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SAFECO RESOURCE SERIES TRUST
EQUITY PORTFOLIO
GROWTH PORTFOLIO
NORTHWEST PORTFOLIO
SMALL COMPANY STOCK PORTFOLIO
BOND PORTFOLIO
MONEY MARKET PORTFOLIO
Statement of Additional Information
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This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus for the Trust. A copy of the Prospectus may
be obtained by calling 1-800-624-5711 or by writing SAFECO Securities, Inc., S-3
SAFECO Plaza, Seattle, Washington 98185.
The date of the most current Prospectus of the Trust to which this Statement of
Additional Information relates is April 30, 1997.
The date of this Statement of Additional Information is April 30, 1997.
Shares of the Trust are offered to life insurance companies, which may or may
not be affiliated with one another ("Participating Insurance Companies"), for
allocation to certain of their separate accounts established for the purpose of
funding variable life insurance policies and variable annuity contracts and may
also be offered directly to qualified pension and retirement plans ("Qualified
Plans"). The Participating Insurance Companies and the Qualified Plans may or
may not make all Portfolios described in this Statement of Additional
Information available for investment.
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TABLE OF CONTENTS
Investment Policies 2 Additional Performance 16
Information
Additional Investment Information 9 Trustees and Officers 19
Special Risks of Below Investment 15 Investment Advisory and 21
Grade Bonds Other Services
Principal Shareholders of the 15 Brokerage Practices; Distributions 23
Portfolio and Tax Information
Additional Information On Financial Statements 27
Calculation of Net Asset Value 16
Per Share
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INVESTMENT POLICIES
The Equity Portfolio, Growth Portfolio, Northwest Portfolio, Small Company Stock
Portfolio ("Small Company Portfolio"), Bond Portfolio and Money Market Portfolio
(collectively, the "Portfolios") are each a series of the SAFECO Resource Series
Trust ("Trust"). The investment policies of each Portfolio are described in the
Prospectus and this Statement of Additional Information. These policies state
the investment practices that the Portfolios 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 (e.g., common stock,
U.S. Government securities or bonds) a Portfolio may purchase is also disclosed
in the Prospectus. Before a Portfolio purchases a security that the following
policies permit but which is not currently described in the Prospectus, the
Prospectus will be amended or supplemented to describe the security. The
following information supplements the discussion in the Prospectus of the
investment policies and limitations of each Portfolio.
Each Portfolio'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 ("1940 Act"). For purposes of such approval, the vote of a
majority of the outstanding voting securities of a Portfolio means the vote, at
a meeting of the shareholders of such Portfolio duly called, (i) of 67% or more
of the voting securities present at such meeting if the holders of more than 50%
of the outstanding voting securities are present or represented by proxy, or
(ii) of more than 50% of the outstanding voting securities, whichever is less.
Fundamental Investment Policies of the Equity Portfolio, Growth Portfolio,
Northwest Portfolio, Bond Portfolio and Money Market Portfolio
Each Portfolio will NOT:
1. Invest more than five percent (5%) of any Portfolio's total assets in the
securities of any one issuer (other than securities issued by the U.S.
Government, its agencies and instrumentalities), except (i) with respect to
the Equity, Growth, Northwest, Bond and Money Market Portfolios, up to
twenty-five percent (25%) of the value of each Portfolio's assets (not
including securities issued by another investment company) may be invested
without regard to this limit and (ii) with respect to the Bond and Money
Market Portfolios, up to one hundred percent (100%) of total assets may be
invested in obligations of or guaranteed by the U.S. Government, its
agencies or instrumentalities.
2. Purchase securities of any issuer (other than obligations of, or guaranteed
by, the U.S. Government, its agencies and instrumentalities) if such
purchase would cause more than ten percent (10%) of any class of securities
of such issuer to be held by a Portfolio.
3. a. With respect to the Equity, Growth, Northwest and Money Market
Portfolios, concentrate its investments in particular industries and
in no event will the respective Portfolio invest twenty-five (25%) or
more of its assets in any one industry. Securities of foreign banks
and
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foreign branches of U.S. banks are considered to be one industry.
This limitation does not apply to obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities or to
certificates of deposit or bankers' acceptances issued by domestic
banks.
b. With respect to the Bond Portfolio, invest more than twenty-five
percent (25%) of its assets in securities of issuers in the same
industry. This restriction does not apply to mortgage-related
securities or to obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
4. Invest more than five percent (5%) of the total assets of any Portfolio in
securities of issuers which with their predecessors have a record of less
than three years continuous operation.
5. Make loans to others, except through the purchase of publicly-distributed
debt obligations or repurchase agreements.
6. Borrow money, except from banks or affiliates of SAFECO Corporation at an
interest rate not greater than that available to a Portfolio from
commercial banks, and then only for temporary or emergency purposes and not
for investment purposes, and in an amount not exceeding five percent (5%)
of a Portfolio's assets at the time of borrowing.
7. Make short sales (sales of securities not presently owned) or purchase
securities on margin, except where the Trust has at the time of the sale by
virtue of its ownership in other securities the right to obtain securities
equivalent in kind and amount to the securities sold and except for such
short-term credits as are necessary for the clearance of transactions,
respectively.
8. Purchase or retain the securities of any issuer any of whose officers,
directors or security holders is an officer or trustee of the Trust if, or
so long as, any such officer or trustee owns beneficially more than one-
half (1/2) of one percent (1%) of such securities and the officers or
trustees of the Trust, together own beneficially more than five percent
(5%) of such securities.
9. Invest in commodities or commodity futures contracts or in real estate,
except the Trust may invest in securities which are secured by real estate
and securities which are of issuers which invest in or deal in real estate.
10. Underwrite securities issued by others, except to the extent that the Trust
may be deemed to be an underwriter under the federal securities laws in
connection with the disposition of portfolio securities.
11. Issue or sell any senior security.
12. Purchase from or sell portfolio securities to any officer or director, the
Trust's investment adviser, principal underwriter or any affiliates or
subsidiaries thereof.
FUNDAMENTAL INVESTMENT POLICIES OF THE SMALL COMPANY PORTFOLIO
The Small Company Portfolio will not:
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1. Purchase the securities of any issuer (except the U.S. Government, its
agencies or instrumentalities) if as a result more than 5% of the value of
the Small Company Portfolio's total assets would be invested in the
securities of such issuer or the Small Company Portfolio would own or hold
more than 10% of the outstanding voting securities of such issuer, except
that up to 25% of the value of such assets (which 25% shall not include
securities issued by another investment company) may be invested without
regard to these limits;
2. Borrow money, except the Small Company Portfolio may borrow money for
temporary and emergency purposes (not for leveraging or investment
purposes) in an amount not exceeding 33 1/3% of its total assets (including
the amount borrowed) less liabilities (other than borrowings). Any
borrowings by the Small Company Portfolio that come to exceed this amount
shall be reduced within three business days to the extent necessary to
comply with the 33 1/3% limit. "Business Day" means any day the New
York Stock Exchange is open for trading;
3. Act as underwriter of securities issued by any other person, firm or
corporation; except to the extent that, in connection with the disposition
of portfolio securities, the Small Company Portfolio may be deemed an
underwriter under federal securities laws;
4. Issue senior securities, except as permitted under the 1940 Act, the rules
or regulations promulgated thereunder or pursuant to a no-action letter
or an exemptive order issued by the Securities and Exchange Commission;
5. Purchase the securities of any issuer (except the U.S. Government, its
agencies or instrumentalities) if, as a result, more than 25% of the Small
Company Portfolio's total assets would be invested in securities of
companies whose principal business activities are in the same industry;
6. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments; however, the Small Company
Portfolio may purchase or sell options or futures contracts and invest in
securities or other instruments backed by physical commodities;
7. Lend any security or make any loan if, as a result, more than 33 1/3% of
its total assets would be lent to other parties; however, this limit does
not apply to purchases of debt securities or to repurchase agreements; and
8. Purchase or sell real estate, except real estate investment trusts.
NON-FUNDAMENTAL INVESTMENT POLICIES
In addition to the policies described in the Prospectus, each Portfolio has
adopted the non-fundamental policies described below that may be changed by the
Trust's Board of Trustees without shareholder approval.
Non-Fundamental Investment Policies of the Equity Portfolio, Growth Portfolio,
Northwest Portfolio, Bond Portfolio and Money Market Portfolio
1. A Portfolio may not participate on a joint or joint and several basis in
any trading account in securities, except that a Portfolio 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.
2. A Portfolio may not purchase securities with unlimited liability, i.e.,
securities for which the holder may be assessed for amounts in addition to
the subscription
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or other price paid for the security.
3. A Portfolio may not purchase or sell put or call options or combinations
thereof.
4. A Portfolio may not invest in oil, gas or other mineral exploration or
development programs or in arbitrage transactions.
5. A Portfolio may not trade in foreign exchange, except as may be necessary
to convert the proceeds of the sale of foreign portfolio securities into
U.S. dollars.
6. A Portfolio may not enter into a repurchase agreement for longer than seven
days.
7. A Portfolio may not purchase the securities of any other investment company
or investment trust, 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. A Portfolio will 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.
8. The Trust's Equity, Growth, Northwest and Bond Portfolios may purchase as
temporary investments for their cash commercial paper, certificates of
deposit, no-load, open-end money market funds (subject to the limitations
in subparagraph 7 above), repurchase agreements (subject to the limitations
in subparagraph 6 above) or any other short-term instrument that the
Trust's investment adviser deems appropriate.
Commercial paper must be rated A-1 or A-2 by Standard & Poor's Ratings
Group ("S&P") or Prime-1 or Prime-2 by Moody's Investors Service, Inc.
("Moodys") or issued by companies with an unsecured debt issue currently
outstanding rated AA by S&P or Aa or higher by Moody's.
9. While the Trust will not engage primarily in trading in the Equity, Growth,
Northwest and Bond Portfolios for the purpose of short-term profits, it may
at times make investments for short-term purposes when such action is
believed to be desirable and consistent with sound investment procedures.
The Trust will dispose of securities whenever it is deemed advisable
without regard to the length of time the securities have been held.
10. The Trust's Money Market Portfolio may invest in short-term instruments, or
long-term instruments with characteristics qualifying them as short-term
instruments, which at the time of purchase are rated in the highest rating
category by at least two nationally recognized rating organizations or, if
rated by only one organization, are rated in the highest category by that
organization, and which in the opinion of the Money Market Portfolio's
investment adviser present minimal credit risks.
11. The Trust's Money Market Portfolio may invest in short-term instruments, or
long-term instruments with characteristics qualifying them as short-term
instruments, which at the time of purchase are split-rated (i.e. rated in
the highest category by one nationally recognized rating organization and
the second highest category by at least one other such organization), are
rated in the second highest rating
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category by at least two nationally recognized rating organizations or, if
rated by only one organization are rated in the second highest category by
that organization and which in the opinion of the Money Market Portfolio's
investment adviser present minimal credit risks. However, the Money Market
Portfolio may invest no more than five percent (5%) of total assets in
these securities and may invest only the greater of $1 million or one
percent (1%) of total assets in such securities from the same issuer.
12. The Trust's Money Market Portfolio may invest in short-term instruments, or
long-term instruments with characteristics qualifying them as short-term
instruments, which are unrated if such securities are determined to be
comparable in quality to securities rated as described in paragraphs 10 and
11 and which in the opinion of the Money Market Portfolio's investment
adviser present minimal credit risks. The Money Market Portfolio will
invest no more than twenty percent (20%) of total assets in unrated
securities which in SAM's opinion are comparable to securities in the
highest rating category. Purchases of unrated securities which in SAM's
opinion are comparable to split-rated securities are subject to the five
percent (5%) and one percent (1%) limitations described in paragraph 11.
13. Subject to the maturity requirements stated in the Money Market Portfolio's
investment objective and the quality and credit risk requirements set forth
in paragraphs 10-12, the Money Market Portfolio may purchase the following
types of securities:
a. Commercial paper obligations.
b. Negotiable and non-negotiable time deposits and certificates of
deposit, bankers' acceptances and other short-term debt obligations of
banks. The Money Market Portfolio 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 United States banks which do not have total 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 such investment is insured in
full by the Federal Deposit Insurance Corporation (FDIC), (b) in the
case of a United States bank, it is a member of the FDIC, and (c) in
the case of a foreign bank, the security is in the opinion of
management of an investment quality comparable with other debt
securities which may be purchased by the Money Market Portfolio.
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.
c. Corporate obligations such as publicly-traded bonds, debentures and
notes.
14. The Trust may not invest more than five percent (5%) of the net assets of
the Equity, Growth and Northwest Portfolios in warrants valued at the lower
of cost or market. Warrants acquired as a result of unit offerings or
attached to securities may be deemed without value for purposes of the five
percent (5%) limitation.
15. A Portfolio will not issue long-term debt securities.
16. A Portfolio will not invest in any security for the purpose of acquiring or
exercising control or management of the issuer.
17. The Growth Portfolio will normally invest a preponderance of assets in
common
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stocks selected primarily for potential appreciation. The Northwest
Portfolio will invest primarily in shares of common stock selected
primarily for potential appreciation that have been issued by Northwest
companies. In determining these common stocks which have the potential for
long-term growth, the Trust's investment adviser will evaluate the issuer's
financial strength, quality of management and earnings power.
18. The Northwest Portfolio may occasionally invest in securities convertible
into common stock when, in the opinion of SAM, the expected total return of
a convertible security exceeds the expected total return of common stock
eligible for purchase by the Portfolio.
19. The Equity Portfolio may invest up to ten percent (10%) of its total assets
in shares of real estate investment trusts ("REITs"). The Growth and
Northwest Portfolios may invest up to five percent (5%) of their total
assets in shares of real estate investment trusts ("REITs").
20. The Equity Portfolio may invest up to 5% of total assets in closed-end
investment companies and investment trusts (other than REITS).
21. The Equity Portfolio may purchase fixed-income securities in accordance
with business and financial conditions.
22. A Portfolio may invest up to 10% of total assets in restricted securities
eligible for resale under Rule 144A ("Rule 144A securities"), provided that
SAM has determined that such securities are liquid under guidelines adopted
by the Board of Trustees.
WHILE THE TRUST CAN INVEST IN THE TYPES OF SECURITIES OR ENGAGE IN THE PRACTICES
WHICH FOLLOW IF THE APPLICABLE LIMITATIONS ARE MET, IT HAS NO PRESENT INTENTION
TO DO SO IN THE COMING YEAR. BEFORE THE TRUST PURCHASES THESE TYPES OF
SECURITIES OR ENGAGES IN THESE PRACTICES WITHIN THE ALLOWED LIMITS, THE
PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED TO IDENTIFY OR DESCRIBE THE SECURITY.
23. The Equity, Growth, Northwest and Money Market Portfolios of the Trust may
not purchase foreign securities, unless at the time thereof, such purchase
would not cause more than five percent (5%) of the total assets of a
Portfolio (taken at market value) to be invested in foreign securities.
This restriction does not apply to the Bond Portfolio.
24. A Portfolio may not pledge, mortgage or hypothecate portfolio securities,
except that to secure borrowings permitted by the fundamental policy on
borrowing, a Portfolio may pledge securities having a market value at the
time of the pledge not exceeding ten percent (10%) of the Portfolio's net
assets.
NON-FUNDAMENTAL INVESTMENT POLICIES OF THE SMALL COMPANY PORTFOLIO
1. The Small Company Portfolio will not make short sales (sales of securities
not presently owned), except where the Portfolio has at the time of sale,
by virtue of its ownership in other securities, the right to obtain at no
additional cost securities equivalent in kind and amount to the securities
to be sold;
2. The Small Company Portfolio will not purchase securities issued by 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 when such
purchase, although not made in the open
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market, is part of a merger, consolidation or acquisition. Nothing in this
policy shall prevent any purchase for the purpose of effecting a merger,
consolidation or acquisition of assets expressly approved by the
shareholders after full disclosure of any commission or profit to the
principal underwriter;
3. The Small Company Portfolio will not invest in oil, gas or other mineral
exploration, development programs or leases;
4. The Small Company Portfolio will not invest more than 5% of its net assets
in warrants. Warrants acquired by the Portfolio in units or attached to
securities are not subject to the 5% limit;
5. The Small Company Portfolio will not invest more than 10% of its total
assets in real estate investment trusts, nor will the Portfolio invest in
interests in real estate investment trusts that are not readily marketable
or interests in real estate limited partnerships not listed or traded on
the Nasdaq Stock Market if, as a result, the sum of such interests
considered illiquid and other illiquid securities would exceed 15% of the
Portfolio's net assets;
6. The Small Company Portfolio will not purchase securities on margin, except
that the Portfolio may obtain such short-term credits as are necessary for
the clearance of transactions, and provided that margin payments made in
connection with futures contracts and options on futures shall not
constitute purchasing securities on margin;
7. The Small Company Portfolio may borrow money only from a bank or SAFECO
Corporation or affiliates thereof or by engaging in reverse repurchase
agreements with any party. The Portfolio will not purchase any securities
while borrowings equal to or greater than 5% of its total assets are
outstanding;
8. The Small Company Portfolio will not purchase any security, if as a result,
more than 15% of its net assets would be invested in securities that are
deemed to be illiquid because they cannot be sold or disposed of in the
ordinary course of business at approximately the prices at which they are
valued;
9. The Small Company Portfolio will not make loans to any person, firm or
corporation, but the purchase by the Portfolio of a portion of an issue of
publicly distributed bonds, debentures or other securities issued by
persons other than the Portfolio, whether or not the purchase was made upon
the original issue of securities, shall not be considered a loan within the
prohibition of this section;
10. The Small Company Portfolio will not purchase or retain the securities of
any issuer if, to the knowledge of the Portfolio's management, the officers
and Trustees of the Trust and the officers and directors of the investment
adviser to the Portfolio (each owning beneficially more than 0.5% of the
outstanding securities of an issuer) own in the aggregate 5% or more of the
securities of the issuer;
11. The Small Company Portfolio may invest in restricted securities eligible
for resale under Rule 144A, provided that SAM has determined that such
securities are liquid under guidelines adopted by the Board of Trustees;
12. The Small Company Portfolio 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 Portfolio may dispose of
securities whenever its adviser deems
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advisable without regard to the length of time they have been held;
13. The Small Company Portfolio will not purchase securities of companies which
together with any predecessors have a record of less than 3 years of
continuous operation, if such purchase at the time thereof would cause more
than 5% of the Portfolio's total assets to be invested in the securities of
such companies;
14. The Small Company Portfolio will not purchase puts, calls, straddles,
spreads or any combination thereof, if by reason thereof the value of its
aggregate investment in such classes of securities would exceed 5% of its
total assets; provided, however, that nothing herein shall prevent the
purchase, ownership, holding or sale of warrants where the grantor of the
warrants is the issuer of the underlying securities; and
15. The Small Company Portfolio will not purchase or sell commodities or
commodity contracts.
ADDITIONAL INVESTMENT INFORMATION
Unless otherwise noted, each Portfolio may make some or all of the following
investments, among others, although they 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 Securities Act of 1933
("1933 Act") or, if they are unregistered, 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. To the extent privately placed securities held by a
Portfolio qualify under Rule 144A and an institutional market develops for
those securities, the Portfolio 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, a Portfolio 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 Portfolio may be permitted to
sell a security under an effective registration statement. If during such
a period adverse market conditions were to develop, the Portfolio 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 a
Portfolio 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
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coupon rate or maturity of the purchased securities. A Portfolio
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.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible declines in the market value
of the underlying securities and delays and costs to a Portfolio if the
other party to a repurchase agreement becomes bankrupt. Each Portfolio
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. 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. The Portfolios do not intend to
purchase illiquid securities but the market for some securities may become
illiquid following purchase by a Portfolio. Due to the absence of an
active trading market, a Portfolio may experience difficulty in valuing or
disposing of illiquid securities. SAM determines the liquidity of the
securities pursuant to guidelines adopted by the Trust's Board of Trustees.
4. WARRANTS. A warrant is an option issued by a corporation that gives the
holder the right to buy a stated number of shares of common stock of the
corporation at a specified price within a designated time period. Warrants
may be purchased and sold separately or attached to stocks or bonds as part
of a unit offering. The term of a warrant may run from two to five years
and in some cases the term may be longer. The exercise price carried by
the warrant is usually well above the prevailing market price of the
underlying common stock at the time the warrant is issued. The holder of a
warrant has no voting rights and receives no dividends. Warrants are
freely transferable and may trade on the major national exchanges.
Warrants may be speculative. Generally, the value of a warrant will
fluctuate by greater percentages than the value of the underlying common
stock. The primary risk associated with a warrant is that the term of the
warrant may expire before the exercise price of the common stock has been
reached. Under these circumstances, a Portfolio could lose all of its
principal investment in the warrant.
A Portfolio will invest in a warrant only if the Portfolio has the
authority to hold the underlying common stock. Additionally, if a
warrant is part of a unit offering, a Portfolio will purchase the
warrant only if it is attached to a security in which the Portfolio has
authority to invest. In all cases, a Portfolio will purchase warrants
only after SAM determines that, in its opinion, the exercise price for
the underlying common stock is likely to be achieved within the required
time-frame and that an actively traded market exists. SAM will make
this determination by analyzing the issuer's financial health, quality
of management and any other factors deemed to be relevant.
5. REAL ESTATE INVESTMENT TRUSTS. Real estate investment trusts ("REITs")
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purchase real property, which is then leased, and make mortgage
investments. For federal income tax purposes REITs attempt to qualify for
beneficial tax treatment by distributing at least 95% of their taxable
income. If a REIT were unable to qualify for such beneficial tax
treatment, it would be taxed as a corporation and distributions to its
shareholders would not be deductible by it in computing its taxable income.
REITs are dependent upon the successful operation of the properties owned
and the financial condition of lessees and mortgagors. The value of REIT
units will fluctuate depending on the underlying value of the real property
and mortgages owned and the amount of cashflow (net income plus
depreciation) generated and paid out. In addition, REITs typically borrow
to increase funds available for investment. Generally there is a greater
risk associated with REITs which are highly leveraged.
6. CONVERTIBLE SECURITIES. Convertible bonds and convertible preferred stock
may be exchanged for a stated number of shares of the issuer's common stock
at a certain price known as the conversion price. The conversion price is
usually greater than the price of the common stock at the time the
convertible security is purchased. Generally, the interest rate of
convertible bonds and the yield of convertible preferred stock will be
lower than the issuer's non-convertible securities. Also, the value of
convertible securities will normally vary with the value of the underlying
common stock and fluctuate inversely with interest rates. However,
convertible securities may show less volatility in value than the issuer's
non-convertible securities. A risk associated with convertible bonds and
convertible preferred stock is that the conversion price of the common
stock will not be attained.
7. YANKEE DEBT SECURITIES AND EURODOLLAR BONDS. (Equity, Growth, Northwest,
Bond and Money Market Portfolios only.) The Yankee Sector is made up of
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 by
the foreign government, establishment of controls by the foreign government
that would inhibit the remittance of amounts due a Portfolio, 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 investments in foreign securities on the same basis
relative to quality and risk as its investments in domestic securities, it
may not always be able to do so.
Eurodollar Bonds are denominated in U.S. dollars. A Portfolio will
purchase Eurodollar Bonds through U.S. securities dealers and hold such
bonds in the U.S. The delivery of Eurodollar Bonds to a Portfolio's
custodian in the U.S. may cause slight delays in settlement which are not
anticipated to affect the Portfolio in any material, adverse manner.
Eurodollar Bonds issued by foreign issuers are subject to the same risks as
Yankee Sector bonds.
8. MORTGAGE-BACKED SECURITIES. (Bond Portfolio only.) Unlike conventional
bonds, the principal with respect to mortgage-backed securities is paid
back over the
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life of the loan rather than at maturity. Consequently, the Bond Portfolio
will receive monthly scheduled payments of both principal and interest. In
addition, the Bond Portfolio may receive unscheduled principal payments
representing unscheduled prepayments on the underlying mortgages. Since
the Bond Portfolio must reinvest scheduled and unscheduled principal
payments at prevailing interest rates at the time of such investment and
such interest rates may be higher or lower than the current yield of the
Bond Portfolio's portfolio, mortgage-backed securities may not be an
effective means to lock in long-term interest rates. In addition, while
prices of mortgage-backed securities, like conventional bonds, are
inversely affected by changes in interest rate levels, because of the
likelihood of increased prepayments of mortgages in times of declining
interest rates, they have less potential for capital appreciation than
comparable fixed-income securities and may in fact decrease in value when
interest rates fall.
The rate of interest payable on CMO classes may be set at levels that are
either above or below market rates at the time of issuance, so that the
securities will be sold at a substantial premium to, or at a discount from,
par value. If the mortgage assets underlying an CMO experience greater
than anticipated principal prepayments, an investor may fail to recoup
fully its initial investment even though the security is government-issued
or guaranteed.
Some CMO classes are structured to pay interest at rates that are adjusted
in accordance with a formula, such as a multiple or fraction of the change
in a specified interest rate index, so as to pay at a rate that will be
attractive in certain interest rate environments but not in others. For
example, a CMO may be structured so that its yield moves in the same
direction as market interest rates - i.e., the yield may increase as rates
increase and decrease as rates decrease -but may do so more rapidly or to a
greater degree. Other CMO classes may be structured to pay floating
interest rates that either move in the same direction or the opposite of
short-term interest rates. The market value of such securities may be more
volatile than that of a fixed rate obligation. Such interest rate formulas
may be combined with other CMO characteristics. The Portfolios will
not invest in interest-only or principal-only classes -- such investments
are extremely sensitive to changes in interest rates.
9. SHORT-TERM INVESTMENTS. The Equity, Growth, Northwest and Bond Portfolios
may purchase short-term securities under those circumstances where they
have cash to manage for a short-term time period or as a defensive measure
when, in the investment adviser's opinion, business or economic conditions
warrant. Certificates of deposit must be issued by banks or savings and
loan associations which have total assets of at least $1 billion or, in the
case of a bank or savings and loan association not having total assets of
at least $1 billion, the bank or savings and loan association is insured by
the Federal Deposit Insurance Corporation in which case the Portfolio will
limit its investment to the statutory insurance coverage.
10. FOREIGN SECURITIES. Foreign securities are securities issued in and
traded in foreign markets and contain greater risks (including currency
risk) than securities issued in and traded in U.S. markets. The Equity,
Growth, Northwest and Money Market Portfolios may not purchase foreign
securities, unless at the time thereof, such purchase would not cause
more than five percent (5%) of the total assets of a Portfolio (taken at
market value) to be invested in foreign securities. The Money Market
Portfolio may purchase dollar-denominated commercial paper issued in
the U.S. by foreign
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<PAGE>
entities (as described in the Prospectus). The Small Company Stock
Portfolio may invest up to 10% of its total assets (taken at market
value) in foreign securities. The Bond Portfolio may invest up to 30%
of its total assets (taken at market value) in foreign securities.
While investments in foreign securities are intended to reduce risk by
providing further diversification, such investments involve sovereign
and other risks, in addition to the credit and market risks normally
associated with domestic securities. These additional risks include the
possibility of adverse political and economic developments (including
political instability) and the potentially adverse effects of
unavailability of public information regarding issuers, reduced
governmental supervision regarding financial markets, reduced liquidity
of certain financial markets, and the lack of uniform accounting,
auditing, and financial standards or the application of standards that
are different or less stringent than those applied in the U.S.
11. ASSET-BACKED SECURITIES. (Equity, Growth, Northwest, Bond and Money Market
Portfolios Only.) 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. There exists a risk of default by
the underlying borrowers and recovery on repossessed collateral may be
unavailable or inadequate to support payments on 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 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.
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 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.
12. COMMERCIAL PAPER AND CERTIFICATES OF DEPOSIT. (Small Company Portfolio
only.) In making temporary investments in commercial paper and
certificates of deposit, the Portfolio will adhere to the following
guidelines:
a) Commercial paper must be rated A-1 or A-2 by Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc.
("S&P") or Prime-1 or Prime-2 by Moody's Investors Services, Inc.
("Moody's") or issued by companies with an unsecured debt issue
currently outstanding rated AA by S&P or Aa by Moody's or higher.
b) Certificates of deposit ("CDs") must be issued by banks or
savings and
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<PAGE>
loan associations that have total assets of at least $1 billion
or, in the case of a bank or savings and loan association not
having total assets of at least $1 billion, the bank or savings
and loan association is insured by the Federal Deposit Insurance
Corporation ("FDIC").
13. CONTINGENT VALUE RIGHTS. (Small Company Portfolio only.) A contingent value
right ("CVR") is a right issued by a corporation that takes on a pre-
established value if the underlying common stock does not attain a target
price by a specified date. Generally, a CVR's value will be the difference
between the target price and the current market price of the common stock
on the target date. If the common stock does attain the target price by
the date, the CVR expires without value. CVRs may be purchased and sold as
part of the underlying common stock or separately from the stock. CVRs may
also be issued to owners of the underlying common stock as the result of a
corporation's restructuring.
14. WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES. (Small Company Portfolio
only.) Under this procedure, the Portfolio agrees to acquire securities
(whose terms and conditions, including price, have been fixed by the
issuer) that are to be issued and delivered against payment in the future.
Delivery of securities so sold normally takes place 30 to 45 days
(settlement date) after the date of the commitment. No interest is earned
by the Portfolio prior to the settlement date. The value of securities
sold on a "when-issued" or "delayed-delivery" basis may fluctuate before
the settlement date and the Portfolio bears the risk of such fluctuation
from the date of purchase. The Portfolio may dispose of its interest in
those securities before delivery.
15. SOVEREIGN DEBT OBLIGATIONS. (Small Company Portfolio only.) Sovereign debt
instruments are issued or guaranteed by foreign governments or their
agencies. Sovereign debt may be in the form of conventional securities or
other types of debt instruments such as loans or loan participations.
Governments or governmental entities responsible for repayment of the debt
may be unable or unwilling to repay principal and interest when due, and
may require renegotiation or rescheduling of debt payments. Repayment of
principal and interest may depend also upon political and economic factors.
16. INDEXED SECURITIES. (Small Company Portfolio only.) Indexed securities are
securities whose prices are indexed to the prices of other securities,
securities indices, currencies, commodities or other financial indicators.
Indexed securities generally are debt securities whose value at maturity or
interest rate is determined by reference to a specific instrument or
statistic. Currency-indexed securities generally are debt securities whose
maturity values or interest rates are determined by reference to values of
one or more specified foreign currencies. Currency-indexed securities may
be positively or negatively indexed; i.e., their maturity value may
increase when the specified currency value increases, resulting in a
security that performs similarly to a foreign-denominated instrument, or
their maturity value may decline when foreign currencies increase,
resulting in a security whose price characteristics are similar to a put on
the underlying currency. Currency-indexed securities may also have prices
that depend on the values of different foreign securities relative to each
other.
The performance of an indexed security depends largely on the performance
of the security, currency or other instrument to which they are indexed.
Performance may also be influenced by interest rate changes in the United
States and foreign countries. Indexed securities additionally are subject
to credit risks associated with the issuer of the security. Their values
may decline
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<PAGE>
substantially if the issuer's creditworthiness deteriorates. Indexed
securities may also be more volatile than their underlying instruments.
17. SHORT SALES AGAINST THE BOX. (Small Company Portfolio only.) The
Portfolio may make short sales of securities or maintain a short position,
provided that at all times when a short position is open the Portfolio owns
an equal amount of such securities or an equal amount of the securities of
the same issuer as the securities sold short (a "short sale against the
box"). If the Portfolio engages in short sales against the box, it will
incur transaction costs.
SPECIAL RISKS OF BELOW INVESTMENT GRADE BONDS
The Bond Portfolio may invest up to 20% of its assets in below investment grade
bonds (commonly referred to as "high-yield" or "junk" bonds). Certain
additional risks are associated with these bonds. Yields on below investment
grade bonds will fluctuate over time. These bonds tend to reflect short-term
economic and corporate developments to a greater extent than higher quality
bonds which primarily react to fluctuations in interest rates. During an
economic downturn or period of rising interest rates, issuers of below
investment grade bonds may experience financial difficulties which adversely
affect their ability to make principal and interest payments, meet projected
business goals and obtain additional financing. In addition, issuers often rely
on cash flow to service debt. Failure to realize projected cash flows may
seriously impair the issuer's ability to service its debt load which in turn
might cause a Portfolio to lose all or part of its investment in that security.
SAM will seek to minimize these additional risks through diversification,
careful assessment of the issuer's financial structure, business plan and
management team and monitoring of the issuer's progress toward its financial
goals.
The liquidity and price of below investment grade bonds can be affected by a
number of factors, including investor perceptions and adverse publicity
regarding major issues, underwriters or dealers of lower-quality corporate
obligations. These effects can be particularly pronounced in a thinly-traded
market with few participants and may adversely impact the Portfolio's ability to
dispose of the bonds as well as make valuation of the bonds more difficult.
Because there tend to be fewer investors in below investment grade bonds, it may
be difficult for the Portfolio to sell these securities at an optimum time.
Consequently, these bonds may be subject to more price changes, fluctuations in
yield and risk to principal and income than higher-rated bonds of the same
maturity.
Credit ratings evaluate the likelihood that an issuer will make principal and
interest payments, but may not reflect market value risks associated with lower-
rated bonds. Credit rating agencies may not timely revise ratings to reflect
subsequent events affecting an issuer's ability to pay principal and interest.
PRINCIPAL SHAREHOLDERS OF THE PORTFOLIOS
At April 1, 1997 SAFECO Life Insurance Company ("SAFECO Life") owned the
following percentages of the outstanding shares of the Portfolios listed:
Equity 99.5%
Growth 99.9%
Northwest 96.5%
Bond 100%
Money Market 100%
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<PAGE>
SAFECO Life and SAM are wholly-owned subsidiaries of SAFECO Corporation,
SAFECO Plaza, Seattle, Washington 98185.
ADDITIONAL INFORMATION ON CALCULATION OF NET ASSET VALUE PER SHARE
The portfolio instruments of the Money Market Portfolio are valued on the basis
of amortized cost. The valuation of the Money Market Portfolio securities based
upon its amortized cost and the maintenance of its net asset value per share at
$1.00 is permitted pursuant to Rule 2a-7 under the 1940 Act. Pursuant to that
rule, the Money Market Portfolio has established the following policies: the
Portfolio will maintain a dollar-weighted average portfolio maturity of 90 days
or less, purchase only securities having remaining maturities of thirteen months
or less and invest only in securities determined by SAM under guidelines adopted
by the Board of Trustees to be of high quality with minimal credit risks. The
Board of Trustees has established procedures designed to stabilize, to the
extent reasonably possible, the Portfolio's price-per-share as computed for the
purpose of sales and redemptions at $1.00. These procedures include a review of
the Portfolio's holdings by the Board of Trustees, at such intervals as it may
deem appropriate, to determine whether the Portfolio's net asset value per
share, calculated by using available market quotations, deviates from $1.00 per
share and, if so, whether such deviation may result in material dilution or is
otherwise unfair to existing contract owners. In the event the Board of
Trustees determines that such a deviation exists, it will take such corrective
action as it regards 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 net asset value per share by using available market quotations;
or taking such other measures as it may deem appropriate.
Each other Portfolio has selected a pricing service to assist in computing
the value of its securities. Short-term debt securities held by each
Portfolio have 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, or under such
other methods as the 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 up until the
61st day prior to maturity. All other securities and assets in the
portfolios will be appraised in accordance with those procedures established
by the Board of Trustees in good faith in computing the fair market value of
those assets.
ADDITIONAL PERFORMANCE INFORMATION
EQUITY, GROWTH, NORTHWEST AND BOND PORTFOLIOS
The yields for the 30-day period ended December 31, 1996 for the Equity, Growth,
Northwest and Bond Portfolios of the Trust were 1.36%, (.24%), .82% and 6.94%,
respectively.
Yield is computed using the following formula:
a-b 6
Yield = 2 [(--- +1) - 1]
cd
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<PAGE>
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
The total returns, expressed as a percentage, for the one-year, five-year and
since inception periods ended December 31, 1996 for the Equity and Bond
Portfolios were as follows:
Since Initial # of Initial
Portfolio 1 Year 5 Year Public Offering Months Public Offering
- --------- ------ ------ --------------- ------ ---------------
Equity 24.79% 141.70% 257.82% 113 July 21, 1987
Bond .54% 35.84% 102.27% 113 July 21, 1987
The total returns, expressed as a percentage, for the one-year, and since
inception periods ended December 31, 1996 for the Growth and Northwest
Portfolios were as follows:
Since Initial # of Initial
Portfolio 1 Year Public Offering Months Public Offering
- --------- ------ --------------- ------ ---------------
Growth 32.06% 180.77% 47 January 7, 1993
Northwest 12.44 24.52% 47 January 7, 1993
The average annual total returns, expressed as a percentage, for the one-year,
five-year and since inception periods ended December 31, 1996 for the Equity and
Bond Portfolios were as follows:
Since Initial # of Initial
Portfolio 1 Year 5 Year Public Offering Months Public Offering
- --------- ------ ------ --------------- ------ ---------------
Equity 24.79% 19.30% 14.50% 113 July 21, 1987
Bond .54% 6.32% 7.77% 113 July 21, 1987
The average annual total returns, expressed as a percentage, for the one-year
and since inception periods ended December 31, 1996 for the Growth and Northwest
Portfolios were as follows:
Since Initial # of Initial
Portfolio 1 Year Public Offering Months Public Offering
- --------- ------ --------------- ------ ---------------
Growth 32.06% 30.16% 47 January 7, 1993
Northwest 12.44% 5.76% 47 January 7, 1993
The total return is computed using the following formula:
ERV-P
T = ------- X 100
P
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<PAGE>
The average annual total return is computed using the following formula:
n -----
A =( \/ ERV/P - 1) x 100
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
In making the above calculations, all dividends and capital-gain distributions
are assumed to be reinvested at the respective Portfolio's NAV on the
reinvestment date.
MONEY MARKET PORTFOLIO:
The yield and effective yield for the Money Market Portfolio of the Trust for
the 7-day period ended December 31, 1996, are 4.87% and 4.99%, respectively.
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:
Effective yield = [(Base Period Return + 1) 365/7 ] -1
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<PAGE>
TRUSTEES AND OFFICERS
TRUSTEES POSITION HELD PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE WITH TRUST DURING PAST 5 YEARS
- --------------------- ------------- --------------------
Boh A. Dickey* Trustee President, Chief Operating
SAFECO Plaza and Officer and Director of SAFECO
Seattle, Washington 98185 Chairman Corporation.
(52) He has been an executive
officer of SAFECO Corporation
and its subsidiaries since
1982. Director of First
SAFECO National Life Insurance
Company of New York. See table
under "Investment Advisory and
Other Services."
Barbara J. Dingfield Trustee Manager, Corporate
Microsoft Corporation Contributions and Community
One Microsoft Way Programs for Microsoft
Redmond, Washington 98052 Corporation, Redmond,
(51) Washington, a computer
software company; Director
and former Executive Vice
President, 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
1270 NW Blakely Ct. Treasurer of the Trust and
Seattle, Washington 98177 other SAFECO Trusts; retired
(68) Senior Vice President and
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
764 S. 293rd Street Customer Relations, Building
Federal Way, Washington Materials Distribution,
98032 Weyerhaeuser Company, Tacoma,
(59) Washington; Director of First
SAFECO National Life Insurance
Company of New York.
Larry L. Pinnt Trustee Retired Vice President and
1600 Bell Plaza, Room 1802 Chief Financial Officer of
Seattle, Washington 98191 U.S. WEST Communications,
(61) Seattle, Washington; Director
of Key Bank of Washington;
Director of University of
Washington Medical Center,
Seattle, Washington; Director
of First SAFECO National Life
Insurance Company of New York;
Director of Cascade Natural
Gas Corporation, Seattle,
Washington.
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<PAGE>
TRUSTEES POSITION HELD PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE WITH TRUST DURING PAST 5 YEARS
- --------------------- ------------- --------------------
John W. Schneider Trustee President of Wallingford
1808 N. 41st Street Group, Inc., an international
Seattle, Washington 98103 trading and business/real
(55) estate development consulting
firm, Seattle, Washington;
former President of Coast
Hotels, Inc.; Director of
First SAFECO National Life
Insurance Company of New York.
David F. Hill* President and President of SAFECO
SAFECO Plaza Trustee Securities, Inc. and SAFECO
Seattle, Washington 98185 Services Corporation; Senior
(48) Vice President of SAFECO Asset
Management Company. See table
under "Investment Advisory and
Other Services."
Neal A. Fuller Vice President Vice President, Controller,
SAFECO Plaza Controller Assistant Secretary and
Seattle, Washington 98185 Assistant Treasurer of SAFECO
(34) Secretary Securities, Inc. and SAFECO
Services 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 Chairman of SAFECO Asset
SAFECO Plaza Treasurer Management Company; Vice
Seattle, WA 98185 President and Treasurer of
(52) SAFECO Corporation; Director
and Vice President of SAFECO
Life Insurance Company; former
senior Portfolio Manager of
SAFECO insurance companies'
taxable bond portfolios;
former Portfolio Manager for
several SAFECO mutual funds.
See Table under "Investment
Advisory and Other Services."
*Trustees who are interested persons as defined by the 1940 Act.
At April 1, 1997 none of the Trustees and officers of the Trust owned
shares of any series of the Trust.
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<PAGE>
COMPENSATION TABLE
FOR THE FISCAL YEAR ENDING DECEMBER 31, 1996
Total
Pension or Compensation
Retirement From
Benefits Estimated Registrant and
Aggregate Accrued As Annual Fund Complex
Compensation Part of Fund Benefits Upon Paid to
Trustee from Registrant Expenses Retirement Trustees
- ------- --------------- ------------ ------------- --------------
Boh A. Dickey N/A N/A N/A N/A
Barbara J. $4,359 $0 $0 $27,938
Dingfield
David F. Hill N/A N/A N/A N/A
Richard W.,
Hubbard $4,359 $0 $0 $25,750
Richard E.
Lundgren $4,359 $0 $0 $27,938
Larry L. Pinnt $4,359 $0 $0 $27,938
John W.
Schneider $4,359 $0 $0 $27,938
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 five other registered open-end,
management investment companies that have, in the aggregate, nineteen series
companies managed by SAM.
INVESTMENT ADVISORY AND OTHER SERVICES
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 and SAFECO Services
is the transfer, dividend and distribution disbursement and shareholder
servicing agent for each Portfolio under agreements with the Trust.
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<PAGE>
The following individuals have the following positions and offices with the
Trust, SAM, SAFECO Securities and SAFECO Services:
Name Trust SAM SAFECO SAFECO
- ---- ----- --- Securities Services
---------- --------
B. A. Dickey Chairman Director Director
Trustee
D. F. Hill President Senior President President
Trustee Vice Director Director
President Secretary Secretary
Director
N. A. Fuller Vice Vice Vice Vice
President President President President
Controller Controller Controller Controller
Assistant Secretary Assistant Assistant
Secretary Treasurer Secretary Secretary
Treasurer Treasurer
R. A. Spaulding Vice Chairman Director Director
President Director
Treasurer
S. C. Bauer President
Director
D. H. Longhurst Assistant Assistant Assistant
Controller Controller Controller
Mr. Dickey is President and Chief Operating Officer of SAFECO Corporation, and
Mr. Spaulding is a Treasurer of SAFECO Corporation. Messrs. Dickey and
Spaulding are also directors of other SAFECO Corporation subsidiaries.
In connection with the investment advisory contract with the Trust, SAM
furnishes or pays for all facilities and services furnished or performed for or
on behalf of the Trust and each Portfolio that include furnishing office
facilities, books, records and personnel to manage the Trust's and each
Portfolio's affairs and paying certain expenses.
For the services and facilities furnished by SAM, the Trust has agreed to pay an
annual fee of .74% for the Equity, Growth, Northwest and Bond Portfolios, .85%
for the Small Company Portfolio and .65% for the Money Market Portfolio computed
on the basis of the average market value of the net assets of each Portfolio
ascertained each business day and paid monthly. During its last three fiscal
years, the Trust paid SAM the following investment advisory fees for each
Portfolio:
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<PAGE>
Investment Advisory Fees Paid to SAM
Years Ended
December 31 December 31 December 31
Portfolio 1996 1995 1994
- --------- -----------------------------------------
Equity $1,488,000 $961,000 $623,000
Bond $ 113,000 $ 93,000 $ 96,000
Northwest $ 56,000 $ 40,000 $ 28,000
Growth $ 519,000 $200,000 $ 68,000
Money Market $ 63,000 $ 54,000 $ 47,000
State Street Bank and Trust, 1776 Heritage Drive, North Quincy, MA, 02170 is the
custodian of the securities and cash of each Portfolio under an agreement with
the Trust. Ernst & Young LLP, 999 Third Avenue, Suite 3500, Seattle, Washington
98104 is the independent auditor of each Portfolio's financial statements.
SAFECO Services, SAFECO Plaza, Seattle, Washington 98185, is the transfer,
dividend and distribution disbursement and shareholder servicing agent for each
Portfolio under an agreement with the Trust. SAFECO Services is responsible for
all required transfer agent activity, including maintenance of records for each
Portfolio's shareholders, records of transactions involving each Portfolio's
shares and the compilation, distribution, or reinvestment of income dividends or
capital gains distributions. SAFECO Services is not compensated by the Trust or
the Portfolios for these services.
SAFECO Securities is the principal underwriter for each Portfolio and
distributes each Portfolio's shares on a continuous best efforts basis under an
agreement. SAFECO Securities is not compensated by the Trust or the Portfolios
for underwriting, distribution or other activities.
BROKERAGE PRACTICES
Brokers typically charge commissions or mark-ups/mark-downs to effect
securities transactions. The Portfolios may also purchase securities from
underwriters, the price of which will include a commission or concession paid
by the issuer to the underwriter. The purchase price of securities purchased
from dealers serving as market makers will include the spread between the bid
and asked prices. Brokerage transactions involving securities of companies
domiciled in countries other than the United States will normally be
conducted on the principal stock exchange of those countries. In most
international markets, commission rates are not negotiable and may be higher
than the negotiated commission rates available in the United States. There
is generally less government supervision and regulation of foreign stock
exchanges and broker-dealers than in the United States.
SAM determines the broker/dealers through whom securities transactions for the
Portfolios are executed. SAM may select a broker/dealer who may receive a
commission for portfolio transactions exceeding the amount another
broker/dealer would have charged for the same transaction if SAM determines
that such amount of commission is reasonable in relation to the value of the
brokerage and research services performed or provided by the broker/dealer,
viewed in terms of either that particular transaction or SAM's overall
responsibilities to the client for whose account such portfolio transaction is
executed and other accounts advised by SAM. Research services include market
information, analysis of specific issues, presentation of special situations
and trading opportunities on a timely basis, advice concerning industries,
economic factors and trends, portfolio strategy and performance of accounts.
Research services are used in advising all accounts, including accounts
advised by related persons of SAM, and not all such services are necessarily
used by SAM in connection with the specific account that paid commissions to
the broker/dealer providing such services. SAM does not acquire research
services through the generation of credits with respect to principal
transactions or transactions in financial futures.
The overall reasonableness of broker commissions paid is evaluated
periodically. Such evaluation includes review of what competing
broker/dealers are willing to charge for similar types of services and what
discounts are being granted by brokerage firms. The evaluation also considers
the timeliness and accuracy of the research received.
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<PAGE>
The following table states the total amount brokerage expenses for the
portfolios listed for the fiscal years ending December 31, 1996, 1995,
and 1994 respectively:
Years Ended
December 31 December 31 December 31
Portfolio 1996 1995 1994
- --------- -----------------------------------------
Equity $314,000 $286,000 $138,000
-------- -------- --------
Northwest $8,000 $1,000 $1,000
-------- -------- --------
Growth $135,000 $82,000 $23,000
-------- -------- --------
Because the portfolio securities purchased and sold by the Bond and Money Market
Portfolios are traded on a principal basis, no commission is charged.
DISTRIBUTIONS AND TAX INFORMATION
DISTRIBUTIONS. The Portfolios will receive income in the form of dividends and
interest earned on their investments in securities. This income, less the
expenses incurred in their operations, is the Portfolios' net investment income,
substantially all of which will be declared as dividends to the Portfolios'
shareholders (the separate accounts of Participating Insurance Companies and
Qualified Plans).
The Portfolios also may derive capital gains or losses in connection with sales
or other dispositions of their portfolio securities. Any net gain a Portfolio
may realize from transactions involving investments held less than the period
required for long-term capital gain or loss recognition or otherwise producing
short-term capital gain or loss recognition or otherwise producing short-term
capital gains and losses (taking into account any carryover of capital losses
from previous years), although technically a distribution from capital gains,
will be distributed to shareholders with and as part of income dividends. If
during any year a Portfolio realizes a net gain on transactions involving
investments held more than the period required for long-term capital gain or
loss recognition or otherwise producing long-term capital gains and losses, the
Portfolio will have a net long-term capital gain. After deduction of the amount
of any net short-term capital loss, the balance (to the extent not offset by any
capital losses carried over from previous years) will be distributed and treated
as long-term capital gains in the hands of the shareholders regardless of the
length of time for the Portfolio's shares may have been held.
Any per-share dividend or distribution paid by a Portfolio reduces the
Portfolio's net asset value per share on the date paid by the amount of the
dividend or distribution per share. Accordingly, a dividend or distribution
paid shortly after a purchase of shares by a shareholder would represent, in
substance, a partial return of capital (to the extent it is paid on the shares
so purchased), even though it would be subject to income taxes.
As stated in the Prospectus, dividends and other distributions will generally be
made in the form of additional shares of the Portfolios.
TAX INFORMATION. Each Portfolio intends to continue to qualify and elect to be
treated as a regulated investment company under Subchapter M of the Internal
Revenue Code for each taxable year by complying with all applicable requirements
regarding the sources of its income, the diversification of its assets, and the
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timing of its distributions. Each Portfolio's policy is to distribute to its
shareholders all of its investment company taxable income and any net realized
capital gains for each fiscal year in a manner that complies with the
distribution requirements of the Internal Revenue Code, so that a Portfolio will
not be subject to any federal income tax or excise taxes based on net income.
In order to qualify as a regulated investment company, a Portfolio must, among
other things, (a) derive at least 90% of its gross income each year from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock or securities or foreign
currency gains related to investments in stocks or other securities, or other
income (generally including gains from options, futures or forward contracts)
derived with respect to the business of investing in stock, securities or
currency, (b) derive less than 30% of its gross income each year from the sale
or other disposition of stock or securities (or options thereon) held less than
three months (excluding some amounts otherwise included in income as a result of
certain hedging transactions), and (c) diversify its holders so that, at the end
of each fiscal quarter, (i) at least 50% of the market value of its assets is
represented by cash, cash items, U.S. Government securities, securities of
other regulated investment companies and other securities limited, for purposes
of this calculation, in the case of other securities of any one issuer to an
amount not greater than 5% of the Portfolio's assets or 10% of the voting
securities of the issuer, and (ii) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than U.S. Government
securities or securities of other regulated investment companies). As such, and
by complying with the applicable provisions of the Internal Revenue Code, a
Portfolio will not be subject to federal income tax on taxable income (including
realized capital gains) that is distributed to shareholders in accordance with
the timing requirements of the Internal Revenue Code. If a Portfolio is unable
to meet certain requirements of the Internal Revenue Code, it may be subject to
taxation as a corporation.
The Portfolios intend to declare and pay dividends and other distributions,
as stated in the Prospectus. In order to avoid the payment of any federal
excise tax based on net income, a Portfolio must declare on or before
December 31 of each year, and pay on or before January 31 of the following
year, distributions at least equal to 98% of its ordinary income for that
calendar year and at least 98% of the excess of any capital gains over any
capital losses realized in the one-year period ending December 31 (by
election) of that year, together with any undistributed amounts of ordinary
income and capital gains (in excess of capital losses) from the previous
calendar year.
The Trust and the Portfolios intend to comply with the requirements of Section
817(h) of the Internal Revenue Code and related regulations, including certain
diversification requirements that are in addition to the diversification
requirements of Subchapter M and the Investment Company Act. Failure to comply
with the requirements of Section 817(h) could result in taxation of the
insurance company and immediate taxation of the owners of variable contracts to
the full extent of appreciation under the contracts.
Shares of a Portfolio underlying variable contracts that comply with the
requirements of Section 817(h) and related regulations will generally be treated
as owned by the insurance company and not by the owners of variable contracts.
In that case, income derived from the appreciation in shares of the Portfolio
would not be currently taxable to the owners of variable contracts. Owners of
variable contracts that do not comply with the requirements of Section 817(h)
would generally be subject to immediate taxation of the appreciation under the
contracts.
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Section 817(h) requires that the investment portfolios underlying variable life
insurance and variable annuity contracts be "adequately diversified". Section
817(h) contains a safe harbor provision which provides that a variable life
insurance or variable annuity contract will meet the diversification
requirements if, as of the close of each calendar quarter, (i) the assets
underlying the contract meet the diversification standards for a regulated
investment company under Subchapter M of the Internal Revenue Code, and (ii) no
more than 55% of the total assets of the account consist of cash, cash items,
U.S. Government securities and securities of regulated investment companies.
Treasury Department regulations provide an alternative test to the safe harbor
provision to meet the diversification requirements. Under these regulations, an
investment portfolio will be adequately diversified if (i) not more than 55% of
the value of its total assets is represented by any one investment; (ii) not
more than 70% of the value of its total assets is represented by any two
investments; (iii) not more than 80% of the value of its total assets is
represented by any three investments; and (iv) not more than 90% of the value of
its total assets is represented by any four investments. These limitations are
increased for investment portfolios which are invested in whole or in part of
U.S. Treasury securities.
Stock of a regulated investment company, such as a Portfolio, held in an
insurance company's separate accounts underlying variable life insurance or
variable annuity contracts may be treated as a single investment for purposes of
the diversification rules of Section 817(h). A special rule in Section 817(h),
however, allows a shareholder of a regulated investment company to "look-
through" the company and treat a pro rata share of the company's assets as owned
directly by the shareholder. This special "look-through" rule may make it
easier to comply with the diversification requirements of Section 817(h). To
qualify for "look-through" treatment, public access to the regulated investment
company must generally be limited to (i) the purchase of a variable contract,
(ii) life insurance companies' general accounts, and (iii) qualified pension or
retirement plans. Interests in the Portfolios are sold only to insurance
company separate accounts to fund the benefits of variable contracts, and may be
sold to qualified pension and retirement plans.
Even if the diversification requirements of Section 817(h) are met, the owner of
a variable contract might be subject to current federal income taxation if the
owner has excessive control over the investments underlying the contract. The
Treasury Department has indicated that guidelines might be forthcoming that
address this issue. At this time, it is impossible to predict when they may be
issued, what the guidelines will include and the extent, if any, to which they
may be retroactive.
In order to maintain the variable contracts' status as annuities or insurance
contracts, the Trust may in the future find it necessary, and reserves the
right, to take certain actions, including, without limitation, amending a
Portfolio's investment objective (upon SEC or shareholder approval) or
substituting shares of one Portfolio for another.
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FINANCIAL STATEMENTS
The following financial statements for the Growth, Equity, Bond, Northwest
and Money Market Portfolios and the report thereon of Ernst & Young LLP,
independent auditors, are incorporated herein by reference to the Resource
Series Trust's Annual Report for the year ended December 31, 1996:
Portfolio of Investments as of December 31, 1996
Statement of Assets and Liabilities as of December 31, 1996
Statement of Operations for the Year Ended December 31, 1996
Statement of Changes in Net Assets for the Years Ended December 31, 1996 and
December 31, 1995
Notes to Financial Statements
A copy of the Trust's Annual Report accompanies this Statement of
Additional Information. Additional copies may be obtained by calling
1-800-624-5711 or by writing to the address on the Prospectus cover.
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