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- ----- Financial
Direction May 10, 1996, as supplemented August 5, 1996
LOGO
The
Pilot
Funds
PROSPECTUS ENCLOSED
PILOT GROWTH
FUND
PILOT DIVERSIFIED BOND
INCOME FUND
Pilot Shares
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TABLE OF CONTENTS
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PAGE
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EXPENSE SUMMARY.................................................................................... 2
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS................................................... 3
Pilot Growth Fund............................................................................. 3
Pilot Diversified Bond Income Fund............................................................ 4
PORTFOLIO INSTRUMENTS AND PRACTICES.............................................................. 4
RISK FACTORS..................................................................................... 9
FUNDAMENTAL LIMITATIONS.......................................................................... 10
INVESTING IN THE PILOT FUNDS....................................................................... 10
HOW TO BUY SHARES................................................................................ 10
HOW TO SELL SHARES............................................................................... 11
DIVIDENDS AND DISTRIBUTIONS...................................................................... 12
EXCHANGE PRIVILEGE................................................................................. 12
THE PILOT FAMILY OF FUNDS.......................................................................... 13
THE BUSINESS OF THE FUND........................................................................... 14
FUND MANAGEMENT.................................................................................. 14
TAX IMPLICATIONS................................................................................. 16
MEASURING PERFORMANCE............................................................................ 17
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THE PILOT FUNDS
LOGO
PROSPECTUS FOR PILOT SHARES OF THE PILOT GROWTH FUND AND PILOT DIVERSIFIED BOND
INCOME FUND
May 10, 1996, as supplemented August 5, 1996
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PILOT FUND GOAL FOR INVESTORS WHO WANT
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GROWTH Long-term capital growth through Capital growth over the long term and
investments primarily in equity are willing to accept the relative
securities. risks associated with equity
investments.
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DIVERSIFIED BOND Current income consistent with Current income from debt securities and
INCOME preservation of capital by investing are willing to accept fluctuations in
primarily in debt securities. The Fund price and yield.
seeks total return as a secondary
objective and will have an average
weighted maturity of from five to
fifteen years.
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FUND SHARES ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, BOATMEN'S TRUST COMPANY OR ANY OF ITS AFFILIATES AND ARE NOT FEDERALLY
INSURED BY, GUARANTEED BY OR OBLIGATIONS OF, OR OTHERWISE SUPPORTED BY THE U.S.
GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENT IN THE FUNDS INVOLVES INVESTMENT
RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. IN ADDITION, THE AMOUNT OF
DIVIDENDS PAID BY A FUND WILL GO UP AND DOWN. BOATMEN'S TRUST COMPANY SERVES AS
INVESTMENT ADVISER TO THE FUNDS, IS PAID A FEE FOR ITS SERVICES, AND IS NOT
AFFILIATED WITH PILOT FUNDS DISTRIBUTORS, INC., THE FUNDS' DISTRIBUTOR.
This Prospectus describes Pilot Shares of Pilot Growth Fund and Pilot
Diversified Bond Income Fund. Pilot Shares are sold by Pilot Funds Distributors,
Inc. and selected broker-dealers to Boatmen's Trust Company, St. Louis, Missouri
("Boatmen's") and its affiliated banks acting on behalf of themselves and
persons maintaining qualified trust, agency or custodial accounts at such banks.
Pilot Shares are sold and redeemed without payment of any purchase or redemption
charge imposed by the Funds, although Boatmen's and its affiliated banks may
charge their customer accounts for services provided in connection with the
purchase or redemption of shares. This Prospectus describes concisely the
information about the Funds that you should know before investing. Please read
it carefully and keep it for future reference.
More information about the Funds is contained in a Statement of Additional
Information that has been filed with the Securities and Exchange Commission. The
Statement of Additional Information can be obtained free upon request by calling
800/71-PILOT. The Statement of Additional Information, as it may be revised from
time to time, is dated May 10, 1996, as supplemented August 5, 1996 and is
incorporated by reference into (considered a part of) the Prospectus.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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1
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EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of a Fund.
ANNUAL FUND OPERATING EXPENSES are paid out of a Fund's assets and include fees
for portfolio management, maintenance of shareholder accounts, general Fund
administration, accounting and other services.
Below is information regarding the Funds' shareholder transaction expenses and
the operating expenses which the Funds expect to incur during the current fiscal
year on their Pilot Shares. Examples based on this information are also
provided.
PILOT SHARES
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PILOT DIVERSIFIED
PILOT GROWTH BOND INCOME
FUND FUND
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SHAREHOLDER TRANSACTION EXPENSES:
Front End Sales Charge Imposed on Purchases
(as a percentage of offering price)............................. None None
Sales Charge Imposed on Reinvested Dividends...................... None None
Deferred Sales Charge............................................. None None
ANNUAL FUND OPERATING EXPENSES AFTER FEE WAIVERS AND EXPENSE
REIMBURSEMENTS (as a percentage of average net assets):
Management Fees (after waivers)(1)................................ 0.75% 0.40%
Distribution Payments............................................. 0.00% 0.00%
Other Expenses (after expense reimbursements)(1).................. 0.25% 0.25%
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Total Fund Operating Expenses (after fee waivers and expense
reimbursements)(1)............................................... 1.00% 0.65%
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(1) This expense information is provided to help you understand the expenses you
would bear either directly (as with the transaction expenses) or indirectly
(as with the annual operating expenses) as a shareholder of one of the
Funds. Management Fees for Pilot Diversified Bond Income Fund reflect the
fact the Adviser has currently agreed to waive a portion of its management
fee, which waiver may be discontinued at any time. Absent the waiver,
Management Fees for Diversified Bond Income Fund would be 0.55%. The Adviser
and Administrator also have agreed to reimburse a portion of the operating
expenses of Pilot Shares of the Funds. Absent the reimbursement of expenses,
Other Expenses would be 0.77% for Pilot Growth Fund and Pilot Diversified
Bond Income Fund. Absent waivers and expense reimbursements, the total
operating expenses for Pilot Shares of the Funds would be 1.52% for the
Pilot Growth Fund and 1.32% for the Pilot Diversified Bond Income Fund.
(2) Each Fund's Annual Operating Expenses are based on estimated amounts for its
first fiscal year.
EXAMPLE: Assume that the annual return on each of the Funds is 5%, and that
their operating expenses are as described above. For every $1,000 you invested
in a particular Fund, after the periods shown below, you would have paid this
much in expenses during such periods:
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1 3
YEAR YEARS
AFTER AFTER
PURCHASE PURCHASE
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PILOT GROWTH FUND
Pilot Shares............................................................. $ 10 $ 32
PILOT DIVERSIFIED BOND INCOME FUND
Pilot Shares............................................................. $ 7 $ 21
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The Example shown above should not be considered a representation of future
investment returns or operating expenses. The Funds are new and actual
investment returns and operating expenses may be more or less than those shown.
2
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INVESTMENT OBJECTIVES, POLICIES
AND RISK FACTORS
The Pilot Funds use different investments and investment techniques in seeking
to achieve a Fund's investment objective. Each Fund does not use all of the
investments and investment techniques described below, which involve various
risks, and which are also described in the following sections. You should
consider whether one or both of the Funds best meets your investment goals.
Although each Fund will attempt to attain its investment objective, there can be
no assurance it will be successful. Shareholder approval is not required to
change the investment objective of a Fund. However, shareholders will be given
at least 30 days' prior written notice in the event of a change in a Fund's
investment objective. If there is a change in investment objective, shareholders
should consider whether a Fund remains an appropriate investment in light of
their current financial position and needs. Unless otherwise stated, each
investment policy described below may be changed at any time by The Pilot Funds'
Board of Trustees without shareholder approval.
Pilot Growth Fund
Pilot Growth Fund offers investors a means of participating in the equity
securities market.
The investment objective of Pilot Growth Fund is to provide long-term capital
growth by investing primarily in equity securities. Under normal circumstances,
the Fund will invest at least 65% of its total assets in common stock, warrants,
and options to purchase common stock.
In making investment decisions for the Fund, the Adviser classifies
approximately 1000 companies by market value and growth characteristics on a
quarterly basis. Due to the number of possible growth stock investments, the
Adviser uses a selection process employing advanced quantitative techniques to
identify buy and sell candidates in an effort to select and hold those companies
which appear able to consistently achieve superior returns by reinvesting
profits into attractive new projects and products. Dividend income is,
therefore, incidental and not an objective of the Fund. The Adviser's
sophisticated investment approach uses an internally designed valuation process
which measures the persistence of future cash flows, the acceleration of
profitability, and evaluates a company's revenue generation relative to its
stock price. The goal of this investment process is to identify businesses where
superior growth appears sustainable and avoid or sell companies where growth is
beginning to deteriorate. The Fund will concentrate on long-term growth
industries where market leaders produce superior products and/or services and
demonstrate a competitive advantage.
Pilot Growth Fund may also acquire debt obligations, including both convertible
and non-convertible corporate and government bonds, debentures, zero coupon
bonds and cash equivalents. "Cash equivalents" include commercial paper (which
is unsecured promissory notes issued by corporations); certificates of deposit,
bankers' acceptances, notes and time deposits issued or supported by U.S. or
foreign banks and savings institutions; repurchase agreements; variable or
floating rate notes; U.S. Government obligations; and money market mutual fund
shares. Under normal conditions, the Fund will not invest more than 10% of its
total assets in debt obligations, unless the Fund assumes a temporary defensive
position as discussed below. The Fund will purchase only those debt obligations
which are rated AA or better by at least one nationally recognized statistical
rating organization ("NRSRO") or, if unrated, are determined by the Adviser to
be of comparable quality. (A description of applicable ratings is attached to
the Statement of Additional Information as Appendix A.)
The Fund may invest in the securities of foreign issuers, either directly in the
securities of such issuers or indirectly through American Depository Receipts
("ADRs") and European Depository Receipts ("EDRs"). ADRs are receipts typically
issued by a United States bank or trust company, and EDRs are receipts issued by
a European financial institution evidencing ownership of the underlying foreign
securities. ADRs, in registered form, are designed for use in the United States
securities markets, while EDRs, in bearer form, are generally designed for use
in the European securities markets. These securities may not be denominated in
the same currency as the securities they represent. The Fund will not invest
more than 5% of its total assets in foreign securities.
The Fund may also invest in futures contracts and options. From time to time,
the Funds may hold cash reserves that do not earn income. For a further
description of the Fund's policies with respect to convertible securities,
foreign securities and other instruments, see "Portfolio Instruments and
Practices" and "Risk Factors" below.
The Fund reserves the right to invest up to 100% of its assets in cash, cash
equivalents and debt obligations when the Adviser believes such a position is
advisable for temporary defensive purposes during periods of unusual market or
economic activity.
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Pilot Diversified Bond Income Fund
Pilot Diversified Bond Income Fund offers investors a means of participating in
the fixed income securities market.
The investment objective of Pilot Diversified Bond Income Fund is to seek
current income consistent with preservation of capital by investing primarily in
debt securities. The Fund seeks total return as a secondary objective. While
there are no restrictions on the maturity of individual securities selected by
the Fund, the Fund's average weighted maturity will be between five and fifteen
years except during temporary defensive periods or unusual market conditions.
Under normal circumstances, Pilot Diversified Bond Income Fund invests at least
65% of its total assets in "bonds," which term refers to instruments identified
as bonds as well as other debt securities, such as debentures, notes,
asset-backed and mortgage-backed securities, variable and floating rate
instruments, zero coupon and stripped securities, participations and trust
receipts, ADRs and EDRs, and cash equivalents, and includes obligations of U.S.
and foreign corporate and government issuers. The Fund does currently intend to
invest more than 5% of its total assets in foreign securities. See "Pilot Growth
Fund" above for a description of ADRs, EDRs, and cash equivalents. The Fund will
purchase only those debt securities rated A or better by at least one NRSRO or,
if unrated, determined by the Adviser to be of comparable quality. If a
portfolio security ceases to be rated at least A or if the Adviser determines
that an unrated security held by the Fund is no longer of comparable quality,
the Fund may continue to hold that security so long as the security is rated at
least BBB (or its equivalent) by at least one NRSRO or, if unrated, is
determined by the Adviser to be of comparable quality. The value of such
downgraded securities will not exceed 35% of the Fund's total assets.
The Fund may also invest in futures contracts and options. From time to time,
the Fund may also hold uninvested cash reserves which do not earn income. For a
further description of the Fund's policies with respect to foreign securities
and other instruments, see "Portfolio Instruments and Practices" and "Risk
Factors" below.
The value of the Fund's portfolio (and consequently its shares) is expected to
fluctuate inversely in relation to changes in the direction of interest rates.
PORTFOLIO INSTRUMENTS AND PRACTICES
- -- U.S. Government Obligations. EACH FUND may invest in securities issued or
guaranteed by the U.S. Government, as well as in obligations issued or
guaranteed by U.S. Government agencies and instrumentalities. Securities issued
or guaranteed by the U.S. Government or its agencies and instrumentalities
include U.S. Treasury securities, which differ only in their interest rates,
maturities and times of issuance: Treasury Bills have initial maturities of one
year or less; Treasury Notes have initial maturities of one to ten years; and
Treasury Bonds generally have initial maturities of greater than ten years. Some
obligations issued or guaranteed by certain U.S. Government agencies and
instrumentalities, such as the Government National Mortgage Association, are
supported by the U.S. Treasury; others, like the Export-Import Bank, are
supported by the issuer's right to borrow from the Treasury; others, including
the Federal National Mortgage Association, are backed by the discretionary
ability of the U.S. Government to purchase the entity's obligations; and still
others, like the Student Loan Marketing Association, are backed solely by the
issuer's credit. U.S. Government obligations also include U.S. Government-backed
trusts that hold obligations of foreign governments and are guaranteed or backed
by the full faith and credit of the United States. There is no assurance that
the U.S. Government would support a U.S. Government-sponsored entity were it not
required to do so by law.
- --Asset-Backed and Mortgage-Backed Securities. EACH FUND may invest in
asset-backed securities (i.e. securities backed by installment sale contracts,
credit card receivables or other assets.) In addition, each Fund may make
significant investments in U.S. Government securities that are backed by
adjustable or fixed rate mortgage loans. The rate of prepayments on asset-backed
instruments and hence the life of the security, will be primarily a function of
current market rates and current conditions in the relevant market. In
calculating the average weighted maturity of a Fund's portfolio, the maturity of
asset-backed instruments will be based on estimates of average life. The
relationship between prepayments and interest rates may give some high-yielding
asset-backed securities less potential for growth in value than conventional
bonds with comparable maturities. In addition, in periods of falling interest
rates, the rate of prepayment tends to increase. During such periods, the
reinvestment of prepayment proceeds by a Fund will generally be at lower rates
than the rates that were carried by the obligations that have been prepaid.
Because of these and other reasons, an asset-backed security's total return may
be difficult to predict precisely. To the extent a Fund purchases asset-backed
securities at a premium, prepayments (which often may be made at any time
without penalty) may result in
4
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some loss of a Fund's principal investment to the extent of any premiums paid.
The timely payment of principal and interest on mortgage-backed securities
issued or guaranteed by the Government National Mortgage Association ("GNMA") is
backed by GNMA and the full faith and credit of the U.S. Government. These
guarantees, however, do not apply to the market value or yield of
mortgage-backed securities or the value of a Fund's shares. Also, GNMA and other
mortgage-backed securities may be purchased at a premium over the maturity value
of the underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs. Each Fund may also invest in mortgage-backed securities of
other issuers, such as the Federal National Mortgage Association, which are not
guaranteed by the U.S. Government. Moreover, each Fund may invest in debt
securities which are secured with collateral consisting of mortgage-backed
securities and in other types of mortgage-related securities. Unscheduled or
early payments on the underlying mortgage may shorten the effective maturities
of mortgage-backed securities and lessen their growth potential. A Fund may
agree to purchase or sell these securities with payment and delivery taking
place at a future date. A decline in interest rates may lead to a faster rate of
repayment of the underlying mortgages and expose a Fund to a lower rate of
return on reinvestment. To the extent that such mortgage-backed securities are
held by a Fund, the prepayment right of mortgagors may limit the increase in net
asset value of the Fund because the value of the mortgage-backed securities held
by the Fund does not appreciate as rapidly as the price of non-callable debt
securities.
- -- Corporate Obligations. EACH FUND may purchase corporate bonds and cash
equivalents that meet a Fund's quality and maturity limitations. These
investments may include obligations issued by Canadian corporations and Canadian
counterparts of U.S. corporations, Eurobonds, which are U.S. dollar-denominated
obligations of foreign issuers, and Yankee bonds, which are U.S. dollar-
denominated bonds issued by foreign issuers in the U.S., and equipment trust
certificates. Each Fund may also purchase obligations issued by foreign
corporations. Corporate bonds are subject to call risk during periods of falling
interest rates. Securities with high stated interest rates may be prepaid (or
called) prior to maturity, requiring a Fund to invest the proceeds at generally
lower interest rates.
Cash equivalents, such as commercial paper and other similar obligations
purchased by a Fund that have an original maturity of thirteen months or less,
will either have short-term ratings at the time of purchase in the top two
categories by one or more NRSROs or be issued by issuers with such ratings.
Unrated instruments of these types purchased by a Fund will be determined by the
Adviser to be of comparable quality.
- -- Repurchase Agreements. EACH FUND may enter into repurchase agreements which
involve a purchase of portfolio securities subject to the seller's agreement to
repurchase them at an agreed upon time and price. The Funds will enter into
repurchase agreements only with financial institutions (such as banks and
broker-dealers) deemed to be creditworthy by the Adviser, pursuant to guidelines
established by the Board of Trustees. The term of these agreements is usually
from overnight to one week and in any event, the Funds intend that such
agreements will not have maturities longer than 60 days.
A repurchase agreement may be viewed as a fully collateralized loan of money by
a Fund to the seller. During the term of any repurchase agreement, the Adviser
will monitor the creditworthiness of the seller, and the seller must maintain
the value of the securities subject to the agreement in an amount that is
greater than the repurchase price. Default or bankruptcy of the seller would,
however, expose a Fund to possible loss because of adverse market action or
delays connected with the disposition of the underlying obligations. Because of
the seller's repurchase obligation, the securities subject to repurchase
agreements do not have maturity limitations.
- -- Reverse Repurchase Agreements. EACH FUND is authorized to make limited
borrowings for temporary purposes by entering into reverse repurchase
agreements. Under such an agreement a Fund sells portfolio securities to
financial institutions (such as banks and broker-dealers) and then buys them
back later at an agreed-upon time and price. When a Fund enters into a reverse
repurchase agreement it will place in a separate custodial account either liquid
assets or high grade debt securities that have a value equal to or more than the
price a Fund must pay when it buys back the securities, and the account will be
continuously monitored by the Adviser to make sure the appropriate value is
maintained. Reverse repurchase agreements involve the possible risk that the
value of portfolio securities a Fund relinquishes may decline below the price a
Fund must pay when the transaction closes. Interest paid by a Fund in a reverse
repurchase or other borrowing transaction will reduce a Fund's income. The Funds
will only enter into reverse repurchase agreements to avoid the need to sell
portfolio securities to meet redemption requests during unfavorable market
conditions.
- --Variable and Floating Rate Instruments. EACH FUND may purchase variable and
floating rate instruments.
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<PAGE> 8
These instruments may include variable amount master demand notes, which are
instruments under which the indebtedness represented by the instrument as well
as its interest rate may vary. Because of the absence of a market in which to
resell variable or floating rate instruments, a Fund might have trouble selling
an instrument should the issuer default or during periods when a Fund is not
permitted by agreement to demand payment of the instrument, and for this or
other reasons a loss could occur with respect to the instrument.
- -- Zero Coupon Securities. EACH FUND may invest in zero coupon securities. Zero
coupon securities are debt obligations which do not entitle the holder to any
periodic payments of interest prior to maturity or a specified date when the
securities begin paying current interest (the "cash payment date") and therefore
are issued and traded at a discount from their face amounts or par value. Such
bonds carry an additional risk in that, unlike bonds which pay interest
throughout the period to maturity, a Fund will realize no cash until the cash
payment date and, if the issuer defaults, the Fund may obtain no return at all
on its investment.
A Fund will be required to include in income daily portions of original issue
discount accrued which will cause the Fund to be required to make distributions
of such amounts to shareholders annually, even if no payment is received before
the distribution date. These distributions must be made from the Fund's cash
assets or, if necessary, from the proceeds of sales of portfolio securities. The
Fund will not be able to purchase additional income producing securities with
cash used to make such distributions and its current income ultimately may be
reduced as a result.
- -- Stripped Securities. EACH FUND may invest in instruments known as "stripped"
securities. These instruments include U.S. Treasury bonds and notes and federal
agency obligations on which the unmatured interest coupons have been separated
from the underlying obligation. These obligations are usually issued at a
discount to their "face value", and because of the manner in which principal and
interest are returned may exhibit greater price volatility than more
conventional debt securities. Each Fund may invest in "interest only" stripped
securities that have been issued by a federal instrumentality known as the
Resolution Funding Corporation and other stripped securities issued or
guaranteed by the U.S. Government, where the principal and interest components
are traded independently under the Separate Trading of Registered Interest and
Principal Securities program ("STRIPS"). Each Fund may also invest in
instruments that have been stripped by their holder, typically a custodian bank
or investment brokerage firm, and then resold in a custodian receipt program
under names such as TIGRS (Treasury Income Growth Receipts) and CATS
(Certificates of Accrual on Treasuries).
In addition, EACH FUND may purchase stripped mortgage-backed securities ("SMBS")
issued by the U.S. Government (or a U.S. Government agency or instrumentality)
or by private issuers such as banks and other institutions. SMBS, in particular,
may exhibit greater price volatility than ordinary debt securities because of
the manner in which their principal and interest are returned to investors.
- -- Participations and Trust Receipts. EACH FUND may purchase from domestic
financial institutions and trusts created by such institutions participation
interests and trust receipts in high quality debt securities. A participation
interest or receipt gives a Fund an undivided interest in the security in the
proportion that a Fund's participation interest or receipt bears to the total
principal amount of the security. Each Fund intends only to purchase
participations and trust receipts from an entity or syndicate, and do not intend
to serve as a co-lender in any such activity.
- --When-Issued Purchases, Forward Commitments and Delayed Settlements. EACH FUND
may purchase securities on a "when-issued" basis and purchase or sell securities
on a "forward commitment" basis. Additionally, the Funds may purchase or sell
securities on a "delayed settlement" basis.
When-issued and forward commitment transactions, which involve a commitment by a
Fund to purchase or sell particular securities with payment and delivery taking
place at a future date (perhaps one or two months later), permit a Fund to
lock-in a price or yield on a security it intends to purchase or sell,
regardless of future changes in interest rates. Delayed settlement refers to a
transaction in the secondary market that will settle some time in the future.
These transactions involve the risk that the price or yield obtained may be less
favorable than the price or yield available when the delivery takes place.
When-issued purchases, forward commitments and delayed settlement transactions
are not expected to exceed 25% of the value of a Fund's total assets under
normal circumstances. In the event a Fund's when-issued purchases, forward
commitments and delayed settlement transactions ever exceeded 25% of the value
of its total assets, a Fund's liquidity and the ability of the Adviser to manage
the Fund might be adversely affected. These transactions will not be entered
into for speculative purposes but only in furtherance of a Fund's investment
objective.
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- -- Other Investment Companies. EACH FUND may invest in the securities of other
mutual funds that invest in the particular instruments in which a Fund itself
may invest subject to requirements of applicable securities laws. The Trust, on
behalf of each of the Funds, has sought relief from the SEC to permit each Fund
to invest in affiliated money market funds. Such relief is currently pending
before the SEC. Neither Fund will invest in an affiliated money market fund
unless and until relief is granted. When a Fund invests in another mutual fund,
it pays a pro rata portion of the advisory and other expenses of that fund as a
shareholder of that fund. These expenses are in addition to the advisory and
other expenses a Fund pays in connection with its own operations. The Adviser
may waive its advisory fee on that portion of any Fund's assets which are
invested in the securities of affiliated money market funds managed by the
Adviser or any of its affiliates.
- -- Securities Lending. EACH FUND may lend securities held in its portfolio to
financial institutions (such as banks and broker-dealers) as a means of earning
additional income. These loans present risks of delay in receiving additional
collateral or in recovering the securities loaned or even a loss of rights in
the collateral should the borrower of the securities fail financially. However,
securities loans will be made only to financial institutions the Adviser deems
to be of good standing, and will only be made if the Adviser thinks the possible
rewards from such loan justify the possible risks. A loan will not be made if,
as a result, the total amount of a Fund's outstanding loans exceeds 33 1/3% of
its total assets. Securities loans will be fully collateralized.
- -- Mortgage Rolls. PILOT DIVERSIFIED BOND INCOME FUND may enter into
transactions known as "mortgage dollar rolls" in which the Fund sells
mortgage-backed securities for current delivery and simultaneously contracts to
repurchase substantially similar securities in the future at a specified price
which reflects an interest factor and other adjustments. During the roll period,
the Fund does not receive principal and interest on the mortgage-backed
securities but it does earn interest on the cash proceeds of the initial sale.
In addition, the Fund is paid a fee as consideration for entering into the
commitment to purchase. Unless a roll has been structured so that it is
"covered," meaning that there exists an offsetting cash or cash-equivalent
security position that will mature at least by the time of settlement of the
roll transaction, cash or U.S. Government securities or other liquid high grade
debt instruments in the amount of the future purchase commitment will be set
apart for the Fund in a separate account at the custodian. Mortgage rolls are
not a primary investment technique for the Fund, and it is expected that, under
normal market conditions, the Fund's commitments under mortgage rolls will not
exceed 10% of the value of its total assets.
- -- Options. EACH FUND may write covered call options, buy put options, buy call
options and sell, or "write," secured put options on particular securities or
various securities indices. A call option for a particular security gives the
purchaser of the option the right to buy, and a writer the obligation to sell,
the underlying security at the stated exercise price at any time prior to the
expiration of the option, regardless of the market price of the security. The
premium paid to the writer is the consideration for undertaking the obligations
under the option contract. A put option for a particular security gives the
purchaser the right to sell the underlying security at the stated exercise price
at any time prior to the expiration date of the option, regardless of the market
price of the security. In contrast to an option on a particular security, an
option on a securities index provides the holder with the right to make or
receive a cash settlement upon exercise of the option.
Options purchased by a Fund will not exceed 5%, and options written by a Fund
will not exceed 25%, of its net assets.
OPTIONS TRADING IS A HIGHLY SPECIALIZED ACTIVITY AND MAY CARRY GREATER THAN
ORDINARY INVESTMENT RISK. Purchasing options may result in the complete loss of
the amounts paid as premiums to the writer of the option. In writing a covered
call option, a Fund gives up the opportunity to profit from an increase in the
market price of the underlying security above the exercise price (except to the
extent the premium represents such a profit). Moreover, it will not be able to
sell the underlying security until the covered call option expires or is
exercised or a Fund closes out the option. In writing a secured put option, a
Fund assumes the risk that the market value of the security will decline below
the exercise price of the option. The Funds may use options to manage their
exposure to changing interest rates and/or security prices. The use of covered
call and secured put options will not be a primary investment technique of any
Fund.
- -- Futures and Related Options. EACH FUND may enter into futures contracts and
options on such futures contracts to protect against the effect of anticipated
market or interest rate fluctuations on securities that a Fund holds in its
portfolio or intends to sell or purchase. Futures contracts obligate a Fund, at
maturity, to take or make delivery of certain securities or the cash value of a
securities index. A Fund may not purchase or sell a futures contract (or related
option) except for bona fide hedging purposes unless immediately after any such
transaction the sum of the aggregate amount of margin
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<PAGE> 10
deposits on its existing futures positions and the amount of premiums paid for
related options is 5% or less of its total assets (after taking into account
certain technical adjustments).
EACH FUND may also purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When a Fund purchases an option on a
futures contract, it has the right to assume a position as a purchaser or seller
of a futures contract at a specified exercise price at any time during the
option period. When a Fund sells an option on a futures contract, it becomes
obligated to purchase or sell a futures contract if the option is exercised. In
anticipation of a market advance, a Fund may purchase call options on futures
contracts as a substitute for the purchase of futures contracts to hedge against
a possible increase in the price of securities which a Fund intends to purchase.
Similarly, if the value of a Fund's portfolio securities is expected to decline,
the Fund might purchase put options or sell call options on futures contracts
rather than sell futures contracts.
More information regarding futures contracts and related options can be found in
the Statement of Additional Information, which is available upon request.
- --Forward Foreign Currency Exchange Contracts. Because EACH FUND may buy and
sell securities and receive dividend and interest proceeds in currencies other
than the U.S. dollar, the Funds may from time to time enter into forward foreign
currency exchange contracts ("forward contracts"). A forward contract involves
an obligation to purchase or sell a specific currency for an agreed price at a
future date, which may be any fixed number of days from the date of the
contract.
The purpose of entering into these contracts is to minimize the risk to the
Funds from adverse changes in the relationship between the U.S. dollar and
foreign currencies. At the same time, such contracts may limit potential gain
from a positive change in the relationship between the U.S. dollar and foreign
currencies. The use of currency transactions can result in a Fund incurring
losses as a result of a number of factors, including the imposition of exchange
controls, suspension of settlements, or the inability to deliver or receive a
specified currency. Unanticipated changes in currency prices may result in
poorer overall performance for a Fund than the performance it would have had if
it had not engaged in forward contracts.
- -- Liquidity Considerations. An illiquid investment is any investment that
cannot be disposed of within seven days in the normal course of business at
approximately the amount at which it is valued by a Fund. Disposing of illiquid
investments may involve time-consuming negotiations and legal expenses, and it
may be difficult or impossible to dispose of such investments promptly at an
acceptable price. Additionally, the absence of a trading market can make it
difficult to value a security. For these and other reasons, a FUND WILL NOT
INVEST MORE THAN 15% OF ITS NET ASSETS IN ILLIQUID SECURITIES. Illiquid
securities include repurchase agreements, securities loans and time deposits
that do not permit a Fund to terminate them after seven days notice, certain
certificates of participation, trust receipts, stripped mortgage-backed
securities issued by private issuers, over-the-counter options and securities
that are not registered under the securities laws. Certain securities that might
otherwise be considered illiquid, however, such as some issues of commercial
paper and variable amount master demand notes with maturities of nine months or
less and securities for which the Adviser has determined pursuant to guidelines
adopted by the Board of Trustees that a liquid trading market exists (including
certain securities that may be purchased by institutional investors under SEC
Rule 144A), are not subject to this 15% limitation.
- -- Portfolio Turnover. Although EACH FUND may engage in short-term trading to
achieve its investment objective, annual portfolio turnover rates for the Funds
are not expected to exceed 100% during the next twelve months. Portfolio
turnover will not be a limiting factor in making investment decisions. Portfolio
turnover may occur for a variety of reasons, including the appearance of a more
favorable investment opportunity. Turnover may require payment of brokerage
commissions, impose other transaction costs and could increase the amount of
income received by a Fund that constitutes taxable capital gains. To the extent
capital gains are realized, distributions from the gains may be ordinary income
for federal tax purposes (see "The Business of the Fund--Tax Implications").
- -- Other Information. Certain brokers who are affiliated with The Pilot Funds
may act as broker for the Funds on exchange portfolio transactions, subject,
however, to procedures adopted by the Board of Trustees. Commissions, fees or
other remuneration paid to an affiliated broker must be at least as favorable as
those which the Trustees believe to be charged by other brokers in connection
with comparable transactions involving similar securities being purchased or
sold on a securities exchange during a comparable period of time. A transaction
will not be placed with an affiliated broker if a Fund would have to pay a
commission rate less favorable than the affiliated broker's contemporaneous
charges for comparable transactions for its other most favored, but
unaffiliated, customers,
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<PAGE> 11
except for accounts for which the affiliated broker acts as a clearing broker
for another brokerage firm, and any customers of the affiliated broker not
comparable to The Pilot Funds as determined by the Board of Trustees.
The Pilot Funds has also adopted certain procedures which enable a Fund to
purchase certain instruments during the existence of an underwriting or selling
syndicate of which an affiliated broker is a member. These procedures establish
certain limitations on the amount of securities which can be purchased in any
single offering and on the amount of a Fund's assets which may be invested in
any single offering. Because of the active role which may be played by
affiliated brokers in the underwriting of securities, a Fund's ability to
purchase securities in the primary market may from time to time be limited.
RISK FACTORS
- -- General Risk Considerations. As with an investment in any mutual fund, an
investment in the Funds entails market and economic risks associated with
investments generally. However, there are certain specific risks of which you
should be aware.
Generally, the market value of fixed income securities in the Funds can be
expected to vary inversely to changes in prevailing interest rates. You should
be aware that in periods of declining interest rates the market value of
investment portfolios comprised primarily of fixed income securities will tend
to increase, and in periods of rising interest rates the market value will tend
to decrease. You should also be aware that in periods of declining interest
rates, the yields of investment portfolios comprised primarily of fixed income
securities will tend to be higher than prevailing market rates and, in periods
of rising interest rates, yields will tend to be somewhat lower. The Funds may
purchase zero-coupon bonds (i.e., discount debt obligations that do not make
periodic interest payments). Zero-coupon bonds are subject to greater market
fluctuations from changing interest rates than debt obligations of comparable
maturities which make current distributions of interest. Debt securities with
longer maturities, which tend to produce higher yields, are subject to
potentially greater capital appreciation and depreciation than obligations with
shorter maturities. Changes in the financial strength of an issuer or changes in
the ratings of any particular security may also affect the value of these
investments. Fluctuations in the market value of fixed income securities
subsequent to their acquisition will not affect cash income from such securities
but will be reflected in a Fund's net asset value.
The value of the equity securities held by Pilot Growth Fund can be expected to
vary in response to a variety of factors. Stock values fluctuate in response to
the activities of individual companies and in response to general market and
economic conditions. In general, equity securities are subject to greater
fluctuations in value than fixed income securities. Therefore, while an
investment in Pilot Growth Fund is likely to have greater potential for total
return over the long term than an investment in Pilot Diversified Bond Income
Fund, it also presents greater risk of loss.
- -- Small Capitalization Companies. Pilot Growth Fund may invest in smaller,
lesser-known companies which the Adviser believes offer greater growth potential
than larger, more mature, better-known firms. Investing in the securities of
such companies, however, may also involve greater risk and the possibility of
greater portfolio price volatility. Among the reasons for the greater price
volatility of these small company and unseasoned stocks are the less certain
growth prospects of smaller firms, the lower degree of liquidity in the markets
for such stocks and the greater sensitivity of small companies to changing
economic conditions. For example, these companies are associated with higher
investment risk than that normally associated with larger firms due to the
greater business risks of small size and limited product lines, markets,
distribution channels and financial and managerial resources.
- -- Foreign Securities. There are risks and costs involved in investing in
securities of foreign issuers (including foreign governments), which are in
addition to the usual risks inherent in U.S. investments. Investments in foreign
securities may involve higher costs than investments in U.S. securities,
including higher transaction costs as well as the imposition of additional taxes
by foreign governments. In addition, foreign investments may involve further
risks associated with the level of currency exchange rates, less complete
financial information about the issuer, less market liquidity and political
instability. Future political and economic developments, the possible imposition
of withholding taxes on interest income, the possible seizure or nationalization
of foreign holdings, the possible establishment of exchange controls or the
adoption of other governmental restrictions might adversely affect the payment
of principal and interest on foreign obligations. Additionally, foreign banks
and foreign branches of domestic banks may be subject to less stringent reserve
requirements, and to different accounting, auditing and recordkeeping
requirements.
- -- Derivative Securities. The securities described above involving options,
futures contracts, options on futures contracts, forward commitments and forward
foreign
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<PAGE> 12
currency exchange contracts are frequently referred to as derivative securities.
In general, derivative securities are instruments whose value is based upon, or
derived from, some underlying index, reference rate (e.g., interest rates or
currency exchange rates), security, commodity, or other asset.
There are different risks associated with these securities. A more complete
description of these securities, including risk factors and limitations on their
use, can be found in the separate sections that describe them.
FUNDAMENTAL LIMITATIONS
Certain of the investment policies of each Fund may not be changed without a
vote of the holders of a majority of the Fund's outstanding shares. Policies
requiring such a vote to effect a change are known as "fundamental". Some of
these fundamental limitations are summarized below, and all of the Funds'
fundamental limitations are set out in full in the Statement of Additional
Information, which is available upon request.
1. A Fund may not invest 25% or more of its total assets in one or more issuers
conducting their principal business activities in the same industry (with
certain limited exceptions described in the Statement of Additional
Information).
2. A Fund may not invest (with certain limited exceptions, including U.S.
Government obligations, as described in the Statement of Additional Information)
more than 5% of its total assets in the securities of a single issuer or subject
to puts from any one issuer, except that up to 25% of the total assets of each
Fund can be invested without regard to the 5% limitation. A Fund may not
purchase more than 10% of the outstanding voting securities of any issuer
subject, however, to the foregoing 25% exception.
3. A Fund may not borrow money except as a temporary measure for extraordinary
or emergency purposes or except in connection with reverse repurchase agreements
and mortgage rolls; provided that the Fund will maintain asset coverage of 300%
for all borrowings.
4. A Fund may not make loans, except that it may invest in debt securities,
enter into repurchase agreements and lend its portfolio securities.
If a percentage limitation is met at the time an investment is made, a
subsequent change in that percentage that is the result of a change in value of
a Fund's portfolio securities does not mean that the limitation has been
violated.
In order to permit the sale of a Fund's shares (or a particular class of shares)
in some states, The Pilot Funds may agree to certain restrictions that may be
stricter than the investment policies and limitations discussed above. If The
Pilot Funds decide that any of these restrictions is no longer in a Fund's (or
class's) best interest, it may revoke its agreement to abide by such restriction
by no longer selling shares in the state involved.
INVESTING IN THE PILOT FUNDS
HOW TO BUY SHARES
Pilot Shares are sold on a continuous basis by Pilot Funds Distributors, Inc.
(the "Distributor").
Pilot Shares are sold to Boatmen's Trust Company (referred to as "Boatmen's" or
the "Adviser") and its affiliates (Boatmen's and such affiliates being sometimes
referred to herein individually as an "Institution" and collectively as
"Institutions") acting on behalf of themselves or their customers who maintain
qualified trust, agency or custodial accounts ("Customers"). Customers may
include individuals, trusts, partnerships, institutions and corporations. All
share purchases are effected through a Customer's account at an Institution
through procedures established in connection with the requirements of the
account, and confirmations of share purchases and redemptions will be sent to
the Institution involved. Institutions (or their nominees) will normally be the
holders of record of Pilot Shares acting on behalf of their Customers, and will
reflect their Customers' beneficial ownership of shares in the account
statements provided by them to their Customers. The exercise of voting rights
and the delivery to Customers of shareholder communications from the Funds will
be governed by the Customers' account agreements with the Institutions.
Pilot Shares are sold at the net asset value per share next determined after
receipt of a purchase order from an Institution by the Fund's transfer agent.
The minimum initial investment in a Fund for an Institution is $500,000 with no
minimum subsequent investment. Institutions may establish different minimum
investment requirements for their Customers and may charge their Customers
certain account fees depending on the type of account a Customer has established
with the Institution. These fees may include, for example, account maintenance
fees, compensating balance requirements or fees based upon account transactions,
assets or income. Information concerning these minimum account requirements,
services and any charges should be obtained from the Institutions before a
customer authorizes the purchase of Fund shares, and this Prospectus should be
read in conjunction with any information so obtained.
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<PAGE> 13
Purchase orders placed by an Institution for Pilot Shares must be received by
the Funds' transfer agent before the close of regular trading hours (currently
3:00 p.m. Central time) on the New York Stock Exchange (the "Exchange") on a day
when the Exchange is open for trading (a "Business Day"), which is Monday
through Friday except for holidays (scheduled Exchange holidays for 1996 are New
Years Day (observed), President's Day, Good Friday, Memorial Day, Independence
Day (observed), Labor Day, Thanksgiving Day and Christmas Day (observed)).
Payment for shares must be made by Institutions in federal funds or other funds
immediately available to the Funds' custodian no later than 3:00 p.m. (Central
time) on the Business Day immediately following placement of the purchase order.
On those days when the Exchange closes early as a result of such day being a
partial holiday or otherwise, the right is reserved to advance the time on that
day by which purchase and redemption requests must be received.
It is the responsibility of Institutions to transmit orders for purchases by
their Customers promptly to the Funds in accordance with their agreements with
their Customers, and to deliver required investments on a timely basis. If
federal funds are not received within the period described, the order will be
canceled, notice will be given, and the Institution will be responsible for any
loss to The Pilot Funds or its beneficial shareholders. Payments for shares of a
Fund may, at the discretion of the Adviser, be made in the form of securities
that are permissible investments for that Fund. For further information see
"In-Kind Purchases" in the Statement of Additional Information.
Purchase orders must include the purchasing Institution's tax identification
number. The Pilot Funds reserves the right to reject any purchase order or to
waive the minimum initial investment requirement. Payment for orders which are
not received or accepted will be returned after prompt notice. The issuance of
shares is recorded in the shareholder records of the Funds, and share
certificates will not be issued.
HOW TO SELL SHARES
Redemption orders are effected at the net asset value per share next determined
after receipt of the order from an Institution by The Pilot Funds' transfer
agent. The Pilot Funds imposes no charges when Pilot Shares are redeemed.
Institutions may charge fees to their Customers for their services in connection
with the instructions and limitations pertaining to the account at the
Institution.
The Funds may suspend the right of redemption or postpone the date of payment
upon redemption (as well as suspend the recordation of the transfer of its
shares) for such periods as permitted under the Investment Company Act of 1940.
The Pilot Funds intends to pay cash for all shares redeemed, but in unusual
circumstances may make payment wholly or partly in readily marketable portfolio
securities at their then market value equal to the redemption price if it
appears appropriate to do so in light of the Funds' responsibilities under the
Investment Company Act of 1940. See the Statement of Additional Information
("Additional Purchase and Redemption Information") for examples of when such
redemptions might be appropriate. In those cases, an investor may incur
brokerage costs in converting securities to cash. The Funds may also redeem
shares involuntarily if the balance has fallen below the minimum level due to
shareholder redemptions and not as a result of market fluctuations.
It is the responsibility of the Institutions to provide their customers with
statements of account with respect to transactions made for their accounts at
the Institutions.
Share balances may be redeemed pursuant to arrangements between Institutions and
their Customers. It is the responsibility of an Institution to transmit
redemption orders to The Pilot Funds' transfer agent and to credit its
Customers' accounts with the redemption proceeds on a timely basis. The
redemption proceeds for all Funds are normally wired to the redeeming
Institution the following Business Day after receipt of the order by the
transfer agent. The Pilot Funds reserves the right, however, to delay the wiring
of redemption proceeds for up to seven days after receipt of a redemption order
if, in the judgment of the Adviser, an earlier payment could adversely affect a
Fund.
With respect to telephone transactions, The Pilot Funds and its service
contractors will employ reasonable procedures to ensure that instructions
communicated by phone are genuine; if these procedures are not followed, The
Pilot Funds or its service contractors may be liable for any losses due to
unauthorized or fraudulent instructions. These procedures include recording all
phone conversations, sending confirmation to shareholders of telephone
transactions, verifying the account name and a shareholder's account number or
tax identification number, and sending redemption proceeds only to the address
of record or to a previously authorized bank account. Each party who establishes
an account directly with The Pilot Funds automatically has the ability to engage
in telephone transactions unless that party elects otherwise.
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<PAGE> 14
The net asset value of shares that are redeemed may be more or less than their
original cost, depending on a Fund's current net asset value.
Explanation of Sales Price
Pilot Shares of the Funds are sold at net asset value. Net asset value per share
is determined on each Business Day (as defined above) at 3:00 p.m. (Central
time) with respect to each Fund by adding the value of a Fund's investments,
cash and other assets attributable to its Pilot Shares, subtracting the Fund's
liabilities attributable to those shares, and then dividing the result by the
number of Pilot Shares in the Fund that are outstanding. The assets of the Funds
are valued at market value or, if market quotes cannot be readily obtained, fair
value is used as determined by the Board of Trustees. Debt securities held by
these Funds that have sixty days or less until they mature are valued at
amortized cost, which generally approximates market value. More information
about valuation can be found in the Funds' Statement of Additional Information,
which is available upon request.
DIVIDENDS AND DISTRIBUTIONS
Where do your dividends and distributions come from?
Dividends for each Fund are derived from its net investment income. For Pilot
Diversified Bond Income Fund, it comes from the interest on the bonds and other
investments that it holds in its portfolio. For Pilot Growth Fund, net
investment income is made up of dividends received from the stocks it holds, as
well as interest accrued on convertible securities, money market instruments and
other debt obligations held in its portfolio.
The Funds realize capital gains when they sell a security for more than its
cost. Each Fund may make distributions of its net realized capital gains, if
any, after any reductions for capital loss carryforwards.
What are your dividend and distribution options?
Shareholders of record receive dividends and net capital gain distributions.
Dividends and distributions will be paid in cash unless you specifically elect
to receive payment in additional shares of the same share class of a Fund for
which the dividend or distribution was declared. Your election and any
subsequent change should be made in writing to your Institution.
Your election is effective for dividends and distributions with record dates
(with respect to Pilot Growth Fund) or payment dates (with respect to Pilot
Diversified Bond Income Fund) after the date the Institution receives the
election.
When are dividends and distributions declared and paid?
<TABLE>
<CAPTION>
DIVIDENDS
ARE DIVIDENDS
FUND DECLARED ARE PAID
- ------------------------------ -------- ------------------
<S> <C> <C>
Pilot Growth Fund............. Monthly Monthly
Pilot Diversified Bond Income
Fund(1)..................... Daily Monthly within
five business days
of month end
</TABLE>
- ------------
(1) Shares of Pilot Diversified Bond Income Fund begin earning dividends the
first Business Day after acceptance of the purchase order for which The
Pilot Funds' custodian has received payment and stop earning dividends the
Business Day such shares are redeemed.
With respect to Pilot Diversified Bond Income Fund, if all of the Pilot Shares
held by an Institution in such a Fund are redeemed, the Fund will make a cash
payment of any accrued dividends within five business days after redemption.
Net capital gain distributions for each of the Funds, if any, are distributed at
least annually after any reductions for capital loss carryforwards.
EXCHANGE PRIVILEGE
If you wish, Pilot Shares of a Fund may be exchanged for Class A Shares of the
same Fund without payment of a sales charge in connection with the distribution
of assets held in a qualified trust, agency or custodial account maintained with
Boatmen's or its affiliates. Similarly, a Customer may exchange Class A Shares
for Pilot Shares of the same Fund if the shares are to be held in such a
qualified trust, agency or custodial account. Pilot Shares of a Fund may also be
exchanged for Pilot Shares of any of the other investment portfolios of The
Pilot Funds. Class A Shares are subject to the same shareholder transaction
expenses as Pilot Shares except that purchases of Class A Shares (other than by
exchange) may be subject to a front end sales charge. Class A Shares are subject
to the same annual fund operating expenses as Pilot Shares except that Class A
Shares are subject to annual Rule 12b-1 Distribution payments of 0.25% of
average net assets. In addition, the procedures for effecting transactions in
Fund shares and other features related to the servicing and maintenance of Fund
accounts may differ for Class A Shares from those applicable to Pilot Shares
depending on whether a shareholder chooses to hold the account containing Class
A Shares directly with the Funds or through a broker/dealer or other
intermediary institution (a "Service Organization"). For more information on
holding Class A Shares of a Fund, please see the
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<PAGE> 15
prospectus for Class A and B Shares which can be obtained by calling 1/800
71-PILOT and, where appropriate, consult the Service Organization through which
the Class A Shares of the Fund received by exchange will be held. The particular
class of shares or Fund you are exchanging into must be registered for sale in
your state. The exchange privilege may be modified or terminated at any time. At
least 60 days' notice will be given to shareholders of any material modification
or termination of the exchange privilege except where notice is not required by
the Securities and Exchange Commission.
THE PILOT FAMILY OF FUNDS
The Pilot Funds was organized on July 15, 1982 as a Massachusetts business trust
under the name Centerland Fund. On June 1, 1994, its name was changed to The
Pilot Funds. The Pilot Funds is a mutual fund of the type known as an "open-end
management investment company." A mutual fund permits an investor to pool his or
her assets with those of others in order to achieve economies of scale, take
advantage of professional money managers and enjoy other advantages
traditionally reserved for large investors. The Agreement and Declaration of
Trust permits the Board of Trustees of The Pilot Funds to create separate series
or portfolios of shares. To date, fourteen portfolios have been established. The
Agreement and Declaration of Trust also permits the Board of Trustees to
classify or reclassify any series or portfolio of shares into one or more
classes. The Trustees have authorized the issuance of an unlimited number of
shares in each of three share classes (Pilot Shares, Class A Shares and Class B
Shares) in the Funds. Each Fund is classified as a diversified company.
Information regarding The Pilot Funds' other portfolios may be obtained by
contacting The Pilot Funds or the Distributor.
The Pilot Shares of the Funds are described in this prospectus. The Funds also
offer Class A and Class B Shares. Class A Shares are sold with maximum 4.5% and
4.0% front-end sales charges, and Class B Shares are sold with maximum 4.5% and
4.0% contingent deferred sales charges. Pilot, Class A and Class B Shares bear
their pro rata portion of all operating expenses paid by the Funds. In addition,
Class A and Class B Shares bear all payments under the Funds' Distribution Plans
(the "Plans"). Under the Plans the Distributor receives fees for distribution
and shareholder support services.
Payments under the Distribution Plan for Class A Shares may be made for payments
to broker-dealers and financial institutions under agreements with those
organizations for personal services provided to Class A shareholders and/or the
maintenance of Class A shareholder accounts. Payments under the Distribution
Plan for Class B Shares, in addition to being used for the same purposes as
payments under the Distribution Plan for Class A Shares, may be used to
reimburse sales commissions and other fees paid to broker-dealers who sell Class
B Shares and may also be used for advertising and marketing. Payments under the
Distribution Plan for Class A Shares may not exceed .25% (on an annual basis) of
the average daily net asset value of outstanding Class A Shares. Payments under
the Distribution Plan for Class B Shares may not exceed 1.00% (on an annual
basis) of the average daily net asset value of outstanding Class B Shares.
Distribution payments under the Distribution Plans are subject to the
requirements of a rule under the Investment Company Act of 1940 known as Rule
12b-1.
The Pilot Funds offers various services and privileges in connection with its
Class A and Class B Shares that are not offered in connection with its Pilot
Shares, including an automatic investment plan and an automatic withdrawal plan.
Class B Shares convert automatically to Class A Shares eight years after the
beginning of the calendar month in which the shares were purchased. Persons
selling or servicing Class A and Class B Shares of the Funds may receive
different compensation with respect to one particular class of shares over
another in the same Fund. For more information on Class A and Class B Shares
call 800/71-PILOT.
SHAREHOLDERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND PROPORTIONATE
FRACTIONAL VOTES FOR FRACTIONAL SHARES HELD. Shares of all the Pilot Fund
portfolios vote together and not by class, unless otherwise required by law or
permitted by the Board of Trustees. All shareholders of a particular Fund will
vote together as a single class on matters relating to the Fund's investment
advisory agreement and fundamental investment policies. Only Class A
shareholders, however, will vote on matters relating to the Distribution Plan
for Class A Shares and only Class B shareholders will vote on matters relating
to the Distribution Plan for Class B Shares.
THE PILOT FUNDS IS NOT REQUIRED TO AND DOES NOT CURRENTLY EXPECT TO HOLD ANNUAL
MEETINGS OF SHAREHOLDERS, ALTHOUGH SPECIAL MEETINGS MAY BE CALLED FOR PURPOSES
SUCH AS ELECTING OR REMOVING TRUSTEES OR OTHER PURPOSES.
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<PAGE> 16
THE BUSINESS OF THE FUND
FUND MANAGEMENT
THE BUSINESS AFFAIRS OF THE PILOT FUNDS ARE MANAGED UNDER THE GENERAL
SUPERVISION OF THE BOARD OF TRUSTEES.
SERVICE PROVIDERS
Adviser: BOATMEN'S TRUST COMPANY (referred to as "Boatmen's" or the "Adviser")
manages the investment portfolio of each Fund, selecting the investments and
making purchase and sale orders. Its principal offices are located at 100 North
Broadway, St. Louis, Missouri 63178-4737.
Administrator: BISYS FUND SERVICES L.P. (referred to as "BISYS"), is responsible
for coordinating the Fund's efforts and generally overseeing the operation of
the Funds' business. BISYS's principal offices are located at 3435 Stelzer Road,
Columbus, Ohio 43219. BISYS is a wholly-owned subsidiary of The BISYS Group,
Inc.
Distributor: The Fund's shares are sold on a continuous basis by the
Distributor, PILOT FUNDS DISTRIBUTORS, INC. (referred to as the "Distributor"),
a registered broker-dealer that is located at 3435 Stelzer Road, Columbus, Ohio
43219.
Custodian: BOATMEN'S TRUST COMPANY (referred to as "Boatmen's") is responsible
for holding the investments purchased by each Fund. Boatmen's has its principal
offices at 100 North Broadway, St. Louis, Missouri 63178-4737.
Transfer Agent: BISYS FUND SERVICES, INC. (referred to as the "Transfer Agent")
is the transfer and dividend disbursing agent of the Funds. It maintains the
account records of all shareholders and administers the distribution of all
income earned as a result of investing in the Funds. The Transfer Agent is
located at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
Fund Accountant: BISYS FUND SERVICES, INC. is the accounting agent responsible
for preparing the Funds' financial statements and determining daily net asset
value per share for the Funds.
MORE ABOUT BOATMEN'S. Founded in 1889, Boatmen's, a trust company organized
under the laws of Missouri, provides a broad range of trust and investment
services for individuals, privately and publicly held businesses, governmental
units, pension and profit sharing plans and other institutions and
organizations. As of June 30, 1996, Boatmen's and its affiliates managed $83
billion in assets ($45 billion over which they had investment discretion and $38
billion over which they did not have investment discretion).
Boatmen's Bancshares, Inc., Boatmen's parent, is a registered bank holding
company which owns substantially all of the outstanding capital stock of
numerous commercial banks and trust companies located in Arkansas, Illinois,
Iowa, Kansas, Missouri, New Mexico, Oklahoma, Tennessee and Texas; a mortgage
banking company, a credit life insurance company and a credit card bank.
Set forth below is certain performance data relating to a trust fund of the
Adviser (the "Commingled Fund"), which has been managed with full investment
authority by the Adviser. This Commingled Fund has a substantially similar
investment objective and uses substantially similar investment strategies and
techniques as will be used by Pilot Diversified Bond Income Fund.
THE PERFORMANCE INFORMATION SET FORTH BELOW REFLECTS PAST PERFORMANCE AND IS NOT
NECESSARILY INDICATIVE OF THE FUTURE PERFORMANCE OF PILOT DIVERSIFIED BOND
INCOME FUND, OR ANY OF THE OTHER INVESTMENT PORTFOLIOS OF THE PILOT FUNDS.
Performance will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
The Commingled Fund is not registered under the 1940 Act and therefore is not
subject to certain investment restrictions imposed by the Act. If the Commingled
Fund had been registered under the 1940 Act, its performance may have been
adversely affected.
PERFORMANCE FOR THE COMMINGLED FUND(1)
SHOWING AVERAGE ANNUAL TOTAL RETURNS(2) FOR VARIOUS
PERIODS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
AS ADJUSTED
TO REFLECT
PILOT SHARES
EXPENSES
------------
<S> <C>
One Year............................... 3.55%
------------
Since Inception*....................... 6.35%
</TABLE>
- ------------
* The Commingled Fund commenced operations January 1, 1992.
(1) The Commingled Fund consists of the Active Core Bond Fund, a collective
investment trust, for which Boatmen's Trust Company serves as trustee.
(2) The average annual total returns are calculated in conformity with
Securities and Exchange Commission guidelines. In addition, these returns
are adjusted to reflect the performance that the Commingled Fund would have
experienced if estimated operating expenses applicable to the Pilot Shares
had been incurred during the periods shown.
Boatmen's utilizes a team approach in managing Pilot Growth Fund.
14
<PAGE> 17
Mr. Michael E. Kenneally, CFA, Senior Vice President and Director of Research
for Boatmen's, is part of the team responsible for the day to day management of
the Pilot Growth Fund's investment activities. Mr. Kenneally currently oversees
Boatmen's fundamental and quantitative research efforts as well as passive and
quantitative investment management. His additional responsibilities include
investment product development, international equity investment, and equity
derivative strategies. Mr. Kenneally holds both a bachelor's degree in economics
and an MBA in finance from the University of Missouri. He joined Boatmen's in
1983 as an equity analyst, later became a quantitative analyst, and subsequently
worked as both a fixed-income portfolio manager and an equity portfolio manager.
Mr. Kenneally is also a member of the Association for Investment Management and
Research (AIMR), the St. Louis Society of Financial Analysts, the Chicago
Quantitative Alliance, and the Society of Quantitative Analysts.
Mr. Daniel N. Ginsparg, Senior Portfolio Manager & Manager of Quantitative
Research, is part of the team responsible for the day to day management of the
Pilot Growth Fund's investment activities. Mr. Ginsparg is responsible for
quantitative research applications and is involved in the management of The
Pilot Small Capitalization Equity Fund. Mr. Ginsparg received both his
bachelor's degree and MBA from the University of Missouri. He joined Boatmen's
in 1989 and is a member of the Chicago Quantitative Alliance, the Society of
Quantitative Analysts, and the St. Louis Society of Financial Analysts.
Mr. Joseph A. Bybee, CFA, Senior Portfolio Manager & Research Analyst, is part
of the team responsible for the day to day management of the Pilot Growth Fund's
investment activities. Mr. Bybee is the research analyst and portfolio manager
for Boatmen's growth equity portfolios, including the Growth Equity Fund. He
joined Boatmen's Trust Company of Texas, formerly Eagle Management & Trust, in
1988. Mr. Bybee earned his bachelor's degree with honors from the University of
the South and his MBA with honors from the University of Chicago. A Chartered
Financial Analyst, Mr. Bybee is also a member of the Houston Society of
Financial Analysts.
The Fixed Income Committee of Boatmen's is primarily responsible for the
day-to-day management of the investment portfolio of Pilot Diversified Bond
Income Fund.
Although expected to be infrequent, Boatmen's may consider the amount of Fund
shares sold by broker-dealers and others (including those who may be connected
with Boatmen's) in allocating orders for purchases and sales of portfolio
securities. This allocation may involve the payment of brokerage commissions or
dealer concessions. Boatmen's will not engage in this practice unless the
execution capability of and the amount received by such broker-dealer or other
company is believed to be comparable to what another qualified firm could offer.
MORE ABOUT BISYS. BISYS is an Ohio corporation that was organized in 1987 to
provide administrative services to mutual funds. BISYS is a wholly-owned
subsidiary of The BISYS Group, Inc. BISYS provides a wide range of such services
to the Funds, including maintaining the Funds' offices, providing statistical
and research data, coordinating the preparation of reports to shareholders,
calculating or providing for the calculation of the net asset values of Fund
shares and dividends and capital gain distributions to shareholders, and
performing other administrative functions necessary for the smooth operation of
the Funds. Certain officers of The Pilot Funds, namely Messrs. Martin Dean,
George O. Martinez, William J. Tomko, Alaina Metz, Eugene Spurbeck and Bruce
Treff, are also employees and/or officers of BISYS and the Distributor.
EXPENSES. In order to support the services described above, as well as other
matters essential to the operation of the Funds, the Funds incur certain
expenses. Expenses are paid out of a Fund's assets, and thus are reflected in
the Fund's dividends and net asset value, but they are not billed directly to
you or deducted from your account.
Boatmen's is entitled to advisory fees that are calculated daily and payable
monthly at the annual rate of 0.75% of Pilot Growth Fund's average daily net
assets and 0.55% of Pilot Diversified Bond Income Fund's average daily net
assets.
Additionally, BISYS is entitled to an administration fee from The Pilot Funds
which is calculated based on the net assets of all of the investment portfolios
of The Pilot Funds combined. Under the Administration Agreement, each Fund pays
its pro-rata share of an annual fee to BISYS, computed daily and payable
monthly, of .115 of 1% of The Pilot Funds' average net assets up to $1.5
billion, .110 of 1% of The Pilot Funds' average net assets on the next $1.5
billion and .1075 of 1% of The Pilot Funds' average net assets in excess of $3
billion.
Operating expenses borne by the Funds include taxes; interest; fees and expenses
of trustees and officers who
15
<PAGE> 18
are not also officers, directors, employees or holders of 5% or more of the
outstanding voting securities of the Adviser, BISYS or any of their affiliates;
Securities and Exchange Commission fees; state securities registration and
qualification fees; advisory fees; administration fees; charges of the custodian
and of the transfer and dividend disbursing agent; certain insurance premiums;
outside auditing and legal expenses; costs of preparing and printing
prospectuses for regulatory purposes and for distribution to shareholders; costs
of shareholder reports and meetings; and any extraordinary expenses. Each Fund
also pays any brokerage fees, commissions and other transaction charges (if any)
incurred in connection with the purchase and sale of its portfolio securities.
FEE WAIVERS. Expenses can be reduced by voluntary fee waivers and expense
reimbursements by Boatmen's and the Funds' other service providers, as well as
by certain mandatory expense limits imposed by some state securities regulators.
However, as to any amounts voluntarily waived or reimbursed, the service
providers retain the ability to be reimbursed by a Fund for such amounts prior
to fiscal year end. These waivers and reimbursements would increase the yield to
investors when made but would decrease yields if a Fund were required to
reimburse a service provider.
TAX IMPLICATIONS
As with any investment, you should consider the tax implications of an
investment in the Funds. The following is only a short summary of the important
tax considerations generally affecting the Funds and their shareholders. You
should consult your tax adviser with specific reference to your own tax
situation.
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX TREATMENT
OF DIVIDENDS AND DISTRIBUTIONS MADE TO YOU.
FEDERAL TAXES. Each Fund intends to qualify as a "regulated investment company"
under the Internal Revenue Code (called the "Code"), meaning that to the extent
a Fund's earnings are passed on to shareholders as required by the Code, the
Fund itself generally will not be required to pay federal income taxes.
In order to so qualify, each Fund intends to pay as dividends at least 90% of
its investment company taxable income. Investment company taxable income
includes taxable interest, dividends and gains attributable to market discount
on taxable as well as tax-exempt securities. To the extent you receive such a
dividend based on either investment company taxable income or the excess of net
short-term capital gain over net long-term capital loss, you would treat that
dividend as ordinary income in determining your gross income for tax purposes,
whether you received it in the form of cash or additional shares. Unless you are
exempt from federal income taxes, the dividends you receive from each Fund will
be taxable to you as ordinary income. Also, to the extent that a Fund's income
consists of dividends paid by U.S. corporations, a portion of the dividends paid
by the Fund may be eligible for the corporate dividends-received deduction.
Any distribution you receive of net long-term capital gain over net short-term
capital loss will be taxed as a long-term capital gain, no matter how long you
have held Fund shares. If you hold shares for six months or less, and during
that time receive a distribution that is taxable as a long-term capital gain,
any loss you might realize on the sale of those shares will be treated as a
long-term loss to the extent of the earlier capital gain distribution.
Before you purchase shares of a Fund, you should consider the effect of any
capital gain distributions (or if you are purchasing shares of Pilot Growth
Fund, you should consider both dividends and capital gain distributions) that
are expected to be declared or that have been declared, but not yet paid. When a
Fund makes these payments, its share price will be reduced by the amount of the
payment, so that you will in effect have paid full price for the shares and then
received a portion of your price back as a taxable distribution or dividend.
Any dividends declared by a Fund in October, November or December of a
particular year and payable to shareholders during those months will be deemed
to have been paid by the Fund and received by shareholders on December 31 of
that year, so long as the dividends are actually paid in January of the
following year.
Shareholders in the Funds may realize a taxable gain or loss when redeeming,
transferring or exchanging shares of a Fund, generally depending on the
difference in the prices at which the shareholder purchased and sold the shares.
This gain or loss will be long-term or short-term, generally depending on how
long the shareholder held the shares.
Each Fund may be required to withhold federal income tax at the rate of 31% of
all taxable distributions payable to shareholders who fail to provide the Fund
with their correct taxpayer identification number or to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Backup withholding is not an
16
<PAGE> 19
additional tax. Any amounts withheld may be credited against the shareholder's
federal income tax liability.
Further information relating to tax consequences is contained in the Statement
of Additional Information.
STATE AND LOCAL TAXES GENERALLY. Because your state and local taxes may be
different than the federal taxes described above, you should see your tax
adviser regarding these taxes. In particular, except as stated below, dividends
paid by the Pilot Diversified Bond Income Fund may be taxable under state or
local law as dividend income, even though all or part of those dividends come
from interest on obligations that would be free of such income taxes if held by
you directly.
MEASURING PERFORMANCE
Performance information provides you with a method of measuring and monitoring
your investments. Each Fund may quote its performance in advertisements or
shareholder communications. The performance for each class of shares of a Fund
is calculated separately from the performance of the Fund's other classes of
shares.
Understanding performance measures:
TOTAL RETURN for each Fund may be calculated on an AVERAGE ANNUAL TOTAL RETURN
basis or an AGGREGATE TOTAL RETURN basis. Average annual total return reflects
the average annual percentage change in value of an investment over the
measuring period. Aggregate total return reflects the total percentage change in
value of an investment over the measuring period. Both measures assume the
reinvestment of dividends and distributions.
YIELDS for the Funds are calculated for a specified 30-day (or one-month) period
by dividing the net income for the period by the maximum offering price on the
last day of the period, and annualizing the result on a semi-annual basis. Net
income used in yield calculations may be different than net income used for
accounting purposes.
Performance comparisons:
The Funds may compare their yields and total returns to those of mutual funds
with similar investment objectives and to bond, stock or other relevant indices
or to rankings prepared by independent services or other financial or industry
publications that monitor mutual fund performance.
Total return and yield data as reported in national financial publications such
as Money, Forbes, Barron's, The Wall Street Journal and The New York Times, as
well as in publications of a local or regional nature, may be used for
comparison.
The performance of the Funds may also be compared to data prepared by Lipper
Analytical Services, Inc., Mutual Fund Forecaster, Wiesenberger Investment
Companies Services, Morningstar or CDA Investment Technologies, Inc., and total
returns for these Funds may be compared to indices such as the Dow Jones
Industrial Average, the Standard & Poor's 500 Stock Index, the Lehman Brothers
Bond Index, the Merrill Lynch Bond Index, the Wilshire 5000 Equity Index or the
Consumer Price Index.
PERFORMANCE QUOTATIONS WILL FLUCTUATE, AND YOU SHOULD NOT CONSIDER QUOTATIONS TO
BE REPRESENTATIVE OF FUTURE PERFORMANCE. YOU SHOULD ALSO REMEMBER THAT
PERFORMANCE IS GENERALLY A FUNCTION OF THE KIND AND QUALITY OF INVESTMENTS HELD
IN A PORTFOLIO, PORTFOLIO MATURITY, OPERATING EXPENSES AND MARKET CONDITIONS.
FEES THAT BOATMEN'S INVESTMENT SERVICES, INC. OR ANOTHER SERVICE ORGANIZATION
MAY CHARGE DIRECTLY TO ITS CUSTOMER ACCOUNTS IN CONNECTION WITH AN INVESTMENT IN
THE FUNDS WILL NOT BE INCLUDED IN THE FUNDS' CALCULATIONS OF TOTAL RETURN AND
YIELD.
INQUIRIES REGARDING THE FUNDS MAY BE DIRECTED TO THE DISTRIBUTOR AT 3435 STELZER
ROAD, COLUMBUS, OHIO 43219-3035.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF
ADDITIONAL INFORMATION RELATING TO THE FUNDS INCORPORATED IN THIS PROSPECTUS BY
REFERENCE, IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUNDS OR THEIR DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY THE FUNDS OR BY THEIR DISTRIBUTOR IN ANY JURISDICTION
IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
- ---------------------------------------------------------------
17
<PAGE> 20
PMC-0092
<PAGE> 21
THE PILOT FUNDS
3435 STELZER ROAD
COLUMBUS, OHIO 43219
STATEMENT OF ADDITIONAL INFORMATION
May 10, 1996, AS SUPPLEMENTED AUGUST 5, 1996
PILOT SHARES, CLASS A SHARES AND CLASS B SHARES
THE PILOT FUNDS (THE "TRUST") IS AN OPEN-END, MANAGEMENT INVESTMENT
COMPANY (OR MUTUAL FUND) CONSISTING OF FOURTEEN PORTFOLIOS, TWO OF WHICH
PORTFOLIOS (THE "FUNDS") ARE OFFERED HEREBY. THE FUNDS ARE:
PILOT GROWTH FUND; AND
PILOT DIVERSIFIED BOND INCOME FUND;
BOATMEN'S TRUST COMPANY ("BOATMEN'S") SERVES AS THE INVESTMENT ADVISER
TO EACH FUND. PILOT FUNDS DISTRIBUTORS, INC. SERVES AS EACH FUND'S DISTRIBUTOR,
AND ITS PARENT, BISYS Fund Services Limited Partnership ("BISYS"), SERVES AS
EACH FUND'S ADMINISTRATOR.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUSES DATED MAY 10, 1996, AS SUPPLEMENTED
AUGUST 5, 1996 WITH RESPECT TO PILOT SHARES, CLASS A SHARES AND CLASS B SHARES
OF THE FUNDS, AND IS INCORPORATED BY REFERENCE IN ITS ENTIRETY INTO SUCH
PROSPECTUSES. BECAUSE THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT ITSELF A
PROSPECTUS, NO INVESTMENT IN PILOT SHARES, CLASS A SHARES OR CLASS B SHARES OF
THE FUNDS SHOULD BE MADE SOLELY UPON THE INFORMATION CONTAINED HEREIN. COPIES
OF THE PROSPECTUSES MAY BE OBTAINED WITHOUT CHARGE BY WRITING TO PILOT FUNDS
DISTRIBUTORS, INC., 3435 STELZER ROAD, COLUMBUS, OHIO 43219-3035.
B-1
<PAGE> 22
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Policies And Practices Of The Funds . . . . . . . . . . . . . B- 3
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . B-15
Trustees And Officers . . . . . . . . . . . . . . . . . . . . . . . . . . B-17
Investment Adviser, Administrator, Distributor And Transfer Agent . . . . B-20
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . . . B-23
Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-24
Matters Relating to Class A Shares and Class B Shares . . . . . . . . . . B-25
Additional Purchase and Redemption Information . . . . . . . . . . . . . B-27
Calculation Of Performance Quotations . . . . . . . . . . . . . . . . . . B-31
Tax Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-33
Organization And Capitalization . . . . . . . . . . . . . . . . . . . . . B-37
Custodian And Subcustodian . . . . . . . . . . . . . . . . . . . . . . . B-39
Independent Accountants And Counsel . . . . . . . . . . . . . . . . . . . B-39
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A- 1
</TABLE>
B-2
<PAGE> 23
INVESTMENT POLICIES AND PRACTICES OF THE FUNDS
The following discussion elaborates on the description of each Fund's
investment policies and practices contained in the Prospectuses. Except as set
forth below, the investment policies and limitations described in this
Statement of Additional Information are not fundamental and may be changed
without Shareholder consent.
U.S. GOVERNMENT OBLIGATIONS
Each Fund may invest in U.S. Government obligations. Examples of the
types of U.S. Government obligations that may be held by the Funds include, in
addition to U.S. Treasury bonds, notes and bills, the obligations of the
Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, Federal
Housing Administration, Farmers Home Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association, Federal National Mortgage Association, General Services
Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks, Tennessee Valley Authority, Resolution Funding Corporation and
Maritime Administration. Obligations guaranteed as to principal or interest by
the U.S. Government, its agencies, authorities or instrumentalities are deemed
to include (a) securities for which the payment of principal and interest is
backed by an irrevocable letter of credit issued by the U.S. Government, its
agencies, authorities or instrumentalities and (b) participations in loans made
to foreign governments or their agencies that are so guaranteed. The secondary
market for certain of these participations is limited. If such participations
are illiquid they will not be purchased.
U.S. Government obligations include principal and interest components of
securities issued or guaranteed by the U.S. Treasury if the components are
traded independently under the Separate Trading of Registered Interest and
Principal of Securities program. Obligations issued or guaranteed as to
principal or interest by the U.S. Government, its agencies, authorities or
instrumentalities may also be acquired in the form of custodial receipts. These
receipts evidence ownership of future interest payments, principal payments or
both on certain notes or bonds issued by the U.S. Government, its agencies,
authorities or instrumentalities.
CUSTODIAL RECEIPTS
Each Fund may also acquire custodial receipts that evidence ownership of
future interest payments, principal payments or both on certain U.S. Government
notes or bonds. Such notes and bonds are held in custody by a bank on behalf of
the owners. These custodial receipts are known by various names, including
"Treasury Receipts," "Treasury Investors Growth Receipts" and "Certificates of
Accrual on Treasury Securities." Although custodial receipts are not considered
U.S. Government securities, they are indirectly issued or guaranteed as to
principal and interest by the U.S. Government, its agencies, authorities or
instrumentalities. Custodial receipts will be treated as illiquid securities.
CORPORATE DEBT SECURITIES
Each Fund may invest in corporate debt securities of domestic issuers of
all types and maturities, such as bonds, debentures, notes and commercial
paper. Corporate debt securities may involve equity features, such as
conversion or exchange rights or warrants for the acquisition of stock of the
same or a different issuer; participation based on revenue, sales or profits;
or the purchase of common stock or warrants in a unit transaction (where
corporate debt obligations and common stock are offered as a unit). Each Fund
may also invest in corporate debt securities of foreign issuers.
B-3
<PAGE> 24
U.S. AND FOREIGN BANK OBLIGATIONS
These obligations include negotiable certificates of deposit, banker's
acceptances and fixed time deposits. Each Fund limits its investments in
domestic bank obligations to banks having total assets in excess of $1 billion
and subject to regulation by the U.S. Government. Each Fund may also invest in
certificates of deposit issued by members of the Federal Deposit Insurance
Corporation ("FDIC") having total assets of less than $1 billion, provided that
the Fund will at no time own more than $100,000 principal amount of
certificates of deposit (or any higher principal amount which in the future may
be fully covered by FDIC insurance) of any one of those issuers. Fixed time
deposits are obligations which are payable at a stated maturity date and bear a
fixed rate of interest. Generally, fixed time deposits may be withdrawn on
demand by a Fund, but they may be subject to early withdrawal penalties which
vary depending upon market conditions and the remaining maturity of the
obligation. Although fixed time deposits do not have a market, there are no
contractual restrictions on a Fund's right to transfer a beneficial interest in
the deposit to a third party.
Each Fund limits its investments in foreign bank obligations (i.e.,
obligations of foreign branches and subsidiaries of domestic banks, and
domestic and foreign branches and agencies of foreign banks) to obligations of
banks which at the time of investment are branches or subsidiaries of domestic
banks which meet the criteria in the preceding paragraphs or are branches or
agencies of foreign banks which (i) have more than $10 billion, or the
equivalent in other currencies, in total assets; (ii) in terms of assets are
among the 75 largest foreign banks in the world; (iii) have branches or
agencies in the United States; and (iv) in the opinion of Boatmen's, pursuant
to criteria established by the Board of Trustees of the Trust, are of an
investment quality comparable to obligations of domestic banks which may be
purchased by a Fund. These obligations may be general obligations of the parent
bank in addition to the issuing branch or subsidiary, but the parent bank's
obligations may be limited by the terms of the specific obligation or by
governmental regulation. Each Fund also limits its investments in foreign bank
obligations to banks, branches and subsidiaries located in Western Europe
(United Kingdom, France, Germany, Belgium, The Netherlands, Italy and
Switzerland), Scandinavia (Denmark and Sweden), Australia, Japan, the Cayman
Islands, the Bahamas and Canada. Each Fund will limit its investment in
securities of foreign banks to not more than 20% of total assets at the time of
investment subject to any other applicable investment limitations and
policies.
Each Fund may also make interest-bearing savings deposits in commercial
and savings banks in amounts not in excess of 5% of the total assets of the
Fund.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS
Each Fund may purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment or delayed settlement basis. These
transactions involve a commitment by a Fund to purchase or sell securities at a
future date. The price of the underlying securities (usually expressed in terms
of yield) and the date on which the securities will be delivered and paid for
(the settlement date) are fixed at the time the transaction is negotiated.
When-issued purchases and forward commitment and delayed settlement
transactions are negotiated directly with the other party, and such commitments
are not traded on exchanges.
A Fund will purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment or delayed settlement basis only with
the intention of completing the transaction and actually purchasing or selling
the securities. If deemed advisable as a matter of investment strategy,
however, a Fund may dispose of or renegotiate a commitment after entering into
it. A Fund also may sell securities it has committed to purchase before those
securities are delivered to the Fund on the settlement date. A Fund may
realize a capital gain or loss in connection with these transactions.
When a Fund purchases securities on a when-issued, forward commitment or
delayed settlement basis, the Fund's custodian or subcustodian will maintain in
a segregated account cash, U.S. Government securities or other high grade
liquid debt obligations having a value (determined daily) at least equal to the
amount of the Fund's purchase commitments. In the case of a forward commitment
or delayed settlement transaction to sell portfolio securities subject to such
commitment, the custodian or subcustodian will hold the portfolio securities
themselves in a segregated account while the commitment is outstanding. These
procedures are designed to
B-4
<PAGE> 25
ensure that a Fund will maintain sufficient assets at all times to cover its
obligations under when-issued purchases, forward commitments and delayed
settlements.
CONVERTIBLE SECURITIES
Each Fund may invest in convertible securities, such as bonds, notes,
debentures, preferred stocks and other securities that may be converted into
common stock. All convertible securities purchased by the Pilot Growth Fund
will be rated at least AA by an NRSRO or, if unrated, determined by Boatmen's
to be of comparable quality. Similarly, all convertible securities purchased
by the Pilot Diversified Bond Income Fund will be rated at least A by an NRSRO
or, if unrated, determined by Boatmen's to be of comparable quality.
Investments in convertible securities can provide income through interest and
dividend payments as well as an opportunity for capital appreciation by virtue
of their conversion or exchange features.
The convertible securities in which the Fund may invest include
fixed-income and zero coupon debt securities, and preferred stock that may be
converted or exchanged at a stated or determinable exchange ratio into
underlying shares of common stock. The exchange ratio for any particular
convertible security may be adjusted from time to time due to stock splits,
dividends, spin-offs, other corporate distributions or scheduled changes in the
exchange ratio. Convertible debt securities and convertible preferred stocks,
until converted, have general characteristics similar to both debt and equity
securities. Although to a lesser extent than with debt securities generally,
the market value of convertible securities tends to decline as interest rates
increase and, conversely, tends to increase as interest rates decline. In
addition, because of the conversion or exchange feature, the market value of
convertible securities typically changes as the market value of the underlying
common stock changes, and, therefore, also tends to follow movements in the
general market for equity securities. A unique feature of convertible
securities is that as the market price of the underlying common stock declines,
convertible securities tend to trade increasingly on a yield basis, and so may
not experience market value declines to the same extent as the underlying
common stock. When the market price of the underlying common stock increases,
the price of a convertible security tends to rise as a reflection of the value
of the underlying common stock, although typically not as much as the price of
the underlying common stock. While no securities investments are without risk,
investments in convertible securities generally entail less risk than
investments in common stock of the same issuer.
As debt securities, convertible securities are investments which provide
for a stream of income or, in the case of zero coupon securities, accretion of
income with generally higher yields than common stocks. Of course, like all
debt securities, there can be no assurance of income or principal payments
because the issuers of the convertible securities may default on their
obligations. Convertible securities generally offer lower yields than
non-convertible securities of similar quality because of their conversion or
exchange features.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, are senior in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, convertible bonds and convertible preferred stock
typically have lower coupon rates than similar non-convertible securities.
Convertible securities may be issued as fixed income obligations that
pay current income or as zero coupon notes and bonds, including Liquid Yield
Option Notes ("LYONs"). Zero coupon securities pay no cash income and are sold
at substantial discounts from their value at maturity. When held to maturity,
their entire income, which consists of accretion of discount, comes from the
difference between the issue price and their value at maturity. Zero coupon
convertible securities offer the opportunity for capital appreciation because
increases (or decreases) in the market value of such securities closely follow
the movements in the market value of the underlying common stock. Zero coupon
convertible securities generally are expected to be less volatile than the
underlying common stocks because they usually are issued with short maturities
(15 years or less) and are issued with options and/or redemption features
exercisable by the holder of the obligation entitling the holder to redeem the
obligation and receive a defined cash payment.
B-5
<PAGE> 26
FOREIGN SECURITIES
Both Funds may invest in foreign securities either directly or
indirectly through American Depository Receipts ("ADRs"), which are receipts
issued by an American bank or trust company evidencing ownership of underlying
securities issued by a foreign issuer, or through European Depository Receipts
("EDRs"), which are receipts issued by European financial institutions
evidencing ownership of underlying securities issued by a foreign issuer. ADRs
may be listed on a national securities exchange or may trade in the
over-the-counter market. ADR prices are denominated in United States dollars
while EDR prices are generally denominated in foreign currencies. The
securities underlying an ADR or EDR will normally be denominated in a foreign
currency. The underlying securities may be subject to foreign government taxes
which could reduce the yield on such securities.
Investors should recognize that investing in foreign securities involves
certain special considerations which are not typically associated with
investing in United States securities and which may favorably or unfavorably
affect a Fund's performance. Because foreign companies generally are not
subject to uniform accounting and auditing and financial reporting standards,
practices and requirements comparable to those applicable to domestic
companies, there may be less publicly available information about a foreign
company than about a domestic company. Many foreign stock markets, while
growing in volume of trading activity, have substantially less volume than the
New York Stock Exchange (the "Exchange"), and securities of some foreign
companies are less liquid and more volatile than securities of domestic
companies. Similarly, volume and liquidity in most foreign bond markets is less
than in United States markets and at times, volatility of price can be greater
than in United States markets. Further, foreign markets have different
clearance and settlement procedures and in certain markets there have been
times when settlements have not kept pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of each Fund are
uninvested and no return is earned thereon. Also, delivery of securities before
payment may be required in some countries. The inability of a Fund to make
intended security purchases due to settlement problems could cause a Fund to
miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to a Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, in possible liability to the
purchaser. Fixed commissions on some foreign stock exchanges are generally
higher than negotiated commissions on U.S. exchanges, although a Fund will
endeavor to achieve the most favorable net results on its portfolio
transactions. Further, a Fund may encounter difficulties or be unable to pursue
legal remedies and obtain judgments in foreign courts. There is generally less
government supervision and regulation of business and industry practices, stock
exchanges, brokers and listed companies in foreign countries than in the United
States. Communications between the United States and foreign countries may be
less reliable than within the United States, thus increasing the risk of
delayed settlements of portfolio transactions or loss of certificates for
portfolio securities. In addition, with respect to certain foreign countries,
there is the possibility of expropriation or confiscatory taxation, political
or social instability, or diplomatic developments, which could affect United
States investments in those countries. Moreover, individual foreign economies
may differ favorably or unfavorably from the United States economy in such
respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position. Each
Fund seeks to mitigate the risks associated with the foregoing considerations
through diversification and continuous professional management. Each Fund does
not currently intend to purchase securities of issuers in emerging markets.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Funds may invest in forward foreign currency exchange contracts
("forward contracts") for hedging and to seek to increase total return. A
forward contract involves an obligation to purchase or sell a specific currency
at a future date, which 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 individually negotiated and privately traded in
the interbank market by currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit requirement, and
no commissions are charged at any stage for trades.
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The maturity date of a forward contract may be any fixed number of days
from the date of the contract agreed upon by the parties, rather than a
predetermined date in a given month, and forward contracts may be in any
amounts agreed upon by the parties rather than predetermined amounts. Closing
purchase transactions with respect to forward contracts are usually effected
with the currency trader who is a party to the original forward contract. A
Fund may be required to segregate assets, consisting of cash, U.S. government
securities or other high grade liquid debt securities to cover forward
contracts that require it to purchase foreign currency.
When the Adviser believes that the currency of a specific country may
deteriorate against another currency, it may enter into a forward contract to
sell the less attractive currency and buy the more attractive one. This
practice is referred to as "cross-hedging." The amount in question could be
less than or equal to the value of a Fund's securities denominated in the less
attractive currency.
A Fund may also enter into a forward contract to sell a currency that is
linked to a currency that Boatmen's believes to be less attractive and buy a
currency that Boatmen's believes to be more attractive (or a currency that is
linked to currency that Boatmen's believes to be more attractive). The amount
in question would not exceed the value of the Fund's securities denominated in
the less attractive currency. For example, if the Austrian Schilling is linked
to the German Deutsche Mark (the "D-mark"), the Fund holds securities
denominated in Austrian Schillings and Boatmen's believes that the value of
Schillings will decline against the British Pound, the Fund may enter into a
contract to sell D-marks and buy Pounds. This practice is referred to as "proxy
hedging." Proxy hedging involves the risk that the amount of currencies
involved may not equal the value of the Fund's securities denominated in the
currency expected to deteriorate and improperly anticipated currency movements
could result in losses to the Fund. Further, there is the risk that the linkage
between various currencies may change or be eliminated.
The Fund's activities involving forward contracts may be limited by the
requirements of Subchapter M of the Internal Revenue Code for qualification as
a regulated investment company.
ASSET-BACKED AND MORTGAGE-BACKED SECURITIES
Each Fund may invest in securities backed by installment contracts,
credit card receivables and other assets. These asset-backed securities
represent interests in pools of assets in which payment of both interest and
principal on the securities are made monthly, thus in effect passing through
(net of fees paid to the issuer or guarantor of the securities) the monthly
payments made by the individual borrowers on the assets that underlie the
asset-backed securities. Each Fund may also make significant investments in
U.S. Government securities that are backed by adjustable or fixed-rate mortgage
loans.
The average life of an asset-backed or mortgage-backed instrument varies
with the maturities of the underlying instruments. In the case of mortgages,
maturities may be a maximum of forty years. The average life of an
asset-backed or mortgage-backed instrument is likely to be substantially less
than the original maturity of the asset or mortgage pools underlying the
security as the result of scheduled principal payments and prepayments. This
may be particularly true for mortgage-backed securities.
Non-mortgage asset-backed securities involve certain risks that are not
presented by mortgage-backed securities. Primarily, these securities do not
have the benefit of the same security interest in the underlying collateral.
Credit card receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, many of
which have given debtors the right to set off certain amounts owed on the
credit cards, thereby reducing the balance due. Most issuers of automobile
receivables permit the servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that
of the holders of the related automobile receivables. In addition, because of
the large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the automobile
receivables may not have an effective security interest in all of the
obligations backing such receivables. Therefore, there is a possibility that
recoveries on repossessed collateral may not, in some cases, be able to support
payments on these securities.
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Presently there are several types of mortgage-backed securities issued
or guaranteed by U.S. Government agencies, including guaranteed mortgage
pass-through certificates, which provide the holder with a pro rata interest in
the underlying mortgages, and collateralized mortgage obligations ("CMOs"),
which provide the holder with a specified interest in the cash flow of a pool
of underlying mortgages or other mortgage-backed securities. Issuers of CMOs
frequently elect to be taxed as a pass-through entity known as real estate
mortgage investment conduits, or REMICs. CMOs are issued in multiple classes,
each with a specified fixed or floating interest rate and a final distribution
date. Although the relative payment rights of these classes can be structured
in a number of different ways, most often payments of principal are applied to
the CMO classes in the order of their respective stated maturities.
CMO classes may include accrual certificates (also known as "Z-Bonds"),
which only accrue interest at a specified rate until other specified classes
have been retired and are converted thereafter to interest-paying securities.
They may also include planned amortization classes ("PAC") which generally
require, within certain limits, that specified amounts of principal be applied
on each payment date, and generally exhibit less yield and market volatility
than other classes. The Funds will not purchase "residual" CMO interests, which
normally exhibit the greatest price volatility.
CMOs can expose a Fund to more volatility and interest rate risk than
other types of mortgage-backed obligations.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with selected
brokers-dealers, banks or other financial institutions. A repurchase agreement
is an arrangement under which the purchaser (i.e., a Fund) purchases a U.S.
Government or other high quality short-term debt obligation (the "Obligation")
and the seller agrees at the time of sale to repurchase the Obligation at a
specified time and price.
Custody of the Obligation will be maintained by the Fund's custodian or
subcustodian. The repurchase price may be higher than the purchase price, the
difference being income to the Fund, or the purchase and repurchase prices may
be the same, with interest at a stated rate due to the Fund together with the
repurchase price on repurchase. In either case, the income to the Fund is
unrelated to the interest rate on the Obligation subject to the repurchase
agreement.
Repurchase agreements pose certain risks for all entities, including the
Funds, that utilize them. Such risks are not unique to the Funds but are
inherent in repurchase agreements. The Funds seek to minimize such risks by,
among others, the means indicated below, but because of the inherent legal
uncertainties involved in repurchase agreements, such risks cannot be
eliminated.
For purposes of the Investment Company Act of 1940 (the "1940 Act"), a
repurchase agreement is deemed to be a loan from the Fund to the seller of the
Obligation. It is not clear whether for other purposes a court would consider
the Obligation purchased by the Fund subject to a repurchase agreement as being
owned by the Fund or as being collateral for a loan by the Fund to the seller.
If in the event of bankruptcy or insolvency proceedings against the
seller of the Obligation, a court holds that the Fund does not have a perfected
security interest in the Obligation, the Fund may be required to return the
Obligation to the seller's estate and be treated as an unsecured creditor of
the seller. As an unsecured creditor, a Fund would be at risk of losing some or
all of the principal and income involved in the transaction. To minimize this
risk, the Funds utilize custodians and subcustodians that Boatmen's believes
follow customary securities industry practice with respect to repurchase
agreements, and Boatmen's analyzes the creditworthiness of the obligor, in
this case the seller of the Obligation. But because of the legal uncertainties,
this risk, like others associated with repurchase agreements, cannot be
eliminated.
Also, in the event of commencement of bankruptcy or insolvency
proceedings with respect to the seller of the Obligation before repurchase of
the Obligation under a repurchase agreement, the Fund may encounter
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<PAGE> 29
delay and incur costs before being able to sell the security. Such a delay may
involve loss of interest or a decline in price of the Obligation.
Apart from risks associated with bankruptcy or insolvency proceedings,
there is also the risk that the seller may fail to repurchase the security.
However, if the market value of the Obligation subject to the repurchase
agreement becomes less than the repurchase price (including accrued interest),
the Fund will direct the seller of the Obligation to deliver additional
securities so that the market value of all securities subject to the repurchase
agreement equals or exceeds the repurchase price.
Certain repurchase agreements which provide for settlement in more than
seven days can be liquidated before the nominal fixed term on seven days or
less notice. Such repurchase agreements will be regarded as illiquid
instruments.
Each Fund may also enter into repurchase agreements with any party
deemed creditworthy by Boatmen's including foreign banks and broker-dealers, if
the transaction is entered into for investment purposes and the counterparty's
creditworthiness is at least equal to that of issuers of securities which a
Fund may purchase.
REVERSE REPURCHASE AGREEMENTS
At the time a Fund enters into a reverse repurchase agreement (an
agreement under which a Fund sells portfolio securities and agrees to
repurchase them at an agreed-upon date and price), it will place in a
segregated custodial account liquid assets such as U.S. Government securities
or other liquid high-grade debt securities having a value equal to or greater
than the repurchase price (including accrued interest) and will subsequently
monitor the account to ensure that such 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 of the securities it is obligated to
repurchase. Reverse repurchase agreements are considered to be borrowings under
the 1940 Act.
VARIABLE AND FLOATING RATE INSTRUMENTS
With respect to the variable and floating rate instruments that may be
acquired by the Funds as described in the Prospectuses, Boatmen's will consider
the earning power, cash flows and other liquidity ratios of the issuers and
guarantors of such instruments and, if the instrument is subject to a demand
feature, will monitor their financial status to meet payment on demand.
In determining a Fund's average weighted portfolio maturity, an
instrument will usually be deemed to have a maturity equal to the longer of the
period remaining until the next regularly scheduled interest rate adjustment or
the time the Fund involved can recover payment of principal as specified in the
instrument. Such instruments which are U.S. Government obligations and certain
variable rate instruments having a nominal maturity of 397 days or less when
purchased by the Fund involved, however, will be deemed to have maturities
equal to the period remaining until the next interest rate adjustment.
LENDING OF PORTFOLIO SECURITIES
When a Fund lends its securities, it continues to receive interest (and
dividends with respect to the Growth Fund) on the securities loaned and may
simultaneously earn interest on the investment of the cash loan collateral
which will be invested in readily marketable, high-quality, short-term
obligations. Although voting rights, or rights to consent, attendant to
securities on loan pass to the borrower, such loans will be called so that the
securities may be voted by a Fund if a material event affecting the investment
is to occur. Portfolio loans will be continuously secured by collateral equal
at all times in value to at least the market value of the securities loaned
plus accrued interest. Collateral for such loans may include cash, U.S.
Government securities, securities of U.S. Government agencies and
instrumentalities or an irrevocable letter of credit issued by a bank which
meets the investment standards of a Fund for short-term instruments. There may
be risks of delay in receiving additional collateral or in recovering the
securities loaned or even a loss of rights in the collateral should the
borrower of the securities fail financially.
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OTHER INVESTMENT COMPANIES
In seeking to attain their investment objectives, the Funds may invest
in securities issued by other investment companies within the limits prescribed
by the 1940 Act. As a shareholder of another investment company, a Fund would
bear, along with other shareholders, its pro rata portion of the other
investment company's expenses, including advisory fees. These expenses would be
in addition to the advisory and other expenses that a Fund bears in connection
with its own operations.
"STRIPPED SECURITIES"
As stated in the Prospectuses, each Fund may purchase stripped
securities issued or guaranteed by the U.S. Government, where the principal and
interest components are traded independently under the Separate Trading of
Registered Interest and Principal of Securities program ("STRIPS"). Under
STRIPS, the principal and interest components are individually numbered and
separately issued by the U.S. Treasury at the request of depository financial
institutions, which then trade the component parts independently.
In addition, each Fund may purchase stripped mortgage-backed securities
("SMBS") issued by the U.S. Government (or a U.S. Government agency or
instrumentality) or by private issuers such as banks and other institutions.
If the underlying obligations experience greater than anticipated prepayments
of principal, a Fund may fail to fully recover its initial investment. The
market value of the class consisting entirely of principal payments can be
extremely volatile in response to changes in interest rates. The yields on a
class of SMBS that receives all or most of the interest are generally higher
than prevailing market yields on other mortgage-backed obligations because
their cash flow patterns are also volatile and there is a greater risk that the
initial investment will not be full recovered. SMBS issued by the U.S.
Government (or a U.S. Government agency or instrumentality) may be considered
liquid under guidelines established by the Trust's Board of Trustees if they
can be disposed of promptly in the ordinary course of business at a value
reasonably close to that used in the calculation of a Fund's per share net
asset value.
Although "stripped" securities may not pay interest to holders prior to
maturity, federal income tax regulations require a Fund to recognize as
interest income a portion of the bond's discount each year. This income must
then be distributed to shareholders along with other income earned by the Fund.
To the extent that any shareholders in a Fund elect to receive their dividends
in cash rather than reinvest such dividends in additional Fund shares, cash to
make these distributions will have to be provided from the assets of the Fund
or other sources such as proceeds of sales of Fund shares and/or sales of
portfolio securities. In such cases, the Fund will not be able to purchase
additional income producing securities with cash used to make such
distributions and its current income may ultimately be reduced as a result.
PARTICIPATION INTERESTS AND TRUST RECEIPTS
As stated in the Prospectuses, each Fund may purchase from domestic
financial institutions and trusts created by such institutions participation
interests and trust receipts in high quality debt securities. A participation
interest or receipt gives a Fund an undivided interest in the security in the
proportion that a Fund's participation interest or receipt bears to the total
principal amount of the security. As to certain instruments for which a Fund
will be able to demand payment, a Fund intends to exercise its right to do so
only upon a default under the terms of the security, as needed to provide
liquidity, or to maintain or improve the quality of its
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investment portfolio. It is possible that a participation interest or trust
receipt may be deemed to be an extension of credit by a Fund to the issuing
financial institution rather than to the obligor of the underlying security and
may not be directly entitled to the protection of any collateral security
provided by the obligor. In such event, the ability of a Fund to obtain
repayment could depend on the issuing financial institution.
Participation interests and trust receipts may have fixed, floating or
variable rates of interest, and will have remaining maturities of thirteen
months or less (as defined by the Securities and Exchange Commission). If a
participation interest or trust receipt is unrated, Boatmen's will have
determined that the interest or receipt is of comparable quality to those
instruments in which the Fund involved may invest pursuant to guidelines
approved by the Board of Trustees. For certain participation interests or trust
receipts a Fund will have the right to demand payment, on not more than 30
days' notice, for all or any part of the Fund's participation interest or trust
receipt in the securities involved, plus accrued interest.
WARRANTS
Warrants are privileges issued by corporations enabling the owner to
subscribe to and purchase a specified number of shares of the corporation at a
specified price during a specified period of time. The prices of warrants do
not necessarily correlate with the prices of the underlying securities. The
purchase of warrants involves the risk that the purchaser could lose the
purchase value of the warrant if the right to subscribe to additional shares is
not exercised prior to the warrant's expiration. Also, the purchase of warrants
involves the risk that the effective price paid for the warrant added to the
subscription price of the related security may exceed the value of the
subscribed security's market price such as when there is no movement in the
level of the underlying security.
OPTIONS ON SECURITIES AND INDICES
Each Fund may purchase and sell (write) both call and put options listed
on securities exchanges as well as over-the-counter options (options not traded
on exchanges). Such options may relate to particular securities or to various
indices.
An option on a security (or index) is a contract that gives the holder
of the option, in return for a premium paid, the right to buy from (in the case
of a call) or sell to (in the case of a put) the seller ("writer") of the
option the security underlying the option (or the cash value of the index) at a
specified exercise price at any time during the term of the option. The writer
of an option on a security has the obligation upon exercise of the option to
deliver the underlying security upon payment of the exercise price or to pay
the exercise price upon delivery of the underlying security. Upon exercise, the
writer of an option on an index is obligated to pay the difference between the
closing price of the index and the exercise price of the option, expressed in
dollars, times a specified multiple (the "multiplier"). (An index is designed
to reflect specified facets of a particular financial or securities market, a
specified group of financial instruments or securities, or certain economic
indicators.) Unlike exchange-traded options, which are standardized with
respect to the underlying instrument, expiration date, contract size, and
strike price, the terms of over-the-counter ("OTC") options generally are
established through negotiation with the other party to the option contract.
Although this type of arrangement allows a Fund greater flexibility to tailor
an option to its needs, OTC options generally involve greater credit risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded.
If an option written by a Fund expires, the Fund realizes a capital gain
equal to the premium received at the time the option was written. If an option
purchased by a Fund expires unexercised, the Fund realizes a capital loss equal
to the premium paid.
Prior to the earlier of exercise or expiration, an option may be closed
out by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price and expiration) or, in
the case of some OTC options, by fulfilling the terms of any agreement with the
counterparty permitting
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<PAGE> 32
a Fund to close out the option. There can be no assurance, however, that a
closing purchase or sale transaction can be effected when a Fund desires.
A Fund will realize a capital gain from a closing purchase transaction
if the cost of the closing option is less than the premium received from
writing the option and will realize a capital loss if it is more. If the
premium received from a closing sale transaction is more than the premium paid
to purchase the option, the Fund will realize a capital gain, or if it is less,
the Fund will realize a capital loss. The principal factors affecting the
market value of a put or a call option include supply and demand, interest
rates, the current market price of the underlying security or index in relation
to the exercise price of the option, the volatility of the underlying security
or index, and the time remaining until the expiration date.
There are several risks associated with transactions in options on
securities and on indices. For example, there are significant differences
between the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objectives.
There can be no assurance that a liquid market will exist when a Fund
seeks to close out an option position. If the Fund were unable to close out an
option it had purchased on a security, it would have to exercise the option to
realize any profit or the option may expire worthless. If a Fund were unable to
close out a covered call option it had written on a security, it would not be
able to sell the underlying security unless the option expired without
exercise. As a writer of a covered call option, the Fund foregoes, during the
option's life, the opportunity to profit from increases in the market value of
the security covering the call option above the sum of the premium and the
exercise price of the call.
If trading were suspended in an option purchased by a Fund, the Fund
would not be able to close out the option. If restrictions on exercise were
imposed, the Fund might be unable to exercise an option it had purchased.
Except to the extent that a call option on an index written by a Fund is
covered by an option on the same index purchased by the Fund, movements in the
index may result in a loss to the Fund; however, such losses may be mitigated
by changes in the value of the Fund's securities during the period the option
was outstanding.
FUTURES CONTRACTS
Each Fund may enter into futures contracts on securities and futures
contracts based on securities indices and securities, which futures are traded
on exchanges that are licensed and regulated by the Commodity Futures Trading
Commission ("CFTC"). Each Fund will do so to hedge against anticipated changes
in securities values that would otherwise have an adverse effect upon the value
of portfolio securities or upon securities to be acquired. Futures contracts
and related options entered into by the Funds will be entered into consistent
with CFTC regulations.
Each Fund may take a "short" position in the futures markets by selling
contracts for the future delivery of securities in order to hedge against an
anticipated decline in stock prices. Such futures contracts may include
contracts for the future delivery of securities held by a Fund or securities
with price-fluctuation characteristics similar to those of its portfolio
securities. If, in the opinion of Boatmen's, there is a sufficient degree of
correlation between price trends for a Fund's securities and futures contracts
based on indices, a Fund may also enter into such futures contracts as part of
its hedging strategy. When hedging of this character is successful, any
depreciation in the value of a Fund's securities will substantially be offset
by appreciation in the value of the futures position. On other occasions a Fund
may take a "long" position by purchasing futures contracts. This would be done,
for example, when a Fund anticipates the purchase of particular securities in
the future, but expects the price then available in the securities market to be
less favorable than prices that are currently available in the futures markets.
Each Fund expects that, in the normal course, it will terminate the long
futures position when it makes the anticipated purchase; under unusual market
conditions, however, a long futures position may be terminated without the
corresponding purchase of securities.
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<PAGE> 33
Futures contracts involve brokerage costs, which may be less than 1% of
the contract price, and require parties to the contract to make "margin"
deposits to secure performance of the contract. Each Fund will be required to
deposit as margin into a segregated custodial account (held subject to the
claims of the Fund's futures broker) an amount of cash or liquid securities
equal to approximately 2% to 5% of the value of each futures contract. This
initial margin is in the nature of a performance bond or good faith deposit on
the contract. Each Fund's position in the futures market will be
marked-to-market on a daily basis; the Funds may subsequently be required to
make "variation" margin payments depending upon whether its futures position
declines or rises in value.
Positions taken in the futures markets are not usually held until the
expiration of the contract but, instead, are normally liquidated through
offsetting transactions, which may result in a profit or a loss. Nevertheless,
a Fund may instead make or take delivery of the underlying securities whenever
it appears economically advantageous for it to do so. A clearing corporation
associated with the exchange on which futures contracts are traded assumes
responsibility for closing out contracts and guarantees that, if the contract
is still open, the sale or purchase of securities will be performed on the
settlement date.
Futures contracts on securities indices do not require the physical
delivery of securities, but merely provide for profits and losses resulting
from changes in the market value of a contract to be credited or debited at the
close of each trading day to the respective accounts of the parties to the
contract. On the contract's expiration date a final cash settlement occurs and
the futures positions are simply closed out. Changes in the market value of a
particular futures contract reflect changes in the value of the securities
comprising the index on which the futures contract is based. Futures contracts
based on securities indices currently are actively traded on the Chicago Board
of Trade, the Chicago Mercantile Exchange, the New York Futures Exchange and
the Kansas City Board of Trade.
OPTIONS ON FUTURES CONTRACTS
Each Fund may also purchase and sell (write) call and put options on
futures contracts, which options are traded on exchanges that are licensed and
regulated by the CFTC. A "call" option on a futures contract gives the
purchaser the right, in return for the premium paid, to buy a futures contract
(assume a long position) at a specified exercise price, by exercising the
option at any time before the option expires. A "put" option gives the
purchaser the right, in return for the premium paid, to sell a futures contract
(assume a "short" position), for a specified exercise price, by exercising the
option at any time before the option expires.
Upon the exercise of a call, the writer of the option is obligated to
sell the futures contract (to deliver a "long" position to the option holder)
at the option exercise price, which will presumably be lower than the then
current market price of the contract in the futures market. Upon exercise of a
put, the writer of the option is obligated to purchase the futures contract
(deliver a "short" position to the option holder) at the option exercise price,
which will presumably be higher than the then current market price of the
contract in the futures market. When a person exercises an option and assumes a
long futures position, in the case of a call, or a short futures position, in
the case of a put, his gain will be credited to his futures margin account,
while the loss suffered by the writer of the option will be debited to his
account. However, as with the trading of futures contracts, most participants
in the options markets do not seek to realize their gains or losses by
exercising their option rights. Instead, the holder of an option will usually
realize a gain or loss by buying or selling an offsetting option at a market
price that will reflect an increase or a decrease from the premium originally
paid.
Options on futures contracts can be used by the Fund to hedge the same
risks as might be addressed by the direct purchase or sale of the underlying
futures contracts. If the Fund purchases an option on a futures contract, it
may obtain benefits similar to those that would result if it held the futures
position itself. But, in contrast to a futures transaction in which only
transaction costs are involved, benefits received in an option transaction in
the event of a favorable market movement will be reduced by the amount of the
premium paid as well as by transaction costs. In the event of an adverse market
movement, however, in contrast to the full market risk of a futures position,
the Fund will not be subject to a risk of loss on the option transaction beyond
the amount of the premium it paid plus its transaction costs. Consequently, the
Fund may benefit from an
B-13
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increase in the value of its portfolio that would have been more completely
offset if the hedge had been effected through the use of a futures contract.
If the Fund writes options on futures contracts, it will receive a
premium but will assume a risk of adverse movement in the price of the
underlying futures contract comparable to that involved in holding a futures
position. If the option is not exercised, the Fund will gain the amount of the
premium, which may partially offset unfavorable changes in the value of its
portfolio securities held in, or to be acquired for, the Fund. If the option is
exercised, the Fund will incur a loss in the option transaction, which will be
reduced by the amount of the premium it has received. Such loss may partially
offset favorable changes in the value of its portfolio securities.
A Fund will not purchase or sell (write) options on futures contracts
unless, in the opinion of Boatmen's, the market for such options has sufficient
liquidity that the risks associated with such options transactions are at
acceptable levels.
LIMITATIONS ON USE OF FUTURES TRANSACTIONS AND RISK CONSIDERATIONS
Each Fund will incur brokerage fees in connection with its futures
transactions, and each will be required to deposit and maintain funds with its
broker as margin to guarantee performance of its futures obligations. In
addition, while futures contracts will be traded to reduce certain risks,
futures trading itself entails certain other risks. Thus, while a Fund may
benefit from the use of such contracts, unanticipated changes in securities
prices may result in a poorer overall performance from the Fund than if it had
not entered into any futures contracts. Some futures contracts may not have a
broad and liquid market, in which case the contracts may not be able to be
closed at a fair price and a Fund may lose in excess of the initial margin
deposit. Moreover, in the event of an imperfect correlation between the futures
contract and the portfolio position that is intended to be protected, the
desired protection may not be obtained and a Fund may be exposed to risk of
loss.
Tax-related requirements may limit the extent to which a Fund may engage
in futures and related options transactions.(See "Tax Information.")
RESTRICTED AND OTHER ILLIQUID SECURITIES
A Fund may purchase securities that are not registered under the
Securities Act of 1933 or have some other legal or contractual restrictions on
resale in the principal market where the security is traded ("restricted
securities"), but can be offered and sold to "qualified institutional buyers"
under Rule 144A under the Securities Act of 1933. However, as stated in the
Prospectuses, a Fund will not invest more than 15% of the value of its net
assets in illiquid securities, including restricted securities, unless the
Trust's Board of Trustees determines, based upon a continuing review of the
trading markets for the specific Rule 144A security, that such restricted
security is liquid. The Trustees may adopt guidelines and delegate to Boatmen's
the daily function of determining and monitoring liquidity of securities. The
Trustees may also delegate to its Valuation Committee valuation decisions. The
Trustees, however, will retain sufficient oversight and be ultimately
responsible for the determinations. Because it is not possible to predict with
assurance exactly how this market for restricted securities sold and offered
under Rule 144A will develop, the Trustees will carefully monitor each Fund's
investments in these securities, focusing on such important factors, among
others, as valuation, liquidity and availability of information. This
investment practice could have the effect of increasing the level of
illiquidity in a Fund to the extent that qualified institutional buyers become
for a time uninterested in purchasing these restricted securities.
COMBINED TRANSACTIONS
A Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple forward foreign currency
exchange contracts and any combination of futures, options and forward foreign
currency exchange contracts ("component" transactions), instead of a single
transaction, as part of a single hedging strategy when, in the opinion of
Boatmen's, it is in the best interest of a Fund to do so and
B-14
<PAGE> 35
where underlying hedging strategies are permitted by a Fund's investment
policies. A combined transaction, while part of a single hedging strategy, may
contain elements of risk that are present in each of its component
transactions. (See above for the risk characteristics of certain transactions.)
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Options, futures and forward foreign currency contracts that obligate a
Fund to provide cash, securities or currencies to complete such transactions
will entail that Fund's either segregating assets in an account with, or on the
books of, the Trust's custodian, or otherwise "covering" the transaction as
described below. For example, a call option written by a Fund will require the
Fund to hold the securities subject to the call (or securities convertible into
the needed securities without additional consideration) or liquid assets
sufficient to meet the obligation by purchasing and delivering the securities
if the call is exercised. A call option written on an index will require that
Fund to have portfolio securities that correlate with the index. A put option
written by a Fund also will require that Fund to have available assets
sufficient to purchase the securities the Fund would be obligated to buy if the
put is exercised.
A forward foreign currency contract that obligates a Fund to provide
currencies will require the Fund to hold currencies or liquid securities
denominated in a foreign currency which will equal the Fund's obligations. Such
a contract requiring the purchase of currencies also requires segregation.
Unless a segregated account consists of the securities, cash or
currencies that are the subject of the obligation, a Fund will hold cash, U.S.
Government securities and other high grade liquid debt obligations in a
segregated account. These assets cannot be transferred while the obligation is
outstanding unless replaced with other suitable assets. In the case of an
index-based transaction, a Fund could own securities substantially replicating
the movement of the particular index.
In the case of a futures contract, a Fund must deposit initial margin
and variation margin, as often as daily if the position moves adversely,
sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index-based
futures contract. Similarly, options on futures contracts require a Fund to
deposit margin to the extent necessary to meet the Fund's commitments.
In lieu of such assets, such transactions may be covered by other means
consistent with applicable regulatory policies. A Fund may enter into
offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related options and
hedging transactions. For example, a Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a
put option sold by that Fund. Moreover, instead of segregating assets if a Fund
held a futures or forward contract, it could purchase a put option on the same
futures or forward contract with a strike price as high or higher than the
price of the contract held. Of course, the offsetting transaction must
terminate at the time of or after the primary transaction.
INVESTMENT RESTRICTIONS
The Trust, on behalf of each Fund, has adopted fundamental investment
restrictions numbered 1 through 9 which may not be changed with respect to a
Fund without the approval of the holders of a majority of that Fund's
outstanding voting shares. Investment restrictions numbered i through xi are
not fundamental policies and may be changed at any time by vote of a majority
of the Trustees of the Trust.
As used in this Statement of Additional Information, with respect to
matters required by the provisions of the 1940 Act to be submitted to
shareholders, the term "majority of the outstanding shares" of either the Trust
or a Fund means the vote of the lesser of: (i) 67% or more of the shares of
the Trust or Fund present at a meeting, if the holders of more than 50% of the
outstanding shares of the Trust or Fund are present or represented by proxy, or
(ii) more than 50% of the outstanding shares of the Trust or Fund.
B-15
<PAGE> 36
As a matter of fundamental policy, each Fund may not:
1) Purchase or sell real estate, except that each Fund may
purchase securities of issuers which deal in real estate and may
purchase securities which are secured by interests in real estate
and except that each Fund reserves freedom of action to hold and
to sell real estate acquired as a result of the Fund's ownership
of securities.
2) Acquire any other investment company or investment company
security except in connection with a merger, consolidation,
reorganization or acquisition of assets or where otherwise
permitted by the 1940 Act.
3) Act as an underwriter of securities within the meaning of
the Securities Act of 1933 except to the extent that the purchase
of obligations directly from the issuer thereof in accordance
with the Fund's investment objective(s), policies and limitations
may be deemed to be underwriting and except to the extent that it
may be deemed an underwriter in connection with the disposition
of the Fund's portfolio securities.
4) Borrow money, except as a temporary measure for
extraordinary or emergency purposes or except in connection with
reverse repurchase agreements and mortgage rolls; provided that
the Fund maintains asset coverage of 300% for all borrowings.
5) Issue senior securities, except as appropriate to evidence
indebtedness which it is permitted to incur and except for shares
of the separate classes or series of the Fund provided that
collateral arrangements with respect to currency-related
contracts, futures contracts, options or other permitted
investments, including deposits of initial and variation margin,
are not considered to be the issuance of senior securities for
purposes of this restriction.
6) Purchase or sell commodity contracts.
7) Make loans, except that each Fund may purchase and hold
debt instruments and enter into repurchase agreements in
accordance with its investment objective(s) and policies and may
lend portfolio securities.
8) Purchase securities of any one issuer (other than
securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities or certificates of deposit for any
such securities) if, immediately after such purchase, more than
5% of the value of the Fund's total assets would be invested in
the securities of such issuer, or more than 10% of the issuer's
outstanding voting securities would be owned by the Fund or the
Trust; except that up to 25% of the value of a Fund's total
assets may be invested without regard to the foregoing
limitations. For purposes of this limitation, (a) a security is
considered to be issued by the entity (or entities) whose assets
and revenues back the security, and (b) a guarantee of a security
shall not be deemed to be a security issued by the guarantor when
the value of securities issued and guaranteed by the guarantor,
and owned by the Fund, does not exceed 10% of the value of the
Fund's total assets.
9) Purchase any securities which would cause 25% or more of
the value of the Fund's total assets at the time of purchase to
be invested in the securities of one or more issuers conducting
their principal business activities in the same industry,
provided that (a) there is no limitation with respect to (i)
instruments issued (as defined with respect to fundamental policy
No. 8 above) or guaranteed by the United States, any state,
territory or possession of the United States, the District of
Columbia or any of their authorities, agencies, instrumentalities
or political subdivisions and (ii) repurchase agreements secured
by the instruments described in clause (i); (b) wholly-owned
finance companies will be considered to be in the industries of
their parents if their activities are primarily related to
financing the activities of the parents; and (c) utilities will
be divided
B-16
<PAGE> 37
according to their services, for example, gas, gas transmission,
electric and gas, electric and telephone will each be considered a
separate industry.
As a matter of non-fundamental policy, each Fund may not:
(i) Purchase, write or sell put options, call options,
straddles, spreads, or any combination thereof, except for
transactions in options on securities, securities indices,
futures contracts and options on futures contracts.
(ii) Purchase securities on margin, make short sales of
securities or maintain a short position, except that (a)
this investment limitation shall not apply to a Fund's
transactions in futures contracts and related options, and
(b) a Fund may obtain short-term credit as may be necessary
for the clearance of purchases and sales of portfolio
securities.
(iii) Invest in oil, gas or mineral exploration or
development programs, or related leases.
(iv) Purchase securities of unseasoned issuers, at which
time, including predecessors, at the time of purchase have
been in operation for less than three years if the value of
a Fund's aggregate investment in such securities will
exceed 5% of its total assets.
(v) Purchase equity securities of issuers that are not
readily marketable if the value of a Fund's aggregate
investment in such securities will exceed 5% of its total
assets.
(vi) Lend its securities if collateral values are not
continuously maintained at no less than 100% by market to
market daily.
(vii) Invest more than 5% of its net assets in warrants,
valued at lower of cost or market. In addition the Trust
on behalf of each Fund, will not invest more than 2% of its
net assets in warrants not listed on the New York or
American Stock Exchange.
(viii) Purchase or sell real estate, or real estate limited
partnership interests.
(ix) Purchase securities of issuers restricted as to
disposition if the value of its aggregate investment in
such classes of securities will exceed 10% of its total
assets.
(x) Purchase securities of companies for the purpose of
exercising control.
(xi) Purchase any security while borrowings in excess of
5% of net assets are oustanding.
For purposes of the foregoing limitations, any limitation that involves
a maximum percentage shall not be considered violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition or
encumbrance of securities or assets of, or borrowings on behalf of, a Fund.
Investment limitation (6) above does not prevent a Fund from purchasing
and selling financial futures contracts, options on financial futures
contracts, or any other similar financial instruments to the extent such
activities are otherwise permitted by that Fund's investment limitations and
policies.
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and officers of the Trust is set
forth below. Trustees and officers deemed to be "interested persons" of the
Trust for purposes of the 1940 Act are indicated by an asterisk.
B-17
<PAGE> 38
<TABLE>
<CAPTION>
Principal Occupation(s)
Name and Address Position(s) with Trust During Past 5 Years
- ----------------------------------------- ---------------------------- ----------------------------------------------
<S> <C> <C>
J. Hord Armstrong, III (54) Trustee Chairman and CEO, D&K Wholesale Drug, Inc., a
8000 Maryland Avenue distributor of pharmaceutical products, since 1987.
Suite 1190
St. Louis, Missouri 63105
Lee F. Fetter (42) Chairman Chief Operating and Financial Officer of Washington
660 S. Euclid, Box 8003 University School of Medicine since 1983.
St. Louis, Missouri 63110
Henry O. Johnston* (58) Trustee President of Fordyce Four, Incorporated, a corporation
9650 Clayton Road engaged in the acquisition and management of personal
St. Louis, Missouri 63124 investments.
L. White Matthews, III (49) Trustee Executive Vice President of Finance since 1987, Union
Eighth and Eaton Avenues Pacific Corporation, a company engaged in
Bethlehem, Pennsylvania 18018 transportation, exploration and refining of
hydrocarbons, mining and real estate.
Nicholas G. Penniman, IV (57) Trustee Publisher, St. Louis Post-Dispatch since 1986. Senior
900 N. Tucker Boulevard Vice President of Pulitzer Publishing Company since
St. Louis, Missouri 63101 1986.
William J. Tomko (37) President Vice President, BISYS Fund Services, Inc.
3435 Stelzer Road
Columbus, Ohio 43219
Martin R. Dean (32) Treasurer Manager, Mutual Fund Accounting, BISYS Fund Services,
3435 Stelzer Road Inc. since May 1994. Prior thereto, Senior Manager,
Columbus, Ohio 43219 KPMG Peat Marwick
W. Eugene Spurbeck (40) Vice President Manager, BISYS Fund Services, Inc.
3435 Stelzer Road
Columbus, Ohio 43219
George O. Martinez (36) Secretary Senior Vice President and Director of Legal and
3435 Stelzer Road Compliance Services of BISYS Fund Services, Inc. since
Columbus, Ohio 43219 April 1995. Prior thereto, Vice President and
Associate General Counsel of Alliance Capital
Management, L.P.
Alaina Metz Assistant Secretary Employee of BISYS Fund Services Limited Partnership
3435 Stelzer Road since June 1995; prior thereto, supervisor, Alliance
Columbus, OH 43219 Capital Management, L.P.
Bruce Treff (29) Assistant Secretary Counsel, BISYS Fund Services, Inc. since September
3435 Stelzer Road 1995. Prior thereto, Manager, Alliance Capital
Columbus, Ohio 43219 Management, V.P.
</TABLE>
B-18
<PAGE> 39
The Agreement and Declaration of Trust of the Trust (the "Trust
Agreement") provides that, subject to its provisions, the business of the Trust
shall be managed by the Trustees. The Trust Agreement provides that: (a) the
Trustees may enter into agreements with other persons to provide for the
performance and assumption of various services and duties, including, subject
to their general supervision, advisory and administration services and duties,
and also including distribution, custodian, transfer and dividend disbursing
agency, shareholder servicing and accounting services and duties, (b) a Trustee
shall be liable for his own willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office, and for
nothing else, and shall not be liable for errors of judgment or mistakes of
fact or law, and (c) subject to the preceding clause, the Trustees are not
responsible or liable for any neglect or wrongdoing of any officer or any
person referred to in clause (a).
Certain of the Trustees and officers and the organizations with which
they are associated have had in the past, and/or may have in the future,
transactions with Boatmen's, its parent, Boatmen's Bancshares Inc., Kleinwort
Benson Investment Management Americas Inc. (investment manager to the
International Equity Fund), BISYS and their respective affiliates. The Trust
has been advised by such Trustees and officers that all such transactions have
been and are expected to be ordinary transactions, and that the terms of such
transactions, including all loans and loan commitments by such persons, have
been and are expected to be substantially the same as the prevailing terms of
comparable transactions with other customers.
Each officer holds comparable positions with certain other investment
companies for which BISYS and its affiliates serve as administrator and/or
distributor.
The following table provides information relating to the aggregate
compensation to be received by the Trustees from the Registrant for the fiscal
year ended August 31, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Total Compensation
Aggregate Pension or Estimated From Registrant
Name of Compensation Retirement Benefits Annual Benefits and Fund Complex
Person, Position From Registrant Upon Retirement Upon Retirement Paid to Person
---------------- --------------- ------------------ --------------- ---------------------
<S> <C> <C> <C> <C>
J. Hord Armstrong, III $14,000 0 0 $14,000
Lee F. Fetter (Chairman) $11,500 0 0 $11,500
Henry O. Johnston* $13,750 0 0 $13,750
L. White Matthews, III $13,750 0 0 $13,750
Nicholas G. Penniman, IV $13,750 0 0 $13,750
</TABLE>
____________________
* "Interested person" of the Funds for purposes of the 1940 Act.
Each of the Trustees who is not an "interested person" of the Funds for
purposes of the 1940 Act (the "non-interested Trustees") is compensated by the
Funds for his services as such. The compensation paid to the non-interested
Trustees other than the Chairman is $13,000 per year and $2,000 for each
Trustee meeting
B-19
<PAGE> 40
attended. Each of the non-interested Trustees is entitled to reimbursement for
out-of-pocket expenses. Compensation paid to the Trustees who are considered
interested persons is paid directly by the investment adviser. Trustees' fees
during the period ended August 31, 1995 distributed to or accrued for the
account of the non-interested Trustees (four persons) amounted to approximately
$53,000, which amount represented the total compensation paid by the Funds to
the Trustees during that year.
INVESTMENT ADVISER, ADMINISTRATOR, DISTRIBUTOR AND TRANSFER AGENT
THE ADVISER
Boatmen's Trust Company, a subsidiary of Boatmen's Bancshares, Inc.,
P.O. Box 14737, 100 North Broadway, St. Louis, Missouri 63178-4737, acts as
investment adviser to each Fund pursuant to separate Investment Advisory
Agreements (the "Advisory Agreements") between the Trust, on behalf of each
Fund, and Boatmen's. As adviser, Boatmen's is responsible for the management of
each Fund's assets, subject to the supervision of the Trustees of the Trust.
The Trust has no present intention of purchasing any securities issued
by Boatmen's, Boatmen's Bancshares, Inc. or any of its affiliates. Mr. Henry O.
Johnston, a Trustee of the Trust, owns shares amounting to less than one-tenth
of one percent (.001%) of the outstanding shares of common stock of Boatmen's
Bancshares, Inc.
Each Advisory Agreement provides that, subject to Section 36 of the 1940
Act, Boatmen's will not be liable for any error of judgment or mistake of law
or for any loss suffered by the Trust, except liability to the Trust or its
Shareholders to which Boatmen's would otherwise be subject by reason of its
willful misfeasance, bad faith or gross negligence in the performance of, or
its reckless disregard of, its obligations and duties under the Agreement. Each
Agreement provides that the Trust will indemnify Boatmen's against certain
liabilities, including liabilities under the Federal securities laws, or, in
lieu thereof, contribute to resulting losses.
As compensation for the services rendered to the Trust by Boatmen's as
investment adviser, and the assumption by Boatmen's of the expenses related
thereto, Boatmen's is entitled to a fee, computed daily and payable monthly, at
an annual rate equal to .75 of 1% of the average daily net assets of Pilot
Growth Fund and .55 of 1% of the average daily net assets of Pilot
Diversified Bond Income Fund.
In connection with the foregoing services, Boatmen's bears all costs
incurred by it in connection with the performance of its duties, other than the
cost (including taxes and brokerage commission, if any) of securities purchased
for each Fund.
The Trust is responsible for all expenses incurred by the Funds, other
than those expressly borne by Boatmen's, the Distributor, BISYS and the
Transfer Agent under the Advisory, Distribution, Administration or Transfer
Agency Agreements. Such expenses include, without limitation, the fees payable
to Boatmen's, BISYS and the Transfer Agent, fees and expenses incurred in
connection with membership in investment company organizations, the fees and
expenses of the Trust's custodian and fund accounting agent, brokerage fees and
commissions, any portfolio losses, filing fees for the registration or
qualification of Trust Shares under federal or state securities laws, expenses
of the organization of the Trust, taxes, interest, costs of liability
insurance, fidelity bonds, indemnification or contribution, any costs, expenses
or losses arising out of any liability of, or claim for damages or other relief
asserted against, the Trust for violation of any law, legal and auditing and
tax fees and expenses, expenses of preparing and setting in type prospectuses,
statements of additional information, proxy material, reports and notices and
the printing and distributing of the same to the Trust's Shareholders and
regulatory authorities, compensation and expenses of its Trustees and
extraordinary expenses incurred by the Trust. If, however, in any fiscal year,
the sum of a Fund's expenses (excluding taxes, interest, brokerage and
extraordinary expenses such as for litigation) exceeds the expense limitations
applicable to such Fund imposed by state securities administrators, as such
limitations may be lowered or raised from time to time, the Trust's agreements
with Boatmen's provide that the respective Fund is entitled to be reimbursed by
Boatmen's to the
B-20
<PAGE> 41
extent required by these expense limitations. As of the date hereof, the most
restrictive expense limitation imposed by state securities administrators of
which the Trust is aware provides that annual expenses (as defined) may not
exceed 2-1/2% of the first $30,000,000 of a Fund's average net assets, plus 2%
of the next $70,000,000 of such assets, plus 1-1/2% of such assets in excess of
$100,000,000, provided that (under the Missouri expense limitation) the
aggregate annual expenses of every type paid or incurred by the Trust, on
behalf of a Fund or its Shareholders, must be substantially comparable with the
aggregate annual operating and advisory expenses incurred by other investment
companies with similar objectives and operating policies.
The Advisory Agreements for the Funds were approved by the Trustees,
including the "non-interested" Trustees, on February 20, 1996. Each Advisory
Agreement will remain in effect until July 31, 1997 and will continue in effect
thereafter only if such continuance is specifically approved at least annually:
(1) by the vote of a majority of the outstanding shares of each Fund (as
defined under "Investment Restrictions") or by the Trustees of the Trust, and
by the vote of a majority of the "non-interested" Trustees. Each Advisory
Agreement will terminate automatically if assigned (as defined in the 1940
Act), and is terminable at any time without penalty by the Trustees of the
Trust or by vote of a majority of the outstanding Shares of the Fund affected
thereby (as defined under "Investment Restrictions") on 60 days' written notice
to Boatmen's, and by Boatmen's on 60 days' written notice to the Trust.
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered open-end investment company
continuously engaged in the issuance of its shares, but such banking laws and
regulations do not prohibit such a holding company or affiliate or banks
generally from acting as investment adviser, transfer agent or custodian to
such an investment company, or from purchasing shares of such a company as
agent for and upon the order of customers. Boatmen's is a state-chartered trust
company. Boatmen's believes that it may perform the services contemplated by
its agreement with the Trust without violation of such banking laws or
regulations, which are applicable to it. It should be noted, however, that
future changes in either Federal or state statutes and regulations relating to
the permissible activities of banks and their subsidiaries or affiliates, as
well as future judicial or administrative decisions or interpretations of
current and future statutes and regulations, could prevent Boatmen's from
continuing to perform such services for the Trust.
Should future legislative, judicial or administrative action prohibit or
restrict the activities of Boatmen's in connection with the provision of
services on behalf of the Trust, the Trust might be required to alter
materially or discontinue its arrangements with Boatmen's and change its method
of operations. It is not anticipated, however, that any change in the Trust's
method of operations would affect the net asset value per share of any Fund or
result in a financial loss to any shareholder. Moreover, if current
restrictions preventing a bank from legally sponsoring, organizing, controlling
or distributing shares of an open-end investment company were relaxed, the
Trust expects that Boatmen's would consider the possibility of offering to
provide some or all of the services now provided by Concord and the
Distributor. It is not possible, of course, to predict whether or in what form
such restrictions might be relaxed or the terms upon which Boatmen's might
offer to provide services for consideration by the Trustees.
THE ADMINISTRATOR
BISYS Fund Services Limited Partnership ("BISYS") has its principal
offices at 3435 Stelzer Road, Columbus, Ohio 43219. BISYS also serves as
administrator to several other investment companies. BISYS is a wholly-owned
subsidiary of The BISYS Group, Inc.
BISYS provides administrative services for the Funds as described in
their Prospectuses pursuant to an Administration Agreement dated as of June 1,
1996. The Agreement will continue in effect with respect to each Fund until
June 1, 1997 and thereafter will be automatically extended as to a particular
Fund for successive periods of one year, provided that such continuance is
specifically approved: (a) by a vote of a majority of those members of the
Board of Trustees of the Trust who are not parties to the Agreement or
interested persons of any such party, cast in person at a meeting called for
the purpose of voting on such
B-21
<PAGE> 42
approval, and (b) by the Board of Trustees of the Trust or by vote of a
majority of the outstanding voting securities of such Fund (as defined under
"Investment Restrictions"). The Agreement is terminable by the Board of
Trustees of the Trust with regard to any Fund, without the payment of any
penalty, at any time if for cause. "Cause" shall mean a material breach by
BISYS of its obligations under the Agreement which shall not have been cured
within 60 days after the date on which BISYS shall have received written
notice setting forth in detail the facts alleged to give rise to the breach.
For its services under the Administration Agreement, BISYS is entitled
to receive an administration fee from the Trust, which is calculated based on
the net assets of all investment portfolios of the Trust combined. Under the
Administration Agreement, each Fund pays its pro rata share of an annual fee to
BISYS, computed daily and payable monthly, of .115 of 1% of the Trust's
average net assets up to $1.5 billion, .110 of 1% of the Trust's average net
assets on the next $1.5 billion, and .1075 of 1% of the Trust's average net
assets in excess of $3 billion. From time to time, BISYS may waive fees or
reimburse the Trust for expenses, either voluntarily or as required by certain
state securities laws.
BISYS will bear all expenses in connection with the performance of its
services under the Administration Agreement for the Trust with the exception of
fees charged by Boatmens Trust Company for certain fund accounting
services which are borne by the Funds.
The Administration Agreement provides that BISYS shall not be liable
for any error of judgment or mistake of law or any loss suffered by any Fund in
connection with the matters to which the Agreement relates except a loss
resulting from willful misfeasance, bad faith or negligence in the performance
of BISYS's duties or from the reckless disregard by BISYS of its
obligations and duties thereunder.
THE DISTRIBUTOR
Pilot Funds Distributors, Inc. (referred to as the "Distributor"), is a
registered broker-dealer and a wholly-owned subsidiary of The BISYS Group,
Inc., located at 3435 Stelzer Road, Columbus, Ohio 43219.
The Distribution Agreement with the Distributor will continue in effect
with respect to each Fund until June 1, 1997 and thereafter will be
automatically extended for successive terms of one year, provided that such
continuance is specifically approved: (a) by a majority of those members of the
Board of Trustees who are not interested persons of the Trust and who have no
direct or indirect financial interest in the operation of any plan that has
been adopted by the Trust pursuant to Rule 12b-1 under the 1940 Act ("Plan") or
in any agreement entered into in connection with such plans ("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 of Trustees of the
Trust or by vote of a majority of the outstanding voting securities of the
Trust (as defined under "Investment Restrictions"). The Agreement is terminable
by the Trust at any time with regard to any class of its shares, 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 class (as
defined under "Investment Restrictions") on 60 days' written notice to the
Distributor, or by the Distributor at any time, without payment of any penalty,
on 60 days' written notice to the Trust.
THE TRANSFER AGENT
BISYS Fund Services, Inc. (the "Transfer Agent"), located at 3435
Stelzer Road, Columbus, Ohio 43219, serves as the Funds' transfer agent and
dividend disbursing agent. The Transfer Agent is a wholly-owned subsidiary of
The BISYS Group, Inc. Under its Transfer Agency Agreement with the Trust,
the Transfer Agent, has undertaken with the Trust to: (i) record the issuance,
transfer and redemption of shares, (ii) provide confirmations of purchases and
redemptions, or monthly statements in lieu thereof, as well as certain other
statements, (iii) provide certain information to the Trust's custodian and the
relevant sub-custodian in connection with redemptions, (iv) provide dividend
crediting and certain disbursing
B-22
<PAGE> 43
agent services, (v) maintain shareholder accounts, (vi) provide certain state
Blue Sky and other information, (vii) provide shareholders and certain
regulatory authorities with tax related information, (viii) respond to
shareholder inquiries, and (ix) render certain other miscellaneous services.
PORTFOLIO TRANSACTIONS
As investment adviser, Boatmen's is responsible for decisions to buy and
sell securities for each Fund, the selection of brokers and dealers to effect
the transactions and the negotiation of brokerage commissions, if any.
Purchases and sales of securities on a securities exchange are effected through
brokers who charge a negotiated commission for their services. Orders may be
directed to any broker including, to the extent and in the manner permitted by
applicable law.
In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without
stated commissions, although the price of a security usually includes a profit
to the dealer. In underwritten offerings, securities are purchased at a fixed
price that includes an amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount. On occasion, certain
money market instruments may be purchased directly from an issuer, in which
case no commissions or discounts are paid.
In placing orders for portfolio securities of a Fund, Boatmen's is
required to give primary consideration to obtaining the most favorable price
and efficient execution. This means that Boatmen's will seek to execute each
transaction at a price and commission, if any, which provide the most favorable
total cost or proceeds reasonably attainable in the circumstances. In seeking
such execution, Boatmen's will use its best judgment in evaluating the terms of
a transaction, and will give consideration to various relevant factors,
including, without limitation, the size and type of the transaction, the nature
and character of the market for the security, the confidentiality, speed and
certainty of effective execution required for the transaction, the general
execution and operational capabilities of the broker-dealer, the reputation,
reliability, experience and financial condition of the firm, the value and
quality of the services rendered by the firm in this and other transactions,
and the reasonableness of the spread or commission, if any.
While Boatmen's generally seeks reasonably competitive spreads or
commissions, a Fund will not necessarily be paying the lowest spread or
commission available. Within the framework of this policy, Boatmen's will
consider research and investment services provided by brokers or dealers who
effect or are parties to portfolio transactions of a Fund, Boatmen's, or its
other clients. Such research and investment services are those which brokerage
houses customarily provide to institutional investors and include statistical
and economic data and research reports on particular companies and industries.
Such services are used by Boatmen's in connection with all of its investment
activities, and some of such services obtained in connection with the execution
of transactions for a Fund may be used in managing other investment accounts.
Conversely, brokers furnishing such services may be selected for the execution
of transactions of such other accounts, whose aggregate assets are far larger
than those of a Fund; and the services furnished by such brokers may be used by
Boatmen's in providing investment advisory and investment management services
for the Trust.
Commission rates are established pursuant to negotiations with the
broker based on the quality and quantity of execution services provided by the
broker in the light of generally prevailing rates. The allocation of orders
among brokers and the commission rates paid are reviewed periodically by the
Trustees of the Trust.
In certain instances there may be securities which are suitable for more
than one portfolio of the Trust as well as for one or more of the other clients
of Boatmen's. Investment decisions for each Fund and for Boatmen's other
clients are made with a view toward achieving their respective investment
objectives. It may happen that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more client
when one or more other clients are selling that same security. Some
simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the same
security is
B-23
<PAGE> 44
suitable for the investment objectives of more than one client. When two or
more clients are simultaneously engaged in the purchase or sale of the same
security, the securities are allocated among clients in a manner believed to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security in a particular
transaction as far as a Fund is concerned. The Trust believes that over time
its ability to participate in volume transactions will produce superior
executions for the Funds.
The portfolio turnover rate for each Fund is calculated by dividing the
lesser of purchases or sales of portfolio securities for the reporting period
by the monthly average value of the portfolio securities owned during the
reporting period. The calculation excludes all securities, including options,
whose maturities or expiration dates at the time of acquisition are one year or
less. Portfolio turnover may vary greatly from year to year as well as within
a particular year, and may be affected by cash requirements for redemption of
shares and by requirements which enable the Funds to receive favorable tax
treatment. Portfolio turnover will not be a limiting factor in making portfolio
decisions.
NET ASSET VALUE
The net asset value per Share of each Fund is determined by the Funds'
custodian at 3:00 p.m., Central time (4:00 p.m., Eastern time), on each
Business Day as defined in the Prospectuses. In the event that the New York
Stock Exchange or the national securities exchange on which stock options are
traded adopt different trading hours on either a permanent or temporary basis,
the Trustees of the Trust will reconsider the time at which net asset value is
computed. In addition, each Trust may compute its net asset value as of any
time permitted pursuant to any exemption, order or statement of the Securities
and Exchange Commission or its staff.
Portfolio securities of each Fund are valued as follows: (a) securities
that are traded on any U.S. or foreign stock exchange or the National
Association of Securities Dealers NASDAQ System ("NASDAQ") are valued at the
last sale price on that exchange or NASDAQ prior to the Trust's valuation time;
if no sale occurs, securities traded on a U.S. exchange or NASDAQ are valued at
the mean between the closing bid and closing asked price and securities traded
on a foreign exchange will be valued at the official bid price; (b)
over-the-counter stocks not quoted on NASDAQ are valued at the last sale price
prior to the Trust's valuation time or, if no sale occurs, at the mean between
the last bid and asked price; (c) debt securities are valued by a pricing
service selected by Boatmen's and approved by the Trustees of the Trust, which
prices reflect broker/dealer supplied valuations and electronic data processing
techniques if those prices are deemed by Boatmen's to be representative of
market values at the Trust's valuation time; (d) options and futures contracts
are valued at the last sale price on the market prior to the Trust's valuation
time where any such option or futures contract is principally traded; (e)
forward foreign currency exchange contracts are valued at their respective
current fair market values supplied by a dealer in such contracts prior to the
Trust's valuation time determined on the basis of prices supplied by a dealer
in such contracts; and (f) all other securities and other assets, including
debt securities, for which prices are supplied by a pricing agent but are not
deemed by Boatmen's to be representative of market values, but excluding money
market instruments with a remaining maturity of sixty days or less and
including restricted securities and securities for which no market quotation is
available, are valued at fair value as determined in good faith pursuant to
procedures established by the Trustees of the Trust, including use of a
Valuation Committee. Money market instruments held by a Fund with a remaining
maturity of sixty days or less will be valued by the amortized cost method.
Portfolio securities traded on more than one United States national
securities exchange or foreign securities exchange are valued at the last sale
price on each business day prior to the Trust's valuation time on the exchange
representing the principal market for such securities. The value of all assets
and liabilities expressed in foreign currencies will be converted into U.S.
dollar values at the rates of such currencies against U.S. dollars last quoted
by any major bank between the buying and selling rates of such currencies
against U.S. dollars last quoted by any major bank. If such quotations are not
available, the rate of exchange will be determined in good faith by or under
procedures established by the Trustees of the Trust.
B-24
<PAGE> 45
Trading in securities on European and Far Eastern securities exchanges
and on over-the-counter markets is normally completed well before the close of
business on each business day of the Trust. In addition, European or Far
Eastern securities trading generally or in a particular country or countries
may not take place on all business days in the United States. Furthermore,
trading takes place in various foreign markets on days which are not business
days in the United States and on days on which a Fund's net asset value is not
calculated. Such calculation does not take place contemporaneously with the
determination of the prices of the majority of the portfolio securities used in
such calculation. Events affecting the values of portfolio securities that
occur between the time their prices are determined and the Trust's valuation
time will not be reflected in a Fund's calculation of net asset values unless
Boatmen's deems that the particular event would materially affect net asset
value, in which case an adjustment will be made.
The proceeds received by the Funds and each additional portfolio
established by the Trustees of the Trust for each issue or sale of its shares,
and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically
allocated to such Fund and constitute the underlying assets of that Fund. The
underlying assets of each Fund will be segregated on the books of account, and
will be charged with the liabilities of such Fund and a share of the general
liabilities of the Trust. Expenses with respect to the Funds are generally
allocated in proportion to the net asset values of the respective portfolios
except where allocations of direct expenses can otherwise be fairly made. In
addition, certain distribution and service fees will be borne exclusively by
the class to which they relate.
MATTERS RELATING TO CLASS A SHARES AND CLASS B SHARES
As distributor, the Distributor pays the cost of printing and
distributing prospectuses to persons who are not shareholders of the Funds
(excluding preparation and printing expenses necessary for the continued
registration of the Funds' shares) and of printing and distributing all sales
literature. The Distributor is entitled to the payment of a front-end sales
charge on the sale of Class A Shares of the Funds as described in the
Prospectus for such Shares. The Distributor is also entitled to the payment of
a contingent deferred sales charge upon redemption of Class B Shares of the
Funds as described in the Prospectus for such Shares.
The Distributor is also entitled to payment by the Trust for
distribution in addition to the sales charges described in the Prospectuses.
Under the Trust's Distribution Plan for Class A Shares, the Trust pays fees for
the provision of services by Service Organizations (which may include the
Distributor itself), persons ("Clients") for whom the Service Organization is
the dealer of record or holder of record or with whom the Service Organization
has a servicing relationship. Under the Trust's Distribution Plan for Class B
Shares of the Funds, the Trust may pay the Distributor for (a) expenses
incurred in connection with advertising and marketing shares of the Funds,
including but not limited to any advertising or marketing via radio,
television, newspapers, magazines, telemarketing or direct mail solicitations;
(b) fees for services rendered with respect to Class B Shares similar to those
services described above with respect to Class A Shares; (c) expenses incurred
in preparing, printing and distributing Prospectuses (except those used for
regulatory purposes or for distribution to existing shareholders) and in
implementing and operating the Distribution Plan; and (d) interest on amounts
expended by the Distributor that are not immediately repaid by the Trust (to
the extent approved by the Board of Trustees and permitted by published
positions of the Securities and Exchange Commission).
Services provided by Service Organizations pursuant to the Distribution
Plans may include, among other things: (i) establishing and maintaining
accounts and records relating to Clients that beneficially own Class A or Class
B Shares; (ii) processing dividend and distribution payments on behalf of
Clients; (iii) providing information periodically to Clients regarding their
Share positions; (iv) arranging for bank wires; (v) responding to Client
inquiries concerning their investments in Shares; (vi) providing the
information to the Funds necessary for accounting or subaccounting; (vii) if
required by law, forwarding shareholder communications from the Funds (such as
proxies, shareholder reports, annual and semi-annual financial statements and
dividend, distribution and tax notices) to Clients; (viii) assisting in
processing exchange and redemption requests from Clients; (ix) assisting
Clients in changing dividend options, account designations and addresses; and
(x) providing other similar services.
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<PAGE> 46
The Distribution Plan for Class A Shares provides that the Distributor
is entitled to receive distribution payments on a monthly basis at an annual
rate not exceeding .25% of the average daily net assets during such month of
the outstanding Shares to which a particular Plan relates. If in any month the
Distributor expends or is due more monies than can be immediately paid due to
this percentage limitation, the unpaid amount is carried forward from month to
month while the Distribution Plan is in effect until such time, if ever, when
it can be paid in accordance with such percentage limitation. Conversely, if in
any month the Distributor does not expend the entire amount then available
under a Plan, and assuming that no unpaid amounts have been carried forward and
remain unpaid, then the amount not expended will be a credit to be drawn upon
by the Distributor to permit future payment. However, any unpaid amounts or
credits due under a Distribution Plan may not be "carried forward" beyond the
end of the fiscal year in which such amounts or credits due are accrued.
The Distribution Plan for Class B Shares provides that the Distributor
is entitled to receive distribution payments on a monthly basis at an annual
rate not exceeding 1.00% of the average daily net assets during such month of
the outstanding Shares to which such Plan relates. Not more than 0.25% of such
net assets will be used to compensate Service Organizations for personal
services provided to Class B Shareholders and/or the maintenance of such
shareholders' accounts and not more than .75% of such net assets will be used
for promotional and other primary distribution activities.
Payments made out of or charged against the assets of a particular class
of Shares of a particular Fund must be in payment for expenses incurred on
behalf of that class. (The Distribution Plans permit, however, joint
distribution financing by the Funds or other investment portfolios or companies
that are affiliated persons of the Funds, affiliated persons of such a person,
or affiliated persons of the Distributor, in accordance with applicable
regulations of the Securities and Exchange Commission.)
Payments for distribution expenses under a particular Distribution Plan
are subject to Rule 12b-1 (the "Rule") under the 1940 Act. Payments under the
Distribution Plans are also subject to the conditions imposed by Rule 18f-3
under the 1940 Act and a Rule 18f-3 Multiple Class Plan which has been adopted
by the Trustees of the Trust for the benefit of the Funds. The Rule defines
distribution expenses to include the cost of "any activity which is primarily
intended to result in the sale of [Trust] shares." The Rule provides, among
other things, that an investment company may bear such expenses only pursuant to
a plan adopted in accordance with the Rule. In accordance with the Rule, the
Plans provide that a report of the amounts expended under the respective Plans,
and the purposes for which such expenditures were incurred, will be made to the
Board of Trustees for its review at least quarterly. The Distribution Plans for
Class A Shares and Class B Shares provide that they may not be amended to
increase materially the costs which Class A or Class B Shares of a Fund may bear
for distribution pursuant to the respective Distribution Plans without
shareholder approval, and both Plans provide that any other type of material
amendment must be approved by a majority of the Board of Trustees, and by a
majority of the Trustees who are neither "interested persons" (as defined in the
1940 Act) of the Trust nor have any direct or indirect financial interest in the
operation of the Plan being amended or in any related agreements, by vote cast
in person at a meeting called for the purpose of considering such amendments
(the "Disinterested Trustees"). In addition, as long as the Distribution Plans
for the respective Share classes are in effect, the nomination of the Trustees
who are not interested persons of the Trust (as defined in the 1940 Act) must be
committed to the non-interested Trustees.
The Board of Trustees of the Trust has concluded that there is a
reasonable likelihood that the respective Plans will benefit the Funds and
Class A and Class B Shareholders, respectively. The Plans are subject to annual
re-approval by a majority of the Disinterested Trustees of the Trust and are
terminable at any time with respect to any Fund by a vote of a majority of such
Trustees or, with respect to the Distribution Plans, by vote of the holders of
a majority of the applicable Shares of the Fund involved. Any agreement
entered into pursuant to the respective Distribution Plans with a Service
Organization is terminable with respect to any Fund without penalty, at any
time, by vote of a majority of the Disinterested Trustees, by vote of the
holders of a majority of the applicable Shares of such Fund, by the Distributor
or by the Service Organization. An agreement will also terminate automatically
in the event of its assignment.
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<PAGE> 47
Banks may act as Service Organizations and receive payments under the
Distribution Plans as described. The Glass-Steagall Act and other applicable
laws, among other things, prohibit banks from engaging in the business of
underwriting securities. If a bank were prohibited from acting as a Service
Organization, changes in the operation of the Funds might occur and a
shareholder serviced by such bank might no longer be able to avail himself or
herself of any automatic investment or other services than being provided by
the bank. It is not expected that shareholders would suffer any adverse
financial consequences as a result of these occurrences.
The Trust understands that Boatmen's and its affiliates and/or some
Service Organizations may charge their clients a direct fee for services in
connection with their investments in the Funds. These fees would be in addition
to any amounts which might be received under the respective Plans. Small,
inactive long-term accounts involving such additional charges may not be in the
best interest of shareholders.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
As described in the Prospectuses for such Shares, Class A Shares and
Class B Shares may be purchased directly from the Distributor or by Clients of
certain financial institutions such as broker-dealers that have entered into
selling and/or servicing agreements with the Distributor ("Service
Organizations"). Pilot Shares may be purchased by Boatmen's and its affiliates
acting on behalf of themselves and persons maintaining qualified accounts at
such institutions, as described in the Prospectus for such Shares. Individuals
may not purchase Pilot Shares directly. Boatmen's and its affiliates and
Service Organizations may impose minimum customer account and other
requirements in addition to those imposed by the Trust and described in the
Prospectuses. Depending on the terms of the particular account, these entities
may charge their customers fees for automatic investment, redemption and other
services. Such fees may include, for example, account maintenance fees,
compensating balance requirements or fees based upon account transactions,
assets or income. Boatmen's and its affiliates and Service Organizations are
responsible for providing information concerning these services and any charges
to any customer who must authorize the purchase of shares prior to such
purchase.
Purchase orders will be effected only on business days. Persons wishing
to purchase shares through their accounts at a Service Organization (for Class
A Shares and Class B Shares, or at Boatmen's or its affiliates (for Pilot
Shares), should contact such entity directly for appropriate instructions.
An investor desiring to purchase Class A Shares or Class B Shares
directly from the Trust by wire should request his or her bank to transmit
immediately available funds by wire to Boatmen's Trust Company, St. Louis, MO,
ABA #081000032, Re: Pilot Funds Incoming Wire Account DDA No. 100101265270,
for purchase of shares in the investor's name. It is important that the wire
include the investor's name, address, and taxpayer identification number,
indicate whether a new account is being established or a subsequent payment is
being made to an established account and indicate the name of the Fund and the
class of shares being purchased. If a subsequent payment is being made, the
investor's Fund account number should be included. An investor in Class A
Shares or Class B Shares must have completed and forwarded to the Transfer
Agent an Account Application including any required signature guarantees,
before any redemptions of shares purchased by wire may be processed.
Class A Shares of each Fund are sold with a front-end sales charge. As
described in the Prospectus for Class A Shares of the Funds, a front-end sales
charge will not be imposed on certain types of transactions and/or investors
(provided the status of the investment is explained at the time of investment).
These exemptions to the imposition of a front-end sales charge are due to the
nature of the investors and/or the reduced sales efforts that will be needed in
obtaining such investments.
Class B Shares of the Funds are sold without a front-end sales charge,
but are subject to a contingent deferred sales charge. As described in the
Prospectus for Class B Shares, the contingent deferred sales charge is not
charged on certain types of redemptions. You must explain the status of your
redemption at the time you redeem your shares in order to receive the sales
charge exemption.
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<PAGE> 48
Boatmen's and/or the Distributor may charge certain fees for acting as
Custodian for IRAs or 401k retirement plans, payment of which could require the
liquidation of shares. Consult the appropriate form for a description of these
fees. Purchases for IRA accounts or 401k retirement plans will be effective
only when payments received by the Transfer Agent are converted into federal
funds. Purchases for these plans may not be made in advance of receipt of
funds.
SUPPLEMENTARY REDEMPTION INFORMATION
An investor whose shares are purchased through accounts at Boatmen's or
its affiliates or a Service Organization may redeem all or part of his or her
shares in accordance with instructions pertaining to such accounts. Shares in a
Fund for which orders placed by Boatmen's or its affiliates, a Service
Organization or individual investor for wire redemption are received on a
business day before the close of regular trading hours on the New York Stock
Exchange (currently 3:00 p.m. Central time) will be redeemed as of the close of
regular trading on such Exchange and the proceeds of redemption (less any
applicable contingent deferred sales charge) will normally be wired in federal
funds on the next business day to the commercial bank specified by the
individual investor on the Account Application (or other bank of record on the
investor's file with the Transfer Agent), or to the Service Organization
through which the investment was made. To qualify to use the wire redemption
privilege with the Trust, the payment for shares must be drawn on, and
redemption proceeds paid to, the same bank and account as designated on the
Account Application (or other bank of record as described above). If the
proceeds of a particular redemption are to be wired to another bank, the
request must be in writing and signature guaranteed. Shares in the Funds for
which orders for wire redemption are received by the Trust after the close of
regular trading hours on the New York Stock Exchange or on a non-business day
will be redeemed as of the close of regular trading on such Exchange on the
next day on which shares of the particular Fund are priced and the proceeds
(less any applicable contingent deferred sales charge) will normally be wired
in federal funds on the next business day thereafter. Redemption proceeds (less
any applicable contingent deferred sales charge) will be wired to a
correspondent member bank if the investor's designated bank is not a member of
the Federal Reserve System. Immediate notification by the correspondent bank to
the investor's bank is necessary to avoid a delay in crediting the funds to the
investor's bank account. Proceeds of less than $1,000 will be mailed to the
investor's address.
To change the commercial bank or account designated to receive
redemption proceeds from Class A Shares or Class B Shares a written request
must be sent to The Pilot Funds, c/o BISYS Fund Services, Inc., 3435 Stelzer
Road, Columbus, Ohio 43219. Such request must be signed by each shareholder,
with each signature guaranteed as described in the Funds' Prospectuses.
Guarantees must be signed by an authorized signatory and "signature guaranteed"
must appear with the signature.
For processing redemptions or to change wiring instructions with the
Trust, the Transfer Agent may request further documentation from corporations,
executors, administrators, trustees or guardians. The Transfer Agent will
accept other suitable verification arrangements from foreign investors, such as
consular verification.
EXCHANGE PRIVILEGE
The Trust offers an exchange privilege whereby investors may exchange
all or part of their Class A Shares for Class A Shares of the other Funds;
Class B Shares for Class B Shares of the other Funds; and Pilot Shares for
Pilot Shares of the other Funds and the other investment portfolios of the
Trust. By use of this exchange privilege, the investor authorizes the Transfer
Agent to act on telephonic or written exchange instructions from any person
representing himself or herself to be the investor and believed by the Transfer
Agent to be genuine. The Transfer Agent's records of such instructions are
binding. The exchange privilege may be modified or terminated at any time upon
notice to shareholders. For federal income tax purposes, exchange transactions
are treated as sales on which a purchaser will realize a capital gain or loss
depending on whether the value of the shares exchanged is more or less than his
or her basis in such shares at the time of the transaction.
B-28
<PAGE> 49
Exchange transactions described in Paragraphs A, B and C below will be
made on the basis of the relative net asset values per share of the investment
portfolios involved in the transaction. Paragraphs A, B and C relate only to
whether a front-end sales charge will be imposed, not to whether a particular
exchange transaction is permissible or impermissible.
(a) Class A Shares, as well as additional shares acquired through
reinvestment of dividends or distributions on such shares, may be
exchanged without a front-end sales charge for Class A Shares of
any non-money market investment portfolio of the Trust.
(b) Shares of any investment portfolio of the Trust acquired by a
previous exchange transaction involving shares on which a
front-end sales charge has directly or indirectly been paid
(e.g., Class A Shares issued in connection with an exchange
transaction involving Class A Shares), as well as additional
shares acquired through reinvestment of dividends or
distributions on such shares, may be exchanged without a
front-end sales charge for Class A Shares of any other non-money
market investment portfolio of the Trust. To accomplish an
exchange transaction under the provisions of this Paragraph,
investors must notify the Transfer Agent of their prior ownership
of shares and their account number.
(c) Class A Shares of any non-money market portfolio acquired in
connection with the distribution of assets held in a qualified
trust, agency or custodial account maintained with Boatmen's or
its affiliates may be exchanged without a front-end sales charge
for Class A Shares of any non-money market investment portfolio
of the Trust.
Class B Shares acquired pursuant to an exchange transaction will
continue to be subject to a contingent deferred sales charge. However, Class B
Shares may be exchanged for other Class B Shares without the payment of a
contingent deferred sales charge at the time of exchange. In determining the
holding period for calculating the contingent deferred sales charge payable on
redemption of Class B Shares, the holding period of the shares originally held
will be added to the holding period of the shares acquired through exchange.
In addition, as described in the Prospectuses, under certain
circumstances exchange transactions between Class A Shares and Pilot Shares in
the same Fund may be permitted without the payment of a front-end sales charge.
Except as stated above, a front-end sales charge will be imposed when
shares of any investment portfolio of the Trust that were purchased or
otherwise acquired without a front-end sales charge are exchanged for shares of
a non-money market investment portfolio of the Trust subject to such a
front-end charge.
Exchange requests received on a business day prior to the time shares of
the investment portfolios involved in the request are priced will be processed
on the date of receipt. "Processing" a request means that shares in the
investment portfolios from which the shareholder is withdrawing an investment
will be redeemed at the net asset value per share next determined on the date
of receipt. Shares of the new investment portfolio into which the shareholder
is investing will also normally be purchased at the net asset value per share
next determined coincident to or after the time of redemption. Exchange
requests received on a business day after the time shares of the investment
portfolios involved in the request are priced will be processed on the next
business day in the manner described above.
RIGHT OF ACCUMULATION AND STATEMENT OF INTENTION
For the purpose of applying the Right of Accumulation or Statement of
Intention privileges available to certain Class A Share investors in the Funds
as described in the Prospectus, the scale of sales charges applies to purchases
of Class A Shares made by any "purchaser," which term includes an individual
and/or spouse purchasing securities for his, her or their own account or for
the account of any minor children; or a trustee or other fiduciary account
(including a pension, profit-sharing or other employee benefit trust created
pursuant to a plan qualified under Section 401 of the Internal Revenue Code)
although more than one beneficiary is
B-29
<PAGE> 50
involved; or "a qualified group" which has been organized for the
purpose of buying redeemable securities of a registered investment
company at a discount, provided that the purchases are made through a
central administrator or a single dealer, or by other means which result
in economy of sales effort or expense. A "qualified group" must have
more than 10 members, must be available to arrange for group meetings
between representatives of the Funds and the members, and must be able
to arrange for mailings to members at reduced or no cost to the
Distributor.
MISCELLANEOUS
Certificates for shares will not be issued.
With respect to the Funds, a "business day" is a day on which the New
York Stock Exchange is open for trading, and includes Martin Luther King, Jr.
Day, Columbus Day and Veterans Day. The scheduled 1996 holidays on which the
New York Stock Exchange is closed are: New Year's Day (observed), President's
Day, Good Friday, Memorial Day, Independence Day (observed), Labor Day,
Thanksgiving Day and Christmas Day (observed).
The Trust may suspend the right of redemption or postpone the date of
payment for shares during any period when (a) trading on the New York Stock
Exchange (the "Exchange") is restricted by applicable rules and regulations of
the Securities Exchange Commission; (b) the Exchange is closed for other than
customary weekend and holiday closings; (c) the Securities and Exchange
Commission has by order permitted such suspension; or (d) an emergency exists
as determined by the Securities and Exchange Commission. (The Trust may also
suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions.)
The Trust reserves the right to require a shareholder to redeem
involuntarily shares in an account (other than an IRA or Qualified Retirement
Plan account) if the balance held of record by the shareholder drops below
$1,000 and such shareholder does not increase such balance to $1,000 or more
upon 30 days' notice. The Trust will not require a shareholder to redeem shares
of a Fund if the balance held of record by the shareholder is less than $1,000
solely because of a decline in the net asset value of the Fund's shares or
because the shareholder has made an initial investment in a lower amount as
provided for in the Funds' Prospectuses. The Trust may also redeem shares
involuntarily if such redemption is appropriate to carry out the Trust's
responsibilities under the 1940 Act.
The Trust may redeem shares involuntarily to reimburse a Fund for any
loss sustained by reason of the failure of a shareholder to make full payment
for shares purchased by the shareholder or to collect any charge relating to a
transaction effected for the benefit of a shareholder which is applicable to
Fund shares as provided in the Funds' Prospectuses from time to time.
IN KIND PURCHASES
Payment for shares of a Fund may, in the discretion of Boatmen's, be
made in the form of securities that are permissible investments for the Fund as
described in the Prospectuses. For further information about this form of
payment, contact Boatmen's. In connection with an in-kind securities payment, a
Fund will require, among other things, that the securities be valued on the day
of purchase in accordance with the pricing methods used by the Fund and that
the Fund receive satisfactory assurances that it will have good and marketable
title to the securities received by it; that the securities be in proper form
for transfer to the Fund; and that adequate information be provided concerning
the basis and other tax matters relating to the securities.
REDEMPTIONS IN KIND
If the Board of Trustees determines that conditions exist which make
payment of redemptions proceeds wholly in cash unwise or undesirable, the Trust
may make payment wholly or partly in securities or other property. Such
redemptions will only be made in "readily marketable" securities. In such an
event, a
B-30
<PAGE> 51
shareholder would incur transaction costs in selling the securities or other
property. Each Fund may commit that it will pay all redemption requests by a
shareholder of record in cash, limited in amount with respect to each
shareholder during any ninety-day period to the lesser of $250,000 or 1% of the
net asset value of the Fund at the beginning of such period.
CALCULATION OF PERFORMANCE QUOTATIONS
From time to time, the yields and the total returns of the Funds may be
quoted in advertisements, shareholder reports or other communications to
shareholders. Performance information with respect to the Funds is generally
available by calling (800) 71-PILOT. Yields and total returns as reported in
the following publications may be used to compare the performance of the Funds
or any one of them to that of other mutual funds with similar investment
objectives and to stock and other relevant indices or to rankings prepared by
independent services or other financial or industry publications that monitor
the performance of mutual funds: Lipper Analytical Services, Incorporated,
Weisenberger Investment Companies Service, Donoghue's Money Fund Report,
Barron's, Business Week, Changing Times, Financial World, Forbes, Money,
Personal Investor, Sylvia Porter's Personal Finance and The Wall Street
Journal.
From time to time, the Funds may include general comparative
information, such as statistical data regarding inflation, securities indices
or the features or performance of alternative investments, in advertisements,
sales literature and reports to shareholders. The Funds may also include
calculations, such as hypothetical compounding examples, which describe
hypothetical investment results in such communications. Such performance
examples will be based on an express set of assumptions and are not indicative
of the performance of any Fund.
In addition, in such communication, Boatmen's may offer opinions on
current economic conditions.
YIELD CALCULATIONS
The yields for the respective share classes of a Fund are calculated
separately by dividing the net investment income per share (as described below)
earned by the Fund during a 30-day (or one month) period by the maximum
offering price per share (including the maximum front-end sales charge of 4.50%
for Class A Shares of the Growth Fund or 4.0% for the Diversified Bond Income
Fund on the last day of the period and annualizing the result on a semi-annual
basis by adding one to the quotient, raising the sum to the power of six,
subtracting one from the result and then doubling the difference. The Fund's
net investment income per share earned during the period with respect to a
particular class is based on the average daily number of shares outstanding in
the class during the period entitled to receive dividends and includes
dividends and interest earned during the period attributable to that class
minus expenses accrued for the period attributable to the class, net of
reimbursements. This calculation can be expressed as follows:
Yield equals 2/(a-b/cd plus 1)6 minus 1
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = maximum offering price per share on the last day
of the period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by a Fund is recognized by accruing 1/360 of the stated
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dividend rate of the security each day that the security is in the Fund. Except
as noted below, interest earned on debt obligations held by a Fund is calculated
by computing the yield to maturity of each obligation held by the Fund based on
the market value of the obligation (including actual accrued interest) at the
close of business on the last business day of each month, or, with respect to
obligations purchased during the month, the purchase price (plus actual accrued
interest), and dividing the result by 360 and multiplying the quotient by the
market value of the obligation (including actual accrued interest) in order to
determine the interest income on the obligation for each day of the subsequent
month that the obligation is held by the Fund. For purposes of this
calculation, it is assumed that each month contains 30 days. The maturity of an
obligation with a call provision is the next call date on which the obligation
reasonably may be expected to be called or, if none, the maturity date. With
respect to debt obligations purchased at a discount or premium, the formula
generally calls for amortization of the discount or premium. The amortization
schedule will be adjusted monthly to reflect changes in the market values of
such debt obligations.
With respect to mortgage or other receivables-backed obligations which
are expected to be subject to monthly payments of principal and interest ("pay
downs"), (a) gain or loss attributable to actual monthly pay downs are
accounted for as an increase or decrease to interest income during the period;
and (b) a Fund may elect either (i) to amortize the discount and premium on the
remaining security, based on the cost of the security, to the weighted average
maturity date, if such information is available, or to the remaining term of
the security, if any, if the weighted average maturity date is not available,
or (ii) not to amortize discount or premium on the remaining security.
Undeclared earned income will be subtracted from the maximum offering
price per share (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the base period, has not been
declared as a dividend, but is reasonably expected to be and is declared and
paid as a dividend shortly thereafter.
TOTAL RETURN CALCULATIONS
Each Fund computes its average annual total return separately for its
separate share classes by determining the average annual compounded rates of
return during specified periods that equate the initial amount invested in a
particular share class to the ending redeemable value of such investment in the
class. This is done by dividing the ending redeemable value of a hypothetical
$1,000 initial payment by $1,000 and raising the quotient to a power equal to
one divided by the number of years (or fractional portion thereof) covered by
the computation and subtracting one from the result. This calculation can be
expressed as follows:
T equals (ERV/P) 1/n minus 1
Where: T = average annual total return.
ERV = ending redeemable value at the end of the
period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in
terms of years.
Each Fund computes its aggregate total returns separately for its
separate share classes by determining the aggregate rates of return during
specified periods that likewise equate the initial amount invested in a
particular share class to the ending redeemable value of such investment in the
class. The formula for calculating aggregate total return is as follows:
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<PAGE> 53
aggregate total return = ERV/P minus 1
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain distributions
on the reinvestment dates during the period. The ending redeemable value
(variable "ERV" in each formula) is determined by assuming complete redemption
of the hypothetical investment and the deduction of all nonrecurring charges at
the end of the period covered by the computations. In addition, a Fund's
average annual total return and aggregate total return quotations reflect the
deduction of the maximum front-end sales charge in connection with the purchase
of Class A Shares and the deduction of any applicable contingent deferred sales
charge with respect to Class B Shares.
Each Fund may also advertise total return data without reflecting sales
charges in accordance with the rules of the Securities and Exchange Commission.
Quotations that do not reflect such sales charges will, of course, be higher
than quotations that do.
Unlike bank deposits or other investments that pay a fixed yield or
return for a stated period of time, the return for a Fund will fluctuate from
time to time and does not provide a basis for determining future returns.
Return is a function of portfolio quality, composition, maturity and market
conditions, as well as the expenses allocated to each Fund. The return of a
Fund may not be readily comparable to other investment alternatives because of
differences in the foregoing variables and the methods used to value portfolio
securities, compute expenses and calculate return.
Average annual total return, aggregate total return and yield are
calculated separately for Pilot Shares, Class A Shares and Class B Shares.
Pilot Shares, Class A Shares and Class B Shares are subject to different fees
and expenses and may have different performance for the same period.
TAX INFORMATION
Each Fund intends to elect to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). Such qualification does not involve supervision of management or
investment practices by any governmental agency or bureau.
In order to qualify as a regulated investment company, each Fund must,
among other things: (a) derive at least 90% of its annual gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock or securities or foreign currencies, or
other income (such as gains from options, futures or forward contracts) derived
with respect to its business of investing in such stock, securities or
currencies; (b) derive less than 30% of its annual gross income from the sale
or other disposition of: (i) stock or securities, (ii) options, futures or
forward contracts (other than options, futures or forward contracts on foreign
currencies), or (iii) foreign currencies (or foreign currency options, futures
or forward contracts) not directly related to the Fund's principal business of
investing in stock or securities (or options and futures with respect to stocks
or securities), held less than three months (the "30% Limitation"); and (c)
diversify its holdings so that, at the end of each quarter of its taxable year:
(i) at least 50% of the market value of the Fund's total assets is represented
by cash and (ii) not more than 25% of the value of the Fund's total assets is
invested in the securities (other than U.S. Government securities and
securities of other regulated investment companies) of any one issuer.
Each Fund, as a regulated investment company, generally should not be
subject to federal income tax on its investment company taxable income (which
includes, among other items, dividends, interest and net short-term capital
gains in excess of net long-term capital losses) and net capital gains (the
excess of net long-term capital gains over net short-term capital losses) which
are distributed to Shareholders in any taxable
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<PAGE> 54
year, provided that the Fund distributes at least 90% of its investment company
taxable income and its net tax-exempt interest income, if any, each taxable
year. In order to avoid a 4% federal excise tax, each Fund must distribute (or
be deemed to have distributed) by December 31 of each calendar year at least
98% of its ordinary income (not taking into account any capital gains or loss)
for such year, at least 98% of the excess of its capital gains over its capital
losses (adjusted for certain ordinary losses) computed on the basis of the
one-year period ending on October 31 of such year, and any ordinary income and
capital gains for previous years that were not distributed during those years.
A distribution, including an "exempt-interest dividend," will be treated as
having been paid on December 31 of the current calendar year if it is declared
by a Fund in October, November or December with a record date in such a month
and paid during January of the following calendar year. Such distributions will
be taxable to Shareholders in the calendar year in which the distributions are
declared.
Dividends paid out of a Fund's investment company taxable income will be
treated as ordinary income in the hands of Shareholders. If a portion of a
Fund's income consists of dividends paid by U.S. corporations, a portion of the
dividends paid by the Fund may qualify for the corporate dividends-received
deduction. Distributions of net capital gains, if any, which are designated as
capital gain dividends are taxable to Shareholders as long-term capital gain,
regardless of the length of time the Shares of a Fund have been held by such
Shareholders, and are not eligible for the corporate dividends-received
deduction. Net capital gains for a taxable year are computed by taking into
account any capital loss carry-forward of a Fund.
Distributions of investment company taxable income and net capital gains
will be taxable as described above, whether received in additional Shares or in
cash. Shareholders electing to receive distributions in the form of additional
Shares will have a cost basis in each Share so received equal to the net asset
value of such Share on the reinvestment date.
Investments by a Fund in zero coupon securities (other than tax-exempt
zero coupon securities) will result in income to the Fund equal to a portion of
the excess of the face value of the securities over their issue price (the
"original issue discount") each year that the securities are held, even though
the Fund receives no cash interest payments. This income is included in
determining the amount of income which a Fund must distribute to maintain its
status as a regulated investment company and to avoid the payment of federal
income tax and the 4% excise tax. Similarly, investments in tax-exempt zero
coupon securities will result in a Fund accruing tax-exempt income each year
that the securities are held, even though the Fund receives no cash payments of
tax-exempt interest. This tax-exempt income is included in determining the
amount of net tax-exempt interest income which a Fund must distribute to
maintain its status as a regulated investment company.
Gain derived by a Fund from the disposition of any market discount bonds
(i.e., bonds purchased other than at original issue, where the face value of
the bonds exceeds their purchase price), including tax-exempt market discount
bonds, held by the Fund will be taxed as ordinary income to the extent of the
accrued market discount on the bonds, unless the Fund elects to include the
market discount in income as it accrues.
The taxation of equity options and over-the-counter options on debt
securities is governed by Code Section 1234. Pursuant to Code Section 1234, the
premium received by a Fund for selling a put or call option is not included in
income at the time of receipt. If the option expires, the premium is
short-term capital gain to the Fund. If the Fund enters into a closing
transaction, the difference between the amount paid to close out its position
and the premium received is short-term capital gain or loss. If a call option
written by a Fund is exercised, thereby requiring the Fund to sell the
underlying security, the premium will increase the amount realized upon the
sale of such security and any resulting gain or loss will be a capital gain or
loss, and will be long-term or short-term depending upon the holding period of
the security. With respect to a put or call option that is purchased by a Fund,
if the option is sold, any resulting gain or loss will be a capital gain or
loss, and will be long-term or short-term, depending upon the holding period of
the option. If the option expires, the resulting loss is a capital loss and is
long-term or short-term, depending upon the holding period of the option. If
the option is exercised, the cost of the option, in the case of a call option,
is added to the basis of the purchased security and, in the case of a put
option, reduces the amount realized on the underlying security in determining
gain or loss.
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<PAGE> 55
Certain options, futures contracts and forward contracts in which a Fund
may invest are "section 1256 contracts." Gains or losses on section 1256
contracts generally are considered 60% long-term and 40% short-term capital
gains or losses ("60/40"); however, foreign currency gains or losses (as
discussed below) arising from certain section 1256 contracts may be treated as
ordinary income or loss. Also, section 1256 contracts held by a Fund at the end
of each taxable year (and, generally, for purposes of the 4% excise tax, on
October 31 of each year) are "marked-to-market" (that is, treated as sold at
fair market value), resulting in unrealized gains or losses being treated as
though they were realized.
Generally, the hedging transactions undertaken by a Fund may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by a Fund. In addition, losses
realized by a Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which the losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to the Funds of engaging in hedging
transactions are not entirely clear. Hedging transactions may increase the
amount of short-term capital gain realized by a Fund which is taxed as ordinary
income when distributed to its Shareholders.
Each Fund may make one or more of the elections available under the Code
which are applicable to straddles. If a Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections
may operate to accelerate the recognition of gains or losses from the affected
straddle position.
Because the straddle rules may affect the character of gains or losses,
defer losses and/or accelerate the recognition of gains or losses from the
affected straddle positions, the amount which may be distributed to
Shareholders, and which will be taxed to them as ordinary income or long-term
capital gain, may be increased or decreased as compared to a Fund that did not
engage in such hedging transactions.
The 30% Limitation and the diversification requirements applicable to
each Fund's assets may limit the extent to which the Fund will be able to
engage in transactions in options, futures contracts and forward contracts.
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Fund accrues receivables, or liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables, or pays such liabilities, generally are treated as ordinary income
or ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency and on disposition of certain futures contracts, forward
contracts and options, gains or losses attributable to fluctuations in the
value of foreign currency between the date of acquisition of the security or
contract and the date of disposition also are treated as ordinary gain or loss.
These gains or losses, referred to under the Code as "section 988" gains or
losses, may increase or decrease the amount of a Fund's investment company
taxable income to be distributed to its Shareholders as ordinary income.
If a Fund invests in stock of certain foreign investment companies, the
Fund may be subject to U.S. federal income taxation on a portion of any "excess
distribution" with respect to, or gain from the disposition of, such stock. The
tax would be determined by allocating such distribution or gain ratably to each
day of the Fund's holding period for the stock. The distribution or gain so
allocated to any taxable year of the Fund, other than the taxable year of the
excess distribution or disposition, would be taxed to the Fund at the highest
ordinary income rate in effect for such year, and the tax would be further
increased by an interest charge to reflect the value of the tax deferral deemed
to have resulted from the ownership of the foreign company's stock. Any amount
of distribution or gain allocated to the taxable year of the distribution or
disposition would be included in the Fund's investment company taxable income
and, accordingly, would not be taxable to the Fund to the extent distributed by
the Fund as a dividend to its Shareholders.
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Each Fund which invests in foreign equity securities may be able to make
an election, in lieu of being taxable in the manner described above, to include
annually in income its pro rata share of the ordinary earnings and net capital
gain of the foreign investment company, regardless of whether it actually
received any distributions from the foreign company. These amounts would be
included in the Fund's investment company taxable income and net capital gain
which, to the extent distributed by the Fund as ordinary or capital gain
dividends, as the case may be, would not be taxable to the Fund. In order to
make this election, the Fund would be required to obtain certain annual
information from the foreign investment companies in which it invests, which in
many cases may be difficult to obtain. Alternatively, a Fund may be able to
elect to mark to market its foreign investment company stock, resulting in the
stock being treated as sold at fair market value on the last business day of
each taxable year. Any resulting gain would be reported as ordinary income, and
any resulting loss would not be recognized.
Any gain or loss realized by a Shareholder upon the sale or other
disposition of Shares, or upon receipt of a distribution in complete
liquidation of a Fund, generally will be a capital gain or loss which will be
long-term or short-term, generally depending upon the Shareholder's holding
period for the Shares. Any loss realized on a sale or exchange will be
disallowed to the extent the Shares disposed of are replaced (including Shares
acquired pursuant to a dividend reinvestment plan) within a period of 61 days
beginning 30 days before and ending 30 days after disposition of the Shares. In
such a case, the basis of the Shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized by a Shareholder on a disposition of Shares
held by the Shareholder for six months or less will be treated as a long-term
capital loss to the extent of any distributions of net capital gains received
by the Shareholder with respect to such Shares.
Each Fund which invests in foreign securities may be subject to foreign
withholding taxes on its investments in such securities. These taxes may be
reduced under the terms of applicable tax treaties, and each Fund intends to
satisfy any procedural requirements to qualify for benefits under these
treaties. In the unlikely event that more than 50% of the value of its total
assets at the close of a taxable year is composed of stock or securities of
foreign corporations, a Fund may make an election under Code Section 853 to
permit its Shareholders (subject to limitations) to claim a credit or deduction
on their federal income tax returns for their pro rata portion of qualified
taxes paid by that Fund in foreign countries. In the event such an election is
made, Shareholders would be required to include their pro rata portion of such
taxes in gross income and may be entitled to claim a foreign tax credit or
deduction for the taxes, subject to certain limitations under the Code.
Shareholders who are precluded from taking such credits or deductions will
nevertheless be taxed on their pro rata share of the foreign taxes included in
their gross income, unless they are otherwise exempt from federal income taxes.
It is not expected, however, that more than 50% of any Fund's total assets will
consist of stock or securities of foreign corporations and, consequently, it is
not expected that Shareholders will be eligible to claim a foreign tax credit
or deduction with respect to foreign taxes paid by any Fund.
Each Fund will be required to report to the Internal Revenue Services
(the "IRS") all taxable distributions (except in the case of certain exempt
Shareholders). Under the backup withholding provisions of Code Section 3406,
all such distributions may be subject to withholding of federal income tax at
the rate of 31%. This tax generally would be withheld if: (a) the payee fails
to furnish a Fund with the payee's taxpayer identification number ("TIN") under
penalties of perjury, (b) the IRS notifies a Fund that the TIN furnished by the
payee is incorrect, (c) the IRS notifies a Fund that the payee has failed to
properly report interest or dividend income to the IRS, or (d) when required to
do so, the payee fails to certify under penalties of perjury that it is not
subject to backup withholding. An individual's TIN is his or her social
security number. The Trust may refuse to accept an application that does not
contain any required TIN or certification that the number provided is correct.
If the withholding provisions are applicable, any distributions, whether taken
in cash or reinvested in Shares, will be reduced by the amounts required to be
withheld. Backup withholding is not an additional tax. Any amounts withheld may
be credited against the Shareholder's U.S. federal income tax liability.
Investors may wish to consult their tax advisors about the applicability of the
backup withholding provisions.
All distributions, whether received in Shares or cash, must be reported
by each Shareholder on his or her federal income tax return. Each Shareholder
should consult his or her own tax adviser to determine the state and local tax
consequences of an investment in a Fund.
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The foregoing discussion relates solely to U.S. federal income tax law
as it applies to U.S. persons (i.e., U.S. citizens and residents and U.S.
corporations, partnerships, trusts and estates). Each Shareholder who is not a
U.S. person should consult his or her tax adviser regarding the U.S. and
non-U.S. tax consequences of ownership of Shares of a Fund, including the
possibility that such a Shareholder may be subject to a U.S. withholding tax at
a rate of 30% (or a lower rate under an applicable U.S. income tax treaty) on
certain distributions.
STATE AND LOCAL
The Funds may be subject to state or local taxes in jurisdictions in
which the Funds may be deemed to be doing business. In addition, in those
states or localities which have income tax laws, the treatment of the Trust and
its Shareholders under such laws may differ from their treatment under Federal
income tax laws. Also, an investment in the Funds may have different tax
consequences for Shareholders than would a direct investment in the securities
held by the Funds. Shareholders should consult their own tax advisers
concerning these matters. For example, in such states or localities, it may be
appropriate for Shareholders to review with their tax advisers the state income
tax consequences of investment by the Funds in securities issued or guaranteed
as to principal and interest by the U.S. Government or its various agencies or
instrumentalities, portfolio repurchase agreements, and securities loans.
Shareholders are advised to consult their own tax advisers with respect
to the particular tax consequences to them of an investment in a Fund.
ORGANIZATION AND CAPITALIZATION
The Trust is a Massachusetts business trust established under the laws
of the Commonwealth of Massachusetts by an Agreement and Declaration of Trust
dated July 15, 1982, as amended (the "Declaration of Trust") under the name
Centerland Fund. On June 1, 1994, the name of the Trust was changed to The
Pilot Funds. Each Shareholder is deemed to have expressly assented and agreed
to the terms of the Declaration of Trust and is deemed to be a party thereto.
The authorized capital of the Trust consists of an unlimited number of units of
beneficial interest which are referred to as "Shares" in this Statement of
Additional Information. The Trustees have authority under the Declaration of
Trust to create and classify Shares of beneficial interest in separate series
("Funds") without further action by Shareholders. The Trustees have established
fourteen Funds, two of which are offered herein and known as the Pilot Growth
Fund and the Pilot Diversified Bond Income Fund. Each Share of each Fund has a
par value of $.001. It represents an equal proportionate interest in that Fund
with each other Share, and is entitled to such distributions out of the income
belonging to the Fund as are declared by the Trustees. Upon the liquidation of
a Fund, Shareholders thereof are entitled to share pro rata in the net assets
belonging to that Fund available for distribution. The Declaration of Trust
further authorizes the Trustees to classify or reclassify any series or Fund of
Shares into one or more classes. The Trustees have authorized the issuance of
three classes of each of the Funds: Pilot Shares, Class A Shares and Class B
Shares.
Except as noted above with respect to the Distribution Plans for Class A
Shares and Class B Shares, shares of the Funds bear the same types of ongoing
expenses with respect to the Fund to which they belong. In addition, Class A
Shares are subject to a front-end sales charge and Class B Shares are subject
to a contingent deferred sales charge as described in the Prospectuses. The
Classes also have different exchange privileges, and Class B Shares are subject
to conversion as described in the Prospectus for those Shares. In the event of
a liquidation or dissolution of the Trust or an individual Fund, shareholders
of a particular Fund would be entitled to receive the assets available for
distribution belonging to the Fund, and a proportionate distribution, based
upon the relative net asset values of the Trust's respective investment
portfolios, of any general assets not belonging to any particular portfolio
which are available for distribution. Shareholders of a Fund are entitled to
participate in the net distributable assets of the particular Fund involved on
liquidation, based on the number of shares of the Fund that are held by each
shareholder, except that Class A Shares of a particular Fund will be solely
responsible for that Fund's payments pursuant to the Distribution Plan for
those Shares and Class B
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Shares of a particular Fund will be solely responsible for that Fund's payments
pursuant to the Distribution Plan for those Shares.
Each Pilot Share, Class A Share and Class B Share is entitled to one
vote. Fractional shares are entitled to proportionate fractional votes. Holders
of all outstanding shares of a particular Fund will vote together in the
aggregate and not by class on all matters, except that only Class A Shares of a
Fund will be entitled to vote on matters submitted to a vote of shareholders
pertaining to such Fund's Distribution Plan for Class A Shares and only Class B
Shares of a Fund will be entitled to vote on matters submitted to a vote of
shareholders pertaining to such Fund's Distribution Plan for Class B Shares.
Further, shareholders of all of the Funds, as well as those of any other
investment portfolio now or hereafter offered by the Trust, will vote together
in the aggregate and not separately on a Fund-by-Fund basis, except as
otherwise required by law or when permitted by the Board of Trustees. 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
affected by the matter. A Fund is affected by a matter unless it is clear that
the interests of each Fund in the matter are substantially identical or that
the matter does not affect any interest of the Fund. Under the Rule, the
approval of an investment advisory agreement or change in a fundamental
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, the
Rule also provides that the ratification of the appointment 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
together in the aggregate without regard to particular investment portfolios.
Shares have neither cumulative voting rights nor any preemptive rights
and only such conversion and exchange rights as the Board of Trustees may grant
in its discretion. When issued for payment as described in the Prospectuses,
shares will be fully paid and nonassessable, except as expressly set forth
below.
The Trust Agreement provides for Shareholder voting only for the
election or removal of one or more Trustees, if a meeting is called for that
purpose, and for certain other designated matters. Each Trustee serves until
the next meeting of Shareholders, if any, called for the purpose of considering
the election or reelection of the Trustee or successor thereto, and until the
election and qualification of his successor, if any, elected at that meeting,
or until the Trustee sooner dies, resigns, retires or is removed by the
Shareholders or two-thirds of the Trustees.
As of the date of this Statement of Additional Information, the Trustees
and officers of the Trust owned beneficially less than 1% of the outstanding
shares of the Funds.
SHAREHOLDER AND TRUSTEE LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts
business trust," which is the form in which many mutual funds are organized.
Shareholders of such a trust may, under certain circumstances, be held
personally liable as partners for the obligations of the trust. The Declaration
of Trust contains an express disclaimer of Shareholder liability for acts or
obligations of the Trust. Notice of such disclaimer will normally be given in
each agreement, obligation or instrument entered into or executed by the Trust
or the Trustees. The Declaration of Trust provides for indemnification by the
relevant Fund for any loss suffered by a Shareholder as a result of an
obligation of the Fund. The Declaration of Trust also provides that the Trust
shall, upon request, assume the defense of any claim made against a Shareholder
for any act or obligation of the Trust, and satisfy any judgment thereon.
Thus, the risk of a Shareholder incurring financial loss on account of
Shareholder liability is limited to circumstances in which a Fund is unable to
meet its obligations. The Trustees believe that, in view of the above, the risk
of personal liability of Shareholders is not material.
The Declaration of Trust provides that the Trustees of the Trust shall
not be liable for any action taken by them in good faith, and that they shall
be fully protected in relying in good faith upon the records of the Trust and
upon reports made to the Trust by persons selected in good faith by the
Trustees as qualified to make such reports. The Declaration of Trust further
provides that the Trustees will not be liable for errors of
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judgment or mistakes of fact or law. The Declaration of Trust provides that the
Trust will indemnify Trustees and officers of the Trust against liabilities and
expenses reasonably incurred in connection with litigation in which they may be
involved because of their positions with the Trust, unless it is determined, in
the manner provided in the Declaration of Trust, that they have not acted in
good faith in the reasonable belief that, in the case of conduct in their
official capacity with the Trust, their conduct was in the best interests of
the Trust and that, in all other cases, their conduct was at least not opposed
to the best interest of the Trust (and that, in the case of any criminal
proceeding, they had no reasonable cause to believe that the conduct was
unlawful). However, nothing in the Declaration of Trust or the By-Laws
protects or indemnifies Trustees or officers against any liability to which
they would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
their office.
No series of the Trust is liable for the liabilities or obligations of
any other series of the Trust.
CUSTODIAN
Boatmen's Trust Company ("Boatmen's"), 100 North Broadway, St. Louis,
Missouri 63178 is the custodian of the Funds' assets. With respect to foreign
securities and currencies held abroad and certain domestic certificated
securities, Boatmen's has entered into subcustody arrangements with Bankers
Trust Company. The Funds have approved the use by Bankers Trust Company of its
network of foreign subcustodians.
INDEPENDENT ACCOUNTANTS AND COUNSEL
Arthur Andersen LLP, independent public accountants, One International
Place, Boston, Massachusetts 02110, have been selected as auditors of the
Funds. In addition to providing audit services, Arthur Andersen LLP prepares
the Trust's federal and state tax returns and provides consultation and
assistance on accounting, internal control and related matters.
Goodwin, Procter & Hoar LLP, Exchange Place, Boston, Massachusetts 02109,
serves as general counsel to the Trust.
B-39
<PAGE> 60
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS(1)
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which made the long-term risks appear somewhat larger than with Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Moody's applies numerical modifiers, 1, 2, and 3 in the Aa, A and Baa
categories. The modifier 1 indicates that the security ranks in the higher end
of the applicable category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of the category.
Moody's ratings for state and municipal and other short-term obligations
will be designated Moody's Investment Grade ("MIG"). The distinction is in
recognition of the differences between short-term credit risk and long-term
risk. Factors affecting the liquidity of the borrower are upper most in
importance in short-term borrowing, while various factors of the first
importance in long-term borrowing risk are of lesser importance in the short
run. Symbols used will be as follows:
MIG-1--Notes bearing this designation are of the best quality enjoying
strong protection from established cash flows of funds for their servicing or
from established and broad-based access to the market for refinancing, or both.
MIG-2--Notes bearing this designation are of favorable quality, with all
security elements accounted for, but lacking the undeniable strength of the
preceding grade. Market access for refinancing, in particular, is likely to be
less well-established.
A short-term rating may also be assigned on an issue having a demand
feature. Such ratings will be designated as VMIG to reflect such
characteristics as payment upon periodic demand rather than fixed maturity
____________________
(1) The ratings indicated herein are believed to be the most recent
ratings available at the date of this Statement of Additional Information.
Ratings are generally given to securities at the time of issuance. While the
rating agencies may from time to time revise such ratings, they undertake no
obligation to do so.
A-1
<PAGE> 61
dates and payment relying on external liquidity. Additionally, investors should
be alert to the fact that the source of payment may be limited to the external
liquidity with no or limited legal recourse to the issuer in the event the
demand is not met. VMIG-1, VMIG-2 and VMIG-3 ratings carry the same definitions
as MIG-1, MIG-2 and MIG-3, respectively.
STANDARD & POOR'S CORPORATION(2)
AAA: Debt rated AAA has the highest rating assigned by Standard &
Poor's. This rating indicates an extremely strong capacity to pay and interest
and repay principal.
AA: Debt rated AA also has a very strong capacity to pay interest and
repay principal, and in the majority of instances it differs from AAA issues
only in small degree. The ratings in AA may be modified by the addition of a
plus ("+") or minus ("-") sign to show relative standing within the major
rating categories.
A: Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Municipal notes issued since July 29, 1984 are rated "SP-1," "SP-2," and
"SP-3." The designation SP-1 indicates a very strong capacity to pay principal
and interest. A plus ("+") sign is added to those issues determined to possess
overwhelming safe characteristics. An SP-2 designation indicates a satisfactory
capacity to pay principal and interest, while an SP-3 designation indicates
speculative capacity to pay principal and interest.
DUFF & PHELPS
AAA: Instruments rated AAA are of the highest credit quality. The risk
factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
AA+, AA, AA-: Instruments bearing these designations are of high credit
quality. Protection factors are strong. Risk is modest but may vary slightly
from time to time because of economic conditions.
A+, A, A-: Protection factors for instruments bearing these designations
are average but adequate. However, risk factors are more variable and greater
in period of economic stress.
BBB+, BBB, BBB-: Protection factors for instruments bearing these
designations are below average but still considered sufficient for prudent
investment. There is considerable variability in risk during economic cycles.
Preferred stocks are rated on the same scale as bonds but the preferred
rating gives weight to its more junior position in the capital structure.
Structured Financings are also rated on this scale.
____________________
(2) Rates all governmental bodies having $1,000,000 or more of debt
outstanding, unless adequate information is not available.
A-2
<PAGE> 62
FITCH INVESTORS SERVICE, INC.
AAA: Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA: Bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA." Because
bonds rated in the "AAA" and "AA" categories are not significantly vulnerable
to foreseeable future developments, short-term debt of these issuers is
generally rated "F-1+."
A: Bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse impact on these
bonds, and therefor impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
Plus ("+") and minus ("-") signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used within the "AAA" category. Ratings are
placed on FitchAlert to notify investors of an occurrence that is likely to
result in a rating change and the likely direction of such change. These are
designated as "Positive," indicating a potential upgrade, "Negative," for
potential downgrade, or "Evaluating," where ratings may be raised or lowered.
FitchAlert is relatively short-term and should be resolved within 12 months.
IBCA, INC.
AAA: Obligations rated AAA are obligations for which there is the lowest
expectation of investment risk. Capacity for timely repayment of principal and
interest is substantial such that adverse changes in business, economic, or
financial conditions are likely to increase investment risk significantly.
AA: Obligations rated AA are obligations for which there is a very low
expectation of investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic, or financial
conditions may increase investment risk albeit not very significantly.
A: Obligations rated A are obligations for which there is a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is strong, although adverse changes in business, economic, or
financial conditions may lead to increased investment risk.
BBB: Obligations rated BBB are obligations for which there is currently
a low expectation of investment risk. Capacity for timely repayment of
principal and interest is adequate, although adverse changes in business,
economic or financial conditions are more likely to lead to increased
investment risk than for obligations in higher categories.
"+" or "-" may be appended to denote relative status within major rating
categories. Rating Watch highlights an emerging situation which may materially
affect the profile of a rated corporation.
A-3
<PAGE> 63
DESCRIPTION OF COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICES, INC.
P-1: Issuers have a superior capacity for repayment of short-term
promissory obligations. Prime-1 or P-1 repayment capacity will normally be
evidenced by the following characteristics:
Leading market positions in well-established industries.
High rates of return on funds employed.
Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
Well-established access to a range of financial markets and assured
sources of alternate liquidity.
P-2: Issuers have a strong capacity for repayment of short-term
promissory 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, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
P-3: Issuers 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.
STANDARD & POOR'S CORPORATION
A-1: Standard & Poor's Commercial Paper ratings are current assessments
of the likelihood of timely payment of debts having an original maturity of no
more than 365 days. The A-1 designation indicates the degree of safety
regarding timely payment is very strong. Those issues determined to possess
overwhelming safety characteristics will be denoted with a plus ("+") sign
designation.
A-2: Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated "A-1."
DUFF & PHELPS
DUFF 1 PLUS: These instruments bear the highest certainty of timely
payment. Short-term liquidity including internal operating factors and/or ready
access to alternative sources of funds, is clearly outstanding, and safety is
just below risk-free U.S. Treasury short-term obligations.
DUFF 1: These instruments bear very high certainty of timely payment.
Liquidity factors are excellent and supported by strong fundamental protection
factors. Risk factors are minor.
DUFF 1 MINUS: These instruments bear high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
DUFF 2: These instruments bear good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing
internal funds needs may enlarge total financing requirements, access to
capital markets is good. Risk factors are small.
A-4
<PAGE> 64
DUFF 3: These instruments bear satisfactory liquidity and other
protection factors which qualify an issue as to investment grade. Risk factors
are larger and subject to more variation. Nevertheless, timely payment is
expected.
No ratings are issued for companies whose paper is not deemed to be of
investment grade.
FITCH INVESTORS SERVICE, INC.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+."
F-2: Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of safety
is not as great as for issues assigned "F-1+" and "F-1" ratings.
F-3: Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely payment is
adequate, however, near-term adverse changes could cause these securities to be
rated below investment grade.
LOC: The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
IBCA, INC.
A1+: Obligations supported by the highest capacity for timely repayment.
A1: Obligations supported by a very strong capacity for timely
repayment.
A2: Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in business,
economic, or financial conditions.
B1: Obligations supported by an adequate capacity for timely repayment.
Such capacity is more susceptible to adverse changes in business, economic, or
financial conditions than for obligations in higher categories.
"+" or "-" may be appended to denote relative status within major rating
categories. Rating Watch highlights an emerging situation which may materially
affect the profile of a rated corporation.
A-5
