
---------------------------------- ------------------ -------------------
Fund for Income
---------------------------------- ------------------ -------------------
Gradison Gov't Reserves
---------------------------------- ------------------ -------------------
Small Company Opportunity
---------------------------------- ------------------ -------------------
Special Value
---------------------------------- ------------------ -------------------
Value
---------------------------------- ------------------ -------------------
Fund Accountant.
BISYS serves as Fund Accountant for all of the Funds pursuant to a fund
|
accounting agreement with the Trust dated April 1, 2002. 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. For each Equity Fund, the Fund Accountant is entitled to receive an annual fee of $60,000. Any Equity Fund with average daily net assets of less than $175 million as of April 1, 2002 will pay an annual fee of only $35,000 until that Fund's average daily net assets reach $175 million. For each Fixed Income Fund, the Fund Accountant is entitled to receive an annual fee of $50,000. Any Fixed Income Fund with average daily net assets of less than $75 million as of April 1, 2002 will pay an annual fee of only $35,000 until that Fund's average daily net assets reach $75 million. For each Money Market Fund, the Fund Accountant is entitled to receive an annual fee of $100,000. With respect to each Fund, 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 and a $5 per security transaction charge. For the three fiscal years ended October 31, 2005, the Fund Accountant was paid the following fees, after waivers and redemptions:
------------------------------------------------------------------------------------------------------------------
2005 2004 2003
------------------------------------------------------------------------------------------------------------------
Balanced $ $110,806 $97,396
------------------------------------------------------------------------------------------------------------------
Convertible 68,804 65,891
------------------------------------------------------------------------------------------------------------------
Core Bond 82,948 85,411
------------------------------------------------------------------------------------------------------------------
Diversified Stock 95,346 93,941
------------------------------------------------------------------------------------------------------------------
Established Value 90,622 86,136
------------------------------------------------------------------------------------------------------------------
Federal Money Market 117,912 114,946
------------------------------------------------------------------------------------------------------------------
Financial Reserves 113,530 113,736
------------------------------------------------------------------------------------------------------------------
Focused Growth 49,041 N/A
------------------------------------------------------------------------------------------------------------------
Fund for Income 139,851 144,302
------------------------------------------------------------------------------------------------------------------
Gradison Government Reserves 107,751 108,944
------------------------------------------------------------------------------------------------------------------
92
|
------------------------------------------------------------------------------------------------------------------
2005 2004 2003
------------------------------------------------------------------------------------------------------------------
Institutional Money Market 115,479 117,017
------------------------------------------------------------------------------------------------------------------
National Municipal Bond 63,489 70,002
------------------------------------------------------------------------------------------------------------------
Ohio Municipal Bond 86,218 81,071
------------------------------------------------------------------------------------------------------------------
Ohio Municipal Money Market 112,611 113,538
------------------------------------------------------------------------------------------------------------------
Prime Obligations 114,839 120,037
------------------------------------------------------------------------------------------------------------------
Small Company Opportunity 71,555 59,796
------------------------------------------------------------------------------------------------------------------
Special Value 98,844 63,322
------------------------------------------------------------------------------------------------------------------
Stock Index 89,234 149,178
------------------------------------------------------------------------------------------------------------------
Tax-Free Money Market 114,144 111,636
------------------------------------------------------------------------------------------------------------------
Value 88,224 88,773
------------------------------------------------------------------------------------------------------------------
|
Custodian.
Cash and securities owned by each of the Funds are held by KeyBank as custodian pursuant to a Custodian Agreement dated July 2, 2001. KeyBank is located at 127 Public Square, Cleveland, Ohio 44114. Under the Custodian Agreement, KeyBank (1) maintains a separate account or accounts in the name of each 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 Board concerning the Trust's operations. KeyBank 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 KeyBank shall remain liable for the performance of all of its duties under the Custodian Agreement.
Independent Registered Public Accounting Firm.
PricewaterhouseCoopers LLP, 100 East Broad Street, Columbus, Ohio 43215, serves as the Trust's independent registered public accounting firm.
Legal Counsel.
Kramer Levin Naftalis & Frankel LLP, 1177 Avenue of the Americas, New York, New York 10036, 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 statutory trust. The Trust's Trust Instrument authorizes the Board to issue an unlimited number of shares, which are units of beneficial interest, par value $0.001. The Trust Instrument authorizes the Board 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 Board 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.
Additional Information About the Stock Index Fund.
The Stock Index Fund is not sponsored, endorsed, sold or promoted by S&P, a division of The McGraw-Hill Companies, Inc. S&P makes no representation or warranty, express or implied, to the owners of the Fund or any member of the public regarding the advisability of investing in securities generally or in the Fund particularly or the ability of the S&P 500 Index to track general stock market performance. S&P's only relationship to the Adviser (the "Licensee") is the licensing of certain trademarks and trade names of S&P and of the S&P 500 Index which is determined, composed and calculated by S&P without regard to the Licensee or the Fund. S&P has no obligation to take the needs of the Licensee or the owners of the Fund into consideration in determining, composing or calculating the S&P 500 Index. S&P is not responsible for and has not participated in the determination of the prices and amount of the Fund or the timing of the issuance or sale of the Fund or in the determination or calculation of the equation by which the Fund is to be converted into cash. S&P has no obligation or liability in connection with the administration, marketing or trading of the Fund.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Principal Holders of Securities.
As shown below, as of November 30, 2005, Raymond James Assoc. Inc., FBO Young JD, 880 Carillon Pkwy, St Petersburg, Florida 33716 is deemed to control Class C shares of the Focused Growth Fund because the account beneficially owned over 25% of those shares.
The names and addresses of the record holders and, to the best knowledge of the Trust, the beneficial owners of, 5% or more of the outstanding shares of each class of the Funds' equity securities as of November 30, 2005, and the percentage of the outstanding shares held by such holders are set forth in the following table.
------------------------------- ---------------------------------------------- ------------------- -------------------
Fund -- Class Name and Address of Owner Percent Owned of Percent Owned
Record Beneficially
------------------------------- ---------------------------------------------- ------------------- -------------------
Balanced -- A SBNOC and Company 20.04%
4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
Union Bank TR Nominee 7.08%
FBO Select Benefit - Omnibus
PO BOX 85484
San Diego CA 92186
------------------------------- ---------------------------------------------- ------------------- -------------------
Wilmington Trust Co TTE 54.65%
FBO KeyCorp 401K Savings Plan
PO BOX 8971
Wilmington DC 19899
------------------------------- ---------------------------------------------- ------------------- -------------------
94
|
------------------------------- ---------------------------------------------- ------------------- -------------------
Fund -- Class Name and Address of Owner Percent Owned of Percent Owned
Record Beneficially
------------------------------- ---------------------------------------------- ------------------- -------------------
Delaware Charter Guarantee & Trust 5.02%
FBO Principal Financial Group
OMNIB
711 High Street
Des Moines IA 50392
------------------------------- ---------------------------------------------- ------------------- -------------------
Balanced -- C Merrill Lynch Pierce Fenner & Smith 40.68%
4800 E Deer Lake Dr 3rd Floor
Jacksonville FL 32246
------------------------------- ---------------------------------------------- ------------------- -------------------
McDonald Investments Inc. 6.28% 6.28%
FBO John Horsted
902 N Greene Road
Goshen IN 46526
------------------------------- ---------------------------------------------- ------------------- -------------------
McDonald Investments Inc. 7.44% 7.44%
Gene M Kindle IRA R/O
55520 County Road 23
Briston IN 46507
------------------------------- ---------------------------------------------- ------------------- -------------------
McDonald Investments Inc. 12.83% 12.83%
FBO Thomas D Regney
51154 Blue Ribbon Land
Elkhart IN 46514
------------------------------- ---------------------------------------------- ------------------- -------------------
Balanced -- R McDonald Investments Inc. 9.98% 9.98%
FBO Cleveland Indians
800 Superior Avenue
Cleveland OH 44114
------------------------------- ---------------------------------------------- ------------------- -------------------
Anesthesia Assoc. of Cincinnati, Inc. 16.07%
200 Northland Blvd.
Cincinnati OH 45246
------------------------------- ---------------------------------------------- ------------------- -------------------
Convertible -- A Wilmington Trust Co TTE 13.80%
FBO KeyCorp 401K Savings Plan
PO BOX 8971
Wilmington DE 19899
------------------------------- ---------------------------------------------- ------------------- -------------------
Charles Schwab & Co. Inc. 20.88%
Customers
101 Montgomery Street
San Francisco CA 94104
------------------------------- ---------------------------------------------- ------------------- -------------------
SBNOC and Company 45.03%
4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
Core Bond -- A SNBOC and Company 55.93%
4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
Wilmington Trust Co TTE 35.38%
FBO KeyCorp 401K Savings Plan
PO BOX 8971
Wilmington DE 19899
------------------------------- ---------------------------------------------- ------------------- -------------------
Diversified Stock -- A Charles Schwab & Co Inc. 5.99%
Customers
101 Montgomery Street
San Francisco CA 94104
------------------------------- ---------------------------------------------- ------------------- -------------------
Merrill Lynch Pierce Fenner & Smith 19.28%
4800 E Deer Lake Dr 3rd Fl
Jacksonville FL 32246
------------------------------- ---------------------------------------------- ------------------- -------------------
SNBOC and Company 10.14%
4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
95
|
------------------------------- ---------------------------------------------- ------------------- -------------------
Fund -- Class Name and Address of Owner Percent Owned of Percent Owned
Record Beneficially
------------------------------- ---------------------------------------------- ------------------- -------------------
Vanguard Fiduciary Trust Company 9.30%
100 Vanguard Blvd MS K-22
Malvern PA 19355
------------------------------- ---------------------------------------------- ------------------- -------------------
Diversified Stock -- C Merrill Lynch Pierce Fenner & Smith Inc. 55.55%
For Sole Benefit of its Customers
4800 Deer Lake Drive East
Jacksonville FL 32246
------------------------------- ---------------------------------------------- ------------------- -------------------
Established Value -- A Merrill Lynch Pierce Fenner & Smith Inc. 5.39%
For Sole Benefit of its Customers
4800 Deer Lake Drive East
Jacksonville FL 32246
------------------------------- ---------------------------------------------- ------------------- -------------------
Leah H Buchanan 13.98%
Leah H Buchanan Trust
1908 Stonehedge Drive
Findlay OH 45840
------------------------------- ---------------------------------------------- ------------------- -------------------
SNBOC and Company 5.27%
4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
MCB Trust Services as agent for 16.24%
Frontier Trust Company as Trustee
PO BOX 10699
Fargo ND 58106
------------------------------- ---------------------------------------------- ------------------- -------------------
Federal Money Market -- SNBOC and Company 20.82%
Investor 4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
SNBOC and Company 15.61%
4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
Federal Money Market -- Select SNBOC and Company 86.55%
4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
BISYS Fund Services Inc. 11.14%
Attn: Sweep Team
3435 Stelzer Road
Columbus OH 43219
------------------------------- ---------------------------------------------- ------------------- -------------------
Financial Reserves Fund SNBOC and Company 98.82%
4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
Focused Growth -- A SNBOC and Company 12.99%
4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
James B Cowperthwait 11.15%
Chris H Cowperthwait
50 Fairfield Road
Greenwich CT 06830
------------------------------- ---------------------------------------------- ------------------- -------------------
AG Edwards Sons Inc 5.75%
Retta B Kelley
1 North Jefferson
St Louis MO 63103
------------------------------- ---------------------------------------------- ------------------- -------------------
Focused Growth Fund BISYS Fund Services 6.84%
Class C 60 State Street Suite 1300
Boston MA 02109
------------------------------- ---------------------------------------------- ------------------- -------------------
96
|
------------------------------- ---------------------------------------------- ------------------- -------------------
Fund -- Class Name and Address of Owner Percent Owned of Percent Owned
Record Beneficially
------------------------------- ---------------------------------------------- ------------------- -------------------
Raymond James Assoc Inc. 46.19% 46.19%
FBO Young JD
880 Carillon Pkwy
St Petersburg FL 33716
------------------------------- ---------------------------------------------- ------------------- -------------------
UBS Financial Services Inc 6.92% 6.92%
FBO Stanley Jason
903 Botentourt Gardens
Norfolk VA 23507
------------------------------- ---------------------------------------------- ------------------- -------------------
Focused Growth -- R BISYS Fund Services 50.77%
60 State Street Suite 1300
Boston MA 02109
------------------------------- ---------------------------------------------- ------------------- -------------------
William Kettler 9.45%
47 Grangefield Ct
Westerville OH 43081
------------------------------- ---------------------------------------------- ------------------- -------------------
First Clearing LLC 21.78% 21.78%
210 Graylyn Drive
Cannon MKT MPP dtd 3 29 96
Anderson SC 29621-1984
------------------------------- ---------------------------------------------- ------------------- -------------------
First Clearing LLC 6.49% 6.49%
PO Box 212074
Augusta GA 30917-2074
------------------------------- ---------------------------------------------- ------------------- -------------------
Fund for Income -- A SNBOC and Company 68.42%
4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
Fund for Income -- C Merrill Lynch Pierce Fenner & Smith Inc. 32.75%
For Sole Benefit of its Customers
4800 Deer Lake Drive East
Jacksonville FL 32246
------------------------------- ---------------------------------------------- ------------------- -------------------
Gradison Government Reserves-- SNBOC and Company 10.79%
Select 4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
SNBOC and Company 8.16%
4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
McDonald & Co. Securities 50.92%
The Exclusive Benefit of Clients
580 Walnut Street 4th Floor
Cincinnati OH 45202-3110
------------------------------- ---------------------------------------------- ------------------- -------------------
SNBOC and Company 22.29%
4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
Gradison Government Reserves SNBOC and Company 99.84%
-- Trust 4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
Institutional Money Market -- McDonald & Co. Securities 5.22%
Investor The Exclusive Benefit of Clients
580 Walnut Street 4th Floor
Cincinnati OH 45202-3110
------------------------------- ---------------------------------------------- ------------------- -------------------
SNBOC and Company 15.91%
4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
97
|
------------------------------- ---------------------------------------------- ------------------- -------------------
Fund -- Class Name and Address of Owner Percent Owned of Percent Owned
Record Beneficially
------------------------------- ---------------------------------------------- ------------------- -------------------
SNBOC and Company 68.57%
4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
Institutional Money Market -- SNBOC and Company 74.63%
Select 4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
BISYS Fund Services Inc. 13.06%
Sweep Clients
3435 Stelzer Road
Columbus OH 43219
------------------------------- ---------------------------------------------- ------------------- -------------------
National Municipal Bond -- A Charles Schwab & Co. 11.80%
Customers
101 Montgomery Street
San Francisco CA 94104
------------------------------- ---------------------------------------------- ------------------- -------------------
SNBOC and Company 17.18%
4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
Ohio Municipal Bond Fund-- A SNBOC and Company 32.95%
4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
Ohio Municipal Money Market -- SNBOC and Company 14.57%
4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
SNBOC and Company 47.43%
4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
McDonald & Co. Securities 31.90%
The Exclusive Benefit of Clients
580 Walnut Street
Cincinnati OH 45202-3110
------------------------------- ---------------------------------------------- ------------------- -------------------
Prime Obligations -- A McDonald & Co. Securities 9.39%
The Exclusive Benefit of Clients
580 Walnut Street
Cincinnati OH 45202-3110
------------------------------- ---------------------------------------------- ------------------- -------------------
SNBOC and Company 35.78%
4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
SNBOC and Company 45.50%
4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
Small Company Opportunity -- A SNBOC and Company 24.63%
4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
Wilmington Trust Co TTE 60.78%
FBO KeyCorp 401K Savings Plan
PO BOX 8971
Wilmington DE 19899
------------------------------- ---------------------------------------------- ------------------- -------------------
Special Value -- A SNBOC and Company 21.60%
4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
Wilmington Trust Co TTE 47.82%
FBO KeyCorp 401K Savings Plan
PO BOX 8971
Wilmington DE 19899
------------------------------- ---------------------------------------------- ------------------- -------------------
Special Value -- C Merrill Lynch Pierce Fenner & Smith 64.14%
4800 E Deer Lake Dr 3rd Fl
Jacksonville FL 32246
------------------------------- ---------------------------------------------- ------------------- -------------------
98
|
------------------------------- ---------------------------------------------- ------------------- -------------------
Fund -- Class Name and Address of Owner Percent Owned of Percent Owned
Record Beneficially
------------------------------- ---------------------------------------------- ------------------- -------------------
Special Value -- R Merrill Lynch Pierce Fenner & Smith 19.44%
4800 E Deer Lake Dr 3rd Fl
Jacksonville FL 32247
------------------------------- ---------------------------------------------- ------------------- -------------------
Brent Nichols, Mark Nichols & Scott Nichols 16.33%
Trustee
TSS Technologies Inc
Attn: Tom Reif
1201 Hillsmith Drive
Cincinnati OH 45215
------------------------------- ---------------------------------------------- ------------------- -------------------
Stock Index -- A SNBOC and Company 48.47%
4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
Delaware Charter Guarantee & Trust 21.56%
FBO Principal Financial Group
OMNIB
711 High Street
Des Moines IA 50392
------------------------------- ---------------------------------------------- ------------------- -------------------
Tax-Free Money Market -- A SNBOC and Company 20.57%
4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
SNBOC and Company 45.41%
4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
McDonald & Co Securities Inc. 27.60%
For the Exclusive Benefit of Clients
580 Walnut Street 4th Floor
Cincinnati OH 45205
------------------------------- ---------------------------------------------- ------------------- -------------------
SNBOC and Company 5.28%
4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
Value -- A Charles Schwab & Co Inc Customers 6.31%
101 Montgomery Street
San Francisco CA 94104
------------------------------- ---------------------------------------------- ------------------- -------------------
SNBOC and Company 10.68%
4900 Tiedeman Road
Brooklyn OH 44144
------------------------------- ---------------------------------------------- ------------------- -------------------
Wilmington Trust Co TTE 75.00%
FBO KeyCorp 401K Savings Plan
PO BOX 8971
Wilmington DE 19899
------------------------------- ---------------------------------------------- ------------------- -------------------
Value -- C Merrill Lynch Pierce Fenner & Smith 76.98%
4800 E Deer Lake Dr 3rd Floor
Jacksonville FL 32246
------------------------------- ---------------------------------------------- ------------------- -------------------
99
|
------------------------------- ---------------------------------------------- ------------------- -------------------
Fund -- Class Name and Address of Owner Percent Owned of Percent Owned
Record Beneficially
------------------------------- ---------------------------------------------- ------------------- -------------------
MG Trust 5.75% 5.75%
Cust. FBO BEH Engineering
Individual K Plan
Suite 300 Denver CO 80202
------------------------------- ---------------------------------------------- ------------------- -------------------
|
Shareholders 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 ("share-based voting"). Alternatively (except where the 1940 Act requires share-based voting), the Board in its discretion may determine that shareholders are entitled to one vote per dollar of NAV (with proportional voting for fractional dollar amounts). Shareholders vote as a single class on all matters except that (1) when required by the 1940 Act, shares shall be voted by individual Fund or class, and (2) when the Board has determined that the matter affects only the interests of one or more Funds, then only shareholders of such Funds 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.
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 statutory trust. The Delaware Statutory Trust Act provides that a shareholder of a Delaware statutory trust shall be entitled to the same limitation of personal liability extended to shareholders of Delaware corporations and the Trust Instrument provides that shareholders of the Trust shall not be liable for the obligations of the Trust. The 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 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 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 Trust Instrument
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 year ended October 31, __________________ are incorporated by reference herein.
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 Board. The Board 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 Board in making allocations of general assets to a particular Fund 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 Board and will be in accordance with generally accepted accounting principles. Determinations by the Board 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.
APPENDIX A.
Description of Security Ratings
The NRSROs that the Adviser may utilize with regard to portfolio investments for the Funds include Moody's, S&P and Fitch, Inc. ("Fitch"). Set forth below is a description of the relevant ratings of each such NRSRO. The NRSROs that the Adviser may utilize and the description of each NRSRO's ratings is as of the date of this SAI and may subsequently change.
Moody's
Long-Term Debt Ratings (may be assigned, for example, to corporate and municipal bonds). The following describes the 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. For example, a rating of A-3 is considered to be within the A rating and a Fund that has a policy of investing in securities with ratings of A or above may invest in A-1, A-2, or A-3 rated securities.
Aaa -- Bonds and preferred stock 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 and preferred stock 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-rated securities, or the fluctuation of protective elements may be of greater amplitude, or there may be other elements present that make the long-term risk in Aa-rated bonds appear somewhat larger than those securities rated Aaa.
A -- Bonds and preferred stock rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. The factors that give security to principal and interest are considered adequate, but elements may be present that suggest a susceptibility to impairment some time in the future.
Baa -- Bonds and preferred stock rated Baa are considered to be 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, possess speculative characteristics as well.
Ba -- Bonds and preferred stock rated Ba are judged to have speculative elements; their future cannot be considered as being 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 over the future. Uncertainty of position characterizes bonds in this class.
B -- Bonds and preferred stock rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Caa -- Bonds and preferred stock rated Caa are of poor standing. Such issues may be in default, or there may be present elements of danger with respect to principal or interest.
Ca -- Bonds and preferred stock rated Ca represent obligations that are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds and preferred stock rated C are the lowest-rated class of bonds. Issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
Moody's assigns ratings to individual long-term debt securities issued from MTN programs, in addition to indicating ratings for medium-term note (MTN) programs themselves
Notes issued under MTN programs with such indicated ratings are rated at issuance at the rating applicable to all pari passu notes issued under the same program, at the program's relevant indicated rating, provided such notes do not exhibit any of the following characteristics listed below. For notes with any of the following characteristics, the rating of the individual note may differ from the indicated rating of the program;
o Notes containing features that link the cash flow and/or market value to the credit performance of any third party or parties.
o Notes allowing for negative coupons, or negative principal.
o Notes containing any provision that could obligate the investor to make any additional payments.
Market participants must determine whether any particular note is rated, and if so, at what rating level. As with all ratings, Moody's encourages market participants to contact Moody's Ratings Desks directly if they have questions regarding ratings for specific notes issued under a medium term note program.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end.
Short-Term Debt Ratings (may be assigned, for example, to commercial paper, master demand notes, bank instruments and letters of credit). The following describes Moody's short-term debt ratings.
Moody's short-term ratings are opinions of the ability of issuers to honor senior financial obligations and contracts. Such obligations generally have an original maturity not exceeding one year, unless explicitly noted.
Moody's employs the following designations, all judged to be investment grade, to indicate the relative repayment ability of rated issuers:
Prime-1 -- Issuers rated Prime-1 (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-1 repayment ability will often be evidenced by many of the following characteristics:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance on debt and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and high internal cash generation.
o Well-established access to a range of financial markets and assured sources of alternate liquidity.
Prime-2 -- Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay 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 (or supporting institutions) rated Prime-3 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.
Not Prime -- Issuers rated Not Prime do not fall within any of the Prime rating categories. Note: In addition, in certain countries the prime rating may be modified by the |
issuer's or guarantor's senior unsecured long-term debt rating.
Speculative Grade Liquidity Ratings. Moody's Speculative Grade Liquidity ratings are opinions of an issuer's relative ability to generate cash from internal resources and the availability of external sources of committed financing, in relation to its cash obligations over the coming 12 months. Speculative Grade Liquidity ratings will consider the likelihood that committed sources of financing will remain available. Other forms of liquidity support will be evaluated and consideration will be given to the likelihood that these sources will be available during the coming 12 months. Speculative Grade Liquidity ratings are assigned to speculative grade issuers that are by definition Not-Prime issuers.
SGL-1 -- Issuers rated SGL-1 possess very good liquidity. They are most likely to have the capacity to meet their obligations over the coming 12 months through internal resources without relying on external sources of committed financing.
SGL-2 -- Issuers rated SGL-2 possess good liquidity. They are likely to meet their obligations over the coming 12 months through internal resources but may rely on external sources of committed financing. The issuer's ability to access committed sources of financing is highly likely based on Moody's evaluation of near-term covenant compliance.
SGL-3 -- Issuers rated SGL-3 possess adequate liquidity. They are expected to rely on external sources of committed financing. Based on Moody's evaluation of near-term covenant compliance, there is only a modest cushion, and the issuer may require covenant relief in order to maintain orderly access to funding lines.
SGL-4 -- Issuers rated SGL-4 possess weak liquidity. They rely on external sources of financing and the availability of that financing is in Moody's opinion highly uncertain.
Short-Term Loan/Municipal Note Ratings. The following describes Moody's 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
Long-Term Debt Ratings (may be assigned, for example, to corporate and municipal bonds). The following describes 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. For example, a rating of A- is considered to be within the A rating and a Fund that has a policy of investing in securities with ratings of A or above may invest in A1 rated securities.
Issue credit ratings are based, in varying degrees, on the following considerations:
o Likelihood of payment--capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation;
o Nature of and provisions of the obligation;
o Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As such, they pertain to senior obligations of an entity. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above. (Such differentiation applies when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.) Accordingly, in the case of junior debt, the rating may not conform exactly with the category definition.
AAA -- An obligation rated `AAA' has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.
AA -- An obligation rated `AA' differs from the highest-rated obligations only to a small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.
A -- An obligation rated `A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.
BBB -- An obligation rated `BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
BB, B, CCC, CC, and C -- Obligations rated `BB', `B', `CCC', `CC', and `C' are regarded as having significant speculative characteristics. `BB' indicates the least degree of speculation and `C' the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
BB -- An obligation rated `BB' is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
B -- An obligation rated `B' is more vulnerable to nonpayment than obligations rated `BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.
CCC -- An obligation rated `CCC' is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC -- An obligation rated `CC' Is currently highly vulnerable to nonpayment.
C -- A subordinated debt or preferred stock obligation rated `C' is currently highly vulnerable to nonpayment. The `C' rating may be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued. A `C' also will be assigned to a preferred stock issue in arrears on dividends or sinking fund payments, but that is currently paying.
D -- An obligation rated `D' is in payment default. The `D' rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The `D' rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
Plus (+) or minus (-) -- The ratings from `AA' to `CCC' may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.
N.R. -- This indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that Standard & Poor's does not rate a particular obligation as a matter of policy.
Active Qualifiers (Currently applied and/or outstanding)
L -- Ratings qualified with `L' apply only to amounts invested up to federal deposit insurance limits.
p -- The letter `p' indicates that the rating is provisional. A provisional rating assumes the successful completion of the project financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful, timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of or the risk of default upon failure of such completion. The investor should exercise his own judgment with respect to such likelihood and risk.
pi -- Ratings with a `pi' subscript are based on an analysis of an issuer's published financial information, as well as additional information in the public domain. They do not, however, reflect in-depth meetings with an issuer's management and are therefore based on less comprehensive information than ratings without a `pi' subscript. Ratings with a `pi' subscript are reviewed annually based on a new year's financial statements, but may be reviewed on an interim basis if a major event occurs that may affect the issuer's credit quality.
t -- This symbol indicates termination structures that are designed to honor their contracts to full maturity or, should certain events occur, to terminate and cash settle all their contracts before their final maturity date.
Short-Term Debt Ratings (may be assigned, for example, to commercial paper, master demand notes, bank instruments and letters of credit). The following describes S&P's short-term debt ratings.
A-1 -- A short-term obligation rated `A-1' is rated in the highest category by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor's capacity to meet its financial commitment on these obligations is extremely strong.
A-2 -- A short-term obligation rated `A-2' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet Its financial commitment on the obligation Is satisfactory.
A-3 -- A short-term obligation rated `A-3' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
B -- A short-term obligation rated `B' is regarded as having significant speculative characteristics. The obligor currently has the capacity to meet its financial commitment on the obligation; however, it faces major ongoing uncertainties which could lead to the obligors inadequate capacity to meet its financial commitment on the obligation.
C -- A short-term obligation rated `C' is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.
D -- A short-term obligation rated `D' is in payment default. The `D' rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The `D' rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
Short-Term Loan/Municipal Note Ratings. The following describes S&P's 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.
Fitch
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.
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.
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 kind appears probable. `C' ratings signal imminent default.
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.
DDD, DD, 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 of repaying all obligations.
International Short-Term Credit Ratings. The following describes Fitch's two highest short-term ratings:
F1. Highest credit quality. Indicates the strongest capacity for timely payment of financial commitments; 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.
Notes to Long- and Short-term ratings:
"+" or "-" may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the `AAA' category or to categories below `CCC'
`NR' indicates that Fitch Ratings does not publicly rate the issuer or issue in question.
`Withdrawn': A rating is withdrawn when Fitch Ratings deems the amount of information available to be inadequate for rating purposes, or when an obligation matures, is called, or refinanced.
Rating Watch: Ratings are placed on Rating Watch 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. Rating Watch is typically resolved over a relatively short period.
A Rating Outlook indicates the direction a rating is likely to move over a one to two-year period. Outlooks may be positive, stable, or negative. A positive or negative Rating Outlook does not imply a rating change is inevitable. Similarly, ratings for which outlooks are "stable" could be upgraded or downgraded before an outlook moves to positive or negative if circumstances warrant such an action. Occasionally, Fitch may be unable to identify the fundamental trend and in these cases, the Rating Outlook may be described as "evolving".
APPENDIX B.
Proxy Voting Policies and Procedures
The Victory Portfolios
The Victory Institutional Funds
The Victory Variable Insurance Funds
Proxy Voting Policies and Procedures
The Victory Portfolios, The Victory Institutional Funds and The Victory Variable Insurance Funds (the "Trusts") each have adopted these Proxy Voting Policies and Procedures ("Policies") to:
o ensure that they vote proxies in the best interests of shareholders of the Funds with a view toward maximizing the value of their investments;
o address any conflicts that may arise between shareholders on the one hand; and "affiliated persons" of the Funds or of Victory Capital Management Inc. ("Victory Capital Management") or the principal underwriter of the Funds (or their affiliates) (all referred to as "Affiliated Persons") on the other;
o provide for oversight of proxy voting by the Boards of Trustees of the Trusts, and
o provide for the disclosure of the Funds' proxy voting records and these Policies.
I. Delegation to Victory Capital Management
The Trusts hereby delegate the responsibility for voting proxies on behalf of the Funds with respect to all equity securities held by the Funds to Victory Capital Management in accordance with these Policies, subject to oversight by the Trustees.
The Trustees have reviewed Victory Capital Management's Proxy Voting Policy and Procedures (the "Procedures") and have determined that they are reasonably designed to ensure that Victory Capital Management will vote all proxies in the best interests of the Shareholders, untainted by conflicts of interests. The Procedures (attached as Exhibit A), are adopted as part of these Policies. The Boards of Trustees must approve any material change in the Procedures before they become effective with respect to the Portfolios.
II. Disclosure
A. Voting Records
In accordance with Rule 30b1-4 under the Investment Company Act of 1940, as amended, the Trusts shall file annually with the Securities and Exchange Commission (the "SEC") on Form N-PX (or such other form as the SEC may designate) each Fund's proxy voting records for the most recent twelve-month period ended June 30 (the "Voting Records"). The Funds will make their proxy voting records available without charge upon request by calling a toll free number after filing the Voting Records with the SEC.
The Voting Records shall consist of, for each proposal on which a Fund was entitled to vote with respect to a security held by the Fund (for the designated time period of the Voting Records):
o the name of the issuer of the portfolio security
o the exchange ticker symbol of the portfolio security
o the CUSIP number for the portfolio security
o the shareholder meeting date
o a brief identification of the matter voted upon
o whether the matter was proposed by the issuer or by a security holder
o whether the Portfolio cast a vote and, if so, how the vote was cast
o whether the vote cast was for or against management of the issuer
B. Disclosure the Policies and How to Obtain Information
1. Description of the policies. The Funds' statement of additional information ("SAI") shall describe these Policies, including the Procedures.
2. How to obtain a copy of the Policies. The Funds shall disclose in all shareholder reports that a description of these Policies is available
o without charge, upon request, by calling a toll-free number; and
o at the SEC's website, www.sec.gov.
3. How to obtain a copy of proxy votes. The Funds shall disclose in all shareholder reports and the SAI that information regarding how the Funds voted proxies relating to portfolio securities is available:
o without charge, upon request, by calling a toll-free number; and
o at the SEC's website, www.sec.gov.
The Funds must send the information disclosed in their most recently filed report on Form N-PX within three business days of receipt of a request for this information, by first-class mail or other means designed to ensure equally prompt delivery.
III. Review by Trustees
Victory Capital Management shall report to the Trustees, at least annually, the Voting Records of the Funds in a form as the Trustees may request. This report shall:
o describe any conflicts of interests that were identified in connection with the voting of securities under the Procedures and how they were addressed; and
o summarize all votes that were made other than in accordance with the Procedures.
The Trustees will review these Policies and the Adviser's Procedures at the same meeting, and determine whether any amendments to these Policies or the Procedures would be appropriate.
Adopted: August 5, 2003
Revised: August 11, 2004
Adopted: February 10, 2005 for The Victory Institutional Funds
Exhibit A to Proxy Voting Procedures of The Victory Portfolios and The Victory Variable Insurance Funds
VICTORY CAPITAL MANAGEMENT INC. POLICY
Section: Investments - General Policy No. H. 1-2
Effective Date: April 17, 1997
Proxy Voting Policy
When VICTORY's accounts hold stock which VICTORY will vote in a fiduciary
capacity, its voting obligations must be exercised in accordance with (1) the
|
direction and guidance, if any, provided by the document establishing the account relationship, and (2) principles of fiduciary law which require the fiduciary to act in the best interests of the account. Thus, in voting such stock, VICTORY will exercise the care, skill, prudence, and diligence under the circumstances that a prudent person would use considering the aims, objectives, and guidance provided by the client.
In general, this will call for the voting of stock consistent with the best interests of the account, including long-term and short-term economic interests. In considering the best interests of the account, VICTORY will take into account, among other things, the effect of the proposal on the underlying value of the securities (including the effect on marketability of the securities, potential legal issues arising from the proposal, and the effect of the proposal on future prospects of the issuer), the makeup of the issuer's board of directors, including the number and quality of both management and non-management directors, the likelihood of a change in such makeup or quality of directors, the necessity of providing the directors with sufficient tools and flexibility to properly discharge their duties as directors, the desirability of providing directors with sufficient time to carefully consider any proposals made to the issuer that might significantly affect the result or nature of activities or ownership of the issuer, and the quality of communications from the corporation to its shareholders.
Where VICTORY has an obligation to vote, (1) all stock, by proxy or in person, will be voted, (2) a written record of such voting will be kept by VICTORY or its designated affiliate, and (3) the Proxy and Corporate Activities Committee will supervise the voting of stock (subject to the review of VICTORY's Chief Investment Officers and senior management of the Bank or Trust Company)
and will establish procedures to carry out this function consistent with the
foregoing principles.
Proxy Voting Procedure
The Proxy and Corporate Activities Committee (the "Committee") determines
how proxies are to be voted and/or recommended to be voted in those instances
|
where VICTORY has a holding of the security for which it has sole or shared authority to vote proxies. The Committee will maintain a record of proxy voting determinations, together with all proxy proposals, including shareholder proposals and proposals included in dissident proxy materials. Decisions will be made exclusively in accordance with the economic interests, both long- and short-term, of the account. Except where required under the terms of the governing instrument, social interests shall not be among the criteria employed by the Committee. VICTORY's investment research department's opinion concerning the management and prospects of the issuer may be taken into account, where appropriate, with special consideration given to the Master List issuers held in VICTORY's model portfolios. Insufficient information or vague or ambiguous wording may indicate that a vote against a proposal is appropriate even though the Committee agrees with the principle of the proposal. In considering anti-takeover provisions, consideration may be given to whether or not the proposal is part of a package of anti-takeover proposals or whether other anti-takeover measures are already in place.
The following proposals are generally approved:
1. Election of management's nominees for Directors.
2. Appointment of Auditors.
3. Change in the date or location of annual meetings.
4. For investment companies, continuation of company management, investment adviser or distribution contracts.
5. Transaction of such other business as may properly come before the meeting.
6. Receiving and/or approving financial reports.
7. Indemnification of Directors.
8. Stock splits and stock dividends.
9. Authority to issue additional debt.
10. Change in the number of authorized common shares.
11. Corporate name change.
12. Change in investment company agreements with advisers.
13. Stock option plans, unless exercise price is less than the market price at the time of the grant or dilution under the plan would exceed 10
14. Removal of a Director only for cause.
15. Waiver of preemptive rights.
16. Fair pricing amendments unless accompanied by a super-majority provision in excess of two-thirds.
17. Equal access proposals.
18. Technical amendments to by-laws or charters.
19. Share repurchases.
20. Spin-offs.
The following proposals are generally opposed:
1. Creation of a second class of stock with unequal voting rights.
2. Fair pricing provisions when accompanied by a super-majority provision in excess of two-thirds.
3. Amendment to bylaws by Board of Directors without shareholder approval.
4. Elimination of shareholder right to call a special meeting or requiring more than 25 % of shareholders to call a special meeting.
5. Elimination of shareholder action by written consent.
6. "Stakeholder" proposals.
7. Loans or guarantees of loans to officers and Directors.
8. Super-majority provisions in excess of two-thirds.
9. A greater vote requirement to repeal a provision than to adopt it.
10. Change to cumulative voting.
There is no general policy with respect to the following proposals which shall be evaluated on a case-by-case basis:
1. Change in the state of incorporation.
2. Mergers or other combinations.
3. Authorization of "blank check" preferred stock.
4. Golden parachutes.
5. Proposals to opt out of state anti-takeover laws.
6. Prohibition of greenmail.
7. Change in the number of directors.
8. Approval of poison pill plan.
9. Confidential voting.
10. Shareholder proposal to de-classify Board of Directors.
When the Committee decides to vote against a proposal which is generally approved or to vote in favor of a proposal which is generally opposed, the reason for the exception will be recorded.
The following is a discussion of selected proxy proposals which periodically are considered at annual meetings and VICTORY's general position with regard to such proposals:
1. Eliminate preemptive rights: Generally in favor. Preemptive rights may result in a loss of financing flexibility and could prevent management from raising capital advantageously. There is potential for abuse if new equity securities are issued at a discount to the market price of existing securities. This may result in a transfer of value from existing to new shareholders. However, instances of abuse are unusual and there are expenses involved in issuing securities on a preemptive basis.
2. Indemnification of directors, i.e., limiting or eliminating
liability for monetary damages for violating the duty of care:
Generally in favor. Indemnification is generally necessary to
attract qualified Board nominees in a litigious corporate
environment. Monetary liability generally is not eliminated or
limited for any breach of duty of loyalty, acts or omissions not in
good faith, and any transactions in which the director derived an
improper personal benefit.
3. Cumulative voting: Generally opposed. Cumulative voting may prevent the majority of shareholders from electing a majority of the board. Cumulative voting requires less votes to obtain a board seat. Therefore it promotes single interest representation on the Board, which may not represent the interest or concerns of all shareholders.
4. Executive stock option plans: Generally opposed if exercise price is below market price or if dilution under the plan would be greater than 10%, particularly if the company is mature or executive compensation is excessive. For rapidly growing, cash-short issuers where executive salaries are reasonable, may approve a plan where dilution exceeds 10%. Generally in favor of change of control provisions.
5. Shareholder action by written consent: Generally opposed to proposals to restrict or prohibit shareholders' ability to take action by written consent. Shareholders may lose the ability to remove directors or initiate a shareholder resolution if they have to wait for the next scheduled meeting.
6. Shareholder right to call a special meeting: Generally opposed to proposals to eliminate the right of shareholders to call a special meeting or to require the petition of more than 25% of shareholders to call a special meeting. Shareholders may lose the right to remove directors or initiate a shareholder resolution if they cannot take action until the next regularly scheduled meeting.
This is especially troublesome if shareholders do not have the right to act by written consent.
7. Super-majority vote requirements: Generally opposed to proposals requiring that a vote of more than two-thirds be required to amend any bylaw or charter provision, or approve a merger or other business combination. Super-majority vote provisions may stifle bidder interest in the issuer and thereby devalue its stock.
8. Unequal voting rights: Generally opposed. Voting rights are valuable.
9. Anti-greenmail provision: No general policy. Favor equal treatment for all shareholders, but anti-greenmail provisions may severely limit management's flexibility, for example, with respect to share repurchase programs or ability to issue shares such as General Motor's Class E and H with special features.
10. Approval of Poison Pills: No general policy. The Company would generally be opposed when poison pills are utilized to prevent takeover bids that would be in the best interest of shareholders. Certain shareholder rights plans, however, protect the interest of shareholders by enabling the Board to respond in a considered manner to unsolicited bids.
11. Blank-check preferred stock: No general policy. Does provide flexibility in financing but also can be used as an entrenchment device. Can be used as a poison pill when distributed to stockholders with rights attached or can be issued with superior voting rights to friendly parties.
12. Classified Boards of Directors: No general policy. Classified boards do provide stability and continuity; but, if someone wins a proxy fight and replaces a third of the directors, because of the difficulties involved in running the issuer with a Board of Directors that is a third hostile and because the vote would be seen as a loss of confidence in management, the remaining original directors might put the issuer up for sale or accommodate the wishes of the dissident group. A staggered board could mean that a director who failed to attend meetings or who voted in favor of actions which were harmful to shareholders could not be removed for up to three years.
13. Confidential voting: No general policy. Confidential voting eliminates the opportunity for management to apply pressure to institutional shareholders with which a business relationship exists. It should be noted that the Department of Labor's "Avon Letter" and the Department of Labor's investigation of proxy voting violations in 1988 may have lessened the need for confidential voting.
14. Fair price provisions: No general policy. Generally opposed to when accompanied by super-majority provision, i.e., a clause requiring a super majority shareholder vote to alter or repeal the fair price provision, in excess of two-thirds. Also generally opposed if the pricing formula is such that the price required is unreasonably high; designed to prevent two-tier, front-end-loaded hostile tender offer; since no shareholder wants to get caught in the second tier, they act selfishly and tender their shares in the first tier, so that effectively all shareholders are coerced into accepting the offer.
15. Golden parachutes: No general policy. It would be difficult for an issuer considered likely to be taken over to attract and retain top managers without severance payments for involuntary termination or significant reduction in compensation, duties or relocation after a change in control. However, the value of parachutes should not be excessive.
16. Reincorporation: No general policy. Should examine whether change of state of incorporation would increase the capacity of management to resist hostile takeovers.
Registration Statement
of
THE VICTORY PORTFOLIOS
on
Form N-1A
PART C. OTHER INFORMATION
Item 23.
Exhibits:
(a)(1) Certificate of Trust. ((1))
(a)(2)(a) Delaware Trust Instrument dated December 6, 1995, as amended March 27, 2000. (2)
(a)(2)(b) Schedule A to Trust Instrument, current as of December 14, 2005.
(b) Bylaws, Amended and Restated as of October 28, 2003. (3)
(c) The rights of holders of the securities being registered are set out in Articles II, VII, IX and X of the Trust Instrument referenced in Exhibit (a)(2) above and in Article IV of the Bylaws referenced in Exhibit (b) above.
(d)(1)(a) Investment Advisory Agreement dated as of March 1, 1997 between Registrant and Key Asset Management Inc. (the "First Advisory Agreement"). (4)
(d)(1)(b) Schedule A to the First Advisory Agreement, current as of December 14, 2005.
(d)(1)(c) Addendum to the First Advisory Agreement dated May 23, 2001. (5)
(d)(2)(a) Investment Advisory Agreement dated March 1, 1997 between Registrant and Key Asset Management Inc. regarding the Established Value, Focused Growth, and Gradison Government Reserves Funds (the "Second Advisory Agreement). (6)
(d)(2)(b) Schedule A to the Second Advisory Agreement, current as of December 14, 2005.
(d)(2)(c) Addendum to the Second Investment Advisory Agreement dated May 23, 2001. (5)
(e) Distribution Agreement dated March 1, 2004 between Registrant and Victory Capital Advisers, Inc.
(f) None.
(2) Filed as an Exhibit to Post-Effective Amendment No. 60 to Registrant's Registration Statement on Form N-1A filed electronically on June 1, 2000, accession number 0000922423-00-000816.
(3) Filed as an Exhibit to Post-Effective Amendment No. 72 to Registrant's Registration Statement on Form N-1A filed electronically on February 27, 2004, accession number 0000922423-04-000368.
(4) Filed as an Exhibit to Post-Effective Amendment No. 42 to Registrant's Registration Statement on Form N-1A filed electronically on July 29, 1998, accession number 0000922423-98-000725.
(5) Filed as an Exhibit to Post-Effective Amendment No. 65 to Registrant's Registration Statement on Form N-1A filed electronically on March 1, 2002, accession number 0000922423-02-000261.
(6) Filed as an Exhibit to Post-Effective Amendment No. 34 to Registrant's Registration Statement on Form N-1A filed electronically on December 12, 1997, accession number 0000922423-97-001015.
(g)(1)(a) Amended and Restated Mutual Fund Custody Agreement dated July 2, 2001 between Registrant and KeyBank National Association. (5)
(g)(1)(b) Attachment A to the Mutual Fund Custody Agreement, as amended December 10, 2003. (3)
(g)(1)(c) Amendment to the Amended and Restated Mutual Fund Custody Agreement dated February 5, 2003.(7)
(h)(1) Form of Broker-Dealer Agreement. (3)
(h)(2) Co-Administration Agreement dated November 1, 2005 between Registrant and BISYS Fund Services Ohio, Inc.
(h)(3) Co-Administration Agreement dated November 1, 2005 between Registrant and Victory Capital Management Inc.
(h)(4)(a) Transfer Agency Agreement dated April 1, 2002 between Registrant and BISYS Fund Services Ohio, Inc. ((8))
(h)(4)(b) Schedule A to Transfer Agency Agreement, as amended December 10, 2003. (3)
(h)(4)(c) Supplement to Transfer Agency Agreement dated April 1, 2002 between Registrant and BISYS Fund Services Ohio, Inc. (8)
(h)(4)(d) Amendment to Transfer Agency Agreement dated July 24, 2002 between Registrant and BISYS Fund Services Ohio, Inc. (8)
(h)(5) Amendment to Transfer Agency Agreement dated May 18, 2004 between Registrant and BISYS Fund Services Ohio, Inc.
(h)(5)(a) Fund Accounting Agreement dated April 1, 2002 between Registrant and BISYS Fund Services Ohio, Inc. (8)
(h)(5)(b) Schedule A to Fund Accounting Agreement, as amended December 10, 2003. (3)
(h)(6) Expense Limitation Undertaking dated July 20, 2005 of Victory Capital Management Inc.
(h)(7) Securities Lending Agency Agreement between Registrant and Key Trust Company of Ohio, N.A. dated August 28, 1997. (9)
(h)(7)(a) Amendment No. 1 to Securities Lending Agency Agreement between Registrant and KeyBank National Association dated March 31, 2001. (9)
(h)(7)(b) Amendment No. 2 dated February 10, 2005 to the Securities Lending Agreement dated August 28, 1997, between Registrant, Key Trust Company of Ohio, N.A. and Key Asset Management Inc. (10)
(i)(1) Opinion and consent of Kramer Levin Naftalis & Frankel LLP, regarding all Funds, dated February 27, 2004. (3)
(8) Filed as an Exhibit to Post-Effective Amendment No. 66 to Registrant's Registration Statement on Form N-1A filed electronically on December 27, 2002, accession number 0000922423-02-001283.
(9) Filed as an Exhibit to Post-Effective Amendment No. 73 to Registrant's Registration Statement on Form N-1A filed electronically on December 23, 2004, accession number 0000922423-04-002088.
(10) Filed as an Exhibit to Post-Effective Amendment No. 74 to Registrant's Registration Statement on Form N-1A filed electronically on February 25, 2005, accession number 0000922423-05-000382.
(i)(2) Consent of Kramer Levin Naftalis & Frankel LLP. (j) Not applicable.
(k) Not applicable.
(l)(1) Purchase Agreement dated November 12, 1986 between Registrant and Physicians Insurance Company of Ohio is incorporated herein by reference to Exhibit 13 to Pre-Effective Amendment No. 1 to Registrant's Registration Statement on Form N-1A filed on November 13, 1986.
(l)(2) Purchase Agreement dated October 15, 1989 is incorporated herein by reference to Exhibit 13(b) to Post-Effective Amendment No. 7 to Registrant's Registration Statement on Form N-1A filed on December 1, 1989.
(l)(3) Purchase Agreement is incorporated herein by reference to Exhibit 13(c) to Post-Effective Amendment No. 7 to Registrant's Registration Statement on Form N-1A filed on December 1, 1989.
(m)(1)(a) Distribution and Service Plan dated June 5, 1995. (4)
(m)(1)(b) Schedule I to the Distribution and Service Plan dated June 5, 1995, revised as of February 26, 2002. ((11))
(m)(2)(a) Distribution and Service Plan dated March 27, 2000 for certain Funds.
(m)(2)(b) Schedule I to the Distribution and Service Plan dated March 27, 2000, revised as of December 10, 2003. (3)
(m)(3)(a) Distribution and Service Plan dated December 11, 1998 for Class G Shares (now called Class R Shares) of Registrant.((12))
(m)(3)(b) Schedule I to Distribution and Service Plan for Class G Shares (now called Class R Shares), revised as of May 23, 2001. ((13))
(m)(4)(a) Distribution and Service Plan dated February 26, 2002 for Class C Shares of Registrant. (5)
(m)(4)(b) Schedule I to Distribution and Service Plan for Class C Shares, as revised December 10, 2003. (3)
(m)(4)(c) Form of Broker-Dealer Agreement for Class C Shares. (5)
(m)(5)(a) Shareholder Servicing Plan dated June 5, 1995 for Class A Shares. (4)
(m)(5)(b) Schedule I to the Shareholder Servicing Plan, revised as of December 10, 2003. (3)
(m)(5)(c) Form of Shareholder Servicing Agreement. (3)
(m)(5)(d) Form of Shareholder Servicing Agreement for non-financial services firms. (5)
(n) Amended and Restated Rule 18f-3 Multi-Class Plan, dated March 23, 2005.
(p)(1) Code of Ethics of Registrant.
(12) Filed as an Exhibit to Post-Effective Amendment No. 45 to Registrant's Registration Statement on Form N-1A filed electronically on January 26, 1999, accession number 0000922423-99-000059.
(13) Filed as an Exhibit to Registrant's Post-Effective Amendment No. 1 to Registration Statement on Form N-14 filed electronically on December 14, 2001, accession number 0000922423-01-501153.
(p)(2) Code of Ethics of Victory Capital Management Inc.
(p)(3) Code of Ethics of BISYS Fund Services.
Powers of Attorney of Frankie D. Hughes, Thomas F. Morrissey Leigh A. Wilson. (2)
Powers of Attorney of Nigel D. T. Andrews, Lyn Hutton and Karen Shepherd. (8) Powers of Attorney of Roger Noall and Frank A. Weil.(14)
Powers of Attorney of David Brooks Adcock, E. Lee Beard and Jakki L. Haussler. (12)
Item 24. Persons Controlled by or Under Common Control with Registrant.
None.
Item 25. Indemnification
Article X, Section 10.02 of Registrant's Delaware Trust Instrument, as amended, incorporated herein as Exhibit (a)(2) hereto, provides for the indemnification of Registrant's Trustees and officers, as follows:
Section 10.02 Indemnification.
(a) Subject to the exceptions and limitations contained in Subsection 10.02(b):
(i) every person who is, or has been, a Trustee or officer of the Trust (hereinafter referred to as a "Covered Person") shall be indemnified by the Trust to the fullest extent permitted by law against liability and against all expenses reasonably incurred or paid by him in connection with any claim, action, suit or proceeding in which he becomes involved as a party or otherwise by virtue of his being or having been a Trustee or officer and against amounts paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall apply to all claims, actions, suits or proceedings (civil, criminal or other, including appeals), actual or threatened while in office or thereafter, and the words "liability" and "expenses" shall include, without limitation, attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered Person:
(i) who shall have been adjudicated by a court or body before which the proceeding was brought (A) to be liable to the Trust or its Shareholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office or (B) not to have acted in good faith in the reasonable belief that his action was in the best interest of the Trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office, (A) by the court or other body approving
the settlement; (B) by at least a majority of those Trustees who are neither
Interested Persons of the Trust nor are parties to the matter based upon a
review of readily available facts (as opposed to a full trial-type inquiry); or
(C) by written opinion of independent legal counsel based upon a review of
readily available facts (as opposed to a full trial-type inquiry).
(c) The rights of indemnification herein provided may be insured against by policies maintained by the Trust, shall be severable, shall not be exclusive of or affect any other rights to which any Covered Person may now or hereafter be entitled, shall continue as to a person who has ceased to be a Covered Person and shall inure to the benefit of the heirs, executors and administrators of such a person. Nothing contained herein shall affect any rights to indemnification to which Trust personnel, other than Covered Persons, and other persons may be entitled by contract or otherwise under law.
(d) Expenses in connection with the preparation and presentation of a defense to
any claim, action, suit or proceeding of the character described in Subsection
(a) of this Section 10.02 may be paid by the Trust or Series from time to time
prior to final disposition thereof upon receipt of an undertaking by or on
behalf of such Covered Person that such amount will be paid over by him to the
Trust or Series if it is ultimately determined that he is not entitled to
indemnification under this Section 10.02; provided, however, that either (i)
such Covered Person shall have provided appropriate security for such
undertaking, (ii) the Trust is insured against losses arising out of any such
advance payments or (iii) either a majority of the Trustees who are neither
Interested Persons of the Trust nor parties to the matter, or independent legal
counsel in a written opinion, shall have determined, based upon a review of
readily available facts (as opposed to a trial-type inquiry or full
investigation), that there is reason to believe that such Covered Person will be
found entitled to indemnification under this Section 10.02."
Indemnification of the Fund's principal underwriter, custodian, fund accountant,
and transfer agent is provided for, respectively, in Section V of the
Distribution Agreement incorporated by reference as Exhibit 6(a) hereto, Section
28 of the Custody Agreement incorporated by reference as Exhibit 8(a) hereto,
Section 5 of the Fund Accounting Agreement incorporated by reference as Exhibit
9(d) hereto, and Section 7 of the Transfer Agency Agreement incorporated by
reference as Exhibit 9(c) hereto. Registrant has obtained from a major insurance
carrier a trustees' and officers' liability policy covering certain types of
errors and omissions. In no event will Registrant indemnify any of its trustees,
officers, employees or agents against any liability to which such person would
otherwise be subject by reason of his willful misfeasance, bad faith, or gross
negligence in the performance of his duties, or by reason of his reckless
disregard of the duties involved in the conduct of his office or under his
agreement with Registrant. Registrant will comply with Rule 484 under the
Securities Act of 1933 and Release 11330 under the Investment Company Act of
1940 in connection with any indemnification.
Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to trustees, officers, and controlling persons or Registrant pursuant to the foregoing provisions, or otherwise, Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Investment Company Act of 1940, as amended, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Registrant of expenses incurred or paid by a trustee, officer, or controlling person of Registrant in the successful defense of any action, suit, or proceeding) is asserted by such trustee, officer, or controlling person in connection with the securities being registered, Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
Item 26. Business and Other Connections of the Investment Adviser
Victory Capital Management Inc. (the "Adviser") is the investment adviser to each Fund of The Victory Portfolios. The Adviser is a wholly-owned subsidiary of KeyBank National Association, which is the principal banking subsidiary of KeyCorp, a bank holding company, which had total assets of approximately $92.3 billion as of September 30, 2005. KeyCorp is a leading financial institution doing business in 13 states from Maine to Alaska, providing a full array of trust, commercial, and retail banking
services. Its non-bank subsidiaries include securities brokerage, insurance and leasing companies. As of September 30, 2005, the Adviser manages assets in excess of $55.8 billion, and provides a full range of investment management services to personal and corporate clients.
To the knowledge of Registrant, none of the directors or officers of the Adviser, except those set forth below, is or has been at any time during the past two calendar years engaged in any other business, profession, vocation or employment of a substantial nature, except that certain directors and officers of the Adviser also hold positions with KeyCorp or its subsidiaries.
The principal executive officers and directors of the Adviser are as follows:
Officers: Lawrence G. Babin o Chief Investment Officer, Diversified Product Gary P. Dunkerley o Chief Investment Officer, Mid Cap Value Kenneth F. Fox o Chief Compliance Officer. Richard L. Janus o Chief Investment Officer, Convertible Securities Product Cynthia G. Koury o Chief Investment Officer, Balanced Erick F. Maronak o Chief Investment Officer, Newbridge Division Arvind K. Sachdeva o Chief Investment Officer, Intrinsic Value Product Catherine R. Savvas o Chief Financial Officer. Thomas M. Seay o Chief Investment Officer, Fixed Income Mark H. Summers o Chief Administrative Officer. Robert L. Wagner o President and Chief Executive Officer Richard G. Zeigler o Secretary. |
The business address of the foregoing individuals is 127 Public Square, Cleveland, Ohio 44114.
Item 27. Principal Underwriter
(a) Victory Capital Advisers, Inc. ("VCA") acts as principal underwriter for The Victory Portfolios, The Victory Variable Insurance Funds and The Victory Institutional Funds:
(b) VCA, 100 Summer Street, Suite 1500, Boston, Massachusetts 02110, acts solely as distributor for the investment companies listed above. The officers of VCA, all of whose principal business address is set forth above, are:
Position and
Principal Position and Officers Officers With
Name of VCA Registrant
----------------------- ----------------------------------- -------------------
William J. Tomko President None
Kevin J. Dell Secretary and Director None
Edward S. Forman Assistant Secretary None
James L. Fox Director None
Robert A. Bucher Financial and Operations Principal None
|
Stephen E. Hoffman Treasurer None
Richard F. Froio Vice President and Chief None
Compliance Officer
Charles L. Booth Vice President and Assistant None
Compliance Officer
|
(c) Not applicable.
Item 28. Location of Accounts and Records
(1) Victory Capital Management Inc., 127 Public Square, Cleveland, Ohio 44114-1306 (records relating to its functions as investment adviser and co-administrator).
(2) KeyBank National Association, 127 Public Square, Cleveland, Ohio 44114-1306 (records relating to its function as custodian, securities lending agent and shareholder servicing agent).
(3) BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio 43219 (records relating to its functions as co-administrator, fund accountant, dividend disbursing agent and shareholder servicing agent).
(4) Victory Capital Advisers, Inc., 100 Summer Street, Suite 1500, Boston, Massachusetts 02110 (records relating to its function as distributor).
(5) The Bank of New York, One Wall Street, New York, New York 10286 (records relating to its function as sub-custodian of the Balanced and Convertible Funds).
Item 29. Management Services
None.
Item 30. Undertakings
None.
NOTICE
A copy of the Certificate of Trust of Registrant is on file with the Secretary of State of Delaware and notice is hereby given that this Post-Effective Amendment to Registrant's Registration Statement has been executed on behalf of Registrant by officers of, and Trustees of, Registrant as officers and as Trustees, respectively, and not individually, and that the obligations of or arising out of this instrument are not binding upon any of the Trustees, officers or shareholders of Registrant individually but are binding only upon the assets and property of Registrant.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York and State of New York, on the 27th day of December, 2005.
THE VICTORY PORTFOLIOS
(Registrant)
By: /s/ Kathleen A. Dennis
-------------------------------------
Kathleen A. Dennis, President
|
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities indicated on the 27th day of December, 2005.
/s/ Kathleen A. Dennis President ---------------------------- Kathleen A. Dennis /s/ David L. Hughes Treasurer ---------------------------- David L. Hughes |
*
---------------------------- Chairman of the Board
Leigh A. Wilson and Trustee
*
---------------------------- Trustee
Roger Noall
*
---------------------------- Trustee
Frankie D. Hughes
*
---------------------------- Trustee
Thomas F. Morrissey
*
---------------------------- Trustee
Frank A. Weil
*
---------------------------- Trustee
Lyn Hutton
*
---------------------------- Trustee
Karen Shepherd
*
---------------------------- Trustee
Nigel D. T. Andrews
*
---------------------------- Trustee
David Brooks Adcock
*
---------------------------- Trustee
E. Lee Beard
*
---------------------------- Trustee
Jakki L. Haussler
*By: /s/ Jay G. Baris
----------------------------------------
Jay G. Baris
Attorney-in-Fact
|
THE VICTORY PORTFOLIOS
INDEX TO EXHIBITS
Item 23.
Exhibit Number
Exhibits:
EX-99.a Schedule A to Trust Instrument, current as of December 14, 2005.
EX-99.d(1) Schedule A to the First Advisory Agreement, current as of December
14, 2005.
EX-99.d(2) Schedule A to the Second Advisory Agreement, current as of December
14, 2005.
EX-99.e Distribution Agreement dated March 1, 2004 between Registrant and
Victory Capital Advisers, Inc.
EX-99.h(1) Amendment to Transfer Agency Agreement dated May 18, 2004 between
Registrant and BISYS Fund Services Ohio, Inc.
EX-99.h(2) Co-Administration Agreement dated November 1, 2005 between
Registrant and BISYS Fund Services Ohio, Inc.
EX-99.h(3) Co-Administration Agreement dated November 1, 2005 between
Registrant and Victory Capital Management Inc.
EX-99.h(4) Expense Limitation Undertaking dated July 20, 2005 of Victory
Capital Management Inc.
EX-99.i Consent of Kramer Levin Naftalis & Frankel LLP.
EX-99.n Amended and Restated Rule 18f-3 Multi-Class Plan, dated March 23,
2005.
EX-99.p(1) Code of Ethics of Registrant.
EX-99.p(2) Code of Ethics of Victory Capital Management Inc.
EX-99.p(3) Code of Ethics of BISYS Fund Services.
|
SCHEDULE A
To the Trust Instrument of The Victory Portfolios dated December 6, 1995,
Amended and Restated as of March 27, 2000
Current as of December 14, 2005.
SCHEDULE A
To the Advisory Agreement dated March 1, 1997 between Key Asset Management Inc.
(the "Adviser") and The Victory Portfolios, on behalf of the following Funds
Fee, at an annual rate, expressed as a percentage of average daily net assets.*
Must Be
Name of Fund Effective January 1, 2005 Prior to January 1, 2005 Last Approved Approved By
------------ ------------------------- ------------------------ ------------- -----------
1. Balanced Fund 0.60% on the first $400 million, 0.70% on the first $400 million, December 16, December 31,
0.55% on the next $400 million and 0.65% on the next $400 million, and 2004 2005
0.50% on assets in excess of $800 0.60% on assets in excess of $800
million million
2. Convertible Fund 0.75% on the first $400 million, 0.75% December 16, December 31,
0.65% on the next $400 million and 2004 2005
0.60% on assets in excess of $800
million
3. Core Bond Fund 0.50% on the first $400 million, 0.75% December 16, December 31,
(formerly, 0.45% on the next $400 million and 2004 2005
Intermediate 0.40% on assets in excess of $800
Income Fund) million
4. Diversified Stock 0.65% on the first $800 million, 0.65% on the first $800 million and December 16, December 31,
Fund 0.60% on the next $1.6 billion and 0.60% on assets in excess of $800 2004 2005
0.55% on assets in excess of $2.4 million
billion
5. Federal Money 0.25% on the first $1.5 billion, 0.25% December 16, December 31,
Market Fund 0.20% on the next $1.5 billion and 2004 2005
0.15% on assets in excess of $3
billion
6. Financial 0.50% 0.50% December 16, December 31,
Reserves Fund 2004 2005
7. Fund for Income 0.50% on the first $400 million, 0.50% December 16, December 31,
0.45% on the next $400 million and 2004 2005
0.40% on assets in excess of $800
million
8. Institutional 0.20% on the first $1.5 billion, 0.20% December 16, December 31,
Money Market Fund 0.17% on the next $1.5 billion and 2004 2005
0.15% on assets in excess of $3
billion
|
Must Be
Name of Fund Effective January 1, 2005 Prior to January 1, 2005 Last Approved Approved By
------------ ------------------------- ------------------------ ------------- -----------
9. National 0.55% on the first $400 million, 0.55% December 16, December 31,
Municipal Bond 0.50% on the next $400 million and 2004 2005
Fund 0.45% on assets in excess of $800
million
10. Ohio Municipal 0.55% on the first $400 million, 0.60% December 16, December 31,
Bond Fund 0.50% on the next $400 million and 2004 2005
0.45% on assets in excess of $800
million
11. Ohio Municipal 0.45% on the first $600 million, 0.50% December 16, December 31,
Money Market Fund 0.35% on the next $600 million and 2004 2005
0.25% on assets in excess of $1.2
billion
12. Prime Obligations 0.35% on the first $1.5 billion, 0.35% December 16, December 31,
Fund 0.30% on the next $500 million, 2004 2005
0.25% on the next $500 million and
0.20% on assets in excess of $2.5
billion
13. Small Company 0.65% on the first $100 million, 0.65% on the first $100 million, December 16, December 31,
Opportunity Fund 0.55% on the next $100 million, and 0.55% on the next $100 million, and 2004 2005
0.45% on assets in excess of $200 0.45% on assets in excess of $200
million million
14. Special Value Fund 0.75% on the first $400 million, 0.75% on the first $400 million, December 16, December 31,
0.65% on the next $400 million, and 0.65% on the next $400 million, and 2004 2005
0.60% on assets in excess of $800 0.60% on assets in excess of $800
million million
15. Stock Index Fund 0.25% on the first $400 million, 0.25% on the first $400 million, December 16, December 31,
0.20% on the next $400 million, and 0.20% on the next $400 million, and 2004 2005
0.15% on assets in excess of $800 0.15% on assets in excess of $800
million million
16. Tax-Free Money 0.35% on the first $600 million, 0.35% December 16, December 31,
Market Fund 0.30% on the next $600 million and 2004 2005
0.25% on assets in excess of $1.2
billion
17. Value Fund 0.75% on the first $400 million, 0.75% on the first $400 million, December 16, December 31,
0.65% on the next $400 million, and 0.65% on the next $400 million, and 2004 2005
0.60% on assets in excess of $800 0.60% on assets in excess of $800
million million
|
Current as of December 14, 2005.
SCHEDULE A
To the Investment Advisory Agreement dated March 1, 1997 between The
Victory Portfolios, on the behalf of the following Funds, and
Victory Capital Management Inc. (formerly Key Asset Management Inc.)
Annual fee, as a percentage of average daily net assets.*
Must Be
Name of Fund Effective January 1, 2005 Prior to January 1, 2005 Last Approved Approved By
------------ ------------------------- ------------------------ ------------- -----------
1. Established 0.65% on the first $100 million, 0.65% on the first $100 million, December 16, December 31,
Value Fund 0.55% on the next $100 million, and 0.55% on the next $100 million, 2004 2005
0.45% on assets in excess of $200 and 0.45% on assets in excess of
million $200 million
2. Focused Growth 0.75% on first $400 million, 0.65% 0.75% on first $400 million, 0.65% December 16, December 31,
Fund on next $400 million and 0.60% in on next $400 million and 0.60% 2004 2005
excess of $800 million in excess of $800 million**
3. Gradison 0.40% on the first $3 billion, 0.50% on the first $400 million, December 16, December 31,
Government 0.30% on the next $500 million and 0.45% on the next $600 million, 2004 2005
Reserves Fund 0.25% on assets in excess of $3.5 0.40% on the next $1 billion and
billion 0.35% on assets in excess of $2
billion
|
Current as of December 14, 2005.
* Note, however, that the Adviser shall have the right, but not the obligation, to contractually waive any portion of the advisory fee from time to time. Any such contractual waiver will be irrevocable and determined in advance of rendering investment advisory services by the Adviser, and shall be in writing and signed by the parties hereto.
** Effective December 10, 2004.
DISTRIBUTION AGREEMENT
between
THE VICTORY PORTFOLIOS
and
VICTORY CAPITAL ADVISERS, INC.
This DISTRIBUTION AGREEMENT is made as of this 1st day of March, 2004 between The Victory Portfolios, a Delaware business trust (herein called the "Trust"), and Victory Capital Advisers, Inc., a Delaware corporation (herein called the "Distributor").
WHEREAS, the Trust is an open-end management investment company and is so registered under the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Trust desires to retain the Distributor as Distributor for each of the Trust's separate portfolios set forth on Schedule I hereto, as such Schedule may be revised from time to time (individually known as a "Fund" and collectively as the "Funds") to provide for the sale and distribution of shares of beneficial interest of the Funds (herein collectively called "Shares"), and the Distributor is willing to render such services;
NOW THEREFORE, in consideration of the premises and mutual covenants set forth herein the parties hereto agree as follows:
I. DELIVERY OF DOCUMENTS
The Trust has delivered to the Distributor copies of each of the following documents and will deliver to it all future amendments and supplements thereto, if any:
(a) The Trust's Certificate of Trust and all amendments thereto (such Certificate of Trust, as presently in effect and as it shall from time to time be amended, herein called the "Trust's Certificate");
(b) The Bylaws of the Trust (such Bylaws, as presently in effect and as they shall from time to time be amended, herein called the "Bylaws");
(c) Resolutions of the Board of Trustees of the Trust (the "Board") authorizing the execution and delivery of this Agreement;
(d) The Trust's most recent Post-Effective Amendment to its Registration Statement under the Securities Act of 1933, as amended ( the "Securities Act"), and under the 1940 Act, on Form N-1A as filed with the Securities and Exchange Commission (the "Commission") and all subsequent amendments thereto (said Registration Statement, as presently in effect and as amended or supplemented from time to time, is herein called the "Registration Statement");
(e) Notification of Registration of the Trust under the 1940 Act on Form N-8A as filed with the Commission; and
(f) A Prospectus and Statement of Additional Information of the Funds (such prospectus and statement of additional information, as presently filed with the Securities and Exchange Commission (the "SEC") and as they shall from time to time be amended and supplemented herein called individually the "Prospectus" and collectively the "Prospectuses").
II. DISTRIBUTION
1. Appointment of Distributor. The Trust hereby appoints the Distributor as Principal Distributor of the Funds' Shares and the Distributor hereby accepts such appointment and agrees to render the services and duties set forth in this Section II.
2. Services and Duties.
(a) The Trust agrees to sell through the Distributor, as agent, from time to time during the term of this Agreement, Shares of the Funds (whether authorized but unissued or treasury shares, in the Trust's sole discretion) upon the terms and at the current offering price as described in the Prospectus. The Distributor will act only in its own behalf as principal in making agreements with selected dealers or others for the sale and redemption of Shares, and shall sell Shares only at the offering price thereof as set forth in the applicable Prospectus. The Distributor shall not be obligated to sell any certain number of Shares. Each Fund reserves the right to issue Shares in connection with any merger or consolidation of the Trust or any Fund with any other investment company or personal holding company or in connection with offers of exchange exempted from Section 11(a) of the 1940 Act.
(b) In all matters relating to the sale and redemption of Shares, the Distributor will act in conformity with the Trust's Certificate, Bylaws, and Prospectus and with the instructions and directions of the Board and will conform to and comply with the requirements of the Securities Act, the 1940 Act, the regulations of the National Association of Securities Dealers, Inc. and all other applicable federal or state laws and regulations. In connection with such sales, the Distributor acknowledges and agrees that it is not authorized to provide any information or make any representations other than as contained in the Trust's Registration Statement and Prospectus and any sales literature specifically approved by the Trust. The Trust shall not be responsible in any way for any information, statements or representations given or made by the Distributor or its representatives or agents other than such information, statements or representations contained in the Prospectus or other financial statements of the Trust or in any sales literature or advertisements specifically approved by the Trust.
(c) The Distributor will bear the cost of (i) printing and distributing any Prospectus (including any supplement thereto) to persons who are not either shareholders or counsel, independent accountants or other persons providing similar services to the Trust, and (ii) preparing, printing and distributing any literature, advertisement or material which is primarily intended to result in the sale of the Shares; provided, however, that the Distributor shall not be obligated to bear the expenses incurred by the
Trust in connection with the preparation and printing of any amendment to any Registration Statement or Prospectus necessary for the continued effective registration of the Shares under the Securities Act; and provided further, that each Fund will bear the expenses incurred and other payments made in accordance with the provisions of this Agreement and any plan now in existence or hereafter adopted with respect to such Fund, or any class or classes of shares of such Fund, pursuant to Rule 12b-1 under the 1940 Act (collectively, the "Plans").
(d) The Distributor agrees to be responsible for implementing and/or operating the Plans in accordance with the terms thereof.
(e) All Shares of the Funds offered for sale by the Distributor shall be offered for sale at a price per Share (the "offering price") equal to their net asset value (determined in the manner set forth in the Trust's Certificate and then current Prospectuses) plus any applicable sales charge as set forth in the then current Prospectuses. The offering price, if not an exact multiple of one cent, shall be adjusted to the nearest cent.
(f) If any Shares sold by the Distributor under the terms of this Agreement are redeemed or repurchased by the Trust or by the Distributor as agent or are tendered for redemption within seven business days after the date of confirmation of the original purchase of said Shares, the Distributor shall forfeit the amount (if any) of the net asset value received by it in respect of such Shares, provided that the portion, if any, of such amount (if any) re-allowed by the Distributor from the broker-dealers or other persons shall be repayable to the Trust only to the extent recovered by the Distributor from the broker-dealers or other person concerned. The Distributor shall include in the forms of agreement with such broker-dealers and other persons a corresponding provision for the forfeiture by them of their concession with respect to Shares sold by them or their principals and redeemed or repurchased by the Trust or by the Distributor as agent (or tendered for redemption) within seven business days after the date of confirmation of such initial purchases.
3. Sales and Redemptions.
(a) The Trust shall pay all costs and expenses in connection with the registration of the Shares under the Securities Act, and all expenses in connection with maintaining facilities for the issue and transfer of the Shares and for supplying information, prices and other data to be furnished by the Trust hereunder, and all expenses in connection with preparing, printing and distributing the Prospectuses except as set forth in subsection 2(c) of Section II hereof.
(b) The Trust shall execute all documents, furnish all information and otherwise take all actions which may be reasonably necessary in the discretion of the Trust's officers in connection with the qualification of the Shares for sale in such states as the Distributor may designate to the Trust and the Trust may approve, and the Trust shall pay all filing fees which may be incurred in connection with such qualification. The
Distributor shall pay all expenses connected with its qualification as a dealer under state or federal laws and, except as otherwise specifically provided in this Agreement, all other expenses incurred by the Distributor in connection with the sale of the Shares as contemplated in this Agreement. It is understood that certain advertising, marketing, shareholder servicing, administration and/or distribution expenses to be incurred in connection with the Shares will be paid by the Funds as provided in this Agreement and in the Plans relating thereto.
(c) The Trust shall furnish from time to time, for use in connection with the sale of the Shares, such supplemental information with respect to the Funds and the Shares as the Distributor may reasonably request, and the Trust warrants that any such supplemental information fairly shows or represents what it purports to show or represent. The Trust shall also furnish the Distributor upon request with: (a) unaudited semi-annual financial statements of the Funds prepared by the Trust, (b) a monthly itemized list of the securities held by each Fund, (c) monthly balance sheets as soon as practicable after the end of each month, and (d) from time to time such additional information regarding the financial condition of the Funds as the Distributor may reasonably request.
(d) The Trust shall have the right to suspend the sale of Shares of any Fund at any time in response to conditions in the securities markets or otherwise, and to suspend the redemption of Shares of any Fund at any time permitted by the 1940 Act or the rules of the SEC ("Rules").
(e) The Trust reserves the right to reject any order for Shares.
(f) The Trust may use, or may request Distributor to use, an electronic processing system over the internet in which electronically transmitted orders are forwarded electronically for processing under circumstances in which the Distributor will not review the orders. Under such circumstances, the Trust acknowledges and agrees that it will independently determinate that any third party used by the Trust to process orders is a satisfactory service provider to process such orders without the Distributor's review.
(g) The Trust authorizes the Distributor and dealers to use the most current Prospectus in the form furnished by the Trust in connection with the sale of the Shares.
(h) The Trust agrees to advise (directly or through one of its service providers) the Distributor as soon as reasonably practical by a notice in writing delivered to the Distributor pursuant to Section VIII or by e-mail to rick.froio@bisys.com and jim.smith@bisys.com:
(i) of any request by the Commission for amendments to the registration statement or Prospectus then in effect or for additional information;
(ii) in the event of the issuance by the Commission of any stop order suspending the effectiveness of the registration statement or Prospectus
then in effect or the initiation by service of process on the Trust of any proceeding for that purpose;
(iii) of the happening of any event that makes untrue any statement of a material fact made in the registration statement or Prospectus then in effect or that requires the making of a change in such registration statement or Prospectus in order to make the statements therein not misleading; and
(iv) of any action of the Commission with respect to any amendment to any registration statement of Prospectus that may from time to time be filed with the Commission, that could reasonably be expected to have a material negative impact upon the offering of Shares;
provided that, for purposes of this section, informal requests by or acts of the staff of the Commission shall not be deemed actions of or requests by the Commission unless they would reasonably be expected to have a material negative impact upon the offering of Shares.
4. Payments to Service Providers. The Funds may pay the Distributor an amount under a Plan. The Distributor may pay such amounts to service providers, some of whom may be affiliates of the Trust or affiliates of affiliates of the Trust.
III. LIMITATION OF LIABILITY
The Distributor shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust or any Fund in connection with the matters to which this Agreement relates, except a loss resulting from willful misfeasance, bad faith or negligence on its part in the performance of its duties or from reckless disregard by it of its obligations and duties under this Agreement.
IV. CONFIDENTIALITY
The Distributor will treat confidentially and as proprietary information of the Trust all records and other information relative to the Trust, to the Trust's prior or present shareholders and to those persons or entities who respond to the Distributor's inquiries concerning investment in the Trust, and except as provided below, will not use such records and information for any purpose other than (i) the performance of its responsibilities and duties hereunder or the performance of its responsibilities and duties with regard to sales of the shares of any Fund which may be added to the Trust in the future and (ii) its internal compliance and compliance monitoring. Any other use by the Distributor of the information and records referred to above may be made only after prior notification to and approval in writing by the Trust. Such approval shall not be unreasonably withheld and may not be withheld where (i) the Distributor may be exposed to civil or criminal contempt proceedings for failure to divulge such information; (ii) the Distributor is requested to divulge such information by duly constituted authorities; or (iii) the Distributor is so requested by the Trust.
V. REPRESENTATIONS AND INDEMNIFICATION
1. Trust Representations. The Trust represents and warrants to the Distributor that at all times the Registration Statement and Prospectuses will in all material respects conform to the applicable requirements of the Securities Act and the Rules and will not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except that no representation or warranty in this subsection shall apply to statements or omissions made in reliance upon and in conformity with written information furnished to the Trust by or on behalf of and with respect to the Distributor expressly for use in the Registration Statement or Prospectuses.
2. Distributor Representations. The Distributor represents and warrants to the Trust that it is duly organized as a Delaware corporation and is, and at all times will remain, duly authorized and licensed to carry out its services as contemplated herein.
3. Trust Indemnification. The Trust will indemnify and hold harmless the Distributor, its several officers and directors, and any person who controls the Distributor within the meaning of Section 15 of the Securities Act, from and against any losses, claims, damages or liabilities, joint or several, to which any of them may become subject (a) as the result of acting as distributor of the Funds and entering into selling agreements, shareholder servicing agreements, or similar agreements with financial intermediaries on behalf of the Trust; (b) under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of, or are based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, the Prospectuses or in any application or other document (collectively, "Trust Materials") executed by or on behalf of the Trust, (ii) information furnished by or on behalf of the Trust filed in any state in order to qualify the Shares under the securities or blue sky laws thereof ("Blue Sky Application"), (iii) any omission or alleged omission to state in any Trust Materials or Blue Sky Application a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iv) any Trust-related advertisement or sales literature that contains any untrue statement, or alleged untrue statement, of a material fact, or any omission, or alleged omission, to state a material fact required to be stated therein to make the statements therein not misleading, due to actions by a Fund or its investment adviser that are contrary to statements made in such advertisements or sales literature; or (c) arising out of or based upon the electronic processing of orders over the internet at the Trust's request, and will reimburse the Distributor, its several officers and directors, and any person who controls the Distributor within the meaning of Section 15 of the Securities Act, for any legal or other expenses reasonably incurred by any of them in investigating, defending, or preparing to defend any such action, proceeding or claim; provided, however, that the Trust shall not be liable in any case to the extent that such loss, claim, damage or liability arises out of, or is based upon, (A) any untrue statement, alleged untrue statement, or omission or alleged omission made in the Registration Statement, the Prospectuses, any Blue Sky Application or any application or other document executed by or on behalf of the Trust in reliance upon and in conformity with written information furnished to the Trust by or on behalf of and with respect to the Distributor specifically for inclusion therein, or (B) the willful misfeasance, bad faith or negligence of the Distributor in the performance of its duties
or the Distributor's reckless disregard of its obligations and duties under this Agreement.
The Trust shall not indemnify any person pursuant to this subsection 3 unless the court or other body before which the proceeding was brought has rendered a final decision on the merits that such person was not liable by reason of his willful misfeasance, bad faith or negligence in the performance of his duties, or his reckless disregard of obligations and duties, under this Agreement ("disabling conduct") or, in the absence of such a decision, a reasonable determination (based upon a review of the facts) that such person was not liable by reason of disabling conduct has been made by the vote of a majority of a quorum of trustees of the Trust who are neither "interested persons" of the Trust (as defined in the 1940 Act) nor parties to the proceeding, or by an independent legal counsel in a written opinion.
Each Fund shall advance attorney's fees and other expenses incurred by any person in defending any claim, demand, action or suit which is the subject of a claim for indemnification pursuant to this subsection 3, so long as: (i) such person shall undertake to repay all such advances unless it is ultimately determined that he is entitled to indemnification hereunder; and (ii) such person shall provide security for such undertaking, or the Fund shall be insured against losses arising by reason of any lawful advances, or a majority of a quorum of the disinterested, non-party trustees of the Trust (or an independent legal counsel in a written opinion) shall determine based on a review of readily available facts (as opposed to a full trial-type inquiry) that there is reason to believe that such person ultimately will be found entitled to indemnification hereunder.
4. Distributor Indemnification. The Distributor will indemnify and hold harmless the Trust, the Trust's several officers and trustees and any person who controls the Trust within the meaning of Section 15 of the Securities Act, from and against any losses, claims, damages or liabilities, joint or several, to which any of them may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect hereof) arise out of, or are based upon, (a) any breach of its representations and warranties in subsection 2 hereof or its agreements in subsection 2 of Section II hereof, or which arise out of, or are based upon, any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, the Prospectuses, any Blue Sky Application or any application or other document executed by or on behalf of the Trust, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, which statement or omission or alleged statement or alleged omission was made in reliance upon or in conformity with information furnished in writing to the Trust or any of its several officers and trustees by or on behalf of and with respect to the Distributor specifically for inclusion therein, (b) the Distributor's willful misfeasance, bad faith or negligence in the performance of its duties or the Distributor's reckless disregard of its obligations and duties under this Agreement, or (c) the Distributor's failure to comply with laws applicable to it in connection with its activities hereunder (other than in respect of Trust-related advertisements or sales literature that fails to comply with applicable laws due to actions by a Fund or its investment adviser that are contrary to statements made in such advertisements or sales literature), and will reimburse the Trust, the Trust's several officers and trustees, and any person who controls the Trust within the meaning of Section 15 of the Securities Act, for any legal or other expenses reasonably incurred by any of them in investigating, defending or
preparing to defend any such action, proceeding or claim.
5. General Indemnity Provisions. No indemnifying party shall be liable under its indemnity agreement contained in subsection 3 or 4 hereof with respect to any claim made against such indemnifying party unless the indemnified party shall have notified the indemnifying party in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon the indemnified party (or after the indemnified party shall have received notice of such service on any designated agent), but failure to notify the indemnifying party of any such claim shall not relieve it from any liability which it may otherwise have to the indemnified party. The indemnifying party will be entitled to participate at its own expense in the defense or, if it so elects, to assume the defense of any suit brought to enforce any such liability, and if the indemnifying party elects to assume the defense, such defense shall be conducted by counsel chosen by it and reasonably satisfactory to the indemnified party. In the event the indemnifying party elects to assume the defense of any such suit and retain such counsel, the indemnified party shall bear the fees and expenses of any additional counsel retained by the indemnified party.
VI. DURATION AND TERMINATION
This Agreement shall become effective as of the date first above written, and, unless sooner terminated as provided herein, shall continue for a period of two years from such date. Thereafter, if not terminated, this Agreement shall continue automatically for successive terms of one year, provided that such continuance is specifically approved at least annually (a) by a majority of those members of the Board who are not parties to this Agreement or "interested persons" of any such party (the "Disinterested Trustees"), pursuant to a vote cast in person at a meeting called for the purpose of voting on such approval, and (b) by the Board or by vote of a "majority of the outstanding voting securities" of the Trust. Notwithstanding anything to the contrary contained in this Section VI, this Agreement may be terminated by the Trust at any time with respect to any Fund, without the payment of any penalty, by vote of a majority of the Disinterested Trustees or by vote of a "majority of the outstanding voting securities" of such Fund on 60 days' written notice to the Distributor, or by the Distributor at any time, without the payment of any penalty, on 60 days' written notice to the Trust. This Agreement will automatically terminate in the event of its "assignment." (As used in this Agreement, the terms "majority of the outstanding voting securities," "interested person" and "assignment" shall have the same meanings as such terms have in the 1940 Act.)
VII. AMENDMENT OF THIS AGREEMENT
No provision of this Agreement may be changed, waived, discharged or terminated except by an instrument in writing signed by the party against which an enforcement of the change, waiver, discharge or termination is sought.
VIII. NOTICES
Notices of any kind to be given to the Trust hereunder by the Distributor shall be in writing and shall be duly given if mailed or delivered to the Trust c/o Victory Capital
Management, Inc., Investment Products Group,127 Public Square, Cleveland, Ohio 44114, Attn: Kathleen A. Dennis, President with a copy to Kramer Levin Naftalis & Frankel LLP, 919 Third Avenue, New York, New, York 10022, Attention: Jay G. Baris, Esquire, or at such other address or to such individual as shall be so specified by the Trust to the Distributor. Notices of any kind to be given to the Distributor hereunder by the Trust shall be in writing and shall be duly given if mailed or delivered to the Distributor at100 Summer Street, 15th Floor, Boston, Massachusetts 02110, Attention: President, or at such other address or to such individual as shall be so specified by the Distributor to the Trust.
IX. COMPENSATION
The Distributor shall not receive compensation with respect to the provision of distribution services under this Agreement; provided, however, that the Distributor shall be entitled to receive payments, if any, under the Plans in accordance with the terms thereof and payments, if any, of sales charges as set forth in the Trust's Prospectuses. The Trust is entering into this Agreement on behalf of the Funds listed on Schedule I severally and not jointly. The responsibilities and benefits set forth in this Agreement shall refer to each Fund severally and not jointly. No individual Fund shall have any responsibility for any obligation, if any, with respect to any other Fund arising out of this Agreement.
X. MISCELLANEOUS
1. Construction. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. Subject to the provisions of Section VI hereof, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and shall be governed by New York law; provided, however, that nothing herein shall be construed in a manner inconsistent with the 1940 Act or any rule or regulation of the SEC thereunder.
2. Names. The names "The Victory Portfolios" and "Trustees of The Victory Portfolios" refer respectively to the Trust created and the Trustees, as trustees but not individually or personally, acting from time to time under a Certificate of Trust filed December 21, 1995, at the office of the Secretary of State of the State of Delaware which is hereby referred to and is also on file at the principal office of the Trust. The obligations of the Trust entered into in the name or on behalf thereof by any of the Trustees, representatives or agents are made not individually, but in such capacities, and are not binding upon any of the Trustees, shareholders or representatives of the Trust personally, but bind only the Trust property, and all persons dealing with any class of shares of the Trust must look solely to the Trust property belonging to such class for the enforcement of any claims against the Trust.
3. Privacy. Nonpublic personal financial information relating to consumers or customers of the Funds provided by, or at the direction of, the Trust to the Distributor, or collected or retained by the Distributor to perform its duties as distributor, shall be considered confidential information. The Distributor shall not disclose or otherwise use nonpublic financial
information relating to present or former shareholders of the Funds other than for the purposes for which that information was disclosed to the Distributor, including use under an exception in Rules 13, 14 or 15 of Securities and Exchange Commission Regulation S-P in the ordinary course of business to carry out those purposes. The Distributor shall have in place and maintain physical, electronic and procedural safeguards reasonably designed to protect the security, confidentiality and integrity of the Funds. The Trust represents to the Distributor that it has adopted a statement of its privacy policies and practices as required by Securities and Exchange Commission Regulation S-P and agrees to provide the Distributor with a copy of that statement annually.
4. Anti-Money Laundering Program. Each of Distributor and the Trust acknowledges that it is a financial institution subject to the USA Patriot Act of 2001 and the Bank Secrecy Act, which require among other things, that financial institutions adopt compliance programs to guard against money laundering. Each of Distributor and the Trust agrees that it will take such further steps, and cooperate with the other to facilitate such compliance. The Distributor acknowledges that it is a "Covered Service Provider" as defined in the Trust's Anti-Money Laundering Program ("Trust AML Program") and shall assume responsibility for the implementation of the requirements of the Trust AML Program with respect to the services provided under this Agreement. The Distributor represents and warrants that it has adopted policies and procedures reasonably designed to detect and prevent money laundering activities in compliance with applicable laws, regulations and regulatory interpretations. The Distributor undertakes that it shall (a) conduct its operations in accordance with the provisions of the Trust AML Program and applicable laws, regulations and regulatory interpretations; (b) provide access to its books, records and operations relating to its anti-money laundering compliance only with respect to the Funds, by appropriate regulatory authorities, the Funds, and the Trust's anti-money laundering Compliance Officer (the Trust's Compliance Officer shall have no access to any of Distributor's anti-money laundering operations, books or records pertaining to other clients of Distributor); (c) certify, in writing, no less frequently than annually, that it is in compliance with applicable anti-money laundering laws, rules, regulations and regulatory interpretations with respect to the services provided under this Agreement; (d) upon request, provide a copy of its anti-money laundering program (or a summary of its program) to the Trust's anti-money laundering Compliance Officer; (e) provide periodic reports to the Trust's Board of Trustees concerning anti-money laundering activities and compliance exceptions, as the parties may agree from time to time; and (f) ensure that selling group agreements require selling group members to adopt, as applicable, reasonable anti-money laundering procedures and otherwise comply with applicable anti-money laundering regulations and regulatory interpretations with respect to the sale and redemption of Shares. The Trust represents and warrants that it will conduct its operations in accordance with the provisions of the Trust AML Program and applicable laws, regulations and regulatory interpretations.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their officers designated below as of the day and year first above written.
THE VICTORY PORTFOLIOS
By: /s/ Kathleen A. Dennis
-------------------------------
Name: Kathleen A. Dennis
Title: President
Attest: /s/ Cynthia Lindsey
----------------------------
Name: Cynthia Lindsey
|
VICTORY CAPITAL ADVISERS, INC.
By: /s/ Charles Booth
---------------------------------
Name: Charles Booth
Title: VP
Attest: /s/ Gail Turner
-----------------------------
Name: Gail Turner
|
SCHEDULE I
FUNDS
Name of Portfolio 1. Victory Balanced Fund 19. Victory Federal Money Market Fund 2. Victory Diversified Stock Fund 20. Victory Convertible Fund 3. Victory Growth Fund 21. Victory Gradison Government 4. Victory Intermediate Income Fund Reserves Fund 5. Victory Focused Growth Fund 22. Victory Small Company 6. Victory Ohio Municipal Bond Fund Opportunity Fund 7. Victory Prime Obligations Fund 23. Victory Established Value Fund 8. Victory Real Estate Investment Fund 9. Victory Special Value Fund 10. Victory Stock Index Fund 11. Victory Tax-Free Money Market Fund 12. Victory Value Fund 13. Victory Financial Reserves Fund 14. Victory Fund for Income 15. Victory Institutional Money Market Fund 16. Victory National Municipal Bond Fund 17. Victory New York Municipal Bond Fund |
18. Victory Ohio Municipal Money Market Fund
AMENDMENT TO TRANSFER AGENCY AGREEMENT
This amendment, made as of May 18, 2004 (the "Amendment"), amends the Transfer Agency Agreement dated as of April 1, 2002 (the "Agreement") between BISYS Fund Services Ohio, Inc. ("BISYS") and The Victory Portfolios (the "Trust").
WHEREAS, pursuant to the Agreement, BISYS provides transfer agency services to the Trust; and
WHEREAS, the Trust wishes to give dealers and financial advisors associated with the Trust (collectively, "Users") internet-based access to certain information stored on BISYS' mutual fund shareholder recordkeeping system (the "Information").
NOW THEREFORE, the Trust and BISYS agree as follows:
1. BISYS'S RESPONSIBILITIES
BISYS will provide access to Information through the services set forth on Schedule 1 to this Amendment (the "Portal Services"). The Portal Services are deemed to constitute additional services "provided on an amendment to Schedule B" of the Agreement.
Upon receipt of the Trust's authorization, BISYS will begin supplying Information through the Portal Services within 120 days. BISYS will reasonably assist the Trust in the service installation and acceptance testing.
BISYS will provide to Users, during BISYS's normal business hours, telephone support regarding a User's proper and authorized use of the then-current Portal Services, provided that support with respect to Portal Services other than Broker Browser shall be limited to issues regarding BISYS's provision of Information through such Portal Service. For any non-support-related assistance or consulting, the Trust may contract with BISYS for additional Professional Services at an agreed upon rate.
The Portal Services are not subject to the disaster recovery provisions of the Agreement.
2. TRUST'S RESPONSIBILITIES
With the exception of the Broker Browser Portal Service, the Trust is responsible for entering into an agreement with any provider of a Portal Service it wishes to make available to Users, and for ensuring that such Portal Service provides appropriate security measures. The Trust will provide, or cause the relevant Portal Service to provide, to BISYS such information as BISYS requires to make Information available through the Portal Service.
The Trust will pay to BISYS the fees set forth on Schedule 2 to this Amendment (the "Portal Fees"). Schedule C to the Agreement is deemed to be amended to include
the Portal Fees, which are separate and additional to the fees payable under the Agreement. The Portal Fees shall be payable until such time as the Portal Services are terminated as provided herein.
Information furnished to a User as part of any Service is furnished at the express direction of the Trust, including for purposes of Section 26 of the Transfer Agency Agreement. The Trust is solely responsible for ensuring that the release of Information complies with applicable privacy and other laws and regulations.
3. REPRESENTATIONS AND WARRANTIES
Each of the Trust and BISYS represents and warrants to the other that this Amendment has been duly authorized by it and, when executed and delivered by it, will constitute its legal, valid and binding obligation, enforceable against it in accordance with this Amendment's terms.
The Trust further represents and warrants that it has all necessary authority and consents to enter into this Amendment and to authorize the provision of Information in accordance with the terms of this Amendment.
4. MODIFIED STANDARD OF CARE AND INDEMNIFICATION
Sections 6 and 9 of the Agreement is modified as follows only as it relates to the Portal Services: all uses of the word "negligence" set forth in Sections 6 and 9 of the Agreement are deleted and replaced with the words "gross negligence."
5. TERMINATION
Either party may terminate one or more Portal Services at any time by giving the other at least 30 days' written notice.
6. MISCELLANEOUS
(a) Capitalized terms used in this Amendment without definition have the meanings given to those terms in the Agreement.
(b) Except as specifically modified or amended by this Amendment, the rights and obligations of the parties with regard to the Portal Services are governed by the Agreement. Therefore, unless specifically provided to the contrary, all provisions of the Agreement, including its indemnification provisions, apply to the Portal Services.
(c) Schedules 1 and/or 2 may be amended at any time by substitution of an executed amended schedule without affecting the balance of this Amendment.
IN WITNESS WHEREOF, a duly authorized officer of each party has signed this Amendment as of the date set forth above.
BISYS FUND SERVICES OHIO, INC.
By: /s/ Fred Naddiff
---------------------------------
Name:
Title:
|
THE VICTORY PORTFOLIOS
By: /s/ Kathleen A. Dennis
----------------------------------
Name: Kathleen A. Dennis
Title: President
|
SCHEDULE 1
Portal Services
1. DST Vision
BISYS will coordinate access to the Trust's investment portfolios such that Users will have access to mutual fund and shareholder account data, including consolidated account views, total market value, comprehensive account detail, transaction history, and tax summaries. Specific User IDs will be tagged for access to some or all of the above information for one or more shareholders and/or dealers.
BISYS will facilitate obtaining User IDs for Trust and BISYS personnel, as well as resolution of any system interference with data access. BISYS will provide appropriate personnel to accept phone calls, during regular business hours, regarding problems with data access to Information.
BISYS is not affiliated with DST Vision or any provider thereof, and is not responsible for errors or problems with the DST Vision system, but will coordinate on behalf of the Trust with DST Vision to assist in resolving any such problems.
SCHEDULE 2
Fees
1. DST VISION
The Trust will be invoiced for BISYS's out-of-pocket expenses, including fees charged by SunGard.
2. GENERAL
I. Professional Services
At Trust's reasonable request and subject to the availability of BISYS's personnel, BISYS will provide consulting services, custom modification programming, and general support services relating to Portal Service at an agreed upon rate. Professional Service Rates in effect as of the date of this Amendment are $150 per hour.
II. Invoicing
The Trust will be invoiced monthly for Portal Services. Fees for any Portal Service may be invoiced together with or separately from other Agreement fees and fees for other Portal Services.
CO - ADMINISTRATION AGREEMENT
THIS AGREEMENT is made as of November 1, 2005, by and between BISYS FUND SERVICES OHIO, INC. ("BISYS"), an Ohio corporation, and THE VICTORY PORTFOLIOS, a Delaware statutory trust (the "Trust").
WHEREAS, the Trust is an open-end management investment company registered under the Investment Company Act of 1940 (the "1940 Act");
WHEREAS, the Trust desires to retain BISYS as a co-administrator of the Trust to perform certain fund administration services for the Trust and each investment portfolio of the Trust, as now in existence and listed on Schedule C, or as hereafter may be established from time to time (individually referred to herein as the "Fund" and collectively as the "Funds");
WHEREAS, BISYS is willing to perform such services on the terms and conditions set forth in this Agreement; and
WHEREAS, the parties hereto wish to enter into this Agreement in order to set forth the terms under which BISYS will perform the services set forth herein for the Trust.
NOW, THEREFORE, in consideration of the mutual premises and covenants hereinafter contained, the parties hereto agree as follows:
1. Retention of BISYS/ Responsibilities of the Co-Administrator.
(a) The Trust hereby appoints BISYS as a co-administrator of the Trust. Victory Capital Management, Inc. (the "Adviser") will serve as the other co-administrator of the Trust pursuant to a separate co-administration agreement (the "Adviser Co-Administration Agreement") between the Trust and the Adviser. BISYS and the Adviser are referred to herein collectively as the "Co-Administrators." BISYS as Co-Administrator will provide the services set forth herein. BISYS shall, for all purposes herein, be deemed to be an independent contractor and, except as otherwise expressly provided or authorized, shall have no authority to act for or represent the Trust or the Funds in any way, and shall not be deemed an agent of the Trust or any Funds.
(b) The rights and obligations of each of the Co-Administrators are several, not joint. BISYS shall not be responsible for the performance of the duties and responsibilities of the Adviser, nor shall BISYS be liable for the actions of the Adviser.
2. Responsibilities of BISYS as the Co-Administrator.
BISYS shall perform the administration services set forth in Schedule A. BISYS shall perform such other administration services, and furnish such other reports, for the
Funds that are mutually agreed upon by the parties from time to time, for which the Trust will pay BISYS the amounts agreed upon between them.
BISYS may, at its expense, utilize agents in its performance of its services; provided, however, that (i) the approval of the Board of Trustees of the Trust (the "Board") shall be required to establish an arrangement in which a sub-agent of BISYS acts as sub-administrator (a "Sub-Agent"); and (ii) any agent (including any Sub-Agent) retained by BISYS shall be the agent of BISYS and not the agent the Trust, and BISYS shall be fully responsible for the acts of any such agent (or Sub-Agent) and shall not be relieved of any of its responsibilities hereunder by the appointment of such agent (or Sub-Agent). In the event that a Sub-Agent is retained by BISYS at the request or instruction of the Trust, the foregoing shall not apply to the extent it is inconsistent with any written agreement(s) entered into by the parties with respect to such arrangement.
3. Allocation of Charges and Expenses.
BISYS shall bear its own expenses in connection with the performance of its duties and responsibilities hereunder, except as provided herein; provided, however, that the Trust shall reimburse BISYS for its reasonable travel and related expenses incurred in attending Board meetings. BISYS shall also furnish at its own expense the executive, supervisory and clerical personnel necessary to perform its obligations under this Agreement. BISYS shall pay all compensation, if any, of officers of the Trust who are its own officers, employees or directors or who are officers employees or directors of its affiliated entities. Unless otherwise specifically provided herein, BISYS shall not be obligated to pay the compensation of any employee or agent of the Trust (who is not an officer employee or director of the BISYS or its affiliated entities) retained by the Board.
The Trust will pay or cause to be paid any other expenses incurred in the operation of the Funds that are not otherwise allocated herein (or subject to another contractual arrangement between the parties or are to be paid under the Adviser Co-Administration Agreement), including, without limitation, Fund organization costs, taxes, expenses for Fund legal and auditing services, costs of maintaining corporate existence, the expenses of preparing (including typesetting), printing and mailing reports, prospectuses, statements of additional information, proxy solicitation material and notices to existing Shareholders, all expenses incurred in connection with issuing and redeeming shares of beneficial interest in the Funds ("Shares"), the cost of custodial services, transfer and dividend disbursing agents' fees, fund accounting agents' fees, the cost of initial and ongoing registration of the Shares under Federal and state securities laws, fees and out-of-pocket expenses of Trustees who are not affiliated persons of BISYS or any affiliate of BISYS, Trust meetings, insurance, interest, brokerage costs and commissions, if any, litigation and other extraordinary or nonrecurring expenses, and all fees and charges of investment advisers.
4. Compensation of BISYS
(a) The Trust shall pay BISYS for its respective services to be provided under this Agreement the fees set forth in the fee schedule set forth in Schedule B. For
purposes of determining fees, the value of each Fund's net assets shall be computed in accordance with the terms of the Fund's Prospectus. Such fee as is attributable to each Fund shall be a separate (and not joint or joint and several) obligation of each such Fund. No individual Fund shall have any responsibility for any obligation, if any, with respect to any other Fund arising out of this Agreement.
(b) If this Agreement becomes effective subsequent to the first day of a month or terminates in accordance with its terms before the last day of a month, BISYS' compensation for that part of the month in which this Agreement is in effect shall be prorated in a manner consistent with the calculation of the fees as set forth on Schedule B.
(c) All rights of compensation under this Agreement for services performed as of the termination date shall survive the termination of this Agreement.
5. Term.
(a) This Agreement becomes effective on the date first set forth above
(the "Effective Date"). Upon the Effective Date, the services, compensation and
expense provisions of this Agreement shall become fully effective. This
Agreement shall continue in effect for a period of two years from the Effective
Date, until October 31, 2007 (the "Initial Term"). Thereafter, unless otherwise
terminated as provided herein, this Agreement shall be renewed automatically for
successive one year periods ("Rollover Periods"); provided that such continuance
is specifically approved by a vote of a majority of those members of the Board
of Trustees of the Trust who are not parties to this Agreement or "interested
persons" of any such party, and by the vote of the Trusts Board of Trustees or a
majority of the outstanding voting securities of such Fund. This Agreement may
be terminated (i) by provision of a written notice of non-renewal at least sixty
(60) days prior to the end of the Initial Term or any Rollover Period, as the
case may be, (ii) by mutual agreement of the parties or (iii) for "cause," as
defined below, upon the provision of sixty (60) days advance written notice by
the party alleging cause. In addition, the Trust may terminate this Agreement
upon written notice to BISYS in the event that the Adviser Co-Administration
Agreement has terminated; provided, however, that such termination will be
subject to payment of liquidated damages pursuant to Section 5(d) of this
Agreement.
(b) For purposes of this Section 5, "Cause" shall mean (i) a material breach of this Agreement, including a material breach of any representations and warranties contained herein, that has not been remedied for thirty (30) days following written notice of such breach from the non-breaching party; (ii) a final, unappealable judicial, regulatory or administrative ruling or order in which the party to be terminated has been found guilty of criminal or unethical behavior in the conduct of its business; or (iii) financial difficulties on the part of the party to be terminated which are evidenced by the authorization or commencement of, or involvement by way of pleading, answer, consent or acquiescence in, a voluntary or involuntary case under Title 11 (Bankruptcy) of the United States Code, as from time to time is in effect, or any applicable law, other than said Title 11, of any jurisdiction relating to the liquidation or reorganization of debtors or
to the modification or alteration of the rights of creditors. BISYS shall not terminate this Agreement pursuant to clause (i) above based solely upon the Trust's failure to pay an amount to BISYS which is the subject of a good faith dispute, if (x) the Trust is attempting in good faith to resolve such dispute with as much expediency as may be possible under the circumstances, and (y) the Trust continues to perform its obligations hereunder in all other material respects (including paying all fees and expenses not subject to reasonable dispute hereunder).
(c) Notwithstanding the foregoing termination provisions, following any such termination, in the event that BISYS in fact continues to perform any one or more of the services contemplated by this Agreement (or any Schedule or exhibit hereto) with the consent of the Trust, the provisions of this Agreement, including without limitation the provisions dealing with compensation and indemnification, shall continue in full force and effect. Fees and out-of-pocket expenses incurred by BISYS but unpaid by the Trust upon such termination shall be immediately due and payable upon and notwithstanding such termination. In the event of a termination other than a termination for cause, BISYS shall be entitled to collect from the Trust, in addition to the fees and expenses provided in Sections 3 and 4 of this Agreement, the amount of all of BISYS' reasonable cash disbursements in connection with BISYS' activities in effecting such termination, including without limitation, the delivery to the Trust, and/or other parties of the Funds' property, records, instruments and documents. Subsequent to such termination, for a reasonable fee, BISYS will provide the Trust with reasonable access to any Trust documents or records remaining in its possession.
(d) If for any reason other than (i) non-renewal, (ii) mutual agreement of the parties, or (iii) "cause" for termination of BISYS hereunder, BISYS' services are terminated hereunder, BISYS is replaced as a Co-Administrator, or if a third party is added to perform a substantive portion of the administration services to be provided by BISYS under this Agreement (excluding any Sub-Agent appointed as provided in Section 2 hereof), then the Trust shall make a one-time cash payment, in consideration of the fee structure and services to be provided under this Agreement, and not as a penalty, to BISYS equal to the balance that would be due BISYS for its services hereunder during (x) the next twelve (12) months or (y) if less than twelve (12) months remain until the end of the then-current term, the number of months remaining in the then-current term, assuming for purposes of the calculation of the one-time payment that the fees that would be earned by BISYS for each month shall be based upon the average fees payable to BISYS monthly during the twelve (12) months prior to the date that services terminate, BISYS is replaced or a third party is added; provided, however, that this liquidated damages provision shall not be applicable to liquidations of individual Funds which may occur from time to time for legitimate economic or regulatory reasons, as determined by the Board. The calculation of payments to BISYS by reference to the period of up to twelve months contemplated by the preceding sentence shall apply only during this Agreement's initial two-year term; during any subsequent Rollover Period, the maximum reference period for such payments shall be six months. For the avoidance of doubt, the Trust may terminate this Agreement at any time upon not less than 60 days' written notice to BISYS, provided that the Trust otherwise complies with all applicable
provisions of this Agreement, including, without limitation, the obligation to pay liquidated damages where applicable.
(e) The one-time cash payment referenced above shall be due and payable on the day prior to the first day in which services are terminated, BISYS is replaced or a third party is added.
(f) In the event the Trust or any Fund is merged into another legal entity in part or in whole pursuant to any form of business reorganization or is liquidated in part or in whole prior to the expiration of the then-current term of this Agreement, the parties acknowledge and agree that the liquidated damages provision set forth above shall be applicable in those instances in which BISYS is not retained to provide administration services consistent with this Agreement to the successor fund or funds, if any.
(g) The parties further acknowledge and agree that, in the event services are terminated, BISYS is replaced, or a third party is added, as set forth above, (i) a determination of actual damages incurred by BISYS would be extremely difficult, and (ii) the liquidated damages provision contained herein is intended to adequately compensate BISYS for damages incurred and is not intended to constitute any form of penalty.
6. Standard of Care; Uncontrollable Events; Limitation of Liability.
BISYS shall use reasonable professional diligence in the performance of services under this Agreement, but shall not be liable to the Trust for any action taken or omitted by it in the absence of bad faith, willful misfeasance, negligence or reckless disregard by it of its obligations and duties. The duties of each of BISYS shall be confined to those expressly set forth herein, and no implied duties are assumed by or may be asserted against BISYS hereunder.
BISYS shall maintain adequate and reliable computer and other equipment necessary or appropriate to carry out its obligations under this Agreement. Upon the Trust's reasonable request, BISYS shall provide supplemental information concerning the aspects of its disaster recovery and business continuity plan that are relevant to the services provided hereunder. Notwithstanding the foregoing or any other provision of this Agreement, BISYS does not assume any responsibility hereunder, and shall not be liable for, any damage, loss of data, delay or any other loss whatsoever caused by events beyond its reasonable control. Events beyond BISYS' reasonable control include, without limitation, force majeure events. Force majeure events include natural disasters, actions or decrees of governmental bodies, and communication lines failures that are not the fault of either party. In the event of force majeure, computer or other equipment failures or other events beyond its reasonable control, BISYS shall follow applicable procedures in its disaster recovery and business continuity plan and use all commercially reasonable efforts to minimize any service interruption.
BISYS shall provide the Trust, at such times as the Trust may reasonably request, copies of reports rendered by independent public accountants on its internal controls and procedures relating to the services provided by it under this Agreement.
NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, IN NO EVENT SHALL BISYS, ITS AFFILIATES OR ANY OF ITS OR ITS DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR SUBCONTRACTORS BE LIABLE FOR EXEMPLARY, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES, OR LOST PROFITS, EACH OF WHICH IS HEREBY EXCLUDED BY AGREEMENT OF THE PARTIES REGARDLESS OF WHETHER SUCH DAMAGES WERE FORESEEABLE OR WHETHER A PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
7. Legal Advice.
BISYS shall notify the Trust at any time BISYS believes that it is in need of the advice of counsel to the Trust with regard to BISYS' responsibilities and duties pursuant to this Agreement. The Trust may authorize counsel to the Trust to give such advice to BISYS; provided, however, this Agreement shall not obligate counsel to the Trust to give any such advice, and counsel to the Trust is free to decline to provide such advice for any reason or for no reason. To the extent that counsel to the Trust provides any such written advice, which advice will be at the Trust's expense, BISYS may rely on such advice. BISYS may rely upon any other written advice provided by any other counsel, accountant or other expert authorized in writing by the Trust to provide such advice to BISYS, which authorization will not be unreasonably withheld or delayed. In no event shall BISYS be liable to the Trust or any Fund or any shareholder or beneficial owner of the Trust for any action reasonably taken pursuant to written advice provided by an expert explicitly authorized by the Trust. In the event that the Trust does not authorize such other expert to provide advice to BISYS, BISYS may, at its own cost and at its own risk, obtain its own legal advice from its own counsel or other experts.
As to the services to be provided hereunder, this Agreement sets forth the terms and conditions under which the services described herein are to be performed. To the extent of any inconsistency between this Agreement and any description, if any, of the services to be provided hereunder that may be contained the Prospectuses and Statement of Additional Information of the Trust relating to the relevant Funds, BISYS may rely on the description contained in that Prospectus or Statement of additional information unless BISYS receives written instructions to the contrary in a timely manner from the Trust.
8. Instructions / Certain Procedures, etc.
BISYS shall be protected in acting upon any document that it reasonably believes to be genuine and to have been signed or presented by a duly authorized person on behalf of the Trust. Unless BISYS is otherwise aware of such change of authority, BISYS will not be held to have notice of any change of authority of any officers, employees or agents of the Trust or the Adviser until receipt of actual notice thereof from the Trust.
In performing the Services, BISYS may rely conclusively upon the terms of the Prospectuses and Statement of Additional Information of the Trust relating to the relevant Funds, as well as the minutes of Board meetings (if applicable) and other records of the Trust. BISYS shall be protected in acting upon any document which it reasonably believes to be genuine and to have been signed or presented by the proper person or persons, excluding BISYS employees.
9. Indemnification.
The Trust agrees to indemnify and hold harmless BISYS, and its employees, agents, directors, officers and nominees from and against any claims, demands, actions, suits, judgments, liabilities, losses, damages, costs, charges, counsel fees and other expenses including reasonable investigation expenses (collectively, "Losses") resulting directly and proximately from BISYS' performance of services under this Agreement or based, if applicable, upon its reasonable reliance on information, records, instructions or requests pertaining to services hereunder, that are given or made to it by the Trust, or other authorized agents of the Trusts with which BISYS must interface in providing services; provided that this indemnification shall not apply to actions or omissions of BISYS involving bad faith, willful misfeasance, negligence or reckless disregard by it of its obligations and duties.
BISYS shall indemnify, defend, and hold the Trust, and its directors, officers, agents and nominees harmless from and against Losses resulting directly and proximately from BISYS' willful misfeasance, bad faith or negligence in the performance of, or the reckless disregard of, its duties or obligations hereunder.
The indemnification rights hereunder shall include the right to reasonable advances of defense expenses in the event of any pending or threatened litigation with respect to which indemnification hereunder may ultimately be merited provided that any such advanced expenses shall be reimbursed by the indemnified party if an ultimate determination is made on the merits by a court or other tribunal of competent jurisdiction that the indemnified party is not entitled to indemnification hereunder. In order that the indemnification provisions contained herein shall apply, however, it is understood that if in any case a party may be asked to indemnify or hold the other party harmless, the indemnified party will use all reasonable care to identify and notify the indemnifying party promptly concerning any situation which presents or appears likely to present the probability of such a claim for indemnification against the indemnifying party together with all facts pertinent to the situation, but failure to do so in good faith shall not affect the rights hereunder except to the extent the indemnifying party is materially prejudiced thereby. As to any matter eligible for indemnification, an indemnified party shall act reasonably and in accordance with good faith business judgment and shall not effect any settlement or confess judgment without the consent of the indemnifying party, which consent shall not be withheld or delayed unreasonably.
The indemnifying party shall be entitled to participate at its own expense or, if it so elects, to assume the defense of any suit brought to enforce any claims subject to this indemnity provision. If the indemnifying party elects to assume the defense of any such
claim, the defense shall be conducted by counsel chosen by it and reasonably satisfactory to the indemnified party, whose approval shall not be withheld or delayed unreasonably. In the event that the indemnifying party elects to assume the defense of any suit and retain counsel, the indemnified party shall bear the fees and expenses of any additional counsel retained by it. An indemnifying party shall not effect any settlement without the consent of the indemnified party (which shall not be withheld or delayed unreasonably by the indemnified party) unless such settlement imposes no liability, responsibility or other obligation upon the indemnified party and does not express, imply or impute fault to the indemnified party. If the indemnifying party does not elect to assume the defense of suit, it will reimburse the indemnified party for the reasonable fees and expenses of any counsel retained by the indemnified party. The indemnity and defense provisions set forth herein shall indefinitely survive the termination of this Agreement.
10. Record Retention and Confidentiality.
BISYS shall keep and maintain all books and records which are customary or which are required to be kept in connection with BISYS' services pursuant to applicable statutes, rules and regulations, including without limitation Rules 31a-1 and 31a-2 under the 1940 Act. BISYS further agrees that all such books and records shall be the property of the Trust. BISYS shall surrender such documents promptly to the Trust on request, and made available for inspection by the Trust, or by the Commission upon demand.
BISYS shall otherwise keep confidential all books and records relating to
the Trust and its shareholders, except when (i) disclosure is required by law,
(ii) BISYS is advised by counsel that it may incur liability for failure to make
a disclosure, (iii) BISYS is requested to divulge such information by a court,
governmental agency or entity or by a self-regulatory organization registered
under the Securities Exchange Act of 1934, or (iv) as requested or authorized by
the Trust (including pursuant to its policies and procedures). BISYS shall
provide the Trust with reasonable advance notice of disclosure pursuant to items
(i) - (iii) of the previous sentence, to the extent reasonably practicable.
11. Return of Records.
BISYS shall promptly upon the Trust's demand, turn over to the Trust and cease to retain the files, records and documents created and maintained by it pursuant to this Agreement which are no longer needed by it in the performance of its services or for its legal protection.
12. Representations and Warranties of the Trust.
The Trust represents and warrants to BISYS that:
(a) The Trust is a trust duly incorporated and validly existing under the laws of its state of organization, and has full capacity and authority to enter into this agreement and to carry out its obligations hereunder;
(b) It has all necessary authorizations, licenses and permits to carry out its business as currently conducted;
(c) It is in compliance in all material respects with all laws and regulations applicable to its business and operations;
(d) This Agreement has been duly authorized by the Trust and, when executed and delivered by the Trust, will constitute a legal, valid and binding obligation of the Trust, enforceable against the Trust in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the right and remedies of creditors and secured parties;
13. Representations and Warranties of BISYS.
BISYS represents and warrants to the Trust that:
(a) It is a corporation duly incorporated and validly existing under the laws of the state of its organization, and has full capacity and authority to enter into this agreement and to carry out its obligations hereunder;
(b) It has all necessary authorizations, licenses and permits to carry out its business as currently conducted;
(c) It is, and shall continue to be, in compliance in all material respects with all provisions of law applicable to it in connection with its services hereunder;
(d) The various procedures and systems which it has implemented with regard to safekeeping from loss or damage attributable to fire, theft or any other cause of the blank checks, records, and other data and its' equipment, facilities, and other property used in the performance of its obligations hereunder are reasonable and adequate and that it will make such changes therein from time to time as are reasonably required for the secure performance of its obligations hereunder;
(e) This Agreement has been duly authorized by it and, when executed and delivered by it, will constitute a legal, valid and binding obligation of it, enforceable against it in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the right and remedies of creditors and secured parties; and
(f) it will maintain sufficient and experienced personnel and an adequate infrastructure to enable it to perform its obligations hereunder.
EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, ALL REPRESENTATIONS AND
WARRANTIES, INCLUDING, WITHOUT
LIMITATION, ANY WARRANTIES REGARDING QUALITY, SUITABILITY, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR OTHERWISE (IRRESPECTIVE OF ANY COURSE OF DEALING, CUSTOM OR USAGE OF TRADE) CONCERNING THE SERVICES OR ANY GOODS PROVIDED INCIDENTAL TO THE SERVICES PROVIDED UNDER THIS AGREEMENT BY THE CO-ADMINISTRATORS ARE COMPLETELY DISCLAIMED.
14. Insurance.
BISYS shall maintain a fidelity bond covering larceny and embezzlement and an insurance policy with respect to directors and officers errors and omissions coverage, in amounts that are appropriate in light of its duties and responsibilities hereunder. Upon the request of the Trust, BISYS shall provide evidence that coverage is in place. BISYS shall notify the Trust should its insurance coverage with respect to professional liability or errors and omissions coverage be reduced or canceled. Such notification shall include the date of cancellation or reduction and the reasons therefore. BISYS shall notify the Trust promptly of any material claims against it with respect to services performed under this Agreement, whether or not they may be covered by insurance, and shall notify the Trust promptly should the total outstanding claims made by BISYS under its insurance coverage materially impair, or threaten to materially impair, the adequacy of its coverage.
15. Information to be Furnished by the Trust.
(a) The Trust will furnish to BISYS the following upon request:
(i) A copy of the Trust's Certificate of Trust and any amendments thereto;
(ii) A copy of the Trust's By-laws and any amendments thereto;
(iii) A copy of the resolutions of the Board regarding (A) approval of this Agreement and authorization for the Trust to instruct BISYS hereunder; and (B) authorization of BISYS to act as Co-Administrator for the Trust;
(iv) A certified list of all officers of the Funds, including the Funds' AML Compliance Officer, and any other persons together with specimen signatures of those officers and other persons who (except as otherwise provided herein to the contrary) shall be authorized to instruct BISYS in all matters. Any delay in delivery of this list shall not relieve the Co-Administrator of any actual knowledge it may possess of any change in authority of persons authorized to provide instructions to BISYS.;
(v) A copy of the AML Program, including any related policies and procedures;
(vi) The Trust's most recent Post-Effective Amendment to its Registration Statement(s) under the Securities Act of 1933, as amended (
the "1933 Act"), and under the 1940 Act, on Form N-1A as filed with the Securities and Exchange Commission (the "Commission") relating to the Shares and any further amendment thereto;
(vii) Notification of registration of the Trust under the 1940 Act on Form N-8A as filed with the Commission;
(viii) Prospectuses and Statements of Additional Information of the Trust with respect to the Funds (such prospectuses and statements of additional information, as presently in effect and as they shall from time to time be amended and supplemented, herein called individually, the "Prospectus" and collectively, the "Prospectuses"); and
(ix) The Trust DCPs (as hereinafter defined).
(b) The Trust shall furnish BISYS written copies of any amendments to, or changes in, any of the items referred to in Section 15(a) hereof, forthwith upon such amendments or changes becoming effective. In addition, the Trust agrees that no amendments will be made to the AML Program, or the Trust DCPs which might have the effect of changing the procedures employed by BISYS in providing the services agreed to hereunder or which amendment might affect the duties of BISYS hereunder unless the Trust first obtains BISYS's approval of such amendments or changes, which approval shall not be withheld unreasonably.
(c) BISYS may rely on all documents furnished to it by the Trust and its agents in connection with the services to be provided under this Agreement, including any amendments to or changes in any of the items to be provided by the Trust pursuant to Section 15(a), and shall be entitled to indemnification in accordance with Section 9 below with regard to such reliance.
(d) The Trust represents and warrants that (A) the provision of certain officers of the Trust by BISYS, as provided in Section 17 of this Agreement, has been approved by the Board, and (B) each of the individuals nominated by BISYS as the Trust's AML Compliance Officer or Financial Officer has been approved and appointed as an officer of the Trust by the Board.
(e) BISYS shall be deemed to have received any document with respect to the Trust that is filed with the SEC and available on EDGAR, unless the Trust files such document without BISYS' knowledge.
16. Information Furnished by BISYS.
BISYS will furnish to the Trust upon request, evidence of the approval of this Agreement by BISYS, and authorization of a specified officer of BISYS to execute and deliver this Agreement.
17. Compliance with Laws; Provision of Executive Officers
(a) Prospectus and Public Offering. Except for information BISYS is obligated to keep pursuant to Section 10 hereof and as specifically provided in the schedules hereto, the Trust assumes full responsibility for the preparation, contents, and distribution of each Prospectus of the Trust in compliance with all applicable requirements of the Securities Act of 1933, as amended (the "1933 Act"), the 1940 Act, and any other laws, rules and regulations of governmental authorities having jurisdiction. BISYS shall have no obligation to take cognizance hereunder of laws relating to the sale of the Trust's shares. The Trust represents and warrants that all shares of the Trust that are offered to the public are covered by an effective registration statement under the 1933 Act and the 1940 Act.
(b) Anti-Money Laundering. The Trust acknowledges that it is a financial institution subject to the law entitled Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism ("U.S.A. Patriot") Act of 2001 and the Bank Secrecy Act and shall comply with the such Acts and applicable regulations adopted thereunder (such Acts and regulations collectively, the "Applicable AML Laws") in all relevant respects.
(c) Provision of AML Compliance Officer
Subject to the provisions set forth in Section 17(b) above, this Section 17(c), and Section 17(e) below, BISYS agrees to make available to the Trust a person to serve as the Trust's AML Compliance Officer. BISYS's obligation in this regard shall be met by providing an appropriately qualified employee or agent of BISYS (or its affiliates) who, in the exercise of his or her duties to the Trust, shall act in good faith and in a manner reasonably believed by him or her to be in the best interests of the Trust. Subject to the Trust's cooperation in implementing and complying with its AML Program, the AML Compliance Officer will assist the Trust in operating its AML Program, and shall perform the duties assigned to the AML Compliance Officer which are set forth in the AML Program.
The Trust shall provide copies of all books and records of the Trust, as the AML Compliance Officer deems necessary or desirable in order to carry out his or her duties hereunder on behalf of the Trust. Each party agrees to provide promptly to the other party (and to the AML Compliance Officer), upon request, copies of such other records and documentation relating to the compliance by such party with Applicable AML Laws (in relation to the Trust), and each party also agrees otherwise to assist the other party (and the AML
Compliance Officer) in complying with the requirements of the AML Program and Applicable AML Laws.
Each party agrees to retain a copy of all documents and
records prepared, maintained or obtained by it relating to
shareholders and transactions for a period of at least five
(5) years after either the relationship with the shareholder
has ended or the execution of the transaction. The foregoing
is not intended to limit any obligation to retain any
specified records for any other period that may be specified
in the AML Program or under Applicable AML Laws.
BISYS shall be entitled to receive the fees set forth on Schedule B for the provision of the AML Compliance Officer.
(d) Provision of Certifying Officer
Subject to the provisions of this Section 17(d) and Section 17(e) below, BISYS shall make a BISYS employee available to the Trust to serve, upon designation as such by the Board, as the Chief Financial Officer of the Trust or under such other title to perform similar functions (a "Certifying Officer"). BISYS's obligation in this regard shall be met by providing an appropriately qualified employee of BISYS (or its affiliates) who, in the exercise of his or her duties to the Trust, shall act in good faith and in a manner reasonably believed by him or her to be in the best interests of the Trust. BISYS shall select, and may replace, the specific employee that it makes available to serve in the designated capacity as a Certifying Officer, in BISYS's reasonable discretion, taking into account such person's responsibilities concerning, and familiarity with, the Trust's operations.
For so long as BISYS provides a Certifying Officer, (a) there shall be a DCP Committee (as defined below), and (b) the Trust's disclosure and control procedures (the "Trust DCPs") shall contain (or the Trust and BISYS shall otherwise establish) mutually agreeable procedures governing the certification of Form N-CSR, Form N-Q, and any other forms required to be certified pursuant to Sections 302 or 906 of the Sarbanes-Oxley Act of 2002, Rule 30a-2 under the 1940 Act, or any other related law or regulation (collectively, "SO Laws" and such forms, collectively, "Reports"), and the parties shall comply with such procedures in all material respects. Among other things, the procedures shall provide as follows:
(i) The Co-Administrators shall establish and maintain a Disclosure Controls and Procedures Committee (the "DCP Committee") to evaluate the Trust DCPs in accordance with Rule 30a-3 under the 1940 Act. The DCP Committee shall
include (at a minimum) the Trust's Principal Executive Officer, Chief Financial Officer, and Chief Legal Officer (if any) and such other individuals as may be necessary or appropriate to enable the DCP Committee to ensure the cooperation of, and to oversee, each of the Trust's agents that records, processes, summarizes, or reports information contained in Trust Reports (or any information from which such information is derived), including the Funds' investment advisors, custodians, and other service providers to the Trust or any Fund ("Other Providers"). The Co-Administrators may from time to time request appropriate approvals from the Board with respect to the DCP Committee.
(ii) The Trust shall require (A) that sub-certifications on internal controls, upon which the Certifying Officer may rely in certifying Reports, be provided by Other Providers in form and content reasonably acceptable to the Certifying Officer and consistent with the SO Laws, and (B) that such sub-certifications are delivered to the DCP Committee and the Certifying Officer sufficiently in advance of the DCP Committee meeting described in (iii) below. BISYS shall obtain such sub-certifications from such Other Providers.
(iii) The DCP Committee shall (A) establish a schedule to ensure that all required disclosures in any Report, including the financial statements, for the Trust are identified and prepared in a timeframe sufficient to allow review, (B) meet prior to the filing date of each Report to review the accuracy and completeness of the relevant Report, and (C) record its considerations and conclusions in a written memorandum sufficient to support conclusions pertaining to Trust DCPs as required by the instructions to Form N-CSR or Form N-Q. In conducting its review and evaluations, the DCP Committee shall:
A. review SAS 70 reports pertaining to BISYS and Other Providers, if applicable, or in the absence of any such reports, consider the adequacy of the sub-certifications supplied by the service provider. In cases where the SAS 70 report is dated more than 90 days prior to the issuance of a Report, the DCP Committee shall request a written representation from the service provider regarding the continued application and effectiveness of internal controls described in the report, or descriptions of any changes in internal control structure, as of the date of the representation;
B. consider whether there are any significant deficiencies or material weaknesses in the design or operation of the Trust DCPs or internal controls over financial reporting that could adversely affect the Trust's ability to record, process, summarize, and report financial information, and in the event that any such weaknesses or deficiencies are identified, disclose them to the Trust's Certifying Officers, audit committee, and auditors;
C. consider whether, to the knowledge of any member of the DCP Committee, there has been or may have been any fraud, whether or not material, and, if so, disclose to the Certifying Officers, and the Trust's audit committee and auditors; and
D. determine whether there was any change in internal controls over financial reporting that occurred during the Trust's second quarter of the period covered by the Report for Reports on Form N-CSR or during the most recent fiscal quarter for Reports on Form N-Q that has materially affected or is reasonably likely to materially affect, the Trust's internal control over financial reporting.
A Certifying Officer shall have the full discretion to decline to certify a particular Report that fails to meet the standards set forth in the Certification, and to report matters involving fraud or other failures to meet the standards of applicable law to the audit committee of the Board.
The Trust shall, in its own capacity, take all reasonably necessary and appropriate measures to comply with its obligations under SO Laws. Without limitation of the foregoing, except for those obligations which are expressly delegated to or assumed by BISYS in this Agreement, the Trust shall maintain responsibility for, and shall support and facilitate the role of each Certifying Officer and the DCP Committee in, designing and maintaining the Trust's DCPs in accordance with applicable laws.
(e) Additional Provisions Concerning Executive Officers It is
mutually agreed and acknowledged by the parties that any
Certifying Officer provided by BISYS under the provisions of
this Section 17 will be executive officers of the Trust
("Executive Officers"). In addition, the parties agree that an
AML Compliance Officer provided by BISYS shall be considered
an Executive Officer of the Trust for purposes of this Section
17(e). The provisions of Sections 17(c) - (d) are subject to
the internal policies of BISYS concerning the activities of
its employees and their service as officers of funds (the
"BISYS Policies"), a copy of which shall be provided to the
Trust upon request. The Trust's governing documents (including
its Agreement and Declaration of Trust and By-Laws) and/or
resolutions of the Board shall contain mandatory
indemnification provisions that are applicable to each Executive Officer, that are designed and intended to have the effect of fully indemnifying him or her and holding him or her harmless with respect to any claims, liabilities and costs arising out of or relating to his or her service in good faith in a manner reasonably believed to be in the best interests of the Trust, except to the extent he or she would otherwise be liable to the Trust by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.
The Trust shall provide coverage to each Executive Officer under its directors and officers liability policy that is appropriate to the Executive Officer's role and title, and consistent with coverage applicable to other officers holding positions of executive management.
In appropriate circumstances, each Executive Officer shall have the discretion to resign from his or her position, in the event that he or she reasonably determines that there has been or is likely to be (a) a material deviation from the BISYS Policies; (b) a violation of SO Laws, Applicable AML Laws, or Federal or state securities laws and regulations applicable to the Trust ("Applicable Securities Laws"), or (c) a material deviation by the Trust from the terms of this Agreement governing the services of such Executive Officer that (in either case) is not primarily caused by the failure of such Executive Officer or BISYS to meet their own obligations under applicable laws and this Agreement. In addition, each Executive Officer shall have reasonable discretion to resign from his or her position in the event that he or she determines that he or she has not received sufficient cooperation from the Trust or its Other Providers to make an informed determination regarding any of the matters listed above.
Each Executive Officer may, and the Trust shall, promptly notify BISYS of any issue, matter or event that would be reasonably likely to result in any claim by the Trust, the Trust's shareholders or any third party which involves an allegation that any Executive Officer failed to exercise his or her obligations to the Trust in a manner consistent with applicable laws (including but not limited to any claim that a Report failed to meet the standards of SO Laws and other applicable laws).
Notwithstanding any provision of the Agreement that expressly or by implication provides to the contrary, (a) it is expressly agreed and acknowledged that BISYS cannot ensure that the Trust complies with Applicable AML Laws, the Applicable Securities Laws or SO Laws, and (b) whenever an employee or agent of BISYS serves as an Executive Officer of the Trust, as long as such Executive Officer
acts in good faith and in a manner reasonably believed to be in the best interests of the Trust (and would not otherwise be liable to the Trust by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office), the Trust shall indemnify the Executive Officer and BISYS and hold the Executive Officer and BISYS harmless from any loss, liability, expenses (including reasonable attorneys fees) and damages incurred by them arising out of or resulting to the service of such Employee/Executive Officer as an Executive Officer of the Trust.
18. Notices.
Any notice provided hereunder shall be sufficiently given when sent by
registered or certified mail to the party required to be served with such notice
at the following address: if to the Trust, to it c/o Victory Capital Management,
Inc., Investment Products Group, 127 Public Square, Cleveland, OH 44114 Attn:
Kathleen A. Dennis, with a copy to Jay G. Baris, Esq. Kramer Levin Naftalis &
Frankel LLP, 919 Third Avenue, New York, NY 10022; and if to BISYS, to it at
3435 Stelzer Road, Columbus, Ohio 43219; Attn: President, or at such other
address as such party may from time to time specify in writing to the other
party pursuant to this Section.
19. Assignment.
This Agreement and the rights and duties hereunder shall not be assignable by either of the parties hereto except by the specific written consent of the other party. This Section 19 shall not limit or in any way affect BISYS' right to appoint a Sub-Agent pursuant to Section 2 hereof. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and permitted assigns.
20. Governing Law.
This Agreement shall be governed by and provisions shall be construed in accordance with the laws of the State of Ohio and the applicable provisions of the 1940 Act. To the extent that the applicable laws of the State of Ohio, or any of the provisions herein, conflict with the applicable provisions of the 1940 Act, the latter shall control.
21 Activities of Co-Administrators.
The services of the Co-Administrators rendered to the Trust hereunder are not to be deemed to be exclusive. BISYS is free to render such services to others and to have other businesses and interests. It is understood that Trustees, officers, employees and Shareholders of the Trust are or may be or become interested in BISYS, as officers, employees or otherwise and that partners, officers and employees of BISYS and its counsel are or may be or become similarly interested in the Trust, and that BISYS may be or become interested in the Trust as a Shareholder or otherwise.
22. Privacy.
Nonpublic personal financial information relating to consumers or customers of the Trust provided by, or at the direction of the Trust or Adviser to BISYS, or collected or retained by BISYS in the course of performing its duties as Co-Administrator, shall be considered confidential information. BISYS shall not give, sell or in any way transfer such confidential information to any person or entity, other than affiliates of BISYS involved in servicing the Funds except at the direction of the Trust or the Funds or as required or permitted by law. BISYS represents, warrants and agrees that it has in place and will maintain physical, electronic and procedural safeguards reasonably designed to protect the security, confidentiality and integrity of, and to prevent unauthorized access to or use of records and information relating to consumers or customers of the Funds. The Trust represents to BISYS that the Trust has adopted a Statement of its privacy policies and practices as required by the Commission's Regulation S-P and agrees to provide BISYS with a copy of that statement annually.
23. Miscellaneous.
(a) Paragraph headings in this Agreement are included for convenience only and are not to be used to construe or interpret this Agreement.
(b) This Agreement constitutes the complete agreement of the parties hereto as to the subject matter covered by this Agreement, and supercedes all prior negotiations, understandings and agreements bearing upon the subject matter covered herein.
(c) This Agreement may be executed in counterparts, each of which shall be an original but all of which, taken together, shall constitute one and the same agreement.
(d) No provision of this Agreement may be changed, waived, discharged or terminated, except by an instrument in writing signed by the parties to this Agreement. For special cases, the parties hereto may amend such procedures set forth herein as may be appropriate or practical under the circumstances, and BISYS may conclusively assume that any special procedure which has been approved by the Trust does not conflict with or violate any requirements of its Declaration of Trust or then-current prospectuses, or any rule, regulation or requirement of any regulatory body. In addition, the Trust agrees that no amendments will be made to the Prospectuses or Statement of Additional Information of the Trust, the AML Program, or the Trust DCPs which might have the effect of changing the procedures employed by BISYS in providing the services agreed to hereunder or which amendment might affect the duties of BISYS hereunder unless the
Trust first obtains BISYS's approval of such amendments or changes, which approval shall not be withheld unreasonably.
(e) It is expressly agreed that the obligations of the Trust hereunder shall not be binding upon any of the Trustees, shareholders, nominees, officers, agents or employees of the Trust personally, but shall bind only the trust property of the Trust. The execution and delivery of this Agreement have been authorized by the Board, and this Agreement has been signed and delivered by an authorized officer of the Trust, acting as such, and neither such authorization by the Board nor such execution and delivery by such officer shall be deemed to have been made by any of them individually or to impose any liability on any of them personally, but shall bind only the trust property of the Trust as provided in the Certificate of Trust. =
(f) If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby.
(g) The names "The Victory Portfolios" and "Trustees of The Victory Portfolios" refer respectively to the Trust created and the Trustees, as trustees but not individually or personally, acting from time to time under a Certificate of Trust filed on December 21, 1995 at the office of the Secretary of State of the State of Delaware which is hereby referred to and is also on file at the principal office of the Trust.
(h) Every reference to a Fund will be deemed a reference solely to the particular Fund (as set forth in Schedule C, as may be amended from time to time). Under no circumstances shall the rights, obligations or remedies with respect to a particular Fund constitute a right, obligation or remedy applicable to any other Fund. In particular, and without otherwise limiting the scope of this paragraph, BISYS shall not have any right to set off claims of a Fund by applying property of any other Fund.
24. Rights of Ownership.
All computer programs, systems and procedures employed or developed by BISYS, or on behalf of BISYS by system providers or vendors used by BISYS, to perform services required to be provided by BISYS under this Agreement are the property of BISYS. All records and other data maintained hereunder, excepting such computer programs, systems and procedures, are the exclusive property of the Trust. All such records and other data which is the property of the Trust shall be furnished to the
Trust in appropriate form as soon as practicable after termination of this Agreement for any reason.
* * * * *
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed all as of the day and year first above written.
THE VICTORY PORTFOLIOS
By: /s/ Kathleen A Dennis ------------------------- Name: Kathleen A. Dennis Title: President |
BISYS FUND SERVICES OHIO, INC.
By: /s/ Fred Naddaff
------------------------
Name: Fred Naddaff
Title: President
|
SCHEDULE A
TO THE CO-ADMINISTRATION AGREEMENT
BETWEEN THE VICTORY PORTFOLIOS AND BISYS FUND SERVICES OHIO, INC.
CO -ADMINISTRATION SERVICES TO BE PROVIDED BY BISYS
1. Calculate contractual Trust expenses and make and control all disbursements for the Trust, subject to review and approval of an officer of the Trust or other authorized person including administration of trustee and vendor fees and compensation on behalf of the Trust, and as appropriate.
2. Calculate all capital gain and distribution information relating to the Funds and its shareholders;
3. Prepare such reports, applications and documents (including reports regarding the sale and redemption of shares in the Trust as may be required in order to comply with Federal and state securities laws) as may be necessary or desirable to register the shares in the Trust ("Shares") with state securities authorities, monitor the sale of Shares for compliance with state securities laws, and file with the appropriate state securities authorities the registration statements and reports for the Trust and the Shares and all amendments thereto, as may be necessary or convenient to register and keep effective the registration of the Trust and the Shares with state securities authorities to enable the Trust to make a continuous offering of its Shares;
4. Prepare drafts of the annual report to Shareholders and certified semi-annual report for each Fund; prepare and file the final certified versions thereof on Form N-CSR; prepare and file the Trust's Form N-SAR; and file all required notices pursuant to Rule 24f-2;
5. Coordinate with the Trust's transfer agent with respect to the payment of dividends and other distributions to Shareholders;
6. Calculate performance data of the Funds for dissemination to information services covering the investment company industry;
7. Prepare and file the Trust's tax returns, including federal, state, local and excise tax returns, issue all tax-related information to shareholders, including IRS Form -1099 and other applicable tax forms;
8. Make available appropriate individuals to serve as officers of the Trust (to serve only in ministerial or administrative capacities relevant to BISYS's services hereunder, except as otherwise provided in this Agreement, upon designation as such by the Board;
9. Assist with the design, development, and operation of the Funds, including new classes, investment objectives, policies and structure;
10. Monitor and advise the Trust and its Funds on their regulated investment company status under the Internal Revenue Code of 1986, as amended. In connection with the foregoing, prepare and send quarterly reminder letters related to such status, and prepare quarterly compliance checklist for use by investment adviser(s) if requested;
11. Assist the Trust in developing portfolio compliance procedures for each Fund. BISYS will also provide the Board with quarterly results of compliance reviews;
12. Report to the Board regarding amounts paid under Shareholder Service Agreements and the nature of Services provided by the Shareholder Service Agents thereunder; and maintain appropriate records in connection with the foregoing;
13. Provide assistance and guidance to the Trust with respect to matters governed by or related to regulatory requirements and developments including: monitoring regulatory and legislative developments which may effect the Trust, and assisting in strategic planning in response thereto. Assistance to be provided with respect to SEC inspections includes (i) rendering advice regarding proposed responses (ii) compiling data and other information in response to SEC requests for information and (iii) communicating with Fund management and portfolio managers to provide status updates.
14. Provide appropriate assistance with respect to audits conducted by the Fund's independent accountants including compiling data and other information as necessary;
15. Furnish advice and recommendations with respect to other aspects of the business and affairs of the Funds as the Trust shall request and the parties shall agree in writing;
16. Prepare quarterly brokerage allocation compliance checklist and supporting documentation for use by investment adviser(s), as requested;
17. Maintain corporate records on behalf of the Trust, including, but not limited to, minute books, Declaration of Trust or Certificate of Incorporation and By-Laws;
18. To assist the Trust in connection with its obligations under SO Laws, BISYS will internally establish and maintain its own controls and procedures ("BISYS internal controls") designed to ensure that information recorded, processed, summarized, or reported by BISYS on behalf of the Trust and included in Reports is (a) recorded, processed, summarized, and reported by BISYS within the time periods specified in the Commission's rules and forms and the Trust DCPs, and (b) communicated to the relevant Certifying Officers consistent with the Trust DCPs.
Solely for the purpose of providing any Certifying Officer with a basis for certification, BISYS will (i) provide a sub-certification with respect to BISYS's services during any fiscal period in which BISYS served as financial administrator to the Trust consistent with the requirements of the certification required under SO Laws and/or (ii) inform the Certifying Officers of any reason why all or part of such certification would be inaccurate. In rendering any such sub-certification, BISYS may (a) limit its representations to information prepared, processed and reported by BISYS; (b) rely upon and assume the accuracy of the information provided by officers and other authorized agents of the Trust, including all Other Providers to the Trust, and compliance by such officers and agents with the Trust DCPs; and (c) assume that the Trust has selected the appropriate accounting policies for the Fund(s).
The Trust shall assist and cooperate with BISYS (and shall cause its officers, and Other Providers to assist and cooperate with BISYS) to facilitate the delivery of information requested by BISYS in connection with the preparation of the Trust's Form N-CSR, and Form N-Q, including Trust financial statements, so that BISYS may submit a draft Report to the Trust's Disclosure Controls and Procedures Committee ("Fund DCP Committee") prior to the date the relevant Report is to be filed.
19. File holdings reports on Form N-Q as required at the end of the first and third fiscal quarters of each year.
20. Notify the Adviser and Fund counsel of all documents filed by BISYS with the SEC.
21. Obtain, maintain and file fidelity bonds and directors and officers/errors and omissions insurance policies for the Trust at the expense of the Trust and Funds in accordance with the requirements of Rules 17g-1 and 17d-1(7) under the 1940 Act, to the extent such bonds and policies are approved by the Board.
SCHEDULE B
TO THE CO - ADMINISTRATION AGREEMENT
BETWEEN THE VICTORY PORTFOLIOS AND BISYS FUND SERVICES OHIO, INC.
The Trust shall pay BISYS on the first business day of each month, or at such time(s) as BISYS shall request and the parties shall agree the following fees for the services provided under this Agreement at the annual rates set forth below. For these purposes, the rate at which the asset-based fees are applied is determined by aggregating the assets of all Funds together. The fees are accrued daily and paid monthly:
Average daily net assets Annual Fee First $10 Billion 0.032% Over $10 Billion 0.025% |
Plus
An annual fee of $12,000.00, payable in equal monthly installments, for the provision of the AML Compliance Officer.
Plus
N-Q filing fees equal to $3,000.00 per Fund per N-Q filed on such Fund's behalf.
SCHEDULE C
TO THE CO - ADMINISTRATION AGREEMENT
BETWEEN THE VICTORY PORTFOLIOS AND BISYS FUND SERVICES OHIO, INC.
FUNDS
Victory Balanced Fund
Victory Diversified Stock Fund
Victory Intermediate Income Fund
Victory Ohio Municipal Bond Fund
Victory Prime Obligations Fund
Victory Special Value Fund
Victory Stock Index Fund
Victory Tax-Free Money Market Fund
Victory Value Fund
Victory Financial Reserves Fund
Victory Fund for Income
Victory Institutional Money Market Fund
Victory National Municipal Bond Fund
Victory Ohio Municipal Money Market Fund
Victory Federal Money Market Fund
Victory Convertible Fund
Victory Gradison Government Reserves Fund
Victory Small Company Opportunity Fund
Victory Established Value Fund
Victory Focused Growth Fund
CO - ADMINISTRATION AGREEMENT
THIS AGREEMENT is made November 1, 2005, by and between VICTORY CAPITAL MANAGEMENT INC. ("VICTORY"), an Ohio corporation, and The Victory Portfolios, a Delaware statutory trust (the "Trust").
WHEREAS, the Trust is an open-end management investment company registered under the Investment Company Act of 1940 (the "1940 Act");
WHEREAS, the Trust desires to retain VICTORY as a co-administrator of the Trust to perform certain fund administration services for the Trust and each investment portfolio of the Trust, as now in existence and listed on Schedule C, or as hereafter may be established from time to time (individually referred to herein as the "Fund" and collectively as the "Funds");
WHEREAS, VICTORY is willing to perform such services on the terms and conditions set forth in this Agreement; and
WHEREAS, the parties hereto wish to enter into this Agreement in order to set forth the terms under which VICTORY will perform the services set forth herein for the Trust.
NOW, THEREFORE, in consideration of the mutual premises and covenants hereinafter contained, the parties hereto agree as follows:
1. Retention of VICTORY/ Responsibilities of the Co-Administrator.
(a) The Trust hereby appoints VICTORY as a co-administrator of the Trust. BISYS Fund Services Ohio, Inc. ("BISYS") will serve as the other co-administrator of the Trust pursuant to a separate co-administration agreement (the "Bisys Co-Administration Agreement") between the Trust and BISYS. VICTORY and BISYS are referred to herein collectively as the "Co-Administrators." VICTORY as Co-Administrator will provide the services set forth herein. VICTORY shall, for all purposes herein, be deemed to be an independent contractor and, except as otherwise expressly provided or authorized, shall have no authority to act for or represent the Trust or the Funds in any way, and shall not be deemed an agent of the Trust or any Funds.
(b) The rights and obligations of each of the Co-Administrators are several, not joint. VICTORY shall not be responsible for the performance of the duties and responsibilities of BISYS, nor shall VICTORY be liable for the actions of BISYS.
2. Responsibilities of VICTORY as the Co-Administrator.
VICTORY shall perform the administration services set forth in Schedule A. VICTORY shall perform such other administration services, and furnish such other reports, for the Funds that are mutually agreed upon by the parties from time to time, for which the Trust will pay VICTORY the amounts agreed upon between them.
VICTORY may, at its expense, utilize agents in its performance of its services; provided, however, that (i) the approval of the Board of Trustees of the Trust (the "Board") shall be required to establish an arrangement in which a sub-agent of VICTORY acts as sub-administrator (a "Sub-Agent"); and (ii) any agent (including any Sub-Agent) retained by VICTORY shall be the agent of VICTORY and not the agent the Trust, and VICTORY shall be fully responsible for the acts of any such agent (or Sub-Agent) and shall not be relieved of any of its responsibilities hereunder by the appointment of such agent (or Sub-Agent). In the event that a Sub-Agent is retained by VICTORY at the request or instruction of the Trust, the foregoing shall not apply to the extent it is inconsistent with any written agreement(s) entered into by the parties with respect to such arrangement.
3. Allocation of Charges and Expenses.
VICTORY shall bear its own expenses in connection with the performance of its duties and responsibilities hereunder, except as provided herein; provided, however, that the Trust shall reimburse VICTORY for its reasonable travel and related expenses incurred in attending Board meetings. VICTORY shall also furnish at its own expense the executive, supervisory and clerical personnel necessary to perform its obligations under this Agreement. VICTORY shall pay all compensation, if any, of officers of the Trust who are its own officers, employees or directors or who are officers employees or directors of its affiliated entities. Unless otherwise specifically provided herein, VICTORY shall not be obligated to pay the compensation of any employee or agent of the Trust (who is not an officer employee or director of the VICTORY or its affiliated entities) retained by the Board.
The Trust will pay or cause to be paid any other expenses incurred in the operation of the Funds that are not otherwise allocated herein (or subject to another contractual arrangement between the parties or are to be paid under the Bisys Co-Administration Agreement), including, without limitation, Fund organization costs, taxes, expenses for Fund legal and auditing services, costs of maintaining corporate existence, the expenses of preparing (including typesetting), printing and mailing reports, prospectuses, statements of additional information, proxy solicitation material and notices to existing Shareholders, all expenses incurred in connection with issuing and redeeming shares of beneficial interest in the Funds ("Shares"), the cost of custodial services, transfer and dividend disbursing agents' fees, fund accounting agents' fees, the cost of initial and ongoing registration of the Shares under Federal and state securities laws, fees and out-of-pocket expenses of Trustees who are not affiliated persons of VICTORY or any affiliate of VICTORY, Trust meetings, insurance, interest, brokerage costs, and commissions, if any, litigation and other extraordinary or nonrecurring expenses, and all fees and charges of investment advisers.
4. Compensation of VICTORY
(a) The Trust shall pay VICTORY for its respective services to be provided under this Agreement the fees set forth in the fee schedule set forth in Schedule B. For purposes of determining fees, the value of each Fund's net assets shall be computed in accordance with the terms of the Fund's Prospectus. Such fee as is attributable to each
Fund shall be a separate (and not joint or joint and several) obligation of each such Fund. No individual Fund shall have any responsibility for any obligation, if any, with respect to any other Fund arising out of this Agreement.
In addition, the Trust shall also reimburse VICTORY for all of its reasonable out-of-pocket expenses.
(b) If this Agreement becomes effective subsequent to the first day of a month or terminates in accordance with its terms before the last day of a month, VICTORY's compensation for that part of the month in which this Agreement is in effect shall be prorated in a manner consistent with the calculation of the fees as set forth on Schedule B.
(c) All rights of compensation under this Agreement for services performed as of the termination date shall survive the termination of this Agreement.
5. Term.
(a) This Agreement becomes effective on the date first set forth above
(the "Effective Date"). Upon the Effective Date, the services, compensation and
expense provisions of this Agreement shall become fully effective. This
Agreement shall continue in effect for a period of two years from the Effective
Date, until October 31, 2007 (the "Initial Term"). Thereafter, unless otherwise
terminated as provided herein, this Agreement shall be renewed automatically for
successive one year periods ("Rollover Periods"); provided that such continuance
is specifically approved by a vote of a majority of those members of the Board
of Trustees of the Trust who are not parties to this Agreement or "interested
persons" of any such party, and by the vote of the Trusts Board of Trustees or a
majority of the outstanding voting securities of such Fund. This Agreement may
be terminated (i) by provision of a written notice of non-renewal at least sixty
(60) days prior to the end of the Initial Term or any Rollover Period, as the
case may be, (ii) by mutual agreement of the parties or (iii) for "cause," as
defined below, upon the provision of sixty (60) days advance written notice by
the party alleging cause. In addition, the Trust may terminate this Agreement
upon written notice to VICTORY in the event that the Bisys Co-Administration
Agreement has terminated; provided, however, that such termination will be
subject to payment of liquidated damages pursuant to Section 5(d) of this
Agreement.
(b) For purposes of this Section 5, "Cause" shall mean (i) a material breach of this Agreement, including a material breach of any representations and warranties contained herein, that has not been remedied for thirty (30) days following written notice of such breach from the non-breaching party; (ii) a final, unappealable judicial, regulatory or administrative ruling or order in which the party to be terminated has been found guilty of criminal or unethical behavior in the conduct of its business; or (iii) financial difficulties on the part of the party to be terminated which are evidenced by the authorization or commencement of, or involvement by way of pleading, answer, consent or acquiescence in, a voluntary or involuntary case under Title 11 (Bankruptcy) of the
United States Code, as from time to time is in effect, or any applicable law, other than said Title 11, of any jurisdiction relating to the liquidation or reorganization of debtors or to the modification or alteration of the rights of creditors. VICTORY shall not terminate this Agreement pursuant to clause (i) above based solely upon the Trust's failure to pay an amount to VICTORY which is the subject of a good faith dispute, if (x) the Trust is attempting in good faith to resolve such dispute with as much expediency as may be possible under the circumstances, and (y) the Trust continues to perform its obligations hereunder in all other material respects (including paying all fees and expenses not subject to reasonable dispute hereunder).
(c) Notwithstanding the foregoing termination provisions, following any such termination, in the event that VICTORY in fact continues to perform any one or more of the services contemplated by this Agreement (or any Schedule or exhibit hereto) with the consent of the Trust, the provisions of this Agreement, including without limitation the provisions dealing with compensation and indemnification, shall continue in full force and effect. Fees and out-of-pocket expenses incurred by VICTORY but unpaid by the Trust upon such termination shall be immediately due and payable upon and notwithstanding such termination. In the event of a termination other than a termination for cause, VICTORY shall be entitled to collect from the Trust, in addition to the fees and expenses provided in Sections 3 and 4 of this Agreement, the amount of all of VICTORY's reasonable cash disbursements in connection with VICTORY's activities in effecting such termination, including without limitation, the delivery to the Trust, and/or other parties of the Funds' property, records, instruments and documents. Subsequent to such termination, for a reasonable fee, VICTORY will provide the Trust with reasonable access to any Trust documents or records remaining in its possession.
(d) If for any reason other than (i) non-renewal, (ii) mutual agreement of the parties, or (iii) "cause" for termination of VICTORY hereunder, VICTORY's services are terminated hereunder, VICTORY is replaced as a Co-Administrator, or if a third party is added to perform a substantive portion of the administration services to be provided by VICTORY under this Agreement (excluding any Sub-Agent appointed as provided in Section 2 hereof), then the Trust shall make a one-time cash payment, in consideration of the fee structure and services to be provided under this Agreement, and not as a penalty, to VICTORY equal to the balance that would be due VICTORY for its services hereunder during (x) the next twelve (12) months or (y) if less than twelve (12) months remain until the end of the then-current term, the number of months remaining in the then-current term, assuming for purposes of the calculation of the one-time payment that the fees that would be earned by VICTORY for each month shall be based upon the average fees payable to VICTORY monthly during the twelve (12) months prior to the date that services terminate, VICTORY is replaced or a third party is added; provided, however, that this liquidated damages provision shall not be applicable to liquidations of individual Funds which may occur from time to time for legitimate economic or regulatory reasons, as determined by the Board. The calculation of payments to VICTORY by reference to the period of up to twelve months contemplated by the preceding sentence shall apply only during this Agreement's initial two-year term; during any subsequent Rollover Period, the maximum reference period for such payments shall be six months. For the avoidance of doubt, the Trust may terminate this Agreement
at any time upon not less than 60 days' written notice to VICTORY, provided that the Trust otherwise complies with all applicable provisions of this Agreement, including, without limitation, the obligation to pay liquidated damages where applicable.
(e) The one-time cash payment referenced above shall be due and payable on the day prior to the first day in which services are terminated, VICTORY is replaced or a third party is added.
(f) In the event the Trust or any Fund is merged into another legal entity in part or in whole pursuant to any form of business reorganization or is liquidated in part or in whole prior to the expiration of the then-current term of this Agreement, the parties acknowledge and agree that the liquidated damages provision set forth above shall be applicable in those instances in which VICTORY is not retained to provide administration services consistent with this Agreement to the successor fund or funds, if any.
(g) The parties further acknowledge and agree that, in the event services are terminated, VICTORY is replaced, or a third party is added, as set forth above, (i) a determination of actual damages incurred by VICTORY would be extremely difficult, and (ii) the liquidated damages provision contained herein is intended to adequately compensate VICTORY for damages incurred and is not intended to constitute any form of penalty.
6. Standard of Care; Uncontrollable Events; Limitation of Liability.
VICTORY shall use reasonable professional diligence in the performance of services under this Agreement, but shall not be liable to the Trust for any action taken or omitted by it in the absence of bad faith, willful misfeasance, negligence or reckless disregard by it of its obligations and duties. The duties of VICTORY shall be confined to those expressly set forth herein, and no implied duties are assumed by or may be asserted against VICTORY hereunder.
VICTORY shall maintain adequate and reliable computer and other equipment necessary or appropriate to carry out its obligations under this Agreement. Upon the Trust's reasonable request, VICTORY shall provide supplemental information concerning the aspects of its disaster recovery and business continuity plan that are relevant to the services provided hereunder. Notwithstanding the foregoing or any other provision of this Agreement, VICTORY does not assume any responsibility hereunder, and shall not be liable for, any damage, loss of data, delay or any other loss whatsoever caused by events beyond its reasonable control. Events beyond VICTORY's reasonable control include, without limitation, force majeure events. Force majeure events include natural disasters, actions or decrees of governmental bodies, and communication lines failures that are not the fault of either party. In the event of force majeure, computer or other equipment failures or other events beyond its reasonable control, VICTORY shall follow applicable procedures in its disaster recovery and business continuity plan and use all commercially reasonable efforts to minimize any service interruption.
VICTORY shall provide the Trust, at such times as the Trust may reasonably request, copies of reports rendered by independent public accountants on its internal controls and procedures relating to the services provided by it under this Agreement.
NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, IN NO EVENT SHALL VICTORY, ITS AFFILIATES OR ANY OF ITS OR ITS DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR SUBCONTRACTORS BE LIABLE FOR EXEMPLARY, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES, OR LOST PROFITS, EACH OF WHICH IS HEREBY EXCLUDED BY AGREEMENT OF THE PARTIES REGARDLESS OF WHETHER SUCH DAMAGES WERE FORESEEABLE OR WHETHER A PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
7. Legal Advice.
VICTORY shall notify the Trust at any time VICTORY believes that it is in need of the advice of counsel to the Trust with regard to VICTORY's responsibilities and duties pursuant to this Agreement. The Trust may authorize counsel to the Trust to give such advice to VICTORY; provided, however, this Agreement shall not obligate counsel to the Trust to give any such advice, and counsel to the Trust is free to decline to provide such advice for any reason or for no reason. To the extent that counsel to the Trust provides any such written advice, which advice will be at the Trust's expense, VICTORY may rely on such advice. VICTORY may rely upon any other written advice provided by any other counsel, accountant or other expert authorized in writing by the Trust to provide such advice to VICTORY, which authorization will not be unreasonably withheld or delayed. In no event shall VICTORY be liable to the Trust or any Fund or any shareholder or beneficial owner of the Trust for any action reasonably taken pursuant to written advice provided by an expert explicitly authorized by the Trust. In the event that the Trust does not authorize such other expert to provide advice to VICTORY, VICTORY may, at its own cost and at its own risk, obtain its own legal advice from its own counsel or other experts.
As to the services to be provided hereunder, this Agreement sets forth the terms and conditions under which the services described herein are to be performed. To the extent of any inconsistency between this Agreement and any description, if any, of the services to be provided hereunder that may be contained in the Prospectuses and Statement of Additional Information of the Trust relating to the relevant Funds, VICTORY may rely on the description contained in that Prospectus or Statement of Additional Information unless VICTORY receives written instructions to the contrary in a timely manner from the Trust. .
8. Instructions / Certain Procedures, etc.
VICTORY shall be protected in acting upon any document that it reasonably believes to be genuine and to have been signed or presented by a duly authorized person on behalf of the Trust. Unless VICTORY is otherwise aware, VICTORY will not be held
to have notice of any change of authority of any officers, employees or agents of the Trust or the Adviser until receipt of actual notice thereof from the Trust.
In performing the Services, VICTORY may rely conclusively upon the terms of the Prospectuses and Statement of Additional Information of the Trust relating to the relevant Funds, as well as the minutes of Board meetings (if applicable) and other records of the Trust. VICTORY shall be protected in acting upon any document which it reasonably believes to be genuine and to have been signed or presented by the proper person or persons, excluding VICTORY employees.
9. Indemnification.
The Trust agrees to indemnify and hold harmless VICTORY, and its employees, agents, directors, officers and nominees from and against any claims, demands, actions, suits, judgments, liabilities, losses, damages, costs, charges, counsel fees and other expenses including reasonable investigation expenses (collectively, "Losses") resulting directly and proximately from VICTORY's performance of services under this Agreement or based, if applicable, upon its reasonable reliance on information, records, instructions or requests pertaining to services hereunder, that are given or made to it by the Trust, or other authorized agents of the Trusts with which VICTORY must interface in providing services; provided that this indemnification shall not apply to actions or omissions of VICTORY involving bad faith, willful misfeasance, negligence or reckless disregard by it of its obligations and duties.
VICTORY shall indemnify, defend, and hold the Trust, and its directors, officers, agents and nominees harmless from and against Losses resulting directly and proximately from VICTORY's willful misfeasance, bad faith or negligence in the performance of, or the reckless disregard of, its duties or obligations hereunder.
The indemnification rights hereunder shall include the right to reasonable advances of defense expenses in the event of any pending or threatened litigation with respect to which indemnification hereunder may ultimately be merited provided that any such advanced expenses shall be reimbursed by the indemnified party if an ultimate determination is made on the merits by a court or other tribunal of competent jurisdiction that the indemnified party is not entitled to indemnification hereunder. In order that the indemnification provisions contained herein shall apply, however, it is understood that if in any case a party may be asked to indemnify or hold the other party harmless, the indemnified party will use all reasonable care to identify and notify the indemnifying party promptly concerning any situation which presents or appears likely to present the probability of such a claim for indemnification against the indemnifying party together with all facts pertinent to the situation, but failure to do so in good faith shall not affect the rights hereunder except to the extent the indemnifying party is materially prejudiced thereby. As to any matter eligible for indemnification, an indemnified party shall act reasonably and in accordance with good faith business judgment and shall not effect any settlement or confess judgment without the consent of the indemnifying party, which consent shall not be withheld or delayed unreasonably.
The indemnifying party shall be entitled to participate at its own expense or, if it so elects, to assume the defense of any suit brought to enforce any claims subject to this indemnity provision. If the indemnifying party elects to assume the defense of any such claim, the defense shall be conducted by counsel chosen by it and reasonably satisfactory to the indemnified party, whose approval shall not be withheld or delayed unreasonably. In the event that the indemnifying party elects to assume the defense of any suit and retain counsel, the indemnified party shall bear the fees and expenses of any additional counsel retained by it. An indemnifying party shall not effect any settlement without the consent of the indemnified party (which shall not be withheld or delayed unreasonably by the indemnified party) unless such settlement imposes no liability, responsibility or other obligation upon the indemnified party and does not express, imply or impute fault to the indemnified party. If the indemnifying party does not elect to assume the defense of suit, it will reimburse the indemnified party for the reasonable fees and expenses of any counsel retained by the indemnified party. The indemnity and defense provisions set forth herein shall indefinitely survive the termination of this Agreement.
10. Record Retention and Confidentiality.
VICTORY shall keep and maintain all books and records which are customary or which are required to be kept in connection with VICTORY's services pursuant to applicable statutes, rules and regulations, including without limitation Rules 31a-1 and 31a-2 under the 1940 Act. VICTORY further agrees that all such books and records shall be the property of the Trust. VICTORY shall surrender such documents promptly to the Trust on request, and make them available for inspection by the Trust, or by the Commission upon demand.
VICTORY shall otherwise keep confidential all books and records relating to the Trust and its shareholders, except when (i) disclosure is required by law, (ii) VICTORY is advised by counsel that it may incur liability for failure to make a disclosure, (iii) VICTORY is requested to divulge such information by a court, governmental agency or entity or by a self-regulatory organization registered under the Securities Exchange Act of 1934, or (iv) as requested or authorized by the Trust (including pursuant to its policies and procedures). VICTORY shall provide the Trust with reasonable advance notice of disclosure pursuant to items (i) - (iii) of the previous sentence, to the extent reasonably practicable.
11. Return of Records.
VICTORY shall promptly upon the Trust's demand, turn over to the Trust and cease to retain the files, records and documents created and maintained by it pursuant to this Agreement which are no longer needed by it in the performance of its services or for its legal protection.
12. Representations and Warranties of the Trust.
The Trust represents and warrants to VICTORY that:
(a) The Trust is a trust duly incorporated and validly existing under the laws of its state of organization, and has full capacity and authority to enter into this agreement and to carry out its obligations hereunder;
(b) It has all necessary authorizations, licenses and permits to carry out its business as currently conducted;
(c) It is in compliance in all material respects with all laws and regulations applicable to its business and operations;
(d) This Agreement has been duly authorized by the Trust and, when executed and delivered by the Trust, will constitute a legal, valid and binding obligation of the Trust, enforceable against the Trust in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the right and remedies of creditors and secured parties.
13. Representations and Warranties of VICTORY.
VICTORY represents and warrants to the Trust that:
(a) It is a corporation duly incorporated and validly existing under the laws of the state of its organization, and has full capacity and authority to enter into this agreement and to carry out its obligations hereunder;
(b) It has all necessary authorizations, licenses and permits to carry out its business as currently conducted;
(c) It is, and shall continue to be, in compliance in all material respects with all provisions of law applicable to it in connection with its services hereunder;
(d) The various procedures and systems which it has implemented with regard to safekeeping from loss or damage attributable to fire, theft or any other cause of the blank checks, records, and other data and its' equipment, facilities, and other property used in the performance of its obligations hereunder are reasonable and adequate and that it will make such changes therein from time to time as are reasonably required for the secure performance of its obligations hereunder; and
(e) This Agreement has been duly authorized by it and, when executed and delivered by it, will constitute a legal, valid and binding obligation of it, enforceable against it in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the right and remedies of creditors and secured parties.
(f) It will maintain sufficient and experienced personnel and an adequate infrastructure to enable it to perform its obligations hereunder.
EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, ALL REPRESENTATIONS AND WARRANTIES, INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES REGARDING QUALITY, SUITABILITY, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR OTHERWISE (IRRESPECTIVE OF ANY COURSE OF DEALING, CUSTOM OR USAGE OF TRADE) CONCERNING THE SERVICES OR ANY GOODS PROVIDED INCIDENTAL TO THE SERVICES PROVIDED UNDER THIS AGREEMENT BY VICTORY ARE COMPLETELY DISCLAIMED.
14. Insurance.
VICTORY shall maintain a fidelity bond covering larceny and embezzlement and an insurance policy with respect to directors and officers errors and omissions coverage, in amounts that are appropriate in light of its duties and responsibilities hereunder. Upon the request of the Trust, VICTORY shall provide evidence that coverage is in place. VICTORY shall notify the Trust should its insurance coverage with respect to professional liability or errors and omissions coverage be reduced or canceled. Such notification shall include the date of cancellation or reduction and the reasons therefore. VICTORY shall notify the Trust promptly of any material claims against it with respect to services performed under this Agreement, whether or not they may be covered by insurance, and shall notify the Trust promptly should the total outstanding claims made by VICTORY under its insurance coverage materially impair, or threaten to materially impair, the adequacy of its coverage.
15. Information to be Furnished by the Trust.
The Trust will furnish to VICTORY the following upon request:
(i) A copy of the Trust's Certificate of Trust and any amendments thereto;
(ii) A copy of the Trust's By-laws and any amendments thereto;
(iii) A copy of the resolutions of the Board regarding (A) approval of this Agreement and authorization for the Trust to instruct VICTORY hereunder; and (B) authorization of VICTORY to act as Co-administrator for the Trust;
(iv) A certified list of all officers of the Funds, including the Funds' AML Compliance Officer, and any other persons together with specimen signatures of those officers and other persons who (except as otherwise provided herein to the contrary) shall be authorized to instruct VICTORY in all matters. Any delay in delivery of this list shall not relieve the Co-Administrator of any
actual knowledge it may possess of any change in authority of persons authorized to provide instructions to VICTORY;
(v) A copy of the AML Program, including any related policies and procedures;
(vi) The Trust's most recent Post-Effective Amendment to its Registration Statement(s) under the Securities Act of 1933, as amended (the "1933 Act"), and under the 1940 Act, on Form N-1A as filed with the Securities and Exchange Commission (the "Commission") relating to the Shares and any further amendment thereto;
(vii) Notification of registration of the Trust under the 1940 Act on Form N-8A as filed with the Commission;
(viii) Prospectuses and Statements of Additional Information of the Trust with respect to the Funds (such prospectuses and statements of additional information, as presently in effect and as they shall from time to time be amended and supplemented, herein called individually, the "Prospectus" and collectively, the "Prospectuses"); and
(ix) The Trust DCPs (as hereinafter defined).
(b) The Trust shall furnish VICTORY written copies of any amendments to, or changes in, any of the items referred to in Section 15(a) hereof, forthwith upon such amendments or changes becoming effective. In addition, the Trust agrees that no amendments will be made to the AML Program, or the Trust DCPs which might have the effect of changing the procedures employed by VICTORY in providing the services agreed to hereunder or which amendment might affect the duties of VICTORY hereunder unless the Trust first obtains VICTORY's approval of such amendments or changes, which approval shall not be withheld unreasonably.
(c) VICTORY may rely on all documents furnished to it by the Trust and its agents in connection with the services to be provided under this Agreement, including any amendments to or changes in any of the items to be provided by the Trust pursuant to Section 15(a), and shall be entitled to indemnification in accordance with Section 9 below with regard to such reliance.
(d) The Trust represents and warrants that (A) the provision of certain officers of the Trust by VICTORY, as provided in Section 17 of this Agreement, has been approved by the Board, and (B) each of the individuals nominated by VICTORY as the Trust's AML Compliance Officer or Financial Officer has been approved and appointed as an officer of the Trust by the Board.
(e) VICTORY shall be deemed to have received any document with respect to the Trust that is filed with the SEC and available on EDGAR, unless the Trust files such document without VICTORY's knowledge.
16. Information Furnished by VICTORY.
VICTORY will furnish to the Trust upon request, evidence of the approval of this Agreement by VICTORY, and authorization of a specified officer of VICTORY to execute and deliver this Agreement;
17. Compliance with Laws Provision of Executive Officers.
(a) Prospectus and Public Offering. Except for information VICTORY is obligated to keep pursuant to Section 10 hereof and as specifically provided in the schedules hereto, the Trust assumes full responsibility for the preparation, contents, and distribution of each Prospectus of the Trust in compliance with all applicable requirements of the Securities Act of 1933, as amended (the "1933 Act"), the 1940 Act, and any other laws, rules and regulations of governmental authorities having jurisdiction. VICTORY shall have no obligation to take cognizance hereunder of laws relating to the sale of the Trust's shares. The Trust represents and warrants that all shares of the Trust that are offered to the public are covered by an effective registration statement under the 1933 Act and the 1940 Act.
(b) Anti-Money Laundering Provisions. The Trust acknowledges that it is a financial institution subject to the law entitled Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism ("U.S.A. Patriot") Act of 2001 and the Bank Secrecy Act and shall comply with the such Acts and applicable regulations adopted thereunder (such Acts and regulations collectively, the "Applicable AML Laws") in all relevant respects, subject to the delegation of certain responsibilities to VICTORY.
(c) Provision of Certifying Officer
Subject to the provisions of this Section 17(d) and Section 17(e) below, VICTORY shall make a VICTORY employee available to the Trust to serve, upon designation as such by the Board, as the Principal Executive officer of the Trust or under such other title to perform similar functions (a "Certifying Officer"). VICTORY's obligation in this regard shall be met by providing an appropriately qualified employee of VICTORY (or its affiliates) who, in the exercise of his or her duties to the Trust, shall act in good faith and in a manner
reasonably believed by him or her to be in the best interests of the Trust. VICTORY shall select, and may replace, the specific employee that it makes available to serve in the designated capacity as a Certifying Officer, in VICTORY's reasonable discretion, taking into account such person's responsibilities concerning, and familiarity with, the Trust's operations.
For so long as VICTORY provides a Certifying Officer, (a) there shall be a DCP Committee (as defined below), and (b) the Trust's disclosure and control procedures (the "Trust DCPs") shall contain (or the Trust and VICTORY shall otherwise establish) mutually agreeable procedures governing the certification of Form N-CSR, Form N-Q, and any other forms required to be certified pursuant to Sections 302 or 906 of the Sarbanes-Oxley Act of 2002, Rule 30a-2 under the 1940 Act, or any other related law or regulation (collectively, "SO Laws" and such forms, collectively, "Reports"), and the parties shall comply with such procedures in all material respects. Among other things, the procedures shall provide as follows:
(i) The Co-Administrators shall establish and maintain a Disclosure Controls and Procedures Committee (the "DCP Committee") to evaluate the Trust DCPs in accordance with Rule 30a-3 under the 1940 Act. The DCP Committee shall include (at a minimum) the Trust's Principal Executive Officer, Chief Financial Officer, and Chief Legal Officer (if any) and such other individuals as may be necessary or appropriate to enable the DCP Committee to ensure the cooperation of, and to oversee, each of the Trust's agents that records, processes, summarizes, or reports information contained in Trust Reports (or any information from which such information is derived), including the Funds' investment advisors, custodians, and other service providers to the Trust or any Fund ("Other Providers"). The Co-Administrators may from time to time request appropriate approvals from the Board with respect to the DCP Committee.
(ii) The Trust shall require (A) that sub-certifications on internal controls, upon which the Certifying Officer may rely in certifying Reports, be provided by Other Providers in form and content reasonably acceptable to the Certifying Officer and consistent with the SO Laws, and (B) that such sub-certifications are delivered to the DCP Committee and the Certifying Officer sufficiently in advance of the DCP Committee meeting described in (iii) below. VICTORY shall obtain such sub-certifications from such Other Providers.
(iii) The DCP Committee shall (A) establish a schedule to ensure that all required disclosures in any Report, including the financial statements, for the Trust are identified and prepared in a timeframe sufficient to allow review, (B) meet prior to the filing date of each Report to review the accuracy and completeness of the relevant Report, and (C) record its considerations and conclusions in a written memorandum sufficient to support conclusions pertaining to Trust DCPs as required by the instructions to Form N-CSR or Form N-Q. In conducting its review and evaluations, the DCP Committee shall:
A. review SAS 70 reports pertaining to VICTORY and Other Providers, if applicable, or in the absence of any such reports, consider the adequacy of the sub-certifications supplied by the service provider. In cases where the SAS 70 report is dated more than 90 days prior to the issuance of a Report, the DCP Committee shall request a written representation from the service provider regarding the continued application and effectiveness of internal controls described in the report, or descriptions of any changes in internal control structure, as of the date of the representation;
B. consider whether there are any significant deficiencies or material weaknesses in the design or operation of the Trust DCPs or internal controls over financial reporting that could adversely affect the Trust's ability to record, process, summarize, and report financial information, and in the event that any such weaknesses or deficiencies are identified, disclose them to the Trust's Certifying Officers, audit committee, and auditors;
C. consider whether, to the knowledge of any member of the DCP Committee, there has been or may have been any fraud, whether or not material, and, if so, disclose to the Certifying Officers, and the Trust's audit committee and auditors; and
D. determine whether there was any change in internal controls over financial reporting that occurred during the Trust's second quarter of the period covered by the Report for Reports on Form N-CSR or during the most recent fiscal quarter for Reports on Form N-Q that has materially affected or is reasonably likely to materially affect, the Trust's internal control over financial reporting.
A Certifying Officer shall have the full discretion to decline to certify ("Certification") a particular Report that fails to meet the standards set forth in the
Certification, and to report matters involving fraud or other failures to meet the standards of applicable law to the audit committee of the Board.
The Trust shall, in its own capacity, take all reasonably necessary and appropriate measures to comply with its obligations under SO Laws. Without limitation of the foregoing, except for those obligations which are expressly delegated to or assumed by VICTORY in this Agreement, the Trust shall maintain responsibility for, and shall support and facilitate the role of each Certifying Officer and the DCP Committee in, designing and maintaining the Trust's DCPs in accordance with applicable laws.
(d) Additional Provisions Concerning Executive Officers It is mutually agreed and acknowledged by the parties that any Certifying Officer provided by VICTORY under the provisions of this Section 17 will be executive officers of the Trust ("Executive Officers"). In addition, the parties agree that an AML Compliance Officer shall be considered an Executive Officer of the Trust for purposes of this Section 17(d). The provisions of Sections 17(c) - (d) are subject to the internal policies of VICTORY concerning the activities of its employees and their service as officers of funds (the "VICTORY Policies"), a copy of which shall be provided to the Trust upon request. The Trust's governing documents (including its Agreement and Declaration of Trust and By-Laws) and/or resolutions of the Board shall contain mandatory indemnification provisions that are applicable to each Executive Officer, that are designed and intended to have the effect of fully indemnifying him or her and holding him or her harmless with respect to any claims, liabilities and costs arising out of or relating to his or her service in good faith in a manner reasonably believed to be in the best interests of the Trust, except to the extent he or she would otherwise be liable to the Trust by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.
The Trust shall provide coverage to each Executive Officer under its directors and officers liability policy that is appropriate to the Executive Officer's role and title, and consistent with coverage applicable to other officers holding positions of executive management.
In appropriate circumstances, each Executive Officer shall have the discretion to resign from his or her position, in the event that he or she reasonably determines that there has been or is likely to be (a) a material deviation from the VICTORY Policies; (b) a violation of SO Laws, Applicable AML Laws, or Federal or state securities laws and regulations applicable to the Trust ("Applicable Securities Laws"), or (c) a material deviation by the Trust from the terms of this Agreement governing the services of such Executive Officer that (in either case) is not primarily caused by the failure of such
Executive Officer or VICTORY to meet their own obligations under applicable laws and this Agreement. In addition, each Executive Officer shall have reasonable discretion to resign from his or her position in the event that he or she determines that he or she has not received sufficient cooperation from the Trust or its Other Providers to make an informed determination regarding any of the matters listed above.
Each Executive Officer may, and the Trust shall, promptly notify VICTORY of any issue, matter or event that would be reasonably likely to result in any claim by the Trust, the Trust's shareholders or any third party which involves an allegation that any Executive Officer failed to exercise his or her obligations to the Trust in a manner consistent with applicable laws (including but not limited to any claim that a Report failed to meet the standards of SO Laws and other applicable laws).
Notwithstanding any provision of the Agreement that
expressly or by implication provides to the contrary,
(a) it is expressly agreed and acknowledged that VICTORY
cannot ensure that the Trust complies with Applicable
AML Laws, the Applicable Securities Laws or SO Laws, and
(b) whenever an employee or agent of VICTORY serves as
an Executive Officer of the Trust, as long as such
Executive Officer acts in good faith and in a manner
reasonably believed to be in the best interests of the
Trust (and would not otherwise be liable to the Trust by
reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved
in the conduct of his or her office), the Trust shall
indemnify the Executive Officer and VICTORY and hold the
Executive Officer and VICTORY harmless from any loss,
liability, expenses (including reasonable attorneys
fees) and damages incurred by them arising out of or
resulting to the service of such Employee/Executive
Officer as an Executive Officer of the Trust.
18. Notices.
Any notice provided hereunder shall be sufficiently given when sent by
registered or certified mail to the party required to be served with such notice
at the following address: if to the Trust, to it c/o Victory Capital Management,
Inc., Investment Products Group, 127 Public Square, Cleveland, OH 44114 Attn:
Kathleen A. Dennis, with a copy to Jay G. Baris, Esq. Kramer Levin Naftalis &
Frankel LLP, 919 Third Avenue, New York, NY 10022 and a copy to Greg Edgehouse,
Sr. V.P. and Managing Counsel, KeyBank N.A., 127 Public Square, 2nd Floor,
Cleveland, OH 44114-1306, Mail Code: OH-01-27-0200; and if to BISYS, to it at
3435 Stelzer Road, Columbus, Ohio 43219;
Attn: President, or at such other address as such party may from time to time specify in writing to the other party pursuant to this Section.
19. Assignment.
This Agreement and the rights and duties hereunder shall not be assignable by either of the parties hereto except by the specific written consent of the other party. This Section 19 shall not limit or in any way affect VICTORY's right to appoint a Sub-Agent pursuant to Section 2 hereof. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and permitted assigns.
20. Governing Law.
This Agreement shall be governed by and provisions shall be construed in accordance with the laws of the State of Ohio and the applicable provisions of the 1940 Act. To the extent that the applicable laws of the State of Ohio, or any of the provisions herein, conflict with the applicable provisions of the 1940 Act, the latter shall control.
21 Activities of Administrators.
The services of the Administrators rendered to the Trust hereunder are not to be deemed to be exclusive. VICTORY is free to render such services to others and to have other businesses and interests. It is understood that Trustees, officers, employees and Shareholders of the Trust are or may be or become interested in VICTORY, as officers, employees or otherwise and that partners, officers and employees of VICTORY and its counsel are or may be or become similarly interested in the Trust, and that VICTORY may be or become interested in the Trust as a Shareholder or otherwise.
22. Privacy.
Nonpublic personal financial information relating to consumers or customers of the Trust provided by, or at the direction of the Trust to VICTORY, or collected or retained by VICTORY in the course of performing its duties as co-administrator, shall be considered confidential information. VICTORY shall not give, sell or in any way transfer such confidential information to any person or entity, other than affiliates of VICTORY involved in servicing the Funds except at the direction of the Trust or the Funds or as required or permitted by law. VICTORY represents, warrants and agrees that it has in place and will maintain physical, electronic and procedural safeguards reasonably designed to protect the security, confidentiality and integrity of, and to prevent unauthorized access to or use of records and information relating to consumers or customers of the Funds. The Trust represents to VICTORY that the Trust has adopted a Statement of its privacy policies and practices as required by the Commission's Regulation S-P and agrees to provide VICTORY with a copy of that statement annually.
23. Miscellaneous.
(a) Paragraph headings in this Agreement are included for convenience only and are not to be used to construe or interpret this Agreement.
(b) This Agreement constitutes the complete agreement of the parties hereto as to the subject matter covered by this Agreement, and supercedes all prior negotiations, understandings and agreements bearing upon the subject matter covered herein.
(c) This Agreement may be executed in counterparts, each of which shall be an original but all of which, taken together, shall constitute one and the same agreement.
(d) No provision of this Agreement may be changed, waived, discharged, or terminated except by an instrument in writing signed by the parties to this Agreement. For special cases, the parties hereto may amend such procedures set forth herein as may be appropriate or practical under the circumstances, and VICTORY may conclusively assume that any special procedure which has been approved by the Trust does not conflict with or violate any requirements of its Declaration of Trust or then-current prospectuses, or any rule, regulation or requirement of any regulatory body. In addition, the Trust agrees that no amendments will be made to the Prospectuses or Statement of Additional Information of the Trust, the AML Program, or the Trust DCPs which might have the effect of changing the procedures employed by VICTORY in providing the services agreed to hereunder or which amendment might affect the duties of VICTORY hereunder unless the Trust first obtains VICTORY's approval of such amendments or changes, which approval shall not be withheld unreasonably.
(e) It is expressly agreed that the obligations of the Trust hereunder shall not be binding upon any of the Trustees, shareholders, nominees, officers, agents or employees of the Trust personally, but shall bind only the trust property of the Trust. The execution and delivery of this Agreement have been authorized by the Board, and this Agreement has been signed and delivered by an authorized officer of the Trust, acting as such, and neither such authorization by the Board nor such execution and delivery by such officer shall be deemed to have been made by any of them individually or to impose any liability on any of them personally, but shall bind only the trust property of the Trust as provided in the Certificate of Trust.
(f) If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. .
(g) The names "The Victory Portfolios" and "Trustees of The Victory Portfolios" refer respectively to the Trust created and the Trustees, as trustees but not individually or personally, acting from time to
time under a Certificate of Trust filed on December 21, 1995 at the office of the Secretary of State of the State of Delaware which is hereby referred to and is also on file at the principal office of the Trust.
(h) Every reference to a Fund will be deemed a reference solely to the particular Fund (as set forth in Schedule C, as may be amended from time to time). Under no circumstances shall the rights, obligations or remedies with respect to a particular Fund constitute a right, obligation or remedy applicable to any other Fund. In particular, and without otherwise limiting the scope of this paragraph, VICTORY shall not have any right to set off claims of a Fund by applying property of any other Fund.
24. Rights of Ownership.
All computer programs, systems and procedures employed or developed by VICTORY, or on behalf of VICTORY by system providers or vendors used by VICTORY, to perform services required to be provided by VICTORY under this Agreement are the property of VICTORY. All records and other data maintained hereunder, excepting such computer programs, systems and procedures, are the exclusive property of the Trust. All such records and other data which is the property of the Trust shall be furnished to the Trust in appropriate form as soon as practicable after termination of this Agreement for any reason.
* * * * *
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed all as of the day and year first above written.
THE VICTORY PORTFOLIOS
By: /s/ Kathleen A. Dennis
----------------------------
Name: Kathleen A. Dennis
Title: President
|
VICTORY CAPITAL MANAGEMENT INC.
By: /s/ Mark H. Summers
-----------------------------
Name: Mark H. Summers
Title: CAO
|
SCHEDULE A
TO THE CO-ADMINISTRATION AGREEMENT
BETWEEN THE VICTORY PORTFOLIOS AND VICTORY CAPITAL MANAGEMENT INC.
CO -ADMINISTRATION SERVICES TO BE PROVIDED BY VICTORY
1. Coordinate, subject to review by counsel to the Trust, (i) the annual update to the Trust's registration statement on Form N-1A, (ii) other amendments to the Trust's registration statement and supplements to its Prospectus and Statement of Additional Information, and (iii) Notices of Annual or Special Meetings of shareholders of the Trust and proxy materials relating thereto, and file same with the Securities and Exchange Commission (the "SEC") upon the request of the Trust or counsel to the Trust;
2. Coordinate with the other co-administrator the preparation of, with the assistance and approval of counsel and officers of the Trust, drafts of communications to shareholders of record of the Funds ("Shareholders"), including the annual report to Shareholders and prepare drafts of the certified semi-annual report for each Fund;
In connection with the foregoing, the Trust shall assist and cooperate with VICTORY (and shall use its best efforts to cause its officers, investment advisers and other service providers to assist and cooperate with VICTORY) to facilitate the delivery of information requested by VICTORY in connection with the preparation of the Trust's Form N-CSR, including Trust financial statements, so that VICTORY may submit a draft Report to the Trust's Disclosure controls and Procedures Committee ("Fund DCP committee") prior to the date the relevant Report is to be filed. The Certifying Officers and the Chief Legal Officer (if any) of the Trust shall be deemed to constitute the Fund DCP Committee in cases in which no other Fund DCP Committee has been designated or is operative. In connection with its review and evaluations, the Fund DCP Committee shall establish a schedule to ensure that all required disclosures in Form N-CSR and in the financial statements for each Fund are identified and prepared in a timeframe sufficient to allow review by the Fund DCP Committee at least 10 days prior to the date the relevant report is to be filed. At the request of the Trust or its Certifying Officers, VICTORY shall provide reasonable administrative assistance to the Trust in connection with obtaining service provider sub-certifications, SAS-70 reports on internal controls, and any applicable representations to bring such certifications current to the end of the reporting period, and in preparing summaries of issues raised in such documents. The Trust shall, in its own capacity, take all reasonably necessary and
appropriate measures to comply with its obligations under SO
Laws. Without limitation of the foregoing, except for those
obligations which are expressly delegated to or assumed by
VICTORY in this Agreement, the Trust shall maintain
responsibility for, and shall support and facilitate the role
of each Certifying Officer and the Fund DCP Committee in,
designing and maintaining the Trust DCPs in accordance with
applicable laws, including (a) ensuring that the Fund DCP
Committee and/or Certifying Officers obtain and review
sub-certifications and reports on internal controls from the
Trust's investment adviser(s) and other service providers, if
any, sufficiently in advance of the date upon which the
relevant financial statements must be finalized by VICTORY (in
order to print, distribute and/or file the same hereunder),
(b) evaluation of the effectiveness of the design and
operation of the Trust DCP, under the supervision, and with
the participation of, the Certifying Officers, within the
requisite timeframe prior to the filing of each Report, and
(c) ensuring that its Certifying Officers render the requisite
certifications or take such other actions as may be permitted
or required under applicable laws;
3. Coordinate the distribution of prospectuses, supplements, proxy materials and reports to Shareholders; and coordinate the solicitation and tabulation of proxies in connection with the annual meeting of Shareholders each year, if one is held;
4. Administer contracts on behalf of the Trust with, among others, the Trust's investment adviser, distributor, custodian, transfer agent and fund accountant;
5. Assist with the layout and printing of prospectuses and assist with and coordinate layout and printing of the Funds' semi-annual and annual reports to Shareholders;
6. Assist with the design, development, and operation of the Funds, including new classes, investment objectives, policies and structure;
7. Provide daily and periodic compliance monitoring services incorporating certain of those procedures, which will include, among other matters, compliance with investment restrictions imposed by the 1940 Act, each Fund's investment objective, defined investment policies, and restrictions, tax diversification, and distribution and income requirements, provided such are determinable based upon the Fund's accounting records. In connection with the foregoing, review quarterly compliance reports that are prepared by the investment adviser(s), and notify appropriate Fund officers and advisor of mark-to-market issues pursuant to Board-approved procedures. VICTORY will also provide the Board with quarterly results of compliance reviews;
8. Coordinate the implementation of service arrangements covered by Shareholder Service Plans adopted by the Board with the financial institutions that serve, or propose to serve, as shareholder services agents thereunder ("Shareholder Service Agents"); review the qualifications of Shareholder Service Agents to serve as such under the relevant Shareholder Service Plan; and coordinate and assist in the Trust's execution and delivery of Shareholder Service Agreements;
9. Assist the Trust and provide on-site personnel in preparing responses to and providing documents for routine regulatory examinations or investigations; and coordinating with and taking instructions from counsel to the Trust in response to such routine or non-routine regulatory matters. The assistance to be provided with respect to SEC inspections includes (i) rendering advice regarding proposed responses (ii) compiling data and other information in response to SEC requests for information and (iii) communicating with Fund management and portfolio managers to provide status updates.
10. Furnish advice and recommendations with respect to other aspects of the business and affairs of the Funds as the Trust shall request and the parties shall agree in writing;
11. Make available appropriate individuals to serve as officers of the Trust (to serve only in ministerial or administrative capacities relevant to Victory's services hereunder, except as otherwise provided in this Agreement, upon designation as such by the Board);
12. Obtain, maintain and file fidelity bonds and directors and officers/errors and omissions insurance policies for the Trust at the expense of the Trust and Funds in accordance with the requirements of Rules 17g-1 and 17d-1(7) under the 1940 Act, to the extent such bonds and policies are approved by the Board;
13. Prepare for Board meetings by (i) preparing and coordinating collection of the relevant sections of the Board materials pertaining to the responsibilities of VICTORY and the various service providers, (ii) assisting and coordinating special materials related to annual contract approvals and approval of rule 12b-1 plans and related matters, (iii) attending Board meetings, and (iv) performing such other Board meeting functions as agreed by the parties;
14. Not less frequently than annually, review the business of the Trust and the services provided by the Co-Administrators and determine: (a) that said services are adequate and complete so as to provide the Funds with all administrative services required by applicable laws and rules and the business needs of the Trust and (b) whether additional or supplemental services are necessary for the operation of the
Funds and inform the Board of Trustees of the Trust how these additional or supplemental services, if any, shall be provided and what additional costs and fees would be associated with same.
15. Notify BISYS and Fund counsel of all documents filed by VICTORY with the SEC.
SCHEDULE B
TO THE CO - ADMINISTRATION AGREEMENT
BETWEEN THE VICTORY PORTFOLIOS AND VICTORY CAPITAL MANAGEMENT INC.
The Trust shall pay VICTORY on the first business day of each month, or at such time(s) as VICTORYshall request and the parties shall agree the following fees for the services provided under this Agreement at the annual rates set forth below. For these purposes, the rate at which the asset-based fees are applied is determined by aggregating the assets of all Funds together. The fees are accrued daily and paid monthly:
Average daily net assets Annual Fee First $10 Billion 0.058% Over $10 Billion 0.055% |
SCHEDULE C
TO THE CO - ADMINISTRATION AGREEMENT
BETWEEN THE VICTORY PORTFOLIOS AND VICTORY CAPITAL MANAGEMENT INC.
FUNDS
Victory Balanced Fund
Victory Diversified Stock Fund
Victory Intermediate Income Fund
Victory Ohio Municipal Bond Fund
Victory Prime Obligations Fund
Victory Special Value Fund
Victory Stock Index Fund
Victory Tax-Free Money Market Fund
Victory Value Fund
Victory Financial Reserves Fund
Victory Fund for Income
Victory Institutional Money Market Fund
Victory National Municipal Bond Fund
Victory Ohio Municipal Money Market Fund
Victory Federal Money Market Fund
Victory Convertible Fund
Victory Gradison Government Reserves Fund
Victory Small Company Opportunity Fund
Victory Established Value Fund
Victory Focused Growth Fund
VICTORY CAPITAL MANAGEMENT, INC.
127 Public Square
Cleveland, Ohio 44114
July 20, 2005
To: The Victory Portfolios
The Victory Institutional Funds
3435 Stelzer Road, Suite 1000
Columbus, Ohio 43219
We hereby undertake to maintain the expense ratios of certain classes of certain series portfolios of The Victory Portfolios and The Victory Institutional Funds (each a "Fund"), as described in Schedule A attached hereto (the "Operating Expense Limits").
We acknowledge and affirm that, to the extent that the aggregate expenses incurred by a Fund in any fiscal year, including but not limited to investment advisory fees payable to us (but excluding interest, taxes, brokerage commissions, other expenditures that are capitalized in accordance with generally accepted accounting principles, and other extraordinary expenses not incurred in the ordinary course of such Fund's business), exceed the Operating Expense Limits, such excess amount shall be our liability.
This letter will remain in effect until the respective dates of termination set forth in Schedule A to this letter.
Sincerely,
VICTORY CAPITAL MANAGEMENT INC.
By: /s/ Kathleen A. Dennis
----------------------------------
Kathleen A. Dennis
Senior Managing Director
|
SCHEDULE A
OPERATING EXPENSE LIMITS AS OF MARCH 1, 2005 FOR
THE VICTORY PORTFOLIOS
Maximum Operating
Name of Fund and Class Expense Limit Date of Termination
---------------------- ------------- -------------------
Balanced - Class C 2.00% February 28, 2014
Balanced - Class R 2.00% February 28, 2012
Diversified Stock - Class C 1.90%/2.00% February 28, 2006/February 28, 2014
Focused Growth - Class A 1.65% February 28, 2006
Focused Growth - Class C 2.35% February 28, 2006
Focused Growth - Class R 1.90% February 28, 2006
Fund for Income - Class C 1.70%/1.82% February 28, 2006/February 28, 2014
Special Value - Class C 2.20% February 28, 2014
Special Value - Class R 2.00% February 28, 2012
Value - Class C 2.00% February 28, 2014
|
OPERATING EXPENSE LIMITS AS OF MARCH 30, 2005 FOR
THE VICTORY INSTITUTIONAL FUNDS
Maximum Operating
Name of Fund Expense Limit Date of Termination
------------ ------------- -------------------
Institutional Diversified Stock Fund 0.70% April 1, 2006
|
KRAMER LEVIN NAFTALIS & FRANKEL LLP
December 27, 2005
The Victory Portfolios
3435 Stelzer Road
Columbus, Ohio 43219
Gentlemen:
We hereby consent to the reference to our firm as counsel in Post-Effective Amendment No. 75 to Registration Statement No. 33-8982 and to the incorporation by reference of our opinion dated February 27, 2004 as an exhibit to this Amendment.
Very truly yours,
/s/ Kramer Levin Naftalis & Frankel LLP Kramer Levin Naftalis & Frankel LLP |
THE VICTORY PORTFOLIOS
AMENDED AND RESTATED
RULE 18f-3 MULTI-CLASS PLAN
I. Introduction.
Pursuant to Rule 18f-3 under the Investment Company Act of 1940, as amended (the "1940 Act"), the following sets forth the method for allocating fees and expenses among each class of shares of the various series (each series a "Fund") of The Victory Portfolios (the "Trust") that issue multiple classes of shares, whether now existing or subsequently established (the "Multi-Class Funds"). In addition, this Rule 18f-3 Multi-Class Plan (the "Plan") sets forth the shareholder servicing arrangements, distribution arrangements, conversion features, exchange privileges, and other shareholder services of each class of shares of the Multi-Class Funds.
The Trust is an open-end series investment company registered under the 1940 Act, the shares of which are registered on Form N-1A under the Securities Act of 1933, as amended, and the 1940 Act (Registration Nos. 33-8982 and 811-4851). Upon the effective date of this Plan, the Trust hereby elects to offer multiple classes of shares of the Multi-Class Funds pursuant to the provisions of Rule 18f-3 under the 1940 Act and this Plan. This Plan does not make any material changes to the general class arrangements and expense allocations previously approved by the Board of Trustees of the Trust (the "Board").
The Trust currently consists of the following 20 separate Funds:
Balanced Fund National Municipal Bond Fund Convertible Fund Ohio Municipal Bond Fund Diversified Stock Fund Ohio Municipal Money Market Fund Established Value Fund Prime Obligations Fund Federal Money Market Fund Small Company Opportunity Fund Financial Reserves Fund Special Value Fund Focused Growth Fund Stock Index Fund Fund for Income Tax-Free Money Market Fund Gradison Government Reserves Fund Value Fund Institutional Money Market Fund Intermediate Income Fund |
The Funds are authorized to issue the following classes of shares representing interests in the same underlying portfolio of assets of the respective Fund:
The Multi-Class Funds The Non-Multi-Class Funds
Class A and Class R Shares Class A Shares
-------------------------- --------------
Stock Index Fund Financial Reserves Fund
Small Company Opportunity Fund Intermediate Income Fund
Ohio Municipal Money Market Fund
Class A, Class C and Class R Shares Prime Obligations Fund
-----------------------------------
Balanced Fund Tax-Free Money Market Fund
Diversified Stock Fund Convertible Fund
Established Value Fund National Municipal Bond Fund
Focused Growth Fund Ohio Municipal Bond Fund
Fund for Income
Special Value Fund
Value Fund
Investor and Select Shares
---------------------------
Federal Money Market Fund
Institutional Money Market Fund
Trust and Select Shares
-----------------------
Gradison Government Reserves Fund
|
II. Class Arrangements.
The following summarizes the front-end sales charges, contingent deferred sales charges, Rule 12b-1 distribution fees, shareholder servicing fees, conversion features, exchange privileges, and other shareholder services applicable to each particular class of shares of the Funds. Additional details regarding such fees and services are set forth in each Fund's current Prospectus and Statement of Additional Information.
A. Class A Shares:
1. Maximum Initial Sales Load: 5.75% (of the offering price).
Exceptions: Fund for Income, Intermediate Income Fund,
National Municipal Bond Fund, and Ohio Municipal Bond Fund
have an initial sales charge of 2.00% (of the offering price).
Additional Exceptions: Financial Reserves Fund, Ohio Municipal
Money Market Fund, Prime Obligations Fund and Tax-Free Money
Market Fund have no sales charge.
2. Contingent Deferred Sales Charge: None.
3. Rule 12b-1 Distribution Fees: None. Exceptions: Class A Shares of the Balanced Fund, Convertible Fund, Diversified Stock Fund, Established Value Fund, Financial Reserves Fund, Focused Growth Fund, Fund for Income, Institutional Money Market Fund, Intermediate Income Fund,
National Municipal Bond Fund, Ohio Municipal Bond Fund, Ohio Municipal Money Market Fund, Small Company Opportunity Fund, Special Value Fund, Stock Index Fund and Value Fund each has a Rule 12b-1 Plan pursuant to which no fees are paid.
4. Shareholder Servicing Fees: Up to 0.25% per annum of average daily net assets. Exception: Stock Index Fund may charge up to 0.15% per annum of its average daily net assets.
5. Conversion Features: None.
6. Exchange Privileges: Class A shares may be exchanged with Class A shares of other Funds without incurring a sales charge. However, exchanges made into a Fund with a higher sales charge require payment of the percentage-point difference between the higher and lower sales charges. For example, investors that exchange Class A shares from a Fund with a 2.00% sale load to purchase Class A shares of a Fund with a 5.75% sales charge would pay the 3.75% difference in sales charge. Class A shares may be exchanged with for Investor Shares or Select Shares of Federal Money Market Fund and Institutional Money Market Fund, without incurring a sales charge.
7. Other Shareholder Services: As provided in the Fund's Prospectus.
B. Class C Shares:
1. Initial Sales Load: None
2. Contingent Deferred Sales Charge ("CDSC"): 1% if shares are sold within 12 months of purchase. The CDSC is based on the current value of the shares being sold or their net asset value when purchased, whichever is lower.
3. Rule 12b-1 Distribution Fees: Up to 1.00% per annum of average daily net assets (of which 0.25% is designated for shareholder servicing).
4. Shareholder Servicing Fees: Included in Rule 12b-1 Plan.
5. Conversion Features: None.
6. Exchange Privileges: Class C shares may be exchanged for Class C shares of any other Fund.
7. Other Shareholder Services: As provided in the Fund's Prospectus.
C. Investor Shares:
1. Maximum Initial Sales Load: None.
2. CDSC: None.
3. Rule 12b-1 Distribution Fees: None. Federal Money Market Fund and Institutional Money Market Fund each has a Rule 12b-1 Plan pursuant to which no fees are paid.
4. Shareholder Servicing Fees: None.
5. Conversion Features: None.
6. Exchange Privileges: Investor Shares may be exchanged with Investor Shares and with R Shares (subject to eligibility) of other Funds at relative net asset value. Investor Shares may be exchanged with Class A Shares of other Funds; however, such exchanges require payment of the sales charge applicable to the other Fund's Class A Shares.
7. Other Shareholder Services: As provided in the Fund's Prospectus.
D. Select Shares:
1. Maximum Initial Sales Load: None.
2. CDSC: None.
3. Rule 12b-1 Distribution Fees: None. Exceptions: Federal Money Market Fund and Institutional Money Market Fund each has a Rule 12b-1 Plan pursuant to which no fees are paid.
4. Shareholder Servicing Fees: Up to 0.25% per annum of the average daily net assets.
5. Conversion Features: None.
6. Exchange Privileges: Select shares may be exchanged with Select Shares and with R Shares (subject to eligibility)of other Funds at relative net asset value. Select Shares may be exchanged with Class A Shares of other Funds; however, such exchanges require payment of the sales charge applicable to the other Fund's Class A Shares.
7. Other Shareholder Services: As provided in the Fund's Prospectus.
E. Class R Shares
1. Maximum Initial Sales Load: None.
2. CDSC: None.
3. Rule 12b-1 Distribution Fees: Small Company Opportunity Fund, Diversified Stock Fund, Established Value Fund, Focused Growth Fund,
Value Fund, Special Value Fund Balanced Fund: up to 0.50% per annum of average daily net assets (of which 0.25% is designated for shareholder servicing); Fund For Income: up to 0.25% per annum of average daily net assets (designated for shareholder servicing); Class R Shares of the Stock Index Fund have a Rule 12b-1 Plan pursuant to which no fees are paid.
4. Shareholder Servicing Fees: Included in Rule 12b-1 Plan; except that Class R Shares of the Stock Index Fund bear a shareholder servicing fee of up to 0.25% per annum of its average daily net assets.
5. Conversion Features: Class R Shares of any relevant Fund may be converted to Class A Shares at any time.
6. Exchange Privileges: Class R Shares may be exchanged with Class R Shares or Select Shares of other Funds at relative net asset value, or for shares of any single class money market Fund without paying a sales charge.
7. Other Shareholder Services: As provided in the Fund's Prospectus.
F. Trust Shares
1. Maximum Initial Sales Load: None.
2. CDSC: None.
3. Rule 12b-1 Distribution Fees: Gradison Government Reserves Fund has a Rule 12b-1 Plan pursuant to which no fees are paid.
4. Shareholder Servicing Fees: None.
5. Conversion Features: None.
6. Exchange Privileges: Trust Shares may be exchanged for Trust Shares and with Class R Shares (subject to eligibility) of other Funds at relative net asset value. Trust Shares may be exchanged with Class A Shares of other Funds; however, such exchanges require payment of the sales charge applicable to the other Fund's Class A Shares.
7. Other Shareholder Services: As provided in the Fund's Prospectus.
III. Allocation of Expenses.
Pursuant to Rule 18f-3 under the 1940 Act, the Trust shall allocate to each class of shares in a Multi-Class Fund (i) any fees and expenses incurred by the Trust in connection with the distribution of such class of shares (other than with respect to the money market Funds) under a distribution plan adopted for such class of shares pursuant to Rule 12b-1 under the 1940 Act ("Rule 12b-1 Fees") and (ii) any fees and expenses incurred by the Trust under a shareholder servicing plan in connection with the provision of shareholder services to the holders of such class of shares ("Service Plan Fees"). In addition, pursuant to Rule 18f-3, the Trust may allocate the following fees and expenses (the "Class Expenses") to a particular class of shares in a single Multi-Class Fund:
1. transfer agent fees identified by the transfer agent as being attributable to such class of shares;
2. printing and postage expenses related to preparing and distributing materials such as shareholder reports, prospectuses, reports, and proxies to current shareholders of such class of shares or to regulatory agencies with respect to such class of shares;
3. blue sky registration or qualification fees incurred by such class of shares;
4. Securities and Exchange Commission registration fees incurred by such class of shares;
5. the expense of administrative personnel and services (including, but not limited to, those of a fund accountant or dividend paying agent charged with calculating net asset values or determining or paying dividends) as required to support the shareholders of such class of shares;
6. litigation or other legal expenses relating solely to such class of shares;
7. fees of the Board incurred as result of issues relating to such class of shares;
8. independent accountants' fees relating solely to such class of shares; and
9. shareholder meeting expenses for meetings of a particular class.
Class Expenses, Rule 12b-1 Fees, and Service Plan Fees are the only expenses allocated to the classes disproportionately. The Class Expenses allocated to each share of a class during a year may differ from the Class Expenses allocated to each share of any other class by up to 50 basis points of the average daily net asset value of the class of shares with the smallest average daily net asset value.
The initial determination of fees and expenses that will be allocated by the Trust to a particular class of shares and any subsequent changes thereto will be reviewed by the Board and approved by a vote of the Board including a majority of the Trustees who are not interested
persons of the Trust. The Board will monitor conflicts of interest among the classes and agree to take any action necessary to eliminate conflicts.
Income, realized and unrealized capital gains and losses, and any expenses of a Fund not allocated to a particular class of such Fund by this Plan shall be allocated to each class of such Fund on the basis of the relative net assets (settled shares), as defined in Rule 18f-3, of that class in relation to the net assets of such Fund. Income, realized and unrealized capital gains and losses, and any expenses of a non-money market Fund not allocated to a particular class of any such Fund pursuant to this Plan shall be allocated to each class of the Fund on the basis of the net asset value of that class in relation to the net asset value of the Fund.
Any dividends and other distributions on shares of a class will differ from dividends and other distributions on shares of other classes only as a result of the allocation of Class Expenses, Rule 12b-1 Fees, Service Plan Fees, and the effects of such allocations.
A Fund's investment adviser will waive or reimburse its management fee in whole or in part only if the fee is waived or reimbursed to all shares of the Fund in proportion to their relative average daily net asset values. The investment adviser, and any entity related to the investment adviser, who charges a fee for a Class Expense will waive or reimburse that fee in whole or in part only if the revised fee more accurately reflects the relative costs of providing to each class the service for which the Class Expense is charged.
IV. Board Governance.
At all times during which the Trusts elects to offer multiple
classes of shares of the Multi-Class Funds pursuant to the provisions of Rule
18f-3 under the 1940 Act and this Plan: (i) any person who acts as legal counsel
for the Independent Board Members will be an independent legal counsel; (ii) at
least seventy-five percent of the Board Members are Independent Board Members;
(iii) Independent Board Members select and nominate any other Independent Board
Member; (iv) an Independent Board Member serves as chair of the Board of
Trustees, presides over meetings of the Board and has substantially the same
responsibilities as would a chairman of a board of directors; (v) the Board
evaluates its performance and the performance of its committees at least
annually, and such evaluation includes a consideration of the effectiveness of
the Board's committee structure and the number of Funds served by each Board
Member; (vi) the Independent Board Members meet at least once quarterly in a
session comprised of only the Independent Board Members; and (vii) the
Independent Board Members have been authorized to hire employees and to retain
advisers and experts necessary to carry out their duties.
V. Board Review.
The Board shall review this Plan as frequently as it deems necessary. Prior to any material amendment(s) to this Plan, the Board, including a majority of the Trustees who are not interested persons of the Trust, shall find that the Plan, as proposed to be amended (including any proposed amendments to the method of allocating Class Expenses and/or Fund expenses), is in the best interest of each class of shares of a Multi-Class Fund individually and the Fund as a
whole. In considering whether to approve any proposed amendment(s) to the Plan, the Board shall request and evaluate such information as it considers reasonably necessary to evaluate the proposed amendment(s) to the Plan. Such information shall address the issue of whether any waivers or reimbursements of advisory or administrative fees could be considered a cross-subsidization of one class by another and other potential conflicts of interest between classes.
In making its initial determination to approve this Plan, the Board
has focused on, among other things, the relationship between or among the
classes and has examined potential conflicts of interest among classes
(including those potentially involving a cross-subsidization between classes)
regarding the allocation of fees, services, waivers and reimbursements of
expenses, and voting rights. The Board has evaluated the level of services
provided to each class and the cost of those services to ensure that the
services are appropriate and the allocation of expenses is reasonable. In
approving any subsequent amendments to this Plan, the Board shall focus on and
evaluate such factors as well as any others it deems necessary.
Adopted May 24, 1995; Effective June 5, 1995
Amended and Restated:
December 6, 1995; February 23, 1999; February 26, 2002 February 14, 1996; May 11, 1999; December 3, 2002 May 31, 1996; August 17, 1999; February 5, 2003 February 19, 1997; December 1, 1999; December 10, 2003 October 2, 1997; February 23, 2000; February 10, 2004 December 3, 1997; May 23, 2000; September 30, 2004 August 28, 1998; September 30, 2000 March 23, 2005 December 11, 1998; May 23, 2001 |
THE VICTORY PORTFOLIOS
THE VICTORY VARIABLE INSURANCE FUNDS
THE VICTORY INSTITUTIONAL FUNDS
CODE OF ETHICS
A. Legal Requirements.
Rule 17j-1(b) under the Investment Company Act of 1940, as amended (the "1940 Act"), makes it unlawful for any officer or Trustee (as well as other persons) of The Victory Portfolios, The Victory Variable Insurance Funds and The Victory Institutional Funds (collectively, the "Trusts"), in connection with the purchase or sale by such person of a security "held or to be acquired" by any investment portfolio of the Trusts (collectively, the "Funds").
(1) To employ any device, scheme or artifice to defraud a Trust or Fund;
(2) To make any untrue statement of a material fact to a Trust or Fund or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made to the Trust or Fund, not misleading;
(3) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon a Trust or Fund; or
(4) To engage in any manipulative practice with respect to a Trust or Fund.
B. Certain Definitions.
(1) "Access Person" means:
(a) Any director, trustee, officer, general partner or Advisory Person of a Fund or of a Fund's investment adviser;
(b) Any director, officer or general partner of a principal underwriter (the "Distributor") who, in the ordinary course of business, makes, participates in or obtains information regarding, the purchase or sale of Covered Securities by the Fund for which the Distributor acts, or whose functions or duties in the ordinary course of business relate to the making of any recommendation to the Fund regarding the purchase or sale of Covered Securities; or
(c) any other person designated by the Compliance Officer to be an Access Person.
(2) "Advisory Person" means:
(a) Any employee of the Fund or investment adviser (or of any company in a control relationship to the Fund or investment adviser) who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of Covered Securities by a Fund, or whose functions relate to the making of any recommendations with respect to the purchases or sales; or
(b) Any natural person in a control relationship to the Fund or investment adviser who obtains information concerning recommendations made to the Fund with regard to the purchase or sale of Covered Securities by the Fund.
(3) "Beneficial Ownership" means
(a) the receipt of benefits substantially equivalent to those of ownership through relationship, understanding, agreement, contract or other arrangements; or
(b) the power to vest benefits substantially equivalent to those of ownership in oneself at once or at some future time.
Generally, a person will be regarded as having a direct or indirect
Beneficial Ownership in securities held in his/her name, as well as in the name
of a spouse, minor children who live with such person, any member of the
person's immediate family,(1) any other relative (parents, adult children,
brothers, sisters, in-laws, etc.) whose investments the person directs or
controls, whether they live together or not, and securities held by a trust or
estate for the person's benefit. The definition of "Beneficial Ownership" will
be interpreted with reference to the definition contained in the provisions of
Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations thereunder, as such provisions may be
interpreted by the Securities and Exchange Commission, except that the
determination of direct or indirect Beneficial Ownership will apply to all
securities which an Access Person has or acquires.
(4) "Compliance Officer" means the Compliance Officer of Victory Capital Management.
(5) "Covered Security" means a security as defined in Section 2(a)(36) of the 1940 Act, including all related securities, except that it does not include (a) direct obligations of the government of the United States; (b) bankers' acceptances, bank certificates of deposit,
commercial paper and high quality short-term debt instruments, including repurchase agreements; and (c) shares issued by open-end investment companies.
(6) "Covered Service Provider" means an investment adviser, sub-adviser, administrator and principal underwriter for each Trust.
(7) "Ethics Committee" means the Ethics Committee established by Victory Capital Management.
(8) "Victory Capital Management" means Victory Capital Management Inc.
(9) "Purchase or sale of a Covered Security" includes, among other things, the writing of an option to purchase or sell a Covered Security.
(10) "Security held or to be acquired by a Fund" means:
(a) Any Covered Security that, within the most recent 15 days, (i) is or has been held by a Managed Account, or (ii) is being or has been considered by a Managed Account or Victory Capital Management for purchase by the Managed Account(2), and
(b) Any option to purchase or sell, and any security convertible into or exchangeable for, a Covered Security.
C. Trust Policies.
(1) No Access Person shall engage in any act, practice or course of conduct that would violate the provisions of Rule 17j-1(b) set forth above.
(2) In keeping with the recommendations of the Board of Governors of the Investment Company Institute, the following general policies shall govern personal investment activities of Access Persons of a Trust or a Fund:
(a) It is the duty of all Access Persons to place the interest of Fund shareholders first;
(b) All Access Persons shall conduct personal securities transactions in a manner that is consistent with this Code of Ethics and that avoids any actual or potential conflict of interest or any abuse of a position of trust and responsibility; and
(c) No Access Person of a Trust or of a Fund shall take inappropriate advantage of his or her position with the Trust or with a Fund.
D. Reports by Access Persons.
(1) Initial Certification. Each Access Person shall submit an initial report in the form attached hereto as Exhibit A ("Initial Certification of Access Persons") to the Trust's Compliance Officer no later than 10 days after becoming an Access Person.
(2) Quarterly Transaction Reports. Each Access Person shall submit to the Fund's Compliance Officer a Securities Transaction Report (Exhibit B) showing all transactions in Covered Securities in which the person has, or by reason of such transaction acquires Beneficial Ownership. Such reports shall be filed no later than 10 days after the end of each calendar quarter.
(3) Annual Holdings Report. Each Access Person shall submit to the Compliance Officer annually (as of each December 31) an Annual Asset Certification of Access Persons (Exhibit C), listing all holdings of Covered Securities in which he or she has a direct or indirect Beneficial Ownership interest. Access Persons must submit the Annual Report and certification no later than January 30 of each year.
(4) Exceptions from Reporting Requirements.
(a) A person need not make a report under this Section D with respect to transactions effected for, and Covered Securities held in, any account over which the person has no direct or indirect influence or control.
(b) A Trustee who is not an "interested person" of the Trust within the meaning of Section 2(a)(19) of the 1940 Act (an "Independent Trustee"), and who would be required to make a report solely by reason of being a Trustee, need not make:
(i) An initial holdings report under paragraph (1) of this
Section D and an annual holdings report under paragraph
(3) of this Section D; and
(ii) A quarterly transaction report under paragraph (2) of this Section D, unless the Independent Trustee knew or, in the ordinary course of fulfilling his or her official duties as a Trustee, should have known that during the 15-day period immediately before or after the Trustee's transaction in a Covered Security, a Fund purchased or sold the Covered Security, or the Fund or its investment adviser considered purchasing or selling the Covered Security.
(c) An assistant officer of a Fund who is not an employee of a Covered Service Provider or its affiliates shall not be considered an Access Person for purposes of this Section D.
(d) An Access Person need not make a quarterly transaction report under paragraph (2) of this Section D if the report would duplicate information
contained in broker trade confirmations or account statements received by the Trust, investment adviser or principal underwriter with respect to the Access Person in the time period required by paragraph (2) of this Section D, if all of the information required by that paragraph is contained in the broker trade confirmations or account statements, or in the records of the Fund, investment adviser or principal underwriter.
E. Procedures.
(1) The Compliance Officer shall notify each Access Person required to submit reports pursuant to this Code of Ethics that such person is subject to this reporting requirement and shall deliver a copy of this Code of Ethics to such person.
(2) The Compliance Officer shall report to the Board of Trustees:
(a) at the next meeting following the receipt of any Securities Transaction Report with respect to each reported transaction in a security which was held or acquired by a Trust or a Fund within 15 days before or after the date of the reported transaction or at a time when, to the knowledge of the Compliance Officer, a Trust, a Fund or the investment adviser for the Trust or a Fund, was considering the purchase or sale of such security;
(b) any transaction not required to be reported to the Board by operation of subparagraph (a) that the Compliance Officer believes may nonetheless constitute a violation of this Code of Ethics; and
(c) any apparent violation of any reporting requirement hereunder.
(3) The Board of Trustees shall consider reports made to it hereunder and shall determine whether any of the provisions of this Code of Ethics have been violated, and what sanctions, if any, should be imposed.
(4) The Board of Trustees, including a majority of the Independent Trustees, with advice of counsel to the Trusts and to the Independent Trustees, shall determine, that each Access Person who is an interested person or an employee of a Covered Service Provider shall be subject to this Code of Ethics or a Code of Ethics adopted by such Covered Service Provider, provided that:
(a) The Covered Service Provider has adopted a Code of Ethics that meets the requirements of Rule 17j-1, has been approved by the Board of Trustees and substantially conforms to generally accepted industry and regulatory standards; and
(b) The Covered Service Provider has implemented adequate procedures for monitoring compliance with its Code of Ethics.
(6) The Board of Trustees shall review the operation of this Code of Ethics at least once a year. To that end, an appropriate officer of each Trust shall prepare an annual report to the Board of Trustees that:
(a) summarizes existing procedures of the Trust and its Covered Service Providers concerning personal investing and any changes in the procedures made during the past year;
(b) identifies any violations requiring significant remedial action during the past year and describes the sanctions imposed;
(c) identifies any recommended changes in existing restrictions or procedures of the Trust or its Covered Service Providers based upon the experience of the Trust or its investment advisers, evolving industry practices or developments in applicable laws or regulations; and
(d) certifies that the Trust has adopted procedures reasonably necessary to prevent Access Persons from violating this Code.
(7) This Code of Ethics, a copy of each Securities Transaction Report by an Access Person, any written report submitted hereunder required by the Ethics Committee, and lists of all persons required to make reports shall be preserved with the Trust records for the period required by Rule 17j-1(f) under the 1940 Act.
Adopted: February 23, 1999
-------
Revised: August 10, 2000
February 6, 2001
August 8, 2001 (Changed Key Asset Management to Victory Capital
Management)
May 18, 2004 (The Victory Institutional Funds added)
|
EXHIBIT A
THE VICTORY PORTFOLIOS
THE VICTORY VARIABLE INSURANCE FUNDS
THE VICTORY INSTITUTIONAL FUNDS
INITIAL ASSET CERTIFICATION OF ACCESS PERSONS
AS OF __________
Instructions
1. You must file this report within 10 days after you become an Access
Person (or January 31, 2001, whichever is earlier).
2. You must list each Covered Security in which you may be deemed to
have Beneficial Ownership, that you hold at the end of the date indicated above.
Use additional sheets if necessary.
3. You must complete and sign this certification whether or not you or
your broker sends statements directly to the Compliance Officer.
4. If you are Trustee who is not an "interested person" of a Fund
solely by reason of being a Trustee, then you need not submit this report.
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Name of Broker, No. of Shares or Registration on
Name of Security(3) Dealer or Bank Principal Amount Account Nature of Interest
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
|
Certifications: I hereby certify that:
1. The securities listed above, or listed in the brokerage statements
that I have provided, reflect all the Covered Securities in which I may be
deemed to have Beneficial Ownership as of the date listed above.
2. I have read the Code of Ethics and the Policy Statement on Insider
Trading and certify that I am in compliance with them.
3. This report excludes transactions with respect to which I had no
direct or indirect influence or control.
Disclaimer [Strike out if inapplicable]: Information contained in this report is not an admission that I have or had any direct or beneficial ownership in the securities listed above.
Date:__________________ Signature:____________________
Name:_______________________
---------------
(3) Including interest rate and maturity, if applicable.
|
EXHIBIT B
THE VICTORY PORTFOLIOS
THE VICTORY VARIABLE INSURANCE FUNDS
THE VICTORY INSTITUTIONAL FUNDS
SECURITY TRANSACTION REPORT
For The Calendar Quarter Ended __________
Instructions
1. List all transactions in Covered Securities in any account in which you
may be deemed to have a Beneficial Ownership. Use additional sheets if
necessary.
2. Write "none" if you had no transactions in Covered Securities during
the quarter.
3. If you are Trustee who is not an "interested person" of a Fund and who
would otherwise be required to report solely by reason of being a Trustee, then
you need only report transactions in Covered Securities when you knew at the
time of the transaction or, in the ordinary course of fulfilling your duties as
a Trustee, you should have known, that during the 15-day period immediately
preceding or after the date of the transaction, such security is or was
purchased or sold, or was considered for purchase or sale, by the Funds. Please
write "none" if you have no transactions in Covered Securities during the
quarter that meet the above conditions.
4. If you submit copies of your monthly brokerage statements to the
Compliance Officer, and those monthly brokerage statements disclose the required
information with respect to all Covered Securities in which you may be deemed to
have Beneficial Ownership, you need not file this form unless you established a
new brokerage account during the quarter.
5. For each account that you established during the previous quarter that
held securities for your direct or indirect benefit, state the name of the
broker, dealer or bank with whom you established the account, the account number
and the date you established the account.
6. Use additional sheets if necessary.
======================== =================== ============= =================== =========== ======================================
Name of Security(4) Date of Purchase/Sale No. of Shares or Price Broker, Dealer or Other Party
Transaction Principal Amount Through Whom Transaction Was Made
------------------------ ------------------- ------------- ------------------- ----------- --------------------------------------
------------------------ ------------------- ------------- ------------------- ----------- --------------------------------------
======================== =================== ============= =================== =========== ======================================
|
During the previous quarter, I established the following accounts with a broker, dealer or bank:
--------------------------------------------------- ----------------------------------------- ----------------------------------
Broker, Dealer or Bank Account Number Date Established
--------------------------------------------------- ----------------------------------------- ----------------------------------
--------------------------------------------------- ----------------------------------------- ----------------------------------
--------------------------------------------------- ----------------------------------------- ----------------------------------
|
Certifications: I hereby certify that:
1. The information provided above is correct.
2. This report excludes transactions with respect to which I had no
direct or indirect influence or control.
Disclaimer [Strike out if inapplicable]: Information contained in this report is not an admission that I have or had any direct or beneficial ownership in the securities listed above.
Date: _________________________ Signature: _______________________ Name: ___________________________
EXHIBIT C
THE VICTORY PORTFOLIOS
THE VICTORY VARIABLE INSURANCE FUNDS
THE VICTORY INSTITUTIONAL FUNDS
ANNUAL ASSET CERTIFICATION OF ACCESS PERSONS
For the Year Ended __________
Instructions
1. You must list each Covered Security in which you may be deemed to
have direct or indirect Beneficial Ownership, that you hold at the end of the
year indicated above. Use additional sheets if necessary.
2. Write "none" if you did not hold any Covered Securities at year end.
3. You must complete and sign this form for annual certification
whether or not you or your broker sends statements directly to the Compliance
Officer.
4. You must submit this form no later than January 30, _____.
5. If you are Trustee who is not an "interested person" of a Fund and
who would otherwise be required to report solely by reason of being a Trustee,
then you need not submit this report.
---------------------------------- ------------------ -------------------- ----------------- ---------------------
No. of Shares or Registration on
Principal Amount Security or Account Nature of Broker, Dealer or
Name of Security(5) Interest Bank
---------------------------------- ------------------ -------------------- ----------------- ---------------------
---------------------------------- ------------------ -------------------- ----------------- ---------------------
---------------------------------- ------------------ -------------------- ----------------- ---------------------
---------------------------------- ------------------ -------------------- ----------------- ---------------------
---------------------------------- ------------------ -------------------- ----------------- ---------------------
---------------------------------- ------------------ -------------------- ----------------- ---------------------
|
Certifications: I hereby certify that:
1. The securities listed above, or listed in the brokerage statements
that I have provided, reflect all the Covered Securities in which I may be
deemed to have Beneficial Ownership at the end of the period.
2. I have read the Code of Ethics and the Policy Statement on Insider
Trading and certify that I am in compliance with them.
3. This report excludes transactions with respect to which I had no
direct or indirect influence or control.
Disclaimer [Strike out if inapplicable]: Information contained in this report is not an admission that I have or had any direct or beneficial ownership in the securities listed above.
Date:___________________________ Signature: _______________________________
Name: _________________________
---------------
(5) Including interest rate and maturity, if applicable.
|
Victory Capital Management Inc. Code of Ethics September 6, 2005
Victory Capital Management Inc ("Victory"), as a registered investment adviser, has a fiduciary responsibility, a duty of loyalty, and a duty of care to our clients. As employees and representatives of Victory, each of us has a responsibility to aspire to the highest ethical principals. Moreover, each of us is required to comply with all applicable Federal and State Securities Regulations. . This Code of Ethics ("Code"), in combination with Victory's Policy Statement on Insider Trading and the KeyCorp Code of Ethics (attached), describes our duties to our clients and Victory, as well as our additional obligations under all applicable regulations, and sets forth certain standards that have been adopted by the firm to ensure that Victory and its employees fulfill such duties and obligations.
Definitions
"Supervised Personnel" or "Supervised Person" is defined as any employee, director or officer of Victory, any Portfolio Manager of a Victory client account, or anyone deemed a Supervised Person by the Chief Compliance Officer, including all Access Personnel.
"Beneficial Interest" in an account or transaction is defined by the following
persons or entities having the opportunity to profit or share directly or
indirectly in any profit derived from such:
o Employee himself or herself
o Any member of the employee's immediate family sharing the same
household
o Any partnership as to which the employee is a general partner
o Any account as to which (a) the employee is the trustee and such
employee or any member of his immediate family is a beneficiary, (b)
the employee is a beneficiary and controls or shares control of the
trust's investments, or (c) the employee is a settlor, has the power
to revoke the trust without the consent of another person and shares
investment control over the trust's investments.
"Reportable Security"" is defined as any security other than direct obligations of the Government of the United States, bankers' acceptances, bank certificates of deposit, commercial paper, and high quality short-term debt instruments, including repurchase agreements, exchange traded funds, and shares issued by money market funds, open-end investment companies that are not managed by Victory, non of which are reportable.
"Reportable Fund" is defined as any Fund for which Victory is an investment advisor or sub-advisor, or any Fund whose investment adviser or principal underwriter controls you, is controlled by you, or is under common control with you.
"Access Personnel" or "Access Person" is defined as any employee, or anyone deemed by CCO, who has access to nonpublic information regarding any clients' purchase or sale of securities, or nonpublic information regarding the portfolio holdings of any Reportable Fund or who is involved in making securities recommendations to clients, or who has access to such recommendations that are nonpublic. In addition, all directors and officers are considered access persons. This group includes all Portfolio Managers, Research Analysts, Trade Analysts, and any individual who has access to Victory's research repository, including McDonald persons. All persons employed at Victory's NewBridge or SBSF Divisions are considered Access Persons. In addition, any person who supervises an Access Person is considered an Access Person.
"Model Change" is defined as any addition, deletion, or change in weighting of a security to a model portfolio.
General Principals of the Code
The General Principals of the Code apply to all Supervised Personnel of Victory.
o It is your duty to place the interests of any Victory client account
first, including Reportable Fund accounts.
o It is required that all personal securities transactions be
conducted in a manner to avoid any actual or potential conflict of
interest, any appearance of a conflict of interest, or any abuse of
your position of trust and responsibility with Victory.
o Supervised Personnel of Victory are held to the fundamental standard
of not taking advantage of their positions at the expense of Victory
or its clients.
o Victory employees will not share portfolio holdings information
except as permitted under Victory Capital Management Inc. Policy.
Because no set of rules can anticipate every possible situation, it is essential that you follow these rules in letter and in spirit. Any activity that compromises Victory's integrity, even if it does not expressly violate a rule, may result in scrutiny or further action from the Chief Compliance Officer.
Supervised Personnel
Anyone considered a Supervised Person under the Code is prohibited from revealing any information regarding securities transactions by any account held at Victory, including the Funds, except as permitted under Victory Capital Management Inc. Policy.
Each Supervised Person is required to disclose certain information regarding
outside affiliates and interests. Specifically:
o A supervised person must disclose the identity of any non-KeyCorp,
for profit entity for which he or she serves as an officer or
director.
o An access person must disclose any outside interest, including equity ownership, to his or her supervisor prior to discussing, recommending or commenting upon any security related to the outside interest.
Supervised Personnel are permitted to open and maintain personal brokerage accounts. Future accounts for Supervised Personnel or any accounts in which Supervised Personnel have a beneficial interest must be opened at a broker dealer that is on Victory's Approved Broker List. Accounts currently held by Supervised Personnel must be held at a brokerage firm on the Grandfathered Broker List. Both lists are maintained by the Compliance Department and attached as Appendix B.
All Supervised Personnel must submit the following reports:
INITIAL HOLDINGS REPORT/ANNUAL HOLDINGS REPORT
An Initial Holdings Report must be submitted within ten (10) calendar days of becoming a Supervised Person. In addition, an Annual Holdings Report must be submitted on an annual basis. Compliance will review all reports received.
These reports must include the following information:
o Date when individual became a Supervised Person (Initial Holdings
Report only).
o Name of each account in which any securities are held in the beneficial
interest of the Supervised Person. The broker dealer or bank holding
these accounts must be indicated.
o Each Reportable Security or Fund in which the Supervised Person has
a beneficial interest in must be reported, including title, number
of shares, and principal amount. Holdings information must be
current as of thirty (30) calendar days before the report is
submitted.
o The date Compliance receives the report will be recorded.
SECURITIES TRANSACTION REPORT
o Must be submitted to Compliance no later than twenty (20) calendar
days following the end of each quarter.
o Must describe each transaction effected during the preceding quarter
in any Reportable Security or Fund. Each transaction must include
the following information: date, title, interest rate and maturity
date, number of shares, principal amount of securities involved,
nature of the transaction, price effected, and the name of the
broker dealer or bank whom effected the transaction.
o Must describe any account established in the preceding quarter, and
include the following information: account name, account number,
name of the broker dealer or bank at which the account is
established, and the date of establishment.
o The date Compliance receives the report will be recorded.
o The following securities transactions are exempt from reporting:
o Open-ended investment funds other than Victory Funds
o Victory Money Market Funds
o 401(k) transactions in open-ended investment funds
o Periodic Investment Plans
o Direct obligations of the US Government
o Dividend reinvestment plans
o Discounted stock purchase plans
o 529 Plans
o Investment Grade Fixed Income
o Exchange-Traded Funds
Access Personnel
Access Personnel are encouraged to invest in securities and issuers that Victory's clients invest in and Exchanged Traded Index or Sector Funds. However, an Access Person must never let a trade in a personal account prevent a Reportable Fund or Account from subsequently trading the same security if not making the trade would disadvantage the Reportable Fund. For example, a Portfolio Manager must keep in mind that if he/she affects a Personal Transaction today, the Fund may not participate in a transaction of the same security for seven (7) days.
Access personnel are prohibited from participating in the same activities described under the Supervised Personnel with the following additions:
o May not purchase any securities in a Limited Offering or an Initial
Public Offering without the preapproval of the Chief Compliance
Officer and the Chief Executive Officer.
o May not recommend any securities transactions in any account or
recommend the change of a weighting in any security without first
disclosing his or her interest, if any, in the security to his or
her direct supervisor and the Chief Compliance Officer.
In addition to the responsibilities listed for Supervised Personnel, Access Personnel who are Portfolio Managers, Research Analysts, Trade Analysts, have access to Victory's research repository, are an employee of Victory's NewBridge or SBSF Divisions, or any person who supervises an Access Person must:
o Obtain pre-clearance from Compliance for all non-exempt personal
transactions in accounts in which the individual has a beneficial
interest, prior to effecting the transaction. Access Personnel are
not to effect any personal transaction in a Reportable Security or
Fund, under any circumstance, until they have received
authorization. *
o Exempted Transactions:
o Automatic investment
o Involuntary exercise of rights issued pro rata to all
holders of a class of securities
o Sale effected by tender offer, etc.
o Observe the following black-out periods:
o Portfolio Managers may not trade the same security in both
their personal account and a portfolio account under their
management on the same day.
o Fund Managers may not trade a security in their personal
account that they have traded in a Fund they manage in the
last seven (7) calendar days without written authorization
from their direct supervisor and the Chief Compliance Officer.
o Fund Managers may not direct a transaction on behalf of a Fund
portfolio, within seven (7) calendar days of conducting a
personal transaction in the same security, without written
authorization from their direct supervisor and the Chief
Investment Officer.
o Research Analysts may not trade a security if he/she is
aware of a recommendation on the security is under
review or pending.
o If a security involved in a Model Change has a market
capitalization of fewer than five (5) billion dollars,
all Access Personnel will be restricted from buying the
security for three (3) business days.
o All Fund Portfolio Managers must pre-clear all non-systematic purchases/ redemptions in their own reportable Fund (except money market funds).
o Research analysts may not personally trade a security that they are assigned to if they have not communicated the information to the investment management teams.
o Maintain adequate records of personal securities transactions.
CONTRA-TRADING RULE
No Portfolio Manager may sell out of his or her personal account any security or related derivative security that is held in any portfolio he or she manages unless he or she has received the written approval from either the President, the Chief Compliance Officer, or his/her designee.
MANDATORY HOLDING PERIOD
All securities purchased by an Access Person must be held for forty-five (45) days. Any gains generated by trading a covered security or its equivalent within a 45-day period must be surrendered.
PRECLEARANCE AND SPECIFIC TRADING SITUATIONS
o Options
o Due to the nature of the options market, option transactions
are exempt from the forty-five (45) day mandatory holdings
period.
o Option transactions in securities held in Victory portfolios
must be bullish. Bearish option transactions are considered a
violation of the contra-trading rule (see above).
o Writing/selling options - preclearance approval must be
obtained prior to the writing/selling of the option.
o When writing/selling an option, any transaction that takes
place after the initial writing/selling of that option is
considered a passive transaction and is exempt from
preclearance, including any required exercise at the time of
expiration. However, the transaction must be reported on the
Securities Transaction Report at quarter end with a special
notation indicating the transaction was passive.
o Buying options - preclearance approval must be obtained prior
to the purchase of an option. In addition, if the option is
exercised or sold before expiration, the exercise transaction
must also be precleared.
o Complex option strategies, e.g. straddles, spreads, etc., are
prohibited.
o Limit/Stop Orders
o Limit/stop orders are permitted providing that preclearance approval
be obtained on the date that the original order is entered.
o Compliance must be immediately notified that the trade is a
limit/stop order.
o Compliance also must be notified of the price for the transaction. o
Preclearance approval must be obtained once the stop is placed on
the order.
o If the stock appears on the blackout list, then the transaction must
be cancelled.
o The transaction must be reported on the Securities Transaction
Report at quarter end with a special notation indicating the
transaction was a limit/stop order.
o Tablepounders Accounts
o Any transaction performed globally by the Portfolio Manager of the
Tablepounders Accounts does not need to be precleared. These
transactions do not need to be reported on the Securities
Transaction Report.
o Any trade that deviates from the global trades in the account must
be precleared and reported on the Securities Transaction Report.
o Convertible Bonds
o Initial purchases of convertible bonds must be precleared in the same manner as an equity transaction.
o Any transaction initiated by the employee to convert the bond into
the underlying equity stock must be precleared.
o Forced conversion, a conversion initiated by the bond issuer, does
not need to be precleared. However, the transaction must be reported
on the Securities Transaction Report.
o If an employee would like to enter into any other type of passive security transaction, they must contact Compliance to receive exemption from the preclearance process.
Compliance recognizes the fact that there are cases when an unexpected purchase/sale of client securities occurs after a personal transaction has been approved through the preclearance system. For example, a client unexpectedly adds additional funds to his/her account or an unexpected new client provides substantial funds for investment. When this situation occurs, Compliance should be notified immediately and proper documentation can be generated.
VICTORY SBSF ("SBSF") AND VICTORY NEWBRIDGE ("NEWBRIDGE")
Any additions or deletions to the portfolio, including weighting changes, will
be considered Model Changes. All employees at SBSF or NewBridge will be
restricted from executing personal trades in any security in which SBSF or
NewBridge has made a Model Change that business day. Any model change that
involves a security with a market capitalization below five (5) billion dollars
will be blacked out for three (3) market days for all Access Personnel. In
addition, the Portfolio Managers of a Reportable Fund that is managed in the
same investment style will be blacked out from buying those securities for seven
(7) calendar days. The standard blackout periods do not apply to trades done as
a result of implementation of new Wrap, or SMA, account.
*A special exemption is available and may be granted on an individual basis for
accounts where the Access Person has a beneficial interest, such as an
investment club account or an account where the broker has full discretion, but
does not exercise control or influence. The following requirements must be met
in order to receive the exemption:
o Request must be submitted and approved in writing.
o Broker carrying the account must provide duplicate confirmations of
each transaction in the account to the Compliance Department.
o Access person must not exercise any control or influence over the
transaction.
Additional Restrictions and Limitations
INVESTMENTS IN KEYCORP STOCK
No Supervised Person may effect transactions, including derivative transactions, in KeyCorp stock ten calendar days prior and two calendar days after a KeyCorp earnings announcement. All restrictions for KeyCorp stock transactions are applicable to diversification transactions by
Supervised Personnel within a 401(k). In addition, no Supervised Person may sell KeyCorp stock short.**
**KeyCorp places additional restrictions on employees that are job grade 89 and above. The officers included in this group may only write call options during the Section 16 insider window (this window commences two days after an earnings announcement and closes three (3) weeks later). These restrictions include: (1) A call option may not be written for a period longer than six (6) months (2) The call option may not be written for more than 10% of the employees KeyCorp Securities (3) The price of the call option must be at least 5% greater than the price at which KeyCorp stock is trading when the call is written and (4) The employee must be in compliance with KeyCorp's stock ownership guidelines both prior to and after the call option is written.
INITIAL PUBLIC OFFERINGS
No Supervised person of Victory may acquire a Beneficial Interest in any Reportable Security that is being offered in an initial public offering without the prior approval of the Chief Compliance Officer, the Chief Administrative Officer, and his or her direct supervisor.
LIMITED OFFERINGS (PRIVATE PLACEMENTS)
No Supervised Person may acquire a Beneficial Interest in a Reportable Security in a private placement without the prior approval of the Chief Compliance Officer, the Chief Administrative Officer, and his or her direct supervisor.
EXCESSIVE TRADING
Supervised Personnel are prohibited from participating in excessive trading in
personal accounts. This includes, but is not limited to, day trading. The
President, Chief Administrative Officer, and/or any Chief Investment Officer may
review the frequency of trading activity for any Supervised Person.
MARKET TIMING MUTUAL FUND TRANSACTIONS
Supervised Personnel shall not participate in any activity that may be construed as market timing of mutual funds.
GIFTS
No Supervised Person may accept any gift of more than de minimis value from any person or entity that does business with, or on behalf of, any investment company as to which Victory
serves as an investment adviser. The KeyCorp Code of Ethics and BISYS Code of Ethics gift clauses apply to gifts from any source.
SERVICE AS A DIRECTOR
No employee of Victory may serve on the board of directors of any publicly traded company absent prior approval of the Chief Compliance Officer and the Chief Investment Officer based upon a determination that such board service would be consistent with the interests of any investment company as to which Victory serves as an investment adviser and its shareholders. Service on the board of directors of a nonprofit or nonpublic company must be pre-approved by the employee's direct manager and reported to Compliance.
Other Reporting Requirements
If a Supervised Person believes that there has been a violation of any of the rules of the Code, that employee must promptly notify the Chief Compliance Officer or the Chief Administrative Officer. As an alternative, employees may contact the anonymous KeyCorp Code of Ethics telephone hotline at 800-418-6423 ext. KEY (539).
If a Supervised Person suspects that fraudulent or other irregular activity might be occurring, including any possible violations of law or regulations, the activity must be reported immediately to a member of the Compliance Committee. Compliance Committee members who are notified of any such activity must immediately report it in writing to the Chief Compliance Officer or the Chief Executive Officer.
Supervised Personnel must report all communications from regulatory or government agencies (federal, state, or local) to their immediate supervisor. The immediate supervisor must immediately notify the Chief Compliance Officer in writing.
Certification of Compliance with Code of Ethics
Each Supervised Person shall be required to certify annually that he or she (i) has read and understood the Code, (ii) recognizes that he or she is subject thereto, (iii) has complied with the requirements of the Code, (iv) has disclosed or reported all personal securities transactions required to be disclosed or reported pursuant to the requirements of the Code.
Review Procedures
Compliance will maintain review procedures consistent with the Code.
Sanctions
Violations letters will be prepared by Compliance and approved by the Chief Compliance Officer and the Chief Executive Officer. Any monetary penalty imposed for violations will be at the discretion of the Chief Executive Officer. The Compliance Committee will review all violations and sanctions. The Chief Compliance Officer reserves the right to revoke personal trading.
----------------------- ----------------------------------------------- -------------------------------------
Response Level Violation Description Suggested Action
----------------------- ----------------------------------------------- -------------------------------------
Level 1 Minor 1st offense: o Compliance Department to
o Employee provides a majority of question employee and
account information but some data is document response.
missing.
Unusual or Suspicious Trading Activity:
o Employee engages in excessive
short-term trading activity on a
continual basis (day trading).
o Employee engages in a pattern of
unusual trading.
o Employee obtains preclearance; Reportable
Fund trades in same small cap security on
same day.
----------------------- ----------------------------------------------- -------------------------------------
Level 2 Technical Violations: o Compliance notifies
o Employee traded without preclearance employee and manager of
approval, but Compliance would have violation in writing.
approved the trade if approval had o Employee and manager sign
been sought. acknowledgement of
o Employee turned in a late quarterly violation.
Securities Transaction Report or o Chief Compliance Officer
failed to turn one in. and Chief Executive
o Employee did not submit a complete Officer are notified.
or timely initial/annual holdings
report.
o Employee did not provide Compliance a
duplicate confirmation after Compliance
notified the employee of the missing
duplicate confirmation.
----------------------- ----------------------------------------------- -------------------------------------
10
|
----------------------- ----------------------------------------------- -------------------------------------
Level 3 Repeat Technical Offenses
o Repeat of the above referenced The same actions as noted for Level
violations- two technical 2 with the following additions:
violations within a twelve-month o Possible suspension of
(12) period. personal trading
activities for one
quarter.
----------------------- ----------------------------------------------- -------------------------------------
Level 4 Material Violations: The same actions as noted for Level
o Employee traded without preclearance 2 with the following additions:
approval; Compliance would not have o Employee required to break
approved the Personal Trade Request. the trade and disgorge
o Employee traded during a black-out profits.
period, without prior approval from o Chief Compliance Officer
o Employee deliberately concealed the meets with Manager and
the existence of an account Empoyee to discuss violation
o Suspension of personal
trading activities for at
least one quarter.
The Chief Compliance Officer and Chief
Executive Officer may impose penalties
of reduction in bonuses and or salary.
----------------------- ----------------------------------------------- -------------------------------------
Level 5 Repeat Material Offenses: The same actions as in Level 3 with
o Any material violation of VCM Code the following additions:
of Ethics repeated by the employee o Human Resources will
at least two times in the last document violation in
twelve (12) months. Employee files.
----------------------- ----------------------------------------------- -------------------------------------
Level 6 Confirmed Fraudulent Activity: The same actions as in Level 5
o Systematic front running, scalping with the following additions:
or other evidence of fraud. o Compliance Committee will
review violations and
recommend penalties up to
and including termination.
----------------------- ----------------------------------------------- -------------------------------------
|
*The Chief Compliance Officer and the Chief Investment Officer reserve the right to lift personal trading sanctions in response to market conditions.
RECONSIDERATION
If a Supervised Person wishes to dispute a violation notice, he or she may submit a written explanation of the circumstances of the violation to the Chief Compliance Officer. The Chief Compliance Officer and the Cheif Executive Officer will review any explanations.
REPORT TO FUND BOARD
At least annually, Victory will provide the Fund's Board of Directors with the following information: o Material violations under the Code and any sanctions imposed as a response to the material violations o Certification that Victory has adopted procedures necessary to prevent Supervised Persons from violation the Code.
RECORD KEEPING REQUIREMENTS
Victory will keep the following records in accordance with applicable Federal Securities Laws: o Copy of the Code o Record of any violation of the Code, any action taken as a result of the violation, and any subsequent communications between Compliance and a Supervised Person regarding the violation. o Copy of each report filed by any Supervised Person as required by the Code o List of persons subject to the Code reporting requirements
Each of the above listed documents will be maintained for a period of at least five years after the end of the fiscal year in which it was created. The first five of these years, Victory will maintain the records in a location specified as a place of business on Form ADV.
The provisions of this Code are in addition to the KeyCorp Code of Ethics and the KeyCorp Policy on Public Disclosure and Securities Trading, or any successor thereto. The KeyCorp Code of Ethics and Policy shall apply to all Supervised Persons of Victory Capital Management Inc.
Appendix I
POLICY STATEMENT ON INSIDER TRADING
A. Introduction
Victory Capital Management Inc. (the "Adviser") seeks to foster a reputation for integrity and professionalism. That reputation is a vital business asset. The confidence and trust placed in us by our clients is something we should value and endeavor to protect. To further that goal, this Policy Statement implements procedures to deter the misuse of material, nonpublic information in securities transactions.
Trading securities while in possession of material, nonpublic information or improperly communicating that information to others may expose you to stringent penalties. Criminal sanctions may include a fine of up to $1,000,000 and/or ten years imprisonment. The Securities and Exchange Commission ("SEC") can recover the profits gained or losses avoided through the violative trading, a penalty of up to three times the illicit windfall and an order permanently barring you from the securities industry. Finally, you may be sued by investors seeking to recover damages for insider trading violations.
Regardless of whether a government inquiry occurs, the Adviser views seriously any violation of this Policy Statement. Such violations constitute grounds for disciplinary sanctions, including dismissal.
B. Scope of the Policy Statement
This Policy Statement is drafted broadly; it will be applied and interpreted in a similar manner. This Policy Statement applies to securities trading and information handling by directors, officers, and employees of the Adviser (including spouses, minor children, and adult members of their households).
The law of insider trading is unsettled; an individual legitimately may be uncertain about the application of the Policy Statement in a particular circumstance. Often, a single question can forestall disciplinary action or complex legal problems. You should direct any questions relating to the Policy Statement to the Chief Compliance Officer. You also must notify the Chief Compliance Officer immediately if you have any reason to believe that a violation of the Policy Statement has occurred or is about to occur.
C. Policy Statement
No person to whom this Policy Statement applies, including you, may trade, either personally or on behalf of others, while in possession of material, nonpublic information; no personnel of the Adviser may communicate material, nonpublic information to others in violation of the law. This section reviews principles important to the Policy Statement.
1. What is Material Information?
Information is "material" when there is a substantial likelihood that a reasonable investor would consider it important in making his or her investment decisions. Generally, this is information whose disclosure will have a substantial effect on the price of a company's securities. No simple "bright line" test exists to determine when information is material; assessments of materiality involve a highly fact-specific inquiry. For this reason, you should direct any questions about whether information is material to the Chief Compliance Officer.
Material information often relates to a company's results and operations including, for example, dividend changes, earning results, changes in previously released earnings estimates, significant merger or acquisition proposals or agreements, major litigation, liquidation problems, and extraordinary management developments.
Material information also may relate to the market for a company's securities. Information about a significant order to purchase or sell securities may, in some contexts, be deemed material. Similarly, prepublication information regarding reports in the financial press also may be deemed material. For example, the U.S. Supreme Court upheld the criminal convictions of insider trading defendants who capitalized on prepublication information about the Wall Street Journal's "Heard on the Street" column.
2. What is Nonpublic Information?
Information is "public" when it has been disseminated broadly to investors in the marketplace. Tangible evidence of such dissemination is the best indication that the information is public. For example, information is public after it has become available to the general public through a public filing with the SEC or some other government agency, the Dow Jones "tape" or the Wall Street Journal or some other publication of general circulation, and after sufficient time has passed so that the information has been disseminated widely.
3. Identifying Inside Information
Before executing any trade for yourself or others, including Accounts, you must determine whether you have access to material, nonpublic information. If you think that you might have access to material, nonpublic information, you should take the following steps:
(i) Report the information and proposed trade immediately to the Compliance Officer.
(ii) Do not purchase or sell the securities on behalf of yourself or others, including the Accounts.
(iii) Do not communicate the information inside or outside the Advisers, other than to the Compliance Officer, and your supervisor if necessary.
(iv) After the Compliance Officer has reviewed the issue, the firm will determine whether the information is material and nonpublic and, if so, what action the firm should take.
You should consult with the Compliance Officer before taking any action. This degree of caution will protect you, your clients and the firm.
4. Contact with Public Companies
The Adviser's contacts with public companies represent an important part of our research efforts. The Adviser may make investment decisions on the basis of the firm's conclusions formed through such contacts and analysis of publicly available information. Difficult legal issues arise, however, when, in the course of these contacts, an employee or other person subject to this Policy Statement becomes aware of material, nonpublic information. This could happen, for example, if a company's Chief Financial Officer were to prematurely disclose quarterly results to an analyst, or an investor relations representative makes a selective disclosure of adverse news to a handful of investors. In such situations, the Adviser must make a judgment as to their further conduct. To protect yourself, your clients and the firm, you should contact the Chief Compliance Officer immediately if you believe that you may have received material, nonpublic information.
5. Tender Offers
Tender offers represent a particular concern in the law of insider trading for two reasons. First, tender offer activity often produces extraordinary gyrations in the price of the target company's securities. Trading during this time period is more likely to attract regulatory attention (and produces a disproportionate percentage of insider trading cases). Second, the SEC has adopted a rule which expressly forbids trading and "tipping" while in possession of material, nonpublic information regarding a tender offer received from the tender offeror, the target company or anyone acting on behalf of either. Employees and others subject to this Policy Statement should exercise particular caution any time they become aware of nonpublic information relating to a tender offer.
BISYS FUND SERVICES
CODE OF ETHICS
JANUARY 1, 2005
I. INTRODUCTION
This Code of Ethics (the "Code") sets forth the basic policies of ethical conduct for all Covered Persons, as hereinafter defined.
Rule 17j-1(b) under the Investment Company Act of 1940, as amended, (the "1940 Act") makes it unlawful for an affiliated person of any BISYS company that is appointed to serve as principal underwriter of a registered investment company, in connection with the purchase or sale by such person of a security held or to be acquired (as hereinafter defined) by any such registered investment company, to:
(1) employ any device, scheme or artifice to defraud the Fund;
(2) make to the Fund any untrue statement of a material fact or omit to
state to the Fund a material fact necessary in order to make the
statements made, in light of the circumstances under which they are
made, not misleading;
(3) engage in any act, practice or course of business that operates or
would operate as a fraud or deceit upon the Fund; or
(4) engage in any manipulative practice with respect to the Fund.
II. DEFINITIONS
The following definitions are used for purposes of the Code.
"Access Person" is defined for purposes of this Code as all Covered Persons identified in Exhibit C. This Code covers certain BISYS associates that are not otherwise deemed Access Persons by law.
"Automatic investment plan" means a program in which regular periodic purchases (or withdrawals) are made automatically in (or from) investment accounts in accordance with a predetermined schedule and allocation. An automatic investment plan includes a dividend reinvestment plan.
"Beneficial ownership" of a security is defined under Rule 16a-1(a)(2) of the Securities Exchange Act of 1934, which provides that a Covered Person should consider himself/herself the beneficial owner of securities held by his/her spouse, his/her minor children, a relative who shares his/her home, or other persons, directly or indirectly, if by reason of any contract, understanding, relationship, agreement or other arrangement, he/she obtains from such securities benefits substantially equivalent to those of ownership. He/she should also consider himself/herself the beneficial owner of securities if he/she can vest or revest title in himself/herself now or in the future.
"Code Compliance Officer" is the person designated to oversee enforcement and ensure compliance with this Code pursuant to procedures established for such purpose.
"Covered Persons" are all directors, officers and associates of the BISYS entities listed on Exhibit B hereto (collectively referred to as "BISYS", excluding Non-BISYS Employee
Registered Representatives identified in Exhibit H. Individuals registered with an entity identified in Exhibit B but not employed by BISYS and not reporting under an RIA's code of ethics are considered Covered Persons for purposes of this Code.
"Covered Securities" include all securities, subject to transaction reporting under this Code. Covered Securities do not include: (i) securities issued by the United States Government; (ii) bankers' acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements; (iii) shares of open-end investment companies other than shares of Reportable Funds; (iv) transactions which you had no direct or indirect influence or control; (v) transactions that are not initiated, or directed, by you; and (vi) securities acquired upon the exercise of rights issued by the issuer to all shareholders pro rata.
A security "held or to be acquired" is defined under Rule 17j-l(a)(10) as any Covered Security which, within the most recent fifteen (15) days: (A) is or has been held by a Fund, or (B) is being or has been considered by a Fund or the investment adviser for a Fund for purchase by the Fund. A purchase or sale includes the writing of an option to purchase or sell and any security that is convertible into or exchangeable for, any security that is held or to be acquired by a Fund.
"Material inside information" is defined as any information about a company which has not been disclosed to the general public and which either a reasonable person would deem to be important in making an investment decision or the dissemination of which is likely to impact the market price of the company's securities.
"Non-BISYS Employee Registered Representative" is defined as any Registered Representative licensed with an entity identified in Exhibit B; but employed by an RIA and reporting under the RIA's code of ethics.
A "personal securities transaction" is considered to be a transaction in a Covered Security of which the Covered Person is deemed to have beneficial ownership. This includes, but is not limited to, transactions in accounts of the Covered Person's spouse, minor children, or other relations residing in the Covered Person's household, or accounts in which the Covered Person has discretionary investment control. Covered Persons engaged in personal securities transactions should not take inappropriate advantage of their position or of information obtained during the course of their association with BISYS. For example, Transfer Agent employees may not process transactions for their own account or influence others to effect improper transactions on their account or for the accounts of any direct family member. Additionally, Covered Persons should avoid situations that might compromise their judgment (e.g. the receipt of perquisites, gifts of more than de minimis value or unusual investment opportunities from persons doing or seeking to do business with BISYS or the Funds).
"Reportable Funds" are non-money market portfolios of investment companies (identified in Exhibit A), for which BISYS serves as principle underwriter or as a service or sub-service agent (e.g. Transfer Agent, Fund Administrator, etc...). BISYS reserves the right to monitor accounts, including retirement plan accounts, of Covered Persons and their direct family members for compliance with these requirements where BISYS is the recordkeeper of the account.
"RIA Code Compliance Officer" is defined as the person designated by a registered investment adviser ("RIA") to oversee enforcement and ensure compliance with the RIA's code of ethics by all persons subject thereto, including, in particular, Non-BISYS Employee Registered Representatives.
III. RISKS OF NON-COMPLIANCE
This Code extends the provisions of Rule 17j-1(b) to all Covered Persons. Any violation of this Code may result in the imposition by BISYS of sanctions against the Covered Person, or may be grounds for the immediate termination of the Covered Person's position with BISYS. Failure to comply with the RIA code of ethics by a Non-BISYS Employee Registered Representative may represent grounds for immediate deregistration. In addition, in some cases (e.g. the misuse of inside information), a violation of federal and state civil and criminal statutes may subject the Covered Person or Non-BISYS Employee Registered Representative to fines, imprisonment and/or monetary damages.
IV. ETHICAL STANDARDS
The foundation of this Code consists of basic standards of conduct including, but not limited to, the avoidance of conflicts between personal interests and interests of BISYS or its Reportable Funds. To this end, Covered Persons should understand and adhere to the following ethical standards:
(a) The duty at all times to place the interests of Reportable Fund shareholders first;
(b) The duty to ensure that all personal securities transactions be conducted in a manner that is consistent with this Code to avoid any actual or potential conflict of interest or any abuse of such Covered Person's position of trust and responsibility; and
(c) The duty to ensure that Covered Persons do not take inappropriate advantage of their position with BISYS.
V. RESTRICTIONS AND PROCEDURES
This section is divided into two (2) parts. Part A relates to restrictions and procedures applicable to all Covered Persons in addition to the aforementioned Rule 17j-1(b) provisions. Part B imposes additional restrictions and reporting requirements for those Covered Persons deemed to be Access Persons.
A. Restrictions and Procedures for all Covered Persons:
1. Prohibition Against Use of Material Inside Information
Covered Persons may have access to information including, but not limited to, material inside information about Reportable Funds that is confidential and not available to the general public, such as (but not limited to) information concerning securities held in, or traded by, investment company portfolios, information concerning certain underwritings of broker/dealers affiliated with an investment company that may be deemed to be material inside information, and information which involves a merger, liquidation or acquisition that has not been disclosed to the public.
Covered Persons in possession of material inside information must not trade in or recommend the purchase or sale of the securities concerned until the information has been properly disclosed and disseminated to the public.
2. Prohibition Against Abusive Trading Practices in Shares of Reportable Funds
Engaging in short-term trading practices or other potentially abusive trading in shares of Reportable Funds may constitute violations of Rule 17j-1(b) and/or the stated policies of Reportable Funds. Accordingly, unless sanctioned by a particular Reportable Fund, Covered Persons are prohibited from engaging or attempting to engage in excessive trading and exchange activity or other potentially abusive trading in contravention of any stated policy of a Reportable Fund.
3. Initial and Annual Certifications
Within ten (10) days following the commencement of their employment or otherwise becoming subject to this Code and at least annually within forty-five (45) days following the end of each calendar year, all Covered Persons shall be required to sign and submit to the Code Compliance Officer a written certification, in the form of Exhibit D hereto, affirming that he/she has read and understands this Code to which he/she is subject. In addition, the Covered Person must certify annually that he/she has complied with the requirements of this Code and has disclosed and reported all personal securities transactions that are required to be disclosed and reported by this Code. The Code Compliance Officer will distribute to all Covered Persons the Annual Certification and Holdings Report for completion following the end of each calendar year.
B. Procedures for all Non-BISYS Employee Registered Representatives:
1. Initial and Annual Certifications
Within ten (10) days following the commencement of their registration with a broker/dealer identified in Exhibit B, and 45 days following the end of each calendar year, all Non-BISYS Employee Registered Representatives shall be required to sign and submit to the Code Compliance Officer a written certification, in the form of Exhibit I hereto, affirming that he/she is subject to an RIA code of ethics.
2. Quarterly RIA Code Compliance Officer Certification
Within thirty (30) days after each calendar quarter-end, the Code Compliance Officer will require the RIA Code Compliance Officer to provide a written certification, in the form of Exhibit J hereto, with regard to adherence by each Non-BISYS Employee Registered Representative subject to the RIA code of ethics. The Code Compliance Officer requires immediate notification from the RIA Code Compliance Officer of any material violation by a Non-BISYS Employee Registered Representative of the RIA code of ethics.
C. Restrictions and Reporting Requirements for all Access Persons:
Each Access Person must refrain from engaging in a personal securities transaction when the Access Person knows, or in the ordinary course of fulfilling his/her duties would have reason to know, that at the time of the personal securities transaction a Reportable Fund has a pending buy or sell order in the same Covered Security.
1. Duplicate Brokerage confirmations and statements
All Access Persons are required to instruct their broker/dealer to file duplicate trade confirmation and account statements with the Code Compliance Officer at BISYS. Statements must be filed for all accounts containing Covered Securities (including accounts of other persons holding Covered Securities in which the Access Person has a Beneficial ownership interest), other than shares of Reportable Funds identified in Exhibit A. Failure of a broker/dealer to send duplicate trade confirmations or account statements will not excuse a violation of this Section by an Access Person.
A sample letter instructing a broker/dealer firm to send duplicate trade confirmations and account statements to BISYS is attached as Exhibit K of this Code. A copy of the letter instructing the broker/dealer to provide duplicate trade confirmations and account statements to BISYS must be sent to the Code Compliance Officer at the time of mailing. If a broker/dealer is unable or refuses to provide duplicate statements, the Access Person should contact the BISYS Code Compliance Officer for further assistance.
If the broker/dealer requires a letter authorizing a BISYS associate to open an account, a sample permission letter is attached as Exhibit L. Please complete the
necessary brokerage information and forward a signature ready copy to the BISYS Code Compliance Officer for signature and submission to the requesting broker/dealer
2 Initial and Annual Holdings Reports
All Access Persons must file a completed Initial and Annual Holdings Report, in the form of Exhibit E hereto, with the Code Compliance Officer within ten (10) days of commencement of their employment or otherwise becoming subject to this Code and thereafter on an annual basis within forty-five (45) days after the end of each calendar year in accordance with Procedures established by the Code Compliance Officer. Such report must be current as of a date not more than 45 days before the reports is submitted. This requirement includes any retirement plan accounts that contain Reportable Funds.
3 Transaction/New Account Reports
All Access Persons must file a completed Transaction/New Account Report, in the form of Exhibit F hereto, with the Code Compliance Officer within thirty (30) days after (i) opening an account with a broker, dealer, bank or transfer agent in which Covered Securities are recorded; or (ii) entering into any personal securities transaction. This requirement includes any retirement plan accounts that contain Reportable Funds. A transaction report need not be submitted for transactions effected pursuant to an Automatic Investment Plan or where such information would duplicate information contained in broker trade confirmations or account statements received by BISYS with respect to the Access Person within 30 days of the transaction if all of the information required by rule 17j-1(d)(1)(ii) is contained in the confirmation or account statement.
D. Review of Reports and Assessment of Code Adequacy:
The Code Compliance Officer shall review and maintain the Initial and Annual Certifications, Initial and Annual Holdings Reports and Transaction/New Account Reports (the "Reports") with the records of BISYS. Following receipt of the Reports, the Code Compliance Officer shall consider in accordance with Procedures designed to prevent Access Persons from violating this Code:
a. whether any personal securities transaction evidences an apparent violation of this Code; and
b. whether any apparent violation has occurred of the reporting requirement set forth in Section C above.
Upon making a determination that a violation of this Code, including its reporting requirements, has occurred, the Code Compliance Officer shall report such violations to the General Counsel of BISYS Fund Services who shall determine what sanctions, if any, should be recommended to be taken by BISYS. The Code Compliance Officer shall prepare quarterly reports to be presented to the Fund Boards of Directors/Trustees of the Reportable Funds with respect to any material trading violations under this Code.
This Code, a copy of all Reports referenced herein, any reports of violations, and lists of all Covered and Access Persons required to make Reports, shall be preserved for the period(s) required by Rule 17j-1. BISYS shall review the adequacy of the Code and the operation of its related Procedures at least once a year.
VI. REPORTS TO FUND BOARDS OF DIRECTORS/TRUSTEES
BISYS shall submit the following reports to the Board of Directors/Trustees for each Fund for which it serves as principal underwriter:
A. BISYS Fund Services Code of Ethics
A copy of this Code shall be submitted to the Board of a Reportable Fund prior to BISYS commencing operations as principal underwriter, for review and approval. All material changes to this Code shall be submitted to the Board of each Reportable Fund for which BISYS serves as principal underwriter for review and approval not later than six (6) months following the date of implementation of such material changes.
B. Annual Certification of Adequacy
The Code Compliance Officer shall annually prepare a written report to be presented to the Board of each Reportable Fund for which BISYS serves as principal underwriter detailing the following:
1. Any issues arising under this Code or its related Procedures since the preceding report, including information about material violations of this Code or its related Procedures and sanctions imposed in response to such material violations; and
2. A Certification in the form of Exhibit G hereto, that BISYS has adopted Procedures designed to be reasonably necessary to prevent Access Persons from violating this Code.
BISYS FUND SERVICES
CODE OF ETHICS
EXHIBIT A
The following investment companies are Reportable Funds(1):
Activa
Actinver Funds
Agilex
American Family Funds
American Independence/ Nestegg
American Performance
Amex Financial Services
AmSouth Funds
BB&T Funds
BNY Hamilton Funds
Boyar
Capstone Funds
CIBC - Trust
CIBC - Munder
Citizens Funds
Comerica
Commonwealth of Virginia
Coventry Group (consisting of the First Source Monogram, UST Boston,
Shelby and Signal)
Empire Builder
Exeter Funds
Federated International Funds PLC
First Focus Funds
Firth Third Funds
Gartmore Funds
GMO
Hansberger Institutional Series
Hartford
Heartland
Hirtle Callaghan Trust
HSBC Canada
HSBC Investor/ VIF /Insight/Star
Huntington Fund
IBT Merrimac
INVESCO Funds
JPMorgan Funds
Laudus Funds/AXA Rosenberg LP
LEADER Funds
Legacy Funds
Levco Securities
Mercantile Funds
MMA Praxis
Monogram Common Trust Funds
MONY Separate Accounts
Morgan Stanley SICAV
Morgan Stanley Cayman Funds
Morgan Stanley Global Franchise Fund LP
Morgan Stanley Investment Management
Munder Funds
New Covenant Funds
Old Westbury
One Group
Pacific Capital (including CATS and Hawaiian Trust)
Paypal (x.com)
Performance Funds
Permal Asset Management
ProFunds
Retirement Services
Sand Hill Investors Fund II
Schroder Funds
Scudder Funds
Shay Funds (IICAF, AMF)
Shelby Funds
Signal Funds
Skyline Funds
STI Classic Funds
Tamarack Funds
TD Waterhouse Funds
Texstar
UBOC Common Trust Funds
UBOC Copper Mountain
UBS
UBS Global Asset Management Trust Co.
UBS Relationship Funds
UBS Supplementary Trust
Universal Institutional Funds, Inc.
USAllianz
US Allianz VIP Funds
Variable Insurance Funds
Victory, Gradison, Lewco
Vintage/Stable Assets
Washington Mutual
As of January 1, 2005
(1) The companies listed on this Exhibit A may be amended from time to time, as necessary.
BISYS FUND SERVICES
CODE OF ETHICS
EXHIBIT B
The following Broker/Dealers are subject to the BISYS Fund Services Code of Ethics(2):
BISYS Fund Services, Limited Partnership
BNY Hamilton Distributor, Inc.
Centura Funds Distributor, Inc.
Evergreen Distributor, Inc.
Fifth Third Funds Distributor, Inc.
Funds Distributors, Inc.
Heartland Investor Services, LLC
J.P. Morgan Fund Distributors, Inc.
Laudus Distributor, Inc.
Mercantile Investment Services, Inc.
New Covenant Funds Distributor, Inc.
Performance Funds Distributor, Inc.
ProFunds Distributors, Inc.
Victory Capital Advisers, Inc.
The following affiliated service entities are subject to the BISYS Fund Services Code of Ethics(2):
BISYS Fund Services Ohio, Inc.
BISYS Fund Services, Inc.
(2) The companies listed on this Exhibit B may be amended from time to time, as required.
BISYS FUND SERVICES
CODE OF ETHICS
EXHIBIT C
The following Covered Persons are considered Access Persons under the BISYS Fund Services Code of Ethics(3):
The following employees of BISYS:
BISYS Compliance - all associates
Business Systems - Fund Accounting associates
CCO Services - all associates
Client Services - all associates
Distribution Solutions - all associates, including individuals
registered with entity identified in Exhibit B but not employed
by BISYS
Directors/Officers of each BISYS entity listed on Exhibit A that
meet the definition of Access Person under Rule17j-1
Financial Services - Fund Accounting, Tax, Financial
Administration, Fund Compliance and Quality Assurance
associates
Information Systems - all associates
Legal Services - all associates
-------------------------
|
As of January 1, 2005
BISYS FUND SERVICES
CODE OF ETHICS
EXHIBIT D
(2005)
INITIAL AND ANNUAL CERTIFICATIONS
I hereby certify that I have read and thoroughly understand and agree to abide by the conditions set forth in the BISYS Fund Services Code of Ethics (the "Code"). I further certify that, during the time of my affiliation with BISYS, I will comply or have complied with the requirements of this Code and will disclose/report or have disclosed/reported all personal securities transactions required to be disclosed/reported by the Code.
If I am deemed to be an Access Person under this Code, I certify that I will comply or have complied with the Transaction/New Account Report requirements as detailed in the Code and submit herewith my Initial and/or Annual Holdings Report. I further certify that I have disclosed all accounts held by me and will direct or have directed each broker, dealer, bank or transfer agent with whom I have an account or accounts to send to the BISYS Code Compliance Officer duplicate copies of all confirmations and/or account statements relating to my account(s). I further certify that the Code Compliance Officer has been supplied with copies of all such letters of instruction.
BISYS FUND SERVICES
CODE OF ETHICS
EXHIBIT E
(2005)
INITIAL AND ANNUAL HOLDINGS REPORT
Name and Address of Discretionary Account Number(s) If New Account, Broker, Dealer, Bank, Account(5) Date Established or Adviser(s) (Yes or No) ______________________ __Yes __No __________________ _________________ ______________________ __________________ _________________ ______________________ __Yes __No __________________ _________________ ______________________ __________________ _________________ |
|_| Attached are the Covered Securities beneficially owned by me as of the date of this Initial and Annual Holdings Report.
|_| I do not have any Covered Securities beneficially owned by me as of the date of this Initial and Annual Holdings Report. For purposes of this representation, transactions in which I had no direct or indirect influence or control or transactions that were not initiated, or directed, by me do not result in Reportable Transactions or holdings in Covered Securities.
|_| I certify that I have directed each broker, dealer, bank or transfer agent with whom I have an account or accounts to send to BISYS duplicate copies of all confirmations and/or statements relating to my account(s) and have provided copies of such letters of instructions to the BISYS Code Compliance Officer. I further certify that the information on the statements attached hereto (if applicable) are accurate and complete for purposes of this Initial and Annual Holdings Report.
Print or Type Name
(5)Discretionary Account is an account empowering a broker, dealer, bank or adviser to buy and sell securities without the client's prior knowledge or consent.
Security Number of Principal Amount
Description Covered (for debt securities only)
(Symbol/CUSIP) Securities/Mutual
Fund Shares Held
------------------ ---------------- ----------------
------------------ ---------------- ----------------
------------------ ---------------- ----------------
------------------ ---------------- ----------------
------------------ ---------------- ----------------
------------------ ---------------- ----------------
------------------ ---------------- ----------------
------------------ ---------------- ----------------
------------------ ---------------- ----------------
------------------ ---------------- ----------------
------------------ ---------------- ----------------
------------------ ---------------- ----------------
------------------ ---------------- ----------------
------------------ ---------------- ----------------
|
BISYS FUND SERVICES CODE OF ETHICS -TRANSACTION/NEW ACCOUNT REPORT
EXHIBIT F
I hereby certify that, (1) the Covered Securities described below were purchased or sold on the date(s) indicated in reliance upon public information; or (2) I have listed below the account number(s) for any new account(s) opened in which Covered Securities are or will be held, and I have attached a copy of my letter of instruction to the institution maintaining such account to provide the Code Compliance Officer with duplicate trade confirmations and account statements.
COVERED SECURITIES AND/OR MUTUAL FUND PORTFOLIOS PURCHASED/ACQUIRED
OR SOLD/DISPOSED
---------------- ----------- ------------ ---------- ----------- ---------- ---------- ------------------ ------------------
Security Trade Date Number of Per Principal Interest Maturity Name of Broker, Bought (B) or
Description Shares Share Amount Rate Rate Dealer, Transfer Sole (S)
Price Agent or Bank
(and Account
Number and Date
Established, If
(Symbol/CUSIP) (for debt (If (If New )
security) Applicable) Applicable)
---------------- ----------- ------------ ---------- ----------- ---------- ---------- ------------------ ------------------
---------------- ----------- ------------ ---------- ----------- ---------- ---------- ------------------ ------------------
---------------- ----------- ------------ ---------- ----------- ---------- ---------- ------------------ ------------------
---------------- ----------- ------------ ---------- ----------- ---------- ---------- ------------------ ------------------
---------------- ----------- ------------ ---------- ----------- ---------- ---------- ------------------ ------------------
---------------- ----------- ------------ ---------- ----------- ---------- ---------- ------------------ ------------------
---------------- ----------- ------------ ---------- ----------- ---------- ---------- ------------------ ------------------
---------------- ----------- ------------ ---------- ----------- ---------- ---------- ------------------ ------------------
---------------- ----------- ------------ ---------- ----------- ---------- ---------- ------------------ ------------------
---------------- ----------- ------------ ---------- ----------- ---------- ---------- ------------------ ------------------
|
This Transaction/New Account Report is not an admission that you have or had any direct or indirect beneficial ownership in the Covered Securities listed above.
-------------------------------- Print or Type Name -------------------------------- --------------------------------------- Signature Date |
BISYS FUND SERVICES
CODE OF ETHICS
EXHIBIT G
CERTIFICATION TO FUND BOARDS
BISYS Fund Services ("BISYS") requires that all directors, officers and associates of BISYS ("Covered Persons") certify, upon becoming subject to the BISYS Code of Ethics (the "Code") and annually thereafter, that they have read and thoroughly understand and agree to abide by the conditions set forth in the Code. If such Covered Persons are deemed to be Access Persons under the Code, they are required to submit Initial and Annual Holdings Reports. Access Persons must also submit Transaction Reports to the Code Compliance Officer, reporting all personal securities transactions in Covered Securities for all accounts in which the Access Person has any direct or indirect beneficial interest within thirty (30) days of entering into any such transactions. Access Persons must disclose all accounts and direct each of their brokers, dealers, banks or transfer agents to send duplicate trade confirmations and statements of all such personal securities transactions directly to the Code Compliance Officer. For Funds where BISYS serves as Distributor and Fund Accountant, the Code Compliance Officer undertakes a quarterly review of each Access Person's personal securities transactions against the investment portfolio of each fund of which they are deemed an Access Person. For Funds where BISYS serves as Distributor but not the Fund Accountant, upon request the Code Compliance Officer will make information available to the Fund's Chief Compliance Officer regarding all personal securities transactions of Access Persons to the Fund.
The undersigned hereby certifies that BISYS has adopted Procedures reasonably designed to prevent Access Persons from violating BISYS' Code and the provisions of Rule 17j-1 under the Investment Company Act of 1940, as amended.
-------------------------------- ------------------ Wayne Rose Date Code Compliance Officer BISYS Fund Services |
BISYS FUND SERVICES
CODE OF ETHICS
NON-BISYS EMPLOYEE REGISTERED REPRESENTATIVE
EXHIBIT H
(2005)
Adams, John S Grier, Paul H Moses, Niesha E Adams, Stephanie E Grifo, Brett J Mudie, Thomas Anderson, Erika C Groves, Elizabeth H Mueth, Thomas Azzara (Pollard), Linda M Gumma, Sam S Muilenburg, Robert Bailey, Craig Gunn, Talmadge D Murphy, Dennis J Baluck, Neil J Gurewitz, Paul D Murphy, Donna S Barlow, Steven Haber, Karen Murphy, Kate Barnes, Shannon M Haight, David E Muszall, Holly Bashant, Jennifer M Hammond, Robert L Myers, John O Baszler, Theodore D Harper, Harry G Najarian, Hratch Best, Nicole J Hathaway, Duc (Rodney) R Nasgovitz, William Beste, Paul T Hayman (Tapper), Amy Nelson, Brian C Blake, Philip M Hendry, Ian Oberholtzer, Carl E Bockoff, Julie Herbert, George (Skip) E O'Connor, Kimberly R Bolanowski, Casimir F Hill, Jeffrey J Oelbracht, Susan Botti, Keith C Hilsabeck, Bradley J Ohlmann, James (Pat) Borelli, Thomas J Brennan, Michele Holmes, Patricia A Ohmacht, Christopher A Brenner, Brett J Holthaus, Douglas M Olesinski, Kathleen Britton, Lon G. Hopkins, Pamela S Olson, Hilary Bromwell, Maureen M Hutka, Kathleen A Omdahl, Jeffrey M Brown, Jason I Ivancich, Anthony Ottaway, Elizabeth Buoncore, Richard J Iwasko, Pamela A Pandon, Joel A Burns, Carole Jabbour, Rena A Pasicznyk, Paul G Calcagno, Jack J Jaworski, Katherine M Payne, Robert Calderwood, Annette C Johnson, Gloria A Pederson, Neil D Caponigro, Jennifer L Johnson, Manuel J Perez-Jackson, Amy C Capuano, John A Johnson, Todd B Picard, Aaron A Carlisle, David W Jones, George A Pilutti, John A Carmichael, Donald Jurec, Michael R Piroozmand, Hamoon Carson, Holly A Kadnar, Matthew Pitigoiaron, Cosmin A Casey, Dennis Kamyszek, Karen M Pleasant, Lori J Chavis, Eric N Karpowicz, Edward J Ploshnick, Jeffrey A Chen, Christopher I Keizer, Stephen M Porter, Harold Cicon, Christina G Kelts, James R Praseutsack, Amphay Clark, Kevin D Kem, Paula A Precious, William R Clemons, Anita J Kenaston, Pamela Pulakhandam, Tanuja Cohen, Steven B Kenly, Franklin C Purdy, David E Coleman, Scott A Kennedy, Anne K Putallaz, Ann Conners, Greg Kennedy, William Putman, Jason E Connors, Matthew F Kenny, Thomas P Pyne, John Cooke, Joshua E Kern, Jeffrey L Rains, Carolyn Cooley, Donald L King, Cheryl B Rajagopal, Suresh Cowperthwait, James King, Christine M Redden, Paul T Crosby, Robert E Klemm, Mark D Ricci, David M Cummings, Kelly A Klosek, Justin Richter, Michael Dahl, Jason Knapp, Jason Ridley, Frank M |
Delucia, Anthony G Knowles, Monica C Rippe, Brenda Denison, Hugh F Kohl, Jeffrey J Roach, Stacy L Dickson, Marybeth Koskuba, Michael Robertson, Paul M Dilorenzo, Benedict R Kozeliski, Brian E Robinson, Jennifer L DiStefano, Michael H Krase, Scott Roche, Sean Doischen, Daniel Kratsas, Victoria Root, Peter Donald, Jobe A Krum, Karen K Rothberg, Barry Dong, Tony Y Krushena, Michael J Rottinger, Jason Durand, Michael M Kutz, John Rouse, Thomas J Dutton, William M Lane, Brett A Rue, George W Dy, Dan LeCount, Roscoe D Ruiz-Quiros, Elisabel R Dyer, Christopher Leich, Deborah L Rust, Andrew Earnest, Elizabeth A Leistra, Andrea E Ryan, Erin Egan, Nicola Levy, Kimberlee Sarafa, Kenneth C Ersbo, Christopher P Liberty, Lory Schacht, Jason F Evans, Brad Liu, Jean L Schmeits, Kevin Fabietti, Richard A Llenado, Maria Gracia T Schosser, Robin Farmer, Marilyn Longo, Lisa T Seay, Thomas Farnsworth, Maryann S Lucido, Maria Seel, Thomas A Farrell, Thomas J Lutz, Geoffrey Selva, Kevin J Fayolle, Sharon E Malaspina, Wendy W Shemo, Russell D Ferguson, Savonne L Maple, Rebecca S Shenkenberg, Stephen Fernandez, Ina G Marables, Troy D Shoemaker, Mark D Fiore, Kimberly A Marotz, Deanna Shpiz, Diane M. Fitzgerald, James V Matuszak, Brian Sims, James E Fitzpatrick, Mark D Mayberg, Louis Slavin, Benjamin F Fluet, Andrew W McCauley, John Smith, Bradford E Fondrie, David C McDonough, Matthew Smith, Terri B Fong, Edward H McKeon, Steven M Snow, Christopher Fox, Kenneth McKindles, Deborah S Soderstrom, Roger A Fragomeni, Bernard J McKoy, Douglas Sokolow, Mary E Fraser, Bruce P Mechler, Charles Spetrino, William A Frye, Victor M Miller, Brian Stahorsky, Scott Gardner, Richard N Miller, Eric J Stein, Bonnie B Glidden, Douglas A Miller, Gary Steinbrech, Vicky R Glowski, Matthew Miller, Theodore Sterba, Neil Goehring, Carla Milloy, Steven J Summers, Mark Goeller, Andrew C Miner, Matthew J Tamoney, Andrew A Goldman, Richard A Mocanasu, Claudia M Tantsios, Ekaterini Gordon (Stribbell), Jennifer L Mohn, Dan C Taylor, Terry Gordon, Gary N Moody, Thomas Thayer, Adam C Gordon, Laura S Moore, Deneen L Thistleton, Michael D Graff, Jeffrey Moore, Thomas W Titus, Lisa D Gresnick, Mark E Morey, John P Wilcox, Jon G Toft, Paul Wagner, Robert L Wiley, Stephen N Tonti, Katherine Wakeham, Cheryl I Wilson, Geoffrey A Turner, John A Walker, Alvin F Wood, Robert P Tyne, Michelle S Warren, Michael P Young, Harry (Mel) M Upward, Benjamin W Weatherhead, Jeffrey G Yousif, Kevin K Van Dreel, Joshua J Weinberg, Paul Zamora, Estrellita (Lili) D Von Breitenbach, Charles Wesselkamper, Charles Zhan, Huimin (Jenny) Vukmirovich, Edward Weyers, Richard Zimmerman, Steven J Waddell, Denise R Whitmore, Gavin Zolotareva, Yana Wagner, David J Wick, Constance R |
BISYS FUND SERVICES
CODE OF ETHICS
NON-BISYS EMPLOYEE REGISTERED REPRESENTATIVE
EXHIBIT I
(2005)
INITIAL AND ANNUAL CERTIFICATIONS
I hereby certify that I have read and understand and agree to abide by the conditions set forth in the RIA codes of ethics. I further certify that, during the time of my affiliation with BISYS, I will comply or have complied with the requirements of the RIA code of ethics and will disclose/report or have disclosed/reported all personal securities transactions required to be disclosed/reported under the RIA code of ethics.
BISYS FUND SERVICES
CODE OF ETHICS
NON-BISYS EMPLOYEE REGISTERED REPRESENTATIVE
INVESTMENT ADVISER CODE COMPLIANCE OFFICER
EXHIBIT J
Quarterly Code of Ethics Certification
(XX/XX/XXXX)
Pursuant to the BISYS Fund Services Code of Ethics covering each of the [ INSERT BROKER DEALER] affiliated Registered Representatives employed by [INSERT INVESTMENT ADVISOR], "Non-BISYS Employee Registered Representatives", please certify the following for the quarter ended [Insert Date] (the "Period"):
1. Each of the Non-BISYS Employee Registered Representatives identified in the attached report have received and are subject to the [Insert Investment Adviser] Code of Ethics. ("Code").
2. All required documentation and holdings reports (if necessary) have been filed with the undersigned by each Non-BISYS Employee Registered Representative during the Period
3. ________ (check if applicable) There have not been any material violations of the Code by any Non-BISYS Employee Registered Representatives identified in the attach report for the Period.
4. ________ (check if applicable and attach documentation) Violation(s) of the Code by one or more Non-BISYS Employee Registered Representative(s) during the Period were detected or reported. A report detailing each violation and the resolution/remedial action taken is attached. (Please attach details and resolution for each item).
[Insert Investment Adviser] Code Compliance Officer
Name: ______________________
Title: _______________________
Date:________________________
BISYS FUND SERVICES
CODE OF ETHICS
DUPLICATE CONFIRMATION STATEMENT
REQUEST FORM
EXHIBIT K
Date:
Your Broker
street address
city, state zip code
Re: Your Name
your S.S. number or account number
Dear Sir or Madam:
Please be advised that I am an associated person of BISYS Fund Services, LP, or one of its affiliated broker-dealers ("BISYS"), each an NASD Member Firm. Please send duplicate statements and trade confirmations of this brokerage account to the attention of:
BISYS Fund Services Attn: Code Compliance Officer 100 Summer Street, Suite 1500 Boston, MA 02110
This request is made pursuant to the BISYS Code of Ethics and compliance therewith by the associated person is subject to receipt of such trade confirmations and account statements by BISYS.
Thank you for your cooperation.
Sincerely,
Your name
BISYS FUND SERVICES
CODE OF ETHICS
DUPLICATE CONFIRMATION STATEMENT
REQUEST FORM
EXHIBIT L
Date:
[Address]
Re: Employee Name
Account #
SS#
Dear Sir or Madam:
Please be advised that the above referenced person is an associated person of BISYS Fund Services, LP or one of its affiliated broker-dealers ("BISYS"), each an NASD member firm. We grant permission for him/her to open a brokerage account with your firm, provided that you agree to send duplicate statements and trade confirmations of this employee's brokerage account to:
BISYS Fund Services Attn: Code Compliance Officer 100 Summer Street, Suite 1500 Boston, MA 02110
This request is made pursuant to the BISYS Code of Ethics and compliance therewith by the associated person is subject to receipt of such trade confirmations and account statements by BISYS.
Thank you for your cooperation.
Sincerely,
BISYS Fund Services
Code Compliance Officer