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Registration Nos. 33-22132/811-5574
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
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Pre-Effective Amendment No. / /
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Post-Effective Amendment No. 12 /X/
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
--
Amendment No. 13 /X/
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(Check appropriate box or boxes.)
SAFECO Taxable Bond Trust
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(Exact Name of Registrant as Specified in Charter)
SAFECO Plaza, Seattle, Washington 98185
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(Address of Principal Executive Offices) Zip Code
Registrant's Telephone Number, including Area Code (206) 545-5269
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Name and Address of Agent for Service
DAVID F. HILL
SAFECO Plaza
Seattle, Washington 98185
(206) 545-5269
Approximate Date of Proposed Public Offering: Continuous
It is proposed that this filing will become effective
___ immediately upon filing pursuant to paragraph (b)
___ on _______, ___ pursuant to paragraph (b)
_X_ 60 days after filing pursuant to paragraph (a)
___ on _______, ___ pursuant to paragraph (a) (3)
___ 75 days after filing pursuant to paragraph (a) (2)
___ on _______, ___ pursuant to paragraph (a) (2) of Rule 485
If appropriate, check the following box:
/ / This post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
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Registrant is registering an indefinite number of its shares under the
Securities Act of 1993, by declaration made pursuant to Section 24(f) of the
Investment Company Act of 1940 (Act). Pursuant to Rule 24f-2 under the Act,
Registrant filed a Rule 24f-2 Notice on or about November 27, 1996.
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SAFECO TAXABLE BOND TRUST
Contents of Registration Statement
This registration statement consists of the following papers and documents:
- - Cover Sheet
- - Contents of Registration Statement
- - Cross Reference Sheets
- - No-Load Class of:
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO GNMA Fund
SAFECO High-Yield Bond Fund
SAFECO Managed Bond Fund
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PART A - Prospectus
PART B - Statement of Additional Information
- - Advisor Class A and Advisor Class B Shares of:
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Income Fund
SAFECO Northwest Fund
SAFECO Balanced Fund
SAFECO International Stock Fund
SAFECO Small Company Stock Fund
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO High-Yield Bond Fund
SAFECO Managed Bond Fund
SAFECO Money Market Fund
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal Bond Fund
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PART A - Prospectus
- Advisor Class A and Advisor Class B Shares of:
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO High-Yield Bond Fund
SAFECO Managed Bond Fund
SAFECO Money Market Fund
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal Bond Fund
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2
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PART B - Statement of Additional Information
- - Advisor Class A and Advisor Class B Shares of:
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Income Fund
SAFECO Northwest Fund
SAFECO Balanced Fund
SAFECO International Stock Fund
SAFECO Small Company Stock Fund
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PART B - Statement of Additional Information
- - PART C - Other Information
- - Signature Page
- - Exhibits
This filing is made to update the Registration Statement of SAFECO Taxable Bond
Trust. No changes are hereby made to the Prospectuses and Statements of
Additional Information relating to the No-Load Class of SAFECO Common Stock
Trust, SAFECO Tax-Exempt Bond Trust, SAFECO Institutional Series Trust and
SAFECO Money Market Trust.
3
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SAFECO TAXABLE BOND TRUST
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO GNMA Fund
SAFECO High-Yield Bond Fund
SAFECO MANAGED BOND TRUST
SAFECO Managed Bond Fund
No-Load Class
Form N-1A Cross Reference Sheet
Part A
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Location
Item No. in Prospectus
- -------- -------------
Item 1. Cover Page Cover Page
Item 2. Synopsis Introduction to the Trusts and
the Funds; Expenses
Item 3. Condensed Financial Information Financial Highlights;
Performance Information
Item 4. General Description of Registrant The Trusts and Each Fund's
Investment Policies;
Information about Share
Ownership and Companies that
Provide Services to the Trusts
Item 5. Management of the Trust Expenses; Portfolio Managers;
Information about Share
Ownership and Companies that
Provide Services to the Trusts
Item 6. Capital Stock and Other Securities Cover Page; Share Price
Calculation; Information About
Share Ownership and Companies
that Provide Services to the
Trusts; Fund Distributions and
How They Are Taxed
Item 7. Purchase of Securities Being Offered How to Purchase Shares; How to
Systematically Purchase or
Redeem Shares; How to Exchange
Shares from One Fund to
Another; Telephone
Transactions; Transactions
Through Registered Investment
Advisers; Share Price
Calculation; Tax-Deferred
Retirement Plans; Account
Statements
4
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Item 8. Redemption or Repurchase How to Redeem Shares; How to
Systematically Purchase or
Redeem Shares; How to Exchange
Shares from One Fund to
Another; Telephone
Transactions; Transactions
Through Registered Investment
Advisers; Account Statements;
Account Changes and Signature
Requirements
Item 9. Pending Legal Proceedings Not applicable
Part B
Location in Statement
Item No. of Additional Information
- -------- -------------------------
Item 10. Cover page Cover page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History Not applicable
Item 13. Investment Objectives and Policies Investment Policies of the
Managed Bond Fund; Additional
Investment Information;
Description of Commercial
Paper and Preferred Stock
Ratings
Item 14. Management of the Trust Trustees and Officers
Item 15. Control Persons and Principal Principal Shareholders of
Securities Holders of Certain Funds
Item 16. Investment Advisory and Investment Advisory and
Other Services Other Services
Item 17. Brokerage Allocation and Other Brokerage Practices
Practices
Item 18. Capital Stock and Other Securities Additional Information on
Calculation of Net Asset Value
Per Share
Item 19. Purchase, Redemption and Pricing Additional Information
of Securities Being Offered on Calculation of Net Asset
Value Per Share; Redemption in
Kind
Item 20. Tax Status Additional Tax Information
5
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Item 21. Underwriters Investment Advisory and Other
Services
Item 22. Calculation of Performance Data Additional Performance
Information
Item 23. Financial Statements Financial Statements
6
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Part C
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Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of this Registration Statement.
7
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SAFECO TAXABLE BOND TRUST
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO High-Yield Bond Fund
SAFECO COMMON STOCK TRUST
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Income Fund
SAFECO Northwest Fund
SAFECO Balanced Fund
SAFECO International Stock Fund
SAFECO Small Company Stock Fund
SAFECO MANAGED BOND TRUST
SAFECO Managed Bond Fund
SAFECO MONEY MARKET TRUST
SAFECO Money Market Fund
SAFECO TAX-EXEMPT BOND TRUST
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal Bond Fund
Advisor Class A and Advisor Class B Shares
Form N-1A Cross Reference Sheet
Part A
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Location
Item No. in Prospectus
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Item 1. Cover Page Cover Page
Item 2. Synopsis Introduction to the Trusts
and the Funds; Expenses
Item 3. Condensed Financial Information Financial Highlights;
Performance Information
Item 4. General Description of Registrant Each Fund's Investment
Objective and Policies;
Information about Share
Ownership and Companies that
Provide Services to the Trusts
Item 5. Management of the Trust Expenses; Sub-Adviser
Information for the
8
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International Fund;
Information About Share
Ownership and Companies that
Provide Services to the
Trusts; Portfolio Managers
Item 6. Capital Stock and Other Securities Cover Page; Share Price
Calculation; Information About
Share Ownership and Companies
That Provide Services to the
Trusts; Fund Distributions and
How They Are Taxed; Persons
Controlling Certain Funds
Item 7. Purchase of Securities Being Offered How to Purchase Shares; How to
Systematically Purchase or
Redeem Shares; How to Exchange
Shares From One Fund to
Another; Telephone
Transactions; Share Price
Calculation; Tax-Deferred
Retirement Plans; Account
Statements
Item 8. Redemption or Repurchase How to Redeem Shares; How to
Systematically Purchase or
Redeem Shares; How to Exchange
Shares From One Fund to
Another; Telephone
Transactions; Account
Statements; Account Changes
and Signature Requirements
Item 9. Pending Legal Proceedings Not applicable
9
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SAFECO TAXABLE BOND TRUST
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO High-Yield Bond Fund
SAFECO MANAGED BOND TRUST
SAFECO Managed Bond Fund
SAFECO MONEY MARKET TRUST
SAFECO Money Market Fund
SAFECO TAX-EXEMPT BOND TRUST
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal Bond Fund
Advisor Class A and Advisor Class B Shares
Form N-1A Cross Reference Sheet
Part B
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Location in Statement
Item No. of Additional Information
- -------- -------------------------
Item 10. Cover page Cover page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History Not applicable
Item 13. Investment Objectives and Policies Investment Policies;
Additional Investment
Information; Description of
Ratings
Item 14. Management of the Trust Trustees and Officers
Item 15. Control Persons and Principal Principal Shareholders
Holders of Securities
Item 16. Investment Advisory and Other Services Investment Advisory and Other
Services
Item 17. Brokerage Allocation and Other Brokerage Practices
Practices
Item 18. Capital Stock and Other Securities Additional Information on
Calculation of Net Asset Value
Per Share; Conversion of
Advisor Class B Shares
10
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Item 19. Purchase, Redemption and Pricing Additional Information
of Securities Being Offered on Calculation of Net Asset
Value Per Share; Redemption in
Kind
Item 20. Tax Status Additional Tax Information
Item 21. Underwriters Investment Advisory and Other
Services
Item 22. Calculation of Performance Data Additional Performance
Information
Item 23. Financial Statements Financial Statements
11
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Part C
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Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of this Registration Statement.
12
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SAFECO GROWTH FUND
SAFECO EQUITY FUND
SAFECO INCOME FUND
SAFECO NORTHWEST FUND
SAFECO BALANCED FUND
SAFECO INTERNATIONAL STOCK FUND
SAFECO SMALL COMPANY STOCK FUND
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
SAFECO HIGH-YIELD BOND FUND
SAFECO MANAGED BOND FUND
SAFECO MUNICIPAL BOND FUND
SAFECO CALIFORNIA TAX-FREE INCOME FUND
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
SAFECO MONEY MARKET FUND
Advisor Class A
Advisor Class B January 26, 1997
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Each fund named above ("Fund") is a series of one of the following trusts (each
a "Trust"): the SAFECO Common Stock Trust ("Common Stock Trust"), the SAFECO
Taxable Bond Trust ("Taxable Bond Trust"), the SAFECO Managed Bond Trust
("Managed Bond Trust"), the SAFECO Tax-Exempt Bond Trust ("Tax-Exempt Bond
Trust") or the SAFECO Money Market Trust ("Money Market Trust"). The investment
objective for each Fund appears on Page 3.
This Prospectus sets forth the information a prospective investor should know
before investing. PLEASE READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
Statements of Additional Information relating to the Advisor Class A ("Class A")
and Advisor Class B ("Class B") shares (collectively "Advisor Classes"), dated
December 31, 1996 and incorporated herein by this reference, have been filed
with the Securities and Exchange Commission and are available at no charge upon
request by calling the telephone number listed below. The Statements of
Additional Information and other material incorporated by reference herein are
also available on the Securities and Exchange Commission Website
(http://www.sec.gov). The Statements of Additional Information contain more
information about many of the topics in this Prospectus as well as information
about the trustees and officers of the Trusts.
For additional assistance, please contact your investment professional, or call
or write:
NATIONWIDE 1-800-463-8791
SAFECO MUTUAL FUNDS
ADVISOR CLASS SHARES
P.O. BOX 34680
SEATTLE, WA 98124-1860
All telephone calls are tape-recorded for your protection
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
THE U.S. GOVERNMENT OR ANY BANK, NOR ARE FUND SHARES FEDERALLY INSURED OR
OTHERWISE PROTECTED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY, AND FUND SHARES ARE SUBJECT TO INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. THERE CAN BE NO
ASSURANCE THAT THE SAFECO MONEY MARKET FUND WILL MAINTAIN A STABLE $1.00 SHARE
PRICE.
THE SAFECO CALIFORNIA TAX-FREE INCOME FUND IS OFFERED FOR SALE ONLY TO RESIDENTS
OF THE STATE OF CALIFORNIA. THE SAFECO WASHINGTON STATE MUNICIPAL BOND FUND IS
OFFERED FOR SALE ONLY TO RESIDENTS OF THE STATE OF WASHINGTON. THESE FUNDS ARE
NOT PERMITTED TO OFFER OR SELL SHARES TO RESIDENTS OF OTHER STATES.
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SAFECO GROWTH FUND ("Growth Fund") has as its investment objective to seek
growth of capital and the increased income that ordinarily follows from such
growth. The Growth Fund ordinarily invests a preponderance of its assets in
common stock selected primarily for potential appreciation.
SAFECO EQUITY FUND ("Equity Fund") has as its investment objective to seek long-
term growth of capital and reasonable current income. The Equity Fund invests
principally in common stock selected for appreciation and/or dividend potential
and from a long-range investment standpoint.
SAFECO INCOME FUND ("Income Fund") has as its investment objective to seek high
current income and, when consistent with its objective, the long-term growth of
capital. The Income Fund invests primarily in common and preferred stock and in
convertible bonds selected for dividend potential.
SAFECO NORTHWEST FUND ("Northwest Fund") has as its investment objective to seek
long-term growth of capital through investing primarily in Northwest companies.
To pursue its objective, the Fund will invest at least 65% of its total assets
in securities issued by companies with their principal executive offices located
in Alaska, Idaho, Montana, Oregon or Washington ("Northwest").
SAFECO BALANCED FUND ("Balanced Fund") has as its investment objective to seek
growth and income consistent with the preservation of capital. To pursue its
objective, the Balanced Fund will invest primarily in equity and fixed income
securities.
SAFECO INTERNATIONAL STOCK FUND ("International Fund") has as its investment
objective to seek maximum long-term total return (capital appreciation and
income) by investing primarily in common stock of established non-U.S.
companies. To pursue its objective, the International Fund, under normal market
conditions, will invest at least 65% of its total assets in the securities of
companies domiciled in at least five countries, not including the United States.
SAFECO SMALL COMPANY STOCK FUND ("Small Company Fund") has as its investment
objective to seek long-term growth of capital through investing primarily in
small-sized companies. To pursue its objective, the Small Company Fund will
invest primarily in companies with total market capitalization of less than $1
billion.
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND ("Intermediate Treasury Fund") has
as its investment objective to provide as high a level of current income as is
consistent with the preservation of capital. During normal market conditions,
the Fund will invest at least 65% of its total assets in direct obligations of
the U.S. Treasury.
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SAFECO HIGH-YIELD BOND FUND ("High-Yield Fund") has as its investment objective
to provide a high level of current interest income through the purchase of high-
yield, fixed-income securities. During normal market conditions, the Fund will
invest at least 65% of its total assets in high-yield, fixed income securities.
SAFECO MANAGED BOND FUND ("Managed Bond Fund") has as its investment objective
to provide as high a level of total return as is consistent with the relative
stability of capital through the purchase of investment grade debt securities.
SAFECO MUNICIPAL BOND FUND ("Municipal Bond Fund") has as its investment
objective to provide as high a level of current interest income exempt from
federal income tax as is consistent with the relative stability of capital.
SAFECO CALIFORNIA TAX-FREE INCOME FUND ("California Fund") has as its
investment objective to provide as high a level of current interest income
exempt from federal income tax and California state personal income tax as is
consistent with the relative stability of capital.
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND ("Washington Fund") has as its
investment objective to provide as high a level of current interest income
exempt from federal income tax as is consistent with prudent investment risk.
SAFECO MONEY MARKET FUND ("Money Market Fund") has as its investment objective
to seek as high a level of current income as is consistent with the preservation
of capital and liquidity through investment in high-quality money market
instruments maturing in thirteen months or less.
There is no assurance that a Fund will achieve its investment objective.
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TABLE OF CONTENTS
PAGE
INTRODUCTION TO THE TRUSTS AND THE FUNDS . . . . . . . . . . . . . . . . . . 6
EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SUB-ADVISER INFORMATION FOR THE INTERNATIONAL FUND . . . . . . . . . . . . . 32
ALTERNATIVE PURCHASE ARRANGEMENT . . . . . . . . . . . . . . . . . . . . . . 33
EACH FUND'S INVESTMENT OBJECTIVE AND POLICIES. . . . . . . . . . . . . . . . 34
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
PORTFOLIO MANAGERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
HOW TO PURCHASE SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
HOW TO REDEEM SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
HOW TO SYSTEMATICALLY PURCHASE OR REDEEM SHARES. . . . . . . . . . . . . . . 77
HOW TO EXCHANGE SHARES FROM ONE FUND TO ANOTHER. . . . . . . . . . . . . . . 78
TELEPHONE TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
SHARE PRICE CALCULATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 80
INFORMATION ABOUT SHARE OWNERSHIP AND COMPANIES
THAT PROVIDE SERVICES TO THE TRUSTS. . . . . . . . . . . . . . . . . . . . . 82
DISTRIBUTION PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
PERSONS CONTROLLING CERTAIN FUNDS. . . . . . . . . . . . . . . . . . . . . . 88
PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 89
FUND DISTRIBUTIONS AND HOW THEY ARE TAXED. . . . . . . . . . . . . . . . . . 90
TAX-DEFERRED RETIREMENT PLANS. . . . . . . . . . . . . . . . . . . . . . . . 93
ACCOUNT STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
ACCOUNT CHANGES AND SIGNATURE REQUIREMENTS . . . . . . . . . . . . . . . . . 95
DESCRIPTION OF STOCKS, BONDS AND CONVERTIBLE SECURITIES. . . . . . . . . . . 95
RATINGS SUPPLEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
DEBT SECURITIES HOLDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . 99
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INTRODUCTION TO THE TRUSTS AND THE FUNDS
- ---------------------------------------------------
Each Trust is an open-end management investment company that issues shares
representing one or more series. This Prospectus offers shares of the stock,
taxable fixed-income, tax-exempt income and money market Funds listed below.
The stock Funds offered are the Growth Fund, the Equity Fund, the Income Fund,
the Northwest Fund, the Balanced Fund, the International Fund and the Small
Company Fund (collectively, the "Stock Funds"). Each Stock Fund is a
diversified series of the Common Stock Trust.
The taxable fixed-income Funds offered are the Intermediate Treasury Fund, the
High-Yield Fund and the Managed Bond Fund. The Intermediate Treasury Fund and
the High-Yield Fund are diversified series of the Taxable Bond Trust. The
Managed Bond Fund is a diversified series of the Managed Bond Trust. Prior to
September 30, 1996, the name of the Managed Bond Fund was the SAFECO Fixed-
Income Portfolio and the name of the Managed Bond Trust was the SAFECO
Institutional Series Trust.
The tax-exempt income Funds offered are the Municipal Bond Fund, the California
Fund and the Washington Fund (collectively, the "Tax-Exempt Income Funds").
Each of the Tax-Exempt Income Funds is a diversified series of the Tax-Exempt
Bond Trust.
This Prospectus also offers the Money Market Fund, which is a diversified series
of the Money Market Trust.
THE FUNDS
Each Fund offers multiple classes of shares. The Advisor Classes of shares are
offered to investors who engage the services of an investment professional. For
each Fund (except the Money Market Fund), Class A shares are subject to a front-
end sales charge and pay a Rule 12b-1 fee. Class B shares are not subject to a
front-end sales charge, but may be subject to a contingent deferred sales charge
("CDSC") and pay a higher Rule 12b-1 fee.
For the Money Market Fund, Class A shares are sold at net asset value with no
front-end sales charge. A front-end sales charge may apply when you exchange
your Class A Money Market Fund shares for Class A shares of other Funds. Money
Market Fund Class B Shares are sold at net asset value and are not subject to a
CDSC upon redemption, provided that the shareholder has remained solely invested
in Money Market Fund Class B shares. A CDSC may apply upon redemption of Money
Market Fund Class B shares that have been exchanged at any time during the
investor's ownership for Class B shares of other Funds. Money Market Fund Class
A and Class B shares do not currently pay Rule 12b-1 fees.
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Each Fund:
- - Offers easy access to your money through telephone redemptions and wire
transfers.
- - Has a minimum initial investment of $1,000 for regular accounts, $250 for
individual retirement accounts ("IRAs") and accounts established under the
Uniform Gift to Minors Act ("UGMA") or Uniform Transfer to Minors Act
("UTMA"). No minimum initial investment is required to establish the
Automatic Investment Method ("AIM") or Payroll Deduction Plan.
RISK FACTORS
There is, of course, no assurance that a Fund will achieve its investment
objective. See "Each Fund's Investment Objective and Policies" for more
information.
There is a risk that the market value of each Fund's portfolio of securities may
decrease and result in a decrease in the value of a shareholder's investment.
Because the Northwest, California and Washington Funds concentrate their
investments in geographic regions, they may be subject to special risks.
Investors should carefully consider the investment risks of such geographic
concentration before purchasing shares of those Funds. Because the
International Fund invests primarily in foreign securities, it is subject to
various risks in addition to those associated with U.S. investments. For
example, the value of the International Fund depends in part upon currency
values, the political and regulatory environments, and overall economic factors
in the countries in which the Fund invests. The Small Company Fund invests in
small-sized companies, which involve greater risks than investments in larger,
more established issuers and their securities can be subject to more abrupt and
erratic movements in price. The value of the Intermediate Treasury Fund, High-
Yield Fund, Managed Bond Fund, Municipal Bond Fund, California Fund and
Washington Fund will normally fluctuate inversely with changes in market
interest rates. The High-Yield Fund is subject to special risks associated
with below investment grade securities, sometimes referred to as "junk bonds,"
which it will purchase to pursue its investment objective. The principal risk
associated with money market funds is that they may experience a delay or
failure in principal or interest payments at maturity of one or more of the
portfolio securities. The Money Market Fund's yield will fluctuate with general
money market interest rates. See "Each Fund's Investment Objective and
Policies" and "Risk Factors" for more information.
INVESTMENT ADVISER; SUB-ADVISER OF INTERNATIONAL FUND
Each Fund is managed by SAFECO Asset Management Company ("SAM"). SAM is
headquartered in Seattle, Washington and managed over $2 billion in mutual fund
assets as of November 30, 1996. SAM has been an adviser to mutual funds and
other investment portfolios since 1973, and its predecessors have been advisers
since 1932. The Bank of Ireland Asset Management (U.S.) Limited (the "Sub-
Adviser") acts as a sub-adviser to the International Fund.
-7-
<PAGE>
The Sub-Adviser is a direct, wholly-owned subsidiary of Bank of Ireland Asset
Management Limited (an investment advisory firm), which is headquartered in
Dublin, Ireland, and an indirect, wholly-owned subsidiary of the Bank of
Ireland, which is also headquartered in Dublin, Ireland. See "Information about
Share Ownership and Companies that Provide Services to the Trusts" for more
information.
- -----------
EXPENSES
- -----------
A. SHAREHOLDER TRANSACTION EXPENSES FOR CLASS A AND CLASS B OF EACH FUND
Class A Class B
------- -------
Maximum Sales Charge on Purchases 4.50%* NONE
(as a Percentage of Offering Price)
Sales Charge on Reinvested NONE NONE
Dividends
Maximum Contingent Deferred Sales NONE* 5.00%**
Charge (CDSC)
Redemption Fees NONE NONE
Exchange Fees NONE NONE
* Except for initial purchases of the Money Market Fund. In addition,
purchases of $1,000,000 or more of Class A shares are not subject to a front-end
sales charge, but a 1% CDSC will apply to redemptions made in the first year.
See "How to Purchase Shares" on page 68 for more information.
** Except for initial purchases of the Money Market Fund. A CDSC may apply to
redemptions from the Money Market Fund that follow exchanges from Class B shares
of another Fund. See "How to Purchase Shares" on page 68 for more information.
Sales charge waivers and reduced sales charge purchase plans are available for
Class A shares. See "How to Purchase Shares" on page 68 for more information.
The maximum 5% CDSC on Class B shares applies to redemptions during the first
year after purchase, declining to 0% in the first month following the investor's
sixth anniversary from purchase. Class B shares of a Fund convert automatically
into Class A shares of that Fund in the first month following the investor's
sixth anniversary from purchase. Money Market Fund Class B shareholders who
subsequently exchange into Class B of another Fund do not receive credit for the
initial time invested in the
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<PAGE>
Money Market Fund for purposes of calculating any CDSC due upon redemption or
the conversion to Class A Shares. See "Purchasing Advisor Class B Shares" on
page 73 for more information.
SAFECO Services Corporation ("SAFECO Services"), the transfer agent for the
Funds, charges a $10 fee to wire redemption proceeds.
B. ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Growth Fund Equity Fund Income Fund
----------- ----------- -----------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
Management Fee .70% .70% .58% .58% .68% .68%
Rule 12b-1 Fees .25% 1.00% .25% 1.00% .25% 1.00%
Other Expenses .32% .32% .21% .21% .18% .18%
---- ---- ---- ---- ---- ----
Total Operating
Expenses (estimated) 1.27% 2.02% 1.04% 1.79% 1.11% 1.86%
Northwest Fund Balanced Fund International Fund
-------------- ------------- ------------------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
Management Fee .73% .73% .72% .72% 1.10% 1.10%
Rule 12b-1 Fees .25% 1.00% .25% 1.00% .25% 1.00%
Other Expenses .34% .34% .60% .60% 1.26% 1.26%
---- ---- ---- ---- ----- -----
Total Operating
Expenses (estimated) 1.32% 2.07% 1.57% 2.32% 2.61% 3.36%
Small Company Intermediate
Fund Treasury Fund High-Yield Fund
---- ------------- ---------------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
Management Fee .83% .83% .55% .55% .62% .62%
Rule 12b-1 Fees .25% 1.00% .25% 1.00% .25% 1.00%
Other Expenses .66% .66% .46% .46% .32% .32%
---- ---- ---- ---- ---- ----
-9-
<PAGE>
Small Company Intermediate
Fund Treasury Fund High-Yield Fund
---- ------------- ---------------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
Total Operating
Expenses (estimated) 1.74% 2.49% 1.26% 2.01% 1.19% 1.94%
Managed Bond Washington Fund Municipal Bond Fund
Fund --------------- -------------------
----
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
Management Fee .49% .49% .64% .64% .41% .41%
Rule 12b-1 Fees .25% 1.00% .25% 1.00% .25% 1.00%
Other Expenses .67% .67% .43% .43% .13% .13%
---- ---- ---- ---- ---- ----
Total Operating
Expenses (estimated) 1.41% 2.16% 1.32% 2.07% .79% 1.54%
California Fund Money Market Fund
--------------- -----------------
Advisor Advisor Advisor Advisor
Class A Class B Class A Class B
------- ------- ------- -------
Management Fee .53% .53% .50% .50%
Rule 12b-1 Fees .25% 1.00% .00% .00%
Other Expenses .15% .15% .28% .28%
---- ---- ---- ----
Total Operating
Expenses (estimated) .93% 1.68% .78% .78%
* The Money Market Fund does not have a Rule 12b-1 fee at this time.
Shareholders will be notified in advance by a supplement to this Prospectus in
the event that the Money Market Fund establishes a Rule 12b-1 fee under its Rule
12b-1 Plan.
Effective September 30, 1996, all of the then-existing shares of each Fund were
redesignated as No-Load Class shares and each Fund except the High-Yield Fund
commenced offering Class A and Class B shares. The High-Yield Fund commenced
offering Class A and Class B shares effective December 31, 1996. Expenses do
not reflect actual Class A or Class B expenses because the Classes have been
offered for less than one year. The amounts shown for the Growth, Equity,
-10-
<PAGE>
Income, Northwest, Intermediate Treasury and High-Yield Funds are estimated
expenses for the Advisor Classes based on the actual expenses paid by
shareholders of the Funds' other class for the fiscal year ended September 30,
1996, restated as applicable to reflect fees borne by Class A or Class B shares.
The amounts shown for the Money Market, Municipal Bond, California, and
Washington Funds are estimated expenses for the Advisor Classes based on the
actual expenses paid by shareholders of the Funds' other class for the fiscal
year ended March 31, 1996, restated as applicable to reflect fees borne by Class
A or Class B shares. The amounts shown for the Managed Bond Fund are estimated
expenses for the Advisor Classes based on the actual expenses paid by
shareholders of the Fund's other class for the fiscal year ended December 31,
1995, restated as applicable to reflect fees borne by Class A or Class B shares.
The amounts shown for the Balanced, International and Small Company Funds are
annualized expenses for Class A or Class B shares based on the maximum
management fee and estimated "other expenses" for the fiscal period ended
September 30, 1996. The management fees paid by the International and Small
Company Funds are higher than the management fees paid by most other investment
companies. See "Information about Share Ownership and Companies that Provide
Services to the Trusts" on page 82 for more information.
Rule 12b-1 fees have the following two components:
Advisor Class A Advisor Class B
--------------- ---------------
Rule 12b-1 service fees 0.25% 0.25%
Rule 12b-1 distribution fees 0.00% 0.75%
Long-term Class A and Class B shareholders may pay more in sales charges and
12b-1 fees than the economic equivalent of the maximum front-end sales
charge permitted by the National Association of Securities Dealers, Inc.
C. EXAMPLE OF EXPENSES
You would pay the following expenses on a $1,000 investment assuming a 5% annual
return and redemption at the end of each time period. The example also assumes
that all dividends and other distributions are reinvested and that the
percentage amounts listed in each Fund's "Annual Operating Expenses" above
remain the same in the years shown.
<TABLE>
<CAPTION>
Fund 1 Year 3 Years 5 Years 10 Years
---- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Growth 57 83 112 191
Advisor Class A(1)
Advisor Class B
Assuming redemption at end of period(2)(3) 71 93 129 198
Assuming no redemption at end of period(3) 21 63 109 198
-11-
<PAGE>
<CAPTION>
Fund 1 Year 3 Years 5 Years 10 Years
---- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Equity 55 77 100 166
Advisor Class A(1)
Advisor Class B
Assuming redemption at end of period(2)(3) 68 86 117 173
Assuming no redemption at end of period(3) 18 56 97 173
Income 56 79 103 174
Advisor Class A(1)
Advisor Class B
Assuming redemption at end of period(2)(3) 69 88 121 180
Assuming no redemption at end of period(3) 19 58 101 180
Northwest 58 85 114 197
Advisor Class A(1)
Advisor Class B
Assuming redemption at end of period(2)(3) 71 95 131 203
Assuming no redemption at end of period(3) 21 65 111 203
Balanced
Advisor Class A(1) 60 92 127 223
Advisor Class B
Assuming redemption at end of period(2) 74 102 144 230
Assuming no redemption at end of period 24 72 124 230
International
Advisor Class A(1) 70 122 177 326
Advisor Class B
Assuming redemption at end of period(2) 84 133 195 332
Assuming no redemption at end of period 34 103 175 332
Small Company
Advisor Class A(1) 62 97 135 241
Advisor Class B
Assuming redemption at end of period(2) 75 108 153 247.00
Assuming no redemption at end of period 25 78 133 247.00
Intermediate Treasury
Advisor Class A(1) 57 83 111 190
Advisor Class B
Assuming redemption at end of period(2)(3) 70 93 128 197
Assuming no redemption at end of period(3) 20 63 108 197
High-Yield
Advisor Class A(1) 57 81 107 183
Advisor Class B
Assuming redemption at end of period(2)(3) 70 91 125 189
Assuming no redemption at end of period(3) 20 61 105 189
-12-
<PAGE>
<CAPTION>
Fund 1 Year 3 Years 5 Years 10 Years
---- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Managed Bond
Advisor Class A(1) $59 $88 $119 $206
Advisor Class B
Assuming redemption at end of period(2)(3) $72 $98 $136 $213
Assuming no redemption at end of period(3) $22 $68 $116 $213
Municipal Bond
Advisor Class A(1) $53 $ 69 $ 87 $138
Advisor Class B
Assuming redemption at end of period(2)(3) $66 $ 79 $104 $145
Assuming no redemption at end of period(3) $16 $ 49 $ 84 $145
California
Advisor Class A(1) $54 $ 73 $ 94 $154
Advisor Class B
Assuming redemption at end of period(2)(3) $67 $ 83 $111 $160
Assuming no redemption at end of period(3) $17 $ 53 $ 91 $160
Washington
Advisor Class A(1) $58 $ 85 $114 $197
Advisor Class B
Assuming redemption at end of period(2)(3) $71 $ 95 $131 $203
Assuming redemption at end of period(3) $21 $ 65 $111 $203
Money Market(4)
Advisor Class A $ 8 $ 25 $ 43 $ 97
Advisor Class B $ 8 $ 25 $ 43 $ 97
</TABLE>
(1) Includes deduction at the time of purchase of the maximum sales charge.
(2) Includes deduction at the time of redemption of the applicable CDSC.
(3) Ten-year figures assume conversion of Class B shares to Class A shares in
the first month following the investor's sixth anniversary from purchase.
(4) Figures for the Money Market Fund assume that the investor purchased Money
Market Fund Shares as an initial investment and made no subsequent exchanges.
The purpose of the table is to assist you in understanding the various costs and
expenses that an investor in Class A and Class B shares of each Fund would bear,
directly or indirectly. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES. A FUND'S ACTUAL EXPENSES OR PERFORMANCE MAY BE
GREATER OR LESS THAN THOSE SHOWN. THE ASSUMED 5% ANNUAL RETURN IS REQUIRED BY
SECURITIES AND EXCHANGE COMMISSION REGULATIONS APPLICABLE TO ALL MUTUAL FUNDS
AND IT IS NOT A PREDICTION OF, NOR DOES IT REPRESENT, PAST OR FUTURE EXPENSES OR
THE PERFORMANCE OF ANY FUND.
-13-
<PAGE>
__________________________
FINANCIAL HIGHLIGHTS
__________________________
The amounts shown for each Fund in the Financial Highlights tables that
follow are based upon a single No-Load Class share outstanding throughout the
period indicated and do not reflect Rule 12b-1 fees. Except for the six
month period ended June 30, 1996 (Managed Bond Fund), the following selected
data have been derived from financial statements that have been audited by
Ernst & Young LLP, independent auditors. The data should be read in
conjunction with the financial statements, related notes and other financial
information included in each Trust's Annual and Semi-Annual Report to
shareholders and incorporated by reference in the applicable Trust's
Statement of Additional Information. The following selected data for the six
month period ended June 30, 1996 (Managed Bond Fund) has been derived from
unaudited financial statements. The data should be read in conjunction with
the financial statements, related notes, and other financial information
included in the Trust's Semi-Annual Report to shareholders and incorporated
by reference in the Trust's Statement of Additional Information. A copy of
each Trust's Statement of Additional Information may be obtained by calling
the number on the front page of this Prospectus.
-14-
<PAGE>
FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO GROWTH FUND
<TABLE>
<CAPTION>
Year Ended September 30
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
----- ----- ----- ----- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value
at beginning
of period $15.83 $17.37 $19.20 $13.98 $17.95 $11.14 $17.22 $14.95 $18.13 $15.40
INCOME (LOSS) FROM INVESTMENT
OPERATIONS
Net investment
(loss) income (.02) .07 (.02) (.02) (.01) .05 .14 .53 .35 .24
Net realized
and unrealized
gain (loss) on
investments 2.24 4.07 .78 5.39 (3.15) 7.77 (4.20) 3.17 (.99) 4.31
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations 2.22 4.14 .76 5.37 (3.16) 7.82 (4.06) 3.70 (.64) 4.55
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from
net
investment
income -- (.07) -- -- -- (.05) (.14) (.53) (.48) (.23)
Distributions from
capital gains (2.60) (5.61) (2.59) (.15) (.81) (.96) (1.88) (.90) (2.06) (1.59)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions (2.60) (5.68) (2.59) (.15) (.81) (1.01) (2.02) (1.43) (2.54) (1.82)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value
at end of
period $15.45 $15.83 $17.37 $19.20 $13.98 $17.95 $11.14 $17.22 $14.95 $18.13
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total return** 14.16% 23.93% 3.88% 38.43% -17.83% 70.22% -23.67% 25.23% -1.47% 32.68%
Net assets at
end of period
(000's omitted) $179,574 $176,483 $156,108 $158,723 $127,897 $155,429 $59,164 $81,472 $74,324 $82,703
</TABLE>
-15-
<PAGE>
FINANCIAL HIGHLIGHTS
SAFECO GROWTH FUND (Continued)
<TABLE>
<CAPTION>
Year Ended September 30
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
----- ----- ----- ----- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of expenses
to average net
assets 1.02% .98% .95% .91% .91% .90% 1.01% .94% .98% .92%
Ratio of net
investment
income (loss) to
average net
assets (.14%) .34% -.12% -.10% -.10% .36% .88% 3.27% 2.37% 1.46%
Portfolio turnover
rate 124.79% 110.44% 71.18% 57.19% 85.38% 49.86% 90.48% 11.38% 19.31% 23.61%
Avg. Commission
rate paid $.0548 -- -- -- -- -- -- -- -- --
</TABLE>
**Total return information does not reflect sales loads.
-16-
<PAGE>
FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO EQUITY FUND
<TABLE>
<CAPTION>
Year Ended September 30
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
----- ----- ----- ----- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value
at beginning
of period $15.31 $13.89 $12.54 $9.53 $10.38 $8.43 $10.10 $8.51 $12.23 $11.44
INCOME FROM INVESTMENT OPERATIONS
Net investment
income .28 .34 .23 .17 .15 .17 .22 .39 .18 .21
Net realized
and unrealized
gain (loss) on
investments 2.42 2.59 1.83 3.79 (.09) 2.37 (1.28) 2.26 (1.82) 2.83
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations 2.70 2.93 2.06 3.96 .06 2.54 (1.06) 2.65 (1.64) 3.04
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from
net
investment
income (.28) (.34) (.23) (.17) (.15) (.17) (.22) (.39) (.23) (.22)
Distributions from
capital gains (1.88) (1.17) (.48) (.78) (.76) (.42) (.39) (.67) (1.85) (2.03)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions (2.16) (1.51) (.71) (.95) (.91) (.59) (.61) (1.06) (2.08) (2.25)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value
at end of
period $15.85 $15.31 $13.89 $12.54 $9.53 $10.38 $8.43 $10.10 $8.51 $12.23
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total return** 18.04% 21.59% 16.51% 41.77% .41% 30.39% -10.73% 32.12% -9.93% 31.75%
Net assets at
end of period
(000's omitted) $725,780 $598,582 $412,805 $148,894 $74,383 $71,586 $51,603 $53,892 $45,625 $64,668
</TABLE>
-17-
<PAGE>
FINANCIAL HIGHLIGHTS
SAFECO EQUITY FUND (Continued)
<TABLE>
<CAPTION>
Year Ended September 30
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
----- ----- ----- ----- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of expenses
to average net
assets .79% .84% .85% .94% .96% .98% .97% .96% 1.00% .97%
Ratio of net
investment
income to
average net
assets 1.74% 2.38% 1.72% 1.50% 1.34% 1.70% 2.19% 4.13% 2.16% 1.92%
Portfolio turnover
rate 74.07% 56.14% 33.33% 37.74% 39.88% 45.21% 51.01% 63.62% 88.19% 85.11%
Avg. Commission
rate paid $.0587 -- -- -- -- -- -- -- -- --
</TABLE>
**Total return information does not reflect sales loads.
-18-
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
SAFECO INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $19.11 $17.25 $17.79 $16.27 $15.35 $12.89 $16.44 $14.32 $17.16 $15.52
INCOME FROM INVESTMENT OPERATIONS
Net investment income .73 .82 .81 .78 .80 .81 .85 .81 .78 .78
Net realized and unrealized gain
(loss) on investments 2.84 2.71 (.30) 1.52 .96 2.53 (3.39) 2.12 (1.80) 2.37
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations 3.57 3.53 .51 2.30 1.76 3.34 (2.54) 2.93 (1.02) 3.15
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income (.73) (.82) (.81) (.78) (.80) (.83) (.83) (.81) (.98) (.78)
Distributions from capital gains (1.92) (.85) (.24) -- (.04) (.05) (.18) -- (.84) (.73)#
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions (2.65) (1.67) (1.05) (.78) (.84) (.88) (1.01) (.81) (1.82) (1.51)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value at end of period $20.03 $19.11 $17.25 $17.79 $16.27 $15.35 $12.89 $16.44 $14.32 $17.16
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
</TABLE>
- 19 -
<PAGE>
FINANCIAL HIGHLIGHTS
SAFECO INCOME FUND (Continued)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total return** 18.98% 21.04% 2.98% 14.35% 11.75% 26.43% -16.06% 21.00% -4.61% 21.41%
Net assets at end of period
(000's omitted) $260,023 $217,870 $190,610 $203,019 $181,582 $181,265 $170,153 $232,812 $231,724 $313,308
Ratio of expenses to average net
assets .86% .87% .86% .90% .90% .93% .92% .92% .97% .94%
Ratio of net investment income to
average net assets 3.56% 4.55% 4.59% 4.55% 5.06% 5.58% 5.59% 5.28% 5.58% 4.53%
Portfolio turnover rate 50.11% 31.12% 19.30% 20.74% 20.35% 22.25% 19.37% 16.38% 34.13% 33.08%
Avg. Commission rate paid $.0591 -- -- -- -- -- -- -- -- --
</TABLE>
**Total return information does not reflect sales loads.
#Distributions include $.04 of additional gain arising from investment
transactions of securities acquired in a non-taxable exchange.
- 20 -
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
SAFECO NORTHWEST FUND
<TABLE>
<CAPTION>
FOR THE NINE FOR THE PERIOD
MONTH PERIOD FROM FEBRUARY 7,
YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED 1991 (INITIAL PUBLIC
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, OFFERING) TO
1996 1995 1994 1993 1992 DECEMBER 31, 1991
------------- ------------- ------------- ------------- ------------ --------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of
period $14.41 $12.59 $12.34 $12.59 $11.37 $10.06
INCOME FROM INVESTMENT OPERATIONS
Net investment income .02 .04 .04 .02 .06 .13
Net realized and unrealized
gain (loss) on investments 1.32 2.35 .59 (.25) 1.53 1.44
------------- ------------- ------------- ------------- ------------ --------------------
Total from investment operations 1.34 2.39 .63 (.23) 1.59 1.57
------------- ------------- ------------- ------------- ------------ --------------------
LESS DISTRIBUTIONS
Dividends from net investment
income (.02) (.04) (.04) (.02) (.06) (.19)
Distributions from capital gains (1.95) (.53) (.34) -- (.31) (.07)
------------- ------------- ------------- ------------- ------------ --------------------
Total distributions (1.97) (.57) (.38) (.02) (.37) (.26)
------------- ------------- ------------- ------------- ------------ --------------------
Net asset value at end of period $13.78 $14.41 $12.59 $12.34 $12.59 $11.37
------------- ------------- ------------- ------------- ------------ --------------------
------------- ------------- ------------- ------------- ------------ --------------------
Total return** 9.61% 19.01% 5.19% -1.86%+ 14.08% 14.93%+
Net assets at end of period
(000's omitted) $43,128 $40,140 $36,383 $39,631 $40,402 $26,434
</TABLE>
- 21 -
<PAGE>
FINANCIAL HIGHLIGHTS
SAFECO NORTHWEST FUND (Continued)
<TABLE>
<CAPTION>
FOR THE NINE FOR THE PERIOD
MONTH PERIOD FROM FEBRUARY 7,
YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED 1991 (INITIAL PUBLIC
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, OFFERING) TO
1996 1995 1994 1993 1992 DECEMBER 31, 1991
------------- ------------- ------------- ------------- ------------ --------------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of expenses to average net
assets 1.07% 1.09% 1.06% 1.11%++ 1.11% 1.27%++
Ratio of net investment income to
average net assets .11% .31% .33% .18%++ .55% 1.14%++
Portfolio turnover rate 35.69% 19.59% 18.46% 14.05%++ 33.34% 27.71%++
Avg. Commission rate paid $.0591 -- -- -- -- --
</TABLE>
**Total return information does not reflect sales loads.
+Not annualized.
++Annualized.
- 22 -
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
SAFECO BALANCED, INTERNATIONAL AND SMALL COMPANY FUNDS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM JANUARY 31, 1996
(INITIAL PUBLIC OFFERING) TO SEPTEMBER 30, 1996
SAFECO
SAFECO SAFECO SMALL
BALANCED INTERNATIONAL COMPANY
FUND FUND FUND
<S> <C> <C> <C>
Net Asset Value at
Beginning of Period $10.00 $10.00 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income .21 .06 (.01)
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign
Currency Transactions .39 .39 2.19
------ ------ ------
Total from Investment Operations .60 .45 2.18
------ ------ ------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (.21) (.06) --
Distributions from Realized Gains (.01) -- (.67)
------ ------ ------
Total Distributions (.22) (.06) (.67)
------ ------ ------
Net Asset Value at End of Period $10.38 $10.39 $11.51%
------ ------ ------
------ ------ ------
Total Return** 5.99%+ 4.54%+ 21.83%+
Net Assets at End of Period (000's omitted) 7,632 8,323 12,552
Ratio of Expenses to Average Net Assets++ 1.32% 2.36% 1.49%
Ratio of Net Investment Income (Loss)
to Average Net Assets ++ 3.21% .93% (.24%)
Portfolio Turnover Rate++ 143.87% 15.73% 91.03%
Average Commission Rate Paid $.0560 $.0225 $.0510
</TABLE>
** Total return information does not reflect sales loads.
+ Not Annualized.
++ Annualized.
-23-
<PAGE>
The information listed above is based on an eight month operating history
and may not be indicative of longer-term results. More information about the
Funds is contained in their annual report to shareholders which may be
obtained without charge by calling the number on the first page of this
Prospectus.
-24-
<PAGE>
FINANCIAL HIGHLIGHTS
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
<TABLE>
<CAPTION>
For the Period
From
September 7,
For the Year Ended September 30 1988 (Initial
Public
Offering)
To September
1996 1995 1994 1993 1992 1991 1990 1989 30, 1988
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $10.24 $9.74 $10.74 $10.69 $10.20 $9.83 $9.96 $9.95 $9.93
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .54 .55 .52 .60 .72 .75 .77 .77 .05
Net realized and unrealized gain (loss) on investments (.14) .50 (1.00) .49 .54 .37 (.13) .01 .02
------ ----- ------ ------ ------ ----- ----- ----- -----
Total from investment operations .40 1.05 (.48) 1.09 1.26 1.12 .64 .78 .07
------ ----- ------ ------ ------ ----- ----- ----- -----
LESS DISTRIBUTIONS:
Dividends from net investment income (.54) (.55) (.52) (.60) (.72) (.75) (.77) (.77) (.05)
Distributions from capital gain -- -- -- (.44) (.05) -- -- -- --
------ ----- ------ ------ ------ ----- ----- ----- -----
Total distributions (.54) (.55) (.52) (1.04) (.77) (.75) (.77) (.77) (.05)
------ ----- ------ ------ ------ ----- ----- ----- -----
Net asset value at end of period $10.10 $10.24 $9.74 $10.74 $10.69 $10.20 $9.83 $9.96 $9.95
------ ----- ------ ------ ------ ----- ----- ----- -----
------ ----- ------ ------ ------ ----- ----- ----- -----
Total return** 4.00% 11.07% (4.56%) 10.51% 12.78% 11.80% 6.65% 8.20% .69%+
Net assets at end of period (000's omitted) $14,668 $13,774 $13,367 $14,706 $12,205 $9,458 $6,916 $6,249 $5,007
Ratio of expenses to average net assets 1.0 .96% .90% .99% .98% 1.00% 1.00% .96 1.06%++
Ratio of net investment income to average net assets 5.30% 5.51% 5.08% 5.52% 6.89% 7.45% 7.76% 7.82% 7.46%++
Portfolio turnover rate 294.25% 124.9% 75.46% 104.94% 37.19% 9.51% 24.17% 4.36% None
</TABLE>
** Total return information does not reflect sales loads.
+ Not annualized.
++ Annualized.
-25-
<PAGE>
FINANCIAL HIGHLIGHTS
SAFECO HIGH-YIELD BOND FUND
<TABLE>
<CAPTION>
For the Period
From
September 7,
For the Year Ended September 30 1988 (Initial
Public
Offering)
To September
1996 1995 1994 1993 1992 1991 1990 1989 30, 1988
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $8.68 $8.55 $9.22 $8.92 $8.35 $7.94 $9.33 $9.86 $9.89
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .78 .79 .82 .91 .83 .93 1.04 1.11 .07
Net realized and unrealized gain (loss) on investments .11 .13 (.67) .30 .57 .41 (1.39) (.53) (.03)
------ ----- ------ ------ ----- ----- ----- ----- -----
Total from investment operations .89 .92 .15 1.21 1.40 1.34 (.35) .58 .04
------ ----- ------ ------ ----- ----- ----- ----- -----
LESS DISTRIBUTIONS:
Dividends from net investment income (.78) (.79) (.82) (.91) (.83) (.93) (1.04) (1.11) (.07)
------ ----- ------ ------ ----- ----- ----- ----- -----
Net asset value at end of period $8.79 $8.68 $8.55 $9.22 $8.92 $8.35 $7.94 $9.33 $9.86
------ ----- ------ ------ ----- ----- ----- ----- -----
------ ----- ------ ------ ----- ----- ----- ----- -----
Total return** 10.79% 11.43% 1.61% 14.29% 17.52% 18.18% (4.04%) 6.10% .37%+
Net assets at end of period (000's omitted) $47,880 $39,178 $27,212 $28,291 $19,672 $11,931 $7,786 $9,051 $5,204
Ratio of expenses to average net assets .94% 1.01% 1.03% 1.09% 1.05% 1.11% 1.15% 1.11% 1.25%+
Ratio of net investment income to average net assets 8.99% 9.28% 9.26% 9.94% 9.66% 11.51% 11.90% 11.52% 10.27%++
Portfolio turnover rate 92.65% 38.03% 63.02% 50.27% 40.66% 32.46% 18.46% 12.57% None
</TABLE>
** Total return information does not reflect sales loads.
+ Not annualized.
++ Annualized.
-26-
<PAGE>
FINANCIAL HIGHLIGHTS
SAFECO MANAGED BOND FUND
<TABLE>
<CAPTION>
FOR THE
FOR THE PERIOD FROM
SIX MONTH FEBRUARY 28, 1994
PERIOD ENDED FOR THE (INITIAL PUBLIC
JUNE 30, 1996 YEAR ENDED OFFERING) TO
(UNAUDITED) DECEMBER 31, 1995 DECEMBER 31, 1994
------------- ----------------- -----------------
<S> <C> <C> <C>
Net asset value at beginning of period $8.77 $8.15 $8.68
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .20 .44 .27
Net realized and unrealized gain (loss) on investments (0.42) .94 (.53)
------------- ----------------- -----------------
Total from investment operations (0.22) 1.38 (.26)
------------- ----------------- -----------------
LESS DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.20) (.44) (.27)
Net Realized gains on investments --- (.32) ---
------------- ----------------- -----------------
Total distributions (0.20) (.76) (.27)
------------- ----------------- -----------------
Net asset value at end of period $8.35 $8.77 $8.15
------------- ----------------- -----------------
------------- ----------------- -----------------
Total return* (2.55%)+ 17.35% (3.01%)+
Net assets at end of period (000's omitted) $4,114 $4,497 $4,627
Ratio of expenses to average net assets 1.17%++ 1.16% 1.28%++
Ratio of net investment income to average net assets 4.64%++ 5.14% 3.88%++
Portfolio turnover rate 117.13%++ 78.78% 132.26%++
</TABLE>
* Total return information does not reflect sales loads.
+ Not annualized.
++ Annualized.
-27-
<PAGE>
FINANCIAL HIGHLIGHTS
SAFECO MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $13.36 $13.27 $14.13 $13.37 $12.95 $12.73 $12.92 $12.85 $14.16 $13.74
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .76 .77 .78 .81 .86 .86 .88 .94 .96 .99
Net realized and unrealized
gain (loss) on investments .33 .12 (.55) .94 .48 .26 .25 .36 (.91) .63
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations 1.09 .89 .23 1.75 1.34 1.12 1.13 1.30 .05 1.62
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net
investment income (.76) (.77) (.78) (.81) (.86) (.86) (.88) (.94) (.96) (.99)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Distributions from
realized gains -- (.03) (.31) (.18) (.06) (.04) (.44) (.29) (.40) (.21)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total distributions (.76) (.80) (1.09) (.99) (.92) (.90) (1.32) (1.23) (1.36) (1.20)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value at
end of period $13.69 $13.36 $13.27 $14.13 $13.37 $12.95 $12.73 $12.92 $12.85 $14.16
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total return* 8.23% 7.10% 1.30% 13.60% 10.57% 9.13% 9.05% 10.49% .93% 12.49%+
Net assets at end of
period (000's omitted) $480,643 $472,569 $507,453 $541,515 $427,638 $331,647 $286,303 $231,911 $183,642 $214,745
Ratio of expenses to
average net assets .54% .56% .52% .53% .54% .56% .57% .60% .61% .59%
Ratio of net investment
income to average
net assets 5.47% 5.96% 5.49% 5.91% 6.37% 6.68% 6.76% 7.23% 7.42% 7.20%
Portfolio turnover rate 12.60% 29.96% 22.07% 31.66% 25.18% 38.55% 65.80% 135.60% 71.91% 23.09%
</TABLE>
* Total return information does not reflect sales loads.
+ Unaudited.
-28-
<PAGE>
FINANCIAL HIGHLIGHTS
SAFECO CALIFORNIA TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $11.54 $11.51 $12.23 $11.60 $11.24 $11.07 $11.02 $10.72 $12.14 $11.68
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .62 .63 .66 .68 .71 .71 .72 .75 .76 .80
Net realized and
unrealized gain (loss)
on investments .40 .13 (.38) .76 .44 .23 .23 .30 (.99) .57
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations 1.02 .76 .28 1.44 1.15 .94 .95 1.05 (.23) 1.37
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net
investment income (.62) (.63) (.66) (.68) (.71) (.71) (.72) (.75) (.76) (.80)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Distributions from
realized gains (.08) (.10) (.34) (.13) (.08) (.06) (.18) --- (.43)++ (.11)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total distributions (.70) (.73) (1.00) (.81) (.79) (.77) (.90) (.75) (1.19) (.91)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value at
end of period $11.86 $11.54 $11.51 $12.23 $11.60 $11.24 $11.07 $11.02 $10.72 $12.14
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total return* 8.87% 7.01% 1.97% 12.88% 10.43% 8.78% 8.87% 10.09% (1.39%) 12.25%+
Net assets at end of
period (000's omitted) $70,546 $64,058 $77,056 $79,872 $71,480 $57,066 $47,867 $36,930 $28,790 $34,792
Ratio of expenses to
average net assets .68% .70% .68% .66% .67% .67% .68% .71% .72% .70%
Ratio of net investment
income to average
net assets 5.12% 5.65% 5.31% 5.71% 6.13% 6.32% 6.42% 6.86% 6.99% 6.71%
Portfolio turnover rate 16.25% 44.10% 32.58% 23.18% 39.35% 22.92% 71.37% 76.95% 66.72% 44.61%
</TABLE>
* Total return information does not reflect sales loads.
+ Unaudited.
++ Distribution includes $.05 per share attributable to the
December 31, 1987, capital gain distribution paid in order to avoid any
exercise tax due under the Tax Reform Act of 1986.
-29-
<PAGE>
FINANCIAL HIGHLIGHTS
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
MARCH 18, 1993
YEAR ENDED YEAR ENDED (INITIAL PUBLIC
MARCH 31, MARCH 31, YEAR ENDED OFFERING) TO
1996 1995 MARCH 31, 1994 MARCH 31, 1993
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period $10.10 $9.91 $10.27 $10.32
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.50 0.49 0.44 0.02
Net realized and unrealized gain (loss) on
investments 0.27 0.19 (0.35) (0.05)
---- ---- ---- ----
Total from investment operations 0.77 0.68 0.09 (0.03)
---- ---- ---- ----
LESS DISTRIBUTIONS:
Dividends from net investment income (0.50) (0.49) (0.44) (0.02)
Distribution from realized gains (0.03) --- (0.01) ---
---- ---- ---- ----
Total distributions (0.53) (0.49) (0.45) (0.02)
---- ---- ---- ----
Net asset value at end of period $10.34 $10.10 $9.91 $10.27
------ ------ ----- ------
------ ------ ----- ------
Total return* 7.73% 7.13% .68% (31%)+
Net assets at end of period (000's omitted) $6,489 $5,953 $2,908 $2,163
Ratio of expenses to average net assets 1.07% 1.09% 1.44% 1.04%++
Ratio of net investment income to average net 4.78% 5.06% 4.17% 4.47%++
assets
Portfolio turnover rate 20.86% 9.23% 17.26% None
</TABLE>
* Total return information does not reflect sales loads.
+ Not annualized.
++ Annualized.
-30-
<PAGE>
FINANCIAL HIGHLIGHTS
SAFECO MONEY MARKET FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1996 1995 1994 1993 1992
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $1.00 $1.00 $1.00 $1.00 $1.00
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .05 .04 .02 .03 .05
LESS DISTRIBUTIONS:
Dividends from net investment income (.05) (.04) (.02) (.03) (.05)
---- ---- ---- ---- ----
Net asset value at end of period $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Total return* 5.15% 4.20% 2.48% 2.98% 5.04%
Net assets at end of period (000's omitted) $165,122 $171,958 $186,312 $144,536 $184,823
Ratio of expenses to average net assets .78% .78% .79% .77% .73%
Ratio of net investment income to average net
assets 5.04% 4.21% 2.47% 3.02% 5.05%
<CAPTION>
Year Ended March 31
1991 1990 1989 1988 1987
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $1.00 $1.00 $1.00 $1.00 $1.00
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .07 .08 .08 .06 .06
LESS DISTRIBUTIONS:
Dividends from net investment income (.07) (.08) (.08) (.06) (.06)
---- ---- ---- ---- ----
Net asset value at end of period $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Total return* 7.60% 8.77% 7.86% 6.56% 5.90%**
Net assets at end of period (000's omitted) $224,065 $225,974 $177,813 $119,709 $57,998
Ratio of expenses to average net assets .70% .71% .74% .79% .82%
Ratio of net investment income to average net
assets 7.34% 8.45% 7.66% 6.49% 5.71%
</TABLE>
* Total return information does not reflect a Contingent Deferred Sales
Charge that may apply to certain shares.
** Unaudited
-31-
<PAGE>
________________________________________________________
SUB-ADVISER INFORMATION FOR THE INTERNATIONAL FUND
_______________________________________________________________
The International Fund's sub-adviser, Bank of Ireland Asset Management (U.S.)
Limited ("BIAM"), has been managing separate accounts for institutional
clients in the United States for six years. BIAM's past performance in
advising these accounts was a key factor in its selection as the Fund's
sub-adviser. The performance illustrated in the table that follows is based
on the return achieved on BIAM's fully discretionary international equity
composite of accounts ("Composite") consisting of 27 accounts totaling
approximately $2.6 billion which comprised approximately 70.2% of BIAM's
assets under management as of December 31, 1995. These returns reflect the
time-weighted total returns achieved by the Composite's constituent accounts,
weighted by reference to their sizes. The past performance of the Composite
is shown after reduction by the International Fund's maximum investment
management and estimated administrative expenses (1.33% per year).
For the Periods Ended December 31, 1995
<TABLE>
<CAPTION>
ONE YEAR TWO YEARS THREE YEARS FOUR YEARS FIVE YEARS SIX YEARS
<S> <C> <C> <C> <C> <C> <C>
BIAM Composite 19.24% 5.26% 16.25% 15.20% 14.49% 11.25%
Morgan Stanley
Europe, Australia and 11.56% 9.80% 17.02% 9.02% 9.71% 3.38%
Far East Index
(EAFE Index)
</TABLE>
The EAFE Index is used for comparison purposes only. The EAFE Index is an
unmanaged index of representative international stocks that has no management
or expense charges. Performance is based on historical earnings and is not
intended to indicate future performance of the Composite or the International
Fund.
Please keep in mind that the International Fund's performance may differ from
the Composite performance. The International Fund's expenses, timing of
purchases and sales of portfolio securities, availability of cash flows,
brokerage commissions and diversification of the portfolio are all reasons
that might cause the performance of the International Fund to vary from that
of the Composite. In addition, the performance of the Composite does not
reflect sales charges imposed on certain purchases or redemptions of the
International Fund's Class A and Class B shares. There are a number of ways
to calculate performance, and it is possible that if a different
-32-
<PAGE>
method were used the result would have varied. Finally, the past performance
of the Composite is no guarantee of the future results of the International
Fund.
____________________________________________
ALTERNATIVE PURCHASE ARRANGEMENT
____________________________________________
This Prospectus offers two classes of shares for each Fund. For each Fund
except the Money Market Fund, Class A shares are sold at net asset value plus
an initial sales charge of up to 4.5%. Class A shares also pay an annual Rule
12b-1 service fee of 0.25% of the average daily net assets of the Class A
shares. For each Fund except the Money Market Fund, Class B shares are sold
at net asset value with no initial sales charge, but a CDSC of up to 5%
applies to redemptions made within six years of purchase. Class B shares
also pay an annual Rule 12b-1 service fee of 0.25% of the average daily net
assets of the Class B shares and an annual Rule 12b-1 distribution fee of
0.75% of the average daily net assets of the Class B shares. Class B shares
convert to Class A shares in the first month following the investor's sixth
anniversary from purchase. The maximum investment amount in Class B shares
is $500,000.
Class A and B shares of the Money Market Fund are sold at net asset value,
are not subject to sales charges, and do not currently pay Rule 12b-1 fees.
Money Market Fund Class A and Class B shares may be subject to sales charges
if an investor exchanges into Class A or Class B shares of another Fund. See
"Purchasing Advisor Class A Shares" and "Purchasing Advisor Class B Shares."
For shareholders of each Fund except the Money Market Fund, the alternative
purchase arrangement permits an investor to choose the method of purchasing
shares that is most beneficial given the amount of the purchase, the length
of time the investor expects to hold the shares, and other circumstances.
Investors should consider whether, during the anticipated life of their
investment in a Fund, the accumulated distribution and service fees and CDSCs
on Class B shares prior to conversion would be less than the initial sales
charge and accumulated service fee on Class A shares purchased at the same
time.
Class A shares will normally be more beneficial than Class B shares to
investors who qualify for reduced initial sales charges or a sales load
waiver on Class A shares. Class A shares are subject to a service fee (but
not a distribution fee) and, accordingly, pay correspondingly higher
dividends per share than Class B shares. However, because initial sales
charges are deducted at the time of purchase, investors purchasing Class A
shares would not have all their funds invested initially and, therefore,
would initially own fewer shares.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time might consider
purchasing Class B shares. The CDSC imposed on the redemption of Class B
shares decreases and is completely eliminated with respect to such
-33-
<PAGE>
shares beginning in the first month following the investor's sixth
anniversary from purchase. Class B shares automatically convert to Class A
shares (which are subject to lower continuing charges) in the first month
following the investor's sixth anniversary from purchase.
For more information about each Fund's shares, see "How to Purchase Shares"
beginning on page 68.
________________________________________________________
EACH FUND'S INVESTMENT OBJECTIVE AND POLICIES
________________________________________________________
The investment objective and investment policies for each Fund are described
below. A Trust's Board of Trustees may change a Fund's (except the
California Fund's) objective without a shareholder vote, but no such change
will be made without prior written notice to shareholders of that Fund (60
days' in the case of the Money Market, Municipal Bond and Washington Funds
and 30 days' in the case of the other Funds). The California Fund has a
fundamental investment objective that may not be changed without a
shareholder vote. In the event a Fund changes its investment objective, the
new objective may not meet the investment needs of every shareholder and may
be different from the objective a shareholder considered appropriate at the
time of initial investment.
Each Fund has adopted a number of investment restrictions. If a Fund
satisfies a percentage limitation at the time of investment, a later increase
or decrease in value, assets or other circumstances will not be considered in
determining whether the Fund complies with the applicable policy (except to
the extent the change may impact the Fund's borrowing limits). Unless
otherwise stated, the investment policies and limitations described below
under each Fund's description and "Common Investment Practices" are
non-fundamental and may be changed without a shareholder vote.
INVESTMENT OBJECTIVES AND POLICIES OF THE STOCK FUNDS
GROWTH FUND
The Growth Fund has as its investment objective to seek growth of capital and
the increased income that ordinarily follows from such growth. The Growth
Fund ordinarily invests a preponderance of its assets in common stock
selected primarily for potential appreciation. Such investments may cause
its share price to be more volatile than the Equity and Income Funds.
To pursue its investment objective, the Growth Fund:
1. WILL INVEST A PREPONDERANCE OF ITS ASSETS IN COMMON STOCKS
SELECTED PRIMARILY FOR POTENTIAL APPRECIATION. To determine
those common stocks which have the potential for
-34-
<PAGE>
long-term growth, SAM will evaluate the issuer's financial strength,
quality of management and earnings power.
2. MAY INVEST IN SECURITIES CONVERTIBLE INTO COMMON STOCK (INCLUDING
CORPORATE BONDS AND PREFERRED STOCK THAT CONVERT TO COMMON STOCK, EITHER
AUTOMATICALLY AFTER A SPECIFIED PERIOD OF TIME OR AT THE OPTION OF THE
ISSUER). The Fund will purchase convertible securities if such
securities offer a higher yield than an issuer's common stock and
provide reasonable potential for capital appreciation.
3. MAY INVEST UP TO 5% OF NET ASSETS IN CONTINGENT VALUE RIGHTS. A
contingent value right is a right issued by a corporation that takes on
a preestablished value if the underlying common stock does not attain a
target price by a specified date.
For a brief description of common stocks, preferred stocks, convertible
securities, and bonds and other debt securities, see "Description of Stocks,
Bonds and Convertible Securities" on page 95.
EQUITY FUND
The Equity Fund has as its investment objective to seek long-term growth of
capital and reasonable current income. The Equity Fund invests principally
in common stock selected for appreciation and/or dividend potential and from
a long-range investment standpoint. The Equity Fund does not seek to achieve
both growth and income with every portfolio security investment. Rather, it
attempts to achieve a reasonable balance between growth and income on an
overall basis.
To pursue its investment objective, the Equity Fund:
1. WILL INVEST, DURING NORMAL MARKET CONDITIONS, AT LEAST 65% OF ITS TOTAL
ASSETS IN EQUITY SECURITIES (WHICH INCLUDE COMMON STOCKS AND PREFERRED
STOCKS). The Fund will invest principally in common stocks selected by
SAM primarily for appreciation and/or dividend potential and from a
long-range investment standpoint.
2. MAY INVEST IN SECURITIES CONVERTIBLE INTO COMMON STOCK (INCLUDING
CORPORATE BONDS AND PREFERRED STOCK THAT CONVERT TO COMMON STOCK,
WHETHER AUTOMATICALLY AFTER A SPECIFIED PERIOD OF TIME OR AT THE OPTION
OF THE ISSUER), EXCEPT THAT LESS THAN 35% OF ITS NET ASSETS WILL BE
INVESTED IN SUCH SECURITIES. The Equity Fund may invest in convertible
corporate bonds that are rated below investment grade (commonly referred
to as "high-yield" or "junk" bonds) or in comparable, unrated bonds, but
less than 35% of the Equity Fund's net assets will be invested in such
securities. The Equity Fund will not purchase a bond rated below Ca by
Moody's Investors Service, Inc. ("Moody's") or CC by Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies ("S&P") or
which is in default on the payment of principal and interest. Bonds
rated Ca
-35-
<PAGE>
or CC are highly speculative and have large uncertainties or major risk
exposures. See "Risk Factors" on page 60 for more information.
For a brief description of common stocks, preferred stocks, convertible
securities, and bonds and other debt securities, see "Description of Stocks,
Bonds and Convertible Securities" on page 95. For a description of
debt securities ratings, see the "Ratings Supplement" on page 96.
INCOME FUND
The Income Fund has as its investment objective to seek high current income
and, when consistent with its objective, the long-term growth of capital.
The Fund currently intends to place greatest emphasis on holding common
stock, convertible corporate bonds and convertible preferred stock. SAM will
select securities primarily for current income, but also with a view toward
capital growth when this can be accomplished without conflicting with the
Fund's investment objective.
To pursue its investment objective, the Income Fund:
1. WILL INVEST PRIMARILY IN COMMON STOCK AND ALSO IN CONVERTIBLE AND
NON-CONVERTIBLE CORPORATE BONDS AND PREFERRED STOCK (INCLUDING CORPORATE
BONDS AND PREFERRED STOCK THAT CONVERT TO COMMON STOCK EITHER
AUTOMATICALLY AFTER A SPECIFIED PERIOD OF TIME OR AT THE OPTION OF THE
ISSUER). The Fund will purchase convertible securities if such
securities offer a higher yield than an issuer's common stock and
provide reasonable potential for capital appreciation. The Income Fund
may invest in convertible corporate bonds that are rated below
investment grade (commonly referred to as "high-yield" or "junk" bonds)
or in comparable, unrated bonds, but less than 35% of the Income Fund's
net assets will be invested in such securities. Bonds rated Ca by
Moody's or CC by S&P are highly speculative and have large uncertainties
or major risk exposures. See "Risk Factors" on page 60 for more
information.
2. MAY INVEST UP TO 10% OF TOTAL ASSETS IN EURODOLLAR BONDS WHICH ARE
ISSUED BY U.S. ISSUERS. Eurodollar bonds are traded in the European
bond market and are denominated in U.S. dollars. The Fund will purchase
Eurodollar bonds through U.S. securities dealers and hold such bonds in
the United States. The delivery of Eurodollar bonds to the Fund's
custodian in the United States may cause slight delays in settlement
which are not anticipated to affect the Fund in any material, adverse
manner.
For a brief description of common stocks, preferred stocks, convertible
securities, and bonds and other debt securities, see "Description of Stocks,
Bonds and Convertible Securities" on page 95. For a description of
debt securities ratings, see the "Ratings Supplement" on page 96.
-36-
<PAGE>
NORTHWEST FUND
The Northwest Fund has as its investment objective to seek long-term growth
of capital through investing primarily in Northwest companies. To pursue its
objective, the Fund will invest at least 65% of its total assets in
securities issued by companies with their principal executive offices located
in Alaska, Idaho, Montana, Oregon or Washington.
To pursue its investment objective, the Northwest Fund:
1. WILL ORDINARILY INVEST ITS ASSETS IN SHARES OF COMMON STOCKS AND
PREFERRED STOCKS OF COMPANIES LOCATED IN THE NORTHWEST SELECTED
PRIMARILY FOR POTENTIAL LONG-TERM APPRECIATION. To determine those
common and preferred stocks which have the potential for long-term
growth, SAM will evaluate the issuer's financial strength, quality of
management and earnings power. The Fund generally invests a portion of
its assets in smaller companies. See "Risk Factors" for more
information about the risks of investing primarily in companies located
in the Northwest.
2. 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 FUND. The Fund may purchase corporate bonds and
preferred stock that convert to common stock either automatically after
a specified period of time or at the option of the issuer. The Fund will
purchase those convertible securities which, in SAM's opinion, have
underlying common stock with potential for long-term growth. The Fund
will purchase convertible securities which are investment grade, i.e.,
rated in the top four categories by either S&P or Moody's.
See "Risk Factors" for more information about the risks inherent in
geographic concentration. For a brief description of common stocks,
preferred stocks, convertible securities, and bonds and other debt
securities, see "Description of Stocks, Bonds and Convertible Securities" on
page 95. For a description of debt securities ratings, see the "Ratings
Supplement" on page 96.
BALANCED FUND
The Balanced Fund has as its investment objective to seek growth and income
consistent with the preservation of capital. To pursue its objective, the
Balanced Fund will invest primarily in equity and fixed income securities and
will occasionally alter the mix of its equity and fixed income securities.
Such action will be taken in response to economic conditions and generally in
small increments. The Balanced Fund will not make significant changes in its
asset mix in an attempt to "time the market."
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To pursue its investment objective, the Balanced Fund:
1. WILL ORDINARILY INVEST FROM 50% TO 70% OF ITS TOTAL ASSETS IN EQUITY
SECURITIES, WHICH INCLUDE COMMON STOCKS, PREFERRED STOCK AND SECURITIES
CONVERTIBLE INTO COMMON STOCK. The Fund will invest principally in
common stocks selected by SAM primarily for appreciation and/or dividend
potential and from a long-range investment standpoint. The Fund may
purchase corporate bonds and preferred stock that convert to common
stock either automatically after a specified period of time or at the
option of the issuer.
The Fund will purchase those convertible securities which, in SAM's
opinion, have underlying common stock with potential for long-term
growth. The Fund will purchase convertible securities which are
investment grade, i.e., rated in the top four categories by either S&P
or Moody's.
2. WILL INVEST AT LEAST 25% OF ITS TOTAL ASSETS IN FIXED-INCOME SENIOR
SECURITIES. The Fund will purchase only those U.S. Government and
investment grade debt obligations or non-rated debt obligations which in
SAM's view contain the credit characteristics of investment grade debt
obligations. Investment grade obligations (rated between Aaa -Baa by
Moody's and AAA-BBB by S&P) are from high to medium quality. Medium
quality obligations possess speculative characteristics and may be more
sensitive to economic changes and changes to the financial condition of
issuers.
For a brief description of common stocks, preferred stocks, convertible
securities, and bonds and other debt securities, see "Description of Stocks,
Bonds and Convertible Securities" on page 95. For a description of debt
securities ratings, see the "Ratings Supplement" on page 96.
INTERNATIONAL FUND
The investment objective of the International Fund is to seek maximum
long-term total return (capital appreciation and income) by investing
primarily in common stock of established non-U.S. companies. To pursue its
objective, the International Fund, under normal market conditions, will
invest at least 65% of its total assets in the securities of companies
domiciled in at least five countries, not including the United States.
To pursue its investment objective, the International Fund:
1. WILL INVEST PRIMARILY IN COMMON STOCKS OF NON-U.S. COMPANIES. Common
stock issued by foreign companies is subject to various risks in
addition to those associated with U.S. investments. For example, the
value of the common stock depends in part upon currency values, the
political and regulatory environments, and overall economic factors in
the countries in which the common stock is issued.
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2. MAY INVEST IN PREFERRED STOCKS AND CONVERTIBLE SECURITIES ISSUED BY
FOREIGN COMPANIES.
3. MAY INVEST IN DEBT SECURITIES ISSUED BY FOREIGN COMPANIES AND
GOVERNMENTS. The Fund will make such investments primarily for
defensive purposes, but may also do so where anticipated interest rate
movements, or other factors affecting the degree of risk inherent in a
fixed income security, are expected to change significantly so as to
produce appreciation in the security consistent with the objective of
the Fund. The Fund may purchase sovereign debt instruments 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.
4. MAY INVEST IN PASSIVE FOREIGN INVESTMENT COMPANIES ("PFICS"), WHICH
INCLUDE FUNDS OR TRUSTS ORGANIZED AS INVESTMENT VEHICLES TO INVEST IN
COMPANIES OF CERTAIN FOREIGN COUNTRIES. Investors in PFICs bear their
proportionate share of the PFIC's management fees and other expenses.
See "Additional Tax Information" in the Common Stock Trust's Statement
of Additional Information.
5. MAY PURCHASE AND SELL PUT AND CALL OPTIONS ON SECURITIES, FINANCIAL
INDICES AND FOREIGN CURRENCIES, MAY PURCHASE AND SELL THE FOLLOWING
NON-LEVERAGED DERIVATIVE SECURITIES: FUTURES CONTRACTS AND RELATED
OPTIONS WITH RESPECT TO SECURITIES, FINANCIAL INDICES AND FOREIGN
CURRENCIES, AND MAY ENTER INTO FOREIGN CURRENCY TRANSACTIONS SUCH AS
FORWARD CONTRACTS. The Fund may employ certain strategies and
techniques utilizing these instruments to mitigate its exposure to
changing currency exchange rates, security prices, interest rates and
other factors that affect security values. There is no guarantee that
these strategies and techniques will work.
An option gives an owner the right to buy or sell securities at a
predetermined exercise price for a given period of time. The writer of
an option is obligated to purchase or sell (depending upon the nature of
the option) the underlying securities if the option is exercised during
the specified period of time. A futures contract is an agreement in
which the seller of the contract agrees to deliver to the buyer an
amount of cash equal to a specific dollar amount times the difference
between the value of a security at the close of the last trading day of
the contract and the price at which the agreement is made. A forward
currency contract is an agreement to purchase or sell a foreign currency
at some future time for a fixed amount of U.S. dollars.
The Fund, under normal conditions, will not sell a put or call option
if, as a result thereof, the aggregate value of the assets underlying
all such options (determined as of the date
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such options are written) would exceed 25% of the Fund's net assets.
The Fund will not purchase a put or call option or option on a futures
contract if, as a result thereof, the aggregate premiums paid on all
options or options on futures contracts held by the Fund would exceed
20% of its net assets. In addition, the Fund will not enter into any
futures contract or option on a futures contract if, as a result
thereof, the aggregate margin deposits and premiums required on all such
instruments would exceed 5% of its net assets.
See "Risk Factors" for more information about the risks inherent in
securities issued by foreign issuers and in the purchase and sale of options,
futures and forward contracts. For a brief description of common stocks,
preferred stocks, convertible securities, and bonds and other debt
securities, see "Description of Stocks, Bonds and Convertible Securities" on
page 95.
SMALL COMPANY FUND
The Small Company Fund has as its investment objective to seek long-term
growth of capital through investing primarily in small-sized companies. To
pursue its objective, the Small Company Fund will invest primarily in
companies with total market capitalization of less than $1 billion.
To pursue its investment objective, the Small Company Fund:
1. WILL INVEST AT LEAST 65% OF ITS TOTAL ASSETS IN COMMON STOCK AND
PREFERRED STOCK OF SMALL-SIZED COMPANIES WITH TOTAL MARKET
CAPITALIZATION OF LESS THAN $1 BILLION. Companies whose capitalization
falls outside this range after purchase continue to be considered
small-capitalized for purposes of the 65% policy. The Fund will invest
principally in common stocks selected by SAM primarily for appreciation
and/or dividend potential and from a long-range investment standpoint.
In determining those common and preferred stocks which have the
potential for long-term growth, SAM will evaluate the issuer's financial
strength, quality of management and earnings power. Investments in
small or newly formed companies involve greater risks than investments
in larger, more established issuers and their securities can be subject
to more abrupt and erratic movements in price. See "Risk Factors" for
more information about the risks inherent in securities issued by small
companies.
2. MAY INVEST IN SECURITIES CONVERTIBLE INTO COMMON STOCK WHEN, IN SAM'S
OPINION, THE EXPECTED TOTAL RETURN OF A CONVERTIBLE SECURITY EXCEEDS THE
EXPECTED TOTAL RETURN OF COMMON STOCK ELIGIBLE FOR PURCHASE BY THE FUND.
The Fund will purchase convertible securities if such securities offer
a higher yield than an issuer's common stock and provide reasonable
potential for capital appreciation. The Fund may invest in convertible
corporate bonds that are rated below investment grade (commonly referred
to as "high-yield" or "junk" bonds) or in comparable, unrated bonds, but
less than 35% of the Fund's net assets will be invested in such
securities. Bonds rated Ca by Moody's or CC by S&P
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are highly speculative and have large uncertainties or major risk
exposures. See "Risk Factors" on page 60 for more information.
See "Risk Factors" for more information about the risks inherent in small
company issuers. For a brief description of common stocks, preferred stocks,
convertible securities, and bonds and other debt securities, see "Description
of Stocks, Bonds and Convertible Securities" on page 95. For a description
of debt securities ratings, see the "Ratings Supplement" on page .
COMMON INVESTMENT PRACTICES OF THE STOCK FUNDS
Each of the Stock Funds may also follow the investment practices described
below:
1. MAY INVEST IN BONDS AND OTHER DEBT SECURITIES.
Each Fund may invest in bonds and other debt securities that are rated
investment grade by Moody's or S&P, or unrated bonds determined by SAM
to be of comparable quality to such rated bonds. Bonds rated in the
lowest category of investment grade (Baa by Moody's and BBB by S&P) and
comparable unrated bonds have speculative characteristics and are more
likely to have a weakened capacity to make principal and interest
payments under changing economic conditions or upon deterioration in the
financial condition of the issuer.
After purchase by a Stock Fund, a corporate bond may be downgraded or,
if unrated, may cease to be comparable to a rated security. Neither
event will require a Stock Fund to dispose of that security, but SAM
will take a downgrade or loss of comparability into account in
determining whether the Fund should continue to hold the security in its
portfolio. The Equity Fund will not hold more than 3% of its total
assets and the Income Fund will not hold more than 1% of its total
assets in bonds that go into default on the payment of principal and
interest after purchase. In the event that 35% or more of a Stock
Fund's net assets is held in securities rated below investment grade due
to a downgrade of one or more corporate bonds, SAM will engage in an
orderly disposition of such securities to the extent necessary to ensure
that the Fund's holdings of such securities remain below 35% of the
Fund's net assets.
2. MAY INVEST IN WARRANTS. Warrants are options to buy a stated number of
shares of common stock at a specified price any time during the life of
the warrant. 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 Stock Fund could lose all of its
principal investment in the warrant.
3. MAY HOLD CASH OR INVEST TEMPORARILY IN HIGH QUALITY, SHORT-TERM
SECURITIES ISSUED BY AN AGENCY OR INSTRUMENTALITY OF THE U.S.
GOVERNMENT, HIGH QUALITY COMMERCIAL PAPER, CERTIFICATES OF DEPOSIT,
SHARES OF NO-LOAD, OPEN-END MONEY MARKET FUNDS
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(EXCEPT THE EQUITY FUND) OR REPURCHASE AGREEMENTS. The Stock Funds may
purchase these short-term securities as a cash management technique
under those circumstances where it has cash to manage for a short time
period, for example, after receiving proceeds from the sale of
securities, dividend distributions from portfolio securities or cash
from the sale of Fund shares to investors. With respect to
repurchase agreements, each Stock Fund will invest no more than 5% of
its total assets in repurchase agreements and will not purchase
repurchase agreements that mature in more than seven days.
Counterparties of foreign repurchase agreements may be less creditworthy
than U.S. counterparties.
4. MAY PURCHASE SECURITIES ON A "WHEN-ISSUED" OR "DELAYED-DELIVERY" BASIS
OR PURCHASE OR SELL SECURITIES ON A "FORWARD COMMITMENT" BASIS. Under
this procedure, a Stock Fund agrees to acquire securities that are to be
issued and delivered against payment in the future. The price, however,
is fixed at the time of commitment. When a Stock Fund purchases
when-issued or delayed-delivery securities, its custodian bank will
maintain in a temporary holding account cash, U.S. Government securities
or other high-grade debt obligations having a value equal to or greater
than such commitments. On delivery dates for such transactions, the
Fund will meet its obligations from maturities or sales of the
securities held in the temporary holding account or from then-available
cash flow. If a Stock Fund chooses to dispose of the right to acquire a
when-issued or delayed delivery security prior to its acquisition, it
could incur a gain or loss due to market fluctuations. Use of these
techniques may affect a Fund's share price in a manner similar to
leveraging.
5. MAY INVEST IN AMERICAN DEPOSITARY RECEIPTS ("ADRS"). ADRs are
registered receipts evidencing ownership of an underlying foreign
security. They typically are issued in the United States by a bank or
trust company. In addition to the risks of foreign investment
applicable to the underlying securities, ADRs may also be subject to the
risks that the foreign issuer may not be obligated to cooperate with the
U.S. bank or trust company, or that such information in the U.S. market
may not be current. ADRs which are structured without sponsorship of
the issuer of the underlying foreign security may also be subject to the
risk that the foreign issuer may not provide financial and other
material information to the U.S. bank or trust company issuer. The
International Fund may utilize European Depositary Receipts ("EDRs"),
which are similar instruments. EDRs may be in bearer form and are
designed for use in the European securities markets.
6. MAY INVEST UP TO 10% OF ITS TOTAL ASSETS IN FOREIGN SECURITIES, EXCEPT
THE INTERNATIONAL FUND, WHICH MAY INVEST 100% OF ITS ASSETS IN FOREIGN
SECURITIES. FOREIGN SECURITIES ARE SUBJECT TO RISKS IN ADDITION TO
THOSE INHERENT IN INVESTMENTS IN DOMESTIC SECURITIES. See "Risk
Factors" on page 60 for more information about the risks associated with
investments in foreign securities.
7. MAY INVEST UP TO 10% OF ITS TOTAL ASSETS IN SHARES OF REAL ESTATE
INVESTMENT TRUSTS ("REITS"). REITs purchase real property, which is
then leased, and make mortgage
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investments. For federal income tax purposes, REITs attempt to qualify
for beneficial "modified pass-through" tax treatment by annually
distributing at least 95% of their taxable income. If a REIT were
unable to qualify for such tax treatment, it would be taxed as a
corporation and the distributions made to its shareholders would not be
deductible by it in computing its taxable income. REITs are dependent
upon the successful operation of properties owned and the financial
condition of lessees and mortgagors. The value of REIT units fluctuates
depending on the underlying value of the real property and mortgages
owned and the amount of cash flow (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 that are highly leveraged.
8. MAY INVEST UP TO 10% OF ITS TOTAL ASSETS IN RESTRICTED SECURITIES,
PROVIDED THAT SAM HAS DETERMINED THAT SUCH SECURITIES ARE LIQUID UNDER
GUIDELINES ADOPTED BY THE COMMON STOCK TRUST'S BOARD OF TRUSTEES.
Restricted securities may be sold only in offerings registered under the
Securities Act of 1933, as amended ("1933 Act"), or in transactions
exempt from the registration requirements under the 1933 Act. Rule 144A
under the 1933 Act provides an exemption for the resale of certain
restricted securities to qualified institutional buyers. Investing in
restricted securities may increase the Stock Funds' illiquidity to the
extent that qualified institutional buyers or other buyers are unwilling
to purchase the securities. As a result, a Stock Fund may not be able
to sell these securities when its investment adviser or sub-investment
adviser deems it advisable to sell, or may have to sell them at less
than fair value. In addition, market quotations are sometimes less
readily available for restricted securities. Therefore, judgment may at
times play a greater role in valuing these securities than in the case
of unrestricted securities.
9. MAY INVEST IN SECURITIES WHOSE PERFORMANCE AND PRINCIPAL AMOUNT AT
MATURITY ARE LINKED TO A SPECIFIED EQUITY SECURITY OR SECURITIES INDEX.
The value of an indexed security is determined by reference to a
specific equity instrument or statistic. The performance of indexed
securities depends largely on the performance of the securities or
indices to which they are indexed, but such securities are also subject
to credit risks associated with the issuer of the security. Indexed
securities may also be more volatile than their underlying instruments.
10. MAY INVEST UP TO 5% OF ITS TOTAL ASSETS IN SECURITIES OF UNSEASONED
ISSUERS. Unseasoned issuers are those companies which, together with
any predecessors, have been in operation for less than three years.
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The following restrictions are fundamental policies of the Stock Funds that
cannot be changed without shareholder vote.
1. EACH FUND, WITH RESPECT TO 75% OF THE VALUE OF ITS TOTAL ASSETS, MAY NOT
INVEST MORE THAN 5% OF ITS TOTAL ASSETS IN THE SECURITIES OF ANY ONE
ISSUER (OTHER THAN U.S. GOVERNMENT SECURITIES).
2. THE GROWTH, INCOME AND NORTHWEST FUNDS MAY NOT PURCHASE MORE THAN 10% OF
ANY CLASS OF SECURITIES OF ANY ONE ISSUER.
3. EACH FUND, WITH RESPECT TO 100% OF THE VALUE OF ITS TOTAL ASSETS, MAY
NOT PURCHASE MORE THAN 10% OF THE OUTSTANDING VOTING SECURITIES OF ANY
ONE ISSUER (OTHER THAN U.S. GOVERNMENT SECURITIES).
4. EACH STOCK FUND MAY BORROW MONEY ONLY FOR TEMPORARY OR EMERGENCY
PURPOSES, AND THE GROWTH FUND ONLY FOR EXTRAORDINARY OR EMERGENCY
PURPOSES, FROM A BANK OR AFFILIATE OF SAFECO CORPORATION AT AN INTEREST
RATE NOT GREATER THAN THAT AVAILABLE FROM COMMERCIAL BANKS. The Growth,
Income and Northwest Funds will not borrow amounts in excess of 20%, and
the Equity, Balanced, International and Small Company Funds will not
borrow amounts in excess of 33%, of total assets. A Stock Fund will not
purchase securities if borrowings equal to or greater than 5% of total
assets are outstanding for that Fund.
For more information, see the "Investment Policies" and "Additional
Investment Information" sections of the Common Stock Trust's Statement of
Additional Information.
INVESTMENT POLICIES OF THE INTERMEDIATE TREASURY FUND
The investment objective of the Intermediate Treasury Fund is to provide as
high a level of current income as is consistent with the preservation of
capital. The Intermediate Treasury Fund will seek to maintain a portfolio of
U.S. Treasury obligations with an average dollar weighted maturity of between
three and ten years; however, individual obligations held by the Intermediate
Treasury Fund may have maturities outside that range.
To pursue its investment objective, the Intermediate Treasury Fund:
1. WILL INVEST, DURING NORMAL MARKET CONDITIONS, AT LEAST 65% OF ITS TOTAL
ASSETS IN DIRECT OBLIGATIONS OF THE U.S. TREASURY SUCH AS U.S. TREASURY
BILLS, NOTES AND BONDS. The Intermediate Treasury Fund may also invest
in stripped securities that are direct obligations of the U.S. Treasury.
Direct obligations of the U.S. Treasury are supported by the full faith
and credit of the U.S. Government.
2. WILL INVEST UP TO 35% OF ITS TOTAL ASSETS IN:
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OTHER U.S. GOVERNMENT SECURITIES, including (a) securities supported by
the full faith and credit of the U.S. Government but that are not direct
obligations of the U.S. Treasury, such as securities issued by the
Government National Mortgage Association ("GNMA"), (b) securities that
are not supported by the full faith and credit of the U.S. Government
but are supported by the issuer's ability to borrow from the U.S.
Treasury, such as securities issued by the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"), and (c) securities supported solely by the creditworthiness
of the issuer, such as securities issued by the Tennessee Valley
Authority ("TVA"). While U.S. Government securities are considered to
be of the highest credit quality available, they are subject to the same
market risks as comparable debt securities.
CORPORATE DEBT SECURITIES which at the time of purchase are rated in the
top three grades (A or higher) by either Moody's or S&P, or, if unrated,
determined by SAM to be of comparable quality to such rated debt
securities. In addition to reviewing ratings, SAM will analyze the
quality of rated and unrated corporate bonds for purchase by the Fund by
evaluating various factors that may include the issuer's capital
structure, earnings power and quality of management. See "Ratings
Supplement" beginning on page 96.
3. MAY INVEST UP TO 5% OF ITS TOTAL ASSETS IN YANKEE SECTOR DEBT
SECURITIES, EURODOLLAR BONDS AND MUNICIPAL SECURITIES. See the Taxable
Bond Trust's Statement of Additional Information for more information
about these securities.
INVESTMENT POLICIES OF THE HIGH-YIELD FUND
The High-Yield Fund has as its investment objective to provide a high level
of current interest income through the purchase of high-yield, fixed-income
securities. The higher yields that the Fund seeks are usually available from
lower-rated or unrated securities sometimes referred to as "junk bonds." The
maturity of the debt obligations held by the Fund may range from 1 to 30
years. However, it is anticipated that the majority of debt obligations will
have maturities from 5 to 15 years.
To pursue its investment objective, the High-Yield Fund:
1. WILL INVEST, DURING NORMAL MARKET CONDITIONS, AT LEAST 65% OF ITS
PORTFOLIO IN HIGH-YIELD, FIXED-INCOME SECURITIES. The High-Yield Fund
may purchase debt and preferred stock issues (including convertible
securities) which are below investment grade, i.e., rated lower than the
top four grades by S&P or Moody's, or, if not rated by these agencies,
in the opinion of SAM, have credit characteristics comparable to such
rated securities. Up to 25% of the Fund's total assets may be invested
in such unrated securities. SAM will determine the quality of unrated
obligations by evaluating the issuer's capital structure, earnings power
and quality of management. Unrated securities may not be as attractive
to as many investors as rated securities. In addition, the Fund
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may invest up to 5% of its total assets in securities which are in
default. The Fund will purchase securities which are in default only
when, in SAM's opinion, the potential for high yield outweighs the risk.
While fixed-income securities rated lower than investment grade
generally lack characteristics of a desirable investment, they normally
offer a current yield or yield-to-maturity which is significantly higher
than the yield available from securities rated as investment grade.
These securities are speculative and involve greater investment risks
due to the issuers' reduced creditworthiness and increased likelihood of
default and bankruptcy. In addition, these securities are frequently
subordinated to senior securities. For further explanation of the
special risks associated with investing in lower-rated, fixed-income
securities, see "Risk Factors" on page 60.
For a description of debt ratings, see "Description of Debt Ratings" on
page 96. For a breakdown of the debt securities held by the High-Yield Fund
during the fiscal year ended September 30, 1996, see "Debt Securities Held
by the High-Yield Fund" on page 100.
The High-Yield Fund may retain an issue whose rating has been changed.
2. MAY INVEST IN FIXED-INCOME SECURITIES WITH EQUITY FEATURES WHEN
COMPARABLE IN YIELD AND RISK TO FIXED-INCOME SECURITIES WITHOUT EQUITY
FEATURES, BUT ONLY WHEN ACQUIRED AS A RESULT OF UNIT OFFERINGS WHICH
CARRY AN EQUITY ELEMENT SUCH AS COMMON STOCK, RIGHTS OR OTHER EQUITY
SECURITIES. The Fund will hold these common stocks, rights or other
equity securities until SAM determines that, in its opinion, the optimal
time for sale of the equity security has been reached.
3. MAY INVEST UP TO 10% OF ITS 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. Restricted securities may be sold
only in offerings registered under the Securities Act of 1933 ("1933
Act") or in transactions exempt from the registration requirements under
the 1933 Act. Rule 144A under the 1933 Act provides an exemption for
the resale of certain restricted securities to qualified institutional
buyers. Investing in Rule 144A securities could have the effect of
increasing the Fund's illiquidity to the extent that qualified
institutional buyers or other buyers are unwilling to purchase the
securities.
4. MAY INVEST UP TO 5% OF ITS TOTAL ASSETS IN MUNICIPAL SECURITIES WHICH
ARE RATED LOWER THAN THE TOP THREE GRADES ASSIGNED BY MOODY'S OR S&P OR
ARE UNRATED BUT COMPARABLE TO SUCH RATED SECURITIES IF, IN THE OPINION
OF SAM, THE POTENTIAL FOR APPRECIATION IS GREATER THAN, AND YIELD IS
COMPARABLE TO OR GREATER THAN, SIMILARLY-RATED TAXABLE SECURITIES.
Investment in medium and lower quality tax-exempt bonds involves the
same risks as investments in taxable bonds of similar quality.
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5. MAY INVEST IN OBLIGATIONS OF, OR GUARANTEED BY, THE U.S. GOVERNMENT, ITS
AGENCIES OR INSTRUMENTALITIES OR IN FIXED-INCOME SECURITIES WHICH ARE
RATED IN THE FOUR HIGHEST GRADES ASSIGNED BY MOODY'S OR S&P DURING
MARKET CONDITIONS WHICH, IN THE OPINION OF SAM, ARE UNFAVORABLE FOR
SATISFACTORY PERFORMANCE BY LOWER-RATED OR UNRATED FIXED-INCOME
SECURITIES. The Fund may invest in higher-rated securities when
changing economic conditions or other factors cause the difference in
yield between lower-rated and higher-rated securities to narrow and SAM
believes that the risk of loss to principal may be substantially reduced
with a small reduction in yield.
COMMON INVESTMENT PRACTICES OF THE INTERMEDIATE TREASURY FUND AND THE
HIGH-YIELD FUND
The Intermediate Treasury Fund and High-Yield Fund may also follow the
investment practices described below:
1. MAY HOLD CASH OR INVEST TEMPORARILY IN HIGH-QUALITY COMMERCIAL PAPER,
CERTIFICATES OF DEPOSIT, SHARES OF NO-LOAD, OPEN-END MONEY MARKET FUNDS,
REPURCHASE AGREEMENTS AND HIGH-QUALITY SHORT-TERM SECURITIES ISSUED BY
AN AGENCY OR INSTRUMENTALITY OF THE U.S. GOVERNMENT. Each Fund may
purchase these short-term securities as a cash management technique
under those circumstances where it has cash to manage for a short time
period, for example, after receiving proceeds from the sale of
securities, interest payments, or dividend distributions from portfolio
securities or cash from the sale of Fund shares to investors. Interest
earned from these short-term securities will be taxable to investors as
ordinary income when distributed.
2. MAY INVEST FOR SHORT-TERM PURPOSES WHEN SAM BELIEVES SUCH ACTION TO BE
DESIRABLE AND CONSISTENT WITH SOUND INVESTMENT PRACTICES. Neither Fund,
however, will engage primarily in trading for the purpose of short-term
profits. A Fund may dispose of its portfolio securities whenever SAM
deems advisable, without regard to the length of time the securities
have been held.
3. MAY PURCHASE OR SELL SECURITIES ON A "WHEN-ISSUED" OR "DELAYED-DELIVERY"
BASIS. Under this procedure, a Fund agrees to acquire or sell
securities that are to be delivered against payment in the future,
normally 30 to 45 days. The price, however, is fixed at the time of
commitment. When a Fund purchases when-issued or delayed-delivery
securities, it will earmark liquid, high-quality securities in an amount
equal in value to the purchase price of the security. Use of these
techniques may affect the Fund's share price in a manner similar to
leveraging.
The following restrictions are fundamental policies of the Intermediate
Treasury Fund and High-Yield Fund which cannot be changed without shareholder
vote.
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1. EACH FUND, WITH RESPECT TO 75% OF THE VALUE OF ITS TOTAL ASSETS, MAY NOT
INVEST MORE THAN 5% OF ITS TOTAL ASSETS IN THE SECURITIES OF ANY ONE
ISSUER (OTHER THAN U.S. GOVERNMENT SECURITIES).
2. EACH FUND, WITH RESPECT TO 100% OF THE VALUE OF ITS TOTAL ASSETS, MAY
NOT PURCHASE MORE THAN 10% OF THE OUTSTANDING VOTING SECURITIES OF ANY
ONE ISSUER (OTHER THAN U.S. GOVERNMENT SECURITIES).
3. EACH FUND MAY BORROW MONEY ONLY FOR TEMPORARY OR EMERGENCY PURPOSES FROM
A BANK OR SAFECO CORPORATION OR AFFILIATES OF SAFECO CORPORATION AT AN
INTEREST RATE NOT GREATER THAN THAT AVAILABLE FROM COMMERCIAL BANKS. A
Fund will not borrow amounts in excess of 20% of its total assets. A
Fund will not purchase securities if outstanding borrowings are equal to
or greater than 5% of its total assets. Each Fund intends to exercise
its borrowing authority primarily to meet shareholder redemptions under
circumstances where redemption requests exceed available cash.
4. EACH FUND MAY INVEST UP TO 10% OF ITS NET ASSETS IN ILLIQUID SECURITIES,
WHICH ARE SECURITIES THAT CANNOT BE SOLD WITHIN SEVEN DAYS IN THE
ORDINARY COURSE OF BUSINESS FOR APPROXIMATELY THE AMOUNT AT WHICH THEY
ARE VALUED. Due to the absence of an active trading market, a Fund may
experience difficulty in valuing or disposing of illiquid securities.
SAM determines the liquidity of the securities under guidelines adopted
by the Taxable Bond Trust's Board of Trustees.
5. EACH FUND MAY INVEST UP TO 10% OF NET ASSETS IN REPURCHASE AGREEMENT
TRANSACTIONS. Repurchase agreements are transactions in which a Fund
purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at
an agreed-upon date and price reflecting a market rate of interest
unrelated to the coupon rate or maturity of the purchased securities.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including the risk that the Fund will be
unable to dispose of the security during the term of the repurchase
agreement if the security's market value declines, and delays and costs
to a Fund if the other party to the repurchase agreement declares
bankruptcy.
For more information see the "Investment Policies" and "Additional Investment
Information" sections of the Taxable Bond Trust's Statement of Additional
Information.
INVESTMENT POLICIES OF THE MANAGED BOND FUND
The investment objective of the Managed Bond Fund is to provide as high a
level of total return as is consistent with the relative stability of capital
through purchase of investment grade debt securities.
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In pursuing the Managed Bond Fund's investment objective, SAM will seek to
minimize the effects of interest rate risks while pursuing total return by
adjusting the investment portfolio's average maturity in response to interest
rate changes. In general, the Managed Bond Fund's strategy will be to hold
fixed-income securities with shorter maturities as interest rates rise and
with longer maturities as interest rates fall. The fixed-income securities
held by the Managed Bond Fund will have maturities of 10 years or less from
the date of purchase. SAM reserves the right to modify the Managed Bond
Fund's investment strategy in any respect at any time.
To pursue its investment objective, the Managed Bond Fund:
1. WILL INVEST AT LEAST 65% OF ITS TOTAL ASSETS IN BONDS, DEFINED AS
FIXED-INCOME SECURITIES.
2. WILL INVEST PRIMARILY IN INVESTMENT GRADE DEBT SECURITIES; I.E.,
SECURITIES RATED IN THE TOP FOUR CATEGORIES BY EITHER S&P OR MOODY'S OR
IF NOT RATED, SECURITIES WHICH, IN SAM'S OPINION, ARE COMPARABLE IN
QUALITY TO INVESTMENT GRADE DEBT SECURITIES. Included in investment
grade debt securities are securities of medium grade (rated Baa by
Moody's or BBB by S&P) which have speculative characteristics and are
more likely to have a weakened capacity to make principal and interest
payments under changing economic or other conditions than higher grade
securities. The Managed Bond Fund will limit investments in such medium
grade debt securities to no more than 10% of its total assets. Unrated
securities are not necessarily of lower quality than rated securities,
but may not be as attractive to investors.
The Managed Bond Fund may retain debt securities which are downgraded to
below investment grade (commonly referred to as "high yield" or "junk"
bonds) after purchase. In the event that due to a downgrade of one or
more debt securities an amount in excess of 5% of the Fund's net assets
is held in securities rated below investment grade, SAM will engage in
an orderly disposition of such securities to the extent necessary to
reduce the Fund's holdings of such seccurities to no more than 5% of the
Fund's net assets. In addition to reviewing ratings, SAM may analyze
the quality of rated and unrated debt securities purchased for the
Managed Bond Fund by evaluating the issuer's capital structure, earnings
power, quality of management and position within its industry. For a
description of debt securities ratings, see the "Ratings Supplement" on
page 96.
3. WILL INVEST AT LEAST 50% OF ITS TOTAL ASSETS IN OBLIGATIONS OF OR
GUARANTEED BY THE U.S. GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES.
These obligations include (a) direct obligations of the U.S. Treasury,
such as U.S. Treasury notes, bills, bonds and stripped securities; (b)
securities supported by the full faith and credit of the U.S. Government
but that are not direct obligations of the U.S. Treasury, such as
securities issued by the GNMA; (c) securities that are not supported by
the full faith and credit of the U.S. Government but are supported by
the issuer's ability to borrow from the U.S. Treasury, such as
securities issued by the FNMA and the FHLMC; and (d) securities
supported solely by the creditworthiness of the issuer, such as
securities issued by the TVA. While
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U.S. Government securities are considered to be of the highest credit
quality available, they are subject to the same market risks as
comparable debt securities.
4. MAY INVEST UP TO 50% OF ITS TOTAL ASSETS IN CORPORATE DEBT SECURITIES OR
EURODOLLAR BONDS. 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. The Managed Bond Fund will purchase
Eurodollar bonds through U.S. securities dealers and hold such bonds in
the United States. The delivery of Eurodollar bonds to the Managed Bond
Fund's custodian in the United States may cause slight delays in
settlement which are not anticipated to affect the Managed Bond Fund in
any material, adverse manner. Eurodollar bonds issued by foreign issuers
are subject to the same risks as Yankee sector bonds discussed below.
5. MAY INVEST IN ASSET-BACKED SECURITIES, WHICH 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. 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 is a risk that one or more of the underlying borrowers may
default and that recovery on repossessed collateral may be unavailable
or inadequate to support payments on the defaulted asset-backed
securities. In addition, asset-backed securities are subject to
prepayment risks which may reduce the overall return of the investment.
6. MAY INVEST UP TO 10% OF ITS TOTAL ASSETS IN YANKEE SECTOR DEBT
SECURITIES, WHICH ARE SECURITIES ISSUED AND TRADED IN THE UNITED STATES
BY FOREIGN ISSUERS. These bonds have investment risks that are
different from those of domestic issuers. Such risks may include
nationalization of the issuer, confiscatory taxation by the foreign
government that would inhibit the ability of the issuer to make
principal and interest payments to the Managed Bond Fund, lack of
comparable publicly available information concerning foreign issuers,
lack of comparable accounting and auditing practices in foreign
countries and, finally, difficulty in enforcing claims against foreign
issuers in the event of default.
Both S&P and Moody's rate Yankee sector debt obligations. If a debt
obligation is unrated, SAM will attempt to analyze a potential
investment in the foreign issuer with respect to quality and risk on the
same basis as the rating services. Because public information is not
always comparable to that available on domestic issuers, this may not be
possible. Therefore, while SAM will attempt to select investments in
foreign securities on the same basis, and with comparable quantities and
types of information, as its investments in domestic securities, that
may not always be possible.
7. MAY PURCHASE OR SELL SECURITIES ON A WHEN-ISSUED OR DELAYED-DELIVERY
BASIS. Under this procedure, the Managed Bond Fund agrees to acquire
securities that are to be issued and delivered against payment in the
future, normally 30 to 45 days. The price, however,
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is fixed at the time of commitment. When the Managed Bond Fund
purchases when-issued or delayed-delivery securities, it will earmark
liquid, high quality securities in an amount equal in value to the
purchase price of the security. Use of these techniques may affect the
Managed Bond Fund's share price in a manner similar to the use of
leveraging.
8. MAY HOLD CASH OR INVEST TEMPORARILY IN HIGH QUALITY, SHORT-TERM
SECURITIES ISSUED BY AN AGENCY OR INSTRUMENTALITY OF THE U.S.
GOVERNMENT, HIGH QUALITY COMMERCIAL PAPER, CERTIFICATES OF DEPOSIT,
SHARES OF NO-LOAD, OPEN-END MONEY MARKET FUNDS OR REPURCHASE AGREEMENTS.
The Managed Bond Fund may purchase these short-term securities as a
cash management technique under those circumstances where it has cash to
manage for a short time period, for example, after receiving proceeds
from the sale of securities, interest payments or dividend distributions
from portfolio securities or cash from the sale of Managed Bond Fund
shares to investors. Interest earned from these short-term securities
will be taxable to investors as ordinary income when distributed. With
respect to repurchase agreements, the Managed Bond Fund will invest no
more than 5% of its total assets in repurchase agreements, and will not
purchase repurchase agreements which mature in more than seven days.
9. MAY HOLD CASH AS A TEMPORARY DEFENSIVE MEASURE WHEN MARKET CONDITIONS SO
WARRANT.
10. MAY INVEST UP TO 5% OF ITS TOTAL ASSETS IN MUNICIPAL SECURITIES IF, IN
SAM'S OPINION, THE POTENTIAL FOR APPRECIATION IS GREATER THAN, AND YIELD
IS COMPARABLE TO OR GREATER THAN, SIMILARLY RATED TAXABLE SECURITIES.
11. MAY INVEST FOR SHORT-TERM PURPOSES WHEN SAM BELIEVES SUCH ACTION TO BE
DESIRABLE AND CONSISTENT WITH SOUND INVESTMENT PRACTICES. The Managed
Bond Fund, however, will not engage primarily in trading for the purpose
of short-term profits. The Managed Bond Fund may dispose of its
portfolio securities whenever SAM deems advisable, without regard to the
length of time the securities have been held.
The following restrictions are fundamental policies of the Managed Bond Fund
which cannot be changed without shareholder vote.
1. THE FUND, WITH RESPECT TO 75% OF THE VALUE OF ITS TOTAL ASSETS, MAY NOT
INVEST MORE THAN 5% OF ITS TOTAL ASSETS IN THE SECURITIES OF ANY ONE
ISSUER (OTHER THAN U.S. GOVERNMENT SECURITIES).
2. THE FUND, WITH RESPECT TO 100% OF THE VALUE OF ITS TOTAL ASSETS, MAY NOT
PURCHASE MORE THAN 10% OF THE OUTSTANDING VOTING SECURITIES OF ANY ONE
ISSUER (OTHER THAN U.S. GOVERNMENT SECURITIES).
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3. THE FUND MAY BORROW MONEY FOR TEMPORARY OR EMERGENCY PURPOSES ONLY FROM A
BANK OR AFFILIATE OF SAFECO CORPORATION AT AN INTEREST RATE NOT GREATER
THAN THAT AVAILABLE FROM COMMERCIAL BANKS. The Fund will not borrow
amounts in excess of 20% of its total assets. As a non-fundamental policy,
the Fund will not purchase securities if outstanding borrowings are equal
to or greater than 5% of its total assets. The Fund intends to exercise
its borrowing authority primarily to meet shareholder redemptions under
circumstances where redemptions exceed available cash.
For more information, see the "Investment Policies" and "Additional Investment
Information" sections of the Managed Bond Trust's Statement of Additional
Information.
INVESTMENT POLICIES OF THE TAX-EXEMPT INCOME FUNDS
The investment objective of the Municipal Bond Fund is to provide as high a
level of current interest income exempt from federal income tax as is consistent
with the relative stability of capital. The investment objective of the
California Fund is to provide as high a level of current interest income exempt
from federal income tax and California state personal income tax as is
consistent with the relative stability of capital. The investment objective of
the Washington Fund is to provide as high a level of current interest income
exempt from federal income tax as is consistent with prudent investment risk.
To pursue its investment objective, each of the Tax-Exempt Income Funds:
1. WILL, DURING NORMAL MARKET CONDITIONS, INVEST AS A MATTER OF FUNDAMENTAL
POLICY AT LEAST 80% OF ITS NET ASSETS IN SECURITIES THE INTEREST ON WHICH
IS EXEMPT FROM FEDERAL INCOME TAX AND, IN THE CASE OF THE CALIFORNIA FUND,
EXEMPT FROM CALIFORNIA PERSONAL INCOME TAX. The Tax-Exempt Income Funds do
not currently intend to purchase taxable investments, except as a temporary
accommodation or in an emergency situation.
2. WILL INVEST AT LEAST 65% OF ITS TOTAL ASSETS IN MUNICIPAL BONDS (IN THE
CASE OF THE WASHINGTON FUND, ISSUED BY THE STATE OF WASHINGTON OR POLITICAL
SUBDIVISIONS, MUNICIPALITIES, AGENCIES, INSTRUMENTALITIES OR PUBLIC
AUTHORITIES WITHIN THE STATE OF WASHINGTON) HAVING A MATURITY IN EXCESS OF
ONE YEAR THAT AT THE TIME OF ACQUISITION ARE INVESTMENT GRADE; I.E., RATED
IN ONE OF THE FOUR HIGHEST GRADES ASSIGNED BY MOODY'S OR S&P OR, IF
UNRATED, DETERMINED BY SAM TO BE OF COMPARABLE QUALITY. Each Tax-Exempt
Income Fund may invest up to 20% of its total assets in unrated municipal
bonds. Unrated securities are not necessarily lower in quality than rated
securities, but may not be as attractive to as many investors as rated
securities. Each Tax-Exempt Income Fund will invest no more than 33% of
its total assets in municipal bonds rated in the fourth highest grade or in
comparable unrated bonds. Such bonds are of medium grade, have speculative
characteristics and are more likely to have a weakened capacity to make
principal and interest payments under changing economic conditions or upon
deterioration in the financial condition of the issuer.
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In addition to reviewing ratings, SAM will analyze the quality of rated and
unrated municipal bonds for purchase by each Tax-Exempt Income Fund by
evaluating various factors that may include the issuer's or guarantor's
financial resources and liquidity, economic feasibility of revenue bond
project financing and general purpose borrowings, cash flow and ability to
meet anticipated debt service requirements, quality of management,
sensitivity to economic conditions, operating history and any relevant
political or regulatory matters. SAM may also evaluate trends in the
economy, the financial markets or specific geographic areas in determining
whether to purchase a bond. For a description of municipal bond ratings,
see the Tax-Exempt Bond Trust's Statement of Additional Information.
After purchase by a Fund, a municipal bond may be downgraded to below
investment grade or, if unrated, may cease to be comparable to a rated
investment grade security (such below investment grade securities are
commonly referred to as "high-yield" or "junk" bonds). Neither event will
require a Fund to dispose of that security, but SAM will take a downgrade
or loss of comparability into account in determining whether the Fund
should continue to hold the security in its portfolio. Each Tax-Exempt
Income Fund will not hold more than 5% of its net assets in such below
investment grade securities.
The term "municipal bonds" as used in this Prospectus means those
obligations issued by or on behalf of states, territories or possessions of
the United States and the District of Columbia and their political
subdivisions, municipalities, agencies, instrumentalities or public
authorities, the interest on which in the opinion of bond counsel is exempt
from federal income tax and, in the case of the California Fund, exempt
from California personal income tax.
3. MAY INVEST IN ANY OF THE FOLLOWING TYPES OF MUNICIPAL BONDS:
REVENUE BONDS, which are "limited obligation" bonds that provide financing
for specific projects or public facilities. These bonds are backed by
revenues generated by a particular project or facility or by a special
tax. A "resource recovery bond" is a type of revenue bond issued to
build waste facilities or plants. An "industrial development bond"
("IDB") is a type of revenue bond that is backed by the credit of a
private issuer, generally does not have access to the resources of a
municipality for payment and may involve greater risk. Each Tax-Exempt
Income Fund intends to invest primarily in revenue bonds that may be
issued to finance various types of projects, including but not limited
to education, hospitals, housing, waste and utilities. Each Tax-Exempt
Income Fund will not purchase private activity bonds ("PABs") or any
other type of revenue bonds, the interest on which is a tax preference
item for purposes of the alternative minimum tax.
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GENERAL OBLIGATION BONDS, which are bonds that provide general purpose
financing for state and local governments and are backed by the taxing
power of the state and local government as the case may be. The taxes or
special assessments that can be levied for the payment of principal and
interest on general obligation bonds may be limited or unlimited as to rate
or amount.
VARIABLE AND FLOATING RATE OBLIGATIONS, which are municipal obligations
that carry variable or floating rates of interest. Variable rate
instruments bear interest at rates that are readjusted at periodic
intervals. Floating rate instruments bear interest at rates that vary
automatically with changes in specified market rates or indexes, such as
the bank prime rate. Accordingly, as interest rates fluctuate, the
potential for capital appreciation or depreciation of these obligations is
less than for fixed rate obligations. Floating and variable rate
obligations typically carry demand features that permit a Fund to tender
(sell) them back to the issuer at par prior to maturity and on short
notice. A Fund's ability to obtain payment from the issuer at par may be
affected by events occurring between the date the Fund elects to tender the
obligation to the issuer and the date redemption proceeds are payable to
the Fund. Each Tax-Exempt Income Fund will purchase floating and variable
rate obligations only if at the time of purchase there is a secondary
market for such instruments.
PUT BONDS, which are municipal bonds that give the holder the unconditional
right to sell the bond back to the issuer at a specified price and exercise
date and PUT BONDS WITH DEMAND FEATURES. The obligation to purchase the
bond on the exercise date may be supported by a letter of credit or other
arrangement from a bank, insurance company or other financial institution,
the credit standing of which affects the credit quality of the bond. A
demand feature is a put that entitles the Fund holding it to repayment of
the principal amount of the underlying security on no more than 30 days'
notice at any time or at specified intervals.
MUNICIPAL LEASE OBLIGATIONS, which are issued by or on behalf of state or
local government authorities to acquire land, equipment or facilities and
may be subject to annual budget appropriations. These obligations
themselves are not normally backed by the credit of the municipality or the
state but are secured by rent payments made by the municipality or by the
state pursuant to a lease. If the lease is assigned, the interest on the
obligation may become taxable. The leases underlying certain municipal
lease obligations provide that lease payments are subject to partial or
full abatement if, because of material damage or destruction of the lease
property, there is substantial interference with the lessee's use or
occupancy of such property. This "abatement risk" may be reduced by the
existence of insurance covering the leased property, the maintenance by the
lessee of reserve funds or the provision of credit enhancements such as
letters of credit. Certain municipal lease obligations also contain "non-
appropriation" clauses that provide that the municipality has no obligation
to make lease or installment purchase payments in future years unless money
is appropriated for such purpose on a yearly basis.
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Some municipal lease obligations of this type are insured as to timely
payment of principal and interest, even in the event of a failure by the
municipality to appropriate sufficient funds to make payments under the
lease. However, in the case of an uninsured municipal lease obligation, a
Fund's ability to recover under the lease in the event of a non-
appropriation or default will be limited solely to the repossession of
leased property without recourse to the general credit of the lessee, and
disposition of the property in the event of foreclosure might prove
difficult. If rent is abated because of damage to the leased property or
if the lease is terminated because monies are not appropriated for the
following year's lease payments, the issuer may default on the obligation
causing a loss to a Fund. Each Tax-Exempt Income Fund will only invest in
municipal lease obligations that are, in the opinion of SAM, liquid
securities under guidelines adopted by the Tax-Exempt Bond Trust's Board of
Trustees. Generally, municipal lease obligations will be determined to be
liquid if they have a readily available market after an evaluation of all
relevant factors.
CERTIFICATES OF PARTICIPATION in municipal lease obligations ("COPs"),
which are certificates issued by state or local governments that entitle
the holder of the certificate to a proportionate interest in the lease
purchase payments made. Each Tax-Exempt Income Fund will only invest in
COPs that are, in the opinion of SAM, liquid securities under guidelines
adopted by the Tax-Exempt Bond Trust's Board of Trustees. Generally, COPs
will be determined to be liquid if they have a readily available market
after an evaluation of all relevant factors.
PARTICIPATION INTERESTS, which are interests in municipal bonds and
floating and variable rate obligations that are owned by banks. These
interests carry a demand feature that permits a Fund holding an interest to
tender (sell) it back to the bank. Generally, the bank will accept tender
of the participation interest with same day notice, but may require up to
five days' notice. The demand feature is usually backed by an irrevocable
letter of credit or guarantee of the bank. The credit rating of the bank
may affect the credit quality of the participation interest.
MUNICIPAL NOTES, which are notes generally issued by an issuer to provide
for short-term capital needs and generally have maturities of one year or
less. Each Tax-Exempt Income Fund may purchase municipal notes as a medium
for its short-term investments. Municipal Notes include tax anticipation,
revenue anticipation and bond anticipation notes and tax-exempt commercial
paper. Each Tax-Exempt Income Fund will invest only in those municipal
notes that at the time of purchase are rated within one of the three
highest grades by Moody's or S&P or, if unrated by any of these agencies,
in the opinion of SAM, are of comparable quality.
4. MAY INVEST IN SHARES OF NO-LOAD, OPEN-END INVESTMENT COMPANIES THAT INVEST
IN TAX-EXEMPT SECURITIES WITH REMAINING MATURITIES OF ONE YEAR OR LESS.
Such shares will only be purchased as a medium for a Fund's short-term
investments if SAM determines that
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they provide a better combination of yield and liquidity than a direct
investment in short-term, tax-exempt securities. Each Tax-Exempt
Income Fund will not invest more than 10% of its total assets in shares
issued by other investment companies, will not invest more than 5% of its
total assets in a single investment company, and will not purchase more
than 3% of the outstanding voting securities of a single investment
company.
5. MAY INVEST FOR SHORT-TERM PURPOSES WHEN SAM BELIEVES SUCH ACTION TO BE
DESIRABLE AND CONSISTENT WITH SOUND INVESTMENT PRACTICES. Each Tax-Exempt
Income Fund, however, will not engage primarily in trading for the purpose
of short-term profits. A Fund may dispose of its portfolio securities
whenever SAM deems advisable, without regard to the length of time the
securities have been held. The portfolio turnover rate is not expected to
exceed 70%.
6. MAY PURCHASE OR SELL SECURITIES ON A "WHEN-ISSUED" OR "DELAYED-DELIVERY"
BASIS. Under this procedure, a Tax-Exempt Income Fund agrees to acquire or
sell securities that are to be delivered against payment in the future,
normally 30 to 45 days. The price, however, is fixed at the time of
commitment. When a Fund purchases when-issued or delayed-delivery
securities, it will earmark liquid, high quality securities in an amount
equal in value to the purchase price of the security. Use of this
technique may affect a Fund's share price in a manner similar to
leveraging.
7. MAY HOLD CASH OR INVEST TEMPORARILY IN HIGH QUALITY, SHORT-TERM SECURITIES
ISSUED BY AN AGENCY OR INSTRUMENTALITY OF THE U.S. GOVERNMENT, HIGH QUALITY
COMMERCIAL PAPER, CERTIFICATES OF DEPOSIT AND SHARES OF NO-LOAD, OPEN-END
MONEY MARKET FUNDS. A Tax-Exempt Income Fund may purchase these short-term
securities as a cash management technique under those circumstances where
it has cash to manage for a short time period, for example, after receiving
proceeds from the sale of securities, dividend distributions from portfolio
securities, or cash from the sale of Fund shares to investors. Interest
earned from these short-term securities will be taxable to investors as
ordinary income when distributed.
The following restrictions are fundamental policies of the Tax-Exempt Income
Funds and cannot be changed without shareholder vote.
1. EACH FUND, WITH RESPECT TO 75% OF THE VALUE OF ITS TOTAL ASSETS, WILL NOT
INVEST MORE THAN 5% OF ITS TOTAL ASSETS IN THE SECURITIES OF ANY ONE ISSUER
(OTHER THAN U.S. GOVERNMENT SECURITIES).
2. EACH FUND WILL NOT INVEST 25% OR MORE OF ITS TOTAL ASSETS IN MUNICIPAL
OBLIGATIONS AND OTHER PERMITTED INVESTMENTS, THE INTEREST ON WHICH IS
PAYABLE FROM REVENUES ON SIMILAR TYPES OF PROJECTS SUCH AS: SPORTS,
CONVENTION OR TRADE SHOW FACILITIES; AIRPORTS; MASS TRANSPORTATION; SEWAGE
OR SOLID WASTE DISPOSAL FACILITIES; OR AIR OR WATER POLLUTION CONTROL
PROJECTS.
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3. THE MUNICIPAL BOND FUND WILL NOT INVEST 25% OR MORE OF ITS TOTAL ASSETS IN
SECURITIES WHOSE ISSUERS ARE LOCATED IN THE SAME STATE.
4. EACH FUND MAY BORROW MONEY ONLY FOR TEMPORARY OR EMERGENCY PURPOSES FROM A
BANK OR AFFILIATE OF SAFECO CORPORATION AT AN INTEREST RATE NOT GREATER
THAN THAT AVAILABLE FROM COMMERCIAL BANKS. A Tax-Exempt Income Fund will
not borrow amounts in excess of 20% of its total assets. As a non-
fundamental policy of the Washington Fund and a fundamental policy of the
California and Municipal Bond Funds, a Fund will not purchase securities if
borrowings equal to or greater than 5% of its total assets are outstanding.
Each Tax-Exempt Income Fund intends to primarily exercise its borrowing
authority to meet shareholder redemptions under circumstances where
redemptions exceed available cash.
For a further description of each Fund's investment policies and restrictions as
well as an explanation of ratings, see the "Investment Objectives and Policies"
and "Description of Ratings" sections of the Tax-Exempt Bond Trust's Statement
of Additional Information.
INVESTMENT POLICIES OF THE MONEY MARKET FUND
The investment objective of the Money Market Fund is to seek as high a level of
current income as is consistent with the preservation of capital and liquidity
through investment in high quality money market instruments maturing in thirteen
months or less.
To pursue its investment objective, the Money Market Fund:
1. WILL PURCHASE ONLY HIGH QUALITY SECURITIES THAT, IN THE OPINION OF SAM
OPERATING UNDER GUIDELINES ESTABLISHED BY THE MONEY MARKET TRUST'S BOARD OF
TRUSTEES, PRESENT MINIMAL CREDIT RISKS AFTER AN EVALUATION OF THE CREDIT
QUALITY OF AN ISSUER OR OF ANY ENTITY PROVIDING A CREDIT ENHANCEMENT FOR
THE SECURITY. The Fund complies with industry-standard guidelines on the
quality and maturity of its investments, which are designed to help
maintain a stable $1.00 share price. The Fund invests in instruments with
remaining maturities of 397 days or less and maintains a dollar-weighted
average portfolio maturity of not more than 90 days.
MAY INVEST IN COMMERCIAL PAPER OBLIGATIONS. Commercial paper is a short-
term instrument issued by corporations, financial institutions,
governmental entities and other entities. The principal risk associated
with commercial paper is the potential insolvency of the issuer. In
addition to commercial paper obligations of domestic corporations, the Fund
may also purchase dollar-denominated commercial paper issued in the United
States by foreign entities. 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
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economic developments (including political instability) and the potentially
adverse effects of unavailability of public information regarding issuers,
reduced governmental supervision of 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 United States. The Fund will
only purchase such securities, if, in the opinion of SAM, the security is
of an investment quality comparable to other obligations that may be
purchased by the Fund.
2. MAY INVEST IN NEGOTIABLE AND NON-NEGOTIABLE DEPOSITS, BANKERS' ACCEPTANCES
AND OTHER SHORT-TERM OBLIGATIONS OF U.S. AND FOREIGN BANKS. Companies in
the financial services industry are subject to various risks related to
that industry, such as government regulation, changes in interest rates,
and exposure on loans, including loans to foreign borrowers. The Fund may
also invest in dollar-denominated securities issued by foreign banks
(including foreign branches of U.S. banks) provided that, in the opinion of
SAM, the security is of an investment quality comparable to other
obligations which may be purchased by the Fund. Foreign banks may not be
subject to accounting standards or governmental supervision comparable to
U.S. banks, and there may be less public information available about their
operations. In addition, foreign securities may be subject to risks
relating to the political and economic conditions of the foreign country
involved, which could affect the payment of principal and interest.
3. MAY INVEST IN U.S. GOVERNMENT SECURITIES. U.S. Government securities
include (a) direct obligations of the U.S. Treasury, (b) securities
supported by the full faith and credit of the U.S. Government but that are
not direct obligations of the U.S. Treasury, (c) securities that are not
supported by the full faith and credit of the U.S. Government but are
supported by the issuer's ability to borrow from the U.S. Treasury such as
securities issued by the FNMA and the FHLMC, and (d) securities supported
solely by the creditworthiness of the issuer such as securities issued by
the TVA. While these securities are considered to be of the highest credit
quality available, they are subject to the same market risks as comparable
debt securities.
4. MAY INVEST IN EURODOLLAR AND YANKEE BANK OBLIGATIONS. Eurodollar bank
obligations are dollar-denominated certificates of deposit and time
deposits issued outside the U.S. capital markets by foreign branches of
U.S. banks and by foreign banks. Yankee bank obligations are dollar-
denominated obligations issued in the United States capital markets by
foreign banks.
Eurodollar and Yankee obligations are subject to the same risks that
pertain to domestic issues, notably credit risk, market risk and liquidity
risk. Additionally, Eurodollar (and to a lesser extent, Yankee)
obligations 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. Other risks include: adverse
political and economic developments in a foreign country; the extent and
quality of government regulation of
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financial markets and institutions; the imposition of foreign withholding
taxes; and expropriation or nationalization of foreign issuers. Eurodollar
and Yankee obligations will undergo the same credit analysis as domestic
issues in which the Fund invests, and foreign issuers will be required to
meet the same tests of financial strength as the domestic issuers approved
for the Fund.
5. MAY INVEST IN REPURCHASE AGREEMENTS. In a repurchase agreement, the Fund
buys securities at one price and simultaneously agrees to sell them back at
a higher price. Delays or losses could result if the counterparty to the
agreement defaults or becomes insolvent. The Fund will invest no more than
10% of total assets in repurchase agreements and will not purchase
repurchase agreements that mature in more than seven days.
6. MAY INVEST IN VARIABLE AND FLOATING RATE INSTRUMENTS. The interest rates
on variable rate instruments reset periodically on specified dates so as to
cause the instruments' market value to approximate their par value. The
interest rates on floating rate instruments change whenever there is a
change in a designated benchmark rate. Variable and floating rate
instruments may have put features. These instruments may have optional put
features. Puts may also be mandatory, in which case the Fund would be
required to act to keep the instrument.
7. MAY INVEST UP TO 5% OF ITS TOTAL ASSETS IN RESTRICTED SECURITIES ELIGIBLE
FOR RESALE UNDER RULE 144A UNDER THE 1933 ACT ("RULE 144A SECURITIES") AND
COMMERCIAL PAPER SOLD PURSUANT TO SECTION 4(2) OF THE 1933 ACT ("SECTION
4(2) PAPER"), PROVIDED THAT SAM HAS DETERMINED THAT SUCH SECURITIES ARE
LIQUID UNDER GUIDELINES ADOPTED BY THE MONEY MARKET TRUST'S BOARD OF
TRUSTEES. Restricted securities may be sold only in offerings registered
under the 1933 Act or in transactions exempt from the registration
requirements under the 1933 Act. Rule 144A under the 1933 Act provides an
exemption for the resale of certain restricted securities to qualified
institutional buyers. Investing in such 144A Securities could have the
effect of increasing the Fund's illiquidity to the extent that qualified
institutional buyers or other buyers are unwilling to purchase the
securities. Section 4(2) of the 1933 Act exempts securities sold by the
issuer in private transactions from the 1933 Act's registration
requirements. Because Section 4(2) paper is a restricted security,
investing in Section 4(2) paper could have the effect of increasing the
Fund's illiquidity to the extent that buyers are unwilling to purchase the
securities.
The following restrictions are fundamental policies of the Money Market Fund and
cannot be changed without shareholder vote. The Money Market Fund:
1. MAY INVEST UP TO 5% OF ITS ASSETS IN THE SECURITIES OF ANY ONE ISSUER OTHER
THAN U.S. GOVERNMENT SECURITIES.
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2. MAY INVEST UP TO 25% OF ITS TOTAL ASSETS IN ANY ONE INDUSTRY (INCLUDING
SECURITIES ISSUED BY FOREIGN BANKS AND FOREIGN BRANCHES OF U.S. BANKS),
PROVIDED, HOWEVER, THAT THIS LIMITATION DOES NOT APPLY TO U.S. GOVERNMENT
SECURITIES, OR TO CERTIFICATES OF DEPOSIT OR BANKERS' ACCEPTANCES ISSUED BY
DOMESTIC BANKS.
3. MAY BORROW MONEY FOR TEMPORARY OR EMERGENCY PURPOSES (BUT NOT FOR
INVESTMENT PURPOSES) FROM A BANK OR AFFILIATES OF SAFECO CORPORATION AT AN
INTEREST RATE NOT GREATER THAN THAT AVAILABLE FROM COMMERCIAL BANKS. The
Fund will not borrow amounts in excess of 20% of total assets and will not
purchase securities if borrowings equal to or greater than 5% of total
assets are outstanding. The Fund intends to primarily exercise its
borrowing authority to meet shareholder redemptions under the circumstances
where redemptions exceed available cash.
For more information, see the "Investment Policies" and "Additional Investment
Information" sections of the Money Market Trust's Statement of Additional
Information.
________________
RISK FACTORS
________________
There are market risks in all securities transactions. Various factors may
cause the value of a shareholder's investment in a Fund to fluctuate. The
principal risk factor associated with an investment in a mutual fund is that the
market value of the portfolio securities may decrease, resulting in a decrease
in the value of a shareholder's investment.
RISK FACTORS OF THE STOCK FUNDS
An investment in the Northwest Fund may be subject to different risks than a
mutual fund whose investments are more geographically diverse. Since the
Northwest Fund invests primarily in companies with their principal executive
offices located in the Northwest, the number of issuers whose securities are
eligible for purchase is significantly less than many other mutual funds. Also,
some companies whose securities are held in the Northwest Fund's portfolio may
primarily distribute products or provide services in a specific locale or in the
Northwest region. The long-term growth of these companies can be significantly
affected by business trends in and the economic health of those areas. Other
companies whose securities are held by the Northwest Fund may have a
predominately national or partially international market for their products or
services and are more likely to be impacted by national or international trends.
As a result, the performance of the Northwest Fund may be influenced by business
trends or economic conditions not only in a specific locale or in the Northwest
region but also on a national or international level, depending on the companies
whose securities are held in its portfolio at any particular time.
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The Equity, Income and Small Company Funds may invest in, and the other Stock
Funds as a result of downgrades may own, below investment grade bonds. Below
investment grade bonds are speculative and involve greater investment risks than
investment grade bonds due to the issuer's reduced creditworthiness and
increased likelihood of default and bankruptcy. During periods of economic
uncertainty or change, the market prices of below investment grade bonds may
experience increased volatility. Below investment grade bonds tend to reflect
short-term economic and corporate developments to a greater extent than higher
quality bonds.
Because the International Fund primarily invests, and the other Stock Funds may
invest, in foreign securities, each Stock Fund is subject to risks in addition
to those associated with U.S. investments. Foreign investments involve
sovereign risk, which includes the possibility of adverse local political or
economic developments, expropriation or nationalization of assets, imposition of
withholding taxes on dividend or interest payments and currency blockage (which
would prevent currency from being sold). Foreign investments may be affected
favorably or unfavorably by changes in currency rates and exchange control
regulations. There is generally less publicly available information about
issuers of foreign securities as compared to U.S. issuers. Many foreign
companies are not subject to accounting, auditing and financial reporting
standards and requirements comparable to those applicable to U.S. companies.
Securities of some foreign issuers are less liquid and more volatile than
securities of U.S. issuers. Financial markets on which foreign securities trade
are generally subject to less governmental regulation as compared to U.S.
markets. Foreign brokerage commissions and custodian fees are generally higher
than those in the United States.
In addition, the International Fund may purchase and sell put and call options,
futures contracts and forward contracts. Risks inherent in the use of futures,
options and forward contracts include: the risk that interest rates, security
prices and currency markets will not move in the directions anticipated;
imperfect correlation between the price of the future, option or forward
contract and the price of the security, interest rate or currency being hedged;
the risk that potential losses may exceed the amount invested in the contracts
themselves; the possible absence of a liquid secondary market for any particular
instrument at any time; the possible need to defer closing out certain hedged
positions to avoid adverse tax consequences; and the reduction or elimination of
the opportunity to profit from increases in the value of the security, interest
rate or currency being hedged.
The Growth Fund currently has an aggressive investment approach to seeking
capital appreciation through investing primarily in securities issued by smaller
companies. In addition, the Small Company Fund invests in companies with small
market capitalizations which involve more risks than investments in larger
companies. Such companies may include newly formed companies which have limited
product lines, markets or financial resources and may lack management depth.
The securities of small or newly formed companies may have limited marketability
and may be subject to more abrupt and erratic movements in price than securities
of larger, more established companies, or equity securities in general. Such
volatility in price may in turn cause the Growth Fund's and Small Company Fund's
share prices to be volatile.
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RISK FACTORS OF THE INTERMEDIATE TREASURY, HIGH-YIELD, MANAGED BOND, MUNICIPAL
BOND, CALIFORNIA, WASHINGTON AND MONEY MARKET FUNDS (THE "FIXED-INCOME FUNDS")
The value of each Fixed-Income Fund (except the Money Market Fund) will normally
fluctuate inversely with changes in market interest rates. Generally, when
market interest rates rise, the price of debt securities held by a Fund will
fall, and when market interest rates fall, the price of the debt securities will
rise. Also, there is a risk that the issuer of a bond or other security held in
a Fund's portfolio will fail to make timely payments of principal and interest
to the Fixed-Income Funds. Included in investment grade debt securities are
securities of medium grade (rated Baa by Moody's or BBB by S&P) which have
speculative characteristics and are more likely to have a weakened capacity to
make principal and interest payments under changing economic or other conditions
than higher grade securities.
The Managed Bond Fund may invest in stripped securities that are obligations
issued by the U.S. Treasury. Stripped securities are the separate income or
principal components of a debt security. The risks asssociated with stripped
securities are similar to those of other debt securities, although stripped
securities may be more volatile than other debt securities.
ADDITIONAL RISK FACTORS OF THE HIGH-YIELD FUND
The High-Yield Fund invests primarily in high-yield, fixed-income securities
which are subject to the following risks:
SENSITIVITY TO ECONOMIC AND CORPORATE DEVELOPMENTS
Yields on high-yield, fixed-income securities will fluctuate over time. During
periods of economic uncertainty or change, the market prices of high-yield,
fixed-income securities may experience increased volatility, which may in turn
cause the net asset value ("NAV") per share of the High-Yield Fund to be
volatile. Lower-quality, fixed-income securities tend to reflect short-term
economic and corporate developments to a greater extent than higher-quality
securities which primarily react to fluctuations in interest rates. Economic
downturns or increases in interest rates can significantly affect the market for
high-yield, fixed-income securities and the ability of issuers to timely repay
principal and interest, increasing the likelihood of defaults. Lower-quality
securities include debt obligations issued as a part of capital restructurings,
such as corporate takeovers or buyouts. Capital restructurings generally
involve the issuance of additional debt on terms different from any current
outstanding debt. As a result, the issuer of the debt is more highly leveraged.
During an economic downturn or period of rising interest rates, a highly-
leveraged issuer may experience financial difficulties which adversely affect
its ability to make principal and interest payments, meet projected business
goals and obtain additional financing. In addition, the issuer will depend on
its cash flow and may depend, especially in the context of corporate takeovers,
on a sale of its assets to service debt. Failure to realize projected cash
flows or asset sales may seriously impair the issuer's ability to service this
greater debt load, which in turn might cause the Fund to lose all or part of its
investment in that
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security. SAM will seek to minimize these additional risks through
diversification, careful assessment of the issuer's financial structure,
business plan and management team following any restructuring, and close
monitoring of the issuer's progress toward its financial goals.
ZERO-COUPON AND PAYMENT-IN-KIND SECURITIES
The High-Yield Fund may hold "zero-coupon" and "payment-in-kind" fixed-income
securities. Zero-coupon securities are purchased at a discount without
scheduled interest payments. Payment-in-kind securities receive interest paid
in additional securities rather than cash. The Fund accrues income on these
securities, but does not receive cash interest payments until maturity or
payment date. The Fund intends to distribute substantially all of its income to
its shareholders so that it can be treated as a regulated investment company
under current federal tax law. As a result, if its cash position is depleted,
the Fund may have to sell securities under disadvantageous circumstances to
obtain enough cash to meet its distribution requirement. However, SAM does not
expect non-cash income to materially affect the Fund's operations. Zero-coupon
and payment-in-kind securities are generally subject to greater price
fluctuations due to changes in interest rates than those fixed-income securities
paying cash interest on a schedule until maturity.
LIQUIDITY AND VALUATION
The liquidity and price of high-yield, fixed-income securities can be affected
by a number of factors, including investor perceptions and adverse publicity
regarding major issuers, 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 High-Yield Fund's
ability to dispose of its securities as well as make valuation of securities
more difficult. Because there tend to be fewer investors in lower-rated, fixed-
income securities, it may be difficult for the Fund to sell these securities at
an optimum time. Consequently, lower-rated securities are subject to more price
changes, fluctuations in yield and risk to principal and income than higher-
rated securities of the same maturity. Judgment plays a greater role in the
valuation of thinly-traded securities.
CREDIT RATINGS
Rating agencies evaluate the likelihood that an issuer will make principal and
interest payments, but ratings may not reflect market value risks associated
with lower-rated, fixed-income securities. Also, rating agencies may not timely
revise ratings to reflect subsequent events affecting an issuer's ability to pay
principal and interest. SAM uses S&P and Moody's ratings as a preliminary
indicator of investment quality. SAM will periodically research and analyze
each issue (whether rated or unrated) and evaluate such factors as the issuer's
interest or dividend coverage, asset coverage, earnings prospects and managerial
strength. This analysis will help SAM to determine if the issuer has sufficient
cash flow and profits to meet required principal and
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interest payments and to monitor the liquidity of the issue. Achievement of a
Fund's investment objective will be more dependent on SAM's credit analysis of
bonds rated below the three highest rating categories than would be the case
were the Fund to invest in higher quality debt securities. This is particularly
true for the High-Yield Fund.
ADDITIONAL RISK FACTORS OF THE MONEY MARKET FUND
The Money Market Fund seeks to maintain a stable $1.00 share price. Of course,
there is no guarantee that the Money Market Fund will maintain a stable $1.00
share price. It is possible that a major change in interest rates or a default
on the Money Market Fund's investments could cause its share price (and the
value of your investment) to fall. The Money Market Fund's yield will fluctuate
with general interest rates.
ADDITIONAL RISK FACTORS OF THE CALIFORNIA AND WASHINGTON FUNDS
Because the California and Washington Funds each concentrate their investments
in a single state, there is a greater risk of fluctuation in the values of their
portfolio securities than with mutual funds whose investments are more
geographically diverse. Investors should carefully consider the investment
risks of such concentration. The share price of the California and Washington
Funds can be affected by political and economic developments within and by the
financial condition of the respective state, its public authorities and
political subdivisions. See the discussion below and "Investment Risks of
Concentration in California and Washington Issuers" in the Tax-Exempt Bond
Trust's Statement of Additional Information for further information.
The information in the following discussion is drawn primarily from official
statements relating to state securities offerings which are dated prior to the
date of this Prospectus. The California and Washington Funds have not
independently verified any of the information in the discussion below.
ADDITIONAL RISKS OF THE CALIFORNIA FUND
After suffering through a severe recession, California's economy has been on a
steady recovery since the start of 1994. Nevertheless, the State's budget
problems in recent years have also been caused by the increasing costs of
education, health, welfare and corrections, driven by California's rapid
population growth. These pressures on the State's General Fund are expected to
continue. The State's long-term credit ratings, reduced in 1992, were lowered
again in 1994 and have not been fully restored. Its ability to provide
assistance to its public authorities and political subdivisions has been
impaired. Cutbacks in state aid adversely affect the financial condition of
many cities, counties and school districts which are already subject to fiscal
constraints and are facing their own reduced tax collections.
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In the past, California voters have passed amendments to the California
Constitution and other measures that limit the taxing and spending authority of
California governmental entities. Future voter initiatives could result in
adverse consequences affecting obligations issued by the State. These factors,
among others, could reduce the credit standing of certain issuers of California
obligations.
ADDITIONAL RISKS OF THE WASHINGTON FUND
The State of Washington's economy consists of both export and local industries.
The State's leading export industries are aerospace, forest products,
agriculture and food processing. The State's manufacturing base includes
aircraft manufacture which comprised approximately 25% of total manufacturing in
1995. The Boeing Company is the State's largest employer and has a significant
impact, in terms of overall production, employment and labor earnings, on the
State's economy. Boeing anticipates increasing employment in the State by
approximately 4,500 jobs by the end of 1996. The commercial airline industry is
cyclical in nature and future job cuts could have an adverse effect on the
Washington economy. Forest products rank second behind aerospace in value of
total production. Although productivity in the forest products industry has
increased steadily in recent years, declines in production are expected in the
future. Unemployment in the timber industry is anticipated in certain regions;
however the impact is not expected to affect the State's overall economic
performance. Growth in agriculture has been an important factor in the State's
economic growth over the past decade. The State is the home of many technology
firms of which approximately half are computer-related. Microsoft, the world's
largest microcomputer software company, is headquartered in Redmond, Washington.
State law requires a balanced budget. The Governor has a statutory
responsibility to reduce expenditures across the board to avoid any cash deficit
at the end of a biennium. In addition, state law prohibits state tax revenue
growth from exceeding the growth rate of state personal income. To date,
Washington State tax revenue increases have remained substantially below the
applicable limit. At any given time, there are numerous lawsuits against the
state which could affect its revenues and expenditures.
_________________________
PORTFOLIO MANAGERS
_________________________
GROWTH FUND
The portfolio manager for the Growth Fund is Thomas M. Maguire, Vice President,
SAM. Mr. Maguire has served as portfolio manager for the Fund since 1989.
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EQUITY FUND
The portfolio manager for the Equity Fund is Richard D. Meagley, Vice President,
SAM. Mr. Meagley began serving as portfolio manager for the Fund in 1995. He
is also the portfolio manager for certain other SAFECO Funds. Prior to these
positions, he served as portfolio manager and analyst from 1992 to 1994 for
Kennedy Associates, Inc., an investment advisory firm located in Seattle,
Washington. He was an Assistant Vice President of SAM and the fund manager of
the SAFECO Northwest Fund from 1991 to 1992.
INCOME FUND
The portfolio manager for the Income Fund is Thomas E. Rath, Assistant Vice
President of SAM. Mr. Rath has been a portfolio manager and securities analyst
for SAFECO Corporation since 1994. From 1992 to 1994, Mr. Rath was a principal
and portfolio manager for Meridian Capital Management, Inc., located in Seattle,
Washington. From 1987 to 1992, he was a portfolio manager and securities
analyst for First Interstate Bank, located in Seattle, Washington, and from 1983
to 1987, he was a securities analyst for SAFECO Corporation.
NORTHWEST FUND
The portfolio manager for the Northwest Fund is Charles R. Driggs, Vice
President, SAM. Mr. Driggs has served as portfolio manager for the Fund since
1992. From 1984 through 1992, Mr. Driggs was a securities analyst for SAM
specializing in banks, savings and loan institutions and the insurance industry.
BALANCED FUND
The portfolio managers for the Balanced Fund are Rex L. Bentley, Vice President,
SAM, and Michael C. Knebel, Vice President, SAM. Mr. Bentley was Vice President
and Investment Counsel at the investment advisory firm of Badgley, Phelps and
Bell Investment Counsel, Inc., from 1990 to 1995. He was a securities analyst
for SAFECO Corporation from 1975 to 1983. Mr. Knebel has served as portfolio
manager for certain other SAFECO mutual funds since 1989.
INTERNATIONAL FUND
The International Fund is managed by a committee of portfolio managers employed
and supervised by the Sub-Adviser, Bank of Ireland Asset Management (U.S.)
Limited, an investment adviser registered with the SEC. All investment
decisions are made by this committee and no single person is primarily
responsible for making recommendations to that committee.
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SMALL COMPANY FUND
The portfolio manager for the Small Company Fund is Greg Eisen, Assistant Vice
President, SAM. Mr. Eisen has served as an investment analyst for SAM since
1992. From 1986 to 1992, Mr. Eisen was engaged by the SAFECO Insurance
Companies as a financial analyst.
INTERMEDIATE TREASURY AND MANAGED BOND FUNDS
The portfolio manager for the Intermediate Treasury and Managed Bond Funds is
Michael C. Knebel, Vice President, SAM. Mr. Knebel has served as portfolio
manager or co-manager for the Managed Bond Fund since 1994. He has served as
portfolio manager for the Intermediate Treasury Fund since 1995. Mr. Knebel has
served as portfolio manager and/or co-portfolio manager for other SAFECO mutual
funds since 1989.
HIGH-YIELD FUND
The portfolio managers for the High-Yield Bond Fund are John Stoeser, Assistant
Vice President, SAM, and Robert Kern, a securities analyst for SAM. Mr. Stoeser
has served as a securities analyst and portfolio manager for SAM since 1992.
From 1989 to 1992 he was an administrative assistant to the President of SAM.
Mr. Kern served as a securities analyst for SAM since 1994. From 1988 to 1994,
Mr. Kern was engaged by the SAFECO Insurance Companies in the Controller's
Department.
MUNICIPAL BOND AND CALIFORNIA FUNDS
The portfolio manager for the Municipal Bond and California Funds is Stephen C.
Bauer, President, SAM. Mr. Bauer has served as portfolio manager for each Fund
since it commenced operations: 1981 for the Municipal Bond Fund and 1983 for
the California Fund. Mr. Bauer is the portfolio manager for certain other SAFECO
municipal bond funds, and also serves as a Director of SAM.
WASHINGTON FUND
The portfolio manager for the Washington Fund is Beverly Denny, Assistant Vice
President, SAM. Ms. Denny was the Marketing Director for the SAFECO mutual
funds from 1991 to 1993, and has been employed as an investment analyst with
SAFECO Asset Management since 1993.
MONEY MARKET FUND
The portfolio manager for the Money Market Fund is Naomi Urata, Assistant Vice
President, SAM. Ms. Urata has been employed as an investment analyst for the
SAFECO mutual funds since 1993. From 1990 to 1992, Ms. Urata served as Cash
Manager for The Seattle Times.
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Each portfolio manager and certain other persons related to SAM, the Sub-Adviser
and the Funds are subject to written policies and procedures designed to prevent
abusive personal securities trading. Incorporated within these policies and
procedures are recommendations made by the Investment Company Institute (the
trade group for the mutual fund industry) with respect to personal securities
trading by persons associated with mutual funds. Those recommendations
include preclearance procedures and blackout periods when certain personnel may
not trade in securities that are the same or related securities being considered
for purchase or sale by a Fund.
______________________________
HOW TO PURCHASE SHARES
______________________________
When placing purchase orders, investors should specify whether the order is for
Class A or Class B shares of a Fund. All share purchase orders that fail to
specify a class will automatically be invested in Class A shares.
The minimum initial investment is $1,000 (IRA, UGMA and UTMA $250). The minimum
additional investment is $100 for all accounts, except for UGMA or UTMA
Automatic Investment Method ("AIM") accounts opened with an initial investment
of $250 or more. These accounts have a minimum additional investment of only
$50. Minimum additional investments are negotiable for retirement accounts
other than IRAs. Except as noted above in connection with UGMA and UTMA
accounts, no minimum initial investment is required to establish the Automatic
Investment Method or Payroll Deduction Plan.
Shares of each Fund are available for purchase through investment professionals
who work at broker-dealers, banks and other financial institutions which have
entered into selling agreements with SAFECO Securities, Inc. ("SAFECO
Securities"), the distributor of the Funds. Orders received by such financial
institutions before 1:00 p.m. Pacific time on any day the New York Stock
Exchange ("NYSE") is open for regular trading will be effected that day,
provided that such order is transmitted to SAFECO Services, the transfer agent
for the Funds, prior to 2:00 p.m. Pacific Time on such day. Investment
professionals will be responsible for forwarding the investor's order to SAFECO
Services so that it will be received prior to such time.
Broker-dealers, banks and other financial institutions that do not have selling
agreements with SAFECO Securities also may offer to place orders for the
purchase of each Fund's shares. Purchases made through these investment firms
will be effected at the public offering price next determined after the order is
received by SAFECO Services. Such financial institutions may charge the
investor a transaction fee as determined by the financial institution. The fee
will be in addition to the sales charge payable by the investor with respect to
Class A shares, and may be avoided by purchasing shares through a broker-dealer,
bank or other financial institution that has a selling agreement with SAFECO
Securities.
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Broker-dealers, banks, financial institutions and any other person entitled to
receive compensation for selling or servicing each Fund's shares may receive
different levels of compensation with respect to one particular class of Fund
shares over another. Salespersons of broker-dealers, banks and other financial
institutions that sell each Fund's shares are eligible to receive special
compensation, the amount of which varies depending on the amount of shares sold.
THE FUNDS RESERVE THE RIGHT TO REFUSE ANY OFFER TO PURCHASE SHARES OF ANY CLASS.
PURCHASING ADVISOR CLASS A SHARES
The public offering price of Class A shares of each Fund except the Money Market
Fund is the next determined net asset value per share (see "Share Price
Calculation" on page __ for additional information) plus any sales charge, which
will vary with the size of the purchase as shown in the following schedule:
Sale Charge as
Percentage of
----------------
Broker
Reallowance as
Amount of Purchase Percentage of
at the Public Offering Net the Offering
Offering Price Price Investment Price
- ------------------ -------- ---------- -------------
Less than $50,000 4.50% 4.71% 4.00%
$50,000 but less than
$100,000 4.00% 4.17% 3.50%
$100,000 but less than
$250,000 3.50% 3.63% 3.00%
$250,000 but less than
$500,000 2.50% 2.56% 2.00%
$500,000 but less than
$1,000,000 1.50% 1.52% 1.00%
$1,000,000 or more NONE* See Below**
* Purchases of $1,000,000 or more of Class A shares are not subject to a front-
end sales charge, but a 1% CDSC will apply to redemptions made in the first
year.
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** See discussion below for a description of the commissions payable on sales of
Class A shares of $1 million or more.
Class A shares of the Money Market Fund are offered at the next determined net
asset value per share (see "Share Price Calculation" on page __ for additional
information) with no initial sales charge. A sales charge will apply to the
first exchange from Class A shares of the Money Market Fund to Class A shares of
another Fund.
From time to time, SAFECO Securities may reallow to broker-dealers, banks and
other financial institutions the full amount of the sales charge on Class A
Shares. In some instances, SAFECO Securities may offer these reallowances only
to those financial institutions that have sold or may sell significant amounts
of Class A shares. These commissions also may be paid to financial institutions
that initiate purchases made pursuant to sales charge waivers (1) and (8),
described below under "Sales Charge Waivers -- Class A shares." To the extent
that SAFECO Securities reallows 90% or more of the sales charge to a financial
institution, such financial institution may be deemed to be an underwriter under
the 1933 Act.
Except as stated below, broker-dealers of record will be paid commissions on
sales of Class A shares of $1 million or more based on an investor's cumulative
purchases during the one-year period beginning with the date of the initial
purchase at net asset value. Each subsequent one-year measuring period for
these purposes begins with the first net asset value purchase following the end
of the prior period. Such commissions are paid at the rate of up to .50% of the
amount under $50 million and .25% thereafter, except for sales to participant-
directed qualified plans (including a plan sponsored by an employer with 200 or
more eligible employees). Commissions for such plans will be paid at a rate of
1.00% of the amount up to $2 million, .80% of the next $1 million, .50% of the
next $47 million and .25% thereafter.
The following describes purchases that may be aggregated for purposes of
determining the amount of purchase:
1. Individual purchases on behalf of a single purchaser and the purchaser's
spouse and their children under the age of 21 years. This includes shares
purchased in connection with an employee benefit plan(s) exclusively for
the benefit of such individual(s), such as an IRA, individual plan(s) under
Section 403(b) of the Internal Revenue Code of 1986, as amended ("Code"),
or single-participant Keogh-type plan(s). This also includes purchases
made by a company controlled by such individual(s);
2. Individual purchases by a trustee or other fiduciary purchasing shares for
a single trust estate or a single fiduciary account, including an employee
benefit plan (such as employer-sponsored pension, profit-sharing and stock
bonus plans, including plans under Code Section 401(k), and medical, life
and disability insurance trusts) other than a plan described in (1) above;
or
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3. Individual purchases by a trustee or other fiduciary purchasing shares
concurrently for two or more employee benefit plans of a single employer or
of employers affiliated with each other (excluding an employee benefit plan
described in (2) above).
SALES CHARGE WAIVERS -- CLASS A SHARES
Class A shares are sold at net asset value per share without imposition of
sales charges for the following investments:
1. Registered representatives or full-time employees of broker-dealers, banks
and other financial institutions that have entered into selling agreements
with SAFECO Securities, and the children, spouse and parents of such
representatives and employees, and employees of financial institutions
that directly, or through their affiliates, have entered into selling
agreements with SAFECO Securities;
2. Companies exchanging shares with or selling assets to one or more of the
Funds pursuant to a merger, acquisition or exchange offer;
3. Any of the direct or indirect affiliates of SAFECO Securities;
4. Purchases made through the automatic investment of dividends and
distributions paid by another Fund;
5. Clients of administrators or consultants to tax-qualified employee benefit
plans which have entered into agreements with SAFECO Securities or any of
its affiliates;
6. Retirement plan participants who borrow from their retirement accounts by
redeeming Fund shares and subsequently repay such loans via a purchase of
Fund shares;
7. Retirement plan participants who receive distributions from a tax-
qualified employer-sponsored retirement plan, which is invested in Fund
shares, the proceeds of which are reinvested in Fund shares;
8. Accounts as to which a broker-dealer, bank or other financial institution
charges an account management fee, provided the financial institution has
entered into an agreement with SAFECO Securities regarding such accounts;
9. Current or retired officers, directors, trustees or employees of any
SAFECO mutual fund or SAFECO Corporation or its affiliates and the
children, spouse and parents of such persons; and
10. Investments made with redemption proceeds from mutual funds having a
similar investment objective with respect to which the investor paid a
front-end sales charge.
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REINSTATEMENT PRIVILEGE
Shareholders who paid an initial sales charge and redeem their Class A shares
in a Fund have a one-time privilege to reinstate their investment by
investing the proceeds of the redemption at net asset value per share without
a sales charge in Class A shares of that Fund and/or one or more of the other
Funds. SAFECO Services must receive from the investor or the investor's
broker-dealer, bank or other financial institution within 60 days after the
date of the redemption both a written request for reinvestment and a check
not exceeding the amount of the redemption proceeds. The reinstatement
purchase will be effected at the net asset value per share next determined
after such receipt.
REDUCED SALES CHARGE PLANS -- CLASS A SHARES
Class A shares of the Funds may be purchased at reduced sales charges either
through the Right of Accumulation or under a Letter of Intent. For more
details on these plans, investors should contact their broker-dealer, bank or
other financial institution or SAFECO Services.
Pursuant to the RIGHT OF ACCUMULATION, investors are permitted to purchase
Class A shares of the Funds at the sales charge applicable to the total of
(a) the dollar amount then being purchased plus (b) the dollar amount equal
to the total purchase price of the investor's concurrent purchases of Class A
shares of other SAFECO Mutual Funds plus (c) the dollar amount equal to the
current public offering price of all Class A shares of Funds already held by
the investor. To receive the Right of Accumulation, at the time of purchase
investors must give their broker-dealers, banks or other financial
institutions sufficient information to permit confirmation of qualification.
In executing a LETTER OF INTENT ("LOI"), an investor should indicate an
aggregate investment amount he or she intends to invest in Class A shares of
Funds in the following thirteen months. The LOI is included as part of the
Account Application. The Class A sales charge applicable to that aggregate
amount then becomes the applicable sales charge on all purchases of Class A
shares made concurrently with the execution of the LOI and in the thirteen
months following that execution. If an investor executes an LOI within 90
days of a prior purchase of Class A shares, the prior purchase may be
included under the LOI and an appropriate adjustment, if any, with respect to
the sales charges paid by the investor in connection with the prior purchase
will be made, based on the then-current net asset value(s) of the pertinent
Fund(s).
If at the end of the thirteen-month period covered by the LOI, the total
amount of purchases does not equal the amount indicated, the investor will be
required to pay the difference between the sales charges paid at the reduced
rate and the sales charges applicable to the purchases actually made. Shares
having a value equal to 5% of the amount specified in the LOI will be held in
escrow during the thirteen month period (while remaining registered in the
investor's name) and are subject to redemption to assure any necessary
payment to SAFECO Securities of a higher applicable sales charge.
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PURCHASING ADVISOR CLASS B SHARES
The public offering price of the Class B shares of each Fund is the next
determined net asset value per share. No initial sales charge is imposed.
However, a CDSC is imposed on certain redemptions of Class B shares. Because
Class B shares are sold without an initial sales charge, the investor
receives Fund shares equal to the full amount of the investment. The maximum
investment amount in Class B shares is $500,000.
Class B shares of a Fund that are redeemed will not be subject to a CDSC to
the extent that the value of such shares represents: (a) reinvestment of
dividends or other distributions or (b) shares redeemed more than six full
years after their purchase. Former Class B shareholders of the SAFECO Advisor
Series Trust who invest in Class B shares of any Fund may include the length
of time of ownership of the former Class B shares for purposes of calculating
any CDSC due upon redemption.
Initial investments in Class B shares of the Money Market Fund are sold with
no initial sales charge and are not subject to a CDSC upon redemption,
provided that the investor has remained invested exclusively in Class B
shares of the Money Market Fund and has not exchanged into Class B Shares of
another Fund in the interim. Money Market Fund Class B shareholders will
become subject to a CDSC calculated in accordance with the table below if
they exchange into Class B shares of another SAFECO Fund and then redeem
those shares. The CDSC will also apply to any Class B shares of the Money
Market Fund subsequently acquired by exchange. Shareholders who initially
purchase Money Market Fund Class B shares do not receive credit for the time
initially invested in the Money Market Fund for purposes of calculating any
CDSC due upon redemption of Class B shares of another SAFECO Fund.
Redemptions of most other Class B shares will be subject to a CDSC. (See
"Contingent Deferred Sales Charge Waivers.") The amount of any applicable
CDSC will be calculated by multiplying the lesser of the original purchase
price or the net asset value of such shares at the time of redemption by the
applicable percentage shown in the table below. Accordingly, no charge is
imposed on increases in the net asset value above the original purchase price:
CDSC AS A PERCENTAGE OF THE LESSER OF NET
ASSET VALUE AT REDEMPTION OR THE ORIGINAL
REDEMPTION DURING PURCHASE PRICE
- ----------------- --------------
1st Year Since Purchase 5%
2nd Year Since Purchase 4%
3rd Year Since Purchase 3%
4th Year Since Purchase 3%
5th Year Since Purchase 2%
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6th Year Since Purchase 1%
Thereafter 0%*
* Automatically converts to Class A shares in the first month following the
investor's sixth anniversary from purchase.
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will
be assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and other distributions
and then of amounts representing the cost of shares held for the longest
period of time.
For example, assume an investor purchased 100 shares at $10 per share at a
cost of $1,000. Subsequently, the shareholder acquired 15 additional shares
through dividend reinvestment. During the second year after the purchase, the
investor decided to redeem $500 of his or her investment. Assuming at the
time of the redemption a net asset value of $11 per share, the value of the
investor's shares would be $1,265 (115 shares at $11 per share). The CDSC
would not be applied to the value of the reinvested dividend shares.
Therefore, the 15 shares currently valued at $165.00 would be redeemed
without a CDSC. The number of shares needed to fund the remaining $335.00 of
the redemption would equal 30.455. Using the lower of cost or market price
to determine the CDSC, the original purchase price of $10.00 per share would
be used. The CDSC calculation would therefore be 30.455 shares times $10.00
per share at a CDSC rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $12.18.
Except for the time period during which a shareholder is initially invested
in Money Market Fund Class B shares, if a shareholder effects one or more
exchanges among Class B shares of the Funds during the six year period, the
holding periods for the shares so exchanged will be counted toward the six
year period.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, recognized on the redemption of
shares. The amount of any CDSC will be paid to SAFECO Securities.
CONTINGENT DEFERRED SALES CHARGE WAIVERS
The CDSC will be waived in the following circumstances: (a) total or
partial redemptions made within one year following the death or disability of
a shareholder; (b) redemptions made pursuant to any systematic withdrawal
plan based on the shareholder's life expectancy, including substantially
equal periodic payments prior to age 59 1/2 which are described in Code
section 72(t), and required minimum distributions after age 70 1/2, including
those required minimum distributions made in connection with customer
accounts under Section 403(b) of the Code and other retirement plans; (c)
total or partial redemption resulting from a distribution following
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retirement in the case of a tax-qualified employer-sponsored retirement plan;
(d) when a redemption results from a tax-free return of an excess
contribution pursuant to Section 408(d)(4) or (5) of the Code; (e)
reinvestment in Class B shares of a Fund within 60 days of a prior
redemption; (f) redemptions pursuant to the Fund's right to liquidate a
shareholder's account involuntarily; (g) redemptions pursuant to
distributions from a tax-qualified employer-sponsored retirement plan that
are invested in Funds and are permitted to be made without penalty pursuant
to the Code; and (h) redemptions in connection with a Fund's systematic
withdrawal plan not in excess of 10% of the value of the account annually.
CONVERSION OF CLASS B SHARES
A shareholder's Class B shares of a Fund will automatically convert to Class
A shares in the same Fund in the first month following the investor's sixth
anniversary from purchase, together with a pro rata portion of all Class B
shares representing dividends and other distributions paid in additional
Class B shares. Class B shares so converted will no longer be subject to the
higher expenses borne by Class B shares. The conversion will be effected at
the relative net asset values per share of the two classes on the first
business day in the first month following the investor's sixth anniversary
from the purchase of Class B shares. Because the net asset value per share
of Class A shares may be higher than that of Class B shares at the time of
conversion, a shareholder may receive fewer Class A shares than the number of
Class B shares converted, although the dollar value will be the same.
___________________________
HOW TO REDEEM SHARES
___________________________
As described below, shares of the Funds may be redeemed at their
next-determined net asset value (subject to any applicable CDSC) and
redemption proceeds will be sent to shareholders within seven days of the
receipt of a redemption request. Shareholders who have purchased shares
through broker-dealers, banks or other financial institutions that sell
shares may redeem shares through such firms; if the shares are held in the
"street name" of the broker-dealer, bank or other financial institution, the
redemption must be made through such firm.
Please note the following:
- If your shares were purchased by wire, redemption proceeds will be
available immediately. If shares were purchased other than by wire,
each Fund reserves the right to hold the proceeds of your redemption
for up to 15 business days after investment or until such time as the
Fund has received assurance that your investment will be honored by
the bank on which it was drawn, whichever occurs first.
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- SAFECO Services charges a $10 fee to wire redemption proceeds. In
addition, some banks may charge a fee to receive wires.
- If shares are issued in certificate form, the certificates must
accompany a redemption request and be duly endorsed.
- Under some circumstances (e.g., a change in corporate officer or
death of an owner), SAFECO Services may require certified copies of
supporting documents before a redemption will be made.
REDEMPTIONS THROUGH BROKER-DEALERS, BANKS AND OTHER FINANCIAL INSTITUTIONS
Shareholders with accounts at broker-dealers, banks and other financial
institutions that sell shares of the Funds may submit redemption requests to
such firms. Broker-dealers, banks or other financial institutions may honor
a redemption request either by repurchasing shares from a redeeming
shareholder at the shares' net asset value per share next computed after the
firm receives the request or by forwarding such requests to SAFECO Services.
Redemption proceeds (less any applicable CDSC) normally will be paid by
check. Broker-dealers, banks and other financial institutions may impose a
service charge for handling redemption transactions placed through them and
may impose other requirements concerning redemptions. Accordingly,
shareholders should contact the investment professional at their
broker-dealer, bank or other financial institution for details.
Redemption requests may also be transmitted to SAFECO Services by telephone
(for amounts of less than $100,000) or by mail.
SHARE REDEMPTION PRICE AND PROCESSING
Your shares will be redeemed at the net asset value per share (subject to any
applicable CDSC) next calculated after receipt of your request that meets the
redemption requirements of the Funds. Except for the Money Market Fund, the
value of the shares you redeem may be more or less than the dollar amount you
purchased, depending on the market value of the shares at the time of
redemption. See "Share Price Calculation" on page for more information.
Redemption proceeds will normally be sent on the next business day following
receipt of your redemption request. If your redemption request is received
after the close of trading on the NYSE (normally 1:00 p.m. Pacific Time),
proceeds will normally be sent on the second business day following receipt.
Each Fund, however, reserves the right to postpone payment of redemption
proceeds for up to seven days if making immediate payment could adversely
affect its portfolio. In addition, redemptions may be suspended or payment
dates postponed if the NYSE is closed, its trading is restricted or the
Securities and Exchange Commission declares an emergency.
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Due to the high cost of maintaining small accounts, your account may be
closed upon 60 days' written notice if at the time of any redemption or
exchange the total value falls below $100. Your shares will be redeemed at
the net asset value per share calculated on the day your account is closed
and the proceeds will be sent to you.
______________________________________________________________
HOW TO SYSTEMATICALLY PURCHASE OR REDEEM SHARES
______________________________________________________________
Call your investment professional or SAFECO Services at 1-800-463-8791 for more
information.
AUTOMATIC INVESTMENT METHOD (AIM)
AIM enables you to make regular monthly investments by authorizing SAFECO
Services to withdraw a specific amount from your bank account and invest the
amount in any Fund. AIM has a minimum of $100 per withdrawal per Fund for all
accounts (except UGMA and UTMA accounts which have a lower $50 minimum for
additional investments, provided that the account was opened with an initial
investment of at least $250).
PAYROLL DEDUCTION PLAN
An employer or other entity using group billing may establish a
self-administered payroll deduction plan in any Fund. Payroll deduction
amounts are negotiable.
SYSTEMATIC WITHDRAWAL PLAN
This plan enables you to receive a portion of your investment on a monthly
basis. A Fund automatically redeems shares in your account and sends you a
withdrawal check (minimum amount $50 per Fund) on or about the fifth business
day of every month. Because Class A shares are subject to sales charges,
shareholders should not concurrently purchase shares with respect to an
account which is utilizing a systematic withdrawal plan. Class B shares may
not be suitable for a systematic withdrawal plan, except in appropriate cases
where the CDSC is being waived. Please see "Contingent Deferred Sales Charge
Waivers" on page 74 for more information.
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_______________________________________________________________
HOW TO EXCHANGE SHARES FROM ONE FUND TO ANOTHER
_______________________________________________________________
Shares of one class of a Fund may be exchanged for shares of the same class
of any other Fund, based on their next-determined respective net asset
values, without imposition of any sales charges, provided that the
shareholder account registration remains identical. CLASS A SHARES MAY BE
EXCHANGED ONLY FOR CLASS A SHARES OF THE OTHER FUNDS LISTED ON THE FIRST PAGE
OF THIS PROSPECTUS. CLASS B SHARES MAY BE EXCHANGED ONLY FOR CLASS B SHARES
OF THE OTHER FUNDS LISTED ON THE FIRST PAGE OF THIS PROSPECTUS. The exchange
of Class B shares will not be subject to a contingent deferred sales charge.
For purposes of computing the CDSC, except for the time period during which a
shareholder is initially invested in Class B shares of the Money Market Fund,
the length of time of ownership of Class B shares will be measured from the
date of original purchase and will not be affected by the exchange.
Exchanges are not tax-free and may result in a shareholder's realizing a gain
or loss, as the case may be, for tax purposes. See "Fund Distributions and
How They Are Taxed" on page 90 for more information. You may purchase shares
of a Fund by exchange only if it is registered for sale in the state where you
reside. Before exchanging into an Advisor class of another Fund, please be
familiar with the Fund's investment objective and policies as described in
"Each Fund's Investment Objective and Policies" beginning on page 34 of this
Prospectus.
EXCHANGES BY MAIL
Exchange orders should be sent by mail to the investor's broker-dealer, bank
or other financial institution. If a shareholder has an account at SAFECO
Services, exchange orders may be sent to the address set forth on the cover
of this Prospectus.
EXCHANGES BY TELEPHONE
A shareholder may give exchange instructions to the shareholder's
broker-dealer, bank or other financial institution or to SAFECO Services by
telephone at the appropriate toll-free number provided on the cover of this
Prospectus. Exchange orders will be accepted by telephone provided that the
exchange involves only uncertificated shares or certificated shares for which
certificates previously have been deposited in the shareholder's account.
See "Telephone Transactions" for more information.
SHARE EXCHANGE PRICE AND PROCESSING
The shares of the Fund you are exchanging from will be redeemed at the price
next computed after your exchange request is received. Normally the purchase
of the Fund you are exchanging into is executed on the same day. However,
each Fund reserves the right to delay the payment of proceeds and, hence, the
purchase in an exchange for up to seven days if making immediate
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payment could adversely affect the portfolio of the Fund whose shares are
being redeemed. The exchange privilege may be modified or terminated with
respect to a Fund at anytime, upon at least 60 days' notice to shareholders.
LIMITATIONS
Each Fund reserves the right to refuse exchange purchases or simultaneous
order transactions by any person or group if, in SAM's judgment, the Fund
would not be able to invest the money effectively in accordance with that
Fund's investment objective and policies or would otherwise potentially be
adversely affected. Although a Fund will attempt to give you prior notice
whenever it is reasonably able to do so, it may impose the above restrictions
at any time.
The Funds are not intended to serve as vehicles for frequent trading in
response to short-term fluctuations in the market. Due to the disruptive
effect that market-timing investment strategies can have on efficient
portfolio management, the Funds have instituted certain policies to
discourage excessive exchange and simultaneous order transactions. Exchanges
and simultaneous order transactions which, in SAM's judgment, appear to
follow a market-timing strategy are limited to 4 in any 12 month period per
account holder (or account, in a case where one person or entity exercises
investment discretion over more than one account). For purposes of these
limitations a "simultaneous order transaction" is a transaction where a
significant portion of an account's assets are redeemed from one SAFECO
Mutual Fund and shortly thereafter reinvested into another SAFECO Mutual
Fund. In order to protect the shareholders of the Funds, SAM reserves the
right to exercise its discretion in determining whether a particular
transaction qualifies as a simultaneous order transaction. In addition to
the foregoing limitations on exchanges and simultaneous order transactions,
as described above, the Funds reserve the right to refuse any offer to
purchase shares.
______________________________
TELEPHONE TRANSACTIONS
______________________________
To redeem or exchange shares by telephone, call 1-800-463-8791 between 6:00
a.m. and 5:00 p.m. Pacific Time, Monday through Friday, except certain
holidays. All telephone calls are tape-recorded for your protection. During
times of drastic or unusual market volatility, it may be difficult for you to
exercise the telephone transaction privileges.
To use the telephone redemption and exchange privileges, you must have
previously selected these services either on your account application or by
having submitted a request in writing to SAFECO Services at the address on
the Prospectus cover. Redeeming or exchanging shares by telephone allows the
Funds and SAFECO Services to accept telephone instructions from an account
owner or a person preauthorized in writing by an account owner.
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Each of the Funds and SAFECO Services reserve the right to refuse any
telephone transaction when a Fund or SAFECO Services, in its sole discretion,
is unable to confirm to its satisfaction that a caller is the account owner
or a person preauthorized by the account owner.
The Funds and SAFECO Services will not be liable for the authenticity of
instructions received by telephone that a Fund or SAFECO Services, in its
discretion, believes to be delivered by an account owner or preauthorized
person, provided that the Fund or SAFECO Services follows reasonable
procedures to identify the caller. The shareholder will bear the risk of any
resulting loss. The Funds and SAFECO Services will employ reasonable
procedures to confirm that instructions communicated by telephone are
genuine. These procedures may include requiring the account owner to select
the telephone privilege in writing prior to first use and to designate
persons authorized to deliver telephone instructions. SAFECO Services
tape-records telephone transactions and may request certain identifying
information from the caller.
The telephone transaction privileges may be suspended, limited, modified or
terminated at any time without prior notice by the Funds or SAFECO Services.
The Funds and SAFECO Services may be liable if they do not employ reasonable
procedures to confirm that telephone transactions are genuine.
______________________________
SHARE PRICE CALCULATION
______________________________
The net asset value per share ("NAV") of each class of each Fund is computed
at the close of regular trading on the NYSE (normally 1:00 p.m. Pacific time)
each day that the NYSE is open for trading. NAV is determined separately for
each class of shares of each Fund. The NAV of a Fund is calculated by
subtracting a Fund's liabilities from its assets and dividing the result by
the number of outstanding shares. In calculating the net asset value of each
class appropriate adjustments will be made to each class's NAV to reflect
expenses allocated to it.
PORTFOLIO VALUATION FOR THE STOCK FUNDS
The Stock Funds generally value their portfolio securities at the last
reported sale price on the national exchange on which the securities are
primarily traded, unless there are no transactions in which case they shall
be valued at the last reported bid price. Securities traded over-the-counter
are valued at the last sale price, unless there is no reported sale price in
which case the last reported bid price will be used. Portfolio securities
that trade on a stock exchange and over-the-counter are valued according to
the broadest and most representative market. Securities not traded on a
national exchange are valued based on consideration of information with
respect to transactions in similar securities, quotations from dealers and
various relationships between securities. Other assets for which market
quotations are unavailable are valued at their fair value pursuant to
guidelines approved by the Common Stock Trust's Board of Trustees.
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The International Fund will invest primarily, and other Funds may invest from
time to time, in foreign securities. Trading in foreign securities will
generally be substantially completed each day at various times prior to the
close of the NYSE. The values of any such securities are determined as of
such times for purposes of computing the Funds' net asset value. Foreign
currency exchange rates are also generally determined prior to the close of
the NYSE. Foreign portfolio securities are valued on the basis of quotations
from the primary market in which they trade. The value of foreign securities
are translated from the local currency into U.S. dollars using current
exchange rates. If quotations are not readily available, or if values have
been materially affected by events occurring after the close of a foreign
market, the security will be valued at fair value as determined in good faith
by SAM or BIAM under procedures established by and under general supervision
of the Common Stock Trust's Board of Trustees.
The values of certain of the Stock Funds' portfolio securities are stated on
the basis of valuations provided by a pricing service, unless the Common
Stock Trust's Board of Trustees determines such does not represent fair
value. The service uses information with respect to transactions in
securities, quotations from securities dealers, market transactions in
comparable securities and various relationships between securities to
determine values.
INTERNATIONAL FUND
Options that are traded on national securities exchanges are valued at their
last sale price as of the close of option trading on such exchange. Futures
contracts will be marked to market daily, and options thereon are valued at
their last sale price, as of the close of the applicable commodities
exchange. Forward contracts are valued at the current cost of covering or
offsetting such contracts.
PORTFOLIO VALUATION FOR THE FIXED-INCOME FUNDS
For each of the Fixed-Income Funds except the Money Market Fund, securities
are valued based on consideration of information with respect to transactions
in similar securities, quotations from dealers and various relationships
between securities. The value of each Fixed-Income Fund's securities are
stated on the basis of valuations provided by a pricing service, unless the
Board of Trustees determines that such valuations do not represent fair
value. The service uses information with respect to transactions in
securities, quotations from security dealers, market transactions in
comparable securities, and various relationships between securities to
determine values. Other assets (including securities for which market
quotations are unavailable and restricted securities) are valued at their
fair value as determined in good faith by each Fixed-Income Fund's respective
Trust's Board of Trustees.
Like most money market funds, the Money Market Fund values the securities it
owns on the basis of amortized cost. The Money Market Fund may use amortized
cost valuation as long as the Money Market Trust's Board of Trustees
determines that it fairly reflects market value. Amortized cost valuation
involves valuing a security at its cost and adding or subtracting, ratably
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to maturity, any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the security. This method minimizes the
effect of changes in a security's market value and helps the Money Market
Fund maintain a stable $1.00 share price.
The NAV of the Class B shares of each Fund will generally be lower than the
NAV of Class A shares of the same Fund because of the higher expenses borne
by the Class B shares. The NAVs of the Advisor Classes of a Fund's shares
also may differ due to differing allocations of class-specific expenses. The
NAVs of the Advisor Classes of each Fund's shares will tend to converge,
however, immediately after the payment of dividends.
Call 1-800-463-8794 for 24-hour price information.
______________________________________________________________
INFORMATION ABOUT SHARE OWNERSHIP AND COMPANIES
THAT PROVIDE SERVICES TO THE TRUSTS
______________________________________________________________
Each Trust is a Delaware business trust established by a Trust Instrument
dated May 13, 1993, and is authorized to issue an unlimited number of shares
of beneficial interest. The Board of Trustees of each Trust may establish
additional series or classes of shares of the Trust without approval of
shareholders.
In addition to Class A and Class B shares, each Fund also offers No-Load
Class shares through a separate prospectus to investors who purchase shares
directly from SAFECO Securities. No-Load Class shares are sold without a
front-end sales charge or CDSC and are not subject to Rule 12b-1 fees.
Accordingly, the performance of No-Load Class shares will differ from that of
Class A or Class B shares. For more information about No-Load Class shares
of each Fund, please call 1-800-624-5711.
Each share of a Fund is entitled to participate equally in dividends and
other distributions and the proceeds of any liquidation except that, due to
the differing expenses borne by the three classes, dividends and liquidation
proceeds for each class of shares will likely differ. All shares issued are
fully paid and non-assessable, and shareholders have no preemptive or other
right to subscribe to any additional shares.
The Trusts do not intend to hold annual meetings of shareholders of the
Funds. The Trustees of a Trust will call a special meeting of shareholders
of a Fund of that Trust only if required under the Investment Company Act of
1940 ("1940 Act"), in their discretion, or upon the written request of
holders of 10% or more of the outstanding shares of a Fund or a class
entitled to vote. Separate votes are taken by each class of shares, a Fund,
or a Trust if a matter affects only that class of shares, Fund, or Trust,
respectively.
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Under Delaware law, the shareholders of the Funds will not be personally
liable for the obligations of any Fund; a shareholder is entitled to the same
limitation of personal liability extended to shareholders of corporations.
To guard against the risk that Delaware law might not be applied in other
states, each Trust Instrument requires that every written obligation of the
Trust or a Fund thereof contain a statement that such obligation may be
enforced only against the assets of that Trust or Fund and generally provides
for indemnification out of property of that Trust or Fund of any shareholder
nevertheless held personally liable for Trust or Fund obligations,
respectively.
Because the Trusts use a combined Prospectus, it is possible that a Fund
might become liable for a misstatement about the series of another Trust
contained in this Prospectus. The Boards of Trustees have considered this
factor in approving the use of a single combined Prospectus.
SAM is the investment adviser for each Fund under an agreement with each
Trust. Under each agreement, SAM is responsible for the overall management
of each Trust's and each Fund's business affairs. SAM provides investment
research, advice, management and supervision to each Trust and each Fund,
and, consistent with each Fund's investment objectives and policies, SAM
determines what securities will be purchased, retained or sold by each Fund
and implements those decisions. Each Fund pays SAM an annual management fee
based on a percentage of that Fund's net assets ascertained each business day
and paid monthly in accordance with the schedules below. A reduction in the
fees paid by a Fund occurs only when that Fund's net assets reach the dollar
amounts of the break points and applies only to the assets that fall within
the specified range:
GROWTH, EQUITY AND INCOME FUNDS
NET ASSETS ANNUAL FEE
$0 - $100,000,000 .75 of 1%
$100,000,001 - $250,000,000 .65 of 1%
$250,000,001 - $500,000,000 .55 of 1%
Over $500,000,000 .45 of 1%
NORTHWEST FUND
NET ASSETS ANNUAL FEE
$0 - $250,000,000 .75 of 1%
$250,000,001 - $500,000,000 .65 of 1%
$500,000,001 - $750,000,000 .55 of 1%
Over $750,000,000 .45 of 1%
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BALANCED FUND
NET ASSETS ANNUAL FEE
$0 - $250,000,000 .75 of 1%
$250,000,001 - $500,000,000 .65 of 1%
Over $500,000,000 .55 of 1%
INTERNATIONAL FUND
NET ASSETS ANNUAL FEE
$0 - $250,000,000 1.10 of 1%
$250,000,001 - $500,000,000 1.00 of 1%
Over $500,000,000 .90 of 1%
SMALL COMPANY FUND
NET ASSETS ANNUAL FEE
$0 - $250,000,000 .85 of 1%
$250,000,001 - $500,000,000 .75 of 1%
Over $500,000,000 .65 of 1%
INTERMEDIATE TREASURY FUND
NET ASSETS ANNUAL FEE
$0 - $250,000,000 .55 of 1%
$250,000,001 - $500,000,000 .45 of 1%
$500,000,001 - $750,000,000 .35 of 1%
Over $750,000,000 .25 of 1%
HIGH-YIELD FUND
NET ASSETS ANNUAL FEE
$0 - $250,000,000 .65 of 1%
$250,000,001 - $500,000,000 .55 of 1%
$500,000,001 - $750,000,000 .45 of 1%
Over $750,000,000 .35 of 1%
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MANAGED BOND FUND
NET ASSETS ANNUAL FEE
$0 - $100,000,000 .50 of 1%
$100,000,001 - $250,000,000 .40 of 1%
Over $250,000,000 .35 of 1%
MONEY MARKET FUND
NET ASSETS ANNUAL FEE
$0 - $250,000,000 .50 of 1%
$250,000,001 - $500,000,000 .40 of 1%
$500,000,001 - $750,000,000 .30 of 1%
Over $750,000,000 .25 of 1%
MUNICIPAL AND CALIFORNIA FUNDS
NET ASSETS ANNUAL FEE
$0 - $100,000,000 .55 of 1%
$100,000,001 - $250,000,000 .45 of 1%
$250,000,001 - $500,000,000 .35 of 1%
Over $500,000,000 .25 of 1%
WASHINGTON FUND
NET ASSETS ANNUAL FEE
$0 - $250,000,000 .65 of 1%
$250,000,001 - $500,000,000 .55 of 1%
$500,000,001 - $750,000,000 .45 of 1%
Over $750,000,000 .35 of 1%
A Trust and each Fund thereof will bear all expenses of their organization,
operations and business not specifically assumed by SAM under each Fund's
management contract. Such expenses may include, among others, custody and
accounting expenses, transfer agency and related expenses, distribution and
shareholder servicing expenses, expenses related to preparing, printing and
delivering prospectuses and shareholder reports, the expenses of holding
shareholders' meetings, legal fees, the compensation of non-interested
trustees of the Trusts, brokerage, taxes and extraordinary expenses.
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With respect to the International Fund, SAM has a sub-advisory agreement with
the Sub-Adviser. The Sub-Adviser is a direct, wholly owned subsidiary of the
Bank of Ireland Asset Management Limited and is an indirect, wholly owned
subsidiary of Bank of Ireland. The Sub-Adviser has its headquarters at 26
Fitzwilliam Place, Dublin, Ireland, and its U.S. office at 2 Greenwich Plaza,
Greenwich, Connecticut. The Sub-Adviser was established in 1987 and manages
over $3 billion in assets. Because the Sub-Adviser is doing business from a
location within the United States, investors will be able to effect service
of legal process within the United States upon the Sub-Adviser, facilitating
the enforcement of judgments against the Sub-Adviser under federal securities
laws in United States courts. However, the Sub-Adviser is a foreign
organization and maintains a substantial portion of its assets outside the
United States. Therefore, the ability of investors to enforce judgments
against the Sub-Adviser may be affected by the willingness of foreign courts
to enforce judgments of U.S. courts.
Under the agreement, the Sub-Adviser is responsible for providing investment
research and advice used to manage the investment portfolio of the
International Fund. In return, SAM (and not the International Fund) pays the
Sub-Adviser a fee in accordance with the schedule below:
NET ASSETS ANNUAL FEE
$0 - $50,000,000 .60 of 1%
$50,000,001 - $100,000,000 .50 of 1%
Over $100,000,000 .40 of 1%
The parent company of the Sub-Adviser, Bank of Ireland Asset Management
Limited, is a direct, wholly owned subsidiary of the Bank of Ireland, which
engages in the investment advisory business and is located at 26 Fitzwilliam
Place, Dublin, Ireland. The Bank of Ireland is a holding company whose
primary subsidiaries are engaged in banking, insurance, securities and
related financial services, and is located at Lower Baggot Street, Dublin,
Ireland.
The distributor of the Advisor Classes of each Fund's shares under an
agreement with each Trust is SAFECO Securities a broker-dealer registered
under the Securities Exchange Act of 1934 and a member of the National
Association of Securities Dealers, Inc.
The transfer, dividend disbursement and shareholder servicing agent for the
Advisor Classes of each Fund under an agreement with each Trust is SAFECO
Services. SAFECO Services receives a fee from each Fund for every
shareholder account held in the Fund. SAFECO Services may enter into
subcontracts with registered broker-dealers, third-party administrators and
other qualified service providers that generally perform shareholder,
administrative, and/or accounting services which would otherwise be provided
by SAFECO Services. Fees incurred by a Fund for these services will not
exceed the transfer agency fee payable to SAFECO Services. Any distribution
expenses associated with these arrangements will be borne by SAM.
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SAM, SAFECO Securities and SAFECO Services are wholly owned subsidiaries of
SAFECO Corporation (a holding company whose primary subsidiaries are engaged
in the insurance and financial services businesses) and are each located at
SAFECO Plaza, Seattle, Washington 98185.
As interpreted by courts and administrative agencies, the Glass-Steagall Act
and other applicable laws and regulations limit the ability of a bank or
other depository institution to become an underwriter or distributor of
securities. However, in the opinion of each Trust's management, based on the
advice of counsel, these laws and regulations do not prohibit such depository
institutions from providing services for investment companies. Banks or
other depository institutions may be subject to various state laws regarding
such services, and may be required to register as dealers pursuant to state
law.
_______________________
DISTRIBUTION PLANS
_______________________
Each Trust, on behalf of the Advisor Classes of each Fund, has entered into a
Distribution Agreement (each an "Agreement") with SAFECO Securities. Each
Trust has also adopted a plan pursuant to Rule 12b-1 under the 1940 Act with
respect to each of the Advisor Classes of each Fund (the "Plans").
Pursuant to the Plans, each Advisor class pays SAFECO Securities a quarterly
service fee, at the annual rate of 0.25% of the aggregate average daily net
assets of the Advisor class. Class B shares also pay SAFECO Securities a
quarterly distribution fee at the annual rate of 0.75% of the aggregate
average daily net assets of the Class B shares. Although the Money Market
Trust has adopted Plans with respect to the Advisor Classes of the Money
Market Fund, the Money Market Trust's Board of Trustees and SAFECO Securities
have agreed not to implement the Plans at this time. Thus, the Advisor
Classes of the Money Market Fund do not currently pay service or distribution
fees to SAFECO Securities under the Money Market Fund Plans. The Money
Market Fund Plans will not be implemented unless authorized by the Money
Market Trust's Board of Trustees.
Under the Plans, SAFECO Securities will use the service fees primarily to
compensate persons selling shares of the Funds for the provision of personal
service and/or the maintenance of shareholder accounts. SAFECO Securities
will use the distribution fees under the Class B Plan to offset the
commissions it pays to broker-dealers, banks or other financial institutions
for selling each Fund's Class B shares. In addition, SAFECO Securities will
use the distribution fees under the Class B Plan to offset each Fund's
marketing costs attributable to the Class B shares, such as preparation of
sales literature, advertising and printing and distributing prospectuses and
other shareholder materials to prospective investors. SAFECO Securities also
may use the distribution fee to pay other costs allocated to SAFECO
Securities' distribution activities, including acting as shareholder of
record, maintaining account records and other overhead expenses.
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SAFECO Securities will receive the proceeds of the initial sales charges paid
upon the purchase of Class A shares and the CDSCs paid upon applicable
redemptions of Class B shares and may use these proceeds for any of the
distribution expenses described above. The amount of sales charges reallowed
to broker-dealers, banks or other financial institutions who sell Class A
shares will equal the percentage of the amount invested in accordance with
the schedule set forth in "Purchasing Advisor Class A Shares" on page 69.
SAFECO Securities, out of its own resources, will pay a brokerage commission
equal to 4.00% of the amount invested to broker-dealers, banks and other
financial institutions who sell Class B shares. Broker-dealers, banks and
other financial institutions who sell Class B shares of the Money Market Fund
will receive the 4.00% brokerage commission at the time the shareholder
exchanges his or her Class B Money Market Fund shares for Class B shares of
another Fund.
During the period they are in effect, the Plans and related Agreements
obligate the Advisor Classes of the Funds to which they relate to pay service
and distribution fees to SAFECO Securities as compensation for its service
and distribution activities, not as reimbursement for specific expenses
incurred. Thus, even if SAFECO Securities' expenses exceed its service or
distribution fees for any class, the class will not be obligated to pay more
than those fees and, if SAFECO Securities' expenses are less than such fees,
it will retain its full fees and realize a profit. Each Fund that has
implemented a Rule 12b-1 Plan will pay the service and distribution fees to
SAFECO Securities until either the applicable Plan or Agreement is terminated
or not renewed.
___________________________________________
PERSONS CONTROLLING CERTAIN FUNDS
___________________________________________
At November 15, 1996, SAM, a wholly owned subsidiary of SAFECO Corporation,
controlled the International and Balanced Funds. At November 15, 1996, SAFECO
Corporation controlled the Small Company Fund. SAFECO Corporation and SAM
have their principal place of business at SAFECO Plaza, Seattle, Washington
98185.
At November 15, 1996, SAFECO Insurance Company of America ("SAFECO Insurance")
controlled the Intermediate Treasury and Washington Funds. SAFECO Insurance
is a Washington Corporation and a wholly owned subsidiary of SAFECO
Corporation, which has its principal place of business at SAFECO Plaza,
Seattle, Washington 98185.
At December 5, 1996, Crown Packaging Corp. Profit Sharing & Pension Plan and
Massman Construction Co. Profit Sharing Retirement Trust controlled the
Managed Bond Fund. Crown Packaging Corp. Profit Sharing & Pension Plan's
address of record is 8514 Eager Road, St. Louis, Mo. 63144. Massman
Construction Co. Profit Sharing Retirement Trust's address of record is 8901
Stateline, Kansas City, Mo. 64114.
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________________________________
PERFORMANCE INFORMATION
________________________________
The yield, total return and average annual total return of each class of a
Fund may be quoted in advertisements. For each Fund except the Money Market
Fund, yield is the annualization on a 360-day basis of a class's net income
per share over a 30-day period divided by the class's net asset value per
share on the last day of the period. The formula for the yield calculation
is defined by regulation. Consequently, the rate of actual income
distributions paid by the Funds may differ from quoted yield figures. Total
return is the total percentage change in an investment in a class of a Fund,
assuming the reinvestment of dividend and capital gain distributions, over a
stated period of time. Average annual total return is the annual percentage
change in an investment in a class of a Fund, assuming the reinvestment of
dividends and capital gain distributions, over a stated period of time.
Performance quotations are calculated separately for each class of a Fund.
Standardized returns for Class A shares reflect deduction of the Fund's
maximum initial sales charge at the time of purchase, and standardized
returns for Class B shares reflect deduction of the applicable CDSC imposed
on a redemption of shares held for the period. A Fund's portfolio turnover
rate will vary from year to year. A high portfolio turnover rate involves
correspondingly higher transaction costs in the form of broker commissions
and dealer spreads and other costs that a Fund will bear directly.
For the Money Market Fund, yield is the annualization on a 365-day basis of
the Fund's net income over a 7-day period. Effective yield is the
annualization, on a 365-day basis, of the Money Market Fund's net income over
a 7-day period with dividends reinvested. The effective yield will be
slightly higher than the yield because of the compounding effect of this
assumed reinvestment.
From time to time, a Fund may advertise rankings. Rankings are calculated by
independent companies that monitor mutual fund performance (e.g., CDA
Investment Technologies, Lipper Analytical Services, Inc., and Morningstar,
Inc.) and are reported periodically in national financial publications such
as BARRON'S, BUSINESS WEEK, FORBES, INVESTOR'S BUSINESS DAILY, MONEY
MAGAZINE, and THE WALL STREET JOURNAL. In addition, non-standardized
performance figures may accompany the standardized figures described above.
Non-standardized figures may be calculated in a variety of ways, including
but not necessarily limited to, different time periods and different initial
investment amounts. Each Fund may also compare its performance to the
performance of relevant indices.
Performance information and quoted rankings are indicative only of past
performance and are not intended to represent future investment results.
Except for the Money Market Fund, the yield and share price of each class of
a Fund will fluctuate and your shares, when redeemed, may be worth more or
less than you originally paid for them.
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____________________________________________________
FUND DISTRIBUTIONS AND HOW THEY ARE TAXED
____________________________________________________
DIVIDENDS AND OTHER DISTRIBUTIONS
The Fixed-Income Funds declare dividends on each business day and pay them on
the last business day of each month; the Growth, Equity, Income, Northwest
and Balanced Funds declare and pay dividends on the last business day of each
calendar quarter; and the International and Small Company Funds declare and
pay dividends annually. Those dividends are declared and paid from net
investment income (which includes accrued dividends and interest, earned
discount, and other income earned on portfolio securities less expenses).
Shares of each Fund become entitled to receive dividends on the next business
day after they are purchased for your account. If you request redemption of
all your shares at any time during a month, you will receive all declared
dividends through the date of redemption, together with the proceeds of the
redemption.
Dividends and other distributions paid by a Fund on each class of its shares
are calculated at the same time in the same manner. However, except for the
Money Market Fund, because of the higher Rule 12b-1 service and distribution
fees associated with Class B shares, the dividends paid by a Fund on its
Class B shares will be lower than those paid on its Class A shares.
Your dividends and other distributions are reinvested in additional shares of
the distributing Fund at net asset value per share, generally determined as
of the close of business on the ex-distribution date, unless you elect in
writing to receive dividends and/or other distributions in cash and that
election is provided to SAFECO Services at the address on the Prospectus
cover. The election remains in effect until revoked by written notice to
SAFECO Services. For retirement accounts, all dividends and other
distributions declared by a Fund must be invested in additional shares of
that Fund.
States generally treat the pass-through of interest earned on U.S. Treasury
securities and other direct obligations of the U.S. Government as tax-free
income in the calculation of their state income tax. This treatment may be
dependent upon the maintenance of certain percentages of fund ownership in
these securities. The Intermediate Treasury Fund will invest primarily in
these securities while the other Funds may occasionally invest a portion of
their portfolios in these securities.
Please remember that if you purchase shares shortly before a Fund pays a
taxable dividend or other distribution, you will pay the full price for the
shares, then receive part of the price back as a taxable distribution.
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TAXES
Each Fund intends to continue to qualify for treatment as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986,
as amended. By so qualifying, a Fund will not be subject to federal income
taxes to the extent it distributes its net investment income and realized
capital gains to its shareholders. Each Fund will inform you as to the
amount and nature of dividends and other distributions to your account.
Dividends and other distributions declared in December, but received by
shareholders in January, are taxable to shareholders in the year in which
declared.
When you sell (redeem) shares, it may result in a taxable gain or loss. This
depends upon whether you receive more or less than your adjusted basis for
the shares (which normally takes into account any initial sales charge paid
on Class A shares). An exchange of any Fund's shares for shares of another
Fund generally will have similar tax consequences.
Special rules apply when you dispose of Class A shares of a Fund (except the
Money Market Fund) through a redemption or exchange within 60 days after your
purchase thereof and subsequently reacquire Class A shares of the same Fund
or acquire Class A shares of another Fund without paying a sales charge due
to the exchange privilege or reinstatement privilege. See "How to Purchase
Shares -Reinstatement Privilege" on page 72 and "How to Exchange Shares from
One Fund to Another" on page 78 for more information. In these cases, any
gain on the disposition of the original Class A shares will be increased, or
any loss decreased, by the amount of the sales charge paid when you acquired
those shares, and that amount will increase the basis of the shares
subsequently acquired. In addition, if you purchase shares of a Fund
(whether pursuant to the reinstatement privilege or otherwise) within thirty
days before or after redeeming other shares of that Fund (regardless of
class) at a loss, all or part of that loss will not be deductible and will
increase the basis of the newly purchased shares.
SPECIAL CONSIDERATIONS FOR THE TAX-EXEMPT INCOME FUNDS
TAXES
Each Tax-Exempt Income Fund intends to continue to qualify for favorable tax
treatment as a "regulated investment company" under the Internal Revenue Code
("Code") so as to be able to pay dividends that are exempt from federal
personal income taxes. The portion of dividends representing net short-term
capital gains, however, is not exempt and will be treated as taxable
dividends for federal income tax purposes. In addition, income which is
derived from purchasing certain bonds below their issued price after April
30, 1993, will be treated as ordinary income for federal income tax purposes.
A portion of a Tax-Exempt Income Fund's assets may from time to time be
temporarily invested in fixed-income obligations, the interest on which when
distributed to the Fund's shareholders will be subject to federal income
taxes. As a matter of non-fundamental investment policy, the
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Tax-Exempt Income Funds will not purchase so-called "non-essential or private
activity" bonds, the interest on which would constitute a preference item for
shareholders in determining their alternative minimum tax.
The excess of net long-term capital gains realized by a Tax-Exempt Income
Fund over net short-term capital loss on portfolio transactions does not
necessarily result in exemption under other federal, state or local income
taxes. Shareholders of each Tax-Exempt Income Fund should bear in mind that
they may be subject to other taxes.
If a shareholder buys shares of a Tax-Exempt Income Fund and sells them at a
loss within six months, such loss for federal income tax purposes will be
disallowed to the extent of the tax-exempt interest component of dividends
received during such six-month period.
If a shareholder buys shares of a Tax-Exempt Income Fund and sells them at a
loss within six months, to the extent not disallowed in the previous
paragraph and to the extent of any long-term capital gains distributions, the
loss will be treated as a long-term capital loss for federal income tax
purposes.
Individuals who receive Social Security benefits must use the amount of
income dividends received from each of the Tax-Exempt Income Funds in
determining the amount of any federal income tax due on such benefits.
Under the Code, the tax effect on individuals of receiving dividends from any
of the Tax-Exempt Income Funds is substantially different from the tax effect
on other types of shareholders.
CALIFORNIA FUND
The California Fund intends to pay dividends that are exempt from California
state personal income taxes. This would not include taxable interest paid on
temporary investments, if any. Generally, the tax treatment of capital gains
under California law is the same as under federal law. Capital gains
distributions paid by the California Fund are treated as long-term capital
gains under California law regardless of how long the shares have been held.
Redemptions and exchanges of the California Fund may result in a capital gain
or loss for California income tax purposes.
Under California law, the dividend income from municipal bonds is tax-exempt
to individual shareholders but its tax treatment for corporate shareholders
is unclear. Therefore, the portion of the California Fund's income dividend
attributable to these obligations and paid by it to corporate shareholders
may be taxable. Corporate shareholders may wish to consult their tax
advisers regarding this issue.
Shares of the California Fund will not be subject to the California property
tax.
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WASHINGTON FUND
Currently the State of Washington has no state personal income tax. When and
if Washington State enacts a personal income tax, there can be no assurance
that income from the Washington Fund's portfolio securities which is
distributed to shareholders would be exempt from such a tax.
TAX WITHHOLDING INFORMATION
You will be asked to certify on your account application or on a separate
form that the taxpayer identification number you provide is correct and that
you are not subject to, or are exempt from, backup withholding for previous
underreporting to the Internal Revenue Service.
Retirement plan distributions may be subject to federal income tax
withholding. However, you may elect not to have any distributions withheld by
checking the appropriate box on the Redemption Request form or by instructing
SAFECO Services in writing at the address on the Prospectus cover.
If the International Fund pays nonrefundable taxes to foreign governments
during the year, the taxes will reduce the Fund's dividends but still be
included in your taxable income. However, you may be able to claim an
offsetting credit or deduction on your tax return for your share of foreign
taxes paid by the Fund.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting each Fund and its shareholders; see the
Trusts' Statements of Additional Information for a further discussion. There
may be other federal, state or local tax considerations applicable to a
particular investor. You therefore are urged to consult your tax adviser.
______________________________________
TAX-DEFERRED RETIREMENT PLANS
______________________________________
SAFECO Services offers a variety of tax-deferred retirement plans for
individuals, businesses and nonprofit organizations. An account may be
established under one of the following plans which allow you to defer
investment income from federal income tax while you save for retirement.
Many of the Funds (other than the Tax-Exempt Income Funds) may be used as
investment vehicles for these plans.
INDIVIDUAL RETIREMENT ACCOUNTS (IRAS). IRAs are tax-deferred retirement
accounts for anyone under age 70 1/2 with earned income. The maximum annual
contribution generally is $2,000 per person ($2,250 for you and a non-working
spouse). Under certain circumstances your contribution will be deductible
for income tax purposes. An annual custodial fee will be charged for any
part of a calendar year in which you have an IRA investment in a Fund.
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SIMPLIFIED EMPLOYEE PENSION IRAS (SEP-IRAS). SEP-IRAs are easily
administered retirement plans for small businesses and self-employed
individuals. Annual contributions up to $22,500 may be made to SEP-IRA
accounts; the annual contribution limit is subject to change. SEP-IRAs have
the same investment minimums and custodial fees as regular IRAs.
403(b) PLANS. 403(b) plans are retirement plans for tax-exempt organizations
and school systems to which employers and employees both may contribute.
Minimum investment amounts are negotiable.
401(k) PLANS. 401(k) plans allow employers and employees to make
tax-advantaged contributions to a retirement account. SAFECO Services offers
a low-cost administration package that includes a prototype plan, record
keeping, testing and employee communications. Minimum investment amounts are
negotiable.
PROFIT SHARING AND MONEY PURCHASE PENSION PLANS. Each plan allows
corporations, partnerships and self-employed persons to make annual,
tax-deductible contributions to a retirement account for each person covered
by the plan. A plan may be adopted individually or paired with another plan
to maximize contributions. SAFECO Services offers an administration package
for these plans. Minimum investment amounts are negotiable.
For information about the above accounts and plans, please contact your
investment professional, or call 1-800-278-1985. For a description of
federal income tax withholding on distributions from these accounts and
plans, see "Fund Distributions and How They Are Taxed - Tax Withholding
Information" on page 90.
_________________________
ACCOUNT STATEMENTS
_________________________
Periodically, you will receive an account statement indicating your current
Fund holdings and transactions affecting your account. Confirmation
statements will be sent to you after each transaction that affects your
account balance. Please review the information on each confirmation
statement for accuracy immediately upon receipt. If you do not notify us
within 30 days of any processing error, SAFECO Services will consider the
transactions listed on the confirmation statement to be correct.
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________________________________________________________
ACCOUNT CHANGES AND SIGNATURE REQUIREMENTS
________________________________________________________
Changes to your account registration or the services you have selected must
be in writing and signed by the number of owners specified on your account
application as having authority to make these changes. Send written changes
to the broker-dealer, bank or other financial institution where your account
is maintained. (Changes made to accounts maintained at SAFECO Services
should be sent to the address on the Prospectus cover.) Certain changes to
the Automatic Investment Method and Systematic Withdrawal Plan can be made by
telephone request if you have previously selected single signature
authorization for your account.
You must specify on your account application the number of signatures
required to authorize redemptions and exchanges and to change account
registration or the services selected. Authorizing fewer than all account
owners has important implications. For example, one owner of a joint tenant
account can redeem money without the co-owner's signature. If you do not
indicate otherwise on the application, the signatures of all account owners
will be required to effect a transaction. Your selection of fewer than all
account owner signatures may be revoked by any account owner who writes to
SAFECO Services or the financial institution where your account is maintained.
The broker-dealer, bank or financial institution where your account is
maintained or SAFECO Services may require a signature guarantee for a
signature that cannot be verified by comparison to the signature(s) on your
account application. A signature guarantee may be obtained from most
financial institutions including banks, savings and loans and broker-dealers.
____________________________________________________________________
DESCRIPTION OF STOCKS, BONDS AND CONVERTIBLE SECURITIES
____________________________________________________________________
COMMON STOCKS represent equity interest in a corporation. Although common
stocks have a history of long-term growth in value, their prices fluctuate
based on changes in a company's financial condition and overall market and
economic conditions. Smaller companies are especially sensitive to these
factors.
PREFERRED STOCKS are equity securities whose owners have a claim on a
company's earnings and assets before holders of common stock, but after debt
holders. The risk characteristics of preferred stocks are similar to those
of common stocks, except that preferred stocks are generally subject to less
risk than common stocks.
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BONDS AND OTHER DEBT SECURITIES are used by issuers to borrow money from
investors. The issuer pays the investor a fixed or variable rate of
interest, and must repay the amount borrowed at maturity. The value of bonds
and other debt securities will normally vary inversely with interest rates.
In general, bond prices rise when interest rates fall, and bond prices fall
when interest rates rise. Debt securities have varying degrees of quality
and varying levels of sensitivity to changes in interest rates. Long-term
bonds are generally more sensitive to interest rate changes than short-term
bonds.
CONVERTIBLE SECURITIES are debt or preferred stock which are convertible into
or exchangeable for common stock. The value of convertible corporate bonds
will normally vary inversely with interest rates and the value of convertible
corporate bonds and convertible preferred stock will normally vary with the
value of the underlying common stock.
_________________________
RATINGS SUPPLEMENT
_________________________
Ratings by Moody's and S&P represent their respective opinions as to the
investment quality of the rate obligations. Investors should realize these
ratings do not constitute a guarantee that the principal and interest payable
under these obligations will be paid when due.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
MOODY'S. Issuers rated Prime-1 have a superior ability for repayment of
senior short-term debt obligations. Issuers rated Prime-2 have a strong
ability for repayment of senior short-term debt obligations. Issuers rated
Prime-3 have an acceptable ability for repayment of senior short-term debt
obligations.
S&P. Commercial Paper issues rated A are the highest quality obligations.
Issues in this category are regarded as having the greatest capacity for
timely payment. For issues designated A-1, the degree of safety regarding
timely payment is very strong. Issuers designated A-2 also have a astrong
capacity for timely payment, but not as high as A-1 issuers. Issuers
designated A-3 have a satisfactory capacity for timely payment.
DESCRIPTION OF DEBT RATINGS
Excerpts from Moody's descriptions of its ratings:
Investment Grade:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are
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protected by a large or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the position of such
issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risk appear somewhat larger than
the Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations
(I.E., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present, but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
BELOW INVESTMENT GRADE:
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa have poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
-97-
<PAGE>
EXCERPTS FROM S&P'S DESCRIPTIONS OF ITS RATINGS:
INVESTMENT GRADE:
AAA -- Debt which is rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA -- Debt which is rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
A -- Debt which is rated A has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BELOW INVESTMENT GRADE:
BB, B, CCC, CC, C -- Debt which is rated BB, B, CCC, CC, or C is predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. "BB" indicates the lowest degree
of speculation and "C" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
C1 -- Debt which is rated C1 is reserved for income bonds on which no interest
is being paid.
D -- Debt rated D is in payment default. Interest payment, or principal
payments are not made on the date due even if the applicable grace period has
not expired, unless S&P believes that such payments will be made during such
grace period.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
-98-
<PAGE>
_____________________________________________________________________________
DEBT SECURITIES HOLDINGS
______________________________________________________________________________
THE EQUITY FUND DID NOT HOLD ANY CONVERTIBLE DEBT SECURITIES DURING THE FISCAL
YEAR ENDED SEPTEMBER 30, 1996.
INCOME FUND
The weighted average ratings of all debt securities held by the Income Fund,
expressed as a percentage of total investments held during the fiscal year ended
September 30, 1996, were as follows:
Moody's % S&P %
------- --- --- ---
Investment Grade
Aaa 3.27% AAA 3.27%
Aa 0% AA 0%
A 5.46% A 3.46%
Baa 2.35% BBB 4.35%
Below Investment Grade
Ba 7.22% BB 4.86%
B 3.08% B 3.62%
Caa 0% CCC 0%
Ca 0% CC 0%
C 0% C 0%
D 0%
Not Rated, but Not Rated, but
determined to determined to
be investment be investment
grade 0% grade 0%
Not Rated, but Not Rated, but
determined to determined to
be below be below
investment grade .77% investment grade 2.58%
-99-
<PAGE>
HIGH-YIELD FUND
The weighted average ratings of all fixed-income securities, expressed as a
percentage of total investments held by the High-Yield Bond during the fiscal
year ended September 30, 1996, were as follows:
Moody's % S&P %
------- --- --- ---
Investment Grade
-------------------------------------------------------------------------
Aaa 9.50% AAA 9.50%
Aa 0% AA 0%
A 0% A 0%
Baa 0% BBB 0%
Below Investment Grade
-------------------------------------------------------------------------
Ba 17.23% BB 28.42%
B 71.22% B 60.03%
Caa 1.58% CCC 1.58%
Ca 0% CC 0%
C 0% C 0%
D 0%
Not Rated, but Not Rated, but
determined to be determined to be
investment grade 0% investment grade 0%
Not Rated, but Not Rated, but
determined to be determined to be
below investment below investment
grade .48% grade .48%
-100-
<PAGE>
SAFECO FAMILY OF FUNDS
STABILITY OF PRINCIPAL
SAFECO Money Market Fund
BOND INCOME
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO High-Yield Bond Fund
SAFECO Managed Bond Fund
TAX-FREE BOND INCOME
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal Bond Fund
HIGH CURRENT INCOME WITH LONG-TERM GROWTH
SAFECO Income Fund
LONG-TERM GROWTH
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Northwest Fund
SAFECO Balanced Fund
SAFECO International Stock Fund
SAFECO Small Company Stock Fund
FOR MORE COMPLETE INFORMATION ON ADVISOR CLASS SHARES OF ANY SAFECO MUTUAL FUND,
INCLUDING MANAGEMENT FEES AND EXPENSES, PLEASE CONTACT YOUR INVESTMENT
PROFESSIONAL.
-101-
<PAGE>
TELEPHONE NUMBERS:
DEALER SERVICES
Nationwide: (800) 528-6501
Seattle: (206) 545-6409
LITERATURE ORDER:
Nationwide: (800) 463-8792
Seattle: (206) 545-6227
SHAREHOLDER SERVICES/TELEPHONE EXCHANGE:
MONDAY THROUGH FRIDAY,
6:00 A.M. TO 5:00 P.M. PACIFIC TIME
Nationwide: (800) 463-8791
Seattle: (206) 545-6283
24-HOUR PRICE AND PERFORMANCE INFORMATION
Nationwide: (800) 463-8794
Seattle: (206) 545-6295
MAILING ADDRESS:
SAFECO MUTUAL FUNDS
Advisor Class Shares
P.O. Box 34890
Seattle, WA 98124-1890
EXPRESS/OVERNIGHT MAIL:
SAFECO Mutual Funds
Advisor Class Shares
4333 Brooklyn Avenue N.E.
Seattle, WA 98105
DISTRIBUTOR:
SAFECO Securities, Inc.
-102-
<PAGE>
PROSPECTUS
December 31, 1996
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Income Fund
SAFECO Northwest Fund
SAFECO Balanced Fund
SAFECO International Stock Fund
SAFECO Small Company Stock Fund
SAFECO Intermediate-Term
U.S. Treasury Fund
SAFECO High-Yield Bond Fund
SAFECO Managed Bond Fund
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal
Bond Fund
SAFECO Money Market Fund
Advisor Class A
Advisor Class B
No dealer, salesperson or other person has been authorized to give any
information or to make any representation, other than those contained in this
Prospectus, and, if given or made, such other information or representations
must not be relied upon as having been authorized by any Trust, any Fund, or by
SAFECO Securities. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy by any Trust, any Fund, or by SAFECO Securities
in any state in which such offer or solicitation may not lawfully be made.
-103-
<PAGE>
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
SAFECO GNMA FUND
SAFECO HIGH-YIELD BOND FUND
SAFECO MANAGED BOND FUND
NO-LOAD CLASS JANUARY 26, 1996
- --------------------------------------------------------------------------------
This Prospectus offers shares of each of the funds listed above. The SAFECO
Intermediate-Term U.S. Treasury Fund, the SAFECO GNMA Fund, the SAFECO High-
Yield Bond Fund are series of the SAFECO Taxable Bond Trust ("Taxable Bond
Trust"). The SAFECO Managed Bond Fund is a series of the SAFECO Managed Bond
Trust ("Managed Bond Trust"). The investment objectives for each of these Funds
appears on page 3.
This Prospectus sets forth the information a prospective investor should know
before investing. PLEASE READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
A Statement of Additional Information, dated December 31, 1996, and incorporated
herein by reference, has been filed with the Securities and Exchange Commission
and is available at no charge upon request by calling one of the numbers listed
below. The Statement of Additional Information and other material incorporated
by reference herein are also available on the Securities and Exchange Commission
website (http://www.sec.gov). The Statement of Additional Information contains
more information about many of the topics in this Prospectus as well as
information about the trustees and officers of the Trusts.
For additional assistance, please call or write:
NATIONWIDE 1-800-624-5711; SEATTLE 545-7319
HEARING IMPAIRED
TTY/TDD SERVICE 1-800-438-8718
SAFECO MUTUAL FUNDS
NO-LOAD CLASS SHARES
P.O. BOX 34890
SEATTLE, WA. 98124-1890
All telephone calls are tape-recorded for your protection.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
THE U.S. GOVERNMENT OR ANY BANK, NOR ARE FUND SHARES FEDERALLY INSURED OR
OTHERWISE PROTECTED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY, AND FUND SHARES ARE SUBJECT TO INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
No dealer, salesperson or other person has been authorized to give any
information or to make any representation, other than those contained in this
Prospectus, and, if given or made, such other information or representations
must not be relied upon as having been authorized by either Trust, any Fund, or
by SAFECO Securities. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy by any Trust, any Fund, or by SAFECO Securities
in any state in which such offer or solicitation may not lawfully be made.
2
<PAGE>
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND ("Intermediate Treasury Fund") has
as its investment objective to provide as high a level of current income as is
consistent with the preservation of capital. During normal market conditions,
the Fund will invest at least 65% of its total assets in direct obligations of
the U.S. Treasury.
SAFECO GNMA FUND ("GNMA Fund") has as its investment objective to provide as
high a level of current interest income as is consistent with the preservation
of capital through the purchase of U.S. Government securities. During normal
market conditions, the Fund will invest at least 65% of its total assets in
Government National Mortgage Association ("GNMA") mortgage-backed securities.
SAFECO HIGH-YIELD BOND FUND ("High-Yield Bond Fund") has as its investment
objective to provide a high level of current interest income through the
purchase of high-yield, fixed-income securities. During normal market
conditions, the Fund will invest at least 65% of its total assets in high-yield,
fixed-income securities.
SAFECO MANAGED BOND FUND ("Managed Bond Fund") has as its investment objective
to provide as high a level of total return as is consistent with the relative
stability of capital through the purchase of investment grade debt securities.
There is no assurance that a Fund will achieve its investment objective.
3
<PAGE>
TABLE OF CONTENTS
Page
INTRODUCTION TO THE TRUSTS AND THE FUNDS . . . . . . . . . . . . . . . . . . 5
EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
EACH FUND'S INVESTMENT OBJECTIVE AND POLICIES. . . . . . . . . . . . . . . . 13
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
PORTFOLIO MANAGERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
HOW TO PURCHASE SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
HOW TO REDEEM SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
HOW TO SYSTEMATICALLY PURCHASE OR REDEEM SHARES. . . . . . . . . . . . . . . 30
HOW TO EXCHANGE SHARES FROM ONE FUND TO ANOTHER. . . . . . . . . . . . . . . 30
TELEPHONE TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
TRANSACTIONS THROUGH REGISTERED INVESTMENT ADVISERS. . . . . . . . . . . . . 33
SHARE PRICE CALCULATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 33
INFORMATION ABOUT SHARE OWNERSHIP AND
COMPANIES THAT PROVIDE SERVICES TO THE TRUSTS. . . . . . . . . . . . . . . . 34
PERSONS CONTROLLING CERTAIN FUNDS. . . . . . . . . . . . . . . . . . . . . . 36
PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 37
FUND DISTRIBUTIONS AND HOW THEY ARE TAXED. . . . . . . . . . . . . . . . . . 37
TAX-DEFERRED RETIREMENT PLANS. . . . . . . . . . . . . . . . . . . . . . . . 39
ACCOUNT STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
ACCOUNT CHANGES AND SIGNATURE REQUIREMENTS . . . . . . . . . . . . . . . . . 40
DEBT SECURITIES HELD BY THE HIGH-YIELD BOND FUND . . . . . . . . . . . . . . 41
DESCRIPTION OF RATINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
4
<PAGE>
__________________________________________________
INTRODUCTION TO THE TRUSTS AND THE FUNDS
__________________________________________________
The Taxable Bond Trust is an open-end management investment company that issues
shares representing three diversified mutual funds: the Intermediate Treasury
Fund, the GNMA Fund and the High-Yield Bond Fund (collectively, the "Taxable
Bond Funds").
The Managed Bond Trust is an open-end management investment company that
currently issues shares representing one diversified mutual fund: the Managed
Bond Fund (each Taxable Bond Fund and the Managed Bond Fund, a "Fund"). Prior
to September 30, 1996, the name of the Managed Bond Fund was the SAFECO Fixed-
Income Portfolio and the name of the Managed Bond Trust was the SAFECO
Institutional Series Trust.
THE FUNDS
No-Load Class shares of each Fund are offered through this Prospectus. Each
Fund, except the GNMA Fund, also offers other classes of shares.
The No-Load Class of each Fund:
- - Is 100% no-load; there are no initial or contingent deferred sales charges
or Rule 12b-1 fees.
- - Offers free exchanges as well as easy access to your money through
telephone redemptions and wire transfers.
- - Has a minimum initial investment of $1,000 for regular accounts, $250 for
individual retirement accounts ("IRAs") and accounts established under the
Uniform Gift to Minors Act ("UGMA") or Uniform Transfer to Minors Act
("UTMA").
RISK FACTORS
There is, of course, no assurance that a Fund will achieve its investment
objective. See "Each Fund's Investment Objective and Policies" for more
information.
There is a risk that the market value of each Fund's portfolio of securities may
decrease and result in a decrease in the value of a shareholder's investment.
Also, the value of a Fund's portfolio will normally fluctuate inversely with
changes in interest rates. In addition, the High-Yield Bond Fund is subject to
special risks associated with below investment grade securities, sometimes
referred to as "junk" bonds, which it will purchase to pursue its investment
objective. See "Each Fund's Investment Objective and Policies" for more
information.
5
<PAGE>
INVESTMENT ADVISER
Each Fund is managed by SAFECO Asset Management Company ("SAM"). SAM is
headquartered in Seattle, Washington and managed over $2 billion in mutual fund
assets as of November 30, 1996. SAM has been an adviser to mutual funds and
other investment portfolios since 1973 and its predecessors have been advisers
since 1932. See "Information about Share Ownership and Companies that Provide
Services to the Trusts" for more information.
__________
EXPENSES
__________
A. SHAREHOLDER TRANSACTION EXPENSES FOR THE NO-LOAD CLASS OF EACH FUND
Sales Charge
Sales Charge Imposed on Contingent
Imposed on Reinvested Deferred Redemption Exchange
Purchases Dividends Sales Charge Fees Fees
---------- --------- ------------ ------ ------
None None None None None
SAFECO Services Corporation ("SAFECO Services"), the transfer agent for the
Funds, charges a $10 fee to wire redemption proceeds.
B. ANNUAL OPERATING EXPENSES FOR THE NO-LOAD CLASS OF EACH FUND
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Total
Management Rule Other Operating
Fund Fee + 12b-1 Fees + Expenses = Expenses
---- -------- ---------- -------- --------
Intermediate
Treasury .55% None .46% 1.01%
GNMA .64% None .39% 1.03%
High-Yield Bond .62% None .32% .94%
Managed Bond .49% None .67% 1.16%
The amounts shown are actual expenses paid by shareholders for the fiscal year
ended September 30, 1996 for the Taxable Bond Funds and December 31, 1995 for
the Managed Bond Fund. See "Information about Share Ownership and Companies that
Provide Services to the Trusts" for more information.
6
<PAGE>
C. EXAMPLE OF EXPENSES
You would pay the following expenses on a $1,000 investment in No-Load Class
shares, assuming a 5% annual return. The example also assumes that all
dividends and other distributions are reinvested and that the percentage amounts
listed in "Annual Operating Expenses" above remain the same in the years shown.
Fund 1 Year 3 Years 5 Years 10 Years
---- ------ ------- ------- --------
Intermediate
Treasury $10.30 $32.15 $55.79 $123.62
GNMA $10.50 $32.78 $56.86 $125.94
High-Yield
Bond $9.59 $29.96 $52.01 $115.47
Managed Bond $11.82 $36.85 $63.83 $140.90
The purpose of the table is to assist you in understanding the various costs and
expenses that an investor in No-Load Class shares of each Fund would bear,
directly or indirectly. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES. A FUND'S ACTUAL EXPENSES OR PERFORMANCE MAY BE
GREATER OR LESS THAN THOSE SHOWN. THE ASSUMED 5% ANNUAL RETURN IS REQUIRED BY
SECURITIES AND EXCHANGE COMMISSION REGULATIONS APPLICABLE TO ALL MUTUAL FUNDS,
AND IT IS NOT A PREDICTION OF, NOR DOES IT REPRESENT, PAST OR FUTURE EXPENSES OR
THE PERFORMANCE OF ANY FUND.
7
<PAGE>
________________________________________
FINANCIAL HIGHLIGHTS
________________________________________
The amounts shown for each Fund in the Financial Highlights tables that follow
are based upon a single share outstanding throughout the period indicated. The
following selected data has been derived from financial statements that have
been audited by Ernst & Young LLP, independent auditors. The data should be
read in conjunction with the financial statements, related notes, and other
financial information included in each Trust's Annual and Semi-Annual Report
to shareholders and incorporated by reference in each Trust's Statement
of Additional Information. The following selected data for the six month
period ended June 30, 1996 (Managed Bond Fund) has been derived from unaudited
financial statements. The data should be read in conjunction with the
financial statements, related notes, and other financial information included
in the Trust's Semi-Annual Report to shareholders and incorporated by reference
in the Trust's Statement of Additional Information. A copy of each of the
Trusts' Statements of Additional Information may be obtained by calling one of
the numbers on the front page of this Prospectus.
8
<PAGE>
FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
<TABLE>
<CAPTION>
For the
Period
From
September
7, 1988
For the Year Ended September 30
(Initial
Public
Offering)
To
September
1996 1995 1994 1993 1992 1991 1990 1989 30, 1988
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning $10.24 $9.74 $10.74 $10.69 $10.20 $9.83 $9.96 $9.95 $9.93
of period
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .54 .55 .52 .60 .72 .75 .77 .77 .05
Net realized and unrealized
gain (loss) on investments (.14) .50 (1.00) .49 .54 .37 (.13) .01 .02
----- ---- ------ ------ ----- ---- ----- ---- ----
Total from investment .40 1.05 (.48) 1.09 1.26 1.12 .64 .78 .07
operations ----- ---- ------ ------ ----- ---- ----- ---- ----
LESS DISTRIBUTIONS:
Dividends from net
investment income (.54) (.55) (.52) (.60) (.72) (.75) (.77) (.77) (.05)
Distributions from capital -- -- -- (.44) (.05) -- -- -- --
gains ----- ---- ------ ------ ----- ---- ----- ---- ----
Total distributions (.54) (.55) (.52) (1.04) (.77) (.75) (.77) (.77) (.05)
----- ---- ------ ------ ----- ---- ----- ---- ----
Net asset value at end of
period $10.10 $10.24 $9.74 $10.74 $10.69 $10.20 $9.83 $9.96 $9.95
------ ------ ------ ------ ------ ------ ----- ----- -----
------ ------ ------ ------ ------ ------ ----- ----- -----
Total return 4.00% 11.07% -4.56% 10.51% 12.78% 11.80% 6.65% 8.20% .69%+
Net assets at end of period
(000's omitted) $14,668 $13,774 $13,367 $14,706 $12,205 $9,458 $6,916 $6,249 $5,007
Ratio of expenses to average 1.01 % .96% .90% .99% .98% 1.00% 1.00% .96% 1.06%++
net assets
Ratio of net investment
income to average net assets 5.30% 5.51% 5.08% 5.52% 6.89% 7.45% 7.76% 7.82% 7.46%++
Portfolio turnover rate 294.25% 124.9% 75.46% 104.94% 37.19% 9.51% 24.17% 4.36% None
</TABLE>
+ Not annualized.
++ Annualized.
9
<PAGE>
FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO GNMA FUND
<TABLE>
<CAPTION>
For the Year Ended September 30
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning
of period $9.45 $9.05 $10.03 $9.95 $9.68 $9.16 $9.23 $9.06 $9.13 $10.00
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .60 .60 .60 .67 .73 .78 .76 .81 .87 .82
Net realized and unrealized
gain (loss) on investments (.19) .40 (.98) .08 .27 .52 (.07) .17 (.07) (.87)
----- ----- ----- ------ ----- ----- ----- ----- ----- -----
Total from investment
operations .41 1.00 (.38) .75 1.00 1.30 .69 .98 .80 (.05)
----- ----- ----- ------ ----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS:
Dividends from net investment
income (.60) (.60) (.60) (.67) (.73) (.78) (.76) (.81) (.87) (.82)
----- ----- ----- ------ ----- ----- ----- ----- ----- -----
Net asset value at end of
period $9.26 $9.45 $9.05 $10.03 $9.95 $9.68 $9.16 $9.23 $9.06 $9.13
----- ----- ----- ------ ----- ----- ----- ----- ----- -----
----- ----- ----- ------ ----- ----- ----- ----- ----- -----
Total return 4.48% 11.49% -3.91% 7.81% 10.75% 14.72% 7.77% 11.25% 9.05% -.63%
Net assets at end of period
(000's omitted) 39,703 $44,055 $46,176 $62,720 $56,474 $42,207 $28,587 $27,063 $27,724 $20,257
Ratio of expenses to average
net assets 1.03% 1.01% .95% .93% .94% .97% .99% 1.02% 1.06% 1.05%
Ratio of net investment
income to average net assets 6.42% 6.55% 6.26% 6.71% 7.49% 8.23% 8.28% 8.83% 9.51% 8.59%
Portfolio turnover rate 47.75% 131.24% 55.12% 70.96% 24.66% 43.80% 90.19% 77.39% 109.53% 100.96%
</TABLE>
* Unaudited
+ Not annualized.
++ Annualized.
10
<PAGE>
FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO HIGH-YIELD BOND FUND
<TABLE>
<CAPTION>
For the
Period From
September 7
, 1988
For the Year Ended September 30 (Initial
Public
Offering)
To
September
1996 1995 1994 1993 1992 1991 1990 1989 30, 1988
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning $8.68 $8.55 $9.22 $8.92 $8.35 $7.94 $9.33 $9.86 $9.89
of period
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .78 .79 .82 .91 .83 .93 1.04 1.11 .07
Net realized and unrealized
gain (loss) on investments .11 .13 (.67) .30 .57 .41 (1.39) (.53) (.03)
----- ----- ----- ----- ----- ----- ----- ----- -----
Total from investment
operations .89 .92 .15 1.21 1.40 1.34 (.35) .58 .04
----- ----- ----- ----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS:
Dividends from net investment
income (.78) (.79) (.82) (.91) (.83) (.93) (1.04) (1.11) (.07)
----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value at end of
period $8.79 $8.68 $8.55 $9.22 $8.92 $8.35 $7.94 $9.33 $9.86
----- ----- ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- ----- -----
Total return 10.79% 11.43% 1.61% 14.29% 17.52% 18.18% -4.04% 6.10% .37%+
Net assets at end of period
(000's omitted) $47,880 $39,178 $27,212 $28,291 $19,672 $11,931 $7,786 $9,051 $5,204
Ratio of expenses to average
net assets .94% 1.01% 1.03% 1.09% 1.05% 1.11% 1.15% 1.11% 1.25%++
Ratio of net investment
income to average net assets 8.99% 9.28% 9.26% 9.94% 9.66% 11.51% 11.90% 11.52% 10.27%++
Portfolio turnover rate 92.65% 38.03% 63.02% 50.27% 40.66% 32.46% 18.46% 12.57% None
</TABLE>
+ Not annualized.
++ Annualized.
11
<PAGE>
FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO MANAGED BOND FUND
<TABLE>
<CAPTION>
For the Period From
For the Six February 28, 1994
Month Period Ended For the Year Ended (Initial Public Offering) To
June 30, 1996 (unaudited) December 31, 1995 December 31, 1994
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value at beginning of period $8.77 $8.15 $8.68
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.20 .44 .27
Net realized and unrealized
gain (loss) on investments (0.42) .94 (.53)
------ ----- ------
Total from investment operations (0.22) 1.38 (.26)
------ ----- ------
DISTRIBUTIONS TO SHAREHOLDERS
FROM:
Net investment income (0.20) (.44) (.27)
Realized gains on investments -- (.32) --
------ ----- ------
Total distributions (0.20) (.76) (.27)
------ ----- ------
Net asset value at end of period $8.35 $8.77 $8.15
------ ----- ------
------ ----- ------
Total return -2.55%+ 17.35% -3.01%+
Net assets at end of period (000's omitted) $4,114 $4,497 $4,627
Ratio of expenses to average net assets 1.17%++ 1.16% 1.28%++
Ratio of net investment income to
average net assets 4.64%++ 5.14% 3.88%++
Portfolio turnover rate 117.13%++ 78.78% 132.26%++
</TABLE>
+ Not annualized.
++ Annualized.
12
<PAGE>
________________________________________________________
EACH FUND'S INVESTMENT OBJECTIVE AND POLICIES
________________________________________________________
Each Trust is a Delaware business trust established by a Trust Instrument dated
May 13, 1993.
The investment objective and investment policies for each Fund are described
below. A Trust's Board of Trustees may change a Fund's objective without a
shareholder vote, but no such change will be made without 30 days' prior written
notice to shareholders of that Fund. In the event a Fund changes its investment
objective, the new objective may not meet the investment needs of every
shareholder and may be different from the objective a shareholder considered
appropriate at the time of initial investment.
Each Fund has adopted a number of investment restrictions. If a Fund satisfies
a percentage limitation at the time of investment, a later increase or decrease
in value, assets or other circumstances will not be considered in determining
whether a Fund complies with the applicable policy (except to the extent the
change may impact a Fund's borrowing limits). Unless otherwise stated, the
investment policies and limitations described below under each Fund's
description and "Common Investment Practices" are non-fundamental and may be
changed without a shareholder vote.
INTERMEDIATE TREASURY FUND
The Intermediate Treasury Fund has as its investment objective to provide as
high a level of current income as is consistent with the preservation of
capital. The Intermediate Treasury Fund will seek to maintain a portfolio of
U.S. Treasury obligations with an average dollar weighted maturity of between
three and ten years; however, individual obligations held by the Intermediate
Treasury Fund may have maturities outside that range.
To pursue its investment objective, the Intermediate Treasury Fund:
1. WILL INVEST, DURING NORMAL MARKET CONDITIONS, AT LEAST 65% OF ITS TOTAL
ASSETS IN DIRECT OBLIGATIONS OF THE U.S. TREASURY SUCH AS U.S. TREASURY
BILLS, NOTES AND BONDS. The Intermediate Treasury Fund may also invest in
stripped securities that are direct obligations of the U.S. Treasury.
Direct obigations of the U.S. Treasury are supported by the full faith and
credit of the U.S. Government.
2. WILL INVEST UP TO 35% OF ITS TOTAL ASSETS IN:
OTHER U.S. GOVERNMENT SECURITIES, including (a) securities supported by the
full faith and credit of the U.S. Government but that are not direct
obligations of the U.S. Treasury, such
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<PAGE>
as securities issued by GNMA; (b) securities that are not supported by the
full faith and credit of the U.S. Government but are supported by the
issuer's ability to borrow from the U.S. Treasury, such as securities
issued by the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC"); and (c) securities
supported solely by the creditworthiness of the issuer, such as securities
issued by the Tennessee Valley Authority ("TVA"). While U.S. Government
securities are considered to be of the highest credit quality available,
they are subject to the same market risks as comparable debt securities.
CORPORATE DEBT SECURITIES which at the time of purchase are rated in the
top three grades (A or higher) by either Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Services, a division of The McGraw
Hill Companies, Inc. ("S&P"), or, if unrated, determined by SAM to be of
comparable quality to such rated debt securities. In addition to reviewing
ratings, SAM will analyze the quality of rated and unrated corporate bonds
for purchase by the Fund by evaluating various factors that may include the
issuer's capital structure, earnings power and quality of management. See
"Description of Ratings" beginning on page.
3. MAY INVEST UP TO 5% OF ITS TOTAL ASSETS IN YANKEE SECTOR DEBT SECURITIES,
EURODOLLAR BONDS AND MUNICIPAL SECURITIES. See the Statement of
Additional Information for more information about these securities.
GNMA FUND
The investment objective of the GNMA Fund is to provide as high a level of
current interest income as is consistent with the preservation of capital
through the purchase of U.S. Government securities.
To pursue its investment objective, the GNMA Fund:
1. WILL INVEST, DURING NORMAL MARKET CONDITIONS, AT LEAST 65% OF ITS PORTFOLIO
IN MORTGAGE-BACKED SECURITIES ISSUED BY GNMA ("GNMA SECURITIES"). The GNMA
securities in which the GNMA Fund will invest represent ownership in a pool
of mortgage loans or securities collateralized by pools of mortgage loans.
Each mortgage loan in the pool is either insured by the Federal Housing
Administration or the Farmers Home Administration or guaranteed by the
Veterans Administration. Once approved by GNMA, the timely payment of
principal and interest by each mortgage pool is guaranteed by GNMA. The
GNMA guarantee represents a general obligation of the U.S. Treasury.
GNMA securities in which the GNMA Fund may invest include "modified pass-
through" securities or collateralized mortgage obligations ("CMOs").
Modified pass-through securities "pass through" to their holders the
scheduled monthly interest and principal payments relating to mortgage
loans in the pool. CMOs are securities collateralized by a portfolio of
mortgage loans or mortgage-backed securities. CMOs are issued with a
number
14
<PAGE>
of classes or series which have different maturities and which may
represent interests in some or all of the interest or principal of the
underlying collateral or a combination thereof. One type of CMO that the
GNMA Fund will purchase is interests in real estate mortgage investment
conduits ("REMICs") sponsored by GNMA.
CMO classes may be specially structured in a manner that provides any of a
wide variety of investment characteristics, such as yield, effective
maturity and interest rate sensitivity. As market conditions change,
however, and particularly during periods of rapid or unanticipated changes
in market interest rates, the attractiveness of the CMO classes and the
ability of the structure to provide the anticipated investment
characteristics may significantly change. Such changes can result in
volatility in the market value, and in some instances reduced liquidity, of
the CMO class.
While the market values of particular securities in which the GNMA Fund
invests may be volatile, or may become volatile under certain conditions,
SAM will seek to manage the Fund so that the volatility of the Fund's
portfolio, taken as a whole, is consistent with the Fund's investment
objective. Unanticipated interest rate changes and other factors may
affect the volatility of securities held by the Fund and the Fund's ability
to fully meet its investment objective.
2. MAY INVEST UP TO 35% OF ITS TOTAL ASSETS IN:
OTHER U.S. GOVERNMENT SECURITIES, including (a) securities backed by the
full faith and credit of the U.S. Government, such as U.S. Treasury bills,
notes and bonds; (b) securities issued by U.S. Government agencies or
instrumentalities that are not backed by the full faith and credit of the
U.S. Government but are supported by the issuer's right to borrow from the
U.S. Treasury, such as securities issued by FNMA and FHLMC; and (c)
securities supported solely by the creditworthiness of the issuer, such as
securities issued by TVA. While U.S. Government securities are considered
to be of the highest credit quality available, they are subject to the same
market risks as comparable debt securities.
OTHER COLLATERALIZED MORTGAGE OBLIGATIONS issued by the U.S. Government or
one of its agencies or instrumentalities (such as FNMA or FHLMC) or by
private issuers which are collateralized by securities issued by the U.S.
Government or one of its agencies or instrumentalities (such as FNMA or
FHLMC). CMOs are securities collateralized by a portfolio of mortgages or
mortgage-backed securities. The issuer's obligation to make interest and
principal payments on the CMO is secured by the underlying portfolio of
mortgages or mortgage-backed securities. CMOs are issued with a number of
classes or series that have different maturities and that may represent
interests in some or all of the interest or principal of the underlying
collateral or a combination thereof.
CORPORATE DEBT SECURITIES which are investment grade. Investment grade
corporate debt securities are rated in one of the four highest grades
assigned by Moody's or S&P or, if
15
<PAGE>
unrated, determined by SAM to be of comparable quality to such rated debt
securities. Moody's deems securities rated in the fourth category (Baa) to
have speculative characteristics. The GNMA Fund may retain a debt security
which is downgraded to below investment grade after purchase. In the event
that, due to a downgrade of one or more debt securities, an amount in
excess of 5% of the Fund's net assets is held in securities rated below
investment grade, SAM will engage in an orderly disposition of such
securities to the extent necessary to ensure that the Fund's holdings of
such securities do not exceed 5% of the Fund's net assets. For an
explanation of ratings, see "Description of Ratings" on page 42.
HIGH-YIELD BOND FUND
The High-Yield Bond Fund has as its investment objective to provide a high level
of current interest income through the purchase of high-yield, fixed-income
securities. The higher yields that the Fund seeks are usually available from
lower-rated or unrated securities sometimes referred to as "junk bonds." The
maturity of the debt obligations held by the Fund may range from 1 to 30 years.
However, it is anticipated that the majority of debt obligations will have
maturities from 5 to 15 years.
To pursue its investment objective, the High-Yield Bond Fund:
1. WILL INVEST, DURING NORMAL MARKET CONDITIONS, AT LEAST 65% OF ITS PORTFOLIO
IN HIGH-YIELD, FIXED-INCOME SECURITIES. The High-Yield Bond Fund may
purchase debt and preferred stock issues (including convertible securities)
which are below investment grade, i.e., rated lower than the top four
grades by S&P or Moody's, or, if not rated by these agencies, in the
opinion of SAM, have credit characteristics comparable to such rated
securities. Up to 25% of the Fund's total assets may be invested in such
unrated securities. SAM will determine the quality of unrated obligations
by evaluating the issuer's capital structure, earnings power and quality of
management. Unrated securities may not be as attractive to as many
investors as rated securities. In addition, the Fund may invest up to 5%
of its total assets in securities which are in default. The Fund will
purchase securities which are in default only when, in SAM's opinion, the
potential for high yield outweighs the risk.
While fixed-income securities rated lower than investment grade generally
lack characteristics of a desirable investment, they normally offer a
current yield or yield-to-maturity which is significantly higher than the
yield available from securities rated as investment grade. These
securities are speculative and involve greater investment risks due to the
issuers' reduced creditworthiness and increased likelihood of default and
bankruptcy. In addition, these securities are frequently subordinated to
senior securities. For further explanation of the special risks associated
with investing in lower-rated, fixed-income securities, see "Risk Factors"
on page 22.
For a description of debt ratings, see "Description of Ratings" on page.
For a breakdown of the debt securities held by the High-Yield Bond Fund
during the fiscal year
16
<PAGE>
ended September 30, 1996, see "Debt Securities Held by the High-Yield Bond Fund"
on page 41.
The High-Yield Bond Fund may retain an issue whose rating has been changed.
2. MAY INVEST IN FIXED-INCOME SECURITIES WITH EQUITY FEATURES WHEN COMPARABLE
IN YIELD AND RISK TO FIXED-INCOME SECURITIES WITHOUT EQUITY FEATURES, BUT
ONLY WHEN ACQUIRED AS A RESULT OF UNIT OFFERINGS WHICH CARRY AN EQUITY
ELEMENT SUCH AS COMMON STOCK, RIGHTS OR OTHER EQUITY SECURITIES. The Fund
will hold these common stocks, rights or other equity securities until SAM
determines that, in its opinion, the optimal time for sale of the equity
security has been reached.
3. MAY INVEST UP TO 10% OF ITS 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. Restricted securities may be sold only in offerings
registered under the Securities Act of 1933 ("1933 Act") or in transactions
exempt from the registration requirements under the 1933 Act. Rule 144A
under the 1933 Act provides an exemption for the resale of certain
restricted securities to qualified institutional buyers. Investing in Rule
144A securities could have the effect of increasing the Fund's illiquidity
to the extent that qualified institutional buyers or other buyers are
unwilling to purchase the securities.
4. MAY INVEST UP TO 5% OF ITS TOTAL ASSETS IN MUNICIPAL SECURITIES WHICH ARE
RATED LOWER THAN THE TOP THREE GRADES ASSIGNED BY MOODY'S OR S&P OR ARE
UNRATED BUT COMPARABLE TO SUCH RATED SECURITIES IF, IN THE OPINION OF SAM,
THE POTENTIAL FOR APPRECIATION IS GREATER THAN, AND YIELD IS COMPARABLE TO
OR GREATER THAN, SIMILARLY-RATED TAXABLE SECURITIES. Investment in medium
and lower quality tax-exempt bonds involves the same risks as investments
in taxable bonds of similar quality.
5. MAY INVEST IN OBLIGATIONS OF, OR GUARANTEED BY, THE U.S. GOVERNMENT, ITS
AGENCIES OR INSTRUMENTALITIES OR IN FIXED-INCOME SECURITIES WHICH ARE RATED
IN THE FOUR HIGHEST GRADES ASSIGNED BY MOODY'S OR S&P DURING MARKET
CONDITIONS WHICH, IN THE OPINION OF SAM, ARE UNFAVORABLE FOR SATISFACTORY
PERFORMANCE BY LOWER-RATED OR UNRATED FIXED-INCOME SECURITIES. The Fund
may invest in higher-rated securities when changing economic conditions or
other factors cause the difference in yield between lower-rated and higher-
rated securities to narrow and SAM believes that the risk of loss to
principal may be substantially reduced with a small reduction in yield.
17
<PAGE>
MANAGED BOND FUND
The Managed Bond Fund has as its investment objective to provide as high a level
of total return as is consistent with the relative stability of capital through
the purchase of investment grade debt securities.
In pursuing the Managed Bond Fund's investment objective, SAM will seek to
minimize the effects of interest rate risks while pursuing total return by
adjusting the investment portfolio's average maturity in response to interest
rate changes. In general, the Managed Bond Fund's strategy will be to hold
fixed-income securities with shorter maturities as interest rates rise and with
longer maturities as interest rates fall. The fixed-income securities held by
the Managed Bond Fund will have maturities of 10 years or less from the date of
purchase. SAM reserves the right to modify the Managed Bond Fund's investment
strategy in any respect at any time.
To pursue its investment objective, the Managed Bond Fund:
1. WILL INVEST AT LEAST 65% OF ITS TOTAL ASSETS IN BONDS, DEFINED AS FIXED-
INCOME SECURITIES.
2. WILL INVEST PRIMARILY IN INVESTMENT GRADE DEBT SECURITIES; I.E., SECURITIES
RATED IN THE TOP FOUR CATEGORIES BY EITHER S&P OR MOODY'S OR IF NOT RATED,
SECURITIES WHICH, IN SAM'S OPINION, ARE COMPARABLE IN QUALITY TO INVESTMENT
GRADE DEBT SECURITIES. Included in such securities are medium grade debt
securities. The Fund will limit investments in such medium grade debt
securities to no more than 10% of its total assets. Unrated securities are
not necessarily of lower quality than rated securities, but may not be as
attractive to investors.
The Fund may retain debt securities which are downgraded to below
investment grade (commonly referred to as "high yield" or "junk" bonds)
after purchase. In the event that due to a downgrade of one or more debt
securities an amount in excess of 5% of the Fund's net assets is held in
securities rated below investment grade, SAM will engage in an orderly
disposition of such securities to the extent necessary to reduce the Fund's
holdings of such securities to no more than 5% of the Fund's net assets.
In addition to reviewing ratings, SAM may analyze the quality of rated and
unrated debt securities purchased for the Fund by evaluating the issuer's
capital structure, earnings power, quality of management and position
within its industry. For a description of debt securities ratings, see
"Description of Ratings" on page 42.
3. WILL INVEST AT LEAST 50% OF ITS TOTAL ASSETS IN OBLIGATIONS OF OR
GUARANTEED BY THE U.S. GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES.
These obligations include (a) direct obligations of the U.S. Treasury, such
as U.S. Treasury notes, bills, bonds and stripped securities; (b)
securities supported by the full faith and credit of the U.S. Government
but that are not direct obligations of the U.S. Treasury, such as
securities issued by GNMA; (c) securities that are not supported by the
full faith and credit of the U.S. Government but are supported by the
issuer's ability to borrow from the U.S. Treasury, such as securities
issued by the FNMA and the FHLMC and (d) securities supported solely by the
creditworthiness of the issuer, such as securities issued by the TVA.
While U.S. Government securities are
18
<PAGE>
considered to be of the highest credit quality available, they are subject to
the same market risks as comparable debt securities.
4. MAY INVEST UP TO 50% OF ITS TOTAL ASSETS IN CORPORATE DEBT SECURITIES OR
EURODOLLAR BONDS. 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. The Fund will purchase Eurodollar bonds
through U.S. securities dealers and hold such bonds in the United States.
The delivery of Eurodollar bonds to the Fund's custodian in the United
States may cause slight delays in settlement which are not anticipated to
affect the Fund in any material, adverse manner. Eurodollar bonds issued
by foreign issuers are subject to the same risks as Yankee sector bonds
discussed below.
5. MAY INVEST IN ASSET-BACKED SECURITIES, WHICH 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. 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 is
the risk that one or more of the underlying borrowers may default and that
recovery on repossessed collateral may be unavailable or inadequate to
support payments on the defaulted asset-backed securities. In addition,
asset-backed securities are subject to prepayment risks which may reduce
the overall return of the investment.
6. MAY INVEST UP TO 10% OF ITS TOTAL ASSETS IN YANKEE SECTOR DEBT SECURITIES,
WHICH ARE SECURITIES ISSUED AND TRADED IN THE UNITED STATES BY FOREIGN
ISSUERS. These bonds have investment risks that are different from those
of domestic issuers. Such risks may include nationalization of the issuer,
confiscatory taxation by the foreign government that would inhibit the
ability of the issuer to make principal and interest payments to the Fund,
lack of comparable publicly available information concerning foreign
issuers, lack of comparable accounting and auditing practices in foreign
countries and, finally, difficulty in enforcing claims against foreign
issuers in the event of default.
Both S&P and Moody's rate Yankee sector debt obligations. If a debt
obligation is unrated, SAM will attempt to analyze a potential investment
in the foreign issuer with respect to quality and risk on the same basis as
the rating services. Because public information is not always comparable
to that available on domestic issuers, this may not be possible.
Therefore, while SAM will attempt to select investments in foreign
securities on the same basis, and with comparable quantities and types of
information, as its investments in domestic securities, that may not always
be possible.
7. MAY HOLD CASH AS A TEMPORARY DEFENSIVE MEASURE WHEN MARKET CONDITIONS SO
WARRANT.
19
<PAGE>
8. MAY INVEST UP TO 5% OF ITS TOTAL ASSETS IN MUNICIPAL SECURITIES IF, IN
SAM'S OPINION, THE POTENTIAL FOR APPRECIATION IS GREATER THAN, AND YIELD IS
COMPARABLE TO OR GREATER THAN, SIMILARLY RATED TAXABLE SECURITIES.
COMMON INVESTMENT PRACTICES
Each Fund may also follow the investment practices described below:
1. HOLD CASH OR INVEST TEMPORARILY IN HIGH QUALITY, SHORT-TERM SECURITIES
ISSUED BY AN AGENCY OR INSTRUMENTALITY OF THE U.S. GOVERNMENT, HIGH QUALITY
COMMERCIAL PAPER, CERTIFICATES OF DEPOSIT, SHARES OF NO-LOAD, OPEN-END
MONEY MARKET FUNDS OR REPURCHASE AGREEMENTS. A Fund may purchase these
short-term securities as a cash management technique under those
circumstances where it has cash to manage for a short time period, for
example, after receiving proceeds from the sale of securities, interest
payments or dividend distributions from portfolio securities or cash from
the sale of Fund shares to investors. Interest earned from these short-
term securities will be taxable to investors as ordinary income when
distributed. The Managed Bond Fund will invest no more than 5% of its total
assets in repurchase agreements and will not purchase repurchase agreements
which mature in more than seven days. Each Taxable Bond Fund will limit
investments in repurchase agreement transactions to 10% of the Fund's net
assets. See "Fundamental Policies" below for more information about the
Taxable Bond Funds' investments in repurchase agreement transactions.
2. INVEST FOR SHORT-TERM PURPOSES WHEN SAM BELIEVES SUCH ACTION TO BE
DESIRABLE AND CONSISTENT WITH SOUND INVESTMENT PRACTICES. No Fund, however,
will engage primarily in trading for the purpose of short-term profits. A
Fund may dispose of its portfolio securities whenever SAM deems advisable,
without regard to the length of time the securities have been held.
3. PURCHASE OR SELL SECURITIES ON A "WHEN-ISSUED" OR "DELAYED-DELIVERY" BASIS.
Under this procedure, a Fund agrees to acquire or sell securities that are
to be issued and delivered against payment in the future, normally 30 to 45
days. The price, however, is fixed at the time of commitment. When a Fund
purchases when-issued or delayed-delivery securities, it will earmark
liquid, high-quality securities in an amount equal in value to the purchase
price of the security. Use of these techniques may affect a Fund's share
price in a manner similar to the use of leveraging.
FUNDAMENTAL POLICIES
Except as noted, the following restrictions are fundamental policies of each
Fund which cannot be changed without shareholder vote:
20
<PAGE>
1. EACH FUND, WITH RESPECT TO 75% OF THE VALUE OF ITS TOTAL ASSETS, MAY NOT
INVEST MORE THAN 5% OF ITS TOTAL ASSETS IN THE SECURITIES OF ANY ONE ISSUER
(OTHER THAN U.S. GOVERNMENT SECURITIES).
2. EACH FUND, WITH RESPECT TO 100% OF THE VALUE OF ITS TOTAL ASSETS, MAY NOT
PURCHASE MORE THAN 10% OF THE OUTSTANDING VOTING SECURITIES OF ANY ONE
ISSUER (OTHER THAN U.S. GOVERNMENT SECURITIES).
3. EACH FUND MAY BORROW MONEY ONLY FOR TEMPORARY OR EMERGENCY PURPOSES FROM A
BANK (OR SAFECO CORPORATION IN THE CASE OF THE TAXABLE BOND FUNDS) OR
AFFILIATES OF SAFECO CORPORATION AT AN INTEREST RATE NOT GREATER THAN THAT
AVAILABLE FROM COMMERCIAL BANKS. A Fund will not borrow amounts in excess
of 20% of its total assets. A Fund will not purchase securities if
outstanding borrowings are equal to or greater than 5% of its total assets
(this 5% policy is non-fundamental for the Managed Bond Fund). Each Fund
intends to exercise its borrowing authority primarily to meet shareholder
redemptions under circumstances where redemptions exceed available cash.
The Taxable Bond Funds have adopted the following additional fundamental
investment restrictions which cannot be changed without shareholder vote:
1. EACH TAXABLE BOND FUND MAY INVEST UP TO 10% (HIGH-YIELD BOND AND
INTERMEDIATE TREASURY FUNDS) AND 5% (GNMA FUND) OF ITS NET ASSETS IN
ILLIQUID SECURITIES, WHICH ARE SECURITIES THAT CANNOT BE SOLD WITHIN SEVEN
DAYS IN THE ORDINARY COURSE OF BUSINESS FOR APPROXIMATELY THE AMOUNT AT
WHICH THEY ARE VALUED. Due to the absence of an active trading market, a
Fund may experience difficulty in valuing or disposing of illiquid
securities. SAM determines the liquidity of the securities under
guidelines adopted by the Taxable Bond Trust's Board of Trustees.
2. EACH TAXABLE BOND FUND MAY INVEST UP TO 10% OF NET ASSETS IN REPURCHASE
AGREEMENT TRANSACTIONS. Repurchase agreements are transactions in which a
Fund purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date and price reflecting a market rate of interest unrelated
to the coupon rate or maturity of the purchased securities. Repurchase
agreements carry certain risks not associated with direct investments in
securities, including the risk that a Fund will be unable to dispose of the
security during the term of the repurchase agreement if the security's
market value declines, and delays and costs to a Fund if the other party to
the repurchase agreement declares bankruptcy.
For more information, see the "Investment Policies" and the "Additional
Investment Information" sections of each Trust's No-Load Class Statement of
Additional Information.
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<PAGE>
________________
RISK FACTORS
________________
There are market risks in all securities transactions. Various factors may
cause the value of a shareholder's investment in a Fund to fluctuate. The
principal risk factor associated with an investment in a mutual fund is that
the market value of the portfolio securities may decrease resulting in a
decrease in the value of a shareholder's investment. The value of a Fund's
portfolio will normally fluctuate inversely with changes in market interest
rates. Generally, when market interest rates rise, the price of the debt
securities held by a Fund will fall, and when market interest rates fall, the
price of the debt securities will rise. Also, there is a risk that the issuer
of a bond or other security held in a Fund's portfolio will fail to make timely
payments of principal and interest to the Fund. Included in investment grade
debt securities are securities of medium grade (rated Baa by Moody's or BBB by
S&P) which have speculative characteristics and are more likely to have a
weakened capacity to make principal and interest payments under changing
economic or other conditions than higher grade securities.
The prices of GNMA and other mortgage-backed securities, like conventional
fixed-income securities, are inversely affected by changes in interest rate
levels. Because of the likelihood of increased prepayments of mortgages in
times of declining interest rates, the GNMA securities held in a Fund's
portfolio have less potential for capital appreciation than comparable fixed-
income securities and may in fact decrease in value when interest rates fall.
Further, purchases of GNMA or other mortgage-backed securities for the GNMA Fund
are based on an anticipated prepayment rate. During periods of rising interest
rates, a decrease in the prepayment of mortgages is likely. This decrease may
cause the average dollar weighted maturity of particular securities held by the
GNMA Fund and the GNMA Fund's portfolio as a whole to increase, thereby
increasing the overall volatility of the Fund's share price during periods of
rising interest rates. To the extent that the other Funds purchase GNMA or
other mortgage-backed securities, they would be similarly affected.
The Managed Bond Fund may invest in stripped securities that are obligations
issued by the U.S. Treasury. Stripped securities are the separate income or
principal components of a debt security. The risks associated with stripped
securities are similar to those of other debt securities, although stripped
securities may be more volatile than other debt securities.
SPECIAL RISKS OF THE HIGH-YIELD BOND FUND
The High-Yield Bond Fund invests primarily in high-yield, fixed-income
securities which are subject to the following risks:
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<PAGE>
SENSITIVITY TO ECONOMIC AND CORPORATE DEVELOPMENTS
Yields on high-yield, fixed-income securities will fluctuate over time. During
periods of economic uncertainty or change, the market prices of high-yield,
fixed-income securities may experience increased volatility, which may in turn
cause the net asset value ("NAV") per share of the High-Yield Bond Fund to be
volatile. Lower-quality, fixed-income securities tend to reflect short-term
economic and corporate developments to a greater extent than higher-quality
securities which primarily react to fluctuations in interest rates. Economic
downturns or increases in interest rates can significantly affect the market for
high-yield, fixed-income securities and the ability of issuers to timely repay
principal and interest, increasing the likelihood of defaults. Lower-quality
securities include debt obligations issued as a part of capital restructurings,
such as corporate takeovers or buyouts. Capital restructurings generally
involve the issuance of additional debt on terms different from any current
outstanding debt. As a result, the issuer of the debt is more highly leveraged.
During an economic downturn or period of rising interest rates, a highly-
leveraged issuer may experience financial difficulties which adversely affect
its ability to make principal and interest payments, meet projected business
goals and obtain additional financing. In addition, the issuer will depend on
its cash flow and may depend, especially in the context of corporate takeovers,
on a sale of its assets to service debt. Failure to realize projected cash
flows or asset sales may seriously impair the issuer's ability to service this
greater debt load, which in turn might cause the Fund 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 following any restructuring, and close
monitoring of the issuer's progress toward its financial goals.
ZERO-COUPON AND PAYMENT-IN-KIND SECURITIES
The High-Yield Bond Fund may hold "zero-coupon" and "payment-in-kind"
fixed-income securities. Zero-coupon securities are purchased at a discount
without scheduled interest payments. Payment-in-kind securities receive
interest paid in additional securities rather than cash. The Fund accrues
income on these securities, but does not receive cash interest payments until
maturity or payment date. The Fund intends to distribute substantially all of
its income to its shareholders so that it can be treated as a regulated
investment company under current federal tax law. As a result, if its cash
position is depleted, the Fund may have to sell securities under disadvantageous
circumstances to obtain enough cash to meet its distribution requirement.
However, SAM does not expect non-cash income to materially affect the Fund's
operations. Zero-coupon and payment-in-kind securities are generally subject to
greater price fluctuations due to changes in interest rates than those fixed-
income securities paying cash interest on a schedule until maturity.
LIQUIDITY AND VALUATION
The liquidity and price of high-yield, fixed-income securities can be affected
by a number of factors, including investor perceptions and adverse publicity
regarding major issuers, underwriters or dealers of lower-quality corporate
obligations. These effects can be particularly pronounced in a thinly-
23
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traded market with few participants and may adversely impact the High-Yield Bond
Fund's ability to dispose of its securities as well as make valuation of
securities more difficult. Because there tend to be fewer investors in lower-
rated, fixed-income securities, it may be difficult for the Fund to sell these
securities at an optimum time. Consequently, lower-rated securities are subject
to more price changes, fluctuations in yield and risk to principal and income
than higher-rated securities of the same maturity. Judgment plays a greater
role in the valuation of thinly-traded securities.
CREDIT RATINGS
Rating agencies evaluate the likelihood that an issuer will make principal and
interest payments, but ratings may not reflect market value risks associated
with lower-rated, fixed-income securities. Also, rating agencies may not timely
revise ratings to reflect subsequent events affecting an issuer's ability to pay
principal and interest. SAM uses S&P and Moody's ratings as a preliminary
indicator of investment quality. SAM will periodically research and analyze
each issue (whether rated or unrated) and evaluate such factors as the issuer's
interest or dividend coverage, asset coverage, earnings prospects and managerial
strength. This analysis will help SAM to determine if the issuer has sufficient
cash flow and profits to meet required principal and interest payments and to
monitor the liquidity of the issue. Achievement of a Fund's investment
objective will be more dependent on SAM's credit analysis of bonds rated below
the three highest rating categories than would be the case were the Fund to
invest in higher quality debt securities. This is particularly true for the
High-Yield Bond Fund.
________________________
PORTFOLIO MANAGERS
________________________
INTERMEDIATE TREASURY FUND AND MANAGED BOND FUND
The portfolio manager for the Intermediate Treasury Fund and the Managed Bond
Fund is Michael C. Knebel, Vice President, SAM. Mr. Knebel has served as
portfolio manager for the Intermediate Treasury Fund since 1995. He has served
as manager or co-manager of the Managed Bond Fund since 1994. He has served as
portfolio manager and/or co-portfolio manager for other SAFECO mutual funds
since 1989.
GNMA FUND
The portfolio manager for the GNMA Fund is Paul A. Stevenson, Vice President,
SAM. Mr. Stevenson has served as portfolio manager for the Fund since 1988. He
also serves as portfolio manager for another SAFECO mutual fund. In addition,
he is an Assistant Vice President of the SAFECO Life Insurance Company.
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<PAGE>
HIGH-YIELD BOND FUND
The portfolio managers for the High-Yield Bond Fund are John Stoeser, Assistant
Vice President, SAM, and Robert Kern, a securities analyst for SAM. Mr. Stoeser
has served as a securities analyst and portfolio manager for SAM since 1992.
From 1989 to 1992 he was an administrative assistant to the President of SAM.
Mr. Kern served as a securities analyst for SAM since 1994. From 1988 to 1994,
Mr. Kern was engaged by the SAFECO Insurance Companies in the Controller's
Department.
Each portfolio manager and certain other persons related to SAM and the Funds
are subject to written policies and procedures designed to prevent abusive
personal securities trading. Incorporated within these policies and procedures
are recommendations made by the Investment Company Institute (the trade group
for the mutual fund industry) with respect to personal securities trading by
persons associated with mutual funds. Those recommendations include
preclearance procedures and blackout periods when certain personnel may not
trade in securities that are the same or related securities being considered for
purchase or sale by a Fund.
_____________________________
HOW TO PURCHASE SHARES
_____________________________
A completed and signed application must accompany payment for an initial
purchase by mail and in all cases is necessary before a redemption can be made.
Specific applications for retirement accounts must be completed and signed
before any retirement account can be set up. The Funds only accept funds drawn
in U.S. dollars and payable through a U.S. bank. The Funds do not accept
currency. The Funds issue shares in uncertificated form, but will issue
certificates for whole shares without charge upon written request. You will be
required to post a bond to replace missing certificates. Please note that
SAFECO Services may not be able to provide participant sub-accounting services
for all employee benefit or pension plans that require such services.
THE FUNDS RESERVE THE RIGHT TO REFUSE ANY OFFER TO PURCHASE SHARES.
INITIAL PURCHASES
MINIMUM INITIAL INVESTMENT $1,000 (IRA, UGMA AND UTMA $250).
Minimum initial investments are negotiable for retirement accounts other than
IRAs.
No minimum initial investment is required to establish the Automatic Investment
Method (except for certain UGMA or UTMA accounts) or Payroll Deduction Plan.
25
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BY WRITTEN REQUEST
Send a check or money order made payable to the No-Load Class of the applicable
Fund and a completed and signed application to the address on the Prospectus
cover.
BY WIRE
Call toll-free 1-800-624-5711 or, in Seattle, 545-7319 for instructions.
Not available for retirement accounts.
IN PERSON
Visit a SAFECO Investor Center. Investor Centers are located at 1409 Fifth
Avenue and 4333 Brooklyn Avenue N.E. in Seattle, Washington, and at 15411 N.E.
51st Street in Redmond, Washington. A representative will be available to
assist you in completing your application.
ADDITIONAL PURCHASES
MINIMUM ADDITIONAL INVESTMENT $100 FOR ALL ACCOUNTS, EXCEPT FOR UGMA OR UTMA
AUTOMATIC INVESTMENT METHOD ("AIM") ACCOUNTS OPENED WITH AN INITIAL INVESTMENT
OF $250 OR MORE. THESE ACCOUNTS HAVE A MINIMUM ADDITIONAL INVESTMENT OF ONLY
$50. THERE IS NO MINIMUM INVESTMENT FOR DIVIDEND REINVESTMENTS.
Minimum additional investments are negotiable for retirement accounts other than
IRAs.
BY WRITTEN REQUEST
Send a check or money order made payable to the No-Load Class of the applicable
Fund to the address on the Prospectus cover. Please specify your account
number.
BY WIRE
Instruct your bank to send wires to U.S. Bank of Washington, N.A., Seattle,
Washington, ABA # 1250-0010-5, Account #0017-086083.
To ensure timely credit to your account, ask your bank to include the following
information in its wire to U.S. Bank of Washington, N.A.:
- SAFECO Fund name and class name
- SAFECO account number
- Name of the registered owner(s) of the SAFECO account
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<PAGE>
Delays of purchases caused by inadequate wire instructions are not the
responsibility of the Funds or SAFECO Services.
Your bank may charge a fee for wire services.
BY TELEPHONE
Call 1-800-624-5711 or, in Seattle, 545-7319. You must have previously selected
this service on your account application or by written request. Not available
to open a new account or for retirement accounts.
Maximum purchase $100,000 per day, minimum purchase $100 per day.
Monies will be transferred from your predesignated bank account to your existing
Fund account. Your bank may charge a fee if monies are wired to your Fund
account. Please allow 15 business days after selecting this service for it to
be available for first use.
Telephone purchases may be unavailable from some bank accounts and non-bank
financial institutions.
Please read "Telephone Transactions" on page 32 for important information.
IN PERSON
Visit a SAFECO Investor Center. Investor Centers are located at 1409 Fifth
Avenue and 4333 Brooklyn Avenue N.E. in Seattle, Washington, and at 15411 N.E.
51st Street in Redmond, Washington.
THROUGH REGISTERED SECURITIES DEALERS
You may open your account and make additional investments through a registered
securities dealer who is responsible for the prompt forwarding of purchase
orders. A dealer may charge a transaction fee and may place more restrictive
conditions on a purchase than would apply if you purchased your shares directly
from a Fund.
THROUGH REGISTERED INVESTMENT ADVISERS
Please read "Transactions Through Registered Investment Advisers" on page 33
for other important information.
27
<PAGE>
SHARE PURCHASE PRICE
You will buy full and fractional shares at the NAV next computed after your
check, money order or wire has been received. For telephone purchase orders,
you will receive the price per share calculated on the day monies are received
from your bank account. See "Share Price Calculation" on page 33 for more
information.
___________________________
HOW TO REDEEM SHARES
___________________________
BY WRITTEN REQUEST
Shares may be redeemed by sending a letter which specifies your account number,
the Fund's name and class name and the number of shares or dollar amount you
wish to redeem. The request should be sent to the address on the Prospectus
cover. The request must be signed by the appropriate number of owners and in
some cases a signature guarantee may be required. In all cases, SAFECO Services
must have a signed and completed application on file before a redemption can be
made. See "Account Changes and Signature Requirements" on page 40 for more
information.
Retirement account shareholders must specify whether or not they elect 10%
federal income tax withholding from a distribution other than an "eligible
rollover distribution."
BY TELEPHONE
Call 1-800-624-5711 or, in Seattle, 545-7319. You must have previously selected
this service on your account application or by written request. Telephone
redemptions are not available for retirement accounts or shares issued in
certificate form. You may request that redemption proceeds be sent directly to
your predesignated bank or mailed to your account address of record.
Please read "Telephone Transactions" on page 40 for important information.
IN PERSON
Shares may be redeemed in person by visiting a SAFECO Investor Center. Investor
Centers are located at 1409 Fifth Avenue and 4333 Brooklyn Avenue N.E. in
Seattle, Washington, and at 15411 N.E. 51st Street in Redmond, Washington.
Funds for shares redeemed in person may be mailed to your address of record,
sent directly to your bank or retrieved directly from the SAFECO Investor Center
once they become available.
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<PAGE>
THROUGH REGISTERED SECURITIES DEALERS
Requests for redemption of shares by wire or telephone will be accepted from
registered securities dealers under agreement with each Fund's principal
underwriter. The dealer may charge a transaction fee for any order processed.
THROUGH REGISTERED INVESTMENT ADVISERS
Please read "Transactions Through Registered Investment Advisers" on page 33 for
important information.
PLEASE NOTE THE FOLLOWING:
If your shares were purchased by wire, redemption proceeds will be available
immediately. If shares were purchased by means other than wire, each Fund
reserves the right to hold the proceeds of a redemption for up to 15 business
days after investment or until such time as the Fund has received assurance that
your investment will be honored by the bank on which it was drawn, whichever
occurs first.
SAFECO Services charges a $10 fee to wire redemption proceeds. In addition, some
banks may charge a fee to receive wires.
If shares are issued in certificate form, the certificates must accompany a
redemption request and be duly endorsed.
Under some circumstances (e.g., a change in corporate officer or death of an
owner), SAFECO Services may require certified copies of supporting documents
before a redemption will be made.
SHARE REDEMPTION PRICE AND PROCESSING
Your shares will be redeemed at the NAV per share next calculated after receipt
of a request that meets the redemption requirements of the Funds. The value of
the shares you redeem may be more or less than the dollar amount purchased,
depending on the market value of the shares at the time of redemption. See
"Share Price Calculation," on page 33 for more information.
Redemption proceeds will normally be sent on the next business day following
receipt of your redemption request. If your redemption request is received
after the close of trading on the New York Stock Exchange (normally 1:00 p.m.
Pacific time), proceeds will normally be sent on the second business day
following receipt. Each Fund, however, reserves the right to postpone payment
of redemption proceeds for up to seven days if making immediate payment could
adversely affect its portfolio. In addition, redemptions may be suspended or
payment dates postponed if the New York Stock Exchange is closed, its trading is
restricted or the Securities and Exchange Commission declares an emergency.
29
<PAGE>
Due to the high cost of maintaining small accounts, your account may be closed
upon 60 days' written notice if at the time of any redemption or exchange the
total value falls below $100. Your shares will be redeemed at the NAV per share
calculated on the day your account is closed and the proceeds will be sent to
you.
_____________________________________________________________
HOW TO SYSTEMATICALLY PURCHASE OR REDEEM SHARES
_____________________________________________________________
Call 1-800-426-6730 or 545-5530, in Seattle, for more information.
AUTOMATIC INVESTMENT METHOD (AIM)
AIM enables you to make regular monthly investments by authorizing SAFECO
Services to withdraw a specific amount from your bank account and invest the
amount in any Fund. AIM has a minimum of $100 per withdrawal per Fund for all
accounts ( except UGMA and UTMA accounts which have a lower $50 minimum for
additional investments, provided that the account was opened with an initial
investment of at least $250).
PAYROLL DEDUCTION PLAN
An employer or other entity using group billing may establish a self-
administered payroll deduction plan in any Fund. Payroll deduction amounts are
negotiable.
SYSTEMATIC WITHDRAWAL PLAN
This plan enables you to receive a portion of your investment on a monthly
basis. A Fund automatically redeems shares in your account and sends you a
withdrawal check (minimum amount $50 per Fund) on or about the fifth business
day of every month.
_______________________________________________________________
HOW TO EXCHANGE SHARES FROM ONE FUND TO ANOTHER
_______________________________________________________________
An exchange is the redemption of shares of one SAFECO Fund and the purchase of
shares of another SAFECO Fund in accounts which are identically registered,
I.E., have the same registered owners and account number. For income tax
purposes, depending on the cost or other basis of the shares you exchange, you
may realize a capital gain or loss when you make an exchange. You may purchase
shares of a SAFECO Fund by exchange only if it is registered for sale in the
state where you reside. Before exchanging into another SAFECO Fund, please read
its current Prospectus.
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<PAGE>
BY WRITTEN REQUEST
Shares may be exchanged by writing SAFECO Services at the address on the
Prospectus cover. Please designate the SAFECO Funds you wish to exchange out of
and into as well as your account number. The request must be signed by the
number of owners designated on your account application and in some cases a
signature guarantee may be required. See "Account Changes and Signature
Requirements" on page for more information.
If the shares you want to exchange are evidenced by certificates, the
certificates must accompany the request and be duly endorsed.
Under some circumstances (E.G., a change in corporate officer or death of an
owner), SAFECO Services may require certified copies of supporting documents
before an exchange can be made.
BY TELEPHONE
Call 1-800-624-5711 or, in Seattle, 545-7319.
Exchanges by telephone must be in amounts of $1,000 or more.
Telephone exchanges are not available for shares issued in certificate form.
Please read "Telephone Transactions" on page for important information.
THROUGH REGISTERED INVESTMENT ADVISERS
Please read "Transactions Through Registered Investment Advisers" on page for
important information.
SHARE EXCHANGE PRICE AND PROCESSING
The shares of the SAFECO Fund you are exchanging from will be redeemed at the
price next computed after your exchange request is received. Normally the
purchase of the SAFECO Fund you are exchanging into is executed on the same day.
However, each Fund reserves the right to delay the payment of proceeds and,
hence, the purchase in an exchange for up to seven days if making immediate
payment could adversely affect the portfolio of the Fund whose shares are being
redeemed. The exchange privilege may be modified or terminated with respect to
a Fund at any time, upon at least 60 days' notice to shareholders.
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<PAGE>
LIMITATIONS
Each Fund reserves the right to refuse exchange purchases or simultaneous order
transactions by any person or group if, in SAM's judgment, the Fund would not be
able to invest the money effectively in accordance with that Fund's investment
objective and policies or would otherwise potentially be adversely affected.
Although a Fund will attempt to give you prior notice whenever it is reasonably
able to do so, it may impose the above restrictions at any time.
The Funds are not intended to serve as vehicles for frequent trading in response
to short-term fluctuations in the market. Due to the disruptive effect that
market-timing investment strategies can have on efficient portfolio management,
the Funds have instituted certain policies to discourage excessive exchange and
simultaneous order transactions. Exchanges and simultaneous order transactions
which, in SAM's judgment, appear to follow a market-timing strategy are limited
to 4 in any 12 month period per account holder (or account, in a case where one
person or entity exercises investment discretion over more than one account).
For purposes of these limitations a "simultaneous order transaction" is a
transaction where a significant portion of an account's assets are redeemed from
one SAFECO Mutual Fund and shortly thereafter reinvested into another SAFECO
Mutual Fund. In order to protect the shareholders of the Funds, SAM reserves
the right to exercise its discretion in determining whether a particular
transaction qualifies as a simultaneous order transaction. In addition to the
foregoing limitations on exchanges and simultaneous order transactions, as
described above, the Funds reserve the right to refuse any offer to purchase
shares.
_____________________________
TELEPHONE TRANSACTIONS
_____________________________
To purchase, redeem or exchange shares by telephone, call 1-800-624-5711 or, in
Seattle, 545-7319 between 5:30 a.m. and 7:00 p.m. Pacific time, Monday through
Friday, except certain holidays. All telephone calls are tape-recorded for your
protection. During times of drastic or unusual market volatility, it may be
difficult for you to exercise the telephone transaction privileges.
To use the telephone purchase, redemption and exchange privileges, you must have
previously selected these services either on your account application or by
having submitted a request in writing to SAFECO Services at the address on the
Prospectus cover. Purchasing, redeeming or exchanging shares by telephone
allows the Funds and SAFECO Services to accept telephone instructions from an
account owner or a person preauthorized in writing by an account owner. Each
Fund and SAFECO Services reserve the right to refuse any telephone transaction
when a Fund or SAFECO Services, in its sole discretion, is unable to confirm to
its satisfaction that a caller is the account owner or a person preauthorized by
the account owner.
The Funds and SAFECO Services will not be liable for the authenticity of
instructions received by telephone which a Fund or SAFECO Services, in its
discretion, believes to be delivered by an
32
<PAGE>
account owner or preauthorized person, provided that the Fund or SAFECO Services
follows reasonable procedures to identify the caller. The shareholder will bear
the risk of any resulting loss. The Funds and SAFECO Services will employ
reasonable procedures to confirm that instructions communicated by telephone are
genuine. These procedures may include requiring the account owner to select the
telephone privilege in writing prior to first use and to designate persons
authorized to deliver telephone instructions. SAFECO Services tape-records
telephone transactions and may request certain identifying information from the
caller.
The telephone transaction privileges may be suspended, limited, modified or
terminated at any time without prior notice by the Funds or SAFECO Services.
The Funds and SAFECO Services may be liable if they do not employ reasonable
procedures to confirm that telephone transactions are genuine.
_________________________________________________________________
TRANSACTIONS THROUGH REGISTERED INVESTMENT ADVISERS
_________________________________________________________________
SAFECO Services may accept instructions for share transactions and account
information changes from investment advisers who are acting on behalf of
shareholders, provided that the adviser is registered under the Investment
Advisers Act of 1940, has a signed agreement with SAFECO Services and has an
executed power of attorney from the shareholder, in an acceptable form, on file
with SAFECO Services. Advisers may charge a fee to shareholders for their
services. The Trust, the Funds and SAFECO Services have no control over, or
involvement with, the fees charged by advisers for such services. Advisers are
responsible for the prompt forwarding of instructions on shareholders' accounts
to SAFECO Services and are bound by the terms of this Prospectus. The Trusts,
the Funds, SAFECO Services and their affiliated companies will not be
responsible to any shareholder for any losses, liabilities, costs or expenses
associated with any investment advice or recommendation provided by the adviser
to the shareholder or for accepting and following any instructions from such
adviser with respect to the shareholder's account(s).
______________________________
SHARE PRICE CALCULATION
______________________________
The NAV per share of the No-Load Class shares of each Fund is computed at the
close of regular trading on the New York Stock Exchange ("NYSE") (normally 1:00
p.m. Pacific time) each day that the NYSE is open for trading. NAV is
determined separately for each class of shares of each Fund. The NAV of a Fund
is calculated by subtracting a Fund's liabilities from its assets and dividing
the result by the number of outstanding shares.
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<PAGE>
The values of each Fund's portfolio securities are stated on the basis of
valuations provided by a pricing service, unless the Board determines such does
not represent fair value. The service uses information with respect to
transactions in securities, quotations from securities dealers, market
transactions in comparable securities and various relationships between
securities to determine values. Other assets for which a representative value
cannot be established are valued at their fair value as determined in good faith
by or under the direction of each Trust's Board of Trustees.
________________________________________________________
INFORMATION ABOUT SHARE OWNERSHIP AND
COMPANIES THAT PROVIDE SERVICES TO THE TRUSTS
________________________________________________________
The Intermediate Treasury Fund, GNMA, and High-Yield Bond Funds are series of
the SAFECO Taxable Bond Trust. The Managed Bond Fund is a series of the SAFECO
Managed Bond Trust. Each Trust is a Delaware business trust established by a
Trust Instrument dated May 13, 1993. Each Trust is authorized to issue an
unlimited number of shares of beneficial interest. The Boards of Trustees may
establish additional series or classes of shares of the Trusts without the
approval of shareholders.
In addition to the No-Load Class of shares, the Intermediate Treasury Fund, the
High-Yield Bond Fund and the Managed Bond Fund also offer two other classes of
shares through a separate prospectus to investors who engage the services of an
investment professional: Advisor Class A shares and Advisor Class B shares.
Advisor Class A shares are sold subject to an initial sales charge and Advisor
Class B shares are sold subject to a contingent deferred sales charge. Advisor
Class A and Advisor Class B shares also incur different expenses than No-Load
Class shares. Accordingly, the performance of the three classes will differ.
For more information about Advisor Class A shares and Advisor Class B shares of
the Intermediate Treasury, High-Yield Bond and Managed Bond Funds, please call
1-800-463-8791.
Each share of a Fund is entitled to participate equally in dividends and other
distributions and the proceeds of any liquidation except that, due to the
differing expenses borne by the three classes of the Intermediate Treasury,
High-Yield Bond and Managed Bond Funds, dividends and liquidation proceeds for
each class of shares of those Funds will likely differ. All shares issued are
fully paid and non-assessable, and shareholders have no preemptive or other
right to subscribe to any additional shares.
The Trusts do not intend to hold annual meetings of shareholders of the Funds.
The Trustees of a Trust will call a special meeting of shareholders of a Fund
only if required under the Investment Company Act of 1940, in their discretion,
or upon the written request of holders of 10% or more of the outstanding shares
of that Fund entitled to vote. Separate votes are taken by each class of
shares, a Fund, or a Trust if a matter affects only that class of shares, a
Fund, or a Trust, respectively.
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Under Delaware law, the shareholders of the Funds will not be personally liable
for the obligations of any Fund; a shareholder is entitled to the same
limitation of personal liability extended to shareholders of corporations. To
guard against the risk that Delaware law might not be applied in other states,
each Trust Instrument requires that every written obligation of a Trust or a
Fund contain a statement that such obligation may be enforced only against the
assets of a Trust or Fund and generally provides for indemnification out of
Trust or Fund property of any shareholder nevertheless held personally liable
for Trust or Fund obligations, respectively.
Because the Trusts use a combined Prospectus, it is possible that a Fund might
become liable for a misstatement about the series of another Trust contained in
the Prospectus. The Boards of Trustees have considered this factor in approving
the use of a single, combined Prospectus.
SAM is the investment adviser for each Fund under an agreement with each Trust.
Under each agreement, SAM is responsible for the overall management of the
Trust's and each Fund's business affairs. SAM provides investment research,
advice, management and supervision to each Trust and each Fund, and, consistent
with each Fund's investment objectives and policies, SAM determines what
securities will be purchased, retained or sold by each Fund and implements those
decisions. Each Fund pays SAM an annual management fee based on a percentage of
that Fund's net assets ascertained each business day and paid monthly in
accordance with the schedules below. A reduction in the fees paid by a Fund
occurs only when that Fund's net assets reach the dollar amounts of the break
points and applies only to the assets that fall within the specified range:
INTERMEDIATE TREASURY FUND
NET ASSETS ANNUAL FEE
$0 - $250,000,000 .55 of 1%
$250,000,001 - $500,000,000 .45 of 1%
$500,000,001 - $750,000,000 .35 of 1%
Over $750,000,000 .25 of 1%
GNMA AND HIGH-YIELD BOND FUNDS
NET ASSETS ANNUAL FEE
$0 - $250,000,000 .65 of 1%
$250,000,001 - $500,000,000 .55 of 1%
$500,000,001 - $750,000,000 .45 of 1%
Over $750,000,000 .35 of 1%
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MANAGED BOND FUND
NET ASSETS ANNUAL FEE
$0 - $100,000,000 .50 of 1%
$100,000,001 - $250,000,000 .40 of 1%
Over $250,000,000 .35 of 1%
The distributor for the No-Load Class of each Fund's shares under an agreement
with each Trust is SAFECO Securities, Inc. ("SAFECO Securities"), a broker-
dealer registered under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. SAFECO Securities receives no
compensation from the Trusts or the Funds for its services as distributor of the
No-Load Class shares.
The transfer, dividend and distribution disbursement and shareholder servicing
agent for the No-Load Class of each Fund under an agreement with each Trust is
SAFECO Services. SAFECO Services receives a fee from each Fund for each
shareholder account held in that Fund. SAFECO Services may enter into
subcontracts with registered broker-dealers, third party administrators and
other qualified service providers that generally perform shareholder,
administrative, and/or accounting services which would otherwise be provided by
SAFECO Services. Fees incurred by a Fund for these services will not exceed the
transfer agency fee payable to SAFECO Services. Any distribution expenses
associated with these arrangements will be borne by SAM.
SAM, SAFECO Securities and SAFECO Services are wholly-owned subsidiaries of
SAFECO Corporation (a holding company whose primary subsidiaries are engaged in
the insurance and financial services businesses) and are each located at SAFECO
Plaza, Seattle, Washington 98185.
__________________________________________
PERSONS CONTROLLING CERTAIN FUNDS
__________________________________________
At December 5, 1996, SAFECO Insurance Company of America ("SAFECO Insurance")
controlled the Intermediate Treasury Fund. SAFECO Insurance is a Washington
Corporation and a wholly-owned subsidiary of SAFECO Corporation, which has its
principal place of business at SAFECO Plaza, Seattle, Washington 98185.
At December 5, 1996, Crown Packaging Corp. Profit Sharing & Pension Plan and
Massman Construction Co. Profit Sharing Retirement Trust controlled the Managed
Bond Fund. Crown Packaging Corp. Profit Sharing & Pension Plan's address of
record is 8514 Eager Road, St. Louis, MO 63144. Massman Construction Co. Profit
Sharing Retirement Trust's address of record is 8901 Stateline, Kansas City, MO
64114.
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_______________________________
PERFORMANCE INFORMATION
_______________________________
The yield, total return and average annual total return of each class of a Fund
may be quoted in advertisements. Yield is the annualization on a 360-day basis
of a Fund's net income per share over a 30-day period divided by the Fund's net
asset value per share on the last day of the period. The formula for the yield
calculation is defined by regulation. Consequently, the rate of actual income
distributions paid by the Funds may differ from quoted yield figures. Total
return is the total percentage change in an investment in a class of a Fund,
assuming the reinvestment of dividends and capital gains distributions, over a
stated period of time. Average annual total return is the annual percentage
change in an investment in a class of a Fund, assuming the reinvestment of
dividends and capital gain distributions, over a stated period of time.
Performance quotations are calculated separately for each class of a Fund.
From time to time, a Fund may advertise rankings. Rankings are calculated by
independent companies that monitor mutual fund performance (E.G., CDA Investment
Technologies, Lipper Analytical Services, Inc., and Morningstar, Inc.), and are
reported periodically in national financial publications such as BARRON'S,
BUSINESS WEEK, FORBES, INVESTOR'S BUSINESS DAILY, MONEY MAGAZINE, and THE WALL
STREET JOURNAL. In addition, non-standardized performance figures may accompany
the standardized figures described above. Non-standardized figures may be
calculated in a variety of ways including, but not necessarily limited to,
different time periods and different initial investment amounts. Each Fund may
also compare its performance to the performance of relevant indices.
Performance information and quoted rankings are indicative only of past
performance and are not intended to represent future investment results. The
yield and share price of each class of a Fund will fluctuate and your shares,
when redeemed, may be worth more or less than you originally paid for them.
___________________________________________________
FUND DISTRIBUTIONS AND HOW THEY ARE TAXED
___________________________________________________
DIVIDEND AND OTHER DISTRIBUTIONS
Each Fund declares dividends on each business day from its net investment income
(which includes accrued interest, earned discount, and other income earned on
portfolio securities less expenses) and shares become entitled to declared
dividends on the next business day after they are purchased for your account.
If you request redemption of all your shares at any time during a month, you
will
37
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receive all declared dividends through the date of redemption, together with the
proceeds of the redemption.
Your dividends and other distributions are reinvested in additional shares of
the distributing Fund at net asset value per share, generally determined as of
the close of business on the ex-distribution date, unless you elect in writing
to receive dividends and/or other distributions in cash and that election is
provided to SAFECO Services at the address on the Prospectus cover. The
election remains in effect until revoked by written notice to SAFECO Services.
For retirement accounts, all dividends and other distributions declared by a
Fund must be invested in additional shares of that Fund.
States generally treat the pass through of interest earned on U.S. Treasury
securities and other direct obligations of the U.S. government as tax-free
income in the calculation of their state income tax. This treatment may be
dependent upon the maintenance of certain minimum percentages of fund ownership
of these securities. The Intermediate Treasury Fund will invest primarily in
these securities, while the GNMA Fund may occasionally invest a portion of its
portfolio in these securities.
Please remember that if you purchase shares shortly before a Fund pays a taxable
dividend or other distribution, you will pay the full price for the shares, then
receive part of the price back as a taxable distribution.
TAXES
Each Fund intends to continue to qualify for treatment as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended. By
so qualifying, a Fund will not be subject to federal income taxes to the extent
it distributes its net investment income and realized capital gains to its
shareholders. Each Fund will inform you as to the amount and nature of
dividends and other distributions to your account. Dividends and other
distributions declared in December, but received by shareholders in January, are
taxable to shareholders in the year in which declared.
TAX WITHHOLDING INFORMATION
You will be asked to certify on your account application or on a separate form
that the taxpayer identification number you provide is correct and that you are
not subject to, or are exempt from, backup withholding for previous under
reporting to the Internal Revenue Service.
Retirement plan distributions may be subject to federal income tax withholding.
However, you may elect not to have any distributions withheld by checking the
appropriate box on the Redemption Request form or by instructing SAFECO
Services in writing at the address on the Prospectus cover.
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<PAGE>
The foregoing is only a summary of some of the important federal tax
considerations generally affecting each Fund and its shareholders; see the
Trust's Statement of Additional Information for additional tax information.
There may be other federal, state or local tax considerations applicable to a
particular investor. You therefore are urged to consult your tax adviser.
_____________________________________
TAX-DEFERRED RETIREMENT PLANS
_____________________________________
SAFECO Services offers a variety of tax-deferred retirement plans for
individuals, businesses and nonprofit organizations. An account may be
established under one of the following plans which allow you to defer investment
income from federal income tax while you save for retirement. Many of the
SAFECO Funds may be used as investment vehicles for these plans.
INDIVIDUAL RETIREMENT ACCOUNTS (IRAS). IRAs are tax-deferred retirement
accounts for anyone under age 70 1/2 with earned income. The maximum annual
contribution generally is $2,000 per person ($2,250 for you and a non-working
spouse). Under certain circumstances your contribution will be deductible for
income tax purposes. An annual custodial fee will be charged for any part of a
calendar year in which you have an IRA investment in a Fund.
SIMPLIFIED EMPLOYEE PENSION IRAS (SEP-IRAS). SEP-IRAs are easily administered
retirement plans for small businesses and self-employed individuals. Annual
contributions of up to $22,500 may be made to SEP-IRA accounts; the annual
contribution limit is subject to change. SEP-IRAs have the same investment
minimums and custodial fees as regular IRAs.
403(B) PLANS. 403(b) plans are retirement plans for tax-exempt organizations
and school systems to which employers and employees both may contribute.
Minimum investment amounts are negotiable.
401(K) PLANS. 401(k) plans allow employers and employees to make tax-advantaged
contributions to a retirement account. SAFECO Services offers a low-cost
administration package that includes a prototype plan, record keeping, testing
and employee communications. Minimum investment amounts are negotiable.
PROFIT SHARING AND MONEY PURCHASE PENSION PLANS. Each plan allows corporations,
partnerships and self-employed persons to make annual, tax-deductible
contributions to a retirement account for each person covered by the plan. A
plan may be adopted individually or paired with another plan to maximize
contributions. SAFECO Services offers an administration package for these
plans. Minimum investment amounts are negotiable.
39
<PAGE>
For information about the above accounts and plans, please call 1-800-278-2985.
For a description of federal income tax withholding on distributions from these
accounts and plans, see "Fund Distributions and How They are Taxed - Tax
Withholding Information" on page 37.
________________________
ACCOUNT STATEMENTS
________________________
Periodically, you will receive an account statement showing your current Fund
holdings and transactions affecting your account. Confirmation statements will
be sent after each transaction that affects your account balance. Please review
the information on each confirmation statement for accuracy immediately upon
receipt. If you do not notify us within 30 days of any processing error, SAFECO
Services will consider the transactions listed on the confirmation statement to
be correct.
_______________________________________________________
ACCOUNT CHANGES AND SIGNATURE REQUIREMENTS
_______________________________________________________
Changes to your account registration or the services you have selected must be
in writing and signed by the person(s) specified on your account application as
having authority to make these changes. Send written changes to SAFECO Services
at the address on the Prospectus cover. Certain changes to the Automatic
Investment Method and Systematic Withdrawal Plan can be made by telephone
request if you have previously selected single signature authorization for your
account.
You must specify on your account application the number of signatures required
to authorize redemptions and exchanges and to change account registration or the
services selected. Authorizing fewer than all account owners has important
implications. For example, one owner of a joint tenant account can redeem money
without the co-owner's signature. If you do not indicate otherwise on the
application, the signatures of all account owners will be required to effect a
transaction. Your selection of fewer than all account owner signatures may be
revoked by any account owner who writes to SAFECO Services at the address on the
Prospectus cover.
SAFECO Services may require a signature guarantee for a signature that cannot be
verified by comparison to the signature(s) on your account application. A
signature guarantee may be obtained from most financial institutions, including
banks, savings and loans and broker-dealers.
40
<PAGE>
__________________________________________________________
DEBT SECURITIES HELD BY THE HIGH-YIELD BOND FUND
__________________________________________________________
The weighted average ratings of all fixed-income securities, expressed as a
percentage of total investments held by the High-Yield Bond Fund during the
fiscal year ended September 30, 1996, were as follows:
Moody's % S&P %
------- - --- -
Investment Grade
-------------------------------------------------------------------------
Aaa 9.50% AAA 9.50%
Aa 0% AA 0%
A 0% A 0%
Baa 0% BBB 0%
Below Investment Grade
- ---------------------------------------------------------------------------
Ba 17.23% BB 28.42%
B 71.22% B 60.03%
Caa 1.58% CCC 1.58%
Ca 0% CC 0%
C 0%
D 0%
Not Rated, but Not Rated, but
determined to be determined to be
investment grade 0% investment grade 0%
Not Rated, but Not Rated, but
determined to be determined to be
below investment below investment
grade .48% grade .48%
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<PAGE>
___________________________
DESCRIPTION OF RATINGS
___________________________
Ratings by Moody's and S&P represent their respective opinions as to the
investment quality of the rated obligations. Investors should realize these
ratings do not constitute a guarantee that the principal and interest payable
under these obligations will be paid when due.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
MOODY'S. Issuers rated Prime-1 have a superior ability for repayment of senior
short-term debt obligations. Issuers rated Prime-2 have a strong ability for
repayment of senior short-term debt obligations. Issuers rated Prime-3 have an
acceptable ability for the repayment of seniro short-term debt obligations.
S&P. Commercial Paper issues rated A are the highest quality obligations.
Issues in this category are regarded as having the greatest capacity for timely
payment. For issues designated A-1 the degree of safety regarding timely
payment is very strong. Issuers designated A-2 also have a strong capacity for
timely payment but not as high as A-1 issuers. Issuers designated A-3 have a
satisfactory capacity for timely payment.
DESCRIPTION OF DEBT RATINGS
EXCERPTS FROM MOODY'S DESCRIPTION OF ITS RATINGS:
INVESTMENT GRADE:
AAA -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the position of such issues.
AA -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered
42
<PAGE>
adequate, but elements may be present which suggest a susceptibility to
impairment sometime in the future.
BAA -- Bonds which are rated Baa are considered as medium grade obligations
(I.E., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BELOW INVESTMENT GRADE:
BA -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B- - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA -- Bonds which are rated Caa have poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA -- Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
EXCERPTS FROM S&P'S DESCRIPTION OF ITS RATINGS:
INVESTMENT GRADE:
AAA -- Debt which is rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA -- Debt which is rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
A -- Debt which is rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
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<PAGE>
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BELOW INVESTMENT GRADE:
BB, B, CCC, CC, C -- Debt which is rated BB, B, CCC, CC, or C is predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. "BB" indicates the lowest degree
of speculation and "C" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
C1 -- Debt which is rated C1 is reserved for income bonds on which no interest
is being paid.
D -- Debt rated D is in payment default. Interest payment, or principal
payments are not made on the date due even if the applicable grace period has
not expired, unless S&P believes that such payments will be made during such
grace period.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
44
<PAGE>
SAFECO FAMILY OF FUNDS
STABILITY OF PRINCIPAL
SAFECO Money Market Fund
SAFECO Tax-Free Money Market Fund
BOND INCOME
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO GNMA Fund
SAFECO High-Yield Bond Fund
SAFECO Managed Bond Fund
TAX-FREE BOND INCOME
SAFECO Intermediate-Term Municipal Bond Fund
SAFECO Insured Municipal Bond Fund
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal Bond Fund
HIGH CURRENT INCOME WITH LONG-TERM GROWTH
SAFECO Income Fund
LONG-TERM GROWTH
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Northwest Fund
SAFECO Balanced Fund
SAFECO International Stock Fund
SAFECO Small Company Stock Fund
FOR MORE COMPLETE INFORMATION ON ANY SAFECO MUTUAL FUND, INCLUDING MANAGEMENT
FEES AND EXPENSES, CALL OR WRITE FOR A FREE PROSPECTUS. PLEASE READ IT
CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
45
<PAGE>
TO REQUEST A PROSPECTUS:
Nationwide: 1-800-426-6730
Seattle: 545-5530
AUTOMATED INFORMATION LINE:
24 HOUR ACCOUNT, PRICE, AND
PERFORMANCE INFORMATION
Nationwide: 1-800-835-4391
Seattle: 545-5113
FOR ACCOUNT INFORMATION OR TELEPHONE
TRANSACTIONS*:
Nationwide: 1-800-624-5711
Seattle: 545-7319
Hearing Impaired TDD/TTY Service:
1-800-438-8718
*All telephone calls are tape-
recorded for your protection.
INTERNET: http://networth.galt.com/safeco
EMAIL: [email protected]
MAILING ADDRESS:
SAFECO MUTUAL FUNDS
P.O. Box 34890
Seattle, WA 98124-1890
EXPRESS/OVERNIGHT MAIL:
SAFECO Mutual Funds
No-Load Class Shares
4333 Brooklyn Avenue N.E.
Seattle, WA 98105
DISTRIBUTOR:
SAFECO Securities, Inc.
46
<PAGE>
SAFECO TAXABLE BOND TRUST:
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
SAFECO HIGH-YIELD BOND FUND
SAFECO MANAGED BOND TRUST:
SAFECO MANAGED BOND FUND
SAFECO TAX-EXEMPT BOND TRUST:
SAFECO MUNICIPAL BOND FUND
SAFECO CALIFORNIA TAX-FREE INCOME FUND
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
SAFECO MONEY MARKET TRUST:
SAFECO MONEY MARKET FUND
ADVISOR CLASS A
ADVISOR CLASS B
Statement of Additional Information
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus for the funds listed above (each a "Fund"). A
copy of the Prospectus may be obtained by writing SAFECO Mutual Funds, Advisor
Class Shares, P.O. Box 34890, Seattle, Washington 98124-1890, or by calling TOLL
FREE: 1-800-463-8791
The date of the most current Prospectus of the Funds to which this Statement of
Additional Information relates is January 26, 1997.
The date of this Statement of Additional Information is January 26, 1997.
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
INVESTMENT POLICIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
INVESTMENT POLICIES OF THE TAXABLE BOND FUNDS . . . . . . . . . . . . . . . . 3
INVESTMENT POLICIES OF THE MANAGED BOND FUND . . . . . . . . . . . . . . . . . 6
INVESTMENT POLICIES OF THE TAX-EXEMPT FIXED INCOME FUNDS . . . . . . . . . . .10
INVESTMENT POLICIES OF THE MONEY MARKET FUND . . . . . . . . . . . . . . . . .15
ADDITIONAL INVESTMENT INFORMATION. . . . . . . . . . . . . . . . . . . . . . .17
INVESTMENT RISKS OF CONCENTRATION IN CALIFORNIA AND WASHINGTON ISSUERS . . . .24
PRINCIPAL SHAREHOLDERS OF CERTAIN FUNDS. . . . . . . . . . . . . . . . . . . .35
ADDITIONAL TAX INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . .35
CONVERSION OF ADVISOR CLASS B SHARES . . . . . . . . . . . . . . . . . . . . .37
ADDITIONAL INFORMATION ON CALCULATION OF NET ASSET VALUE PER SHARE . . . . . .38
ADDITIONAL PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . .39
ADDITIONAL INFORMATION ON DIVIDENDS. . . . . . . . . . . . . . . . . . . . . .46
TRUSTEES AND OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
INVESTMENT ADVISORY AND OTHER SERVICES . . . . . . . . . . . . . . . . . . . .53
BROKERAGE PRACTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60
REDEMPTION IN KIND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60
DESCRIPTION OF RATINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . .62
<PAGE>
INVESTMENT POLICIES
SAFECO Intermediate-Term U.S. Treasury Fund ("Intermediate Treasury Fund") and
SAFECO High-Yield Bond Fund "High-Yield Bond Fund") are series of the SAFECO
Taxable Bond Trust (collectively the "Taxable Bond Funds"). The SAFECO Managed
Bond Fund ("Managed Bond Fund") is a series of SAFECO Managed Bond Trust
("Managed Bond Trust"); (Taxable Bond Funds and Managed Bond Fund, collectively
the "Taxable Fixed Income Funds").
SAFECO Municipal Bond Fund ("Municipal Bond Fund"), SAFECO California Tax-Free
Income Fund ("California Fund") and SAFECO Washington State Municipal Bond Fund
("Washington Fund") (collectively, the "Tax-Exempt Fixed Income Funds") are
series of SAFECO Tax-Exempt Bond Trust ("Tax-Exempt Bond Trust").
SAFECO Money Market Fund ("Money Market Fund") is a series of SAFECO Money
Market Trust ("Money Market Trust").
The investment policies of each Fund are described in the Prospectus and this
Statement of Additional Information. These policies state the investment
practices that the Funds will follow, in some cases limiting investments to a
certain percentage of assets, as well as those investment activities that are
prohibited. The types of securities that a Fund may purchase are also
disclosed in the Prospectus. Before a Fund purchases a security that the
following policies permit, but that is not currently described in the
Prospectus, the Prospectus will be amended or supplemented to identify or
describe the security. If a policy's percentage limitation is adhered to
immediately after and as a result of the investment, a later increase or
decrease in values, net assets or other circumstances will not be considered
in determining whether a Fund complies with the applicable limitation (except
to the extent the change may impact a Fund's borrowing limit).
Generally, the entity that has the ultimate responsibility for the payment of
interest and principal on a particular security is deemed to be its issuer for
purposes of the Tax-Exempt Fixed Income Funds' investment policies. The
identification of the issuer of a tax-exempt security for purposes of
diversification depends on the terms and conditions of the security. For
example, when the assets and revenues of an agency, authority, instrumentality
or other political subdivision are separate from those of the government
creating the subdivision and the security is backed only by the assets and
revenues of the subdivision, such subdivision would be deemed to be the sole
issuer for diversification purposes. Similarly, in the case of an industrial
development bond, if that bond is backed only by the assets and revenues of the
non-governmental user, then such non-governmental user would be deemed to be the
sole issuer for purposes of diversification. If, however, in either case, the
creating government or some other entity guarantees a security, such a guarantee
would be considered a separate security which must be valued and included in
each Tax-Exempt Fixed Income Fund's five percent (5%) limitation on investments
in one issuer.
Each Fund's fundamental policies may not be changed without the approval of a
"majority of its outstanding voting securities," as defined in the Investment
Company Act of 1940, as amended
-2-
<PAGE>
("1940 Act"). For purposes of such approval, the vote of a majority of the
outstanding voting securities of a Fund means the vote, at a meeting of the
shareholders of such Fund duly called, (i) of 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.
Non-fundamental policies may be changed without shareholder approval.
INVESTMENT POLICIES OF THE TAXABLE BOND FUNDS
Each Taxable Bond Fund has adopted the following fundamental investment
policies. Each Taxable Bond Fund will NOT:
FUNDAMENTAL INVESTMENT POLICIES
1. Purchase the securities of any issuer (except the U.S. Government, its
agencies or instrumentalities) if as a result more than five percent (5%)
of the value of its total assets at the time of purchase would be invested
in the securities of such issuer, except that up to twenty-five percent
(25%) of the value of a Fund's assets (which twenty-five percent (25%)
shall not include securities issued by another investment company) may be
invested without regard to this five percent (5%) limitation;
2. Underwrite any issue of securities, except to the extent that the purchase
of permitted investments directly from the issuer in accordance with the
Fund's investment objective, policies and restrictions and the subsequent
disposition thereof may be deemed to be underwriting or the later
disposition of restricted securities acquired within the limits imposed on
the acquisition of such securities may be deemed to be an underwriting;
3. Purchase or sell real estate, but this shall not prevent the Fund from
investing in municipal obligations or other permitted investments secured
by real estate or interests therein;
4. Purchase or retain for the Fund's portfolio the securities of any issuer,
if, to the Fund's knowledge, the officers or directors of the Fund, or its
investment adviser, who individually own more than one-half ( 1/2) of one
percent (1%) of the outstanding securities of such an issuer, together own
more than five percent (5%) of such outstanding securities;
5. Borrow money, except from a bank or SAFECO Corporation or its affiliates at
an interest rate not greater than that available to the Fund from
commercial banks, for temporary or emergency purposes and not for
investment purposes, and then only in an amount not exceeding twenty
percent (20%) of the value of the Fund's total assets at the time of such
borrowing;
-3-
<PAGE>
Each Fund will not purchase securities if borrowings equal to or greater
than five percent (5%) of the Fund's total assets are outstanding;
6. Pledge, mortgage or hypothecate its assets, except that to secure
borrowings permitted by subparagraph (5) above, it may pledge securities
having a market value at the time of pledge not exceeding ten percent (10%)
of the cost of the Fund's total assets;
7. Purchase or sell commodities or commodity contracts, other than futures
contracts, or invest in oil, gas or other mineral exploration or
development programs or in arbitrage transactions;
8. Make short sales of securities or purchase securities on margin, except for
margin deposits in connection with futures contracts and such short-term
credits as are necessary for the clearance of transactions;
9. Participate on a joint or a joint-and-several basis in any trading account
in securities, except that the Fund may, for the purpose of seeking better
net results on portfolio transactions or lower brokerage commission rates,
join with other transactions executed by the investment adviser or the
investment adviser's parent company and any subsidiary thereof;
10. Purchase from or sell portfolio securities to any officer or director, the
Fund's investment adviser, principal underwriter or any affiliates or
subsidiaries thereof; provided, however, that this prohibition shall not
prohibit the Fund from purchasing with the up to $7,000,000 raised through
the sale of up to 700,000 shares of common stock to SAFECO Life Insurance
Company, portfolio securities from subsidiaries of SAFECO Corporation prior
to the effective date of the Fund's initial public offering;
11. Purchase securities (other than obligations issued or guaranteed by the
United States Government, its agencies or instrumentalities), if as a
result twenty-five percent (25%) or more of the Fund's total assets would
be invested in one industry (governmental issuers of securities are not
considered part of any one industry);
12. Purchase shares of common stock, other than those issued by other regulated
investment companies only, when the acquisition of such common stocks,
rights or other equity interests is consistent with the Fund's investment
objective. Generally, each Fund will only hold such equity securities as a
result of purchases or unit offerings of fixed-income securities which
include such equity securities or in connection with an actual or proposed
conversion or exchange of fixed-income securities;
13. Issue or sell any senior security, except that this restriction shall not
be construed to prohibit the Fund from borrowing funds (i) on a temporary
basis as permitted by Section 18(g) of the 1940 Act or (ii) from any bank
provided, that immediately after such
-4-
<PAGE>
borrowing, there is an asset coverage of at least three hundred percent
(300%) for all such borrowings and provided, further, that in the event
that such asset coverage shall at any time fall below three hundred
percent (300%), the Fund shall, within three (3) days thereafter (not
including Sundays and holidays), or such longer period as the Securities
and Exchange Commission ("SEC") may prescribe by rules and regulations,
reduce the amount of its borrowings to an extent that the asset coverage
of such borrowings shall be at least three hundred percent (300%). For
purposes of this restriction, the terms "senior security" and "asset
coverage" shall be understood to have the meaning assigned to those
terms in Section 18 of the 1940 Act;
14. Purchase securities of any issuer, if, as a result, more than ten percent
(10%) of any class of securities of such issuer would be owned by the Fund;
15. With respect to one hundred percent (100%) of the value of its total
assets, purchase more than ten percent (10%) of the outstanding voting
securities of any one issuer (other than U.S. Government securities);
16. Purchase or otherwise acquire securities which are illiquid or subject to
legal or contractual restrictions on resale, if as a result more than ten
percent (10%) of the Fund's total assets would be invested in such
securities; or
17. Make loans, except through the purchase of a portion or all of an issue of
debt or money market securities in accordance with its investment
objective, policies and restrictions, or through investments in qualified
repurchase agreements (provided, however, that the Fund shall not invest
more than ten percent (10%) of its total assets in qualified repurchase
agreements maturing in more than seven (7) days), or through qualified loan
agreements (by making secured loans of its portfolio securities which
amount to not more than five percent (5%) of its total assets).
NON-FUNDAMENTAL INVESTMENT POLICIES
In addition to the policies described in the Prospectus, each Taxable Bond Fund
has adopted the following non-fundamental investment policies which may be
changed without shareholder approval:
1. The Fund will not invest more than five percent (5%) of its total assets in
securities of issuers, including their predecessors, which have been in
operation for less than three years.
2. The Fund will not issue long-term debt securities.
-5-
<PAGE>
3. The Fund will not invest in securities with unlimited liability, I.E.,
securities the holder of which may be assessed for amounts in addition to
the subscription or other price paid for the security.
4. The Fund will not trade in foreign currency, except as may be necessary to
convert the proceeds of the sale of foreign securities in the Fund's
portfolio into U.S. dollars.
5. The Fund may purchase "when-issued" or "delayed-delivery" securities or
purchase or sell securities on a "forward commitment" basis.
6. The Fund will not invest in any security issued by a commercial bank unless
(a) the bank has total assets of at least $1 billion, or the equivalent in
other currencies, or, in the case of a United States bank which does not
have assets of at least $1 billion, the aggregate investment made in any
one such bank is limited to $100,000 and the principal sum of each
investment is insured in full by the Federal Deposit Insurance Corporation
("FDIC"), (b) in the case of a U.S. bank, it is a member of the FDIC and
(c) in the case of a foreign bank, the security is, in the opinion of the
Fund's investment adviser, of an investment quality comparable with other
debt securities which may be purchased by the Fund. These limitations do
not prohibit investment in securities issued by foreign branches of U.S.
banks, provided the U.S. banks meet the foregoing requirements.
7. The Fund shall not engage primarily in trading for short-term profits, but
it may from time to time make investments for short-term purposes when such
action is believed to be desirable and consistent with sound investment
policy, and it may dispose of securities whenever its investment adviser
deems advisable without regard to the length of time they have been held.
8. The Intermediate Treasury Fund may invest up to five percent (5%) of its
total assets in Yankee Sector debt securities and up to five percent (5%)
of its total assets in Eurodollar bonds.
9. The Fund may invest up to five percent (5%) of its total assets in
securities the interest on which, in the opinion of counsel for the issuer,
is exempt from federal income tax.
INVESTMENT POLICIES OF THE MANAGED BOND FUND
FUNDAMENTAL INVESTMENT POLICIES
The Managed Bond Fund has adopted the following fundamental investment policies.
The Managed Bond Fund will NOT:
1. Purchase the securities of any issuer (except the U.S. Government, its
agencies or instrumentalities) if as a result more than five percent (5%)
of the value of total assets at
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the time of purchase would be invested in the securities of such issuer,
except that up to twenty-five percent (25%) of the value of the Fund's
assets (which twenty-five percent (25%) shall not include securities issued
by another investment company) may be invested without regard to this five
percent (5%) limitation;
2. Purchase the securities of any issuer (other than obligations of or
guaranteed by the U.S. Government, its agencies and instrumentalities) if,
as a result, more than ten percent (10%) of any class of securities of such
issuer will be held by the Fund;
3. With respect to one hundred percent (100%) of the value of its total
assets, purchase more than ten percent (10%) of the outstanding voting
securities of any one issuer (other than U.S. Government securities);
4. Purchase securities, if as a result, twenty-five percent (25%) or more of
the Fund's total assets would be invested in the securities of issuers
having their principal business activities in any one industry. Securities
of foreign banks and foreign branches of U.S. banks are considered to be
one industry. This limitation does not apply to obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or to
certificates of deposit or bankers' acceptances issued by domestic banks;
5. Purchase securities on margin, except for short-term credits necessary for
the clearance of transactions;
6. Make short sales of securities (sales of securities not presently owned);
7. Make loans, except through the purchase of a portion or all of an issue of
debt securities in accordance with the Fund's investment objective,
policies and restrictions or through investments in qualified repurchase
agreements;
8. Borrow money, except from a bank or SAFECO Corporation or its affiliates at
an interest rate not greater than that available to the Fund from
commercial banks, for temporary or emergency purposes and not for
investment purposes, and then only in an amount not exceeding twenty
percent (20%) of the value of the Fund's total assets (including
borrowings) less liabilities (other than borrowings) immediately after such
borrowing;
9. Underwrite any issue of securities, except to the extent that the purchase
of permitted investments directly from the issuer in accordance with the
Fund's investment objective, policies and restrictions and the subsequent
disposition thereof may be deemed to be underwriting or the later
disposition of restricted securities acquired within the limits imposed on
the acquisition of such securities may be deemed to be an underwriting;
10. Purchase or sell real estate or real estate limited partnerships (unless
acquired as a result of the ownership of securities or instruments) but
this shall not prevent the Fund from
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investing in permitted investments secured by real estate or interests
therein or in real estate investment trusts;
11. Purchase or sell commodities, commodity contracts or futures contracts;
12. Participate on a joint or joint-and-several basis in any trading account in
securities, except that the Fund may join with other transactions executed
by the investment adviser or the investment adviser's parent company and
any subsidiary thereof, for the purpose of seeking better net results on
portfolio transactions or lower brokerage commission rates; or
13. Issue or sell any senior security, except as permitted under the 1940 Act.
NON-FUNDAMENTAL INVESTMENT POLICIES
In addition to the policies described in the Prospectus, the Managed Bond Fund
has adopted the following non-fundamental policies which may be changed without
shareholder approval:
1. The Fund will not issue long-term debt securities.
2. The Fund will not invest in any security for the purpose of acquiring or
exercising control or management of the issuer.
3. The Fund will not invest in oil, gas or other mineral exploration or
development programs or leases.
4. The Fund will not invest in or sell (write) puts, calls, straddles, spreads
or any combinations thereof.
5. The Fund will not invest more than five percent (5%) of its total assets in
securities of issuers (including predecessor companies of the issuer)
having a record of less than three years continuous operation.
6. The Fund will not invest in securities with unlimited liability, I.E.,
securities the holder of which may be assessed for amounts in addition to
the subscription or other price paid for the security.
7. The Fund will not invest more than ten percent (10%) of its total assets in
qualified repurchase agreements and will not invest in qualified repurchase
agreements maturing in more than seven (7) days.
8. The Fund will not purchase the securities of any other investment company,
except by purchase in the open market where no commission or profit to a
broker or dealer results
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from such purchase other than the customary broker's commissions, or except
as part of a merger, consolidation or acquisition. The Fund shall not
invest more than ten percent (10%) of its total assets in shares of other
investment companies, invest more than five percent (5%) of its total
assets in a single investment company nor purchase more than three percent
(3%) of the outstanding voting securities of a single investment company.
9. The Fund will not purchase securities if borrowings equal to or greater
than five percent (5%) of the Fund's total assets are outstanding.
10. The Fund will invest at least sixty-five percent (65%) of its total assets
in fixed income obligations.
11. The Fund will invest at least fifty percent (50%) of its total assets in
obligations of or guaranteed by the U.S. Government, its agencies and
instrumentalities.
12. The Fund may invest up to fifty percent (50%) of its total assets in
corporate debt securities or Eurodollar bonds.
13. The Fund may invest up to ten percent (10%) of its total assets in Yankee
Sector debt obligations.
14. The Fund may purchase securities on a when-issued or delayed-delivery basis
or may purchase or sell securities on a forward commitment basis.
15. The Fund may temporarily invest its cash in high quality commercial paper,
certificates of deposit, shares of no-load, open-end money market funds
(subject to the percentage limitations set forth in subparagraph 8 above),
repurchase agreements (subject to the limitations set forth in subparagraph
7 above) or any other short-term instrument the Fund's investment adviser
deems appropriate.
16. The Fund may hold cash as a temporary defensive measure when market
conditions so warrant.
17. The Fund shall not engage primarily in trading for short-term profits, but
it may from time to time make investments for short-term purposes when such
action is believed to be desirable and consistent with sound investment
policy. The Fund may dispose of securities whenever it deems advisable
without regard to the length of time they have been held.
18. The Fund may invest up to five percent (5%) of its total assets in
securities the interest on which, in the opinion of counsel for the issuer,
is exempt from federal income tax.
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<PAGE>
WHILE THE FUND HAS THE AUTHORITY TO INVEST IN THE FOLLOWING TYPES OF SECURITIES,
IT HAS NO PRESENT INTENTION TO DO SO IN THE COMING YEAR. BEFORE THE FUND
PURCHASES ANY OF THESE SECURITIES, THE PROSPECTUS WILL BE AMENDED BY SUPPLEMENT
TO IDENTIFY OR DESCRIBE THE SECURITY.
19. The Fund may invest up to five percent (5%) of its total assets in shares
of real estate investment trusts.
20. The Fund may purchase securities subject to legal or contractual
restrictions on resale or illiquid securities, if no more than fifteen
percent (15%) of the Fund's total assets would be invested in such
securities.
21. The Fund may purchase foreign securities, provided that such purchase, at
the time thereof, would not cause more than ten percent (10%) of the total
assets of the Fund (taken at market value) to be invested in foreign
securities.
22. The Fund will not buy or sell foreign currency, except as may be necessary
to invest the proceeds of the sale of any foreign securities held by the
Fund in U.S. dollars.
INVESTMENT POLICIES OF THE TAX-EXEMPT FIXED INCOME FUNDS
FUNDAMENTAL INVESTMENT POLICIES
The WASHINGTON FUND has adopted the following fundamental investment policies.
The Washington Fund will NOT:
1. Purchase the securities of any issuer (except the U.S. Government, its
agencies or instrumentalities) if as a result more than five percent (5%)
of the value of the Fund's total assets would be invested in the securities
of such issuer, except that up to twenty-five percent (25%) of the value of
the Fund's total assets (which twenty-five percent (25%) shall not include
securities issued by another investment company) may be invested without
regard to this five percent (5%) limitation;
2. Underwrite any issue of securities, except to the extent that the purchase
of municipal obligations or other permitted investments directly from the
issuer in accordance with the Fund's investment objective, policies and
restrictions and the later disposition thereof may be deemed to be
underwriting;
3. Purchase or sell real estate, unless acquired as a result of the ownership
of securities or instruments, but this shall not prevent the Fund from
investing in municipal obligations or other permitted investments secured
by real estate or interests therein;
4. Borrow money, except from a bank or affiliates of SAFECO Corporation at an
interest rate not greater than that available to the Fund from commercial
banks, for temporary or
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<PAGE>
emergency purposes and not for investment purposes, and then only in an
amount not exceeding twenty percent (20%) of its total assets (including
borrowings) less liabilities (other than borrowings) immediately after such
borrowing;
5. Make loans, except through the purchase of a portion or all of an issue of
debt securities in accordance with the Fund's investment objective,
policies and restrictions and through investments in qualified repurchase
agreements;
6. Purchase or sell commodities, commodity contracts or futures;
7. Purchase securities, if as a result, twenty-five percent (25%) or more of
the Fund's total assets would be invested in the securities of issuers
having their principal business activities in any one industry
(governmental issuers of special or general tax-exempt securities are not
considered part of any one industry);
8. Issue or sell any senior security, except as permitted under the 1940 Act;
9. Permit twenty-five percent (25%) or more of the Fund's total assets to be
invested in municipal obligations and other permitted investments, the
interest on which is payable from revenues on similar types of projects. As
a matter of operating policy, similar types of projects may include sports,
convention or trade show facilities; airports or mass transportation;
sewage or solid waste disposal facilities; or air or water pollution
control projects; or
10. During normal market conditions, invest less than eighty percent (80%) of
the Fund's net assets in obligations the interest on which, in the opinion
of counsel for the issuer of the obligation, is exempt from federal income
tax.
The MUNICIPAL BOND and CALIFORNIA FUNDS have adopted the following fundamental
investment policies. The Funds will NOT:
1. Purchase the securities of any issuer (except the U.S. Government, its
agencies or instrumentalities), if as a result more than five percent (5%)
of the value of a Fund's total assets would be invested in the securities
of such issuer, except that up to twenty-five percent (25%) of the value of
a Fund's assets (which twenty-five percent (25%) shall not include
securities issued by another investment company) may be invested without
regard to this five percent (5%) limitation;
2. Underwrite any issue of securities, except to the extent that the purchase
of municipal obligations or other permitted investments directly from the
issuer in accordance with a Fund's investment objective, policies and
restrictions and the subsequent disposition thereof may be deemed to be
underwriting;
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<PAGE>
3. Purchase or sell real estate or real estate limited partnerships, but this
shall not prevent a Fund from investing in municipal obligations or other
permitted investments secured by real estate or interests therein;
4. Purchase or retain for a Fund's portfolio the securities of any issuer if,
to the Fund's knowledge, the officers or directors of the Fund, or its
investment adviser, who individually own more than one-half (1/2) of one
percent (1%) of the outstanding securities of such an issuer, together own
more than five percent (5%) of such outstanding securities;
5. Participate on a joint or a joint-and-several basis in any trading account
in securities, except that a Fund may, for the purpose of seeking better
net results on portfolio transactions or lower brokerage commission rates,
join with other transactions executed by the investment adviser or the
investment adviser's parent company and any subsidiary thereof;
6. Purchase from, or sell portfolio securities to, any officer or director,
the Fund's investment adviser, principal underwriter or any affiliates or
subsidiaries thereof;
7. Borrow money, except from a bank or affiliates of SAFECO Corporation at an
interest rate not greater than that available to a Fund from commercial
banks, for temporary or emergency purposes and not for investment purposes
and then only in an amount not exceeding twenty percent (20%) of its total
assets (including borrowings) less liabilities (other than borrowings)
immediately after such borrowing;
8. Pledge, mortgage or hypothecate its assets, except that, to secure
borrowings permitted by subparagraph 7 above, a Fund may pledge securities
having a market value at the time of pledge not exceeding ten percent (10%)
of the cost of a Fund's total assets;
9. Make loans, except through the purchase of a portion or all of an issue of
debt securities in accordance with a Fund's investment objective, policies
and restrictions and through investments in qualified repurchase agreements
(provided, however, that a Fund will not invest more than ten percent (10%)
of its total assets in qualified repurchase agreements maturing in more
than seven (7) days);
10. Purchase or sell commodities, commodity contracts or futures or invest in
oil, gas or other mineral exploration or development programs or leases;
11. Make short sales of securities or purchase securities on margin, except for
such short-term credits as are necessary for the clearance of transactions,
or purchase or sell any put or call options or combinations thereof;
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<PAGE>
12. Knowingly purchase or otherwise acquire any securities that are subject to
legal or contractual restrictions on resale or for which there is no
readily available market;
13. Purchase securities (other than obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities), if as a result, more
than twenty-five percent (25%) of a Fund's total assets would be invested
in one industry (governmental issuers of special or general tax-exempt
securities are not considered part of any one industry);
14. Purchase an industrial development bond, if as a result of such purchase,
more than five percent (5%) of a Fund's total assets would be invested in
industrial revenue bonds where the payment of principal and interest is the
responsibility of a company with less than three years' operating history;
15. Issue or sell any senior security, except that this restriction shall not
be construed to prohibit a Fund from borrowing funds (i) on a temporary
basis as permitted by Section 18(g) of the 1940 Act, or (ii) from any bank
provided, that immediately after such borrowing, there is an "asset
coverage" of at least three hundred percent (300%) for all such borrowings
and provided, further, that in the event that such "asset coverage" shall
at any time fall below three hundred percent (300%), the Fund shall, within
three (3) days thereafter (not including Sundays and holidays) or such
longer period as the SEC may prescribe by rules and regulations, reduce the
amount of its borrowings to an extent that the asset coverage of such
borrowings shall be at least three hundred percent (300%) (for purposes of
this restriction, the terms "senior security" and "asset coverage" shall be
understood to have the meanings assigned to those terms in Section 18 of
the 1940 Act);
16. Permit more than twenty percent (20%) of a Fund's net assets to be
invested, during normal market conditions, in securities the interest on
which is not, in its investment adviser's opinion, exempt from federal
income tax, as long as the Fund has its investment objective to provide as
high a level of current interest income exempt from federal income tax as
is consistent with the relative stability of capital. As a matter of
operating policy, the Funds' investment adviser may base its opinion on the
opinion of counsel for the issuer of the security;
17. Permit twenty-five percent (25%) or more of a Fund's total assets to be
invested in municipal obligations and other permitted investments, the
interest on which is payable from revenues on similar types of projects
such as sports, convention or trade show facilities; airports or mass
transportation; sewage or solid waste disposal facilities or air or water
pollution control projects;
18. MUNICIPAL BOND FUND ONLY: Permit twenty-five percent (25%) or more of the
Fund's total assets to be invested in securities whose issuers are located
in the same state; or
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<PAGE>
19. During normal market conditions, invest less than eighty percent (80%) of a
Fund's net assets in obligations the interest on which, in the opinion of
counsel for the issuer, is exempt from federal income tax (and, in the case
of the California Fund, also from California state personal income tax).
NON-FUNDAMENTAL INVESTMENT POLICIES
In addition to the policies described in the Prospectus, the WASHINGTON,
MUNICIPAL BOND and CALIFORNIA FUNDS have adopted the following non-fundamental
policies which may be changed without shareholder approval:
1. Each Fund may invest in any of the following types of short-term, tax-
exempt obligations: municipal notes of issuers rated, at the time of
purchase, within one of the three highest grades assigned by Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies ("S&P") or Fitch Investors Services,
Inc. ("Fitch"); unrated municipal notes offered by issuers having
outstanding municipal bonds rated within one of the three highest grades
assigned by Moody's, S&P or Fitch; notes issued by or on behalf of
municipal issuers which are guaranteed by the U.S. Government; tax-exempt
commercial paper assigned one of the two highest grades by Moody's, S&P or
Fitch; certificates of deposit issued by banks with assets of
$1,000,000,000 or more and municipal obligations which have a maturity of
one year or less from the date of purchase. The Funds do not currently
intend to rely on Fitch Ratings.
2. Each Fund may invest in obligations of the U.S. Government, its agencies or
instrumentalities or in qualified repurchase agreements, the net interest
on which is taxable.
3. Each Fund may invest in municipal notes including tax anticipation, revenue
anticipation and bond anticipation notes and tax-exempt commercial paper.
4. Each Fund may invest in repurchase agreements for a period longer than
seven days.
5. Each Fund may permit twenty-five percent (25%) or more of its assets to be
invested in industrial development bonds.
6. Each Fund may purchase or sell securities on a "when-issued" or "delayed-
delivery" basis.
In addition, the WASHINGTON FUND has adopted the following non-fundamental
policies. The Washington Fund:
1. May not make short sales of securities.
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<PAGE>
2. May not purchase securities on margin, except that a Fund may obtain such
short-term credits as are necessary for the clearance of transactions.
3. May not purchase or sell any put or call options or combinations thereof.
4. May not purchase any security, if as a result, more than fifteen percent
(15%) of its net assets would be invested in illiquid securities.
5. May not invest in oil, gas or other mineral exploration or development
programs or leases.
6. May not invest in real estate limited partnerships.
7. Will not purchase securities if borrowings equal to or greater than five
percent (5%) of its total assets are outstanding.
INVESTMENT POLICIES OF THE MONEY MARKET FUND
FUNDAMENTAL INVESTMENT POLICIES
The Money Market Fund has adopted the following fundamental policies. The Money
Market Fund will NOT:
1. Purchase securities of any issuer, other than obligations of, or guaranteed
by, the U.S. Government, its agencies or instrumentalities, if, as a
result, more than five percent (5%) of the value of the Fund's assets would
be invested in securities of such issuer;
2. Purchase more than ten percent (10%) of any class of securities of any
issuer. All issues of debt securities of any issuer are considered as one
class;
3. Concentrate more than twenty-five percent (25%) of the value of its total
assets in any one industry including securities issued by foreign banks and
foreign branches of U.S. banks; provided, however, that this limitation
does not apply to obligations issued or guaranteed by the U.S. Government,
or its agencies or instrumentalities, or to certificates of deposit or
bankers' acceptances issued by domestic banks;
4. Invest more than five percent (5%) of the Fund's total assets in securities
of issuers that with their predecessors have a record of less than three
years' continuous operation;
5. Invest more than five percent (5%) of the Fund's total assets in securities
restricted as to disposition under the federal securities laws;
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<PAGE>
6. Invest more than ten percent (10%) of the Fund's total assets in time
deposits, repurchase agreements maturing in more than seven days and other
non-negotiable instruments;
7. Enter into repurchase agreements if, as a result thereof, more than ten
percent (10%) of the Fund's total assets valued at the time of the
transaction would be subject to repurchase agreements maturing in more than
seven days;
8. Make loans to others, except through the purchase of publicly distributed
debt obligations or repurchase agreements;
9. Borrow money, except from a bank or affiliates of SAFECO Corporation at an
interest rate not greater than that available to the Fund from commercial
banks, for temporary or emergency purposes and not for investment purposes,
and then only in an amount not exceeding twenty percent (20%) of its total
assets (including borrowings) less liabilities (other than borrowings)
immediately after such borrowing. The Fund will not purchase securities if
borrowings in excess of five percent (5%) of the Fund's total assets are
outstanding;
10. Make short sales of securities or purchase securities on margin, except for
such short-term credits as are necessary for the clearance of transactions,
or purchase or sell any put or call options or combinations thereof;
11. Pledge, mortgage or hypothecate, or in any other manner transfer as
security for indebtedness any security owned by the Fund, except as may be
necessary in connection with permissible borrowings mentioned in paragraph
9 above, and then such pledging, mortgaging or hypothecating may not exceed
fifteen percent (15%) of the Fund's total assets, taken at cost; provided,
however, that as a matter of operating policy the Fund will limit any such
pledging, mortgaging or hypothecating to ten percent (10%) of its net
assets, taken at market, in order to comply with certain state investment
restrictions;
12. Purchase or retain securities of any issuer if any of the officers or
directors of the Fund or its investment adviser owns beneficially more than
one-half (1/2) of one percent (1%) of the securities of such issuer and
together own more than five percent (5%) of the securities of such issuer;
13. Invest in commodities or commodity futures contracts or in real estate,
although the Fund may invest in securities which are secured by real estate
and securities of issuers that invest or deal in real estate;
14. Invest in interests in oil, gas or other mineral exploration or development
programs, although it may invest in securities of issuers that invest in or
sponsor such programs;
15. Purchase securities of other investment companies;
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16. Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in
connection with the disposition of portfolio securities; or
17. Issue or sell any senior security, except that this restriction shall not
be construed to prohibit the Fund from borrowing funds (i) on a temporary
basis as permitted by Section 18(g) of the 1940 Act, or (ii) from any bank
provided, that immediately after such borrowing, there is an asset coverage
of at least three hundred percent (300%) for all such borrowings and
provided, further, that in the event that such asset coverage shall at any
time fall below three hundred percent (300%), the Fund shall, within three
(3) days thereafter (not including Sundays and holidays), or such longer
period as the SEC may prescribe by rules and regulations, reduce the amount
of its borrowings to an extent that the asset coverage of such borrowings
shall be at least three hundred percent (300%) (for purposes of this
restriction, the terms "senior security" and "asset coverage" shall be
understood to have the meaning assigned to those terms in Section 18 of the
1940 Act).
NON-FUNDAMENTAL INVESTMENT POLICIES
In addition to the policies described in the Prospectus, the Money Market Fund
has adopted the following non-fundamental policies which may be changed without
shareholder approval:
1. The Fund will not invest in securities with unlimited liability; i.e.,
securities the holder of which may be assessed for amounts in addition to
the subscription or other price paid for the security.
2. The Fund will not buy or sell foreign currency, except as may be necessary
to convert the proceeds of the sale of foreign securities in the Fund's
portfolio into U.S. dollars.
3. The Fund may invest up to five percent (5%) of its total assets in
restricted securities eligible for resale under Rule 144A ("Rule 144A
securities") or Section 4(2) of the Securities Act of 1933 ("Section 4(2)
securities"), provided that SAFECO Asset Management Company ("SAM"), the
Fund's investment adviser, has determined that such securities are liquid
under guidelines adopted by the Money Market Trust's Board of Trustees.
ADDITIONAL INVESTMENT INFORMATION
TAXABLE BOND FUNDS
The Taxable Bond Funds may make the following investments, among others,
although the Funds may not buy all of the types of securities that are
described.
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1. RESTRICTED SECURITIES AND RULE 144A SECURITIES. Restricted securities
are securities that may be sold only in a public offering with respect
to which a registration statement is in effect under the 1933 Act or, if
they are unregistered, pursuant to an exemption from registration. In
recognition of the increased size and liquidity of the institutional
markets for unregistered securities and the importance of institutional
investors in the formation of capital, the Securities and Exchange
Commission ("SEC") has adopted Rule 144A under the 1933 Act, which is
designed to further facilitate efficient trading among institutional
investors by permitting the sale of Rule 144A securities to qualified
institutional buyers without registration under the 1933 Act. To the
extent privately placed securities held by a Fund qualify under Rule
144A and an institutional market develops for those securities, the Fund
likely will be able to dispose of the securities without registering
them under the 1933 Act. SAM, acting under guidelines established by
the Taxable Bond Trust's Board of Trustees, may determine that certain
securities qualified for trading under Rule 144A are liquid.
Where registration is required, a Fund may be obligated to pay all or part
of the registration expenses, and a considerable period may elapse between
the decision to sell and the time the Fund may be permitted to sell a
security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the Fund might obtain a
less favorable price than prevailed when it decided to sell. To the extent
privately placed securities are illiquid, purchases thereof will be subject
to any limitations on investments in illiquid securities. Restricted
securities for which no market exists are priced at fair value as
determined in accordance with procedures approved and periodically reviewed
by the Taxable Bond Trust's Board of Trustees.
2. REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
Fund purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed upon date and price reflecting a market rate of interest unrelated
to the coupon rate or maturity of the purchased securities. A Fund
maintains custody of the underlying securities prior to their repurchase;
thus, the obligation of the bank or dealer to pay the repurchase price on
the date agreed to is, in effect, secured by such securities. If the value
of these securities is less than the repurchase price, plus any agreed-upon
additional amount, the other party to the agreement must provide additional
collateral so that at all times the collateral is at least equal to the
repurchase price, plus any agreed-upon additional amount.
Each Fund intends to enter into repurchase agreements only with banks and
dealers in transactions believed by SAM to present minimum credit risks in
accordance with guidelines established by the Taxable Bond Trust's Board of
Trustees. SAM will review and monitor the creditworthiness of those
institutions under the general supervision of the Board of Trustees.
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3. WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES. Under this procedure, a Fund
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 a Fund 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 a Fund bears the risk of such fluctuation
from the date of purchase. A Fund may dispose of its interest in those
securities before delivery.
A Fund will commit to purchase such securities only with the intent of
actually acquiring the securities when issued. Assets which are short-
term, high-quality obligations will be earmarked in anticipation of making
payments for securities purchased on a when-issued basis.
4. YANKEE DEBT SECURITIES AND EURODOLLAR BONDS. Yankee debt securities are
securities issued in the U.S. by foreign issuers. These bonds involve
investment risks that are different from those of domestic issuers. Such
risks may include nationalization of the issuer, confiscatory taxation by
the foreign government, establishment of controls by the foreign government
that would inhibit the ability of the issuer to make principal and interest
payments to a Fund, lack of comparable publicly available information
concerning foreign issuers, lack of comparable accounting and auditing
practices in foreign countries and finally, difficulty in enforcing claims
against foreign issuers in the event of default.
SAM will make every effort to analyze potential investments in foreign
issuers on the same basis as the rating services analyze domestic issuers.
Because public information is not always comparable to that available on
domestic issuers, this may not be possible. Therefore, while SAM will make
every effort to select investment in foreign securities on the same basis
relative to quality and risk as its investments in domestic securities,
that may not always be possible.
Eurodollar bonds are denominated in U.S. dollars. A Fund will purchase
Eurodollar bonds through U.S. securities dealers and hold such bonds in the
U.S. The delivery of Eurodollar bonds to a Fund's custodian in the U.S.
may cause slight delays in settlement which are not anticipated to affect
any Fund in any material, adverse manner. Eurodollar bonds issued by
foreign issuers are subject to the same risks as Yankee sector bonds.
5. MUNICIPAL SECURITIES. Municipal securities include obligations issued by
or on behalf of the states, territories and possessions of the United
States and the District of Columbia and their political subdivisions,
agencies, instrumentalities or authorities, the interest on which, in the
opinion of counsel to the issuer, is exempt from federal income tax.
Generally, when market interest rates rise, the price of municipal
securities will fall, and when market interest rates fall, the price of
these securities will rise. There is also a risk that the issuer of a
municipal security will fail to make timely payments of principal and
interest to the Fund.
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6. ILLIQUID SECURITIES. Illiquid securities are securities that cannot be
sold within seven days in the ordinary course of business for approximately
the amount at which they are valued. Due to the absence of an active
trading market, a Fund may experience difficulty in valuing or disposing
of illiquid securities. SAM determines the liquidity of the securities
under guidelines adopted by the Taxable Bond Trust's Board of Trustees.
MANAGED BOND FUND
The Managed Bond Fund may make the following investments, among others, although
it may not buy all of the types of securities that are described.
1. REPURCHASE AGREEMENTS. See the description of such securities under
"Additional Investment Information-- Taxable Bond Funds" on page 17.
2. WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES. See the description of such
securities under "Additional Investment Information-- Taxable Bond Funds"
on page 17.
3. YANKEE DEBT SECURITIES AND EURODOLLAR BONDS. See the description of such
securities under "Additional Investment Information-- Taxable Bond Funds"
on page 17.
4. MUNICIPAL SECURITIES. See the description of such securities under
"Additional Investment Information-- Taxable Bond Funds" on page 17.
5. ASSET-BACKED SECURITIES. Asset-backed securities represent interests in,
or are secured by and payable from, pools of assets such as consumer loans,
automobile receivable securities, credit card receivable securities, and
installment loan contracts. The assets underlying the securities are
securitized through the use of trusts and special purpose corporations.
These securities may be supported by credit enhancements such as letters of
credit. Payment of interest and principal ultimately depends upon
borrowers paying the underlying loans. Repossessed collateral may be
unavailable or inadequate to support payments on defaulted asset-backed
securities. In addition, asset-backed securities are subject to prepayment
risks which may reduce the overall return of the investment.
Automobile receivable securities represent undivided fractional interests
in a trust whose assets consist of a pool of automobile retail installment
sales contracts and security interests in vehicles securing the contracts.
Payments of principal and interest on the certificates issued by the
automobile receivable trust are passed through periodically to certificate
holders and are generally guaranteed up to specified amounts by a letter of
credit issued by a financial institution. Certificate holders may
experience delays in payments or losses if the full amounts due on the
underlying installment sales contracts are not realized by the trust
because of factors such as unanticipated legal or administrative costs of
enforcing the contracts, or depreciation, damage or loss of the vehicles
securing the contracts.
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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.
6. ZERO COUPON BONDS. Zero coupon bonds do not make interest payments;
instead they are sold at a deep discount from their face value and are
redeemed at face value when they mature. Because zero coupon bonds do not
pay current income, their prices can be very volatile when interest rates
change. In calculating its dividends, the Managed Bond Fund takes into
account as income a portion of the difference between a zero coupon bond's
purchase price and its face value.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and
principal components of an outstanding U.S. Treasury bond and selling them
as individual securities.
TAX-EXEMPT FIXED INCOME FUNDS
The Tax-Exempt Fixed Income Funds may make the following investments, among
others, although they may not buy all of the types of securities that are
described.
1. REPURCHASE AGREEMENTS. See the description of such securities under
"Additional Investment Information-- Taxable Bond Funds" on page 17.
2. WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES. See the description of such
securities under "Additional Investment Information--Taxable Bond Funds" on
page 17.
3. ILLIQUID SECURITIES. See the description of such securities under
"Additional Investment Information-- Taxable Bond Funds" on page 17.
MONEY MARKET FUND
The Money Market Fund may make the following investments, among others, although
it may not buy all of the types of securities that are described.
1. QUALITY AND MATURITY. Pursuant to procedures adopted by the Money Market
Trust's Board of Trustees, the Fund may purchase only high-quality
securities that SAM believes present minimal credit risks. To be
considered high quality, a security must be rated, or the issuer must have
received a rating for a comparable short-term security, in accordance with
applicable rules in one of the two highest categories for short-term
securities by at least two
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nationally recognized rating services (or by one, if only one rating
service has rated the security); or, if unrated, judged to be of equivalent
quality by SAM.
High-quality securities are divided into "first tier" and "second tier"
securities. First tier securities are those deemed to be in the highest
rating category (e.g., A-1 by S&P) and second tier securities are those
deemed to be in the second highest rating category (e.g., A-2 by S&P).
The Fund may not invest more than five percent (5%) of its total assets in
second tier securities. In addition, the Fund may not invest more than one
percent (1%) of its total assets or $1 million (whichever is greater) in
the second tier securities of a single issuer.
The Fund currently intends to limit its investments to securities with
remaining maturities of 397 days or less, and to maintain a dollar-weighted
average maturity of 90 days or less. When determining the maturity of a
security, the Fund may look to an interest rate reset or demand feature.
A security is considered to be rated if either the security itself is
assigned a rating or the issuer is assigned a rating for comparable short-
term debt obligations. Alternatively, a security (whether or not rated)
with an unconditional demand feature (as defined in Rule 2a-7 under the
1940 Act) may be considered to be rated if the demand feature or its issuer
has been assigned a rating. See "Description of Ratings" on page 62 for
further explanation of rating categories.
2. RESTRICTED SECURITIES AND RULE 144A SECURITIES. See the description of
such securities under "Additional Investment Information-- Taxable Bond
Funds" on page 17.
3. VARIABLE AND FLOATING RATE INSTRUMENTS. Certain municipal obligations may
carry variable or floating rates of interest. Variable rate instruments
bear interest at rates that are readjusted at periodic intervals so as to
cause the instruments' market value to approximate their par value.
Floating rate instruments bear interest at rates which vary automatically
with changes in specified market rates or indices, such as the bank prime
rate. The Fund's right to obtain payment at par on a demand instrument
upon demand could be affected by events occurring between the date the Fund
elects to redeem the instrument and the date redemption proceeds are due
which affect the ability of the issuer to pay the instrument at par value.
4. TERM PUT BONDS. Term put bonds are variable rate obligations which have a
maturity in excess of one year with the option to put back (sell back) the
bonds on a specified put date. On the put date, the interest rate of the
bond is reset according to current market conditions and accrues at the
reset rate until the next put date. The Fund may also hold mandatory put
bonds. Mandatory put bonds require the holder to take certain action to
retain the bonds. Put bonds are generally credit-enhanced by collateral,
guaranteed investment contracts,
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surety bonds, a letter of credit or insurance which guarantees the payment
of principal and interest.
5. ILLIQUID SECURITIES. See the description of such securities under
"Additional Investment Information-- Taxable Bond Funds" on page 17.
6. FOREIGN ISSUERS. Obligations of foreign issuers involve certain additional
risks. These risks may include future unfavorable political and economic
developments, withholding taxes, seizures of foreign deposits, currency
controls, interest limitations, or other governmental restrictions that
might affect payment of principal or interest. Additionally, there may be
less public information available about foreign banks and their branches.
Foreign issuers may be subject to less governmental regulation and
supervision than U.S. issuers. Foreign issuers also generally are not
bound by uniform accounting, auditing and financial reporting requirements
comparable to those applicable to U.S. issuers.
7. SECURITIES ISSUED BY BANKS AND OTHER ISSUERS. Investments may be made in
U.S. dollar-denominated time deposits, certificates of deposit, and
bankers' acceptances of U.S. banks and their branches located outside of
the United States, U.S. branches and agencies of foreign banks and foreign
branches of foreign banks. The Fund may also invest in U.S. dollar-
denominated securities issued or guaranteed by other U.S. or foreign
issuers, including U.S. and foreign corporations or other business
organizations, foreign governments, foreign government agencies or
instrumentalities and U.S. and foreign financial institutions, including
savings and loan institutions, insurance companies and mortgage bankers, as
well as banks.
The obligations of foreign branches of U.S. banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by governmental
regulation. Payment of interest and principal on these obligations may
also be affected by governmental action in the country of domicile of the
branch (generally referred to as sovereign risk). In addition, evidence of
ownership of portfolio securities may be held outside of the U.S. and the
Fund may be subject to the risks associated with the holding of such
property overseas. Various provisions of federal law governing the
establishment and operation of U.S. branches do not apply to foreign
branches of U.S. banks.
Obligations of U.S. branches and agencies of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by federal and state
regulation, as well as by governmental action in the country in which the
foreign bank has its head office.
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INVESTMENT RISKS OF CONCENTRATION IN CALIFORNIA AND WASHINGTON ISSUERS
CALIFORNIA FUND
The following is a condensed and general description of the judicial,
legislative and electoral proceedings affecting the taxing ability and fiscal
condition of the State of California and its various political subdivisions
which have occurred since June 1978. All of these proceedings affect the
continuing ability of California political subdivisions to meet their debt
service obligations. Since during normal market conditions the Fund plans to
invest at least 80% of its net assets in bonds issued by California and its
political subdivisions, the investment risk of such concentration should be
carefully considered. The description below summarizes discussions contained in
official statements relating to various types of bonds issued by the State of
California and its political subdivisions. A more detailed description can be
found in such official statements. The California Fund has not independently
verified any of the information presented in this section.
The taxing powers of California public agencies are limited by Article XIII A of
the State Constitution, added by an initiative amendment approved by voters on
June 6, 1978, and commonly known as Proposition 13. Article XIII A limits the
maximum ad valorem tax on real property to one percent of "full cash value"
which is defined as "the County Assessor's valuation of real property as shown
on the fiscal year 1975-76 tax bill under 'full cash value' or, thereafter, the
appraised value of real property when purchased, newly constructed, or a change
in ownership has occurred after the 1975 assessment." The full cash value may
be adjusted annually to reflect inflation at a rate not to exceed two percent
per year, or reduction in the consumer price index or comparable local data, or
declining property value caused by damage, destruction, or other factors.
The tax rate limitation referred to above does not apply to ad valorem taxes to
pay the interest and redemption charges on any indebtedness approved by the
voters before July 1, 1978 or any bonded indebtedness for the acquisition or
improvement of real property approved by two-thirds of the votes cast by the
voters voting on the proposition. Article XIII A also requires a two-thirds
vote of the electors prior to the imposition of any special taxes and totally
precludes the imposition of any new ad valorem taxes on real property or sales
or transaction taxes on the sales of real property. The validity of Article
XIII A has been upheld by both the California Supreme Court and the United
States Supreme Court.
Legislation adopted in 1979 exempts business inventories from taxation. However,
the same legislation provides a formula for reimbursement by California to
cities and counties, special districts and school districts for the amount of
tax revenues lost by reason of such exemption or adjusted for changes in the
population and the cost of living. Legislation adopted in 1980 provides for
state reimbursements to redevelopment agencies to replace revenues lost due to
the exemption of business inventories from taxation. Such legislation provides
for restoration of
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business inventory tax revenues through the annual addition of artificial
assessed value, not actually existing in a project area, to the tax rolls of
redevelopment projects. These reimbursements are adjusted for changes in the
population and the cost of living. All such reimbursements are subject to
change or repeal by the Legislature, and they have been changed since 1980.
Furthermore, current law generally prohibits the pledging of such reimbursement
revenues to secure redevelopment agency bonds.
Redevelopment agencies in California have no power to levy and collect taxes;
hence, any decrease in property taxes or limitations in the amounts by which
property taxes may increase adversely affects such agencies, which lack the
inherent power to correct for such decreases or limitations.
State and local government agencies in California and the State itself are
subject to annual "appropriation limits" imposed by Article XIII B, an
initiative constitutional amendment approved by the voters on November 6, 1979,
which prohibits government agencies and the State from spending "appropriations
subject to limitation" in excess of the appropriations limit imposed.
"Appropriations subject to limitation" are authorizations to spend "proceeds of
taxes", which consist of tax revenues, certain State subventions and certain
other funds, including proceeds from regulatory licenses, user revenues, certain
State subventions and certain other funds to the extent that such proceeds
exceed "the cost reasonably born by such entity in providing the regulation,
product, or service." No limit is imposed on appropriation of funds which are
not "proceeds of taxes", on debt service or indebtedness existing or authorized
by January 1, 1979, or subsequently authorized by the voters, or appropriations
required to comply with mandates of courts or the federal government, or user
charges or fees that do not exceed the cost of the service provided, nor on
certain other non-tax funds.
By statute (which has been upheld by the California Court of Appeals), tax
revenues allocated to redevelopment agencies are not "proceeds of taxes" within
the meaning of Article XIII B, and the expenditure of such revenues is therefore
not subject to the limitations under Article XIII B.
The imposition of taxes by local agencies is further limited by the provisions
of an initiative statute ("Proposition 62") approved by the voters on November
4, 1986. The statute (i) requires that any tax for general governmental
purposes imposed by local government entities be approved by resolution or
ordinance adopted by two-thirds vote of the governmental entity's legislative
body and by a majority vote of the electorate of the governmental entity, (ii)
requires that any special tax (defined as a tax levied for other than general
governmental purposes) imposed by a local governmental entity be approved by a
two-thirds vote of the voters within that jurisdiction, (iii) restricts the use
of revenues from a special tax to the purposes or for the service for which the
special tax was imposed, (iv) prohibits the imposition of AD VALOREM taxes on
real property by local governmental entities except as permitted by Article XIII
A, (v) prohibits the imposition of transaction taxes and sales taxes on the sale
of real property by local governmental entities and (vi) requires that any tax
imposed by a local governmental entity on or
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after May 1, 1985 be ratified by a majority vote of the electorate within two
years of the adoption of the initiative or be terminated by November 15, 1988.
Subsequent decisions of California Courts of Appeal held that all or portions of
the provisions of Proposition 62, including those requiring the submission of
general fund tax measures to the electorate, are unconstitutional. However, on
September 28, 1995, in the case of SANTA CLARA COUNTY LOCAL TRANSPORTATION
AUTHORITY V. GUARDINO, the California Supreme Court upheld the constitutionality
of Proposition 62. As a result, the annual revenues of any local government or
district as shown in the general fund budget must be reduced in any year to the
extent that they rely on the proceeds of any general tax which has not been
approved by majority vote of the electorate. Senate Bill No. 1590 has been
introduced in the California Legislature in an effort to clarify whether the
general tax voter approval requirement is applicable to any tax that was imposed
or increased by an ordinance or resolution adopted prior to December 14, 1995.
If adopted, Senate Bill No. 1590 will apply the GUARDINO decision prospectively
only.
An initiative petition called the "Right to Vote on Taxes Act" is expected to
qualify for the November 5, 1996 general election ballot. If this measure
receives the requisite number of signatures for inclusion on the ballot and if
it is approved by majority vote of the electorate, it will add Articles XIII C
and XIII D to the State Constitution. The measure requires that general tax
increases by all local government entities be approved by not less than a
majority vote and that taxes for special purposes be approved by a two-thirds
vote; provides that existing language in the California Constitution shall not
be construed to limit the initiative power with respect to reducing or repealing
any local tax, assessment, fee or charge; prescribes procedures applicable to
all assessments and requires that all assessments be approved by property
owners; prohibits property related fees and charges from exceeding costs of the
service being provided; imposes procedural requirements, including notice and
public hearing, prior to imposition of new or increased fees or charges on
property; and requires that, except for fees for sewer, water and refuse
collection, fees be approved by a majority vote of the fee payers.
Generally, revenues derived from most utility property assessed by the State
Board of Equalization are allocated as follows: (i) each jurisdiction,
including redevelopment project areas, receives up to 102 percent of its prior
year State-assessed revenue; and (ii) if countrywide revenues generated from
such utility property are less than the previous year's revenue or greater than
102 percent of the previous year's revenues, each jurisdiction shares the burden
of the shortfall or benefit from the excess revenues by a specified formula.
This provision applies to all utility property except railroads whose valuation
will continue to be allocated to individual tax rate areas. In a 1991 Superior
Court ruling, the valuation method used by the State Board to value unitary
utility property was declared illegal and a new method was imposed, resulting in
significantly lower values and therefore significantly reduced property tax
revenues. One of the effects of the decision was to entitle the principal
utility plaintiff to a refund of $9 million. As a result of this case, the
State Board along with certain counties signed a settlement agreement with
several affected utilities providing for an orderly 10.5% phase-down of tax
assessments over fiscal years 1992-93, 1993-94 and 1994-95.
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Lease-based financing, typically marketed in the form of certificates of
participation, has been extremely popular in California, since the courts have
long held that properly structured long-term leases do not create "indebtedness"
for purposes of constitutional and statutory debt limitations. The obligation
to pay rent thereunder is nevertheless enforceable, on an annual basis, so long
as the leased property is available for use and occupancy by the government
lessee. The risk of rent abatement (because of construction delays, damage to
structures and the like) is usually mitigated by funded reserves, casualty
insurance and rental interruption insurance.
Given the turbulent history of California electoral, judicial and legal
proceedings affecting taxation since 1978, it is impossible to predict what
proceedings might occur in the future that would affect the ability of
California and its political subdivisions to service their outstanding
indebtedness. In addition, there are both nuclear and non-nuclear electric
power authorities in California that are financed in whole or in part by so-
called "take or pay" or "hell or high water" contracts. Court decisions outside
of the State of California have called into question the enforceability of such
contracts.
The State of California recently issued general obligation bonds in March, 1996.
The related Official Statement for that bond issue disclosed that the recent
recession has seriously affected State tax revenues, has caused increased
expenditures for health and welfare programs, and has caused a structural
imbalance in the State's budget, with the largest programs supported by the
General Fund -- K-12 schools and community colleges, health and welfare, and
corrections --growing at rates higher than the growth rates for the principal
revenue sources of the General Fund. As a result, the State has experienced
recurring budget deficits and has had to use a series of external borrowings to
meet its cash needs.
The Governor's budget proposal for 1996-97 released January 10, 1996, projects
General Fund revenues and transfers in the 1995-96 fiscal year of $45 billion
(an increase of approximately $900 million over the projection contained in the
original 1995-96 Budget Act) and expenditures of $44.2 billion (an increase of
approximately $800 million over the amount shown in the original 1995-96 Budget
Act). The Governor's Budget for 1996-97 estimates General Fund revenues and
transfers of about $45.6 billion, which would leave a balance of approximately
$400 million in the budget reserve, the Special Fund for Economic Uncertainties,
at June 30, 1997.
As a result of the deterioration in the State's budget and cash situation in
fiscal years 1991-92 and 1992-93, rating agencies reduced the State's credit
ratings. Between November 1991 and October 1992 the rating on the State's
general obligation bonds was reduced by Standard & Poor's Ratings Group from
"AAA" to "A+" and by Moody's Investors Service from "Aaa" to "Aa" and by Fitch
Investors Service, Inc. from "AAA" to "AA." On July 15, 1994, based on the
State's inability to eliminate its accumulated deficit, the same three rating
agencies further lowered their ratings on the State's general obligation bonds
to "A," "A1" and "A", respectively. More recently, however, Fitch Investors
Service, Inc. raised its rating from "A" to "A+." It is not possible to predict
the future course of the State's credit ratings.
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On December 6, 1994, Orange County, California, together with its pooled
investment funds, filed for protection under Chapter 9 of the federal Bankruptcy
Code, after reports that the funds had suffered significant market losses in
their investments, causing a liquidity crisis for the funds and the County. More
than 200 other public entities, most of which, but not all, are located in the
County, were also depositors in the funds. As of mid-January, 1995, the County
estimated the funds' loss at about $1.69 billion, or 23% of their initial
deposits of approximately $7.5 billion. Many of the entities which deposited
moneys in the funds, including the County, faced interim or extended cash flow
difficulties because of the bankruptcy filing and may be required to reduce
programs or capital projects. Orange County has embarked on a fiscal recovery
plan based on sharp reductions in services and personnel, and rescheduling of
outstanding short-term debt using certain new revenues transferred to Orange
County from other local governments pursuant to special legislation approved by
the bankruptcy judge on May 15, 1996. The State has no existing obligation with
respect to any outstanding obligations or securities of Orange County or any of
the other participating entities.
The Fund will attempt to achieve geographic diversification by investing in
obligations of issuers that are located in different areas within California as
well as obligations of the State of California itself. In addition, the Fund
will not invest more than 15% of its total assets in tax allocation bonds issued
by California redevelopment agencies. These are operating policies of the Fund
and may be changed without the approval of the Fund's shareholders.
WASHINGTON FUND
WASHINGTON STATE
A discussion of certain economic, financial and legal matters regarding the
State of Washington follows. During normal market conditions, the Washington
Fund will generally invest at least 80% of its net assets in bonds issued by
Washington and its political subdivisions, municipalities, agencies,
instrumentalities or public authorities. Therefore, the investment risk of such
concentration should be carefully considered. The information in the discussion
is drawn primarily from official statements relating to securities offerings of
the State which are dated prior to the date of this Statement of Additional
Information. This information may be relevant in evaluating the economic and
financial position of the State, but is not intended to provide all relevant
data necessary for a complete evaluation of the State's economic and financial
position. Discussions regarding the financial health of the State government may
not be relevant to municipal obligations issued by a political subdivision of
the State. Furthermore, general economic conditions discussed may or may not
affect issuers of the obligations of the State. The Washington Fund has not
independently verified any of the information presented in this section.
GENERAL INFORMATION
According to the U.S. Census Bureau's 1990 Census, Washington State's
population is ranked 18th of the 50 states. During the ten-year time period from
1980-1990, the State's population
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increased at an average annual rate of 1.8%, while the U.S. population grew at
an average annual rate of 1.1%. The State's population increased at an average
annual rate of approximately 2.5% 1990 to 1993, and at an average annual rate of
approximately 1.8% from 1993 to 1995.
The State's largest city, Seattle, is part of an international trade,
manufacturing, high technology and business service corridor which extends along
Puget Sound from Everett to Tacoma. The State's Pacific Coast-Puget Sound
region includes 75% of its population, the major portion of its industrial
activity and the major part of the forests important to its timber and paper
industries. The remainder of the State has agricultural areas primarily
devoted to grain, fruit orchard and dairy operations.
The State's economy has recently diversified with employment in the trade and
service sectors representing an increasing portion of total employment relative
to the manufacturing sector. The rate of economic growth as measured by
employment in the State was 2.0% in 1992, 1.3% in 1993, 2.3% in 1994 and 2.1% in
1995.
The State operates on a July 1 to June 30 fiscal year and on a biennial budget
basis. Fiscal controls are exercised during the biennium through an allotment
process which requires each agency to submit a monthly expenditure plan. The
plan must be approved by the Office of Financial Management, which is the
Governor's budget agency. It provides the authority for agencies to spend funds
within statutory maximums specified in a legislatively adopted budget. State
law requires a balanced biennial budget. Whenever it appears that disbursements
will exceed the aggregate of estimated receipts plus beginning cash surplus, the
Governor is required to reduce allotments, thereby reducing expenditures of
appropriated funds.
As interpreted by the State Supreme Court, Washington's Constitution prohibits
the imposition of net income taxes.
The State's tax revenues are primarily comprised of excise and ad valorem taxes.
By constitutional provision, the aggregate of all regular (unvoted) tax levies
on real and personal property by state and local taxing districts cannot exceed
1% of the true and fair value of the property. Excess levies are subject to
voter approval. For the fiscal year ending June 30, 1995, approximately 78.5% of
the State's tax revenues came from general and selective sales and gross
receipts taxes, of which the retail sales tax and its companion use tax
represented 46% of total collections. Business and occupation tax collections
represented about 16.6% and the motor vehicle fuel tax represented approximately
7.0% of total State taxes for the year. Ad valorem taxes represented 10.8% of
State revenues for the fiscal year 1995.
Expenditures of State revenues are made in accordance with constitutional and
statutory mandates.
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STATE EXPENDITURE LIMITATIONS
Initiative 601, which passed by the voters in November 1993, limits increases in
General Fund-State government expenditures to the average rate of population and
inflation growth, and sets forth a series of guidelines for limiting tax and
expenditure increases and stabilizing long range budget planning.
Provisions of Initiative 601 establish a procedure for computing a fiscal year
growth factor based on a lagged, three-year average of population and inflation
growth. This growth factor is used to determine a state spending limit for
programs and expenditures supported by the State General Fund. The growth
factor is 5.13% for fiscal year 1996 and 4.47% for fiscal year 1997. The
initiative creates two new reserve funds (the Emergency Reserve Fund and the
Education Construction Fund) for depositing revenues in excess of the spending
limit and abolishes the current Budget Stabilization Account. Ending balances
in the Budget Stabilization Account were transferred to the State General Fund
($100 million) and the Pension Reserve Account ($25 million). The initiative
also places restrictions on the addition or transfer of functions to local
government unless there is reimbursement by the State.
The Initiative's requirement for voter approval for new tax measures has
expired. Effective July 1, 1995, taxes can be enacted with a two-thirds
majority of both houses of the State Legislature if resulting General Fund-State
expenditures do not exceed the spending limit. Voter approval is still required
to exceed the spending limit. Thus far, the Initiative has not had a
restrictive impact on the State's budget. However, the State expects its
expenditures to be constrained by the Initiative beginning in the 1997-99
Biennium.
The State Constitution and enabling statutes authorize the incurrence of State
general obligation debt to the payment of which the State's full faith and
credit and taxing power are pledged. With certain exceptions, the amount of
State general obligation debt which may be incurred is limited by constitutional
and statutory restrictions. These limitations are imposed by prohibiting the
issuance of new debt if the new debt would cause the maximum annual debt service
on all thereafter outstanding general obligation debt to exceed a specified
percentage of the arithmetic mean of general State revenues for the preceding
three years. These limitations apply to the incurrence of new debt and are not
limitations on the amount of debt service which may be paid by the State in
future years.
The State Legislature is obligated to appropriate money for State debt service
requirements. Generally, on or before June 30 of each year, the State Finance
Committee certifies to the State Treasurer the amount required for payment of
bond interest and principal for the coming year. Some general obligation bond
statutes provide that the General Fund will be reimbursed from discrete revenues
which are not considered general State revenues. Other bonds are limited
obligation bonds not payable from the General Fund. For the 1995-97 Biennium,
General Fund-State revenues are projected to be $17.395 billion, an increase of
4.5% over the 1993-95 Biennium, plus a carry-forward of $559 million. The
revenue outlook for the 1995-97
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<PAGE>
Biennium is stable and the General Fund is projected to end the Biennium with a
$341 million fund balance.
The State Legislature passed a 1993-95 Biennium Budget on May 6, 1993, and the
Governor signed the budget bill on May 28, 1993. The 1993-95 Biennium Budget
contained $650 million in general tax increases, $163 million in other revenues,
$700 million in program and administrative reductions, and $622 million in fund
shifts (such as to federal funding sources). The 1994 Supplemental Budget
passed the State Legislature on March 14, 1994, and the Governor signed the
Supplemental Budget bill on April 6, 1994. The 1994 Supplemental Budget
included $48 million in tax cuts, an $11 million revenue increase from a variety
of sources and $168 million in additional expenditures, many of which
represented one time investments.
The 1995 Supplemental Budget passed the State Legislature on May 1, 1995 and was
signed by Governor Lowry on May 9, 1995. The 1995 Supplemental Budget made
adjustments to expenditure authority for State agencies for the last quarter of
the Biennium. These budget adjustments reflected the most recent enrollment and
caseload estimates and addressed significant unexpected expenses, including
extraordinary costs of $47 million incurred in one of the worst forest fire
years since 1970. The 1995 Legislature also appropriated $110 million from the
General Fund to provide school construction funding in the K-12 system. Overall,
the 1995 Supplemental Budget expenditure adjustments and other 1993-95
appropriation bills in the 1995 Legislative session increased expenditures by
$114.5 million.
During the 1995 legislative session, Governor Lowry vetoed two bills that would
have cut taxes: House Bill 1997, an ongoing property tax bill that would cost
$92 million in the 1995-97 budget period and House bill 1023, which would roll
back business and occupation taxes, along with several other taxes, by $176.3
million in the 1995-97 Biennium.
For most municipalities in the State, the fiscal year is the calendar year
except that school districts have a September 1 - August 31 fiscal year. All
municipalities must maintain balanced budgets. Depending on the type of
municipality, local revenues are derived from ad valorem taxes, excise and gross
receipts taxes, special assessments, fees, user charges and State and federal
grants.
Municipalities incur debt by the issuance of general obligations or other
borrowings which are payable from taxes, though other revenue sources may be
used. Revenue obligations do not constitute debt under constitutional and
statutory limitations as long as taxes are not pledged or used to pay debt
service. Only non-tax revenue from the operation of a project or enterprise
financed by the revenue obligations (and sometimes special assessments on
property benefitted from the financed improvements) may be used to pay that debt
service. Usually, revenue bonds are secured by a reserve funded in an amount
based on a factor of debt service. Many municipalities may issue improvement
district obligations payable only from special assessments on benefitted
property, but some of those obligations also may be secured by a special
guaranty fund.
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ECONOMIC OVERVIEW
Over the past few years, the State's economic performance has remained
relatively strong compared to the U.S. as a whole. After adjusting for
inflation, growth in personal income in the State increased 3.7% in 1995 over
the 1994 level.
The State's economic base includes manufacturing and service industries as well
as agricultural and timber production. During 1990-1995, the State experienced
growth in non-manufacturing industries and a decline in manufacturing
industries. The rate of employment growth, which exceeded 4.5% during the mid-
to-late 1980's, has declined since 1991 to an average rate of 1.4%. The 1996
employment growth rate is expected to be 1.46%.
Washington's economy consists of both export and local industries. Leading
export industries are aerospace, forest products, agriculture and food
processing. The aerospace, timber and food processing industries together employ
approximately 9% of the State's non-farm workers. However, the non-manufacturing
sector has played an increasingly significant role in contributing to the
State's economy in recent years.
Below is a summary of key industry segments of the State's economy as well as of
selected economic and employment data.
MANUFACTURING. The Boeing Company ("Boeing"), which is the Seattle Metropolitan
Area's largest employer, has several facilities located throughout the area.
Boeing is the world's leading manufacturer of commercial airliners and as of
April 1996 employed approximately 74,000 people state-wide, primarily at several
locations in the area. Boeing anticipates bringing total employment in the
State to approximately 78,500 by the end of 1996. While the primary activity
of Boeing is the manufacture of commercial aircraft, Boeing has played leading
roles in the aerospace and military missile programs of the U.S. and has
undertaken a broad program of diversification activities including Boeing
Information and Support Services. In 1995, Boeing had $19.5 billion in sales
and net earnings of $393 million, and a backlog of orders totaling $72.3
billion. Boeing currently anticipates 1996 sales to be in the $22 billion
range.
Boeing recently completed two major expansion projects and is currently
undertaking another. The company recently acquired a 212-acre site in Renton
(King County), which is the site of the former Longacres Race Track. The site
will be used as a location for the development of an office complex, the first
building of which will be a 500,000 square-foot customer service training
center. In Everett (Snohomish County), Boeing completed construction of a 5.6
million square-foot assembly plant for the new 777 jetliner. In 1993, Boeing
completed a $400 million skin and spar plant and a composite manufacturing
center on 500 acres in Puyallup (Pierce County).
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<PAGE>
A total of 206 commercial jet transports were delivered in 1995, compared with
270 for 1994. Defense and space sales of $5.6 billion were approximately 10%
higher than in 1994. The 10-week strike by the International Association of
Machinist and Aerospace Workers (IAM) resulted in the delay of approximately 30
commercial jet transport deliveries during the fourth quarter. During the first
quarter of 1996, deliveries for all models were hampered by the strike. A total
of 40 commercial jet transports were delivered, compared with 59 in the first
quarter of 1995.
TECHNOLOGY-RELATED INDUSTRIES. The State ranks fourth among all states in the
percentage of its work force employed by technology-related industries. It
ranks third among the largest software development centers. The State is the
home of approximately 1000 advanced technology firms of which approximately 50%
are computer-related. Microsoft, headquartered in Redmond, Washington, is the
largest microcomputer software company in the world. In addition, several
biotechnical firms located in the State have attained international acclaim for
their research and development.
TIMBER. Natural forests cover more than 40% of the State's land area and forest
products rank second behind aerospace in terms of total production. The primary
employer in the timber industry is The Weyerhaeuser Company. Productivity in
the State's forest products industry increased steadily from 1980 to 1990.
However, since 1991, recessionary influences have resulted in a production
decline. A slight decline is anticipated for 1996 and for the next few years,
due to federally-imposed limitations on the harvest of old-growth timber and the
inability to maintain the previous record levels of production increases.
Although a continued decline in employment is anticipated for 1996 in certain
regions, the impact is not expected to affect materially the State's overall
economic performance.
AGRICULTURE AND FOOD PROCESSING. Agriculture and food processing is the State's
most important industry by most measures. Growth in agricultural products was
an integral factor in the State's economic growth in the late 1980s and early
1990s.
FINANCE, INSURANCE AND REAL ESTATE. Employment in finance, insurance and real
estate is estimated to represent 5.2% of the State's wage and salary employment
in 1995. Projections for 1996 show this segment holding steady at 5.2% of
employment.
TRADE. International trade plays an important role in the State's employment
base and one in six jobs is related to this area. During the past twenty years
the State has consistently ranked number one or number two in international
exports per capita. Seattle-Tacoma International Airport is the focus of the
region's air traffic and trade. The State, particularly the Puget Sound
Corridor, is a trade center for the Northwest and the State of Alaska. A system
of public ports, the largest of which are the Ports of Seattle and Tacoma,
handle waterborne trade primarily to and from the Far East. These two Ports
each rank among the top 20 ports in the world based on volume of containerized
cargo shipped. Approximately 70% of the cargo entering the Ports of Seattle and
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Tacoma has an ultimate destination outside the Pacific Northwest. Therefore,
trade levels depend largely on national and world, rather than local, economic
conditions.
Growth in retail sales in the State between 1990 and 1992 was higher than that
in the United States. During 1993 through 1995, the rate of growth for retail
sales was lower for the State than for the United States. The State is home to
a number of specialty retail companies that have reached national stature,
including Nordstrom, Eddie Bauer, Costco and Recreational Equipment Inc. (REI).
SERVICES/TOURISM. The highest employment growth in the State since 1981 has
taken place in the services sector, although rate of growth has shown small but
relatively consistent decline since 1990 from 7% to 4.3%% forecast for 1995.
Seattle is the location for the Washington State Convention and Trade Center
which opened in June 1988. The State also has many tourist attractions such as
the Olympic and Cascade mountain ranges, ocean beaches and local wineries.
CONSTRUCTION. Employment in the construction sector in the Puget Sound area
increased 69.2% between 1981 and 1991. The increase in employment in the late
1980s was due in part to the affordability of housing compared to other areas of
the country. Construction employment growth flattened between 1991 and 1993,
but showed a modest increase in 1994 and leveled again in 1995. Commercial
building, while not increasing at the pace of the 1980s, remains stable.
FEDERAL, STATE AND LOCAL GOVERNMENT. Employment in the government sector
represents approximately 19% of all wage and salary employment in the State on a
combined basis. Seattle is the regional headquarters for a number of federal
government agencies and the State receives an above-average share of defense
expenditures. Employment in the government sector has expanded in the State
since 1990, but at a declining rate. State and local government employment has
increased at a faster pace than employment by the federal government, and is
projected to add new jobs through 1996.
LITIGATION
At any given time, including the present, there are numerous lawsuits pending
against the State of Washington which could affect the State's revenues and
expenditures. However, none of the lawsuits are expected to have a material
adverse impact on either State revenues or expenditures.
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<PAGE>
PRINCIPAL SHAREHOLDERS OF CERTAIN FUNDS
INTERMEDIATE TREASURY FUND
At November 15, 1996, SAFECO Insurance Company of America ("SAFECO
Insurance") owned 500,000 shares of the Intermediate Treasury Fund which
represented 32.63% of the outstanding shares of the Fund. SAFECO Insurance
is a Washington Corporation and a wholly-owned subsidiary of SAFECO
Corporation, each of which has its principal place of business at SAFECO
Plaza, Seattle, Washington 98185. At November 15, 1996, SAFECO Corporation
owned 500,000 shares of the High-Yield Bond Fund, which represented 8.41% of
the outstanding shares of the Fund. SAFECO Corporatioin is a Washington
corporation and a holding company whose primary subsidiaries are engaged in
the insurance and related financial service businesses.
MANAGED BOND FUND
At September 13, 1996, Principal Shareholders of the Managed Bond Fund were
as follows. Crista Ministries, PO Box 330303, Seattle, WA 98133, owned
91,375 shares, which represented 18.4% of the Fund's outstanding shares.
Massman Construction Co. Profit Sharing and Pension Plan, 8901 Stateline,
Kansas City, MO 64114, owned 233,262 shares, which represented 7.0% of the
Fund's outstanding shares. Crown Packaging Corp. Profit Sharing Retirement
Trust, 8514 Eager Road, St. Louis, MO 63144, owned 155,933 shares, which
represented 31.4% of the Fund's outstanding shares.
WASHINGTON FUND
At June 30, 1996, SAFECO Insurance owned 502,372 shares, which represents 79.6%
of the outstanding shares of the Washington Fund. SAFECO is a wholly-owned
subsidiary of SAFECO Corporation, a Washington corporation, having its principal
place of business at SAFECO Plaza, Seattle Washington 98185.
Principal shareholders of a Fund may control the outcome of a shareholder vote.
ADDITIONAL TAX INFORMATION
GENERAL
Each Fund 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 Fund
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). Each Fund intends to make
sufficient distributions to shareholders to relieve it from liability for
federal excise and income taxes.
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<PAGE>
Each Fund is treated as a separate corporation for federal income tax purposes.
The excess of net long-term capital gains over net short-term capital loss
realized by a Fund on portfolio transactions, when distributed by the Fund, is
subject to long-term capital gains treatment under the Code, regardless of how
long you have held the shares of the Fund. 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.
Redemptions and exchanges of shares of a Fund may result in a capital gain or
loss for federal income tax purposes.
If shares of a Fund are sold at a loss after being held for one year or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any capital gain distributions received on those shares. Investors
also should be aware that if shares are purchased shortly before the record date
for any distribution, the shareholder will pay full price for the shares and
receive some portion of the purchase price back as a taxable dividend or capital
gain distribution.
Each Fund is required to withhold 31% of all taxable dividends, capital gain
distributions and redemption proceeds payable to individuals and certain other
noncorporate shareholders who do not furnish the Fund with a correct taxpayer
identification number. Withholding at that rate also is required from dividends
and those distributions for shareholders who otherwise are subject to backup
withholding.
These are tax requirements that all mutual funds must follow in order to avoid
federal taxation. The Funds may have to limit investment activity in some types
of securities in order to adhere to these requirements.
SPECIAL CONSIDERATIONS FOR THE TAX-EXEMPT FIXED INCOME FUNDS
The tax-exempt interest portion of each daily dividend will be based upon the
ratio of a Tax-Exempt Fixed Income Fund's tax-exempt to taxable income for the
entire fiscal year (average annual method). As a result, the percentage of tax-
exempt income for any particular distribution may be substantially different
from the percentage of a Tax-Exempt Fixed Income Fund's income that was tax-
exempt during the period covered by that distribution. Each Tax-Exempt Fixed
Income Fund will advise its shareholders of this ratio within 60 days after the
close of its fiscal year.
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of a Tax-Exempt Fixed Income Fund is not deductible. In addition,
entities or persons who are "substantial users" (or related persons) of
facilities financed by most "private activity" bonds should consult their tax
advisers before purchasing shares of any of the Tax-Exempt Fixed Income Funds.
"Substantial user" is generally defined to include a "non-exempt person" who
regularly uses in a trade or business a part of a facility financed from the
proceeds of most "private activity" bonds.
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<PAGE>
Each Tax-Exempt Fixed Income Fund may invest in municipal bonds that are
purchased, generally not on their original issue, with market discount (that is,
at a price less than the principal amount of the bond or, in the case of a bond
that was issued with original issue discount, at a price less than the amount of
the issue price plus accrued original issue discount) ("municipal market
discount bonds"). Gain on the disposition of a municipal market discount bond
(other than a bond with a fixed maturity date within one year from its
issuance), generally is treated as ordinary (taxable) income, rather than
capital gain, to the extent of the bond's accrued market discount at the time of
disposition. Market discount on such a bond generally is accrued ratably, on a
daily basis, over the period from the acquisition date to the date of maturity.
In lieu of treating the disposition gain as above, a Tax-Exempt Fixed Income
Fund may elect to include market discount in its gross income currently, for
each taxable year to which it is attributable.
Each Tax-Exempt Fixed Income Fund 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 November 30 of that year, plus certain
other amounts.
No portion of the dividends or other distributions paid by any Tax-Exempt Fixed
Income Fund is eligible for the dividends-received deduction allowed to
corporations.
In the future, proposals may be introduced before Congress for the purpose of
further restricting or even eliminating the federal income tax exemption for
interest on all or certain types of municipal obligations. If such a proposal
were enacted, the availability of municipal obligations for investment by each
Tax-Exempt Fixed Income Fund and the value of each Tax-Exempt Fixed Income
Fund's portfolio would be affected. In such event, each Tax-Exempt Fixed Income
Fund would review its investment objectives and policies.
CONVERSION OF ADVISOR CLASS B SHARES
Advisor Class B shares of a Fund will automatically convert to Advisor Class A
shares of that Fund, based on the relative net asset values per share ("NAVs")
of the Classes, within the first month following the investor's sixth
anniversary from purchase of such Advisor Class B shares. For the purpose of
calculating the holding period required for conversion of Advisor Class B shares
of each Fund except the Money Market Fund, the date of purchase shall mean (1)
the date on which such Advisor Class B shares were purchased, or (2) for Advisor
Class B shares obtained through an exchange, or a series of exchanges, the date
on which the original Advisor Class B shares were purchased. For the purpose of
calculating the holding period required for conversion of Advisor Class B shares
of the Money Market Fund, the date of purchase shall mean the date on which
those shares were first exchanged for Advisor Class B shares of any other SAFECO
Fund. Holders of Class B shares of the SAFECO Advisor Series Trust ("Advisor
Series Shares") who have converted those shares to Advisor Class B shares may
calculate the holding period from the date of the purchase of the Advisor Series
Shares.
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<PAGE>
For purposes of conversion to Advisor Class A shares, Advisor Class B shares
purchased through the reinvestment of dividends and other distributions paid in
respect of Advisor Class B shares will be held in a separate sub-account; each
time any Advisor Class B shares in the shareholder's regular account (other than
those in the sub-account) convert to Advisor Class A shares, a pro rata portion
of the Advisor Class B shares in the sub-account will also convert to Advisor
Class A shares. The portion will be determined by the ratio that the
shareholder's Advisor Class B shares converting to Advisor Class A shares bears
to the shareholder's total Advisor Class B shares not acquired through dividends
and other distributions.
ADDITIONAL INFORMATION ON CALCULATION OF NET ASSET VALUE PER SHARE
Each Fund determines its NAV by subtracting its liabilities (including accrued
expenses and dividends payable) from its total assets (the market value of the
securities the Fund holds plus cash and other assets, including interest accrued
but not yet received) and dividing the result by the total number of shares
outstanding. The NAVs of the Advisor Classes of each Fund are calculated as of
the close of regular trading on the New York Stock Exchange ("Exchange") every
day the Exchange is open for trading. The Exchange is closed on the following
days: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. NAV is determined
separately for each class of shares of each Fund.
Short-term debt securities held in a Fund's portfolio having a remaining
maturity of less than 60 days when purchased and securities originally purchased
with maturities in excess of 60 days, but which currently have maturities of 60
days or less, may be valued at cost adjusted for amortization of premiums or
accrual of discounts if in the judgment of each Board of Trustees such methods
of valuation are appropriate or under such other methods as a Board of Trustees
may from time to time deem to be appropriate. The cost of those securities that
had original maturities in excess of 60 days shall be determined by their fair
market value as of the 61st day prior to maturity. All other securities and
assets in the portfolio will be appraised in accordance with those procedures
established by each Board of Trustees in good faith in computing the fair market
value of those assets.
The portfolio instruments of the Money Market Fund are valued on the basis of
amortized cost. The valuation of the Money Market Fund's portfolio securities
based upon amortized cost, and the maintenance of the Money Market Fund's NAV at
$1.00, are permitted pursuant to Rule 2a-7 under the 1940 Act. Pursuant to that
rule, the Money Market Fund maintains a dollar-weighted average portfolio
maturity of 90 days or less, purchases only securities having remaining
maturities of 397 days or less, and invests only in securities determined by
SAM, under guidelines adopted by the Money Market Trust's Board of Trustees, to
be of high quality and to present minimal credit risks. The Board of Trustees
has established procedures designed to stabilize, to the extent reasonably
possible, the Money Market Fund's price-per-share as computed for the purpose of
sales and redemptions at $1.00. These procedures include a review
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<PAGE>
of the Money Market Fund's portfolio holdings by the Board of Trustees, at such
intervals as the Board deems appropriate, to determine whether the Fund's NAV,
calculated by using available market quotations, deviates from $1.00 per share
and, if so, whether such deviation may result in material dilution or is
otherwise unfair to existing shareholders of the Money Market Fund. In the
event the Board determines that such a deviation exists in the Fund, the
Trustees will take such corrective action with respect to the Money Market Fund
as they regard as necessary and appropriate, including, but not limited to:
selling portfolio investments prior to maturity to realize capital gains or
losses or to shorten average portfolio maturity, withholding dividends or
redeeming shares in kind, establishing the NAV by using available market
quotations.
ADDITIONAL PERFORMANCE INFORMATION
Effective September 30, 1996, all of the then-existing shares of each Fund were
redesignated No-Load Class shares and each Fund, except the High-Yield Bond
Fund, commenced offering Advisor Class A and Advisor Class B shares. Advisor
Class A and Advisor Class B shares of the High-Yield Bond Fund were first
offered on or about January 26, 1997.
YIELDS FOR THE INTERMEDIATE TREASURY, HIGH-YIELD BOND, MANAGED BOND, AND TAX-
EXEMPT FIXED INCOME FUNDS.
The yield and total return calculations set forth below are for the dates
indicated and are not a prediction of future results. The performance
information that follows is based on the original shares of each Fund. The
performance figures quoted reflect applicable Advisor Class Rule 12b-1 fees.
The yields for the Advisor Classes of the Intermediate Treasury and High-Yield
Bond Funds for the 30-day period ended September 30, 1996 would have been as
follows:
Advisor Class A Advisor Class B
--------------- ---------------
Intermediate Treasury Fund 5.41% 4.66%
High-Yield Bond Fund 8.58% 7.83%
The yields for the Advisor Classes of the Managed Bond Fund for the 30-day
period ended December 31, 1995 would have been as follows:
Advisor Class A Advisor Class B
--------------- ---------------
Managed Bond Fund 4.32% 3.78%
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<PAGE>
The yields for the Advisor Classes of the Managed Bond Fund for the 30-day
period ended June 30, 1996 would have been as follows:
Advisor Class A Advisor Class B
--------------- ---------------
Managed Bond Fund 4.78% 4.02%
The yields and tax-equivalent yields for the 30-day period ending March 31, 1996
at the maximum federal tax rate of 39.6% for the Advisor Classes of the
Municipal, California, and Washington Funds and at the maximum combined federal
and California tax rates of 46.2% for the Advisor Classes of the California
Fund, would have been as follows:
Advisor Class A Advisor Class B
--------------- ---------------
Tax-equivalent Tax-equivalent
Yield Yield Yield Yield
----- -------------- ----- --------------
Municipal Fund 4.59% 7.60% 4.06% 6.72%
California Fund 4.57% 8.49% 4.04% 7.51%
Washington Fund 4.17% 6.90% 3.62% 5.99%
Yield is computed using the following formula:
ab 6
Yield = 2[( ---- +1) -1]
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
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<PAGE>
Tax-equivalent yield is computed using the following formula:
eg
Tax-equivalent yield = [-----] + [e(1-g)]
(1-f)
Where: e = yield as calculated above
f = tax rate
g = percentage of "yield" which is tax-free
YIELD FOR THE MONEY MARKET FUND
The yields and effective yields for the Advisor Classes of the Money Market Fund
for the 7-day period ended March 31, 1996 would have been as follows:
Advisor Class A Advisor Class B
--------------- ---------------
Yield Effective Yield Yield Effective Yield
----- --------------- ----- ---------------
Money Market Fund 4.60% 4.70% 4.60% 4.70%
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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During periods of declining interest rates, the Money Market Fund's yield based
on amortized cost may be higher than the yield based on market valuations. Under
these circumstances, a shareholder in the Money Market Fund would be able to
obtain a somewhat higher yield than would result if the Money Market Fund
utilized market valuations to determine its NAV. The converse would apply in a
period of rising interest rates.
TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FOR THE INTERMEDIATE TREASURY,
HIGH-YIELD BOND, MANAGED BOND, AND TAX-EXEMPT FIXED INCOME FUNDS.
The performance information that follows is based on the original shares of each
Fund, recalculated to reflect the sales charges of the Advisor Classes. The
performance figures quoted do not reflect any applicable Advisor Class Rule
12b-1 fees, which if reflected would cause the performance figures to be lower
than those indicated.
The total returns for the Advisor Classes of the Intermediate Treasury and High-
Yield Bond Funds for the one-year, five-year and since initial public offering
periods ending September 30, 1996 would have been as follows:
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year 5 Years Public Offering Months Public Offering
------ ------- ---------------- ------ ---------------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Intermediate
Treasury Fund (0.68%) (1.00%) 31.21% 35.39% 70.25% 78.28% 96 September 7, 1988
High-Yield
Bond Fund 5.80% 5.79% 60.90% 66.48% 94.26% 103.41% 96 September 7, 1988
</TABLE>
The total returns for the Advisor Classes of the Managed Bond Fund for the
period from February 28, 1994 (initial public offering) through December 31,
1995, would have been as follows:
Since Initial # of Date of Initial
1 Year Public Offering Months Public Offering
------ --------------- ------ ---------------
Advisor Advisor Advisor Advisor
Class A Class B Class A Class B
------- ------- ------- -------
Managed Bond
Fund 12.07% 12.35% 8.70% 9.82% 22 February 28, 1994
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<PAGE>
The total returns for the Adviser Classes of the Managed Bond Fund for the
period from February 28, 1994 (initial public offering) through June 30, 1996,
would have been as follows:
Since Initial # of Date of Initial
1 Year Public Offering Months Public Offering
------ --------------- ------ ---------------
Advisor Advisor Advisor Advisor
Class A Class B Class A Class B
------- ------- ------- -------
Managed Bond
Fund (0.21%) (0.51%) 5.93% 7.92% 28 February 28, 1994
The total returns for the Advisor Classes of the Municipal and California Funds
for the one-year, five-year and ten-year periods ending March 31, 1996 would
have been as follows:
1 Year 5 Years 10 Years
------ ------- --------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
Municipal Fund 3.36% 3.23% 40.84% 45.47% 110.25% 120.16%
California Fund 3.97% 3.87% 41.43% 46.09% 104.10% 113.72%
The total returns for the Advisor Classes of the Washington Fund for the one-
year period (and since inception) ended March 31, 1996 would have been as
follows:
Since Initial Effective Date
1 Year (36 Months)
------ ----------------------------
Advisor Advisor Advisor Advisor
Class A Class B Class A Class B
------- ------- ------- -------
Washington Fund 2.88% 2.73% 10.97% 13.20%
The average annual total returns for the Advisor Classes of the Intermediate
Treasury and High-Yield Bond Fund for the one-year, five-year and since initial
public offering periods ended September 30, 1996 would have been as follows:
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year 5 Years Public Offering Months Public Offering
------ ------- --------------- ------ ---------------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Intermediate
Treasury Fund (0.68%) (1.00%) 5.58% 6.25% 6.82% 7.42% 96 September 7, 1988
High-Yield
Bond Fund 5.80% 5.79% 9.98% 10.73% 8.58% 9.21% 96 September 7, 1988
</TABLE>
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<PAGE>
The average annual total returns for the Advisor Classes of the Managed Bond
Fund for the period from February 28, 1994 (initial public offering) through
December 31, 1995 would have been as follows:
Since Initial # of Date of Initial
1 Year Public Offering Months Public Offering
------ --------------- ------ ---------------
Advisor Advisor Advisor Advisor
Class A Class B Class A Class B
------- ------- ------- -------
Managed Bond
Fund 12.07% 12.35% 4.66% 5.24% 22 February 28, 1994
The average annual total returns for the Advisor Classes of the Managed Bond
Fund for the period from February 28, 1994 (initial public offering) through
June 30, 1996 would have been as follows:
Since Initial # of Date of Initial
1 Year Public Offering Months Public Offering
------ --------------- ------ ---------------
Advisor Advisor Advisor Advisor
Class A Class B Class A Class B
------- ------- ------- -------
Managed Bond
Fund (0.21%) (0.51%) 2.50% 3.32% 28 February 28, 1994
The average annual total returns for the Advisor Classes of the Municipal and
California Funds for the one-year, five-year and ten-year periods ending
March 31, 1996 would have been as follows:
1 Year 5 Years 10 Years
------ ------- --------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
Municipal Fund 3.36% 3.23% 7.09% 7.78% 7.71% 8.21%
California Fund 3.97% 3.87% 7.18% 7.88% 7.39% 7.89%
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The average annual total returns for the Advisor Classes of the Washington Fund
for the one-year period (and since inception) ended March 31, 1996 would have
been as follows:
Since Initial # of Date of Initial
1 Year Public Offering Months Public Offering
------ --------------- ------ ---------------
Advisor Advisor Advisor Advisor
Class A Class B Class A Class B
------- ------- ------- -------
Washington
Fund 2.88% 2.73% 3.53% 4.22% 36 March 18, 1993
The total return is computed using the following formula:
ERV-P
T = [ ----- ] x 100
P
Where: T = ending redeemable value of a hypothetical $1,000
investment at the end of a specified period of time
P = a hypothetical initial investment of $1,000
The average annual total return is computed using the following formula:
A = (nth-root (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 calculation all dividends and capital gain distributions are
assumed to be reinvested at the Fund's NAV on the reinvestment date.
In addition to performance figures, each Fund may advertise its ranking as
calculated by independent rating services which monitor mutual funds'
performance (E.G., CDA Investment Technologies, Lipper Analytical Services, Inc.
and Morningstar, Inc.). These rankings may be
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among mutual funds with similar objectives and/or size or with mutual funds in
general and may be based on relative performance during periods deemed by the
rating services to be representative of up and down markets. The Funds may also
describe in their advertisements the methodology used by the rating services to
arrive at Fund ratings. In addition, the Funds may also advertise individual
measurements of Fund performance published by the rating services.
The Funds may upon occasion reproduce articles or portions of articles about the
Funds written by independent third parties such as financial writers, financial
planners and financial analysts, and appearing in financial publications of
general circulation or financial newsletters (including but not limited to
BARRONS, BUSINESS WEEK, FABIANS, FORBES, FORTUNE, INVESTOR'S BUSINESS DAILY,
KIPLINGER'S, MONEY MAGAZINE, MORNINGSTAR MUTUAL FUNDS, MUTUAL FUNDS FORECASTER,
MUTUAL FUNDS MAGAZINE, NO-LOAD FUND INVESTOR, NO-LOAD FUND X, NEWSWEEK, PENSIONS
& INVESTMENTS, RUCKEYSER'S MUTUAL FUNDS, TELESWITCH, TIME MAGAZINE, U.S. NEWS
AND WORLD REPORT, YOUR MONEY and THE WALL STREET JOURNAL).
Each Fund may also present in its advertisements and sales literature (i) a
biography or the credentials of its portfolio manager (including but not limited
to educational degrees, professional designations, work experience, work
responsibilities and outside interests); (ii) current facts (including but not
limited to number of employees, number of shareholders, business
characteristics) about its investment adviser (SAM) or any sub investment
adviser, the investment adviser's parent company (SAFECO Corporation) or the
parent company of any sub investment adviser or the SAFECO Family of Funds;
(iii) descriptions, including quotations attributable to the portfolio manager,
of the investment style used to manage a Fund's portfolio, the research
methodologies underlying securities selection and a Fund's investment objective;
and (iv) information about particular securities held in a Fund's portfolio.
From time to time, each Fund may discuss its performance in relation to the
performance of relevant indices and/or representative peer groups. Such
discussions may include how a Fund's investment style (including but not limited
to portfolio holdings, asset types, industry/sector weightings and the purchase
and sale of specific securities) contributed to such performance.
In addition, each Fund may comment on the market and economic outlook in
general, on specific economic events, on how these conditions have impacted its
performance and on how the portfolio manager will or has addressed such
conditions.
Performance information and quoted ratings are indicative only of past
performance and are not intended to represent future investment results.
ADDITIONAL INFORMATION ON DIVIDENDS
Because the Money Market Fund intends to hold its portfolio securities to
maturity and expects that most of its portfolio securities will be valued at
their amortized cost, realized gains or losses should not be a significant
factor in the computation of net income. Should, however, in an unusual
circumstance, the Money Market Fund experience a realized gain or loss, a
shareholder
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of the Money Market Fund could receive an increased, reduced, or no dividend for
a period of time. In such an event, the Money Market Trust's Board of Trustees
would consider whether to adhere to its present dividend policy or to revise it
in light of the then-prevailing circumstances.
TRUSTEES AND OFFICERS
Position(s) Held Principal Occupation(s)
Name and Address with the Trusts During Past 5 Years
---------------- ---------------- -----------------------
Boh A. Dickey* Chairman and Trustee President, Chief Operating Officer
SAFECO Plaza and Director of SAFECO Corporation.
Seattle, WA 98185 Previously, Executive Vice
(52) 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
(51) 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.
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 Vice
(67) 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 Customer
764 S. 293rd Street Relations, Building Materials
Federal Way, WA 98032 Distribution, Weyerhaeuser Company,
(59) Tacoma, Washington; Director of
First SAFECO National Life
Insurance Company of New York.
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<PAGE>
Position(s) Held Principal Occupation(s)
Name and Address with the Trusts During Past 5 Years
---------------- ---------------- -----------------------
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; Director of Key Bank
(62) of Washington, Seattle, Washington;
Director of University of
Washington Medical Center, Seattle,
Washington; Director of Cascade
Natural Gas Corporation, Seattle,
Washington; Director of First
SAFECO National Life Insurance
Company of New York.
John W. Schneider Trustee President of Wallingford Group,
1808 N 41st St. Inc., Seattle, Washington; former
Seattle, WA 98103 President of Coast Hotels, Inc.,
(55) Seattle, Washington; 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 President
(48) 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 Treasurer
Seattle, WA 98185 Assistant Secretary of SAFECO Securities, Inc. and
(34) SAFECO Services Corporation; Vice
President, Controller, Secretary
and Treasurer of SAFECO Asset
Management Company. See table under
"Investment Advisory and Other
Services."
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<PAGE>
Position(s) Held Principal Occupation(s)
Name and Address with the Trusts During Past 5 Years
---------------- ---------------- -----------------------
Ronald L. Spaulding Vice President Vice Chairman of SAFECO Asset
SAFECO Plaza Treasurer Management Company; Vice President
Seattle, WA 98185 and Treasurer of SAFECO
(53) Corporation; Vice President of
SAFECO Life Insurance Company;
former Senior Fund Manager of
SAFECO insurance companies; former
Fund Manager for several SAFECO
mutual funds. See table under
"Investment Advisory and Other
Services."
* Trustees who are interested persons as defined by the 1940 Act.
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<PAGE>
COMPENSATION TABLE FOR CURRENT TRUSTEES
(Taxable Bond Trust)
For the Fiscal Year Ended September 30, 1996
Pension or Total
Retirement Compensation
Benefits From Registrant
Aggregate Accrued As Estimated and Fund
Compensation Part of Fund Annual Benefits Complex Paid to
Trustee from Registrant Expenses Upon Retirement Trustees
- ------- --------------- -------- --------------- --------
Boh A. Dickey N/A N/A N/A N/A
Barbara J.
Dingfield $2,458 N/A N/A $28,478
Richard E.
Lundgren $2,458 N/A N/A $28,478
Larry L. Pinnt $2,458 N/A N/A $28,478
John W.
Schneider $2,458 N/A N/A $28,478
Richard W.
Hubbard $2,458 N/A N/A $28,478
David F. Hill* N/A N/A N/A N/A
* First elected to the Board of Trustees in August, 1996.
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 companies that have, in the aggregate, twenty series
companies managed by SAM.
The officers of the Trust receive no compensation for their services as
officers, or if applicable, as Trustees.
At October 30, 1996, the Trustees and officers of the Taxable Bond Trust as a
group owned less than 1% of the outstanding shares of the Taxable Bond Funds.
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<PAGE>
COMPENSATION TABLE FOR CURRENT TRUSTEES
(Managed Bond Trust)
For the Fiscal Year Ended December 31, 1995
Pension or Total
Retirement Compensation
Benefits From Registrant
Aggregate Accrued As Estimated and Fund
Compensation Part of Fund Annual Benefits Complex Paid to
Trustee from Registrant Expenses Upon Retirement Trustees
- ------- --------------- -------- --------------- --------
Boh A. Dickey N/A N/A N/A N/A
Barbara J.
Dingfield $852 N/A N/A $23,875
Richard E.
Lundgren $852 N/A N/A $23,875
Larry L. Pinnt $852 N/A N/A $23,875
John W.
Schneider $852 N/A N/A $23,875
Richard W.
Hubbard $960 N/A N/A $26,900
David F. Hill* N/A N/A N/A N/A
* First elected to the Board of Trustees in August, 1996.
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 companies that have, in the aggregate, twenty-two series companies
managed by SAM.
The officers of the Trust received no compensation for their services as
officers or, if applicable, as Trustees.
At September 18, 1996, the Trustees and officers of the Managed Bond Trust owned
none of the outstanding shares of the Managed Bond Fund.
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<PAGE>
COMPENSATION TABLE FOR CURRENT TRUSTEES
(Money Market Trust)
For the Fiscal Year Ended March 31, 1996
Pension or Total
Retirement Compensation
Benefits From Registrant
Aggregate Accrued As Estimated and Fund
Compensation Part of Fund Annual Benefits Complex Paid to
Trustee from Registrant Expenses Upon Retirement Trustees
- ------- --------------- -------- --------------- --------
Boh A. Dickey N/A N/A N/A N/A
Barbara J.
Dingfield $2,095 N/A N/A $24,813
Richard E.
Lundgren $2,095 N/A N/A $24,813
Larry L. Pinnt $2,095 N/A N/A $24,813
John W.
Schneider $2,095 N/A N/A $24,813
Richard W.
Hubbard $2,095 N/A N/A $23,000
David F. Hill* N/A N/A N/A N/A
* First elected to the Board of Trustees in August, 1996.
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, twenty-one series
companies managed by SAM.
The officers of the Trust receive no compensation for their service as officers
or, if applicable, as Trustees.
At June 30, 1996, the Trustees and officers of the Money Market Trust as a
group owned less than 1% of the outstanding shares of the Money Market Fund.
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<PAGE>
COMPENSATION TABLE FOR CURRENT TRUSTEES
(Tax-Exempt Bond Trust)
For the Fiscal Year Ended March 31, 1996
Pension or Total
Retirement Compensation
Benefits From Registrant
Aggregate Accrued As Estimated and Fund
Compensation Part of Fund Annual Benefits Complex Paid to
Trustee from Registrant Expenses Upon Retirement Trustees
- ------- --------------- -------- --------------- --------
Boh A. Dickey N/A N/A N/A N/A
Barbara J.
Dingfield $4,547 N/A N/A $24,813
Richard E.
Lundgren $4,547 N/A N/A $24,813
Larry L. Pinnt $4,547 N/A N/A $24,813
John W.
Schneider $4,547 N/A N/A $24,813
Richard W.
Hubbard $4,547 N/A N/A $23,000
David F. Hill* N/A N/A N/A N/A
* First elected to the Board of Trustees in August, 1996.
Currently, there is no pension, retirement, or other plan or any arrangement
pursuant to which Trustees or officers of a Trust are compensated by that
Trust. Each Trustee also serves as trustee for five other registered
open-end, management investment companies that have, in the aggregate,
eighteen series companies managed by SAM.
The officers of a Trust received no compensation for their services as officers
or, if applicable, trustees.
At June 30, 1996, the Trustees and officers of the Trust as a group owned
less than 1% of the outstanding shares of each Tax-Exempt Fixed Income Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
SAFECO Asset Management Company ("SAM"), SAFECO Securities, Inc. ("SAFECO
Securities") and SAFECO Services Corporation ("SAFECO Services") are wholly-
owned subsidiaries of SAFECO Corporation. SAFECO Securities is the principal
underwriter of each Fund and SAFECO Services is the transfer, dividend and
distribution disbursement and shareholder servicing agent of each Fund.
The following individuals have the following positions and offices with the
Trusts, SAM, SAFECO Securities and SAFECO Services.
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<PAGE>
SAFECO SAFECO
Name Trusts SAM Securities Securities
- ---- ------ --- ---------- ----------
B. A. Dickey Chairman Director Director
Trustee Chairman
D. F. Hill President Senior President President
Trustee Vice Director Secretary
President Secretary Director
Director
N. A. Fuller Vice President Vice Vice Vice President
Controller President President Controller
Assistant Controller Controller Assistant
Secretary Secretary Assistant Secretary
Treasurer Secretary Treasurer
Treasurer
R.L. Spaulding Vice President Vice Director Director
Treasurer Chairman
Director
S.C. Bauer President
Director
D.H. Longhurst Assistant Assistant Assistant
Controller Controller Controller
Mr. Dickey is President, Chief Operating Officer and a Director of SAFECO
Corporation and Mr. Spaulding is a Treasurer and Vice President of SAFECO
Corporation. Messrs. Dickey and Spaulding are also Directors of other SAFECO
Corporation subsidiaries.
In connection with its investment advisory contract with each Trust, SAM
furnishes or pays for all facilities and services furnished or performed for or
on behalf of each Trust and each Fund, that includes furnishing office
facilities, books, records and personnel to manage each Trust's and each Fund's
affairs and paying certain expenses.
The Trust Instrument of each Trust provides that the Trust will indemnify its
Trustees and its officers against liabilities and expenses reasonably incurred
in connection with litigation in which they may be involved because of their
offices with the Trust, unless it is adjudicated that they engaged in bad faith,
wilful misfeasance, gross negligence, or reckless disregard of the duties
involved in the conduct of their offices. In the case of settlement, such
indemnification will not be provided unless it has been determined -- by a court
or other body approving the settlement or other disposition, or by a majority of
disinterested Trustees, based upon a review of readily available facts, or in a
written opinion of independent counsel -- that such officers or Trustees have
not engaged in wilful misfeasance, bad faith, gross negligence or reckless
disregard of their duties.
SAM also serves as the investment adviser for other investment companies in
addition to the Funds. Several of these investment companies have investment
objectives similar to those of certain Funds. It is therefore possible that the
same securities will be purchased for both a Fund and another investment company
advised by SAM. When two or more funds advised by SAM
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<PAGE>
are simultaneously engaged in the purchase or sale of the same security, the
prices and amounts will be allocated in a manner considered by the officers
of the funds involved to be equitable to each fund. In some cases this
system could have a detrimental effect on the price or value of the security
as far as a Fund is concerned. It is expected that the opportunity to
participate in volume transactions will produce better executions and prices
for a Fund, generally. In some cases, the price of a security allocated to
one Fund may be higher or lower than the price of a security allocated to
another Fund.
For the services and facilities furnished by SAM, each Fund has agreed to pay an
annual fee computed on the basis of the average market value of the net assets
of each Fund ascertained each business day and paid monthly in accordance with
the following schedules. The reduction in fees occurs only at such time as the
respective Fund's net assets reach the dollar amounts of the break points and
applies only to those assets that fall within the specified range:
INTERMEDIATE TREASURY FUND
NET ASSETS FEE
$0 - $250,000,000 .55 of 1%
$250,000,001 - $500,000,000 .45 of 1%
$500,000,001 - $750,000,000 .35 of 1%
Over $750,000,000 .25 of 1%
HIGH-YIELD BOND FUND
NET ASSETS FEE
$0 - $250,000,000 .65 of 1%
$250,000,001 - $500,000,000 .55 of 1%
$500,000,001 - $750,000,000 .45 of 1%
Over $750,000,000 .35 of 1%
MANAGED BOND FUND
NET ASSETS FEE
$0 - $100,000,000 .50 of 1%
$100,000,001 - $250,000,000 .40 of 1%
Over $250,000,000 .35 of 1%
WASHINGTON FUND
NET ASSETS FEE
$0 - $250,000,000 .65 of 1%
$250,000,001 - $500,000,000 .55 of 1%
$500,000,001 - $750,000,000 .45 of 1%
Over $750,000,000 .35 of 1%
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<PAGE>
MUNICIPAL AND CALIFORNIA FUNDS
NET ASSETS FEE
$0 - $100,000,000 .55 of 1%
$100,000,001 - $250,000,000 .45 of 1%
$250,000,001 - $500,000,000 .35 of 1%
Over $500,000,000 .25 of 1%
MONEY MARKET FUND
NET ASSETS FEE
$0 - $250,000,00 .50 of 1%
$250,000,001 - $500,000,000 .40 of 1%
$500,000,001 - $750,000,000 .30 of 1%
Over $750,000,000 .25 of 1%
The following states the total amounts of compensation paid by each Fund to SAM
for the past three fiscal years or periods (or since its initial public offering
in the case of the Managed Bond Fund):
TAXABLE BOND FUNDS
Year Ended
September 30, September 30, September 30, 1994
1996 1995
------------- ------------- ------------------
Intermediate
Treasury Fund $ 78,000 $ 71,000 $ 77,000
High-Yield Bond
Fund $255,000 $206,000 $202,000
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MANAGED BOND FUND
Year or Period Ended
February 28, 1994
(Initial Public Offering) to
December 31, 1995 December 31, 1994
----------------- ----------------------------
$22,720 $15,869
TAX-EXEMPT FIXED INCOME FUNDS
Year Ended
March 31, 1996 March 31, 1995 March 31, 1994
-------------- -------------- --------------
Municipal Bond Fund $2,020,685 $2,010,754 $2,248,615
California Fund $365,684 $364,000 $455,505
Washington Fund $39,038 $31,475 $18,350
MONEY MARKET FUND
Year or Period Ended
March 31, 1996 March 31, 1995 March 31, 1994
-------------- -------------- --------------
$864,914 $840,727 $690,549
DISTRIBUTION ARRANGEMENTS. SAFECO Securities is the principal underwriter for
each Fund and acts as the distributor of the Advisor Class A and Advisor Class B
shares of each Fund under a Distribution Agreement with each Trust that requires
SAFECO Securities to use its best efforts, consistent with its other businesses,
to sell shares of the Funds. Shares of the Funds are offered continuously.
Under separate plans of distribution pertaining to the Advisor Class A and
Advisor Class B shares of each Fund adopted by each Trust in the manner
prescribed under Rule 12b-1 under the 1940 Act (each a "Plan"), each Advisor
Class pays fees described in the Prospectus.
Among other things, each Plan provides that (1) SAFECO Securities will submit to
each Trust's Board of Trustees at least quarterly, and the Trustees will review,
reports regarding all amounts expended under the Plan and the purposes for which
such expenditures were made, (2) the Plan will continue in effect so long as
they are approved at least annually and any material amendment thereto is
approved, by each respective Trust's Board of Trustees, including those Trustees
who are not "interested persons" of each Trust and who have no Plan, acting in
person at the meeting called for that purpose, (3) payments by a Fund under the
Plan shall not be materially increased
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without the affirmative vote of the holders of a majority of the outstanding
voting securities of the relevant Advisor Class of that Fund and (4) while the
Plan remains in effect, the selection and nomination of Trustees who are not
"interested persons" of each Trust shall be committed to the discretion of each
of the Trustees who are not "interested persons" of each Trust.
In reporting amounts expended under the Plans to each Trust's Board of Trustees,
SAFECO Securities will allocate expenses attributable to the sale of each
Advisor Class of Fund shares to such Advisor Class based on the ratio of sales
of shares of such Advisor Class to the sales of all Advisor Classes of shares.
Expenses attributable to a specific Advisor Class will be allocated to that
Advisor Class.
In approving the adoption of each Plan, each Trust's Board of Trustees
determined that the adoption was in the best interests of the Funds'
shareholders.
In the event that a Plan is terminated or not continued with respect to the
Advisor Class A or Advisor Class B shares of any Fund, (i) no fees would be owed
by the Fund to SAFECO Securities with respect to that class, and (ii) the Fund
would not be obligated to pay SAFECO Securities for any amounts expended under
the Plan not previously recovered by SAFECO Securities.
The Plans comply with rules of the National Association of Securities Dealers,
Inc. which limit the annual asset-based sales charges and service fees that a
mutual fund may impose on a class of shares to .75% and .25%, respectively, of
the average annual net assets attributable to that class. The rules also limit
the aggregate of all front-end, deferred and asset-based sales charges imposed
with respect to a class of shares by a mutual fund that also charges a service
fee to 6.25% of cumulative gross sales of that class, plus interest at the prime
rate plus 1% per annum.
CUSTODIAN. U.S. Bank of Washington, N.A., 1420 Fifth Avenue, Seattle,
Washington 98111, is the custodian of the securities, cash and other assets of
each Fund under an agreement with each Trust.
AUDITOR. Ernst & Young LLP, 999 Third Avenue, Suite 3500, Seattle, Washington
98104, is the independent auditor of each Fund's financial statements.
SAFECO Services provides, or through subcontracts makes provision for, all
required transfer agency activity, including maintenance of records of each
Fund's shareholders, records of transactions involving each Fund's shares, and
the compilation, distribution, or reinvestment of income dividends or capital
gains distribution. For the Intermediate Treasury, Managed Bond and Tax-Exempt
Fixed Income Funds, SAFECO Services is paid a fee for these services equal to
$32.00 per shareholder account, but not to exceed .30% of each Fund's average
net assets. For the Money Market Fund, SAFECO Services is paid a fee of $34.00
per shareholder account, but not to exceed .30% of each Fund's average net
assets. The following tables shows the fees paid by each Fund to SAFECO
Services during the past three fiscal years.
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TAXABLE BOND FUNDS
Year Ended*
September 30, September 30, September 30, 1994
1996 1995
------------- ------------- ------------------
Intermediate
Treasury Fund $39,000 $33,000 $25,000
High-Yield Bond Fund $90,000 $78,000 $63,000
* Figures reflect fees of $3.10 per shareholder transaction until July,
1996 when the new fee schedule went into effect.
MANAGED BOND FUND
Year or Period Ended**
February 28, 1994
(Initial Public Offering) to
December 31, 1995 December 31, 1994
----------------- ----------------------------
$309 $96
MONEY MARKET FUND
Year Ended**
March 31, 1996 March 31, 1995 March 31, 1994
-------------- -------------- --------------
$424,260 $385,495 $308,090
TAX-EXEMPT FIXED INCOME FUNDS
Year or Period Ended**
March 31, 1996 March 31, 1995 March 31, 1994
-------------- -------------- --------------
Municipal Bond Fund $511,005 $531,978 $557,561
California Fund $68,839 $68,840 $66,667
Washington Fund $2,842 $3,219 $2,801
** Figures reflect fees of $3.10 per shareholder transaction payable pursuant
to the prior fee schedule.
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BROKERAGE PRACTICES
SAM places orders for the purchase or sale of each Fund's portfolio securities
based on various factors including:
(1) Which broker gives the best execution (i.e., which broker is able to trade
the securities in the size and at the price desired and on a timely basis);
(2) Whether the broker is known as being reputable; and,
(3) All other things being equal, which broker has provided useful research
services.
Such research services as are furnished during the year (e.g., written reports
analyzing economic and financial characteristics of industries and companies,
telephone conversations between brokerage security analysts and members of SAM's
staff, and personal visits by such analysts and brokerage strategists and
economists to SAM's office) are used to advise all clients including the Funds,
but not all such research services furnished to SAM are used by it to advise the
Funds. SAM does not pay excess commissions or mark-ups to any broker or dealer
for research services or for any other reason. Purchases and sales of portfolio
securities are transacted with the issuer or with a primary market maker acting
as principal for the securities on a net basis with no commission being paid by
the Funds. Transactions placed through dealers serving as primary market makers
reflect the spread between the bid and asked prices. Occasionally the Funds may
make purchases of underwritten issues at prices that include underwriting fees.
REDEMPTION IN KIND
If a Trust concludes that cash payment upon redemption to a shareholder of a
Fund would be prejudicial to the best interest of other shareholders of a Fund,
a portion of the payment may be made in kind. Each Trust has elected to be
governed by Rule 18f-1 under the 1940 Act, pursuant to which the Trust must
redeem shares tendered by a shareholder of a Fund solely in cash up to the
lesser of $250,000 or 1% of a net asset value of a Fund during any 90-day
period. Any shares tendered by the shareholder in excess of the above-mentioned
limit may be redeemed through distribution of a Fund's assets. Any securities
or other property so distributed in kind shall be valued by the same method as
is used in computing NAV. Distributions in kind will be made in readily
marketable securities, unless the investor elects otherwise. Investors may
incur brokerage costs in disposing of securities received in such a distribution
in kind.
FINANCIAL STATEMENTS
The following financial statements for the Intermediate Treasury and High-Yield
Bond Funds and the report thereon of Ernst & Young LLP, independent auditors,
are incorporated herein by reference to the Taxable Bond Trust's Annual Report
for the year ended September 30, 1996.
Portfolio of Investments as of September 30, 1996
Statement of Assets and Liabilities as of September 30, 1996
Statement of Operations for the Year Ended September 30, 1996
Statement of Changes in Net Assets for the Years Ended September 30, 1996
and September 30, 1995
Notes to Financial Statements
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The following financial statements for the Managed Bond Fund (formerly Fixed
Income Portfolio) and the report thereon of Ernst & Young LLP, independent
auditors, are incorporated herein by reference to the Managed Bond Trust's
(formerly Institutional Series Trust) Annual Report for the year ended
December 31, 1995:
Portfolio of Investments as of December 31, 1995
Statement of Assets and Liabilities as of December 31, 1995
Statement of Operations for the Year Ended December 31, 1995
Statement of Changes in Net Assets for the Years Ended December 31, 1995
and December 31, 1994
Notes to Financial Statements
The following unaudited financial statements for the Managed Bond Fund
(formerly the Fixed-Income Portfolio) are incorporated herein by reference
to the Managed Bond Trust's (formerly the Institutional Series Trust)
Semi-Annual Report for the period ended June 30, 1996.
Portfolio of Investments as of June 30, 1996 (unaudited)
Statement of Assets and Liabilities as of June 30, 1996 (unaudited)
Statement of Operations for the Period Ended June 30, 1996 (unaudited)
Statement of Changes in Net Assets for the Period Ended June 30, 1996
(unaudited)
Notes to Financial Statements (unaudited)
The following financial statements for the Municipal Bond, California and
Washington Funds and the report thereon of Ernst & Young LLP, independent
auditors, are incorporated herein by reference to the Tax-Exempt Bond Trust's
Annual Report for the year ended March 31, 1996:
Portfolio of Investments as of March 31, 1996
Statement of Assets and Liabilities as of March 31, 1996
Statement of Operations for the Year Ended March 31, 1996
Statement of Changes in Net Assets for the Years Ended March 31, 1996 and
March 31, 1995
Notes to Financial Statements
The following financial statements for the Money Market Fund and the report
thereon of Ernst & Young LLP, independent auditors, are incorporated herein by
reference to the Money Market Trust's Annual Report for the year ended March 31,
1996:
Portfolio of Investments as of March 31, 1996
Statement of Assets and Liabilities as of March 31, 1996
Statement of Operations for the Year Ended March 31, 1996
Statement of Changes in Net Assets for the Years Ended March 31, 1996 and
March 31, 1995
Notes to Financial Statements
A copy of each Trusts' Annual Report and the Semi-Annual Report of the
Managed Bond Fund accompanies this Statement of Additional Information.
Additional copies may be obtained by calling SAFECO Services at
1-800-463-8791 or by writing to the address on the Prospectus cover.
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DESCRIPTION OF RATINGS
Ratings by Moody's and S&P represent opinions of those organizations as to the
investment quality of the rated obligations. Investors should realize these
ratings do not constitute a guarantee that the principal and interest payable
under these obligations will be paid when due.
DESCRIPTION OF BOND RATINGS
MOODY'S
INVESTMENT GRADE DESCRIPTIONS:
Aaa -- Bonds which are rated Aaa are judged to be of the best-quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BELOW INVESTMENT GRADE DESCRIPTIONS:
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characteristics bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
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C -- Bonds which are rated C are the lowest-rated class of bonds. Issues so
rated have extremely poor prospects of ever attaining any real investment
standing.
S&P
INVESTMENT GRADE DESCRIPTIONS:
AAA -- Debt rated "AAA" has the highest rating assigned by S&P's. Capacity to
pay interest and repay principal is extremely strong.
AA -- Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in a small degree.
A -- Debt rated "A" has a very strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt rated in a higher
category.
BBB -- Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas, it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BELOW INVESTMENT GRADE DESCRIPTIONS:
BB, B, CCC, CC -- Debt rated BB, B, CCC, CC or C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
BB -- Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B -- Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
CCC -- Debt rated "CCC" has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions. It is not likely to have
the capacity to pay interest and repay principal.
The "CCC" rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied "B" or "B-" rating.
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C -- The rating "C" is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The "C" rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
C1 -- The rating C1 is reserved for income bonds on which no interest is being
paid.
D -- Debt rated D is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payment
will be made during such grace period.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
MOODY'S
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations with an original maturity not exceeding one
year.
Prime-1: Issuers (or supporting institutions) rated Prime-1 (P-1) have a
superior ability for repayment of senior short-term debt obligations. P-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2: Issuers (or supporting institutions) rated Prime-2 (P-2) have a strong
ability for repayment of senior short-term obligations. This will normally be
evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
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S&P
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days.
A-1: This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
DESCRIPTION OF RATINGS FOR MUNICIPAL NOTES,
TAX-EXEMPT DEMAND NOTES AND OTHER SHORT-TERM OBLIGATIONS
MOODY'S
Moody's rates municipal notes and other short-term obligations using Moody's
Investment Grade (MIG). A short-term obligation having a demand feature (a
variable-rate demand obligation) will be designated VMIG. This distinction
recognizes differences between short-term credit risk and long-term credit risk
as well as differences between short-term issues making payments on fixed
maturity dates (MIG) and those making payments on periodic demand (VMIG).
MIG/VMIG 1: This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broadbased access to the market for refinancing.
MIG 2/VMIG 2: This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
S&P
Ratings for municipal notes and other short-term obligations are designated by
Standard & Poor's note rating. These ratings reflect liquidity concerns and
market access risks unique to notes. Notes due in three years or less will
likely receive a note rating.
SP-1 Very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
Standard & Poor's assigns "dual" ratings to all long-term debt issues that have
as part of their provisions a demand or double feature.
The first rating addresses the likelihood of repayment of principal and interest
as due, and the second rating addresses only the demand feature. The long-term
debt rating symbols are used for bonds to denote the long-term maturity and the
commercial paper rating symbols are used to denote the put option (for example,
"AAA/A-1+"). For the newer "demand notes," Standard & Poor's note rating
symbols, combined with the commercial paper symbols, are used (for example, "SP-
1+/A-1+").
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SAFECO TAXABLE BOND TRUST:
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
SAFECO GNMA FUND
SAFECO HIGH-YIELD BOND FUND
SAFECO MANAGED BOND TRUST:
SAFECO MANAGED BOND FUND
NO-LOAD CLASS
Statement of Additional Information
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus for the funds listed above (each a "Fund").
A copy of the Prospectus may be obtained by writing SAFECO Mutual Funds, No-Load
Class Shares, P.O. Box 34890, Seattle, Washington 98124-1890, or by calling TOLL
FREE:
Nationwide
1-800-426-6730
Seattle Area
206-545-5530
Hearing Impaired TDD/TTY Service
1-800-438-8718
The date of the most current Prospectus of the Funds to which this Statement of
Additional Information relates is January 26, 1997.
The date of this Statement of Additional Information is January 26, 1997.
<PAGE>
TABLE OF CONTENTS
Page
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INVESTMENT POLICIES......................................................
INVESTMENT POLICIES OF THE TAXABLE BOND FUNDS............................
INVESTMENT POLICIES OF THE MANAGED BOND FUND..............................
ADDITIONAL INVESTMENT INFORMATION.........................................
PRINCIPAL SHAREHOLDERS OF CERTAIN FUNDS...................................
ADDITIONAL TAX INFORMATION................................................
ADDITIONAL INFORMATION ON CALCULATION OF NET ASSET VALUE PER SHARE........
ADDITIONAL PERFORMANCE INFORMATION........................................
TRUSTEES AND OFFICERS OF THE TRUSTS.......................................
INVESTMENT ADVISORY AND OTHER SERVICES....................................
BROKERAGE PRACTICES.......................................................
REDEMPTION IN KIND........................................................
FINANCIAL STATEMENTS......................................................
DESCRIPTION OF COMMERCIAL PAPER RATINGS...................................
<PAGE>
INVESTMENT POLICIES
SAFECO Intermediate-Term U.S. Treasury Fund ("Intermediate Treasury Fund"),
SAFECO GNMA Fund ("GNMA Fund") and SAFECO High-Yield Bond Fund ("High-Yield
Bond Fund") (collectively "Taxable Bond Funds") are series of SAFECO Taxable
Bond Trust ("Taxable Bond Trust"). SAFECO Managed Bond Fund ("Managed Bond
Fund") is the only series of SAFECO Managed Bond Trust ("Managed Bond Trust"
and, together with Taxable Bond Trust, the "Trusts"). The investment
policies of the Taxable Bond Funds and the Managed Bond Fund (each a "Fund")
are described in the Prospectus and this Statement of Additional Information.
These policies state the investment practices that the Funds will follow, in
some cases limiting investments to a certain percentage of assets, as well as
those investment activities that are prohibited. The types of securities
that a Fund may purchase are also disclosed in the Prospectus. Before a Fund
purchases a security that the following policies permit, but that is not
currently described in the Prospectus, the Prospectus will be amended or
supplemented to identify or describe the security. If a policy's percentage
limitation is adhered to immediately after and as a result of the investment,
a later increase or decrease in values, net assets or other circumstances
will not be considered in determining whether a Fund complies with the
applicable limitation (except to the extent the change may impact a Fund's
borrowing limit).
Each Fund's fundamental policies may not be changed without the approval of a
"majority of its outstanding voting securities," as defined in the Investment
Company Act of 1940, as amended ("1940 Act"). For purposes of such approval,
the vote of a majority of the outstanding voting securities of a Fund means the
vote, at a meeting of the shareholders of such Fund duly called, (i) of 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.
Non-fundamental policies may be changed without shareholder approval.
INVESTMENT POLICIES OF THE TAXABLE BOND FUNDS
FUNDAMENTAL INVESTMENT POLICIES
Each Taxable Bond Fund has adopted the following fundamental investment
policies. Each Taxable Bond Fund will NOT:
1. Purchase the securities of any issuer (except the U.S. Government, its
agencies or instrumentalities) if as a result more than five percent (5%)
of the value of its total assets at the time of purchase would be invested
in the securities of such issuer, except that up to twenty-five percent
(25%) of the value of a Fund's assets (which twenty-five percent (25%)
shall not include securities issued by another investment company) may be
invested without regard to this five percent (5%) limitation.
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2. Underwrite any issue of securities, except to the extent that the purchase
of permitted investments directly from the issuer in accordance with the
Fund's investment objective, policies and restrictions and the subsequent
disposition thereof may be deemed to be underwriting or the later
disposition of restricted securities acquired within the limits imposed on
the acquisition of such securities may be deemed to be an underwriting.
3. Purchase or sell real estate, but this shall not prevent the Fund from
investing in municipal obligations or other permitted investments secured
by real estate or interests therein.
4. Purchase or retain for the Fund's portfolio the securities of any issuer,
if, to the Fund's knowledge, the officers or directors of the Fund, or its
investment adviser, who individually own more than one-half (1/2) of one
percent (1%) of the outstanding securities of such an issuer, together own
more than five percent (5%) of such outstanding securities.
5. High-Yield Bond and Intermediate Treasury Funds only: Borrow money, except
from a bank or SAFECO Corporation or its affiliates at an interest rate not
greater than that available to the Fund from commercial banks, for
temporary or emergency purposes and not for investment purposes, and then
only in an amount not exceeding twenty percent (20%) of the value of the
Fund's total assets at the time of such borrowing.
GNMA Fund only: Borrow money, except from a bank or affiliates of SAFECO
Corporation at an interest rate not greater than that available to the GNMA
Fund from commercial banks, for temporary or emergency purposes and not for
investment purposes, and then only in an amount not exceeding twenty
percent (20%) of its total assets (including borrowings) less liabilities
(other than borrowings) immediately after such borrowing.
Each Fund will not purchase securities if borrowings equal to or greater
than five percent (5%) of the Fund's total assets are outstanding.
6. Pledge, mortgage or hypothecate its assets, except that to secure
borrowings permitted by subparagraph (5) above, it may pledge securities
having a market value at the time of pledge not exceeding ten percent (10%)
of the cost of the Fund's total assets.
7. Purchase or sell commodities or commodity contracts, other than futures
contracts, or invest in oil, gas or other mineral exploration or
development programs or in arbitrage transactions.
8. Make short sales of securities or purchase securities on margin, except for
margin deposits in connection with futures contracts and such short-term
credits as are necessary for the clearance of transactions.
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<PAGE>
9. Participate on a joint or a joint-and-several basis in any trading account
in securities, except that the Fund may, for the purpose of seeking better
net results on portfolio transactions or lower brokerage commission rates,
join with other transactions executed by the investment adviser or the
investment adviser's parent company and any subsidiary thereof.
10. Purchase from or sell portfolio securities to any officer or director, the
Fund's investment adviser, principal underwriter or any affiliates or
subsidiaries thereof; provided, however, that this prohibition shall not
prohibit the Fund from purchasing with the up to $7,000,000 raised through
the sale of up to 700,000 shares of common stock to SAFECO Life Insurance
Company, portfolio securities from subsidiaries of SAFECO Corporation prior
to the effective date of the Fund's initial public offering.
11. Purchase securities (other than obligations issued or guaranteed by the
United States Government, its agencies or instrumentalities), if as a
result twenty-five percent (25%) or more of the Fund's total assets would
be invested in one industry (governmental issuers of securities are not
considered part of any one industry).
12. Purchase shares of common stock, other than those issued by other regulated
investment companies (or, with respect to the High-Yield Bond and
Intermediate Treasury Funds only, when the acquisition of such common
stocks, rights or other equity interests is consistent with the High-Yield
Bond and Intermediate Treasury Funds' investment objectives). Generally,
the High-Yield Bond and Intermediate Treasury Funds will only hold such
equity securities as a result of purchases or unit offerings of
fixed-income securities which include such equity securities or in
connection with an actual or proposed conversion or exchange of
fixed-income securities.
13. Issue or sell any senior security, except that this restriction shall not
be construed to prohibit the Fund from borrowing funds (i) on a temporary
basis as permitted by Section 18(g) of the 1940 Act or (ii) from any bank
provided, that immediately after such borrowing, there is an asset coverage
of at least three hundred percent (300%) for all such borrowings and
provided, further, that in the event that such asset coverage shall at any
time fall below three hundred percent (300%), the Fund shall, within three
(3) days thereafter (not including Sundays and holidays), or such longer
period as the Securities and Exchange Commission ("SEC") may prescribe by
rules and regulations, reduce the amount of its borrowings to an extent
that the asset coverage of such borrowings shall be at least three hundred
percent (300%). For purposes of this restriction, the terms "senior
security" and "asset coverage" shall be understood to have the meaning
assigned to those terms in Section 18 of the 1940 Act.
14. Purchase securities of any issuer, if, as a result, more than ten percent
(10%) of any class of securities of such issuer would be owned by the Fund.
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15. With respect to one hundred percent (100%) of the value of its total
assets, purchase more than ten percent (10%) of the outstanding voting
securities of any one issuer (other than U.S. Government securities).
16. Purchase or otherwise acquire securities which are illiquid or subject to
legal or contractual restrictions on resale, if as a result more than ten
percent (10%) of the Fund's (five percent (5%) of the GNMA Fund's) total
assets would be invested in such securities.
17. Make loans, except through the purchase of a portion or all of an issue of
debt or money market securities in accordance with its investment
objective, policies and restrictions, or through investments in qualified
repurchase agreements (provided, however, that a Fund shall not invest more
than ten percent (10%) of its total assets in qualified repurchase
agreements maturing in more than seven (7) days), or through qualified loan
agreements (by making secured loans of its portfolio securities which
amount to not more than five percent (5%) of its total assets).
NON-FUNDAMENTAL INVESTMENT POLICIES
In addition to the policies described in the Prospectus, each Taxable Bond Fund
has adopted the following non-fundamental investment policies which may be
changed without shareholder approval:
1. The Fund will not invest more than five percent (5%) of its total assets in
securities of issuers, including their predecessors, which have been in
operation for less than three years.
2. The Fund will not issue long-term debt securities.
3. The Fund will not invest in securities with unlimited liability, i.e.,
securities the holder of which may be assessed for amounts in addition to
the subscription or other price paid for the security.
4. The Fund will not trade in foreign currency, except as may be necessary to
convert the proceeds of the sale of foreign securities in the Fund's
portfolio into U.S. dollars.
5. The Fund may purchase "when-issued" or "delayed-delivery" securities or
purchase or sell securities on a "forward commitment" basis.
6. The Fund will not invest in any security issued by a commercial bank unless
(a) the bank has total assets of at least $1 billion, or the equivalent in
other currencies, or, in the case of a United States bank which does not
have assets of at least $1 billion, the aggregate investment made in any
one such bank is limited to $100,000 and the principal sum of each
investment is insured in full by the Federal Deposit Insurance Corporation
5
<PAGE>
("FDIC"), (b) in the case of a U.S. bank, it is a member of the FDIC and
(c) in the case of a foreign bank, the security is, in the opinion of the
Fund's investment adviser, of an investment quality comparable with other
debt securities which may be purchased by the Fund. These limitations do
not prohibit investment in securities issued by foreign branches of U.S.
banks, provided the U.S. banks meet the foregoing requirements.
7. The Fund shall not engage primarily in trading for short-term profits, but
it may from time to time make investments for short-term purposes when such
action is believed to be desirable and consistent with sound investment
policy, and it may dispose of securities whenever its investment adviser
deems advisable without regard to the length of time they have been held.
8. The Intermediate Treasury Fund may invest up to five percent (5%) of its
total assets in Yankee Sector debt securities and up to five percent (5%)
of its total assets in Eurodollar bonds.
9. The Intermediate Treasury Fund and High-Yield Bond Fund may each invest up
to five percent (5%) of its total assets in securities the interest on
which, in the opinion of counsel for the issuer, is exempt from federal
income tax. The GNMA Fund may not invest in such tax-exempt securities.
INVESTMENT POLICIES OF THE MANAGED BOND FUND
FUNDAMENTAL INVESTMENT POLICIES
The Managed Bond Fund has adopted the following fundamental investment policies.
The Managed Bond Fund will NOT:
1. Purchase the securities of any issuer (except the U.S. Government, its
agencies or instrumentalities) if as a result more than five percent (5%)
of the value of total assets at the time of purchase would be invested in
the securities of such issuer, except that up to twenty-five percent (25%)
of the value of the Fund's assets (which twenty-five percent (25%) shall
not include securities issued by another investment company) may be
invested without regard to this five percent (5%) limitation.
2. Purchase the securities of any issuer (other than obligations of or
guaranteed by the U.S. Government, its agencies and instrumentalities) if,
as a result, more than ten percent (10%) of any class of securities of such
issuer will be held by the Fund.
3. With respect to one hundred percent (100%) of the value of its total
assets, purchase more than ten percent (10%) of the outstanding voting
securities of any one issuer (other than U.S. Government securities).
6
<PAGE>
4. Purchase securities, if as a result, twenty-five percent (25%) or more of
the Fund's total assets would be invested in the securities of issuers
having their principal business activities in any one industry. Securities
of foreign banks and foreign branches of U.S. banks are considered to be
one industry. This limitation does not apply to obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or to
certificates of deposits or bankers' acceptances issued by domestic banks.
5. Purchase securities on margin, except for short-term credits necessary for
the clearance of transactions.
6. Make short sales of securities (sales of securities not presently owned).
7. Make loans, except through the purchase of a portion or all of an issue of
debt securities in accordance with the Fund's investment objective,
policies and restrictions or through investments in qualified repurchase
agreements.
8. Borrow money, except from a bank or SAFECO Corporation or its affiliates at
an interest rate not greater than that available to the Fund from
commercial banks, for temporary or emergency purposes and not for
investment purposes, and then only in an amount not exceeding twenty
percent (20%) of the value of the Fund's total assets (including
borrowings) less liabilities (other than borrowings) immediately after such
borrowing.
9. Underwrite any issue of securities, except to the extent that the purchase
of permitted investments directly from the issuer in accordance with the
Fund's investment objective, policies and restrictions and the subsequent
disposition thereof may be deemed to be underwriting or the later
disposition of restricted securities acquired within the limits imposed on
the acquisition of such securities may be deemed to be an underwriting.
10. Purchase or sell real estate or real estate limited partnerships (unless
acquired as a result of the ownership of securities or instruments) but
this shall not prevent the Fund from investing in permitted investments
secured by real estate or interests therein or in real estate investment
trusts.
11. Purchase or sell commodities, commodity contracts or futures contracts.
12. Participate on a joint or joint-and-several basis in any trading account in
securities, except that the Fund may join with other transactions executed
by the investment adviser or the investment adviser's parent company and
any subsidiary thereof, for the purpose of seeking better net results on
portfolio transactions or lower brokerage commission rates.
13. Issue or sell any senior security, except as permitted under the 1940 Act.
7
<PAGE>
NON-FUNDAMENTAL INVESTMENT POLICIES
The Managed Bond Fund has adopted the following non-fundamental investment
policies which may be changed without shareholder approval:
1. The Fund will not issue long-term debt securities.
2. The Fund will not invest in any security for the purpose of acquiring or
exercising control or management of the issuer.
3. The Fund will not invest in oil, gas or other mineral exploration or
development programs or leases.
4. The Fund will not invest in or sell (write) puts, calls, straddles, spreads
or any combinations thereof.
5. The Fund will not invest more than five percent (5%) of its total assets in
securities of issuers (including predecessor companies of the issuer)
having a record of less than three years continuous operation.
6. The Fund will not invest in securities with unlimited liability, i.e.,
securities the holder of which may be assessed for amounts in addition to
the subscription or other price paid for the security.
7. The Fund will not invest more than ten percent (10%) of its total assets in
qualified repurchase agreements and will not invest in qualified repurchase
agreements maturing in more than seven (7) days.
8. The Fund will not purchase the securities of any other investment company,
except by purchase in the open market where no commission or profit to a
broker or dealer results from such purchase other than the customary
broker's commissions, or except as part of a merger, consolidation or
acquisition. The Fund shall not invest more than ten percent (10%) of its
total assets in shares of other investment companies, invest more than five
percent (5%) of its total assets in a single investment company nor
purchase more than three percent (3%) of the outstanding voting securities
of a single investment company.
9. The Fund will not purchase securities if borrowings equal to or greater
than five percent (5%) of the Fund's total assets are outstanding.
10. The Fund will invest at least sixty-five percent (65%) of its total assets
in fixed income obligations.
8
<PAGE>
11. The Fund will invest at least fifty percent (50%) of its total assets in
obligations of or guaranteed by the U.S. Government, its agencies and
instrumentalities.
12. The Fund may invest up to fifty percent (50%) of its total assets in
corporate debt securities or Eurodollar bonds.
13. The Fund may invest up to ten percent (10%) of its total assets in Yankee
Sector debt obligations.
14. The Fund may purchase securities on a when-issued or delayed-delivery basis
or may purchase or sell securities on a forward commitment basis.
15. The Fund may temporarily invest its cash in high quality commercial paper,
certificates of deposit, shares of no-load, open-end money market funds
(subject to the percentage limitations set forth in subparagraph 8 above),
repurchase agreements (subject to the limitations set forth in subparagraph
7 above) or any other short-term instrument the Fund's investment adviser
deems appropriate.
16. The Fund may hold cash as a temporary defensive measure when market
conditions so warrant.
17. The Fund shall not engage primarily in trading for short-term profits, but
it may from time to time make investments for short-term purposes when such
action is believed to be desirable and consistent with sound investment
policy. The Fund may dispose of securities whenever it deems advisable
without regard to the length of time they have been held.
18. The Fund may invest up to five percent (5%) of its total assets in
securities the interest on which, in the opinion of counsel for the
issuer, is exempt from federal income tax.
WHILE THE FUND HAS THE AUTHORITY TO INVEST IN THE FOLLOWING TYPES OF SECURITIES,
IT HAS NO PRESENT INTENTION TO DO SO IN THE COMING YEAR. BEFORE THE FUND
PURCHASES ANY OF THESE SECURITIES, THE PROSPECTUS WILL BE AMENDED BY SUPPLEMENT
TO IDENTIFY OR DESCRIBE THE SECURITY.
19. The Fund may invest up to five percent (5%) of its total assets in shares
of real estate investment trusts.
20. The Fund may purchase securities subject to legal or contractual
restrictions on resale or illiquid securities, if no more than fifteen
percent (15%) of the Fund's total assets would be invested in such
securities.
9
<PAGE>
21. The Fund may purchase foreign securities, provided that such purchase, at
the time thereof, would not cause more than ten percent (10%) of the total
assets of the Fund (taken at market value) to be invested in foreign
securities.
22. The Fund will not buy or sell foreign currency, except as may be necessary
to invest the proceeds of the sale of any foreign securities held by the
Fund in U.S. dollars.
ADDITIONAL INVESTMENT INFORMATION
The Funds may make the following investments, among others, although they may
not buy all of the types of securities that are described.
1. REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
Fund purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date and price reflecting a market rate of interest unrelated
to the coupon rate or maturity of the purchased securities. A Fund
maintains custody of the underlying securities prior to their repurchase;
thus, the obligation of the bank or dealer to pay the repurchase price on
the date agreed to is, in effect, secured by such securities. If the value
of these securities is less than the repurchase price, plus any agreed-upon
additional amount, the other party to the agreement must provide additional
collateral so that at all times the collateral is at least equal to the
repurchase price, plus any agreed-upon additional amount.
Each Fund intends to enter into repurchase agreements only with banks and
dealers in transactions believed by SAM to present minimum credit risks in
accordance with guidelines established by the Taxable Bond Trust's Board
of Trustees. SAM will review and monitor the creditworthiness of those
institutions under the general supervision of the Board of Trustees.
2. WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES. Under this procedure, a Fund
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 a Fund 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 a Fund bears the risk of such fluctuation
from the date of purchase. A Fund may dispose of its interest in those
securities before delivery.
A Fund will commit to purchase such securities only with the intent of
actually acquiring the securities when issued. Assets which are
short-term, high-quality obligations will be earmarked in anticipation of
making payments for securities purchased on a when-issued basis.
10
<PAGE>
3. YANKEE DEBT SECURITIES AND EURODOLLAR BONDS. Yankee debt securities are
securities issued in the U.S. by foreign issuers. These bonds involve
investment risks that are different from those of domestic issuers. Such
risks may include nationalization of the issuer, confiscatory taxation by
the foreign government, establishment of controls by the foreign government
that would inhibit the ability of the issuer to make principal and interest
payments to a Fund, lack of comparable publicly available information
concerning foreign issuers, lack of comparable accounting and auditing
practices in foreign countries and finally, difficulty in enforcing claims
against foreign issuers in the event of default.
SAM will make every effort to analyze potential investments in foreign
issuers on the same basis as the rating services analyze domestic issuers.
Because public information is not always comparable to that available on
domestic issuers, this may not be possible. Therefore, while SAM will make
every effort to select investment in foreign securities on the same basis
relative to quality and risk as its investments in domestic securities,
that may not always be possible.
Eurodollar bonds are denominated in U.S. dollars. A Fund will purchase
Eurodollar bonds through U.S. securities dealers and hold such bonds in the
United States. The delivery of Eurodollar bonds to a Fund's custodian in
the United States may cause slight delays in settlement which are not
anticipated to affect any Fund in any material, adverse manner. Eurodollar
bonds issued by foreign issuers are subject to the same risks as Yankee
sector bonds.
4. MUNICIPAL SECURITIES. Municipal securities include obligations issued by
or on behalf of the states, territories and possessions of the United
States and the District of Columbia and their political subdivisions,
agencies, instrumentalities or authorities, the interest on which, in the
opinion of counsel to the issuer, is exempt from federal income tax.
Generally, when market interest rates rise, the price of municipal
securities will fall, and when market interest rates fall, the price of
these securities will rise. There is also a risk that the issuer of a
municipal security will fail to make timely payments of principal and
interest to the Fund.
The TAXABLE BOND FUNDS may also purchase the following types of securities:
1. RESTRICTED SECURITIES AND RULE 144A SECURITIES. Restricted securities are
securities that may be sold only in a public offering with respect to which
a registration statement is in effect under the 1933 Act or, if they are
unregistered, 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 SEC has adopted Rule 144A under the 1933 Act,
which is designed to further facilitate efficient trading among
institutional investors by permitting the sale of Rule 144A securities to
qualified institutional buyers without registration under the 1933 Act.
To the extent privately placed securities held by a Fund qualify under
Rule 144A and an institutional market develops for those securities, the
Fund likely will be able to dispose of the securities without registering
them under the 1933 Act. SAM, acting under guidelines established by the
Taxable Bond Trust's Board of Trustees, may determine that certain
securities qualified for trading under Rule 144A are liquid.
11
<PAGE>
Where registration is required, a Fund may be obligated to pay all or part
of the registration expenses, and a considerable period may elapse between
the decision to sell and the time the Fund may be permitted to sell a
security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the Fund might obtain a
less favorable price than prevailed when it decided to sell. To the extent
privately placed securities are illiquid, purchases thereof will be subject
to any limitations on investments in illiquid securities. Restricted
securities for which no market exists are priced at fair value as
determined in accordance with procedures approved and periodically reviewed
by the Taxable Bond Trust's Board of Trustees.
2. MORTGAGE-BACKED SECURITIES (GNMA FUND ONLY). Unlike conventional bonds,
the principal with respect to GNMA securities is paid back over the life of
the loan rather than at maturity. Consequently, the GNMA Fund will receive
monthly scheduled payments of both principal and interest. In addition,
the GNMA Fund may receive unscheduled principal payments representing
unscheduled prepayments on the underlying mortgages. Since the GNMA Fund
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 GNMA Fund's portfolio,
GNMA securities may not be an effective means to lock in long-term interest
rates. In addition, while prices of GNMA 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 a 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
12
<PAGE>
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 GNMA Fund will not invest in
interest-only or principal-only classes -- such investments are extremely
sensitive to changes in interest rates.
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. Due to the absence of an active
trading market, a Fund may experience difficulty in valuing or disposing of
illiquid securities. SAM determines the liquidity of the securities under
guidelines adopted by the Taxable Bond Trust's Board of Trustees.
The MANAGED BOND FUND may also purchase the following type of securities:
1. ASSET-BACKED SECURITIES. Asset-backed securities represent interests in,
or are secured by and payable from, pools of assets such as consumer loans,
automobile receivable securities, credit card receivable securities, and
installment loan contracts. The assets underlying the securities are
securitized through the use of trusts and special purpose corporations.
These securities may be supported by credit enhancements such as letters of
credit. Payment of interest and principal ultimately depends upon
borrowers paying the underlying loans. Repossessed collateral may be
unavailable or inadequate to support payments on defaulted asset-backed
securities. In addition, asset-backed securities are subject to prepayment
risks which may reduce the overall return of the investment.
Automobile receivable securities represent undivided fractional interests
in a trust whose assets consist of a pool of automobile retail installment
sales contracts and security interests in vehicles securing the contracts.
Payments of principal and interest on the certificates issued by the
automobile receivable trust are passed through periodically to certificate
holders and are generally guaranteed up to specified amounts by a letter of
credit issued by a financial institution. Certificate holders may
experience delays in payments or losses if the full amounts due on the
underlying installment sales contracts are not realized by the trust
because of factors such as unanticipated legal or administrative costs of
enforcing the contracts, or depreciation, damage or loss of the vehicles
securing the contracts.
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
13
<PAGE>
receivable security and reducing its yield. Credit card accounts are
unsecured obligations of the cardholder.
2. ZERO COUPON BONDS. Zero coupon bonds do not make interest payments;
instead they are sold at a deep discount from their face value and are
redeemed at face value when they mature. Because zero coupon bonds do not
pay current income, their prices can be very volatile when interest rates
change. In calculating its dividends, the Managed Bond Fund takes into
account as income a portion of the difference between a zero coupon bond's
purchase price and its face value.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and
principal components of an outstanding U.S. Treasury bond and selling them
as individual securities.
PRINCIPAL SHAREHOLDERS OF CERTAIN FUNDS
At November 15, 1996, SAFECO Insurance Company of America ("SAFECO Insurance")
owned 500,000 shares of the Intermediate Treasury Fund, which represented
32.63% of the outstanding shares of the Fund. SAFECO Insurance is a Washington
corporation and a wholly owned subsidiary of SAFECO Corporation, each of which
has its principal place of business at SAFECO Plaza, Seattle, WA 98185. At
November 15, 1996, SAFECO Corporation owned 500,000 shares of High-Yield Bond
Fund, which represented 8.41% of the Fund's outstanding shares. SAFECO
Corporation is a Washington corporation and a holding company whose primary
subsidiaries are engaged in the insurance and financial services businesses.
At September 13, 1996, the principal shareholders of the Managed Bond Fund were
as follows: Crista Ministries, whose address of record is P.O. Box 330303,
Seattle, WA 98133, owned 91,375 shares, which represented 18.4% of the Fund's
outstanding shares. Massman Construction Co. Profit Sharing Retirement Trust,
whose address of record is 8901 Stateline, Kansas City, MO 64114, owned 233,262
shares, which represented 47.0% of the Fund's outstanding shares. Crown
Packaging Corp. Profit Sharing & Pension Plan, whose address of record is 8514
Eager Road, St. Louis, MO 63144, owned 155,933 shares, which represented 31.4%
of the Fund's outstanding shares.
Principal shareholders of a Fund may control the outcome of a shareholder vote.
ADDITIONAL TAX INFORMATION
Each Fund 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 Fund
must distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of
14
<PAGE>
taxable net investment income and net short-term capital gain). Each Fund
intends to make sufficient distributions to shareholders to relieve it from
liability for federal excise and income taxes.
Each Fund is treated as a separate corporation for federal income tax purposes.
The excess of net long-term capital gains over net short-term capital loss
realized by a Fund on portfolio transactions, when distributed by the Fund, is
subject to long-term capital gains treatment under the Code, regardless of how
long you have held the shares of the Fund. 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.
Redemptions and exchanges of shares of a Fund may result in a capital gain or
loss for federal income tax purposes.
If shares of a Fund are sold at a loss after being held for one year or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for any distribution, the shareholder will pay full price for the
shares and receive some portion of the purchase price back as a taxable dividend
or capital gain distribution.
Each Fund is required to withhold 31% of all taxable dividends, capital gain
distributions and redemption proceeds payable to individuals and certain other
noncorporate shareholders who do not furnish the Fund with a correct taxpayer
identification number. Withholding at that rate also is required from dividends
and those distributions for shareholders who otherwise are subject to backup
withholding.
These are tax requirements that all mutual funds must follow in order to avoid
federal taxation. The Funds may have to limit investment activity in some types
of securities in order to adhere to these requirements.
ADDITIONAL INFORMATION ON CALCULATION OF NET ASSET VALUE PER SHARE
Each Fund determines its net asset value per share ("NAV") by subtracting its
liabilities (including accrued expenses and dividends payable) from its total
assets (the market value of the securities the Fund holds plus cash and other
assets, including interest accrued but not yet received) and dividing the result
by the total number of shares outstanding. The NAV of the No-Load Class of each
Fund is calculated as of the close of regular trading on the New York Stock
Exchange ("Exchange") every day the Exchange is open for trading. The Exchange
is closed on the following days: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
NAV is determined separately for each class of shares of each Fund.
15
<PAGE>
Short-term securities held in a Fund's portfolio having a remaining maturity of
less than 60 days when purchased, and securities originally purchased with
maturities in excess of 60 days but which currently have maturities of 60 days
or less, may be valued at cost adjusted for amortization of premiums or accrual
of discounts or under such other methods as a Board of Trustees may from time to
time deem to be appropriate. The cost of those securities that had original
maturities in excess of 60 days shall be determined by their fair market value
as of the 61st day prior to maturity. All other securities and assets in the
portfolio will be appraised in accordance with those procedures established by a
Board of Trustees in good faith in computing the fair market value of those
assets.
ADDITIONAL PERFORMANCE INFORMATION
Effective September 30, 1996 all of the then-existing shares of each Fund were
redesignated No-Load Class shares, and the Intermediate Treasury and Managed
Bond Funds commenced offering Advisor Class A and Advisor Class B shares.
The High-Yield Bond Fund commenced offering Advisor Class A and Advisor Class B
shares on or about January 26, 1997.
The yield and total return calculations set forth below are for the dates
indicated and are not a prediction of future results.
The yields for the No-Load Class of the Taxable Bond Funds for the 30-day period
ended September 30, 1996 were as follows:
Intermediate Treasury Fund 5.66%
GNMA Fund 6.75%
High-Yield Bond Fund 8.83%
The yields for the No-Load Class of the Managed Bond Fund for the 30-day periods
ended December 31, 1995 and June 30, 1996 were 4.78% and 5.04%, respectively.
16
<PAGE>
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 for the No-Load Class of each Taxable Bond Fund for the
one-year, five-year and ten-year (or since initial public offering ) period
ended September 30, 1996 were as follows:
10 Year Period
or Since Initial # of Date of Initial
1 Year 5 Year Public Offering Months Public Offering
------ ------ --------------- ------ ---------------
Intermediate
Treasury
Fund 4.00% 37.39% 78.28% 96 September 7, 1988
GNMA Fund 4.48% 33.66% 99.23%(*) 120
High-Yield
Bond Fund 10.79% 68.48% 103.41% 96 September 7, 1988
(*) 10-year period
The total returns for the No-Load Class of the Managed Bond Fund for the
one-year and since initial public offering periods ended December 31, 1995, were
as follows:
One Since Initial # of Date of Initial
Year Public Offering Months Public Offering
--- --------------- ------ ---------------
Managed
Bond Fund 17.35% 13.82% 22 February 28, 1994
17
<PAGE>
The total returns for the No-Load Class of the Managed Bond Fund for the
one-year and since initial public offering periods ended June 30, 1996 were as
follows:
One Since Initial # of Date of Initial
Year Public Offering Months Public Offering
---- --------------- ------ ---------------
Managed
Bond Fund 4.49% 10.92% 28 February 28, 1994
The average annual returns for the No-Load Class of each Taxable Bond Fund for
the one-year, five-year and ten-year (or since initial public offering ) period
ended September 30, 1996 were as follows:
Since Initial # of Date of Initial
1 Year 5 Year Public Offering Months Public Offering
------ ------ --------------- ------ ---------------
Intermediate
Treasury Fund 4.00% 6.56% 7.43% 96 September 7, 1988
GNMA Fund 4.48% 5.97% 7.14%(*) 120
High-Yield Bond
Fund 10.79% 11.00% 9.21% 96 September 7, 1988
(*) 10-year period.
The average annual returns for the No-Load Class of the Managed Bond Fund for
the one-year and since initial public offering periods ended December 31, 1995
were as follows:
One Since Initial # of Date of Initial
Year Public Offering Months Public Offering
--- --------------- ------ ---------------
Managed
Bond Fund 17.35% 7.32% 22 February 28, 1994
18
<PAGE>
The average annual returns for the No-Load Class of the Managed Bond Fund for
the one-year and since initial public offering periods ended June 30, 1996 were
as follows:
One Since Initial # of Date of Initial
Year Public Offering Months Public Offering
--- --------------- ------ ---------------
Managed
Bond Fund 4.49% 4.54% 28 February 28, 1994
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 = (nth-root(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 calculation, all dividends and capital gain distributions
are assumed to be reinvested at the Fund's NAV on the reinvestment date.
In addition to performance figures, the Funds may advertise their rankings as
calculated by independent rating services which monitor mutual funds'
performance (e.g., CDA Investment Technologies, Lipper Analytical Services,
Inc., Morningstar, Inc. and Wiesenberger Investment Companies Service). These
rankings may be among mutual funds with similar objectives and/or size or with
mutual funds in general. In addition, the Funds may advertise rankings which
are in part based upon subjective criteria developed by independent rating
services to measure relative performance. Such criteria may include methods to
account for levels of risk and potential tax liability, sales commissions and
expense and turnover ratios. These rating services may also base the measure of
relative performance on time periods deemed by them to be representative of up
and down markets. The Funds may also describe in their advertisements the
methodology used
19
<PAGE>
by rating services to arrive at Fund ratings. In addition, the Funds may also
advertise individual measurements of Fund performance published by the rating
services.
The Funds may occasionally reproduce articles or portions of articles about the
Funds 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, MORNINGSTAR MUTUAL FUNDS, MUTUAL FUNDS FORECASTER, MUTUAL FUNDS
MAGAZINE, MONEY MAGAZINE, NEWSWEEK, NO-LOAD FUND INVESTOR, NO-LOAD FUND X,
NO-LOAD INVESTOR, PENSIONS & INVESTMENTS, RUKEYSER'S MUTUAL FUNDS, TELESWITCH,
TIME MAGAZINE, U.S. NEWS AND WORLD REPORT, YOUR MONEY and THE WALL STREET
JOURNAL).
Each Fund may also present in its advertisements and sales literature (i) a
biography or the credentials of its portfolio manager (including but not limited
to educational degrees, professional designations, work experience, work
responsibilities and outside interests), (ii) descriptions, including quotations
attributable to the portfolio manager of the investment style used to manage a
Fund's portfolio, the research methodologies underlying securities selection and
a Fund's investment objective, (iii) current facts (including but not limited to
number of employees, number of shareholders, business characteristics) about the
Fund's investment adviser (SAM), or any sub investment adviser, the investment
adviser's parent company (SAFECO Corporation) or the parent company of any sub
investment adviser, or the SAFECO Family of Funds, and (iv) information about
particular securities held in a Fund's portfolio.
From time to time, each Fund may discuss its performance in relation to the
performance of relevant indices and/or representative peer groups. Such
discussions may include how a Fund's investment style (including but not limited
to portfolio holdings, asset types, industry/sector weightings and the purchase
and sale of specific securities) contributed to such performance.
In addition, each Fund may comment on the market and economic outlook in
general, on specific economic events, on how these conditions have impacted its
performance and on how the portfolio manager will or has addressed such
conditions.
Performance information and quoted ratings are indicative only of past
performance and are not intended to represent future investment results.
20
<PAGE>
TRUSTEES AND OFFICERS OF THE TRUSTS
Position(s) Held with Principal Occupation(s)
Name and Address the Trust During Past 5 Years
- ---------------- ------------------ --------------------
Boh A. Dickey* Chairman and Trustee President, Chief Operating
SAFECO Plaza Officer, and Director of
Seattle, WA 98185 SAFECO Corporation.
(52) Previously, 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
Microsoft Corporation Contributions and Community
One Microsoft Way Programs for Microsoft
Redmond, WA 98052 Corporation, Redmond,
(51) Washington, a computer
software 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.
Richard W. Hubbard* Trustee Retired Vice President and
1270 NW Blakely Ct. Treasurer of the Trust and
Seattle, WA 98177 other SAFECO Trusts; retired
(67) 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, WA 98032 Materials Distribution,
(59) Weyerhaeuser Company, Tacoma,
Washington; Director of First
SAFECO National Life Insurance
Company of New York.
21
<PAGE>
Position(s) Held with Principal Occupation(s)
Name and Address the Trust During Past 5 Years
- ---------------- ------------------ --------------------
Larry L. Pinnt Trustee Retired Vice President and
1600 Bell Plaza Chief Financial Officer U.S.
Room 1802 WEST Communications, Seattle,
Seattle, WA 98191 Washington; Director of Key
(62) Bank of Washington, Seattle,
Washington; Director of
University of Washington
Medical Center, Seattle,
Washington; Director of
Cascade Natural Gas
Corporation, Seattle,
Washington; Director of First
SAFECO National Life Insurance
Company of New York.
John W. Schneider Trustee President of Wallingford
1808 N 41st St. Group, Inc., Seattle,
Seattle, WA 98103 Washington; former President
(55) of Coast Hotels, Inc.,
Seattle, Washington; Director
of First SAFECO National Life
Insurance Company of New York.
David F. Hill* President President of SAFECO
SAFECO Plaza Trustee Securities, Inc. and SAFECO
Seattle, WA 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, WA 98185 Assistant Secretary Treasurer of SAFECO
(34) 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.
22
<PAGE>
Position(s) Held with Principal Occupation(s)
Name and Address the Trust During Past 5 Years
- ---------------- ------------------ --------------------
Ronald L. Spaulding Vice President Vice Chairman of SAFECO Asset
SAFECO Plaza Treasurer Management Company; Vice
Seattle, WA 98185 President and Treasurer of
(53) SAFECO Corporation; Vice
President of SAFECO Life
Insurance Company; former
Senior Portfolio Manager of
SAFECO insurance companies;
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 Investment Company Act
of 1940.
23
<PAGE>
COMPENSATION TABLE FOR CURRENT TRUSTEES
FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1996
(Taxable Bond Trust)
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement Estimated Annual From Registrant
Aggregate Benefits Accrued Benefits Upon and Fund
Compensation As Part of Fund Retirement Complex Paid to
Trustee from Registrant Expenses ---------- Trustees
------- --------------- -------- --------
<S> <C> <C> <C> <C>
Boh A. Dickey N/A N/A N/A N/A
Barbara J. Dingfield $2,458 N/A N/A $28,478
Richard E. Lundgren $2,458 N/A N/A $28,478
Larry L. Pinnt $2,458 N/A N/A $28,478
John W. Schneider $2,458 N/A N/A $28,478
Richard W. Hubbard $2,458 N/A N/A $28,478
David F. Hill* N/A N/A N/A N/A
* First elected to the Board of Trustees in August, 1996.
</TABLE>
Currently, there is no pension, retirement, or other plan or any arrangement
pursuant to which Trustees or officers of the Trust are compensated by the
Trust. Each Trustee also serves as Trustee for five other registered open-end
management companies that have, in the aggregate, twenty series companies
managed by SAM.
The officers of the Trust receive no compensation for their services as
officers, or if applicable, as Trustees.
At October 30, 1996 the Trustees and officers of the Taxable Bond Trust as a
group owned less than 1% of the outstanding shares of each Taxable Bond Fund.
24
<PAGE>
COMPENSATION TABLE FOR CURRENT TRUSTEES
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1995
(Managed Bond Trust)
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits Estimated From Registrant
Aggregate Accrued As Annual Benefits and Fund
Compensation Part of Fund Upon Retirement Complex Paid to
Trustee from Registrant Expenses --------------- Trustees
- ------- --------------- -------- --------
<S> <C> <C> <C> <C>
Boh A. Dickey N/A N/A N/A N/A
Barbara J. Dingfield $852 N/A N/A $23,875
Richard E. Lundgren $852 N/A N/A $23,875
Larry L. Pinnt $852 N/A N/A $23,875
John W. Schneider $852 N/A N/A $23,875
Richard W. Hubbard $960 N/A N/A $26,900
David F. Hill* N/A N/A N/A N/A
</TABLE>
* First elected to the Board of Trustees in August, 1996.
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 companies that have, in the aggregate, twenty-two series companies
managed by SAM.
The officers of the Managed Bond Trust received no compensation for their
services as officers or, if applicable, as Trustees.
At September 18, 1996 the Trustees and officers of the Managed Bond Trust owned
none of the outstanding shares of the Managed Bond Fund.
25
<PAGE>
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 of each Fund and
SAFECO Services is the transfer, dividend and distribution disbursement and
shareholder servicing agent of each Fund.
The following individuals have the following positions and offices with the
Trust, SAM, SAFECO Securities and SAFECO Services:
<TABLE>
<CAPTION>
SAFECO SAFECO
Name Trust SAM Securities Services
- --- ----- --- ---------- --------
<S> <C> <C> <C> <C>
B. A. Dickey Chairman Director Director
Trustee Chairman
D. F. Hill President Senior Vice President President
Trustee President Director Director
Director Secretary Secretary
N. A. Fuller Vice President Vice President Vice President Vice President
Controller Controller Controller Controller
Assistant Secretary Assistant Assistant
Secretary Treasurer Secretary Secretary
Treasurer Treasurer
R. L. Spaulding Vice President Vice Chairman Director Director
Treasurer Director
S. C. Bauer President
Director
D.H. Longhurst Assistant Assistant Assistant
Controller Controller Controller
</TABLE>
Mr. Dickey is President, Chief Operating Officer and a Director of SAFECO
Corporation and Mr. Spaulding is a Treasurer and a Vice President of SAFECO
Corporation. Messrs. Dickey and Spaulding are also directors of other SAFECO
Corporation subsidiaries.
In connection with the investment advisory contract with each Trust, SAM
furnishes or pays for all facilities and services furnished or performed for or
on behalf of each Trust and each Fund of the Trust, which includes furnishing
office facilities, books, records and personnel to manage each Trust's and each
Fund's affairs and paying certain expenses.
The Trust Instrument of each Trust provides that the Trust will indemnify its
Trustees and its officers against liabilities and expenses reasonably incurred
in connection with litigation in
26
<PAGE>
which they may be involved because of their offices with the Trust, unless it is
adjudicated that they engaged in bad faith, wilful misfeasance, gross
negligence, or reckless disregard of the duties involved in the conduct of their
offices. In the case of settlement, such indemnification will not be provided
unless it has been determined -- by a court or other body approving the
settlement or other disposition, or by a majority of a quorum of Trustees who
are neither interested persons of the Trust nor are parties to the proceeding,
based upon a review of readily available facts (rather than a trial-type
inquiry), or in a written opinion of independent counsel --that such officers or
Trustees have not engaged in wilful misfeasance, bad faith, gross negligence, or
reckless disregard of their duties.
SAM also serves as the investment adviser for other investment companies in
addition to the Funds. Several of these investment companies have investment
objectives similar to those of certain Funds. It is therefore possible that
the same securities will be purchased for both a Fund and another investment
company advised by SAM. When two or more funds advised by SAM are
simultaneously engaged in the purchase or sale of the same security, the
prices and amounts will be allocated in a manner considered by the officers
of the funds involved to be equitable to each Fund. It is expected that the
opportunity to participate in volume transactions will produce better
executions and prices for a Fund generally. In some cases, the price of a
security allocated to the Fund may be higher or lower than the price of a
security allocated to another Fund.
For the services and facilities furnished by SAM, each Trust has agreed to pay
an annual fee for each Fund computed on the basis of the average market value of
the net assets of each Fund ascertained each business day and paid monthly in
accordance with the following schedules. The reduction in fees occurs only at
such time as the respective Fund's net assets reach the dollar amounts of the
break points and applies only to those assets that fall within the specified
range:
INTERMEDIATE TREASURY FUND
For assets up to and
including $250,000,000 .55 of 1%
For assets in excess of $250,000,000
and up to and including $500,000,000 .45 of 1%
For assets in excess of $500,000,000
and up to and including $750,000,000 .35 of 1%
For assets over $750,000,000 .25 of 1%
GNMA AND HIGH-YIELD BOND FUNDS
For assets up to and
including $250,000,000 .65 of 1%
For assets in excess of $250,000,000
and up to and including $500,000,000 .55 of 1%
For assets in excess of $500,000,000
and up to and including $750,000,000 .45 of 1%
For assets over $750,000,000 .35 of 1%
27
<PAGE>
MANAGED BOND FUND
Net Assets Fee
---------- ---
For assets up to and
including $100,000,000 .50 of 1%
For assets in excess of $100,000,000
and up to and including $250,000,000 .40 of 1%
For assets over $250,000,000 .35 of 1%
The following table states the total amount of compensation paid by each Fund to
SAM for the past three fiscal years (or since its initial public offering in the
case of the Managed Bond Fund):
TAXABLE BOND FUNDS
Year Ended
September 30, 1996 September 30, 1995 September 30, 1994
Intermediate
Treasury Fund $ 78,000 $ 71,000 $ 77,000
GNMA Fund $270,000 $276,000 $352,000
High-Yield Bond
Fund $255,000 $206,000 $202,000
MANAGED BOND FUND
Period from February 28, 1994
(Initial Public Offering) to
Year Ended December 31, 1995 December 31, 1994
---------------------------- -------------------------
$22,720 $15,869
28
<PAGE>
CUSTODIAN. U.S. Bank of Washington, N.A., 1420 Fifth Avenue, Seattle,
Washington 98101, is the custodian of the securities, cash and other assets of
each Fund under an agreement with the Trusts.
AUDITOR. Ernst & Young LLP, 999 Third Avenue, Suite 3500, Seattle, Washington
98104 is the independent auditor of each Fund's financial statements.
SAFECO Services, SAFECO Plaza, Seattle, Washington 98185 is the transfer,
dividend and distribution disbursement and shareholder servicing agent for the
No-Load Class of each Fund under an Agreement with the Trusts. SAFECO Services
provides, or through subcontracts makes provisions for, all required transfer
agent activity, including maintenance of records of the No-Load Class of each
Fund's shareholders, records of transactions involving the No-Load Class of each
Fund's shares, and the compilation, distribution, or reinvestment of income
dividends or capital gains distributions.
SAFECO Services is paid a fee for these services equal to $32.00 per shareholder
account but not to exceed .30% of each Taxable Bond Fund's or the Managed Bond
Fund's average net assets. The following table shows the fees paid by each
Taxable Bond Fund to SAFECO Services during the past three fiscal years:
Year Ended*
September 30, 1996 September 30, 1995 September 30, 1994
Intermediate
Treasury Fund $ 39,000 $ 33,000 $ 25,000
GNMA Fund $111,000 $120,000 $115,000
High-Yield Bond
Fund $ 90,000 $ 78,000 $ 63,000
The following table states the total amount of compensation paid by the Managed
Bond Fund to SAFECO Services for the year ended December 31, 1995 and for the
period from February 28, 1994 (initial public offering) to December 31, 1994:
Period from February 28, 1994
Year Ended (Initial Public Offering) to
December 31, 1995* December 31, 1994*
------------------ ----------------------------
$309 $96
* Figures reflect fees of $3.10 per shareholder transaction until July, 1996
when the new fee schedule went into effect.
SAFECO Securities is the principal underwriter for the No-Load Class of each
Fund and distributes each Fund's No-Load Class shares on a continuous best
efforts basis under an Agreement with the Trusts. SAFECO Securities is not
compensated by the Trusts or the Funds for underwriting, distribution or other
activities in connection with the No-Load shares.
BROKERAGE PRACTICES
SAM places orders for the purchase or sale of each Fund's portfolio securities.
In deciding which broker to use in a given transaction, SAM uses the following
criteria:
29
<PAGE>
(1) Which broker gives the best execution (i.e., which broker is able to trade
the securities in the size and at the price desired and on a timely basis);
(2) Whether the broker is known as being reputable; and
(3) All other things being equal, which broker has provided useful research
services to SAM.
Such research services as are furnished during the year (e.g., written reports
analyzing economic and financial characteristics of industries and companies,
telephone conversations between brokerage security analysts and members of SAM's
staff and personal visits by such analysts and brokerage strategists and
economists to SAM's office) are used to advise all of its clients including the
Funds, but not all such research services furnished to SAM are used by it to
advise the Funds. SAM does not pay excess commissions or mark-ups to any broker
or dealer for research services or for any other reason. Purchases and sales of
portfolio securities are transacted with the issuer or with a primary market
maker, acting as principal for the securities on a net basis, with no brokerage
commission being paid by the Funds. Transactions placed through dealers serving
as primary market makers reflect the spread between the bid and the asked
prices. Occasionally, the Funds may make purchases of underwritten issues at
prices that include underwriting fees.
REDEMPTION IN KIND
If the Trusts conclude that cash payment upon redemption to a shareholder would
be prejudicial to the best interest of the other shareholders of a Fund, a
portion of the payment may be made in kind. The Trusts have elected to be
governed by Rule 18f-1 under the Investment Company Act of 1940 pursuant to
which each Trust must redeem shares tendered by a shareholder solely in cash up
to the lesser of $250,000 or 1% of the net asset value of a Fund during any
90-day period. Any shares tendered by the shareholder in excess of the
above-mentioned limit may be redeemed through distribution of a Fund's assets.
Any securities or other property so distributed in kind shall be valued by the
same method as is used in computing NAV. Distributions in kind will be made in
readily-marketable securities, unless the investor elects otherwise. Investors
may incur brokerage costs in disposing of securities received in such a
distribution in kind.
FINANCIAL STATEMENTS
TAXABLE BOND FUNDS
The following financial statements of the Taxable Bond Funds and the report
thereon of Ernst & Young LLP, independent auditors, are incorporated by
reference to the Taxable Bond Trust's Annual Report for the year ended September
30, 1996.
Portfolio of Investments as of September 30, 1996
Statement of Assets and Liabilities as of September 30, 1996
Statement of Operations for the Year Ended September 30, 1996
Statement of Changes in Net Assets for the Years Ended September 30, 1996
and September 30, 1995
Notes to Financial Statements
30
<PAGE>
The following financial statements of the Managed Bond Fund (formerly Fixed
Income Portfolio) and the report thereon of Ernst & Young LLP, independent
auditors, are incorporated by reference to the Managed Bond Trust's (formerly
Institutional Series Trust) Annual Report for the year ended December 31, 1995:
Portfolio of Investments as of December 31, 1995
Statement of Assets and Liabilities as of December 31, 1995
Statement of Operations for the Year Ended December 31, 1995
Statement of Changes in Net Assets for the years ended December 31, 1994
and December 31, 1995.
Notes to Financial Statements
The following unaudited financial statements of the Managed Bond Fund (formerly
Fixed Income Portfolio) are incorporated herein by reference to the Managed Bond
Trust's (formerly Institutional Series Trust) Semi-Annual Report for the period
ended June 30, 1996.
Portfolio of Investments as of June 30, 1996 (unaudited)
Statement of Assets and Liabilities as of June 30, 1996 (unaudited)
Statement of Operations for the Period ended June 30, 1996 (unaudited)
Statement of Changes in Net Assets for the Period Ended June 30, 1996
(unaudited)
Notes to Financial Statements (unaudited)
A copy of each Trust's Annual and the Semi-Annual Report of the Managed Bond
Fund accompanies this Statement of Additional Information. Additional copies
may be obtained by calling SAFECO Services at 1-800-426-6730 nationwide or
545-5530 in Seattle or by writing to the address on the Prospectus cover.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICES, INC. ("MOODY'S")
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations with an original maturity not exceeding one
year.
Prime-1: Issuers (or supporting institutions) rated Prime-1 (P-1) have a
superior ability for repayment of senior short-term debt obligations. P-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2: Issuers (or supporting institutions) rated Prime-2 (P-2) have a strong
ability for repayment of senior short-term obligations. This will normally be
evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
31
<PAGE>
STANDARD & POOR'S RATING GROUP ("S&P")
S&P's commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
A-1: This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
32
<PAGE>
SAFECO TAXABLE BOND TRUST
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
Financial Highlights for a single No-Load Class share of (i) SAFECO
Intermediate-Term U.S. Treasury Fund for the period from September 7, 1988
(Initial Public Offering) to September 30, 1988, and for each of the eight
fiscal years ended September 30, 1996; (ii) SAFECO GNMA Fund and each of
ten fiscal years ended September 30, 1996; and (iii) SAFECO High-Yield
Bond Fund for the period from September 7, 1988 (Initial Public Offering)
September 30, 1988, and for each of the eight fiscal years ended September
30, 1996, are included in Part A of this Registration Statement.
Financial Statements for each of these Funds for the fiscal year ended
September 30, 1996 and the report thereon of Ernst & Young LLP,
independent auditors are incorporated by reference into Part B of this
Registration Statement and were filed with the SEC on or about November
25, 1996 for SAFECO Taxable Bond Trust.
Financial Highlights for a single No-Load Class share of SAFECO Managed
Bond Fund for the period from February 28, 1994 (Initial Public Offering)
to December 31, 1994 and for the fiscal year ended December 31, 1995 and
for the six month period ended June 30, 1996 (unaudited) are included in
Part A of this Registration Statement. Financial Statements for the
fiscal year ended December 31, 1995 and the report thereon of Ernst &
Young LLP, independent auditors, and financial statements for the six
month period ended June 30, 1996 (unaudited) are incorporated by reference
into Part B of this Registration Statement and were filed with the SEC on
or about February 29, 1996 and August 31, 1996, respectively for SAFECO
Managed Bond Trust.
Financial Highlights for a single No-Load Class share of SAFECO Money
Market Fund for each of the ten fiscal years ended March 31, 1996 are
included in Part A of this Registration Statement. Financial Statements
for the fiscal year ended March 31, 1996 and the report thereon of Ernst &
Young LLP, independent auditors, are incorporated by reference into Part B
of this Registration Statement and were filed with the SEC on or about May
30, 1996 for SAFECO Money Market Trust.
Financial Highlights for a single No-Load Class share of (i) SAFECO Growth
Fund, SAFECO Equity Fund and SAFECO Income Fund for each of the ten fiscal
years ended September 30, 1996; (ii) SAFECO Northwest Fund for the period
from February 7, 1991 (Initial Public Offering) to December 31, 1991, the
fiscal year ended December 31, 1992, the nine month period ended September
30, 1993 and each of the three fiscal years ended September 30, 1996,
(iii) SAFECO Balanced Fund, SAFECO International Fund and SAFECO Small
Company Fund for the period from January 31, 1996 (Initial Public
Offering) to September 30, 1996 are included in Part A of this
Registration Statement. Financial Statements for each of the Funds for
the fiscal period ended
<PAGE>
September 30, 1996 and the report thereon of Ernst & Young LLP,
independent auditors, are incorporated by reference into Part B of this
Registration Statement and were filed with the SEC on or about November
27, 1996 for SAFECO Common Stock Trust.
Financial Highlights for a single No-Load Class share of (i) SAFECO
Municipal Bond Fund, SAFECO California Tax-Free Income Fund for each of
the ten fiscal years ended March 31, 1996; (ii) SAFECO Washington State
Municipal Bond Fund for the period from March 18, 1993 (Initial Public
Offering) to March 31, 1993 and for each of the three fiscal years ended
March 31, 1996 are included in Part A of this Registration Statement.
Financial Statements for each of these Funds for the fiscal year ended
March 31, 1996 and the report thereon of Ernst & Young LLP, independent
auditors, are incorporated by reference into Part B of this Registration
Statement and were filed with the SEC on or about May 30, 1996 for SAFECO
Tax-Exempt Bond Trust.
Financial Statements from the Registrant's Annual Report are filed as
Exhibit 12.
(b) Exhibits:
Exhibit
Number Description of Document Page
(27.1-3) Financial Data Schedules
(1) Trust Instrument/Certificate of Trust *
(2) Bylaws *
(3) Inapplicable
(4) Form of Stock Certificate *
(5) Investment Advisory and Management Contract *
(6) Form of Distribution Agreement **
Form of Selling Dealer Agreement **
(7) Inapplicable
(8) Custody Agreement with U.S. Bank *
(9) Form of Transfer Agent Agreement **
(10) Opinion and Consent of Counsel for No-Load Class *
Opinion and Consent of Counsel for
Advisor Class A and Advisor Class B **
C-2
<PAGE>
(11) Consent of Independent Auditors
(12) Registrant's Annual Report for the Year Ended +
September 30, 1996 Including Financial Statements
Annual Report for SAFECO Managed Bond Trust for ++
the Year Ended December 31, 1995 Including
Financial Statements
Annual Report for SAFECO Money Market Trust for +++
the Year Ended March 31, 1996 Including
Financial Statements
Annual Report for SAFECO Common Stock Trust for +
the Year Ended September 30, 1996 Including
Financial Statements
Annual Report for SAFECO Tax-Exempt Bond Trust +++
for the Year Ended March 31, 1996 Including
Financial Statements
(13) Subscription Agreement *
(14) Prototype 401(k)/Profit Sharing Plan *
(15) Rule 12b-1 Plan (Advisor Class A) **
Rule 12b-1 Plan (Advisor Class B) **
(16) Calculation of Performance Information-
No-Load Class *
Calculation of Performance Information-
Advisor Class A **
Calculation of Performance Information-
Advisor Class B **
(17) Inapplicable
(18) Rule 18f-3 Plan **
* Filed as an exhibit to Post-Effective Amendment No. 10 filed with the SEC
on or about January 31, 1996.
** Filed as an exhibit to Post-Effective Amendment No. 11 filed with the SEC
on or about August 1, 1996.
+ Annual Reports for Registrant and SAFECO Common Stock Trust were filed with
the SEC on or about November 27, 1996.
C-3
<PAGE>
++ Annual Report for SAFECO Managed Bond Trust was filed with the SEC on or
about February 29, 1996.
+++ Annual Reports for SAFECO Money Market Trust and SAFECO Tax-Exempt Bond
Trust were filed with the SEC on or about May 30, 1996.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
SAFECO Corporation, a Washington corporation, owns 100% of SAFECO Asset
Management Company (SAM), SAFECO Services Corporation (SAFECO Services) and
SAFECO Securities, Inc. (SAFECO Securities), each a Washington corporation. SAM
is the investment advisor, SAFECO Services is the transfer agent and SAFECO
Securities is the principal underwriter for each of the SAFECO Mutual Funds.
The SAFECO Mutual Funds consist of seven Delaware business trusts: SAFECO Common
Stock Trust, SAFECO Taxable Bond Trust, SAFECO Tax-Exempt Bond Trust, SAFECO
Advisor Series Trust, SAFECO Money Market Trust, SAFECO Managed Bond Trust
(formerly SAFECO Institutional Series Trust) and SAFECO Resource Series Trust.
The SAFECO Common Stock Trust consists of seven mutual funds: SAFECO Growth
Fund, SAFECO Equity Fund, SAFECO Income Fund, SAFECO Northwest Fund, SAFECO
International Stock Fund, SAFECO Balanced Fund and SAFECO Small Company Stock
Fund. The SAFECO Taxable Bond Trust consists of three mutual funds: SAFECO
Intermediate-Term U.S. Treasury Fund, SAFECO GNMA Fund and SAFECO High-Yield
Bond Fund. The SAFECO Tax-Exempt Bond Trust consists of five mutual funds:
SAFECO Intermediate-Term Municipal Bond Fund, SAFECO Insured Municipal Bond
Fund, SAFECO Municipal Bond Fund, SAFECO California Tax-Free Income Fund and
SAFECO Washington State Municipal Bond Fund. The SAFECO Advisor Series Trust
consists of eight mutual funds: Advisor Equity Fund, Advisor Northwest Fund,
Advisor Intermediate-Term Treasury Fund, Advisor GNMA Fund, Advisor U.S.
Government Fund, Advisor Municipal Bond Fund, Advisor Intermediate-Term
Municipal Bond Fund and Advisor Washington Municipal Bond Fund. The SAFECO
Money Market Trust consists of two mutual funds: SAFECO Money Market Fund and
SAFECO Tax-Free Money Market Fund. The SAFECO Managed Bond Trust consists of
one mutual fund: SAFECO Managed Bond Fund (formerly SAFECO Fixed Income
Portfolio). The SAFECO Resource Series Trust consists of five mutual funds:
Equity Portfolio, Growth Portfolio, Northwest Portfolio, Bond Portfolio and
Money Market Portfolio.
SAFECO Corporation, a Washington corporation, owns 100% of the following
Washington corporations: SAFECO Insurance Company of America, General Insurance
Company of America, First National Insurance Company of America, SAFECO Life
Insurance Company of America, SAFECO Assigned Benefits Service Company, SAFECO
Administrative Services, Inc., SAFECO Properties Inc., SAFECO Credit Company,
Inc., SAFECO Asset Management Company, SAFECO Securities, Inc., SAFECO Services
Corporation, SAFECO Trust Company and General America Corporation. SAFECO
Corporation owns 100% of SAFECO National Insurance Company, a Missouri
corporation, and SAFECO Insurance Company of Illinois, an Illinois corporation.
SAFECO Corporation owns 20% of Agena, Inc., a Washington corporation. SAFECO
Insurance Company of America owns 100% of SAFECO Surplus Lines Insurance
Company, a Washington corporation, and Market Square Holding, Inc., a Minnesota
corporation. SAFECO Life Insurance Company owns 100% of SAFECO National Life
Insurance Company, a Washington corporation, and First SAFECO National Life
Insurance Company of New York, a New York
C-4
<PAGE>
corporation. SAFECO Administrative Services, Inc. owns 100% of Employee Benefit
Claims of Wisconsin, Inc. and Wisconsin Pension and Group Services, Inc., each a
Wisconsin corporation. General America Corporation owns 100% of COMAV Managers,
Inc., an Illinois corporation, F.B. Beattie & Co., Inc., a Washington
corporation, General America Corp. of Texas, a Texas corporation, Talbot
Financial Corporation, a Washington corporation. F.B. Beattie Co., Inc. owns
100% of F.B. Beattie Insurance Services, Inc., a California corporation.
General America Corp. of Texas is Attorney-in-fact for SAFECO Lloyds Insurance
Company, a Texas corporation. Talbot Financial Corporation owns 100% of Talbot
Agency, Inc., a New Mexico corporation. Talbot Agency, Inc. owns 100% of PNMR
Securities, Inc., a Washington corporation, and SAFECO Select Insurance
Services, Inc., a California corporation. SAFECO Properties Inc. owns 100% of
the following, each a Washington corporation: RIA Development, Inc., SAFECARE
Company, Inc. and Winmar Company, Inc. SAFECARE Company, Inc. owns 100% of the
following, each a Washington corporation: S.C. Bellevue, Inc., S.C. Everett,
Inc., S.C. Marysville, Inc., S.C. Simi Valley, Inc. and S.C. Vancouver, Inc.
SAFECARE Company, Inc. owns 50% of Lifeguard Ventures, Inc., a California
corporation, 50% of Mission Oaks Hospital, Inc., a California corporation, S.C.
River Oaks, Inc., a Washington corporation, Mississippi Health Services, Inc. a
Louisiana corporation, and Safecare Texas, Inc., a Texas corporation. S.C. Simi
Valley, Inc. owns 100% of Simi Valley Hospital, Inc., a Washington corporation.
Winmar Company, Inc. owns 100% of the following: Barton Street Corp., C-W
Properties, Inc., Gem State Investors, Inc., Kitsap Mall, Inc., WNY Development,
Inc., Winmar Cascade, Inc., Winmar Metro, Inc., Winmar Northwest, Inc., Winmar
Redmond, Inc. and Winmar of Kitsap, Inc., each a Washington corporation, and
Capitol Court Corp., a Wisconsin corporation, SAFECO Properties of Boise, Inc.,
an Idaho corporation, SCIT, Inc., a Massachusetts corporation, Valley Fair
Shopping Centers, Inc., a Delaware corporation, WDI Golf Club, Inc., a
California corporation, Winmar Oregon, Inc., an Oregon corporation, Winmar of
Texas, Inc., a Texas corporation, Winmar of Wisconsin, Inc., a Wisconsin
corporation, and Winmar of the Desert, Inc., a California corporation. Winmar
Oregon, Inc. owns 100% of the following, each an Oregon corporation: North Coast
Management, Inc., Pacific Surfside Corp., Winmar of Jantzen Beach, Inc. and W-P
Development, Inc., and 100% of the following, each a Washington corporation:
Washington Square, Inc. and Winmar Pacific, Inc.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
At November 15, 1996 Registrant had 535, 1907 and 1672 shareholders of record
in its No-Load Class of SAFECO Intermediate-Term U.S. Treasury Fund, SAFECO GNMA
Fund and SAFECO High-Yield Bond Fund, respectively. At November 20, 1996 there
were no shareholders of record of Advisor Class A or Advisor Class B of SAFECO
Intermediate-Term U.S. Treasury Fund.
ITEM 27. INDEMNIFICATION
Under the Trust Instrument of the Registrant, the Registrant's trustees,
officers, employees and agents are indemnified against certain liabilities,
subject to specified conditions and limitations.
C-5
<PAGE>
Under the indemnification provisions in the Registrant's Trust Instrument and
subject to the limitations described in the paragraph below, every person who
is, or has been, a trustee, officer, employee or agent of the Registrant shall
be indemnified by the Registrant or the appropriate Series of the Registrant to
the fullest extent permitted by law against liability and against all expenses
reasonably incurred or paid by him or her in connection with any claim, action,
suit or proceeding in which he or she becomes involved as a party or otherwise
by virtue of his or her being, or having been, a trustee, officer, employee or
agent and against amounts paid or incurred by him or her in the settlement
thereof. As used in this paragraph, "claim," "action," "suit" or "proceeding"
shall apply to all claims, actions, suits or proceedings (civil, criminal or
other, including appeals), actual or threatened, and the words "liability" and
"expenses" shall include, without limitation, attorneys' fees, costs,
judgements, amounts paid in settlement, fines, penalties and other liabilities.
No indemnification will be provided to a trustee, officer, employee or agent:
(i) who shall have been adjudicated by a court or body before which the
proceeding was brought (a) to be liable to the Registrant or its shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office, or (b) not to have
acted in good faith in the reasonable belief that his or her action was in the
best interest of the Registrant; or (ii) in the event of settlement, unless
there has been a determination that such trustee, officer, employee or agent did
not engage in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office; (a) by the
court or other body approving the settlement, (b) by the vote of at least a
majority of a quorum of those trustees who are neither interested persons, as
that term is defined by the Investment Company Act of 1940, of the Registrant
nor are the parties to the proceeding based upon a review of readily available
facts (as opposed to a full trial type inquiry); or (c) by written opinion of
independent legal counsel based upon a review of readily available facts (as
opposed to a full trial type inquiry).
To the maximum extent permitted by applicable law, expenses incurred in
connection with the preparation and presentation of a defense to any claim,
action, suit or proceeding of the character described above may be paid by the
Registrant or applicable Series from time to time prior to final disposition
thereof upon receipt of an undertaking by or on behalf of such trustee, officer,
employee or agent that such amount will be paid over by him or her to the
Registrant or the applicable Series if it is ultimately determined that he or
she is not entitled to indemnification under the Trust Instrument; provided,
however, that either (i) such trustee, officer, employee or agent shall have
provided appropriate security for such undertaking, (ii) the Registrant is
insured against such losses arising out of such advance payments or (iii) either
a majority of the trustees who are neither interested persons, as that term is
defined by the Investment Company Act of 1940, of the Registrant nor parties to
the proceeding, or independent legal counsel in a written opinion, shall have
determined, based on a review of readily available facts (as opposed to a full
trial type inquiry), that there is reason to believe that such trustee, officer,
employee or agent, will not be disqualified from indemnification under
Registrant's Trust Instrument.
C-6
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to trustees, officers, employees and agents of the
Registrant pursuant to such provisions of the Trust Instrument or statutes or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in said Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a trustee, officer, employee or
agent of the Registrant in the successful defense of any such action, suit or
proceeding) is asserted by such a trustee, officer, employee or agent in
connection with the shares of any series of the Registrant, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in said Act and
will be governed by the final adjudication of such issue.
Under an agreement with its distributor ("Distribution Agreement"), Registrant
has agreed to indemnify, defend and hold the distributor, the distributor's
several directors, officers and employees, and any person who controls the
distributor within the meaning of Section 15 of the 1933 Act, free and harmless
from and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands or
liabilities and any counsel fees incurred in connection therewith) which the
distributor, its directors, officers or employees, or any such controlling
person may incur, under the 1933 Act or under common law or otherwise, arising
out of or based upon any alleged untrue statement of a material fact contained
in the Registration Statement or arising out of or based upon any alleged
omission to state a material fact required to be stated or necessary to make the
Registration Statement not misleading.
In no event shall anything contained in the Distribution Agreement be construed
so as to protect the distributor against any liability to the Registrant or its
shareholders to which the distributor would otherwise be subject by reason of
willful misfeasance, bad faith, or gross negligence in the performance of its
duties, or by reason of its reckless disregard of its obligations and duties
under the Distribution Agreement, and further provided that the Registrant shall
not indemnify the distributor for conduct set forth in this paragraph.
Under an agreement with its transfer agent, Registrant has agreed to indemnify
and hold the transfer agent harmless against any losses, claims, damages,
liabilities or expenses (including reasonable attorneys' fees and expenses)
resulting from: (1) any claim, demand, action or suit brought by any person
other than the Registrant, including by a shareholder, which names the transfer
agent and/or the Registrant as a party, and is not based on and does not result
from the transfer agent's willful misfeasance, bad faith or negligence or
reckless disregard of duties, and arises out of or in connection with the
transfer agent's performance hereunder; or (2) any claim, demand, action or suit
(except to the extent contributed to by the transfer agent's willful
misfeasance, bad faith or negligence or reckless disregard of duties) which
results from the negligence of the Registrant, or from the transfer
C-7
<PAGE>
agent acting upon any instruction(s) reasonably believed by it to have been
executed or communicated by any person duly authorized by the Registrant, or as
a result of the transfer agent acting in reliance upon advice reasonably
believed by the transfer agent to have been given by counsel for the Registrant,
or as a result of the transfer agent acting in reliance upon any instrument or
stock certificate reasonably believed by it to have been genuine and signed,
countersigned or executed by the proper person.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The investment adviser to Registrant, SAM, serves as an adviser to: (a)
twenty-three series (portfolios) of six registered investment companies,
including five series of an investment company that serves as an investment
vehicle for variable insurance products and (b) a number of pension funds not
affiliated with SAFECO Corporation or its affiliates. The directors and
officers of SAM serve in similar capacities with SAFECO Corporation or its
affiliates. The information set forth under "Investment Advisory and Other
Services" in the Registrant's Statement of Additional Information is
incorporated by reference.
ITEM 29. PRINCIPAL UNDERWRITER
(a) SAFECO Securities, Inc., the principal underwriter for Registrant, also
acts as the principal underwriter for each class of each series of the
SAFECO Common Stock Trust, SAFECO Tax-Exempt Bond Trust, SAFECO Money
Market Trust, SAFECO Managed Bond Trust. In addition, SAFECO Securities,
Inc. is the principal underwriter for SAFECO Separate Account C, SAFECO
Variable Account B and SAFECO Separate Account SL, all of which are
variable insurance products.
(b) The information set forth under "Investment Advisory and Other Services" in
the Statement of Additional Information is incorporated by reference.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
U.S. Bank of Washington, N.A., 1420 Fifth Avenue, Seattle, Washington 98101
maintains physical possession of the accounts, books and documents of the
Registrant relating to its activities as custodian of the Registrant. SAFECO
Asset Management Company, SAFECO Plaza, Seattle, Washington 98185, maintains
physical possession of all other accounts, books or documents of the Registrant
required to be maintained by Section 31(a) of the Investment Company Act of 1940
and the rules promulgated thereunder.
ITEM 31. MANAGEMENT SERVICES
Inapplicable.
ITEM 32. UNDERTAKINGS
Registrant undertakes to furnish each person to whom a prospectus is delivered
with a copy of the Registrant's latest annual report to shareholders, upon
request and without charge.
C-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned thereto duly authorized, in the
City of Seattle, and State of Washington on the 26th day of November, 1996.
SAFECO TAXABLE BOND TRUST
By /s/ David F. Hill
David F. Hill, President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
Name Title Date
---- ----- ----
/s/ David F. Hill++ President and Trustee 11/26/96
- ----------------------------- Principal Executive Officer
David F. Hill
RONALD L. SPAULDING* Vice President and 11/26/96
- ------------------------------ Treasurer
Ronald L. Spaulding
NEAL A. FULLER* Vice President, Controller 11/26/96
- ------------------------------ and Assistant Secretary
Neal A. Fuller
/s/ Boh A. Dickey++ Chairman and Trustee 11/26/96
- ------------------------------
Boh A. Dickey
BARBARA J. DINGFIELD* Trustee 11/26/96
- ------------------------------
Barbara J. Dingfield
RICHARD W. HUBBARD*++ Trustee 11/26/96
- ------------------------------
Richard W. Hubbard
RICHARD E. LUNDGREN* Trustee 11/26/96
- ------------------------------
Richard E. Lundgren
LARRY L. PINNT* Trustee 11/26/96
- ------------------------------
Larry L. Pinnt
JOHN W. SCHNEIDER* Trustee 11/26/96
- ------------------------------
John W. Schneider
*By: /s/ Boh A. Dickey
------------------------
Boh A. Dickey
Attorney-in-Fact
*By: /s/ David F. Hill
------------------------
David F. Hill
Attorney-in-Fact
++ Trustees who are interested persons as defined by the 1940 Act.
<PAGE>
Registration Nos. 33-22132/811-5574
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXHIBITS
to
FORM N-1A
REGISTRATION STATEMENT
POST-EFFECTIVE AMENDMENT NO. 12
Under
The Securities Act of 1933
and
AMENDMENT NO. 13
Under
The Investment Company Act of 1940
__________
SAFECO Taxable Bond Trust
(Exact Name of Registrant as Specified in Charter)
SAFECO Plaza
Seattle, Washington 98185
(Address of Principal Executive Offices)
206-545-5269
(Registrant's Telephone Number, including Area Code)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SAFECO TAXABLE BOND TRUST
Form N-1A
Post-Effective Amendment No. 12
Exhibit Index
Exhibit
Number Description of Document Page
- ------- ----------------------- ----
(27.1-3) Financial Data Schedules
(99.11) Consent of Independent Auditors
(99.12) Registrant's Annual Report for Year Ended
September 30, 1996+ including Financial
Statements
+ Registrant's Annual Report was filed with the SEC on or about November 25,
1996 and is hereby incorporated by reference.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000833045
<NAME> SAFECO HIGH YIELD BOND FUND
<SERIES>
<NUMBER> 1
<NAME> SAFECO HIGH YIELD BOND FUND
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 46,843
<INVESTMENTS-AT-VALUE> 47,479
<RECEIVABLES> 1,209
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 48,688
<PAYABLE-FOR-SECURITIES> 507
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 301
<TOTAL-LIABILITIES> 808
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 48,111
<SHARES-COMMON-STOCK> 5,448
<SHARES-COMMON-PRIOR> 4,511
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (867)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 636
<NET-ASSETS> 47,880
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,084
<OTHER-INCOME> 0
<EXPENSES-NET> 388
<NET-INVESTMENT-INCOME> 3,696
<REALIZED-GAINS-CURRENT> 504
<APPREC-INCREASE-CURRENT> 46
<NET-CHANGE-FROM-OPS> 4,246
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,696)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,549
<NUMBER-OF-SHARES-REDEEMED> (5,863)
<SHARES-REINVESTED> 251
<NET-CHANGE-IN-ASSETS> 8,702
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1,371)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 255
<INTEREST-EXPENSE> 1
<GROSS-EXPENSE> 388
<AVERAGE-NET-ASSETS> 41,109
<PER-SHARE-NAV-BEGIN> 8.68
<PER-SHARE-NII> 0.78
<PER-SHARE-GAIN-APPREC> 0.11
<PER-SHARE-DIVIDEND> (0.78)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.79
<EXPENSE-RATIO> 0.94
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000833045
<NAME> SAFECO TAXABLE BOND TRUST
<SERIES>
<NUMBER> 2
<NAME> SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
<MULTIPLIER> 1,000
<CURRENCY> U.S DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 14,416
<INVESTMENTS-AT-VALUE> 14,276
<RECEIVABLES> 457
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 14,733
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 65
<TOTAL-LIABILITIES> 65
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 14,879
<SHARES-COMMON-STOCK> 1,453
<SHARES-COMMON-PRIOR> 1,346
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (71)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (140)
<NET-ASSETS> 14,668
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 902
<OTHER-INCOME> 0
<EXPENSES-NET> 144
<NET-INVESTMENT-INCOME> 758
<REALIZED-GAINS-CURRENT> 290
<APPREC-INCREASE-CURRENT> (496)
<NET-CHANGE-FROM-OPS> 552
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (758)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,516
<NUMBER-OF-SHARES-REDEEMED> (1,444)
<SHARES-REINVESTED> 35
<NET-CHANGE-IN-ASSETS> 894
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (361)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 78
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 144
<AVERAGE-NET-ASSETS> 14,302
<PER-SHARE-NAV-BEGIN> 10.24
<PER-SHARE-NII> 0.54
<PER-SHARE-GAIN-APPREC> (0.14)
<PER-SHARE-DIVIDEND> (0.54)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.10
<EXPENSE-RATIO> 1.01
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000833045
<NAME> SAFECO TAXABLE BOND TRUST
<SERIES>
<NUMBER> 3
<NAME> SAFECO GNMA FUND
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 39,632
<INVESTMENTS-AT-VALUE> 40,168
<RECEIVABLES> 3,557
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 43,725
<PAYABLE-FOR-SECURITIES> 3,853
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 169
<TOTAL-LIABILITIES> 4,022
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 42,338
<SHARES-COMMON-STOCK> 4,289
<SHARES-COMMON-PRIOR> 4,664
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,171
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 536
<NET-ASSETS> 39,703
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,144
<OTHER-INCOME> 0
<EXPENSES-NET> 433
<NET-INVESTMENT-INCOME> 2,711
<REALIZED-GAINS-CURRENT> (416)
<APPREC-INCREASE-CURRENT> (453)
<NET-CHANGE-FROM-OPS> 1,842
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,711)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 694
<NUMBER-OF-SHARES-REDEEMED> (1,267)
<SHARES-REINVESTED> 198
<NET-CHANGE-IN-ASSETS> (4,352)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (3,639)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 270
<INTEREST-EXPENSE> 1
<GROSS-EXPENSE> 433
<AVERAGE-NET-ASSETS> 42,191
<PER-SHARE-NAV-BEGIN> 9.45
<PER-SHARE-NII> 0.60
<PER-SHARE-GAIN-APPREC> (0.19)
<PER-SHARE-DIVIDEND> (0.60)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.26
<EXPENSE-RATIO> 1.03
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights", "Investment Advisory and Other Services" and "Financial Statements"
in Post-Effective Amendment No. 12 to the registration statement (Form N-1A, No.
33-22132) and related No-Load Class and Advisor Class A and Advisor Class B
Prospectuses of SAFECO Taxable Bond Trust.
We also consent to the incorporation by reference therein of our report dated
November 1, 1996 with respect to the financial statements of SAFECO Taxable
Bond Trust as of and for the year ended September 30, 1996 included in the 1996
Annual Report filed with the Securities and Exchange Commission.
Seattle, Washington
November 25, 1996
