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SUBJECT TO COMPLETION, DATED JULY 30,1996
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Statement of Additional Information shall not constitute an
offer to sell or the solicitation of an offer to buy nor shall there be any sale
of these securities in any State in which such offer, solicitation or sale would
be unlawful prior to registration or qualification under the securities laws of
any such state.
SAFECO TAXABLE BOND TRUST:
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
SAFECO MANAGED BOND TRUST:
SAFECO MANAGED BOND FUND
SAFECO TAX-EXEMPT BOND TRUST:
SAFECO MUNICIPAL BOND FUND
SAFECO CALIFORNIA TAX-FREE INCOME FUND
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
SAFECO MONEY MARKET TRUST:
SAFECO MONEY MARKET FUND
ADVISOR CLASS A
ADVISOR CLASS B
Statement of Additional Information
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus for the funds listed above (each a "Fund"). A
copy of the Prospectus may be obtained by writing SAFECO Mutual Funds, Advisor
Class Shares, P.O. Box 34890, Seattle, Washington 98124-1890, or by calling TOLL
FREE: 1-800-463-8791
The date of the most current Prospectus of the Funds to which this Statement of
Additional Information relates is September 30, 1996.
The date of this Statement of Additional Information is September 30, 1996.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT POLICIES........................................................................ 1
INVESTMENT POLICIES OF THE INTERMEDIATE TREASURY FUND...................................... 2
INVESTMENT POLICIES OF THE MANAGED BOND FUND............................................... 5
INVESTMENT POLICIES OF THE TAX-EXEMPT INCOME FUNDS......................................... 9
INVESTMENT POLICIES OF THE MONEY MARKET FUND .............................................. 14
ADDITIONAL INVESTMENT INFORMATION.......................................................... 16
INVESTMENT RISKS OF CONCENTRATION IN CALIFORNIA AND
WASHINGTON ISSUERS................................................................... 22
PRINCIPAL SHAREHOLDERS OF CERTAIN FUNDS.................................................... 33
ADDITIONAL TAX INFORMATION................................................................. 34
CONVERSION OF ADVISOR CLASS B SHARES....................................................... 36
ADDITIONAL INFORMATION ON CALCULATION OF NET ASSET
VALUE PER SHARE...................................................................... 36
ADDITIONAL PERFORMANCE INFORMATION......................................................... 38
ADDITIONAL INFORMATION ON DIVIDENDS........................................................ 45
TRUSTEES AND OFFICERS...................................................................... 45
INVESTMENT ADVISORY AND OTHER SERVICES..................................................... 51
BROKERAGE PRACTICES........................................................................ 57
REDEMPTION IN KIND......................................................................... 57
FINANCIAL STATEMENTS....................................................................... 58
DESCRIPTION OF RATINGS..................................................................... 59
</TABLE>
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INVESTMENT POLICIES
SAFECO Intermediate-Term U.S. Treasury Fund ("Intermediate Treasury Fund") and
SAFECO Managed Bond Fund ("Managed Bond Fund") are series of SAFECO Taxable Bond
Trust ("Taxable Bond Trust") and SAFECO Managed Bond Trust ("Managed Bond
Trust"), respectively.
SAFECO Municipal Bond Fund ("Municipal Bond Fund"), SAFECO California Tax-Free
Income Fund ("California Fund") and SAFECO Washington State Municipal Bond Fund
("Washington Fund") (collectively, the "Tax-Exempt Income Funds") are series of
SAFECO Tax-Exempt Bond Trust ("Tax-Exempt Bond Trust").
SAFECO Money Market Fund ("Money Market Fund") is a series of SAFECO Money
Market Trust ("Money Market Trust").
The investment policies of each Fund are described in the Prospectus and this
Statement of Additional Information. These policies state the investment
practices that the Funds will follow, in some cases limiting investments to a
certain percentage of assets, as well as those investment activities that are
prohibited. The types of securities that a Fund may purchase are also disclosed
in the Prospectus. Before a Fund purchases a security that the following
policies permit, but that is not currently described in the Prospectus, the
Prospectus will be amended or supplemented to describe the security. If a
policy's percentage limitation is adhered to immediately after and as a result
of the investment, a later increase or decrease in values, net assets or other
circumstances will not be considered in determining whether a Fund complies with
the applicable limitation (except to the extent the change may impact a Fund's
borrowing limit).
Generally, the entity that has the ultimate responsibility for the payment of
interest and principal on a particular security is deemed to be its issuer for
purposes of the Tax-Exempt Income Funds' investment policies. The
identification of the issuer of a tax-exempt security for purposes of
diversification depends on the terms and conditions of the security. For
example, when the assets and revenues of an agency, authority, instrumentality
or other political subdivision are separate from those of the government
creating the subdivision and the security is backed only by the assets and
revenues of the subdivision, such subdivision would be deemed to be the sole
issuer for diversification purposes. Similarly, in the case of an industrial
development bond, if that bond is backed only by the assets and revenues of the
non-governmental user, then such non-governmental user would be deemed to be the
sole issuer for purposes of diversification. If, however, in either case, the
creating government or some other entity guarantees a security, such a guarantee
would be considered a separate security which must be valued and included in
each Tax-Exempt Fund's five percent (5%) limitation on investments in one
issuer.
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Each Fund's fundamental policies may not be changed without the approval of a
"majority of its outstanding voting securities," as defined in the Investment
Company Act of 1940, as amended ("1940 Act"). For purposes of such approval, the
vote of a majority of the outstanding voting securities of a Fund means the
vote, at a meeting of the shareholders of such Fund duly called, (I) of
sixty-seven percent (67%) or more of the voting securities present at such
meeting if the holders of more than fifty percent (50%) of the outstanding
voting securities are present or represented by proxy, or (ii) of more than
fifty percent (50%) of the outstanding voting securities, whichever is less.
Non-fundamental policies may be changed by each Trust's Board of Trustees
without shareholder approval.
INVESTMENT POLICIES OF THE INTERMEDIATE TREASURY FUND
The Intermediate Treasury Fund has adopted the following
fundamental investment policies. The Intermediate Treasury Fund
will NOT:
FUNDAMENTAL INVESTMENT POLICIES
1. Purchase the securities of any issuer (except the U.S.
Government, its agencies or instrumentalities) if as a
result more than five percent (5%) of the value of its total
assets at the time of purchase would be invested in the
securities of such issuer, except that up to twenty-five
percent (25%) of the value of the Fund's assets (which
twenty-five percent (25%) shall not include securities
issued by another investment company) may be invested
without regard to this five percent (5%) limitation;
2. Underwrite any issue of securities, except to the extent
that the purchase of permitted investments directly from the
issuer in accordance with the Fund's investment objective,
policies and restrictions and the subsequent disposition
thereof may be deemed to be underwriting or the later
disposition of restricted securities acquired within the
limits imposed on the acquisition of such securities may be
deemed to be an underwriting;
3. Purchase or sell real estate, but this shall not prevent the
Fund from investing in municipal obligations or other
permitted investments secured by real estate or interests
therein;
4. Purchase or retain for the Fund's portfolio the securities of any issuer,
if, to the Fund's knowledge, the officers or directors of the Fund, or its
investment adviser, who individually own more than one-half (1/2) of one
percent (1%)
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of the outstanding securities of such an issuer, together own
more than five percent (5%) of such outstanding securities;
5. Borrow money, except from a bank or SAFECO Corporation or its affiliates
at an interest rate not greater than that available to the Fund from
commercial banks, for temporary or emergency purposes and not for
investment purposes, and then only in an amount not exceeding twenty
percent (20%) of the value of the Fund's total assets at the time of such
borrowing;
The Fund will not purchase securities if borrowings equal to or greater
than five percent (5%) of the Fund's total assets are outstanding;
6. Pledge, mortgage or hypothecate its assets, except that to secure
borrowings permitted by subparagraph (5) above, it may pledge securities
having a market value at the time of pledge not exceeding ten percent
(10%) of the cost of the Fund's total assets;
7. Purchase or sell commodities or commodity contracts, other than futures
contracts, or invest in oil, gas or other mineral exploration or
development programs or in arbitrage transactions;
8. Make short sales of securities or purchase securities on margin, except
for margin deposits in connection with futures contracts and such
short-term credits as are necessary for the clearance of transactions;
9. Participate on a joint or a joint-and-several basis in any trading account
in securities, except that the Fund may, for the purpose of seeking better
net results on portfolio transactions or lower brokerage commission rates,
join with other transactions executed by the investment adviser or the
investment adviser's parent company and any subsidiary thereof;
10. Purchase from or sell portfolio securities to any officer or director, the
Fund's investment adviser, principal underwriter or any affiliates or
subsidiaries thereof; provided, however, that this prohibition shall not
prohibit the Fund from purchasing with the up to $7,000,000 raised through
the sale of up to 700,000 shares of common stock to SAFECO Life Insurance
Company, portfolio securities from subsidiaries of SAFECO Corporation
prior to the effective date of the Fund's initial public offering;
11. Purchase securities (other than obligations issued or guaranteed by the
United States Government, its agencies or
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instrumentalities), if as a result twenty-five percent (25%) or more of
the Fund's total assets would be invested in one industry (governmental
issuers of securities are not considered part of any one industry);
12. Purchase shares of common stock, other than those issued by other
regulated investment companies only, when the acquisition of such common
stocks, rights or other equity interests is consistent with the Fund's
investment objective. Generally, the Fund will only hold such equity
securities as a result of purchases or unit offerings of fixed-income
securities which include such equity securities or in connection with an
actual or proposed conversion or exchange of fixed-income securities;
13. Issue or sell any senior security, except that this restriction shall not
be construed to prohibit the Fund from borrowing funds (I) on a temporary
basis as permitted by Section 18(g) of the 1940 Act or (ii) from any bank
provided, that immediately after such borrowing, there is an asset
coverage of at least three hundred percent (300%) for all such borrowings
and provided, further, that in the event that such asset coverage shall at
any time fall below three hundred percent (300%), the Fund shall, within
three (3) days thereafter (not including Sundays and holidays), or such
longer period as the Securities and Exchange Commission ("SEC") may
prescribe by rules and regulations, reduce the amount of its borrowings to
an extent that the asset coverage of such borrowings shall be at least
three hundred percent (300%). For purposes of this restriction, the terms
"senior security" and "asset coverage" shall be understood to have the
meaning assigned to those terms in Section 18 of the 1940 Act;
14. Purchase securities of any issuer, if, as a result, more than ten percent
(10%) of any class of securities of such issuer would be owned by the
Fund;
15. With respect to one hundred percent (100%) of the value of its total
assets, purchase more than ten percent (10%) of the outstanding voting
securities of any one issuer (other than U.S. Government securities);
16. Purchase or otherwise acquire securities which are illiquid or subject to
legal or contractual restrictions on resale, if as a result more than ten
percent (10%) of the Fund's total assets would be invested in such
securities; or
17. Make loans, except through the purchase of a portion or all of an issue of
debt or money market securities in accordance with its investment
objective, policies and restrictions, or through investments in qualified
repurchase agreements
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(provided, however, that the Fund shall not invest more than ten percent
(10%) of its total assets in qualified repurchase agreements maturing in
more than seven (7) days), or through qualified loan agreements (by making
secured loans of its portfolio securities which amount to not more than
five percent (5%) of its total assets).
NON-FUNDAMENTAL INVESTMENT POLICIES
In addition to the policies described in the Prospectus, the Intermediate
Treasury Fund has adopted the following non-fundamental investment policies
which may be changed by the Taxable Bond Trust's Board of Trustees without
shareholder approval:
1. The Fund will not invest more than five percent (5%) of its total assets
in securities of issuers, including their predecessors, which have been in
operation for less than three years.
2. The Fund will not issue long-term debt securities.
3. The Fund will not invest in securities with unlimited liability, i.e.,
securities the holder of which may be assessed for amounts in addition to
the subscription or other price paid for the security.
4. The Fund will not trade in foreign currency, except as may be necessary to
convert the proceeds of the sale of foreign securities in the Fund's
portfolio into U.S. dollars.
5. The Fund may purchase "when-issued" or "delayed-delivery" securities or
purchase or sell securities on a "forward commitment" basis.
6. The Fund will not invest in any security issued by a commercial bank
unless (a) the bank has total assets of at least $1 billion, or the
equivalent in other currencies, or, in the case of a United States bank
which does not have assets of at least $1 billion, the aggregate
investment made in any one such bank is limited to $100,000 and the
principal sum of each investment is insured in full by the Federal Deposit
Insurance Corporation ("FDIC"), (b) in the case of a U.S. bank, it is a
member of the FDIC and (c) in the case of a foreign bank, the security is,
in the opinion of the Fund's investment adviser, of an investment quality
comparable with other debt securities which may be purchased by the Fund.
These limitations do not prohibit investment in securities issued by
foreign branches of U.S. banks, provided the U.S. banks meet the foregoing
requirements.
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7. The Fund shall not engage primarily in trading for short-term profits, but
it may from time to time make investments for short-term purposes when
such action is believed to be desirable and consistent with sound
investment policy, and it may dispose of securities whenever its
investment adviser deems advisable without regard to the length of time
they have been held.
8. The Fund may invest up to five percent (5%) of its total assets in Yankee
Sector debt securities and up to five percent (5%) of its total assets in
Eurodollar bonds.
9. The Fund may invest up to five percent (5%) of its total assets in
securities the interest on which, in the opinion of counsel for the
issuer, is exempt from federal income tax.
INVESTMENT POLICIES OF THE MANAGED BOND FUND
FUNDAMENTAL INVESTMENT POLICIES
The Managed Bond Fund has adopted the following fundamental investment policies.
The Managed Bond Fund will NOT:
1. Purchase the securities of any issuer (except the U.S. Government, its
agencies or instrumentalities) if as a result more than five percent (5%)
of the value of total assets at the time of purchase would be invested in
the securities of such issuer, except that up to twenty-five percent (25%)
of the value of the Fund's assets (which twenty-five percent (25%) shall
not include securities issued by another investment company) may be
invested without regard to this five percent (5%) limitation;
2. Purchase the securities of any issuer (other than obligations of or
guaranteed by the U.S. Government, its agencies and instrumentalities) if,
as a result, more than ten percent (10%) of any class of securities of
such issuer will be held by the Fund;
3. With respect to one hundred percent (100%) of the value of its total
assets, purchase more than ten percent (10%) of the outstanding voting
securities of any one issuer (other than U.S. Government securities);
4. Purchase securities, if as a result, twenty-five percent (25%) or more of
the Fund's total assets would be invested in the securities of issuers
having their principal business activities in any one industry. Securities
of foreign banks and foreign branches of U.S. banks are considered to be
one industry. This limitation does not apply to obligations
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issued or guaranteed by the U.S. Government, its agencies or
instrumentalities or to certificates of deposit or bankers' acceptances
issued by domestic banks;
5. Purchase securities on margin, except for short-term credits necessary for
the clearance of transactions;
6. Make short sales of securities (sales of securities not presently owned);
7. Make loans, except through the purchase of a portion or all of an issue of
debt securities in accordance with the Fund's investment objective,
policies and restrictions or through investments in qualified repurchase
agreements;
8. Borrow money, except from a bank or SAFECO Corporation or its affiliates
at an interest rate not greater than that available to the Fund from
commercial banks, for temporary or emergency purposes and not for
investment purposes, and then only in an amount not exceeding twenty
percent (20%) of the value of the Fund's total assets (including
borrowings) less liabilities (other than borrowings) immediately after
such borrowing;
9. Underwrite any issue of securities, except to the extent that the purchase
of permitted investments directly from the issuer in accordance with the
Fund's investment objective, policies and restrictions and the subsequent
disposition thereof may be deemed to be underwriting or the later
disposition of restricted securities acquired within the limits imposed on
the acquisition of such securities may be deemed to be an underwriting;
10. Purchase or sell real estate or real estate limited partnerships (unless
acquired as a result of the ownership of securities or instruments) but
this shall not prevent the Fund from investing in permitted investments
secured by real estate or interests therein or in real estate investment
trusts;
11. Purchase or sell commodities, commodity contracts or futures contracts;
12. Participate on a joint or joint-and-several basis in any trading account
in securities, except that the Fund may join with other transactions
executed by the investment adviser or the investment adviser's parent
company and any subsidiary thereof, for the purpose of seeking better net
results on portfolio transactions or lower brokerage commission rates; or
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13. Issue or sell any senior security, except as permitted under the 1940 Act.
NON-FUNDAMENTAL INVESTMENT POLICIES
In addition to the policies described in the Prospectus, the Managed Bond Fund
has adopted the following non-fundamental policies which may be changed by the
Managed Bond Trust's Board of Trustees without shareholder approval:
1. The Fund will not issue long-term debt securities.
2. The Fund will not invest in any security for the purpose of acquiring or
exercising control or management of the issuer.
3. The Fund will not invest in oil, gas or other mineral exploration or
development programs or leases.
4. The Fund will not invest in or sell (write) puts, calls, straddles,
spreads or any combinations thereof.
5. The Fund will not invest more than five percent (5%) of its total assets
in securities of issuers (including predecessor companies of the issuer)
having a record of less than three years continuous operation.
6. The Fund will not invest in securities with unlimited liability, i.e.,
securities the holder of which may be assessed for amounts in addition
to the subscription or other price paid for the security.
7. The Fund will not invest more than ten percent (10%) of its total assets
in qualified repurchase agreements and will not invest in qualified
repurchase agreements maturing in more than seven (7) days.
8. The Fund will not purchase the securities of any other investment company,
except by purchase in the open market where no commission or profit to a
broker or dealer results from such purchase other than the customary
broker's commissions, or except as part of a merger, consolidation or
acquisition. The Fund shall not invest more than ten percent (10%) of its
total assets in shares of other investment companies, invest more than
five percent (5%) of its total assets in a single investment company nor
purchase more than three percent (3%) of the outstanding voting securities
of a single investment company.
9. The Fund will not purchase securities if borrowings equal to or greater
than five percent (5%) of the Fund's total assets are outstanding.
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10. The Fund will invest at least sixty-five percent (65%) of its total assets
in fixed income obligations.
11. The Fund will invest at least fifty percent (50%) of its total assets in
obligations of or guaranteed by the U.S. Government, its agencies and
instrumentalities.
12. The Fund may invest up to fifty percent (50%) of its total assets in
corporate debt securities or Eurodollar bonds.
13. The Fund may invest up to ten percent (10%) of its total assets in Yankee
Sector debt obligations.
14. The Fund may purchase securities on a when-issued or delayed-delivery
basis or may purchase or sell securities on a forward commitment basis.
15. The Fund may temporarily invest its cash in high quality commercial paper,
certificates of deposit, shares of no-load, open-end money market funds
(subject to the percentage limitations set forth in subparagraph 8 above),
repurchase agreements (subject to the limitations set forth in
subparagraph 7 above) or any other short-term instrument the Fund's
investment adviser deems appropriate.
16. The Fund may hold cash as a temporary defensive measure when market
conditions so warrant.
17. The Fund shall not engage primarily in trading for short-term profits, but
it may from time to time make investments for short-term purposes when
such action is believed to be desirable and consistent with sound
investment policy. The Fund may dispose of securities whenever it deems
advisable without regard to the length of time they have been held.
18. The Fund may invest up to five percent (5%) of its total assets in
securities the interest on which, in the opinion of counsel for the
issuer, is exempt from federal income tax.
WHILE THE FUND HAS THE AUTHORITY TO INVEST IN THE FOLLOWING TYPES OF SECURITIES,
IT HAS NO PRESENT INTENTION TO DO SO IN THE COMING YEAR. BEFORE THE FUND
PURCHASES ANY OF THESE SECURITIES, THE PROSPECTUS WILL BE AMENDED BY SUPPLEMENT
TO DESCRIBE THE SECURITY.
19. The Fund may invest up to five percent (5%) of its total assets in shares
of real estate investment trusts.
20. The Fund may purchase securities subject to legal or contractual
restrictions on resale or illiquid securities,
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if no more than fifteen percent (15%) of the Fund's total assets would be
invested in such securities.
21. The Fund may purchase foreign securities, provided that such purchase, at
the time thereof, would not cause more than ten percent (10%) of the total
assets of the Fund (taken at market value) to be invested in foreign
securities.
22. The Fund will not buy or sell foreign currency, except as may be necessary
to invest the proceeds of the sale of any foreign securities held by the
Fund in U.S. dollars.
INVESTMENT POLICIES OF THE TAX-EXEMPT INCOME FUNDS
FUNDAMENTAL INVESTMENT POLICIES
The WASHINGTON FUND has adopted the following fundamental investment policies.
The Washington Fund will NOT:
1. Purchase the securities of any issuer (except the U.S. Government, its
agencies or instrumentalities) if as a result more than five percent (5%)
of the value of the Fund's total assets would be invested in the
securities of such issuer, except that up to twenty-five percent (25%) of
the value of the Fund's total assets (which twenty-five percent (25%)
shall not include securities issued by another investment company) may be
invested without regard to this five percent (5%) limitation;
2. Underwrite any issue of securities, except to the extent that the purchase
of municipal obligations or other permitted investments directly from the
issuer in accordance with the Fund's investment objective, policies and
restrictions and the later disposition thereof may be deemed to be
underwriting;
3. Purchase or sell real estate, unless acquired as a result of the ownership
of securities or instruments, but this shall not prevent the Fund from
investing in municipal obligations or other permitted investments secured
by real estate or interests therein;
4. Borrow money, except from a bank or affiliates of SAFECO Corporation at an
interest rate not greater than that available to the Fund from commercial
banks, for temporary or emergency purposes and not for investment
purposes, and then only in an amount not exceeding twenty percent (20%) of
its total assets (including borrowings) less liabilities (other than
borrowings) immediately after such borrowing;
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5. Make loans, except through the purchase of a portion or all of an issue of
debt securities in accordance with the Fund's investment objective,
policies and restrictions and through investments in qualified repurchase
agreements;
6. Purchase or sell commodities, commodity contracts or futures;
7. Purchase securities, if as a result, twenty-five percent (25%) or more of
the Fund's total assets would be invested in the securities of issuers
having their principal business activities in any one industry
(governmental issuers of special or general tax-exempt securities are not
considered part of any one industry);
8. Issue or sell any senior security, except as permitted under the 1940 Act;
9. Permit twenty-five percent (25%) or more of the Fund's total assets to be
invested in municipal obligations and other permitted investments, the
interest on which is payable from revenues on similar types of projects.
As a matter of operating policy, similar types of projects may include
sports, convention or trade show facilities; airports or mass
transportation; sewage or solid waste disposal facilities; or air or water
pollution control projects; or
10. During normal market conditions, invest less than eighty percent (80%) of
the Fund's net assets in obligations the interest on which, in the opinion
of counsel for the issuer of the obligation, is exempt from federal income
tax.
The MUNICIPAL BOND and CALIFORNIA Funds have adopted the following fundamental
investment policies. The Funds will NOT:
1. Purchase the securities of any issuer (except the U.S. Government, its
agencies or instrumentalities), if as a result more than five percent (5%)
of the value of a Fund's total assets would be invested in the securities
of such issuer, except that up to twenty-five percent (25%) of the value
of a Fund's assets (which twenty-five percent (25%) shall not include
securities issued by another investment company) may be invested without
regard to this five percent (5%) limitation;
2. Underwrite any issue of securities, except to the extent that the purchase
of municipal obligations or other permitted investments directly from the
issuer in accordance with a Fund's investment objective, policies and
restrictions and the subsequent disposition thereof may be deemed to be
underwriting;
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<PAGE> 14
3. Purchase or sell real estate or real estate limited partnerships, but this
shall not prevent a Fund from investing in municipal obligations or other
permitted investments secured by real estate or interests therein;
4. Purchase or retain for a Fund's portfolio the securities of any issuer if,
to the Fund's knowledge, the officers or directors of the Fund, or its
investment adviser, who individually own more than one-half (1/2) of one
percent (1%) of the outstanding securities of such an issuer, together own
more than five percent (5%) of such outstanding securities;
5. Participate on a joint or a joint-and-several basis in any trading account
in securities, except that a Fund may, for the purpose of seeking better
net results on portfolio transactions or lower brokerage commission rates,
join with other transactions executed by the investment adviser or the
investment adviser's parent company and any subsidiary thereof;
6. Purchase from, or sell portfolio securities to, any officer or director,
the Fund's investment adviser, principal underwriter or any affiliates or
subsidiaries thereof;
7. Borrow money, except from a bank or affiliates of SAFECO Corporation at an
interest rate not greater than that available to a Fund from commercial
banks, for temporary or emergency purposes and not for investment purposes
and then only in an amount not exceeding twenty percent (20%) of its total
assets (including borrowings) less liabilities (other than borrowings)
immediately after such borrowing;
8. Pledge, mortgage or hypothecate its assets, except that, to secure
borrowings permitted by subparagraph 7 above, a Fund may pledge securities
having a market value at the time of pledge not exceeding ten percent
(10%) of the cost of a Fund's total assets;
9. Make loans, except through the purchase of a portion or all of an issue of
debt securities in accordance with a Fund's investment objective, policies
and restrictions and through investments in qualified repurchase
agreements (provided, however, that a Fund will not invest more than ten
percent (10%) of its total assets in qualified repurchase agreements
maturing in more than seven (7) days);
10. Purchase or sell commodities, commodity contracts or futures or invest in
oil, gas or other mineral exploration or development programs or leases;
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<PAGE> 15
11. Make short sales of securities or purchase securities on margin, except
for such short-term credits as are necessary for the clearance of
transactions, or purchase or sell any put or call options or combinations
thereof;
12. Knowingly purchase or otherwise acquire any securities that are subject to
legal or contractual restrictions on resale or for which there is no
readily available market;
13. Purchase securities (other than obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities), if as a result, more
than twenty-five percent (25%) of a Fund's total assets would be invested
in one industry (governmental issuers of special or general tax-exempt
securities are not considered part of any one industry);
14. Purchase an industrial development bond, if as a result of such purchase,
more than five percent (5%) of a Fund's total assets would be invested in
industrial revenue bonds where the payment of principal and interest is
the responsibility of a company with less than three years' operating
history;
15. Issue or sell any senior security, except that this restriction shall not
be construed to prohibit a Fund from borrowing funds (I) on a temporary
basis as permitted by Section 18(g) of the 1940 Act, or (ii) from any bank
provided, that immediately after such borrowing, there is an "asset
coverage" of at least three hundred percent (300%) for all such borrowings
and provided, further, that in the event that such "asset coverage" shall
at any time fall below three hundred percent (300%), the Fund shall,
within three (3) days thereafter (not including Sundays and holidays) or
such longer period as the SEC may prescribe by rules and regulations,
reduce the amount of its borrowings to an extent that the asset coverage
of such borrowings shall be at least three hundred percent (300%) (for
purposes of this restriction, the terms "senior security" and "asset
coverage" shall be understood to have the meanings assigned to those terms
in Section 18 of the 1940 Act);
16. Permit more than twenty percent (20%) of a Fund's net assets to be
invested, during normal market conditions, in securities the interest on
which is not, in its investment adviser's opinion, exempt from federal
income tax, as long as the Fund has its investment objective to provide as
high a level of current interest income exempt from federal income tax as
is consistent with the relative stability of capital. As a matter of
operating policy, the Funds' investment adviser may base its opinion on
the opinion of counsel for the issuer of the security;
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<PAGE> 16
17. Permit twenty-five percent (25%) or more of a Fund's total assets to be
invested in municipal obligations and other permitted investments, the
interest on which is payable from revenues on similar types of projects
such as sports, convention or trade show facilities; airports or mass
transportation; sewage or solid waste disposal facilities or air or water
pollution control projects;
18. MUNICIPAL BOND FUND ONLY: Permit twenty-five percent (25%) or more of the
Fund's total assets to be invested in securities whose issuers are located
in the same state; or
19. During normal market conditions, invest less than eighty percent (80%) of
a Fund's net assets in obligations the interest on which, in the opinion
of counsel for the issuer, is exempt from federal income tax (and, in the
case of the California Fund, also from California state personal income
tax).
NON-FUNDAMENTAL INVESTMENT POLICIES
In addition to the policies described in the Prospectus, the Tax-Exempt Income
Funds have adopted the following non-fundamental policies which may be changed
by the Board of Trustees without Shareholder approval.
1. Each Fund may invest in any of the following types of short-term,
tax-exempt obligations: municipal notes of issuers rated, at the time of
purchase, within one of the three highest grades assigned by Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies ("S&P") or Fitch Investors Services,
Inc. ("Fitch"); unrated municipal notes offered by issuers having
outstanding municipal bonds rated within one of the three highest grades
assigned by Moody's, S&P or Fitch; notes issued by or on behalf of
municipal issuers which are guaranteed by the U.S. Government; tax-exempt
commercial paper assigned one of the two highest grades by Moody's, S&P or
Fitch; certificates of deposit issued by banks with assets of
$1,000,000,000 or more and municipal obligations which have a maturity of
one year or less from the date of purchase.
2. Each Fund may invest in obligations of the U.S. Government, its agencies
or instrumentalities or in qualified repurchase agreements, the net
interest on which is taxable.
3. Each Fund may invest in municipal notes including tax anticipation,
revenue anticipation and bond anticipation notes and tax-exempt commercial
paper.
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<PAGE> 17
4. Each Fund may invest in repurchase agreements for a period longer than
seven days.
5. Each Fund may permit twenty-five percent (25%) or more of its assets to be
invested in industrial development bonds.
6. Each Fund may purchase or sell securities on a "when-issued" or
"delayed-delivery" basis.
In addition, the Washington Fund has adopted the following non-
fundamental policies. The Washington Fund:
1. May not make short sales of securities.
2. May not purchase securities on margin, except that a Fund may obtain such
short-term credits as are necessary for the clearance of transactions.
3. May not purchase or sell any put or call options or combinations thereof.
4. May not purchase any security, if as a result, more than fifteen percent
(15%) of its net assets would be invested in illiquid securities.
5. May not invest in oil, gas or other mineral exploration or development
programs or leases.
6. May not invest in real estate limited partnerships.
7. Will not purchase securities if borrowings equal to or greater than five
percent (5%) of its total assets are outstanding.
INVESTMENT POLICIES OF THE MONEY MARKET FUND
FUNDAMENTAL INVESTMENT POLICIES
The Money Market Fund has adopted the following fundamental policies. The Money
Market Fund will NOT:
1. Purchase securities of any issuer, other than obligations of, or
guaranteed by, the U.S. Government, its agencies or instrumentalities, if,
as a result, more than five percent (5%) of the value of the Fund's assets
would be invested in securities of such issuer;
2. Purchase more than ten percent (10%) of any class of securities of any
issuer. All issues of debt securities of any issuer are considered as one
class;
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<PAGE> 18
3. Concentrate more than twenty-five percent (25%) of the value of its total
assets in any one industry including securities issued by foreign banks
and foreign branches of U.S. banks; provided, however, that this
limitation does not apply to obligations issued or guaranteed by the U.S.
Government, or its agencies or instrumentalities, or to certificates of
deposit or bankers' acceptances issued by domestic banks;
4. Invest more than five percent (5%) of the Fund's total assets in
securities of issuers that with their predecessors have a record of less
than three years' continuous operation;
5. Invest more than five percent (5%) of the Fund's total assets in
securities restricted as to disposition under the federal securities laws;
6. Invest more than ten percent (10%) of the Fund's total assets in time
deposits, repurchase agreements maturing in more than seven days and other
non-negotiable instruments;
7. Enter into repurchase agreements if, as a result thereof, more than ten
percent (10%) of the Fund's total assets valued at the time of the
transaction would be subject to repurchase agreements maturing in more
than seven days;
8. Make loans to others, except through the purchase of publicly distributed
debt obligations or repurchase agreements;
9. Borrow money, except from a bank or affiliates of SAFECO Corporation at an
interest rate not greater than that available to the Fund from commercial
banks, for temporary or emergency purposes and not for investment
purposes, and then only in an amount not exceeding twenty percent (20%) of
its total assets (including borrowings) less liabilities (other than
borrowings) immediately after such borrowing. The Fund will not purchase
securities if borrowings in excess of five percent (5%) of the Fund's
total assets are outstanding;
10. Make short sales of securities or purchase securities on margin, except
for such short-term credits as are necessary for the clearance of
transactions, or purchase or sell any put or call options or combinations
thereof;
11. Pledge, mortgage or hypothecate, or in any other manner transfer as
security for indebtedness any security owned by the Fund, except as may be
necessary in connection with permissible borrowings mentioned in paragraph
9 above, and then such pledging, mortgaging or hypothecating may not
exceed fifteen percent (15%) of the Fund's total assets, taken at cost;
provided, however, that as a matter of operating policy the Fund will
limit any such pledging, mortgaging or hypothecating to ten percent (10%)
of its net
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<PAGE> 19
assets, taken at market, in order to comply with certain state investment
restrictions;
12. Purchase or retain securities of any issuer if any of the officers or
directors of the Fund or its investment adviser owns beneficially more
than one-half (1/2) of one percent (1%) of the securities of such issuer
and together own more than five percent (5%) of the securities of such
issuer;
13. Invest in commodities or commodity futures contracts or in real estate,
although the Fund may invest in securities which are secured by real
estate and securities of issuers that invest or deal in real estate;
14. Invest in interests in oil, gas or other mineral exploration or
development programs, although it may invest in securities of issuers that
invest in or sponsor such programs;
15. Purchase securities of other investment companies;
16. Underwrite securities issued by others except to the extent the Fund may
be deemed to be an underwriter, under the federal securities laws, in
connection with the disposition of portfolio securities; or
17. Issue or sell any senior security, except that this restriction shall not
be construed to prohibit the Fund from borrowing funds (I) on a temporary
basis as permitted by Section 18(g) of the 1940 Act, or (ii) from any bank
provided, that immediately after such borrowing, there is an asset
coverage of at least three hundred percent (300%) for all such borrowings
and provided, further, that in the event that such asset coverage shall at
any time fall below three hundred percent (300%), the Fund shall, within
three (3) days thereafter (not including Sundays and holidays), or such
longer period as the SEC may prescribe by rules and regulations, reduce
the amount of its borrowings to an extent that the asset coverage of such
borrowings shall be at least three hundred percent (300%) (for purposes of
this restriction, the terms "senior security" and "asset coverage" shall
be understood to have the meaning assigned to those terms in Section 18 of
the 1940 Act).
NON-FUNDAMENTAL INVESTMENT POLICIES
In addition to the policies described in the Prospectus, the
Money Market Fund has adopted the following non-fundamental policies which may
be changed by the Board of Trustees without Shareholder approval:
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<PAGE> 20
1. The Fund will not invest in securities with unlimited liability; e.g.,
securities the holder of which may be assessed for amounts in addition to
the subscription or other price paid for the security.
2. The Fund will not buy or sell foreign currency, except as may be necessary
to convert the proceeds of the sale of foreign securities in the Fund's
portfolio into U.S. dollars.
3. The Fund may invest up to five percent (5%) of its total assets in
restricted securities eligible for resale under Rule 144A ("Rule 144A
securities") or Section 4(2) of the Securities Act of 1933 ("Section 4(2)
securities"), provided that SAFECO Asset Management Company ("SAM"), the
Fund's investment advisor, has determined that such securities are liquid
under guidelines adopted by the Board of Trustees.
ADDITIONAL INVESTMENT INFORMATION
INTERMEDIATE TREASURY FUND
The Intermediate Treasury Fund may make the following investments, among others,
although it may not buy all of the types of securities that are described.
1. RESTRICTED SECURITIES AND RULE 144A SECURITIES. Restricted securities are
securities that may be sold only in a public offering with respect to
which a registration statement is in effect under the 1933 Act or, if they
are unregistered, in a privately negotiated transaction or pursuant to an
exemption from registration. In recognition of the increased size and
liquidity of the institutional markets for unregistered securities and the
importance of institutional investors in the formation of capital, the
Securities and Exchange Commission ("SEC") has adopted Rule 144A under the
1933 Act, which is designed to further facilitate efficient trading among
institutional investors by permitting the sale of Rule 144A securities to
qualified institutional buyers without registration under the 1933 Act. To
the extent privately placed securities held by the Fund qualify under Rule
144A and an institutional market develops for those securities, the Fund
likely will be able to dispose of the securities without registering them
under the 1933 Act. SAM, acting under guidelines established by the
Trust's Board of Trustees, may determine that certain securities qualified
for trading under Rule 144A are liquid.
Where registration is required, the Fund may be obligated to pay all or
part of the registration expenses, and a considerable period may elapse
between the decision to sell and the time the Fund may be permitted to
sell a security
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<PAGE> 21
under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell. To the extent
privately placed securities are illiquid, purchases thereof will be
subject to any limitations on investments in illiquid securities.
Restricted securities for which no market exists are priced at fair value
as determined in accordance with procedures approved and periodically
reviewed by the Trust's Board of Trustees.
2. REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which the
Fund purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at
an agreed upon date and price reflecting a market rate of interest
unrelated to the coupon rate or maturity of the purchased securities. The
Fund maintains custody of the underlying securities prior to their
repurchase; thus, the obligation of the bank or dealer to pay the
repurchase price on the date agreed to is, in effect, secured by such
securities. If the value of these securities is less than the repurchase
price, plus any agreed-upon additional amount, the other party to the
agreement must provide additional collateral so that at all times the
collateral is at least equal to the repurchase price, plus any agreed-upon
additional amount.
The Fund intends to enter into repurchase agreements only with banks and
dealers in transactions believed by SAM to present minimum credit risks in
accordance with guidelines established by the Trust's Board of Trustees.
SAM will review and monitor the creditworthiness of those institutions
under the general supervision of the Board of Trustees.
3. WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES. In addition to the policies
described in the Prospectus, the Tax-Exempt Income Funds have adopted the
following non-fundamental policies which may be changed by the Board of
Trustees without Shareholder approval.
The Fund will commit to purchase such securities only with the intent of
actually acquiring the securities when issued. Assets which are
short-term, high-quality obligations will be segregated in anticipation of
making payments for securities purchased on a when-issued basis.
4. YANKEE DEBT SECURITIES AND EURODOLLAR BONDS. Yankee debt securities are
securities issued in the U.S. by foreign issuers. These bonds involve
investment risks that are different from those of domestic issuers. Such
risks may include nationalization of the issuer, confiscatory taxation
- 19 -
<PAGE> 22
by the foreign government, establishment of controls by the foreign
government that would inhibit the ability of the issuer to make principal
and interest payments to the Fund, lack of comparable publicly available
information concerning foreign issuers, lack of comparable accounting and
auditing practices in foreign countries and finally, difficulty in
enforcing claims against foreign issuers in the event of default.
SAM will make every effort to analyze potential investments in foreign
issuers on the same basis as the rating services analyze domestic issuers.
Because public information is not always comparable to that available on
domestic issuers, this may not be possible. Therefore, while SAM will make
every effort to select investment in foreign securities on the same basis
relative to quality and risk as its investments in domestic securities,
that may not always be possible.
Eurodollar bonds are denominated in U.S. dollars. The Fund will purchase
Eurodollar bonds through U.S. securities dealers and hold such bonds in
the U.S. The delivery of Eurodollar bonds to the Fund's custodian in the
U.S. may cause slight delays in settlement which are not anticipated to
affect the Fund in any material, adverse manner. Eurodollar bonds issued
by foreign issuers are subject to the same risks as Yankee sector bonds.
5. MUNICIPAL SECURITIES. Municipal securities include obligations issued by
or on behalf of the states, territories and possessions of the United
States and the District of Columbia and their political subdivisions,
agencies, instrumentalities or authorities, the interest on which, in the
opinion of counsel to the issuer, is exempt from federal income tax.
Generally, when market interest rates rise, the price of municipal
securities will fall, and when market interest rates fall, the price of
these securities will rise. There is also a risk that the issuer of a
municipal security will fail to make timely payments of principal and
interest to the Fund.
6. ILLIQUID SECURITIES. Illiquid securities are securities that cannot be
sold within seven days in the ordinary course of business for
approximately the amount at which they are valued. Due to the absence of
an active trading market, the Fund may experience difficulty in valuing or
disposing of illiquid securities. SAM determines the liquidity of the
securities under guidelines adopted by the Trust's Board of Trustees.
MANAGED BOND FUND
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<PAGE> 23
The Managed Bond Fund may make the following investments, among others, although
it may not buy all of the types of securities that are described.
1. REPURCHASE AGREEMENTS. See the description of such securities under
"Additional Investment Information-- Intermediate Treasury Fund" on page
17.
2. WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES. See the description of such
securities under "Additional Investment Information--Intermediate Treasury
Fund" on page 17.
3. YANKEE DEBT SECURITIES AND EURODOLLAR BONDS. See the description of such
securities under "Additional Investment Information--Intermediate Treasury
Fund" on page 18.
4. MUNICIPAL SECURITIES. See the description of such securities under
"Additional Investment Information -- Intermediate Treasury Fund" on page
18.
5. ASSET-BACKED SECURITIES. Asset-backed securities represent interests in,
or are secured by and payable from, pools of assets such as consumer
loans, automobile receivable securities, credit card receivable
securities, and installment loan contracts. The assets underlying the
securities are securitized through the use of trusts and special purpose
corporations. These securities may be supported by credit enhancements
such as letters of credit. Payment of interest and principal ultimately
depends upon borrowers paying the underlying loans. Repossessed collateral
may be unavailable or inadequate to support payments on defaulted
asset-backed securities. In addition, asset-backed securities are subject
to prepayment risks which may reduce the overall return of the investment.
Automobile receivable securities represent undivided fractional interests
in a trust whose assets consist of a pool of automobile retail installment
sales contracts and security interests in vehicles securing the contracts.
Payments of principal and interest on the certificates issued by the
automobile receivable trust are passed through periodically to certificate
holders and are generally guaranteed up to specified amounts by a letter
of credit issued by a financial institution. Certificate holders may
experience delays in payments or losses if the full amounts due on the
underlying installment sales contracts are not realized by the trust
because of factors such as unanticipated legal or administrative costs of
enforcing the contracts, or depreciation, damage or loss of the vehicles
securing the contracts.
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<PAGE> 24
Credit card receivable securities are backed by receivables from revolving
credit card accounts. Certificates issued by credit card receivable trusts
generally are pass-through securities. Competitive and general economic
factors and an accelerated cardholder payment rate can adversely affect
the rate at which new receivables are credited to an account, potentially
shortening the expected weighted average life of the credit card
receivable security and reducing its yield. Credit card accounts are
unsecured obligations of the cardholder.
TAX-EXEMPT INCOME FUNDS
The Tax-Exempt Income Funds may make the following investments, among others,
although they may not buy all of the types of securities that are described.
1. REPURCHASE AGREEMENTS. See the description of such securities under
"Additional Investment Information-- Intermediate Treasury Fund" on page
17.
2. WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES.
3. ILLIQUID SECURITIES. See the description of such securities under
"Additional Investment Information--Intermediate Treasury Fund" on page
18.
MONEY MARKET FUND
The Money Market Fund may make the following investments, among others, although
it may not buy all of the types of securities that are described.
1. QUALITY AND MATURITY. Pursuant to procedures adopted by the Money Market
Trust's Board of Trustees, the Fund may purchase only high-quality
securities that SAM believes present minimal credit risks. To be
considered high quality, a security must be rated, or the issuer must have
received a rating for a comparable short-term security, in accordance with
applicable rules in one of the two highest categories for short-term
securities by at least two nationally recognized rating services (or by
one, if only one rating service has rated the security); or, if unrated,
judged to be of equivalent quality by SAM.
High-quality securities are divided into "first tier" and "second tier"
securities. First tier securities are those deemed to be in the highest
rating category (e.g., A-1 by S&P) and second tier securities are those
deemed to be in the second highest rating category (e.g., A-2 by S&P).
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<PAGE> 25
The Fund may not invest more than five percent (5%) of its total assets in
second tier securities. In addition, the Fund may not invest more than one
percent (1%) of its total assets or $1 million (whichever is greater) in
the second tier securities of a single issuer.
The Fund currently intends to limit its investments to securities with
remaining maturities of 397 days or less, and to maintain a
dollar-weighted average maturity of 90 days or less. When determining the
maturity of a security, the Fund may look to an interest rate reset or
demand feature.
A security is considered to be rated if either the security itself is
assigned a rating or the issuer is assigned a rating for comparable
short-term debt obligations. Alternatively, a security (whether or not
rated) with an unconditional demand feature (as defined in Rule 2a-7 under
the 1940 Act) may be considered to be rated if the demand feature or its
issuer has been assigned a rating. See "Description of Ratings" on page 59
for further explanation of rating categories.
2. RESTRICTED SECURITIES AND RULE 144A SECURITIES. See the description of
such securities under "Additional Investment Information--Intermediate
Treasury Fund" on page 16.
3. VARIABLE AND FLOATING RATE INSTRUMENTS. Certain municipal obligations may
carry variable or floating rates of interest. Variable rate instruments
bear interest at rates that are readjusted at periodic intervals so as to
cause the instruments' market value to approximate their par value.
Floating rate instruments bear interest at rates which vary automatically
with changes in specified market rates or indices, such as the bank prime
rate. The Fund's right to obtain payment at par on a demand instrument
upon demand could be affected by events occurring between the date the
Fund elects to redeem the instrument and the date redemption proceeds are
due which affect the ability of the issuer to pay the instrument at par
value.
4. TERM PUT BONDS. Term put bonds are variable rate obligations which have a
maturity in excess of one year with the option to put back (sell back) the
bonds on a specified put date. On the put date, the interest rate of the
bond is reset according to current market conditions and accrues at the
reset rate until the next put date. The Fund may also hold mandatory put
bonds. Mandatory put bonds require the holder to take certain action to
retain the bonds. Put bonds are generally credit-enhanced by collateral,
guaranteed investment contracts, surety bonds, a letter of credit or
insurance which guarantees the payment of principal and interest.
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<PAGE> 26
5. ILLIQUID SECURITIES. See the description of such securities under
"Additional Investment Information--Intermediate Treasury Fund" on page
18.
6. FOREIGN ISSUERS. Obligations of foreign issuers involve certain additional
risks. These risks may include future unfavorable political and economic
developments, withholding taxes, seizures of foreign deposits, currency
controls, interest limitations, or other governmental restrictions that
might affect payment of principal or interest. Additionally, there may be
less public information available about foreign banks and their branches.
Foreign issuers may be subject to less governmental regulation and
supervision than U.S. issuers. Foreign issuers also generally are not
bound by uniform accounting, auditing and financial reporting requirements
comparable to those applicable to U.S. issuers.
7. SECURITIES ISSUED BY BANKS. Investments may be made in U.S.
dollar-denominated time deposits, certificates of deposit, and bankers'
acceptances of U.S. banks and their branches located outside of the United
States, U.S. branches and agencies of foreign banks and foreign branches
of foreign banks. The Fund may also invest in U.S. dollar-denominated
securities issued or guaranteed by other U.S. or foreign issuers,
including U.S. and foreign corporations or other business organizations,
foreign governments, foreign government agencies or instrumentalities and
U.S. and foreign financial institutions, including savings and loan
institutions, insurance companies and mortgage bankers, as well as banks.
The obligations of foreign branches of U.S. banks may be general
obligations of the parent bank in addition to the issuing branch, or may
be limited by the terms of a specific obligation and by governmental
regulation. Payment of interest and principal on these obligations may
also be affected by governmental action in the country of domicile of the
branch (generally referred to as sovereign risk). In addition, evidence of
ownership of portfolio securities may be held outside of the U.S. and the
Fund may be subject to the risks associated with the holding of such
property overseas. Various provisions of federal law governing the
establishment and operation of U.S. branches do not apply to foreign
branches of U.S. banks.
Obligations of U.S. branches and agencies of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may
be limited by the terms of a specific obligation and by federal and state
regulation, as well as by governmental action in the country in which the
foreign bank has its head office.
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<PAGE> 27
INVESTMENT RISKS OF CONCENTRATION IN CALIFORNIA AND WASHINGTON ISSUERS
CALIFORNIA FUND
The following is a condensed and general description of the judicial,
legislative and electoral proceedings affecting the taxing ability and fiscal
condition of the State of California and its various political subdivisions
which have occurred since June 1978. All of these proceedings affect the
continuing ability of California political subdivisions to meet their debt
service obligations. Since during normal market conditions the Fund plans to
invest at least 80% of its net assets in bonds issued by California and its
political subdivisions, the investment risk of such concentration should be
carefully considered. The description below summarizes discussions contained in
official statements relating to various types of bonds issued by the State of
California and its political subdivisions. A more detailed description can be
found in such official statements. The California Fund has not independently
verified any of the information presented in this section.
The taxing powers of California public agencies are limited by Article XIII A
of the State Constitution, added by an initiative amendment approved by voters
on June 6, 1978, and commonly known as Proposition 13. Article XIII A limits
the maximum ad valorem tax on real property to one percent of "full cash value"
which is defined as "the County Assessor's valuation of real property as shown
on the fiscal year 1975-76 tax bill under 'full cash value' or, thereafter, the
appraised value of real property when purchased, newly constructed, or a change
in ownership has occurred after the 1975 assessment." The full cash value may be
adjusted annually to reflect inflation at a rate not to exceed two percent per
year, or reduction in the consumer price index or comparable local data, or
declining property value caused by damage, destruction, or other factors.
The tax rate limitation referred to above does not apply to ad valorem taxes to
pay the interest and redemption charges on any indebtedness approved by the
voters before July 1, 1978 or any bonded indebtedness for the acquisition or
improvement of real property approved by two-thirds of the votes cast by the
voters voting on the proposition. Article XIII A also requires a two-thirds vote
of the electors prior to the imposition of any special taxes and totally
precludes the imposition of any new ad valorem taxes on real property or sales
or transaction taxes on the sales of real property. The validity of Article XIII
A has been upheld by both the California Supreme Court and the United States
Supreme Court.
Legislation adopted in 1979 exempts business inventories from taxation. However,
the same legislation provides a formula for
- 25 -
<PAGE> 28
reimbursement by California to cities and counties, special districts and school
districts for the amount of tax revenues lost by reason of such exemption or
adjusted for changes in the population and the cost of living. Legislation
adopted in 1980 provides for state reimbursements to redevelopment agencies to
replace revenues lost due to the exemption of business inventories from
taxation. Such legislation provides for restoration of business inventory tax
revenues through the annual addition of artificial assessed value, not actually
existing in a project area, to the tax rolls of redevelopment projects. These
reimbursements are adjusted for changes in the population and the cost of
living. All such reimbursements are subject to change or repeal by the
Legislature, and they have been changed since 1980. Furthermore, current law
generally prohibits the pledging of such reimbursement revenues to secure
redevelopment agency bonds.
Redevelopment agencies in California have no power to levy and collect taxes;
hence, any decrease in property taxes or limitations in the amounts by which
property taxes may increase adversely affects such agencies, which lack the
inherent power to correct for such decreases or limitations.
State and local government agencies in California and the State itself are
subject to annual "appropriation limits" imposed by Article XIII B, an
initiative constitutional amendment approved by the voters on November 6, 1979,
which prohibits government agencies and the State from spending "appropriations
subject to limitation" in excess of the appropriations limit imposed.
"Appropriations subject to limitation" are authorizations to spend "proceeds of
taxes", which consist of tax revenues, certain State subventions and certain
other funds, including proceeds from regulatory licenses, user revenues, certain
State subventions and certain other funds to the extent that such proceeds
exceed "the cost reasonably born by such entity in providing the regulation,
product, or service." No limit is imposed on appropriation of funds which are
not "proceeds of taxes", on debt service or indebtedness existing or authorized
by January 1, 1979, or subsequently authorized by the voters, or appropriations
required to comply with mandates of courts or the federal government, or user
charges or fees that do not exceed the cost of the service provided, nor on
certain other non-tax funds.
By statute (which has been upheld by the California Court of Appeals), tax
revenues allocated to redevelopment agencies are not "proceeds of taxes" within
the meaning of Article XIII B, and the expenditure of such revenues is therefore
not subject to the limitations under Article XIII B.
The imposition of taxes by local agencies is further limited by the provisions
of an initiative statute ("Proposition 62")
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<PAGE> 29
approved by the voters on November 4, 1986. The statute (i) requires that any
tax for general governmental purposes imposed by local government entities be
approved by resolution or ordinance adopted by two-thirds vote of the
governmental entity's legislative body and by a majority vote of the electorate
of the governmental entity, (ii) requires that any special tax (defined as a tax
levied for other than general governmental purposes) imposed by a local
governmental entity be approved by a two-thirds vote of the voters within that
jurisdiction, (iii) restricts the use of revenues from a special tax to the
purposes or for the service for which the special tax was imposed, (iv)
prohibits the imposition of ad valorem taxes on real property by local
governmental entities except as permitted by Article XIII A, (v) prohibits the
imposition of transaction taxes and sales taxes on the sale of real property by
local governmental entities and (vi) requires that any tax imposed by a local
governmental entity on or after May 1, 1985 be ratified by a majority vote of
the electorate within two years of the adoption of the initiative or be
terminated by November 15, 1988.
Subsequent decisions of California Courts of Appeal held that all or portions of
the provisions of Proposition 62, including those requiring the submission of
general fund tax measures to the electorate, are unconstitutional. However, on
September 28, 1995, in the case of Santa Clara County Local Transportation
Authority v. Guardino, the California Supreme Court upheld the constitutionality
of Proposition 62. As a result, the annual revenues of any local government or
district as shown in the general fund budget must be reduced in any year to the
extent that they rely on the proceeds of any general tax which has not been
approved by majority vote of the electorate. Senate Bill No. 1590 has been
introduced in the California Legislature in an effort to clarify whether the
general tax voter approval requirement is applicable to any tax that was imposed
or increased by an ordinance or resolution adopted prior to December 14, 1995.
If adopted, Senate Bill No. 1590 will apply the Guardino decision prospectively
only.
An initiative petition called the "Right to Vote on Taxes Act" is expected to
qualify for the November 5, 1996 general election ballot. If this measure
receives the requisite number of signatures for inclusion on the ballot and if
it is approved by majority vote of the electorate, it will add Articles XIII C
and XIII D to the State Constitution. The measure requires that general tax
increases by all local government entities be approved by not less than a
majority vote and that taxes for special purposes be approved by a two-thirds
vote; provides that existing language in the California Constitution shall not
be construed to limit the initiative power with respect to reducing or repealing
any local tax, assessment, fee or charge; prescribes procedures applicable to
all assessments and requires that all assessments be approved by property
owners; prohibits property
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related fees and charges from exceeding costs of the service being provided;
imposes procedural requirements, including notice and public hearing, prior to
imposition of new or increased fees or charges on property; and requires that,
except for fees for sewer, water and refuse collection, fees be approved by a
majority vote of the fee payers.
Generally, revenues derived from most utility property assessed by the State
Board of Equalization are allocated as follows: (i) each jurisdiction, including
redevelopment project areas, receives up to 102 percent of its prior year
State-assessed revenue; and (ii) if countrywide revenues generated from such
utility property are less than the previous year's revenue or greater than 102
percent of the previous year's revenues, each jurisdiction shares the burden of
the shortfall or benefit from the excess revenues by a specified formula. This
provision applies to all utility property except railroads whose valuation will
continue to be allocated to individual tax rate areas. In a 1991 Superior Court
ruling, the valuation method used by the State Board to value unitary utility
property was declared illegal and a new method was imposed, resulting in
significantly lower values and therefore significantly reduced property tax
revenues. One of the effects of the decision was to entitle the principal
utility plaintiff to a refund of $9 million. As a result of this case, the State
Board along with certain counties signed a settlement agreement with several
affected utilities providing for an orderly 10.5% phase-down of tax assessments
over fiscal years 1992-93, 1993-94 and 1994-95.
Lease-based financing, typically marketed in the form of certificates of
participation, has been extremely popular in California, since the courts have
long held that properly structured long-term leases do not create "indebtedness"
for purposes of constitutional and statutory debt limitations. The obligation to
pay rent thereunder is nevertheless enforceable, on an annual basis, so long as
the leased property is available for use and occupancy by the government lessee.
The risk of rent abatement (because of construction delays, damage to structures
and the like) is usually mitigated by funded reserves, casualty insurance and
rental interruption insurance.
Given the turbulent history of California electoral, judicial and legal
proceedings affecting taxation since 1978, it is impossible to predict what
proceedings might occur in the future that would affect the ability of
California and its political subdivisions to service their outstanding
indebtedness. In addition, there are both nuclear and non-nuclear electric power
authorities in California that are financed in whole or in part by so-called
"take or pay" or "hell or high water" contracts. Court decisions outside of the
State of California have called into question the enforceability of such
contracts.
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The State of California recently issued general obligation bonds in March, 1996.
The related Official Statement for that bond issue disclosed that the recent
recession has seriously affected State tax revenues, has caused increased
expenditures for health and welfare programs, and has caused a structural
imbalance in the State's budget, with the largest programs supported by the
General Fund -- K-12 schools and community colleges, health and welfare, and
corrections -- growing at rates higher than the growth rates for the principal
revenue sources of the General Fund. As a result, the State has experienced
recurring budget deficits and has had to use a series of external borrowings to
meet its cash needs.
The Governor's budget proposal for 1996-97 released January 10, 1996, projects
General Fund revenues and transfers in the 1995-96 fiscal year of $45 billion
(an increase of approximately $900 million over the projection contained in the
original 1995-96 Budget Act) and expenditures of $44.2 billion (an increase of
approximately $800 million over the amount shown in the original 1995-96 Budget
Act). The Governor's Budget for 1996-97 estimates General Fund revenues and
transfers of about $45.6 billion, which would leave a balance of approximately
$400 million in the budget reserve, the Special Fund for Economic Uncertainties,
at June 30, 1997.
As a result of the deterioration in the State's budget and cash situation in
fiscal years 1991-92 and 1992-93, rating agencies reduced the State's credit
ratings. Between November 1991 and October 1992 the rating on the State's
general obligation bonds was reduced by Standard & Poor's Ratings Group from
"AAA" to "A+" and by Moody's Investors Service from "Aaa" to "Aa" and by Fitch
Investors Service, Inc. from "AAA" to "AA." On July 15, 1994, based on the
State's inability to eliminate its accumulated deficit, the same three rating
agencies further lowered their ratings on the State's general obligation bonds
to "A," "A1" and "A", respectively. More recently, however, Fitch Investors
Service, Inc. raised its rating from "A" to "A+." It is not possible to predict
the future course of the State's credit ratings.
On December 6, 1994, Orange County, California, together with its pooled
investment funds, filed for protection under Chapter 9 of the federal Bankruptcy
Code, after reports that the funds had suffered significant market losses in
their investments, causing a liquidity crisis for the funds and the County. More
than 200 other public entities, most of which, but not all, are located in the
County, were also depositors in the funds. As of mid-January, 1995, the County
estimated the funds' loss at about $1.69 billion, or 23% of their initial
deposits of approximately $7.5 billion. Many of the entities which deposited
moneys in the funds, including the County, faced interim or extended cash flow
difficulties because of the bankruptcy filing and may be required
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to reduce programs or capital projects. Orange County has embarked on a fiscal
recovery plan based on sharp reductions in services and personnel, and
rescheduling of outstanding short-term debt using certain new revenues
transferred to Orange County from other local governments pursuant to special
legislation approved by the bankruptcy judge on May 15, 1996. The State has no
existing obligation with respect to any outstanding obligations or securities of
Orange County or any of the other participating entities.
The Fund will attempt to achieve geographic diversification by investing in
obligations of issuers that are located in different areas within California as
well as obligations of the State of California itself. In addition, the Fund
will not invest more than 15% of its total assets in tax allocation bonds issued
by California redevelopment agencies. These are operating policies of the Fund
and may be changed without the approval of the Fund's shareholders.
WASHINGTON FUND
WASHINGTON STATE
A discussion of certain economic, financial and legal matters regarding the
State of Washington follows. During normal market conditions, the Washington
Fund will generally invest at least 80% of its net assets in bonds issued by
Washington and its political subdivisions, municipalities, agencies,
instrumentalities or public authorities. Therefore, the investment risk of such
concentration should be carefully considered. The information in the discussion
is drawn primarily from official statements relating to securities offerings of
the State which are dated prior to the date of this Statement of Additional
Information. This information may be relevant in evaluating the economic and
financial position of the State, but is not intended to provide all relevant
data necessary for a complete evaluation of the State's economic and financial
position. Discussions regarding the financial health of the State government may
not be relevant to municipal obligations issued by a political subdivision of
the State. Furthermore, general economic conditions discussed may or may not
affect issuers of the obligations of the State. The Washington Fund has not
independently verified any of the information presented in this section.
GENERAL INFORMATION
According to the U.S. Census Bureau's 1990 Census, Washington State's population
is ranked 18th of the 50 states. During the ten-year time period from 1980-1990,
the State's population increased at an average annual rate of 1.8%, while the
U.S. population grew at an average annual rate of 1.1%. The State's
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population increased at an average annual rate of approximately 2.5% 1990 to
1993, and at an average annual rate of approximately 1.8% from 1993 to 1995.
The State's largest city, Seattle, is part of an international trade,
manufacturing, high technology and business service corridor which extends along
Puget Sound from Everett to Tacoma. The State's Pacific Coast-Puget Sound region
includes 75% of its population, the major portion of its industrial activity and
the major part of the forests important to its timber and paper industries. The
remainder of the State has agricultural areas primarily devoted to grain, fruit
orchard and dairy operations.
The State's economy has recently diversified with employment in the trade and
service sectors representing an increasing portion of total employment relative
to the manufacturing sector. The rate of economic growth as measured by
employment in the State was 2.0% in 1992, 1.3% in 1993, 2.3% in 1994, 2.1% in
1995.
The State operates on a July 1 to June 30 fiscal year and on a biennial budget
basis. Fiscal controls are exercised during the biennium through an allotment
process which requires each agency to submit a monthly expenditure plan. The
plan must be approved by the Office of Financial Management, which is the
Governor's budget agency. It provides the authority for agencies to spend funds
within statutory maximums specified in a legislatively adopted budget. State law
requires a balanced biennial budget. Whenever it appears that disbursements will
exceed the aggregate of estimated receipts plus beginning cash surplus, the
Governor is required to reduce allotments, thereby reducing expenditures of
appropriated funds.
As interpreted by the State Supreme Court, Washington's Constitution prohibits
the imposition of net income taxes.
The State's tax revenues are primarily comprised of excise and ad valorem taxes.
By constitutional provision, the aggregate of all regular (unvoted) tax levies
on real and personal property by state and local taxing districts cannot exceed
1% of the true and fair value of the property. Excess levies are subject to
voter approval. For the fiscal year ending June 30, 1995, approximately 78.5% of
the State's tax revenues came from general and selective sales and gross
receipts taxes, of which the retail sales tax and its companion use tax
represented 46% of total collections. Business and occupation tax collections
represented about 16.6% and the motor vehicle fuel tax represented approximately
7.0% of total State taxes for the year. Ad valorem taxes represented 10.8% of
State revenues for the fiscal year 1995.
Expenditures of State revenues are made in accordance with constitutional and
statutory mandates.
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STATE EXPENDITURE LIMITATIONS
Initiative 601, which passed by the voters in November 1993, limits increases in
General Fund-State government expenditures to the average rate of population and
inflation growth, and sets forth a series of guidelines for limiting tax and
expenditure increases and stabilizing long range budget planning.
Provisions of Initiative 601 establish a procedure for computing a fiscal year
growth factor based on a lagged, three-year average of population and inflation
growth. This growth factor is used to determine a state spending limit for
programs and expenditures supported by the State General Fund. The growth factor
is 5.13% for fiscal year 1996 and 4.47% for fiscal year 1997. The initiative
creates two new reserve funds (the Emergency Reserve Fund and the Education
Construction Fund) for depositing revenues in excess of the spending limit and
abolishes the current Budget Stabilization Account. Ending balances in the
Budget Stabilization Account were transferred to the State General Fund ($100
million) and the Pension Reserve Account ($25 million). The initiative also
places restrictions on the addition or transfer of functions to local government
unless there is reimbursement by the State.
The Initiative's requirement for voter approval for new tax measures has
expired. Effective July 1, 1995, taxes can be enacted with a two-thirds majority
of both houses of the State Legislature if resulting General Fund-State
expenditures do not exceed the spending limit. Voter approval is still required
to exceed the spending limit. Thus far, the Initiative has not had a restrictive
impact on the State's budget. However, the State expects its expenditures to be
constrained by the Initiative beginning in the 1997-99 Biennium.
The State Constitution and enabling statutes authorize the incurrence of State
general obligation debt to the payment of which the State's full faith and
credit and taxing power are pledged. With certain exceptions, the amount of
State general obligation debt which may be incurred is limited by constitutional
and statutory restrictions. These limitations are imposed by prohibiting the
issuance of new debt if the new debt would cause the maximum annual debt service
on all thereafter outstanding general obligation debt to exceed a specified
percentage of the arithmetic mean of general State revenues for the preceding
three years. These limitations apply to the incurrence of new debt and are not
limitations on the amount of debt service which may be paid by the State in
future years.
The State Legislature is obligated to appropriate money for State debt service
requirements. Generally, on or before June 30 of each year, the State Finance
Committee certifies to the State Treasurer the
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amount required for payment of bond interest and principal for the coming year.
Some general obligation bond statutes provide that the General Fund will be
reimbursed from discrete revenues which are not considered general State
revenues. Other bonds are limited obligation bonds not payable from the General
Fund. For the 1995-97 Biennium, General Fund-State revenues are projected to be
$17.395 billion, an increase of 4.5% over the 1993-95 Biennium, plus a
carry-forward of $559 million. The revenue outlook for the 1995-97 Biennium is
stable and the General Fund is projected to end the Biennium with a $341 million
fund balance.
The State Legislature passed a 1993-95 Biennium Budget on May 6, 1993, and the
Governor signed the budget bill on May 28, 1993. The 1993-95 Biennium Budget
contained $650 million in general tax increases, $163 million in other revenues,
$700 million in program and administrative reductions, and $622 million in fund
shifts (such as to federal funding sources). The 1994 Supplemental Budget passed
the State Legislature on March 14, 1994, and the Governor signed the
Supplemental Budget bill on April 6, 1994. The 1994 Supplemental Budget included
$48 million in tax cuts, an $11 million revenue increase from a variety of
sources and $168 million in additional expenditures, many of which represented
one time investments.
The 1995 Supplemental Budget passed the State Legislature on May 1, 1995 and was
signed by Governor Lowry on May 9, 1995. The 1995 Supplemental Budget made
adjustments to expenditure authority for State agencies for the last quarter of
the Biennium. These budget adjustments reflected the most recent enrollment and
caseload estimates and addressed significant unexpected expenses, including
extraordinary costs of $47 million incurred in one of the worst forest fire
years since 1970. The 1995 Legislature also appropriated $110 million from the
General Fund to provide school construction funding in the K-12 system. Overall,
the 1995 Supplemental Budget expenditure adjustments and other 1993-95
appropriation bills in the 1995 Legislative session increased expenditures by
$114.5 million.
During the 1995 legislative session, Governor Lowry vetoed two bills that would
have cut taxes: House Bill 1997, an ongoing property tax bill that would cost
$92 million in the 1995-97 budget period and House bill 1023, which would roll
back business and occupation taxes, along with several other taxes, by $176.3
million in the 1995-97 Biennium.
For most municipalities in the State, the fiscal year is the calendar year
except that school districts have a September 1 - August 31 fiscal year. All
municipalities must maintain balanced budgets. Depending on the type of
municipality, local revenues are derived from ad valorem taxes, excise and gross
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receipts taxes, special assessments, fees, user charges and State and federal
grants.
Municipalities incur debt by the issuance of general obligations or other
borrowings which are payable from taxes, though other revenue sources may be
used. Revenue obligations do not constitute debt under constitutional and
statutory limitations as long as taxes are not pledged or used to pay debt
service. Only non-tax revenue from the operation of a project or enterprise
financed by the revenue obligations (and sometimes special assessments on
property benefitted from the financed improvements) may be used to pay that debt
service. Usually, revenue bonds are secured by a reserve funded in an amount
based on a factor of debt service. Many municipalities may issue improvement
district obligations payable only from special assessments on benefitted
property, but some of those obligations also may be secured by a special
guaranty fund.
ECONOMIC OVERVIEW
Over the past few years, the State's economic performance has remained
relatively strong compared to the U.S. as a whole. After adjusting for
inflation, growth in personal income in the State increased 3.7% in 1995 over
the 1994 level.
The State's economic base includes manufacturing and service industries as well
as agricultural and timber production. During 1990-1995, the State experienced
growth in non-manufacturing industries and a decline in manufacturing
industries. The rate of employment growth, which exceeded 4.5% during the
mid-to-late 1980's, has declined since 1991 to an average rate of 1.4%. The 1996
employment growth is expected to be 1.46%.
Washington's economy consists of both export and local industries. Leading
export industries are aerospace, forest products, agriculture and food
processing. The aerospace, timber and food processing industries together employ
approximately 9% of the State's non-farm workers. However, the non-manufacturing
sector has played an increasingly significant role in contributing to the
State's economy in recent years.
Below is a summary of key industry segments of the State's economy as well as of
selected economic and employment data.
Manufacturing. The Boeing Company ("Boeing"), which is the Seattle Metropolitan
Area's largest employer, has several facilities located throughout the area.
Boeing is the world's leading manufacturer of commercial airliners and as of
April 1996 employed approximately 74,000 people state-wide, primarily at several
locations in the area. Boeing anticipates bringing total employment in the State
to approximately 78,500 by the end of 1996. While the primary activity of Boeing
is the manufacture
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of commercial aircraft, Boeing has played leading roles in the aerospace and
military missile programs of the U.S. and has undertaken a broad program of
diversification activities including Boeing Information and Support Services. In
1995, Boeing had $19.5 billion in sales and net earnings of $393 million, and a
backlog of orders totaling $72.3 billion. Boeing currently anticipates 1996
sales to be in the $22 billion range.
Boeing recently completed two and is currently undertaking one major expansion
project. The company recently acquired a 212-acre site in Renton (King County),
which is the site of the former Longacres Race Track. The site will be used as a
location for the development of an office complex, the first building of which
will be a 500,000 square-foot customer service training center. In Everett
(Snohomish County), Boeing completed construction of a 5.6 million square-foot
assembly plant for the new 777 jetliner. In 1993, Boeing completed a $400
million skin and spar plant and a composite manufacturing center on 500 acres in
Puyallup (Pierce County).
A total of 206 commercial jet transports were delivered in 1995, compared with
270 for 1994. Defense and space sales of $5.6 billion were approximately 10%
higher than in 1994. The 10-week strike by the International Association of
Machinist and Aerospace Workers (IAM) resulted in the delay of approximately 30
commercial jet transport deliveries during the fourth quarter. During the first
quarter of 1996, deliveries for all models were limited by the recovery from the
strike. A total of 40 commercial jet transports were delivered, compared with 59
in the first quarter of 1995.
Technology-Related Industries. The State ranks fourth among all states in the
percentage of its work force employed by technology-related industries. It ranks
third among the largest software development centers. The State is the home of
approximately 1000 advanced technology firms of which approximately 50% are
computer-related. Microsoft, headquartered in Redmond, Washington, is the
largest microcomputer software company in the world. In addition, several
biotechnical firms located in the State have attained international acclaim for
their research and development.
Timber. Natural forests cover more than 40% of the State's land area and forest
products rank second behind aerospace in terms of total production. The primary
employer in the timber industry is The Weyerhaeuser Company. Productivity in the
State's forest products industry increased steadily from 1980 to 1990. However,
since 1991, recessionary influences have resulted in a production decline. A
slight decline is anticipated for 1996 and for the next few years, due to
federally-imposed limitations on the harvest of old-growth timber and the
inability to maintain the previous record levels of production increases.
Although a
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continued decline in employment is anticipated for 1996 in certain regions, the
impact is not expected to affect materially the State's overall economic
performance.
Agriculture and Food Processing. Agriculture and food processing is the State's
most important industry by most measures. Growth in agricultural products was an
integral factor in the State's economic growth in the late 1980s and early
1990s.
Finance, Insurance and Real Estate. Employment in finance, insurance and real
estate is estimated to represent 5.2% of the State's wage and salary employment
in 1995. Projections for 1996 show this segment holding steady at 5.2% of
employment.
Trade. International trade plays an important role in the State's employment
base and one in six jobs is related to this area. During the past twenty years
the State has consistently ranked number one or number two in international
exports per capita. Seattle-Tacoma International Airport is the focus of the
region's air traffic and trade. The State, particularly the Puget Sound
Corridor, is a trade center for the Northwest and the State of Alaska. A system
of public ports, the largest of which are the Ports of Seattle and Tacoma,
handle waterborne trade primarily to and from the Far East. These two Ports each
rank among the top 20 ports in the world based on volume of containerized cargo
shipped. Approximately 70% of the cargo entering the Ports of Seattle and Tacoma
has an ultimate destination outside the Pacific Northwest. Therefore, trade
levels depend largely on national and world, rather than local, economic
conditions.
Growth in retail sales in the State between 1990 and 1992 was higher than that
in the United States. During 1993 through 1995, the rate of growth for retail
sales was lower for the State than for the United States. The State is home to a
number of specialty retail companies that have reached national stature,
including Nordstrom, Eddie Bauer, Costco and Recreational Equipment Inc. (REI).
Services/Tourism. The highest employment growth in the State since 1981 has
taken place in the services sector, although rate of growth has shown small but
relatively consistent decline since 1990 from 7% to 4.3% forecast for 1995.
Seattle is the location for the Washington State Convention and Trade Center
which opened in June 1988. The State also has many tourist attractions such as
the Olympic and Cascade mountain ranges, ocean beaches and local wineries.
Construction. Employment in the construction sector in the Puget Sound area
increased 69.2% between 1981 and 1991. The increase in employment in the late
1980s was due in part to the affordability of housing compared to other areas of
the country. Construction employment growth flattened between 1991 and 1993,
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but showed a modest increase in 1994 and leveled again in 1995. Commercial
building, while not increasing at the pace of the 1980s, remains stable.
Federal, State and Local Government. Employment in the government sector
represents approximately 19% of all wage and salary employment in the State on a
combined basis. Seattle is the regional headquarters for a number of federal
government agencies and the State receives an above-average share of defense
expenditures. Employment in the government sector has expanded in the State
since 1990, but at a declining rate. State and local government employment has
increased at a faster pace than employment by the federal government, and is
projected to add new jobs through 1996.
LITIGATION
At any given time, including the present, there are numerous lawsuits pending
against the State of Washington which could affect the State's revenues and
expenditures. However, none of the lawsuits are expected to have a material
adverse impact on either State revenues or expenditures.
PRINCIPAL SHAREHOLDERS OF CERTAIN FUNDS
INTERMEDIATE TREASURY FUND
At June 30, 1996, SAFECO Insurance Company of America ("SAFECO Insurance") owned
500,000 shares of the Intermediate Treasury Fund which represented 35.40% of the
outstanding shares of the Fund. SAFECO Insurance is a Washington Corporation and
a wholly-owned subsidiary of SAFECO Corporation, each of which has its principal
place of business at SAFECO Plaza, Seattle, Washington 98185.
MANAGED BOND FUND
At June 30, 1996, Principal Shareholders of the Managed Bond Fund were as
follows. Crista Ministries, PO Box 330303, Seattle, WA 98133, owned 90,590
shares, which represented 18.4% of the Fund's outstanding shares. Massman
Construction Co. PSRT, 8901 Stateline, Kansas City, MO 64114, owned 231,260
shares, which represented 47% of the Fund's outstanding shares. Crown Packaging
Corp. PS&P, 8514 Eager Road, St. Louis, MO 63144, owned 154,595 shares, which
represented 31.4% of the Fund's outstanding shares.
WASHINGTON FUND
At June 30, 1996, SAFECO Insurance owned 502,372 shares, which represents 79.6%
of the outstanding shares of the Washington Fund. SAFECO is a wholly-owned
subsidiary of SAFECO Corporation,
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a Washington corporation, having its principal place of business at SAFECO
Plaza, Seattle Washington 98185.
ADDITIONAL TAX INFORMATION
GENERAL
Each Fund (which is treated as a separate corporation for federal income tax
purposes) intends to continue to qualify for treatment as a "regulated
investment company" ("RIC") under Subchapter M of the Internal Revenue Code of
1986, as amended ("Code"). In order to qualify for that treatment, a Fund must
distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of net investment income
and net short-term capital gain) ("Distribution Requirement") and must meet
several additional requirements. For each Fund, these requirements include the
following: (1) the Fund must derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities
loans, and gains from the sale or other disposition of securities, or other
income derived with respect to its business of investing in securities ("Income
Requirement"); (2) the Fund must derive less than 30% of its gross income each
taxable year from the sale or other disposition of securities held for less than
three months ("Short-Short Limitation"); and (3) at the close of each quarter of
the Fund's taxable year, (a) at least 50% of the value of its total assets must
be represented by cash and cash items, U.S. Government securities, securities of
other RICs, and other securities limited, in respect of any one issuer, to an
amount that does not exceed 5% of the value of the Fund's total assets, and (b)
not more than 25% of the value of its total assets may be invested in securities
(other than U.S. Government securities or the securities of other RICs) of any
one issuer.
If shares of a Fund are sold at a loss after being held for six months or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any capital gain distributions received on those shares and, in
the case of shares of a Tax-Exempt Fund, the loss will be disallowed to the
extent of any exempt-interest dividends received on those shares. Investors also
should be aware that if shares are purchased shortly before the record date for
any dividend or capital gain distribution, the shareholder will pay full price
for the shares and receive some portion of the purchase price back as a taxable
distribution.
Each Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to the
extent it fails to distribute by the end of any calendar year substantially all
of its ordinary (taxable) income for that year and capital gain net income for
the one-year period ending on October 31 (November 30 in the case of a
Tax-Exempt Fund) of that year, plus certain other amounts. Each
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Fund intends to distribute annually a sufficient amount of income and capital
gains to avoid liability for the Excise Tax.
SPECIAL CONSIDERATIONS FOR THE BOND FUNDS
The "exempt-interest" portion of each daily dividend declared by a Tax-Exempt
Income Fund will be based upon the ratio of its tax-exempt to taxable income for
the entire taxable year (average annual method). As a result, the percentage of
any particular dividend that is treated as tax-exempt may be substantially
different from the percentage of income earned during the period covered by that
dividend that actually was tax-exempt. Each Tax-Exempt Fund will advise its
shareholders of this ratio within 60 days after the close of its fiscal year
(March 31).
Each Tax-Exempt Income Fund may invest in municipal bonds that are purchased,
generally not on their original issue, with market discount (that is, at a price
less than the principal amount of the bond or, in the case of a bond that was
issued with original issue discount, at a price less than the amount of the
issue price plus accrued original issue discount) ("municipal market discount
bonds"). Gain on the disposition of a municipal market discount bond (other than
a bond with a fixed maturity date within one year from its issuance), generally
is treated as ordinary (taxable) income, rather than capital gain, to the extent
of the bond's accrued market discount at the time of disposition. Market
discount on such a bond generally is accrued ratably, on a daily basis, over the
period from the acquisition date to the date of maturity. In lieu of treating
the disposition gain as above, a Fund may elect to include market discount in
its gross income currently, for each taxable year to which it is attributable.
No portion of the dividends or other distributions paid by any Tax-Exempt Income
Fund is eligible for the dividends-received deduction allowed to corporations.
The foregoing is only a general summary of some of the important federal income
tax considerations generally affecting the Funds. No attempt is made to present
a complete explanation of the federal tax treatment of their activities, and
this discussion is not intended as a substitute for careful tax planning. For
example, dividends paid by the Tax-Exempt Income Funds may be subject to state
and local income taxes (except to the extent noted in the Prospectus in the case
of dividends paid by the California Fund). Accordingly, potential investors are
urged to consult with their own tax advisers for more detailed information and
for information regarding any state, local or foreign taxes applicable to the
Funds and to distributions therefrom.
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CONVERSION OF ADVISOR CLASS B SHARES
Advisor Class B shares of a Fund will automatically convert to Advisor Class A
shares of that Fund, based on the relative net asset values per share ("NAVs")
of the Classes, as of the close of business on the first business day of the
month in which the sixth anniversary of the shareholder's purchase of such
Advisor Class B shares occurs. For the purpose of calculating the holding period
required for conversion of Advisor Class B shares of each Fund except the Money
Market Fund, the date of purchase shall mean (1) the date on which such Advisor
Class B shares were purchased, or (2) for Advisor Class B shares obtained
through an exchange, or a series of exchanges, the date on which the original
Advisor Class B shares were purchased. For the purpose of calculating the
holding period required for conversion of Advisor Class B shares of the Money
Market Fund, the date of purchase shall mean the date on which those shares were
first exchanged for Advisor Class B shares of any other SAFECO Fund. Holders of
Class B shares of the SAFECO Advisor Series Trust ("Advisor Series Shares") who
invest in Advisor Class B shares may calculate the holding period from the date
of the purchase of the Advisor Series Shares.
For purposes of conversion to Advisor Class A shares, Advisor Class B shares
purchased through the reinvestment of dividends and other distributions paid in
respect of Advisor Class B shares will be held in a separate sub-account; each
time any Advisor Class B shares in the shareholder's regular account (other than
those in the sub-account) convert to Advisor Class A shares, a pro rata portion
of the Advisor Class B shares in the sub-account will also convert to Advisor
Class A shares. The portion will be determined by the ratio that the
shareholder's Advisor Class B shares converting to Advisor Class A shares bears
to the shareholder's total Advisor Class B shares not acquired through dividends
and other distributions.
The availability of the conversion feature will be subject to the availability
of a ruling of the Internal Revenue Service that (1) the dividends and other
distributions paid on Advisor Class A and Advisor Class B shares will not result
in "preferential dividends" under the Code and (2) the conversion of shares does
not constitute a taxable event. If the conversion feature ceased to be
available, the Advisor Class B shares of each Fund would not be converted and
would continue to be subject to the higher ongoing expenses of the Advisor Class
B shares beyond six years from the date of purchase. SAM has no reason to
believe that this condition for the availability of the conversion feature will
not continue to be met.
- 40 -
<PAGE> 43
ADDITIONAL INFORMATION ON CALCULATION OF
NET ASSET VALUE PER SHARE
Each Fund determines its NAV by subtracting its liabilities (including accrued
expenses and dividends payable) from its total assets (the market value of the
securities the Fund holds plus cash and other assets, including interest accrued
but not yet received) and dividing the result by the total number of shares
outstanding. The NAVs of the Advisor Classes of each Fund are calculated as of
the close of regular trading on the New York Stock Exchange ("Exchange") every
day the Exchange is open for trading. The Exchange is closed on the following
days: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
Short-term debt securities held in a Fund's portfolio having a remaining
maturity of less than 60 days when purchased and securities originally purchased
with maturities in excess of 60 days, but which currently have maturities of 60
days or less, may be valued at cost adjusted for amortization of premiums or
accrual of discounts if in the judgment of each Board of Trustees such methods
of valuation are appropriate or under such other methods as a Board of Trustees
may from time to time deem to be appropriate. The cost of those securities that
had original maturities in excess of 60 days shall be determined by their fair
market value as of the 61st day prior to maturity. All other securities and
assets in the portfolio will be appraised in accordance with those procedures
established by each Board of Trustees in good faith in computing the fair market
value of those assets.
The portfolio instruments of the Money Market Fund are valued on the basis of
amortized cost. The valuation of the Money Market Fund's portfolio securities
based upon amortized cost, and the maintenance of the Money Market Fund's NAV at
$1.00, are permitted pursuant to Rule 2a-7 under the 1940 Act. Pursuant to that
rule, the Money Market Fund maintains a dollar-weighted average portfolio
maturity of 90 days or less, purchases only securities having remaining
maturities of 397 days or less, and invests only in securities determined by
SAM, under guidelines adopted by the Money Market Trust's Board of Trustees, to
be of high quality and to present minimal credit risks. The Board of Trustees
has established procedures designed to stabilize, to the extent reasonably
possible, the Money Market Fund's price-per-share as computed for the purpose of
sales and redemptions at $1.00. These procedures include a review of the Money
Market Fund's portfolio holdings by the Board of Trustees, at such intervals as
the Board deems appropriate, to determine whether the Fund's NAV, calculated by
using available market quotations, deviates from $1.00 per share and, if so,
whether
- 41 -
<PAGE> 44
such deviation may result in material dilution or is otherwise unfair to
existing shareholders of the Money Market Fund. In the event the Board
determines that such a deviation exists in the Fund, the Trustees will take such
corrective action with respect to the Money Market Fund as they regard as
necessary and appropriate, including: selling portfolio investments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity, withholding dividends, redeeming shares in kind, establishing the NAV
by using available market quotations; or such other measures as the Trustees
deem appropriate.
ADDITIONAL PERFORMANCE INFORMATION
Effective September 30, 1996, all of the then-existing shares of each Fund were
redesignated No-Load Class shares and each Fund commenced offering Advisor Class
A and Advisor Class B shares.
YIELDS FOR THE INTERMEDIATE TREASURY, MANAGED BOND, AND TAX-
EXEMPT INCOME FUNDS.
The yield and total return calculations set forth below are for the dates
indicated and are not a prediction of future results. The performance
information that follows is based on the No-Load Class shares of each Fund. The
performance figures quoted reflect applicable Advisor Class Rule 12b-1 fees.
The yields for the Advisor Classes of the Intermediate Treasury Fund for the
30-day period ended September 30, 1995 would have been as follows:
Advisor Class A Advisor Class B
Intermediate 4.92% 4.41%
Treasury Fund
The yields for the Advisor Classes of the Intermediate Treasury Fund for the
30-day period ended March 31, 1996 would have been as follows:
Advisor Class A Advisor Class B
Intermediate 4.03% 3.47%
Treasury Fund
The yields for the Advisor Classes of the Managed Bond Fund for the 30-day
period ended December 31, 1995 would have been as follows:
- 42 -
<PAGE> 45
Advisor Class A Advisor Class B
Managed Bond Fund 4.32% 3.78%
The yields and tax-equivalent yields for the 30-day period ended March 31, 1996
at the maximum federal tax rate of 39.6% for the Advisor Classes of the
Municipal, and Washington Funds and at the maximum combined federal and
California tax rates of 46.2% for the Advisor Classes of the California Fund,
would have been as follows:
<TABLE>
<CAPTION>
Advisor Class A Advisor Class B
--------------- ---------------
Tax- Tax-
equivalent equivalent
Yield Yield Yield Yield
----- ---------- ----- ----------
<S> <C> <C> <C> <C>
Municipal Fund 4.59 7.60% 4.06% 6.72%
California Fund 4.57 8.49% 4.04% 7.51%
Washington Fund 4.17 6.90% 3.62% 5.99%
</TABLE>
Yield is computed using the following formula:
ab 6
Yield = 2[( ---- +1) -1]
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
YIELD FOR THE MONEY MARKET FUND
The yields and effective yields for the Advisor Classes of the Money Market Fund
for the 7-day period ended March 31, 1996 would have been as follows:
- 43 -
<PAGE> 46
<TABLE>
<CAPTION>
Advisor Class A Advisor Class B
--------------- ---------------
Yield Effective Yield Yield Effective Yield
----- --------------- ----- ---------------
<S> <C> <C> <C> <C>
Money Market 4.60% 4.70% 4.60% 4.70%
Fund
</TABLE>
Yield is computed using the following formula:
(x-y) - z 365
Yield = [--------] = Base Period Return x -----
y 7
Where: x = value of one share at the end of a 7-day period
y = value of one share at the beginning of a 7-day period
($1.00)
z = capital changes during the 7-day period, if any
Effective yield is computed using the following formula:
365/7
Effective yield = [(Base Period Return + 1) ]-1
Tax-equivalent yield is computed using the following formula:
eg
Tax-equivalent yield = [ ----- ]+ [e (1-g)]
1-f
Where: e = yield as calculated above
f = tax rate
g = percentage of yield which is tax-free
During periods of declining interest rates, the Fund's yield based on amortized
cost may be higher than the yield based on market valuations. Under these
circumstances, a shareholder in the Fund would be able to obtain a somewhat
higher yield than would result if the Fund utilized market valuations to
determine its NAV. The converse would apply in a period of rising interest
rates.
- 44 -
<PAGE> 47
TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FOR THE INTERMEDIATE TREASURY,
MANAGED BOND, AND TAX-EXEMPT FUNDS.
The performance information that follows is based on the original shares of each
Fund, recalculated to reflect the sales charges of the Advisor Classes. The
performance figures quoted do not reflect any applicable Advisor Class Rule
12b-1 fees, which if reflected would cause the performance figures to be lower
than those indicated.
The total returns for the Advisor Classes of the Intermediate Treasury Fund for
the one-year, five-year and since initial public offering periods ending
September 30, 1995 would have been as follows:
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year 5 Years Public Offering Months Public Offering
------ ------- --------------- ------ ---------------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Intermediate
Treasury Fund 6.07% 6.07% 41.06% 45.70% 62.78% 70.45% 84 September 7, 1988
</TABLE>
The total returns for the Advisor Classes of the Intermediate Treasury Fund for
the one-year, five-year and since initial public offering periods ending March
31, 1996 would have been as follows:
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year 5 Years Public Offering Months Public Offering
------ ------- --------------- ------ ---------------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Intermediate
Treasury Fund 4.65% 4.58% 36.89% 41.34% 66.08% 73.91% 90 September 7, 1988
</TABLE>
The total returns for the Advisor Classes of the Managed Bond Fund for the
period from February 28, 1994 (initial public offering) through December 31,
1995, would have been as follows:
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year Public Offering Months Public Offering
------ --------------- ------ ---------------
Advisor Advisor Advisor Advisor
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Managed Bond
Fund 12.07% 12.35% 8.70% 9.82% 22 February 28, 1994
</TABLE>
- 45 -
<PAGE> 48
The total returns for the Advisor Classes of the Municipal and California Funds
for the one-year, five-year and ten-year periods ending March 31, 1996 would
have been as follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Municipal Fund 3.36% 3.23% 40.84% 45.47% 110.25% 120.16%
California Fund 3.97% 3.87% 41.43% 46.09% 104.10% 113.72%
</TABLE>
The total returns for the Advisor Classes of the Washington Fund for the
one-year period (and since inception) ended March 31, 1996 would have been as
follows:
<TABLE>
<CAPTION>
Since Initial Effective Date
1 Year (36 Months)
------ ----------------------------
Advisor Advisor Advisor Advisor
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Washington Fund 2.88% 2.73% 10.97% 13.20%
</TABLE>
The average annual total returns for the Advisor Classes of the Intermediate
Treasury Fund for the one-year, five-year and since initial public offering
periods ended September 30, 1995 would have been as follows:
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year 5 Years Public Offering Months Public Offering
------ ------- --------------- ------ ---------------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Intermediate
Treasury Fund 6.07% 6.07% 7.12% 7.82% 7.21% 7.92% 84 September 7, 1988
</TABLE>
The average annual total returns for the Advisor Classes of the Intermediate
Treasury Fund for the one-year, five-year and since initial public offering
period ended March 31, 1996 would have been as follows:
- 46 -
<PAGE> 49
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year 5 Years Public Offering Months Public Offering
------ ------- --------------- ------ ---------------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Intermediate 4.65% 4.58% 6.48% 7.17% 7.00% 7.66% 90 September 7, 1988
Treasury Fund
</TABLE>
The average annual total returns for the Advisor Classes of the Managed Bond
Fund for the period from February 28, 1994 (initial public offering) through
December 31, 1995 would have been as follows:
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year Public Offering Months Public Offering
------ --------------- ------ ---------------
Advisor Advisor Advisor Advisor
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Managed Bond 12.07% 12.35% 4.66% 5.24% 22 February 28, 1994
Fund
</TABLE>
The average annual total returns for the Advisor Classes of the Municipal and
California Funds for the one-year, five-year and ten year periods ending March
31, 1996 would have been as follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Municipal
Fund 3.36% 3.23% 7.09% 7.78% 7.71% 8.21%
California
Fund 3.97% 3.87% 7.18% 7.88% 7.39% 7.89%
</TABLE>
The average annual total returns for the Advisor Classes of the Washington Fund
for the one-year period (and since inception) ended March 31, 1996 would have
been as follows:
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year Public Offering Months Public Offering
------ --------------- ------ ---------------
Advisor Advisor Advisor Advisor
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Washington
Fund 2.88% 2.73% 3.53% 4.22% 36 March 18, 1993
</TABLE>
The total return is computed using the following formula:
ERV-P
T = [ ----- ] x 100
P
- 47 -
<PAGE> 50
Where: T = ending redeemable value of a hypothetical $1,000 investment
at the end of a specified period of time
P = a hypothetical initial investment of $1,000
The average annual total return is computed using the following formula:
A = (the nth root of ERV divided by P - 1) times 100
<TABLE>
<S> <C> <C> <C>
Where: T = total return
A = average annual total return
n = number of years
ERV = ending redeemable value of a
hypothetical $1,000 investment
at the end of a specified period of time
P = a hypothetical initial investment of $1,000
</TABLE>
In making the above calculation all dividends and capital gain distributions are
assumed to be reinvested at the Fund's NAV on the reinvestment date.
In addition to performance figures, each Fund may advertise its ranking as
calculated by independent rating services which monitor mutual funds'
performance (e.g., CDA Investment Technologies, Lipper Analytical Services, Inc.
and Morningstar, Inc.). These rankings may be among mutual funds with similar
objectives and/or size or with mutual funds in general and may be based on
relative performance during periods deemed by the rating services to be
representative of up and down markets.
The Funds may upon occasion reproduce articles or portions of articles about the
Funds written by independent third parties such as financial writers, financial
planners and financial analysts, and appearing in financial publications of
general circulation or financial newsletters (including but not
limited to Barrons, Business Week, Fabian's, Forbes, Fortune, Investor's
Business Daily, Kiplinger's, Money Magazine, Morningstar Mutual Funds, Mutual
Funds Forecaster, Mutual Funds Magazine, Newsweek, Pensions & Investments,
Rukeyser's Mutual Funds, Tele-Switch, Time Magazine, U.S. News and World Report,
Your Money, and The Wall Street Journal).
Each Fund may also present in its advertisements and sales literature (I) a
biography or the credentials of its portfolio manager (including but not limited
to educational degrees, professional designations, work experience, work
responsibilities and outside interests); (ii) current facts (including but not
limited to number of employees, number of shareholders,
- 48 -
<PAGE> 51
business characteristics) about its investment adviser (SAM), or any
sub-investment adviser, the investment adviser's parent company (SAFECO
Corporation), or the parent company of any sub-investment adviser, or the
SAFECO Family of Funds; (iii) descriptions, including quotations attributable to
the portfolio manager, of the investment style used to manage a Fund's
portfolio, the research methodologies underlying securities selection and a
Fund's investment objective; and (iv) information about particular securities
held in a Fund's portfolio.
From time to time, each Fund may discuss its performance in relation to the
performance of relevant indices and/or representative peer groups. Such
discussions may include how a Fund's investment style (including but not limited
to portfolio holdings, asset types, industry/sector weightings and the purchase
and sale of specific securities) contributed to such performance.
In addition, each Fund may comment on the market and economic outlook in
general, on specific economic events, on how these conditions have impacted its
performance and on how the portfolio manager will or has addressed such
conditions.
Performance information and quoted ratings are indicative only of past
performance and are not intended to represent future investment results.
ADDITIONAL INFORMATION ON DIVIDENDS
Because the Money Market Fund intends to hold its portfolio securities to
maturity and expects that most of its portfolio securities will be valued at
their amortized cost, realized gains or losses should not be a significant
factor in the computation of net income. Should, however, in an unusual
circumstance, the Money Market Fund experience a realized gain or loss, a
shareholder of the Money Market Fund could receive an increased, reduced, or no
dividend for a period of time. In such an event, the Money Market Trust's Board
of Trustees would consider whether to adhere to its present dividend policy or
to revise it in light of the then-prevailing circumstances.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation(s)
Name and Address with the Trusts During Past 5 Years
---------------- ---------------- ---------------------
<S> <C> <C>
Boh A. Dickey* Chairman and Trustee President, Chief Operating Officer, and
SAFECO Plaza Director of SAFECO Corporation.
Seattle, WA 98185 Previously, Executive Vice President and
(51) Chief Financial Officer. He has been an
executive officer of SAFECO
Corporation subsidiaries since 1982. See
table under "Investment Advisory and
Other Services."
</TABLE>
49
<PAGE> 52
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation(s)
Name and Address with the Trusts During Past 5 Years
---------------- ---------------- ---------------------
<S> <C> <C>
Barbara J. Dingfield Trustee Manager, Corporate Contributions and
Microsoft Corporation Community Programs for Microsoft
One Microsoft Way Corporation, Redmond, Washington, a
Redmond, WA 98052 computer software company; Director
(50) and former Executive Vice President of
Wright Runstad & Co., Seattle, Washington, a real estate
development company; Director of First SAFECO National
Life Insurance Company of New York.
Richard W. Hubbard* Trustee Retired Vice President and Treasurer of
1270 NW Blakely Ct. the Trust and other SAFECO Trusts;
Seattle, WA 98177 retired Senior Vice President and
(67) Treasurer of SAFECO Corporation;
former President of SAFECO Asset
Management Company; Director of First
SAFECO National Life Insurance
Company of New York.
Richard E. Lundgren Trustee Director of Marketing and Customer
764 S. 293rd Street Relations, Building Materials
Federal Way, WA 98032 Distribution, Weyerhaeuser Company,
(58) Tacoma, Washington; Director of First
SAFECO National Life Insurance
Company of New York.
Larry L. Pinnt Trustee Retired Vice President and Chief
1600 Bell Plaza Financial Officer U.S. WEST
Room 1802 Communications, Seattle, Washington;
Seattle, WA 98191 Director of Key Bank of Washington,
(61) Seattle, Washington; Director of
University of Washington Medical Center, Seattle,
Washington; Director of Cascade Natural Gas Corporation,
Seattle, Washington; Director of First SAFECO National
Life Insurance Company of New York.
John W. Schneider Trustee President of Wallingford Group, Inc.,
1808 N 41st St. Seattle, Washington; former President of
Seattle, WA 98103 Coast Hotels, Inc., Seattle, Washington;
(54) Director of First SAFECO National Life
Insurance Company of New York.
</TABLE>
- 50 -
<PAGE> 53
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation(s)
Name and Address with the Trusts During Past 5 Years
---------------- ---------------- ---------------------
<S> <C> <C>
David F. Hill* President and Trustee President of SAFECO Securities, Inc. and
SAFECO Plaza SAFECO Services Corporation; Senior
Seattle, WA 98185 Vice President of SAFECO Asset
(47) Management Company. See table under
"Investment Advisory and other
Services."
Neal A. Fuller Vice President Vice President, Controller, Assistant
SAFECO Plaza Controller Secretary and Treasurer of SAFECO
Seattle, WA 98185 Assistant Secretary Securities, Inc. and SAFECO Services
(34) Corporation; Vice President, Controller,
Secretary and Treasurer of SAFECO
Asset Management Company. See table
under "Investment Advisory and Other
Services."
Ronald L. Spaulding Vice President Vice Chairman of SAFECO Asset
SAFECO Plaza Treasurer Management Company; Vice President
Seattle, WA 98185 and Treasurer of SAFECO Corporation;
(52) Vice President of SAFECO Life
Insurance Company; former Senior Fund
Manager of SAFECO insurance
companies; former Fund Manager for
several SAFECO mutual funds. See table
under "Investment Advisory and Other
Services."
</TABLE>
* Trustees who are interested persons as defined by the Investment Company Act
of 1940.
- 51 -
<PAGE> 54
COMPENSATION TABLE
(Taxable Bond Trust)
For the Fiscal Year Ended September 30, 1995
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits From Registrant
Aggregate Accrued As Estimated and Fund
Compensation Part of Fund Annual Benefits Complex Paid to
Trustee from Registrant Expenses Upon Retirement Trustees
------- --------------- -------- --------------- --------
<S> <C> <C> <C> <C>
Boh A. Dickey $ 0 N/A N/A $ 0
Barbara J. Dingfield $2,360 N/A N/A $22,737
David F. Hill $ 0 N/A N/A $ 0
Richard W. Hubbard $2,568 N/A N/A $24,150
Richard E. Lundgren $2,360 N/A N/A $22,737
Larry L. Pinnt $2,360 N/A N/A $22,737
John W. Schneider $2,360 N/A N/A $22,737
</TABLE>
Currently, there is no pension, retirement, or other plan or any arrangement
pursuant to which Trustees or officers of the Trust are compensated by the
Trust. Each Trustee also serves as Trustee for six other registered open-end
management companies that have, in the aggregate, twenty-eight series companies
managed by SAM.
The officers of the Trust receive no compensation for their services as
officers, or if applicable, as Trustees.
At June 30, 1996, the Trustees and officers of the Taxable Bond Trust as a group
owned less than 1% of the outstanding shares of the Intermediate Treasury Fund.
- 52 -
<PAGE> 55
COMPENSATION TABLE
(Managed Bond Trust)
For the Fiscal Year Ended December 31, 1995
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits From Registrant
Aggregate Accrued As Part Estimated and Fund
Compensation of Fund Annual Benefits Complex Paid
Trustee from Registrant Expenses Upon Retirement to Trustees
------- --------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Boh A. Dickey $ 0 N/A N/A $ 0
Barbara J. Dingfield $852 N/A N/A $23,875
David F. Hill $ 0 N/A N/A $ 0
Richard W. Hubbard $960 N/A N/A $26,900
Richard E. Lundgren $852 N/A N/A $23,875
Larry L. Pinnt $852 N/A N/A $23,875
John W. Schneider $852 N/A N/A $23,875
</TABLE>
Currently, there is no pension, retirement, or other plan or any arrangement
pursuant to which Trustees or officers of the Trust are compensated by the
Trust. Each Trustee also serves as Trustee for six other registered open-end
management companies that have, in the aggregate, thirty series companies
managed by SAM.
The officers of the Trust received no compensation for their services as
officers or, if applicable, as Trustees.
At June 30, 1996, the Trustees and officers of the Managed Bond Trust owned none
of the outstanding shares of the Managed Bond Fund.
- 53 -
<PAGE> 56
COMPENSATION TABLE
(Money Market Trust)
For the Fiscal Year Ended March 31, 1996
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits From Registrant
Aggregate Accrued As Part Estimated Annual and Fund
Compensation of Fund Benefits Complex Paid to
Trustee from Registrant Expenses Upon Retirement Trustees
------- --------------- ------------ --------------- --------
<S> <C> <C> <C> <C>
Boh A. Dickey $ 0 N/A N/A $ 0
Barbara J. Dingfield $2,095 N/A N/A $24,813
David F. Hill $ 0 N/A N/A $ 0
Richard W. Hubbard $2,095 N/A N/A $23,000
Richard E. Lundgren $2,095 N/A N/A $24,813
Larry L. Pinnt $2,095 N/A N/A $ 0
John W. Schneider $2,095 N/A N/A $24,813
</TABLE>
Currently, there is no pension, retirement, or other plan or any arrangement
pursuant to which Trustees or officers of the Trust are compensated by the
Trust. Each Trustee also serves as trustee for six other registered open-end,
management investment companies that have, in the aggregate, twenty-nine series
companies managed by SAM.
The officers of the Trust receive no compensation for their service as officers
or, if applicable, as Trustees.
At June 30, 1996, the Trustees and officers of the Money Market Trust as a group
owned less than 1% of the outstanding shares of the Fund.
-54-
<PAGE> 57
COMPENSATION TABLE
(Tax-Exempt Bond Trust)
For the Fiscal Year Ended March 31, 1996
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits From Registrant
Aggregate Accrued As Part Estimated Annual and Fund
Compensation of Fund Benefits Complex Paid to
Trustee from Registrant Expenses Upon Retirement Trustees
------- --------------- ------------ --------------- --------
<S> <C> <C> <C> <C>
Boh A. Dickey $ 0 N/A N/A $ 0
Barbara J. Dingfield $4,547 N/A N/A $24,813
David F. Hill $ 0 N/A N/A $ 0
Richard W. Hubbard $4,547 N/A N/A $23,000
Richard E. Lundgren $4,547 N/A N/A $24,813
Larry L. Pinnt $4,547 N/A N/A $24,813
John W. Schneider $4,547 N/A N/A $24,813
</TABLE>
Currently, there is no pension, retirement, or other plan or any arrangement
pursuant to which Trustees or officers of a Trust are compensated by that Trust.
Each Trustee also serves as trustee for six other registered open-end,
management investment companies that have, in the aggregate, twenty-six series
companies managed by SAM.
The officers of a Trust received no compensation for their services as officers
or, if applicable, trustees.
At June 30, 1996, the Trustees and officers of the Tax-Exempt Bond Trust as a
group owned less than 1% of the outstanding shares of each Tax-Exempt Income
Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
SAFECO Asset Management Company ("SAM"), SAFECO Securities, Inc. ("SAFECO
Securities") and SAFECO Services Corporation ("SAFECO Services") are
wholly-owned subsidiaries of SAFECO Corporation. SAFECO Securities is the
principal underwriter of each Fund and SAFECO Services is the transfer, dividend
and distribution disbursement and shareholder servicing agent of each Fund.
-55-
<PAGE> 58
The following individuals have the following positions and offices with the
Trust, SAM, SAFECO Securities and SAFECO Services.
<TABLE>
<CAPTION>
SAFECO SAFECO
Name Trust SAM Securities Services
- ---- ----- --- ---------- --------
<S> <C> <C> <C> <C>
B. A. Dickey Chairman Director Director
Trustee Chairman
D. F. Hill President Senior President President
Trustee Vice Director Secretary
President Secretary Director
Director
N. A. Fuller Vice President Vice Vice Vice President
Controller President President Controller
Assistant Controller Controller Assistant
Secretary Secretary Assistant Secretary
Treasurer Secretary Treasurer
Treasurer
R.L. Spaulding Vice President Vice Director Director
Treasurer Chairman
Director
S.C. Bauer President
Director
</TABLE>
Mr. Dickey is President, Chief Operating Officer, and a director of SAFECO
Corporation and Mr. Spaulding is Treasurer and Vice President of SAFECO
Corporation. Messrs. Dickey and Spaulding are also directors of other SAFECO
Corporation subsidiaries.
In connection with its investment advisory contract with each Trust, SAM
furnishes or pays for all facilities and services furnished or performed for or
on behalf of each Trust and each Fund of the Trust, that includes furnishing
office facilities, books, records and personnel to manage each Trust's and each
Fund's affairs and paying certain expenses.
The Trust Instrument of each Trust provides that it will indemnify its Trustees
and its officers against liabilities and expenses reasonably incurred in
connection with litigation in which they may be involved because of their
offices with a Trust, unless it is adjudicated that they engaged in bad faith,
wilful misfeasance, gross negligence, or reckless disregard of the duties
involved in the conduct of their offices. In the case of settlement, such
indemnification will not be provided unless it has been determined -- by a court
or other body approving the settlement or other disposition, or by a majority of
disinterested Trustees, based upon a review of readily available facts, or in a
written opinion of independent counsel -- that such officers or Trustees have
not engaged in wilful misfeasance, bad faith, gross negligence or reckless
disregard of their duties.
- 56 -
<PAGE> 59
SAM also serves as the investment adviser for other investment companies in
addition to the Funds. Several of these investment companies have investment
objectives similar to those of certain Funds. It is therefore possible that the
same securities will be purchased for both a Fund and another investment company
advised by SAM. When two or more funds advised by SAM are simultaneously engaged
in the purchase or sale of the same security, the prices and amounts will be
allocated in a manner considered by the officers of the funds involved to be
equitable to each fund. In some cases this system could have a detrimental
effect on the price or value of the security as far as a Fund is concerned. In
other cases, however, the ability of a Fund to participate in volume
transactions will produce better executions and prices for the Fund.
For the services and facilities furnished by SAM, each Fund has agreed to pay an
annual fee computed on the basis of the average market value of the net assets
of each Fund ascertained each business day and paid monthly in accordance with
the following schedules. The reduction in fees occurs only at such time as the
respective Fund's net assets reach the dollar amounts of the break points and
applies only to those assets that fall within the specified range:
INTERMEDIATE TREASURY FUND
NET ASSETS FEE
$0 - $250,000,000 .55 of 1%
$250,000,001 - $500,000,000 .45 of 1%
$500,000,001 - $750,000,000 .35 of 1%
Over $750,000,000 .25 of 1%
MANAGED BOND FUND
NET ASSETS FEE
$0 - $100,000,000 .50 of 1%
$100,000,001 - $250,000,000 .40 of 1%
Over $250,000,000 .35 of 1%
MONEY MARKET FUND
NET ASSETS FEE
$0 - $250,000,00 .50 of 1%
$250,000,001 - $500,000,000 .40 of 1%
$500,000,001 - $750,000,000 .30 of 1%
Over $750,000,000 .25 of 1%
MUNICIPAL AND CALIFORNIA FUNDS
NET ASSETS FEE
$0 - $100,000,000 .55 of 1%
$100,000,001 - $250,000,000 .45 of 1%
$250,000,001 - $500,000,000 .35 of 1%
Over $500,000,000 .25 of 1%
- 57 -
<PAGE> 60
WASHINGTON FUND
NET ASSETS FEE
$0 - $250,000,00 .65 of 1%
$250,000,001 - $500,000,000 .55 of 1%
$500,000,001 - $750,000,000 .45 of 1%
Over $750,000,000 .35 of 1%
Each Fund bears all expenses of its operations not specifically assumed by SAM.
SAM has agreed to reimburse each Fund for the amount by which a Fund's expenses
in any full fiscal year (excluding interest expense, taxes, brokerage expenses,
and extraordinary expenses) exceed the limits prescribed by any state in which a
Fund's shares are qualified for sale. Presently, the most restrictive expense
ratio limitation imposed by any such state is 2.5% of the first $30 million of a
Fund's average daily net assets, 2.0% of the next $70 million of such assets,
and 1.5% of the remaining net assets. For the purpose of determining whether a
Fund is entitled to reimbursement, the expenses of the Fund are calculated on a
monthly basis. If a Fund is entitled to a reimbursement, that month's advisory
fee will be reduced or postponed, with any adjustment made after the end of the
fiscal year.
The following states the total amounts of compensation paid by each Fund to SAM
for the past three fiscal years or periods (or since its initial public offering
in the case of the Managed Bond Fund):
<TABLE>
<CAPTION>
INTERMEDIATE TREASURY FUND
Year Ended
September 30, 1995 September 30, 1994 September 30, 1993
------------------ ------------------ ------------------
<S> <C> <C> <C>
$71,000 $77,000 $ 72,000
</TABLE>
MANAGED BOND FUND
Year Ended
<TABLE>
<CAPTION>
February 28, 1994
(Initial Public Offering) to
December 31, 1995 December 31, 1994
----------------- ------------------
<S> <C> <C>
$22,720 $15,869
</TABLE>
- 58 -
<PAGE> 61
TAX-EXEMPT INCOME FUNDS
Year Ended
<TABLE>
<CAPTION>
March 31, 1996 March 31, 1995 March 31, 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Municipal Bond Fund $2,020,685 $2,010,754 $2,248,615
California Fund 365,684 364,000 455,505
Washington Fund 39,038 31,475 18,350
</TABLE>
<TABLE>
<CAPTION>
MONEY MARKET FUND
Year Ended
March 31, 1996 March 31, 1995 March 31, 1994
------------------ ------------------ ------------------
<S> <C> <C> <C>
$864,914 $840,727 $690,549
</TABLE>
DISTRIBUTION ARRANGEMENTS. SAFECO Securities is the principal underwriter for
each Fund and acts as the distributor of the Advisor Class A and Advisor Class B
shares of each Fund under a Distribution Agreement with the Trust that requires
SAFECO Securities to use its best efforts, consistent with its other businesses,
to sell shares of the Funds. Shares of the Funds are offered continuously.
Under separate plans of distribution pertaining to the Advisor Class A and
Advisor Class B shares of each Fund adopted by each Trust in the manner
prescribed under Rule 12b-1 under the 1940 Act (each a "Plan"), each Advisor
Class pays fees described in the Prospectus.
Among other things, each Plan provides that (1) SAFECO Securities will submit to
each Trust's Board of Trustees at least quarterly, and the Trustees will review,
reports regarding all amounts expended under the Plan and the purposes for which
such expenditures were made, (2) the Plan will continue in effect so long as
they are approved at least annually and any material amendment thereto is
approved, by each respective Trust's Board of Trustees, including those Trustees
who are not "interested persons" of each Trust and who have no direct or
indirect financial interest in the operation of the Plan or any agreement
related to the Plan, acting in person at the meeting called for that purpose,
(3) payments by a Fund under the Plan shall not be materially increased without
the affirmative vote of the holders of a majority of the outstanding voting
securities of the relevant Advisor Class of that Fund and (4) while the Plan
remains in effect, the selection and nomination of Trustees who are not
"interested persons" of each Trust shall be committed to the discretion of each
Trustees who are not "interested persons" of each Trust.
In reporting amounts expended under the Plans to each Trust's Board of Trustees,
SAFECO Securities will allocate expenses attributable to the sale of each
Advisor Class of Fund shares to such Advisor Class based on the ratio of sales
of shares of such Advisor Class to the sales of all Advisor Classes of shares.
Expenses attributable to a specific Advisor Class will be allocated to that
Advisor Class.
- 59 -
<PAGE> 62
In approving the adoption of each Plan, each Trust's Board of Trustees
determined that the adoption was in the best interests of the Funds'
shareholders.
In the event that a Plan is terminated or not continued with respect to the
Advisor Class A or Advisor Class B shares of any Fund, (i) no fees would be owed
by the Fund to SAFECO Securities with respect to that class, and (ii) the Fund
would not be obligated to pay SAFECO Securities for any amounts expended under
the Plan not previously recovered by SAFECO Securities.
The Plans comply with rules of the National Association of Securities Dealers,
Inc. which limit the annual asset-based sales charges and service fees that a
mutual fund may impose on a class of shares to .75% and .25%, respectively, of
the average annual net assets attributable to that class. The rules also limit
the aggregate of all front-end, deferred and asset-based sales charges imposed
with respect to a class of shares by a mutual fund that also charges a service
fee to 6.25% of cumulative gross sales of that class, plus interest at the prime
rate plus 1% per annum.
CUSTODIAN. U.S. Bank of Washington, N.A., 1420 Fifth Avenue, Seattle, Washington
98111, is the custodian of the securities, cash and other assets of each Fund
under an agreement with each Trust. AUDITOR. Ernst & Young LLP, 999 Third
Avenue, Suite 3500, Seattle, Washington 98104, is the independent auditor of
each Fund's financial statements.
SAFECO Services provides, or through subcontracts makes provision for, all
required transfer agency activity, including maintenance of records of each
Fund's shareholders, records of transactions involving each Fund's shares, and
the compilation, distribution, or reinvestment of income dividends or capital
gains distribution. For the Intermediate Treasury, Managed Bond and Tax-Exempt
Funds, SAFECO Services is paid a fee for these services equal to $32.00 per
shareholder account, but not to exceed .30% of each Fund's average net assets.
For the Money Market Fund, SAFECO Services is paid a fee of $34.00 per
shareholder account, but not to exceed .30% of each Fund's average net assets.
The following tables shows the fees paid by each Fund to SAFECO Services during
the past three fiscal years.
<TABLE>
<CAPTION>
INTERMEDIATE TREASURY FUND
Year Ended*
September 30, 1995 September 30, 1994 September 30, 1993
------------------ ------------------ ------------------
<S> <C> <C> <C>
$33,000 $25,000 $23,000
</TABLE>
MANAGED BOND FUND*
Year Ended
<TABLE>
<CAPTION>
February 28, 1994
(Initial Public Offering) to
December 31, 1995 December 31, 1994
----------------- ------------------
<S> <C> <C>
$309 $96
</TABLE>
- 60 -
<PAGE> 63
MONEY MARKET FUND
Year Ended*
<TABLE>
<CAPTION>
March 31, 1996 March 31, 1995 March 31, 1994
------------------ ------------------ ------------------
<S> <C> <C> <C>
$424,260 $385,495 $308,090
</TABLE>
TAX-EXEMPT BOND FUNDS
Year Ended*
<TABLE>
<CAPTION>
March 31, 1996 March 31, 1995 March 31, 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Municipal Bond Fund $511,005 $531,978 $557,561
California Fund 68,839 68,840 66,667
Washington Fund 2,842 3,219 2,801
</TABLE>
* Tables reflect fees of $3.10 per shareholder transaction payable
pursuant to the prior fee schedule.
BROKERAGE PRACTICES
SAM places orders for the purchase or sale of each Fund's portfolio securities
based on various factors including:
(1) Which broker gives the best execution (i.e., which broker is able to
trade the securities in the size and at the price desired and on a
timely basis);
(2) Whether the broker is known as being reputable; and,
(3) All other things being equal, which broker has provided useful research
services.
Such research services as are furnished during the year (e.g., written reports
analyzing economic and financial characteristics of industries and companies,
telephone conversations between brokerage security analysts and members of SAM's
staff, and personal visits by such analysts and brokerage strategists and
economists to SAM's office) are used to advise all clients including the Funds,
but not all such research services furnished to SAM are used by it to advise the
Funds. SAM does not pay excess commissions or mark-ups to any broker or dealer
for research services or for any other reason. Purchases and sales of portfolio
securities are transacted with the issuer or with a primary market maker acting
as principal for the securities on a net basis with no commission being paid by
the Funds. Transactions placed through dealers serving as primary market makers
reflect the spread between the bid and asked prices. Occasionally the Funds may
make purchases of underwritten issues at prices that include underwriting fees.
- 61 -
<PAGE> 64
REDEMPTION IN KIND
If a Trust concludes that cash payment upon redemption to a shareholder of a
Fund would be prejudicial to the best interest of other shareholders of a Fund,
a portion of the payment may be made in kind. Each Fund has elected to be
governed by Rule 18(f)(1) under the Investment Company Act of 1940, pursuant to
which a Fund must redeem shares tendered by a shareholder solely in cash up to
the lesser of $250,000 or 1% of a net asset value of a Fund during any 90-day
period. Any shares tendered by the shareholder in excess of the above-mentioned
limit may be redeemed through distribution of a Fund's assets. Any securities or
other property so distributed in kind shall be valued by the same method as is
used in computing NAV. Distributions in kind will be made in readily marketable
securities, unless the investor elects otherwise. Investors may incur brokerage
costs in disposing of securities received in such a distribution in kind.
[/R]
FINANCIAL STATEMENTS
The following financial statements for the Intermediate Treasury Fund and the
report thereon of Ernst & Young LLP, independent auditors, are incorporated
herein by reference to the Taxable Bond Trust's Annual Report for the year ended
September 30, 1995.
Portfolio of Investments as of September 30, 1995
Statement of Assets and Liabilities as of September 30, 1995
Statement of Operations for the Six Months Ended September 30, 1995
Statement of Changes in Net Assets for the Years Ended
September 30, 1995 and September 30, 1994
Notes to Financial Statements
The following unaudited financial statements for the Intermediate Treasury Fund
are incorporated herein by reference to the Taxable Bond Trust's Semi-Annual
Report for the period ending March 31, 1996.
Portfolio of Investments as of March 31, 1996 (unaudited)
Statement of Assets and Liabilities as of March 31, 1996 (unaudited)
Statement of Operations for the Year Ended March 31, 1996
(unaudited)
Statement of Changes in Net Assets for the Period Ended March 31,
1996 (unaudited)
Notes to Financial Statements (unaudited)
The following financial statements for the Managed Bond Fund and the report
thereon of Ernst & Young LLP, independent auditors, are incorporated herein by
reference to the Managed Bond Trust's Annual Report for the year ended December
31, 1995:
Portfolio of Investments as of December 31, 1995
Statement of Assets and Liabilities as of December 31, 1995
Statement of Operations for the Year Ended December 31, 1995
Statement of Changes in Net Assets for the Years Ended
December 31, 1995 and December 31, 1994
Notes to Financial Statements
The following financial statements for the Municipal Bond, California and
Washington Funds and the report thereon of Ernst & Young LLP, independent
auditors, are incorporated herein by reference to the Tax-Exempt Bond Trust's
Annual Report for the year ended March 31, 1996:
- 62 -
<PAGE> 65
Portfolio of Investments as of March 31, 1996
Statement of Assets and Liabilities as of March 31, 1996
Statement of Operations for the Year Ended March 31, 1996
Statement of Changes in Net Assets for the Years Ended
March 31, 1996 and March 31, 1995
Notes to Financial Statements
The following financial statements for the Money Market Fund and the report
thereon of Ernst & Young LLP, independent auditors, are incorporated herein by
reference to the Money Market Trust's Annual Report for the year ended March 31,
1996:
Portfolio of Investments as of March 31, 1996
Statement of Assets and Liabilities as of March 31, 1996
Statement of Operations for the Year Ended March 31, 1996
Statement of Changes in Net Assets for the Years Ended
March 31, 1996 and March 31, 1995
Notes to Financial Statements
A copy of each Trust's Annual Report and the Semi-Annual Report of the
Intermediate Treasury Fund accompanies this Statement of Additional Information.
Additional copies may be obtained by calling SAFECO Services at 1-800-463-8791
or by writing to the address on the first page of this Statement of Additional
Information.
DESCRIPTION OF RATINGS
Ratings by Moody's and S&P represent opinions of those organizations as to the
investment quality of the rated obligations. Investors should realize these
ratings do not constitute a guarantee that the principal and interest payable
under these obligations will be paid when due.
DESCRIPTION OF BOND RATINGS
MOODY'S
Investment Grade Descriptions:
Aaa -- Bonds which are 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 by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered upper medium-grade obligations. Factors giving security to
principal and interest
- 63 -
<PAGE> 66
are considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered 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 have
speculative characteristics.
Below Investment Grade Descriptions:
Ba -- 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.
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 -- Have poor standing. Such issues may be in default or there may be present
elements of danger with respect to principal or interest.
Ca -- Represent obligations which are speculative in a high degree. Such issues
are often in default or have other marked short-comings.
C -- The lowest-rated class of bonds. Issues so rated have extremely poor
prospects of ever attaining any real investment standing.
S&P
Investment Grade Descriptions:
AAA -- Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A -- Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB -- Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
Below Investment Grade Descriptions:
- 64 -
<PAGE> 67
BB, B, CCC, CC -- 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 "CC" 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.
C -- Reserved for income bonds on which no interest is being paid.
D -- In default, and payment of interest and/or repayment of principal is in
arrears.
PLUS (+) OR MINUS (-): The ratings from "AA" to "D" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
MOODY'S.
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations with an original maturity not exceeding one
year.
Prime-1: Issuers (or supporting institutions) rated Prime-1 (P-1) have a
superior ability for repayment of senior short-term debt obligations. P-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2: Issuers (or supporting institutions) rated Prime-2 (P-2) have a strong
ability for repayment of senior short-term obligations. This will normally be
evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
STANDARD & POOR'S.
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days.
A-1: This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
- 65 -
<PAGE> 68
DESCRIPTION OF RATINGS FOR MUNICIPAL NOTES,
TAX-EXEMPT DEMAND NOTES AND OTHER SHORT-TERM OBLIGATIONS
STANDARD & POOR'S
Ratings for municipal notes and other short-term obligations are designated by
Standard & Poor's note rating. These ratings reflect liquidity concerns and
market access risks unique to notes. Notes due in three years or less will
likely receive a note rating.
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
Standard & Poor's assigns "dual" ratings to all long-term debt issues that have
as part of their provisions a demand or double feature.
The first rating addresses the likelihood of repayment of principal and interest
as due, and the second rating addresses only the demand feature. The long-term
debt rating symbols are used for bonds to denote the long-term maturity and the
commercial paper rating symbols are used to denote the put option (for example,
"AAA/A-1+"). For the newer "demand notes," Standard & Poor's note rating
symbols, combined with the commercial paper symbols, are used (for example,
"SP-1+/A-1+").
MOODY'S
Moody's rates municipal notes and other short-term obligations using Moody's
Investment Grade (MIG). A short-term obligation having a demand feature (a
variable-rate demand obligation) will be designated VMIG. This distinction
recognizes differences between short-term credit risk and long-term credit risk
as well as differences between short-term issues making payments on fixed
maturity dates (MIG) and those making payments on periodic demand (VMIG).
MIG/VMIG 1: This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broadbased access to the market for refinancing.
MIG 2/VMIG 2: This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
- 66 -
