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CRABBE HUSON FUNDS
PROSPECTUS
OCT. 1, 1996
CRABBE HUSON
SMALL CAP FUND - INSTITUTIONAL CLASS
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CRABBE HUSON
ASSET ALLOCATION FUND - INSTITUTIONAL CLASS
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CRABBE HUSON
EQUITY FUND - INSTITUTIONAL CLASS
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH 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.
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TABLE OF CONTENTS
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PAGE
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Summary of Key Information................................................... 4
Expense Data................................................................. 5
Investment Objective and Policies............................................ 6
Fundamental Policies......................................................... 9
Characteristics, Risks of Securities and Investment Techniques............... 11
Management of the Funds...................................................... 19
Control Persons.............................................................. 21
Net Asset Value.............................................................. 21
Performance Comparisons...................................................... 21
Allocation of Brokerage...................................................... 23
Capital Structure............................................................ 23
Yield........................................................................ 24
Investor Services............................................................ 24
How to Purchase Your Shares.................................................. 26
How to Redeem Your Shares.................................................... 28
How to Exchange Your Shares.................................................. 30
When Transactions are Recorded in Your Account............................... 32
Statements................................................................... 32
Special Situations........................................................... 32
Special Services............................................................. 33
Dividends, Capital Gains, Taxes.............................................. 33
Appendix A................................................................... 36
Appendix B................................................................... 39
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PROSPECTUS
OCTOBER 1, 1996
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Shares of the Institutional Class of the following three mutual funds
(individually, a "Fund" and, collectively, the "Funds") are offered in this
Prospectus:
- CRABBE HUSON SMALL CAP FUND
- CRABBE HUSON EQUITY FUND
- CRABBE HUSON ASSET ALLOCATION FUND
Each Fund's shares offered in this Prospectus are sold at net asset value
with no sales load.
This Prospectus concisely sets forth information about the Funds an investor
ought to know, and should be retained for future reference. A Statement of
Additional Information dated October 1, 1996 has been filed with the Securities
and Exchange Commission (the "SEC"). It may be obtained free of charge by
calling (800) 541-9732. The Statement of Additional Information, as it may be
supplemented from time to time, is incorporated by reference in this Prospectus.
Each Fund has its own investment objectives and policies designed to meet
different investment goals. As is the case for all mutual funds, attainment of
each Fund's investment objective cannot be assured.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION, AND THE SHARES ARE NOT FEDERALLY INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER AGENCY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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A COPY OF THIS PROSPECTUS MUST BE DELIVERED TO RESIDENTS OF CERTAIN STATES PRIOR
TO CONSUMMATION OF A SALE OF SHARES IN THE FUND.
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SUMMARY OF KEY INFORMATION
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The information below is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus and in the Funds' Statement
of Additional Information.
CRABBE HUSON SMALL CAP FUND
(the "Small Cap Fund") seeks to provide long-term capital appreciation. It
pursues this objective through a flexible policy of investing in a diversified
portfolio of carefully selected stocks that have small market capitalization.
CRABBE HUSON EQUITY FUND
(the "Equity Fund") seeks to provide long-term capital appreciation. It pursues
this objective by investing in a diversified portfolio of common stocks which
are widely and actively traded and that have large market capitalizations.
CRABBE HUSON ASSET ALLOCATION FUND
(the "Asset Allocation Fund") seeks preservation of capital, capital
appreciation and income. It pursues these objectives by investing in stocks,
fixed income securities, and cash and cash equivalents.
Each of the Funds is a separate series of the Crabbe Huson Funds, a Delaware
business trust operating as an open-end management investment company. Each fund
operates as a diversified fund. The Funds are managed by The Crabbe Huson Group,
Inc. (the "Adviser").
Shares of the Funds may be purchased directly from the Funds by investors
such as pension and profit sharing plans, employee benefit trusts, endowments,
foundations, corporations and high net worth individuals, or through certain
broker-dealers, financial institutions, and other financial intermediaries who
have entered into agreements with the Fund (collectively, "Financial
Intermediaries"). For information about how to purchase, redeem or exchange
shares of the Funds, see "INVESTOR SERVICES" in this Prospectus.
The Institutional Class of shares of each Fund is offered pursuant to this
Prospectus. Each of the Funds offer or intend to offer additional classes of
shares to investors eligible to purchase those shares, including shares of a
Primary Class, currently offered by each Fund. Each class of shares has or will
have different fees and expenses than the class of shares offered by this
Prospectus and those different fees and expenses may affect performance. To
obtain information concerning the other class of shares not offered in this
Prospectus, call (800) 541-9732 or contact your Financial Intermediary.
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Because the Funds have the same adviser, officers and trustees and have
similar investment privileges, the Funds believe you will find this combined
Prospectus useful and informative in understanding the important features of the
Funds and their similarities and differences. Although each Fund is offering
only its own shares and is not participating in the sale of the shares of the
other Funds, it is possible that a Fund might become liable for any
misstatement, inaccuracy or incomplete disclosure in the Prospectus concerning
the Funds.
Each of the Funds is subject to the risks of investments in common stock,
principally that the prices of stocks can fluctuate dramatically in response to
company, market, or economic news. The Equity and Asset Allocation Funds
historically have had turnover rates in their portfolios in excess of 75% per
year, resulting in potentially higher brokerage costs and the potential loss of
advantageous long-term capital gain treatment for tax purposes. See "Taxes" and
"Allocation of Brokerage." In addition, each of the Funds may invest up to 35%
of its total assets in securities issued by foreign issuers. The Small Cap Fund
has a limited operating history. For additional information about specific risk
factors associated with an investment in each of the Funds, see "CHARACTERISTICS
AND RISKS OF SECURITIES AND INVESTMENT TECHNIQUES."
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EXPENSE DATA
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The following information is provided in order to help you understand the
various costs and expenses that you as an investor in the Funds, will bear,
directly or indirectly.
SHAREHOLDER TRANSACTION EXPENSES
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Maximum Sales Load Imposed on Purchases.................... NONE
Maximum Sales Load Imposed on Reinvested Dividends......... NONE
Deferred Sales Load........................................ NONE
Redemption Fees............................................ NONE
Exchange Fees.............................................. NONE
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ANNUAL FUND OPERATING EXPENSES(1)
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
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<CAPTION>
ASSET
SMALL CAP EQUITY ALLOCATION
FUND(1) FUND FUND
<S> <C> <C> <C>
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Management Fees (after waiver)..................... .75% .90% .96%
12b(1) Fees........................................ none none none
Other Expenses (after reimbursement)............... .25% .10% .04%
TOTAL FUND OPERATING EXPENSES
(AFTER REIMBURSEMENT OR WAIVER)(2)............... 1.00% 1.00% 1.00%
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EXAMPLE ---------------------------------------------------------------------
Assuming, hypothetically, that each Fund's annual return is 5% and that its
operating expenses are as set forth above, an investor buying $1,000 of a Fund's
shares would have paid the following total expenses upon redeeming such
shares:(3)
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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Small Cap Fund.................................. $ 10 $ 32 $ 55 $ 123
Equity Fund..................................... 10 32 55 123
Asset Allocation Fund........................... 10 32 55 123
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The purpose of the above table is to assist the investor in understanding
the various costs and expenses that an investor in the Funds will bear directly
or indirectly. Certain broker dealers, financial institutions and financial
advisers also may charge their clients fees in connection with investment in the
Funds, which fees are not reflected in the above table.
(1) The percentages as set forth in the table under the caption "Other
Expenses" have been estimated based upon the expected asset levels and the
amount of expenses to be incurred during the current fiscal period ending
October 31, 1996.
(2) For the fiscal period through October 31, 1996 and for the fiscal year
ending October 31, 1997, the Adviser has agreed to reimburse "Other
Expenses" of each Fund to the extent Total Fund Operating Expenses exceed
1.00%. Under this arrangement, the Adviser will reimburse "Other Expenses"
in order to limit Total Fund Operating expenses to 1.00% of the Funds'
average daily net assets.
(3) THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
FUND EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN
THOSE SHOWN. MOREOVER, WHILE THE TABLE ASSUMES A 5% ANNUAL RETURN, THE
FUNDS' ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL RETURN
GREATER OR LESSER THAN 5%.
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INVESTMENT OBJECTIVE AND POLICIES
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Each Fund's investment objective is discussed below in connection with the
Fund's investment policies. The descriptions are designed to help you choose the
Fund that best fits your investment objective. You may want to pursue more than
one objective by investing in more than one of the Funds. Because of the risks
inherent in all investments, there can be no assurance that the Funds will meet
their objectives.
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Each Fund follows a basic value, contrarian approach in selecting stocks for
its portfolio. The Funds put primary emphasis on balance sheet and cash flow
analysis and on the relationship between the market price of a security and its
value as a share of an ongoing business. These investments represent "special"
situations or opportunities that arise when companies, whose long-term financial
structure is intact, run into short-term difficulties that present an
opportunity to buy these companies' stocks at substantial discounts. The Funds'
basic value approach is based on the Adviser's belief that the securities of
many companies often sell at a discount from the securities' estimated
theoretical (intrinsic) value. The Funds attempt to identify and invest in such
undervalued securities, anticipating that capital appreciation will be realized
as the securities' prices rise to their estimated intrinsic value. This
approach, while not unique, contrasts with certain other methods of investment
analysis, which rely upon market timing, technical analysis, earnings forecasts,
or economic predictions.
CRABBE HUSON SMALL CAP FUND seeks to provide its investors long-term growth
of capital by investing in a diversified portfolio of selected domestic and
foreign securities. The Fund will invest principally in common stocks and,
secondarily, preferred stocks and bonds. The production of current income is
secondary to the primary objective. The Fund seeks to invest up to 100%, and
under normal conditions at least 65%, of its total assets in securities of
companies that have small market capitalization (under $1,000,000,000).
The Adviser believes that common stock will generally, over the long-term,
offer the greatest potential for capital appreciation and preservation of
purchasing power. Investments in small growth companies may involve greater
risks and volatility than more traditional equity investments due to some of
these companies potentially having limited product lines, reduced market
liquidity for the trading of their shares and less depth in management than more
established companies. For this reason, the Small Cap Fund is not intended as a
complete investment vehicle, but rather as an investment for persons who are in
a financial position to assume above average risk and share price volatility
over time. The Small Cap Fund may be appropriate only for investors who have a
longer term investment horizon or perspective. For a further description of the
risks associated with an investment in the Fund, see "CHARACTERISTICS AND RISKS
OF SECURITIES AND INVESTMENT TECHNIQUES."
CRABBE HUSON EQUITY FUND seeks long-term capital appreciation. The Fund will
seek to achieve this objective by investing in a carefully chosen portfolio
consisting primarily of common stock. It will focus its investments in widely
and actively traded stocks with medium (from $1,000,000,000 to $3,000,000,000)
and large market capitalizations (in excess of $3,000,000,000).
Under normal market conditions, the Fund intends to have at least 65% of its
total assets invested in common stock. The Fund will purchase and hold for
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investment common stock, and may also purchase convertible and nonconvertible
preferred stocks and bonds or debentures. The Fund may invest up to 35% of its
total assets in foreign securities. Although the Fund intends to adapt to
changing market conditions, the Adviser believes that common stock will
generally, over the long-term, offer the greatest potential for capital
appreciation. Therefore, the Fund may be appropriate for investors who have a
longer term investment horizon or perspective.
CRABBE HUSON ASSET ALLOCATION FUND seeks to provide for its shareholders
preservation of capital, capital appreciation and income. The Fund seeks to
achieve these objectives by a flexible policy of investing in a select portfolio
of common stocks, fixed income securities, cash or cash equivalents. Depending
upon economic and market conditions, the Fund may invest as little as 20%, or as
much as 75%, of its entire portfolio in common stocks. The Adviser will purchase
common stocks which, in its opinion, have the greatest potential for capital
appreciation. The remaining portion of the portfolio will be invested in fixed
income securities, cash or cash equivalents. The fixed income securities that
the Fund will invest in consist of corporate debt securities (bonds, debentures
and notes), asset-backed securities, bank obligations, collateralized bonds,
loan and mortgage obligations, commercial paper, preferred stocks, repurchase
agreements, savings and loan obligations and U.S. Government and agency
obligations. There are no limitations on the average maturity of the Fund's
portfolio of fixed income securities. Securities will be selected on the basis
of the Adviser's assessment of interest rate trends and the liquidity of various
instruments under prevailing market conditions. For a discussion of the ratings
of the fixed income securities to be held by the Fund see "CHARACTERISTICS AND
RISKS OF SECURITIES AND INVESTMENT TECHNIQUES."
Many factors will be considered in determining what portion of the portfolio
will be invested in stocks, fixed income securities, or cash and cash
equivalents. The Adviser will constantly monitor and adjust its weighting of
investments in any particular area to adapt to changing market and economic
conditions. Since its inception, the Fund has generally invested its net assets
45% to 55% in fixed income securities, 25% to 55% in common stocks, and 5% to
30% in cash, cash equivalents or other money market instruments. Furthermore,
the Fund may take advantage of opportunities to earn short-term profits if the
Adviser believes that such a strategy will benefit the Fund's overall objective
in light of the increased tax and brokerage expenses associated with such a
strategy.
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FUNDAMENTAL POLICIES
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Unless set forth below as a "Fundamental Policy," each Fund's investment
policies, including its investment objective discussed previously, may be
changed without shareholder approval. A Fundamental Policy may not be changed
without a vote of the holders of "a majority of the outstanding voting
securities" of the Fund, as such term is defined in the 1940 Act. For further
discussion concerning these Fundamental Policies, see "INVESTMENT RESTRICTIONS"
in the Statement of Additional Information.
ISSUER AND INDUSTRY RESTRICTIONS. Each Fund's investment restrictions
include a prohibition on investing more than 5% of its total assets (at the time
of the purchase) in the securities of any one issuer. This policy, however, does
not include investments in U.S. Government securities.
BORROWING RESTRICTIONS. Each Fund may borrow up to one-third of the value
of its total assets, although the Equity Fund and the Asset Allocation Fund may
only borrow in the case of an emergency. If, for any reason, the current value
of a Fund's total assets falls below an amount equal to three times the amount
of its indebtedness from money borrowed, the Fund will, within three days (not
including Saturdays, Sundays and holidays), reduce its indebtedness to the
extent necessary to satisfy the one-third test. Further, the Equity Fund and the
Asset Allocation Fund are both prohibited from purchasing securities when the
Fund's total borrowings exceed 5% of its total assets.
FIXED INCOME SECURITIES. The Small Cap, Equity and Asset Allocation Funds
may each invest up to 20% of its total assets in fixed income securities that
are either unrated or are rated less than Baa by Moody's or BBB by S&P, or in
commercial paper that is rated less than B-1 by Moody's or A- by S&P. However,
not more than 5% of these Fund's total assets may be invested in fixed income
securities that are unrated (including convertible stock). See "CHARACTERISTICS
AND RISKS OF SECURITIES AND INVESTMENT TECHNIQUES" for a discussion concerning
the purchase of below investment grade securities.
ILLIQUID SECURITIES. Both the Equity and Asset Allocation Fund may not
invest more than 10% of their net assets in illiquid securities. The Small Cap
Fund may invest no more than 5% of its total assets in a combination of illiquid
securities and/or securities of issuers, including their predecessors, which
have been in existence less than three years. The following securities in which
a Fund may invest will be considered illiquid: (1) repurchase agreements
maturing in more than seven days; (2) restricted securities (securities whose
public resale is subject to legal restrictions); and (3) any other securities in
which a Fund may
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invest that are not readily marketable. The Board of Trustees may adopt
guidelines and delegate to the Adviser the daily function of determining and
monitoring the liquidity of securities. The Board, however, will retain
sufficient oversight and be ultimately responsible for the determinations. In
determining whether a security is liquid, the Board shall consider whether the
security can be disposed of promptly in the ordinary course of business at a
value reasonably close to that used in the calculation of the net asset value
per share.
Securities eligible for resale to certain institutional investors pursuant
to Rule 144A of the Securities Act of 1933 shall not be considered illiquid.
Since it is not possible to predict with assurance how the market for restricted
securities sold and offered under Rule 144A will develop, the Board will
carefully monitor a Fund's investments in these securities, focusing on such
important factors, among others, as valuation, liquidity, and availability of
information. This 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.
OPTIONS AND FUTURES TRANSACTIONS. Each of the Funds may invest up to 10% of
its total assets in both put or call options and futures contracts.
INVESTMENT IN ISSUERS OF WHICH SHAREHOLDERS AND TRUSTEES OWN SHARES. The
Small Cap Fund may not invest in securities of issuers of which the officers and
trustees of the Fund, as a group, own beneficially more than five percent of the
securities of that issuer.
OTHER INVESTMENT COMPANIES. Each of the Funds may invest in the securities
of other registered investment companies under the circumstances described under
"SECURITIES OF OTHER INVESTMENT COMPANIES" in the Statement of Additional
Information, and to the extent permitted under Section 12 of the 1940 Act.
Currently, no more than 10% of the total assets of a Fund may be so invested, no
more than 5% of total assets of a Fund may be invested in the securities of any
other single investment company, and no more than 3% of the total outstanding
voting stock of an investment company may be purchased. Investments in the
securities of other registered investment companies are or may be subject to
duplicate expenses resulting from the management of the portfolio investment
company as well as those of the Fund.
FOREIGN SECURITIES. Each of the Funds may invest up to 35% of its total
assets in foreign securities, which may or may not be traded on an exchange.
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CHARACTERISTICS, RISKS OF SECURITIES AND
INVESTMENT TECHNIQUES
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The following describes in greater detail different types of securities and
investment techniques used by the Funds, and discusses certain concepts relevant
to the investment policies of the Funds. Additional information about the Funds'
investments and investment practices may be found in the Statement of Additional
Information.
FOREIGN SECURITIES. Each of the Funds may invest up to 35% of its total
assets in foreign securities, which may or may not be traded on an exchange. The
Funds may purchase securities issued by issuers in any country. Securities of
foreign companies are frequently denominated in foreign currencies, and the
Funds may temporarily hold uninvested reserves in bank deposits in foreign
currencies. As a result, the Funds will be affected favorably or unfavorably by
changes in currency rates and in exchange control regulations, and they may
incur expenses in connection with conversion between various currencies. Subject
to its investment restrictions, the Funds may invest in other investment
companies that invest in foreign securities.
Foreign securities may be subject to foreign government taxes that would
reduce the income yield on such securities. Certain foreign governments levy
withholding taxes against dividend and interest income. Although in some
countries a portion of these taxes is recoverable, the non-recovered portion of
any foreign withholding taxes would reduce the income a Fund received from any
foreign investments.
Foreign investments involve certain risks, such as political or economic
instability of the issuer or of the country of the issuer, difficulty of
predicting international trade patterns, and the possibility of imposition of
exchange controls. Such securities may also be subject to greater fluctuations
in price than securities of domestic corporations or of the United States
government. In addition, the net asset value of a Fund is determined and shares
of a Fund can be redeemed only on days during which securities are traded on the
New York Stock Exchange ("NYSE"). However, foreign securities held by a Fund may
be traded on Saturdays or other holidays when the NYSE is closed. Accordingly,
the net asset value of a Fund may be significantly affected on days when an
investor has no access to the Fund.
In addition, there may be less publicly available information about a
foreign company than about a domestic company. Foreign companies generally are
not subject to uniform accounting, auditing and financial reporting standards
comparable to those applicable to domestic companies. There is generally less
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government regulation of stock exchanges, brokers and listed companies abroad
than in the United States, and the absence of negotiated brokerage commissions
in certain countries may result in higher brokerage fees. With respect to
certain foreign countries, there is a possibility of expropriation,
nationalization, or confiscatory taxation, which could affect investment in
those countries.
Each of the Funds may invest a portion of its assets in developing countries
or in countries with new or developing capital markets, such as countries in
Eastern Europe and the Pacific Rim. The considerations noted above regarding the
risks of investing in foreign securities are generally more significant for
these investments. These countries may have relatively unstable governments and
securities markets in which only a small number of securities trade. Markets of
developing countries may be more volatile than markets of developed countries.
Investments in these markets may involve significantly greater risks, as well as
the potential for greater gains.
PUT, CALL OPTIONS, FUTURES CONTRACTS. Each of the Funds may use options and
futures contracts to attempt to enhance income, and to reduce the overall risk
of its investments ("hedge"). These instruments are commonly referred to as
"derivative instruments" due to the fact that their value is derived from or
related to the value of some other instrument or asset. Each Fund's ability to
use these strategies may be limited by market conditions, regulatory limits, and
tax considerations. Appendix B to this prospectus describes the instruments that
the Funds may use and the way the Funds may use the instruments for hedging
purposes.
Each of the Funds may invest up to 10% of its total assets in premiums on
put and call options, both exchange-traded and over-the-counter and write call
options on securities the Fund owns or has a right to acquire. Each of these
Funds may also purchase options on securities indices, foreign currencies, and
futures contracts. Besides exercising its option or permitting the option to
expire, prior to expiration of the option, a Fund may sell the option in a
closing transaction. The Funds may only write call options that are covered. A
call option is covered if written on a security a Fund already owns.
Each of the Funds may invest in interest futures contracts and may invest in
stock index futures provided that the aggregate initial margin of all futures
contracts in which the Fund invests shall not exceed 10% of the total assets of
the Fund after taking into account unrealized profits and unrealized losses on
any such transactions it has entered into. Upon entering into a futures
contract, the Fund will set aside liquid assets, such as cash, U.S. Government
securities, or other high grade debt obligations in a segregated account with
the Fund's custodian to secure its potential obligation under such contract.
The principal risks of options and futures transactions are: (a) imperfect
correlation between movements in the prices of options or futures contracts and
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movements in the prices of the securities hedged or used for cover; (b) lack of
assurance that a liquid secondary market will exist for any particular option or
futures contract at any particular time; (c) the need for additional skills and
techniques beyond those required for normal portfolio management; (d) losses on
futures contracts, which may be unlimited, from market movements not anticipated
by the Adviser; (e) possible need to defer closing out certain options or future
contracts in order to continue to qualify for beneficial tax treatment afforded
"regulated investment companies" under the Internal Revenue Code of 1986, as
amended (the "Code"). For a further discussion of Put, Call Options and Futures
contract, see the Statement of Additional Information "Special Investment
Risks."
FIXED INCOME SECURITIES. Each Fund may invest up to 20% of its total assets
in fixed income securities, including convertible securities, that are either
unrated or rated below the fourth highest category by Moody's or S&P, although
not more than 5% of the Fund's total assets may be invested in fixed income
securities that are unrated. Such high-yielding, lower-rated securities are
commonly referred to as "junk bonds." Such securities are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal. Investment in such securities normally involves a greater degree of
investment and credit risk than does investment in a high-rated security. In
addition, the market for such securities is usually less broad than the market
for higher-rated securities, which could affect their marketability. The market
prices of such securities may fluctuate more than the market prices of
higher-rated securities in response to changes in interest rates and economic
conditions. Moreover, with such securities, there is a greater possibility that
an adverse change in the financial condition of the issuer, particularly a
highly leveraged issuer, may affect its ability to make payments of principal
and interest.
INVESTMENT IN REITS. Each Fund may invest in real estate investment trusts
("REITs"). Such investment may not exceed 25% of a Fund's total assets. REITs
are pooled investment vehicles that invest primarily in income producing real
estate or real estate related loans or interests. REITs are generally classified
as equity REITs, mortgage REITs or a combination of equity and mortgage REITs.
Equity REITs invest the majority of their assets directly in real property and
derive income primarily from the collection of rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs invest the majority of their assets in real estate mortgages and
derive income from the collection of interest payments. For federal income tax
purposes, REITs qualify for beneficial tax treatment by distributing 95% of
their taxable income. If a REIT is unable to qualify for such beneficial tax
treatment, it would be taxed as a corporation and distributions to its
shareholders would therefore be reduced.
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Investing in REITs involves certain unique risks in addition to those risks
associated with investing in the real estate industry in general. Equity REITs
may be affected by changes in the value of the underlying property owned by the
REITs, while mortgage REITs may be affected by the quality of any credit
extended. All REITs are dependent upon management skills, are not diversified,
and are subject to the risks of financing projects. REITs are subject to heavy
cash flow dependency, default by borrowers, self-liquidation, and the
possibilities of failing to qualify for the exemption from tax for distributed
income under the Code and failing to maintain their exemptions from the 1940
Act.
REPURCHASE AGREEMENTS. Each of the Funds may engage in repurchase
agreements. Repurchase agreements are agreements under which a person purchases
a security and simultaneously commits to resell that security to the seller (a
commercial bank or recognized securities dealer) at an agreed upon price on an
agreed upon date within a number of days (usually not more than seven) from the
date of purchase. The resale price reflects the purchase price plus an agreed
upon market rate of interest that is unrelated to the coupon rate or maturity of
the purchased security. A Fund will engage in repurchase agreements only with
banks or broker-dealers whose obligations would qualify for direct purchase by
that Fund. A repurchase agreement involves the obligation of the seller to pay
an agreed-upon price, which obligation is, in effect, secured by the value of
the underlying security. All repurchase agreements are fully collateralized and
marked to market daily, and may therefore be viewed by the SEC or the courts as
loans collateralized by the underlying security. There are some risks associated
with repurchase agreements. For instance, in the case of default by the seller,
a Fund could incur a loss or, if bankruptcy proceedings are commenced against
the seller, the Fund could incur costs and delays in realizing upon the
collateral.
MORTGAGE-BACKED SECURITIES. The Asset Allocation Fund may invest in
mortgage pass-through certificates and multiple-class pass-through securities,
such as Collateralized Mortgage Obligations ("CMOs") and Stripped Mortgage Back
Securities ("SMBS"), and other types of mortgage-backed securities that may be
available in the future (collectively, "Mortgage-Backed Securities").
Mortgage pass-through securities represent participation interests in pools
of mortgage loans secured by residential or commercial real property in which
payments of both interest and principal on the securities are generally made
monthly, in effect "passing through" monthly payments made by the individual
borrowers on the mortgage loans which underlie the securities (net of fees paid
to the issuer or guarantor of the securities).
Payment of principal and interest on some mortgage pass-through securities,
but not the market value of the securities themselves) may be guaranteed by the
full faith and credit of the U.S. Government (in the case of securities
14
<PAGE>
guaranteed by GNMA); or guaranteed by the agency or instrumentality of the U.S.
Government issuing the security (in the case of securities guaranteed by FNMA or
the Federal Home Loan Mortgage Corporation ("FHLMC"), which are supported only
by the discretionary authority of the U.S. Government to purchase the agencies'
obligations). Mortgage pass-through securities created by non-governmental
issuers (such as commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market
issuers) may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance and letters of credit, which
may be issued by governmental entities, private insurers or the mortgage
poolers.
CMOs are hybrid mortgage related instruments. Similar to a bond, interest
and prepaid principal on a CMO are paid, in most cases, semi-annually. CMOs may
be collateralized by whole mortgage loans but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC or
FNMA. CMOs are structured into multiple classes, with each class bearing a
different stated maturity. Monthly payments of principal, including prepayments,
are first returned to investors holding the shortest maturity class and
investors holding the longer maturity classes receive principal only after the
first class has been retired. CMOs that are issued or guaranteed by the U.S.
Government or by any of its agencies or instrumentalities will be considered
U.S. Government securities by the Fund, while other CMOs, even if collateralized
by U.S. Government securities, will have the same status as other privately
issued securities for purposes of applying the Fund's diversification test.
SMBS are derivative multiple-class mortgage-backed securities, usually
structured with two classes that receive different proportions of interest and
principal distributions on a pool of mortgage assets. A typical SMBS will have
one class receiving some of the interest and most of the principal, while the
other class will receive most of the interest and the remaining principal. In
the most extreme case, one class will receive all of the interest (the "interest
only" class), while the other class will receive all of the principal (the
"principal only" class).
Investing in Mortgage-Backed Securities involves certain unique risks in
addition to those risks associated with investing in the real estate industry in
general. These risks include the failure of a counter-party to meet its
commitments, adverse interest rate changes and the effects of prepayment on
mortgage cash flows. In addition, investing in the lowest tranche of CMOs
involves risks similar to those associated with investing in equity securities.
15
<PAGE>
Further, the yield characteristics of Mortgage-Backed Securities differ from
those of traditional fixed income securities. The major differences typically
include more frequent interest and principal payments (usually monthly), the
adjustability of interest rates, and the possibility that prepayments of
principal may be made substantially earlier than their final distribution dates.
If the Mortgage-Backed Security is a fixed-income security, when interest
rates decline, the value of an investment in fixed rate obligations can be
expected to rise. Conversely, when interest rates rise, the value of an
investment in fixed rate obligations can be expected to decline. In contrast, if
the Mortgage-Backed Security represents an interest in a pool of loans with
adjustable interest rates, as interest rates on adjustable rate mortgage loans
are reset periodically, yields on investments in such loans will gradually align
themselves to reflect changes in market interest rates, causing the value of
such investments to fluctuate less dramatically in response to interest rate
fluctuations than would investments in fixed rate obligations.
If a security subject to prepayment has been purchased at a premium, in the
event of prepayment the value of the premium would be lost. Prepayment rates are
influenced by changes in current interest rates and a variety of economic,
geographic, social and other factors, and cannot be predicted with certainty.
Both adjustable rate mortgage loans and fixed rate mortgage loans may be subject
to a greater rate of principal prepayments in a declining interest rate
environment, and to a lesser rate of principal prepayments in an increasing
interest rate environment. Under certain interest rate and prepayment rate
scenarios, the Fund may fail to recoup fully its investment in Mortgage-Backed
Securities, notwithstanding any direct or indirect governmental or agency
guarantee. When the Fund reinvests amounts representing payments and unscheduled
prepayments of principal, it may receive a rate of interest that is lower than
the rate on existing adjustable rate mortgage pass-through securities. Thus,
Mortgage-Backed Securities, and adjustable rate mortgage pass-through securities
in particular, may be less effective than other types of U.S. Government
securities as a means of "locking in" interest rates.
SHORT SALES "AGAINST THE BOX." Each of the Funds may engage in short sales
"against the box." While a short sale is made by selling a security the Fund
does not own, a short sale is "against the box" to the extent that the Fund
contemporaneously owns or has the right to obtain at no added cost securities
identical to those sold short.
WHEN ISSUED AND/OR DELAYED DELIVERY. Each of the Funds may purchase and
sell securities on a when-issued or delayed-delivery basis. When-issued or
delayed-delivery transactions arise when securities are purchased or sold by the
Fund, with payment and delivery taking place in the future in order to secure
what is considered to be an advantageous price and yield to the Fund at the time
16
<PAGE>
of entering into the transaction. Such securities are subject to market
fluctuations, and no interest accrues to a Fund until the time of delivery. The
value of the securities may be less at the time of delivery than the value of
the securities when the commitment was made. When a Fund engages in when-issued
and delayed-delivery transactions, it relies on the buyer or seller, as the case
may be, to consummate the sale. Failure to do so may result in the Fund missing
the opportunity of obtaining a price or yield considered to be advantageous. To
the extent any Fund engages in when-issued and delayed-delivery transactions, it
will do so for the purpose of acquiring portfolio securities consistent with its
investment objective and policies, and not for the purpose of investment
leverage. No Fund may commit more than 25% of its total assets to the purchase
of when-issued and delayed-delivery securities. A separate account of liquid
assets consisting of cash, U.S. Government securities or other high grade debt
obligations equal to the value of any purchase commitment of a Fund shall be
maintained by the Fund's custodian until payment is made.
ILLIQUID SECURITIES. The Funds may invest in illiquid securities, which may
be difficult to sell promptly at an acceptable price. This difficulty may result
in a loss or be costly to a Fund.
INTEREST RATES. Each Fund may invest in debt securities. The market value
of debt securities that are sensitive to prevailing interest rates is inversely
related to actual changes in interest rates. That is, an interest rate decline
produces an increase in a security's market value and an interest rate increase
produces a decrease in value. The longer the remaining maturity of a security,
the greater the effect of an interest rate change. Changes in the ability of an
issuer to make payments of interest and principal and in the market's perception
of its creditworthiness also affect the market value of that issuer's debt
securities.
U.S. GOVERNMENT SECURITIES. Although U.S. Government securities and
high-quality debt securities are issued or guaranteed by the U.S. Treasury or
agency or instrumentality of the U.S. Government, not all U.S. Government
securities are backed by the full faith and credit of the United States. For
example, securities issued by the General Farm Credit Bank or by the Federal
National Mortgage Association are supported by the instrumentality's right to
borrow money from the U.S. Treasury under certain circumstances. On the other
hand, securities issued by the Student Loan Marketing Association are supported
only by the credit of the instrumentality.
LIMITED OPERATING HISTORY OF FUND. The Small Cap Fund commenced operations
on February 16, 1996 and thus has a limited operating history.
SMALL COMPANIES. The Small Cap Fund intends to invest in small market
capitalization companies. Investing in such securities may involve greater risks
since these securities may have limited marketability and, thus, may be more
17
<PAGE>
volatile. Because small-sized companies normally have fewer outstanding shares
than larger companies, it may be difficult for a Fund to buy or sell significant
amounts of such shares without an unfavorable impact on prevailing prices. In
addition, small companies are typically subject to a greater degree of changes
in earnings and business prospects than are larger, more established companies.
LENDING OF PORTFOLIO SECURITIES. The Funds may loan portfolio securities to
broker-dealers or other institutional investors if at least 100% cash (or cash
equivalent) collateral is pledged and maintained by the borrower. The Funds
believe that the cash collateral minimizes the risk of lending their portfolio
securities. Such loans of portfolio securities may not be made if the aggregate
of such loans would exceed 20% of the value of a Fund's total assets. If the
borrower defaults, there may be delays in recovery of loaned securities or even
a loss of the securities loaned, in which case the Fund would pursue the cash
(or cash equivalent) collateral. While there is some risk in loaning portfolio
securities, loans will be made only to firms or broker-dealers deemed by the
Adviser to be of good standing and will not be made unless, in the judgment of
the Adviser, the consideration to be earned from such loans would justify the
risk. For additional disclosure, see "INVESTMENT RESTRICTIONS--LOANS OF
PORTFOLIO SECURITIES" in the Statement of Additional Information.
PORTFOLIO TURNOVER. The Funds generally do not trade in securities with the
goal of obtaining short-term profits, but when circumstances warrant, securities
will be sold without regard to the length of time the security has been held. A
higher portfolio turnover rate may involve correspondingly greater transaction
costs, which will be borne directly by the Funds, as well as additional realized
gains and/or losses to shareholders. See "ALLOCATION OF BROKERAGE," and "TAXES"
in the Prospectus. The annual portfolio turnover rate of the Funds may at times
exceed 100%. The portfolio turnover rates are shown in the Condensed Financial
Information section of this Prospectus.
TEMPORARY DEFENSIVE INVESTMENTS. For temporary defensive purposes, the
Funds may invest up to 100% of their assets in fixed income securities, cash and
cash equivalents. The fixed income securities in which each Fund will invest in
such a situation shall consist of corporate debt securities (bonds, debentures
and notes), asset-backed securities, bank obligations, collateralized bonds,
loan and mortgage obligations, commercial paper, preferred stocks, repurchase
agreements, savings and loan obligations, and U.S. Government and agency
obligations. The fixed income securities will be rated investment grade or
higher (BBB by S&P and Baa by Moody's) and will have maturities of three years
or less. When the Fund assumes a temporary defensive position, it may not invest
in securities designed to achieve its investment objective.
18
<PAGE>
--------------------------------------
MANAGEMENT OF
THE FUNDS
----------------------------------
The Funds are managed by the Trust's Board of Trustees, and all powers and
authorities are exercised by or under the direction of the Board of Trustees.
ADVISER. Subject to the policies of, review by, and overall control of the
Board of Trustees of the Trust, the Adviser has been retained by each Fund to
act as its manager and investment adviser pursuant to investment advisory
agreements.
The Adviser was incorporated in 1980 and has been engaged in the business of
providing investment advice since July 1, 1980 to individual and institutional
accounts, such as corporate pension and profit sharing plans, as well as mutual
funds. The Adviser currently has over $4 billion in assets under management. The
address of the Adviser is 121 S.W. Morrison, Suite 1400, Portland, Oregon 97204.
James E. Crabbe and Richard S. Huson are controlling shareholders of the
Adviser. Mr. Crabbe and Mr. Huson are primarily responsible for the day-to-day
management of the Adviser. Mr. Crabbe is President and a director of the Adviser
and Mr. Huson is Vice President, Secretary and a director.
Each Fund pays the Adviser a fee for its services that accrues daily and is
payable bi-monthly. Fees are based on a percentage of the average daily net
assets of each Fund, as set forth below:
<TABLE>
<CAPTION>
NET ASSET VALUE ANNUAL RATE
- -------------------------------------------------- -------------
<S> <C>
First $100 million................................ 1.00%
Next $400 million................................. 0.85%
Amounts over $500 million......................... 0.60%
</TABLE>
Fees paid by each of the Funds are higher than those paid by most other
mutual funds, although the fees paid by these Funds are comparable to mutual
funds with similar objectives and policies. From time to time, the Adviser may
voluntarily waive all or a portion of its management fee and/or reimburse
certain Fund expenses without further notification of the commencement or
termination of such waiver or reimbursement. Any such waiver or reimbursement
will temporarily lower a Fund's overall expense ratio and increase a Fund's
overall return to investors. Additionally, many states require that mutual funds
meet certain expense limitations. The Funds, their Adviser, Distributor, and
Transfer Agent intend to qualify, meet, or conform to any individual state
requirements while the Funds are registered in that state. The Funds bear all
expenses incurred in their operation as they are incurred, other than those
assumed by the Adviser or the Distributor.
19
<PAGE>
Management of the Small Cap Fund portfolio is handled on a day-to-day basis
by a team consisting of Mr. Crabbe and John W. Johnson. Mr. Crabbe is
coordinator of the team. Mr. Crabbe has served in various management positions
with the Adviser since 1980 and has managed the portfolio of the Crabbe Huson
Special Fund since January 1, 1990. Prior to joining the Adviser, Mr. Johnson
was a private investment banker from November, 1991 to May, 1995. Between
August, 1988 and November, 1991, Mr. Johnson was Director of Equity Investments
for Kennedy Associates.
The portfolios of the Equity and Asset Allocation Funds are managed on a
day-to-day basis by a team consisting of John E. Maack, Jr., Marian L. Kessler,
Robert E. Anton, Garth R. Nisbet and Mr. Huson. Mr. Huson is coordinator of the
team. Mr. Huson has served in various management positions with the Adviser
since 1980. Mr. Maack has been employed as a portfolio manager and securities
analyst by the Adviser since 1988. Ms. Kessler joined the Adviser in August,
1995. From September, 1993 until July, 1995, Ms. Kessler was a portfolio manager
with Safeco Asset Management. Between August, 1986 and June, 1993, Ms. Kessler
was an equity analyst for IDS Financial Services. Mr. Anton joined the Adviser
in June, 1995. Prior to joining the Adviser, Mr. Anton served 17 years as Chief
Investment Officer, Portfolio Manager at Financial Aims Corporation. Mr. Nisbet
joined the Adviser in April, 1995. From February, 1993 until March, 1995, Mr.
Nisbet worked for Capital Consultants, Inc. as a portfolio manager of its fixed
income portfolio. Prior to joining Capital Consultants, Mr. Nisbet was a Vice
President and the fixed income portfolio manager at Lincoln National Investment
Management.
ADMINISTRATORS. The Funds have retained State Street Bank and Trust Company
("State Street") to provide administrative services to the Funds. Such services
relate to administration, operations and compliance. For such services, the
Funds have agreed to pay State Street a fee based on the total assets of the
funds managed by the Adviser. The fee shall be as follows: first $500 million
managed by Adviser -- .06%; next $500 million -- .03%; thereafter -- .01%. Each
Fund pays its pro rata share of such fee.
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND SHAREHOLDER
SERVICING. Investors Fiduciary Trust Company, 127 West 10th Street, Kansas
City, Missouri 64105, acts as Custodian of the cash and securities of each Fund.
State Street Bank and Trust Company, 225 Franklin Street, Boston, MA 02110,
800-541-9732, acts as Transfer Agent and Dividend Disbursing Agent for the Fund.
The Transfer Agent uses Boston Financial Data Services, a 50% owned subsidiary,
as its servicing agent in carrying out the Transfer Agent's responsibilities to
the Fund.
20
<PAGE>
DISTRIBUTOR. Shares of the Funds are distributed by Crabbe Huson
Securities, Inc. (the "Distributor"). Mr. Crabbe and Mr. Huson own 100% of the
stock of the Distributor.
--------------------------------------
CONTROL PERSONS
----------------------------------
As of September 20, 1996, 100% of the outstanding voting securities of the
Equity Fund and Asset Allocation Fund are owned by The Crabbe Huson Equity Fund,
Inc. and The Crabbe Huson Asset Allocation Fund, Inc., respectively.
--------------------------------------
NET ASSET VALUE
----------------------------------
The net asset value ("NAV") of a share is determined as of 4 p.m. Eastern
Time, or the close of the NYSE, whichever is earlier, on each day during which
securities are traded on the NYSE. A class's NAV is the value of a single share.
The value of a single share of a class is computed by adding that class's pro
rata share of the value of the applicable Fund's investments, cash and other
assets, subtracting that class's pro rata share of the value of the applicable
Fund's liabilities, subtracting the liabilities allocated to that class, and
dividing the result by the number of shares of that class that are outstanding.
Each Fund's assets are valued on the basis of market quotations, if
available. Foreign securities are valued on the basis of quotations from the
primary market in which they are traded, and are translated from the local
currency into U.S. dollars using current exchange rates. If quotations are not
readily available, or if the values have been materially affected by events
occurring after the closing of a foreign market, assets are valued by a method
that the Board of Trustees believes accurately reflects fair value.
--------------------------------------
PERFORMANCE COMPARISONS
----------------------------------
The Funds may compare their performance to other mutual funds with similar
investment objectives and to the mutual fund industry as a whole, as quoted by
ranking services and publications of general interest. These services or
publications may include Lipper Analytical Services, Inc., Schabacker's Total
21
<PAGE>
Investment Service, CDA Technologies, SEI, Frank Russell Trust, BARRON'S
BUSINESS WEEK, CHANGING TIMES, THE FINANCIAL TIMES, FINANCIAL WORLD, FORBES,
INVESTOR'S DAILY, MONEY, MORNINGSTAR MUTUAL FUNDS, PERSONAL INVESTOR, THE
ECONOMIST, THE WALL STREET JOURNAL, INDIVIDUAL INVESTOR, LOUIS RUKEYSER'S WALL
STREET, FINANCIAL WORLD, and USA TODAY. These ranking services and publications
rank the performance of the Funds against all other funds over specified periods
and against funds in specified categories. The Funds may include presentations
of, or may compare their performance or the performance of the Funds' Adviser to
a recognized stock index, including the Standard & Poor's 500, Standard & Poor's
Mid-Cap 400 Index, Value Line Composite Index, Dow Jones Industrial Average,
NASDAQ/OTC Price Index, Russell 2000 Index, Wilshire 5000 Equity Index, the
Lehman Brothers Government/Corporate Bond Index and Salomon Bond indices. The
comparative material found in advertisements, sales literature, or in reports to
shareholders may contain past or present performance ratings. This is not to be
considered representative or indicative of future results or future performance.
The performance of a specific Fund will be calculated as required by the
rules of the SEC. The Funds may also publish average annual total return
quotations for recent one, five and ten-year periods and will graphically
illustrate the redeemable value of an initial investment over some given period
of time. These standardized calculations do not reflect the impact of federal or
state income taxes.
The yields of each of the Funds are not fixed and will fluctuate. The
principal value of an investment in each Fund at redemption may be more or less
than its original cost. In addition, investments in the Funds are not insured
and an investor's yield is not guaranteed.
The Fund's investment results will vary from time to time depending on
market conditions, the composition of the Fund's portfolio, and operating
expenses of the Fund. These factors and possible differences in the methods used
in calculating investment results should be considered when comparing
performance information regarding the Fund to information published for other
investment companies and other investment vehicles. You should also consider
return quotations relative to changes in the value of the Fund's shares and the
risks associated with the Fund's investment objectives and policies. At any time
in the future, return quotations may be higher or lower than past return
quotations, and there may be no assurance that any historical return-quotation
will continue in the future.
For more information about the calculation methods used to compute the
Fund's investment results, see "YIELD AND PERFORMANCE" in the Statement of
Additional Information. The annual report for the Funds contains information
about the performance of the Funds, and is available upon request, without
charge, by calling Investor Services at (800) 541-9732.
22
<PAGE>
------------------------------------------
ALLOCATION OF BROKERAGE
----------------------------------
The Adviser is responsible for the overall management of the portfolio of
each Fund and determines which brokers will execute the purchase and sale of the
portfolio securities. The Adviser's foremost objective is to place orders so as
to achieve prompt execution at the most favorable price. However, the Adviser is
authorized, in recognition of the value of brokerage and research services
provided, to pay commissions to a broker in excess of the amounts which another
broker might have charged for effecting the same transaction. The Adviser may
also execute Fund portfolio transactions with broker-dealers that provide
services to the Funds pursuant to a written agreement. Under these arrangements,
participating Funds direct the Adviser to execute a portion of the Fund's
transactions to a broker-dealer in return for a credit which represents a
percentage of the total commissions generated through the broker-dealer. The
Fund uses the credit to reduce transfer agent, custodian, shareholder servicing
and other expenses of the Fund. Provided the Funds receive prompt execution at
competitive prices, the Adviser may execute portfolio transactions through
broker-dealers who also sell the Funds' shares. Additional information about
portfolio brokerage is included in the Statement of Additional Information.
--------------------------------------
CAPITAL STRUCTURE
----------------------------------
Beneficial interests in the Trust are divided into shares, all without par
value. The shares may be divided in separate series, with each series
representing investments in a particular portfolio and sub-series (classes) of
each series, all at the discretion of the Board of Trustees. Shareholders of
each of the Funds are entitled to one vote for each dollar of net asset value
held. Shareholders shall have the power to vote only on the following matters:
(1) the election of the initial trustees of the Trust, the removal of trustees,
and to the extent required by the 1940 Act, the subsequent election of any
trustee to fill any vacancy (although trustees may be elected to fill vacancies
or be removed by the Board of Trustees without a vote of Shareholders, subject
to certain restrictions in the 1940 Act); (2) any contract entered into by the
Trust to the extent Shareholders' approval is required by the 1940 Act; (3) with
respect to any termination or reorganization of the Trust or any series thereof
to the extent and as provided in the Declaration of Trust; (4) with respect to
any amendment of the Declaration of Trust that adversely affects the rights of
the shareholder; (5) with respect to derivative actions whether or not a court
action, proceeding or claim should or should not be brought or maintained
derivatively or as a class
23
<PAGE>
action on behalf of the Trust or any series of the Trust or the Trust
shareholders; (6) an amendment of the Fund's Fundamental Policies as set forth
in the Trust's By-laws; and (7) with respect to such additional matters relating
to the Trust as may be required by the 1940 Act, the Declaration of Trust, the
By-laws of the Trust, any registration of the Trust with the SEC (or any
successor agency) or any state, or as the Trustees may consider necessary or
desirable. Separate votes are taken by each class of shares, fund or trust, if a
matter affects that class of shares, the Fund or the Trust, respectively. Shares
issued are fully paid and nonassessable and have no preemptive or conversion
rights. Each share is entitled to participate equally in dividends and
distributions declared by its respective Fund and in the net assets of that Fund
upon liquidation or dissolution after satisfaction of outstanding liabilities.
Amendment to the Declaration of Trust may be made upon approval by shareholders
holding the lesser of (i) 67% or more of the shares entitled to vote on the
matter, present in person at the meeting or represented by proxy, if holders of
more than 50% of the shares entitled to vote on the matter are present, in
person or by proxy, or (ii) a majority of the shares issued and outstanding.
--------------------------------------
YIELD
----------------------------------
The SEC has imposed a number of rules and policies regarding the calculation
of yield. The Fund intends to continually comply with these rules and policies
in their quotation of yield. For an explanation of the method of yield
calculation, see "CALCULATION OF PERFORMANCE DATA" in the Statement of
Additional Information.
--------------------------------------
INVESTOR SERVICES
----------------------------------
INFORMATION YOU NEED TO KNOW TO PURCHASE, REDEEM OR EXCHANGE SHARES
<TABLE>
<S> <C> <C>
Investor Services Telephone: (800)
541-9732
Mail: Crabbe Huson Funds
P.O. Box 8413
Boston, MA 02266-8413
Crabbe Huson "Instant Access": (800)
235-2442
Express Mail: Crabbe Huson Funds
Two Heritage Drive
Quincy, MA 02171
Internet: http://www.contrarian.com
</TABLE>
24
<PAGE>
The Fund's shares are offered to the public with no sales load. Crabbe Huson
Securities, Inc. (the "Distributor"), Portland, Oregon, an affiliate of the
Adviser and a corporation organized under the laws of Oregon, is the distributor
of the Fund's shares. The shares are offered by the Distributor directly to the
public or through Financial Intermediaries that have established a shareholder
servicing relationship with the Fund or Distributor.
If there is no account application accompanying this Prospectus, you may
obtain one by calling your Financial Intermediary or by calling Investor
Services. If you are investing through a tax-sheltered retirement plan, such as
an IRA, for the first time, you will need a special application. Contact
Investor Services for more information on retirement accounts.
TYPES OF ACCOUNTS AVAILABLE:
- Individual, Joint Tenants, Tenants in Common
- Trusts
- Businesses or Organizations (corporations, partnerships or other groups)
Gifts or Transfers to Minors
- Retirement Accounts (Individual Retirement Accounts (IRA), Spousal IRA,
Simplified Employee Pension IRA (SEP-IRA), Salary Reduction-SEP IRA
(SAR-SEPIRA) or 403(b) Tax Sheltered Accounts)
- Others (contact Investor Services for information regarding other
accounts)
Note, if you are considering adopting any type of retirement plan, you
should consult with your own legal or tax adviser, with respect to the
establishment and maintenance of such a plan.
MINIMUM INVESTMENTS: The minimum investment in any Fund is $1,000,000.
Additional Investments in any Fund must be in amounts of at least $10,000.
Shares may be purchased through Financial Intermediaries which maintain a single
account with a Fund. In those instances, the investment minimums may be
satisfied by the Financial Intermediary. See "WHAT YOU SHOULD KNOW ABOUT BUYING
SHARES THROUGH A FINANCIAL INTERMEDIARY." The Adviser, in its sole discretion,
may waive any minimum purchase requirements. The Funds reserve the right to vary
the initial and subsequent investment minimums at any time. The Funds will
provide you with written notice of any such change.
25
<PAGE>
--------------------------------------
HOW TO PURCHASE
YOUR SHARES
----------------------------------
HOW TO OPEN AN ACCOUNT:
<TABLE>
<S> <C> <C>
- - Mail: Complete and sign the account application,
indicating the Fund, class and dollar amount
you want to invest. Mail or express mail your
check with your completed application to the
appropriate address listed above under
"INFORMATION YOU NEED TO KNOW TO PURCHASE,
REDEEM OR EXCHANGE SHARES."
- - Exchange: You may exchange your shares for shares of
another Crabbe Huson Fund, provided the
dollar value of the shares you desire to
exchange meet the minimum investment
requirement of the new Fund. Call Investor
Services for more information about this
option.
- - Financial
Intermediaries: You may purchase shares in a Fund by
contacting your Financial Intermediary. See
"WHAT YOU SHOULD KNOW ABOUT BUYING SHARES
THROUGH A FINANCIAL INTERMEDIARY."
</TABLE>
HOW TO PURCHASE ADDITIONAL SHARES:
<TABLE>
<S> <C> <C>
- - Mail: Detach and complete the stub attached to your
statement. Make a check payable to Crabbe
Huson Funds, write your shareholder account
number on your check, and include your
investment stub(s) or a note designating how
the amount of your check is to be invested by
Fund and class. Mail or express mail the
above to the appropriate address listed above
under "INFORMATION YOU NEED TO KNOW TO PUR-
CHASE, REDEEM OR EXCHANGE SHARES."
- - Telephone: As an existing shareholder, you may also
purchase shares by calling Investor Services
at the telephone number listed above under
"INFORMATION YOU NEED TO KNOW TO PURCHASE,
REDEEM OR EXCHANGE SHARES."
</TABLE>
26
<PAGE>
<TABLE>
<S> <C> <C>
- - Wire: You may purchase shares by wiring funds from
your bank account. In order to purchase
additional shares by wire transfer, you need
to call Investor Services to place your order
and then wire transfer your funds to the
following wire transfer address: State Street
Bank & Trust Co., 225 Franklin Street,
Boston, MA 02110, ABA No. 011 000 28, FOR
CREDIT: Crabbe Huson, DDA No. 99051039,
Shareholder Name, Name of Fund and Class,
Shareholder Account Number.
</TABLE>
WHAT YOU SHOULD KNOW ABOUT BUYING SHARES BY MAIL:
If payment and an account application is received in proper form by the
close of regular trading on the NYSE (currently 4:00 p.m., Eastern Time) on a
day that the Fund calculates its net asset value (a "business day"), the
purchase will be made at the Fund's net asset value calculated at the end of
that day. If payment is received after the close of regular trading on the NYSE,
the purchase will be effected at the Fund's net asset value determined for the
next business day after payment has been received.
Make all checks or money orders payable to Crabbe Huson Funds. The Funds
will not accept purchases made by cash or credit card. Checks payable to the
investor and endorsed to the order of the Fund will not be accepted as payment
and will be returned to the sender. If a check used for purchase does not clear,
the Fund will cancel the purchase and the investor may be liable for any losses
or fees incurred. In order to prevent lengthy processing delays caused by the
clearing of foreign checks, the Funds will only accept a foreign check drawn in
U.S. dollars issued by a foreign bank with a U.S. correspondent bank. The name
of the U.S. correspondent bank must be printed on the face of the check. Further
documentation may be requested from corporations, executors, administrators,
trustees, guardians, agents, or attorneys in fact.
WHAT YOU SHOULD KNOW ABOUT BUYING ADDITIONAL SHARES BY TELEPHONE:
The Funds may, at their discretion, accept purchase orders from existing
shareholders by telephone, although the order is not accompanied by payment for
the shares being purchased. To receive the net asset value for a specific day, a
telephone purchase request must be received before the close of the NYSE on that
day. Payment for shares ordered in this way must be received by the Funds'
Transfer Agent within three business days after acceptance of the order. If
payment is not received on time, a Fund may cancel the order and redeem the
shares held in the shareholder's account to compensate the Fund for any decline
in the value of the purchased shares.
27
<PAGE>
WHAT YOU SHOULD KNOW ABOUT BUYING SHARES THROUGH A FINANCIAL INTERMEDIARY:
Shares of each Fund are offered through Financial Intermediaries that have
established a shareholder servicing relationship with the Fund on behalf of
their customers. The Fund pays no compensation to such entities, although the
Adviser may make payments to such Financial Intermediaries out of its own
management fee revenue, past profits, or other resources. Financial
Intermediaries may impose additional or different conditions on the purchase or
redemption of Fund shares by their customers and may charge their customers
transaction or account fees on the purchase and redemption of Fund shares and on
maintenance of such accounts. Each Financial Intermediary is responsible for
transmitting to its customers a schedule of any such fees and information
regarding any additional or different conditions regarding purchases and
redemptions. Shareholders who are customers of Financial Intermediaries should
consult their Financial Intermediary for information regarding these fees and
conditions.
Financial Intermediaries that have entered into agreements with the Fund
and/or its Distributor may enter confirmed purchase orders on behalf of clients
and customers, with payment to follow no later than the Funds' pricing on the
following business day. If payment is not received by such time, the Financial
Intermediary could be held liable for resulting fees and losses.
--------------------------------------
HOW TO REDEEM
YOUR SHARES
----------------------------------
You may arrange to take money out of your account at any time by selling
(redeeming) some or all of your shares. Shares may be redeemed at any time,
without charge, at the net asset value per share next determined after receipt
by the Transfer Agent of a redemption request in proper form from the investor.
Payment for all shares redeemed will be made within three business days after
receipt of a redemption request in proper form except (as outlined by the 1940
Act) during a period when 1) trading on the NYSE is restricted or the NYSE is
closed for other than customary weekends and holidays, 2) the SEC has by order
permitted such suspension for the protection of the Fund's shareholders, or 3)
an emergency exists making disposal of portfolio securities or valuation of net
assets of the applicable class not reasonably practicable.
When a request for redemption is made shortly after the purchase of shares,
you will not receive the redemption proceeds until the check(s) received for the
shares purchased has cleared. Under such circumstances, it may take as
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<PAGE>
long as 15 days for a shareholder to receive the proceeds of a redemption. You
may avoid such delays by purchasing shares with a certified or cashier's check,
or by federal funds wire.
To redeem your shares in a non-retirement account, you may use any of the
methods described below. To sell shares in a retirement account, you should
contact Investor Services or your Financial Intermediary for special
instructions. For your protection, certain redemption requests may require a
signature guarantee. See "Special Situations--Signature Guarantee." You may
redeem shares in the following ways:
<TABLE>
<S> <C> <C>
- - Mail: To be in proper form, written requests for
redemption must include 1) the total dollar
value of shares or the total number of shares
to be redeemed, 2) the investor's account
number, 3) the Fund's name and applicable
class name, and 4) the signature of each
registered owner exactly as the shares are
registered, and 5) in certain situations, a
signature guarantee. See "Special
Situations-Signature Guarantee." The Transfer
Agent may require additional supporting
documents for redemptions made by
corporations, executors, administrators,
trustees, or guardians. A redemption request
will not be deemed to have been submitted
until the Transfer Agent receives
all required documents in proper form. All
documents and correspondence concerning
redemptions should be sent to Investor
Services at the address listed above under
"INFORMATION YOU NEED TO KNOW TO PURCHASE,
REDEEM OR EXCHANGE SHARES."
- - Telephone: You may redeem shares by calling Investor
Services at the telephone number listed above
under "INFORMATION YOU NEED TO KNOW TO
PURCHASE, REDEEM OR EXCHANGE SHARES."
- - Wire: Should you wish to receive instructions on
how to obtain your funds by wire, please call
Investor Services. At the present time there
is no fee charged for redemptions by wire
transfer. However, in the future the Funds
may elect to impose such a fee.
</TABLE>
29
<PAGE>
<TABLE>
<S> <C> <C>
- - Financial
Intermediaries: Shares may also be redeemed by telephone from
Financial Intermediaries who have established
a shareholder servicing relationship with the
Distributor and/or the Funds. Such redemption
orders should be placed by the Financial
Intermediary with the Transfer Agent. Shares
will be redeemed at the net asset value
determined on a shareholder's trade date. The
three-day period within which the proceeds of
the redemption will be sent to the
shareholder or shareholder's Financial
Intermediary will begin on the day of the net
asset value calculation, unless the Transfer
Agent has not received a written request in
proper form from the Financial Intermediary
by the third day. In that event, the proceeds
of the redemption will be sent to the
shareholder or the shareholder's Financial
Intermediary immediately upon the Transfer
Agent's receipt of the written request in
proper form. Financial Intermediaries are
responsible for the prompt transmittal of
redemption orders to the Transfer Agent.
Financial Intermediaries not affiliated with
a Fund may charge a fee for handling
redemptions.
</TABLE>
--------------------------------------
HOW TO EXCHANGE
YOUR SHARES
----------------------------------
BEFORE MAKING AN EXCHANGE TO ANOTHER FUND, THE INVESTOR SHOULD READ THE
PROSPECTUS RELATING TO THE FUND OR FUNDS INTO WHICH SHARES ARE BEING EXCHANGED.
The proceeds from the redemption of your shares may be used to purchase
shares of any other Fund in every state in which the exchange may be made
legally, provided you may only exchange if the dollar value of the exchange is
sufficient to satisfy any minimum investment requirements in the new Fund. You
may only exchange between accounts that are registered in the same name,
address, and taxpayer identification number. The exchange privilege is a
standard option on all accounts. If you do not want this option, please mark the
appropriate box on the application. You may exchange shares in the following
ways:
30
<PAGE>
<TABLE>
<S> <C> <C>
- - Exchange by
Mail: Any written exchange request, in proper form,
may be mailed or express mailed to the
Transfer Agent to the appropriate address
listed above under "INFORMATION YOU NEED TO
KNOW TO PURCHASE, REDEEM OR EXCHANGE YOUR
SHARES."
- - Exchange by
Telephone: You may exchange shares by telephone by
contacting Investor Services at the number
listed above under "INFORMATION YOU NEED TO
KNOW TO PURCHASE, REDEEM OR EXCHANGE YOUR
SHARES."
</TABLE>
The exchange of shares of the Fund for shares of another fund is treated for
federal and state income tax purposes as a sale on which an investor may realize
a capital gain or loss.
Excessive trading can hurt Fund performance. Each Fund reserves the right to
terminate or modify the exchange privilege applicable to all shareholders at any
time upon 60 days' notice. This exchange privilege may be temporarily or
permanently suspended with respect to any shareholder that engages in more than
ten exchanges in any 12-month period.
WHAT YOU SHOULD KNOW ABOUT TELEPHONE TRANSACTIONS:
Each Fund, the Adviser and the Transfer Agent will employ reasonable
procedures to confirm that instructions communicated by telephone are properly
authorized. The failure of a Fund to do so may result in the Fund being liable
for losses due to unauthorized or fraudulent telephone transactions. However, a
Fund, the Adviser and the Transfer Agent will not be liable for executing
telephonic instructions that are deemed to be authorized after following
reasonable procedures. Such reasonable procedures include providing written
confirmation of telephone transactions, tape recording telephone instructions,
and requiring specific personal information prior to acting upon telephone
instructions.
31
<PAGE>
--------------------------------------
WHEN TRANSACTIONS
ARE RECORDED
IN YOUR ACCOUNT
----------------------------------
Your trade date is the date when transactions are recorded in your account.
Your shares are purchased, redeemed or exchanged at the net asset value
determined on your trade date.
--------------------------------------
STATEMENTS
----------------------------------
You will receive a quarterly summary of all account activity for the most
recent calendar quarter and an annual statement which includes all activity
during the most recent year. You will also receive a statement of account after
any transaction that affects your share balance or share registration, other
than for the reinvestment of dividends or distributions or investments made
through the Systematic Exchange Program discussed below. See "SPECIAL SERVICES."
In addition to the annual statement, you will also receive, in January, a full
report of your account activity during the prior year.
--------------------------------------
SPECIAL SITUATIONS
----------------------------------
SIGNATURE GUARANTEE. A signature guarantee is designed to protect you and
the Funds from fraudulent transactions by unauthorized persons. In the following
instances, the Funds will require a signature guarantee for all authorized
owners of an account:
- you wish to redeem more than $15,000 worth of shares;
- the redemption proceeds are to be sent to a different name or address
than is registered on your account;
- you wish to change your name or add/remove an owner on your account; or
- you wish to add/change a beneficiary on your transfer-on-death account or
retirement account.
A signature guarantee may be obtained from any eligible guarantor
institution, as defined by the SEC. These institutions include banks, savings
associations, credit unions, brokerage firms and others. A notary public stamp
or seal is not acceptable.
32
<PAGE>
INVOLUNTARY CONVERSION. In order to reduce expenses, if the shares in your
account other than a tax-deferred retirement account, are worth less than
$750,000, the Fund may, at its discretion, elect to convert the shares into
shares of that Fund's Primary Class. You will receive 60 days' prior written
notice in which to purchase additional shares, to avoid such a conversion.
INVOLUNTARY REDEMPTION. Any Fund may compel the redemption of shares if, in
its opinion, such action would prevent the Fund from becoming a personal holding
company, as defined by the Code.
--------------------------------------
SPECIAL SERVICES
----------------------------------
SYSTEMATIC EXCHANGE. Systematic Exchange allows you to make regular,
systematic exchanges of at least $10,000 from one Crabbe Huson Fund into another
Crabbe Huson account. When you establish a systematic exchange program, you
authorize the Fund, the Transfer Agent and their agents to sell shares at a set
dollar amount or number of shares from the first account and purchase shares of
a second Crabbe Huson Fund. An exchange transaction is a sale and purchase of
shares for federal income tax purposes and may result in a gain or loss. To
establish this program, you may call your Financial Intermediary or Investor
Services at (800) 541-9732. You may only make a systematic exchange into shares
of the Institutional Class of one of the Funds. Further, both accounts must
satisfy all investment minimums.
--------------------------------------
DIVIDENDS, CAPITAL GAINS, TAXES
----------------------------------
Each Fund distributes substantially all of its net investment income and
capital gains (if any) to shareholders each year. Each Fund declares and
distributes realized capital gains, if any, to shareholders in December.
Dividends for the Small Cap and Equity Funds are distributed in December.
Dividends for the Asset Allocation Fund are distributed on the last business day
of each fiscal quarter.
On the date the dividends or capital gains are declared, they will
automatically be reinvested in additional shares of the same class of your Fund
unless you have elected to receive payments in cash. You may elect the option to
receive your distributions in cash by so specifying on your application.
33
<PAGE>
Each Fund intends to qualify each year as a "regulated investment company"
under the Code so it will not pay federal taxes on either income or capital
gains distributed to shareholders, although there can be no assurance that they
will so qualify.
Each Fund will be subject to a 4% excise tax on a portion of its
undistributed income if they fail to meet certain annual distribution
requirements. Each Fund intends to make distributions in a timely manner and,
accordingly, does not expect to be subject to the excise tax.
For federal income tax purposes, all distributions are reportable as taxable
income whether a shareholder elects to take them in cash or reinvest them in
additional shares of a Fund.
Distributions representing net investment income (including short-term
capital gains) are taxable as ordinary income. Distributions derived from net
long-term capital gains that are properly designated by a Fund as such will be
taxable to shareholders as long-term capital gains, regardless of how long the
shareholder has held the shares.
Under the Revenue Reconciliation Act of 1993 (the "Act"), potentially
favorable income tax treatment on distributions representing long-term capital
gains has been restored, effective for tax years beginning after 1992. Under the
Act, ordinary income may be taxed at marginal rates significantly (up to 11.6%)
higher than the marginal rate at which long-term capital gains are taxed.
Accordingly, distributions representing net long-term capital gains may be
subject to a reduced rate of tax to shareholders.
Shareholders may be subject to a $50 penalty under the Internal Revenue Code
and the Funds may be required to withhold and remit to the U.S. Treasury a
portion (31%) of any redemption or repurchase proceeds (including the value of
shares exchanged into another fund for whom the Adviser acts as Adviser) and of
any dividend or distribution on any account, where the shareholder failed to
provide a correct taxpayer identification number or to make certain required
certifications.
The foregoing relates only to federal income tax consequences for
shareholders who are U.S. citizens or corporations. Shareholders should consult
their own tax advisers regarding these matters, and regarding state, local, and
other applicable tax laws.
Each Fund will issue annually, in January, a full report to each shareholder
detailing the tax status of each distribution to the shareholder during the
calendar year. The Fund do not assume any responsibility for the calculation of
any taxable gain (or loss) from the purchase and sale of Fund shares, including
34
<PAGE>
purchases made with reinvested dividends and/or capital gains. Every shareholder
should consult with their tax adviser concerning such calculations and tax
consequences.
Each Fund will be treated as a separate entity and thus the provisions of
the Code applicable to registered investment companies generally will be applied
to each fund separately instead of the Trust as a whole. Net capital gains, net
investment income and operating expenses will be determined separately for each
Fund.
35
<PAGE>
------------------------------------------
APPENDIX A
----------------------------------
BOND RATING AGENCIES:
The following is a description of the bond ratings employed by Moody's
Investors Service, Inc. ("Moody's").
Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or exceptionally stable margin, and
principal is secure. While the various protective elements are likely to change,
such changes as can be visualized are unlikely to impair the fundamentally
strong position of such issues.
Aa: Bonds 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 that
make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds 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 that
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered as medium-grade obligations (i.e., they
are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba: Bonds rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
36
<PAGE>
Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Moody's applies the numerical modifiers "1", "2", and "3" in each generic
rating classification from Aa through B. The modifier "1" indicates that the
security ranks in the higher end of its generic rating category; the modifier
"2" indicates a mid-range ranking; and the modifier "3" indicates that the issue
ranks in the lower end of its generic rating category.
The following is a description of the bond ratings employed by Standards &
Poor's Corporation ("S&P").
AAA: Bonds rated AAA are highest-grade obligations. Capacity to pay
interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal, and differ from the highest rated issues only in small degree.
A: Bonds rated A have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in higher rated categories.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC, and C is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
37
<PAGE>
B: Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
C1: The rating C1 is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarding as having extremely poor prospects of ever attaining
any real investment standing.
The S&P letter rating may be modified by the addition of a plus (+) or minus
sign (-), which is used to show relative standing within rating categories
between AA to CCC.
From time to time a bond rating agency may adjust its rating of a particular
bond issue. Subsequent to a Fund's purchase of a bond, such a bond may have its
rating reduced (down graded) to a category not permitted to be owned by that
Fund, or it may cease to be rated. Neither case would require that a Fund
eliminate such a bond from its portfolio. However, the Fund's Adviser will
consider such an event in determining whether or not the Fund should continue to
hold such a security.
38
<PAGE>
------------------------------------------
APPENDIX B
----------------------------------
HEDGING INSTRUMENTS:
OPTIONS ON EQUITY AND DEBT SECURITIES--A call option is a short-term
contract pursuant to which the purchaser of the option, in return for a premium,
has the right to buy the security underlying the option at a specified price at
any time during the term of the option. The writer of the call option, who
receives the premium, has the obligation, upon exercise of the option during the
option term, to deliver the underlying security against payment of the exercise
price. A put option is a similar contract that gives its purchaser, in return
for a premium, the right to sell the underlying security at a specified price
during the option term. The writer of the put option, who receives the premium,
has the obligation, upon exercise of the option during the option term, to buy
the underlying security at the exercise price.
OPTIONS ON SECURITIES INDICES--A securities index assigns relative values to
the securities included in the index and fluctuates with changes in the market
values of those securities. An index option operates in the same way as a more
traditional stock option, except that exercise of an index option is effected
with cash payment and does not involve delivery of securities. Thus, upon
exercise of an index option, the purchase will realize, and the writer will pay,
an amount based on the difference between the exercise price and the closing
price of the index.
STOCK INDEX FUTURES CONTRACTS--A stock index futures contract is a bilateral
agreement pursuant to which one party agrees to accept, and the other party
agrees to make, delivery of an amount of cash equal to a specified dollar amount
times the difference between the stock index value at the close of trading of
the contract and the price at which the futures contract is originally struck.
No physical delivery of the stocks comprising the index is made. Generally,
contracts are closed out prior to the expiration date of the contract.
INTEREST RATE FUTURES CONTRACTS--Interest rate futures contracts are
bilateral agreements pursuant to which one party agrees to make, and the other
party agrees to accept, delivery of a specified type of debt security at a
specified future time and at a specified price. Although such futures contracts
by their terms call for actual delivery or acceptance of debt securities, in
most cases the contracts are closed out before the settlement date without the
making or taking of delivery.
OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar to
options on securities or currency, except that an option on a futures contract
gives the purchaser the right, in return for the premium, to assume a position
in a futures contract (a long position if the option is a call and a short
position if
39
<PAGE>
the option is a put), rather than to purchase or sell a security or currency, at
a specified price at any time during the option term. Upon exercise of the
option, the delivery of the futures position to the holder of the option will be
accompanied by delivery of the accumulated balance that represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
future. The writer of an option, upon exercise, will assume a short position in
the case of a call and a long position in the case of a put.
Purchase of these financial instruments allows the Adviser to hedge against
changes in market conditions. For example, the Adviser may purchase a put option
in a securities index or when it believes that the stock prices will decline.
Conversely, the Adviser may purchase a call option in a securities index when it
anticipates that stock prices will increase.
40
<PAGE>
MAILING ADDRESS
CRABBE HUSON FUNDS
P.O. BOX 8413
BOSTON, MA 02266-8413
INVESTMENT ADVISER
THE CRABBE HUSON GROUP, INC.
121 S.W. MORRISON, SUITE 1400
PORTLAND, OR 97204
DISTRIBUTOR
CRABBE HUSON SECURITIES, INC.
121 S.W. MORRISON, SUITE 1400
PORTLAND, OR 97204
LEGAL COUNSEL
DAVIS WRIGHT TREMAINE
1300 S.W. FIFTH AVENUE, SUITE 2300
PORTLAND, OR 97201
INDEPENDENT AUDITORS
KPMG PEAT MARWICK LLP
1211 S.W. FIFTH AVENUE, SUITE 2000
PORTLAND, OR 97204
TRANSFER AGENT &
INVESTOR SERVICES
STATE STREET BANK AND TRUST COMPANY
P.O. BOX 8413
BOSTON, MA 02266-8413
FUND TRUSTEES
GARY L. CAPPS
JAMES E. CRABBE
RICHARD S. HUSON
LOUIS SCHERZER
BOB L. SMITH
CRAIG P. STUVLAND
RICHARD P. WOLLENBERG
WILLIAM W. WYATT, JR.
