<PAGE> 1
1933 Act Registration No. 2-78440
1940 Act Registration No. 811-3517
As filed with the Securities and Exchange Commission on November 1, 1996
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [X]
Post-Effective Amendment No. 32 [X]
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 33 [X]
(Check appropriate box or boxes)
--------
THE PILOT FUNDS
(Exact name of Registrant as specified in charter)
3435 Stelzer Road
Columbus, Ohio 43219
(Address of principal executive offices)
Registrant's Telephone Number, Including Area Code
800-717-4568
--------
Copy to:
George O. Martinez, Esq. Philip H. Newman, Esq.
BISYS Fund Services, Inc. Goodwin, Procter & Hoar LLP
3435 Stelzer Road Exchange Place
Columbus, Ohio 43219 Boston, Massachusetts 02109
(Name and Address of Agent for Service of Process)
--------
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on ____________________ pursuant to paragraph (b)
[X] 60 days, after filing pursuant to paragraph (a)
[ ] on ____________________ pursuant to paragraph (a) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a) (2).
REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF SHARES UNDER THE SECURITIES
ACT OF 1933 PURSUANT TO RULE 24F-2. REGISTRANT FILED A RULE 24F-2 NOTICE FOR THE
FISCAL YEAR ENDED AUGUST 31, 1996 ON OCTOBER 30, 1996.
THE TOTAL NUMBER OF PAGES IS _______. THE EXHIBIT INDEX IS ON PAGE ________.
<PAGE> 2
THE PILOT FUNDS
Pilot Small Capitalization Fund
Pilot Short-Term U.S. Treasury Fund
Pilot Short-Term Diversified Assets Fund
Pilot Short-Term Tax-Exempt Diversified Fund
Pilot Missouri Short-Term Tax-Exempt Fund
Pilot Growth Fund
Pilot Diversified Bond Income Fund
Pilot International Equity Fund
Pilot Growth and Income Fund
Pilot Equity Income Fund
Pilot Intermediate U.S. Government Securities Fund
Pilot U.S. Government Securities Fund
Pilot Intermediate Municipal Bond Fund
Pilot Municipal Bond Fund
--------
FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER IN PART A PROSPECTUS CAPTION
--------------------- ------------------
<S> <C>
1. Cover Page.......................................... Cover Page
2. Synopsis............................................ Not Applicable
3. Condensed Financial Information..................... Financial Highlights
4. General Description of Registrant................... Cover Page; Investment Objectives; Risk Factors;
The Pilot Family of Funds
5. Management of the Fund.............................. The Business of the Fund - Fund Management
5A. Management's Discussion of Fund Performance......... Not Applicable
6. Capital Stock and Other Securities.................. Investing in The Pilot Funds - Dividends and
Distributions; The Pilot Family of Funds; The
Business of the Fund - Tax Implications
7. Purchase of Securities Being Offered................ Investing in The Pilot Funds - How to Buy Shares;
Investing in The Pilot Funds - Explanation of Sales
Price; Investing in The Pilot Funds - Exchange
Privileges
8. Redemption or Repurchase............................ Investing in The Pilot Funds - How to Sell Shares;
Investing in The Pilot Funds - Exchange Privilege
9. Pending Legal Proceedings........................... Not Applicable
</TABLE>
2
<PAGE> 3
Financial
Direction
December 31, 1996
[PILOT LOGO]
PILOT DIVERSIFIED
BOND INCOME FUND
PILOT INTERMEDIATE
U.S. GOVERNMENT
SECURITIES FUND
PILOT U.S. GOVERNMENT
SECURITIES FUND
PILOT INTERMEDIATE
MUNICIPAL BOND FUND
PILOT MUNICIPAL
BOND FUND
Pilot Shares
THE
PILOT
FUNDS
Prospectus enclosed
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXPENSE SUMMARY.................................................................................... 3
FINANCIAL HIGHLIGHTS............................................................................... 5
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS................................................... 7
Pilot Diversified Bond Income Fund............................................................ 7
Pilot Intermediate U.S. Government Securities Fund and Pilot U.S. Government Securities
Fund......................................................................................... 7
Pilot Intermediate Municipal Bond Fund and Pilot Municipal Bond Fund.......................... 8
PORTFOLIO INSTRUMENTS AND PRACTICES.............................................................. 9
RISK FACTORS..................................................................................... 15
FUNDAMENTAL LIMITATIONS.......................................................................... 15
INVESTING IN THE PILOT FUNDS....................................................................... 16
HOW TO BUY SHARES................................................................................ 16
HOW TO SELL SHARES............................................................................... 16
DIVIDENDS AND DISTRIBUTIONS...................................................................... 17
EXCHANGE PRIVILEGE................................................................................. 18
THE PILOT FAMILY OF FUNDS.......................................................................... 18
THE BUSINESS OF THE FUND........................................................................... 19
FUND MANAGEMENT.................................................................................. 19
TAX IMPLICATIONS................................................................................. 21
MEASURING PERFORMANCE............................................................................ 22
</TABLE>
<PAGE> 5
THE PILOT FUNDS
LOGO
PROSPECTUS FOR PILOT SHARES OF PILOT DIVERSIFIED BOND INCOME,
PILOT INTERMEDIATE U.S. GOVERNMENT SECURITIES, PILOT U.S. GOVERNMENT SECURITIES,
PILOT INTERMEDIATE MUNICIPAL BOND AND PILOT MUNICIPAL BOND FUNDS
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PILOT FUND GOAL FOR INVESTORS WHO WANT
- ------------------ ------------------------------------- -------------------------------------
<S> <C> <C>
DIVERSIFIED BOND Current income consistent with Current income from debt securities
INCOME preservation of capital by investing and are willing to accept
primarily in debt securities. The fluctuations in price and yield.
Fund seeks total return as a
secondary objective and will have an
average weighted maturity of from
five to fifteen years.
- ----------------------------------------------------------------------------------------------------
INTERMEDIATE U.S. Total return and preservation of Capital appreciation over the long
GOVERNMENT capital by investing primarily in term as well as current income from
SECURITIES U.S. Government securities and U.S. Government securities and less
repurchase agreements. The Fund will principal volatility than normally
emphasize the capital appreciation associated with a long-term fund.
component of total return. The Fund
will generally have an average
weighted maturity of from three to
ten years.
- ----------------------------------------------------------------------------------------------------
U.S. GOVERNMENT Total return and preservation of Capital appreciation over the long
SECURITIES capital by investing primarily in term as well as current income from
U.S. Government securities and U.S. Government securities and are
repurchase agreements. The Fund will willing to accept fluctuations in
emphasize the capital appreciation price and yield.
component of total return. The Fund
will generally have an average
weighted maturity of from five to
thirty years.
- ----------------------------------------------------------------------------------------------------
INTERMEDIATE Current income free of federal income Current income that is free from
MUNICIPAL BOND tax as is consistent with regular federal income tax and less
preservation of capital through principal volatility than normally
investments primarily in investment associated with a long-term fund.
grade municipal obligations. The Fund
will generally have an average
weighted maturity of from three to
ten years.
- ----------------------------------------------------------------------------------------------------
MUNICIPAL BOND Current income free of federal income Current income that is free from
tax as is consistent with regular federal income tax and are
preservation of capital through willing to accept fluctuations in
investments primarily in investment price and yield.
grade municipal obligations. The Fund
will generally have an average
weighted maturity of from five to
thirty years.
- ----------------------------------------------------------------------------------------------------
</TABLE>
1
<PAGE> 6
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 the Pilot Diversified Bond Income,
Pilot Intermediate U.S. Government Securities, Pilot U.S. Government Securities,
Pilot Intermediate Municipal Bond and Pilot Municipal Bond Funds. 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 December 31, 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.
- --------------------------------------------------------------------------------
2
<PAGE> 7
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
<TABLE>
<CAPTION>
INTERMEDIATE
DIVERSIFIED U.S. U.S.
BOND GOVERNMENT GOVERNMENT INTERMEDIATE
INCOME SECURITIES SECURITIES MUNICIPAL MUNICIPAL
FUND FUND FUND BOND FUND BOND FUND
----------- ----------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Front End Sales Charge Imposed on Purchases
(as a percentage of offering price)...... None None None None None
Sales Charge Imposed on Reinvested
Dividends................................ None None None None None
Deferred Sales Charge....................... None None None None None
ANNUAL FUND OPERATING EXPENSES AFTER FEE WAIVERS
AND EXPENSE REIMBURSEMENTS (as a percentage of
average net assets):
Management Fees (after waivers)(1).......... 0.40% 0.35% 0.40% 0.40% 0.45%
Distribution Payments....................... 0.00% 0.00% 0.00% 0.00% 0.00%
Other Expenses (after expense
reimbursements)(1)....................... 0.25% 0.22% 0.22% 0.18% 0.22%
---- ---- ---- ---- ----
Total Fund Operating Expenses After Fee
Waivers and Expense Reimbursements(1).... 0.65% 0.57% 0.62% 0.58% 0.67%
==== ==== ==== ==== ====
</TABLE>
- ---------------
(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. Without waivers by the Adviser, investment management fees as a
percentage of net assets would be .55% for the Pilot Diversified Bond
Income, Pilot Intermediate U.S. Government Securities, Pilot U.S. Government
Securities, Pilot Intermediate Municipal Bond and Pilot Municipal Bond
Funds. Other Expenses also reflect reimbursements by the Adviser and
Administrator. Absent reimbursement, Other Expenses would be %, 0.23%,
0.27%, 0.24%, and 0.25% for Pilot Diversified Bond Income Fund, Pilot
Intermediate U.S. Government Securities Fund, Pilot U.S. Government
Securities Fund, Pilot Intermediate Municipal Bond Fund, and Pilot Municipal
Bond Fund, respectively. Absent waivers and expense reimbursements, the
total operating expenses for Pilot Shares of the Funds would be 1.32% for
the Pilot Diversified Bond Income Fund; 0.78% for the Pilot Intermediate
U.S. Government Securities Fund; 0.82% for the Pilot U.S. Government
Securities Fund; 0.79% for the Pilot Intermediate Municipal Bond Fund; and
0.80% for the Pilot Municipal Bond Fund. These waivers and reimbursements
are voluntary and may be terminated at any time with respect to any Fund at
the discretion of the Adviser or Administrator and without the consent of
the Funds except that the Adviser has voluntarily agreed to limit the total
operating expenses of the Pilot Shares of Pilot Diversified Bond Income Fund
to 0.65% of the Fund's average net assets until February 1, 1998.
3
<PAGE> 8
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:
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
AFTER AFTER AFTER AFTER
PURCHASE PURCHASE PURCHASE PURCHASE
---- ---- ---- ----
<S> <C> <C> <C> <C>
PILOT DIVERSIFIED BOND INCOME FUND
Pilot Shares.......................... $ 10 $ 32 $ -- $ --
PILOT INTERMEDIATE U.S. GOVERNMENT
SECURITIES FUND
Pilot Shares.......................... $ $ $ $
PILOT U.S. GOVERNMENT SECURITIES FUND
Pilot Shares.......................... $ $ $ $
PILOT INTERMEDIATE MUNICIPAL BOND FUND
Pilot Shares.......................... $ $ $ $
PILOT MUNICIPAL BOND FUND
Pilot Shares.......................... $ $ $ $
</TABLE>
The Example shown above should not be considered a representation of future
investment returns or operating expenses. Pilot Diversified Bond Income Fund is
new and actual investment returns and operating expenses may be more or less
than shown for the Fund.
4
<PAGE> 9
THE PILOT FUNDS
FINANCIAL HIGHLIGHTS
The following data with respect to a Share of the Pilot Intermediate U.S.
Government Securities Fund, Pilot U.S. Government Securities Fund, Pilot
Intermediate Municipal Bond Fund and Pilot Municipal Bond Fund outstanding
during the periods indicated have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report incorporated by
reference and attached to the Statement of Additional Information, and should be
read in conjunction with the financial statements and related notes incorporated
by reference and attached to the Statement of Additional Information. The
following data with respect to a Share of the Pilot Diversified Bond Income Fund
outstanding during the period indicated is unaudited.
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout the Period
- --------------------------------------------------------------------------------
Pilot Diversified Bond Income Fund
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT OPERATIONS
----------------------------------------
NET REALIZED TOTAL
AND UNREALIZED INCOME DIVIDENDS DIVIDENDS NET ASSET
NET ASSET VALUE NET GAIN ON FROM FROM NET FROM NET VALUE AT
AT BEGINNING INVESTMENT INVESTMENT INVESTMENT INVESTMENT REALIZED END OF
OF PERIOD INCOME TRANSACTIONS OPERATIONS INCOME GAINS PERIOD
--------------- ---------- -------------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE PERIOD ENDED OCTOBER 22,
- --------------------------------
1996--Pilot Shares(b).......... $ $ $ $ $ $ $
1996--Class A Shares(b)........
1996--Class B Shares(b)........
<CAPTION>
RATIO INFORMATION ASSUMING
NO FEE WAIVER OR EXPENSE
REIMBURSEMENT
RATIO OF NET -------------------------- RATIO OF NET
RATIO OF INVESTMENT NET ASSETS RATIO OF INVESTMENT
EXPENSES INCOME PORTFOLIO AT END OF EXPENSES TO INCOME
TOTAL TO AVERAGE TO AVERAGE TURNOVER PERIOD AVERAGE TO AVERAGE
RETURN(C) NET ASSETS(D) NET ASSETS(D) RATE (IN 000'S) NET ASSETS(D) NET ASSETS(D)
--------- ------------- ------------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE PERIOD ENDED OCTOBER 22,
- --------------------------------
1996--Pilot Shares(b).......... % % % % $ % %
1996--Class A Shares(b)........
1996--Class B Shares(b)........
</TABLE>
- --------------------------------------------------------------------------------
Pilot Intermediate U.S. Government Securities Fund
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED AUGUST 31,
- -------------------------------
1996--Pilot Shares............. $ 10.44 $ 0.59 $(0.23) $ 0.36 $(0.59) $ (0.05) $ 10.16
1996--Class A Shares........... 10.44 0.57 (0.23) 0.34 (0.57) (0.05) 10.16
1995--Pilot Shares(g).......... 10.00 0.56 0.44 1.00 (0.56) 10.44
1995--Class A Shares(f)........ 9.98 0.45 0.46 0.91 (0.45) 10.44
<CAPTION>
FOR THE YEAR ENDED AUGUST 31,
- -------------------------------
1996--Pilot Shares............. 3.52% 0.57% 5.68% 73% $230,030 0.78% 5.47%
1996--Class A Shares........... 3.33 0.72 5.45 73 932 1.03 5.14
1995--Pilot Shares(g).......... 10.21 0.57 6.65 87 165,441 0.87 6.35
1995--Class A Shares(f)........ 9.31 0.72 6.27 87 499 1.12 5.87
<CAPTION>
- -------------------------------
</TABLE>
- ------------
<TABLE>
<S> <C>
(a) Class A share activity commenced February 7, 1995.
(b) Share activity commenced October 21, 1996.
(c) Assumes investment at net asset value at the beginning of the period, reinvestment of all dividends and distributions, a
complete redemption of the investment at the net asset value at the end of the period and no sales charge. Total return would
be reduced if sales charge were taken for Class A or Class B shares. Total return is not annualized.
(d) Annualized.
(e) Class B share activity commenced November 11, 1994.
(f) Class A share activity commenced December 21, 1994.
(g) Pilot share activity commenced November 7, 1994.
</TABLE>
5
<PAGE> 10
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
Pilot U.S. Government Securities Fund
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT OPERATIONS
----------------------------------------
NET REALIZED TOTAL
NET ASSET AND UNREALIZED INCOME DIVIDENDS IN EXCESS DIVIDENDS
VALUE AT NET GAIN ON FROM FROM NET OF NET FROM NET
BEGINNING INVESTMENT INVESTMENT INVESTMENT INVESTMENT INVESTMENT REALIZED
OF PERIOD INCOME TRANSACTIONS OPERATIONS INCOME INCOME GAINS
--------- ---------- -------------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED AUGUST 31,
- -----------------------------
1996--Pilot Shares................. $ 11.20 $ 0.61 $(0.22) $ 0.39 $(0.61) $ -- $ (0.45)
1996--Class A Shares............... 11.19 0.59 (0.20) 0.39 (0.59) -- (0.45)
1996--Class B Shares............... 11.19 0.51 (0.22) 0.29 (0.51) -- (0.45)
1995--Pilot Shares(g).............. 10.00 0.56 1.20 1.76 (0.56) -- --
1995--Class A Shares(a)............ 10.48 0.37 0.71 1.08 (0.37) -- --
1995--Class B Shares(b)............ 10.05 0.46 1.14 1.60 (0.46) -- --
<CAPTION>
RATIO OF NET
NET ASSET INVESTMENT NET ASSETS
VALUE AT RATIO OF EXPENSES INCOME TO PORTFOLIO AT END OF
END OF TOTAL TO AVERAGE NET AVERAGE NET TURNOVER PERIOD
PERIOD RETURN(c) ASSETS(d) ASSETS(d) RATE (IN 000'S)
--------- --------- ----------------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED AUGUST 31,
- -----------------------------
1996--Pilot Shares................. $ 10.53 3.46% 0.65% 5.61% 87% $145,066
1996--Class A Shares............... 10.54 3.44 0.85 5.44 87 632
1996--Class B Shares............... 10.52 2.43 1.65 4.60 87 1,237
1995--Pilot Shares(g).............. 11.20 18.03 0.62 6.45 132 137,261
1995--Class A Shares(a)............ 11.19 10.41 0.82 5.76 132 87
1995--Class B Shares(b)............ 11.19 16.19 1.62 5.19 132 146
<CAPTION>
RATIO INFORMATION ASSUMING NO
FEE WAIVER OR EXPENSE
REIMBURSEMENT
--------------------------------
RATIO OF NET
INVESTMENT
RATIO OF EXPENSES INCOME TO
TO AVERAGE NET AVERAGE NET
ASSETS(c) ASSETS(c)
----------------- ------------
<S> <C> <C>
FOR THE YEAR ENDED AUGUST 31,
- -----------------------------
1996--Pilot Shares................. 0.82% 5.44%
1996--Class A Shares............... 1.07 5.22
1996--Class B Shares............... 1.82 4.43
1995--Pilot Shares(g).............. 0.87 6.20
1995--Class A Shares(a)............ 1.12 5.46
1995--Class B Shares(b)............ 1.87 4.94
</TABLE>
- --------------------------------------------------------------------------------
Pilot Intermediate Municipal Bond Fund
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT OPERATIONS
----------------------------------------
NET REALIZED TOTAL
NET ASSET AND UNREALIZED INCOME DIVIDENDS IN EXCESS DIVIDENDS
VALUE AT NET GAIN ON FROM FROM NET OF NET FROM NET
BEGINNING INVESTMENT INVESTMENT INVESTMENT INVESTMENT INVESTMENT REALIZED
OF PERIOD INCOME TRANSACTIONS OPERATIONS INCOME INCOME GAINS
--------- ---------- -------------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1996--Pilot Shares................. $ 10.49 $ 0.48 $(0.13) $ 0.35 $(0.48) $ -- $ (0.02)
1996--Class A Shares............... 10.49 0.46 (0.11) 0.35 (0.46) -- (0.02)
1995--Pilot Shares(g).............. 10.00 0.41 0.49 0.90 (0.41) -- --
1995--Class A Shares(e)............ 9.88 0.37 0.61 0.98 (0.37) -- --
<CAPTION>
RATIO OF NET
NET ASSET INVESTMENT NET ASSETS
VALUE AT RATIO OF EXPENSES INCOME TO PORTFOLIO AT END OF
END OF TOTAL TO AVERAGE NET AVERAGE NET TURNOVER PERIOD
PERIOD RETURN(c) ASSETS(d) ASSETS(d) RATE (IN 000'S)
--------- --------- ----------------- ------------- --------- ----------
<S> <C> <C>
1996--Pilot Shares................. $ 10.34 3.43% 0.63% 4.60% 12% $218,902
1996--Class A Shares............... 10.36 3.45 0.78 4.38 12 764
1995--Pilot Shares(g).............. 10.49 9.16 0.58 4.90 8 196,209
1995--Class A Shares(e)............ 10.49 10.03 0.73 4.60 8 232
<CAPTION>
RATIO INFORMATION ASSUMING NO
FEE WAIVER OR EXPENSE
REIMBURSEMENT
--------------------------------
RATIO OF NET
INVESTMENT
RATIO OF EXPENSES INCOME TO
TO AVERAGE NET AVERAGE NET
ASSETS(c) ASSETS(c)
----------------- ------------
<S> <C> <C>
1996--Pilot Shares................. 0.79% 4.44%
1996--Class A Shares............... 1.03 4.13
1995--Pilot Shares(g).............. 0.81 4.67
1995--Class A Shares(e)............ 1.06 4.27
</TABLE>
- --------------------------------------------------------------------------------
Pilot Municipal Bond Fund
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT OPERATIONS
----------------------------------------
NET REALIZED TOTAL
NET ASSET AND UNREALIZED INCOME DIVIDENDS IN EXCESS DIVIDENDS
VALUE AT NET GAIN ON FROM FROM NET OF NET FROM NET
BEGINNING INVESTMENT INVESTMENT INVESTMENT INVESTMENT INVESTMENT REALIZED
OF PERIOD INCOME TRANSACTIONS OPERATIONS INCOME INCOME GAINS
--------- ---------- -------------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1996--Pilot Shares................. $ 10.70 $ 0.57 $ 0.01 $ 0.58 $(0.56) $(0.01) $ (0.03)
1996--Class A Shares............... 10.70 0.54 0.01 0.55 (0.53) (0.01) (0.03)
1996--Class B Shares............... 10.65 0.45 -- 0.45 (0.44) (0.01) (0.03)
1995--Pilot Shares(g).............. 10.00 0.48 0.70 1.18 (0.48) -- --
1995--Class A Shares(a)............ 10.37 0.34 0.33 0.64 (0.34) -- --
1995--Class B Shares(f)............ 10.02 0.33 0.63 0.95 (0.33) -- --
<CAPTION>
RATIO OF NET
NET ASSET INVESTMENT NET ASSETS
VALUE AT RATIO OF EXPENSES INCOME TO PORTFOLIO AT END OF
END OF TOTAL TO AVERAGE NET AVERAGE NET TURNOVER PERIOD
PERIOD RETURN(c) ASSETS(d) ASSETS(d) RATE (IN 000'S)
--------- --------- ----------------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot Shares................. $ 10.68 5.44% 0.69% 5.20% 18% $187,939
1996--Class A Shares............... 10.68 5.23 0.92 4.91 18 1,755
1996--Class B Shares............... 10.62 4.31 1.68 4.16 18 1,259
1995--Pilot Shares(g).............. 10.70 12.00 0.67 5.63 10 150,934
1995--Class A Shares(a)............ 10.70 6.54 0.87 5.26 10 340
1995--Class B Shares(f)............ 10.65 9.62 1.67 4.48 10 448
<CAPTION>
RATIO INFORMATION ASSUMING NO
FEE WAIVER OR EXPENSE
REIMBURSEMENT
--------------------------------
RATIO OF NET
INVESTMENT
RATIO OF EXPENSES INCOME TO
TO AVERAGE NET AVERAGE NET
ASSETS(c) ASSETS(c)
----------------- ------------
<S> <C> <C>
1996--Pilot Shares................. 0.80% 5.09%
1996--Class A Shares............... 1.08 4.75
1996--Class B Shares............... 1.79 4.05
1995--Pilot Shares(g).............. 0.86 5.44
1995--Class A Shares(a)............ 1.11 5.02
1995--Class B Shares(f)............ 1.86 4.29
</TABLE>
- ---------------
(a) Class A share activity commenced February 7, 1995.
(b) Class B share activity commenced November 10, 1994.
(c) Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
charge. Total return would be reduced if sales charge were taken for Class A
or Class B shares. Total return is not annualized.
(d) Annualized.
(e) Class A share activity commenced November 18, 1994.
(f) Class B share activity commenced December 27, 1994.
(g) Pilot share activity commenced November 7, 1994.
6
<PAGE> 11
INVESTMENT OBJECTIVES, POLICIES
AND RISK FACTORS
The Pilot Funds uses a variety of 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 which Funds best meet 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 a Fund's investment objective, shareholders
should consider whether the Fund remains an appropriate investment in light of
their then 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 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 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, American Depository Receipts ("ADRs") and European Depository Receipts
("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.
The Fund will purchase only those debt securities rated A or better by at least
one Nationally Recognized Statistical Rating Organization ("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.
Pilot Intermediate U.S. Government Securities Fund and Pilot U.S. Government
Securities Fund
The Pilot Intermediate U.S. Government Securities Fund and the Pilot U.S.
Government Securities Fund (sometimes referred to together as the "Government
Funds") offer investors two alternatives for participating in the fixed income
securities market with a concentration in U.S. Government securities. The
average weighted maturity of the Pilot Intermediate U.S. Government Securities
Fund is normally expected to be shorter than that of the Pilot U.S. Government
Securities Fund.
The investment objective of each Fund is to seek total return and preservation
of capital by investing primarily in U.S. Government securities and repurchase
agreements collateralized by such securities. Each Fund will emphasize the
capital appreciation component of total return. While the maturity of individual
securities will not be restricted, except during temporary defensive periods or
unusual market conditions, the average weighted maturity of the Pilot
Intermediate U.S. Government Securities Fund will be between three and ten years
and the average weighted maturity of the Pilot U.S. Government Securities Fund
will be between five and thirty years.
Each Fund invests at least 65% of its total assets in U.S. Government securities
and repurchase agreements
7
<PAGE> 12
collateralized by such securities. Each Fund may invest in a variety of U.S.
Government securities, including U.S. Treasury bonds, notes and bills, and
obligations of a number of U.S. Government agencies and instrumentalities. Each
Fund may also invest in interests in the foregoing securities, including
collateralized mortgage obligations issued or guaranteed by a U.S. Government
agency or instrumentality. Securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities have historically had a very low
risk of loss of principal if held to maturity. The Funds, however, can give no
assurance that the U.S. Government would provide financial support to its
agencies or instrumentalities if it were not legally required to do so.
Each Fund may also invest up to 35% of its total assets in debt securities of
U.S. and foreign corporate and foreign government issuers, ADRs and EDRs, zero
coupon bonds and cash equivalents. See "Pilot Diversified Bond Income Fund"
above for a description of ADRs and EDRs and cash equivalents. The Funds will
purchase only those investments which are rated investment grade by at least one
NRSRO or, if unrated, are determined by the Adviser to be of comparable quality.
If a portfolio security held by a Fund ceases to be rated investment grade by at
least one NRSRO or if the Adviser determines that an unrated portfolio security
held by a Fund is no longer of comparable quality to an investment grade
security, the security will be sold in an orderly manner as quickly as possible.
Obligations in the lowest of the top four rating categories ("BBB" or "Baa")
have certain speculative characteristics and are subject to more credit and
market risk than securities with higher ratings.
Additionally, each Fund may also invest in futures contracts and options. From
time to time, each Fund may also hold uninvested cash reserves which do not earn
income. For a further description of the Funds' policies with respect to foreign
securities and other instruments, see "Portfolio Instruments and Practices" and
"Risk Factors" below.
The value of each Fund's portfolio (and consequently its shares) is expected to
fluctuate inversely in relation to changes in the direction of interest rates.
Pilot Intermediate Municipal Bond Fund
and Pilot Municipal Bond Fund
The Pilot Intermediate Municipal Bond Fund and the Pilot Municipal Bond Fund
(sometimes referred to together as the "Municipal Bond Funds") offer investors
two alternatives for participating in the municipal securities market. The
average weighted maturity of the Pilot Intermediate Municipal Bond Fund is
normally expected to be shorter than the average weighted maturity of the Pilot
Municipal Bond Fund.
The investment objective of each Fund is to seek current income free of federal
income tax as is consistent with preservation of capital. Each Fund seeks to
attain its objective by investing its assets primarily in debt obligations of
states, territories and possessions of the United States, the District of
Columbia and of their agencies, authorities, instrumentalities and political
sub-divisions ("Municipal Obligations") that are rated investment grade or above
by one or more NRSROs at the time of purchase. Obligations purchased by a Fund
that have not been assigned a rating will be determined by the Adviser to be of
comparable quality. See "Pilot Growth and Income Fund and Pilot Equity Income
Fund" above for a description of the risks of investing in securities with the
lowest investment grade ratings. If a portfolio security ceases to be rated
investment grade by at least one NRSRO or if the Adviser determines that an
unrated portfolio security held by a Fund is no longer of comparable quality to
an investment grade security, the security will be sold in an orderly manner as
quickly as possible. While each Fund has the flexibility to invest in Municipal
Obligations with short, medium or long term maturities, except during temporary
defensive periods or unusual market conditions, the average weighted maturity of
the Pilot Intermediate Municipal Bond Fund will be between three and ten years,
and the average weighted maturity of the Pilot Municipal Bond Fund will be
between five and thirty years.
Under normal market and economic conditions, each Fund will invest at least 80%
of its net assets in Municipal Obligations the interest on which is exempt from
regular federal income tax. In addition, under normal market conditions each
Fund may invest up to 20% of its net assets in taxable instruments, including
zero coupon bonds, cash equivalents and certain so-called private activity
bonds, which are a type of obligation that, although exempt from regular federal
income tax, may be subject to the federal alternative minimum tax. See "Pilot
Diversified Bond Income Fund" above for a description of cash equivalents. The
Funds may also invest in futures contracts and options. From time to time, each
Fund may also hold uninvested cash reserves that do not earn income. For a
further description of the Funds' policies with respect to Municipal Obligations
and other instruments, see "Portfolio Instruments and Practices" and "Risk
Factors" below.
Although the MUNICIPAL BOND FUNDS do not presently intend to do so on a regular
basis, either Fund may
8
<PAGE> 13
invest more than 25% of its total assets in Municipal Obligations the interest
on which comes solely from revenues of similar projects. When a Fund's assets
are concentrated in obligations payable from revenues of similar projects or
issued by issuers located in the same state, or in industrial development bonds,
the Fund will be subject to the particular risks (including legal and economic
conditions) relating to such securities to a greater extent than if its assets
were not so concentrated. Payment on Municipal Obligations held by a Municipal
Bond Fund relating to certain projects may be secured by mortgages or deeds of
trust. In the event of a default, enforcement of a mortgage or deed of trust
will be subject to statutory enforcement procedures and limitations on obtaining
deficiency judgments. Should a foreclosure occur, collection of the proceeds
from that foreclosure may be delayed and the amount of the proceeds received may
not be enough to pay the principal or accrued interest on the defaulted
Municipal Obligation.
The value of each 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 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
9
<PAGE> 14
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.
- --Municipal Obligations. Each of the MUNICIPAL BOND FUNDS will invest primarily
in Municipal Obligations. The two principal classifications of Municipal
Obligations are "general obligation" securities (which are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest) and "revenue" securities (which are payable only from
revenues received from the operation of a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or other
specific revenue source). A third type of Municipal Obligation, normally issued
by special purpose public authorities, is known as a "moral obligation" security
because if the issuer cannot meet its obligations it then draws on a reserve
fund, the restoration of which is a moral commitment but not a legal requirement
of the state or municipality which created the issuer. Private activity bonds
(such as bonds issued by industrial development authorities) are usually revenue
securities issued by or for public authorities to finance a privately operated
facility and are not payable from the unrestricted revenues of the issuer.
Consequently, the credit quality of such private activity bonds is usually
directly related to the credit standing of the corporate user of the facility
involved.
Within the principal classifications described above there are a variety of
categories including municipal leases and certificates of participation.
Municipal lease obligations are issued by state and local governments or
authorities to finance the acquisition of equipment and facilities. Certain
municipal lease obligations may include "non-appropriation" clauses which
provide that the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such purpose
on a yearly basis. Municipal leases (and participations in such leases) present
the risk that a municipality will not appropriate funds for the lease payments.
The Adviser, under the supervision of the Board of Trustees, will determine the
credit quality of any unrated municipal leases on an on-going basis, including
an assessment of the likelihood that the lease will not be canceled.
Securities acquired by each of the Municipal Bond Funds may be in the form of
custodial receipts evidencing rights to receive a specific future interest
payment, principal payment or both on certain Municipal Obligations. Such
Obligations are held in custody by a bank on behalf of holders of the receipts.
These custodial receipts are known by various names, including "Municipal
Receipts," "Municipal Certificates of Accrual on Tax-Exempt Securities"
("M-CATs") and "Municipal Zero-Coupon Receipts." The Funds may also purchase
from time to time participation interests in debt securities held by trusts or
financial institutions. A participation interest gives a Fund an undivided
interest in the security or securities involved. Participation interests may
have fixed, floating or variable rates of interest (although securities held by
the issuer may have longer maturities). If a participation interest is unrated,
the Adviser will have determined that the interest is of comparable quality to
those instruments in which the Fund may invest. For certain participation
interests, a Fund will have the right to demand payment for all or any part of
the Fund's participation interest, plus accrued interest. As to these
instruments, each Fund intends to exercise its right to demand payment as needed
to provide liquidity, to maintain or improve the quality of its investment
portfolio or upon a default (if permitted under the terms of the instrument).
In addition, each Municipal Bond Fund may also hold other tax-exempt derivative
instruments, which may be in the form of tender options bonds, participations,
custodial receipts and bonds that have interest rates that re-set inversely to
changing short-term rates and/or have imbedded interest rate floors and caps.
Many of these derivative instruments are proprietary products that have been
recently developed by investment banking firms, and it is uncertain how these
instruments will perform under different economic and interest-rate scenarios.
In addition, because certain of these instruments are leveraged, their market
values may be more volatile than other types of Municipal Obligations and may
present greater potential for capital gain or loss. In some cases it may be
difficult to determine the fair value of a derivative instrument because of a
lack of reliable objective information and an established secondary market for
some instruments may not exist.
In many cases, the Internal Revenue Service has not ruled on whether the
interest received on a tax-exempt derivative instrument or other types of
Municipal Obligations is tax-exempt and, accordingly, purchases of such
securities are based on the opinion of counsel to the sponsors of the
instruments. The Pilot Funds and the Adviser rely on these opinions and do not
intend to review the bases for them.
10
<PAGE> 15
Municipal Obligations purchased by the Funds may be backed by letters of credit
or guarantees issued by domestic or foreign banks and other financial
institutions which are not subject to federal deposit insurance. Adverse
developments affecting the banking industry generally or a particular bank or
financial institution that has provided its credit or a guarantee with respect
to a Municipal Obligation held by a Fund could have an adverse effect on a
Fund's portfolio and the value of its shares. As described below under "Risk
Factors-Foreign Securities," foreign letters of credit and guarantees involve
certain risks in addition to those of domestic obligations.
- --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 of the GOVERNMENT FUNDS 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, except the MUNICIPAL BOND FUNDS, 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 liquid assets
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. 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
11
<PAGE> 16
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.
- --Stand-by Commitments. Each of the MUNICIPAL BOND FUNDS may acquire stand-by
commitments under which a dealer agrees to purchase certain Municipal
Obligations at the Fund's option at a price equal to amortized cost plus
interest. These commitments will be used only to assist in maintaining the
liquidity of the Funds, and not for trading purposes.
- --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 obtained relief from the SEC to permit each
Fund to invest any uninvested cash reserves in an amount not to exceed 25% of
its total assets in affiliated money market funds. 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
12
<PAGE> 17
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. Each of the GOVERNMENT FUNDS may enter into transactions known
as "mortgage dollar rolls" in which a 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, a 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, a 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, liquid assets in the amount
of the future purchase commitment will be set apart for the Fund involved in a
separate account at the custodian. Mortgage rolls are not a primary investment
technique for any of the Funds, and it is expected that, under normal market
conditions, a 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. All options will be listed on a national
securities exchange and issued by the Options Clearing Corporation.
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 as a hedge against anticipated interest rate
fluctuations. Such fluctuations could have an effect on securities that a Fund
holds in its portfolio or intends to sell. 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 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
13
<PAGE> 18
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 DIVERSIFIED BOND INCOME
FUND and the GOVERNMENT FUNDS may each buy and sell securities and receive
dividend and interest proceeds in currencies other than the U.S. dollar, these
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
KNOWINGLY 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, tax-exempt derivative
instruments, stripped mortgage-backed securities issued by private issuers 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. EACH FUND may engage in short-term trading to achieve its
investment objective. The 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, 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
14
<PAGE> 19
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
- --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.
- --Other 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.
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.
15
<PAGE> 20
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.
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 1997 are New
Years Day (observed), President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day). 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
16
<PAGE> 21
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 within 72 hours of a
telephone transaction, 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.
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 the
Government and Municipal Bond Funds, it comes from the interest on the bonds and
other investments that they hold in their portfolios. For the Equity Funds, net
investment income is made up of dividends received from the stocks they hold, as
well as interest accrued on convertible securities, money market instruments and
other debt obligations held in their portfolios.
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 the Equity Funds) or payment dates (with respect to the
Government and Municipal Bond Funds) after the date the Institution receives the
election.
When are dividends and distributions declared and paid?
Dividends are declared daily and paid monthly. Shares of the Funds begin earning
dividends the first Business Day after acceptance of the purchase order for
which
17
<PAGE> 22
The Pilot Funds' custodian has received payment and stop earning dividends the
Business Day such shares are redeemed. 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 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 a maximum 4.5%
(4.0% for Diversified Bond Income Fund, Intermediate U.S. Government Securities
Fund and Intermediate Municipal Bond Fund) front-end sales charge, and Class B
Shares are sold with a maximum 4.5% (4.0% for Diversified Bond Income Fund,
Intermediate U.S. Government Securities Fund and Intermediate Municipal Bond
Fund) contingent deferred sales charge. 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
18
<PAGE> 23
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.
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.
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 LIMITED PARTNERSHIP (referred to as "BISYS"),
is responsible for coordinating the Fund's efforts and generally overseeing the
operation of the Fund's business. BISYS' principal offices are located at 3435
Stelzer Road, Columbus, Ohio 43219-3035.
Distributor: Each 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 whose ultimate corporate parent is The BISYS Group,
Inc., is located at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
Custodian: BOATMEN'S TRUST COMPANY (referred to as "Boatmen's") is responsible
for holding the investments purchased by each Fund. Boatmen's is located at 100
N. Broadway, St. Louis, Missouri 63178.
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.
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 $
billion in assets ($ billion over which they had investment discretion and
$ billion over which they did not have investment discretion).
Boatmen's Bancshares, Inc., Boatmen's parent, ("Bancshares") is a registered
bank holding company which owns substantially all of the outstanding capital
stock of numerous commercial banks Boatmen's, and more than fifty 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.
On August 30, 1996, Bancshares and NationsBank Corporation ("NationsBank")
announced that they have entered into an agreement pursuant to which Bancshares
will merge into NationsBank. The proposed merger, which is currently expected to
take place in January 1997, is subject to a number of conditions, including
19
<PAGE> 24
approval by the appropriate regulatory authorities and by the shareholders of
both Bancshares and NationsBank. If the proposed merger is consummated,
Boatmen's will become a wholly owned subsidiary of NationsBank.
Pilot Intermediate Municipal Bond Fund, Pilot Municipal Bond Fund, and Pilot
Intermediate Municipal Bond Fund each commenced operations on November 7, 1994
upon the transfer to each Fund of a portion of assets of a common trust fund of
Boatman's Trust Company (the "Commingled Funds") having corresponding investment
objectives, policies and limitations in exchange for shares of such Fund. Each
Fund's portfolio of investments on November 7, 1994 was substantially the same
as the portfolio of the corresponding Commingled Fund immediately prior to the
transfer.
Because each Commingled Fund constitutes a "predecessor" of its corresponding
Fund, each corresponding Fund calculates the performance for each of its classes
for periods commencing prior to the transfer of Commingled Fund assets to the
Fund by including its Commingled Fund predecessor's total return adjusted to
reflect the deduction of estimated fees and expenses applicable to that class as
stated in the expense table of the Fund's initial prospectus.
The quoted performance data includes the performance of the Commingled Funds for
periods before their corresponding Funds' commencement of operations including
periods when the Commingled Funds were managed by the Adviser's predecessor in
interest or affiliate. The Commingled Funds have not been and are not currently
registered under the 1940 Act or subject to the investment restrictions imposed
by the 1940 Act. If the Commingled Funds had been registered under the 1940 Act,
the Commingled Funds' performance might have been adversely affected. The
performance information set forth below reflects past performance and is not
necessarily indicative of the future performance of the Funds, 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.
Average Annual Total Returns for the period ended September 30, 1996.
<TABLE>
<CAPTION>
1 YEAR
PILOT SHARES
------------
<S> <C>
Pilot Intermediate Municipal Bond Fund and its
predecessor %
Pilot Intermediate U.S. Government Securities Fund
and its predecessor %
Pilot Municipal Bond Fund and its predecessor %
</TABLE>
<TABLE>
<CAPTION>
3 YEARS
PILOT SHARES
------------
<S> <C>
Pilot Intermediate Municipal Bond Fund and its
predecessor %
Pilot Intermediate U.S. Government Securities Fund
and its predecessor %
Pilot Municipal Bond Fund and its predecessor %
</TABLE>
<TABLE>
<CAPTION>
5 YEARS
PILOT SHARES
------------
<S> <C>
Pilot Intermediate Municipal Bond Fund and its
predecessor %
Pilot Intermediate U.S. Government Securities Fund
and its predecessor %
Pilot Municipal Bond Fund and its predecessor %
</TABLE>
<TABLE>
<CAPTION>
10 YEARS
(OR SINCE INCEPTION)
PILOT SHARES
------------
<S> <C>
Pilot Intermediate Municipal Bond Fund and its
predecessor %
Pilot Intermediate U.S. Government Securities Fund
and its predecessor %
Pilot Municipal Bond Fund and its predecessor %
</TABLE>
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
operating expenses applicable to the Pilot Shares (as estimated at commencement
of operations) had been incurred during the periods shown.
The Fixed Income Committee of Boatmen's is primarily responsible for the
day-to-day management of the investment portfolio of each of the Government
Funds and Municipal Bond Funds.
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 Fund Services Limited Partnership ("BISYS") is a
subsidiary of The BISYS Group, Inc., 150 Clove Road, Little Falls, New Jersey
07424, a publicly owned company engaged in information processing, loan
servicing and 401(k) administration and recordkeeping services to and through
banking and other financial organizations. Under its Administration Agreement
with the Fund, BISYS provides a wide range of such services to the Funds,
including maintaining the Funds' offices, providing statistical and research
data, coordinating the
20
<PAGE> 25
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, W. Eugene Spurbeck, George O.
Martinez, William J. Tomko and Bruce Treff are also employees and/or officers of
BISYS, the Distributor or an affiliate.
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 0.55% of Pilot Diversified Bond Income Fund's
average daily net assets, 0.55% of the Pilot Intermediate U.S. Government
Securities Fund's average daily net assets, 0.55% of the Pilot U.S. Government
Securities Fund's average daily net assets, 0.55% of the Pilot Intermediate
Municipal Bond Fund's average daily net assets, and 0.55% of the Pilot Municipal
Bond Fund's average daily net assets. For the fiscal year ended August 31, 1996,
the funds paid advisory fees in the amount of 0.35%, 0.40%, 0.40% and 0.45% for
Pilot Intermediate U.S. Government Securities Fund, Pilot U.S. Government
Securities Fund, Pilot Intermediate Municipal Bond Fund and Pilot Municipal Bond
Fund, respectively. Pilot Diversified Bond Income Fund commenced operations on
October 21, 1996.
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. For the fiscal year ended August 31, 1996, the Pilot Funds paid
administration fees to BISYS in the amount of $217,071, $133,452, $219,483 and
$166,741 for Pilot Intermediate U.S. Government Securities Fund, Pilot U.S.
Government Securities Fund Pilot Intermediate Municipal Bond Fund and Pilot
Municipal Bond Fund, respectively. For the fiscal period ended August 31, 1995,
The Pilot Funds paid administration fees to BISYS in the amount of $28,065,
$11,784, $52,366 and $23,572 for Pilot Intermediate U.S. Government Securities
Fund, Pilot U.S. Government Securities Fund, Pilot Intermediate Municipal Bond
Fund and Pilot Municipal Bond Fund, respectively.
Operating expenses borne by the Funds include taxes; interest; fees and expenses
of trustees and officers who 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. 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
21
<PAGE> 26
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, other than the "exempt
interest dividends" from the Municipal Bond Funds, 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.
In addition, each Municipal Bond Fund intends to pay at least 90% of its net
exempt-interest income as dividends known as "exempt-interest dividends". These
dividends may be treated by you as excludable from your gross income (unless the
exclusion would be disallowed because of your particular situation). You should
note that income that is not subject to federal income taxes may nonetheless
have to be considered along with other adjusted gross income in determining
whether any Social Security payments received by you are subject to federal
income taxes.
If a Municipal Bond Fund holds certain so-called "private activity bonds" issued
after August 7, 1986 shareholders will need to include as an item of tax
preference for purposes of the federal alternative minimum tax that portion of
the dividends paid by the Fund derived from interest received on such bonds. The
maximum federal alternative minimum tax rate is 28% for individuals. In
addition, corporations will need to take into account all exempt-interest
dividends paid by these Funds in determining certain adjustments for the federal
alternative minimum tax and the environmental tax.
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 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 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 Government Funds and the Municipal Bond Funds 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
22
<PAGE> 27
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.
TAX-EQUIVALENT YIELDS for the Municipal Bond Funds show the amount of taxable
yield needed to produce an after-tax equivalent of a tax-free yield, and are
calculated by increasing the yield (as calculated above) by the amount necessary
to reflect the payment of federal income taxes at a stated rate.
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.
- ---------------------------------------------------------------
23
<PAGE> 28
PILVP1295P
<PAGE> 29
- ----- Financial
Direction December 31, 1996
LOGO
The
Pilot
Funds
PILOT DIVERSIFIED BOND
INCOME FUND
PILOT U.S. GOVERNMENT
SECURITIES FUND
PILOT INTERMEDIATE U.S.
GOVERNMENT SECURITIES FUND
PILOT MUNICIPAL
BOND FUND
PILOT INTERMEDIATE
MUNICIPAL BOND FUND
Class A Shares and
Class B Shares
PROSPECTUS ENCLOSED
<PAGE> 30
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXPENSE SUMMARY................................................................................... 3
FINANCIAL HIGHLIGHTS.............................................................................. 6
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS.................................................. 8
Pilot Diversified Bond Income Fund........................................................... 8
Pilot Intermediate U.S. Government Securities Fund........................................... 8
Pilot U.S. Government Securities Fund........................................................ 8
Pilot Intermediate Municipal Bond Fund....................................................... 9
Pilot Municipal Bond Fund.................................................................... 9
PORTFOLIO INSTRUMENTS AND PRACTICES............................................................. 10
RISK FACTORS.................................................................................... 16
FUNDAMENTAL LIMITATIONS......................................................................... 16
INVESTING IN THE PILOT FUNDS...................................................................... 17
HOW TO BUY SHARES............................................................................... 19
HOW TO SELL SHARES.............................................................................. 23
TRANSACTION RULES............................................................................... 24
SHAREHOLDER SERVICES............................................................................ 26
DIVIDENDS AND DISTRIBUTIONS..................................................................... 29
DISTRIBUTION AND SERVICE ARRANGEMENTS............................................................. 30
THE PILOT FAMILY OF FUNDS......................................................................... 31
THE BUSINESS OF THE FUND.......................................................................... 31
FUND MANAGEMENT................................................................................. 31
TAX IMPLICATIONS................................................................................ 34
MEASURING PERFORMANCE........................................................................... 35
</TABLE>
<PAGE> 31
THE PILOT FUNDS
LOGO
PROSPECTUS FOR CLASS A SHARES AND CLASS B SHARES OF PILOT DIVERSIFIED BOND
INCOME, PILOT INTERMEDIATE U.S. GOVERNMENT SECURITIES, PILOT U.S. GOVERNMENT
SECURITIES, PILOT INTERMEDIATE MUNICIPAL BOND AND PILOT MUNICIPAL BOND FUNDS
November , 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PILOT FUND GOAL FOR INVESTORS WHO WANT
- -------------------------- ------------------------------------ ------------------------------------
<S> <C> <C>
DIVERSIFIED BOND INCOME Current income consistent with Current income from debt securities
preservation of capital by investing and are willing to accept
primarily in debt securities. The fluctuations in price and yield.
Fund seeks total return as a
secondary objective and will have an
average weighted maturity of from
five to fifteen years.
- ----------------------------------------------------------------------------------------------------------
INTERMEDIATE U.S. Total return and preservation of The Fund will emphasize the capital
GOVERNMENT SECURITIES capital by investing primarily in appreciation component of total
U.S. Government securities and return. U.S. Government securities
repurchase agreements. The Fund will and less principal volatility than
generally have an average weighted normally associated with a long-term
maturity of from three to ten years. fund.
- ----------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES Total return and preservation of Capital appreciation over the long
capital by investing in U.S. term as well as current income from
Government securities and repurchase U.S. Government securities and are
agreements. Capital appreciation willing to accept fluctuations in
over the long term as well as price and yield.
current income from the Fund will
generally have an average weighted
maturity of from five to thirty
years.
- ----------------------------------------------------------------------------------------------------------
INTERMEDIATE MUNICIPAL Current income free of federal Current income that is free from
BOND income tax as is consistent with regular federal income tax and less
preservation of capital through principal volatility than normally
investments primarily in investment associated with a long-term fund.
grade municipal obligations. The
Fund will generally have an average
weighted maturity of from three to
ten years.
- ----------------------------------------------------------------------------------------------------------
MUNICIPAL BOND Current income free of federal Current income that is free from
income tax as is consistent with regular federal income tax and are
preservation of capital through willing to accept fluctuations in
investments primarily in investment price and yield.
grade municipal obligations. The
Fund will generally have an average
weighted maturity of from five to
thirty years.
- ----------------------------------------------------------------------------------------------------------
</TABLE>
1
<PAGE> 32
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 two classes of shares from which investors may choose
in Pilot Diversified Bond Income, Pilot Intermediate U.S. Government Securities,
Pilot U.S. Government Securities, Pilot Intermediate Municipal Bond and Pilot
Municipal Bond Funds. Class A Shares are sold with a front-end sales charge;
Class B shares are sold with a deferred sales charge. 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 December 31, 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.
- --------------------------------------------------------------------------------
2
<PAGE> 33
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 the 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 Class A and Class B Shares. Examples based on this information are
also provided.
<TABLE>
<CAPTION>
DIVERSIFIED INTERMEDIATE
BOND INCOME U.S. GOVERNMENT
FUND SECURITIES FUND
--------------- ---------------
CLASS CLASS CLASS CLASS
A B A B
---- ---- ---- ----
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Front End Sales Charge Imposed on Purchases
(as a percentage of offering price)............................... 4.00%(1) None 4.00%(1) None
Sales Charge Imposed on Reinvested Dividends........................ None None None None
Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, whichever is lower).......................... None 4.00%(2) None 4.00%(3)
Exchange Fee........................................................ None None None None
ANNUAL FUND OPERATING EXPENSES AFTER FEE WAIVERS AND EXPENSE
REIMBURSEMENTS (as a percentage of average net assets):
Management Fees (after waivers)(4).................................. 0.40% 0.50% 0.35% 0.35%
Rule 12b-1/Distribution Payments.................................... 0.25% 1.00% 0.25% 1.00%
Other Expenses (after reimbursements)(4)............................ 0.25% 0.25% 0.22% 0.22%
---- ---- ---- ----
Total Fund Operating Expenses After Fee Waivers and Expense
Reimbursements(4)................................................. .90% 1.75% 0.82% 1.57%
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
INTERMEDIATE
U.S. GOVERNMENT MUNICIPAL BOND MUNICIPAL BOND
SECURITIES FUND FUND FUND
--------------- --------------- ---------------
CLASS CLASS CLASS CLASS CLASS CLASS
A B A B A B
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Front End Sales Charge Imposed on Purchases
(as a percentage of offering price)......... 4.50%(1) None 4.00%(1) None 4.50%(1) None
Sales Charge Imposed on Reinvested
Dividends................................... None None None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)............... None 4.50%(2) None 4.00%(3) None 4.50%(2)
Exchange Fee.................................. None None None None None None
ANNUAL FUND OPERATING EXPENSES AFTER FEE WAIVERS
AND EXPENSE REIMBURSEMENTS (as a percentage of
average net assets):
Management Fees (after waivers)(4)............ 0.40% 0.40% 0.40% 0.40% 0.45% 0.45%
Rule 12b-1/Distribution Payments.............. 0.25% 1.00% 0.25% 1.00% 0.25% 1.00%
Other Expenses (after reimbursements)(4)...... 0.22% 0.22% 0.18% 0.18% 0.22% 0.22%
---- ---- ---- ---- ---- ----
Total Fund Operating Expenses After Fee
Waivers and Expense Reimbursements(4)....... 0.87% 1.62% 0.83% 1.58% 0.92% 1.67%
===== ===== ===== ===== ===== =====
</TABLE>
- ------------
(1) Reduced sales charges may be available. See "Shareholder Services--Front-End
Sales Charge Reductions."
(2) This amount applies to redemptions during the first year. The charge
decreases .50% annually to 2.50% for redemptions made during the fifth year
and then decreases .75% to 1.75% for redemptions made during the sixth year.
No deferred sales charge is charged for redemptions made after the sixth
year. See "How to Buy Shares-- Explanation of Sales Price."
3
<PAGE> 34
(3) This amount applies to redemptions during the first year. The charge
decreases .50% annually to 2.00% for redemptions made during the fifth year
and then decreases .75% to 1.25% for redemptions made during the sixth year.
No deferred sales charge is charged for redemptions made after the sixth
year. See "How to Buy Shares-- Explanation of Sales Price."
(4) 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. Without waivers by the Adviser, investment management fees as a
percentage of net assets would be 0.55%, 0.55%, 0.55%, 0.55% and 0.55% for
the Pilot Diversified Bond Income, Pilot Intermediate U.S. Government
Securities, Pilot U.S. Government Securities, Pilot Intermediate Municipal
Bond and Pilot Municipal Bond Funds, respectively. Other Expenses also
reflect reimbursements by the Adviser and Administrator. Absent
reimbursement, Other Expenses would be % and % for the Class A and
Class B Shares, respectively, of Pilot Diversified Bond Income Fund; %
and % for the Class A and Class B Shares, respectively, of Pilot
Intermediate U.S. Government Securities Fund; % and % for the
Class A and Class B Shares, respectively, of Pilot U.S. Government
Securities Fund; be % and % for the Class A and Class B Shares,
respectively, of; % and % for the Class A and Class B Shares,
respectively, of Pilot Intermediate Municipal Bond Fund; and % and
% for the Class A and Class B Shares, respectively, of Pilot Municipal
Bond Fund. Absent waivers and expense reimbursements, the total operating
expenses for the Funds would be % and % for Class A Shares and
Class B Shares, respectively, of the Pilot Diversified Bond Income Fund;
1.12% and 1.87% for Class A Shares and Class B Shares, respectively, of the
Pilot Intermediate U.S. Government Securities Fund; 1.12% and 1.87% for
Class A Shares and Class B Shares, respectively, of the Pilot U.S.
Government Securities Fund; 1.06% and 1.81% for Class A Shares and Class B
Shares, respectively, of the Pilot Intermediate Municipal Bond Fund; and
1.11% and 1.86% for Class A Shares and Class B Shares, respectively, of the
Pilot Municipal Bond Fund. These waivers and reimbursements are voluntary
and may be terminated at any time with respect to any Fund at the discretion
of the Adviser or Administrator and without the consent of the Funds. The
Adviser has voluntarily agreed to limit the total operating expenses of the
Pilot Shares of Pilot Diversified Bond Income Fund to % of the Fund's
average net assets until February 1, 1998 which will have the effect of
limiting the expenses of Class A and Class B shares of the Fund to %
and %, respectively, of the Fund's average net assets for the same
period. You should note that any fees that are charged by the Funds'
Adviser, its affiliates or any other institutions directly to their customer
accounts for services related to an investment in the Funds are in addition
to and not reflected in the fees and expenses described above.
BECAUSE OF THE DISTRIBUTION PAYMENTS PAID BY THE FUNDS AS SHOWN IN THE ABOVE
TABLE, LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGE PERMITTED BY THE NATIONAL ASSOCIATION OF
SECURITIES DEALERS, INC.
4
<PAGE> 35
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:
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
AFTER AFTER AFTER AFTER
PURCHASE PURCHASE PURCHASE PURCHASE
---- ---- ----- -----
<S> <C> <C> <C> <C>
PILOT DIVERSIFIED BOND INCOME FUND
Class A Shares(1)................... $ $ $ $
Class B Shares
Assuming complete redemption at
end of period(2)............. $ $ $ $
Assuming no redemption......... $ $ $ $
PILOT INTERMEDIATE U.S. GOVERNMENT
SECURITIES FUND
Class A Shares(1)................... $ $ $ $
Class B Shares
Assuming complete redemption at
end of period(2)............. $ $ $ $
Assuming no redemption......... $ $ $ $
PILOT U.S. GOVERNMENT SECURITIES FUND
Class A Shares(1)................... $ $ $ $
Class B Shares
Assuming complete redemption at
end of period(2)............. $ $ $ $
Assuming no redemption......... $ $ $ $
PILOT INTERMEDIATE MUNICIPAL BOND FUND
Class A Shares(1)................... $ $ $ $
Class B Shares
Assuming complete redemption at
end of period(2)............. $ $ $ $
Assuming no redemption......... $ $ $ $
PILOT MUNICIPAL BOND FUND
Class A Shares(1)................... $ $ $ $
Class B Shares
Assuming complete redemption at
end of period(2)............. $ $ $ $
Assuming no redemption......... $ $ $ $
</TABLE>
- ------------
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
(2) Assumes deduction of maximum applicable contingent deferred sales charge.
The Example shown above should not be considered a representation of future
investment returns or operating expenses.
Pilot Diversified Bond Income Fund is new and actual investment returns and
operating expenses may be more or less than shown for the Fund.
5
<PAGE> 36
THE PILOT FUNDS
FINANCIAL HIGHLIGHTS
The following data with respect to a Share of the Pilot Growth and Income Fund,
Pilot Equity Income Fund, Pilot Intermediate U.S. Government Securities Fund,
Pilot U.S. Government Securities Fund, Pilot Intermediate Municipal Bond Fund
and Pilot Municipal Bond Fund outstanding during the periods indicated have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report incorporated by reference and attached to the Statement of
Additional Information, and should be read in conjunction with the financial
statements and related notes incorporated by reference and attached to the
Statement of Additional Information.
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout the Period
- --------------------------------------------------------------------------------
Pilot Growth & Income Fund
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT OPERATIONS
----------------------------------------
NET REALIZED TOTAL
AND UNREALIZED INCOME DIVIDENDS NET ASSET
NET ASSET VALUE NET GAIN ON FROM FROM NET VALUE AT
AT BEGINNING INVESTMENT INVESTMENT INVESTMENT INVESTMENT END OF
OF PERIOD INCOME TRANSACTIONS OPERATIONS INCOME PERIOD
--------------- ---------- -------------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED AUGUST 31,
- -----------------------------------------
1996--Pilot Shares.......................
1996--Class A Shares.....................
1996--Class B Shares.....................
1995--Pilot Shares(g).................... $ 10.00 $ 0.17 $ 1.59 $ 1.76 $(0.17) $ 11.59
1995--Class A Shares(a).................. 10.44 0.09 1.14 1.23 (0.09) 11.58
1995--Class B Shares(e).................. 10.08 0.08 1.51 1.59 (0.08) 11.59
<CAPTION>
RATIO
INFORMATION
ASSUMING NO
FEE WAIVER OR
EXPENSE
REIMBURSEMENT
-------------
RATIO OF NET
RATIO OF INVESTMENT NET ASSETS RATIO OF
EXPENSES INCOME PORTFOLIO AT END OF EXPENSES TO
TOTAL TO AVERAGE TO AVERAGE TURNOVER PERIOD AVERAGE
RETURN(C) NET ASSETS(D) NET ASSETS(D) RATE (IN 000'S) NET ASSETS(D)
--------- ------------- ------------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED AUGUST 31,
- -----------------------------------------
1996--Pilot Shares.......................
1996--Class A Shares.....................
1996--Class B Shares.....................
1995--Pilot Shares(g).................... 17.72% 0.75% 1.98% 28% $109,423 1.15%
1995--Class A Shares(a).................. 11.78 1.00 1.65 28 697 1.40
1995--Class B Shares(e).................. 15.85 1.75 0.94 28 661 2.15
<CAPTION>
RATIO OF NET
INVESTMENT
INCOME
TO AVERAGE
NET ASSETS(D)
-------------
FOR THE YEAR ENDED AUGUST 31,
- -----------------------------------------
<S> <C>
1996--Pilot Shares.......................
1996--Class A Shares.....................
1996--Class B Shares.....................
1995--Pilot Shares(g).................... 1.58%
1995--Class A Shares(a).................. 1.25
1995--Class B Shares(e).................. 0.54
</TABLE>
- --------------------------------------------------------------------------------
Pilot Equity Income Fund
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot Shares.......................
1996--Class A Shares.....................
1996--Class B Shares.....................
1995--Pilot Shares(g).................... $ 10.00 $ 0.35 $ 1.29 $ 1.64 $(0.35) $ 11.29
1995--Class A Shares(a).................. 10.24 0.18 1.12 1.30 (0.18) 11.36
1995--Class B Shares(b).................. 9.85 0.18 1.49 1.67 (0.18) 11.34
<CAPTION>
1996--Pilot Shares.......................
<S> <C> <C> <C> <C> <C> <C>
1996--Class A Shares.....................
1996--Class B Shares.....................
1995--Pilot Shares(g).................... 16.69% 0.75% 4.12% 37% $ 98,607 1.14%
1995--Class A Shares(a).................. 12.78 1.00 3.70 37 311 1.39
1995--Class B Shares(b).................. 17.36 1.25 2.88 37 713 2.14
<CAPTION>
<S> <C>
1996--Pilot Shares.......................
1996--Class A Shares.....................
1996--Class B Shares.....................
1995--Pilot Shares(g).................... 3.73%
1995--Class A Shares(a).................. 3.31
1995--Class B Shares(b).................. 2.49
</TABLE>
- --------------------------------------------------------------------------------
Pilot Intermediate U.S. Government Securities Fund
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot Shares.......................
1996--Class A Shares.....................
1995--Pilot Shares(g).................... $ 10.00 $ 0.56 $ 0.44 $ 1.00 $(0.56) $ 10.44
1995--Class A Shares(f).................. 9.98 0.45 0.46 0.91 (0.45) 10.44
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot Shares.......................
1996--Class A Shares.....................
1995--Pilot Shares(g).................... 10.21% 0.57% 6.65% 87% $165,441 0.87%
1995--Class A Shares(f).................. 9.31 0.72 6.27 87 499 1.12
<CAPTION>
<S> <C>
1996--Pilot Shares.......................
1996--Class A Shares.....................
1995--Pilot Shares(g).................... 6.35%
1995--Class A Shares(f).................. 5.87
</TABLE>
- ------------
<TABLE>
<S> <C>
(a) Class A share activity commenced February 7, 1995.
(b) Class B share activity commenced January 12, 1995.
(c) Assumes investment at net asset value at the beginning of the period, reinvestment of all dividends and distributions, a
complete redemption of the investment at the net asset value at the end of the period and no sales charge. Total return would
be reduced if sales charge were taken for Class A or Class B shares. Total return is not annualized.
(d) Annualized.
(e) Class B share activity commenced November 11, 1994.
(f) Class A share activity commenced December 21, 1994.
(g) Pilot share activity commenced November 7, 1994.
</TABLE>
6
<PAGE> 37
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
Pilot U.S. Government Securities Fund
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT OPERATIONS
----------------------------------------
NET REALIZED TOTAL
AND UNREALIZED INCOME DIVIDENDS NET ASSET
NET ASSET VALUE NET GAIN ON FROM FROM NET VALUE AT
AT BEGINNING INVESTMENT INVESTMENT INVESTMENT INVESTMENT END OF
OF PERIOD INCOME TRANSACTIONS OPERATIONS INCOME PERIOD
--------------- ---------- -------------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED AUGUST 31,
- -------------------------------------
1996--Pilot Shares...................
1996--Class A Shares.................
1996--Class B Shares.................
1995--Pilot Shares(g)................ $ 10.00 $ 0.56 $ 1.20 $ 1.76 $(0.56) $ 11.20
1995--Class A Shares(a).............. 10.48 0.37 0.71 1.08 (0.37) 11.19
1995--Class B Shares(b).............. 10.05 0.46 1.14 1.60 (0.46) 11.19
<CAPTION>
RATIO
INFORMATION
ASSUMING NO
FEE WAIVER OR
EXPENSE
REIMBURSEMENT
-------------
RATIO OF NET
RATIO OF INVESTMENT NET ASSETS RATIO OF
EXPENSES TO INCOME PORTFOLIO AT END OF EXPENSES TO
TOTAL AVERAGE TO AVERAGE TURNOVER PERIOD AVERAGE
RETURN(C) NET ASSETS(D) NET ASSETS(D) RATE (IN 000'S) NET ASSETS(C)
--------- ------------- ------------- --------- ---------- -------------
FOR THE YEAR ENDED AUGUST 31,
- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot Shares...................
1996--Class A Shares.................
1996--Class B Shares.................
1995--Pilot Shares(g)................ 18.03% 0.62% 6.45% 132% $137,261 0.87%
1995--Class A Shares(a).............. 10.41 0.82 5.76 132 87 1.12
1995--Class B Shares(b).............. 16.19 1.62 5.19 132 146 1.87
<CAPTION>
RATIO OF NET
INVESTMENT
INCOME
TO AVERAGE
NET ASSETS(C)
-------------
FOR THE YEAR ENDED AUGUST 31,
- -------------------------------------
<S> <C>
1996--Pilot Shares...................
1996--Class A Shares.................
1996--Class B Shares.................
1995--Pilot Shares(g)................ 6.20%
1995--Class A Shares(a).............. 5.46
1995--Class B Shares(b).............. 4.94
</TABLE>
- --------------------------------------------------------------------------------
Pilot Intermediate Municipal Bond Fund
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot Shares...................
1996--Class A Shares.................
1995--Pilot Shares(g)................ $ 10.00 $ 0.41 $ 0.49 $ 0.90 $(0.41) $ 10.49
1995--Class A Shares(e).............. 9.88 0.37 0.61 0.98 (0.37) 10.49
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot Shares...................
1996--Class A Shares.................
1995--Pilot Shares(g)................ 9.16% 0.58% 4.90% 8% $196,209 0.81%
1995--Class A Shares(e).............. 10.03 0.73 4.60 8 232 1.06
<CAPTION>
<S> <C>
1996--Pilot Shares...................
1996--Class A Shares.................
1995--Pilot Shares(g)................ 4.67%
1995--Class A Shares(e).............. 4.27
</TABLE>
- --------------------------------------------------------------------------------
Pilot Municipal Bond Fund
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot Shares...................
1996--Class A Shares.................
1996--Class B Shares.................
1995--Pilot Shares(g)................ $ 10.00 $ 0.48 $ 0.70 $ 1.18 $(0.48) $ 10.70
1995--Class A Shares(a).............. 10.37 0.34 0.33 0.64 (0.34) 10.70
1995--Class B Shares(f).............. 10.02 0.33 0.63 0.95 (0.33) 10.65
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot Shares...................
1996--Class A Shares.................
1996--Class B Shares.................
1995--Pilot Shares(g)................ 12.00% 0.67% 5.63% 10% $150,934 0.86%
1995--Class A Shares(a).............. 6.54 0.87 5.26 10 340 1.11
1995--Class B Shares(f).............. 9.62 1.67 4.48 10 448 1.86
<CAPTION>
<S> <C>
1996--Pilot Shares...................
1996--Class A Shares.................
1996--Class B Shares.................
1995--Pilot Shares(g)................ 5.44%
1995--Class A Shares(a).............. 5.02
1995--Class B Shares(f).............. 4.29
</TABLE>
- ---------------
(a) Class A share activity commenced February 7, 1995.
(b) Class B share activity commenced November 10, 1994.
(c) Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
charge. Total return would be reduced if sales charge were taken for Class A
or Class B shares. Total return is not annualized.
(d) Annualized.
(e) Class A share activity commenced November 18, 1994.
(f) Class B share activity commenced December 27, 1994.
(g) Pilot share activity commenced November 7, 1994.
7
<PAGE> 38
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The Pilot Funds use a variety of 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 which Funds best meet 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 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, American Depository Receipts ("ADRs") and European Depository Receipts
("EDRs"), and cash equivalents, and includes obligations of U.S. and foreign
corporate and government issuers. 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 does currently intend to
invest more than 5% of its total assets in foreign securities. "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.
The Fund will purchase only those debt securities rated A or better by at least
one Nationally Recognized Statistical Rating Organization ("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.
Pilot Intermediate U.S. Government Securities Fund and Pilot U.S. Government
Securities Fund
The Pilot Intermediate U.S. Government Securities Fund and the Pilot U.S.
Government Securities Fund (sometimes referred to together as the "Government
Funds") offer investors two alternatives for participating in the fixed income
securities market with a concentration in U.S. Government securities. The
average weighted maturity of the Pilot Intermediate U.S. Government
8
<PAGE> 39
Securities Fund is normally expected to be shorter than that of the Pilot U.S.
Government Securities Fund.
The investment objective of each Fund is to seek total return and preservation
of capital by investing primarily in U.S. Government securities and repurchase
agreements collateralized by such securities. Each Fund will emphasize the
capital appreciation component of total return. While the maturity of individual
securities will not be restricted, except during temporary defensive periods or
unusual market conditions, the average weighted maturity of the Pilot
Intermediate U.S. Government Securities Fund will be between three and ten years
and the average weighted maturity of the Pilot U.S. Government Securities Fund
will be between five and thirty years.
Each Fund invests at least 65% of its total assets in U.S. Government securities
and repurchase agreements collateralized by such securities. Each Fund may
invest in a variety of U.S. Government securities, including U.S. Treasury
bonds, notes and bills, and obligations of a
number of U.S. Government agencies and instrumentalities. Each Fund may also
invest in interests in the foregoing securities, including collateralized
mortgage obligations issued or guaranteed by a U.S. Government agency or
instrumentality. Securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities have historically had a very low risk of loss of
principal if held to maturity. The Funds, however, can give no assurance that
the U.S. Government would provide financial support to its agencies or
instrumentalities if it were not legally required to do so.
Each Fund may also invest up to 35% of its total assets in debt securities of
U.S. and foreign corporate and foreign government issuers, ADRs and EDRs, zero
coupon bonds and cash equivalents. See "Pilot Diversified Bond Income Fund"
above for a description of ADRs and EDRs and cash equivalents. The Funds will
purchase only those investments which are rated investment grade by at least one
NRSRO or, if unrated, are determined by the Adviser to be of comparable quality.
If a portfolio security held by a Fund ceases to be rated investment grade by at
least one NRSRO or if the Adviser determines that an unrated portfolio security
held by a Fund is no longer of comparable quality to an investment grade
security, the security will be sold in an orderly manner as quickly as possible.
Obligations in the lowest of the top four rating categories ("BBB" or "Baa")
have certain speculative characteristics and are subject to more credit and
market risk than securities with higher ratings.
Additionally, each Fund may also invest in futures contracts and options. From
time to time, each Fund may also hold uninvested cash reserves which do not earn
income. For a further description of the Funds' policies with respect to foreign
securities and other instruments, see "Portfolio Instruments and Practices" and
"Risk Factors" below.
The value of each Fund's portfolio (and consequently its shares) is expected to
fluctuate inversely in relation to changes in the direction of interest rates.
Pilot Intermediate Municipal Bond Fund and Pilot Municipal Bond Fund
The Pilot Intermediate Municipal Bond Fund and the Pilot Municipal Bond Fund
(sometimes referred to together as the "Municipal Bond Funds") offer investors
two alternatives for participating in the municipal securities market. The
average weighted maturity of the Pilot Intermediate Municipal Bond Fund is
normally expected to be shorter than the average weighted maturity of the Pilot
Municipal Bond Fund.
The investment objective of each Fund is to seek current income free of federal
income tax as is consistent with preservation of capital. Each Fund seeks to
attain its objective by investing its assets primarily in debt obligations of
states, territories and possessions of the United States, the District of
Columbia and of their agencies, authorities, instrumentalities and political
sub-divisions ("Municipal Obligations") that are rated investment grade or above
by one or more NRSROs at the time of purchase. Obligations purchased by a Fund
that have not been assigned a rating will be determined by the Adviser to be of
comparable quality. If a portfolio security ceases to be rated investment grade
by at least one NRSRO or if the Adviser determines that an unrated portfolio
security held by a Fund is no longer of comparable quality to an investment
grade security, the security will be sold in an orderly manner as quickly as
possible. While each Fund has the flexibility to invest in Municipal Obligations
with short, medium or long term maturities, except during temporary defensive
periods or unusual market conditions, the average weighted maturity of the Pilot
Intermediate Municipal Bond Fund will be between three and ten years, and the
average weighted maturity of the Pilot Municipal Bond Fund will be between five
and thirty years.
Under normal market and economic conditions, each Fund will invest at least 80%
of its net assets in Municipal Obligations the interest on which is exempt from
regular
9
<PAGE> 40
federal income tax. In addition, under normal market conditions each Fund may
invest up to 20% of its net assets in taxable instruments, including zero coupon
bonds, cash equivalents and certain so-called private activity bonds, which are
a type of obligation that, although exempt from regular federal income tax, may
be subject to the federal alternative minimum tax. See "Pilot Diversified Bond
Income Fund" above for a description of cash equivalents. The Funds may also
invest in futures contracts and options. From time to time, each Fund may also
hold uninvested cash reserves that do not earn income. For a further description
of the Funds' policies with respect to Municipal Obligations and other
instruments, see "Portfolio Instruments and Practices" and "Risk Factors" below.
Although the MUNICIPAL BOND FUNDS do not presently intend to do so on a regular
basis, either Fund may invest more than 25% of its total assets in Municipal
Obligations the interest on which comes solely from revenues of similar
projects. When a Fund's assets are concentrated in obligations payable from
revenues of similar projects or issued by issuers located in the same state, or
in industrial development bonds, the Fund will be subject to the particular
risks (including legal and economic conditions) relating to such securities to a
greater extent than if its assets were not so concentrated. Payment on Municipal
Obligations held by a Municipal Bond Fund relating to certain projects may be
secured by mortgages or deeds of trust. In the event of a default, enforcement
of a mortgage or deed of trust will be subject to statutory enforcement
procedures and limitations on obtaining deficiency judgments. Should a
foreclosure occur, collection of the proceeds from that foreclosure may be
delayed and the amount of the proceeds received may not be enough to pay the
principal or accrued interest on the defaulted Municipal Obligation.
The value of each 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 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
10
<PAGE> 41
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.
- --Municipal Obligations. Each of the MUNICIPAL BOND FUNDS will invest primarily
in Municipal Obligations. The two principal classifications of Municipal
Obligations are "general obligation" securities (which are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest) and "revenue" securities (which are payable only from
revenues received from the operation of a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or other
specific revenue source). A third type of Municipal Obligation, normally issued
by special purpose public authorities, is known as a "moral obligation" security
because if the issuer cannot meet its obligations it then draws on a reserve
fund, the restoration of which is a moral commitment but not a legal requirement
of the state or municipality which created the issuer. Private activity bonds
(such as bonds issued by industrial development authorities) are usually revenue
securities issued by or for public authorities to finance a privately operated
facility and are not payable from the unrestricted revenues of the issuer.
Consequently, the credit quality of such private activity bonds is usually
directly related to the credit standing of the corporate user of the facility
involved.
Within the principal classifications described above there are a variety of
categories including municipal leases and certificates of participation.
Municipal lease obligations are issued by state and local governments or
authorities to finance the acquisition of equipment and facilities. Certain
municipal lease obligations may include "non-appropriation" clauses which
provide that the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such purpose
on a yearly basis. Municipal leases (and participations in such leases) present
the risk that a municipality will not appropriate funds for the lease payments.
The Adviser, under the supervision of the Board of Trustees, will determine the
credit quality of any unrated municipal leases on an on-going basis, including
an assessment of the likelihood that the lease will not be canceled.
Securities acquired by each of the Municipal Bond Funds may be in the form of
custodial receipts evidencing rights to receive a specific future interest
payment, principal payment or both on certain Municipal Obligations. Such
Obligations are held in custody by a bank on behalf of holders of the receipts.
These custodial receipts are known by various names, including "Municipal
Receipts", "Municipal Certificates of Accrual on Tax-Exempt Securities"
("M-CATs") and "Municipal Zero--Coupon Receipts". The Funds may also purchase
from time to time participation interests in debt securities held by trusts or
financial institutions. A participation interest gives a Fund an undivided
interest in the security or securities involved. Participation interests may
have fixed, floating or variable rates of interest (although securities held by
the issuer may have longer maturities). If a participation interest is unrated,
the Adviser will have determined that the interest is of comparable quality to
those instruments in which the Fund may invest. For certain participation
interests, a Fund will have the right to demand payment for all or any part of
the Fund's participation interest, plus accrued interest. As to these
instruments, each Fund intends to exercise its right to demand payment as needed
to provide liquidity, to maintain or improve the quality of its investment
portfolio or upon a default (if permitted under the terms of the instrument).
In addition, each Municipal Bond Fund may also hold other tax-exempt derivative
instruments, which may be in the form of tender options bonds, participations,
custodial receipts and bonds that have interest rates that re-set inversely to
changing short-term rates and/or have
11
<PAGE> 42
imbedded interest rate floors and caps. Many of these derivative instruments are
proprietary products that have been recently developed by investment banking
firms, and it is uncertain how these instruments will perform under different
economic and interest-rate scenarios. In addition, because certain of these
instruments are leveraged, their market values may be more volatile than other
types of Municipal Obligations and may present greater potential for capital
gain or loss. In some cases it may be difficult to determine the fair value of a
derivative instrument because of a lack of reliable objective information and an
established secondary market for some instruments may not exist.
In many cases, the Internal Revenue Service has not ruled on whether the
interest received on a tax-exempt derivative instrument or other types of
Municipal Obligations is tax-exempt and, accordingly, purchases of such
securities are based on the opinion of counsel to the sponsors of the
instruments. The Pilot Funds and the Adviser rely on these opinions and do not
intend to review the bases for them.
Municipal Obligations purchased by the Funds may be backed by letters of credit
or guarantees issued by domestic or foreign banks and other financial
institutions which are not subject to federal deposit insurance. Adverse
developments affecting the banking industry generally or a particular bank or
financial institution that has provided its credit or a guarantee with respect
to a Municipal Obligation held by a Fund could have an adverse effect on a
Fund's portfolio and the value of its shares. As described below under "Risk
Factors--Foreign Securities", foreign letters of credit and guarantees involve
certain risks in addition to those of domestic obligations.
- --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 of the GOVERNMENT FUNDS 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, except the MUNICIPAL BOND FUNDS, 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
12
<PAGE> 43
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. 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
13
<PAGE> 44
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.
- --Stand-by Commitments. Each of the MUNICIPAL BOND FUNDS may acquire stand-by
commitments under which a dealer agrees to purchase certain Municipal
Obligations at the Fund's option at a price equal to amortized cost plus
interest. These commitments will be used only to assist in maintaining the
liquidity of the Funds, and not for trading purposes.
- --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 obtained relief from the SEC to permit each
Fund to invest any uninvested cash reserves in an amount not to exceed 25% of
its total assets in affiliated money market funds. 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. Each of the GOVERNMENT FUNDS may enter into transactions known
as "mortgage dollar rolls" in which a 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, a 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, a 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, liquid assets in the amount
of the future purchase commitment will be set apart for the Fund involved in a
separate account at the custodian. Mortgage rolls are not a primary investment
technique for any of the Funds, and it is expected that, under normal market
conditions, a 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. All options will be listed on a national
securities exchange and issued by the Options Clearing Corporation.
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
14
<PAGE> 45
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 as a hedge against anticipated interest rate
fluctuations. Such fluctuations could have an effect on securities that a Fund
holds in its portfolio or intends to sell. 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 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 DIVERSIFIED BOND INCOME
FUND and the GOVERNMENT FUNDS may each buy and sell securities and receive
dividend and interest proceeds in currencies other than the U.S. dollar, these
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
KNOWINGLY 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, tax-exempt derivative
instruments, stripped mortgage-backed securities issued by private issuers 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. EACH FUND may engage in short-term trading to achieve its
investment objective. The 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
15
<PAGE> 46
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, 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
- --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.
- --Other 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.
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
16
<PAGE> 47
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.
INVESTING IN THE PILOT FUNDS
Getting Your Investment Started
Investing in The Pilot Funds is quick and convenient. Fund Shares may be
purchased either through the account you maintain with Boatmen's Investment
Services, Inc., another broker-dealer or certain other institutions or from The
Pilot Funds directly. Fund shares are distributed by Pilot Funds Distributors,
Inc. (the "Distributor"). The Distributor is located at 3435 Stelzer Road,
Columbus, Ohio 43219-3035.
You may choose to invest through your Boatmen's Investment Services account
where an Account Representative can advise you in selecting among The Pilot
Funds. Whether you currently have a Boatmen's Investment Services account or
wish to open one, your Pilot Funds investment can be executed within a few
minutes by telephone or, if you prefer, during a consultation with an Investment
Officer of Boatmen's Investment Services, Inc. Call The Pilot Funds at
800/71-PILOT to arrange a consultation scheduled at your convenience.
Clients of Boatmen's Investment Services, Inc. and other institutions (such as
broker-dealers) that have entered into agreements with the Distributor ("Service
Organizations") may purchase shares through their accounts at their Service
Organization and should contact the Service Organization directly for
appropriate purchase instructions. Share purchases (and redemptions) made
through Boatmen's Investment Services, Inc. or another Service Organization are
effected only on days the particular institution and the Fund involved are open
for business. When shares are purchased through Boatmen's Investment Services,
Inc. or another Service Organization, a fee may be charged by those institutions
for providing administrative services in connection with your investment.
Should you wish to establish an account directly with The Pilot Funds, please
refer to the purchase options described under "Opening and Adding to Your Pilot
Funds Account".
Payments for Fund shares must normally be in U.S. dollars and in order to avoid
fees and delays should be drawn on a U.S. bank. Please remember that The Pilot
Funds retains the right to reject any purchase order.
Your Alternative Purchase Options
Your purchases of Fund shares are subject to either a front-end or back-end
sales charge. You may elect to have the sales charge deducted at the time of
your investment--on the "front-end"--or choose to defer the sales charge until
your investment is redeemed--on the "back-end". This back-end sales charge
declines over time and is known as a "contingent deferred sales charge." If you
decide to pay the sales charge at the time you make your investment, your
purchase will be made in Class A Shares, whereas if you prefer to pay the sales
charge when you redeem your investment, your purchase will be made in Class B
Shares. Once you have held Class B Shares for six years, you do not pay the
contingent deferred sales charge when you redeem those shares.
17
<PAGE> 48
Characteristics of Class A Shares and Class B Shares
Class A Shares and Class B Shares differ primarily in their sales charge
structures and distribution arrangements, including ongoing distribution fees.
The classes may also have differing transfer agency and other fees, although the
Funds currently do not intend to allocate such fees on a class basis. You should
understand that the purpose and function of the sales charge structures and
distribution arrangements for both Class A Shares and Class B Shares are the
same.
Class A Shares: Class A Shares are sold at their net asset value plus a
front-end sales charge of up to 4.50% (4.00% for Pilot Diversified Bond Income
Fund, Pilot Intermediate U.S. Government Securities Fund and Pilot Intermediate
Municipal Bond Fund). (See "How to Buy Shares--Explanation of Sales Price".)
This front-end sales charge may be reduced or waived in some cases. (See
"Transaction Rules" and "Shareholder Services--Front-End Sales Charge
Reductions.") Class A Shares are subject to ongoing distribution fees at an
annual rate of up to 0.25% of a Fund's average daily net assets attributable to
its Class A Shares.
Class B Shares: Class B Shares are sold at net asset value without an initial
sales charge. Normally, however, a deferred sales charge is paid if the shares
are redeemed within six years of investment. (See "How to Buy Shares--
Explanation of Sales Price".) Class B Shares are subject to ongoing distribution
fees at an annual rate of up to 1.00% of a Fund's average daily net assets
attributable to its Class B Shares. These ongoing fees, which are higher than
those charged on Class A Shares, will cause Class B Shares to have a higher
expense ratio and pay lower dividends than Class A Shares.
Eight years after purchase, Class B Shares will convert automatically to Class A
Shares. The conversion relieves a shareholder of Class B Shares of the higher
ongoing expenses charged to those shares, after enough time has passed to allow
the Distributor to recover approximately the amount it would have received if a
front-end sales charge had been charged.
The conversion from Class B Shares to Class A Shares takes place at net asset
value, so you receive dollar-for-dollar the same value of Class A Shares as you
had of Class B Shares. The conversion occurs eight years after the beginning of
the calendar month in which the shares are purchased. As a result of the
conversion, the converted shares are relieved of the distribution fees borne by
Class B Shares, although they are subject to the distribution fees borne by
Class A Shares.
Class B Shares of a Fund acquired through a reinvestment of dividends or
distributions from that Fund (as discussed under "Dividends and Distributions")
are also converted at the earlier of two dates--eight years after the beginning
of the calendar month in which the reinvestment occurred or the date of
conversion of the most recently purchased Class B Shares that were not acquired
through reinvestment of dividends or distributions. For example, if you make a
one-time purchase of Class B Shares of a particular Fund, and subsequently
acquire additional Class B Shares of that Fund only through reinvestment of
dividends and/or distributions from that Fund, all of your Class B Shares in
that Fund, including those acquired through reinvestment, will convert to Class
A Shares of that Fund on the same date.
Considerations In Choosing Between Class A And
Class B Shares
The decision as to which share class may be more beneficial for you depends, in
part, on the amount and intended length of your investment. Due to the lower
ongoing distribution fees on Class A Shares, the dividends for those shares will
be higher than the Class B Shares. However, since a front-end sales charge is
deducted from your purchase at the time of your investment, not all of your
purchase amount will purchase shares. Thus, the same initial investment will
purchase more Class B Shares than Class A Shares of the same Fund. In addition,
Class B Shares are subject to a contingent deferred sales charge.
Since large investors may qualify for a reduced front-end sales charge (see
"Shareholder Services--Front-End Sales Charge Reductions"), such investors
should consider making their purchase in Class A Shares.
Because of these possible front-end sales charge reductions, purchases in excess
of $100,000 may be more advantageous to you if made in Class A Shares rather
than Class B Shares. In any event The Pilot Funds will not accept any order of
$250,000 or more for Class B Shares. In addition, regardless of whether you
qualify for a reduced front-end sales charge, if you expect to hold your
investment for an extended period of time, you might still consider purchasing
Class A Shares because the accumulated higher ongoing expenses, together with
the contingent deferred sales charge, of the Class B Shares will exceed the
amount of the front-end sales charge and ongoing distribution fees related to
Class A Shares.
On the other hand, you might decide, because you would be subject to higher
front-end charges or for other reasons, that it would be more advantageous for
you to
18
<PAGE> 49
have all of your purchase amount invested immediately in Fund shares, even
though you would also be subject to higher ongoing distribution fees. These
higher ongoing fees might be offset by any return you receive from the
additional shares you originally purchased as a result of not having to pay a
front-end sales charge. You should note however, that a Fund's future returns
cannot be predicted, and that there is no assurance that such returns, if any,
would compensate for those higher ongoing expenses. You should also remember
that you would be subject to any applicable contingent deferred sales charge
during the first six years of your investment in Class B Shares.
If You Have Questions
If you are investing in The Pilot Funds through an account with Boatmen's
Investment Services, Inc. or another Service Organization, you should speak
directly with your assigned Account Representative or contact person at such
organization. If you are a direct investor with The Pilot Funds and need
assistance with your account, a Pilot Funds service representative is available
to answer your questions by calling the appropriate toll-free numbers listed
below.
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
CALL FOR INFORMATION
- -------------- ------------------------------------
<S> <C>
800/71-PILOT Regarding the Funds' investment
8:00 am to objectives and policies or for
7:00 pm information about opening an account
Central time (including information regarding the
Funds' alternative purchase
options). Information on changing
your Pilot Funds' services, and
Statements of Additional
Information, are also available at
this number.
- ----------------------------------------------------
800/227-3654 To obtain your account balance or to
7:30 am to request a telephone transaction.
4:00 pm
Central time
- ----------------------------------------------------
</TABLE>
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 within 72 hours of a
telephone transaction, 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.
The Pilot Funds will send you the following statements and reports to provide
you with current information on the status of your account:
<TABLE>
<S> <C>
Confirmation Statements After every transaction
(other than an Automatic
Investment Plan transaction
or dividend credit) that
affects your account
balance or your account
registration.
Account Statements On a quarterly basis
detailing year to date
activity for each of your
accounts.
Financial Reports Every six months. To reduce
The Pilot Funds' expenses,
only one copy of most Fund
reports will be mailed to
your household, even if you
have more than one account
in a Fund.
</TABLE>
HOW TO BUY SHARES
This section provides you with pertinent information on how to buy Fund shares.
Further information can be found under "Transaction Rules". Before investing you
will need to decide whether to purchase Class A Shares (which are sold with a
front-end sales charge) or Class B Shares (which are sold without a front-end
sales charge but are subject to a contingent deferred sales charge). See "Your
Alternative Purchase Options".
19
<PAGE> 50
<TABLE>
<CAPTION>
MINIMUM INVESTMENT
-----------------------------
TO OPEN ADDITIONAL
ACCOUNT INVESTMENTS
------------- -------------
<S> <C> <C>
Regular Account........ $1,000 $100
Automatic Investment
Plan................. $100 $100
Employee*--Regular
Accounts............. $500 $100
Employee*--Automatic
Investment Plan...... $100 $50
Tax-Sheltered
Retirement Plans..... $500 $50
Exchange
Transactions......... $1,000 $500
</TABLE>
- ------------
*Applies to employees of the Adviser and its affiliates.
OPENING AND ADDING TO YOUR PILOT FUNDS ACCOUNT
As described above under "Getting Your Investment Started," you may purchase
Fund shares through Boatmen's Investment Services, Inc. or another Service
Organization. Direct investments in The Pilot Funds may also be made in a number
of different ways, as shown in the following chart. Simply choose the method
that is most convenient for you. Any questions you have can be answered by
calling the appropriate toll-free number indicated above under "If You Have
Questions".
20
<PAGE> 51
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT
DIRECTLY WITH THE PILOT FUNDS HELD DIRECTLY WITH THE PILOT FUNDS
--------------------------------------- ---------------------------------------
<S> <C> <C>
By Mail to: --Complete an Account Application and --Make your check payable to the
The Pilot Funds, mail it, along with a check payable particular Fund in which you are
c/o BISYS Fund Services to the Fund in which you are investing and mail it to the address
Dept. L-1709 investing, to the address on the on the left.
Columbus, OH 43260-1709 left. --Please include your account number
on your check.
--Or use the convenient form attached
to your regular Fund statement.
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
In Person to: --Deliver the Account Application and --Deliver your check payable to the
BISYS Fund Services your check payable to the particular particular Fund in which you are
3435 Stelzer Road Fund in which you are investing to investing to the address on the left.
Columbus, OH 43219-3035 the address on the left. --Please include your account number
on your check.
- -------------------------------------------------------------------------------------------------------------
By Wire to: --Ask your bank to send immediately --Ask your bank to wire immediately
Call 1-800/71-PILOT available funds by wire. available funds as described at left,
for Wire Instructions --The wire should say that you are except that the wire should note that
opening a new Fund account (if an it is to make a subsequent purchase
Account Application Form is not rather than to open a new account.
received for a new account within 30 --Please include your Fund account
days after the wire is received, number.
dividends and redemption proceeds from
the account will be subject to back-up
withholding). The wire should say that
the purchase is to be in your name.
--Include your name, address and
taxpayer identification number.
Indicate the name of the Fund in
which you are investing. Investors
should also indicate share class
selection.
Consult your bank for information on remitting funds by
wire and associated bank charges.
- -------------------------------------------------------------------------------------------------------------
Automatic Investment --You must first complete an Account --Call 800/71-PILOT to find out how to
(allows regular investment Application and select the Automatic set up this service.
without ongoing paperwork) Investment Plan option. --Additional purchases will then
--Call 800/71-PILOT for more automatically be made as directed by
information. you.
- -------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 52
Explanation of Sales Price
The public offering price for each class of shares is based upon net asset value
per share plus, in the case of Class A Shares, a front-end sales charge. Net
asset value per share for each class of each Fund will be determined by adding
the value of the Fund's investments, cash and other assets attributable to the
class, subtracting the Fund's liabilities attributable to that class, and then
dividing the result by the number of shares in the class that are outstanding.
The assets of each Fund 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.
The per share net asset values of Class A Shares and Class B Shares will diverge
due to the different distribution expenses borne by the classes. More
information about valuation can be found in the Funds' Statement of Additional
Information, which is available upon request.
Net asset value is computed as of 3:00 P.M., Central time, on all days the New
York Stock Exchange (the "Exchange") is open for trading, which is Monday
through Friday except for holidays (scheduled Exchange holidays for 1997 are New
Years Day (observed), President's Day, Good Friday, Memorial Day, Independence
Day (observed), Labor Day, Thanksgiving Day and Christmas Day (observed)). 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.
CLASS A SHARES: THE FRONT-END SALES CHARGE OPTION. The front-end sales charge
for Class A Shares of the Funds begins at 4.50% (4.00% for the Pilot
Intermediate U.S. Government Securities Fund and Pilot Intermediate Municipal
Bond Fund) and may decrease as the amount you invest in Class A Shares
increases, as shown in the following two charts:
<TABLE>
<CAPTION>
PILOT U.S. GOVERNMENT
SECURITIES FUND
PILOT MUNICIPAL BOND FUND
---------------------------
PER SHARE DEALERS
AS A REALLOWANCE
PERCENTAGE OF AS A
---------------- PERCENTAGE
NET OF
OFFERING ASSET OFFERING
AMOUNT OF TRANSACTION PRICE VALUE PRICE
- --------------------------- ----- ----- -----
<S> <C> <C> <C>
Less than $100,000......... 4.50 4.71 4.00
$100,000 to $249,999....... 3.75 3.90 3.25
$250,000 to $499,999....... 3.00 3.09 2.50
$500,000 to $999,999....... 2.00 2.04 1.75
$1,000,000 to $2,499,999... 1.00 1.01 0.90
$2,500,000 and over........ 0.00 0.00 0.00
</TABLE>
<TABLE>
<CAPTION>
PILOT DIVERSIFIED BOND INCOME
FUND
PILOT INTERMEDIATE U.S.
GOVERNMENT SECURITIES FUND
PILOT INTERMEDIATE MUNICIPAL
BOND FUND
-----------------------------
PER SHARE DEALERS
AS A REALLOWANCE
PERCENTAGE OF AS A
---------------- PERCENTAGE
NET OF
OFFERING ASSET OFFERING
AMOUNT OF TRANSACTION PRICE VALUE PRICE
- --------------------------- ----- ----- -----
<S> <C> <C> <C>
Less than $100,000....... 4.00 4.17 3.50
$100,000 to $249,999..... 3.25 3.36 2.75
$250,000 to $499,999..... 2.50 2.56 2.00
$500,000 to $999,999..... 1.50 1.52 1.25
$1,000,000 to
$2,499,999.............. 1.00 1.01 0.90
$2,500,000 and over...... 0.00 0.00 0.00
</TABLE>
It is possible that the dealers reallowance shown in the tables above may change
over time. Further reductions in the sales charges shown above are also
possible--please see "Shareholder Services--Sales Charge Reductions".
CLASS B SHARES: THE CONTINGENT DEFERRED SALES CHARGE OPTION. Although you pay no
front-end sales charge on Class B Shares, if you redeem those shares within six
years after the date you purchased them, the shares will be subject to a
contingent deferred sales charge at the rates set forth in the charts below. The
sales charge is charged on the lesser of the net asset value on the redemption
date or the original cost of the shares being redeemed. As a result, no sales
charge is charged on any increase in the principal value of your shares.
The amount of any contingent deferred sales charge will be different depending
on the number of years that elapse between the time you pay for Class B Shares
and the time those shares are redeemed. Solely for purposes of determining the
number of years from the time of payment for your share purchase, all payments
during a
22
<PAGE> 53
month will be aggregated and deemed to have been made on the first day of the
month.
<TABLE>
<CAPTION>
PILOT U.S. GOVERNMENT SECURITIES FUND
PILOT MUNICIPAL BOND FUND
- ---------------------------------------------------------------
CONTINGENT DEFERRED
SALES CHARGE
(AS A PERCENTAGE OF
NUMBER OF YEARS DOLLAR AMOUNT SUBJECT
ELAPSED SINCE PURCHASE TO THE CHARGE)
- ------------------------------- -------------------------------
<S> <C>
One............................ 4.50%
Two............................ 4.00%
Three.......................... 3.50%
Four........................... 3.00%
Five........................... 2.50%
Six............................ 1.75%
After Six Years................ 0.00%
</TABLE>
<TABLE>
<CAPTION>
PILOT DIVERSIFIED BOND INCOME FUND
PILOT INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND
PILOT INTERMEDIATE MUNICIPAL BOND FUND
- ---------------------------------------------------------------
CONTINGENT DEFERRED
SALES CHARGE
(AS A PERCENTAGE OF
NUMBER OF YEARS DOLLAR AMOUNT SUBJECT
ELAPSED SINCE PURCHASE TO THE CHARGE)
- ------------------------------- -------------------------------
<S> <C>
One............................ 4.00%
Two............................ 3.50%
Three.......................... 3.00%
Four........................... 2.50%
Five........................... 2.00%
Six............................ 1.25%
After Six Years................ 0.00%
</TABLE>
When you sell your Class B Shares, your order is processed to minimize the
amount of the contingent deferred sales charge that will be charged. Class B
Shares are redeemed first from those shares that are not subject to a contingent
deferred sales charge (i.e., shares held longer than six years and shares that
were acquired through reinvestment of dividends or distributions or that qualify
for other deferred sales charge waivers) and after that from the Class B Shares
you have held the longest.
For example, assume you purchased 100 Class B Shares at $10 a share (for a total
cost of $1,000), three years later the shares have a net asset value of $12 per
share and during that time you acquired 10 additional shares through dividend
reinvestment. If you then make your first redemption of 50 shares (resulting in
proceeds of $600, 50 shares x $12 per share), the first 10 shares redeemed will
not be subject to the contingent deferred sales charge because they were
acquired through reinvestment of dividends. With respect to the remaining 40
shares redeemed, the contingent deferred sales charge is charged at $10 per
share (because the original purchase price of $10 per share is lower than the
current net asset value of $12 per share). Therefore, only $400 of the $600 you
received from selling your shares will be subject to the contingent deferred
sales charge, at a rate of 3.50% (3.00% for the Pilot Intermediate U.S.
Government Securities Fund and Pilot Intermediate Municipal Bond Fund), the
applicable rate in the third year after purchase. The proceeds from the
contingent deferred sales charge that you may pay upon redemption go to the
Distributor, which may use such amounts to defray the expenses associated with
the distribution-related services involved in selling Class B Shares. The
contingent deferred sales charge, along with the ongoing distribution fees paid
with respect to Class B Shares, enables those shares to be purchased without the
imposition of a front-end sales charge.
HOW TO SELL SHARES
The Pilot Funds makes it easy to sell, or "redeem" your shares. If you purchased
your shares through an account at Boatmen's Investment Services, Inc. or another
Service Organization, you may redeem shares in accordance with the instructions
pertaining to that account. If you purchased your shares through an account at
Boatmen's Investment Services, Inc. or another Service Organization and you,
yourself, appear on The Pilot Funds' books as the shareholder of record, you may
redeem shares by mail, phone or hand delivery as described below; however, you
must contact Boatmen's Investment Services, Inc. or your other Service
Organization if you wish to redeem your shares by another method. If you
purchased your shares directly from The Pilot Funds, you have the ability to
redeem shares by any of the methods described below. Requests must be signed by
you and by each other owner of the account (for joint accounts). Except for a
contingent deferred sales charge that may be charged on Class B shares, The
Pilot Funds imposes no charges when you redeem shares.
- --------------------------------------------------------------------------------
23
<PAGE> 54
<TABLE>
<CAPTION>
HOW TO REDEEM SHARES ADDITIONAL LIMITATIONS
------------------------------------ ------------------------------------
<S> <C> <C>
By Mail to: --Send a signed request (each --Requests greater than $50,000 per
The Pilot Funds, owner, including each joint owner, day must be signature guaranteed.
c/o BISYS Fund Services must sign) to the Transfer Agent
Dept. L-1709 at the address on the left. --You should refer to "Transaction
Columbus, OH 43260-1709 Rules" below for additional
--Be sure to include both the name limitations.
of the particular Fund whose shares
you are selling and your account
number.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
By Wire: --After you have signed up for wire --The Transfer Agent may act upon
redemption privileges on the such a request from any person
Account Application, you may representing himself or herself to
instruct the Transfer Agent to be you and reasonably believed by
wire your redemption proceeds to the Transfer Agent to be genuine.
your bank account by sending a
request in writing or by phone --The transaction amount must be a
(800/844-1235). $1,000 minimum.
--This privilege may be subject to
limits regarding frequency and
overall amount.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
In Person to: --Deliver your written request --Requests must be signed by each
BISYS Fund Services directly to the Transfer Agent at owner, including each joint owner.
3435 Stelzer Road the address on the left.
Columbus, OH 43219-3035 --Requests greater than $50,000 per
day must be signature guaranteed.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Automatic Withdrawal --Withdrawals begin after you have --Your account must have a total
(permits automatic signed up for this service (either net asset value of at least $5,000.
withdrawal on the account application or in a
of pre-arranged amount) subsequent letter to the Transfer --The transaction amount must be at
Agent). least a $50 minimum.
--Call 800/71-PILOT for more
information.
</TABLE>
- --------------------------------------------------------------------------------
Redemption requests are processed when received in proper form by The Pilot
Funds at the net asset value per share next determined after such receipt
(subject to the contingent deferred sales charge for Class B Shares).
TRANSACTION RULES
THE PURCHASE PROCEDURES differ depending on whether you place your order
directly with The Pilot Funds or use Boatmen's Investment Services, Inc. or
another Service Organization.
IF YOU PLACE AN ORDER FOR FUND SHARES directly with the Fund, in proper form and
accompanied by payment, it will be processed upon receipt by the Transfer Agent.
An order in proper form will also be processed upon receipt by the Transfer
Agent where Boatmen's Investment Services, Inc. or another Service Organization
undertakes to pay for the order in immediately available funds wired to the
Transfer Agent by the close of business the next Business Day. If the Transfer
Agent receives your order and, where required, payment by 3 p.m., Central time,
your shares will be purchased at the public offering price calculated on that
day. Otherwise, your shares will be purchased at the public offering price
determined as of 3 p.m., Central time, on the next Business Day.
IF YOU PLACE AN ORDER FOR FUND SHARES THROUGH BOATMEN'S INVESTMENT SERVICES,
INC. OR ANOTHER SERVICE ORGANIZATION, and you place your order in proper form on
any Business Day in accordance with their procedures, your purchase will be
processed at the public offering price calculated at 3 p.m. Central time on that
day, if Boatmen's Investment Services, Inc. or your other Service Organization
then sends your order to the Transfer Agent before the end of its Business Day
(which is normally 4 p.m. Central time). Boatmen's Investment Services, Inc. or
your other Service Organization must promise to send to the Transfer Agent
immediately available funds in the amount of the purchase price within five
business days.
24
<PAGE> 55
WIRE PURCHASES AND REDEMPTIONS. If you purchase shares by wire, you must file an
Account Application before any of those shares can be redeemed. You should
contact your bank (which will need to be a commercial bank that is a member of
the Federal Reserve System) for information about sending and receiving funds by
wire, including any charges by your bank for these services. The Pilot Funds may
decide at any time to no longer permit wire redemptions.
MISCELLANEOUS PURCHASE INFORMATION. You must specify at the time of investment
whether you are purchasing Class A Shares or Class B Shares. Federal regulations
require that you provide a certified taxpayer identification number whenever you
open or reopen an account. Share certificates will not be issued. If your check
does not clear, a fee may be imposed by the Transfer Agent. The minimum initial
investment in the Fund by employees of Boatmen's or its affiliates is $500. The
minimum amount required for subsequent investments is $100, except in connection
with certain investment programs.
MISCELLANEOUS REDEMPTION INFORMATION. The Pilot Funds usually makes payment for
the shares that you redeem within Three Business Days after it receives your
request in proper form. SHARES PURCHASED BY CHECK FOR WHICH A REDEMPTION REQUEST
HAS BEEN RECEIVED WILL NOT BE REDEEMED UNLESS THE CHECK PAYMENT USED FOR
INVESTMENT HAS CLEARED, WHICH MAY TAKE UP TO SEVEN BUSINESS DAYS.
When redeeming shares in the Funds, you should indicate whether you are
redeeming Class A Shares or Class B Shares. If you own Class A Shares and Class
B Shares of the same Fund, Class A Shares will be redeemed first unless you
request otherwise.
Certain types of redemption requests will need to include a signature guarantee
for each name in which the account is registered. Signature guarantees must
accompany redemption requests for: (i) an amount in excess of $50,000 per day,
(ii) any amount if the redemption proceeds are to be sent elsewhere than the
address of record on The Pilot Funds' books, or (iii) an amount of $50,000 or
less if the address of record has been on The Pilot Funds' books for less than
sixty days, although the Transfer Agent reserves the right to require signature
guarantees on all redemptions. Signature guarantees are designed to protect both
you and The Pilot Funds from fraud. To obtain a signature guarantee you should
visit a bank, trust company, credit union, savings association, broker-dealer or
other member of a national securities exchange, or other eligible guarantor
institution. (Notaries public cannot provide signature guarantees.) Guarantees
must be signed by an authorized person at one of these institutions, and be
accompanied by the words "Signature Guarantee".
If you experience difficulty in contacting the Transfer Agent to redeem shares
by phone, for example because of unusual market activity, you are urged to
consider redeeming your shares by mail or in person.
THE VALUE OF SHARES THAT ARE REDEEMED IN A FUND may be more or less than their
original cost, depending on the Fund's current net asset value. In addition, if
you are redeeming Class B Shares you may be subject to a contingent deferred
sales charge, which will be deducted from the proceeds of your redemption.
THE PILOT FUNDS RESERVES THE RIGHT TO INVOLUNTARILY REDEEM AN ACCOUNT (other
than a tax-sheltered retirement plan account) if, after thirty days' written
notice, the account's net asset value falls and remains below a $1,000 minimum
due to share redemptions and not market fluctuations.
In unusual circumstances The Pilot Funds may make payment in readily marketable
portfolio securities at their market value equal to the redemption price.
In certain situations or for certain individuals or entities, the front-end
sales charge for Class A Shares of the Funds may be waived either because of the
nature of the investor or the reduced sales efforts required to attract such
investments. In order to receive the sales charge waiver, you must explain the
status of your investment at the time of purchase. No sales charge is charged on
reinvested dividends or distributions. Likewise, there is no front-end sales
charge on (1) any purchase by Boatmen's, BISYS, any of their affiliates or their
respective officers, partners, directors or employees (including retired
employees), any Trustee or officer of The Pilot Funds and designated family
members of any of the above individuals, (2) any purchase by any registered
representative or full-time employee of broker-dealers or Service Organizations
having agreements with the Distributor pertaining to the sale and/or servicing
of Fund shares (and their spouses and minor children) to the extent permitted by
such organizations, (3) any purchase by any state, county or city, or any
instrumentality, department, authority or agency thereof, which is prohibited by
applicable investment laws from paying a sales load or commission, (4) any
purchase by a registered investment adviser who is purchasing shares for its own
account or for accounts for which it is authorized to make investment decisions
(i.e., a discretionary account), (5) any shares issued in connection with
reorganizations with or acquisitions of the assets of other organizations, (6)
under certain circumstances, any purchase of shares pursuant to the
Reinstatement Privilege described below under "Shareholder Services", (7) under
certain circumstances, any purchase of shares as a result of the Cross-
Reinvestment Privilege described below under
25
<PAGE> 56
"Shareholder Services", (8) under certain circumstances, any purchase of Fund
shares with the proceeds from a recent redemption of shares of any other
non-money market investment portfolio of another investment company, provided
that any purchase must be made within 60 days of such redemption and that a copy
of the account statement showing such redemption must accompany the purchase
request, (9) any purchase of shares offered through a registered broker-dealer
as part of a wrap product, (10) exchanges where the shares being exchanged are
non-money market fund shares that came from the distribution of assets held in a
qualified trust agency or custodian account maintained with the trust department
of Boatmen's or its affiliates, (11) any purchase of Fund shares by a
shareholder who purchased Pilot Class A Shares of the Pilot International Equity
Fund for an account prior to June 1, 1994 and who qualified for a reduced sales
charge on its purchases made prior to that date, and who has continuously held
shares of the Fund, and (12) any purchase of Fund shares by a shareholder who
was a record or beneficial holder of shares of Kleinwort Benson International
Equity Fund, a series of Kleinwort Benson Investment Strategies, on July 12,
1993, and who became directly or indirectly a beneficial owner of the Pilot
International Equity Fund (the "Fund") as a result of a reorganization between
the two funds (the "Reorganization"), and who has continuously held shares of
the Pilot International Equity Fund. For more information or to determine
eligibility for any of these waivers, contact The Pilot Funds at 800/71-PILOT.
CERTAIN TYPES OF REDEMPTIONS MAY ALSO QUALIFY FOR AN EXEMPTION FROM THE
CONTINGENT DEFERRED SALES CHARGE. To receive one of the first three exemptions
listed below, you must explain the status of your redemption at the time you
redeem your shares. The contingent deferred sales charge with respect to Class B
Shares is not charged on (1) exchanges described under "Shareholder Services--
Exchange Privileges"; (2) redemptions in connection with minimum required
distributions from IRA, 403(b)(7) and Qualified Plan accounts due to the
shareholder reaching age 70 1/2; (3) redemptions in connection with a
shareholder's death or disability (as defined in the Internal Revenue Code); and
(4) involuntary redemptions as a result of an account's net asset value
remaining below $1,000 after thirty days' written notice. In addition, no
contingent deferred sales charge is charged on shares acquired through the
reinvestment of dividends or distributions.
YOUR PILOT FUND ACCOUNT
SHAREHOLDER SERVICES
The Pilot Funds provides a variety of ways to make managing your investments
more convenient. Some of these methods require you to request them on your
Account Application or you may request them after opening an account by sending
a signature guaranteed letter of instruction to the Transfer Agent.
Tax-Sheltered Retirement Plans
The Funds are available for investment by tax-sheltered retirement plans,
including Individual Retirement Accounts although the Municipal Bond Funds may
not be appropriate investments for such plans. See your Account Representative
for details on eligibility and other information. Consult your tax adviser with
specific reference to your own situation. No minimum initial investment or
additional investment requirement applies to purchases in connection with
tax-sheltered retirement plans.
EXCHANGE PRIVILEGES AMONG THE PILOT FUNDS
If you have purchased shares directly from The Pilot Funds, you may sell your
Fund shares and buy other shares of The Pilot Funds by calling the Transfer
Agent at 800/71-PILOT or sending a written exchange request to the Transfer
Agent at The Pilot Funds, c/o BISYS Fund Services, Dept. L-1705, Columbus, OH
43260-1709. If you have purchased shares through an account at Boatmen's
Investment Services, Inc., or another Service Organization, you may sell your
fund shares and buy shares of the other Pilot Funds in accordance with the
procedures applicable to your account. Specifically, Class A Shares of a Fund
may be exchanged for Class A Shares of any other Fund and Class B Shares of a
Fund may be exchanged for Class B Shares of any other Fund. Class A Shares
purchased with a front-end sales charge may be exchanged without the need to pay
any additional front-end charge on the shares acquired through the exchange.
Class B Shares may be exchanged without the payment of any contingent deferred
sales charge at the time the exchange is made. 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.
If you have a qualified trust, agency or custodian account with Boatmen's or its
affiliates, and your shares are to be held in that account, you may also
exchange your current Class A Shares in a Fund for Pilot Shares in the same
Fund. Pilot Shares are subject to the same shareholder
26
<PAGE> 57
transaction expenses as Class A Shares except that Pilot Shares are not subject
to a front-end sales charge. Pilot Shares are subject to the same annual fund
operating expenses as those for Class A Shares except that Pilot Shares make no
annual Rule 12b-1 Distribution payments. In addition, the procedures for
effecting transactions in Fund shares and other features related to the
servicing and maintenance of a Fund account may differ for Pilot Shares of the
Fund from those applicable to Class A Shares depending on the terms of the
shareholder's qualified trust, agency, or custodian relationship with Boatmen's
or its affiliate. For more information on holding Pilot Shares of the Funds,
please see the prospectus for Pilot Shares which can be obtained by calling
1/800 71-PILOT and consult the institution (Boatmen's or an affiliate) which
will maintain the account holding the Pilot Shares received by exchanging Class
A Shares.
For investors holding their shares directly, a minimum initial investment of
$1,000 must be made to establish an account into which exchange proceeds will be
invested.
The minimum amount required for any subsequent exchanges into the newly
established account is $100. Exchanges may have tax consequences. Please consult
your tax adviser for further information.
If you are opening a new account in a different Fund by exchange, the shares
being exchanged must be at least equal in value to the minimum investment for
the Fund in which the account is being opened. The particular class of shares
you are exchanging into must be registered for sale in your state.
Additional information regarding exchanges can be obtained by reading the
Statement of Additional Information. 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.
A shareholder who purchased Class A Shares of the Pilot International Equity
Fund (the "International Equity Fund") as part of a wrap fee program and who has
continuously held shares of the International Equity Fund, may exchange Class A
Shares in the International Equity Fund for Class A shares of any other fund in
the Pilot Family of Funds without paying any front-end sales charge on the
shares acquired through the exchange.
A shareholder who purchased Class A Shares of the Fund for an account prior to
June 1, 1994 and who qualified for a sales charge exemption or waiver on its
purchases made prior to that date, and who has continuously held shares of the
Fund, may exchange Class A Shares in the International Equity Fund for Class A
shares of any other fund in the Pilot Family of Funds without paying any
front-end sales charge on the shares acquired through the exchange after such
date so long as (i) such account remains open on the books of the Trust or (ii)
such investor continues to qualify for one of the sales load exemptions
described above.
A shareholder who was a record or beneficial holder of shares of Kleinwort
Benson International Equity Fund, a series of Kleinwort Benson Investment
Strategies, and who become directly or indirectly a beneficial owner of shares
of the Pilot International Equity Fund (the "Fund") as a result of a
reorganization between the two funds, and who has continuously held shares of
the Fund, may exchange Class A Shares or Class A shares of any fund in the Pilot
Family of Funds for Class A Shares or Class A shares of any other fund without
paying a front-end sales charge on the shares acquired through the exchange
after July 12, 1993 so long as such account remains open on the books of the
Trust.
AUTOMATIC INVESTMENT PLAN
(requires your request)
One easy way to pursue your financial goals is to invest money regularly. The
Pilot Funds offers the Automatic Investment Plan--a convenient service that lets
you transfer money from your bank account into your Fund account automatically,
on a schedule of your choice.
At your option, your bank account will be debited in a particular amount that
you have specified, and Fund shares will be automatically purchased at regular
intervals. Your bank account must be a checking, NOW or bank money market
account maintained at a domestic financial institution which is an Automated
Clearing House member. Your institution must also permit automated withdrawals
(which may be subject to a fee by that institution). A minimum initial
investment of $100 is required for Automatic Investment Plans and the minimum
amount required for subsequent investments is $100. The minimum amount required
for subsequent investments as part of the Plan for employees of Boatmen's or its
affiliates is $50.
The Automatic Investment Plan is one means by which you may use "DOLLAR COST
AVERAGING" in making investments. Dollar Cost Averaging can be useful in
investing in portfolios such as the Funds whose price per share fluctuates.
Instead of trying to time market performance, a fixed dollar amount is invested
in Fund shares at predetermined intervals. This may help you to reduce your
average cost per share because the agreed upon fixed investment amount allows
more shares to be purchased during periods of lower share prices and fewer
27
<PAGE> 58
shares during periods of higher prices. In order to be effective, Dollar Cost
Averaging should usually be followed on a sustained, consistent basis. You
should be aware, however, that shares bought using Dollar Cost Averaging are
made without regard to their price on the day of investment or to market trends.
While regular investment plans do not guarantee a profit and will not protect
you against loss in a declining market, they can be a good way to invest for
retirement, a home, educational expenses and other long-term financial goals.
You may cancel your Automatic investments or change the amount of purchase at
any time by mailing written notification to the Transfer Agent at The Pilot
Funds, c/o BISYS Fund Services, Dept. L-1709, Columbus, OH 43260-1709. You may
also implement the Dollar Cost Averaging method on your own initiative. The
Pilot Funds may modify or terminate the Automatic Investment Plan at any time or
charge a service fee, although no such fee currently is contemplated.
AUTOMATIC WITHDRAWAL PLAN
(requires your request)
The Pilot Funds offers a convenient way of withdrawing funds from your
investment portfolio. You may request regular monthly, quarterly, semi-annual or
annual withdrawals in any amount above $50 provided the particular Fund account
you are withdrawing from has a minimum current balance of at least $5,000. The
automatic withdrawal will be made on the first or fifteenth day of the month.
Purchases of additional shares concurrently with withdrawals are ordinarily not
advantageous for share classes that charge a sales charge. Use of the Plan may
also be disadvantageous for Class B Shares during the first six years a share is
held, due to the potential need to pay a contingent deferred sales charge.
FRONT-END SALES CHARGE REDUCTIONS
YOU MAY BE ENTITLED TO LOWER FRONT-END SALES CHARGES ON CLASS A SHARES OF THE
FUNDS THROUGH RIGHT OF ACCUMULATION, STATEMENT OF INTENTION AND QUANTITY
DISCOUNTS.
Right of Accumulation. When buying Class A Shares, your current aggregate
investment determines the amount of any front-end sales charge that you pay. If
your current aggregate investment in Class A Shares accumulates to $100,000 or
beyond, the sales percentage charged to you on subsequent investments is
decreased as shown in the Section entitled "Class A Shares: The Front-End Sales
Charge Option". Your current aggregate investment is the accumulated combination
of your immediate investment along with the shares that you beneficially own in
any Fund on which you paid a front-end sales charge (including shares that carry
no front-end sales charge but were obtained through an exchange and can be
traced back to shares that were acquired with such a charge).
EXAMPLE
If you beneficially own Class A Shares of the Funds or shares of The Pilot
Funds' money market funds that can be traced back to the purchase of shares
carrying a front-end sales charge (or any combination of such shares) with an
aggregate value of $90,000 and then buy Class A Shares of the Pilot U.S.
Government Securities Fund with a current value of $10,000, you would pay a
front-end sales charge of 3.75% (the charge applicable to a $100,000 purchase)
on your $10,000 purchase.
To qualify for a reduced front-end sales charge, you or your Service
Organization must notify the Transfer Agent at the time of investment. The
reduced sales charge is subject to confirmation of your holdings through a check
of appropriate records.
Statement of Intention. This Statement provides the means for you to receive a
reduced front-end sales charge on all of your investments in Class A Shares,
whether they are made in one or more transactions. The Statement of Intention is
your commitment to acquire an aggregate investment for $100,000 or more. You
should read the Statement of Intention, which you can obtain by calling
800/71-PILOT, as you will be bound by its terms.
While signing a Statement of Intention does not bind you to purchase, or The
Pilot Funds to sell, the full amount indicated at the front-end sales charge in
effect at the time of signing, you must complete the intended purchase to obtain
the reduced sales charge.
When you sign a Statement of Intention, the Transfer Agent is authorized to hold
in escrow a sufficient number of shares which can be redeemed to make up any
difference in the sales load on the amount actually invested. After the terms of
the Statement of Intention are fulfilled, the escrow will be released.
Within a 13-month period beginning up to 90 days prior to the date of its
execution, the Class A Shares you purchase may be used as a credit toward the
completion of the Statement of Intention. The investments you make during the
period receive the discounted sales charge based on the full amount of your
investment commitment. A shareholder may include the value of all Class A Pilot
Funds shares on which a sales load has previously been paid as an "accumulation
credit" toward the completion of the Statement, but a price readjustment will be
made to reflect any reduced front-end sales charge applicable to shares
purchased only during the 90-day period prior to the submission of your
Statement of Intention.
28
<PAGE> 59
If your aggregate investment exceeds the amount indicated in your Statement, an
adjustment will be made to reflect any further reduced sales charge applicable
to your excess investment. The adjustment will be in the form of additional
Class A Shares credited to your account at the then current offering price
applicable to a single purchase of the total amount of the total purchase.
Quantity Discounts. As you can see by looking at the table in the Section
entitled "Class A Shares: The Front-End Sales Charge Option", larger purchases
in Class A Shares may result in lower front-end sales charges to you. If
requested, purchases by you, your spouse and your minor children will be
combined when computing the applicable front-end sales charge.
CROSS-REINVESTMENT PRIVILEGE
You may want to have your dividends received from a Fund automatically invested
in shares of any other Fund or any of The Pilot Funds' other investment
portfolios. Investments will be made at a price equal to the net asset value of
the acquired shares next determined after receipt of the distribution proceeds
by the Transfer Agent. No sales load will be charged on such investments. In
order to qualify for the Cross-Reinvestment Privilege, the value of your account
in the acquired fund must equal or exceed the acquired fund's minimum initial
investment requirement. There are no subsequent investment requirements for
amounts to which dividends are directed nor are service fees currently charged
for effecting these transactions. The election to cross-reinvest dividends will
not affect the tax treatment of such dividends, which will be treated as
received by you and then used to purchase shares of the acquired fund.
REINSTATEMENT PRIVILEGE
If you are a Class A shareholder in a Fund, you may reinvest all or any portion
of your redemption proceeds in Class A shares of any other Fund without paying a
sales load. Shares so acquired will be purchased at a price equal to the net
asset value next determined after the Transfer Agent receives a reinstatement
request and payment. If you wish to use this privilege, you must submit a
written reinstatement request to the Transfer Agent stating that you are
eligible to use the privilege. The reinstatement request and payment must be
received within 90 days of the trade date of the redemption and the shares
redeemed must have been held for at least 30 days before the redemption. The
reinstatement privilege may be exercised once annually by a Class A shareholder,
except that there is no such limit as to the availability of this privilege in
connection with transactions the sole purpose of which is to reinvest the
proceeds at net asset value in a tax-sheltered retirement plan.
Generally, exercising the reinstatement privilege will not affect the character
of any gain or loss realized on a redemption for federal income tax purposes.
However, if a redemption results in a loss, the reinstatement may result in the
loss being disallowed under IRS "wash sale" rules. Also in certain instances,
shareholders may not be permitted to take into account sales charges incurred on
the original purchase of shares in computing their taxable gain or loss. Consult
your tax adviser for additional information.
DIVIDENDS AND DISTRIBUTIONS
Where do your dividends and distributions come from?
Dividends for each Fund are derived from its net investment income from the
interest on the bonds and other investments that they hold in their portfolios.
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. You
will automatically receive dividends and distributions in additional shares of
the same share class of a Fund for which the dividend or distribution was
declared, unless you specifically elect to receive payments in cash or elect the
Cross-Reinvestment Privilege described above under "Shareholder Services". Your
election and any subsequent change should be made in writing to: The Pilot Funds
[name of Fund, including Class A or Class B Shares, as applicable], c/o BISYS
Fund Services, Dept. L-1709, Columbus, OH 43260-1709.
Your election is effective for dividends and distributions with payment dates
after the date the Transfer Agent receives the election.
When are dividends and distributions declared and paid?
Dividends are declared daily and paid monthly. Shares of the Funds 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. Of all of an investor's shares in a
particular share class 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.
The dividends and distributions paid by each Fund on its Class A and Class B
Shares are calculated in the same manner, but because of the differing
distribution expenses
29
<PAGE> 60
borne by the different share classes, the dividends on those classes are
expected to differ.
DISTRIBUTION AND SERVICE
ARRANGEMENTS
The Pilot Funds has adopted Distribution Plans for its Class A and Class B
Shares.
UNDER THESE PLANS THE DISTRIBUTOR RECEIVES PAYMENTS FOR DISTRIBUTION AND SUPPORT
SERVICES. The Distribution Plan for Class A Shares authorizes payments to the
Distributor and Service Organizations for personal services provided to Class A
shareholders and/or the maintenance of shareholder accounts. Payments under the
Distribution Plan for Class B Shares will also be used to pay for sales
commissions and other fees payable to the Distributor and to Service
Organizations and other broker-dealers who sell Class B Shares, and may include
interest on such amounts that are not initially repaid by The Pilot Funds.
PAYMENTS UNDER THE DISTRIBUTION PLAN FOR CLASS A SHARES MAY NOT EXCEED 0.25% (on
an annual basis) of the average daily net asset value of the shares to which
such Plan relates. If more money is due the Distributor than it can collect in
any month because of this limitation, the unpaid amount may be carried forward
until it can be paid. Similarly, if in any month the Distributor does not expend
the entire amount to which it would otherwise be entitled, this amount may be
used as a credit and drawn upon to permit the payment of expenses in the future.
Neither of these amounts, however, is payable beyond the fiscal year in which
they accrue.
DISTRIBUTION 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 the
Class B Shares. Not more than 0.25% of such value will be used to compensate
Service Organizations for personal services provided to Class B shareholders
and/or the maintenance of shareholder accounts. Not more than 0.75% of such
value will be paid to the Distributor as reimbursement for commissions and
transaction fees of up to 4.00% (which amount may change over time) of the net
asset value per share of the Class B Shares purchased by clients of the
Distributor, Service Organizations and other broker-dealers who sell such Shares
as well as expenses related to other promotional and distribution activities.
The distribution payments under this Plan have been structured to provide you
the option of purchasing Fund shares without the need to pay a front-end sales
charge. The purpose and function of the contingent deferred sales charge and
distribution fee for Class B Shares is the same as the front-end sales charge
and distribution fee for Class A Shares. In both cases the sales charge and
distribution fee are used to pay and provide compensation for the distribution
of Fund shares.
Actual distribution expenses paid by the Distributor with respect to Class B
Shares for any given year may exceed the distribution fees and contingent
deferred sales charges received with respect to those Shares. These excess
expenses may be reimbursed by a Fund or its Class B shareholders out of
contingent deferred sales charges and distribution payments in future years as
long as the Distribution Plan for Class B Shares is in effect.
Distribution payments under the Plans are subject to the requirements of a rule
under the Investment Company Act of 1940 known as Rule 12b-1. The distribution
fee and any sales charge applicable to a particular class will not be used to
assist the distribution of any other class.
From time to time, the Distributor, at its expense, will also provide additional
compensation to dealers in connection with sales of Shares of any of the Funds
and other Funds of the Group. Compensation may include tickets to sporting and
other entertainment events, gifts of merchandise, and financial assistance to
dealers in connection with conferences, sales or training programs for their
employees, seminars for the public, advertising campaigns regarding one or more
Funds of the Group, and/or other dealer-sponsored special events. In some
instances, this compensation may be made available only to certain dealers whose
representatives have sold or are expected to sell a significant amount of such
shares. Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to exotic locations within or outside of the
United States for meetings or seminars of a business nature. The Distributor, at
its expense, currently conducts an annual sales contest for dealers in
connection with their sales of Shares of the Funds. Dealers may not use sales of
a Fund's Shares to qualify for this compensation to the extent such may be
prohibited by the laws of any state or any self-regulatory agency, such as the
National Association of Securities Dealers, Inc.
IF YOU ARE A CLIENT OF BOATMEN'S INVESTMENT SERVICES, INC. OR ANOTHER SERVICE
ORGANIZATION, YOU SHOULD NOTE that they may charge you a separate fee for
administrative services in connection with investments in Fund shares and may
impose minimum customer account and other requirements. These fees and
requirements would be in addition to those imposed by the Funds under the Plans
or otherwise. If you are investing through Boatmen's Investment Services, Inc.
or another Service Organization, please refer to their program materials for any
additional special provisions or conditions that may be different from those
described in this Prospectus (for example, some or
30
<PAGE> 61
all of the services and privileges described may not be available to you).
Boatmen's Investment Services, Inc. and the other Service Organizations have the
responsibility of transmitting purchase orders and required funds, and of
crediting their customers' accounts following redemptions, in a timely manner in
accordance with their customer agreements and this Prospectus.
Investors may note that federal banking laws currently limit the securities
activities of banks. It is possible that a bank might be prohibited from acting
as a Service Organization in the future. If this were to happen, the bank's
shareholder clients would be permitted by the Funds to remain shareholders. The
Funds' method of operations might, however, change and such shareholders might
not be able to avail themselves of the services provided by their banks. No
adverse financial consequences are expected to occur to these shareholders from
any such event.
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 (Class A Shares, Class B Shares and Pilot
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.
Class A and Class B Shares of the Funds are described in this prospectus. These
Funds also offer Pilot Shares solely to Boatmen's and its affiliated banks,
acting on behalf of themselves and their customers. Pilot Shares are sold
without a front-end or contingent deferred sales charge to qualified
shareholders. For more information on Pilot Shares, call 800/71-PILOT. Shares of
each class bear their pro rata portion of all operating expenses paid by the
Funds, except certain payments under the Funds' Distribution Plans applicable
only to Class A or Class B Shares.
Persons selling or servicing different classes of shares of the Funds may
receive different compensation with respect to one particular class of shares as
opposed to another in the same Fund.
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.
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 LIMITED PARTNERSHIP (referred to as "BISYS"),
is responsible for coordinating the Fund's efforts and generally overseeing the
operation of the Fund's business. BISYS' principal offices are located at 3435
Stelzer Road, Columbus, Ohio 43219-3035.
Distributor: Each 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 and a wholly-owned subsidiary of Concord that is
located at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
Custodian: BOATMEN'S TRUST COMPANY (referred to as "Boatmen's") is responsible
for holding the investments purchased by each Fund. Boatmen's is located at 100
N. Broadway, St. Louis, Missouri 63178.
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
31
<PAGE> 62
distribution of all income earned as a result of investing in the Funds. The
Transfer Agent is located at 3435 Stelzer Road, Columbus, OH 43219-3035.
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, 1995, Boatmen's and its affiliates managed nearly
$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 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.
On August 30, 1996, Bancshares and NationsBank Corporation ("NationsBank")
announced that they have entered into an agreement pursuant to which Bancshares
will merge into NationsBank. The proposed merger, which is currently expected to
take place in January 1997, is subject to a number of conditions, including
approval by the appropriate regulatory authorities and by the shareholders of
both Bancshares and NationsBank. If the proposed merger is consummated,
Boatmen's will become a wholly owned subsidiary of NationsBank.
MORE ABOUT BISYS. BISYS Fund Services Limited Partnership ("BISYS") is a
subsidiary of The BISYS Group, Inc., 150 Clove Road, Little Falls, New Jersey
07424, a publicly owned company engaged in information processing, loan
servicing and 401(k) administration and recordkeeping services to and through
banking and other financial organizations. Under its Administration Agreement
with the Fund, 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. Marvin Dean, W. Eugene
Spurbeck, George O. Martinez, William J. Tomko and Bruce Treff are also
employees and/or officers of BISYS, the Distributor or an affiliate.
Pilot Intermediate Municipal Bond Fund, Pilot Municipal Bond Fund, and Pilot
Intermediate Municipal Bond Fund each commenced operations on November 7, 1994
upon the transfer to each Fund of a portion of the assets of the common trust
fund of Boatmen's Trust Company (the "Commingled Funds") having corresponding
investment objectives, policies and limitations in exchange for shares of such
Fund. Each Fund's portfolio of investments on November 7, 1994 was substantially
the same as the portfolio of the corresponding Commingled Fund immediately prior
to the transfer.
Because each Commingled Fund constitutes a "predecessor" of its corresponding
Fund, each corresponding Fund calculates the performance for each of its classes
for periods commencing prior to the transfer of Commingled Fund assets to the
Fund by including its Commingled Fund predecessor's total return adjusted to
reflect the deduction of estimated fees and expenses applicable to that class as
stated in the expense table of the Fund's initial prospectus.
The quoted performance data includes the performance of the Commingled Funds for
periods before their corresponding Funds' commencement of operations including
periods when the Commingled Funds were managed by the Adviser's predecessor in
interest or other affiliate. The Commingled Funds have not been and are not
currently registered under the 1940 Act or subject to the investment
restrictions imposed by the 1940 Act. If the Commingled Funds had been
registered under the 1940 Act, the Commingled Funds' performance might have been
adversely affected. The performance information set forth below reflects past
performance and is not necessarily indicative of the future performance of the
Funds, 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.
Average Annual Total Returns for the period ended September 30, 1996.
<TABLE>
<CAPTION>
1 YEAR
CLASS A CLASS B
------- -------
<S> <C> <C>
Pilot Intermediate Municipal Bond Fund and
its predecessor % %
Pilot Intermediate U.S. Government
Securities Fund and its predecessor % %
Pilot Municipal Bond Fund and its
predecessor % %
</TABLE>
32
<PAGE> 63
<TABLE>
<CAPTION>
3 YEARS
CLASS A CLASS B
------- -------
<S> <C> <C>
Pilot Intermediate Municipal Bond Fund and
its predecessor % %
Pilot Intermediate U.S. Government
Securities Fund and its predecessor % %
Pilot Municipal Bond Fund and its
predecessor % %
</TABLE>
<TABLE>
<CAPTION>
5 YEARS
CLASS A CLASS B
------- -------
<S> <C> <C>
Pilot Intermediate Municipal Bond Fund and
its predecessor % %
Pilot Intermediate U.S. Government
Securities Fund and its predecessor % %
Pilot Municipal Bond Fund and its
predecessor % %
</TABLE>
<TABLE>
<CAPTION>
10 YEARS
(OR SINCE INCEPTION)
CLASS A CLASS B
------- -------
<S> <C> <C>
Pilot Intermediate Municipal Bond Fund and
its predecessor % %
Pilot Intermediate U.S. Government
Securities Fund and its predecessor % %
Pilot Municipal Bond Fund and its
predecessor % %
</TABLE>
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 Class
A and Class B shareholder transaction expenses and operating expenses applicable
to the Class A and Class B Shares (as estimated at commencement of operations)
had been incurred during the periods shown.
The Fixed Income Committee of Boatmen's is primarily responsible for the
day-to-day management of the investment portfolio of each of the Government
Funds and Municipal Bond Funds.
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.
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 0.55% of the Pilot Diversified Bond Income Fund's
average daily net assets, 0.55% of the Pilot Intermediate U.S. Government
Securities Fund's average daily net assets, 0.55% of the Pilot U.S. Government
Securities Fund's average daily net assets, 0.55% of the Pilot Intermediate
Municipal Bond Fund's average daily net assets, and 0.55% of the Pilot Municipal
Bond Fund's average daily net assets. For the fiscal year ended August 31, 1996,
The Funds paid advisory fees in the amount of 0.35%, 0.40%, 0.40% and 0.45% for
Pilot Intermediate U.S. Government Securities Fund, Pilot U.S. Government
Securities Fund, Pilot Intermediate Municipal Bond Fund and Pilot Municipal Bond
Fund, respectively. Pilot Diversified Bond Income Fund commenced operations on
October 21, 1996.
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. For the fiscal year ended August 31, 1996, The Pilot Funds paid
administration fees to BISYS in the amount of [ ], [ ], [ ], [ ]
and [ ] for The Pilot Growth and Income Fund, Pilot Equity Income Fund,
Pilot Intermediate U.S. Government Securities Fund, Pilot Intermediate Municipal
Bond Fund and Pilot Municipal Bond Fund, respectively. For the fiscal period
ended August 31, 1995, The Pilot Funds paid administration fees to BISYS in the
amount of $0, $0, $28,065, $11,784, $52,366 and $23,572 for the Pilot Growth and
Income Fund, Pilot Equity Income Fund, Pilot Intermediate U.S. Government
Securities Fund, Pilot U.S. Government Securities Fund, Pilot Intermediate
Municipal Bond Fund and Pilot Municipal Bond Fund, respectively.
Operating expenses borne by the Funds include taxes; interest; fees and expenses
of trustees and officers who 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
33
<PAGE> 64
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. 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,
other than the "exempt interest dividends" from the Municipal Bond Funds, 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.
In addition, each Municipal Bond Fund intends to pay at least 90% of its net
exempt-interest income as dividends known as "exempt-interest dividends". These
dividends may be treated by you as excludable from your gross income (unless the
exclusion would be disallowed because of your particular situation). You should
note that income that is not subject to federal income taxes may nonetheless
have to be considered along with other adjusted gross income in determining
whether any Social Security payments received by you are subject to federal
income taxes.
If a Municipal Bond Fund holds certain so-called "private activity bonds" issued
after August 7, 1986 shareholders will need to include as an item of tax
preference for purposes of the federal alternative minimum tax that portion of
the dividends paid by the Fund derived from interest received on such bonds. The
maximum federal alternative minimum tax rate is 28% for individuals. In
addition, corporations will need to take into account all exempt-interest
dividends paid by these Funds in determining certain adjustments for the federal
alternative minimum tax and the environmental tax.
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 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
34
<PAGE> 65
withholding. Backup withholding is not an 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 Government Funds and the Municipal Bond Funds 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.
TAX-EQUIVALENT YIELDS for the Municipal Bond Funds show the amount of taxable
yield needed to produce an after-tax equivalent of a tax-free yield, and are
calculated by increasing the yield (as calculated above) by the amount necessary
to reflect the payment of federal income taxes at a stated rate.
The Funds may provide quotes of total returns and yields WITHOUT REFLECTING A
FRONT-END SALES CHARGE, which quotations will, of course, be higher than
quotations that do reflect such a sales charge.
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 Indexes, the Merrill Lynch Bond Indexes, the Wilshire 5000 Equity Indexes
or the Consumer Price Index.
Special information for investors in the Municipal Bond Funds:
You may find it particularly useful to compare the tax-free yields of the Funds
to the equivalent yields from taxable investments. For an investor in a low tax
bracket, it may not be helpful to invest in a tax-exempt investment if a higher
after-tax yield can be achieved from a taxable instrument.
The following table illustrates the differences between hypothetical tax-free
yields and tax-equivalent yields for different tax brackets. You should be
aware, however, that tax brackets can change over time and that your tax adviser
should be
35
<PAGE> 66
consulted for specific yield calculations. (The federal tax brackets and rates
below are those currently available for 1996.)
<TABLE>
<CAPTION>
TAX EXEMPT YIELD
----------------------------------------------------------
TAXABLE INCOME 4.00% 4.50% 5.00%
- ---------------------------------------------------------- ---------------- ---------------- ----------------
FEDERAL
SINGLE RETURN JOINT RETURN BRACKET EQUIVALENT TAXABLE YIELD
- ----------------- ----------------- ---------------- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Not over $22,750 Not over $38,000 15.000% 4.71% 5.29% 5.88%
22,751- 55,100 38,001- 91,850 28.000% 5.56% 6.25% 6.94%
55,101-115,000 91,851-140,000 31.000% 5.80% 6.52% 7.25%
115,001-250,000 140,001-250,000 36.000% 6.25% 7.03% 7.81%
Over 250,000 Over 250,000 39.600% 6.62% 7.45% 8.28%
<CAPTION>
5.50% 6.00% 6.50% 7.00% 7.50%
---------------- ---------------- ---------------- ---------------- ----------------
SINGLE RETURN
- -----------------
<S> <C> <C> <C> <C> <C>
Not over $22,750 6.47% 7.06% 7.65% 8.24% 8.82%
22,751- 55,100 7.64% 8.33% 9.03% 9.72% 10.42%
55,101-115,000 7.97% 8.70% 9.42% 10.14% 10.87%
115,001-250,000 8.59% 9.38% 10.16% 10.94% 11.72%
Over 250,000 9.11% 9.93% 10.76% 11.59% 12.42%
<CAPTION>
8.00%
----------------
SINGLE RETURN
- -----------------
<S> <C>
Not over $22,750 9.41%
22,751- 55,100 11.11%
55,101-115,000 11.59%
115,001-250,000 12.50%
Over 250,000 13.25%
</TABLE>
These yields are for illustrative purposes only. The tax brackets do not take
into account the effect of reductions in the deductibility of itemized
deductions for taxpayers with adjusted gross income over $111,800 or the
possible effect of the federal alternative minimum tax. Additionally, effective
brackets and equivalent taxable yields could be higher than those shown.
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.
36
<PAGE> 67
PILVAB1295P
<PAGE> 68
- ----- Financial
Direction December 31, 1996
LOGO
The
Pilot
Funds
PROSPECTUS ENCLOSED
PILOT EQUITY
INCOME FUND
PILOT GROWTH
AND INCOME FUND
PILOT
GROWTH FUND
PILOT
SMALL CAPITALIZATION
EQUITY FUND
Pilot Shares
<PAGE> 69
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXPENSE SUMMARY.................................................................................... 3
FINANCIAL HIGHLIGHTS............................................................................... 5
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS................................................... 7
Pilot Growth and Income Fund and Pilot Equity Income Fund..................................... 7
Pilot Growth Fund............................................................................. 8
Pilot Small Capitalization Equity Fund........................................................ 9
PORTFOLIO INSTRUMENTS AND PRACTICES.............................................................. 9
RISK FACTORS..................................................................................... 14
FUNDAMENTAL LIMITATIONS.......................................................................... 15
INVESTING IN THE PILOT FUNDS....................................................................... 15
HOW TO BUY SHARES................................................................................ 15
HOW TO SELL SHARES............................................................................... 16
DIVIDENDS AND DISTRIBUTIONS...................................................................... 17
EXCHANGE PRIVILEGE................................................................................. 17
THE PILOT FAMILY OF FUNDS.......................................................................... 17
THE BUSINESS OF THE FUND........................................................................... 18
FUND MANAGEMENT.................................................................................. 18
TAX IMPLICATIONS................................................................................. 21
MEASURING PERFORMANCE............................................................................ 22
</TABLE>
<PAGE> 70
THE PILOT FUNDS
LOGO
PROSPECTUS FOR PILOT SHARES OF THE PILOT GROWTH AND INCOME, PILOT EQUITY INCOME,
PILOT GROWTH AND PILOT SMALL CAPITALIZATION EQUITY FUNDS
December 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
PILOT FUND GOAL FOR INVESTORS WHO WANT
- ------------------ ------------------------------------- -------------------------------------
<S> <C> <C>
GROWTH AND INCOME Capital appreciation and current Capital appreciation over the long
income through investments primarily term as well as current income and
in common stocks of U.S. companies. are willing to accept the relative
risks associated with equity
investments.
- ----------------------------------------------------------------------------------------------------
EQUITY INCOME Current income and, secondarily, Current income with the possibility
capital appreciation through of some price appreciation and are
investments primarily in common willing to accept the relative risks
stocks of above average financial associated with equity investments.
quality and securities convertible
into common stock.
- ----------------------------------------------------------------------------------------------------
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.
- ----------------------------------------------------------------------------------------------------
SMALL Long-term capital growth by investing Capital growth over the long term and
CAPITALIZATION primarily in equity securities. are willing to accept the relatively
EQUITY FUND greater risks associated with
investments in small capitalization
equity securities.
- ----------------------------------------------------------------------------------------------------
</TABLE>
1
<PAGE> 71
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 the Pilot Growth and Income, Pilot
Equity Income, Pilot Growth and Pilot Small Capitalization Equity Funds. 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 December 31, 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.
- --------------------------------------------------------------------------------
2
<PAGE> 72
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
<TABLE>
<CAPTION>
GROWTH
AND EQUITY SMALL
INCOME INCOME CAPITALIZATION
FUND FUND GROWTH FUND EQUITY FUND
------ ------ ----------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Front End Sales Charge Imposed on Purchases (as a percentage of
offering price)................................................. None None None None
Sales Charge Imposed on Reinvested Dividends....................... None None None None
Deferred Sales Charge.............................................. None None None None
ANNUAL FUND OPERATING EXPENSES AFTER FEE WAIVERS AND EXPENSE
REIMBURSEMENTS (as a percentage of average net assets):
Management Fees (after waivers)(1)................................. 0.50% 0.50% 0.75% 0.75%
Distribution Payments.............................................. 0.00% 0.00% 0.00% 0.00%
Other Expenses (after expense reimbursements)...................... 0.25% 0.25% 0.25% 0.25%
---- ---- ---- ----
Total Fund Operating Expenses After Fee Waivers and Expense
Reimbursements(1)................................................ 0.75% 0.75% 1.00% 1.00%
==== ==== ==== ====
</TABLE>
- ---------------
(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. Without waivers by the Adviser, investment management fees as a
percentage of net assets would be .75%, .75%, and 1.00% for the Pilot Growth
and Income, Pilot Equity Income, and Pilot Small Capitalization Equity
Funds, respectively. Other Expenses also reflect reimbursements by the
Adviser and Administrator. Absent reimbursement, Other Expenses would be
.26%, .29%, %, and .54% for Pilot Growth and Income Fund, Pilot Equity
Income Fund, Pilot Growth Fund, and Pilot Small Capitalization Equity Fund,
respectively. Absent waivers and expense reimbursements, the total operating
expenses for Pilot Shares of the Funds would be 1.01% for Pilot Growth and
Income Fund; 1.04% for Pilot Equity Income Fund; 1.54% for the Pilot Small
Capitalization Equity Fund; and 1.52% for the Pilot Growth Fund. These
waivers and reimbursements are voluntary and may be terminated at any time
with respect to any Fund at the discretion of the Adviser or Administrator
and without the consent of the Funds except that the Adviser has voluntarily
agreed to limit the total operating expenses of the Pilot Shares of Pilot
Growth and Income Fund and Pilot Growth Fund to .75% and 1.00%, respectively
of each Fund's average net assets until February 1, 1998.
3
<PAGE> 73
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:
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
AFTER AFTER AFTER AFTER
PURCHASE PURCHASE PURCHASE PURCHASE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PILOT GROWTH AND INCOME FUND
Pilot Shares.......................... $ 8 $ 24 $ 42 $ 93
PILOT EQUITY INCOME FUND
Pilot Shares.......................... $ 8 $ 24 $ 42 $ 93
PILOT GROWTH FUND
Pilot Shares.......................... $ 10 $ 32 $ -- $ --
PILOT SMALL CAPITALIZATION EQUITY FUND
Pilot Shares.......................... $ 6 $ 20 $ 35 $ 77
</TABLE>
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.
Pilot Growth Fund is new and actual investment returns and operating expenses
may be more or less than shown for the Fund.
4
<PAGE> 74
THE PILOT FUNDS
FINANCIAL HIGHLIGHTS
The following data with respect to a Share of the Pilot Growth and Income Fund,
Pilot Equity Income Fund, and Pilot Small Capitalization Equity Fund outstanding
during the periods indicated have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report incorporated by
reference and attached to the Statement of Additional Information, and should be
read in conjunction with the financial statements and related notes incorporated
by reference and attached to the Statement of Additional Information. The
following data with respect to a share of the Pilot Growth Fund Outstanding
during the period indicated are unaudited.
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout the Period
- --------------------------------------------------------------------------------
Pilot Growth & Income Fund
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT OPERATIONS
--------------------------------------
NET REALIZED TOTAL
AND UNREALIZED INCOME DIVIDENDS DIVIDENDS
NET ASSET VALUE NET GAIN ON FROM FROM NET FROM NET
AT BEGINNING INVESTMENT INVESTMENT INVESTMENT INVESTMENT REALIZED
OF PERIOD INCOME TRANSACTIONS OPERATIONS INCOME GAINS
--------------- ---------- -------------- ---------- ---------- --------
FOR THE YEAR ENDED AUGUST 31,
- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot Shares........................... $ 11.59 $ 0.22 $ 1.59 $ 1.81 $(0.22) $(0.28)
1996--Class A Shares......................... 11.58 0.18 1.60 1.78 (0.18) (0.28)
1996--Class B Shares......................... 11.59 0.09 1.60 1.69 (0.09) (0.28)
1995--Pilot Shares(g)........................ 10.00 0.17 1.59 1.76 (0.17)
1995--Class A Shares(a)...................... 10.44 0.09 1.14 1.23 (0.09)
1995--Class B Shares(e)...................... 10.08 0.08 1.51 1.59 (0.08)
<CAPTION>
RATIO
INFORMATION
ASSUMING
NO FEE
WAIVER OR
EXPENSE
REIMBURSEMENT
RATIO OF NET -------------
NET ASSET RATIO OF INVESTMENT NET ASSETS
VALUE AT EXPENSES INCOME PORTFOLIO AT END OF
END OF TOTAL TO AVERAGE TO AVERAGE TURNOVER PERIOD
PERIOD RETURN(C) NET ASSETS(D) NET ASSETS(D) RATE (IN 000'S)
--------- --------- ------------- ------------- --------- ----------
FOR THE YEAR ENDED AUGUST 31,
- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot Shares........................... $ 12.90 15.79% 0.74% 1.76% 37% $182,379
1996--Class A Shares......................... 12.90 15.57 0.99 1.52 37 4,667
1996--Class B Shares......................... 12.91 14.75 1.74 0.76 37 3,818
1995--Pilot Shares(g)........................ 11.59 17.72 0.75 1.98 28 109,423
1995--Class A Shares(a)...................... 11.58 11.78 1.00 1.65 28 697
1995--Class B Shares(e)...................... 11.59 15.85 1.75 0.94 28 661
<CAPTION>
RATIO OF NET
RATIO OF INVESTMENT
EXPENSES TO INCOME
AVERAGE TO AVERAGE
NET ASSETS(D) NET ASSETS(D)
------------- -------------
FOR THE YEAR ENDED AUGUST 31,
- ---------------------------------------------
<S> <C> <C>
1996--Pilot Shares........................... 1.01% 1.49%
1996--Class A Shares......................... 1.26 1.25
1996--Class B Shares......................... 2.01 0.49
1995--Pilot Shares(g)........................ 1.15 1.58
1995--Class A Shares(a)...................... 1.40 1.25
1995--Class B Shares(e)...................... 2.15 0.54
</TABLE>
- --------------------------------------------------------------------------------
Pilot Equity Income Fund
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot Shares........................... $ 11.29 $ 0.46 $ 1.38 $ 1.84 $(0.45) $(0.28)
1996--Class A Shares......................... 11.36 0.41 1.40 1.81 (0.41) (0.28)
1996--Class B Shares......................... 11.34 0.33 1.39 1.72 (0.32) (0.28)
1995--Pilot Shares(g)........................ 10.00 0.35 1.29 1.64 (0.35)
1995--Class A Shares(a)...................... 10.24 0.18 1.12 1.30 (0.18)
1995--Class B Shares(b)...................... 9.85 0.18 1.49 1.67 (0.18)
<CAPTION>
1996--Pilot Shares........................... $ 12.38 16.49% 0.75% 3.78% 34% $130,278
1996--Class A Shares......................... 12.46 16.10 1.00 3.53 34 1,640
1996--Class B Shares......................... 12.44 15.31 1.75 2.79 34 3,200
1995--Pilot Shares(g)........................ 11.29 16.69 0.75 4.12 37 98,607
1995--Class A Shares(a)...................... 11.36 12.78 1.00 3.70 37 311
1995--Class B Shares(b)...................... 11.34 17.36 1.25 2.88 37 713
<CAPTION>
1996--Pilot Shares........................... 1.04% 3.44%
1996--Class A Shares......................... 1.29 3.24
1996--Class B Shares......................... 2.04 2.50
1995--Pilot Shares(g)........................ 1.14 3.73
1995--Class A Shares(a)...................... 1.39 3.31
1995--Class B Shares(b)...................... 2.14 2.49
</TABLE>
- --------------------------------------------------------------------------------
- ------------
<TABLE>
<S> <C>
(a) Class A share activity commenced February 7, 1995.
(b) Class B share activity commenced January 12, 1995.
(c) Assumes investment at net asset value at the beginning of the period, reinvestment of all dividends and distributions, a
complete redemption of the investment at the net asset value at the end of the period and no sales charge. Total return would
be reduced if sales charge were taken for Class A or Class B shares. Total return is not annualized.
(d) Annualized.
(e) Class B share activity commenced November 11, 1994.
(f) Class A share activity commenced December 12, 1996.
(g) Pilot share activity commenced November 7, 1994.
(h) Share activity commenced October 21, 1996.
</TABLE>
5
<PAGE> 75
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
Pilot Small Capitalization Equity Fund
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT OPERATIONS
--------------------------------------
NET REALIZED TOTAL
AND UNREALIZED INCOME DIVIDENDS NET ASSET
NET ASSET VALUE NET GAIN ON FROM FROM NET VALUE AT
AT BEGINNING INVESTMENT INVESTMENT INVESTMENT INVESTMENT END OF TOTAL
OF PERIOD INCOME TRANSACTIONS OPERATIONS INCOME PERIOD RETURN(C)
--------------- ---------- -------------- ---------- ---------- --------- ---------
<CAPTION>
FOR THE PERIOD ENDED AUGUST 31,
- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996--Pilot Shares(f).................. $ 10.00 $ 0.09 $ 0.64 $ 0.73 $(0.08) $-- $ 10.65
1996--Class A Shares(f)................ $ 10.00 0.05 0.64 0.69 (0.05) -- $ 10.64
1996--Class B Shares(f)................ $ 10.00 0.01 0.65 0.66 (0.01) -- $ 10.65
<CAPTION>
RATIO INFORMATION ASSUMING
NO FEE WAIVER OR EXPENSE
REIMBURSEMENT
----------------------------
RATIO OF NET RATIO OF NET
RATIO OF INVESTMENT NET ASSETS RATIO OF INVESTMENT
EXPENSES TO INCOME PORTFOLIO AT END OF EXPENSES TO INCOME
AVERAGE TO AVERAGE TURNOVER PERIOD AVERAGE TO AVERAGE
NET ASSETS(D) NET ASSETS(D) RATE (IN 000'S) NET ASSETS(C) NET ASSETS(C)
------------- ------------- --------- ---------- ------------- -------------
FOR THE PERIOD ENDED AUGUST 31,
- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot Shares(f).................. 7.37% 1.00%(c) 1.06%(c) 30.67% $70,483 1.54%(c)
1996--Class A Shares(f)................ 6.88% 1.25%(c) 0.66%(c) 30.67% $ 2,611 1.65%(c)
1996--Class B Shares(f)................ 6.65% 2.01%(c) (0.07%)(c) 30.67% $ 1,878 2.44%(c)
<CAPTION>
FOR THE PERIOD ENDED AUGUST 31,
- ---------------------------------------
<S> <C>
1996--Pilot Shares(f).................. 0.52%(c)
1996--Class A Shares(f)................ 0.26%(c)
1996--Class B Shares(f)................ (0.50%)(c)
</TABLE>
- --------------------------------------------------------------------------------
Pilot Growth Fund
For the Period Ended October 22,
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot Shares.....................
1996--Class A Shares...................
1996--Class B Shares...................
<CAPTION>
1996--Pilot Shares.....................
1996--Class A Shares...................
1996--Class B Shares...................
<CAPTION>
1996--Pilot Shares.....................
1996--Class A Shares...................
1996--Class B Shares...................
</TABLE>
6
<PAGE> 76
INVESTMENT OBJECTIVES, POLICIES
AND RISK FACTORS
The Pilot Funds uses a variety of 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 which Funds best meet 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 a Fund's investment objective, shareholders
should consider whether the Fund remains an appropriate investment in light of
their then 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 and Income Fund and
Pilot Equity Income Fund
The Pilot Growth and Income Fund and the Pilot Equity Income Fund (sometimes
referred to together as the "Equity Funds") offer investors two alternatives for
participating in the equity securities market.
The investment objective of the Pilot Growth and Income Fund is to seek capital
appreciation and current income by investing primarily in common stocks of U.S.
companies. The Fund invests primarily in common stocks which demonstrate
favorable prospects for either capital growth or current dividend income. In
making investment decisions, the Adviser assesses factors such as current and
future earnings potential, existing resources and assets, trading liquidity,
marketing valuation and profitability. The Fund will invest, during normal
market and economic conditions, at least 65% of its total assets in common
stocks, preferred stocks and debt instruments convertible into common stock of
U.S. companies.
The investment objective of the Pilot Equity Income Fund is to seek current
income and, secondarily, capital appreciation through investments primarily in
common stocks of above average financial quality and securities convertible into
common stock. Under normal market and economic conditions, the Fund will invest
at least 65% of its total assets in common stocks, preferred stocks and
securities convertible into common stock of companies believed by the Adviser to
demonstrate sound management, future growth potential and the ability to pay
dividends. The Fund will attempt to achieve a yield that is greater than the
published composite yield of the securities comprising the Standard and Poor's
500 Composite Stock Index(1) (the "S & P 500 Index"), a broad-based unmanaged
index of 500 companies listed on the New York Stock Exchange and which is
typically used as a performance benchmark for equity investments.
Each 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. Each Fund will purchase only those debt obligations which are rated
investment grade 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.) Obligations in the lowest of
the top four rating categories ("BBB" or "Baa") have certain speculative
characteristics and are subject to more credit and market risk than securities
with higher ratings. If a debt obligation held by a Fund ceases to be rated
investment grade by at least one NRSRO or if the Adviser determines that an
unrated debt obligation held by a Fund is no longer of comparable quality to an
investment grade debt obligation, the obligation will be sold in an orderly
manner as quickly as possible.
The convertible securities in which a Fund may invest include bonds, notes and
preferred stock that may be converted into common stock either at a stated price
or within a specified period of time. In investing in convertibles, a Fund is
looking for the opportunity, through the conversion feature, to participate in
the capital appreciation of the common stock into which the securities are
convertible, while earning higher current income than is available from the
common stock.
Additionally, each Fund may invest up to 20% of the value of its total assets in
the securities of foreign issuers, either directly in the securities of such
issuers or indirectly through American Depository Receipts
- ---------------
1 "Standard and Poor's(R)," "S & P(R)" and Standard and Poor's 500 Index(R)" are
registered trademarks of Standard and Poor's Corporation.
7
<PAGE> 77
("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.
Each 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 Funds' policies with respect to convertible securities,
foreign securities and other instruments, see "Portfolio Instruments and
Practices" and "Risk Factors" below.
Each 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.
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 1,000 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
8
<PAGE> 78
for temporary defensive purposes during periods of unusual market or economic
activity.
Pilot Small Capitalization Equity Fund
The investment objective of the 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 equity securities, including
securities convertible into equity securities. In addition, under normal
circumstances, the Fund will invest at least 65% of its total assets in
companies with a market capitalization of $1 billion or less.
In making investment decisions for the Fund, the Adviser on a quarterly basis,
classifies approximately 6,000 companies by market value and eliminates the
largest 20%. The remaining companies constitute the Fund's small-capitalization
universe and generally represents only one-tenth of the aggregate U.S. equity
market capitalization. Due to the large number of small stocks to choose from,
the Adviser's selection process uses advanced quantitative techniques to
identify buy and sell candidates in a timely and objective manner. The strategy
is to own those investments offering both attractive fundamental valuation and
relative earnings improvement. Typically, two types of companies are purchased:
(i) mature companies which may have fallen from a larger market value due to
business difficulties, but which now exhibit improving prospects; and (ii)
smaller or younger companies which are experiencing strong trends in earnings
growth, but remain reasonably valued and therefore offer premium growth at a
discount in comparison to other companies.
The Adviser's internally designed investment approach uses a sophisticated
valuation process which measures changes in current earnings estimates and
longer-term growth trends, compares recent earnings results with market
expectations, and evaluates a company's earnings power relative to its stock
price. Companies become purchase candidates based upon a composite ranking of
these factors, and the top 20% are further evaluated on additional criteria.
Candidates for investment must also possess a sound financial structure and
demonstrate consistent factor rankings before being added to the Fund's
portfolio.
The Fund's weighted median capitalization generally is not expected to exceed
125% of the weighted median capitalization of the Russell 2000 as measured on a
quarterly basis, although this may vary from time to time. Furthermore, a stock
may be sold if the composite rank falls into the bottom 20% of the universe,
financial quality weakens significantly, or if individual factors demonstrate
patterns of deterioration.
The Fund may invest up to 35% of its total assets in securities of issuers with
a market capitalization greater than $1 billion and in debt securities. However,
the Fund will not invest more than 10% of its total assets in debt securities,
unless the Fund assumes a temporary defensive position as discussed below. Debt
securities, if any, purchased by the Fund will be rated AA or above by Standard
and Poor's Corporation ("S&P") or Aa or above by Moody's Investor Services, Inc.
("Moody's") or, if unrated, determined by the Adviser to be of comparable
quality. For temporary defensive purposes, the Fund may invest up to 100% of its
assets in debt securities. Debt securities in which the Fund may invest include
short-term and intermediate-term obligations of corporations, the U.S. and
foreign governments and international organizations (such as the International
Bank for Reconstruction and Development (the "World Bank")), including money
market instruments.
Investments and investment techniques in which the Fund may invest include
common stocks (including securities convertible into common stocks) of foreign
issuers and rights to purchase common stock, options and futures contracts on
securities, securities indexes and foreign currencies, securities lending and
repurchase agreements. The Fund currently intends to limit any investment in
foreign securities to 5% of total assets. These and other securities in which
the Fund may invest are further described below.
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
9
<PAGE> 79
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 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.
10
<PAGE> 80
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 liquid assets
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. 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
11
<PAGE> 81
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.
- --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 obtained relief from the SEC to permit each
Fund to invest any uninvested cash reserves in an amount not to exceed 25% of
its total assets in affiliated money market funds. 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.
- --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. All options will be listed on a national
securities exchange and issued by the Options Clearing Corporation.
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
12
<PAGE> 82
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 as a hedge against anticipated interest rate
fluctuations. Such fluctuations could have an effect on securities that a Fund
holds in its portfolio or intends to sell. 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 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. EACH FUND may buy and sell
securities and receive dividend and interest proceeds in currencies other than
the U.S. dollar, these 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
KNOWINGLY 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, tax-exempt derivative
instruments, stripped mortgage-backed securities issued by private issuers 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. EACH FUND may engage in short-term trading to achieve its
investment objective. The annual portfolio turnover rates for PILOT EQUITY
INCOME FUND, PILOT GROWTH AND INCOME FUND, AND PILOT GROWTH FUND are not
expected to exceed 100% during the next twelve months. The turnover rate for
PILOT SMALL CAPITALIZATION EQUITY FUND is not expected to exceed 125% for the
same period. 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
13
<PAGE> 83
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, 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. The value of equity securities held by the Funds 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 a
fund investing primarily in equity securities is likely to have greater
potential for total return over the long term than a fund investing in fixed-
income securities whose value will vary inversely with interest rate
fluctuations, it also presents greater risk of loss.
- --Small Capitalization Companies. EACH FUND may invest in smaller, lesser-known
companies which the Adviser believes offer greater growth potential than larger,
more mature, better-known firms. PILOT SMALL CAPITALIZATION EQUITY FUND will
focus on these securities. 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.
- --Convertible Securities. In general, the market value of a convertible security
is the higher of its "investment value" (i.e., its value as a fixed-income
security) or its "conversion value" (i.e., the value of the underlying shares of
common stock if the security is converted). As a fixed-income security, the
market value of a convertible security generally increases when interest rates
decline and generally decreases when interest rates rise. However, the price of
a convertible security also is influenced by the market value of the security's
underlying common stock. Thus, the price of a convertible security generally
increases as the market value of the underlying stock increases, and generally
14
<PAGE> 84
decreases as the market value of the underlying stock declines.
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.
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.
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 1997 are New
Years Day (observed), President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day). 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
15
<PAGE> 85
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 within 72 hours of a
telephone transaction, 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.
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
16
<PAGE> 86
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. Net
investment income is made up of dividends received from the stocks they hold, as
well as interest accrued on convertible securities, money market instruments and
other debt obligations held in their portfolios.
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
after the date the Institution receives the election.
When are dividends and distributions declared and paid?
Dividends are declared and paid monthly.
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 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 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 a maximum 4.5%
front-end sales charge, and Class B Shares are sold with a maximum 4.5%
contingent deferred sales charge. Pilot, Class A and Class B Shares bear their
pro rata portion of all operating expenses paid by the Funds. In
17
<PAGE> 87
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.
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.
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 LIMITED PARTNERSHIP (referred to as "BISYS"),
is responsible for coordinating the Fund's efforts and generally overseeing the
operation of the Fund's business. BISYS' principal offices are located at 3435
Stelzer Road, Columbus, Ohio 43219-3035.
Distributor: Each 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 whose ultimate corporate parent is the BISYS Group,
Inc., is located at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
Custodian: BOATMEN'S TRUST COMPANY (referred to as "Boatmen's") is responsible
for holding the investments purchased by each Fund. Boatmen's is located at 100
N. Broadway, St. Louis, Missouri 63170.
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.
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
$ billion in assets ($ billion over which they had investment
discretion and $ billion over which they did not have investment
discretion).
18
<PAGE> 88
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 Boatmen's, and more than fifty 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.
On August 30, 1996, Bancshares and NationsBank Corporation ("NationsBank")
announced that they have entered into an agreement pursuant to which Bancshares
will merge into NationsBank. The proposed merger, which is currently expected to
take place in January 1997, is subject to a number of conditions, including
approval by the appropriate regulatory authorities and by the shareholders of
both Bancshares and NationsBank. If the proposed merger is consummated,
Boatmen's will become a wholly owned subsidiary of NationsBank.
Boatmen's utilizes a team approach in managing each of the Equity Funds.
Randall L. Yoakum, a Chartered Financial Analyst, is the team member primarily
responsible for managing the day-to-day investment operations of the Pilot
Growth and Income Fund. Mr. Yoakum is a Senior Vice President and Director of
Equity and Balanced Portfolio Management with Boatmen's. Mr. Yoakum is
responsible for overseeing all institutional equity and balanced portfolios. In
addition to serving as a member of Boatmen's Investment Policy Committee, Mr.
Yoakum manages the Value Plus collective fund and the Pilot Growth and Income
mutual fund. Prior to joining Boatmen's Trust, he served most recently as a
senior vice president and chief equity officer for Composite Research &
Management. Mr. Yoakum has over a decade of investment experience, and he is
presently a member of both the Association for Investment Management and
Research (AIMR) and the St. Louis Society of Financial Analysts. He has earned
the Chartered Financial Analyst designation as well as a bachelor's degree in
political science and finance from Pacific Lutheran University and an MBA from
Arizona State University.
Mr. Michael E. Kenneally, a Chartered Financial Analyst, is a Senior Vice
President and Director of Research for Boatmen's and is part of the team
responsible for the day to day management of Pilot Growth and Pilot Small
Capitalization Equity Funds' day to day 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 and Manager of Quantitative
Research is part of the team responsible for the day to day management of Pilot
Growth and Pilot Small Capitalization Equity Funds' investment activities. Mr.
Ginsparg is responsible for quantitative research applications and is involved
in the management of Boatmen's 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.
David W. Papendick, a Chartered Financial Analyst, is the team member primarily
responsible for the day-to-day investment operations of the Pilot Equity Income
Fund. Mr. Papendick has been associated with Boatmen's since 1973 and is
responsible for the management of pooled equity investment funds with current
assets of over $360 million. He also oversees Boatmen's equity analyst training
program and is a member of Boatmen's Investment Policy Committee. Prior to
joining Boatmen's, Mr. Papendick was associated with two regional brokerage and
investment management firms. Mr. Papendick earned his bachelor's degree from
Washington University.
Pilot Equity Income Fund and Pilot Growth and Income Fund each commenced
operations on November 7, 1994 upon the transfer to each Fund of a portion of
the assets of a common trust fund of Boatmen's Trust Company (the "Commingled
Funds") having corresponding investment objectives, policies and limitations in
exchange for shares of such Fund. Each Fund's portfolio of investments on
November 7, 1994 was substantially the same as the portfolio of the
corresponding Commingled Fund immediately prior to the transfer.
Because each Commingled Fund constitutes a "predecessor" of its corresponding
Fund, each corresponding Fund calculates the performance for each
19
<PAGE> 89
of its classes for periods commencing prior to the transfer of Commingled Fund
assets to the Fund by including its Commingled Fund predecessor's total return
adjusted to reflect the deduction of estimated fees and expenses applicable to
that class as stated in the expense table of the Fund's initial prospectus.
The quoted performance data includes the performance of the Commingled Funds for
periods before their corresponding Funds' commencement of operations including
periods when the Commingled Funds were managed by the Advisor's predecessor in
interest on affiliates. The Commingled Funds have not been and are not currently
registered under the 1940 Act or subject to the investment restrictions imposed
by the 1940 Act. If the Commingled Funds had been registered under the 1940 Act,
the performance of the Commingled Funds might have been adversely affected. The
performance information set forth below reflects past performance and is not
necessarily indicative of the future performance of the Funds, 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.
Average Annual Total Returns for the period ended September 30, 1996.
<TABLE>
<CAPTION>
1 YEAR PILOT
SHARES
<S> <C>
Pilot Equity Income Fund and its predecessor %
Pilot Growth and Income Fund and its predecessor %
</TABLE>
<TABLE>
<CAPTION>
3 YEARS PILOT
SHARES
<S> <C>
Pilot Equity Income Fund and its predecessor %
Pilot Growth and Income Fund and its predecessor %
</TABLE>
<TABLE>
<CAPTION>
5 YEARS PILOT
SHARES
<S> <C>
Pilot Equity Income Fund and its predecessor %
Pilot Growth and Income Fund and its predecessor %
</TABLE>
<TABLE>
<CAPTION>
10 YEARS (OR SHARES INCEPTION) PILOT
SHARES
<S> <C>
Pilot Equity Income Fund and its predecessor %
Pilot Growth and Income Fund and its predecessor %
</TABLE>
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
operating expenses applicable to the Pilot Shares (as estimated at commencement
of operations) had been incurred during the periods shown.
Average Annual Total Returns for the period ended September 30, 1996.
<TABLE>
<CAPTION>
1 YEAR
CLASS A CLASS B
------- -------
<S> <C> <C>
Pilot Equity Income Fund and its predecessor % %
Pilot Growth and Income Fund and its
predecessor % %
</TABLE>
<TABLE>
<CAPTION>
3 YEARS
CLASS A CLASS B
------- -------
<S> <C> <C>
Pilot Equity Income Fund and its predecessor % %
Pilot Growth and Income Fund and its
predecessor % %
</TABLE>
<TABLE>
<CAPTION>
5 YEARS
CLASS A CLASS B
------- -------
<S> <C> <C>
Pilot Equity Income Fund and its predecessor % %
Pilot Growth and Income Fund and its
predecessor % %
</TABLE>
<TABLE>
<CAPTION>
10 YEARS
(OR SINCE INCEPTION)
CLASS A CLASS B
------- -------
<S> <C> <C>
Pilot Equity Income Fund and its predecessor % %
Pilot Growth and Income Fund and its
predecessor % %
</TABLE>
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 Class
A and Class B shareholder transaction expenses and operating expenses applicable
to the Class A and Class B Shares (as estimated at commencement of operations)
had been incurred during the periods shown.
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 Fund Services Limited Partnership ("BISYS") is a
subsidiary of The BISYS Group, Inc., 150 Clove Road, Little Falls, New Jersey
07424, a publicly owned company engaged in information processing, loan
servicing and 401(k) administration and recordkeeping services to and through
banking and other financial organizations. Under its Administration Agreement
with the Fund, BISYS provides a wide range of such services to the Funds,
including maintaining the Funds' offices,
20
<PAGE> 90
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, W. Eugene Spurbeck, George O. Martinez, William J. Tomko
and Bruce Treff are also employees and/or officers of BISYS, the Distributor or
an affiliate.
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 and Income Fund's average
daily net assets, 0.75% of Pilot Equity Income Fund's average daily net assets,
0.75% of Pilot Growth Fund's average daily net assets, and 1.00% of the Pilot
Small Capitalization Equity Fund's average daily net assets. For the fiscal year
ended August 31, 1996, the funds paid advisory fees in the amount of 0.50%,
0.50% and 0.75%, for Pilot Growth and Income Fund, Pilot Equity Income Fund, and
Pilot Small Capitalization Equity Fund, respectively. Pilot Growth Fund
commenced operations on October 21, 1996.
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. For the fiscal year ended August 31, 1996, The Pilot Funds paid
administration fees to BISYS in the amount of $146,186, $93,059, and $0 for the
Pilot Growth and Income Fund, Pilot Equity Income Fund, and Pilot Small
Capitalization Equity Fund, respectively.
Operating expenses borne by the Funds include taxes; interest; fees and expenses
of trustees and officers who 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
21
<PAGE> 91
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 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 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.
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
22
<PAGE> 92
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.
- ---------------------------------------------------------------
23
<PAGE> 93
- ----- Financial
Direction December 31, 1996
LOGO
The
Pilot
Funds
PROSPECTUS ENCLOSED
PILOT EQUITY
INCOME FUND
PILOT GROWTH
AND INCOME FUND
PILOT GROWTH FUND
PILOT SMALL
CAPITALIZATION
EQUITY FUND
Class A Shares and
Class B Shares
<PAGE> 94
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXPENSE SUMMARY................................................................................... 2
FINANCIAL HIGHLIGHTS.............................................................................. 5
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS.................................................. 7
Pilot Growth and Income Fund................................................................. 7
Pilot Equity Income Fund..................................................................... 7
Pilot Growth Fund............................................................................ 8
Pilot U.S. Small Capitalization Equity Fund.................................................. 9
PORTFOLIO INSTRUMENTS AND PRACTICES............................................................. 9
RISK FACTORS.................................................................................... 14
FUNDAMENTAL LIMITATIONS......................................................................... 15
INVESTING IN THE PILOT FUNDS...................................................................... 15
HOW TO BUY SHARES............................................................................... 18
HOW TO SELL SHARES.............................................................................. 21
TRANSACTION RULES............................................................................... 22
SHAREHOLDER SERVICES............................................................................ 23
DIVIDENDS AND DISTRIBUTIONS..................................................................... 26
DISTRIBUTION AND SERVICE ARRANGEMENTS............................................................. 27
THE PILOT FAMILY OF FUNDS......................................................................... 28
THE BUSINESS OF THE FUND.......................................................................... 29
FUND MANAGEMENT................................................................................. 29
TAX IMPLICATIONS................................................................................ 32
MEASURING PERFORMANCE........................................................................... 32
</TABLE>
<PAGE> 95
THE PILOT FUNDS
LOGO
PROSPECTUS FOR CLASS A SHARES AND CLASS B SHARES OF THE PILOT GROWTH AND INCOME,
PILOT EQUITY INCOME, PILOT GROWTH AND PILOT SMALL CAPITALIZATION EQUITY FUNDS
December 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PILOT FUND GOAL FOR INVESTORS WHO WANT
---------- ---- ----------------------
<S> <C> <C>
GROWTH AND INCOME Capital appreciation and current Capital appreciation over the long
income through investments primarily term as well as current income and
in common stocks of U.S. companies. are willing to accept the relative
risks associated with equity
investments.
- ----------------------------------------------------------------------------------------------------------
EQUITY INCOME Current income and, secondarily, Current income with the possibility
capital appreciation through of some price appreciation and are
investments primarily in common willing to accept the relative risks
stocks of above average financial associated with equity investments.
quality and securities convertible
into common stock.
- ----------------------------------------------------------------------------------------------------------
GROWTH Long-term capital growth through Capital growth over the long term
investments primarily in equity and are willing to accept the
securities. relative risks associated with
equity investments.
- ----------------------------------------------------------------------------------------------------------
SMALL CAPITALIZATION Long-term capital growth by Capital growth over the long term
EQUITY investing primarily in equity and are willing to accept the
securities relatively greater risks associated
with investments in small
capitalization equity securities.
- ----------------------------------------------------------------------------------------------------------
</TABLE>
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 two classes of shares from which investors may choose
in the Pilot Growth and Income, Pilot Equity Income, Pilot Growth and Pilot
Small Capitalization Equity Funds. Class A Shares are sold with a front-end
sales charge; Class B shares are sold with a deferred sales charge. 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 December 31, 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.
- --------------------------------------------------------------------------------
1
<PAGE> 96
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 the 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 Class A and Class B Shares. Examples based on this information are
also provided.
<TABLE>
<CAPTION>
GROWTH EQUITY
AND INCOME INCOME
FUND FUND
--------------- ---------------
CLASS A CLASS B CLASS A CLASS B
------- ------- ------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Front End Sales Charge Imposed on Purchases
(as a percentage of offering price)................................. 4.50%(1) None 4.50%(1) None
Sales Charge Imposed on Reinvested Dividends.......................... None None None None
Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, whichever is lower)............................. None 4.50%(2) None 4.50%(2)
Exchange Fee.......................................................... None None None None
ANNUAL FUND OPERATING EXPENSES AFTER FEE WAIVERS AND EXPENSE
REIMBURSEMENTS (as a percentage of average net assets):
Management Fees (after waivers)(4).................................... 0.50% 0.50% 0.50% 0.50%
Rule 12b-1/Distribution Payments...................................... 0.25% 1.00% 0.25% 1.00%
Other Expenses (after reimbursements)(4).............................. 0.25% 0.25% 0.25% 0.25%
---- ---- ---- ----
Total Fund Operating Expenses After Fee Waivers and Expense
Reimbursements(4).................................................... 1.00% 1.75% 1.00% 1.75%
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
SMALL
GROWTH CAPITALIZATION
FUND EQUITY FUND
--------------- ---------------
CLASS A CLASS B CLASS A CLASS B
------- ------- ------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Front End Sales Charge Imposed on Purchases
(as a percentage of offering price)................................. 4.50%(1) None 4.00%(1) None
Sales Charge Imposed on Reinvested Dividends.......................... None None None None
Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, whichever is lower)............................. None 4.50%(2) None 4.00%(3)
Exchange Fee.......................................................... None None None None
ANNUAL FUND OPERATING EXPENSES AFTER FEE WAIVERS AND EXPENSE
REIMBURSEMENTS (as a percentage of average net assets):
Management Fees (after waivers)(4).................................... 0.75% 0.75% 0.75% 0.75%
Rule 12b-1/Distribution Payments...................................... 0.25% 1.00% 0.25% 1.00%
Other Expenses (after reimbursements)(4).............................. 0.25% 0.25% 0.25% 0.25%
---- ---- ---- ----
Total Fund Operating Expenses After Fee Waivers and Expense
Reimbursements(4).................................................... 1.25% 2.00% 1.25% 2.00%
===== ===== ===== =====
</TABLE>
- ------------
(1) Reduced sales charges may be available. See "Shareholder Services--Front-End
Sales Charge Reductions."
(2) This amount applies to redemptions during the first year. The charge
decreases .50% annually to 2.50% for redemptions made during the fifth year
and then decreases .75% to 1.75% for redemptions made during the sixth year.
No deferred sales charge is charged for redemptions made after the sixth
year. See "How to Buy Shares-- Explanation of Sales Price."
2
<PAGE> 97
(3) This amount applies to redemptions during the first year. The charge
decreases .50% annually to 2.00% for redemptions made during the fifth year
and then decreases .75% to 1.25% for redemptions made during the sixth year.
No deferred sales charge is charged for redemptions made after the sixth
year. See "How to Buy Shares-- Explanation of Sales Price."
(4) 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. Without waivers by the Adviser, investment management fees as a
percentage of net assets would be 0.75%, 0.75%, and 1.00% for the Pilot
Growth and Income, Pilot Equity Income, and Pilot Small Capitalization
Equity Funds, respectively. Other Expenses also reflect reimbursements by
the Adviser and Administrator. Absent reimbursement, Other Expenses would be
0.26% for the Class A and Class B Shares of Pilot Growth and Income Fund;
0.29% for the Class A and Class B Shares of Pilot Equity Income Fund; %
for the Class A and Class B Shares of Pilot Growth Fund; and 0.35% for the
Class A and Class B Shares, respectively, of Pilot Small Capitalization
Equity Fund. Absent waivers and expense reimbursements, the total operating
expenses for the Funds would be 1.26% and 2.01% for Class A Shares and Class
B Shares, respectively, of the Pilot Growth and Income Fund; 1.29% and 2.04%
for Class A Shares and Class B Shares, respectively, of the Pilot Equity
Income Fund; and 1.65% and 2.44% for Class A Shares and Class B Shares,
respectively, of the Pilot Small Capitalization Equity Fund. These waivers
and reimbursements are voluntary and may be terminated at any time with
respect to any Fund at the discretion of the Adviser or Administrator and
without the consent of the Funds except that the Adviser has voluntarily
agreed to limit the total operating expenses of the Pilot Shares of Pilot
Growth and Income Fund and Pilot Growth Fund to 0.75% and 1.00% of each
Fund's average net assets until February 1, 1998 which will have the effect
of limiting the expenses of Class A and Class B shares of Pilot Growth and
Income Fund to 1.00% and 1.75%, respectively, and the expenses of Class A
and Class B shares of Pilot Growth Fund to 1.75% and 2.00%, respectively, of
each Fund's average net assets for the same period. You should note that any
fees that are charged by the Funds' Adviser, its affiliates or any other
institutions directly to their customer accounts for services related to an
investment in the Funds are in addition to and not reflected in the fees and
expenses described above.
BECAUSE OF THE DISTRIBUTION PAYMENTS PAID BY THE FUNDS AS SHOWN IN THE ABOVE
TABLE, LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGE PERMITTED BY THE NATIONAL ASSOCIATION OF
SECURITIES DEALERS, INC.
3
<PAGE> 98
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:
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
AFTER AFTER AFTER AFTER
PURCHASE PURCHASE PURCHASE PURCHASE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PILOT GROWTH AND INCOME FUND
Class A Shares(1)................... $ 55 $ 75 $ 98 $ 162
Class B Shares
Assuming complete redemption at
end of period(2)............. $ 63 $ 90 $ 120 $ 206
Assuming no redemption......... $ 18 $ 55 $ 95 $ 206
PILOT EQUITY INCOME FUND
Class A Shares(1)................... $ 55 $ 75 $ 98 $ 162
Class B Shares
Assuming complete redemption at
end of period(2)............. $ 63 $ 90 $ 120 $ 206
Assuming no redemption......... $ 18 $ 55 $ 95 $ 206
PILOT GROWTH FUND
Class A Shares(1)................... $ 57 $ 83 $ 111 $ 189
Class B Shares
Assuming complete redemption at
end of period(2)............. $ 65 $ 98 $ 133 $ 233
Assuming no redemption......... $ 20 $ 63 $ 108 $ 233
PILOT SMALL CAPITALIZATION EQUITY FUND
Class A Shares(1)................... $ 57 $ 83 $ 111 $ 189
Class B Shares
Assuming complete redemption at
end of period(2)............. $ 65 $ 98 $ 133 $ 233
Assuming no redemption......... $ 20 $ 63 $ 108 $ 233
</TABLE>
- ------------
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
(2) Assumes deduction of maximum applicable contingent deferred sales charge.
The Example shown above should not be considered a representation of future
investment returns or operating expenses. Pilot Growth Fund is new and actual
investment returns and operating expenses may be more or less than shown for the
Fund.
4
<PAGE> 99
THE PILOT FUNDS
FINANCIAL HIGHLIGHTS
The following data with respect to a Share of the Pilot Growth and Income Fund,
Pilot Equity Income Fund, and Pilot Small Capitalization Equity Fund outstanding
during the periods indicated have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report incorporated by
reference and attached to the Statement of Additional Information, and should be
read in conjunction with the financial statements and related notes incorporated
by reference and attached to the Statement of Additional Information. The
following data with respect to a share of the Pilot Growth Fund Outstanding
during the period indicated are unaudited.
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout the Period
- --------------------------------------------------------------------------------
Pilot Growth & Income Fund
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT OPERATIONS
--------------------------------------
NET REALIZED TOTAL
AND UNREALIZED INCOME DIVIDENDS DIVIDENDS
NET ASSET VALUE NET GAIN ON FROM FROM NET FROM NET
AT BEGINNING INVESTMENT INVESTMENT INVESTMENT INVESTMENT REALIZED
OF PERIOD INCOME TRANSACTIONS OPERATIONS INCOME GAINS
--------------- ---------- -------------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED AUGUST 31,
- ---------------------------------------------
1996--Pilot Shares........................... $ 11.59 $ 0.22 $ 1.59 $ 1.81 $(0.22) $(0.28)
1996--Class A Shares......................... 11.58 0.18 1.60 1.78 (0.18) (0.28)
1996--Class B Shares......................... 11.59 0.09 1.60 1.69 (0.09) (0.28)
1995--Pilot Shares(g)........................ 10.00 0.17 1.59 1.76 (0.17)
1995--Class A Shares(a)...................... 10.44 0.09 1.14 1.23 (0.09)
1995--Class B Shares(e)...................... 10.08 0.08 1.51 1.59 (0.08)
<CAPTION>
RATIO
INFORMATION
ASSUMING
NO FEE
WAIVER OR
EXPENSE
REIMBURSEMENT
RATIO OF NET ----------
NET ASSET RATIO OF INVESTMENT NET ASSETS
VALUE AT EXPENSES INCOME PORTFOLIO AT END OF
END OF TOTAL TO AVERAGE TO AVERAGE TURNOVER PERIOD
PERIOD RETURN(C) NET ASSETS(D) NET ASSETS(D) RATE (IN 000'S)
--------- --------- ------------- ------------- --------- ----------
FOR THE YEAR ENDED AUGUST 31,
- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot Shares........................... $ 12.90 15.79% 0.74% 1.76% 37% $182,379
1996--Class A Shares......................... 12.90 15.57 0.99 1.52 37 4,667
1996--Class B Shares......................... 12.91 14.75 1.74 0.76 37 3,818
1995--Pilot Shares(g)........................ 11.59 17.72 0.75 1.98 28 109,423
1995--Class A Shares(a)...................... 11.58 11.78 1.00 1.65 28 697
1995--Class B Shares(e)...................... 11.59 15.85 1.75 0.94 28 661
<CAPTION>
RATIO OF NET
RATIO OF INVESTMENT
EXPENSES TO INCOME
AVERAGE TO AVERAGE
NET ASSETS(D) NET ASSETS(D)
------------- -------------
FOR THE YEAR ENDED AUGUST 31,
- ---------------------------------------------
<S> <C> <C>
1996--Pilot Shares........................... 1.01% 1.49%
1996--Class A Shares......................... 1.26 1.25
1996--Class B Shares......................... 2.01 0.49
1995--Pilot Shares(g)........................ 1.15 1.58
1995--Class A Shares(a)...................... 1.40 1.25
1995--Class B Shares(e)...................... 2.15 0.54
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
Pilot Equity Income Fund
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot Shares........................... $ 11.29 $ 0.46 $ 1.38 $ 1.84 $(0.45) $(0.28)
1996--Class A Shares......................... 11.36 0.41 1.40 1.81 (0.41) (0.28)
1996--Class B Shares......................... 11.34 0.33 1.39 1.72 (0.32) (0.28)
1995--Pilot Shares(g)........................ 10.00 0.35 1.29 1.64 (0.35)
1995--Class A Shares(a)...................... 10.24 0.18 1.12 1.30 (0.18)
1995--Class B Shares(b)...................... 9.85 0.18 1.49 1.67 (0.18)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot Shares........................... $ 12.38 16.49% 0.75% 3.78% 34% $130,278
1996--Class A Shares......................... 12.46 16.10 1.00 3.53 34 1,640
1996--Class B Shares......................... 12.44 15.31 1.75 2.79 34 3,200
1995--Pilot Shares(g)........................ 11.29 16.69 0.75 4.12 37 98,607
1995--Class A Shares(a)...................... 11.36 12.78 1.00 3.70 37 311
1995--Class B Shares(b)...................... 11.34 17.36 1.25 2.88 37 713
<CAPTION>
<S> <C> <C>
1996--Pilot Shares........................... 1.04% 3.44%
1996--Class A Shares......................... 1.29 3.24
1996--Class B Shares......................... 2.04 2.50
1995--Pilot Shares(g)........................ 1.14 3.73
1995--Class A Shares(a)...................... 1.39 3.31
1995--Class B Shares(b)...................... 2.14 2.49
</TABLE>
- --------------------------------------------------------------------------------
- ------------
<TABLE>
<S> <C>
(a) Class A share activity commenced February 7, 1995.
(b) Class B share activity commenced January 12, 1995.
(c) Assumes investment at net asset value at the beginning of the period, reinvestment of all dividends and distributions, a
complete redemption of the investment at the net asset value at the end of the period and no sales charge. Total return would
be reduced if sales charge were taken for Class A or Class B shares. Total return is not annualized.
(d) Annualized.
(e) Class B share activity commenced November 11, 1994.
(f) Class A share activity commenced December 12, 1996.
(g) Pilot share activity commenced November 7, 1994.
(h) Share activity commenced October 21, 1996.
</TABLE>
5
<PAGE> 100
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
Pilot Small Capitalization Equity Fund
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT OPERATIONS
--------------------------------------
NET REALIZED TOTAL
AND UNREALIZED INCOME DIVIDENDS NET ASSET
NET ASSET VALUE NET GAIN ON FROM FROM NET VALUE AT
AT BEGINNING INVESTMENT INVESTMENT INVESTMENT INVESTMENT END OF TOTAL
OF PERIOD INCOME TRANSACTIONS OPERATIONS INCOME PERIOD RETURN(C)
--------------- ---------- -------------- ---------- ---------- --------- ---------
FOR THE PERIOD ENDED AUGUST 31,
- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996--Pilot Shares(f).................. $ 10.00 $ 0.09 $ 0.64 $ 0.73 $(0.08) $-- $ 10.65
1996--Class A Shares(f)................ $ 10.00 0.05 0.64 0.69 (0.05) -- $ 10.64
1996--Class B Shares(f)................ $ 10.00 0.01 0.65 0.66 (0.01) -- $ 10.65
<CAPTION>
RATIO INFORMATION ASSUMING
NO FEE WAIVER OR EXPENSE
REIMBURSEMENT
----------------------------
RATIO OF NET RATIO OF NET
RATIO OF INVESTMENT NET ASSETS RATIO OF INVESTMENT
EXPENSES TO INCOME PORTFOLIO AT END OF EXPENSES TO INCOME
AVERAGE TO AVERAGE TURNOVER PERIOD AVERAGE TO AVERAGE
NET ASSETS(D) NET ASSETS(D) RATE (IN 000'S) NET ASSETS(C) NET ASSETS(C)
------------- ------------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE PERIOD ENDED AUGUST 31,
- ---------------------------------------
1996--Pilot Shares(f).................. 7.37% 1.00%(c) 1.06%(c) 30.67% $70,483 1.54%(c)
1996--Class A Shares(f)................ 6.88% 1.25%(c) 0.66%(c) 30.67% $ 2,611 1.65%(c)
1996--Class B Shares(f)................ 6.65% 2.01%(c) (0.07%)(c) 30.67% $ 1,878 2.44%(c)
FOR THE PERIOD ENDED AUGUST 31,
- ---------------------------------------
<S> <C>
1996--Pilot Shares(f).................. 0.52%(c)
1996--Class A Shares(f)................ 0.26%(c)
1996--Class B Shares(f)................ (0.50%)(c)
</TABLE>
- --------------------------------------------------------------------------------
Pilot Growth Fund
For the Period Ended October 22,
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
1996--Pilot Shares.....................
1996--Class A Shares...................
1996--Class B Shares...................
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
1996--Pilot Shares.....................
1996--Class A Shares...................
1996--Class B Shares...................
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
1996--Pilot Shares.....................
1996--Class A Shares...................
1996--Class B Shares...................
</TABLE>
6
<PAGE> 101
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The Pilot Funds use a variety of 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 which Funds best meet 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 and Income Fund and
Pilot Equity Income Fund
The Pilot Growth and Income Fund and the Pilot Equity Income Fund (sometimes
referred to together as the "Equity Funds") offer investors two alternatives for
participating in the equity securities market.
The investment objective of the Pilot Growth and Income Fund is to seek capital
appreciation and current income by investing primarily in common stocks of U.S.
companies. The Fund invests primarily in common stocks which demonstrate
favorable prospects for either capital growth or current dividend income. In
making investment decisions, the Adviser assesses factors such as current and
future earnings potential, existing resources and assets, trading liquidity,
marketing valuation and profitability. The Fund will invest, during normal
market and economic conditions, at least 65% of its total assets in common
stocks, preferred stocks and debt instruments convertible into common stock of
U.S. companies.
The investment objective of the Pilot Equity Income Fund is to seek current
income and, secondarily, capital appreciation through investments primarily in
common stocks of above average financial quality and securities convertible into
common stock. Under normal market and economic conditions, the Fund will invest
at least 65% of its total assets in common stocks, preferred stocks and
securities convertible into common stock of companies believed by the Adviser to
demonstrate sound management, future growth potential and the ability to pay
dividends. The Fund will attempt to achieve a yield that is greater than the
published composite yield of the securities comprising the Standard and Poor's
500 Composite Stock Index1 (the "S & P 500 Index"), a broad-based unmanaged
index of 500 companies listed on the New York Stock Exchange and which is
typically used as a performance benchmark for equity investments.
Each 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. Each Fund will purchase only those debt
obligations which are rated investment grade 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.) Obligations in the lowest of the top four rating categories ("BBB"
or "Baa") have certain speculative characteristics and are subject to more
credit and market risk than securities with higher ratings. If a debt obligation
held by a Fund ceases to be rated investment grade by at least one NRSRO or if
the Adviser determines that an unrated debt obligation held by a Fund is no
longer of comparable quality to an investment grade debt obligation, the
obligation will be sold in an orderly manner as quickly as possible.
The convertible securities in which a Fund may invest include bonds, notes and
preferred stock that may be converted into common stock either at a stated price
or within a specified period of time. In investing in convertibles, a Fund is
looking for the opportunity, through the conversion feature, to participate in
the capital appreciation of the common stock into which the securities are
convertible, while earning higher current income than is available from the
common stock.
- ---------------
1 "Standard and Poor's(R)", "S & P(R)" and "Standard and Poor's 500 Index(R)"
are registered trademarks of Standard and Poor's Corporation.
7
<PAGE> 102
Additionally, each Fund may invest up to 20% of the value of its total assets 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.
Each 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 Funds' policies with respect to convertible securities,
foreign securities and other instruments, see "Portfolio Instruments and
Practices" and "Risk Factors" below.
Each 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.
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 require 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
8
<PAGE> 103
the Adviser believes such a position is advisable for temporary defensive
purposes during periods of unusual market or economic activity.
PILOT SMALL CAPITALIZATION
EQUITY FUND
The investment objective of the 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 equity securities, including
securities convertible into equity securities. In addition, under normal
circumstances, the Fund will invest at least 65% of its total assets in
companies with a market capitalization of $1 billion or less.
In making investment decisions for the Fund, the Adviser on a quarterly basis,
classifies approximately 6,000 companies by market value and eliminates the
largest 20%. The remaining companies constitute the Fund's small-capitalization
universe and generally represents only one-tenth of the aggregate U.S. equity
market capitalization. Due to the large number of small stocks to choose from,
the Adviser's selection process uses advanced quantitative techniques to
identify buy and sell candidates in a timely and objective manner. The strategy
is to own those investments offering both attractive fundamental valuation and
relative earnings improvement. Typically, two types of companies are purchased:
(i) mature companies which may have fallen from a larger market value due to
business difficulties, but which now exhibit improving prospects; and (ii)
smaller or younger companies which are experiencing strong trends in earnings
growth, but remain reasonably valued and therefore offer premium growth at a
discount in comparison to other companies.
The Adviser's internally designed investment approach uses a sophisticated
valuation process which measures changes in current earnings estimates and
longer-term growth trends, compares recent earnings results with market
expectations, and evaluates a company's earnings power relative to its stock
price. Companies become purchase candidates based upon a composite ranking of
these factors, and the top 20% are further evaluated on additional criteria.
Candidates for investment must also possess a sound financial structure and
demonstrate consistent factor rankings before being added to the Fund's
portfolio.
The Fund's weighted median capitalization generally is not expected to exceed
125% of the weighted median capitalization of the Russell 2000 as measured on a
quarterly basis, although this may vary from time to time. Furthermore, a stock
may be sold if the composite rank falls into the bottom 20% of the universe,
financial quality weakens significantly, or if individual factors demonstrate
patterns of deterioration.
The Fund may invest up to 35% of its total assets in securities of issuers with
a market capitalization greater than $1 billion and in debt securities. However,
the Fund will not invest more than 10% of its total assets in debt securities,
unless the Fund assumes a temporary defensive position as discussed below. Debt
securities, if any, purchased by the Fund will be rated AA or above by Standard
and Poor's Corporation ("S & P") or Aa or above by Moody's Investor Services,
Inc. ("Moody's") or, if unrated, determined by the Adviser to be of comparable
quality. For temporary defensive purposes, the Fund may invest up to 100% of its
assets in debt securities. Debt securities in which the fund may invest include
short-term and intermediate-term obligations of corporations, the U.S. and
foreign governments and international organizations [such as the International
Bank for Reconstruction and Development (the "World Bank")], including money
market instruments.
Investments and investment techniques in which the Fund may invest include
common stocks (including securities convertible into common stocks) of foreign
issuers and rights to purchase common stock, options and futures contracts on
securities, securities indexes and foreign currencies, securities lending and
repurchase agreements. The Fund currently intends to limit any investment in
foreign securities to 5% of total assets. These and other securities in which
the Fund may invest are further described below.
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
9
<PAGE> 104
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 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
10
<PAGE> 105
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 liquid assets
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. 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
11
<PAGE> 106
(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.
- --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 obtained relief from the SEC to permit each
Fund to invest any uninvested cash reserves in an amount not to exceed 25% of
its total assets in affiliated money market funds. 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.
- --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. All options will be listed on a national
securities exchange and issued by the Options Clearing Corporation.
OPTIONS TRADING IS A HIGHLY SPECIALIZED ACTIVITY AND MAY CARRY GREATER THAN
ORDINARY INVESTMENT RISK. Purchasing
12
<PAGE> 107
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 as a hedge against anticipated interest rate
fluctuations. Such fluctuations could have an effect on securities that a Fund
holds in its portfolio or intends to sell. 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 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. EACH FUND may buy and sell
securities and receive dividend and interest proceeds in currencies other than
the U.S. dollar, these 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
KNOWINGLY 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, tax-exempt derivative
instruments, stripped mortgage-backed securities issued by private issuers 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. EACH FUND may engage in short-term trading to achieve its
investment objective. The annual portfolio turnover rates for Pilot Equity
Income
13
<PAGE> 108
Fund, Pilot Growth and Income Fund, and Pilot Growth Fund 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, 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. The value of equity securities held by the Funds 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 a
fund investing primarily in equity securities is likely to have greater
potential for total return over the long term than a fund investing in
fixed-income securities whose value will vary inversely with interest rate
fluctuations, it also presents greater risk of loss.
- --Small Capitalization Companies. Each Fund may invest in smaller, lesser-known
companies which the Adviser believes offer greater growth potential than larger,
more mature, better-known firms. PILOT SMALL CAPITALIZATION EQUITY FUND will
focus on these securities. 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
14
<PAGE> 109
stringent reserve requirements, and to different accounting, auditing and
recordkeeping requirements.
- --Convertible Securities. In general, the market value of a convertible security
is the higher of its "investment value" (i.e., its value as a fixed-income
security) or its "conversion value" (i.e., the value of the underlying shares of
common stock if the security is converted). As a fixed-income security, the
market value of a convertible security generally increases when interest rates
decline and generally decreases when interest rates rise. However, the price of
a convertible security also is influenced by the market value of the security's
underlying common stock. Thus, the price of a convertible security generally
increases as the market value of the underlying stock increases, and generally
decreases as the market value of the underlying stock declines.
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.
INVESTING IN THE PILOT FUNDS
Getting Your Investment Started
Investing in The Pilot Funds is quick and convenient. Fund Shares may be
purchased either through the account you maintain with Boatmen's Investment
Services, Inc., another broker-dealer or certain other institutions or from The
Pilot Funds directly. Fund shares are distributed by Pilot Funds Distributors,
Inc. (the "Distributor"). The Distributor is located at 3435 Stelzer Road,
Columbus, Ohio 43219-3035.
You may choose to invest through your Boatmen's Investment Services account
where an Account Representative can advise you in selecting among The Pilot
Funds. Whether you currently have a Boatmen's Investment Services account or
wish to open one, your Pilot Funds investment can be executed within a few
minutes by telephone or, if you prefer, during a consultation with an Investment
Officer of Boatmen's Investment Services, Inc. Call The Pilot Funds at
800/71-PILOT to arrange a consultation scheduled at your convenience.
Clients of Boatmen's Investment Services, Inc. and other institutions (such as
broker-dealers) that have entered into agreements with the Distributor ("Service
Organizations") may purchase shares through their accounts at their Service
Organization and should contact the Service Organization directly for
appropriate purchase instructions. Share purchases (and redemptions) made
through Boatmen's Investment Services, Inc. or another Service Organization are
effected only on days the particular institution and the Fund involved are open
for business. When shares are purchased through Boatmen's Investment Services,
Inc. or another Service Organization, a fee may be charged by those institutions
for providing administrative services in connection with your investment.
Should you wish to establish an account directly with The Pilot Funds, please
refer to the purchase options described
15
<PAGE> 110
under "Opening and Adding to Your Pilot Funds Account".
Payments for Fund shares must normally be in U.S. dollars and in order to avoid
fees and delays should be drawn on a U.S. bank. Please remember that The Pilot
Funds retains the right to reject any purchase order.
Your Alternative Purchase Options
Your purchases of Fund shares are subject to either a front-end or back-end
sales charge. You may elect to have the sales charge deducted at the time of
your investment--on the "front-end"--or choose to defer the sales charge until
your investment is redeemed--on the "back-end". This back-end sales charge
declines over time and is known as a "contingent deferred sales charge." If you
decide to pay the sales charge at the time you make your investment, your
purchase will be made in Class A Shares, whereas if you prefer to pay the sales
charge when you redeem your investment, your purchase will be made in Class B
Shares. Once you have held Class B Shares for six years, you do not pay the
contingent deferred sales charge when you redeem those shares.
Characteristics of Class A Shares and Class B Shares
Class A Shares and Class B Shares differ primarily in their sales charge
structures and distribution arrangements, including ongoing distribution fees.
The classes may also have differing transfer agency and other fees, although the
Funds currently do not intend to allocate such fees on a class basis. You should
understand that the purpose and function of the sales charge structures and
distribution arrangements for both Class A Shares and Class B Shares are the
same.
Class A Shares: Class A Shares are sold at their net asset value plus a
front-end sales charge of up to 4.50%. (See "How to Buy Shares--Explanation of
Sales Price".) This front-end sales charge may be reduced or waived in some
cases. (See "Transaction Rules" and "Shareholder Services--Front-End Sales
Charge Reductions.") Class A Shares are subject to ongoing distribution fees at
an annual rate of up to 0.25% of a Fund's average daily net assets attributable
to its Class A Shares.
Class B Shares: Class B Shares are sold at net asset value without an initial
sales charge. Normally, however, a deferred sales charge is paid if the shares
are redeemed within six years of investment. (See "How to Buy Shares--
Explanation of Sales Price".) Class B Shares are subject to ongoing distribution
fees at an annual rate of up to 1.00% of a Fund's average daily net assets
attributable to its Class B Shares. These ongoing fees, which are higher than
those charged on Class A Shares, will cause Class B Shares to have a higher
expense ratio and pay lower dividends than Class A Shares.
Eight years after purchase, Class B Shares will convert automatically to Class A
Shares. The conversion relieves a shareholder of Class B Shares of the higher
ongoing expenses charged to those shares, after enough time has passed to allow
the Distributor to recover approximately the amount it would have received if a
front-end sales charge had been charged.
The conversion from Class B Shares to Class A Shares takes place at net asset
value, so you receive dollar-for-dollar the same value of Class A Shares as you
had of Class B Shares. The conversion occurs eight years after the beginning of
the calendar month in which the shares are purchased. As a result of the
conversion, the converted shares are relieved of the distribution fees borne by
Class B Shares, although they are subject to the distribution fees borne by
Class A Shares.
Class B Shares of a Fund acquired through a reinvestment of dividends or
distributions from that Fund (as discussed under "Dividends and Distributions")
are also converted at the earlier of two dates--eight years after the beginning
of the calendar month in which the reinvestment occurred or the date of
conversion of the most recently purchased Class B Shares that were not acquired
through reinvestment of dividends or distributions. For example, if you make a
one-time purchase of Class B Shares of a particular Fund, and subsequently
acquire additional Class B Shares of that Fund only through reinvestment of
dividends and/or distributions from that Fund, all of your Class B Shares in
that Fund, including those acquired through reinvestment, will convert to Class
A Shares of that Fund on the same date.
Considerations In Choosing Between Class A And
Class B Shares
The decision as to which share class may be more beneficial for you depends, in
part, on the amount and intended length of your investment. Due to the lower
ongoing distribution fees on Class A Shares, the dividends for those shares will
be higher than the Class B Shares. However, since a front-end sales charge is
deducted from your purchase at the time of your investment, not all of your
purchase amount will purchase shares. Thus, the same initial investment will
purchase more Class B Shares than Class A Shares of the
16
<PAGE> 111
same Fund. In addition, Class B Shares are subject to a contingent deferred
sales charge.
Since large investors may qualify for a reduced front-end sales charge (see
"Shareholder Services--Front-End Sales Charge Reductions"), such investors
should consider making their purchase in Class A Shares.
Because of these possible front-end sales charge reductions, purchases in excess
of $100,000 may be more advantageous to you if made in Class A Shares rather
than Class B Shares. In any event The Pilot Funds will not accept any order of
$250,000 or more for Class B Shares. In addition, regardless of whether you
qualify for a reduced front-end sales charge, if you expect to hold your
investment for an extended period of time, you might still consider purchasing
Class A Shares because the accumulated higher ongoing expenses, together with
the contingent deferred sales charge, of the Class B Shares will exceed the
amount of the front-end sales charge and ongoing distribution fees related to
Class A Shares.
On the other hand, you might decide, because you would be subject to higher
front-end charges or for other reasons, that it would be more advantageous for
you to have all of your purchase amount invested immediately in Fund shares,
even though you would also be subject to higher ongoing distribution fees. These
higher ongoing fees might be offset by any return you receive from the
additional shares you originally purchased as a result of not having to pay a
front-end sales charge. You should note however, that a Fund's future returns
cannot be predicted, and that there is no assurance that such returns, if any,
would compensate for those higher ongoing expenses. You should also remember
that you would be subject to any applicable contingent deferred sales charge
during the first six years of your investment in Class B Shares.
If You Have Questions
If you are investing in The Pilot Funds through an account with Boatmen's
Investment Services, Inc. or another Service Organization, you should speak
directly with your assigned Account Representative or contact person at such
organization. If you are a direct investor with The Pilot Funds and need
assistance with your account, a Pilot Funds service representative is available
to answer your questions by calling the appropriate toll-free numbers listed
below.
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
CALL FOR INFORMATION
- -------------- ------------------------------------
<S> <C>
800/71-PILOT Regarding the Funds' investment
8:00 am to objectives and policies or for
7:00 pm information about opening an account
Central time (including information regarding the
Funds' alternative purchase
options). Information on changing
your Pilot Funds' services, and
Statements of Additional
Information, are also available at
this number.
- ----------------------------------------------------
800/227-3654 To obtain your account balance or to
7:30 am to request a telephone transaction.
4:00 pm
Central time
- ----------------------------------------------------
</TABLE>
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 within 72 hours of a
telephone transaction, 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.
17
<PAGE> 112
The Pilot Funds will send you the following statements and reports to provide
you with current information on the status of your account:
<TABLE>
<S> <C>
Confirmation Statements After every transaction
(other than an Automatic
Investment Plan transaction
or dividend credit) that
affects your account
balance or your account
registration.
Account Statements On a quarterly basis
detailing year to date
activity for each of your
accounts.
Financial Reports Every six months. To reduce
The Pilot Funds' expenses,
only one copy of most Fund
reports will be mailed to
your household, even if you
have more than one account
in a Fund.
</TABLE>
HOW TO BUY SHARES
This section provides you with pertinent information on how to buy Fund shares.
Further information can be found under "Transaction Rules". Before investing you
will need to decide whether to purchase Class A Shares (which are sold with a
front-end sales charge) or Class B Shares (which are sold without a front-end
sales charge but are subject to a contingent deferred sales charge). See "Your
Alternative Purchase Options".
<TABLE>
<CAPTION>
MINIMUM INVESTMENT
-----------------------------
TO OPEN ADDITIONAL
ACCOUNT INVESTMENTS
------------- -------------
<S> <C> <C>
Regular Account........ $1,000 $100
Automatic Investment
Plan................. $100 $100
Employee*--Regular
Accounts............. $500 $100
Employee*--Automatic
Investment Plan...... $100 $50
Tax-Sheltered
Retirement Plans..... $500 $50
Exchange
Transactions......... $1,000 $500
</TABLE>
- ------------
*Applies to employees of the Adviser and its affiliates.
OPENING AND ADDING TO YOUR PILOT FUNDS ACCOUNT
As described above under "Getting Your Investment Started," you may purchase
Fund shares through Boatmen's Investment Services, Inc. or another Service
Organization. Direct investments in The Pilot Funds may also be made in a number
of different ways, as shown in the following chart. Simply choose the method
that is most convenient for you. Any questions you have can be answered by
calling the appropriate toll-free number indicated above under "If You Have
Questions".
18
<PAGE> 113
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT
DIRECTLY WITH THE PILOT FUNDS HELD DIRECTLY WITH THE PILOT FUNDS
--------------------------------------- ---------------------------------------
<S> <C> <C>
By Mail to: -- Complete an Account Application and -- Make your check payable to the
The Pilot Funds, mail it, along with a check payable particular Fund in which you are
c/o BISYS Fund Services to the Fund in which you are investing and mail it to the address
Dept. L-1709 investing, to the address on the on the left.
Columbus, OH 43260-1709 left. -- Please include your account number
on your check.
-- Or use the convenient form attached
to your regular Fund statement.
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
In Person to: -- Deliver the Account Application and -- Deliver your check payable to the
BISYS Fund Services your check payable to the particular particular Fund in which you are
3435 Stelzer Road Fund in which you are investing to investing to the address on the left.
Columbus, OH 43219-3035 the address on the left. -- Please include your account number
on your check.
- -------------------------------------------------------------------------------------------------------------
By Wire to: -- Ask your bank to send immediately -- Ask your bank to wire immediately
Call 1-800/71-PILOT available funds by wire. available funds as described at left,
for Wire Instructions -- The wire should say that you are except that the wire should note that
opening a new Fund account (if an it is to make a subsequent purchase
Account Application Form is not rather than to open a new account.
received for a new account within 30 -- Please include your Fund account
days after the wire is received, number.
dividends and redemption proceeds from
the account will be subject to back-up
withholding). The wire should say that
the purchase is to be in your name.
-- Include your name, address and
taxpayer identification number.
Indicate the name of the Fund in
which you are investing. Investors
should also indicate share class
selection.
Consult your bank for information on remitting funds by
wire and associated bank charges.
- -------------------------------------------------------------------------------------------------------------
Automatic Investment -- You must first complete an Account -- Call 800/71-PILOT to find out how to
(allows regular investment Application and select the Automatic set up this service.
without ongoing paperwork) Investment Plan option. -- Additional purchases will then
-- Call 800/71-PILOT for more automatically be made as directed by
information. you.
- -------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 114
Explanation of Sales Price
The public offering price for each class of shares is based upon net asset value
per share plus, in the case of Class A Shares, a front-end sales charge. Net
asset value per share for each class of each Fund will be determined by adding
the value of the Fund's investments, cash and other assets attributable to the
class, subtracting the Fund's liabilities attributable to that class, and then
dividing the result by the number of shares in the class that are outstanding.
The assets of each Fund 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.
The per share net asset values of Class A Shares and Class B Shares will diverge
due to the different distribution expenses borne by the classes. More
information about valuation can be found in the Funds' Statement of Additional
Information, which is available upon request.
Net asset value is computed as of 3:00 P.M., Central time, on all days the New
York Stock Exchange (the "Exchange") is open for trading, which is Monday
through Friday except for holidays (scheduled Exchange holidays for 1997 are New
Years Day (observed), President's Day, Good Friday, Memorial Day, Independence
Day (observed), Labor Day, Thanksgiving Day and Christmas Day (observed)). 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.
CLASS A SHARES: THE FRONT-END SALES CHARGE OPTION. The front-end sales charge
for Class A Shares of the Funds begins at 4.50% and may decrease as the amount
you invest in Class A Shares increases, as shown in the following two charts:
<TABLE>
<CAPTION>
PILOT GROWTH AND INCOME
FUND
PILOT EQUITY INCOME FUND
PILOT SMALL CAPITALIZATION
EQUITY FUND
PILOT GROWTH FUND
---------------------------
<S> <C> <C> <C>
PER SHARE
AS A DEALERS
PERCENTAGE OF REALLOWANCE
------------- AS A
NET PERCENTAGE
OFFERING ASSET OF OFFERING
AMOUNT OF TRANSACTION PRICE VALUE PRICE
- --------------------------- ---- ---- -----------
Less than $100,000......... 4.50 4.71 4.00
$100,000 to $249,999....... 3.75 3.90 3.25
$250,000 to $499,999....... 3.00 3.09 2.50
$500,000 to $999,999....... 2.00 2.04 1.75
$1,000,000 to $2,499,999... 1.00 1.01 0.90
$2,500,000 and over........ 0.00 0.00 0.00
</TABLE>
It is possible that the dealers reallowance shown in the tables above may change
over time. Further reductions in the sales charges shown above are also
possible--please see "Shareholder Services--Sales Charge Reductions".
CLASS B SHARES: THE CONTINGENT DEFERRED SALES CHARGE OPTION. Although you pay no
front-end sales charge on Class B Shares, if you redeem those shares within six
years after the date you purchased them, the shares will be subject to a
contingent deferred sales charge at the rates set forth in the charts below. The
sales charge is charged on the lesser of the net asset value on the redemption
date or the original cost of the shares being redeemed. As a result, no sales
charge is charged on any increase in the principal value of your shares.
The amount of any contingent deferred sales charge will be different depending
on the number of years that elapse between the time you pay for Class B Shares
and the time those shares are redeemed. Solely for purposes of determining the
number of years from the time of payment for your share purchase, all payments
during a month will be aggregated and deemed to have been made on the first day
of the month.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
(AS A PERCENTAGE OF
NUMBER OF YEARS DOLLAR AMOUNT SUBJECT
ELAPSED SINCE PURCHASE TO THE CHARGE)
- ------------------------------- -------------------------------
<S> <C>
One............................ 4.50%
Two............................ 4.00%
Three.......................... 3.50%
Four........................... 3.00%
Five........................... 2.50%
Six............................ 1.75%
After Six Years................ 0.00%
</TABLE>
When you sell your Class B Shares, your order is processed to minimize the
amount of the contingent deferred sales charge that will be charged. Class B
Shares are redeemed first from those shares that are not subject to a contingent
deferred sales charge (i.e., shares held longer than six years and shares that
were acquired through reinvestment of dividends or distributions or that qualify
for other deferred sales charge waivers) and after that from the Class B Shares
you have held the longest.
For example, assume you purchased 100 Class B Shares at $10 a share (for a total
cost of $1,000), three years later the shares have a net asset value of $12 per
share and during that time you acquired 10 additional shares through dividend
reinvestment. If you then make your first redemption of 50 shares (resulting in
proceeds of $600, 50 shares x $12 per share), the first 10 shares redeemed will
not be subject to the contingent deferred sales charge because they were
acquired through reinvestment of dividends. With respect to the remaining 40
shares redeemed, the contingent deferred sales charge is charged at $10 per
share (because the original purchase price of $10 per share is lower than the
current net asset value of $12 per share). Therefore, only $400 of the $600 you
received from selling your shares will be subject to the contingent deferred
sales charge, at a rate of 3.50%, the
20
<PAGE> 115
applicable rate in the third year after purchase. The proceeds from the
contingent deferred sales charge that you may pay upon redemption go to the
Distributor, which may use such amounts to defray the expenses associated with
the distribution-related services involved in selling Class B Shares. The
contingent deferred sales charge, along with the ongoing distribution fees paid
with respect to Class B Shares, enables those shares to be purchased without the
imposition of a front-end sales charge.
HOW TO SELL SHARES
The Pilot Funds makes it easy to sell, or "redeem" your shares. If you purchased
your shares through an account at Boatmen's Investment Services, Inc. or another
Service Organization, you may redeem shares in accordance with the instructions
pertaining to that account. If you purchased your shares through an account at
Boatmen's Investment Services, Inc. or another Service Organization and you,
yourself, appear on The Pilot Funds' books as the shareholder of record, you may
redeem shares by mail, phone or hand delivery as described below; however, you
must contact Boatmen's Investment Services, Inc. or your other Service
Organization if you wish to redeem your shares by another method. If you
purchased your shares directly from The Pilot Funds, you have the ability to
redeem shares by any of the methods described below. Requests must be signed by
you and by each other owner of the account (for joint accounts). Except for a
contingent deferred sales charge that may be charged on Class B shares, The
Pilot Funds imposes no charges when you redeem shares.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
HOW TO REDEEM SHARES ADDITIONAL LIMITATIONS
------------------------------------ ------------------------------------
<S> <C> <C>
By Mail to: -- Send a signed request (each -- Requests greater than $50,000 per
The Pilot Funds, owner, including each joint owner, day must be signature guaranteed.
c/o BISYS Fund Services must sign) to the Transfer Agent
Dept. L-1709 at the address on the left. -- You should refer to "Transaction
Columbus, OH 43260-1709 Rules" below for additional
-- Be sure to include both the name limitations.
of the particular Fund whose shares
you are selling and your account
number.
- -----------------------------------------------------------------------------------------------------------
By Wire: -- After you have signed up for wire -- The Transfer Agent may act upon
redemption privileges on the such a request from any person
Account Application, you may representing himself or herself to
instruct the Transfer Agent to be you and reasonably believed by
wire your redemption proceeds to the Transfer Agent to be genuine.
your bank account by sending a
request in writing or by phone -- The transaction amount must be a
(800/844-1235). $1,000 minimum.
-- This privilege may be subject to
limits regarding frequency and
overall amount.
</TABLE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
In Person to: -- Deliver your written request -- Requests must be signed by each
BISYS Fund Services directly to the Transfer Agent at owner, including each joint owner.
3435 Stelzer Road the address on the left.
Columbus, OH 43219-3035 -- Requests greater than $50,000 per
day must be signature guaranteed.
</TABLE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Automatic Withdrawal -- Withdrawals begin after you have -- Your account must have a total
(permits automatic signed up for this service (either net asset value of at least $5,000.
withdrawal on the account application or in a
of pre-arranged amount) subsequent letter to the Transfer -- The transaction amount must be at
Agent). least a $50 minimum.
-- Call 800/71-PILOT for more
information.
- -----------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 116
Redemption requests are processed when received in proper form by The Pilot
Funds at the net asset value per share next determined after such receipt
(subject to the contingent deferred sales charge for Class B Shares).
TRANSACTION RULES
THE PURCHASE PROCEDURES differ depending on whether you place your order
directly with The Pilot Funds or use Boatmen's Investment Services, Inc. or
another Service Organization.
IF YOU PLACE AN ORDER FOR FUND SHARES directly with the Fund, in proper form and
accompanied by payment, it will be processed upon receipt by the Transfer Agent.
An order in proper form will also be processed upon receipt by the Transfer
Agent where Boatmen's Investment Services, Inc. or another Service Organization
undertakes to pay for the order in immediately available funds wired to the
Transfer Agent by the close of business the next Business Day. If the Transfer
Agent receives your order and, where required, payment by 3 p.m., Central time,
your shares will be purchased at the public offering price calculated on that
day. Otherwise, your shares will be purchased at the public offering price
determined as of 3 p.m., Central time, on the next Business Day.
IF YOU PLACE AN ORDER FOR FUND SHARES THROUGH BOATMEN'S INVESTMENT SERVICES,
INC. OR ANOTHER SERVICE ORGANIZATION, and you place your order in proper form on
any Business Day in accordance with their procedures, your purchase will be
processed at the public offering price calculated at 3 p.m. Central time on that
day, if Boatmen's Investment Services, Inc. or your other Service Organization
then sends your order to the Transfer Agent before the end of its Business Day
(which is normally 4 p.m. Central time). Boatmen's Investment Services, Inc. or
your other Service Organization must promise to send to the Transfer Agent
immediately available funds in the amount of the purchase price within five
business days.
WIRE PURCHASES AND REDEMPTIONS. If you purchase shares by wire, you must file an
Account Application before any of those shares can be redeemed. You should
contact your bank (which will need to be a commercial bank that is a member of
the Federal Reserve System) for information about sending and receiving funds by
wire, including any charges by your bank for these services. The Pilot Funds may
decide at any time to no longer permit wire redemptions.
MISCELLANEOUS PURCHASE INFORMATION. You must specify at the time of investment
whether you are purchasing Class A Shares or Class B Shares. Federal regulations
require that you provide a certified taxpayer identification number whenever you
open or reopen an account. Share certificates will not be issued. If your check
does not clear, a fee may be imposed by the Transfer Agent. The minimum initial
investment in the Fund by employees of Boatmen's or its affiliates is $500. The
minimum amount required for subsequent investments is $100, except in connection
with certain investment programs.
MISCELLANEOUS REDEMPTION INFORMATION. The Pilot Funds usually makes payment for
the shares that you redeem within Three Business Days after it receives your
request in proper form. SHARES PURCHASED BY CHECK FOR WHICH A REDEMPTION REQUEST
HAS BEEN RECEIVED WILL NOT BE REDEEMED UNLESS THE CHECK PAYMENT USED FOR
INVESTMENT HAS CLEARED, WHICH MAY TAKE UP TO SEVEN BUSINESS DAYS.
When redeeming shares in the Funds, you should indicate whether you are
redeeming Class A Shares or Class B Shares. If you own Class A Shares and Class
B Shares of the same Fund, Class A Shares will be redeemed first unless you
request otherwise.
Certain types of redemption requests will need to include a signature guarantee
for each name in which the account is registered. Signature guarantees must
accompany redemption requests for: (i) an amount in excess of $50,000 per day,
(ii) any amount if the redemption proceeds are to be sent elsewhere than the
address of record on The Pilot Funds' books, or (iii) an amount of $50,000 or
less if the address of record has been on The Pilot Funds' books for less than
sixty days, although the Transfer Agent reserves the right to require signature
guarantees on all redemptions. Signature guarantees are designed to protect both
you and The Pilot Funds from fraud. To obtain a signature guarantee you should
visit a bank, trust company, credit union, savings association, broker-dealer or
other member of a national securities exchange, or other eligible guarantor
institution. (Notaries public cannot provide signature guarantees.) Guarantees
must be signed by an authorized person at one of these institutions, and be
accompanied by the words "Signature Guarantee".
If you experience difficulty in contacting the Transfer Agent to redeem shares
by phone, for example because of unusual market activity, you are urged to
consider redeeming your shares by mail or in person.
THE VALUE OF SHARES THAT ARE REDEEMED IN A FUND may be more or less than their
original cost, depending on the Fund's current net asset value. In addition, if
you are redeeming Class B Shares you may be subject to a contingent deferred
sales charge, which will be deducted from the proceeds of your redemption.
THE PILOT FUNDS RESERVES THE RIGHT TO INVOLUNTARILY REDEEM AN ACCOUNT (other
than a tax-sheltered retirement plan account) if, after thirty days' written
notice, the account's
22
<PAGE> 117
net asset value falls and remains below a $1,000 minimum due to share
redemptions and not market fluctuations.
In unusual circumstances The Pilot Funds may make payment in readily marketable
portfolio securities at their market value equal to the redemption price.
In certain situations or for certain individuals or entities, the front-end
sales charge for Class A Shares of the Funds may be waived either because of the
nature of the investor or the reduced sales efforts required to attract such
investments. In order to receive the sales charge waiver, you must explain the
status of your investment at the time of purchase. No sales charge is charged on
reinvested dividends or distributions. Likewise, there is no front-end sales
charge on (1) any purchase by Boatmen's, BISYS, any of their affiliates or their
respective officers, partners, directors or employees (including retired
employees), any Trustee or officer of The Pilot Funds and designated family
members of any of the above individuals, (2) any purchase by any registered
representative or full-time employee of broker-dealers or Service Organizations
having agreements with the Distributor pertaining to the sale and/or servicing
of Fund shares (and their spouses and minor children) to the extent permitted by
such organizations, (3) any purchase by any state, county or city, or any
instrumentality, department, authority or agency thereof, which is prohibited by
applicable investment laws from paying a sales load or commission, (4) any
purchase by a registered investment adviser who is purchasing shares for its own
account or for accounts for which it is authorized to make investment decisions
(i.e., a discretionary account), (5) any shares issued in connection with
reorganizations with or acquisitions of the assets of other organizations, (6)
under certain circumstances, any purchase of shares pursuant to the
Reinstatement Privilege described below under "Shareholder Services", (7) under
certain circumstances, any purchase of shares as a result of the Cross-
Reinvestment Privilege described below under "Shareholder Services", (8) under
certain circumstances, any purchase of Fund shares with the proceeds from a
recent redemption of shares of any other non-money market investment portfolio
of another investment company, provided that any purchase must be made within 60
days of such redemption and that a copy of the account statement showing such
redemption must accompany the purchase request, (9) any purchase of shares
offered through a registered broker-dealer as part of a wrap product, (10)
exchanges where the shares being exchanged are non-money market fund shares that
came from the distribution of assets held in a qualified trust agency or
custodian account maintained with the trust department of Boatmen's or its
affiliates, (11) any purchase of Fund shares by a shareholder who purchased
Pilot Class A Shares of the Pilot International Equity Fund for an account prior
to June 1, 1994 and who qualified for a reduced sales charge on its purchases
made prior to that date, and who has continuously held shares of the Fund, and
(12) any purchase of Fund shares by a shareholder who was a record or beneficial
holder of shares of Kleinwort Benson International Equity Fund, a series of
Kleinwort Benson Investment Strategies, on July 12, 1993, and who became
directly or indirectly a beneficial owner of the Pilot International Equity Fund
(the "Fund") as a result of a reorganization between the two funds (the
"Reorganization"), and who has continuously held shares of the Pilot
International Equity Fund. For more information or to determine eligibility for
any of these waivers, contact The Pilot Funds at 800/71-PILOT.
CERTAIN TYPES OF REDEMPTIONS MAY ALSO QUALIFY FOR AN EXEMPTION FROM THE
CONTINGENT DEFERRED SALES CHARGE. To receive one of the first three exemptions
listed below, you must explain the status of your redemption at the time you
redeem your shares. The contingent deferred sales charge with respect to Class B
Shares is not charged on (1) exchanges described under "Shareholder Services--
Exchange Privileges"; (2) redemptions in connection with minimum required
distributions from IRA, 403(b)(7) and Qualified Plan accounts due to the
shareholder reaching age 70 1/2; (3) redemptions in connection with a
shareholder's death or disability (as defined in the Internal Revenue Code); and
(4) involuntary redemptions as a result of an account's net asset value
remaining below $1,000 after thirty days' written notice. In addition, no
contingent deferred sales charge is charged on shares acquired through the
reinvestment of dividends or distributions.
YOUR PILOT FUND ACCOUNT
SHAREHOLDER SERVICES
The Pilot Funds provides a variety of ways to make managing your investments
more convenient. Some of these methods require you to request them on your
Account Application or you may request them after opening an account by sending
a signature guaranteed letter of instruction to the Transfer Agent.
Tax-Sheltered Retirement Plans
The Funds are available for investment by tax-sheltered retirement plans,
including Individual Retirement Accounts. See your Account Representative for
details on eligibility and other information. Consult your tax adviser with
specific reference to your own situation. No
23
<PAGE> 118
minimum initial investment or additional investment requirement applies to
purchases in connection with tax-sheltered retirement plans.
EXCHANGE PRIVILEGES AMONG THE PILOT FUNDS
If you have purchased shares directly from The Pilot Funds, you may sell your
Fund shares and buy other shares of The Pilot Funds by calling the Transfer
Agent at 800/71-PILOT or sending a written exchange request to the Transfer
Agent at The Pilot Funds, c/o BISYS Fund Services, Dept. L-1709, Columbus, OH
43260-1709. If you have purchased shares through an account at Boatmen's
Investment Services, Inc. or another Service Organization, you may sell your
Fund shares and buy shares of the other Pilot Funds in accordance with the
procedures applicable to your account. Specifically, Class A Shares of a Fund
may be exchanged for Class A Shares of any other Fund and Class B Shares of a
Fund may be exchanged for Class B Shares of any other Fund. Class A Shares
purchased with a front-end sales charge may be exchanged without the need to pay
any additional front-end charge on the shares acquired through the exchange.
Class B Shares may be exchanged without the payment of any contingent deferred
sales charge as the time the exchange is made. 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.
If you have a qualified trust, agency or custodian account with Boatmen's or its
affiliates, and your shares are to be held in their account, you may also
exchange your current Class A Shares in a Fund for Pilot Shares in the same
Fund. Pilot Shares are subject to the same shareholder transaction expenses as
Class A Shares except that Pilot Shares are not subject to a front end sales
charge. Pilot Shares are subject to the same annual fund operating expenses as
those for Class A Shares except that Pilot Shares make no annual Rule 12b-1
Distribution payments. In addition, the procedures for effecting transactions in
Fund shares and other features related to the servicing and maintenance of a
Fund account may differ for Pilot Shares of the Fund from those applicable to
Class A Shares depending on the terms of the shareholder's qualified trust,
agency, or custodian relationship with Boatmen's or its affiliate. For more
information on holding Pilot Shares of the Funds, please see the prospectus for
Pilot Shares which can be obtained by calling 1/800 71-PILOT and consult the
institution (Boatmen's or an affiliate) which will maintain the account holding
the Pilot Shares received by exchanging Class A Shares.
For investors holding their shares directly, a minimum initial investment of
$1,000 must be made to establish an account into which exchange proceeds will be
invested. The minimum amount required for any subsequent exchanges into the
newly established account is $100. Exchanges may have tax consequences. Please
consult your tax adviser for further information.
If you are opening a new account in a different Fund by exchange, the shares
being exchanged must be at least equal in value to the minimum investment for
the Fund in which the account is being opened. The particular class of shares
you are exchanging into must be registered for sale in your state.
Additional information regarding exchanges can be obtained by reading the
Statement of Additional Information. 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.
A shareholder who purchased Class A Shares of the Pilot International Equity
Fund (the "International Equity Fund") as part of a wrap fee program and who has
continuously held shares of the International Equity Fund, may exchange Class A
Shares in the International Equity Fund for Class A shares of any other fund in
the Pilot Family of Funds without paying any front-end sales charge on the
shares acquired through the exchange.
A shareholder who purchased Class A Shares of the Fund for an account prior to
June 1, 1994 and who qualified for a sales charge exemption or waiver on its
purchases made prior to that date, and who has continuously held shares of the
Fund, may exchange Class A Shares in the International Equity Fund for Class A
shares of any other fund in the Pilot Family of Funds without paying any
front-end sales charge on the shares acquired through the exchange after such
date so long as (i) such account remains open on the books of the Trust or (ii)
such investor continues to qualify for one of the sales load exemptions
described above.
A shareholder who was a record or beneficial holder of shares of Kleinwort
Benson International Equity Fund, a series of Kleinwort Benson Investment
Strategies, and who become directly or indirectly a beneficial owner of shares
of the Pilot International Equity Fund (the "Fund") as a result of a
reorganization between the two funds, and who has continuously held shares of
the Fund, may exchange Class A Shares or Class A shares of any fund in the Pilot
Family of Funds for Class A Shares or Class A shares of any other fund without
paying a front-end
24
<PAGE> 119
sales charge on the shares acquired through the exchange after July 12, 1993 so
long as such account remains open on the books of the Trust.
AUTOMATIC INVESTMENT PLAN
(requires your request)
One easy way to pursue your financial goals is to invest money regularly. The
Pilot Funds offers the Automatic Investment Plan--a convenient service that lets
you transfer money from your bank account into your Fund account automatically,
on a schedule of your choice.
At your option, your bank account will be debited in a particular amount that
you have specified, and Fund shares will be automatically purchased at regular
intervals. Your bank account must be a checking, NOW or bank money market
account maintained at a domestic financial institution which is an Automated
Clearing House member. Your institution must also permit automated withdrawals
(which may be subject to a fee by that institution). A minimum initial
investment of $100 is required for Automatic Investment Plans and the minimum
amount required for subsequent investments is $100. The minimum amount required
for subsequent investments as part of the Plan for employees of Boatmen's or its
affiliates is $50.
The Automatic Investment Plan is one means by which you may use "DOLLAR COST
AVERAGING" in making investments. Dollar Cost Averaging can be useful in
investing in portfolios such as the Funds whose price per share fluctuates.
Instead of trying to time market performance, a fixed dollar amount is invested
in Fund shares at predetermined intervals. This may help you to reduce your
average cost per share because the agreed upon fixed investment amount allows
more shares to be purchased during periods of lower share prices and fewer
shares during periods of higher prices. In order to be effective, Dollar Cost
Averaging should usually be followed on a sustained, consistent basis. You
should be aware, however, that shares bought using Dollar Cost Averaging are
made without regard to their price on the day of investment or to market trends.
While regular investment plans do not guarantee a profit and will not protect
you against loss in a declining market, they can be a good way to invest for
retirement, a home, educational expenses and other long-term financial goals.
You may cancel your Automatic investments or change the amount of purchase at
any time by mailing written notification to the Transfer Agent at The Pilot
Funds, c/o BISYS Fund Services, Dept. L-1709, Columbus, OH 43260-1709. You may
also implement the Dollar Cost Averaging method on your own initiative. The
Pilot Funds may modify or terminate the Automatic Investment Plan at any time or
charge a service fee, although no such fee currently is contemplated.
AUTOMATIC WITHDRAWAL PLAN
(requires your request)
The Pilot Funds offers a convenient way of withdrawing funds from your
investment portfolio. You may request regular monthly, quarterly, semi-annual or
annual withdrawals in any amount above $50 provided the particular Fund account
you are withdrawing from has a minimum current balance of at least $5,000. The
automatic withdrawal will be made on the first or fifteenth day of the month.
Purchases of additional shares concurrently with withdrawals are ordinarily not
advantageous for share classes that charge a sales charge. Use of the Plan may
also be disadvantageous for Class B Shares during the first six years a share is
held, due to the potential need to pay a contingent deferred sales charge.
FRONT-END SALES CHARGE REDUCTIONS
YOU MAY BE ENTITLED TO LOWER FRONT-END SALES CHARGES ON CLASS A SHARES OF THE
FUNDS THROUGH RIGHT OF ACCUMULATION, STATEMENT OF INTENTION AND QUANTITY
DISCOUNTS.
Right of Accumulation. When buying Class A Shares, your current aggregate
investment determines the amount of any front-end sales charge that you pay. If
your current aggregate investment in Class A Shares accumulates to $100,000 or
beyond, the sales percentage charged to you on subsequent investments is
decreased as shown in the Section entitled "Class A Shares: The Front-End Sales
Charge Option". Your current aggregate investment is the accumulated combination
of your immediate investment along with the shares that you beneficially own in
any Fund on which you paid a front-end sales charge (including shares that carry
no front-end sales charge but were obtained through an exchange and can be
traced back to shares that were acquired with such a charge).
EXAMPLE
If you beneficially own Class A Shares of the Funds or shares of The Pilot
Funds' money market funds that can be traced back to the purchase of shares
carrying a front-end sales charge (or any combination of such shares) with an
aggregate value of $90,000 and then buy Class A Shares of the Pilot Growth and
Income Fund with a current value of $10,000, you would pay a front-end sales
charge of 3.75% (the charge applicable to a $100,000 purchase) on your $10,000
purchase.
To qualify for a reduced front-end sales charge, you or your Service
Organization must notify the Transfer Agent
25
<PAGE> 120
at the time of investment. The reduced sales charge is subject to confirmation
of your holdings through a check of appropriate records.
Statement of Intention. This Statement provides the means for you to receive a
reduced front-end sales charge on all of your investments in Class A Shares,
whether they are made in one or more transactions. The Statement of Intention is
your commitment to acquire an aggregate investment for $100,000 or more. You
should read the Statement of Intention, which you can obtain by calling
800/71-PILOT, as you will be bound by its terms.
While signing a Statement of Intention does not bind you to purchase, or The
Pilot Funds to sell, the full amount indicated at the front-end sales charge in
effect at the time of signing, you must complete the intended purchase to obtain
the reduced sales charge.
When you sign a Statement of Intention, the Transfer Agent is authorized to hold
in escrow a sufficient number of shares which can be redeemed to make up any
difference in the sales load on the amount actually invested. After the terms of
the Statement of Intention are fulfilled, the escrow will be released.
Within a 13-month period beginning up to 90 days prior to the date of its
execution, the Class A Shares you purchase may be used as a credit toward the
completion of the Statement of Intention. The investments you make during the
period receive the discounted sales charge based on the full amount of your
investment commitment. A shareholder may include the value of all Class A Pilot
Funds shares on which a sales load has previously been paid as an "accumulation
credit" toward the completion of the Statement, but a price readjustment will be
made to reflect any reduced front-end sales charge applicable to shares
purchased only during the 90-day period prior to the submission of your
Statement of Intention.
If your aggregate investment exceeds the amount indicated in your Statement, an
adjustment will be made to reflect any further reduced sales charge applicable
to your excess investment. The adjustment will be in the form of additional
Class A Shares credited to your account at the then current offering price
applicable to a single purchase of the total amount of the total purchase.
Quantity Discounts. As you can see by looking at the table in the Section
entitled "Class A Shares: The Front-End Sales Charge Option", larger purchases
in Class A Shares may result in lower front-end sales charges to you. If
requested, purchases by you, your spouse and your minor children will be
combined when computing the applicable front-end sales charge.
CROSS-REINVESTMENT PRIVILEGE
You may want to have your dividends received from a Fund automatically invested
in shares of any other Fund or any of The Pilot Funds' other investment
portfolios. Investments will be made at a price equal to the net asset value of
the acquired shares next determined after receipt of the distribution proceeds
by the Transfer Agent. No sales load will be charged on such investments. In
order to qualify for the Cross-Reinvestment Privilege, the value of your account
in the acquired fund must equal or exceed the acquired fund's minimum initial
investment requirement. There are no subsequent investment requirements for
amounts to which dividends are directed nor are service fees currently charged
for effecting these transactions. The election to cross-reinvest dividends will
not affect the tax treatment of such dividends, which will be treated as
received by you and then used to purchase shares of the acquired fund.
REINSTATEMENT PRIVILEGE
If you are a Class A shareholder in a Fund, you may reinvest all or any portion
of your redemption proceeds in Class A shares of any other Fund without paying a
sales load. Shares so acquired will be purchased at a price equal to the net
asset value next determined after the Transfer Agent receives a reinstatement
request and payment. If you wish to use this privilege, you must submit a
written reinstatement request to the Transfer Agent stating that you are
eligible to use the privilege. The reinstatement request and payment must be
received within 90 days of the trade date of the redemption and the shares
redeemed must have been held for at least 30 days before the redemption. The
reinstatement privilege may be exercised once annually by a Class A shareholder,
except that there is no such limit as to the availability of this privilege in
connection with transactions the sole purpose of which is to reinvest the
proceeds at net asset value in a tax-sheltered retirement plan.
Generally, exercising the reinstatement privilege will not affect the character
of any gain or loss realized on a redemption for federal income tax purposes.
However, if a redemption results in a loss, the reinstatement may result in the
loss being disallowed under IRS "wash sale" rules. Also in certain instances,
shareholders may not be permitted to take into account sales charges incurred on
the original purchase of shares in computing their taxable gain or loss. Consult
your tax adviser for additional information.
DIVIDENDS AND DISTRIBUTIONS
Where do your dividends and distributions come from?
Dividends for each Fund are derived from its net investment income. Net
investment income is made up of dividends received from the stocks they hold, as
well as interest
26
<PAGE> 121
accrued on convertible securities, money market instruments and other debt
obligations held in their portfolios.
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. You
will automatically receive dividends and distributions in additional shares of
the same share class of a Fund for which the dividend or distribution was
declared, unless you specifically elect to receive payments in cash or elect the
Cross-Reinvestment Privilege described above under "Shareholder Services". Your
election and any subsequent change should be made in writing to: The Pilot Funds
[name of Fund, including Class A or Class B Shares, as applicable], c/o BISYS
Fund Services, Dept. L-1709, Columbus, OH 43260-1709.
Your election is effective for dividends and distributions with record dates
after the date the Transfer Agent receives the election.
When are dividends and distributions declared and paid?
Dividends are declared monthly and paid monthly.
Net capital gain distributions for each of the Funds, if any, are distributed at
least annually after any reductions for capital loss carryforwards.
The dividends and distributions paid by each Fund on its Class A and Class B
Shares are calculated in the same manner, but because of the differing
distribution expenses borne by the different share classes, the dividends on
those classes are expected to differ.
DISTRIBUTION AND SERVICE
ARRANGEMENTS
The Pilot Funds has adopted Distribution Plans for its Class A and Class B
Shares.
UNDER THESE PLANS THE DISTRIBUTOR RECEIVES PAYMENTS FOR DISTRIBUTION AND SUPPORT
SERVICES. The Distribution Plan for Class A Shares authorizes payments to the
Distributor and Service Organizations for personal services provided to Class A
shareholders and/or the maintenance of shareholder accounts. Payments under the
Distribution Plan for Class B Shares will also be used to pay for sales
commissions and other fees payable to the Distributor and to Service
Organizations and other broker-dealers who sell Class B Shares, and may include
interest on such amounts that are not initially repaid by The Pilot Funds.
PAYMENTS UNDER THE DISTRIBUTION PLAN FOR CLASS A SHARES MAY NOT EXCEED 0.25% (on
an annual basis) of the average daily net asset value of the shares to which
such Plan relates. If more money is due the Distributor than it can collect in
any month because of this limitation, the unpaid amount may be carried forward
until it can be paid. Similarly, if in any month the Distributor does not expend
the entire amount to which it would otherwise be entitled, this amount may be
used as a credit and drawn upon to permit the payment of expenses in the future.
Neither of these amounts, however, is payable beyond the fiscal year in which
they accrue.
DISTRIBUTION 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 the
Class B Shares. Not more than 0.25% of such value will be used to compensate
Service Organizations for personal services provided to Class B shareholders
and/or the maintenance of shareholder accounts. Not more than 0.75% of such
value will be paid to the Distributor as reimbursement for commissions and
transaction fees of up to 4.00% (which amount may change over time) of the net
asset value per share of the Class B Shares purchased by clients of the
Distributor, Service Organizations and other broker-dealers who sell such Shares
as well as expenses related to other promotional and distribution activities.
The distribution payments under this Plan have been structured to provide you
the option of purchasing Fund shares without the need to pay a front-end sales
charge. The purpose and function of the contingent deferred sales charge and
distribution fee for Class B Shares is the same as the front-end sales charge
and distribution fee for Class A Shares. In both cases the sales charge and
distribution fee are used to pay and provide compensation for the distribution
of Fund shares.
Actual distribution expenses paid by the Distributor with respect to Class B
Shares for any given year may exceed the distribution fees and contingent
deferred sales charges received with respect to those Shares. These excess
expenses may be reimbursed by a Fund or its Class B shareholders out of
contingent deferred sales charges and distribution payments in future years as
long as the Distribution Plan for Class B Shares is in effect.
Distribution payments under the Plans are subject to the requirements of a rule
under the Investment Company Act of 1940 known as Rule 12b-1. The distribution
fee and any sales charge applicable to a particular class will not be used to
assist the distribution of any other class.
From time to time the Distributor, at its expense, will also provide additional
compensation to dealers in connection with sales of Shares of any of the Funds
and other Funds of the Group. Compensation may include tickets to sporting and
other entertainment events, gifts of merchandise, and financial assistance to
dealers in
27
<PAGE> 122
connection with conferences, sales or training programs for their employees,
seminars for the public, advertising campaigns regarding one or more Funds of
the Group, and/or other dealer-sponsored special events. In some instances, this
compensation may be made available only to certain dealers whose representatives
have sold or are expected to sell a significant amount of such shares.
Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to exotic locations within or outside of the
United States for meetings or seminars of a business nature. The Distributor, at
its expense, currently conducts an annual sales contest for dealers in
connection with their sales of Shares of the Funds. Dealers may not use sales of
a Fund's Shares to qualify for this compensation to the extent such may be
prohibited by the laws of any state or any self-regulatory agency, such as the
National Association of Securities Dealers, Inc.
IF YOU ARE A CLIENT OF BOATMEN'S INVESTMENT SERVICES, INC. OR ANOTHER SERVICE
ORGANIZATION, YOU SHOULD NOTE that they may charge you a separate fee for
administrative services in connection with investments in Fund shares and may
impose minimum customer account and other requirements. These fees and
requirements would be in addition to those imposed by the Funds under the Plans
or otherwise. If you are investing through Boatmen's Investment Services, Inc.
or another Service Organization, please refer to their program materials for any
additional special provisions or conditions that may be different from those
described in this Prospectus (for example, some or all of the services and
privileges described may not be available to you). Boatmen's Investment
Services, Inc. and the other Service Organizations have the responsibility of
transmitting purchase orders and required funds, and of crediting their
customers' accounts following redemptions, in a timely manner in accordance with
their customer agreements and this Prospectus.
Investors may note that federal banking laws currently limit the securities
activities of banks. It is possible that a bank might be prohibited from acting
as a Service Organization in the future. If this were to happen, the bank's
shareholder clients would be permitted by the Funds to remain shareholders. The
Funds' method of operations might, however, change and such shareholders might
not be able to avail themselves of the services provided by their banks. No
adverse financial consequences are expected to occur to these shareholders from
any such event.
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 (Class A Shares, Class B Shares and Pilot
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.
Class A and Class B Shares of the Funds are described in this prospectus. These
Funds also offer Pilot Shares solely to Boatmen's and its affiliated banks,
acting on behalf of themselves and their customers. Pilot Shares are sold
without a front-end or contingent deferred sales charge to qualified
shareholders. For more information on Pilot Shares, call 800/71-PILOT. Shares of
each class bear their pro rata portion of all operating expenses paid by the
Funds, except certain payments under the Funds' Distribution Plans applicable
only to Class A or Class B Shares.
Persons selling or servicing different classes of shares of the Funds may
receive different compensation with respect to one particular class of shares as
opposed to another in the same Fund.
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.
28
<PAGE> 123
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 LIMITED PARTNERSHIP (referred to as "BISYS"),
is responsible for coordinating the Fund's efforts and generally overseeing the
operation of the Fund's business. BISYS' principal offices are located at 3435
Stelzer Road, Columbus, Ohio 43219-3035.
Distributor: Each 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 and a wholly-owned subsidiary of Concord that is
located at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
Custodian: BOATMEN'S TRUST COMPANY (referred to as "Boatmen's") is responsible
for holding the investments purchased by each Fund. Boatmen's is located at 100
N. Broadway, St. Louis, Missouri 63178.
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, OH 43219-3035.
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 nearly
$ billion in assets ($ billion over which they had investment discretion and
$ 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 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.
On August 30, 1996, Bancshares and NationsBank Corporation ("NationsBank")
announced that they have entered into an agreement pursuant to which Bancshares
will merge into NationsBank. The proposed merger, which is currently expected to
take place in January 1997, is subject to a number of conditions, including
approval by the appropriate regulatory authorities and by the shareholders of
both Bancshares and NationsBank. If the proposed merger is consummated,
Boatmen's will become a wholly owned subsidiary of NationsBank.
Boatmen's utilizes a team approach in managing each of the Equity Funds.
Randall L. Yoakum, a Chartered Financial Analyst, is the team member primarily
responsible for managing the day-to-day investment operations of the Pilot
Growth and Income Fund. Mr. Yoakum is a Senior Vice President and Director of
Equity and Balanced Portfolio Management with Boatmen's. Mr. Yoakum is
responsible for overseeing all institutional equity and balanced portfolios. In
addition to serving as a member of Boatmen's Investment Policy Committee, Mr.
Yoakum manages the Value Plus collective fund and the Pilot Growth and Income
mutual fund. Prior to joining Boatmen's Trust, he served most recently as a
senior vice president and chief equity officer for Composite Research &
Management. Mr. Yoakum has over a decade of investment experience, and he is
presently a member of both the Association for
29
<PAGE> 124
Investment Management and Research (AIMR) and the St. Louis Society of Financial
Analysts. He has earned the Chartered Financial Analyst designation as well as a
bachelor's degree in political science and finance from Pacific Lutheran
University and an MBA from Arizona State University.
Mr. Michael E. Kenneally, a Chartered Financial Analyst, is a Senior Vice
President and Director of Research for Boatmen's and is part of the team
responsible for the day to day management of Pilot Growth and Pilot Small
Capitalization Equity Funds' day to day 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 and Manager of Quantitative
Research is part of the team responsible for the day to day management of Pilot
Growth and Pilot Small Capitalization Equity Funds' investments activities. Mr.
Ginsparg is responsible for quantitative research applications and is involved
in the management of Boatmen's 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 Chinese Quantitative Alliance,
the Society of Quantitative Analyses, and the St. Louis Society of Financial
Analysts.
David W. Papendick, a Chartered Financial Analyst, is the team member primarily
responsible for the day-to-day investment operations of the Pilot Equity Income
Fund. Mr. Papendick has been associated with Boatmen's since 1973 and is
responsible for the management of pooled equity investment funds with current
assets of over $360 million. He also oversees Boatmen's equity analyst training
program and is a member of Boatmen's Investment Policy Committee. Prior to
joining Boatmen's, Mr. Papendick was associated with two regional brokerage and
investment management firms. Mr. Papendick earned his bachelor's degree from
Washington University.
Pilot Equity Income Fund and Pilot Growth and Income Fund each commenced
operations on November 7, 1994 upon the transfer to each Fund a portion of the
assets of the a common trust fund of Boatmen's Trust Company (the "Commingled
Funds") having corresponding investment objectives, policies and limitations in
exchange for shares of such Fund. Each Fund's portfolio of investments on
November 7, 1994 was substantially the same as the portfolio of the
corresponding Commingled Fund immediately prior to the transfer.
Because each Commingled Fund constitutes a "predecessor" of its corresponding
Fund, each corresponding Fund calculates the performance for each of its classes
for periods commencing prior to the transfer of Commingled Fund assets to the
Fund by including its Commingled Fund predecessor's total return adjusted to
reflect the deduction of estimated fees and expenses applicable to that Class as
stated in the expense table of the Fund's initial prospectus.
The quoted performance data includes the performance of the Commingled Funds for
periods before their corresponding Funds' commencement of operations including
periods when the Commingled Funds were managed by the Adviser's predecessor in
interest or other affiliate. The Commingled Funds have not been and are not
currently registered under the 1940 Act or subject to the investment
restrictions imposed by the 1940 Act. If the Commingled Funds had been
registered under the 1940 Act, the Commingled Funds performance might have been
adversely affected. The performance information set forth below reflects past
performance and is not necessarily indicative of the future performance of the
Funds, 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.
Average Annual Total Returns for the period ended September 30, 1996.
<TABLE>
<CAPTION>
1 YEAR
PILOT SHARES
------------
<S> <C>
Pilot Equity Income Fund and its predecessor %
Pilot Growth and Income Fund and its predecessor %
</TABLE>
<TABLE>
<CAPTION>
3 YEARS
PILOT SHARES
------------
<S> <C>
Pilot Equity Income Fund and its predecessor %
Pilot Growth and Income Fund and its predecessor %
</TABLE>
<TABLE>
<CAPTION>
5 YEARS
PILOT SHARES
------------
<S> <C>
Pilot Equity Income Fund and its predecessor %
Pilot Growth and Income Fund and its predecessor %
</TABLE>
30
<PAGE> 125
<TABLE>
<CAPTION>
10 YEARS
(OR SINCE INCEPTION)
PILOT SHARES
------------
<S> <C>
Pilot Equity Income Fund and its predecessor %
Pilot Growth and Income Fund and its predecessor %
</TABLE>
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
operating expenses applicable to the Pilot Shares (as estimated at commencement
of operations) had been incurred during the periods shown.
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 Fund Services Limited Partnership ("BISYS") is a
subsidiary of The BISYS Group, Inc., 150 Clove Road, Little Falls, New Jersey
07424, a publicly owned company engaged in information processing, loan
servicing and 401(k) administration and recordkeeping services to and through
banking and other financial organizations. Under its Administration Agreement
with the Fund, 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, W. Eugene
Spurbeck, George O. Martinez, William J. Tomko and Bruce Treff are also
employees and/or officers of BISYS, the Distributor or an affiliate.
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 and Income Fund's average
daily net assets, 0.75% of Pilot Equity Income Fund's average daily net assets,
0.75% of Pilot Growth Fund's average daily net assets, and 1.00% of the Pilot
Small Capitalization Equity Fund's average daily net assets. For the fiscal year
ended August 31, 1996, The Funds paid advisory fees in the amount of 0.50%,
0.50% and 0.75% for Pilot Growth and Income Fund, Pilot Equity Income Fund, and
Pilot Small Capitalization Equity Fund, respectively. Pilot Growth Fund
commenced operations on October 21, 1996.
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. For the fiscal year ended August 31, 1996, The Pilot Funds paid
administration fees to BISYS in the amount of $146,786, $73,059 and $0 for The
Pilot Growth and Income Fund, Pilot Equity Income Fund, Intermediate U.S.
Government Securities Fund, Pilot and Pilot Small Capitalization Equity Fund,
respectively. For the fiscal period ended August 31, 1995, The Pilot Funds paid
administration fees to BISYS in the amount of $0, $0, and $23,572 for Pilot
Growth and Income Fund, Pilot Equity Income Fund, and Pilot Small Capitalization
Equity Fund, respectively.
Operating expenses borne by the Funds include taxes; interest; fees and expenses
of trustees and officers who 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. 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
31
<PAGE> 126
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 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 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.
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
32
<PAGE> 127
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.
The Funds may provide quotes of total returns and yields WITHOUT REFLECTING A
FRONT-END SALES CHARGE, which quotations will, of course, be higher than
quotations that do reflect such a sales charge.
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 Indexes, the Merrill Lynch Bond Indexes, the Wilshire 5000 Equity Indexes
or the Consumer Price Index.
These yields are for illustrative purposes only. The tax brackets do not take
into account the effect of reductions in the deductibility of itemized
deductions for taxpayers with adjusted gross income over $111,800 or the
possible effect of the federal alternative minimum tax. Additionally, effective
brackets and equivalent taxable yields could be higher than those shown.
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.
33
<PAGE> 128
PILVAB1295P
<PAGE> 129
FINANCIAL
DIRECTION
DECEMBER 31, 1996
LOGO
PILOT INTERNATIONAL
EQUITY FUND
PILOT SHARES
THE
PILOT
FUNDS
PROSPECTUS ENCLOSED
<PAGE> 130
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXPENSE SUMMARY....................................................................................... 2
FINANCIAL HIGHLIGHTS.................................................................................. 3
INVESTMENT OBJECTIVE AND RISK FACTORS................................................................. 5
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES................................................... 5
U.S. Government Securities....................................................................... 5
U.S. and Foreign Bank Obligations................................................................ 5
Forward Commitments and When-Issued Securities................................................... 5
Common and Preferred Stocks...................................................................... 6
Convertible Securities........................................................................... 6
Small Capitalization Companies................................................................... 6
Foreign Securities............................................................................... 6
Investing in Emerging Markets.................................................................... 6
American/European Depository Receipts............................................................ 7
Forward Foreign Currency Exchange Contracts...................................................... 7
Currency Swaps................................................................................... 7
Repurchase Agreements............................................................................ 7
Lending of Portfolio Securities.................................................................. 8
Options Transactions............................................................................. 8
Futures Contracts and Options on Futures Contracts............................................... 8
Other Information................................................................................ 9
INVESTMENT LIMITATIONS................................................................................ 9
INVESTING IN THE PILOT FUNDS.......................................................................... 9
HOW TO BUY SHARES..................................................................................... 9
HOW TO SELL SHARES.................................................................................... 10
Payment of Redemption Proceeds and Dividends..................................................... 11
EXCHANGE PRIVILEGE.................................................................................... 11
DIVIDENDS AND DISTRIBUTIONS........................................................................... 11
Where do your dividends and distributions come from?............................................. 11
How are dividends and distributions declared and paid?........................................... 11
When are dividends and distributions declared and paid?.......................................... 11
THE PILOT FAMILY OF FUNDS............................................................................. 11
THE BUSINESS OF THE FUND.............................................................................. 12
FUND MANAGEMENT....................................................................................... 12
TAX IMPLICATIONS...................................................................................... 14
MEASURING PERFORMANCE................................................................................. 15
</TABLE>
<PAGE> 131
THE PILOT FUNDS
LOGO
PROSPECTUS FOR PILOT SHARES
OF THE
PILOT INTERNATIONAL EQUITY FUND
December 31, 1996
- --------------------------------------------------------------------------------
The Pilot Funds is an open-end, management investment company (a "mutual fund")
consisting of multiple portfolios. This prospectus relates solely to the
offering of shares of the Pilot International Equity Fund, formerly known as the
Pilot Kleinwort Benson International Equity Fund (the "Fund"). Boatmen's Trust
Company ("Boatmen's") serves as the Fund's investment adviser. Kleinwort Benson
Investment Management Americas Inc. ("Kleinwort Benson") serves as the Fund's
investment manager. Pilot Funds Distributors, Inc. serves as the Fund's
distributor, and its affiliate, BISYS Fund Services Limited Partnership, serves
as the Fund's administrator.
The investment objective of the Fund is to provide long-term capital growth by
investing primarily in equity securities of companies domiciled in countries
outside the United States and listed on major stock exchanges primarily in
Europe and the Pacific Basin. The Fund may invest up to 35% of its total assets
in issuers domiciled in developing countries. This Prospectus describes Pilot
Shares of the Pilot International Equity Fund.
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 FUND INVOLVES INVESTMENT
RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. IN ADDITION, THE AMOUNT OF
DIVIDENDS PAID BY THE FUND WILL VARY. BOATMEN'S TRUST COMPANY SERVES AS
INVESTMENT ADVISER TO THE FUND, IS PAID A FEE FOR ITS SERVICES, AND IS NOT
AFFILIATED WITH PILOT FUNDS DISTRIBUTORS, INC., THE FUND'S DISTRIBUTOR.
THIS PROSPECTUS DESCRIBES CONCISELY THE INFORMATION ABOUT THE FUND THAT YOU
SHOULD KNOW BEFORE INVESTING. PLEASE READ IT CAREFULLY AND KEEP IT FOR FUTURE
REFERENCE.
MORE INFORMATION ABOUT THE FUND 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, BY CALLING YOUR INSTITUTION OR BY WRITING PILOT FUNDS
DISTRIBUTORS, INC., 3435 STELZER ROAD, COLUMBUS, OHIO 43219-3035. THE STATEMENT
OF ADDITIONAL INFORMATION, AS IT MAY BE REVISED FROM TIME TO TIME, IS DATED
DECEMBER 29, 1995 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.
- --------------------------------------------------------------------------------
1
<PAGE> 132
EXPENSE SUMMARY (1)
SHAREHOLDER TRANSACTION EXPENSES are charges you pay directly when buying or
selling shares of the Fund.
ANNUAL FUND OPERATING EXPENSES are paid out of the 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 Fund's shareholder transaction expenses and
the operating expenses which the Fund expects to incur during the next twelve
months on its Pilot Shares. Examples based on this information are also
provided.
PILOT SHARES (2)
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
PILOT INTERNATIONAL
EQUITY FUND
-------------------
<S> <C>
Maximum Sales Load Imposed on Purchases.................................................... None
Maximum Sales Load Imposed on Reinvested Dividends......................................... None
Redemption Fees............................................................................ None
Exchange Fees.............................................................................. None
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
<TABLE>
<S> <C>
Management Fees............................................................................ 0.80%
Other Expenses............................................................................. 0.28%
-----
Total Operating Expenses.............................................................. 1.08%
=====
</TABLE>
Example of Expenses (2)
You would pay the following Fund expenses on a hypothetical $1,000 investment,
assuming a 5% annual return and redemption at the end of each time period. THE
EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES;
ACTUAL EXPENSES MAY VARY DEPENDING UPON A VARIETY OF FACTORS, INCLUDING THE
ACTUAL PERFORMANCE OF THE FUND, WHICH MAY BE GREATER OR LESS THAN 5%.
<TABLE>
<S> <C>
One Year........................................................................... $ 11
Three Years........................................................................ $ 34
Five Years......................................................................... $ 60
Ten Years.......................................................................... $132
</TABLE>
- ---------------
Notes:
(1) The purpose of this Table is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear directly
or indirectly.
(2) The information set forth in the Table and Example relates only to Pilot
Shares of the Fund. Class A and Class B Shares of the Fund are subject to
different fees and expenses. See "The Pilot Family of Funds". Class A Shares
pay a distribution fee of up to .25 of 1% of average daily net assets and
are subject to a front-end sales load of up to 4.5% of the offering price.
Class B Shares pay a distribution fee of up to 1% of average daily net
assets and are subject to a contingent deferred sales charge. All other Fund
expenses related to Class A and Class B Shares are the same as for Pilot
Shares.
2
<PAGE> 133
PILOT INTERNATIONAL EQUITY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following data with respect to a Share of the Pilot International Equity
Fund, formerly known as the Pilot Kleinwort Benson International Equity Fund,
outstanding during the period ended August 31, 1996 has been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report
incorporated by reference and attached to the Statement of Additional
Information, and should be read in conjunction with the financial statements and
related notes incorporated by reference and attached to the Statement of
Additional Information. This annual report also contains performance information
and is available upon request and without charge by writing to the address on
the front of this Prospectus. Prior to a tax-free reorganization effective July
12, 1993, the Pilot Kleinwort Benson International Equity Fund was a separate
portfolio of Kleinwort Benson Investment Strategies and known as the Kleinwort
Benson International Equity Fund. The following financial highlights also
present historical information of the Kleinwort Benson International Equity Fund
prior to July 12, 1993. The Kleinwort Benson International Equity Fund was
advised solely by Kleinwort Benson Investment Management Americas Inc., formerly
Kleinwort Benson International Investment Limited for those periods.
The following data with respect to a Share of the Kleinwort Benson International
Equity Fund of Kleinwort Benson Investment Strategies outstanding for each of
the six years in the period ended December 31, 1992 have been audited by Ernst &
Young LLP, independent auditors, as indicated in their report incorporated by
reference and attached to the Statement of Additional Information, and should be
read in conjunction with the financial statements and related notes incorporated
by reference and attached to the Statement of Additional Information.
The Pilot Shares were first issued by the Pilot Kleinwort Benson International
Equity Fund during July, 1993. Accordingly, there are no financial highlights
with respect to the Fund for such shares for periods prior to such dates. The
financial highlights presented below for periods prior to July 12, 1993
represent historical information for shares of the Kleinwort Benson
International Equity Fund which became Pilot Administration Shares pursuant to a
tax-free reorganization effected on July 12, 1993. Effective August 21, 1995 the
Administration Shares were redesignated as the Class A Shares of the Fund.
- --------------------------------------------------------------------------------
3
<PAGE> 134
PILOT INTERNATIONAL EQUITY FUND
------------------------
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF
THE PERIODS INDICATED
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT OPERATIONS
------------------------------------------------------------------------
NET REALIZED
AND
UNREALIZED TOTAL
NET REALIZED GAIN (LOSS) INCOME
NET ASSET NET AND UNREALIZED ON FOREIGN (LOSS)
VALUE AT INVESTMENT GAIN (LOSS) ON CURRENCY FROM
BEGINNING INCOME INVESTMENT RELATED INVESTMENT
OF PERIOD (LOSS) TRANSACTIONS(C) TRANSACTIONS OPERATIONS
--------- ---------- --------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED AUGUST 31,
- -----------------------------
1996--Pilot Shares.................................... $ 16.24 $ 0.18 (i) $ 1.61 (i) $(0.13)(i) $ 1.66
1996--Class A Shares.................................. 16.14 0.04 (i) 1.69 (i) (0.12)(i) 1.61
1996--Class B Shares(k)............................... 17.54 -- (i) (0.65)(i) (0.15)(i) (0.50)
1995--Pilot Shares.................................... 16.34 0.13 (i) (0.22)(i) 0.39 (i) 0.30
1995--Class A Shares(j)............................... 16.29 0.08 (i) (0.22)(i) 0.39 (i) 0.25
1994--Pilot Shares.................................... 14.14 0.11 (i) 1.65 (i) 0.59 (i) 2.35
1994--Administration Shares........................... 14.13 0.07 (i) 1.65 (i) 0.59 (i) 2.31
FOR THE EIGHT MONTHS ENDED AUGUST 31,
- -------------------------------------
1993--Pilot Shares(d)................................. 13.15 (0.01)(i) 1.10 (i) (0.10)(i) 0.99
1993--Administration Shares(a)(b)..................... 11.85 0.02 (i) 2.51 (i) (0.25)(i) 2.28
FOR THE YEARS ENDED DECEMBER 31,(a)(b)
- --------------------------------------
1992--Administration Shares........................... 12.29 0.04 (i) (0.46)(i) -- (0.42)
1991--Administration Shares........................... 12.65 0.06 1.36 -- 1.42
1990--Administration Shares........................... 15.58 0.12 (2.40) -- (2.28)
1989--Administration Shares........................... 14.66 0.07 3.22 -- 3.29
1988--Administration Shares........................... 13.21 (0.01) 2.73 -- 2.72
1987--Administration Shares........................... 22.92 -- 2.11 -- 2.11
<CAPTION>
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
--------------------------
NET REALIZED
GAIN ON
INVESTMENTS
AND
FOREIGN
NET CURRENCY
INVESTMENT RELATED
INCOME TRANSACTIONS
---------- ------------
<S> <C> <C>
FOR THE YEAR ENDED AUGUST 31,
- -----------------------------
1996--Pilot Shares.................................... $(0.46) $ (0.39)
1996--Class A Shares.................................. (0.46) (0.39)
1996--Class B Shares(k)............................... -- --
1995--Pilot Shares.................................... (0.11) (0.29)
1995--Class A Shares(j)............................... (0.11) (0.29)
1994--Pilot Shares.................................... -- (0.15)
1994--Administration Shares........................... -- (0.15)
FOR THE EIGHT MONTHS ENDED AUGUST 31,
- -------------------------------------
1993--Pilot Shares(d)................................. -- --
1993--Administration Shares(a)(b)..................... -- --
FOR THE YEARS ENDED DECEMBER 31,(a)(b)
- --------------------------------------
1992--Administration Shares........................... (0.02) --
1991--Administration Shares........................... (0.08) (1.70)
1990--Administration Shares........................... (0.14) (0.51)
1989--Administration Shares........................... (0.22) (2.15)
1988--Administration Shares........................... -- (1.27)
1987--Administration Shares........................... -- (11.82)
<CAPTION>
RATIO OF
NET NET
ASSET RATIO OF INVESTMENT
VALUE EXPENSES INCOME NET ASSETS
AT PORTFOLIO TO AVERAGE (LOSS) AT END OF
END OF TOTAL TURNOVER NET TO AVERAGE PERIOD
PERIOD RETURN(e) RATE ASSETS NET ASSETS (IN 000'S)
------- --------- --------- ---------- ----------- -----------
FOR THE YEAR ENDED AUGUST 31,
- -----------------------------
1996--Pilot Shares....................................$17.05 10.64% 22.31% 1.08% 0.69% $ 79,019
1996--Class A Shares.................................. 16.90 10.40 22.31 1.32 0.48 26,730
1996--Class B Shares(k)............................... 17.04 (2.85) 22.31 2.06(j) (0.32)(j) 184
1995--Pilot Shares.................................... 16.24 2.08 35.91 1.18 0.82 363,212
1995--Class A Shares(j)............................... 16.14 1.77 35.91 1.42 0.50 27,625
1994--Pilot Shares.................................... 16.34 16.75 35.40 1.12 0.75 307,561
1994--Administration Shares........................... 16.29 16.48 35.40 1.37 0.48 44,990
FOR THE EIGHT MONTHS ENDED AUGUST 31,
- -------------------------------------
1993--Pilot Shares(d)................................. 14.14 7.53(f) 26.65(f)(h) 1.31(g) (0.56)(g) 195,548
1993--Administration Shares(a)(b)..................... 14.13 19.24(f) 26.65(f)(h) 2.17(g) 0.25 (g) 55,816
FOR THE YEARS ENDED DECEMBER 31,(a)(b)
- --------------------------------------
1992--Administration Shares........................... 11.85 (3.42) 58.55 1.78 0.35 56,358
1991--Administration Shares........................... 12.29 11.81 51.88 1.79 0.45 65,939
1990--Administration Shares........................... 12.65 (14.77) 52.00 1.82 0.76 72,007
1989--Administration Shares........................... 15.58 22.99 61.54 2.00 0.39 80,224
1988--Administration Shares........................... 14.66 21.03 54.84 2.31 (0.07) 59,864
1987--Administration Shares........................... 13.21 9.28 58.98 1.72 0.01 53,800
- ------------
(a) Prior to a tax-free reorganization into Pilot Administration shares effective July 12, 1993, the Pilot Kleinwort Benson
International Equity Portfolio was a separate portfolio of Kleinwort Benson Investment Strategies known as Kleinwort Benson
International Equity Fund. The predecessor portfolio was advised by Kleinwort Benson International Investment Limited and had
a December 31 fiscal year-end.
(b) Prior to July 12, 1993, the Pilot Administration shares were not subjected to an Administration plan.
(c) For years preceding the fiscal year ended August 31, 1993, net realized and unrealized gain (losses) from foreign currency
related transactions were included in net realized and unrealized gain (losses) on investment transactions. Effective January
1, 1993, realized and unrealized gain (losses) from Foreign currency related transactions are disclosed separately from net
realized and unrealized gain (losses) on investment transactions.
(d) Pilot shares were initially issued on July 26, 1993.
(e) Assumes investment at net asset value at the beginning of the period, reinvestment of all dividends and distributions, a
complete redemption of the investment at the net asset value at the end of the period and no sales charges. Total return would
be reduced if sales charges were taken for the Pilot Administration shares.
(f) Not annualized.
(g) Annualized.
(h) Calculated on a portfolio-wide level and excludes the transfer of assets effective on August 6, 1993.
(i) Calculated based on the average shares outstanding methodology.
(j) Effective August 21, 1995 the Administration Class Shares were redesignated as the Class A Shares.
(k) Class B Shares were initially issued during July, 1996.
</TABLE>
4
<PAGE> 135
The Pilot International Equity Fund uses a variety of different investments and
investment techniques in seeking to achieve the Fund's investment objective. The
Fund does not use all of the investments and investment techniques described in
the following sections. The Fund is not designed to be a complete investment
program but can be appropriate as part of a complete investment strategy. You
should consider whether the Fund meets your investment goal. Although the Fund
attempts 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 THE
FUND. HOWEVER, SHAREHOLDERS WILL BE GIVEN AT LEAST 30 DAYS' PRIOR WRITTEN NOTICE
IN THE EVENT OF A CHANGE IN THE FUND'S OBJECTIVE. UNLESS OTHERWISE STATED, EACH
INVESTMENT POLICY DESCRIBED BELOW MAY BE CHANGED AT ANY TIME BY THE PILOT FUNDS'
BOARD OF TRUSTEES WITHOUT SHAREHOLDER APPROVAL.
INVESTMENT OBJECTIVE AND RISK FACTORS
The investment objective of the Fund is to provide long-term capital growth by
investing primarily in equity securities of companies domiciled in countries
outside the United States and listed on major stock exchanges primarily in
Europe and the Pacific Basin. Under normal circumstances, the Fund will invest
at least 65% of its total assets in foreign equity securities, including
securities convertible into equity securities and in securities which are listed
on major stock exchanges. The Fund may purchase the stock of small and large
capitalization companies.
The Fund may invest up to 35% of its total assets in securities of issuers
domiciled in developing countries. These countries are generally located in
Eastern Europe, the Asia-Pacific region, Latin and South America, Africa and,
subject to approval by the Board of Trustees, Russia and the Middle East. Debt
securities, if any, purchased by the Fund will be rated in the top two
categories by a nationally recognized statistical rating organization ("NRSRO")
or, if unrated, determined by Kleinwort Benson to be of comparable quality. For
temporary defensive purposes, the Fund may invest up to 100% of its assets in
debt and equity securities of U.S. issuers. Debt securities in which the Fund
may invest include short-term and intermediate-term obligations of corporations,
foreign governments and international organizations (such as the International
Bank for Reconstruction and Development (the "World Bank")), including money
market instruments.
Investments and investment techniques in which the Fund may invest include
common stocks (including securities convertible into common stocks) of foreign
issuers and rights to purchase common stock, options and futures contracts on
securities, securities indexes and foreign currencies, securities lending and
repurchase agreements. These and other securities in which the Fund may invest
are further described below.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
- --U.S. Government Securities. The Fund may purchase obligations of the U.S.
Government. These obligations are issued or guaranteed as to principal or
interest by the U.S. Government, its agencies, authorities or instrumentalities
("U.S. Government Securities"). Some U.S. Government securities, such as
Treasury bills, notes and bonds, which differ only in their interest rates,
maturities and times of issuance, are supported by the full faith and credit of
the United States. Others, such as obligations issued or guaranteed by U.S.
Government agencies, authorities or instrumentalities, are supported by (a) the
full faith and credit of the U.S. Government (such as securities of the Small
Business Administration), (b) the right of the issuer to borrow from the
Treasury (such as securities of the Federal Home Loan Banks), (c) the
discretionary authority of the U.S. Government to purchase the agency's
obligations (such as securities of the Federal National Mortgage Association),
or (d) only the credit of the issuer. No assurance can be given that the U.S.
Government will continue to provide financial support to U.S. Government
agencies, authorities or instrumentalities.
- --U.S. and Foreign Bank Obligations. The Fund may invest in domestic bank
obligations of banks that have total assets in excess of $1 billion and are
subject to U.S. Government regulation, and in certificates of deposit issued by
Federal Deposit Insurance Corporation (FDIC) members that have total assets less
than $1 billion, provided that the principal amounts of such certificates are
fully covered by FDIC insurance. The Fund may invest in U.S. dollar-denominated
foreign bank obligations of foreign banks that have total assets in excess of
$10 billion, are among the 75 largest foreign banks in total assets, have
branches or agencies in the U.S. and meet other criteria established by the
Fund's Trustees. The Fund may also invest in other bank obligations.
- --Forward Commitments and When-Issued Securities. The Fund may purchase
when-issued securities and make contracts to purchase or sell securities for a
fixed price at a future date beyond customary settlement time. The Fund is
required to hold and maintain in a segregated account with the Funds' custodian
or subcustodian until the settlement date, cash, U.S. Government securities or
other high grade liquid debt obligations in an amount sufficient to meet the
purchase price. Alternatively, the Fund may enter into offsetting contracts for
the forward sale of other securities that it owns. Securities purchased or sold
on a when-issued or forward commitment basis involve a risk of loss if the
5
<PAGE> 136
value of the security to be purchased decreases prior to the settlement date or
if the value of the security to be sold increases prior to the settlement date.
Although the Fund would generally purchase securities on a when-issued or
forward commitment basis with the intention of acquiring securities for its
portfolio, the Fund may dispose of a when-issued security or forward commitment
prior to settlement if Boatmen's, or Kleinwort Benson, deems it appropriate to
do so and such disposition may give rise to a capital gain and loss.
- --Common and Preferred Stocks. Common stocks are generally more volatile than
other securities. Preferred stocks share some of the characteristics of both
debt and equity and are generally preferred over common stocks with respect to
dividends and in liquidation.
- --Convertible Securities. The Fund may invest in convertible securities, which
may offer higher income than the common stocks into which they may be converted.
All convertible securities purchased by the Fund will be rated in the top two
categories by an NRSRO or, if unrated, determined by Kleinwort Benson to be of
comparable quality. Convertible securities (which may be current or zero coupon
securities) are bonds, notes, debentures, preferred stocks or other securities
which may be converted or exchanged at a stated or determinable exchange ratio
into shares of common stock. Prior to their conversion, convertible securities
have general characteristics similar to non-convertible securities. While
convertible securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality, they may reflect changes in the
value of the underlying common stock. Convertible securities generally entail
less credit risk than the issuer's common stock because they rank senior to
common stock.
- --Small Capitalization Companies. The Fund may invest in smaller, lesser-known
companies which Kleinwort Benson 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. The Fund may invest in foreign securities which are
denominated in foreign currencies. Investment in foreign securities may present
a greater degree of risk than investment in domestic securities because of less
publicly-available financial and other information, less securities regulation,
different accounting standards, lower trading volume and market volatility,
difficulties in enforcing obligations, potential imposition of foreign
withholding and other taxes (including withholding on dividends or interest paid
to the Fund), war, expropriation or other adverse governmental or economic
actions. Furthermore, the settlement period of securities transactions may be
longer in foreign markets than in domestic markets, delivery of securities
without payment therefor may be required and transactions may involve
non-negotiable brokerage commissions. Purchases of foreign securities by the
Fund will usually be made in foreign currencies and, as a result, the Fund may
incur currency conversion costs and may be affected favorably or unfavorably by
changes in the value of foreign currencies against the U.S. dollar. In addition,
the Fund's performance may be favorably or unfavorably affected by changes in
exchange rates or exchange rate controls, which may include suspension of the
ability to transfer currency from a given country. These risks generally are of
greater concern in developing countries.
The Fund may acquire U.S. dollar denominated obligations of the World Bank.
Obligations of the World Bank are supported by subscribed but unpaid commitments
of its member countries; there is no assurance that these commitments will be
fulfilled in the future.
- --Investing in Emerging Markets. The Fund may also invest up to 35% of its total
assets in one or more countries with emerging economies. These countries are
located in the Asia-Pacific region, Eastern Europe, Latin and South America,
Africa and, subject to approval by the Board of Trustees, Russia and the Middle
East. Political and economic structures in many of such countries may be
undergoing significant evolution and rapid development, and such countries may
lack the social, political and economic stability characteristic of more
developed countries. Certain of such countries may have in the past failed to
recognize private property rights and have at times nationalized or expropriated
the assets of private companies. As a result, the risks described above,
including the risks of nationalization or expropriation of assets, may be
heightened. In addition, unanticipated political or social developments may
affect the values of the Fund's investments in those countries and the
availability to the Fund of additional investments in those countries. The small
size and inexperience of the securities markets in certain of such countries and
the limited volume of trading in securities in those countries may make the
Fund's investment in such countries illiquid and more volatile than investments
in most other non-major U.S. markets, and the Fund may be required to establish
special custodial or other arrangements before making certain investments in
those countries. There may be little
6
<PAGE> 137
financial or accounting information available with respect to issuers located in
certain of such countries, and it may be difficult as a result to assess the
value of prospects of an investment in such issuers.
- --American/European Depository Receipts. The Fund may invest indirectly in the
securities of foreign issuers through sponsored or unsponsored ADRs and EDRs or
other securities representing securities of companies based in countries other
than the United States. Transactions in these securities may not necessarily be
settled in the same currency as the underlying securities which they represent.
Ownership of unsponsored ADRs and EDRs may not entitle the Fund to financial or
other reports from the issuer, to which it would be entitled as the owner of
sponsored ADRs or EDRs. Generally, ADRs, in registered form, are designed for
use in the U.S. securities markets, and EDRs, in bearer form, are designed for
use in European securities markets. ADRs and EDRs also involve certain risks of
other investments in foreign securities.
- --Forward Foreign Currency Exchange Contracts. The Fund may enter into forward
foreign currency exchange contracts ("forward contracts") for hedging and to
seek to increase total return and to purchase or sell currency in connection
with purchases and sales of foreign securities. A forward contract is
individually negotiated and privately traded by currency traders and their
customers. 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. A forward contract may be for a
single price or for a range of prices. The Fund may be required to segregate
assets, consisting of cash, U.S. Government securities or other high grade
liquid debt obligations to cover forward contracts that require it to purchase
foreign currency.
The purpose of entering into these contracts is to minimize the risk to the Fund
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. When Kleinwort Benson 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
("cross-hedging"). The amount in question could be less than or equal to the
value of the Fund's securities denominated in the less attractive currency. The
use of currency transactions can result in the 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 the Fund than that performance it would have had had it not
engaged in forward contracts.
- --Currency Swaps. The Fund may enter into currency swaps for hedging purposes
and to seek to increase total return. Currency swaps involve the exchange of
rights to make or receive payments in specified currencies. Since currency swaps
are individually negotiated, the Fund expects to achieve an acceptable degree of
correlation between its portfolio investments and its currency swap positions.
Currency swaps usually involve the delivery of the entire principal value of one
designated currency in exchange for the other designated currency. Therefore,
the entire principal value of a currency swap is subject to the risk that the
other party to the swap will default on its contractual delivery obligations.
The use of currency swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If Kleinwort Benson is incorrect in its
forecasts of market values and currency exchange rates, the investment
performance of the Fund would be less favorable than it would be if this
investment technique were not used.
- --Repurchase Agreements. The Fund may enter into repurchase agreements with
banks and selected broker-dealers. A repurchase agreement is an agreement under
which the Fund purchases securities and the seller agrees to repurchase the
securities within a particular time at a specified price. The repurchase price
will exceed the original purchase price, the difference being income to the
Fund, and will be unrelated to the interest rate on the purchased securities.
The Fund's custodian or subcustodian will maintain custody of the purchased
securities for the duration of the agreement. The value of the purchased
securities, including accrued interest, will at all times exceed the value of
the repurchase agreement. In the event of bankruptcy of the seller or failure of
the seller to repurchase the securities as agreed, the Fund could suffer losses,
including loss of interest on or principal of the security and costs associated
with delay and enforcement of the repurchase agreement.
- --Other Investment Companies. The Fund may invest in the securities of other
mutual funds that invest in the particular instruments in which the Fund itself
may invest subject to requirements of applicable securities laws. The Trust, on
behalf of each of the Funds, has obtained relief from the SEC to permit each
Fund to invest any uninvested cash reserves in an amount not to exceed 25% of
its total assets in affiliated money market funds. 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
7
<PAGE> 138
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.
- --Lending of Portfolio Securities. The Fund may seek to increase its total
return by lending portfolio securities. Under present regulatory policies, such
loans may be made to institutions, such as broker-dealers, and are required to
be secured continuously by collateral in cash, U.S. Government securities or
other high grade liquid debt obligations maintained on a current basis at an
amount at least equal to the market value of the securities loaned. As with
other extensions of credit there are risks of delay in recovering, or even loss
of rights in, the collateral should the borrower of the securities fail
financially. However, the loans will be made only to firms deemed by Boatmen's
or Kleinwort Benson to be of good standing, and when, in the judgment of
Boatmen's or Kleinwort Benson, the consideration which may be earned currently
from securities loans of this type justifies the attendant risk. If securities
loans are made, it is intended that the value of the securities loaned would not
exceed 30% of the value of the total assets of the Fund.
- --Options Transactions. The Fund may purchase and sell (write) call and put
options on securities. Such options are agreements by the Fund in exchange for a
premium to sell or purchase securities at a specified price if the option is
exercised on or before a set date. Put options on securities will be written
only when the underlying securities are ones which the Fund could otherwise
purchase. Risks associated with writing covered options include the possible
inability to effect closing transactions at favorable prices and an appreciation
limit on the securities set aside for settlement. Call options will be sold
(written) only when the underlying securities are ones which the Fund holds.
The Fund may purchase and sell (write) call and put options on securities to
hedge against the risk of unfavorable price movements adversely affecting the
value of the securities the Fund holds or intends to buy.
The Fund may also purchase and sell (write) call and put options on securities
indexes to hedge against the risk of unfavorable price movements in securities.
Options on securities indexes are similar to options on securities except that
the holder of an option on an index has the right, in return for the premium
paid, to buy from (in the case of a call) or sell (in the case of a put) the
writer of the option the cash value of the index (rather than the security
underlying the option) at a specified exercise price at any time during the term
of the option.
The Fund may also purchase and sell options on currencies to seek to increase
total return and to protect against declines in the dollar value of foreign
portfolio securities and against increases in the U.S. dollar cost of foreign
securities to be acquired. As with other kinds of option transactions, however,
the writing of an option on foreign currency will constitute only a partial
hedge, up to the amount of the premium received. The Fund could be required to
purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on foreign currency may constitute
an effective hedge against exchange rate fluctuations; however, in the event of
exchange rate movements adverse to the Fund's position, the Fund may forfeit the
entire amount of the premium plus related transaction costs. Options on foreign
currencies to be written or purchased by the Fund will be traded on U.S. and
foreign exchanges or over-the-counter.
The Fund is required to segregate liquid assets in an amount equal to the value
of its obligations unless offsetting positions are maintained.
- --Futures Contracts and Options on Futures Contracts. For bona fide hedging or
other permissible risk management purposes, such as protecting the price or
interest rate of a security it holds or intends to buy, the Fund may enter into
futures contracts on securities and securities indexes and may purchase and sell
(write) call and put options on these futures contracts. The Fund may also enter
into futures contracts on currencies and may enter into futures contracts and
related options for purposes of seeking to increase total return, consistent
with the regulations of the Commodities Futures Trading Commission.
Hedging and other risk-management transactions are undertaken to reduce or
eliminate any of several kinds of price fluctuation risk. For example, put
options on securities futures might be purchased to protect against declines in
the market values of debt securities occasioned by higher interest rates and
securities-index futures might be sold to protect against a general decline in
the value of securities of the type that comprise the index. Currency futures
might be sold to protect against declines in the value of currencies in which
portfolio securities are denominated. If these hedging transactions are
successful, the futures or options positions taken by the Fund will rise in
value by an amount which approximately offsets the decline in the value of the
portion of a portfolio that is being hedged. Such decline in value might be
caused by a decline in the market value of portfolio securities.
The Fund may lose the expected benefit of futures transactions if securities
prices move in an unanticipated manner. Such unanticipated changes may also
result in poorer overall performance for the Fund than the performance it would
have had had it not entered into any
8
<PAGE> 139
futures transactions. In addition, changes in the value of the Fund's futures
and options positions may not prove to be perfectly or even highly correlated
with changes in the value of its portfolio securities. This could limit the
Fund's ability to hedge effectively against interest rate or market risk or both
and give rise to additional risks. There is no assurance of market liquidity for
purposes of closing out positions in futures contracts and options on futures
contracts; if such positions cannot be closed, the Fund may incur losses in
excess of its initial margin deposits.
The Fund will incur brokerage costs and will be required to post and maintain
"margin" as a good-faith deposit against performance of its obligations under
futures contracts and options thereon. In addition, the Fund is required to
segregate assets, consisting of cash, U.S. Government securities or other high
grade liquid debt obligations in an amount equal to the value of the instruments
underlying futures contracts and options thereon.
- --Other Information. The Funds have adopted certain procedures under the 1940
Act which enable the Fund to purchase certain instruments during the existence
of an underwriting or selling syndicate of which The Boatmen's National Bank of
St. Louis or Kleinwort Benson is a member relating to the instruments. These
procedures establish, among other things, certain limitations on the amount of
securities which may be purchased in any single offering and on the amount of
the Fund's assets which may be invested in any single offering. Accordingly, in
view of such entities' active role in the underwriting of securities, the Fund's
ability to purchase securities in the primary market may from time to time be
limited.
The Fund changes its portfolio securities for investment consideration and not
for trading purposes.
INVESTMENT LIMITATIONS
Certain of the investment policies of the Fund may not be changed without a vote
of 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 the
fundamental limitations are summarized below, and all of the Fund's fundamental
limitations are set out in greater detail in the Statement of Additional
Information, which is available upon request.
1. The 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). For purposes of this restriction, foreign governments are
considered to be separate industries.
2. The 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 the value of the Fund's total assets in the securities of a
single issuer, except that up to 25% of the Fund's total assets can be invested
without regard to such 5% limitation (such 5% limitation shall not apply to
repurchase agreements collateralized by U.S. Government securities).
3. The Fund may not borrow money except as a temporary measure and then only in
amounts not exceeding 5% of the value of the Fund's total assets or from banks
or in connection with reverse repurchase agreements provided that immediately
after such borrowing, all borrowings of the Fund do not exceed one-third of the
Fund's total assets and no purchases of portfolio instruments will be made while
such Fund has borrowings outstanding in an amount exceeding 5% of its total
assets.
4. The Fund may not make loans, except to the extent that the lending of
portfolio securities and purchase of debt obligations in accordance with the
Fund's investment objective and policies and the entry into repurchase
agreements with banks, brokers, dealers and other financial institutions may be
deemed to be loans.
The Fund has no current intention (which may be changed without shareholder
approval) of purchasing restricted securities, except those securities which can
be offered and sold to "qualified institutional buyers" pursuant to Rule 144A
and which the Funds' Trustees determine are traded in a liquid market. The Fund
may invest up to 15% of the value of its net assets in illiquid securities,
including restricted securities. Risks associated with investing in restricted
securities include the risk that the lack of an active secondary market and
resale restrictions may result in the inability of the Fund to sell a security
at a fair price and may substantially delay the sale of a security that the Fund
seeks to sell. Issuers whose securities are publicly traded are also not subject
to the same disclosure and other legal requirements as are applicable to issuers
with publicly traded securities.
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 exclusively to customers of Boatmen's Trust Company
(referred to as "Boatmen's" or the "Adviser"), 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") and certain other participating banks and institutions. Customers
may include individuals, trusts, partnerships, institutions and
9
<PAGE> 140
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 Fund 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.
Institutions 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 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.
If, by 3:00 p.m., Central time, a purchase order is received by Boatmen's, the
price per Share will be based on the net asset value computed on the Business
Day the purchase order is received. Payment will be effected by wiring Federal
Funds to the Custodian. Boatmen's has undertaken to arrange for the timely
transmittal of purchase orders to the Transfer Agent and of Federal Funds to the
Custodian. Purchases are made through a customer's account at Boatmen's or its
affiliate, as directed by the customer in an application form executed prior to
the customer's first purchase of Pilot Shares, except in the case of purchases
by a fiduciary account where purchases of Pilot Shares of a Fund are made as
directed by Boatmen's or an affiliate.
Pilot Shares are sold without a sales load. A salesperson and any other person
entitled to receive compensation for selling Class A or Class B Shares of the
Fund may receive different compensation.
As used in this prospectus, the term "Business Day" refers to those days when
the New York Stock Exchange is open for business, which is Monday through Friday
except for holidays (scheduled Exchange holidays for 1997 are New Years Day,
Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day). 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 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
including exchanges for any reason or to waive the minimum initial investment
requirement. The Pilot Funds also reserve the right to establish a minimum
initial and/or subsequent investment requirement and to change that requirement
with respect to any person or class of persons. 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.
Explanation of Sales Price
Pilot Shares of the Fund 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 the 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. Portfolio securities
are valued based on market quotations or, if quotations are not readily
available, at fair value as determined in good faith under procedures adopted by
The Pilot Funds' Board of Trustees.
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 Fund's 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.
10
<PAGE> 141
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 Pilot Funds' responsibilities under
the Investment Company Act of 1940. See the Statement of Additional Information
("Redemptions"). In those cases, an investor may incur brokerage costs in
converting securities to cash.
Shares of a Fund are also redeemable at the unilateral option of The Pilot Funds
if the Trustees determine in their sole discretion that failure to so redeem may
have material adverse consequences to the Shareholders of such Fund. The Funds,
however, assume no responsibility to compel such redemptions.
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. Redemptions of Pilot Shares of a Fund may be made in accordance
with the application form executed prior to the Customer's first purchase of
Pilot Shares. Redemptions by fiduciary accounts are made as an Institution
directs.
Payment of Redemption Proceeds and Dividends
If a redemption request is received in "good order" by Boatmen's before 3:00
p.m., Central time, redemption proceeds will normally be credited to the
Shareholder's account with Boatmen's or its affiliate on the next Business Day.
Neither the Funds nor the Transfer Agent shall have any liability for any delay
in the availability of proceeds in a Shareholder's account. Institutions have
undertaken to arrange for the timely transmittal to the Transfer Agent of
redemption requests and the timely crediting to Shareholders' accounts at an
Institution of redemption proceeds. In order to effect timely transmittals and
crediting, Institutions may establish earlier times by which redemption
directions must be received by it. Institutions have undertaken to advise
Shareholders if earlier times are established.
EXCHANGE PRIVILEGE
Pilot Shares of the Fund may be exchanged for Pilot Shares of any other fund of
the Pilot Family of Funds at the net asset value next determined after receipt
by Boatmen's of the exchange instructions. Customers of Boatmen's and its
affiliates may effect exchanges by calling their Boatmen's account
representative. Prior to the completion of any exchange, investors must have the
Prospectus of the fund into which they are exchanging. All telephone exchanges
must be registered in the same name(s) and with the same address as are
registered in the fund from which the exchange is being made. In times of
drastic economic or market changes the telephone exchange privilege may be
difficult to implement. 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 within
72 hours of a telephone transaction, 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. Exchanges are available only in states where the
exchange may be legally made. The exchange privilege may be modified or
withdrawn at any time on 60 days' written notice except where notice is not
required by the Securities and Exchange Commission.
DIVIDENDS AND DISTRIBUTIONS
Where do your dividends and distributions come from?
A Fund's net investment income consists of the excess of (i) accrued interest or
discount (including both original issue and market discount, if any) on
portfolio securities and (ii) any income of the Fund from sources other than
capital gains, over (iii) the amortization of market premium on portfolio
securities and (iv) the estimated expenses of the Fund, including a
proportionate share of the general expenses of the Funds.
How are dividends and distributions declared and paid?
Income dividends and capital gain distributions will be paid in cash or at the
election of the Shareholder will be reinvested in additional shares of the same
Fund.
When are dividends and distributions declared and paid?
The Fund intends to declare and pay dividends from net investment income at
least annually.
THE PILOT FAMILY OF FUNDS
The Pilot Funds was organized on July 15, 1992 as a Massachusetts business trust
under the name Centerland Fund. On June 1, 1994, its name was changed to The
Pilot
11
<PAGE> 142
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 Trustees of the Funds are
responsible for the overall management and supervision of its affairs. 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 and to establish additional portfolios in the
future. The Trustees have authorized the issuance of an unlimited number of
shares available to selected investors, in each of three share classes (Pilot
Shares, Class A Shares and Class B Shares in the Funds. Information regarding
The Pilot Funds' other portfolios and other classes may be obtained by
contacting The Pilot Funds or the Distributor.
Pilot Shares of the Fund are described in this prospectus. Each Pilot Share,
Class A Share and Class B Share of a Fund represents an equal proportionate
interest in the assets belonging to that Fund. It is contemplated that most
Shares will be held in accounts of which the record owner is a bank or other
institution acting as nominee for its customers who are beneficial owners of the
Shares. Pilot Shares may be purchased for accounts held in the name of an
institution that is not compensated by the Funds for services provided to the
institution's customers. Class A and Class B Shares may be purchased for
accounts held in the name of an institution that provides certain account
administration services to its customers, including maintenance of account
records and processing orders to purchase, redeem and exchange Class A and Class
B Shares. Please refer to the Statement of Additional Information for the Class
A and Class B Shares for a more complete description of such services. Shares of
each class may be exchanged only for Shares of the same class in another fund.
Except as described herein, the three classes of Shares are identical. Certain
aspects of the Shares may be altered, after advance notice to Shareholders, if
it is deemed necessary in order to satisfy certain tax regulatory requirements.
When issued, Shares will be fully paid and nonassessable. In the event of
liquidation, Shareholders are entitled to share pro rata in the net assets of
the applicable fund available for distribution to Shareholders. Shares entitle
their holders to one vote per Share, are freely transferable and have no
preemptive, subscription or conversion rights.
SHAREHOLDERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND PROPORTIONATE
FRACTIONAL VOTES FOR FRACTIONAL SHARES HELD. Shares of all the Pilot Funds
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.
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.
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 the Fund, selecting the investments and
making purchase and sale orders. Its principal offices are located at 100 North
Broadway, St. Louis, Missouri 63178-4737. The mailing address is P.O. Box 14737
at that address.
Investment Manager: KLEINWORT BENSON INVESTMENT MANAGEMENT AMERICAS INC.
(referred to as "Kleinwort Benson"), formerly Kleinwort Benson International
Investment Limited, serves as investment manager to the Fund. It is located at
200 Park Avenue, New York, New York 10166.
Administrator: BISYS FUND SERVICES LIMITED PARTNERSHIP (referred to as "BISYS"),
is responsible for coordinating the Fund's efforts and generally overseeing the
operation of the Fund's business. BISYS' principal offices are located at 3435
Stelzer Road, Columbus, Ohio 43219-3035.
Distributor: Each 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 and an affiliate of BISYS is located at 3435 Stelzer
Road, Columbus, Ohio 43219-3035.
Custodian: BOATMEN'S TRUST COMPANY (referred to as "Boatmen's") is responsible
for holding the investments purchased by each Fund. Boatmen's is located at 100
N. Broadway, St. Louis, Missouri 63178.
Transfer Agent: BISYS FUND SERVICES, INC. (referred to as the "Transfer Agent")
is the transfer and dividend disbursing agent of the Fund. It maintains the
account records of all shareholders and administers the distribution of all
income
12
<PAGE> 143
earned as a result of investing in the Fund. The Transfer Agent is located at
3435 Stelzer Road, Columbus, Ohio 43219-3035.
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 business, governmental
units, pension and profit sharing plans and other institutions and
organizations. As of June 30, 1996, Boatmen's and its affiliates managed nearly
$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 located in Arkansas, Illinois, Iowa, Kansas, Missouri,
New Mexico, Oklahoma, Tennessee and Texas, a mortgage banking company, a credit
life insurance company, a federal savings bank in Arkansas and a limited service
bank in Delaware.
On August 30, 1996, Bancshares and NationsBank Corporation ("NationsBank")
announced that they have entered into an agreement pursuant to which Bancshares
will merge into NationsBank. The proposed merger, which is currently expected to
take place on or about January 1997, is subject to a number of conditions,
including approval by the appropriate regulatory authorities and by the
shareholders of both Bancshares and NationsBank. If the proposed merger is
consummated, Boatmen's will become a wholly owned subsidiary of NationsBank.
Under its Advisory Agreement with the Funds on behalf of each of the Funds,
Boatmen's supervises the activities of Kleinwort Benson, the investment manager.
Boatmen's pays all costs incurred by it in connection with the performance of
its duties under the Advisory Agreement other than the cost (including taxes and
brokerage commissions, if any) of securities purchased for the Fund.
Boatmen's has designated the following portfolio manager as being primarily
responsible for the management of the Fund. Michael E. Kenneally, CFA is a
Senior Vice President and Director of Research. In addition to his
responsibilities in connection with the management of the international
portfolios, including the Fund, Mr. Kenneally is responsible for all fundamental
and quantitative research as well as the management of all small capitalization
and growth-style portfolios.
MORE ABOUT KLEINWORT BENSON. Kleinwort Benson is the Securities and Exchange
Commission (the "SEC") registered investment management subsidiary of the
London-based Kleinwort Benson Group plc, a holding company for a merchant
banking group whose origins date back to 1792. Kleinwort Benson has offices in
London, Hong Kong and Tokyo and may utilize the general expertise of Kleinwort
Benson Group plc and its affiliates in respect of, for example, economic
analyses and predictions and market developments and trends. Kleinwort Benson
plc is a wholly owned subsidiary of Dresdner Bank AG.
Since it commenced operations in 1980, Kleinwort Benson has managed investment
accounts, primarily for institutions in North America, comprised of equity,
fixed income and balanced portfolios. These portfolios as a general rule consist
principally of foreign securities. As of June 30, 1996, Kleinwort Benson had
approximately $ billion of assets under management.
MORE ABOUT BISYS. BISYS Fund Services Limited Partnership ("BISYS") is a
subsidiary of The BISYS Group, Inc., 150 Clove Road, Little Falls, New Jersey
07424, a publicly owned company engaged in information processing, loan
servicing and 401(k) administration and recordkeeping services to and through
banking and other financial organizations. Under its Administration Agreement
with the Fund, 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, W. Eugene
Spunbeck, George O. Martinez, William J. Tomko and Bruce Treff are also
employees and/or officers of BISYS, the Distributor or an affiliate.
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.
As compensation for the services rendered to the Funds 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 .80 of 1% of the average daily net assets of the Fund. For
the period from September 1, 1995 through August 31, 1996, Boatmen's was paid at
the above rate. For the fiscal years ended August 31, 1994, 1995 and 1996,
Boatmen's received $2,422,559, $2,828,628 and $3,873,513 in advisory fees,
respectively.
Effective June 1, 1995, pursuant to approval from Shareholders received at a
Special Meeting held on May 24, 1995, as compensation for the services rendered
by Kleinwort
13
<PAGE> 144
Benson as investment manager to the Fund, Kleinwort Benson is entitled to a fee,
paid by Boatmen's directly out of Boatmen's advisory fee, computed daily and
payable monthly at an annual rate equal to .40 of 1% up to $325,000,000 and .25
of 1% of such assets in excess of $325,000,000, on an annualized basis. Prior to
June 1, 1995, Kleinwort Benson was entitled to a fee, computed daily and payable
monthly at an annual rate equal to .80 of 1% of such assets up to $65,000,000,
.40 of 1% of such assets in excess of $65,000,000 and less than $325,000,000,
and .25 of 1% of such assets in excess of $325,000,000. For the period from
August 31, 1993 through August 31, 1994, the compensation received by Kleinwort
Benson constituted .48 of 1% of the Fund's average daily net assets. For the
fiscal years ended August 31, 1995 and 1996, the fee paid by Boatmen's to
Kleinwort Benson America was $1,535,377 and $1,658,658, respectively, which
equaled .43 of 1% and .34% or 1%, respectively, of the Fund's average daily net
assets. Under the terms of the Investment Management Agreement among the Funds,
Kleinwort Benson and Boatmen's, Kleinwort Benson, subject to the general
supervision of the Funds' Board of Trustees and Boatmen's, manages the
investment operations of the Fund and the composition of the Fund's assets,
including the purchase, retention and disposition thereof. With respect to the
Fund, all investment decisions are made by a committee consisting of personnel
of Kleinwort Benson. No one person is responsible for recommendations to that
committee.
For its services as administrator, 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. These amounts may be reduced pursuant to fee waivers by
BISYS. Any such fee waivers may be terminated by BISYS at any time. For the
fiscal years ended August 31, 1994, 1995 and 1996, the Fund paid administration
fees to BISYS in the amount of $295,477, $386,949 and $536,016, respectively.
The Funds are responsible for all expenses incurred by the Fund, other than
those expressly borne by Boatmen's, Kleinwort Benson, BISYS or the Transfer
Agent under the Advisory, Investment Management, Administration or Transfer
Agency Agreements. Such expenses include, the fees payable to Boatmen's, BISYS
and the Transfer Agent, the fees and expenses of the Fund's custodian, brokerage
fees and commissions, any portfolio losses, state and federal registration fees
for the qualifying Fund Shares under federal or state securities laws,
organization expenses, membership fees in investment-company organizations,
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 Funds 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 Fund's Shareholders and regulatory authorities, compensation and expenses of
its Trustees and extraordinary expenses incurred by the Funds. The fees payable
to Kleinwort Benson are paid by Boatmen's directly out of Boatmen's advisory
fee.
FEE WAIVERS. Expenses can be reduced by voluntary fee waivers and expense
reimbursements by Boatmen's and the Fund's other service providers. However, as
to any amounts voluntarily waived or reimbursed, the service providers retain
the ability to be reimbursed by the 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 the 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.
The Fund intends to elect to be treated as a regulated investment company under
Subchapter M of the Internal Revenue Code, as amended, (the "Code"). As a
regulated investment company, the Fund must satisfy certain requirements
relating to the sources of its income, diversification of its assets and
distribution of its income to shareholders. In addition, as a regulated
investment company, the Fund generally will not incur a federal income or excise
tax on any investment company taxable income and net capital gains that are
distributed to its Shareholders in accordance with certain timing requirements
of the Code.
Dividends of investment company taxable income, which generally includes the
excess of net short-term capital gains over net long-term capital losses,
dividends and interest (including original issue discount and market discount),
less expenses, will be taxable to Shareholders as ordinary
14
<PAGE> 145
income. If a portion of the income of the Fund 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. Distributions of the excess of
net long-term capital gains over net short-term capital losses, if any, which
are designated as "capital gains dividends" by the Fund will be taxable as
long-term capital gains regardless of how long the Shareholders have held their
Shares. These tax consequences will apply regardless of whether distributions
are received in cash or reinvested in Shares. Distributions declared in October,
November or December with a record date in such month and paid in January of the
following year are taxable to Shareholders as if received on December 31 of the
year declared. Shareholders will be informed about the amount and character of
distributions received from the Fund for federal income tax purposes, including
any distributions that may constitute a return of capital.
Investments in zero coupon securities and other original issue discount
obligations will result in income to the Fund each year equal to a portion of
the excess of the face value of the securities over their issue price, even
though the Fund receives no cash interest payments from the securities.
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 the 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.
Individuals and certain other classes of Shareholders may be subject to 31%
withholding of federal income tax on taxable distributions if they fail to
furnish the Fund with their correct taxpayer identification number and certain
certifications regarding their tax status or if they are otherwise subject to
backup withholding. Backup withholding is not an additional tax. Any amounts
withheld may be credited against a Shareholder's U.S. federal income tax
liability.
If the Fund invests in foreign securities it may be subject to foreign
withholding taxes on income earned on such securities and may be unable to pass
through to Shareholders the ability to claim foreign tax credits and deductions
with respect to such taxes. Certain gains and losses which are attributable to
fluctuations in the value of foreign currency are treated as ordinary income and
losses. These gains and losses may increase or decrease the amount of the Fund's
investment company taxable income to be distributed to Shareholders as ordinary
income.
In addition to federal taxes, a Shareholder may be subject to state and local
taxes on payments received from the Fund. A state tax exemption may be available
in some states to the extent distributions of the Fund are derived from interest
on certain direct U.S. Government obligations or on obligations of the
particular state.
Shareholders should consult their own tax advisers concerning these matters.
Further information relating to tax consequences is contained in the Statement
of Additional Information.
MEASURING PERFORMANCE
Performance information provides you with a method of measuring and monitoring
your investments. The 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 the Fund may be calculated on an AVERAGE ANNUAL TOTAL RETURN
basis or an AGGREGATE TOTAL RETURN basis. Average annual 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.
The Fund may provide quotes of total returns and yields WITHOUT REFLECTING A
SALES LOAD, which quotations will, of course, be higher than quotations that do
reflect such a sales charge.
Performance comparisons:
The Fund may compare its total returns to that 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 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.
Total returns for the Fund 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.
INVESTMENT RESULTS OF THE FUND ARE BASED ON HISTORICAL PERFORMANCE AND
PERFORMANCE QUOTATIONS WILL FLUCTUATE. 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
15
<PAGE> 146
QUALITY OF INVESTMENTS HELD IN A PORTFOLIO, PORTFOLIO MATURITY, OPERATING
EXPENSES AND MARKET CONDITIONS. FEES THAT BOATMEN'S INVESTMENT SERVICES OR
ANOTHER INSTITUTION MAY CHARGE DIRECTLY TO ITS CUSTOMER ACCOUNTS IN CONNECTION
WITH AN INVESTMENT IN THE FUNDS WILL NOT BE INCLUDED IN THE FUND'S CALCULATIONS
OF TOTAL RETURN. INQUIRIES REGARDING THE FUND 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 FUND 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 FUND OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY THE FUND OR BY ITS DISTRIBUTOR IN ANY JURISDICTION IN
WHICH SUCH AN OFFERING MAY NOT LAWFULLY BE MADE.
16
<PAGE> 147
PILIEP1295P
<PAGE> 148
- -----FINANCIAL
DIRECTION December 31, 1996
LOGO
The
Pi lot
Funds
PROSPECTUS ENCLOSED
PILOT INTERNATIONAL
EQUITY FUND
Class A Shares and
Class B Shares
<PAGE> 149
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
EXPENSE SUMMARY.................................................................................... 2
FINANCIAL HIGHLIGHTS............................................................................... 3
INVESTMENT OBJECTIVE AND RISK FACTORS.............................................................. 5
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES................................................ 5
U.S. Government Securities.................................................................... 5
U.S. and Foreign Bank Obligations............................................................. 5
Forward Commitments and When-Issued Securities................................................ 5
Common and Preferred Stocks................................................................... 6
Convertible Securities........................................................................ 6
Small Capitalization Companies................................................................ 6
Foreign Securities............................................................................ 6
Investing in Emerging Markets................................................................. 6
American/European Depository Receipts......................................................... 7
Forward Foreign Currency Exchange Contracts................................................... 7
Currency Swaps................................................................................ 7
Repurchase Agreements......................................................................... 7
Lending of Portfolio Securities............................................................... 8
Other Investment Companies.................................................................... 8
Options Transactions.......................................................................... 8
Futures Contracts and Options on Futures Contracts............................................ 8
Other Information............................................................................. 9
INVESTMENT LIMITATIONS............................................................................. 9
INVESTING IN THE PILOT FUNDS....................................................................... 10
HOW TO BUY SHARES.................................................................................. 13
HOW TO SELL SHARES................................................................................. 16
TRANSACTION RULES.................................................................................. 17
SHAREHOLDER SERVICES............................................................................... 20
Tax Sheltered Retirement Plans................................................................ 20
Exchange Privileges Among The Pilot Funds..................................................... 20
Automatic Investment Plan..................................................................... 21
Automatic Withdrawal Plan..................................................................... 21
Front-End Sales Charge Reductions............................................................. 21
Right of Accumulation......................................................................... 21
Example....................................................................................... 22
Statement of Intention........................................................................ 22
Quantity Discounts............................................................................ 22
Cross-Reinvestment Privilege.................................................................. 22
Reinstatement Privilege....................................................................... 22
DIVIDENDS AND DISTRIBUTIONS........................................................................ 23
Where do your dividends and distributions come from?.......................................... 23
What are your dividend and distribution options?.............................................. 23
When are dividends and distributions declared and paid?....................................... 23
DISTRIBUTION ARRANGEMENTS.......................................................................... 23
THE PILOT FAMILY OF FUNDS.......................................................................... 24
THE BUSINESS OF THE FUND........................................................................... 25
FUND MANAGEMENT.................................................................................... 25
TAX IMPLICATIONS................................................................................... 27
MEASURING PERFORMANCE.............................................................................. 28
</TABLE>
<PAGE> 150
THE PILOT FUNDS
LOGO
PROSPECTUS FOR CLASS A SHARES AND CLASS B SHARES
OF THE
PILOT INTERNATIONAL EQUITY FUND
December 31, 1996
- --------------------------------------------------------------------------------
The Pilot Funds is an open-end, management investment company (a "mutual fund")
consisting of multiple portfolios (the "Funds"). This prospectus relates solely
to the offering of Class A and Class B Shares of the Pilot International Equity
Fund, formerly known as the Pilot Kleinwort Benson International Equity Fund
(the "Fund"). Boatmen's Trust Company ("Boatmen's") serves as the Fund's
investment adviser. Kleinwort Benson Investment Management Americas Inc.
("Kleinwort Benson") serves as the Fund's investment manager. Pilot Funds
Distributors, Inc. serves as the Fund's distributor, and its affiliate, BISYS
Fund Services Limited Partnership, serves as the Fund's administrator.
The investment objective of the Fund is to provide long-term capital growth by
investing primarily in equity securities of companies domiciled in countries
outside the United States and listed on major stock exchanges primarily in
Europe and the Pacific Basin. The Fund may invest up to 35% of its total assets
in issuers domiciled in developing countries.
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 FUND INVOLVES INVESTMENT
RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. IN ADDITION, THE AMOUNT OF
DIVIDENDS PAID BY THE FUND WILL VARY. BOATMEN'S TRUST COMPANY SERVES AS
INVESTMENT ADVISER TO THE FUND, IS PAID A FEE FOR ITS SERVICES, AND IS NOT
AFFILIATED WITH PILOT FUNDS DISTRIBUTORS INC., THE FUND'S DISTRIBUTOR.
This Prospectus describes concisely the information about the Fund that you
should know before investing. Please read it carefully and keep it for future
reference.
More information about the Fund 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, by calling your service organization or by writing Pilot Funds
Distributors, Inc., 3435 Stelzer Road, Columbus, Ohio 43219-3035. The Statement
of Additional Information, as it may be revised from time to time, is dated
December 31, 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.
- --------------------------------------------------------------------------------
1
<PAGE> 151
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 the 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 Fund's shareholder transaction expenses and
the operating expenses which the Fund expects to incur during the current fiscal
year on its Class A and Class B Shares. Examples based on this information are
also provided.
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Front End Sales Charge Imposed on Purchases (as a percentage of offering
price)..................................................................... 4.50%(1) None
Sales Charge Imposed on Reinvested Dividends.................................. None None
Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, whichever is lower)................................... None 4.50%(2)
Exchange Fee.................................................................. None None
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets):
Management Fee(3)............................................................. 0.80% 0.80%
Rule 12b-1/Distribution Payments.............................................. 0.25% 1.00%
Other Expenses................................................................ 0.25% 0.28%(4)
------- -------
Total Fund Operating Expenses(3).............................................. 1.33% 2.08%
======= ======
</TABLE>
- ---------------
(1) Reduced sales charges may be available. See "Shareholder
Services -- Front-End Sales Charge Reductions."
(2) This amount applies to redemptions during the first year. The charge
decreases .50% annually to 2.50% for redemptions made during the fifth year
and then decreases .75% to 1.75% for redemptions made during the sixth year.
No deferred sales charge is charged for redemptions made after the sixth
year. See "How to Buy Shares -- Explanation of Sales Price."
(3) 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 the Fund. You
should note that any fees that are charged by the Fund's Adviser, its
affiliates or any other institutions directly to their customer accounts for
services related to an investment in the Fund are in addition to and not
reflected in the fees and expenses described above.
(4) Other Expenses for the Class B Shares are based on estimated amounts for the
current fiscal year.
Because of the Distribution Payments paid by the Fund as shown in the above
table, long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc.
Example: Assume that the annual return on the Fund is 5%, and that its 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:
<TABLE>
<CAPTION>
1 3 5 10
YEAR AFTER YEARS AFTER YEARS AFTER YEARS AFTER
PURCHASE PURCHASE PURCHASE PURCHASE
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Class A Shares(1)..................................... $ 58 $ 85 $ 115 $ 198
Class B Shares
Assuming complete redemption at end of period(2).... $ 66 $ 100 $ 137 $ 241
Assuming no redemption.............................. $ 21 $ 65 $ 112 $ 241
</TABLE>
- ---------------
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
(2) Assumes deduction of maximum applicable contingent deferred sales charge.
The Example shown above should not be considered a representation of future
investment returns or operating expenses. The Fund is new and actual investment
returns and operating expenses may be more or less than those shown.
2
<PAGE> 152
PILOT INTERNATIONAL EQUITY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following data with respect to a Share of the Pilot International Equity
Fund, formerly known as the Pilot Kleinwort Benson International Equity Fund,
outstanding during the period ended August 31, 1996 has been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report
incorporated by reference and attached to the Statement of Additional
Information, and should be read in conjunction with the financial statements and
related notes incorporated by reference and attached to the Statement of
Additional Information. This annual report also contains performance information
and is available upon request and without charge by writing to the address on
the front of this Prospectus. Prior to a tax-free reorganization effective July
12, 1993, the Pilot Kleinwort Benson International Equity Fund was a separate
portfolio of Kleinwort Benson Investment Strategies and known as the Kleinwort
Benson International Equity Fund. The following financial highlights also
present historical information of the Kleinwort Benson International Equity Fund
prior to July 12, 1993. The Kleinwort Benson International Equity Fund was
advised solely by Kleinwort Benson Investment Management Americas Inc., formerly
Kleinwort Benson International Investment Limited for those periods.
The following data with respect to a Share of the Kleinwort Benson International
Equity Fund of Kleinwort Benson Investment Strategies outstanding for each of
the six years in the period ended December 31, 1992 have been audited by Ernst &
Young LLP, independent auditors, as indicated in their report incorporated by
reference and attached to the Statement of Additional Information, and should be
read in conjunction with the financial statements and related notes incorporated
by reference and attached to the Statement of Additional Information.
The Pilot Shares were first issued by the Pilot Kleinwort Benson International
Equity Fund during July, 1993. Accordingly, there are no financial highlights
with respect to the Fund for such shares for periods prior to such dates. In
this regard, Class B Shares were first issued by the Pilot International Equity
Fund during June, 1996. Therefore, financial highlights are not presented for
such shares. The financial highlights presented below for periods prior to July
12, 1993 represent historical information for shares of the Kleinwort Benson
International Equity Fund which became Pilot Administration Shares pursuant to a
tax-free reorganization effected on July 12, 1993. Effective August 21, 1995 the
Administration Shares of the Fund were redesignated as the Class A Shares of the
Fund.
- --------------------------------------------------------------------------------
3
<PAGE> 153
PILOT INTERNATIONAL EQUITY FUND
------------------------
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF
THE PERIODS INDICATED
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT OPERATIONS
------------------------------------------------------------------------
NET REALIZED NET REALIZED
AND AND UNREALIZED TOTAL
UNREALIZED GAIN (LOSS) ON INCOME
NET ASSET NET GAIN (LOSS) FOREIGN (LOSS)
VALUE AT INVESTMENT ON CURRENCY FROM
BEGINNING INCOME INVESTMENT RELATED INVESTMENT
OF PERIOD (LOSS) TRANSACTIONS TRANSACTIONS(C) OPERATIONS
--------- ---------- ------------ --------------- ----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED AUGUST 31,
- -----------------------------
1996--Pilot Shares.................................... $ 16.24 $ 0.18 (i) $ 1.61 (i) $ (0.13)(i) $ 1.66
1996--Class A Shares.................................. 16.14 0.04 (i) 1.69 (i) (0.12)(i) 1.61
1996--Class B Shares(k)............................... 17.54 -- (i) (0.65)(i) 0.15 (i) (0.50)
1995--Pilot Shares.................................... 16.34 0.13 (i) (0.22)(i) 0.39 (i) 0.30
1995--Class A Shares(j)............................... 16.29 0.08 (i) (0.22)(i) 0.39 (i) 0.25
1994--Pilot Shares.................................... 14.14 0.11 (i) 1.65 (i) 0.59 (i) 2.35
1994--Administration Shares........................... 14.13 0.07 (i) 1.65 (i) 0.59 (i) 2.31
FOR THE EIGHT MONTHS ENDED AUGUST 31,
- -------------------------------------
1993--Pilot Shares(d)................................. 13.15 (0.01)(i) 1.10 (i) (0.10)(i) 0.99
1993--Administration Shares........................... 11.85 0.02 (i) 2.51 (i) (0.25)(i) 2.28
FOR THE YEARS ENDED DECEMBER 31,(a)(b)
- --------------------------------------
1992--Administration Shares........................... 12.29 0.04 (i) (0.46)(i) -- (0.42)
1991--Administration Shares........................... 12.65 0.06 1.36 -- 1.42
1990--Administration Shares........................... 15.58 0.12 (2.40) -- (2.28)
1989--Administration Shares........................... 14.66 0.07 3.22 -- 3.29
1988--Administration Shares........................... 13.21 (0.01) 2.73 -- 2.72
1987--Administration Shares........................... 22.92 -- 2.11 -- 2.11
<CAPTION>
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
--------------------------
NET REALIZED
GAIN ON
INVESTMENTS
AND
FOREIGN
NET CURRENCY
INVESTMENT RELATED
INCOME TRANSACTIONS
---------- ------------
<S> <C> <C>
FOR THE YEAR ENDED AUGUST 31,
- -----------------------------
1996--Pilot Shares.................................... $(0.46) $ (0.39)
1996--Class A Shares.................................. (0.46) (0.39)
1996--Class B Shares(k)............................... -- --
1995--Pilot Shares.................................... (0.11) (0.29)
1995--Class A Shares(j)............................... (0.11) (0.29)
1994--Pilot Shares.................................... -- (0.15)
1994--Administration Shares........................... -- (0.15)
FOR THE EIGHT MONTHS ENDED AUGUST 31,
- -------------------------------------
1993--Pilot Shares(d)................................. -- --
1993--Administration Shares........................... -- --
FOR THE YEARS ENDED DECEMBER 31,(a)(b)
- --------------------------------------
1992--Administration Shares........................... (0.02) --
1991--Administration Shares........................... (0.08) (1.70)
1990--Administration Shares........................... (0.14) (0.51)
1989--Administration Shares........................... (0.22) (2.15)
1988--Administration Shares........................... -- (1.27)
1987--Administration Shares........................... -- (11.82)
<CAPTION>
RATIO OF
NET RATIO OF NET
ASSET EXPENSES INVESTMENT
VALUE TO INCOME NET ASSETS
AT PORTFOLIO AVERAGE (LOSS) AT END OF
END OF TOTAL TURNOVER NET TO AVERAGE PERIOD
PERIOD RETURN(e) RATE ASSETS NET ASSETS (IN 000'S)
------- --------- ------ ---------- ---------- ----------
FOR THE YEAR ENDED AUGUST 31,
- -----------------------------
1996--Pilot Shares....................................$17.05 10.64% 22.31% 1.08% 0.69% $579,019
1996--Class A Shares.................................. 16.90 10.40 22.31 1.32 0.48 26,730
1996--Class B Shares(k)............................... 17.04 (2.85) 22.31 2.06(g) (0.32) 184
1995--Pilot Shares.................................... 16.24 2.08 35.91 1.18 0.82 363,212
1995--Class A Shares(j)............................... 16.14 1.77 35.91 1.42 0.50 27,625
1994--Pilot Shares.................................... 16.34 16.75 35.40 1.12 0.75 307,561
1994--Administration Shares........................... 16.29 16.48 35.40 1.37 0.48 44,990
FOR THE EIGHT MONTHS ENDED AUGUST 31,
- -------------------------------------
1993--Pilot Shares(d)................................. 14.14 7.53(f) 26.65(f)(h) 1.31(g) (0.56)(g) 195,548
1993--Administration Shares........................... 14.13 19.24(f) 26.65(f)(h) 2.17(g) 0.25 (g) 55,816
FOR THE YEARS ENDED DECEMBER 31,(a)(b)
- --------------------------------------
1992--Administration Shares........................... 11.85 (3.42) 58.55 1.78 0.35 56,358
1991--Administration Shares........................... 12.29 11.81 51.88 1.79 0.45 65,939
1990--Administration Shares........................... 12.65 (14.77) 52.00 1.82 0.76 72,007
1989--Administration Shares........................... 15.58 22.99 61.54 2.00 0.39 80,224
1988--Administration Shares........................... 14.66 21.03 54.84 2.31 (0.07) 59,864
1987--Administration Shares........................... 13.21 9.28 58.98 1.72 0.01 53,800
- ------------
(a) Prior to a tax-free organization into Pilot Administration shares effective July 12, 1993, the Pilot Kleinwort Benson
International Equity Portfolio was a separate portfolio of Kleinwort Benson Investment Strategies known as Kleinwort Benson
International Equity Fund. The predecessor portfolio was advised by Kleinwort Benson International Investment Limited and had
a December 31 fiscal year-end.
(b) Prior to July 12, 1993, the Pilot Administration shares were not subject to an Administration plan.
(c) For years preceding the fiscal year ended August 31, 1993, net realized and unrealized gain (losses) from foreign currency
related transactions were included in net realized and unrealized gain (losses) from investments. Effective January 1, 1993,
realized and unrealized gain (losses) from Foreign currency related transactions are disclosed separately from net realized
and unrealized gain (losses) from investments.
(d) Pilot shares were initially issued on July 26, 1993.
(e) Assumes investment at net asset value at the beginning of the period, reinvestment of all dividends and distributions, a
complete redemption of the investment at the net asset value at the end of the period and no sales charges. Total return would
be reduced if sales charges were taken for the Pilot Administration shares.
(f) Not annualized
(g) Annualized
(h) Calculated on a portfolio-wide level and excludes the transfer of assets effective on August 6, 1993.
(i) Calculated based on the average shares outstanding methodology.
(j) Effective August 21, 1995 the Administration Class Shares were redesignated as the Class A Shares.
(k) Class B Shares were initially issued during July, 1996.
</TABLE>
4
<PAGE> 154
THE PILOT INTERNATIONAL EQUITY FUND USES A VARIETY OF DIFFERENT INVESTMENTS AND
INVESTMENT TECHNIQUES IN SEEKING TO ACHIEVE THE FUND'S INVESTMENT OBJECTIVE. THE
FUND DOES NOT USE ALL OF THE INVESTMENTS AND INVESTMENT TECHNIQUES DESCRIBED IN
THE FOLLOWING SECTIONS. THE FUND IS NOT DESIGNED TO BE A COMPLETE INVESTMENT
PROGRAM BUT CAN BE APPROPRIATE AS PART OF A COMPLETE INVESTMENT STRATEGY. YOU
SHOULD CONSIDER WHETHER THE FUND MEETS YOUR INVESTMENT GOAL. ALTHOUGH THE FUND
ATTEMPTS 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 THE
FUND. HOWEVER, SHAREHOLDERS WILL BE GIVEN AT LEAST 30 DAYS' PRIOR WRITTEN NOTICE
IN THE EVENT OF A CHANGE IN THE FUND'S OBJECTIVE. UNLESS OTHERWISE STATED, EACH
INVESTMENT POLICY DESCRIBED BELOW MAY BE CHANGED AT ANY TIME BY THE PILOT FUNDS'
BOARD OF TRUSTEES WITHOUT SHAREHOLDER APPROVAL.
INVESTMENT OBJECTIVE AND RISK FACTORS
The investment objective of the Fund is to provide long-term capital growth by
investing primarily in equity securities of companies domiciled in countries
outside the United States and listed on major stock exchanges primarily in
Europe and the Pacific Basin. Under normal circumstances, the Fund will invest
at least 65% of its total assets in foreign equity securities, including
securities convertible into equity securities and in securities which are listed
on major stock exchanges. The Fund may purchase the stock of small and large
capitalization companies.
The Fund may invest up to 35% of its total assets in securities of issuers
domiciled in developing countries. These countries are generally located in
Eastern Europe, the Asia-Pacific region, Latin and South America, Africa and,
subject to approval by the Board of Trustees, Russia and the Middle East. Debt
securities, if any, purchased by the Fund will be rated in the top two
categories by a nationally recognized statistical rating organization ("NRSRO")
or, if unrated, determined by Kleinwort Benson to be of comparable quality. For
temporary defensive purposes, the Fund may invest up to 100% of its assets in
debt and equity securities of U.S. issuers. Debt securities in which the Fund
may invest include short-term and intermediate-term obligations of corporations,
foreign governments and international organizations (such as the International
Bank for Reconstruction and Development (the "World Bank")), including money
market instruments.
Investments and investment techniques in which the Fund may invest include
common stocks (including securities convertible into common stocks) of foreign
issuers and rights to purchase common stock, options and futures contracts on
securities, securities indexes and foreign currencies, securities lending and
repurchase agreements. These and other securities in which the Fund may invest
are further described below.
DESCRIPTION OF SECURITIES
AND INVESTMENT TECHNIQUES
- --U.S. Government Securities. The Fund may purchase obligations of the U.S.
Government. These obligations are issued or guaranteed as to principal or
interest by the U.S. Government, its agencies, authorities or instrumentalities
("U.S. Government Securities"). Some U.S. Government securities, such as
Treasury bills, notes and bonds, which differ only in their interest rates,
maturities and times of issuance, are supported by the full faith and credit of
the United States. Others, such as obligations issued or guaranteed by U.S.
Government agencies, authorities or instrumentalities, are supported by (a) the
full faith and credit of the U.S. Government (such as securities of the Small
Business Administration), (b) the right of the issuer to borrow from the
Treasury (such as securities of the Federal Home Loan Banks), (c) the
discretionary authority of the U.S. Government to purchase the agency's
obligations (such as securities of the Federal National Mortgage Association),
or (d) only the credit of the issuer. No assurance can be given that the U.S.
Government will continue to provide financial support to U.S. Government
agencies, authorities or instrumentalities.
- --U.S. and Foreign Bank Obligations. The Fund may invest in domestic bank
obligations of banks that have total assets in excess of $1 billion and are
subject to U.S. Government regulation, and in certificates of deposit issued by
Federal Deposit Insurance Corporation (FDIC) members that have total assets less
than $1 billion, provided that the principal amounts of such certificates are
fully covered by FDIC insurance. The Fund may invest in U.S. dollar-denominated
foreign bank obligations of foreign banks that have total assets in excess of
$10 billion, are among the 75 largest foreign banks in total assets, have
branches or agencies in the U.S. and meet other criteria established by the
Fund's Trustees. The Fund may also invest in other bank obligations.
- --Forward Commitments and When-Issued Securities. The Fund may purchase
when-issued securities and make contracts to purchase or sell securities for a
fixed price at a future date beyond customary settlement time. The Fund is
required to hold and maintain in a segregated account with the Funds' custodian
or subcustodian until the settlement date, cash, U.S. Government securities or
other high grade liquid debt obligations in an amount sufficient
5
<PAGE> 155
to meet the purchase price. Alternatively, the Fund may enter into offsetting
contracts for the forward sale of other securities that it owns. Securities
purchased or sold on a when-issued or forward commitment basis involve a risk of
loss if the value of the security to be purchased decreases prior to the
settlement date or if the value of the security to be sold increases prior to
the settlement date. Although the Fund would generally purchase securities on a
when-issued or forward commitment basis with the intention of acquiring
securities for its portfolio, the Fund may dispose of a when-issued security or
forward commitment prior to settlement if Boatmen's, or Kleinwort Benson, deems
it appropriate to do so and such disposition may give rise to a capital gain and
loss.
- --Common and Preferred Stocks. Common stocks are generally more volatile than
other securities. Preferred stocks share some of the characteristics of both
debt and equity and are generally preferred over common stocks with respect to
dividends and in liquidation.
- --Convertible Securities. The Fund may invest in convertible securities, which
may offer higher income than the common stocks into which they may be converted.
All convertible securities purchased by the Fund will be rated in the top two
categories by an NRSRO or, if unrated, determined by Kleinwort Benson to be of
comparable quality. Convertible securities (which may be current or zero coupon
securities) are bonds, notes, debentures, preferred stocks or other securities
which may be converted or exchanged at a stated or determinable exchange ratio
into shares of common stock. Prior to their conversion, convertible securities
have general characteristics similar to non-convertible securities. While
convertible securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality, they may reflect changes in the
value of the underlying common stock. Convertible securities generally entail
less credit risk than the issuer's common stock because they rank senior to
common stock.
- --Small Capitalization Companies. The Fund may invest in smaller, lesser-known
companies which Kleinwort Benson 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. The Fund may invest in foreign securities which are
denominated in foreign currencies. Investment in foreign securities may present
a greater degree of risk than investment in domestic securities because of less
publicly-available financial and other information, less securities regulation,
different accounting standards, lower trading volume and market volatility,
difficulties in enforcing obligations, potential imposition of foreign
withholding and other taxes (including withholding on dividends or interest paid
to the Fund), war, expropriation or other adverse governmental or economic
actions. Furthermore, the settlement period of securities transactions may be
longer in foreign markets than in domestic markets, delivery of securities
without payment therefor may be required and transactions may involve
non-negotiable brokerage commissions. Purchases of foreign securities by the
Fund will usually be made in foreign currencies and, as a result, the Fund may
incur currency conversion costs and may be affected favorably or unfavorably by
changes in the value of foreign currencies against the U.S. dollar. In addition,
the Fund's performance may be favorably or unfavorably affected by changes in
exchange rates or exchange rate controls, which may include suspension of the
ability to transfer currency from a given country. These risks generally are of
greater concern in developing countries.
The Fund may acquire U.S. dollar denominated obligations of the World Bank.
Obligations of the World Bank are supported by subscribed but unpaid commitments
of its member countries; there is no assurance that these commitments will be
fulfilled in the future.
- --Investing in Emerging Markets. The Fund may also invest up to 35% of its total
assets in one or more countries with emerging economies. These countries are
located in the Asia-Pacific region, Eastern Europe, Latin and South America,
Africa and, subject to approval by the Board of Trustees, Russia and the Middle
East. Political and economic structures in many of such countries may be
undergoing significant evolution and rapid development, and such countries may
lack the social, political and economic stability characteristic of more
developed countries. Certain of such countries may have in the past failed to
recognize private property rights and have at times nationalized or expropriated
the assets of private companies. As a result, the risks described above,
including the risks of nationalization or expropriation of assets, may be
heightened. In addition, unanticipated political or social developments may
affect the values of the Fund's investments in those countries and the
availability to the Fund of additional investments in those
6
<PAGE> 156
countries. The small size and inexperience of the securities markets in certain
of such countries and the limited volume of trading in securities in those
countries may make the Fund's investment in such countries illiquid and more
volatile than investments in most other non-major U.S. markets, and the Fund may
be required to establish special custodial or other arrangements before making
certain investments in those countries. There may be little financial or
accounting information available with respect to issuers located in certain of
such countries, and it may be difficult as a result to assess the value of
prospects of an investment in such issuers.
- --American/European Depository Receipts. The Fund may invest indirectly in the
securities of foreign issuers through sponsored or unsponsored ADRs and EDRs or
other securities representing securities of companies based in countries other
than the United States. Transactions in these securities may not necessarily be
settled in the same currency as the underlying securities which they represent.
Ownership of unsponsored ADRs and EDRs may not entitle the Fund to financial or
other reports from the issuer, to which it would be entitled as the owner of
sponsored ADRs or EDRs. Generally, ADRs, in registered form, are designed for
use in the U.S. securities markets, and EDRs, in bearer form, are designed for
use in European securities markets. ADRs and EDRs also involve certain risks of
other investments in foreign securities.
- --Forward Foreign Currency Exchange Contracts. The Fund may enter into forward
foreign currency exchange contracts ("forward contracts") for hedging and to
seek to increase total return and to purchase or sell currency in connection
with purchases and sales of foreign securities. A forward contract is
individually negotiated and privately traded by currency traders and their
customers. 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. A forward contract may be for a
single price or for a range of prices. The Fund may be required to segregate
assets, consisting of cash, U.S. Government securities or other high grade
liquid debt obligations to cover forward contracts that require it to purchase
foreign currency.
The purpose of entering into these contracts is to minimize the risk to the Fund
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. When Kleinwort Benson 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
("cross-hedging"). The amount in question could be less than or equal to the
value of the Fund's securities denominated in the less attractive currency. The
use of currency transactions can result in the 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 the Fund than that performance it would have had had it not
engaged in forward contracts.
- --Currency Swaps. The Fund may enter into currency swaps for hedging purposes
and to seek to increase total return. Currency swaps involve the exchange of
rights to make or receive payments in specified currencies. Since currency swaps
are individually negotiated, the Fund expects to achieve an acceptable degree of
correlation between its portfolio investments and its currency swap positions.
Currency swaps usually involve the delivery of the entire principal value of one
designated currency in exchange for the other designated currency. Therefore,
the entire principal value of a currency swap is subject to the risk that the
other party to the swap will default on its contractual delivery obligations.
The use of currency swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If Kleinwort Benson is incorrect in its
forecasts of market values and currency exchange rates, the investment
performance of the Fund would be less favorable than it would be if this
investment technique were not used.
- --Repurchase Agreements. The Fund may enter into repurchase agreements with
banks and selected broker-dealers. A repurchase agreement is an agreement under
which the Fund purchases securities and the seller agrees to repurchase the
securities within a particular time at a specified price. The repurchase price
will exceed the original purchase price, the difference being income to the
Fund, and will be unrelated to the interest rate on the purchased securities.
The Fund's custodian or subcustodian will maintain custody of the purchased
securities for the duration of the agreement. The value of the purchased
securities, including accrued interest, will at all times exceed the value of
the repurchase agreement. In the event of bankruptcy of the seller or failure of
the seller to repurchase the securities as agreed, the Fund could suffer losses,
including loss of interest on or principal of the security and costs associated
with delay and enforcement of the repurchase agreement.
7
<PAGE> 157
- --Lending of Portfolio Securities. The Fund may seek to increase its total
return by lending portfolio securities. Under present regulatory policies, such
loans may be made to institutions, such as broker-dealers, and are required to
be secured continuously by collateral in cash, U.S. Government securities or
other high grade liquid debt obligations maintained on a current basis at an
amount at least equal to the market value of the securities loaned. As with
other extensions of credit there are risks of delay in recovering, or even loss
of rights in, the collateral should the borrower of the securities fail
financially. However, the loans will be made only to firms deemed by Boatmen's
or Kleinwort Benson to be of good standing, and when, in the judgment of
Boatmen's or Kleinwort Benson, the consideration which may be earned currently
from securities loans of this type justifies the attendant risk. If securities
loans are made, it is intended that the value of the securities loaned would not
exceed 30% of the value of the total assets of the Fund.
- --Other Investment Companies. The Fund may invest in the securities of other
mutual funds that invest in the particular instruments in which the Fund itself
may invest subject to requirements of applicable securities laws. The Trust, on
behalf of each of the Funds, has obtained relief from the SEC to permit each
Fund to invest any uninvested cash reserves in an amount not to exceed 25% of
its total assets in affiliated money market funds. 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. Those expenses are in
addition to the advisory and other expenses a Fund pays in connection with its
own operations. The Advisor 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 Advisor or any of its affiliates.
- --Options Transactions. The Fund may purchase and sell (write) call and put
options on securities. Such options are agreements by the Fund in exchange for a
premium to sell or purchase securities at a specified price if the option is
exercised on or before a set date. Put options on securities will be written
only when the underlying securities are ones which the Fund could otherwise
purchase. Risks associated with writing covered options include the possible
inability to effect closing transactions at favorable prices and an appreciation
limit on the securities set aside for settlement. Call options will be sold
(written) only when the underlying securities are ones which the Fund holds.
The Fund may purchase and sell (write) call and put options on securities to
hedge against the risk of unfavorable price movements adversely affecting the
value of the securities the Fund holds or intends to buy.
The Fund may also purchase and sell (write) call and put options on securities
indexes to hedge against the risk of unfavorable price movements in securities.
Options on securities indexes are similar to options on securities except that
the holder of an option on an index has the right, in return for the premium
paid, to buy from (in the case of a call) or sell (in the case of a put) the
writer of the option the cash value of the index (rather than the security
underlying the option) at a specified exercise price at any time during the term
of the option.
The Fund may also purchase and sell options on currencies to seek to increase
total return and to protect against declines in the dollar value of foreign
portfolio securities and against increases in the U.S. dollar cost of foreign
securities to be acquired. As with other kinds of option transactions, however,
the writing of an option on foreign currency will constitute only a partial
hedge, up to the amount of the premium received. The Fund could be required to
purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on foreign currency may constitute
an effective hedge against exchange rate fluctuations; however, in the event of
exchange rate movements adverse to the Fund's position, the Fund may forfeit the
entire amount of the premium plus related transaction costs. Options on foreign
currencies to be written or purchased by the Fund will be traded on U.S. and
foreign exchanges or over-the-counter.
The Fund is required to segregate liquid assets in an amount equal to the value
of its obligations unless offsetting positions are maintained.
- --Futures Contracts and Options on Futures Contracts. For bona fide hedging or
other permissible risk management purposes, such as protecting the price or
interest rate of a security it holds or intends to buy the Fund may enter into
futures contracts on securities and securities indexes and may purchase and sell
(write) call and put options on these futures contracts. The Fund may also enter
into futures contracts on currencies and may enter into futures contracts and
related options for purposes of seeking to increase total return, consistent
with the regulations of the Commodities Futures Trading Commission.
Hedging and other risk-management transactions are undertaken to reduce or
eliminate any of several kinds of price fluctuation risk. For example, put
options on securities futures might be purchased to protect against declines in
the market values of debt securities occasioned by higher interest rates and
securities-index futures might be sold to protect against a general decline in
the value of
8
<PAGE> 158
securities of the type that comprise the index. Currency futures might be sold
to protect against declines in the value of currencies in which portfolio
securities are denominated. If these hedging transactions are successful, the
futures or options positions taken by the Fund will rise in value by an amount
which approximately offsets the decline in the value of the portion of a
portfolio that is being hedged. Such decline in value might be caused by a
decline in the market value of portfolio securities.
The Fund may lose the expected benefit of futures transactions if securities
prices move in an unanticipated manner. Such unanticipated changes may also
result in poorer overall performance for the Fund than the performance it would
have had had it not entered into any futures transactions. In addition, changes
in the value of the Fund's futures and options positions may not prove to be
perfectly or even highly correlated with changes in the value of its portfolio
securities. This could limit the Fund's ability to hedge effectively against
interest rate or market risk or both and give rise to additional risks. There is
no assurance of market liquidity for purposes of closing out positions in
futures contracts and options on futures contracts; if such positions cannot be
closed, the Fund may incur losses in excess of its initial margin deposits.
The Fund will incur brokerage costs and will be required to post and maintain
"margin" as a good-faith deposit against performance of its obligations under
futures contracts and options thereon. In addition, the Fund is required to
segregate assets, consisting of cash, U.S. Government securities or other high
grade liquid debt obligations in an amount equal to the value of the instruments
underlying futures contracts and options thereon.
- --Other Information. The Funds have adopted certain procedures under the 1940
Act which enable the Fund to purchase certain instruments during the existence
of an underwriting or selling syndicate of which The Boatmen's National Bank of
St. Louis or Kleinwort Benson, is a member relating to the instruments. These
procedures establish, among other things, certain limitations on the amount of
securities which may be purchased in any single offering and on the amount of
the Fund's assets which may be invested in any single offering. Accordingly, in
view of such entities' active role in the underwriting of securities, the Fund's
ability to purchase securities in the primary market may from time to time be
limited.
The Fund changes its portfolio securities for investment consideration and not
for trading purposes.
INVESTMENT LIMITATIONS
Certain of the investment policies of the Fund may not be changed without a vote
of 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 the
fundamental limitations are summarized below, and all of the Fund's fundamental
limitations are set out in greater detail in the Statement of Additional
Information, which is available upon request.
1. The 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). For purposes of this restriction, foreign governments are
considered to be separate industries.
2. The 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 the value of the Fund's total assets in the securities of a
single issuer, except that up to 25% of the Fund's total assets can be invested
without regard to such 5% limitation (such 5% limitation shall not apply to
repurchase agreements collateralized by U.S. Government securities).
3. The Fund may not borrow money except as a temporary measure and then only in
amounts not exceeding 5% of the value of the Fund's total assets or from banks
or in connection with reverse repurchase agreements provided that immediately
after such borrowing, all borrowings of the Fund do not exceed one-third of the
Fund's total assets and no purchases of portfolio instruments will be made while
such Fund has borrowings outstanding in an amount exceeding 5% of its total
assets.
4. The Fund may not make loans, except to the extent that the lending of
portfolio securities and purchase of debt obligations in accordance with the
Fund's investment objective and policies and the entry into repurchase
agreements with banks, brokers, dealers and other financial institutions may be
deemed to be loans.
The Fund has no current intention (which may be changed without shareholder
approval) of purchasing restricted securities, except those securities which can
be offered and sold to "qualified institutional buyers" pursuant to Rule 144A
and which the Funds' Trustees determine are traded in a liquid market. The Fund
may invest up to 15% of the value of its net assets in illiquid securities,
including restricted securities. Risks associated with investing in restricted
securities include the risk that the lack of an active secondary market and
resale restrictions may result in the inability of the Fund to sell a security
at a fair price
9
<PAGE> 159
and may substantially delay the sale of a security that the Fund seeks to sell.
Issuers whose securities are publicly traded are also not subject to the same
disclosure and other legal requirements as are applicable to issuers with
publicly traded securities.
INVESTING IN THE PILOT FUNDS
Getting Your Investment Started
Investing in the Pilot Funds is quick and convenient. Fund Shares may be
purchased either through the account you maintain with participating banks,
trust companies and other institutions (Service Organizations) or through
Boatmen's Investment Services, Inc. Fund shares are distributed by Pilot Funds
Distributors, Inc. (the "Distributor"). The Distributor is located at 3435
Stelzer Road, Columbus, Ohio 43219-3035.
You may choose to invest your Boatmen's Investment Services account where an
Account Representative can advise you in selecting among the Pilot Funds.
Whether you currently have a Boatmen's Investment Services account or wish to
open one, your Pilot Funds investment can be executed within a few minutes by
telephone or, if you prefer, during a consultation with an Investment Officer of
Boatmen's Investment Services. Call Boatmen's Investment Services at
800/469-5999 to speak with an Account Representative, to place a Pilot Funds
transaction or to arrange a consultation scheduled at your convenience.
Clients of Boatmen's Investment Services and other Service Organizations may
purchase shares through their accounts at their Service Organization and should
contact such Service Organization directly for appropriate purchase
instructions. Share purchases (and redemptions) made through Boatmen's
Investment Services or another Service Organization are effected only on days
the particular institution and the Fund involved are open for business. When
shares are purchased through Boatmen's Investment Services or another Service
Organization, a fee may be charged by those institutions for providing
administrative services in connection with your investment.
Payments for Fund shares must normally be in U.S. dollars and in order to avoid
fees and delays should be drawn on a U.S. bank. Please remember that The Pilot
Funds retains the right to reject any purchase order.
Your Alternative Purchase Options
Your purchases of Fund shares are subject to either a front-end or back-end
sales charge. You may elect to have the sales charge deducted at the time of
your investment -- on the "front-end" -- or choose to defer the sales charge
until your investment is redeemed -- on the "back-end". This back-end sales
charge declines over time and is known as a "contingent deferred sales charge."
If you decide to pay the sales charge at the time you make your investment, your
purchase will be made in Class A Shares, whereas if you prefer to pay the sales
charge when you redeem your investment, your purchase will be made in Class B
Shares. Once you have held Class B Shares for six years, you do not pay the
contingent deferred sales charge when you redeem those shares.
Characteristics of Class A Shares and Class B Shares
Class A Shares and Class B Shares differ primarily in their sales charge
structures and distribution arrangements, including ongoing distribution fees.
The classes may also have differing transfer agency and other fees, although the
Fund currently does not intend to allocate such fees on a class basis. You
should understand that the purpose and function of the sales charge structures
and distribution arrangements for both Class A Shares and Class B Shares are the
same.
Class A Shares: Class A Shares are sold at their net asset value plus a
front-end sales charge of up to 4.50%. (See "How to Buy Shares -- Explanation of
Sales Price".) This front-end sales charge may be reduced or waived in some
cases. (See "Front-End Sales Charge Reductions.") Class A Shares are subject to
ongoing distribution fees at an annual rate of up to 0.25% of the Fund's average
daily net assets attributable to its Class A Shares.
Class B Shares: Class B Shares are sold at net asset value without an initial
sales charge. Normally, however, a deferred sales charge is paid if the shares
are redeemed within six years of investment. (See "How to Buy Shares
- -- Explanation of Sales Price".) Class B Shares are subject to ongoing
distribution fees at an annual rate of up to 1.00% of a Fund's average daily net
assets attributable to its Class B Shares. These ongoing fees, which are higher
than those charged on Class A Shares, will cause Class B Shares to have a higher
expense ratio and pay lower dividends than Class A Shares.
Eight years after purchase, Class B Shares will convert automatically to Class A
Shares. The conversion relieves a shareholder of Class B Shares of the higher
ongoing expenses charged to those shares, after enough time has passed to allow
the Distributor to recover approximately the amount it would have received if a
front-end sales charge had been charged.
The conversion from Class B Shares to Class A Shares takes place at net asset
value, so you receive dollar-for-dollar the same value of Class A Shares as you
had of Class B Shares. The conversion occurs eight years after the beginning of
the calendar month in which the shares are
10
<PAGE> 160
purchased. As a result of the conversion, the converted shares are relieved of
the distribution fees borne by Class B Shares, although they are subject to the
distribution fees borne by Class A Shares.
Class B Shares of a Fund acquired through a reinvestment of dividends or
distributions from that Fund (as discussed under "Dividends and Distributions")
are also converted at the earlier of two dates -- eight years after the
beginning of the calendar month in which the reinvestment occurred or the date
of conversion of the most recently purchased Class B Shares that were not
acquired through reinvestment of dividends or distributions. For example, if you
make a one-time purchase of Class B Shares of a particular Fund, and
subsequently acquire additional Class B Shares of that Fund only through
reinvestment of dividends and/or distributions from that Fund, all of your Class
B Shares in that Fund, including those acquired through reinvestment, will
convert to Class A Shares of that Fund on the same date.
Considerations In Choosing Between Class A And Class B Shares
The decision as to which share class may be more beneficial for you depends, in
part, on the amount and intended length of your investment. Due to the lower
ongoing distribution fees on Class A Shares, the dividends for those shares will
be higher than the Class B Shares. However, since a front-end sales charge is
deducted from your purchase at the time of your investment, not all of your
purchase amount will purchase shares. Thus, the same initial investment will
purchase more Class B Shares than Class A Shares of the same Fund. In addition,
Class B Shares are subject to a contingent deferred sales charge.
Since large investors may qualify for a reduced front-end sales charge (see
"Front-End Sales Charge Reductions"), such investors should consider making
their purchase in Class A Shares.
Because of these possible front-end sales charge reductions, purchases in excess
of $100,000 may be more advantageous to you if made in Class A Shares rather
than Class B Shares. In any event The Pilot Funds will not accept any order of
$250,000 or more for Class B Shares. In addition, regardless of whether you
qualify for a reduced front-end sales charge, if you expect to hold your
investment for an extended period of time, you might still consider purchasing
Class A Shares because the accumulated higher ongoing expenses, together with
the contingent deferred sales charge, of the Class B Shares will exceed the
amount of the front-end sales charge and ongoing distribution fees related to
Class A Shares.
On the other hand, you might decide, because you would be subject to higher
front-end charges, or for other reasons, that it would be more advantageous for
you to have all of your purchase amount invested immediately in Fund shares,
even though you would also be subject to higher ongoing distribution fees. These
higher ongoing fees might be offset by any return you receive from the
additional shares you originally purchased as a result of not having to pay a
front-end sales charge. You should note however, that a Fund's future returns
cannot be predicted, and that there is no assurance that such returns, if any,
would compensate for those higher ongoing expenses. You should also remember
that you would be subject to any applicable contingent deferred sales charge
during the first six years of your investment in Class B Shares.
If You Have Questions
If you are investing in The Pilot Funds through an account with Boatmen's
Investment Services or another Service Organization, you should speak with your
assigned Account Representative or contact person at such organization. If you
are a direct investor with The Pilot Funds and need assistance with your
account, a Pilot Funds service representative is available to answer your
questions by calling the appropriate toll-free numbers listed below.
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
CALL FOR INFORMATION
- --------------- -----------------------------------
<S> <C>
800/71-PILOT Regarding the Fund's investment
8:00 am to objectives and policies or for
7:00 pm information about opening an
Central time account (including information
regarding the Fund's alternative
purchase options). Information on
changing your Pilot Fund's
services, and Statements of
Additional Information, are also
available at this number.
- -----------------------------------------------------
800/227-3654 To obtain your account balance or
8:00 am to to request a telephone transaction.
5:00 pm
Central time
</TABLE>
- ---------------------------------------------------------------
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
11
<PAGE> 161
conversations, sending confirmation to shareholders within 72 hours of a
telephone transaction, 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.
The Pilot Funds will send you the following statements and reports to provide
you with current information on the status of your account:
<TABLE>
<S> <C>
Confirmation Statements After every transaction that
affects your account balance or
your account registration.
Account Statements Either monthly, quarterly or
annually depending on the Fund in
which you invest or the type of
account you hold.
Financial Reports Every six months. To reduce The
Pilot Funds' expenses, only one
copy of most Fund reports will be
mailed to your household, even if
you have more than one account in
a fund.
</TABLE>
HOW TO BUY SHARES
This section provides you with pertinent information on how to buy Fund shares.
Further information can be found under "Transaction Rules". Before investing you
will need to decide whether to purchase Class A Shares (which are sold with a
front-end sales charge) or Class B Shares (which are sold without a front-end
sales charge but are subject to a contingent deferred sales charge). See "Your
Alternative Purchase Options".
<TABLE>
<CAPTION>
MINIMUM INVESTMENT
----------------------
TO OPEN ADDITIONAL
ACCOUNT INVESTMENTS
------- -----------
<S> <C> <C>
Regular Account................... $1,000 $ 100
Automatic Investment Plan......... $ 100 $ 100
Employee* -- Regular Accounts..... $ 500 $ 100
Employee* -- Automatic Investment
Plan............................ $ 100 $ 50
Tax-Sheltered Retirement Plans.... $ 500 $ 50
Exchange Transactions............. $1,000 $ 500
</TABLE>
- ------------
*Applies to employees of the Adviser and its affiliates.
OPENING AND ADDING TO YOUR PILOT FUNDS ACCOUNT
As described above under "Getting Your Investment Started," you may purchase
Fund shares through Boatmen's Investment Services, Inc. or another Service
Organization. Direct investments in The Pilot Funds may also be made in a number
of different ways, as shown in the following chart. Simply choose the method
that is most convenient for you. Any questions you have can be answered by
calling the appropriate toll-free number indicated above under "If You Have
Questions".
12
<PAGE> 162
[CAPTION]
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TO ADD TO AN ACCOUNT
TO OPEN AN ACCOUNT HELD DIRECTLY WITH THE
DIRECTLY WITH THE PILOT FUNDS PILOT FUNDS
----------------------------- ----------------------
<S> <C> <C>
By Mail to: -- Complete an Account Application -- Make your check payable to the
The Pilot Funds and mail it, along with a check particular Fund in which you are
c/o BISYS Fund Services payable to the Fund in which you investing and mail it to the
Dept. L-1709 are investing, to the address on address on the left.
Columbus, OH 43260-1709 the left.
-- Please include your account number
on your check.
-- Or use the convenient form
attached to your regular Fund
statement.
- ------------------------------------------------------------------------------------------------------------
In Person to: -- Deliver the Account Application -- Deliver your check payable to the
BISYS Fund Services and your check payable to the Fund in particular Fund in which you are
3435 Stelzer Road which you are investing to the investing to the address on the
Columbus, OH 43219-3035 address on the left. left.
-- Please include your account number
on your check.
- ------------------------------------------------------------------------------------------------------------
By Wire to: -- Ask your bank to send immediately -- Ask your bank to wire immediately
Call 1-800-71-PILOT for available funds by wire. available funds as described at
Wire Instructions left, except that the wire should
-- The wire should say that you are note that it is to make a
opening a new Fund account (if an subsequent purchase rather than to
Account Application Form is not open a new account.
received for a new account within
30 days after the wire is received, -- Please include your Fund account
dividends and redemption proceeds number.
from the account will be subject to
back-up withholding). The wire
should say that the purchase is to
be in your name.
-- Include your name, address and
taxpayer identification number.
Indicate the name of the Fund in
which you are investing. Investors
should also indicate share class
selection.
Consult your bank for information on remitting funds by wire and associated
bank charges
- ------------------------------------------------------------------------------------------------------------
Automatic Investment (allows -- You must first complete an Account -- Call 800/71-PILOT to find out how
regular investment without Application and select the to set up this service.
ongoing paperwork) Automatic Investment Plan option.
-- Additional purchases will then
-- Call 800/71-PILOT for more automatically be made as directed
information. by you.
</TABLE>
- --------------------------------------------------------------------------------
13
<PAGE> 163
Explanation of Sales Price
The public offering price for each class of shares is based upon net asset value
per share plus, in the case of Class A Shares, a front-end sales charge. Net
asset value per share for each class of the Fund will be determined by adding
the value of the Fund's investments, cash and other assets attributable to the
class, subtracting the Fund's liabilities attributable to that class, and then
dividing the result by the number of shares in the class that are outstanding.
The assets of the Fund 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 the Fund that have sixty days or less until they mature
are valued at amortized cost, which generally approximates market value.
The per share net asset values of Class A Shares and Class B Shares will diverge
due to the different distribution expenses borne by the classes. More
information about valuation can be found in the Fund's Statement of Additional
Information, which is available upon request.
Net asset value is computed as of 3:00 P.M., Central time, on all days the New
York Stock Exchange (the "Exchange") is open for trading, which is Monday
through Friday except for holidays (scheduled Exchange holidays for 1997 are New
Years Day (observed), President's Day, Good Friday, Memorial Day, Independence
Day (observed), Labor Day, Thanksgiving Day and Christmas Day (observed)). 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.
CLASS A SHARES: THE FRONT-END SALES CHARGE OPTION. The front-end sales charge
for Class A Shares of the Fund begins at 4.50% and may decrease as the amount
you invest in Class A Shares increases, as shown in the following chart:
<TABLE>
<CAPTION>
PER SHARE
AS A PERCENTAGE OF DEALERS
-------------------------- REALLOWANCE AS A
NET ASSET PERCENTAGE OF
AMOUNT OF TRANSACTION OFFERING PRICE VALUE OFFERING PRICE
- --------------------------- -------------- ---------- ----------------
<S> <C> <C> <C>
Less than $100,000......... 4.50 4.71 4.00
$100,000 to $249,999....... 3.75 3.90 3.25
$250,000 to $499,999....... 3.00 3.09 2.50
$500,000 to $999,999....... 2.00 2.04 1.75
$1,000,000 to $2,499,999... 1.00 1.01 0.90
$2,500,000 and over........ 0.00 0.00 0.00
</TABLE>
It is possible that the dealers reallowance shown in the table above may change
over time. Further reductions in the sales charges shown above are also
possible -- please see "Sales Charge Reductions".
CLASS B SHARES: THE CONTINGENT DEFERRED SALES CHARGE OPTION. Although you pay no
front-end sales charge on Class B Shares, if you redeem those shares within six
years after the date you purchased them, the shares will be subject to a
contingent deferred sales charge at the rates set forth in the chart below. The
sales charge is charged on the lesser of the net asset value on the redemption
date or the original cost of the shares being redeemed. As a result, no sales
charge is charged on any increase in the principal value of your shares.
The amount of any contingent deferred sales charge will be different depending
on the number of years that elapse between the time you pay for Class B Shares
and the time those shares are redeemed. Solely for purposes of determining the
number of years from the time of payment for your share purchase, all payments
during a month will be aggregated and deemed to have been made on the first day
of the month.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
(AS A PERCENTAGE OF
NUMBER OF YEARS DOLLAR AMOUNT SUBJECT
ELAPSED SINCE PURCHASE TO THE CHARGE)
- ----------------------- ---------------------
<S> <C>
One............................................ 4.50%
Two............................................ 4.00%
Three.......................................... 3.50%
Four........................................... 3.00%
Five........................................... 2.50%
Six............................................ 1.75%
After Six Years................................ 0.00%
</TABLE>
When you sell your Class B Shares, your order is processed to minimize the
amount of the contingent deferred sales charge that will be charged. Class B
Shares are redeemed first from those shares that are not subject to a contingent
deferred sales charge (i.e., shares held longer than six years and shares that
were acquired through reinvestment of dividends or distributions or that qualify
for other deferred sales charge waivers) and after that from the Class B Shares
you have held the longest.
For example, assume you purchased 100 Class B Shares at $10 a share (for a total
cost of $1,000), three years later the shares have a net asset value of $12 per
share and during that time you acquired 10 additional shares through dividend
reinvestment. If you then make your first redemption of 50 shares (resulting in
proceeds of $600, 50 shares X $12 per share), the first 10 shares redeemed will
not be subject to the contingent deferred sales charge because they were
acquired through reinvestment of dividends. With respect to the remaining 40
shares redeemed, the contingent deferred sales charge is charged at $10 per
share (because the original purchase price of $10 per share is lower than the
current net asset value of $12 per share). Therefore, only $400 of the $600 you
received from selling your shares will be subject to the contingent deferred
sales charge, at a rate of 3.50%, the applicable rate in the third year after
purchase. The proceeds from the contingent deferred sales charge that
14
<PAGE> 164
you may pay upon redemption go to the Distributor, which may use such amounts to
defray the expenses associated with the distribution-related services involved
in selling Class B Shares. The contingent deferred sales charge, along with the
ongoing distribution fees paid with respect to Class B Shares, enables those
shares to be purchased without the imposition of a front-end sales charge.
HOW TO SELL SHARES
The Pilot Funds makes it easy to sell, or "redeem" your shares. If you purchased
your shares through an account at Boatmen's Investment Services, Inc. or another
Service Organization, you may redeem shares in accordance with the instructions
pertaining to that account. If you purchased your shares through an account at
Boatmen's Investment Services, Inc. or another Service Organization and you
appear on The Pilot Funds' books as the shareholder of record, you may redeem
shares by mail, phone or hand delivery as described below; however, you must
contact Boatmen's Investment Services, Inc. or your other Service Organization
if you wish to redeem your shares by another method. If you purchased your
shares directly from The Pilot Funds, you have the ability to redeem shares by
any of the methods described below. Requests must be signed by you and by each
other owner of the account (for joint accounts). Except for a contingent
deferred sales charge that may be charged on Class B Shares, The Pilot Funds
imposes no charges when you redeem shares.
15
<PAGE> 165
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HOW TO REDEEM SHARES ADDITIONAL LIMITATIONS
-------------------- ----------------------
<S> <C> <C>
By Mail to: -- Send a signed request (each owner, -- Requests greater than $50,000 per
The Pilot Funds including each joint owner, must day must be signature guaranteed.
c/o BISYS Fund Services sign) to the Transfer Agent at the
Dept. L-1709 address on the left. -- You should refer to "Transaction
Columbus, OH 43260-1709 Rules" below for additional
-- Be sure to include both the name limitations.
of the particular Fund whose shares
you are selling and your account
number.
- ------------------------------------------------------------------------------------------------------------
By Wire: -- After you have signed up for wire -- The Transfer Agent may act upon
redemption privileges on the such a request from any person
Account Application, you may representing himself or herself to
instruct the Transfer Agent to wire be you and reasonably believed by
your redemption proceeds to your the Transfer Agent to be genuine.
bank account by sending a request
in writing or by phone -- The transaction amount must be a
(800/71-PILOT). $1,000 minimum.
-- This privilege may be subject to
limits regarding frequency and
overall amount.
- ------------------------------------------------------------------------------------------------------------
In Person to: -- Deliver your written request -- Requests must be signed by each
BISYS Fund Services directly to the Transfer Agent at owner, including each joint owner.
3435 Stelzer Road the address on the left.
Columbus, OH 43219-3035 -- Requests greater than $50,000 per
day must be signature guaranteed.
- ------------------------------------------------------------------------------------------------------------
Systematic Withdrawal -- Withdrawals begin after you have -- Your account must have a total net
(permits automatic signed up for this service (either asset value of at least $5,000.
withdrawal of pre-arranged on the account application or in a
amount) subsequent letter to the Transfer -- The transaction amount must be at
Agent). least $50 minimum.
-- Call 800/71-PILOT for more
information.
Consult your bank for information on remitting funds by wire and associated
bank charges
</TABLE>
- --------------------------------------------------------------------------------
Redemption requests are processed when received in proper form by The Pilot
Funds at the net asset value per share next determined after such receipt
(subject to the contingent deferred sales charge for Class B Shares).
TRANSACTION RULES
THE PURCHASE PROCEDURES differ depending on whether you place your order
directly with The Pilot Funds or use Boatmen's Investment Services or another
Service Organization.
Purchases and sales should be made for long-term investment purposes only and
not for short-term trading. The Funds and its Service Organizations each reserve
the right to restrict purchases of Shares (including exchanges) when a pattern
of frequent purchases and sales made in response to short-term fluctuations in
the Fund's share price appears evident. Additionally, the Fund reserves the
right to reject any purchase order (including exchanges) that is not received in
"good order."
IF YOU PLACE AN ORDER FOR FUND SHARES in proper form, it will be processed upon
receipt by the Transfer Agent where Boatmen's Investment Services or another
Service Organization undertakes to pay for the order in immediately available
funds wired to the Transfer Agent by the close of business the next Business
Day. If the Transfer Agent receives your order and, where required, payment by 3
p.m., Central time, your shares will be purchased at the public offering price
calculated on that day. Otherwise, your shares will be purchased at the public
offering price determined as of 3 p.m., Central time, on the next Business Day.
16
<PAGE> 166
IF YOU PLACE AN ORDER FOR FUND SHARES THROUGH BOATMEN'S INVESTMENT SERVICES OR
ANOTHER SERVICE ORGANIZATION, and you place your order in proper form on any
Business Day in accordance with their procedures, your purchase will be
processed at the public offering price calculated at 3 p.m., Central time on
that day, if Boatmen's Investment Services or your other Service Organization
then sends your order to the Transfer Agent before the end of its Business Day
(which is normally 4 p.m., Central time.) Boatmen's Investment Services or your
other Service Organization must promise to send to the Transfer Agent
immediately available funds in the amount of the purchase price within three
business days.
WIRE PURCHASES AND REDEMPTIONS. If you purchase shares by wire, you must file an
Account Application before any of those Shares can be redeemed. You should
contact your bank (which will need to be a commercial bank that is a member of
the Federal Reserve System) for information about sending and receiving funds by
wire, including any charges by your bank for these services. The Pilot Funds may
decide at any time to no longer permit wire redemptions.
MISCELLANEOUS PURCHASE INFORMATION. You must specify at the time of investment
whether you are purchasing Class A or Class B Shares. Federal regulations
require that you provide a certified taxpayer identification number whenever you
open or reopen an account. Share certificates will not be issued. If your check
does not clear, a fee may be imposed by the Transfer Agent. If shares are
purchased with a check that does not clear, the purchase will be cancelled and
the purchaser will be subject to any losses or fees incurred in the transaction.
MISCELLANEOUS REDEMPTION INFORMATION. The Pilot Funds usually makes payments for
the shares that you redeem within three business days after it receives your
request in proper form. SHARES PURCHASED BY CHECK FOR WHICH A REDEMPTION REQUEST
HAS BEEN RECEIVED WILL NOT BE REDEEMED UNLESS THE CHECK USED FOR INVESTMENT HAS
CLEARED, WHICH MAY TAKE UP TO SEVEN BUSINESS DAYS OR MORE. If the purchaser
purchases shares by Federal Funds wire the purchaser may avoid this delay.
Redemption requests by telephone prior to the expiration of the seven-day period
will not be accepted. The telephone redemption option will be suspended for a
period of 30 days following a telephonic address change.
When redeeming shares in the Fund, you should indicate whether you are redeeming
Class A or Class B Shares. If you own Class A and Class B Shares of the Fund,
Class A Shares will be redeemed first unless you request otherwise.
Certain types of redemption requests will need to include a signature guarantee
for each name in which the account is registered. Signature guarantees must
accompany redemption requests for: (i) an amount in excess of $50,000 per day,
(ii) any amount if the redemption proceeds are to be sent elsewhere than the
address of record on The Pilot Funds' books, or (iii) an amount of $50,000 or
less if the address of record has been on The Pilot Funds' books for less than
sixty days, although the Transfer Agent reserves the right to require signature
guarantees on all redemptions. Signature guarantees are designed to protect both
you and The Pilot Funds from fraud. To obtain a signature guarantee you should
visit a bank, trust company, credit union, savings association, broker-dealer or
other member of a national securities exchange, or other eligible guarantor
institution. (Notaries public cannot provide signature guarantees.) Guarantees
must be signed by an authorized person at one of these institutions, and be
accompanied by the words "Signature Guarantee".
If you experience difficulty in contacting the Transfer Agent to redeem shares
by phone, for example because of unusual market activity, you are urged to
consider redeeming your shares by mail or in person.
THE VALUE OF SHARES THAT ARE REDEEMED IN THE FUND may be more or less than their
original cost, depending on the Fund's current net asset value. In addition, if
you are redeeming Class B Shares you may be subject to a contingent deferred
sales charge, which will be deducted from the proceeds of your redemption.
THE FUND MAY SUSPEND THE RIGHT OF A SHAREHOLDER TO REDEEM SHARES and may suspend
the date of payments by the Fund (a) for any period during which the New York
Stock Exchange is closed, other than the customary weekends or holidays, or if
trading in the markets the Fund normally utilizes is closed or is restricted as
determined by the Securities and Exchange Commission ("SEC"), (b) during any
emergency, as determined by the SEC, as a result of which it is not reasonably
practicable for the Fund to dispose of instruments owned by it or fairly to
determine the value of its net assets, or (c) for such other period as the SEC
may by order permit for the protection of the Shareholders of the Fund.
The Fund reserves the right to adopt by action of the Trustees a policy pursuant
to which it may without Shareholder approval redeem upon not less than 60 days'
notice (a) Shares in an account which have a value below $500, or such other
amount as the Trustees may designate at the time the policy is adopted
(provided, however, that the Fund will not redeem Shares when, due to a change
in the net asset value of the Shares, the value of a Shareholder's account drops
below such designated minimum amount; and provided further that during the
notice period Shareholders will have the opportunity to
17
<PAGE> 167
bring the value of their accounts up to the designated amount) or (b) all of the
Fund's Shares if such Shares have an aggregate value below a designated amount
and if the Trustees determine that it is not practical, efficient or advisable
to continue the operation of the Fund and that any applicable requirements of
the 1940 Act have been complied with. As of the date of this Prospectus, no such
policy has been adopted. While, as indicated above, the Trustees have the
authority to adopt, and thereafter to change from time to time, such a policy,
they will not do so without providing at least 60 days' notice to the
Shareholders.
In unusual circumstances The Pilot Funds may make payment in readily marketable
portfolio securities at their market value equal to the redemption price.
In order to maximize earnings on the Fund, the Fund tries to be invested as
completely as is practicable. Accordingly, orders for Class A and Class B Shares
received by a Service Organization by 3:00 p.m., Central time, on Business Days
are executed at the net asset value next calculated after receipt of the order,
plus a sales load, if any. Different Service Organizations may establish
different times by which purchase orders must be received by them in order to
ensure timely transmittal of purchase orders to the Transfer Agent and payments
to the Custodian or the Funds.
The purchase price must be paid by a Service Organization by wiring Federal
Funds to the Custodian or by forwarding a check to Pilot International Equity
Fund, c/o BISYS Fund Services, Dept. L-1709, Columbus, OH 43260-1709. Payment
must be received within three business days of receipt of the purchase order.
Boatmen's Investment Services and other participating Service Organizations have
undertaken to arrange for the timely transmittal of purchase orders to the
Transfer Agent and of payments to the Custodian or the Funds. Purchases may be
made through a customer's account at Boatmen's, its affiliates or other Service
Organizations.
Additional purchases may be made at any time through Service Organizations or
directly with the Fund's Transfer Agent, c/o The Pilot Funds, Pilot
International Equity Fund, Dept. L-1709, Columbus, OH 43260-1709.
In certain situations or for certain individuals or entities, the front-end
sales charge for Class A Shares of the Fund may be waived either because of the
nature of the investor or the reduced sales efforts required to attract such
investments. No sales charge is charged on reinvested dividends or
distributions. Likewise, there is no front-end sales charge on (1) any purchase
by Boatmen's, BISYS, any of their affiliates or their respective officers,
partners, directors or employees (including retired employees), any Trustee or
officer of The Pilot Funds and designated family members of any of the above
individuals, (2) any purchase by any registered representative or full-time
employee of broker-dealers or Service Organizations having agreements with the
Distributor pertaining to the sale and/or servicing of Fund shares (and their
spouses and minor children) to the extent permitted by such organizations, (3)
any purchase by any state, county or city, or any instrumentality, department,
authority or agency thereof, which is prohibited by applicable investment laws
from paying a sales load or commission, (4) any purchase by a registered
investment adviser who is purchasing shares for its own account or for accounts
for which it is authorized to make investment decisions (i.e., a discretionary
account), (5) any shares issued in connection with reorganizations with or
acquisitions of the assets of other organizations, (6) under certain
circumstances, any purchase of shares pursuant to the Reinstatement Privilege
described below under "Shareholder Services", (7) under certain circumstances,
any purchase of shares as a result of the Cross-Reinvestment Privilege described
below under "Shareholder Services", (8) any purchase of Fund shares with the
proceeds from a recent redemption of shares of any other non-money market
investment portfolio of another investment company, provided that any purchase
must be made within 60 days of such redemption and that a copy of the account
statement showing such redemption must accompany the purchase request, (9) any
purchase of shares offered through a registered broker-dealer as part of a wrap
product, and (10) exchanges where the shares being exchanged are non-money
market fund shares that came from the distribution of assets held in a qualified
trust agency or custodian account maintained with the trust department of
Boatmen's or its affiliates.
In order to receive the sales charge waiver, a purchaser must certify its
eligibility for a waiver to their Service Organization on its application form
and must certify on such form that it will notify the Service Organization if,
at the time of additional purchases, it is no longer eligible for a waiver. The
Transfer Agent and Service Organizations reserve the right to request additional
certification or information from a purchaser in order to verify that such
purchaser is eligible for a waiver. From time to time, the Fund's distributor or
a Service Organization may make expense reimbursements for special training of
registered representatives in group meetings or to help pay the expenses of
sales contests. In some instances, promotional incentives to dealers may be
offered only to certain dealers who have sold or may sell significant amounts of
Fund shares.
CERTAIN TYPES OF REDEMPTIONS MAY ALSO QUALIFY FOR AN EXEMPTION FROM THE
CONTINGENT DEFERRED SALES CHARGE. To receive one of the first three exemptions
listed below, you
18
<PAGE> 168
must explain the status of your redemption at the time you redeem your shares.
The contingent deferred sales charge with respect to Class B Shares is not
charged on (1) exchanges described under "Exchange Privileges"; (2) redemptions
in connection with minimum required distributions from IRA, 403(b)(7) and
Qualified Plan accounts due to the shareholder reaching age 70 1/2; (3)
redemptions in connection with a shareholder's death or disability (as defined
in the Internal Revenue Code); and (4) involuntary redemptions as a result of an
account's net asset value remaining below $1,000 after thirty days' written
notice. In addition, no contingent deferred sales charge is charged on shares
acquired through the reinvestment of dividends or distributions.
SHAREHOLDER SERVICES
The Pilot Funds provides a variety of ways to make managing your investments
more convenient. Some of these methods require you to request them on your
Account Application or you may request them after opening an account by sending
a signature guaranteed letter of instruction to the Transfer Agent.
Tax Sheltered Retirement Plans
The Fund will offer Class A and Class B Shares for purchase by retirement plans,
including Individual Retirement Account Plans for individuals and their non-
employed spouses.
Detailed information concerning these plans and copies of the plans will be
available from Service Organizations. This information should be read carefully,
and consultation with an attorney or tax adviser is advisable. The information
will set forth the service fee charged for retirement plans and describe the
federal income tax consequences of establishing a plan. Under all plans,
dividends and distributions will be automatically reinvested in additional
shares of the same fund or, if so directed by the shareholder, in cash, in
shares of another fund or in Administration Shares of a Money Market Fund. An
initial investment minimum of $500 applies to purchases in connection with
tax-sheltered retirement plans.
EXCHANGE PRIVILEGES AMONG THE PILOT FUNDS
If you have purchased shares directly from The Pilot Funds, you may sell your
Fund shares and buy other shares of The Pilot Funds by calling the Transfer
Agent at 800/71-PILOT or sending a written exchange request to the Transfer
Agent at The Pilot Funds, c/o BISYS Fund Services, Dept. L-1709, Columbus, OH
43260-1709. If you have purchased shares through an account at Boatmen's
Investment Services, Inc. or another Service Organization, you may sell your
fund shares and buy shares of the other Pilot Funds in accordance with the
procedures applicable to your account. Specifically, Class A Shares of a Fund
may be exchanged for Class A Shares of any other Fund and Class B Shares of a
Fund may be exchanged for Class B Shares of any other Fund. Class A Shares
purchased with a front-end sales charge may be exchanged without the need to pay
any additional front-end charge on the shares acquired through the exchange.
Class B Shares may be exchanged without the payment of any contingent deferred
sales charge at the time the exchange is made. 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.
If you have a qualified trust, agency or custodian account with Boatmen's or its
affiliates, and your shares are to be held in that account, you may also
exchange your current Class A Shares in a Fund for Pilot Shares in the same
Fund. Pilot Shares are subject to the same shareholder transaction expenses as
Class A Shares except that Pilot Shares are not subject to a front-end sales
charge. Pilot Shares are subject to the same annual fund operating expenses as
those for Class A Shares except that Pilot Shares make no annual Rule 12b-1
Distribution payments. In addition, the procedures for effecting transactions in
Fund shares and other features related to the servicing and maintenance of a
Fund account may differ for Pilot Shares of the Fund from those applicable to
Class A Shares depending on the terms of the shareholder's qualified trust,
agency, or custodian relationship with Boatmen's or its affiliate. For more
information on holding Pilot Shares of the Funds, please see the prospectus for
Pilot Shares which can be obtained by calling 1/800/71-PILOT and consult the
institution (Boatmen's or an affiliate) which will maintain the account holding
the Pilot Shares received by exchanging Class A Shares.
For investors holding their shares directly, a minimum initial investment of
$1,000 must be made to establish an account into which exchange proceeds will be
invested.
Exchanges may have tax consequences for you. Consult your tax adviser for
further information.
If you are opening a new account in a different Fund by exchange, the shares
being exchanged must be at least equal in value to the minimum investment for
the Fund in which the account is being opened. The particular class of shares
you are exchanging into must be registered for sale in your state.
Additional information regarding exchanges can be obtained by reading the
Statement of Additional Information. The Exchange Privilege may be modified or
19
<PAGE> 169
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 SEC.
AUTOMATIC INVESTMENT PLAN
(requires your request)
One easy way to pursue your financial goals is to invest money regularly. The
Pilot Funds offers the Automatic Investment Plan--a convenient service that lets
you transfer money from your bank account into your Fund account automatically,
on a schedule of your choice.
At your option, your bank account will be debited in a particular amount that
you have specified, and Fund shares will be automatically purchased at regular
intervals. Your bank account must be a checking, NOW or bank money market
account maintained at a domestic financial institution which is an Automatic
Clearing House member. Your institution must also permit automated withdrawals
(which may be subject to a fee by that institution). A minimum initial
investment of $100 is required for Automatic Investment Plans and the minimum
amount required for subsequent investments is $100. The minimum amount required
for initial and subsequent investments as part of the Plan for employees of
Boatmen's or its affiliates is $50.
The Automatic Investment Plan is one means by which you may use "DOLLAR COST
AVERAGING" in making investments. Dollar Cost Averaging can be useful in
investing in portfolios such as the Fund whose price per share fluctuates.
Instead of trying to time market performance, a fixed dollar amount is invested
in Fund shares at predetermined intervals. This may help you to reduce your
average cost per share because the agreed upon fixed investment amount allows
more shares to be purchased during periods of lower share prices and fewer
shares during periods of higher prices. In order to be effective, Dollar Cost
Averaging should usually be followed on a sustained, constant basis. You should
be aware, however, that shares bought using Dollar Cost Averaging are made
without regard to their price on the day of investment or to market trends.
While regular investment plans do not guarantee a profit and will not protect
you against loss in a declining market, they can be a good way to invest for
retirement, a home, educational expenses and other long-term financial goals.
You may cancel your Automatic investments or change the amount of purchase at
any time by mailing written notification to the Transfer Agent at Department
L-1709 Columbus, OH 43260-1709. You may also implement the Dollar Cost Averaging
method on your own initiative. The Pilot Funds may modify or terminate the
Automatic Investment Plan at any time or charge a service fee, although no such
fee currently is contemplated.
AUTOMATIC WITHDRAWAL PLAN
(requires your request)
The Pilot Funds offers a convenient way of withdrawing funds from your
investment portfolio. You may request regular monthly, quarterly, semi-annual or
annual withdrawals in any amount above $50 provided the Fund account you are
withdrawing from has a minimum current balance of at least $5,000. There is no
minimum withdrawal amount required for automatic withdrawals by employees of
Boatmen's or its affiliates. The automatic withdrawal will be made on the first
or fifteenth day of the month. Purchases of additional shares concurrently with
withdrawals are ordinarily not advantageous for share classes that charge a
sales charge. Use of the Plan may also be disadvantageous for Class B Shares
during the first six years a share is held, due to the potential need to pay a
contingent deferred sales charge.
FRONT-END SALES CHARGE REDUCTIONS
YOU MAY BE ENTITLED TO LOWER SALES LOAD CHARGES ON CLASS A SHARES OF THE FUND
THROUGH RIGHT OF ACCUMULATION, STATEMENT OF INTENTION AND QUANTITY DISCOUNTS.
Right of Accumulation. When buying Class A Shares, your current aggregate
investment determines the amount of any sales load that you pay. If your current
aggregate investment plus the purchase price of the new investment in Class A
Shares accumulates to the requisite amount or beyond, the sales percentage
charged to you on subsequent investments is decreased. Your current aggregate
investment is the accumulated combination of your immediate investment along
with the Class A Shares that you beneficially own in the Fund alone or in
combination with Class A Shares of other funds of the Pilot Family of Funds
(excluding Administration Shares of the Money Market Funds not acquired by
exchange from other funds.) Class A Shares purchased without the imposition of a
sales charge may not be aggregated with Class A Shares purchased subject to a
sales charge. Class A Shares of the Fund and Class A shares of other funds of
the Pilot Family of Funds purchased (i) by an individual, his spouse and his
children, and (ii) by a trustee, guardian or other fiduciary of a single trust
estate or a single fiduciary account, will be combined for the purpose of
determining whether a purchase will qualify for such right of accumulation and,
if qualifying, the applicable sales level.
20
<PAGE> 170
EXAMPLE
If a Class A Shareholder owns Class A Shares with a current market value of
$75,000 and purchases additional Class A Shares with a purchase price of
$25,000, the sales load for the $25,000 purchase would be the rate applicable to
a single purchase of $100,000.
To qualify for a reduced sales load charge, you or your Service Organization
must notify the Transfer Agent at the time of investment. The reduced sales
charge is subject to confirmation of your holdings through a check of
appropriate records.
Statement of Intention. This Statement provides the means for you to receive a
reduced sales load on all of your investments in Class A Shares, whether they
are of the Fund alone or in combination with Class A Shares of the Funds
(excluding the Money Market Funds). The Statement of Intention is your
commitment to acquire an aggregate investment for $100,000 or more within a
13-month period. You should read the Statement of Intention, which you can
obtain by calling 800/71-PILOT, as you will be bound by its terms.
While signing a Statement of Intention does not bind you to purchase, or The
Pilot Funds to sell, the full amount indicated at the sales load in effect at
the time of signing, you must complete the intended purchase to obtain the
reduced sales load.
When you sign a Statement of Intention, the Transfer Agent is authorized to hold
in escrow a sufficient number of shares which can be redeemed to make up any
difference in the sales load on the amount actually invested. After the terms of
the Statement of Intention are fulfilled, the escrow will be released.
Within a 13-month period beginning up to 90 days prior to the date of its
execution, the Class A Shares you purchase may be used as a credit toward the
completion of the Statement of Intention. The investments you make during the
period receive the discounted sales charge based on the full amount of your
investment commitment. A shareholder may include the value of all Pilot Fund
Class A Shares on which a sales load has previously been paid as an
"accumulation credit" toward the completion of the Statement, but a price
readjustment will be made to reflect any reduced sales load applicable to shares
purchased only during the 90-day period prior to the submission of your
Statement of Intention.
If your aggregate investment exceeds the amount indicated in your Statement, an
adjustment will be made to reflect any further reduced sales load applicable to
your excess investment. The adjustment will be in the form of additional Class A
Shares credited to your account at the then current offering price applicable to
a single purchase of the total amount of the total purchase.
Quantity Discounts. As you can see by looking at the table in the section
entitled "Class A Shares: The Front-End Sales Charge Option", larger purchases
in Class A Shares may result in lower front-end sales charges to you. If
requested, purchases by you, your spouse and your minor children will be
combined when computing the applicable front-end sales charge.
CROSS-REINVESTMENT PRIVILEGE
You may want to have your dividends, capital gains distributions, or both,
received from a Fund automatically invested in shares of any other Fund or any
of The Pilot Funds' other investment portfolios. Investments will be made at a
price equal to the net asset value of the acquired shares determined after
receipt of the distribution proceeds by the Transfer Agent. No sales load will
be charged on such investments. In order to qualify for the Cross-Reinvestment
Privilege, the value of your account in the acquired fund must equal or exceed
the acquired fund's minimum initial investment requirement. There are no
subsequent investment requirements for amounts to which dividends and capital
gains distributions are directed nor are service fees currently charged for
effecting these transactions. The election to cross-reinvest dividends or
distributions will not affect the tax treatment of such dividends and capital
gains distributions, which will be treated as received by you and then used to
purchase shares of the acquired fund.
REINSTATEMENT PRIVILEGE
If you are a Class A shareholder in the Fund, you may reinvest all or any
portion of your redemption proceeds (plus that amount necessary to acquire a
fractional share to round off your purchase to the nearest full share) in Class
A Shares of any other Fund without paying a sales load. Shares so acquired will
be purchased at a price equal to the net asset value next determined after the
Transfer Agent receives a written purchase order indicating that the Shares are
eligible for reinstatement at net asset value by a Shareholder's Service
Organization and payment. If you wish to use this privilege, you must submit a
written reinstatement request to the Transfer Agent stating that you are
eligible to use the privilege. The reinstatement request and payment must be
received within 90 days of the trade date of the redemption and the shares must
have been held for at least 30 days before the redemption. The reinstatement
privilege may be exercised once annually by a Class A Shareholder, except that
there is no such limit as to the availability of this privilege in connection
with transactions the sole purpose of which is to reinvest the
21
<PAGE> 171
proceeds at net asset value in a tax-sheltered retirement plan.
A reinstating Shareholder may realize a gain or loss for federal tax purposes as
a result of such redemption. If the redemption occurs within ninety (90) days
after the original purchase of Class A Shares, any sales load paid on the
original purchase cannot be taken into account by a Class A Shareholder
reinstating at net asset value for purposes of determining gain or loss realized
on the redemption, but instead will be added to the tax basis of the Class A
Shares received in the reinstatement, provided that Shares of the Fund into
which the reinstatement is made are subject to a sales load on initial
purchases. To the extent that any loss is realized and the Class A Shares of the
Funds are purchased within thirty (30) days before or after the redemption, some
or all of the loss will not be allowed as a deduction depending upon the number
of Class A Shares purchased. Shareholders should consult their own tax advisers
concerning the tax consequences of reinstatement.
DIVIDENDS AND DISTRIBUTIONS
Where do your dividends and distributions come from?
The Fund's net investment income consists of the excess of (i) certain accrued
interest, (ii) accretion of discount (including both original issue and market
discount, if any, on certain portfolio securities) and (iii) any income of the
Fund from sources other than capital gains, over (iv) the amortization of market
premium on certain portfolio securities and (v) the estimated expenses of the
Fund, including a proportionate share of the general expenses of the Fund.
What are your dividend and distribution options?
A shareholder may elect on his or her application form to have dividends,
capital gains distributions or both either paid in cash or reinvested in shares
of the same fund or one of the other funds, as described under "Shareholder
Services--Cross-Reinvestment Privilege." Such reinvestments will be made at the
net asset value per share. This election may be changed upon written notice to
the Service Organization at any time prior to the record date for a particular
dividend or distribution. If no election is made, all dividends and capital gain
distributions will be reinvested in the same Fund. The election to reinvest
dividends and distributions paid by the Fund in additional Shares of the Fund or
any other fund of the Pilot Family of Funds will not affect the tax treatment of
such dividends and distributions, which will be treated as received by the
shareholder and then used to purchase shares of the Fund or another fund of the
Funds. Any election to reinvest in additional Shares or to receive cash will be
administered by the Shareholder's Service Organization in a manner arranged for
the Fund. If you elect to receive distributions in cash and checks (1) are
returned and marked as "undeliverable" or (2) remain uncashed for six months,
your cash election will be changed automatically and your future dividend and
capital gains distributions will be reinvested in the Fund at the per share net
asset value determined as of the date of payment of the distribution. In
addition, any undeliverable checks or checks that remain uncashed for six months
will be canceled and will be reinvested in the Fund at the per share net asset
value determined as of the date of cancellation.
When are dividends and distributions declared and paid?
The Fund intends to declare and pay dividends from net investment income at
least annually.
DISTRIBUTION ARRANGEMENTS
The Pilot Funds has adopted Distribution Plans for its Class A and Class B
Shares.
UNDER THESE PLANS THE DISTRIBUTOR RECEIVES PAYMENTS FOR DISTRIBUTION AND SUPPORT
SERVICES. The Distribution Plan for Class A Shares authorizes payments to the
Distributor and Service Organizations for personal services provided to Class A
shareholders and/or the maintenance of shareholder accounts. Payments under the
Distribution Plan for Class B Shares will also be used to pay for sales
commissions and other fees payable to the Distributor and to Service
Organizations and other broker-dealers who sell Class B Shares, and may include
interest on such amounts that are not initially repaid by The Pilot Funds.
PAYMENTS UNDER THE DISTRIBUTION PLAN FOR CLASS A SHARES MAY NOT EXCEED 0.25% (on
an annual basis) of the average daily net asset value of the shares to which
such Plan relates. If more money is due the Distributor than it can collect in
any month because of this limitation, the unpaid amount may be carried forward
until it can be paid. Similarly, if in any month the Distributor does not expend
the entire amount to which it would otherwise be entitled, this amount may be
used as a credit and drawn upon to permit the payment of expenses in the future.
Neither of these amounts, however, is payable beyond the fiscal year in which
they accrue.
DISTRIBUTION 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 the
Class B Shares. Not more than 0.25% of such value will be used to compensate
Service Organizations for personal services provided to Class B shareholders
and/or the maintenance of shareholder accounts. Not more than 0.75% of such
value will be paid to the Distributor as reimbursement for
22
<PAGE> 172
commissions and transaction fees of up to 4.00% (which amount may change over
time) of the net asset value per share of the Class B Shares purchased by
clients of the Distributor, Service Organizations and other broker-dealers who
sell such Shares as well as expenses related to other promotional and
distribution activities. The distribution payments under this Plan have been
structured to provide you the option of purchasing Fund shares without the need
to pay a front-end sales charge. The purpose and function of the contingent
deferred sales charge and distribution fee for Class B Shares is the same as the
front-end sales charge and distribution fee for Class A Shares. In both cases
the sales charge and distribution fee are used to pay and provide compensation
for the distribution of Fund shares.
Actual distribution expenses paid by the Distributor with respect to Class B
Shares for any given year may exceed the distribution fees and contingent
deferred sales charges received with respect to those Shares. These excess
expenses may be reimbursed by a Fund or its Class B shareholders out of
contingent deferred sales charges and distribution payments in future years as
long as the Distribution Plan for Class B Shares is in effect.
Distribution payments under the Plans are subject to the requirements of a rule
under the Investment Company Act of 1940 known as Rule 12b-1. The distribution
fee and any sales charge applicable to a particular class will not be used to
assist the distribution of any other class.
From time to time the Distributor, at its expense, will also provide additional
compensation to dealers in connection with sales of Shares of any of the Funds
and other Funds of the Group. Compensation may include tickets to sporting and
other entertainment events, gifts of merchandise, and financial assistance to
dealers in connection with conferences, sales or training programs for their
employees, seminars for the public, advertising campaigns regarding one or more
Funds of the Group, and/or other dealer-sponsored special events. In some
instances, this compensation may be made available only to certain dealers whose
representatives have sold or are expected to sell a significant amount of such
shares. Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to exotic locations within or outside of the
United States for meetings or seminars of a business nature. The Distributor, at
its expense, currently conducts an annual sales contest for dealers in
connection with their sales of Shares of the Funds. Dealers may not use sales of
a Fund's Shares to qualify for this compensation to the extent such may be
prohibited by the laws of any state or any self-regulatory agency, such as the
National Association of Securities Dealers, Inc.
IF YOU ARE A CLIENT OF BOATMEN'S INVESTMENT SERVICES, INC. OR ANOTHER SERVICE
ORGANIZATION, YOU SHOULD NOTE that they may charge you a separate fee for
administrative services in connection with investments in Fund shares and may
impose minimum customer account and other requirements. These fees and
requirements would be in addition to those imposed by the Funds under the Plans
or otherwise. if you are investing through Boatmen's Investment Services, Inc.
or another Service Organization, please refer to their program materials for any
additional special provisions or conditions that may be different from those
described in this Prospectus (for example, some or all of the services and
privileges described may not be available to you). Boatmen's Investment
Services, Inc. and the other Service Organizations have the responsibility of
transmitting purchase orders and required funds, and of crediting their
customers' accounts following redemptions, in a timely manner in accordance with
their customer agreements and this Prospectus.
Investors may note that federal banking laws currently limit the securities
activities of banks. It is possible that a bank might be prohibited from acting
as a Service Organization in the future. If this were to happen, the bank's
shareholder clients would be permitted by the Fund to remain shareholders. The
Fund's method of operations might, however, change and such shareholders might
not be able to avail themselves of the services provided by their banks. No
adverse financial consequences are expected to occur to these shareholders from
any such event.
THE PILOT FAMILY OF FUNDS
The Pilot Funds was organized on July 15, 1992 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 Trustees of the Funds are
responsible for the overall management and supervision of its affairs. 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 and to establish additional portfolios in the
future.
23
<PAGE> 173
The Trustees have authorized the issuance of an unlimited number of shares
available to selected investors, in each of three share classes (Class A Shares,
Class B Shares and Pilot Shares) in the Funds. Information regarding The Pilot
Funds' other portfolios may be obtained by contacting The Pilot Funds or the
Distributor.
Class A and Class B Shares of the Fund are described in this prospectus. Each
Class A Share, Class B Share and Pilot Share of the Fund represents an equal
proportionate interest in the assets belonging to the Fund. It is contemplated
that most Shares will be held in accounts of which the record owner is a bank or
other institution acting as nominee for its customers who are beneficial owners
of the Shares. Pilot Shares may be purchased for accounts held in the name of an
institution that is not compensated by the Funds for services provided to the
institution's customers. For more information on Pilot Shares, call 800/71-PILOT
Class A and Class B Shares may be purchased for accounts held in the name of an
institution that provides certain account administration services to its
customers, including maintenance of account records and processing orders to
purchase, redeem and exchange Class A and Class B Shares. Please refer to the
Statement of Additional Information for the Class A and Class B Shares for a
more complete description of such services. Shares of each class may be
exchanged only for Shares of the same class in another fund. Except as described
herein, the three classes of Shares are identical. Certain aspects of the Shares
may be altered, after advance notice to Shareholders, if it is deemed necessary
in order to satisfy certain tax regulatory requirements.
When issued, Shares will be fully paid and nonassessable. In the event of
liquidation, Shareholders are entitled to share pro rata in the net assets of
the applicable fund available for distribution to Shareholders. Shares entitle
their holders to one vote per Share, are freely transferable and have no
preemptive, subscription or conversion rights.
SHAREHOLDERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND PROPORTIONATE
FRACTIONAL VOTES FOR FRACTIONAL SHARES HELD. Shares of all the Pilot Funds
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 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.
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 the Fund, selecting the investments and
making purchase and sale orders. Its principal offices are located at 100 North
Broadway, St. Louis, Missouri 63178-4737. The mailing address is P.O. Box 14737
at that address.
Investment Manager: KLEINWORT BENSON INVESTMENT MANAGEMENT AMERICAS INC.
(referred to as "Kleinwort Benson"), formerly Kleinwort Benson International
Investment Limited, serves as investment manager to the Fund. It is located at
200 Park Avenue, New York, New York 10166.
Administrator: BISYS FUND SERVICES LIMITED PARTNERSHIP (referred to as "BISYS"),
is responsible for coordinating the Fund's efforts and generally overseeing the
operation of the Fund's business. BISYS principal offices are located at 3435
Stelzer Road, Columbus, Ohio 43219-3035.
Distributor: Each 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 whose ultimate corporate parent is The BISYS Group,
Inc., is located at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
Custodian: BOATMEN'S TRUST COMPANY (referred to as "Boatmen's") is responsible
for holding the investments purchased by each Fund. Boatmen's is located at 100
N. Broadway, St. Louis, Missouri 63178.
Transfer Agent: BISYS FUND SERVICES, INC. (referred to as the "Transfer Agent")
is the transfer and dividend disbursing agent of the Fund. It maintains the
account records of all shareholders and administers the distribution of all
income earned as a result of investing in the Fund. The Transfer Agent is
located at 3435 Stelzer Road, Columbus, OH 43219-3035.
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 business,
24
<PAGE> 174
governmental units, pension and profit sharing plans and other institutions and
organizations. As of June 30, 1996, Boatmen's and its affiliates managed nearly
$[ ] billion in assets ($[ ] billion over which they had investment discretion
and $[ ] 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 located in Arkansas, Illinois, Iowa, Kansas, Missouri,
New Mexico, Oklahoma, Tennessee and Texas, a mortgage banking company, a credit
life insurance company, a federal savings bank in Arkansas and a limited service
bank in Delaware.
On August 30, 1996, Bancshares and NationsBank Corporation ("NationsBank")
announced that they have entered into an agreement pursuant to which Bancshares
will merge into NationsBank. The proposed merger, which is currently expected to
take place on or about January 1997, is subject to a number of conditions,
including approval by the appropriate regulatory authorities and by the
shareholders of both Bancshares and NationsBank. If the proposed merger is
consummated, Boatmen's will become a wholly owned subsidiary of NationsBank.
Under its Advisory Agreement with the Funds on behalf of each of the Funds,
Boatmen's supervises the activities of Kleinwort Benson, the investment manager.
Boatmen's pays all costs incurred by it in connection with the performance of
its duties under the Advisory Agreement other than the cost (including taxes and
brokerage commissions, if any) of securities purchased for the Fund.
Boatmen's has designated the following portfolio manager as being primarily
responsible for the management of the Fund. Michael E. Kenneally, CFA is a
Senior Vice President and Director of Research. In addition to his
responsibilities in connection with the management of the international
portfolios, including the Fund, Mr. Kenneally is responsible for all fundamental
and quantitative research as well as the management of all small capitalization
and growth-style portfolios.
MORE ABOUT KLEINWORT BENSON. Kleinwort Benson is the SEC registered investment
management subsidiary of the London-based Kleinwort Benson Group plc, a holding
company for a merchant banking group whose origins date back to 1792. Kleinwort
Benson has offices in London, Hong Kong and Tokyo and may utilize the general
expertise of Kleinwort Benson Group plc and its affiliates in respect of, for
example, economic analyses and predictions and market developments and trends.
Kleinwort Benson plc is a wholly owned subsidiary of Dresdner Bank AG.
Since it commenced operations in 1980, Kleinwort Benson has managed investment
accounts, primarily for institutions in North America, comprised of equity,
fixed income and balanced portfolios. These portfolios as a general rule consist
principally of foreign securities. As of June 30, 1996, Kleinwort Benson had
approximately $3 billion of assets under management.
MORE ABOUT BISYS. BISYS Fund Services Limited Partnership ("BISYS") is a
subsidiary of The BISYS Group, Inc., 150 Clove Road, Little Falls, New Jersey
07424, a publicly owned company engaged in information processing, loan
servicing and 401(k) administration and recordkeeping services to and through
banking and other financial organizations. Under its Administration Agreement
with the Fund, 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, W. Eugene
Spurbeck, George O. Martinez, William J. Tomko and Bruce Treff are also
employees and/or officers of BISYS, the Distributor or an affiliate.
EXPENSES. In order to support the services described above, as well as other
matters essential to the operation of the Fund, the Fund incurs 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.
As compensation for the services rendered to the Fund 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 .80 of 1% of the average daily net assets of the Fund. For the
period from September 1, 1995 through August 31, 1996, Boatmen's was paid at the
above rate. For the fiscal years ended August 31, 1994, 1995 and 1996 Boatmen's
received $2,422,559, $2,828,628 and $3,873,513 in advisory fees, respectively.
Effective June 1, 1995, pursuant to approval from shareholders received at a
Special Meeting held on May 24, 1995, as compensation for the services rendered
by Kleinwort Benson as investment manager to the Fund, Kleinwort Benson is
entitled to a fee, paid by Boatmen's directly out of Boatmen's advisory fee,
computed daily and
payable monthly at an annual rate equal to .40 of 1% up to $325,000,000 and .25
of 1% of such assets in excess of $325,000,000, on an annualized basis. Prior to
June 1,
25
<PAGE> 175
1995, Kleinwort Benson was entitled to a fee, computed daily and payable monthly
at an annual rate equal to .80 of 1% of such assets up to $65,000,000, .40 of 1%
of such assets in excess of $65,000,000 and less than $325,000,000, and .25 of
1% of such assets in excess of $325,000,000. For the period from August 31, 1993
through August 31, 1994, the compensation received by Kleinwort Benson
constituted .48 of 1% of the Fund's average daily net assets. For the fiscal
years ended August 31, 1995 and 1996, the fee paid by Boatmen's to Kleinwort
Benson America was $1,535,377and $ respectively, which equaled .43 of
1% and % of 1%, respectively, of the Fund's average daily net assets. Under
the terms of the Investment Management Agreement among the Funds, Kleinwort
Benson and Boatmen's, Kleinwort Benson, subject to the general supervision of
the Funds' Board of Trustees and Boatmen's, manages the investment operations of
the Fund and the composition of the Fund's assets, including the purchase,
retention and disposition thereof. With respect to the Fund, all investment
decisions are made by a committee consisting of personnel of Kleinwort Benson.
No one person is responsible for recommendations to that committee.
For its services as administrator, 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. These amounts may be reduced pursuant to fee waivers by
BISYS. Any such fee waivers may be terminated by BISYS at any time. For the
fiscal year ended August 31, 1994, 1995 and 1996, the Fund paid administration
fees in the amount of $295,477, $386,949 and $ , respectively.
The Funds are responsible for all expenses incurred by the Fund, other than
those expressly borne by Boatmen's, Kleinwort Benson, BISYS or the Transfer
Agent under the Advisory, Investment Management, Administration or Transfer
Agency Agreements. Such expenses include, the fees payable to Boatmen's, BISYS
and the Transfer Agent, the fees and expenses of the Fund's custodian, brokerage
fees and commissions, any portfolio losses, state and federal registration fees
for qualifying Fund Shares under federal or state securities laws, organization
expenses, membership fees in investment-company organizations, 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 Funds 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 Fund's
Shareholders and regulatory authorities, compensation and expenses of its
Trustees and extraordinary expenses incurred by the Funds. The fees payable to
Kleinwort Benson are paid by Boatmen's directly out of Boatmen's advisory fee.
FEE WAIVERS. Expenses can be reduced by voluntary fee waivers and expense
reimbursements by Boatmen's and the Fund's other service providers. However, as
to any amounts voluntarily waived or reimbursed, the service providers retain
the ability to be reimbursed by the 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 the 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.
The Fund intends to elect to be treated as a regulated investment company under
Subchapter M of the Internal Revenue Code, as amended, (the "Code"). As a
regulated investment company, the Fund must satisfy certain requirements
relating to the sources of its income, diversification of its assets and
distribution of its income to shareholders. In addition, as a regulated
investment company, the Fund generally will not incur a federal income or excise
tax on any investment company taxableincome and net capital gains that are
distributed to its Shareholders in accordance with certain timing requirements
of the Code.
Dividends of investment company taxable income, which generally includes the
excess of net short-term capital gains over net long-term capital losses,
dividends and interest (including original issue discount and market discount),
less expenses, will be taxable to Shareholders as ordinary income. If a portion
of the income of the Fund 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. Distributions of
26
<PAGE> 176
the excess of net long-term capital gains over net short-term capital losses, if
any, which are designated as "capital gains dividends" by the Fund will be
taxable as long-term capital gains regardless of how long the Shareholders have
held their Shares. These tax consequences will apply regardless of whether
distributions are received in cash or reinvested in Shares. Distributions
declared in October, November or December with a record date in such month and
paid in January of the following year are taxable to Shareholders as if received
on December 31 of the year declared. Shareholders will be informed about the
amount and character of distributions received from the Fund for federal income
tax purposes, including any distributions that may constitute a return of
capital.
Investments in zero coupon securities and other original issue discount
obligations will result in income to the Fund each year equal to a portion of
the excess of the face value of the securities over their issue price, even
though the Fund receives no cash interest payments from the securities.
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 the 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.
Individuals and certain other classes of Shareholders may be subject to 31%
withholding of federal income tax on taxable distributions if they fail to
furnish the Fund with their correct taxpayer identification number and certain
certifications regarding their tax status or if they are otherwise subject to
backup withholding. Backup withholding is not an additional tax. Any amounts
withheld may be credited against a Shareholder's U.S. federal income tax
liability.
If the Fund invests in foreign securities it may be subject to foreign
withholding taxes on income earned on such securities and may be unable to pass
through to Shareholders the ability to claim foreign tax credits and deductions
with respect to such taxes. Certain gains and losses which are attributable to
fluctuations in the value of foreign currency are treated as ordinary income and
losses. These gains and losses may increase or decrease the amount of the Fund's
investment company taxable income to be distributed to Shareholders as ordinary
income.
In addition to federal taxes, a Shareholder may be subject to state and local
taxes on payments received from the Fund. A state tax exemption may be available
in some states to the extent distributions of the Fund are derived from interest
on certain direct U.S. Government obligations or on obligations of the
particular state.
Shareholders should consult their own tax advisers concerning these matters.
Further information relating to tax consequences is contained in the Statement
of Additional Information.
MEASURING PERFORMANCE
Performance information provides you with a method of measuring and monitoring
your investments. The 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 the Fund may be calculated on an AVERAGE ANNUAL TOTAL RETURN
basis or an AGGREGATE TOTAL RETURN BASIS. Average annual 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.
The Fund may provide quotes of total returns and yields WITHOUT REFLECTING A
SALES LOAD, which quotations will, of course, be higher than quotations that do
reflect such a sales charge.
27
<PAGE> 177
PILIEAB596P
<PAGE> 178
- ----------------------------------------------------------------
- -----
Financial
Direction
LOGO PILOT SHORT-TERM
U.S. TREASURY FUND
PILOT SHORT-TERM
DIVERSIFIED ASSETS FUND
PILOT SHORT-TERM
TAX-EXEMPT
DIVERSIFIED FUND
PILOT MISSOURI
SHORT-TERM
TAX-EXEMPT FUND
PILOT SHARES
DECEMBER 31, 1996
The
Pilot
Funds
Prospectus enclosed
<PAGE> 179
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
EXPENSE SUMMARY....................................................................................... 4
Shareholder Transaction Expenses.................................................................. 4
Annual Fund Operating Expenses.................................................................... 4
Example........................................................................................... 4
THE PILOT FUNDS FINANCIAL HIGHLIGHTS.................................................................. 6
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS...................................................... 11
Pilot Short-Term U.S. Treasury Fund............................................................... 11
Pilot Short-Term Diversified Assets Fund.......................................................... 11
Pilot Short-Term Tax-Exempt Diversified Fund and Pilot Missouri Short-Term Tax-Exempt Fund........ 11
PORTFOLIO INSTRUMENTS AND PRACTICES................................................................. 12
U.S. Government Securities........................................................................ 12
Foreign Securities................................................................................ 13
Repurchase Agreements............................................................................. 13
Municipal Instruments............................................................................. 14
State of Missouri................................................................................. 15
Loan Participations and Asset-Backed and Receivables-Backed Securities............................ 15
Other Investment Companies........................................................................ 15
Forward Commitments and When-Issued Securities.................................................... 16
Managing Liquidity................................................................................ 16
Other Risk Considerations......................................................................... 16
Additional Information............................................................................ 17
INVESTMENT LIMITATIONS.............................................................................. 17
Treasury, Diversified and Tax-Exempt Diversified Funds............................................ 17
Missouri Tax-Exempt Fund.......................................................................... 17
INVESTING IN THE PILOT FUNDS.......................................................................... 18
How to Buy Shares................................................................................. 18
EXPLANATION OF SALES PRICE............................................................................ 19
HOW TO SELL SHARES.................................................................................... 20
How to Redeem..................................................................................... 20
Payment of Redemption Proceeds and Dividends...................................................... 20
Check Redemption Privilege........................................................................ 20
EXCHANGES............................................................................................. 21
DIVIDENDS AND DISTRIBUTIONS........................................................................... 21
Where do your dividends and distributions come from?.............................................. 21
When are dividends and distributions declared and paid?........................................... 22
How are dividends and distributions declared and paid?............................................ 22
THE PILOT FAMILY OF FUNDS............................................................................. 22
THE BUSINESS OF THE FUND.............................................................................. 23
FUND MANAGEMENT....................................................................................... 23
Service Providers................................................................................. 23
More about BISYS.................................................................................. 25
Expenses.......................................................................................... 25
Fee Waivers....................................................................................... 26
TAX IMPLICATIONS...................................................................................... 26
MEASURING PERFORMANCE................................................................................. 27
Performance comparisons........................................................................... 28
</TABLE>
<PAGE> 180
THE PILOT FUNDS
LOGO
PROSPECTUS FOR PILOT SHARES
PILOT SHORT-TERM U.S. TREASURY FUND
PILOT SHORT-TERM DIVERSIFIED ASSETS FUND
PILOT SHORT-TERM TAX-EXEMPT DIVERSIFIED FUND
PILOT MISSOURI SHORT-TERM TAX-EXEMPT FUND
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PILOT FUND GOAL FOR INVESTORS WHO WANT
- ----------------- -------------------------------------- --------------------------------------
<S> <C> <C>
SHORT-TERM Maximize current income to the extent Safety, liquidity and stability of
U.S. TREASURY consistent with the preservation of capital, consistent with current
capital and the maintenance of income, from U.S. Treasury securities.
liquidity by investing exclusively in
high-quality money market instruments.
- ---------------------------------------------------------------------------------------------------
SHORT-TERM Maximize current income to the extent Liquidity and stability of capital,
DIVERSIFIED consistent with the preservation of consistent with current income, from a
ASSETS capital and the maintenance of diversified portfolio of money market
liquidity by investing exclusively in securities.
high quality money market instruments.
- ---------------------------------------------------------------------------------------------------
SHORT-TERM Seek as high a level of current income Liquidity and stability of capital,
TAX-EXEMPT which is exempt from federal income consistent with current income which
DIVERSIFIED tax as is consistent with the is exempt from federal income tax.
preservation of capital.
- ---------------------------------------------------------------------------------------------------
MISSOURI Seek as high a level of current income Liquidity and stability of capital,
SHORT-TERM which is exempt from federal income consistent with current income which
TAX-EXEMPT tax as is consistent with the is exempt from federal income tax and,
preservation of capital. to the extent possible, Missouri
income tax.
- ---------------------------------------------------------------------------------------------------
</TABLE>
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.
SHARES OF THE PILOT MISSOURI SHORT-TERM TAX EXEMPT FUND ARE NOT OFFERED IN ALL
STATES.
- --------------------------------------------------------------------------------
1
<PAGE> 181
THE PILOT FUNDS
LOGO
PROSPECTUS FOR PILOT SHARES
PILOT SHORT-TERM U.S. TREASURY FUND
PILOT SHORT-TERM DIVERSIFIED ASSETS FUND
PILOT SHORT-TERM TAX-EXEMPT DIVERSIFIED FUND
PILOT MISSOURI SHORT-TERM TAX-EXEMPT FUND
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PILOT FUND GOAL FOR INVESTORS WHO WANT
- ----------------- -------------------------------------- --------------------------------------
<S> <C> <C>
SHORT-TERM Maximize current income to the extent Safety, liquidity and stability of
U.S. TREASURY consistent with the preservation of capital, consistent with current
capital and the maintenance of income, from U.S. Treasury securities.
liquidity by investing exclusively in
high-quality money market instruments.
- ---------------------------------------------------------------------------------------------------
SHORT-TERM Maximize current income to the extent Liquidity and stability of capital,
DIVERSIFIED consistent with the preservation of consistent with current income, from a
ASSETS capital and the maintenance of diversified portfolio of money market
liquidity by investing exclusively in securities.
high quality money market instruments.
- ---------------------------------------------------------------------------------------------------
SHORT-TERM Seek as high a level of current income Liquidity and stability of capital,
TAX-EXEMPT which is exempt from federal income consistent with current income which
DIVERSIFIED tax as is consistent with the is exempt from federal income tax.
preservation of capital.
- ---------------------------------------------------------------------------------------------------
MISSOURI Seek as high a level of current income Liquidity and stability of capital,
SHORT-TERM which is exempt from federal income consistent with current income which
TAX-EXEMPT tax as is consistent with the is exempt from federal income tax and,
preservation of capital. to the extent possible, Missouri
income tax.
- ---------------------------------------------------------------------------------------------------
</TABLE>
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.
SHARES OF THE PILOT MISSOURI SHORT-TERM TAX EXEMPT FUND ARE NOT OFFERED IN ALL
STATES.
- --------------------------------------------------------------------------------
1
<PAGE> 182
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. WHILE EACH FUND SEEKS TO MAINTAIN A STABLE
PRICE PER SHARE OF $1.00, THERE IS NO ASSURANCE THAT EACH FUND WILL BE ABLE TO
DO SO. INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL. BECAUSE THE MISSOURI SHORT-TERM TAX-EXEMPT FUND MAY INVEST A
SIGNIFICANT PERCENTAGE OF ITS ASSETS IN A SINGLE ISSUER AND IS CONCENTRATED IN
SECURITIES ISSUED BY A SINGLE STATE, AN INVESTMENT IN THE FUND MAY BE RISKIER
THAN AN INVESTMENT IN OTHER TYPES OF MUTUAL FUNDS. IN ADDITION, THE AMOUNT OF
DIVIDENDS PAID BY A FUND WILL VARY. BOATMEN'S TRUST COMPANY SERVES AS INVESTMENT
ADVISER TO EACH OF THE FUNDS AND IS PAID A FEE FOR ITS SERVICES, AND IS NOT
AFFILIATED WITH PILOT FUNDS DISTRIBUTORS, INC., THE FUNDS' DISTRIBUTOR.
This Prospectus describes Pilot Shares in the Pilot Short-Term U.S. Treasury,
Pilot Short-Term Diversified Assets, Pilot Short-Term Tax-Exempt Diversified and
Pilot Missouri Short-Term Tax-Exempt Funds. 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
your Institution, by writing Pilot Funds Distributors, Inc., 3435 Stelzer Road,
Columbus, Ohio 43219-3035, or by calling 800/71-PILOT. The Statement of
Additional Information dated December 31, 1996, is incorporated by reference
into (considered a part of) the Prospectus.
2
<PAGE> 183
The Funds are particularly designed for customers of Boatmen's, its affiliates
and other Institutions seeking investment of short-term funds to obtain the
yields available on certain types of money market instruments while maintaining
maximum liquidity and constant net asset value (see "Net Asset Value").
Investment in the Funds permits the customer to participate in money market
transactions with a degree of diversification not normally available to the
individual investor. In addition, investment in the Funds relieves the customer
of many investment management and administrative burdens usually associated with
the direct purchase and sale of money market instruments. These include:
selection of portfolio investments; surveying the market for the best price at
which to buy and sell; valuation of portfolio securities; selection and
scheduling of maturities and reinvestment; receipt, delivery and safekeeping of
securities; and portfolio recordkeeping.
Each Fund seeks to maintain a stable net asset value of $1.00 per Share. To
facilitate this goal, each Fund's securities are valued by the amortized cost
method as permitted by a rule of the Securities and Exchange Commission (the
"SEC"). The SEC rule requires that all portfolio securities have at the time of
purchase a maximum remaining maturity of not more than 397 days and that each
Fund maintain a dollar-weighted average portfolio maturity of not more than 90
days.
Investments by each Fund must present minimal credit risk and be rated within
one of the two highest rating categories for short-term debt obligations by at
least two nationally recognized statistical rating organizations ("NRSROs")
assigning a rating to the security or issuer, or if only one NRSRO has assigned
a rating, by that NRSRO. Purchases of securities which are unrated or rated by
only one NRSRO must be approved or ratified by the Trustees except for purchases
made on behalf of the Pilot Short-Term Tax-Exempt Diversified Fund and the Pilot
Missouri Short-Term Tax-Exempt Fund (the "Tax-Exempt Funds"). Securities which
are rated (or that have been issued by an issuer that is rated with respect to a
class of short-term debt obligations, or any security within that class,
comparable in priority and quality with such securities) in the highest
short-term rating category by at least two NRSROs are designated "First Tier
Securities". Securities rated in the top two short-term rating categories by at
least two NRSROs, but which are not rated in the highest short-term rating
category by two or more NRSROs, are designated "Second Tier Securities".
Securities which are unrated may be purchased only if they are deemed to be of
comparable quality to First Tier or Second Tier rated securities. NRSROs include
Standard & Poor's Corporation, Moody's Investors Service, Inc., Fitch Investors
Service, Inc., Duff and Phelps, Inc., IBCA Limited and its affiliate IBCA Inc.,
and Thomson BankWatch, Inc. For a description of each NRSRO's rating categories,
see Appendix A to the Statement of Additional Information.
None of the Funds alone constitutes a complete investment program. There can be
no assurance that the Funds will be able to maintain a stable net asset value,
or that they will achieve their investment objectives.
- --------------------------------------------------------------------------------
3
<PAGE> 184
EXPENSE SUMMARY (1)(3)
SHAREHOLDER TRANSACTION EXPENSES are charges you pay directly 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.
Examples based on this information are also provided.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
PILOT SHARES (3)
----------------------------------------------------------------
PILOT PILOT
PILOT PILOT SHORT-TERM MISSOURI
SHORT-TERM SHORT-TERM TAX-EXEMPT SHORT-TERM
U.S. TREASURY DIVERSIFIED ASSETS DIVERSIFIED TAX-EXEMPT
FUND FUND FUND FUND
------------- ------------------ ----------- ----------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases......... None None None None
Redemption Fees................................. None None None None
Exchange Fees................................... None None None None
ANNUAL FUND OPERATING EXPENSES (2)
(As a percentage of average net assets)
Management Fees (1)............................. 0.15% 0.15% 0.20% 0.20%
Other Expenses (4).............................. 0.13% 0.13% 0.13% 0.26%
-------- ----------- ------- -------
Total Operating Expenses (1)............... 0.28% 0.28% 0.33% 0.46%
-------- ----------- ------- -------
-------- ----------- ------- -------
</TABLE>
EXAMPLE (3): 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:
<TABLE>
<CAPTION>
1 3 5 10
YEAR AFTER YEARS AFTER YEARS AFTER YEARS AFTER
PURCHASE PURCHASE PURCHASE PURCHASE
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
PILOT SHORT-TERM U.S. TREASURY FUND
Pilot Shares................................. $3 $ 9 $16 $36
PILOT SHORT-TERM DIVERSIFIED ASSETS FUND
Pilot Shares................................. 3 9 16 36
PILOT SHORT-TERM TAX-EXEMPT DIVERSIFIED FUND
Pilot Shares................................. 3 11 19 42
PILOT MISSOURI SHORT-TERM TAX-EXEMPT FUND
Pilot Shares................................. 5 15 26 58
</TABLE>
The Example shown above should not be considered a representation of past or
future investment returns or operating expenses. Actual investment returns and
operating expenses may be more or less than those shown. Actual expenses
may vary depending upon a variety of factors, including the actual performance
of a Fund, which may be greater or
less than 5%.
4
<PAGE> 185
- ------------
Notes:
(1) The purpose of this Table is to assist investors in understanding the
various costs and expenses that an investor in the Funds will bear directly
or indirectly. It does not, however, reflect the fee which may be charged by
Boatmen's directly to its customers at an annual rate not to exceed .25% per
annum of the average daily balance of Pilot Shares in the customer's
account, which fee Boatmen's has advised is similar to that charged by it to
customers investing in any other money market fund.
(2) For further information concerning management fees, see the section entitled
"Management."
(3) The information set forth in the Table and Example relates only to Pilot
Shares of the Funds. Administration Shares and Investor Shares are subject
to different fees and expenses. See "The Pilot Family of Funds."
Administration Shares pay an account administration fee of up to .25 of 1%
of average daily net assets. Investor Shares pay a Rule 12b-1 fee of up to
.50 of 1% of average daily net assets. All other Fund expenses related to
Administration Shares and Investor Shares are the same as for Pilot Shares.
(4) The table does not reflect the allocation of any miscellaneous "class
expenses" (e.g., certain printing and registration expenses).
5
<PAGE> 186
THE PILOT FUNDS
FINANCIAL HIGHLIGHTS
The following data with respect to a Share of the Pilot Short-Term Diversified
Assets Fund, Pilot Short-Term U.S. Treasury Fund, Pilot Missouri Short-Term
Tax-Exempt Fund (formerly "Pilot Short-Term Tax-Exempt Fund") and Pilot
Short-Term Tax-Exempt Diversified Fund outstanding during the periods indicated
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report incorporated by reference and attached to the
Statement of Additional Information, and should be read in conjunction with the
financial statements and related notes incorporated by reference and attached to
the Statement of Additional Information. For periods shown, except as otherwise
noted, Goldman, Sachs & Co. served as investment adviser to each of the Pilot
Short-Term Tax-Exempt Diversified Fund and Pilot Missouri Short-Term Tax-Exempt
Fund, and Boatmen's Trust Company served as investment subadviser to the Pilot
Missouri Short-Term Tax-Exempt Fund.
The Administration Shares and the Investor Shares are two classes of Shares
first issued by the Funds during June, 1991 and July, 1992, respectively.
Accordingly, there are no financial highlights with respect to the Funds for
such Shares for periods prior to such dates. The financial highlights presented
below for periods prior to June, 1991 for the Administration Shares and July,
1992 for the Investor Shares are historical information for Shares that did not
provide administration or additional services to Shareholders pursuant to a
separate Service Agreement. As indicated elsewhere in this prospectus, the
Service Organizations providing services pursuant to a Service Agreement will
receive a fee in an amount up to .25 of 1% (on an annualized basis) of the
average daily net asset value of the Administration Shares of the applicable
Fund and a fee in an amount up to .50 of 1% (on an annualized basis) of the
average daily net asset value of the Investor Shares of the applicable Fund.
6
<PAGE> 187
THE PILOT FUNDS
------------------------
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
SHORT-TERM DIVERSIFIED ASSETS FUND
------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
--------------------------------------------
NET ASSET NET REALIZED TOTAL NET ASSET
VALUE AT NET GAIN ON INCOME FROM DISTRIBUTIONS VALUE AT
BEGINNING INVESTMENT INVESTMENT INVESTMENT TO END OF
FOR THE YEARS ENDED AUGUST 31,(F ) OF PERIOD INCOME TRANSACTIONS OPERATIONS SHAREHOLDERS PERIOD
- ------------------------------------ --------- ---------- ------------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot shares.................. $1.00 $ 0.0534 $ -- $ 0.0534 $ (0.0534) $1.00
1996--Pilot Administration shares... 1.00 0.0509 -- 0.0509 (0.0509) 1.00
1996--Pilot Investor shares......... 1.00 0.0484 -- 0.0484 (0.0484) 1.00
1995--Pilot shares.................. 1.00 0.0554 -- 0.0554 (0.0554) 1.00
1995--Pilot Administration shares... 1.00 0.0529 -- 0.0529 (0.0529) 1.00
1995--Pilot Investor shares......... 1.00 0.0504 -- 0.0504 (0.0504) 1.00
1994--Pilot shares.................. 1.00 0.0353 0.0001 0.0354 (0.0354) 1.00
1994--Pilot Administration shares... 1.00 0.0328 0.0001 0.0329 (0.0329) 1.00
1994--Pilot Investor shares......... 1.00 0.0303 0.0001 0.0304 (0.0304) 1.00
1993--Pilot shares.................. 1.00 0.0325 0.0001 0.0326 (0.0326) 1.00
1993--Pilot Administration shares... 1.00 0.0298 0.0001 0.0299 (0.0299) 1.00
1993--Pilot Investor shares......... 1.00 0.0274 0.0001 0.0275 (0.0274) 1.00
1992--Pilot shares.................. 1.00 0.0452 -- 0.0452 (0.0452) 1.00
1992--Pilot Administration shares... 1.00 0.0396 0.0001 0.0397 (0.0397) 1.00
1992--Pilot Investor shares(a)...... 1.00 0.0043 -- 0.0043 (0.0043) 1.00
1991--Pilot shares.................. 1.00 0.0691 0.0003 0.0694 (0.0694) 1.00
1991--Pilot Administration
shares(b).......................... 1.00 0.0134 -- 0.0134 (0.0134) 1.00
1990--Pilot shares.................. 1.00 0.0829 -- 0.0829 (0.0829) 1.00
1989--Pilot shares.................. 1.00 0.0890 -- 0.0890 (0.0890) 1.00
1988--Pilot shares.................. 1.00 0.0703 -- 0.0703 (0.0703) 1.00
1987--Pilot shares.................. 1.00 0.0605 -- 0.0605 (0.0605) 1.00
<CAPTION>
RATIO INFORMATION
ASSUMING NO WAIVER OF
ADVISORY FEES AND
EXPENSE LIMITATIONS(D)
----------------------------
RATIO OF NET RATIO OF NET
RATIO OF INVESTMENT NET ASSETS RATIO OF INVESTMENT
NET EXPENSES INCOME TO AT END OF EXPENSES TO INCOME TO
TOTAL TO AVERAGE AVERAGE PERIOD AVERAGE NET AVERAGE NET
FOR THE YEARS ENDED AUGUST 31,(F ) RETURN(E) NET ASSETS NET ASSETS (IN 000'S) ASSETS ASSETS
- ------------------------------------ --------- ------------ ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot shares.................. 5.47% 0.27% 5.33% $1,318,767 0.31% 5.29%
1996--Pilot Administration shares... 5.21 0.52 5.07 241,970 0.56 5.03
1996--Pilot Investor shares......... 4.95 0.77 4.83 49,849 0.81 4.79
1995--Pilot shares.................. 5.68 0.23 5.56 1,056,624 0.24 5.55
1995--Pilot Administration shares... 5.42 0.48 5.22 231,688 0.49 5.21
1995--Pilot Investor shares......... 5.15 0.73 5.00 33,948 0.74 4.99
1994--Pilot shares.................. 3.60 0.15 3.53 857,795 0.29 3.40
1994--Pilot Administration shares... 3.35 0.40 3.28 303,288 0.54 3.15
1994--Pilot Investor shares......... 3.10 0.65 3.03 37,896 0.79 2.90
1993--Pilot shares.................. 3.29 0.12 3.25 1,293,667 0.29 3.08
1993--Pilot Administration shares... 3.04 0.37 2.98 378,262 0.54 2.81
1993--Pilot Investor shares......... 2.78 0.62 2.74 36,814 0.79 2.57
1992--Pilot shares.................. 4.68 0.12 4.52 1,939,568 0.29 4.35
1992--Pilot Administration shares... 4.42 0.37 3.95 271,606 0.54 3.78
1992--Pilot Investor shares(a)...... 3.24(c) 0.62(c) 3.14(c) 27,880 0.80(c) 2.96(c)
1991--Pilot shares.................. 7.27 0.12 6.91 1,425,385 0.29 6.74
1991--Pilot Administration
shares(b).......................... 5.77(c) 0.37(c) 5.68(c) 43,189 0.54(c) 5.51(c)
1990--Pilot shares.................. 8.65 0.16 8.29 1,202,805 0.33 8.12
1989--Pilot shares.................. 9.25 0.33 8.90 429,053 0.38 8.85
1988--Pilot shares.................. 7.25 0.31 7.03 402,799 0.38 6.96
1987--Pilot shares.................. 6.25 0.28 6.05 352,037 0.33 6.00
</TABLE>
- ------------
(a) Pilot Investor share activity commenced during July of 1992.
(b) Pilot Administration share activity commenced during June of 1991.
(c) Annualized.
(d) The above does not reflect the fee which may be charged by Boatmen's
directly to its customers' accounts at an annual rate not to exceed 0.25% of
the average daily balance of Pilot shares in the customer's account.
(e) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption of
the investment at the net asset value at the end of the period.
(f ) Prior to June 1, 1994, the Short-Term Diversified Assets Fund was advised
by Goldman Sachs Asset Management.
7
<PAGE> 188
THE PILOT FUNDS
------------------------
FINANCIAL HIGHLIGHTS--(CONTINUED)
<TABLE>
<CAPTION>
SHORT-TERM U.S. TREASURY FUND
------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
--------------------------------------------
NET ASSET NET REALIZED TOTAL NET ASSET
VALUE AT NET GAIN ON INCOME FROM DISTRIBUTIONS VALUE AT
BEGINNING INVESTMENT INVESTMENT INVESTMENT TO END OF
FOR THE YEARS ENDED AUGUST 31,(F ) OF PERIOD INCOME TRANSACTIONS OPERATIONS SHAREHOLDERS PERIOD
- ----------------------------------- --------- ---------- ------------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot shares................. $1.00 $ 0.0522 $ -- $0.0522 $ (0.0522) $1.00
1996--Pilot Administration
shares............................ 1.00 0.0497 -- 0.0497 (0.0497) 1.00
1996--Pilot Investor shares........ 1.00 0.0472 -- 0.0472 (0.0472) 1.00
1995--Pilot shares................. 1.00 0.0534 -- 0.0534 (0.0534) 1.00
1995--Pilot Administration
shares............................ 1.00 0.0509 -- 0.0509 (0.0509) 1.00
1995--Pilot Investor shares........ 1.00 0.0484 -- 0.0484 (0.0484) 1.00
1994--Pilot shares................. 1.00 0.0334 0.0002 0.0336 (0.0336) 1.00
1994--Pilot Administration
shares............................ 1.00 0.0309 0.0002 0.0311 (0.0311) 1.00
1994--Pilot Investor shares........ 1.00 0.0284 0.0002 0.0286 (0.0286) 1.00
1993--Pilot shares................. 1.00 0.0294 0.0006 0.0300 (0.0300) 1.00
1993--Pilot Administration
shares............................ 1.00 0.0269 0.0006 0.0275 (0.0275) 1.00
1993--Pilot Investor shares........ 1.00 0.0244 0.0007 0.0251 (0.0250) 1.00
1992--Pilot shares................. 1.00 0.0400 0.0014 0.0414 (0.0414) 1.00
1992--Pilot Administration
shares............................ 1.00 0.0362 0.0014 0.0378 (0.0378) 1.00
1992--Pilot Investor shares(a ).... 1.00 0.0048 0.0002 0.0050 (0.0050) 1.00
1991--Pilot shares................. 1.00 0.0644 0.0016 0.0659 (0.0659) 1.00
1991--Pilot Administration
shares(b)......................... 1.00 0.0124 0.0003 0.0127 (0.0127) 1.00
<CAPTION>
FOR THE PERIOD MARCH 26, 1990
(COMMENCEMENT OF OPERATIONS)
THROUGH AUGUST 31,
- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
1990--Pilot shares................. 1.00 0.0346 0.0001 0.0347 (0.0347) 1.00
<CAPTION>
RATIO INFORMATION
ASSUMING NO WAIVER
OF ADVISORY FEES(D)
----------------------------
RATIO OF NET NET ASSETS RATIO OF NET
RATIO OF INVESTMENT AT RATIO OF INVESTMENT
NET EXPENSES INCOME TO END OF EXPENSES TO INCOME TO
TOTAL TO AVERAGE AVERAGE PERIOD AVERAGE NET AVERAGE NET
FOR THE YEARS ENDED AUGUST 31,(F ) RETURN(E) NET ASSETS NET ASSETS (IN 000'S) ASSETS ASSETS
- ----------------------------------- --------- ------------ ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot shares................. 5.35% 0.27% 5.22% $1,299,086 0.31% 5.18%
1996--Pilot Administration
shares............................ 5.08 0.52 4.96 216,368 0.56 4.92
1996--Pilot Investor shares........ 4.82 0.77 4.70 177,882 0.81 4.66
1995--Pilot shares................. 5.47 0.23 5.36 1,191,447 0.24 5.35
1995--Pilot Administration
shares............................ 5.21 0.48 5.12 215,593 0.49 5.11
1995--Pilot Investor shares........ 4.94 0.73 4.82 131,074 0.74 4.81
1994--Pilot shares................. 3.40 0.16 3.34 843,111 0.28 3.24
1994--Pilot Administration
shares............................ 3.15 0.41 3.09 98,823 0.53 2.99
1994--Pilot Investor shares........ 2.90 0.66 2.84 156,132 0.78 2.74
1993--Pilot shares................. 3.04 0.14 2.94 942,109 0.30 2.78
1993--Pilot Administration
shares............................ 2.79 0.39 2.69 65,570 0.55 2.53
1993--Pilot Investor shares........ 2.53 0.64 2.44 193,764 0.80 2.28
1992--Pilot shares................. 4.30 0.24 4.00 887,321 0.30 3.94
1992--Pilot Administration
shares............................ 4.04 0.49 3.62 91,152 0.56 3.55
1992--Pilot Investor shares(a ).... 2.92(c) 0.71(c) 2.83(c) 212,920 0.81(c) 2.73(c)
1991--Pilot shares................. 6.89 0.24 6.44 588,141 0.29 6.39
1991--Pilot Administration
shares(b)......................... 5.53(c) 0.49(c) 5.24(c) 15,980 0.54(c) 5.19(c)
FOR THE PERIOD MARCH 26, 1990
(COMMENCEMENT OF OPERATIONS)
THROUGH AUGUST 31,
- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
1990--Pilot shares................. 8.05(c) 0.26(c) 7.94(c) 360,685 0.39(c) 7.81(c)
</TABLE>
- ------------
(a) Pilot Investor share activity commenced during July of 1992.
(b) Pilot Administration share activity commenced during June of 1991.
(c) Annualized.
(d) The above does not reflect the fee which may be charged by Boatmen's
directly to its customers' accounts at an annual rate not to exceed .25% of
the average daily balance of Pilot shares in the customer's account.
(e) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption
of the investment at the net asset value at the end of the period.
(f ) Prior to June 1, 1994, the Short-Term U.S. Treasury Fund was advised by
Goldman Sachs Asset Management.
8
<PAGE> 189
THE PILOT FUNDS
------------------------
FINANCIAL HIGHLIGHTS--(CONTINUED)
<TABLE>
<CAPTION>
MISSOURI SHORT-TERM TAX-EXEMPT FUND
------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
--------------------------------------------
NET ASSET NET REALIZED TOTAL NET ASSET
VALUE AT NET LOSS ON INCOME FROM DISTRIBUTIONS VALUE AT
BEGINNING INVESTMENT INVESTMENT INVESTMENT TO END OF
FOR THE YEARS ENDED AUGUST 31, OF PERIOD INCOME TRANSACTIONS OPERATIONS SHAREHOLDERS PERIOD
- -------------------------------------- --------- ---------- ------------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot shares.................... $1.00 $ 0.0318 $ -- $0.0318 $ (0.0318) $1.00
1996--Pilot Administration shares..... 1.00 0.0292 -- 0.0292 (0.0292) 1.00
1996--Pilot Investor shares........... 1.00 0.0267 -- 0.0267 (0.0267) 1.00
1995--Pilot shares(g)................. 1.00 0.0332 -- 0.0332 (0.0332) 1.00
1995--Pilot Administration
shares(g)............................ 1.00 0.0300 -- 0.0300 (0.0300) 1.00
1995--Pilot Investor shares(g)........ 1.00 0.0282 -- 0.0282 (0.0282) 1.00
1994--Pilot shares.................... 1.00 0.0220 -- 0.0220 (0.0220) 1.00
1994--Pilot Administration
shares(f )........................... 1.00 0.0103 -- 0.0103 (0.0103) 1.00
1994--Pilot Investor shares........... 1.00 0.0170 -- 0.0170 (0.0170) 1.00
1993--Pilot shares.................... 1.00 0.0221 -- 0.0221 (0.0221) 1.00
1993--Pilot Investor shares........... 1.00 0.0171 -- 0.0171 (0.0172) 1.00
1992--Pilot shares.................... 1.00 0.0324 (0.0001) 0.0323 (0.0324) 1.00
1992--Pilot Investor shares(a)........ 1.00 0.0030 -- 0.0030 (0.0030) 1.00
<CAPTION>
FOR THE ELEVEN MONTHS ENDED AUGUST
31,(B)
- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1991--Pilot shares.................... 1.00 0.0435 -- 0.0435 (0.0435) 1.00
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1990--Pilot shares.................... 1.00 0.0547 -- 0.0547 (0.0547) 1.00
1989--Pilot shares.................... 1.00 0.0600 -- 0.0600 (0.0600) 1.00
<CAPTION>
FOR THE PERIOD APRIL 25, 1988
(COMMENCEMENT OF OPERATIONS)
THROUGH SEPTEMBER 30,
- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1988--Pilot shares.................... 1.00 0.0210 -- 0.0210 (0.0210) 1.00
<CAPTION>
RATIO INFORMATION
ASSUMING NO
REIMBURSEMENT OR
ABSORPTION OF ADVISORY
FEES AND DISTRIBUTION
EXPENSES(D)
----------------------------
RATIO OF NET RATIO OF NET
RATIO OF INVESTMENT NET ASSETS RATIO OF INVESTMENT
NET EXPENSES INCOME TO AT END OF EXPENSES TO INCOME TO
TOTAL TO AVERAGE AVERAGE PERIOD AVERAGE NET AVERAGE NET
FOR THE YEARS ENDED AUGUST 31, RETURN(E) NET ASSETS NET ASSETS (IN 000'S) ASSETS ASSETS
- -------------------------------------- --------- ------------ ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot shares.................... 3.22% 0.43% 3.17% $ 183,772 0.43% 3.17%
1996--Pilot Administration shares..... 2.96 0.68 2.87 13,501 0.68 2.87
1996--Pilot Investor shares........... 2.70 0.93 2.65 15,743 0.93 2.65
1995--Pilot shares(g)................. 3.37 0.44 3.21 210,834 0.44 3.31
1995--Pilot Administration
shares(g)............................ 3.05 0.69 3.06 4,555 0.69 3.06
1995--Pilot Investor shares(g)........ 2.86 0.94 2.83 11,222 0.94 2.83
1994--Pilot shares.................... 2.23 0.37 2.20 239,796 0.37 2.20
1994--Pilot Administration
shares(f )........................... 2.04(c) 0.67(c) 2.03(c) -- 0.67(c) 2.03(c)
1994--Pilot Investor shares........... 1.73 0.87 1.70 9,364 0.87 1.70
1993--Pilot shares.................... 2.24 0.36 2.21 228,075 0.36 2.21
1993--Pilot Investor shares........... 1.73 0.86 1.71 7,819 0.86 1.71
1992--Pilot shares.................... 3.29 0.37 3.24 202,304 0.37 3.24
1992--Pilot Investor shares(a)........ 1.74(c) 0.87(c) 1.75(c) 10,696 0.87(c) 1.75(c)
FOR THE ELEVEN MONTHS ENDED AUGUST
31,(B)
- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1991--Pilot shares.................... 4.83(c) 0.38(c) 4.74(c) 166,499 0.61(c) 4.51(c)
FOR THE YEARS ENDED SEPTEMBER 30,
- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1990--Pilot shares.................... 5.61 0.42 5.47 152,375 0.67 5.22
1989--Pilot shares.................... 6.17 0.39 6.02 129,551 0.70 5.71
FOR THE PERIOD APRIL 25, 1988
(COMMENCEMENT OF OPERATIONS)
THROUGH SEPTEMBER 30,
- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1988--Pilot shares.................... 4.86(c) 0.44(c) 4.93(c) 71,658 0.85(c) 4.52(c)
</TABLE>
- ------------
(a) Pilot Investor share activity commenced during July of 1992.
(b) Prior to a tax-free reorganization effective August 1, 1991, the Missouri
Short-Term Tax-Exempt Portfolio was a separate portfolio of the Locust
Street Fund and known as the Tax-Exempt Money Market Portfolio which was
advised by Boatmen's Trust Company and had a September 30 fiscal year-end.
(c) Annualized.
(d) The above does not reflect the fee which may be charged by Boatmen's
directly to its customers' accounts at an annual rate not to exceed 0.25% of
the average daily balance of Pilot shares in the customer's account.
(e) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption of
the investment at the net asset value at the end of the period.
(f ) Pilot Administration share activity commenced during March of 1994.
(g) Prior to July 1, 1995, Goldman Sachs Asset Management served as the
investment adviser.
9
<PAGE> 190
THE PILOT FUNDS
------------------------
FINANCIAL HIGHLIGHTS--(CONTINUED)
<TABLE>
<CAPTION>
SHORT-TERM TAX-EXEMPT DIVERSIFIED FUND
------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
--------------------------------------------
NET ASSET NET REALIZED TOTAL NET ASSET
VALUE AT NET GAIN ON INCOME FROM DISTRIBUTIONS VALUE AT
BEGINNING INVESTMENT INVESTMENT INVESTMENT TO END OF
FOR THE YEARS ENDED AUGUST 31, OF PERIOD INCOME TRANSACTIONS OPERATIONS SHAREHOLDERS PERIOD
- ------------------------------------- --------- ---------- ------------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot shares................... $1.00 $ 0.0326 $ -- $0.0326 $ (0.0326) $1.00
1996--Pilot Administration shares.... 1.00 0.0301 -- 0.0301 (0.0301) 1.00
1996--Pilot Investor shares.......... 1.00 0.0276 -- 0.0276 (0.0276) 1.00
1995--Pilot shares(f )............... 1.00 0.0353 -- 0.0353 (0.0353) 1.00
1995--Pilot Administration
shares(f ).......................... 1.00 0.0328 -- 0.0328 (0.0328) 1.00
1995--Pilot Investor shares(e)(f )... 1.00 0.0195 -- 0.0195 (0.0195) 1.00
1994--Pilot shares................... 1.00 0.0240 -- 0.0240 (0.0240) 1.00
1994--Pilot Administration
shares(d)........................... 1.00 0.0208 -- 0.0208 (0.0208) 1.00
<CAPTION>
FOR THE PERIOD FEBRUARY 16, 1993
(COMMENCEMENT OF OPERATIONS)
THROUGH AUGUST 31,
- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1993--Pilot shares................... 1.00 0.0121 -- 0.0121 (0.0121) 1.00
<CAPTION>
RATIO INFORMATION
ASSUMING NO WAIVER
OF ADVISORY FEES(A)
----------------------------
RATIO OF NET NET ASSET RATIO OF NET
RATIO OF INVESTMENT AT END OF RATIO OF INVESTMENT
NET EXPENSES INCOME TO PERIOD EXPENSES TO INCOME TO
TOTAL TO AVERAGE AVERAGE (IN AVERAGE NET AVERAGE NET
FOR THE YEARS ENDED AUGUST 31, RETURN(B) NET ASSETS NET ASSETS 000'S) --- ASSETS ASSETS
- ------------------------------------- --------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot shares................... 3.31% 0.37% 3.26% $ 375,777 0.41% 3.22%
1996--Pilot Administration shares.... 3.05 0.62 2.97 14,550 0.66 2.93
1996--Pilot Investor shares.......... 2.79 0.87 2.56 907 0.91 2.52
1995--Pilot shares(f )............... 3.59 0.28 3.54 397,783 0.29 3.53
1995--Pilot Administration
shares(f ).......................... 3.36 0.53 3.36 14,443 0.54 3.35
1995--Pilot Investor shares(e)(f )... 1.96(g) 0.78(c) 3.15(c) 5 0.79(c) 3.14(c)
1994--Pilot shares................... 2.43 0.20 2.40 388,048 0.20 2.40
1994--Pilot Administration
shares(d)........................... 2.18(c) 0.45(c) 2.15(c) 3,040 0.45(c) 2.15(c)
FOR THE PERIOD FEBRUARY 16, 1993
(COMMENCEMENT OF OPERATIONS)
THROUGH AUGUST 31,
- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1993--Pilot shares................... 2.23(c) 0.15(c) 2.21(c) 428,843 0.20(c) 2.16(c)
</TABLE>
- ------------
(a) The above does not reflect the fee which may be charged by Boatmen's
directly to its customers' accounts at an annual rate not to exceed 0.25% of
the average daily balance of Pilot shares in the customer's account.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption of
the investment at the net asset value at the end of the period.
(c) Annualized.
(d) Pilot Administration share activity commenced during September of 1993.
(e) Pilot Investor share activity commenced during January of 1995.
(f ) Prior to July 1, 1995, Goldman Sachs Asset Management served as the
investment adviser.
(g) Not annualized.
10
<PAGE> 191
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The Pilot Funds uses a variety of 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 which Funds best meet your investment goals. Although each
Fund will attempt to achieve its investment objective, there can be no assurance
it will be successful.
The Pilot Funds intends to use its best efforts to maintain the net asset value
of each money market fund at $1.00 per share, although there can be no assurance
that it will be able to do so on a continuous basis.
Pilot Short-Term U.S. Treasury Fund
The investment objective of the Pilot Short-Term U.S. Treasury Fund (the
"Treasury Fund") is to maximize current income to the extent consistent with the
preservation of capital and the maintenance of liquidity by investing
exclusively in high quality money market instruments. The Fund intends to
achieve its objective by investing, under normal circumstances, at least 90% of
its total assets in securities issued or guaranteed by the U.S. Treasury and
repurchase agreements relating to such securities. You should note, however,
that shares of the Treasury Fund are not themselves issued or guaranteed by the
U.S. Government or any of its agencies. U.S. Government obligations include
Treasury bills, certain Treasury strips, certificates of indebtedness, notes and
bonds, and obligations of other agencies and instrumentalities that are backed
by the U.S. Treasury.
Pilot Short-Term Diversified Assets Fund
The investment objective of the Pilot Short-Term Diversified Assets Fund (the
"Diversified Fund") is to maximize current income to the extent consistent with
the preservation of capital and the maintenance of liquidity by investing
exclusively in high quality money market instruments. The Diversified Fund
pursues its objective by investing in a broad range of government, bank and
corporate obligations, both rated and unrated, asset backed securities,
participation interests and repurchase agreements. The Fund is permitted to
invest in unrated notes, paper or other instruments which are determined to be
of comparable high quality by Boatmen's pursuant to criteria established by the
Board of Trustees.
The Diversified Fund concentrates in the banking industry by investing 25% or
more of its total assets in bank obligations (whether domestic or foreign)
except that if adverse economic conditions prevail in the banking industry the
Diversified Fund may, for temporary defensive purposes, temporarily invest less
than 25% of its total assets in bank obligations. For this purpose, the
obligations of foreign banks and foreign branches of U.S. banks will be
considered "bank obligations." (See "Portfolio Instruments and
Practices--Foreign Securities.")
Investments in bank obligations include (i) obligations issued or guaranteed by
U.S. banks (including certificates of deposit, loan participation interests,
commercial paper, unsecured bank promissory notes and bankers' acceptances)
which have more than $1 billion in total assets at the time of purchase; (ii)
U.S. dollar denominated obligations issued or guaranteed (including fixed time
deposits) by foreign banks which have more than $1 billion in total assets at
the time of purchase; U.S. branches of such foreign banks (Yankee obligations),
foreign branches of such foreign banks, and foreign branches of U.S. banks
(Eurodollar obligations) having more than $1 billion in total assets at the time
of purchase. Such bank obligations may be general obligations of the parent bank
or may be limited to the issuing branch by the terms of the specific obligation
or by government regulation; and (iii) commercial paper issued by U.S. or
foreign commercial banks, which at the time of purchase are rated in the highest
rating category of at least one NRSRO or, if unrated, deemed of comparable
quality by the Adviser.
Pilot Short-Term Tax-Exempt Diversified Fund and
Pilot Missouri Short-Term Tax-Exempt Fund
The investment objective of the Pilot Short-Term Tax-Exempt Diversified Fund
(the "Tax-Exempt Diversified Fund") is to seek as high a level of current income
which is exempt from federal income tax, as is
11
<PAGE> 192
consistent with the preservation of capital. The Fund pursues its objective by
investing primarily in municipal obligations issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies, authorities and instrumentalities, and the District of
Columbia, the interest from which is, in the opinion of bond counsel, if any,
exempt from federal income tax ("Municipal Instruments"). As a matter of
fundamental policy, at least 80% of the Tax-Exempt Diversified Fund's annual
gross income will be derived from Municipal Instruments, except in extraordinary
circumstances when in Boatmen's opinion a temporary defensive posture is
appropriate.
The investment objective of the Pilot Missouri Short-Term Tax-Exempt Fund (the
"Missouri Tax-Exempt Fund") is to seek as high a level of current income which
is exempt from federal income tax as is consistent with the preservation of
capital. The Missouri Tax-Exempt Fund invests exclusively in high quality money
market instruments. The Fund seeks to achieve its objective by investing at
least 80% of its net assets during normal market conditions in debt obligations
issued by or on behalf of the State of Missouri, the interest on which is exempt
from regular Federal income tax, is not a tax preference item under the Federal
alternative minimum tax and is exempt from Missouri income taxes ("Missouri
Instruments"). The Missouri Tax-Exempt Fund attempts to maximize the amount of
income exempt from Missouri income tax to the extent that such available
obligations meet the Fund's quality standards and have a suitable yield. Because
there may be an insufficient supply of Missouri Instruments which meet the
Fund's quality and liquidity standards and have a suitable yield, a varying
percent of the Fund's income may at any one time be exempt from Missouri income
tax. Interest from Municipal Instruments other than Missouri Instruments may be
subject to Missouri income tax.
As a matter of fundamental policy, at least 80% of the Missouri Tax-Exempt
Fund's income will be exempt from federal income taxes, except in extraordinary
circumstances when in Boatmen's opinion a temporary defensive posture is
appropriate. The Fund anticipates being as fully invested as practicable in
municipal bonds and notes. However, because the Missouri Tax-Exempt Fund
presently does not intend to invest in taxable obligations other than "private
activity" bonds, there may be occasions when, as a result of maturities of
portfolio securities, or sales of shares, or in order to meet anticipated
redemption requests, the Fund may hold cash which is not earning income.
Investments by the Tax-Exempt Diversified Fund and the Missouri Tax-Exempt Fund
(the "Tax-Exempt Funds") in taxable money market instruments will be limited to
those meeting the quality standards of each Fund.
Instruments in which the Tax-Exempt Funds may invest, include:
(A) fixed rate notes and similar debt instruments rated in the highest
short-term rating category or in one of the two highest rating categories of at
least one NRSRO;
(B) variable and floating rate demand instruments rated (i) in the highest
rating category for municipal notes or (ii) in one of the two highest rating
categories for long-term instruments or (iii) in the highest rating category for
commercial paper and municipal notes with demand features of at least one NRSRO;
(C) tax-exempt commercial paper rated in the highest rating category of at least
one NRSRO;
(D) unrated notes, paper or other instruments which are determined to be of
comparable high quality by Boatmen's pursuant to criteria approved by the
Trustees and in accordance with the procedures reviewed and approved by the
Trustees; and
(E) municipal bonds rated in one of the two highest rating categories of at
least one NRSRO and unrated bonds determined to be of comparable quality by
Boatmen's pursuant to criteria approved by the Trustees.
In addition, the Missouri Tax-Exempt Fund may invest in other municipal
obligations rated in the highest short-term rating category or in one of the two
highest long-term rating categories of at least one NRSRO or, if unrated, deemed
to be of comparable quality by the Adviser.
PORTFOLIO INSTRUMENTS AND PRACTICES
- --U.S. Government Securities. U.S. Government Securities are obligations issued
or guaranteed as to principal or interest by the U.S. Government, its agencies,
authorities or instrumentalities. Some
12
<PAGE> 193
U.S. Government Securities, such as Treasury bills, notes and bonds, which
differ only in their interest rates, maturities and times of issuance, are
supported by the full faith and credit of the United States. Others, such as
obligations issued or guaranteed by U.S. Government agencies, authorities or
instrumentalities, are supported either by (a) the full faith and credit of the
U.S. Government (such as securities of the Government National Mortgage
Association), (b) the right of the issuer to borrow from the Treasury (such as
securities of the Student Loan Marketing Association), (c) the discretionary
authority of the U.S. Government to purchase the agency's obligations (such as
securities of the Federal National Mortgage Association and the Federal Home
Loan Mortgage Corporation), or (d) only the credit of the issuer. No assurance
can be given that the U.S. Government will provide financial support to U.S.
Government agencies, authorities or instrumentalities in the future.
Securities 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 and such participations may therefore be treated as
illiquid.
U.S. Government Securities may include zero coupon bonds (i.e., discount debt
obligations that do not make periodic interest payments). U.S. Government
Securities 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.
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.
Securities issued or guaranteed as to principal or interest by the U.S.
Government, its agencies, authorities or instrumentalities may 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 are not considered to be U.S. Government securities for the
purpose of determining whether 90% of the total assets of the Treasury Fund are
invested in U.S. Government securities and repurchase agreements relating to
such securities.
- --Foreign Securities. Investment in foreign securities and bank obligations may
present a greater degree of risk than investment in domestic securities because
of less publicly-available financial and other information, less securities
regulation, potential imposition of foreign withholding and other taxes, war,
expropriation or other adverse governmental actions. Foreign banks and their
foreign branches are not regulated by U.S. banking authorities, and generally
are not bound by the accounting, auditing and financial reporting standards
applicable to U.S. banks.
The DIVERSIFIED FUND may acquire U.S. dollar denominated obligations of the
International Bank for Reconstruction and Development (the "World Bank").
Obligations of the World Bank are supported by subscribed but unpaid commitments
of its member countries; there is no assurance that these commitments will be
fulfilled in the future.
- --Repurchase Agreements. EACH FUND may enter into repurchase agreements with
selected broker-dealers and with banks. A repurchase agreement is an agreement
under which a Fund purchases securities and the seller agrees to repurchase the
securities within a particular time at a specified price. The repurchase price
will exceed the original purchase price, the difference being income to the
Fund, and will be unrelated to the interest rate on the purchased security. The
Funds' custodian or subcustodian will maintain custody of the purchased
securities for the duration of the agreement. The value of the purchased
securities, including accrued interest, will at all times exceed the value of
the repurchase agreement. In the event of bankruptcy of the seller or failure of
the seller to repurchase the securities as agreed, a Fund could suffer losses,
including loss of interest on or principal of the security and costs associated
with delay and enforcement of the repurchase agreement. In
13
<PAGE> 194
evaluating whether to enter into a repurchase agreement, Boatmen's will consider
the credit worthiness of the seller pursuant to procedures reviewed and approved
by the Trustees.
- --Municipal Instruments. Municipal notes which may be purchased by the
DIVERSIFIED FUND and the TAX-EXEMPT FUNDS include tax anticipation notes,
revenue anticipation notes, bond anticipation notes, tax and revenue
anticipation notes and construction notes. Municipal bonds, which may be issued
to raise money for various public purposes, include general obligation bonds and
revenue bonds, and the Funds may hold both in any proportion. General obligation
bonds are backed by the taxing power of the issuing municipality and are
considered the safest type of bonds. Revenue bonds are backed by the revenues of
a project or facility such as tolls from a toll bridge. Industrial development
bonds (generally referred to under current tax law as "private activity bonds")
are a specific type of revenue bond backed by the credit and security of a
private issuer and therefore may have more potential risk. These bonds may be
issued in a variety of forms, including Commercial Paper, tender option bonds
and variable and floating rate securities.
The value of floating and variable rate obligations generally is more stable
than that of fixed rate obligations in response to changes in interest rate
levels. Variable and floating rate obligations usually carry rights that permit
the Funds to sell them at par value plus accrued interest upon short notice. The
issuers or financial intermediaries providing rights to sell may support their
ability to purchase the obligations by obtaining credit with liquidity supports.
These may include lines of credit, which are conditional commitments to lend,
letters of credit, which will ordinarily be irrevocable, both issued by domestic
banks or foreign banks which have a branch, agency or subsidiary in the United
States. (See "Portfolio Instruments and Practices--Foreign Securities.") When
considering whether an obligation meets a Fund's quality standards, the Fund
will look to the credit worthiness of the party providing the right to sell as
well as to the quality of the obligation itself. The Funds may consider the
maturity of a variable or floating rate Municipal Instrument to be shorter than
its ultimate maturity if a Fund has the right to demand prepayment of its
principal at specified intervals prior to the security's ultimate maturity,
subject to the conditions for using amortized cost valuation under the
Investment Company Act of 1940 (the "1940 Act"). EACH FUND may purchase such
variable or floating rate obligations from the issuers or may purchase
participations, a type of floating or variable rate obligation, which are
interests in a pool of municipal obligations held by a bank or other financial
institution.
EACH FUND may invest in municipal securities issued to finance private
activities, the interest from which is an item of tax preference to Shareholders
for purposes of the federal alternative minimum tax (See "Dividends and
Distributions" and "Tax Implications.") However, any such interest which a
Tax-Exempt Fund might earn will not be deemed to have been derived from
Municipal Instruments for purposes of determining whether at least 80% of the
Fund's annual gross income has been derived from such Instruments. The
TAX-EXEMPT DIVERSIFIED FUND does not currently intend to invest in such bonds.
As a non-fundamental policy, the MISSOURI TAX-EXEMPT FUND currently intends to
limit its income from private activity bonds to no more than 20% of the Fund's
income.
Ordinarily, the TAX-EXEMPT FUNDS expect that 100% of their portfolio securities
will be Municipal Instruments. However, the Funds may hold cash or invest in
short-term taxable securities as set forth above. Each Tax-Exempt Fund may
invest 25% or more of its total assets in Municipal Instruments which are
related in such a way that an economic, business or political development or
change affecting one Municipal Instrument would also affect the other Municipal
Instruments. For example, a Fund may so invest in (a) Municipal Instruments the
interest on which is paid solely from revenues of similar municipal projects
such as hospitals, electric utility systems, multi-family housing, nursing
homes, commercial facilities (including hotels) or life care facilities, (b)
Municipal Instruments whose issuers are in the same state (including, in the
case of the Missouri Tax-Exempt Fund, issuers in states other than Missouri), or
(c) industrial development obligations.
14
<PAGE> 195
EACH FUND may purchase Municipal Instruments which are backed by letters of
credit, which will ordinarily be irrevocable, issued by domestic banks or
foreign banks which have a branch, agency or subsidiary in the United States. In
addition, each Fund may acquire securities in the form of custodial receipts
which evidence ownership of future interest payments, principal payments or both
on obligations of certain state and local governments and authorities.
In order to enhance the liquidity, stability, or quality of a Municipal
Instrument, EACH FUND may acquire the right to sell the security to another
party at a guaranteed price and date. These rights may be referred to as puts,
demand features or standby commitments.
- --State of Missouri. The MISSOURI TAX EXEMPT FUND is more susceptible to risks
affecting issuers of Missouri Instruments than would be a comparable municipal
bond fund that does not emphasize these issuers to this degree. The
marketability and market value of Missouri Instruments may be affected by
economic factors in Missouri. These include the Missouri economy's heavy
dependence upon manufacturing, defense and agriculture, which tend to be
cyclical. Missouri and its political subdivisions are subject to the Hancock
Amendment, a constitutional amendment which limits taxing authority and
government spending. It imposes a limit on the total amount of taxes which the
State may impose and limits the revenues of counties and other political
subdivisions. Voter approval is required to exceed the limit, or to raise the
rate of an existing tax, license, or other fee at a rate faster than specified
limits. At the State level such limit is tied to personal income in Missouri,
and at the county and local level such limit is tied to the consumer price
index. The limitations do not apply to the payment of principal and interest on
bonds approved by the voters. However, such limitations could affect adversely
the ability of certain issuers to repay obligations which are not backed by the
full faith or taxing authority of Missouri or a political subdivision. If either
Missouri or any of its governmental entities are unable to meet their financial
obligations, the income derived by the Fund, the Fund's net asset value, the
ability to preserve or realize appreciation of the Fund's capital or the Fund's
liquidity could be adversely affected. An expanded discussion concerning
Missouri is contained in the Statement of Additional Information.
- --Loan Participations and Asset-Backed and Receivables-Backed Securities. The
DIVERSIFIED FUND may invest in loan participations. A loan participation is an
interest in a loan to a U.S. corporation (the borrower) which is administered
and sold by an intermediary bank. The borrower of the underlying loan will be
deemed to be the issuer of the participation interest except to the extent the
Fund derives its rights from the intermediary bank who sold the loan
participation. The Fund may only purchase participations from banks which have
total assets exceeding $1 billion. Loan participations will be treated as
illiquid if they cannot be sold at market price within seven days.
The Diversified Fund may also invest in asset-backed and receivables-backed
securities. These securities represent participations in, or are secured by and
payable from, pools of assets such as motor vehicle installment sale contracts,
installment loan contracts, leases of various types of real and personal
property, receivables from revolving credit (credit card) agreements and other
categories of receivables. Such asset pools are securitized through the use of
privately-formed trusts or special purpose corporations. Payments or
distributions of principal and interest may be guaranteed up to certain amounts
and for a certain time period by a letter of credit or a pool insurance policy
issued by a financial institution unaffiliated with the trust or corporation, or
other credit enhancements may be present.
The Fund may invest in new types of mortgage-related securities and in other
asset-backed securities that may be developed in the future to the extent
consistent with its investment objective and policies.
- --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 the Funds, has obtained relief from the SEC to permit each Fund to
sell its securities in excess of otherwise applicable limits to the non-money
market portfolios of the Trust. 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
15
<PAGE> 196
in addition to the advisory and other expenses a Fund pays in connection with
its own operations.
- --Forward Commitments and When-Issued Securities. EACH FUND may purchase
securities on a "when-issued" basis and purchase or sell securities on a
"forward commitment" basis. When-issued and forward commitment transactions,
which involve a commitment by the Fund to purchase or sell particular securities
with payment and delivery taking place at a future date (perhaps one or two
months later), permit the Fund to lock in a price or yield on a security it
intends to purchase or sell, regardless of future changes in interest rates.
These transactions involve the risk that the price or yield obtained may be less
favorable than the price or yield when the delivery takes place. These
transactions will not be entered into for speculative purposes but only in
furtherance of a Fund's investment objective. Although a Fund would generally
purchase securities on a when-issued or forward commitment basis with the
intention of acquiring securities for its portfolio, such Fund may dispose of a
when-issued security or forward commitment prior to settlement if Boatmen's
deems it appropriate to do so and such disposition may give rise to a capital
gain or loss.
- --Managing Liquidity. 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, as a matter of non-fundamental policy
which may be changed by the Trustees without shareholder approval, EACH OF THE
FUNDS DOES NOT KNOWINGLY INVEST MORE THAN 10% OF ITS NET ASSETS IN ILLIQUID
SECURITIES. For this purpose, not all securities which are restricted are deemed
to be illiquid. Illiquid securities include certain certificates of
participation and tax-exempt derivative securities that do not permit a Fund to
terminate them after seven days' notice. Certain securities that might otherwise
be considered illiquid, however, such as some issues of commercial paper and
securities for which Boatmen's 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 10% limitation. In addition, certain repurchase
agreements which provide for settlement in more than seven days, but can be
liquidated before the nominal fixed term on seven days' or less notice, are
treated as liquid instruments.
- --Other 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 additional 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
recognize 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 will tend to decrease. You
should also recognize 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 Missouri Tax-Exempt Fund may invest more than 25% of its total assets in
municipal obligations the interest of which comes from issuers located in the
same state. When the Fund's assets are concentrated in obligations payable from
revenues of issuers located in the same state, the Fund will be subject to the
particular risks (including legal and economic conditions) relating to such
securities to a greater extent than if its assets were not so concentrated. In
addition, payment on Municipal Instruments related to certain projects in which
the Tax-Exempt Funds invest may be secured by mortgages or deeds of trust. In
the event of a default, enforcement of a mortgage or deed of trust will be
subject to statutory enforcement procedures on obtaining deficiency judgments.
Should a foreclosure occur, collection of the proceeds from that foreclosure may
be delayed and the amount of the proceeds received may not be enough to pay the
16
<PAGE> 197
principal or accrued interest on the defaulted Municipal Instruments.
The Missouri Tax-Exempt Fund is non-diversified, which means that the Fund is
not limited by the 1940 Act in the proportion of its assets that it may invest
in the obligations of a single issuer. The investment of a large percentage of
the Fund's assets in the securities of a small number of issuers may subject the
Fund to particular risks relating to such issuers to a greater extent than if
the Fund were diversified under the 1940 Act.
- --Additional Information. The Funds have adopted certain procedures under the
1940 Act which enable the Funds to purchase certain instruments during the
existence of an underwriting or selling syndicate of which Boatmen's National
Bank of St. Louis ("Boatmen's Bank"), an affiliate of Boatmen's, or Kleinwort
Benson Investment Management Americas Inc. is a member relating to the
instruments. These procedures establish, among other things, certain limitations
on the amount of debt securities which may be purchased in any single offering
and on the amount of a Fund's assets which may be invested in any single
offering. Accordingly, in view of Boatmen's Bank's active role in the
underwriting of debt securities, a Fund's ability to purchase debt securities in
the primary market may from time to time be limited.
INVESTMENT LIMITATIONS
Certain of the investment policies of each Fund may not be changed without a
vote of 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 the
fundamental limitations are summarized below, and all of the Funds' fundamental
limitations are set out in greater detail in the Statement of Additional
Information, which is available upon request.
Treasury, Diversified and Tax-Exempt Diversified Funds
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 as described in the Statement of Additional
Information, including investments in U.S. Government securities, investments in
banking obligations by the Diversified Fund and investments in Municipal
Instruments by the Tax-Exempt Diversified Fund).
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 the value of the Fund's total assets in the securities of a
single issuer, except that up to 25% of each Fund's total assets can be invested
without regard to such 5% limitation (such 5% limitation shall not apply to
repurchase agreements collateralized by U.S. Government securities).
3. A Fund may not borrow money except as a temporary measure and then only in
amounts not exceeding 5% of the value of the Fund's total assets or from banks
provided that immediately after such borrowing, all borrowings of the Fund do
not exceed one-third of the Fund's total assets and no purchases of portfolio
instruments will be made while such Fund has borrowings outstanding in an amount
exceeding 5% of its total assets.
Missouri Tax-Exempt Fund
1. The 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 as described in the Statement of Additional
Information, including investments in U.S. Government securities and investments
in Municipal Instruments).
2. The Fund may not borrow money except as a temporary measure for emergency
purposes and then only in amounts not exceeding one-third of the value of the
Fund's total assets and no purchases of portfolio instruments will be made while
such Fund has borrowings outstanding in an amount exceeding 5% of its net
assets.
THE INVESTMENT OBJECTIVE OF EACH FUND IS FUNDAMENTAL AND ACCORDINGLY CANNOT BE
CHANGED WITHOUT THE APPROVAL OF A MAJORITY OF THE OUTSTANDING SHARES OF THAT
FUND. THE INVESTMENT POLICIES AND PRACTICES OF EACH OF THE TREASURY, DIVERSIFIED
AND TAX-EXEMPT DIVERSIFIED FUNDS, UNLESS OTHERWISE SPECIFICALLY STATED HEREIN,
ARE NOT
17
<PAGE> 198
FUNDAMENTAL AND CAN BE CHANGED BY THE FUNDS' TRUSTEES WITHOUT A SHAREHOLDER
VOTE; THE INVESTMENT POLICIES AND PRACTICES OF THE MISSOURI TAX-EXEMPT FUND,
OTHER THAN ITS NON-DIVERSIFIED STATUS, ARE FUNDAMENTAL, UNLESS OTHERWISE
SPECIFICALLY STATED HEREIN.
Pursuant to a rule of the Securities and Exchange Commission, each of the
Diversified Fund and the Treasury Fund may not invest more than 5% of its total
assets (taken at amortized cost) in the securities of any one issuer (except
U.S. Government Securities and repurchase agreements collateralized by such
securities). Each of such Funds may, however, invest more than 5% of its total
assets in the First Tier Securities of a single issuer for a period of up to
three business days after the purchase thereof, although a Fund may not make
more than one such investment at any time. Further, each of such Funds may not
invest more than the greater of (i) 1% of its total assets; or (ii) one million
dollars in the securities of a single issuer which were Second Tier Securities
when acquired by a Fund. In addition, each of such Funds may not invest more
than 5% of its total assets in securities which were Second Tier Securities when
acquired. Pursuant to the SEC rule, the foregoing restrictions are not
applicable to the Tax-Exempt Funds. The foregoing operating policies are more
restrictive than the fundamental policy set forth above, which would give a Fund
the ability to invest, with respect to 25% of its total assets, more than 5% of
its total assets in any one issuer. Each Fund operates in accordance with these
operating policies which comply with the SEC rule.
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 exclusively to customers of 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.
Institutions 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 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.
Pilot Shares may be purchased on any Business Day (as defined below) at the net
asset value next determined after receipt of both the purchase order and its
purchase price in Federal Funds. Payment will be effected by wiring Federal
Funds to the Custodian. Boatmen's has undertaken to arrange for the timely
transmittal of purchase orders to the Transfer Agent and of Federal Funds to the
Custodian. Purchases are made through a customer's account at Boatmen's or its
affiliate, as directed by the customer in an application form executed prior to
the customers' first purchase of Pilot Shares, except in the case of purchases
by a fiduciary account where purchases of Pilot Shares of a Fund are made as
directed by Boatmen's or an affiliate.
A customer of Boatmen's (other than a fiduciary account) may direct Boatmen's to
invest automatically any cash income balance and any cash principal
18
<PAGE> 199
balance of the customers' account in Pilot Shares of a Fund. This automatic
investment will occur on each Business Day for each balance in its entirety. A
customer maintaining an account at the trust department of a bank affiliated
with Boatmen's may instruct the bank to invest automatically through Boatmen's
any cash principal balance of the customers' account in Pilot Shares of a Fund
on the same basis as applicable to customers of Boatmen's or may give other
instructions to the bank within limits prescribed by the bank. Customers of
Boatmen's and its affiliates who wish to obtain additional information
concerning investment procedures or a Fund's current yield should call Boatmen's
at 314/466-3489. Other investors should call 800/71-PILOT. Additional copies of
this Prospectus, and copies of the Statement of Additional Information, may be
obtained from the Distributor, 3435 Stelzer Road, Columbus, Ohio 43219-3035.
In order to maximize earnings, the Funds try to be invested as completely as is
practicable. The Funds are normally required to make settlement in Federal Funds
for securities purchased. Accordingly, orders for Pilot Shares will become
effective on Business Days as follows: if an order is received by the Transfer
Agent by 2:00 p.m., Central time for the Diversified and Treasury Funds and by
12:00 Noon, Central time for the Tax-Exempt Funds, and Federal Funds are
received by the Custodian on the same day by 3:00 p.m., Central time, the order
is effective as of that day. Pilot Shares are deemed to have been purchased when
an order becomes effective and are entitled to income commencing on that day.
As used in this prospectus, the term "Business Day" refers to those days when
the New York Stock Exchange and the Custodian are open for business, which is
Monday through Friday except for holidays (scheduled holidays for 1997 are New
Years Day, Martin Luther King, Jr. Day, Presidents Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day
and Christmas Day). On those days when one or more of such organizations close
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.
Purchase orders must include the purchasing Institution's tax identification
number. The Pilot Funds reserves the right to reject any purchase order
including exchanges for any reason or to waive the minimum initial investment
requirement. The Funds also reserve the right to establish a minimum initial
and/or subsequent investment requirement and to change that requirement with
respect to any person or class of persons. 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.
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 2:00 p.m., Central
time, for the Diversified and Treasury Funds, and 12:00 noon, Central time, for
the Tax-Exempt Funds 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 Funds seek to maintain a net asset value of $1.00 per share. In
this connection, each Fund's securities are valued at its amortized cost, which
does not take into account unrealized securities gains or losses. This method
involves initially valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any premium paid or discount received. For
a more complete description of the amortized cost valuation method and its
effect
19
<PAGE> 200
on existing and prospective shareholders, see "Net Asset Value" in the Statement
of Additional Information.
HOW TO SELL SHARES
How to Redeem
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 1940 Act.
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
1940 Act. See the Statement of Additional Information ("Redemptions"). In those
cases, an investor may incur brokerage costs in converting securities to cash.
Shares of a Fund are also redeemable at the unilateral option of the Funds if
the Trustees determine in their sole discretion that failure to so redeem may
have material adverse consequences to the Shareholders of such Fund. The Funds,
however, assume no responsibility to compel such redemptions. In the event
losses are sustained by a Fund, the Funds may reduce the number of outstanding
Shares in that Fund in order to maintain a net asset value per Share of $1.00.
Such reduction will be effected by having each Shareholder of that Fund
proportionally contribute to the Fund's capital the necessary Shares to restore
such net asset value per Share. Each Shareholder will be deemed to have agreed
to such contribution in these circumstances by his or her investment in the
Funds.
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. Redemptions of Pilot Shares of a Fund may be made in accordance
with the application form executed prior to the customer's first purchase of
Pilot Shares or pursuant to redemption drafts drawn on Boatmen's Bank of Rolla.
Redemptions by fiduciary accounts are made as an Institution directs.
Payment of Redemption Proceeds and Dividends
If a redemption request is received by the Transfer Agent from an Institution
before 2:00 p.m., Central time, for the Diversified and Treasury Funds and 12:00
a.m., Central time, for the Tax-Exempt Funds, the Pilot Shares to be redeemed do
not earn income on that day, but the proceeds will be available in the
Shareholder's account at an Institution or its affiliate on the same day (if it
is a Business Day). If a redemption request is received after that time, the
Pilot Shares to be redeemed earn income on the day the request is received, and
the proceeds will be available in the Shareholder's account at an Institution on
the following Business Day. Neither the Funds nor the Distributor or Transfer
Agent shall have any liability for any delay in the availability of proceeds in
a Shareholder's account. Institutions have undertaken to arrange for the timely
transmittal to the Transfer Agent of redemption requests and the timely
crediting to Shareholders' accounts at an Institution of redemption proceeds. In
order to effect timely transmittals and crediting, Institutions may establish
earlier times by which redemption directions must be received by it.
Institutions have undertaken to advise Shareholders if earlier times are
established.
Check Redemption Privilege
A Shareholder of any Fund may elect to have a special account with Boatmen's
Bank of Rolla (the "Bank") for the purpose of redeeming Shares from his or her
account in that Fund by check. When the Bank receives a completed signature card
and authorization form, the Shareholder will be provided with a supply
20
<PAGE> 201
of checks. Checks drawn on this account may be payable to the order of any
person in any amount of $500 or more, but cannot be certified. The payee of the
check may cash or deposit it like any other check drawn on a bank. When such a
check is presented to the Bank for payment, a sufficient number of full and
fractional Shares will be redeemed to cover the amount of the check. Cancelled
checks will be returned to the Shareholder by the Bank.
The check redemption privilege enables a Shareholder to receive the dividends
declared on the Pilot Shares to be redeemed until such time as the check is
processed. Because of this feature, the check redemption privilege may not be
used for a complete liquidation of a Shareholder's account. If the amount of a
check is greater than the value of Pilot Shares held in the Shareholder's
account, the check will be returned unpaid, and the Shareholder may be subject
to extra charges.
The Transfer Agent reserves the right to impose conditions on or terminate the
check redemption privilege at any time with respect to a particular Shareholder
or all Shareholders in general. The Funds and the Bank reserve the right at any
time to suspend the procedure permitting redemption by check and intend to do so
in the event that federal legislation or regulations impose reserve requirements
or other restrictions deemed by the Trustees to be adverse to the interests of
other Shareholders of the Funds.
The Pilot Funds reserves the right, however, to delay the wiring of redemption
proceeds for up to seven days or longer after receipt of a redemption order if,
in the judgment of the Adviser, an earlier payment could adversely affect a
Fund.
EXCHANGES
Pilot Shares of the Fund may be exchanged for Pilot Shares of any other fund of
the Pilot Family of Funds, unless otherwise determined by the Trustees at the
time any new portfolios become available, at the net asset value next
determined. Prior to the completion of any exchange, investors must have the
Prospectus of the Fund into which they are exchanging. Shares can only be
exchanged in a state where the Shares to be received are registered.
For federal income tax purposes, an exchange is treated as a sale of the Shares
surrendered in the exchange, on which an investor may realize a gain or loss,
followed by a purchase of Shares received in the exchange. All telephone
exchanges must be registered in the same name(s) and with the same address as
are registered in the Fund from which the exchange is being made. Any election
to use telephone exchanges or redemptions will be administered by Boatmen's. In
times of drastic economic or market changes the telephone exchange privilege may
be difficult to implement. 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 within
72 hours of a telephone transaction, 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. Exchanges are available only in states where the
exchange may legally be made. An exchange fee may be imposed or the exchange
privilege may be modified or withdrawn at any time on 60 days' written notice or
as otherwise permitted by applicable law.
DIVIDENDS AND DISTRIBUTIONS
Where do your dividends and distributions come from?
A Fund's net investment income consists of the excess of (i) accrued interest or
discount (including both original issue and market discount, if any) on
portfolio securities and (ii) any income of the Fund from sources other than
capital gains, over (iii) the amortization of market premium on portfolio
securities and (iv) the estimated expenses of the Fund, including a
proportionate share of the general expenses of the Funds.
21
<PAGE> 202
When are dividends and distributions declared and paid?
Each Fund intends to declare substantially all of its net investment income
daily (as of 2:00 p.m., Central time, for the Diversified and Treasury Funds,
and as of 12:00 Noon, Central time, for the Tax-Exempt Funds) as a dividend and
distribute these dividends to Pilot Shareholders, monthly. Net short-term
capital gains, if any, will be distributed in accordance with the requirements
of the Code, and may be reflected in the Funds' daily distributions. Each Fund
may distribute at least annually, on or about the close of each calendar year,
its long-term capital gains, if any.
How are dividends and distributions declared and paid?
Income dividends and capital gain distributions will be paid in cash or at the
election of the Shareholder will be reinvested in additional shares of the same
Fund. Any election to receive cash or to reinvest in additional Shares will be
administered by your Institution in a manner arranged for each Fund. Cash
distributions will be paid on or about the first business day of each month.
Although realized gains and losses on the assets of each Fund are reflected in
the net asset value of each Fund, they are not expected to be of an amount which
would affect a Fund's net asset value of $1.00 per Share.
Should a Fund incur or anticipate any unusual expense, loss or depreciation
which could adversely affect income or net asset value, the Trustees would at
that time consider whether to adhere to the present income accrual and
distribution policy described above or to revise it in light of the then
prevailing circumstances. For example, the Trustees might reduce or suspend
Shareholder income accruals in order to prevent to the extent possible the net
asset value of such Fund from being reduced below $1.00 per Share. Thus, such
expenses, losses or depreciation could result in a Shareholder receiving no
income for the period during which he held the Shares.
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 Trustees of the Funds are
responsible for the overall management and supervision of its affairs. 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 and to establish additional portfolios in the
future. The Trustees have authorized the issuance of an unlimited number of
shares available to selected investors in each of three share classes (Pilot
Shares, Investor Shares and Administration Shares) in these Funds. Information
regarding The Pilot Funds' other portfolios may be obtained by contacting The
Pilot Funds at 800/71-PILOT or the Distributor.
Each Pilot Share, Investor Share and Administration Share of the Fund represents
an equal proportionate interest in the assets belonging to the Fund. It is
contemplated that most Shares will be held in accounts of which the record owner
is a bank or other institution acting as nominee for its customers who are the
beneficial owners of the Shares. Pilot Shares may be purchased for accounts held
in the name of an institution that is not compensated by the Funds for services
provided to the institution's customers. Administration Shares may be purchased
for accounts held in the name of an institution that provides certain account
administration services to its customers, including maintenance of account
records and processing orders to purchase, redeem and exchange Administration
Shares. Administration Shares bear the cost of administration fees at the annual
rate of up to .25 of 1% of the average daily net asset value of such Shares.
Investor Shares may be purchased for accounts held in the name of an institution
that provides certain account administration and Shareholder liaison services to
its customers, including maintenance of account records, processing orders to
purchase, redeem and exchange Investor Shares, responding to customer inquiries
and assisting
22
<PAGE> 203
customers with investment procedures. Investor Shares bear the cost of service
fees at the annual rate of up to .50 of 1% of the average daily net asset value
of such Shares. Please refer to the Statement of Additional Information for the
Administration Shares and Investor Shares for a more complete description of
such services. It is possible that an institution (a "Service Organization") or
its affiliate may offer different classes of Shares to its customers and thus
receive different compensation with respect to different classes of Shares of
the same Fund. Each Service Organization offering both Administration Shares and
Investor Shares intends to limit the availability of such Shares to different
types of investors. Shares of each class may be exchanged only for Shares of the
same class in another Fund. Except as described herein, the three classes of
Shares are identical. Certain aspects of the Shares may be altered, after
advance notice to Shareholders, if it is deemed necessary in order to satisfy
certain tax regulatory requirements.
When issued, Shares will be fully paid and nonassessable. In the event of
liquidation, Shareholders are entitled to share pro rata in the net assets of
the applicable Fund available for distribution to Shareholders. Shares entitle
their holders to one vote per Share, are freely transferable and have no
preemptive, subscription or conversion rights.
If a proposal concerning the Administration Plan or Service Plan is submitted to
holders of Administration Shares or Investor Shares, respectively, Service
Organizations holding Administration or Investor Shares for their own accounts
have undertaken to vote such Shares in the same proportions as the vote by
customers of such Shares held for the account of such customers of the Service
Organization.
Persons selling or servicing different classes of shares of the Funds may
receive different compensation with respect to one particular class of shares as
opposed to another in the same Fund.
SHAREHOLDERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND PROPORTIONATE
FRACTIONAL VOTES FOR FRACTIONAL SHARES HELD. Shares of all the Pilot Funds
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.
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.
Effective June 30, 1995, the name of the Pilot Short-Term Tax-Exempt Fund was
changed to the Pilot Missouri Short-Term Tax-Exempt Fund.
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") 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. The mailing address is P.O. Box 14737 at that
location.
Administrator: BISYS Fund Services Limited Partnership (referred to as "BISYS"),
is responsible for coordinating the Fund's efforts and generally overseeing the
operation of the Fund's business. BISYS's principal offices are located at 3435
Stelzer Road, Columbus, Ohio 43219-3035.
Distributor: Each 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 and an affiliate of BISYS that is located at 3435
Stelzer Road, Columbus, Ohio 43219-3035.
Custodian: Boatmen's Trust Company (referred to as "Boatmen's") is responsible
for holding the investments purchased by each Fund. Boatmen's is located at 100
N. Broadway, St. Louis, Missouri 63278.
23
<PAGE> 204
Transfer Agent: BISYS FUND SERVICES, INC. (referred to as the "Transfer Agent")
is an affiliate of BISYS and 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.
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 nearly
$[ ] billion in assets ($[ ] billion over which they had investment discretion
and $[ ] 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 located in Arkansas, Illinois, Iowa, Kansas, Missouri,
New Mexico, Oklahoma, Tennessee and Texas, a mortgage banking company, a credit
life insurance company, a federal savings bank in Arkansas and a limited service
bank in Delaware.
On August 30, 1996, Bancshares and NationsBank Corporation ("NationsBank")
announced that they have entered into an agreement pursuant to which Bancshares
will merge into NationsBank. The proposed merger, which is currently expected to
take place on or about January 1997, is subject to a number of conditions,
including approval by the appropriate regulatory authorities and by the
shareholders of both Bancshares and NationsBank. If the proposed merger is
consummated, Boatmen's will become a wholly owned subsidiary of NationsBank.
Under its Advisory Agreements with the Funds, Boatmen's, subject to the general
supervision of the Funds' Trustees, manages the investment operations of each
Fund and the composition of each Fund's assets, including the purchase,
retention, and disposition thereof.
Boatmen's pays all costs incurred by it in connection with the performance of
its duties under the Advisory Agreements, other than the cost (including taxes
and brokerage commissions, if any) of securities purchased for the Funds and the
cost of preparing tax returns, shareholder reports and prospectuses and reports
filed with regulatory authorities.
Boatmen's began serving as investment adviser to the Treasury Fund and
Diversified Fund on June 1, 1994 and began serving as investment adviser to the
Tax-Exempt Diversified Fund and Missouri Tax-Exempt Fund effective July 1, 1995.
Goldman Sachs, acting through its separate operating division, Goldman Sachs
Asset Management, served as investment adviser to the Tax-Exempt Diversified
Fund and Missouri Tax-Exempt Fund prior to July 1, 1995.
Boatmen's is entitled to receive advisory fees on a monthly basis at an annual
rate of .15 of 1% of the Diversified Fund's average net assets, .15 of 1% of the
Treasury Fund's average net assets, .20 of 1% of the Tax-Exempt Diversified
Fund's average net assets and .20 of 1% of the Missouri Tax-Exempt Fund's
average net assets. For the fiscal year ended August 31, 1996 total Advisory
fees paid by the Diversified Fund and Treasury Fund were .13% and .15%,
respectively. For the fiscal year ended August 31, 1995 total advisory fees paid
by the Diversified Fund and Treasury Fund were .07% and .08%, respectively. For
the fiscal year ended August 31, 1994 (under the former advisory agreements from
September 1, 1993 to June 1, 1994, and from June 1, 1994 to August 31, 1994),
total advisory fees paid by the Diversified Fund and Treasury Fund were .07% and
.08%, respectively.
For the fiscal year ended August 31, 1996, each of the Diversified and Treasury
Funds paid an advisory fee of $2,174,296 and $2,532,746, respectively. For the
fiscal year ended August 31, 1995, each of the Diversified and Treasury Funds
paid an advisory fee of $998,016 and $972,623, respectively. For the fiscal year
ended August 31, 1994, each of the Diversified and Treasury Funds paid an
advisory fee of $1,679,800 and $1,366,594, respectively. Goldman Sachs received
$1,453,413 and $1,154,974, respectively, and Boatmen's received $226,387 and
$211,620, respectively.
24
<PAGE> 205
For the period ended June 30, 1995, Goldman Sachs & Co. acted as the investment
adviser to the Tax-Exempt Diversified Fund and Missouri Tax-Exempt Fund.
Boatmen's acts as an administrator by providing shareholder administrative
services with respect to investments by its and its affiliates' customers in
Pilot Shares of the Funds. Boatmen's maintains Shareholders' records and
otherwise acts as servicing agent with respect to their investments. Any
Shareholder inquiries should be directed to it. Boatmen's telephone number is
(314) 466-3489.
Boatmen's may assess a fee directly against the account of each customer of
Boatmen's and its affiliates who beneficially owns Pilot Shares at an annual
rate not to exceed .25 of 1% of the average daily balance of Pilot Shares (based
upon the value at which the Pilot Shares are then being sold and redeemed by the
Funds) in the customer's account. If imposed, this fee will be computed monthly
on the basis of the average daily balance in the account and deducted from the
account monthly. Boatmen's has advised the Funds that (a) the monthly statement
it provides will show income net of the fee assessed against the customers'
accounts, (b) this will be the only compensation which Boatmen's receives for
serving as administrator with respect to Pilot Shares of the Funds, and (c)
Boatmen's and its affiliates will continue to charge their usual and customary
fees to all their customers (including those who invest in the Funds) for
performing agency, custodial and fiduciary services.
MORE ABOUT BISYS. BISYS Fund Services Limited Partnership ("BISYS") is a
subsidiary of The BISYS Group, Inc., 150 Clove Road, Little Falls, New Jersey
07424, a publicly owned company engaged in information processing, loan
servicing and 401(k) administration and recordkeeping services to and through
banking and other financial organizations. Under its Administration Agreement
with the Fund, 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, W. Eugene
Spurbeck, George O. Martinez, William J. Tomko and Bruce Treff are also
employees and/or officers of BISYS, the Distributor or an affiliate.
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.
For its services as administrator, 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. These amounts may be reduced pursuant to fee waivers by
BISYS. Any such fee waivers may be terminated by BISYS at any time. For the
fiscal year ended August 31, 1996, The Pilot Funds paid administration fees to
BISYS in the amount of $1,880,792, $1,598,802, $433,805 and $257,068 for the
Pilot Short-Term U.S. Treasury Fund, Pilot Short Term Diversified Assets Fund,
Pilot Missouri Short-Term Tax-Exempt Fund and Pilot Short-Term Tax-Exempt
Diversified Fund, respectively. For the fiscal year ended August 31, 1995, The
Pilot Funds paid administration fees to BISYS in the amount of $1,357,012,
$1,479,697, $293,693 and $449,267 for the Pilot Short-Term U.S. Treasury Fund,
Pilot Short-Term Diversified Assets Fund, Pilot Missouri Short-Term Tax-Exempt
Fund and Pilot Short-Term Tax-Exempt Diversified Fund, respectively.
The Funds are responsible for all expenses incurred by the Funds, other than
those expressly borne by Boatmen's, BISYS or the Transfer Agent under the
Advisory, Administration or Transfer Agency
25
<PAGE> 206
Agreements. Such expenses include, the fees payable to Boatmen's, BISYS and the
Transfer Agent, the fees and expenses of the Funds' custodian, brokerage fees
and commissions, any portfolio losses, state and federal registration fees for
qualifying Funds Shares under federal or state securities laws, organization
expenses, membership fees in investment company organizations, 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 Funds 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 Funds'
Shareholders and regulatory authorities, compensation and expenses of its
Trustees and extraordinary expenses incurred by the Funds.
FEE WAIVERS. Expenses can be reduced by voluntary fee waivers and expense
reimbursements by Boatmen's and the Funds' other service providers. 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 their 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. Boatmen's has voluntarily agreed to limit the total operating
expenses of the Pilot Shares of Pilot Short-Term Diversified Assets Fund to
.28% of the Fund's average net assets until February 1, 1998.
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.
Each Fund intends to elect to be treated as a regulated investment company under
Subchapter M of the Internal Revenue Code, as amended, (the "Code"). As a
regulated investment company, each Fund must satisfy certain requirements
relating to the sources of its income, diversification of its assets and
distribution of its income to Shareholders. In addition, as a regulated
investment company, a Fund generally will not incur a federal income or excise
tax on any investment company taxable income and net capital gains that are
distributed to its Shareholders in accordance with certain timing requirements
of the Code.
Dividends distributed by the Tax-Exempt Funds that are derived from interest
income exempt from federal income taxation and are designated by a Fund as
"exempt-interest dividends" will be exempt from federal income taxation.
Dividends of investment company taxable income, which generally includes the
excess of net short-term capital gains over net long-term capital losses and
interest (including original issue discount and market discount), less expenses,
will be taxable to Shareholders as ordinary income. Because no portion of the
dividends paid by any Fund is expected to consist of dividends paid by U.S.
corporations, no portion of the dividends paid by any Fund is expected to be
eligible for the corporate dividends-received deduction. Distributions of the
excess of net long-term capital gains over net short-term capital losses, if
any, which are designated as "capital gain dividends" by a Fund will be taxable
as long-term capital gains regardless of how long the Shareholders have held
their Funds Shares. The Funds are not normally expected to realize any long-term
capital gains or losses. These tax consequences will apply regardless of whether
distributions are received in cash or reinvested in Shares. Distributions
declared in October, November or December with a record date in such month and
paid in January of the following year are taxable to Shareholders as if received
on December 31 of the year declared. Shareholders will be informed about the
amount and character distributions received from a Fund for federal income tax
purposes, including any distributions that may constitute a return of capital.
Investments in zero coupon securities (other than tax-exempt zero coupon
securities) will result in income to a Fund each year equal to a portion of the
excess of
26
<PAGE> 207
the face value of the securities over their issue price, even though the Fund
receives no cash interest payments from the securities.
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.
Individuals and certain other classes of Shareholders may be subject to 31%
withholding of federal income tax on taxable distributions if they fail to
furnish a Fund with their correct taxpayer identification number and certain
certifications regarding their tax status or if they are otherwise subject to
backup withholding. Backup withholding is not an additional tax. Any amounts
withheld may be credited against a Shareholder's U.S. federal income tax
liability.
A Fund that invests in foreign securities may be subject to foreign withholding
taxes on income earned on such securities and may be unable to pass through to
Shareholders the ability to claim foreign tax credits and deductions with
respect to such taxes.
In addition to federal taxes, a Shareholder may be subject to state and local
taxes on payments received from a Fund. A state tax exemption may be available
in some states to the extent distributions of a Fund are derived from interest
on certain direct U.S. Government obligations or on obligations of the
particular state. Shareholders should consult their own tax advisers concerning
these matters.
The Tax-Exempt Diversified Fund intends to satisfy certain requirements of the
Code for the payment of "exempt-interest dividends" not included in
shareholders' federal gross income. In addition, to the extent that
distributions made by the Missouri Tax-Exempt Fund qualify as "exempt-interest
dividends" for federal income tax purposes, are derived from interest on
Missouri Instruments and are designated by the Missouri Tax-Exempt Fund as
"state income tax exempt-interest dividends," these distributions will be exempt
from Missouri income tax, the earnings and profits tax of Kansas City and the
City of St. Louis earnings tax. Shares of the Missouri Tax-Exempt Fund and
income dividends and other distributions from the Missouri Tax-Exempt Fund are
not excludable in computing Missouri franchise taxes on corporations and
financial institutions. Distributions of long-term and short-term capital gains,
if any, that are includable in federal adjusted gross income will be subject to
Missouri income taxation, but will not be subject to the earnings and profits
tax of Kansas City or, for individuals in an individual capacity, the City of
St. Louis earnings tax. Shares of the Missouri Tax-Exempt Fund are not subject
to Missouri personal property taxes.
Further information relating to tax consequences is contained in the Statement
of Additional Information.
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.
UNDERSTANDING PERFORMANCE MEASURES: YIELD, EFFECTIVE YIELD AND TAX EQUIVALENT
YIELD will be calculated separately for Pilot Shares, Administration Shares and
Investor Shares. Because each such class of Shares is subject to different
expenses, the net yield of such classes of the same Fund for the same period may
differ. Absent a waiver of administration or service fees, the yield of Pilot
Shares will exceed that of other shares.
The YIELD of a Fund refers to the income generated by an investment in the Fund
over a seven-day period (which period will be stated in the advertisement). This
income is then annualized; that is, the amount of income generated by the
investment during that week is assumed to be generated each week over a 52 week
period and is shown as a percentage of the investment.
The EFFECTIVE YIELD is calculated similarly but, when annualized, the net income
earned by an investment in a Fund is assumed to be reinvested. The effective
yield will be slightly higher than the yield because of the compounding effect
of this assumed reinvestment.
TAX-EQUIVALENT YIELDS for the Tax-Exempt Diversified and Missouri Tax-Exempt
Funds show the amount of taxable yield needed to produce an after-tax equivalent
of a tax-free yield, and are calculated by
27
<PAGE> 208
increasing the yield (as calculated above) by the amount necessary to reflect
the payment of federal income taxes at a stated rate.
Performance comparisons:
The Funds may compare their yields to those of mutual funds with similar
investment objectives and to relevant indices or to rankings prepared by
independent services or other financial or industry publications that monitor
mutual fund performance.
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..
INVESTMENT RESULTS OF A FUND ARE BASED ON HISTORICAL PERFORMANCE AND PERFORMANCE
QUOTATIONS WILL FLUCTUATE. 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 BIS OR ANOTHER INSTITUTION MAY CHARGE DIRECTLY TO ITS CUSTOMER ACCOUNTS IN
CONNECTION WITH AN INVESTMENT IN THE FUNDS WILL NOT BE INCLUDED IN THE FUNDS'
CALCULATIONS OF 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
REPRESENTATION 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.
28
<PAGE> 209
- ----------------------------------------------------------------
- -----
Financial
Direction
LOGO PILOT SHORT-TERM
U.S. TREASURY FUND
PILOT SHORT-TERM
DIVERSIFIED ASSETS FUND
PILOT SHORT-TERM
TAX-EXEMPT
DIVERSIFIED FUND
PILOT MISSOURI
SHORT-TERM
TAX-EXEMPT FUND
INVESTOR SHARES
DECEMBER 31, 1996
The
Pilot
Funds
Prospectus enclosed
<PAGE> 210
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXPENSE SUMMARY...................................................................................... 4
Shareholder Transaction Expenses................................................................. 4
Annual Fund Operating Expenses................................................................... 4
Example.......................................................................................... 4
THE PILOT FUNDS FINANCIAL HIGHLIGHTS................................................................. 6
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS..................................................... 11
Pilot Short-Term U.S. Treasury Fund.............................................................. 11
Pilot Short-Term Diversified Assets Fund......................................................... 11
Pilot Short-Term Tax-Exempt Diversified Fund and Pilot Missouri Short-Term Tax-Exempt Fund....... 11
PORTFOLIO INSTRUMENTS AND PRACTICES.................................................................. 12
U.S. Government Securities....................................................................... 12
Foreign Securities............................................................................... 13
Repurchase Agreements............................................................................ 13
Municipal Instruments............................................................................ 14
State of Missouri................................................................................ 15
Loan Participations and Asset-Backed and Receivables-Backed Securities........................... 15
Other Investment Companies....................................................................... 15
Forward Commitments and When-Issued Securities................................................... 16
Managing Liquidity............................................................................... 16
Other Risk Considerations........................................................................ 16
Additional Information........................................................................... 17
INVESTMENT LIMITATIONS............................................................................... 17
Treasury, Diversified and Tax-Exempt Diversified Funds........................................... 17
Missouri Tax-Exempt Fund......................................................................... 17
SERVICE PLAN......................................................................................... 18
INVESTING IN THE PILOT FUNDS......................................................................... 19
Getting Your Investment Started.................................................................. 19
HOW TO BUY SHARES.................................................................................... 19
Tax-Sheltered Retirement Plans................................................................... 20
Explanation of Sales Price....................................................................... 20
HOW TO SELL SHARES................................................................................... 21
Payment of Redemption Proceeds and Dividends..................................................... 21
EXCHANGES............................................................................................ 21
TRANSACTION RULES.................................................................................... 22
DIVIDENDS AND DISTRIBUTIONS.......................................................................... 23
Where do your dividends and distributions come from?............................................. 23
What are your dividend and distribution options?................................................. 23
When are dividends and distributions declared and paid?.......................................... 23
THE PILOT FAMILY OF FUNDS............................................................................ 23
THE BUSINESS OF THE FUND............................................................................. 25
FUND MANAGEMENT...................................................................................... 25
Service Providers................................................................................ 25
More about BISYS................................................................................. 26
Expenses......................................................................................... 26
Fee Waivers...................................................................................... 27
TAX IMPLICATIONS..................................................................................... 27
MEASURING PERFORMANCE................................................................................ 28
Performance comparisons.......................................................................... 28
</TABLE>
<PAGE> 211
THE PILOT FUNDS
LOGO
PROSPECTUS FOR INVESTOR SHARES
PILOT SHORT-TERM U.S. TREASURY FUND
PILOT SHORT-TERM DIVERSIFIED ASSETS FUND
PILOT SHORT-TERM TAX-EXEMPT DIVERSIFIED FUND
PILOT MISSOURI SHORT-TERM TAX-EXEMPT FUND
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PILOT FUND GOAL FOR INVESTORS WHO WANT
- ----------------- -------------------------------------- --------------------------------------
<S> <C> <C>
SHORT-TERM Maximize current income to the extent Safety, liquidity and stability of
U.S. TREASURY consistent with the preservation of capital, consistent with current
capital and the maintenance of income, from U.S. Treasury Securities.
liquidity by investing exclusively in
high-quality money market instruments.
- ---------------------------------------------------------------------------------------------------
SHORT-TERM Maximize current income to the extent Liquidity and stability of capital,
DIVERSIFIED consistent with the preservation of consistent with current income, from a
ASSETS capital and the maintenance of diversified portfolio of money market
liquidity by investing exclusively in securities.
high quality money market instruments.
- ---------------------------------------------------------------------------------------------------
SHORT-TERM Seek as high a level of current income Liquidity and stability of capital,
TAX-EXEMPT which is exempt from federal income consistent with current income which
DIVERSIFIED tax as is consistent with the is exempt from federal income tax.
preservation of capital.
- ---------------------------------------------------------------------------------------------------
MISSOURI Seek as high a level of current income Liquidity and stability of capital,
SHORT-TERM which is exempt from federal income consistent with current income which
TAX-EXEMPT tax as is consistent with the is exempt from federal income tax and,
preservation of capital. to the extent possible, Missouri
income tax.
- ---------------------------------------------------------------------------------------------------
</TABLE>
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.
SHARES OF THE PILOT MISSOURI SHORT-TERM TAX-EXEMPT FUND ARE NOT OFFERED IN ALL
STATES.
- --------------------------------------------------------------------------------
1
<PAGE> 212
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. WHILE EACH FUND SEEKS TO MAINTAIN A STABLE
PRICE PER SHARE OF $1.00, THERE IS NO ASSURANCE THAT EACH FUND WILL BE ABLE TO
DO SO. INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL. BECAUSE THE MISSOURI SHORT-TERM TAX-EXEMPT FUND MAY INVEST A
SIGNIFICANT PERCENTAGE OF ITS ASSETS IN A SINGLE ISSUER AND IS CONCENTRATED IN
SECURITIES ISSUED BY A SINGLE STATE, AN INVESTMENT IN THE FUND MAY BE RISKIER
THAN AN INVESTMENT IN OTHER TYPES OF MUTUAL FUNDS. IN ADDITION, THE AMOUNT OF
DIVIDENDS PAID BY A FUND WILL VARY. BOATMEN'S TRUST COMPANY SERVES AS
INVESTMENT ADVISER TO EACH OF THE FUNDS AND IS PAID A FEE FOR ITS SERVICES, AND
IS NOT AFFILIATED WITH PILOT FUNDS DISTRIBUTORS, INC., THE FUNDS' DISTRIBUTOR.
This Prospectus describes Investor Shares in the Pilot Short-Term U.S. Treasury,
Pilot Short-Term Diversified Assets, Pilot Short-Term Tax-Exempt Diversified and
Pilot Missouri Short-Term Tax-Exempt Funds. 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
your Service Organization, by writing Pilot Funds Distributors, Inc., 3435
Stelzer Road, Columbus, Ohio 43219-3035, or by calling 800/71-PILOT. The
Statement of Additional Information dated December 31, 1996 is incorporated by
reference into (considered a part of) the Prospectus.
2
<PAGE> 213
The Funds are particularly designed for customers of Boatmen's, its affiliates
and certain other participating banks and financial institutions ("Service
Organizations") seeking investment of short-term funds to obtain the yields
available on certain types of money market instruments while maintaining maximum
liquidity and constant net asset value (see "Net Asset Value"). Investment in
the Funds permits the customer to participate in money market transactions with
a degree of diversification not normally available to the individual investor.
In addition, investment in the Funds relieves the customer of many investment
management and administrative burdens usually associated with the direct
purchase and sale of money market instruments. These include: selection of
portfolio investments; surveying the market for the best price at which to buy
and sell; valuation of portfolio securities; selection and scheduling of
maturities and reinvestment; receipt, delivery and safekeeping of securities;
and portfolio recordkeeping.
Each Fund seeks to maintain a stable net asset value of $1.00 per Share. To
facilitate this goal, each Fund's securities are valued by the amortized cost
method as permitted by a rule of the Securities and Exchange Commission (the
"SEC"). The SEC rule requires that all portfolio securities have at the time of
purchase a maximum remaining maturity of not more than 397 days and that each
Fund maintain a dollar-weighted average portfolio maturity of not more than 90
days.
Investments by each Fund must present minimal credit risk and be rated within
one of the two highest rating categories for short-term debt obligations by at
least two nationally recognized statistical rating organizations ("NRSROs")
assigning a rating to the security or issuer, or if only one NRSRO has assigned
a rating, by that NRSRO. Purchases of securities which are unrated or rated by
only one NRSRO must be approved or ratified by the Trustees except for purchases
made on behalf of the Pilot Short-Term Tax-Exempt Diversified Fund and the Pilot
Missouri Short-Term Tax-Exempt Fund (the "Tax-Exempt Funds"). Securities which
are rated (or that have been issued by an issuer that is rated with respect to a
class of short-term debt obligations, or any security within that class,
comparable in priority and quality with such securities) in the highest
short-term rating category by at least two NRSROs are designated "First Tier
Securities". Securities rated in the top two short-term rating categories by at
least two NRSROs, but which are not rated in the highest short-term rating
category by two or more NRSROs, are designated "Second Tier Securities".
Securities which are unrated may be purchased only if they are deemed to be of
comparable quality to First Tier or Second Tier rated securities. NRSROs include
Standard & Poor's Corporation, Moody's Investors Service, Inc., Fitch Investors
Service, Inc., Duff and Phelps, Inc., IBCA Limited and its affiliate IBCA Inc.,
and Thomson BankWatch, Inc. For a description of each NRSRO's rating categories,
see Appendix A to the Statement of Additional Information.
None of the Funds alone constitutes a complete investment program. There can be
no assurance that the Funds will be able to maintain a stable net asset value,
or that they will achieve their investment objectives.
- --------------------------------------------------------------------------------
3
<PAGE> 214
EXPENSE SUMMARY (1)(3)
SHAREHOLDER TRANSACTION EXPENSES are charges you pay directly 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.
Examples based on this information are also provided.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
INVESTOR SHARES (3)
---------------------------------------------------------------
PILOT PILOT
PILOT PILOT SHORT-TERM MISSOURI
SHORT-TERM SHORT-TERM TAX-EXEMPT SHORT-TERM
U.S. TREASURY DIVERSIFIED ASSETS DIVERSIFIED TAX-EXEMPT
FUND FUND FUND FUND
------------- ------------------ ---------- ----------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on
Purchases............................. None None None None
Redemption Fees......................... None None None None
Exchange Fees........................... None None None None
ANNUAL FUND OPERATING EXPENSES (2)
(As a percentage of average net assets)
Management Fees (1)..................... 0.15% 0.15% 0.20% 0.20%
12b-1 Fees (4).......................... 0.50% 0.50% 0.50% 0.50%
Other Expenses (5)...................... 0.13% 0.13% 0.13% 0.26%
-------- ----------- ------- -------
Total Operating Expenses (1)....... 0.78% 0.78% 0.83% 0.96%
-------- ----------- ------- -------
-------- ----------- ------- -------
</TABLE>
EXAMPLE (3): Assume that the annual return and redemption 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:
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
AFTER AFTER AFTER AFTER
PURCHASE PURCHASE PURCHASE PURCHASE
---- ---- ---- -----
<S> <C> <C> <C> <C>
PILOT SHORT-TERM U.S. TREASURY FUND
Investor Shares............................ $ 8 $ 25 $ 43 $ 97
PILOT SHORT-TERM DIVERSIFIED ASSETS FUND
Investor Shares............................ 8 25 43 97
PILOT SHORT-TERM TAX-EXEMPT DIVERSIFIED FUND
Investor Shares............................ 8 26 46 103
PILOT MISSOURI SHORT-TERM TAX-EXEMPT FUND
Investor Shares............................ 10 31 53 118
</TABLE>
The Example shown above should not be considered a representation of past or
future investment returns or operating expenses. Actual investment returns and
operating expenses may be more or less than those shown. Actual expenses may
vary depending upon a variety of factors, including the actual performance of a
Fund, which may be greater or less than 5%.
4
<PAGE> 215
- ---------------
Notes:
(1) The purpose of this Table is to assist investors in understanding the
various costs and expenses that an investor in the Funds will bear directly
or indirectly.
(2) For further information concerning management fees, see the section entitled
"Fund Management".
(3) The information set forth in the Table and Example relates only to Investor
Shares of the Funds. Pilot Shares and Administration Shares are subject to
different fees and expenses. See "The Pilot Family of Funds". Pilot Shares
pay no 12b-1 or account administration fees. Administration Shares do not
pay a Rule 12b-1 fee but pay an account administration fee of up to .25 of
1% of average daily net assets. All other Fund expenses related to Pilot
Shares and Administration Shares are the same as for Investor Shares.
(4) Service Organizations, other than broker-dealers, may charge other fees to
their customers who are the beneficial owners of Investor Shares in
connection with their customer accounts. See "Service Plan".
(5) The table does not reflect the allocation of any miscellaneous "class
expenses" (e.g., certain printing and registration expenses).
BECAUSE OF THE DISTRIBUTION PAYMENTS PAID BY THE FUND AS SHOWN IN THE ABOVE
TABLE, LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGE PERMITTED BY THE NATIONAL ASSOCIATION OF
SECURITIES DEALERS, INC.
5
<PAGE> 216
THE PILOT FUNDS
FINANCIAL HIGHLIGHTS
The following data with respect to a Share of the Pilot Short-Term Diversified
Assets Fund, Pilot Short-Term U.S. Treasury Fund, Pilot Missouri Short-Term
Tax-Exempt Fund (formerly "Pilot Short-Term Tax-Exempt Fund") and Pilot
Short-Term Tax-Exempt Diversified Fund outstanding during the periods indicated
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report incorporated by reference and attached to the
Statement of Additional Information, and should be read in conjunction with the
financial statements and related notes incorporated by reference and attached to
the Statement of Additional Information. For periods shown, except as otherwise
noted, Goldman, Sachs & Co. served as investment adviser to each of the Pilot
Short-Term Tax-Exempt Diversified Fund and Pilot Missouri Short-Term Tax-Exempt
Fund, and Boatmen's Trust Company served as investment subadviser to the Pilot
Missouri Short-Term Tax-Exempt Fund.
The Administration Shares and the Investor Shares are two classes of Shares
first issued by the Funds during June, 1991 and July, 1992, respectively.
Accordingly, there are no financial highlights with respect to the Funds for
such Shares for periods prior to such dates. The financial highlights presented
below for periods prior to June, 1991 for the Administration Shares and July,
1992 for the Investor Shares are historical information for Shares that did not
provide administration or additional services to Shareholders pursuant to a
separate Service Agreement. As indicated elsewhere in this prospectus, the
Service Organizations providing services pursuant to a Service Agreement will
receive a fee in an amount up to .25 of 1% (on an annualized basis) of the
average daily net asset value of the Administration Shares of the applicable
Fund and a fee in an amount up to .50 of 1% (on an annualized basis) of the
average daily net asset value of the Investor Shares of the applicable Fund.
6
<PAGE> 217
THE PILOT FUNDS
------------------------
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
SHORT-TERM DIVERSIFIED ASSETS FUND
------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
--------------------------------------------
NET ASSET NET REALIZED TOTAL NET ASSET
VALUE AT NET GAIN ON INCOME FROM DISTRIBUTIONS VALUE AT
BEGINNING INVESTMENT INVESTMENT INVESTMENT TO END OF
FOR THE YEARS ENDED AUGUST 31,(F ) OF PERIOD INCOME TRANSACTIONS OPERATIONS SHAREHOLDERS PERIOD
- ------------------------------------ --------- ---------- ------------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot shares.................. $1.00 $ 0.0534 $ -- $0.0534 $ (0.0534) $1.00
1996--Pilot Administration shares... 1.00 0.0509 -- 0.0508 (0.0508) 1.00
1996--Pilot Investor shares......... 1.00 0.0484 -- 0.0484 (0.0484) 1.00
1995--Pilot shares.................. 1.00 0.0554 -- 0.0554 (0.0554) 1.00
1995--Pilot Administration shares... 1.00 0.0529 -- 0.0529 (0.0529) 1.00
1995--Pilot Investor shares......... 1.00 0.0504 -- 0.0504 (0.0504) 1.00
1994--Pilot shares.................. 1.00 0.0353 0.0001 0.0354 (0.0354) 1.00
1994--Pilot Administration shares... 1.00 0.0328 0.0001 0.0329 (0.0329) 1.00
1994--Pilot Investor shares......... 1.00 0.0303 0.0001 0.0304 (0.0304) 1.00
1993--Pilot shares.................. 1.00 0.0325 0.0001 0.0326 (0.0326) 1.00
1993--Pilot Administration shares... 1.00 0.0298 0.0001 0.0299 (0.0299) 1.00
1993--Pilot Investor shares......... 1.00 0.0274 0.0001 0.0275 (0.0274) 1.00
1992--Pilot shares.................. 1.00 0.0452 -- 0.0452 (0.0452) 1.00
1992--Pilot Administration shares... 1.00 0.0396 0.0001 0.0397 (0.0397) 1.00
1992--Pilot Investor shares(a)...... 1.00 0.0043 -- 0.0043 (0.0043) 1.00
1991--Pilot shares.................. 1.00 0.0691 0.0003 0.0694 (0.0694) 1.00
1991--Pilot Administration
shares(b).......................... 1.00 0.0134 -- 0.0134 (0.0134) 1.00
1990--Pilot shares.................. 1.00 0.0829 -- 0.0829 (0.0829) 1.00
1989--Pilot shares.................. 1.00 0.0890 -- 0.0890 (0.0890) 1.00
1988--Pilot shares.................. 1.00 0.0703 -- 0.0703 (0.0703) 1.00
1987--Pilot shares.................. 1.00 0.0605 -- 0.0605 (0.0605) 1.00
<CAPTION>
RATIO INFORMATION
ASSUMING NO WAIVER OF
ADVISORY FEES AND
EXPENSE LIMITATIONS(D)
----------------------------
RATIO OF NET RATIO OF NET
RATIO OF INVESTMENT NET ASSETS RATIO OF INVESTMENT
NET EXPENSES INCOME TO AT END OF EXPENSES TO INCOME TO
TOTAL TO AVERAGE AVERAGE PERIOD AVERAGE NET AVERAGE NET
FOR THE YEARS ENDED AUGUST 31,(F ) RETURN(E) NET ASSETS NET ASSETS (IN 000'S) ASSETS ASSETS
- ------------------------------------ --------- ------------ ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot shares.................. 5.47% 0.27% 5.33% $1,318,767 0.31% 5.29%
1996--Pilot Administration shares... 5.21 0.52 5.07 241,990 0.56 5.03
1996--Pilot Investor shares......... 4.95 0.77 4.83 49,849 0.81 4.79
1995--Pilot shares.................. 5.68 0.23 5.56 1,056,624 0.24 5.55
1995--Pilot Administration shares... 5.42 0.48 5.22 231,688 0.49 5.21
1995--Pilot Investor shares......... 5.15 0.73 5.00 33,948 0.74 4.99
1994--Pilot shares.................. 3.60 0.15 3.53 857,795 0.29 3.40
1994--Pilot Administration shares... 3.35 0.40 3.28 303,288 0.54 3.15
1994--Pilot Investor shares......... 3.10 0.65 3.03 37,896 0.79 2.90
1993--Pilot shares.................. 3.29 0.12 3.25 1,293,667 0.29 3.08
1993--Pilot Administration shares... 3.04 0.37 2.98 378,262 0.54 2.81
1993--Pilot Investor shares......... 2.78 0.62 2.74 36,814 0.79 2.57
1992--Pilot shares.................. 4.68 0.12 4.52 1,939,568 0.29 4.35
1992--Pilot Administration shares... 4.42 0.37 3.95 271,606 0.54 3.78
1992--Pilot Investor shares(a)...... 3.24(c) 0.62(c) 3.14(c) 27,880 0.80(c) 2.96(c)
1991--Pilot shares.................. 7.27 0.12 6.91 1,425,385 0.29 6.74
1991--Pilot Administration
shares(b).......................... 5.77(c) 0.37(c) 5.68(c) 43,189 0.54(c) 5.51(c)
1990--Pilot shares.................. 8.65 0.16 8.29 1,202,805 0.33 8.12
1989--Pilot shares.................. 9.25 0.33 8.90 429,053 0.38 8.85
1988--Pilot shares.................. 7.25 0.31 7.03 402,799 0.38 6.96
1987--Pilot shares.................. 6.25 0.28 6.05 352,037 0.33 6.00
</TABLE>
- ------------
(a) Pilot Investor share activity commenced during July of 1992.
(b) Pilot Administration share activity commenced during June of 1991.
(c) Annualized.
(d) The above does not reflect the fee which may be charged by Boatmen's
directly to its customers' accounts at an annual rate not to exceed 0.25% of
the average daily balance of Pilot shares in the customer's account.
(e) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption of
the investment at the net asset value at the end of the period.
(f ) Prior to June 1, 1994, the Short-Term Diversified Assets Fund was advised
by Goldman Sachs Asset Management.
7
<PAGE> 218
THE PILOT FUNDS
------------------------
FINANCIAL HIGHLIGHTS--(CONTINUED)
<TABLE>
<CAPTION>
SHORT-TERM U.S. TREASURY FUND
------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
--------------------------------------------
NET ASSET NET REALIZED TOTAL NET ASSET
VALUE AT NET GAIN ON INCOME FROM DISTRIBUTIONS VALUE AT
BEGINNING INVESTMENT INVESTMENT INVESTMENT TO END OF
FOR THE YEARS ENDED AUGUST 31,(F ) OF PERIOD INCOME TRANSACTIONS OPERATIONS SHAREHOLDERS PERIOD
- ----------------------------------- --------- ---------- ------------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot shares................. $1.00 $ 0.0522 $ -- $0.0522 $ (0.0522) $1.00
1996--Pilot Administration
shares............................ 1.00 0.0497 -- 0.0497 (0.0497) 1.00
1996--Pilot Investor shares........ 1.00 0.0472 -- 0.0472 (0.0472) 1.00
1995--Pilot shares................. 1.00 0.0534 -- 0.0534 (0.0534) 1.00
1995--Pilot Administration
shares............................ 1.00 0.0509 -- 0.0509 (0.0509) 1.00
1995--Pilot Investor shares........ 1.00 0.0484 -- 0.0484 (0.0484) 1.00
1994--Pilot shares................. 1.00 0.0334 0.0002 0.0336 (0.0336) 1.00
1994--Pilot Administration
shares............................ 1.00 0.0309 0.0002 0.0311 (0.0311) 1.00
1994--Pilot Investor shares........ 1.00 0.0284 0.0002 0.0286 (0.0286) 1.00
1993--Pilot shares................. 1.00 0.0294 0.0006 0.0300 (0.0300) 1.00
1993--Pilot Administration
shares............................ 1.00 0.0269 0.0006 0.0275 (0.0275) 1.00
1993--Pilot Investor shares........ 1.00 0.0244 0.0007 0.0251 (0.0250) 1.00
1992--Pilot shares................. 1.00 0.0400 0.0014 0.0414 (0.0414) 1.00
1992--Pilot Administration
shares............................ 1.00 0.0362 0.0014 0.0378 (0.0378) 1.00
1992--Pilot Investor shares(a ).... 1.00 0.0048 0.0002 0.0050 (0.0050) 1.00
1991--Pilot shares................. 1.00 0.0644 0.0016 0.0659 (0.0659) 1.00
1991--Pilot Administration
shares(b)......................... 1.00 0.0124 0.0003 0.0127 (0.0127) 1.00
<CAPTION>
FOR THE PERIOD MARCH 26, 1990
(COMMENCEMENT OF OPERATIONS)
THROUGH AUGUST 31,
- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
1990--Pilot shares................. 1.00 0.0346 0.0001 0.0347 (0.0347) 1.00
<CAPTION>
RATIO INFORMATION
ASSUMING NO WAIVER
OF ADVISORY FEES(D)
----------------------------
RATIO OF NET NET ASSETS RATIO OF NET
RATIO OF INVESTMENT AT RATIO OF INVESTMENT
NET EXPENSES INCOME TO END OF EXPENSES TO INCOME TO
TOTAL TO AVERAGE AVERAGE PERIOD AVERAGE NET AVERAGE NET
FOR THE YEARS ENDED AUGUST 31,(F ) RETURN(E) NET ASSETS NET ASSETS (IN 000'S) ASSETS ASSETS
- ----------------------------------- --------- ------------ ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot shares................. 5.35% 0.27% 5.22% $1,299,086 0.31% 5.18%
1996--Pilot Administration
shares............................ 5.08 0.52 4.96 216,368 0.56 4.92
1996--Pilot Investor shares........ 4.82 0.77 4.70 177,882 0.81 4.66
1995--Pilot shares................. 5.47 0.23 5.36 1,191,447 0.24 5.35
1995--Pilot Administration
shares............................ 5.21 0.48 5.12 215,593 0.49 5.11
1995--Pilot Investor shares........ 4.94 0.73 4.82 131,074 0.74 4.81
1994--Pilot shares................. 3.40 0.16 3.34 843,111 0.28 3.24
1994--Pilot Administration
shares............................ 3.15 0.41 3.09 98,823 0.53 2.99
1994--Pilot Investor shares........ 2.90 0.66 2.84 156,132 0.78 2.74
1993--Pilot shares................. 3.04 0.14 2.94 942,109 0.30 2.78
1993--Pilot Administration
shares............................ 2.79 0.39 2.69 65,570 0.55 2.53
1993--Pilot Investor shares........ 2.53 0.64 2.44 193,764 0.80 2.28
1992--Pilot shares................. 4.30 0.24 4.00 887,321 0.30 3.94
1992--Pilot Administration
shares............................ 4.04 0.49 3.62 91,152 0.56 3.55
1992--Pilot Investor shares(a ).... 2.92(c) 0.71(c) 2.83(c) 212,920 0.81(c) 2.73(c)
1991--Pilot shares................. 6.89 0.24 6.44 588,141 0.29 6.39
1991--Pilot Administration
shares(b)......................... 5.53(c) 0.49(c) 5.24(c) 15,980 0.54(c) 5.19(c)
FOR THE PERIOD MARCH 26, 1990
(COMMENCEMENT OF OPERATIONS)
THROUGH AUGUST 31,
- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
1990--Pilot shares................. 8.05(c) 0.26(c) 7.94(c) 360,685 0.39(c) 7.81(c)
</TABLE>
- ------------
(a) Pilot Investor share activity commenced during July of 1992.
(b) Pilot Administration share activity commenced during June of 1991.
(c) Annualized.
(d) The above does not reflect the fee which may be charged by Boatmen's
directly to its customers' accounts at an annual rate not to exceed .25% of
the average daily balance of Pilot shares in the customer's account.
(e) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption
of the investment at the net asset value at the end of the period.
(f ) Prior to June 1, 1994, the Short-Term U.S. Treasury Fund was advised by
Goldman Sachs Asset Management.
8
<PAGE> 219
THE PILOT FUNDS
------------------------
FINANCIAL HIGHLIGHTS--(CONTINUED)
<TABLE>
<CAPTION>
MISSOURI SHORT-TERM TAX-EXEMPT FUND
------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
--------------------------------------------
NET ASSET NET REALIZED TOTAL NET ASSET
VALUE AT NET LOSS ON INCOME FROM DISTRIBUTIONS VALUE AT
BEGINNING INVESTMENT INVESTMENT INVESTMENT TO END OF
FOR THE YEARS ENDED AUGUST 31, OF PERIOD INCOME TRANSACTIONS OPERATIONS SHAREHOLDERS PERIOD
- -------------------------------------- --------- ---------- ------------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot shares.................... $1.00 $ 0.0318 $ -- $0.0318 $ (0.0318) $1.00
1996--Pilot Administration shares..... 1.00 0.0292 -- 0.0292 (0.0292) 1.00
1996--Pilot Investor shares........... 1.00 0.0267 -- 0.0267 (0.0267) 1.00
1995--Pilot shares(g)................. 1.00 0.0332 -- 0.0332 (0.0332) 1.00
1995--Pilot Administration
shares(g)............................ 1.00 0.0300 -- 0.0300 (0.0300) 1.00
1995--Pilot Investor shares(g)........ 1.00 0.0282 -- 0.0282 (0.0282) 1.00
1994--Pilot shares.................... 1.00 0.0220 -- 0.0220 (0.0220) 1.00
1994--Pilot Administration
shares(f )........................... 1.00 0.0103 -- 0.0103 (0.0103) 1.00
1994--Pilot Investor shares........... 1.00 0.0170 -- 0.0170 (0.0170) 1.00
1993--Pilot shares.................... 1.00 0.0221 -- 0.0221 (0.0221) 1.00
1993--Pilot Investor shares........... 1.00 0.0171 -- 0.0171 (0.0172) 1.00
1992--Pilot shares.................... 1.00 0.0324 (0.0001) 0.0323 (0.0324) 1.00
1992--Pilot Investor shares(a)........ 1.00 0.0030 -- 0.0030 (0.0030) 1.00
<CAPTION>
FOR THE ELEVEN MONTHS ENDED AUGUST
31,(B)
- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1991--Pilot shares.................... 1.00 0.0435 -- 0.0435 (0.0435) 1.00
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1990--Pilot shares.................... 1.00 0.0547 -- 0.0547 (0.0547) 1.00
1989--Pilot shares.................... 1.00 0.0600 -- 0.0600 (0.0600) 1.00
<CAPTION>
FOR THE PERIOD APRIL 25, 1988
(COMMENCEMENT OF OPERATIONS)
THROUGH SEPTEMBER 30,
- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1988--Pilot shares.................... 1.00 0.0210 -- 0.0210 (0.0210) 1.00
<CAPTION>
RATIO INFORMATION
ASSUMING NO
REIMBURSEMENT OR
ABSORPTION OF ADVISORY
FEES AND DISTRIBUTION
EXPENSES(D)
----------------------------
RATIO OF NET RATIO OF NET
RATIO OF INVESTMENT NET ASSETS RATIO OF INVESTMENT
NET EXPENSES INCOME TO AT END OF EXPENSES TO INCOME TO
TOTAL TO AVERAGE AVERAGE PERIOD AVERAGE NET AVERAGE NET
FOR THE YEARS ENDED AUGUST 31, RETURN(E) NET ASSETS NET ASSETS (IN 000'S) ASSETS ASSETS
- -------------------------------------- --------- ------------ ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot shares.................... 3.22% 0.43% 3.17% $ 183,772 0.43% 3.17%
1996--Pilot Administration shares..... 2.96 0.68 2.87 13,501 0.68 2.87
1996--Pilot Investor shares........... 2.70 0.93 2.65 15,743 0.93 2.65
1995--Pilot shares(g)................. 3.37 0.44 3.21 210,834 0.44 3.31
1995--Pilot Administration
shares(g)............................ 3.05 0.69 3.06 4,555 0.69 3.06
1995--Pilot Investor shares(g)........ 2.86 0.94 2.83 11,222 0.94 2.83
1994--Pilot shares.................... 2.23 0.37 2.20 239,796 0.37 2.20
1994--Pilot Administration
shares(f )........................... 2.04(c) 0.67(c) 2.03(c) -- 0.67(c) 2.03(c)
1994--Pilot Investor shares........... 1.73 0.87 1.70 9,364 0.87 1.70
1993--Pilot shares.................... 2.24 0.36 2.21 228,075 0.36 2.21
1993--Pilot Investor shares........... 1.73 0.86 1.71 7,819 0.86 1.71
1992--Pilot shares.................... 3.29 0.37 3.24 202,304 0.37 3.24
1992--Pilot Investor shares(a)........ 1.74(c) 0.87(c) 1.75(c) 10,696 0.87(c) 1.75(c)
FOR THE ELEVEN MONTHS ENDED AUGUST
31,(B)
- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1991--Pilot shares.................... 4.83(c) 0.38(c) 4.74(c) 166,499 0.61(c) 4.51(c)
FOR THE YEARS ENDED SEPTEMBER 30,
- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1990--Pilot shares.................... 5.61 0.42 5.47 152,375 0.67 5.22
1989--Pilot shares.................... 6.17 0.39 6.02 129,551 0.70 5.71
FOR THE PERIOD APRIL 25, 1988
(COMMENCEMENT OF OPERATIONS)
THROUGH SEPTEMBER 30,
- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1988--Pilot shares.................... 4.86(c) 0.44(c) 4.93(c) 71,658 0.85(c) 4.52(c)
</TABLE>
- ------------
(a) Pilot Investor share activity commenced during July of 1992.
(b) Prior to a tax-free reorganization effective August 1, 1991, the Missouri
Short-Term Tax-Exempt Portfolio was a separate portfolio of the Locust
Street Fund and known as the Tax-Exempt Money Market Portfolio which was
advised by Boatmen's Trust Company and had a September 30 fiscal year-end.
(c) Annualized.
(d) The above does not reflect the fee which may be charged by Boatmen's
directly to its customers' accounts at an annual rate not to exceed 0.25% of
the average daily balance of Pilot shares in the customer's account.
(e) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption of
the investment at the net asset value at the end of the period.
(f ) Pilot Administration share activity commenced during March of 1994.
(g ) Prior to July 1, 1995, Goldman Sachs Asset Management served as the
investment adviser.
9
<PAGE> 220
THE PILOT FUNDS
------------------------
FINANCIAL HIGHLIGHTS--(CONTINUED)
<TABLE>
<CAPTION>
SHORT-TERM TAX-EXEMPT DIVERSIFIED FUND
------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
--------------------------------------------
NET ASSET NET REALIZED TOTAL NET ASSET
VALUE AT NET GAIN ON INCOME FROM DISTRIBUTIONS VALUE AT
BEGINNING INVESTMENT INVESTMENT INVESTMENT TO END OF
FOR THE YEARS ENDED AUGUST 31, OF PERIOD INCOME TRANSACTIONS OPERATIONS SHAREHOLDERS PERIOD
- ------------------------------------- --------- ---------- ------------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot shares................... $1.00 $ 0.0326 $ -- $0.0326 $ (0.0326) $1.00
1996--Pilot Administration shares.... 1.00 0.0301 -- 0.0301 (0.0301) 1.00
1996--Pilot Investor shares.......... 1.00 0.0276 -- 0.0276 (0.0276) 1.00
1995--Pilot shares(f)................ 1.00 0.0353 -- 0.0353 (0.0353) 1.00
1995--Pilot Administration
shares(f)........................... 1.00 0.0328 -- 0.0328 (0.0328) 1.00
1995--Pilot Investor shares(e)(f).... 1.00 0.0195 -- 0.0195 (0.0195) 1.00
1994--Pilot shares................... 1.00 0.0240 -- 0.0240 (0.0240) 1.00
1994--Pilot Administration
shares(d)........................... 1.00 0.0208 -- 0.0208 (0.0208) 1.00
<CAPTION>
FOR THE PERIOD FEBRUARY 16, 1993
(COMMENCEMENT OF OPERATIONS)
THROUGH AUGUST 31,
- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1993--Pilot shares................... 1.00 0.0121 -- 0.0121 (0.0121) 1.00
<CAPTION>
RATIO INFORMATION
ASSUMING NO WAIVER
OF ADVISORY FEES(A)
----------------------------
RATIO OF NET NET ASSET RATIO OF NET
RATIO OF INVESTMENT AT END OF RATIO OF INVESTMENT
NET EXPENSES INCOME TO PERIOD EXPENSES TO INCOME TO
TOTAL TO AVERAGE AVERAGE (IN AVERAGE NET AVERAGE NET
FOR THE YEARS ENDED AUGUST 31, RETURN(B) NET ASSETS NET ASSETS 000'S) --- ASSETS ASSETS
- ------------------------------------- --------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot shares................... 3.31% 0.37% 3.26% $ 375,777 0.41% 3.22%
1996--Pilot Administration shares.... 3.05 0.62 2.97 14,550 0.66 2.93
1996--Pilot Investor shares.......... 2.79 0.87 2.56 907 0.91 2.52
1995--Pilot shares(f)................ 3.59 0.28 3.54 397,783 0.29 3.53
1995--Pilot Administration
shares(f)........................... 3.36 0.53 3.36 14,443 0.54 3.35
1995--Pilot Investor shares(e)(f).... 1.96(g) 0.78(c) 3.15(c) 5 0.79(c) 3.14(c)
1994--Pilot shares................... 2.43 0.20 2.40 388,048 0.20 2.40
1994--Pilot Administration
shares(d)........................... 2.18(c) 0.45(c) 2.15(c) 3,040 0.45(c) 2.15(c)
FOR THE PERIOD FEBRUARY 16, 1993
(COMMENCEMENT OF OPERATIONS)
THROUGH AUGUST 31,
- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1993--Pilot shares................... 2.23(c) 0.15(c) 2.21(c) 428,843 0.20(c) 2.16(c)
</TABLE>
- ------------
(a) The above does not reflect the fee which may be charged by Boatmen's
directly to its customers' accounts at an annual rate not to exceed 0.25% of
the average daily balance of Pilot shares in the customer's account.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption of
the investment at the net asset value at the end of the period.
(c) Annualized.
(d) Pilot Administration share activity commenced during September of 1993.
(e) Pilot Investor share activity commenced during January of 1995.
(f ) Prior to July 1, 1995, Goldman Sachs Asset Management served as the
investment adviser.
(g ) Not annualized.
10
<PAGE> 221
INVESTMENT OBJECTIVES, POLICIES
AND RISK FACTORS
The Pilot Funds uses a variety of 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 which Funds best meet your investment goals. Although each
Fund will attempt to achieve its investment objective, there can be no assurance
it will be successful.
The Pilot Funds intends to use its best efforts to maintain the net asset value
of each money market fund at $1.00 per share, although there can be no assurance
that it will be able to do so on a continuous basis.
Pilot Short-Term U.S. Treasury Fund
The investment objective of the Pilot Short-Term U.S. Treasury Fund (the
"Treasury Fund") is to maximize current income to the extent consistent with the
preservation of capital and the maintenance of liquidity by investing
exclusively in high quality money market instruments. The Fund intends to
achieve its objective by investing, under normal circumstances, at least 90% of
its total assets in securities issued or guaranteed by the U.S. Treasury and
repurchase agreements relating to such securities. You should note, however,
that shares of the Treasury Fund are not themselves issued or guaranteed by the
U.S. Government or any of its agencies. U.S. Government obligations include
Treasury bills, certain Treasury strips, certificates of indebtedness, notes and
bonds, and obligations of other agencies and instrumentalities that are backed
by the U.S. Treasury.
Pilot Short-Term Diversified Assets Fund
The investment objective of the Pilot Short-Term Diversified Assets Fund (the
"Diversified Fund") is to maximize current income to the extent consistent with
the preservation of capital and the maintenance of liquidity by investing
exclusively in high quality money market instruments. The Diversified Fund
pursues its objective by investing in a broad range of government, bank and
corporate obligations, both rated and unrated, asset backed securities,
participation interests and repurchase agreements. The Fund is permitted to
invest in unrated notes, paper or other instruments which are determined to be
of comparable high quality by Boatmen's pursuant to criteria established by the
Board of Trustees.
The Diversified Fund concentrates in the banking industry by investing 25% or
more of the value of its total assets in bank obligations (whether domestic or
foreign) except that if adverse economic conditions prevail in the banking
industry the Diversified Fund may, for temporary defensive purposes, temporarily
invest less than 25% of the value of its total assets in bank obligations. For
this purpose, the obligations of foreign banks and foreign branches of U.S.
banks will be considered "bank obligations". (See "Portfolio Instruments and
Practices--Foreign Securities".)
Investments in bank obligations include (i) obligations issued or guaranteed by
U.S. banks (including certificates of deposit, loan participation interests,
commercial paper, unsecured bank promissory notes and bankers' acceptances)
which have more than $1 billion in total assets at the time of purchase; (ii)
U.S. dollar denominated obligations issued or guaranteed (including fixed time
deposits) by foreign banks which have more than $1 billion in total assets at
the time of purchase; U.S. branches of such foreign banks (Yankee obligations),
foreign branches of such foreign banks, and foreign branches of U.S. banks
(Eurodollar obligations) having more than $1 billion in total assets at the time
of purchase. Such bank obligations may be general obligations of the parent bank
or may be limited to the issuing branch by the terms of the specific obligation
or by government regulation; and (iii) commercial paper issued by U.S. or
foreign commercial banks, which at the time of purchase are rated in the highest
rating category of at least one NRSRO or, if unrated, deemed of comparable
quality by the Adviser.
Pilot Short-Term Tax-Exempt Diversified Fund
and Pilot Missouri Short-Term Tax-Exempt Fund
The investment objective of the Pilot Short-Term Tax-Exempt Diversified Fund
(the "Tax-Exempt Diversified Fund") is to seek as high a level of current income
which is exempt from federal income tax, as is
11
<PAGE> 222
consistent with the preservation of capital. The Fund pursues its objective by
investing primarily in municipal obligations issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies, authorities and instrumentalities, and the District of
Columbia, the interest from which is, in the opinion of bond counsel, if any,
exempt from federal income tax ("Municipal Instruments"). As a matter of
fundamental policy, at least 80% of the Tax-Exempt Diversified Fund's annual
gross income will be derived from Municipal Instruments, except in extraordinary
circumstances when in Boatmen's opinion a temporary defensive posture is
appropriate.
The investment objective of the Pilot Missouri Short-Term Tax-Exempt Fund (the
"Missouri Tax-Exempt Fund") is to seek as high a level of current income which
is exempt from federal income tax as is consistent with the preservation of
capital. The Missouri Tax-Exempt Fund invests exclusively in high quality money
market instruments. The Fund seeks to achieve its objective by investing at
least 80% of its net assets during periods of normal market conditions in debt
obligations issued by or on behalf of the State of Missouri, the interest on
which is exempt from regular Federal income tax, is not a tax preference item
under the Federal alternative minimum tax and is exempt from Missouri income
taxes ("Missouri Instruments"). The Missouri Tax-Exempt Fund attempts to
maximize the amount of income exempt from Missouri income tax to the extent that
such available obligations meet the Fund's quality standards and have a suitable
yield. Because there may be an insufficient supply of Missouri Instruments which
meet the Fund's quality and liquidity standards and have a suitable yield, a
varying percent of the Fund's income may at any one time be exempt from Missouri
income tax. Interest from Municipal Instruments other than Missouri Instruments
may be subject to Missouri income tax.
As a matter of fundamental policy, at least 80% of the Missouri Tax-Exempt
Fund's income will be exempt from federal income taxes, except in extraordinary
circumstances when in Boatmen's opinion a temporary defensive posture is
appropriate. The Fund anticipates being as fully invested as practicable in
municipal bonds and notes. However, because the Missouri Tax-Exempt Fund
presently does not intend to invest in taxable obligations other than "private
activity" bonds, there may be occasions when, as a result of maturities of
portfolio securities, or sales of shares, or in order to meet anticipated
redemption requests, the Fund may hold cash which is not earning income.
Investments by the Tax-Exempt Diversified Fund and the Missouri Tax-Exempt Fund
(the "Tax-Exempt Funds") in taxable money market instruments will be limited to
those meeting the quality standards of each Fund.
Instruments in which the Tax-Exempt Funds may invest, include:
(A) fixed rate notes and similar debt instruments rated in the highest
short-term rating category or in one of the two highest rating categories of at
least one NRSRO;
(B) variable and floating rate demand instruments rated (i) in the highest
rating category for municipal notes or (ii) in one of the two highest rating
categories for long-term instruments or (iii) in the highest rating category for
commercial paper and municipal notes with demand features of at least one NRSRO;
(C) tax-exempt commercial paper rated in the highest rating category of at least
one NRSRO;
(D) unrated notes, paper or other instruments which are determined to be of
comparable high quality by Boatmen's pursuant to criteria approved by the
Trustees and in accordance with the procedures reviewed and approved by the
Trustees; and
(E) municipal bonds rated in one of the two highest rating categories of at
least one NRSRO and unrated bonds determined to be of comparable quality by
Boatmen's pursuant to criteria approved by the Trustees.
In addition, the Missouri Tax-Exempt Fund may invest in other municipal
obligations rated in the highest short-term rating category or in one of the two
highest long-term rating categories of at least one NRSRO or, if unrated, deemed
to be of comparable quality by the Adviser.
PORTFOLIO INSTRUMENTS AND PRACTICES
- --U.S. Government Securities. U.S. Government Securities are obligations issued
or guaranteed as to
12
<PAGE> 223
principal or interest by the U.S. Government, its agencies, authorities or
instrumentalities. Some U.S. Government Securities, such as Treasury bills,
notes and bonds, which differ only in their interest rates, maturities and times
of issuance, are supported by the full faith and credit of the United States.
Others, such as obligations issued or guaranteed by U.S. Government agencies,
authorities or instrumentalities, are supported either by (a) the full faith and
credit of the U.S. Government (such as securities of the Government National
Mortgage Association), (b) the right of the issuer to borrow from the Treasury
(such as securities of the Student Loan Marketing Association), (c) the
discretionary authority of the U.S. Government to purchase the agency's
obligations (such as securities of the Federal National Mortgage Association and
the Federal Home Loan Mortgage Corporation), or (d) only the credit of the
issuer. No assurance can be given that the U.S. Government will provide
financial support to U.S. Government agencies, authorities or instrumentalities
in the future.
Securities 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 and such participations may therefore be treated as
illiquid.
U.S. Government Securities may include zero coupon bonds (i.e., discount debt
obligations that do not make periodic interest payments). U.S. Government
Securities 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.
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.
Securities issued or guaranteed as to principal or interest by the U.S.
Government, its agencies, authorities or instrumentalities may 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 are not considered to be U.S. Government securities for the
purpose of determining whether 90% of the total assets of the Treasury Fund are
invested in U.S. Government securities and repurchase agreements relating to
such securities.
- --Foreign Securities. Investment in foreign securities and bank obligations may
present a greater degree of risk than investment in domestic securities because
of less publicly-available financial and other information, less securities
regulation, potential imposition of foreign withholding and other taxes, war,
expropriation or other adverse governmental actions. Foreign banks and their
foreign branches are not regulated by U.S. banking authorities, and generally
are not bound by the accounting, auditing and financial reporting standards
applicable to U.S. banks.
The DIVERSIFIED FUND may acquire U.S. dollar denominated obligations of the
International Bank for Reconstruction and Development (the "World Bank").
Obligations of the World Bank are supported by subscribed but unpaid commitments
of its member countries; there is no assurance that these commitments will be
fulfilled in the future.
- --Repurchase Agreements. EACH FUND may enter into repurchase agreements with
selected broker-dealers and with banks. A repurchase agreement is an agreement
under which a Fund purchases securities and the seller agrees to repurchase the
securities within a particular time at a specified price. The repurchase price
will exceed the original purchase price, the difference being income to the
Fund, and will be unrelated to the interest rate on the purchased security. The
Funds' custodian or subcustodian will maintain custody of the purchased
securities for the duration of the agreement. The value of the purchased
securities, including accrued interest, will at all times exceed the value of
the repurchase agreement. In the event of bankruptcy of the seller or failure of
the seller to repurchase the securities as agreed, a Fund could suffer losses,
including loss of interest on or principal
13
<PAGE> 224
of the security and costs associated with delay and enforcement of the
repurchase agreement. In evaluating whether to enter into a repurchase
agreement, Boatmen's will consider the credit worthiness of the seller pursuant
to procedures reviewed and approved by the Trustees.
- --Municipal Instruments. Municipal notes which may be purchased by the
DIVERSIFIED FUND and the TAX-EXEMPT FUNDS include tax anticipation notes,
revenue anticipation notes, bond anticipation notes, tax and revenue
anticipation notes and construction notes. Municipal bonds, which may be issued
to raise money for various public purposes, include general obligation bonds and
revenue bonds, and the Funds may hold both in any proportion. General obligation
bonds are backed by the taxing power of the issuing municipality and are
considered the safest type of bonds. Revenue bonds are backed by the revenues of
a project or facility such as tolls from a toll bridge. Industrial development
bonds (generally referred to under current tax law as "private activity bonds")
are a specific type of revenue bond backed by the credit and security of a
private issuer and therefore may have more potential risk. These bonds may be
issued in a variety of forms, including Commercial Paper, tender option bonds
and variable and floating rate securities.
The value of floating and variable rate obligations generally is more stable
than that of fixed rate obligations in response to changes in interest rate
levels. Variable and floating rate obligations usually carry rights that permit
the Funds to sell them at par value plus accrued interest upon short notice. The
issuers or financial intermediaries providing rights to sell may support their
ability to purchase the obligations by obtaining credit with liquidity supports.
These may include lines of credit, which are conditional commitments to lend,
letters of credit, which will ordinarily be irrevocable, both issued by domestic
banks or foreign banks which have a branch, agency or subsidiary in the United
States. (See "Portfolio Instruments and Practices--Foreign Securities".) When
considering whether an obligation meets a Fund's quality standards, the Fund
will look to the credit worthiness of the party providing the right to sell as
well as to the quality of the obligation itself. The Funds may consider the
maturity of a variable or floating rate Municipal Instrument to be shorter than
its ultimate maturity if a Fund has the right to demand prepayment of its
principal at specified intervals prior to the security's ultimate maturity,
subject to the conditions for using amortized cost valuation under the
Investment Company Act of 1940 (the "1940 Act"). EACH FUND may purchase such
variable or floating rate obligations from the issuers or may purchase
participations, a type of floating or variable rate obligation, which are
interests in a pool of municipal obligations held by a bank or other financial
institution.
EACH FUND may invest in municipal securities issued to finance private
activities, the interest from which is an item of tax preference to Shareholders
for purposes of the federal alternative minimum tax (see "Dividends and
Distributions" and "Tax Implications"). However, any such interest which a
Tax-Exempt Fund might earn will not be deemed to have been derived from
Municipal Instruments for purposes of determining whether at least 80% of the
Fund's annual gross income has been derived from such Instruments. The
TAX-EXEMPT DIVERSIFIED FUND does not currently intend to invest in such bonds.
As a non-fundamental policy, the MISSOURI TAX-EXEMPT FUND currently intends to
limit its income from private activity bonds to no more than 20% of the Fund's
income.
Ordinarily, the TAX-EXEMPT FUNDS expect that 100% of their portfolio securities
will be Municipal Instruments. However, the Funds may hold cash or invest in
short-term taxable securities as set forth above. Each Tax-Exempt Fund may
invest 25% or more of its total assets in Municipal Instruments which are
related in such a way that an economic, business or political development or
change affecting one Municipal Instrument would also affect the other Municipal
Instruments. For example, a Fund may so invest in (a) Municipal Instruments the
interest on which is paid solely from revenues of similar municipal projects
such as hospitals, electric utility systems, multi-family housing, nursing
homes, commercial facilities (including hotels) or life care facilities, (b)
Municipal Instruments whose issuers are in the same state (including, in the
case of the Missouri Tax-Exempt Fund, issuers in states other than Missouri), or
(c) industrial development obligations.
14
<PAGE> 225
EACH FUND may purchase Municipal Instruments which are backed by letters of
credit, which will ordinarily be irrevocable, issued by domestic banks or
foreign banks which have a branch, agency or subsidiary in the United States. In
addition, EACH FUND may acquire securities in the form of custodial receipts
which evidence ownership of future interest payments, principal payments or both
on obligations of certain state and local governments and authorities.
In order to enhance the liquidity, stability, or quality of a Municipal
Instrument, EACH FUND may acquire the right to sell the security to another
party at a guaranteed price and date. These rights may be referred to as puts,
demand features or standby commitments.
- --State of Missouri. The MISSOURI TAX-EXEMPT FUND is more susceptible to risks
affecting issuers of Missouri Instruments than would be a comparable municipal
bond fund that does not emphasize these issuers to this degree. The
marketability and market value of Missouri Instruments may be affected by
economic factors in Missouri. These include the Missouri economy's heavy
dependence upon manufacturing, defense and agriculture, which tend to be
cyclical. Missouri and its political subdivisions are subject to the Hancock
Amendment, a constitutional amendment which limits taxing authority and
government spending. It imposes a limit on the total amount of taxes which the
State may impose and limits the revenues of counties and other political
subdivisions. Voter approval is required to exceed the limit, or to raise the
rate of an existing tax, license, or other fee at a rate faster than specified
limits. At the State level such limit is tied to personal income in Missouri,
and at the county and local level such limit is tied to the consumer price
index. The limitations do not apply to the payment of principal and interest on
bonds approved by the voters. However, such limitations could affect adversely
the ability of certain issuers to repay obligations which are not backed by the
full faith or taxing authority of Missouri or a political subdivision. If either
Missouri or any of its governmental entities are unable to meet their financial
obligations, the income derived by the Fund, the Fund's net asset value, the
ability to preserve or realize appreciation of the Fund's capital or the Fund's
liquidity could be adversely affected. An expanded discussion concerning
Missouri is contained in the Statement of Additional Information.
- --Loan Participations and Asset-Backed and Receivables-Backed Securities. The
DIVERSIFIED FUND may invest in loan participations. A loan participation is an
interest in a loan to a U.S. corporation (the borrower) which is administered
and sold by an intermediary bank. The borrower of the underlying loan will be
deemed to be the issuer of the participation interest except to the extent the
Fund derives its rights from the intermediary bank who sold the loan
participation. The Fund may only purchase participations from banks which have
total assets exceeding $1 billion. Loan participations will be treated as
illiquid if they cannot be sold at market price within seven days.
The Diversified Fund may also invest in asset-backed and receivables-backed
securities. These securities represent participations in, or are secured by and
payable from, pools of assets such as motor vehicle installment sale contracts,
installment loan contracts, leases of various types of real and personal
property, receivables from revolving credit (credit card) agreements and other
categories of receivables. Such asset pools are securitized through the use of
privately-formed trusts or special purpose corporations. Payments or
distributions of principal and interest may be guaranteed up to certain amounts
and for a certain time period by a letter of credit or a pool insurance policy
issued by a financial institution unaffiliated with the trust or corporation, or
other credit enhancements may be present.
The Fund may invest in new types of mortgage-related securities and in other
asset-backed securities that may be developed in the future to the extent
consistent with its investment objective and policies.
- --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 the Funds, has obtained relief from the SEC to permit each Fund to
sell its securities in excess of otherwise applicable limits to the non-money
market portfolios of the Trust. 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
15
<PAGE> 226
in addition to the advisory and other expenses a Fund pays in connection with
its own operations.
- --Forward Commitments and When-Issued Securities. EACH FUND may purchase
securities on a "when-issued" basis and purchase or sell securities on a
"forward commitment" basis. When-issued and forward commitment transactions,
which involve a commitment by the Fund to purchase or sell particular securities
with payment and delivery taking place at a future date (perhaps one or two
months later), permit the Fund to lock in a price or yield on a security it
intends to purchase or sell, regardless of future changes in interest rates.
These transactions involve the risk that the price or yield obtained may be less
favorable than the price or yield when the delivery takes place. These
transactions will not be entered into for speculative purposes but only in
furtherance of a Fund's investment objective. Although a Fund would generally
purchase securities on a when-issued or forward commitment basis with the
intention of acquiring securities for its portfolio, such Fund may dispose of a
when-issued security or forward commitment prior to settlement if Boatmen's
deems it appropriate to do so and such disposition may give rise to a capital
gain or loss.
- --Managing Liquidity. 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, as a matter of non-fundamental policy
which may be changed by the Trustees without shareholder approval, EACH OF THE
FUNDS DOES NOT KNOWINGLY INVEST MORE THAN 10% OF ITS NET ASSETS IN ILLIQUID
SECURITIES. For this purpose, not all securities which are restricted are deemed
to be illiquid. Illiquid securities include certain certificates of
participation and tax-exempt derivative securities that do not permit a Fund to
terminate them after seven days' notice. Certain securities that might otherwise
be considered illiquid, however, such as some issues of commercial paper and
securities for which Boatmen's 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 10% limitation. In addition, certain repurchase
agreements which provide for settlement in more than seven days, but can be
liquidated before the nominal fixed term on seven days' or less notice, are
treated as liquid instruments.
- --Other 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 additional 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
recognize 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 will tend to decrease. You
should also recognize 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 Missouri Tax-Exempt Fund may invest more than 25% of its total assets in
municipal obligations the interest of which comes from issuers located in the
same state. When the Fund's assets are concentrated in obligations payable from
revenues of issuers located in the same state, the Fund will be subject to the
particular risks (including legal and economic conditions) relating to such
securities to a greater extent than if its assets were not so concentrated. In
addition, payment on Municipal Instruments related to certain projects in which
the Tax-Exempt Funds invest may be secured by mortgages or deeds of trust. In
the event of a default, enforcement of a mortgage or deed of trust will be
subject to statutory enforcement procedures on obtaining deficiency judgments.
Should a foreclosure occur, collection of the proceeds from that foreclosure may
be delayed and the amount of the proceeds received may not be enough to pay the
principal or accrued interest on the defaulted Municipal Instruments.
The Missouri Tax-Exempt Fund is non-diversified, which means that the Fund is
not limited by the 1940 Act in the proportion of its assets that it may invest
in
16
<PAGE> 227
the obligations of a single issuer. The investment of a large percentage of the
Fund's assets in the securities of a small number of issuers may subject the
Fund to particular risks relating to such issuers to a greater extent than if
the Fund were diversified under the 1940 Act.
- --Additional Information. The Funds have adopted certain procedures under the
1940 Act which enable the Funds to purchase certain instruments during the
existence of an underwriting or selling syndicate of which Boatmen's National
Bank of St. Louis ("Boatmen's Bank"), an affiliate of Boatmen's, or Kleinwort
Benson Investment Management Americas Inc. is a member relating to the
instruments. These procedures establish, among other things, certain limitations
on the amount of debt securities which may be purchased in any single offering
and on the amount of a Fund's assets which may be invested in any single
offering. Accordingly, in view of Boatmen's Bank's active role in the
underwriting of debt securities, a Fund's ability to purchase debt securities in
the primary market may from time to time be limited.
INVESTMENT LIMITATIONS
Certain of the investment policies of each Fund may not be changed without a
vote of 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 the
fundamental limitations are summarized below, and all of the Funds' fundamental
limitations are set out in greater detail in the Statement of Additional
Information, which is available upon request.
Treasury, Diversified and Tax-Exempt Diversified Funds
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 as described in the Statement of Additional
Information, including investments in U.S. Government securities, investments in
banking obligations by the Diversified Fund and investments in Municipal
Instruments by the Tax-Exempt Diversified Fund).
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 the value of the Fund's total assets in the securities of a
single issuer, except that up to 25% of each Fund's total assets can be invested
without regard to such 5% limitation (such 5% limitation shall not apply to
repurchase agreements collateralized by U.S. Government securities).
3. A Fund may not borrow money except as a temporary measure and then only in
amounts not exceeding 5% of the value of the Fund's total assets or from banks
provided that immediately after such borrowing, all borrowings of the Fund do
not exceed one-third of the Fund's total assets and no purchases of portfolio
instruments will be made while such Fund has borrowings outstanding in an amount
exceeding 5% of its total assets.
Missouri Tax-Exempt Fund
1. The 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 as described in the Statement of Additional
Information, including investments in U.S. Government securities and investments
in Municipal Instruments).
2. The Fund may not borrow money except as a temporary measure for emergency
purposes and then only in amounts not exceeding one-third of the value of the
Fund's total assets and no purchases of portfolio instruments will be made while
such Fund has borrowings outstanding in an amount exceeding 5% of its net
assets.
THE INVESTMENT OBJECTIVE OF EACH FUND IS FUNDAMENTAL AND ACCORDINGLY CANNOT BE
CHANGED WITHOUT THE APPROVAL OF A MAJORITY OF THE OUTSTANDING SHARES OF THAT
FUND. THE INVESTMENT POLICIES AND PRACTICES OF EACH OF THE TREASURY, DIVERSIFIED
AND TAX-EXEMPT DIVERSIFIED FUNDS, UNLESS OTHERWISE SPECIFICALLY STATED HEREIN,
ARE NOT FUNDAMENTAL AND CAN BE CHANGED BY THE FUNDS' TRUSTEES WITHOUT A
SHAREHOLDER VOTE; THE INVESTMENT POLICIES AND PRACTICES OF THE MISSOURI
TAX-EXEMPT FUND, OTHER THAN ITS NON-DIVERSIFIED STATUS, ARE
17
<PAGE> 228
FUNDAMENTAL, UNLESS OTHERWISE SPECIFICALLY STATED HEREIN.
Pursuant to a rule of the Securities and Exchange Commission, each of the
Diversified Fund and the Treasury Fund may not invest more than 5% of its total
assets (taken at amortized cost) in the securities of any one issuer (except
U.S. Government Securities and repurchase agreements collateralized by such
securities). Each of such Funds may, however, invest more than 5% of its total
assets in the First Tier Securities of a single issuer for a period of up to
three business days after the purchase thereof, although a Fund may not make
more than one such investment at any time. Further, each of such Funds may not
invest more than the greater of (i) 1% of its total assets; or (ii) one million
dollars in the securities of a single issuer which were Second Tier Securities
when acquired by a Fund. In addition, each of such Funds may not invest more
than 5% of its total assets in securities which were Second Tier Securities when
acquired. Pursuant to the SEC rule, the foregoing restrictions are not
applicable to the Tax-Exempt Funds. The foregoing operating policies are more
restrictive than the fundamental policy set forth above, which would give a Fund
the ability to invest, with respect to 25% of its total assets, more than 5% of
its total assets in any one issuer. Each Fund operates in accordance with these
operating policies which comply with the SEC rule.
SERVICE PLAN
Each Fund has adopted a Service Plan (the "Plan") with respect to the Investor
Shares which authorizes the Fund to compensate Boatmen's, its affiliates and
other Service Organizations for providing account administration and Shareholder
liaison services to their customers who are beneficial owners of such Shares.
Each Fund will enter into agreements with Service Organizations which purchase
Pilot Investor Shares on behalf of their customers ("Service Agreements"). The
Service Agreements will provide for compensation to the Service Organization in
an amount up to .50% (on an annualized basis) of the average daily net asset
value of the Investor Shares of the applicable Fund attributable to or held in
the name of the Service Organization for its customers. The services provided by
the Service Organizations may include acting as a Shareholder of record,
maintaining account records for its customers, processing orders to purchase,
redeem and exchange Investor Shares for its customers, responding to inquiries
from prospective and existing Shareholders and assisting customers with
investment procedures.
For the fiscal years ended August 31, 1994, 1995 and 1996, the Funds incurred
Service Organization fees at the annual rate of .50%, .50% and .50%,
respectively, of each Fund's average daily net assets attributable to Investor
Shares.
Holders of Investor Shares of a Fund will bear all expenses and fees paid to
Service Organizations with respect to such Shares as well as any other expenses
which are directly attributable to such Shares.
Service Organizations, other than broker-dealers, may charge other fees to their
customers who are the beneficial owners of Investor Shares in connection with
their customer accounts. These fees would be in addition to any amounts received
by the Service Organization under a Service Agreement and would be for services
other than those provided under such an Agreement. Under the terms of such
Service Agreements, Service Organizations are required to provide their
customers with a schedule of fees charged to such customers which relate to the
investment of customers' assets in Investor Shares. This schedule will be
provided at the time of any investment and whenever changes to the schedule are
made.
The Funds will accrue payments made pursuant to a Service Agreement daily. The
Funds will receive a prospective undertaking from each Service Organization
eliminating that portion of such service payments which is necessary to assure
that the service payments which are required to be accrued to the Investor
Shares on any day do not exceed the income to be accrued to such Shares on that
day.
The Funds have adopted the Plan in accordance with the provisions of Rule 12b-1
under the Investment Company Act of 1940 which regulates circumstances under
which an investment company may directly or indirectly bear expenses relating to
the distribution of its shares. Continuance of the Plan must be approved
18
<PAGE> 229
annually by a majority of the Trustees of the Funds and by a majority of the
non-interested Trustees. The Plan requires that quarterly written reports of
amounts spent under the Plan and the purposes of such expenditures be furnished
to and reviewed by the Trustees. The Plan may not be amended to increase
materially the amount which may be spent thereunder without approval by a
majority of the outstanding shares of the Funds. All material amendments to the
Plan will require approval by a majority of the Trustees of the Funds and of the
non-interested Trustees.
All inquiries of beneficial owners of Investor Shares should be directed to such
owners' Service Organization.
Payments for Fund shares must normally be in U.S. dollars and in order to avoid
fees and delays should be drawn on a U.S. bank. Please remember that The Pilot
Funds retains the right to reject any purchase order.
INVESTING IN THE PILOT FUNDS
Getting Your Investment Started
Investing in The Pilot Funds is quick and convenient. Fund Shares may be
purchased either through the account you maintain with Boatmen's Investment
Services, Inc. ("BIS") or other Service Organization or by a fiduciary account
where purchases of Investor Shares of a Fund are made as directed by Boatmen's
or other Service Organization. See "How to Buy Shares" below. Fund shares are
distributed by Pilot Funds Distributors, Inc., (the "Distributor"). The
Distributor is located at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
You may choose to invest your BIS account where an Account Representative can
advise you in selecting among the Pilot Funds. Whether you currently have a BIS
account or wish to open one, your Pilot Funds investment can be executed within
a few minutes by telephone or, if you prefer, during a consultation with an
Investment Officer of BIS. Call BIS at 800/469-5999 to speak with an Account
Representative, to place a Pilot Funds transaction or to arrange a consultation
scheduled at your convenience.
Clients of BIS and other institutions such as broker-dealers that have entered
into agreements with the Distributor ("Service Organizations") may purchase
shares through their accounts at their Service Organization and should contact
such Service Organization directly for appropriate purchase instructions. Share
purchases (and redemptions) made through BIS or another Service Organization are
effected only on Business Days. When shares are purchased through BIS or another
Service Organization, a fee may be charged by those institutions for providing
administrative services in connection with your investment.
The Pilot Funds will send you the following statements and reports to provide
you with current information on the status of your account:
<TABLE>
<S> <C>
Confirmation Statements After every transaction that
affects your account balance.
Account Statements Either monthly, quarterly or
annually depending on the
Fund in which you invest or
the type of account you hold.
Financial Reports Every six months. To reduce
The Pilot Funds' expenses,
only one copy of most Fund
reports will be mailed to
your household, even if you
have more than one account in
a Fund.
</TABLE>
HOW TO BUY SHARES
This section provides you with pertinent information on how to buy Fund shares.
Further information can be found under "Transaction Rules". As set forth above,
Investor Shares of the Funds are offered exclusively to customers of Boatmen's,
its affiliates and to customers of other participating Service Organizations.
Investor Shares may be purchased on any Business Day (as defined below) at the
net asset value next determined after receipt by the Transfer Agent from the
Service Organization of both the purchase order and its purchase price in
Federal Funds. Payment will be effected by wiring Federal Funds to the
Custodian. Boatmen's and other participating Service Organizations have
undertaken to arrange for the timely transmittal of purchase orders to
19
<PAGE> 230
the Transfer Agent and of Federal Funds to the Custodian. Purchases are made
through a customer's account at Boatmen's or other Service Organization as
directed by the customer in an application form executed prior to the customer's
first purchase of Investor Shares, except in the case of purchases by a
fiduciary account where purchases of Investor Shares of a Fund are made as
directed by Boatmen's or other Service Organization.
A customer of Boatmen's or other Service Organization (other than a fiduciary
account) may direct Boatmen's or such Service Organization to invest
automatically any cash income balance and any cash principal balance of the
customer's account in Investor Shares of a Fund. This automatic investment will
occur on each Business Day for each balance in its entirety. A customer
maintaining an account at the trust department of a bank affiliated with
Boatmen's may instruct the bank to invest automatically through Boatmen's any
cash income balance and any cash principal balance of the customer's account in
Investor Shares of a Fund on the same basis as applicable to customers of
Boatmen's or may give other instructions to the bank within limits prescribed by
the bank. Investors who wish to obtain additional information concerning
investment procedures or a Fund's current yield should call 800/71-PILOT.
Additional copies of this Prospectus, and copies of the Statement of Additional
Information, may be obtained from the Distributor, 3435 Stelzer Road, Columbus,
Ohio 43219-3035.
In order to maximize earnings, the Funds try to be invested as completely as is
practicable. The Funds are normally required to make settlement in Federal Funds
for securities purchased. Accordingly, orders for Investor Shares will become
effective on Business Days as follows: if an order is received by the Transfer
Agent by 2:00 p.m., Central time, for the Diversified and Treasury Funds and by
12:00 Noon, Central time, for the Tax-Exempt Funds, and Federal Funds are
received by the Custodian on the same day by 3:00 p.m., Central time, the order
is effective as of that day. Shares are deemed to have been purchased when an
order becomes effective and are entitled to income commencing on that day.
It is the responsibility of Service Organizations 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 Service Organization 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.
Purchase orders must include the purchaser's tax identification number. The
Pilot Funds reserves the right to reject any purchase order including exchanges
for any reason or to waive the minimum initial investment requirement. The Funds
also reserve the right to establish a minimum initial and/or subsequent
investment requirement and to change that requirement with respect to any person
or class of persons. 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.
Tax-Sheltered Retirement Plans
Shares of the Funds may be purchased for Individual Retirement Accounts ("IRAs")
for individuals and their non-employed spouses who desire to make limited
contributions, including rollovers, to a tax deferred retirement program and if
eligible, receive a federal income tax deduction for amounts contributed. For
information about an IRA application with the Funds, contact your Service
Organization.
Explanation of Sales Price
Investor Shares of the Funds are sold at net asset value. Net asset value per
share is determined on each Business Day (as defined below) at 2:00 p.m.,
Central time, for the Diversified and Treasury Funds, and 12:00 noon, Central
time, for the Tax-Exempt Funds with respect to each Fund by adding the value of
a Fund's investments, cash, and other assets attributable to its Investor
Shares, subtracting the Fund's liabilities attributable to those shares, and
then dividing the result by the number of Investor Shares in the Fund
20
<PAGE> 231
that are outstanding. The Funds seek to maintain a net asset value of $1.00 per
share. In this connection, each Fund's securities are valued at its amortized
cost, which does not take into account unrealized securities gains or losses.
This method involves initially valuing an instrument at its cost and thereafter
assuming a constant amortization to maturity of any premium paid or discount
received. For a more complete description of the amortized cost valuation method
and its effect on existing and prospective shareholders, see "Net Asset Value"
in the Statement of Additional Information.
HOW TO SELL SHARES
The Pilot Funds makes it easy to sell, or "redeem" your shares. If you purchased
your shares through an account at BIS or another Service Organization, you may
redeem shares in accordance with the instructions pertaining to that account.
Payment of Redemption Proceeds and Dividends
If a redemption request is received by the Transfer Agent from Boatmen's or
another Service Organization before 2:00 p.m., Central time, for the Diversified
and Treasury Funds and 12:00 a.m., Central time, for the Tax-Exempt Funds, the
Investor Shares to be redeemed do not earn income on that day, but the proceeds
will be available in the Shareholder's account at Boatmen's or another Service
Organization, or will be available by check at the election of a Shareholder on
the same day (if it is a Business Day). If a redemption request is received
after that time, the Investor Shares to be redeemed earn income on the day the
request is received, and the proceeds will be available in the Shareholder's
account at Boatmen's or another Service Organization on the following Business
Day. Neither the Funds nor the Distributor or Transfer Agent shall have any
liability for any delay in the availability of proceeds in a Shareholder's
account. Boatmen's and other Service Organizations have undertaken to arrange
for the timely transmittal to the Transfer Agent of redemption requests and the
timely crediting to Shareholders' accounts at Boatmen's and other Service
Organizations of redemption proceeds. In order to effect timely transmittals and
crediting, Service Organizations may establish earlier times by which redemption
directions must be received by them. Service Organizations have undertaken to
advise Shareholders if earlier times are established.
EXCHANGES
Investor Shares of the Fund may be exchanged for Class A Shares of any other
fund of the Pilot family of Funds, unless otherwise determined by the Trustees
at the time any new funds become available at the net asset value next
determined plus any applicable sales charge, by calling your Service
Organization. However, if a sales charge has previously been paid on the
investment represented by the exchanged shares (i.e., the shares to be exchanged
were originally issued in exchange for shares on which a sales charge was paid),
the exchange will be made at net asset value. Investor Shares of the Fund
purchased through dividend and/or capital gains reinvestment may be exchanged
for Class A Shares of a Pilot Fund without a sales charge. Prior to the
completion of any exchange, investors must have the Prospectus of the Fund into
which they are exchanging. Shares can only be exchanged in a state where the
Shares to be received are registered.
For federal income tax purposes, an exchange is treated as a sale of the Shares
surrendered in the exchange, on which an investor may realize a gain or loss,
followed by a purchase of Shares received in the exchange. All telephone
exchanges must be registered in the same name(s) and with the same address as
are registered in the Fund from which the exchange is being made. Any election
to use telephone exchanges or redemptions will be administered by your Service
Organization. In times of drastic economic or market changes the telephone
exchange privilege may be difficult to implement. 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 within 72 hours of a telephone transaction, 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
21
<PAGE> 232
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. All exchanges are subject to the minimum investment
requirements, if any, of The Pilot Funds into which the shares are being
exchanged. Exchanges are available only in states where the exchange may legally
be made. An exchange fee may be imposed or the exchange privilege may be
modified or withdrawn at any time on 60 days' written notice or as otherwise
permitted by applicable law.
TRANSACTION RULES
The right of a Shareholder to redeem Shares and the date of payments by the
Funds may be suspended (a) for any period during which the New York Stock
Exchange is closed, other than the customary week ends or holidays, or trading
in the markets the Funds normally utilize is closed or is restricted as
determined by the SEC, (b) during any emergency, as determined by the SEC, as a
result of which it is not reasonably practicable for the Funds to dispose of
instruments owned by it or fairly to determine the value of its net assets, or
(c) for such other period as the SEC may by order permit for the protection of
the Shareholders of the Funds.
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 1940 Act.
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
1940 Act. See the Statement of Additional Information ("Redemptions"). In those
cases, an investor may incur brokerage costs in converting securities to cash.
Shares of a Fund are redeemable at the unilateral option of the Funds if the
Trustees determine in their sole discretion that failure to so redeem may have
material adverse consequences to the Shareholders of such Fund. The Funds,
however, assume no responsibility to compel such redemptions. In the event
losses are sustained by a Fund, the Funds may reduce the number of outstanding
Shares in that Fund in order to maintain a net asset value per Share of $1.00.
Such reduction will be effected by having each Shareholder of that Fund
proportionally contribute to the Fund's capital the necessary Shares to restore
such net asset value per Share. Each Shareholder will be deemed to have agreed
to such contribution in these circumstances by his investment in the Funds. In
addition, the Funds reserve the right to adopt by action of the Trustees a
policy pursuant to which it may without Shareholder approval redeem upon not
less than 30 days' notice (a) Shares in an account which have a value below
$500, or such other amount as the Trustees may designate at the time the policy
is adopted (and during the notice period Shareholders will have the opportunity
to bring the value of their accounts up to the designated amount) or (b) all of
a Fund's Shares if such Shares have an aggregate value below a designated amount
and if the Trustees determine that it is not practical, efficient or advisable
to continue the operation of the Fund and that any applicable requirements of
the 1940 Act have been complied with. As of the date of this Prospectus, no such
policy has been adopted. While, as indicated above, the Trustees have the
authority to adopt, and thereafter to change from time to time, such a policy,
they will not do so without providing at least 30 days' notice to the
Shareholders.
The Funds reserve the right to reject any purchase order (including exchanges)
for any reason. The Funds also reserve the right to establish a minimum initial
and/or subsequent investment requirement and to change that requirement with
respect to any person or class of persons.
As used in this Prospectus, the term "Business Day" refers to those days when
the New York Stock Exchange and the Custodian are open for business, which is
Monday through Friday except for holidays (scheduled holidays for 1997 are: New
Year's Day, Martin Luther King, Jr. Day, Presidents Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day
and Christmas Day). On those days when one or more of such organizations close
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.
22
<PAGE> 233
DIVIDENDS AND DISTRIBUTIONS
Where do your dividends and distributions come from?
A Fund's net investment income consists of the excess of (i) accrued interest or
discount (including both original issue and market discount, if any) on
portfolio securities and (ii) any income of the Fund from sources other than
capital gains, over (iii) the amortization of market premium on portfolio
securities and (iv) the estimated expenses of the Fund, including a
proportionate share of the general expenses of the Funds and the service fee
specifically allocated to the Funds.
What are your dividend and distribution options?
Income dividends and capital gain distributions will be reinvested in additional
shares of the same Fund or at the election of the Shareholder will be paid in
cash. Any election to receive cash or to reinvest in additional Shares will be
administered by your Service Organization in a manner arranged for each Fund.
Cash distributions will be paid on or about the first business day of each
month. Although realized gains and losses on the assets of each Fund are
reflected in the net asset value of each Fund, they are not expected to be of an
amount which would affect a Fund's net asset value of $1.00 per Share.
When are dividends and distributions declared and paid?
Each Fund intends to declare substantially all of its net investment income
daily (as of 2:00 p.m., Central time, for the Diversified and Treasury Funds,
and as of 12:00 Noon, Central time, for the Tax-Exempt Funds) as a dividend and
distribute these dividends to Investor Shareholders, monthly. Net short-term
capital gains, if any, will be distributed in accordance with the requirements
of the Code, and may be reflected in the Funds' daily distributions. Each Fund
may distribute at least annually, on or about the close of each fiscal year, its
long-term capital gains, if any.
Should a Fund incur or anticipate any unusual expense, loss or depreciation
which could adversely affect income or net asset value, the Trustees would at
that time consider whether to adhere to the present income accrual and
distribution policy described above or to revise it in light of the then
prevailing circumstances. For example, the Trustees might reduce or suspend
Shareholder income accruals in order to prevent to the extent possible the net
asset value of such Fund from being reduced below $1.00 per Share. Thus, such
expenses, losses or depreciation could result in a Shareholder receiving no
income for the period during which he or she held the Shares.
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 Trustees of the Funds are
responsible for the overall management and supervision of its affairs. 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 and to establish additional portfolios in the
future. The Trustees have authorized the issuance of an unlimited number of
shares available to selected investors in each of three share classes (Investor
Shares, Administration Shares and Pilot Shares) in these Funds. Information
regarding The Pilot Funds' other portfolios may be obtained by contacting The
Pilot Funds at 800/71-PILOT or the Distributor.
Each Investor Share, Administration Share and Pilot Share of the Fund represents
an equal proportionate interest in the assets belonging to the Fund. It is
contemplated that most Shares will be held in accounts of which the record owner
is a bank or other institution acting as nominee for its customers who are the
beneficial owners of the Shares. Pilot Shares may be purchased for accounts held
in the name of an institution that is not compensated by the Funds for services
provided to the institution's customers. Administration Shares may be purchased
for accounts held in the name of an institution that provides certain account
administration services to its customers, including maintenance of account
records and
23
<PAGE> 234
processing orders to purchase, redeem and exchange Administration Shares.
Administration Shares bear the cost of administration fees at the annual rate of
up to .25 of 1% of the average daily net asset value of such Shares. Investor
Shares may be purchased for accounts held in the name of an institution that
provides certain account administration and Shareholder liaison services to its
customers, including maintenance of account records, processing orders to
purchase, redeem and exchange Investor Shares, responding to customer inquiries
and assisting customers with investment procedures. Investor Shares bear the
cost of service fees at the annual rate of up to .50 of 1% of the average daily
net asset value of such Shares. Please refer to the Statement of Additional
Information for the Administration Shares and Investor Shares for a more
complete description of such services. It is possible that an institution (a
"Service Organization") or its affiliate may offer different classes of Shares
to its customers and thus receive different compensation with respect to
different classes of Shares of the same Fund. Each Service Organization offering
both Administration Shares and Investor Shares intends to limit the availability
of such Shares to different types of investors. Shares of each class may be
exchanged only for Shares of the same class in another Fund. Except as described
herein, the three classes of Shares are identical. Certain aspects of the Shares
may be altered, after advance notice to Shareholders, if it is deemed necessary
in order to satisfy certain tax regulatory requirements.
When issued, Shares will be fully paid and nonassessable. In the event of
liquidation, Shareholders are entitled to share pro rata in the net assets of
the applicable Fund available for distribution to Shareholders. Shares entitle
their holders to one vote per Share, are freely transferable and have no
preemptive, subscription or conversion rights.
If a proposal concerning the Administration Plan or Service Plan is submitted to
holders of Administration Shares or Investor Shares, respectively, Service
Organizations holding Administration or Investor Shares for their own accounts
have undertaken to vote such Shares in the same proportions as the vote by
customers of such Shares held for the account of such customers of the Service
Organization.
Persons selling or servicing different classes of shares of the Funds may
receive different compensation with respect to one particular class of shares as
opposed to another in the same Fund.
From time to time the Distributor, at its expense, will also provide additional
compensation to dealers in connection with sales of Shares of any of the Funds
and other Funds of the Group. Compensation may include tickets to sporting and
other entertainment events, gifts of merchandise, and financial assistance to
dealers in connection with conferences, sales or training programs for their
employees, seminars for the public, advertising campaigns regarding one or more
Funds of the Group, and/or other dealer-sponsored special events. In some
instances, this compensation may be made available only to certain dealers whose
representatives have sold or are expected to sell a significant amount of such
shares. Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to exotic locations within or outside of the
United States for meetings or seminars of a business nature. The Distributor, at
its expense, currently conducts an annual sales contest for dealers in
connection with their sales of Shares of the Funds. Dealers may not use sales of
a Fund's Shares to qualify for this compensation to the extent such may be
prohibited by the laws of any state or any self-regulatory agency, such as the
National Association of Securities Dealers, Inc.
SHAREHOLDERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND PROPORTIONATE
FRACTIONAL VOTES FOR FRACTIONAL SHARES HELD. Shares of all the Pilot Funds
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.
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.
Effective June 30, 1995, the name of the Pilot Short-Term Tax-Exempt Fund was
changed to the Pilot Missouri Short-Term Tax-Exempt Fund.
24
<PAGE> 235
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") 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. The mailing address is P.O. Box 14737 at that
location.
Administrator: BISYS FUND SERVICES LIMITED PARTNERSHIP (referred to as
"BISYS"), is responsible for coordinating the Fund's efforts and generally
overseeing the operation of the Fund's business. BISYS principal offices are
located at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
Distributor: Each 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 and an affiliate of BISYS that is located at 3435
Stelzer Road, Columbus, Ohio 43219-3035.
Custodian: BOATMEN'S TRUST COMPANY (referred to as "Boatmen's") is responsible
for holding the investments purchased by each Fund. Boatmen's is located at 100
N. Broadway, St Louis, Missouri 63178.
Transfer Agent: BISYS FUND SERVICES, INC. (referred to as the "Transfer Agent")
is an affiliate of BISYS and 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, OH 43219-3035.
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 nearly
$[ ] billion in assets ($[ ] 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 located in Arkansas, Illinois, Iowa, Kansas, Missouri,
New Mexico, Oklahoma, Tennessee and Texas, a mortgage banking company, a credit
life insurance company, a federal savings bank in Arkansas and a limited service
bank in Delaware.
On August 30, 1996, Bancshares and NationsBank Corporation ("NationsBank")
announced that they have entered into an agreement pursuant to which Bancshares
will merge into NationsBank. The proposed merger, which is currently expected to
take place on or about January 1997, is subject to a number of conditions,
including approval by the appropriate regulatory authorities and by the
shareholders of both Bancshares and NationsBank. If the proposed merger is
consummated, Boatmen's will become a wholly owned subsidiary of NationsBank.
Under its Advisory Agreements with the Funds on behalf of each Fund, Boatmen's,
subject to the general supervision of the Funds' Trustees, manages the
investment operations of each Fund and the composition of each Fund's assets,
including the purchase, retention, and disposition thereof.
Boatmen's pays all costs incurred by it in connection with the performance of
its duties under each Advisory Agreement, other than the cost (including taxes
and brokerage commissions, if any) of securities purchased for the Funds and the
cost of preparing tax returns, shareholder reports and prospectuses and reports
filed with regulatory authorities.
Boatmen's began serving as investment adviser to the Treasury Fund and
Diversified Fund on June 1, 1994 and began serving as investment adviser to the
Tax-Exempt Diversified Fund and Missouri Tax-Exempt Fund effective July 1, 1995.
Goldman Sachs, acting through its separate operating division, Goldman Sachs
Asset Management, served as investment adviser to the Tax-Exempt Diversified
Fund and Missouri Tax-Exempt Fund prior to July 1, 1995.
25
<PAGE> 236
Boatmen's is entitled to receive advisory fees on a monthly basis at an annual
rate of .15 of 1% of the Diversified Fund's average net assets, .15 of 1% of the
Treasury Fund's average net assets, .20 of 1% of the Tax-Exempt Diversified
Fund's average net assets and .20 of 1% of the Missouri Tax-Exempt Fund's
average net assets.
For the fiscal year ended August 31, 1996 total advisory fees paid by the
Diversified Fund and Treasury Fund were .13% and .15%, respectively. For the
fiscal year ended August 31, 1995 total advisory fees paid by the Diversified
Fund and Treasury Fund were .07% and .08%, respectively. For the fiscal year
ended August 31, 1994 (under the former advisory agreements from September 1,
1993 to June 1, 1994, and from June 1, 1994 to August 31, 1994), total advisory
fees paid by the Diversified Fund and Treasury Fund were .07% and .08%,
respectively.
For the fiscal year ended August 31, 1996 each of the Diversified and Treasury
Funds paid an advisory fee of $2,174,296 and $2,552,746, respectively. For the
fiscal year ended August 31, 1995 each of the Diversified and Treasury Funds
paid an advisory fee of $998,016 and $972,623, respectively. For the fiscal year
ended August 31, 1994, each of the Diversified and Treasury Funds paid an
advisory fee of $1,679,800 and $1,366,594, respectively. Goldman Sachs received
$1,453,413 and $1,154,974, respectively, and Boatmen's received $226,387 and
$211,620, respectively.
For the period ended June 30, 1995, Goldman Sachs & Co. acted as the investment
adviser to the Tax-Exempt Diversified Fund and Missouri Tax-Exempt Fund.
MORE ABOUT BISYS. BISYS Fund Services Limited Partnership ("BISYS") is a
subsidiary of The BISYS Group Inc., 150 Clove Road, Little Falls, New Jersey
07424, a publicly owned company engaged in information processing, loan
servicing and 401 (k) administration and recordkeeping services to and through
banking and other financial organizations. Under its Administration Agreement
with the Fund, 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 operations of the Funds.
Certain officers of The Pilot Funds namely Messrs. Martin Dean, W. Eugene
Spurbeck, George O. Martinez, William J. Tomko and Bruce Treff are also
employees and/or officers of BISYS, the Distributor or an affiliate.
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.
For its services as administrator, 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. These amounts may be reduced pursuant to fee waivers by
BISYS. Any such fee waivers may be terminated by BISYS at any time. For the
fiscal year ended August 31, 1996, The Pilot Funds paid administration fees to
BISYS in the amount of $1,880,792, $1,598,802, $257,068, and $433,805, for the
Pilot Short-Term U.S. Treasury Fund, Pilot Short Term Diversified Assets Fund,
Pilot Missouri Short-Term Tax-Exempt Fund and Pilot Short-Term Tax-Exempt
Diversified Fund, respectively. For the fiscal year ended August 31, 1995, The
Pilot Funds paid administration fees to BISYS in the amount of $1,357,012,
$1,479,697, $293,693 and $449,267 for the Pilot Short-Term U.S. Treasury Fund,
Pilot Short-Term Diversified Assets Fund, Pilot Missouri Short-Term Tax-Exempt
Fund and Pilot Short-Term Tax-Exempt Diversified Fund, respectively.
The Funds are responsible for all expenses incurred by the Funds, other than
those expressly borne by
26
<PAGE> 237
Boatmen's, BISYS or the Transfer Agent under the Advisory, Administration or
Transfer Agency Agreements. Such expenses include, the fees payable to
Boatmen's, BISYS and the Transfer Agent, the fees and expenses of the Funds'
custodian, brokerage fees and commissions, any portfolio losses, state and
federal registration fees for qualifying Funds Shares under federal or state
securities laws, organization expenses, membership fees in investment company
organizations, 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
Funds 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 Funds' Shareholders and regulatory authorities,
compensation and expenses of its Trustees and extraordinary expenses incurred by
the Funds.
FEE WAIVERS. Expenses can be reduced by voluntary fee waivers and expense
reimbursements by Boatmen's and the Funds' other service providers. 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 their 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.The Adviser has voluntarily agreed to limit the total operating
expenses of the Pilot Shares of Pilot Short-Term Diversified Assets Fund to
.28% of the Fund's average net assets until February 1, 1998 which will have
the effect of limiting the expenses of the Investor Shares of the Fund to .78%
of the Fund's average net assets for the same period.
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.
Each Fund intends to elect to be treated as a regulated investment company under
Subchapter M of the Internal Revenue Code, as amended, (the "Code"). As a
regulated investment company, each Fund must satisfy certain requirements
relating to the sources of its income, diversification of its assets and
distribution of its income to Shareholders. In addition, as a regulated
investment company, a Fund generally will not incur a federal income or excise
tax on any investment company taxable income and net capital gains that are
distributed to its Shareholders in accordance with certain timing requirements
of the Code.
Dividends distributed by the Tax-Exempt Funds that are derived from interest
income exempt from federal income taxation and are designated by a Fund as
"exempt-interest dividends" will be exempt from federal income taxation.
Dividends of investment company taxable income, which generally includes the
excess of net short-term capital gains over net long-term capital losses and
interest (including original issue discount and market discount), less expenses,
will be taxable to Shareholders as ordinary income. Because no portion of the
dividends paid by any Fund is expected to consist of dividends paid by U.S.
corporations, no portion of the dividends paid by any Fund is expected to be
eligible for the corporate dividends-received deduction. Distributions of the
excess of net long-term capital gains over net short-term capital losses, if
any, which are designated as "capital gain dividends" by a Fund will be taxable
as long-term capital gains regardless of how long the Shareholders have held
their Funds Shares. The Funds are not normally expected to realize any long-term
capital gains or losses. These tax consequences will apply regardless of whether
distributions are received in cash or reinvested in Shares. Distributions
declared in October, November or December with a record date in such month and
paid in January of the following year are taxable to Shareholders as if received
on December 31 of the year declared. Shareholders will be informed about the
amount and character distributions received from a
27
<PAGE> 238
Fund for federal income tax purposes, including any distributions that may
constitute a return of capital.
Investments in zero coupon securities (other than tax-exempt zero coupon
securities) will result in income to a Fund each year equal to a portion of the
excess of the face value of the securities over their issue price, even though
the Fund receives no cash interest payments from the securities.
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.
Individuals and certain other classes of Shareholders may be subject to 31%
withholding of federal income tax on taxable distributions if they fail to
furnish a Fund with their correct taxpayer identification number and certain
certifications regarding their tax status or if they are otherwise subject to
backup withholding. Backup withholding is not an additional tax. Any amounts
withheld may be credited against a Shareholder's U.S. federal income tax
liability.
A Fund that invests in foreign securities may be subject to foreign withholding
taxes on income earned on such securities and may be unable to pass through to
Shareholders the ability to claim foreign tax credits and deductions with
respect to such taxes.
In addition to federal taxes, a Shareholder may be subject to state and local
taxes on payments received from a Fund. A state tax exemption may be available
in some states to the extent distributions of a Fund are derived from interest
on certain direct U.S. Government obligations or on obligations of the
particular state. Shareholders should consult their own tax advisers concerning
these matters.
The Tax-Exempt Diversified Fund intends to satisfy certain requirements of the
Code for the payment of "exempt-interest dividends" not included in
shareholders' federal gross income. In addition, to the extent that
distributions made by the Missouri Tax-Exempt Fund qualify as "exempt-interest
dividends" for federal income tax purposes, are derived from interest on
Missouri Instruments and are designated by the Missouri Tax-Exempt Fund as
"state income tax exempt-interest dividends," these distributions will be exempt
from Missouri income tax, the earnings and profits tax of Kansas City and the
City of St. Louis earnings tax. Shares of the Missouri Tax-Exempt Fund and
income dividends and other distributions from the Missouri Tax-Exempt Fund are
not excludable in computing Missouri franchise taxes on corporations and
financial institutions. Distributions of long-term and short-term capital gains,
if any, that are includable in federal adjusted gross income will be subject to
Missouri income taxation, but will not be subject to the earnings and profits
tax of Kansas City or, for individuals in an individual capacity, the City of
St. Louis earnings tax. Shares of the Missouri Tax-Exempt Fund are not subject
to Missouri personal property taxes.
Further information relating to tax consequences is contained in the Statement
of Additional Information.
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.
UNDERSTANDING PERFORMANCE MEASURES: YIELD, EFFECTIVE YIELD AND TAX EQUIVALENT
YIELD will be calculated separately for Investor Shares, Administration Shares
and Pilot Shares. Because each such class of Shares is subject to different
expenses, the net yield of such classes of the same Fund for the same period may
differ. Absent a waiver of administration or service fees, the yield of Pilot
Shares will exceed that of other shares.
The YIELD of a Fund refers to the income generated by an investment in the Fund
over a seven-day period (which period will be stated in the advertisement). This
income is then annualized; that is, the amount of income generated by the
investment during that week is assumed to be generated each week over a 52 week
period and is shown as a percentage of the investment.
The EFFECTIVE YIELD is calculated similarly but, when annualized, the net income
earned by an investment in a Fund is assumed to be reinvested. The effective
yield will be slightly higher than the yield because of the compounding effect
of this assumed reinvestment.
28
<PAGE> 239
TAX-EQUIVALENT YIELDS for the Tax-Exempt Diversified and Missouri Tax-Exempt
Funds show the amount of taxable yield needed to produce an after-tax equivalent
of a tax-free yield, and are calculated by increasing the yield (as calculated
above) by the amount necessary to reflect the payment of federal income taxes at
a stated rate.
Performance comparisons:
The Funds may compare their yields to those of mutual funds with similar
investment objectives and to relevant indices or to rankings prepared by
independent services or other financial or industry publications that monitor
mutual fund performance.
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.
INVESTMENT RESULTS OF A FUND ARE BASED ON HISTORICAL PERFORMANCE AND PERFORMANCE
QUOTATIONS WILL FLUCTUATE. 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 BIS 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 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
REPRESENTATION 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.
29
<PAGE> 240
- ----------------------------------------------------------------
- -----
Financial
Direction
LOGO PILOT SHORT-TERM
U.S. TREASURY FUND
PILOT SHORT-TERM
DIVERSIFIED ASSETS FUND
PILOT SHORT-TERM
TAX-EXEMPT
DIVERSIFIED FUND
PILOT MISSOURI
SHORT-TERM
TAX-EXEMPT FUND
ADMINISTRATION
SHARES
DECEMBER 31, 1996
The
Pilot
Funds
Prospectus enclosed
<PAGE> 241
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
EXPENSE SUMMARY....................................................................................... 4
Shareholder Transaction Expenses.................................................................. 4
Annual Fund Operating Expenses.................................................................... 4
Example........................................................................................... 4
THE PILOT FUNDS FINANCIAL HIGHLIGHTS.................................................................. 6
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS...................................................... 11
Pilot Short-Term U.S. Treasury Fund............................................................... 11
Pilot Short-Term Diversified Assets Fund.......................................................... 11
Pilot Short-Term Tax-Exempt Diversified Fund and Pilot Missouri Short-Term Tax-Exempt Fund........ 11
</TABLE>
<TABLE>
<S> <C>
PORTFOLIO INSTRUMENTS AND PRACTICES................................................................... 13
U.S. Government Securities........................................................................ 13
Foreign Securities................................................................................ 13
Repurchase Agreements............................................................................. 13
Municipal Instruments............................................................................. 14
State of Missouri................................................................................. 15
Loan Participations and Asset-Backed and Receivables-Backed Securities............................ 15
Other Investment Companies........................................................................ 15
Forward Commitments and When-Issued Securities.................................................... 16
Managing Liquidity................................................................................ 16
Other Risk Considerations......................................................................... 16
Additional Information............................................................................ 17
INVESTMENT LIMITATIONS................................................................................ 17
Treasury, Diversified and Tax-Exempt Diversified Funds............................................ 17
Missouri Tax-Exempt Fund.......................................................................... 17
ADMINISTRATION PLAN................................................................................... 18
INVESTING IN THE PILOT FUNDS.......................................................................... 19
Getting Your Investment Started................................................................... 19
HOW TO BUY SHARES..................................................................................... 19
Tax-Sheltered Retirement Plans.................................................................... 20
Explanation of Sales Price........................................................................ 20
HOW TO SELL SHARES.................................................................................... 21
Payment of Redemption Proceeds and Dividends...................................................... 21
EXCHANGES............................................................................................. 21
TRANSACTION RULES..................................................................................... 22
DIVIDENDS AND DISTRIBUTIONS........................................................................... 22
Where do your dividends and distributions come from?.............................................. 22
What are your dividend and distribution options?.................................................. 23
When are dividends and distributions declared and paid?........................................... 23
THE PILOT FAMILY OF FUNDS............................................................................. 23
THE BUSINESS OF THE FUND.............................................................................. 25
FUND MANAGEMENT....................................................................................... 25
Service Providers................................................................................. 25
Expenses.......................................................................................... 26
Fee Waivers....................................................................................... 27
TAX IMPLICATIONS...................................................................................... 27
MEASURING PERFORMANCE................................................................................. 28
Performance comparisons........................................................................... 29
</TABLE>
<PAGE> 242
THE PILOT FUNDS
LOGO
PROSPECTUS FOR ADMINISTRATION SHARES
PILOT SHORT-TERM U.S. TREASURY FUND
PILOT SHORT-TERM DIVERSIFIED ASSETS FUND
PILOT SHORT-TERM TAX-EXEMPT DIVERSIFIED FUND
PILOT MISSOURI SHORT-TERM TAX-EXEMPT FUND
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PILOT FUND GOAL FOR INVESTORS WHO WANT
- ----------------- -------------------------------------- --------------------------------------
<S> <C> <C>
SHORT-TERM Maximize current income to the extent Safety, liquidity and stability of
U.S. TREASURY consistent with the preservation of capital, consistent with current
capital and the maintenance of income, from U.S. Treasury securities.
liquidity by investing exclusively in
high-quality money market instruments.
- ---------------------------------------------------------------------------------------------------
SHORT-TERM Maximize current income to the extent Liquidity and stability of capital,
DIVERSIFIED consistent with the preservation of consistent with current income, from a
ASSETS capital and the maintenance of diversified portfolio of money market
liquidity by investing exclusively in securities.
high quality money market instruments.
- ---------------------------------------------------------------------------------------------------
SHORT-TERM Seek as high a level of current income Liquidity and stability of capital,
TAX-EXEMPT which is exempt from federal income consistent with current income which
DIVERSIFIED tax as is consistent with the is exempt from federal income tax.
preservation of capital.
- ---------------------------------------------------------------------------------------------------
MISSOURI Seek as high a level of current income Liquidity and stability of capital,
SHORT-TERM which is exempt from federal income consistent with current income which
TAX-EXEMPT tax as is consistent with the is exempt from federal income tax and,
preservation of capital. to the extent possible, Missouri
income tax.
- ---------------------------------------------------------------------------------------------------
</TABLE>
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.
SHARES OF THE PILOT MISSOURI SHORT-TERM TAX EXEMPT FUND ARE NOT OFFERED IN ALL
STATES.
- --------------------------------------------------------------------------------
1
<PAGE> 243
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. WHILE EACH FUND SEEKS TO MAINTAIN A STABLE
PRICE PER SHARE OF $1.00, THERE IS NO ASSURANCE THAT EACH FUND WILL BE ABLE TO
DO SO. INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL. BECAUSE THE MISSOURI SHORT-TERM TAX EXEMPT FUND MAY INVEST A
SIGNIFICANT PERCENTAGE OF ITS ASSETS IN A SINGLE ISSUER AND IS CONCENTRATED IN
SECURITIES ISSUED BY A SINGLE STATE AN INVESTMENT IN THE FUND MAY BE RISKIER
THAN AN INVESTMENT IN OTHER TYPES OF MUTUAL FUNDS. IN ADDITION, THE AMOUNT OF
DIVIDENDS PAID BY A FUND WILL VARY. BOATMEN'S TRUST COMPANY SERVES AS INVESTMENT
ADVISER TO EACH OF THE FUNDS AND IS PAID A FEE FOR ITS SERVICES, AND IS NOT
AFFILIATED WITH PILOT FUNDS DISTRIBUTORS, INC., THE FUNDS' DISTRIBUTOR.
This Prospectus describes Administration Shares in the Pilot Short-Term U.S.
Treasury, Pilot Short-Term Diversified Assets, Pilot Short-Term Tax-Exempt
Diversified and Pilot Missouri Short-Term Tax-Exempt Funds. 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
your Service Organization, by writing Pilot Funds Distributors, Inc., 3435
Stelzer Road, Columbus, Ohio 43219-3035, or by calling 800/71-PILOT. The
Statement of Additional Information dated December 31, 1996, is incorporated by
reference into (considered a part of) the Prospectus.
2
<PAGE> 244
The Funds are particularly designed for customers of Boatmen's, its affiliates
and certain other participating banks and financial institutions ("Service
Organizations") seeking investment of short-term funds to obtain the yields
available on certain types of money market instruments while maintaining maximum
liquidity and constant net asset value (see "Net Asset Value"). Investment in
the Funds permits the customer to participate in money market transactions with
a degree of diversification not normally available to the individual investor.
In addition, investment in the Funds relieves the customer of many investment
management and administrative burdens usually associated with the direct
purchase and sale of money market instruments. These include: selection of
portfolio investments; surveying the market for the best price at which to buy
and sell; valuation of portfolio securities; selection and scheduling of
maturities and reinvestment; receipt, delivery and safekeeping of securities;
and portfolio recordkeeping.
Each Fund seeks to maintain a stable net asset value of $1.00 per Share. To
facilitate this goal, each Fund's securities are valued by the amortized cost
method as permitted by a rule of the Securities and Exchange Commission (the
"SEC"). The SEC rule requires that all portfolio securities have at the time of
purchase a maximum remaining maturity of not more than 397 days and that each
Fund maintain a dollar-weighted average portfolio maturity of not more than 90
days.
Investments by each Fund must present minimal credit risk and be rated within
one of the two highest rating categories for short-term debt obligations by at
least two nationally recognized statistical rating organizations ("NRSROs")
assigning a rating to the security or issuer, or if only one NRSRO has assigned
a rating, by that NRSRO. Purchases of securities which are unrated or rated by
only one NRSRO must be approved or ratified by the Trustees except for purchases
made on behalf of the Pilot Short-Term Tax-Exempt Diversified Fund and the Pilot
Missouri Short-Term Tax-Exempt Fund (the "Tax-Exempt Funds"). Securities which
are rated (or that have been issued by an issuer that is rated with respect to a
class of short-term debt obligations, or any security within that class,
comparable in priority and quality with such securities) in the highest
short-term rating category by at least two NRSROs are designated "First Tier
Securities." Securities rated in the top two short-term rating categories by at
least two NRSROs, but which are not rated in the highest short-term rating
category by two or more NRSROs, are designated "Second Tier Securities."
Securities which are unrated may be purchased only if they are deemed to be of
comparable quality to First Tier or Second Tier rated securities. NRSROs include
Standard & Poor's Corporation, Moody's Investors Service, Inc., Fitch Investors
Service, Inc., Duff and Phelps, Inc., IBCA Limited and its affiliate IBCA Inc.,
and Thomson BankWatch, Inc. For a description of each NRSRO's rating categories,
see Appendix A to the Statement of Additional Information.
None of the Funds alone constitutes a complete investment program. There can be
no assurance that the Funds will be able to maintain a stable net asset value,
or that they will achieve their investment objectives.
- --------------------------------------------------------------------------------
3
<PAGE> 245
EXPENSE SUMMARY (1) (3)
SHAREHOLDER TRANSACTION EXPENSES are charges you pay directly 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.
Examples based on this information are also provided.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
ADMINISTRATION SHARES (3)
----------------------------------------------------------------
PILOT PILOT
PILOT PILOT SHORT-TERM MISSOURI
SHORT-TERM SHORT-TERM TAX-EXEMPT SHORT-TERM
U.S. TREASURY DIVERSIFIED ASSETS DIVERSIFIED TAX-EXEMPT
FUND FUND FUND FUND
------------- ------------------ ----------- ----------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases... None None None None
Redemption Fees........................... None None None None
Exchange Fees............................. None None None None
ANNUAL FUND OPERATING EXPENSES (2)
(As a percentage of average net assets)
Management Fees (1)....................... 0.15% 0.15% 0.20% 0.20%
Account Administration Fees (4)........... 0.25% 0.25% 0.25% 0.25%
Other Expenses (5)........................ 0.13% 0.13% 0.13% 0.26%
-------- ----------- ------- -------
Total Operating Expenses (1)......... 0.53% 0.53% 0.58% 0.71%
-------- ----------- ------- -------
-------- ----------- ------- -------
</TABLE>
EXAMPLE (3): Assume that the annual return and redemption 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:
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
AFTER AFTER AFTER AFTER
PURCHASE PURCHASE PURCHASE PURCHASE
--- ---- ---- ----
<S> <C> <C> <C> <C>
PILOT SHORT-TERM U.S. TREASURY FUND
Administration Shares................. $ 5 $ 17 $ 30 $ 66
PILOT SHORT-TERM DIVERSIFIED ASSETS FUND
Administration Shares................. 5 17 30 66
PILOT SHORT-TERM TAX-EXEMPT DIVERSIFIED
FUND
Administration Shares................. 6 19 32 73
PILOT MISSOURI SHORT-TERM TAX-EXEMPT FUND
Administration Shares................. 7 23 40 88
</TABLE>
The Example shown above should not be considered a representation of past or
future investment returns or operating expenses. Actual investment returns and
operating expenses may be more or less than those shown. Actual expenses may
vary depending upon a variety of factors, including the actual performance of a
Fund, which may be greater or less than 5%.
4
<PAGE> 246
- ------------
Notes:
(1) The purpose of this Table is to assist investors in understanding the
various costs and expenses that an investor in the Funds will bear directly
or indirectly.
(2) For further information concerning management fees, see the section entitled
"Fund Management."
(3) The information set forth in the Table and Example relates only to
Administration Shares of the Funds. Pilot Shares and Investor Shares are
subject to different fees and expenses. See "The Pilot Family of Funds."
Pilot Shares pay no 12b-1 or account administration fees. Investor Shares
pay a Rule 12b-1 fee of up to .50 of 1% of average daily net assets. All
other Fund expenses related to Pilot Shares and Investor Shares are the same
as for Administration Shares.
(4) Service Organizations, other than broker-dealers, may charge other fees to
their customers who are the beneficial owners of Administration Shares in
connection with their customer accounts. See "Administration Plan."
(5) The table does not reflect the allocation of any miscellaneous "class
expenses" (e.g., certain printing and registration expenses).
5
<PAGE> 247
THE PILOT FUNDS
FINANCIAL HIGHLIGHTS
The following data with respect to a Share of the Pilot Short-Term Diversified
Assets Fund, Pilot Short-Term U.S. Treasury Fund, Pilot Missouri Short-Term
Tax-Exempt Fund (formerly "Pilot Short-Term Tax-Exempt Fund") and Pilot
Short-Term Tax-Exempt Diversified Fund outstanding during the periods indicated
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report incorporated by reference and attached to the
Statement of Additional Information, and should be read in conjunction with the
financial statements and related notes incorporated by reference and attached to
the Statement of Additional Information. For periods shown, except as otherwise
noted, Goldman, Sachs & Co. served as investment adviser to each of the Pilot
Short-Term Tax-Exempt Diversified Fund and Pilot Missouri Short-Term Tax-Exempt
Fund, and Boatmen's Trust Company served as investment subadviser to the Pilot
Missouri Short-Term Tax-Exempt Fund.
The Administration Shares and the Investor Shares are two classes of Shares
first issued by the Funds during June, 1991 and July, 1992, respectively.
Accordingly, there are no financial highlights with respect to the Funds for
such Shares for periods prior to such dates. The financial highlights presented
below for periods prior to June, 1991 for the Administration Shares and July,
1992 for the Investor Shares are historical information for Shares that did not
provide administration or additional services to Shareholders pursuant to a
separate Service Agreement. As indicated elsewhere in this prospectus, the
Service Organizations providing services pursuant to a Service Agreement will
receive a fee in an amount up to .25 of 1% (on an annualized basis) of the
average daily net asset value of the Administration Shares of the applicable
Fund and a fee in an amount up to .50 of 1% (on an annualized basis) of the
average daily net asset value of the Investor Shares of the applicable Fund.
6
<PAGE> 248
THE PILOT FUNDS
------------------------
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
SHORT-TERM DIVERSIFIED ASSETS FUND
------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
--------------------------------------------
NET ASSET NET REALIZED TOTAL NET ASSET
VALUE AT NET GAIN ON INCOME FROM DISTRIBUTIONS VALUE AT
BEGINNING INVESTMENT INVESTMENT INVESTMENT TO END OF
FOR THE YEARS ENDED AUGUST 31,(F ) OF PERIOD INCOME TRANSACTIONS OPERATIONS SHAREHOLDERS PERIOD
- ------------------------------------ --------- ---------- ------------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot shares.................. $1.00 $ 0.0534 $ -- $0.0534 $ (0.0534) $1.00
1996--Pilot Administration shares... 1.00 0.0509 -- 0.0509 (0.0509) 1.00
1996--Pilot Investor shares......... 1.00 0.0484 -- 0.0484 (0.0484) 1.00
1995--Pilot shares.................. 1.00 0.0554 -- 0.0554 (0.0554) 1.00
1995--Pilot Administration shares... 1.00 0.0529 -- 0.0529 (0.0529) 1.00
1995--Pilot Investor shares......... 1.00 0.0504 -- 0.0504 (0.0504) 1.00
1994--Pilot shares.................. 1.00 0.0353 0.0001 0.0354 (0.0354) 1.00
1994--Pilot Administration shares... 1.00 0.0328 0.0001 0.0329 (0.0329) 1.00
1994--Pilot Investor shares......... 1.00 0.0303 0.0001 0.0304 (0.0304) 1.00
1993--Pilot shares.................. 1.00 0.0325 0.0001 0.0326 (0.0326) 1.00
1993--Pilot Administration shares... 1.00 0.0298 0.0001 0.0299 (0.0299) 1.00
1993--Pilot Investor shares......... 1.00 0.0274 0.0001 0.0275 (0.0274) 1.00
1992--Pilot shares.................. 1.00 0.0452 -- 0.0452 (0.0452) 1.00
1992--Pilot Administration shares... 1.00 0.0396 0.0001 0.0397 (0.0397) 1.00
1992--Pilot Investor shares(a)...... 1.00 0.0043 -- 0.0043 (0.0043) 1.00
1991--Pilot shares.................. 1.00 0.0691 0.0003 0.0694 (0.0694) 1.00
1991--Pilot Administration
shares(b).......................... 1.00 0.0134 -- 0.0134 (0.0134) 1.00
1990--Pilot shares.................. 1.00 0.0829 -- 0.0829 (0.0829) 1.00
1989--Pilot shares.................. 1.00 0.0890 -- 0.0890 (0.0890) 1.00
1988--Pilot shares.................. 1.00 0.0703 -- 0.0703 (0.0703) 1.00
1987--Pilot shares.................. 1.00 0.0605 -- 0.0605 (0.0605) 1.00
<CAPTION>
RATIO INFORMATION
ASSUMING NO WAIVER OF
ADVISORY FEES AND
EXPENSE LIMITATIONS(D)
----------------------------
RATIO OF NET RATIO OF NET
RATIO OF INVESTMENT NET ASSETS RATIO OF INVESTMENT
NET EXPENSES INCOME TO AT END OF EXPENSES TO INCOME TO
TOTAL TO AVERAGE AVERAGE PERIOD AVERAGE NET AVERAGE NET
FOR THE YEARS ENDED AUGUST 31,(F ) RETURN(E) NET ASSETS NET ASSETS (IN 000'S) ASSETS ASSETS
- ------------------------------------ --------- ------------ ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot shares.................. 5.47% 0.27% 5.33% $1,318,767 0.31% 5.29%
1996--Pilot Administration shares... 5.21 0.52 5.07 241,970 0.56 5.03
1996--Pilot Investor shares......... 4.95 0.77 4.83 49,849 0.81 4.79
1995--Pilot shares.................. 5.68 0.23 5.56 1,056,624 0.24 5.55
1995--Pilot Administration shares... 5.42 0.48 5.22 231,688 0.49 5.21
1995--Pilot Investor shares......... 5.15 0.73 5.00 33,948 0.74 4.99
1994--Pilot shares.................. 3.60 0.15 3.53 857,795 0.29 3.40
1994--Pilot Administration shares... 3.35 0.40 3.28 303,288 0.54 3.15
1994--Pilot Investor shares......... 3.10 0.65 3.03 37,896 0.79 2.90
1993--Pilot shares.................. 3.29 0.12 3.25 1,293,667 0.29 3.08
1993--Pilot Administration shares... 3.04 0.37 2.98 378,262 0.54 2.81
1993--Pilot Investor shares......... 2.78 0.62 2.74 36,814 0.79 2.57
1992--Pilot shares.................. 4.68 0.12 4.52 1,939,568 0.29 4.35
1992--Pilot Administration shares... 4.42 0.37 3.95 271,606 0.54 3.78
1992--Pilot Investor shares(a)...... 3.24(c) 0.62(c) 3.14(c) 27,880 0.80(c) 2.96(c)
1991--Pilot shares.................. 7.27 0.12 6.91 1,425,385 0.29 6.74
1991--Pilot Administration
shares(b).......................... 5.77(c) 0.37(c) 5.68(c) 43,189 0.54(c) 5.51(c)
1990--Pilot shares.................. 8.65 0.16 8.29 1,202,805 0.33 8.12
1989--Pilot shares.................. 9.25 0.33 8.90 429,053 0.38 8.85
1988--Pilot shares.................. 7.25 0.31 7.03 402,799 0.38 6.96
1987--Pilot shares.................. 6.25 0.28 6.05 352,037 0.33 6.00
</TABLE>
- ------------
(a) Pilot Investor share activity commenced during July of 1992.
(b) Pilot Administration share activity commenced during June of 1991.
(c) Annualized.
(d) The above does not reflect the fee which may be charged by Boatmen's
directly to its customers' accounts at an annual rate not to exceed 0.25% of
the average daily balance of Pilot shares in the customer's account.
(e) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption of
the investment at the net asset value at the end of the period.
(f ) Prior to June 1, 1994, the Short-Term Diversified Assets Fund was advised
by Goldman Sachs Asset Management.
7
<PAGE> 249
THE PILOT FUNDS
------------------------
FINANCIAL HIGHLIGHTS--(CONTINUED)
<TABLE>
<CAPTION>
SHORT-TERM U.S. TREASURY FUND
------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
--------------------------------------------
NET ASSET NET REALIZED TOTAL NET ASSET
VALUE AT NET GAIN ON INCOME FROM DISTRIBUTIONS VALUE AT
BEGINNING INVESTMENT INVESTMENT INVESTMENT TO END OF
FOR THE YEARS ENDED AUGUST 31,(F ) OF PERIOD INCOME TRANSACTIONS OPERATIONS SHAREHOLDERS PERIOD
- ----------------------------------- --------- ---------- ------------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot shares................. $1.00 $ 0.0522 $ -- $0.0522 $ (0.0522) $1.00
1996--Pilot Administration
shares............................ 1.00 0.0497 -- 0.0497 (0.0497) 1.00
1996--Pilot Investor shares........ 1.00 0.0472 -- 0.0472 (0.0472) 1.00
1995--Pilot shares................. 1.00 0.0534 -- 0.0534 (0.0534) 1.00
1995--Pilot Administration
shares............................ 1.00 0.0509 -- 0.0509 (0.0509) 1.00
1995--Pilot Investor shares........ 1.00 0.0484 -- 0.0484 (0.0484) 1.00
1994--Pilot shares................. 1.00 0.0334 0.0002 0.0336 (0.0336) 1.00
1994--Pilot Administration
shares............................ 1.00 0.0309 0.0002 0.0311 (0.0311) 1.00
1994--Pilot Investor shares........ 1.00 0.0284 0.0002 0.0286 (0.0286) 1.00
1993--Pilot shares................. 1.00 0.0294 0.0006 0.0300 (0.0300) 1.00
1993--Pilot Administration
shares............................ 1.00 0.0269 0.0006 0.0275 (0.0275) 1.00
1993--Pilot Investor shares........ 1.00 0.0244 0.0007 0.0251 (0.0250) 1.00
1992--Pilot shares................. 1.00 0.0400 0.0014 0.0414 (0.0414) 1.00
1992--Pilot Administration
shares............................ 1.00 0.0362 0.0014 0.0378 (0.0378) 1.00
1992--Pilot Investor shares(a ).... 1.00 0.0048 0.0002 0.0050 (0.0050) 1.00
1991--Pilot shares................. 1.00 0.0644 0.0016 0.0659 (0.0659) 1.00
1991--Pilot Administration
shares(b)......................... 1.00 0.0124 0.0003 0.0127 (0.0127) 1.00
<CAPTION>
FOR THE PERIOD MARCH 26, 1990
(COMMENCEMENT OF OPERATIONS)
THROUGH AUGUST 31,
- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
1990--Pilot shares................. 1.00 0.0346 0.0001 0.0347 (0.0347) 1.00
<CAPTION>
RATIO INFORMATION
ASSUMING NO WAIVER
OF ADVISORY FEES(D)
----------------------------
RATIO OF NET RATIO OF NET
RATIO OF INVESTMENT NET ASSETS RATIO OF INVESTMENT
NET EXPENSES INCOME TO AT END OF EXPENSES TO INCOME TO
TOTAL TO AVERAGE AVERAGE PERIOD AVERAGE NET AVERAGE NET
FOR THE YEARS ENDED AUGUST 31,(F ) RETURN(E) NET ASSETS NET ASSETS (IN 000'S) ASSETS ASSETS
- ----------------------------------- --------- ------------ ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot shares................. 5.35% 0.27% 5.22% $1,299,086 0.31% 5,18%
1996--Pilot Administration
shares............................ 5.08 0.52 4.96 216,368 0.56 4.92
1996--Pilot Investor shares........ 4.82 0.77 4.70 177,882 0.81 4.66
1995--Pilot shares................. 5.47 0.23 5.36 1,191,447 0.24 5.35
1995--Pilot Administration
shares............................ 5.21 0.48 5.12 215,593 0.49 5.11
1995--Pilot Investor shares........ 4.94 0.73 4.82 131,074 0.74 4.81
1994--Pilot shares................. 3.40 0.16 3.34 843,111 0.28 3.24
1994--Pilot Administration
shares............................ 3.15 0.41 3.09 98,823 0.53 2.99
1994--Pilot Investor shares........ 2.90 0.66 2.84 156,132 0.78 2.74
1993--Pilot shares................. 3.04 0.14 2.94 942,109 0.30 2.78
1993--Pilot Administration
shares............................ 2.79 0.39 2.69 65,570 0.55 2.53
1993--Pilot Investor shares........ 2.53 0.64 2.44 193,764 0.80 2.28
1992--Pilot shares................. 4.30 0.24 4.00 887,321 0.30 3.94
1992--Pilot Administration
shares............................ 4.04 0.49 3.62 91,152 0.56 3.55
1992--Pilot Investor shares(a ).... 2.92(c) 0.71(c) 2.83(c) 212,920 0.81(c) 2.73(c)
1991--Pilot shares................. 6.89 0.24 6.44 588,141 0.29 6.39
1991--Pilot Administration
shares(b)......................... 5.53(c) 0.49(c) 5.24(c) 15,980 0.54(c) 5.19(c)
FOR THE PERIOD MARCH 26, 1990
(COMMENCEMENT OF OPERATIONS)
THROUGH AUGUST 31,
- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
1990--Pilot shares................. 8.05(c) 0.26(c) 7.94(c) 360,685 0.39(c) 7.81(c)
</TABLE>
- ------------
(a) Pilot Investor share activity commenced during July of 1992.
(b) Pilot Administration share activity commenced during June of 1991.
(c) Annualized.
(d) The above does not reflect the fee which may be charged by Boatmen's
directly to its customers' accounts at an annual rate not to exceed .25% of
the average daily balance of Pilot shares in the customer's account.
(e) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption
of the investment at the net asset value at the end of the period.
(f ) Prior to June 1, 1994, the Short-Term U.S. Treasury Fund was advised by
Goldman Sachs Asset Management.
8
<PAGE> 250
THE PILOT FUNDS
------------------------
FINANCIAL HIGHLIGHTS--(CONTINUED)
<TABLE>
<CAPTION>
MISSOURI SHORT-TERM TAX-EXEMPT FUND
------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
--------------------------------------------
NET ASSET NET REALIZED TOTAL NET ASSET
VALUE AT NET LOSS ON INCOME FROM DISTRIBUTIONS VALUE AT
BEGINNING INVESTMENT INVESTMENT INVESTMENT TO END OF
FOR THE YEARS ENDED AUGUST 31, OF PERIOD INCOME TRANSACTIONS OPERATIONS SHAREHOLDERS PERIOD
- -------------------------------------- --------- ---------- ------------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot shares.................... $1.00 $ 0.0318 $ -- $0.0318 $ (0.0318) $1.00
1996--Pilot Administration shares..... 1.00 0.0292 -- 0.0292 (0.0292) 1.00
1996--Pilot Investor shares........... 1.00 0.0267 -- 0.0267 (0.0267) 1.00
1995--Pilot shares(g)................. 1.00 0.0332 -- 0.0332 (0.0332) 1.00
1995--Pilot Administration
shares(g)............................ 1.00 0.0300 -- 0.0300 (0.0300) 1.00
1995--Pilot Investor shares(g)........ 1.00 0.0282 -- 0.0282 (0.0282) 1.00
1994--Pilot shares.................... 1.00 0.0220 -- 0.0220 (0.0220) 1.00
1994--Pilot Administration
shares(f )........................... 1.00 0.0103 -- 0.0103 (0.0103) 1.00
1994--Pilot Investor shares........... 1.00 0.0170 -- 0.0170 (0.0170) 1.00
1993--Pilot shares.................... 1.00 0.0221 -- 0.0221 (0.0221) 1.00
1993--Pilot Investor shares........... 1.00 0.0171 -- 0.0171 (0.0172) 1.00
1992--Pilot shares.................... 1.00 0.0324 (0.0001) 0.0323 (0.0324) 1.00
1992--Pilot Investor shares(a)........ 1.00 0.0030 -- 0.0030 (0.0030) 1.00
<CAPTION>
FOR THE ELEVEN MONTHS ENDED AUGUST
31,(B)
- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1991--Pilot shares.................... 1.00 0.0435 -- 0.0435 (0.0435) 1.00
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1990--Pilot shares.................... 1.00 0.0547 -- 0.0547 (0.0547) 1.00
1989--Pilot shares.................... 1.00 0.0600 -- 0.0600 (0.0600) 1.00
<CAPTION>
FOR THE PERIOD APRIL 25, 1988
(COMMENCEMENT OF OPERATIONS)
THROUGH SEPTEMBER 30,
- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1988--Pilot shares.................... 1.00 0.0210 -- 0.0210 (0.0210) 1.00
<CAPTION>
RATIO INFORMATION
ASSUMING NO
REIMBURSEMENT OR
ABSORPTION OF ADVISORY
FEES AND DISTRIBUTION
EXPENSES(D)
----------------------------
RATIO OF NET RATIO OF NET
RATIO OF INVESTMENT NET ASSETS RATIO OF INVESTMENT
NET EXPENSES INCOME TO AT END OF EXPENSES TO INCOME TO
TOTAL TO AVERAGE AVERAGE PERIOD AVERAGE NET AVERAGE NET
FOR THE YEARS ENDED AUGUST 31, RETURN(E) NET ASSETS NET ASSETS (IN 000'S) ASSETS ASSETS
- -------------------------------------- --------- ------------ ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot shares.................... 3.22% 0.43% 3.17% $ 183,772 0.43% 3.17%
1996--Pilot Administration shares..... 2.96 0.68 2.87 13,501 0.68 2.87
1996--Pilot Investor shares........... 2.70 0.93 2.65 15,743 0.93 2.65
1995--Pilot shares(g)................. 3.37 0.44 3.21 210,834 0.44 3.31
1995--Pilot Administration
shares(g)............................ 3.05 0.69 3.06 4,555 0.69 3.06
1995--Pilot Investor shares(g)........ 2.86 0.94 2.83 11,222 0.94 2.83
1994--Pilot shares.................... 2.23 0.37 2.20 239,796 0.37 2.20
1994--Pilot Administration
shares(f )........................... 2.04(c) 0.67(c) 2.03(c) -- 0.67(c) 2.03(c)
1994--Pilot Investor shares........... 1.73 0.87 1.70 9,364 0.87 1.70
1993--Pilot shares.................... 2.24 0.36 2.21 228,075 0.36 2.21
1993--Pilot Investor shares........... 1.73 0.86 1.71 7,819 0.86 1.71
1992--Pilot shares.................... 3.29 0.37 3.24 202,304 0.37 3.24
1992--Pilot Investor shares(a)........ 1.74(c) 0.87(c) 1.75(c) 10,696 0.87(c) 1.75(c)
FOR THE ELEVEN MONTHS ENDED AUGUST
31,(B)
- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1991--Pilot shares.................... 4.83(c) 0.38(c) 4.74(c) 166,499 0.61(c) 4.51(c)
FOR THE YEARS ENDED SEPTEMBER 30,
- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1990--Pilot shares.................... 5.61 0.42 5.47 152,375 0.67 5.22
1989--Pilot shares.................... 6.17 0.39 6.02 129,551 0.70 5.71
FOR THE PERIOD APRIL 25, 1988
(COMMENCEMENT OF OPERATIONS)
THROUGH SEPTEMBER 30,
- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1988--Pilot shares.................... 4.86(c) 0.44(c) 4.93(c) 71,658 0.85(c) 4.52(c)
</TABLE>
- ------------
(a) Pilot Investor share activity commenced during July of 1992.
(b) Prior to a tax-free reorganization effective August 1, 1991, the Missouri
Short-Term Tax-Exempt Portfolio was a separate portfolio of the Locust
Street Fund and known as the Tax-Exempt Money Market Portfolio which was
advised by Boatmen's Trust Company and had a September 30 fiscal year-end.
(c) Annualized.
(d) The above does not reflect the fee which may be charged by Boatmen's
directly to its customers' accounts at an annual rate not to exceed 0.25% of
the average daily balance of Pilot shares in the customer's account.
(e) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption of
the investment at the net asset value at the end of the period.
(f ) Pilot Administration share activity commenced during March of 1994.
(g) Prior to July 1, 1995, Goldman Sachs Asset Management served as the
investment adviser.
9
<PAGE> 251
THE PILOT FUNDS
------------------------
FINANCIAL HIGHLIGHTS--(CONTINUED)
<TABLE>
<CAPTION>
SHORT-TERM TAX-EXEMPT DIVERSIFIED FUND
------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
--------------------------------------------
NET ASSET NET REALIZED TOTAL NET ASSET
VALUE AT NET GAIN ON INCOME FROM DISTRIBUTIONS VALUE AT
BEGINNING INVESTMENT INVESTMENT INVESTMENT TO END OF
FOR THE YEARS ENDED AUGUST 31, OF PERIOD INCOME TRANSACTIONS OPERATIONS SHAREHOLDERS PERIOD
- ------------------------------------- --------- ---------- ------------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot shares................... $1.00 $ 0.0326 $ -- $0.0326 $ (0.0326) $1.00
1996--Pilot Administration shares.... 1.00 0.0301 -- 0.0301 (0.0301) 1.00
1996--Pilot Investor shares.......... 1.00 0.0276 -- 0.0276 (0.0276) 1.00
1995--Pilot shares(f )............... 1.00 0.0353 -- 0.0353 (0.0353) 1.00
1995--Pilot Administration
shares(f ).......................... 1.00 0.0328 -- 0.0328 (0.0328) 1.00
1995--Pilot Investor shares(e)(f )... 1.00 0.0195 -- 0.0195 (0.0195) 1.00
1994--Pilot shares................... 1.00 0.0240 -- 0.0240 (0.0240) 1.00
1994--Pilot Administration
shares(d)........................... 1.00 0.0208 -- 0.0208 (0.0208) 1.00
<CAPTION>
FOR THE PERIOD FEBRUARY 16, 1993
(COMMENCEMENT OF OPERATIONS)
THROUGH AUGUST 31,
- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1993--Pilot shares................... 1.00 0.0121 -- 0.0121 (0.0121) 1.00
<CAPTION>
RATIO INFORMATION
ASSUMING NO WAIVER
OF ADVISORY FEES(A)
----------------------------
RATIO OF NET NET ASSET RATIO OF NET
RATIO OF INVESTMENT AT END OF RATIO OF INVESTMENT
NET EXPENSES INCOME TO PERIOD EXPENSES TO INCOME TO
TOTAL TO AVERAGE AVERAGE (IN AVERAGE NET AVERAGE NET
FOR THE YEARS ENDED AUGUST 31, RETURN(B) NET ASSETS NET ASSETS 000'S) --- ASSETS ASSETS
- ------------------------------------- --------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
1996--Pilot shares................... 3.31% 0.37% 3.26% $ 375,777 0.41% 3.22%
1996--Pilot Administration shares.... 3.05 0.62 2.97 14,550 0.66 2.93
1996--Pilot Investor shares.......... 2.79 0.87 2.56 907 0.91 2.52
1995--Pilot shares(f )............... 3.59 0.28 3.54 397,783 0.29 3.53
1995--Pilot Administration
shares(f ).......................... 3.36 0.53 3.36 14,443 0.54 3.35
1995--Pilot Investor shares(e)(f )... 1.96(g) 0.78(c) 3.15(c) 5 0.79(c) 3.14(c)
1994--Pilot shares................... 2.43 0.20 2.40 388,048 0.20 2.40
1994--Pilot Administration
shares(d)........................... 2.18(c) 0.45(c) 2.15(c) 3,040 0.45(c) 2.15(c)
FOR THE PERIOD FEBRUARY 16, 1993
(COMMENCEMENT OF OPERATIONS)
THROUGH AUGUST 31,
- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1993--Pilot shares................... 2.23(c) 0.15(c) 2.21(c) 428,843 0.20(c) 2.16(c)
</TABLE>
- ------------
(a) The above does not reflect the fee which may be charged by Boatmen's
directly to its customers' accounts at an annual rate not to exceed 0.25% of
the average daily balance of Pilot shares in the customer's account.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption of
the investment at the net asset value at the end of the period.
(c) Annualized.
(d) Pilot Administration share activity commenced during September of 1993.
(e) Pilot Investor share activity commenced during January of 1995.
(f ) Prior to July 1, 1995, Goldman Sachs Asset Management served as the
investment adviser.
(g) Not annualized.
10
<PAGE> 252
INVESTMENT OBJECTIVES, POLICIES
AND RISK FACTORS
The Pilot Funds uses a variety of 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 which Funds best meet your investment goals. Although each
Fund will attempt to achieve its investment objective, there can be no assurance
it will be successful.
The Pilot Funds intends to use its best efforts to maintain the net asset value
of each money market fund at $1.00 per share, although there can be no assurance
that it will be able to do so on a continuous basis.
Pilot Short-Term U.S. Treasury Fund
The investment objective of the Pilot Short-Term U.S. Treasury Fund (the
"Treasury Fund") is to maximize current income to the extent consistent with the
preservation of capital and the maintenance of liquidity by investing
exclusively in high quality money market instruments. The Fund intends to
achieve its objective by investing, under normal circumstances, at least 90% of
its total assets in securities issued or guaranteed by the U.S. Treasury and
repurchase agreements relating to such securities. You should note, however,
that shares of the Treasury Fund are not themselves issued or guaranteed by the
U.S. Government or any of its agencies. U.S. Government obligations include
Treasury bills, certain Treasury strips, certificates of indebtedness, notes and
bonds, and obligations of other agencies and instrumentalities that are backed
by the U.S. Treasury.
Pilot Short-Term Diversified Assets Fund
The investment objective of the Pilot Short-Term Diversified Assets Fund (the
"Diversified Fund") is to maximize current income to the extent consistent with
the preservation of capital and the maintenance of liquidity by investing
exclusively in high quality money market instruments. The Diversified Fund
pursues its objective by investing in a broad range of government, bank and
corporate obligations, both rated and unrated, asset backed securities,
participation interests and repurchase agreements. The Fund is permitted to
invest in unrated notes, paper or other instruments which are determined to be
of comparable high quality by Boatmen's pursuant to criteria established by the
Board of Trustees.
The Diversified Fund concentrates in the banking industry by investing 25% or
more of its total assets in bank obligations (whether domestic or foreign)
except that if adverse economic conditions prevail in the banking industry the
Diversified Fund may, for temporary defensive purposes, temporarily invest less
than 25% of its total assets in bank obligations. For this purpose, the
obligations of foreign banks and foreign branches of U.S. banks will be
considered "bank obligations." (See "Portfolio Instruments and
Practices--Foreign Securities.")
Investments in bank obligations include (i) obligations issued or guaranteed by
U.S. banks (including certificates of deposit, loan participation interests,
commercial paper, unsecured bank promissory notes and bankers' acceptances)
which have more than $1 billion in total assets at the time of purchase; (ii)
U.S. dollar denominated obligations issued or guaranteed (including fixed time
deposits) by foreign banks which have more than $1 billion in total assets at
the time of purchase; U.S. branches of such foreign banks (Yankee obligations),
foreign branches of such foreign banks, and foreign branches of U.S. banks
(Eurodollar obligations) having more than $1 billion in total assets at the time
of purchase. Such bank obligations may be general obligations of the parent bank
or may be limited to the issuing branch by the terms of the specific obligation
or by government regulation; and (iii) commercial paper issued by U.S. or
foreign commercial banks, which at the time of purchase are rated in the highest
rating category of at least one NRSRO or, if unrated, deemed of comparable
quality by the Adviser.
Pilot Short-Term Tax-Exempt Diversified Fund
and Pilot Missouri Short-Term Tax-Exempt Fund
The investment objective of the Pilot Short-Term Tax-Exempt Diversified Fund
(the "Tax-Exempt Diversified Fund") is to seek as high a level of current income
which is exempt from federal income tax, as is
11
<PAGE> 253
consistent with the preservation of capital. The Fund pursues its objective by
investing primarily in municipal obligations issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies, authorities and instrumentalities, and the District of
Columbia, the interest from which is, in the opinion of bond counsel, if any,
exempt from federal income tax ("Municipal Instruments"). As a matter of
fundamental policy, at least 80% of the Tax-Exempt Diversified Fund's annual
gross income will be derived from Municipal Instruments, except in extraordinary
circumstances when in Boatmen's opinion a temporary defensive posture is
appropriate.
The investment objective of the Missouri Pilot Short-Term Tax-Exempt Fund (the
"Missouri Tax-Exempt Fund") is to seek as high a level of current income which
is exempt from federal income tax as is consistent with the preservation of
capital. The Missouri Tax-Exempt Fund invests exclusively in high quality money
market instruments. The Fund seeks to achieve its objective by investing at
least 80% of its net assets during normal market conditions in debt obligations
issued by or on behalf of the State of Missouri, the interest on which is exempt
from regular Federal income tax, is not a tax preference item under the Federal
alternative minimum tax and is exempt from Missouri income taxes ("Missouri
Instruments"). The Missouri Tax-Exempt Fund attempts to maximize the amount of
income exempt from Missouri income tax to the extent that such available
obligations meet the Fund's quality standards and have a suitable yield. Because
there may be an insufficient supply of Missouri Instruments which meet the
Fund's quality and liquidity standards and have a suitable yield, a varying
percent of the Fund's income may at any one time be exempt from Missouri income
tax. Interest from Municipal Instruments other than Missouri Instruments may be
subject to Missouri income tax.
As a matter of fundamental policy, at least 80% of the Missouri Tax-Exempt
Fund's income will be exempt from federal income taxes, except in extraordinary
circumstances when in Boatmen's opinion a temporary defensive posture is
appropriate. The Fund anticipates being as fully invested as practicable in
municipal bonds and notes. However, because the Missouri Tax-Exempt Fund
presently does not intend to invest in taxable obligations other than "private
activity" bonds, there may be occasions when, as a result of maturities of
portfolio securities, or sales of shares, or in order to meet anticipated
redemption requests, the Fund may hold cash which is not earning income.
Investments by the Tax-Exempt Diversified Fund and the Missouri Tax-Exempt Fund
(the "Tax-Exempt Funds") in taxable money market instruments will be limited to
those meeting the quality standards of each Fund.
Instruments in which the Tax-Exempt Funds may invest, include:
(A) fixed rate notes and similar debt instruments rated in the highest
short-term rating category or in one of the two highest rating categories of at
least one NRSRO;
(B) variable and floating rate demand instruments rated (i) in the highest
rating category for municipal notes or (ii) in one of the two highest rating
categories for long-term instruments or (iii) in the highest rating category for
commercial paper and municipal notes with demand features of at least one NRSRO;
(C) tax-exempt commercial paper rated in the highest rating category of at least
one NRSRO;
(D) unrated notes, paper or other instruments which are determined to be of
comparable high quality by Boatmen's pursuant to criteria approved by the
Trustees and in accordance with the procedures reviewed and approved by the
Trustees; and
(E) municipal bonds rated in one of the two highest rating categories of at
least one NRSRO and unrated bonds determined to be of comparable quality by
Boatmen's pursuant to criteria approved by the Trustees.
In addition, the Missouri Tax-Exempt Fund may invest in other municipal
obligations rated in the highest short-term rating category or in one of the two
highest long-term rating categories of at least one NRSRO or, if unrated, deemed
to be of comparable quality by the Adviser.
12
<PAGE> 254
PORTFOLIO INSTRUMENTS AND PRACTICES
--U.S. Government Securities. U.S. Government Securities are obligations issued
or guaranteed as to principal or interest by the U.S. Government, its agencies,
authorities or instrumentalities. Some U.S. Government Securities, such as
Treasury bills, notes and bonds, which differ only in their interest rates,
maturities and times of issuance, are supported by the full faith and credit of
the United States. Others, such as obligations issued or guaranteed by U.S.
Government agencies, authorities or instrumentalities, are supported either by
(a) the full faith and credit of the U.S. Government (such as securities of the
Government National Mortgage Association), (b) the right of the issuer to borrow
from the Treasury (such as securities of the Student Loan Marketing
Association), (c) the discretionary authority of the U.S. Government to purchase
the agency's obligations (such as securities of the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation), or (d) only the
credit of the issuer. No assurance can be given that the U.S. Government will
provide financial support to U.S. Government agencies, authorities or
instrumentalities in the future.
Securities 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 and such participations may therefore be treated as
illiquid.
U.S. Government Securities may include zero coupon bonds (i.e., discount debt
obligations that do not make periodic interest payments). U.S. Government
Securities 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.
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.
Securities issued or guaranteed as to principal or interest by the U.S.
Government, its agencies, authorities or instrumentalities may 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 are not considered to be U.S. Government securities for the
purpose of determining whether 90% of the total assets of the Treasury Fund are
invested in U.S. Government securities and repurchase agreements relating to
such securities.
- --Foreign Securities. Investment in foreign securities and bank obligations may
present a greater degree of risk than investment in domestic securities because
of less publicly-available financial and other information, less securities
regulation, potential imposition of foreign withholding and other taxes, war,
expropriation or other adverse governmental actions. Foreign banks and their
foreign branches are not regulated by U.S. banking authorities, and generally
are not bound by the accounting, auditing and financial reporting standards
applicable to U.S. banks.
The DIVERSIFIED FUND may acquire U.S. dollar denominated obligations of the
International Bank for Reconstruction and Development (the "World Bank").
Obligations of the World Bank are supported by subscribed but unpaid commitments
of its member countries; there is no assurance that these commitments will be
fulfilled in the future.
- --Repurchase Agreements. EACH FUND may enter into repurchase agreements with
selected broker-dealers and with banks. A repurchase agreement is an agreement
under which a Fund purchases securities and the seller agrees to repurchase the
securities within a particular time at a specified price. The repurchase price
will exceed the original purchase price, the difference being income to the
Fund, and will be unrelated to the interest rate on the purchased security. The
Funds' custodian or subcustodian will maintain custody of the purchased
securities for the duration of the agreement. The value of the purchased
securities, including accrued interest, will at all times
13
<PAGE> 255
exceed the value of the repurchase agreement. In the event of bankruptcy of the
seller or failure of the seller to repurchase the securities as agreed, a Fund
could suffer losses, including loss of interest on or principal of the security
and costs associated with delay and enforcement of the repurchase agreement. In
evaluating whether to enter into a repurchase agreement, Boatmen's will consider
the credit worthiness of the seller pursuant to procedures reviewed and approved
by the Trustees.
- --Municipal Instruments. Municipal notes which may be purchased by the
DIVERSIFIED FUND and the TAX-EXEMPT FUNDS include tax anticipation notes,
revenue anticipation notes, bond anticipation notes, tax and revenue
anticipation notes and construction notes. Municipal bonds, which may be issued
to raise money for various public purposes, include general obligation bonds and
revenue bonds, and the Funds may hold both in any proportion. General obligation
bonds are backed by the taxing power of the issuing municipality and are
considered the safest type of bonds. Revenue bonds are backed by the revenues of
a project or facility such as tolls from a toll bridge. Industrial development
bonds (generally referred to under current tax law as "private activity bonds")
are a specific type of revenue bond backed by the credit and security of a
private issuer and therefore may have more potential risk. These bonds may be
issued in a variety of forms, including Commercial Paper, tender option bonds
and variable and floating rate securities.
The value of floating and variable rate obligations generally is more stable
than that of fixed rate obligations in response to changes in interest rate
levels. Variable and floating rate obligations usually carry rights that permit
the Funds to sell them at par value plus accrued interest upon short notice. The
issuers or financial intermediaries providing rights to sell may support their
ability to purchase the obligations by obtaining credit with liquidity supports.
These may include lines of credit, which are conditional commitments to lend,
letters of credit, which will ordinarily be irrevocable, both issued by domestic
banks or foreign banks which have a branch, agency or subsidiary in the United
States. (See "Portfolio Instruments and Practices--Foreign Securities.") When
considering whether an obligation meets a Fund's quality standards, the Fund
will look to the credit worthiness of the party providing the right to sell as
well as to the quality of the obligation itself. The Funds may consider the
maturity of a variable or floating rate Municipal Instrument to be shorter than
its ultimate maturity if a Fund has the right to demand prepayment of its
principal at specified intervals prior to the security's ultimate maturity,
subject to the conditions for using amortized cost valuation under the
Investment Company Act of 1940 (the "1940 Act"). EACH FUND may purchase such
variable or floating rate obligations from the issuers or may purchase
participations, a type of floating or variable rate obligation, which are
interests in a pool of municipal obligations held by a bank or other financial
institution.
EACH FUND may invest in municipal securities issued to finance private
activities, the interest from which is an item of tax preference to Shareholders
for purposes of the federal alternative minimum tax. (See "Dividends and
Distributions" and "Tax Implications.") However, any such interest which a
Tax-Exempt Fund might earn will not be deemed to have been derived from
Municipal Instruments for purposes of determining whether at least 80% of the
Fund's annual gross income has been derived from such Instruments. The
TAX-EXEMPT DIVERSIFIED FUND does not currently intend to invest in such bonds.
As a non-fundamental policy, the MISSOURI TAX-EXEMPT FUND currently intends to
limit its income from private activity bonds to no more than 20% of the Fund's
income.
Ordinarily, the TAX-EXEMPT FUNDS expect that 100% of their portfolio securities
will be Municipal Instruments. However, the Funds may hold cash or invest in
short-term taxable securities as set forth above. Each Tax-Exempt Fund may
invest 25% or more of its total assets in Municipal Instruments which are
related in such a way that an economic, business or political development or
change affecting one Municipal Instrument would also affect the other Municipal
Instruments. For example, a Fund may so invest in (a) Municipal Instruments the
interest on which is paid solely from revenues of similar municipal projects
such as hospitals, electric utility systems, multi-family housing, nursing
homes, commercial facilities (including hotels) or life care facilities, (b)
Municipal Instruments whose issuers are
14
<PAGE> 256
in the same state (including, in the case of the Missouri Tax-Exempt Fund,
issuers in states other than Missouri), or (c) industrial development
obligations.
EACH FUND may purchase Municipal Instruments which are backed by letters of
credit, which will ordinarily be irrevocable, issued by domestic banks or
foreign banks which have a branch, agency or subsidiary in the United States. In
addition, each Fund may acquire securities in the form of custodial receipts
which evidence ownership of future interest payments, principal payments or both
on obligations of certain state and local governments and authorities.
In order to enhance the liquidity, stability, or quality of a Municipal
Instrument, EACH FUND may acquire the right to sell the security to another
party at a guaranteed price and date. These rights may be referred to as puts,
demand features or standby commitments.
--State of Missouri. The MISSOURI TAX EXEMPT FUND is more susceptible to risks
affecting issuers of Missouri Instruments than would be a comparable municipal
bond fund that does not emphasize these issuers to this degree. The
marketability and market value of Missouri Instruments may be affected by
economic factors in Missouri. These include the Missouri economy's heavy
dependence upon manufacturing, defense and agriculture, which tend to be
cyclical. Missouri and its political subdivisions are subject to the Hancock
Amendment, a constitutional amendment which limits taxing authority and
government spending. It imposes a limit on the total amount of taxes which the
State may impose and limits the revenues of counties and other political
subdivisions. Voter approval is required to exceed the limit, or to raise the
rate of an existing tax, license, or other fee at a rate faster than specified
limits. At the State level such limit is tied to personal income in Missouri,
and at the county and local level such limit is tied to the consumer price
index. The limitations do not apply to the payment of principal and interest on
bonds approved by the voters. However, such limitations could affect adversely
the ability of certain issuers to repay obligations which are not backed by the
full faith or taxing authority of Missouri or a political subdivision. If either
Missouri or any of its governmental entities are unable to meet their financial
obligations, the income derived by the Fund, the Fund's net asset value, the
ability to preserve or realize appreciation of the Fund's capital or the Fund's
liquidity could be adversely affected. An expanded discussion concerning
Missouri is contained in the Statement of Additional Information.
--Loan Participations and Asset-Backed and Receivables-Backed Securities. The
DIVERSIFIED FUND may invest in loan participations. A loan participation is an
interest in a loan to a U.S. corporation (the borrower) which is administered
and sold by an intermediary bank. The borrower of the underlying loan will be
deemed to be the issuer of the participation interest except to the extent the
Fund derives its rights from the intermediary bank who sold the loan
participation. The Fund may only purchase participations from banks which have
total assets exceeding $1 billion. Loan participations will be treated as
illiquid if they cannot be sold at market price within seven days.
The Diversified Fund may also invest in asset-backed and receivables-backed
securities. These securities represent participations in, or are secured by and
payable from, pools of assets such as motor vehicle installment sale contracts,
installment loan contracts, leases of various types of real and personal
property, receivables from revolving credit (credit card) agreements and other
categories of receivables. Such asset pools are securitized through the use of
privately-formed trusts or special purpose corporations. Payments or
distributions of principal and interest may be guaranteed up to certain amounts
and for a certain time period by a letter of credit or a pool insurance policy
issued by a financial institution unaffiliated with the trust or corporation, or
other credit enhancements may be present.
The Fund may invest in new types of mortgage-related securities and in other
asset-backed securities that may be developed in the future to the extent
consistent with its investment objective and policies.
--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 the Funds, has obtained relief from the SEC to permit each Fund to
sell its
15
<PAGE> 257
securities in excess of otherwise applicable limits to the non-money market
portfolios of the Trust. 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.
- --Forward Commitments and When-Issued Securities. EACH FUND may purchase
securities on a "when-issued" basis and purchase or sell securities on a
"forward commitment" basis. When-issued and forward commitment transactions,
which involve a commitment by the Fund to purchase or sell particular securities
with payment and delivery taking place at a future date (perhaps one or two
months later), permit the Fund to lock in a price or yield on a security it
intends to purchase or sell, regardless of future changes in interest rates.
These transactions involve the risk that the price or yield obtained may be less
favorable than the price or yield when the delivery takes place. These
transactions will not be entered into for speculative purposes but only in
furtherance of a Fund's investment objective. Although a Fund would generally
purchase securities on a when-issued or forward commitment basis with the
intention of acquiring securities for its portfolio, such Fund may dispose of a
when-issued security or forward commitment prior to settlement if Boatmen's
deems it appropriate to do so and such disposition may give rise to a capital
gain or loss.
- --Managing Liquidity. 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, as a matter of non-fundamental policy
which may be changed by the Trustees without shareholder approval, EACH OF THE
FUNDS DOES NOT KNOWINGLY INVEST MORE THAN 10% OF ITS NET ASSETS IN ILLIQUID
SECURITIES. For this purpose, not all securities which are restricted are deemed
to be illiquid. Illiquid securities include certain certificates of
participation and tax-exempt derivative securities that do not permit a Fund to
terminate them after seven days' notice. Certain securities that might otherwise
be considered illiquid, however, such as some issues of commercial paper and
securities for which Boatmen's 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 10% limitation. In addition, certain repurchase
agreements which provide for settlement in more than seven days, but can be
liquidated before the nominal fixed term on seven days' or less notice, are
treated as liquid instruments.
- --Other 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 additional 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
recognize 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 will tend to decrease. You
should also recognize 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 Missouri Tax-Exempt Fund may invest more than 25% of its total assets in
municipal obligations the interest of which comes from issuers located in the
same state. When the Fund's assets are concentrated in obligations payable from
revenues of issuers located in the same state, the Fund will be subject to the
particular risks (including legal and economic conditions) relating to such
securities to a greater extent than if its assets were not so concentrated. In
addition, payment on Municipal Instruments related to certain projects in which
the Tax-Exempt Funds invest may be secured by mortgages or deeds of trust. In
the event of a default, enforcement of a mortgage or deed of trust will be
subject to statutory enforcement procedures on obtaining deficiency judgments.
Should a foreclosure occur, collection of the proceeds from that foreclosure may
be delayed and the amount of the proceeds received may not be enough to pay the
16
<PAGE> 258
principal or accrued interest on the defaulted Municipal Instruments.
The Missouri Tax-Exempt Fund is non-diversified, which means that the Fund is
not limited by the 1940 Act in the proportion of its assets that it may invest
in the obligations of a single issuer. The investment of a large percentage of
the Fund's assets in the securities of a small number of issuers may subject the
Fund to particular risks relating to such issuers to a greater extent than if
the Fund were diversified under the 1940 Act.
- --Additional Information. The Funds have adopted certain procedures under the
1940 Act which enable the Funds to purchase certain instruments during the
existence of an underwriting or selling syndicate of which Boatmen's National
Bank of St. Louis ("Boatmen's Bank"), an affiliate of Boatmen's, or Kleinwort
Benson Investment Management Americas Inc. is a member relating to the
instruments. These procedures establish, among other things, certain limitations
on the amount of debt securities which may be purchased in any single offering
and on the amount of a Fund's assets which may be invested in any single
offering. Accordingly, in view of Boatmen's Bank's active role in the
underwriting of debt securities, a Fund's ability to purchase debt securities in
the primary market may from time to time be limited.
INVESTMENT LIMITATIONS
Certain of the investment policies of each Fund may not be changed without a
vote of 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 the
fundamental limitations are summarized below, and all of the Funds' fundamental
limitations are set out in greater detail in the Statement of Additional
Information, which is available upon request.
Treasury, Diversified and Tax-Exempt Diversified Funds
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 as described in the Statement of Additional
Information, including investments in U.S. Government securities, investments in
banking obligations by the Diversified Fund and investments in Municipal
Instruments by the Tax-Exempt Diversified Fund).
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 the value of the Fund's total assets in the securities of a
single issuer, except that up to 25% of each Fund's total assets can be invested
without regard to such 5% limitation (such 5% limitation shall not apply to
repurchase agreements collateralized by U.S. Government securities).
3. A Fund may not borrow money except as a temporary measure and then only in
amounts not exceeding 5% of the value of the Fund's total assets or from banks
provided that immediately after such borrowing, all borrowings of the Fund do
not exceed one-third of the Fund's total assets and no purchases of portfolio
instruments will be made while such Fund has borrowings outstanding in an amount
exceeding 5% of its total assets.
Missouri Tax-Exempt Fund
1. The 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 as described in the Statement of Additional
Information, including investments in U.S. Government securities and investments
in Municipal Instruments).
2. The Fund may not borrow money except as a temporary measure for emergency
purposes and then only in amounts not exceeding one-third of the value of the
Fund's total assets and no purchases of portfolio instruments will be made while
such Fund has borrowings outstanding in an amount exceeding 5% of its net
assets.
THE INVESTMENT OBJECTIVE OF EACH FUND IS FUNDAMENTAL AND ACCORDINGLY CANNOT BE
CHANGED WITHOUT THE APPROVAL OF A MAJORITY OF THE OUTSTANDING SHARES OF THAT
FUND. THE INVESTMENT POLICIES AND PRACTICES OF EACH OF THE TREASURY, DIVERSIFIED
AND TAX-EXEMPT DIVERSIFIED FUNDS, UNLESS OTHERWISE SPECIFICALLY STATED HEREIN,
ARE NOT
17
<PAGE> 259
FUNDAMENTAL AND CAN BE CHANGED BY THE FUNDS' TRUSTEES WITHOUT A SHAREHOLDER
VOTE; THE INVESTMENT POLICIES AND PRACTICES OF THE MISSOURI TAX-EXEMPT FUND,
OTHER THAN ITS NON-DIVERSIFIED STATUS, ARE FUNDAMENTAL, UNLESS OTHERWISE
SPECIFICALLY STATED HEREIN.
Pursuant to a rule of the Securities and Exchange Commission, each of the
Diversified Fund and the Treasury Fund may not invest more than 5% of its total
assets (taken at amortized cost) in the securities of any one issuer (except
U.S. Government Securities and repurchase agreements collateralized by such
securities). Each of such Funds may, however, invest more than 5% of its total
assets in the First Tier Securities of a single issuer for a period of up to
three business days after the purchase thereof, although a Fund may not make
more than one such investment at any time. Further, each of such Funds may not
invest more than the greater of (i) 1% of its total assets; or (ii) one million
dollars in the securities of a single issuer which were Second Tier Securities
when acquired by a Fund. In addition, each of such Funds may not invest more
than 5% of its total assets in securities which were Second Tier Securities when
acquired. Pursuant to the SEC rule, the foregoing restrictions are not
applicable to the Tax-Exempt Funds. The foregoing operating policies are more
restrictive than the fundamental policy set forth above, which would give a Fund
the ability to invest, with respect to 25% of its total assets, more than 5% of
its total assets in any one issuer. Each Fund operates in accordance with these
operating policies which comply with the SEC rule.
ADMINISTRATION PLAN
Each Fund has adopted an Administration Plan with respect to the Administration
Shares which authorizes the Fund to compensate Boatmen's, its affiliates and
other Service Organizations for providing account administration services to
their customers who are beneficial owners of such Shares. Each Fund will enter
into agreements with Service Organizations which purchase Administration Shares
on behalf of their customers ("Service Agreements"). The Service Agreements will
provide for compensation to the Service Organizations in an amount up to .25%
(on an annualized basis) of the average daily net asset value of the
Administration Shares of the applicable Fund attributable to or held in the name
of the Service Organization for its customers. The services provided by the
Service Organization may include acting as a Shareholder of record, maintaining
account records for their customers, and processing orders to purchase, redeem
and exchange Administration Shares for their customers.
For the fiscal years ended August 31, 1994, 1995 and 1996 the Funds incurred
Service Organization fees at the annual rate of 0.25%, 0.25% and .025%
respectively, of each Fund's average daily net assets attributable to
Administration Shares.
Holders of Administration Shares of a Fund will bear all expenses and fees paid
to Service Organizations for their services with respect to such Shares as well
as any other expenses which are directly attributable to such Shares.
Service Organizations, other than broker-dealers, may charge other fees to their
customers who are the beneficial owners of Administration Shares in connection
with their customer accounts. These fees would be in addition to any amounts
received by the Service Organizations under a Service Agreement and would be for
services other than those provided under such an Agreement. Under the terms of
such Service Agreements, Service Organizations are required to provide their
customers with a schedule of fees charged to such customers which relate to the
investment of customers' assets in Administration Shares. This schedule will be
provided at the time of any investment and whenever changes to the schedule are
made.
Each Fund will accrue payments made pursuant to a Service Agreement daily. The
Funds will receive a prospective undertaking from each Service Organization
eliminating that portion of such service payments which is necessary to assure
that the service payments which are required to be accrued to the Administration
Shares on any day do not exceed the income to be accrued to such Shares on that
day.
All inquiries of beneficial owners of Administration Shares should be directed
to such owners' Service Organization.
18
<PAGE> 260
Payments for Fund shares must normally be in U.S. dollars and in order to avoid
fees and delays should be drawn on a U.S. bank. Please remember that The Pilot
Funds retains the right to reject any purchase order.
INVESTING IN THE PILOT FUNDS
Getting Your Investment Started
Investing in The Pilot Funds is quick and convenient. Fund Shares may be
purchased either through the account you maintain with Boatmen's Investment
Services, Inc. ("BIS") or other Service Organization or by a fiduciary account
where purchases of Administration Shares of a Fund are made as directed by
Boatmen's or other Service Organization. See "How to Buy Shares" below. Fund
shares are distributed by Pilot Funds Distributors, Inc., (the "Distributor").
The Distributor is located at 3435 Stelzer Road Columbus, Ohio 43219-3035.
You may choose to invest your BIS account where an Account Representative can
advise you in selecting among the Pilot Funds. Whether you currently have a BIS
account or wish to open one, your Pilot Funds investment can be executed within
a few minutes by telephone or, if you prefer, during a consultation with an
Investment Officer of BIS. Call BIS at 800/469-5999 to speak with an Account
Representative, to place a Pilot Funds transaction or to arrange a consultation
scheduled at your convenience.
Clients of BIS and other institutions such as broker-dealers that have entered
into agreements with the Distributor ("Service Organizations") may purchase
shares through their accounts at their Service Organization and should contact
such Service Organization directly for appropriate purchase instructions. Share
purchases (and redemptions) made through BIS or another Service Organization are
effected only on Business Days. When shares are purchased through BIS or another
Service Organization, a fee may be charged by those institutions for providing
administrative services in connection with your investment.
The Pilot Funds will send you the following statements and reports to provide
you with current information on the status of your account:
<TABLE>
<S> <C>
Confirmation Statements After every transaction that
affects your account balance.
Account Statements Either monthly, quarterly or
annually depending on the
Fund in which you invest or
the type of account you hold.
Financial Reports Every six months. To reduce
The Pilot Funds' expenses,
only one copy of most Fund
reports will be mailed to
your household, even if you
have more than one account in
a Fund.
</TABLE>
HOW TO BUY SHARES
This section provides you with pertinent information on how to buy Fund shares.
Further information can be found under "Transaction Rules." As set forth above,
Administration Shares of the Funds are offered exclusively to customers of
Boatmen's, its affiliates and to customers of other participating Service
Organizations. Administration Shares may be purchased on any Business Day (as
defined below) at the net asset value next determined after receipt by the
Transfer Agent from the Service Organization of both the purchase order and its
purchase price in Federal Funds. Payment will be effected by wiring Federal
Funds to the Custodian. Boatmen's and other participating Service Organizations
have undertaken to arrange for the timely transmittal of purchase orders to the
Transfer Agent and of Federal Funds to the Custodian. Purchases are made through
a customer's account at Boatmen's or other Service Organization as directed by
the customer in an application form executed prior to the customer's first
purchase of Administration Shares, except in the case of purchases by a
fiduciary account where purchases of Administration Shares of a Fund are made as
directed by Boatmen's or other Service Organization.
A customer of Boatmen's or other Service Organization (other than a fiduciary
account) may direct Boatmen's or such Service Organization to invest
automatically any cash income balance and any cash principal balance of the
customer's account in Administration
19
<PAGE> 261
Shares of a Fund. This automatic investment will occur on each Business Day for
each balance in its entirety. A customer maintaining an account at the trust
department of a bank affiliated with Boatmen's may instruct the bank to invest
automatically through Boatmen's any cash income balance and any cash principal
balance of the customer's account in Administration Shares of a Fund on the same
basis as applicable to customers of Boatmen's or may give other instructions to
the bank within limits prescribed by the bank. Investors who wish to obtain
additional information concerning investment procedures or a Fund's current
yield should call 800/71-PILOT. Additional copies of this Prospectus, and copies
of the Statement of Additional Information, may be obtained from the
Distributor, 3435 Stelzer Road, Columbus, Ohio 43219-3035.
In order to maximize earnings, the Funds try to be invested as completely as is
practicable. The Funds are normally required to make settlement in Federal Funds
for securities purchased. Accordingly, orders for Administration Shares will
become effective on Business Days as follows: if an order is received by the
Transfer Agent by 2:00 p.m., Central time, for the Diversified and Treasury
Funds and by 12:00 Noon, Central time, for the Tax-Exempt Funds, and Federal
Funds are received by the Custodian on the same day by 3:00 p.m., Central time,
the order is effective as of that day. Shares are deemed to have been purchased
when an order becomes effective and are entitled to income commencing on that
day.
It is the responsibility of Service Organizations 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 Service Organization 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.
Purchase orders must include the purchaser's tax identification number. The
Pilot Funds reserves the right to reject any purchase order including exchanges
for any reason or to waive the minimum initial investment requirement. The Funds
also reserve the right to establish a minimum initial and/or subsequent
investment requirement and to change that requirement with respect to any person
or class of persons. 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.
Tax-Sheltered Retirement Plans
Shares of the Funds may be purchased for Individual Retirement Accounts ("IRAs")
for individuals and their non-employed spouses who desire to make limited
contributions, including rollovers, to a tax deferred retirement program and if
eligible, receive a federal income tax deduction for amounts contributed. For
information about an IRA application with the Funds, contact your Service
Organization.
Explanation of Sales Price
Administration Shares of the Funds are sold at net asset value. NET ASSET VALUE
PER SHARE is determined on each Business Day (as defined below) at 2:00 p.m.,
Central time, for the Diversified and Treasury Funds, and 12:00 Noon, Central
time, for the Tax-Exempt Funds with respect to each Fund by adding the value of
a Fund's investments, cash, and other assets attributable to its Administration
Shares, subtracting the Fund's liabilities attributable to those shares, and
then dividing the result by the number of Administration Shares in the Fund that
are outstanding. The Funds seek to maintain a net asset value of $1.00 per
share. In this connection, each Fund's securities are valued at its amortized
cost, which does not take into account unrealized securities gains or losses.
This method involves initially valuing an instrument at its cost and thereafter
assuming a constant amortization to maturity of any premium paid or discount
received. For a more complete description of the amortized cost valuation method
and its effect on existing and prospective shareholders, see "Net Asset Value"
in the Statement of Additional Information.
20
<PAGE> 262
HOW TO SELL SHARES
The Pilot Funds makes it easy to sell, or "redeem" your shares. If you purchased
your shares through an account at BIS or another Service Organization, you may
redeem shares in accordance with the instructions pertaining to that account.
Payment of Redemption Proceeds and Dividends
If a redemption request is received by the Transfer Agent from Boatmen's or
another Service Organization before 2:00 p.m., Central time, for the Diversified
and Treasury Funds and 12:00 a.m., Central time, for the Tax-Exempt Funds, the
Administration Shares to be redeemed do not earn income on that day, but the
proceeds will be available in the Shareholder's account at Boatmen's or another
Service Organization, or will be available by check at the election of a
Shareholder on the same day (if it is a Business Day). If a redemption request
is received after that time, the Administration Shares to be redeemed earn
income on the day the request is received, and the proceeds will be available in
the Shareholder's account at Boatmen's or another Service Organization on the
following Business Day. Neither the Funds nor the Distributor, or Transfer Agent
shall have any liability for any delay in the availability of proceeds in a
Shareholder's account. Boatmen's and other Service Organizations have undertaken
to arrange for the timely transmittal to the Transfer Agent of redemption
requests and the timely crediting to Shareholders' accounts at Boatmen's and
other Service Organizations of redemption proceeds. In order to effect timely
transmittals and crediting, Service Organizations may establish earlier times by
which redemption directions must be received by them. Service Organizations have
undertaken to advise Shareholders if earlier times are established.
EXCHANGES
Administration Shares of the Fund may be exchanged for Class A Shares of any
other fund of the Pilot Family of Funds, unless otherwise determined by the
Trustees at the time any new funds become available at the net asset value next
determined plus any applicable sales charge, by calling your Service
Organization. However, if a sales charge has previously been paid on the
investment represented by the exchanged shares (i.e., the shares to be exchanged
were originally issued in exchange for shares on which a sales charge was paid),
the exchange will be made at net asset value. Administration Shares of the Fund
purchased through dividend and/or capital gains reinvestment may be exchanged
for Class A Shares of a Pilot Fund without a sales charge. Prior to the
completion of any exchange, investors must have the Prospectus of the Fund into
which they are exchanging. Shares can only be exchanged in a state where the
shares to be received are registered.
For federal income tax purposes, an exchange is treated as a sale of the Shares
surrendered in the exchange, on which an investor may realize a gain or loss,
followed by a purchase of Shares received in the exchange. All telephone
exchanges must be registered in the same name(s) and with the same address as
are registered in the Fund from which the exchange is being made. Any election
to use telephone exchanges or redemptions will be administered by your Service
Organization. In times of drastic economic or market changes the telephone
exchange privilege may be difficult to implement. 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 within 72 hours of a telephone transaction, 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. All exchanges are subject to the minimum
investment requirements, if any, of The Pilot Funds into which the shares are
being exchanged. Exchanges are available only in states where the exchange may
legally be made. An exchange fee may be imposed or the exchange privilege may be
modified
21
<PAGE> 263
or withdrawn at any time on 60 days' written notice or as otherwise permitted by
applicable law.
TRANSACTION RULES
The right of a Shareholder to redeem Shares and the date of payments by the
Funds may be suspended (a) for any period during which the New York Stock
Exchange is closed, other than the customary weekends or holidays, or trading in
the markets the Funds normally utilize is closed or is restricted as determined
by the SEC, (b) during any emergency, as determined by the SEC, as a result of
which it is not reasonably practicable for the Funds to dispose of instruments
owned by it or fairly to determine the value of its net assets, or (c) for such
other period as the SEC may by order permit for the protection of the
Shareholders of the Funds.
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 1940 Act.
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
1940 Act. See the Statement of Additional Information ("Redemptions"). In those
cases, an investor may incur brokerage costs in converting securities to cash.
Shares of a Fund are redeemable at the unilateral option of the Funds if the
Trustees determine in their sole discretion that failure to so redeem may have
material adverse consequences to the Shareholders of such Fund. The Funds,
however, assume no responsibility to compel such redemptions. In the event
losses are sustained by a Fund, the Funds may reduce the number of outstanding
Shares in that Fund in order to maintain a net asset value per Share of $1.00.
Such reduction will be effected by having each Shareholder of that Fund
proportionally contribute to the Fund's capital the necessary Shares to restore
such net asset value per Share. Each Shareholder will be deemed to have agreed
to such contribution in these circumstances by his investment in the Funds. In
addition, the Funds reserve the right to adopt by action of the Trustees a
policy pursuant to which it may without Shareholder approval redeem upon not
less than 30 days' notice (a) Shares in an account which have a value below
$500, or such other amount as the Trustees may designate at the time the policy
is adopted (and during the notice period Shareholders will have the opportunity
to bring the value of their accounts up to the designated amount) or (b) all of
a Fund's Shares if such Shares have an aggregate value below a designated amount
and if the Trustees determine that it is not practical, efficient or advisable
to continue the operation of the Fund and that any applicable requirements of
the 1940 Act have been complied with. As of the date of this Prospectus, no such
policy has been adopted. While, as indicated above, the Trustees have the
authority to adopt, and thereafter to change from time to time, such a policy,
they will not do so without providing at least 30 days' notice to the
Shareholders.
The Funds reserve the right to reject any purchase order (including exchanges)
for any reason. The Funds also reserve the right to establish a minimum initial
and/or subsequent investment requirement and to change that requirement with
respect to any person or class of persons.
As used in this Prospectus, the term "Business Day" refers to those days when
the New York Stock Exchange and the Custodian are open for business, which is
Monday through Friday except for holidays (scheduled holidays for 1997 are: New
Year's Day, Martin Luther King, Jr. Day, Presidents Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day
and Christmas Day). On those days when one or more of such organizations close
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.
DIVIDENDS AND DISTRIBUTIONS
Where do your dividends and distributions come from?
A Fund's net investment income consists of the excess of (i) accrued interest or
discount (including both original issue and market discount, if any) on
portfolio
22
<PAGE> 264
securities and (ii) any income of the Fund from sources other than capital
gains, over (iii) the amortization of market premium on portfolio securities and
(iv) the estimated expenses of the Fund, including a proportionate share of the
general expenses of the Funds and the service fee specifically allocated to the
Funds.
What are your dividend and distribution options?
Income dividends and capital gain distributions will be reinvested in additional
shares of the same Fund or at the election of the Shareholder will be paid in
cash. Any election to receive cash or to reinvest in additional Shares will be
administered by your Service Organization in a manner arranged for each Fund.
Cash distributions will be paid on or about the first business day of each
month. Although realized gains and losses on the assets of each Fund are
reflected in the net asset value of each Fund, they are not expected to be of an
amount which would affect a Fund's net asset value of $1.00 per Share.
When are dividends and distributions declared and paid?
Each Fund intends to declare substantially all of its net investment income
daily (as of 2:00 p.m., Central time, for the Diversified and Treasury Funds,
and as of 12:00 Noon, Central time, for the Tax-Exempt Funds) as a dividend and
distribute these dividends to Pilot Administration Shareholders, monthly. Net
short-term capital gains, if any, will be distributed in accordance with the
requirements of the Code, and may be reflected in the Funds' daily
distributions. Each Fund may distribute at least annually, on or about the close
of each calendar year, its long-term capital gains, if any.
Should a Fund incur or anticipate any unusual expense, loss or depreciation
which could adversely affect income or net asset value, the Trustees would at
that time consider whether to adhere to the present income accrual and
distribution policy described above or to revise it in light of the then
prevailing circumstances. For example, the Trustees might reduce or suspend
Shareholder income accruals in order to prevent to the extent possible the net
asset value of such Fund from being reduced below $1.00 per Share. Thus, such
expenses, losses or depreciation could result in a Shareholder receiving no
income for the period during which he held the Shares.
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 Trustees of the Funds are
responsible for the overall management and supervision of its affairs. 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 and to establish additional portfolios in the
future. The Trustees have authorized the issuance of an unlimited number of
shares available to selected investors in each of three share classes
(Administration Shares, Investor Shares and Pilot Shares) in these Funds.
Information regarding The Pilot Funds' other portfolios may be obtained by
contacting The Pilot Funds at 800/71-PILOT or the Distributor.
Each Administration Share, Investor Share and Pilot Share of the Fund represents
an equal proportionate interest in the assets belonging to the Fund. It is
contemplated that most Shares will be held in accounts of which the record owner
is a bank or other institution acting as nominee for its customers who are the
beneficial owners of the Shares. Pilot Shares may be purchased for accounts held
in the name of an institution that is not compensated by the Funds for services
provided to the institution's customers. Administration Shares may be purchased
for accounts held in the name of an institution that provides certain account
administration services to its customers, including maintenance of account
records and processing orders to purchase, redeem and exchange Administration
Shares. Administration Shares bear the cost of administration fees at the annual
rate of up to .25 of 1% of the average daily net asset value of such Shares.
Investor Shares may be purchased for
23
<PAGE> 265
accounts held in the name of an institution that provides certain account
administration and Shareholder liaison services to its customers, including
maintenance of account records, processing orders to purchase, redeem and
exchange Investor Shares, responding to customer inquiries and assisting
customers with investment procedures. Investor Shares bear the cost of service
fees at the annual rate of up to .50 of 1% of the average daily net asset value
of such Shares. Please refer to the Statement of Additional Information for the
Administration Shares and Investor Shares for a more complete description of
such services. It is possible that an institution (a "Service Organization") or
its affiliate may offer different classes of Shares to its customers and thus
receive different compensation with respect to different classes of Shares of
the same Fund. Each Service Organization offering both Administration Shares and
Investor Shares intends to limit the availability of such Shares to different
types of investors. Shares of each class may be exchanged only for Shares of the
same class in another Fund. Except as described herein, the three classes of
Shares are identical. Certain aspects of the Shares may be altered, after
advance notice to Shareholders, if it is deemed necessary in order to satisfy
certain tax regulatory requirements.
When issued, Shares will be fully paid and nonassessable. In the event of
liquidation, Shareholders are entitled to share pro rata in the net assets of
the applicable Fund available for distribution to Shareholders. Shares entitle
their holders to one vote per Share, are freely transferable and have no
preemptive, subscription or conversion rights.
If a proposal concerning the Administration Plan or Service Plan is submitted to
holders of Administration Shares or Investor Shares, respectively, Service
Organizations holding Administration or Investor Shares for their own accounts
have undertaken to vote such Shares in the same proportions as the vote by
customers of such Shares held for the account of such customers of the Service
Organization.
Persons selling or servicing different classes of shares of the Funds may
receive different compensation with respect to one particular class of shares as
opposed to another in the same Fund.
From time to time the Distributor, at its expense, will also provide additional
compensation to dealers in connection with sales of Shares of any of the Funds
and other Funds of the Group. Compensation may include tickets to sporting and
other entertainment events, gifts of merchandise, and financial assistance to
dealers in connection with conferences, sales or training programs for their
employees, seminars for the public, advertising campaigns regarding one or more
Funds of the Group, and/or other dealer-sponsored special events. In some
instances, this compensation may be made available only to certain dealers whose
representatives have sold or are expected to sell a significant amount of such
shares. Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to exotic locations within or outside of the
United States for meetings or seminars of a business nature. The Distributor, at
its expense, currently conducts an annual sales contest for dealers in
connection with their sales of Shares of the Funds. Dealers may not use sales of
a Fund's Shares to qualify for this compensation to the extent such may be
prohibited by the laws of any state or any self-regulatory agency, such as the
National Association of Securities Dealers, Inc.
SHAREHOLDERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND PROPORTIONATE
FRACTIONAL VOTES FOR FRACTIONAL SHARES HELD. Shares of all the Pilot Funds
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.
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.
Effective June 30, 1995, the name of the Pilot Short-Term Tax-Exempt Fund was
changed to the Pilot Missouri Short-Term Tax-Exempt Fund.
24
<PAGE> 266
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") 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. The mailing address is P.O. Box 14737 at that
location.
Administrator: BISYS FUND SERVICES LIMITED PARTNERSHIP (referred to as "BISYS"),
is responsible for coordinating the Fund's efforts and generally overseeing the
operation of the Fund's business. BISYS principal offices are located at 3435
Stelzer Road, Columbus, Ohio 43219-3035.
Distributor: Each 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 and an affiliate of BISYS that is located at 3435
Stelzer Road, Columbus, Ohio 43219-3035.
Custodian: BOATMEN'S TRUST COMPANY (referred to as "Boatmen's") is responsible
for holding the investments purchased by each Fund. Boatmen's is located at 100
N. Broadway, St. Louis, Missouri 63178.
Transfer Agent: BISYS FUND SERVICES, INC. (referred to as the "Transfer Agent")
is an affiliate of BISYS and 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, OH 43219.
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 located in Arkansas, Illinois, Iowa, Kansas, Missouri,
New Mexico, Oklahoma, Tennessee and Texas, a mortgage banking company, a credit
life insurance company, a federal savings bank in Arkansas and a limited service
bank in Delaware.
On August 30, 1996, Bancshares and NationsBank Corporation ("NationsBank")
announced that they have entered into an agreement pursuant to which Bancshares
will merge into NationsBank. The proposed merger, which is currently expected to
take place on or about January 1997, is subject to a number of conditions,
including approval by the appropriate regulatory authorities and by the
shareholders of both Bancshares and NationsBank. If the proposed merger is
consummated, Boatmen's will become a wholly owned subsidiary of NationsBank.
Under its Advisory Agreements with the Funds on behalf of each Fund, Boatmen's,
subject to the general supervision of the Funds' Trustees, manages the
investment operations of each Fund and the composition of each Fund's assets,
including the purchase, retention, and disposition thereof.
Boatmen's pays all costs incurred by it in connection with the performance of
its duties under the Advisory Agreements, other than the cost (including taxes
and brokerage commissions, if any) of securities purchased for the Funds and the
cost of preparing tax returns, shareholder reports and prospectuses and reports
filed with regulatory authorities.
Boatmen's began serving as investment adviser to the Treasury Fund and
Diversified Fund on June 1, 1994 and began serving as investment adviser to the
Tax-Exempt Diversified Fund and Missouri Tax-Exempt Fund effective July 1, 1995.
Goldman Sachs, acting through its separate operating division, Goldman Sachs
Asset Management, served as investment adviser to the Tax-Exempt Diversified
Fund and Missouri Tax-Exempt Fund prior to July 1, 1995.
25
<PAGE> 267
Boatmen's is entitled to receive advisory fees on a monthly basis at an annual
rate of .15 of 1% of the Diversified Fund's average net assets, .15 of 1% of the
Treasury Fund's average net assets, .20 of 1% of the Tax-Exempt Diversified
Fund's average net assets and .20 of 1% of the Missouri Tax-Exempt Fund's
average net assets.For the fiscal year ended August 31, 1996 total Advisory fees
paid by the Diversified Fund and Treasury Fund were .13% and .15%, respectively.
For the fiscal year ended August 31, 1995 total Advisory fees paid by the
Diversified Fund and Treasury Fund were .07% and .08%, respectively. For the
fiscal year ended August 31, 1994 (under the former advisory agreements from
September 1, 1993 to June 1, 1994, and from June 1, 1994 to August 31, 1994),
total advisory fees paid by the Diversified Fund and Treasury Fund were .07% and
.08%, respectively.
For the fiscal year ended August 31, 1996, each of the Diversified and Treasury
Funds paid an advisory fees of $2,174,296 and $2,552,746, respectively. For the
fiscal year ended August 31, 1995, each of the Diversified and Treasury Funds
paid an advisory fee of $998,016 and $972,623, respectively. For the fiscal year
ended August 31, 1994, each of the Diversified and Treasury Funds paid an
advisory fee of $1,679,800 and $1,366,594, respectively. Goldman Sachs received
$1,453,413 and $1,154,974, respectively, and Boatmen's received $226,387 and
$211,620, respectively.
For the period ended June 30, 1995, Goldman Sachs & Co. acted as the investment
adviser to the Tax-Exempt Diversified Fund and Missouri Tax-Exempt Fund.
MORE ABOUT BISYS. BISYS Fund Services Limited Partnership ("BISYS") is a
subsidiary of The BISYS Group Inc., 150 Clove Road, Little Falls, New Jersey
07424, a publicly owned company engaged in information processing, loan
servicing and 401(k) administration and recordkeeping services to and through
banking and other financial organizations. Under its Administration Agreement
with the Fund, 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 operations of the Funds.
Certain officers of The Pilot Funds namely Messrs. Martin Dean, W. Eugene
Sparbeck, George O. Martinez, William J. Tomko and Bruce Treff are also
employees and/or officers of BISYS, the Distributor or an affiliate.
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.
For its services as administrator, 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. These amounts may be reduced pursuant to fee waivers by
BISYS. Any such fee waivers may be terminated by BISYS at any time. For the
fiscal year ended August 31, 1996, The Pilot Funds paid administration fees to
BISYS in the amount of $1,880,792, $1,598,802, $433,805 and $257,068 for the
Pilot Short-Term U.S. Treasury Fund, Pilot Short Term Diversified Assets Fund,
Pilot Missouri Short-Term Tax-Exempt Fund and Pilot Short-Term Tax-Exempt
Diversified Fund, respectively. For the fiscal year ended August 31, 1995, The
Pilot Funds paid administration fees to BISYS in the amount of $1,357,012,
$1,479,697, $293,693 and $449,267 for the Pilot Short-Term U.S. Treasury Fund,
Pilot Short-Term Diversified Assets Fund, Pilot Missouri Short-Term Tax-Exempt
Fund and Pilot Short-Term Tax-Exempt Diversified Fund, respectively.
The Funds are responsible for all expenses incurred by the Funds, other than
those expressly borne by Boatmen's, BISYS or the Transfer Agent under the
26
<PAGE> 268
Advisory, Administration or Transfer Agency Agreements. Such expenses include,
the fees payable to Boatmen's, BISYS and the Transfer Agent, the fees and
expenses of the Funds' custodian, brokerage fees and commissions, any portfolio
losses, state and federal registration fees for qualifying Funds Shares under
federal or state securities laws, organization expenses, membership fees in
investment company organizations, 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 Funds 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 Funds' Shareholders and regulatory authorities,
compensation and expenses of its Trustees and extraordinary expenses incurred by
the Funds.
FEE WAIVERS. Expenses can be reduced by voluntary fee waivers and expense
reimbursements by Boatmen's and the Funds' other service providers. 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 their 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. The Adviser has voluntarily agreed to limit the total
operating expenses of the Pilot Shares of Pilot Short-Term diversified Assets
Fund to % of the Fund's average net assets until February 1, 1998 which
will have the effect of limiting the expenses of the Administration Shares of
the Fund to, % of the Fund's average net assets for the same period.
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.
Each Fund intends to elect to be treated as a regulated investment company under
Subchapter M of the Internal Revenue Code, as amended, (the "Code"). As a
regulated investment company, each Fund must satisfy certain requirements
relating to the sources of its income, diversification of its assets and
distribution of its income to Shareholders. In addition, as a regulated
investment company, a Fund generally will not incur a federal income or excise
tax on any investment company taxable income and net capital gains that are
distributed to its Shareholders in accordance with certain timing requirements
of the Code.
Dividends distributed by the Tax-Exempt Funds that are derived from interest
income exempt from federal income taxation and are designated by a Fund as
"exempt-interest dividends" will be exempt from federal income taxation.
Dividends of investment company taxable income, which generally includes the
excess of net short-term capital gains over net long-term capital losses and
interest (including original issue discount and market discount), less expenses,
will be taxable to Shareholders as ordinary income. Because no portion of the
dividends paid by any Fund is expected to consist of dividends paid by U.S.
corporations, no portion of the dividends paid by any Fund is expected to be
eligible for the corporate dividends-received deduction. Distributions of the
excess of net long-term capital gains over net short-term capital losses, if
any, which are designated as "capital gain dividends" by a Fund will be taxable
as long-term capital gains regardless of how long the Shareholders have held
their Funds Shares. The Funds are not normally expected to realize any long-term
capital gains or losses. These tax consequences will apply regardless of whether
distributions are received in cash or reinvested in Shares. Distributions
declared in October, November or December with a record date in such month and
paid in January of the following year are taxable to Shareholders as if received
on December 31 of the year declared. Shareholders will be informed about the
amount and character distributions received from a Fund for federal income tax
purposes, including any distributions that may constitute a return of capital.
27
<PAGE> 269
Investments in zero coupon securities (other than tax-exempt zero coupon
securities) will result in income to a Fund each year equal to a portion of the
excess of the face value of the securities over their issue price, even though
the Fund receives no cash interest payments from the securities.
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.
Individuals and certain other classes of Shareholders may be subject to 31%
withholding of federal income tax on taxable distributions if they fail to
furnish a Fund with their correct taxpayer identification number and certain
certifications regarding their tax status or if they are otherwise subject to
backup withholding. Backup withholding is not an additional tax. Any amounts
withheld may be credited against a Shareholder's U.S. federal income tax
liability.
A Fund that invests in foreign securities may be subject to foreign withholding
taxes on income earned on such securities and may be unable to pass through to
Shareholders the ability to claim foreign tax credits and deductions with
respect to such taxes.
In addition to federal taxes, a Shareholder may be subject to state and local
taxes on payments received from a Fund. A state tax exemption may be available
in some states to the extent distributions of a Fund are derived from interest
on certain direct U.S. Government obligations or on obligations of the
particular state. Shareholders should consult their own tax advisers concerning
these matters.
The Tax-Exempt Diversified Fund intends to satisfy certain requirements of the
Code for the payment of "exempt-interest dividends" not included in
shareholders' federal gross income. In addition, to the extent that
distributions made by the Missouri Tax-Exempt Fund qualify as "exempt-interest
dividends" for federal income tax purposes, are derived from interest on
Missouri Instruments and are designated by the Missouri Tax-Exempt Fund as
"state income tax exempt-interest dividends," these distributions will be exempt
from Missouri income tax, the earnings and profits tax of Kansas City and the
City of St. Louis earnings tax. Shares of the Missouri Tax-Exempt Fund and
income dividends and other distributions from the Missouri Tax-Exempt Fund are
not excludable in computing Missouri franchise taxes on corporations and
financial institutions. Distributions of long-term and short-term capital gains,
if any, that are includable in federal adjusted gross income will be subject to
Missouri income taxation, but will not be subject to the earnings and profits
tax of Kansas City or, for individuals in an individual capacity, the City of
St. Louis earnings tax. Shares of the Missouri Tax-Exempt Fund are not subject
to Missouri personal property taxes.
Further information relating to tax consequences is contained in the Statement
of Additional Information.
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.
UNDERSTANDING PERFORMANCE MEASURES: YIELD, EFFECTIVE YIELD AND TAX EQUIVALENT
YIELD will be calculated separately for Administration Shares, Investor Shares
and Pilot Shares. Because each such class of Shares is subject to different
expenses, the net yield of such classes of the same Fund for the same period may
differ. Absent a waiver of administration or service fees, the yield of Pilot
Shares will exceed that of other shares.
The YIELD of a Fund refers to the income generated by an investment in the Fund
over a seven-day period (which period will be stated in the advertisement). This
income is then annualized; that is, the amount of income generated by the
investment during that week is assumed to be generated each week over a 52 week
period and is shown as a percentage of the investment.
The EFFECTIVE YIELD is calculated similarly but, when annualized, the net income
earned by an investment in a Fund is assumed to be reinvested. The effective
yield will be slightly higher than the yield because of the compounding effect
of this assumed reinvestment.
28
<PAGE> 270
TAX-EQUIVALENT YIELDS for the Tax-Exempt Diversified and Missouri Tax-Exempt
Funds show the amount of taxable yield needed to produce an after-tax equivalent
of a tax-free yield, and are calculated by increasing the yield (as calculated
above) by the amount necessary to reflect the payment of federal income taxes at
a stated rate.
Performance comparisons:
The Funds may compare their yields to those of mutual funds with similar
investment objectives and to relevant indices or to rankings prepared by
independent services or other financial or industry publications that monitor
mutual fund performance.
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.
INVESTMENT RESULTS OF A FUND ARE BASED ON HISTORICAL PERFORMANCE AND PERFORMANCE
QUOTATIONS WILL FLUCTUATE. 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 BIS 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 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
REPRESENTATION 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.
29
<PAGE> 271
THE PILOT FUNDS
--------
FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
STATEMENT OF ADDITIONAL
ITEM NUMBER IN PART B INFORMATION CAPTION
--------------------- -----------------------
<S> <C>
10. Cover Page.......................................... Cover Page
11. Table of Contents................................... Table of Contents
12. General Information and History..................... Organization and Capitalization
13. Investment Objectives and Policies.................. Investment Policies and Practices of the Fund;
Investment Restrictions
14. Management of the Fund.............................. Trustees and Officers
15. Control Persons and Principal Holders of
Securities.......................................... Trustees and Officers; Organization and
Capitalization
16. Investment Advisory and Other Services.............. Investment Adviser, Administrator, Distributor
and Transfer Agent; Matters Relating to Class A
Shares and Class B Shares; Portfolio
Transactions; Custodian and Subcustodian;
Independent Accountants and Counsel
17. Brokerage Allocation................................ Portfolio Transactions
18. Capital Stock and Other Securities.................. Organization and Capitalization; Matters Relating
to Class A Shares and Class B Shares
19. Purchase, Redemption and Pricing of Securities
Being Offered....................................... Net Asset Value; Matters Relating to Class A
Shares and Class B Shares; Additional Purchase
and Redemption Information
20. Tax Status.......................................... Tax Information
21. Underwriters........................................ Investment Adviser, Administrator, Distributor
and Transfer Agent
22. Calculation of Performance Data..................... Calculation of Performance Quotations
23. Financial Statements................................ Financial Statements
</TABLE>
3
<PAGE> 272
THE PILOT FUNDS
3435 Stelzer Road
Columbus, Ohio 43219
STATEMENT OF ADDITIONAL INFORMATION
December 31, 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, five of which
portfolios (the "Funds") are offered hereby. The Funds are:
Pilot Diversified Bond Income Fund;
Pilot Intermediate U.S. Government Securities Fund;
Pilot U.S. Government Securities Fund;
Pilot Intermediate Municipal Bond Fund; and
Pilot Municipal Bond 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 affiliate, 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 December 31, 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> 273
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Investment Policies And Practices Of The Funds..................... B -
Investment Restrictions............................................ B -
Trustees And Officers.............................................. B -
Investment Adviser, Administrator, Distributor And Transfer Agent B -
Portfolio Transactions............................................. B -
Net Asset Value.................................................... B -
Matters Relating to Class A Shares and Class B Shares.............. B -
Additional Purchase and Redemption Information..................... B -
Calculation Of Performance Quotations.............................. B -
Tax Information.................................................... B -
Organization And Capitalization.................................... B -
Custodian.......................................................... B -
Independent Accountants And Counsel................................ B -
Miscellaneous...................................................... B -
Appendix........................................................... A - 1
Financial Statements............................................... F - 1
</TABLE>
B-2
<PAGE> 274
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. The Pilot Intermediate Municipal Bond Fund and
Pilot Municipal Bond Fund (the "Municipal Bond Funds") may acquire custodial
receipts that evidence ownership of future interest payments, principal payments
or both on certain municipal notes and bonds. 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
B-3
<PAGE> 275
common stock are offered as a unit). Each Fund except the Municipal Bond Funds
may also invest in corporate debt securities of foreign issuers.
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
limitations with respect to investments in foreign securities.
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.
MUNICIPAL OBLIGATIONS
Each of the Municipal Bond Funds generally invests in Municipal
Obligations. Municipal Obligations are issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies, authorities and instrumentalities and the District of
Columbia to obtain funds for various public purposes. The interest on most of
these obligations is generally exempt from regular federal income tax. The two
principal classifications of Municipal Obligations are "notes" and "bonds."
NOTES. Municipal notes are generally used to provide for short-term
capital needs and generally have maturities of one year or less. Municipal notes
include tax anticipation notes, revenue anticipation notes, bond anticipation
notes, tax and revenue anticipation notes, construction loan notes, tax-exempt
commercial paper and certain receipts for Municipal Obligations.
Tax and revenue anticipation notes are sold to finance working capital
needs of municipalities. Tax anticipation notes are generally payable from
specific tax revenues expected to be received at a
B-4
<PAGE> 276
future date. They are usually general obligations of the issuer. Revenue
anticipation notes are issued in expectation of receipt of other types of
revenue such as state aid to be received by a local issuer. They are not usually
general obligations of the issuer. Tax anticipation notes and revenue
anticipation notes are generally issued in anticipation of various seasonal
revenues such as income, sales, use and business taxes as well as
intergovernmental aid. Bond anticipation notes are sold to provide interim
financing. These notes are generally issued in anticipation of long-term
financing in the market. In most cases, these monies provide for the repayment
of the notes and the notes are not secured by any other source. Construction
loan notes are sold to provide construction financing. These notes are secured
by mortgage notes insured by the Federal Housing Authority; however, the
proceeds from the issuance may be less than the economic equivalent of the
payment of principal and interest on the mortgage notes if there had been a
default. Tax-exempt commercial paper consists of short-term unsecured promissory
notes issued by a state or local government or an authority or agency thereof.
Each Fund may also acquire securities in the form of custodial receipts
which evidence ownership of future interest payments, principal payments or both
on certain state and local governmental and authority obligations when, in the
opinion of bond counsel, interest payments with respect to such custodial
receipts are exempt from federal income taxes. Such obligations are held in
custody by a bank on behalf of the holders of the receipts. These custodial
receipts are known by various names, including "Municipal Receipts" ("MRs") and
"Municipal Certificates of Accrual on Tax-Exempt Securities" ("M-CATS").
There are a number of other types of notes issued for different
purposes and secured differently from those described above.
BONDS. Municipal bonds, which generally meet longer term capital needs
and have maturities of more than one year when issued, have two principal
classifications, "general obligation" bonds and "revenue" bonds.
General obligation bonds are issued by entities such as states,
counties, cities, towns and regional districts and are used to fund a wide range
of public projects including the construction or improvement of schools,
highways and roads, water and sewer systems and a variety of other public
purposes. The basic security of general obligation bonds is the issuer's pledge
of its faith, credit and taxing power for the payment of principal and interest.
The taxes that can be levied for the payment of debt service may be limited or
unlimited as to rate or amount or special assessments.
Revenue bonds have been issued to fund a wide variety of capital
projects, including electric, gas, water and sewer systems; highways, bridges
and tunnels; port and airport facilities; colleges and universities; and
hospitals. The principal security for a revenue bond is generally the net
revenues derived from a particular facility or group of facilities or, in some
cases, from the proceeds of a special excise tax or other specific revenue
source. Although the principal security behind these bonds varies widely, many
issuers provide additional security in the form of a debt service reserve fund
whose monies may also be used to make principal and interest payments on the
issuer's obligations. Housing finance authorities have a wide range of security
including partially or fully insured, rent subsidized mortgages, collateralized
mortgages, and the net revenues from housing or other public projects. In
addition to a debt service reserve fund, some authorities provide further
security in the form of a state's ability (without obligation) to make up
deficiencies in the debt service reserve fund. Lease rental revenue bonds issued
by a state or local authority for capital projects are secured by annual lease
rental payments from the state or locality to the authority sufficient to cover
debt service on the authority's obligations. Such obligations shall be treated
as illiquid securities, unless the Board of Trustees determines that they are
liquid.
Private activity bonds, a term that includes certain types of bonds,
the proceeds of which are used to a specified extent for the benefit of persons
other than governmental units, although nominally issued by municipal
authorities, are generally secured not by the taxing power of the municipality
but
B-5
<PAGE> 277
by the revenues of the authority derived from payments by the industrial user.
Each of the Municipal Bond Funds may invest in private activity bonds. The
interest from such bonds would be an item of tax preference to shareholders
under the federal alternative minimum tax.
Generally, the Municipal Obligations that may be purchased by Pilot
Intermediate Municipal Bond Fund will have remaining effective maturities
between three and ten years. Each Municipal Bond Fund may also purchase
long-term bonds (sometimes referred to as "Put Bonds"), which are subject to a
Fund's commitment to put the bond back to the issuer at par at a designated time
and the issuer's commitment to so purchase the bond at such price and time. For
purposes of computing Pilot Intermediate Municipal Bond Fund's average weighted
maturity, an instrument will be treated as having a maturity earlier than its
stated maturity date if the instrument has technical features (such as puts or
demand features) or a variable rate of interest which, in the judgment of
Boatmen's, will result in the instrument being valued in the market as though it
has the earlier maturity.
Each of the Municipal Bond Funds may purchase long-term fixed-rate
bonds that have been coupled with an option granted by a third party financial
institution allowing the Fund, at periodic intervals (usually every six months,
but in no event more than every twelve months), to tender (or "put") its bonds
to the institution and receive the face value thereof. The Fund may be assessed
"tender fees" for each tender period at a rate equal to the difference between
the bonds' fixed coupon rate and the rate, as determined by a remarketing or
similar agent, that would cause the bonds coupled with the tender option to
trade at par on the date of such determination.
In addition to the instruments described above, there are a variety of
hybrid and special types of Municipal Obligations as well as numerous
differences in the security of Municipal Obligations both within and between the
two principal classifications above.
Each of the Municipal Bond Funds may purchase Municipal Obligations
that are backed by letters of credit issued by domestic banks or foreign banks
that have a branch, agency or subsidiary in the United States. See "Foreign
Securities" for information concerning credit risks of foreign bank obligations.
Certain Municipal Obligations may be insured at the time of issuance as
to the timely payment of principal and interest. The insurance policies will
usually be obtained by the issuer of the Municipal Obligations at the time of
its original issuance. In the event that the issuer defaults on an interest or
principal payment, the insurer of the obligation is required to make payment to
the bondholders upon proper notification. There is, however, no guarantee that
the insurer will meet its obligations. In addition, such insurance will not
protect against market fluctuations caused by changes in interest rates and
other factors. Each of the Municipal Bond Funds may, from time to time, invest
more than 25% of its total assets in Municipal Obligations covered by insurance
policies.
For the purpose of the investment restrictions of each Fund, the
identification of the "issuer" of Municipal Obligations that are not general
obligation bonds is made by Boatmen's on the basis of the characteristics of the
obligation as described above, the most significant of which is the source of
funds for the payment of principal of and interest on such obligations.
An entire issue of Municipal Obligations may be purchased by one or a
small number of institutional investors such as one of the Municipal Bond Funds.
Unlike securities that must be registered under the Securities Act of 1933 prior
to offer and sale, unless an exemption from such registration is available,
Municipal Obligations that are not publicly offered may nevertheless be readily
marketable. A secondary market exists for Municipal Obligations that were not
publicly offered initially.
Securities purchased for each of the Municipal Bond Funds are subject
to the policy on holdings of securities that are not readily marketable.
Boatmen's determines whether a Municipal Obligation is readily marketable based
on whether it may be sold in a reasonable time consistent with the customs
B-6
<PAGE> 278
of the municipal markets (usually seven days) at a price (or interest rate)
which accurately reflects its value. Boatmen's believes that the quality
standards applicable to the Funds' investments enhance marketability. In
addition, standby commitments and demand obligations also enhance marketability.
Yields on Municipal Obligations depend on a variety of factors,
including municipal bond market conditions, the size of a particular offering,
the maturity of the obligation and the quality of the issue. Higher quality
Municipal Obligations tend to have a lower yield than lower quality obligations.
Municipal Obligations are subject to the provisions of bankruptcy, insolvency
and other laws affecting the rights and remedies of creditors, such as the
Federal Bankruptcy Code, and laws, if any, that may be enacted by Congress or
state legislatures extending the time for payment of principal or interest, or
both, or imposing other constraints upon enforcement of such obligations or
municipalities' power to levy taxes. Litigation or other conditions may
materially affect the power or ability of any issuer to pay when due principal
of and interest on its Municipal Obligations.
Each of the Municipal Bond Funds may also purchase resource recovery
bonds. The viability of the resource recovery project, environmental protection
regulations and project operator tax incentives may affect the value and credit
quality of resource recovery bonds.
Neither Municipal Bond Fund currently intends to invest in taxable
obligations; however, each Fund may from time to time invest a portion of its
assets in fixed-income obligations whose interest payments are subject to
federal income tax. Each Fund may invest in taxable obligations pending the
investment or reinvestment in Municipal Obligations of proceeds from sales of
Fund Shares or sales of portfolio securities. Each Fund may also invest in
highly liquid, taxable obligations to avoid the necessity of liquidating
portfolio investments to meet redemption requests by Fund Shareholders.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
the interest on Municipal Obligations.
For example, pursuant to federal tax legislation passed in 1986, interest on
certain private activity bonds must be included in an investor's federal
alternative minimum taxable income, and corporate investors must include all
tax-exempt interest in their federal alternative minimum taxable income. The
Trust cannot, of course, predict what legislation, if any, may be proposed in
the future as regards the income tax status of interest on Municipal
Obligations, or which proposals, if any, might be enacted. Such proposals, while
pending or if enacted, might materially and adversely affect the availability of
Municipal Obligations for investment by the Municipal Bond Funds and the
liquidity and value of those Funds' portfolios. In such an event, the Trust
would reevaluate the investment objectives and policies of the Municipal Bond
Funds and consider possible changes in their structure or possible dissolution.
STANDBY COMMITMENTS
In order to enhance the liquidity, stability or quality of Municipal
Obligations, each of the Municipal Bond Funds may acquire the right to sell a
security to another party at a guaranteed price and date. Such a right to resell
may be referred to as a put, demand feature or "standby commitment," depending
on its characteristics. The aggregate price that a Fund pays for securities with
standby commitments may be higher than the price that the Fund otherwise would
pay for the securities.
Standby commitments may involve letters of credit issued by domestic or
foreign banks supporting the other party's ability to purchase the security from
a Fund. The right to sell may be exercisable on demand or at specified
intervals, and may form part of a security or be acquired separately by the
Fund. In considering whether a security meets a Fund's quality standards,
Boatmen's will look to the creditworthiness of the party providing the Fund with
the right to sell as well as to the quality of the security itself.
No value is assigned to the standby commitments for purposes of
determining the Fund's net asset value. The cost of a standby commitment is
carried as unrealized depreciation from the time of
B-7
<PAGE> 279
purchase until it is exercised or expires. Because the value of a standby
commitment is dependent on the ability of the standby commitment writer to meet
its obligation to repurchase, each Fund's policy is to enter into standby
commitment transactions only with banks, brokers or dealers that represent a
minimal risk of default. The duration of standby commitments will not be a
factor in determining the average weighted maturity of a Fund. There is no
assurance that standby commitments will be available to a Fund, nor have the
Funds assumed that such commitments would continue to be available under all
market conditions.
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 liquid assets 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 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
Pilot Diversified Bond Income 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 Fund will be rated at least A or its equivalent 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.
B-8
<PAGE> 280
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.
FOREIGN SECURITIES
Pilot Intermediate U.S. Government Securities Fund and Pilot U.S.
Government Securities Fund (the "Government Funds") and Pilot Diversified Bond
Income Fund 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
B-9
<PAGE> 281
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.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Pilot Diversified Bond Income Fund and the Government 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.
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 liquid assets 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
B-10
<PAGE> 282
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.
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.
B-11
<PAGE> 283
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 may 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 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
B-12
<PAGE> 284
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 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 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.
B-13
<PAGE> 285
OTHER INVESTMENT COMPANIES
In seeking to attain its investment objective, each Fund may invest in
securities issued by other investment companies within the limits prescribed by
the 1940 Act. Each Fund currently intends to limit its investments so that, as
determined immediately after a securities purchase is made: (a) not more than 5%
of the value of its total assets will be invested in the securities of any one
investment company; (b) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group;
and (c) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Fund or by the Trust as a whole.
The Pilot Funds has received exemptive relief from the Securities and
Exchange Commission to permit each Fund to use cash reserves not invested in
portfolio securities to purchase shares of one or more of any existing or future
series of the Trust which holds itself out to the public as a money market fund
and is subject to the requirements of Rule 2a-7 under the Investment Company Act
of 1940, as amended (a "Money Market Fund"), and to permit each Money Market
Fund to sell and redeem its shares in transactions with each Fund. Pursuant to
this exemptive relief, each Fund may purchase shares of a Money Market Fund
without regard to the limits in the preceding paragraph provided the Fund's
aggregate investment in Money Market Funds does not exceed 25% of the Fund's
total assets. In addition, each Fund's investment in Money Market Funds will be
disregarded in determining compliance with the limitations in the preceding
paragraph.
As a shareholder of another investment company, each Fund bears, along
with other shareholders, its pro rata portion of the other investment company's
expenses, including advisory fees. These expenses are in addition to the
advisory and other expenses that the Fund bears in connection with its own
operations.
"STRIPPED SECURITIES"
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
B-14
<PAGE> 286
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
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 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.
OPTIONS ON SECURITIES AND INDICES
Each Fund may purchase and sell (write) both call and put options
listed on a national securities exchange and issued by the Options Clearing
Corporation as well as over-the-counter or OTC 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.
B-15
<PAGE> 287
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 an agreement with the
common party permitting the 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, 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
B-16
<PAGE> 288
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.
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.
B-17
<PAGE> 289
Options on futures contracts can be used by a 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 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 a 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 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, 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,
B-18
<PAGE> 290
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 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 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 assets 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 liquid
assets 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.
B-19
<PAGE> 291
INVESTMENT RESTRICTIONS
The Trust, on behalf of each Fund, has adopted fundamental investment
restrictions numbered 1 through 12 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 13 through 15 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 the 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.
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.
Pilot Intermediate U.S. Government Securities Fund, Pilot U.S.
Government Securities Fund, Pilot Intermediate Municipal Bond Fund, and Pilot
Municipal Bond Fund may not:
(8) Purchase securities of companies for the purpose of exercising
control.
B-20
<PAGE> 292
All Funds may not:
(9) Purchase securities of any one issuer (other than securities
issued or guaranteed by the U.S. Government, its agencies or
instrumentalists 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.
The Municipal Bond Funds may not:
(10) 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 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, (ii) instruments
issued by domestic branches of U.S. banks and (iii) repurchase
agreements secured by the instruments described in clauses (i)
and (ii); (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 according to
their services, for example, gas, gas transmission, electric
and gas, electric and telephone will each be considered a
separate industry.
Each Municipal Bond Fund may not:
(11) Invest less than 80% of its net assets in securities the
interest on which is exempt from federal income tax, except
during defensive periods or during periods of unusual market
conditions. For purposes of this fundamental policy, Municipal
Obligations that are subject to federal alternative minimum
tax are considered taxable.
Pilot Diversified Bond Income Fund and the Government Funds may not:
(12) 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. 9 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 according to
their services, for example, gas, gas transmission, electric
and gas, electric and telephone will each be considered a
separate industry.
B-21
<PAGE> 293
As a matter of non-fundamental policy, each Fund may not:
(13) 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.
(14) Lend its securities if collateral values are not continuously
maintained at no less than 100% by market to market daily.
(15) Purchase any security while borrowings in excess of 5% of net
assets are outstanding.
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.
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.
<TABLE>
<CAPTION>
Principal Occupation(s)
Name and Address Position(s) with Trust During Past 5 Years
- ---------------- ---------------------- -------------------
<S> <C> <C>
J. Hord Armstrong, III (55) Trustee Chairman and CEO, D&K
8000 Maryland Avenue Wholesale Drug, Inc., a
Suite 1190 distributor of pharmaceutical
St. Louis, Missouri 63105 products, since 1987.
Lee F. Fetter (43) Chairman Chief Operating and Financial
660 S. Euclid, Box 8003 Officer of Washington
St. Louis, Missouri 63110 University School of Medicine
since 1983.
Henry O. Johnston (59) Trustee President of Fordyce Four,
9650 Clayton Road Incorporated, a corporation
St. Louis, Missouri 63124 engaged in the acquisition and
management of personal
investments.
L. White Matthews, III (50) Trustee Executive Vice President of
Eighth and Eaton Avenues Finance since 1987, Union
Bethlehem, Pennsylvania 18018 Pacific Corporation, a company
engaged in transportation,
exploration and refining of
hydrocarbons, mining and real
estate.
</TABLE>
B-22
<PAGE> 294
<TABLE>
<CAPTION>
Principal Occupation(s)
Name and Address Position(s) with Trust During Past 5 Years
- ---------------- ---------------------- -------------------
<S> <C> <C>
Nicholas G. Penniman, IV (58) Trustee Publisher, St. Louis Post-
900 N. Tucker Boulevard Dispatch since 1986. Senior
St. Louis, Missouri 63101 Vice President of Pulitzer
Publishing Company since
1986.
William J. Tomko (37) President Senior Vice President, BISYS
3435 Stelzer Road Fund Services, Inc.
Columbus, Ohio 43219
W. Eugene Spurbeck (40) Vice President Manager, BISYS Fund Services,
3435 Stelzer Road Inc.
Columbus, Ohio 43219
Martin R. Dean (33) Treasurer Manager, Mutual Fund
3435 Stelzer Road Accounting, BISYS Fund
Columbus, Ohio 43219 Services, Inc. since May 1994.
Prior thereto, Senior Manager,
KPMG Peat Marwick.
GEORGE O. MARTINEZ (37) Secretary Senior Vice President and
3435 STELZER ROAD Director of Legal and
COLUMBUS, OHIO 43219 Compliance Services of BISYS
Fund Services, Inc. since April
1995. Prior thereto, Vice
President and Associate
General Counsel of Alliance
Capital Management, L.P.
Sheldon A. Jones (58) Assistant Secretary Partner of the law firm of
Ten Post Office Square South Dechert Price & Rhoads.
Boston, Massachusetts 02109
Alaina Metz (28) Assistant Secretary Employee of BISYS Fund
3435 Stelzer Road Services Limited Partnership
Columbus, Ohio 43219 since June 1995; prior thereto,
supervisor, Alliance Capital
Management, L.P.
Bruce Treff (30) Assistant Secretary Counsel, BISYS Fund Services,
3435 Stelzer Road Inc. since September 1995.
Columbus, Ohio 43219 Prior thereto, Manager, Alliance
Capital Management, L.P.
</TABLE>
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
B-23
<PAGE> 295
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, [as of __________________ , NationsBank
Corporation], Kleinwort Benson Investment Management Americas Inc. (investment
manager to Pilot 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, 1996.
COMPENSATION TABLE
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
TOTAL COMPENPENSION
PENSION OR ESTIMATED PENSION FROM
AGGREGATE RETIREMENT ANNUAL REGISTRANT AND
NAME OF COMPENSATION BENEFITS UPON BENEFITS UPON FUND COMPLEX
PERSON, POSITION FROM REGISTRANT RETIREMENT RETIREMENT PAID TO PERSONS
<S> <C> <C> <C> <C>
J. Hord Armstrong, III $26,000 0 0 $26,000
Lee F. Fetter (Chairman) $28,000 0 0 $28,000
Henry O. Johnston* $26,000 0 0 $26,000
L. White Matthews, III $26,000 0 0 $26,000
Nicholas G. Penniman, IV $26,000 0 0 $26,000
</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 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, 1996 distributed to or accrued
for the account of the non-interested Trustees (four persons) amounted to
approximately $106,000, which amount represented the total compensation paid by
the Funds to the Trustees during that year.
B-24
<PAGE> 296
INVESTMENT ADVISER, ADMINISTRATOR, DISTRIBUTOR AND TRANSFER AGENT
THE ADVISER
Boatmen's Trust Company, [a wholly-owned subsidiary of Nations Bank
Corporation as of ___________________], 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, NationsBank Corporation 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 .55 of 1% of the average daily net assets of each of
Pilot Diversified Bond Income Fund, Pilot Intermediate U.S. Government
Securities Fund, Pilot U.S. Government Securities Fund, Pilot Intermediate
Municipal Bond Fund and Pilot Municipal Bond Fund. Boatmen's has made additional
voluntary undertakings to waive their fees. For the periods ended August 31,
1996 and August 31, 1995, respectively, Boatman's received advisory fees (net of
waivers) in the amounts of $717,666, $555,098, $832,165 and $761,069,
and $340,310, $415,164, $547,737, and $498,166 for Pilot Intermediate U.S.
Government Securities Fund, Pilot U.S. Government Securities Fund, Pilot
Intermediate Municipal Bond Fund and Pilot Municipal Bond Fund, respectively.
For the same periods, Boatmen's waived fees and reimbursed expenses in the
amounts of $410,522, $215,525, $312,402 and $170,236, and $215,601,
$155,704, $225,063, and $109,745 for the same respective Funds. Pilot
Diversified Bond Income Fund commenced operations on October 21, 1996.
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
B-25
<PAGE> 297
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.
The Advisory Agreements for the Funds were approved by the Trustees,
including the "non-interested" Trustees, on October 22, 1996 and by the
shareholders of each Fund on December 18, 1996. Each Advisory Agreement will
remain in effect until May 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 BISYS 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, a wholly-owned subsidiary of The BISYS Group, Inc., which has
its principal offices at 3435 Stelzer Road, Columbus, Ohio 43219, 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
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.
B-26
<PAGE> 298
"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 voluntarily waive fees or
reimburse the Trust for expenses. For the period ended August 31, 1996, BISYS
voluntarily waived fees in the amounts of $10,698, $22,148, $10,387 and
$20,332, for Pilot Intermediate U.S. Government Securities Fund, Pilot U.S.
Government Securities Fund, Pilot Intermediate Municipal Bond Fund and Pilot
Municipal Bond Fund, respectively; and for the period ended August 31, 1995,
Concord Holding Corporation, an affiliate of BISYS and the Trust's former
Administrator, voluntarily waived fees in the amounts of $84,789, $103,393,
$103,532, and $100,185 for the same respective Funds. Pilot Diversified Bond
Income Fund commenced operations on October 21, 1996.
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 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' 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. For the Funds' fiscal periods ended August 31, 1996 and
August 31, 1995, respectively, Pilot Funds Distributors, Inc. received
$143,860 and $6,349 in underwriting commissions and retained $0
and $0.
B-27
<PAGE> 299
THE TRANSFER AGENT
BISYS Fund Services, Inc. (the "Transfer Agent"), a wholly-owned
subsidiary of The BISYS Group, Inc., located at 3435 Stelzer Road, Columbus,
Ohio 43219, serves as the Funds' transfer agent and dividend disbursing agent.
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 any relevant sub-custodian in
connection with redemptions, (iv) provide dividend crediting and certain
disbursing 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. For
the fiscal year ended August 31, 1996, the Transfer Agent received a fee of
$294,880 in its capacity as transfer agent. For the fiscal year September 1,
1994 through August 31, 1995, Primary Funds Service Corp., the Fund's former
transfer agent, received a fee of $178,800 for its services as transfer agent.
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
B-28
<PAGE> 300
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 Fund 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 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. For the fiscal years ended August 31, 1996 and August 31, 1995,
respectively, the portfolio turnover rates for the Funds were 73%, 87%, 12%, and
18%, and 87%, 132%, 8% and 10% for Pilot Intermediate U.S. Government Securities
Fund, Pilot U.S. Government Securities Fund, Pilot Intermediate Municipal Bond
Fund and Pilot Municipal Bond Fund, respectively. Pilot Diversified Bond Income
Fund commenced operations on October 31, 1996.
B-29
<PAGE> 301
For the fiscal years ended August 31, 1996 and August 31, 1995,
respectively, the brokerage commissions paid by the Funds were as follows:
<TABLE>
<CAPTION>
Total Amount of Brokerage
Total Total Brokerage Transactions on Commissions
Brokerage Commissions Which Paid to Brokers
Commissions Paid to Affiliated Commissions Providing
Paid Persons (1) Were Paid (2) Research
---- ----------- ------------- --------
<S> <C> <C> <C> <C>
Intermediate U.S.
Government
Securities Fund
- 1996 $ $ $ $
- 1995 $0 $0 $0 $0
Intermediate
Municipal Bond Fund
- 1996 $ $ $ $
- 1995 $0 $0 $0 $0
Municipal Bond Fund
- 1996 $ $ $ $
- 1995 $0 $0 $0 $0
</TABLE>
(1) Percentage of total commissions paid.
(2) Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
Pilot Diversified Bond Income Fund commenced operations on October 21,
1996.
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
B-30
<PAGE> 302
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.
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.
B-31
<PAGE> 303
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.
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.)
B-32
<PAGE> 304
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 Fund. 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 the 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.
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
B-33
<PAGE> 305
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.
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 each 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.
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
B-34
<PAGE> 306
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 other portfolios of
the Trust; 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
subject to applicable regulatory restrictions. 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.
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
B-35
<PAGE> 307
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 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 1997 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 of shares of any Fund and
may postpone payment for any period: (i) during which the New York Stock
Exchange is closed other than customary weekend and holiday closings or during
which trading on the New York Stock Exchange is restricted by applicable rules
and regulations of the Securities and Exchange Commission, (ii) when the SEC
determines that a state of emergency exists which may make payment or transfer
not reasonably
B-36
<PAGE> 308
practicable, (iii) as the SEC may by order permit for the protection of the
shareholders of the Funds, or (iv) at any other time when the Funds may, under
applicable laws and regulations, suspend payment on the redemption of its
shares. The Trust may also suspend or postpone the recordation of the transfer
of its shares under any of the foregoing circumstances.
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 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.
B-37
<PAGE> 309
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 CALCULATION
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 (4.00% for Pilot Diversified Bond Income Fund, Pilot Intermediate
Government Securities and Pilot Intermediate Municipal Bond Funds)) 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:
a-b
Yield = 2 [ ( - - - - + 1)6 - 1].
cd
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 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.
Interest earned on tax-exempt obligations that are issued without
original issue discount and have a current market discount is calculated by
using the coupon rate of interest instead of the yield to maturity. In the case
of tax-exempt obligations that are issued with original issue discount but
B-38
<PAGE> 310
which have discounts based on current market value that exceed the
then-remaining portion of the original issue discount (market discount), the
yield to maturity is the imputed rate based on the original issue discount
calculation. On the other hand, in the case of tax-exempt obligations that are
issued with original issue discount but which have the discounts based on
current market value that are less than the then-remaining portion of the
original issue discount (market premium), the yield to maturity is based on the
market value.
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.
The 30-day yield for each Fund as of August 31, 1996 was as follows:
<TABLE>
<CAPTION>
Class A Shares Class B Shares Pilot Shares
<S> <C> <C> <C>
Pilot U.S. Government Securities Fund 5.26% 4.68% 5.76%
Pilot Intermediate U.S. Government 5.27% N/A 5.74%
Securities Fund
Pilot Municipal Bond Fund 4.37% 3.82% 4.83%
Pilot Intermediate Municipal Bond Fund 3.53% N/A 3.93%
</TABLE>
The "tax-equivalent" yield of each Municipal Bond Fund for a particular
share class is computed by (a) dividing the portion of the Fund's yield for a
particular class (calculated as above) that is exempt from federal income taxes
by one minus a stated federal income tax rate; and (b) adding the quotient to
that portion, if any, of such yield that is not exempt from federal income tax.
The tax-equivalent yield for each Fund as of August 31, 1996 was as
follows:
<TABLE>
<CAPTION>
Class A Shares Class B Shares Pilot Shares
<S> <C> <C> <C>
Pilot Municipal Bond Fund 7.24% 6.34% 8.00%
Pilot Intermediate Municipal Bond 5.88% N/A 6.51%
Fund
</TABLE>
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:
B-39
<PAGE> 311
ERV
T = [ ( - - - - ) 1/n - 1]
P
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:
ERV
aggregate total return = [ ( - - - - - 1 )].
P
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, yield and tax
equivalent 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.
B-40
<PAGE> 312
The aggregate total return for each of the Funds since its inception as
of August 31, 1996 was as follows:
<TABLE>
<CAPTION>
Class A Shares Class B Shares Pilot Shares
<S> <C> <C> <C>
Pilot U.S. Government Securities 9.11% 15.01% 22.11%
Fund
Pilot Intermediate U.S. Government 8.38% N/A 14.10%
Securities Fund
Pilot Municipal Bond Fund 7.05% 10.34% 18.10%
Pilot Intermediate Municipal Bond 9.29% N/A 12.91%
Fund
</TABLE>
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 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.
B-41
<PAGE> 313
The Trust intends that the Municipal Bond Funds will each qualify under
the Code to pay "exempt-interest dividends" to their respective shareholders. A
Municipal Bond Fund will be so qualified if, at the close of each quarter of its
taxable year, at least 50% of the value of its total assets consists of
securities on which the interest payments are exempt from federal income tax. To
the extent that dividends distributed by a Fund to each of its shareholders are
derived from interest income exempt from federal income tax and are designated
as "exempt-interest dividends" by the Fund, they will be excludable from the
gross income of the shareholders for federal income tax purposes.
"Exempt-interest dividends," however, must be taken into account by shareholders
in determining whether their total income is large enough to result in taxation
of up to one-half (85%, for taxable years beginning after 1993) of their social
security benefits and certain railroad retirement benefits. It should also be
noted that tax-exempt interest on private activity bonds in which each of the
Municipal Bond Funds may invest generally is treated as a tax preference item
for purposes of the alternative minimum tax for corporate and individual
shareholders. Each Municipal Bond Fund will inform its respective shareholders
annually as to the portion of the distributions from the Fund which constituted
"exempt-interest dividends."
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
B-42
<PAGE> 314
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.
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.
B-43
<PAGE> 315
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.
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. Furthermore, a loss realized by a shareholder on the redemption,
sale or exchange of shares in each of the Municipal Bond Funds with respect to
which exempt-interest dividends have been paid will, to the extent of such
exempt-interest dividends, be disallowed if such shares have been held by the
shareholders for less than six months.
Under the Code, a shareholder may not deduct that portion of interest
on indebtedness incurred or continued to purchase or carry shares of an
investment company paying exempt-interest dividends (such as the shares of each
of the Municipal Bond Funds) which bears the same ratio to the total of such
interest as the exempt-interest dividends bear to the total dividends (excluding
net capital gain dividends) received by the shareholder. In addition, under
rules issued by the Internal Revenue Service for determining when borrowed funds
are considered to be used to purchase or carry particular assets, the purchase
of shares may be considered to have been made with borrowed funds even though
the borrowed funds are not directly traceable to such purchase.
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
B-44
<PAGE> 316
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.
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.
In certain states, distributions made by each of the Municipal Bond
Funds which are derived from interest on obligations of that state or any
municipality or political subdivision thereof may be exempt from taxation.
B-45
<PAGE> 317
Shareholders are advised to consult their own tax advisers with respect
to the particular tax consequences to them of an investment in a Fund. Persons
who may be "substantial users" or "related persons" of substantial users) of
facilities financed by industrial development bonds should consult their tax
advisers before purchasing units of the Municipal Bond Funds. The term
"substantial user" generally includes any "non-exempt person" who regularly uses
in his or her trade or business a part of a facility financed by industrial
development bonds. Generally, an individual will not be a "related person" of a
substantial user under the Code unless the person or his or her immediate family
owns directly or indirectly in the aggregate more than a 50% equity interest in
the substantial user.
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, five of which are offered herein and known as Pilot Diversified
Bond Income Fund, Pilot Intermediate U.S. Government Securities Fund, Pilot U.S.
Government Securities Fund, Pilot Intermediate Municipal Bond Fund and Pilot
Municipal Bond 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 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
B-46
<PAGE> 318
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. [CHECK W/ERIC]
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 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
B-47
<PAGE> 319
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, 100 North Broadway, St. Louis, Missouri
63178-4737 is the custodian of the Funds' assets.
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.
MISCELLANEOUS
The following table indicates each additional person known by the Fund
to own beneficially 5% or more of each Pilot Fund listed below as of October 23,
1996.
<TABLE>
<CAPTION>
Name and Address Percent of Total Outstanding Shares
---------------- -----------------------------------
<S> <C>
PILOT U.S. GOVERNMENT SECURITIES FUND -
Sovers Charitable Trust 9.67%
c/o Boatmen's Trust Company
100 North Broadway
St. Louis, Missouri 63178
PILOT DIVERSIFIED BOND INCOME FUND -
Boatmen's Bancshares Ret. Pl. 7.36%
100 North Broadway
St. Louis, Missouri 63178
</TABLE>
B-48
<PAGE> 320
PILOT MUNICIPAL BOND FUND -
Boatmen's Trust Company Investment 7.72%
100 North Broadway
St. Louis, Missouri 63178
B-49
<PAGE> 321
APPENDIX
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.
- --------
(1) The ratings indicated herein are believed to be the most recent
ratings available at the date of this Statement of Additional
Information for the securities listed. 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, and the ratings indicated do not necessarily represent ratings
which will be given to these securities on the date of the Funds'
taxable year ends.
A-1
<PAGE> 322
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 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.
- --------
(2) Rates all governmental bodies having $1,000,000 or more of debt
outstanding, unless adequate information is not available.
A-2
<PAGE> 323
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.
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.
A-3
<PAGE> 324
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-4
<PAGE> 325
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-5
<PAGE> 326
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-6
<PAGE> 327
THE PILOT FUNDS
3435 Stelzer Road
Columbus, Ohio 43219
STATEMENT OF ADDITIONAL INFORMATION
December 31, 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, four of which
portfolios (the "Funds") are offered hereby. The Funds are:
Pilot Growth and Income Fund;
Pilot Equity Income Fund;
Pilot Growth Fund; and
Pilot Small Capitalization 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 affiliate, BISYS Fund Services L.P. ("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 December 31, 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> 328
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Investment Policies And Practices Of The Funds...................... B -
Investment Restrictions............................................. B -
Trustees And Officers............................................... B -
Investment Adviser, Administrator, Distributor And Transfer Agent .. B -
Portfolio Transactions.............................................. B -
Net Asset Value..................................................... B -
Matters Relating to Class A Shares and Class B Shares............... B -
Additional Purchase and Redemption Information...................... B -
Calculation Of Performance Quotations............................... B -
Tax Information..................................................... B -
Organization And Capitalization..................................... B -
Custodian........................................................... B -
Independent Accountants And Counsel................................. B -
Miscellaneous....................................................... B -
Appendix............................................................ A - 1
Financial Statements................................................ F - 1
</TABLE>
B-2
<PAGE> 329
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> 330
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
limitations with respect to investments in foreign securities.
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 liquid
B-4
<PAGE> 331
assets 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 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
The Funds 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 Growth and Income and
Equity Income Funds will be rated at least investment grade 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 Equity Funds 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
B-5
<PAGE> 332
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.
FOREIGN SECURITIES
Each Fund 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.
B-6
<PAGE> 333
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Each Fund 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.
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 liquid assets 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.
B-7
<PAGE> 334
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.
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 may 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.
B-8
<PAGE> 335
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 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 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.
B-9
<PAGE> 336
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 Equity Funds) 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.
OTHER INVESTMENT COMPANIES
In seeking to attain its investment objective, each Fund may invest in
securities issued by other investment companies within the limits prescribed by
the 1940 Act. Each Fund currently intends to limit its investments so that, as
determined immediately after a securities purchase is made: (a) not more than 5%
of the value of its total assets will be invested in the securities of any one
investment company; (b) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group;
and (c) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Fund or by the Trust as a whole.
The Pilot Funds has received exemptive relief from the Securities and
Exchange Commission to permit each Fund to use cash reserves not invested in
portfolio securities to purchase shares of one or more of any existing or future
series of the Trust which holds itself out to the public as a money market fund
and is subject to the requirements of Rule 2a-7 under the Investment Company Act
of 1940, as amended (a "Money Market Fund"), and to permit each Money Market
Fund to sell and redeem its shares in transactions with each Fund. Pursuant to
this exemptive relief, each Fund may purchase shares of a Money Market Fund
without regard to the limits in the preceding paragraph provided the Fund's
aggregate investment in Money Market Funds does not exceed 25% of the Fund's
total assets. In addition, each Fund's investment in Money Market Funds will be
disregarded in determining compliance with the limitations in the preceding
paragraph.
As a shareholder of another investment company, each Fund bears, along
with other shareholders, its pro rata portion of the other investment company's
expenses, including advisory fees. These expenses are in addition to the
advisory and other expenses that the Fund bears in connection with its own
operations.
"STRIPPED SECURITIES"
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
B-10
<PAGE> 337
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
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 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
B-11
<PAGE> 338
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 a national securities exchange and issued by the Options Clearing
Corporation as well as over-the-counter or OTC 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 an agreement with the
counterparty permitting the 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.
B-12
<PAGE> 339
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, 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.
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
B-13
<PAGE> 340
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 a 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 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 a 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.
B-14
<PAGE> 341
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 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, 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 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 either segregating assets
B-15
<PAGE> 342
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 assets 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 liquid
assets 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 12 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 13 through 15 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 the 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-16
<PAGE> 343
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.
As a matter of fundamental policy, Equity Income Fund, Growth and
Income Fund, and Growth Fund may not:
(6) Purchase or sell commodity contracts.
As a matter of fundamental policy, Small Capitalization Equity Fund may
not:
(7) Purchase or sell commodity contracts (except to the extent
permitted by the Fund's investment objectives and policies).
(8) 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.
As a matter of fundamental policy, Equity Income Fund, Growth and
Income Fund, and Small Capitalization Equity Fund may not:
(9) Purchase securities of companies for the purpose of exercising
control.
As a matter of fundamental policy, each Fund may not:
(10) Purchase securities of any one issuer (other than securities
issued or guaranteed by the U.S. Government, its agencies or
instrumentalists 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
B-17
<PAGE> 344
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.
As a matter of fundamental policy, Equity Income Fund, Growth and
Income Fund, and Small Capitalization Equity Fund may not:
(11) 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. 10 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 according to
their services, for example, gas, gas transmission, electric
and gas, electric and telephone will each be considered a
separate industry.
(12) 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 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, (ii) instruments
issued by domestic branches of U.S. banks and (iii) repurchase
agreements secured by the instruments described in clauses (i)
and (ii); (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 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:
(13) 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.
(14) Lend its securities if collateral values are not continuously
maintained at no less than 100% by market to market daily.
(15) Purchase any security while borrowings in excess of 5% of net
assets are outstanding.
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.
B-18
<PAGE> 345
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.
<TABLE>
<CAPTION>
Principal Occupation(s)
Name and Address Position(s) with Trust During Past 5 Years
- ---------------- ---------------------- -------------------
<S> <C> <C>
J. Hord Armstrong, III (55) Trustee Chairman and CEO, D&K
8000 Maryland Avenue Wholesale Drug, Inc., a
Suite 1190 distributor of pharmaceutical
St. Louis, Missouri 63105 products, since 1987.
Lee F. Fetter (43) Chairman Chief Operating and Financial
660 S. Euclid, Box 8003 Officer of Washington
St. Louis, Missouri 63110 University School of Medicine
since 1983.
Henry O. Johnston (59) Trustee President of Fordyce Four,
9650 Clayton Road Incorporated, a corporation
St. Louis, Missouri 63124 engaged in the acquisition and
management of personal
investments.
L. White Matthews, III (50) Trustee Executive Vice President of
Eighth and Eaton Avenues Finance since 1987, Union
Bethlehem, Pennsylvania 18018 Pacific Corporation, a company
engaged in transportation,
exploration and refining of
hydrocarbons, mining and real
estate.
Nicholas G. Penniman, IV (58) Trustee Publisher, St. Louis Post-
900 N. Tucker Boulevard Dispatch since 1986. Senior
St. Louis, Missouri 63101 Vice President of Pulitzer
Publishing Company since
1986.
William J. Tomko (37) President Senior Vice President, BISYS
3435 Stelzer Road Fund Services, Inc.
Columbus, Ohio 43219
W. Eugene Spurbeck (40) Vice President Manager, BISYS Fund Services,
3435 Stelzer Road Inc.
Columbus, Ohio 43219
Martin R. Dean (33) Treasurer Manager, Mutual Fund
3435 Stelzer Road Accounting, BISYS Fund
Columbus, Ohio 43219 Services, Inc. since May 1994.
Prior thereto, Senior Manager,
KPMG Peat Marwick.
</TABLE>
B-19
<PAGE> 346
<TABLE>
<CAPTION>
Principal Occupation(s)
Name and Address Position(s) with Trust During Past 5 Years
- ---------------- ---------------------- -------------------
<S> <C> <C>
George O. Martinez (37) Secretary Senior Vice President and
3435 Stelzer Road Director of Legal and
Columbus, Ohio 43219 Compliance Services of BISYS
Fund Services, Inc. since April
1995. Prior thereto, Vice
President and Associate
General Counsel of Alliance
Capital Management, L.P.
Sheldon A. Jones (58) Assistant Secretary Partner of the law firm of
Ten Post Office Square South Dechert Price & Rhoads.
Boston, Massachusetts 02109
Alaina Metz (28) Assistant Secretary Employee of BISYS Fund
3435 Stelzer Road Services Limited Partnership
Columbus, Ohio 43219 since June 1995; prior thereto,
supervisor, Alliance Capital
Management, L.P.
Bruce Treff (30) Assistant Secretary Counsel, BISYS Fund Services,
3435 Stelzer Road Inc. since September 1995.
Columbus, Ohio 43219 Prior thereto, Manager, Alliance
Capital Management, L.P.
</TABLE>
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, [as of , NationsBank Corporation],
Kleinwort Benson Investment Management Americas Inc. (investment manager to
Pilot 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.
B-20
<PAGE> 347
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, 1996.
COMPENSATION TABLE
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
TOTAL COMPENPENSION
PENSION OR ESTIMATED FROM
AGGREGATE RETIREMENT ANNUAL PENSION OR REGISTRANT AND
NAME OF COMPENSATION BENEFITS UPON BENEFITS UPON FUND COMPLEX
PERSON, POSITION FROM REGISTRANT RETIREMENT RETIREMENT PAID TO PERSONS
<S> <C> <C> <C> <C>
J. Hord Armstrong, III $26,000 0 0 $26,000
Lee F. Fetter (Chairman) $28,000 0 0 $28,000
Henry O. Johnston* $26,000 0 0 $26,000
L. White Matthews, III $26,000 0 0 $26,000
Nicholas G. Penniman, IV $26,000 0 0 $26,000
</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 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, 1996 distributed to or accrued
for the account of the non-interested Trustees (four persons) amounted to
approximately $106,000, 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 wholly-owned subsidiary of NationsBank
Corporation as of ], 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, [NationsBank Corporation], 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
B-21
<PAGE> 348
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 each of
Pilot Small Capitalization Equity Fund, Pilot Growth Fund, Pilot Growth and
Income Fund and Pilot Equity Income Fund. Boatmen's has made additional
voluntary undertakings to waive their fees. For the period ended August 31,
1995, Boatman's received advisory fees (net of waivers) in the amounts of
[$325,447] for Pilot Growth and Income Fund and [$331,383] for Pilot Equity
Income Fund, and for the fiscal period ended August 31, 1996, it received
$310,841, $1,184,210, and $910,255 for Pilot Small Capitalization Equity Fund,
Pilot Growth and Income Fund, and Pilot Equity Income Fund, respectively. For
the fiscal period ended August 31, 1996 Boatmen's waived and reimbursed
$131,964, $395,403 and $314,789 for Pilot Small Capitalization Equity Fund,
Pilot Growth and Income Fund and Pilot Equity Income Fund respectively. For the
fiscal period ended August 31, 1995, Boatmen's waived fees and reimbursed
expenses in the amounts of [$211,618] and [$198,417] for Pilot Growth and Income
Fund and Pilot Equity Income Fund respectively. Pilot Growth Fund and Pilot
Small Capitalization Equity Fund commenced operations on October 21, 1996 and
December 12, 1995, respectively.
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.
The Advisory Agreements for the Funds were approved by the Trustees,
including the "non-interested" Trustees, on October 22, 1996 and by the
shareholders of each Fund on December 18, 1996. Each Advisory Agreement will
remain in effect until May 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,
B-22
<PAGE> 349
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 BISYS 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, a wholly-owned subsidiary of The BISYS Group, Inc., which has
its principal offices as 3435 Stelzer Road, Columbus, Ohio 43219, 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
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 voluntarily waive fees or
reimburse the Trust for expenses. For the period ended August 31, 1996, BISYS
voluntarily waived fees in the amounts of [$34,284], [$28,203] and [$40,985],
for Pilot Small Capitalization Equity Fund, Pilot Growth and Income Fund, and
Pilot Equity Income Fund, respectively; and for the period ended August 31,
1995, Concord Holding Corporation, an affiliate of BISYS and the Trust's former
Administrator, voluntarily waived fees in the amounts of $79,443, and $78,905
for Pilot Growth and Income Fund and Pilot Equity Income Fund, respectively.
Pilot Growth Fund and Pilot Small Capitalization Equity Fund commenced
operations on October 21, 1996 and December 12, 1995, respectively.
B-23
<PAGE> 350
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 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' 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. For the Funds' fiscal periods ended August 31, 1996 and
August 31, 1995, respectively, Pilot Funds Distributors, Inc. received [$_____]
and $6,349 in underwriting commissions and retained [$_____] and $0.
THE TRANSFER AGENT
BISYS Fund Services, Inc. (the "Transfer Agent"), a wholly-owned
subsidiary of The BISYS Group, Inc., located at 3435 Stelzer Road, Columbus,
Ohio 43219, serves as the Funds' transfer agent and dividend disbursing agent.
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 any relevant sub-custodian in
connection with redemptions, (iv) provide dividend crediting and certain
disbursing 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. For
the fiscal year ended August 31, 1996, the Transfer Agent received a fee of
[$215,939] in its capacity as transfer agent. For the fiscal year September 1,
1994 through August 31, 1995, Primary Funds Service Corp., the Fund's former
transfer agent, received a fee of $178,800 for its services as transfer agent.
B-24
<PAGE> 351
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 Fund 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 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
B-25
<PAGE> 352
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. For the fiscal year ended August 31, 1995, the portfolio turnover
rates were 28% for Pilot Growth and Income Fund and 37% for Pilot Equity
Income Fund and for the fiscal year ended August 31, 1996, portfolio turnover
rates were 31%, 37%, and 34% for Pilot Small Capitalization Equity Fund,
Pilot Growth and Income Fund, and Pilot Equity Income Fund, respectively.
Pilot Growth Fund and Pilot Small Capitalization Equity Fund commenced
operations on October 21, 1996 and December 12, 1995, respectively.
For the fiscal years ended August 31, 1996 and August 31, 1995,
respectively, the brokerage commissions paid by the Funds were as follows:
<TABLE>
<CAPTION>
Total Amount of Brokerage
Total Total Brokerage Transactions on Commissions
Brokerage Commissions Which Paid to Brokers
Commissions Paid to Affiliated Commissions Providing
Paid Persons (1) Were Paid (2) Research
---- ----------- ------------- --------
<S> <C> <C> <C> <C>
Growth and Income
Fund
- 1996 $ $ $ $
- 1995 $97,007 $0 $78,300,728 $42,089
Equity Income Fund
- 1996 $ $ $ $
- 1995 $88,938 $0 $59,960,082 $21,034
Small Capitalization
Equity Fund
- 1996 $ $ $ $
</TABLE>
(1) Percentage of total commissions paid.
(2) Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
Pilot Growth Fund and Pilot Small Capitalization Equity Fund commenced
operations on October 21, 1996 and December 12, 1995, respectively.
B-26
<PAGE> 353
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.
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.
B-27
<PAGE> 354
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.
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
B-28
<PAGE> 355
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 Fund. 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 the 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.
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
B-29
<PAGE> 356
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.
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 each 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.
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
B-30
<PAGE> 357
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 other portfolios of
the Trust; 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
subject to applicable regulatory restrictions. 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.
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.
B-31
<PAGE> 358
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 involved; or "a qualified group" which has
been organized for the purpose of buying redeemable securities of a registered
investment company at a
B-32
<PAGE> 359
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 1997 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 of shares of any Fund and
may postpone payment for any period: (i) during which the New York Stock
Exchange is closed other than customary weekend and holiday closings or during
which trading on the New York Stock Exchange is restricted by applicable rules
and regulations of the Securities and Exchange Commission, (ii) when the SEC
determines that a state of emergency exists which may make payment or transfer
not reasonably practicable, (iii) as the SEC may by order permit for the
protection of the shareholders of the Funds, or (iv) at any other time when the
Funds may, under applicable laws and regulations, suspend payment on the
redemption of its shares. The Trust may also suspend or postpone the recordation
of the transfer of its shares under any of the foregoing circumstances.
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.
B-33
<PAGE> 360
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 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 CALCULATION
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) 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:
a-b
Yield = 2 [ ( - - - - + 1)6 - 1].
cd
B-34
<PAGE> 361
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 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.
Interest earned on tax-exempt obligations that are issued without
original issue discount and have a current market discount is calculated by
using the coupon rate of interest instead of the yield to maturity. In the case
of tax-exempt obligations that are issued with original issue discount but which
have discounts based on current market value that exceed the then-remaining
portion of the original issue discount (market discount), the yield to maturity
is the imputed rate based on the original issue discount calculation. On the
other hand, in the case of tax-exempt obligations that are issued with original
issue discount but which have the discounts based on current market value that
are less than the then-remaining portion of the original issue discount (market
premium), the yield to maturity is based on the market value.
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.
The 30-day yield for each Fund as of August 31, 1996 was as follows:
<TABLE>
<CAPTION>
Class A Shares Class B Shares Pilot Shares
<S> <C> <C> <C>
Pilot Small Capitalization Equity Fund 0.71% 0.01% 0.99%
Pilot Equity Income Fund 2.92% 2.29% 3.32%
Pilot Growth and Income Fund 1.40% 0.73% 1.72%
</TABLE>
B-35
<PAGE> 362
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:
ERV
T = [ ( - - - - ) 1/n - 1]
P
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:
ERV
aggregate total return = [ ( - - - - - 1 )].
P
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, yield and tax
equivalent 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.
B-36
<PAGE> 363
The aggregate total return for each of the Funds since its inception as
of August 31, 1996 was as follows:
<TABLE>
<CAPTION>
Class A Shares Class B Shares Pilot Shares
<S> <C> <C> <C>
Pilot Growth and Income Fund 23.29% 28.24% 36.30%
Pilot Equity Income Fund 25.06% 31.34% 35.93%
Pilot Small Capitalization Equity Fund 2.09% 2.15% 7.37%
</TABLE>
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 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.
The Trust intends that the Municipal Bond Funds will each qualify under
the Code to pay "exempt-interest dividends" to their respective shareholders. A
Municipal Bond Fund will be so qualified if, at the close of each quarter of its
taxable year, at least 50% of the value of its total assets consists of
securities on which the interest payments are exempt from federal income tax. To
the extent that dividends distributed by a Fund to each of its shareholders are
derived from interest income
B-37
<PAGE> 364
exempt from federal income tax and are designated as "exempt-interest dividends"
by the Fund, they will be excludable from the gross income of the shareholders
for federal income tax purposes. "Exempt-interest dividends," however, must be
taken into account by shareholders in determining whether their total income is
large enough to result in taxation of up to one-half (85%, for taxable years
beginning after 1993) of their social security benefits and certain railroad
retirement benefits. It should also be noted that tax-exempt interest on private
activity bonds in which each of the Municipal Bond Funds may invest generally is
treated as a tax preference item for purposes of the alternative minimum tax for
corporate and individual shareholders. Each Municipal Bond Fund will inform its
respective shareholders annually as to the portion of the distributions from the
Fund which constituted "exempt-interest dividends."
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
B-38
<PAGE> 365
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.
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,
B-39
<PAGE> 366
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.
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. Furthermore, a loss realized by a shareholder on the redemption,
sale or exchange of shares in each of the Municipal Bond Funds with respect to
which exempt-interest dividends have been paid will, to the extent of such
exempt-interest dividends, be disallowed if such shares have been held by the
shareholders for less than six months.
Under the Code, a shareholder may not deduct that portion of interest
on indebtedness incurred or continued to purchase or carry shares of an
investment company paying exempt-interest dividends (such as the shares of each
of the Municipal Bond Funds) which bears the same ratio to the total of such
interest as the exempt-interest dividends bear to the total dividends (excluding
net capital gain dividends) received by the shareholder. In addition, under
rules issued by the Internal Revenue Service for determining when borrowed funds
are considered to be used to purchase or carry particular assets, the purchase
of shares may be considered to have been made with borrowed funds even though
the borrowed funds are not directly traceable to such purchase.
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
B-40
<PAGE> 367
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.
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.
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
B-41
<PAGE> 368
to create and classify shares of beneficial interest in separate series
("Funds") without further action by shareholders. The Trustees have established
fourteen Funds, four of which are offered herein and known as Pilot Growth and
Income Fund, Pilot Equity Income Fund, Pilot Growth Fund and Pilot Small
Capitalization Equity 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 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.
B-42
<PAGE> 369
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. [CHECK W/ERIC WHO TO SPEAK WITH IN TA TO VERIFY
THIS SENTENCE]
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 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, 100 North Broadway, St. Louis, Missouri
63178-4737 is the custodian of the Funds' assets.
B-43
<PAGE> 370
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.
MISCELLANEOUS
The following table indicates each additional person known by the Fund
to own beneficially 5% or more of each Pilot Fund listed below as of October 23,
1996.
Name and Address Percent of Total Outstanding Shares of Class
---------------- --------------------------------------------
PILOT GROWTH FUND
BOATMEN'S BANKSHARES RET PL 7.30%
PILOT GROWTH AND INCOME FUND
(NONE)
PILOT EQUITY INCOME FUND
(NONE)
PILOT SMALL CAPITALIZATION EQUITY FUND
S WOODS TRUST FOR
MRS. McCLENDON 6.24%
B-44
<PAGE> 371
APPENDIX
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.
- --------
(1) The ratings indicated herein are believed to be the most recent
ratings available at the date of this Statement of Additional
Information for the securities listed. 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, and the ratings indicated do not necessarily represent ratings
which will be given to these securities on the date of the Funds'
taxable year ends.
A-1
<PAGE> 372
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 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.
- --------
(2) Rates all governmental bodies having $1,000,000 or more of debt
outstanding, unless adequate information is not available.
A-2
<PAGE> 373
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.
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
A-3
<PAGE> 374
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-4
<PAGE> 375
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-5
<PAGE> 376
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-6
<PAGE> 377
THE PILOT FUNDS
3435 Stelzer Road
Columbus, Ohio 43219-3035
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 31, 1996
PILOT SHARES, CLASS A SHARES AND CLASS B SHARES
The Pilot Funds (the "Funds" or the "Trust") is an open-end, management
investment company (or mutual fund) consisting of fourteen portfolios, one of
which portfolios (the "Fund") is offered hereby. The Fund is:
Pilot International Equity Fund (formerly Pilot Kleinwort Benson
International Equity Fund).
Boatmen's Trust Company ("Boatmen's") serves as the investment adviser
to the Fund. Kleinwort Benson Investment Management Americas Inc., formerly
Kleinwort Benson International Investment Limited, ("Kleinwort Benson") serves
as the investment manager to the Pilot International Equity Fund. Pilot Funds
Distributors, Inc. ("PFD") serves as the Fund's distributor, and its affiliate,
BISYS Fund Services Limited Partnership ("BISYS"), serves as the Fund's
administrator.
This Statement of Additional Information is not a Prospectus, should be
read in conjunction with the Fund's current Prospectuses with respect to Pilot
Shares, Class A Shares and Class B Shares of the Fund 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 Fund 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.
<PAGE> 378
TABLE OF CONTENTS
INVESTMENT POLICIES AND PRACTICES OF THE FUND..................................
U.S. Government Securities............................................
Custodial Receipts....................................................
Corporate Debt Securities.............................................
U.S. and Foreign Bank Obligations.....................................
Forward Commitments and When-Issued Securities........................
REITs.................................................................
Convertible Securities................................................
Foreign Securities....................................................
Forward Foreign Currency Exchange Contracts...........................
Currency Swaps........................................................
Repurchase Agreements.................................................
Lending of Portfolio Securities.......................................
Other Investment Companies............................................
Options on Securities and Indexes.....................................
Options on Currencies.................................................
Futures Contracts on Securities and Indexes...........................
Futures Contracts on Foreign Currencies...............................
Options on Futures Contracts..........................................
Limitations on Use of Futures Transactions and Risk Considerations....
Restricted and Other Illiquid Securities..............................
Risks of Specialized Investment Techniques Abroad.....................
Combined Transactions.................................................
Use of Segregated and Other Special Accounts..........................
Other Information.....................................................
INVESTMENT RESTRICTIONS........................................................
Other Investment Policies.............................................
TRUSTEES AND OFFICERS..........................................................
INVESTMENT ADVISER, MANAGER, ADMINISTRATOR,
DISTRIBUTOR AND TRANSFER AGENT...............................................
The Adviser and Manager...............................................
The Administrator.....................................................
The Distributor.......................................................
The Transfer Agent....................................................
PORTFOLIO TRANSACTIONS.........................................................
NET ASSET VALUE................................................................
MATTERS RELATING TO CLASS A SHARES AND CLASS B SHARES..........................
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.................................
Supplementary Redemption Information..................................
Exchange Privilege....................................................
Right of Accumulation and Statement of Information....................
Miscellaneous.........................................................
In Kind Purchases.....................................................
Redemptions in Kind...................................................
- 2 -
<PAGE> 379
CALCULATION OF PERFORMANCE QUOTATIONS.........................................
TAX INFORMATION...............................................................
State and Local......................................................
ORGANIZATION AND CAPITALIZATION...............................................
Shareholder and Trustee Liability....................................
CUSTODIAN AND SUBCUSTODIANS...................................................
INDEPENDENT ACCOUNTANTS AND COUNSEL...........................................
MISCELLANEOUS.................................................................
FINANCIAL STATEMENTS..........................................................
APPENDIX......................................................................
DESCRIPTION OF COMMERCIAL PAPER RATINGS.......................................
- 3 -
<PAGE> 380
INVESTMENT POLICIES AND PRACTICES OF THE FUND
The following discussion elaborates on the description of the Fund's
investment policies and practices contained in the Prospectus. 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 SECURITIES
The Fund may invest in U.S. Government securities. Securities
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 securities 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. Securities 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
The 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
The Fund may invest in short-term and intermediate-term corporate debt
securities of both foreign and domestic issuers of all types and maturities,
such as bonds, debentures, notes, equipment lease certificates, equipment trust
certificates, conditional sales contracts 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).
Corporate debt securities purchased by the Fund, if any, will be rated
in the top two categories by a Nationally Recognized Statistical Rating
Organization ("NRSRO") or, if unrated, determined to be of equivalent quality by
Kleinwort Benson. Consistent with prudent investment management, if the rating
of any corporate debt security held by the Fund falls below such ratings then
consideration shall be given as to whether it should be sold. A description of
these ratings is attached in an Appendix to this Statement of Additional
Information.
- 4 -
<PAGE> 381
U.S. AND FOREIGN BANK OBLIGATIONS
These obligations include negotiable certificates of deposit, banker's
acceptances and fixed time deposits. The 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. The 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 the 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 the
Fund's right to transfer a beneficial interest in the deposit to a third party.
The Fund will limit its investment in securities of foreign banks in
accordance with Section 12 of the Investment Company Act of 1940 (the "1940
Act"), the applicable rules thereunder and interpretations thereof of the staff
of the Securities and Exchange Commission (the "SEC").
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES
The Fund may purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis. These transactions involve a
commitment by the 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 transactions are negotiated directly with the other
party, and such commitments are not traded on exchanges.
The Fund will purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment 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, the Fund may
dispose of or renegotiate a commitment after entering into it. The Fund also may
sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. The Fund may realize a capital
gain or loss in connection with these transactions.
When the Fund purchases securities on a when-issued or forward
commitment basis, the Fund's custodian or subcustodian will maintain in a
segregated account liquid assets having a value (determined daily) at least
equal to the amount of the Fund's purchase commitments. In the case of a forward
commitment 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 ensure that the Fund will maintain sufficient assets at all times to
cover its obligations under when-issued purchases and forward commitments.
REITS
Securities issued by real estate investment trusts (REITs) bear certain
unique risks. These include the same market risks as those affecting the real
estate industry, such as fluctuations in interest rates and changes in tax laws.
REITs' underlying assets are illiquid and often not diversified, and REITs are
highly dependent upon management skill. REITs also are subject to heavy cash
flow dependency, defaults by borrowers, self-liquidation and the possibility of
failing to qualify for special tax treatment and other regulatory exemptions.
For so long as it remains a restriction of the Wisconsin Securities Department,
the Funds may not purchase securities issued by REITs in excess of 10% of the
Fund's total assets.
CONVERTIBLE SECURITIES
- 5 -
<PAGE> 382
The 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 Fund will be rated in
the top two categories by an NRSRO or, if unrated, determined by Kleinwort
Benson 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.
FOREIGN SECURITIES
Foreign securities curtail risks different from those associated with
U.S. securities. 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
6
<PAGE> 383
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 the Fund are uninvested and no return
is earned thereon. Also, delivery of securities before payment may be required
in some countries. The inability of the Fund to make intended security purchases
due to settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the 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 the Fund will endeavor to achieve the most favorable
net results on its portfolio transactions. Further, the 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. The management of the Fund seeks to mitigate the risks
associated with the foregoing considerations through diversification and
continuous professional management.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund 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 traded in the interbank market conducted directly between
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.
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. Also, forward
contracts are traded directly between currency traders so that no intermediary
is required. A forward contract generally requires no margin or other deposit.
Closing purchase transactions with respect to forward contracts are usually
effected with the currency trader who is a party to the original forward
contract. The Fund may be required to segregate liquid assets to cover forward
contracts that require it to purchase foreign currency.
The Fund may also enter into a forward contract to sell a currency that
is linked to a currency that Kleinwort Benson believes to be less attractive and
buy a currency that Kleinwort Benson believes to be more attractive (or a
currency that is linked to currency that Kleinwort Benson 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 Kleinwort Benson 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.
- 7 -
<PAGE> 384
The reasons forward contracts would be used are described under
"Futures Contracts on Foreign Currencies" below. 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.
CURRENCY SWAPS
The Fund may enter into currency swaps for hedging purposes and to seek
to increase total return. Inasmuch as swaps are entered into for good faith
hedging purposes or are offset by a segregated account as described below, the
Fund and Kleinwort Benson believe that swaps do not constitute senior securities
as defined in the 1940 Act and, accordingly, will not treat them as being
subject to the Fund's borrowing restrictions. The net amount of the excess, if
any, of the Fund's obligations over its entitlements with respect to each
currency swap will be accrued on a daily basis and an amount of liquid assets
having an aggregate net asset value at least equal to such accrued excess will
be maintained in a segregated account by the Fund's custodian. The Fund will not
enter into any currency swap unless the credit quality of the unsecured senior
debt or the claims-paying ability of the other party thereto is considered to be
investment grade by Kleinwort Benson. If there is a default by the other party
to such a transaction, the Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid in comparison with the
markets for other similar instruments which are traded in the interbank market.
However, the staff of the SEC takes the position that currency swaps are
illiquid investments that are subject to the Fund's 15% limitation on such
investments.
REPURCHASE AGREEMENTS
The 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., the 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 Fund, that utilize them. Such risks are not unique to the Fund but are
inherent in repurchase agreements. The Fund seeks 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 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, the Fund would be at risk of losing some or
all of the principal and income involved in the transaction. To minimize this
risk, the Fund utilizes custodians and subcustodians that Kleinwort Benson
believes follow customary securities industry practice with respect to
repurchase agreements, and Kleinwort Benson 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.
- 8 -
<PAGE> 385
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 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.
The Fund may also enter into repurchase agreements with any party
deemed creditworthy by Kleinwort Benson, 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 the Fund may purchase.
LENDING OF PORTFOLIO SECURITIES
When the Fund lends its securities, it continues to receive interest
and dividends 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 the 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 the 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.
OTHER INVESTMENT COMPANIES
In seeking to attain its investment objective, the Fund may invest in
securities issued by other investment companies within the limits prescribed by
the 1940 Act. The Fund currently intends to limit its investments so that, as
determined immediately after a securities purchase is made: (a) not more than 5%
of the value of its total assets will be invested in the securities of any one
investment company; (b) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group;
and (c) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Fund or by the Trust as a whole.
The Pilot Funds has received exemptive relief from the Securities and
Exchange Commission to permit the Fund to use cash reserves not invested in
portfolio securities to purchase shares of one or more of any existing or future
series of the Trust which holds itself out to the public as a money market fund
and is subject to the requirements of Rule 2a-7 under the Investment Company Act
of 1940, as amended (a "Money Market Fund"), and to permit each Money Market
Fund to sell and redeem its shares in transactions with the Fund. Pursuant to
this exemptive relief, the Fund may purchase shares of a Money Market Fund
without regard to the limits in the preceding paragraph provided the Fund's
aggregate investment in Money Market Funds does not exceed 25% of the Fund's
total assets. In addition, the Fund's investment in Money Market Funds will be
disregarded in determining compliance with the limitations in the preceding
paragraph.
- 9 -
<PAGE> 386
As a shareholder of another investment company, the Fund bears, along
with other shareholders, its pro rata portion of the other investment company's
expenses, including advisory fees. These expenses are in addition to the
advisory and other expenses that the Fund bears in connection with its own
operations.
OPTIONS ON SECURITIES AND INDEXES
The Fund also may purchase and sell options on securities that the Fund
may buy and on securities indexes.
The Fund may purchase and sell over-the-counter options to the extent
consistent with the Fund's limitation on investments in illiquid securities.
Trading in over-the-counter options is subject to the risk that the other party
will be unable or unwilling to close-out options purchased or sold by the Fund.
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.)
If an option written by the 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 the 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). There can be no assurance, however, that a closing purchase or
sale transaction can be effected when the Fund desires.
The 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 indexes. 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
the 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 the 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 forgoes, 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
the 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 the
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.
- 10 -
<PAGE> 387
OPTIONS ON CURRENCIES
The Fund may purchase and sell options on currencies to hedge the value
of securities the Fund holds or intends to buy. Options on foreign currencies
may be traded on U.S. and foreign exchanges or over-the-counter.
FUTURES CONTRACTS ON SECURITIES AND INDEXES
The Fund may enter into futures contracts on securities and futures
contracts based on securities indexes, which futures are traded on exchanges
that are licensed and regulated by the Commodity Futures Trading Commission
("CFTC") or, consistent with CFTC regulations, on foreign exchanges. The 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 and to increase total return. Futures contracts and
related options entered into by the Fund will be entered into consistent with
CFTC regulations.
The 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 the Fund or securities
with price-fluctuation characteristics similar to those of its portfolio
securities. If, in the opinion of Kleinwort Benson, there is a sufficient degree
of correlation between price trends for the Fund's securities and futures
contracts based on indexes, the 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 the Fund's securities will substantially be
offset by appreciation in the value of the futures position. On other occasions,
the Fund may take a "long" position by purchasing futures contracts. This would
be done, for example, when the 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. The 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.
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. The 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. The Fund's position in the futures market will be marked-to-
market on a daily basis; the Fund 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, the 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 indexes 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 indexes 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.
FUTURES CONTRACTS ON FOREIGN CURRENCIES
- 11 -
<PAGE> 388
A foreign currency futures contract is a standardized contract for the
future delivery of a specified amount of a foreign currency at a future date at
a price established when the position is taken. Foreign currency futures
contracts traded in the United States are designed by and traded on exchanges
regulated by the CFTC, such as the Chicago Mercantile Exchange.
The Fund may enter into foreign currency futures contracts in several
circumstances. First, when the Fund enters into a contract for the purchase or
sale of a foreign security denominated in a foreign currency, or when the Fund
anticipates the receipt in a foreign currency of interest payments on such a
security which it holds, the Fund may desire to "lock in" the U.S. dollar price
of the security or the U.S. dollar equivalent of such interest payments, as the
case may be. By entering into a futures contract for the purchase or sale, for a
fixed amount of U.S. dollars, of the amount of foreign currency involved in the
underlying transactions, the Fund will attempt to protect itself against a
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the applicable foreign currency during the period between the
date on which the obligation is purchased or sold, or on which the interest
payment is declared, and the date on which such payments are made or received.
Second, when Kleinwort Benson believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar (or sometimes against another currency), the Fund may enter into a
futures contract to sell, for a fixed dollar or other currency amount, foreign
currency approximating the value of some or all of the securities held by the
Fund which are denominated in that currency. The precise matching of the futures
contract amounts and the value of the securities involved will not generally be
possible because the future value of such securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the date on which the contract is entered into and the date it expires.
Under normal circumstances, consideration of the prospect for changes
in currency exchange rates will be incorporated into the Fund's long-term
investment strategies. However, Kleinwort Benson believes that it is important
for the Fund to have the flexibility to enter into foreign currency futures
contracts when it determines that the best interest of the Fund will be served.
OPTIONS ON FUTURES CONTRACTS
The 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, or, consistent with CFTC regulations, traded on foreign
exchanges or in the over-the-counter market or are privately negotiated. 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.
- 12 -
<PAGE> 389
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 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.
LIMITATIONS ON USE OF FUTURES TRANSACTIONS AND RISK CONSIDERATIONS
The Fund will incur brokerage fees in connection with its futures
transactions, and 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 the Fund may benefit from the
use of such contracts, unanticipated changes in securities or currency values
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 the 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 the Fund may be exposed to risk of loss.
Tax-related requirements may limit the extent to which the Fund may
engage in futures and related options transactions.(See "TAX INFORMATION.")
RESTRICTED AND OTHER ILLIQUID SECURITIES
The Fund may purchase securities that are not registered under the
Securities Act of 1933 or have some other legal or contractual restriction 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, the Fund will not
invest more than 15% of the value of its net assets in illiquid securities,
including restricted securities, unless the Funds' 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 Kleinwort Benson the daily function of determining
and monitoring liquidity of securities. 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 the 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 the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities.
RISKS OF SPECIALIZED INVESTMENT TECHNIQUES ABROAD
The above described specialized investment techniques, when engaged in
abroad, may not be regulated as effectively as when engaged in the United
States; may not involve a clearing mechanism and
- 13 -
<PAGE> 390
related guarantees; and are subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities. The value of such
positions also could be adversely affected by: (i) other complex foreign
political, legal and economic factors; (ii) lesser availability than in the
United States of data on which to make trading decisions; (iii) delays in the
Fund's ability to act upon economic events occurring in foreign markets during
non-business hours in the United States; (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States; and (v) lesser trading volume.
COMBINED TRANSACTIONS
The Fund may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple foreign currency
transactions (including forward foreign currency exchange contracts) and any
combination of futures, options and foreign currency transactions ("component"
transactions), instead of a single transaction, as part of a single hedging
strategy when, in the opinion of Kleinwort Benson, it is in the best interest of
the Fund to do so and where underlying hedging strategies are permitted by the
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
the Fund to provide cash, securities or currencies to complete such transactions
will result in the Fund either segregating liquid assets in an account with, or
on the books of, the Funds' custodian, or otherwise "covering" the transaction
as described below. For example, a call option written by the 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 the Fund
to have portfolio securities that correlate with the index. A put option written
by the Fund also will require the 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 the 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, the Fund will hold liquid
assets in a segregated account sufficient to meet its obligation. These assets
cannot be transferred while the obligation is outstanding unless replaced with
other suitable assets. In the case of an index-based transaction, the Fund could
own securities substantially replicating the movement of the particular index.
In the case of a futures contract, the 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 the 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. The 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, the 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 the Fund. Moreover, instead of segregating assets if the 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.
- 14 -
<PAGE> 391
OTHER INFORMATION
Kleinwort Benson Investment Management Americas Inc. is a wholly-owned,
independent subsidiary of Kleinwort Benson Group plc. The Fund may hold
securities of companies with respect to which Kleinwort Benson Group plc or its
affiliates (including, without limitation, Kleinwort Benson Limited)
(collectively, the "Kleinwort Benson Group") provides investment banking,
financial advisory or other services, has other confidential relationships,
maintains a position or makes a market or otherwise may have an interest. For
good commercial and legal reasons, nonpublic information (a) which becomes
available to any member of the Kleinwort Benson Group through its relationships
or for any other reason cannot be passed on to Kleinwort Benson Investment
Management Americas Inc. or to the Funds or used for the benefit of the Fund;
and (b) which becomes available to Kleinwort Benson Investment Management
Americas Inc. for any reason cannot be passed on to the Funds or used for the
benefit of the Fund.
INVESTMENT RESTRICTIONS
The Fund has adopted certain fundamental investment restrictions which
may not be changed with respect to the Fund without the approval of the holders
of a majority of the Fund's outstanding voting Shares.
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 Funds
or the Fund means the vote of the lesser of: (i) 67% or more of the Shares of
the Funds or Fund present at a meeting, if the holders of more than 50% of the
outstanding Shares of the Funds or Fund are present or represented by proxy, or
(ii) more than 50% of the outstanding Shares of the Funds or Fund.
- 15 -
<PAGE> 392
As a matter of fundamental policy, the Fund may not:
(1) Purchase securities of any issuer if immediately after such purchase
the value of the Fund's investments in issuers conducting their
principal business activity in any one industry would exceed 25% of the
value of the Fund's total assets, provided that: (a) the gas, electric,
water and telephone businesses will be considered separate industries;
(b) the personal credit and business credit businesses will be
considered separate industries; (c) wholly-owned finance companies will
be considered to be in the industry of their parents if their
activities are primarily related to financing the activity of their
parents; (d) foreign governments will be considered separate
industries; and (e) there is no limitation with respect to or arising
out of investments in obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities or tax-exempt
obligations of state and municipal governments and their agencies and
authorities.
(2) Make loans, except to the extent that the lending of portfolio
securities and purchase of debt obligations in accordance with the
Fund's investment objective and policies and the entry into repurchase
agreements with banks, brokers, dealers and other financial
institutions may be deemed to be loans.
(3) Borrow money, except: (a) as a temporary measure, and then only in
amounts not exceeding 5% of the value of the Fund's total assets, (b)
from banks, or (c) in connection with reverse repurchase agreements,
provided that immediately after any such borrowing all borrowings of
the Fund do not exceed one-third of the Fund's total assets. While the
Fund has borrowings outstanding in an amount exceeding 5% of its total
assets the Funds will not make any purchases of portfolio instruments
for the Fund. The Funds may not borrow money from Boatmen's Bancshares,
Inc. or any majority-owned subsidiary thereof.
(4) Purchase or sell real estate (except securities secured by real estate
or interests therein, securities issued by real estate investment
trusts and securities of companies that deal in real estate or
mortgages), commodities or commodity contracts relating to physical
commodities or oil and gas interests (although the Fund may invest in
companies that own or invest in such interests) except that the Fund
may invest up to 10% of its net assets in gold bullion, or invest in
companies for the purpose of exercising control or management. The
Funds reserve freedom of action to hold and to sell real estate
acquired as a result of the Funds' ownership of securities.
(5) Act as an underwriter of securities (except as the Funds may be deemed
to be an underwriter under the Securities Act of 1933) in connection
with the purchase and sale of instruments or make short sales of
securities unless the Fund contemporaneously owns or has the right to
obtain at no added cost securities identical to those sold short.
(6) Mortgage, pledge or hypothecate more than one-third of the Fund's
assets, except to secure permitted borrowings.
(7) Purchase the securities of any issuer other than the U.S. Government,
its agencies or instrumentalities, if immediately after such purchase,
more than 5% of the value of the Fund's total assets would be invested
in any one issuer except that: (a) up to 25% of the value of its total
assets may be invested without regard to such 5% limitation, and (b)
such 5% limitation shall not apply to repurchase agreements
collateralized by obligations of the U.S. Government, its agencies or
instrumentalities. For purposes of this restriction, a guaranty of an
instrument will be considered a separate security (subject to certain
exclusions allowed under the 1940 Act).
(8) Issue senior securities, except: (a) as appropriate to evidence
indebtedness that it is permitted to incur and (b) for Shares of the
separate classes or series of the Funds, 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 the purpose of this restriction.
- 16 -
<PAGE> 393
OTHER INVESTMENT POLICIES
As a matter of non-fundamental policy, which may be changed by the
Trustees without Shareholder approval, the Fund may not:
(a) Invest in any securities that would cause more than 15% of its net
assets at the time of such investment to be invested in securities that
are not readily marketable (for these purposes restricted security
means a security with a legal or contractual restriction on resale in
the principal market in which the security is traded but does not
include liquid Rule 144A securities), including repurchase agreements
maturing in more than seven days, and any other assets for which a bona
fide market does not exist at the time of purchase or subsequent
valuation;
(b) Write put and call options, unless each option is "covered," the
underlying securities are ones that the Fund is permitted to purchase,
each option is traded in a liquid market and the aggregate value of the
securities underlying the calls or obligations underlying the puts
determined as of the date an option is sold shall not exceed 25% of the
Fund's net assets;
(c) Purchase futures contracts or options on futures contracts for
non-hedging purposes if immediately after the purchase the value of the
aggregate initial margin with respect to all futures contracts (both
for receipt and delivery) entered into on behalf of the Fund (including
foreign currency futures contracts) and premiums paid for options on
futures contracts, will exceed 5% of the fair market value of its total
assets;
(c) Purchase securities on margin or make short sales unless, by virtue of
the ownership of other securities, it has the right to obtain
securities equivalent in kind and amount to the securities sold and, if
the right is conditional, the sale is made upon the same conditions,
except in connection with arbitrage transactions and except that the
Fund may obtain such short-term credits as are necessary for the
clearance of transactions, and provided that the Fund may make initial
and variation margin payments in connection with transactions in
futures contracts and options on futures contracts.
With respect to fundamental investment restriction (4), investment in
real estate limited partnerships is prohibited.
For purposes of the foregoing fundamental and non-fundamental
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, the Fund.
- 17 -
<PAGE> 394
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and officers of the Funds is set
forth below. Trustees and officers deemed to be "interested persons" of the
Funds for purposes of the 1940 Act are indicated by an asterisk.
<TABLE>
<CAPTION>
Principal Occupation(s)
Name and Address Position(s) with Trust During Past 5 Years
- ---------------- ---------------------- -------------------
<S> <C> <C>
J. Hord Armstrong, III (55) Trustee Chairman and CEO, D&K
8000 Maryland Avenue Wholesale Drug, Inc., a
Suite 1190 distributor of pharmaceutical
St. Louis, Missouri 63105 products, since 1987.
Lee F. Fetter (43) Chairman Chief Operating and Financial
660 S. Euclid, Box 8003 Officer of Washington
St. Louis, Missouri 63110 University School of
Medicine since 1983.
Henry O. Johnston (59) Trustee President of Fordyce Four,
9650 Clayton Road Incorporated, a corporation
St. Louis, Missouri 63124 engaged in the acquisition
and management of personal
investments.
L. White Matthews, III (50) Trustee Executive Vice President of
Eighth and Eaton Avenues Finance since 1987, Union
Bethlehem, Pennsylvania 18018 Pacific Corporation, a
company engaged in
transportation, exploration
and refining of hydrocarbons,
mining and real estate.
Nicholas G. Penniman, IV (58) Trustee Publisher, St. Louis Post-
900 N. Tucker Boulevard Dispatch since 1986. Senior
St. Louis, Missouri 63101 Vice President of Pulitzer
Publishing Company since
1986.
William J. Tomko (37) President Senior Vice President, BISYS
3435 Stelzer Road Fund Services, Inc.
Columbus, Ohio 43219
W. Eugene Spurbeck (40) Vice President Manager, BISYS Fund
3435 Stelzer Road Services, Inc.
Columbus, Ohio 43219
Martin R. Dean (33) Treasurer Manager, Mutual Fund
3435 Stelzer Road Accounting, BISYS Fund
Columbus, Ohio 43219 Services, Inc. since May
1994. Prior thereto, Senior
Manager, KPMG Peat
Marwick.
</TABLE>
- 18 -
<PAGE> 395
<TABLE>
<CAPTION>
Principal Occupation(s)
Name and Address Position(s) with Trust During Past 5 Years
- ---------------- ---------------------- -------------------
<S> <C> <C>
George O. Martinez (37) Secretary Senior Vice President and
3435 Stelzer Road Director of Legal and
Columbus, Ohio 43219 Compliance Services of
BISYS Fund Services, Inc.
since April 1995. Prior
thereto, Vice President and
Associate General Counsel of
Alliance Capital
Management, L.P.
Sheldon A. Jones (58) Assistant Secretary Partner of the law firm of
Ten Post Office Square South Dechert Price & Rhoads.
Boston, Massachusetts 02109
Alaina Metz (28) Assistant Secretary Employee of BISYS Fund
3435 Stelzer Road Services Limited Partnership
Columbus, Ohio 43219 since June 1995; prior
thereto, supervisor, Alliance
Capital Management, L.P.
Bruce Treff (30) Assistant Secretary Counsel, BISYS Fund
3435 Stelzer Road Services, Inc. since
Columbus, Ohio 43219 September 1995. Prior
thereto, Manager, Alliance
Capital Management, L.P.
</TABLE>
The Agreement and Declaration of Trust of the Funds (the "Trust
Agreement") provides that, subject to its provisions, the business of the Funds
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, [as of______________________,
NationsBank Corporation], Kleinwort Benson, BISYS and their respective
affiliates. The Funds have 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 received by the Trustees from the Registrant for the fiscal year
ended August 31, 1996.
COMPENSATION TABLE
- 19 -
<PAGE> 396
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
TOTAL COMPEN-
PENSION OR ESTIMATED SATION FROM
AGGREGATE RETIREMENT ANNUAL REGISTRANT AND
NAME OF COMPENSATION BENEFITS UPON BENEFITS UPON FUND COMPLEX
PERSON, POSITION FROM REGISTRANT RETIREMENT RETIREMENT PAID TO PERSONS
<S> <C> <C> <C> <C>
J. Hord Armstrong, III $26,000 0 0 $26,000
Lee F. Fetter (Chairman) $28,000 0 0 $28,000
Henry O. Johnston* $26,000 0 0 $26,000
L. White Matthews, III $26,000 0 0 $26,000
Nicholas G. Penniman, IV $26,000 0 0 $26,000
</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 meeting
attended by such Trustee. The compensation paid to the Chairman is $18,000 and
$2,000 for each Trustee meeting 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, 1996
distributed to or accrued for the account of the non-interested Trustees (four
persons) amounted to approximately $106,000, which amount represented the total
compensation paid by the Funds to the Trustees during that year.
INVESTMENT ADVISER, MANAGER, ADMINISTRATOR,
DISTRIBUTOR AND TRANSFER AGENT
THE ADVISER AND MANAGER
Boatmen's Trust Company, a subsidiary [as of of ___________ NationsBank
Corporation], P.O. Box 14737, 100 North Broadway, St. Louis, Missouri
63178-4737, acts as investment adviser to the Fund pursuant to an Investment
Advisory Agreement (the "Advisory Agreement") between the Trust on behalf of the
Fund and Boatmen's. As adviser, Boatmen's is responsible for the management of
the Fund's assets pursuant to an Advisory Agreement between the Fund and
Boatmen's.
Kleinwort Benson Investment Management Americas, Inc., a wholly-owned
subsidiary of Dresdner Bank AG, 200 Park Avenue, New York, New York 10166,
serves as investment manager to the Fund pursuant to an Investment Management
Agreement among Kleinwort Benson, Boatmen's and the Trust on behalf of the Fund.
As investment manager, Kleinwort Benson manages the investment operations of the
Fund and the composition of the Fund's assets, including the purchase, retention
and sale thereof.
The Fund has no present intention of purchasing any securities issued
by Boatmen's, [NationsBank Corporation] or any of its affiliates. Mr. Henry O.
Johnston, a Trustee of the Funds, owns shares amounting to less than one-tenth
of one percent (.001%) of the outstanding shares of common stock of Boatmen's
Bancshares, Inc.
Under its Advisory Agreement with the Fund, Boatmen's provides
guidelines for Kleinwort Benson, the investment manager, with regard to
investment strategy and the allocation of assets among countries and currencies,
monitors compliance with such guidelines, reviews selection and monitors
performance
- 20 -
<PAGE> 397
of foreign subcustodians, periodically reviews pricing of portfolio securities,
and makes periodic reports to the Funds' Board of Trustees.
The 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 Funds, except liability to the Funds 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. The
Agreement provides that the Funds 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 Fund 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 .80 of 1% of the average daily net assets of the Fund.
While this fee is higher than the advisory fee paid by most mutual funds, it is
believed to be comparable to advisory fees paid by many funds having similar
objectives and policies. For the period September 1, 1993 to August 31, 1994,
received a fee of $2,422,559 for such services, for the period September 1, 1994
through August 31, 1995, received a fee of $2,828,628 for such services and for
the period September 1, 1995 through August 31, 1996, received a fee of
$3,873,513 for such services.
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 the Fund.
Kleinwort Benson's fee is paid by Boatmen's directly out of Boatmen's
advisory fee. The Fund is responsible for all expenses incurred by the Fund,
other than those expressly borne by Boatmen's, Kleinwort Benson, PFD, BISYS and
the Transfer Agent under the Advisory, Investment Management, Distribution,
Administration and Transfer Agency Agreements. Such expenses include, without
limitation, the fees payable to Boatmen's and BISYS, fees and expenses incurred
in connection with membership in investment company organizations, the fees and
expenses of the Fund's custodian and fund accounting agent, brokerage fees and
commissions, any portfolio losses, filing fees for the registration or
qualification of the Fund's shares under federal or state securities laws,
expenses of the organization of the Fund, 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 Fund 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 Fund's shareholders and
regulatory authorities, compensation and expenses of its Trustees and
extraordinary expenses incurred by the Fund. If, however, in any fiscal year,
the sum of the 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 Fund's agreements
with Boatmen's and Kleinwort Benson provide that the Fund is entitled to be
reimbursed on a pro rata basis based on Boatmen's and Kleinwort Benson's
respective share of the fees paid by the Fund to Boatmen's for investment
advisory services, to the extent required by these expense limitations. As of
the date hereof, the most restrictive expense limitation imposed by state
securities administrators of which the Fund is aware provides that annual
expenses (as defined) may not exceed 2 1/2% of the first $30,000,000 of the
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 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 Agreement for the Fund was approved by the Trustees,
including the "non- interested" Trustees, on October 22, 1996 and by
shareholders on December 18, 1995. The Advisory Agreement will remain in effect
until May 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 the Fund
- 21 -
<PAGE> 398
(as defined under "Investment Restrictions") or by the Trustees of the Funds,
and by the vote of a majority of the "non-interested" Trustees. The 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 Funds or by
vote of a majority of the outstanding shares of the Fund (as defined under
"Investment Restrictions") on 60 days' written notice to Boatmen's, and by
Boatmen's on 60 days' written notice to the Funds.
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
Funds 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 Funds.
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 Funds, the Funds 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 Funds' method
of operations would affect the net asset value per share of the 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 Funds
expect that Boatmen's would consider the possibility of offering to provide some
or all of the services now provided by BISYS and PFD. 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 terms of the Investment Management Agreement among Kleinwort
Benson, Boatmen's and the Fund provide that Kleinwort Benson, subject to
supervision of the Funds' Board of Trustees and Boatmen's, manages the
investment operations of the Fund and the composition of the Fund's assets,
including the purchase, retention and disposition thereof. The Investment
Management Agreement provides that, subject to Section 36 of the 1940 Act,
Kleinwort Benson will not be liable for any error of judgment or mistake of law
or for any loss suffered by the Fund, except liability to the Fund or its
shareholders to which Kleinwort Benson would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of, or its
reckless disregard of, its obligations and duties under the Agreement. The
Agreement provides that the Fund will indemnify Kleinwort Benson against certain
liabilities, including liabilities under the Federal securities laws, or, in
lieu thereof, contribute to resulting losses.
At a regular meeting held on October 22, 1996, the Board of Trustees of
The Pilot Funds approved the investment management agreement between Kleinwort
Benson Investment Management Americas Inc., Boatmen's Trust Company and the
Trust on behalf of the Fund.
As compensation for Kleinwort Benson's services, Kleinwort Benson is
entitled to a fee paid by Boatmen's directly out of Boatmen's advisory fee
computed daily and payable monthly, at an annual rate equal to, effective June
1, 1995, .40 of 1% up to $325,000,000 and .25 of 1% of such assets in excess of
$325,000,000, on an annualized basis. Prior to June 1, 1995, Kleinwort Benson
was entitled to a fee, computed daily and payable monthly at an annual rate
equal to .80 of 1% of the Fund up to $65,000,000, .40 of 1% of such assets in
excess of $65,000,000 and .25 of 1% of such assets in excess of $325,000,000.
For the fiscal year ended August 31, 1994, the fee paid by Boatmen's to
Kleinwort Benson was $1,465,815 which equaled .48 of 1% of the Fund's average
daily net assets. For the fiscal year ended August 31, 1995, the fee paid by
Boatmen's to Kleinwort Benson was $1,535,377, which equaled .43 of 1% of the
Fund's average daily net assets. For the fiscal year ended August 31, 1996, the
fee paid
- 22 -
<PAGE> 399
by Boatmen's to Kleinwort Benson was $1,658,658, which equaled .34 of 1% of
the Fund's average daily net assets. All fees and expenses are accrued daily and
deducted before declaration of dividends to shareholders.
THE ADMINISTRATOR
BISYS Fund Services Limited Partnership ("BISYS"), with principal
offices at 3435 Stelzer Road, Columbus, Ohio 43219 serves as the Fund's
Administrator. 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 Fund as described in the
Prospectus pursuant to an Administration Agreement with the Trust dated as of
June 1, 1996. The Agreement will continue in effect with respect to the Fund
until June 1, 1997 and thereafter will be automatically extended as to the 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 approval, and (b) by the Board of Trustees of the Trust or by
vote of a majority of the outstanding voting securities of the Fund (as defined
under "Investment Restrictions"). The Agreement is terminable by the Board of
Trustees of the Trust with regard to the 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, the 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 voluntarily waive fees or
reimburse the Trust for expenses. For the period ended August 31, 1996, BISYS
voluntarily waived fees in the amount of $0 for the Fund.
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 for certain fund accounting services which are borne by the Fund.
The Administration Agreement provides that BISYS shall not be liable
for any error of judgment or mistake of law or any loss suffered by the 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' duties or from the reckless disregard by BISYS of its obligations and
duties thereunder.
THE DISTRIBUTOR
Pilot Funds Distributors Inc. (the "Distributor"), is a registered
broker-dealer located at 3435 Stelzer Road, Columbus, Ohio 43219. The
Distributor is a wholly-owned subsidiary of The BISYS Group, Inc.
The Distribution Agreement with the Distributor will continue in effect
with respect to the 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
- 23 -
<PAGE> 400
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. For the fiscal year ended
August 31, 1996, the Distributor received $143,860 in underwriting commissions
and retained $0.
THE TRANSFER AGENT
BISYS Fund Services, Inc. (the "Transfer Agent"), located at 3435
Stelzer Road, Columbus, Ohio 43219 serves as the Fund's 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 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. For the fiscal year ended August 31, 1996, the
Transfer Agent received a fee of $294,880 for its services as transfer agent.
PORTFOLIO TRANSACTIONS
Kleinwort Benson is responsible for decisions to buy and sell
securities for the 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.
In placing orders for portfolio securities of the Fund, Kleinwort
Benson is required to give primary consideration to obtaining the most favorable
price and efficient execution. This means that Kleinwort Benson 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, Kleinwort Benson 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 Kleinwort Benson generally seeks reasonably competitive spreads
or commissions, the Fund will not necessarily be paying the lowest spread or
commission available. Within the framework of this policy, Kleinwort Benson will
consider research and investment services provided by brokers or dealers who
effect or are parties to portfolio transactions of the Fund, Kleinwort Benson,
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 Kleinwort Benson in connection with all of
its investment activities, and some of such services obtained in connection with
the execution of transactions for the Fund may be used in managing other
investment accounts. Conversely, brokers furnishing such services may be
- 24 -
<PAGE> 401
selected for the execution of transactions of such other accounts, whose
aggregate assets are far larger than those of the Fund; and the services
furnished by such brokers may be used by Kleinwort Benson in providing
investment management services for the Funds.
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 Funds.
In certain instances there may be securities which are suitable for one
or more of the other clients of Kleinwort Benson. Investment decisions for the
Fund and for Kleinwort Benson'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 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 the Fund is concerned. The
Fund believes that over time its ability to participate in volume transactions
will produce superior executions for the Fund.
The Portfolio turnover rate for the Fund for the fiscal years ended
August 31, 1995 and August 31, 1996 was 35.9% and 22.31%, respectively. The Fund
will not engage in purchasing securities for short-term trading purposes.
- 25 -
<PAGE> 402
For the fiscal years ended August 31, 1995 and August 31, 1996, the
brokerage commissions paid by the Fund were as follows:
<TABLE>
<CAPTION>
Total Total Amount Brokerage
Total Brokerage of Transactions Commissions
Brokerage Commissions On Which Paid To
Commissions Paid To Commissions Brokers Providing
Paid Affiliated Persons Were Paid Research
----------- ------------------ --------------- -----------------
<S> <C> <C> <C> <C>
Fiscal Year
from Sept. 1,
1995 through
Aug. 31, 1996 $ $ (1) $ (2) $
Fiscal Year
from Sept. 1,
1994 through
Aug. 31, 1995 $781,228 $ 0 (1) $291,172,320 (2) $ 0
</TABLE>
(1) Percentage of total commissions paid.
(2) Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
NET ASSET VALUE
The net asset value per share of the Fund is determined by the Fund's
custodian at 3:00 p.m., Central time (4:00 p.m., Eastern time), on each Business
Day as defined in the Prospectus. 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 Funds will reconsider the time at which net asset value is computed. In
addition, the Fund may compute its net asset value as of any time permitted
pursuant to any exemption, order or statement of the SEC or its staff.
Portfolio securities of the 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 Fund'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 Fund'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 Kleinwort Benson and approved by the Trustees of the Funds,
which prices reflect broker/dealer supplied valuations and electronic data
processing techniques if those prices are deemed by Kleinwort Benson to be
representative of market values at the Fund's valuation time; (d) options and
futures contracts are valued at the last sale price on the market prior to the
Fund'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 Fund'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 Kleinwort Benson 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 Funds, including use
of a valuation committee. Money market instruments held by the Fund with a
remaining maturity of sixty days or less will be valued by the amortized cost
method.
- 26 -
<PAGE> 403
Fund 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 Fund'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 Funds.
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 Funds. 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 days on which the 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 Fund's valuation time will not be reflected
in the Fund's calculation of net asset values unless Kleinwort Benson deems that
the particular event would materially affect net asset value, in which case an
adjustment will be made.
The proceeds received by the Fund and each additional portfolio
established by the Trustees of the Funds 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 such 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 Funds. Expenses with respect to the Fund 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, administration 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 Fund
(excluding preparation and printing expenses necessary for the continued
registration of the Fund's 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 Fund 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 Fund 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 Fund, the Trust may pay the Distributor for (a) expenses incurred
in connection with advertising and marketing shares of the Fund, 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).
- 27 -
<PAGE> 404
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 Fund
necessary for accounting or subaccounting; (vii) if required by law, forwarding
shareholder communications from the Fund (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.
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 0.75% 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 Fund or other investment portfolios or companies
that are affiliated persons of the Fund, 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 Fund. 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 the 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.
- 28 -
<PAGE> 405
The Board of Trustees of the Trust has concluded that there is a
reasonable likelihood that the Plan will benefit the Fund and Class A and Class
B shareholders, respectively. The Plan is 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 Plan, 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 Plan 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.
Banks may act as Service Organizations and receive payments under the
Distribution Plan 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 Fund. These fees would be in addition
to any amounts which might be received under the Plan. 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.
Class A Shares of the Fund are sold with a front-end sales charge. As
described in the Prospectus for Class A Shares of the Fund, 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 Fund 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.
- 29 -
<PAGE> 406
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.
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
the 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 Fund 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 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 Fund's 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.
- 30 -
<PAGE> 407
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 other investment
portfolios of the Trust; Class B Shares for Class B Shares of other investment
portfolios of the Trust; and Pilot Shares for Pilot Shares of 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 subject to applicable regulatory restrictions. 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.
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 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
- 31 -
<PAGE> 408
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 Fund 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 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 Fund 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 Fund, 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 1997 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 of shares of any Fund and
may postpone payment for any period: (i) during which the New York Stock
Exchange is closed other than customary weekend and holiday closings or during
which trading on the New York Stock Exchange is restricted by applicable rules
and regulations of The Securities and Exchange Commission, (ii) when the SEC
determines that a state of emergency exists which may make payment or transfer
not reasonably practicable, (iii) as the SEC may by order permit for the
protection of the shareholders of the Funds, or (iv) at any other time when the
Funds may, under applicable laws and regulations, suspend payment on the
redemption of its shares. The Trust may also suspend or postpone the recordation
of the transfer of its shares under any of the foregoing circumstances.
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 the 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 Fund's 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
- 32 -
<PAGE> 409
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 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, quotations of the Fund's performance may be included
in advertisements, sales literature or reports to shareholders or prospective
investors. These performance figures may be calculated in the following manner:
A. Average Annual Total Return is the average annual compounded rate of
return for the periods of one year and the life of the Fund, ended on
the last day of a recent calendar quarter. Average annual total return
quotations reflect changes in the price of the Fund's shares and assume
that all dividends and capital gains distributions during the
respective periods were reinvested in the Fund's shares. Average annual
total return is calculated by finding the average annual compounded
rates of return of a hypothetical investment over such periods
according to the following formula (average annual total return is then
expressed as a percentage):
T = (ERV/P)(1/n) - 1
Where:
T = average annual total return
P = a hypothetical initial investment of $1,000
n = number of years
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made
at the beginning of the applicable period.
B. Cumulative Total Return is the cumulative rate of return on a
hypothetical initial investment of $1,000 for a specified period.
Cumulative total return quotations reflect changes in the price of a
Fund's shares and assume that all dividends and capital gains
distributions during the period were reinvested in shares of the
applicable Fund. Cumulative total return is calculated by finding the
cumulative rates of a return of a hypothetical investment over such
periods, according to the following formula (cumulative total return is
then expressed as a percentage):
- 33 -
<PAGE> 410
C = (ERV/P) - 1
Where:
C = cumulative total return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made
at the beginning of the applicable period.
C. Total Return is the rate of return on an investment for a specified
period of time calculated in the same manner as Cumulative Total
Return.
D. Yield is the net annualized yield based on a specified 30-day (or one
month) period assuming semi-annual compounding of income. Yield is
calculated by dividing the net investment income per share earned
during the period by the maximum offering price per share on the last
day of the period, according to the following formula:
YIELD = 2[(a-b + 1)6 - 1]
---
cd
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 = the maximum offering price per share on the last day of the
period.
Unlike bank deposits or other investments that pay a fixed yield or
return for a stated period of time, the return for the 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 the Fund. The return of the 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, cumulative total return, total return and
yield are calculated separately for Pilot Shares and Class A Shares. Pilot
Shares and Class A and Class B Shares are subject to different fees and expenses
and may have different performance for the same period. Performance information
is not available for Class B Shares which did not commence operations until June
1996.
For periods prior to July 12, 1993, the performance information for the
Pilot International Equity Fund is actually the performance for the Kleinwort
Benson International Equity Fund of Kleinwort Benson Investment Strategies, all
of the assets of which were acquired by the Pilot International Equity Fund in
exchange for Class A Shares in a reorganization effective July 12, 1993. The
Pilot International Equity Fund did not commence operations until that date. The
Kleinwort Benson International Equity Fund was advised solely by Kleinwort
Benson prior to that date.
The average annual total return for share classes outstanding August
31, 1996 of the Pilot International Equity Fund with respect to Pilot Shares and
Class A Shares for the one, five and ten-year periods ended August 31, 1996,
assuming such shares had been outstanding and subject to maximum service fees
and that no sales charge had been assessed is shown below:
- 34 -
<PAGE> 411
For the period prior to July 12, 1993, the information reflects the
performance of the Kleinwort Benson International Equity Fund. The Class B
Shares commenced operations during July, 1996.
<TABLE>
<CAPTION>
Average Annual Total Return
-----------------------------------------
One Year Five Years Ten Years
-------- ---------- ---------
<S> <C> <C> <C>
Pilot International Equity Fund
Pilot Shares 10.77% 8.67% 9.43%
Class A Shares 10.53% 8.34% 9.15%
Class B Shares -2.85% N/A N/A
</TABLE>
The average annual total return for share classes outstanding August
31, 1996 of the Fund with respect to Pilot Shares and Class A Shares for the
one, five and ten-year periods ended August 31, 1996, assuming such shares had
been outstanding and subject to maximum service fees and that no sales charge
had been assessed is shown below:
From time to time, the Funds may publish an indication of one or more
Funds' past performance as measured by independent sources, such as 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.
TAX INFORMATION
The 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, the 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 cash items (including receivables), U.S. Government securities, the
securities of other regulated investment
- 35 -
<PAGE> 412
companies and other securities, with such other securities of any one issuer
limited for the purposes of this calculation to an amount not greater than 5% of
the value of the Fund's total assets and not greater than 10% of the outstanding
voting securities of such issuer, 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.
The 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 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, the 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 losses) 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 will be treated as
having been paid on December 31 of the current calendar year if it is declared
by the 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 the Fund's investment company taxable income will
be treated as ordinary income in the hands of shareholders. If a portion of the
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 the 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 the 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 the Fund in 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 the 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.
Gain derived by the 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 the 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 the
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
- 36 -
<PAGE> 413
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 the 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.
Certain options, futures contracts and forward contracts in which the
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; 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 the 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 the 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 the Fund. In addition,
losses realized by the 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 Fund of engaging in hedging
transactions are not entirely clear. Hedging transactions may increase the
amount of short-term capital gain realized by the Fund which is taxed as
ordinary income when distributed to its shareholders.
The Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the 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
the 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 the 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 the Fund's
investment company taxable income to be distributed to its shareholders as
ordinary income.
If the 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
- 37 -
<PAGE> 414
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.
The Fund 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, the
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 the 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.
The Fund may be subject to foreign withholding taxes on its investments
in certain securities of foreign entities. These taxes may be reduced under the
terms of applicable tax treaties, and the Fund intends to satisfy any procedural
requirements to qualify for benefits under these treaties. In the 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.
The Fund will be required to report to the Internal Revenue Service
(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 the Fund with the payee's taxpayer identification number ("TIN") under
penalties of perjury, (b) the IRS notifies the Fund that the TIN furnished by
the payee is incorrect, (c) the IRS notifies the 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 Funds 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
- 38 -
<PAGE> 415
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 the Fund.
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 the 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 Fund may be subject to state or local taxes in jurisdictions in
which the Fund may be deemed to be doing business. In addition, in those states
or localities which have income tax laws, the treatment of the Fund and its
shareholders under such laws may differ from their treatment under Federal
income tax laws. Also, an investment in the Fund may have different tax
consequences for shareholders than would a direct investment in the securities
held by the Fund. 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 Fund 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.
ORGANIZATION AND CAPITALIZATION
The Pilot Funds 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 Funds 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 Funds 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, one of which is offered herein and known as Pilot International
Equity Fund. Each share of the Fund has a par value of $.001. It represents an
equal proportionate interest in the 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 the Fund, shareholders thereof are
entitled to share pro rata in the net assets belonging to the 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 the Fund: 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 Fund
bear the same types of ongoing expenses with respect to the Fund. 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 the Fund, shareholders of
the 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 the Fund are entitled to participate in the net
distributable assets of the Fund on liquidation, based on the number of shares
of the Fund that are held by each shareholder, except that Class A Shares of the
Fund will be solely responsible for the Fund's
- 39 -
<PAGE> 416
payments pursuant to the Distribution Plan for those shares and Class B Shares
of the Fund will be solely responsible for the 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 per share; however, separate votes will be taken by the Fund or one of its
classes on matters affecting only the Fund or that particular class or as
otherwise required by law. Fractional shares are entitled to proportionate
fractional votes. Shares have neither cumulative voting rights nor any
preemptive, subscription, or conversion rights (the right of redemption is
described under "Transaction Rules" and "How to Sell Shares" in the Prospectus).
Shares when issued as described herein are fully paid and nonassessable, except
as expressly set forth below. For information relating to possible mandatory
redemption of shares at the option of the Funds, see "Transaction Rules" and
"How to Sell Shares" in the Prospectus. 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 Funds owned beneficially less than 1% of the
outstanding shares of the Fund.
SHAREHOLDER AND TRUSTEE LIABILITY
The Pilot Funds 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 Funds. Notice of such disclaimer will normally be
given in each agreement, obligation or instrument entered into or executed by
the Funds 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 Funds
shall, upon request, assume the defense of any claim made against a shareholder
for any act or obligation of the Funds, 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 the 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 Funds 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 Funds and upon
reports made to the Funds 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 judgment or mistakes of fact or
law. The Declaration of Trust provides that the Funds will indemnify Trustees
and officers of the Funds against liabilities and expenses reasonably incurred
in connection with litigation in which they may be involved because of their
positions with the Funds, unless it is determined, in the manner provided in the
Declaration of Funds, that they have not acted in good faith in the reasonable
belief that, in the case of conduct in their official capacity with the Funds,
their conduct was in the best interests of the Funds and that, in all other
cases, their conduct was at least not opposed to the best interest of the Funds
(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.
- 40 -
<PAGE> 417
CUSTODIAN AND SUBCUSTODIANS
Boatmen's Trust Company ("Boatmen's"), 100 N. Broadway, St. Louis,
Missouri 63102, is the custodian of the Fund's 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 Fund has 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 Fund.
In addition to providing audit services, Arthur Andersen LLP prepares the Funds'
federal and state tax returns and provides consultation and assistance on
accounting, internal control and related matters. The financial statements and
related report of Arthur Andersen LLP contained in the 1995 Annual Report of the
Funds and the financial statements and related report of Ernst & Young LLP,
independent auditors, contained in the 1992 Annual Report of Kleinwort Benson
Investment Strategies relating to its Kleinwort Benson International Equity Fund
series, are hereby incorporated by reference.
Goodwin, Procter & Hoar LLP, Exchange Place, Boston, Massachusetts
02109, serves as general counsel to the Funds.
MISCELLANEOUS
The following table indicates each additional person known by the Fund
to own beneficially 5% or more of the Fund as of greater as of October 23, 1996.
<TABLE>
<CAPTION>
Percent of Total Outstanding
Name and Address Number of Shares Shares of Class
- ---------------- ---------------- ----------------------------
<S> <C> <C>
Union Elec P/T 2,819,452 7.52%
c/o Boatmen's Trust Company
100 North Broadway
St. Louis, Missouri 63102
Boatmen's Bancshares 2,466,375 6.57%
100 North Broadway
St. Louis, Missouri 63102
</TABLE>
FINANCIAL STATEMENTS
The financial statements and related report of Arthur Andersen LLP
contained in the 1996 Annual Report of the Funds are hereby incorporated by
reference and attached hereto.
- 41 -
<PAGE> 418
APPENDIX
DESCRIPTION OF SECURITIES RATINGS
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 uppermost 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 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.
- 42 -
<PAGE> 419
STANDARD & POOR'S CORPORATION
AAA: Debt rated AAA has the highest rating assigned by Standard &
Poor's. This rating indicates an extremely strong capacity to pay 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.
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+."
- 43 -
<PAGE> 420
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.
- 44 -
<PAGE> 421
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.
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.
- 45 -
<PAGE> 422
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.
- 46 -
<PAGE> 423
THE PILOT FUNDS
3435 Stelzer Road
Columbus, Ohio 43219
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 31, 1996
PILOT SHARES
The Pilot Funds (the "Funds") is an open-end, management investment
company (or mutual fund) consisting of fourteen portfolios, four of which
portfolios (the "Funds") are described herein:
Pilot Short-Term U.S. Treasury Fund (the "Treasury Fund");
Pilot Short-Term Diversified Assets Fund (the "Diversified Fund");
Pilot Short-Term Tax-Exempt Diversified Fund (the "Tax-Exempt
Diversified Fund"); and
Pilot Missouri Short-Term Tax-Exempt Fund (the "Tax-Exempt Fund").
Boatmen's Trust Company ("Boatmen's") serves as investment adviser to
the Funds. Pilot Funds Distributors, Inc. ("PFD") serves as each Fund's
distributor, and its affiliate, BISYS Fund Services Limited Partnership
("BISYS"), serves as each Fund's administrator. The Tax-Exempt Diversified Fund
and the Tax-Exempt Fund are sometimes referred to as the "Tax-Exempt Funds."
This Statement of Additional Information is not a Prospectus, and
should be read in conjunction with the Prospectus for the Pilot Shares (the
"Prospectus") dated December 31, 1996, as may be amended or supplemented from
time to time, which may be obtained without charge from institutions ("Service
Organizations") that hold Pilot Shares for the benefit of their customers, or by
writing to Pilot Funds Distributors Inc., 3435 Stelzer Road, Columbus, Ohio
43219.
<PAGE> 424
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT POLICIES AND PRACTICES OF THE PORTFOLIOS..........................
U.S. Government Securities..........................................
Custodial Receipts..................................................
Bank and Corporate Obligations......................................
Repurchase Agreements...............................................
Foreign Securities..................................................
Asset-Backed and Receivables-Backed Securities......................
Forward Commitments and When-Issued Securities......................
Variable Amount Master Demand Notes.................................
Variable Rate and Floating Rate Demand Instruments..................
Loan Participation..................................................
Municipal Obligations...............................................
Investing in Missouri...............................................
Standby Commitments.................................................
Tax-Exempt Fund Taxable Obligations.................................
Restricted and Other Illiquid Securities
INVESTMENT RESTRICTIONS......................................................
Treasury Fund, Diversified Fund and Tax-Exempt Diversified Fund.....
Tax-Exempt Fund.....................................................
TRUSTEES AND OFFICERS........................................................
THE INVESTMENT ADVISER, ADMINISTRATOR, DISTRIBUTOR
AND TRANSFER AGENT.........................................................
Investment Adviser . . . . . . . . . ...............................
The Administrator, Distributor and Transfer Agent...................
Expenses ...........................................................
PORTFOLIO TRANSACTIONS.......................................................
NET ASSET VALUE..............................................................
REDEMPTIONS..................................................................
CALCULATION OF YIELD QUOTATIONS..............................................
TAX INFORMATION..............................................................
State and Local.....................................................
ORGANIZATION AND CAPITALIZATION..............................................
Shareholder and Trustee Liability...................................
CUSTODIAN....................................................................
INDEPENDENT ACCOUNTANTS AND COUNSEL..........................................
FINANCIAL STATEMENTS.........................................................
SHAREHOLDER ADMINISTRATIVE SERVICES..........................................
APPENDIX: DESCRIPTION OF SECURITIES RATINGS..................................
</TABLE>
-2-
<PAGE> 425
PILOT SHARES
INVESTMENT POLICIES AND PRACTICES OF THE PORTFOLIOS
The following discussion elaborates on the description of each Fund's
investment policies and practices contained in the Prospectus. 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 SECURITIES
A Fund may invest in separately traded principal and interest
components of securities issued or guaranteed by the U.S. Treasury. The
principal and interest components of selected securities are traded
independently under the Separate Trading of Registered Interest and Principal of
Securities program ("STRIPS"). Under the STRIPS program, 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.
CUSTODIAL RECEIPTS
The Diversified 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. Although it has no current intent, the
Treasury Fund could invest more than 10% of its total assets in custodial
receipts if the staff of the Securities and Exchange Commission ("SEC") changes
its current policy that such evidences of ownership do not constitute Government
Securities for purposes of Section 35(d) of the Investment Company Act of 1940
(the "1940 Act"). The Tax-Exempt Funds may acquire custodial receipts that
evidence ownership of future interest payments, principal payments or both on
certain municipal notes and bonds.
BANK AND CORPORATE OBLIGATIONS
Commercial paper represents short-term unsecured promissory notes
typically issued in bearer form by banks or bank holding companies,
corporations, and finance companies. The commercial paper purchased by the Funds
consists of direct U.S. dollar denominated obligations of domestic or foreign
issuers. Bank obligations in which the Funds may invest include certificates of
deposit, bankers' acceptances, fixed time deposits and bank notes. Certificates
of deposit are negotiable certificates issued against funds deposited in a
commercial bank for a definite period of time and earning a specified return.
Bankers' acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific merchandise, which
are "accepted" by a bank, meaning, in effect, that the bank unconditionally
agrees to pay the face value of the instrument on maturity. Fixed time deposits
are bank obligations payable at a stated maturity date and bearing interest at a
fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but
may be subject to early withdrawal penalties which vary depending upon market
conditions and the remaining maturity of the obligation. There are no
contractual restrictions on the right to transfer a beneficial interest in a
fixed time deposit to a third party, although there is no market for such
deposits. Bank notes and bankers acceptances rank junior to domestic deposit
liabilities of the bank and pari passu with other senior,
-3-
<PAGE> 426
unsecured obligations of the bank. Bank notes are classified as "other
borrowings" on a bank's balance sheet, while deposit notes and certificates of
deposit are classified as deposits. Bank notes are not insured by the Federal
Deposit Insurance Corporation or any other insurer. Deposit notes are insured by
the Federal Deposit Insurance Corporation only to the extent of $100,000 per
depositor per bank. Certain fixed time deposits maturing in more than seven days
may be deemed to be illiquid securities.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with selected
broker-dealers, banks or other financial institutions. A repurchase agreement is
an arrangement under which the purchaser (i.e., the 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 Funds' 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 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 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 liquid instruments.
-4-
<PAGE> 427
FOREIGN SECURITIES
The Diversified Fund may invest in U.S. dollar denominated foreign
securities and certificates of deposit, bankers' acceptances and fixed time
deposits and other obligations issued by major foreign banks, foreign branches
of U.S. banks, U.S. branches of foreign banks, and foreign branches of foreign
banks. Investments can include fixed time deposits in Cayman Island branches of
such banks. The Tax-Exempt Funds may also invest in municipal instruments backed
by letters of credit issued by certain of such banks. Under current SEC rules
relating to the use of the amortized cost method of portfolio securities
valuation, these Funds are restricted to purchasing U.S. dollar denominated
securities, but are not otherwise precluded from purchasing securities of
foreign issuers.
Investments in foreign securities and bank obligations may involve
considerations different from investments in domestic securities due to limited
publicly available information; non-uniform accounting standards; the possible
imposition of withholding or confiscatory taxes, the possible adoption of
foreign governmental restrictions affecting the payment of principal and
interest, expropriation, or other adverse political or economic developments. In
addition, it could be more difficult to obtain and enforce a judgment against a
foreign issuer or a foreign branch of a domestic bank.
ASSET-BACKED AND RECEIVABLES-BACKED SECURITIES
The securitization techniques used to develop mortgage-backed
securities are now being applied to a broad range of assets. Through the use of
trusts and special purpose corporations, various types of assets, including
automobile loans, computer leases, trade receivables and credit card
receivables, are being securitized in pass-through structures similar to the
mortgage pass-through structures. Consistent with its investment objectives and
policies, the Diversified Fund may invest in these and other types of
asset-backed securities that may be developed in the future. However, the Fund
will generally not invest in an asset-backed security if the income received
with respect to its investment constitutes rental income or other income not
treated as qualifying income under the 90% test described in "Tax Information"
below. In general, the collateral supporting these securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments with interest rate fluctuations.
Several types of asset-backed and receivable-backed securities have
already been offered to investors, for example Certificates for Automobile
Receivables(SM) ("CARS(SM)") and interests in pools of credit card receivables.
CARS(SM) represent undivided fractional interests in a trust ("CAR Trust") whose
assets consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARS(SM) are passed through monthly to certificate holders, and
are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the CAR Trust. An investor's return on CARSSM may be affected by
early prepayment of principal on the underlying vehicle sales contracts. If the
letter of credit is exhausted, the CAR Trust may be prevented from realizing the
full amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage or
loss of a vehicle, the application of federal and state bankruptcy and
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets. 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 give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. There is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
-5-
<PAGE> 428
Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection, and (ii) protection against losses
resulting from ultimate default by an obligor or servicer. Liquidity protection
refers to the provision of advances, generally by the entity administering the
pool of assets, to ensure that the receipt of payments on the underlying pool
occurs in a timely fashion. Protection against losses results from payment of
the insurance obligations on at least a portion of the assets in the pool. This
protection may be provided through guarantees, policies or letters of credit
obtained by the issuer or sponsor from third parties, through various means of
structuring the transaction or through a combination of such approaches. The
degree of credit support provided for each issue is generally based on
historical information reflecting the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that anticipated or failure
of the credit support could adversely affect the return on an investment in such
a security.
The availability of asset-backed securities may be affected by
legislative or regulatory developments. It is possible that such developments
may require the Diversified Fund to dispose of any then existing holdings of
such securities.
Consistent with the Diversified Fund's investment objectives and
policies, the Fund also may invest in other types of asset-backed and
receivables-backed securities.
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES
Each Fund may purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis. These transactions involve a
commitment by the 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 when 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 transactions are negotiated directly with the other party,
and such commitments are not traded on exchanges, but may be traded
over-the-counter.
A Fund will purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment 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 negotiate 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. The Fund may realize a capital gain or loss in
connection with these transactions. For purposes of determining a Fund's average
dollar weighted maturity, the maturity of when-issued or forward commitment
securities will be calculated from the commitment date.
When a Fund purchases securities on a when-issued or forward commitment
basis, the Fund's custodian or subcustodian will maintain in a segregated
account liquid assets having a value (determined daily) at least equal to the
amount of the Fund's purchase commitments. In the case of a forward commitment
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
ensure that the Fund will maintain sufficient assets at all times to cover its
obligations under when-issued purchases and forward commitments.
VARIABLE AMOUNT MASTER DEMAND NOTES
Each Fund may purchase variable amount master demand notes. These
obligations permit the investment of fluctuating amounts at varying rates of
interest pursuant to direct arrangements between the Fund (as lender) and the
borrower. These notes are direct lending arrangements between lenders and
borrowers, and are not generally transferable, nor are they ordinarily rated by
a Nationally
-6-
<PAGE> 429
Recognized Statistical Rating Organization ("NRSRO"). The Fund may invest in
these notes only if Boatmen's believes that, as of the time of investment, the
notes are of a quality comparable to the other obligations in which a Fund may
invest.
VARIABLE RATE AND FLOATING RATE DEMAND INSTRUMENTS
Each Fund may purchase variable and floating rate demand instruments
that are tax-exempt municipal obligations and other debt securities that possess
a floating or variable interest rate adjustment formula. These instruments also
permit a Fund to demand payment of the principal balance plus unpaid accrued
interest upon a specified number of days' notice to the issuer or its agent. The
demand feature may be backed by a bank letter of credit or guarantee issued with
respect to such instrument.
The terms of the variable or floating rate demand instruments that a
Fund may purchase provide that interest rates are adjustable at intervals
ranging from daily up to six months, and the adjustments are based upon current
market levels, the prime rate of a bank or other appropriate interest rate
adjustment index as provided in the respective instruments. Some of these
instruments are payable on demand on a daily basis or on not more than seven
days' notice. Others, such as instruments with quarterly or semiannual interest
rate adjustments, may be put back to the issuer on designated days on not more
than thirty days' notice. Still others are automatically called by the issuer
unless the Fund instructs otherwise. A Fund will determine the variable or
floating rate demand instruments that it will purchase in accordance with
procedures approved by the Trustees to minimize credit risks. Accordingly, any
variable or floating rate demand instrument must be of high quality with respect
to both its long-term and short-term aspects, except that where credit support
is provided even if the issuer defaults in the payment of principal or interest,
the Fund may rely only on the high quality character of the short-term aspect of
the variable or floating rate demand instrument, i.e., the right to sell. A
variable or floating rate demand instrument which is unrated must have high
quality characteristics similar to other obligations rated high quality.
Boatmen's may determine that an unrated variable or floating rate demand
instrument meets a Fund's quality criteria by reason of being backed by a letter
of credit or guarantee issued by a bank that meets the quality criteria for that
Fund. Thus, either the credit of the issuer of the obligation or the guarantor
bank or both will meet the quality standards of the Fund.
The maturity of the variable or floating rate demand instruments held
by a Fund will ordinarily be deemed to be the longer of: (1) the notice period
required before the Fund is entitled to receive payment of the principal amount
of the instrument through demand, or (2) the period remaining until the
instrument's next interest rate adjustment. The acquisition of variable or
floating rate demand notes for a Fund must also meet the requirements of rules
issued by the SEC applicable to the use of the amortized cost method of
securities valuation.
A Fund may invest in variable or floating rate demand instruments in
the form of participation interests in variable or floating rate tax-exempt
obligations held by financial institutions (usually commercial banks). Such
participation interests provide the Fund with a specific undivided interest (up
to 100%) in an obligation and the right to demand payment of the unpaid
principal balance plus accrued interest on the participation interest from the
financial institution upon a specific number of days' notice. In addition, the
participation interest generally is backed by an irrevocable letter of credit or
guarantee from the institution. The institution usually retains fees out of the
interest paid on the obligation for servicing the obligation and providing the
letter of credit.
LOAN PARTICIPATION
The Diversified Fund may purchase participation interests with
remaining maturities of thirteen months or less in loans of any maturity. Such
loans must be to issuers in whose obligations the Fund may invest. Any
participation purchased by the Fund must be issued by a bank in the United
States with assets exceeding $1 billion. Because the issuing bank does not
guarantee the participation in any
-7-
<PAGE> 430
way, it is subject to the credit risks generally associated with the underlying
corporate borrower. In addition, because it may be necessary under the terms of
the loan participation for the Fund to assert through the issuing bank such
rights as may exist against the underlying corporate borrower, in the event that
the underlying corporate borrower should fail to pay principal and interest when
due, the Fund could be subject to delays, expenses and risks which are greater
than those which would have been involved if the Fund had purchased a direct
obligation (such as commercial paper) of the borrower. Moreover, under the terms
of the loan participation, the purchasing Fund may be regarded as a creditor of
the issuing bank (rather than of the underlying corporate borrower), so that the
Fund also may be subject to the risk that the issuing bank may become insolvent.
Further, in the event of the bankruptcy or insolvency of the corporate borrower,
the loan participation might be subject to certain defenses that can be asserted
by a borrower as a result of improper conduct by the issuing bank. The secondary
market, if any, for these loan participation interests is limited, and any such
participation purchased by the Fund may be treated as illiquid.
MUNICIPAL OBLIGATIONS
The Diversified Fund and the Tax-Exempt Funds may invest in municipal
obligations. Municipal obligations are issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies, authorities and instrumentalities and the District of
Columbia to obtain funds for various public purposes. The interest on most of
these obligations is generally exempt from regular federal income tax. The two
principal classifications of municipal obligations are "notes" and "bonds."
NOTES. Municipal notes are generally used to provide for short-term
capital or operating cash flow needs and generally have maturities of one year
or less. Municipal notes include tax anticipation notes, revenue anticipation
notes, bond anticipation notes, tax and revenue anticipation notes, tax-exempt
commercial paper and certain receipts for municipal obligations.
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. They are often general obligations of the
issuer, secured by the taxing power for payment of principal and interest.
Revenue anticipation notes are issued in expectation of receipt of other types
of revenue such as federal revenues available under the Federal Revenue Sharing
Program. They are often general obligations of the issuer. Tax anticipation
notes and revenue anticipation notes are generally issued in anticipation of
various seasonal revenues such as income, sales, use and business taxes. Bond
anticipation notes are sold to provide interim financing in anticipation of
long-term financing in the market. In most cases, these monies provide for the
repayment of the notes and the notes are not secured by any other source.
Tax-exempt commercial paper consists of short-term unsecured promissory notes
issued by a state or local government or an authority or agency thereof. The
Funds may also acquire securities in the form of custodial receipts which
evidence ownership of future interest payments, principal payments or both on
certain state and local governmental and authority obligations when, in the
opinion of bond counsel, they are exempt from federal income tax. Such
obligations are held in custody by a bank on behalf of the holders of the
receipts. These custodial receipts are known by various names, including
"Municipal Receipts" and "Municipal Certificates of Accrual on Tax-Exempt
Securities." There are a number of other types of notes issued for different
purposes and secured differently from those described above.
BONDS. Municipal bonds, which generally meet longer term capital needs
and have maturities of more than one year when issued, have two principal
classifications, "general obligation" bonds and "revenue" bonds.
General obligation bonds are issued by entities such as states,
counties, cities, towns and regional districts and are used to fund a wide range
of public projects including the construction or improvement of schools,
highways and roads, water and sewer systems and a variety of other public
-8-
<PAGE> 431
purposes. The basic security of general obligation bonds is the issuer's pledge
of its faith, credit, and taxing power for the payment of principal and
interest. The taxes that can be levied for the payment of debt service may be
limited or unlimited as to rate or amount or special assessments.
Revenue bonds have been issued to fund a wide variety of capital
projects including: electric, gas, water and sewer systems; highways, bridges
and tunnels; port and airport facilities; colleges and universities; and
hospitals. The principal security for a revenue bond is generally the net
revenues derived from a particular facility or group of facilities or, in some
cases, from the proceeds of a special excise or other specific revenue source.
Although the principal security behind these bonds varies widely, many provide
additional security in the form of a debt service reserve fund whose monies may
also be used to make principal and interest payments on the issuer's
obligations. Housing finance authorities have a wide range of security including
partially or fully insured, rent subsidized and/or collateralized mortgages,
and/or the net revenues from housing or other public projects. In addition to a
debt service reserve fund, some authorities provide further security in the form
of a state's ability (without obligation) to make up deficiencies in the debt
service reserve fund. Lease rental revenue bonds issued by a state or local
authority for capital projects are secured by annual lease rental payments from
the state or locality to the authority sufficient to cover debt service on the
authority's obligations.
Private activity bonds, a term that includes certain types of bonds,
the proceeds of which are used to a specified extent for the benefit of persons
other than governmental units, although nominally issued by municipal
authorities, are generally not secured by the taxing power of the municipality
but are secured by the revenues of the authority derived from payments by the
industrial user. The Tax-Exempt Diversified Fund does not intend to invest in
recently issued private activity bonds. The Tax-Exempt Fund may invest in
private activity bonds. The interest from such bonds would be an item of tax
preference to shareholders under the federal alternative minimum tax.
Municipal bonds with a series of maturity dates are called serial
bonds. The serial bonds which the Funds may purchase are limited to short-term
serial bonds, those with original or remaining maturities of 13 months or less.
The Funds may purchase long-term bonds provided that they have a remaining
maturity of 13 months or less or, in the case of bonds called for redemption,
the date on which the redemption payment must be made is within 13 months. The
Funds may also purchase long-term bonds (sometimes referred to as "Put Bonds"),
which are subject to a Fund's commitment to put the bond back to the issuer at
par at a designated time within 13 months and the issuer's commitment to so
purchase the bond at such price and time. The Funds may purchase long-term
fixed-rate bonds that have been coupled with an option granted by a third party
financial institution allowing the Fund, at periodic intervals (usually every
six months, but in no event more than every twelve months), to tender (or "put")
its bonds to the institution and receive the face value thereof. The Fund may be
assessed "tender fees" for each tender period at a rate equal to the difference
between the bonds' fixed coupon rate and the rate, as determined by a
remarketing or similar agent, that would cause the bonds coupled with the tender
option to trade at par on the date of such determination.
These bonds coupled with puts, as well as standby commitments
(discussed below), may present tax issues. With either type of investment, the
Tax-Exempt Funds intend to take the position that they are the owners of
municipal obligations acquired subject to a third-party put, and that tax-exempt
interest earned with respect to such municipal obligations will be tax-exempt in
their bonds. There is no assurance that the Internal Revenue Service will agree
with such position in any particular case. Additionally, the federal income tax
treatment of certain other aspects of these investments, including the treatment
of any tender fees or swap payments, in relation to various regulated investment
company tax provision is unclear.
In addition to general obligation bonds, revenue bonds and serial
bonds, there are a variety of hybrid and special types of municipal obligations
as well as numerous differences in the security of municipal obligations both
within and between the two principal classifications above.
-9-
<PAGE> 432
The Tax-Exempt Funds may purchase municipal instruments that are backed
by letters of credit issued by domestic banks or foreign banks that have a
branch, agency or subsidiary in the United States. See "Foreign Securities" for
information concerning credit risks of foreign bank obligations.
For the purpose of investment restrictions of the Funds, the
identification of the "issuer" of municipal obligations that are not general
obligation bonds is made by Boatmen's on the basis of the characteristics of the
obligation as described above, the most significant of which is the source of
funds for the payment of principal of and interest on such obligations.
An entire issue of municipal obligations may be purchased by one or a
small number of institutional investors such as one of the Funds. Thus, the
issue may not be said to be publicly offered. Unlike securities which must be
registered under the Securities Act of 1933 prior to offer and sale, unless an
exemption from such registration is available, municipal obligations which are
not publicly offered may nevertheless be readily marketable. A secondary market
exists for municipal obligations which were not publicly offered initially.
Securities purchased for the Tax-Exempt Funds are subject to the policy
on holdings of securities which are not readily marketable. Boatmen's determines
whether a municipal obligation is readily marketable based on whether it may be
sold in a reasonable time consistent with the customs of the municipal markets
(usually seven days) at a price (or interest rate) which accurately reflects its
value. Boatmen's believes that the quality standards applicable to the Funds'
investments enhance marketability. In addition, standby commitments and demand
obligations also enhance marketability.
Yields on municipal obligations depend on a variety of factors,
including money market conditions, municipal bond market conditions, the size of
a particular offering, the maturity of the obligation and the quality of the
issue. Higher quality municipal obligations tend to have a lower yield than
lower rated obligations. Municipal obligations are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, extending the
time for payment of principal or interest, or both, or imposing other
constraints upon enforcement of such obligations or municipalities to levy
taxes. There is also the possibility that as a result of litigation or other
conditions the power or ability of any one or more issuers to pay when due
principal of and interest on its or their municipal obligations may be
materially affected.
INVESTING IN MISSOURI
The following information as to certain Missouri risk factors is given
to investors in view of the Tax-Exempt Fund's policy of concentrating its
investments in Missouri issuers. Such information constitutes only a brief
summary, does not purport to be a complete description and is based on
information from recent official statements relating to securities offerings of
Missouri issuers.
Missouri has a diverse economy based upon manufacturing, commerce,
trade, agriculture and mining. The State's proximity to the geographic and
population centers of the nation makes the State an attractive location for
business and industry. Earnings and employment are distributed among the
manufacturing, service and trade sectors in a close approximation of the
national average, lessening the State's cyclical sensitivity to a downturn in
any single sector. Wholesale and retail trade, services and manufacturing
together account for approximately 67% of Missouri's non-agricultural
employment. The unemployment rate in Missouri exceeded the national average in
the 1983 recession period, fell below the national average in 1984-86, 1989 and
1991-92 and exceeded the national average in 1987, 1988 and 1990.
The Missouri portions of the St. Louis and Kansas City metropolitan
areas contain approximately 1,855,000 and 961,000 residents, respectively,
constituting over 53% of Missouri's 1990 estimated population of approximately
5,117,000. St. Louis is an important site for banking and manufacturing
activity, as well as a distribution and transportation center, with eleven
Fortune 500 companies (as well
-10-
<PAGE> 433
as other major educational, financial, insurance, retail, wholesale and
transportation companies and institutions) headquartered there. Kansas City is a
major agribusiness center and an important center for finance and industry.
Economic reversals in either of these two areas would have a major impact on the
overall economic condition of the State of Missouri.
Manufacturing is a leading component of Missouri's economy. To the
extent that the economy suffers a recessionary period, the manufacturing sector,
which relies heavily on durable goods such as automobiles and electric and
electronic equipment, could be adversely affected.
Defense related business plays an important role in Missouri's economy.
In addition to the large number of civilians employed at the various military
installations and training bases in the State, aircraft and related businesses
in Missouri are the recipients of substantial annual dollar volumes of defense
contract awards. McDonnell Douglas Corporation is the State's largest employer,
employing approximately 30,000 employees in Missouri in 1994. From 1977 through
1991, Missouri has ranked in the top six states in total military contract
awards and ranked eighth in 1992, compared to its population ranking as the
nation's fifteenth largest state. To the extent that changes in military
appropriations were enacted by the United States Congress, Missouri could be
disproportionately affected.
Article X, Section 16-24 of the Constitution of Missouri (the "Hancock
Amendment") imposes a limit on the amount of taxes that may be imposed by the
State and on the amount of taxes, licenses and fees that may be imposed by local
government units in any fiscal year. The details of the Hancock Amendment are
complex; the amendment has been the subject of several judicial decisions and
further clarification from implementing legislation and subsequent judicial
decisions may be necessary.
The Hancock Amendment provides that the State may not collect revenues
in any fiscal year that exceed by more than one percent total State revenues for
the fiscal year ended June 30, 1981, adjusted annually based on increases in the
average personal income of Missouri residents. If the revenue limit is exceeded
by more than one percent in any fiscal year, a refund of the excess revenues
collected by the State is required.
The revenue limit may be exceeded if the Governor declares an emergency
and expenditures above the limit are approved by a two-thirds vote of each house
of the Missouri legislature. The revenue limit can also be exceeded if the
voters of the State of Missouri approve a constitutional amendment authorizing
new or increased taxes or revenues. In addition, the revenue limit does not
apply to taxes imposed for the payment of principal and interest on bonds
approved by the voters and authorized under the Missouri Constitution. The
Hancock Amendment does not prohibit increasing State taxes so long as State
revenues are expected to be less than the revenue limit.
The Hancock Amendment further provides that the State may not reduce
the State financed portion of the cost of any existing activity or service
required of a county or political subdivision and that the cost of any new
activity or service required by the State must be funded by the State. In
addition, State expenditures in any fiscal year may not exceed the established
revenue limit plus federal and surplus funds.
The Hancock Amendment generally prohibits counties and other political
subdivisions (all local government Units having the power to tax) from levying
any new or increased tax, license or fee without the approval of the required
majority of voters; however, the Missouri Supreme Court has ruled that increases
in specific charges for certain services actually provided are not subject to
the Hancock Amendment. If the required majority of voters approve the issuance
of debt obligations and the levy of taxes or imposition of licenses or fees
necessary to meet payments of principal and interest on such debt obligation,
existing taxes, licenses or fees may be increased or new taxes, licenses or fees
imposed without violating the Hancock Amendment. Missouri constitutional or
statutory provisions other than the Hancock Amendment may require greater than
majority approval for the valid issuance of debt obligations.
-11-
<PAGE> 434
Counties and other political subdivisions (but not the State) may
increase taxes without regard to the Hancock Amendment to pay principal and
interest on obligations if such obligations were authorized to be issued prior
to the adoption of the Hancock Amendment.
If the tax base of a county or other political subdivision with respect
to a tax, fee or license is broadened, the Hancock Amendment requires the tax
levy or fee to be reduced to yield the same estimated gross revenue as on the
prior base. Even if the assessed value of property in the county or other
political subdivision (excluding the value of new construction and improvements)
increases at a rate exceeding the consumer price index, the Hancock Amendment
limits any percentage increase in property tax revenues to the percentage
increase in the consumer price index and requires a rollback of taxes if
assessed values of real property increase faster than the consumer price index.
The Hancock Amendment limitations do not apply to the tax levy on the
assessed valuation of new construction and improvements.
To the extent that the payment of general obligation bonds issued by
the State of Missouri or a county or other political subdivision is dependent on
revenues from the levy of taxes and such obligations have been issued after the
date of the Hancock Amendment's adoption, November 4, 1980, the ability of the
State of Missouri or the appropriate local Unit to levy sufficient taxes to pay
the debt service on such bonds may be affected, unless there has been specific
voter approval of the issuance of such bonds and the levy of such taxes as are
necessary to pay the principal and interest on such bonds.
Debt obligations issued by certain State issuers, including those of
the Board of Public Buildings of the State of Missouri and the Department of
Natural Resources of the State of Missouri, are payable either solely or
primarily from the rentals, incomes and revenues of specific projects financed
with the proceeds of the debt obligations and are not supported by the taxing
powers of the State or of the issuer of the bonds. The Hancock Amendment may
most strongly affect such state revenue bonds, since they are dependent in whole
or in part on State appropriations to provide sufficient revenues to pay
principal and interest. Unless such bonds are approved by the voters of
Missouri, under the Hancock Amendment, taxes cannot be raised to cover the state
appropriations necessary to provide revenues to pay principal and interest on
the bonds.
Consequently, there may be insufficient state revenues available to
permit the State legislature to make appropriations adequate to enable the
issuer to make timely payment of principal and interest on such State revenue
bonds. For example, in the case of the Board of Public Buildings of the State of
Missouri, the payment of principal and interest on debt obligations is dependent
solely on the appropriation by the State legislature of sufficient funds to pay
the rentals of State agencies occupying buildings constructed by the Board of
Public Buildings. State park revenue bonds of the Department of Natural
Resources of the State of Missouri are in part dependent on revenues generated
by operations of the particular project and in part on State appropriations.
Consequently, payment of principal and interest on such State revenue bonds,
relating to specific projects and not supported by the taxing power of the State
of Missouri, may not be made or may not be made in a timely fashion because of
the inability of the State to appropriate sufficient funds for the payment of
such bonds (or to make up shortfalls therein) due to the limitations on State
taxes and expenditures imposed by the Hancock Amendment, the inability of the
issuer to generate sufficient income or revenue from the project to make such
payment or a combination of such factors.
As described above, general obligation bonds and revenue bonds of
counties or other political subdivision issuers may also be affected by the tax,
license and fee limitations of the Hancock Amendment. Unless the required voter
approval of such debt obligations and the imposition of taxes to pay them is
obtained prior to their issuance, the Hancock Amendment imposes limitations on
the imposition of new taxes and the increase of existing taxes which may be
necessary to pay principal and interest on general obligations bonds of local
issuers. The limitations contained in the Hancock Amendment also may affect the
payment of principal and interest on bonds and other obligations
-12-
<PAGE> 435
issued by local governmental units and supported by the revenues generated from
user fees, licenses or other fees and charges, unless the requisite voter
approval of the issuance of such bonds or other obligations, and the approval of
the assessment of such fees or other charges as may be necessary to pay the
principal and interest on such bonds or other obligations, has been obtained
prior to their issuance.
Debt obligations of certain other state and local agencies and
authorities are not, by the terms of their respective authorizing statutes,
obligations of the state or any political subdivision, public instrumentality or
authority, county, municipality or other state or local unit of government.
Illustrative of such issuers are the Missouri Housing Development Commission,
the State Environmental Improvement and Energy Resources Authority, the Health
and Educational Facilities Authority of the State of Missouri, the Missouri
Higher Education Loan Authority, the Industrial Development Board of the State
of Missouri, the Missouri Agricultural and Small Business Development Authority
and other similar bodies organized on a local level under similar state
authorizing statutes such as the various local industrial development
authorities. The debt obligations of such issuers are payable only from the
revenues generated by the project or program financed from the proceeds of the
debt obligations they issue, and the Hancock Amendment has no application.
In November 1992, Missouri voters approved a constitutional amendment
which removed the net proceeds of fuel taxes allocated to counties, cities,
towns and villages from the definition of "total state revenues" in the Hancock
Amendment. This change became effective July 1, 1993.
Under Missouri law, property tax abatement and tax increment financing
can be made available to encourage redevelopment projects. Neither tax abatement
nor tax increment financing diminishes tax revenues collected in affected areas,
but instead act to freeze such revenues at current levels and thereby deprive
the taxing authority of future increases in ad valorem property tax revenues
which would otherwise result from increases in assessed valuations in affected
areas.
In addition to the spending limitation imposed by the Hancock
Amendment, the Missouri General Assembly has proposed a Constitutional amendment
which would prohibit the General Assembly in any fiscal year from increasing
taxes or fees without voter approval that in total produce new annual revenues
greater than either $50 million adjusted annually by the percentage change in
the person income of Missouri for the second previous fiscal year, or by 1% of
total state revenue, whichever is less. In emergency situations, as defined by
the Hancock Amendment, the General Assembly could increase taxes, licenses or
fees for one year above the limit without voter approval. The proposed amendment
to the Constitution is scheduled to be voted upon on April 19, 1996.
Another proposed constitutional amendment would allow school districts
to increase their bond indebtedness from 10 to 15 percent of the value of
taxable tangible property located in the district. No vote on such amendment has
been scheduled.
STANDBY COMMITMENTS
In order to enhance the liquidity, stability or quality of municipal
obligations, the Tax-Exempt Funds may acquire the right to sell a security to
another party at a guaranteed price and date. Such a right to resell may be
referred to as a put, demand feature or "standby commitment," depending on its
characteristics. The aggregate price which a Fund pays for securities with
standby commitments may be higher than the price which otherwise would be paid
for the securities.
Standby commitments may involve letters of credit issued by domestic or
foreign banks supporting the other party's ability to purchase the security from
the Fund. The right to sell may be exercisable on demand or at specified
intervals, and may form part of a security or be acquired separately by the
Fund. In considering whether a security meets a Fund's quality standards, the
Fund will look to the creditworthiness of the party providing the Fund with the
right to sell as well as the quality of the security itself.
-13-
<PAGE> 436
The Funds value municipal obligations which are subject to standby
commitments at amortized cost. The exercise price of the standby commitments is
expected to approximate such amortized cost. No value is assigned to the standby
commitments for purposes of determining a Fund's net asset value. The cost of a
standby commitment is carried as unrealized depreciation from the time of
purchase until it is exercised or expires. Since the value of a standby
commitment is dependent on the ability of the standby commitment writer to meet
its obligation to repurchase, each Fund's policy is to enter into standby
commitment transactions only with banks, brokers or dealers which represent a
minimal risk of default. The duration of standby commitments will not be a
factor in determining the weighted average maturity of a Fund. There is no
assurance that standby commitments will be available to a Fund nor have the
Funds assumed that such commitments would continue to be available under all
market conditions.
TAX-EXEMPT FUND TAXABLE OBLIGATIONS
The Tax-Exempt Funds do not currently intend to invest in taxable
obligations; however, from time to time each Fund may invest a portion of its
assets on a temporary basis in fixed-income obligations whose interest payments
are subject to federal or, in the case of the Tax-Exempt Fund, Missouri income
tax. In addition to the temporary defensive investments described in the
Prospectus, each Fund may invest in taxable obligations pending the investment
or reinvestment in municipal bonds of proceeds from sales of Fund shares or
sales of portfolio securities. A Fund may also invest in highly liquid, taxable
obligations in order to avoid the necessity of liquidating portfolio investments
to meet redemption requests by Fund shareholders.
RESTRICTED AND OTHER ILLIQUID SECURITIES
A Fund may purchase securities that are not registered ("restricted
securities") under the Securities Act of 1933, including restricted securities
offered and sold to "qualified institutional buyers" under Rule 144A under the
Securities Act of 1933. However, a Fund will not invest more than 10% of the
value of its net assets in securities which are illiquid, which may include
restricted securities, unless the Funds' Board of Trustees determines, based
upon a continuing review of the trading markets for the specific restricted
security, that such restricted securities are liquid. The Board of Trustees may
adopt guidelines and delegate to Boatmen's the daily function of determining and
monitoring liquidity of restricted securities. The Board, however, will retain
sufficient oversight and be ultimately responsible for the determinations, since
it is not possible to predict with assurance that the market for securities
eligible for resale under Rule 144A will continue to be liquid. The Board 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.
INVESTMENT RESTRICTIONS
The Funds have adopted certain fundamental policies, which may not be
changed with respect to any Fund without the approval of the holders of a
majority of the outstanding voting shares of that Fund as defined in the 1940
Act.
TREASURY FUND, DIVERSIFIED FUND AND TAX-EXEMPT DIVERSIFIED FUND
As a matter of fundamental policy for the Treasury Fund, the
Diversified Fund and the Tax-Exempt Diversified Fund, each Fund may not:
(1) Purchase securities of any issuer if immediately after such
purchase the value of the Fund's investments in issuers
conducting their principal business activity in any one
industry would exceed 25% of the value of the Fund's total
assets, provided that:
-14-
<PAGE> 437
(a) the gas, electric, water and telephone businesses will be
considered separate industries, (b) the personal credit and
business credit businesses will be considered separate
industries, (c) wholly-owned finance companies will be
considered to be in the industry of their parents if their
activities are primarily related to financing the activity of
their parents, (d) there is no limitation with respect to or
arising out of investments in obligations issued or guaranteed
by the U.S. Government, its agencies and instrumentalities or
by banks and (e) the Diversified Fund will invest more than
25% of the value of its total assets in bank obligations
(whether foreign or domestic) except that if adverse economic
conditions prevail in the banking industry the Diversified
Fund may, for defensive purposes, temporarily invest less than
25% of the value of its total assets in bank obligations (for
the purposes of this restriction, state and municipal
governments and their agencies or authorities are not deemed
to be industries).
(2) Make loans, except to the extent that the purchase of debt
obligations in accordance with each Fund's investment
objective and policies and repurchase agreements with banks,
brokers, dealers and other financial institutions may be
deemed to be loans.
(3) Borrow money, except: (a) as a temporary measure, and then
only in amounts not exceeding 5% of the value of the Fund's
total assets, or (b) from banks, provided that immediately
after any such borrowing all borrowings of the Fund do not
exceed one-third of the Fund's total assets. While any Fund
has borrowings outstanding in an amount exceeding 5% of its
total assets the Funds will not make any purchases of
portfolio instruments for that Fund. The Funds may not borrow
money from Boatmen's Bancshares, Inc. or any majority-owned
subsidiary thereof.
(4) Purchase or sell real estate (except securities secured by
real estate or interests therein), commodities, commodity
contracts or oil and gas interests, or purchase any voting
securities or invest in companies for the purpose of
exercising control or management.
(5) Act as an underwriter of securities (except as the Funds may
be deemed to be an underwriter under the Securities Act of
1933 in connection with the purchase and sale of instruments
in accordance with its investment objective and portfolio
management policies), make short sales of securities, or
maintain a short position.
(6) Mortgage, pledge or hypothecate any assets, except to secure
permitted borrowings.
(7) Purchase the securities of any issuer other than the U.S.
Government, its agencies or instrumentalities, if immediately
after such purchase, more than 5% of the value of the Fund's
total assets would be invested in any one issuer except that:
(a) up to 25% of the value of its total assets may be invested
without regard to such 5% limitation, and (b) such 5%
limitation shall not apply to repurchase agreements
collateralized by obligations of the U.S. Government, its
agencies or instrumentalities.
For purposes of the investment restriction in item (1), each foreign
government will be considered a separate industry. For purposes of the
restriction in item (7) above, a guaranty of an instrument will be considered a
separate security (subject to certain exclusions allowed under the 1940 Act).
The exceptions to item (3), above, with regard to borrowing are not for
investment leverage purposes, but are solely for extraordinary or emergency
purposes and to facilitate management of the Funds by enabling the Funds to meet
redemption requests when the liquidation of portfolio instruments is deemed to
be disadvantageous or not possible. If, due to market fluctuations or other
reasons, the net assets of a Fund fall below 300% of its borrowings, the Funds
would promptly reduce the borrowings of such Fund in accordance with the 1940
Act. To do this, the Funds may have to sell a portion of such Fund's investments
at a time when it may be disadvantageous to do so.
-15-
<PAGE> 438
In addition, the Trustees have approved the following non-fundamental
investment restriction on behalf of the Treasury Fund, the Diversified Fund and
the Tax-Exempt Diversified Fund: it will not, on behalf of such Funds, purchase
securities on margin (except for delayed delivery or when-issued transactions or
such short-term credits as are necessary for the clearance of transactions).
Pursuant to an SEC rule, the Diversified Fund and the Treasury Fund may
not invest more than 5% of their total assets in the securities of any one
issuer (except U.S. Government securities or repurchase agreements
collateralized by such obligations). Each of such Funds may, however, invest
more than 5% of its total assets in the First Tier Securities of a single issuer
for a period of up to three business days after the purchase thereof, although a
Fund may not make more than one such investment at any time. Securities which
are rated in the highest short-term rating category by at least two Nationally
Recognized Statistical Rating Organizations ("NRSROs") are designated "First
Tier Securities." Further, each of such Funds will not invest more than: (i) the
greater of 1% of its total assets, or (ii) one million dollars in the securities
of a single issuer which were Second Tier Securities when acquired by a Fund. In
addition, each of such Funds may not invest more than 5% of its total assets in
securities which were Second Tier Securities when acquired by a Fund. Securities
rated in the top two short-term rating categories by at least two NRSROs, but
which are not rated in the highest category by two or more NRSROs, are
designated "Second Tier Securities." Pursuant to SEC Rule 2a-7 the foregoing
restrictions are not applicable to the Tax-Exempt Funds. "NRSROs" include
Standard & Poor's Corporation, Moody's Investors Service, Inc., Duff & Phelps,
Inc., Fitch Investors Service, Inc., IBCA Limited and its affiliate IBCA Inc.,
and Thomson BankWatch, Inc. For a description of their rating categories, see
Appendix A.
TAX-EXEMPT FUND
As a matter of fundamental policy, the Tax-Exempt Fund may not:
(1) Purchase the securities of any issuer (other than obligations
issued or guaranteed by the Government of the United States or
its agencies or instrumentalities) if, as a result, more than
25% of the Fund's total assets (taken at current value) would
be invested in the securities of issuers having their
principal business activities in the same industry.
(2) Make loans, except: (a) through the purchase of all or a
portion of an issue of debt securities in accordance with its
investment objective, policies and limitations, or (b) by
engaging in repurchase agreements with respect to portfolio
securities, or (c) by lending securities to other parties,
provided that no securities loan may be made, if, as a result,
more than 33-1/3% of the value of its total assets would be
lent to other parties.
(3) Borrow money, except that the Fund may borrow money for
temporary or emergency purposes (not for leveraging or
investment) in an amount not exceeding 33-1/3% of the value of
its total assets (less liabilities other than borrowings) and
may not purchase any security while borrowings representing
more than 5% of its net assets are outstanding. Any borrowings
that come to exceed 33-1/3% of the value of the Fund's total
assets by reason of a decline in net assets will be reduced
within three days to the extent necessary to comply with the
33-1/3% limitation.
(4) Purchase or sell physical commodities or real estate unless
acquired as a result of the ownership of securities (but this
shall not prevent the Fund from purchasing and selling futures
contracts or marketable securities issued by companies or
other entities or investment vehicles that deal in real estate
or interests therein, nor shall this prevent the Fund from
purchasing interests in pools of real estate mortgage loans).
-16-
<PAGE> 439
(5) Underwrite securities issued by others (except to the extent
that the Fund may be deemed to be an underwriter within the
meaning of the Securities Act of 1933 in the disposition of
restricted securities).
(6) Issue bonds or any other class of securities preferred over
shares of the Fund in respect of the Fund's assets or
earnings, provided that the Fund may establish additional
series or classes of shares in accordance with its Declaration
of Trust.
(7) Sell securities short, unless it owns, or by virtue of
ownership of other securities has the right to obtain,
securities equivalent in kind and amount to the securities
sold short, and provided that transactions in futures
contracts are not deemed to constitute short sales.
To the extent that limitation (7) allows the Fund to engage in certain
short sales, and that limitation (4) allows the Fund to purchase or sell
physical commodities or real estate and purchase and sell futures contracts, the
Fund does not plan on doing so in the coming year. For purposes of the foregoing
restriction (1), municipal governments and their agencies and authorities are
not deemed to be industries.
As a matter of non-fundamental policy, the Tax-Exempt Fund may not:
(a) Purchase securities on margin, except that the Fund may obtain
such short-term credits as are necessary for the clearance of
transactions, and provided that the Fund may make initial and
variation margin payments in connection with transactions in
futures contracts and options on futures contracts.
(b) Purchase or otherwise acquire any security or enter into a
repurchase agreement with respect to any security if, as a
result, more than 10% of the value of its net assets would be
invested in securities subject to legal or contractual
restrictions on resale (restricted securities), securities for
which there is no readily available market, and repurchase
agreements not entitling the holder to payment of interest and
principal within seven days.
The foregoing non-fundamental investment restrictions of the Funds may
be changed or terminated without the approval of shareholders.
For purposes of the foregoing limitations, any limitation which
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, one of
the Funds.
As used in this Statement of Additional Information, with respect to
matters required to be submitted to shareholders by the provisions of the 1940
Act, the term "majority of the outstanding shares" of either the Funds or a
particular Fund of the Funds means the vote of the lesser of (i) 67% or more of
the shares of the Funds or Fund present at a meeting, if the holders of more
than 50% of the outstanding shares of the Funds or Fund are present or
represented by proxy, or (ii) more than 50% of the outstanding shares of the
Funds or Fund.
-17-
<PAGE> 440
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and officers of the Funds is set
forth below. Trustees and officers deemed to be "interested persons" of the
Funds for purposes of the 1940 Act are indicated by an asterisk.
<TABLE>
<CAPTION>
Principal Occupation(s)
Name and Address Position(s) with Trust During Past 5 Years
- ---------------- ---------------------- -------------------
<S> <C> <C>
J. Hord Armstrong, III (55) Trustee Chairman and CEO, D&K
8000 Maryland Avenue Wholesale Drug, Inc., a
Suite 1190 distributor of pharmaceutical
St. Louis, Missouri 63105 products, since 1987.
Lee F. Fetter (43) Chairman Chief Operating and Financial
660 S. Euclid, Box 8003 Officer Of Washington
St. Louis, Missouri 63110 University School of Medicine
since 1983.
Henry O. Johnston (59) Trustee President of Fordyce Four,
9650 Clayton Road Incorporated, a corporation
St. Louis, Missouri 63124 engaged in the acquisition and
management of personal
investments.
Executive Vice President of
L. White Matthews, III (50) Trustee Finance since 1987, Union
Eighth and Eaton Avenues Pacific Corporation, a company
Bethlehem, Pennsylvania 18018 engaged in transportation,
exploration and refining of
hydrocarbons, mining and real
estate.
Nicholas G. Penniman, IV (58) Trustee Publisher, St. Louis Post-
900 N. Tucker Boulevard Dispatch since 1986. Senior
St. Louis, Missouri 63101 Vice President of Pulitzer
Publishing Company since
1986.
William J. Tomko (37) President Senior Vice President, BISYS
3435 Stelzer Road Fund Services, Inc.
Columbus, Ohio 43219
W. Eugene Spurbeck (40) Vice President Manager, BISYS Fund Services,
3435 Stelzer Road Inc.
Columbus, Ohio 43219
Martin R. Dean (33) Treasurer Manager, Mutual Fund
3435 Stelzer Road Accounting, BISYS Fund
Columbus, Ohio 43219 Services, Inc. since May 1994.
Prior thereto, Senior Manager,
KPMG Peat Marwick.
</TABLE>
-18-
<PAGE> 441
<TABLE>
<CAPTION>
Principal Occupation(s)
Name and Address Position(s) with Trust During Past 5 Years
- ---------------- ---------------------- -------------------
<S> <C> <C>
George O. Martinez (37) Secretary Senior Vice President and
3435 Stelzer Road Director of Legal and
Columbus, Ohio 43219 Compliance Services of BISYS
Fund Services, Inc. since April
1995. Prior thereto, Vice
President and Associate
General Counsel of Alliance
Capital Management, L.P.
Sheldon A. Jones (58) Assistant Secretary Partner of the law firm of
Ten Post Office Square South Dechert Price & Rhoads.
Boston, Massachusetts 02109
Alaina Metz (28) Assistant Secretary Employee of BISYS Fund
3435 Stelzer Road Services Limited Partnership
Columbus, Ohio 43219 since June 1995; prior thereto,
supervisor, Alliance Capital
Management, L.P.
Bruce Treff (30) Assistant Secretary Counsel, BISYS Fund Services,
3435 Stelzer Road Inc. since September 1995.
Columbus, Ohio 43219 Prior thereto, Manager, Alliance
Capital Management, L.P.
</TABLE>
The Agreement and Declaration of Trust of the Funds (the "Trust
Agreement") provides that, subject to its provisions, the business of the Funds
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 [as of ________________________,
NationsBank Corporation], BISYS and their respective affiliates. The Funds have
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 for
comparable transactions with other customers.
Each officer holds comparable positions with certain other investment
companies for which BISYS or its affiliates serve as administrator and/or
distributor.
-19-
<PAGE> 442
The following table provides information relating to the aggregate
compensation received by the Trustees from the Registrant for the fiscal year
ended August 31, 1996.
COMPENSATION TABLE
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
TOTAL COMPEN-
PENSION OR ESTIMATED SATION FROM
AGGREGATE RETIREMENT ANNUAL REGISTRANT AND
NAME OF COMPENSATION BENEFITS UPON BENEFITS UPON FUND COMPLEX
PERSON, POSITION FROM REGISTRANT RETIREMENT RETIREMENT PAID TO PERSONS
<S> <C> <C> <C> <C>
J. Hord Armstrong, III $26,000 0 0 $26,000
Lee F. Fetter (Chairman) $28,000 0 0 $28,000
Henry O. Johnston* $26,000 0 0 $26,000
L. White Matthews, III $26,000 0 0 $26,000
Nicholas G. Penniman, IV $26,000 0 0 $26,000
</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 meeting
attended by such Trustee. The compensation paid to the Chairman is $18,000 and
$2,000 for each Trustee meeting 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 fiscal year ended August 31, 1996,
distributed to or accrued for the account of the non-interested Trustees (four
persons), amounted to approximately $106,000, which represented the total
compensation paid by the Funds to the Trustees during that year.
THE INVESTMENT ADVISER, ADMINISTRATOR, DISTRIBUTOR
AND TRANSFER AGENT
INVESTMENT ADVISER
Boatmen's Trust Company, P.O. Box 14737, 100 North Broadway, St. Louis,
Missouri 63178, acts as investment adviser to the Funds. As adviser, Boatmen's
is responsible for the management of each Fund's assets pursuant to separate
Advisory Agreements between each Fund and Boatmen's. As of ,
Boatmen's is a subsidiary of NationsBank Corporation.
The Funds have no present intention of purchasing any securities issued
by Boatmen's, [NationsBank Corporation] or any of its affiliates. Mr. Henry O.
Johnston, a Trustee of the Funds, owns shares amounting to less than one-tenth
of one percent (0.1%) of the outstanding shares of common stock of Boatmen's
Bancshares, Inc.
Under each Advisory Agreement, Boatmen's, subject to the supervision of
the Trustees of the Funds, manages the investment operations of each of the
Funds.
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 Funds, except
-20-
<PAGE> 443
liability to the Funds 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 Funds will indemnify
Boatmen's against certain liabilities, including liabilities under the Federal
securities laws, or, in lieu thereof, contribute to resulting losses.
Boatmen's began serving as investment adviser to the Treasury Fund and
Diversified Fund on June 1, 1994 and began serving as investment adviser to the
Tax-Exempt Diversified Fund and Tax- Exempt Fund on July 1, 1995. Goldman Sachs,
acting through its separate operating division, Goldman Sachs Asset Management,
served as investment adviser to the Tax-Exempt Diversified Fund and Missouri
Tax-Exempt Fund prior to July 1, 1995.
Boatmen's is entitled to receive advisory fees on a monthly basis at an
annual rate of .15 of 1% of the Diversified Fund's average net assets, .15 of 1%
of the Treasury Funds's average net assets, .20 of 1% of the Tax-Exempt
Diversified Fund's average net assets and .20 of 1% of the Tax- Exempt Fund's
average net assets. For the fiscal year ended August 31, 1996, total advisory
fees paid by the Diversified Fund and Treasury Fund were .13% and .15% of each
Fund's net assets, respectively. For the fiscal year ended August 31, 1995,
total advisory fees paid by the Diversified Fund and Treasury Fund were .07% and
.08% of each Fund's net assets, respectively. For the fiscal year ended August
31, 1994 (under the former advisory agreements from September 1, 1993 to June 1,
1994, and from June 1, 1994 to August 31, 1994), total advisory fees paid by the
Diversified Fund and Treasury Fund were .07% and .08%, respectively.
For the fiscal year ended August 31, 1996, total advisory fees paid by
the Tax-Exempt Fund were .22% of net assets and .20% of the net assets of the
Tax-Exempt Diversified Fund. For the fiscal year ended August 31, 1995, total
advisory fees paid by the Tax-Exempt Fund were .20% of net assets and .17% of
the net assets of the Tax-Exempt Diversified Fund. For the fiscal year ended
August 31, 1994, during which Goldman Sachs acted as investment adviser to each
of the Tax-Exempt Funds, the compensation received by Goldman Sachs for services
and expenses (net of fees waived) constituted .28% of the net assets of the
Tax-Exempt Fund and .14% of the net assets of the Tax-Exempt Diversified 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 commissions, if any) of securities purchased
for each Fund.
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
Funds 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 Funds.
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 Funds, the Funds might be required to alter materially
or discontinue their arrangements with Boatmen's and change their method of
operations. It is not anticipated, however, that any change in the Funds' method
of operations would affect the net asset value per share of any Fund or result
in a financial loss to any shareholder.
-21-
<PAGE> 444
Moreover, if current restrictions preventing a bank from legally sponsoring,
organizing, controlling or distributing shares of an open-end investment company
were relaxed, the Funds expect that Boatmen's would consider the possibility of
offering to perform some or all of the services now provided by BISYS and PFD.
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 Advisory Agreements for the Treasury Fund, Diversified Fund,
Tax-Exempt Diversified Fund and Tax-Exempt Fund were approved by the Trustees,
including the "non-interested" Trustees (as defined under "Investment
Restrictions"), on October 22, 1996 and by shareholders of each Fund on December
18, 1996. Each Advisory Agreement will remain in effect until May 31, 1997, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually: (1) by vote of a majority of the outstanding shares
of each such Fund (as defined under "Investment Restrictions") or by the
Trustees of the Funds, and (2) by the vote of a majority of the "non-interested"
Trustees. Each 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 Funds 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
Funds.
THE ADMINISTRATOR, DISTRIBUTOR AND TRANSFER AGENT
BISYS, a wholly-owned subsidiary of The BISYS Group, Inc., which has
its principal offices at 3435 Stelzer Road, Columbus, Ohio 43219, 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
Funds who are not parties to this Agreement or interested persons of any such
party, cast in person at a meeting called for the purpose of voting on such
approval, and (b) by the Board of Trustees of the Funds or by vote of a majority
of the outstanding voting securities of such Fund. The Agreement is terminable
by the Board of Trustees of the Funds 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 Funds, which is calculated based on
the net assets of all 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 Funds' average net assets up to $1.5
billion, .110 of 1% of the Funds' average net assets on the next $1.5 billion,
and .1075 of 1% of the Funds' average net assets in excess of $3 billion. From
time to time, BISYS may waive fees or voluntarily reimburse the Funds for
expenses. For the period March 31, 1994 to August 31, 1994, the amount of the
administrator fee paid by the Funds to Concord Holding Corporation ("Concord"),
an affiliate of BISYS and the Trust's former Administrator, was $1,198,735. For
the fiscal year September 1, 1994 through August 31, 1995, the Treasury,
Diversified, Tax-Exempt Diversified and Tax-Exempt Funds paid Concord
$1,357,012, $1,479,697, $449,267 and $293,693, respectively, for the performance
of administrative services during such period. For the fiscal year ended August
31, 1996, the Treasury, Diversified, Tax-Exempt Diversified and Tax-Exempt Funds
paid BISYS, $1,880,792, $1,598,802, $433,805 and $257,068, respectively, for the
performance of administrative services during such period.
BISYS will bear all expenses in connection with the performance of its
services under the Administration Agreement for the Funds with the exception of
fees for certain fund accounting services which are borne by the Funds.
-22-
<PAGE> 445
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' duties or from the reckless disregard by BISYS of its obligations and
duties thereunder.
Pilot Funds Distributors, Inc. ("PFD"), a wholly-owned subsidiary of
The BISYS Group, Inc., located at 3435 Stelzer Road, Columbus, Ohio 43219, acts
as the exclusive distributor of the shares of each of the Funds pursuant to a
Distribution Agreement with the Funds dated as of June 1, 1996. Shares are sold
on a continuous basis by PFD as agent, although PFD is not obligated to sell any
particular amount of shares. No compensation is payable by the Funds to PFD for
its distribution services.
The Distribution Agreement with PFD 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 Funds and who have no direct or
indirect financial interest in the operation of any plan that has been adopted
by the Funds 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 Funds or by vote of a
majority of the outstanding voting securities of the Funds. The Agreement is
terminable by the Funds 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 on 60 days' written notice to PFD, or by PFD at any time, without payment
of any penalty, on 60 days' written notice to the Funds.
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 Funds, the
Transfer Agent, has undertaken with the Funds 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 Funds' custodian and the
relevant sub-custodian in connection with redemptions, (iv) provide dividend
crediting and certain disbursing 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. For the fiscal year ended August 31, 1996, the
Transfer Agent received a fee of $28,182 in its capacity as transfer agent. For
the fiscal year September 1, 1994 through August 31, 1995, Concord Financial
Services, Inc., the Funds' former transfer agent, received a fee of $14,493 in
the capacity of transfer agent. Prior to June 1, 1994, Goldman, Sachs & Co.
served as the Funds' transfer agent.
EXPENSES
The Funds are responsible for all expenses other than those expressly
borne by Boatmen's, BISYS, the Distributor, and the Transfer Agent under the
Advisory Agreements, Administration Agreement, Distribution Agreement, and
Transfer Agency Agreement, respectively. Such expenses include, without
limitation, the fees payable to Boatmen's, BISYS, the Distributor, and the
Transfer Agent, the fees and expenses of the Funds' custodian, brokerage fees
and commissions, any portfolio losses, filing fees for the registration or
qualification of the Funds' shares under federal or state securities laws,
expenses of the organization of the Funds, fees and expenses incurred by the
Funds in connection with membership in investment company organizations, 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 Funds for violation of
any law,
-23-
<PAGE> 446
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 Funds'
shareholders and regulatory authorities, compensation and expenses of its
Trustees and extraordinary expenses incurred by the Funds.
PORTFOLIO TRANSACTIONS
Boatmen's places the portfolio transactions of the respective Funds and
of all other accounts managed by Boatmen's for execution with many firms.
Boatmen's uses their best efforts to obtain execution of portfolio transactions
at prices which are advantageous to each Fund and at reasonably competitive
spreads or (when a disclosed commission is being charged) at reasonably
competitive commission rates. In seeking such execution, Boatmen's will use
their 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 general execution and operational capabilities of the
firm, 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.
Securities purchased and sold by the Funds are generally traded in the
over-the-counter market on a net basis (i.e., without commission) through
broker-dealers and banks acting for their own account rather than as brokers, or
otherwise involve transactions directly with the issuer of such securities.
In certain instances there may be securities which are suitable for
more than one Fund advised by Boatmen's 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 to 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 clients
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 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 Funds believe that over time its ability to
participate in volume transactions will produce superior executions for the
Funds.
During the fiscal year ended August 31, 1996, the Funds acquired/sold
securities of its regular brokers/dealers: Prudential Funding Corp., Bear Sterns
Co., Inc., Dean Witter Discover and Co., J.P. Morgan, Lehman Bros., Merrill
Lynch, and State Street Bank & Trust.
NET ASSET VALUE
The net asset value per share of each Fund is determined by the Funds'
custodian at 2:00 p.m., Central time (3:00 p.m., Eastern time), for the
Diversified and Treasury Funds and 12:00 Noon, Central time, (1:00 p.m. Eastern
time) for the Tax-Exempt Funds on each Business Day. A Business Day means any
day on which the New York Stock Exchange and the Custodian are open for business
and the New York Stock Exchange (the "Exchange") is open for trading, which is
Monday through Friday except for holidays (scheduled holidays for 1997 are: New
Year's Day, Martin Luther King, Jr. Day, Presidents Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day
and Christmas Day).
-24-
<PAGE> 447
Pursuant to a rule of the SEC, the Funds' securities are valued using
the amortized cost method of valuation in an effort to maintain a constant net
asset value of $1.00 per share, which the Board of Trustees has determined to be
in the best interest of the Funds and their shareholders. This method involves
valuing a security at cost on the date of acquisition and thereafter assuming a
constant accretion of a discount or amortization of a premium to maturity,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. While this method provides certainty in valuation, it may result
in periods during which value, as determined by amortized cost, is higher or
lower than the price a Fund would receive if it sold the instrument. During such
periods, the yield to an investor in a Fund may differ somewhat from that
obtained in a similar investment company which uses available market quotations
to value all of its portfolio securities. During periods of declining interest
rates, the quoted yield on shares of a Fund may tend to be higher than a like
computation made by a fund with identical investments utilizing a method of
valuation based upon market prices and estimates of market prices for all of its
portfolio instruments. Thus, if the use of amortized cost by a Fund resulted in
a lower aggregate portfolio value on a particular day, a prospective investor in
the Fund would be able to obtain a somewhat higher yield if he purchased shares
of the Fund on that day than could be obtained from investment in a fund
utilizing solely market values, and existing investors in the Fund would receive
less investment income. The converse would apply in a period of rising interest
rates.
The Trustees have established procedures designed to stabilize, to the
extent reasonably possible, each Fund's price per share as computed for the
purpose of sales and redemptions at $1.00. These procedures include review of a
Fund by the Trustees, at such intervals as they deem appropriate, to determine
whether its net asset value calculated by using available market quotations (or
an appropriate substitute which reflects market conditions) deviates from $1.00
per share based on amortized cost, as well as review of methods used to
calculate the deviation. If such deviation exceeds 1/2 of 1%, the Trustees will
promptly consider what action, if any, will be initiated. In the event that the
Trustees should determine that a deviation exists which could result in material
dilution or other unfair results to investors or existing shareholders, they
will take such corrective action as they may deem to be necessary and
appropriate, including: selling portfolio instruments prior to maturity to
realize capital gains or losses or to shorten average portfolio maturity;
withholding part or all of dividends or payment of distributions from capital or
capital gains; redeeming shares in kind; or establishing a net asset value per
share by using available market quotations or equivalents. In addition, the
Trustees have the authority: (1) to reduce or increase the number of shares
outstanding on a pro rata basis, and (2) to offset each shareholder's pro rata
portion of the deviation between the net asset value per share and $1.00 from
the shareholder's accrued dividend account or from future dividends. Each Fund
may hold cash for the purpose of stabilizing its net asset value per share.
Holdings of cash, on which no return is earned, would tend to lower the yield on
such Fund's shares. Such procedures also provide for certain action to be taken
with respect to portfolio securities which experience a downgrade in rating or
suffer a default.
In order to continue to use the amortized cost method of valuation,
each Fund's investments, including repurchase agreements, must be U.S.
dollar-denominated instruments which the Trustees determine to present minimal
credit risk and be rated within one of the two highest rating categories for
short-term debt obligations by at least two major rating agencies assigning a
rating to the security or issuer, or if only one rating agency has assigned a
rating, by that agency. Purchases by the Diversified and Treasury Funds of
securities which are unrated or rated by only one rating agency must be approved
or ratified by the Trustees. Securities which are unrated may be purchased only
if they are deemed to be of comparable quality to rated securities.
Each of the Funds may not maintain a dollar-weighted average portfolio
maturity of more than 90 days nor purchase portfolio securities with maximum
remaining maturities of more than 13 months (13 months is defined herein and in
the rule to equal 397 days). However, a Fund may also, consistent with the
provisions of the above-mentioned rule, invest in securities with a maturity of
more than 13 months, provided that the security is either a variable U.S.
Government security, or a floating or variable rate security with certain demand
interest rate reset features. Should the disposition of a
-25-
<PAGE> 448
portfolio security result in a dollar-weighted average portfolio maturity of
more than 90 days, that Fund will invest its available cash in such a manner as
to reduce such maturity to 90 days or less as soon as reasonably practicable.
REDEMPTIONS
The Trust may suspend the right of redemption of shares of any Fund and
may postpone payment for any period: (i) during which the New York Stock
Exchange is closed other than customary weekend and holiday closings or during
which trading on the New York Stock Exchange is restricted by applicable rules
and regulations of the Securities and Exchange Commission, (ii) when the SEC
determines that a state of emergency exists which may make payment or transfer
not reasonably practicable, (iii) as the SEC may by order permit for the
protection of the shareholders of the Funds, or (iv) at any other time when the
Funds may, under applicable laws and regulations, suspend payment on the
redemption of its shares. The Trust may also suspend or postpone the recordation
of the transfer of its shares under any of the foregoing circumstances.
The Funds agree to redeem shares of each Fund solely in cash up to the
lesser of $250,000 or 1% of the net asset value of the Fund during any 90-day
period for any one shareholder. The Funds reserve the right to pay other
redemptions, either total or partial, by a distribution in kind of securities
(instead of cash) from the applicable Fund's portfolio although the Funds have
no current intention to do so. The securities distributed in such a distribution
would be valued at the same value as that assigned to them in calculating the
net asset value of the shares being redeemed. If a shareholder receives a
distribution in kind, he or she should expect to incur transaction costs when he
or she converts the securities to cash.
CALCULATION OF YIELD QUOTATIONS
Each Fund's yield quotations are calculated by a standard method
prescribed by the rules of the SEC. Under this method, the yield quotation is
based on an hypothetical account having a balance of exactly one share at the
beginning of a seven-day period.
The yield quotation is computed as follows: the net change, exclusive
of capital changes (i.e., realized gains and losses from the sale of securities
and unrealized appreciation and depreciation), in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the base
period is determined by dividing the net change in account value by the value of
the account at the beginning of the base period. This base period return is then
multiplied by 365/7 with the resulting yield figure carried to the nearest 100th
of 1%. Such yield quotations shall take into account all fees that are charged
to a Fund.
Each Fund also may advertise a quotation of effective yield for a
7-calendar day period. Effective yield is computed by compounding the
unannualized base period return determined as in the preceding paragraph by
adding 1 to that return, raising the sum to the 365/7 power and subtracting one
from the result, according to the following formula:
(365/7)
Effective Yield = [(base period return + 1) ] - 1.
The Tax-Exempt Funds may also advertise a tax equivalent yield which is
computed by dividing that portion of the Fund's yield (as computed above) which
is tax-exempt by one minus a stated income tax rate and adding the quotient to
that portion, if any, of the yield of the Fund that is not tax-exempt and a tax
equivalent effective yield computed by compounding the tax equivalent yield on a
weekly basis.
-26-
<PAGE> 449
Unlike bank deposits or other investments which 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 in the methods used to value portfolio securities,
compute expenses, and calculate return.
Yield, effective yield, tax equivalent yield and tax equivalent
effective yield are calculated separately for Pilot Shares, Administration
Shares and Investor Shares. Each type of share is subject to different fees and
expenses and may have differing yields for the same period.
The yield of each Fund with respect to Pilot Shares, Administration
Shares and Investor Shares for the seven day period ended August 31, 1996 was as
follows:
<TABLE>
<CAPTION>
Tax Equivalent Tax Equivalent
Yield Effective Yield Yield Effective Yield
----- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Treasury Fund
Pilot Shares 4.80% 4.91% N/A N/A
Administration Shares 4.55% 4.65% N/A N/A
Investor Shares 4.30% 4.39% N/A N/A
Diversified Fund
Pilot Shares 5.11% 5.25% N/A N/A
Administration Shares 4.87% 4.98% N/A N/A
Investor Shares 4.62% 4.72% N/A N/A
Tax-Exempt Fund
Pilot Shares 3.09% 3.14% 5.12% 5.20%
Administration Shares 2.85% 2.89% 4.72% 4.78%
Investor Shares 2.60% 2.63% 4.30% 4.35%
Tax-Exempt Diversified Fund
Pilot Shares 3.16% 3.21% 5.23% 5.31%
Administration Shares 2.91% 2.95% 4.82% 4.88%
Investor Shares 2.66% 2.69% 4.40% 4.45%
</TABLE>
The quotations of tax equivalent yield set forth in advertising,
marketing and other Funds literature are based on a federal marginal tax rate of
39.6%. Tax-equivalent yield may be higher when combined with Missouri state
personal income tax rates.
From time to time, the Funds may publish an indication of one or more
Fund's past performance as measured by independent sources, such as Lipper
Analytical Services, Incorporated, Weisenberger Investment Companies Service,
Donoghue's Money Report, Barron's, Business Week, Changing Times, Financial
World, Forbes, Money, Personal Investor, Sylvia Porter's Personal Finance and
The Wall Street Journal.
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 or policies by any governmental agency or bureau.
-27-
<PAGE> 450
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
and 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 cash items (including receivables), U.S. Government securities,
securities of other regulated investment companies, and other securities, with
such other securities limited for any one issuer to an amount not greater than
5% of the Fund's assets and 10% of the outstanding voting securities of that
issuer, 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 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 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.
The Funds intend that the Tax-Exempt Funds each will qualify under the
Code to pay "exempt-interest dividends" to its shareholders. The Tax-Exempt
Funds will be so qualified if, at the close of each quarter of their taxable
year, at least 50% of the value of their total assets consists of securities on
which the interest payments are exempt from federal income tax. To the extent
that dividends distributed by the Tax-Exempt Funds to their shareholders are
derived from interest income exempt from federal income tax and are designated
as "exempt-interest dividends" by the Tax-Exempt Funds, they will be excludable
from the gross income of the shareholders for federal income tax purposes.
"Exempt-interest dividends," however, must be taken into account by shareholders
in determining whether their total income is large enough to result in taxation
of up to 85% of their social security benefits and certain railroad retirement
benefits. It should also be noted that tax-exempt interest on private activity
bonds in which a Tax-Exempt Fund may invest generally is treated as a tax
preference item for purposes of the alternative minimum tax for corporate and
individual shareholders. The Tax-Exempt Funds will inform shareholders annually
as to the portion of the distributions from such Funds which constituted
"exempt-interest dividends."
Dividends paid out of a Fund's investment company taxable income will
be treated as ordinary income in the hands of shareholders. Because no portion
of a Fund's income is expected to consist of dividends paid by U.S.
corporations, no portion of such dividends is expected to 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
-28-
<PAGE> 451
dividends-received deduction. Net capital gains for a taxable year are computed
by taking into account any capital loss carry-forward of a Fund. The Funds are
not normally expected to realize any long-term capital gains or losses.
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.
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. Furthermore, a loss realized by a shareholder on the redemption,
sale or exchange of shares in the Tax-Exempt Funds with respect to which
exempt-interest dividends have been paid will, to the extent of such
exempt-interest dividends, be disallowed if such shares have been held by the
shareholder for less than six months.
Under the Code, a shareholder may not deduct that portion of interest
on indebtedness incurred or continued to purchase or carry shares of an
investment company paying exempt-interest dividends (such as the shares of the
Tax-Exempt Funds) which bears the same ratio to the total of such interest as
the exempt-interest dividends bear to the total dividends (excluding net capital
gain dividends) received by the shareholder. In addition, under rules issued by
the Internal Revenue Service for determining when borrowed funds are considered
to be used to purchase or carry particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though the borrowed funds
are not directly traceable to such purchase.
Each Fund may be subject to foreign withholding taxes on its
investments in certain securities of foreign entities. 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
-29-
<PAGE> 452
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 share 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 a 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 a Fund.
Each Fund will be required to report to the Internal Revenue Service
(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 Funds 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.
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 Funds 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 investments 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.
To the extent that distributions made by the Tax-Exempt Fund qualify as
"exempt-interest dividends" for federal income tax purposes, are derived from
interest on obligations of the state of Missouri or any of its political
subdivisions or authorities, and are designated by the Tax-Exempt Fund as "state
income tax exempt-interest dividends," these distributions will be exempt from
Missouri income taxation.
-30-
<PAGE> 453
Shareholders are advised to consult their own tax advisers with respect
to the particular tax consequences to them of an investment in a Fund. Persons
who may be "substantial users" (or "related persons" of substantial users) of
facilities financed by industrial development bonds should consult their tax
advisers before purchasing shares of the Tax-Exempt Funds. The term "substantial
user" generally includes any "non-exempt person" who regularly uses in his or
her trade or business a part of a facility financed by industrial development
bonds. Generally, an individual will not be a "related person" of a substantial
user under the Code unless the person or his or her immediate family owns
directly or indirectly in the aggregate more than a 50% equity interest in the
substantial user.
ORGANIZATION AND CAPITALIZATION
The Pilot Funds 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 Funds 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 Funds 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, four of which are offered herein and known as Pilot Short-Term
Diversified Assets Fund, Pilot Short-Term U.S. Treasury Fund, Pilot Short-Term
Tax-Exempt Diversified Fund and Pilot Missouri Short-Term Tax-Exempt 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
offered hereby: Pilot Shares, Administration Shares and Investor Shares. Each
Pilot Share, Administration Share and Investor Share is entitled to one vote per
share: however, separate votes will be taken by each Fund or class (or by one or
more Funds voting as a single class if similarly affected) on matters affecting
only that individual Fund or class (or those affected Funds or classes) or as
otherwise required by law. Fractional shares are entitled to proportionate
fractional votes. Shares have neither cumulative voting rights nor any
preemptive, subscription, or conversion rights (the right of redemption is
described under "Transaction Rules" and "How to Sell Shares" in the Prospectus).
Shares when issued as described herein are fully paid and nonassessable, except
as expressly set forth below. For information relating to possible mandatory
redemption of shares at the option of the Funds, see "Transaction Rules" and
"How to Sell Shares" in the Prospectus. 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.
-31-
<PAGE> 454
SHAREHOLDER AND TRUSTEE LIABILITY
The Pilot Funds 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 Funds. Notice of such disclaimer will normally be
given in each agreement, obligation or instrument entered into or executed by
the Funds 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 Funds
shall, upon request, assume the defense of any claim made against a shareholder
for any act or obligation of the Funds, 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 Funds 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 Funds and upon
reports made to the Funds 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 judgment or mistakes of fact or
law. The Declaration of Trust provides that the Funds will indemnify the
Trustees and officers of the Funds against liabilities and expenses reasonably
incurred in connection with litigation in which they may be involved because of
their positions with the Funds, 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 Funds, their conduct was in the best interests of the Funds and that, in all
other cases, their conduct was at least not opposed to the best interests of the
Funds (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.
CUSTODIAN
Boatmen's Trust Company, 100 North Broadway, St. Louis, Missouri
63178-4737 is the custodian of the Funds' assets.
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 audit services, Arthur Andersen LLP, prepares the Funds' federal
and state tax returns, and provides consultation and assistance on accounting,
internal control and related matters. The financial statements of the Funds
incorporated by reference into this Statement of Additional Information (under
"Financial Statements") are from the Funds' annual report for the year ended
August 31, 1996, and the data set forth under "Selected Per Share Data and
Ratios" in the Prospectus have been audited by Arthur Andersen LLP, as indicated
in their report with respect thereto, and are included in reliance upon the
authority of said firm as experts in giving the reports.
Goodwin, Procter & Hoar LLP, Exchange Place, Boston, Massachusetts
02109, serves as general counsel to the Funds.
MISCELLANEOUS
The following table indicates each additional person known by the
Funds to own benefically 5% or more of the Funds as of October 23, 1996.
<TABLE>
<CAPTION>
Name and Address Percent of Total Outstanding Shares
- ---------------- -----------------------------------
<S> <C>
Treasury Fund
Boatmen's Trust Company 77.12%
100 N. Broadway LBT 0785
St. Louis, MO 63102
Diversified Fund
Boatmen's Trust Company 82.60%
100 N. Broadway LBT 0785
St. Louis, MO 63102
Tax-Exempt Fund
Boatmen's Trust Company 69.87%
100 N. Broadway LBT 0785
St. Louis, MO 63102
</TABLE>
-32-
<PAGE> 455
FINANCIAL STATEMENTS
The financial statements and related report of Arthur Andersen LLP
contained in the 1996 Annual Report of the Funds are hereby incorporated by
reference and attached hereto.
SHAREHOLDER ADMINISTRATIVE SERVICES
Boatmen's provides certain shareholder administrative services for
investments by its own customers and those of affiliates in the Funds, pursuant
to a letter agreement with the Funds. In carrying out its duties, Boatmen's has
undertaken to: (1) act as holder of record of all shares for the beneficial
holders thereof ("shareholders"), (2) establish and maintain shareholder
accounts and records, including the furnishing of transfer and dividend
disbursement agent services, (3) answer customer inquiries regarding the current
yield of the Funds, and certain other administrative matters (e.g., account
status information), (4) process purchase and redemption transactions, including
redemption drafts and transmittal of purchase orders, funds and redemption
requests, and the disbursement of the proceeds of redemptions, (5) provide
periodic statements to each shareholder showing account balances and all
transactions since the last statement, and (6) mail reports and proxy materials
to shareholders.
-33-
<PAGE> 456
APPENDIX: DESCRIPTION OF SECURITIES RATINGS
MOODY'S INVESTORS SERVICE, INC.
LONG-TERM RATINGS
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.
Moody's applies numerical modifiers, 1, 2, and 3 in the Aa category.
The modifier 1 indicates that the security ranks in the higher end of the Aa
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of the Aa category.
SHORT-TERM RATINGS
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.
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade ("MIG"). 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-1
<PAGE> 457
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 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
LONG-TERM RATINGS
AAA: Bonds rated AAA are highest grade debt obligations. This rating
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ 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.
SHORT-TERM RATINGS
A-1: Standard & Poor's short-term 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." 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
LONG-TERM RATINGS
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.
SHORT-TERM RATINGS
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.
A-2
<PAGE> 458
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.
FITCH INVESTORS SERVICE, INC.
LONG-TERM RATINGS
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+."
Plus ("+") and minus ("-") signs are used with a rating symbol to
indicate the relative position of a credit within the AA rating category.
SHORT-TERM RATINGS
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 with "F-1"+ and "F-1" ratings.
LOC: The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
IBCA LIMITED AND IBCA, INC.
LONG-TERM RATINGS
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 unlikely 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.
"+" or "-" may be appended to denote relative status within major
rating categories.
A-3
<PAGE> 459
SHORT-TERM RATINGS
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 satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic, or financial conditions.
THOMSON BANKWATCH, INC.
LONG-TERM RATINGS
AAA: The highest category; indicates a superior ability to repay
principal and interest on a timely basis.
AA: The second highest category; indicates a superior ability to repay
principal and interest on a timely basis with limited incremental risk versus
issues rated in the highest category. Ratings in the Long-Term Debt categories
may include a plus ("+") or minus ("-") designation which indicates where within
the respective category the issue is placed.
SHORT-TERM RATINGS
TBW-1: The highest category; indicates a very high degree of likelihood
that principal and interest will be paid on a timely basis.
TBW-2: The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
The TBW Short-Term Ratings apply only to unsecured instruments that
have a maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an
untimely payment of principal and interest.
A-4
<PAGE> 460
THE PILOT FUNDS
3435 Stelzer Road
Columbus, Ohio 43219
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 31, 1996
INVESTOR SHARES
The Pilot Funds (the "Funds") is an open-end, management investment
company (or mutual fund) consisting of fourteen portfolios, four of which
portfolios (the "Funds") are described herein:
Pilot Short-Term U.S. Treasury Fund (the "Treasury Fund");
Pilot Short-Term Diversified Assets Fund (the "Diversified Fund");
Pilot Short-Term Tax-Exempt Diversified Fund (the "Tax-Exempt
Diversified Fund"); and
Pilot Missouri Short-Term Tax-Exempt Fund (the "Tax-Exempt Fund").
Boatmen's Trust Company ("Boatmen's") serves as investment adviser to
the Funds. Pilot Funds Distributors, Inc. ("PFD") serves as each Fund's
distributor, and its affiliate, BISYS Fund Services Limited Partnership
("BISYS"), serves as each Fund's administrator. The Tax-Exempt Diversified Fund
and the Tax-Exempt Fund are sometimes referred to as the "Tax-Exempt Funds."
This Statement of Additional Information is not a Prospectus, and
should be read in conjunction with the Prospectus for the Investor Shares (the
"Prospectus") dated December 31, 1996, as may be amended or supplemented from
time to time, which may be obtained without charge from institutions ("Service
Organizations") that hold Investor Shares for the benefit of their customers, or
by writing to Pilot Funds Distributors Inc., 3435 Stelzer Road, Columbus, Ohio
43219.
<PAGE> 461
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT POLICIES AND PRACTICES OF THE PORTFOLIOS..........................
U.S. Government Securities..........................................
Custodial Receipts..................................................
Bank and Corporate Obligations......................................
Repurchase Agreements...............................................
Foreign Securities..................................................
Asset-Backed and Receivables-Backed Securities......................
Forward Commitments and When-Issued Securities......................
Variable Amount Master Demand Notes.................................
Variable Rate and Floating Rate Demand Instruments..................
Loan Participation..................................................
Municipal Obligations...............................................
Investing in Missouri...............................................
Standby Commitments.................................................
Tax-Exempt Fund Taxable Obligations.................................
Restricted and Other Illiquid Securities............................
INVESTMENT RESTRICTIONS......................................................
Treasury Fund, Diversified Fund and Tax-Exempt Diversified Fund.....
Tax-Exempt Fund.....................................................
TRUSTEES AND OFFICERS........................................................
THE INVESTMENT ADVISER, ADMINISTRATOR, DISTRIBUTOR AND TRANSFER AGENT........
Investment Adviser..................................................
The Administrator, Distributor and Transfer Agent...................
Expenses ...........................................................
PORTFOLIO TRANSACTIONS.......................................................
NET ASSET VALUE..............................................................
REDEMPTIONS..................................................................
CALCULATION OF YIELD QUOTATIONS..............................................
TAX INFORMATION..............................................................
State and Local.....................................................
ORGANIZATION AND CAPITALIZATION..............................................
Shareholder and Trustee Liability...................................
CUSTODIAN....................................................................
INDEPENDENT ACCOUNTANTS AND COUNSEL..........................................
FINANCIAL STATEMENTS.........................................................
SERVICE PLAN.................................................................
APPENDIX: DESCRIPTION OF SECURITIES RATINGS..................................
</TABLE>
-2-
<PAGE> 462
INVESTOR SHARES
INVESTMENT POLICIES AND PRACTICES OF THE PORTFOLIOS
The following discussion elaborates on the description of each Fund's
investment policies and practices contained in the Prospectus. 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 SECURITIES
A Fund may invest in separately traded principal and interest
components of securities issued or guaranteed by the U.S. Treasury. The
principal and interest components of selected securities are traded
independently under the Separate Trading of Registered Interest and Principal of
Securities program ("STRIPS"). Under the STRIPS program, 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.
CUSTODIAL RECEIPTS
The Diversified 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. Although it has no current intent, the
Treasury Fund could invest more than 10% of its total assets in custodial
receipts if the staff of the Securities and Exchange Commission ("SEC") changes
its current policy that such evidences of ownership do not constitute Government
Securities for purposes of Section 35(d) of the Investment Company Act of 1940
(the "1940 Act"). The Tax-Exempt Funds may acquire custodial receipts that
evidence ownership of future interest payments, principal payments or both on
certain municipal notes and bonds.
BANK AND CORPORATE OBLIGATIONS
Commercial paper represents short-term unsecured promissory notes
typically issued in bearer form by banks or bank holding companies,
corporations, and finance companies. The commercial paper purchased by the Funds
consists of direct U.S. dollar denominated obligations of domestic or foreign
issuers. Bank obligations in which the Funds may invest include certificates of
deposit, bankers' acceptances, fixed time deposits and bank notes. Certificates
of deposit are negotiable certificates issued against funds deposited in a
commercial bank for a definite period of time and earning a specified return.
Bankers' acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific merchandise, which
are "accepted" by a bank, meaning, in effect, that the bank unconditionally
agrees to pay the face value of the instrument on maturity. Fixed time deposits
are bank obligations payable at a stated maturity date and bearing interest at a
fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but
may be subject to early withdrawal penalties which vary depending upon market
conditions and the remaining maturity of the obligation. There are no
contractual restrictions on the right to transfer a beneficial interest in a
fixed time deposit to a third party, although there is no market for such
deposits. Bank notes and bankers acceptances rank junior to domestic deposit
liabilities of the bank and pari passu with other senior,
-3-
<PAGE> 463
unsecured obligations of the bank. Bank notes are classified as "other
borrowings" on a bank's balance sheet, while deposit notes and certificates of
deposit are classified as deposits. Bank notes are not insured by the Federal
Deposit Insurance Corporation or any other insurer. Deposit notes are insured by
the Federal Deposit Insurance Corporation only to the extent of $100,000 per
depositor per bank. Certain fixed time deposits maturing in more than seven days
may be deemed to be illiquid securities.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with selected
broker-dealers, banks or other financial institutions. A repurchase agreement is
an arrangement under which the purchaser (i.e., the 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 Funds' 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 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 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 liquid instruments.
-4-
<PAGE> 464
FOREIGN SECURITIES
The Diversified Fund may invest in U.S. dollar denominated foreign
securities and certificates of deposit, bankers' acceptances and fixed time
deposits and other obligations issued by major foreign banks, foreign branches
of U.S. banks, U.S. branches of foreign banks, and foreign branches of foreign
banks. Investments can include fixed time deposits in Cayman Island branches of
such banks. The Tax-Exempt Funds may also invest in municipal instruments backed
by letters of credit issued by certain of such banks. Under current SEC rules
relating to the use of the amortized cost method of portfolio securities
valuation, these Funds are restricted to purchasing U.S. dollar denominated
securities, but are not otherwise precluded from purchasing securities of
foreign issuers.
Investments in foreign securities and bank obligations may involve
considerations different from investments in domestic securities due to limited
publicly available information; non-uniform accounting standards; the possible
imposition of withholding or confiscatory taxes, the possible adoption of
foreign governmental restrictions affecting the payment of principal and
interest, expropriation, or other adverse political or economic developments. In
addition, it could be more difficult to obtain and enforce a judgment against a
foreign issuer or a foreign branch of a domestic bank.
ASSET-BACKED AND RECEIVABLES-BACKED SECURITIES
The securitization techniques used to develop mortgage-backed
securities are now being applied to a broad range of assets. Through the use of
trusts and special purpose corporations, various types of assets, including
automobile loans, computer leases, trade receivables and credit card
receivables, are being securitized in pass-through structures similar to the
mortgage pass-through structures. Consistent with its investment objectives and
policies, the Diversified Fund may invest in these and other types of
asset-backed securities that may be developed in the future. However, the Fund
will generally not invest in an asset-backed security if the income received
with respect to its investment constitutes rental income or other income not
treated as qualifying income under the 90% test described in "Tax Information"
below. In general, the collateral supporting these securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments with interest rate fluctuations.
Several types of asset-backed and receivable-backed securities have
already been offered to investors, for example Certificates for Automobile
Receivables(SM) ("CARS(SM)") and interests in pools of credit card receivables.
CARS(SM) represent undivided fractional interests in a trust ("CAR Trust") whose
assets consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARS(SM) are passed through monthly to certificate holders, and
are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the CAR Trust. An investor's return on CARS(SM) may be affected by
early prepayment of principal on the underlying vehicle sales contracts. If the
letter of credit is exhausted, the CAR Trust may be prevented from realizing the
full amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage or
loss of a vehicle, the application of federal and state bankruptcy and
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets. 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 give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. There is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
-5-
<PAGE> 465
Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection, and (ii) protection against losses
resulting from ultimate default by an obligor or servicer. Liquidity protection
refers to the provision of advances, generally by the entity administering the
pool of assets, to ensure that the receipt of payments on the underlying pool
occurs in a timely fashion. Protection against losses results from payment of
the insurance obligations on at least a portion of the assets in the pool. This
protection may be provided through guarantees, policies or letters of credit
obtained by the issuer or sponsor from third parties, through various means of
structuring the transaction or through a combination of such approaches. The
degree of credit support provided for each issue is generally based on
historical information reflecting the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that anticipated or failure
of the credit support could adversely affect the return on an investment in such
a security.
The availability of asset-backed securities may be affected by
legislative or regulatory developments. It is possible that such developments
may require the Diversified Fund to dispose of any then existing holdings of
such securities.
Consistent with the Diversified Fund's investment objectives and
policies, the Fund also may invest in other types of asset-backed and
receivables-backed securities.
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES
Each Fund may purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis. These transactions involve a
commitment by the 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 when 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 transactions are negotiated directly with the other party,
and such commitments are not traded on exchanges, but may be traded
over-the-counter.
A Fund will purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment 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 negotiate 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. The Fund may realize a capital gain or loss in
connection with these transactions. For purposes of determining a Fund's average
dollar weighted maturity, the maturity of when-issued or forward commitment
securities will be calculated from the commitment date.
When a Fund purchases securities on a when-issued or forward commitment
basis, the Fund's custodian or subcustodian will maintain in a segregated
account liquid assets having a value (determined daily) at least equal to the
amount of the Fund's purchase commitments. In the case of a forward commitment
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
ensure that the Fund will maintain sufficient assets at all times to cover its
obligations under when-issued purchases and forward commitments.
VARIABLE AMOUNT MASTER DEMAND NOTES
Each Fund may purchase variable amount master demand notes. These
obligations permit the investment of fluctuating amounts at varying rates of
interest pursuant to direct arrangements between the Fund (as lender) and the
borrower. These notes are direct lending arrangements between lenders and
borrowers, and are not generally transferable, nor are they ordinarily rated by
a Nationally
-6-
<PAGE> 466
Recognized Statistical Rating Organization ("NRSRO"). The Fund may invest in
these notes only if Boatmen's believes that, as of the time of investment, the
notes are of a quality comparable to the other obligations in which a Fund may
invest.
VARIABLE RATE AND FLOATING RATE DEMAND INSTRUMENTS
Each Fund may purchase variable and floating rate demand instruments
that are tax-exempt municipal obligations and other debt securities that possess
a floating or variable interest rate adjustment formula. These instruments also
permit a Fund to demand payment of the principal balance plus unpaid accrued
interest upon a specified number of days' notice to the issuer or its agent. The
demand feature may be backed by a bank letter of credit or guarantee issued with
respect to such instrument.
The terms of the variable or floating rate demand instruments that a
Fund may purchase provide that interest rates are adjustable at intervals
ranging from daily up to six months, and the adjustments are based upon current
market levels, the prime rate of a bank or other appropriate interest rate
adjustment index as provided in the respective instruments. Some of these
instruments are payable on demand on a daily basis or on not more than seven
days' notice. Others, such as instruments with quarterly or semiannual interest
rate adjustments, may be put back to the issuer on designated days on not more
than thirty days' notice. Still others are automatically called by the issuer
unless the Fund instructs otherwise. A Fund will determine the variable or
floating rate demand instruments that it will purchase in accordance with
procedures approved by the Trustees to minimize credit risks. Accordingly, any
variable or floating rate demand instrument must be of high quality with respect
to both its long-term and short-term aspects, except that where credit support
is provided even if the issuer defaults in the payment of principal or interest,
the Fund may rely only on the high quality character of the short-term aspect of
the variable or floating rate demand instrument, i.e., the right to sell. A
variable or floating rate demand instrument which is unrated must have high
quality characteristics similar to other obligations rated high quality.
Boatmen's may determine that an unrated variable or floating rate demand
instrument meets a Fund's quality criteria by reason of being backed by a letter
of credit or guarantee issued by a bank that meets the quality criteria for that
Fund. Thus, either the credit of the issuer of the obligation or the guarantor
bank or both will meet the quality standards of the Fund.
The maturity of the variable or floating rate demand instruments held
by a Fund will ordinarily be deemed to be the longer of: (1) the notice period
required before the Fund is entitled to receive payment of the principal amount
of the instrument through demand, or (2) the period remaining until the
instrument's next interest rate adjustment. The acquisition of variable or
floating rate demand notes for a Fund must also meet the requirements of rules
issued by the SEC applicable to the use of the amortized cost method of
securities valuation.
A Fund may invest in variable or floating rate demand instruments in
the form of participation interests in variable or floating rate tax-exempt
obligations held by financial institutions (usually commercial banks). Such
participation interests provide the Fund with a specific undivided interest (up
to 100%) in an obligation and the right to demand payment of the unpaid
principal balance plus accrued interest on the participation interest from the
financial institution upon a specific number of days' notice. In addition, the
participation interest generally is backed by an irrevocable letter of credit or
guarantee from the institution. The institution usually retains fees out of the
interest paid on the obligation for servicing the obligation and providing the
letter of credit.
LOAN PARTICIPATION
The Diversified Fund may purchase participation interests with
remaining maturities of thirteen months or less in loans of any maturity. Such
loans must be to issuers in whose obligations the Fund may invest. Any
participation purchased by the Fund must be issued by a bank in the United
States with assets exceeding $1 billion. Because the issuing bank does not
guarantee the participation in any
-7-
<PAGE> 467
way, it is subject to the credit risks generally associated with the underlying
corporate borrower. In addition, because it may be necessary under the terms of
the loan participation for the Fund to assert through the issuing bank such
rights as may exist against the underlying corporate borrower, in the event that
the underlying corporate borrower should fail to pay principal and interest when
due, the Fund could be subject to delays, expenses and risks which are greater
than those which would have been involved if the Fund had purchased a direct
obligation (such as commercial paper) of the borrower. Moreover, under the terms
of the loan participation, the purchasing Fund may be regarded as a creditor of
the issuing bank (rather than of the underlying corporate borrower), so that the
Fund also may be subject to the risk that the issuing bank may become insolvent.
Further, in the event of the bankruptcy or insolvency of the corporate borrower,
the loan participation might be subject to certain defenses that can be asserted
by a borrower as a result of improper conduct by the issuing bank. The secondary
market, if any, for these loan participation interests is limited, and any such
participation purchased by the Fund may be treated as illiquid.
MUNICIPAL OBLIGATIONS
The Diversified Fund and the Tax-Exempt Funds may invest in municipal
obligations. Municipal obligations are issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies, authorities and instrumentalities and the District of
Columbia to obtain funds for various public purposes. The interest on most of
these obligations is generally exempt from regular federal income tax. The two
principal classifications of municipal obligations are "notes" and "bonds."
NOTES. Municipal notes are generally used to provide for short-term
capital or operating cash flow needs and generally have maturities of one year
or less. Municipal notes include tax anticipation notes, revenue anticipation
notes, bond anticipation notes, tax and revenue anticipation notes, tax-exempt
commercial paper and certain receipts for municipal obligations.
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. They are often general obligations of the
issuer, secured by the taxing power for payment of principal and interest.
Revenue anticipation notes are issued in expectation of receipt of other types
of revenue such as federal revenues available under the Federal Revenue Sharing
Program. They are often general obligations of the issuer. Tax anticipation
notes and revenue anticipation notes are generally issued in anticipation of
various seasonal revenues such as income, sales, use and business taxes. Bond
anticipation notes are sold to provide interim financing in anticipation of
long-term financing in the market. In most cases, these monies provide for the
repayment of the notes and the notes are not secured by any other source.
Tax-exempt commercial paper consists of short-term unsecured promissory notes
issued by a state or local government or an authority or agency thereof. The
Funds may also acquire securities in the form of custodial receipts which
evidence ownership of future interest payments, principal payments or both on
certain state and local governmental and authority obligations when, in the
opinion of bond counsel, they are exempt from federal income tax. Such
obligations are held in custody by a bank on behalf of the holders of the
receipts. These custodial receipts are known by various names, including
"Municipal Receipts" and "Municipal Certificates of Accrual on Tax-Exempt
Securities." There are a number of other types of notes issued for different
purposes and secured differently from those described above.
BONDS. Municipal bonds, which generally meet longer term capital needs
and have maturities of more than one year when issued, have two principal
classifications, "general obligation" bonds and "revenue" bonds.
General obligation bonds are issued by entities such as states,
counties, cities, towns and regional districts and are used to fund a wide range
of public projects including the construction or improvement of schools,
highways and roads, water and sewer systems and a variety of other public
-8-
<PAGE> 468
purposes. The basic security of general obligation bonds is the issuer's pledge
of its faith, credit, and taxing power for the payment of principal and
interest. The taxes that can be levied for the payment of debt service may be
limited or unlimited as to rate or amount or special assessments.
Revenue bonds have been issued to fund a wide variety of capital
projects including: electric, gas, water and sewer systems; highways, bridges
and tunnels; port and airport facilities; colleges and universities; and
hospitals. The principal security for a revenue bond is generally the net
revenues derived from a particular facility or group of facilities or, in some
cases, from the proceeds of a special excise or other specific revenue source.
Although the principal security behind these bonds varies widely, many provide
additional security in the form of a debt service reserve fund whose monies may
also be used to make principal and interest payments on the issuer's
obligations. Housing finance authorities have a wide range of security including
partially or fully insured, rent subsidized and/or collateralized mortgages,
and/or the net revenues from housing or other public projects. In addition to a
debt service reserve fund, some authorities provide further security in the form
of a state's ability (without obligation) to make up deficiencies in the debt
service reserve fund. Lease rental revenue bonds issued by a state or local
authority for capital projects are secured by annual lease rental payments from
the state or locality to the authority sufficient to cover debt service on the
authority's obligations.
Private activity bonds, a term that includes certain types of bonds,
the proceeds of which are used to a specified extent for the benefit of persons
other than governmental units, although nominally issued by municipal
authorities, are generally not secured by the taxing power of the municipality
but are secured by the revenues of the authority derived from payments by the
industrial user. The Tax-Exempt Diversified Fund does not intend to invest in
recently issued private activity bonds. The Tax-Exempt Fund may invest in
private activity bonds. The interest from such bonds would be an item of tax
preference to shareholders under the federal alternative minimum tax.
Municipal bonds with a series of maturity dates are called serial
bonds. The serial bonds which the Funds may purchase are limited to short-term
serial bonds, those with original or remaining maturities of 13 months or less.
The Funds may purchase long-term bonds provided that they have a remaining
maturity of 13 months or less or, in the case of bonds called for redemption,
the date on which the redemption payment must be made is within 13 months. The
Funds may also purchase long-term bonds (sometimes referred to as "Put Bonds"),
which are subject to a Fund's commitment to put the bond back to the issuer at
par at a designated time within 13 months and the issuer's commitment to so
purchase the bond at such price and time. The Funds may purchase long-term
fixed-rate bonds that have been coupled with an option granted by a third party
financial institution allowing the Fund, at periodic intervals (usually every
six months, but in no event more than every twelve months), to tender (or "put")
its bonds to the institution and receive the face value thereof. The Fund may be
assessed "tender fees" for each tender period at a rate equal to the difference
between the bonds' fixed coupon rate and the rate, as determined by a
remarketing or similar agent, that would cause the bonds coupled with the tender
option to trade at par on the date of such determination.
These bonds coupled with puts, as well as standby commitments
(discussed below), may present tax issues. With either type of investment, the
Tax-Exempt Funds intend to take the position that they are the owners of
municipal obligations acquired subject to a third-party put, and that tax-exempt
interest earned with respect to such municipal obligations will be tax-exempt in
their bonds. There is no assurance that the Internal Revenue Service will agree
with such position in any particular case. Additionally, the federal income tax
treatment of certain other aspects of these investments, including the treatment
of any tender fees or swap payments, in relation to various regulated investment
company tax provision is unclear.
In addition to general obligation bonds, revenue bonds and serial
bonds, there are a variety of hybrid and special types of municipal obligations
as well as numerous differences in the security of municipal obligations both
within and between the two principal classifications above.
-9-
<PAGE> 469
The Tax-Exempt Funds may purchase municipal instruments that are backed
by letters of credit issued by domestic banks or foreign banks that have a
branch, agency or subsidiary in the United States. See "Foreign Securities" for
information concerning credit risks of foreign bank obligations.
For the purpose of investment restrictions of the Funds, the
identification of the "issuer" of municipal obligations that are not general
obligation bonds is made by Boatmen's on the basis of the characteristics of the
obligation as described above, the most significant of which is the source of
funds for the payment of principal of and interest on such obligations.
An entire issue of municipal obligations may be purchased by one or a
small number of institutional investors such as one of the Funds. Thus, the
issue may not be said to be publicly offered. Unlike securities which must be
registered under the Securities Act of 1933 prior to offer and sale, unless an
exemption from such registration is available, municipal obligations which are
not publicly offered may nevertheless be readily marketable. A secondary market
exists for municipal obligations which were not publicly offered initially.
Securities purchased for the Tax-Exempt Funds are subject to the policy
on holdings of securities which are not readily marketable. Boatmen's determines
whether a municipal obligation is readily marketable based on whether it may be
sold in a reasonable time consistent with the customs of the municipal markets
(usually seven days) at a price (or interest rate) which accurately reflects its
value. Boatmen's believes that the quality standards applicable to the Funds'
investments enhance marketability. In addition, standby commitments and demand
obligations also enhance marketability.
Yields on municipal obligations depend on a variety of factors,
including money market conditions, municipal bond market conditions, the size of
a particular offering, the maturity of the obligation and the quality of the
issue. Higher quality municipal obligations tend to have a lower yield than
lower rated obligations. Municipal obligations are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, extending the
time for payment of principal or interest, or both, or imposing other
constraints upon enforcement of such obligations or municipalities to levy
taxes. There is also the possibility that as a result of litigation or other
conditions the power or ability of any one or more issuers to pay when due
principal of and interest on its or their municipal obligations may be
materially affected.
INVESTING IN MISSOURI
The following information as to certain Missouri risk factors is given
to investors in view of the Tax-Exempt Fund's policy of concentrating its
investments in Missouri issuers. Such information constitutes only a brief
summary, does not purport to be a complete description and is based on
information from recent official statements relating to securities offerings of
Missouri issuers.
Missouri has a diverse economy based upon manufacturing, commerce,
trade, agriculture and mining. The State's proximity to the geographic and
population centers of the nation makes the State an attractive location for
business and industry. Earnings and employment are distributed among the
manufacturing, service and trade sectors in a close approximation of the
national average, lessening the State's cyclical sensitivity to a downturn in
any single sector. Wholesale and retail trade, services and manufacturing
together account for approximately 67% of Missouri's non-agricultural
employment. The unemployment rate in Missouri exceeded the national average in
the 1983 recession period, fell below the national average in 1984-86, 1989 and
1991-92 and exceeded the national average in 1987, 1988 and 1990.
The Missouri portions of the St. Louis and Kansas City metropolitan
areas contain approximately 1,855,000 and 961,000 residents, respectively,
constituting over 53% of Missouri's 1990 estimated population of approximately
5,117,000. St. Louis is an important site for banking and manufacturing
activity, as well as a distribution and transportation center, with eleven
Fortune 500 companies (as well
-10-
<PAGE> 470
as other major educational, financial, insurance, retail, wholesale and
transportation companies and institutions) headquartered there. Kansas City is a
major agribusiness center and an important center for finance and industry.
Economic reversals in either of these two areas would have a major impact on the
overall economic condition of the State of Missouri.
Manufacturing is a leading component of Missouri's economy. To the
extent that the economy suffers a recessionary period, the manufacturing sector,
which relies heavily on durable goods such as automobiles and electric and
electronic equipment, could be adversely affected.
Defense related business plays an important role in Missouri's economy.
In addition to the large number of civilians employed at the various military
installations and training bases in the State, aircraft and related businesses
in Missouri are the recipients of substantial annual dollar volumes of defense
contract awards. McDonnell Douglas Corporation is the State's largest employer,
employing approximately 30,000 employees in Missouri in 1994. From 1977 through
1991, Missouri has ranked in the top six states in total military contract
awards and ranked eighth in 1992, compared to its population ranking as the
nation's fifteenth largest state. To the extent that changes in military
appropriations were enacted by the United States Congress, Missouri could be
disproportionately affected.
Article X, Section 16-24 of the Constitution of Missouri (the "Hancock
Amendment") imposes a limit on the amount of taxes that may be imposed by the
State and on the amount of taxes, licenses and fees that may be imposed by local
government units in any fiscal year. The details of the Hancock Amendment are
complex; the amendment has been the subject of several judicial decisions and
further clarification from implementing legislation and subsequent judicial
decisions may be necessary.
The Hancock Amendment provides that the State may not collect revenues
in any fiscal year that exceed by more than one percent total State revenues for
the fiscal year ended June 30, 1981, adjusted annually based on increases in the
average personal income of Missouri residents. If the revenue limit is exceeded
by more than one percent in any fiscal year, a refund of the excess revenues
collected by the State is required.
The revenue limit may be exceeded if the Governor declares an emergency
and expenditures above the limit are approved by a two-thirds vote of each house
of the Missouri legislature. The revenue limit can also be exceeded if the
voters of the State of Missouri approve a constitutional amendment authorizing
new or increased taxes or revenues. In addition, the revenue limit does not
apply to taxes imposed for the payment of principal and interest on bonds
approved by the voters and authorized under the Missouri Constitution. The
Hancock Amendment does not prohibit increasing State taxes so long as State
revenues are expected to be less than the revenue limit.
The Hancock Amendment further provides that the State may not reduce
the State financed portion of the cost of any existing activity or service
required of a county or political subdivision and that the cost of any new
activity or service required by the State must be funded by the State. In
addition, State expenditures in any fiscal year may not exceed the established
revenue limit plus federal and surplus funds.
The Hancock Amendment generally prohibits counties and other political
subdivisions (all local government Units having the power to tax) from levying
any new or increased tax, license or fee without the approval of the required
majority of voters; however, the Missouri Supreme Court has ruled that increases
in specific charges for certain services actually provided are not subject to
the Hancock Amendment. If the required majority of voters approve the issuance
of debt obligations and the levy of taxes or imposition of licenses or fees
necessary to meet payments of principal and interest on such debt obligation,
existing taxes, licenses or fees may be increased or new taxes, licenses or fees
imposed without violating the Hancock Amendment. Missouri constitutional or
statutory provisions other than the Hancock Amendment may require greater than
majority approval for the valid issuance of debt obligations.
-11-
<PAGE> 471
Counties and other political subdivisions (but not the State) may
increase taxes without regard to the Hancock Amendment to pay principal and
interest on obligations if such obligations were authorized to be issued prior
to the adoption of the Hancock Amendment.
If the tax base of a county or other political subdivision with respect
to a tax, fee or license is broadened, the Hancock Amendment requires the tax
levy or fee to be reduced to yield the same estimated gross revenue as on the
prior base. Even if the assessed value of property in the county or other
political subdivision (excluding the value of new construction and improvements)
increases at a rate exceeding the consumer price index, the Hancock Amendment
limits any percentage increase in property tax revenues to the percentage
increase in the consumer price index and requires a rollback of taxes if
assessed values of real property increase faster than the consumer price index.
The Hancock Amendment limitations do not apply to the tax levy on the
assessed valuation of new construction and improvements.
To the extent that the payment of general obligation bonds issued by
the State of Missouri or a county or other political subdivision is dependent on
revenues from the levy of taxes and such obligations have been issued after the
date of the Hancock Amendment's adoption, November 4, 1980, the ability of the
State of Missouri or the appropriate local Unit to levy sufficient taxes to pay
the debt service on such bonds may be affected, unless there has been specific
voter approval of the issuance of such bonds and the levy of such taxes as are
necessary to pay the principal and interest on such bonds.
Debt obligations issued by certain State issuers, including those of
the Board of Public Buildings of the State of Missouri and the Department of
Natural Resources of the State of Missouri, are payable either solely or
primarily from the rentals, incomes and revenues of specific projects financed
with the proceeds of the debt obligations and are not supported by the taxing
powers of the State or of the issuer of the bonds. The Hancock Amendment may
most strongly affect such state revenue bonds, since they are dependent in whole
or in part on State appropriations to provide sufficient revenues to pay
principal and interest. Unless such bonds are approved by the voters of
Missouri, under the Hancock Amendment, taxes cannot be raised to cover the state
appropriations necessary to provide revenues to pay principal and interest on
the bonds.
Consequently, there may be insufficient state revenues available to
permit the State legislature to make appropriations adequate to enable the
issuer to make timely payment of principal and interest on such State revenue
bonds. For example, in the case of the Board of Public Buildings of the State of
Missouri, the payment of principal and interest on debt obligations is dependent
solely on the appropriation by the State legislature of sufficient funds to pay
the rentals of State agencies occupying buildings constructed by the Board of
Public Buildings. State park revenue bonds of the Department of Natural
Resources of the State of Missouri are in part dependent on revenues generated
by operations of the particular project and in part on State appropriations.
Consequently, payment of principal and interest on such State revenue bonds,
relating to specific projects and not supported by the taxing power of the State
of Missouri, may not be made or may not be made in a timely fashion because of
the inability of the State to appropriate sufficient funds for the payment of
such bonds (or to make up shortfalls therein) due to the limitations on State
taxes and expenditures imposed by the Hancock Amendment, the inability of the
issuer to generate sufficient income or revenue from the project to make such
payment or a combination of such factors.
As described above, general obligation bonds and revenue bonds of
counties or other political subdivision issuers may also be affected by the tax,
license and fee limitations of the Hancock Amendment. Unless the required voter
approval of such debt obligations and the imposition of taxes to pay them is
obtained prior to their issuance, the Hancock Amendment imposes limitations on
the imposition of new taxes and the increase of existing taxes which may be
necessary to pay principal and interest on general obligations bonds of local
issuers. The limitations contained in the Hancock Amendment also may affect the
payment of principal and interest on bonds and other obligations
-12-
<PAGE> 472
issued by local governmental units and supported by the revenues generated from
user fees, licenses or other fees and charges, unless the requisite voter
approval of the issuance of such bonds or other obligations, and the approval of
the assessment of such fees or other charges as may be necessary to pay the
principal and interest on such bonds or other obligations, has been obtained
prior to their issuance.
Debt obligations of certain other state and local agencies and
authorities are not, by the terms of their respective authorizing statutes,
obligations of the state or any political subdivision, public instrumentality or
authority, county, municipality or other state or local unit of government.
Illustrative of such issuers are the Missouri Housing Development Commission,
the State Environmental Improvement and Energy Resources Authority, the Health
and Educational Facilities Authority of the State of Missouri, the Missouri
Higher Education Loan Authority, the Industrial Development Board of the State
of Missouri, the Missouri Agricultural and Small Business Development Authority
and other similar bodies organized on a local level under similar state
authorizing statutes such as the various local industrial development
authorities. The debt obligations of such issuers are payable only from the
revenues generated by the project or program financed from the proceeds of the
debt obligations they issue, and the Hancock Amendment has no application.
In November 1992, Missouri voters approved a constitutional amendment
which removed the net proceeds of fuel taxes allocated to counties, cities,
towns and villages from the definition of "total state revenues" in the Hancock
Amendment. This change became effective July 1, 1993.
Under Missouri law, property tax abatement and tax increment financing
can be made available to encourage redevelopment projects. Neither tax abatement
nor tax increment financing diminishes tax revenues collected in affected areas,
but instead act to freeze such revenues at current levels and thereby deprive
the taxing authority of future increases in ad valorem property tax revenues
which would otherwise result from increases in assessed valuations in affected
areas.
In addition to the spending limitation imposed by the Hancock
Amendment, the Missouri General Assembly has proposed a constitutional amendment
which would prohibit the General Assembly in any fiscal year from increasing
taxes or fees without voter approval that in total produce new annual revenues
greater than either $50 million adjusted annually by the percentage change in
the person income of Missouri for the second previous fiscal year, or by 1% of
total state revenues, whichever is less. In emergency situations, as defined by
the Hancock Amendment, the General Assembly could increase taxes, licenses or
fees for one year above the limit without voter approval. The proposed amendment
to the Constitution is scheduled to be voted upon on April 19, 1996.
Another proposed constitutional amendment would allow school districts
to increase their bond indebtedness from 10 to 15 percent of the value of
taxable tangible property located in the district. No vote on such amendment
has been scheduled.
STANDBY COMMITMENTS
In order to enhance the liquidity, stability or quality of municipal
obligations, the Tax-Exempt Funds may acquire the right to sell a security to
another party at a guaranteed price and date. Such a right to resell may be
referred to as a put, demand feature or "standby commitment," depending on its
characteristics. The aggregate price which a Fund pays for securities with
standby commitments may be higher than the price which otherwise would be paid
for the securities.
Standby commitments may involve letters of credit issued by domestic or
foreign banks supporting the other party's ability to purchase the security from
the Fund. The right to sell may be exercisable on demand or at specified
intervals, and may form part of a security or be acquired separately by the
Fund. In considering whether a security meets a Fund's quality standards, the
Fund will look to the creditworthiness of the party providing the Fund with the
right to sell as well as the quality of the security itself.
-13-
<PAGE> 473
The Funds value municipal obligations which are subject to standby
commitments at amortized cost. The exercise price of the standby commitments is
expected to approximate such amortized cost. No value is assigned to the standby
commitments for purposes of determining a Fund's net asset value. The cost of a
standby commitment is carried as unrealized depreciation from the time of
purchase until it is exercised or expires. Since the value of a standby
commitment is dependent on the ability of the standby commitment writer to meet
its obligation to repurchase, each Fund's policy is to enter into standby
commitment transactions only with banks, brokers or dealers which represent a
minimal risk of default. The duration of standby commitments will not be a
factor in determining the weighted average maturity of a Fund. There is no
assurance that standby commitments will be available to a Fund nor have the
Funds assumed that such commitments would continue to be available under all
market conditions.
TAX-EXEMPT FUND TAXABLE OBLIGATIONS
The Tax-Exempt Funds do not currently intend to invest in taxable
obligations; however, from time to time each Fund may invest a portion of its
assets on a temporary basis in fixed-income obligations whose interest payments
are subject to federal or, in the case of the Tax-Exempt Fund, Missouri income
tax. In addition to the temporary defensive investments described in the
Prospectus, each Fund may invest in taxable obligations pending the investment
or reinvestment in municipal bonds of proceeds from sales of Fund shares or
sales of portfolio securities. A Fund may also invest in highly liquid, taxable
obligations in order to avoid the necessity of liquidating portfolio investments
to meet redemption requests by Fund shareholders.
RESTRICTED AND OTHER ILLIQUID SECURITIES
A Fund may purchase securities that are not registered ("restricted
securities") under the Securities Act of 1933, including restricted securities
offered and sold to "qualified institutional buyers" under Rule 144A under the
Securities Act of 1933. However, a Fund will not invest more than 10% of the
value of its net assets in securities which are illiquid, which may include
restricted securities, unless the Funds' Board of Trustees determines, based
upon a continuing review of the trading markets for the specific restricted
security, that such restricted securities are liquid. The Board of Trustees may
adopt guidelines and delegate to Boatmen's the daily function of determining and
monitoring liquidity of restricted securities. The Board, however, will retain
sufficient oversight and be ultimately responsible for the determinations. Since
it is not possible to predict with assurance that the market for securities
eligible for resale under Rule 144A will continue to be liquid, the Board 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.
INVESTMENT RESTRICTIONS
The Funds have adopted certain fundamental policies, which may not be
changed with respect to any Fund without the approval of the holders of a
majority of the outstanding voting shares of that Fund as defined in the 1940
Act.
TREASURY FUND, DIVERSIFIED FUND AND TAX-EXEMPT DIVERSIFIED FUND
As a matter of fundamental policy for the Treasury Fund, the
Diversified Fund and the Tax-Exempt Diversified Fund, each Fund may not:
(1) Purchase securities of any issuer if immediately after such
purchase the value of the Fund's investments in issuers
conducting their principal business activity in any one
industry would exceed 25% of the value of the Fund's total
assets, provided that: (a)
-14-
<PAGE> 474
the gas, electric, water and telephone businesses will be
considered separate industries, (b) the personal credit and
business credit businesses will be considered separate
industries, (c) wholly-owned finance companies will be
considered to be in the industry of their parents if their
activities are primarily related to financing the activity of
their parents, (d) there is no limitation with respect to or
arising out of investments in obligations issued or guaranteed
by the U.S. Government, its agencies and instrumentalities or
by banks and (e) the Diversified Fund will invest more than
25% of the value of its total assets in bank obligations
(whether foreign or domestic) except that if adverse economic
conditions prevail in the banking industry the Diversified
Fund may, for defensive purposes, temporarily invest less than
25% of the value of its total assets in bank obligations (for
the purposes of this restriction, state and municipal
governments and their agencies or authorities are not deemed
to be industries).
(2) Make loans, except to the extent that the purchase of debt
obligations in accordance with each Fund's investment
objective and policies and repurchase agreements with banks,
brokers, dealers and other financial institutions may be
deemed to be loans.
(3) Borrow money, except: (a) as a temporary measure, and then
only in amounts not exceeding 5% of the value of the Fund's
total assets, or (b) from banks, provided that immediately
after any such borrowing all borrowings of the Fund do not
exceed one-third of the Fund's total assets. While any Fund
has borrowings outstanding in an amount exceeding 5% of its
total assets the Funds will not make any purchases of
portfolio instruments for that Fund. The Funds may not borrow
money from Boatmen's Bancshares, Inc. or any majority-owned
subsidiary thereof.
(4) Purchase or sell real estate (except securities secured by
real estate or interests therein), commodities, commodity
contracts or oil and gas interests, or purchase any voting
securities or invest in companies for the purpose of
exercising control or management.
(5) Act as an underwriter of securities (except as the Funds may
be deemed to be an underwriter under the Securities Act of
1933 in connection with the purchase and sale of instruments
in accordance with its investment objective and portfolio
management policies), make short sales of securities, or
maintain a short position.
(6) Mortgage, pledge or hypothecate any assets, except to secure
permitted borrowings.
(7) Purchase the securities of any issuer other than the U.S.
Government, its agencies or instrumentalities, if immediately
after such purchase, more than 5% of the value of the Fund's
total assets would be invested in any one issuer except that:
(a) up to 25% of the value of its total assets may be invested
without regard to such 5% limitation, and (b) such 5%
limitation shall not apply to repurchase agreements
collateralized by obligations of the U.S. Government, its
agencies or instrumentalities.
For purposes of the investment restriction in item (1), each foreign
government will be considered a separate industry. For purposes of the
restriction in item (7) above, a guaranty of an instrument will be considered a
separate security (subject to certain exclusions allowed under the 1940 Act).
The exceptions to item (3), above, with regard to borrowing are not for
investment leverage purposes, but are solely for extraordinary or emergency
purposes and to facilitate management of the Funds by enabling the Funds to meet
redemption requests when the liquidation of portfolio instruments is deemed to
be disadvantageous or not possible. If, due to market fluctuations or other
reasons, the net assets of a Fund fall below 300% of its borrowings, the Funds
would promptly reduce the borrowings of such Fund in accordance with the 1940
Act. To do this, the Funds may have to sell a portion of such Fund's investments
at a time when it may be disadvantageous to do so.
-15-
<PAGE> 475
In addition, the Trustees have approved the following non-fundamental
investment restriction on behalf of the Treasury Fund, the Diversified Fund and
the Tax-Exempt Diversified Fund: it will not, on behalf of such Funds, purchase
securities on margin (except for delayed delivery or when-issued transactions or
such short-term credits as are necessary for the clearance of transactions).
Pursuant to an SEC rule, the Diversified Fund and the Treasury Fund may
not invest more than 5% of their total assets in the securities of any one
issuer (except U.S. Government securities or repurchase agreements
collateralized by such obligations). Each of such Funds may, however, invest
more than 5% of its total assets in the First Tier Securities of a single issuer
for a period of up to three business days after the purchase thereof, although a
Fund may not make more than one such investment at any time. Securities which
are rated in the highest short-term rating category by at least two Nationally
Recognized Statistical Rating Organizations ("NRSROs") are designated "First
Tier Securities." Further, each of such Funds will not invest more than: (i) the
greater of 1% of its total assets, or (ii) one million dollars in the securities
of a single issuer which were Second Tier Securities when acquired by a Fund. In
addition, each of such Funds may not invest more than 5% of its total assets in
securities which were Second Tier Securities when acquired by a Fund. Securities
rated in the top two short-term rating categories by at least two NRSROs, but
which are not rated in the highest category by two or more NRSROs, are
designated "Second Tier Securities." Pursuant to SEC Rule 2a-7 the foregoing
restrictions are not applicable to the Tax-Exempt Funds. "NRSROs" include
Standard & Poor's Corporation, Moody's Investors Service, Inc., Duff & Phelps,
Inc., Fitch Investors Service, Inc., IBCA Limited and its affiliate IBCA Inc.,
and Thomson BankWatch, Inc. For a description of their rating categories, see
Appendix A.
TAX-EXEMPT FUND
As a matter of fundamental policy, the Tax-Exempt Fund may not:
(1) Purchase the securities of any issuer (other than obligations
issued or guaranteed by the Government of the United States or
its agencies or instrumentalities) if, as a result, more than
25% of the Fund's total assets (taken at current value) would
be invested in the securities of issuers having their
principal business activities in the same industry.
(2) Make loans, except: (a) through the purchase of all or a
portion of an issue of debt securities in accordance with its
investment objective, policies and limitations, or (b) by
engaging in repurchase agreements with respect to portfolio
securities, or (c) by lending securities to other parties,
provided that no securities loan may be made, if, as a result,
more than 33-1/3% of the value of its total assets would be
lent to other parties.
(3) Borrow money, except that the Fund may borrow money for
temporary or emergency purposes (not for leveraging or
investment) in an amount not exceeding 33-1/3% of the value of
its total assets (less liabilities other than borrowings) and
may not purchase any security while borrowings representing
more than 5% of its net assets are outstanding. Any borrowings
that come to exceed 33-1/3% of the value of the Fund's total
assets by reason of a decline in net assets will be reduced
within three days to the extent necessary to comply with the
33-1/3% limitation.
(4) Purchase or sell physical commodities or real estate unless
acquired as a result of the ownership of securities (but this
shall not prevent the Fund from purchasing and selling futures
contracts or marketable securities issued by companies or
other entities or investment vehicles that deal in real estate
or interests therein, nor shall this prevent the Fund from
purchasing interests in pools of real estate mortgage loans).
-16-
<PAGE> 476
(5) Underwrite securities issued by others (except to the extent
that the Fund may be deemed to be an underwriter within the
meaning of the Securities Act of 1933 in the disposition of
restricted securities).
(6) Issue bonds or any other class of securities preferred over
shares of the Fund in respect of the Fund's assets or
earnings, provided that the Fund may establish additional
series or classes of shares in accordance with its Declaration
of Trust.
(7) Sell securities short, unless it owns, or by virtue of
ownership of other securities has the right to obtain,
securities equivalent in kind and amount to the securities
sold short, and provided that transactions in futures
contracts are not deemed to constitute short sales.
To the extent that limitation (7) allows the Fund to engage in certain
short sales, and that limitation (4) allows the Fund to purchase or sell
physical commodities or real estate and purchase and sell futures contracts, the
Fund does not plan on doing so in the coming year. For purposes of the foregoing
restriction (1), municipal governments and their agencies and authorities are
not deemed to be industries.
As a matter of non-fundamental policy, the Tax-Exempt Fund may not:
(a) Purchase securities on margin, except that the Fund may obtain
such short-term credits as are necessary for the clearance of
transactions, and provided that the Fund may make initial and
variation margin payments in connection with transactions in
futures contracts and options on futures contracts.
(b) Purchase or otherwise acquire any security or enter into a
repurchase agreement with respect to any security if, as a
result, more than 10% of the value of its net assets would be
invested in securities subject to legal or contractual
restrictions on resale (restricted securities), securities for
which there is no readily available market, and repurchase
agreements not entitling the holder to payment of interest and
principal within seven days.
The foregoing non-fundamental investment restrictions of the Funds may
be changed or terminated without the approval of shareholders.
For purposes of the foregoing limitations, any limitation which
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, one of
the Funds.
As used in this Statement of Additional Information, with respect to
matters required to be submitted to shareholders by the provisions of the 1940
Act, the term "majority of the outstanding shares" of either the Funds or a
particular Fund of the Funds means the vote of the lesser of (i) 67% or more of
the shares of the Funds or Fund present at a meeting, if the holders of more
than 50% of the outstanding shares of the Funds or Fund are present or
represented by proxy, or (ii) more than 50% of the outstanding shares of the
Funds or Fund.
-17-
<PAGE> 477
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and officers of the Funds is set
forth below. Trustees and officers deemed to be "interested persons" of the
Funds for purposes of the 1940 Act are indicated by an asterisk.
<TABLE>
<CAPTION>
Principal Occupation(s)
Name and Address Position(s) with Trust During Past 5 Years
- ---------------- ---------------------- -------------------
<S> <C> <C>
J. Hord Armstrong, III (55) Trustee Chairman and CEO, D&K
8000 Maryland Avenue Wholesale Drug, Inc., a
Suite 1190 distributor of pharmaceutical
St. Louis, Missouri 63105 products, since 1987.
Lee F. Fetter (43) Chairman Chief Operating and Financial
660 S. Euclid, Box 8003 Officer of Washington
St. Louis, Missouri 63110 University School of Medicine
since 1983.
Henry O. Johnston (59) Trustee President of Fordyce Four,
9650 Clayton Road Incorporated, a corporation
St. Louis, Missouri 63124 engaged in the acquisition and
management of personal
investments.
L. White Matthews, III (50) Trustee Executive Vice President of
Eighth and Eaton Avenues Finance since 1987, Union
Bethlehem, Pennsylvania 18018 Pacific Corporation, a company
engaged in transportation,
exploration and refining of
hydrocarbons, mining and real
estate.
Nicholas G. Penniman, IV (58) Trustee Publisher, St. Louis Post-
900 N. Tucker Boulevard Dispatch since 1986. Senior
St. Louis, Missouri 63101 Vice President of Pulitzer
Publishing Company since
1986.
William J. Tomko (37) President Senior Vice President, BISYS
3435 Stelzer Road Fund Services, Inc.
Columbus, Ohio 43219
W. Eugene Spurbeck (40) Vice President Manager, BISYS Fund Services,
3435 Stelzer Road Inc.
Columbus, Ohio 43219
Martin R. Dean (33) Treasurer Manager, Mutual Fund
3435 Stelzer Road Accounting, BISYS Fund
Columbus, Ohio 43219 Services, Inc. since May 1994.
Prior thereto, Senior Manager,
KPMG Peat Marwick.
</TABLE>
-18-
<PAGE> 478
<TABLE>
<CAPTION>
Principal Occupation(s)
Name and Address Position(s) with Trust During Past 5 Years
- ---------------- ---------------------- -------------------
<S> <C> <C>
George O. Martinez (37) Secretary Senior Vice President and
3435 Stelzer Road Director of Legal and
Columbus, Ohio 43219 Compliance Services of BISYS
Fund Services, Inc. since April
1995. Prior thereto, Vice
President and Associate
General Counsel of Alliance
Capital Management, L.P.
Sheldon A. Jones (58) Assistant Secretary Partner of the law firm of
Ten Post Office Square South Dechert Price & Rhoads.
Boston, Massachusetts 02109
Alaina Metz (28) Assistant Secretary Employee of BISYS Fund
3435 Stelzer Road Services Limited Partnership
Columbus, Ohio 43219 since June 1995; prior thereto,
supervisor, Alliance Capital
Management, L.P.
Bruce Treff (30) Assistant Secretary Counsel, BISYS Fund Services,
3435 Stelzer Road Inc. since September 1995.
Columbus, Ohio 43219 Prior thereto, Manager, Alliance
Capital Management, L.P.
</TABLE>
The Agreement and Declaration of Trust of the Funds (the "Trust
Agreement") provides that, subject to its provisions, the business of the Funds
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 [as of ________________________,
NationsBank Corporation], BISYS and their respective affiliates. The Funds have
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 for
comparable transactions with other customers.
Each officer holds comparable positions with certain other investment
companies for which BISYS or its affiliates serve as administrator and/or
distributor.
-19-
<PAGE> 479
The following table provides information relating to the aggregate
compensation received by the Trustees from the Registrant for the fiscal year
ended August 31, 1996.
COMPENSATION TABLE
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
TOTAL COMPEN-
PENSION OR ESTIMATED SATION FROM
AGGREGATE RETIREMENT ANNUAL REGISTRANT AND
NAME OF COMPENSATION BENEFITS UPON BENEFITS UPON FUND COMPLEX
PERSON, POSITION FROM REGISTRANT RETIREMENT RETIREMENT PAID TO PERSONS
<S> <C> <C> <C> <C>
J. Hord Armstrong, III $26,000 0 0 $26,000
Lee F. Fetter (Chairman) $28,000 0 0 $28,000
Henry O. Johnston* $26,000 0 0 $26,000
L. White Matthews, III $26,000 0 0 $26,000
Nicholas G. Penniman, IV $26,000 0 0 $26,000
</TABLE>
* "Interested person" of the Funds for purposes of the 1940 Act.
Each of the Trustees who are not "interested persons" 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 meeting
attended by such Trustee. The compensation paid to the Chairman is $18,000 and
$2,000 for each Trustee meeting 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 fiscal year ended August 31, 1996,
distributed to or accrued for the account of the non-interested Trustees (four
persons), amounted to approximately $106,000, which amount represented the total
compensation paid by the Funds to the Trustees during that year.
THE INVESTMENT ADVISER, ADMINISTRATOR, DISTRIBUTOR
AND TRANSFER AGENT
INVESTMENT ADVISER
Boatmen's Trust Company, P.O. Box 14737, 100 North Broadway, St. Louis,
Missouri 63178, acts as investment adviser to the Funds. As adviser, Boatmen's
is responsible for the management of each Fund's assets pursuant to separate
Advisory Agreements between each Fund and Boatmen's. As of , Boatmen's is a
subsidiary of NationsBank Corporation.
The Funds have no present intention of purchasing any securities issued
by Boatmen's, [NationsBank Corporation] or any of its affiliates. Mr. Henry O.
Johnston, a Trustee of the Funds, owns shares amounting to less than one-tenth
of one percent (0.1%) of the outstanding shares of common stock of Boatmen's
Bancshares, Inc.
Under each Advisory Agreement, Boatmen's, subject to the supervision of
the Trustees of the Funds, manages the investment operations of each of the
Funds.
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 Funds, except
-20-
<PAGE> 480
liability to the Funds 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 Funds will indemnify
Boatmen's against certain liabilities, including liabilities under the Federal
securities laws, or, in lieu thereof, contribute to resulting losses.
Boatmen's began serving as investment adviser to the Treasury Fund and
Diversified Fund on June 1, 1994 and began serving as investment adviser to the
Tax-Exempt Diversified Fund and Tax- Exempt Fund on July 1, 1995. Goldman Sachs,
acting through its separate operating division, Goldman Sachs Asset Management,
served as investment adviser to the Tax-Exempt Diversified Fund and Missouri
Tax-Exempt Fund prior to July 1, 1995.
Boatmen's is entitled to receive advisory fees on a monthly basis at an
annual rate of .15 of 1% of the Diversified Fund's average net assets, .15 of 1%
of the Treasury Fund's average net assets, .20 of 1% of the Tax-Exempt
Diversified Fund's average net assets and .20 of 1% of the Tax-Exempt Fund's
average net assets. For the fiscal year ended August 31, 1996, total advisory
fees paid by the Diversified Fund and Treasury Fund were .13% and .15% of each
Fund's net assets, respectively. For the fiscal year ended August 31, 1995,
total advisory fees paid by the Diversified Fund and Treasury Fund were .07% and
.08% of each Fund's net assets, respectively. For the fiscal year ended August
31, 1994 (under the former advisory agreements from September 1, 1993 to June 1,
1994, and from June 1, 1994 to August 31, 1994), total advisory fees paid by the
Diversified Fund and Treasury Fund were .07% and .08%, respectively.
For the fiscal year ended August 31, 1996, total advisory fees paid by
the Tax-Exempt Fund were .22% of net assets and .20% of the net assets of the
Tax-Exempt Diversified Fund. For the fiscal year ended August 31, 1995, total
advisory fees paid by the Tax-Exempt Fund were .20% of net assets and .17% of
the net assets of the Tax-Exempt Diversified Fund. For the fiscal year ended
August 31, 1994, during which Goldman Sachs acted as investment adviser to each
of the Tax-Exempt Funds, the compensation received by Goldman Sachs for services
and expenses (net of fees waived) constituted .28% of the net assets of the
Tax-Exempt Fund and .14% of the net assets of the Tax- Exempt Diversified 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 commissions, if any) of securities purchased
for each Fund.
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
Funds 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 Funds.
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 Funds, the Funds might be required to alter materially
or discontinue their arrangements with Boatmen's and change their method of
operations. It is not anticipated, however, that any change in the Funds' method
of operations would affect the net asset value per share of any Fund or result
in a financial loss to any shareholder.
-21-
<PAGE> 481
Moreover, if current restrictions preventing a bank from legally sponsoring,
organizing, controlling or distributing shares of an open-end investment company
were relaxed, the Funds expect that Boatmen's would consider the possibility of
offering to perform some or all of the services now provided by BISYS and PFD.
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 Advisory Agreements for such Funds were approved by the Trustees,
including the "non-interested" Trustees (as defined under "Investment
Restrictions"), on October 22, 1996 and by shareholders of each Fund on December
18, 1996. Each Advisory Agreement will remain in effect until May 31, 1997, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually: (1) by vote of a majority of the outstanding shares
of each such Fund (as defined under "Investment Restrictions") or by the
Trustees of the Funds, and (2) by the vote of a majority of the "non-interested"
Trustees. Each 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 Funds 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
Funds.
THE ADMINISTRATOR, DISTRIBUTOR AND TRANSFER AGENT
BISYS, a wholly-owned subsidiary of The BISYS Group, Inc., which has
its principal offices at 3435 Stelzer Road, Columbus, Ohio 43219, 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
Funds who are not parties to this Agreement or interested persons of any such
party, cast in person at a meeting called for the purpose of voting on such
approval, and (b) by the Board of Trustees of the Funds or by vote of a majority
of the outstanding voting securities of such Fund. The Agreement is terminable
by the Board of Trustees of the Funds 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 Funds, which is calculated based on
the net assets of all 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 Funds' average net assets up to $1.5
billion, .110 of 1% of the Funds' average net assets on the next $1.5 billion,
and .1075 of 1% of the Funds' average net assets in excess of $3 billion. From
time to time, BISYS may waive fees or voluntarily reimburse the Funds for
expenses. For the period March 31, 1994 to August 31, 1994, the amount of the
administrator fee paid by the Funds to Concord Holding Corporation ("Concord"),
an affiliate of BISYS and the Trust's former Administrator was $1,198,735. For
the fiscal year September 1, 1994 through August 31, 1995, the Treasury,
Diversified, Tax-Exempt Diversified and Tax-Exempt Funds paid Concord
$1,357,012, $1,479,697, $449,267 and $293,693, respectively, for the performance
of administrative services during such period. For the fiscal year September 1,
1995 through August 31, 1996, the Treasury, Diversified, Tax-Exempt Diversified
and Tax-Exempt Funds paid BISYS $1,880,792, $1,598,802, $433,805 and $257,068,
respectively, for the performance of administrative services during such period.
BISYS will bear all expenses in connection with the performance of its
services under the Administration Agreement for the Funds with the exception of
fees for certain fund accounting services which are borne by the Funds.
-22-
<PAGE> 482
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' duties or from the reckless disregard by BISYS of its obligations and
duties thereunder.
Pilot Funds Distributors, Inc. ("PFD"), a wholly-owned subsidiary of
The BISYS Group, Inc., located at 3435 Stelzer Road, Columbus, Ohio 43219, acts
as the exclusive distributor of the shares of each of the Funds pursuant to a
Distribution Agreement with the Funds dated as of June 1, 1996. Shares are sold
on a continuous basis by PFD as agent, although PFD is not obligated to sell any
particular amount of shares. No compensation is payable by the Funds to PFD for
its distribution services.
The Distribution Agreement with PFD 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 Funds and who have no direct or
indirect financial interest in the operation of any plan that has been adopted
by the Funds 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 Funds or by vote of a
majority of the outstanding voting securities of the Funds. The Agreement is
terminable by the Funds 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 on 60 days' written notice to PFD, or by PFD at any time, without payment
of any penalty, on 60 days' written notice to the Funds.
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 Funds, the
Transfer Agent, has undertaken with the Funds 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 Funds' custodian and the
relevant sub-custodian in connection with redemptions, (iv) provide dividend
crediting and certain disbursing 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. For the fiscal year September 1, 1995 through
August 31, 1996, the Transfer Agent received a fee of $28,182 in its capacity as
transfer agent. For the fiscal year September 1, 1994 through August 31, 1995,
Concord Financial Services, Inc., the Funds' former transfer agent, received a
fee of $14,493 in the capacity of transfer agent. Prior to June 1, 1994,
Goldman, Sachs & Co. served as the Funds' transfer agent.
EXPENSES
The Funds are responsible for all expenses other than those expressly
borne by Boatmen's, BISYS, the Distributor, and the Transfer Agent under the
Advisory Agreements, Administration Agreement, Distribution Agreement, and
Transfer Agency Agreement, respectively. Such expenses include, without
limitation, the fees payable to Boatmen's, BISYS, the Distributor, and the
Transfer Agent, the fees and expenses of the Funds' custodian, brokerage fees
and commissions, any portfolio losses, filing fees for the registration or
qualification of the Funds' shares under federal or state securities laws,
expenses of the organization of the Funds, fees and expenses incurred by the
Funds in connection with membership in investment company organizations, 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 Funds for violation of
any law,
-23-
<PAGE> 483
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 Funds'
shareholders and regulatory authorities, compensation and expenses of its
Trustees and extraordinary expenses incurred by the Funds.
PORTFOLIO TRANSACTIONS
Boatmen's places the portfolio transactions of the respective Funds and
of all other accounts managed by Boatmen's for execution with many firms.
Boatmen's uses their best efforts to obtain execution of portfolio transactions
at prices which are advantageous to each Fund and at reasonably competitive
spreads or (when a disclosed commission is being charged) at reasonably
competitive commission rates. In seeking such execution, Boatmen's will use
their 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 general execution and operational capabilities of the
firm, 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.
Securities purchased and sold by the Funds are generally traded in the
over-the-counter market on a net basis (i.e., without commission) through
broker-dealers and banks acting for their own account rather than as brokers, or
otherwise involve transactions directly with the issuer of such securities.
In certain instances there may be securities which are suitable for
more than one Fund advised by Boatmen's 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 to 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 clients
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 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 Funds believe that over time its ability to
participate in volume transactions will produce superior executions for the
Funds.
During the fiscal year ended August 31, 1996, the Funds acquired/sold
securities of its regular brokers/dealers: Prudential Funding Corp., Bear Sterns
Co., Inc., Dean Witter Discover and Co., J.P. Morgan, Lehman Bros., Merrill
Lynch, and State Street Bank & Trust.
NET ASSET VALUE
The net asset value per share of each Fund is determined by the Funds'
custodian at 2:00 p.m., Central time (3:00 p.m., Eastern time), for the
Diversified and Treasury Funds and 12:00 Noon, Central time, (1:00 p.m. Eastern
time) for the Tax-Exempt Funds on each Business Day. A Business Day means any
day on which the New York Stock Exchange and the Custodian are open for business
and the New York Stock Exchange (the "Exchange") is open for trading, which is
Monday through Friday except for holidays (scheduled Exchange holidays for 1997
are: New Year's Day, Martin Luther King, Jr. Day, Presidents Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day,
Thanksgiving Day and Christmas Day).
-24-
<PAGE> 484
Pursuant to a rule of the SEC, the Funds' securities are valued using
the amortized cost method of valuation in an effort to maintain a constant net
asset value of $1.00 per share, which the Board of Trustees has determined to be
in the best interest of the Funds and their shareholders. This method involves
valuing a security at cost on the date of acquisition and thereafter assuming a
constant accretion of a discount or amortization of a premium to maturity,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. While this method provides certainty in valuation, it may result
in periods during which value, as determined by amortized cost, is higher or
lower than the price a Fund would receive if it sold the instrument. During such
periods, the yield to an investor in a Fund may differ somewhat from that
obtained in a similar investment company which uses available market quotations
to value all of its portfolio securities. During periods of declining interest
rates, the quoted yield on shares of a Fund may tend to be higher than a like
computation made by a fund with identical investments utilizing a method of
valuation based upon market prices and estimates of market prices for all of its
portfolio instruments. Thus, if the use of amortized cost by a Fund resulted in
a lower aggregate portfolio value on a particular day, a prospective investor in
the Fund would be able to obtain a somewhat higher yield if he purchased shares
of the Fund on that day than could be obtained from investment in a fund
utilizing solely market values, and existing investors in the Fund would receive
less investment income. The converse would apply in a period of rising interest
rates.
The Trustees have established procedures designed to stabilize, to the
extent reasonably possible, each Fund's price per share as computed for the
purpose of sales and redemptions at $1.00. These procedures include review of a
Fund by the Trustees, at such intervals as they deem appropriate, to determine
whether its net asset value calculated by using available market quotations (or
an appropriate substitute which reflects market conditions) deviates from $1.00
per share based on amortized cost, as well as review of methods used to
calculate the deviation. If such deviation exceeds 1/2 of 1%, the Trustees will
promptly consider what action, if any, will be initiated. In the event that the
Trustees should determine that a deviation exists which could result in material
dilution or other unfair results to investors or existing shareholders, they
will take such corrective action as they may deem to be necessary and
appropriate, including: selling portfolio instruments prior to maturity to
realize capital gains or losses or to shorten average portfolio maturity;
withholding part or all of dividends or payment of distributions from capital or
capital gains; redeeming shares in kind; or establishing a net asset value per
share by using available market quotations or equivalents. In addition, the
Trustees have the authority: (1) to reduce or increase the number of shares
outstanding on a pro rata basis, and (2) to offset each shareholder's pro rata
portion of the deviation between the net asset value per share and $1.00 from
the shareholder's accrued dividend account or from future dividends. Each Fund
may hold cash for the purpose of stabilizing its net asset value per share.
Holdings of cash, on which no return is earned, would tend to lower the yield on
such Fund's shares. Such procedures also provide for certain action to be taken
with respect to portfolio securities which experience a downgrade in rating or
suffer a default.
In order to continue to use the amortized cost method of valuation,
each Fund's investments, including repurchase agreements, must be U.S.
dollar-denominated instruments which the Trustees determine to present minimal
credit risk and be rated within one of the two highest rating categories for
short-term debt obligations by at least two major rating agencies assigning a
rating to the security or issuer, or if only one rating agency has assigned a
rating, by that agency. Purchases by the Diversified and Treasury Funds of
securities which are unrated or rated by only one rating agency must be approved
or ratified by the Trustees. Securities which are unrated may be purchased only
if they are deemed to be of comparable quality to rated securities.
Each of the Funds may not maintain a dollar-weighted average portfolio
maturity of more than 90 days nor purchase portfolio securities with maximum
remaining maturities of more than 13 months (13 months is defined herein and in
the rule to equal 397 days). However, a Fund may also, consistent with the
provisions of the above-mentioned rule, invest in securities with a maturity of
more than 13 months, provided that the security is either a variable U.S.
Government security, or a floating or variable rate security with certain demand
interest rate reset features. Should the disposition of a
-25-
<PAGE> 485
portfolio security result in a dollar-weighted average portfolio maturity of
more than 90 days, that Fund will invest its available cash in such a manner as
to reduce such maturity to 90 days or less as soon as reasonably practicable.
REDEMPTIONS
The Trust may suspend the right of redemption of shares of any Fund and
may postpone payment for any period: (i) during which the New York Stock
Exchange is closed other than customary weekend and holiday closings or during
which trading on the New York Stock Exchange is restricted by applicable rules
and regulations of the Securities and Exchange Commission, (ii) when the SEC
determines that a state of emergency exists which may make payment or transfer
not reasonably practicable, (iii) as the SEC may by order permit for the
protection of the shareholders of the Funds, or (iv) at any other time when the
Funds may, under applicable laws and regulations, suspend payment on the
redemption of its shares. The Trust may also suspend or postpone the recordation
of the transfer of its shares under any of the foregoing circumstances.
The Funds agree to redeem shares of each Fund solely in cash up to the
lesser of $250,000 or 1% of the net asset value of the Fund during any 90-day
period for any one shareholder. The Funds reserve the right to pay other
redemptions, either total or partial, by a distribution in kind of securities
(instead of cash) from the applicable Fund's portfolio although the Funds have
no current intention to do so. The securities distributed in such a distribution
would be valued at the same value as that assigned to them in calculating the
net asset value of the shares being redeemed. If a shareholder receives a
distribution in kind, he or she should expect to incur transaction costs when he
or she converts the securities to cash.
CALCULATION OF YIELD QUOTATIONS
Each Fund's yield quotations are calculated by a standard method
prescribed by the rules of the SEC. Under this method, the yield quotation is
based on a hypothetical account having a balance of exactly one share at the
beginning of a seven-day period.
The yield quotation is computed as follows: the net change, exclusive
of capital changes (i.e., realized gains and losses from the sale of securities
and unrealized appreciation and depreciation), in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the base
period is determined by dividing the net change in account value by the value of
the account at the beginning of the base period. This base period return is then
multiplied by 365/7 with the resulting yield figure carried to the nearest 100th
of 1%. Such yield quotations shall take into account all fees that are charged
to a Fund.
Each Fund also may advertise a quotation of effective yield for a
7-calendar day period. Effective yield is computed by compounding the
unannualized base period return determined as in the preceding paragraph by
adding 1 to that return, raising the sum to the 365/7 power and subtracting one
from the result, according to the following formula:
Effective Yield = [(base period return + 1)(365/7)] - 1.
The Tax-Exempt Funds may also advertise a tax equivalent yield which is
computed by dividing that portion of the Fund's yield (as computed above) which
is tax-exempt by one minus a stated income tax rate and adding the quotient to
that portion, if any, of the yield of the Fund that is not tax-exempt and a tax
equivalent effective yield computed by compounding the tax equivalent yield on a
weekly basis.
-26-
<PAGE> 486
Unlike bank deposits or other investments which 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 in the methods used to value portfolio securities,
compute expenses, and calculate return.
Yield, effective yield, tax equivalent yield and tax equivalent
effective yield are calculated separately for Pilot Shares, Administration
Shares and Investor Shares. Each type of share is subject to different fees and
expenses and may have differing yields for the same period.
The yield of each Fund with respect to Pilot Shares, Administration
Shares and Investor Shares for the seven day period ended August 31, 1996 was as
follows:
<TABLE>
<CAPTION>
Tax Equivalent Tax Equivalent
Yield Effective Yield Yield Effective Yield
----- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Treasury Fund
Pilot Shares 4.80% 4.91% N/A N/A
Administration Shares 4.55% 4.65% N/A N/A
Investor Shares 4.30% 4.39% N/A N/A
Diversified Fund
Pilot Shares 5.11% 5.25% N/A N/A
Administration Shares 4.87% 4.98% N/A N/A
Investor Shares 4.62% 4.72% N/A N/A
Tax-Exempt Fund
Pilot Shares 3.09% 3.14% 5.12% 5.20%
Administration Shares 2.85% 2.89% 4.72% 4.78%
Investor Shares 2.60% 2.63% 4.30% 4.35%
Tax-Exempt Diversified Fund
Pilot Shares 3.16% 3.21% 5.23% 5.31%
Administration Shares 2.91% 2.95% 4.82% 4.88%
Investor Shares 2.66% 2.69% 4.40% 4.45%
</TABLE>
The quotations of tax equivalent yield set forth in advertising,
marketing and other Funds literature are based on a federal marginal tax rate of
39.6%. Tax-equivalent yield may be higher when combined with Missouri state
personal income tax rates.
From time to time, the Funds may publish an indication of one or more
Fund's past performance as measured by independent sources, such as Lipper
Analytical Services, Incorporated, Weisenberger Investment Companies Service,
Donoghue's Money Report, Barron's, Business Week, Changing Times, Financial
World, Forbes, Money, Personal Investor, Sylvia Porter's Personal Finance and
The Wall Street Journal.
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 or policies by any governmental agency or bureau.
-27-
<PAGE> 487
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
and 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 assets is represented by cash
and cash items (including receivables), U.S. Government securities, securities
of other regulated investment companies, and other securities, with such other
securities limited for any one issuer to an amount not greater than 5% of the
Fund's total assets and 10% of the outstanding voting securities of that issuer,
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 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 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.
The Funds intend that the Tax-Exempt Funds each will qualify under the
Code to pay "exempt-interest dividends" to its shareholders. The Tax-Exempt
Funds will be so qualified if, at the close of each quarter of their taxable
year, at least 50% of the value of their total assets consists of securities on
which the interest payments are exempt from federal income tax. To the extent
that dividends distributed by the Tax-Exempt Funds to their shareholders are
derived from interest income exempt from federal income tax and are designated
as "exempt-interest dividends" by the Tax-Exempt Funds, they will be excludable
from the gross income of the shareholders for federal income tax purposes.
"Exempt-interest dividends," however, must be taken into account by shareholders
in determining whether their total income is large enough to result in taxation
of up to 85% of their social security benefits and certain railroad retirement
benefits. It should also be noted that tax-exempt interest on private activity
bonds in which a Tax-Exempt Fund may invest generally is treated as a tax
preference item for purposes of the alternative minimum tax for corporate and
individual shareholders. The Tax-Exempt Funds will inform shareholders annually
as to the portion of the distributions from such Funds which constituted
"exempt-interest dividends."
Dividends paid out of a Fund's investment company taxable income will
be treated as ordinary income in the hands of shareholders. Because no portion
of a Fund's income is expected to consist of dividends paid by U.S.
corporations, no portion of such dividends is expected to 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
-28-
<PAGE> 488
dividends-received deduction. Net capital gains for a taxable year are computed
by taking into account any capital loss carry-forward of a Fund. The Funds are
not normally expected to realize any long-term capital gains or losses.
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.
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. Furthermore, a loss realized by a shareholder on the redemption,
sale or exchange of shares in the Tax-Exempt Funds with respect to which
exempt-interest dividends have been paid will, to the extent of such
exempt-interest dividends, be disallowed if such shares have been held by the
shareholder for less than six months.
Under the Code, a shareholder may not deduct that portion of interest
on indebtedness incurred or continued to purchase or carry shares of an
investment company paying exempt-interest dividends (such as the shares of the
Tax-Exempt Funds) which bears the same ratio to the total of such interest as
the exempt-interest dividends bear to the total dividends (excluding net capital
gain dividends) received by the shareholder. In addition, under rules issued by
the Internal Revenue Service for determining when borrowed funds are considered
to be used to purchase or carry particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though the borrowed funds
are not directly traceable to such purchase.
Each Fund may be subject to foreign withholding taxes on its
investments in certain securities of foreign entities. 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
-29-
<PAGE> 489
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 share 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 a 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 a Fund.
Each Fund will be required to report to the Internal Revenue Service
(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 Funds 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.
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 Funds 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 investments 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.
To the extent that distributions made by the Tax-Exempt Fund qualify as
"exempt-interest dividends" for federal income tax purposes, are derived from
interest on obligations of the state of Missouri or any of its political
subdivisions or authorities, and are designated by the Tax-Exempt Fund as "state
income tax exempt-interest dividends," these distributions will be exempt from
Missouri income taxation.
-30-
<PAGE> 490
Shareholders are advised to consult their own tax advisers with respect
to the particular tax consequences to them of an investment in a Fund. Persons
who may be "substantial users" (or "related persons" of substantial users) of
facilities financed by industrial development bonds should consult their tax
advisers before purchasing shares of the Tax-Exempt Funds. The term "substantial
user" generally includes any "non-exempt person" who regularly uses in his or
her trade or business a part of a facility financed by industrial development
bonds. Generally, an individual will not be a "related person" of a substantial
user under the Code unless the person or his or her immediate family owns
directly or indirectly in the aggregate more than a 50% equity interest in the
substantial user.
ORGANIZATION AND CAPITALIZATION
The Pilot Funds 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 Funds 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 Funds 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, four of which are offered herein and known as Pilot Short-Term
Diversified Assets Fund, Pilot Short-Term U.S. Treasury Fund, Pilot Short-Term
Tax-Exempt Diversified Fund and Pilot Short-Term Tax-Exempt 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
offered hereby: Pilot Shares, Administration Shares and Investor Shares. Each
Pilot Share, Administration Share and Investor Share is entitled to one vote per
share: however, separate votes will be taken by each Fund or class (or by one or
more Funds voting as a single class if similarly affected) on matters affecting
only that individual Fund or class (or those affected Funds or classes) or as
otherwise required by law. Fractional shares are entitled to proportionate
fractional votes. Shares have neither cumulative voting rights nor any
preemptive, subscription, or conversion rights (the right of redemption is
described under "Transaction Rules" and "How to Sell Shares" in the Prospectus).
Shares when issued as described herein are fully paid and nonassessable, except
as expressly set forth below. For information relating to possible mandatory
redemption of shares at the option of the Funds, see "Transaction Rules" and
"How to Sell Shares" in the Prospectus. 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.
SHAREHOLDER AND TRUSTEE LIABILITY
The Pilot Funds 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
-31-
<PAGE> 491
Funds. Notice of such disclaimer will normally be given in each agreement,
obligation or instrument entered into or executed by the Funds 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 Funds shall, upon request, assume
the defense of any claim made against a shareholder for any act or obligation of
the Funds, 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 Funds 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 Funds and upon
reports made to the Funds 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 judgment or mistakes of fact or
law. The Declaration of Trust provides that the Funds will indemnify the
Trustees and officers of the Funds against liabilities and expenses reasonably
incurred in connection with litigation in which they may be involved because of
their positions with the Funds, 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 Funds, their conduct was in the best interests of the Funds and that, in all
other cases, their conduct was at least not opposed to the best interests of the
Funds (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.
CUSTODIAN
Boatmen's Trust Company, 100 North Broadway, St. Louis, Missouri
63178-4737 is the custodian of the Funds' assets.
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 audit services, Arthur Andersen LLP, prepares the Funds' federal
and state tax returns, and provides consultation and assistance on accounting,
internal control and related matters. The financial statements of the Funds
incorporated by reference into this Statement of Additional Information (under
"Financial Statements") are from the Funds' annual report for the year ended
August 31, 1996, and the data set forth under "Selected Per Share Data and
Ratios" in the Prospectus have been audited by Arthur Andersen LLP, as indicated
in their report with respect thereto, and are included in reliance upon the
authority of said firm as experts in giving the reports.
Goodwin, Procter & Hoar LLP, Exchange Place, Boston, Massachusetts
02109, serves as general counsel to the Funds.
MISCELLANEOUS
The following table indicates each additional person known by the
Funds to own benefically 5% or more of the Funds as of October 23, 1996.
<TABLE>
<CAPTION>
Name and Address Percent of Total Outstanding Shares
- ---------------- -----------------------------------
<S> <C>
Treasury Fund
Boatmen's Trust Company 77.12%
100 N. Broadway LBT 0785
St. Louis, MO 63102
Diversified Fund
Boatmen's Trust Company 82.60%
100 N. Broadway LBT 0785
St. Louis, MO 63102
Tax-Exempt Fund
Boatmen's Trust Company 69.87%
100 N. Broadway LBT 0785
St. Louis, MO 63102
</TABLE>
FINANCIAL STATEMENTS
The financial statements and related report of Arthur Andersen LLP,
independent public accountants, contained in the 1996 Annual Report of the Funds
are hereby incorporated by reference and attached hereto.
-32-
<PAGE> 492
SERVICE PLAN
The Funds have adopted a service plan (the "Plan") with respect to the
Investor Shares (formerly known as Centerland Service Shares) which will
authorize the Funds to compensate certain institutions ("Service Organizations")
for providing certain account administration and shareholder liaison services to
their customers who are or may become beneficial owners of such shares. Pursuant
to the Plan, the Funds will enter into agreements with Service Organizations
which purchase Investor Shares on behalf of their customers ("Service
Agreements"). Under such Service Agreements the Service Organizations may: (a)
aggregate and process purchase, exchange, and redemption requests from customers
and place net purchase, exchange and redemption orders with the Funds'
distributor; (b) process dividend payments from the Funds on behalf of customers
and assist customers in changing dividend options, account designations and
addresses; (c) act as sole shareholder of record and nominee for customers; (d)
maintain accounts and records for Investor Shares owned by each customer; (e)
issue confirmations concerning customer orders to purchase, redeem and exchange
Investor Shares; (f) provide subaccounting with respect to Investor Shares
beneficially owned by customers or the information to the Funds necessary for
subaccounting; (g) if required by law, forward shareholder communications from
the Funds (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to customers;
(h) provide other similar administrative services; (i) provide customers with a
service that invests the assets of their accounts in Investor Shares pursuant to
specific or pre-authorized instructions; and (j) provide and maintain elective
services such as check writing and wire transfer services.
As compensation for such services, the Funds will pay each Service
Organization a service fee in an amount up to .50 of 1% (on an annualized basis)
of the average daily net asset value of the Investor Shares of the Fund
attributable to or held in the name of such Service Organization. For the fiscal
years ended August 31, 1996, August 31, 1995 and August 31, 1994, with respect
to each Fund then in existence, the amount of the service fees paid to Service
Organizations was:
<TABLE>
<CAPTION>
Fund 1996 1995 1994
---- ---- ---- ----
<S> <C> <C> <C>
Pilot Short-Term U.S. Treasury Fund $799,775 $353,371 $232,476
Pilot Short-Term Diversified Assets
Fund $199,056 $703,026 $858,564
Pilot Missouri Short-Term Tax-Exempt
Fund $ 64,299 $ 7,552 $ 1,173
Pilot Short-Term Tax-Exempt
Diversified Fund $ 968 $ 23,899 $ 2,587
</TABLE>
The Funds have adopted the Plan pursuant to Rule 12b-1 under the 1940
Act. Rule 12b-1, which was adopted by the SEC under the 1940 Act, regulates the
circumstances under which an investment company such as the Funds may bear
expenses associated with the distribution of its shares. In particular, such an
investment company cannot engage directly or indirectly in financing any
activity which is primarily intended to result in the sale of shares issued by
the company unless it has adopted a plan pursuant to, and complies with the
other requirements of, such Rule.
The Glass-Steagall Act prohibits all entities which receive deposits
from engaging to any extent in the business of issuing, underwriting, selling or
distributing securities, although institutions such as national banks are
permitted to purchase and sell securities upon the order and for the account of
their customers. Should future legislative or administrative action or judicial
or administrative decisions or interpretations prohibit or restrict the
activities of one or more of the Service Organizations in connection with the
Funds, such Service Organizations might be required to alter materially or
-33-
<PAGE> 493
discontinue the services performed under their Service Agreements. If one or
more of the Service Organizations were restricted from effecting purchases or
sales of Pilot Shares automatically pursuant to pre-authorized instructions, for
example, effecting such transactions on a manual basis might affect the size
and/or growth of the Fund. In addition, state securities laws on this issue may
differ from the interpretations of federal law expressed herein and banks and
other financial institutions purchasing Investor Shares on behalf of their
customers may be required to register as dealers pursuant to state law. Any such
alteration or discontinuance of services could require the Trustees of the Funds
to consider changing the Funds' method of operations or providing alternative
means of offering Investor Shares to customers of such Service Organizations, in
which case the operation of the Funds, their size and/or growth might be
significantly altered. It is not anticipated, however, that any alteration of
the Funds' operations would have any effect on the net asset value per share or
result in financial losses to any shareholder.
Conflict of interest restrictions (including the Employee Retirement
Income Security Act of 1974) may apply to a Service Organization's receipt of
compensation paid by the Funds in connection with the investment of fiduciary
funds in Investor Shares. Service Organizations, including banks regulated by
the Comptroller of the Currency, the Federal Reserve Board or the Federal
Deposit Insurance Corporation, and investment advisers and other money managers
subject to the jurisdiction of the Securities and Exchange Commission, the
Department of Labor or State Securities Commissions, are urged to consult legal
advisers before investing fiduciary assets in Investor Shares.
The Plan was approved by the holders of Investor Shares of each Fund on
August 31, 1992. The Trustees of the Funds, including a majority of the Trustees
who are not interested persons of the Funds and who have no direct or indirect
financial interest in the operation of such Plan or the related Service
Agreements, voted: (a) to continue the Plan and Service Agreements at a meeting
called for the purpose of voting on such Plan and Service Agreements on October
20, 1993, and (b) to revise the Plan and Service Agreements, effective March 31,
1994, at a meeting called for the purpose of voting on such Plan and Service
Agreements on March 3-4, 1994. The Trustees voted to continue the Plan and
Service Agreements at a meeting called for the purpose of voting on such Plan
and Service Agreements on May 21, 1996. The Plan and Service Agreements will
remain in effect until May 31, 1997 and will continue in effect thereafter only
if such continuance is specifically approved annually by a vote of the Trustees
in the manner described above. The Plan may not be amended to increase
materially the amount to be spent for the services described therein without
approval of the shareholders of the affected Fund, and all material amendments
of the Plan must also be approved by the Trustees in the manner described above.
The Plan may be terminated at any time by a majority of the Trustees as
described above or by vote of a majority of the outstanding Investor Shares of
the affected Fund. The Service Agreements may be terminated at any time, without
payment of any penalty, by vote of a majority of the Trustees as described above
or by a vote of a majority of the outstanding Investor Shares of the affected
Fund on not more than 60 days' written notice to any other party to the Service
Agreements. The Service Agreements shall terminate automatically if assigned. So
long as the Plan is in effect, the selection and nomination of those Trustees
who are not interested persons shall be committed to the discretion of the
non-interested members of the Board of Trustees. The Trustees have determined
that, in their judgment, there is a reasonable likelihood that the Plan will
benefit the Funds and holders of Investor Shares of such Funds. In the Trustees'
quarterly review of the Plan and Service Agreements, they will consider their
continued appropriateness and the level of compensation provided therein.
-34-
<PAGE> 494
APPENDIX: DESCRIPTION OF SECURITIES RATINGS
MOODY'S INVESTORS SERVICE, INC.
LONG-TERM RATINGS
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.
Moody's applies numerical modifiers, 1, 2, and 3 in the Aa category.
The modifier 1 indicates that the security ranks in the higher end of the Aa
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of the Aa category.
SHORT-TERM RATINGS
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.
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade ("MIG"). 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.
A-1
<PAGE> 495
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 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
LONG-TERM RATINGS
AAA: Bonds rated AAA are highest grade debt obligations. This rating
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ 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.
SHORT-TERM RATINGS
A-1: Standard & Poor's short-term 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." 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
LONG-TERM RATINGS
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.
SHORT-TERM RATINGS
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.
A-2
<PAGE> 496
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.
FITCH INVESTORS SERVICE, INC.
LONG-TERM RATINGS
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+."
Plus ("+") and minus ("-") signs are used with a rating symbol to
indicate the relative position of a credit within the AA rating category.
SHORT-TERM RATINGS
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 with "F-1"+ and "F-1" ratings.
LOC: The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
IBCA LIMITED AND IBCA, INC.
LONG-TERM RATINGS
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 unlikely to increase investment risk
significantly.
A-3
<PAGE> 497
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.
"+" or "-" may be appended to denote relative status within major
rating categories.
SHORT-TERM RATINGS
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 satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic, or financial conditions.
THOMSON BANKWATCH, INC.
LONG-TERM RATINGS
AAA: The highest category; indicates a superior ability to repay
principal and interest on a timely basis.
AA: The second highest category; indicates a superior ability to repay
principal and interest on a timely basis with limited incremental risk versus
issues rated in the highest category. Ratings in the Long-Term Debt categories
may include a plus ("+") or minus ("-") designation which indicates where within
the respective category the issue is placed.
SHORT-TERM RATINGS
TBW-1: The highest category; indicates a very high degree of likelihood
that principal and interest will be paid on a timely basis.
TBW-2: The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
The TBW Short-Term Ratings apply only to unsecured instruments that
have a maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an
untimely payment of principal and interest.
A-4
<PAGE> 498
THE PILOT FUNDS
3435 Stelzer Road
Columbus, Ohio 43219
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 31, 1996
ADMINISTRATION SHARES
The Pilot Funds (the "Funds") is an open-end, management investment
company (or mutual fund) consisting of fourteen portfolios, four of which
portfolios (the "Funds") are described herein:
Pilot Short-Term U.S. Treasury Fund (the "Treasury Fund"); Pilot
Short-Term Diversified Assets Fund (the "Diversified Fund"); Pilot
Short-Term Tax-Exempt Diversified Fund (the "Tax-Exempt Diversified
Fund"); and Pilot Missouri Short-Term Tax-Exempt Fund (the "Tax-Exempt
Fund").
Boatmen's Trust Company ("Boatmen's") serves as investment adviser to
the Funds. Pilot Funds Distributors, Inc. ("PFD") serves as each Fund's
distributor, and its affiliate, BISYS Fund Services Limited Partnership
("BISYS"), serves as each Fund's administrator. The Tax-Exempt Diversified Fund
and the Tax-Exempt Fund are sometimes referred to as the "Tax-Exempt Funds."
This Statement of Additional Information is not a Prospectus, and
should be read in conjunction with the Prospectus for the administration Shares
(the "Prospectus") dated December 31, 1996, as may be amended or supplemented
from time to time, which may be obtained without charge from institutions
("Service Organizations") that hold administration Shares for the benefit of
their customers, or by writing to Pilot Funds Distributors Inc., 3435 Stelzer
Road, Columbus, Ohio 43219.
<PAGE> 499
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT POLICIES AND PRACTICES OF THE PORTFOLIOS.............................
U.S. Government Securities.............................................
Custodial Receipts.....................................................
Bank and Corporate Obligations.........................................
Repurchase Agreements..................................................
Foreign Securities.....................................................
Asset-Backed and Receivables-Backed Securities.........................
Forward Commitments and When-Issued Securities.........................
Variable Amount Master Demand Notes....................................
Variable Rate and Floating Rate Demand Instruments.....................
Loan Participation.....................................................
Municipal Obligations..................................................
Investing in Missouri..................................................
Standby Commitments....................................................
Tax-Exempt Fund Taxable Obligations....................................
Restricted and Other Illiquid Securities...............................
INVESTMENT RESTRICTIONS.........................................................
Treasury Fund, Diversified Fund and Tax-Exempt Diversified Fund........
Tax-Exempt Fund........................................................
TRUSTEES AND OFFICERS...........................................................
THE INVESTMENT ADVISER, ADMINISTRATOR, DISTRIBUTOR
AND TRANSFER AGENT............................................................
Investment Adviser.....................................................
The administrator, Distributor and Transfer Agent......................
Expenses...............................................................
PORTFOLIO TRANSACTIONS..........................................................
NET ASSET VALUE.................................................................
REDEMPTIONS.....................................................................
CALCULATION OF YIELD QUOTATIONS.................................................
TAX INFORMATION.................................................................
State and Local........................................................
ORGANIZATION AND CAPITALIZATION.................................................
Shareholder and Trustee Liability......................................
CUSTODIAN.......................................................................
INDEPENDENT ACCOUNTANTS AND COUNSEL.............................................
FINANCIAL STATEMENTS............................................................
ADMINISTRATION PLAN.............................................................
APPENDIX: DESCRIPTION OF SECURITIES RATINGS.....................................
</TABLE>
-2-
<PAGE> 500
ADMINISTRATION SHARES
INVESTMENT POLICIES AND PRACTICES OF THE PORTFOLIOS
The following discussion elaborates on the description of each Fund's
investment policies and practices contained in the Prospectus. 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 SECURITIES
A Fund may invest in separately traded principal and interest
components of securities issued or guaranteed by the U.S. Treasury. The
principal and interest components of selected securities are traded
independently under the Separate Trading of Registered Interest and Principal of
Securities program ("STRIPS"). Under the STRIPS program, 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.
CUSTODIAL RECEIPTS
The Diversified 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. Although it has no current intent, the
Treasury Fund could invest more than 10% of its total assets in custodial
receipts if the staff of the Securities and Exchange Commission ("SEC") changes
its current policy that such evidences of ownership do not constitute Government
Securities for purposes of Section 35(d) of the Investment Company Act of 1940
(the "1940 Act"). The Tax-Exempt Funds may acquire custodial receipts that
evidence ownership of future interest payments, principal payments or both on
certain municipal notes and bonds.
BANK AND CORPORATE OBLIGATIONS
Commercial paper represents short-term unsecured promissory notes
typically issued in bearer form by banks or bank holding companies,
corporations, and finance companies. The commercial paper purchased by the Funds
consists of direct U.S. dollar denominated obligations of domestic or foreign
issuers. Bank obligations in which the Funds may invest include certificates of
deposit, bankers' acceptances, fixed time deposits and bank notes. Certificates
of deposit are negotiable certificates issued against funds deposited in a
commercial bank for a definite period of time and earning a specified return.
Bankers' acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific merchandise, which
are "accepted" by a bank, meaning, in effect, that the bank unconditionally
agrees to pay the face value of the instrument on maturity. Fixed time deposits
are bank obligations payable at a stated maturity date and bearing interest at a
fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but
may be subject to early withdrawal penalties which vary depending upon market
conditions and the remaining maturity of the obligation. There are no
contractual restrictions on the right to transfer a beneficial interest in a
fixed time deposit to a third party, although there is no market for such
deposits. Bank notes and bankers acceptances rank junior to domestic deposit
liabilities of the bank and pari passu with other senior,
-3-
<PAGE> 501
unsecured obligations of the bank. Bank notes are classified as "other
borrowings" on a bank's balance sheet, while deposit notes and certificates of
deposit are classified as deposits. Bank notes are not insured by the Federal
Deposit Insurance Corporation or any other insurer. Deposit notes are insured by
the Federal Deposit Insurance Corporation only to the extent of $100,000 per
depositor per bank. Certain fixed time deposits maturing in more than seven days
may be deemed to be illiquid securities.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with selected
broker-dealers, banks or other financial institutions. A repurchase agreement is
an arrangement under which the purchaser (i.e., the 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 Funds' 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 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 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 liquid instruments.
-4-
<PAGE> 502
FOREIGN SECURITIES
The Diversified Fund may invest in U.S. dollar denominated foreign
securities and certificates of deposit, bankers' acceptances and fixed time
deposits and other obligations issued by major foreign banks, foreign branches
of U.S. banks, U.S. branches of foreign banks, and foreign branches of foreign
banks. Investments can include fixed time deposits in Cayman Island branches of
such banks. The Tax-Exempt Funds may also invest in municipal instruments backed
by letters of credit issued by certain of such banks. Under current SEC rules
relating to the use of the amortized cost method of portfolio securities
valuation, these Funds are restricted to purchasing U.S. dollar denominated
securities, but are not otherwise precluded from purchasing securities of
foreign issuers.
Investments in foreign securities and bank obligations may involve
considerations different from investments in domestic securities due to limited
publicly available information; non-uniform accounting standards; the possible
imposition of withholding or confiscatory taxes, the possible adoption of
foreign governmental restrictions affecting the payment of principal and
interest, expropriation, or other adverse political or economic developments. In
addition, it could be more difficult to obtain and enforce a judgment against a
foreign issuer or a foreign branch of a domestic bank.
ASSET-BACKED AND RECEIVABLES-BACKED SECURITIES
The securitization techniques used to develop mortgage-backed
securities are now being applied to a broad range of assets. Through the use of
trusts and special purpose corporations, various types of assets, including
automobile loans, computer leases, trade receivables and credit card
receivables, are being securitized in pass-through structures similar to the
mortgage pass-through structures. Consistent with its investment objectives and
policies, the Diversified Fund may invest in these and other types of
asset-backed securities that may be developed in the future. However, the Fund
will generally not invest in an asset-backed security if the income received
with respect to its investment constitutes rental income or other income not
treated as qualifying income under the 90% test described in "Tax Information"
below. In general, the collateral supporting these securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments with interest rate fluctuations.
Several types of asset-backed and receivable-backed securities have
already been offered to investors, for example Certificates for Automobile
ReceivablesSM ("CARSSM") and interests in pools of credit card receivables.
CARSSM represent undivided fractional interests in a trust ("CAR Trust") whose
assets consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARSSM are passed through monthly to certificate holders, and
are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the CAR Trust. An investor's return on CARSSM may be affected by
early prepayment of principal on the underlying vehicle sales contracts. If the
letter of credit is exhausted, the CAR Trust may be prevented from realizing the
full amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage or
loss of a vehicle, the application of federal and state bankruptcy and
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets. 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 give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. There is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
-5-
<PAGE> 503
Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection, and (ii) protection against losses
resulting from ultimate default by an obligor or servicer. Liquidity protection
refers to the provision of advances, generally by the entity inistering the
pool of assets, to ensure that the receipt of payments on the underlying pool
occurs in a timely fashion. Protection against losses results from payment of
the insurance obligations on at least a portion of the assets in the pool. This
protection may be provided through guarantees, policies or letters of credit
obtained by the issuer or sponsor from third parties, through various means of
structuring the transaction or through a combination of such approaches. The
degree of credit support provided for each issue is generally based on
historical information reflecting the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that anticipated or failure
of the credit support could adversely affect the return on an investment in such
a security.
The availability of asset-backed securities may be affected by
legislative or regulatory developments. It is possible that such developments
may require the Diversified Fund to dispose of any then existing holdings of
such securities.
Consistent with the Diversified Fund's investment objectives and
policies, the Fund also may invest in other types of asset-backed and
receivables-backed securities.
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES
Each Fund may purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis. These transactions involve a
commitment by the 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 when 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 transactions are negotiated directly with the other party,
and such commitments are not traded on exchanges, but may be traded
over-the-counter.
A Fund will purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment 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 negotiate 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. The Fund may realize a capital gain or loss in
connection with these transactions. For purposes of determining a Fund's average
dollar weighted maturity, the maturity of when-issued or forward commitment
securities will be calculated from the commitment date.
When a Fund purchases securities on a when-issued or forward commitment
basis, the Fund's custodian or subcustodian will maintain in a segregated
account liquid assets having a value (determined daily) at least equal to the
amount of the Fund's purchase commitments. In the case of a forward commitment
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
ensure that the Fund will maintain sufficient assets at all times to cover its
obligations under when-issued purchases and forward commitments.
VARIABLE AMOUNT MASTER DEMAND NOTES
Each Fund may purchase variable amount master demand notes. These
obligations permit the investment of fluctuating amounts at varying rates of
interest pursuant to direct arrangements between the Fund (as lender) and the
borrower. These notes are direct lending arrangements between lenders and
borrowers, and are not generally transferable, nor are they ordinarily rated by
a Nationally
-6-
<PAGE> 504
Recognized Statistical Rating Organization ("NRSRO"). The Fund may invest in
these notes only if Boatmen's believes that, as of the time of investment, the
notes are of a quality comparable to the other obligations in which a Fund may
invest.
VARIABLE RATE AND FLOATING RATE DEMAND INSTRUMENTS
Each Fund may purchase variable and floating rate demand instruments
that are tax-exempt municipal obligations and other debt securities that possess
a floating or variable interest rate adjustment formula. These instruments also
permit a Fund to demand payment of the principal balance plus unpaid accrued
interest upon a specified number of days' notice to the issuer or its agent. The
demand feature may be backed by a bank letter of credit or guarantee issued with
respect to such instrument.
The terms of the variable or floating rate demand instruments that a
Fund may purchase provide that interest rates are adjustable at intervals
ranging from daily up to six months, and the adjustments are based upon current
market levels, the prime rate of a bank or other appropriate interest rate
adjustment index as provided in the respective instruments. Some of these
instruments are payable on demand on a daily basis or on not more than seven
days' notice. Others, such as instruments with quarterly or semiannual interest
rate adjustments, may be put back to the issuer on designated days on not more
than thirty days' notice. Still others are automatically called by the issuer
unless the Fund instructs otherwise. A Fund will determine the variable or
floating rate demand instruments that it will purchase in accordance with
procedures approved by the Trustees to minimize credit risks. Accordingly, any
variable or floating rate demand instrument must be of high quality with respect
to both its long-term and short-term aspects, except that where credit support
is provided even if the issuer defaults in the payment of principal or interest,
the Fund may rely only on the high quality character of the short-term aspect of
the variable or floating rate demand instrument, i.e., the right to sell. A
variable or floating rate demand instrument which is unrated must have high
quality characteristics similar to other obligations rated high quality.
Boatmen's may determine that an unrated variable or floating rate demand
instrument meets a Fund's quality criteria by reason of being backed by a letter
of credit or guarantee issued by a bank that meets the quality criteria for that
Fund. Thus, either the credit of the issuer of the obligation or the guarantor
bank or both will meet the quality standards of the Fund.
The maturity of the variable or floating rate demand instruments held
by a Fund will ordinarily be deemed to be the longer of: (1) the notice period
required before the Fund is entitled to receive payment of the principal amount
of the instrument through demand, or (2) the period remaining until the
instrument's next interest rate adjustment. The acquisition of variable or
floating rate demand notes for a Fund must also meet the requirements of rules
issued by the SEC applicable to the use of the amortized cost method of
securities valuation.
A Fund may invest in variable or floating rate demand instruments in
the form of participation interests in variable or floating rate tax-exempt
obligations held by financial institutions (usually commercial banks). Such
participation interests provide the Fund with a specific undivided interest (up
to 100%) in an obligation and the right to demand payment of the unpaid
principal balance plus accrued interest on the participation interest from the
financial institution upon a specific number of days' notice. In addition, the
participation interest generally is backed by an irrevocable letter of credit or
guarantee from the institution. The institution usually retains fees out of the
interest paid on the obligation for servicing the obligation and providing the
letter of credit.
LOAN PARTICIPATION
The Diversified Fund may purchase participation interests with
remaining maturities of thirteen months or less in loans of any maturity. Such
loans must be to issuers in whose obligations the Fund may invest. Any
participation purchased by the Fund must be issued by a bank in the United
States with assets exceeding $1 billion. Because the issuing bank does not
guarantee the participation in any
-7-
<PAGE> 505
way, it is subject to the credit risks generally associated with the underlying
corporate borrower. In addition, because it may be necessary under the terms of
the loan participation for the Fund to assert through the issuing bank such
rights as may exist against the underlying corporate borrower, in the event that
the underlying corporate borrower should fail to pay principal and interest when
due, the Fund could be subject to delays, expenses and risks which are greater
than those which would have been involved if the Fund had purchased a direct
obligation (such as commercial paper) of the borrower. Moreover, under the terms
of the loan participation, the purchasing Fund may be regarded as a creditor of
the issuing bank (rather than of the underlying corporate borrower), so that the
Fund also may be subject to the risk that the issuing bank may become insolvent.
Further, in the event of the bankruptcy or insolvency of the corporate borrower,
the loan participation might be subject to certain defenses that can be asserted
by a borrower as a result of improper conduct by the issuing bank. The secondary
market, if any, for these loan participation interests is limited, and any such
participation purchased by the Fund may be treated as illiquid.
MUNICIPAL OBLIGATIONS
The Diversified Fund and the Tax-Exempt Funds may invest in municipal
obligations. Municipal obligations are issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies, authorities and instrumentalities and the District of
Columbia to obtain funds for various public purposes. The interest on most of
these obligations is generally exempt from regular federal income tax. The two
principal classifications of municipal obligations are "notes" and "bonds."
NOTES. Municipal notes are generally used to provide for short-term
capital or operating cash flow needs and generally have maturities of one year
or less. Municipal notes include tax anticipation notes, revenue anticipation
notes, bond anticipation notes, tax and revenue anticipation notes, tax-exempt
commercial paper and certain receipts for municipal obligations.
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. They are often general obligations of the
issuer, secured by the taxing power for payment of principal and interest.
Revenue anticipation notes are issued in expectation of receipt of other types
of revenue such as federal revenues available under the Federal Revenue Sharing
Program. They are often general obligations of the issuer. Tax anticipation
notes and revenue anticipation notes are generally issued in anticipation of
various seasonal revenues such as income, sales, use and business taxes. Bond
anticipation notes are sold to provide interim financing in anticipation of
long-term financing in the market. In most cases, these monies provide for the
repayment of the notes and the notes are not secured by any other source.
Tax-exempt commercial paper consists of short-term unsecured promissory notes
issued by a state or local government or an authority or agency thereof. The
Funds may also acquire securities in the form of custodial receipts which
evidence ownership of future interest payments, principal payments or both on
certain state and local governmental and authority obligations when, in the
opinion of bond counsel, they are exempt from federal income tax. Such
obligations are held in custody by a bank on behalf of the holders of the
receipts. These custodial receipts are known by various names, including
"Municipal Receipts" and "Municipal Certificates of Accrual on Tax-Exempt
Securities." There are a number of other types of notes issued for different
purposes and secured differently from those described above.
BONDS. Municipal bonds, which generally meet longer term capital needs
and have maturities of more than one year when issued, have two principal
classifications, "general obligation" bonds and "revenue" bonds.
General obligation bonds are issued by entities such as states,
counties, cities, towns and regional districts and are used to fund a wide range
of public projects including the construction or improvement of schools,
highways and roads, water and sewer systems and a variety of other public
-8-
<PAGE> 506
purposes. The basic security of general obligation bonds is the issuer's pledge
of its faith, credit, and taxing power for the payment of principal and
interest. The taxes that can be levied for the payment of debt service may be
limited or unlimited as to rate or amount or special assessments.
Revenue bonds have been issued to fund a wide variety of capital
projects including: electric, gas, water and sewer systems; highways, bridges
and tunnels; port and airport facilities; colleges and universities; and
hospitals. The principal security for a revenue bond is generally the net
revenues derived from a particular facility or group of facilities or, in some
cases, from the proceeds of a special excise or other specific revenue source.
Although the principal security behind these bonds varies widely, many provide
additional security in the form of a debt service reserve fund whose monies may
also be used to make principal and interest payments on the issuer's
obligations. Housing finance authorities have a wide range of security including
partially or fully insured, rent subsidized and/or collateralized mortgages,
and/or the net revenues from housing or other public projects. In addition to a
debt service reserve fund, some authorities provide further security in the form
of a state's ability (without obligation) to make up deficiencies in the debt
service reserve fund. Lease rental revenue bonds issued by a state or local
authority for capital projects are secured by annual lease rental payments from
the state or locality to the authority sufficient to cover debt service on the
authority's obligations.
Private activity bonds, a term that includes certain types of bonds,
the proceeds of which are used to a specified extent for the benefit of persons
other than governmental units, although nominally issued by municipal
authorities, are generally not secured by the taxing power of the municipality
but are secured by the revenues of the authority derived from payments by the
industrial user. The Tax-Exempt Diversified Fund does not intend to invest in
recently issued private activity bonds. The Tax-Exempt Fund may invest in
private activity bonds. The interest from such bonds would be an item of tax
preference to shareholders under the federal alternative minimum tax.
Municipal bonds with a series of maturity dates are called serial
bonds. The serial bonds which the Funds may purchase are limited to short-term
serial bonds, those with original or remaining maturities of 13 months or less.
The Funds may purchase long-term bonds provided that they have a remaining
maturity of 13 months or less or, in the case of bonds called for redemption,
the date on which the redemption payment must be made is within 13 months. The
Funds may also purchase long-term bonds (sometimes referred to as "Put Bonds"),
which are subject to a Fund's commitment to put the bond back to the issuer at
par at a designated time within 13 months and the issuer's commitment to so
purchase the bond at such price and time. The Funds may purchase long-term
fixed-rate bonds that have been coupled with an option granted by a third party
financial institution allowing the Fund, at periodic intervals (usually every
six months, but in no event more than every twelve months), to tender (or "put")
its bonds to the institution and receive the face value thereof. The Fund may be
assessed "tender fees" for each tender period at a rate equal to the difference
between the bonds' fixed coupon rate and the rate, as determined by a
remarketing or similar agent, that would cause the bonds coupled with the tender
option to trade at par on the date of such determination.
These bonds coupled with puts, as well as standby commitments
(discussed below), may present tax issues. With either type of investment, the
Tax-Exempt Funds intend to take the position that they are the owners of
municipal obligations acquired subject to a third-party put, and that tax-exempt
interest earned with respect to such municipal obligations will be tax-exempt in
their bonds. There is no assurance that the Internal Revenue Service will agree
with such position in any particular case. Additionally, the federal income tax
treatment of certain other aspects of these investments, including the treatment
of any tender fees or swap payments, in relation to various regulated investment
company tax provision is unclear.
In addition to general obligation bonds, revenue bonds and serial
bonds, there are a variety of hybrid and special types of municipal obligations
as well as numerous differences in the security of municipal obligations both
within and between the two principal classifications above.
-9-
<PAGE> 507
The Tax-Exempt Funds may purchase municipal instruments that are backed
by letters of credit issued by domestic banks or foreign banks that have a
branch, agency or subsidiary in the United States. See "Foreign Securities" for
information concerning credit risks of foreign bank obligations.
For the purpose of investment restrictions of the Funds, the
identification of the "issuer" of municipal obligations that are not general
obligation bonds is made by Boatmen's on the basis of the characteristics of the
obligation as described above, the most significant of which is the source of
funds for the payment of principal of and interest on such obligations.
An entire issue of municipal obligations may be purchased by one or a
small number of institutional investors such as one of the Funds. Thus, the
issue may not be said to be publicly offered. Unlike securities which must be
registered under the Securities Act of 1933 prior to offer and sale, unless an
exemption from such registration is available, municipal obligations which are
not publicly offered may nevertheless be readily marketable. A secondary market
exists for municipal obligations which were not publicly offered initially.
Securities purchased for the Tax-Exempt Funds are subject to the policy
on holdings of securities which are not readily marketable. Boatmen's determines
whether a municipal obligation is readily marketable based on whether it may be
sold in a reasonable time consistent with the customs of the municipal markets
(usually seven days) at a price (or interest rate) which accurately reflects its
value. Boatmen's believes that the quality standards applicable to the Funds'
investments enhance marketability. In addition, standby commitments and demand
obligations also enhance marketability.
Yields on municipal obligations depend on a variety of factors,
including money market conditions, municipal bond market conditions, the size of
a particular offering, the maturity of the obligation and the quality of the
issue. Higher quality municipal obligations tend to have a lower yield than
lower rated obligations. Municipal obligations are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, extending the
time for payment of principal or interest, or both, or imposing other
constraints upon enforcement of such obligations or municipalities to levy
taxes. There is also the possibility that as a result of litigation or other
conditions the power or ability of any one or more issuers to pay when due
principal of and interest on its or their municipal obligations may be
materially affected.
INVESTING IN MISSOURI
The following information as to certain Missouri risk factors is given
to investors in view of the Tax-Exempt Fund's policy of concentrating its
investments in Missouri issuers. Such information constitutes only a brief
summary, does not purport to be a complete description and is based on
information from recent official statements relating to securities offerings of
Missouri issuers.
Missouri has a diverse economy based upon manufacturing, commerce,
trade, agriculture and mining. The State's proximity to the geographic and
population centers of the nation makes the State an attractive location for
business and industry. Earnings and employment are distributed among the
manufacturing, service and trade sectors in a close approximation of the
national average, lessening the State's cyclical sensitivity to a downturn in
any single sector. Wholesale and retail trade, services and manufacturing
together account for approximately 67% of Missouri's non-agricultural
employment. The unemployment rate in Missouri exceeded the national average in
the 1983 recession period, fell below the national average in 1984-86, 1989 and
1991-92 and exceeded the national average in 1987, 1988 and 1990.
-10-
<PAGE> 508
The Missouri portions of the St. Louis and Kansas City metropolitan
areas contain approximately 1,855,000 and 961,000 residents, respectively,
constituting over 53% of Missouri's 1990 estimated population of approximately
5,117,000. St. Louis is an important site for banking and manufacturing
activity, as well as a distribution and transportation center, with eleven
Fortune 500 companies (as well as other major educational, financial, insurance,
retail, wholesale and transportation companies and institutions) headquartered
there. Kansas City is a major agribusiness center and an important center for
finance and industry. Economic reversals in either of these two areas would have
a major impact on the overall economic condition of the State of Missouri.
Manufacturing is a leading component of Missouri's economy. To the
extent that the economy suffers a recessionary period, the manufacturing sector,
which relies heavily on durable goods such as automobiles and electric and
electronic equipment, could be adversely affected.
Defense related business plays an important role in Missouri's economy.
In addition to the large number of civilians employed at the various military
installations and training bases in the State, aircraft and related businesses
in Missouri are the recipients of substantial annual dollar volumes of defense
contract awards. McDonnell Douglas Corporation is the State's largest employer,
employing approximately 30,000 employees in Missouri in 1994. From 1977 through
1991, Missouri has ranked in the top six states in total military contract
awards and ranked eighth in 1992, compared to its population ranking as the
nation's fifteenth largest state. To the extent that changes in military
appropriations were enacted by the United States Congress, Missouri could be
disproportionately affected.
Article X, Section 16-24 of the Constitution of Missouri (the "Hancock
Amendment") imposes a limit on the amount of taxes that may be imposed by the
State and on the amount of taxes, licenses and fees that may be imposed by local
government units in any fiscal year. The details of the Hancock Amendment are
complex; the amendment has been the subject of several judicial decisions and
further clarification from implementing legislation and subsequent judicial
decisions may be necessary.
The Hancock Amendment provides that the State may not collect revenues
in any fiscal year that exceed by more than one percent total State revenues for
the fiscal year ended June 30, 1981, adjusted annually based on increases in the
average personal income of Missouri residents. If the revenue limit is exceeded
by more than one percent in any fiscal year, a refund of the excess revenues
collected by the State is required.
The revenue limit may be exceeded if the Governor declares an emergency
and expenditures above the limit are approved by a two-thirds vote of each house
of the Missouri legislature. The revenue limit can also be exceeded if the
voters of the State of Missouri approve a constitutional amendment authorizing
new or increased taxes or revenues. In addition, the revenue limit does not
apply to taxes imposed for the payment of principal and interest on bonds
approved by the voters and authorized under the Missouri Constitution. The
Hancock Amendment does not prohibit increasing State taxes so long as State
revenues are expected to be less than the revenue limit.
The Hancock Amendment further provides that the State may not reduce
the State financed portion of the cost of any existing activity or service
required of a county or political subdivision and that the cost of any new
activity or service required by the State must be funded by the State. In
addition, State expenditures in any fiscal year may not exceed the established
revenue limit plus federal and surplus funds.
The Hancock Amendment generally prohibits counties and other political
subdivisions (all local government Units having the power to tax) from levying
any new or increased tax, license or fee without the approval of the required
majority of voters; however, the Missouri Supreme Court has ruled that increases
in specific charges for certain services actually provided are not subject to
the Hancock Amendment. If the required majority of voters approve the issuance
of debt obligations and the levy of taxes or imposition of licenses or fees
necessary to meet payments of principal and interest on such
-11-
<PAGE> 509
debt obligation, existing taxes, licenses or fees may be increased or new taxes,
licenses or fees imposed without violating the Hancock Amendment. Missouri
constitutional or statutory provisions other than the Hancock Amendment may
require greater than majority approval for the valid issuance of debt
obligations.
Counties and other political subdivisions (but not the State) may
increase taxes without regard to the Hancock Amendment to pay principal and
interest on obligations if such obligations were authorized to be issued prior
to the adoption of the Hancock Amendment.
If the tax base of a county or other political subdivision with respect
to a tax, fee or license is broadened, the Hancock Amendment requires the tax
levy or fee to be reduced to yield the same estimated gross revenue as on the
prior base. Even if the assessed value of property in the county or other
political subdivision (excluding the value of new construction and improvements)
increases at a rate exceeding the consumer price index, the Hancock Amendment
limits any percentage increase in property tax revenues to the percentage
increase in the consumer price index and requires a rollback of taxes if
assessed values of real property increase faster than the consumer price index.
The Hancock Amendment limitations do not apply to the tax levy on the
assessed valuation of new construction and improvements.
To the extent that the payment of general obligation bonds issued by
the State of Missouri or a county or other political subdivision is dependent on
revenues from the levy of taxes and such obligations have been issued after the
date of the Hancock Amendment's adoption, November 4, 1980, the ability of the
State of Missouri or the appropriate local Unit to levy sufficient taxes to pay
the debt service on such bonds may be affected, unless there has been specific
voter approval of the issuance of such bonds and the levy of such taxes as are
necessary to pay the principal and interest on such bonds.
Debt obligations issued by certain State issuers, including those of
the Board of Public Buildings of the State of Missouri and the Department of
Natural Resources of the State of Missouri, are payable either solely or
primarily from the rentals, incomes and revenues of specific projects financed
with the proceeds of the debt obligations and are not supported by the taxing
powers of the State or of the issuer of the bonds. The Hancock Amendment may
most strongly affect such state revenue bonds, since they are dependent in whole
or in part on State appropriations to provide sufficient revenues to pay
principal and interest. Unless such bonds are approved by the voters of
Missouri, under the Hancock Amendment, taxes cannot be raised to cover the state
appropriations necessary to provide revenues to pay principal and interest on
the bonds.
Consequently, there may be insufficient state revenues available to
permit the State legislature to make appropriations adequate to enable the
issuer to make timely payment of principal and interest on such State revenue
bonds. For example, in the case of the Board of Public Buildings of the State of
Missouri, the payment of principal and interest on debt obligations is dependent
solely on the appropriation by the State legislature of sufficient funds to pay
the rentals of State agencies occupying buildings constructed by the Board of
Public Buildings. State park revenue bonds of the Department of Natural
Resources of the State of Missouri are in part dependent on revenues generated
by operations of the particular project and in part on State appropriations.
Consequently, payment of principal and interest on such State revenue bonds,
relating to specific projects and not supported by the taxing power of the State
of Missouri, may not be made or may not be made in a timely fashion because of
the inability of the State to appropriate sufficient funds for the payment of
such bonds (or to make up shortfalls therein) due to the limitations on State
taxes and expenditures imposed by the Hancock Amendment, the inability of the
issuer to generate sufficient income or revenue from the project to make such
payment or a combination of such factors.
As described above, general obligation bonds and revenue bonds of
counties or other political subdivision issuers may also be affected by the tax,
license and fee limitations of the Hancock
-12-
<PAGE> 510
Amendment. Unless the required voter approval of such debt obligations and the
imposition of taxes to pay them is obtained prior to their issuance, the Hancock
Amendment imposes limitations on the imposition of new taxes and the increase of
existing taxes which may be necessary to pay principal and interest on general
obligations bonds of local issuers. The limitations contained in the Hancock
Amendment also may affect the payment of principal and interest on bonds and
other obligations issued by local governmental units and supported by the
revenues generated from user fees, licenses or other fees and charges, unless
the requisite voter approval of the issuance of such bonds or other obligations,
and the approval of the assessment of such fees or other charges as may be
necessary to pay the principal and interest on such bonds or other obligations,
has been obtained prior to their issuance.
Debt obligations of certain other state and local agencies and
authorities are not, by the terms of their respective authorizing statutes,
obligations of the state or any political subdivision, public instrumentality or
authority, county, municipality or other state or local unit of government.
Illustrative of such issuers are the Missouri Housing Development Commission,
the State Environmental Improvement and Energy Resources Authority, the Health
and Educational Facilities Authority of the State of Missouri, the Missouri
Higher Education Loan Authority, the Industrial Development Board of the State
of Missouri, the Missouri Agricultural and Small Business Development Authority
and other similar bodies organized on a local level under similar state
authorizing statutes such as the various local industrial development
authorities. The debt obligations of such issuers are payable only from the
revenues generated by the project or program financed from the proceeds of the
debt obligations they issue, and the Hancock Amendment has no application.
In November 1992, Missouri voters approved a constitutional amendment
which removed the net proceeds of fuel taxes allocated to counties, cities,
towns and villages from the definition of "total state revenues" in the Hancock
Amendment. This change became effective July 1, 1993.
Under Missouri law, property tax abatement and tax increment financing
can be made available to encourage redevelopment projects. Neither tax abatement
nor tax increment financing diminishes tax revenues collected in affected areas,
but instead act to freeze such revenues at current levels and thereby deprive
the taxing authority of future increases in ad valorem property tax revenues
which would otherwise result from increases in assessed valuations in affected
areas.
In addition to the spending limitation imposed by the Hancock
Amendment, the Missouri General Assembly has proposed a constitutional amendment
which would prohibit the General Assembly in any fiscal year from increasing
taxes or fees without voter approval that in total produce new annual revenues
greater than either $50 million adjusted annually by the percentage change in
the person income of Missouri for the second previous fiscal year, or by 1% of
total state revenues, whichever is less. In emergency situations, as defined by
the Hancock Amendment, the General Assembly could increase taxes, licenses or
fees for one year above the limit without voter approval. The proposed amendment
to the Constitution is scheduled to be voted upon on April 19, 1996.
Another proposed constitutional amendment would allow school districts
to increase their bond indebtedness from 10 to 15 percent of the value of
taxable tangible property located in the district.
No vote on such amendment has been scheduled.
STANDBY COMMITMENTS
In order to enhance the liquidity, stability or quality of municipal
obligations, the Tax-Exempt Funds may acquire the right to sell a security to
another party at a guaranteed price and date. Such a right to resell may be
referred to as a put, demand feature or "standby commitment," depending on its
characteristics. The aggregate price which a Fund pays for securities with
standby commitments may be higher than the price which otherwise would be paid
for the securities.
-13-
<PAGE> 511
Standby commitments may involve letters of credit issued by domestic or
foreign banks supporting the other party's ability to purchase the security from
the Fund. The right to sell may be exercisable on demand or at specified
intervals, and may form part of a security or be acquired separately by the
Fund. In considering whether a security meets a Fund's quality standards, the
Fund will look to the creditworthiness of the party providing the Fund with the
right to sell as well as the quality of the security itself.
The Funds value municipal obligations which are subject to standby
commitments at amortized cost. The exercise price of the standby commitments is
expected to approximate such amortized cost. No value is assigned to the standby
commitments for purposes of determining a Fund's net asset value. The cost of a
standby commitment is carried as unrealized depreciation from the time of
purchase until it is exercised or expires. Since the value of a standby
commitment is dependent on the ability of the standby commitment writer to meet
its obligation to repurchase, each Fund's policy is to enter into standby
commitment transactions only with banks, brokers or dealers which represent a
minimal risk of default. The duration of standby commitments will not be a
factor in determining the weighted average maturity of a Fund. There is no
assurance that standby commitments will be available to a Fund nor have the
Funds assumed that such commitments would continue to be available under all
market conditions.
TAX-EXEMPT FUND TAXABLE OBLIGATIONS
The Tax-Exempt Funds do not currently intend to invest in taxable
obligations; however, from time to time each Fund may invest a portion of its
assets on a temporary basis in fixed-income obligations whose interest payments
are subject to federal or, in the case of the Tax-Exempt Fund, Missouri income
tax. In addition to the temporary defensive investments described in the
Prospectus, each Fund may invest in taxable obligations pending the investment
or reinvestment in municipal bonds of proceeds from sales of Fund shares or
sales of portfolio securities. A Fund may also invest in highly liquid, taxable
obligations in order to avoid the necessity of liquidating portfolio investments
to meet redemption requests by Fund shareholders.
RESTRICTED AND OTHER ILLIQUID SECURITIES
A Fund may purchase securities that are not registered ("restricted
securities") under the Securities Act of 1933, including restricted securities
offered and sold to "qualified institutional buyers" under Rule 144A under the
Securities Act of 1933. However, a Fund will not invest more than 10% of the
value of its net assets in securities which are illiquid, which may include
restricted securities, unless the Funds' Board of Trustees determines, based
upon a continuing review of the trading markets for the specific restricted
security, that such restricted securities are liquid. The Board of Trustees may
adopt guidelines and delegate to Boatmen's the daily function of determining and
monitoring liquidity of restricted securities. The Board, however, will retain
sufficient oversight and be ultimately responsible for the determinations. Since
it is not possible to predict with assurance that the market for securities
eligible for resale under Rule 144A will continue to be liquid, the Board 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.
INVESTMENT RESTRICTIONS
The Funds have adopted certain fundamental policies, which may not be
changed with respect to any Fund without the approval of the holders of a
majority of the outstanding voting shares of that Fund as defined in the 1940
Act.
-14-
<PAGE> 512
TREASURY FUND, DIVERSIFIED FUND AND TAX-EXEMPT DIVERSIFIED FUND
As a matter of fundamental policy for the Treasury Fund, the
Diversified Fund and the Tax-Exempt Diversified Fund, each Fund may not:
(1) Purchase securities of any issuer if immediately after such
purchase the value of the Fund's investments in issuers
conducting their principal business activity in any one
industry would exceed 25% of the value of the Fund's total
assets, provided that: (a) the gas, electric, water and
telephone businesses will be considered separate industries,
(b) the personal credit and business credit businesses will be
considered separate industries, (c) wholly-owned finance
companies will be considered to be in the industry of their
parents if their activities are primarily related to financing
the activity of their parents, (d) there is no limitation with
respect to or arising out of investments in obligations issued
or guaranteed by the U.S. Government, its agencies and
instrumentalities or by banks and (e) the Diversified Fund
will invest more than 25% of the value of its total assets in
bank obligations (whether foreign or domestic) except that if
adverse economic conditions prevail in the banking industry
the Diversified Fund may, for defensive purposes, temporarily
invest less than 25% of the value of its total assets in bank
obligations (for the purposes of this restriction, state and
municipal governments and their agencies or authorities are
not deemed to be industries).
(2) Make loans, except to the extent that the purchase of debt
obligations in accordance with each Fund's investment
objective and policies and repurchase agreements with banks,
brokers, dealers and other financial institutions may be
deemed to be loans.
(3) Borrow money, except: (a) as a temporary measure, and then
only in amounts not exceeding 5% of the value of the Fund's
total assets, or (b) from banks, provided that immediately
after any such borrowing all borrowings of the Fund do not
exceed one-third of the Fund's total assets. While any Fund
has borrowings outstanding in an amount exceeding 5% of its
total assets the Funds will not make any purchases of
portfolio instruments for that Fund. The Funds may not borrow
money from Boatmen's Bancshares, Inc. or any majority-owned
subsidiary thereof.
(4) Purchase or sell real estate (except securities secured by
real estate or interests therein), commodities, commodity
contracts or oil and gas interests, or purchase any voting
securities or invest in companies for the purpose of
exercising control or management.
(5) Act as an underwriter of securities (except as the Funds may
be deemed to be an underwriter under the Securities Act of
1933 in connection with the purchase and sale of instruments
in accordance with its investment objective and portfolio
management policies), make short sales of securities, or
maintain a short position.
(6) Mortgage, pledge or hypothecate any assets, except to secure
permitted borrowings.
(7) Purchase the securities of any issuer other than the U.S.
Government, its agencies or instrumentalities, if immediately
after such purchase, more than 5% of the value of the Fund's
total assets would be invested in any one issuer except that:
(a) up to 25% of the value of its total assets may be invested
without regard to such 5% limitation, and (b) such 5%
limitation shall not apply to repurchase agreements
collateralized by obligations of the U.S. Government, its
agencies or instrumentalities.
For purposes of the investment restriction in item (1), each foreign
government will be considered a separate industry. For purposes of the
restriction in item (7) above, a guaranty of an instrument will be considered a
separate security (subject to certain exclusions allowed under the 1940
-15-
<PAGE> 513
Act). The exceptions to item (3), above, with regard to borrowing are not for
investment leverage purposes, but are solely for extraordinary or emergency
purposes and to facilitate management of the Funds by enabling the Funds to meet
redemption requests when the liquidation of portfolio instruments is deemed to
be disadvantageous or not possible. If, due to market fluctuations or other
reasons, the net assets of a Fund fall below 300% of its borrowings, the Funds
would promptly reduce the borrowings of such Fund in accordance with the 1940
Act. To do this, the Funds may have to sell a portion of such Fund's investments
at a time when it may be disadvantageous to do so.
In addition, the Trustees have approved the following non-fundamental
investment restriction on behalf of the Treasury Fund, the Diversified Fund and
the Tax-Exempt Diversified Fund: it will not, on behalf of such Funds purchase
securities on margin (except for delayed delivery or when-issued transactions or
such short-term credits as are necessary for the clearance of transactions).
Pursuant to an SEC rule, the Diversified Fund and the Treasury Fund may
not invest more than 5% of their total assets in the securities of any one
issuer (except U.S. Government securities or repurchase agreements
collateralized by such obligations). Each of such Funds may, however, invest
more than 5% of its total assets in the First Tier Securities of a single issuer
for a period of up to three business days after the purchase thereof, although a
Fund may not make more than one such investment at any time. Securities which
are rated in the highest short-term rating category by at least two Nationally
Recognized Statistical Rating Organizations ("NRSROs") are designated "First
Tier Securities." Further, each of such Funds will not invest more than: (i) the
greater of 1% of its total assets, or (ii) one million dollars in the securities
of a single issuer which were Second Tier Securities when acquired by a Fund. In
addition, each of such Funds may not invest more than 5% of its total assets in
securities which were Second Tier Securities when acquired by a Fund. Securities
rated in the top two short-term rating categories by at least two NRSROs, but
which are not rated in the highest category by two or more NRSROs, are
designated "Second Tier Securities." Pursuant to SEC Rule 2a-7 the foregoing
restrictions are not applicable to the Tax-Exempt Funds. "NRSROs" include
Standard & Poor's Corporation, Moody's Investors Service, Inc., Duff & Phelps,
Inc., Fitch Investors Service, Inc., IBCA Limited and its affiliate IBCA Inc.,
and Thomson BankWatch, Inc. For a description of their rating categories, see
Appendix A.
TAX-EXEMPT FUND
As a matter of fundamental policy, the Tax-Exempt Fund may not:
(1) Purchase the securities of any issuer (other than obligations
issued or guaranteed by the Government of the United States or
its agencies or instrumentalities) if, as a result, more than
25% of the Fund's total assets (taken at current value) would
be invested in the securities of issuers having their
principal business activities in the same industry.
(2) Make loans, except: (a) through the purchase of all or a
portion of an issue of debt securities in accordance with its
investment objective, policies and limitations, or (b) by
engaging in repurchase agreements with respect to portfolio
securities, or (c) by lending securities to other parties,
provided that no securities loan may be made, if, as a result,
more than 33-1/3% of the value of its total assets would be
lent to other parties.
(3) Borrow money, except that the Fund may borrow money for
temporary or emergency purposes (not for leveraging or
investment) in an amount not exceeding 33-1/3% of the value of
its total assets (less liabilities other than borrowings) and
may not purchase any security while borrowings representing
more than 5% of its net assets are outstanding. Any borrowings
that come to exceed 33-1/3% of the value of the Fund's total
assets by reason of a decline in net assets will be reduced
within three days to the extent necessary to comply with the
33-1/3% limitation.
-16-
<PAGE> 514
(4) Purchase or sell physical commodities or real estate unless
acquired as a result of the ownership of securities (but this
shall not prevent the Fund from purchasing and selling futures
contracts or marketable securities issued by companies or
other entities or investment vehicles that deal in real estate
or interests therein, nor shall this prevent the Fund from
purchasing interests in pools of real estate mortgage loans).
(5) Underwrite securities issued by others (except to the extent
that the Fund may be deemed to be an underwriter within the
meaning of the Securities Act of 1933 in the disposition of
restricted securities).
(6) Issue bonds or any other class of securities preferred over
shares of the Fund in respect of the Fund's assets or
earnings, provided that the Fund may establish additional
series or classes of shares in accordance with its Declaration
of Trust.
(7) Sell securities short, unless it owns, or by virtue of
ownership of other securities has the right to obtain,
securities equivalent in kind and amount to the securities
sold short, and provided that transactions in futures
contracts are not deemed to constitute short sales.
To the extent that limitation (7) allows the Fund to engage in certain
short sales, and that limitation (4) allows the Fund to purchase or sell
physical commodities or real estate and purchase and sell futures contracts, the
Fund does not plan on doing so in the coming year. For purposes of the foregoing
restriction (1), municipal governments and their agencies and authorities are
not deemed to be industries.
As a matter of non-fundamental policy, the Tax-Exempt Fund may not:
(a) Purchase securities on margin, except that the Fund may obtain
such short-term credits as are necessary for the clearance of
transactions, and provided that the Fund may make initial and
variation margin payments in connection with transactions in
futures contracts and options on futures contracts.
(b) Purchase or otherwise acquire any security or enter into a
repurchase agreement with respect to any security if, as a
result, more than 10% of the value of its net assets would be
invested in securities subject to legal or contractual
restrictions on resale (restricted securities), securities for
which there is no readily available market, and repurchase
agreements not entitling the holder to payment of interest and
principal within seven days.
The foregoing non-fundamental investment restrictions of the Funds may
be changed or terminated without the approval of shareholders.
For purposes of the foregoing limitations, any limitation which
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, one of
the Funds.
As used in this Statement of Additional Information, with respect to
matters required to be submitted to shareholders by the provisions of the 1940
Act, the term "majority of the outstanding shares" of either the Funds or a
particular Fund of the Funds means the vote of the lesser of (i) 67% or more of
the shares of the Funds or Fund present at a meeting, if the holders of more
than 50% of the outstanding shares of the Funds or Fund are present or
represented by proxy, or (ii) more than 50% of the outstanding shares of the
Funds or Fund.
-17-
<PAGE> 515
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and officers of the Funds is set
forth below. Trustees and officers deemed to be "interested persons" of the
Funds for purposes of the 1940 Act are indicated by an asterisk.
<TABLE>
<CAPTION>
Principal Occupation(s)
Name and Address Position(s) with Trust During Past 5 Years
- ---------------- ---------------------- -------------------
<S> <C> <C>
J. Hord Armstrong, III (55) Trustee Chairman and CEO, D&K
8000 Maryland Avenue Wholesale Drug, Inc., a
Suite 1190 distributor of pharmaceutical
St. Louis, Missouri 63105 products, since 1987.
Lee F. Fetter (43) Chairman Chief Operating and Financial
660 S. Euclid, Box 8003 Officer of Washington
St. Louis, Missouri 63110 University School of Medicine
since 1983.
Henry O. Johnston (59) Trustee President of Fordyce Four,
9650 Clayton Road Incorporated, a corporation
St. Louis, Missouri 63124 engaged in the acquisition and
management of personal
investments.
L. White Matthews, III (50) Trustee Executive Vice President of
Eighth and Eaton Avenues Finance since 1987, Union
Bethlehem, Pennsylvania 18018 Pacific Corporation, a company
engaged in transportation,
exploration and refining of
hydrocarbons, mining and real
estate.
Nicholas G. Penniman, IV (58) Trustee Publisher, St. Louis Post-
900 N. Tucker Boulevard Dispatch since 1986. Senior
St. Louis, Missouri 63101 Vice President of Pulitzer
Publishing Company since
1986.
William J. Tomko (37) President Senior Vice President, BISYS
3435 Stelzer Road Fund Services, Inc.
Columbus, Ohio 43219
W. EUGENE SPURBECK (40) Vice President Manager, BISYS Fund Services,
3435 STELZER ROAD Inc.
COLUMBUS, OHIO 43219
Martin R. Dean (33) Treasurer Manager, Mutual Fund
3435 Stelzer Road Accounting, BISYS Fund
Columbus, Ohio 43219 Services, Inc. since May 1994.
Prior thereto, Senior Manager,
KPMG Peat Marwick.
</TABLE>
-18-
<PAGE> 516
<TABLE>
<CAPTION>
Principal Occupation(s)
Name and Address Position(s) with Trust During Past 5 Years
- ---------------- ---------------------- -------------------
<S> <C> <C>
George O. Martinez (37) Secretary Senior Vice President and
3435 Stelzer Road Director of Legal and
Columbus, Ohio 43219 Compliance Services of BISYS
Fund Services, Inc. since April
1995. Prior thereto, Vice
President and Associate
General Counsel of Alliance
Capital Management, L.P.
Sheldon A. Jones (58) Assistant Secretary Partner of the law firm of
Ten Post Office Square South Dechert Price & Rhoads.
Boston, Massachusetts 02109
Alaina Metz (28) Assistant Secretary Employee of BISYS Fund
3435 Stelzer Road Services Limited Partnership
Columbus, Ohio 43219 since June 1995; prior thereto,
supervisor, Alliance Capital
Management, L.P.
Bruce Treff (30) Assistant Secretary Counsel, BISYS Fund Services,
3435 Stelzer Road Inc. since September 1995.
Columbus, Ohio 43219 Prior thereto, Manager, Alliance
Capital Management, L.P.
</TABLE>
The Agreement and Declaration of Trust of the Funds (the "Trust
Agreement") provides that, subject to its provisions, the business of the Funds
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 inistration 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 [as of ________________________________,
NationsBank Corporation], BISYS and their respective affiliates. The Funds have
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 for
comparable transactions with other customers.
Each officer holds comparable positions with certain other investment
companies for which BISYS or its affiliates serve as administrator and/or
distributor.
-19-
<PAGE> 517
The following table provides information relating to the aggregate
compensation received by the Trustees from the Registrant for the fiscal year
ended August 31, 1996.
COMPENSATION TABLE
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
TOTAL COMPEN-
PENSION OR ESTIMATED SATION FROM
AGGREGATE RETIREMENT ANNUAL REGISTRANT AND
NAME OF COMPENSATION BENEFITS UPON BENEFITS UPON FUND COMPLEX
PERSON, POSITION FROM REGISTRANT RETIREMENT RETIREMENT PAID TO PERSONS
<S> <C> <C> <C> <C>
J. Hord Armstrong, III $26,000 0 0 $26,000
Lee F. Fetter (Chairman) $28,000 0 0 $28,000
Henry O. Johnston* $26,000 0 0 $26,000
L. White Matthews, III $26,000 0 0 $26,000
Nicholas G. Penniman, IV $26,000 0 0 $26,000
</TABLE>
* "Interested person" of the Funds for purposes of the 1940 Act.
Each of the Trustees who are not "interested persons" 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 meeting
attended by such Trustee. The compensation paid to the Chairman is $18,000 and
$2,000 for each Trustee meeting 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 fiscal year ended August 31, 1996,
distributed to or accrued for the account of the non-interested Trustees (four
persons), amounted to approximately $106,000, which represented the total
compensation paid by the Funds to the Trustees during that year.
THE INVESTMENT ADVISER, ADMINISTRATOR, DISTRIBUTOR
AND TRANSFER AGENT
INVESTMENT ADVISER
Boatmen's Trust Company, P.O. Box 14737, 100 North Broadway, St. Louis,
Missouri 63178, acts as investment adviser to the Funds. As adviser, Boatmen's
is responsible for the management of each Fund's assets pursuant to separate
Advisory Agreements between each Fund and Boatmen's. As of ____________________,
Boatmen's is a subsidiary of NationsBank Corporation.
The Funds have no present intention of purchasing any securities issued
by Boatmen's, [NationsBank Corporation] or any of its affiliates. Mr. Henry O.
Johnston, a Trustee of the Funds, owns shares amounting to less than one-tenth
of one percent (0.1%) of the outstanding shares of common stock of Boatmen's
Bancshares, Inc.
Under each Advisory Agreement, Boatmen's, subject to the supervision of
the Trustees of the Funds, manages the investment operations of each of the
Funds.
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 Funds, except
-20-
<PAGE> 518
liability to the Funds 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 Funds will indemnify
Boatmen's against certain liabilities, including liabilities under the Federal
securities laws, or, in lieu thereof, contribute to resulting losses.
Boatmen's began serving as investment adviser to the Treasury Fund and
Diversified Fund on June 1, 1994 and began serving as investment adviser to the
Tax-Exempt Diversified Fund and Tax-Exempt Fund on July 1, 1995. Goldman Sachs,
acting through its separate operating division, Goldman Sachs Asset Management,
served as investment adviser to the Tax-Exempt Diversified Fund and Tax-Exempt
Fund prior to July 1, 1995.
Boatmen's is entitled to receive advisory fees on a monthly basis at an
annual rate of .15 of 1% of the Diversified Fund's average net assets, .15 of 1%
of the Treasury Fund's average net assets, .20 of 1% of the Tax-Exempt
Diversified Fund's average net assets and .20 of 1% of the Tax-Exempt Fund's
average net assets. For the fiscal year ended August 31, 1996, total advisory
fees paid by the Diversified Fund and Treasury Fund were .13% and .15% of each
Fund's net assets, respectively. For the fiscal year ended August 31, 1995,
total advisory fees paid by the Diversified Fund and Treasury Fund were .07% and
.08% of each Fund's net assets, respectively. For the fiscal year ended August
31, 1994 (under the former advisory agreements from September 1, 1993 to June 1,
1994, and from June 1, 1994 to August 31, 1994), total advisory fees paid by the
Diversified Fund and Treasury Fund were .07% and .08%, respectively.
For the fiscal year ended August 31, 1996, total advisory fees paid by
the Tax-Exempt Fund were .22% of net assets and .20% of the net assets of the
Tax-Exempt Diversified Fund. For the fiscal year ended August 31, 1995, total
advisory fees paid by the Tax-Exempt Fund were .20% of net assets and .17% of
the net assets of the Tax-Exempt Diversified Fund. For the fiscal year ended
August 31, 1994, during which Goldman Sachs acted as investment adviser to each
of the Tax-Exempt Funds, the compensation received by Goldman Sachs for services
and expenses (net of fees waived) constituted .28% of the net assets of the
Tax-Exempt Fund and .14% of the net assets of the Tax-Exempt Diversified 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 commissions, if any) of securities purchased
for each Fund.
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
Funds 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
inistrative decisions or interpretations of current and future statutes and
regulations, could prevent Boatmen's from continuing to perform such services
for the Funds.
Should future legislative, judicial or inistrative action prohibit
or restrict the activities of Boatmen's in connection with the provision of
services on behalf of the Funds, the Funds might be required to alter materially
or discontinue their arrangements with Boatmen's and change their method of
operations. It is not anticipated, however, that any change in the Funds' method
of operations would affect the net asset value per share of any Fund or result
in a financial loss to any shareholder.
-21-
<PAGE> 519
Moreover, if current restrictions preventing a bank from legally sponsoring,
organizing, controlling or distributing shares of an open-end investment company
were relaxed, the Funds expect that Boatmen's would consider the possibility of
offering to perform some or all of the services now provided by BISYS and PFD.
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 Advisory Agreements for such Funds were approved by the Trustees,
including the "non-interested" Trustees (as defined under "Investment
Restrictions"), on October 22, 1996 and by shareholders of each Fund on December
18, 1996. Each Advisory Agreement will remain in effect until May 31, 1997, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually: (1) by vote of a majority of the outstanding shares
of each such Fund (as defined under "Investment Restrictions") or by the
Trustees of the Funds, and (2) by the vote of a majority of the "non-interested"
Trustees. Each 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 Funds 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
Funds.
THE ADMINISTRATOR, DISTRIBUTOR AND TRANSFER AGENT
BISYS, a wholly-owned subsidiary of The BISYS Group, Inc., which has
its principal offices at 3435 Stelzer Road, Columbus, Ohio 43219, provides
inistrative services for the Funds as described in their Prospectuses
pursuant to an inistration 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
Funds who are not parties to this Agreement or interested persons of any such
party, cast in person at a meeting called for the purpose of voting on such
approval, and (b) by the Board of Trustees of the Funds or by vote of a majority
of the outstanding voting securities of such Fund. The Agreement is terminable
by the Board of Trustees of the Funds 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 inistration Agreement, BISYS is entitled
to receive an inistration fee from the Funds, which is calculated based on
the net assets of all Funds combined. Under the inistration 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 Funds' average net assets up to $1.5
billion, .110 of 1% of the Funds' average net assets on the next $1.5 billion,
and .1075 of 1% of the Funds' average net assets in excess of $3 billion. From
time to time, BISYS may waive fees or voluntarily reimburse the Funds for
expenses. For the period March 31, 1994 to August 31, 1994, the amount of the
administrator fee paid by the Funds to Concord Holding Corporation ("Concord"),
an affiliate of BISYS and the Trust's former administrator, was $1,198,735. For
the fiscal year September 1, 1994 through August 31, 1995, the Treasury,
Diversified, Tax-Exempt Diversified and Tax-Exempt Funds paid Concord
$1,357,012, $1,479,697, $449,267 and $293,693, respectively, for the performance
of inistrative services during such period. For the fiscal year September 1,
1995 through August 31, 1996, the Treasury, Diversified, Tax-Exempt Diversified
and Tax-Exempt Funds paid BISYS $1,880,792, $1,598,802, $433,805 and $257,068,
respectively, for the performance of inistrative services during such period.
BISYS will bear all expenses in connection with the performance of its
services under the inistration Agreement for the Funds with the exception of
fees for certain fund accounting services which are borne by the Funds.
-22-
<PAGE> 520
The inistration 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' duties or from the reckless disregard by BISYS of its obligations and
duties thereunder.
Pilot Funds Distributors, Inc. ("PFD"), a wholly-owned subsidiary of
The BISYS Group, Inc., located at 3435 Stelzer Road, Columbus, Ohio 43219, acts
as the exclusive distributor of the shares of each of the Funds pursuant to a
Distribution Agreement with the Funds dated as of June 1, 1996. shares are sold
on a continuous basis by PFD as agent, although PFD is not obligated to sell any
particular amount of shares. No compensation is payable by the Funds to PFD for
its distribution services.
The Distribution Agreement with PFD 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 Funds and who have no direct or
indirect financial interest in the operation of any plan that has been adopted
by the Funds 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 Funds or by vote of a
majority of the outstanding voting securities of the Funds. The Agreement is
terminable by the Funds 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 on 60 days' written notice to PFD, or by PFD at any time, without payment
of any penalty, on 60 days' written notice to the Funds.
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 Funds, the
Transfer Agent, has undertaken with the Funds 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 Funds' custodian and the
relevant sub-custodian in connection with redemptions, (iv) provide dividend
crediting and certain disbursing 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. For the fiscal year September 1, 1995 through
August 31, 1996, the Transfer Agent received a fee of $28,182 in its capacity as
transfer agent. For the fiscal year September 1, 1994 through August 31, 1995,
Concord Financial Services, Inc., the Funds' former transfer agent, received a
fee of $14,493 in the capacity of transfer agent. Prior to June 1, 1994,
Goldman, Sachs & Co. served as the Funds' transfer agent.
EXPENSES
The Funds are responsible for all expenses other than those expressly
borne by Boatmen's, BISYS, the Distributor, and the Transfer Agent under the
Advisory Agreements, inistration Agreement, Distribution Agreement, and
Transfer Agency Agreement, respectively. Such expenses include, without
limitation, the fees payable to Boatmen's, BISYS, the Distributor and the
Transfer Agent, the fees and expenses of the Funds' custodian, brokerage fees
and commissions, any portfolio losses, filing fees for the registration or
qualification of the Funds' shares under federal or state securities laws,
expenses of the organization of the Funds, fees and expenses incurred by the
Funds in connection with membership in investment company organizations, 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 Funds for violation of
any law,
-23-
<PAGE> 521
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 Funds'
shareholders and regulatory authorities, compensation and expenses of its
Trustees and extraordinary expenses incurred by the Funds.
PORTFOLIO TRANSACTIONS
Boatmen's places the portfolio transactions of the respective Funds and
of all other accounts managed by Boatmen's for execution with many firms.
Boatmen's uses their best efforts to obtain execution of portfolio transactions
at prices which are advantageous to each Fund and at reasonably competitive
spreads or (when a disclosed commission is being charged) at reasonably
competitive commission rates. In seeking such execution, Boatmen's will use
their 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 general execution and operational capabilities of the
firm, 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.
Securities purchased and sold by the Funds are generally traded in the
over-the-counter market on a net basis (i.e., without commission) through
broker-dealers and banks acting for their own account rather than as brokers, or
otherwise involve transactions directly with the issuer of such securities.
In certain instances there may be securities which are suitable for
more than one Fund advised by Boatmen's 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 to 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 clients
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 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 Funds believe that over time its ability to
participate in volume transactions will produce superior executions for the
Funds.
During the fiscal year ended August 31, 1996, the Funds acquired/sold
securities of its regular brokers/dealers: Prudential Funding Corp., Bear Sterns
Co., Inc., Dean Witter Discover and Co., J.P. Morgan, Lehman Bros., Merrill
Lynch, and State Street Bank & Trust.
NET ASSET VALUE
The net asset value per share of each Fund is determined by the Funds'
custodian at 2:00 p.m., Central time (3:00 p.m., Eastern time), for the
Diversified and Treasury Funds and 12:00 Noon, Central time, (1:00 p.m. Eastern
time) for the Tax-Exempt Funds on each Business Day. A Business Day means any
day on which the New York Stock Exchange and the Custodian are open for business
and the New York Stock Exchange (the "Exchange") is open for trading, which is
Monday through Friday except for holidays (scheduled Exchange holidays for 1997
are: New Year's Day, Martin Luther King, Jr. Day, Presidents Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day,
Thanksgiving Day and Christmas Day).
-24-
<PAGE> 522
Pursuant to a rule of the SEC, the Funds' securities are valued using
the amortized cost method of valuation in an effort to maintain a constant net
asset value of $1.00 per share, which the Board of Trustees has determined to be
in the best interest of the Funds and their shareholders. This method involves
valuing a security at cost on the date of acquisition and thereafter assuming a
constant accretion of a discount or amortization of a premium to maturity,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. While this method provides certainty in valuation, it may result
in periods during which value, as determined by amortized cost, is higher or
lower than the price a Fund would receive if it sold the instrument. During such
periods, the yield to an investor in a Fund may differ somewhat from that
obtained in a similar investment company which uses available market quotations
to value all of its portfolio securities. During periods of declining interest
rates, the quoted yield on shares of a Fund may tend to be higher than a like
computation made by a fund with identical investments utilizing a method of
valuation based upon market prices and estimates of market prices for all of its
portfolio instruments. Thus, if the use of amortized cost by a Fund resulted in
a lower aggregate portfolio value on a particular day, a prospective investor in
the Fund would be able to obtain a somewhat higher yield if he purchased shares
of the Fund on that day than could be obtained from investment in a fund
utilizing solely market values, and existing investors in the Fund would receive
less investment income. The converse would apply in a period of rising interest
rates.
The Trustees have established procedures designed to stabilize, to the
extent reasonably possible, each Fund's price per share as computed for the
purpose of sales and redemptions at $1.00. These procedures include review of a
Fund by the Trustees, at such intervals as they deem appropriate, to determine
whether its net asset value calculated by using available market quotations (or
an appropriate substitute which reflects market conditions) deviates from $1.00
per share based on amortized cost, as well as review of methods used to
calculate the deviation. If such deviation exceeds 1/2 of 1%, the Trustees will
promptly consider what action, if any, will be initiated. In the event that the
Trustees should determine that a deviation exists which could result in material
dilution or other unfair results to investors or existing shareholders, they
will take such corrective action as they may deem to be necessary and
appropriate, including: selling portfolio instruments prior to maturity to
realize capital gains or losses or to shorten average portfolio maturity;
withholding part or all of dividends or payment of distributions from capital or
capital gains; redeeming shares in kind; or establishing a net asset value per
share by using available market quotations or equivalents. In addition, the
Trustees have the authority: (1) to reduce or increase the number of shares
outstanding on a pro rata basis, and (2) to offset each shareholder's pro rata
portion of the deviation between the net asset value per share and $1.00 from
the shareholder's accrued dividend account or from future dividends. Each Fund
may hold cash for the purpose of stabilizing its net asset value per share.
Holdings of cash, on which no return is earned, would tend to lower the yield on
such Fund's shares. Such procedures also provide for certain action to be taken
with respect to portfolio securities which experience a downgrade in rating or
suffer a default.
In order to continue to use the amortized cost method of valuation,
each Fund's investments, including repurchase agreements, must be U.S.
dollar-denominated instruments which the Trustees determine to present minimal
credit risk and be rated within one of the two highest rating categories for
short-term debt obligations by at least two major rating agencies assigning a
rating to the security or issuer, or if only one rating agency has assigned a
rating, by that agency. Purchases by the Diversified and Treasury Funds of
securities which are unrated or rated by only one rating agency must be approved
or ratified by the Trustees. Securities which are unrated may be purchased only
if they are deemed to be of comparable quality to rated securities.
Each of the Funds may not maintain a dollar-weighted average portfolio
maturity of more than 90 days nor purchase portfolio securities with maximum
remaining maturities of more than 13 months (13 months is defined herein and in
the rule to equal 397 days). However, a Fund may also, consistent with the
provisions of the above-mentioned rule, invest in securities with a maturity of
more than 13 months, provided that the security is either a variable U.S.
Government security, or a floating or variable rate security with certain demand
interest rate reset features. Should the disposition of a
-25-
<PAGE> 523
portfolio security result in a dollar-weighted average portfolio maturity of
more than 90 days, that Fund will invest its available cash in such a manner as
to reduce such maturity to 90 days or less as soon as reasonably practicable.
REDEMPTIONS
The Trust may suspend the right of redemption of shares of any Fund and
may postpone payment for any period: (i) during which the New York Stock
Exchange is closed other than customary weekend and holiday closings or during
which trading on the New York Stock Exchange is restricted, by applicable rules
and regulations of The Securities and Exchange Commission, (ii) when the SEC
determines that a state of emergency exists which may make payment or transfer
not reasonably practicable, (iii) as the SEC may by order permit for the
protection of the shareholders of the Funds, or (iv) at any other time when the
Funds may, under applicable laws and regulations, suspend payment on the
redemption of its shares. The Trust may also suspend or postpone the recordation
of the transfer of its shares under any of the foregoing circumstances.
The Funds agree to redeem shares of each Fund solely in cash up to the
lesser of $250,000 or 1% of the net asset value of the Fund during any 90-day
period for any one shareholder. The Funds reserve the right to pay other
redemptions, either total or partial, by a distribution in kind of securities
(instead of cash) from the applicable Fund's portfolio although the Funds have
no current intention to do so. The securities distributed in such a distribution
would be valued at the same value as that assigned to them in calculating the
net asset value of the shares being redeemed. If a shareholder receives a
distribution in kind, he or she should expect to incur transaction costs when he
or she converts the securities to cash.
CALCULATION OF YIELD QUOTATIONS
Each Fund's yield quotations are calculated by a standard method
prescribed by the rules of the SEC. Under this method, the yield quotation is
based on a hypothetical account having a balance of exactly one share at the
beginning of a seven-day period.
The yield quotation is computed as follows: the net change, exclusive
of capital changes (i.e., realized gains and losses from the sale of securities
and unrealized appreciation and depreciation), in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the base
period is determined by dividing the net change in account value by the value of
the account at the beginning of the base period. This base period return is then
multiplied by 365/7 with the resulting yield figure carried to the nearest 100th
of 1%. Such yield quotations shall take into account all fees that are charged
to a Fund.
Each Fund also may advertise a quotation of effective yield for a
7-calendar day period. Effective yield is computed by compounding the
unannualized base period return determined as in the preceding paragraph by
adding 1 to that return, raising the sum to the 365/7 power and subtracting one
from the result, according to the following formula:
Effective Yield = [(base period return + 1)(365/7)] - 1.
The Tax-Exempt Funds may also advertise a tax equivalent yield which is
computed by dividing that portion of the Fund's yield (as computed above) which
is tax-exempt by one minus a stated income tax rate and adding the quotient to
that portion, if any, of the yield of the Fund that is not tax-exempt and a tax
equivalent effective yield computed by compounding the tax equivalent yield on a
weekly basis.
-26-
<PAGE> 524
Unlike bank deposits or other investments which 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 in the methods used to value portfolio securities,
compute expenses, and calculate return.
Yield, effective yield, tax equivalent yield and tax equivalent
effective yield are calculated separately for Pilot Shares, inistration
Shares and Investor Shares (formerly known as Centerland Shares, Centerland
inistration Shares and Centerland Service Shares, respectively). Each type of
share is subject to different fees and expenses and may have differing yields
for the same period.
The yield of each Fund with respect to Pilot Shares, inistration
Shares and Investor Shares for the seven-day period ended August 31, 1996 was as
follows:
<TABLE>
<CAPTION>
Tax Equivalent Tax Equivalent
-------------- --------------
Yield Effective Yield Yield Effective Yield
----- --------------- ----- ---------------
Treasury Fund
<S> <C> <C> <C> <C>
Pilot Shares 4.80% 4.91% N/A N/A
Administration Shares 4.55% 4.65% N/A N/A
Investor Shares 4.30% 4.39% N/A N/A
Diversified Fund
Pilot Shares 5.11% 5.25% N/A N/A
Administration Shares 4.87% 4.98% N/A N/A
Investor Shares 4.62% 4.72% N/A N/A
Tax-Exempt Fund
Pilot Shares 3.09% 3.14% 5.12% 5.20%
Administration Shares 2.85% 2.89% 4.72% 4.78%
Investor Shares 2.60% 2.63% 4.30% 4.35%
Tax-Exempt Diversified Fund
Pilot Shares 3.16% 3.21% 5.23% 5.31%
Administration Shares 2.91% 2.95% 4.82% 4.88%
Investor Shares 2.66% 2.69% 4.40% 4.45%
</TABLE>
The quotations of tax equivalent yield set forth in advertising,
marketing and other Funds literature are based on a federal marginal tax rate of
39.6%. Tax-equivalent yield may be higher when combined with Missouri state
personal income tax rates.
From time to time, the Funds may publish an indication of one or more
Fund's past performance as measured by independent sources, such as Lipper
Analytical Services, Incorporated, Weisenberger Investment Companies Service,
Donoghue's Money Report, Barron's, Business Week, Changing Times, Financial
World, Forbes, Money, Personal Investor, Sylvia Porter's Personal Finance and
The Wall Street Journal.
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 or policies by any governmental agency or bureau.
-27-
<PAGE> 525
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
and 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 assets is represented by cash
and cash items (including receivables), U.S. Government securities, securities
of other regulated investment companies, and other securities, with such other
securities limited for any one issuer to an amount not greater than 5% of the
Fund's total assets and 10% of the outstanding voting securities of that issuer,
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 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 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.
The Funds intend that the Tax-Exempt Funds each will qualify under the
Code to pay "exempt-interest dividends" to its shareholders. The Tax-Exempt
Funds will be so qualified if, at the close of each quarter of their taxable
year, at least 50% of the value of their total assets consists of securities on
which the interest payments are exempt from federal income tax. To the extent
that dividends distributed by the Tax-Exempt Funds to their shareholders are
derived from interest income exempt from federal income tax and are designated
as "exempt-interest dividends" by the Tax-Exempt Funds, they will be excludable
from the gross income of the shareholders for federal income tax purposes.
"Exempt-interest dividends," however, must be taken into account by shareholders
in determining whether their total income is large enough to result in taxation
of up to 85% of their social security benefits and certain railroad retirement
benefits. It should also be noted that tax-exempt interest on private activity
bonds in which a Tax-Exempt Fund may invest generally is treated as a tax
preference item for purposes of the alternative minimum tax for corporate and
individual shareholders. The Tax-Exempt Funds will inform shareholders annually
as to the portion of the distributions from such Funds which constituted
"exempt-interest dividends."
Dividends paid out of a Fund's investment company taxable income will
be treated as ordinary income in the hands of shareholders. Because no portion
of a Fund's income is expected to consist of dividends paid by U.S.
corporations, no portion of such dividends is expected to 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
-28-
<PAGE> 526
dividends-received deduction. Net capital gains for a taxable year are computed
by taking into account any capital loss carry-forward of a Fund. The Funds are
not normally expected to realize any long-term capital gains or losses.
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.
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. Furthermore, a loss realized by a shareholder on the redemption,
sale or exchange of shares in the Tax-Exempt Funds with respect to which
exempt-interest dividends have been paid will, to the extent of such
exempt-interest dividends, be disallowed if such shares have been held by the
shareholder for less than six months.
Under the Code, a shareholder may not deduct that portion of interest
on indebtedness incurred or continued to purchase or carry shares of an
investment company paying exempt-interest dividends (such as the shares of the
Tax-Exempt Funds) which bears the same ratio to the total of such interest as
the exempt-interest dividends bear to the total dividends (excluding net capital
gain dividends) received by the shareholder. In addition, under rules issued by
the Internal Revenue Service for determining when borrowed funds are considered
to be used to purchase or carry particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though the borrowed funds
are not directly traceable to such purchase.
Each Fund may be subject to foreign withholding taxes on its
investments in certain securities of foreign entities. 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
-29-
<PAGE> 527
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 share 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 a 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 a Fund.
Each Fund will be required to report to the Internal Revenue Service
(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 Funds 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.
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 Funds 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 investments 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.
To the extent that distributions made by the Tax-Exempt Fund qualify as
"exempt-interest dividends" for federal income tax purposes, are derived from
interest on obligations of the state of Missouri or any of its political
subdivisions or authorities, and are designated by the Tax-Exempt Fund as "state
income tax exempt-interest dividends," these distributions will be exempt from
Missouri income taxation.
-30-
<PAGE> 528
Shareholders are advised to consult their own tax advisers with respect
to the particular tax consequences to them of an investment in a Fund. Persons
who may be "substantial users" (or "related persons" of substantial users) of
facilities financed by industrial development bonds should consult their tax
advisers before purchasing shares of the Tax-Exempt Funds. The term "substantial
user" generally includes any "non-exempt person" who regularly uses in his or
her trade or business a part of a facility financed by industrial development
bonds. Generally, an individual will not be a "related person" of a substantial
user under the Code unless the person or his or her immediate family owns
directly or indirectly in the aggregate more than a 50% equity interest in the
substantial user.
ORGANIZATION AND CAPITALIZATION
The Pilot Funds 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 Funds 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 Funds 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, four of which are offered herein and known as Pilot Short-Term
Diversified Assets Fund, Pilot Short-Term U.S. Treasury Fund, Pilot Short-Term
Tax-Exempt Diversified Fund and Pilot Missouri Short-Term Tax-Exempt 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
offered hereby: Pilot Shares, inistration Shares and Investor Shares. Each
Pilot Share, inistration Share and Investor Share is entitled to one vote per
share: however, separate votes will be taken by each Fund or class (or by one or
more Funds voting as a single class if similarly affected) on matters affecting
only that individual Fund or class (or those affected Funds or classes) or as
otherwise required by law. Fractional shares are entitled to proportionate
fractional votes. Shares have neither cumulative voting rights nor any
preemptive, subscription, or conversion rights (the right of redemption is
described under "Transaction Rules" and "How to Sell Shares" in the Prospectus).
Shares when issued as described herein are fully paid and nonassessable, except
as expressly set forth below. For information relating to possible mandatory
redemption of shares at the option of the Funds, see "Transaction Rules" and
"How to Sell Shares" in the Prospectus. 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.
SHAREHOLDER AND TRUSTEE LIABILITY
The Pilot Funds 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
-31-
<PAGE> 529
Funds. Notice of such disclaimer will normally be given in each agreement,
obligation or instrument entered into or executed by the Funds 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 Funds shall, upon request, assume
the defense of any claim made against a shareholder for any act or obligation of
the Funds, 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 Funds 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 Funds and upon
reports made to the Funds 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 judgment or mistakes of fact or
law. The Declaration of Trust provides that the Funds will indemnify the
Trustees and officers of the Funds against liabilities and expenses reasonably
incurred in connection with litigation in which they may be involved because of
their positions with the Funds, 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 Funds, their conduct was in the best interests of the Funds and that, in all
other cases, their conduct was at least not opposed to the best interests of the
Funds (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.
CUSTODIAN
Boatmen's Trust Company, 100 North Broadway, St. Louis, Missouri
63178-4737 is the custodian of the Funds' assets.
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 audit services, Arthur Andersen LLP, prepares the Funds' federal
and state tax returns, and provides consultation and assistance on accounting,
internal control and related matters. The financial statements of the Funds
incorporated by reference into this Statement of Additional Information (under
"Financial Statements") are from the Funds' annual report for the year ended
August 31, 1996, and the data set forth under "Selected Per Share Data and
Ratios" in the Prospectus have been audited by Arthur Andersen LLP, as indicated
in their report with respect thereto, and are included in reliance upon the
authority of said firm as experts in giving the reports.
Goodwin, Procter & Hoar LLP, Exchange Place, Boston, Massachusetts
02109, serves as general counsel to the Funds.
MISCELLANEOUS
The following table indicates each additional person known by the
Funds to own benefically 5% or more of the Funds as of October 23, 1996.
<TABLE>
<CAPTION>
Name and Address Percent of Total Outstanding Shares
- ---------------- -----------------------------------
<S> <C>
Treasury Fund
Boatmen's Trust Company 77.12%
100 N. Broadway LBT 0785
St. Louis, MO 63102
Diversified Fund
Boatmen's Trust Company 82.60%
100 N. Broadway LBT 0785
St. Louis, MO 63102
Tax-Exempt Fund
Boatmen's Trust Company 69.87%
100 N. Broadway LBT 0785
St. Louis, MO 63102
</TABLE>
FINANCIAL STATEMENTS
The financial statements and related report of Arthur Andersen LLP
contained in the 1996 Annual Report of the Funds are hereby incorporated by
reference and attached hereto.
-32-
<PAGE> 530
ADMINISTRATION PLAN
Each Fund has adopted an inistration plan (the "Plan") with respect
to the inistration Shares which will authorize the Funds to compensate
certain institutions ("Service Organizations") for providing certain account
inistration services to their customers who are beneficial owners of such
shares. Pursuant to the Plan, each Fund will enter into agreements with Service
Organizations which purchase inistration Shares on behalf of their customers
("Service Agreements"). Under such Service Agreements the Service Organizations
may: (a) aggregate and process purchase, exchange and redemption requests from
customers and place net purchase, exchange and redemption orders with the Funds'
distributor; (b) provide clients with a service that invests the assets of their
accounts in inistration Shares pursuant to specific or pre-authorized
instructions; (c) process dividend payments from the Funds on behalf of clients
and assist clients in changing dividend options, account designations and
addresses; (d) provide and maintain elective services such as check writing and
wire transfer services; (e) act as sole shareholder of record and nominee for
clients; (f) maintain account records for clients; (g) issue confirmations of
transactions; (h) provide subaccounting with respect to inistration Shares
beneficially owned by clients or the information to the Funds necessary for
subaccounting; (i) if required by law, forward shareholder communications from
the Funds (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to clients; and
(j) provide other similar inistrative services.
As compensation for such services, each Fund will pay each Service
Organization a service fee in an amount up to .25 of 1% (on an annualized basis)
of the average daily net asset value of the inistration Shares of each Fund
attributable to or held in the name of such Service Organization. For the fiscal
years ended August 31, 1996, August 31, 1995 and August 31, 1994, with respect
to each Fund then in existence, the amount of the inistration fees paid by
each Fund to Service Organizations was:
<TABLE>
<CAPTION>
Fund 1996 1995 1994
---- ---- ---- ----
<S> <C> <C> <C>
Pilot Short-Term U.S. Treasury Fund $535,662 $353,371 $232,476
Pilot Short-Term Diversified Assets
Fund $579,043 $703,026 $858,564
Pilot Missouri Short-Term Tax-Exempt
Fund $ 25,994 $ 7,552 $ 1,173
Pilot Short-Term Tax-Exempt
Diversified Fund $ 33,990 $ 23,899 $ 2,587
</TABLE>
The Funds have adopted the Plan pursuant to Rule 12b-1 under the 1940
Act, except that holders of inistration Shares do not enjoy the voting rights
specified in Rule 12b-1. Rule 12b-1, which was adopted by the SEC under the 1940
Act, regulates the circumstances under which an investment company such as the
Funds may bear expenses associated with the distribution of its shares. In
particular, such an investment company cannot engage directly or indirectly in
financing any activity which is primarily intended to result in the sale of
shares issued by the company unless it has adopted a plan pursuant to, and
complies with the other requirements of, such Rule. The Funds believe that fees
paid for the services provided in the Plan and described above are not expenses
incurred primarily for effecting the distribution of inistration Shares.
Conflict of interest restrictions (including the Employee Retirement
Income Security Act of 1974) may apply to a Service Organization's receipt of
compensation paid by the Funds in connection with the investment of fiduciary
funds in inistration Shares. Service Organization's, including banks
regulated by the Comptroller of the Currency, the Federal Reserve Board or the
Federal Deposit Insurance Corporation, and investment advisers and other money
managers subject to the jurisdiction
-33-
<PAGE> 531
of the Securities and Exchange Commission, the Department of Labor or State
Securities Commissions, are urged to consult legal advisers before investing
fiduciary assets in inistration Shares. In addition, under some state
securities laws, banks and other financial institutions purchasing
inistration Shares on behalf of their customers may be required to register
as dealers.
The Trustees of the Funds, including a majority of the Trustees who are
not interested persons of the Funds and who have no direct or indirect financial
interest in the operation of such Plan or the related Service Agreements, voted:
(a) to continue the Plan and Service Agreements at a meeting called for the
purpose of voting on such Plan and Service Agreements on October 20, 1993 and
(b) to revise the Plan and Service Agreements, effective March 31, 1994, at a
meeting called for the purpose of voting on such Plan and Service Agreements on
March 3-4, 1994. The Trustees voted to continue the Plan and Service Agreements
at a meeting called for the purpose of voting on such Plan and Service
Agreements on May 21, 1996. The Plan and Service Agreements will remain in
effect until May 31, 1997 and will continue in effect thereafter only if such
continuance is specifically approved annually by a vote of the Trustees in the
manner described above. All material amendments of the Plan must also be
approved by the Trustees in the manner described above. The Plan may be
terminated at any time by a majority of the Trustees as described above or by
vote of a majority of the outstanding inistration Shares of the affected
Fund. The Service Agreements may be terminated at any time, without payment of
any penalty, by vote of a majority of the Trustees as described above or by a
vote of a majority of the outstanding inistration Shares of the affected Fund
on not more than 60 days' written notice to any other party to the Service
Agreements. The Service Agreements shall terminate automatically if assigned. So
long as the Plan is in effect, the selection and nomination of those Trustees
who are not interested persons shall be committed to the discretion of the
non-interested members of the Board of Trustees. The Trustees have determined
that, in their judgment, there is a reasonable likelihood that the Plan will
benefit the Funds and holders of inistration Shares of such Funds. In the
Trustees' quarterly review of the Plan and Service Agreements, they will
consider their continued appropriateness and the level of compensation provided
therein.
-34-
<PAGE> 532
APPENDIX: DESCRIPTION OF SECURITIES RATINGS
MOODY'S INVESTORS SERVICE, INC.
LONG-TERM RATINGS
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.
Moody's applies numerical modifiers, 1, 2, and 3 in the Aa category.
The modifier 1 indicates that the security ranks in the higher end of the Aa
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of the Aa category.
SHORT-TERM RATINGS
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.
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade ("MIG"). 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.
A-1
<PAGE> 533
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 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
LONG-TERM RATINGS
AAA: Bonds rated AAA are highest grade debt obligations. This rating
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ 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.
SHORT-TERM RATINGS
A-1: Standard & Poor's short-term 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." 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
LONG-TERM RATINGS
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.
SHORT-TERM RATINGS
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.
A-2
<PAGE> 534
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.
FITCH INVESTORS SERVICE, INC.
LONG-TERM RATINGS
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+."
Plus ("+") and minus ("-") signs are used with a rating symbol to
indicate the relative position of a credit within the AA rating category.
SHORT-TERM RATINGS
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 with "F-1"+ and "F-1" ratings.
LOC: The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
IBCA LIMITED AND IBCA, INC.
LONG-TERM RATINGS
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 unlikely to increase investment risk
significantly.
A-3
<PAGE> 535
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.
"+" or "-" may be appended to denote relative status within major
rating categories.
SHORT-TERM RATINGS
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 satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic, or financial conditions.
THOMSON BANKWATCH, INC.
LONG-TERM RATINGS
AAA: The highest category; indicates a superior ability to repay
principal and interest on a timely basis.
AA: The second highest category; indicates a superior ability to repay
principal and interest on a timely basis with limited incremental risk versus
issues rated in the highest category. Ratings in the Long-Term Debt categories
may include a plus ("+") or minus ("-") designation which indicates where within
the respective category the issue is placed.
SHORT-TERM RATINGS
TBW-1: The highest category; indicates a very high degree of likelihood
that principal and interest will be paid on a timely basis.
TBW-2: The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
The TBW Short-Term Ratings apply only to unsecured instruments that
have a maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an
untimely payment of principal and interest.
A-4
<PAGE> 536
PILOT GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------
Portfolio of Investments
August 31, 1996
- ----------------------------------------------------------
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Value
Shares (Note 2)
<S> <C> <C>
- -------------------------------------------------------------
COMMON STOCKS--97.2%
CONSUMER CYCLICAL--6.3%
AUTOMOTIVE--3.0%
170,000 Ford Motor Co. $ 5,695,000
------------
HOUSING & FURNISHING--1.7%
90,000 Owens Corning Fiberglass Corp. 3,273,750
------------
MEDIA--1.6%
200,000 Tele-Communications, Inc., Class A* 2,975,000
------------
CONSUMER STAPLES--7.1%
BEVERAGE & TOBACCO--4.2%
55,000 Anheuser-Busch Cos., Inc. 4,166,250
43,000 Philip Morris Cos., Inc. 3,859,250
------------
8,025,500
------------
FOOD PROCESSING--2.9%
315,000 Archer-Daniels-Midland Co. 5,591,250
------------
ENERGY--9.7%
INTEGRATED OIL--9.7%
50,000 Atlantic Richfield Co. 5,837,500
90,400 Chevron Corp. 5,322,300
49,110 Royal Dutch Petroleum Co. (ADR) 7,335,806
------------
18,495,606
------------
FINANCE--17.7%
BANKING--2.9%
71,330 BankAmerica Corp. 5,528,075
------------
HOLDING COMPANIES--2.9%
110,000 Temple-Inland, Inc. 5,431,250
------------
FINANCIAL SERVICES--5.0%
75,305 Chase Manhattan Corp. 5,600,809
45,000 Federal Home Loan Mortgage Corp. 3,976,875
------------
9,577,684
------------
Value
Shares (Note 2)
- -------------------------------------------------------------
INSURANCE--6.9%
30,000 AETNA Life and Casualty Co. $ 1,983,750
40,000 General Re Corp. 5,795,000
58,190 Marsh & McClennan Cos., Inc. 5,411,670
------------
13,190,420
------------
HEALTHCARE--8.2%
MEDICAL SUPPLIES & SERVICES--2.1%
70,000 Columbia/HCA Healthcare Corp. 3,946,250
------------
PHARMACEUTICALS--6.1%
80,490 Merck & Co., Inc. 5,282,156
110,000 SmithKline Beecham 6,407,500
------------
11,689,656
------------
INDUSTRIAL GOODS & SERVICES--12.8%
AEROSPACE--5.0%
45,265 Lockheed Martin Corp. 3,807,918
110,000 Raytheon Co. 5,665,000
------------
9,472,918
------------
COMMERCIAL SERVICES--2.9%
175,000 WMX Technologies, Inc. 5,534,375
------------
METAL & PLASTIC--4.9%
95,000 Cooper Industries, Inc. 3,847,500
117,450 Crown Cork & Seal, Inc. 5,490,788
------------
9,338,288
------------
MANUFACTURING--5.3%
CONSUMER PRODUCTS--5.3%
82,290 Kimberly-Clark Corp. 6,449,479
140,000 Rubbermaid, Inc. 3,710,000
------------
10,159,479
------------
MATERIALS & PROCESSING--2.2%
PAPER & FOREST PRODUCTS--2.2%
105,000 International Paper Co. 4,200,000
------------
</TABLE>
- ----------------------------------------------------------
- ----------------------------------------------------------
See Notes to Financial Statements.
16
<PAGE> 537
PILOT GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- ----------------------------------------------------------
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Value
Shares (Note 2)
<S> <C> <C>
- -------------------------------------------------------------
RETAILING--7.4%
DEPARTMENT STORES--5.2%
186,690 Dayton Hudson Corp. $ 6,440,805
75,340 May Department Stores Co. 3,427,970
------------
9,868,775
------------
SPECIALTY STORES--2.2%
145,670 Toys R Us* 4,297,265
------------
TECHNOLOGY--6.1%
COMPUTERS & OFFICE EQUIPMENT--1.9%
145,430 Apple Computer 3,526,678
------------
SOFTWARE & SERVICES--4.2%
145,000 Automatic Data Processing, Inc. 6,035,625
65,000 Electronic Arts* 2,006,875
------------
8,042,500
------------
UTILITIES--14.5%
COMMUNICATION--9.0%
120,000 AT&T Corp. 6,300,000
220,000 MCI Communications Corp. 5,527,500
100,000 Motorola, Inc. 5,337,500
------------
17,165,000
------------
ELECTRIC POWER--5.5%
266,110 PacifiCorp 5,355,464
220,960 Unicom Corp. 5,082,080
------------
10,437,544
- -------------------------------------------------------------
TOTAL COMMON STOCKS (cost $164,557,838) 185,462,263
- -------------------------------------------------------------
Value
Shares (Note 2)
- -------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK--0.3%
7,892 AETNA Services, Inc. $ 548,494
- -------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCK (cost $279,785) 548,494
- -------------------------------------------------------------
Principal
Amount
(000)
- ----------------------------------------------------------
REPURCHASE AGREEMENT--2.4%
$ 4,525 Repurchase agreement with Lehman
Brothers, Inc., dated 8/30/96,
5.24% due 9/3/96, (cost
$4,525,004) (see Footnote A) 4,525,004
- -------------------------------------------------------------
TOTAL INVESTMENTS--99.8% (cost $169,362,628) 190,535,761
- -------------------------------------------------------------
OTHER ASSETS IN EXCESS OF LIABILITIES--0.2% 328,815
- -------------------------------------------------------------
NET ASSETS--100.0% $190,864,576
- -------------------------------------------------------------
ADR--American Depository Receipt.
* Non-income producing security.
Footnote A
Collateralized by $5,320,000 U.S. Treasury Bond, 6.00%, due 2/15/26 with a
value of $4,619,812.
</TABLE>
- ----------------------------------------------------------
- ----------------------------------------------------------
See Notes to Financial Statements.
17
<PAGE> 538
PILOT EQUITY INCOME FUND
- --------------------------------------------------------------------------------
Portfolio of Investments
August 31, 1996
- ----------------------------------------------------------
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Market
Value
Shares (Note 2)
<S> <C> <C>
- --------------------------------------------------------------
COMMON STOCKS--84.4%
CONSUMER CYCLICAL--5.3%
AUTOMOTIVE--2.9%
115,271 Ford Motor Co. $ 3,861,579
-------------
MEDIA--2.4%
80,000 Readers Digest Assoc., Inc. Class A 3,230,000
-------------
7,091,579
-------------
CONSUMER STAPLES--10.8%
BEVERAGES AND TOBACCO--5.3%
49,404 Philip Morris Cos., Inc. 4,434,009
90,000 UST, Inc. 2,700,000
-------------
7,134,009
-------------
FOOD PROCESSING--5.5%
98,763 Conagra, Inc. 4,160,391
60,000 General Mills, Inc. 3,300,000
-------------
7,460,391
-------------
ENERGY--9.7%
INTEGRATED OIL--9.7%
33,524 AMOCO Corp. 2,313,156
19,409 Atlantic Richfield Co. 2,266,001
27,645 Exxon Corp. 2,249,612
20,000 Royal Dutch Petroleum Co. (ADR) 2,987,500
37,645 Texaco, Inc. 3,340,993
-------------
13,157,262
-------------
FINANCE--14.9%
BANKING--8.0%
100,000 Banc One Corp. 3,837,500
46,000 BankAmerica Corp. 3,565,000
43,288 Bankers Trust New York Corp. 3,365,642
-------------
10,768,142
-------------
INSURANCE--2.1%
30,000 Marsh & McLennan Co., Inc. 2,790,000
-------------
MISCELLANEOUS FINANCE--4.8%
41,000 J.P. Morgan & Co. 3,592,625
60,000 Temple-Inland, Inc. 2,962,500
-------------
6,555,125
-------------
Market
Value
Shares (Note 2)
- --------------------------------------------------------------
HEALTHCARE--7.1%
PHARMACEUTICALS--7.1%
70,294 American Home Products Corp. $ 4,164,920
35,359 Bristol-Myers Squibb Co. 3,102,752
35,288 Merck & Co., Inc. 2,315,775
-------------
9,583,447
-------------
MANUFACTURING--4.2%
AUTO PARTS--2.2%
55,000 Eaton Corp. 3,045,625
-------------
HOUSEHOLD PRODUCTS--2.0%
100,000 Rubbermaid, Inc. 2,650,000
-------------
MATERIALS AND PROCESSING--7.5%
CHEMICALS (BASIC)--2.8%
48,000 Dow Chemical Co. 3,828,000
-------------
PAPER AND FOREST PRODUCTS--4.7%
50,000 Kimberly Clark Corp. 3,918,750
50,000 Union Camp Corp. 2,425,000
-------------
6,343,750
-------------
RETAILING--2.7%
DEPARTMENT AND DISCOUNT STORES--2.7%
70,000 J. C. Penney Co., Inc. 3,701,250
-------------
UTILITIES--22.2%
COMMUNICATIONS--4.3%
73,519 GTE Corp. 2,894,810
24,702 NYNEX Corp. 1,065,274
63,000 U. S. West, Inc. 1,858,500
-------------
5,818,584
-------------
ELECTRIC POWER--15.0%
115,000 Consolidated Edison Company New
York, Inc. 3,004,375
100,000 Frontier Corp. 2,950,000
110,000 Oklahoma Gas & Electric Co. 4,455,000
179,660 PacifiCorp 3,615,658
141,154 UNICOM Corp. 3,246,542
100,000 Western Resources, Inc. 2,937,500
-------------
20,209,075
-------------
</TABLE>
- ----------------------------------------------------------
- ----------------------------------------------------------
See Notes to Financial Statements.
18
<PAGE> 539
PILOT EQUITY INCOME FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- ----------------------------------------------------------
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Market
Value
Shares (Note 2)
<S> <C> <C>
- --------------------------------------------------------------
NATURAL GAS AND WATER--2.9%
123,800 NICOR, Inc. $ 3,884,225
- --------------------------------------------------------------
TOTAL COMMON STOCKS (cost $96,748,570) 114,020,464
- --------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS--8.6%
ENERGY--2.8%
INTEGRATED OIL--2.8%
61,288 Ashland Inc., $3.125, 12/31/49 3,715,585
-------------
HEALTHCARE--2.6
MEDICAL SERVICES--2.6%
50,590 AETNA Services, Inc. 3,516,005
-------------
MATERIAL & PROCESSING--2.4%
PAPER & FOREST PRODUCTS--2.4%
70,000 International Paper Co., 5.25%,
7/20/25, 144A 3,272,500
-------------
TECHNOLOGY--0.8%
INSTRUMENTS & COMPONENTS--0.8%
1,000,000 Analog Devices, 3.50%, 12/1/00 1,107,500
- --------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
($11,334,068) 11,611,590
- --------------------------------------------------------------
Principal Market
Amount Value
(000) (Note 2)
- --------------------------------------------------------------
CONVERTIBLE BONDS--5.4%
CONSUMER CYCLICAL--0.7%
HOUSING & FURNISHINGS--0.7%
$1,000 Masco Corp., 5.25%, 2/15/12 $ 917,500
-------------
ENERGY--1.6%
INTEGRATED OIL--1.6%
2,000 Pennzoil Oil Co., 4.75%, 10/01/03 2,130,000
-------------
INDUSTRIAL GOODS & SERVICES--3.1%
MANUFACTURING--3.1%
3,922 Cooper Industries, Inc., 7.05%,
1/1/15 4,216,150
- --------------------------------------------------------------
TOTAL CONVERTIBLE BONDS (cost $6,953,962) 7,263,650
- --------------------------------------------------------------
REPURCHASE AGREEMENT--4.3%
5,900 Repurchase agreement with Lehman
dated 8/30/96, 5.24%, due 9/3/96
(Cost 5,899,701)
(See Footnote A) 5,899,701
- --------------------------------------------------------------
TOTAL INVESTMENTS--102.7% (cost $120,936,301) 138,795,405
LIABILITIES IN EXCESS OF OTHER ASSETS--(2.7%) (3,677,533)
- --------------------------------------------------------------
NET ASSETS--100.0% $ 135,117,872
- --------------------------------------------------------------
ADR--American Depository Receipt.
Footnote A
Collateralized by $6,782,000 U.S. Treasury Bonds, with various coupon rates
and maturity dates ranging from 6.00% to 6.75% and 2/15/26 through 8/15/26
with a market value of $6,019,548.
</TABLE>
- ----------------------------------------------------------
- ----------------------------------------------------------
See Notes to Financial Statements.
19
<PAGE> 540
PILOT SMALL CAPITALIZATION EQUITY FUND
- --------------------------------------------------------------------------------
Portfolio of Investments
August 31, 1996
- ----------------------------------------------------------
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Value
Shares (Note 2)
<S> <C> <C>
- -------------------------------------------------------------
COMMON STOCKS--84.2%
CONSUMER CYCLICAL--8.3%
AUTOMOTIVE--1.8%
24,400 Champion Enterprises, Inc.* $ 463,600
19,300 Kaydon Corp. 866,088
-----------
1,329,688
-----------
HOUSING & FURNISHING--3.8%
29,300 Bush Industries, Inc. 538,388
49,800 Kaufman & Broad Home Corp. 610,050
21,400 NCI Building Systems, Inc.* 596,525
28,400 Oakwood Homes Corp. 667,400
17,700 Pulte Corp. 440,288
-----------
2,852,651
-----------
MEDIA--2.7%
23,400 Ha-Lo Industries, Inc.* 585,000
36,025 International Family
Entertainment-- Class B* 648,450
14,300 Pulitzer Publishing Co. 775,775
-----------
2,009,225
-----------
CONSUMER GOODS & STAPLES--3.5%
BEAUTY & HEALTH PRODUCTS--1.7%
19,800 Alberto Culver Co. 819,225
21,700 Church & Dwight, Inc. 458,413
-----------
1,277,638
-----------
BEVERAGE & TOBACCO--1.0%
26,600 Mondavi Robert Corp.* 751,450
-----------
FOOD PRODUCTS & PROCESSING--0.8%
24,800 Ben & Jerry's Homemade, Inc.* 372,000
18,000 Eskimo Pie Corp. 270,000
-----------
642,000
-----------
ENERGY--6.1%
DRILLING--1.4%
17,200 Parker Drilling Co.* 120,400
38,100 Reading & Bates Corp.* 933,450
-----------
1,053,850
-----------
Value
Shares (Note 2)
- -------------------------------------------------------------
INTEGRATED OIL & GAS--4.7%
27,400 Brown, Tom, Inc.* $ 438,400
70,550 Comstock Resources, Inc.* 740,775
9,100 Diamond Shamrock, Inc. 249,113
47,546 Forest Oil Corp.* 671,587
69,700 Texas Meridian Resources Corp.* 897,388
20,800 Vintage Petroleum, Inc. 525,200
-----------
3,522,463
-----------
FINANCE--15.8%
BANKING--4.0%
15,400 Brenton Banks, Inc. 377,300
54,600 City National Corp. 962,325
7,400 Commercial Federal Corp. 288,600
12,300 Deposit Guaranty Corp. 567,338
40,400 First Republic Bancorp, Inc.* 540,350
9,000 OnBancorp, Inc. 290,250
-----------
3,026,163
-----------
BROKERAGE--1.0%
67,700 Southwest Securities Group, Inc. 795,475
-----------
FINANCIAL SERVICES--7.2%
9,400 Aames Financial Corp. 458,766
16,100 Advanta Corp. 786,888
25,400 Bay View Capital Corp. 939,800
32,850 Capstead Mortgage Corp. 685,744
13,300 Cole Taylor Financial Group, Inc. 385,700
31,100 Resource Mortgage Capital Corp. 769,725
18,000 Sturm, Ruger & Co. 645,750
19,500 US BANCORP, Inc. 711,750
-----------
5,384,123
-----------
INSURANCE--3.6%
14,200 Berkeley, W.R. Corp. 646,100
10,800 Executive Risk, Inc. 371,250
27,200 First American Financial Corp. 867,000
20,940 Frontier Insurance Group, Inc. 816,660
-----------
2,701,010
-----------
</TABLE>
- ----------------------------------------------------------
- ----------------------------------------------------------
See Notes to Financial Statements.
20
<PAGE> 541
PILOT SMALL CAPITALIZATION EQUITY FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- ----------------------------------------------------------
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Value
Shares (Note 2)
<S> <C> <C>
- -------------------------------------------------------------
HEALTH CARE--5.3%
MEDICAL SUPPLIES & SERVICES--4.9%
32,400 Amco International Corp. $ 469,800
11,300 Ballard Medical Products 189,275
16,100 Bergen Brunswig Corp. 448,788
24,250 Bio-Rad Laboratories, Inc.* 679,000
8,600 Coherent, Inc.* 337,550
17,200 Human Genome Sciences, Inc.* 586,950
26,236 Steris Corp.* 806,757
8,365 Vital Signs, Inc. 170,436
-----------
3,688,556
-----------
PHARMACEUTICALS--0.4%
22,800 Matrix Pharmaeuticals* 287,850
-----------
INDUSTRIAL GOODS & SERVICES--5.6%
CHEMICALS--1.6%
55,200 Crompton & Knowles Corp. 828,000
32,400 International Specialty Products* 356,400
-----------
1,184,400
-----------
COMMERCIAL SERVICES--0.7%
49,200 Calgon Carbon Corp. 565,800
-----------
ELECTRONICS--2.4%
24,500 Core Industries, Inc. 297,063
15,700 Electro Scientific Industries,
Inc.* 286,525
9,700 Komag, Inc.* 206,125
30,100 Logicon, Inc. 891,713
7,900 Watkins-Johnson Co. 158,000
-----------
1,839,426
-----------
ENVIRONMENT--0.7%
26,600 Zurn Industries, Inc. 548,625
-----------
METAL & PLASTIC--0.2%
8,760 Wyman-Gordon Co.* 182,865
-----------
LEISURE--2.8%
GAMING RESORTS & HOTELS--2.8%
3,900 Rio Hotel & Casino, Inc.* 67,763
25,400 Sodak Gaming, Inc.* 1,320,800
30,900 WMS Industries, Inc.* 714,563
-----------
2,103,126
-----------
Value
Shares (Note 2)
- -------------------------------------------------------------
MANUFACTURING--14.1%
COMMUNICATIONS EQUIPMENT--0.4%
2,700 Communications Systems, Inc. $ 35,100
20,000 Network Equipment Technologies* 255,000
-----------
290,100
-----------
CONSUMER PRODUCTS--1.8%
36,000 Foamex International, Inc.* 560,250
36,600 Paragon Trade Brands, Inc.* 759,450
-----------
1,319,700
-----------
MACHINERY--2.5%
42,200 Credence Systems Corp.* 569,700
21,200 Gardner Denver Machinery, Inc.* 636,000
28,000 Standard Products Co. 644,000
-----------
1,849,700
-----------
MANUFACTURING--MISC.--4.8%
9,500 Applied Power, Inc. 285,000
15,100 Blount International, Inc. 517,175
17,700 Dionex Corp.* 632,775
12,900 Esterline Technologies Corp.* 266,063
46,300 Fossil, Inc.* 381,975
26,000 GenCorp, Inc. 360,750
19,400 Proxim, Inc.* 630,500
9,400 Tuscarora, Inc. 203,275
54,000 Worldtex, Inc.* 324,000
-----------
3,601,513
-----------
STEEL--4.0%
44,500 National Steel Corp.* 456,125
44,000 Olympic Steel, Inc.* 1,078,000
18,700 Rouge Steel Co. 418,413
46,600 Steel Technologies, Inc. 553,375
51,300 WHX Corp.* 525,825
-----------
3,031,738
-----------
TEXTILE--0.6%
36,400 Culp, Inc. 473,200
-----------
RETAILING--9.4%
DEPARTMENT STORES--2.1%
27,300 Neiman Marcus Group, Inc. 808,763
19,100 Proffitts, Inc.* 783,100
-----------
1,591,863
-----------
</TABLE>
- ----------------------------------------------------------
- ----------------------------------------------------------
See Notes to Financial Statements.
21
<PAGE> 542
PILOT SMALL CAPITALIZATION EQUITY FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- ----------------------------------------------------------
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Value
Shares (Note 2)
<S> <C> <C>
- -------------------------------------------------------------
GROCERY STORES--0.8%
23,800 Riser Foods, Inc. $ 568,225
-----------
SPECIALTY STORES--5.8%
38,300 Chronimed, Inc.* 469,175
45,370 Eagle Hardware & Garden, Inc.* 1,009,483
23,800 Fabri Centers of America, Inc.* 321,300
21,800 Inacom Corp.* 588,600
24,600 Pacific Sunwear of California* 639,600
19,600 Quicksilver, Inc.* 460,600
8,500 Ross Stores, Inc. 327,250
113,400 Venture Stores, Inc.* 524,475
-----------
4,340,483
-----------
WAREHOUSE--0.7%
23,700 Waban, Inc.* 503,625
-----------
SERVICES--2.4%
AIRLINES--1.0%
15,900 Air Express International Corp. 443,213
16,200 USAir Group, Inc.* 289,575
-----------
732,788
-----------
RESTAURANT--0.7%
21,100 Sbarro, Inc. 522,225
-----------
SERVICES--MISC.--0.7%
10,600 Corrections Corp. of America* 341,850
7,200 Filenet Corp.* 172,800
-----------
514,650
-----------
TECHNOLOGY--1.2%
COMPUTERS & OFFICE EQUIPMENT--1.2%
6,600 American Business Products, Inc. 134,475
25,000 Exabyte Corp.* 368,750
35,450 Marcam Corp.* 385,509
-----------
888,734
-----------
Value
Shares (Note 2)
- -------------------------------------------------------------
UTILITIES--9.7%
ELECTRIC POWER--5.8%
24,100 Calenergy Inc.* $ 729,024
20,400 Central Hudson Gas & Electric Co. 614,550
11,900 Central Maine Power Co. 144,288
10,700 Central Vermont Public Service 135,088
18,000 Commonwealth Energy System Cos. 420,750
20,500 DT Industries, Inc. 538,125
8,600 IES Industries, Inc. 285,950
5,100 Northwestern Public Service Co. 146,625
38,900 Pioneer Standard Electronics, Inc. 515,425
30,300 TNP Enterprises, Inc. 708,263
7,000 Tucson Electric Power Co.* 112,875
-----------
4,350,963
-----------
NATURAL GAS--3.9%
15,100 Connecticut Natural Gas Corp. 339,750
26,700 Giant Industries, Inc. 400,500
33,900 Piedmont Natural Gas Co., Inc. 839,025
27,070 Southeastern Michigan Gas 466,958
28,800 Southwestern Energy Co. 442,800
128,000 Wainoco Oil Corp.* 432,000
-----------
2,921,033
- -------------------------------------------------------------
63,246,924
- -------------------------------------------------------------
TOTAL COMMON STOCKS (cost $62,289,386)
</TABLE>
- ----------------------------------------------------------
- ----------------------------------------------------------
See Notes to Financial Statements.
22
<PAGE> 543
PILOT SMALL CAPITALIZATION EQUITY FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- ----------------------------------------------------------
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Value
(000) (Note 2)
- -------------------------------------------------------------
<S> <C>
U.S. TREASURY BILLS--0.6%**
$400 5.25%, 12/12/96 $ 394,269
- -------------------------------------------------------------
TOTAL U.S. TREASURY BILLS (cost $394,466) 394,269
- -------------------------------------------------------------
REPURCHASE AGREEMENTS--15.4%
7,512 Repurchase agreement with Lehman
Brothers Inc., dated 8/30/96,
5.24%, due 9/3/96 (see Footnote
A) 7,512,003
4,000 Repurchase agreement with J. P.
Morgan, dated 8/30/96, 5.25%, due
9/3/96, (see Footnote B) 4,000,000
- -------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS (cost $11,512,003) 11,512,003
- -------------------------------------------------------------
TOTAL INVESTMENTS --100.2% (cost $74,195,855) 75,153,196
LIABILITIES IN EXCESS OF OTHER ASSETS--(0.2%) (180,128)
- -------------------------------------------------------------
NET ASSETS--100.0% $74,973,068
- -------------------------------------------------------------
</TABLE>
Footnote A
Collateralized by $7,755,000 U.S. Treasury Note, 5.25%, due 4/15/00 with a
value of $7,662,518.
Footnote B
Collateralized by $3,364,000 U.S. Treasury Bonds, 10.75%, due 2/15/03 with a
value of $4,080,915.
* Non-income producing security.
** Securities deposited into a segregated custodial account for futures margin
requirements.
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS SETTLEMENT UNREALIZED
TYPE LONG(A) MONTH LOSS
- -------------------------------------------------------------
<S> <C> <C> <C>
FUTURES CONTRACTS
S & P 400 MIDCAP 73 Sept. 96 $ (268,353)
S & P 500 INDEX 9 Sept. 96 (67,500)
- -------------------------------------------------------------
$ (335,853)
- -------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------
(a) Each S&P 400 MIDCAP and S&P 500 contract. Contract represents $50,000 in
notional par value. The total net notional amount and net market value for
the futures contracts shown above are $4,100,000 and $11,415,500,
respectively. The determination of notional amounts does not consider market
risk factors and therefore notional amounts as presented here are indicative
only of volume of activity and not a measure of market risk.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
23
<PAGE> 544
PILOT U.S. GOVERNMENT SECURITIES FUND
- --------------------------------------------------------------------------------
Portfolio of Investments
August 31, 1996
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Maturity Value
(000) Rate Date (Note 2)
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS--96.6%
U.S. TREASURY BONDS--25.4%
$ 34,000 U.S. Treasury Bond 7.50 % 11/15/16 $ 34,823,480
2,500 U.S. Treasury Bond 7.13 2/15/23 2,457,025
------------
37,280,505
------------
U.S. TREASURY NOTES--71.2%
30,000 U.S. Treasury Note 6.88 2/28/97 30,182,700
10,500 U.S. Treasury Note 6.50 4/30/97 10,549,245
20,000 U.S. Treasury Note 5.50 11/15/98 19,634,400
11,000 U.S. Treasury Note 5.63 11/30/00 10,571,990
24,000 U.S. Treasury Note 5.75 8/15/03 22,541,280
11,500 U.S. Treasury Note 6.50 8/15/05 11,163,970
------------
104,643,585
- ----------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(cost $143,401,169) 141,924,090
- ----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
(000) (Note 2)
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
REPURCHASE AGREEMENT--2.1%
$ 3,118 Repurchase agreement, Lehman Brothers
dated 8/30/96, 5.24%, due 9/3/96
(Cost $3,118,222) (See Footnote A) $ 3,118,222
- ----------------------------------------------------------------
TOTAL INVESTMENTS--98.7% (cost $146,519,391) 145,042,312
OTHER ASSETS IN EXCESS OF LIABILITIES--1.3% 1,893,157
- ----------------------------------------------------------------
NET ASSETS--100.0% $146,935,469
- ----------------------------------------------------------------
</TABLE>
- ----------------------------------------------------------------
Footnote A
Collateralized by $3,220,000 U.S. Treasury Note, 5.50%, due 4/15/00 with a
value of $3,181,642.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
24
<PAGE> 545
PILOT INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND
- --------------------------------------------------------------------------------
Portfolio of Investments
August 31, 1996
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Maturity Value
(000) Rate Date (Note 2)
- -----------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS--97.5%
UNITED STATES TREASURY NOTES--97.5%
$31,000 United States
Treasury Note 6.25% 2/15/03 $ 30,074,960
16,000 United States
Treasury Note 6.75 6/30/99 16,100,000
36,000 United States
Treasury Note 6.50 8/15/97 36,168,840
11,000 United States
Treasury Note 7.88 11/15/04 11,648,010
58,000 United States
Treasury Note 7.13 2/29/00 58,897,260
24,000 United States
Treasury Note 6.13 5/15/98 23,940,000
13,500 United States
Treasury Note 6.50 5/15/05 13,122,405
11,000 United States
Treasury Note 8.13 2/15/98 11,288,750
25,000 United States
Treasury Note 5.63 11/30/00 24,027,250
- -----------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(cost $229,003,079) 225,267,475
- -----------------------------------------------------------------
<CAPTION>
Principal
Amount Value
(000) (Note 2)
- -----------------------------------------------------------------
<S> <C> <C> <C>
REPURCHASE AGREEMENT--1.3%
$ 2,908 Repurchase agreement, Lehman Brothers,
dated 8/30/96, 5.24%, due 9/3/96
(cost $2,907,839) (See Footnote A) $ 2,907,839
- -----------------------------------------------------------------
TOTAL INVESTMENTS--98.8% (cost $231,910,918) 228,175,314
OTHER ASSETS IN EXCESS OF LIABILITIES--1.2% 2,786,640
- -----------------------------------------------------------------
NET ASSETS--100.0% $230,961,954
- -----------------------------------------------------------------
</TABLE>
Footnote A
Collateralized by $3,005,000 U.S. Treasury Note, 5.50%, due 4/15/00, with a
market value of $2,969,203.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
25
<PAGE> 546
PILOT MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Portfolio of Investments
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Ratings
Amount (Moody's/S&P) Maturity Value
(000) Unaudited Rate Date (Note 2)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS--95.6%
ARIZONA--2.7%
$2,000 Maricopa County, Scottsdale School District, G.O. Aa/AA 5.00% 7/01/14 $ 1,827,500
400 Pima County University School District, Series D,
G.O. (FGIC Insured) Aaa/AAA 6.10 7/01/11 412,000
2,000 Salt River Project, Agriculture Improvement &
Power District Electric Systems Revenue, Series C Aa/AA 6.25 1/01/19 2,057,500
900 Tucson, Series 1984-G, G.O. (FGIC Insured) Aaa/AAA 6.25 7/01/16 938,250
----------
5,235,250
----------
ARKANSAS--0.7%
1,300 State Development Waste Systems Authority, Revenue
Series A Aa/NR 5.70 12/01/12 1,280,500
----------
CALIFORNIA--7.9%
400 California State, G.O. A+/A1 9.10 11/01/01 477,000
200 California State, G.O. A+/A1 9.00 6/01/02 240,250
500 California State, Series AM, G.O. A+/A1 9.00 10/01/02 605,625
200 California State, Series-AQ, G.O. A+/A1 9.10 10/01/02 243,250
1,000 California State, G.O. A+/A1 7.10 9/01/02 1,113,750
200 California State, Series AM, G.O. A+/A1 9.00 10/01/03 246,750
1,000 California State, G.O. A+/A1 7.00 8/01/04 1,123,750
200 California State, Series AN, G.O. A+/A1 9.00 4/01/05 251,500
200 California State, G.O. A+/A1 7.20 4/01/05 227,750
700 California State, G.O. A+/A1 7.00 8/01/05 790,125
400 California State, G.O. A+/A1 7.10 3/01/07 454,500
400 California State University Revenue, (FGIC
Insured) Aaa/AAA 6.00 11/01/10 413,500
500 Long Beach Water Revenue Aa/AA 6.00 5/01/14 505,000
200 Los Angeles, Water & Power Waterworks Revenue Aa/AA 7.70 5/15/07 214,000
1,000 Los Angeles Wastewater Systems Revenue, Series C,
(MBIA Insured) Aaa/AAA 5.50 6/01/14 958,750
500 Los Angeles County, Metropolitan Transportation
Authority Sales Tax Revenue Propodition A-Series
A, (MBIA Insured) Aaa/AAA 5.63 7/01/18 484,375
400 Los Angeles County Sanitation District Authority
Revenue Capital Project, Series A Aa/AA 5.38 10/01/13 378,000
2,000 Metropolitan Water District Southern, Revenue
Bonds, Series A (MBIA Insured) Aaa/AAA 5.75 7/01/15 1,992,500
500 San Francisco Rapid Transit District Sales Tax
Revenue (AMBAC Insured) Aaa/AAA 6.75 7/01/11 561,250
700 San Francisco City & County Sewer Revenue, (AMBAC
Insured) Aaa/AAA 5.50 10/01/15 673,750
2,595 San Francisco Apartments Commission, Revenue
Series 98 (FGIC Insured) Aaa/AAA 5.25 5/01/13 2,462,006
500 University Revenue, Project-Series C, (AMBAC
Insured) Aaa/AAA 5.25 9/01/16 460,625
----------
14,878,006
----------
COLORADO--1.4%
200 Colorado Springs, Utilities Revenue, Series A Aa/AA 6.50 11/15/15 215,250
2,500 Douglas County, Sales & Use Tax, Revenue Aaa/AAA 5.50 10/15/11 2,446,875
----------
2,662,125
----------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
26
<PAGE> 547
PILOT MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Ratings
Amount (Moody's/S&P) Maturity Value
(000) Unaudited Rate Date (Note 2)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONNECTICUT--0.5%
$1,000 State of Connecticut, G.O., Series A Aa-/AA 5.30% 5/15/10 $ 978,750
----------
FLORIDA--6.3%
2,500 Broward County School District, G.O. Aa-/AA1 5.60 2/15/07 2,534,375
500 Florida State Board of Education Cap Outlay, G.O. Aa/AA 6.13 6/01/10 519,375
1,000 Florida State Board of Education Cap Outlay, G.O.,
Series A Aa/AA 5.50 6/01/14 975,000
700 Florida State Board of Education Cap Outlay, G.O.,
Series D Aa/AA 5.00 6/01/15 637,875
200 Florida State Board of Education Cap Outlay, G.O.,
Series A Aa/AA 7.25 6/01/23 219,000
300 Florida State Board of Education Public Education,
G.O., Series B1 Aaa/AAA 7.88 6/01/19 324,375
400 Jacksonville Electric Authority Revenue-St. Johns
River Power Park Systems, Series 10 Aa/AA1 5.50 10/01/13 388,500
2,000 Jacksonville Electric Authority Revenue-St. Johns
River Power Park Systems Aa/AA1 5.38 10/01/15 1,897,500
600 Jacksonville Transportation, Series 1985 Aaa/AAA 9.00 1/01/04 648,750
1,200 Orlando Utilities Common Water & Electric Revenue,
Series D Aa-/AA 6.75 10/01/17 1,369,500
700 Orlando Utilities Common Water & Electric Revenue,
Series A Aa-/AA 5.50 10/01/12 682,500
1,800 St. Lucie County, Pollution Control Revenue* Aa-/AA3 3.75 1/01/26 1,800,000
----------
11,996,750
----------
GEORGIA--2.6%
1,100 Atlanta, G.O. Aa/AA 5.60 12/01/11 1,108,250
800 De Kalb County, G.O. Aa+/AA1 5.25 1/01/20 738,000
200 Fulton County Water & Sewer Revenue, (FGIC
Insured) Aaa/AAA 6.38 1/01/14 215,000
300 Municipal Electric Authority Revenue, Series V A/A 6.50 1/01/12 320,250
1,000 Municipal Electric Authority Revenue, Series V A/A 6.60 1/01/18 1,073,750
1,000 Municipal Electric Authority Revenue, Series B A/A 6.25 1/01/12 1,042,500
400 Henry County School District, G.O., (MBIA Insured) Aaa/AAA 6.00 8/01/14 412,500
----------
4,910,250
----------
HAWAII--0.1%
200 Hawaii State, Series BW, G.O. Aa/AA 6.25 3/01/12 213,250
----------
ILLINOIS--6.3%
400 Chicago, Series 1993, G.O., (FGIC Insured) Aaa/AAA 5.38 1/01/13 384,000
600 Chicago Metro Water-Capital Improvement, G.O. Aa/AA 5.50 12/01/12 591,000
400 Chicago Park District-Capital Improvement, G.O.,
(FGIC Insured) Aaa/AAA 6.05 1/01/03 407,500
2,000 Cook County, G.O. Aaa/AAA 5.90 11/15/16 1,980,000
600 Du Page County, Ref. Jail Proj., G.O. Aaa/AAA 5.50 1/01/13 580,500
600 Du Page County, Ref. Jail Proj., G.O. Aaa/AAA 5.60 1/01/21 579,750
600 Du Page Water Commission, Water Revenue Aa/AA1 5.25 5/01/14 551,250
200 Illinois State, G.O. Aa-/A1 9.50 11/01/03 214,000
400 Illinois State, G.O. Aa-/NR 8.00 10/01/04 423,972
2,340 Illinois State, G.O. Aa-/A1 5.88 6/01/11 2,354,625
2,000 Illinois State, G.O. Aaa/AAA 6.00 2/01/16 2,030,000
800 Illinois State, G.O. Aa-/A1 5.50 8/01/18 756,000
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
27
<PAGE> 548
PILOT MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Ratings
Amount (Moody's/S&P) Maturity Value
(000) Unaudited Rate Date (Note 2)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ILLINOIS (continued)
$ 600 Illinois State, G.O. Aa-/A1 5.80% 4/01/19 $ 585,000
700 Illinois State Sales Tax Revenue, Series S Aaa/A1 5.25 6/15/18 629,125
----------
12,066,722
----------
KANSAS--1.5%
2,000 Kansas State Department Transportation Highway
Revenue, Series A Aa/AA 6.00 9/01/07 2,115,000
700 Kansas State Department Transportation Highway
Revenue Aa/AA 5.38 3/01/13 670,250
----------
2,785,250
----------
KENTUCKY--0.5%
1,000 Kentucky State Turnpike Authority Economic
Development Revenue Aaa/AAA 5.63 7/01/15 980,000
----------
LOUISIANA--0.2%
400 Louisiana State, Series B, G.O. A-/AAA 8.00 5/01/03 418,092
----------
MAINE--0.4%
700 Turnpike Authority Revenue, (MBIA Insured) Aaa/AAA 6.00 7/01/14 712,250
----------
MASSACHUSETTS--4.5%
2,500 Massachusetts, Series A, G.O. (MBIA Insured) Aaa/AAA 5.75 2/01/13 2,503,125
2,000 Massachusetts, Series B, G.O. Aaa/AAA 5.50 6/01/10 1,987,500
3,675 Massachusetts Bay Transportation Authority,
Revenue, Series A A+/A1 5.75 3/01/18 3,592,313
500 Massachusetts Water Reserve Authority, Series A,
Revenue Bonds (MBIA Insured) Aaa/AAA 5.90 8/01/16 501,250
----------
8,584,188
----------
MICHIGAN--5.4%
1,750 Byron Center Public Schools, G.O. (MBIA Insured) Aaa/AAA 5.97 5/01/15 1,771,875
1,000 Environmental Protection Project, G.O. Aa/AA 6.25 11/01/12 1,073,750
1,400 Ferndale School District, G.O. Aaa/AAA 5.38 5/01/16 1,326,500
1,010 Grand Rapids County College, G.O. Aaa/AAA 5.45 5/01/12 991,063
300 Hudsonville Public Schools, Series B, G.O. (FGIC
Insured) Aaa/AAA 6.00 5/01/14 306,000
1,250 Kalamazoo City School District, G.O. Aaa/AAA 5.65 5/01/14 1,243,750
1,000 Lakeshore Public Schools, G.O. Aaa/AAA 5.75 5/01/15 986,250
1,000 Michigan State Trunk Line, Revenue, Series A (FGIC
Insured) Aaa/AAA 5.63 11/15/14 972,500
1,700 Oxford Community School District, G.O. (FGIC
Insured) Aaa/AAA 5.30 5/01/11 1,634,125
----------
10,305,813
----------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
28
<PAGE> 549
PILOT MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Ratings
Amount (Moody's/S&P) Maturity Value
(000) Unaudited Rate Date (Note 2)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MISSOURI--14.3%
$ 300 Board Public Building, State Office Building,
Revenue, Special Obligation Aa/AA 6.40% 12/01/10 $ 315,000
400 Environmental Impt. & Energy Res. Auth. Water Poll
Ct.-Revolving FD-Multipart, Series A NR/AA 6.45 7/01/08 433,000
500 Environmental Impt. & Energy Res. Auth. Water Poll
Ct.-Revolving FD-Springfield, Series A NR/AA 7.00 10/01/10 548,750
300 Environmental Impt. & Energy Res. Auth. Water Poll
Ct.-Revolving FD-Multipart, Series A Aaa/AAA 6.88 6/01/14 325,125
400 Environmental Impt. & Energy Res. Auth. Water Poll
Ct.-Revolving FD-Multipart, Series A NR/AA 6.55 7/01/14 427,500
200 Environmental Impt. & Energy Res. Auth. Water Poll
Ct.-Revolving FD-Multipart, Series A NR/AA 6.05 7/01/15 201,750
1,000 Environmental Impt. & Energy Res. Auth., Revolving
FD, Kansas City, Series A NR/AA1 5.75 1/01/16 996,250
1,100 Environmental Impt. & Energy Res. Auth. Env. Impt.
Rev.-Union Electric Co. (AMBAC-TCRS Insured) Aaa/AAA 7.40 5/01/20 1,197,625
200 Environmental Impt. & Energy Res. Auth. Env. Impt.
Rev.-Union Electric Co., Series A Aa-/A1 7.40 5/01/20 217,000
200 Health & Educational Facs. Authority Rev.-Gen.
Tuition-St. Louis University, (AMBAC Insured) Aaa/AAA 6.50 8/01/16 214,000
400 Health & Educational Facs. Authority Rev.-St.
Louis University, Series A, (AMBAC Insured) Aaa/AAA 7.75 6/01/07 417,012
1,500 Health & Educational Facs. Authority Health Facs.
Rev.-Barnes Hospital Aaa/NR 7.13 12/15/09 1,672,500
400 Health & Educational Facs. Authority Health Facs.
Rev.-Children's Mercy Hosp. Proj. (MBIA Insured) Aaa/AAA 5.63 5/15/12 391,000
500 Health & Educational Facs. Authority Health Facs.
Rev.-Deaconess Health Services Corp., (FGIC
Insured) Aaa/AAA 6.75 4/01/15 514,425
500 Health & Educational Facs. Authority Health Facs.
Rev.-Deaconess Health Services Corp., (FGIC
Insured) Aaa/AAA 6.75 4/01/07 513,625
200 Health & Educational Facs. Authority Health Facs.
Rev.-SSM Hlth. Care Proj., Series B, (MBIA
Insured) Aaa/AAA 7.00 6/01/15 213,000
290 Health & Educational Facs. Authority Health Facs.
Rev.-Jewish Hosp. St. Louis, (FGIC Insured) Aaa/AAA 7.25 7/01/15 298,947
500 Health & Educational Facs. Authority Health Facs.
Rev.-Sisters Of Mercy Health, Series A Aa/AA 6.25 6/01/15 520,000
900 Health & Educational Facs. Authority Health Facs.
Rev.-SSM Health Care Proj., (BIGI Insured) Aaa/AAA 7.75 6/01/16 972,000
700 Health & Educational Facs. Authority Health Facs.
Rev.-St. Louis University, (AMBAC Insured) Aaa/AAA 5.00 10/01/10 659,750
1,000 Health & Educational Facs. Authority Health Facs.
Rev.-St. Louis University, (AMBAC Insured) Aaa/AAA 5.13 10/01/16 915,000
900 Health & Educational Facs. Authority Health Facs.
Rev.-St. Lukes Episcopl-Presby., (FGIC Insured) Aaa/AAA 6.88 12/01/07 932,625
200 Health & Educational Facs. Authority Health Facs.
Rev.-St. Lukes Episcopal Hosp., (FGIC Insured) Aaa/AAA 6.80 12/01/03 214,500
1,000 Independence School District, G.O. NR/A 6.25 3/01/11 1,061,250
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
29
<PAGE> 550
PILOT MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Ratings
Amount (Moody's/S&P) Maturity Value
(000) Unaudited Rate Date (Note 2)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MISSOURI (continued)
$ 200 Jackson County Ind. Dev. Authority Health Care
Corp. Rev.- St. Joseph Health Center Proj. (BIG
Insured) Aaa/AAA 8.25% 7/01/07 $ 210,964
300 Jefferson City School District, G.O., Series A NR/AA 6.70 3/01/11 335,625
400 Kansas City Apartment Revenue, Series B, (MBIA
Insured) Aaa/AAA 7.20 9/01/08 437,000
500 Kansas City Apartment Revenue, Series B, (MBIA
Insured) Aaa/AAA 7.20 9/01/09 546,250
400 Kansas City, G.O. Aa/AA 5.75 10/01/07 408,000
400 Kansas City, G.O. Aa/AA 5.75 10/01/11 402,000
1,000 Kansas City-Var. Purpose, G.O. Aa/AA 6.00 3/01/08 1,023,750
400 Mehlville School District 09, G.O., (MBIA Insured) Aaa/AAA 6.00 2/15/13 411,000
1,625 Missouri State Water Pollution Control, G.O.,
Series A Aaa/AAA 5.60 4/01/15 1,610,781
1,750 Missouri State Housing Development Commission,
Revenue,
Series A, (GNMA/FHA/VA)** Aaa/NR 6.10 9/01/14 1,758,750
400 Ritenour Cons. School District, Series A, G.O.,
(FGIC Insured) Aaa/AAA 6.00 2/01/10 408,500
400 Rolla School District No. 31, G.O. A/A 6.38 3/01/14 417,500
400 Springfield School District No. R-12, Series A,
G.O., (MBIA Insured) Aaa/AAA 5.25 3/01/11 381,500
800 Springfield Waterworks Revenue, Series A A+/AA 5.50 5/01/19 766,000
500 St. Louis County Pattonville R-3 School District, G.O.,
(FGIC Insured) Aaa/AAA 6.25 2/01/10 535,000
200 St. Louis County Parkway School, Series A, G.O. NR/AA 6.00 7/01/10 206,500
500 St. Louis County-Refunding & Improvement,
Series B, G.O. NR/AA1 5.40 2/01/10 493,125
200 St. Louis Industrial Development
Authority-Anheuser-Busch Co. Project Aa-/A1 6.65 5/01/16 216,250
500 University City School District, G.O., (MBIA
Insured) Aaa/AAA 6.20 2/15/14 521,250
800 University of Missouri, Revenue, Hospital &
Clinics Improvement Aaa/AAA 7.38 11/01/10 897,000
500 University of Missouri, Revenue, Ref. &
Impt.-Systems Facs. Aa+/AA 5.38 11/01/13 476,250
400 University of Missouri, Revenue, Series A, (AMBAC
Insured) Aaa/AAA 6.50 11/01/11 428,500
200 University of Missouri, Revenue, Series B, (AMBAC
Insured) Aaa/AAA 6.50 11/01/11 214,250
----------
27,277,379
----------
NEBRASKA--0.8%
800 Public Power District Revenue, Power Supply
Systems A+/A1 6.13 1/01/15 808,000
400 Public Power District Revenue, Power Supply
Systems A+/A1 5.75 1/01/20 387,000
400 Omaha Public Power District Electric Revenue,
Series B Aa/AA 6.20 2/01/17 424,500
----------
1,619,500
----------
NEVADA--2.2%
1,400 Clark County-Ref. & Impt. Transportation, Series
A, G.O.,
(MBIA Insured) Aaa/AAA 6.00 6/01/12 1,447,250
1,000 Las Vegas-Clark County Library District, G.O.,
(FGIC Insured) Aaa/AAA 6.00 2/01/12 1,027,500
800 Nevada State, Municipal Bond Bank Project No. 42,
G.O. Aa/AA 5.88 9/01/12 808,000
1,000 Nevada State, Municipal Bank, Series A, G.O. Aa/AA 5.50 11/01/17 947,500
----------
4,230,250
----------
NEW JERSEY--0.3%
500 New Jersey State, Series B, G.O. Aa+/AA1 6.25 1/15/05 542,500
----------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
30
<PAGE> 551
PILOT MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Ratings
Amount (Moody's/S&P) Maturity Value
(000) Unaudited Rate Date (Note 2)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NEW MEXICO--0.3%
$ 400 New Mexico State University Revenue, Refunding &
Improvement Aa/A1 5.75% 4/01/16 $ 401,500
200 Santa Fe Revenue (AMBAC Insured) Aaa/AAA 6.25 6/01/15 215,500
----------
617,000
----------
NEW YORK--3.7%
2,000 Municipal Assistance Corp. for New York A+/AA 5.20 7/01/08 1,972,500
2,000 New York Energy Authority, Revenue A+/A1 6.10 8/15/00 1,995,000
3,000 New York State Assistance Corp. Revenue, Series A A/A 6.00 4/01/16 3,030,000
----------
6,997,500
----------
NORTH CAROLINA--1.6%
2,000 Eastern Municipal Power, Series A, (FGIC Insured) Aaa/AAA 6.20 1/01/12 2,065,000
1,000 Municipal Power Agency, Catawba Electric Revenue,
(MBIA Insured) Aaa/AAA 6.00 1/01/10 1,045,000
----------
3,110,000
----------
OHIO--0.4%
700 Lakota Local School District, G.O., (AMBAC
Insured) Aaa/AAA 6.25 12/01/14 730,625
----------
OREGON--2.9%
2,000 Chemetka Community College District, G.O. (FGIC
Insured) Aaa/AAA 5.80 6/01/12 2,017,500
200 Oregon State, G.O. Aa/AA 8.75 10/01/97 210,058
200 Oregon State, G.O. Aa/AA 11.00 12/01/99 239,000
2,900 Portland Sewer Systems Revenue, Series A A+/A1 6.25 6/01/15 3,001,500
----------
5,468,058
----------
PENNSYLVANIA--0.2%
500 Pennsylvania State Higher Education, Revenue
Series J,
(AMBAC Insured) Aaa/AAA 5.63 6/15/19 478,125
----------
RHODE ISLAND--1.5%
2,845 State of Rhode Island, G.O., Series A (MBIA
Insured) Aaa/AAA 5.60 8/01/10 2,841,444
----------
SOUTH CAROLINA--0.6%
1,000 Piedmont Municipal Power Agency, Electric Revenue,
Series A, (FGIC Insured) Aaa/AAA 6.50 1/01/16 1,082,500
----------
TENNESSEE--0.5%
1,000 Memphis, G.O. Aa/AA 5.20 11/01/10 958,750
----------
TEXAS--9.9%
700 Austin Utility Systems Revenue, Series A Aaa/AAA 8.00 11/15/16 792,750
500 Austin Utility Systems Revenue, Combined, Series A Aaa/AAA 9.50 5/15/15 580,000
400 Austin Utility Systems Revenue, Combined, (BIG
Insured) Aaa/AAA 8.63 11/15/12 473,000
1,000 Austin Utility Systems Revenue Aaa/AAA 7.30 5/15/17 1,115,000
10 Austin Water Sewer & Electric Refunding Revenue A-/A 14.00 11/15/01 12,888
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
31
<PAGE> 552
PILOT MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Ratings
Amount (Moody's/S&P) Maturity Value
(000) Unaudited Rate Date (Note 2)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TEXAS (continued)
$ 385 Austin Water Sewer & Electric Refunding Revenue A-/A 14.00% 11/15/01 $ 498,575
3,610 Bexar Metropolitan Water District Waterworks,
Revenue
(MBIA Insured) Aaa/AAA 6.00 5/01/15 3,668,662
2,575 Carrollton Farmers Branch School District, G.O.,
(PSFG Insured) Aaa/AAA 5.70 2/15/17 2,539,594
400 Cypress-Fairbanks Indpt. School District, G.O.,
(PSFG Insured) Aaa/AAA 5.75 2/01/08 407,000
1,275 Cypress-Fairbanks Indpt. School District, G.O.,
(PSFG Insured) Aaa/AAA 5.75 2/15/16 1,271,812
1,000 Dallas School District, G.O., (PSFG Insured) Aaa/AAA 5.70 8/15/12 1,002,500
1,075 Denton Utility System, Revenue Aaa/AAA 5.70 12/01/10 1,069,625
200 Harris County, G.O. Aa/AAA 7.80 1/01/03 230,250
700 Harris County Toll Rd - Sub Lien Revenue, G.O. Aa/AA 6.75 8/01/14 751,625
500 Houston Water Systems Revenue, Prior Lien Aaa/AAA 7.40 12/01/17 530,000
1,000 San Antonio Electric & Gas, Revenue (MBIA Insured) Aaa/AAA 5.38 2/01/16 948,750
2,000 San Antonio Electric & Gas, Revenue (MBIA Insured) Aaa/AAA 5.38 2/01/18 1,870,000
1,100 San Antonio Water Revenue, (MBIA Insured) Aaa/AAA 6.50 5/15/10 1,179,750
----------
18,941,781
----------
UTAH--2.2%
500 Intermountain Power Agency, Power Supply Revenue,
Series B Aa-/AA 5.25 7/01/17 454,375
800 Intermountain Power Agency Power Supply Revenue,
Series A Aa-/AA 5.50 7/01/20 743,000
2,000 Intermountain Power Agency, Power Supply Revenue,
Series A Aa-/AA 5.00 7/01/16 1,775,000
1,300 Salt Lake City Water & Sewer, Revenue (AMBAC
Insured) Aaa/AAA 6.10 2/01/14 1,326,000
----------
4,298,375
----------
WASHINGTON--12.2%
2,480 Clark County Sewer, Revenue Aaa/AAA 5.80 12/01/11 2,492,400
900 King & Snohomish Counties School District No. 417
Northshore, G.O., (MBIA Insured) Aaa/AAA 6.30 6/01/13 928,125
1,035 King County Library Systems, G.O. Aa-/AA 6.15 12/01/10 1,084,162
2,000 King County School District #415, G.O. Aaa/AAA 5.80 6/01/13 2,005,000
2,000 Seattle, G.O., Series A Aa+/AA1 5.63 1/15/10 1,990,000
300 Seattle Metropolitan Municipality, G.O. A+/AA 5.65 1/01/20 288,375
2,000 Seattle Metropolitan Municipal Sewer Revenue,
Series X (FGIC Insured) Aaa/AAA 5.50 1/01/16 1,897,500
2,000 Seattle Municipal Light & Power, Revenue Aa/AA 6.63 7/01/16 2,107,500
500 Seattle Municipal Light & Power Revenue, Series B Aa/AA 5.75 8/01/08 505,625
1,400 Seattle Water Systems, Revenue Aa/AA 5.50 6/01/18 1,323,000
500 Tacoma Electric Systems Revenue, Series B, (AMBAC
Insured) Aaa/AAA 5.90 1/01/05 520,000
500 Washington State, G.O. Aaa/AAA 8.90 10/01/03 525,330
200 Washington State, G.O., Ref-Series 86D** Aaa/AAA 8.00 9/01/05 200,000
200 Washington State-Motor Vehicle Fuel Tax, Series E,
G.O.** Aaa/AAA 8.00 9/01/05 200,000
300 Washington State, G.O. Aaa/AAA 7.75 12/01/07 322,500
5,000 Washington State, G.O., Series A Aa/AA 6.75 2/01/15 5,581,250
300 Washington State, G.O., Series A & AT-6 Aa/AA 6.25 2/01/11 318,375
200 Public Power Supply Systems Nuclear Project #1,
Revenue Aaa/AAA 14.38 7/01/01 250,500
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
32
<PAGE> 553
PILOT MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Ratings
Amount (Moody's/S&P) Maturity Value
(000) Unaudited Rate Date (Note 2)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WASHINGTON (continued)
$ 400 Public Power Supply Systems Nuclear Project #2,
Revenue, Series A Aa-/AA1 7.25% 7/01/06 $ 450,000
300 Public Power Supply Systems Nuclear Project #1,
Revenue, Series B Aa-/AA1 7.25 7/01/09 337,875
----------
23,327,517
----------
WEST VIRGINIA--0.5%
1,000 University Revenue, (AMBAC Insured) Aaa/AAA 5.75 4/01/16 983,750
----------
WISCONSIN--0.5%
1,000 Wisconsin State, Series 1, G.O. Aa/AA 5.80 11/01/08 1,033,750
----------
TOTAL MUNICIPAL BONDS (cost $174,946,457) 182,546,000
Shares
(000)
- ---------------------------------------------------------------------------------------------------------------------------------
TAX-EXEMPT MONEY MARKET MUTUAL FUND--3.2%
6,170 Federated Tax Exempt Obligation Fund (Cost $6,170,068) 6,170,068
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.8% (cost $181,116,525) 188,716,068
OTHER ASSETS IN EXCESS OF LIABILITIES--1.2% 2,236,576
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS--100.0% $ 190,952,644
- ---------------------------------------------------------------------------------------------------------------------------------
AMBAC -- AMBAC Indemnity Corporation
BIG -- Bond Investors Guaranty
FGIC -- Financial Guaranty Insurance Corporation
FHA -- Federal Housing Administration
GNMA -- Government National Mortgage Association
G.O. -- General Obligation
MBIA -- Municipal Bond Insurance Association
VA -- Veterans Administration
</TABLE>
* Variable rate securities having liquidity sources through bank letters of
credit or other credit and/or liquidity agreements. The interest rate, which
will change periodically, is based upon bank prime rates or an index of
market interest rates. The rate reflected on the Schedule of Portfolio
Investments is the rate in effect at August 31, 1996.
** Indicates bonds called or portions of bonds called subsequent to year-end.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
33
<PAGE> 554
PILOT INTERMEDIATE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Portfolio of Investments
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's/S&P
Principal Ratings Maturity Value
Amount Unaudited Rate Date (Note 2)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS--98.5%
ARIZONA--5.7%
$2,000,000 Arizona State Transportation Board, Excise Tax
Revenue (AMBAC Insured) Aa/AAA 5.50 % 7/01/02 $ 2,065,000
300,000 Flagstaff, Series 1991A (FGIC Insured) Aaa/AAA 8.50 7/01/98 322,125
1,100,000 Glendale G.O. Refunding Bonds (FGIC Insured) Aaa/AAA 4.95 7/01/01 1,113,750
300,000 Maricopa County High School District 210, G.O.
Refunding Bonds, Series D Aa/AA 6.70 7/01/03 325,875
300,000 Maricopa County School District 48, G.O. Refunding
Bonds, Series 1991 Aa/AA 6.00 7/01/00 310,125
3,000,000 Mesa G.O. Refunding Bonds (FGIC Insured) Aaa/AAA 5.35 7/01/00 3,082,500
900,000 Mesa G.O. Refunding Bonds (MBIA Insured) Aaa/AAA 5.00 7/01/03 905,625
900,000 Phoenix G.O. Refunding Bonds Aa+/AA1 5.40 7/01/97 911,538
300,000 Pima County G.O. NR 7.10 7/01/99 313,683
900,000 Pima County G.O. Refunding Bonds A+/AA 5.35 7/01/00 922,500
400,000 Pima County School District No. 1, G.O., Refunding
Bonds, Preref 7/01/01 @ 101 (MBIA Insured) Aaa/AAA 6.70 7/01/04 438,000
600,000 Salt River Project, Agriculture Impt. & Power
District Revenue Bonds, Series D Aa/AA 5.10 1/01/99 609,000
800,000 Salt River Project, Agriculture Revenue Refunding
Bonds,
Series C Aa/AA 4.30 1/01/02 777,000
400,000 Tempe, Series 1992 Aa+/AA 5.60 7/01/00 414,500
-----------
12,511,221
-----------
CALIFORNIA--4.6%
300,000 California State, G.O. A+/A1 5.70 10/01/00 311,625
400,000 California State, G.O. A+/A1 7.00 8/01/04 449,500
2,000,000 California State, Public Improvements, G.O. A+/A1 5.25 3/01/00 2,040,000
1,100,000 California State, School & Public Improvements, G.O. A+/A1 4.80 3/01/00 1,105,500
900,000 Contra Costa Water District Revenue Bonds, Series G
(MBIA Insured) Aaa/AAA 5.40 10/01/03 924,750
900,000 Los Angeles G.O. Bonds, Series A (MBIA Insured) Aaa/AAA 5.40 9/01/03 924,750
1,100,000 Metropolitan Water District Southern Revenue Bonds,
Series 1992 Aa/AA 4.85 7/01/99 1,111,000
1,400,000 Metropolitan Water District Southern Revenue Bonds,
Series B Aaa/AAA 4.10 7/01/02 1,356,250
700,000 Riverside Sewer Revenue Refunding Bonds (FGIC
Insured) Aaa/AAA 4.80 8/01/01 701,750
600,000 San Diego Open Space Park Facilities, District No. 1,
G.O. Refunding Bonds Aa+/AAA 5.13 1/01/00 613,500
600,000 University of California, Multiple Purpose
Projects--C, Revenue Refunding Bonds (AMBAC
Insured) Aaa/AAA 4.80 9/01/04 591,000
-----------
10,129,625
-----------
COLORADO--3.0%
300,000 Colorado Springs Utility Authority, Revenue, Series A Aa/AA 6.63 11/15/04 325,125
300,000 Denver City & County, G.O. Bonds Aa/AA 6.38 8/01/03 322,125
300,000 Denver City & County, G.O. Bonds Aa/AA 6.50 8/01/04 322,500
400,000 Denver City & County, Various Purpose G.O. Bonds,
Series A Aa/AA 5.50 8/01/99 409,500
1,195,000 La Plata County School District, #9R Durango, G.O.
(MBIA Insured) Aaa/AAA 5.00 11/01/02 1,206,950
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
34
<PAGE> 555
PILOT INTERMEDIATE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's/S&P
Principal Ratings Maturity Value
Amount Unaudited Rate Date (Note 2)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COLORADO(continued)
$1,500,000 Northglenn, G.O. Bonds** Aaa/AAA 5.25 % 12/01/03 $ 1,541,250
1,500,000 Northglenn, G.O. Bonds** Aaa/AAA 5.25 12/01/04 1,535,625
900,000 Platte River Power Authority, Revenue, Series CC A+/AA 4.63 6/01/00 897,750
-----------
6,560,825
-----------
CONNECTICUT--2.2%
600,000 Connecticut State G.O., Refunding Bonds, Series B Aa-/AA 5.65 11/15/98 618,000
300,000 Connecticut State G.O., Series A NR/AA 6.60 3/01/04 324,750
700,000 Connecticut State Public Improvements, G.O. Bonds,
Series D Aa-/AA 4.60 8/01/00 700,875
1,000,000 Connecticut State Public Improvements, G.O. Refunding
Bonds, Series B Aa-/AA 4.80 3/15/01 1,005,000
2,000,000 Connecticut State Special Unemployment Compensation,
Revenue Series A Aaa/AAA 5.50 11/15/00 2,067,500
-----------
4,716,125
-----------
DELAWARE--0.4%
800,000 Delaware State School Improvements, G.O. Bonds,
Series A Aa+/AA1 4.60 3/01/00 801,000
-----------
DISTRICT OF COLUMBIA--0.5%
1,100,000 District of Columbia G.O. Bonds, Series A (AMBAC
Insured) Aaa/AAA 7.00 6/01/98 1,144,000
-----------
FLORIDA--2.3%
1,000,000 Broward County School Dist., G.O. Refunding Bonds Aa-/A1 5.10 2/15/02 1,008,750
500,000 Florida State Board of Education Capital Outlay, G.O.
Refunding Bonds, Series 1992A Aa/AA 5.70 6/01/03 525,000
1,500,000 Jacksonville Electric Authority, St. Johns River,
Revenue Refunding Bonds, Series 10 Aa/AA1 4.60 10/01/00 1,507,500
300,000 Jacksonville Electric Authority, St. Johns River,
Special Obligation Bonds Aa/AA1 6.40 10/01/00 321,375
1,000,000 Orlando Utility Commission, Water & Electric Revenue
Refunding Bonds Aa/AA1 5.20 10/01/00 1,026,250
600,000 Tampa Guaranteed Entitlement Revenue Refunding Bonds
(AMBAC Insured) Aaa/AAA 6.50 10/01/99 635,250
-----------
5,024,125
-----------
GEORGIA--1.6%
300,000 Georgia Municipal Electric Authority, Power Revenue
Ref. Bonds, Series Q A/A 7.40 1/01/98 310,500
300,000 Georgia Municipal Electric Authority, Power Revenue
Ref. Bonds, Series U A/A 6.80 1/01/03 323,625
300,000 Georgia State, G.O. Aa+/AAA 7.00 1/01/00 328,500
200,000 Georgia State Public Improvements, G.O., Series C Aa+/AAA 6.50 4/01/04 220,500
700,000 Gwinnett County G.O. Refunding Bonds, Series 1992 Aa+/AA1 4.88 1/01/99 707,000
1,615,000 Gwinnett County School District, G.O., Series A Aa+/AA1 5.10 2/01/01 1,647,300
-----------
3,537,425
-----------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
35
<PAGE> 556
PILOT INTERMEDIATE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's/S&P
Principal Ratings Maturity Value
Amount Unaudited Rate Date (Note 2)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HAWAII--5.0%
$ 700,000 Hawaii County, Series 1993A (FGIC Insured) Aaa/AAA 4.80 % 5/01/00 $ 703,500
600,000 Hawaii State, G.O. Refunding Bonds, Series 1992BW Aa/AA 5.50 3/01/99 614,250
900,000 Hawaii State, G.O. Refunding Bonds, Series CC Aa/AA 4.60 2/01/00 900,000
1,000,000 Hawaii State, G.O. School & Public Improvements,
Series BU Aa/AA 5.85 11/01/01 1,052,500
300,000 Hawaii State, G.O., Series BZ Aa/AA 5.40 10/01/01 309,375
2,000,000 Hawaii State, G.O., Series CJ Aa/AA 5.63 1/01/02 2,077,500
2,000,000 Hawaii State, G.O. Aa/AA 5.00 3/01/03 2,010,000
600,000 Honolulu City & County, G.O. Refunding Bonds, Series B Aa/AA 4.60 10/01/99 600,750
900,000 Honolulu City & County, G.O. Refunding Bonds,
Series 1992 One Aa/AA 5.38 6/01/99 919,125
500,000 Honolulu City & County, Public Improvements, Series
1994A Aa/AA 5.00 4/01/99 505,625
1,300,000 Honolulu City & County, Public Improvements, G.O.
Series A Aa/AA 5.25 1/01/01 1,324,375
-----------
11,017,000
-----------
ILLINOIS--6.3%
2,165,000 Chicago Metropolitan Water Reclamation District, G.O. Aa/AA 5.75 12/01/01 2,262,425
1,100,000 Chicago Metropolitan Capital Improvement, G.O. Aa/AA 5.00 12/01/02 1,108,250
600,000 Chicago Water Revenue Refunding Bonds (AMBAC Insured) Aaa/AAA 5.60 11/01/04 616,500
1,500,000 Cook County, G.O. Aaa/AAA 5.10 11/12/03 1,503,750
100,000 Du Page County Jail Project, G.O. Revenue Bonds Aaa/AAA 9.00 1/01/00 113,000
300,000 Du Page County Stormwater Project, G.O. Revenue Bonds Aaa/AAA 9.00 1/01/00 339,000
900,000 Du Page Water Commission Revenue Refunding Bonds Aa/AA1 5.00 5/01/02 910,125
1,100,000 Illinois State G.O. Bonds Aa-/A1 5.50 8/01/03 1,127,500
1,450,000 Illinois State G.O. Bonds Aa-/AA1 5.00 6/01/02 1,451,813
1,900,000 Illinois State, G.O. Sales Tax Revenue Bonds, Series
Q Aaa/A1 5.30 6/15/00 1,928,500
1,300,000 Illinois State Toll Hwy. Priority Revenue Refunding ,
Series A A/A1 4.50 1/01/00 1,287,000
600,000 Northwest Subn. Mun. Water Agy. Revenue Refunding
Bonds (MBIA Insured) Aaa/AAA 5.40 5/01/99 612,000
500,000 Waukegan G.O. Refunding Bonds (FGIC Insured) Aaa/AAA 5.40 1/01/00 510,625
-----------
13,770,488
-----------
INDIANA--0.4%
900,000 Indiana Municipal Power Supply System Revenue
Refunding Bonds, Series B (MBIA Insured) Aaa/AAA 5.38 1/01/03 915,750
-----------
KANSAS--0.2%
100,000 Johnson County Uni. School District No. 229, G.O.
Refunding Bonds (FGIC Insured) Aaa/AAA 7.10 3/01/99 102,642
300,000 Kansas State Department of Transportation Highway
Revenue Bonds, Series A Aa/AA 4.10 9/01/00 291,000
-----------
393,642
-----------
KENTUCKY--0.3%
700,000 Kentucky State Turnpike Authority Economic
Development Revitalization Project, (AMBAC Insured) Aaa/AAA 4.90 7/01/00 706,125
-----------
LOUISIANA--0.5%
300,000 Louisiana State, G.O. Refunding Bonds, Series A A-/BAA1 6.60 8/01/97 305,487
700,000 Louisiana St., Series A (MBIA Insured) Aaa/AAA 6.70 8/01/98 728,259
-----------
1,033,746
-----------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
36
<PAGE> 557
PILOT INTERMEDIATE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's/S&P
Principal Ratings Maturity Value
Amount Unaudited Rate Date (Note 2)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MAINE--0.5%
$1,000,000 Maine Municipal Bond Bank, Series E Aaa/AAA 5.25 % 11/01/04 $ 1,016,250
-----------
MARYLAND--0.3%
600,000 Anne Arundel County Cons. General Improvement, G.O. Aa+/AA 4.40 2/01/00 595,500
-----------
MASSACHUSETTS--2.2%
1,000,000 Massachusetts State G.O., Refunding, Series B A+/A1 5.00 11/01/01 1,012,500
300,000 Massachusetts State G.O., Series B A+/A1 7.25 4/01/99 319,125
300,000 Massachusetts State G.O., Series C A+/A1 7.00 12/01/97 310,875
400,000 Massachusetts State G.O., Series D A+/A1 6.38 7/01/00 424,500
1,260,000 Massachusetts State G.O., Series D Aaa/AAA 5.13 11/01/01 1,283,625
1,500,000 Massachusetts State Turnpike Authority, Series A A+/A1 5.00 6/01/99 1,522,500
-----------
4,873,125
-----------
MICHIGAN--1.0%
900,000 Michigan State Recreation Program, G.O., Series 1992 Aa/AA 5.50 11/01/99 925,875
600,000 Michigan State Trunk Line, Series 1994A Aa-/A1 5.25 11/15/00 609,000
600,000 University of Michigan, University Revenue Refunding,
Student Fee Aa+/AA1 4.60 4/01/99 602,250
-----------
2,137,125
-----------
MINNESOTA--1.5%
900,000 Metropolitan Council, G.O., Minneapolis-St. Paul,
Series A Aaa/AAA 5.00 12/01/04 897,750
300,000 Minnesota State, Various Purpose G.O. Bonds Aa+/AAA 6.40 8/01/99 316,500
900,000 Minnesota State, G.O. Refunding Bonds Aa+/AAA 4.88 8/01/00 913,500
300,000 Ramsey County, G.O., Refunding Capital Improvement,
Series C Aa+/AAA 5.15 12/01/00 307,500
900,000 St. Paul Sewer Revenue Refunding Bonds (AMBAC
Insured) Aaa/AAA 5.10 12/01/01 905,625
-----------
3,340,875
-----------
MISSOURI--13.7%
300,000 Clay County Public School District 53, G.O. Series B
(MBIA Insured) Aaa/AAA 5.00 3/01/03 301,125
400,000 Columbia G.O., Refunding Aa/AA 5.20 10/01/00 410,000
100,000 Independence School District G.O. Bonds NR/A 6.10 3/01/01 105,500
300,000 Kansas City Airport Revenue Bonds A/A 7.40 9/01/98 315,951
1,000,000 Kansas City Municipal Assistance Revenue Bonds Aaa/AAA 4.80 4/15/03 991,250
200,000 Kansas City Public Safety G.O. Bonds Aa/AA 6.20 9/01/97 200,012
1,300,000 Kansas City School District Building, Leasehold
Revenue Series A, Prerefunded 2/1/98 @ 102 (FGIC
Insured) Aaa/AAA 7.90 2/01/08 1,392,625
300,000 Kansas City Various Purpose G.O. Bonds Aa/AA 6.30 3/01/03 315,750
300,000 Kansas City Various Purpose G.O. Bonds Aa/AA 6.40 3/01/04 315,750
600,000 Kansas City Various Purpose G.O. Bonds Aa/AA 6.00 3/01/07 616,500
200,000 Kansas City Water Revenue Bonds, Series B (AMBAC
Insured) Aa/AA 6.60 12/01/02 207,000
300,000 Mehlville School District No. 9, G.O. (MBIA Insured) Aaa/AAA 5.00 2/15/00 303,375
200,000 Missouri State Environmental Improvement & Energy
Authority, Water Pollution Control Revenue Bonds,
Series A NR/AA 5.40 7/01/97 202,570
1,000,000 Missouri State Environmental Bonds Aa/A1 5.50 12/01/05 1,025,000
600,000 Missouri State Health & Educational Facilities
Authority, Revenue, Barnes-Jewish, Series A Aa/AA 5.90 5/15/04 629,250
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
37
<PAGE> 558
PILOT INTERMEDIATE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's/S&P
Principal Ratings Maturity Value
Amount Unaudited Rate Date (Note 2)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MISSOURI(continued)
$1,200,000 Missouri State Health & Educational Facilities
Authority, Revenue, Barnes-Jewish, Series A Aa/AA 4.00 % 5/15/98 $ 1,192,500
200,000 Missouri State Health & Educational Facilities
Authority, Revenue, Barnes Hospital Aaa/NR 6.55 12/15/97 206,500
200,000 Missouri State Health & Educational Facilities
Authority, Revenue, Barnes Hospital Aaa/NR 6.65 12/15/98 211,000
200,000 Missouri State Health & Educational Facilities
Authority, Revenue, Barnes Hospital Aaa/NR 6.75 12/15/99 214,000
300,000 Missouri State Health & Educational Facilities
Authority, Revenue Refunding & Improvement,
Christian Health, A (FGIC Insured) Aaa/AAA 6.40 2/15/00 318,375
300,000 Missouri State Health & Educational Facilities
Authority, Revenue Refunding & Improvement,
Christian Health, Series A (FGIC Insured) Aaa/AAA 6.25 2/15/98 309,375
600,000 Missouri State Health & Educational Facilities
Authority, Revenue Refunding & Improvement,
Christian Health, Series A, Prerefunded 2/15/01
@ 102 Aaa/AAA 6.60 2/15/02 655,500
3,000,000 Missouri State Health & Educational Facilities
Authority, Revenue, Drury College, Series A * NR/AA3 3.25 8/15/21 3,000,000
300,000 Missouri State Health & Educational Facilities
Authority, Revenue, Missouri Baptist Medical
Center, Series 1990A NR 7.30 7/01/99 322,500
300,000 Missouri State Health & Educational Facilities
Authority Revenue, General Tuition, St. Louis
University (AMBAC Insured) Aaa/AAA 6.10 8/01/99 313,125
600,000 Missouri State Health & Educational Facilities
Authority, Revenue Refunding, St. Louis University
(AMBAC Insured) Aaa/AAA 4.10 10/01/00 586,500
1,000,000 Missouri State Health & Educational Facilities
Authority, Revenue, St. Louis Childrens Hosp. (MBIA
Insured) Aaa/AAA 5.40 5/15/99 1,026,250
100,000 Missouri State Health & Educational Facilities
Authority, Revenue Refunding, St. Lukes Hospital,
Kansas City (MBIA Insured) Aaa/AAA 6.50 11/15/02 109,000
300,000 Missouri State Health & Educational Facilities
Authority, Health Facilities Revenue, St. Lukes
Episcopal/Presbyterian (FGIC Insured) Aaa/AAA 4.70 12/01/98 304,125
200,000 Missouri State Health & Educational Facilities
Authority, Revenue, St. Lukes Episcopal Hosp. (FGIC
Insured) Aaa/AAA 6.60 12/01/00 213,250
600,000 Missouri State Health & Educational Facilities
Authority, Revenue, St. Lukes Health System (MBIA
Insured) Aaa/AAA 4.25 11/15/01 583,500
300,000 Missouri State Health & Educational Facilities
Authority, Revenue Refunding & Improvement, Sisters
of Mercy, Series E Aa/AA 7.00 6/01/98 312,750
700,000 Missouri State Health & Educational Facilities
Authority, Revenue Refunding & Improvement, Sisters
of Mercy, Series E Aa/AA 7.00 6/01/99 743,750
1,500,000 Missouri State Health & Educational Facilities
Authority, Revenue Refunding, SSM Health Care,
Series AA (MBIA Insured) Aaa/AAA 5.40 6/01/00 1,535,625
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
38
<PAGE> 559
PILOT INTERMEDIATE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's/S&P
Principal Ratings Maturity Value
Amount Unaudited Rate Date (Note 2)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MISSOURI(continued)
$ 200,000 Missouri State Health & Educational Facilities
Authority, Revenue, SSM Care Project., Series B
(MBIA Insured) Aaa/AAA 6.50 % 6/01/98 $ 208,000
400,000 Missouri State Health & Educational Facilities
Authority, Revenue, SSM Health Care Project (BIGI
Insured) Aaa/AAA 7.00 6/01/97 409,292
200,000 Missouri State Health & Educational Facilities
Authority, Revenue, SSM Health Care Project, Series
B (MBIA Insured) Aaa/AAA 6.40 6/01/97 203,782
400,000 Missouri State Office Building Special Obligation
Revenue, Series A 1991 Aa/AA 5.90 12/01/01 423,000
900,000 Missouri State, Third State Building, G.O. Refunding
Bonds, Series A Aaa/AAA 5.00 8/01/01 916,875
300,000 Missouri State, Third State Building, G.O. Refunding
Bonds, Series B Aaa/AAA 5.50 11/01/01 312,375
200,000 Missouri State, Water Pollution Control, G.O., Series
1989 A Aaa/AAA 7.75 9/01/96 200,022
200,000 Missouri State, Water Pollution Control, G.O., Series
B, Prerefunded 11/01/01 @ 100 Aaa/AAA 5.70 11/01/02 209,250
300,000 Missouri State, Water Pollution Control, G.O., Series
B, Prerefunded 11/01/01 @ 100 Aaa/AAA 5.80 11/01/03 315,375
300,000 Springfield School District No. R12, School Building,
G.O. Refunding Bonds, Series A (FGIC Insured) Aaa/AAA 6.40 3/01/03 318,000
300,000 Springfield School District No. R12, School Building,
G.O. Refunding Bonds, Series A (FGIC Insured) Aaa/AAA 6.40 3/01/04 317,625
300,000 Springfield School District No. R12, School Building,
G.O. Refunding Bonds, Series A (FGIC Insured) Aaa/AAA 6.25 3/01/05 315,750
400,000 Springfield Waterworks Revenue Refunding Bonds,
Series B A+/AA 4.75 5/01/02 399,000
600,000 St. Louis County, Pattonville School District No.
R-3, G.O. (FGIC Insured) Aaa/AAA 5.70 2/01/01 624,750
1,300,000 St. Louis County Refunding & Improvement, Series A Aaa/AAA 4.80 2/01/03 1,293,500
200,000 St. Louis County Regional Convention & Sports
Complex, Series B BBB+/A 6.20 8/15/98 205,250
100,000 St. Louis County Regional Convention & Sports
Complex, Series B BBB+/A 6.30 8/15/99 103,625
500,000 St. Louis County, Rockwood School District No. R-6,
G.O., Prerefunded 2/1/99 @ 100 NR/AAA 6.00 2/01/01 518,750
400,000 St. Louis County, Rockwood School District No. R-6,
G.O., Prerefunded 2/1/99 @ 100 NR/AAA 6.00 2/01/02 415,000
700,000 St. Louis County, Rockwood School District No. R-6,
G.O., Refunding Bonds NR/AA 5.00 2/01/03 698,250
300,000 St. Louis School District, G.O., (FGIC Insured) Aaa/AAA 6.50 4/01/03 329,250
400,000 St. Louis School District, Mississippi River Subdiv.,
G.O. Ref Bonds, (FGIC Insured) Aaa/AAA 6.30 2/15/01 422,000
400,000 St. Louis School District, Mississippi River Subdiv.,
G.O. Ref Bonds, (FGIC Insured) Aaa/AAA 6.40 2/15/02 422,000
100,000 University Mo., Univ. Revenue Refunding Bonds, Series
A (AMBAC Insured) Aaa/AAA 6.05 11/01/96 100,410
200,000 University Mo., Univ. Revenue Refunding Bonds, Series
A (AMBAC Insured) Aaa/AAA 6.10 11/01/97 204,250
200,000 University Mo., Univ. Revenue Refunding Bonds, Series
A (AMBAC Insured) Aaa/AAA 6.20 11/01/98 207,000
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
39
<PAGE> 560
PILOT INTERMEDIATE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's/S&P
Principal Ratings Maturity Value
Amount Unaudited Rate Date (Note 2)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MISSOURI(continued)
$ 200,000 University Mo., Univ. Revenue Refunding Bonds, Series
B (AMBAC Insured) Aaa/AAA 6.05 % 11/01/96 $ 200,820
200,000 University Mo., Univ. Revenue Refunding Bonds, Series
B (AMBAC Insured) Aaa/AAA 6.10 11/01/97 204,250
100,000 University Mo., Univ. Revenue Refunding Bonds, Series
B (AMBAC Insured) Aaa/AAA 6.20 11/01/98 103,500
-----------
30,090,234
-----------
NEBRASKA--1.2%
1,000,000 Nebraska Public Power District Revenue, Power Supply
System A+/A1 5.30 1/01/02 1,016,250
900,000 Omaha Public Power District Electric Revenue, Series A Aaa/NR 5.40 2/01/98 916,875
600,000 Omaha Public Power District Electric Revenue, Series D Aa/AA 4.75 2/01/04 587,250
-----------
2,520,375
-----------
NEVADA--2.0%
400,000 Clark County G.O. Revenue Bonds, Series A (AMBAC Insured) Aaa/AAA 5.50 6/01/98 408,500
300,000 Clark County School District, G.O., Series A. (MBIA
Insured) Aaa/AAA 6.50 6/01/02 323,625
1,000,000 Nevada State, G.O., Bk. No. 38-39-A Aa/NR 6.00 7/01/01 1,050,000
1,000,000 Nevada State, G.O., Series A Aa/AA 5.80 5/01/00 1,038,750
1,500,000 Washoe County G.O. Refunding Bonds (AMBAC Insured) Aaa/AAA 5.00 9/01/01 1,522,500
-----------
4,343,375
-----------
NEW JERSEY--3.3%
1,100,000 Bergen County Util. Authority, Water Pollution Cntrl.
Revenue, Series B (FGIC Insured) Aaa/AAA 5.50 12/15/02 1,141,250
3,000,000 New Jersey G.O. Bonds Aa+/AA1 5.13 1/01/02 3,060,000
1,100,000 New Jersey State Transportation Trust Fund Authority,
Series A (AMBAC Insured) Aaa/AAA 5.20 12/15/00 1,122,000
2,000,000 New Jersey State Transportation Trust Fund Authority,
Series B (MBIA Insured) Aaa/AAA 5.00 6/15/02 2,007,500
-----------
7,330,750
-----------
NEW MEXICO--1.8%
1,400,000 Albuquerque G.O. Bonds, Series A & B Aa/AA 4.70 7/01/00 1,405,250
2,000,000 New Mexico State Capital Project, G.O. Bonds Aa+/AA1 5.25 9/01/03 2,022,500
600,000 New Mexico State Severance Tax, Series B Aa/AA 5.10 7/01/00 610,500
-----------
4,038,250
-----------
NEW YORK--1.4%
300,000 New York State G.O. A-/A 6.75 6/15/99 316,875
600,000 New York State Various Purpose G.O. Bonds A-/A 6.60 11/15/98 629,250
1,100,000 New York State Various Purpose G.O. Bonds A-/A 6.70 11/15/99 1,168,750
1,000,000 New York State Tollway Authority Bonds, Series B Aaa/AAA 5.00 4/01/00 1,013,750
-----------
3,128,625
-----------
NORTH CAROLINA--0.1%
300,000 North Carolina State G.O. Aaa/AAA 5.60 4/01/00 310,875
-----------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
40
<PAGE> 561
PILOT INTERMEDIATE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's/S&P
Principal Ratings Maturity Value
Amount Unaudited Rate Date (Note 2)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OHIO--1.0%
$1,000,000 Cleveland, G.O. (AMBAC Insured) Aaa/AAA 4.90 % 9/01/04 $ 997,500
900,000 Columbus G.O. Refunding Bonds, Series D Aaa/AAA 4.75 9/15/00 907,875
300,000 Ohio State Water Development Authority Revenue, Pure
Water Series I (MBIA Insured) Aaa/AAA 7.00 6/01/99 320,250
-----------
2,225,625
-----------
OKLAHOMA--0.9%
2,000,000 Tulsa, G.O. Aa/AA 5.13 5/01/02 2,035,000
-----------
OREGON--2.6%
3,000,000 Multnomah County School District 1J, G.O., Portland** Aa-/AA 5.50 6/01/05 3,075,000
1,300,000 Portland Sewer System Revenue, Series A A+/A1 5.45 6/01/03 1,343,875
1,300,000 Washington County University Sewer Agency (AMBAC
Insured) Aaa/AAA 5.30 10/01/01 1,337,375
-----------
5,756,250
-----------
RHODE ISLAND--0.4%
800,000 Pawtucket G.O. Bonds (FGIC Insured) Aaa/AAA 5.25 4/15/01 818,000
-----------
TENNESSEE--0.8%
300,000 Hamilton County, Series 1994 NR/AA 5.00 7/01/00 303,750
600,000 Metropolitan Government, Nashville & Davidson County,
Electric Revenue, Series B Aa/AA 5.63 5/15/03 621,750
900,000 Shelby County G.O. Refunding Bonds, Series A Aa+/AA 5.30 3/01/98 914,625
-----------
1,840,125
-----------
TEXAS--13.0%
700,000 Arlington Permanent Improvement Refunding Bonds Aa/AA 4.80 8/15/01 702,625
500,000 Austin Public Improvement Refunding Bonds Aa/AA 4.50 9/01/98 502,500
1,100,000 Austin Utility System Revenue Refunding Comb., Series
A A/A 5.00 5/15/01 1,098,625
500,000 Austin Utility System Revenue Refunding Comb., Series
A (AMBAC Insured) Aaa/AAA 6.50 11/15/03 543,125
900,000 Colorado River Municipal Water District (AMBAC
Insured) Aaa/AAA 5.00 1/01/04 892,125
2,000,000 Dallas-Fort Worth International Airport Revenue Bonds
(MBIA Insured) Aaa/AAA 4.75 11/01/01 1,995,000
1,000,000 Dallas G.O. Refunding Bonds Aaa/AA1 5.20 2/15/98 1,013,750
2,400,000 Dallas Waterworks & Sewer System Revenue Refunding
Bonds Aa/AA 4.50 4/01/00 2,397,000
900,000 Garland G.O. Refunding Bonds Aa/AA 5.50 8/15/99 924,750
900,000 Houston Refunding , Series 1993D Aa-/AA 4.70 3/01/01 897,750
2,500,000 Houston Water & Sewer System Revenue, Series A (MBIA
Insured) Aaa/AAA 5.80 12/01/04 2,606,250
400,000 Lower Co. River Authority Revenue Refunding Bonds Aa-/AA 6.90 1/01/01 410,216
400,000 Lower Co. River Authority Revenue, Prerefunded
1/01/97 @ 102 Aaa/AAA 7.00 1/01/03 411,888
1,100,000 San Antonio Electric & Gas Revenue Refunding Bonds Aa/AA1 4.00 2/01/00 1,076,625
1,000,000 San Antonio Electric & Gas Revenue Refunding, Libor
Reserve 2 Aa/AA1 5.20 2/01/01 1,016,250
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
41
<PAGE> 562
PILOT INTERMEDIATE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's/S&P
Principal Ratings Maturity Value
Amount Unaudited Rate Date (Note 2)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TEXAS(continued)
$1,100,000 San Antonio Electric & Gas Revenue Refunding, Libor
Reserve 2 Aa/AA1 5.20 % 2/01/01 $ 1,115,125
2,200,000 Texas A & M University Revenue Refunding Bonds Aa/AA 5.95 5/15/05 2,318,250
1,880,000 Texas A & M University Revenue Refunding Bonds Aa/AA 5.00 5/15/02 1,887,050
900,000 Texas State Pub. Fin. Authority, Series B Aa/AA 5.00 10/01/01 915,750
900,000 Texas State Refunding, Series A Aa/AA 5.70 10/01/03 945,000
1,100,000 Texas State Superconducting, 1992 C Aa/AA 5.35 4/01/01 1,133,000
300,000 University of Texas, Permanent Fund, Revenue
Refunding Bond Aaa/AAA 6.70 7/01/05 329,250
1,100,000 University of Texas, Revenue Refunding Bond Aa+/AA1 5.10 8/15/99 1,116,500
2,000,000 University of Texas, Permanent University Revenue
Fund Aaa/AAA 5.00 7/01/01 2,027,500
300,000 University of Texas, Revenue Refunding Bond Aa+/AA1 5.20 8/15/00 305,625
-----------
28,581,529
-----------
UTAH--2.0%
300,000 Davis County School District G.O. Bonds, Preref.
12/01/01 @ 100 (FGIC Insured) Aaa/AAA 6.45 6/01/02 323,250
2,000,000 Intermountain Power Agency Obligation Aaa/AAA 5.05 7/01/01 2,020,000
900,000 Intermountain Pwr. Agy., Pwr. Supply Revenue
Refunding, Series B Aa-/AA 5.20 7/01/98 912,375
1,100,000 Utah State G.O. Bonds, Series A & B Aaa/AAA 4.40 7/01/99 1,101,375
-----------
4,357,000
-----------
VIRGINIA--2.5%
1,620,000 Chesapeake Bay Bridge & Tunnel Revenue Bonds (FGIC
Insured) Aaa/AAA 5.10 7/01/01 1,644,300
1,100,000 Fairfax County Refunding, Series A Aaa/AAA 4.70 6/01/00 1,104,125
1,000,000 Norfolk G.O. Bonds Aa/AA 5.25 6/01/01 1,023,750
700,000 Norfolk G.O. Refunding Bonds, Series A Aa/AA 4.60 6/01/01 697,375
1,100,000 Prince William County Refunding, Series C Aa/AA 4.50 8/01/01 1,093,125
-----------
5,562,675
-----------
WASHINGTON--9.4%
600,000 King County Refunding, Series A Aa+/AA1 5.25 12/01/01 616,500
2,500,000 King County Refunding, Series C Aa+/AA1 5.63 6/01/02 2,606,250
1,195,000 King County School District # 415 Aaa/AAA 5.10 6/01/04 1,193,506
3,000,000 Pierce County School District Refunding Aaa/AAA 5.00 12/01/03 3,022,500
1,500,000 Snohomish County School District 103 Aaa/AAA 5.15 6/01/05 1,501,875
300,000 Snohomish County School District 2, Series A (MBIA
Insured) Aaa/AAA 6.80 6/01/03 325,500
400,000 Spokane G.O. Aa/AA 8.50 1/01/00 446,000
800,000 Tacoma Electric System Revenue Refunding Bonds (FGIC
Insured) Aaa/AAA 5.50 1/01/01 821,000
2,500,000 Tacoma Electric System Revenue Refunding, Series B
(AMBAC Insured) Aaa/AAA 5.90 1/01/05 2,600,000
600,000 Tacoma Sewer Revenue Refunding, Series B (FGIC
Insured) Aaa/AAA 5.50 12/01/03 616,500
1,000,000 Tacoma, Series A A+/A1 5.75 7/01/02 1,037,500
700,000 Washington State Public Power Supply, Nuclear Project
No. 1, Series C Aa/AA1 7.25 7/01/97 716,275
600,000 Washington State Public Power Supply, Nuclear Project
No. 1, Series C Aa/AA1 7.30 7/01/98 626,250
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
42
<PAGE> 563
PILOT INTERMEDIATE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's/S&P
Principal Ratings Maturity Value
Amount Unaudited Rate Date (Note 2)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WASHINGTON(continued)
$ 300,000 Washington State Public Power Supply, Nuclear Project
No. 3, Series B Aa/AA1 7.10 % 7/01/98 $ 312,375
600,000 Washington State Refunding Aa/AA 4.80 9/01/98 606,000
900,000 Washington State Refunding, Series R 92C Aa/AA 5.60 9/01/01 934,875
600,000 Washington State, Prerefunded 6/01/98 @ 100 Aa/AAA 7.30 6/01/00 631,500
900,000 Washington State, Series 93A Aa/AA 5.25 10/01/00 920,250
500,000 Washington State, Series B Aa/AA 6.30 6/01/02 531,250
600,000 Yakima County School District No. 7 (MBIA Insured) Aaa/AAA 5.50 12/01/03 624,000
-----------
20,689,906
-----------
WISCONSIN--3.9%
800,000 Milwaukee County, Series 1994A Aa-/A1 5.00 12/01/00 807,000
300,000 Milwaukee Metropolitan Sewer District, Series A Aa/AA 7.00 9/01/00 324,750
400,000 Milwaukee Metropolitan Sewer District, Series A Aa/AA 6.70 10/01/00 429,000
600,000 Milwaukee Refunding, Series 1992 Aa+/AA1 5.70 6/01/99 619,500
300,000 Milwaukee, Series BZ Aa+/AA1 6.38 6/15/03 319,500
3,070,000 Sun Prairie Area School District, G.O. Aaa/AAA 5.50 4/01/03 3,150,587
600,000 Wisconsin State G.O., Series A Aa/AA 5.75 5/01/00 622,500
300,000 Wisconsin State G.O., Series D Aa/AA 6.00 5/01/00 313,875
900,000 Wisconsin State Refunding, Series 1 Aa/AA 5.10 11/01/01 915,750
1,100,000 Wisconsin State Refunding, Series 3 Aa/AA 4.25 11/01/99 1,093,125
-----------
8,595,587
-----------
TOTAL MUNICIPAL BONDS (cost $210,853,987) 216,448,153
-----------
</TABLE>
<TABLE>
<CAPTION>
Shares
(000)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TAX-EXEMPT MONEY MARKET MUTUAL FUND--3.9%
8,469 Federated Tax Exempt Obligation Fund (cost $8,469,127) 8,469,127
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--102.4%(cost $219,323,114) 224,917,280
LIABILITIES IN EXCESS OF OTHER ASSETS--(2.4%) (5,251,796)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS--100.0% $219,665,484
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
AMBAC -- AMBAC Indemnity Corporation
FGIC -- Financial Guaranty Insurance Corporation
MBIA -- Municipal Bond Insurance Association
* Variable rate securities having liquidity sources through bank letters of
credit or other credit and/or liquidity agreements. The interest rate, which
will change periodically, is based upon bank prime rates or an index of
market interest rates. The rate reflected on the Schedule of Portfolio
Investments is the rate in effect at August 31, 1996.
** When issued securities
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
43
<PAGE> 564
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL
GROWTH AND EQUITY CAPITALIZATION
INCOME FUND INCOME FUND EQUITY FUND
------------ ------------ -------------------
<S> <C> <C> <C>
ASSETS:
Investment in securities, at value...................................... $186,010,757 $132,895,704 $63,641,193
Repurchase agreements, at cost.......................................... 4,525,004 5,899,701 11,512,003
- -----------------------------------------------------------------------------------------------------------------------------
Total (cost $169,362,628; $120,936,301; and $74,195,855;
respectively).......................................................... 190,535,761 138,795,405 75,153,196
Cash.................................................................... 659 860 1,677
Dividends receivable.................................................... 443,091 607,775 32,478
Interest receivable..................................................... 658 42,775 1,676
Receivable for Portfolio shares sold.................................... 364,624 117,229 200,058
Receivable from brokers from investments sold........................... -- 2,652 --
Deferred organization costs and other assets............................ 68,080 64,667 26,046
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS............................................................ 191,412,873 139,631,363 75,415,131
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Advisory fees payable................................................... 80,629 55,529 45,426
Administration fees payable............................................. 17,794 12,721 --
Distribution expenses payable (Class A Shares).......................... 969 343 528
Distribution expenses payable (Class B Shares).......................... 3,221 2,492 1,464
Payable to brokers for investments purchased............................ -- 3,866,900 218,007
Dividends payable....................................................... 378,279 436,971 35,159
Payable for Portfolio shares redeemed................................... -- 60,331 86,341
Custodian fees payable.................................................. 6,974 3,633 2,597
Net variation margin on open futures contracts.......................... -- -- 34,616
Other accrued expenses.................................................. 60,431 74,571 17,925
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES....................................................... 548,297 4,513,491 442,063
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS.............................................................. $190,864,576 $135,117,872 $74,973,068
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
($1.00 PAR VALUE, UNLIMITED NUMBER OF SHARES AUTHORIZED):
PILOT SHARES:
Net assets.............................................................. $182,379,130 $130,278,087 $70,483,423
Shares of beneficial interest issued and outstanding.................... 14,134,853 10,526,776 6,617,289
Net asset value......................................................... $12.90 $12.38 $10.65
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES:
Net assets.............................................................. $ 4,667,227 $ 1,639,657 $ 2,611,194
Shares of beneficial interest issued and outstanding.................... 361,868 131,637 245,417
Net asset value......................................................... $12.90 $12.46 $10.64
- -----------------------------------------------------------------------------------------------------------------------------
Sales charge--4.50%, 4.50%, and 4.50%, respectively, of offering
price.................................................................. 0.61 0.59 0.50
- -----------------------------------------------------------------------------------------------------------------------------
Maximum offering price.................................................. $13.51 $13.05 $11.14
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES:
Net assets.............................................................. $ 3,818,219 $ 3,200,128 $ 1,878,451
Shares of beneficial interest issued and outstanding.................... 295,864 257,156 176,356
Net asset value......................................................... $12.91 $12.44 $10.65
- -----------------------------------------------------------------------------------------------------------------------------
COMPOSITION OF NET ASSETS:
Shares of beneficial interest, at par................................... $ 14,792,585 $ 10,915,569 $ 7,039,062
Additional paid-in capital.............................................. 146,269,265 103,004,683 66,723,981
Undistributed net investment income..................................... 22,405 126,759 7,331
Accumulated undistributed net realized gains from investment and futures
transactions........................................................... 8,607,188 3,211,757 581,207
Net unrealized appreciation from investments and futures................ 21,173,133 17,859,104 621,487
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS, AUGUST 31, 1996............................................. $190,864,576 $135,117,872 $74,973,068
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
44
<PAGE> 565
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERMEDIATE INTERMEDIATE
U.S. GOVERNMENT U.S. GOVERNMENT MUNICIPAL MUNICIPAL
SECURITIES FUND SECURITIES FUND BOND FUND BOND FUND
---------------- ---------------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS:
Investment in securities, at value.................... $141,924,090 $225,267,475 $188,716,068 $224,917,280
Repurchase agreements, at cost........................ 3,118,222 2,907,839 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total (cost $146,519,391; $231,910,918; $181,116,525;
and $219,323,114, respectively)...................... 145,042,312 228,175,314 188,716,068 224,917,280
Cash.................................................. 454 423 -- --
Dividends receivable.................................. -- -- -- --
Interest receivable................................... 2,613,646 3,811,094 2,878,528 2,822,964
Receivable for Portfolio shares sold.................. 91,400 131,000 290,500 333,800
Receivable from brokers from investments sold......... -- -- -- --
Deferred organization costs and other assets.......... 64,099 65,629 64,968 66,263
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS.......................................... 147,811,911 232,183,460 191,950,064 228,140,307
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Advisory fees payable................................. 48,619 68,610 73,263 74,237
Administration fees payable........................... 13,717 21,646 17,984 20,494
Distribution expenses payable (Class A Shares)........ 138 197 378 140
Distribution expenses payable (Class B Shares)........ 933 -- 1,052 --
Payable to brokers for investments purchased.......... -- -- 7,425,535
Dividends payable..................................... 694,730 1,042,589 812,893 832,232
Payable for Portfolio shares redeemed................. 25,090 30,380 242 36,000
Custodian fees payable................................ 3,723 4,543 4,361 3,243
Net variation margin on open futures contracts........ -- -- -- --
Other accrued expenses................................ 89,492 53,541 87,247 82,942
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES..................................... 876,442 1,221,506 997,420 8,474,823
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS............................................ $146,935,469 $230,961,954 $190,952,644 $219,665,484
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE
PER SHARE:
($1.00 PAR VALUE, UNLIMITED NUMBER OF SHARES
AUTHORIZED):
PILOT SHARES:
Net assets............................................ $145,065,550 $230,030,254 $187,939,314 $218,901,820
Shares of beneficial interest issued and
outstanding.......................................... 13,780,940 22,639,312 17,593,520 21,164,250
Net asset value....................................... $10.53 $10.16 $10.68 $10.34
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES:
Net assets............................................ $ 632,434 $ 931,700 $ 1,754,563 $ 763,664
Shares of beneficial interest issued and
outstanding.......................................... 60,030 91,731 164,350 73,742
Net asset value....................................... $10.54 $10.16 $10.68 $10.36
- ---------------------------------------------------------------------------------------------------------------------------------
Sales charge--4.50%, 4.00%, 4.50%, and 4.00%,
respectively, of offering price...................... 0.50 0.42 0.50 0.43
- ---------------------------------------------------------------------------------------------------------------------------------
Maximum offering price................................ $11.04 $10.58 $11.18 $10.79
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES:
Net assets............................................ $ 1,237,485 $ -- $ 1,258,767 $ --
Shares of beneficial interest issued and
outstanding.......................................... 117,601 -- 118,533 --
Net asset value....................................... $10.52 -- $10.62 --
- ---------------------------------------------------------------------------------------------------------------------------------
COMPOSITION OF NET ASSETS:
Shares of beneficial interest, at par................. $ 13,958,571 $ 22,731,043 $ 17,876,403 $ 21,237,992
Additional paid-in capital............................ 127,511,360 208,830,182 164,275,240 192,309,747
Undistributed net investment income................... 22,072 22,072 (151,486) 22,150
Accumulated undistributed net realized gains from
investment and futures transactions.................. 6,920,545 3,114,261 1,352,944 501,429
Net unrealized appreciation (depreciation) from
investments and futures.............................. (1,477,079) (3,735,604) 7,599,543 5,594,166
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, AUGUST 31, 1996........................... $146,935,469 $230,961,954 $190,952,644 $219,665,484
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
45
<PAGE> 566
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Statements of Operations
For the year ended August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EQUITY
GROWTH AND INCOME SMALL CAPITALIZATION
INCOME FUND FUND EQUITY FUND(a)
----------- ----------- --------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends (net of foreign taxes of $10,028 on Growth and Income
Fund)................................................................ $3,727,607 $4,929,581 $ 103,779
Interest............................................................... 211,409 564,455 537,785
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME........................................................... 3,939,016 5,494,036 641,564
- -----------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Advisory fees.......................................................... 1,184,210 910,255 310,841
Administration fees.................................................... 174,389 134,044 34,284
Distribution expenses (Class A Shares)................................. 5,586 2,101 1,958
Distribution expenses (Class B Shares)................................. 22,266 16,984 6,106
Accounting Fees........................................................ 8,139 6,374 4,253
Audit fees............................................................. 16,754 21,726 13,423
Transfer agent fees and expenses....................................... 35,640 32,690 10,567
Custodian fees and expenses............................................ 48,804 49,386 32,617
Reports to shareholders................................................ 12,167 9,249 3,050
Registration fees...................................................... 48,875 51,393 47,814
Amortization of organization expenses.................................. 20,496 19,764 5,391
Legal fees............................................................. 6,914 4,840 3,333
Trustees' fees......................................................... 6,357 5,598 2,581
Other expenses......................................................... 19,209 18,135 9,754
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES......................................................... 1,609,806 1,282,539 485,972
- -----------------------------------------------------------------------------------------------------------------------------
Less: Fee waivers and expense reimbursements by advisor, administrator,
and distributor...................................................... (423,606 ) (355,773 ) (166,248)
- -----------------------------------------------------------------------------------------------------------------------------
NET EXPENSES........................................................... 1,186,200 926,766 319,724
- -----------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME.................................................. 2,752,816 4,567,270 321,840
- -----------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAINS FROM INVESTMENTS:
Net realized gains from investment and futures transactions............ 9,243,395 4,887,676 581,207
Net change in unrealized appreciation from investments and futures..... 8,360,600 7,360,212 621,487
- -----------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAINS FROM INVESTMENTS AND FUTURES......... 17,603,995 12,247,888 1,202,694
- -----------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................... $20,356,811 $16,815,158 $1,524,534
- -----------------------------------------------------------------------------------------------------------------------------
<FN>
(a) For the period from December 12, 1995 (commencement of operations) through
August 31, 1996.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
46
<PAGE> 567
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Statements of Operations
For the year ended August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERMEDIATE INTERMEDIATE
U.S. GOVERNMENT U.S. GOVERNMENT MUNICIPAL MUNICIPAL
SECURITIES FUND SECURITIES FUND BOND FUND BOND FUND
--------------- --------------- ---------- ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest.................................................. $ 8,777,414 $12,820,252 $9,969,995 $10,889,785
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME.............................................. 8,777,414 12,820,252 9,969,995 10,889,785
- -------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Advisory fees............................................. 770,623 1,128,188 931,305 1,144,620
Administration fees....................................... 155,600 227,769 187,073 229,870
Distribution expenses (Class A Shares).................... 816 1,811 2,213 884
Distribution expenses (Class B Shares).................... 7,222 -- 7,906 --
Accounting fees........................................... 6,085 9,528 17,183 20,241
Audit fees................................................ 17,098 20,752 19,752 31,088
Transfer agent fees and expenses.......................... 32,574 33,032 33,340 38,096
Custodian fees and expenses............................... 43,336 38,604 42,672 37,676
Reports to shareholders................................... 10,203 15,834 12,731 15,326
Registration fees......................................... 57,766 63,069 74,591 77,961
Amortization of organization expenses..................... 19,764 19,764 19,764 19,764
Legal fees................................................ 5,343 10,879 7,474 10,761
Trustees' fees............................................ 7,207 9,615 9,478 12,714
Other expenses............................................ 22,271 10,407 3,513 3,377
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES............................................ 1,155,908 1,589,252 1,368,995 1,642,378
- -------------------------------------------------------------------------------------------------------------------------------
Less: Fee waivers and expense reimbursements by advisor,
administrator, and distributor.......................... (237,673) (421,581) (190,712 ) (322,971)
- -------------------------------------------------------------------------------------------------------------------------------
NET EXPENSES.............................................. 918,235 1,167,671 1,178,283 1,319,407
- -------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME..................................... 7,859,179 11,652,581 8,791,712 9,570,378
- -------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED LOSSES FROM INVESTMENTS:
Net realized gains from investment and futures
transactions............................................ 6,920,545 3,434,313 1,327,403 626,264
Net change in unrealized depreciation from investments and
futures................................................. (9,917,288) (8,921,949) (1,391,889) (3,240,645)
- -------------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSSES FROM INVESTMENTS....... (2,996,743) (5,487,636) (64,486 ) (2,614,381)
- -------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS...... $ 4,862,436 $ 6,164,945 $8,727,226 $ 6,955,997
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
47
<PAGE> 568
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH AND INCOME FUND EQUITY INCOME FUND
----------------------------------------- ------------------
FOR THE PERIOD
NOVEMBER 7, 1994
FOR THE YEAR ENDED THROUGH AUGUST 31, FOR THE YEAR ENDED
AUGUST 31, 1996 1995(a) AUGUST 31, 1996
------------------ ------------------- ------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income........................ $ 2,752,816 $ 1,410,693 $ 4,567,270
Net realized gains from investment and
futures transactions....................... 9,243,395 2,531,612 4,887,676
Net change in unrealized appreciation from
investments and futures.................... 8,360,600 12,812,533 7,360,212
- -------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations..................................... 20,356,811 16,754,838 16,815,158
- -------------------------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment
income:
Pilot Shares................................. (2,705,578) (1,405,927) (4,386,503)
Class A Shares............................... (35,542) (2,695) (29,116)
Class B Shares............................... (18,351) (2,071) (46,964)
- -------------------------------------------------------------------------------------------------------------------
Total dividends to shareholders from net
investment income.............................. (2,759,471) (1,410,693) (4,462,583)
- -------------------------------------------------------------------------------------------------------------------
Dividends to shareholders from net realized
gains:
Pilot Shares................................. (3,103,049) -- (2,661,530)
Class A Shares............................... (26,472) -- (10,717)
Class B Shares............................... (32,042) -- (28,820)
- -------------------------------------------------------------------------------------------------------------------
TOTAL DIVIDENDS TO SHAREHOLDERS FROM NET
REALIZED GAINS................................. (3,161,563) -- (2,701,067)
- -------------------------------------------------------------------------------------------------------------------
Portfolio share transactions:
Proceeds from shares issued.................. 86,745,491 108,627,918 35,891,753
Dividends reinvested......................... 1,030,725 29,706 408,568
Cost of shares redeemed...................... (22,128,731) (13,220,455) (10,464,963)
- -------------------------------------------------------------------------------------------------------------------
Net increase in net assets from Portfolio share
transactions................................... 65,647,485 95,437,169 25,835,358
- -------------------------------------------------------------------------------------------------------------------
Total increase.................................. 80,083,262 110,781,314 35,486,866
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of period............................. 110,781,314 -- 99,631,006
- -------------------------------------------------------------------------------------------------------------------
End of period(b)................................ $190,864,576 $ 110,781,314 $135,117,872
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
SMALL CAPITALIZATION
EQUITY INCOME FUND EQUITY FUND
------------------ --------------------
FOR THE PERIOD FOR THE PERIOD
NOVEMBER 7, 1994 DECEMBER 12, 1995
THROUGH AUGUST 31, THROUGH AUGUST 31,
1995(a) 1996(a)
------------------- --------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income........................ $ 2,906,445 $ 321,840
Net realized gains from investment and
futures transactions....................... 1,025,148 581,207
Net change in unrealized appreciation from
investments and futures.................... 10,498,892 621,487
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations..................................... 14,430,485 1,524,534
- -----------------------------------------------------------------------------------------------
Dividends to shareholders from net investment
income:
Pilot Shares................................. (2,899,282) (310,641)
Class A Shares............................... (2,859) (5,306)
Class B Shares............................... (4,304) (1,071)
- -----------------------------------------------------------------------------------------------
Total dividends to shareholders from net
investment income.............................. (2,906,445) (317,018)
- -----------------------------------------------------------------------------------------------
Dividends to shareholders from net realized
gains:
Pilot Shares................................. -- --
Class A Shares............................... -- --
Class B Shares............................... -- --
- -----------------------------------------------------------------------------------------------
TOTAL DIVIDENDS TO SHAREHOLDERS FROM NET
REALIZED GAINS................................. -- --
- -----------------------------------------------------------------------------------------------
Portfolio share transactions:
Proceeds from shares issued.................. 97,830,026 75,500,924
Dividends reinvested......................... 11,124 61,309
Cost of shares redeemed...................... (9,734,184) (1,796,681)
- -----------------------------------------------------------------------------------------------
Net increase in net assets from Portfolio share
transactions................................... 88,106,966 73,765,552
- -----------------------------------------------------------------------------------------------
Total increase.................................. 99,631,006 74,973,068
- -----------------------------------------------------------------------------------------------
NET ASSETS
Beginning of period............................. -- --
- -----------------------------------------------------------------------------------------------
End of period(b)................................ $99,631,006 $ 74,973,068
- -----------------------------------------------------------------------------------------------
<FN>
(a) Period from commencement of operations.
(b) Includes undistributed net investment income of $22,405, $0, $126,759, $0
and $7,331, respectively.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
48
<PAGE> 569
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERMEDIATE
U.S. GOVERNMENT SECURITIES FUND U.S. GOVERNMENT SECURITIES FUND
---------------------------------------- ----------------------------------------
FOR THE PERIOD FOR THE PERIOD
NOVEMBER 7, 1994 NOVEMBER 7, 1994
FOR THE YEAR ENDED THROUGH AUGUST 31, FOR THE YEAR ENDED THROUGH AUGUST 31,
AUGUST 31, 1996 1995(a) AUGUST 31,1996 1995(a)
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income.................. $ 7,859,179 $ 6,679,639 $ 11,652,581 $ 6,702,977
Net realized gains from investment
transactions......................... 6,920,545 5,611,049 3,434,313 603,070
Net change in unrealized appreciation
from investments..................... (9,917,288) 8,440,209 (8,921,949) 5,186,345
- ------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations............................... 4,862,436 20,730,897 6,164,945 12,492,392
- ------------------------------------------------------------------------------------------------------------------------------
Dividends to shareholders from net
investment income:
Pilot Shares........................... (7,807,800) (6,676,446) (11,613,105) (6,696,515)
Class A Shares......................... (17,876) (1,568) (39,476) (6,462)
Class B Shares......................... (33,503) (1,625) -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total dividends to shareholders from net
investment income........................ (7,859,179) (6,679,639) (11,652,581) (6,702,977)
- ------------------------------------------------------------------------------------------------------------------------------
Dividends to shareholders from net realized
gains:
Pilot Shares........................... (5,585,839) -- (920,212) --
Class A Shares......................... (6,785) -- (2,910) --
Class B Shares......................... (18,425) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total dividends to shareholders from net
realized gains........................... (5,611,049) -- (923,122) --
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio share transactions:
Proceeds from shares issued............ 35,505,082 132,691,392 106,677,263 175,708,067
Proceeds from shares issued to
shareholders in reinvestment of
dividends............................ 318,249 6,753 434,942 37,493
Cost of shares redeemed................ (17,773,679) (9,255,794) (35,679,621) (15,594,847)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets from Portfolio
share transactions....................... 18,049,652 123,442,351 71,432,584 160,150,713
- ------------------------------------------------------------------------------------------------------------------------------
Total increase............................. 9,441,860 137,493,609 65,021,826 165,940,128
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of period........................ 137,493,609 -- 165,940,128 --
- ------------------------------------------------------------------------------------------------------------------------------
End of period(b)........................... $146,935,469 $137,493,609 $230,961,954 $165,940,128
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Period from commencement of operations.
(b) Includes undistributed net investment income of $22,072, $0, $22,072 and $0,
respectively.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
49
<PAGE> 570
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERMEDIATE
MUNICIPAL BOND FUND MUNICIPAL BOND FUND
---------------------------------------- ----------------------------------------
FOR THE PERIOD FOR THE PERIOD
NOVEMBER 7, 1994 NOVEMBER 7, 1994
FOR THE YEAR ENDED THROUGH AUGUST 31, FOR THE YEAR ENDED THROUGH AUGUST 31,
AUGUST 31, 1996 1995(a) AUGUST 31, 1996 1995(a)
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income................. $ 8,791,712 $ 6,200,580 $ 9,570,378 $ 6,846,081
Net realized gains from investment
transactions........................ 1,327,403 333,880 626,264 333,078
Net change in unrealized appreciation
from investments.................... (1,391,889) 8,991,432 (3,240,645) 8,834,811
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations.............................. 8,727,226 15,525,892 6,955,997 16,013,970
- ----------------------------------------------------------------------------------------------------------------------------------
Dividends to shareholders from net
investment income:
Pilot Shares.......................... (8,564,690) (6,191,471) (9,554,825) (6,841,198)
Class A Shares........................ (43,027) (5,179) (15,553) (4,883)
Class B Shares........................ (32,509) (3,930) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total dividends to shareholders from net
investment income....................... (8,640,226) (6,200,580) (9,570,378) (6,846,081)
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions in excess of net investment
income:
Pilot Shares.......................... (150,162) -- -- --
Class A Shares........................ (754) -- -- --
Class B Shares........................ (570) -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions in excess of net
investment income....................... (151,486) -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Dividends to shareholders from net
realized gains:
Pilot Shares.......................... (478,674) -- (457,443) --
Class A Shares........................ (1,491) -- (392) --
Class B Shares........................ (1,732) -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total dividends to shareholders from net
realized gains.......................... (481,897) -- (457,835) --
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio share transactions:
Proceeds from shares issued........... 57,950,418 152,916,334 61,811,217 218,287,220
Proceeds from shares issued to
shareholders in reinvestment of
dividends........................... 122,269 11,041 136,276 9,603
Cost of shares redeemed............... (18,294,826) (10,531,521) (35,651,223) (31,023,282)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets from Portfolio
share transactions...................... 39,777,861 142,395,854 26,296,270 187,273,541
- ----------------------------------------------------------------------------------------------------------------------------------
Total increase............................ 39,231,478 151,721,166 23,224,054 196,441,430
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of period....................... 151,721,166 -- 196,441,430 --
- ----------------------------------------------------------------------------------------------------------------------------------
End of period(b).......................... $190,952,644 $151,721,166 $219,665,484 $196,441,430
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Period from commencement of operations.
(b) Includes undistributed (distributions in excess of) net investment income of
($151,486), $0, $22,150 and $0, respectively.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
50
<PAGE> 571
Financial Pilot Growth and
Direction Income Fund
[logo]
Pilot Equity
Income Fund
Pilot Small
Capitalization
Equity Fund
Pilot U.S. Government
Securities Fund
Pilot Intermediate
U.S. Government
Securities Fund
Pilot Municipal
Bond Fund
Pilot Intermediate
Municipal Bond Fund
Annual Report
August 31, 1996
The
Pilot
Funds
NOT May Lose Value
FDIC No Bank Guarantee
INSURED No Govt. Guarantee
Distributor: Pilot Funds Distributors, Inc. 10/96
<PAGE> 572
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Notes to Financial Statements
August 31, 1996
- --------------------------------------------------------------------------------
1. GENERAL
The Pilot Growth and Income Fund, Pilot Equity Income Fund, Pilot Small
Capitalization Equity Fund, Pilot U.S. Government Securities Fund, Pilot
Intermediate U.S. Government Securities Fund, Pilot Municipal Bond Fund, and
Pilot Intermediate Municipal Bond Fund are separate portfolios (individually, a
"Portfolio"; collectively, the "Portfolios") of The Pilot Funds (the "Fund").
The Fund is a Massachusetts business trust registered under the Investment
Company Act of 1940, as amended (the 1940 Act), as an open-end management
investment company. All of the Portfolios are diversified. The Fund currently
offers twelve portfolios. The accompanying financial statements are those of the
seven Portfolios only.
The Portfolios each offer three classes of shares: Pilot Shares, Class A Shares,
and Class B Shares. Each class of shares is substantially the same, except that
Class A Shares and Class B Shares bear the fees payable under the Fund's
Distribution Plan. Small Capitalization Equity Fund commenced operations on
December 12, 1995, by offering Pilot Shares, Class A Shares, and Class B Shares.
Class B Shares of Intermediate U.S. Government Securities Fund and Intermediate
Municipal Bond Fund have not been sold as of August 31, 1996.
The Fund entered into an Agreement and Plan of Reorganization (the
"Reorganization Agreement") with FUNDS IV Trust ("FUNDS IV"), a Massachusetts
business trust. The agreement contemplates that each of six investment
portfolios of FUNDS IV will transfer substantially all of the assets and
liabilities of FUNDS IV to a corresponding Portfolio of the Fund. The Board of
Trustees of FUNDS IV and the FUNDS IV shareholders, at a special shareholder
meeting held September 17, 1996, each approved the Reorganization Agreement
which became effective October 21, 1996. Pursuant to the Reorganization
Agreement, the Value Stock Appreciation Fund of FUNDS IV and the Stock
Appreciation Fund of FUNDS IV transferred substantially all of their assets and
liabilities to the Pilot Growth and Income Fund. All such transfers were in
exchange for Pilot Shares of each respective Portfolio.
Growth and Income Fund seeks capital appreciation and current income. Equity
Income Fund seeks current income and, secondarily, capital appreciation. Small
Capitalization Equity Fund seeks long-term capital growth. Municipal Bond Fund
and Intermediate Municipal Bond Fund seek current income free of federal income
tax as is consistent with preservation of capital.
At a meeting of the Board of Trustees on February 20, 1996, the Trustees of the
Fund approved a change in investment objectives and policies of the U.S.
Government Securities Fund and the Intermediate U.S. Government Securities Fund.
Effective June 1, 1996, these Portfolios will seek total return and preservation
of capital. These Portfolios will emphasize the capital appreciation component
of total return.
Boatmen's Trust Company ("Boatmen's") serves as the Fund's investment adviser
and custodian. BISYS Fund Services Limited Partnership ("BISYS") serves as the
Fund's administrator and Pilot Funds Distributor Inc. (the "Distributor"), an
affiliate of BISYS, serves as the distributor of the Fund's shares. BISYS is a
wholly-owned subsidiary of The BISYS Group, Inc.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies consistently
followed by the Portfolios in the preparation of the financial statements. The
policies are in conformity with generally accepted accounting principles. The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of income and expenses
for the period. Actual results could differ from those estimates.
- --------------------------------------------------------------------------------
51
<PAGE> 573
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
August 31, 1996
- --------------------------------------------------------------------------------
A. Investment Valuation
Portfolio securities are valued as follows: (a) securities that are traded on
any U.S. or foreign stock exchange or the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") are valued at the last sale price
on that exchange or NASDAQ prior to the Portfolio'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
Portfolio'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 Fund; these 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 Portfolio's valuation time; and (d) all other securities
and assets, for which quotations supplied are not representative of current
market values or for which quotations are not readily available, are valued at
fair value as determined in good faith pursuant to procedures established by the
Trustees of the Fund. Money market instruments held by a Portfolio with a
remaining maturity of sixty days or less are valued at amortized cost which
approximates market value.
B. Repurchase Agreements
The custodian for the Portfolios and other banks acting in a subcustodian
capacity take possession of the collateral pledged for investments in repurchase
agreements. The underlying collateral is valued daily on a mark-to-market basis
to determine that the value, including accrued interest, is not less than 102%
of the repurchase price, including accrued interest. In the event of the
seller's default of the obligation to repurchase, the Portfolios have the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
C. Futures Contracts
The Small Capitalization Equity Fund may enter into futures contracts on
securities and futures based on securities indices. The Portfolio 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 involve brokerage costs, which may be less than 1% of the
contract price, and require the Portfolio to deposit as margin into a segregated
custodial account an amount of cash or liquid securities equal to approximately
2% to 5% of the value of each futures contract. The Portfolio's position in the
futures market will be marked-to-market on a daily basis; the Portfolio 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, the
Portfolio may instead make or take delivery of the underlying securities
whenever it appears economically advantageous for it to do so.
Futures contracts on securities indices do not require the physical delivery of
securities, but merely provide for gains and losses resulting from changes in
the market value of a 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.
D. Securities Transactions and Investment Income
Securities transactions are recorded on the trade date. Realized gains and
losses from sales of investments are
- --------------------------------------------------------------------------------
52
<PAGE> 574
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
August 31, 1996
- --------------------------------------------------------------------------------
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date. Interest income, including accretion of discounts and
amortization of premiums on investments, is accrued daily. Investment income of
each Portfolio is allocated to the separate classes of shares based upon their
relative net assets.
E. Dividends to Shareholders
Dividends of U.S. Government Securities Fund, Intermediate U.S. Government
Securities Fund, Municipal Bond Fund and Intermediate Municipal Bond Fund are
declared daily to shareholders of record at the close of business on the day of
declaration and paid monthly. Dividends of Growth and Income Fund, Equity Income
Fund, and Small Capitalization Equity Fund are declared and paid monthly to
shareholders of record at the close of business on the day of declaration.
Distributions of net realized gains, if any, will be paid at least annually.
However, to the extent that net realized gains of a Portfolio can be offset by
capital loss carryovers, such gains will not be distributed. Dividends and
distributions are recorded by the Portfolios on the ex-dividend date.
F. Federal Taxes
It is each Portfolio's policy to comply or continue to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute each year substantially all of its investment
company taxable and tax-exempt income to its shareholders. Accordingly, no
federal tax provisions are required.
G. Organizational Expenses
Costs incurred by the Fund in connection with its organization and registration
of shares have been deferred and are amortized using the straight line method
over a period not to exceed five years from the commencement of the public
offering of shares of the Portfolios.
H. Expenses
Expenses incurred by the Fund that do not specifically relate to an individual
portfolio of the Fund are allocated to the portfolios based on each portfolio's
relative net assets. The expenses of each Portfolio (other than expenses
incurred pursuant to the Distribution Plans) are allocated to the separate
classes of shares based upon their relative net assets.
3. AGREEMENTS AND TRANSACTIONS WITH AFFILIATES
A. Advisory Agreement
Boatmen's is the investment adviser for each Portfolio pursuant to separate
Investment Advisory Agreements and is responsible for managing the investment
operations of the Portfolios. For its services, Boatmen's is entitled to a fee,
accrued daily and paid monthly, at an annual rate equal to 1.00% of the average
daily net assets of the Small Capitalization Equity Fund; 0.75% of the average
daily net assets of each of the Growth and Income Fund and the Equity Income
Fund; and 0.55% of the average daily net assets of each of the U.S. Government
Securities Fund, the Intermediate U.S. Government Securities Fund, the Municipal
Bond Fund and the Intermediate Municipal Bond Fund.
Boatmen's has voluntarily agreed to limit the fees it receives from each
Portfolio to the following annual rates: 0.75% of the average daily net assets
of the Small Capitalization Equity Fund; 0.50% of the average daily net assets
of each of the Growth and Income Fund and the Equity Income Fund; 0.45% of the
average daily net assets of the Municipal Bond Fund; 0.40% of the average daily
net assets of each of the U.S. Government Securities Fund and the Intermediate
Municipal Bond Fund; and 0.35% of the average daily net assets of the
Intermediate U.S. Government Securities Fund.
Additionally, Boatmen's has voluntarily agreed to reimburse each of the
Portfolio's expenses to the extent that such expenses exceed the following
limits as percentages of average daily net assets (excluding distribution fees
for Class A Shares and Class B Shares): 1.00% of the Small Capitalization Equity
Fund; 0.75% of the Growth and Income Fund and Equity Income Fund; 0.70% of the
Municipal Bond Fund; 0.65% of the U.S. Government Securities Fund and the
Intermediate Municipal Bond Fund; and 0.60% of
- --------------------------------------------------------------------------------
53
<PAGE> 575
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
August 31, 1996
- --------------------------------------------------------------------------------
the Intermediate U.S. Government Securities Fund. For the period ended August
31, 1996, Boatmen's waived fees and/or reimbursed expenses in the following
amounts:
<TABLE>
<S> <C>
Growth and Income Fund.......................... $395,403
Equity Income Fund.............................. 314,788
Small Capitalization Equity Fund................ 131,964
U.S. Government Securities Fund................. 215,525
Intermediate U.S. Government Securities Fund.... 410,883
Municipal Bond Fund............................. 170,380
Intermediate Municipal Bond Fund................ 312,584
</TABLE>
B. Administration Agreement
The Portfolios have entered into an Administration Agreement with BISYS.
Pursuant to the terms of this agreement, BISYS is responsible for assisting in
all aspects of the operations of each of the Portfolios. For its services, BISYS
is entitled to a fee, accrued daily and paid monthly, at an annual rate of
0.115% of the first $1.5 billion of the aggregate average net assets of all of
the portfolios constituting the Fund, plus 0.11% of the next $1.5 billion of
such assets, plus 0.1075% of such assets in excess of $3.0 billion. For the
period ended August 31, 1996, BISYS voluntarily waived a portion of its fees as
administrator. The fee waivers were equal to the following amounts:
<TABLE>
<S> <C>
Growth and Income Fund.......................... $ 28,203
Equity Income Fund.............................. 40,985
Small Capitalization Equity Fund................ 34,284
U.S. Government Securities Fund................. 22,148
Intermediate U.S. Government Securities Fund.... 10,698
Municipal Bond Fund............................. 20,332
Intermediate Municipal Bond Fund................ 10,387
</TABLE>
C. Distribution Agreements
The Portfolios adopted Distribution Plans pursuant to Rule 12b-1 under the 1940
Act for its Class A and Class B Shares. Under these Plans, the Distributor
receives payments for distribution and support services. The Distribution Plan
for Class A Shares authorizes payments to the Distributor and service
organizations for personal services provided to Class A shareholders and/or the
maintenance of shareholder accounts.
Payments under the Distribution Plan for Class A Shares may not exceed 0.25% (on
an annual basis) of the average daily net assets of the shares to which such
Plan relates. If more money is due the Distributor than it can collect in any
month because of this limitation, the unpaid amount may be carried forward until
it can be paid. Similarly, if in any month the Distributor does not expend the
entire amount to which it would otherwise be entitled, this amount may be used
as a credit and drawn upon to permit the payment of expenses in the future.
Neither of these amounts, however, is payable beyond the fiscal year in which
they accrue.
Distribution payments under the Distribution Plan for Class B Shares may not
exceed 1.00% (on an annual basis) of the average daily net assets of the Class B
Shares. Not more than 0.25% of such value will be used to compensate service
organizations for personal services provided to Class B shareholders and/or the
maintenance of shareholder accounts. Not more than 0.75% of such value will be
paid to the Distributor as reimbursement for commissions and transaction fees as
well as expenses related to other promotional and distribution activities.
Actual distribution expenses paid by the Distributor with respect to Class B
Shares for any given year may exceed the distribution fees and contingent
deferred sales charges received with respect to those Shares. These excess
expenses may be reimbursed by a Portfolio or its Class B Shareholders out of
contingent deferred sales charges and distribution payments in future years as
long as the Distribution Plan for Class B Shares is in effect.
The Distributor has voluntarily agreed to limit the fees it receives on Class A
Shares from the following Portfolios to the following annual rates: 0.20 of 1%
of the average daily net asset value of the U.S. Government Securities Fund and
the Municipal Bond Fund; and 0.15 of 1% of the average daily net asset value of
the Intermediate U.S. Government Securities Fund and the Intermediate Municipal
Bond Fund.
- --------------------------------------------------------------------------------
54
<PAGE> 576
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
August 31, 1996
- --------------------------------------------------------------------------------
D. Transfer Agent Agreement
BISYS Fund Services, Inc. (the "Transfer Agent"), a wholly-owned subsidiary of
The BISYS Group, Inc. is the transfer agent for all classes of the Portfolios.
Prior to April 26, 1996, Primary Fund Services Corporation was the transfer
agent for Class A Shares and Class B Shares. The Portfolios incurred fees and
expenses in total of $215,939 for the transfer agent services provided.
E. Custodian Agreement
Boatmen's is the custodian responsible for holding the investments purchased by
the Portfolios. In connection with the Custodian Agreement with Boatmen's, the
Portfolios incurred expenses of approximately $30,000. Prior to May 6, 1996,
State Street Bank & Trust served the Portfolios as custodian.
F. Fund Accounting Agreement
BISYS is the fund accounting agent for all of the Portfolios. Pursuant to the
terms of the Fund Accounting Agreement, BISYS is entitled to a fee accrued daily
and paid monthly, at an annual rate of 0.012% of average daily net assets. The
fee will not exceed, on an annual basis, $200,000 per Portfolio.
4. SECURITIES TRANSACTIONS
For the period ended August 31, 1996, the cost of purchases and the proceeds
from sales or maturities of portfolio securities (excluding short-term
investments) were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
------------ -----------
<S> <C> <C>
Growth and Income Fund........... $117,794,227 $55,614,116
Equity Income Fund............... 65,105,311 40,400,061
Small Capitalization Equity
Fund*.......................... 72,981,687 11,266,268
U.S. Government Securities
Fund**......................... 123,641,507 119,484,052
Intermediate U.S. Government
Securities Fund***............. 207,038,208 137,075,977
Municipal Bond Fund.............. 65,201,881 29,616,725
Intermediate Municipal Bond
Fund........................... 50,762,613 23,229,579
<FN>
- ---------------
* For the period December 12, 1995 (commencement of operations) to August 31,
1996.
** 100% of purchases and sales are of U.S. Government securities.
*** Includes purchases and sales of U.S. Government Securities of $197,089,919
and $96,330,665, respectively.
</TABLE>
At August 31, 1996, the cost of each of the following Portfolio's securities for
federal income tax purposes was substantially the same as for financial
reporting purposes. Accordingly, the Portfolio's had the following amounts of
net unrealized appreciation and depreciation:
<TABLE>
<CAPTION>
APPRECIATION DEPRECIATION NET
------------ ------------ -----------
<S> <C> <C> <C>
Growth and Income
Fund(a)........... $25,789,059 $(4,622,198) $21,166,861
Equity Income
Fund.............. 19,360,553 (1,501,449) 17,859,104
Small Capitalization
Equity Fund(a).... 5,666,240 (4,708,899) 957,341
U.S. Government
Securities Fund... 879,479 (2,356,558) (1,477,079)
Intermediate U.S.
Government
Securities Fund
(a)............... 785,746 (4,657,385) (3,871,639)
Municipal Bond
Fund.............. 8,589,036 (989,493) 7,599,543
Intermediate
Municipal Bond
Fund.............. 5,985,263 (391,097) 5,594,166
<FN>
- ---------------
(a) Cost of securities for financial reporting purposes differs from cost basis
for federal income tax purposes by the amount of losses recognized for
financial reporting purposes in excess of federal income tax reporting of
$6,272, $1,195, and $136,035, respectively for Growth and Income Fund, Small
Capitalization Equity Fund and Intermediate U.S. Government Securities Fund.
</TABLE>
- --------------------------------------------------------------------------------
55
<PAGE> 577
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
August 31, 1996
- --------------------------------------------------------------------------------
5. PORTFOLIO SHARE TRANSACTIONS
Transactions in shares of the Portfolios are as follows (000 omitted):
<TABLE>
<CAPTION>
EQUITY
GROWTH AND INCOME FUND INCOME FUND
---------------------------------- ------------
YEAR NOVEMBER 7, 1994 YEAR
ENDED THROUGH ENDED
AUGUST 31, AUGUST 31, AUGUST 31,
1996 1995(a) 1996
------------ ----------------- ------------
<S> <C> <C> <C>
CAPITAL TRANSACTIONS:
Pilot Shares:
Proceeds from shares issued............................. $ 79,546 $ 107,297 $ 31,927
Dividends reinvested.................................... 920 25 298
Cost of shares redeemed................................. (21,705) (13,174) (10,117)
-------- --------- --------
Change in net assets from Pilot share transactions...... $ 58,761 $ 94,148 $ 22,108
======== ========= ========
Class A Shares(b):
Proceeds from shares issued............................. $ 4,152 $ 695 $ 1,498
Dividends reinvested.................................... 61 3 37
Cost of shares redeemed................................. (348) (29) (233)
-------- --------- --------
Change in net assets from Class A share transactions.... $ 3,865 $ 669 $ 1,302
======== ========= ========
Class B Shares(c):
Proceeds from shares issued............................. $ 3,048 $ 636 $ 2,467
Dividends reinvested.................................... 50 2 74
Cost of shares redeemed................................. (76) (18) (116)
-------- --------- --------
Change in net assets from Class B share transactions.... $ 3,022 $ 620 $ 2,425
======== ========= ========
SHARE TRANSACTIONS:
Pilot Shares:
Issued.................................................. 6,320 10,643 2,586
Reinvested.............................................. 74 2 25
Redeemed................................................ (1,702) (1,202) (820)
-------- --------- --------
Change in Pilot Shares.................................. 4,692 9,443 1,791
======== ========= ========
Class A Shares(b):
Issued.................................................. 324 62 120
Reinvested.............................................. 5 - 3
Redeemed................................................ (27) (2) (18)
-------- --------- --------
Change in Class A Shares................................ 302 60 105
======== ========= ========
Class B Shares(c):
Issued.................................................. 241 58 198
Reinvested.............................................. 4 -- 6
Redeemed................................................ (6) (1) (9)
-------- --------- --------
Change in Class B Shares................................ 239 57 195
======== ========= ========
<CAPTION>
SMALL
CAPITALIZATION
EQUITY FUND
-----------------
NOVEMBER 7, 1994 DECEMBER 12, 1995
THROUGH THROUGH
AUGUST 31, AUGUST 31,
1995(a) 1996(a)
----------------- -----------------
<S> <C> <C>
CAPITAL TRANSACTIONS:
Pilot Shares:
Proceeds from shares issued............................. $96,783 $70,989
Dividends reinvested.................................... 5 56
Cost of shares redeemed................................. (9,671) (1,743)
------- -------
Change in net assets from Pilot share transactions...... $87,117 $69,302
======= =======
Class A Shares(b):
Proceeds from shares issued............................. $ 300 $ 2,643
Dividends reinvested.................................... 3 4
Cost of shares redeemed................................. (3) (42)
------- -------
Change in net assets from Class A share transactions.... $ 300 $ 2,605
======= =======
Class B Shares(c):
Proceeds from shares issued............................. $ 746 $ 1,869
Dividends reinvested.................................... 4 1
Cost of shares redeemed................................. (60) (11)
------- -------
Change in net assets from Class B share transactions.... $ 690 $ 1,859
======= =======
SHARE TRANSACTIONS:
Pilot Shares:
Issued.................................................. 9,631 6,777
Reinvested.............................................. - 6
Redeemed................................................ (895) (166)
------- -------
Change in Pilot Shares.................................. 8,736 6,617
======= =======
Class A Shares(b):
Issued.................................................. 27 249
Reinvested.............................................. - --
Redeemed................................................ - (4)
------- -------
Change in Class A Shares................................ 27 245
======= =======
Class B Shares(c):
Issued.................................................. 68 177
Reinvested.............................................. - (0)
Redeemed................................................ (5) (1)
------- -------
Change in Class B Shares................................ 63 176
======= =======
<FN>
- ---------------
(a) Period from commencement of operations.
(b) Class A Shares commenced operations February 7, 1995 for the Growth and
Income Fund and the Equity Income Fund.
(c) Class B Shares commenced operations November 11, 1994 and January 12, 1995
for the Growth and Income Fund and the Equity Income Fund, respectively.
</TABLE>
- ------------------------------------------------------------------------------
56
<PAGE> 578
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
August 31, 1996
- ----------------------------------------------------------
- ----------------------------------------------------------
<TABLE>
<CAPTION>
INTERMEDIATE
U.S. GOVERNMENT U.S. GOVERNMENT MUNICIPAL
SECURITIES FUND SECURITIES FUND BOND FUND
----------------------------- ----------------------------- ----------
NOVEMBER 7, 1994 NOVEMBER 7, 1994
YEAR ENDED THROUGH YEAR ENDED THROUGH YEAR ENDED
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1996 1995(a) 1996 1995(a) 1996
---------- ---------------- ---------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
Pilot Shares:
Proceeds from shares issued........... $ 33,655 $132,462 $106,052 $175,132 $ 55,601
Dividends reinvested.................. 261 3 416 34 66
Cost of shares redeemed............... (17,579) (9,250) (35,490) (15,511) (18,138)
---------- -------- ---------- ------- --------
Change in net assets from Pilot
share transactions.................. $ 16,337 $123,215 $ 70,978 $159,655 $ 37,529
======== ======== ======== ======== ========
Class A Shares(b):
Proceeds from shares issued........... $ 690 $ 88 $ 625 $ 577 $ 1,462
Dividends reinvested.................. 16 2 19 3 32
Cost of shares redeemed............... (143) (6) (189) (84) (70)
---------- -------- ---------- ------- --------
Change in net assets from Class A
share transactions.................. $ 563 $ 84 $ 455 $ 496 $ 1,424
======== ======== ======== ======== ========
Class B Shares(c):
Proceeds from shares issued........... $ 1,160 $ 141 $ -- $ -- $ 888
Dividends reinvested.................. 42 2 -- -- 24
Cost of shares redeemed............... (52) -- -- -- (87)
---------- -------- ---------- ------- --------
Change in net assets from Class B
share transactions.................. $ 1,150 $ 143 $ -- $ -- $ 825
======== ======== ======== ======== ========
SHARE TRANSACTIONS:
Pilot Shares:
Issued................................ 3,091 13,109 10,181 17,349 5,168
Reinvested............................ 23 -- 39 3 6
Redeemed.............................. (1,590) (852) (3,421) (1,512) (1,684)
---------- -------- ---------- ------- --------
Change in Pilot Shares................ 1,524 12,257 6,799 15,840 3,490
======== ======== ======== ======== ========
Class A Shares(b):
Issued................................ 64 8 60 56 136
Reinvested............................ 1 -- 2 -- 3
Redeemed.............................. (13) -- (18) (8) (6)
---------- -------- ---------- ------- --------
Change in Class A Shares.............. 52 8 44 48 133
======== ======== ======== ======== ========
Class B Shares(c):
Issued................................ 106 13 -- -- 82
Reinvested............................ 4 -- -- -- 2
Redeemed.............................. (5) -- -- -- (8)
---------- -------- ---------- ------- --------
Change in Class B Shares.............. 105 13 -- -- 76
======== ======== ======== ======== ========
<CAPTION>
INTERMEDIATE
MUNICIPAL BOND FUND
-----------------------------
NOVEMBER 7, 1994 NOVEMBER 7, 1994
THROUGH YEAR ENDED THROUGH
AUGUST 31, AUGUST 31, AUGUST 31,
1995(a) 1996 1995(a)
---------------- ---------- ----------------
<S> <<C> <C> <C>
CAPITAL TRANSACTIONS:
Pilot Shares:
Proceeds from shares issued........... $152,081 $ 60,965 $218,063
Dividends reinvested.................. 4 129 9
Cost of shares redeemed............... (10,476) (35,332) (31,023)
------- ---------- -------
Change in net assets from Pilot
share transactions.................. 141,609 25,762 187,049
================ ========= ================
Class A Shares(b):
Proceeds from shares issued........... $ 334 $ 846 $ 225
Dividends reinvested.................. 5 7 --
Cost of shares redeemed............... -- (319) --
------- ---------- -------
Change in net assets from Class A
share transactions.................. $ 339 $ 534 $ 225
================ ========= ================
Class B Shares(c):
Proceeds from shares issued........... $ 501 $ -- $ --
Dividends reinvested.................. 2 -- --
Cost of shares redeemed............... (55) -- --
------- ---------- -------
Change in net assets from Class B
share transactions.................. $ 448 $ -- $ --
================ ========= ================
SHARE TRANSACTIONS:
Pilot Shares:
Issued................................ 15,116 5,830 21,735
Reinvested............................ -- 12 1
Redeemed.............................. (1,013) (3,381) (3,033)
------- ---------- -------
Change in Pilot Shares................ 14,103 2,461 18,703
================ ========= ================
Class A Shares(b):
Issued................................ 32 81 22
Reinvested............................ -- 1 --
Redeemed.............................. -- (30) --
------- ---------- -------
Change in Class A Shares.............. 32 52 22
================ ========= ================
Class B Shares(c):
Issued................................ 47 -- --
Reinvested............................ -- -- --
Redeemed.............................. (5) -- --
------- ---------- -------
Change in Class B Shares.............. 42 -- --
================ ========= ================
<FN>
- ---------------
(a) Period from commencement of operations.
(b) Class A Shares commenced operations February 7, 1995, December 21, 1994,
February 7, 1995 and November 18, 1994 for the U.S. Government Securities
Fund, Intermediate U.S. Government Securities Fund, Municipal Bond Fund, and
Intermediate Municipal Bond Fund, respectively.
(c) Class B Shares commenced operations November 10, 1994 and December 27, 1994
for the U.S. Government Securities Fund and Municipal Bond Fund,
respectively.
</TABLE>
- ----------------------------------------------------------
- ----------------------------------------------------------
57
<PAGE> 579
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
August 31, 1996
- --------------------------------------------------------------------------------
6. FEDERAL INCOME TAX INFORMATION (UNAUDITED)
At August 31, 1996, none of the Portfolios had any capital loss carryforwards.
Under current tax law, capital losses realized after October 31 may be
deferred and treated as occurring on the first day of the fiscal year ended
August 31, 1997. As of August 31, 1996, the Small Capitalization Equity Fund has
deferred losses of $133,049.
The Municipal Bond Fund and the Intermediate Municipal Bond Fund designate
exempt-interest dividends paid for the taxable year ended August 31, 1996 of
$8,303,039 and $8,400,686, respectively.
For the taxable year ended August 31, 1996, 94.6% and 89.7% of the income
dividends paid by the Growth and Income Fund and the Equity Income Fund,
respectively, qualifies for the dividends received deduction available to
corporations.
- --------------------------------------------------------------------------------
58
<PAGE> 580
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Pilot Growth and Income Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1996 PERIOD ENDED AUGUST 31, 1995
---------------------------- --------------------------
PILOT CLASS A CLASS B PILOT CLASS A CLASS B
SHARES SHARES SHARES SHARES(a) SHARES(b) SHARES(c)
-------- ------- ------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..... $ 11.59 $ 11.58 $ 11.59 $ 10.00 $10.44 $10.08
-------- ------- ------- -------- ------ ------
Investment Activities
Net investment income................ 0.22 0.18 0.09 0.17 0.09 0.08
Net realized and unrealized
gains from investments............. 1.59 1.60 1.60 1.59 1.14 1.51
-------- ------- ------- -------- ------ ------
Total from Investment Activities..... 1.81 1.78 1.69 1.76 1.23 1.59
Distributions
From net investment income........... (0.22) (0.18) (0.09) (0.17) (0.09) (0.08)
From net realized gains.............. (0.28) (0.28) (0.28) -- -- --
-------- ------- ------- -------- ------ ------
Total distributions.................. (0.50) (0.46) (0.37) (0.17) (0.09) (0.08)
-------- ------- ------- -------- ------ ------
Net Asset Value, End of Period........... $ 12.90 $ 12.90 $ 12.91 $ 11.59 $11.58 $11.59
========= ======== ======== ========= ======= =======
Total Return(d).......................... 15.79% 15.57% 14.75% 17.72% 11.78% 15.85%
Ratios/Supplemental Data:
Net Assets at end of period (000).... $182,379 $ 4,667 $ 3,818 $109,423 $ 697 $ 661
Ratio of expenses to average net
assets............................. 0.74% 0.99% 1.74% 0.75%(e) 1.00%(e) 1.75%(e)
Ratio of net investment income to
average net assets................. 1.76% 1.52% 0.76% 1.98%(e) 1.65%(e) 0.94%(e)
Ratio of expenses to average net
assets assuming no waiver or
expense reimbursement.............. 1.01% 1.26% 2.01% 1.15%(e) 1.40%(e) 2.15%(e)
Ratio of net investment income to
average net assets assuming no
waiver or expense reimbursement.... 1.49% 1.25% 0.49% 1.58%(e) 1.25%(e) 0.54%(e)
Portfolio turnover rate(f)........... 36.77% 36.77% 36.77% 28.00% 28.00% 28.00%
Average commission rate paid(g)...... $ 0.0539 $0.0539 $0.0539
<FN>
- ---------------
(a) Pilot Shares commenced activity November 7, 1994.
(b) Class A Shares commenced activity February 7, 1995.
(c) Class B Shares commenced activity November 11, 1994.
(d) Total return excludes sales charge of Class A Shares and Class B Shares,
would have been lower had certain expenses not been reduced during the
periods presented, and is not annualized.
(e) Annualized.
(f) Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing among the classes of shares issued.
(g) The average commission represents the total dollar amount of commissions
paid on portfolio transactions, for the time period of May 4, 1996 to
August 31, 1996, divided by total number of portfolio shares purchased and
sold for which commissions were charged. Disclosure is not required for
prior periods.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
59
<PAGE> 581
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Pilot Equity Income Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1996 PERIOD ENDED AUGUST 31, 1995
------------------------------ --------------------------------------
PILOT CLASS A CLASS B PILOT CLASS A CLASS B
SHARES SHARES SHARES SHARES(a) SHARES(b) SHARES(c)
-------- ------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period............................ $ 11.29 $ 11.36 $ 11.34 $ 10.00 $10.24 $ 9.85
-------- ------- ------- ---------- ---------- ----------
Investment Activities
Net investment income........... 0.46 0.41 0.33 0.35 0.18 0.18
Net realized and unrealized
gains from investments........ 1.38 1.40 1.39 1.29 1.12 1.49
-------- ------- ------- ---------- ---------- ----------
Total from Investment
Activities.................... 1.84 1.81 1.72 1.64 1.30 1.67
Distributions
From net investment income...... (0.45) (0.41) (0.32) (0.35) (0.18) (0.18)
From net realized gains......... (0.30) (0.30) (0.30) -- -- --
-------- ------- ------- ---------- ---------- ----------
Total distributions............. (0.75) (0.71) (0.62) (0.35) (0.18) (0.18)
-------- ------- ------- ---------- ---------- ----------
Net Asset Value, End of Period...... $ 12.38 $ 12.46 $ 12.44 $ 11.29 $11.36 $11.34
========= ======== ======== ========= ========= =========
Total Return(d)..................... 16.49% 16.10% 15.31% 16.69% 12.78% 17.36%
Ratios/Supplemental Data:
Net Assets at end of period
(000)......................... $130,278 $ 1,640 $ 3,200 $ 98,607 $ 311 $ 713
Ratio of expenses to average net
assets........................ 0.75% 1.00% 1.75% 0.75%(e) 1.00%(e) 1.75%(e)
Ratio of net investment income
to average net assets......... 3.78% 3.53% 2.79% 4.12%(e) 3.70%(e) 2.88%(e)
Ratio of expenses to average net
assets assuming no waiver or
expense reimbursement......... 1.04% 1.29% 2.04% 1.14%(e) 1.39%(e) 2.14%(e)
Ratio of net investment income
to average net assets assuming
no waiver or expense
reimbursement................. 3.49% 3.24% 2.50% 3.73%(e) 3.31%(e) 2.49%(e)
Portfolio turnover rate(f)...... 34.48% 34.48% 34.48% 37.00% 37.00% 37.00%
Average commission rate
paid(g)....................... $ 0.0629 $0.0629 $0.0629
<FN>
- ---------------
(a) Pilot Shares commenced activity November 7, 1994.
(b) Class A Shares commenced activity February 7, 1995.
(c) Class B Shares commenced activity January 12, 1995.
(d) Total return excludes sales charge of Class A Shares and Class B Shares,
would have been lower had certain expenses not been reduced during the
periods presented, and is not annualized.
(e) Annualized.
(f) Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing among the classes of shares issued.
(g) The average commission represents the total dollar amount of commissions
paid on portfolio transactions, for the time period of May 4, 1996 to
August 31, 1996, divided by total number of portfolio shares purchased and
sold for which commissions were charged. Disclosure is not required for
prior periods.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
60
<PAGE> 582
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Pilot Small Capitalization Equity Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 12, 1995 TO AUGUST
31, 1996(a)
-----------------------------
PILOT CLASS A CLASS B
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period................................... $ 10.00 $ 10.00 $ 10.00
------- ------ ------
Investment Activities
Net investment income.............................................. 0.09 0.05 0.01
Net realized and unrealized 0.64 0.64 0.65
gains from investments and futures...............................
------- ------ ------
Total from Investment Activities................................... 0.73 0.69 0.66
Distributions
From net investment income......................................... (0.08) (0.05) (0.01)
From net realized gains............................................ -- -- --
------- ------ ------
Total distributions................................................ (0.08) (0.05) (0.01)
------- ------ ------
Net Asset Value, End of Period......................................... $ 10.65 $ 10.64 $ 10.65
======= ====== ======
Total Return(b)........................................................ 7.37% 6.88% 6.65%
Ratios/Supplemental Data:
Net Assets at end of period (000).................................. $70,483 $ 2,611 $ 1,878
Ratio of expenses to average net assets............................ 1.00%(c) 1.25%(c) 2.01%(c)
Ratio of net investment income to average net assets............... 1.06%(c) 0.66%(c) (0.07%)(c)
Ratio of expenses to average net assets 1.54%(c) 1.65%(c) 2.44%(c)
assuming no waiver or expense reimbursement......................
Ratio of net investment income to average net assets 0.52%(c) 0.26%(c) (0.50%)(c)
assuming no waiver or expense reimbursement......................
Portfolio turnover rate(d)......................................... 30.67% 30.67% 30.67%
Average commission rate paid(e).................................... $0.0340 $0.0340 $0.0340
<FN>
- ---------------
(a) Period from commencement of operations.
(b) Total return from date of inception excludes sales charge of Class A Shares
and Class B Shares, would have been lower had certain expenses not been
reduced during the periods presented, and is not annualized.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing among the classes of shares issued.
(e) The average commission represents the total dollar amount of commissions
paid on portfolio transactions, for the time period of May 4, 1996 to
August 31, 1996, divided by total number of portfolio shares purchased and
sold for which commissions were charged. Disclosure is not required for
prior periods.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
61
<PAGE> 583
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Pilot U.S. Government Securities Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1996 PERIOD ENDED AUGUST 31, 1995
------------------------------ -----------------------------------
PILOT CLASS A CLASS B PILOT CLASS A CLASS B
SHARES SHARES SHARES SHARES(a) SHARES(b) SHARES(c)
-------- ------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period............................. $ 11.20 $ 11.19 $ 11.19 $ 10.00 $ 10.48 $ 10.05
-------- ------- ------- --------- --------- ---------
Investment Activities
Net investment income............ 0.61 0.59 0.51 0.56 0.37 0.46
Net realized and unrealized gains
from investments............... (0.22) (0.20) (0.22) 1.20 0.71 1.14
-------- ------- ------- --------- --------- ---------
Total from Investment
Activities..................... 0.39 0.39 0.29 1.76 1.08 1.60
Distributions
From net investment income....... (0.61) (0.59) (0.51) (0.56) (0.37) (0.46)
From net realized gains.......... (0.45) (0.45) (0.45) -- -- --
-------- ------- ------- --------- --------- ---------
Total distributions.............. (1.06) (1.04) (0.96) (0.56) (0.37) (0.46)
-------- ------- ------- --------- --------- ---------
Net Asset Value, End of Period....... $ 10.53 $ 10.54 $ 10.52 $ 11.20 $ 11.19 $ 11.19
========= ======= ======= ========= ======== ========
Total Return(d)...................... 3.46% 3.44% 2.43% 18.03% 10.41% 16.19%
Ratios/Supplemental Data:
Net Assets at end of period
(000).......................... $145,066 $ 632 $ 1,237 $ 137,261 $ 87 $ 146
Ratio of expenses to average net
assets......................... 0.65% 0.85% 1.65% 0.62%(e) 0.82%(e) 1.62%(e)
Ratio of net investment income to
average net assets............. 5.61% 5.44% 4.60% 6.45%(e) 5.76%(e) 5.19%(e)
Ratio of expenses to average net
assets assuming no waiver or
expense reimbursement.......... 0.82% 1.07% 1.82% 0.87%(e) 1.12%(e) 1.87%(e)
Ratio of net investment income to
average net assets assuming no
waiver or expense
reimbursement.................. 5.44% 5.22% 4.43% 6.20%(e) 5.46%(e) 4.94%(e)
Portfolio turnover rate(f)....... 87.18% 87.18% 87.18% 132.00% 132.00% 132.00%
<FN>
- ---------------
(a) Pilot Shares commenced activity November 7, 1994.
(b) Class A Shares commenced activity February 7, 1995.
(c) Class B Shares commenced activity November 10, 1994.
(d) Total return excludes sales charge of Class A Shares and Class B Shares,
would have been lower had certain expenses not been reduced during the
periods presented, and is not annualized.
(e) Annualized.
(f) Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing among the classes of shares issued.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
62
<PAGE> 584
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Pilot Intermediate U.S. Government Securities Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
AUGUST 31, 1996 AUGUST 31, 1995
------------------- ----------------------
PILOT CLASS A PILOT CLASS A
SHARES SHARES SHARES(a) SHARES(b)
-------- ------- -------- ----------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $ 10.44 $ 10.44 $ 10.00 $ 9.98
-------- ------- -------- ----------
Investment Activities
Net investment income.............................. 0.59 0.57 0.56 0.45
Net realized and unrealized gains from
investments...................................... (0.23) (0.23) 0.44 0.46
-------- ------- -------- ----------
Total from Investment Activities................... 0.36 0.34 1.00 0.91
Distributions
From net investment income......................... (0.59) (0.57) (0.56) (0.45)
From net realized gains............................ (0.05) (0.05) -- --
-------- ------- -------- ----------
Total distributions................................ (0.64) (0.62) (0.56) (0.45)
-------- ------- -------- ----------
Net Asset Value, End of Period......................... $ 10.16 $ 10.16 $ 10.44 $10.44
========= ======= ========= =========
Total Return(c)........................................ 3.52% 3.33% 10.21% 9.31%
Ratios/Supplemental Data:
Net Assets at end of period (000).................. $230,030 $ 932 $165,441 $ 499
Ratio of expenses to average net assets............ 0.57% 0.72% 0.57%(d) 0.72%(d)
Ratio of net investment income to average net
assets........................................... 5.68% 5.45% 6.65%(d) 6.27%(d)
Ratio of expenses to average net assets assuming no
waiver or expense reimbursement.................. 0.78% 1.03% 0.87%(d) 1.12%(d)
Ratio of net investment income to average net
assets assuming no waiver or expense
reimbursement.................................... 5.47% 5.14% 6.35%(d) 5.87%(d)
Portfolio turnover rate(e)......................... 73.41% 73.41% 87.00% 87.00%
<FN>
- ---------------
(a) Pilot Shares commenced activity November 7, 1994.
(b) Class A Shares commenced activity December 21, 1994.
(c) Total return excludes sales charge of Class A Shares, would have been lower
had certain expenses not been reduced during the periods presented, and is
not annualized.
(d) Annualized.
(e) Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
63
<PAGE> 585
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Pilot Municipal Bond Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1996 PERIOD ENDED AUGUST 31, 1995
------------------------------ ------------------------------------
PILOT CLASS A CLASS B PILOT CLASS A CLASS B
SHARES SHARES SHARES SHARES(a) SHARES(b) SHARES(c)
-------- ------- ------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period............................. $ 10.70 $10.70 $10.65 $ 10.00 $10.37 $10.02
-------- ------- ------- -------- ---------- ----------
Investment Activities
Net investment income............ 0.57 0.54 0.45 0.48 0.34 0.33
Net realized and unrealized
gains from investments......... 0.01 0.01 -- 0.70 0.33 0.63
-------- ------- ------- -------- ---------- ----------
Total from Investment
Activities..................... 0.58 0.55 0.45 1.18 0.67 0.96
Distributions
From net investment income....... (0.56) (0.53) (0.44) (0.48) (0.34) (0.33)
In excess of net investment
income......................... (0.01) (0.01) (0.01) -- -- --
From net realized gains.......... (0.03) (0.03) (0.03) -- -- --
-------- ------- ------- -------- ---------- ----------
Total distributions.............. (0.60) (0.57) (0.48) (0.48) (0.34) (0.33)
-------- ------- ------- -------- ---------- ----------
Net Asset Value, End of Period....... $ 10.68 $10.68 $10.62 $ 10.70 $10.70 $10.65
========= ======= ======= ========= ========= =========
Total Return(d)...................... 5.44% 5.23% 4.31% 12.00% 6.54% 9.62%
Ratios/Supplemental Data:
Net Assets at end of period
(000).......................... $187,939 $1,755 $1,259 $150,934 $ 340 $ 448
Ratio of expenses to average net
assets......................... 0.69% 0.92% 1.68% 0.67%(e) 0.87%(e) 1.67%(e)
Ratio of net investment income to
average net assets............. 5.20% 4.91% 4.16% 5.63%(e) 5.26%(e) 4.48%(e)
Ratio of expenses to average net
assets assuming no waiver or
expense reimbursement.......... 0.80% 1.08% 1.79% 0.86%(e) 1.11%(e) 1.86%(e)
Ratio of net investment income to
average net assets assuming no
waiver or expense
reimbursement.................. 5.09% 4.75% 4.05% 5.44%(e) 5.02%(e) 4.29%(e)
Portfolio turnover rate(f)....... 18.06% 18.06% 18.06% 10.00% 10.00% 10.00%
<FN>
- ---------------
(a) Pilot Shares commenced activity November 7, 1994.
(b) Class A Shares commenced activity February 7, 1995.
(c) Class B Shares commenced activity December 27, 1994.
(d) Total return excludes sales charge of Class A Shares and Class B Shares,
would have been lower had certain expenses not been reduced during the
periods presented, and is not annualized.
(e) Annualized.
(f) Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing among the classes of shares issued.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
64
<PAGE> 586
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Pilot Intermediate Municipal Bond Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
AUGUST 31, 1996 AUGUST 31, 1995
------------------- ----------------------
PILOT CLASS A PILOT CLASS A
SHARES SHARES SHARES(A) SHARES(B)
-------- ------- -------- ----------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period....................... $ 10.49 $ 10.49 $ 10.00 $ 9.88
-------- ------ -------- ------
Investment Activities
Net investment income.................................. 0.48 0.46 0.41 0.37
Net realized and unrealized gains from investments..... (0.13) (0.11) 0.49 0.61
-------- ------ -------- ------
Total from Investment Activities....................... 0.35 0.35 0.90 0.98
Distributions
From net investment income............................. (0.48) (0.46) (0.41) (0.37)
From net realized gains................................ (0.02) (0.02) -- --
-------- ------ -------- ------
Total distributions.................................... (0.50) (0.48) (0.41) (0.37)
-------- ------ -------- ------
Net Asset Value, End of Period............................. $ 10.34 $ 10.36 $ 10.49 $10.49
======== ====== ======== ======
Total Return(c)............................................ 3.43% 3.45% 9.16% 10.03%
Ratios/Supplemental Data:
Net Assets at end of period (000)...................... $218,902 $ 764 $196,209 $ 232
Ratio of expenses to average net assets................ 0.63% 0.78% 0.58%(d) 0.73%(d)
Ratio of net investment income to average net assets... 4.60% 4.38% 4.90%(d) 4.60%(d)
Ratio of expenses to average net assets assuming no
waiver or expense reimbursement...................... 0.79% 1.03% 0.81%(d) 1.06%(d)
Ratio of net investment income to average net assets
assuming no waiver or expense reimbursement.......... 4.44% 4.13% 4.67%(d) 4.27%(d)
Portfolio turnover rate(e)............................. 11.54% 11.54% 8.00% 8.00%
<FN>
- ---------------
(a) Pilot Shares commenced activity November 7, 1994.
(b) Class A Shares commenced activity November 18, 1994.
(c) Total return excludes sales charge of Class A Shares and Class B Shares,
would have been lower had certain expenses not been reduced during the
periods presented, and is not annualized.
(d) Annualized.
(e) Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
65
<PAGE> 587
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Trustees of the Pilot Growth and Income Fund, Pilot
Equity Income Fund, Pilot Small Capitalization Equity Fund, Pilot U.S.
Government Securities Fund, Pilot Intermediate U.S. Government Securities Fund,
Pilot Municipal Bond Fund and Pilot Intermediate Municipal Bond Fund of The
Pilot Funds:
We have audited the accompanying statements of assets and liabilities of the
Pilot Growth and Income Fund, Pilot Equity Income Fund, Pilot Small
Capitalization Equity Fund, Pilot U.S. Government Securities Fund, Pilot
Intermediate U.S. Government Securities Fund, Pilot Municipal Bond Fund and
Pilot Intermediate Municipal Bond Fund (the "Funds") of The Pilot Funds (a
Massachusetts business trust), including the portfolios of investments as of
August 31, 1996, and the related statements of operations for the period then
ended and the statements of changes in net assets and financial highlights for
the periods presented. These financial statements and financial highlights are
the responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1996 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of the Funds as of August 31, 1996, the results of their operations for
the period then ended, the changes in their net assets and the financial
highlights for the periods presented in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
October 21, 1996
66
<PAGE> 588
PILOT INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
Portfolio of Investments
August 31, 1996
==========================================================
<TABLE>
<CAPTION>
Shares or
Principal Value
Amount Description (Note 2)
<S> <C> <C>
- -------------------------------------------------------------
COMMON STOCKS--94.8%
ARGENTINA PESO--0.3%
Telecommunications--0.3%
269,966 Naviera Perez Comp., Class A* $ 1,532,767
------------
AUSTRALIAN DOLLAR--4.1%
Banking--0.4%
475,000 Commonwealth Bank of Australia 2,574,471
------------
Broadcasting & Publishing--0.5%
565,000 News Corp. Ltd. 3,013,090
------------
Commercial Services--0.8%
140,000 Brambles Industries Ltd. 2,093,600
400,000 Mayne Nickless Ltd. 2,680,694
------------
4,774,294
------------
Energy Sources--0.5%
209,000 Broken Hill Proprietary Co. Ltd. 2,847,628
------------
Entertainment--0.5%
2,000,000 Sydney Harbour Casino Holdings* 2,848,435
------------
Metals & Mining--1.0%
2,070,000 M.I.M. Holdings Ltd. 2,653,317
501,250 Western Mining Corp. 3,490,124
------------
6,143,441
------------
22,201,359
------------
AUSTRIAN SCHILLING--0.4%
Engineering--0.4%
20,000 VA Technologies A.G. 2,561,806
------------
BELGIAN FRANC--0.6%
Retail Stores/Catalog--0.6%
83,000 G.I.B. Holdings NPV 3,671,310
------------
BRITISH POUND STERLING--10.2%
Advertising--0.8%
1,425,000 WPP Group PLC 5,133,871
------------
<CAPTION>
Shares or
Principal Value
Amount Description (Note 2)
- -------------------------------------------------------------
<S> <C> <C>
Banking--1.1%
285,281 Royal Bank of Scotland $ 2,171,506
407,512 Standard Chartered Bank PLC 4,522,285
------------
6,693,791
------------
Chemicals--0.6%
250,000 BOC Group PLC 3,391,711
------------
Commercial Services--1.1%
600,000 Inchcape PLC 2,789,956
961,500 Securicor PLC 4,057,628
------------
6,847,584
------------
Electrical Components & Instruments--0.7%
415,789 Premier Farnell Electronic PLC 4,269,702
------------
Financial Services--0.6%
1,000,000 Invesco PLC 3,766,831
------------
Food & Household Products--0.7%
411,000 Reckitt & Coleman PLC 4,374,698
------------
Leisure & Tourism--0.9%
403,354 Granada Group PLC 5,494,307
------------
Multi-Industry--0.6%
567,638 Morgan Crucible Co., PLC 3,823,912
------------
Oil & Gas Products & Services--0.8%
343,000 Shell Transport & Trading Co. 4,991,177
------------
Pharmaceuticals--0.8%
200,000 Zeneca PLC 4,782,782
------------
Printing & Publishing--1.4%
400,000 Emap PLC 4,451,426
349,000 Reuters Holdings PLC 4,069,335
------------
8,520,761
------------
62,091,127
------------
BRAZILIAN CRUZIERO--0.7%
Home Appliances--0.4%
7,000,000 Brasmotor S.A. 2,134,762
------------
</TABLE>
- ----------------------------------------------------------
See Notes to Financial Statements.
6
<PAGE> 589
PILOT INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
=============================================================
<TABLE>
<CAPTION>
Shares or
Principal Value
Amount Description (Note 2)
<S> <C> <C>
- -------------------------------------------------------------
Telecommunications--0.3%
32,300,000 Telec Brasilieiras S.A. $ 1,958,958
------------
4,093,720
------------
DANISH KRONE--0.3%
Telecommunications--0.3%
32,000 Tele Danmark, Class B 1,579,895
------------
FINNISH MARKKA--0.8%
Airlines--0.3%
250,000 Finnair OY 1,773,466
------------
Forest Products & Paper--0.5%
370,000 Enso Gutzeit OY* 3,162,924
------------
4,936,390
------------
FRENCH FRANC--7.8%
Automotive--0.8%
40,000 Peugeot S.A. 4,588,508
------------
Beverages & Tobacco--0.7%
20,000 LVMH Moet Hennessy 4,220,636
------------
Broadcasting & Publishing--0.6%
33,000 TV Francaise 3,772,465
------------
Building Materials & Components--0.4%
46,000 Lafarge-Coppee 2,547,413
------------
Business & Public Service--0.3%
20,054 Lyonnaise Des Eaux-Dumez 1,760,240
------------
Electronic Products--0.5%
200,000 Unisor Sacilor S.A. 2,749,149
------------
Energy Sources--0.7%
60,000 Societe Elf Aquitaine S.A. 4,376,487
------------
Financial Services--0.8%
50,000 CIE Bancaire 4,954,402
------------
Shares or
Principal Value
Amount Description (Note 2)
- -------------------------------------------------------------
Food & Household Products--0.4%
17,058 Groupe Danone 2,358,244
------------
Health & Personal Care--0.7%
18,500 Roussel-UCLAF $ 4,302,913
------------
Leisure & Tourism--0.6%
31,941 Accor 3,872,509
------------
Merchandising--0.6%
20,231 Castorama Dubois Investments 3,937,276
------------
Office Equipment & Services--0.6%
50,000 Strafor-Facom 3,906,165
------------
47,346,407
------------
GERMAN DEUTSCHEMARK--4.6%
Banking--1.4%
100,000 Deutsche Bank, A.G. 4,958,726
87,900 Deutsche Pfandbrief and Hypo
Bank, A.G. 3,500,419
------------
8,459,145
------------
Chemicals--0.5%
75,000 Henkel Kgaa-Vorzug 3,067,907
------------
Conglomerates--0.5%
13,000 Preussag, A.G. 3,066,588
------------
Construction & Housing--0.5%
38,260 Hochtief, A.G. 1,807,112
4,000 Weru, A.G. 1,393,965
------------
3,201,077
------------
Insurance--0.6%
1,500 Muenchener Rueckversich 3,456,153
------------
Pharmaceuticals--1.1%
100,000 GEHE, A.G. 6,563,139
------------
27,814,009
------------
HONG KONG DOLLAR--5.1%
Banking--1.2%
409,400 HSBC Holdings PLC 7,067,970
------------
</TABLE>
- ----------------------------------------------------------
See Notes to Financial Statements.
7
<PAGE> 590
PILOT INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Shares or
Principal Value
Amount Description (Note 2)
<S> <C> <C>
- -------------------------------------------------------------
Broadcasting & Publishing--0.3%
440,000 Television Broadcasts, Ltd. $ 1,564,772
------------
Business & Public Services--0.7%
1,060,000 Wharf Holdings 4,002,712
------------
Merchandising--0.4%
2,612,000 Giordano International, Ltd. 2,161,816
------------
Multi-Industry--1.7%
650,000 Hutchison Whampoa 3,933,913
450,000 Swire Pacific, Class A, (HKD) 4,000,836
3,400,000 Guangdong Investment 2,440,268
------------
10,375,017
------------
Real Estate--1.0%
1,500,000 Shargri La Asia Ltd. 1,959,197
400,000 Sun Hung Kai Properties, Ltd. 3,905,463
------------
5,864,660
------------
31,036,947
------------
INDONESIAN RUPIAH--0.6%
Beverages & Tobacco--0.3%
464,000 Gudang Garam 1,703,842
------------
Multi-Industry--0.3%
1,550,000 PT Astra International 2,018,574
------------
3,722,416
------------
IRISH PUNT--0.7%
Building Materials & Components--0.7%
404,557 CRH PLC (Dublin Registered) 4,162,953
------------
ITALIAN LIRA--1.5%
Machinery & Engineering--0.4%
660,000 SASIB 2,361,868
------------
Telecommunications--0.7%
1,300,000 Societe Fiananziaria Telefonica 4,135,257
------------
<CAPTION>
Shares or
Principal Value
Amount Description (Note 2)
- -------------------------------------------------------------
Utilities-Electric & Gas--0.5%
200,000 Edison SPA 1,081,529
500,000 Italgas 1,709,770
------------
2,791,299
------------
9,288,424
------------
JAPANESE YEN--28.7%
Appliances & Household Durables--1.7%
400,000 Sharp Corp. $ 6,335,171
800,000 Sanyo Electric Co. 4,125,228
------------
10,460,399
------------
Automobiles--1.2%
300,000 Toyota Motor Corp. 7,237,565
------------
Banking--2.3%
240,000 Sanwa Bank 4,243,091
200,000 Fuji Bank 3,683,239
282,000 Bank of Toyko -- Mitsubishi 5,738,671
------------
13,665,001
------------
Building Materials & Components--0.3%
164,000 INAX Corp. 1,570,533
------------
Business & Public Services--2.8%
209,000 Canon Sales Co., Inc. 5,465,558
100,000 Secom Co., Ltd. 6,399,628
400,000 Toppan Printing Co. 5,046,037
------------
16,911,223
------------
Chemicals--2.3%
860,000 Asahi Chemical Industries 5,780,844
900,000 Dainippon Ink & Chemicals, Inc. 3,928,174
250,000 Shin-Etsu Chemical 4,419,887
------------
14,128,905
------------
Construction & Housing--1.0%
800,000 Mitsubishi Heavy Industries 6,327,805
------------
Electrical & Electronic--2.6%
600,000 Fujitsu 5,408,837
600,000 Hitachi 5,513,809
300,000 Matsushita Electric Industries 5,055,246
------------
15,977,892
------------
</TABLE>
- -------------------------------------------------------------
See Notes to Financial Statements.
8
<PAGE> 591
PILOT INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- -------------------------------------------------------------
<TABLE>
<CAPTION>
Shares or
Principal Value
Amount Description (Note 2)
<S> <C> <C>
=============================================================
Electrical Components & Instruments--2.6%
100,000 TDK Corp. $ 5,764,269
63,000 Kyocera Corp. 4,281,213
44,000 Keyence Corp. 5,591,157
------------
15,636,639
------------
Food & Household Products--1.5%
194,000 House Foods Industry 3,537,014
483,000 KAO Corp. 5,737,289
------------
9,274,303
------------
Health & Personal Care--1.7%
200,000 Hoya Corp. 6,353,587
266,000 Daiichi Pharmaceutical Co., Ltd. 4,065,928
------------
10,419,515
------------
Industrial Components--0.7%
400,000 NGK Spark Plug Co. 4,125,228
------------
Insurance--1.1%
600,000 Tokio Marine & Fire 6,850,825
------------
Merchandising--1.4%
96,500 York-Benimaru Co. 3,794,243
250,000 Marui Co., Ltd. 4,903,312
------------
8,697,555
------------
Recreation & Other Consumer Goods--1.4%
500,000 Citizen Watch Co. 4,019,335
400,000 Nikon Corp. 4,346,222
------------
8,365,557
------------
Steel--0.9%
1,650,000 Nippon Steel 5,226,516
------------
Telecommunications--0.9%
400,000 Nippon Comsys Corp. 5,303,864
------------
Tools-Hand/Machine--0.7%
260,000 Mori Seiki Co. 4,309,390
------------
<CAPTION>
Shares or
Principal Value
Amount Description (Note 2)
=============================================================
Transportation-Road/Rail--1.6%
600,000 Nippon Express Co. 5,287,290
225,000 Shimano, Inc. 4,164,362
------------
9,451,652
------------
173,940,367
------------
MALAYSIAN RINGGIT--1.0%
Diversified--0.1%
130,000 Sime Darby $ 440,493
------------
Financial --0.1%
440,000 Public Bank Berhad 843,374
------------
Leisure--0.2%
145,000 Genting Berhad 1,069,856
------------
Machinery & Engineering--0.4%
300,000 United Engineers Berhad 2,129,286
------------
Telecommunications--0.2%
160,000 Telekom Malaysia Berhad 1,411,503
------------
5,894,512
------------
MEXICAN PESO--0.2%
Diversified--0.0%
108,500 Invercorpaction S.A.* 13,729
------------
Financial Services--0.2%
600,000 Grupo Financiero Banamexico --
Class B* 1,293,789
------------
1,307,518
------------
NETHERLANDS GUILDER--6.0%
Appliances & Household Durables--0.6%
115,760 Philips Electronics NV 3,920,107
------------
Broadcasting & Publishing--1.1%
50,574 Wolters Kluwer CVA 6,365,169
------------
Business & Public Services--2.1%
248,128 Getronics NV 6,051,091
92,000 Randstad Holdings 6,919,623
------------
12,970,714
------------
</TABLE>
- -------------------------------------------------------------
See Notes to Financial Statements.
9
<PAGE> 592
PILOT INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- -------------------------------------------------------------
<TABLE>
<CAPTION>
Shares or
Principal Value
Amount Description (Note 2)
<S> <C> <C>
=============================================================
Energy--0.6%
25,000 Royal Dutch Petroleum Co. NV $ 3,742,556
------------
Manufacturing-Capital Goods--0.3%
20,000 DSM NV 1,847,132
------------
Merchandising--1.3%
138,162 Koninklijke Ahold 7,739,505
------------
36,585,183
------------
NORWEGIAN KRONE--0.3%
Machinery & Engineering--0.3%
28,000 Kvaerner Industries, A.S. Class B 917,777
25,074 Kvaerner Industries, A.S. Class A 894,273
------------
1,812,050
------------
PHILIPPINE PESO--0.2%
Banking--0.1%
25,600 Philippine National Bank* 427,562
------------
Utilities-Electric & Gas--0.1%
84,500 Manila Electric Co., Class B 648,387
------------
1,075,949
------------
POLISH ZLOTY--0.1%
Construction & Housing--0.1%
280,000 Mostostal-Export, S.A. 797,512
------------
PORTUGUESE ESCUDA--0.9%
Banking--0.1%
40,000 Banco Espirito Santo* 665,127
------------
Building Materials & Components--0.2%
32,000 Cimpor Cimentos de Portugal, S.A. 718,971
44,000 Corticeira Amorim Gestora 505,180
------------
1,224,151
------------
Engineering--0.1%
62,000 Engil-SGPS 561,293
------------
Food & Household Products--0.1%
9,100 Estabelev Jeronimo Martins 846,651
------------
<CAPTION>
Shares or
Principal Value
Amount Description (Note 2)
- -------------------------------------------------------------
Insurance--0.2%
61,000 Companhia de Seguros Mundial
Confianca S.A.* $ 507,159
32,600 Companhia de Seguros Tranquilidade 638,878
------------
1,146,037
------------
General Merchandise--0.0%
9,000 Modelo Continente Sociedade
Gestora 260,112
------------
Telecommunications--0.1%
29,000 Portugal Telecom S.A. 776,714
------------
5,480,085
------------
SINGAPOREAN DOLLAR--3.2%
Banking--0.6%
290,687 Development Bank of Singapore,
Ltd. 3,408,352
------------
Food & Household Products--0.5%
43,200 Fraser & Neave, Warrants, 5/7/98* 204,146
300,000 Fraser & Neave 3,027,224
------------
3,231,370
------------
Leisure & Tourism--0.2%
185,000 Genting Berhad 1,367,225
------------
Machinery & Engineering--0.6%
450,000 Keppel 3,421,616
------------
Multi-Industry--0.5%
1,200,000 Singapore Technologies Industrial
Corp. 2,848,148
------------
Printing & Publishing--0.3%
120,000 Singapore Press Holdings 2,080,683
------------
Real Estate--0.5%
375,000 City Developments 3,117,827
------------
19,475,221
------------
SPANISH PESETA--2.4%
Banking--0.5%
75,000 Corporacion Bancaria de Espana 3,100,883
------------
</TABLE>
- -------------------------------------------------------------
See Notes to Financial Statements.
10
<PAGE> 593
PILOT INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- -------------------------------------------------------------
<TABLE>
<CAPTION>
Shares or
Principal Value
Amount Description (Note 2)
<S> <C> <C>
=============================================================
Energy Sources--0.5%
100,000 Respol S.A. $ 3,250,829
------------
Utilities-Electric & Gas--1.4%
20,000 Gas Natural SDG S.A. 3,838,617
76,000 Empresa Nacional Electricidad 4,430,723
------------
8,269,340
------------
14,621,052
------------
SWEDISH KRONA--1.0%
Machine Construction & Manufacturing--0.7%
200,000 Atlas Copco Atiebolag, Class A 4,005,871
------------
Telecommunications--0.4%
100,000 Tlelfonaktiebolaget LM Ericsson 2,335,498
------------
6,341,369
------------
SWISS FRANC--4.1%
Business & Consumer Services--0.6%
1,500 SGS Holdings 3,513,368
------------
Diversified--0.8%
4,000 ABB A.G. 4,940,008
------------
Financial Services--0.9%
40,000 CS Holdings 4,158,424
------------
Food & Household Products--0.7%
3,856 Nestle, S.A. 4,523,898
------------
Health & Personal Care--1.2%
970 Roche Holdings, Warrants* 26,526
970 Roche Holdings, A.G. 7,407,214
------------
7,433,740
------------
24,569,438
------------
THAI BAHT--1.0%
Banking--0.3%
160,000 Bangkok Bank (FGN) 2,023,311
------------
Building Materials & Components--0.1%
168,000 T.P.I. Polene (FOR) 770,123
------------
Shares or
Principal Value
Amount Description (Note 2)
=============================================================
Utilities-Electric & Gas--0.2%
440,000 Electricity Generating $ 1,304,087
------------
Real Estate--0.3%
147,200 Land & House 2,117,395
------------
6,214,916
------------
TURKISH LIRE--0.3%
Appliances & Household Durables--0.1%
4,818,325 PT Arcelik, A.S. 427,604
------------
Building Materials & Components--0.1%
16,579,163 Trakya Cam Sananyll 773,879
------------
Food & Household Products--0.1%
704,700 Migros Turk 560,413
------------
1,761,896
------------
UNITED STATES DOLLAR--8.1%
Automobiles--0.2%
85,500 Tata Engineering & Locomotion
Co.(GDR) 1,421,010
------------
Banking--0.9%
36,000 Banco Frances (ADR) 832,500
88,000 Banco Industrial Colombiano,
S.A.(ADR) 1,628,000
------------
85,000 Banco O'Higgins (ADR) 1,880,625
10,000 Banque Marocaine (ADR)* 130,000
40,000 Credicorp Ltd. 780,000
------------
5,251,125
------------
Beverages & Tobacco--0.3%
182,300 Quilmes Industrial (ADR) 1,823,000
------------
Closed-End Mutual Funds--0.8%
798,600 Five Arrow Chile Investment Trust 2,343,891
55,000 Korea Fund, Inc. 1,051,875
120,000 Republic of China Fund* 1,320,000
------------
4,715,766
------------
Construction--0.1%
115,000 Cemex S.A. (ADR)* 842,755
------------
</TABLE>
- -------------------------------------------------------------
See Notes to Financial Statements.
11
<PAGE> 594
PILOT INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- --------------------------------------------------------------
<TABLE>
<CAPTION>
Shares or
Principal Value
Amount Description (Note 2)
==============================================================
<S> <C> <C>
Electrical & Electronics--0.7%
190,000 Elektrim, S.A. (ADR) $ 1,871,500
40,000 Korea Electric (ADR) 850,000
38,350 Manila Electric Co. (GDS) 1,418,950
3,930 Samsung Electric Co. (GDS) 107,707
10,661 Samsung Electric Co. (NV) (GDR) 247,868
------------
4,496,025
------------
Engineering--0.2%
198,000 Advanced Semiconducting
Engineering (GDR) 1,410,750
------------
Entertainment--0.2%
49,300 Grupo Televisa (GDR) 1,497,488
------------
Financial Services--0.2%
183,318 Corporacion Financiera (ADR) 1,407,424
------------
Food & Household Products--0.2%
222,937 Mavesa, S.A. (ADR) 1,126,411
------------
Health & Personal Care--0.1%
80,000 Barlow, Ltd. (ADR) 736,256
------------
Merchandising--0.3%
1,030,000 Cifra, S.A. de C.V. (ADR)* 1,596,500
------------
Metals-Iron/Steel--0.1%
35,000 Pohang Iron & Steel, Ltd. (ADR) 765,625
------------
Metal-Non Ferrous--0.5%
60,000 Hindalco Industries (GDR) 2,010,000
270,000 Siderurgica Venezolana (ADR) 871,101
2,881,101
------------
Mining--0.1%
50,000 Impala Platinum Holdings (ADR) 662,945
------------
Multi-Industry--0.4%
72,000 Corimon CASACA (ADR)* 50,400
110,552 Desc, S.A. de C.V. (ADR)* 2,266,316
------------
2,316,716
------------
<CAPTION>
Shares or
Principal Value
Amount Description (Note 2)
- --------------------------------------------------------------
Consumer Goods--0.9%
30,000 Gedeon Richter (ADR) 1,704,000
50,000 Luxottica Group (ADR) 3,818,750
------------
5,522,750
------------
Telecommunications--0.7%
36,700 Philippine Long Distance
Telephone (ADR) $ 2,197,413
76,900 Telefonica del Peru (ADR) 1,797,537
------------
3,994,950
------------
Utilities-Electric & Gas--1.1%
55,694 Cemig, S.A. (ADR) 1,676,562
52,000 Enersis, S.A. (ADR) 1,618,500
75,220 Empresa Nacional de Electricidad,
S.A. (ADR) 1,476,193
10,000 Empresa Nacional de Electricidad,
S.A. (ADR) 587,500
50,000 Hub Power Co. (GDR)* 1,081,250
------------
6,440,005
------------
48,908,602
------------
- --------------------------------------------------------------
TOTAL COMMON STOCKS (cost $508,646,348) 574,825,200
- --------------------------------------------------------------
PREFERRED STOCKS--1.2%
BRAZILIAN CRUZEIRO--0.4%
Banking--0.4%
276,644,579 Banco Bradesco, S.A. $ 2,340,509
------------
GERMAN DEUTSCHEMARK--0.7%
Machinery & Engineering--0.4%
6,875 GEA, A.G. 2,233,051
------------
Health & Personal Care--0.4%
50,000 Fielmann, A.G. 2,121,398
------------
4,354,449
------------
U.S. DOLLAR--0.1%
Electrical & Electronic--0.1%
11,306 Cemig 340,346
------------
- -------------------------------------------------------------
TOTAL PREFERRED STOCKS (cost $5,694,614) 7,035,304
- -------------------------------------------------------------
TOTAL LONG-TERM INVESTMENTS (cost $514,340,962) 581,860,504
</TABLE>
- -------------------------------------------------------------
See Notes to Financial Statements.
12
<PAGE> 595
PILOT INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- -------------------------------------------------------------
<TABLE>
<CAPTION>
Shares or
Principal Value
Amount Description (Note 2)
<S> <C> <C>
=============================================================
SHORT-TERM INVESTMENTS--3.7%
22,135,042 Banker's Trust Money Fund $ 22,135,042
- -------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (cost $22,135,042) 22,135,042
- -------------------------------------------------------------
TOTAL INVESTMENTS (cost $536,476,004**)--99.7% 603,995,546
- -------------------------------------------------------------
OTHER ASSETS IN EXCESS OF LIABILITIES--0.3% 1,938,019
- -------------------------------------------------------------
NET ASSETS--100.0% $605,933,565
=============================================================
* Non-income producing security.
** Represents cost for financial reporting purposes and
differs from cost basis for federal income tax purposes by
the amount of losses recognized for financial reporting
purposes in excess of federal income tax reporting of
approximately $372,000.
Cost for federal income tax purposes differs from value by
net unrealized appreciation from investments as follows:
Gross unrealized appreciation from investments $ 92,075,253
Gross unrealized depreciation from investments (24,927,506)
- -------------------------------------------------------------
Net unrealized appreciation from investments $ 67,147,747
=============================================================
</TABLE>
ADR--American Depository Receipt.
GDR--Global Depository Receipt.
GDS--Global Depository Shares.
- -------------------------------------------------------------
See Notes to Financial Statements.
13
<PAGE> 596
PILOT INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Value on Appreciation
Forward Foreign Currency Exchange Contracts Expiring Settlement Date Current Value (Depreciation)
<S> <C> <C> <C> <C>
==============================================================================================================================
CURRENCY SOLD:
German Deutschemark 9/20/96 $22,935,780 $23,664,651 $ (728,871)
Netherlands Guilder 9/20/96 22,261,277 22,932,911 (671,634)
--------------- ------------- --------------
$45,197,057 $46,597,562 $ (1,400,505)
- ------------------------------------------------------------------------------------------------------------------------------
CURRENCY PURCHASED:
Philippine Peso 9/5/96 $ 433,402 $ 432,588 $ (814)
--------------- ------------- --------------
$ 433,402 $ 432,588 $ (814)
==============================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
14
<PAGE> 597
PILOT INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (cost $514,340,962).................................................... $581,860,504
Short-term investments, at cost........................................................................... 22,135,042
- -------------------------------------------------------------------------------------------------------------------------
Total Investments......................................................................................... 603,995,546
Cash and foreign currency................................................................................. 1,290,272
Receivable from brokers for investments sold.............................................................. 617,921
Dividends receivable...................................................................................... 544,338
Interest receivable....................................................................................... 98,555
Foreign taxes receivable.................................................................................. 501,622
Receivable for Portfolio shares sold...................................................................... 1,627,217
Deferred organization costs and other assets.............................................................. 311,076
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS.............................................................................................. 608,986,547
- -------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Payable to brokers for investments purchased.............................................................. 912,139
Payable for Portfolio shares redeemed..................................................................... 158,326
Payable for forward foreign currency exchange contracts................................................... 1,401,319
Advisory fees payable..................................................................................... 403,208
Administration fees payable............................................................................... 55,638
Distribution fees payable (Class A Shares)................................................................ 34,076
Distribution fees payable (Class B Shares)................................................................ 141
Custodian fees payable.................................................................................... 76,432
Other accrued expenses.................................................................................... 11,703
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES......................................................................................... 3,052,982
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS................................................................................................ $605,933,565
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
($0.001 PAR VALUE, UNLIMITED NUMBER OF SHARES AUTHORIZED):
PILOT SHARES:
Net assets.............................................................................................. $579,019,007
Shares of beneficial interest issued and outstanding.................................................... 33,969,619
Net asset value......................................................................................... $ 17.05
- -------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES:
Net assets.............................................................................................. $ 26,730,103
Shares of beneficial interest issued and outstanding.................................................... 1,581,654
Net asset value......................................................................................... $ 16.90
- -------------------------------------------------------------------------------------------------------------------------
SALES CHARGE--4.50% OF OFFERING PRICE..................................................................... 0.80
- -------------------------------------------------------------------------------------------------------------------------
MAXIMUM OFFERING PRICE.................................................................................... $ 17.70
- -------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES:
Net assets.............................................................................................. $ 184,455
Shares of beneficial interest issued and outstanding.................................................... 10,822
Net asset value......................................................................................... $ 17.04
- -------------------------------------------------------------------------------------------------------------------------
COMPOSITION OF NET ASSETS:
Shares of beneficial interest, at par..................................................................... $ 35,562
Additional paid-in capital................................................................................ 522,301,564
Undistributed net investment income....................................................................... 7,013,267
Accumulated undistributed net realized gains from investment transactions................................. 8,862,534
Accumulated undistributed net realized gains from foreign currency transactions........................... 1,596,900
Net unrealized appreciation from investments.............................................................. 65,436,746
Net unrealized appreciation from translation of assets and liabilities denominated in foreign
currencies.............................................................................................. 686,992
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS, AUGUST 31, 1996............................................................................... $605,933,565
=========================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
15
<PAGE> 598
PILOT INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
Statement of Operations
For the year ended August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of foreign taxes of $1,234,207).......................... $ 7,470,878
Interest................................................................ 1,172,285
- ---------------------------------------------------------------------------------------------------
TOTAL INCOME............................................................ 8,643,163
- ---------------------------------------------------------------------------------------------------
EXPENSES:
Advisory fees........................................................... $3,873,513
Administration fees..................................................... 536,016
Distribution fees (Class A Shares)...................................... 67,600
Distribution fees (Class B Shares)...................................... 136
Accounting fees......................................................... 30,184
Audit fees.............................................................. 93,016
Transfer agent fees and expenses........................................ 51,778
Custodian fees and expenses............................................. 327,872
Registration fees....................................................... 49,240
Amortization of organization expenses................................... 39,336
Legal fees.............................................................. 11,102
Trustees' fees.......................................................... 15,552
Reports to shareholders................................................. 107,452
Other expenses.......................................................... 124,349
- ---------------------------------------------------------------------------------------------------
TOTAL EXPENSES.......................................................... 5,327,146
- ---------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME................................................... 3,316,017
- ---------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENTS AND FOREIGN
CURRENCIES:
Net realized gains from investment transactions......................... 8,391,035
Net realized gains from foreign currency transactions................... 15,336,402
Net change in unrealized appreciation from investments.................. 38,713,502
Net change in unrealized appreciation from translation of assets and
liabilities denominated in foreign currencies......................... (19,628,913)
- ---------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAINS FROM INVESTMENTS AND FOREIGN
CURRENCIES............................................................ 42,812,026
- ---------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................... $ 46,128,043
===================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
16
<PAGE> 599
<TABLE>
<CAPTION>
PILOT INTERNATIONAL EQUITY FUND
- ----------------------------------------------------------------------------------------------------------
Statements of Changes in Net Assets
- ----------------------------------------------------------------------------------------------------------
FOR THE FOR THE
YEAR ENDED YEAR ENDED
AUGUST 31, AUGUST 31,
1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income............................................ $ 3,316,017 $ 2,760,153
Net realized gains from investment transactions.................. 8,391,035 7,897,049
Net realized gains from foreign currency transactions............ 15,336,402 2,930,897
Net change in unrealized appreciation from investments........... 38,713,502 (15,002,978)
Net change in unrealized appreciation from translation of assets
and liabilities denominated in foreign currencies............. (19,628,913) 9,613,918
- ----------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations............. 46,128,043 8,199,039
- ----------------------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Pilot Shares..................................................... (11,112,928) (2,165,488)
Class A Shares................................................... (765,596) (248,680)
- ----------------------------------------------------------------------------------------------------------
Total dividends to shareholders from net investment income......... (11,878,524) (2,414,168)
- ----------------------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS FROM NET REALIZED GAINS:
Pilot Shares..................................................... (9,018,759) (5,727,080)
Class A Shares................................................... (648,034) (657,682)
- ----------------------------------------------------------------------------------------------------------
Total dividends to shareholders from net realized gains............ (9,666,793) (6,384,762)
- ----------------------------------------------------------------------------------------------------------
PORTFOLIO SHARE TRANSACTIONS:
Proceeds from shares issued...................................... 215,676,940 93,286,629
Dividends reinvested............................................. 16,367,712 7,173,468
Cost of shares redeemed.......................................... (41,530,325) (61,574,895)
- ----------------------------------------------------------------------------------------------------------
Net increase in net assets from Portfolio share transactions..... 190,514,327 38,885,202
- ----------------------------------------------------------------------------------------------------------
Total Increase in Net Assets....................................... 215,097,053 38,285,311
- ----------------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of period................................................ 390,836,512 352,551,201
- ----------------------------------------------------------------------------------------------------------
End of period (including accumulated undistributed net investment
income of $7,013,267 and $2,488,507, respectively.).............. $605,933,565 $390,836,512
==========================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
17
<PAGE> 600
PILOT INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements
August 31, 1996
- --------------------------------------------------------------------------------
1. GENERAL
The Pilot International Equity Fund, formerly Pilot Kleinwort Benson
International Equity Fund, (the "Portfolio") is a separate diversified portfolio
of The Pilot Funds (the "Fund"). The Fund is a Massachusetts business trust
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as an open-end management investment company. The Portfolio seeks to
provide long-term capital growth by investing primarily in equity securities of
companies domiciled in countries outside the United States and listed on major
stock exchanges primarily in Europe and the Pacific Basin. The Fund currently
offers twelve portfolios. The accompanying financial statements are those of the
Portfolio only.
The Portfolio offers three classes of shares: Pilot Shares, Class A Shares and
Class B Shares. Pilot Shares, Class A Shares and Class B Shares are
substantially the same except that Class A Shares bear the fees payable under
the Portfolio's Class A Distribution Plan and Class B Shares bear the fees
payable under the Portfolio's Class B Distribution Plan. The Class B Shares
commenced offering on July 1, 1996.
The Fund entered into an Agreement and Plan of Reorganization (the
"Reorganization Agreement") with FUNDS IV Trust ("FUNDS IV"), a Massachusetts
business trust. The agreement contemplates that each of six investment
portfolios of FUNDS IV will transfer substantially all of the assets and
liabilities of FUNDS IV to a corresponding Portfolio of the Fund. The Board of
Trustees of FUNDS IV and the FUNDS IV shareholders, at a special shareholder
meeting held September 17, 1996, each approved the Reorganization Agreement
which became effective October 21, 1996.
Boatmen's Trust Company ("Boatmen's") serves as the Fund's investment adviser.
Kleinwort Benson Investment Management Americas Inc. ("Kleinwort Benson") serves
as the Portfolio's investment manager. BISYS Fund Services Limited Partnership
("BISYS") serves as the Fund's administrator and Pilot Funds Distributor Inc.
(the "Distributor"), an affiliate of BISYS, serves as the distributor of the
Fund's shares. BISYS is a wholly-owned subsidiary of The BISYS Group, Inc.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies consistently
followed by the Portfolio in the preparation of the financial statements. The
policies are in conformity with generally accepted accounting principles. The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of income and expenses
for the period. Actual results could differ from those estimates.
A. Investment Valuation
Investments in securities traded on a U.S. or foreign securities exchange or the
National Association of Securities Dealers Automated Quotation System ("NASDAQ")
are valued at their last sale or closing price on the principal exchange on
which they are traded or NASDAQ, on the valuation day. If no sale occurs,
securities traded on a U.S. exchange or NASDAQ are valued at the mean between
the closing bid and asked price, and securities traded on a foreign exchange
will be valued at the official bid price. Unlisted equity securities for which
market quotations are available are valued at the mean between the most recent
bid and asked prices.
Debt securities are valued at prices supplied by an independent pricing service,
which reflect broker/dealer-supplied valuations and matrix pricing systems.
Short-term debt obligations maturing in sixty days or less are valued at
amortized cost, which approximates market value. The amortized cost method
involves valuing a security at its cost on the date of purchase or, in the case
of securities
- --------------------------------------------------------------------------------
18
<PAGE> 601
PILOT INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
August 31, 1996
- --------------------------------------------------------------------------------
purchased with more than 60 days until maturity, at their market value each day
until the 61st day prior to maturity, and thereafter assuming a constant
amortization to maturity of the difference between the principal amount due at
maturity and such valuation. Restricted securities, and other securities for
which quotations are not readily available, are valued at fair value using
methods approved by the Board of Trustees of the Fund.
B. Foreign Currency Translation
The books and records of the Portfolio are maintained in U.S. dollars. Amounts
denominated in foreign currencies are translated into U.S. dollars on the
following basis: (i) investment securities, other assets and liabilities
initially expressed in foreign currencies are converted each business day into
U.S. dollars based upon current exchange rates; (ii) purchases and sales of
foreign securities, income and expenses are converted into U.S. dollars based
upon currency exchange rates prevailing on the respective dates of such
transactions.
Net realized and unrealized gains (losses) from foreign currency translation
will represent: (i) foreign exchange gains and losses from the sale and holdings
of foreign currencies and securities; (ii) gains and losses between trade date
and settlement date on investment securities transactions and forward exchange
contracts; and (iii) gains and losses from the difference between amounts of
dividends and interest recorded and the amounts actually received.
C. Forward Foreign Currency Exchange Contracts
The Portfolio is authorized to enter into forward foreign exchange contracts for
the purchase of a specific foreign currency at a fixed price on a future date as
a hedge or cross-hedge against either specific transactions or portfolio
positions. The aggregate principal amounts of the contracts are reflected net in
the Portfolio's Statement of Assets and Liabilities. All commitments are
"marked-to-market" daily at the applicable translation rates and any resulting
unrealized appreciation or depreciation is recorded in the Portfolio's financial
statements. The Portfolio records realized gains or losses at the time the
forward contract is offset by entry into a closing transaction or extinguished
by delivery of the currency. Risks may arise upon entering these contracts from
the potential inability of counterparties to meet the terms of their contracts
and from unanticipated movements in the value of a foreign currency relative to
the U.S. dollar.
The contractual amounts of forward foreign currency exchange contracts do not
necessarily represent the amounts potentially subject to risk. The measurement
of the risks associated with these instruments is meaningful only when all
related and offsetting transactions are considered. At August 31, 1996, the Fund
had sufficient cash and/or securities to cover any commitments under these
contracts.
D. Securities Transactions and Investment Income
Securities transactions are recorded on the trade date. Realized gains and
losses from sales of investments are calculated on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income, including
accretion of discounts and amortization of premiums on investments, is accrued
daily. Investment income is allocated to the separate classes of shares based
upon their relative net assets.
E. Dividends to Shareholders
Dividends of the Portfolio are declared and paid annually to shareholders of
record at the close of business on the day of declaration. Distributions of net
realized gains, if any, will be paid at least annually. However, to the extent
that net realized gains of the Portfolio can be offset by capital loss
carryovers, such gains will not be distributed. Dividends and distributions are
recorded by the Portfolio on the ex-dividend date.
- --------------------------------------------------------------------------------
19
<PAGE> 602
PILOT INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
August 31, 1996
- --------------------------------------------------------------------------------
Distributions from net investment income and from net capital gains are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due to
differing treatments for expiring capital loss carryforwards, foreign currency
transactions, and deferrals of certain losses. Permanent book and tax basis
differences, which affect shareholder distributions, have been reclassified
among the components of net assets.
F. Federal Taxes
It is the Portfolio's policy to comply with the requirements of the Internal
Revenue Code (the "Code") applicable to regulated investment companies and to
distribute substantially all of its investment company taxable income and
capital gains to its shareholders. Accordingly, no federal tax provision is
required.
G. Organizational Expenses
Costs incurred by the Fund in connection with its organization and registration
of shares have been deferred and are amortized using the straight-line method
over a period not to exceed five years from the commencement of the public
offering of shares of the Portfolio.
H. Expenses
Expenses incurred by the Fund that do not specifically relate to an individual
portfolio of the Fund are allocated to the portfolios based on each portfolio's
relative net assets. The expenses of the Portfolio (other than expenses incurred
pursuant to the Class A and Class B Distribution Plans) are allocated to the
separate classes of shares based upon their relative net assets.
3. AGREEMENTS AND TRANSACTIONS WITH AFFILIATES
A. Advisory Agreement
Boatmen's is the Portfolio's investment adviser under an Advisory Agreement.
Under the Advisory Agreement, Boatmen's supervises the activities of Kleinwort
Benson, the Portfolio's investment manager. As compensation for the services
rendered under the Advisory Agreement and the assumption of the expenses related
thereto, Boatmen's is entitled to a fee, computed daily and payable monthly, at
an annual rate equal to 0.80% of the Portfolio's average daily net assets.
B. Investment Management Agreement
The Portfolio has entered into an Investment Management Agreement with Kleinwort
Benson and Boatmen's. Under the Investment Management Agreement, Kleinwort
Benson, subject to the general supervision of the Portfolio's Board of Trustees
and Boatmen's, manages the investment operations of the Portfolio. As
compensation for the services rendered pursuant to the Investment Management
Agreement, Kleinwort Benson is entitled to a fee, paid by Boatmen's directly out
of Boatmen's advisory fee, computed daily and payable monthly, at an annual rate
equal to 0.40% of the Portfolio's average daily net assets up to $325,000,000
and 0.25% of such assets in excess of $325,000,000.
At a special meeting of stockholders of the Portfolio, held on November 30,
1995, shareholders approved a new Investment Management Agreement between the
Trust, on behalf of the Portfolio, Kleinwort Benson and Boatmen's. Such approval
was necessary because of the merger of Kleinwort Benson Group PLC and Dresdner
Bank AG.
C. Administration Agreement
The Portfolio has entered into an Administration Agreement with BISYS. Pursuant
to the terms of this agreement, BISYS is responsible for assisting in all
aspects of the operations of the Portfolio. For its services, BISYS is entitled
to a fee, accrued daily and paid monthly, at an annual rate of 0.115% of the
first $1.5 billion of the aggregate average net assets of all of the portfolios
constituting the Fund, plus 0.11% of the next $1.5 billion of such assets, plus
0.1075% of such assets in excess of $3.0 billion.
- --------------------------------------------------------------------------------
20
<PAGE> 603
PILOT INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
August 31, 1996
- --------------------------------------------------------------------------------
D. Distribution Agreements
The Portfolio adopted Distribution Plans pursuant to Rule 12b-1 under the 1940
Act for its Class A and Class B Shares. Under these Plans, the Distributor
receives payments for distribution and support services. The Distribution Plan
for Class A Shares, formerly the Administration Plan, authorizes payments to the
Distributor and service organizations for personal services provided to Class A
shareholders and/or the maintenance of shareholder accounts.
Payments under the Distribution Plan for Class A Shares may not exceed 0.25% (on
an annual basis) of the average daily net assets of the shares to which such
Plan relates. If more money is due the Distributor than it can collect in any
month because of this limitation, the unpaid amount may be carried forward until
it can be paid. Similarly, if in any month the Distributor does not expend the
entire amount to which it would otherwise be entitled, this amount may be used
as a credit and drawn upon to permit the payment of expenses in the future.
Neither of these amounts, however, is payable beyond the fiscal year in which
they accrue. The Distribution Plan for Class A Shares replaced the Portfolio's
Administration Plan effective April 5, 1996 under substantially the same terms.
Fees incurred under the Distribution Plan for Class A Shares and the
Administration Plan have been combined in the financial statements.
Distribution payments under the Distribution Plan for Class B Shares may not
exceed 1.00% (on an annual basis) of the average daily net assets of the Class B
Shares. Not more than 0.25% of such value will be used to compensate service
organizations for personal services provided to Class B shareholders and/or the
maintenance of shareholder accounts. Not more than 0.75% of such value will be
paid to the Distributor as reimbursement for commissions and transaction fees as
well as expenses related to other promotional and distribution activities.
Actual distribution expenses paid by the Distributor with respect to Class B
Shares for any given year may exceed the distribution fees and contingent
deferred sales charges received with respect to those Shares. These excess
expenses may be reimbursed by a Portfolio or its Class B Shareholders out of
contingent deferred sales charges and distribution payments in future years as
long as the Distribution Plan for Class B Shares is in effect.
E. Transfer Agent Agreement
BISYS Fund Services, Inc. (the "Transfer Agent"), a wholly-owned subsidiary of
The BISYS Group, Inc. is the transfer agent for all classes of the Portfolios.
Prior to April 26, 1996, National Financial Data Services was the transfer agent
for Class A Shares. BISYS does not receive a fee for the transfer agent services
provided.
F. Custodian Agreement
Boatmen's is the custodian responsible for holding the investments purchased by
the Portfolio. In connection with the Custodian Agreement with Boatmen's, the
Portfolio incurred expenses of approximately $20,000. Prior to May 6, 1996,
State Street Bank & Trust served the Portfolios as custodian.
G. Fund Accounting Agreement
BISYS is the fund accounting agent for the Portfolio. Pursuant to the terms of
the Fund Accounting Agreement, BISYS is entitled to a fee, accrued daily and
paid monthly, at an annual rate of 0.012% of average daily net assets. The fee
will not exceed, on an annual basis, $200,000.
- --------------------------------------------------------------------------------
21
<PAGE> 604
PILOT INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
August 31, 1996
- --------------------------------------------------------------------------------
4. SECURITIES TRANSACTIONS
For the year ended August 31, 1996, cost of purchases and proceeds from sales or
maturities of securities (excluding short-term investments) were $284,891,243
and $103,861,631, respectively.
5. PORTFOLIO SHARE TRANSACTIONS
Transactions in Portfolio shares of the Portfolio are as follows (000 omitted):
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
AUGUST 31, AUGUST 31,
1996 1995
---------- ----------
<S> <C> <C>
CAPITAL TRANSACTIONS:
Pilot Shares:
Proceeds from shares issued..... $214,270 $ 92,626
Dividends reinvested............ 15,491 6,608
Cost of shares redeemed......... (37,293) (44,103)
------- ---------
Change in net assets from Pilot
share transactions............ $192,468 $ 55,131
======= =========
Class A Shares:
Proceeds from shares issued..... $ 1,223 $ 659
Dividends reinvested............ 877 566
Cost of shares redeemed......... (4,237) (17,471)
------- ---------
Change in net assets from Class
A share transactions.......... $ (2,137) $(16,246)
======= =========
Class B Shares:
Proceeds from shares issued..... $ 183
Dividends reinvested............ --
Cost of shares redeemed......... --
-------
Change in net assets from Class
B share transactions.......... $ 183
=======
Total change in net assets from
portfolio share transactions...... $190,514 $ 38,885
======= =========
</TABLE>
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
AUGUST 31, AUGUST 31,
1996 1995
---------- ----------
<S> <C> <C>
SHARE TRANSACTIONS:
Pilot Shares:
Issued.......................... 12,865 6,037
Reinvested...................... 967 451
Redeemed........................ (2,235) (2,937)
------- ---------
Change in Pilot Shares.......... 11,597 3,551
======= =========
Class A Shares:
Issued.......................... 73 44
Reinvested...................... 55 39
Redeemed........................ (258) (1,133)
------- ---------
Change in Class A Shares........ (130) (1,050)
======= =========
Class B Shares:
Issued.......................... 11
Reinvested...................... --
Redeemed........................ --
Change in Class B Shares........ 11
-------
Total change in shares.............. 11,478 2,501
======= =========
</TABLE>
6. FEDERAL INCOME TAX INFORMATION
For the year ended August 31, 1996, capital gain dividend distributions from
long-term capital gains were approximately $8,649,780.
- --------------------------------------------------------------------------------
22
<PAGE> 605
[THIS PAGE INTENTIONALLY LEFT BLANK]
23
<PAGE> 606
<TABLE>
<CAPTION>
THE PILOT INTERNATIONAL EQUITY FUND
- ---------------------------------------------------------------------------------------------------------------------------
Financial Highlights
- ---------------------------------------------------------------------------------------------------------------------------
PILOT INTERNATIONAL
EQUITY FUND(A) PILOT KLEINWORT BENSON INTERNATIONAL EQUITY FUND
------------------------------- ----------------------------------------------------
YEAR ENDED
YEAR ENDED YEAR ENDED AUGUST 31, 1994
AUGUST 31, 1996 AUGUST 31, 1995 --------------------------
------------------------------- ----------------------- PILOT
PILOT CLASS A CLASS B PILOT CLASS A PILOT ADMINISTRATION
SHARES SHARES SHARES(B) SHARES SHARES(C) SHARES SHARES
-------- ------- ---------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period................ $ 16.24 $ 16.14 $ 17.54 $ 16.34 $ 16.29 $ 14.14 $ 14.13
-------- ------- ---------- ---------- ---------- ---------- -------
Investment Activities
Net investment income (loss)..... 0.18 0.04 -- 0.13(g) 0.08(g) 0.11(g) 0.07(g)
Net realized and unrealized gain
(loss) from investments........ 1.61 1.69 (0.65) (0.22)(g) (0.22)(g) 1.65(g) 1.65(g)
Net realized and unrealized gain
(loss) from foreign
currencies..................... (0.13) (0.12) 0.15 0.39(g) 0.39(g) 0.59(g) 0.59(g)
-------- ------- ---------- ---------- ---------- ---------- -------
Total from Investment
Activities..................... 1.66 1.61 (0.50) 0.30 0.25 2.35 2.31
Distributions
From net investment income....... (0.46) (0.46) -- (0.11) (0.11) -- --
From net realized gains
from investments and
foreign currencies............. (0.39) (0.39) -- (0.29) (0.29) (0.15) (0.15)
-------- ------- ---------- ---------- ---------- ---------- -------
Total distributions.............. (0.85) (0.85) -- (0.40) (0.40) (0.15) (0.15)
-------- ------- ---------- ---------- ---------- ---------- -------
Net Asset Value, End of Period....... $ 17.05 $ 16.90 $ 17.04 $ 16.24 $ 16.14 $ 16.34 $ 16.29
======== ======= ========= ======== ========= ======== =============
Total Return(i)...................... 10.64% 10.40% (2.85)% 2.08% 1.77% 16.75% 16.48%
Ratios/Supplemental Data:
Net Assets at end
of period (000)................ $579,019 $26,730 $ 184 $ 363,212 $ 27,625 $ 307,561 $ 44,990
Ratio of expenses to average net
assets......................... 1.08% 1.32% 2.06%(j) 1.18% 1.42% 1.12% 1.37%
Ratio of net investment income
(loss) to average net assets... 0.69% 0.48% (0.32)%(j) 0.82% 0.50% 0.75% 0.48%
Portfolio turnover rate(k)....... 22.31% 22.31% 22.31% 35.91% 35.91% 35.40% 35.40%
Average commission rate
paid(l)........................ $ 0.0160 $0.0160 $ 0.0160
<FN>
- ---------------
(a) The Pilot Kleinwort Benson International Equity Fund has been renamed the
Pilot International Equity Fund effective November 30, 1995.
(b) Class B Shares were initially issued on July 1, 1996.
(c) The Pilot Administration Shares were redesignated the Class A Shares.
(d) Pilot Shares were initially issued on July 26, 1993.
(e) Prior to July 12, 1993, the Pilot Administration Shares were not subject to
an Administration plan.
(f) Prior to a tax-free reorganization into Pilot Administration Shares
effective July 12, 1993, the Pilot Kleinwort Benson International Equity
Portfolio was a separate portfolio of Kleinwort Benson Investment
Strategies known as Kleinwort Benson International Equity Fund. The
predecessor portfolio was advised by Kleinwort Benson International
Investment Limited and had a December 31 year end.
(g) Calculated based on the average shares outstanding methodology.
(h) For years preceding the fiscal period ended August 31, 1993, net realized
and unrealized gains (losses) from investments included net realized and
unrealized gains (losses) from foreign currencies.
(i) Total return excludes sales charge of Class A Shares and is not annualized.
(j) Annualized.
(k) Portfolio turnover is calculated on the basis of the portfolio as a whole
without distinguishing between the classes of shares issued and is not
annualized.
(l) Represents the total dollar amount of commissions paid on security
transactions, for the time period of May 4, 1996 to August 31, 1996,
divided by total number of security shares purchased and sold for which
commissions were charged. Disclosure is not required for prior periods.
(m) Excludes transfer of assets effective August 6, 1993 from a collective trust
for which Boatmen's Trust Company served as Trustee.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
24
<PAGE> 607
THE PILOT INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
KLEINWORT BENSON
PILOT KLEINWORT BENSON INTERNATIONAL EQUITY
INTERNATIONAL EQUITY FUND FUND
------------------------- --------------------
EIGHT MONTHS ENDED YEAR ENDED
AUGUST 31, 1993 DECEMBER 31, 1992
------------------------- --------------------
PILOT PILOT
PILOT ADMINISTRATION ADMINISTRATION
SHARES(D) SHARES SHARES(E)(F)
-------- -------------- --------------------
<S> <C> <C> <C>
$ 13.15 $ 11.85 $ 12.29
-------- ------- -------
(0.01)(g) 0.02(g) 0.04(g)
1.10(g) 2.51(g) (0.46)(g)(h)
(0.10)(g) (0.25)(g) --
-------- ------- -------
0.99 2.28 (0.42)
-- -- (0.02)
-- -- --
-------- ------- -------
-- -- (0.02)
-------- ------- -------
$ 14.14 $ 14.13 $ 11.85
======== ======= =======
7.53% 19.24% (3.42)%
$195,548 $ 55,816 $ 56,358
1.31%(j) 2.17%(j) 1.78%
(0.56)%(j) 0.25%(j) 0.35%
26.65%(m) 26.65%(m) 58.55%
</TABLE>
25
<PAGE> 608
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Trustees of the Pilot International Equity Fund:
We have audited the accompanying statement of assets and liabilities of the
Pilot International Equity Fund (formerly Pilot Kleinwort Benson International
Equity Fund) of The Pilot Funds (a Massachusetts business trust), including the
portfolio of investments as of August 31, 1996, and the related statement of
operations for the period then ended, the statement of changes in net assets for
the periods presented, and the financial highlights for the periods ended August
31, 1996, 1995, 1994 and 1993. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits. The financial highlights for the period ended December 31,
1992, was audited by other auditors whose report dated January 29, 1993,
expressed an unqualified opinion on those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1996 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Pilot International Equity Fund as of August 31, 1996, the results of its
operations and the changes in its net assets for the periods presented and the
financial highlights for the periods ended August 31, 1996, 1995, 1994 and 1993
in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
October 21, 1996
26
<PAGE> 609
PILOT SHORT-TERM U.S. TREASURY FUND
- --------------------------------------------------------------------------------
Portfolio of Investments
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Maturity Amortized
(000) Description Rate Date Cost
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS--53.8%
U.S. TREASURY BILLS--27.1%
$ 25,00 U.S. Treasury Bill 4.85%* 2/06/97 $ 24,474,979
435,000 U.S. Treasury Bill 5.23* 9/17/96 434,126,428
--------------
458,601,407
--------------
U.S. TREASURY NOTES--26.7%
300,000 U.S. Treasury Note 7.25 11/30/96 301,306,913
100,000 U.S. Treasury Note 7.50 12/31/96 100,688,728
50,00 U.S. Treasury Note 6.88 2/28/97 50,378,606
--------------
452,374,247
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS (cost $910,975,654) 910,975,654
- -----------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS--43.6%
355,187 Repurchase agreement with J.P. Morgan, dated 8/30/96, 5.23%, due
9/03/96,
(see Footnote A) 355,186,607
16,439 Repurchase agreement with Lehman Brothers, dated 8/30/96, 5.24%, due 9/03/96,
(see Footnote B) 16,439,249
366,771 Repurchase agreement with Merrill Lynch, dated 8/30/96, 5.22%, due 9/03/96,
(see Footnote C) 366,770,959
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS (cost $738,396,815) 738,396,815
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (cost $1,649,372,469) -- 97.4% 1,649,372,469
- -----------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS IN EXCESS OF LIABILITIES--2.6% 43,963,161
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS--100.0% $1,693,335,630
- -----------------------------------------------------------------------------------------------------------------------------
<FN>
* Effective yield.
Footnote A
Collateralized by $320,742,000 U.S. Treasury Bonds, with various coupon
rates and maturities ranging from 6.25% to 12.375% and 5/15/03 through
8/15/26 with an aggregate value of $362,290,954.
Footnote B
Collateralized by $18,288,000 U.S. Treasury Bonds, with various coupon rates
and maturities ranging from 6.00% to 7.63% and 8/15/23 through 2/15/26, with
an aggregate value of $16,768,449.
Footnote C
Collateralized by $286,684,000 U.S. Treasury Securities, with various coupon
rates and maturities ranging from 0.00% to 15.75% and 8/21/97 through
11/15/04, with an aggregate value of $374,112,251.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
8
<PAGE> 610
PILOT SHORT-TERM DIVERSIFIED ASSETS FUND
- --------------------------------------------------------------------------------
Portfolio of Investments
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Moody's/S&P
Amount Ratings Maturity Amortized
(000) Description (Unaudited) Rate Date Cost
<C> <S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER--25.1%
$ 25,000 ABN AMRO Aa1/AA 5.22% 12/04/96 $ 24,659,250
12,000 Amercian Home Products Corp. A2/A- 5.32 10/15/96 11,920,200
4,030 Brown-Forman Corp. A1/A+ 5.31 9/18/96 4,019,895
27,565 First Chicago Financial A1/A+ 5.29 9/18/96 27,496,141
25,000 Ford Motor Credit Corp. A1/A+ 5.36 12/02/96 24,657,556
50,000 General Motors Acceptance Corp. A3/A- 5.37 11/04/96 49,522,667
10,000 Glaxo Wellcome PLC A1/NA 5.30 10/01/96 9,955,833
20,000 Green Tree Financial Corp. Baa1/A 5.41 9/24/96 19,930,872
50,000 IBM Credit Corp. A3/A 5.29 9/12/96 49,919,181
50,000 J.P. Morgan Company, Inc. Aa2/AA+ 5.40 1/06/97 49,047,500
25,000 Merrill Lynch & Co. A1/A+ 5.35 9/03/96 24,992,569
15,000 NYNEX Corp. A3/A 5.45 9/13/96 14,972,750
37,000 NYNEX Corp. A3/A 5.41 9/20/96 36,894,355
30,000 Sears Roebuck Acceptance A2/A 5.31 10/15/96 29,805,300
26,000 Whirlpool Financial Corp. A/A3 5.31 9/16/96 25,942,475
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (cost $403,736,544) 403,736,544
- ------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS--8.7%
25,000 Federal Farm Credit Banks Aaa/NA 4.95 3/03/97 24,975,653
20,000 Federal National Mortgage Association * Aaa/AAA 5.37 9/04/96 20,000,000
25,000 Federal National Mortgage Association * Aaa/AAA 5.37 9/04/96 24,991,596
40,700 Student Loan Marketing Association * Aaa/AAA 5.56 9/04/96 40,778,290
30,000 Student Loan Marketing Association * Aaa/AAA 5.42 9/04/96 30,000,000
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATION NOTES (cost $140,745,539) 140,745,539
- ------------------------------------------------------------------------------------------------------------------------------
MASTER NOTES--7.8%
50,000 Anchor National Life Insurance Co. * A2/AA- 5.54 10/01/96 50,000,000
25,000 Bear Stearns Co., Inc. * A2/A 5.63 6/03/97 25,000,000
50,000 General American Life Insurance * A1/AA- 5.64 9/01/96 50,000,000
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL MASTER NOTES (cost $125,000,000) 125,000,000
- ------------------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS--9.4%
25,000 Bear Stearns Co., Inc. A2/A 5.60 3/18/97 25,000,000
32,000 SMM Trust * NA/NA 5.71 9/26/96 32,000,000
50,000 First Boston * A2/A 5.46 5/12/97 50,000,000
45,000 USL Cap Corp. * A1/A+ 5.60 10/31/96 45,009,202
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS (cost $152,009,202) 152,009,202
- ------------------------------------------------------------------------------------------------------------------------------
TIME DEPOSITS--1.9%
30,000 SunTrust Bank A1/A+ 5.19 9/03/96 30,000,000
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL TIME DEPOSITS (cost $30,000,000) 30,000,000
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
9
<PAGE> 611
PILOT SHORT-TERM DIVERSIFIED ASSETS FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Moody's/S&P
Amount Ratings Maturity Amortized
(000) Description (Unaudited) Rate Date Cost
<C> <S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT--22.8%
$ 50,000 Bank of America A1/A+ 5.35% 9/03/96 $ 50,000,000
45,000 Banque Nationale De Paris Aa3/A+ 5.35 10/21/96 45,001,190
25,000 Chase Manhattan Corp. A1/A 5.50 11/04/96 25,000,000
21,000 Chase Manhattan Corp. A1/A 5.85 1/08/97 21,021,902
25,000 Commerzbank AG Aa2/AA- 5.32 10/22/96 25,000,000
50,000 Landesbank Hesson -- Thuringen Aaa/AAA 5.44 12/09/96 50,000,000
8,000 Merrill Lynch A1/A+ 6.36 12/16/96 8,016,524
50,000 Morgan Guaranty Trust Corp. Aa1/AAA 5.52 1/06/97 50,001,729
50,000 NationsBank A2/A 5.65 11/01/96 50,009,996
13,000 Royal Bank of Canada Aa2/AA- 5.62 11/29/96 13,003,231
20,000 Royal Bank of Canada Aa2/AA- 5.39 12/13/96 19,995,402
10,000 Societe Generale Aa2/AA- 5.39 11/22/96 10,000,674
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT (cost $367,050,648) 367,050,648
- ------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS--24.2%
153,327 Repurchase agreement with Lehman Brothers, dated 153,326,522
8/30/96, 5.24%, due 9/03/96
(See Footnote A)
112,831 Repurchase agreement with J. P. Morgan, dated 112,830,912
8/30/96, 5.25%, due 9/03/96
(See Footnote B)
122,863 Repurchase agreement with Merrill Lynch, dated 122,862,747
8/30/96, 5.27%, due 9/03/96
(See Footnote C)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS (cost $389,020,181) 389,020,181
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--99.8% (cost $1,607,562,114) 1,607,562,114
- ------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS IN EXCESS OF LIABILITIES--0.2% 3,024,043
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSETS--100.0% $1,610,586,157
- ------------------------------------------------------------------------------------------------------------------------------
* Variable rate security.
Footnote A
Collateralized by $169,565,000 U.S. Treasury Notes, 5.625%, with maturity
date of 2/15/06, with an aggregate value of $156,388,573.
Footnote B
Collateralized by $118,193,000 U.S. Treasury Bills, with maturity date of
2/27/97, with a value of $115,091,616.
Footnote C
Collateralized by $50,000,000 U.S. Treasury Bonds, 7.625%, with maturity
date of 2/15/25, and by $188,648,906 Federal National Mortgage Association
Bonds, with various coupon rates and maturity dates ranging from 6.06%
through 8.15% and 11/01/17 through 1/01/31, with an aggregate value of
$125,320,750.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
10
<PAGE> 612
PILOT MISSOURI SHORT-TERM TAX-EXEMPT FUND
- --------------------------------------------------------------------------------
Portfolio of Investments
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Moody's/S&P Amortized
Amount Ratings Maturity Cost
(000) Description (Unaudited) Rate Date (Note 2)
- ------------------------------------------------------------------------------------------------------------------------
MUNICIPAL SECURITIES--99.0%
COLORADO--0.1%
<S> <C> <C> <C> <C> <C>
$ 250 Adams Arapahoe Counties School District 28 (Aaa)(AAA) 10.00% 12/01/96 $ 253,814
------------
FLORIDA--1.6%
1,900 St. Lucie County PCR, Florida Power & Light
Co.* (Aa3)(AA-) 3.75 9/03/96 1,900,000
1,400 Volusia County Health Facility Revenue (LOC
Rabobank Nederland) * (NR)(AAA) 3.80 9/03/96 1,400,000
------------
3,300,000
------------
MISSOURI--95.8%
5,000 Berkeley IDR Bonds, Wetterau Project* (Aa3)(NR) 3.55 9/03/96 5,000,000
5,000 Berkeley IDR Bonds, Flight Safety
International Inc. Project* (Aa2)(NR) 3.50 9/03/96 5,000,000
10,800 Columbia Water & Electric Revenue Bonds,
Series B (LOC--Toronto Dominion Bank)* (Aa2)(AA+) 3.40 9/04/96 10,800,000
4,100 Columbia Special Obligation, (LOC Toronto
Dominion Bank)* (Aa2)(NR) 3.40 9/04/96 4,100,000
3,400 Independence, Water Utility Revenue (Aa1)(NR) 3.50 10/04/96 3,400,000
5,350 Independence, Water Utility Revenue (Aa1)(NR) 3.45 9/03/96 5,350,000
1,400 Independence IDR, Resthaven Project* (Aaa)(NR) 3.50 2/01/97 1,400,000
6,500 Independence Industrial Authority
(LOC--Citibank)* (NR)(AA-) 3.45 9/06/96 6,500,000
2,400 Kansas City IDR, Multi-Family Housing
Revenue Bonds, Timblane Village Apartments
Project (LOC--Security Pacific National
Bank)* (Aaa)(AAA) 3.50 9/05/96 2,400,000
1,385 Kansas City School District Building,
Capital Improvement Project (Aaa)(AAA) 3.65 2/01/97 1,386,122
810 Mexico IDR Bonds, Wetterau Inc. Project A* (Aa3)(NR) 3.50 9/03/96 810,000
815 Mexico IDR Bonds, Wetterau Inc. Project B* (Aa3)(NR) 3.50 9/05/96 815,000
7,000 Missouri Environment Improvement & Energy
Resources Authority, Pollution Control
Revenue, Union Electric, Series B * (NR)(NR) 3.65 6/01/97 7,000,000
2,000 Missouri Environment Improvement & Energy
Resources Authority, PCR, Monsanto Co.
Project* (A1)(NR) 3.45 9/04/96 2,000,000
2,795 Missouri Environment Improvement & Energy
Resources Authority, PCR (Aa1)(AA+) 3.70 9/04/96 2,795,000
5,000 Missouri Environment Improvement & Energy
Resources Authority (Aaa)(AAA) 3.55 9/20/96 5,000,000
5,000 Missouri Environment Improvement & Energy
Resources Authority (Aa1)(AA+) 3.65 11/19/96 5,000,000
3,000 Missouri Environment Improvement & Energy
Resources Authority (Aaa)(AAA) 3.60 10/09/96 3,000,000
8,000 Missouri Environment Improvement & Energy
Resources Authority, PCR, Kansas City
Power* (Aa1)(AA+) 3.55 9/04/96 8,000,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
11
<PAGE> 613
PILOT MISSOURI SHORT-TERM TAX-EXEMPT FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Moody's/S&P Amortized
Amount Ratings Maturity Cost
(000) Description (Unaudited) Rate Date (Note 2)
<C> <S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
MISSOURI (continued)
$ 345 Missouri Health & Educational Facilities
Authority Revenue, St. Louis University
Project (Aa1)(AA) 4.00% 10/01/96 $ 345,179
500 Missouri Health & Educational Facilities
Authority Revenue, Washington University,
Freeman Hospital Project Prerefunded
9/01/96 @ 102 (Aa)(AA-) 7.30 9/01/96 510,000
2,000 Missouri Health & Educational Facilities
Authority Funding, Branson School District
Advanced Funding Program (Aa1)(AA) 4.50 9/08/97 2,011,782
7,900 Missouri Health & Educational Facilities
Authority, Educational Facilities Revenue,
Washington University Project, Series C* (Aa1)(AA) 3.85 9/03/96 7,900,000
2,000 Missouri Health & Educational Facilities
Authority, Pattonville School District
Advanced Funding (Aa1)(AA) 4.50 9/08/97 2,011,782
4,370 Missouri Health & Educational Facilities
Authority, Barnes Jewish, Inc., Series A (Aa1)(AA) 3.90 5/15/97 4,377,893
1,300 Missouri Health & Educational Facilities
Authority, Health Facilities Revenue,
Sisters Mercy Ref., Series A (Aa1)(AA) 3.60 12/01/96 1,300,000
9,500 Missouri Health & Educational Facilities
Authority, St. Francis Medical Center,
Series A (LOC--Local De France)* (Aa1)(AA) 3.80 9/03/96 9,500,000
1,500 Missouri Health & Educational Facilities
Authority Revenue* (Aa1)(AA) 3.35 9/05/96 1,500,000
2,800 Missouri Health & Educational Facilities
Authority, St. Louis University Project* (Aa1)(AA) 3.85 9/03/96 2,800,000
2,000 Missouri Health & Educational Facilities
Authority Revenue (Aa1)(AA) 4.50 9/08/97 2,011,782
5,800 Missouri Health & Educational Facilities
Authority Revenue, Series C* (Aa1)(AA) 3.45 9/03/96 5,800,000
1,400 Missouri Health & Educational Facilities
Authority Revenue, Washington University
Project* (Aa1)(AA) 3.80 9/03/96 1,400,000
7,000 Missouri Health & Educational Facilities
Authority Revenue, Rockers & College
Project* (Aa1)(AA) 3.45 9/03/96 7,000,000
1,400 Missouri Health & Educational Facilities
Authority Revenue, Washington University* (Aa1)(AA) 3.45 9/03/96 1,400,000
4,300 Missouri Health & Educational Facilities
Authority Revenue, Washington University
Project* (Aa1)(AA) 3.85 9/03/96 4,300,000
1,100 Missouri Health & Educational Facilities
Authority Revenue, Washington University,
Series A* (Aa1)(AA) 3.45 9/04/96 1,100,000
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
12
<PAGE> 614
PILOT MISSOURI SHORT-TERM TAX-EXEMPT FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Moody's/S&P Amortized
Amount Ratings Maturity Cost
(000) Description (Unaudited) Rate Date (Note 2)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MISSOURI (continued)
$ 1,000 Missouri Health & Educational Facilities
Authority Revenue, Series B, Washington
University, Series A* (Aa1)(AA) 3.45% 9/03/96 $ 1,000,000
7,000 Missouri Health & Educational Facilities
Authority Revenue, Washington University* (Aa1)(AA) 3.45 9/04/96 7,000,000
6,125 Missouri Health & Educational Facilities
Authority Revenue, Drury College, Series
A* (Aa1)(AA) 3.25 9/03/96 6,125,000
4,000 Missouri Health & Educational Facilities
Authority Revenue (Aa1)(AA) 3.45 10/10/96 4,000,000
8,600 Missouri Health & Educational Facilities
Authority Revenue (Aa1)(AA) 3.55 10/15/96 8,600,000
600 Missouri Water Pollution Control, Series B (Aa)(NR) 7.75 11/01/96 604,507
1,505 Moberly Hospital Authority Prefunded 3/1/97
@ 103 (Aa)(NR) 8.75 3/01/97 1,586,759
3,070 St. Charles County IDR, Casalon Apartments
Project* (NR)(AA-) 3.76 9/05/96 3,070,000
3,000 St. Charles County IDR, Westchester
Apartment Projects* (NR)(AA-) 3.50 9/03/96 3,000,000
2,500 St. Louis Tax & Revenue (NR)(NR) 4.75 6/30/97 2,515,556
8,000 St. Louis County IDR* (Aa3)(NR) 3.50 9/03/96 8,000,000
785 St. Louis County IDR, Rockwood School (A1)(NR) 7.30 2/01/97 798,293
4,000 St. Louis County IDR* (Aa3)(NR) 3.50 9/05/96 4,000,000
5,500 St. Louis Planned Industrial Expansion
Authority, Alumax Foils Project (LOC--PNC
Bank)* (Aa3)(NR) 3.50 9/03/96 5,500,000
13,000 University of Missouri, Capital Projects
Notes, Series FY 1995-96 (NR)(NR) 4.75 6/30/97 13,087,904
------------
203,912,559
------------
NEW YORK--0.5%
1,000 New York City, GO*, FGIC Insured (Aaa)(AAA) 4.00 9/03/96 1,000,000
------------
OHIO--0.3%
700 Columbus School District, GO (Aaa)(AAA) 4.00 12/01/96 700,825
------------
PENNSYLVANIA--0.7%
1,590 Allegheny County Hospital Authority
(LOC--PNC Bank)* (Aa1)(NR) 3.50 9/05/96 1,590,000
- --------------------------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL SECURITIES (cost $210,757,198) 210,757,198
- --------------------------------------------------------------------------------------------------------------------
SHARES (000'S)
- --------
TAX-EXEMPT MONEY MARKET MUTUAL FUND--0.8%
1,781 Federated Tax-Exempt Obligation Fund (cost
$1,781,000) 1,781,000
- --------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--(cost $212,538,198) 99.8% 212,538,198
OTHER ASSETS IN EXCESS OF LIABILITIES--0.2% 477,620
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS--100.0% $213,015,818
- --------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
13
<PAGE> 615
PILOT MISSOURI SHORT-TERM TAX-EXEMPT FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- --------------------------------------------------------------------------------
* Variable rate security.
FGIC--Financial Guaranty Insurance Corporation.
GO --General Obligation.
IDR --Industrial Development Revenue.
LOC --Letter of Credit.
PCR --Pollution Control Revenue.
TAN --Tax Anticipation Notes.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
14
<PAGE> 616
PILOT SHORT-TERM TAX-EXEMPT DIVERSIFIED FUND
- --------------------------------------------------------------------------------
Portfolio of Investments
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Moody's/S&P Amortized
Amount Ratings Maturity Cost
(000) Description (Unaudited) Rate Date (Note 2)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MUNICIPAL SECURITIES--79.8%
ARKANSAS--0.4%
$ 1,785 Jonesboro Residential Housing NR/AAA 3.80% 5/01/97 $ 1,785,000
------------
COLORADO--2.5%
5,000 Arapahoe County School District #005** NR 4.50 6/30/97 5,025,950
5,000 Denver City & County, GO NR/AA 5.00 10/01/96 5,007,254
------------
10,033,204
------------
DISTRICT OF COLUMBIA--3.6%
5,700 District of Columbia Revenue,
ACES-Georgetown University, Series C* A1+/A+ 3.50 9/04/96 5,700,000
7,300 District of Columbia Revenue,
ACES-Georgetown University, Series D* A1+/A+ 3.50 9/04/96 7,300,000
1,100 District of Columbia Revenue,
ACES-Georgetown University, Series E* A1+/A+ 3.50 9/04/96 1,100,000
------------
14,100,000
------------
FLORIDA--4.2%
5,400 Martin County, PCR* A1+/AA 3.75 9/03/96 5,400,000
1,600 Manatee County PCR, Florida Power & Light
Co. Project* A1+/AA 3.75 9/03/96 1,600,000
400 Putnam County Development Authority, PCR,
Florida Power & Light Co.* A1+/AA 3.75 9/03/96 400,000
8,200 St. Lucie County PCR,
Florida Power & Light Co.* A1+/AA 3.75 9/03/96 8,200,000
1,100 Volusia County Health Facilities Authority,
Alliance Community* (LOC-Rabobank
Nederland) A1+/AA 3.80 9/03/96 1,100,000
------------
16,700,000
------------
GEORGIA--5.3%
1,000 Burke County Development Authority, PCR,
Georgia Power Plant Project, 4th Series* A1/A+ 3.75 9/03/96 1,000,000
6,000 Cobb County Development Authority, PCR,
Georgia Power Co. Plant Project
(LOC-Trust Co. Bank)* NR/A1 3.80 7/01/11 6,000,000
2,200 Dekalb County, Atlantic Jewish Federation,
(LOC-Wachovia Bank)* NR/AA2 3.50 9/05/96 2,200,000
6,600 Fulco Hospital Authority Revenue, Piedmont
Hospital Project, (LOC-Trust Co. Bank)* A1+/AA 3.50 9/04/96 6,600,000
2,400 Georgia State, Series F NR/AAA 6.50 12/01/96 2,417,582
1,900 Monroe County Cev. Authority, PCR* A1/A+ 3.75 9/03/96 1,900,000
510 Walton County, School District NR/AAA 5.00 1/01/97 511,815
------------
20,629,397
------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
15
<PAGE> 617
PILOT SHORT-TERM TAX-EXEMPT DIVERSIFIED FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Moody's/S&P Amortized
Amount Ratings Maturity Cost
(000) Description (Unaudited) Rate Date (Note 2)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ILLINOIS--1.4%
$ 1,450 Du Page Water Commission Revenue,
Prerefunded 5/01/97 @ 102 NR/AAA 6.88% 5/01/97 $ 1,521,915
1,250 Du Page Water Commission Revenue,
Prerefunded 5/01/97 @ 102 NR/AAA 6.80 5/01/97 1,299,399
1,400 Illinois State Sales Tax Revenue,
Prerefunded 6/15/97 @102 NR/AAA 7.50 6/15/97 1,466,250
1,000 Illinois State Sales Tax Revenue,
Prerefunded 6/15/97 @102 NR/AAA 7.60 6/15/97 1,048,089
------------
5,335,653
------------
INDIANA--1.7%
6,700 Indiana Health Facilities Finance Authority,
Hospital Revenue, ACES-Methodist Hospital,
Series B* A1+/AA 3.40 9/04/96 6,700,000
------------
KENTUCKY--1.5%
5,900 Mason County PCR, Eastern Kentucky Power
Co., (LOC -- CFC)* A1-/AA- 3.55 9/03/96 5,900,000
------------
LOUISIANA--1.1%
4,000 Louisiana State Reference, GO, Series A NR/AAA 7.00 8/01/02 4,195,943
------------
MICHIGAN--5.3%
8,000 Michigan, GO Aaa/AAA 4.00 9/30/96 8,005,590
4,150 Michigan Underground (LOC-AMBAC) NR/AAA 5.00 5/01/97 4,184,733
7,600 University of Michigan, Hospital Revenue
Series A* NR/AA 3.85 9/03/96 7,600,000
800 University of Michigan Revenue, Medical
Services Plan, Series A* A1+/AA 3.85 9/03/96 800,000
------------
20,590,323
------------
MINNESOTA--2.9%
3,000 Minnesota School District Tax & AID, TAN,
Series B (LOC, SD Credit Program) NR 4.00 3/14/97 3,011,576
3,000 Minnesota School District Tax & AID** NR 4.50 9/09/97 3,018,750
3,520 Minneapolis & St. Paul Housing Authority
Health Care Series B* A1+/AAA 3.85 9/03/96 3,520,000
1,600 Minneapolis Special School District (LOC-SD
Credit Program) NR/AA 5.00 2/01/97 1,609,707
------------
11,160,033
------------
MISSISSIPPI--1.3%
5,000 Grenada County, Georgia Pacific Corp.
Project (LOC-Sumitomo Bank)* NR/A1 3.65 9/04/96 5,000,000
------------
MISSOURI--18.2%
4,000 Kansas City Industrial Development
Authority* NR/A1 3.53 9/05/96 4,000,000
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
16
<PAGE> 618
PILOT SHORT-TERM TAX-EXEMPT DIVERSIFIED FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Moody's/S&P Amortized
Amount Ratings Maturity Cost
(000) Description (Unaudited) Rate Date (Note 2)
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
MISSOURI (continued)
$ 14,700 Kansas City Multi-Family Housing Revenue,
Timblane Village Apartments Project
(LOC-Security Pacific National Bank)* NR/AA3 3.50% 9/05/96 $ 14,700,000
3,000 Missouri Environment Authority (LOC-Sanwa
Bank)* NR/AA3 3.70 9/04/96 3,000,000
9,500 Missouri Environment Authority* A1/A- 3.55 9/04/96 9,500,000
2,600 Missouri Health & Educational Facilities
Authority* A1+/AA 3.45 9/04/96 2,600,000
9,600 Missouri Health & Educational Facilities
Authority, Educational Facilities Revenue,
Sisters Mercy Health* A1+/AA 3.45 9/05/96 9,600,000
6,100 Missouri Health & Educational Facilities
Authority, Educational Facilities Revenue,
Sisters Mercy Health, Series D* A1+/AA 3.45 9/05/96 6,100,000
1,500 Missouri Health & Educational Facilities
Authority, Educational Facilities Revenue,
ACES-SSM Health Care Project, Series A
(LOC-Industrial Bank of Japan)* NR/AAA 3.60 9/03/96 1,500,000
250 Missouri Health & Educational Facilities,
Christian Health Services, Series B*
(LOC-Morgan Guaranty)* A1+/AA 3.35 9/04/96 250,000
15,490 Missouri Health & Educational Facilities,
Barnes Hospital Project (LOC-Morgan
Stanley)* A1+/AA 3.40 9/04/96 15,490,000
3,500 St. Louis Tax & Revenue, Anticipation Note A1/NR 4.75 6/30/97 3,521,779
1,000 St. Louis Industrial Development Authority* A1/NR 3.50 9/05/96 1,000,000
------------
71,261,779
------------
MONTANA--1.8%
5,800 Montana State Board of Investments, Payroll
Tax Workers Compensation* NR/A 3.55 9/04/96 5,800,000
1,400 Montana Health Facilities Authority Revenue,
Healthcare Pooled Loan Project, Series A
(FGIC Insured) * A1+/AAA 3.45 9/05/96 1,400,000
------------
7,200,000
------------
NEW YORK--6.2%
3,000 New York City, Series B* A1+/AAA 4.00 9/03/96 3,000,000
2,800 New York City, Subseries B-4, GO* A1+/AAA 4.00 9/03/96 2,800,000
2,800 New York City, Series B, GO* A1+/AAA 4.00 9/03/96 2,800,000
15,600 New York City Municipal Water Financing
Authority, Water & Sewer System Revenue,
Series A (FGIC Insured)* A1+/AAA 4.00 9/03/96 15,600,000
------------
24,200,000
------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
17
<PAGE> 619
PILOT SHORT-TERM TAX-EXEMPT DIVERSIFIED FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Moody's/S&P Amortized
Amount Ratings Maturity Cost
(000) Description (Unaudited) Rate Date (Note 2)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NORTH CAROLINA--3.3%
$ 3,300 Raleigh Durham Airport Authority (LOC --
Royal Bank of Canada) * A1+/AA 3.85% 9/03/96 $ 3,300,000
9,450 Raleigh Durham Airport Authority, Special
Facility Revenue American Airlines, Series
A (LOC -- Royal Bank of Canada) * A1+/AA 3.85 9/03/96 9,450,000
------------
12,750,000
------------
PENNSYLVANIA--5.8%
11,200 Temple University Higher Education Revenue NR 4.63 5/20/97 11,274,259
2,600 Allegheny County Hospital* A1/AAA 3.50 9/05/96 2,600,000
8,650 Allegheny County Hospital Development* A1/AAA 3.50 9/05/96 8,650,000
------------
22,524,259
------------
SOUTH CAROLINA--0.5%
2,100 York County PCR, Electric Project NRU-84N-1
(WC -- FGIC) * A1-/AA- 3.55 9/04/96 2,100,000
------------
2,100,000
------------
TEXAS--8.6%
2,000 Houston, GO NR/AA 5.50 4/01/97 2,020,409
1,500 Klein Independent School District, Prefunded
8/01/97 @100 NR/AAA 6.88 8/01/97 1,540,992
1,805 North Harris Montgomery Community College
District, GO NR/AAA 6.10 2/15/97 1,825,203
5,200 Harris County Health Facilities Development
Corp., Hospital Revenue, St. Lukes
Episcopal, Series D, (SPA-Morgan Guaranty
Trust)* A1+/AA 3.75 9/03/96 5,200,000
3,700 Harris County Health Facilities Development
Corp., Hospital Revenue, Texas Children,
Series B2, (SPA-NationsBank of Texas)* NR/AA 3.45 9/04/96 3,700,000
2,200 Harris County Health Facilities, St. Lukes,
Series B* A1+/AA 3.75 9/03/96 2,200,000
4,100 Harris County Industrial Development Corp.,
Exxon Corp., PCR* A1+/AA 3.75 9/03/96 4,100,000
10,700 Harris County Health Facility, St. Lukes,
Series C* A1+/AA 3.75 9/03/96 10,700,000
335 Lewisville Water & Sewer Revenue,
Prerefunded 2/15/97 @100,
San Antonio Electric & Gas System NR/AA 8.05 2/15/97 341,618
1,000 Texas, Series A NR/AA 6.00 10/01/96 1,001,754
1,065 Dallas Waterworks & Sewer, Series A NR/AA 5.90 10/01/96 1,067,262
------------
33,697,238
------------
UTAH--0.5%
2,000 Salt Lake County, PCR* A1+/AA- 3.75 9/03/96 2,000,000
------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
18
<PAGE> 620
PILOT SHORT-TERM TAX-EXEMPT DIVERSIFIED FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Moody's/S&P Amortized
Amount Ratings Maturity Cost
(000) Description (Unaudited) Rate Date (Note 2)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
WASHINGTON--3.7%
$ 5,200 Washington Public Power Supply System,
Nuclear Project No 3, Series 3A-1,
(LOC-Bank of America)* A1/AA- 3.40% 9/04/96 $ 5,200,000
7,300 Washington Public Power Supply, System,
Nuclear Project No 3, Series 3A-2,
(LOC-Indl Bank Japan Ltd.)* A1/AA- 3.40 9/04/96 7,300,000
2,000 Washington Motor Vehicle Fuel, Series R 93C NR/AAA 3.85 9/01/96 2,000,000
------------
14,500,000
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL SECURITIES (cost $312,362,829) 312,362,829
- -----------------------------------------------------------------------------------------------------------------------------
SHORT TERM PUTS--4.2%
ILLINOIS--3.1%
12,000 Chicago, GO Limited, (LOC-Morgan Guaranty) A1+/NR 3.65 10/31/96 12,000,000
------------
PENNSYLVANIA--1.1%
4,500 Cumberland County Municipal Authority, (LOC-
PNC Bank)* NR/A1 3.68 6/01/97 4,500,000
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT TERM PUTS (cost $16,500,000) 16,500,000
- -----------------------------------------------------------------------------------------------------------------------------
TAX-FREE COMMERCIAL PAPER--17.2%
FLORIDA--3.6%
13,950 Sunshine State, Government Finance
Commission Aa2/NR 3.60 9/26/96 13,950,000
------------
GEORGIA--4.3%
2,000 Georgia Municipal Gas Authority A1+/AA+ 3.50 10/16/96 2,000,000
15,000 Municipal Electric Authority A1+/AA 3.60 11/06/96 15,000,000
------------
17,000,000
------------
ILLINOIS--0.9%
3,350 Cook County Health Fund A1/NR 3.50 10/01/96 3,350,000
------------
KANSAS--0.5%
2,000 Burlington, PCR A1+/AA 3.60 10/16/96 2,000,000
------------
MASSACHUSETTS--0.8%
3,300 Anne Arundel County 3.65 9/10/96 3,300,000
------------
MISSOURI--4.2%
7,000 Missouri Environment Improvement & Energy A1+/AA+ 3.65 11/19/96 7,000,000
2,000 Missouri Environment Improvement & Energy A1+/AA+ 3.65 11/19/96 2,000,000
7,475 Missouri Environment Improvement & Energy A1+/AA+ 3.70 2/14/97 7,475,000
------------
16,475,000
------------
NEW YORK--1.3%
5,000 New York City A1+/AA+ 3.50 9/13/96 5,000,000
------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
19
<PAGE> 621
PILOT SHORT-TERM TAX-EXEMPT DIVERSIFIED FUND
- --------------------------------------------------------------------------------
Portfolio of Investments (continued)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Moody's/S&P Amortized
Amount Ratings Maturity Cost
(000) Description (Unaudited) Rate Date (Note 2)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TEXAS--1.6%
$ 6,100 San Antonio, Electric & Gas, Series A A1+/AA 3.60% 10/10/96 $ 6,100,000
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL TAX FREE COMMERCIAL PAPER(COST $67,175,000) 67,175,000
- -----------------------------------------------------------------------------------------------------------------------------
TAX-EXEMPT MONEY MARKET FUND--0.5%
2,166 Federated Tax-Exempt Obligation Fund (cost
$2,166,053) 2,166,053
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (cost $398,203,882)--101.8% 398,203,882
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES IN EXCESS OF OTHER ASSETS--(1.8%) (6,969,435)
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS--100.0% $391,234,447
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Variable rate security.
** When issued security.
<TABLE>
<S> <C>
ACES --Adjustable Convertible Extendible Securities.
FGIC --Financial Guaranty Insurance Company.
GO --General Obligation.
LOC --Letter of credit.
MBIA --Municipal Bond Insurance Association.
PCR --Pollution Control Revenue.
TAN --Tax Anticipation Notes.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
20
<PAGE> 622
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MISSOURI SHORT-TERM
SHORT-TERM SHORT-TERM SHORT-TERM TAX-EXEMPT
U.S. TREASURY DIVERSIFIED TAX-EXEMPT DIVERSIFIED
FUND ASSETS FUND FUND FUND
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Investment in securities, at amortized cost............. $ 910,975,654 $1,218,541,933 $ 212,538,198 $ 398,203,882
Repurchase agreements, at cost.......................... 738,396,815 389,020,181 -- --
Cash.................................................... -- 56,758 -- 880
Interest receivable..................................... 24,056,030 8,849,128 980,493 2,230,143
Receivable from brokers for investments sold............ 460,000,000 -- -- --
Other assets............................................ 244,439 112,348 25,060 49,372
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS............................................ 2,133,672,938 1,616,580,348 213,543,751 400,484,277
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Advisory fees payable................................... 216,278 192,549 36,635 67,021
Administration fees payable............................. 159,608 140,774 20,180 36,905
Service fees payable (Pilot Administration Shares)...... 47,848 51,958 2,603 3,040
Service fees payable (Pilot Investor Shares)............ 75,475 19,493 6,562 427
Custodian fees payable.................................. 16,008 7,478 2,237 16,458
Payable to brokers for investments purchased............ 434,126,428 -- -- 8,044,700
Dividends payable....................................... 5,625,016 5,428,487 403,935 1,017,754
Other accrued expenses.................................. 70,647 153,452 55,781 63,525
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES....................................... 440,337,308 5,994,191 527,933 9,249,830
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS.............................................. $1,693,335,630 $1,610,586,157 $ 213,015,818 $ 391,234,447
- -----------------------------------------------------------------------------------------------------------------------------
SHARES OUTSTANDING ($0.001 PAR VALUE, UNLIMITED NUMBER
OF SHARES AUTHORIZED):
Pilot Shares............................................ 1,299,257,989 1,318,714,071 183,782,475 375,748,990
Pilot Administration Shares............................. 216,392,754 241,953,456 13,500,641 14,549,406
Pilot Investor Shares................................... 177,903,259 49,847,391 15,744,033 906,905
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL SHARES OUTSTANDING................................ 1,693,554,002 1,610,514,918 213,027,149 391,205,301
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Offering Price and Redemption Price per
Share................................................. $1.00 $1.00 $1.00 $1.00
- -----------------------------------------------------------------------------------------------------------------------------
COMPOSITION OF NET ASSETS:
Shares of beneficial interest, at par................... $ 1,693,554 $ 1,610,515 $ 213,027 $ 391,205
Additional paid-in capital.............................. 1,691,860,481 1,608,842,012 212,616,014 390,769,608
Undistributed (distributions in excess of) net
investment income..................................... (87,358) 276,000 201,785 41,741
Accumulated undistributed net realized gains (losses)
from investment transactions.......................... (131,047) (142,370) (15,008) 31,893
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS, AUGUST 31, 1996............................. $1,693,335,630 $1,610,586,157 $ 213,015,818 $ 391,234,447
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
21
<PAGE> 623
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Statements of Operations
For the year ended August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHORT-TERM MISSOURI SHORT-TERM
U.S. SHORT-TERM SHORT-TERM TAX-EXEMPT
TREASURY DIVERSIFIED TAX-EXEMPT DIVERSIFIED
FUND ASSETS FUND FUND FUND
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest............................................ $ 93,046,517 $ 81,049,659 $ 8,356,213 $ 14,242,722
- ------------------------------------------------------------------------------------------------------------------
EXPENSES:
Advisory fees....................................... 2,552,746 2,174,296 466,582 787,503
Administration fees................................. 1,880,792 1,598,802 257,068 433,805
Administration Service Fees (Pilot Administration
Shares)........................................... 535,662 579,043 25,994 33,990
Investor Service Fees (Pilot Investor Shares)....... 799,775 199,056 64,299 968
Accounting fees..................................... 64,990 56,629 11,228 16,541
Audit fees.......................................... 84,507 65,571 51,960 82,838
Transfer agent fees and expenses.................... 6,708 10,102 4,794 5,559
Custodian fees and expenses......................... 123,260 105,065 75,653 41,906
Registration fees................................... 116,909 105,018 47,375 41,386
Amortization of organization expenses............... 6,773 42,551 38,714 18,300
Legal fees.......................................... 76,704 86,599 11,799 19,140
Trustees' fees...................................... 58,348 70,361 7,751 16,607
Reports to shareholders............................. 31,726 27,545 4,277 7,343
Other expenses...................................... 204,731 67,191 13,762 122,656
- ------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES...................................... 6,543,631 5,187,829 1,081,256 1,628,542
- ------------------------------------------------------------------------------------------------------------------
Less fee waived by advisor.......................... (656,963) (518,392) -- (145,549)
- ------------------------------------------------------------------------------------------------------------------
NET EXPENSES........................................ 5,886,668 4,669,437 1,081,256 1,482,993
- ------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME............................... 87,159,849 76,380,222 7,274,957 12,759,729
- ------------------------------------------------------------------------------------------------------------------
NET REALIZED GAINS (LOSSES) FROM INVESTMENTS........ (72,161) (7,389) 25,794 59,395
- ------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS........................................ $ 87,087,688 $ 76,372,833 $ 7,300,751 $ 12,819,124
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
22
<PAGE> 624
[THIS PAGE INTENTIONALLY LEFT BLANK]
23
<PAGE> 625
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHORT-TERM SHORT-TERM
U.S. TREASURY FUND DIVERSIFIED ASSETS FUND
---------------------------------- ----------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED THE YEAR ENDED YEAR ENDED
AUGUST 31, 1996 AUGUST 31, 1995 AUGUST 31, 1996 AUGUST 31, 1995
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income......................... $ 87,159,849 $ 64,324,193 $ 76,380,222 $ 72,518,156
Net realized gains (losses) from investment
transactions................................ (72,161) (99,326) (7,389) (126,776)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations...................................... 87,087,688 64,224,867 76,372,833 72,391,380
- -----------------------------------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment
income:
Pilot Shares.................................. (68,912,660) (50,061,109) (62,678,596) (56,135,624)
Pilot Administration Shares................... (10,651,264) (7,236,770) (11,779,432) (14,769,836)
Pilot Investor Shares......................... (7,507,828) (7,049,513) (1,922,216) (1,730,773)
- -----------------------------------------------------------------------------------------------------------------------------
Total dividends to shareholders from net
investment income............................... (87,071,752) (64,347,392) (76,380,244) (72,636,233)
- -----------------------------------------------------------------------------------------------------------------------------
Distributions in excess of net investment income:
Pilot Shares.................................. (69,139) -- -- --
Pilot Administration Shares................... (10,686) -- -- --
Pilot Investor Shares......................... (7,533) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total distributions in excess of net investment
income.......................................... (87,358) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio share transactions:
Proceeds from shares issued................... 9,878,532,918 7,633,890,413 5,663,449,795 6,079,682,781
Dividends reinvested.......................... 18,323,119 12,508,935 13,444,984 13,612,333
Cost of shares redeemed....................... (9,741,562,840) (7,206,228,934) (5,388,561,055) (5,969,699,418)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from
Portfolio share transactions.................... 155,293,197 440,170,414 288,333,724 123,595,696
- -----------------------------------------------------------------------------------------------------------------------------
Total increase (decrease)......................... 155,221,775 440,047,889 288,326,313 123,350,843
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of period............................... 1,538,113,855 1,098,065,966 1,322,259,844 1,198,909,001
- -----------------------------------------------------------------------------------------------------------------------------
End of period(a).................................. $ 1,693,335,630 $ 1,538,113,855 $ 1,610,586,157 $ 1,322,259,844
- -----------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Includes undistributed (distributions in excess of) net investment income
of ($87,358), $6, $276,000, $0, $201,785, $0, $41,741 and $0, respectively.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
24
<PAGE> 626
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MISSOURI SHORT-TERM SHORT-TERM
TAX-EXEMPT FUND TAX-EXEMPT DIVERSIFIED FUND
--------------------------------------- ---------------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
AUGUST 31, 1996 AUGUST 31, 1995 AUGUST 31, 1996 AUGUST 31, 1995
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
$ 7,274,957 $ 8,685,370 $ 12,759,729 $ 14,249,567
25,794 (26,998) 59,395 (17,838)
-----------------------------------------------------------------------------------
7,300,751 8,658,372 12,819,124 14,231,729
-----------------------------------------------------------------------------------
(6,637,519) (8,297,281) (12,351,930) (13,962,657)
(297,782) (89,381) (405,583) (287,100)
(339,651) (299,924) (4,963) (98)
-----------------------------------------------------------------------------------
(7,274,952) (8,686,586) (12,762,476) (14,249,855)
-----------------------------------------------------------------------------------
-- -- -- --
-- -- -- --
-- -- -- --
-----------------------------------------------------------------------------------
-- -- -- --
-----------------------------------------------------------------------------------
573,611,650 1,021,732,285 497,372,489 601,226,465
2,239,269 2,892,628 442,282 262,723
(589,471,487) (1,047,146,227) (518,867,826) (580,327,778)
-----------------------------------------------------------------------------------
(13,620,568) (22,521,314) (21,053,055) 21,161,410
-----------------------------------------------------------------------------------
(13,594,769) (22,549,528) (20,996,407) 21,143,284
-----------------------------------------------------------------------------------
226,610,587 249,160,115 412,230,854 391,087,570
-----------------------------------------------------------------------------------
$ 213,015,818 $ 226,610,587 $ 391,234,447 $ 412,230,854
-----------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 627
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Notes to Financial Statements
August 31, 1996
- ----------------------------------------------------------
- ----------------------------------------------------------
1. GENERAL
The Pilot Short-Term U.S. Treasury Fund, the Pilot Short-Term Diversified Assets
Fund, the Pilot Missouri Short-Term Tax-Exempt Fund, and the Pilot Short-Term
Tax-Exempt Diversified Fund are separate money market portfolios (individually,
a "Portfolio"; collectively, the "Portfolios") of The Pilot Funds (the "Fund").
The Fund is a Massachusetts business trust registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company. All of the Portfolios are diversified except for the
Missouri Short-Term Tax-Exempt Fund. Shares of the Fund are offered exclusively
to customers of Boatmen's Trust Company ("Boatmen's"), its affiliates and to
customers of other participating service organizations. The Fund currently
offers twelve Portfolios. The accompanying financial statements are those of the
four Portfolios only.
The Portfolios each offer three classes of shares: Pilot Shares, Pilot
Administration Shares and Pilot Investor Shares. Each class of shares is
substantially the same, except that Pilot Administration Shares bear the fees
payable under the Portfolios' Administration Plan, and Pilot Investor Shares
bear the fees payable under the Portfolios' Service Plan.
The Fund entered into an Agreement and Plan of Reorganization (the
"Reorganization Agreement") with FUNDS IV Trust ("FUNDS IV"), a Massachusetts
business trust. The agreement contemplates that each of six investment
portfolios of FUNDS IV will transfer substantially all of the assets and
liabilities of FUNDS IV to a corresponding Portfolio of the Fund. The Board of
Trustees of FUNDS IV and the FUNDS IV shareholders, at a special shareholder
meeting held September 17, 1996, each approved the Reorganization Agreement
which became effective October 21, 1996. Pursuant to the Reorganization
Agreement, the Cash Reserve Money Market Fund of FUNDS IV transferred
substantially all of its assets and liabilities to the Short-Term Diversified
Assets Fund in exchange for Pilot Shares of such Portfolio.
The Short-Term U.S. Treasury Fund and Short-Term Diversified Assets fund seek to
maximize current income to the extent consistent with the preservation of
capital and the maintenance of liquidity by investing exclusively in
high-quality money market instruments. The Missouri Short-Term Tax-Exempt Fund
and Short-Term Tax-Exempt Diversified Fund seek as high a level of current
income which is exempt from federal income tax as is consistent with the
preservation of capital.
Boatmen's serves as the Fund's investment adviser and custodian. BISYS Fund
Services Limited Partnership ("BISYS") serves as the Fund's administrator and
Pilot Funds Distributor Inc. (the "Distributor"), an affiliate of BISYS, serves
as the distributor of the Fund's shares. BISYS is a wholly-owned subsidiary of
The BISYS Group, Inc.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies consistently
followed by the Portfolios in the preparation of the financial statements. The
policies are in conformity with generally accepted accounting principles. The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of income and expenses
for the period. Actual results could differ from those estimates.
A. Investment Valuation
The Portfolios use the amortized cost method for valuing portfolio securities.
Under this method, all investments purchased at a discount or premium are valued
by amortizing the difference between the original purchase price and maturity
value of the issue over the period to maturity. In addition, the Portfolios may
not (a) purchase
- ----------------------------------------------------------
- ----------------------------------------------------------
26
<PAGE> 628
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
August 31, 1996
- ----------------------------------------------------------
- ----------------------------------------------------------
any instrument with a remaining maturity greater than thirteen months unless
such instrument is subject to a demand feature, or (b) maintain a
dollar-weighted-average maturity which exceeds 90 days.
B. Repurchase Agreements
The custodian for the Portfolios and other banks acting in a subcustodian
capacity take possession of the collateral pledged for investments in repurchase
agreements. The underlying collateral is valued daily on a mark-to-market basis
to determine that the value, including accrued interest, is not less than 102%
of the repurchase price, including accrued interest. In the event of the
seller's default of the obligation to repurchase, the Portfolios have the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
C. Securities Transactions and Investment Income
Securities transactions are recorded on a trade date basis. Interest income,
including accretion of discounts and amortization of premiums on investments, is
accrued daily. Investment income of each Portfolio is allocated to the separate
classes of shares based upon their relative net assets.
D. Dividends to Shareholders
Dividends are declared daily to shareholders of record at the close of business
on the day of declaration and paid monthly. Distributions of net realized gains,
if any, will be paid at least annually. However, to the extent that net realized
gains of a Portfolio can be offset by capital loss carryovers, such gains will
not be distributed. Dividends and distributions are recorded by the Portfolios
on the ex-dividend date.
Distributions from net investment income and from net capital gains are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due to
differing treatments for expiring capital loss carryforwards and deferrals of
certain losses. Permanent book and tax differences, which affect shareholder
distributions, have been reclassified among the components of net assets.
E. Federal Taxes
It is each Portfolio's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute each
year substantially all of its investment company taxable and tax-exempt income
to its shareholders. Accordingly, no federal tax provisions are required.
Amortized cost of investments is substantially the same for federal income tax
purposes and financial reporting purposes.
F. Organizational Expenses
Costs incurred by the Fund in connection with its organization and registration
of shares have been deferred and were amortized using the straight-line method
over a period not to exceed five years from the commencement of the public
offering of shares of the Portfolios. As of August 31, 1996, organization costs
have been fully amortized.
G. Expenses
Expenses incurred by the Fund that do not specifically relate to an individual
portfolio of the Fund are allocated to the portfolios based on each portfolio's
relative net assets. The expenses of each Portfolio (other than expenses
incurred pursuant to the Administration and Service Plans) are allocated to the
separate classes of shares based upon their relative net assets.
- ----------------------------------------------------------
- ----------------------------------------------------------
27
<PAGE> 629
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
August 31, 1996
- ----------------------------------------------------------
- ----------------------------------------------------------
3. AGREEMENTS AND TRANSACTIONS WITH AFFILIATES
A. Advisory Agreements
Boatmen's is the investment adviser for each Portfolio pursuant to separate
Investment Advisory Agreements and is responsible for managing the investment
operations of the Portfolios. For its services, Boatmen's is entitled to a fee,
accrued daily and paid monthly, at an annual rate equal to 0.15% of the average
daily net assets of each of the Short-Term U.S. Treasury Fund and the Short-Term
Diversified Assets Fund and 0.20% of the average daily net assets of each of the
Missouri Short-Term Tax-Exempt Fund and the Short-Term Tax-Exempt Diversified
Fund.
Boatmen's voluntarily waived 0.05% from its contractual fee rates for the
Short-Term U.S. Treasury Fund, the Short-Term Diversified Assets, and the
Short-Term Tax-Exempt Diversified Assets Fund, based on each Portfolios average
daily net assets on an annualized basis, for each such Portfolio for the period
July 1, 1995 until January 1, 1996, and 0.03% from its contractual fee rates,
based on each Portfolios average daily net assets on an annualized basis, for
the period January 1, 1996 until July 1, 1996. For the year ended August 31,
1996 Boatmen's waived fees in the following amounts:
<TABLE>
<S> <C>
Short-Term U.S. Treasury Fund................... $ 656,963
Short-Term Diversified Assets Fund.............. 518,392
Short-Term Tax-Exempt Diversified Fund.......... 145,549
</TABLE>
B. Administration Agreement
The Portfolios have entered into an Administration Agreement with BISYS.
Pursuant to the terms of this agreement, BISYS is responsible for assisting in
all aspects of the operations of each of the Portfolios. For its services, BISYS
is entitled to a fee, accrued daily and paid monthly, at an annual rate of
0.115% of the first $1.5 billion of the aggregate average daily net assets of
all of the portfolios constituting the Fund, plus 0.11% of the next $1.5 billion
of such net assets, plus 0.1075% of such net assets in excess of $3.0 billion.
C. Administration and Investor Plans
The Fund has adopted Administration and Investor Plans which allow for Pilot
Administration Shares and Pilot Investor Shares, respectively, to compensate
service organizations, which may include Boatmen's, BISYS and their affiliates
for providing varying levels of account administration and shareholder liaison
services to customers who are beneficial owners of such shares. The
Administration and Investor Plans provide for compensation to the service
organizations in an amount up to 0.25% and 0.50% (on an annualized basis),
respectively, of the average daily net asset value of the respective shares.
During the year ended August 31, 1996, affiliates of the Fund received the
following fees pursuant to the Administration and Investor Plans:
<TABLE>
<CAPTION>
ADMINISTRATION INVESTOR
FUND PLAN PLAN
- --------------------------------- -------------- --------
<S> <C> <C>
Short-Term U.S. Treasury Fund.... $535,662 $799,775
Short-Term Diversified Assets
Fund........................... 579,043 199,056
Missouri Short-Term Tax-Exempt
Fund........................... 25,994 64,299
Short-Term Tax-Exempt Diversified
Fund........................... 33,990 968
</TABLE>
D. Distribution Agreement
The Distributor does not receive a fee under its Distribution Agreement.
E. Transfer Agent Agreement
BISYS Fund Services, Inc. (the "Transfer Agent"), a wholly-owned subsidiary of
The BISYS Group, Inc. is the transfer agent for all classes of the Portfolios.
BISYS does not receive a fee for the transfer agent services provided.
F. Custodian Agreement
Boatmen's is the custodian responsible for holding the investments purchased by
the Portfolios. In connection with the Custodian Agreement with Boatmen's, the
Portfolios incurred expenses of approximately $55,000. Prior to
- ----------------------------------------------------------
- ----------------------------------------------------------
28
<PAGE> 630
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
August 31, 1996
- ----------------------------------------------------------
- ----------------------------------------------------------
May 6, 1996, State Street Bank & Trust served the Portfolios as custodian.
G. Fund Accounting Agreement
BISYS is the fund accounting agent for all of the Portfolios. Pursuant to the
terms of the Fund Accounting Agreement,
BISYS is entitled to a fee accrued daily and paid monthly, at an annual rate of
0.012% of average daily net assets. The fee will not exceed, on an annual basis,
$200,000 per Portfolio.
4. PORTFOLIO SHARE TRANSACTIONS
Transactions in shares of the Portfolios are as follows (000 omitted) (at $1.00
per share):
PILOT SHORT-TERM U.S. TREASURY FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
AUGUST 31, AUGUST 31,
1996 1995
---------- ----------
<S> <C> <C>
Pilot Shares:
Proceeds from shares
issued..................... 2,810,597 2,313,451
Dividends reinvested......... 150 151
Cost of shares redeemed...... (2,703,045) (1,965,257)
---------- ----------
Change in net assets from Pilot
share transactions............. 107,702 348,345
========== ==========
Pilot Administration Shares:
Proceeds from shares
issued..................... 4,452,376 2,834,858
Dividends reinvested......... 10,146 5,415
Cost of shares redeemed...... (4,461,741) (2,723,506)
---------- ----------
Change in net assets from Pilot
Administration share
transactions................... 781 116,767
========== ==========
Pilot Investor Shares:
Proceeds from shares
issued..................... 2,615,560 2,485,581
Dividends reinvested......... 8,027 6,943
Cost of shares redeemed...... (2,576,777) (2,517,466)
---------- ----------
Change in net assets from Pilot
Investor share transactions.... 46,810 (24,942)
========== ==========
</TABLE>
PILOT SHORT-TERM DIVERSIFIED ASSETS FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
AUGUST 31, AUGUST 31,
1996 1995
---------- ----------
<S> <C> <C>
Pilot Shares:
Proceeds from shares issued... 1,876,383 1,554,497
Dividends reinvested.......... 119 152
Cost of shares redeemed....... (1,614,354) (1,355,685)
---------- ----------
Change in net assets from Pilot
share transactions.............. 262,148 198,964
========== ==========
Pilot Administration Shares:
Proceeds from shares issued... 3,150,340 3,925,718
Dividends reinvested.......... 11,279 11,755
Cost of shares redeemed....... (3,151,335) (4,008,968)
---------- ----------
Change in net assets from Pilot
Administration share
transactions.................... 10,284 (71,495)
========== ==========
Pilot Investor Shares:
Proceeds from shares issued... 636,727 599,468
Dividends reinvested.......... 2,047 1,705
Cost of shares redeemed....... (622,872) (605,046)
---------- ----------
Change in net assets from Pilot
Investor share transactions..... 15,902 (3,873)
========== ==========
</TABLE>
- ----------------------------------------------------------
- ----------------------------------------------------------
29
<PAGE> 631
THE PILOT FUNDS
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
August 31, 1996
- ----------------------------------------------------------
- ----------------------------------------------------------
PILOT MISSOURI SHORT-TERM TAX-EXEMPT FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
AUGUST 31, AUGUST 31,
1996 1995
---------- ----------
<S> <C> <C>
Pilot Shares:
Proceeds from shares issued..... 348,043 839,422
Dividends reinvested............ 1,563 2,540
Cost of shares redeemed......... (376,691) (870,898)
---------- ----------
Change in net assets from Pilot
share transactions................ (27,085) (28,936)
========== ==========
Pilot Administration Shares:
Proceeds from shares issued..... 140,954 62,333
Dividends reinvested............ 310 69
Cost of shares redeemed......... (132,319) (57,846)
---------- ----------
Change in net assets from Pilot
Administration share
transactions...................... 8,945 8,915
========== ==========
Pilot Investor Shares:
Proceeds from shares issued..... 84,615 119,978
Dividends reinvested............ 366 283
Cost of shares redeemed......... (80,461) (118,402)
---------- ----------
Change in net assets from Pilot
Investor share transactions....... 4,520 1,859
========== ==========
</TABLE>
PILOT SHORT-TERM TAX-EXEMPT DIVERSIFIED ASSETS FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
AUGUST 31, AUGUST 31,
1996 1995
---------- ----------
<S> <C> <C>
Pilot Shares:
Proceeds from shares issued..... 482,524 504,042
Dividends reinvested............ -- --
Cost of shares redeemed......... (504,585) (494,289)
-------- --------
Change in net assets from Pilot
share transactions................ (22,061) 9,753
======== ========
Pilot Administration Shares:
Proceeds from shares issued..... 13,384 97,179
Dividends reinvested............ 438 263
Cost of shares redeemed......... (13,716) (86,039)
-------- --------
Change in net assets from Pilot
Administration share
transactions...................... 106 11,403
======== ========
Pilot Investor Shares:
Proceeds from shares issued..... 1,465 5
Dividends reinvested............ 4 --
Cost of shares redeemed......... (567) --
-------- --------
Change in net assets from Pilot
Investor share transactions....... 902 5
======== ========
</TABLE>
5. FEDERAL INCOME TAX INFORMATION
At August 31, 1996, the Portfolios had the following capital loss carryforwards
which are available to offset future capital gains, if any (000 omitted):
<TABLE>
<CAPTION>
AMOUNT EXPIRES
-------- -------
<S> <C> <C>
Short-Term U.S. Treasury Fund........... $ 16,306 2002
Short-Term U.S. Treasury Fund........... 26,323 2003
Short-Term U.S. Treasury Fund........... 88,418 2004
Short-Term Diversified Assets Fund...... 131,029 2003
Short-Term Diversified Assets Fund...... 11,341 2004
Missouri Short-Term Tax-Exempt Fund..... 15,008 2003
</TABLE>
6. EXEMPT-INTEREST INCOME DESIGNATIONS
(UNAUDITED):
The Missouri Short-Term Tax-Exempt Fund and Short-Term Tax-Exempt Diversified
Fund designate exempt-interest dividends paid for the taxable period January 1,
1996 to August 31, 1996 of approximately $4,075,360 and $6,889,538,
respectively.
- ----------------------------------------------------------
- ----------------------------------------------------------
30
<PAGE> 632
[THIS PAGE INTENTIONALLY LEFT BLANK]
31
<PAGE> 633
PILOT SHORT-TERM U.S. TREASURY FUND
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1996 YEAR ENDED AUGUST 31, 1995
---------------------------------------- ----------------------------------------
PILOT ADMINISTRATION INVESTOR PILOT ADMINISTRATION INVESTOR
SHARES SHARES SHARES SHARES SHARES SHARES
---------- -------------- -------- ---------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........ $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
---------- -------- -------- ---------- -------- --------
Investment Activities
Net investment income................... 0.0522 0.0497 0.0472 0.0534 0.0509 0.0484
Net realized gains from investment
transactions.......................... -- -- -- -- -- --
---------- -------- -------- ---------- -------- --------
Total from Investment Activities........ 0.0522 0.0497 0.0472 0.0534 0.0509 0.0484
Distributions to shareholders from net
investment income......................... (0.0522) (0.0497) (0.0472) (0.0534) (0.0509) (0.0484)
---------- -------- -------- ---------- -------- --------
Net Asset Value, End of Period.............. $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
========== ======== ======== ========== ======== ========
Total Return(c)............................. 5.35% 5.08% 4.82% 5.47% 5.21% 4.94%
Ratios/Supplemental Data:
Net Assets at end of period (000)....... $1,299,086 $216,368 $177,882 $1,191,447 $215,593 $131,074
Ratio of expenses to average net
assets(d)............................. 0.27% 0.52% 0.77% 0.23% 0.48% 0.73%
Ratio of net investment income
to average net assets(d).............. 5.22% 4.96% 4.70% 5.36% 5.12% 4.82%
Ratio of expenses to average net
assets assuming no waiver or expense
reimbursement(d)...................... 0.31% 0.56% 0.81% 0.24% 0.49% 0.74%
Ratio of net investment income to
average net assets assuming no waiver
or expense reimbursement(d)........... 5.18% 4.92% 4.66% 5.35% 5.11% 4.81%
<FN>
- ---------------
(a) Pilot Investor Shares commenced offering during July 1992.
(b) Prior to June 1, 1994, Goldman Sachs Asset Management served the Portfolio
as investment adviser.
(c) Total return would have been lower had certain expenses not been reduced
during the periods presented and is not annualized.
(d) Does not reflect the fee which may be charged by Boatmen's directly to its
customers' accounts at an annual rate not to exceed 0.25% of the average
daily balance of Pilot Shares in the customers' accounts.
(e) Annualized.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
32
<PAGE> 634
PILOT SHORT-TERM U.S. TREASURY FUND
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1994(B) YEAR ENDED AUGUST 31, 1993(B) YEAR ENDED AUGUST 31, 1992(B)
-------------------------------------- -------------------------------------- --------------------------------------
PILOT ADMINISTRATION INVESTOR PILOT ADMINISTRATION INVESTOR PILOT ADMINISTRATION INVESTOR
SHARES SHARES SHARES SHARES SHARES SHARES SHARES SHARES SHARES(A)
-------- -------------- -------- -------- -------------- -------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
-------- ------- -------- -------- ------- -------- -------- ------- --------
0.0334 0.0309 0.0284 0.0294 0.0269 0.0244 0.0400 0.0362 0.0048
0.0002 0.0002 0.0002 0.0006 0.0006 0.0006 0.0014 0.0016 0.0002
-------- ------- -------- -------- ------- -------- -------- ------- --------
0.0336 0.0311 0.0286 0.0300 0.0275 0.0250 0.0414 0.0378 0.0050
(0.0336) (0.0311) (0.0286) (0.0300) (0.0275) (0.0250) (0.0414) (0.0378) (0.0050)
-------- ------- -------- -------- ------- -------- -------- ------- --------
$ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
======== ======= ======== ======== ======= ======== ======== ======= ========
3.40% 3.15% 2.90% 3.04% 2.79% 2.53% 4.30% 4.04% 2.92%(e)
$843,111 $ 98,823 $156,132 $942,109 $ 65,570 $193,764 $887,321 $ 91,152 $212,920
0.16% 0.41% 0.66% 0.14% 0.39% 0.64% 0.24% 0.49% 0.71%(e)
3.34% 3.09% 2.84% 2.94% 2.69% 2.44% 4.00% 3.62% 2.83%(e)
0.28% 0.53% 0.78% 0.30% 0.55% 0.80% 0.30% 0.56% 0.81%(e)
3.24% 2.99% 2.74% 2.78% 2.53% 2.28% 3.94% 3.55% 2.73%(e)
</TABLE>
- --------------------------------------------------------------------------------
33
<PAGE> 635
PILOT SHORT-TERM DIVERSIFIED ASSETS FUND
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1996 YEAR ENDED AUGUST 31, 1995
---------------------------------------- ----------------------------------------
PILOT ADMINISTRATION INVESTOR PILOT ADMINISTRATION INVESTOR
SHARES SHARES SHARES SHARES SHARES SHARES
---------- -------------- -------- ---------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.............................. $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
---------- -------- -------- ---------- -------- --------
Investment Activities
Net investment income............. 0.0534 0.0509 0.0484 0.0554 0.0529 0.0504
Net realized gains from investment
transactions.................... -- -- -- -- -- --
---------- -------- -------- ---------- -------- --------
Total from Investment
Activities...................... 0.0534 0.0509 0.0484 0.0554 0.0529 0.0504
Distributions to shareholders from net
investment income................... (0.0534) (0.0509) (0.0484) (0.0554) (0.0529) (0.0504)
---------- -------- -------- ---------- -------- --------
Net Asset Value, End of Period........ $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
========== ======== ======== ========== ======== ========
Total Return(c)....................... 5.47% 5.21% 4.95% 5.68% 5.42% 5.15%
Ratios/Supplemental Data:
Net Assets at end of period
(000)........................... $1,318,767 $241,970 $ 49,849 $1,056,624 $231,688 $ 33,948
Ratio of expenses to average net
assets(d)....................... 0.27% 0.52% 0.77% 0.23% 0.48% 0.73%
Ratio of net investment income to
average net assets(d)........... 5.33% 5.07% 4.83% 5.56% 5.22% 5.00%
Ratio of expenses to average net
assets assuming no waiver or
expense reimbursement(d)........ 0.31% 0.56% 0.81% 0.24% 0.49% 0.74%
Ratio of net investment income to
average net assets assuming no
waiver or expense
reimbursement(d) 5.29% 5.03% 4.79% 5.55% 5.21% 4.99%
<FN>
- ---------------
(a) Pilot Investor Shares commenced offering during July 1992.
(b) Prior to June 1, 1994, Goldman Sachs Asset Management served the Portfolio
as investment adviser.
(c) Total return would have been lower had certain expenses not been reduced
during the periods presented and is not annualized.
(d) Does not reflect the fee which may be charged by Boatmen's directly to its
customers' accounts at an annual rate not to exceed 0.25% of the average
daily balance of Pilot Shares in the customers' accounts.
(e) Annualized.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
34
<PAGE> 636
PILOT SHORT-TERM DIVERSIFIED ASSETS FUND
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1994(B) YEAR ENDED AUGUST 31, 1993(B) YEAR ENDED AUGUST 31, 1992(B)
- -------------------------------------- ---------------------------------------- ----------------------------------------
PILOT ADMINISTRATION INVESTOR PILOT ADMINISTRATION INVESTOR PILOT ADMINISTRATION INVESTOR
SHARES SHARES SHARES SHARES SHARES SHARES SHARES SHARES SHARES(A)
- -------- -------------- -------- ---------- -------------- -------- ---------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
- -------- -------- -------- ---------- -------- -------- -------- -------- --------
0.0353 0.0328 0.0303 0.0325 0.0298 0.0273 0.0452 0.0396 0.0043
0.0001 0.0001 0.0001 0.0001 0.0001 0.0001 -- 0.0001 --
- -------- -------- -------- ---------- -------- -------- -------- -------- --------
0.0354 0.0329 0.0304 0.0326 0.0299 0.0274 0.0452 0.0397 0.0043
(0.0354) (0.0329) (0.0304) (0.0326) (0.0299) (0.0274) (0.0452) (0.0397) (0.0043)
- -------- -------- -------- ---------- -------- -------- -------- -------- --------
$ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
======== ======== ======== ========== ======== ======== ======== ======== ========
3.60% 3.35% 3.10% 3.29% 3.04% 2.78% 4.68% 4.42% 3.24%(e)
$857,795 $303,288 $ 37,896 $1,293,667 $378,262 $ 36,814 $1,939,568 $271,606 $ 27,880
0.15% 0.40% 0.65% 0.12% 0.37% 0.62% 0.12% 0.37% 0.62%(e)
3.53% 3.28% 3.03% 3.25% 2.98% 2.74% 4.52% 3.95% 3.14%(e)
0.29% 0.54% 0.79% 0.29% 0.54% 0.79% 0.29% 0.54% 0.80%(e)
3.40% 3.15% 2.90% 3.08% 2.81% 2.57% 4.35% 3.78% 2.96%(e)
</TABLE>
35
<PAGE> 637
PILOT MISSOURI SHORT-TERM U.S. TAX-EXEMPT FUND
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1996 YEAR ENDED AUGUST 31, 1995(B)
-------------------------------------- --------------------------------------
PILOT ADMINISTRATION INVESTOR PILOT ADMINISTRATION INVESTOR
SHARES SHARES SHARES SHARES SHARES SHARES
-------- -------------- -------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period...... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
----------
-
------------
---------- -------- -------- --------
Investment Activities
Net investment income................. 0.0318 0.0292 0.0267 0.0332 0.0300 0.0282
Net realized gains from investment
transactions........................ -- -- -- -- -- --
----------
-
------------
---------- -------- -------- --------
Total from Investment Activities...... 0.0318 0.0292 0.0267 0.0332 0.0300 0.0282
Distributions to shareholders from net
investment income....................... (0.0318) (0.0292) (0.0267) (0.0332) (0.0300) (0.0282)
----------
-
------------
---------- -------- -------- --------
Net Asset Value, End of Period............ $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
============ ========== =========== ======== ======== ========
Total Return(c)........................... 3.22% 2.96% 2.70% 3.37% 3.05% 2.86%
Ratios/Supplemental Data:
Net Assets at end of period (000)..... $183,772 $ 13,501 $ 15,743 $210,834 $ 4,555 $ 11,222
Ratio of expenses to average net
assets(d) 0.43% 0.68% 0.93% 0.44% 0.69% 0.94%
Ratio of net investment income to
average net assets(d)............... 3.17% 2.87% 2.65% 3.31% 3.06% 2.83%
Ratio of expenses to average net
assets assuming no waiver or expense
reimbursement(d).................... 0.43% 0.68% 0.93% 0.44% 0.69% 0.94%
Ratio of net investment income to
average net assets assuming no
waiver or expense reimbursement(d) 3.17% 2.87% 2.65% 3.31% 3.06% 2.83%
<FN>
- ---------------
(a) Pilot Investor Shares commenced offering during July 1992.
(b) Prior to July 1, 1995, Goldman Sachs Asset Management served the Portfolio
as investment adviser.
(c) Total return would have been lower had certain expenses not been reduced
during the periods presented and is not annualized.
(d) Does not reflect the fee which may be charged by Boatmen's directly to its
customers' accounts at an annual rate not to exceed 0.25% of the average
daily balance of Pilot Shares in the customers' accounts.
(e) Annualized.
(f) Pilot Administration Shares commenced offering during March of 1994.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
36
<PAGE> 638
PILOT MISSOURI SHORT-TERM U.S. TAX-EXEMPT FUND
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
YEAR ENDED AUGUST 31, 1994(B) AUGUST 31, 1993(B) AUGUST 31, 1992(B)
-------------------------------------------- ----------------------- ------------------------
PILOT ADMINISTRATION INVESTOR PILOT INVESTOR PILOT INVESTOR
SHARES SHARES(F) SHARES SHARES SHARES SHARES SHARES(A)
-------- -------------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
-------- -------- -------- -------- -------- -------- --------
0.0220 0.0103 0.0170 0.0221 0.0172 0.0325 0.0030
-- -- -- -- -- (0.0001) --
-------- -------- -------- -------- -------- -------- --------
0.0220 0.0103 0.0170 0.0221 0.0172 0.0324 0.0030
(0.0220) (0.0103) (0.0170) (0.0221) (0.0172) (0.0324) (0.0030)
-------- -------- -------- -------- -------- -------- --------
$ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
======== ======== ======== ======== ======== ======== ========
2.23% 2.04%(e) 1.73% 2.24% 1.73% 3.29% 1.74%(e)
$239,796 $ -- $ 9,364 $228,075 $ 7,819 $202,304 $ 10,696
0.37% 0.67%(e) 0.87% 0.36% 0.86% 0.37% 0.87%(e)
2.20% 2.03%(e) 1.70% 2.21% 1.71% 3.24% 1.75%(e)
0.37% 0.67%(e) 0.87% 0.36% 0.86% 0.37% 0.87%(e)
2.20% 2.03%(e) 1.70% 2.21% 1.71% 3.24% 1.75%(e)
</TABLE>
37
<PAGE> 639
PILOT SHORT-TERM TAX-EXEMPT DIVERSIFIED FUND
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
AUGUST 31, 1996 AUGUST 31, 1995(B)
-------------------------------------- ---------------------------------------
PILOT ADMINISTRATION INVESTOR PILOT ADMINISTRATION INVESTOR
SHARES SHARES SHARES SHARES SHARES SHARES(A)
-------- -------------- -------- -------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
-------- -------- -------- -------- -------- --------
Investment Activities
Net investment income................ 0.0326 0.0301 0.0276 0.0353 0.0328 0.0195
Net realized gains from investment
transactions....................... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total from Investment Activities..... 0.0326 0.0301 0.0276 0.0353 0.0328 0.0195
Distributions to shareholders from net
investment income...................... (0.0326) (0.0301) (0.0276) (0.0353) (0.0328) (0.0195)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period........... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
======== ======== ======== ======== ======== ========
Total Return(c).......................... 3.31% 3.05% 2.79% 3.59% 3.33% 1.96%
Ratios/Supplemental Data:
Net Assets at end of period (000).... $375,777 $ 14,550 $ 907 $397,783 $ 14,443 $ 5
Ratio of expenses to average net
assets(d).......................... 0.37% 0.62% 0.87% 0.28% 0.53% 0.78%(e)
Ratio of net investment income to
average net assets(d).............. 3.26% 2.97% 2.56% 3.54% 3.36% 3.15%(e)
Ratio of expenses to average net
assets assuming no waiver or
expense reimbursement(d) 0.41% 0.66% 0.91% 0.29% 0.54% 0.79%(e)
Ratio of net investment income to
average net assets assuming no
waiver or expense reimbursement(d) 3.22% 2.93% 2.52% 3.53% 3.35% 3.14%(e)
<FN>
- ---------------
(a) Pilot Investor Shares commenced offering during January 1995.
(b) Prior to July 1, 1995, Goldman Sachs Asset Management served the Portfolio
as investment adviser.
(c) Total return would have been lower had certain expenses not been reduced
during the periods presented and is not annualized.
(d) Does not reflect the fee which may be charged by Boatmen's directly to its
customers' accounts at an annual rate not to exceed 0.25% of the average
daily balance of Pilot Shares in the customers' accounts.
(e) Annualized.
(f) Pilot Administration Shares commenced offering during September 1993.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
38
<PAGE> 640
PILOT SHORT-TERM TAX-EXEMPT DIVERSIFIED FUND
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, YEAR ENDED
1994(B) AUGUST 31, 1993(B)
-------------------------- ------------------
PILOT ADMINISTRATION PILOT
SHARES SHARES(F) SHARES
-------- -------------- ------------------
<S> <C> <C> <C>
$ 1.0000 $ 1.0000 $ 1.0000
-------- -------- --------
0.0240 0.0208 0.0121
-- -- --
-------- -------- --------
0.0240 0.0208 0.0121
(0.0240) (0.0208) (0.0121)
-------- -------- --------
$ 1.0000 $ 1.0000 $ 1.0000
======== ======== ========
2.43% 2.18%(e) 2.23%(e)
388,048 3,040 428,843
0.20% 0.45%(e) 0.15%(e)
2.40% 2.15%(e) 2.21%(e)
0.20% 0.45%(e) 0.20%(e)
2.40% 2.15%(e) 2.16%(e)
</TABLE>
39
<PAGE> 641
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Trustees of the Pilot Short-Term U.S. Treasury Fund,
Pilot Short-Term Diversified Assets Fund, Pilot Missouri Short-Term Tax-Exempt
Fund, and Pilot Short-Term Tax-Exempt Diversified Fund of The Pilot Funds:
We have audited the accompanying statements of assets and liabilities of the
Pilot Short-Term U.S. Treasury Fund, Pilot Short-Term Diversified Assets Fund,
Pilot Missouri Short-Term Tax-Exempt Fund and Pilot Short-Term Tax-Exempt
Diversified Fund (the Pilot Money Market Funds) of The Pilot Funds (a
Massachusetts business trust), including the portfolios of investments as of
August 31, 1996, and the related statements of operations for the period then
ended, and the statements of changes in net assets and financial highlights for
the periods presented. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1996 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Pilot Money Market Funds as of August 31, 1996, the results of their operations,
the changes in their net assets and the financial highlights for the periods
presented in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
October 21, 1996
40
<PAGE> 642
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS
The Financial Statements filed as part of this Registration
Statement are as follows:
Included in the Prospectus:
- Financial Highlights
Included in the Statements of Additional Information:
- Portfolio of Investments for the period ended
August 31, 1996
- Statements of Assets and Liabilities for the
period ended August 31, 1996
- Statements of Operations for the period ended
August 31, 1996
- Statements of Changes in Net Assets for the
period ended August 31, 1996
- Notes to Financial Statements for the period
ended August 31, 1996
(B) EXHIBITS
The following exhibits are incorporated herein by reference
unless otherwise noted or are not required to be filed:
1(a). Agreement and Declaration of Trust, dated July 15, 1982,
filed as Exhibit 1 to Registrant's Registration Statement on
Form N-1A.
1(b). Amendment to Agreement and Declaration of Trust, dated
August 4, 1982, filed as Exhibit 1(b) to Post-Effective
Amendment No. 29 to Registrant's Registration Statement on
Form N-1A.
1(c). Amendment to Agreement and Declaration of Trust, dated
October 27, 1989, filed as Exhibit 1(b) to Post-Effective
Amendment No. 10 to Registrant's Registration Statement on
Form N-1A.
1(d). Amendment to Agreement and Declaration of Trust, dated
January 2, 1991, filed as Exhibit 1(d) to Post-Effective
Amendment No. 29 to Registrant's Registration Statement on
Form N-1A.
1(e). Amendment to Agreement and Declaration of Trust to
Establish and Designate Shares of the Short-Term Tax-Exempt
Portfolio, filed as Exhibit 1(f) to Post-Effective Amendment
No. 15 to Registrant's Registration Statement on Form N-1A.
1(f). Amendment to Agreement and Declaration of Trust to
Permit Trustees to Establish a Mandatory Retirement Age for
Trustees, dated July 2, 1991, filed as Exhibit 1(f) to
Post-Effective Amendment No. 29 to Registrant's Registration
Statement on Form N-1A.
1(g). Amendment to Agreement and Declaration of Trust to
Establish and Designate Units of the Taxable Bond Portfolio,
Intermediate-Term Tax-Exempt Portfolio, Tax-Exempt Portfolio,
Equity
4
<PAGE> 643
Income Portfolio and International Equity Portfolio, filed as
Exhibit 1(g) to Post-Effective Amendment No. 29 to
Registrant's Registration Statement on Form N-1A.
1(h). Amendment to Agreement and Declaration of Trust to
Redesignate Units of the Taxable Bond Portfolio,
Intermediate-Term Tax-Exempt Portfolio, Tax-Exempt Portfolio,
filed as Exhibit 1(h) to Post-Effective Amendment No. 18 to
Registrant's Registration Statement on Form N-1A.
1(i). Amendment to Agreement and Declaration of Trust to
Establish and Designate Shares of the Short-Term Tax-Exempt
Diversified Portfolio, filed as Exhibit 1(i) to Post-Effective
Amendment No. 18 to Registrant's Registration Statement on
Form N-1A.
1(j). Amendment to Agreement and Declaration of Trust to
Redesignate Shares of the International Equity Portfolio,
filed as Exhibit 1(j) to Post-Effective Amendment No. 19 to
Registrant's Registration Statement on Form N-1A.
1(k). Amendment to Agreement and Declaration of Trust, dated
May 27, 1994, to Change the Name of the Trust and to
Redesignate Shares and Classes, filed as Exhibit 1(k) to
Post-Effective Amendment No. 22 to Registrant's Registration
Statement on Form N-1A.
1(m). Redesignation of Series, Designation of New Series and
Designation of New Classes, filed as Exhibit 1(m) to
Post-Effective Amendment No. 23 to Registrant's Registration
Statement on Form N-1A.
1(n). Amendment to Agreement and Declaration of Trust to
Redesignate Shares of the Pilot Short-Term Tax-Exempt Fund to
be known as Shares of the Pilot Missouri Short-Term Tax-Exempt
Fund - filed as Exhibit 1(n) to Post-Effective Amendment No.
29 to Registrant's Registration Statement on Form N-1A.
1(o). Amendment to Agreement and Declaration of Trust to
designate Shares of Small Capitalization Equity Fund, filed as
Exhibit 1(o) to Post-Effective Amendment No. 29 to
Registrant's Registration Statement on Form N-1A.
2(a). By-Laws, filed as Exhibit 2 to Registrant's Registration
Statement on Form N-1A.
2(b). Amendment to Section 6.3 of the By-Laws, filed as
Exhibit 2(a) to Post-Effective Amendment No. 3 to Registrant's
Registration Statement on Form N-1A.
2(c). Amendment to Section 3.7 of the By-Laws, filed as
Exhibit 2(b) to Post-Effective Amendment No. 8 to Registrant's
Registration Statement on Form N-1A.
2(d). Amendment to the By-Laws adding Section 3.10, filed as
Exhibit 2(d) to Post-Effective Amendment No. 29 to
Registrant's Registration Statement on Form N-1A.
3. Not applicable.
5(a). Investment Advisory Agreement dated June 1, 1994 between
Registrant, on behalf of the Short-Term Diversified Assets
Portfolio, and Boatmen's Trust Company, filed as Exhibit 5(a)
to Post-Effective Amendment No. 22 to Registrant's
Registration Statement on Form N-1A.
5(b). Investment Advisory Agreement dated June 1, 1994 between
Registrant, on behalf of the Short-Term U.S. Treasury
Portfolio, and Boatmen's Trust Company, filed as Exhibit 5(b)
to Post-Effective Amendment No. 22 to Registrant's
Registration Statement on Form N-1A.
5(c). Advisory Agreement between Registrant, on behalf of the
Centerland Kleinwort Benson International Equity Portfolio,
and Boatmen's Trust Company, filed as Exhibit 5(h) to Post-
Effective Amendment No. 21 to Registrant's Registration
Statement on Form N-1A.
5
<PAGE> 644
5(d). Investment Management Agreement among Registrant, on
behalf of the Centerland Kleinwort Benson International Equity
Portfolio, Boatmen's Trust Company and Kleinwort Benson
International Investment Limited, filed as Exhibit 5(i) to
Post-Effective Amendment No. 21 to Registrant's Registration
Statement on Form N-1A.
5(e). Investment Advisory Agreement between Registrant on
behalf of the Pilot Small Capitalization Equity Fund, and
Boatmen's Trust Company - Filed herewith.
5(f). Form of Investment Advisory Agreement between
Registrant on behalf of the Pilot Growth Fund, and Boatmen's
Trust Company, filed as Exhibit 5(f) to Post-Effective
Amendment No. 31 to Registrant's Registration Statement on
Form N-1A.
5(g). Form of Investment Advisory Agreement between
Registrant on behalf of the Pilot Diversified Bond Income
Fund, and Boatmen's Trust Company, filed as Exhibit 5(g) to
Post- Effective Amendment No. 31 to Registrant's Registration
Statement on Form N-1A.
6. Distribution Agreement dated as of June 1, 1996 between
Registrant and Pilot Funds Distributors, Inc. - Filed
herewith.
7. Not applicable.
8(a). Custodian Agreement dated May 4, 1996 between
Registrant and Boatmen's Trust Company - Filed herewith.
9(a). Transfer Agency Agreement dated as of December 18, 1995
between Registrant and BISYS Fund Services, Inc. - Filed
herewith.
9(b). Administration Plan of Registrant with respect to the
Administration Class of shares dated May 19, 1991, as revised
October 13, 1992, as further revised March 4, 1994 to be
effective March 31, 1994, filed as Exhibit 9(e) to
Post-Effective Amendment No. 22 to Registrant's Registration
Statement on Form N-1A.
9(c). Form of Agreement between Registrant and Service
Organizations with respect to the Administration Plan, filed
as Exhibit 9(f) to Post-Effective Amendment No. 22 to
Registrant's Registration Statement on Form N-1A.
9(d). Form of Agreement and Plan of Reorganization between
Registrant, Kleinwort Benson Investment Strategies Fund and
Kleinwort Benson International Investment Limited, filed as
Exhibit 9(e) to Post-Effective Amendment No. 19 to
Registrant's Registration Statement on Form N-1A.
10(a). Opinions of Goodwin, Procter & Hoar LLP, Counsel to
Registrant, filed with Registrant's Notice pursuant to Rule
24f-2 on October 30, 1996 and Registrant's Registration
Statement on Form N-14 filed July 5, 1996 - incorporated
herein by reference.
10(b). Opinion of Goodwin Procter & Hoar - Not applicable.
11(a). Consents of Arthur Andersen LLP - Filed herewith.
11(b). Consent of Goodwin, Procter & Hoar LLP - Filed
herewith.
12. Not applicable.
13. Not applicable.
15(a). Service Plan of Registrant with respect to the Service
Class of Shares dated May 1, 1991, as revised effective July
1, 1993, as further revised March 4, 1994 to be effective
March 31, 1994, filed as Exhibit 15(a) to Post-Effective
Amendment No. 22 to Registrant's Registration Statement on
Form N-1A.
6
<PAGE> 645
15(b). Form of Agreement between Registrant and Service
Organizations with respect to the Service Plan, filed as
Exhibit 15(b) to Post-Effective Amendment No. 22 to
Registrant's Registration Statement on Form N-1A.
15(c). Distribution Plan for Class A Shares adopted July 25,
1994, filed as Exhibit 15(c) to Post-Effective Amendment No.
22 to Registrant's Registration Statement on Form N-1A.
15(d). Agreement between Concord Financial Group, Inc. and
Service Organizations with respect to the Distribution Plan
for Class A Shares, filed as Exhibit 15(d) to Post-Effective
Amendment No. 22 to Registrant's Registration Statement on
Form N-1A.
15(e). Distribution Plan for Class B Shares adopted July 25,
1994, filed as Exhibit 15(e) to Post-Effective Amendment No.
22 to Registrant's Registration Statement on Form N-1A.
15(f). Form of Agreement between Concord Financial Group, Inc.
and Service Organizations with respect to the Distribution
Plan for Class B Shares, filed as Exhibit 15(f) to
Post-Effective Amendment No. 22 to Registrant's Registration
Statement on Form N-1A.
17. Financial Data Schedule for Registrant's fiscal year
ended August 31, 1996 - Filed herewith.
18. Rule 18f-3 Multiple Class Plan - filed as Exhibit 6(b)
to Post-Effective Amendment No. 25 to Registrant's
Registration Statement on Form N-1A.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES AS OF OCTOBER 15, 1996
<TABLE>
<CAPTION>
Fund Name Total Active Shareholders
--------- -------------------------
<S> <C>
Municipal Bond
Pilot Shares 6
Class A Shares 48
Class B Shares 36
Intermediate Municipal Bond
Pilot Shares 6
Class A Shares 18
Class B Shares 0
U.S. Government Securities
Pilot Shares 4
Class A Shares 39
Class B Shares 54
Intermediate U.S. Government Securities
Pilot Shares 16
Class A Shares 56
Class B Shares 0
Equity Income
Pilot Shares 6
Class A Shares 206
Class B Shares 236
</TABLE>
7
<PAGE> 646
<TABLE>
<CAPTION>
<S> <C>
Growth & Income
Pilot Shares 18
Class A Shares 617
Class B Shares 335
Short-Term Diversified Assets Fund
Pilot Shares 23
Administration Shares 568
Investor Shares 546
Short-Term U.S. Treasury Fund
Pilot Shares 5
Administration Shares 558
Investor Shares 1,020
Missouri Tax-Exempt Fund
Pilot Shares 343
Administration Shares 25
Investor Shares 84
Short-Term Tax-Exempt Diversified Fund
Pilot Shares 2
Administration Shares 27
Investor Shares 18
International Equity Fund
Pilot Shares 19
Class A Shares 1,231
Class B Shares 45
Small Capitalization Equity Fund
Pilot Shares 14
Class A Shares 546
Class B Shares 244
Growth Fund
Pilot Shares 0
Class A Shares 0
Class B Shares 0
Diversified Bond Income Fund
Pilot Shares 0
Class A Shares 0
Class B Shares 0
Total: 7,019
</TABLE>
ITEM 27. INDEMNIFICATION.
Article VI of the Registrant's Agreement and Declaration of Trust
provides for indemnification of the Registrant's Trustees and officers under
certain circumstances. A copy of such Agreement and Declaration of Trust was
filed as Exhibit 1 to Registrant's Registration Statement on Form N-1A.
Paragraph 8 of each Investment Advisory Agreement between the
Registrant and Boatmen's Trust Company (other than the Advisory Agreement with
respect to the Pilot International Equity Fund) provides for indemnification of
Boatmen's Trust Company or, in lieu thereof, contribution by the Registrant,
under certain circumstances. Copies of the Advisory Agreements for the
Short-Term Diversified Assets, Short-Term U.S.
8
<PAGE> 647
Treasury, Short-Term Tax-Exempt Diversified, and Short-Term Tax-Exempt were
filed as Exhibits 5(a), 5(b), 5(c), 5(d), to Post-Effective Amendment No. 22 to
the Registrant's Registration Statement on Form N-1A. A copy of the Investment
Advisory Agreement for the Growth and Income, Equity Income, Intermediate U.S.
Government Securities, U.S. Government Securities, Intermediate Municipal Bond
and Municipal Bond Portfolios are to be filed in a Post-Effective Amendment to
the Registrant's Registration Statement on Form N-1A. A form of the Investment
Advisory Agreements for the Growth Fund and Diversified Bond Income Fund were
filed in Post-Effective Amendment No. 31 to the Registrant's Registration
Statement on Form N-1A.
Paragraph 7 of the Advisory Agreement between the Registrant and
Boatmen's Trust Company with respect to the Pilot Kleinwort Benson International
Equity Fund provides for indemnification of Boatmen's Trust Company or, in lieu
thereof, contribution by the Registrant, under certain circumstances. A copy of
the Advisory Agreement was filed as Exhibit 5(h) to Post-Effective Amendment No.
21 to the Registrant's Registration Statement on Form N-1A.
Kleinwort Benson International Equity Fund, Boatmen's Trust Company and
Kleinwort Benson Investment Management Americas Inc. (formerly Kleinwort Benson
International Investment Limited) provide for indemnification of Kleinwort
Benson Investment Management Americas Inc. or, in lieu thereof, contribution by
the Registrant, under certain circumstances. A copy of the Investment Management
Agreement was filed as Exhibit 5(i) to Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A.
Section 1.11 of the Distribution Agreement between Registrant and Pilot
Funds Distributors, Inc. provides for the indemnification of Pilot Funds
Distributors, Inc. under certain circumstances. A copy of the Distribution
Agreement is filed herewith.
Investment Company Professional Liability Policy purchased jointly by
Registrant and Pilot Funds Distributors, Inc. insure such entities and their
respective trustees, directors, officers and employees, subject to the policies'
coverage limits and exclusions and varying deductibles, against loss under
certain circumstances.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISERS.
The business and other connections of the directors and officers of
Kleinwort Benson Investment Management Americas Inc. formerly Kleinwort Benson
International Investment Limited ("KBI") are listed in the Form ADV of Kleinwort
Benson Investment Management Americas, Inc. as currently on file with the
Commission (File No. 801-15027), the text of which is hereby incorporated by
reference.
The business and other connections of the directors and certain
senior executive officers of Boatmen's Trust Company are:
<TABLE>
<CAPTION>
NAME POSITION WITH POSITION AND NAME
---- ------------- -----------------
BOATMEN'S TRUST COMPANY OF OTHER BUSINESS
----------------------- -----------------
<S> <C> <C>
Howard F. Baer Director Retired
32 North Kings Highway, Suite 504
St. Louis, Missouri 63108
</TABLE>
9
<PAGE> 648
<TABLE>
<CAPTION>
<S> <C> <C>
Clarence C. Barksdale Director Vice Chairman
Washington University
7425 Forsyth Boulevard
Campus Box 1227
St. Louis, Missouri 63105
Gerald D. Blatherwick Director Retired
26 Fordyce Lane
St. Louis, Missouri 63124
Stephen F. Brauer Director President
Hunter Engineering Company
11250 Hunter Drive
Bridgeton, Missouri 63004
Mary L. Burke, Ph.D. Director Head of School
Whitfield School
175 South Mason Road
St. Louis, Missouri 63141
Andrew B. Craig, III Director Chairman and Chief Executive Officer
Boatmen's Bancshares, Inc.
One Boatmen's Plaza
St. Louis, Missouri 63101
Donald Danforth, Jr. Director President
Danforth Agri-Resources Inc.
700 Corporate Park Drive, Suite 330
St. Louis, Missouri 63105-4209
The Honorable John C. Danforth Director Bryan Cave LLP
One Metropolitan Square
211 N. Broadway, Suite 3600
St. Louis, Missouri 63102-2750
Martin E. Galt, III Director and Chairman of the Board, President and
President Chief Executive Officer
Boatmen's Trust Company
100 North Broadway
St. Louis, Missouri 63102
A. William Hager Director Chairman of the Board
Hager Hinge Company
139 Victor Street
St. Louis, Missouri 63104
Samuel B. Hayes, III Director President, Boatmen's Bancshares, Inc.
The Boatmen's National Bank of St. Louis
One Boatmen's Plaza
St. Louis, Missouri 63101
Robert B. Hoffman Director Senior Vice President and
Chief Financial Officer
Monsanto Company-DIF
800 N. Lindbergh Boulevard
St. Louis, Missouri 63167
Robert E. Kresko Director Pierre Laclede Center
7701 Forsyth, Suite 680
St. Louis, Missouri 63105
John Peters MacCarthy Director Retired
6 Robin Hill Lane
St. Louis, Missouri 63124
</TABLE>
10
<PAGE> 649
<TABLE>
<CAPTION>
<S> <C> <C>
James S. McDonnell, III Director Retired
40 Glens Eagles Drive
St. Louis, Missouri 63124
John B. McKinney Director President, Chief Executive Officer
Laclede Steel Company
One Metropolitan Square, 15th Floor
St. Louis, Missouri 63102
Reuben M. Morriss, III Director Retired
10048 Litzsinger Road
St. Louis, Missouri 63124
William C. Nelson Director Chairman, President and Chief Executive Officer
Boatmen's First National Bank of Kansas City
10th & Baltimore
P.O. Box 419038
Kansas City, Missouri 64183
Kimberly A. Olson Director Executive Vice President
Group One Capital
1611 Des Peres Road, Suite 3200
St. Louis, Missouri 63131
William A. Peck, M.D. Director Executive Vice Chancellor and Dean
Washington University School of Medicine
660 South Euclid Avenue, Box 8106
St. Louis, Missouri 63110
W.R. Persons Director 200 South Bemiston Avenue
Suite 308
St. Louis, Missouri 63105
Jerry E. Ritter Director Chairman of the Board of
Clark Enterprises, Inc., and consultant to
Anheuser-Busch Companies, Inc.
1401 Clark Avenue
St. Louis, Missouri 63103
Hugh Scott, III Director Chairman and Chief Executive Officer
Western Diesel Services, Inc.
101 South Hauley, Suite 1910
St. Louis, Missouri 63105
Richard W. Shomaker Director Retired
14181 Woods Mill Cove
Chesterfield, Missouri 63017
Brice R. Smith, Jr. Director Chairman Emeritus
Sverdrup Corporation
SPIRE Company LLC
13801 Riverport Drive, Suite 301
Maryland Heights, Missouri 63043
William D. Stamper Director President
William D. Stamper Company
7777 Bonhomme, Suite 1006
St. Louis, Missouri 63105
Janet M. Weekly Director President
Janet McAfee Inc. Real Estate
9889 Clayton Road
St. Louis, Missouri 63124
Gordon B. Wells Director Retired
3121 West 67th Terrace
Shawnee Mission, Kansas 66208
</TABLE>
11
<PAGE> 650
<TABLE>
<CAPTION>
<S> <C> <C>
Janet M. Weakley Director President
Janet McAfee Inc. Real Estate
9889 Clayton Road
St. Louis, Missouri 63124
Gordon E. Wells Director Retired
3121 West 67th Terrace
Shawnee Mission, Kansas 66208
Eugene F. Williams, Jr. Director Retired
515 Olive Street, Suite 1505
St. Louis, Missouri 63101
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Pilot Funds Distributors, Inc., which is located at 3435
Stelzer Road, Columbus, Ohio 43219-3035, will act as exclusive
distributor for the Registrant. The distributor is registered
with the Securities and Exchange Commission as a broker-dealer
and is a member of the National Association of Securities
Dealers.
(b) To the best of Registrant's knowledge, the directors and
officers of PFD are as follows:
<TABLE>
<CAPTION>
NAMES POSITIONS AND OFFICES WITH POSITIONS AND
PRINCIPAL BUSINESS ADDRESS PILOT FUND DISTRIBUTORS, INC. OFFICES WITH REGISTRANT
- -------------------------- ----------------------------- -----------------------
<S> <C> <C>
Lynn J. Mangum Chairman None
150 Clove Road
Little Falls, New Jersey 07424
Robert J. McMullan Executive Vice President None
150 Clove Road
Little Falls, New Jersey 07424
Steven Mintos Executive Vice President and None
3435 Stelzer Road Chief Operating Officer
Columbus, Ohio 43219
George Martinez Senior Vice President Secretary
3435 Stelzer Road
Columbus, Ohio 43219
Richard Galloway Regional Vice President None
3435 Stelzer Road
Columbus, Ohio 43219
Michael Burns Vice President/Compliance None
3435 Stelzer Road
Columbus, Ohio 43219
Dennis Sheehan Vice President None
150 Clove Road
Little Falls, New Jersey 07424
Dale Smith Vice President and None
3435 Stelzer Road Chief Financial Officer
Columbus, Ohio 43219
</TABLE>
12
<PAGE> 651
<TABLE>
<CAPTION>
<S> <C> <C>
William J. Tomko Vice President President
3435 Stelzer Road
Columbus, Ohio 43219
Annamarie Porcaro Assistant Secretary None
150 Clove Road
Little Falls, New Jersey 07424
Robert Tuch Assistant Secretary None
3435 Stelzer Road
Columbus, Ohio 43219
</TABLE>
(c) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
(1) Pilot Funds Distributors, Inc., 3435 Stelzer Road, Columbus,
Ohio 43219-3035 (records relating to the Distributor).
(2) Boatmen's Trust Company, 100 North Broadway, St. Louis,
Missouri 63102 (records relating to Adviser, Subadviser and
Custodian).
(3) Kleinwort Benson Investment Management Americas Inc., 200 Park
Avenue, New York, New York 10166 (records relating to
Investment Manager).
(4) BISYS Fund Services, Inc., 3435 Stelzer Road, Columbus, Ohio
43219 (records relating to Transfer Agent).
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
Registrant hereby undertakes to furnish each person to whom a
prospectus for the Registrant is delivered with a copy of the
most recent annual report to shareholders for the series of
the Registrant offered by that prospectus upon request and
without charge.
13
<PAGE> 652
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Columbus and
State of Ohio on the 28th day of October, 1996.
THE PILOT FUNDS
By: /s/ William J. Tomko
-------------------------------
William J. Tomko, President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ William J. Tomko
- ----------------------------------- President October 28, 1996
William J. Tomko, President (Principal Executive Officer)
/s/ Martin R. Dean Treasurer October 28, 1996
- ----------------------------------- (Principal Accounting Officer)
Martin R. Dean and Principal Financial Officer)
J. HORD ARMSTRONG, III* Trustee October 28, 1996
- -----------------------------------
J. Hord Armstrong, III
LEE F. FETTER* Trustee October 28, 1996
- -----------------------------------
Lee F. Fetter
HENRY O. JOHNSTON* Trustee October 28, 1996
- -----------------------------------
Henry O. Johnston
L. WHITE MATTHEWS, III* Trustee October 28, 1996
- -----------------------------------
L. White Matthews, III
NICHOLAS G. PENNIMAN* Trustee October 28, 1996
- -----------------------------------
Nicholas G. Penniman
/s/ William J. Tomko
- -----------------------------------
*William J. Tomko, Attorney-in-fact
</TABLE>
14
<PAGE> 653
EXHIBITS
Exhibit 5(e) Investment Advisory Agreement between Registrant on behalf
of the Pilot Small Capitalization Equity Fund, and Boatmen's
Trust Company
Exhibit 6 Distribution Agreement dated as of June 1, 1996 between
Registrant and Pilot Funds Distributors, Inc.
Exhibit 8(a) Custodian Agreement dated May 4, 1996 between Registrant
and Boatmen's Trust Company
Exhibit 9(a) Transfer Agency Agreement dated as of December 18, 1995
between Registrant and BISYS Fund Services, Inc.
Exhibit 11(a) Consents of Arthur Andersen LLP
Exhibit 11(b) Consent of Goodwin, Procter & Hoar LLP
Exhibit 17 Financial Data Schedule
15
<PAGE> 1
Exhibit 5(e)
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 11th day of December, 1995 between THE PILOT FUNDS, a
Massachusetts business trust (the "Trust"), formerly Centerland Fund, on behalf
of the Pilot Small Capitalization Equity Fund, and BOATMEN'S TRUST COMPANY, a
Trust Company organized under the laws of Missouri (the "Adviser").
W I T N E S S E T H:
WHEREAS, the Trust is an open-end management investment company registered under
the Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Trust is authorized to issue Units of beneficial interest
(hereafter referred to as "Shares") in separate series with each such series
representing the interests in a separate portfolio of securities and other
assets;
WHEREAS, the Trust has established and presently offers (or intends to offer)
Shares of beneficial interest in a portfolio currently known as the Pilot
Diversified Bond Income Fund (the "Fund"); and
WHEREAS, the Trust desires to retain the Adviser to render investment advisory
services to the Trust with respect to the Fund as indicated herein and the
Adviser is willing to so render such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
hereinafter set forth, the parties hereto agree as follows:
1. Appointment of Adviser. The Trust hereby appoints the Adviser to
act as investment adviser to the Trust and the Fund for the
periods and on the terms herein set forth. The Adviser accepts
such appointment and agrees to render the services herein set
forth, for the compensation herein provided.
2. Delivery of Documents. The Trust has delivered (or will deliver as
soon as is possible) to the Adviser copies of each of the
following documents:
(a) Agreement and Declaration of Trust of the Trust dated
as of July 15, 1982 (such Agreement and Declaration
of Trust, as presently in effect and as amended from
time to time, is herein called the "Trust
Agreement"), copies of which are also on file with
the Secretary of the Commonwealth of Massachusetts;
(b) By-Laws of the Trust (such By-Laws, as presently in
effect and as amended from time to time, are herein
called the "By-Laws");
<PAGE> 2
(c) Certified resolutions of the Shareholder(s) and the
Trustees of the Trust approving the terms of this
Agreement;
(d) Custodian Agreement (including related fee schedule)
dated November 24, 1982 between the Trust and State
Street Bank and Trust Company (such Agreement, as
presently in effect and as amended and/or superseded from
time to time, is herein called the "Custodian
Agreement");
(e) Prospectus and Statement of Additional Information of the
Trust with respect to the Fund as currently in effect
(such Prospectus and Statement of Additional Information,
as currently in effect and as amended, supplemented
and/or superseded from time to time, is herein called the
"Prospectus"); and
(f) Registration Statement of the Trust under the Securities
Act of 1933, as amended (the "1933 Act"), and the 1940
Act on Form N-1 as filed with the Securities and Exchange
Commission (the "Commission") on July 16, 1982, and as
amended on Form N-1A (such Registration Statement, as
presently in effect and as amended from time to time, is
herein called the "Registration Statement").
The Trust agrees to promptly furnish the Adviser from time to time with copies
of all amendments of or supplements to or otherwise current versions of any of
the foregoing documents not heretofore furnished.
3. Duties of Adviser.
(a) Subject to the general supervision of the Trustees of the
Trust, the Adviser shall manage the investment operations
of the Fund and the composition of the Fund's assets,
including the purchase, retention and disposition
thereof. In this regard, the Adviser:
(i) shall provide supervision of the Fund's
assets, furnish a continuous investment
program for the Fund, determine from time to
time what investments or securities will be
purchased, retained or sold by the Fund, and
what portion of the assets will be invested
or held uninvested as cash;
(ii) shall place orders with broker-dealers,
foreign currency dealers, futures
commissions merchants or others pursuant to
the Adviser's determinations in accordance
with the Fund's policies as expressed in the
Registration Statement; and
- 2 -
<PAGE> 3
(iii) may, on occasions when it deems the purchase
or sale of a security to be in the best
interests of the Fund as well as its other
customers (including any other Fund or any
other investment company or trust or
advisory account for which the Adviser acts
as adviser), aggregate, to the extent
permitted by applicable laws and
regulations, the securities to be sold or
purchased in order to obtain the best net
price and the most favorable execution. In
such event, allocation of the securities so
purchased or sold, as well as the expenses
incurred in the transaction, will be made by
the Adviser in the manner it considers to be
the most equitable and consistent with its
fiduciary obligations to the Fund and to
such other customers.
(b) The Adviser, in the performance of its duties
hereunder, shall act in conformity with the Trust
Agreement, By-Laws, Registration Statement and
Prospectus and with the instructions and directions
of the Trustees of the Trust, and will use its best
efforts to conform to the requirements of the 1940
Act, the Investment Advisers Act of 1940 (to the
extent applicable), the Internal Revenue Code of
1986, as amended, relating to regulated investment
companies and all rules and regulations thereunder,
the Insider Trading and Securities Fraud Enforcement
Act of 1988 (to the extent applicable) and all other
applicable federal and state laws, regulations and
rulings.
(c) The Adviser shall render to the Trustees of the Trust
such periodic and special reports as the Trustees may
reasonably request.
(d) The Adviser shall notify the Trust of any material
change in the management of the Adviser within a
reasonable time after such change.
(e) The Adviser shall immediately notify the Trust in the
event that the Adviser or any of its affiliates: (1)
becomes aware that it is subject to a statutory
disqualification that prevents the Adviser from
serving as investment adviser pursuant to this
Agreement; or (2) becomes aware that it is the
subject of an administrative proceeding or
enforcement action by the Securities and Exchange
Commission or other regulatory authority. The Adviser
further agrees to notify the Trust immediately of any
material fact known to the Adviser respecting or
relating to the Adviser that is not contained in the
Trust's Registration Statement regarding the Trust,
or any amendment or supplement thereto, but that is
required to be disclosed therein, and of any
statement contained therein that becomes untrue in
any material respect.
- 3 -
<PAGE> 4
(f) The services of the Adviser hereunder are not deemed
exclusive and the Adviser shall be free to render
similar services to others so long as its services
under this Agreement are not impaired thereby.
4. Expenses
(a) During the term of this Agreement, the Adviser will
pay all costs incurred by it in connection with the
performance of its duties under paragraph 3 hereof,
other than the cost (including taxes and brokerage
commissions, if any) of securities purchased for the
Fund.
(b) The Adviser agrees that its gross compensation for
any fiscal year shall not be greater than an amount
which, when added to the other expenses of the Fund,
shall cause the aggregate expenses of the Fund to
equal the maximum expenses under the lowest
applicable expense limitation established pursuant to
the statutes or regulations of any jurisdiction in
which the Shares of the Fund may be qualified for
offer and sale. Except to the extent that such amount
has been reflected in reduced payments to the
Adviser, the Adviser shall refund to the Fund the
amount of any payment received in excess of the
limitation pursuant to this section as promptly as
practicable after the end of such fiscal year,
provided that the Adviser shall not be required to
pay the Fund an amount greater than the fee paid to
the Adviser in respect of such year pursuant to this
Agreement. As used in this section, "expenses" shall
mean those expenses included in the applicable
expense limitation having the broadest specifications
thereof, and "expense limitation" means a limit of
the maximum annual expenses which may be incurred by
the Fund determined (i) by multiplying a fixed
percentage by the average, or by multiplying more
than one such percentage by different specified
amounts of the average, of the values of the Fund's
net assets for a fiscal year or (ii) by multiplying a
fixed percentage by the Fund's net investment income
for a fiscal year. The words "lowest applicable
expense limitation" shall be construed to result in
the largest reduction of the Adviser's compensation
for any fiscal year of the Fund; provided, however,
that nothing in this Agreement shall limit the
Adviser's fees if not required by an applicable
statute or regulation referred to above in this
section.
The Adviser may waive all or a portion of its fees
provided for hereunder and such waiver shall be
treated as a reduction in purchase price of the
Adviser's services. The Adviser shall be
contractually bound hereunder by the terms of any
publicly announced waiver of its fee, or any
limitation of the Fund's expenses, as if such waiver
or limitation were fully set forth herein.
- 4 -
<PAGE> 5
5. Compensation
(a) For the services provided and the expenses assumed by
the Adviser pursuant to this Agreement, the Trust
will pay to the Adviser as full compensation therefor
a fee at an annual rate of .55% of the Fund's average
net assets.
(b) The fee will be computed based on net assets on each
day and will be paid to the Adviser monthly.
6. Books and Records. The Adviser shall maintain all of the
Trust's records relating to the Adviser's duties with respect
to the Fund. The Adviser agrees that all records so maintained
are the property of the Trust and it will surrender promptly
to the Trust any of such records upon the Trust's request. The
Adviser further agrees to preserve for the periods, and in the
manner, prescribed by the Rules of the Commission under the
1940 Act any such records as are required to be maintained by
such Rules. To the extent required by law, the Adviser shall
furnish to regulatory authorities having the requisite
authority such records which may be requested in order to
ascertain whether the operations of the Trust with respect to
the Fund are being conducted in a manner consistent with
applicable laws and regulations.
7. Indemnification
(a) Subject to Section 36 of the 1940 Act to the extent
applicable, the Adviser shall not be liable for any
error of judgment or mistake of law or for any loss
suffered by the Trust in connection with the matters
to which this Agreement relates, except a loss
resulting from willful misfeasance, bad faith or
gross negligence in the performance of its
obligations and duties, or by reason of its reckless
disregard of its obligations and duties, under this
Agreement.
(b) The Trust, on behalf of the Fund, hereby agrees to
indemnify and hold harmless the Adviser, its
directors, officers and employees and each person, if
any, who controls the Adviser (collectively, the
"Indemnified Parties") against any and all losses,
claims, damages or liabilities, joint or several,
relating to the Fund, to which any such Indemnified
Party may become subject under the 1933 Act, the
Securities Exchange Act of 1934, the Advisers Act,
the 1940 Act or other federal or state statutory law
or regulation, at common law or otherwise, insofar as
such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based
upon
(i) any untrue statement or alleged untrue
statement of a material fact or any omission
or alleged omission to state a material fact
required to be stated or necessary to make
the statements made not misleading in (x)
the Registration Statement or the
- 5 -
<PAGE> 6
Prospectus, (y) any advertisement or
sales literature authorized by the Trust for
use in the offer and sale of Shares of the
Fund, or (z) any application or other
document filed in connection with the
qualification of the Trust or Shares of the
Fund under the Blue Sky or securities laws
of any jurisdiction, except insofar as such
losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or
are based upon any such untrue statement or
omission or alleged untrue statement or
omission (1) in a document prepared by the
Adviser, or (2) made in reliance upon and in
conformity with information furnished to the
Trust by or on behalf of the Adviser
pertaining to or originating with the
Adviser for use in connection with any
document referred to in clauses (x), (y) or
(z), or
(ii) subject in each case to clause (i) above,
the Adviser acting as investment adviser to
the Trust with respect to the Fund;
and the Trust, from the assets of the Fund, will
reimburse each Indemnified Party for any legal or
other expenses incurred by such Indemnified Party in
connection with investigating or defending any such
loss, claim, damage, liability or action.
(c) If the indemnification provided for in paragraph 7(b)
is available in accordance with the terms of such
paragraph but is for any reason held by a court in a
final adjudication to be unavailable from the Trust,
then the Trust, from the assets of the Fund, shall
contribute to the aggregate amount paid or payable by
the Trust and such Indemnified Party as a result of
such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is
appropriate to reflect (i) the relative benefits
received by the Fund and such Indemnified Party in
connection with the operations of the Fund, (ii) the
relative fault of the Trust with respect to the Fund
and such Indemnified Party, and (iii) any other
relevant equitable considerations. The Trust and the
Adviser agree that it would not be just and equitable
if contribution pursuant to this subparagraph (c)
were determined by pro rata allocation or any other
method of allocation which does not take account of
the equitable considerations referred to above in
this subparagraph (c). The amount paid or payable as
a result of the losses, claims, damages or
liabilities (or actions in respect thereof) referred
to above in this subparagraph (c) shall be deemed to
include any legal or other expenses incurred by the
Trust and the Indemnified Party in connection with
investigating or defending any such loss, claim,
damage, liability or action. No person guilty of
fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall
- 6 -
<PAGE> 7
be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
(d) It is understood, however, that nothing in this
paragraph 7 shall protect any Indemnified Party
against, or entitle any Indemnified Party to
indemnification against, or contribution with respect
to, any liability to the Trust or its Shareholders to
which such Indemnified Party is subject, by reason of
its willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by
reason of any reckless disregard of its obligations
and duties, under this Agreement or otherwise to an
extent or in a manner inconsistent with Section 17(i)
of the 1940 Act.
8. Duration and Termination. This Agreement, shall continue,
unless sooner terminated as provided herein, until May 31,
1997, and thereafter shall continue automatically for periods
of one year so long as each such latter continuance is
approved at least annually (a) by the vote of a majority of
the Trustees of the Trust who are not parties to this
Agreement or interested persons (as defined by the 1940 Act)
of any such party, cast in person at a meeting called for the
purpose of voting on such approval, and (b) by the Trustees of
the Trust or by vote of a majority of the outstanding Shares
(as defined with respect to voting securities in the 1940 Act)
representing the interests in the Fund; provided, however,
that this Agreement may be terminated by the Trust at any
time, without the payment of any penalty, by vote of a
majority of the Trustees of the Trust or by vote of a majority
of the outstanding Shares (as so defined) representing the
interests in the Fund affected thereby on 60 days' written
notice to the Adviser, or by the Adviser at any time, without
the payment of any penalty, on 60 days' written notice to the
Trust. This Agreement will automatically and immediately
terminate in the event of its assignment (as defined by the
1940 Act).
9. Status of Adviser as Independent Contractor. The Adviser shall
for all purposes herein be deemed to be an independent
contractor and shall, unless otherwise expressly provided
herein or authorized by the Trustees of the Trust from time to
time, have no authority to act for or represent the Trust or
Fund in any way or otherwise be deemed an agent of the Trust
or Fund.
10. Amendment of Agreement. This Agreement may be amended, changed
or waived only by an instrument in writing and by mutual
consent, but the consent of the Trust must be approved (a) by
vote of a majority of those Trustees of the Trust who are not
parties to this Agreement or interested persons (as defined in
the 1940 Act) of any such party, cast in person at a meeting
called for the purpose of voting on such amendment, and (b) by
vote of a majority of the outstanding Shares (as defined with
respect to voting securities by the 1940 Act) representing the
interests in the Fund.
- 7 -
<PAGE> 8
11. Limitation of Liability. The name "The Pilot Funds" refers to
the Trustees under the Declaration collectively as trustees
and not as individuals. The Declaration, a copy of which,
together with all amendments thereto, is on file in the Office
of the Secretary of the Commonwealth of Massachusetts,
provides that no shareholder, Trustee, officer, employee or
agent of the Trust, shall be subject to claims against or
obligations of the Trust to any extent whatsoever, but that
the Trust estate only shall be liable.
The Adviser is hereby expressly put on notice of the
limitation of liability as set forth in the Declaration and
agrees that the obligations assumed by the Trust pursuant to
this Agreement shall be limited in all cases to the Fund's
assets, and the Adviser shall not seek satisfaction of any
such obligation from the shareholders or any shareholder of
the Trust or Fund or any other series of the Trust, or from
any Trustee, officer, employee or agent of the Trust. The
Adviser understands that the rights and obligations of each
series under the Declaration are separate and distinct from
those of any and all other series.
12. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit
any of the provisions hereof or otherwise affect their
construction or effect. If any provision of this Agreement
shall be held or made invalid by a court decision, statute,
rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be construed in
accordance with applicable federal law and the laws of the
Commonwealth of Massachusetts and shall be binding upon and
shall inure to the benefit of the parties hereto and their
respective successors subject to the last sentence of
paragraph 8, and, to the extent provided in paragraph 7
hereof, each Indemnified Party. Anything herein to the
contrary notwithstanding, this Agreement shall not be
construed in a manner inconsistent with the 1940 Act, or in a
manner which would cause the Trust to fail to comply with the
requirements of Subchapter M of the Internal Revenue Code of
1986, as amended, nor shall this Agreement be construed to
require, or to impose any duty upon, either of the parties to
do anything in violation of any applicable laws or
regulations. This Agreement may be executed simultaneously in
two counterparts, each of which shall be deemed an original,
but both of which together shall constitute one and the same
instrument. This Agreement shall supersede all prior
investment advisory or management agreements entered into
between the parties. This Agreement shall not apply to the
management of assets allocated to any series of the Trust
other than the Fund.
- 8 -
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed as of the day and year first above written.
THE PILOT FUNDS
Attest:
___________________________ By:___________________________
Title:
BOATMEN'S TRUST COMPANY
Attest:
___________________________ By:___________________________
Title:
- 9 -
<PAGE> 1
Exhibit 6
DISTRIBUTION AGREEMENT
AGREEMENT made this 1st day of June, 1996, between THE PILOT FUNDS (the
"Trust"), a Massachusetts business trust having its principal place of business
at 3435 Stelzer Road, Columbus, Ohio 43219, and PILOT FUNDS DISTRIBUTORS, INC.
("Distributor"), having its principal place of business at 3435 Stelzer Road,
Columbus, Ohio 43219.
WHEREAS, the Trust is an open-end management investment company,
organized as a Massachusetts business trust and registered with the Securities
and Exchange Commission (the "Commission") under the Investment Company Act of
1940, as amended (the "1940 Act"); and
WHEREAS, it is intended that Distributor act as the distributor of the
units of beneficial interest ("Shares") of each of the investment portfolios of
the Trust, either now or hereafter created (such portfolios being referred to
individually as a "Fund" and collectively as the "Funds").
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. Services as Distributor.
1.1 Distributor will act as agent for the distribution of the
Shares covered by the registration statement and prospectus of the Trust then in
effect under the Securities Act of 1933, as amended (the "Securities Act"). As
used in this Agreement, the term "registration statement" shall mean Parts A
(the prospectus), B (the Statement of Additional Information) and C of each
registration statement that is filed on Form N-1A, or any successor thereto,
with the Commission, together with any amendments thereto. The term "prospectus"
shall mean each form of prospectus and Statement of Additional Information used
by the Funds for delivery to shareholders and prospective shareholders after the
effective dates of the above referenced registration statements, together with
any amendments and supplements thereto.
1.2 Distributor agrees to use appropriate efforts to solicit
orders for the sale of the Shares and will undertake such advertising and
promotion as it believes reasonable in connection with such solicitation. The
Trust understands that Distributor is now and may in the future be the
distributor of the shares of several investment companies or series (together,
"Companies") including Companies having investment objectives similar to those
of the Trust. The Trust further understands that investors and potential
investors in the Trust may invest in shares of such other Companies. The Trust
agrees that Distributor's duties to such Companies shall not be deemed in
conflict with its duties to the Trust under this paragraph 1.2.
Distributor shall, at its own expense, finance
appropriate activities which it deems reasonable, which are primarily intended
to result in the sale of the Shares, including, but not limited to, advertising,
compensation of underwriters, dealers and sales personnel, the printing and
1
<PAGE> 2
mailing of prospectuses to other than current Shareholders, and the printing and
mailing of sales literature.
1.3 In its capacity as distributor of the Shares, all
activities of Distributor and its partners, agents, and employees shall comply
with all applicable laws, rules and regulations, including, without limitation,
the 1940 Act, all rules and regulations promulgated by the Commission thereunder
and all rules and regulations adopted by any securities association registered
under the Securities Exchange Act of 1934.
1.4 Distributor will provide one or more persons, during
normal business hours, to respond to telephone questions with respect to the
Trust.
1.5 Distributor will transmit any orders received by it for
purchase or redemption of the Shares to the transfer agent and custodian for the
Funds.
1.6 Whenever in their judgment such action is warranted by
unusual market, economic or political conditions, or by abnormal circumstances
of any kind, the Trust's officers may decline to accept any orders for, or make
any sales of, the Shares until such time as those officers deem it advisable to
accept such orders and to make such sales.
1.7 Distributor will act only on its own behalf as principal
if it chooses to enter into selling agreements with selected dealers or others.
1.8 The Trust agrees at its own expense to execute any
and all documents and to furnish any and all information and otherwise to take
all actions that may be reasonably necessary in connection with the
qualification of the Shares for sale in such states as Distributor may
designate.
1.9 The Trust shall furnish from time to time, for use in
connection with the sale of the Shares, such information with respect to the
Funds and the Shares as Distributor may reasonably request; and the Trust
warrants that the statements contained in any such information shall fairly show
or represent what they purport to show or represent. The Trust shall also
furnish Distributor upon request with: (a) unaudited semi-annual statements of
the Funds' books and accounts prepared by the Trust, (b) a monthly itemized list
of the securities in the Funds, (c) monthly balance sheets as soon as
practicable after the end of each month, and (d) from time to time such
additional information regarding the financial condition of the Funds as
Distributor may reasonably request.
1.10 The Trust represents to Distributor that, with respect to
the Shares, all registration statements and prospectuses filed by the Trust with
the Commission under the Securities Act have been carefully prepared in
conformity with requirements of said Act and rules and regulations of the
Commission thereunder. The registration statement and prospectus contain all
statements required to be stated therein in conformity with said Act and the
rules and regulations of said Commission and all statements of fact contained in
any such registration statement and
2
<PAGE> 3
prospectus are true and correct. Furthermore, neither any registration statement
nor any prospectus includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading to a purchaser of the Shares. The Trust may,
but shall not be obligated to, propose from time to time such amendment or
amendments to any registration statement and such supplement or supplements to
any prospectus as, in the light of future developments, may, in the opinion of
the Trust's counsel, be necessary or advisable. If the Trust shall not propose
such amendment or amendments and/or supplement or supplements within fifteen
days after receipt by the Trust of a written request from Distributor to do so,
Distributor may, at its option, terminate this Agreement. The Trust shall not
file any amendment to any registration statement or supplement to any prospectus
without giving Distributor reasonable notice thereof in advance; provided,
however, that nothing contained in this Agreement shall in any way limit the
Trust's right to file at any time such amendments to any registration statement
and/or supplements to any prospectus, of whatever character, as the Trust may
deem advisable, such right being in all respects absolute and unconditional.
1.11 The Trust authorizes Distributor and dealers to use any prospectus
in the form furnished from time to time in connection with the sale of the
Shares. The Trust agrees to indemnify, defend and hold Distributor, its several
partners and employees, and any person who controls Distributor within the
meaning of Section 15 of the Securities Act free and harmless from and against
any and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which Distributor, its partners and
employees, or any such controlling person, may incur under the Securities Act or
under common law or otherwise, arising out of or based upon any untrue
statement, or alleged untrue statement, of a material fact contained in any
registration statement or any prospectus or arising out of or based upon any
omission, or alleged omission, to state a material fact required to be stated in
either any registration statement or any prospectus or necessary to make the
statements in either thereof not misleading; provided, however, that the Trust's
agreement to indemnify Distributor, its partners or employees, and any such
controlling person shall not be deemed to cover any claims, demands, liabilities
or expenses arising out of any statements or representations as are contained in
any prospectus and in such financial and other statements as are furnished in
writing to the Trust by Distributor and used in the answers to the registration
statement or in the corresponding statements made in the prospectus, or arising
out of or based upon any omission or alleged omission to state a material fact
in connection with the giving of such information required to be stated in such
answers or necessary to make the answers not misleading; and further provided
that the Trust's agreement to indemnify Distributor and the Trust's
representations and warranties hereinbefore set forth in paragraph 1.10 shall
not be deemed to cover any liability to the Trust or its Shareholders to which
Distributor would otherwise be subject by reason of willful misfeasance, bad
faith or negligence in the performance of its duties, or by reason of
Distributor's reckless disregard of its obligations and duties under this
Agreement. The Trust's agreement to indemnify Distributor, its partners and
employees and any such controlling person, as aforesaid, is expressly
conditioned upon the Trust being notified of any action brought against
Distributor, its partners or employees, or any such controlling person, such
notification to be given by letter or by telegram addressed to the Trust at its
principal office in Columbus, Ohio and sent to the Trust by the person against
whom such action is
3
<PAGE> 4
brought, within 10 days after the summons or other first legal process shall
have been served. The failure to so notify the Trust of any such action shall
not relieve the Trust from any liability which the Trust may have to the person
against whom such action is brought by reason of any such untrue, or allegedly
untrue, statement or omission, or alleged omission, otherwise than on account of
the Trust's indemnity agreement contained in this paragraph 1.11. The Trust will
be entitled to assume the defense of any suit brought to enforce any such claim,
demand or liability, but, in such case, such defense shall be conducted by
counsel of good standing chosen by the Trust and approved by Distributor, which
approval shall not be unreasonably withheld. In the event the Trust elects to
assume the defense of any such suit and retain counsel of good standing approved
by Distributor, the defendant or defendants in such suit shall bear the fees and
expenses of any additional counsel retained by any of them; but in case the
Trust does not elect to assume the defense of any such suit, or in case
Distributor reasonably does not approve of counsel chosen by the Trust, the
Trust will reimburse Distributor, its partners and employees, or the controlling
person or persons named as defendant or defendants in such suit, for the fees
and expenses of any counsel retained by Distributor or them. The Trust's
indemnification agreement contained in this paragraph 1.11 and the Trust's
representations and warranties in this Agreement shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
Distributor, its partners and employees, or any controlling person, and shall
survive the delivery of any Shares.
This Agreement of indemnity will inure exclusively to Distributor's
benefit, to the benefit of its several partners and employees, and their
respective estates, and to the benefit of the controlling persons and their
successors. The Trust agrees promptly to notify Distributor of the commencement
of any litigation or proceedings against the Trust or any of its officers or
Trustees in connection with the issue and sale of any Shares.
1.12 Distributor agrees to indemnify, defend and hold the Trust, its
several officers and Trustees and any person who controls the Trust within the
meaning of Section 15 of the Securities Act free and harmless from and against
any and all claims, demands, liabilities and expenses (including the costs of
investigating or defending such claims, demands, or liabilities and any counsel
fees incurred in connection therewith) which the Trust, its officers or Trustees
or any such controlling person, may incur under the Securities Act or under
common law or otherwise, but only to the extent that such liability or expense
incurred by the Trust, its officers or Trustees or such controlling person
resulting from such claims or demands, shall arise out of or be based upon any
untrue, or alleged untrue, statement of a material fact contained in information
furnished in writing by Distributor to the Trust and used in the answers to any
of the items of the registration statement or in the corresponding statements
made in the prospectus, or shall arise out of or be based upon any omission, or
alleged omission, to state a material fact in connection with such information
furnished in writing by Distributor to the Trust required to be stated in such
answers or necessary to make such information not misleading. Distributor's
agreement to indemnify the Trust, its officers and Trustees, and any such
controlling person, as aforesaid, is expressly conditioned upon Distributor
being notified of any action brought against the Trust, its officers or
Trustees, or any such controlling person, such notification to be given by
letter or telegram addressed to Distributor at its principal office in Columbus,
Ohio, and sent to Distributor by the person against whom such action is brought,
within
4
<PAGE> 5
10 days after the summons or other first legal process shall have been served.
Distributor shall have the right of first control of the defense of such action,
with counsel of its own choosing, satisfactory to the Trust, if such action is
based solely upon such alleged misstatement or omission on Distributor's part,
and in any other event the Trust, its officers or Trustees or such controlling
person shall each have the right to participate in the defense or preparation of
the defense of any such action. The failure to so notify Distributor of any such
action shall not relieve Distributor from any liability which Distributor may
have to the Trust, its officers or Trustees, or to such controlling person by
reason of any such untrue or alleged untrue statement, or omission or alleged
omission, otherwise than on account of Distributor's indemnity agreement
contained in this paragraph 1.12.
1.13 No Shares shall be offered by either Distributor or the Trust
under any of the provisions of this Agreement and no orders for the purchase or
sale of Shares hereunder shall be accepted by the Trust if and so long as the
effectiveness of the registration statement then in effect or any necessary
amendments thereto shall be suspended under any of the provisions of the
Securities Act or if and so long as a current prospectus as required by Section
10(b)(2) of said Act is not on file with the Commission; provided, however, that
nothing contained in this paragraph 1.13 shall in any way restrict or have an
application to or bearing upon the Trust's obligation to repurchase Shares from
any Shareholder in accordance with the provisions of the Trust's prospectus,
Agreement and Declaration of Trust, or Bylaws.
1.14 The Trust agrees to advise Distributor as soon as reasonably
practical by a notice in writing delivered to Distributor or its counsel:
(a) of any request by the Commission for amendments to
the registration statement or prospectus then in
effect or for additional information;
(b) in the event of the issuance by the Commission of any
stop order suspending the effectiveness of the
registration statement or prospectus then in effect
or the initiation by service of process on the Trust
of any proceeding for that purpose;
(c) of the happening of any event that makes untrue any
statement of a material fact made in the registration
statement or prospectus then in effect or which
requires the making of a change in such registration
statement or prospectus in order to make the
statements therein not misleading; and
(d) of all action of the Commission with respect to any
amendment to any registration statement or prospectus
which may from time to time be filed with the
Commission.
For purposes of this section, informal requests by or acts of
the Staff of the Commission shall not be deemed actions of or requests by the
Commission.
5
<PAGE> 6
1.15 Distributor agrees on behalf of itself and its partners and
employees to treat confidentially and as proprietary information of the Trust
all records and other information relative to the Trust and its prior, present
or potential Shareholders, and not to use such records and information for any
purpose other than performance of its responsibilities and duties hereunder,
except, after prior notification to and approval in writing by the Trust, which
approval shall not be unreasonably withheld and may not be withheld where
Distributor may be exposed to civil or criminal contempt proceedings for failure
to comply, when requested to divulge such information by duly constituted
authorities, or when so requested by the Trust.
1.16 This Agreement shall be governed by the laws of the State of Ohio.
2. Fee.
Distributor shall receive from the Funds (the "Distribution Plan
Funds") a distribution fee at the rate and upon the terms and conditions set
forth in the Distribution and Shareholder Service Plan, which may be amended
from time to time. The Distributor's contractual right to such distribution fees
shall be the maximum fee set forth in the Distribution and Shareholder Service
Plan. The distribution fee shall be accrued daily and shall be paid on the first
business day of each month, or at such time(s) as the Distributor shall
reasonably request.
3. Sale and Payment.
Pursuant to the Agreement and Declaration of Trust dated as of July 15,
1982, as amended, each Fund may be divided into separate classes of Shares in
which case the Shares of one or more classes may be subject to a sales load and
may be subject to the imposition of a distribution fee pursuant to the
Distribution and Service Plan referred to above. To the extent that Shares of a
Fund are sold at an offering price which includes a sales load or at net asset
value subject to a contingent deferred sales load with respect to certain
redemptions (either within a single class of Shares or pursuant to two or more
classes of Shares), such Shares shall hereinafter be referred to collectively as
"Load Shares" (in the case of Shares that are sold with a front-end sales load
or Shares that are sold subject to a contingent deferred sales load), "Front-End
Load Shares" or "CDSL Shares" and individually as a "Load Share," a "Front-End
Load Share" or a "CDSL Share." A Fund that contains Front-End Load Shares shall
hereinafter be referred to collectively as "Load Funds" or "Front-End Load
Funds" and individually as a "Load Fund" or a "Front-end Load Fund." A Fund that
contains CDSL Shares shall hereinafter be referred to collectively as "Load
Funds" or "CDSL Funds" and individually as a "Load Fund" or a "CDSL Fund." Under
this Agreement, the following provisions shall apply with respect to the sale
of, and payment for, Load Shares of the Funds.
3.1 Distributor shall have the right to purchase Load Shares at their
net asset value and to sell such Load Shares to the public against orders
therefor at the applicable public offering price, as defined in Section 4
hereof. Distributor shall also have the right to sell Load Shares to dealers
against orders therefor at the public offering price less a concession
determined by Distributor, which concession shall not exceed the amount of the
sales charge or underwriting discount, if any,
6
<PAGE> 7
referred to in Section 4 below.
3.2 Prior to the time of delivery of any Load Shares by a Load Fund to,
or on the order of, Distributor, Distributor shall pay or cause to be paid to
the Load Fund or to its order an amount in Boston or New York clearing house
funds equal to the applicable net asset value of such Shares. Distributor may
retain so much of any sales charge or underwriting discount as is not allowed by
Distributor as a concession to dealers.
4. Public Offering Price.
The public offering price of a Load Share shall be the net asset value
of such Load Share, plus any applicable sales charge, all as set forth in the
current prospectus of the Load Fund. The net asset value of Shares shall be
determined in accordance with the provisions of the Agreement and Declaration of
Trust and Bylaws of the Trust and the then-current prospectus of the Load Fund.
5. Issuance of Shares.
The Trust reserves the right to issue, transfer or sell Load Shares at
net asset value (a) in connection with the merger or consolidation of the Trust
or the Load Fund(s) with any other investment company or the acquisition by the
Trust or the Load Fund(s) of all or substantially all of the assets or of the
outstanding Shares of any other investment company; (b) in connection with a pro
rata distribution directly to the holders of Shares in the nature of a stock
dividend or split; (c) upon the exercise of subscription rights granted to the
holders of Shares on a pro rata basis; (d) in connection with the issuance of
Load Shares pursuant to any exchange and reinvestment privileges described in
any then-current prospectus of the Load Fund; and (e) otherwise in accordance
with any then-current prospectus of the Load Fund.
6. Term, Duration and Termination.
This Agreement shall become effective with respect to each Fund, either
now or hereafter created, as of the date first written above and, unless sooner
terminated as provided herein, shall continue until June 1, 1997. Thereafter, if
not terminated, this Agreement shall continue with respect to a particular Fund
automatically for successive one-year terms, provided that such continuance is
specifically approved at least annually by (a) by the vote of a majority of
those members of the Trust's Board of Trustees who are not parties to this
Agreement or interested persons of any such party, cast in person at a meeting
for the purpose of voting on such approval and (b) by the vote of the Trust's
Board of Trustees or the vote of a majority of the outstanding voting securities
of such Fund. This Agreement is terminable without penalty, on not less than
sixty days' prior written notice, by the Trust's Board of Trustees, by vote of a
majority of the outstanding voting securities of the Trust or by the
Distributor. This Agreement will also terminate automatically in the
event of its assignment. (As used in this Agreement, the terms "majority of the
outstanding voting securities," "interested persons" and "assignment" shall have
the same meanings as ascribed to such terms in the 1940 Act.)
7
<PAGE> 8
7. Limitation of Liability of the Trustees and Shareholders.
It is expressly agreed that the obligations of the Trust hereunder
shall not be binding upon any of the Trustees, shareholders, nominees, officers,
agents or employees of the Trust personally, but shall bind only the trust
property of the Trust. The execution and delivery of this Agreement have been
authorized by the Trustees, and this Agreement has been signed and delivered by
an authorized officer of the Trust, acting as such, and neither such
authorization by the Trustees nor such execution and delivery by such officer
shall be deemed to have been made by any of them individually or to impose any
liability on any of them personally, but shall bind only the trust property of
the Trust as provided in the Trust's Agreement and Declaration of Trust.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
written above.
THE PILOT FUNDS PILOT FUNDS DISTRIBUTORS, INC.
By:__________________________ By:__________________________
Title:_______________________ Title:_______________________
Date:________________________ Date:________________________
8
<PAGE> 1
Exhibit 8(a)
CUSTODIAN AGREEMENT
DATED AS OF: MAY 4, 1996
BETWEEN
THE PILOT FUNDS
AND
BOATMEN'S TRUST COMPANY
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I - APPOINTMENT OF CUSTODIAN................................................................ 1
ARTICLE II - POWERS AND DUTIES OF CUSTODIAN......................................................... 1
Section 2.1 Safekeeping.............................................................. 2
Section 2.2 Manner of Holding Securities............................................. 2
Section 2.3 Security Purchases....................................................... 2
Section 2.4 Exchanges of Securities.................................................. 3
Section 2.5 Sales of Securities...................................................... 3
Section 2.6 Depositary Receipts...................................................... 4
Section 2.7 Exercise of Rights; Tender Offers........................................ 4
Section 2.8 Stock Dividends, Rights, Etc............................................. 4
Section 2.9 Options.................................................................. 4
Section 2.10 Futures Contracts........................................................ 5
Section 2.11 Borrowing................................................................ 5
Section 2.12 Interest Bearing Deposits................................................ 5
Section 2.13 Foreign Exchange Transactions............................................ 6
Section 2.14 Securities Loans......................................................... 7
Section 2.15 Collections.............................................................. 7
Section 2.16 Dividends, Distributions and Redemptions................................. 7
Section 2.17 Proceeds from Shares Sold................................................ 7
Section 2.18 Proxies, Notices, Etc.................................................... 8
Section 2.19 Bills and Other Disbursements............................................ 8
Section 2.20 Nondiscretionary Functions............................................... 8
Section 2.21 Bank Accounts............................................................ 8
Section 2.22 Deposit of Fund Assets in Securities Systems............................. 9
Section 2.23 Other Transfers..........................................................11
Section 2.24 Establishment of Segregated Account......................................11
Section 2.25 Custodian's Books and Records............................................11
Section 2.26 Opinion of Fund's Independent Certified Public Accountants...............12
Section 2.27 Reports by Independent Certified Public Accountants......................12
Section 2.28 Overdraft Facility.......................................................12
ARTICLE III - PROPER INSTRUCTIONS, SPECIAL
INSTRUCTIONS AND RELATED MATTERS...........................................................12
Section 3.1 Proper Instructions and Special Instructions.............................12
Section 3.2 Authorized Persons.......................................................13
Section 3.3 Persons Having Access to Assets of the Portfolios........................14
Section 3.4 Actions of Custodian Based on Proper Instructions and Special
Instructions......................................................................14
</TABLE>
(i)
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
ARTICLE IV - SUBCUSTODIANS..........................................................................14
Section 4.1 Domestic Subcustodians...................................................14
Section 4.2 Foreign Subcustodians and Interim Subcustodians..........................15
Section 4.3 Termination of a Subcustodian............................................15
Section 4.4 Certification Regarding Foreign Subcustodians............................16
ARTICLE V - STANDARD OF CARE; INDEMNIFICATION.......................................................16
Section 5.1 Standard of Care.........................................................16
Section 5.2 Liability of Custodian for Actions of Other Persons......................17
Section 5.3 Indemnification..........................................................18
Section 5.4 Fund's Right to Proceed..................................................18
ARTICLE VI - COMPENSATION...........................................................................19
ARTICLE VII - TERMINATION...........................................................................19
Section 7.1 Termination of Agreement as to the Fund..................................19
Section 7.2 Termination as to One or More Portfolios.................................20
ARTICLE VIII - DEFINED TERMS........................................................................21
ARTICLE IX - MISCELLANEOUS..........................................................................21
Section 9.1 Execution of Documents, Etc..............................................21
Section 9.2 Representative Capacity; Nonrecourse Obligations.........................22
Section 9.3 Several Obligations of the Fund and the Portfolios.......................22
Section 9.4 Representations and Warranties...........................................22
Section 9.5 Entire Agreement.........................................................23
Section 9.6 Waivers and Amendments...................................................23
Section 9.7 Interpretation...........................................................23
Section 9.8 Captions.................................................................23
Section 9.9 Governing Law............................................................23
Section 9.10 Notices..................................................................24
Section 9.11 Assignment...............................................................24
Section 9.12 Counterparts.............................................................24
Section 9.13 Confidentiality; Survival of Obligations.................................24
</TABLE>
(ii)
<PAGE> 4
APPENDIX
Appendix "A" - List of Portfolios
(iii)
<PAGE> 5
CUSTODIAN AGREEMENT
AGREEMENT made as of the 4th day of May, 1996 between The Pilot Funds
(the "Fund") and Boatmen's Trust Company (the "Custodian").
W I T N E S S E T H
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the " 1940 Act");
WHEREAS, the Fund is organized with more than one series of shares,
each of which shall represent an interest in a separate portfolio of cash,
securities and other assets (all such existing and additional series now or
hereafter listed on Appendix "A" being hereinafter referred to individually, as
a "Portfolio," and collectively, as the "Portfolios"); and
WHEREAS, the Fund desires to appoint the Custodian as custodian on
behalf of each of its Portfolios in accordance with the provisions of the 1940
Act, and the rules and regulations thereunder, under the terms and conditions
set forth in this Agreement, and the Custodian has agreed so to act as
custodian.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
ARTICLE I - APPOINTMENT OF CUSTODIAN
On behalf of each of its Portfolios, the Fund hereby employs and
appoints the Custodian as custodian, subject to the terms and provisions of this
Agreement. The Fund shall deliver to the Custodian, or shall cause to be
delivered to the Custodian, cash, securities and other assets owned by each of
its Portfolios from time to time during the term of this Agreement and shall
specify which of its Portfolios such cash, securities and other assets are to be
specifically allocated.
ARTICLE II - POWERS AND DUTIES OF CUSTODIAN
As custodian, the Custodian shall have and perform the powers and
duties set forth in this Article II. Pursuant to and in accordance with Article
IV hereof, the Custodian may appoint one or more Subcustodians (as hereinafter
defined) to exercise the powers and perform the duties of the Custodian set
forth in this Article II and references to the Custodian in this Article II
shall include any Subcustodian so appointed.
1
<PAGE> 6
Section 2.1 Safekeeping. The Custodian shall keep safely all cash,
securities and other assets of the Fund's Portfolios delivered to the Custodian
and, on behalf of such Portfolios, the Custodian shall, from time to time,
accept delivery of cash, securities and other assets for safekeeping.
Section 2.2 Manner of Holding Securities.
(a) The Custodian shall at all times hold securities of the Fund's
Portfolios either: (i) by physical possession of the share certificates or other
instruments representing such securities in registered or bearer form; (ii) in
book-entry form by a Securities System (as hereinafter defined) in accordance
with the provisions of Section 2.22 below; (iii) with respect to securities
consisting of shares of a registered open-end investment company, by maintenance
of a shareholder account with the transfer agent of such investment company; or
(iv) in such other manner as is provided in Special Instructions.
(b) The Custodian shall at all times hold registered securities of
each Portfolio in the name of the Custodian, the Portfolio or a nominee of
either of them, unless specifically directed by Proper Instructions to hold such
registered securities in so-called street name; provided that, in any event, all
such securities and other assets shall be held in an account of the Custodian
containing only assets of a Portfolio, or only assets held by the Custodian as a
fiduciary or custodian for customers; and provided further, that the records of
the Custodian shall indicate at all times the Portfolio or other customer for
which such securities and other assets are held in such account and the
respective interests therein.
Section 2.3 Security Purchases. Upon receipt of Proper Instructions (as
hereinafter defined), the Custodian shall pay for and receive securities
purchased for the account of a Portfolio, provided that payment shall be made by
the Custodian only upon receipt of the securities: (a) by the Custodian; (b) by
a clearing corporation of a national securities exchange of which the Custodian
is a member; or (c) by a Securities System. Notwithstanding the foregoing, upon
receipt of Proper Instructions: (i) in the case of a repurchase agreement, the
Custodian may release funds to a Securities System prior to the receipt of
advice from the Securities System that the securities underlying such repurchase
agreement have been transferred by book-entry into the Account (as hereinafter
defined) maintained with such Securities System by the Custodian, provided that
the Custodian's instructions to the Securities System require that the
Securities System may make payment of such funds to the other party to the
repurchase agreement only upon transfer by book-entry of the securities
underlying the repurchase agreement into the Account; (ii) in the case of time
deposits, call account deposits, currency deposits, and other deposits, foreign
exchange transactions, futures contracts or options, pursuant to Sections 2.9,
2.10, 2.12 and 2.13 hereof, the Custodian may make payment therefor before
receipt of an advice or confirmation evidencing said deposit or entry into such
transaction; (iii) in the case of the purchase of securities, the settlement of
which occurs outside of the United States of America, the Custodian may make
payment therefor and receive delivery of such securities in accordance with
local custom and practice generally accepted by Institutional Clients (as
hereinafter defined) in the country in which
2
<PAGE> 7
the settlement occurs, but in all events subject to the standard of care set
forth in Article V hereof; and (iv) in the case of the purchase of securities in
which, in accordance with standard industry custom and practice generally
accepted by Institutional Clients with respect to such securities, the receipt
of such securities and the payment therefor take place in different countries,
the Custodian may receive delivery of such securities and make payment therefor
in accordance with standard industry custom and practice for such securities
generally accepted by Institutional Clients, but in all events subject to the
standard of care set forth in Article V hereof. For purposes of this Agreement,
an "Institutional Client" shall mean a major commercial bank, corporation,
insurance company, or substantially similar institution, which, as a substantial
part of its business operations, purchases or sells securities and makes use of
custodial services.
Section 2.4 Exchanges of Securities. Upon receipt of Proper
Instructions, the Custodian shall exchange securities held by it for the account
of a Portfolio for other securities in connection with any reorganization,
recapitalization, split-up of shares, change of par value, conversion or other
event relating to the securities or the issuer of such securities, and shall
deposit any such securities in accordance with the terms of any reorganization
or protective plan. The Custodian shall, without receiving Proper Instructions:
surrender securities in temporary form for definitive securities; surrender
securities for transfer into the name of the Custodian, a Portfolio or a nominee
of either of them, as permitted by Section 2.2(b); and surrender securities for
a different number of certificates or instruments representing the same number
of shares or same principal amount of indebtedness, provided that the securities
to be issued will be delivered to the Custodian or a nominee of the Custodian.
Section 2.5 Sales of Securities. Upon receipt of Proper Instructions,
the Custodian shall make delivery of securities which have been sold for the
account of a Portfolio, but only against payment therefor in the form of: (a)
cash, certified check, bank cashier's check, bank credit, or bank wire transfer;
(b) credit to the account of the Custodian with a clearing corporation of a
national securities exchange of which the Custodian is a member; or (c) credit
to the Account of the Custodian with a Securities System, in accordance with the
provisions of Section 2.22 hereof. Notwithstanding the foregoing: (i) in the
case of the sale of securities, the settlement of which occurs outside of the
United States of America, such securities shall be delivered and paid for in
accordance with local custom and practice generally accepted by Institutional
Clients in the country in which the settlement occurs; (ii) in the case of the
sale of securities in which, in accordance with standard industry custom and
practice generally accepted by Institutional Clients with respect to such
securities, the delivery of such securities and receipt of payment therefor take
place in different countries, the Custodian may deliver such securities and
receive payment therefor in accordance with standard industry custom and
practice for such securities generally accepted by Institutional Clients; and
(iii) in the case of securities held in physical form, such securities shall be
delivered and paid for in accordance with "street delivery custom" to a broker
or its clearing agent, it being understood that the Custodian shall not be
responsible for the selection of or the failure or inability to perform of such
broker or its clearing agent.
3
<PAGE> 8
Section 2.6 Depositary Receipts. Upon receipt of Proper Instructions,
the Custodian shall surrender securities to the depositary used for such
securities by an issuer of American Depositary Receipts or International
Depositary Receipts (hereinafter referred to, collectively, as "ADRs"), against
a written receipt therefor adequately describing such securities and written
evidence satisfactory to the Custodian that the depositary has acknowledged
receipt of instructions to issue ADRs with respect to such securities in the
name of the Custodian or a nominee of the Custodian, for delivery to the
Custodian at such place as the Custodian may from time to time designate. Upon
receipt of Proper Instructions, the Custodian shall surrender ADRs to the issuer
thereof, against a written receipt therefor adequately describing the ADRs
surrendered and written evidence satisfactory to the Custodian that the issuer
of the ADRs has acknowledged receipt of instructions to cause its depositary to
deliver the securities underlying such ADRs to the Custodian.
Section 2.7 Exercise of Rights; Tender Offers. Upon receipt of Proper
Instructions, the Custodian shall: (a) deliver warrants, puts, calls, rights or
similar securities to the issuer or trustee thereof, or to the agent of such
issuer or trustee, for the purpose of exercise or sale, provided that the new
securities, cash or other assets, if any, acquired as a result of such actions
are to be delivered to the Custodian; and (b) deposit securities upon
invitations for tenders thereof, provided that the consideration for such
securities is to be paid or delivered to the Custodian, or the tendered
securities are to be returned to the Custodian. Notwithstanding any provision of
this Agreement to the contrary, the Custodian shall take all necessary action,
unless otherwise directed to the contrary in Proper Instructions, to comply with
the terms of all mandatory or compulsory exchanges, calls, tenders, redemptions,
or similar rights of security ownership, and shall promptly notify the Fund of
such action in writing by facsimile transmission or in such other manner as the
Fund and the Custodian may agree in writing.
Section 2.8 Stock Dividends, Rights, Etc. The Custodian shall receive
and collect all stock dividends, rights and other items of like nature and, upon
receipt of Proper Instructions, take action with respect to the same as directed
in such Proper Instructions.
Section 2.9 Options. Upon receipt of Proper Instructions and in
accordance with the provisions of any agreement between the Custodian, any
registered broker-dealer and, if necessary, the Fund on behalf of any applicable
Portfolio relating to compliance with the rules of the Options Clearing
Corporation or of any registered national securities exchange or similar
organization(s), the Custodian shall: (a) receive and retain confirmations or
other documents, if any, evidencing the purchase or writing of an option on a
security or securities index by the applicable Portfolio; (b) deposit and
maintain in a segregated account, securities (either physically or by book-entry
in a Securities System), cash or other assets; and (c) pay, release and/or
transfer such securities, cash or other assets in accordance with notices or
other communications evidencing the expiration, termination or exercise of such
options furnished by the Options Clearing Corporation, the securities or options
exchange on which such options are traded, or such other organization as may be
responsible for handling such option transactions. The Fund, on behalf of its
Portfolios, and the broker-dealer shall be responsible for the sufficiency of
assets held
4
<PAGE> 9
in any segregated account established in compliance with applicable margin
maintenance requirements and the performance of other terms of any option
contract.
Section 2.10 Futures Contracts. Upon receipt of Proper Instructions, or
pursuant to the provisions of any futures margin procedural agreement among the
Fund, on behalf of any applicable Portfolio, the Custodian and any futures
commission merchant (a "Procedural Agreement"), the Custodian shall: (a) receive
and retain confirmations, if any, evidencing the purchase or sale of a futures
contract or an option on a futures contract by the applicable Portfolio; (b)
deposit and maintain in a segregated account, cash, securities and other assets
designated as initial, maintenance or variation "margin" deposits intended to
secure the applicable Portfolio's performance of its obligations under any
futures contracts purchased or sold or any options on futures contracts written
by the Portfolio, in accordance with the provisions of any Procedural Agreement
designed to comply with the rules of the Commodity Futures Trading Commission
and/or any commodity exchange or contract market (such as the Chicago Board of
Trade), or any similar organization(s), regarding such margin deposits; and (c)
release assets from and/or transfer assets into such margin accounts only in
accordance with any such Procedural Agreements. The Fund, on behalf of its
applicable Portfolios, and such futures commission merchant shall be responsible
for the sufficiency of assets held in the segregated account in compliance with
applicable margin maintenance requirements and the performance of any futures
contract or option on a futures contract in accordance with its terms.
Section 2.11 Borrowing. Upon receipt of Proper Instructions, the
Custodian shall deliver securities of a Portfolio to lenders or their agents, or
otherwise establish a segregated account as agreed to by the Fund on behalf of
such Portfolio and the Custodian, as collateral for borrowings effected by such
Portfolio, provided that such borrowed money is payable by the lender (a) to or
upon the Custodian's order, as Custodian for such Portfolio, and (b)
concurrently with delivery of such securities.
Section 2.12 Interest Bearing Deposits. Upon receipt of Proper
Instructions directing the Custodian to purchase interest bearing fixed term and
call deposits (hereinafter referred to collectively, as "Interest Bearing
Deposits") for the account of a Portfolio, the Custodian shall purchase such
Interest Bearing Deposits in the name of the Portfolio with such banks or trust
companies (including the Custodian, any Subcustodian or any subsidiary or
affiliate of the Custodian) (hereinafter referred to as "Banking Institutions")
and in such amounts as the Fund may direct pursuant to Proper Instructions. Such
Interest Bearing Deposits may be denominated in U.S. Dollars or other
currencies, as the Fund on behalf of its Portfolio may determine and direct
pursuant to Proper Instructions. The Custodian shall include in its records with
respect to the assets of each Portfolio appropriate notation as to the amount
and currency of each such Interest Bearing Bank Deposit, the accepting Banking
Institution and all other appropriate details, and shall retain such forms of
advice or receipt evidencing such account, if any, as may be forwarded to the
Custodian by the Banking Institution. The responsibilities of the Custodian to
the Fund for Interest Bearing Deposits accepted on the Custodian's books in the
United States on behalf of the Fund's Portfolios shall be that of a U.S. bank
for a similar deposit. With respect to Interest
5
<PAGE> 10
Bearing Deposits other than those accepted on the Custodian's books, (a) the
Custodian shall be responsible for the collection of income as set forth in
Section 2.15 and the transmission of cash and instructions to and from such
accounts; and (b) the Custodian shall have no duty with respect to the selection
of the Banking Institution or, so long as the Custodian acts in accordance with
Proper Instructions, for the failure of such Banking Institution to pay upon
demand. Upon receipt of Proper Instructions, the Custodian shall take such
reasonable actions as the Fund deems necessary or appropriate to cause each such
Interest Bearing Deposit Account to be insured to the maximum extent possible by
all applicable deposit insurers including, without limitation, the Federal
Deposit Insurance Corporation.
Section 2.13 Foreign Exchange Transactions.
(a) Foreign Exchange Transactions Other Than as Principal.
Upon receipt of Proper Instructions, the Custodian shall settle foreign exchange
contracts or options to purchase and sell foreign currencies for spot and future
delivery on behalf of and for the account of a Portfolio with such currency
brokers or Banking Institutions as the Fund may determine and direct pursuant to
Proper Instructions. The Custodian shall be responsible for the transmission of
cash and instructions to and from the currency broker or Banking Institution
with which the contract or option is made, the safekeeping of all certificates
and other documents and agreements evidencing or relating to such foreign
exchange transactions and the maintenance of proper records as set forth in
Section 2.25. The Custodian shall have no duty with respect to the selection of
the currency brokers or Banking Institutions with which the Fund deals on behalf
of its Portfolios or, so long as the Custodian acts in accordance with Proper
Instructions, for the failure of such brokers or Banking Institutions to comply
with the terms of any contract or option.
(b) Foreign Exchange Contracts as Principal. The Custodian
shall not be obligated to enter into foreign exchange transactions as principal.
However, if the Custodian has made available to the Fund its services as a
principal in foreign exchange transactions, upon receipt of Proper Instructions,
the Custodian shall enter into foreign exchange contracts or options to purchase
and sell foreign currencies for spot and future delivery on behalf of and for
the account of a Portfolio of the Fund with the Custodian as principal. The
Custodian shall be responsible for the selection of the currency brokers or
Banking Institutions and the failure of such currency brokers or Banking
Institutions to comply with the terms of any contract or option.
(c) Payments. Notwithstanding anything to the contrary
contained herein, upon receipt of Proper Instructions the Custodian may, in
connection with a foreign exchange contract, make free outgoing payments of cash
in the form of U.S. Dollars or foreign currency prior to receipt of confirmation
of such foreign exchange contract or confirmation that the countervalue currency
completing such contract has been delivered or received.
Section 2.14 Securities Loans. Upon receipt of Proper Instructions, the
Custodian shall, in connection with loans of securities by a Portfolio, deliver
securities of such Portfolio to the borrower thereof prior to receipt of the
collateral, if any, for such borrowing; provided that, in
6
<PAGE> 11
cases of loans of securities secured by cash collateral, the Custodian's
instructions to the Securities System shall require that the Securities System
deliver the securities of the Portfolio to the borrower thereof only upon
receipt of the collateral for such borrowing.
Section 2.15 Collections. The Custodian shall, and shall cause any
Subcustodian to: (a) collect amounts due and payable to the Fund with respect to
portfolio securities and other assets of each of the Fund's Portfolios; (b)
promptly credit to the account of each applicable Portfolio all income and other
payments relating to portfolio securities and other assets held by the Custodian
hereunder upon Custodian's receipt of such income or payments or as otherwise
agreed in writing by the Custodian and the Fund; (c) promptly endorse and
deliver any instruments required to effect such collections; (d) promptly
execute ownership and other certificates and affidavits for all federal, state
and foreign tax purposes in connection with receipt of income, capital gains or
other payments with respect to portfolio securities and other assets of each
applicable Portfolio, or in connection with the purchase, sale or transfer of
such securities or other assets; and (e) promptly file any certificates or other
affidavits for the refund or reclaim of foreign taxes paid, and promptly notify
the Fund of any changes to law, interpretative rulings or procedures regarding
such reclaims, and otherwise use all available measures customarily used to
minimize the imposition of foreign taxes at source, and promptly inform the Fund
of alternative means of minimizing such taxes of which the Custodian shall
become aware (or with the exercise of reasonable care should have become aware);
provided, however, that with respect to portfolio securities registered in
so-called "street name", the Custodian shall use its best efforts to collect
amounts due and payable to the Fund with respect to its Portfolios. The
Custodian shall promptly notify the Fund in writing by facsimile transmission or
in such other manner as the Fund and the Custodian may agree in writing if any
amount payable with respect to portfolio securities or other assets of the
Portfolios of the Fund is not received by the Custodian when due. The Custodian
shall not be responsible for the collection of amounts due and payable with
respect to portfolio securities or other assets that are in default.
Section 2.16 Dividends, Distributions and Redemptions. The Custodian
shall promptly release funds or securities: (a) upon receipt of Proper
Instructions, to one or more Distribution Accounts designated by the Fund in
such Proper Instructions; or (b) upon receipt of Special Instructions, as
otherwise directed by the Fund, for the purpose of the payment of dividends or
other distributions to shareholders of each applicable Portfolio, and payment to
shareholders who have requested repurchase or redemption of their shares of the
Portfolio(s) (collectively, the "Shares"). For purposes of this Agreement, a
"Distribution Account" shall mean an account established at a Banking
Institution designated by the Fund on behalf of one or more of its Portfolios in
Special Instructions.
Section 2.17 Proceeds from Shares Sold. The Custodian shall receive
funds representing cash payments received for Shares issued or sold from time to
time by the Fund, and shall promptly credit such funds to the account(s) of the
applicable Portfolio(s). The Custodian shall promptly notify the Fund of
Custodian's receipt of cash in payment for Shares issued by the Fund by
facsimile transmission or in such other manner as the Fund and Custodian may
agree in
7
<PAGE> 12
writing. Upon receipt of Proper Instructions, the Custodian shall: (a) deliver
all federal funds received by the Custodian in payment for Shares in payment for
such investments as may be set forth in such Proper Instructions and at a time
agreed upon between the Custodian and the Fund; and (b) make federal funds
available to the Fund as of specified times agreed upon from time to time by the
Fund and the Custodian, in the amount of checks received in payment for Shares
which are deposited to the accounts of each applicable Portfolio.
Section 2.18 Proxies, Notices, Etc. The Custodian shall deliver to the
Fund, in the most expeditious manner practicable, all forms of proxies, all
notices of meetings, and any other notices or announcements affecting or
relating to securities owned by the Portfolios that are received by the
Custodian, any Subcustodian, or any nominee of either of them, and, upon receipt
of Proper Instructions, the Custodian shall execute and deliver, or cause such
Subcustodian or nominee to execute and deliver, such proxies or other
authorizations as may be required. Except as directed pursuant to Proper
Instructions, neither the Custodian nor any Subcustodian or nominee shall vote
upon any such securities, or execute any proxy to vote thereon, or give any
consent or take any other action with respect thereto.
Section 2.19 Bills and Other Disbursements. Upon receipt of Proper
Instructions, the Custodian shall promptly pay or cause to be paid, all bills,
statements, or other obligations of each Portfolio.
Section 2.20 Nondiscretionary Functions. The Custodian shall attend to
all nondiscretionary details in connection with the sale, exchange,
substitution, purchase, transfer or other dealings with securities or other
assets of each Portfolio held by the Custodian, except as otherwise directed
from time to time pursuant to Proper Instructions.
Section 2.21 Bank Accounts.
(a) Accounts with the Custodian and any Subcustodians. The
Custodian may open and operate a bank account or accounts (hereinafter referred
to collectively, as "Bank Accounts") on the books of the Custodian or any
Subcustodian provided that such account(s) shall be in the name of the Custodian
or a nominee of the Custodian, for the account of a Portfolio, and shall be
subject only to the draft or order of the Custodian; provided however, that such
Bank Accounts in countries other than the United States may be held in an
account of the Custodian containing only assets held by the Custodian as a
fiduciary or custodian for customers, and provided further, that the records of
the Custodian shall indicate at all times the Portfolio or other customer for
which such securities and other assets are held in such account and the
respective interests therein. Such Bank Accounts may be denominated in either
U.S. Dollars or other currencies. The responsibilities of the Custodian to the
Fund for deposits accepted on the Custodian's books in the United States shall
be that of a U.S. bank for a similar deposit. The responsibilities of the
Custodian to the Fund for deposits accepted on any Subcustodian's books shall be
governed by the provisions of Section 5.2.
8
<PAGE> 13
(b) Accounts With Other Banking Institutions. The Custodian
may open and operate Bank Accounts on behalf of a Portfolio, in the name of the
Custodian or a nominee of the Custodian, at a Banking Institution other than the
Custodian or any Subcustodian, provided that such account(s) shall be in the
name of the Custodian or a nominee of the Custodian, for the account of a
Portfolio, and shall be subject only to the draft or order of the Custodian;
provided however, that such Bank Accounts may be held in an account of the
Custodian containing only assets held by the Custodian as a fiduciary or
custodian for customers, and provided further, that the records of the Custodian
shall indicate at all times the Portfolio or other customer for which such
securities and other assets are held in such account and the respective
interests therein. Such Bank Accounts may be denominated in either U.S. Dollars
or other currencies. Subject to the provisions of Section 5.1 (a), the Custodian
shall be responsible for the selection of the Banking Institution and for the
failure of such Banking Institution to pay according to the terms of the
deposit.
(c) Deposit Insurance. Upon receipt of Proper Instructions,
the Custodian shall take such reasonable actions as the Fund deems necessary or
appropriate to cause each deposit account established by the Custodian pursuant
to this Section 2.21 to be insured to the maximum extent possible by all
applicable deposit insurers including, without limitation, the Federal Deposit
Insurance Corporation.
Section 2.22 Deposit of Fund Assets in Securities Systems. The
Custodian may deposit and/or maintain domestic securities owned by a Portfolio
in: (a) The Depository Trust Company; (b) the Participants' Trust Company; (c)
any book-entry system as provided in (i) Subpart 0 of Treasury Circular No. 300,
31 CFR 306.115, (ii) Subpart B of Treasury Circular Public Debt Series No.
27-76, 31 CFR 350.2, or (iii) the book-entry regulations of federal agencies
substantially in the form of 31 CFR 306.115; or (d) any other domestic clearing
agency registered with the Securities and Exchange Commission ("SEC") under
Section 17A of the Securities Exchange Act of 1934 (or as may otherwise be
authorized by the Securities and Exchange Commission to serve in the capacity of
depository or clearing agent for the securities or other assets of investment
companies) which acts as a securities depository and the use of which the Fund
has previously approved by Special Instructions (as hereinafter defined) (each
of the foregoing being referred to in this Agreement as a "Securities System").
Use of a Securities System shall be in accordance with applicable Federal
Reserve Board and SEC rules and regulations, if any, and subject to the
following provisions:
(i) The Custodian may deposit and/or maintain
securities held hereunder in a Securities System, provided
that such securities are represented in an account ("Account")
of the Custodian in the Securities System which Account shall
not contain any assets of the Custodian other than assets held
as a fiduciary, custodian, or otherwise for customers and
shall be so designated on the books and records of the
Securities System.
(ii) The Securities System shall be obligated to
comply with the Custodian's directions with respect to the
securities held in such Account and shall not be
9
<PAGE> 14
entitled to a lien against the assets in such Account for extensions of
credit to the Custodian other than for payment of the purchase price of
such assets.
(iii) The Fund hereby designates the Custodian as the
party in whose name any securities deposited by the Custodian in the
Account are to be registered.
(iv) The books and records of the Custodian shall at
all times identify those securities belonging to each Portfolio which
are maintained in a Securities System.
(v) The Custodian shall pay for securities
purchased for the account of a Portfolio only upon (w) receipt of
advice from the Securities System that such securities have been
transferred to the Account of the Custodian, and (x) the making of an
entry on the records of the Custodian to reflect such payment and
transfer for the account of such Portfolio. The Custodian shall
transfer securities sold for the account of a Portfolio only upon (y)
receipt of advice from the Securities System that payment for such
securities has been transferred to the Account of the Custodian, and
(z) the making of an entry on the records of the Custodian to reflect
such transfer and payment for the account of such Portfolio. Copies of
all advices from the Securities System relating to transfers of
securities for the account of a Portfolio shall identify such Portfolio
and shall be maintained for such Portfolio by the Custodian. The
Custodian shall deliver to the Fund on the next succeeding business day
daily transaction reports which shall include each day's transactions
in the Securities System for the account of each applicable Portfolio.
Such transaction reports shall be delivered to the Fund or any agent
designated by the Fund pursuant to Proper Instructions, by computer or
in such other manner as the Fund and the Custodian may agree in
writing.
(vi) The Custodian shall, if requested by the Fund
pursuant to Proper Instructions, provide the Fund with all reports
obtained by the Custodian or any Subcustodian with respect to a
Securities System's accounting system, internal accounting control and
procedures for safeguarding securities deposited in the Securities
System.
(vii) Upon receipt of Special Instructions, the
Custodian shall terminate the use of any Securities System (except the
federal book-entry system) on behalf of any Portfolio as promptly as
practicable and shall take all actions reasonably practicable to
safeguard the securities of any Portfolio maintained with such
Securities System.
Section 2.23 Other Transfers. Upon receipt of Special Instructions, the
Custodian shall make such other dispositions of securities, funds or other
property of a Portfolio in a manner or for purposes other than as expressly set
forth in this Agreement, provided that the Special Instructions relating to such
disposition shall include a statement of the purpose for which the delivery is
to be made, the amount of funds and/or securities to be delivered, and the name
of the person or persons to whom delivery is to be made, and shall otherwise
comply with the provisions of Sections 3.1 and 3.3 hereof.
10
<PAGE> 15
Section 2.24 Establishment of Segregated Account. Upon receipt of
Proper Instructions, the Custodian shall establish and maintain on its books a
segregated account or accounts for and on behalf of a Portfolio, into which
account or accounts may be transferred cash and/or securities or other assets of
such Portfolio, including securities maintained by the Custodian in a Securities
System pursuant to Section 2.22 hereof, said account or accounts to be
maintained: (a) for the purposes set forth in Sections 2.9, 2.10 and 2.11
hereof, (b) for the purposes of compliance by the Portfolio with the procedures
required by Investment Company Act Release No. 10666, or any subsequent release
or releases of the SEC relating to the maintenance of segregated accounts by
registered investment companies; or (c) for such other purposes as set forth,
from time to time, in Special Instructions.
Section 2.25 Custodian's Books and Records. The Custodian shall provide
any assistance reasonably requested by the Fund in the preparation of reports to
the Fund's shareholders and others, audits of accounts, and other ministerial
matters of like nature. The Custodian shall maintain complete and accurate
records with respect to securities and other assets held for the accounts of
each Portfolio as required by the rules and regulations of the SEC applicable to
investment companies registered under the 1940 Act, including: (a) journals or
other records of original entry containing a detailed and itemized daily record
of all receipts and deliveries of securities (including certificate and
transaction identification numbers, if any), and all receipts and disbursements
of cash; (b) ledgers or other records reflecting (i) securities in transfer,
(ii) securities in physical possession, (iii) securities borrowed, loaned or
collateralizing obligations of each Portfolio, (iv) monies borrowed and monies
loaned (together with a record of the collateral therefor and substitutions of
such collateral), (v) dividends and interest received, (vi) the amount of tax
withheld by any person in respect of any collection by the Custodian or any
Subcustodian, and (vii) the amount of reclaims or refunds for foreign taxes
paid; and (c) cancelled checks and bank records related thereto. The Custodian
shall keep such other books and records of the Fund as the Fund shall reasonably
request. All such books and records maintained by the Custodian shall be
maintained in a form acceptable to the Fund and in compliance with the rules and
regulations of the SEC, including, but not limited to, books and records
required to be maintained by Section 31 (a) of the 1940 Act and the rules and
regulations from time to time adopted thereunder. All books and records
maintained by the Custodian pursuant to this Agreement shall at all times be the
property of the Fund and shall be available during normal business hours for
inspection and use by the Fund and its agents, including, without limitation,
its independent certified public accountants. Notwithstanding the preceding
sentence, the Fund shall not take any actions or cause the Custodian to take any
actions which would cause, either directly or indirectly, the Custodian to
violate any applicable laws, regulations or orders.
Section 2.26 Opinion of Fund's Independent Certified Public
Accountants. The Custodian shall take all reasonable action as the Fund may
request to obtain from year to year favorable opinions from the Fund's
independent certified public accountants with respect to the Custodian's
activities hereunder in connection with the preparation of the Fund's Form N-IA
and the Fund's Form N-SAR or other periodic reports to the SEC and with respect
to any other requirements of the SEC.
11
<PAGE> 16
Section 2.27 Reports by Independent Certified Public Accountants. At
the request of the Fund, the Custodian shall deliver to the Fund a written
report prepared by the Custodian's independent certified public accountants with
respect to the services provided by the Custodian under this Agreement,
including, without limitation, the Custodian's accounting system, internal
accounting control and procedures for safeguarding cash, securities and other
assets, including cash, securities and other assets deposited and/or maintained
in a Securities System or with a Subcustodian. Such report shall be of
sufficient scope and in sufficient detail as may reasonably be required by the
Fund and as may reasonably be obtained by the Custodian.
Section 2.28 Overdraft Facility. In the event that the Custodian is
directed by Proper Instructions to make any payment or transfer of funds on
behalf of a Portfolio for which there would be, at the close of business on the
date of such payment or transfer, insufficient funds held by the Custodian on
behalf of such Portfolio, the Custodian may, in its discretion, provide an
overdraft (an "Overdraft") to the Fund on behalf of such Portfolio, in an amount
sufficient to allow the completion of such payment. Any Overdraft provided
hereunder: (a) shall be payable on the next Business Day, unless otherwise
agreed by the Fund and the Custodian; and (b) shall accrue interest from the
date of the Overdraft to the date of payment in full by the Fund on behalf of
the applicable Portfolio at a rate agreed upon in writing, from time to time, by
the Custodian and the Fund. The Custodian and the Fund acknowledge that the
purpose of such Overdrafts is to temporarily finance the purchase or sale of
securities for prompt delivery in accordance with the terms hereof, or to meet
emergency expenses not reasonably foreseeable by the Fund. The Custodian shall
promptly notify the Fund in writing (an "Overdraft Notice") of any Overdraft by
facsimile transmission or in such other manner as the Fund and the Custodian may
agree in writing.
ARTICLE III - PROPER INSTRUCTIONS, SPECIAL
INSTRUCTIONS AND RELATED MATTERS
Section 3.1 Proper Instructions and Special Instructions.
(a) Proper Instructions. As used herein, the term "Proper
Instructions" shall mean: (i) a tested telex, a written (including, without
limitation, facsimile transmission) request, direction, instruction or
certification signed or initialed by or on behalf of the Fund by one or more
Authorized Persons (as hereinafter defined); (ii) a telephonic or other oral
communication by one or more Authorized Persons; or (iii) a communication
effected directly between an electromechanical or electronic device or system
(including, without limitation, computers) by or on behalf of the Fund by one or
more Authorized Persons; provided, however, that communications of the types
described in clauses (ii) and (iii) above purporting to be given by an
Authorized Person shall be considered Proper Instructions only if the Custodian
believes in good faith that such communications were given by an Authorized
Person with respect to the transaction involved. Proper Instructions in the form
of oral communications shall be confirmed by the Fund by tested telex or in
writing in the manner set forth in clause (i) above, but the lack of such
12
<PAGE> 17
confirmation shall in no way affect any action taken by the Custodian in
reliance upon such oral instructions prior to the Custodian's receipt of such
confirmation. The Fund and the Custodian are hereby authorized to record any and
all telephonic or other oral instructions communicated to the Custodian. Proper
Instructions may relate to specific transactions or to types or classes of
transactions, and may be in the form of standing instructions.
(b) Special Instructions. As used herein, the term "Special
Instructions" shall mean Proper Instructions countersigned or confirmed in
writing by the Treasurer or any Assistant Treasurer of the Fund or any other
person designated by the Treasurer of the Fund in writing, which
countersignature or confirmation shall be (i) included on the same instrument
containing the Proper Instructions or on a separate instrument relating thereto,
and (ii) delivered by hand, by facsimile transmission, or in such other manner
as the Fund and the Custodian agree in writing.
(c) Address for Proper Instructions and Special Instructions.
Proper Instructions and Special Instructions shall be delivered to the Custodian
at the address and/or telephone, telecopy or telex number agreed upon from time
to time by the Custodian and the Fund.
Section 3.2 Authorized Persons. Concurrently with the execution of
this Agreement and from time to time thereafter, as appropriate, the Fund shall
deliver to the Custodian, duly certified as appropriate by a Treasurer or
Assistant Treasurer of the Fund, a certificate setting forth: (a) the names,
titles, signatures and scope of authority of all persons authorized to give
Proper Instructions or any other notice, request, direction, instruction,
certificate or instrument on behalf of the Fund (collectively, the "Authorized
Persons" and individually, an "Authorized Person"); and (b) the names, titles
and signatures of those persons authorized to issue Special Instructions. Such
certificate may be accepted and relied upon by the Custodian as conclusive
evidence of the facts set forth therein and shall be considered to be in full
force and effect until delivery to the Custodian of a similar certificate to the
contrary. Upon delivery of a certificate which deletes the name(s) of a person
previously authorized by the Fund to give Proper Instructions or to issue
Special Instructions, such persons shall no longer be considered an Authorized
Person or authorized to issue Special Instructions for the Fund.
Section 3.3 Persons Having Access to Assets of the Portfolios.
Notwithstanding anything to the contrary contained in this Agreement, no
Authorized Person, Trustee, officer, employee or agent of the Fund shall have
physical access to the assets of any Portfolio of the Fund held by the Custodian
nor shall the Custodian deliver any assets of a Portfolio for delivery to an
account of such person; provided, however, that nothing in this Section 3.3
shall prohibit (a) any Authorized Person from giving Proper Instructions, or any
person authorized to issue Special Instructions from issuing Special
Instructions, so long as such action does not result in delivery of or access to
assets of any Portfolio prohibited by this Section 3.3; or (b) the Fund's
independent certified public accountants from examining or reviewing the assets
of the Portfolios of the Fund held by the Custodian. The Fund shall deliver to
the Custodian a written certificate identifying such Authorized Persons,
Trustees, officers, employees and agents of the Fund.
13
<PAGE> 18
Section 3.4 Actions of Custodian Based on Proper Instructions and
Special Instructions. So long as and to the extent that the Custodian acts in
accordance with (a) Proper Instructions or Special Instructions, as the case may
be, and (b) the terms of this Agreement, the Custodian shall not be responsible
for the title, validity or genuineness of any property, or evidence of title
thereof, received by it or delivered by it pursuant to this Agreement.
ARTICLE IV - SUBCUSTODIANS
The Custodian may, from time to time, in accordance with the relevant
provisions of this Article IV, appoint one or more Domestic Subcustodians,
Foreign Subcustodians or Interim Subcustodians to act on behalf of a Portfolio.
(For purposes of this Agreement, all duly appointed Domestic Subcustodians,
Interim Subcustodians and Foreign Subcustodians, are hereinafter referred to
collectively, as "Subcustodians.")
Section 4.1 Domestic Subcustodians. The Custodian may, at any time and
from time to time, appoint any bank as defined in Section 2(a)(5) of the 1940
Act meeting the requirements of a custodian under Section 17(f) of the 1940 Act
and the rules and regulations thereunder, to act on behalf of one or more
Portfolios as a subcustodian for purposes of holding cash, securities and other
assets of such Portfolios and performing other functions of the Custodian within
the United States (a "Domestic Subcustodian"); provided, that, the Custodian
shall notify the Fund in writing of the identity and qualifications of any
proposed Domestic Subcustodian at least thirty (30) days prior to appointment of
such Domestic Subcustodian, and the Fund may, in its sole discretion, by written
notice to the Custodian executed by an Authorized Person disapprove of the
appointment of such Domestic Subcustodian. If, following notice by the Custodian
to the Fund regarding appointment of a Domestic Subcustodian and the expiration
of thirty (30) days after the date of such notice, the Fund shall have failed to
notify the Custodian of its disapproval thereof, the Custodian may, in its
discretion, appoint such proposed Domestic Subcustodian as its subcustodian.
Section 4.2 Foreign Subcustodians and Interim Subcustodians.
(a) Foreign Subcustodians. The Custodian or a Domestic
Subcustodian may, at any time and from time to time, appoint: (i) any bank,
trust company or other entity meeting the requirements of an "eligible foreign
custodian" under Section 17(f) of the 1940 Act and the rules and regulations
thereunder or by order of the Securities and Exchange Commission exempted
therefrom, or (ii) any bank as defined in Section 2(a)(5) of the 1940 Act
meeting the requirements of a custodian under Section 17(f) of the 1940 Act and
the rules and regulations thereunder to act on behalf of one or more Portfolios
as a subcustodian for purposes of holding cash, securities and other assets of
such Portfolios and performing other functions of the Custodian in countries
other than the United States of America (a "Foreign Subcustodian"); provided,
that, prior to the appointment of any Foreign Subcustodian, the Custodian or the
Domestic Subcustodian shall have obtained written confirmation of the approval
of the Board of Trustees of the Fund on behalf of
14
<PAGE> 19
its applicable Portfolio(s) (which approval may be withheld in the sole
discretion of such Board of Trustees) with respect to (i) the identity and
qualifications of any proposed Foreign Subcustodian, (ii) the country or
countries in which, and the securities depositories or clearing agencies, if
any, through which, any proposed Foreign Subcustodian is authorized to hold
securities and other assets of the applicable Portfolio(s), and (iii) the form
and terms of the subcustodian agreement to be entered into between such proposed
Foreign Subcustodian and the Custodian or Domestic Subcustodian. The Fund shall
be responsible for informing the Custodian sufficiently in advance of a proposed
investment by one of its Portfolios which is to be held in a country in which no
Foreign Subcustodian is authorized to act, in order that there shall be
sufficient time for the Custodian or Domestic Subcustodian to effect the
appropriate arrangements with a proposed foreign subcustodian, including
obtaining approval as provided in this Section 4.2(a). Neither the Custodian nor
the Domestic Subcustodian shall amend any subcustodian agreement entered into
with a Foreign Subcustodian, or agree to change or permit any changes
thereunder, or waive any rights under such agreement, which materially affect a
Fund's rights or the Foreign Subcustodian's obligations or duties to a Fund
under such agreement, except upon prior approval of the Fund pursuant to Special
Instructions.
(b) Interim Subcustodians. Notwithstanding the foregoing, in
the event that a Portfolio shall invest in a security or other asset to be held
in a country in which no Foreign Subcustodian is authorized to act, the
Custodian shall promptly notify the Fund in writing by facsimile transmission or
in such other manner as the Fund and Custodian shall agree in writing of the
unavailability of an approved Foreign Subcustodian in such country; and the
Custodian shall, upon receipt of Special Instructions, appoint any Person
designated by the Fund in such Special Instructions to hold such security or
other asset. (Any Person appointed as a subcustodian pursuant to this Section
4.2(b) is hereinafter referred to as an "Interim Subcustodian.")
Section 4.3 Termination of a Subcustodian. The Custodian shall (i)
cause each Domestic Subcustodian and Foreign Subcustodian to, and (ii) use
reasonable efforts to cause each Interim Subcustodian to, perform all of its
obligations in accordance with the terms and conditions of the subcustodian
agreement between the Custodian and such Domestic Subcustodian or Interim
Subcustodian. In the event that the Custodian is unable to cause such
Subcustodian to fully perform its obligations thereunder, the Custodian shall
forthwith, upon the receipt of Special Instructions, terminate such Subcustodian
and, if necessary or desirable, appoint a replacement Subcustodian in accordance
with the provisions of Section 4.1, Section 4.2 or Section 4.3, as the case may
be. In addition to the foregoing, the Custodian (A) may, at any time in its
discretion, upon written notification to the Fund, terminate any Domestic
Subcustodian, Foreign Subcustodian or Interim Subcustodian, and (B) shall, upon
receipt of Special Instructions, terminate any Subcustodian, in accordance with
the termination provisions under the applicable subcustodian agreement.
Section 4.4 Certification Regarding Foreign Subcustodians. Upon
request of the Fund, the Custodian shall deliver to the Fund a certificate
stating: (i) the identity of each Foreign Subcustodian then acting on behalf of
the Custodian for the Fund and its Portfolios; (ii) the
15
<PAGE> 20
countries in which and the securities depositories and clearing agents through
which each such Foreign Subcustodian is then holding cash, securities and other
assets of any Portfolio of the Fund; and (iii) such other information as may be
requested by the Fund to ensure compliance with Rule 17f-5 under the 1940 Act.
ARTICLE V - STANDARD OF CARE; INDEMNIFICATION
Section 5.1 Standard of Care.
(a) General Standard of Care. The Custodian shall exercise
reasonable care and diligence in carrying out all of its duties and obligations
under this Agreement, and shall be liable to the Fund for all loss, damage and
expense suffered or incurred by the Fund or its Portfolios resulting from the
failure of the Custodian to exercise such reasonable care and diligence.
Notwithstanding the foregoing, under no circumstances shall the Custodian be
liable to the Fund or its Portfolios for consequential, special or incidental
damages.
(b) Actions Prohibited by Applicable Law, Etc. In no event
shall the Custodian incur liability hereunder if the Custodian or any
Subcustodian or Securities System, or any subcustodian, securities depository or
securities system utilized by any such Subcustodian, or any nominee of the
Custodian or any Subcustodian (individually, a "Person") is prevented, forbidden
or delayed from performing, or omits to perform, any act or thing which this
Agreement provides shall be performed or omitted to be performed, by reason of:
(i) any provision of any present or future law or regulation or order of the
United States of America, or any state thereof, or of any foreign country, or
political subdivision thereof or of any court of competent jurisdiction; or (ii)
any act of God or war or other similar circumstance beyond the control of the
Custodian.
(c) Advice of Counsel. The Custodian shall be entitled to
receive and act upon advice of counsel on all matters. The Custodian shall be
without liability for any action reasonably taken or omitted in good faith
pursuant to the advice of (i) counsel for the Fund or Trustees of the Fund, or
(ii) at the expense of the Custodian, such other counsel as the Fund and the
Custodian may agree upon; provided, however, with respect to the performance of
any action or omission of any action upon such advice, the Custodian shall be
required to conform to the standard of care set forth in Section 5.1 (a).
(d) Liability for Past Records. The Custodian shall have no
liability in respect of any loss, damage or expense suffered by the Fund,
insofar as such loss, damage or expense arises from the performance of the
Custodian's duties hereunder by reason of the Custodian's reliance upon records
that were maintained for the Fund by entities other than the Custodian prior to
the Custodian's appointment as custodian for the Fund.
16
<PAGE> 21
Section 5.2 Liability of Custodian for Actions of Other Persons.
(a) Domestic Subcustodians and Foreign Subcustodians.
Notwithstanding the provisions of Section 5.1 to the contrary, the Custodian
shall have no more responsibility or liability to the Fund for any loss, damage
or expense suffered or incurred by the Fund or any of its Portfolios resulting
from the actions or omissions of a Domestic Subcustodian or Foreign Subcustodian
than any such Domestic Subcustodian or Foreign Subcustodian has to the
Custodian.
(b) Interim Subcustodians. Notwithstanding the provisions of
Section 5.1 to the contrary, the Custodian shall not be liable to the Fund for
any loss, damage or expense suffered or incurred by the Fund or any of its
Portfolios resulting from the actions or omissions of an Interim Subcustodian
unless such loss, damage or expense is caused by, or results from, the
negligence, misfeasance or misconduct of the Custodian; provided, however, in
the event of any such loss, damage or expense, the Custodian shall take all
reasonable steps to enforce such rights as it may have against such Interim
Subcustodian to protect the interests of the Fund and the Portfolios.
(c) Securities Systems. Notwithstanding the provisions of
Section 5.1 to the contrary, the Custodian shall not be liable to a Fund for any
loss, damage or expense suffered or incurred by the Fund or any of its
Portfolios resulting from the use by the Custodian of a Securities System,
unless such loss, damage or expense is caused by, or results from, the
negligence, misfeasance or misconduct of the Custodian; provided, however, that
in the event of any such loss, damage or expense, the Custodian shall take all
reasonable steps to enforce such rights as it may have against the Securities
System to protect the interests of the Fund and the Portfolios.
(d) Reimbursement of Expenses. The Fund agrees to reimburse
the Custodian for all reasonable out-of-pocket expenses incurred by the
Custodian on behalf of the Fund in connection with the fulfillment of its
obligations under this Section 5.2; provided, however, that such reimbursement
shall not apply to expenses occasioned by or resulting from the negligence,
misfeasance or misconduct of the Custodian.
Section 5.3 Indemnification.
(a) Indemnification Obligations. Subject to the limitations
set forth in this Agreement, the Fund agrees to indemnify and hold harmless the
Custodian and its nominees from all loss, damage and expense (including
reasonable attorneys' fees) suffered or incurred by the Custodian or its nominee
caused by or arising from actions taken by the Custodian on behalf of the Fund
in the performance of its duties and obligations under this Agreement; provided,
however, that such indemnity shall not apply to loss, damage and expense
occasioned by or resulting from the negligence, misfeasance or misconduct of the
Custodian or its nominee. In addition, the Fund agrees to indemnify any Person
against any liability incurred by reason of taxes assessed to such Person, or
other loss, damage or expenses incurred by such Person, resulting
17
<PAGE> 22
from the fact that securities and other property of the Fund's Portfolios are
registered in the name of such Person; provided, however, that in no event shall
such indemnification be applicable to income, franchise or similar taxes which
may be imposed or assessed against any Person.
(b) Notice of Litigation, Right to Prosecute, Etc. Any Person
entitled to indemnification under Section 5.3(a) hereof shall promptly notify
the Fund in writing of the commencement of any litigation or proceeding brought
against such Person in respect of which indemnity may be sought under this
Section 5.3; provided, however, that the failure to so notify the Fund promptly
will not relieve the Fund from any liability except to the extent that the Fund
shall have been prejudiced as a result of such failure. With respect to claims
in such litigation or proceedings for which indemnity by the Fund may be sought
and subject to applicable law and the ruling of any court of competent
jurisdiction, the Fund shall be entitled to participate in any such litigation
or proceeding and, after written notice from the Fund to any Person, the Fund
may assume the defense of such litigation or proceeding with counsel of its
choice at its own expense in respect of that portion of the litigation for which
the Fund may be subject to an indemnification obligation; provided, however, a
Person shall be entitled to participate in (but not control) at its own cost and
expense, the defense of any such litigation or proceeding if the Fund has not
acknowledged in writing its obligation to indemnify the Person with respect to
such litigation or proceeding. If the Fund is not permitted to participate or
control such litigation or proceeding under applicable law or by a ruling of a
court of competent jurisdiction, such Person shall reasonably prosecute such
litigation or proceeding. A Person shall not consent to the entry of any
judgment or enter into any settlement in any such litigation or proceeding
without providing the Fund with adequate notice of any such settlement or
judgment, and without the Fund's prior written consent. All Persons shall submit
written evidence to the Fund with respect to any cost or expense for which they
are seeking indemnification in such form and detail as the Fund may reasonably
request.
Section 5.4 Fund's Right to Proceed. Notwithstanding anything to the
contrary contained herein, the Fund shall have, at its election upon reasonable
notice to the Custodian, the right to enforce, to the extent permitted by any
applicable agreement and applicable law, the Custodian's rights against any
Subcustodian, Securities System, or other Person for loss, damage or expense
caused the Fund by such Subcustodian, Securities System, or other Person, and
shall be entitled to enforce the rights of the Custodian with respect to any
claim against such Subcustodian, Securities System or other Person, which the
Custodian may have as a consequence of any such loss, damage or expense, if and
to the extent that the Fund has not been made whole for any such loss or damage.
If the Custodian makes the Fund whole for any such loss or damage, the Custodian
shall retain the ability to enforce its rights directly against such
Subcustodian, Securities System or other Person. Upon the Fund's election to
enforce any rights of the Custodian under this Section 5.4, the Fund shall
reasonably prosecute all actions and proceedings directly relating to the rights
of the Custodian in respect of the loss, damage or expense incurred by the Fund;
provided that, so long as the Fund has acknowledged in writing its obligation to
indemnify the Custodian under Section 5.3 hereof with respect to such claim, the
Fund shall retain the right to settle, compromise and/or terminate any action or
proceeding in
18
<PAGE> 23
respect of the loss, damage or expense incurred by the Fund without the
Custodian's consent and provided further, that if the Fund has not made an
acknowledgment of its obligation to indemnify, the Fund shall not settle,
compromise or terminate any such action or proceeding without the written
consent of the Custodian, which consent shall not be unreasonably withheld or
delayed. The Custodian agrees to cooperate with the Fund and take all actions
reasonably requested by the Fund in connection with the Fund's enforcement of
any rights of the Custodian. The Fund agrees to reimburse the Custodian for all
reasonable out-of-pocket expenses incurred by the Custodian on behalf of the
Fund in connection with the fulfillment of its obligations under this Section
5.4; provided, however, that such reimbursement shall not apply to expenses
occasioned by or resulting from the negligence, misfeasance or misconduct of the
Custodian.
ARTICLE VI - COMPENSATION
On behalf of each of its Portfolios, the Fund shall compensate the
Custodian in an amount, and at such times, as may be agreed upon in writing,
from time to time, by the Custodian and the Fund.
ARTICLE VII - TERMINATION
Section 7.1 Termination of Agreement as to the Fund. With respect to
the Fund, this Agreement shall continue in full force and effect until the first
to occur of: (a) termination by the Custodian by an instrument in writing
delivered or mailed to the Fund, such termination to take effect not sooner than
ninety (90) days after the date of such delivery; (b) termination by the Fund by
an instrument in writing delivered or mailed to the Custodian, such termination
to take effect not sooner than ninety (90) days after the date of such delivery;
or (c) termination by the Fund by written notice delivered to the Custodian,
based upon the Fund's determination that there is a reasonable basis to conclude
that the Custodian is insolvent or that the financial condition of the Custodian
is deteriorating in any material respect, in which case termination shall take
effect upon the Custodian's receipt of such notice or at such later time as the
Fund shall designate. In the event of termination pursuant to this Section 7.1
by the Fund, the Fund shall make payment of all accrued fees and unreimbursed
expenses within a reasonable time following termination and delivery of a
statement to the Fund setting forth such fees and expenses. The Fund shall
identify in any notice of termination a successor custodian or custodians to
which the cash, securities and other assets of its Portfolios shall, upon
termination of this Agreement, be delivered. In the event that no written notice
designating a successor custodian shall have been delivered to the Custodian on
or before the date when termination of this Agreement shall become effective,
the Custodian may deliver to a bank or trust company doing business in the
United States of its own selection, having an aggregate capital, surplus, and
undivided profits, as shown by its last published report, of not less than
$25,000,000, all securities and other assets of the Fund's Portfolios held by
the Custodian and all instruments held by the Custodian relative thereto and all
other property of the
19
<PAGE> 24
Fund's Portfolios held by the Custodian under this Agreement. Thereafter, such
bank or trust company shall be the successor of the Custodian under this
Agreement. In the event that securities and other assets of the Fund's
Portfolios remain in the possession of the Custodian after the date of
termination hereof owing to failure of the Fund to appoint a successor
custodian, the Custodian shall be entitled to compensation for its services in
accordance with the fee schedule most recently in effect, for such period as the
Custodian retains possession of such securities and other assets, and the
provisions of this Agreement relating to the duties and obligations of the
Custodian and the Fund shall remain in full force and effect. In the event of
the appointment of a successor custodian, it is agreed that the cash, securities
and other property owned by the Fund and held by the Custodian, any Subcustodian
or nominee shall be delivered to the successor custodian; and the Custodian
agrees to cooperate with the Fund in the execution of documents and performance
of other actions necessary or desirable in order to substitute the successor
custodian for the Custodian under this Agreement.
Section 7.2 Termination as to One or More Portfolios. This Agreement
may be terminated as to one or more of the Fund's Portfolios (but less than all
of its Portfolios) by delivery of an amended Appendix "A" deleting such
Portfolios pursuant to Section 9.6(b) hereof, in which case termination as to
such deleted Portfolios shall take effect ninety (90) days after the date of
such delivery. The execution and delivery of an amended Appendix "A" which
deletes one or more Portfolios shall constitute a termination of this Agreement
only with respect to such deleted Portfolio(s), shall be governed by the
preceding provisions of Section 7.1 as to the identification of a successor
custodian and the delivery of cash, securities and other assets of the
Portfolio(s) so deleted, and shall not affect the obligations of the Custodian
and the Fund hereunder with respect to the other Portfolios set forth in
Appendix "A," as amended from time to time.
20
<PAGE> 25
ARTICLE VIII - DEFINED TERMS
The following terms are defined in the following sections:
<TABLE>
<CAPTION>
Term Section
- ---- -------
<S> <C>
Account...................................................... 2.22
ADRs......................................................... 2.6
Authorized Person(s)......................................... 3.2
Banking Institution.......................................... 2.12(a)
Bank Accounts................................................ 2.21
Distribution Account......................................... 2.16
Domestic Subcustodian........................................ 4.1
Foreign Subcustodian......................................... 4.2(a)
Fund......................................................... Preamble
Institutional Client......................................... 2.3
Interim Subcustodian......................................... 4.2(b)
Overdraft.................................................... 2.28
Overdraft Notice............................................. 2.28
Person....................................................... 5.1(b)
Portfolio.................................................... Preamble
Procedural Agreement......................................... 2.10
Proper Instructions.......................................... 3.1(a)
SEC.......................................................... 2.22
Securities System............................................ 2.22
Shares....................................................... 2.16
Special Instructions......................................... 3.1(b)
Subcustodian................................................. Article IV
1940 Act..................................................... Preamble
</TABLE>
ARTICLE IX - MISCELLANEOUS
Section 9.1 Execution of Documents, Etc.
(a) Actions by the Fund. Upon request, the Fund shall execute
and deliver to the Custodian such proxies, powers of attorney or other
instruments as may be reasonable and necessary or desirable in connection with
the performance by the Custodian or any Subcustodian of their respective
obligations to the Fund under this Agreement or any applicable subcustodian
agreement with respect to the Fund.
(b) Actions by Custodian. Upon receipt of Proper Instructions,
the Custodian shall execute and deliver to the Fund or to such other parties as
the Fund may designate in such
21
<PAGE> 26
Proper Instructions, all such documents, instruments or agreements as may be
reasonable and necessary or desirable in order to effectuate any of the
transactions contemplated hereby.
Section 9.2 Representative Capacity; Nonrecourse Obligations. A COPY OF
THE DECLARATION OF TRUST OF THE FUND IS ON FILE WITH THE SECRETARY OF STATE OF
MASSACHUSETTS, AND NOTICE IS HEREBY GIVEN THAT THIS AGREEMENT IS NOT EXECUTED ON
BEHALF OF THE TRUSTEES OF THE FUND AS INDIVIDUALS, AND THE OBLIGATIONS OF THIS
AGREEMENT ARE NOT BINDING UPON ANY OF THE TRUSTEES, OFFICERS, OR SHAREHOLDERS OF
THE FUND INDIVIDUALLY, BUT ARE BINDING ONLY UPON THE ASSETS AND PROPERTY OF THE
FUND'S PORTFOLIOS. THE CUSTODIAN AGREES THAT NO SHAREHOLDER, TRUSTEE OR OFFICER
OF THE FUND MAY BE HELD PERSONALLY LIABLE OR RESPONSIBLE FOR ANY OBLIGATIONS OF
THE FUND ARISING OUT OF THIS AGREEMENT.
Section 9.3 Several Obligations of the Fund and the Portfolios. WITH
RESPECT TO ANY OBLIGATIONS OF THE FUND ON BEHALF OF ANY OF ITS PORTFOLIOS
ARISING OUT OF THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, THE OBLIGATIONS
ARISING UNDER SECTIONS 2.28, 5.3, 5.4 and ARTICLE VI HEREOF, THE CUSTODIAN SHALL
LOOK FOR PAYMENT OR SATISFACTION OF ANY OBLIGATION SOLELY TO THE ASSETS AND
PROPERTY OF THE PORTFOLIO TO WHICH SUCH OBLIGATION RELATES AS THOUGH THE FUND
HAD SEPARATELY CONTRACTED WITH THE CUSTODIAN BY SEPARATE WRITTEN INSTRUMENT WITH
RESPECT TO EACH OF ITS PORTFOLIOS.
Section 9.4 Representations and Warranties.
(a) Representations and Warranties of the Fund. The Fund
hereby represents and warrants that each of the following shall be true, correct
and complete at all times during the term of this Agreement: (i) the Fund is
duly organized under the laws of its jurisdiction of organization and is
registered as an open-end management investment company under the 1940 Act; and
(ii) the execution, delivery and performance by the Fund of this Agreement are
(w) within its power, (x) have been duly authorized by all necessary action, and
(y) will not (A) contribute to or result in a breach of or default under or
conflict with any existing law, order, regulation or ruling of any governmental
or regulatory agency or authority, or (B) violate any provision of the Fund's
corporate charter, Declaration of Trust or bylaws, or any amendment thereof or
any provision of its most recent Prospectus or Statement of Additional
Information.
(b) Representations and Warranties of the Custodian. The
Custodian hereby represents and warrants to the Fund that each of the following
shall be true, correct and complete at all times during the term of this
Agreement: (i) the Custodian is duly organized under the laws of its
jurisdiction of organization and qualifies to act as a custodian to open-end
management investment companies under the provisions of the 1940 Act; and (ii)
the execution, delivery and
22
<PAGE> 1
Exhibit 9(a)
TRANSFER AGENCY AGREEMENT
AGREEMENT made this 18th day of December, 1995, between THE PILOT FUNDS
(the "Trust"), a Massachusetts business trust having its principal place of
business at 3435 Stelzer Road, Columbus, Ohio 43219, and BISYS FUND SERVICES,
INC. ("BISYS"), a Delaware corporation having its principal place of business at
3435 Stelzer Road, Columbus, Ohio 43219.
WHEREAS, the Trust desires that BISYS perform certain services for
those series of the Trust set forth in Schedule A attached hereto, as such
Schedule may be amended from time to time (individually referred to herein as a
"Fund" and collectively as the "Funds"); and
WHEREAS, BISYS is willing to perform such services on the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. Services.
BISYS shall perform for the Trust the transfer agent services set
forth in Schedule B hereto.
BISYS also agrees to perform for the Trust such special services
incidental to the performance of the services enumerated herein as agreed to by
the parties from time to time. BISYS shall perform such additional services as
are provided on an amendment to Schedule B hereof, in consideration of such fees
as the parties hereto may agree.
BISYS may, in its discretion and upon written notice to the
Trust, appoint in writing other parties qualified to perform transfer agency
services reasonably acceptable to the Trust (individually, a "Sub-transfer
Agent") to carry out some or all of its responsibilities under this Agreement
with respect to a Fund; provided, however, that the Sub-transfer Agent shall be
the agent of BISYS and not the agent of the Trust or such Fund, and that BISYS
shall be fully responsible for the acts of such Sub-transfer Agent and shall not
be relieved of any of its responsibilities hereunder by the appointment of such
Sub-transfer Agent.
2. Fees.
The Trust shall pay BISYS for the services to be provided by BISYS
under this Agreement in accordance with, and in the manner set forth in,
Schedule C hereto. BISYS may increase the fees it charges pursuant to the fee
schedule; provided, however, that BISYS may not increase such fees until the
expiration of the Initial Term of this Agreement (as defined below), unless the
Trust otherwise agrees to such change in writing. Fees for any additional
services to be
<PAGE> 2
provided by BISYS pursuant to an amendment to Schedule B hereto shall be subject
to mutual agreement at the time such amendment to Schedule B is proposed.
3. Reimbursement of Expenses.
In addition to paying BISYS the fees described in Section 2 hereof,
the Trust agrees to reimburse BISYS for BISYS' reasonable out-of-pocket expenses
in providing services hereunder, including without limitation, the following:
(a) All freight and other delivery and bonding charges incurred by
BISYS in delivering materials to and from the Trust and in
delivering all materials to shareholders;
(b) All direct telephone, telephone transmission and telecopy or
other electronic transmission expenses incurred by BISYS in
communication with the Trust, the Trust's investment adviser
or custodian, dealers, shareholders or others as required for
BISYS to perform the services to be provided hereunder;
(c) Costs of postage, couriers, stock computer paper, statements,
labels, envelopes, checks, reports, letters, tax forms,
proxies, notices or other form of printed material which shall
be required by BISYS for the performance of the services to be
provided hereunder;
(d) The cost of microfilm or microfiche of records or other
materials; and
(e) Any expenses BISYS shall incur at the written direction of an
officer of the Trust thereunto duly authorized.
4. Effective Date.
This Agreement shall become effective as of the date first written
above (the "Effective Date").
5. Term.
This Agreement shall continue in effect with respect to a Fund,
unless earlier terminated by either party hereto as provided hereunder, until
June 1, 1997. Thereafter, it shall be renewed automatically for successive
one-year terms unless written notice not to renew is given by the non-renewing
party to the other party at least 60 days prior to the expiration of the
then-current term; provided, however, that after such termination, for so long
as BISYS, with the written consent of the Trust, in fact continues to perform
any one or more of the services contemplated by this Agreement or any Schedule
or exhibit hereto, the provisions of this Agreement, including without
limitation the provisions dealing with indemnification, shall continue in full
force and effect. Fees and
2
<PAGE> 3
reasonable out-of-pocket expenses incurred by BISYS but unpaid by the Trust upon
such termination shall be immediately due and payable upon and notwithstanding
such termination. BISYS shall be entitled to collect from the Trust, in addition
to the fees and disbursements provided by Sections 2 and 3 hereof, the amount of
all of BISYS' cash disbursements and a reasonable fee (which fee shall be not
less than one hundred and two percent (102%) of the sum of the actual costs
incurred by BISYS in performing such service) for services in connection with
BISYS' activities in effecting such termination, including without limitation,
the delivery to the Trust and/or its distributor or investment adviser and/or
other parties, of the Trust's property, records, instruments and documents, or
any copies thereof. To the extent that BISYS may retain in its possession copies
of any Trust documents or records subsequent to such termination which copies
had not been requested by or on behalf of the Trust in connection with the
termination process described above, BISYS, for a reasonable fee, will provide
the Trust with reasonable access to such copies.
6. Uncontrollable Events.
BISYS assumes no responsibility hereunder, and shall not be
liable for any damage, loss of data, delay or any other loss whatsoever caused
by events beyond its reasonable control.
7. Legal Advice.
BISYS shall notify the Trust at any time BISYS believes that
it is in need of the advice of counsel (other than counsel in the regular employ
of BISYS or any affiliated companies) with regard to BISYS' responsibilities and
duties pursuant to this Agreement; and after so notifying the Trust, BISYS, at
its discretion, shall be entitled to seek, receive and act upon advice of legal
counsel of its choosing, such advice to be at the expense of the Trust or Funds
unless relating to a matter involving BISYS' willful misfeasance, bad faith,
negligence or reckless disregard with respect to BISYS' responsibilities and
duties hereunder and BISYS shall in no event be liable to the Trust or any Fund
or any shareholder or beneficial owner of the Trust for any action reasonably
taken pursuant to such advice.
8. Instructions.
Whenever BISYS is requested or authorized to take action
hereunder pursuant to instructions from a shareholder, or a properly authorized
agent of a shareholder ("shareholder's agent"), concerning an account in a Fund,
BISYS shall be entitled to rely upon any certificate, letter or other instrument
or communication, believed by BISYS to be genuine and to have been properly
made, signed or authorized by an officer or other authorized agent of the Trust
or by the shareholder or shareholder's agent, as the case may be, and shall be
entitled to receive as conclusive proof of any fact or matter required to be
ascertained by it hereunder a certificate signed by an officer of the Trust or
any other person authorized by the Trust's Board of Trustees or by the
shareholder or shareholder's agent, as the case may be.
3
<PAGE> 4
As to the services to be provided hereunder, BISYS may rely
conclusively upon the terms of the Prospectuses and Statement of Additional
Information of the Trust relating to the Funds to the extent that such services
are described therein unless BISYS receives written instructions to the contrary
in a timely manner from the Trust.
9. Standard of Care; Reliance on Records and Instructions;
Indemnification.
BISYS shall use its best efforts to ensure the accuracy of all
services performed under this Agreement, but shall not be liable to the Trust
for any action taken or omitted by BISYS in the absence of bad faith, willful
misfeasance, negligence or from reckless disregard by it of its obligations and
duties. BISYS hereby agrees to indemnify and hold harmless the Trust, and its
series, for any action taken or omitted by BISYS, in the exercise of its
responsibilities under this Agreement in bad faith, willful misfeasance,
negligence, or from reckless disregard by it of its obligations and duties. The
Trust agrees to indemnify and hold harmless BISYS, its employees, agents,
directors, officers and nominees from and against any and all claims, demands,
actions and suits, whether groundless or otherwise, and from and against any and
all judgments, liabilities, losses, damages, costs, charges, counsel fees and
other reasonable expenses of every nature and character arising out of or in any
way relating to BISYS' actions taken or nonactions with respect to the
performance of services under this Agreement or based, if applicable, upon
reasonable reliance on information, records, instructions or requests given or
made to BISYS by the Trust, the investment adviser and on any records provided
by any fund accountant or custodian thereof; provided that this indemnification
shall not apply to actions or omissions of BISYS in cases of its own bad faith,
willful misfeasance, negligence or from reckless disregard by it of its
obligations and duties; and further provided that prior to confessing any claim
against it which may be the subject of this indemnification, BISYS shall give
the Trust written notice of and reasonable opportunity to defend against said
claim in its own name or in the name of BISYS.
10. Record Retention and Confidentiality.
BISYS shall keep and maintain on behalf of the Trust all books
and records which the Trust or BISYS is, or may be, required to keep and
maintain pursuant to any applicable statutes, rules and regulations, including
without limitation Rules 31a-1 and 31a-2 under the Investment Company Act of
1940, as amended (the "1940 Act"), relating to the maintenance of books and
records in connection with the services to be provided hereunder. BISYS further
agrees that all such books and records shall be the property of the Trust and to
make such books and records available for inspection by the Trust or by the
Securities and Exchange Commission (the "Commission") at reasonable times and
otherwise to keep confidential all books and records and other information
relative to the Trust and its shareholders, except when requested to divulge
such information by duly-constituted authorities or court process, or requested
by a shareholder or shareholder's agent with respect to information concerning
an account as to which such shareholder has either a legal or beneficial
interest or when requested by the Trust, the shareholder, or shareholder's
agent, or the dealer of record as to such account.
4
<PAGE> 5
11. Reports.
BISYS will furnish to the Trust and to its properly-authorized
auditors, investment advisers, examiners, distributors, dealers, underwriters,
salesmen, insurance companies and others designated by the Trust in writing,
such reports at such times as are prescribed in Schedule D attached hereto, or
as subsequently agreed upon by the parties pursuant to an amendment to Schedule
D. The Trust agrees to examine each such report or copy promptly and will report
or cause to be reported any errors or discrepancies therein not later than ten
business days from the receipt thereof. In the event that errors or
discrepancies, except such errors and discrepancies as may not reasonably be
expected to be discovered by the recipient within ten days after conducting a
diligent examination, are not so reported within the aforesaid period of time, a
report will for all purposes be accepted by and be binding upon the Trust and
any other recipient, and BISYS shall have no liability for errors or
discrepancies therein and shall have no further responsibility with respect to
such report except to perform reasonable corrections of such errors and
discrepancies within a reasonable time after requested to do so by the Trust.
12. Rights of Ownership.
All computer programs and procedures developed to perform
services required to be provided by BISYS under this Agreement are the property
of BISYS. All records and other data except such computer programs and
procedures are the exclusive property of the Trust and all such other records
and data will be furnished to the Trust in appropriate usable form as soon as
practicable after termination of this Agreement for any reason.
13. Return of Records.
BISYS may at its option at any time, and shall promptly upon
the Trust's demand, turn over to the Trust and cease to retain BISYS' files,
records and documents created and maintained by BISYS pursuant to this Agreement
which are no longer needed by BISYS in the performance of its services or for
its legal protection. If not so turned over to the Trust, such documents and
records will be retained by BISYS for six years from the year of creation or
such longer period as may be required by law. At the end of such period, such
records and documents will be turned over to the Trust unless the Trust
authorizes in writing the destruction of such records and documents.
14. Bank Accounts.
The Trust and the Funds shall establish and maintain such bank
accounts with such bank or banks as are selected by the Trust, as are necessary
in order that BISYS may perform the services required to be performed hereunder.
To the extent that the performance of such services shall require BISYS directly
to disburse amounts for payment of dividends, redemption proceeds or other
purposes, the Trust and Funds shall provide such bank or banks with all
instructions and authorizations necessary for BISYS to effect such
disbursements.
5
<PAGE> 6
15. Representations of the Trust.
The Trust certifies to BISYS that: (a) as of the close of
business on the Effective Date, each Fund which is in existence as of the
Effective Date has authorized unlimited shares, and (b) by virtue of its
Declaration of Trust, shares of each Fund which are redeemed by the Trust may be
sold by the Trust from its treasury, and (c) this Agreement has been duly
authorized by the Trust and, when executed and delivered by the Trust, will
constitute a legal, valid and binding obligation of the Trust, enforceable
against the Trust in accordance with its terms, subject to bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting the rights and remedies of creditors and secured parties.
16. Representations of BISYS.
BISYS represents and warrants that: (a) BISYS has been in, and
shall continue to be in, substantial compliance with all provisions of law,
including Section 17A(c) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), required in connection with the performance of its duties under
this Agreement; (b) the various procedures and systems which BISYS has
implemented with regard to safekeeping from loss or damage attributable to fire,
theft or any other cause of the blank checks, records, and other data of the
Trust and BISYS' records, data, equipment, facilities and other property used in
the performance of its obligations hereunder are adequate and that it will make
such changes therein from time to time as are required for the secure
performance of its obligations hereunder; and (c) this Agreement has been duly
authorized by BISYS and, when executed and delivered by BISYS, will constitute a
legal, valid and binding obligation of BISYS, enforceable against BISYS in
accordance with its terms, subject to bankruptcy, insolvency, reorganization,
moratorium and other laws of general application affecting the rights and
remedies of creditors and secured parties.
BISYS maintains and shall continue to maintain insurance
coverage in such amount as is reasonably necessary and customary for the
performance of the transfer agency services required in connection with the
performance of the duties provided for in this Agreement.
17. Insurance.
BISYS shall notify the Trust should its insurance coverage
with respect to professional liability or errors and omissions coverage be
canceled or reduced. Such notification shall include the date of change and the
reasons therefor. BISYS shall notify the Trust of any material claims against it
with respect to services performed under this Agreement, whether or not they may
be covered by insurance, and shall notify the Trust from time to time as may be
appropriate of the total outstanding claims made by BISYS under its insurance
coverage.
18. Information to be Furnished by the Trust and Funds.
The Trust has furnished to BISYS the following:
6
<PAGE> 7
(a) Copies of the Declaration of Trust of the Trust and
of any amendments thereto.
(b) Copies of the following documents:
1. The Trust's By-Laws and any amendments
thereto;
2. Certified copies of resolutions of the Board
of Trustees covering the following matters:
A. Approval of this Agreement and
authorization of a specified
officer of the Trust to execute and
deliver this Agreement and
authorization for specified
officers of the Trust to instruct
BISYS hereunder; and
B. Authorization of BISYS to act as
Transfer Agent for the Trust on
behalf of the Funds.
(c) A list of all officers of the Trust, together with
specimen signatures of those officers, who are
authorized to instruct BISYS in all matters.
(d) Two copies of the following (if such documents are
employed by the Trust):
1. Prospectuses and Statement of Additional
Information;
2. Distribution Agreement; and
3. All other forms commonly used by the Trust
or its Distributor with regard to their
relationships and transactions with
shareholders of the Funds.
(e) A certificate as to shares of beneficial interest of
the Trust authorized, issued, and outstanding as of
the Effective Date of BISYS' appointment as Transfer
Agent (or as of the date on which BISYS' services are
commenced, whichever is the later date) and as to
receipt of full consideration by the Trust for all
shares outstanding, such statement to be certified by
the Treasurer of the Trust.
19. Information Furnished by BISYS.
BISYS has furnished to the Trust the following:
(a) BISYS' Articles of Incorporation.
7
<PAGE> 8
(b) BISYS' Bylaws and any amendments thereto.
(c) Certified copies of actions of BISYS covering the
following matters:
1. Approval of this Agreement, and
authorization of a specified officer of
BISYS to execute and deliver this Agreement;
2. Authorization of BISYS to act as Transfer
Agent for the Trust.
(d) A copy of the most recent independent accountants'
report relating to internal accounting control
systems as filed with the Commission pursuant to Rule
17Ad-13 under the Exchange Act.
20. Amendments to Documents.
The Trust shall furnish BISYS with written copies of any
amendments to, or changes in, any of the items referred to in Section 18 hereof
forthwith upon such amendments or changes becoming effective. Accordingly, BISYS
shall furnish the Trust with written copies of any amendments to, or changes in,
any of the items referred to in Section 19 hereof forthwith upon such amendments
or changes becoming effective. In addition, the Trust agrees that no amendments
will be made to the Prospectuses or Statement of Additional Information of the
Trust which might have the effect of changing the procedures employed by BISYS
in providing the services agreed to hereunder or which amendment might affect
the duties of BISYS hereunder unless the Trust first obtains BISYS' approval of
such amendments or changes.
21. Reliance on Amendments.
BISYS may rely on any amendments to or changes in any of the
documents and other items to be provided by the Trust pursuant to Sections 18
and 20 of this Agreement and the Trust hereby agrees to indemnify and hold
harmless BISYS from and against any and all claims, demands, actions, suits,
judgments, liabilities, losses, damages, costs, charges, counsel fees and other
reasonable expenses of every nature and character which may result from actions
or omissions on the part of BISYS in reasonable reliance upon such amendments
and/or changes. Although BISYS is authorized to rely on the above-mentioned
amendments to and changes in the documents and other items to be provided
pursuant to Sections 18 and 20 hereof, BISYS shall be under no duty to comply
with or take any action as a result of any of such amendments or changes unless
the Trust first obtains BISYS' written consent to and approval of such
amendments or changes. The Trust may rely on any amendments to or changes in any
of the documents and other items to be provided by BISYS pursuant to Sections 19
and 20 of this Agreement and BISYS hereby agrees to indemnify and hold harmless
the Trust from and against any and all claims, demands, actions, suits,
judgments, liabilities, losses, damages, costs, charges, counsel fees and other
reasonable expenses of every nature and character which may result from actions
or omissions on the part of the Trust in reasonable reliance upon such
amendments and/or changes.
8
<PAGE> 9
22. Compliance with Law.
Except for the obligations of BISYS set forth in Section 10
hereof, the Trust assumes full responsibility for the preparation, contents, and
distribution of each prospectus of the Trust as to compliance with all
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), the 1940 Act, and any other laws, rules and regulations of governmental
authorities having jurisdiction. BISYS shall have no obligation to take
cognizance of any laws relating to the sale of the Trust's shares. The Trust
represents and warrants that no shares of the Trust will be offered to the
public until the Trust's registration statement under the 1933 Act and the 1940
Act has been declared or becomes effective.
23. Notices.
Any notice provided hereunder shall be sufficiently given when
sent by registered or certified mail to the party required to be served with
such notice at the following address: 3435 Stelzer Road, Columbus, Ohio 43219,
or at such other address as such party may from time to time specify in writing
to the other party pursuant to this Section.
24. Headings.
Paragraph headings in this Agreement are included for
convenience only and are not to be used to construe or interpret this Agreement.
25. Assignment.
This Agreement and the rights and duties hereunder shall not
be assignable by either of the parties hereto except by the specific written
consent of the other party. This Section 25 shall not limit or in any way affect
BISYS' right to appoint a Sub-transfer Agent pursuant to Section 1 hereof.
26. Governing Law and Matters Relating to the Trust as a
Massachusetts Business Trust.
This Agreement shall be governed by and provisions shall be
construed in accordance with the laws of the Commonwealth of Massachusetts. It
is expressly agreed that the obligations of the Trust hereunder shall not be
binding upon any of the Trustees, shareholders, nominees, officers, agents or
employees of the Trust personally, but shall bind only the trust property of the
Trust and that no series of the Trust shall be liable for the obligations of any
other series of the Trust. The execution and delivery of this Agreement have
been authorized by the Trustees, and this Agreement has been signed and
delivered by an authorized officer of the Trust, acting as such, and neither
such authorization by the Trustees nor such execution and delivery by such
officer shall be deemed to have been made by any of them individually or to
impose any liability on any of them personally, but shall bind only the trust
property of the Trust as provided in the Trust's Agreement and Declaration of
Trust.
9
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed all as of the day and year first above written.
THE PILOT FUNDS
By:________________________________
BISYS FUND SERVICES, INC.
By:________________________________
10
<PAGE> 11
Dated:_____________
SCHEDULE A
TO THE TRANSFER AGENCY AGREEMENT
BETWEEN
THE PILOT FUNDS
AND
BISYS FUND SERVICES, INC.
NAME OF FUND
------------
Small Capitalization Equity Fund (P)
Small Capitalization Equity Fund (A)
Small Capitalization Equity Fund (B)
Short Term Diversified Assets (P)
Short Term Diversified Assets (A)
Short Term Diversified Assets (I)
Short Term U.S. Treasury (P)
Short Term U.S. Treasury (A)
Short Term U.S. Treasury (I)
Missouri Short Term Tax-Exempt (P)
Missouri Short Term Tax-Exempt (A)
Missouri Short Term Tax-Exempt (I)
Short Term Tax-Exempt Diversified (P)
Short Term Tax-Exempt Diversified (A)
Short Term Tax-Exempt Diversified (I)
International Equity (P)
International Equity (A)
International Equity (I)
Growth and Income (P)
Growth and Income (R-A)
Growth and Income (R-B)
Equity Income (P)
Equity Income (R-A)
Equity Income (R-B)
Int. U.S. Government Sec. (P)
Int. U.S. Government Sec. (R-A)
Int. U.S. Government Sec. (R-B)
U.S. Government Secs. (P)
A-1
<PAGE> 12
U.S. Government Secs. (R-A)
U.S. Government Secs. (R-B)
Int. Municipal Bond (P)
Int. Municipal Bond (R-A)
Int. Municipal Bond (R-B)
Municipal Bond (P)
Municipal Bond (R-A)
Municipal Bond (R-B)
Growth (P)
Growth (A)
Growth (B)
Diversified Bond Income (P)
Diversified Bond Income (A)
Diversified Bond Income (B)
THE PILOT FUNDS
By:________________________________
BISYS FUND SERVICES, INC.
By:________________________________
A-2
<PAGE> 13
SCHEDULE B
TO THE TRANSFER AGENCY AGREEMENT
BETWEEN
THE PILOT FUNDS
AND
BISYS FUND SERVICES, INC.
TRANSFER AGENCY SERVICES
1. Shareholder Transactions
a. Process shareholder purchase and redemption orders.
b. Set up account information, including address, dividend
option, taxpayer identification numbers and wire instructions.
c. Issue confirmations in compliance with Rule 10b-10 under the
Securities Exchange Act of 1934, as amended.
d. Issue periodic statements for shareholders.
e. Process transfers and exchanges.
f. Process dividend payments, including the purchase of new
shares, through dividend reimbursement.
2. Shareholder Information Services
a. Make information available to shareholder servicing unit and
other remote access units regarding trade date, share price,
current holdings, yields, and dividend information.
b. Produce detailed history of transactions through duplicate or
special order statements upon request.
c. Provide mailing labels for distribution of financial reports,
prospectuses, proxy statements or marketing material to
current shareholders.
B-1
<PAGE> 14
3. Compliance Reporting
a. Provide reports to the Securities and Exchange Commission, the
National Association of Securities Dealers and the States in
which the Fund is registered.
b. Prepare and distribute appropriate Internal Revenue Service
forms for corresponding Fund and shareholder income and
capital gains.
c. Issue tax withholding reports to the Internal Revenue Service.
4. Dealer/Load Processing (if applicable)
a. Provide reports for tracking rights of accumulation and
purchases made under a Letter of Intent.
b. Account for separation of shareholder investments from
transaction sale charges for purchase of Fund shares.
c. Calculate fees due under 12b-1 plans for distribution and
marketing expenses.
d. Track sales and commission statistics by dealer and provide
for payment of commissions on direct shareholder purchases in
a load Fund.
5. Shareholder Account Maintenance
a. Maintain all shareholder records for each account in the
Trust.
b. Issue customer statements on scheduled cycle, providing
duplicate second and third party copies if required.
c. Record shareholder account information changes.
d. Maintain account documentation files for each shareholder.
B-2
<PAGE> 15
SCHEDULE C
TO THE TRANSFER AGENCY AGREEMENT
BETWEEN
THE PILOT FUNDS
AND
BISYS FUND SERVICES, INC.
TRANSFER AGENT FEES
<TABLE>
<CAPTION>
ANNUAL FEES:
<S> <C> <C>
Annual per portfolio charge $27,000.00 (1)
Annual per shareholder account charge - retail $23.00
Annual per shareholder account charge - institutional $15.00
Asset Based Fees:
Classes under $1 Billion 1.0 BP Annual Fee
Classes over $1 Billion .75 BP Annual Fee
Maximum Complex Fee:
Number of active classes x $18,000 plus the annual per account charge
</TABLE>
Additional Services:
Additional services such as IRA processing are subject to additional fees which
will be quoted upon request. Programming costs or database management fees for
special reports or specialized processing will be quoted upon request.
Out-of-pocket Expenses:
BISYS shall be entitled to be reimbursed for all reasonable out-of-pocket
expenses including, but not limited to, the expenses set forth in Section 3 of
the Transfer Agency Agreement to which this Schedule C is attached.
- -------------------------
(1) Assumes up to three classes. Additional classes are $16,000.00
C-1
<PAGE> 16
SCHEDULE D
TO THE TRANSFER AGENCY AGREEMENT
BETWEEN
THE PILOT FUNDS
AND
BISYS FUND SERVICES, INC.
REPORTS
1. Daily Shareholder Activity Journal
2. Daily Fund Activity Summary Report
a. Beginning Balance
b. Dealer Transactions
c. Shareholder Transactions
d. Reinvested Dividends
e. Exchanges
f. Adjustments
g. Ending Balance
3. Daily Wire and Check Registers
4. Monthly Dealer Processing Reports
5. Monthly Dividend Reports
6. Sales Data Reports for Blue Sky Registration
7. Annual report by independent public accountants concerning BISYS'
shareholder system and internal accounting control systems to be filed
with the Securities and Exchange Commission pursuant to Rule 17Ad-13 of
the Securities Exchange Act of 1934, as amended.
D-1
<PAGE> 1
EXHIBIT 11(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Pilots Funds:
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated October 21, 1996
incorporated by reference in Post-Effective Amendment No. 32 to Registration
Statement File Nos. 2-78440 and 811-03517, respectively.
/s/ Arthur Andersen LLP
------------------------
ARTHUR ANDERSEN LLP
Boston Massachusetts
November 1, 1996
<PAGE> 1
Exhibit 11(b)
[Goodwin, Procter & Hoar LLP letterhead]
October 30, 1996
The Pilot funds
3435 Stelzer Road
Columbus, OH 43219
Ladies and Gentlemen:
We hereby consent to the incorporation by reference in Post-Effective
Amendment No. 32 (the "Amendment") to the Registration Statement (No. 2-78440)
on Form N-1A of The Pilot Funds (the "Registrant"), a Massachusetts business
trust, of our opinion with respect to the legality of the shares of the
Registrant representing interests in the Pilot Short-Term U.S. Treasury Fund,
Pilot Short-Term Diversified Assets Fund, Pilot Short-Term Tax-Exempt
Diversified Fund, Pilot Missouri Short-Term Tax Exempt Fund, Pilot Intermediate
U.S. Government Securities Fund, Pilot U.S. Government Securities Fund, Pilot
Intermediate Municipal Bond Fund, Pilot Municipal Bond Fund, Pilot Equity
Income Fund, Pilot Growth and Income Fund, Pilot Small Capitalization Equity
Fund, and Pilot International Equity Fund series of the Registrant (the
"Funds"), which opinion was filed with the Registrant's Annual Notice on form
24F-2 on October 30, 1996, and our opinion with respect to the legality of the
shares of the Registrant representing interests in the Pilot Diversified Bond
Income Fund and Pilot Growth Fund series of the Registrant (also "Funds"),
which opinion was filed with the Registrant's Registration Statement on Form
N-14 on July 5, 1996.
We also hereby consent to the references to this firm in the Statement
of Additional Information for the Funds under the heading "Independent
Accountants Counsel" which form a part of the Amendment and to the filing of
this consent as an exhibit to the Amendment.
Very truly yours,
GOODWIN, PROCTER & HOAR LLP
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 11
<NAME> PILOT SHORT-TERM DIVERSIFIED ASSETS FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 1607562114
<INVESTMENTS-AT-VALUE> 1607562114
<RECEIVABLES> 8849128
<ASSETS-OTHER> 169106
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1616580348
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5994191
<TOTAL-LIABILITIES> 5994191
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1610452527
<SHARES-COMMON-STOCK> 1318714071<F1>
<SHARES-COMMON-PRIOR> 1056565783<F1>
<ACCUMULATED-NII-CURRENT> 276000
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 142370
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1610586157
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 81049659
<OTHER-INCOME> 0
<EXPENSES-NET> 4669437
<NET-INVESTMENT-INCOME> 76380222
<REALIZED-GAINS-CURRENT> (7389)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 76372833
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 62678596<F1>
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1876383<F1>
<NUMBER-OF-SHARES-REDEEMED> 1614354<F1>
<SHARES-REINVESTED> 119<F1>
<NET-CHANGE-IN-ASSETS> 288326313
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 78650
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2174296
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5187829
<AVERAGE-NET-ASSETS> 1175081599<F1>
<PER-SHARE-NAV-BEGIN> 1.000<F1>
<PER-SHARE-NII> .053<F1>
<PER-SHARE-GAIN-APPREC> .000<F1>
<PER-SHARE-DIVIDEND> .053<F1>
<PER-SHARE-DISTRIBUTIONS> .000<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 1.000<F1>
<EXPENSE-RATIO> .270<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Pilot Shares
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 11
<NAME> PILOT SHORT-TERM DIVERSIFIED ASSETS FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 1607562114
<INVESTMENTS-AT-VALUE> 1607562114
<RECEIVABLES> 8849128
<ASSETS-OTHER> 169106
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1616580348
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5994191
<TOTAL-LIABILITIES> 5994191
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1610452527
<SHARES-COMMON-STOCK> 241953456<F1>
<SHARES-COMMON-PRIOR> 231669742<F1>
<ACCUMULATED-NII-CURRENT> 276000
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 142370
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1610586157
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 81049659
<OTHER-INCOME> 0
<EXPENSES-NET> 4669437
<NET-INVESTMENT-INCOME> 76380222
<REALIZED-GAINS-CURRENT> (7389)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 76372833
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 11779432<F1>
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3150340<F1>
<NUMBER-OF-SHARES-REDEEMED> 3151335<F1>
<SHARES-REINVESTED> 11279<F1>
<NET-CHANGE-IN-ASSETS> 288326313
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 78650
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2174296
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5187829
<AVERAGE-NET-ASSETS> 232548306<F1>
<PER-SHARE-NAV-BEGIN> 1.000<F1>
<PER-SHARE-NII> .051<F1>
<PER-SHARE-GAIN-APPREC> .000<F1>
<PER-SHARE-DIVIDEND> .051<F1>
<PER-SHARE-DISTRIBUTIONS> .000<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 1.000<F1>
<EXPENSE-RATIO> .520<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Administration Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 11
<NAME> PILOT SHORT-TERM DIVERSIFIED ASSETS FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 1607562114
<INVESTMENTS-AT-VALUE> 1607562114
<RECEIVABLES> 8849128
<ASSETS-OTHER> 169106
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1616580348
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5994191
<TOTAL-LIABILITIES> 5994191
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1610452527
<SHARES-COMMON-STOCK> 49847391<F1>
<SHARES-COMMON-PRIOR> 33945669<F1>
<ACCUMULATED-NII-CURRENT> 276000
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 142370
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1610586157
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 81049659
<OTHER-INCOME> 0
<EXPENSES-NET> 4669437
<NET-INVESTMENT-INCOME> 76380222
<REALIZED-GAINS-CURRENT> (7389)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 76372833
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1922216<F1>
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 636727<F1>
<NUMBER-OF-SHARES-REDEEMED> 622872<F1>
<SHARES-REINVESTED> 2047<F1>
<NET-CHANGE-IN-ASSETS> 288326313
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 78650
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2174296
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5187829
<AVERAGE-NET-ASSETS> 39784175<F1>
<PER-SHARE-NAV-BEGIN> 1.000<F1>
<PER-SHARE-NII> .048<F1>
<PER-SHARE-GAIN-APPREC> .000<F1>
<PER-SHARE-DIVIDEND> .048<F1>
<PER-SHARE-DISTRIBUTIONS> .000<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 1.000<F1>
<EXPENSE-RATIO> .770<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Investor Shares
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 21
<NAME> PILOT SHORT-TERM U.S. TREASURY FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 1649372469
<INVESTMENTS-AT-VALUE> 1649372469
<RECEIVABLES> 484056030
<ASSETS-OTHER> 244439
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2133672938
<PAYABLE-FOR-SECURITIES> 434126428
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6210880
<TOTAL-LIABILITIES> 440337308
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1693554035
<SHARES-COMMON-STOCK> 1299257989<F1>
<SHARES-COMMON-PRIOR> 1191556006<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 87358
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 131047
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1693335630
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 93046517
<OTHER-INCOME> 0
<EXPENSES-NET> 5886668
<NET-INVESTMENT-INCOME> 87159849
<REALIZED-GAINS-CURRENT> (72161)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 87087688
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 68981799<F1>
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2810597<F1>
<NUMBER-OF-SHARES-REDEEMED> 2703045<F1>
<SHARES-REINVESTED> 150<F1>
<NET-CHANGE-IN-ASSETS> 155221775
<ACCUMULATED-NII-PRIOR> 6
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 146956
<GROSS-ADVISORY-FEES> 2552746
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6543631
<AVERAGE-NET-ASSETS> 1322442479<F1>
<PER-SHARE-NAV-BEGIN> 1.000<F1>
<PER-SHARE-NII> .052<F1>
<PER-SHARE-GAIN-APPREC> .000<F1>
<PER-SHARE-DIVIDEND> .052<F1>
<PER-SHARE-DISTRIBUTIONS> .000<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 1.000<F1>
<EXPENSE-RATIO> .270<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Pilot Shares
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 21
<NAME> PILOT SHORT-TERM U.S. TREASURY FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 1649372469
<INVESTMENTS-AT-VALUE> 1649372469
<RECEIVABLES> 484056030
<ASSETS-OTHER> 244439
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2133672938
<PAYABLE-FOR-SECURITIES> 434126428
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6210880
<TOTAL-LIABILITIES> 440337308
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1693554035
<SHARES-COMMON-STOCK> 216392754<F1>
<SHARES-COMMON-PRIOR> 215612393<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 87358
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 131047
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1693335630
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 93046517
<OTHER-INCOME> 0
<EXPENSES-NET> 5886668
<NET-INVESTMENT-INCOME> 87159849
<REALIZED-GAINS-CURRENT> (72161)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 87087688
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 10661950<F1>
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4452376<F1>
<NUMBER-OF-SHARES-REDEEMED> 4461741<F1>
<SHARES-REINVESTED> 10146<F1>
<NET-CHANGE-IN-ASSETS> 155221775
<ACCUMULATED-NII-PRIOR> 6
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 146956
<GROSS-ADVISORY-FEES> 2552746
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6543631
<AVERAGE-NET-ASSETS> 214998740<F1>
<PER-SHARE-NAV-BEGIN> 1.000<F1>
<PER-SHARE-NII> .050<F1>
<PER-SHARE-GAIN-APPREC> .000<F1>
<PER-SHARE-DIVIDEND> .050<F1>
<PER-SHARE-DISTRIBUTIONS> .000<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 1.000<F1>
<EXPENSE-RATIO> .520<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Administration Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 21
<NAME> PILOT SHORT-TERM U.S. TREASURY FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 1649372469
<INVESTMENTS-AT-VALUE> 1649372469
<RECEIVABLES> 484056030
<ASSETS-OTHER> 244439
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2133672938
<PAYABLE-FOR-SECURITIES> 434126428
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6210880
<TOTAL-LIABILITIES> 440337308
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1693554035
<SHARES-COMMON-STOCK> 177903259<F1>
<SHARES-COMMON-PRIOR> 131092406<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 87358
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 131047
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1693335630
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 93046517
<OTHER-INCOME> 0
<EXPENSES-NET> 5886668
<NET-INVESTMENT-INCOME> 87159849
<REALIZED-GAINS-CURRENT> (72161)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 87087688
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 7515361<F1>
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2615560<F1>
<NUMBER-OF-SHARES-REDEEMED> 2576777<F1>
<SHARES-REINVESTED> 8027<F1>
<NET-CHANGE-IN-ASSETS> 155221775
<ACCUMULATED-NII-PRIOR> 6
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 146956
<GROSS-ADVISORY-FEES> 2552746
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6543631
<AVERAGE-NET-ASSETS> 159935839<F1>
<PER-SHARE-NAV-BEGIN> 1.000<F1>
<PER-SHARE-NII> .047<F1>
<PER-SHARE-GAIN-APPREC> .000<F1>
<PER-SHARE-DIVIDEND> .047<F1>
<PER-SHARE-DISTRIBUTIONS> .000<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 1.000<F1>
<EXPENSE-RATIO> .770<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Investor Shares
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 31
<NAME> PILOT MISSOURI SHORT-TERM TAX-EXEMPT FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 212538198
<INVESTMENTS-AT-VALUE> 212538198
<RECEIVABLES> 980493
<ASSETS-OTHER> 25060
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 213543751
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 527933
<TOTAL-LIABILITIES> 527933
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 212829041
<SHARES-COMMON-STOCK> 183782475<F1>
<SHARES-COMMON-PRIOR> 210867457<F1>
<ACCUMULATED-NII-CURRENT> 201785
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 15008
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 213015818
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8356213
<OTHER-INCOME> 0
<EXPENSES-NET> 1081256
<NET-INVESTMENT-INCOME> 7274957
<REALIZED-GAINS-CURRENT> 25794
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 7300751
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 6637519<F1>
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 348043<F1>
<NUMBER-OF-SHARES-REDEEMED> 376691<F1>
<SHARES-REINVESTED> 1563<F1>
<NET-CHANGE-IN-ASSETS> (13594769)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 37130
<GROSS-ADVISORY-FEES> 466582
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1081256
<AVERAGE-NET-ASSETS> 209257103<F1>
<PER-SHARE-NAV-BEGIN> 1.000<F1>
<PER-SHARE-NII> .032<F1>
<PER-SHARE-GAIN-APPREC> .000<F1>
<PER-SHARE-DIVIDEND> .032<F1>
<PER-SHARE-DISTRIBUTIONS> .000<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 1.000<F1>
<EXPENSE-RATIO> .430<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Pilot Shares
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 31
<NAME> PILOT MISSOURI SHORT-TERM TAX-EXEMPT FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 212538198
<INVESTMENTS-AT-VALUE> 212538198
<RECEIVABLES> 980493
<ASSETS-OTHER> 25060
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 213543751
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 527933
<TOTAL-LIABILITIES> 527933
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 212829041
<SHARES-COMMON-STOCK> 13500641<F1>
<SHARES-COMMON-PRIOR> 4556323<F1>
<ACCUMULATED-NII-CURRENT> 201785
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 15008
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 213015818
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8356213
<OTHER-INCOME> 0
<EXPENSES-NET> 1081256
<NET-INVESTMENT-INCOME> 7274957
<REALIZED-GAINS-CURRENT> 25794
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 7300751
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 297782<F1>
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 140954<F1>
<NUMBER-OF-SHARES-REDEEMED> 132319<F1>
<SHARES-REINVESTED> 310<F1>
<NET-CHANGE-IN-ASSETS> (13594769)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 37130
<GROSS-ADVISORY-FEES> 466582
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1081256
<AVERAGE-NET-ASSETS> 10385648<F1>
<PER-SHARE-NAV-BEGIN> 1.000<F1>
<PER-SHARE-NII> .029<F1>
<PER-SHARE-GAIN-APPREC> .000<F1>
<PER-SHARE-DIVIDEND> .029<F1>
<PER-SHARE-DISTRIBUTIONS> .000<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 1.000<F1>
<EXPENSE-RATIO> .680<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Administration Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 31
<NAME> PILOT MISSOURI SHORT-TERM TAX-EXEMPT FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 212538198
<INVESTMENTS-AT-VALUE> 212538198
<RECEIVABLES> 980493
<ASSETS-OTHER> 25060
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 213543751
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 527933
<TOTAL-LIABILITIES> 527933
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 212829041
<SHARES-COMMON-STOCK> 15744033<F1>
<SHARES-COMMON-PRIOR> 11223937<F1>
<ACCUMULATED-NII-CURRENT> 201785
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 15008
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 213015818
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8356213
<OTHER-INCOME> 0
<EXPENSES-NET> 1081256
<NET-INVESTMENT-INCOME> 7274957
<REALIZED-GAINS-CURRENT> 25794
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 7300751
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 339651<F1>
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 84615<F1>
<NUMBER-OF-SHARES-REDEEMED> 80461<F1>
<SHARES-REINVESTED> 366<F1>
<NET-CHANGE-IN-ASSETS> (13594769)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 37130
<GROSS-ADVISORY-FEES> 466582
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1081256
<AVERAGE-NET-ASSETS> 12809185<F1>
<PER-SHARE-NAV-BEGIN> 1.000<F1>
<PER-SHARE-NII> .027<F1>
<PER-SHARE-GAIN-APPREC> .000<F1>
<PER-SHARE-DIVIDEND> .027<F1>
<PER-SHARE-DISTRIBUTIONS> .000<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 1.000<F1>
<EXPENSE-RATIO> .930<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Investor Shares
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 42
<NAME> PILOT MUNICIPAL BOND FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 181116525
<INVESTMENTS-AT-VALUE> 188716068
<RECEIVABLES> 3169028
<ASSETS-OTHER> 64968
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 191950064
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 997420
<TOTAL-LIABILITIES> 997420
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 182151643
<SHARES-COMMON-STOCK> 17593520<F1>
<SHARES-COMMON-PRIOR> 14102794<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 151486
<ACCUMULATED-NET-GAINS> 1352944
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7599543
<NET-ASSETS> 190952644
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 9969995
<OTHER-INCOME> 0
<EXPENSES-NET> 1178283
<NET-INVESTMENT-INCOME> 8791712
<REALIZED-GAINS-CURRENT> 1327403
<APPREC-INCREASE-CURRENT> (1391889)
<NET-CHANGE-FROM-OPS> 8727226
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 8714852<F1>
<DISTRIBUTIONS-OF-GAINS> 478674<F1>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5168000<F1>
<NUMBER-OF-SHARES-REDEEMED> 1684000<F1>
<SHARES-REINVESTED> 6000<F1>
<NET-CHANGE-IN-ASSETS> 39231478
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 333880
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 931305
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1368995
<AVERAGE-NET-ASSETS> 167682335<F1>
<PER-SHARE-NAV-BEGIN> 10.70<F1>
<PER-SHARE-NII> .570<F1>
<PER-SHARE-GAIN-APPREC> .010<F1>
<PER-SHARE-DIVIDEND> .560<F1>
<PER-SHARE-DISTRIBUTIONS> .030<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 10.68<F1>
<EXPENSE-RATIO> .690<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Pilot Shares
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 42
<NAME> PILOT MUNICIPAL BOND FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 181116525
<INVESTMENTS-AT-VALUE> 188716068
<RECEIVABLES> 3169028
<ASSETS-OTHER> 64968
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 191950064
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 997420
<TOTAL-LIABILITIES> 997420
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 182151643
<SHARES-COMMON-STOCK> 164350<F1>
<SHARES-COMMON-PRIOR> 31743<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 151486
<ACCUMULATED-NET-GAINS> 1352944
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7599543
<NET-ASSETS> 190952644
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 9969995
<OTHER-INCOME> 0
<EXPENSES-NET> 1178283
<NET-INVESTMENT-INCOME> 8791712
<REALIZED-GAINS-CURRENT> 1327403
<APPREC-INCREASE-CURRENT> (1391889)
<NET-CHANGE-FROM-OPS> 8727226
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 43781<F1>
<DISTRIBUTIONS-OF-GAINS> 1491<F1>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 136000<F1>
<NUMBER-OF-SHARES-REDEEMED> 6000<F1>
<SHARES-REINVESTED> 3000<F1>
<NET-CHANGE-IN-ASSETS> 39231478
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 333880
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 931305
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1368995
<AVERAGE-NET-ASSETS> 891697<F1>
<PER-SHARE-NAV-BEGIN> 10.70<F1>
<PER-SHARE-NII> .540<F1>
<PER-SHARE-GAIN-APPREC> .010<F1>
<PER-SHARE-DIVIDEND> .540<F1>
<PER-SHARE-DISTRIBUTIONS> .030<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 10.68<F1>
<EXPENSE-RATIO> .920<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Class A Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 42
<NAME> PILOT MUNICIPAL BOND FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 181116525
<INVESTMENTS-AT-VALUE> 188716068
<RECEIVABLES> 3169028
<ASSETS-OTHER> 64968
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 191950064
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 997420
<TOTAL-LIABILITIES> 997420
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 182151643
<SHARES-COMMON-STOCK> 118533<F1>
<SHARES-COMMON-PRIOR> 42017<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 151486
<ACCUMULATED-NET-GAINS> 1352944
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7599543
<NET-ASSETS> 190952644
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 9969995
<OTHER-INCOME> 0
<EXPENSES-NET> 1178283
<NET-INVESTMENT-INCOME> 8791712
<REALIZED-GAINS-CURRENT> 1327403
<APPREC-INCREASE-CURRENT> (1391889)
<NET-CHANGE-FROM-OPS> 8727226
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 33079<F1>
<DISTRIBUTIONS-OF-GAINS> 1732<F1>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 82000<F1>
<NUMBER-OF-SHARES-REDEEMED> 8000<F1>
<SHARES-REINVESTED> 2000<F1>
<NET-CHANGE-IN-ASSETS> 39231478
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 333880
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 931305
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1368995
<AVERAGE-NET-ASSETS> 795510<F1>
<PER-SHARE-NAV-BEGIN> 10.65<F1>
<PER-SHARE-NII> .450<F1>
<PER-SHARE-GAIN-APPREC> .000<F1>
<PER-SHARE-DIVIDEND> .450<F1>
<PER-SHARE-DISTRIBUTIONS> .030<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 10.62<F1>
<EXPENSE-RATIO> 1.68<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Class B Shares
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 51
<NAME> PILOT INTERMEDIATE MUNICIPAL BOND FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 219323114
<INVESTMENTS-AT-VALUE> 224917280
<RECEIVABLES> 3156764
<ASSETS-OTHER> 66263
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 228140307
<PAYABLE-FOR-SECURITIES> 7425535
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1049288
<TOTAL-LIABILITIES> 8474823
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 213547739
<SHARES-COMMON-STOCK> 21164250<F1>
<SHARES-COMMON-PRIOR> 18702336<F1>
<ACCUMULATED-NII-CURRENT> 22150
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 501427
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5594166
<NET-ASSETS> 219665484
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 10889785
<OTHER-INCOME> 0
<EXPENSES-NET> 1319407
<NET-INVESTMENT-INCOME> 9570378
<REALIZED-GAINS-CURRENT> 626264
<APPREC-INCREASE-CURRENT> (3240645)
<NET-CHANGE-FROM-OPS> 6955997
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 9554825<F1>
<DISTRIBUTIONS-OF-GAINS> 457443<F1>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5830000<F1>
<NUMBER-OF-SHARES-REDEEMED> 3381000<F1>
<SHARES-REINVESTED> 12000<F1>
<NET-CHANGE-IN-ASSETS> 23224054
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 333078
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1144620
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1642378
<AVERAGE-NET-ASSETS> 207795551<F1>
<PER-SHARE-NAV-BEGIN> 10.49<F1>
<PER-SHARE-NII> .480<F1>
<PER-SHARE-GAIN-APPREC> (.130)<F1>
<PER-SHARE-DIVIDEND> .480<F1>
<PER-SHARE-DISTRIBUTIONS> .020<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 10.34<F1>
<EXPENSE-RATIO> .630<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Pilot Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 51
<NAME> PILOT INTERMEDIATE MUNICIPAL BOND FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 219323114
<INVESTMENTS-AT-VALUE> 224917280
<RECEIVABLES> 3156764
<ASSETS-OTHER> 66263
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 228140307
<PAYABLE-FOR-SECURITIES> 7425535
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1049288
<TOTAL-LIABILITIES> 8474823
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 213547739
<SHARES-COMMON-STOCK> 73742<F1>
<SHARES-COMMON-PRIOR> 22167<F1>
<ACCUMULATED-NII-CURRENT> 22150
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 501427
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5594166
<NET-ASSETS> 219665484
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 10889785
<OTHER-INCOME> 0
<EXPENSES-NET> 1319407
<NET-INVESTMENT-INCOME> 9570378
<REALIZED-GAINS-CURRENT> 626264
<APPREC-INCREASE-CURRENT> (3240645)
<NET-CHANGE-FROM-OPS> 6955997
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 15553<F1>
<DISTRIBUTIONS-OF-GAINS> 392<F1>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 81000<F1>
<NUMBER-OF-SHARES-REDEEMED> 30000<F1>
<SHARES-REINVESTED> 1000<F1>
<NET-CHANGE-IN-ASSETS> 23224054
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 333078
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1144620
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1642378
<AVERAGE-NET-ASSETS> 353441<F1>
<PER-SHARE-NAV-BEGIN> 10.49<F1>
<PER-SHARE-NII> .460<F1>
<PER-SHARE-GAIN-APPREC> .110<F1>
<PER-SHARE-DIVIDEND> .460<F1>
<PER-SHARE-DISTRIBUTIONS> .020<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 10.36<F1>
<EXPENSE-RATIO> .780<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Class A Shares
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 61
<NAME> PILOT U.S. GOVERNMENT SECURITIES FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 146519391
<INVESTMENTS-AT-VALUE> 145042312
<RECEIVABLES> 2705046
<ASSETS-OTHER> 64553
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 147811911
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 876442
<TOTAL-LIABILITIES> 876442
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 141469931
<SHARES-COMMON-STOCK> 13780940<F1>
<SHARES-COMMON-PRIOR> 12256939<F1>
<ACCUMULATED-NII-CURRENT> 22072
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6920545
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1477079)
<NET-ASSETS> 146935469
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8777414
<OTHER-INCOME> 0
<EXPENSES-NET> 918235
<NET-INVESTMENT-INCOME> 7859179
<REALIZED-GAINS-CURRENT> 6920545
<APPREC-INCREASE-CURRENT> (9917288)
<NET-CHANGE-FROM-OPS> 4862436
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 7807800<F1>
<DISTRIBUTIONS-OF-GAINS> 5585839<F1>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3091000<F1>
<NUMBER-OF-SHARES-REDEEMED> 1590000<F1>
<SHARES-REINVESTED> 23000<F1>
<NET-CHANGE-IN-ASSETS> 9441860
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 5611049
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 770623
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1155908
<AVERAGE-NET-ASSETS> 139080608<F1>
<PER-SHARE-NAV-BEGIN> 11.20<F1>
<PER-SHARE-NII> .610<F1>
<PER-SHARE-GAIN-APPREC> (.220)<F1>
<PER-SHARE-DIVIDEND> .610<F1>
<PER-SHARE-DISTRIBUTIONS> .450<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 10.53<F1>
<EXPENSE-RATIO> .650<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Pilot Shares
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 61
<NAME> PILOT U.S. GOVERNMENT SECURITIES FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 146519391
<INVESTMENTS-AT-VALUE> 145042312
<RECEIVABLES> 2705046
<ASSETS-OTHER> 64553
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 147811911
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 876442
<TOTAL-LIABILITIES> 876442
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 141469931
<SHARES-COMMON-STOCK> 60030<F1>
<SHARES-COMMON-PRIOR> 7743<F1>
<ACCUMULATED-NII-CURRENT> 22072
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6920545
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1477079)
<NET-ASSETS> 146935469
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8777414
<OTHER-INCOME> 0
<EXPENSES-NET> 918235
<NET-INVESTMENT-INCOME> 7859179
<REALIZED-GAINS-CURRENT> 6920545
<APPREC-INCREASE-CURRENT> (9917288)
<NET-CHANGE-FROM-OPS> 4862436
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 17876<F1>
<DISTRIBUTIONS-OF-GAINS> 6785<F1>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 64000<F1>
<NUMBER-OF-SHARES-REDEEMED> 13000<F1>
<SHARES-REINVESTED> 1000<F1>
<NET-CHANGE-IN-ASSETS> 9441860
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 5611049
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 770623
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1155908
<AVERAGE-NET-ASSETS> 328520<F1>
<PER-SHARE-NAV-BEGIN> 11.19<F1>
<PER-SHARE-NII> .590<F1>
<PER-SHARE-GAIN-APPREC> .200<F1>
<PER-SHARE-DIVIDEND> .590<F1>
<PER-SHARE-DISTRIBUTIONS> .450<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 10.54<F1>
<EXPENSE-RATIO> .850<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Class A Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 61
<NAME> PILOT U.S. GOVERNMENT SECURITIES FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 146519391
<INVESTMENTS-AT-VALUE> 145042312
<RECEIVABLES> 2705046
<ASSETS-OTHER> 64553
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 147811911
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 876442
<TOTAL-LIABILITIES> 876442
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 141469931
<SHARES-COMMON-STOCK> 117601<F1>
<SHARES-COMMON-PRIOR> 13049<F1>
<ACCUMULATED-NII-CURRENT> 22072
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6920545
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1477079)
<NET-ASSETS> 146935469
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8777414
<OTHER-INCOME> 0
<EXPENSES-NET> 918235
<NET-INVESTMENT-INCOME> 7859179
<REALIZED-GAINS-CURRENT> 6920545
<APPREC-INCREASE-CURRENT> (9917288)
<NET-CHANGE-FROM-OPS> 4862436
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 33503<F1>
<DISTRIBUTIONS-OF-GAINS> 18425<F1>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 106000<F1>
<NUMBER-OF-SHARES-REDEEMED> 5000<F1>
<SHARES-REINVESTED> 4000<F1>
<NET-CHANGE-IN-ASSETS> 9441860
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 5611049
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 770623
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1155908
<AVERAGE-NET-ASSETS> 728864<F1>
<PER-SHARE-NAV-BEGIN> 11.19<F1>
<PER-SHARE-NII> .510<F1>
<PER-SHARE-GAIN-APPREC> (.220)<F1>
<PER-SHARE-DIVIDEND> .510<F1>
<PER-SHARE-DISTRIBUTIONS> .450<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 10.52<F1>
<EXPENSE-RATIO> 1.65<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Class B Shares
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 71
<NAME> PILOT EQUITY INCOME FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 120936301
<INVESTMENTS-AT-VALUE> 138795405
<RECEIVABLES> 770431
<ASSETS-OTHER> 65527
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 139631363
<PAYABLE-FOR-SECURITIES> 3866900
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 646591
<TOTAL-LIABILITIES> 4513491
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 113920252
<SHARES-COMMON-STOCK> 10526776<F1>
<SHARES-COMMON-PRIOR> 8735804<F1>
<ACCUMULATED-NII-CURRENT> 126759
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3211757
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17859104
<NET-ASSETS> 135117872
<DIVIDEND-INCOME> 4929581
<INTEREST-INCOME> 564455
<OTHER-INCOME> 0
<EXPENSES-NET> 926766
<NET-INVESTMENT-INCOME> 4567270
<REALIZED-GAINS-CURRENT> 4887676
<APPREC-INCREASE-CURRENT> 7360212
<NET-CHANGE-FROM-OPS> 16815158
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4386503<F1>
<DISTRIBUTIONS-OF-GAINS> 2661530<F1>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2586000<F1>
<NUMBER-OF-SHARES-REDEEMED> 820000<F1>
<SHARES-REINVESTED> 25000<F1>
<NET-CHANGE-IN-ASSETS> 35486866
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1025148
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 910255
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1282539
<AVERAGE-NET-ASSETS> 118877452<F1>
<PER-SHARE-NAV-BEGIN> 11.29<F1>
<PER-SHARE-NII> .460<F1>
<PER-SHARE-GAIN-APPREC> 1.38<F1>
<PER-SHARE-DIVIDEND> .450<F1>
<PER-SHARE-DISTRIBUTIONS> .300<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 12.38<F1>
<EXPENSE-RATIO> .750<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Pilot Shares
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 71
<NAME> PILOT EQUITY INCOME FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 120936301
<INVESTMENTS-AT-VALUE> 138795405
<RECEIVABLES> 770431
<ASSETS-OTHER> 65527
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 139631363
<PAYABLE-FOR-SECURITIES> 3866900
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 646591
<TOTAL-LIABILITIES> 4513491
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 113920252
<SHARES-COMMON-STOCK> 131637<F1>
<SHARES-COMMON-PRIOR> 27404<F1>
<ACCUMULATED-NII-CURRENT> 126759
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3211757
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17859104
<NET-ASSETS> 135117872
<DIVIDEND-INCOME> 4929581
<INTEREST-INCOME> 564455
<OTHER-INCOME> 0
<EXPENSES-NET> 926766
<NET-INVESTMENT-INCOME> 4567270
<REALIZED-GAINS-CURRENT> 4887676
<APPREC-INCREASE-CURRENT> 7360212
<NET-CHANGE-FROM-OPS> 16815158
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 29116<F1>
<DISTRIBUTIONS-OF-GAINS> 10717<F1>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 120000<F1>
<NUMBER-OF-SHARES-REDEEMED> 18000<F1>
<SHARES-REINVESTED> 3000<F1>
<NET-CHANGE-IN-ASSETS> 35486866
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1025148
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 910255
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1282539
<AVERAGE-NET-ASSETS> 838622<F1>
<PER-SHARE-NAV-BEGIN> 11.36<F1>
<PER-SHARE-NII> .410<F1>
<PER-SHARE-GAIN-APPREC> 1.40<F1>
<PER-SHARE-DIVIDEND> .410<F1>
<PER-SHARE-DISTRIBUTIONS> .300<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 12.46<F1>
<EXPENSE-RATIO> 1.00<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Class A Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 71
<NAME> PILOT EQUITY INCOME FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 120936301
<INVESTMENTS-AT-VALUE> 138795405
<RECEIVABLES> 770431
<ASSETS-OTHER> 65527
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 139631363
<PAYABLE-FOR-SECURITIES> 3866900
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 646591
<TOTAL-LIABILITIES> 4513491
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 113920252
<SHARES-COMMON-STOCK> 257156<F1>
<SHARES-COMMON-PRIOR> 62820<F1>
<ACCUMULATED-NII-CURRENT> 126759
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3211757
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17859104
<NET-ASSETS> 135117872
<DIVIDEND-INCOME> 4929581
<INTEREST-INCOME> 564455
<OTHER-INCOME> 0
<EXPENSES-NET> 926766
<NET-INVESTMENT-INCOME> 4567270
<REALIZED-GAINS-CURRENT> 4887676
<APPREC-INCREASE-CURRENT> 7360212
<NET-CHANGE-FROM-OPS> 16815158
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 46964<F1>
<DISTRIBUTIONS-OF-GAINS> 28820<F1>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 198000<F1>
<NUMBER-OF-SHARES-REDEEMED> 9000<F1>
<SHARES-REINVESTED> 6000<F1>
<NET-CHANGE-IN-ASSETS> 35486866
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1025148
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 910255
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1282539
<AVERAGE-NET-ASSETS> 1698165<F1>
<PER-SHARE-NAV-BEGIN> 11.34<F1>
<PER-SHARE-NII> .330<F1>
<PER-SHARE-GAIN-APPREC> 1.39<F1>
<PER-SHARE-DIVIDEND> .320<F1>
<PER-SHARE-DISTRIBUTIONS> .300<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 12.44<F1>
<EXPENSE-RATIO> 1.75<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Class B Shares
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 81
<NAME> THE PILOT INTERNATIONAL EQUITY FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 536476004
<INVESTMENTS-AT-VALUE> 603995546
<RECEIVABLES> 3389653
<ASSETS-OTHER> 1601348
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 608986547
<PAYABLE-FOR-SECURITIES> 912139
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2140843
<TOTAL-LIABILITIES> 3052982
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 522337126
<SHARES-COMMON-STOCK> 33969619<F1>
<SHARES-COMMON-PRIOR> 22371312<F1>
<ACCUMULATED-NII-CURRENT> 7013267
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 10459434
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 66123738
<NET-ASSETS> 605933565
<DIVIDEND-INCOME> 7470878
<INTEREST-INCOME> 1172285
<OTHER-INCOME> 0
<EXPENSES-NET> 5327146
<NET-INVESTMENT-INCOME> 3316017
<REALIZED-GAINS-CURRENT> 23727437
<APPREC-INCREASE-CURRENT> 19084589
<NET-CHANGE-FROM-OPS> 46128043
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 11112928<F1>
<DISTRIBUTIONS-OF-GAINS> 9018759<F1>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 12865000<F1>
<NUMBER-OF-SHARES-REDEEMED> 2235000<F1>
<SHARES-REINVESTED> 967000<F1>
<NET-CHANGE-IN-ASSETS> 215097053
<ACCUMULATED-NII-PRIOR> 2488507
<ACCUMULATED-GAINS-PRIOR> 9516175
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3873513
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5327146
<AVERAGE-NET-ASSETS> 460777277<F1>
<PER-SHARE-NAV-BEGIN> 16.24<F1>
<PER-SHARE-NII> .180<F1>
<PER-SHARE-GAIN-APPREC> 1.48<F1>
<PER-SHARE-DIVIDEND> .460<F1>
<PER-SHARE-DISTRIBUTIONS> .390<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 17.05<F1>
<EXPENSE-RATIO> 1.08<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Pilot Shares
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 81
<NAME> THE PILOT INTERNATIONAL EQUITY FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 536476004
<INVESTMENTS-AT-VALUE> 603995546
<RECEIVABLES> 3389653
<ASSETS-OTHER> 1601348
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 608986547
<PAYABLE-FOR-SECURITIES> 912139
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2140843
<TOTAL-LIABILITIES> 3052982
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 522337126
<SHARES-COMMON-STOCK> 1581654<F1>
<SHARES-COMMON-PRIOR> 1711244<F1>
<ACCUMULATED-NII-CURRENT> 7013267
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 10459434
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 66123738
<NET-ASSETS> 605933565
<DIVIDEND-INCOME> 7470878
<INTEREST-INCOME> 1172285
<OTHER-INCOME> 0
<EXPENSES-NET> 5327146
<NET-INVESTMENT-INCOME> 3316017
<REALIZED-GAINS-CURRENT> 23727437
<APPREC-INCREASE-CURRENT> 19084589
<NET-CHANGE-FROM-OPS> 46128043
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 765596<F1>
<DISTRIBUTIONS-OF-GAINS> 648034<F1>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 73000<F1>
<NUMBER-OF-SHARES-REDEEMED> 258000<F1>
<SHARES-REINVESTED> 55000<F1>
<NET-CHANGE-IN-ASSETS> 215097053
<ACCUMULATED-NII-PRIOR> 2488507
<ACCUMULATED-GAINS-PRIOR> 9516175
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3873513
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5327146
<AVERAGE-NET-ASSETS> 27109426<F1>
<PER-SHARE-NAV-BEGIN> 16.14<F1>
<PER-SHARE-NII> .040<F1>
<PER-SHARE-GAIN-APPREC> 1.57<F1>
<PER-SHARE-DIVIDEND> .460<F1>
<PER-SHARE-DISTRIBUTIONS> .390<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 16.90<F1>
<EXPENSE-RATIO> 1.32<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Class A Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 81
<NAME> THE PILOT INTERNATIONAL EQUITY FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 536476004
<INVESTMENTS-AT-VALUE> 603995546
<RECEIVABLES> 3389653
<ASSETS-OTHER> 1601348
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 608986547
<PAYABLE-FOR-SECURITIES> 912139
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2140843
<TOTAL-LIABILITIES> 3052982
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 522337126
<SHARES-COMMON-STOCK> 10822<F1>
<SHARES-COMMON-PRIOR> 0<F1>
<ACCUMULATED-NII-CURRENT> 7013267
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 10459434
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 66123738
<NET-ASSETS> 605933565
<DIVIDEND-INCOME> 7470878
<INTEREST-INCOME> 1172285
<OTHER-INCOME> 0
<EXPENSES-NET> 5327146
<NET-INVESTMENT-INCOME> 3316017
<REALIZED-GAINS-CURRENT> 23727437
<APPREC-INCREASE-CURRENT> 19084589
<NET-CHANGE-FROM-OPS> 46128043
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0<F1>
<DISTRIBUTIONS-OF-GAINS> 0<F1>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 11000<F1>
<NUMBER-OF-SHARES-REDEEMED> 0<F1>
<SHARES-REINVESTED> 0<F1>
<NET-CHANGE-IN-ASSETS> 215097053
<ACCUMULATED-NII-PRIOR> 2488507
<ACCUMULATED-GAINS-PRIOR> 9516175
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3873513
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5327146
<AVERAGE-NET-ASSETS> 14137<F1>
<PER-SHARE-NAV-BEGIN> 17.54<F1>
<PER-SHARE-NII> .000<F1>
<PER-SHARE-GAIN-APPREC> (.500)<F1>
<PER-SHARE-DIVIDEND> .000<F1>
<PER-SHARE-DISTRIBUTIONS> .000<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 17.04<F1>
<EXPENSE-RATIO> 2.06<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Class B Shares
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 91
<NAME> PILOT SHORT-TERM TAX-EXEMPT DIVERSIFIED FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 398203882
<INVESTMENTS-AT-VALUE> 398203882
<RECEIVABLES> 2230143
<ASSETS-OTHER> 50252
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 400484277
<PAYABLE-FOR-SECURITIES> 8044700
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1205130
<TOTAL-LIABILITIES> 9249830
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 391160813
<SHARES-COMMON-STOCK> 375748990<F1>
<SHARES-COMMON-PRIOR> 397810341<F1>
<ACCUMULATED-NII-CURRENT> 41741
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 31893
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 391234447
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 14242722
<OTHER-INCOME> 0
<EXPENSES-NET> 1482993
<NET-INVESTMENT-INCOME> 12759729
<REALIZED-GAINS-CURRENT> 59395
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 12819124
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 12351930<F1>
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 482524<F1>
<NUMBER-OF-SHARES-REDEEMED> 504585<F1>
<SHARES-REINVESTED> 0<F1>
<NET-CHANGE-IN-ASSETS> (20996407)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 27502
<GROSS-ADVISORY-FEES> 787503
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1628542
<AVERAGE-NET-ASSETS> 379096448<F1>
<PER-SHARE-NAV-BEGIN> 1.000<F1>
<PER-SHARE-NII> .033<F1>
<PER-SHARE-GAIN-APPREC> .000<F1>
<PER-SHARE-DIVIDEND> .033<F1>
<PER-SHARE-DISTRIBUTIONS> .000<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 1.000<F1>
<EXPENSE-RATIO> .370<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Pilot Shares
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 101
<NAME> PILOT GROWTH AND INCOME FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 169362628
<INVESTMENTS-AT-VALUE> 190535761
<RECEIVABLES> 808373
<ASSETS-OTHER> 68739
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 191412873
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 548297
<TOTAL-LIABILITIES> 548297
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 161061850
<SHARES-COMMON-STOCK> 14134853<F1>
<SHARES-COMMON-PRIOR> 9442613<F1>
<ACCUMULATED-NII-CURRENT> 22405
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 8607188
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 21173133
<NET-ASSETS> 190864576
<DIVIDEND-INCOME> 3727607
<INTEREST-INCOME> 211409
<OTHER-INCOME> 0
<EXPENSES-NET> 1186200
<NET-INVESTMENT-INCOME> 2752816
<REALIZED-GAINS-CURRENT> 9243395
<APPREC-INCREASE-CURRENT> 8360600
<NET-CHANGE-FROM-OPS> 20356811
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2705578<F1>
<DISTRIBUTIONS-OF-GAINS> 3103049<F1>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6320000<F1>
<NUMBER-OF-SHARES-REDEEMED> 1702000<F1>
<SHARES-REINVESTED> 74000<F1>
<NET-CHANGE-IN-ASSETS> 80083262
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 2531612
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1184210
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1609806
<AVERAGE-NET-ASSETS> 153548771<F1>
<PER-SHARE-NAV-BEGIN> 11.57<F1>
<PER-SHARE-NII> .220<F1>
<PER-SHARE-GAIN-APPREC> 1.57<F1>
<PER-SHARE-DIVIDEND> .220<F1>
<PER-SHARE-DISTRIBUTIONS> .280<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 12.90<F1>
<EXPENSE-RATIO> .740<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Pilot Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 91
<NAME> PILOT SHORT-TERM TAX-EXEMPT DIVERSIFIED FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 398203882
<INVESTMENTS-AT-VALUE> 398203882
<RECEIVABLES> 2230143
<ASSETS-OTHER> 50252
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 400484277
<PAYABLE-FOR-SECURITIES> 8044700
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1205130
<TOTAL-LIABILITIES> 9249830
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 391160813
<SHARES-COMMON-STOCK> 906905<F1>
<SHARES-COMMON-PRIOR> 5094<F1>
<ACCUMULATED-NII-CURRENT> 41741
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 31893
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 391234447
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 14242722
<OTHER-INCOME> 0
<EXPENSES-NET> 1482993
<NET-INVESTMENT-INCOME> 12759729
<REALIZED-GAINS-CURRENT> 59395
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 12819124
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4963<F1>
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1465<F1>
<NUMBER-OF-SHARES-REDEEMED> 567<F1>
<SHARES-REINVESTED> 4<F1>
<NET-CHANGE-IN-ASSETS> (20996407)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 27502
<GROSS-ADVISORY-FEES> 787503
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1628542
<AVERAGE-NET-ASSETS> 193632<F1>
<PER-SHARE-NAV-BEGIN> 1.000<F1>
<PER-SHARE-NII> .028<F1>
<PER-SHARE-GAIN-APPREC> .000<F1>
<PER-SHARE-DIVIDEND> .028<F1>
<PER-SHARE-DISTRIBUTIONS> .000<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 1.000<F1>
<EXPENSE-RATIO> .870<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Investor Shares
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 101
<NAME> PILOT GROWTH AND INCOME FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 169362628
<INVESTMENTS-AT-VALUE> 190535761
<RECEIVABLES> 808373
<ASSETS-OTHER> 68739
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 191412873
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 548297
<TOTAL-LIABILITIES> 548297
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 161061850
<SHARES-COMMON-STOCK> 14134853<F1>
<SHARES-COMMON-PRIOR> 9442613<F1>
<ACCUMULATED-NII-CURRENT> 22405
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 8607188
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 21173133
<NET-ASSETS> 190864576
<DIVIDEND-INCOME> 3727607
<INTEREST-INCOME> 211409
<OTHER-INCOME> 0
<EXPENSES-NET> 1186200
<NET-INVESTMENT-INCOME> 2752816
<REALIZED-GAINS-CURRENT> 9243395
<APPREC-INCREASE-CURRENT> 8360600
<NET-CHANGE-FROM-OPS> 20356811
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2705578<F1>
<DISTRIBUTIONS-OF-GAINS> 3103049<F1>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6320000<F1>
<NUMBER-OF-SHARES-REDEEMED> 1702000<F1>
<SHARES-REINVESTED> 74000<F1>
<NET-CHANGE-IN-ASSETS> 80083262
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 2531612
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1184210
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1609806
<AVERAGE-NET-ASSETS> 153548771<F1>
<PER-SHARE-NAV-BEGIN> 11.57<F1>
<PER-SHARE-NII> .220<F1>
<PER-SHARE-GAIN-APPREC> 1.57<F1>
<PER-SHARE-DIVIDEND> .220<F1>
<PER-SHARE-DISTRIBUTIONS> .280<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 12.90<F1>
<EXPENSE-RATIO> .740<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Pilot Shares
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 101
<NAME> PILOT GROWTH AND INCOME FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 169362628
<INVESTMENTS-AT-VALUE> 190535761
<RECEIVABLES> 808373
<ASSETS-OTHER> 68739
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 191412873
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 548297
<TOTAL-LIABILITIES> 548297
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 161061850
<SHARES-COMMON-STOCK> 361868<F1>
<SHARES-COMMON-PRIOR> 60167<F1>
<ACCUMULATED-NII-CURRENT> 22405
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 8607188
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 21173133
<NET-ASSETS> 190864576
<DIVIDEND-INCOME> 3727607
<INTEREST-INCOME> 211409
<OTHER-INCOME> 0
<EXPENSES-NET> 1186200
<NET-INVESTMENT-INCOME> 2752816
<REALIZED-GAINS-CURRENT> 9243395
<APPREC-INCREASE-CURRENT> 8360600
<NET-CHANGE-FROM-OPS> 20356811
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 35542<F1>
<DISTRIBUTIONS-OF-GAINS> 26472<F1>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 324000<F1>
<NUMBER-OF-SHARES-REDEEMED> 27000<F1>
<SHARES-REINVESTED> 5000<F1>
<NET-CHANGE-IN-ASSETS> 80083262
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 2531612
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1184210
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1609806
<AVERAGE-NET-ASSETS> 2233361<F1>
<PER-SHARE-NAV-BEGIN> 11.58<F1>
<PER-SHARE-NII> .180<F1>
<PER-SHARE-GAIN-APPREC> 1.60<F1>
<PER-SHARE-DIVIDEND> .180<F1>
<PER-SHARE-DISTRIBUTIONS> .280<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 12.90<F1>
<EXPENSE-RATIO> .990<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Class A Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 101
<NAME> PILOT GROWTH AND INCOME FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 169362628
<INVESTMENTS-AT-VALUE> 190535761
<RECEIVABLES> 808373
<ASSETS-OTHER> 68739
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 191412873
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 548297
<TOTAL-LIABILITIES> 548297
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 161061850
<SHARES-COMMON-STOCK> 295864<F1>
<SHARES-COMMON-PRIOR> 57043<F1>
<ACCUMULATED-NII-CURRENT> 22405
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 8607188
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 21173133
<NET-ASSETS> 190864576
<DIVIDEND-INCOME> 3727607
<INTEREST-INCOME> 211409
<OTHER-INCOME> 0
<EXPENSES-NET> 1186200
<NET-INVESTMENT-INCOME> 2752816
<REALIZED-GAINS-CURRENT> 9243395
<APPREC-INCREASE-CURRENT> 8360600
<NET-CHANGE-FROM-OPS> 20356811
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 18351<F1>
<DISTRIBUTIONS-OF-GAINS> 32042<F1>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 241000<F1>
<NUMBER-OF-SHARES-REDEEMED> 6000<F1>
<SHARES-REINVESTED> 4000<F1>
<NET-CHANGE-IN-ASSETS> 80083262
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 2531612
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1184210
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1609806
<AVERAGE-NET-ASSETS> 2219894<F1>
<PER-SHARE-NAV-BEGIN> 11.59<F1>
<PER-SHARE-NII> .090<F1>
<PER-SHARE-GAIN-APPREC> 1.60<F1>
<PER-SHARE-DIVIDEND> .090<F1>
<PER-SHARE-DISTRIBUTIONS> .280<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 12.91<F1>
<EXPENSE-RATIO> 1.74<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Class B Shares
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 111
<NAME> PILOT INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-10-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 231910918
<INVESTMENTS-AT-VALUE> 228175314
<RECEIVABLES> 3942094
<ASSETS-OTHER> 66052
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 232183460
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1221506
<TOTAL-LIABILITIES> 1221506
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 231561225
<SHARES-COMMON-STOCK> 22639312<F1>
<SHARES-COMMON-PRIOR> 15840048<F1>
<ACCUMULATED-NII-CURRENT> 22072
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3114261
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3735604)
<NET-ASSETS> 230961954
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12820252
<OTHER-INCOME> 0
<EXPENSES-NET> 1167671
<NET-INVESTMENT-INCOME> 11652581
<REALIZED-GAINS-CURRENT> 3434313
<APPREC-INCREASE-CURRENT> (8921949)
<NET-CHANGE-FROM-OPS> 6164945
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 11613105<F1>
<DISTRIBUTIONS-OF-GAINS> 920212<F1>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10181000<F1>
<NUMBER-OF-SHARES-REDEEMED> 3421000<F1>
<SHARES-REINVESTED> 39000<F1>
<NET-CHANGE-IN-ASSETS> 65021826
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 603070
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1128188
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1589252
<AVERAGE-NET-ASSETS> 204460755<F1>
<PER-SHARE-NAV-BEGIN> 10.44<F1>
<PER-SHARE-NII> .590<F1>
<PER-SHARE-GAIN-APPREC> (.230)<F1>
<PER-SHARE-DIVIDEND> .590<F1>
<PER-SHARE-DISTRIBUTIONS> .050<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 10.16<F1>
<EXPENSE-RATIO> .570<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Pilot Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 111
<NAME> PILOT INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-10-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 231910918
<INVESTMENTS-AT-VALUE> 228175314
<RECEIVABLES> 3942094
<ASSETS-OTHER> 66052
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 232183460
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1221506
<TOTAL-LIABILITIES> 1221506
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 231561225
<SHARES-COMMON-STOCK> 91731<F1>
<SHARES-COMMON-PRIOR> 47766<F1>
<ACCUMULATED-NII-CURRENT> 22072
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3114261
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3735604)
<NET-ASSETS> 230961954
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12820252
<OTHER-INCOME> 0
<EXPENSES-NET> 1167671
<NET-INVESTMENT-INCOME> 11652581
<REALIZED-GAINS-CURRENT> 3434313
<APPREC-INCREASE-CURRENT> (8921949)
<NET-CHANGE-FROM-OPS> 6164945
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 39476<F1>
<DISTRIBUTIONS-OF-GAINS> 2910<F1>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 60000<F1>
<NUMBER-OF-SHARES-REDEEMED> 18000<F1>
<SHARES-REINVESTED> 2000<F1>
<NET-CHANGE-IN-ASSETS> 65021826
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 603070
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1128188
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1589252
<AVERAGE-NET-ASSETS> 725508<F1>
<PER-SHARE-NAV-BEGIN> 10.44<F1>
<PER-SHARE-NII> .570<F1>
<PER-SHARE-GAIN-APPREC> (.230)<F1>
<PER-SHARE-DIVIDEND> .570<F1>
<PER-SHARE-DISTRIBUTIONS> .050<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 10.16<F1>
<EXPENSE-RATIO> .720<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Class A Shares
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 121
<NAME> PILOT SMALL CAPITALIZATION EQUITY FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 74195855
<INVESTMENTS-AT-VALUE> 75153196
<RECEIVABLES> 234212
<ASSETS-OTHER> 27723
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 75415131
<PAYABLE-FOR-SECURITIES> 218007
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 224056
<TOTAL-LIABILITIES> 442063
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 73763043
<SHARES-COMMON-STOCK> 6617289<F1>
<SHARES-COMMON-PRIOR> 0<F1>
<ACCUMULATED-NII-CURRENT> 7331
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 581207
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 621487
<NET-ASSETS> 74973068
<DIVIDEND-INCOME> 103779
<INTEREST-INCOME> 537785
<OTHER-INCOME> 0
<EXPENSES-NET> 319724
<NET-INVESTMENT-INCOME> 321840
<REALIZED-GAINS-CURRENT> 581207
<APPREC-INCREASE-CURRENT> 621487
<NET-CHANGE-FROM-OPS> 1524534
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 310641<F1>
<DISTRIBUTIONS-OF-GAINS> 0<F1>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6777000<F1>
<NUMBER-OF-SHARES-REDEEMED> 166000<F1>
<SHARES-REINVESTED> 6000<F1>
<NET-CHANGE-IN-ASSETS> 74973068
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 310841
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 485972
<AVERAGE-NET-ASSETS> 29788203<F1>
<PER-SHARE-NAV-BEGIN> 10.00<F1>
<PER-SHARE-NII> .090<F1>
<PER-SHARE-GAIN-APPREC> .640<F1>
<PER-SHARE-DIVIDEND> .080<F1>
<PER-SHARE-DISTRIBUTIONS> .000<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 10.65<F1>
<EXPENSE-RATIO> 1.00<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Pilot Shares
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 121
<NAME> PILOT SMALL CAPITALIZATION EQUITY FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 74195855
<INVESTMENTS-AT-VALUE> 75153196
<RECEIVABLES> 234212
<ASSETS-OTHER> 27723
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 75415131
<PAYABLE-FOR-SECURITIES> 218007
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 224056
<TOTAL-LIABILITIES> 442063
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 73763043
<SHARES-COMMON-STOCK> 245417<F1>
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 7331
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 581207
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 621487
<NET-ASSETS> 74973068
<DIVIDEND-INCOME> 103779
<INTEREST-INCOME> 537785
<OTHER-INCOME> 0
<EXPENSES-NET> 319724
<NET-INVESTMENT-INCOME> 321840
<REALIZED-GAINS-CURRENT> 581207
<APPREC-INCREASE-CURRENT> 621487
<NET-CHANGE-FROM-OPS> 1524534
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 5306<F1>
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 249000<F1>
<NUMBER-OF-SHARES-REDEEMED> 4000<F1>
<SHARES-REINVESTED> 0<F1>
<NET-CHANGE-IN-ASSETS> 74973068
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 310841
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 485972
<AVERAGE-NET-ASSETS> 783869<F1>
<PER-SHARE-NAV-BEGIN> 10.00<F1>
<PER-SHARE-NII> .050<F1>
<PER-SHARE-GAIN-APPREC> .640<F1>
<PER-SHARE-DIVIDEND> .050<F1>
<PER-SHARE-DISTRIBUTIONS> .000<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 10.64<F1>
<EXPENSE-RATIO> 1.25<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Class A Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000704178
<NAME> THE PILOT FUNDS
<SERIES>
<NUMBER> 121
<NAME> PILOT SMALL CAPITALIZATION EQUITY FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 74195855
<INVESTMENTS-AT-VALUE> 75153196
<RECEIVABLES> 234212
<ASSETS-OTHER> 27723
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 75415131
<PAYABLE-FOR-SECURITIES> 218007
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 224056
<TOTAL-LIABILITIES> 442063
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 73763043
<SHARES-COMMON-STOCK> 176356<F1>
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 7331
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 581207
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 621487
<NET-ASSETS> 74973068
<DIVIDEND-INCOME> 103779
<INTEREST-INCOME> 537785
<OTHER-INCOME> 0
<EXPENSES-NET> 319724
<NET-INVESTMENT-INCOME> 321840
<REALIZED-GAINS-CURRENT> 581207
<APPREC-INCREASE-CURRENT> 621487
<NET-CHANGE-FROM-OPS> 1524534
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1071<F1>
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 177000<F1>
<NUMBER-OF-SHARES-REDEEMED> 1000<F1>
<SHARES-REINVESTED> 0<F1>
<NET-CHANGE-IN-ASSETS> 74973068
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 310841
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 485972
<AVERAGE-NET-ASSETS> 609391<F1>
<PER-SHARE-NAV-BEGIN> 10.00<F1>
<PER-SHARE-NII> .010<F1>
<PER-SHARE-GAIN-APPREC> .650<F1>
<PER-SHARE-DIVIDEND> .010<F1>
<PER-SHARE-DISTRIBUTIONS> .000<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 10.65<F1>
<EXPENSE-RATIO> 2.01<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Class B Shares
</FN>
</TABLE>
