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[LETTERHEAD]
May 1, 1998
VIA ELECTRONIC FILING
Securities & Exchange Commission
450 Fifth Street NW
Washington, DC 20549
Re: SAFECO Resource Series Trust
1933 Act File No. 33-06547
1940 Act File No. 811-4717
Ladies and Gentlemen:
The enclosed filing of the above-referenced Registrant's Statement of Additional
Information dated April 30, 1998 is made pursuant to Rule 497(c) of the
Securities Act of 1933, as amended.
If you have any comments or questions concerning the filing, please call me at
(206) 548-7075.
Sincerely,
/s/ Margaret E. DiDonna
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Margaret E. DiDonna
Counsel
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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 Prospectuses for the Portfolios listed above. Copies of
the Portfolios' Prospectuses 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 Prospectuses to which this Statement of Additional
Information relates is April 30, 1998. The date of this Statement of Additional
Information is April 30, 1998.
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 3 Additional Performance 20
Information
Additional Investment Information 10 Trustees and Officers 23
Special Risks of Below Investment 18 Investment Advisory and 26
Grade Bonds Other Services
Principal Shareholders of the 19 Brokerage Practices 28
Portfolios
Distributions and Tax 29
Additional Information on 19 Information
Calculation of Net Asset Value
Per Share Financial Statements 30
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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 the Portfolios are described in each
Portfolio's Prospectus and this Statement of Additional Information. These
policies state the investment practices that each Portfolio 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 are also
disclosed in its Prospectus. Before a Portfolio purchases a security that the
following policies permit but which is not currently described in its
Prospectus, its Prospectus will be amended or supplemented to describe the
security. The following information supplements the discussion of investment
policies and limitations in each Portfolio's Prospectus.
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 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.
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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:
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
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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 or other price paid for the security.
3. The Equity, Bond and Money Market Portfolios may not purchase or sell
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put or call options or combinations thereof.
4. The Growth and Northwest Portfolios may not purchase puts, calls,
straddles, spreads or any combination thereof if by reason thereof the
value of the Portfolio's aggregate investment in such classes of securities
would exceed 5% of its total assets.
5. A Portfolio may not invest in oil, gas or other mineral exploration or
development programs or in arbitrage transactions.
6. 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.
7. A Portfolio may not enter into a repurchase agreement for longer than
seven days, except that the Money Market Portfolio may invest up to 10% of
its net assets in repurchase agreements that mature in more than 7 days.
8. 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. The Trust's
investment adviser will waive its advisory fees for assets invested in
other investment companies.
9. 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 8 above), repurchase agreements (subject to the limitations
in subparagraph 7 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.
10. 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.
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 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.
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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 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 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.
13. 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 11 and
12 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 12.
14. 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 11-13, 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.
15. 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
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to securities may be deemed without value for purposes of the five percent
(5%) limitation.
16. A Portfolio will not issue long-term debt securities.
17. A Portfolio will not invest in any security for the purpose of acquiring or
exercising control or management of the issuer.
18. The Growth Portfolio will normally invest a preponderance of assets in
common 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.
19. 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.
20. 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").
21. The Equity Portfolio may invest up to 5% of total assets in closed-end
investment companies and investment trusts (other than REITS).
22. The Equity Portfolio may purchase fixed-income securities in accordance
with business and financial conditions.
23. The Bond and Money Market Portfolios 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.
24. The Equity, Growth and Northwest Portfolios may invest in Rule 144A
securities, provided that SAM has determined that such securities are
liquid under guidelines adopted by the Board of Trustees, except that the
Equity, Growth and Northwest Portfolios may each invest up to 10% of their
respective total assets in 144A securities that are illiquid.
25. 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.
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.
26. A Portfolio may not pledge, mortgage or hypothecate portfolio securities,
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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 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;
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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,
except that the Portfolio may invest up to 10% of its total assets in 144A
securities that are illiquid.
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 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
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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 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.
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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")
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
12
<PAGE>
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 bonds issued by either U.S. or foreign issuers that
are traded in the European bond markets and denominated in U.S. dollars.
Eurodollar bonds are subject to the same risks that pertain to domestic
issues, notably credit risk, market risk and liquidity risk. Additionally,
Eurodollar bonds are subject to certain sovereign risks. One such risk is
the possibility that a foreign government might prevent dollar-denominated
funds from flowing across its borders. Eurodollar Bonds issued by foreign
issuers also are subject to the same risks as Yankee Sector bonds.
8. MORTGAGE-BACKED SECURITIES. (Bond and Money Market Portfolios only.) Unlike
conventional bonds, the principal with respect to mortgage-backed
securities is paid back over the life of the loan rather than at maturity.
Consequently, the Portfolio will receive monthly scheduled payments of both
principal and interest. In addition, the Portfolio may receive unscheduled
prepayments on the underlying mortgages. Since the Portfolio must reinvest
scheduled and unscheduled principal payments at prevailing interest rates
and such interest rates may be higher or lower than the current yield of
the 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 collateralized mortgage obligation ("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. There is the risk that the
Portfolio may fail to recover any premium it pays due to market conditions
and/or mortgage prepayments. A Portfolio will not invest in interest-only
or principal-only classes -- such investments are extremely sensitive to
changes in interest rates.
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.
9. WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES (Money Market and Small Company
Portfolios only). Under this procedure, a 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
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<PAGE>
days (settlement date) after the date of the commitment. No interest is
earned by a 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. A Portfolio may dispose of its interest in those
securities before delivery.
10. 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.
11. 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 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.
12. 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 (but not limited to)
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
14
<PAGE>
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.
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.
13. OPTIONS ON EQUITY SECURITIES. (Growth, Income, Northwest and Small Company
Portfolios only.) The Growth, Income, Northwest and Small Company
Portfolios may purchase and write (i.e., sell) covered call options. A call
option is a short-term contract pursuant to which the purchaser or holder,
in return for a premium paid, has the right to buy the equity security
underlying the option at a specified exercise price (the strike price) at
any time during the term of the option (for "American-style" options) or on
the option expiration date (for "European-style" options). The writer of
the call option, who received the premium, has the obligation, upon
exercise of the option, to deliver the underlying equity security against
payment of the strike price.
The Portfolios will write call options on stocks only if they are covered,
and such options must remain covered so long as a Portfolio is obligated as
a writer. A call option is "covered" only if at the time the Portfolio
writes the call, the Portfolio holds on a share-for-share basis the same
security as the call written. A Portfolio must maintain such security in
its portfolio from the time the Portfolio writes the call option until the
option is exercised, terminated or expires. The Portfolios' use of options
on equity securities is subject to certain special risks including the risk
that the market value of the security will move adversely to the
Portfolio's option position.
The Portfolios may effect "closing purchase transactions." If a Portfolio,
as a writer of an option, wishes to terminate the obligation, it may effect
a closing purchase transaction by buying an option of the same series as
the option previously written. A Portfolio will realize a profit from a
closing transaction if the price of the transaction is less than the
premium received from writing the option. Because increases in the market
price of a call option will generally reflect increases in the market price
of the underlying security, any loss resulting from a closing purchase
transaction with respect to a call option is likely to be offset in whole
or in part by appreciation of the underlying equity security owned by the
Portfolio. There is no guaranty that closing purchase transactions can be
effected.
The Portfolios' use of options on equity securities is subject to certain
special risks, in addition to the risk that the market value of the
security will move adversely to the Portfolio's option position. An option
position may be closed out only on an exchange, board of trade or other
trading facility that provides a secondary market for an option of the same
series. There is no assurance that a liquid secondary market on an exchange
will exist for any particular option, or at any particular time,
15
<PAGE>
and for some options no secondary market on an exchange or otherwise may
exist. In such event it might not be possible to effect closing
transactions in particular options. If a Portfolio as a covered call option
writer is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange can
include any of the following: (i) there may be insufficient trading
interest in certain options; (ii) restrictions imposed by an exchange on
opening transactions or closing transactions or both; (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities; (iv) unusual or
unforeseen circumstances may interrupt normal operations on an exchange;
(v) the facilities of an exchange or a clearing corporation may not at all
times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a particular
class or series of options), in which event the secondary market on that
exchange (or in the class or series of options) would cease to exist,
although outstanding options on that exchange that had been issued by a
clearing corporation as a result of trades on that exchange would continue
to be exercisable in accordance with their terms. There is no assurance
that higher than anticipated trading activity or other unforeseen events
might not, at times, render certain of the facilities of any of the
clearing corporations inadequate, and thereby result in the institution by
an exchange of special procedures that may interfere with the timely
execution of customers' orders.
14. OPTIONS ON STOCK INDICES. (Growth, Income, Northwest and Small Company
Portfolios only.) The Growth, Income, Northwest and Small Company
Portfolios may purchase put and call options on stock indices. Options on
stock indices are similar to options on stock except that, rather than
obtaining the right to take or make delivery of stock at a specified price,
an option on a stock index gives the holder the right to receive, upon
exercise of the option, an amount of cash if the closing level of the stock
index upon which the option is based is greater than (in the case of a
call) or less than (in the case of a put) the strike price of the option.
The amount of cash is equal to such difference between the closing price of
the index and the strike price of the option times a specified multiple
(the "multiplier"). If the option is exercised, the writer is obligated, in
return for the premium received, to make delivery of this amount. Unlike
stock options, all settlements are in cash, and gain or loss depends on
price movements in the stock market generally (or in a particular industry
or segment of the market) rather than price movements in individual stocks.
The Portfolios do not intend to invest more than 5% of their net assets at
any one time in the purchase of puts and calls on stock indices. The
Portfolios may effect "closing sale transactions," whereby a Portfolio may
liquidate its position in an option it holds by selling an option of the
same series as the option previously purchased. A Portfolio will realize a
profit from a closing transaction if the price of the transaction is more
than the premium paid to purchase the option. There is no guaranty that
closing sale transactions can be effected.
Investment in options on stock indices will be subject to the same risks as
investment in options on equity securities, described above. In addition,
the distinctive characteristics of options on indices create certain risks
that are not present with stock options. Index prices may be distorted if
trading of certain stocks included in the index is interrupted. Trading in
index options also may be interrupted in certain circumstances, such as if
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<PAGE>
trading were halted in a substantial number of stocks included in the
index. If this occurred, the Portfolios would not be able to close out
options that they had purchased and, if restrictions on exercise were
imposed, a Portfolio might be unable to exercise an option it holds, which
could result in substantial losses to the Portfolio. The Portfolios
generally will select stock indices that include a number of stocks
sufficient to minimize the likelihood of a trading halt in options on the
index.
Although the markets for certain index option contracts have developed
rapidly, the markets for other index options are still relatively illiquid.
The ability of the Portfolios to establish and close out positions on such
options will be subject to the development and maintenance of a liquid
secondary market. It is not certain that this market will develop in all
index options contracts. The Portfolios will not purchase any index option
contract unless and until the Portfolios' investment adviser believes the
market for such options has developed sufficiently that the risk in
connection with such transactions is no greater than the risk in connection
with options on stocks.
There are other special risks involved in purchasing put and call options
on stock indices. If a Portfolio holds an index option and exercises it
before final determination of the closing index value for that day, it runs
the risk that the level of the underlying index may change before closing.
If such a change causes the exercised option to fall out-of-the-money, the
Portfolio will be required to pay the difference between the closing index
value and the strike price of the option (times the applicable multiplier)
to the assigned writer. Although the Portfolio may be able to minimize the
risk by withholding exercise instructions until just before the daily
cutoff time or by selling rather than exercising an option when the index
level is close to the exercise price, it may not be possible to eliminate
this risk entirely because the cutoff times for index options may be
earlier than those fixed for other types of options and may occur before
definitive closing index values are announced.
15. 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
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").
16. 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
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<PAGE>
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.
17. 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.
18. 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 substantially if the issuer's creditworthiness deteriorates.
Indexed securities may also be more volatile than their underlying
instruments.
19. 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
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<PAGE>
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 February 3, 1998 SAFECO Life Insurance Company ("SAFECO Life") owned the
following percentages of the outstanding shares of the Portfolios listed:
Equity 96.87%
Growth 94.75%
Northwest 100%
Bond 100%
Money Market 100%
Small Company 100%
SAFECO Life is a Washington corporation and a wholly-owned subsidiary of
SAFECO Corporation. SAFECO Corporation, also a Washington corporation, has
its principal place of business at SAFECO Plaza, Seattle, WA 98185. SAFECO
Life has its principal place of business at 15411 N.E. 51st Street,
Redmond, Washington.
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 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
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<PAGE>
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, but not
limited to: selling portfolio investments prior to maturity to realize capital
gains or losses or to shorten average portfolio maturity; withholding dividends;
redeeming shares in kind; or establishing the net asset value per share by using
available market quotations.
Short-term debt securities held by each 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, 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 held by
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, BOND AND SMALL COMPANY PORTFOLIOS
The yield for the 30-day period ended December 31, 1997 for the Bond Portfolio
was 3.87%
Yield is computed using the following formula:
a-b 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
The total returns, expressed as a percentage, for the one-year, five-year, and
ten-year periods ended December 31, 1997 for the Equity and Bond Portfolios were
as follows:
<TABLE>
<CAPTION>
Portfolio 1 Year 5 Year 10 Year
<S> <C> <C> <C>
Equity 24.85% 179.25% 480.97%
Bond 8.41% 37.86% 113.09%
113.0
</TABLE>
The total returns, expressed as a percentage, for the one-year, and since
effective date periods ended December 31, 1997 for the Growth and
Northwest
20
<PAGE>
Portfolios were as follows:
<TABLE>
<CAPTION>
Since # of
Portfolio 1 Year Effective Date Months Effective Date
- --------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Growth 44.55% 305.87% 59 January 7, 1993
Northwest 31.02% 63.14% 59 January 7, 1993
</TABLE>
The total return, expressed as a percentage, for the eight-month period ended
December 31, 1997 for the Small Company Portfolio was 28.40
The average annual total returns, expressed as a percentage, for the one-, five-
and ten-year periods ended December 31, 1997 for the Equity and Bond Portfolios
were as follows:
<TABLE>
<CAPTION>
Portfolio 1 Year 5 Year 10 Year
<S> <C> <C> <C>
Equity 24.85% 22.80% 19.24%
Bond 8.41% 6.63% 7.86%
</TABLE>
The average annual total returns, expressed as a percentage, for the one-year
and since effective date periods ended December 31, 1997 for the Growth and
Northwest Portfolios were as follows:
<TABLE>
<CAPTION>
Since # of
Portfolio 1 Year Effective Date Months Effective Date
- --------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Growth 44.55% 32.97% 59 January 7, 1993
Northwest 31.02% 10.47% 59 January 7, 1993
</TABLE>
The total return is computed using the following formula:
ERV-P
T = ------- X 100
P
The average annual total return is computed using the following formula:
-----
A =( n\/ 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.
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<PAGE>
MONEY MARKET PORTFOLIO:
The yield and effective yield for the Money Market Portfolio of the Trust for
the 7-day period ended December 31, 1997, are 3.55% and 3.61%, 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
The Portfolios may occasionally reproduce articles or portions of articles about
the Portfolios written by independent third parties such as financial writers,
financial planners and financial analysts, which have appeared in financial
publications of general circulation or financial newsletters (including but not
limited to BARRONS, BUSINESS WEEK, FABIANS, FORBES, FORTUNE, INVESTOR'S BUSINESS
DAILY, KIPLINGER'S, MONEY MAGAZINE, MORNINGSTAR MUTUAL FUNDS, MUTUAL FUNDS
FORECASTER, MUTUAL FUNDS MAGAZINE, NEWSWEEK, PENSIONS & INVESTMENTS, RUCKEYSER'S
MUTUAL FUNDS, TELESWITCH, TIME MAGAZINE, U.S. NEWS AND WORLD REPORT, YOUR MONEY
AND THE WALL STREET JOURNAL).
Each Portfolio may 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, business
characteristics) about its investment adviser (SAM) or the investment adviser's
parent company (SAFECO Corporation) or (iii) descriptions, including quotations
attributable to the portfolio manager, of the investment style used to manage
the Portfolio, the research methodologies underlying securities selection and
a Portfolio's investment objective and (iv) information about particular
securities held by a Portfolio.
From time to time, each Portfolio may discuss its performance in relation to
the performance of relevant indices and/or representative peer groups. Such
discussions may include how a Portfolio'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 Portfolio 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.
22
<PAGE>
TRUSTEES AND OFFICERS
Name, Address and Age Position(s) Held Principal Occupations(s)
with the During Past 5 Years
Trust
Boh A. Dickey* Chairman and Trustee President, Chief Operating
SAFECO Plaza Officer, and Director of SAFECO
Seattle, WA 98185 Corporation. Previously,
(53) Executive Vice President and
Chief Financial Officer. He has
been an executive officer of
SAFECO Corporation subsidiaries
since 1982. See table under
"Investment Advisory and Other
Services."
Barbara J. Dingfield Trustee Manager, Corporate Contributions
Microsoft Corporation and Community Programs for
One Microsoft Way Microsoft Corporation, Redmond,
Redmond, WA 98052 Washington, a computer software
(52) company; Director 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.
David F. Hill* President President of SAFECO Securities,
SAFECO Plaza Trustee Inc. and SAFECO Services
Seattle, WA 98185 Corporation; Senior Vice
(49) President of SAFECO Asset
Management Company. See table
under "Investment Advisory and
Other Services."
Richard W. Hubbard Trustee Retired Vice President and
1270 NW Blakely Ct. Treasurer of the Trust and other
Seattle, WA 98177 SAFECO Trusts; retired Senior
(68) 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;
Member of Diocese of Olympia
Investment Committee.
Richard E. Lundgren Trustee Director of Marketing and
764 S. 293rd Street Customer Relations, Building
Federal Way, WA 98032 Materials Distribution,
(60) Weyerhaeuser Company, 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,
Seattle, WA 98191 Washington; Member of University
(63) of Washington Medical Center
23
<PAGE>
Board, 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,
1808 N. 41st St. Inc., Seattle, Washington;
Seattle, WA 98103 former President of Coast
(56) Hotels, Inc., Seattle,
Washington; Director of First
SAFECO National Life Insurance
Company of New York.
Neal Fuller Vice President Vice President, Controller,
SAFECO Plaza Controller Assistant Secretary and
Seattle, WA 98185 Assistant Treasurer of SAFECO Securities,
(35) Secretary 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; Treasurer
Seattle, WA 98185 and Chief Investment Officer of
(54) SAFECO Corporation; Vice
President of SAFECO Insurance
Companies; Director, Vice
President and Treasurer of First
SAFECO National Life Insurance
Company of New York; former
Senior Portfolio Manager of
SAFECO insurance companies and
Portfolio Manager for SAFECO
mutual funds. See table under
"Investment Advisory and Other
Services."
David H. Longhurst Assistant Assistant Controller of SAFECO
SAFECO Plaza Controller Securities, Inc., SAFECO
Seattle, WA 98185 Services Corporation and SAFECO
(40) Asset Management Company; former
Senior Manager with Ernst &
Young LLP, an independent
accounting company.
Stephen D. Collier Assistant Secretary Assistant Secretary of SAFECO
(45) Asset Management Company, SAFECO
Securities, Inc. and SAFECO
Services Corporation. He has
been an executive officer of
SAFECO Insurance Company and
subsidiaries since 1991.
*Trustees who are interested persons as defined by the 1940 Act.
At February 3, 1998, none of the Trustees and officers of the Trust owned shares
of any series of the Trust. Each Trustee and officer of the Trust holds the
24
<PAGE>
same position(s) with five other registered open-end, management investment
companies that have, in the aggregate, nineteen series companies managed by SAM.
25
<PAGE>
COMPENSATION TABLE
FOR THE FISCAL YEAR ENDING
DECEMBER 31, 1997
<TABLE>
<CAPTION>
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
- ------- --------------- -------- ---------- --------
<S> <C> <C> <C> <C>
Boh A. Dickey N/A N/A N/A N/A
Barbara J. $5,188.47 N/A N/A $22,750
Dingfield
David F. Hill N/A N/A N/A N/A
Richard W.
Hubbard $4,805.11 N/A N/A $21,000
Richard E.
Lundgren $5,188.47 N/A N/A $22,750
Larry L. Pinnt $5,188.47 N/A N/A $22,750
John W.
Schneider $5,188.47 N/A N/A $22,750
</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.
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.
The following individuals have the following positions and offices with the
Trust, SAM, SAFECO Securities and SAFECO Services:
SAFECO SAFECO
Name Trust SAM Securities Services
---- ----- --- ---------- --------
B. A. Dickey Chairman Director
Trustee
D. F. Hill President Senior President President
Trustee Vice Director Director
President Secretary Secretary
Director
26
<PAGE>
N. A. Fuller Vice Vice Vice Vice
President President President President
Controller Controller Controller Controller
Assistant Assistant 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 Assistant
Controller Controller Controller Controller
S.D. Collier Assistant Assistant Assistant Assistant
Secretary Secretary Secretary Secretary
Mr. Dickey is President , Chief Operating Officer and a Director of SAFECO
Corporation, and Mr. Spaulding is a Vice President and 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:
Investment Advisory Fees Paid to SAM
<TABLE>
<CAPTION>
Years Ended
December 31 December 31 December 31
Portfolio 1997 1996 1995
- --------- --------------------------------------------
<S> <C> <C> <C>
Equity $2,429,000 $1,488,000 $961,000
Bond $ 120,000 $ 113,000 $ 93,000
Northwest $ 104,000 $ 56,000 $ 40,000
Growth $1,227,000 $ 519,000 $200,000
Money Market $ 108,000 $ 63,000 $ 54,000
</TABLE>
For the period April 30, 1997 (effective date) to December 31, 1997, the
Trust paid SAM $40,000 in investment advisory fees for the Small Company
Portfolio.
27
<PAGE>
State Street Bank and Trust Company, 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 which audits the financial
statements of the Trust.
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
exchanges 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 come in the
form of written reports, 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.
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
28
<PAGE>
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.
The following table states the total amount of brokerage expenses for the
Portfolios listed for the fiscal years ending December 31, 1997, 1996, and 1995
respectively:
<TABLE>
<CAPTION>
Years Ended
December 31 December 31 December 31
Portfolio 1997 1996 1995
- --------- --------------------------------------------
<S> <C> <C> <C>
Equity $302,000 $314,000 $$286,000
Northwest $ 17,000 $ 8,000 $ $1,000
Growth $313,000 $135,000 $ $82,000
</TABLE>
The brokerage expenses for the Small Company Portfolio for the period from April
30, 1997 (effective date) to December 31, 1997 were $11,000.
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).
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. As stated in the Prospectus, dividends
and other distributions will generally be made in the form of additional
shares of the Portfolios.
29
<PAGE>
TAX INFORMATION. Each Portfolio is treated as a separate corporation for
federal income tax purposes. Each Portfolio intends to continue to qualify as
a "regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986 ("Code"). In order to qualify for treatment as a regulated
investment company under the Code, a Portfolio must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of taxable net investment income and net
short-term capital gain) and diversify its holdings, as reflected in the
Portfolio's investment policies. Each Portfolio intends to make sufficient
distributions to shareholders to relieve it from liability for federal excise
and income taxes.
Each Portfolio will be subject to a nondeductible 4% excise tax to the extent
it fails to distribute by the end of any calendar year substantially all of
its ordinary income for that year and capital gain net income for the
one-year period ending on December 31 (by election) of that year, plus
certain other amounts.
The excess of net long-term capital gains over net short-term capital loss
realized by a Portfolio on portfolio transactions, when distributed by the
Portfolio, is subject to long-term capital gains treatment under the Code,
regardless of how long the Participating Insurance Company or Qualified Plan
has held the shares of the Portfolio. Distributions of net short-term
capital gains realized from portfolio transactions are treated as ordinary
income for federal income tax purposes. The tax consequences described above
apply whether distributions are taken in cash or in additional shares.
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
30
<PAGE>
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.
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 where they may be
issued, what the guidelines will include and the extent, if any, to which they
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<PAGE>
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.
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 each Portfolio's Annual Report
for the year ended December 31, 1997.
Portfolio of Investments as of December 31, 1997
Statement of Assets and Liabilities as of December 31, 1997
Statement of Operations for the Year Ended December 31, 1997
Statement of Changes in Net Assets for the Years Ended December 31, 1997
and December 31, 1996
Notes to Financial Statements
The following financial statements for the Small Company Portfolio and the
report thereon of Ernst & Young LLP, independent auditors, are incorporated
herein by reference to the Portfolio's Annual Report for the period ended
December 31, 1997.
Portfolio of Investments as of December 31, 1997
Statement of Assets and Liabilities as of December 31, 1997
Statement of Operations for the Period from April 30, 1997
(effective date) to December 31, 1997
Statement of Changes in Net Assets for the Period from April 30, 1997
(effective date) to December 31, 1997
Notes to Financial Statements
A copy of each Portfolio'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 first page of this
Statement of Additional Information.
32
