October 19, 1998 as Revised
CRABBE HUSON SMALL CAP FUND
CRABBE HUSON EQUITY FUND
CRABBE HUSON MANAGED
INCOME & EQUITY FUND
CRABBE HUSON CONTRARIAN
INCOME FUND
CLASS I SHARES
PROSPECTUS
Colonial Management Associates, Inc. (Administrator) and your full-service
financial advisor want you to understand both the risks and benefits of mutual
fund investing.
While mutual funds offer significant opportunities and are professionally
managed, they also carry risks including possible loss of principal. Unlike
savings accounts and certificates of deposit, mutual funds are not insured or
guaranteed by any financial institution or government agency.
Please consult your full-service financial advisor to determine how investing in
this mutual fund may suit your unique needs, time horizon and risk tolerance.
Crabbe Huson Small Cap Fund (Small Cap Fund) seeks to provide long-term capital
appreciation.
Crabbe Huson Equity Fund (Equity Fund) seeks to provide long-term capital
appreciation.
Crabbe Huson Managed Income & Equity Fund (Managed Fund) seeks preservation of
capital, capital appreciation and income.
Crabbe Huson Contrarian Income Fund (Income Fund) seeks to provide the highest
level of current income that is consistent with preservation of capital.
Each of the Funds is a diversified portfolio of Colonial Trust III (Trust), an
open-end management investment company and is managed by Crabbe Huson Group,
Inc. (Advisor), successor to an investment advisory firm founded in 1980 and an
affiliate of the Administrator.
This Prospectus explains concisely what you should know before investing in the
Class I shares of a Fund. Read it carefully and retain it for future reference.
More detailed information about the Funds is in the October 19, 1998 Statement
of Additional Information which has been filed with the Securities and Exchange
CH-01/049G-1098
Commission and is obtainable free of charge by calling the Administrator at
1-800-426-3750. The Statement of Additional Information is incorporated by
reference in (which means it is considered to be a part of) this Prospectus.
Class I shares may be purchased only by pension and profit sharing plans,
employee benefit trusts, endowments, foundations and corporations and high net
worth individuals, or through certain broker-dealers, financial institutions and
other financial intermediaries which have entered into agreements with a Fund,
and which invest a minimum of $1 million.
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 another Fund.
An investment in a Fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
Contents Page
Summary of Expenses 2
The Funds' Financial History 3
The Funds' Investment Objectives 6
How the Funds Pursue their Objective and
Certain Risk Factors 6
Investment Techniques and Additional
Risk Factors 7
How the Funds Measure their Performance 12
How the Funds are Managed 12
Year 2000 13
How the Funds Value their Shares 13
Distributions and Taxes 14
How to Buy Shares 14
How to Sell Shares 14
How to Exchange Shares 15
Telephone Transactions 15
Organization and History 15
Appendix A 17
Appendix B 18
The SEC maintains a Web site (http://www.sec.gov) that contains the Statement of
Additional Information, materials that are incorporated by reference into this
Prospectus and the Statement of Additional Information, and other information
regarding the Funds.
- ----------------------------- --------------------------
NOT FDIC-INSURED MAY LOSE VALUE
NO BANK GUARANTEE
- ----------------------------- --------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
SUMMARY OF EXPENSES
Expenses are one of several factors to consider when investing in a Fund. The
following tables summarize your maximum transaction costs and your annual
expenses for an investment in the Class I shares of a Fund. See "How the Funds
are Managed" for more complete descriptions of each Fund's various costs and
expenses.
Shareholder Transaction Expenses(1)(2)
Maximum Initial Sales Charge Imposed on a Purchase (as a % of offering price)
0.00% Maximum Contingent Deferred Sales Charge (as a % of offering price) 0.00%
(1) For accounts less than $1,000 an annual fee of $10 may be deducted. See "How
to Buy Shares." (2) Redemption proceeds exceeding $500 sent via federal funds
wire will be subject to a $7.50 charge per
transaction.
Annual Operating Expenses (as a % of average net assets)
<TABLE>
<CAPTION>
Small Cap Fund Equity Fund
<S> <C> <C>
Management fee 0.88% 0.83%
12b-1 fees 0.00 0.00
Other expenses 0.08 0.10
---- ----
Total operating expenses 0.96% 0.93%
==== ====
Managed Fund Income Fund
<S> <C> <C>
Management fee (after fee waiver) 0.73% 0.00%
12b-1 fees 0.00 0.00
Other expenses (after expense reimbursement) 0.18 0.38
---- ----
Total operating expenses (after fee waiver and
expense reimbursement) 0.91% 0.38%
==== ====
</TABLE>
(3) The Advisor has voluntarily agreed to waive a portion of its Management
fee (and to reimburse expenses, if applicable) so that Total operating
expenses do not exceed 0.38% per annum of the Income Fund's net asset
value. Had the fee waiver and expense reimbursement not been made, the
Income Fund's Management fee would be 0.80%, estimated Other expenses
would be 1.39% and estimated Total operating expenses would be 2.19%.
Since the Fund did not offer Class I shares prior to the date of this
Prospectus, expenses are estimated based on Class A share expenses.
Example
The following Examples show the cumulative transaction and operating expenses
attributable to a hypothetical $1,000 investment in the Class I shares of the
Funds for the periods specified, assuming a 5% annual return with or without
redemption at period end. This Example uses the fees and expenses in the table
above and, as they relate to the Income Fund, give effect to the fee waiver and
expense reimbursement described above. The 5% return and expenses used in this
Example should not be considered indicative of actual or expected Fund
performance or expenses, both of which will vary:
Small Cap Fund Equity Fund
Period:
1 year $ 10 $ 9
3 years 31 30
5 years 53 51
10 years 118 114
Managed Fund Income Fund
Period:
1 year $ 9 $ 4
3 years 29 12
5 years 50 21
10 years 112 48
<PAGE>
THE FUNDS' FINANCIAL HISTORY
The following information for a share outstanding through October 31, 1997 has
been audited by KPMG Peat Marwick LLP, each Fund's independent auditors, whose
report dated December 3, 1997 is incorporated by reference into the Funds'
Statement of Additional Information. Prior to the date of this Prospectus, each
Fund's (other than Income Fund's) Class I shares were known as the
"Institutional Class". Prior to the date of this Prospectus, no Class I shares
were offered by the Income Fund. On the date of this Prospectus, the Crabbe
Huson Asset Allocation Fund and Crabbe Huson Income Fund each changed their
names to Crabbe Huson Managed Income & Equity Fund and Crabbe Huson Contrarian
Income Fund, respectively.
<TABLE>
<CAPTION>
CRABBE HUSON SMALL CAP FUND - Class I
------------------------------------------------------
(Unaudited)
Period Ended Year Ended Period Ended
---------------- --------------------------------
4/30/98 10/31/97 10/31/96 (a)
---------------- --------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $15.53 $11.01 $11.05
INCOME FROM INVESTMENT OPERATIONS
Net investment income (0.01) 0.07 0.00
Net realized and unrealized gain (loss) on Investments (0.07) 4.62 (0.04)
------ ---- ------
Total from Investment Operations (0.08) 4.69 (0.04)
LESS DISTRIBUTIONS
Distributions from Net Investment Income 0.01 0.03 0.00
Distributions in Excess of Net Investment Income 0.05 0.00 0.00
Distributions from Capital Gains 1.24 0.14 0.00
---- ---- ----
Total Distributions 1.30 0.17 0.00
---- ---- ----
Net Asset Value, End of Period $14.15 $15.53 $11.01
====== ====== ======
Total Return 46.00% 43.11% (0.36)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $111,974 $71,655 $1,514
Ratio of Expenses to Average Net Assets 1.00%(b)(c) 1.00%(b) 1.00%(b) (c)
Ratio of Net Investment Income to Average Net Assets (0.13)%(c)% 0.60% (0.43)%(c)%
Portfolio Turnover Rate 9.17% 65.11% 39.34%
Average Commission Rate (d) $0.0357 $0.0363 $0.0275
Average Number of Shares Outstanding 9,483,973 * --- ---
Amount of Debt Outstanding $0 --- ---
Average Amount of Debt Outstanding During the Period $19,983 * --- ---
Average Amount of Debt Per Share During the Period $0.00 --- ---
RATIOS IF FEES HAD NOT BEEN WAIVED AND/OR REIMBURSED
Ratio of Expenses to Average Net Assets 1.14%(b)(c) 1.28%(b) 3.55%(b) (c)
Ratio of Net Investment Income to Average Net Assets 0.27%(c) 0.32% (2.98)%(c)%
RATIOS NET OF FEES PAID INDIRECTLY
Ratio of Expenses to Average Net Assets 1.00%(c) 1.00% 1.00%(c)
Ratio of Net Investment Income to Average Net Assets (0.13)%(c)% 0.60% -0.43%(c)
</TABLE>
Footnotes appear on page 5.
<PAGE>
THE FUNDS' FINANCIAL HISTORY (CONT'D)
<TABLE>
<CAPTION>
CRABBE HUSON EQUITY FUND - Class I
------------------------------------------------------
(Unaudited)
Period Ended Year Ended Period Ended
---------------- --------------------------------
4/30/98 10/31/97 10/31/96 (f)
---------------- --------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $23.40 $19.51 $19.82
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.10 0.21 0.00
Net realized and unrealized gain (loss) on Investments 2.43 5.31 (0.31)
---- ---- ------
Total from Investment Operations 2.53 5.52 (0.31)
LESS DISTRIBUTIONS
Distributions from Net Investment Income 0.15 0.09 0.00
Distributions from Capital Gains 4.74 1.54 0.00
---- ---- ----
Total Distributions 4.89 1.63 0.00
---- ---- ----
Net Asset Value, End of Period $21.04 $23.40 $19.51
====== ====== ======
Total Return 14.08% 30.35% (1.56)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $33,685 $24,084 $4,415
Ratio of Expenses to Average Net Assets 1.00%(b)(c) 1.00%(b) 1.00%(b) (c)
Ratio of Net Investment Income to Average Net Assets 0.95%(c) 0.71% 0.15%(c)
Portfolio Turnover Rate 74.30% 128.65% 117.00%
Average Commission Rate (d) $0.0572 $0.0537 $0.0530
Average Number of Shares Outstanding (Composite) 21,949,236 * 19,623,834 * ---
Amount of Debt Outstanding --- --- ---
Average Amount of Debt Outstanding During the Period $47,731 * $21,750 * ---
Average Amount of Debt Per Share During the Period $0.00 $0.00 ---
RATIOS IF FEES HAD NOT BEEN WAIVED AND/OR REIMBURSED
Ratio of Expenses to Average Net Assets 1.13%(b)(c) 1.23%(b) 1.58%(b) (c)
Ratio of Net Investment Income to Average Net Assets 82.00(c) 48.00% (0.43)%(c)%
RATIOS NET OF FEES PAID INDIRECTLY
Ratio of Expenses to Average Net Assets 1.00%(c) 1.00% 1.00%(c)
Ratio of Net Investment Income to Average Net Assets 0.95%(c) 0.71% 0.15%(c)
</TABLE>
Footnotes appear on page 5.
<PAGE>
THE FUNDS' FINANCIAL HISTORY (CONT'D)
<TABLE>
CRABBE HUSON MANAGED INCOME & EQUITY FUND - Class I
------------------------------------------------------
(Unaudited)
Period Ended Year Ended Period Ended
---------------- --------------------------------
4/30/98 10/31/97 10/31/96 (e)
---------------- --------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $14.94 $13.39 $13.38
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.20 0.42 0.01
Net realized and unrealized gain (loss) on Investments 1.06 2.24 0.08
---- ---- ----
Total from Investment Operations 1.26 2.66 0.09
LESS DISTRIBUTIONS
Distributions from Net Investment Income 0.17 0.37 0.08
Distributions from Capital Gains 1.80 0.74 0.00
---- ---- ----
Total Distributions 1.97 1.11 0.08
---- ---- ----
Net Asset Value, End of Period $14.23 $14.94 $13.39
====== ====== ======
Total Return 9.65% 21.18% 0.59%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $36,536 $28,598 $2,526
Ratio of Expenses to Average Net Assets 1.00%(c) 1.00%(b) 1.00%(b) (c)
Ratio of Net Investment Income to Average Net Assets 2.75%(c) 2.70% 2.87%(c)
Portfolio Turnover Rate 58.19% 118.65% 252.29%
Average Commission Rate (d) $0.0566 $0.0529 $0.0536
Average Number of Shares Outstanding (Composite) 9,685,020 * 8,772,675 * ---
Amount of Debt Outstanding --- --- ---
Average Amount of Debt Outstanding During the Period --- $3,460 ---
Average Amount of Debt Per Share During the Period $0.00 $0.00 ---
RATIOS IF FEES HAD NOT BEEN WAIVED AND/OR REIMBURSED
Ratio of Expenses to Average Net Assets 1.23%(c) 1.42%(b) 2.00%(b) (c)
Ratio of Net Investment Income to Average Net Assets 2.52%(c) 2.28% 1.87%(c)
RATIOS NET OF FEES PAID INDIRECTLY
Ratio of Expenses to Average Net Assets 1.00%(c) 1.00% 1.00%(c)
Ratio of Net Investment Income to Average Net Assets 2.75%(c) 2.70% 2.87%(c)
</TABLE>
(a) Commencement of operations - 10/10/96.
(b) Ratios include expenses indirectly through directed brokerage and certain
expense offset arrangements.
(c) Computed on an annualized basis.
(d) Disclosure of the average commission rate paid relates to the purchase and
sale of investment securities and is required for funds that invest greater
than 10% of average net assets in equity transactions. This disclosure is
required for fiscal periods beginning on or after September 1, 1995.
(e) Commencement of operations - 10/28/96.
(f) Commencement of operations - 10/3/96.
* Computed on a daily basis.
Further performance information is contained in the Funds' Annual Report to
shareholders, which is obtainable free of charge by calling 1-800-426-3750.
<PAGE>
THE FUNDS' INVESTMENT OBJECTIVES
The Small Cap Fund seeks to provide long-term capital appreciation.
The Equity Fund seeks to provide long-term capital appreciation.
The Managed Fund seeks preservation of capital, capital appreciation and income.
The Income Fund seeks to provide the highest level of current income that is
consistent with preservation of capital.
HOW THE FUNDS PURSUE THEIR OBJECTIVES AND CERTAIN RISK FACTORS
The Equity, Small Cap and Managed Funds each follows a basic value, contrarian
approach in selecting stocks for its portfolio. This approach puts primary
emphasis on security price, balance sheet and cash flow analysis and on the
relationship between the market price of a security and its estimated intrinsic
value as a share of an ongoing business. The basic value contrarian approach is
based on the Advisor's belief that the securities of many companies often sell
at a discount from the securities' estimated intrinsic value. These Funds
attempt to identify and invest in such undervalued securities in the hope that
their market price will rise to their estimated intrinsic value. This approach,
while not unique, contrasts with certain other investment styles, which rely
upon market timing, technical analysis, earnings forecasts, or economic
predictions.
The Small Cap Fund seeks 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 billion).
Investments in companies with small market capitalization may involve greater
risk and volatility than more traditional equity investments due to their more
limited product lines, reduced market liquidity for the trading of their shares
and less depth in management than more established companies. The Small Cap Fund
does not, by itself, constitute a balanced investment program. It may be
appropriate for persons who are in a financial position to assume above average
risk and share price volatility over time and who have a longer term investment
horizon or perspective.
The Equity Fund seeks long-term capital appreciation. The Fund will seek to
achieve this objective by investing, under normal conditions, at least 65% of
its total assets in common stocks. It will focus its investments in widely and
actively traded stocks with medium (from $1 billion to $3 billion) and large (in
excess of $3 billion) market capitalizations.
The Fund will purchase and hold for investment common stock, and may also
purchase convertible and nonconvertible preferred stocks and bonds or
debentures. These securities will not be considered common stock for purposes of
the 65% limitation referenced above. The Fund may be appropriate only for
investors who have a longer term investment horizon or perspective.
The Managed Fund seeks 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 portfolio in common stocks. The
Advisor 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 Advisor's assessment of interest rate trends and
the liquidity of various instruments under prevailing market conditions. The
Fund may invest up to 35% of its total assets in fixed income securities that
are either unrated or are rated less than Baa by Moody's Investors Service
(Moody's) or BBB by Standard & Poor's Corporation (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 the Fund's total assets may be invested in fixed income securities that are
unrated (including convertible securities).
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 Advisor will constantly monitor and adjust its weighting of
investments in any particular area to adapt to changing market and economic
conditions. Under normal market conditions, the Fund generally expects to invest
its net assets as follows: 30% to 55% in fixed income securities; 25% to 60% 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 Advisor 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.
The Income Fund seeks a high level of current income by investing in a
diversified portfolio of fixed income securities (such as bonds and notes of
corporate and government issuers) and preferred or convertible preferred stock
while, at the same time, attempting to preserve capital by varying the overall
average maturity of the Fund's portfolio.
There are no limitations on the average maturity of the Fund's portfolio. In
general, the Advisor will seek to adjust the average maturity of the Fund's
portfolio in response to changes in interest rates.
The Fund invests in a variety of fixed income securities, including domestic and
foreign corporate bonds, debentures, convertible bonds and debentures, foreign
and U.S. Government securities, preferred and convertible preferred stock, and
short-term money market instruments.
At least 65% of the Fund's total assets will be invested in (1) debt securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities; (2) investment-grade debt securities, including convertible
securities and preferred or convertible preferred stock, which are rated "A" or
higher by the major recognized bond services (for a description of ratings, see
Appendix A); or (3) cash and cash equivalents (such as certificates of deposit,
repurchase agreements maturing in one week or less, and bankers' acceptances).
The Fund may invest up to 35% of its total assets in fixed income securities
that are either unrated or are rated less than A by Moody's or A 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 the Fund's total assets may be invested in fixed income
securities that are unrated (including convertible securities).
INVESTMENT TECHNIQUES AND ADDITIONAL RISK FACTORS
The following describes in greater detail different types of securities and
investment techniques used by the Funds, and discusses certain risks related to
such securities and techniques. Additional information about the Funds'
investments and investment practices may be found in the Statement of Additional
Information.
The Small Cap, Equity and Managed Funds are 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,
Managed and Income 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. In addition, the Small Cap, Equity, Managed and Income Funds
may each invest up to 35% of its total assets in securities issued by foreign
issuers. The Small Cap Fund has a limited operating history. A significant risk
associated with investment in the Income Fund is that of increasing interest
rates causing a decline in the net asset value 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. 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, a Fund will be affected favorably or unfavorably by changes in
currency rates, 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 a 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
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.
Emerging Markets. 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.
Puts, Call Options and Futures Contracts. 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 describes the instruments that the Funds may use and
the way the Funds may use the instruments for hedging purposes.
Each of these Funds may invest up to 5% of its total assets in premiums on put
and call options, both exchange-traded and over-the-counter, and may write call
options on securities a 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.
The Funds may invest in interest rate futures contracts and the Small Cap,
Equity and Managed Funds may invest in stock index futures provided that the
aggregate initial margin of all futures contracts in which a Fund invests shall
not exceed 5% of the total assets of a Fund after taking into account unrealized
profits and unrealized losses on any such transactions it has entered into. Upon
entering into a futures contract, a Fund will set aside liquid assets, such as
cash, U.S. Government securities, or other high grade debt obligations in a
segregated account with a 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
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; and (d) losses
on futures contracts, which may be unlimited, from market movements not
anticipated by the Advisor. For a further discussion of put and call options and
futures contracts, see the Statement of Additional Information.
Lower-Rated Securities. Each of the Funds may invest 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 a Fund's
total assets may be invested in fixed income securities that are unrated.
Securities rated below the fourth highest category 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 less broad than the market for higher-rated securities, which
could affect their marketability. The market prices of such securities tend to
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 of the Small Cap, Equity and Managed Funds may invest
in real estate investment trusts (REITs). A Fund's investments in REITs may not
exceed 25% of such 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.
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
Investment Company Act of 1940.
Repurchase Agreements. Each of the Funds may engage in repurchase agreements.
Repurchase agreements are agreements under which a Fund purchases a security
from the seller (a commercial bank or recognized securities dealer) which
simultaneously commits to repurchase the security from a Fund 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 commercial banks or registered broker-dealers. The seller's
obligation to repurchase the security at the agreed-upon repurchase price, is,
in effect, secured by the value of the underlying security. All repurchase
agreements are fully collateralized and marked to market daily. 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, a Fund could incur costs and delays in
liquidating the collateral.
Mortgage-Backed Securities. The Managed and Income Funds may invest in mortgage
pass-through certificates and multiple-class pass-through securities, such as
collateralized mortgage obligations (CMOs) and stripped mortgage-backed
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 guaranteed by
the Government National Mortgage Association (GNMA)); or guaranteed by the
agency or instrumentality of the U.S. Government issuing the security (in the
case of securities guaranteed by the Federal National Mortgage Association
(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 issued in 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. For the purpose of determining compliance with the diversification
tests applicable to the Funds, 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, which generally are not subject to such
diversification tests, while other CMOs, even if collateralized by U.S.
Government securities, will have the same status as other privately issued
securities.
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.
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.
When interest rates decline, the value of a Mortgage-Backed Security that
carries a fixed interest rate can be expected to rise. Conversely, when interest
rates rise, the value of an investment in such fixed rate obligations can be
expected to decline. If interest rates increase rapidly and substantially, fixed
rate obligations may become illiquid. 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 Mortgage-Backed Security subject to prepayment has been purchased at a
premium, the value of the premium would be lost if the security is in fact
prepaid. 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, a Fund may fail to recoup fully its
investment in Mortgage-Backed Securities, notwithstanding any direct or indirect
governmental or agency guarantee. When a Fund reinvests amounts representing
scheduled payments and unscheduled prepayments of principal on Mortgage-Backed
Securities, it may receive a rate of interest that is lower than the rate on
existing 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. The Small Cap, Equity, and Managed Funds may engage in short sales
"against the box." While a short sale is made by selling a security a Fund does
not own, a short sale is "against the box" to the extent that a 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 Securities. 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 a
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 a Fund at the time
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 a 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 liquid securities
equal to the value of any purchase commitment of a Fund shall be maintained by a
Fund's custodian until payment is made.
Illiquid Securities. The Funds may not invest more than 15% of their assets 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 such security's market value and an interest rate
increase produces a decrease in its 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 an 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 Federal Farm Credit Bank or by FNMA 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.
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
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, under current
lending arrangements, 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 a Fund would pursue the cash (or cash equivalent) collateral. While there
is some risk in lending portfolio securities, loans will be made only to firms
or broker-dealers deemed by the Advisor to be of good standing and will not be
made unless, in the judgment of the Advisor, the consideration to be earned from
such loans would justify the risk. For additional information, see
"Miscellaneous Investment Practices -- Securities Loans" 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 a Fund, as well as additional realized
gains and/or losses to shareholders. The annual portfolio turnover rate of a
Fund may at times exceed 100%. Portfolio turnover rates are shown in "The Funds'
Financial History" above.
Temporary Defensive Investments. For temporary defensive purposes, the Small Cap
and Equity Funds may invest up to 100% (80% for Managed Fund) 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 a Fund assumes a temporary defensive
position, it may not be investing in securities designed to achieve its
investment objective. Other. The Funds may not always achieve their investment
objectives. Each Fund's investment objective(s) and non-fundamental investment
policies may be changed without shareholder approval. The Funds' fundamental
investment policies listed in the Statement of Additional Information, cannot be
changed without the approval of a majority of a Fund's outstanding voting
securities. Additional information concerning certain of the securities and
investment techniques described above is contained in the Statement of
Additional Information.
HOW THE FUNDS MEASURE THEIR PERFORMANCE
Performance may be quoted in sales literature and advertisements. Average annual
total returns are calculated in accordance with the Securities and Exchange
Commission's formula and assume the reinvestment of all distributions. Other
total returns differ from average annual total return only in that they may
relate to different time periods and may represent aggregate as opposed to
average annual total returns.
Yield, which differs from total return because it does not consider changes in
net asset value, is calculated in accordance with the Securities and Exchange
Commission's formula. Each Class's distribution rate is usually calculated by
dividing annual or annualized distributions, by the maximum offering price on
the last day of the period. Performance may be compared to various indices.
Quotations from various publications may be included in sales literature and
advertisements. See "Performance Measures" in the Statement of Additional
Information for more information. All performance information is historical and
does not predict future results.
Each of the Funds' Class I shares were first offered to the public on the dates
referenced below and were previously designated as the "Institutional Class". At
the date of this Prospectus, no Class I shares had been offered for the Income
Fund. The historical performance of Class I shares of each of the Funds for all
periods is based on the performance of the Institutional Class of each Fund's
predecessor and assuming reinvestment of dividends and capital gains. Historical
performance as restated should not be interpreted as indicative of each Fund's
future performance. The average annual returns for each Fund's Class I shares as
of October 31, 1997 and June 30, 1998 would have been as follows:
10/31/97 6/30/98
Small Cap Fund
1 year 43.11% (1.01)%
Since inception (October 39.74% 14.48%
10, 1996)
Equity Fund
1 year 30.35% 10.21%
Since inception (October 3, 25.98% 17.54%
1996)
Managed Fund
1 year 21.18% 11.74%
Since inception (October 20.84% 15.70%
28, 1996)
Performance results reflect any voluntary waivers or reimbursement of Fund
expenses by the Advisor or its affiliates. Absent these waivers or
reimbursements, performance results would have been lower.
HOW THE FUNDS ARE MANAGED
The Trustees formulate the Funds' general policies and oversee the Funds'
affairs as conducted by the Advisor.
Liberty Funds Distributor, Inc. (Distributor), a subsidiary of the
Administrator, serves as the distributor for the Funds' shares. Liberty Funds
Services, Inc. (Transfer Agent), an affiliate of the Administrator, serves as
the shareholder services and transfer agent for the Funds. Each of the Advisor,
the Administrator, the Distributor and the Transfer Agent is an indirect
subsidiary of Liberty Financial Companies, Inc. (Liberty Financial), which, in
turn, is an indirect majority-owned subsidiary of Liberty Mutual Insurance
Company (Liberty Mutual). Liberty Mutual is considered to be the controlling
entity of the Advisor, the Administrator and their affiliates. Liberty Mutual is
an underwriter of workers' compensation insurance and a property and casualty
insurer in the U.S.
Each Fund pays the Advisor a fee for its services that accrues daily and is
payable monthly. Fees are based on a percentage of the average daily net assets
of each Fund, as set forth below:
Small Cap Fund
Equity Fund
Managed Fund
Net Asset Value Annual Rate
First $100 million 1.05%
Next $400 million 0.90%
Amounts over $500 million 0.65%
Income Fund
Net Asset Value Annual Rate
First $100 million 0.80%
Next $400 million 0.65%
Amounts over $500 million 0.55%
The Funds' Advisor delegates certain of its administrative duties to the
Administrator.
James E. Crabbe is primarily responsible for the day-to-day management of the
Advisor. Mr. Crabbe is President and a Director of the Advisor.
Management of the Small Cap Fund is handled on a day-to-day basis by a team
consisting of Mr. Crabbe, John W. Johnson, and Peter P. Belton. Mr. Crabbe is
coordinator of the team. Mr. Crabbe has served in various management positions
with the Advisor since 1980 and has managed the predecessor to the Special Fund
since January 1, 1990. Prior to joining the Advisor, Mr. Johnson was a private
investment banker from November, 1991 to May, 1995. Prior to joining the
Advisor, Mr. Belton was an analyst at Arnhold & S. Bleichroeder from August,
1992 to September, 1993 and Vice President/Analyst at Capital Management
Associates from February, 1994 to September, 1997.
The Income Fund is managed on a day-to-day basis by a team consisting of Garth
R. Nisbet and Paul C. Rocheleau. Mr. Nisbet joined the Advisor in April, 1995.
Between February, 1993 and March, 1995 Mr. Nisbet worked for Capital
Consultants, Inc. as a portfolio manager of its fixed income portfolio. Mr.
Rocheleau joined the Advisor in December, 1992.
The portfolios of the Equity and Managed Funds are managed on a day-to-day basis
by a team consisting of John E. Maack, Jr., Marian L. Kessler, Robert E. Anton
and Mr. Nisbet. Mr. Anton is coordinator of the team. Mr. Maack has been
employed as a portfolio manager and securities analyst by the Advisor since
1988. Ms. Kessler joined the Advisor in August, 1995. From September, 1993 until
July, 1995, Ms. Kessler was a portfolio manager with Safeco Asset Management.
Mr. Anton joined the Advisor in June, 1995. Prior to joining the Advisor, Mr.
Anton served 17 years as Chief Investment Officer, portfolio manager at
Financial Aims Corporation.
The Administrator provides certain administrative and pricing and bookkeeping
services to the Funds for a monthly fee of $2,250 per Fund, plus a percentage of
each Fund's average net assets over $50 million.
The Transfer Agent provides transfer agency and shareholder services to each
Fund for a monthly fee at the annual rate of 0.0025% of average daily net assets
plus certain out-of-pocket expenses.
Each of the foregoing fees is subject to any reimbursement or fee waiver to
which the Advisor and its affiliates may agree.
The Advisor places all orders for purchases and sales of portfolio securities.
In selecting broker-dealers, the Advisor may consider research and brokerage
services furnished by such broker-dealers to the Advisor and its affiliates. In
recognition of the research and brokerage services provided, the Advisor may
cause a Fund to pay the selected broker-dealer a higher commission than would
have been charged by another broker-dealer not providing such services.
Subject to seeking best execution, the Advisor may consider sales of shares of a
Fund (and of certain other funds advised by the Advisor, the Administrator and
their affiliates) in selecting broker-dealers for portfolio security
transactions.
YEAR 2000
The Funds' Advisor, Administrator, Distributor and Transfer Agent (Liberty
Companies) are actively coordinating, managing and monitoring Year 2000
readiness for the Funds. The Administrator is working within the Liberty
Companies and with vendors who provide services, software and systems to a Fund
to ensure that date-related information and data can be properly processed and
calculated on and after January 1, 2000. Many Fund service providers and
vendors, including the Liberty Companies, are in the process of making Year 2000
modifications to their services, software and systems and believe that such
modifications will be completed on a timely basis prior to January 1, 2000. The
cost of these modifications will not affect the Funds. However, no assurances
can be given that all modifications required to ensure proper data processing
and calculation on and after January 1, 2000 will be timely made or that
services to a Fund will not be adversely affected.
HOW THE FUNDS VALUE THEIR SHARES
Per share net asset value is calculated by dividing the total value of each
Class's net assets by its number of outstanding shares. Shares of the Funds are
generally valued as of the close of regular trading of the NYSE (normally 4:00
p.m. Eastern time) each day the NYSE is open. Portfolio securities for which
market quotations are readily available are valued at current market value.
Short-term investments maturing in 60 days or less are valued at amortized cost
when the Advisor determines, pursuant to procedures adopted by the Trustees,
that such cost approximates current market value. The Board of Trustees has
adopted procedures to value at their fair value (i) foreign securities if the
value of such securities have been materially affected by events occurring after
the closing of a foreign market and (ii) all other securities.
DISTRIBUTIONS AND TAXES
Each Fund intends to qualify as a "regulated investment company" under the
Internal Revenue Code and to distribute to shareholders net income and any net
realized gain annually.
Distributions are invested in additional shares of the same Class of a Fund at
net asset value unless the shareholder elects to receive cash. Regardless of the
shareholder's election, distributions of $10 or less will not be paid in cash to
shareholders but will be invested in additional shares of the same Class of a
Fund at net asset value. If a shareholder has elected to receive dividends
and/or capital gain distributions in cash and the postal or other delivery
service selected by the Transfer Agent is unable to deliver checks to the
shareholder's address of record, such shareholder's distribution option will
automatically be converted to having all dividend and other distributions
reinvested in additional shares. No interest will accrue on amounts represented
by uncashed distribution or redemption checks. To change your election, call the
Transfer Agent for information.
Whether you receive taxable distributions in cash or in additional Fund shares,
you must report them as taxable income unless you are a tax-exempt institution.
If you buy shares shortly before a distribution is declared, the distribution
may be taxable although it is, in effect, a partial return of the amount
invested. Each January, information on the amount and nature of distributions
for the prior year is sent to shareholders.
HOW TO BUY SHARES
Shares of the Funds are offered continuously. Orders received in good form prior
to the time at which a Fund values its shares (or placed with the financial
service firm before such time and transmitted by the financial service firm
before a Fund processes that day's share transactions) will be processed based
on that day's closing net asset value. A Fund may refuse any purchase order for
its shares. Certificates will not be issued for Class I shares. See the
Statement of Additional Information for more information.
Other Classes of Shares. Each of the Small Cap, Managed and Equity Funds also
offer Class A, Class B and Class C shares through a separate Prospectus. The
Income Fund also offers Class A shares through a separate Prospectus, but does
not permit new purchases or exchanges into such Class. In general, investors
eligible to purchase Class I shares, which do not charge initial or contingent
deferred sales charges and do not bear Rule 12b-1 fees, should do so in
preference over other classes.
General. Financial service firms may receive different compensation rates for
selling different classes of shares. The Distributor may pay additional
compensation to financial service firms which have made or may make significant
sales. See the Statement of Additional Information for more information.
Special Purchase Programs. The Funds allow certain investors or groups of
investors to purchase shares with reduced or without initial or contingent
deferred sales charges. These programs are described in the Statement of
Additional Information under "Programs for Reducing or Eliminating Sales
Charges."
Investors may be charged a fee if they effect transactions in a Fund's shares
through a broker or agent.
Shareholder Services and Account Fees. A variety of shareholder services are
available. For more information about these services or your account, call
1-800-345-6611. Some services are described in the attached account application.
A shareholder's manual explaining all available services will be provided upon
request.
In June of any year, a Fund may deduct $10 (payable to the Transfer Agent) from
accounts valued at less than $1,000 unless the account value has dropped below
$1,000 solely as a result of share value depreciation. Shareholders will receive
60 days' written notice to increase the account value before the fee is
deducted. A Fund may deduct annual maintenance and processing fees (payable to
the Transfer Agent) in connection with certain retirement plan accounts
sponsored by the Distributor. See "Special Purchase Programs/Investor Services"
in the Statement of Additional Information for more information.
HOW TO SELL SHARES
Shares of the Funds may be sold on any day the NYSE is open, either directly to
a Fund or through your financial service firm. Sale proceeds generally are sent
within seven days (usually on the next business day after your request is
received in good form). However, for shares recently purchased by check, a Fund
will delay sending proceeds for 15 days in order to protect the Fund against
financial losses and dilution in net asset value caused by dishonored purchase
payment checks. To avoid delay in payment, investors are advised to purchase
shares unconditionally, such as by certified check or other immediately
available funds.
Selling Shares Directly To A Fund. Send a signed letter of instruction or stock
power form to the Transfer Agent, along with any certificates for shares to be
sold. The sale price is the net asset value (less any applicable contingent
deferred sales charge) next calculated after a Fund receives the request in
proper form. Signatures must be guaranteed by a bank, a member firm of a
national stock exchange or another eligible guarantor institution. Stock power
forms are available from financial service firms, the Transfer Agent and many
banks. Additional documentation is required for sales by corporations, agents,
fiduciaries, surviving joint owners and individual retirement account holders.
For details contact:
Liberty Funds Services, Inc.
P.O. Box 1722
Boston, MA 02105-1722
1-800-345-6611
Selling Shares Through Financial Service Firms. Financial service firms must
receive requests prior to the time at which a Fund values its shares to receive
that day's price, are responsible for furnishing all necessary documentation to
the Transfer Agent and may charge for this service.
General. The sale of shares is a taxable transaction for income tax purposes.
See the Statement of Additional Information for more information. Under unusual
circumstances, a Fund may suspend repurchases or postpone payment for up to
seven days or longer, as permitted by federal securities law. No interest will
accrue on amounts represented by uncashed distribution or redemption checks.
HOW TO EXCHANGE SHARES
Except as described below with respect to money market funds, Fund shares may be
exchanged at net asset value among the Class I shares of other mutual funds
offered through this Prospectus.
Call 1-800-422-3737 to exchange shares by telephone. An exchange is a taxable
capital transaction. The exchange service may be changed, suspended or
eliminated on 60 days' written notice. A Fund will terminate the exchange
privilege as to a particular shareholder if the Advisor determines, in its sole
and absolute discretion, that the shareholder's exchange activity is likely to
adversely impact the Advisor's ability to manage a Fund's investments in
accordance with its investment objective or otherwise harm a Fund or its
remaining shareholders.
TELEPHONE TRANSACTIONS
All shareholders and/or their financial advisors are automatically eligible to
exchange Fund shares and redeem up to $100,000 of Fund shares by calling
1-800-422-3737 toll-free any business day between 9:00 a.m. and the time at
which a Fund values its shares. Telephone redemptions are limited to a total of
$100,000 in a 30-day period. Redemptions that exceed $100,000 may be
accomplished by placing a wire order trade through a broker or furnishing a
signature guaranteed request. Telephone redemption privileges may be elected on
the account application. The Transfer Agent will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine and may be
liable for losses related to unauthorized or fraudulent transactions in the
event reasonable procedures are not employed. Such procedures include
restrictions on where proceeds of telephone redemptions may be sent, limitations
on the ability to redeem by telephone shortly after an address change, recording
of telephone lines and requirements that the redeeming shareholder and/or his or
her financial advisor provide certain identifying information. Shareholders
and/or their financial advisors wishing to redeem or exchange shares by
telephone may experience difficulty in reaching a Fund at its toll-free
telephone number during periods of drastic economic or market changes. In that
event, shareholders and/or their financial advisors should follow the procedures
for redemption or exchange by mail as described above under "How to Sell
Shares." The Advisor, the Administrator, the Transfer Agent and each Fund
reserve the right to change, modify or terminate the telephone redemption or
exchange services at any time upon prior written notice to shareholders.
Shareholders and/or their financial advisors are not obligated to transact by
telephone.
ORGANIZATION AND HISTORY
The Trust is a Massachusetts business trust organized in 1986. Each Fund
represents the entire interest in a separate portfolio of the Trust.
The Trust is not required to hold annual shareholder meetings, but special
meetings may be called for certain purposes. Shareholders receive one vote for
each Fund share. Shares of the Funds and any other series of the Trust that may
be in existence from time to time generally vote together except when required
by law to vote separately by fund or by class. Shareholders owning in the
aggregate ten percent of Trust shares may call meetings to consider removal of
Trustees. Under certain circumstances, the Trust will provide information to
assist shareholders in calling such a meeting. See the Statement of Additional
Information for more information.
Each Fund is a successor to the corresponding series of the former Crabbe Huson
Funds, a Delaware business trust organized in 1995. On September 30, 1998, the
shareholders of each Funds' predecessor series approved an Agreement and Plan of
Reorganization pursuant to which such predecessor series was reorganized as a
separate series of the Trust. At the closing of each reorganization,
shareholders holding Institutional Class shares (other than Income Fund which
did not offer the Institutional Class) received Class I shares of the successor
series equal in net asset value to the shares of the predecessor series they
held.
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS
S&P
AAA bonds have the highest rating assigned by S&P. The obligor's capacity to
meet its financial commitment on the obligation is extremely strong.
AA bonds differ from the highest rated obligations only in small degree. The
obligor's capacity to meet its financial commitment on the obligation is very
strong.
A bonds are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in higher rated
categories. However, the obligor's capacity to meet its financial commitment on
the obligation is still strong.
BBB bonds exhibit adequate protection parameters. However, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity of the obligor to meet its financial commitment on the obligation.
BB, B, CCC and CC bonds are regarded as having significant speculative
characteristics. BB indicates the least degree of speculation and C the highest.
While such obligations will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or major
exposures to adverse conditions.
BB bonds are less vulnerable to non-payment than other speculative issues.
However, they face major ongoing uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
B bonds are more vulnerable to nonpayment than obligations rated BB, but the
obligor currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
CCC bonds are currently vulnerable to nonpayment, and are dependent upon
favorable business, financial, and economic conditions for the obligor to meet
its financial commitment on the obligation. In the event of adverse business,
financial, or economic conditions, the obligor is not likely to have the
capacity to meet its financial commitment on the obligation.
CC bonds are currently highly vulnerable to nonpayment.
C ratings may be used to cover a situation where a bankruptcy petition has been
filed or similar action has been taken, but payments on this obligation are
being continued.
D bonds are in payment default. The D rating category is used when payments on
an obligation are not made on the date due even if the applicable grace period
has not expired, unless 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 or the taking of a similar action if payments on an obligation are
jeopardized.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r This symbol is attached to the rating of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
MOODY'S
Aaa bonds 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 by an exceptionally stable margin and
principal is secure. While various protective elements are likely to change,
such changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa bonds are judged to be of high quality by all standards. Together with Aaa
bonds they comprise what are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may not be as large as
in Aaa securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A bonds possess many favorable investment attributes and are to be considered as
upper-medium-grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present which suggest a
susceptibility to impairment some time in the future.
Baa bonds 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 are judged to have speculative elements; their future cannot be
considered as well secured. 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 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 are of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest.
Ca bonds represent obligations which are speculative in a high degree. Such
issues are often in default or have other marked shortcomings.
C bonds 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.
Conditional Ratings. Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting
conditions attach. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
Note: Those bonds in the Aa, A, Baa, Ba, and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1, and B 1.
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 purchaser 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 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 Advisor to hedge against
changes in market conditions. For example, the Advisor may purchase a put option
in a securities index when it believes that the stock prices will decline.
Conversely, the Advisor may purchase a call option in a securities index when it
anticipates that stock prices will increase.
See "Puts, Call Options and Futures Contracts" above for a discussion of risks
associated with hedging instruments.
<PAGE>
Investment Advisor
Crabbe Huson Group, Inc.
121 S.W. Morrison, Suite 1400
Portland, OR 97204
Administrator
Colonial Management Associates, Inc.
One Financial Center
Boston, MA 02111-2621
Distributor
Liberty Funds Distributor, Inc.
One Financial Center
Boston, MA 02111-2621
Custodian
State Street Bank & Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Services and Transfer Agent
Liberty Funds Services, Inc.
One Financial Center
Boston, MA 02111-2621
1-800-345-6611
Independent Auditors
KPMG Peat Marwick LLP
99 High Street
Boston, MA 02110
Legal Counsel
Ropes & Gray
One International Place
Boston, MA 02110-2624
Your financial service firm is:
Printed in U.S.A.
October 19, 1998 as Revised
CRABBE HUSON SMALL CAP FUND
CRABBE HUSON EQUITY FUND
CRABBE HUSON MANAGED
INCOME & EQUITY FUND
CRABBE HUSON CONTRARIAN
INCOME FUND
CLASS I SHARES
PROSPECTUS
Crabbe Huson Small Cap Fund seeks to provide long-term capital appreciation.
Crabbe Huson Equity Fund seeks to provide long-term capital appreciation.
Crabbe Huson Managed Income & Equity Fund seeks preservation of capital, capital
appreciation and income.
Crabbe Huson Contrarian Income Fund seeks to provide the highest level of
current income that is consistent with preservation of capital.
For more detailed information about the Funds, call the Distributor at
1-800-426-3750 for the October 19, 1998 Statement of Additional Information.
- ----------------------------- ------------------------------
NOT FDIC-INSURED MAY LOSE VALUE
NO BANK GUARANTEE
- ----------------------------- ------------------------------
