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SUBJECT TO COMPLETION, DATED JULY 30, 1996
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Statement of Additional Information shall not constitute an
offer to sell or the solicitation of an offer to buy nor shall there be any sale
of these securities in any State in which such offer, solicitation or sale would
be unlawful prior to registration or qualification under the securities laws of
any such State.
SAFECO 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
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. A copy of the Prospectus may
be obtained by writing SAFECO Mutual Funds, Advisor Class Shares, P.O. Box
34890, Seattle, Washington 98124-1890, or by calling TOLL FREE: 1-800-463-8791.
The date of the most current Prospectus of the Funds to which this Statement of
Additional Information relates is September 30, 1996.
The date of this Statement of Additional Information is September 30, 1996.
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TABLE OF CONTENTS
OVERVIEW OF INVESTMENT POLICIES...........................................- 1 -
INVESTMENT POLICIES OF THE GROWTH FUND....................................- 1 -
INVESTMENT POLICIES OF THE EQUITY FUND....................................- 5 -
INVESTMENT POLICIES OF THE INCOME FUND....................................- 8 -
INVESTMENT POLICIES OF THE NORTHWEST FUND................................- 11 -
INVESTMENT POLICIES OF THE BALANCED FUND.................................- 15 -
INVESTMENT POLICIES OF THE INTERNATIONAL FUND............................- 18 -
INVESTMENT POLICIES OF THE SMALL COMPANY FUND............................- 21 -
ADDITIONAL INVESTMENT INFORMATION........................................- 24 -
SPECIAL RISKS OF BELOW INVESTMENT GRADE BONDS - EQUITY,
INCOME AND SMALL COMPANY FUNDS..................................- 40 -
SPECIAL RISKS OF FOREIGN INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS...........................................- 41 -
PRINCIPAL SHAREHOLDERS OF CERTAIN FUNDS..................................- 43 -
ADDITIONAL TAX INFORMATION...............................................- 43 -
CONVERSION OF ADVISOR CLASS B SHARES.....................................- 47 -
ADDITIONAL INFORMATION ON CALCULATION OF NET ASSET
VALUE PER SHARE.................................................- 48 -
ADDITIONAL PERFORMANCE INFORMATION.......................................- 49 -
TRUSTEES AND OFFICERS....................................................- 56 -
INVESTMENT ADVISORY AND OTHER SERVICES...................................- 59 -
BROKERAGE PRACTICES......................................................- 65 -
REDEMPTION IN KIND.......................................................- 66 -
FINANCIAL STATEMENTS.....................................................- 66 -
DESCRIPTION OF COMMERCIAL PAPER AND PREFERRED STOCK RATINGS..............- 67 -
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OVERVIEW OF INVESTMENT POLICIES
SAFECO Growth Fund ("Growth Fund"), SAFECO Equity Fund ("Equity Fund"), SAFECO
Income Fund ("Income Fund"), SAFECO Northwest Fund ("Northwest Fund"), SAFECO
Balanced Fund ("Balanced Fund"), SAFECO International Stock Fund ("International
Fund") and SAFECO Small Company Stock Fund ("Small Company Fund") (collectively,
the "Funds") are each a series of the SAFECO Common Stock Trust ("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 (e.g., common stock, U.S. Government
securities or bonds) a Fund may purchase are also disclosed in the Prospectus.
Before a Fund purchases a security that the following policies permit, but which
is not currently described in the Prospectus, the Prospectus will be amended or
supplemented to describe the security. 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.
Each Fund's fundamental policies may not be changed without the approval of a
"majority of its outstanding voting securities," as defined by 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, of (I) 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) more than 50% of the outstanding voting securities, whichever is
less.
Non-fundamental policies may be changed by the Trust's Board of Trustees without
shareholder approval.
INVESTMENT POLICIES OF THE GROWTH FUND
FUNDAMENTAL INVESTMENT POLICIES
The Growth Fund has adopted the following fundamental investment policies. The
Growth 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 5% of the value
of the Growth Fund's total assets would be invested in the securities
of such issuer, except that up to 25% of the value of such assets
(which 25% shall not include securities issued by another investment
company) may be invested without regard to this 5% limitation.
2. Purchase securities of any issuer, if such purchase at the time thereof
would cause more than 10% of any class of securities of such issuer to
be held by the Growth Fund.
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3. With respect to 100% of the value of its total assets, purchase more
than 10% of the outstanding voting securities of any one issuer (other
than U.S. Government securities).
4. Purchase securities of companies which have a record of less than 3
years of continuous operation, including in such 3 years the operation
of any predecessor company or companies, partnerships, or individual
proprietorship, if the company whose securities are to be purchased by
the Growth Fund has come into existence as a result of a merger,
consolidation, reorganization or purchase of substantially all of the
assets of such predecessor company or companies, partnership or
individual proprietorship, if such purchase at the time thereof would
cause more than 5% of the Fund's assets to be invested in the
securities of such companies.
5. Concentrate its investments in particular industries or companies, but
shall maintain substantial diversification of its investments among
industries and, to the extent deemed practicable by management, among
companies within particular industries.
6. Purchase securities on margin, except for short-term credits as are
necessary for the clearance of transactions.
7. Make short sales (sales of securities not presently owned), except
where the Growth Fund has at the time of sale, by virtue of its
ownership in other securities, the right to obtain securities
equivalent in kind and amount to the securities sold.
8. Make loans to any person, firm or corporation, but the purchase by the
Growth Fund of a portion of an issue of publicly distributed bonds,
debentures or other securities issued by persons other than the Growth
Fund, whether or not the purchase was made upon the original issue of
securities, shall not be considered a loan within the prohibition of
this section.
9. Borrow money, except from banks or affiliates of SAFECO Corporation at
an interest rate not greater than that available to the Growth Fund
from commercial banks as a temporary measure for extraordinary or
emergency purposes and in amounts not in excess of 20% of its total
assets (including borrowings) less liabilities (other than borrowings)
immediately after such borrowing. The Growth Fund will not purchase
securities if borrowings equal to or greater than 5% of the Fund's
total assets are outstanding.
10. Pledge, mortgage or hypothecate assets taken at market to an extent
greater than 15% of its gross assets taken at cost.
11. Purchase for nor retain in its portfolio securities issued by any
issuer any of whose officers, directors or security holders is an
officer or director of the Growth Fund, if or so long as the officers
or trustees of the Growth Fund, together, own beneficially more than
five percent (5%) of any class of the securities of such issuer.
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12. Purchase securities issued by any other investment company or
investment trust, except by purchase in the open market where no
commission or profit to a broker or dealer results from such purchase,
other than the customary broker's commissions, or except when such
purchase, although not made in the open market, is part of a merger,
consolidation or acquisition. Such purchases in the open market will be
limited to not more than 5% of the value of the Growth Fund's total
assets. Nothing in this section or in sections 1 or 2 above shall
prevent any purchase for the purpose of effecting a merger,
consolidation or acquisition of assets expressly approved by the
shareholders after full disclosure of any commission or profit to the
principal underwriter.
13. Act as underwriter of securities issued by any other person, firm or
corporation; however, the Growth Fund may be deemed to be a statutory
underwriter as that term is defined in the 1940 Act and the Securities
Act of 1933, as amended ("1933 Act"), in connection with the
disposition of any unmarketable or restricted securities which it may
acquire and hold in its portfolio.
14. Buy or sell real estate (except real estate investment trusts),
commodities, commodity contracts or futures contracts in the ordinary
course of business, but this policy shall not be construed as
preventing the Growth Fund from acquiring real estate, commodities,
commodity contracts or futures contracts through liquidating
distributions as a result of the ownership of securities.
15. Participate, on a joint or joint and several basis, in any trading
account in securities.
16. Issue or sell any senior securities, except that this restriction shall
not be construed to prohibit the Growth 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 300% for all such borrowings and
provided, further, that in the event that such asset coverage shall at
any time fall below 300% the Growth Fund shall, within 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 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.
17. Act as a distributor of securities of which the Growth Fund is the
issuer, except through an underwriter (who may be designated as
"distributor"), who may act as principal or be an agent of the Growth
Fund and may not be obligated to the Growth Fund to sell or take any
specific amount of securities.
18. Purchase foreign securities only if (a) such securities are listed on a
national securities exchange, and (b) such purchase, at the time
thereof, would not cause more than 10%
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of the total assets of the Growth Fund (taken at market value) to be
invested in foreign securities.
NON-FUNDAMENTAL INVESTMENT POLICIES
In addition to the policies described in the Prospectus, the Growth Fund has
adopted the following non-fundamental policies which may be changed by the
Board of Trustees without shareholder approval:
1. The Growth Fund will not buy or sell foreign exchange, except as
necessary to convert the proceeds of the sale of foreign portfolio
securities into U.S. dollars.
2. The Growth Fund will not issue long-term debt securities.
3. The Growth Fund will not invest in any security for the purpose of
acquiring or exercising control or management of the issuer.
4. The Growth Fund will not invest in oil, gas or other mineral
exploration, development programs or leases.
5. The Growth Fund will not invest in puts, calls, straddles, spreads or
any combinations thereof.
6. The Growth Fund will not invest in securities with unlimited liability,
e.g., securities the holder of which may be assessed for amounts in
addition to the subscription or other price paid for the security.
7. Although the Growth Fund has the right to pledge, mortgage or
hypothecate its assets up to 15% of gross assets under the fundamental
policy at section 10 above, it will only do so up to ten percent
(10%) of its net assets in order to comply with state law.
8. The Growth Fund will invest no more than five percent (5%) of total
assets in qualified repurchase agreements and will not enter into a
repurchase agreement for a period longer than 7 days.
9. The Growth Fund may purchase as temporary investments for its cash
commercial paper, certificates of deposit, no-load, open-end money
market funds (subject to the fundamental policy limitations set forth
in section 12 above), repurchase agreements (subject to the
non-fundamental policy limitations in section 8 above) or any other
short-term instrument that SAFECO Asset Management Company ("SAM")
deems appropriate.
10. The Growth Fund may invest up to 5% of net assets in warrants, but will
limit investments in warrants which are not listed on the New York or
American Stock Exchange to no more than two percent (2%) of net assets.
Warrants acquired as a result
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of unit offerings or attached to securities may be deemed without value
for purposes of the 5% limitation.
11. The Growth Fund may invest up to 10% of its total assets in contingent
value rights.
12. The Growth Fund may invest up to 10% of its total assets in shares of
real estate investment trusts.
13. The Growth Fund will not purchase any security, if as a result, more
than 15% of its net assets would be invested in securities that are
deemed to be illiquid because they are subject to legal or contractual
restrictions on resale or because they cannot be sold or disposed of in
the ordinary course of business at approximately the prices at which
they are valued.
14. The Growth Fund may invest up to 10% of its total assets in restricted
securities eligible for resale under Rule 144A under the 1933 Act, as
amended ("Rule 144A"), provided that SAM has determined that such
securities are liquid under guidelines adopted by the Board of
Trustees.
INVESTMENT POLICIES OF THE EQUITY FUND
FUNDAMENTAL INVESTMENT POLICIES
The Equity Fund has adopted the following fundamental investment policies. The
Equity Fund will NOT:
1. Purchase the securities of any issuer (except the U.S. Government, its
agencies and instrumentalities) if as a result more than 5% of the
value of the Equity Fund's total assets would be invested in the
securities of such issuer, except that up to 25% of the value of the
Fund's assets (which 25% shall not include securities issued by another
investment company) may be invested without regard to this 5%
limitation.
2. Purchase securities of any issuer, if such purchase at the time thereof
would cause more than 10% of the outstanding voting securities of such
issuer to be held by the Equity Fund.
3. Make short sales of securities or purchase securities on margin, except
for such short-term credits as are necessary for the clearance of
transactions and where the Equity Fund has at the time of sale, by
virtue of its ownership in other securities, the right to obtain
securities equivalent in kind and amount to the securities sold.
4. Purchase securities (other than obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities) if as a result more
than 25% of the Equity Fund's total
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assets would be invested in one industry (governmental issues of
securities are not considered part of any one industry).
5. Make loans, except through the purchase of a portion or all of an issue
of debt or money market securities in accordance with the Equity Fund's
investment objective, policies and restrictions or through investments
in qualified repurchase agreements; provided, however, that the Equity
Fund shall not invest more than 10% of its total assets in qualified
repurchase agreements or through qualified loan agreements.
6. Borrow money, except from a bank or affiliates of SAFECO Corporation at
an interest rate not greater than that available to the Equity Fund
from commercial banks for temporary or emergency purposes and not for
investment purposes. The Equity Fund will not purchase securities if
borrowings equal to or greater than 5% of the Fund's total assets are
outstanding.
7. Purchase shares of registered investment companies other than real
estate investment trusts.
8. Underwrite any issue of securities, except to the extent that the
purchase of permitted investments directly from the issuer in
accordance with the Equity Fund's investment objective, policies and
restrictions and the subsequent disposition thereof may be deemed to be
an 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.
9. Purchase or sell real estate (except real estate investment trusts),
commodities, commodity contracts or futures contracts. This limitation
is intended to include ownership of real estate through limited
partnerships.
10. Purchase any security for the purpose of acquiring or exercising
control or management of the issuer.
11. Purchase puts, calls, straddles, spreads or any combination thereof;
provided, however, that nothing herein shall prevent the purchase,
ownership, holding or sale of warrants where the grantor of the
warrants is the issuer of the underlying securities.
12. Issue or sell any senior securities, except that this restriction shall
not be construed to prohibit the Equity 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 300% for all such borrowings and
provided, further, that in the event that such asset coverage shall at
any time fall below 300%, the Equity Fund shall, within 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 300%; for purposes of this restriction, the terms
"senior
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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 Equity Fund has
adopted the following non-fundamental policies which may be changed by the
Board of Trustees without Shareholder approval:
1. The Equity Fund will not participate on a joint or joint and several
basis in any trading account in securities, except that the Equity 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 Fund's investment adviser or the
investment adviser's parent company and any subsidiary thereof. 2. The
Equity Fund will not purchase securities of any issuer which with its
predecessors has been in operation less than three years, if such
purchase would cause more than 5% of the Equity Fund's total assets to
be invested in such issuers.
3. The Equity Fund will not trade in foreign currency, except as may be
necessary to convert the proceeds of the sale of foreign portfolio
securities into U.S. dollars.
4. The Equity Fund will not purchase securities with unlimited liability,
e.g., securities the holder of which may be assessed for amounts in
addition to the subscription or other price paid for the security.
5. The Equity Fund will not invest in oil, gas or other mineral
exploration, development programs or leases.
6. The Equity Fund will not pledge, mortgage, or hypothecate its portfolio
securities to the extent that, at any time, the percentage of pledged
securities at market value will exceed 10% of its net assets.
7. The Equity Fund will invest no more than 5% of total assets in
qualified repurchase agreements and will not enter into a repurchase
agreement for a period longer than 7 days.
8. The Equity Fund may purchase as temporary investments for its cash
commercial paper, certificates of deposit, repurchase agreements
(subject to the non-fundamental policy limitations in section 7) or any
other short-term instrument SAM deems appropriate.
9. The Equity Fund may invest up to 5% of net assets in warrants purchased
at the lower of market or cost, but will limit investments in warrants
which are not listed on the New York or American Stock Exchange to no
more than 2% of net assets. Warrants acquired
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as a result of unit offerings or attached to securities may be deemed
without value for purposes of the 5% limitation.
10. The Equity Fund may invest up to 10% of its total assets in shares of
real estate investment trusts.
11. The Equity Fund may invest up to 10% of its total assets in restricted
securities eligible for resale under Rule 144A, provided that SAM has
determined that such securities are liquid under guidelines adopted by
the Board of Trustees.
12. The Equity Fund may invest in securities convertible into common stock,
but less than 35% of its total assets will be invested in such
securities.
13. The Equity 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 Equity Fund taken at market value to
be invested in foreign securities.
14. The Equity Fund will not purchase or retain for its portfolio the
securities of any issuer, if, to the Fund's knowledge, the officers or
trustees of the Fund or its investment adviser (who individually own
more than 0.5% of the outstanding securities of such issuer), together
own more than 5% of such issuer's outstanding securities.
INVESTMENT POLICIES OF THE INCOME FUND
FUNDAMENTAL POLICIES
The Income Fund has adopted the following fundamental investment policies. The
Income 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 5% of the value
of its total assets would be invested in the securities of such issuer,
except that up to 25% of the value of such assets (which 25% shall not
include securities issued by another investment company) may be
invested without regard to this 5% limitation.
2. Purchase securities of any issuer, if such purchase at the time thereof
would cause more than 10% of any class of securities of such issuer to
be held by the Income Fund.
3. With respect to 100% of the value of its total assets, purchase more
than 10% of the outstanding voting securities of any one issuer (other
than U.S. Government securities).
4. Purchase securities of companies which have a record of less than three
years of continuous operation (including in such three years the
operation of any predecessor company or companies, partnerships, or
individual proprietorship, if the company whose
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securities are to be purchased by the Income Fund has come into
existence as a result of a merger, consolidation, reorganization or
purchase of substantially all of the assets of such predecessor company
or companies, partnership, or individual proprietorship), if such
purchase at the time thereof would cause more than 5% of the Income
Fund's assets to be invested in the securities of such companies.
5. Concentrate its investments in particular industries or companies, but
shall maintain substantial diversification of its investments among
industries and, to the extent deemed practicable by management, among
companies within particular industries; in no event shall the Income
Fund invest more than 25% of its assets in any one industry.
6. Purchase securities on margin, except for short-term credits as are
necessary for the clearance of transactions.
7. Make short sales (sales of securities not presently owned), except
where the Income Fund has at the time of sale, by virtue of its
ownership in other securities, the right to obtain securities
equivalent in kind and amount to the securities sold.
8. Make loans to any person, firm or corporation, but the purchase of a
portion of an issue of publicly distributed bonds, debentures or other
securities issued by persons other than the Income Fund, whether or not
the purchase was made upon the original issue of the securities, shall
not be considered as a loan within the prohibition of this section.
9. Borrow money, except from banks or affiliates of SAFECO Corporation at
an interest rate not greater than that available to the Income Fund
from commercial banks as a temporary measure for extraordinary or
emergency purposes and in amounts not in excess of 20% of its total
assets (including borrowings) less liabilities (other than borrowings)
immediately after such borrowing. The Fund will not purchase securities
if borrowings equal to or greater than 5% of the Fund's total assets
are outstanding.
10. Pledge, mortgage or hypothecate assets taken at market to an extent
greater than 15% of its gross assets taken at cost.
11. Purchase for nor retain in its portfolio securities issued by any
issuer, any of whose officers, trustees or security holders is an
officer or director of the Income Fund, if or so long as the officers
or directors of the Income Fund together own beneficially more than
five percent (5%) of any class of the securities of such issuer.
12. Purchase securities issued by any other investment company or
investment trust, except by purchase in the open market where no
commission or profit to a broker or dealer results from such purchase,
other than the customary broker's commissions, or except where such
purchase, although not made in the open market, is part of a plan of
merger or consolidation. Such purchases in the open market shall be
limited to not more than five percent (5%) of the value of the Income
Fund's total assets. Nothing in this section
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or in sections 1 or 2 above shall prevent any purchase for the purpose
of effecting a merger, consolidation or acquisition of assets.
13. Underwrite securities issued by any other person, firm or corporation;
however the Income Fund may be deemed a statutory underwriter as that
term is defined in the 1940 Act and the 1933 Act in connection with the
disposition of any unmarketable or restricted securities which it may
acquire and hold in its portfolio.
14. Buy or sell real estate, (except real estate investment trusts)
commodities, commodity contracts or futures contracts.
15. Participate, on a joint or joint and several basis, in any trading
account in securities.
16. Purchase foreign securities, unless (a) such securities are listed on a
national securities exchange, and (b) such purchase at the time thereof
would not cause more than 10% of the total assets of the Income Fund
(taken at market value) to be invested in foreign securities.
17. Issue or sell any senior security, except that this restriction shall
not be construed to prohibit the Income 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 300% for all such borrowings and
provided, further, that in the event that such asset coverage shall at
any time fall below 300%, the Income 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 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 Income Fund has
adopted the following non-fundamental policies which may be changed by the
Board of Trustees without Shareholder approval:
1. The Income Fund will not buy or sell foreign exchange, except as
necessary to convert the proceeds of the sale of foreign portfolio
securities into U.S. dollars.
2. The Income Fund will not issue long-term debt securities.
3. Although the Income Fund has the right to pledge, mortgage or
hypothecate its assets up to 15% of gross assets under the fundamental
policy at section 10 above, it will only do so up to 10% of its net
assets.
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4. The Income Fund will not invest in any security for the purpose of
acquiring or exercising control or management of the issuer.
5. The Income Fund will not invest in oil, gas or other mineral
exploration, development programs or leases.
6. The Income Fund will not invest in puts, calls, straddles, spreads or
any combinations thereof.
7. The Income Fund will not invest in securities with unlimited liability,
e.g., securities the holder of which may be assessed for amounts in
addition to the subscription or other price paid for the security.
8. The Income Fund will invest no more than 5% of total assets in
qualified repurchase agreements and will not enter into a repurchase
agreement for a period longer than 7 days.
9. The Income Fund will invest primarily in common stock and may also
invest in convertible and non-convertible bonds and preferred stock.
10. The Income Fund may purchase as temporary investments for its cash
commercial paper, certificates of deposit, no-load, open-end money
market funds (subject to the fundamental policy limitations set forth
in section (12 above), repurchase agreements (subject to the
non-fundamental policy limitations in section 8 above) or any other
short-term instrument SAM deems appropriate.
11. The Income Fund may invest up to 5% of net assets in warrants, but will
limit investments in warrants which are not listed on the New York or
American Stock Exchange to no more than 2% of net assets. Warrants
acquired as a result of unit offerings or attached to securities may be
deemed without value for purposes of the 5% limitation.
12. The Income Fund may invest up to 10% of its total assets in shares of
real estate investment trusts.
13. The Income Fund may invest up to 10% of its total assets in restricted
securities eligible for resale under Rule 144A, provided that SAM has
determined that such securities are liquid under guidelines adopted by
the Board of Trustees.
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INVESTMENT POLICIES OF THE NORTHWEST FUND
FUNDAMENTAL POLICIES
The Northwest Fund has adopted the following fundamental investment policies.
The Northwest 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 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 25% of the Fund's total
assets (which 25% shall not include securities issued by another
investment company) may be invested without regard to this 5%
limitation.
2. Purchase the securities of any issuer if, as a result, more than 10% of
any class of securities of such issuer will be owned by the Fund.
3. With respect to 100% of the value of its total assets, purchase more
than 10% of the outstanding voting securities of any one issuer (other
than U.S. Government securities).
4. Concentrate its investments in particular industries (other than
obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities) or invest 25% or more of the Fund's total assets
in any one industry (governmental issues of securities are not
considered part of one industry).
5. Purchase securities on margin, except for short-term credits necessary
for the clearance of transactions.
6. Make short sales (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 Northwest Fund's investment
objective, policies and restrictions or through the purchase of
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
Northwest Fund from commercial banks, for temporary or emergency
purposes and not for investment purposes, and then only in an amount
not exceeding 20% of the value of the Fund's total assets at the time
of borrowing. The Northwest Fund will not purchase securities if
borrowings equal to or greater than 5% of the Fund's total assets are
outstanding.
9. Pledge, mortgage or hypothecate its assets, except that, to secure
borrowings permitted by section 7 above, the Northwest Fund may pledge
securities having a market value at the time of pledge not exceeding
10% of the Fund's total assets.
10. Purchase or retain for its portfolio the securities of any issuer, if,
to the Northwest Fund's knowledge, the officers or directors of the
Fund, or its investment adviser, who individually own more than 1/2 of
1% of the outstanding securities of such an issuer, together own more
than 5% of such outstanding securities.
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<PAGE> 15
11. Underwrite any issue of securities, except to the extent that the
purchase of permitted investments directly from the issuer in
accordance with the Northwest 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.
12. Purchase or sell real estate, except real estate investment trusts.
13. Purchase or sell commodities, commodity contracts or futures contracts.
14. Participate, on a joint or joint-and-several basis, in any trading
account in securities, except that the Northwest 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.
15. Issue or sell any senior security, except that this restriction shall
not be construed to prohibit the Northwest 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 300% for all such borrowings and
provided, further, that in the event that such asset coverage shall at
any time fall below 300%, the Northwest Fund shall, within 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 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.
16. Purchase from, or sell portfolio securities to, any officer or
director, the Northwest Fund's investment adviser, principal
underwriter or any affiliates or subsidiaries thereof, provided,
however, that this prohibition shall not prohibit the Northwest Fund
from purchasing with the $5,000,000 raised through the sale of 500,000
shares of common stock to SAFECO Insurance Company of America,
portfolio securities from subsidiaries of SAFECO Corporation prior to
its effective date.
NON-FUNDAMENTAL INVESTMENT POLICIES
In addition to the policies described in the Prospectus, the Northwest Fund
has adopted the following non-fundamental policies which may be changed by the
Board of Trustees without Shareholder approval:
1. The Northwest Fund will not buy or sell foreign exchange, except as may
be necessary to invest the proceeds of the sale of foreign securities
in the Fund's portfolio in U.S. dollars.
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<PAGE> 16
2. The Northwest Fund will not issue long-term debt securities.
3. The Northwest Fund will not invest in any security for the purpose of
acquiring or exercising control or management of the issuer.
4. The Northwest Fund will not invest in oil, gas or other mineral
exploration or development programs.
5. The Northwest Fund will not invest in puts, calls, straddles, spreads
or any combinations thereof.
6. The Northwest Fund will not invest more than 5% of its total assets in
securities of companies (including predecessor companies) having a
record of less than 3 years of continuous operation.
7. The Northwest Fund will not invest in securities with unlimited
liability, e.g., securities the holder of which may be assessed for
amounts in addition to the subscription or other price paid for the
security.
8. The Northwest Fund will not invest more than 10% of its total assets in
qualified repurchase agreements and will not invest in qualified
repurchase agreements maturing in more than 7 days.
9. The Northwest Fund will not purchase the securities of any other
investment company or investment trust, except by purchase in the open
market where no commission or profit to a broker or dealer results from
such purchase other than the customary broker's commissions, or except
as part of a merger, consolidation or acquisition. The Fund shall not
invest more than 10% of its total assets in shares of other investment
companies nor invest more than 5% of its total assets in a single
investment company.
10. The Northwest Fund may invest in shares of common stock selected
primarily for potential appreciation.
11. The Northwest Fund 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.
12. The Northwest Fund may invest up to 5% of its net assets in warrants,
but shall limit investments in warrants which are not listed on the New
York or American Stock Exchange to no more than 2% of net assets.
Warrants acquired as a result of unit offerings or attached to
securities may be deemed without value for purposes of the 5%
limitation.
13. The Northwest Fund may purchase as temporary investments for its cash
commercial paper, certificates of deposit, shares of no-load, open-end
money market funds (subject
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<PAGE> 17
to the percentage limitations set forth in section 9 above), repurchase
agreements (subject to the limitations set forth in section 8 above) or
any other short-term instrument that SAM deems appropriate.
14. The Northwest 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 its adviser deems advisable without regard to the length of
time they have been held.
15. The Northwest Fund may invest up to 10% of its total assets in
restricted securities eligible for resale under Rule 144A, provided
that SAM has determined that such securities are liquid under
guidelines adopted by the Board of Trustees.
16. The Northwest Fund may purchase foreign securities, provided that such
purchase, at the time thereof, would not cause more than 10% of the
total assets of the Northwest Fund (at market value) to be invested in
foreign securities.
INVESTMENT POLICIES OF THE BALANCED FUND
FUNDAMENTAL POLICIES
The Balanced Fund has adopted the following fundamental investment policies. The
Balanced 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 5% of the value
of the Balanced Fund's total assets would be invested in the securities
of such issuer or the Balanced Fund would own or hold more than 10% of
the outstanding voting securities of such issuer), except that up to
25% of the value of such assets (which 25% shall not include securities
issued by another investment company) may be invested without regard to
these limits;
2. Borrow money, except the Balanced Fund may borrow money for temporary
and emergency purposes (not for leveraging or investment purposes) in
an amount not exceeding 33 1/3% of its total assets (including the
amount borrowed) less liabilities (other than borrowings). Any
borrowings by the Fund that come to exceed this amount shall be reduced
within three days (not including Sundays and holidays) to the extent
necessary to comply with the 33 1/3% limit;
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<PAGE> 18
3. Act as underwriter of securities issued by any other person, firm or
corporation; except to the extent that, in connection with the
disposition of portfolio securities, the Balanced Fund may be deemed an
underwriter under federal securities laws;
4. Issue senior securities, except as permitted under the 1940 Act;
5. Purchase the securities of any issuer (except the U.S. Government, its
agencies or instrumentalities) if, as a result, more than 25% of the
Balanced Fund's total assets would be invested in securities of
companies whose principal business activities are in the same industry;
6. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments; however, the Balanced
Fund may purchase or sell options or futures contracts and invest in
securities or other instruments backed by physical commodities; and
7. Lend any security or make any loan if, as a result, more than 33 1/3%
of its total assets would be lent to other parties; however, this limit
does not apply to purchases of debt securities or to repurchase
agreements.
NON-FUNDAMENTAL INVESTMENT POLICIES
In addition to the policies described in the Prospectus, the Balanced Fund has
adopted the following non-fundamental policies which may be changed by the
Board of Trustees without Shareholder approval:
1. The Balanced Fund will not purchase securities of companies which
together with any predecessors have a record of less than 3 years of
continuous operation, if such purchase at the time thereof would cause
more than 5% of the Fund's total assets to be invested in the
securities of such companies.
2. The Balanced Fund will not make short sales (sales of securities not
presently owned), except where the Fund has at the time of sale, by
virtue of its ownership in other securities, the right to obtain at no
additional cost securities equivalent in kind and amount to the
securities to be sold.
3. The Balanced Fund will not purchase securities issued by any other
investment company, except by purchase in the open market where no
commission or profit to a broker or dealer results from such purchase,
other than the customary broker's commissions, or except when such
purchase, although not made in the open market, is part of a merger,
consolidation or acquisition. Nothing in this policy shall prevent any
purchase for the purpose of effecting a merger, consolidation or
acquisition of assets expressly approved by the shareholders after full
disclosure of any commission or profit to the principal underwriter.
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<PAGE> 19
4. The Balanced Fund will not invest in oil, gas or other mineral
exploration, development programs or leases.
5. The Balanced Fund will not invest more than 5% of its net assets in
warrants. Included in that amount, but not to exceed 2% of net assets,
are warrants whose underlying securities are not traded on principal
domestic or foreign exchanges. Warrants acquired by the Fund in units
or attached to securities are not subject to these limits.
6. The Balanced Fund will not invest in interests in real estate
investment trusts that are not readily marketable or interests in real
estate limited partnerships not listed or trade on NASDAQ National
Market System if, as a result, the sum of such interests considered
illiquid and other illiquid securities would exceed 15% of the Fund's
net assets.
7. The Balanced Fund will not purchase securities on margin, except that
the Fund may obtain such short-term credits as are necessary for the
clearance of transactions, and provided that margin payments made in
connection with futures contracts and options on futures shall not
constitute purchasing securities on margins.
8. The Balanced Fund may borrow money only from a bank or SAFECO
Corporation or affiliates thereof or by engaging in reverse repurchase
agreements with any party. The Fund will not purchase any securities
while borrowings equal to or greater than 5% of its total assets are
outstanding.
9. The Balanced Fund will not purchase any security, if as a result, more
than 15% of its net assets would be invested in securities that are
deemed to be illiquid because they are subject to legal or contractual
restrictions on resale or because they cannot be sold or disposed of in
the ordinary course of business at approximately the prices at which
they are valued.
10. The Balanced Fund will not make loans to any person, firm or
corporation, but the purchase by the Fund of a portion of an issue of
publicly distributed bonds, debentures or other securities issued by
persons other than the Fund, whether or not the purchase was made upon
the original issue of securities, shall not be considered a loan within
the prohibition of this section.
11. The Balanced Fund will not purchase or retain the securities of any
issuer if, to the knowledge of the Fund's management, the officers and
Trustees of the SAFECO Common Stock Trust and the officers and
directors of the investment adviser to the Fund (each owning
beneficially more than 0.5% of the outstanding securities of an issuer)
own in the aggregate 5% or more of the securities of the issuer.
12. The Balanced Fund may invest up to 10% of its total assets in
restricted securities eligible for resale under Rule 144A, provided
that SAM has determined that such securities are liquid under
guidelines adopted by the Board of Trustees.
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<PAGE> 20
13. The Balanced 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 its adviser deems advisable without regard to the length of
time they have been held.
14. The Balanced Fund will not purchase puts, calls, straddles, spreads or
any combination thereof if by reason thereof the value of its aggregate
investment in such classes of securities would exceed 5% of its total
assets; provided, however, that nothing herein shall prevent the
purchase, ownership, holding or sale of warrants where the grantor of
the warrants is the issuer of the underlying securities.
15. The Balanced Fund will not purchase or sell real estate (except real
estate investment trusts), commodities or commodity contracts.
INVESTMENT POLICIES OF THE INTERNATIONAL FUND
FUNDAMENTAL POLICIES
The International Fund has adopted the following fundamental investment
policies. The International 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 5% of the value
of the Fund's total assets would be invested in the securities of such
issuer or the Fund would own or hold more than 10% of the outstanding
voting securities of such issuer), except that up to 25% of the value
of such assets (which 25% shall not include securities issued by
another investment company) may be invested without regard to these
limits;
2. Borrow money, except the Fund may borrow money for temporary and
emergency purposes (not for leveraging or investment purposes) in an
amount not exceeding 33 1/3% of its total assets (including the amount
borrowed) less liabilities (other than borrowings). Any borrowings by
the Fund that come to exceed this amount shall be reduced within three
days (not including Sundays and holidays) to the extent necessary to
comply with the 33 1/3% limit;
3. Act as underwriter of securities issued by any other person, firm or
corporation; except to the extent that, in connection with the
disposition of portfolio securities, the Fund may be deemed an
underwriter under federal securities laws;
4. Issue senior securities, except as permitted under the 1940 Act;
5. Purchase the securities of any issuer (except the U.S. Government, its
agencies or instrumentalities) if, as a result, more than 25% of the
Fund's total assets would be
-18-
<PAGE> 21
invested in securities of companies whose principal business activities
are in the same industry;
6. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments; however, the Fund may
purchase or sell options or futures contracts and invest in securities
or other instruments backed by physical commodities; and
7. Lend any security or make any loan if, as a result, more than 33 1/3%
of its total assets would be lent to other parties; however, this limit
does not apply to purchases of debt securities or to repurchase
agreements.
NON-FUNDAMENTAL INVESTMENT POLICIES
In addition to the policies described in the Prospectus, the International
Fund has adopted the following non-fundamental policies which may be changed
by the Board of Trustees without Shareholder approval:
1. The Fund will not purchase securities of companies which together with
any predecessors have a record of less than 3 years of continuous
operation, if such purchase at the time thereof would cause more than
5% of the Fund's total assets to be invested in the securities of such
companies.
2. The Fund will not make short sales (sales of securities not presently
owned), except where the Fund has at the time of sale, by virtue of its
ownership in other securities, the right to obtain at no additional
cost securities equivalent in kind and amount to the securities to be
sold.
3. The Fund will not purchase securities issued by any other investment
company, except by purchase in the open market where no commission or
profit to a broker or dealer results from such purchase, other than the
customary broker's commissions, or except when such purchase, although
not made in the open market, is part of a merger, consolidation or
acquisition. Nothing in this policy shall prevent any purchase for the
purpose of effecting a merger, consolidation or acquisition of assets
expressly approved by the shareholders after full disclosure of any
commission or profit to the principal underwriter.
4. The Fund will not invest in oil, gas or other mineral exploration,
development programs or leases.
5. The Fund will not invest more than 5% of its net assets in warrants.
Included in that amount, but not to exceed 2% of net assets, are
warrants whose underlying securities are not traded on principal
domestic or foreign exchanges. Warrants acquired by the Fund in units
or attached to securities are not subject to these limits.
-19-
<PAGE> 22
6. The Fund will not invest in interests in real estate investment
trusts that are not readily marketable or interests in real estate
limited partnerships not listed or trade on NASDAQ National Market
System if, as a result, the sum of such interests considered illiquid
and other illiquid securities would exceed 15% of the Fund's net
assets.
7. The Fund will not purchase securities on margin, except that the Fund
may obtain such short-term credits as are necessary for the clearance
of transactions, and provided that margin payments made in connection
with futures contracts and options on futures shall not constitute
purchasing securities on margins.
8. The Fund may borrow money only from a bank or SAFECO Corporation or
affiliates thereof or by engaging in reverse repurchase agreements with
any party. The Fund will not purchase any securities while borrowings
equal to or greater than 5% of its total assets are outstanding.
9. The Fund will not purchase any security, if as a result, more than 15%
of its net assets would be invested in securities that are deemed to be
illiquid because they are subject to legal or contractual restrictions
on resale or because they cannot be sold or disposed of in the ordinary
course of business at approximately the prices at which they are
valued.
10. The Fund will not make loans to any person, firm or corporation, but
the purchase by the Fund of a portion of an issue of publicly
distributed bonds, debentures or other securities issued by persons
other than the Fund, whether or not the purchase was made upon the
original issue of securities, shall not be considered a loan within the
prohibition of this section.
11. The Fund will not purchase or retain the securities of any issuer if,
to the knowledge of the Fund's management, the officers and Trustees of
the SAFECO Common Stock Trust and the officers and directors of the
investment adviser to the Fund (each owning beneficially more than 0.5%
of the outstanding securities of an issuer) own in the aggregate 5% or
more of the securities of the issuer.
12. The Fund may invest up to 10% of its total assets in restricted
securities eligible for resale under Rule 144A, provided that SAM has
determined that such securities are liquid under guidelines adopted by
the Board of Trustees.
13. 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 its
adviser deems advisable without regard to the length of time they have
been held.
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<PAGE> 23
INVESTMENT POLICIES OF THE SMALL COMPANY FUND
FUNDAMENTAL POLICIES
The Small Company Fund has adopted the following fundamental investment
policies. The Small Company 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 5% of the value
of the Small Company Stock Fund's total assets would be invested in the
securities of such issuer or the Small Company Fund would own or hold
more than 10% of the outstanding voting securities of such issuer),
except that up to 25% of the value of such assets (which 25% shall not
include securities issued by another investment company) may be
invested without regard to these limits;
2. Borrow money, except the Small Company Fund may borrow money for
temporary and emergency purposes (not for leveraging or investment
purposes) in an amount not exceeding 33 1/3% of its total assets
(including the amount borrowed) less liabilities (other than
borrowings). Any borrowings by the Fund that come to exceed this amount
shall be reduced within three days (not including Sundays and holidays)
to the extent necessary to comply with the 33 1/3% limit;
3. Act as underwriter of securities issued by any other person, firm or
corporation; except to the extent that, in connection with the
disposition of portfolio securities, the Small Company Fund may be
deemed an underwriter under federal securities laws;
4. Issue senior securities, except as permitted under the 1940 Act;
5. Purchase the securities of any issuer (except the U.S. Government, its
agencies or instrumentalities) if, as a result, more than 25% of the
Small Company Fund's total assets would be invested in securities of
companies whose principal business activities are in the same industry;
6. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments; however, the Small
Company Fund may purchase or sell options or futures contracts and
invest in securities or other instruments backed by physical
commodities; and
7. Lend any security or make any loan if, as a result, more than 33 1/3%
of its total assets would be lent to other parties; however, this limit
does not apply to purchases of debt securities or to repurchase
agreements.
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<PAGE> 24
NON-FUNDAMENTAL INVESTMENT POLICIES
In addition to the policies described in the Prospectus, the Small Company
Fund has adopted the following non-fundamental policies which may be changed
by the Board of Trustees without Shareholder approval:
1. The Small Company Fund will not make short sales (sales of securities
not presently owned), except where the Fund has at the time of sale, by
virtue of its ownership in other securities, the right to obtain at no
additional cost securities equivalent in kind and amount to the
securities to be sold.
2. The Small Company Fund will not purchase securities issued by any other
investment company, except by purchase in the open market where no
commission or profit to a broker or dealer results from such purchase,
other than the customary broker's commissions, or except when such
purchase, although not made in the open market, is part of a merger,
consolidation or acquisition. Nothing in this policy shall prevent any
purchase for the purpose of effecting a merger, consolidation or
acquisition of assets expressly approved by the shareholders after full
disclosure of any commission or profit to the principal underwriter.
3. The Small Company Fund will not invest in oil, gas or other mineral
exploration, development programs or leases.
4. The Small Company Fund will not invest more than 5% of its net assets
in warrants. Included in that amount, but not to exceed 2% of net
assets, are warrants whose underlying securities are not traded on
principal domestic or foreign exchanges. Warrants acquired by the Fund
in units or attached to securities are not subject to these limits.
5. The Small Company Fund will not invest in interests in real estate
investment trusts that are not readily marketable or interests in real
estate limited partnerships not listed or trade on NASDAQ National
Market System if, as a result, the sum of such interests considered
illiquid and other illiquid securities would exceed 15% of the Fund's
net assets.
6. The Small Company Fund will not purchase securities on margin, except
that the Fund may obtain such short-term credits as are necessary for
the clearance of transactions, and provided that margin payments made
in connection with futures contracts and options on futures shall not
constitute purchasing securities on margins.
7. The Small Company Fund may borrow money only from a bank or SAFECO
Corporation or affiliates thereof or by engaging in reverse repurchase
agreements with any party. The Fund will not purchase any securities
while borrowings equal to or greater than 5% of its total assets are
outstanding.
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<PAGE> 25
8. The Small Company Fund will not purchase any security, if as a result,
more than 15% of its net assets would be invested in securities that
are deemed to be illiquid because they are subject to legal or
contractual restrictions on resale or because they cannot be sold or
disposed of in the ordinary course of business at approximately the
prices at which they are valued.
9. The Small Company Fund will not make loans to any person, firm or
corporation, but the purchase by the Fund of a portion of an issue of
publicly distributed bonds, debentures or other securities issued by
persons other than the Fund, whether or not the purchase was made upon
the original issue of securities, shall not be considered a loan within
the prohibition of this section.
10. The Small Company Fund will not purchase or retain the securities of
any issuer if, to the knowledge of the Fund's management, the officers
and Trustees of the SAFECO Common Stock Trust and the officers and
directors of the investment adviser to the Fund (each owning
beneficially more than 0.5% of the outstanding securities of an issuer)
own in the aggregate 5% or more of the securities of the issuer.
11. The Small Company Fund may invest up to 10% of its total assets in
restricted securities eligible for resale under Rule 144A, provided
that SAM has determined that such securities are liquid under
guidelines adopted by the Board of Trustees.
12. The Small Company 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 its adviser deems advisable without regard to the
length of time they have been held.
13. The Small Company Fund will not purchase securities of companies which
together with any predecessors have a record of less than 3 years of
continuous operation, if such purchase at the time thereof would cause
more than 5% of the Fund's total assets to be invested in the
securities of such companies.
14. The Small Company Fund will not purchase puts, calls, straddles,
spreads or any combination thereof, if by reason thereof the value of
its aggregate investment in such classes of securities would exceed 5%
of its total assets; provided, however, that nothing herein shall
prevent the purchase, ownership, holding or sale of warrants where the
grantor of the warrants is the issuer of the underlying securities.
15. The Small Company Fund will not purchase or sell real estate (except
real estate investment trusts), commodities or commodity contracts.
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<PAGE> 26
ADDITIONAL INVESTMENT INFORMATION
Each Fund may make the following investments, among others, although they may
not buy all of the types of securities that are described.
1. RESTRICTED SECURITIES AND RULE 144A SECURITIES. Restricted securities
are securities that may be sold only in a public offering with respect
to which a registration statement is in effect under the 1933 Act or,
if they are unregistered, in a privately negotiated transaction or
pursuant to an exemption from registration. In recognition of the
increased size and liquidity of the institutional markets for
unregistered securities and the importance of institutional investors
in the formation of capital, the SEC has adopted Rule 144A, which is
designed to further facilitate efficient trading among institutional
investors by permitting the sale of Rule 144A securities to qualified
institutional buyers. To the extent privately placed securities held by
a Fund qualify under Rule 144A and an institutional market develops for
those securities, the Fund likely will be able to dispose of the
securities without registering them under the 1933 Act. SAM, acting
under guidelines established by the Trust's Board of Trustees, may
determine that certain securities qualified for trading under Rule 144A
are liquid.
Where registration is required, 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 Trust's Board
of Trustees.
2. WARRANTS. A warrant is an option issued by a corporation that gives the
holder the right to buy a stated number of shares of common stock of
the corporation at a specified price within a designated time period.
Warrants may be purchased and sold separately or attached to stocks or
bonds as part of a unit offering. The term of a warrant may run from
two to five years and in some cases the term may be longer. The
exercise price carried by the warrant is usually well above the
prevailing market price of the underlying common stock at the time the
warrant is issued. The holder of a warrant has no voting rights and
receives no dividends. Warrants are freely transferable and may trade
on the major national exchanges.
Warrants may be speculative. Generally, the value of a warrant will
fluctuate by greater percentages than the value of the underlying
common stock. The primary risk associated with a warrant is that the
term of the warrant may expire before the exercise price of the common
stock has been reached. Under these circumstances, a Fund could lose
all of its principal investment in the warrant.
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<PAGE> 27
A Fund will invest in a warrant only if the Fund has the authority to
hold the underlying common stock. Additionally, if a warrant is part of
a unit offering, a Fund will purchase the warrant only if it is
attached to a security in which the Fund has authority to invest. In
all cases, a Fund will purchase warrants only after SAM determines that
the exercise price for the underlying common stock is likely to be
achieved within the required time-frame and for which an actively
traded market exists. SAM will make this determination by analyzing the
issuer's financial health, quality of management and any other factors
deemed to be relevant.
3. REPURCHASE AGREEMENTS. In a repurchase agreement, a Fund and the seller
agree at the time of sale to the repurchase of a security at a mutually
agreed upon time and place. The period of maturity is usually quite
short, possibly overnight or a few days, although it may extend over a
number of months. The resale price is in excess of the purchase price,
reflecting an agreed upon market rate effective for the period of time
a Fund's money is invested in the security (which is not related to the
coupon rate of the purchased security). Repurchase agreements may be
considered loans of money to the seller of the underlying security,
which are collateralized by the securities underlying the repurchase
agreement. A Fund will not enter into a repurchase agreement unless the
agreement is fully collateralized. A Fund will take possession of the
securities underlying the repurchase agreement and will value them
daily to assure that this condition is met. In the event that a seller
defaults on a repurchase agreement, a Fund may incur loss in the market
value of the collateral, as well as disposition costs; and, if a party
with whom a Fund has entered into a repurchase agreement becomes
involved in a bankruptcy proceeding, a Fund's ability to realize the
collateral may be limited or delayed and a loss may be incurred if the
collateral securing the repurchase agreement declines in value during
the bankruptcy proceeding. Foreign repurchase agreements may be less
well secured than U.S. repurchase agreements and may be subject to
currency risks. In addition, foreign counter parties may be less
creditworthy than U.S. counterparties.
4. COMMERCIAL PAPER AND CERTIFICATES OF DEPOSIT. In making temporary
investments in commercial paper and certificates of deposit, a Fund
will adhere to the following guidelines:
a) Commercial paper must be rated A-1 or A-2 by Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies
Inc.("S&P") or Prime-1 or Prime-2 by Moody's Investors
Service, Inc. ("Moody's") or issued by companies with an
unsecured debt issue currently outstanding rated AA by S&P or
Aa by Moody's or higher.
b) Certificates of deposit must be issued by banks or savings and
loan associations that have total assets of at least $1
billion or, in the case of a bank or savings and loan
association not having total assets of at least $1 billion,
the bank or savings and loan association is insured by the
Federal Deposit Insurance Corporation in
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which case the Growth Fund will limit its investment to the
statutory insurance coverage.
5. CONTINGENT VALUE RIGHTS. A contingent value right ("CVR") is a right
issued by a corporation that takes on a pre-established value if the
underlying common stock does not attain a target price by a specified
date. Generally, a CVR's value will be the difference between the
target price and the current market price of the common stock on the
target date. If the common stock does attain the target price by the
date, the CVR expires without value. CVRs may be purchased and sold as
part of the underlying common stock or separately from the stock. CVRs
may also be issued to owners of the underlying common stock as the
result of a corporation's restructuring.
6. REAL ESTATE INVESTMENT TRUSTS ("REITS"). REITs purchase real property,
which is then leased, and make mortgage 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 the properties
owned and the financial condition of lessees and mortgagors. The value
of REIT units will fluctuate depending on the underlying value of the
real property and mortgages owned and the amount of 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.
7. 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 Trust's
Board of Trustees.
8. CONVERTIBLE SECURITIES. Convertible bonds and convertible preferred
stock may be exchanged for a stated number of shares of the issuer's
common stock at a certain price known as the conversion price. The
conversion price is usually greater than the price of the common stock
at the time the convertible security is purchased. Generally, the
interest rate of convertible bonds and the yield of convertible
preferred stock will be lower than the issuer's non-convertible
securities. Also, the value of convertible securities will normally
vary with the value of the underlying common stock and fluctuate
inversely with interest rates. However, convertible securities may show
less volatility in value than the issuer's non-convertible securities.
A risk associated with convertible bonds and convertible preferred
stock is that the conversion price of the common stock will not be
attained.
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<PAGE> 29
9. 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
the Fund bears the risk of such fluctuation from the date of purchase.
A Fund may dispose of its interest in those securities before delivery.
10. SOVEREIGN DEBT OBLIGATIONS. Sovereign debt instruments are issued or
guaranteed by foreign governments or their agencies. Sovereign debt may
be in the form of conventional securities or other types of debt
instruments such as loans or loan participations. Governments or
governmental entities responsible for repayment of the debt may be
unable or unwilling to repay principal and interest when due, and may
require renegotiation or rescheduling of debt payments. Repayment of
principal and interest may depend also upon political and economic
factors.
11. INDEXED SECURITIES. Indexed securities are securities whose prices are
indexed to the prices of other securities, securities indices,
currencies, commodities or other financial indicators. Indexed
securities generally are debt securities whose value at maturity or
interest rate is determined by reference to a specific instrument or
statistic. Currency- indexed securities generally are debt securities
whose maturity values or interest rates are determined by reference to
values of one or more specified foreign currencies. Currency- indexed
securities may be positively or negatively indexed, i.e., their
maturity value may increase when the specified currency value
increases, resulting in a security that performs similarly to a
foreign-denominated instrument, or their maturity value may decline
when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the
values of different foreign securities relative to each other.
The performance of an indexed security depends largely on the
performance of the security, currency or other instrument to which they
are indexed. Performance may also be influenced by interest rate
changes in the United States and foreign countries. Indexed securities
additionally are subject to credit risks associated with the issuer of
the security. Their values may decline substantially if the issuer's
creditworthiness deteriorates. Indexed securities may also be more
volatile than their underlying instruments.
12. PASSIVE FOREIGN INVESTMENT COMPANIES ("PFICS"). PFICs may include funds
or trusts organized as investment vehicles to invest in companies of
certain foreign countries. Investors in a PFIC bear their proportionate
share of the PFIC's management fees and other expenses. See "Additional
Tax Information -- Passive Foreign Investment Companies" for more
information.
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13. SHORT SALES AGAINST THE BOX. A Fund may make short sales of securities
or maintain a short position, provided that at all times when a short
position is open the Fund owns an equal amount of such securities or an
equal amount of the securities of the same issuer as the securities
sold short (a "short sale against the box"). Funds engaging in short
sales against the box will incur transaction costs.
14. OPTIONS ON EQUITY SECURITIES. (International Fund only.) The
International Fund may purchase and write (i.e., sell) put and call
options on equity securities that are traded on national securities
exchanges or that are listed on NASDAQ. A call option is a short-term
contract pursuant to which the purchaser or holder, in return for a
premium paid, has the right to buy the equity security underlying the
option at a specified exercise price (the strike price) at any time
during the term of the option. The writer of the call option, who
received the premium, has the obligation, upon exercise of the option,
to deliver the underlying equity security against payment of the strike
price. A put option is a similar contract that gives the purchaser or
holder, in return for a premium, the right to sell the underlying
equity security at a specified exercise price (the strike price) during
the term of the option. The writer of the put, who receives the
premium, has the obligation to buy the underlying equity security at
the strike price upon exercise by the holder of the put.
The Fund will write call options on stocks only if they are covered,
and such options must remain covered so long as the Fund is obligated
as a writer. A call option is "covered" if: the Fund has an immediate
right to acquire that security without additional cash consideration
(or for additional cash consideration held in a segregated account by
its custodian); upon the Fund's conversion or exchange of other
securities held in its portfolio; or the Fund holds a share-for-share
basis a call on the same security as the call written where the strike
price of the call held is equal to or less than the strike price of the
call written or greater than the strike price of the call written if
the difference is maintained by the Fund in cash, Treasury bills or
other liquid high-grade short-term debt obligations in a segregated
account with its custodian.
The Fund will write put options on stocks only if they are covered, and
such options must remain covered so long as the Fund is obligated as a
writer. A put option is "covered" if: the Fund holds in a segregated
account cash, Treasury bills, or other liquid high-grade short-term
debt obligations of a value equal to the strike price; or the Fund
holds on a share-for-share basis a put on the same security as the put
written where the strike price of the put held is equal to or greater
than the strike price of the put written or less than the strike price
of the put written if the difference is maintained by the Fund in cash,
Treasury bills, or other liquid high-grade short-term obligations in a
segregated account with its custodian.
The Fund may purchase "protective puts," i.e., put options acquired for
the purpose of protecting a portfolio security from a decline in market
value. In exchange for the premium paid for the put option, the Fund
acquires the right to sell the underlying security at the strike price
of the put regardless of the extent to which the underlying
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<PAGE> 31
security declines in value. The loss to the Fund is limited to the
premium paid for, and transaction costs in connection with, the put
plus the initial excess, if any, of the market price of the underlying
security over the strike price. However, if the market price of the
security underlying the put rises, the profit the Fund realizes on the
sale of the security will be reduced by the premium paid for the put
option less any amount (net of transaction costs) for which the put may
be sold.
The Fund does not intend to invest more than 5% of its net assets at
any one time in the purchase of call options on stocks.
If the Fund, as a writer of an option, wishes to terminate the
obligation, it may effect a "closing purchase transaction" by buying an
option of the same series as the option previously written. Similarly,
the holder of an option may liquidate his or her position by exercising
the option or by effecting a "closing sale transaction, i.e., selling
an option of the same series as the option previously purchased. The
Fund may effect closing sale and purchase transactions. The Fund will
realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option
or is more than the premium paid to purchase the option. Because
increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss
resulting from a closing purchase transaction with respect to a call
option is likely to be offset in whole or in part by appreciation of
the underlying equity security owned by the Fund. There is no guaranty
that closing purchase or closing sale transactions can be effected.
The Fund's use of options on equity securities is subject to certain
special risks, in addition to the risk that the market value of the
security will move adversely to the Fund's option position. An option
position may be closed out only on an exchange, board of trade or other
trading facility that provides a secondary market for an option of the
same series. Although the Fund will generally purchase or write only
those options for which there appears to be an active secondary market,
there is no assurance that a liquid secondary market on an exchange
will exist for any particular option, or at any particular time, and
for some options no secondary market on an exchange or otherwise may
exist. In such event it might not be possible to effect closing
transactions in particular options, with the result that the Fund would
have to exercise its options in order to realize any profit and would
incur brokerage commissions upon the exercise of such options and upon
the subsequent disposition of the underlying securities acquired
through the exercise of call options or upon the purchase of underlying
securities or the exercise of put options. If the Fund as a covered
call option writer is unable to effect a closing purchase transaction
in a secondary market, it will not be able to sell underlying security
until the option expires or it delivers the underlying security upon
exercise.
Reasons for the absence of a liquid secondary market on an exchange can
include any of the following: (I) there may be insufficient trading
interest in certain options; (ii) restrictions imposed by an exchange
on opening transactions or closing transactions or
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<PAGE> 32
both; (iii) trading halts, suspensions or other restrictions may be
imposed with respect to particular classes or series of options or
underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an
exchange or a clearing corporation may not at all times be adequate to
handle current trading volume; or (vi) one or more exchanges could, for
economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series
of options), in which event the secondary market on that exchange (or
in the class or series of options) would cease to exist, although
outstanding options on that exchange that had been issued by a clearing
corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms. There is no assurance that
higher than anticipated trading activity or other unforeseen events
might not, at times, render certain of the facility of any of the
clearing corporations inadequate, and thereby result in the institution
by an exchange of special procedures that may interfere with the timely
execution of customers' orders.
15. OPTIONS ON STOCK INDICES. (International Fund only.) The International
Fund may purchase and sell (i.e., write) put and call options on stock
indices traded on national securities exchanges or listed on NASDAQ.
Options on stock indices are similar to options on stock except that,
rather than obtaining the right to take or make delivery of stock at a
specified price, an option on stock index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing
level of the stock index upon which the option is based is greater than
(in the case of a call) or less than (in the case of a put) the strike
price of the option. The amount of cash is equal to such difference
between the closing price of the index and the strike price of the
option times a specified multiple (the "multiplier"). If the option is
exercised, the writer is obligated, in return for the premium received,
to make delivery of this amount. Unlike stock options, all settlements
are in cash, and gain or loss depends on price movements in the stock
market generally (or in particular industry or segment of the market)
rather than price movements in individual stocks.
The Fund will write call options on stock indices only if they are
covered, and such options remain covered as long as the Fund is
obligated as a writer. When the Fund writes a call option on a broadly
based stock market index, the Fund will segregate or put into escrow
with its custodian or pledge to a broker as collateral for the option,
cash, Treasury bills or other liquid high-grade short-term debt
obligations, or "qualified securities" (defined below) with a market
value at the time the option is written of not less than 100% of the
current index value times the multiplier times the number of contracts.
A "qualified security" is an equity security that is listed on a
national securities exchange or listed on NASDAQ against which the
Fund has not written a stock call option and that has not been hedged
by the Fund by the sale of stock index futures.
When the Fund writes a call option on an industry or market segment
index, the Fund will segregate or put into escrow with its custodian or
pledge to a broker as collateral for the option, cash, Treasury bills
or other liquid high-grade short-term debt obligations, or at least
five qualified securities, all of which are stocks of issuers in such
industry or
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<PAGE> 33
market segment, with a market value at the time the option
is written of not less than 100% of the current index value times the
multiplier times the number of contracts. Such stocks will include
stocks that represent at least 50% of the weighting of the industry or
market segment index and will represent at least 50% of the portfolio's
holdings in that industry or market segment. No individual security
will represent more than 15% of the amount so segregated, pledged or
escrowed in the case of broadly based stock market stock options or 25%
of such amount in the case of industry or market segment index options.
If at the close of business on any day the market value of such
qualified securities so segregated, escrowed, or pledged falls below
100% of the current index value times the multiplier times the number
of contracts, the Fund will so segregate, escrow, or pledge an amount
in cash, Treasury bills, or other liquid high-grade short-term
obligations equal in value to the difference. In addition, when the
Fund writes a call on an index that is in-the-money at the time the
call is written, the Fund will segregate with its custodian or pledge
to the broker as collateral, cash or U.S. Government or other liquid
high-grade short-term debt obligations equal in value to the amount by
which the call is in-the-money times the multiplier times the number of
contracts. Any amount segregated pursuant to the foregoing sentence may
be applied to the Fund's obligation to segregate additional amounts in
the event that the market value of the qualified securities falls below
100% of the current index value times the multiplier times the number
of contracts. A call option is also covered and the Fund need not
follow the segregation requirements set forth in this paragraph if the
Fund holds a call on the same index as the call written where the
strike price of the call held is equal to or less than the strike price
of the call written or greater than the strike price of the call
written if the difference is maintained by the Fund in cash, Treasury
bills or other liquid high-grade short-term obligations in a segregated
account with its custodian.
The Fund will write put options on stock indices only if they are
covered, and such options must remain covered so long as the Fund is
obligated as a writer. A put option is covered if the Fund holds in a
segregated account cash, Treasury bills, or other liquid high-grade
short-term debt obligations of a value equal to the strike price times
the multiplier times the number of contracts; or the Fund holds a put
on the same index as the put written where the strike price of the put
held is equal to or greater than the strike price of the put written or
less than the strike price of the put written if the difference is
maintained by the Fund in cash, Treasury bills, or other liquid
high-grade short-term debt obligations in a segregated account with its
custodian.
The Fund does not intend to invest more than 5% of its net assets at
any one time in the purchase of puts and calls on stock indices. The
Fund may effect closing sale and purchase transactions, as described
above in connection with options on equity securities.
The purchase and sale of options on stock indices will be subject to
the same risks as options on equity securities, described above. In
addition, the distinctive characteristics of options on indices create
certain risks that are not present with stock options. Index
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<PAGE> 34
prices may be distorted if trading of certain stocks included in the
index is interrupted. Trading in index options also may be interrupted
in certain circumstances, such as if trading were halted in a
substantial number of stocks included in the index. If this occurred,
the Fund would not be able to close out options that it had purchased
or written and, if restrictions on exercise were imposed, may be unable
to exercise an option it holds, which could result in substantial
losses to the Fund. The Fund generally will purchase or write options
only on stock indices that include a number of stocks sufficient to
minimize the likelihood of a trading halt in options on the index.
Although the markets for certain index option contracts have developed
rapidly, the markets for other index options are still relatively
illiquid. The ability to establish and close out positions on such
options will be subject to the development and maintenance of a liquid
secondary market. It is not certain that this market will develop in
all index options contracts. The Fund will not purchase or sell any
index option contract unless and until Bank of Ireland Asset Management
(U.S.) Limited (the "Sub-Adviser"), the Fund's sub-investment adviser,
believes the market for such options has developed sufficiently that
the risk in connection with such transactions is no greater than the
risk in connection with options on stocks.
Price movements in the Fund's equity security portfolio probably will
not correlate precisely with movements in the level of the index and,
therefore, in writing a call on a stock index the Fund bears the risk
that the price of the securities held by the Fund may not increase as
much as the index. In such event, the Fund would bear a loss on the
call that is not completely offset by movement in the price of the
Fund's equity securities. It is also possible that the index may rise
when the Fund's securities do not rise in value. If this occurred, the
Fund would experience a loss on the call that is not offset by an
increase in the value of its securities portfolio and might also
experience a loss in its securities portfolio. However, because the
value of a diversified securities portfolio will, over time, tend to
move in the same direction as the market, movements in the value of the
Fund's securities in the opposite direction as the market would be
likely to occur for only a short period or to a small degree.
When the Fund has written a call, there is also a risk that the market
may decline between the time the Fund has a call exercised against it,
at a price which is fixed as of the closing level of the index on the
date of exercise, and the time the Fund is able to sell stocks in its
portfolio. As with stock options, the Fund will not learn that an index
option has been exercised until the day following the exercise date
but, unlike a call on stock where the Fund would be able to deliver the
underlying securities in settlement, the Fund may have to sell part of
its stock portfolio in order to make settlement in cash, and the price
of such stocks might decline before they can be sold. This timing risk
makes certain strategies involving more than one option substantially
more risky with options in stock indices than with stock options.
There are also certain special risks involved in purchasing put and
call options on stock indices. If the Fund holds an index option and
exercises it before final determination of
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the closing index value for that day, it runs the risk that the level
of the underlying index may change before closing. If such a change
causes the exercised option to fall out-of-the-money, the Fund will be
required to pay the difference between the closing index value and the
strike price of the option (times the applicable multiplier) to the
assigned writer. Although the Fund may be able to minimize the risk by
withholding exercise instructions until just before the daily cutoff
time or by selling rather than exercising an option when the index
level is close to the exercise price, it may not be possible to
eliminate this risk entirely because the cutoff times for index options
may be earlier than those fixed for other types of options and may
occur before definitive closing index values are announced.
16. OPTIONS ON DEBT SECURITIES. (International Fund only.) The Fund may
purchase and write (i.e., sell) put and call options on debt securities
(including U.S. Government debt securities) that are traded on national
securities exchanges or that result from privately negotiated
transactions with primary U.S. Government securities dealers recognized
by the Federal Reserve Bank of New York ("OTC options"). Options on
debt are similar to options on stock, except that the option holder has
the right to take or make delivery of a debt security, rather than
stock.
The Fund will write options only if they are covered, and such options
must remain covered so long as the Fund is obligated as a writer. An
option on debt securities is covered in the same manner as explained in
connection with options on equity securities, except that, in the case
of call options on U.S. Treasury bills, the Fund might own U.S.
Treasury bills of a different series from those underlying the call
option, but with a principal amount and value corresponding to the
option contract amount and a maturity date no later than that of the
securities deliverable under the call option. The principal reason for
the Fund to write an option on one or more of its securities is to
realize through the receipt of the premiums paid by the purchaser of
the option a greater current return than would be realized on the
underlying security alone. Calls on debt securities will not be written
when, in the opinion of the Sub-Adviser, interest rates are likely to
decline significantly, because under those circumstances the premium
received by writing the call likely would not fully offset the foregone
appreciation in the value of the underlying security.
The Fund may also write straddles (i.e., a combination of a call and a
put written on the same security at the same strike price where the
same issue of the security is considered "cover" for both the put and
the call). In such cases, the Fund will also segregate or deposit for
the benefit of the Fund's broker cash or liquid high-grade debt
obligations equivalent to the amount, if any, by which the put is
in-the-money. The Fund's use of straddles will be limited to 5% of its
net assets (meaning that the securities used for cover or segregated as
described above will not exceed 5% of the Fund's net assets at the time
the straddle is written). The writing of a call and a put on the same
security at the same strike price where the call and the put are
covered by different securities is not considered a straddle for
purposes of this limit.
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<PAGE> 36
The Fund may purchase "protective puts" on debt securities in an effort
to protect the value of a security that they own against a substantial
decline in market value. Protective puts are described above in
"Options on Equities."
The Fund does not intend to invest more than 5% of its net assets at
any one time in the purchase of call options on debt securities.
If the Fund, as a writer of an exchange-traded option, wishes to
terminate the obligation, it may effect a closing purchase or sale
transaction in a manner similar to that discussed above in connection
with options on equity securities. Unlike exchange-traded options, OTC
options generally do not have a continuous liquid market. Consequently,
the Fund will generally be able to realize the value of an OTC option
it has purchased only by exercising it or reselling it to the dealer
who issued it. Similarly, when the Fund writes an OTC option, it
generally will be able to close out the OTC option prior to its
expiration only by entering into a closing purchase transaction with
the dealer to which the Fund originally wrote the OTC option. While the
Fund will seek to enter into OTC options only with dealers who agree to
and who are expected to be able to be capable of entering into closing
transactions with the Fund, there can be no assurance that the Fund
will be able to liquidate an OTC option at a favorable price at any
time prior to expiration. In the event of insolvency of the other
party, the Fund may be unable to liquidate an OTC option. There is, in
general, no guarantee that closing purchase or closing sale
transactions can be effected. The Fund may not invest more than 15% of
its total assets (determined at the time of investment) in illiquid
securities, including debt securities for which there is not an
established market. The staff of the SEC has taken the position that
purchased OTC options and the assets used as "cover" for written OTC
options are illiquid securities. However, pursuant to the terms of
certain no-action letters issued by the staff, the securities used as
cover for written OTC options may be considered liquid provided that
the Fund sells OTC options only to qualified dealers who agree that the
Fund may repurchase any OTC option its writes for a maximum price to be
calculated by a predetermined formula. In such cases, the OTC option
would be considered illiquid only to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the
option.
The Fund's purchase and sale of exchange-traded options on debt
securities will be subject to the risks described above in "Options on
Equity Securities."
17. OPTIONS ON FOREIGN CURRENCIES. (International Fund only.) The Fund may
purchase and write put and call options on foreign currencies traded on
U.S. or foreign securities exchanges or boards of trade for hedging
purposes. Options on foreign currencies are similar to options on
stock, except that the option holder has the right to take or make
delivery of a specified amount of foreign currency, rather than stock.
The Fund may purchase and write options to hedge its securities
denominated in foreign currencies. If there is a decline in the dollar
value of a foreign currency in which the Fund's securities are
denominated, the dollar value of such securities will decline even
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though the foreign currency value remains the same. To hedge against
the decline of the foreign currency, the Fund may purchase put options
on such foreign currency. If the value of the foreign currency
declines, the gain realized on the put option would offset, in whole or
in part, the adverse effect such decline would have on the value of the
Fund's securities. Alternatively, the Fund may write a call option on
the foreign currency. If the foreign currency declines, the option
would not be exercised and the decline in the value of the portfolio
securities denominated in such foreign currency would be offset in part
by the premium the Fund received for the option.
If, on the other hand, the Sub-Adviser anticipates purchasing a foreign
security and also anticipates a rise in such foreign currency (thereby
increasing the cost of such security), the Fund may purchase call
options on the foreign currency. The purchase of such options could
offset, at least partially, the effects of the adverse movements of the
exchange rates. Alternatively, the Fund could write a put option on the
currency and, if the exchange rates move as anticipated, the option
would expire unexercised.
The Fund's successful use of options on foreign currencies depends upon
the Sub-Adviser's ability to predict the direction of the currency
exchange markets and political conditions, which requires different
skills and techniques than predicting changes in the securities markets
generally. For instance, if the currency being hedged has moved in a
favorable direction, the corresponding appreciation of the Fund's
securities denominated in such currency would be partially offset by
the premiums paid on the options. Furthermore, if the currency exchange
rate does not change, the Fund's net income would be less than if the
Fund had not hedged since there are costs associated with options.
The use of these options is subject to various additional risks. The
correlation between movements in the price of options and the price of
the currencies being hedged is imperfect. The use of these instruments
will hedge only the currency risks associated with investments in
foreign securities, not market risks. The Fund's ability to establish
and maintain positions will depend on market liquidity. The ability of
the Fund to close out an option depends upon a liquid secondary market.
There is no assurance that liquid secondary markets will exist for any
particular option at any particular time.
18. STOCK INDEX FUTURES CONTRACTS. (International Fund only.) The
International Fund may buy and sell for hedging purposes stock index
futures contracts traded on a commodities exchange or board of trade. A
stock index 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
specific stock index at the close of the last trading day of the
contract and the price at which the agreement is made. No physical
delivery of the underlying stocks in the index is made. When the
futures contract is entered into, each party deposits with a broker or
in a segregated custodial account approximately 5% of the contract
amount, called the "initial margin." Subsequent payments to and from
the broker, called "variation margin," will be made on a daily basis as
the price of the underlying stock index fluctuates, making the long and
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short positions in the futures contracts more or less valuable, a
process known as "marking to the market."
The Fund may sell stock index futures to hedge against a decline in the
value of equity securities it holds. The Fund may also buy stock index
futures to hedge against a rise in the value of equity securities it
intends to acquire. To the extent permitted by federal regulations, the
Fund may also engage in other types of hedging transactions in stock
index futures that are economically appropriate for the reduction of
risks inherent in the ongoing management of the Fund's equity
securities.
The Fund's successful use of stock index futures contracts depends upon
the Sub-Adviser's ability to predict the direction of the market and is
subject to various additional risks. The correlation between movement
in the price of the stock index future and the price of the
securities being hedged is imperfect and the risk from imperfect
correlation increases as the composition of the Fund's securities
portfolio diverges from the composition of the relevant index. In
addition, the ability of the Fund to close out a futures position
depends on a liquid secondary market. There is no assurance that liquid
secondary markets will exist for any particular stock index futures
contract at any particular time.
Under regulations of the Commodity Futures Trading Commission ("CFTC"),
investment companies registered under the 1940 Act are excluded from
regulation as commodity pools or commodity pool operators if their use
of futures is limited in certain specified ways. The Fund will use
futures in a manner consistent with the terms of this exclusion. Among
other requirements, no more than 5% of the Fund's assets may be
committed as initial margin on futures contracts.
19. INTEREST RATE FUTURES CONTRACTS. (International Fund only.) The
International Fund may buy and sell for hedging purposes futures
contracts on interest bearing securities (such as U.S. Treasury bonds,
U.S. Treasury notes, U.S. Treasury bills, and GNMA certificates) or
interest rate indices. Futures contracts on interest bearing securities
and interest rate indices are referred to collectively as "interest
rate futures contracts." The portfolios will engage in transactions in
only those futures contracts that are traded on a commodities exchange
or board of trade.
The Fund may sell an interest rate futures contract to hedge against a
decline in the market value of debt securities it owns. The Fund may
purchase an interest rate futures contract to hedge against an
anticipated increase in the value of debt securities it intends to
acquire. The Fund may also engage in other types of transactions in
interest rate futures contracts that are economically appropriate for
the reduction of risks inherent in the ongoing management of its
futures.
The Fund's successful use of interest rate futures contracts depends
upon the Sub-Adviser's ability to predict interest rate movements.
Further, because there are a limited number of types of interest rate
futures contracts, it is likely that the interest rate futures
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contracts available to the Fund will not exactly match the debt
securities the Fund intends to hedge or acquire. To compensate for
differences in historical volatility between securities the Fund
intends to hedge or acquire and the interest rate futures contracts
available to it, the Fund could purchase or sell futures contracts with
a greater or lesser value than the securities it wished to hedge or
intended to purchase. Interest rate futures contracts are subject to
the same risks regarding closing transactions and the CFTC limits as
described above in "Stock Index Futures Contracts."
20. FOREIGN CURRENCY FUTURES CONTRACTS. (International Fund only.) The
International Fund may buy and sell for hedging purposes futures
contracts on foreign currencies or groups of foreign currencies such as
the European Currency Unit. An European Currency Unit is a basket of
specified amounts of the currencies of certain member states of the
European Economic Community, a Western European economic cooperative
organization including France, Germany, the Netherlands and the United
Kingdom. The Fund will engage in transactions in only those futures
contracts and other options thereon that are traded on a commodities
exchange or a board of trade. See "Stock Index Futures Contracts" above
for a general description of futures contracts. The Fund intends to
engage in transactions involving futures contracts as a hedge against
changes in the value of the currencies in which they hold investments
or in which they expect to pay expenses or pay for future purchases.
The Fund may also engage in such transactions when they are
economically appropriate for the reduction of risks inherent in their
ongoing management.
The use of these futures contracts is subject to risks similar to those
involved in the use of options of foreign currencies and the use of any
futures contract. The Fund's successful use of foreign currency futures
contracts depends upon the Sub-Adviser's ability to predict the
direction of currency exchange markets and political conditions. In
addition, the correlation between movements in the price of futures
contracts and the price of currencies being hedged is imperfect, and
there is no assurance that liquid markets will exist for any particular
futures contract at any particular time. Those risks are discussed
above more fully under "Options on Foreign Currencies" and "Stock Index
Futures Contracts."
21. OPTIONS ON FUTURES CONTRACTS. (International Fund only.) The Fund may,
to the extent permitted by applicable regulations, enter into certain
transactions involving options on futures contracts. An option on a
futures contract gives the purchaser or holder the right, but not the
obligation, to assume a position in a futures contract (a long position
if the option is a call and a short position if the option is a put) at
a specified price at any time during the option exercise period. The
writer of the option is required upon exercise to assume an offsetting
futures position (a short position if the option is a call and a long
position if the option is a put). Upon exercise of the option, the
assumption of offsetting futures positions by the writer and holder of
the option will be accomplished by delivery of the accumulated balance
in the writer's futures margin account that represents the amount by
which the market price of the futures contract, an exercise, exceeds,
in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the
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<PAGE> 40
futures contract. As an alternative to exercise, the holder or writer
of an option may terminate a position by selling or purchasing an
option of the same series. There is no guarantee that such closing
transactions can be effected. The Fund intends to utilize options on
futures contracts for the same purposes that it intends to use the
underlying futures contracts.
Options on futures contracts are subject to risks similar to those
described above with respect to options and futures contracts. There is
also the risk of imperfect correlation between the option and the
underlying futures contract. If there were no liquid secondary market
for a particular option on a futures contract, the Fund might have to
exercise an option it held in order to realize any profit and might
continue to be obligated under an option it had written until the
option expired or was exercised. If the Fund were unable to close out
an option it had written on a futures contract, it would continue to be
required to maintain initial margin and make variation margin payments
with respect to the option position until the option expired or was
exercise against the Fund.
22. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. (International Fund only.)
The Fund may enter into forward foreign currency exchange contracts
("forward contracts") in several circumstances. When the Fund enters
into a contract for the purchase or sale of a security denominated in a
foreign currency, or when the Fund anticipates the receipt in a foreign
currency of dividends or interest payments on a security that it holds,
the Fund may desire to "lock-in" the U.S. dollar price of the security
or the U.S. dollar equivalent of such dividend or interest payment, as
the case may be. By entering into a forward contract for a fixed amount
of dollars, for the purchase or sale of the amount of foreign currency
involved in the underlying transactions, the Fund will be able to
protect itself against a possible loss resulting from an adverse change
in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date on which the security is
purchased or sold, or on which the dividend or interest payment is
declared, and the date on which such payments are made or received.
Additionally, when the Sub-Adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the
U.S. dollar, the Fund may enter into a forward contract for a fixed
amount of dollars, to sell the amount of foreign currency approximating
the value of some or all of the portfolio securities denominated in
such foreign currency. The precise matching of the forward contract
amounts and the value of the securities involved will not generally be
possible since the future value of securities in foreign currencies
will change as a consequence of market movements in the value of those
securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency
market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain. The Fund will not
enter into forward contracts or maintain a net exposure to such
contracts where the consummation of the contracts would obligate the
Fund to deliver an amount of foreign currency in excess of the value of
the securities or other assets denominated in that currency held by the
Fund.
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<PAGE> 41
Under normal circumstances, consideration of the prospect for currency
parities will be incorporated into the long-term investment decisions
made with regard to overall diversification strategies. However, the
Fund believes that it is important to have the flexibility to enter
into forward contracts when it is determined that the best interests of
the Fund will thereby be served. The Fund's custodian will place cash
or liquid, high-grade equity or debt securities into a segregated
account of the portfolio in an amount equal to the value of the Fund's
total assets committed to the consummation of forward foreign currency
exchange contracts. If the value of the securities placed in the
segregated account declines, additional cash or securities will be
placed in the account on a daily basis so that the value of the account
will equal the amount of the Fund's commitments with respect to such
contracts.
The Fund generally will not enter into a forward contract with a term
of greater than one year. At the maturity of a forward contract, the
Fund may either sell the portfolio security and make delivery of the
foreign currency or it may retain the security and terminate its
contractual obligation to deliver the foreign currency by purchasing an
"offsetting" contract with the same currency trader obligating it to
purchase, on the same maturity date, the same amount of the foreign
currency. However, there is no assurance that liquid markets will exist
for any particular forward contract at any particular time or that the
Fund will be able to effect a closing or "offsetting" transaction.
Forward contracts are subject to other risks described in "Special
Risks of Foreign Investments and Foreign Currency Transactions."
It is impossible to forecast with absolute precision the market value
of a particular portfolio security at the expiration of the contract.
Accordingly, it may be necessary for the Fund to purchase additional
foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount
of foreign currency that the Fund is obligated to deliver and if a
decision is made to sell the security and make delivery of the foreign
currency.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below)
to the extent that there has been movement in forward contract prices.
Should forward contract prices decline during the period between the
Fund's entering into a forward contract for the sale of a foreign
currency and the date it enters into an offsetting contract for the
purchase of the foreign currency, the Fund will realize a gain to the
extent that the price of the currency it has agreed to sell exceeds the
price of the currency it has agreed to purchase. Should forward
contract prices increase, the Fund will suffer a loss to the extent
that the price of the currency it has agreed to purchase exceeds the
price of the currency it has agreed to sell.
The Fund's dealing in forward contracts will be limited to the
transactions described above. Of course, the Fund is not required to
enter into such transactions with regard to its foreign
currency-denominated securities. It also should be realized that this
method of protecting the value of the portfolio securities against a
decline in the value of a
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<PAGE> 42
currency does not eliminate fluctuations in the underlying prices of
the securities that are unrelated to exchange rates. Additionally,
although such contracts tend to minimize the risk of loss due to a
decline in the value of the hedged currency, at the same time they tend
to limit any potential gain that might result should the value of such
currency increase.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend physically to convert its holdings of foreign
currencies into U.S. dollars on a daily basis. The Fund will do so from
time to time, incurring the costs of currency conversion. Although
foreign exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference (the "spread") between the
prices at which they are buying and selling various currencies. Thus, a
dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer.
SPECIAL RISKS OF BELOW INVESTMENT GRADE BONDS - EQUITY, INCOME AND SMALL COMPANY
FUNDS
Below investment grade bonds (commonly referred to as "high-yield" or "junk"
bonds) have certain additional risks associated with them. Yields on below
investment grade bonds will fluctuate over time. These bonds tend to reflect
short-term economic and corporate developments to a greater extent than higher
quality bonds that primarily react to fluctuations in interest rates. During an
economic downturn or period of rising interest rates, issuers of below
investment grade bonds may experience financial difficulties that adversely
affect their ability to make principal and interest payments, meet projected
business goals and obtain additional financing. In addition, issuers often rely
on cash flow to service debt. Failure to realize projected cash flows may
seriously impair the issuer's ability to service its debt load that in turn
might cause a 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 and monitoring of the issuer's progress toward its financial goals.
The liquidity and price of below investment grade bonds can be affected by a
number of factors, including investor perceptions and adverse publicity
regarding major issues, underwriters or dealers of lower-quality corporate
obligations. These effects can be particularly pronounced in a thinly-traded
market with few participants and may adversely impact the Fund's ability to
dispose of the bonds as well as make valuation of the bonds more difficult.
Because there tend to be fewer investors in below investment grade bonds, it may
be difficult for the Fund to sell these securities at an optimum time.
Consequently, these bonds may be subject to more price changes, fluctuations in
yield and risk to principal and income than higher-rated bonds of the same
maturity.
Credit ratings evaluate the likelihood that an issuer will make principal and
interest payments, but may not reflect market value risks associated with
lower-rated bonds. Credit rating agencies
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<PAGE> 43
may not timely revise ratings to reflect subsequent events affecting an issuer's
ability to pay principal and interest.
SPECIAL RISKS OF FOREIGN INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS
FOREIGN SECURITIES
Investing in foreign companies and markets involves certain considerations,
including those set forth below, that are not typically associated with
investing in U.S. securities denominated in U.S. dollars and traded in U.S.
markets. Many of the securities held by a Fund will not be registered under, nor
will the issuers thereof be subject to the reporting requirements of, U.S.
securities laws. Accordingly, there may be less publicly available information
about a foreign company than about a domestic company. Foreign companies are not
generally subject to uniform accounting and auditing and financial reporting
standards, practices and requirements comparable to those applicable to domestic
companies. Securities of some foreign companies are less liquid and more
volatile than securities of comparable domestic companies.
It is contemplated that most foreign securities will be purchased in
over-the-counter markets or stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market. Fixed commissions on foreign
stock exchanges are generally higher than negotiated commissions on U.S.
exchanges. There is generally less governmental supervision and regulation of
foreign stock exchanges, broker-dealers and issuers than in the United States.
In addition, with respect to some foreign countries, there is the possibility of
expropriation or confiscatory taxation, limitations on the removal of funds or
other assets of a Fund, political or social instability, or diplomatic
developments that could affect U.S. investments in those countries. Moreover,
individual foreign economics may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross domestic product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
CURRENCY EXCHANGE RATES
The value of the assets of a Fund as measured in U.S. dollars may be affected
favorably or unfavorably by fluctuations in currency rates and exchange control
regulations (including, but not limited to, actions by a foreign government to
devalue its currency, thereby effecting a possibly substantial reduction in the
U.S. dollar value of a Fund's investments in that country). The International
Fund is authorized to employ certain hedging techniques to minimize this risk.
However, to the extent such transactions do not fully protect the International
Fund against adverse changes in exchange rates, decreases in the value of the
currencies of the countries in which the Fund will invest will result in a
corresponding decrease in the U.S. dollar value of the Fund's assets denominated
in those currencies. Further, the International Fund may incur costs in
connection with conversions between various currencies. Foreign exchange dealers
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<PAGE> 44
(including banks) realize a profit based on the difference between the prices at
which they buy and sell various currencies. Thus, a dealer or bank normally will
offer to sell a foreign currency to the International Fund at one rate, while
offering a lesser rate of exchange should the Fund desire immediately to resell
that currency to the dealer. Moreover, fluctuations in exchange rates may
decrease or eliminate income available for distribution. For example, if certain
foreign currency losses exceed other investment company taxable income (as
defined below under "Additional Tax Information") during a taxable year, the
Fund would not be able to make ordinary dividend distributions, or distributions
made before the losses were realized would be recharacterized as a return of
capital to shareholders for federal income tax purposes, rather than as an
ordinary dividend, reducing each shareholder's basis in his International Fund
shares.
HEDGING TRANSACTIONS (INTERNATIONAL FUND ONLY)
Hedging transactions cannot eliminate all risks of loss to the International
Fund and may prevent the Fund from realizing some potential gains. The
projection of short-term foreign currency and market movements is extremely
difficult, and the successful execution of a short-term hedging strategy is
highly uncertain. Among the risks of hedging transactions are: incorrect
prediction of the movement of currency exchange rates and market movements;
imperfect correlation of currency movements in cross-hedges and indirect hedges;
imperfect correlation in the price movements of options, futures contracts and
options on future contracts with the assets on which they are based; lack of
liquid secondary markets and inability to effect closing transactions; costs
associated with effecting such transactions; inadequate disclosure and/or
regulatory controls in certain markets; counterpart default with respect to
transactions not executed on an exchange; trading restrictions imposed by
governments, or securities and commodities exchanges; and governmental actions
affecting the value or liquidity of currencies. Hedging transactions may be
effected in foreign markets or on foreign exchanges and are subject to the same
types of risks that affect foreign securities. See "Special Risks of Foreign
Investments and Foreign Currency Transactions".
Indirect hedges and cross-hedges are more speculative than other hedges because
they are not directly related to the position or transaction being hedged. With
respect to indirect hedges, movements in the proxy currency may not precisely
mirror movements in the currency in which portfolio securities are denominated.
Accordingly, the potential gain or loss on an indirect hedge may be more or less
than if the Fund had directly hedged a currency risk. Similar risks are
associated with cross-hedge transactions. In a cross-hedge, the foreign currency
in which a portfolio security is denominated is hedged against another foreign
currency, rather than the U.S. dollar. Cross-hedges may also create a greater
risk of loss than other hedging transactions because they may involve hedging a
currency risk through the U.S. dollar rather than directly to the U.S. dollar or
another currency.
In order to help reduce certain risks associated with hedging transactions, the
Board of Trustees has adopted the requirement that forward contracts, options,
futures contracts and options on futures contracts be used on the behalf of the
Fund as a hedge and not for speculation. In addition to this requirement, the
Board of Trustees has adopted the following percentage restrictions on the use
of options, futures contracts and options on futures contracts:
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<PAGE> 45
(I) The Fund will not write 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 such options are written) would exceed 25%
of the Fund's net assets.
(ii) 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 the Fund's net assets.
(iii) 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 the
Fund's net assets.
PRINCIPAL SHAREHOLDERS OF CERTAIN FUNDS
At June 30, 1996, SAFECO Insurance Company of America ("SAFECO Insurance") owned
500,000 shares of the Northwest Fund which represented 17.98% of the Fund's
outstanding shares. At June 30, 1996, SAM owned 500,000 shares of each of the
Balanced Fund and International Fund, which represented 70.78% of each Fund's
outstanding shares. At June 30, 1996, SAFECO Corporation owned 500,000 shares of
the Small Company Fund which represented 53.76% of the Fund's outstanding
shares. SAFECO Insurance and SAM are Washington corporations and wholly owned
subsidiaries of SAFECO Corporation, which has its principal place of business at
SAFECO Plaza, Seattle, Washington 98185.
ADDITIONAL TAX INFORMATION
GENERAL
Each Fund (which is treated as a separate corporation for federal income tax
purposes) intends to qualify for treatment as a "regulated investment company"
("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended
("Code"). In order to qualify for that treatment, a Fund must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income, net short-term
capital gain and net gains from certain foreign currency transactions)
("Distribution Requirement") and must meet several additional requirements. For
each Fund, these requirements include the following: (1) the Fund must derive at
least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans, and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures, or forward contracts) derived with respect to its
business of investing in securities or those currencies ("Income Requirement");
(2) the Fund must derive less than 30% of its gross income each taxable year
from the sale or other disposition of securities, or any of the following, that
were held for less than three months -- options or futures (other than those on
foreign currencies), or foreign currencies (or options, futures, or forward
contracts thereon) that are not directly related to the Fund's principal
business of investing in securities (or options and futures with respect to
securities) ("Short-Short Limitation"); and (3) at the close of each
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<PAGE> 46
quarter of the Fund's taxable year, (a) at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. Government securities,
securities of other RICs, and other securities limited, in respect of any one
issuer, to an amount that does not exceed 5% of the value of the Fund's total
assets and that does not represent more than 10% of the issuer's outstanding
voting securities, and (b) not more than 25% of the value of its total assets
may be invested in securities (other than U.S. Government securities or the
securities of other RICs) of any one issuer.
If shares of a Fund are sold at a loss after being held for six months or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for any dividend or other distribution, the shareholder will pay
full price for the shares and receive some portion of the purchase price back as
a taxable distribution.
Each Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to the
extent it fails to distribute by the end of any calendar year substantially all
of its ordinary income for that year and capital gain net income for the
one-year period ending on October 31 of that year, plus certain other amounts.
Each Fund intends to distribute annually a sufficient amount of income and
capital gains to avoid liability for the Excise Tax.
INVESTMENTS IN FOREIGN SECURITIES
For each Fund that may invest in foreign-currency-denominated securities or
engage in foreign currency transactions, or both, gains or losses (1) from the
disposition of foreign currencies, (2) on the disposition of a debt security
denominated in a foreign currency that are attributable to fluctuations in the
value of the foreign currency between the date of acquisition of the security
and the date of disposition, and (3) that are attributable to fluctuations in
exchange rates that occur between the time the Fund accrues interest, dividends,
or other receivables or accrues expenses or other liabilities denominated in a
foreign currency and the time the Fund actually collects the receivables or pays
the liabilities, generally are treated as ordinary income or loss. These gains
or losses, referred to under the Code as "section 988" gains or losses, may
increase or decrease the amount of investment company taxable income available
to a Fund for distribution to its shareholders.
The International Fund and any other Fund that invests in foreign securities may
be required to pay withholding or other taxes to a foreign government on the
income derived from those securities. If so, the taxes will reduce the Fund's
income available for distributions. Foreign tax withholding from dividends and
interest (if any) is typically set at a rate between 10% and 15% if there is a
treaty with the foreign government that addresses this issue; if no such treaty
exists, the foreign tax withholding generally would be higher. Moreover, many
foreign countries do not impose taxes on capital gains in respect of investments
by foreign investors.
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<PAGE> 47
PASSIVE FOREIGN INVESTMENT COMPANIES ("PFICS")
Certain Funds, including the International Fund, may invest in the stock of
PFICs. A PFIC is a foreign corporation that, in general, meets either of the
following tests: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, if a Fund holds stock of a
PFIC, it will b e subject to federal income tax on a portion of any "excess
distribution" received on the stock or of any gain on disposition of the stock
(collectively "PFIC income"), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent that
income is distributed to its shareholders.
If a Fund invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund" ("QEF"), then in lieu of the foregoing tax and interest
obligation, the Fund would be required to include in income each year its pro
rata share of the QEF's annual ordinary earnings and net capital gain (the
excess of net long-term capital gain over net short-term capital loss) -- which
probably would have to be distributed by the Fund to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax -- even if those earnings and
gain were not received by the Fund. In most instances it will be very difficult,
if not impossible, to make this election because of certain requirements
thereof.
Pursuant to proposed regulations, open-end RICs, such as the Funds, would be
entitled to elect to "mark-to-market" their stock in certain PFICs.
"Marking-to-market," in this context, means recognizing as gain for each taxable
year the excess, as of the end of that year, of the fair market value of any
such PFIC's stock over the adjusted basis in that stock (including
mark-to-market gain for each prior year for which an election was in effect).
THE INTERNATIONAL FUND
If more than 50% of the value of the International Fund's total assets at the
close of any taxable year consists of securities of foreign corporations, the
Fund will be eligible to, and may, file an election with the Internal Revenue
Service that will enable its shareholders, in effect, to receive the benefit of
the foreign tax credit with respect to any foreign and U.S. possessions income
taxes paid by it. Pursuant to any such election, the Fund would treat those
taxes as dividends paid to its shareholders and each shareholder would be
required to (1) include in gross income, and treat as paid by the shareholder,
the shareholder's proportionate share of those taxes, (2) treat the
shareholder's share of those taxes and of any dividend paid by the Fund that
represents income from foreign or U.S. possessions sources as the shareholder's
own income from those sources, and (3) either deduct the taxes deemed paid by
the shareholder in computing the shareholder's taxable income or, alternatively,
use the foregoing information in calculating the foreign tax credit against the
shareholder's federal income tax. The Fund will report to its shareholders
shortly after each taxable year their respective shares of the Fund's income
from
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<PAGE> 48
sources within, and taxes paid to, foreign countries and U.S. possessions if it
makes this election.
The use of hedging strategies, such as writing (selling) and purchasing options
and futures contracts and entering into forward contracts, involves complex
rules that will determine for income tax purposes the character and timing of
recognition of the gains and losses the International Fund realizes in
connection therewith. Gains from the disposition of foreign currencies (except
certain gains that may be excluded by future regulations), and gains from
options, futures, and forward contracts derived by the Fund with respect to its
business of investing in securities or foreign currencies, will qualify as
permissible income under the Income Requirement. However, income from the
disposition of options and futures contracts (other than those on foreign
currencies) will be subject to the Short-Short Limitation if they are held for
less than three months. Income from the disposition of foreign currencies, and
options, futures, and forward contracts thereon, that are not directly related
to the Fund's principal business of investing in securities (or options and
futures with respect to securities) and are held for less than three months also
will be subject to the Short-Short Limitation.
If the International Fund satisfies certain requirements, any increase in value
of a position that is part of a "designated hedge" will be offset by any
decrease in value (whether realized or not) of the offsetting hedging position
during the period of the hedge for purposes of determining whether the Fund
satisfies the Short-Short Limitation. Thus, only the net gain (if any) from the
designated hedge will be included in gross income for purposes of that
limitation. The Fund intends that, when it engages in hedging transactions, they
will qualify for this treatment, but at the present time it is not clear whether
this treatment will be available for all of the Fund's hedging transactions. To
the extent this treatment is not available, the Fund may be forced to defer the
closing out of certain options, futures, forward contracts, and foreign currency
positions beyond the time when it otherwise would be advantageous to do so, in
order for it to continue to qualify as a RIC.
Any income the International Fund earns from writing options is taxed as
short-term capital gain. If the Fund enters into a closing purchase transaction,
it will have a short-term capital gain or loss based on the difference between
the premium it received for the option it wrote and the premium it pays for the
option it buys. If an option written by the Fund expires without being
exercised, the premium it receives also will be a short-term gain. If such an
option is exercised and the Fund thus sells the securities subject to the
option, the premium the Fund receives will be added to the exercise price to
determine the gain or loss on the sale. Losses on written covered calls and
purchased puts on securities, excluding certain "qualified covered call" options
on equity securities, may be long-term capital losses, if the security covering
the option was held for more than twelve months prior to the writing of the
option. The Fund will not write so many options that it could fail to continue
to qualify as a RIC.
Certain of the International Fund's options, futures, and forward contacts,
including options and futures on currencies, will be treated as "Section 1256
contracts." Section 1256 contracts held by the Fund at the end of its taxable
year will be "marked-to-market" (that is, treated as sold for their fair market
value, with the result that unrealized gains or losses are treated as though
- 46 -
<PAGE> 49
they were realized), and those gains and losses will be recognized for tax
purposes, at that time. Any net gains or losses recognized on those deemed
sales, and gains or losses from actual closings or settlements of Section 1256
contracts, will be characterized as 60% long-term capital gain or loss and 40%
short-term capital gain or loss regardless of the Fund's holding period for the
contract. The Fund will be required to distribute any such net gains to its
shareholders even though it may not have closed the transactions and received
cash to pay the distributions.
Code section 1092 (dealing with straddles) also may affect the taxation of
options and futures contracts in which the International Fund may invest.
Section 1092 defines a "straddle" as offsetting positions with respect to
personal property; for these purposes, options and futures contracts are
personal property. Section 1092 generally provides that any loss from the
disposition of a position in a straddle may be deducted only to the extent the
loss exceeds the unrealized gain on the offsetting position(s) of the straddle.
Section 1092 also provides certain "wash sale" rules, which apply to
transactions where a position is sold at a loss and a new offsetting position is
acquired within a prescribed period, and "short sale" rules applicable to
straddles. If the Fund makes certain elections, the amount, character, and
timing of the recognition of gains and losses from the affected straddle
positions will be determined under rules that vary according to the elections
made. Because only a few of the regulations implementing the straddle rules have
been promulgated, the tax consequences of straddle transactions to the Fund are
not entirely clear.
The foregoing is only a general summary of some of the important federal income
tax considerations generally affecting the Funds. No attempt is made to present
a complete explanation of the federal tax treatment of their activities, and
this discussion is not intended as a substitute for careful tax planning.
Accordingly, potential investors are urged to consult with their own tax
advisors for more detailed information and for information regarding any state,
local or foreign taxes applicable to the Funds and to distributions therefrom.
CONVERSION OF ADVISOR CLASS B SHARES
Advisor Class B shares of a Fund will automatically convert to Advisor Class A
shares of that Fund, based on the relative net asset values per share ("NAVs")
of the Classes, as of the close of business on the first business day of the
month in which the sixth anniversary of the shareholder's purchase of such
Advisor Class B shares occurs. For the purpose of calculating the holding period
required for conversion of Advisor Class B shares, 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. Holders of
Class B shares of the former SAFECO Advisor Series Trust ("Advisor Series
Shares") who invest in Advisor Class B Shares of a Fund may calculate the
holding period from the date of the purchase of the Advisor Series Shares. For
purposes of conversion to Advisor Class A shares, Advisor Class B shares
purchased through the reinvestment of dividends and other distributions paid in
respect of Advisor Class B shares will be held in a separate sub-account; each
time any Advisor Class B shares in the shareholder's regular account (other than
those in the sub-account) convert to Advisor Class A shares, a pro rata portion
of the Advisor Class B shares in the sub-account will
- 47 -
<PAGE> 50
also convert to Advisor Class A shares. The portion will be determined by the
ratio that the shareholder's Advisor Class B shares converting to Advisor Class
A shares bears to the shareholder's total Advisor Class B shares not acquired
through dividends and other distributions.
The availability of the conversion feature will be subject to the
availability of a ruling of the Internal Revenue Service that (1) the dividends
and other distributions paid on Advisor Class A and Advisor Class B shares will
not result in "preferential dividends" under the Code and (2) the conversion of
shares does not constitute a taxable event. If the conversion feature ceased to
be available, the Advisor Class B shares of each Fund would not be converted and
would continue to be subject to the higher ongoing expenses of the Advisor Class
B shares beyond six years from the date of purchase. SAM has no reason to
believe that this condition for the availability of the conversion feature will
not continue to be met.
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.
Each Fund has selected a pricing service to assist in computing the value of its
securities. There are a number of pricing services available and the decision as
to whether, or how, a pricing service should be used by a Fund will be subject
to review by the Trust's Board of Trustees.
Short-term debt securities held by each 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 the Board of
Trustees may from time to time deem to be appropriate. The cost of those
securities that had original maturities in excess of 60 days shall be determined
by their fair market value as of the 61st day prior to maturity. All other
securities and assets in the portfolios will be appraised in accordance with
those procedures established by the Board of Trustees in good faith in computing
the fair market value of those assets.
Trading in foreign securities will generally be substantially completed each day
at various times prior to the close of the Exchange. The value of any such
securities are determined as of such times for purposes of computing the
International Fund's NAV. Foreign currency exchange rates are also generally
determined prior to the close of the Exchange. If an extraordinary event
- 48 -
<PAGE> 51
occurs after the close of an exchange on which that security is traded, the
security will be valued at fair value as determined in good faith by the
Sub-Adviser under procedures established by and under general supervision of the
Fund's Board of Trustees.
Options the International Fund may purchase 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 the International Fund will
enter into 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.
Quotations of foreign securities in a foreign currency are converted into U.S.
dollar equivalents at the current rate obtained by a recognized bank or dealer.
Forward contracts are valued at the current cost of covering or offsetting such
contracts.
ADDITIONAL PERFORMANCE INFORMATION
Effective September 30, 1996, all of the then-existing shares of each Fund were
redesignated No- Load Class shares and each Fund commenced offering Advisor
Class A and Advisor Class B shares. 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
Advisor Class Rule 12b-1 fees, which if reflected would cause the performance
figures to be lower than those indicated.
The total returns, expressed as a percentage, for the one-, five- and ten-year
periods ended September 30, 1995, for the Advisor Classes of the Growth, Equity
and Income Funds would have been as follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
<S> <C> <C> <C> <C> <C> <C>
Growth Fund 18.35% 18.93% 138.05% 147.27% 237.03% 252.91%
Equity Fund 16.12% 16.59% 151.11% 160.94% 355.54% 377.00%
Income Fund 115.60% 16.04% 92.32% 99.38% 198.06% 212.11%
</TABLE>
The total returns, expressed as a percentage, for the one-year and
since-inception (55 months) periods ended September 30, 1995, for the Advisor
Class of the Northwest Fund would have been as follows:
- 49 -
<PAGE> 52
<TABLE>
<CAPTION>
1 Year Since Initial Effective Date
(55 Months)
Advisor Advisor Advisor Advisor
Class A Class B Class A Class B
<S> <C> <C> <C> <C>
Northwest Fund 13.66% 14.01% 53.78% 59.08%
</TABLE>
The total returns, expressed as a percentage, for the one-, five- and ten-year
periods ended March 31, 1996, for the Advisor Classes of the Growth, Equity and
Income Funds would have been as follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
<S> <C> <C> <C> <C> <C> <C>
Growth Fund 23.31% 24.12% 84.21% 90.89% 196.74% 210.72%
Equity Fund 20.14% 20.80% 119.87% 128.23% 269.22% 286.61%
Income Fund 19.84% 20.49% 78.69% 85.11% 151.09% 162.92%
</TABLE>
The total returns, expressed as a percentage, for the one-year, five-year and
since-inception (61 months) periods ended March 31, 1996, for the Advisor
Classes of the Northwest Fund would have been as follows:
<TABLE>
<CAPTION>
1 Year 5 Years Since Initial Effective Date
------ ------- (61 Months)
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>
Northwest Fund 18.04% 18.60% 61.49% 67.10% 65.05% 71.89%
</TABLE>
- 50 -
<PAGE> 53
The total returns, expressed as a percentage, for the two month period from
inception to March 31, 1996 for the Advisor Classes of the Balanced,
International, and Small Company Funds would have been as follows:
<TABLE>
<CAPTION>
2 Month Period From
Inception to March 31, 1996
Advisor Advisor
Class A Class B
<S> <C> <C>
Balanced Fund -4.34% -4.83%
International Fund -4.12% -4.60%
Small Company Fund 0.18% -0.10%
</TABLE>
The total returns, expressed in dollars and assuming a $10,000 initial
investment, for the one-, five- and ten-year periods ended September 30, 1995,
for the Advisor Classes of the Growth, Equity and Income Funds would have been
as follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
<S> <C> <C> <C> <C> <C> <C>
Growth Fund $11,835 $11,893 $23,805 $24,727 $33,703 $35,291
Equity Fund $11,612 $11,659 $25,111 $26,094 $45,554 $47,700
Income Fund $11,560 $11,604 $19,232 $19,938 $29,806 $31,211
</TABLE>
The total returns, expressed in dollars and assuming a $10,000 initial
investment, for the one-year and since-inception (55 months) periods ended
September 30, 1995, for the Advisor Class of the Northwest Fund would have
been as follows:
<TABLE>
<CAPTION>
Since Initial Effective Date
1 Year (55 Months)
------ -------------------------------
Advisor Advisor Advisor Advisor
Class A Class B Class A Class B
<S> <C> <C> <C> <C>
Northwest Fund $11,366 $11,401 $15,378 $15,908
</TABLE>
- 51 -
<PAGE> 54
The total returns, expressed in dollars and assuming a $10,000 initial
investment, for the one-, five- and ten-year periods ended March 31, 1996, for
the Advisor Classes of the Growth, Equity and Income Funds would have been as
follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
<S> <C> <C> <C> <C> <C> <C>
Growth Fund $12,331 $12,412 $18,421 $19,089 $29,674 $31,072
Equity Fund $12,014 $12,080 $21,987 $22,823 $36,922 $38,661
Income Fund $11,984 $12,049 $17,869 $18,511 $25,109 $26,292
</TABLE>
The total returns, expressed in dollars and assuming a $10,000 initial
investment, for the one-year, five-year and since-inception (61 months) periods
ended March 31, 1996, for the Advisor Classes of the Northwest Fund would have
been as follows:
<TABLE>
<CAPTION>
1 Year 5 Years Since Initial Effective Date
------ ------- (61 Months)
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>
Northwest Fund $11,804 $11,860 $16,149 $16,710 $16,505 $17,189
</TABLE>
The total returns, expressed in dollars and assuming a $10,000 initial
investment, for the two month period from inception to March 31, 1996, for the
Advisor Classes of the Balanced, International and Small Company Funds would
have been as follows:
<TABLE>
<CAPTION>
2 Month Period From
Inception to March 31, 1996
Advisor Advisor
Class A Class B
<S> <C> <C>
Balanced Fund $9,566 $9,517
International Fund $9,588 $9,540
Small Company Fund $10,018 $9,990
</TABLE>
- 52 -
<PAGE> 55
The average annual total returns for the one-, five- and ten-year periods ended
September 30, 1995, for the Advisor Classes of the Growth, Equity and Income
Funds would have been as follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
<S> <C> <C> <C> <C> <C> <C>
Growth Fund 18.35% 18.93% 18.94% 19.85% 12.92% 13.44%
Equity Fund 16.12% 16.59% 20.22% 21.15% 16.37% 16.91%
Income Fund 15.60% 16.04% 13.97% 14.80% 11.54% 12.05%
</TABLE>
The average annual total returns for the one-year and since-inception (55
months) periods ended September 30, 1995, for the Advisor Class of the
Northwest Fund would have been as follows:
<TABLE>
<CAPTION>
Since Initial Effective Date
1 Year (55 Months)
------ --------------------
Advisor Advisor Advisor Advisor
Class A Class B Class A Class B
<S> <C> <C> <C> <C>
Northwest Fund 13.66% 14.01% 9.84% 10.66%
</TABLE>
The average annual total returns for the one-, five- and ten-year periods ended
March 31, 1996, for the Advisor Classes of the Growth, Equity and Income Funds
would have been as follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
<S> <C> <C> <C> <C> <C> <C>
Growth Fund 23.31% 24.12% 13.00% 13.80% 11.49% 12.01%
Equity Fund 20.14% 20.80% 17.07% 17.94% 13.95% 14.48%
Income Fund 19.84% 20.49% 12.31% 13.11% 9.64% 10.15%
</TABLE>
- 53 -
<PAGE> 56
The average annual total returns for the one-year, five year and since-inception
(61 months) periods ended March 31, 1996, for the Advisor Class of the
Northwest Fund would have been as follows:
<TABLE>
<CAPTION>
Since Initial Effective Date
1 Year 5 Years (61 Months)
------ ------- -----------
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>
Northwest Fund 18.04% 18.60% 10.06% 10.81% 10.36% 11.24%
</TABLE>
Calculations
The total return, expressed as a percentage, is computed using the following
formula:
ERV-P
T = ----- x 100
P
The total return, expressed in dollars, is computed using the following formula:
T = P(1+A)n
The average annual total return is computed using the following formula:
A = (n x/ 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 investment of $1,000 at
the end of a specified period of time
P = a hypothetical initial investment of $1,000
or $10,000 (when total return is expressed in
dollars)
In making the above calculation, all dividends and capital gain distributions
are assumed to be reinvested at the respective Fund's NAV on the reinvestment
date, and the maximum sales charge for each Class is applied.
- 54 -
<PAGE> 57
In addition to performance figures, the Funds may advertise their rankings as
calculated by independent rating services that 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 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, Mutual Fund Forecaster, Business Week, Fabian's,
Forbes, Fortune, Investor's Business Daily, Kiplinger's, Money Magazine, Mutual
Funds Magazine, Morningstar Mutual Funds, Newsweek, 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 compare its performance against the following unmanaged indices
that (unless otherwise noted in the advertisement) assume reinvestment of
dividends:
AMEX (American Stock Exchange) Major Market Index - Price weighted
(high priced issues have more influence than low-priced issues) average
of 20 Blue Chip stocks.
Dow Jones Industrial Average - Price weighted average of 30
actively-traded Blue Chip stocks.
NASDAQ Price Index - Market value weighted (impact of a component's
price change is proportionate to the overall market value of the issue)
index of approximately 3500 over-the-counter stocks.
S & P's Composite Index of 500 Stocks - Market value weighted index of
500 stocks most of which are listed on the New York Stock Exchange with
some listed on the American Stock Exchange and NASDAQ.
Wilshire 5000 Equity Index - Market value weighted index of
approximately 5000 stocks including all stocks on the New York and
American Exchanges.
Morgan Stanley Capital International EAFE Index - Market value weighted
index of approximately 1200 companies located throughout the world.
- 55 -
<PAGE> 58
Russell 2000 Index - The 2000 smallest firms in the Russell 3000 Index
which is composed of the 3000 largest companies in the United States as
measured by capitalization.
Each Fund may present in its advertisements and sales literature (I) a
biography or the credentials of its portfolio manager (including but not limited
to educational degrees, professional designations, work experience, work
responsibilities and outside interests), (ii) current facts (including but not
limited to number of employees, number of shareholders, business
characteristics) about its investment adviser (SAM) or 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.
- 56 -
<PAGE> 59
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position Held with Principal Occupation
Name and Address the Trust During Past 5 Years
- ---------------- ------------------- -------------------
<S> <C> <C>
Boh A. Dickey* Chairman and President, Chief Operating Officer
SAFECO Plaza Trustee and Director of SAFECO
Seattle, WA 98185 Corporation. Previously,
(51) Executive Vice President and Chief
Financial Officer. He has been an
executive officer of SAFECO
Corporation and its 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
(50) 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
(67) 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,
(58) Weyerhaeuser Company, Tacoma,
Washington; Director of First
SAFECO National Life Insurance
Company of New York.
</TABLE>
- 57 -
<PAGE> 60
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
<S> <C> <C>
Larry L. Pinnt Trustee Retired Vice President and Chief
1600 Bell Plaza Financial Officer of US WEST
Room 1802 Communications, Seattle,
Seattle, WA 98191 Washington; Director of Key Bank
(61) of Washington, Seattle,
Washington; Director of University
of Washington Medical Center, Seattle,
Washington; Director of First SAFECO
National Life Insurance Company
of New York; Director of Cascade
Natural Gas Corporation, Seattle,
Washington.
John W. Schneider Trustee President of Wallingford Group,
1808 N 41st St. Inc., Seattle, Washington; former
Seattle, WA 98103 President of Coast Hotels, Inc.,
(54) Seattle, Washington; Director of
First SAFECO National Life
Insurance Company of New York.
David F. Hill President and Trustee President of SAFECO Securities
SAFECO Plaza Inc. and SAFECO Services
Seattle, WA 98185 Corporation; Senior Vice President
(47) 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."
</TABLE>
- 58 -
<PAGE> 61
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
<S> <C> <C>
Ronald L. Spaulding Vice President Vice Chairman of SAFECO Asset
SAFECO Plaza Treasurer Management Company; Vice
Seattle, WA 98185 President and Treasurer of
(52) SAFECO Corporation; Director
and Vice President of SAFECO
Life Insurance Company; former
senior Portfolio Manager of
SAFECO insurance companies'
taxable bond portfolios; former
Portfolio Manager for several
SAFECO mutual funds. See Table
under "Investment Advisory and
Other Services."
</TABLE>
* Trustees who are interested persons as defined by the 1940 Act.
- 59 -
<PAGE> 62
COMPENSATION TABLE FOR THE
CURRENT TRUSTEES' FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits From
Aggregate Accrued As Estimated Registrant and
Compensation Part of Fund Annual Benefits Fund Complex
Trustee from Registrant Expenses Upon Retirement Paid
to Trustees
<S> <C> <C> <C> <C>
Boh A. Dickey $0 N/A N/A $0
Barbara J. Dingfield $3,708 N/A N/A $22,737
David F. Hill $0 N/A N/A $0
Richard W. Hubbard $3,875 N/A N/A $24,150
Richard E. Lundgren $3,708 N/A N/A $22,737
Larry L. Pinnt $3,708 N/A N/A $22,737
John W. Schneider $3,708 N/A N/A $22,737
</TABLE>
Currently, there is no pension, retirement, or other plan or any arrangement
pursuant to which Trustees or officers of the Trust are compensated by the
Trust. Each Trustee also serves as Trustee for six other registered open-end
management investment companies that have, in the aggregate, twenty-four 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 Trust as a group owned less
than 1% of the outstanding shares of each Fund.
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.
SAM has a sub-advisory Agreement with Bank of Ireland Asset Management (U.S.)
Limited. 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 is a direct, wholly owned subsidiary of Bank of Ireland Asset
Management Limited (an investment advisory firm) that is located at 26
-60 -
<PAGE> 63
Fitzwilliam Place, Dublin, Ireland. The Sub-Adviser is an indirect, wholly owned
subsidiary of Bank of Ireland (a holding company whose primary subsidiaries are
engaged in banking, insurance, securities and related financial services), which
is located at Lower Baggot Street, Dublin, Ireland.
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 Vice
Controller Controller President President
Assistant Secretary Controller Controller
Secretary Treasurer Assistant Assistant
Secretary Secretary
Treasurer Treasurer
R.L. Spaulding Vice President Vice Director Director
Treasurer Chairman
Director
S. C. Bauer President
Director
</TABLE>
Mr. Dickey is President, Chief Operating Officer, and a Director of SAFECO
Corporation, and Mr. Spaulding is Treasurer and Vice President of SAFECO
Corporation. Messrs. Dickey and Spaulding are also directors of other SAFECO
Corporation subsidiaries.
In connection with its investment advisory contract with the Trust, SAM
furnishes or pays for all facilities and services furnished or performed for or
on behalf of the Trust and each Fund that includes furnishing office facilities,
books, records and personnel to manage the Trust's and each Fund's affairs and
paying certain expenses.
The Trust Instrument of the Trust provides that it will indemnify its Trustees
and its officers against liabilities and expenses reasonably incurred in
connection with litigation in which they may be involved because of their
offices with 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
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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 are simultaneously engaged
in the purchase or sale of the same security, the prices and amounts will be
allocated in a manner considered by the officers of the Funds involved to be
equitable to each fund. In some cases, this system could have a detrimental
effect on the price or value of the security as far as a Fund is concerned. In
other cases, however, the ability of a Fund to participate in volume
transactions will produce better executions and prices for the Fund.
For the services and facilities furnished by SAM, each Fund has agreed to pay an
annual fee computed on the basis of the average market value of the net assets
of each Fund ascertained each business day and paid monthly in accordance with
the following schedules. The reduction in fees occurs only at such time as the
respective Fund's net assets reach the dollar amounts of the break points and
applies only to those assets that fall within the specified range:
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
.75 of 1%
$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
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<PAGE> 65
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%
Under the sub-advisory Agreement between SAM and the Sub-Adviser, 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%
Each Fund bears all expenses of its operations not specifically assumed by SAM.
SAM has agreed to reimburse each Fund for the amount by which a Fund's expenses
in any full fiscal year (excluding interest expense, taxes, brokerage expense
and extraordinary expenses) exceed the limits prescribed by any state in which a
Fund's shares are qualified for sale. Presently, the most restrictive expense
ratio limitation imposed by any such state is 2.5% of the first $30 million of a
Fund's average daily net assets, 2.0% of the next $70 million of such assets,
and 1.5% of the remaining net assets. For the purpose of determining whether a
Fund is entitled to reimbursement, the expenses of the Fund are calculated on a
monthly basis. If a Fund is entitled to a reimbursement, that month's advisory
fee will be reduced or postponed, with any adjustment made after the end of the
fiscal year.
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<PAGE> 66
The following table states the total amounts of compensation paid to SAM for the
past three fiscal years for the Growth, Equity and Income Funds and the three
fiscal periods for the Northwest Fund:
FISCAL YEAR OR PERIOD ENDED
<TABLE>
<CAPTION>
September 30 September 30 September 30
1995 1994 1993
------------ ------------ -------
<S> <C> <C> <C>
Growth Fund $1,107,000 $1,096,000 $1,068,000
Equity Fund $3,151,000 $1,676,000 $ 749,000
Income Fund $1,348,000 $1,363,000 $1,353,000
</TABLE>
<TABLE>
<CAPTION>
9 Month
Period Ended
September 30, 1995 September 30, 1994 September 30, 1993
------------------ ------------------ ------------------
<S> <C> <C> <C>
Northwest
Fund $269,000 $287,000 $228,000
</TABLE>
DISTRIBUTION ARRANGEMENTS. SAFECO Securities is the principal underwriter for
each Fund and acts as the distributor of the Advisor Class A and Advisor Class B
shares of each Fund under a Distribution Agreement with the Trust that requires
SAFECO Securities to use its best efforts, consistent with its other businesses,
to sell shares of the Funds. Shares of the Funds are offered continuously.
Under separate plans of distribution pertaining to the Advisor Class A and
Advisor Class B shares of each Fund adopted by the 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
the 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 it
is approved at least annually and any material amendment thereto is approved, by
the Trust's board of trustees, including those Trustees who are not "interested
persons" of the Trust and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan, acting in person
at the meeting called for that purpose, (3) payments by a Fund under the Plan
shall not be materially increased without the affirmative vote of the holders of
a majority of the outstanding voting securities of the relevant Advisor Class of
that Fund and (4) while the Plan remains in effect, the selection and nomination
of Trustees who are not "interested persons" of the Trust shall be committed to
the discretion of the Trustees who are not "interested persons" of the Trust.
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<PAGE> 67
In reporting amounts expended under the Plans to the 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, the 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 a Fund to SAFECO Securities with respect to that class, and (ii) a 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
(except the International Fund) under an agreement with the Trust. Chase
Manhattan Bank, N.A., 1211 Avenue of the Americas, New York, New York is the
custodian of the securities, cash and other assets of the International Fund.
Chase Manhattan Bank, N.A. has entered into sub-custodian agreements with
several foreign banks and clearing agencies, pursuant to which portfolio
securities purchased outside the United States are maintained in the custody of
these entities. 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
Advisor classes of each Fund under an Agreement with the Trust. SAFECO Services
provides, or through subcontracts makes provision for, all required transfer
agent activity, including maintenance of records of each Fund's Advisor Class
shareholders, records of transactions involving each Fund's Advisor Class
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 $28.00 per shareholder account, but not to exceed .30% of each Fund's
average net assets. The following table shows the fees paid by the Growth,
Equity, Income and Northwest Funds to SAFECO Services during the past three
fiscal years or periods:
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<PAGE> 68
<TABLE>
<CAPTION>
Fiscal Year or Period Ended*
September 30 September 30 September 30
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Growth Fund $ 305,000 $ 210,000 $ 169,000
Equity Fund $1,018,000 $ 370,000 $ 143,000
Income Fund $ 298,000 $ 264,000 $ 259,000
</TABLE>
<TABLE>
<CAPTION>
9 Month
Period Ended
September 30, 1995 September 30, 1994 September 30, 1993
------------------ ------------------ ------------------
<S> <C> <C> <C>
Northwest Fund $97,000 $85,000 $56,000
</TABLE>
- ------------------
* Table reflects fees of $3.10 per shareholder transaction payable pursuant to
the prior fee schedule.
BROKERAGE PRACTICES
SAM and the Sub-Adviser place orders for the purchase or sale of Fund 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
and the Sub-Adviser'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 are not paid to any broker or dealer for research services or for any
other reason. During the fiscal year ended September 30, 1995, for the Growth,
Income, Equity and Northwest Funds, 100% of each Fund's total brokerage expenses
were commissions paid to brokers providing research services. The following
table states the total amount of brokerage expense for each Fund for the past
three fiscal years for the Growth, Equity and Income Funds and for the three
fiscal periods for the Northwest Fund:
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<PAGE> 69
Year Ended
<TABLE>
<CAPTION>
September 30 September 30 September 30
1995 1994 1993
------------ ------------ --------
<S> <C> <C> <C>
Growth Fund $ 489,983 $220,350 $197,179
Equity Fund $1,082,137 $731,184 $223,474
Income Fund $ 159,717 $111,612 $106,893
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
September 30, 1995 September 30, 1994 September 30, 1993
------------------ ------------------ ------------------
<S> <C> <C> <C>
Northwest Fund $6,536 $11,409 $10,390
</TABLE>
REDEMPTION IN KIND
If the Trust concludes 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. Each Fund has elected to be governed
by Rule 18(f)(1) under the Investment Company Act of 1940, pursuant to which the
Fund must redeem shares tendered by a shareholder solely in cash up to the
lesser of $250,000 or 1% of a net asset value of a Fund during any 90-day
period. Any shares tendered by the shareholder in excess of the above-mentioned
limit may be redeemed through distribution of a Fund's assets. Any securities or
other property so distributed in kind shall be valued by the same method as is
used in computing NAV. Distributions in kind will be made in readily marketable
securities, unless the investor elects otherwise. Investors may incur brokerage
costs in disposing of securities received in such a distribution in kind.
FINANCIAL STATEMENTS
The following financial statements for the Growth, Equity, Income and
Northwest Funds and the report thereon of Ernst & Young LLP, independent
auditors, are incorporated herein by reference to the Trust's Annual Report for
the year ended September 30, 1995.
Portfolio of Investments as of September 30, 1995
Statement of Assets and Liabilities as of September 30, 1995
Statement of Operations for the Year Ended September 30, 1995
Statement of Changes in Net Assets for the Years Ended
September 30, 1995 and September 30, 1994
Notes to Financial Statements
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<PAGE> 70
The following unaudited financial statements for each Fund are incorporated
herein by reference to the Trust's Semi-Annual Report for the period ended March
31, 1996.
Portfolio of Investments as of March 31, 1996 (unaudited)
Statement of Assets and Liabilities as of March 31, 1996 (unaudited)
Statement of Operations for the Period Ended March 31, 1996 (unaudited)
Statement of Changes in Net Assets for the Period Ended March 31, 1996
(unaudited)
Notes to Financial Statements (unaudited)
A copy of the Trust's Annual and Semi-Annual Report accompanies this Statement
of Additional Information. Additional copies may be obtained by calling SAFECO
Services at 1-800-463-8791 or by writing to the address on the first page of
this Statement of Additional Information.
DESCRIPTION OF COMMERCIAL PAPER AND PREFERRED STOCK RATINGS
COMMERCIAL PAPER RATINGS
Moody's. Issuers rated Prime-1 have a superior capacity, issuers rated Prime-2
have a strong capacity and issuers rated Prime-3 have an acceptable capacity for
the repayment of short-term promissory obligations.
S&P. Commercial paper 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. Issues designated A-2 also have a strong capacity for timely payment but
not as high as A-1 issuers. Issues designated A-3 have a satisfactory capacity
for timely payment.
PREFERRED STOCK RATINGS
Generally, a preferred stock rating is an assessment of the capacity and
willingness of an issuer to pay preferred stock dividends. A preferred stock
rating differs from a bond rating since it is assigned to an equity issue which
is different from, and subordinated to, a debt issue.
Excerpts from Moody's description of its preferred stock ratings:
aaa - Top-quality preferred stock. This rating indicates good asset protection
and the least risk of dividend impairment within the universe of preferred
stocks.
aa - High-grade preferred stock. This rating indicates that there is a
reasonable assurance that earnings and asset protection will remain relatively
well maintained in the foreseeable future.
a - Upper-medium grade preferred stock. While risks are judged to be somewhat
greater than in the "aaa" and "aa" classifications, earnings and asset
protections are, nevertheless, expected to be maintained at adequate levels.
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<PAGE> 71
baa - Medium grade preferred stock, neither highly protected nor poorly secured.
Earnings and asset protection appear adequate at present but may be questionable
over any great length of time.
ba - Considered to have speculative elements and its future cannot be considered
well assured. Earnings and asset protection may be very moderate and not well
safeguarded during adverse periods. Uncertainty of position characterizes
preferred stocks in this class.
b - Generally lacks the characteristics of a desirable investment. Assurance of
dividend payments and maintenance of other terms of the issue over any long
period of time may be small.
caa - Likely to be in arrears on dividend payments. This rating designation does
not purport to indicate the future status of payments.
ca - Speculative in a high degree and is likely to be in arrears on dividends
with little likelihood of eventual payments.
c - Lowest rated class of preferred or preference stock. 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 preferred stock ratings:
AAA - The highest rating that may be assigned by S&P to a preferred stock issue
and indicates an extremely strong capacity to pay the preferred stock
obligations.
AA - Qualifies as a high-quality fixed-income security. The capacity to pay
preferred stock obligations is very strong, although not as overwhelming as for
issues rated "AAA."
A - Backed by a sound capacity to pay the preferred stock obligations, although
it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Backed by an adequate capacity to pay the preferred stock obligations.
Whereas it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to make payments for a preferred stock in this category than for issues
in the "A" category.
BB, B, CCC - Preferred stock rated "BB", "B", and "CCC" are regarded, on
balance, as predominately speculative with respect to the issuer's capacity to
pay preferred stock obligations. "BB" indicates the lowest degree of speculation
and "CCC" the highest degree of speculation. While such issues will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CC - The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
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<PAGE> 72
C - A preferred stock rated "C" is a non-paying issue.
D - A preferred stock rated "D" is a non-paying issue with issuer in default on
debt instruments.
NR indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
Plus (+) or Minus(-) To provide more detailed indications of preferred stock
quality, 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.
