<PAGE>
Registration No. 33-36700/811-6167
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
-
Pre-Effective Amendment No. / /
-------------- -
Post-Effective Amendment No. 12 /X/
-------------- -
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 13 /X/
-------------
(Check appropriate box or boxes.)
SAFECO Common Stock Trust
--------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
SAFECO Plaza, Seattle, Washington 98185
--------------------------------------------------
(Address of Principal Executive Offices) ZIP Code
Registrant's Telephone Number, including
Area Code (206) 545-5180
Name and Address of Agent for Service
-------------------------------------
DAVID F. HILL
SAFECO Plaza
Seattle, Washington 98185
Approximate Date of Proposed Public Offering: Continuous
It is proposed that this filing will become effective
immediately upon filing pursuant to paragraph (b)
---
on ________, 199_ pursuant to paragraph (b)
---
X 75 days after filing pursuant to paragraph (a)
---
on ________, 199_ pursuant to paragraph (a) of Rule 485
---
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Registrant is registering an indefinite number of its shares under the
Securities Act of 1933 by declaration made pursuant to Section 24(f) of the
Investment Company Act of 1940 (Act). Pursuant to Rule 24f-2 under the Act,
Registrant will file a Rule 24f-2 Notice on or about February 26, 1997.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
SAFECO COMMON STOCK TRUST
Contents of Registration Statement
This registration statement consists of the following papers and documents:
Cover Sheet
Contents of Registration Statement
Cross Reference Sheets
No-Load Class of:
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Income Fund
SAFECO Northwest Fund
SAFECO International Stock Fund
SAFECO Balanced Fund
SAFECO Small Company Stock Fund
SAFECO U.S. Value Fund
-------------------------------
PART A - Prospectus
Advisor Class A and Advisor Class B Shares of:
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Income Fund
SAFECO Northwest Fund
SAFECO International Stock Fund,
SAFECO Balanced Fund
SAFECO Small Company Stock Fund
SAFECO U.S. Value Fund
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal Bond Fund
SAFECO Money Market Fund
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO High-Yield Bond Fund
SAFECO Managed Bond Fund
-------------------------------------------
PART A - Prospectus
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Income Fund
SAFECO Northwest Fund
SAFECO International Fund
SAFECO Balanced Fund
SAFECO Small Company Fund
SAFECO U.S. Value Fund
-------------------------
PART B - Statement of Additional Information
Advisor Class A and Advisor Class B Shares of:
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Income Fund
SAFECO Northwest Fund
SAFECO International Stock Fund
SAFECO Balanced Fund
2
<PAGE>
SAFECO Small Company Stock Fund
SAFECO U.S. Value Fund
PART B - Statement of Additional Information
PART C - Other Information
Signature Page
Exhibits
This filing is made to update the Registration Statement of SAFECO Common
Stock Trust. No changes are hereby made to the Prospectuses and Statements
of Additional Information relating to the No-Load Class of shares of any
series of SAFECO Taxable Bond Trust, SAFECO Tax-Exempt Bond Trust, SAFECO
Money Market Trust, or SAFECO Managed Bond Trust.
3
<PAGE>
SAFECO COMMON STOCK TRUST
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Income Fund
SAFECO Northwest Fund
SAFECO International Stock Fund
SAFECO Balanced Fund
SAFECO Small Company Stock Fund
SAFECO U.S. Value Fund
No-Load Class
Form N-1A Cross Reference Sheet
Part A
------
Item No. Location in Prospectus
- -------- -----------------------
Item 1. Cover Page Cover page
Item 2. Synopsis Introduction to the
Trust and the Funds;
Expenses
Item 3. Condensed Financial Information Financial Highlights;
Performance Information
Item 4. General Description of Registrant Introduction to the
Trust and the Funds; Each Fund's
Investment Objective and Policies;
Information about Share Ownership
and Companies that Provide Services
to the Trust; Risk Factors;
Description of Stocks, Bonds and
Convertible Securities; Ratings
Supplement
Item 5. Management of the Trust Expenses; Sub-Adviser Information
for the International Fund;
Portfolio Managers; Information
about Share Ownership and Companies
that Provide Services to the Trust
4
<PAGE>
Item 6. Capital Stock and Cover Page; Share Price
Other Securities Calculation; Fund Distributions and
How They Are Taxed; Information
About Share Ownership and Companies
that Provide Services to the Trust;
Persons Controlling Certain Funds
Item 7. Purchase of Securities How to Purchase Shares;
Being Offered How to Exchange Shares From One
Fund to Another; How to
Systematically Purchase or Redeem
Shares; Telephone Transactions;
Transactions Through Registered
Investment Advisers; Share
Price Calculation; Information
about share ownership and
companies that provide services
to the Trust; Tax-Deferred
Retirement Plans; Share Price
Calculation; Account Statements
Item 8. Redemption or Repurchase How to Redeem Shares;
How to Exchange Shares
From One Fund to
Another; How to Systematically
Purchase or Redeem Shares; Account
Changes and Signature Requirements;
Account Statements; Telephone
Transactions; Transactions Through
Registered Investment Advisers
Item 9. Pending Legal Proceedings Not applicable
Part B
------
Location in Statement of
Item No. Additional Information
- -------- ------------------------
Item 10. Cover Page Cover page
5
<PAGE>
Item 11. Table of Contents Table of Contents
Item 12. General Information and History Not applicable
Item 13. Investment Objectives and Investment Policies;
Policies Investment Policies of the Growth,
Equity, Income, Northwest, Balanced,
International and Small Company
Funds; Additional Investment
Information; Special Risks of
Below Investment Grade Bonds;
Special Risks of Foreign Investment
and Foreign Currency Transactions;
Description of Commercial Paper
and Preferred Stock Ratings
Item 14. Management of the Trust Trustees and Officers
Item 15. Control Persons and Principal Principal Shareholders
Holders of Securities of Certain Funds
Item 16. Investment Advisory and Other Investment Advisory and
Services Other Services
Item 17. Brokerage Allocation and Other Brokerage Practices
Practices
Item 18. Capital Stock and Other Additional Information on
Securities Calculation of Net Asset Value Per
Share
Item 19. Purchase, Redemption and Pricing Additional Information on
of Securities Being Offered Calculation of Net Asset Value
Per Share; Redemption in Kind
Item 20. Tax Status Additional Tax Information
Item 21. Underwriters Investment Advisory and
Other Services
Item 22. Calculation of Performance Data Additional Performance
Information
Item 23. Financial Statements Financial Statements
6
<PAGE>
Part C
------
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of this Registration Statement.
SAFECO COMMON STOCK TRUST
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Income Fund
SAFECO Northwest Fund
SAFECO Balanced Fund
SAFECO International Stock Fund
SAFECO Small Company Stock Fund
SAFECO U.S. Value Fund
SAFECO TAX-EXEMPT BOND TRUST
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal Bond Fund
SAFECO MONEY MARKET TRUST
SAFECO Money Market Fund
SAFECO TAXABLE BOND TRUST
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO High-Yield Bond Fund
SAFECO MANAGED BOND TRUST
SAFECO Managed Bond Fund
Advisor Class A and Advisor Class B Shares
Form N-1A Cross Reference Sheet
Part A
------
Item No. Location in Prospectus
- -------- ----------------------
Item 1. Cover Page Cover page
Item 2. Synopsis Introduction to the Trusts and the
Funds; Expenses
Item 3. Condensed Financial Information Financial Highlights; Performance
Information
Item 4. General Description of Registrant Introduction to the Trust and the
Funds; Each Fund's Investment
Objective and Policies; Risk
Factors; Information About Share
Ownership and Companies that
Provide Services to the Trusts;
Risk Factors; Description of
Stocks, Bonds and Convertible
Securities; Ratings Supplement
7
<PAGE>
Item 5. Management of the Trust Expenses; Sub-Adviser Information
for the International Fund;
Information About Share Ownership
and Companies that Provide Services
to the Trusts; Portfolio Managers
Item 6. Capital Stock and Other Cover Page; Share Price
Securities Calculation; Information About Share
Ownership and Companies That Provide
Services to the Trusts; Fund
Distributions and How They Are
Taxed; Persons Controlling Certain
Funds
Item 7. Purchase of Securities How to Purchase Shares; How to
Being Offered Systematically Purchase or
Redeem Shares; Telephone
Transactions; Distribution Plans;
Share Price Calculation; How to
Exchange Shares from One Fund to
Another; Tax-Deferred Retirement
Plans; Transactions Through
Registered Investment Advisors;
Account Statements
Item 8. Redemption or Repurchase How to Redeem Shares; How to
Systematically Purchase or Redeem
Shares; Telephone Transactions;
Account Statements; Account
Changes and Signature
Requirements; How to Exchange
Shares from One Fund to Another;
Transactions Through Registered
Investment Advisors
Item 9. Pending Legal Proceedings Not applicable
SAFECO COMMON STOCK TRUST
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Income Fund
SAFECO Northwest Fund
SAFECO International Stock Fund
SAFECO Balanced Fund
SAFECO Small Company Stock Fund
SAFECO U.S. Value Fund
Part B
------
Location in Statement
Item No. of Additional Information
- -------- -------------------------
Item 10. Cover Page Cover page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History Not applicable
8
<PAGE>
Item 13. Investment Objectives and Investment Policies;
Policies Investment Policies of the Growth,
Equity, Income, Northwest, Balanced,
International and Small Company
Funds; Additional Investment
Information; Special Risks of
Below Investment Grade Bonds;
Special Risks of Foreign Investment
and Foreign Currency Transactions;
Description of Commercial Paper
and Preferred Stock Ratings
Item 14. Management of the Trust Trustees and Officers
Item 15. Control Persons and Principal Principal Shareholders
Holders of Securities of Certain Funds
Item 16. Investment Advisory and Other Investment Advisory and
Services Other Services
Item 17. Brokerage Allocation and Other Brokerage Practices
Practices
Item 18. Capital Stock and Other Additional Information on
Securities Calculation of Net Asset Value Per
Share
Item 19. Purchase, Redemption and Pricing Additional Information on
of Securities Being Offered Calculation of Net Asset Value
Per Share; Redemption in Kind
Item 20. Tax Status Additional Tax Information
Item 21. Underwriters Investment Advisory and
Other Services
Item 22. Calculation of Performance Data Additional Performance
Information
Item 23. Financial Statements Financial Statements
9
<PAGE>
SAFECO GROWTH FUND
SAFECO EQUITY FUND
SAFECO INCOME FUND
SAFECO NORTHWEST FUND
SAFECO INTERNATIONAL STOCK FUND
SAFECO BALANCED FUND
SAFECO SMALL COMPANY STOCK FUND
SAFECO U.S. VALUE FUND
NO-LOAD CLASS ____________, 1997
Each mutual fund named above ("Fund") is a series of the SAFECO Common Stock
Trust ("Trust"), an open-end, management investment company. The investment
objective for each Fund appears on page __.
This Prospectus sets forth the information a prospective investor should know
before investing. PLEASE READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. A
Statement of Additional Information, dated ____________, 1997 and incorporated
herein by reference, has been filed with the Securities and Exchange Commission
and is available at no charge upon request by calling one of the numbers listed
on this page. The Statement of Additional Information and other material
incorporated by reference herein are also available on the Securities and
Exchange Commission website (http://www.sec.gov). The Statement of Additional
Information contains more information about many of the topics in this
Prospectus as well as information about the trustees and officers of the Trust.
For additional assistance, please call or write:
NATIONWIDE 1-800-624-5711; SEATTLE 1-206-545-7319
DEAF AND HARD OF HEARING TTY/TDD SERVICE 1-800-438-8718
SAFECO MUTUAL FUNDS
NO-LOAD CLASS SHARES
P.O. BOX 34890
SEATTLE, WA 98124-1890
ALL TELEPHONE CALLS ARE TAPE-RECORDED
FOR YOUR PROTECTION.
- ---------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- ---------------------------------------------------------
-- 1 --
<PAGE>
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
THE U.S. GOVERNMENT OR ANY BANK, NOR ARE FUND SHARES FEDERALLY INSURED OR
OTHERWISE PROTECTED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY, AND FUND SHARES ARE SUBJECT TO INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
- ---------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST, ANY FUND, OR BY
SAFECO SECURITIES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE TRUST, ANY FUND, OR BY SAFECO SECURITIES
IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION MAY NOT LAWFULLY BE MADE.
-- 2 --
<PAGE>
SAFECO GROWTH FUND ("Growth Fund") has as its investment objective to seek
growth of capital and the increased income that ordinarily follows from such
growth. The Growth Fund ordinarily invests a preponderance of its assets in
common stock selected primarily for potential appreciation.
SAFECO EQUITY FUND ("Equity Fund") has as its investment objective to seek
long-term growth of capital and reasonable current income. The Equity Fund
invests principally in common stock selected for appreciation and/or dividend
potential and from a long-range investment standpoint.
SAFECO INCOME FUND ("Income Fund") has as its investment objective to seek high
current income and, when consistent with its objective, the long-term growth of
capital. The Income Fund invests primarily in common and preferred stock and in
convertible bonds selected for dividend potential.
SAFECO NORTHWEST FUND ("Northwest Fund") has as its investment objective to seek
long-term growth of capital through investing primarily in Northwest companies.
To pursue its objective, the Fund will invest at least 65% of its total assets
in securities issued by companies with their principal executive offices located
in Alaska, Idaho, Montana, Oregon or Washington ("Northwest").
SAFECO INTERNATIONAL STOCK FUND ("International Fund") has as its investment
objective to seek maximum long-term total return (capital appreciation and
income) by investing primarily in common stock of established non-U.S.
companies. To pursue its objective, the International Fund, under normal market
conditions, will invest at least 65% of its total assets in the securities of
companies domiciled in at least five countries, not including the United States.
SAFECO BALANCED FUND ("Balanced Fund") has as its investment objective to seek
growth and income consistent with the preservation of capital. To pursue its
objective, the Balanced Fund will invest primarily in equity and fixed income
securities.
-- 3 --
<PAGE>
SAFECO SMALL COMPANY STOCK FUND ("Small Company Fund") has as its investment
objective to seek long-term growth of capital through investing primarily in
small-sized companies. To pursue its objective, the Small Company Fund will
invest primarily in companies with total market capitalization of less than $1
billion.
SAFECO U.S. VALUE FUND ("Value Fund") has as its investment objective to seek
long-term growth of capital and income. To pursue its objective, the Value
Fund will primarily invest in common stocks selected for potential
appreciation and income using fundamental value analysis.
There is no assurance that a Fund will achieve its investment objective.
-- 4 --
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Introduction to the Trust and the Funds
Expenses
Financial Highlights
Adviser's Institutional Private Account Performance
Each Fund's Investment Objective and Policies
Risk Factors
Portfolio Managers
How to Purchase Shares
How to Redeem Shares
How to Systematically Purchase or Redeem Shares
How to Exchange Shares From One Fund to Another
Telephone Transactions
Transactions through Registered Investment Advisers
Share Price Calculation
Information about Share Ownership and Companies that Provide
Services to the Trust
Persons Controlling Certain Funds
Performance Information
Fund Distributions and How They are Taxed
Tax-Deferred Retirement Plans
Account Statements
Account Changes and Signature Requirements
Description of Stocks, Bonds and Convertible Securities
Ratings Supplement
Debt Securities Holdings
</TABLE>
-- 5 --
<PAGE>
INTRODUCTION TO THE TRUST AND THE FUNDS
The Trust is a series investment company that currently issues shares
representing seven diversified mutual funds: Growth Fund, Equity Fund, Income
Fund, Northwest Fund, International Fund, Balanced Fund, Small Company Fund,
and the Value Fund (collectively, the "Funds").
THE FUNDS
Each Fund offers multiple classes of shares. No-Load Class shares of each Fund
are offered through this prospectus.
The No-Load Class of Each Fund:
/ / Is 100% no-load; there are no initial or contingent deferred sales charges
or Rule 12b-1 fees.
/ /
Offers free exchanges as well as easy access to your money
through telephone redemptions and wire transfers.
/ /
Has a minimum initial investment requirement of $1,000 for
regular accounts, $250 for individual retirement accounts ("IRAs") and
accounts established under the Uniform Gift to Minors Act ("UGMA") or Uniform
Transfer to Minors Act ("UTMA").
RISK FACTORS
There is, of course, no assurance that a Fund will achieve its investment
objective. See "Each Fund's Investment Objective and Policies" for more
information.
There is a risk that the market value of each Fund's portfolio of securities may
decrease and result in a decrease in the value of a shareholder's investment.
Because the Northwest Fund concentrates its investments primarily in the
Northwest, it may be subject to special risks. Investors should carefully
consider the investment risks of such geographic concentration before purchasing
shares of the Northwest Fund. Because the International Fund invests primarily
in foreign securities, it is subject to various risks in addition to those
associated
-- 6 --
<PAGE>
INTRODUCTION TO THE TRUST AND THE FUNDS (CONTINUED)
with U.S. investments. For example, the value of the International Fund depends
in part upon currency values, the political and regulatory environments, and
overall economic factors in the countries in which the Fund invests. The Small
Company Fund invests in small-sized companies, which involves greater risks than
investments in larger, more established issuers and their securities can be
subject to more abrupt and erratic movements in price. See "Each Fund's
Investment Objective and Policies" for more information.
INVESTMENT ADVISER; SUB-ADVISER OF INTERNATIONAL FUND
Each Fund is managed by SAFECO Asset Management Company ("SAM"). SAM is
headquartered in Seattle, Washington and managed over $2 billion in mutual fund
assets as of December 31, 1996. SAM has been an adviser to mutual funds and
other investment portfolios since 1973 and its predecessors have been advisers
since 1932. The Bank of Ireland Asset Management (U.S.) Limited (the
"Sub-Adviser") acts as a sub-adviser to the International Fund. The Sub-Adviser
is a direct, wholly-owned subsidiary of Bank of Ireland Asset Management Limited
(an investment advisory firm), which is headquartered in Dublin, Ireland, and an
indirect, wholly-owned subsidiary of the Bank of Ireland, which is also
headquartered in Dublin, Ireland. See "Information about Share Ownership and
Companies that Provide Services to the Trust" for more information.
-- 7 --
<PAGE>
EXPENSES
A. SHAREHOLDER TRANSACTION EXPENSES FOR THE NO-LOAD CLASS OF EACH FUND
<TABLE>
<CAPTION>
SALES CHARGE
SALES CHARGE IMPOSED ON CONTINGENT
IMPOSED ON REINVESTED DEFERRED SALES REDEMPTION EXCHANGE
PURCHASES DIVIDENDS CHARGE FEES FEES
- --------------- --------------- --------------- ------------- -----------
<S> <C> <C> <C> <C>
NONE NONE NONE NONE NONE
</TABLE>
SAFECO Services Corporation ("SAFECO Services"), the transfer agent for the
Funds, charges a $10 fee to wire redemption proceeds.
B. ANNUAL OPERATING EXPENSES FOR THE NO-LOAD CLASS OF EACH FUND
(as a percentage of average net assets)
<TABLE>
<CAPTION>
TOTAL
OTHER OPERATING
FUND 12B-1 FEES + MANAGEMENT FEE + EXPENSES = EXPENSES
- ----------------- ----------- ---------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Growth None .70% .32% 1.02%
Equity None .58% .21% .79%
Income None .68% .18% .86%
Northwest None .73% .34% 1.07%
International None 1.10% 1.26% 2.36%
Balanced None .72% .60% 1.32%
Small Company None .83% .66% 1.49%
Value Fund None .75% .29% 1.04%
</TABLE>
The amounts shown are actual expenses incurred by the Growth, Equity, Income
and Northwest Funds for the fiscal period ended September 30, 1996. The
amounts shown for the International, Balanced, and Small Company Funds are
annualized expenses based on the actual expenses for the fiscal period ending
September 30, 1996. The amounts shown for the Value Fund are estimated
expenses based on the Fund's maximum management fee and estimated "Other
Expenses". The management fees paid by the International and Small Company
Funds are higher than the management fees paid by most other investment
companies. See "Information about Share Ownership and Companies that Provide
Services to the Trust" for more information.
-- 8 --
<PAGE>
EXPENSES (CONTINUED)
C. EXAMPLE OF EXPENSES
You would pay the following expenses on a $1,000 investment in No-Load Class
shares assuming a 5% annual return. The example also assumes that all dividends
and other distributions are reinvested and that the percentage amounts listed in
"Annual Operating Expenses" above remain the same in the years shown.
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Growth $ 10 $ 32 $ 56 $ 125
Equity $ 8 $ 25 $ 44 $ 98
Income $ 9 $ 27 $ 48 $ 106
Northwest $ 11 $ 34 $ 59 $ 131
International $ 24 $ 74
Balanced $ 13 $ 42
Small Company $ 15 $ 47
Value $ 11 $ 33
</TABLE>
The purpose of the table is to assist you in understanding the various costs and
expenses that an investor in the No-Load Class of each Fund would bear, directly
or indirectly. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. A FUND'S ACTUAL EXPENSES OR PERFORMANCE MAY BE GREATER OR LESS
THAN THOSE SHOWN. THE ASSUMED 5% ANNUAL RETURN IS REQUIRED BY SECURITIES AND
EXCHANGE COMMISSION REGULATIONS APPLICABLE TO ALL MUTUAL FUNDS AND IT IS NOT A
PREDICTION OF, NOR DOES IT REPRESENT, PAST OR FUTURE EXPENSES OR THE PERFORMANCE
OF ANY FUND.
-- 9 --
<PAGE>
FINANCIAL HIGHLIGHTS
The amounts shown for each Fund in the Financial Highlights tables that follow
are based upon a single share outstanding throughout the period indicated. The
following selected data for the Funds has been derived from financial statements
that have been audited by Ernst & Young LLP, independent auditors. The data
should be read in conjunction with the financial statements, related notes and
other information included in the Trust's annual report to shareholders and
incorporated by reference in the Trust's Statement of Additional Information. A
copy of the Trust's Statement of Additional Information may be obtained by
calling one of the numbers on the front page of this Prospectus.
-- 10 --
<PAGE>
FINANCIAL HIGHLIGHTS
(For a No-Load Class Share Outstanding Throughout the Period)
SAFECO GROWTH FUND
<TABLE>
<CAPTION>
FOR THE FISCAL
PERIOD FROM YEAR ENDED SEPTEMBER 30
OCTOBER 1, 1996 TO
DECEMBER 31, 1996 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------------------ -------- -------- -------- -------- -------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period -- $ 15.83 $ 17.37 $ 19.20 $ 13.98 $ 17.95 $ 11.14 $ 17.22 $ 14.95 $ 18.13 $ 15.40
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment (loss)
income -- (.02) .07 (.02) (.02) (.01) .05 .14 .53 .35 .24
Net realized and
unrealized gain (loss)
on investments -- 2.24 4.07 .78 5.39 (3.15) 7.77 (4.20) 3.17 (.99) 4.31
-------- -------- -------- -------- -------- -------- -------- -------- ------- ------- -------
Total from investment
operations -- 2.22 4.14 .76 5.37 (3.16) 7.82 (4.06) 3.70 (.64) 4.55
-------- -------- -------- -------- -------- -------- -------- -------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net
investment income -- -- (.07) -- -- -- (.05) (.14) (.53) (.48) (.23)
Distributions from
capital gains -- (2.60) (5.61) (2.59) (.15) (.81) (.96) (1.88) (.90) (2.06) (1.59)
-------- -------- -------- -------- -------- -------- -------- -------- ------- ------- -------
Total distributions -- (2.60) (5.68) (2.59) (.15) (.81) (1.01) (2.02) (1.43) (2.54) (1.82)
-------- -------- -------- -------- -------- -------- -------- -------- ------- ------- -------
Net asset value at end of
period -- $ 15.45 $ 15.83 $ 17.37 $ 19.20 $ 13.98 $ 17.95 $ 11.14 $ 17.22 $ 14.95 $ 18.13
-------- -------- -------- -------- -------- -------- -------- -------- ------- ------- -------
-------- -------- -------- -------- -------- -------- -------- -------- ------- ------- -------
Total return -- 14.16% 23.93% 3.88% 38.43% (17.83%) 70.22% (23.67%) 25.23% (1.47%) 32.68%
Net assets at end of
period (000's omitted) -- $179,574 $176,483 $156,108 $158,723 $127,897 $155,429 $ 59,164 $81,472 $74,324 $82,703
Ratio of expenses to
average net assets -- 1.02% .98% .95% .91% .91% .90% 1.01% .94% .98% .92%
Ratio of net investment
income (loss) to
average net assets -- (.14%) .34% (.12%) (.10%) (.10%) .36% .88% 3.27% 2.37% 1.46%
Portfolio turnover rate -- 124.79% 110.44% 71.18% 57.19% 85.38% 49.86% 90.48% 11.38% 19.31% 23.61%
Avg. Commission rate paid -- $ .0548 -- -- -- -- -- -- -- -- --
</TABLE>
-- 11 --
<PAGE>
FINANCIAL HIGHLIGHTS
(For a No-Load Class Share Outstanding Throughout the Period)
SAFECO EQUITY FUND
<TABLE>
<CAPTION>
FOR THE FISCAL
PERIOD FROM YEAR ENDED SEPTEMBER 30
OCTOBER 1, 1996 TO ----------------------------------------------------------------------------
DECEMBER 31, 1996 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------------------ -------- -------- -------- -------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period -- $ 15.31 $ 13.89 $ 12.54 $ 9.53 $ 10.38 $ 8.43 $ 10.10 $ 8.51 $ 12.23 $ 11.44
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income -- .28 .34 .23 .17 .15 .17 .22 .39 .18 .21
Net realized and
unrealized gain (loss)
on investments -- 2.42 2.59 1.83 3.79 (.09) 2.37 (1.28) 2.26 (1.82) 2.83
-------- -------- -------- -------- -------- ------- ------- -------- ------- ------- -------
Total from investment
operations -- 2.70 2.93 2.06 3.96 .06 2.54 (1.06) 2.65 (1.64) 3.04
LESS DISTRIBUTIONS:
Dividends from net
investment income -- (.28) (.34) (.23) (.17) (.15) (.17) (.22) (.39) (.23) (.22)
Distributions from
capital gains -- (1.88) (1.17) (.48) (.78) (.76) (.42) (.39) (.67) (1.85) (2.03)
-------- -------- -------- -------- -------- ------- ------- -------- ------- ------- -------
Total distributions -- (2.16) (1.51) (.71) (.95) (.91) (.59) (.61) (1.06) (2.08) (2.25)
-------- -------- -------- -------- -------- ------- ------- -------- ------- ------- -------
Net asset value at end of
period -- $ 15.85 $ 15.31 $ 13.89 $ 12.54 $ 9.53 $ 10.38 $ 8.43 $ 10.10 $ 8.51 $ 12.23
-------- -------- -------- -------- -------- ------- ------- -------- ------- ------- -------
-------- -------- -------- -------- -------- ------- ------- -------- ------- ------- -------
Total return -- 18.04% 21.59% 16.51% 41.77% .41% 30.39% (10.73%) 32.12% (9.93%) 31.75%
Net assets at end of
period (000's omitted) -- $725,780 $598,582 $412,805 $148,894 $74,383 $71,586 $ 51,603 $53,892 $45,625 $64,668
Ratio of expenses to
average net assets -- .79% .84% .85% .94% .96% .98% .97% .96% 1.00% .97%
Ratio of net investment
income to average net
assets -- 1.74% 2.38% 1.72% 1.50% 1.34% 1.70% 2.19% 4.13% 2.16% 1.92%
Portfolio turnover rate 74.07% 56.14% 33.33% 37.74% 39.88% 45.21% 51.01% 63.62% 88.19% 85.11%
Avg. Commission rate paid -- $ .0587 -- -- -- -- -- -- -- -- --
</TABLE>
-- 12 --
<PAGE>
FINANCIAL HIGHLIGHTS
(For a No-Load Class Share Outstanding Throughout the Period)
SAFECO INCOME FUND
<TABLE>
<CAPTION>
FOR THE FISCAL
PERIOD FROM YEAR ENDED SEPTEMBER 30
OCTOBER 1, 1996 TO --------------------------------------------------------------------------------
DECEMBER 31, 1996 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------------------ -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period -- $ 19.11 $ 17.25 $ 17.79 $ 16.27 $ 15.35 $ 12.89 $ 16.44 $ 14.32 $ 17.16 $ 15.52
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income -- .73 .82 .81 .78 .80 .81 .85 .81 .78 .78
Net realized and
unrealized gain
(loss) on investments -- 2.84 2.71 (.30) 1.52 .96 2.53 (3.39) 2.12 (1.80) 2.37
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Total from investment
operations -- 3.57 3.53 .51 2.30 1.76 3.34 (2.54) 2.93 (1.02) (3.15)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
LESS DISTRIBUTIONS:
Dividends from net
investment income -- (.73) (.82) (.81) (.78) (.80) (.83) (.83) (.81) (.98) (.78)
Distributions from
capital gains -- (1.92) (.85) (.24) -- (.04) (.05) (.18) -- (.84) (.73)#
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Total distributions -- (2.65) (1.67) (1.05) (.78) (.84) (.88) (1.01) (.81) (1.82) (1.51)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Net asset value at
end of period -- $ 20.03 $ 19.11 $ 17.25 $ 17.79 $ 16.27 $ 15.35 $ 12.89 $ 16.44 $ 14.32 $17.16%
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Total return -- 18.98% 21.04% 2.98% 14.35% 11.75% 26.43% (16.06%) 21.00% (4.61%) 21.41%
Net assets at end of
period (000's omitted) -- $260,023 $217,870 $190,610 $203,019 $181,582 $181,265 $170,153 $232,812 $231,724 $13,308
Ratio of expenses
to average net assets -- .86% .87% .86% .90% .90% .93% .92% .92% .97% .94%
Ratio of net investment
income to average
net assets -- 3.56% 4.55% 4.59% 4.55% 5.06% 5.58% 5.59% 5.28% 5.58% 4.53%
Portfolio turnover rate -- 50.11% 31.12% 19.30% 20.74% 20.35% 22.25% 19.37% 16.38% 34.13% 33.08%
Avg. Commission
rate paid -- $ .0591 -- -- -- -- -- -- -- -- --
</TABLE>
# Distributions include $.04 of additional gain arising from investment
transactions of securities acquired in a nontaxable exchange.
-- 13 --
<PAGE>
FINANCIAL HIGHLIGHTS
(For a No-Load Class Share Outstanding Throughout the Period)
SAFECO NORTHWEST FUND
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
FEBRUARY 7,
FOR THE NINE 1991 (INITIAL
FOR THE FISCAL MONTH PERIOD PUBLIC
PERIOD FROM YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED OFFERING) TO
OCTOBER 1, 1996 TO SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
DECEMBER 31, 1996 1996 1995 1994 1993 1992 1991
------------------ ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of
period -- $ 14.41 $ 12.59 $ 12.34 $ 12.59 $ 11.37 $ 10.06
INCOME FROM
INVESTMENT
OPERATIONS:
Net investment
income -- .02 .04 .04 .02 .06 .13
Net realized and
unrealized gain
(loss) on
investments -- 1.32 2.35 .59 (.25) 1.53 1.44
------------- ------------- ------------- ------------- ------------- ------------- -------------
Total from
investment
operations -- 1.34 2.39 .63 (.23) 1.59 1.57
------------- ------------- ------------- ------------- ------------- ------------- -------------
LESS
DISTRIBUTIONS:
Dividends from net
investment income -- (.02) (.04) (.04) (.02) (.06) (.19)
Distributions from
capital gains -- (1.95) (.53) (.34) -- (.31) (.07)
------------- ------------- ------------- ------------- ------------- ------------- -------------
Total
distributions -- (1.97) (.57) (.38) (.02) (.37) (.26)
------------- ------------- ------------- ------------- ------------- ------------- -------------
Net asset value at
end of period -- $ 13.78 $ 14.41 $ 12.59 $ 12.34 $ 12.59 $ 11.37
------------- ------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- ------------- -------------
Total return -- 9.61% 19.01% 5.19% (1.86%)+ 14.08% 14.93%+
Net assets at end
of period (000's
omitted) -- $ 43,128 $ 40,140 $ 36,383 $ 39,631 $ 40,402 $ 26,434
Ratio of expenses
to average net
assets -- 1.07% 1.09% 1.06% 1.11%++ 1.11% 1.27%++
Ratio of net
investment income
to average net
assets -- .11% .31% .33% .18%++ .55% 1.14%++
Portfolio turnover
rate -- 35.69% 19.59% 18.46% 14.05%++ 33.34% 27.71%++
Avg. Commission
rate paid -- $ .0591 -- -- -- -- --
</TABLE>
+ Not Annualized
++Annualized
-- 14 --
<PAGE>
FINANCIAL HIGHLIGHTS
(For a No-Load Class Share Outstanding Throughout the Period)
SAFECO INTERNATIONAL FUND,
BALANCED FUND AND
SMALL COMPANY FUND
<TABLE>
<CAPTION>
FOR THE PERIOD FROM JANUARY 31, 1996
FOR THE FISCAL PERIOD FROM OCTOBER 1, 1996 (INITIAL PUBLIC OFFERING) TO
TO DECEMBER 31, 1996 SEPTEMBER 30, 1996
------------------------------------------- -------------------------------------------
SAFECO SAFECO SAFECO SAFECO
INTERNATIONAL SAFECO SMALL COMPANY INTERNATIONAL SAFECO SMALL COMPANY
FUND BALANCED FUND FUND FUND BALANCED FUND FUND
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period -- -- -- $ 10.00 $ 10.00 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income -- -- -- .06 .21 (.01)
Net realized and unrealized gain (loss)
on investment and foreign currency
transactions -- -- -- .39 .39 2.19
----------- ----------- -----------
Total from investment operations -- -- -- .45 .60 2.18
----------- ----------- -----------
LESS DISTRIBUTIONS:
Dividends from net investment income -- -- -- (.06) (.21) --
Distributions from realized gains -- -- -- -- (.01) (.67)
----------- ----------- -----------
Total distributions -- -- -- (.06) (.22) (.67)
----------- ----------- -----------
Net asset value at end of period -- -- -- $ 10.39 $ 10.38 $ 11.51
----------- ----------- -----------
----------- ----------- -----------
Total return -- -- -- 4.54%+ 5.99%+ 21.83%+
Net assets at end of period
(000's omitted) -- -- -- $ 8,323 $ 7,632 $ 12,552
Ratio of expenses to average net assets -- -- -- 2.36%++ 1.32%++ 1.49%++
Ratio of net investment income (loss)
to average net assets -- -- -- .93%++ 3.21%++ (.24%)++
Portfolio turnover rate -- -- -- 15.73%++ 143.87%++ 91.03%++
Average commission rate paid -- -- -- $ .0225 $ .0560 $ .0510
</TABLE>
+ Not Annualized.
++ Annualized.
The information listed above is based on an eight month operating history and
may not be indicative of longer-term results. More information about the Funds
is contained in their Annual Report to shareholders, which may be obtained
without charge by calling one of the numbers on the first page of this
Prospectus.
-- 15 --
<PAGE>
ADVISER'S INSTITUTIONAL PRIVATE ACCOUNT PERFORMANCE
The Value Fund's adviser, SAFECO Asset Management Company ("SAM")has been
managing institutional private accounts ("SAFECO Composite") since 1979. The
SAFECO Composite had investment objectives, policies, strategies and risks
substantially similar to those of the Value Fund. The data is provided to
illustrate the past performance of the Investment Adviser in managing
substantially similar accounts as measured against the S&P 500 Index and does
not represent the performance of the Value Fund. Investors should not
consider this performance data as an indication of future performance of the
Value Fund or of SAM.
CALENDAR YEAR TOTAL RETURN FOR THE PERIODS ENDED DECEMBER 31, 1996
SAFECO S&P 500
YEAR COMPOSITE INDEX(1)
----------------------------------------------------
1987 0.51% 5.17%
1988 19.12% 16.50%
1989 19.72% 31.43%
1990 (4.25%) (3.19%)
1991 28.85% 30.55%
1992 13.16% 7.68%
1993 10.83% 10.00%
1994 3.58% 1.33%
1995 37.24% 37.50%
1996 25.43% 23.25%
- -------------
(1) The S&P 500 Index is an unmanaged index containing common
stocks of 500 industrial, transportation, utility and financial companies,
regarded as generally representative of the U.S. stock market. The Index
reflects the reinvestment of income dividends and capital gain distributions,
if any, but does not reflect fees, brokerage commissions, or other expenses
of investing.
AVERAGE ANNUAL TOTAL RETURN FOR
ONE, FIVE AND TEN YEAR PERIODS ENDING DECEMBER 31, 1996
SAFECO S&P 500
COMPOSITE INDEX
--------- --------
Last One Year 25.43% 23.25%
Last Five Years 17.46% 15.26%
Last Ten Years 14.74% 15.26%
The performance data for the SAFECO Composite shown above was calculated in
accordance with recommended standards of the Association for Investment
Management and Research ("AIMR"), retroactively applied to all time periods.
All returns presented were calculated on a total return basis and reflect the
reinvestment of capital gains, dividends and interest. The gross performance of
the SAFECO Composite is shown after reduction by the Value Fund's maximum
management fee and "other expenses" for the fiscal period ended December 31,
1996 (1.04% per year). The returns also reflect the deduction of brokerage
commissions and transaction costs paid by the institutional private accounts.
Custodial fees, if any, were not included in the calculation. The SAFECO
Composite's returns are asset-weighted using beginning-of-period market
values adjusted for cash flows.
The Value Fund's expenses, timing of purchases and sales of portfolio
securities, availability of cash flows, and brokerage commissions are all
reasons that might cause the performance of the Value Fund to vary from that
of the SAFECO Composite. In addition, the institutional private accounts are
not subject to the diversification requirements, specific tax restrictions
and investment limitations imposed on the Value Fund by the Investment
Company Act or Subchapter M of the Internal Revenue Code. Consequently, the
performance results for the SAFECO Composite could have been adversely
affected if the institutional private accounts included in the composite had
been regulated as investment companies under the federal securities laws.
Investment results of SAFECO Composite are unaudited and are not intended to
predict or suggest the returns that might be experienced by the Value Fund or
an investor investing in the SAFECO Composite. Investors should also be
aware that the use of a methodology different from that used above to
calculate the SAFECO Composite's performance could result in different
performance data.
S&P500 Index is used for comparison purposes only. The S&P500 Index is an
unmanaged index of representative international stocks that has no management
or expense charges. Performance is based on historical earnings and is not
intended to indicate future performance of the SAFECO Composite or the Value
Fund.
- ---------------------------------------------------------------
SUB-ADVISER INFORMATION FOR THE INTERNATIONAL FUND
- ---------------------------------------------------------------
The International Fund's sub-adviser, Bank of Ireland Asset Management (U.S.)
Limited ("BIAM") has been managing separate accounts for institutional
clients in the United States for seven years. BIAM's past performance in
advising these accounts was a key factor in its selection as the Fund's
sub-adviser. The performance illustrated in the table that follows is based
on the return achieved on BIAM's fully discretionary international equity
composite of accounts ("Composite") consisting of 46 accounts totaling
approximately $7 billion which comprised approximately 92.5% of BIAM's assets
under management as of December 31, 1996. These accounts had investment
objectives, policies, strategies and risks substantially similar to those of
the International Fund.
FOR THE PERIODS ENDED DECEMBER 31, 1996
<TABLE>
PERIOD
BEGINNING
JANUARY 31,
1996, ENDING
DECEMBER THREE FOUR
31, 1996 ONE YEAR TWO YEARS YEARS YEARS FIVE YEARS SIX YEARS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
International Fund 14.23% -- -- -- -- -- --
BIAM Composite 17.62% 21.79% 20.08% 9.96% 16.98% 15.81% 14.98%
Morgan Stanley
Europe, Australia and
Far East Index
("EAFE Index") 5.90% 6.36% 8.93% 8.64% 14.26% 8.48% 9.14%
</TABLE>
The gross performance of the Composite is shown after reduction by the
International Fund's weighted average expenses (2.09%) of the two fiscal
periods ending September 30, 1996 and December 31, 1996. The data is provided
to illustrate the past performance of the Investment Adviser in managing
substantially similar accounts as measured against specified market indices
and does not represent the performance of the International Fund. Investors
should not consider this performance data as an indication of future
performance of the International Fund or of BIAM.
All returns presented were calculated on a total return basis and reflect the
reinvestment of capital gains, dividends and interest. The Composite's
returns are asset-weighted using beginning-of-period market values adjusted
for cash flows.
The institutional private accounts are not subject to the diversification
requirements, specific tax restrictions and investment limitations imposed on
the International Fund by the Investment Company Act or Subchapter M of the
Internal Revenue Code. Consequently, the performance results for the BIAM
composite could have been adversely affected if the institutional private
accounts included in the composite had been regulated as investment companies
under the federal securities laws. In addition, the performance of the
Composite does not reflect the sales charges imposed on certain purchases or
redemptions of the International Fund's Class A and Class B shares.
The investment results of BIAM's composite are unaudited and are not intended
to preduct or suggest the returns that might be experienced by the
International Fund or an individual investor investing in such Portfolios.
Investors should also be aware that the use of a methodology different from
that used below to calculate performance could result in different
performance data.
The EAFE Index is used for comparison purposes only. The EAFE Index is an
unmanaged index of representative international stocks that has no management
or expense charges. Performance is based on historical earnings and is not
intended to indicate future performance of the Composite or the International
Fund.
EACH FUND'S INVESTMENT
OBJECTIVE AND POLICIES
The investment objective and investment policies for each Fund are described
below. The Trust's Board of Trustees may change a Fund's objective without
shareholder vote, but no such change will be made without 30 days' prior written
notice to shareholders of that Fund. In the event a Fund changes its investment
objective, the new objective may not meet the investment needs of every
shareholder and may be different from the objective a shareholder considered
appropriate at the time of initial investment.
Each Fund has adopted a number of investment restrictions. If a Fund satisfies a
percentage limitation at the time of investment, a later increase or decrease in
values, assets or other circumstances will not be considered in determining
whether a Fund complies with the applicable policy (except to the extent the
change may impact a Fund's borrowing limits). Unless otherwise stated, the
investment policies and limitations described below under each Fund's
description and "Common Investment Practices" are non-fundamental and may be
changed without a shareholder vote.
GROWTH FUND
The Growth Fund has as its investment objective to seek growth of capital and
the increased income that ordinarily follows from such growth. The Growth Fund
ordinarily invests a preponderance of its assets in common stock selected
primarily for potential appreciation. Such investments may cause its share price
to be more volatile than the Equity and Income Funds.
To pursue its investment objective, the Growth Fund:
1. WILL INVEST A PREPONDERANCE OF ITS ASSETS IN COMMON STOCKS
SELECTED PRIMARILY FOR POTENTIAL APPRECIATION. To determine those common
stocks which have the potential for long-term growth, SAM will evaluate the
issuer's financial strength, quality of management and earnings power.
-- 16 --
<PAGE>
EACH FUND'S INVESTMENT
OBJECTIVE AND POLICIES (CONTINUED)
2. MAY INVEST IN SECURITIES CONVERTIBLE INTO COMMON STOCK
(INCLUDING CORPORATE BONDS AND PREFERRED STOCK THAT CONVERT TO COMMON STOCK,
EITHER AUTOMATICALLY AFTER A SPECIFIED PERIOD OF TIME OR AT THE OPTION OF THE
ISSUER). The Fund will purchase convertible securities if such securities
offer a higher yield than an issuer's common stock and provide reasonable
potential for capital appreciation.
3. MAY INVEST UP TO 5% OF NET ASSETS IN CONTINGENT VALUE
RIGHTS. A contingent value right is a right issued by a corporation that
takes on a preestablished value if the underlying common stock does not
attain a target price by a specified date.
For a brief description of common stocks, preferred stocks, convertible
securities, and bonds and other debt securities, see "Description of Stocks,
Bonds and Convertible Securities" on page 60.
EQUITY FUND
The Equity Fund has as its investment objective to seek long-term growth of
capital and reasonable current income. The Equity Fund invests principally in
common stock selected for appreciation and/or dividend potential and from a
long-range investment standpoint. The Equity Fund does not seek to achieve both
growth and income with every portfolio security investment. Rather, it attempts
to achieve a reasonable balance between growth and income on an overall basis.
To pursue its investment objective, the Equity Fund:
1. WILL INVEST, DURING NORMAL MARKET CONDITIONS, AT LEAST 65%
OF ITS TOTAL ASSETS IN EQUITY SECURITIES (WHICH INCLUDE COMMON STOCKS AND
PREFERRED STOCKS). The Fund will invest principally in common stocks selected
by SAM primarily for appreciation and/or dividend potential and from a
long-range investment standpoint.
-- 17 --
<PAGE>
EACH FUND'S INVESTMENT
OBJECTIVE AND POLICIES (CONTINUED)
2. MAY INVEST IN SECURITIES CONVERTIBLE INTO COMMON STOCK
(INCLUDING CORPORATE BONDS AND PREFERRED STOCK THAT CONVERT TO COMMON STOCK,
WHETHER AUTOMATICALLY AFTER A SPECIFIED PERIOD OF TIME OR AT THE OPTION OF
THE ISSUER), EXCEPT THAT LESS THAN 35% OF ITS NET ASSETS WILL BE INVESTED IN
SUCH SECURITIES. The Equity Fund may invest in convertible corporate bonds
that are rated below investment grade (commonly referred to as "high-yield"
or "junk" bonds) or in comparable, unrated bonds, but less than 35% of the
Equity Fund's net assets will be invested in such securities. The Equity Fund
will not purchase a bond rated below Ca by Moody's Investors Service, Inc.
("Moody's") or CC by Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies ("S&P") or which is in default on the payment of
principal and interest. Bonds rated Ca or CC are highly speculative and have
large uncertainties or major risk exposures. See "Risk Factors" on page 31
for more information.
For a brief description of common stocks, preferred stocks, convertible
securities, and bonds and other debt securities, see "Description of Stocks,
Bonds and Convertible Securities" on page 60. For a description of debt
securities ratings, see the "Ratings Supplement" on page 61.
INCOME FUND
The Income Fund has as its investment objective to seek high current income and,
when consistent with its objective, the long-term growth of capital. The Fund
currently intends to place greatest emphasis on holding common stock,
convertible corporate bonds and convertible preferred stock. SAM will select
securities primarily for current income, but also with a view toward capital
growth when this can be accomplished without conflicting with the Fund's
investment objective.
-- 18 --
<PAGE>
EACH FUND'S INVESTMENT
OBJECTIVE AND POLICIES (CONTINUED)
To pursue its investment objective, the Income Fund:
1. WILL INVEST PRIMARILY IN COMMON STOCK AND ALSO IN
CONVERTIBLE AND NON-CONVERTIBLE CORPORATE BONDS AND PREFERRED STOCK
(INCLUDING CORPORATE BONDS AND PREFERRED STOCK THAT CONVERT TO COMMON STOCK
EITHER AUTOMATICALLY AFTER A SPECIFIED PERIOD OF TIME OR AT THE OPTION OF THE
ISSUER).
The Fund will purchase convertible securities if such securities offer a
higher yield than an issuer's common stock and provide reasonable potential
for capital appreciation. The Income Fund may invest in convertible corporate
bonds that are rated below investment grade (commonly referred to as
"high-yield" or "junk" bonds) or in comparable, unrated bonds, but less than
35% of the Income Fund's net assets will be invested in such securities.
Bonds rated Ca by Moody's or CC by S&P are highly speculative and have large
uncertainties or major risk exposures. See "Risk Factors" on page 31 for more
information.
2. MAY INVEST UP TO 10% OF TOTAL ASSETS IN EURODOLLAR BONDS
WHICH ARE ISSUED BY U.S. ISSUERS. Eurodollar bonds are traded in the European
bond market and are denominated in U.S. dollars. The Fund will purchase
Eurodollar bonds through U.S. securities dealers and hold such bonds in the
United States. The delivery of Eurodollar bonds to the Fund's custodian in
the United States may cause slight delays in settlement which are not
anticipated to affect the Fund in any material, adverse manner.
For a brief description of common stocks, preferred stocks, convertible
securities, and bonds and other debt securities, see "Description of Stocks,
Bonds and Convertible Securities" on page 60. For a description of debt
securities ratings, see the "Ratings Supplement" on page 61.
-- 19 --
<PAGE>
EACH FUND'S INVESTMENT
OBJECTIVE AND POLICIES (CONTINUED)
NORTHWEST FUND
The Northwest Fund has as its investment objective to seek long-term growth of
capital through investing primarily in Northwest companies. To pursue its
objective, the Fund will invest at least 65% of its total assets in securities
issued by companies with their principal executive offices located in Alaska,
Idaho, Montana, Oregon or Washington.
To pursue its investment objective, the Northwest Fund:
1. WILL ORDINARILY INVEST ITS ASSETS IN SHARES OF COMMON STOCKS
AND PREFERRED STOCKS OF COMPANIES LOCATED IN THE NORTHWEST SELECTED PRIMARILY
FOR POTENTIAL LONG-TERM APPRECIATION. To determine those common and preferred
stocks which have the potential for long-term growth, SAM will evaluate the
issuer's financial strength, quality of management and earnings power. The
Fund generally invests a portion of its assets in smaller companies. See
"Risk Factors" for more information about the risks of investing primarily in
companies located in the Northwest.
2. MAY OCCASIONALLY INVEST IN SECURITIES CONVERTIBLE INTO
COMMON STOCK WHEN, IN THE OPINION OF SAM, THE EXPECTED TOTAL RETURN OF A
CONVERTIBLE SECURITY EXCEEDS THE EXPECTED TOTAL RETURN OF COMMON STOCK
ELIGIBLE FOR PURCHASE BY THE FUND. The Fund may purchase corporate bonds and
preferred stock that convert to common stock either automatically after a
specified period of time or at the option of the issuer. The Fund will
purchase those convertible securities which, in SAM's opinion, have
underlying common stock with potential for long-term growth. The Fund will
purchase convertible securities which are investment grade, I.E., rated in
the top four categories by either S&P or Moody's.
-- 20 --
<PAGE>
EACH FUND'S INVESTMENT
OBJECTIVE AND POLICIES (CONTINUED)
See "Risk Factors" for more information about the risks inherent in
geographic concentration. For a brief description of common stocks, preferred
stocks, convertible securities, and bonds and other debt securities, see
"Description of Stocks, Bonds and Convertible Securities" on page 60. For a
description of debt securities ratings, see the "Ratings Supplement" on page
61.
INTERNATIONAL FUND
The investment objective of the International Fund is to seek maximum long-term
total return (capital appreciation and income) by investing primarily in common
stock of established non-U.S. companies. To pursue its objective, the
International Fund, under normal market conditions, will invest at least 65% of
its total assets in the securities of companies domiciled in at least five
countries, not including the United States.
To pursue its investment objective, the International Fund:
1. WILL INVEST PRIMARILY IN COMMON STOCKS OF NON-U.S.
COMPANIES. Common stock issued by foreign companies is subject to various
risks in addition to those associated with U.S. investments. For example, the
value of the common stock depends in part upon currency values, the political
and regulatory environments, and overall economic factors in the countries in
which the common stock is issued.
2. MAY INVEST IN PREFERRED STOCKS AND CONVERTIBLE SECURITIES
ISSUED BY FOREIGN COMPANIES.
3. MAY INVEST IN DEBT SECURITIES ISSUED BY FOREIGN COMPANIES
AND GOVERNMENTS.The Fund will make such investments primarily for defensive
purposes, but may also do so where anticipated interest rate movements, or
other factors affecting the degree of risk inherent in a fixed income
security, are expected to change significantly so as to produce appreciation
in the security consistent with the objective of the Fund. The Fund may
purchase sovereign
-- 21 --
<PAGE>
EACH FUND'S INVESTMENT
OBJECTIVE AND POLICIES (CONTINUED)
debt instruments issued or guaranteed by foreign governments or their
agencies. Sovereign debt may be in the form of conventional securities or
other types of debt instruments such as loans or loan participations.
Governments or governmental entities responsible for repayment of the debt
may be unable or unwilling to repay principal and interest when due, and may
require renegotiation or rescheduling of debt payments. Repayment of
principal and interest may depend also upon political and economic factors.
4. MAY INVEST IN PASSIVE FOREIGN INVESTMENT COMPANIES
("PFICS"), WHICH INCLUDE FUNDS OR TRUSTS ORGANIZED AS INVESTMENT VEHICLES TO
INVEST IN COMPANIES OF CERTAIN FOREIGN COUNTRIES. Investors in PFICs bear
their proportionate share of the PFIC's management fees and other expenses.
See "Additional Tax Information" in the Trust's Statement of Additional
Information.
5. MAY PURCHASE AND SELL PUT AND CALL OPTIONS ON SECURITIES,
FINANCIAL INDICES AND FOREIGN CURRENCIES, MAY PURCHASE AND SELL THE FOLLOWING
NON-LEVERAGED DERIVATIVE SECURITIES: FUTURES CONTRACTS AND RELATED OPTIONS
WITH RESPECT TO SECURITIES, FINANCIAL INDICES AND FOREIGN CURRENCIES, AND MAY
ENTER INTO FOREIGN CURRENCY TRANSACTIONS SUCH AS FORWARD CONTRACTS. The Fund
may employ certain strategies and techniques utilizing these instruments to
mitigate its exposure to changing currency exchange rates, security prices,
interest rates and other factors that affect security values. There is no
guarantee that these strategies and techniques will work.
An option gives an owner the right to buy or sell securities at a
predetermined exercise price for a given period of time. The writer of an
option is obligated to purchase or sell (depending upon the nature of the
option) the underlying securities if the option is exercised during the
specified period of time. A futures contract is an agreement in which
-- 22 --
<PAGE>
EACH FUND'S INVESTMENT
OBJECTIVE AND POLICIES (CONTINUED)
the seller of the contract agrees to deliver to the buyer an amount of cash
equal to a specific dollar amount times the difference between the value of a
security at the close of the last trading day of the contract and the price
at which the agreement is made. A forward currency contract is an agreement
to purchase or sell a foreign currency at some future time for a fixed amount
of U.S. dollars.
The Fund, under normal conditions, will not sell a put or call option if, as
a result thereof, the aggregate value of the assets underlying all such
options (determined as of the date such options are written) would exceed 25%
of the Fund's net assets. The Fund will not purchase a put or call option or
option on a futures contract if, as a result thereof, the aggregate premiums
paid on all options or options on futures contracts held by the Fund would
exceed 20% of its net assets. In addition, the Fund will not enter into any
futures contract or option on a futures contract if, as a result thereof, the
aggregate margin deposits and premiums required on all such instruments would
exceed 5% of its net assets.
See "Risk Factors" for more information about the risks inherent in securities
issued by foreign issuers and in the purchase and sale of options, futures and
forward contracts. For a brief description of common stocks, preferred stocks,
convertible securities, and bonds and other debt securities, see "Description of
Stocks, Bonds and Convertible Securities" on page 60.
BALANCED FUND
The Balanced Fund has as its investment objective to seek growth and income
consistent with the preservation of capital. To pursue its objective, the
Balanced Fund will invest primarily in equity and fixed income securities and
will occasionally alter the mix of its equity and fixed income securities. Such
action will be taken in response to economic conditions and
-- 23 --
<PAGE>
EACH FUND'S INVESTMENT
OBJECTIVE AND POLICIES (CONTINUED)
generally in small increments. The Balanced Fund will not make significant
changes in its asset mix in an attempt to "time the market."
To pursue its investment objective, the Balanced Fund:
1. WILL ORDINARILY INVEST FROM 50% TO 70% OF ITS TOTAL ASSETS
IN EQUITY SECURITIES, WHICH INCLUDE COMMON STOCKS, PREFERRED STOCK AND
SECURITIES CONVERTIBLE INTO COMMON STOCK. The Fund will invest principally in
common stocks selected by SAM primarily for appreciation and/or dividend
potential and from a long-range investment standpoint. The Fund may purchase
corporate bonds and preferred stock that convert to common stock either
automatically after a specified period of time or at the option of the
issuer.
The Fund will purchase those convertible securities which, in SAM's opinion,
have underlying common stock with potential for long-term growth. The Fund
will purchase convertible securities which are investment grade, I.E., rated
in the top four categories by either S&P or Moody's.
2. WILL INVEST AT LEAST 25% OF ITS TOTAL ASSETS IN FIXED-INCOME
SENIOR SECURITIES. The Fund will purchase only those U.S. Government and
investment grade debt obligations or non-rated debt obligations which in
SAM's view contain the credit characteristics of investment grade debt
obligations. Investment grade obligations (rated between Aaa - Baa by Moody's
and AAA-BBB by S&P) are from high to medium quality. Medium quality
obligations possess speculative characteristics and may be more sensitive to
economic changes and changes to the financial condition of issuers.
For a brief description of common stocks, preferred stocks, convertible
securities, and bonds and other debt securities, see "Description of Stocks,
Bonds and Convertible Securities" on page 60. For a description of debt
securities ratings, see the "Ratings Supplement" on page 61.
-- 24 --
<PAGE>
EACH FUND'S INVESTMENT
OBJECTIVE AND POLICIES (CONTINUED)
SMALL COMPANY FUND
The Small Company Fund has as its investment objective to seek long-term growth
of capital through investing primarily in small-sized companies. To pursue its
objective, the Small Company Fund will invest primarily in companies with total
market capitalization of less than $1 billion.
To pursue its investment objective, the Small Company Fund:
1. WILL INVEST AT LEAST 65% OF ITS TOTAL ASSETS IN COMMON STOCK
AND PREFERRED STOCK OF SMALL-SIZED COMPANIES WITH TOTAL MARKET CAPITALIZATION
OF LESS THAN $1 BILLION. Companies whose capitalization falls outside this
range after purchase continue to be considered small-capitalized for purposes
of the 65% policy. The Fund will invest principally in common stocks selected
by SAM primarily for appreciation and/or dividend potential and from a
long-range investment standpoint. In determining those common and preferred
stocks which have the potential for long-term growth, SAM will evaluate the
issuer's financial strength, quality of management and earnings power.
Investments in small or newly formed companies involve greater risks than
investments in larger, more established issuers and their securities can be
subject to more abrupt and erratic movements in price. See "Risk Factors" for
more information about the risks inherent in securities issued by small
companies.
2. MAY INVEST IN SECURITIES CONVERTIBLE INTO COMMON STOCK
WHEN, IN SAM'S OPINION, THE EXPECTED TOTAL RETURN OF A CONVERTIBLE SECURITY
EXCEEDS THE EXPECTED TOTAL RETURN OF COMMON STOCK ELIGIBLE FOR PURCHASE BY
THE FUND. The Fund will purchase convertible securities if such securities
offer a higher yield than an issuer's common stock and provide reasonable
potential for capital appreciation. The Fund may invest in convertible
corporate bonds that are rated below investment grade (commonly referred to
as "high-yield" or "junk" bonds) or in comparable, unrated
-- 25 --
<PAGE>
EACH FUND'S INVESTMENT
OBJECTIVE AND POLICIES (CONTINUED)
bonds, but less than 35% of the Fund's net assets will be invested in such
securities. Bonds rated Ca by Moody's or CC by S&P are highly speculative and
have large uncertainties or major risk exposures. See "Risk Factors" on page
31 for more information.
See "Risk Factors" for more information about the risks inherent in small
company issuers. For a brief description of common stocks, preferred stocks,
convertible securities, and bonds and other debt securities, see "Description of
Stocks, Bonds and Convertible Securities" on page 60. For a description of debt
securities ratings, see the "Ratings Supplement" on page 61.
VALUE FUND
The Value Fund has as its investment objective to seek long-term growth of
capital and income. The Value Fund primarily invests in common stock
selected for potential appreciation and income using fundamental value
analysis.
To pursue its investment objective the, the Value Fund:
1. WILL INVEST A PREPONDERANCE OF ITS ASSETS IN COMMON STOCKS SELECTED
PRIMARILY FOR POTENTIAL APPRECIATION. To determine those common stocks
which have the potential for long-term growth, SAM will evaluate the
issuer's financial strength quality of management and earnings power.
2. MAY INVEST IN SECURITIES CONVERTIBLE INTO COMMON STOCK (INCLUDING
CORPORATE BONDS AND PREFERRED STOCK THAT CONVERT TO COMMON STOCK, EITHER
AUTOMATICALLY AFTER A SPECIFIED PERIOD OF TIME OR AT THE OPTION OF THE
ISSUER). The Fund will purchase convertible securities if such
securities offer a higher yield than an issuer's common stock and
provide reasonable potential for capital appreciation.
For a brief description of common stocks, preferred stocks, convertible
securities, and bonds and other debt securities, see Description of Stocks,
Bonds and Convertible Securities on page __.
COMMON INVESTMENT PRACTICES OF THE FUNDS
Each of the Funds may also follow the investment practices described below:
1. MAY INVEST IN BONDS AND OTHER DEBT SECURITIES.
Each Fund may invest in bonds and other debt securities that are rated
investment grade by Moody's or S&P, or unrated bonds determined by SAM to be
of comparable quality to such rated bonds. Bonds rated in the lowest category
of investment grade (Baa by Moody's and BBB by S&P) and comparable unrated
bonds have speculative characteristics and are more likely to have a weakened
capacity to make principal and interest payments under changing economic
conditions or upon deterioration in the financial condition of the issuer.
After purchase by a Fund, a corporate bond may be downgraded or, if unrated,
may cease to be comparable to a rated security. Neither event will require a
Fund to dispose of that security, but SAM will take a downgrade or loss of
comparability into account in determining whether the Fund should continue to
hold the security in its portfolio. The Equity Fund will not hold more than
3% of its total
-- 26 --
<PAGE>
EACH FUND'S INVESTMENT
OBJECTIVE AND POLICIES (CONTINUED)
assets and the Income Fund will not hold more than 1% of its total assets in
bonds that go into default on the payment of principal and interest after
purchase. In the event that 35% or more of a Fund's net assets is held in
securities rated below investment grade due to a downgrade of one or more
corporate bonds, SAM will engage in an orderly disposition of such securities
to the extent necessary to ensure that the Fund's holdings of such securities
remain below 35% of the Fund's net assets.
2. MAY INVEST IN WARRANTS. Warrants are options to buy a
stated number of shares of common stock at a specified price any time during
the life of the warrant. Generally, the value of a warrant will fluctuate by
greater percentages than the value of the underlying common stock. The
primary risk associated with a warrant is that the term of the warrant may
expire before the exercise price of the common stock has been reached. Under
these circumstances, a Fund could lose all of its principal investment in the
warrant.
3. MAY HOLD CASH OR INVEST TEMPORARILY IN HIGH QUALITY, SHORT-
TERM SECURITIES ISSUED BY AN AGENCY OR INSTRUMENTALITY OF THE U.S.
GOVERNMENT, HIGH QUALITY COMMERCIAL PAPER, CERTIFICATES OF DEPOSIT, SHARES OF
NO-LOAD, OPEN-END MONEY MARKET FUNDS (EXCEPT THE EQUITY FUND) OR REPURCHASE
AGREEMENTS. The Funds may purchase these short-term securities as a cash
management technique under those circumstances where it has cash to manage
for a short time period, for example, after receiving proceeds from the sale
of securities, dividend distributions from portfolio securities or cash from
the sale of Fund shares to investors. With respect to repurchase agreements,
each Fund will invest no more than 5% of its total assets in repurchase
agreements and will not purchase repurchase agreements that mature
-- 27 --
<PAGE>
EACH FUND'S INVESTMENT
OBJECTIVE AND POLICIES (CONTINUED)
in more than seven days. Counterparties of foreign repurchase agreements may
be less creditworthy than U.S. counterparties.
4. MAY PURCHASE SECURITIES ON A "WHEN-ISSUED" OR "DELAYED-
DELIVERY" BASIS OR PURCHASE OR SELL SECURITIES ON A "FORWARD COMMITMENT"
BASIS. Under this procedure, a Fund agrees to acquire securities that are to
be issued and delivered against payment in the future. The price, however, is
fixed at the time of commitment. When a Fund purchases when-issued or
delayed-delivery securities, its custodian bank will maintain in a temporary
holding account cash, U.S. Government securities or other high-grade debt
obligations having a value equal to or greater than such commitments. On
delivery dates for such transactions, the Fund will meet its obligations from
maturities or sales of the securities held in the temporary holding account
or from then-available cash flow. If a Fund chooses to dispose of the right
to acquire a when-issued or delayed delivery security prior to its
acquisition, it could incur a gain or loss due to market fluctuations. Use of
these techniques may affect a Fund's share price in a manner similar to
leveraging.
5. MAY INVEST IN AMERICAN DEPOSITARY RECEIPTS ("ADRS").
ADRs are registered receipts evidencing ownership of an underlying foreign
security. They typically are issued in the United States by a bank or trust
company. In addition to the risks of foreign investment applicable to the
underlying securities, ADRs may also be subject to the risks that the foreign
issuer may not be obligated to cooperate with the U.S. bank or trust company,
or that such information in the U.S. market may not be current. ADRs which
are structured without sponsorship of the issuer of the underlying foreign
security may also be subject to the risk that the foreign issuer may not
provide financial and other material information to the U.S. bank or trust
company issuer. The
-- 28 --
<PAGE>
EACH FUND'S INVESTMENT
OBJECTIVE AND POLICIES (CONTINUED)
International Fund may utilize European Depositary Receipts ("EDRs"), which
are similar instruments. EDRs may be in bearer form and are designed for use
in the European securities markets.
6. MAY INVEST UP TO 10% OF ITS TOTAL ASSETS IN FOREIGN
SECURITIES, EXCEPT THE INTERNATIONAL FUND, WHICH MAY INVEST 100% OF ITS
ASSETS IN FOREIGN SECURITIES. Foreign securities are subject to risks in
addition to those inherent in investments in domestic securities. See "Risk
Factors" on page 31 for more information about the risks associated with
investments in foreign securities.
7. MAY INVEST UP TO 10% OF ITS TOTAL ASSETS IN SHARES OF REAL
ESTATE INVESTMENT TRUSTS ("REITS"). REITs purchase real property, which is
then leased, and make mortgage investments. For federal income tax purposes,
REITs attempt to qualify for beneficial "modified pass-through" tax treatment
by annually distributing at least 95% of their taxable income. If a REIT were
unable to qualify for such tax treatment, it would be taxed as a corporation
and the distributions made to its shareholders would not be deductible by it
in computing its taxable income. REITs are dependent upon the successful
operation of properties owned and the financial condition of lessees and
mortgagors. The value of REIT units fluctuates depending on the underlying
value of the real property and mortgages owned and the amount of cash flow
(net income plus depreciation) generated and paid out. In addition, REITs
typically borrow to increase funds available for investment. Generally, there
is a greater risk associated with REITs that are highly leveraged.
8. MAY INVEST UP TO 10% OF ITS TOTAL ASSETS IN RESTRICTED
SECURITIES, PROVIDED THAT SAM HAS DETERMINED THAT SUCH SECURITIES ARE LIQUID
UNDER GUIDELINES ADOPTED BY THE TRUST'S BOARD OF TRUSTEES. Restricted
securities may be sold
-- 29 --
<PAGE>
EACH FUND'S INVESTMENT
OBJECTIVE AND POLICIES (CONTINUED)
only in offerings registered under the Securities Act of 1933, as amended
("1933 Act"), or in transactions exempt from the registration requirements
under the 1933 Act. Rule 144A under the 1933 Act provides an exemption for
the resale of certain restricted securities to qualified institutional
buyers. Investing in restricted securities may increase the Funds'
illiquidity to the extent that qualified institutional buyers or other buyers
are unwilling to purchase the securities. As a result, a Fund may not be able
to sell these securities when its investment adviser or sub-investment
adviser deems it advisable to sell, or may have to sell them at less than
fair value. In addition, market quotations are sometimes less readily
available for restricted securities. Therefore, judgment may at times play a
greater role in valuing these securities than in the case of unrestricted
securities.
9. MAY INVEST IN SECURITIES WHOSE PERFORMANCE AND PRINCIPAL
AMOUNT AT MATURITY ARE LINKED TO A SPECIFIED EQUITY SECURITY OR SECURITIES
INDEX. The value of an indexed security is determined by reference to a
specific equity instrument or statistic. The performance of indexed
securities depends largely on the performance of the securities or indices to
which they are indexed, but such securities are also subject to credit risks
associated with the issuer of the security. Indexed securities may also be
more volatile than their underlying instruments.
10.MAY INVEST UP TO 5% OF ITS TOTAL ASSETS IN SECURITIES OF
UNSEASONED ISSUERS. Unseasoned issuers are those companies which, together
with any predecessors, have been in operation for less than three years.
The following restrictions are fundamental policies of the Funds that cannot be
changed without shareholder vote.
-- 30 --
<PAGE>
EACH FUND'S INVESTMENT
OBJECTIVE AND POLICIES (CONTINUED)
1. EACH FUND, WITH RESPECT TO 75% OF THE VALUE OF ITS TOTAL
ASSETS, MAY NOT INVEST MORE THAN 5% OF ITS TOTAL ASSETS IN THE SECURITIES OF
ANY ONE ISSUER (OTHER THAN U.S. GOVERNMENT SECURITIES).
2. THE GROWTH, INCOME AND NORTHWEST FUNDS MAY NOT
PURCHASE MORE THAN 10% OF ANY CLASS OF SECURITIES OF ANY ONE ISSUER.
3. EACH FUND, WITH RESPECT TO 100% OF THE VALUE OF ITS TOTAL
ASSETS, MAY NOT PURCHASE MORE THAN 10% OF THE OUTSTANDING VOTING SECURITIES
OF ANY ONE ISSUER (OTHER THAN U.S. GOVERNMENT SECURITIES).
4. EACH FUND MAY BORROW MONEY ONLY FOR TEMPORARY OR
EMERGENCY PURPOSES, AND THE GROWTH FUND ONLY FOR EXTRAORDINARY OR EMERGENCY
PURPOSES, FROM A BANK OR AFFILIATE OF SAFECO CORPORATION AT AN INTEREST RATE
NOT GREATER THAN THAT AVAILABLE FROM COMMERCIAL BANKS. The Growth, Income and
Northwest Funds will not borrow amounts in excess of 20%, and the Equity,
Balanced, International and Small Company Funds will not borrow amounts in
excess of 33%, of total assets. A Fund will not purchase securities if
borrowings equal to or greater than 5% of total assets are outstanding for
that Fund.
For more information, see the "Investment Policies" and "Additional Investment
Information" sections of the Trust's Statement of Additional Information.
RISK FACTORS
There are market risks in all securities transactions. Various factors may cause
the value of a shareholder's investment in a Fund to fluctuate. The principal
risk factor associated with an investment in a mutual fund like any of the Funds
is that the market value of the portfolio securities may decrease, resulting in
a decrease in the value of a shareholder's investment.
-- 31 --
<PAGE>
RISK FACTORS (CONTINUED)
An investment in the Northwest Fund may be subject to different risks than a
mutual fund whose investments are more geographically diverse. Since the
Northwest Fund invests primarily in companies with their principal executive
offices located in the Northwest, the number of issuers whose securities are
eligible for purchase is significantly less than many other mutual funds. Also,
some companies whose securities are held in the Northwest Fund's portfolio may
primarily distribute products or provide services in a specific locale or in the
Northwest region. The long-term growth of these companies can be significantly
affected by business trends in and the economic health of those areas. Other
companies whose securities are held by the Northwest Fund may have a
predominately national or partially international market for their products or
services and are more likely to be impacted by national or international trends.
As a result, the performance of the Northwest Fund may be influenced by business
trends or economic conditions not only in a specific locale or in the Northwest
region but also on a national or international level, depending on the companies
whose securities are held in its portfolio at any particular time.
The Equity, Income, Small Company and Value Funds may invest in, and the
other Funds as a result of downgrades may own, below investment grade bonds.
Below investment grade bonds are speculative and involve greater investment
risks than investment grade bonds due to the issuer's reduced
creditworthiness and increased likelihood of default and bankruptcy. During
periods of economic uncertainty or change, the market prices of
below-investment grade bonds may experience increased volatility.
Below-investment grade bonds tend to reflect short-term economic and
corporate developments to a greater extent than higher quality bonds.
Because the International Fund primarily invests, and the other Funds may
invest, in foreign securities, each Fund is subject to risks in addition to
those associated with U.S. investments. Foreign investments involve sovereign
risk, which
-- 32 --
<PAGE>
RISK FACTORS (CONTINUED)
includes the possibility of adverse local political or economic developments,
expropriation or nationalization of assets, imposition of withholding taxes on
dividend or interest payments and currency blockage (which would prevent
currency from being sold). Foreign investments may be affected favorably or
unfavorably by changes in currency rates and exchange control regulations. There
is generally less publicly available information about issuers of foreign
securities as compared to U.S. issuers. Many foreign companies are not subject
to accounting, auditing and financial reporting standards and requirements
comparable to those applicable to U.S. companies. Securities of some foreign
issuers are less liquid and more volatile than securities of U.S. issuers.
Financial markets on which foreign securities trade are generally subject to
less governmental regulation as compared to U.S. markets. Foreign brokerage
commissions and custodian fees are generally higher than those in the United
States.
In addition, the International Fund may purchase and sell put and call options,
futures contracts and forward contracts. Risks inherent in the use of futures,
options and forward contracts include: the risk that interest rates, security
prices and currency markets will not move in the directions anticipated;
imperfect correlation between the price of the future, option or forward
contract and the price of the security, interest rate or currency being hedged;
the risk that potential losses may exceed the amount invested in the contracts
themselves; the possible absence of a liquid secondary market for any particular
instrument at any time; the possible need to defer closing out certain hedged
positions to avoid adverse tax consequences; and the reduction or elimination of
the opportunity to profit from increases in the value of the security, interest
rate or currency being hedged.
The Growth Fund currently has an aggressive investment approach to seeking
capital appreciation. The Growth Fund may invest a significant portion of its
assets in securities issued by smaller companies. In addition, the Small Company
-- 33 --
<PAGE>
RISK FACTORS (CONTINUED)
Fund invests in companies with small market capitalizations which involve more
risks than investments in larger companies. Such companies may include newly
formed companies which have limited product lines, markets or financial
resources and may lack management depth. The securities of small or newly formed
companies may have limited marketability and may be subject to more abrupt and
erratic movements in price than securities of larger, more established
companies, or equity securities in general. Such volatility in price may in turn
cause the Growth Fund's and Small Company Fund's share prices to be volatile.
PORTFOLIO MANAGERS
GROWTH FUND
The portfolio manager for the Growth Fund is Thomas M. Maguire, Vice President,
SAM. Mr. Maguire has served as portfolio manager for the Fund since 1989.
EQUITY FUND
The portfolio manager for the Equity Fund is Richard D. Meagley, Vice President,
SAM. Mr. Meagley began serving as portfolio manager for the Fund in 1995. He is
also the portfolio manager for certain other SAFECO Funds. Prior to these
positions, he served as portfolio manager and analyst from 1992 to 1994 for
Kennedy Associates, Inc., an investment advisory firm located in Seattle,
Washington. He was an Assistant Vice President of SAM and the fund manager of
the SAFECO Northwest Fund from 1991 to 1992.
INCOME FUND
The portfolio manager for the Income Fund is Thomas E. Rath, Assistant Vice
President of SAM. Mr. Rath has been a portfolio manager and securities analyst
for SAFECO Corporation since 1994. From 1992 to 1994, Mr. Rath was a principal
and portfolio manager for Meridian Capital Management, Inc., located in Seattle,
Washington. From 1987 to 1992 he was a
-- 34 --
<PAGE>
PORTFOLIO MANAGERS (CONTINUED)
portfolio manager and securities analyst for First Interstate Bank, located in
Seattle, Washington, and from 1983 to 1987 he was a securities analyst for
SAFECO Corporation.
NORTHWEST FUND
The portfolio manager for the Northwest Fund is Charles R. Driggs, Vice
President, SAM. Mr. Driggs has served as portfolio manager for the Fund since
1992. From 1984 through 1992, Mr. Driggs was a securities analyst for SAM
specializing in banks, savings and loan institutions and the insurance industry.
INTERNATIONAL FUND
The International Fund is managed by a committee of portfolio managers employed
and supervised by the Sub-Adviser, Bank of Ireland Asset Management (U.S.)
Limited, an investment adviser registered with the SEC. All investment decisions
are made by this committee and no single person is primarily responsible for
making recommendations to that committee.
BALANCED FUND
The equity portion of the Balanced Fund is co-managed by Rex L. Bentley, Vice
President, SAM, and Lynette D. Sagvold, Assistant Vice President, SAM, and
the fixed-income portion is managed by Michael C. Knebel, Vice President,
SAM. Mr. Bentley was Vice President and Investment Counsel at the investment
advisory firm of Badgley, Phelps and Bell Investment Counsel, Inc., from 1990
to 1995. He was a securities analyst for SAFECO Corporation from 1975 to
1983. Ms. Sagvold was a portfolio manager and analyst for First Interstate
Bank from 1993 to 1995 and she was a portfolio manager and analyst for Key
Trust Company from 1985 to 1993. Mr. Knebel has served as portfolio manager
for certain other SAFECO mutual funds since 1989.
-- 35 --
<PAGE>
SMALL COMPANY FUND
The portfolio manager for the Small Company Fund is Greg Eisen. Mr. Eisen has
served as an investment analyst for SAM since 1992. From 1986 to 1992, Mr. Eisen
was engaged by the SAFECO Insurance Companies as a financial analyst.
VALUE FUND
The Value Fund is co-managed by Rex L. Bentley, Vice President, SAM and
Lynette D. Sagvold, Assistant Vice President, SAM. Mr. Bentley was Vice
President and Investment Counsel at the investment advisory firm of Badgley,
Phelps and Bell Investment Counsel, Inc. from 1990 to 1995. He was a
securities analyst for SAFECO Corporation from 1975 to 1983. Ms. Sagvold was
a portfolio manager and analyst for First Interstate Bank from 1993 to 1995
and she was a portfolio manager and analyst for Key Trust Company from 1985
to 1993.
Each portfolio manager and certain other persons related to SAM, the Sub-Adviser
and the Funds are subject to written policies and procedures designed to prevent
abusive personal securities trading. Incorporated within these policies and
procedures are recommendations made by the Investment Company Institute (the
trade group for the mutual fund industry) with respect to personal securities
trading by persons associated with mutual funds. Those recommendations include
preclearance procedures and blackout periods when certain personnel may not
trade in securities that are the same or related securities being considered for
purchase or sale by a Fund.
HOW TO PURCHASE SHARES
A completed and signed application must accompany payment for an initial
purchase by mail and in all cases is necessary before a redemption can be made.
Specific applications for retirement accounts must be completed and signed
before any retirement account can be set up. The Funds only accept funds drawn
in U.S. dollars and payable through a U.S. bank. The Funds do not accept
currency. The Funds issue shares in uncertificated form, but will issue
certificates for whole shares without charge upon written request. You will be
required to post a bond to replace missing certificates.
THE FUNDS RESERVE THE RIGHT TO REFUSE ANY OFFER TO PURCHASE SHARES.
INITIAL PURCHASES
MINIMUM INITIAL INVESTMENT $1,000 (IRA, UGMA AND UTMA $250).
Minimum initial investments are negotiable for retirement accounts other than
IRAs.
-- 36 --
<PAGE>
HOW TO PURCHASE SHARES (CONTINUED)
No minimum initial investment is required to establish the Automatic Investment
Method (except for certain UGMA or UTMA accounts) or Payroll Deduction Plan.
BY WRITTEN REQUEST
Send a check or money order made payable to No-Load Class of the applicable Fund
and a completed and signed application to the address on the Prospectus cover.
BY WIRE
Call toll-free 1-800-624-5711 or, in Seattle, 545-7319 for instructions.
Not available for retirement accounts.
IN PERSON
Visit a SAFECO Investor Center. Investor Centers are located at 1409 Fifth
Avenue and 4333 Brooklyn Avenue N.E. in Seattle, Washington, and at 15411 N.E.
51st Street in Redmond, Washington. A representative will assist you in
completing your application.
ADDITIONAL PURCHASES
MINIMUM ADDITIONAL INVESTMENT $100 FOR ALL ACCOUNTS, EXCEPT FOR UGMA OR UTMA
AUTOMATIC INVESTMENT METHOD ("AIM") ACCOUNTS OPENED WITH AN INITIAL INVESTMENT
OF $250 OR MORE. THESE ACCOUNTS HAVE A MINIMUM ADDITIONAL INVESTMENT OF ONLY
$50. THERE IS NO MINIMUM INVESTMENT FOR DIVIDEND REINVESTMENTS.
Minimum additional investments are negotiable for retirement accounts other than
IRAs.
BY WRITTEN REQUEST
Send a check or money order made payable to No-Load Class of the applicable Fund
to the address on the Prospectus cover. Please specify your account number.
-- 37 --
<PAGE>
HOW TO PURCHASE SHARES (CONTINUED)
BY WIRE
Instruct your bank to send wires to U.S. Bank of Washington, N.A., Seattle,
Washington, ABA #1250-0010-5, Account #0017-086083.
To ensure timely credit to your account, ask your bank to include the following
information in its wire to U.S. Bank of Washington, N.A.:
/ / SAFECO Fund name and class name
/ / SAFECO account number
/ / Name of the registered owner(s) of the SAFECO account
Delays of purchases caused by inadequate wire instructions are not the
responsibility of the Funds or SAFECO Services.
Your bank may charge a fee for wire services.
BY TELEPHONE
Call 1-800-624-5711 or, in Seattle, 545-7319. You must have previously selected
this service on your account application or by written request. Not available to
open a new account or for retirement accounts.
Maximum purchase $100,000 per day, minimum purchase $100 per day.
Monies will be transferred from your predesignated bank account to your existing
Fund account. Your bank may charge a fee if monies are wired to your Fund
account. Please allow 15 business days after selecting this service for it to be
available for first use.
Telephone purchases may be unavailable from some bank accounts and nonbank
financial institutions.
Please read "Telephone Transactions" on page 45 for other important information.
-- 38 --
<PAGE>
HOW TO PURCHASE SHARES (CONTINUED)
IN PERSON
You may complete your initial application and make additional investments in
person by visiting a SAFECO Investor Center. Investor Centers are located at
1409 Fifth Avenue and 4333 Brooklyn Avenue N.E. in Seattle, Washington, and at
15411 N.E. 51st Street in Redmond, Washington. A licensed representative will be
available to assist you in completing your application.
THROUGH REGISTERED SECURITIES DEALERS
You may open your account and make additional investments through a registered
securities dealer who is responsible for the prompt forwarding of purchase
orders. A dealer may charge a transaction fee and may place more restrictive
conditions on a purchase than would apply if you purchased your shares directly
from a Fund.
THROUGH REGISTERED INVESTMENT ADVISERS
Please read "Transactions Through Registered Investment Advisers" on page 47 for
important information.
SHARE PURCHASE PRICE
You will buy full and fractional shares at the NAV next computed after your
check, money order or wire has been received. For telephone purchase orders, you
will receive the price per share calculated on the day monies are received from
your bank account. See "Share Price Calculation" on page 47 for more
information.
HOW TO REDEEM SHARES
BY WRITTEN REQUEST
Shares may be redeemed by sending a letter which specifies your account number,
the Fund's name and applicable class, and the number of shares or dollar amount
you wish to redeem. The request should be sent to the address on the
-- 39 --
<PAGE>
HOW TO REDEEM SHARES (CONTINUED)
Prospectus cover. The request must be signed by the appropriate number of owners
and in some cases a signature guarantee may be required. In all cases, SAFECO
Services must have a signed and completed application on file before a
redemption can be made. See "Account Changes and Signature Requirements" on page
59 for more information.
Retirement account shareholders must specify whether or not they elect 10%
federal income tax withholding from a distribution other than an "eligible
rollover distribution."
BY TELEPHONE
Call 1-800-624-5711 or, in Seattle, 206-545-7319. You must have previously
selected this service on your account application or by written request.
Telephone redemptions are not available for retirement accounts or shares issued
in certificate form. You may request that redemption proceeds be sent directly
to your predesignated bank or mailed to your account address of record.
Please read "Telephone Transactions" on page 45 for other important information.
IN PERSON
Shares may be redeemed in person by visiting a SAFECO Investor Center. Investor
Centers are located at 1409 Fifth Avenue and 4333 Brooklyn Avenue N.E. in
Seattle, Washington, and at 15411 N.E. 51st Street in Redmond, Washington. Funds
for shares redeemed in person may be mailed to your address of record, sent
directly to your bank or retrieved directly from the SAFECO Investor Center once
they become available.
THROUGH REGISTERED SECURITIES DEALERS
Requests for redemption of shares by wire or telephone will be accepted from
registered securities dealers under agreement with each Fund's principal
underwriter. The dealer may charge a transaction fee for any order processed.
-- 40 --
<PAGE>
HOW TO REDEEM SHARES (CONTINUED)
THROUGH REGISTERED INVESTMENT ADVISERS
Please read "Transactions Through Registered Investment Advisers" on page 47 for
important information.
PLEASE NOTE THE FOLLOWING:
If your shares were purchased by wire, redemption proceeds will be available
immediately. If shares were purchased other than by wire, each Fund reserves the
right to hold the proceeds of your redemption for up to 15 business days after
investment or until such time as the Fund has received assurance that your
investment will be honored by the bank on which it was drawn, whichever occurs
first.
SAFECO Services charges a $10 fee to wire redemption proceeds. In addition, some
banks may charge a fee to receive wires.
If shares are issued in certificate form, the certificates must accompany a
redemption request and be duly endorsed.
Under some circumstances (E.G., a change in corporate officer or death of an
owner), SAFECO Services may require certified copies of supporting documents
before a redemption will be made.
SHARE REDEMPTION PRICE AND PROCESSING
Your shares will be redeemed at the NAV next calculated after receipt of your
request that meets the redemption requirements of the Funds. The value of the
shares you redeem may be more or less than the dollar amount you purchased,
depending on the market value of the shares at the time of redemption. See
"Share Price Calculation" on page 47 for more information.
Redemption proceeds will normally be sent on the next business day following
receipt of your redemption request. If your redemption request is received after
the close of trading on the New York Stock Exchange (normally 1:00 p.m. Pacific
time), proceeds will normally be sent on the second business
-- 41 --
<PAGE>
HOW TO REDEEM SHARES (CONTINUED)
day following receipt. Each Fund, however, reserves the right to postpone
payment of redemption proceeds for up to seven days if making immediate payment
could adversely affect its portfolio. In addition, redemptions may be suspended
or payment dates postponed if the New York Stock Exchange is closed, its trading
is restricted or the Securities and Exchange Commission declares an emergency.
Due to the high cost of maintaining small accounts, your account may be closed
upon 60 days' written notice if at the time of any redemption or exchange the
total value falls below $100. Your shares will be redeemed at the NAV calculated
on the day your account is closed and the proceeds will be sent to you.
HOW TO SYSTEMATICALLY PURCHASE OR REDEEM SHARES
Call 1-800-426-6730 or 206-545-5530, in Seattle, for more information.
AUTOMATIC INVESTMENT METHOD ("AIM")
AIM enables you to make regular monthly investments by authorizing SAFECO
Services to withdraw a specific amount from your bank account and invest the
amount in any Fund. AIM has a minimum $100 per withdrawal per Fund for all
accounts (except UGMA and UTMA accounts which have a lower $50 minimum for
additional investments provided that the account was opened with an initial
investment of at least $250).
PAYROLL DEDUCTION PLAN
An employer or other entity using group billing may establish a
self-administered payroll deduction plan in any Fund. Payroll deduction amounts
are negotiable.
-- 42 --
<PAGE>
HOW TO SYSTEMATICALLY PURCHASE OR REDEEM SHARES (CONTINUED)
SYSTEMATIC WITHDRAWAL PLAN
This plan enables you to receive a portion of your investment on a monthly
basis. A Fund automatically redeems shares in your account and sends you a
withdrawal check (minimum amount $50 per Fund) on or about the fifth business
day of every month.
HOW TO EXCHANGE SHARES FROM ONE FUND TO ANOTHER
An exchange is the redemption of shares of one SAFECO Fund and the purchase of
shares of another SAFECO Fund in accounts which are identically registered;
i.e., have the same registered owners and account number. For income tax
purposes, depending on the cost or other basis of the shares you exchange, you
may realize a capital gain or loss when you make an exchange. You may purchase
shares of a SAFECO Fund by exchange only if it is registered for sale in the
state where you reside. Before exchanging into another SAFECO Fund, please read
its current Prospectus.
BY WRITTEN REQUEST
Shares may be exchanged by writing SAFECO Services at the address on the
Prospectus cover. Please designate the SAFECO Funds and classes you wish to
exchange out of and into as well as your account number. The request must be
signed by the number of owners designated on your account application and in
some cases a signature guarantee may be required. See "Account Changes and
Signature Requirements" for more information.
If the shares you want to exchange are evidenced by certificates, the
certificates must accompany the request and be duly endorsed.
-- 43 --
<PAGE>
HOW TO EXCHANGE SHARES FROM ONE FUND TO ANOTHER (CONTINUED)
Under some circumstances (E.G., a change in corporate officer or death of an
owner), SAFECO Services may require certified copies of supporting documents
before an exchange can be made.
BY TELEPHONE
Call 1-800-624-5711 or, in Seattle, 206-545-7319.
Exchanges by telephone must be in amounts of $1,000 or more. Telephone exchanges
are not available for shares issued in certificate form.
Please read "Telephone Transactions" on page 45 for other important information.
THROUGH REGISTERED INVESTMENT ADVISERS
Please read "Transactions Through Registered Investment Advisers" on page 47 for
important information.
SHARE EXCHANGE PRICE AND PROCESSING
The shares of the SAFECO Fund you are exchanging from will be redeemed at the
price next computed after your exchange request is received. Normally, the
purchase of the SAFECO Fund you are exchanging into is executed on the same day.
However, each Fund reserves the right to delay the payment of proceeds and,
hence, the purchase in an exchange for up to seven days if making immediate
payment could adversely affect the portfolio of the Fund whose shares are being
redeemed. The exchange privilege may be modified or terminated with respect to a
Fund at any time, upon at least 60 days' notice to shareholders.
LIMITATIONS
Each Fund reserves the right to refuse exchange purchases or simultaneous order
transactions by any person or group if, in SAM's judgment, the Fund would not be
able to invest the money effectively in accordance with that Fund's investment
-- 44 --
<PAGE>
HOW TO EXCHANGE SHARES FROM ONE FUND TO ANOTHER (CONTINUED)
objective and policies or would otherwise potentially be adversely affected.
Although a Fund will attempt to give you prior notice whenever it is reasonably
able to do so, it may impose the above restrictions at any time.
The Funds are not intended to serve as vehicles for frequent trading in response
to short-term fluctuations in the market. Due to the disruptive effect that
market-timing investment strategies can have on efficient portfolio management,
the Funds have instituted certain policies to discourage excessive exchange and
simultaneous order transactions. Exchanges and simultaneous order transactions
which, in SAM's judgment, appear to follow a market-timing strategy are limited
to 4 in any 12 month period per account holder (or account, in a case where one
person or entity exercises investment discretion over more than one account).
For purposes of these limitations a "simultaneous order transaction" is a
transaction where a significant portion of an account's assets are redeemed from
one SAFECO Mutual Fund and shortly thereafter reinvested into another SAFECO
Mutual Fund. In order to protect the shareholders of the Funds, SAM reserves the
right to exercise its discretion in determining whether a particular transaction
qualifies as a simultaneous order transaction. In addition to the foregoing
limitations on exchanges and simultaneous order transactions, as described
above, the Funds reserve the right to refuse any offer to purchase shares.
TELEPHONE TRANSACTIONS
To purchase, redeem or exchange shares by telephone, call 1-800-624-5711 or, in
Seattle, 206-545-7319 between 5:30 a.m. and 7:00 p.m. Pacific time, Monday
through Friday, except certain holidays. All telephone calls are tape-recorded
for your protection. During times of drastic or unusual market volatility, it
may be difficult for you to exercise the telephone transaction privilege.
-- 45 --
<PAGE>
TELEPHONE TRANSACTIONS (CONTINUED)
To use the telephone purchase, redemption and exchange privileges, you must have
previously selected these services either on your account application or by
having submitted a request in writing to SAFECO Services at the address on the
Prospectus cover. Purchasing, redeeming or exchanging shares by telephone allows
the Funds and SAFECO Services to accept telephone instructions from an account
owner or a person preauthorized in writing by an account owner.
Each of the Funds and SAFECO Services reserve the right to refuse any telephone
transaction when a Fund or SAFECO Services, in its sole discretion, is unable to
confirm to its satisfaction that a caller is the account owner or a person
preauthorized by the account owner.
The Funds and SAFECO Services will not be liable for the authenticity of
instructions received by telephone that a Fund or SAFECO Services, in its
discretion, believes to be delivered by an account owner or preauthorized
person, provided that the Fund or SAFECO Services follows reasonable procedures
to identify the caller. The shareholder will bear the risk of any resulting
loss. The Funds and SAFECO Services will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. These procedures may
include requiring the account owner to select the telephone privilege in writing
prior to first use and to designate persons authorized to deliver telephone
instructions. SAFECO Services tape-records telephone transactions and may
request certain identifying information from the caller.
The telephone transaction privileges may be suspended, limited, modified or
terminated at any time without prior notice by the Funds or SAFECO Services. The
Funds and SAFECO Services may be liable if they do not employ reasonable
procedures to confirm that telephone transactions are genuine.
-- 46 --
<PAGE>
TRANSACTIONS THROUGH REGISTERED INVESTMENT ADVISERS
SAFECO Services may accept instructions for share transactions and account
information changes from investment advisers who are acting on behalf of
shareholders, provided that the adviser is registered under the Investment
Advisers Act of 1940, has a signed agreement with SAFECO Services and has an
executed power of attorney from the shareholder, in an acceptable form, on file
with SAFECO Services. Advisers may charge a fee to shareholders for their
services. The Trust, the Funds and SAFECO Services have no control over or
involvement with, the fees charged by advisers for such services. Advisers are
responsible for the prompt forwarding of instructions on shareholders' accounts
to SAFECO Services and are bound by the terms of this Prospectus. The Trust, the
Funds, SAFECO Services and their affiliated companies will not be responsible to
any shareholder for any losses, liabilities, costs or expenses associated with
any investment advice or recommendation provided by the adviser to the
shareholder or for accepting and following any instructions from such adviser on
the shareholder's account(s).
SHARE PRICE CALCULATION
The NAV of the No-Load Class shares of each Fund is computed at the close of
regular trading on the New York Stock Exchange ("NYSE") (normally 1:00 p.m.
Pacific time) each day that the NYSE is open for trading. NAV is determined
separately for each class of shares of each Fund. The NAV of a Fund is
calculated by subtracting a Fund's liabilities from its assets and dividing the
result by the number of outstanding shares. In calculating the net asset value
of each class, appropriate adjustments will be made to each class's NAV to
reflect expenses allocated to it.
In general, portfolio securities are valued at the last reported sale price on
the national exchange on which the securities are primarily traded, unless there
are no transactions in which
-- 47 --
<PAGE>
SHARE PRICE CALCULATION (CONTINUED)
case they shall be valued at the last reported bid price. Securities traded
over-the-counter are valued at the last sale price, unless there is no reported
sale price in which case the last reported bid price will be used. Portfolio
securities that trade on a stock exchange and over-the-counter are valued
according to the broadest and most representative market. Securities not traded
on a national exchange are valued based on consideration of information with
respect to transactions in similar securities, quotations from dealers and
various relationships between securities. Other assets for which market
quotations are unavailable are valued at their fair value pursuant to guidelines
approved by the Trust's Board of Trustees. The International Fund will invest
primarily, and the other Funds may invest from time to time, in foreign
securities. Trading in foreign securities will generally be substantially
completed each day at various times prior to the close of the NYSE. The values
of any such securities are determined as of such times for purposes of computing
the Funds' net asset value. Foreign currency exchange rates are also generally
determined prior to the close of the NYSE. If quotations are not readily
available, or if values have been materially affected by events occurring after
the close of a foreign market, the security will be valued at fair value as
determined in good faith by SAM or BIAM under procedures established by and
under general supervision of the Fund's Board of Trustees. Foreign portfolio
securities are valued on the basis of quotations from the primary market in
which they trade. The value of foreign securities are translated from the local
currency into U.S. dollars using current exchange rates.
The values of certain of the Funds' portfolio securities may be stated on the
basis of quotations provided by a pricing service, unless the Board determines
that such does not represent fair value. The service uses information with
respect to transactions in securities, quotations from securities dealers,
market transactions in comparable securities and various relationships between
securities to determine values.
-- 48 --
<PAGE>
SHARE PRICE CALCULATION (CONTINUED)
INTERNATIONAL FUND
Options that are traded on national securities exchanges are valued at their
last sale price as of the close of option trading on such exchange. Futures
contracts will be marked to market daily, and options thereon are valued at
their last sale price, as of the close of the applicable commodities exchange.
Forward contracts are valued at the current cost of covering or offsetting such
contracts.
INFORMATION ABOUT SHARE OWNERSHIP AND COMPANIES THAT PROVIDE SERVICES TO THE
TRUST
Each Fund is a series of SAFECO Common Stock Trust, a Delaware business trust
established by a Trust Instrument dated May 13, 1993. The Trust is authorized to
issue an unlimited number of shares of beneficial interest. The Board of
Trustees may establish additional series or classes of shares of the Trust
without approval of shareholders.
In addition to the No-Load Class of shares, each Fund also offers two other
classes of shares through a separate prospectus to investors who engage the
services of an investment professional: Advisor Class A shares and Advisor Class
B shares. Advisor Class A shares are sold subject to an initial sales charge and
Advisor Class B shares are sold subject to a contingent deferred sales charge.
Advisor Class A and Advisor Class B shares also incur different expenses than
No-Load Class shares. Accordingly, the performance of the three classes will
differ. For more information about Advisor Class A shares and Advisor Class B
shares of each Fund, please call 1-800-463-8794.
Each share of a Fund is entitled to participate equally in dividends and other
distributions and the proceeds of any liquidation except that, due to the
differing expenses borne by the three classes, dividends and liquidation
proceeds for each
-- 49 --
<PAGE>
INFORMATION ABOUT SHARE OWNERSHIP AND COMPANIES THAT PROVIDE SERVICES TO THE
TRUST (CONTINUED)
class of shares will likely differ. All shares issued are fully paid and
non-assessable, and shareholders have no preemptive or other right to subscribe
to any additional shares.
The Trust does not intend to hold annual meetings of shareholders of the Funds.
The Trustees will call a special meeting of shareholders of a Fund only if
required under the 1940 Act, in their discretion, or upon the written request of
holders of 10% or more of the outstanding shares of the Fund entitled to vote.
Separate votes are taken by each class of shares, a Fund, or the Trust if a
matter affects only that class of shares, a Fund, or the Trust, respectively.
Under Delaware law, the shareholders of the Funds will not be personally liable
for the obligations of any Fund; a shareholder is entitled to the same
limitation of personal liability extended to shareholders of corporations. To
guard against the risk that Delaware law might not be applied in other states,
the Trust Instrument requires that every written obligation of the Trust or Fund
contain a statement that such obligation may be enforced only against the assets
of the Trust or Fund and generally provides for indemnification out of Trust or
Fund property of any shareholder nevertheless held personally liable for Trust
or Fund obligations, respectively.
Because the Trust may use a combined Prospectus to offer other classes of
shares, it is possible that a Fund might become liable for a misstatement about
the series of another Trust contained in a combined Prospectus. The Board of
Trustees has considered this factor in approving the use of a single, combined
Prospectus.
SAM is the investment adviser for each Fund under an agreement with the Trust.
Under the agreement, SAM is responsible for the overall management of the
Trust's and each Fund's business affairs. SAM provides investment research,
-- 50 --
<PAGE>
INFORMATION ABOUT SHARE OWNERSHIP AND COMPANIES THAT PROVIDE SERVICES TO THE
TRUST (CONTINUED)
advice, management and supervision to the Trust and each Fund, and, consistent
with each Fund's investment objectives and policies, SAM determines what
securities will be purchased, retained or sold by each Fund and implements those
decisions. Each Fund pays SAM an annual management fee based on a percentage of
that Fund's net assets ascertained each business day and paid monthly in
accordance with the schedules below. A reduction in the fees paid by a Fund
occurs only when that Fund's net assets reach the dollar amounts of the break
points and applies only to the assets that fall within the specified range:
<TABLE>
<CAPTION>
GROWTH, EQUITY AND INCOME FUNDS
<S> <C>
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%
<CAPTION>
NORTHWEST FUND
NET ASSETS ANNUAL FEE
<S> <C>
$0 - $250,000,000 .75 of 1%
$250,000,001 - $500,000,000 .65 of 1%
$500,000,001 - $750,000,000 .55 of 1%
Over $750,000,000 .45 of 1%
<CAPTION>
INTERNATIONAL FUND
NET ASSETS ANNUAL FEE
<S> <C>
$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%
</TABLE>
-- 51 --
<PAGE>
INFORMATION ABOUT SHARE OWNERSHIP AND COMPANIES THAT PROVIDE SERVICES TO THE
TRUST (CONTINUED)
<TABLE>
<CAPTION>
BALANCED AND VALUE FUNDS
NET ASSETS ANNUAL FEE
<S> <C>
$0 - $250,000,000 .75 of 1%
$250,000,001 - $500,000,000 .65 of 1%
Over $500,000,000 .55 of 1%
<CAPTION>
SMALL COMPANY FUND
NET ASSETS ANNUAL FEE
<S> <C>
$0 - $250,000,000 .85 of 1%
$250,000,001 - $500,000,000 .75 of 1%
Over $500,000,000 .65 of 1%
</TABLE>
The Trust and each Fund will bear all expenses of their organization, operations
and business not specifically assumed by SAM under each Fund's management
contract. Such expenses may include, among others, custody and accounting
expenses, transfer agency and related expenses, distribution and shareholder
servicing expenses, expenses related to preparing, printing and delivering
prospectuses and shareholder reports, the expenses of holding shareholders'
meetings, legal fees, the compensation of non-interested trustees of the Trusts,
brokerage, taxes and extraordinary expenses.
With respect to the International Fund, SAM has a sub-advisory agreement with
the Sub-Adviser. The Sub-Adviser is a direct, wholly-owned subsidiary of the
Bank of Ireland Asset Management Limited and is an indirect, wholly-owned
subsidiary of Bank of Ireland. The Sub-Adviser has its headquarters at 26
Fitzwilliam Place, Dublin, Ireland, and its U.S. office at 2 Greenwich Plaza,
Greenwich, Connecticut. The Sub-Adviser was established in 1987 and currently
manages over $3 billion in assets. Because the Sub-Adviser is doing business
from a location within the United States, investors will be able to effect
service of legal process within the United States upon the Sub-Adviser under
federal securities laws in United States
-- 52 --
<PAGE>
INFORMATION ABOUT SHARE OWNERSHIP AND COMPANIES THAT PROVIDE SERVICES TO THE
TRUST (CONTINUED)
courts. However, the Sub-Adviser is a foreign organization and maintains a
substantial portion of its assets outside the United States. Therefore, the
ability of investors to enforce judgments against the Sub-Adviser may be
affected by the willingness of foreign courts to enforce judgments of United
States courts.
Under the sub-advisory agreement, the Sub-Adviser is responsible for providing
investment research and advice used to manage the investment portfolio of the
International Fund. In return, SAM (and not the International Fund) pays the
Sub-Adviser a fee in accordance with the schedule below:
<TABLE>
<CAPTION>
NET ASSETS ANNUAL FEE
<S> <C>
$0 - $50,000,000 .60 of 1%
$50,000,001 - $100,000,000 .50 of 1%
Over $100,000,000 .40 of 1%
</TABLE>
The parent company of the Sub-Adviser, Bank of Ireland Asset Management Limited,
is a direct, wholly-owned subsidiary of the Bank of Ireland, which engages in
the investment advisory business and is located at 26 Fitzwilliam Place, Dublin,
Ireland. The Bank of Ireland is a holding company whose primary subsidiaries are
engaged in banking, insurance, securities and related financial services, and is
located at Lower Baggot Street, Dublin, Ireland.
The distributor of the No-Load Class of each Fund's shares under an agreement
with the Trust is SAFECO Securities, Inc. ("SAFECO Securities"), a broker-dealer
registered under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. SAFECO Securities receives no
compensation from the Trust or the Funds for its services as distributor of the
No-Load Class.
The transfer, dividend and distribution disbursement and shareholder servicing
agent for the No-Load Class of each
-- 53 --
<PAGE>
Fund under an agreement with the Trust is SAFECO Services. SAFECO Services
receives a fee from each Fund for every shareholder account held in the Fund.
SAFECO Services may enter into subcontracts with registered broker-dealers,
third party administrators and other qualified service providers that generally
perform shareholder, administrative, and/or accounting services which would
otherwise be provided by SAFECO Services. Fees incurred by a Fund for these
services will not exceed the transfer agency fee payable to SAFECO Services. Any
distribution expenses associated with these arrangements will be borne by SAM.
SAM, SAFECO Securities and SAFECO Services are wholly-owned subsidiaries of
SAFECO Corporation (a holding company whose primary subsidiaries are engaged in
the insurance and financial services businesses) and are each located at SAFECO
Plaza, Seattle, Washington 98185.
PERSONS CONTROLLING CERTAIN FUNDS
At ____________, 1997, SAM, a wholly-owned subsidiary of SAFECO Corporation,
controlled the International and Balanced Funds. At ____________, 1997, SAFECO
Corporation controlled the Small Company Fund. At ____________, 1997, SAFECO
Asset Management Company controlled the Value Fund. SAFECO Corporation and
SAM have their principal place of business at SAFECO Plaza, Seattle,
Washington 98185.
PERFORMANCE INFORMATION
The yield, total return and average annual total return of each class of a Fund
may be quoted in advertisements. Yield is the annualization on a 360-day basis
of a class's net income per share over a 30-day period divided by the class's
NAV on the last day of the period. Total return is the total percentage change
in an investment in a class of a Fund, assuming the reinvestment of dividend and
capital gains distributions, over a stated period of time. Average annual total
return is the annual percentage change in an investment in a class of a Fund,
assuming the reinvestment of dividends and capital gains distributions, over a
stated period of time. Performance
-- 54 --
<PAGE>
PERFORMANCE INFORMATION (CONTINUED)
quotations are calculated separately for each class of a Fund. A Fund's
portfolio turnover rate will vary from year to year. A high portfolio turnover
rate involves correspondingly higher transaction costs in the form of broker
commissions and dealer spreads and other costs that a Fund will bear directly.
From time to time, a Fund may advertise rankings. Rankings are calculated by
independent companies that monitor mutual fund performance (E.G., CDA Investment
Technologies, Lipper Analytical Services, Inc., and Morningstar, Inc.), and are
reported periodically in national financial publications such as BARRON'S,
BUSINESS WEEK, FORBES, INVESTOR'S BUSINESS DAILY, MONEY MAGAZINE, and THE WALL
STREET JOURNAL. In addition, non-standardized performance figures may accompany
the standardized figures described above. Non-standardized figures may be
calculated in a variety of ways, including but not necessarily limited to,
different time periods and different initial investment amounts. Each Fund may
also compare its performance to the performance of relevant indices.
Performance information and quoted rankings are indicative only of past
performance and are not intended to represent future investment results. The
yield and share price of each class of a Fund will fluctuate and your shares,
when redeemed, may be worth more or less than you originally paid for them.
FUND DISTRIBUTIONS AND HOW THEY ARE TAXED
DIVIDEND AND OTHER DISTRIBUTIONS
The Equity, Income, Balanced and Value Funds declare dividends on the last
business day of each calendar quarter and the Growth, Northwest,
International and Small Company Funds declare dividends annually. Each Fund
declares dividends from its net investment income (which includes accrued
dividends and interest, earned discount, and other income earned on portfolio
securities less expenses) and such shares become entitled to declared
dividends on the next business day after shares are
-- 55 --
<PAGE>
FUND DISTRIBUTIONS AND HOW THEY ARE TAXED (CONTINUED)
purchased for your account. If you request redemption of all your shares at any
time during a month, you will receive all declared dividends through the date of
redemption together with the proceeds of the redemption.
A shareholder's dividends and other distributions are reinvested in additional
shares of the distributing Fund at net asset value per share generally
determined as of the close of business on the ex-distribution date, unless the
shareholder elects in writing to receive dividends or other distributions in
cash and that election is provided to SAFECO Services at the address on the
Prospectus cover.
The election remains in effect until revoked by written notice to SAFECO
Services. For retirement accounts, all dividends and other distributions
declared by a Fund must be invested in additional shares of that Fund.
Please remember that if you purchase shares shortly before a Fund pays a taxable
dividend or other distribution, you will pay the full price for the shares, then
receive part of the price back as a taxable distribution.
TAXES
Each Fund intends to qualify for treatment as a regulated investment company
under Subchapter M of the Internal Revenue Code. By so qualifying, a Fund will
not be subject to federal income taxes to the extent it distributes its net
investment income and realized capital gains to its shareholders. Each Fund will
inform you as to the amount and nature of dividends and other distributions to
your account. Dividends and distributions declared in December, but received by
shareholders in January, are taxable to shareholders in the year in which
declared.
-- 56 --
<PAGE>
FUND DISTRIBUTIONS AND HOW THEY ARE TAXED (CONTINUED)
TAX WITHHOLDING INFORMATION
You will be asked to certify on your account application or on a separate form
that the taxpayer identification number you provide is correct and that you are
not subject to, or are exempt from, backup withholding for previous
underreporting to the Internal Revenue Service.
Retirement plan distributions may be subject to federal income tax withholding.
However, you may elect not to have any distributions withheld by checking the
appropriate box on the Redemption Request form or by instructing SAFECO Services
in writing at the address on the Prospectus cover.
If the International Fund pays nonrefundable taxes to foreign governments during
the year, the taxes will reduce the Fund's dividends but still be included in
your taxable income. However, you may be able to claim an offsetting credit or
deduction on your tax return for your share of foreign taxes paid by the Fund.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting each Fund and its shareholders; see the
Trust's Statement of Additional Information for a further discussion. There may
be other federal, state or local tax considerations applicable to a particular
investor. You therefore are urged to consult your tax adviser.
TAX-DEFERRED RETIREMENT PLANS
SAFECO Services offers a variety of tax-deferred retirement plans for
individuals, businesses and nonprofit organizations. An account may be
established under one of the following plans which allow you to defer investment
income from federal income tax while you save for retirement. Many of the Funds
may be used as investment vehicles for these plans.
INDIVIDUAL RETIREMENT ACCOUNTS (IRAS). IRAs are tax-deferred retirement
accounts for anyone under age 70 with
-- 57 --
<PAGE>
TAX-DEFERRED RETIREMENT PLANS (CONTINUED)
earned income. The maximum annual contribution generally is $2,000 per person
($4,000 for you and a non-working spouse). Under certain circumstances your
contribution will be deductible for income tax purposes. An annual custodial fee
will be charged for any part of a calendar year in which you have an IRA
investment in a Fund.
SIMPLIFIED EMPLOYEE PENSION IRAS (SEP-IRAS). SEP-IRAs are easily administered
retirement plans for small businesses and self-employed individuals. Annual
contributions up to $22,500 may be made to SEP-IRA accounts; the annual
contribution limit is subject to change. SEP-IRAs have the same investment
minimums and custodial fees as regular IRAs.
403(b) PLANS. 403(b) plans are retirement plans for tax-exempt organizations
and school systems to which employers and employees both may contribute. Minimum
investment amounts are negotiable.
401(k) PLANS. 401(k) plans allow employers and employees to make tax-advantaged
contributions to a retirement account. SAFECO Services offers a low-cost
administration package that includes a prototype plan, record keeping, testing
and employee communications. Minimum investment amounts are negotiable.
PROFIT SHARING AND MONEY PURCHASE PENSION PLANS. Each plan allows corporations,
partnerships and self-employed persons to make annual, tax-deductible
contributions to a retirement account for each person covered by the plan. A
plan may be adopted individually or paired with another plan to maximize
contributions. SAFECO Services offers an administration package for these plans.
Minimum investment amounts are negotiable.
For information about the above accounts and plans, please call 1-800-278-1985.
-- 58 --
<PAGE>
ACCOUNT STATEMENTS
Periodically, you will receive an account statement indicating your current Fund
holdings and transactions affecting your account. Confirmation statements will
be sent to you after each transaction that affects your account balance. Please
review the information on each confirmation statement for accuracy immediately
upon receipt. If you do not notify us within 30 days of any processing error,
SAFECO Services will consider the transactions listed on the confirmation
statement to be correct.
ACCOUNT CHANGES AND SIGNATURE REQUIREMENTS
Changes to your account registration or the services you have selected must be
in writing and signed by the number of owners specified on your account
application as having authority to make these changes. Send written changes to
SAFECO Services at the address on the Prospectus cover. Certain changes to the
Automatic Investment Method and Systematic Withdrawal Plan can be made by
telephone request if you have previously selected single signature authorization
for your account.
You must specify on your account application the number of signatures required
to authorize redemptions and exchanges and to change account registration or the
services selected. Authorizing fewer than all account owners has important
implications. For example, one owner of a joint tenant account can redeem money
without the co-owner's signature. If you do not indicate otherwise on the
application, the signatures of all account owners will be required to effect a
transaction. Your selection of fewer than all account owner signatures may be
revoked by any account owner who writes to SAFECO Services at the address on the
Prospectus cover.
SAFECO Services may require a signature guarantee for a signature that cannot be
verified by comparison to the
-- 59 --
<PAGE>
ACCOUNT CHANGES AND SIGNATURE REQUIREMENTS (CONTINUED)
signature(s) on your account application. A signature guarantee may be obtained
from most financial institutions, including banks, savings and loans and
broker-dealers.
DESCRIPTION OF STOCKS, BONDS AND CONVERTIBLE SECURITIES
COMMON STOCKS represent equity interest in a corporation. Although common stocks
have a history of long-term growth in value, their prices fluctuate based on
changes in a company's financial condition and overall market and economic
conditions. Smaller companies are especially sensitive to these factors.
PREFERRED STOCKS are equity securities whose owners have a claim on a company's
earnings and assets before holders of common stock, but after debt holders. The
risk characteristics of preferred stocks are similar to those of common stocks,
except that preferred stocks are generally subject to less risk than common
stocks.
BONDS AND OTHER DEBT SECURITIES are used by issuers to borrow money from
investors. The issuer pays the investor a fixed or variable rate of interest,
and must repay the amount borrowed at maturity. The value of bonds and other
debt securities will normally vary inversely with interest rates. In general,
bond prices rise when interest rates fall, and bond prices fall when interest
rates rise. Debt securities have varying degrees of quality and varying levels
of sensitivity to changes in interest rates. Long-term bonds are generally more
sensitive to interest rate changes than short-term bonds.
CONVERTIBLE SECURITIES are debt or preferred stock which are convertible into or
exchangeable for common stock. The value of convertible corporate bonds will
normally vary inversely
-- 60 --
<PAGE>
DESCRIPTION OF STOCKS, BONDS AND CONVERTIBLE SECURITIES (CONTINUED)
with interest rates and the value of convertible corporate bonds and convertible
preferred stock will normally vary with the value of the underlying common
stock.
RATINGS SUPPLEMENT
Ratings by Moody's and S&P represent their respective opinions as to the
investment quality of the rated obligations. Investors should realize these
ratings do not constitute a guarantee that the principal and interest payable
under these obligations will be paid when due.
DESCRIPTION OF DEBT RATINGS
Excerpts from Moody's description of its ratings:
INVESTMENT GRADE:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than the Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and
-- 61 --
<PAGE>
RATINGS SUPPLEMENT (CONTINUED)
interest are considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium-grade obligations
(I.E., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BELOW INVESTMENT GRADE:
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa have poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
-- 62 --
<PAGE>
RATINGS SUPPLEMENT (CONTINUED)
Excerpts from S&P's description of its ratings:
INVESTMENT GRADE:
AAA -- Debt which is rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA -- Debt which is rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
A -- Debt which is rated A has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BELOW INVESTMENT GRADE:
BB, B, CCC, CC, C -- Debt which is rated BB, B, CCC, CC, or C is predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
C1 -- Debt which is rated C1 is reserved for income bonds on which no interest
is being paid.
D -- Debt rated D is in payment default. Interest payment, or principal payments
are not made on the date due even if the applicable grace period has not
expired, unless S&P believes that such payments will be made during such grace
period.
-- 63 --
<PAGE>
RATINGS SUPPLEMENT (CONTINUED)
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DEBT SECURITIES HOLDINGS
The Equity Fund did not hold any convertible debt securities during the fiscal
year ended December 31, 1996.
The weighted average ratings of all debt securities held by the Income Fund,
expressed as a percentage of total investments held during the fiscal year ended
December 31, 1996, were as follows:
<TABLE>
<CAPTION>
MOODY'S % S&P %
--------------------------- ---- --------------------------- ----
<S> <C> <C> <C>
INVESTMENT GRADE
----------------------------------------------------------------------
Aaa AAA
Aa AA
A A
Baa BBB
<CAPTION>
BELOW INVESTMENT GRADE
----------------------------------------------------------------------
<S> <C> <C> <C>
Ba BB
B B
Caa CCC
Ca CC
Not Rated, but Not Rated, but
determined to determined to
be investment be investment
grade grade
Not Rated, but Not Rated, but
determined to determined to
be below be below
investment grade investment grade
</TABLE>
-- 64 --
<PAGE>
SAFECO FAMILY OF FUNDS
STABILITY OF PRINCIPAL
SAFECO Money Market Fund
SAFECO Tax-Free Money Market Fund
BOND INCOME
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO GNMA Fund
SAFECO High-Yield Bond Fund
SAFECO Managed Bond Fund
TAX-FREE BOND INCOME
SAFECO Intermediate-Term Municipal Bond Fund
SAFECO Insured Municipal Bond Fund
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal Bond Fund
HIGH CURRENT INCOME WITH LONG-TERM GROWTH
SAFECO Income Fund
LONG-TERM GROWTH
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Northwest Fund
SAFECO International Stock Fund
SAFECO Balanced Fund
SAFECO Small Company Stock Fund
SAFECO U.S. Value Fund
FOR MORE COMPLETE INFORMATION ON ANY SAFECO MUTUAL FUND, INCLUDING MANAGEMENT
FEES AND EXPENSES, PLEASE CALL OR WRITE FOR A FREE PROSPECTUS. PLEASE READ IT
CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
<PAGE>
TO REQUEST A PROSPECTUS:
Nationwide: 1-800-426-6730
Seattle: 545-5530
FOR 24-HOUR PRICE
AND PERFORMANCE INFORMATION:
Nationwide: 1-800-835-4391
Seattle: 545-5113
FOR ACCOUNT INFORMATION
OR TELEPHONE TRANSACTIONS*:
Nationwide: 1-800-624-5711
Seattle: 545-7319
Deaf and Hard of Hearing TTY/TDD Service:
1-800-438-8718
*All telephone calls are tape-recorded for your
protection.
INTERNET: http://networth.galt.com/safeco
E-MAIL: [email protected]
MAILING ADDRESS:
SAFECO Mutual Funds
P.O. Box 34890
Seattle, WA 98124-1890
EXPRESS/OVERNIGHT MAIL:
SAFECO Mutual Funds
4333 Brooklyn Avenue N.E.
Seattle, WA 98105
DISTRIBUTOR:
SAFECO Securities, Inc.
[LOGO]
<PAGE>
PROSPECTUS
- --------------------------------------------------------------------------------
SAFECO GROWTH FUND
SAFECO EQUITY FUND
SAFECO INCOME FUND
SAFECO NORTHWEST FUND
SAFECO INTERNATIONAL STOCK FUND
SAFECO BALANCED FUND
SAFECO SMALL COMPANY STOCK FUND
SAFECO U.S. VALUE FUND
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
SAFECO HIGH-YIELD BOND FUND
SAFECO MANAGED BOND FUND
SAFECO MUNICIPAL BOND FUND
SAFECO CALIFORNIA TAX-FREE INCOME FUND
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
SAFECO MONEY MARKET FUND
Advisor Class A
Advisor Class B , 1997
------------
- --------------------------------------------------------------------------------
Each fund named above ("Fund") is a series of one of the following trusts
(each a "Trust"): the SAFECO Common Stock Trust ("Common Stock Trust"), the
SAFECO Taxable Bond Trust ("Taxable Bond Trust"), the SAFECO Managed Bond
Trust ("Managed Bond Trust"), the SAFECO Tax-Exempt Bond Trust ("Tax-Exempt
Bond Trust") or the SAFECO Money Market Trust ("Money Market Trust"). The
investment objective for each Fund appears on Page __.
This Prospectus sets forth the information a prospective investor should know
before investing. PLEASE READ AND RETAIN THIS PROSPECTUS FOR FUTURE
REFERENCE. Statements of Additional Information relating to the Advisor Class
A ("Class A") and Advisor Class B ("Class B") shares (collectively "Advisor
Classes"), dated ____________, 1997 and incorporated herein by this
reference, have been filed with the Securities and Exchange Commission and
are available at no charge upon request by calling the telephone number
listed on this page. The Statements of Additional Information and other
material incorporated by reference herein are also available on the
Securities and Exchange Commission Website (http://www.sec.gov). The
Statements of Additional Information contain more information about many of
the topics in this Prospectus as well as information about the trustees and
officers of the Trusts.
For additional assistance, please contact your investment professional, or call
or write:
<TABLE>
<S> <C>
NATIONWIDE 1-800-463-8791 SAFECO MUTUAL FUNDS
ADVISOR CLASS SHARES
P.O. BOX 34680
SEATTLE, WA 98124-1868
</TABLE>
All telephone calls are tape-recorded for your protection
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
THE U.S. GOVERNMENT OR ANY BANK, NOR ARE FUND SHARES FEDERALLY INSURED OR
OTHERWISE PROTECTED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY, AND FUND SHARES ARE SUBJECT TO INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. THERE CAN BE NO
ASSURANCE THAT THE SAFECO MONEY MARKET FUND WILL MAINTAIN A STABLE $1.00 SHARE
PRICE.
THE SAFECO CALIFORNIA TAX-FREE INCOME FUND IS OFFERED FOR SALE ONLY TO RESIDENTS
OF THE STATE OF CALIFORNIA. THE SAFECO WASHINGTON STATE MUNICIPAL BOND FUND IS
OFFERED FOR SALE ONLY TO RESIDENTS OF THE STATE OF WASHINGTON. THESE FUNDS ARE
NOT PERMITTED TO OFFER OR SELL SHARES TO RESIDENTS OF OTHER STATES.
- --------------------------------------------------------------------------------
-- 1 --
<PAGE>
SAFECO GROWTH FUND ("Growth Fund") has as its investment objective to seek
growth of capital and the increased income that ordinarily follows from such
growth. The Growth Fund ordinarily invests a preponderance of its assets in
common stock selected primarily for potential appreciation.
SAFECO EQUITY FUND ("Equity Fund") has as its investment objective to seek
long-term growth of capital and reasonable current income. The Equity Fund
invests principally in common stock selected for appreciation and/or dividend
potential and from a long-range investment standpoint.
SAFECO INCOME FUND ("Income Fund") has as its investment objective to seek high
current income and, when consistent with its objective, the long-term growth of
capital. The Income Fund invests primarily in common and preferred stock and in
convertible bonds selected for dividend potential.
SAFECO NORTHWEST FUND ("Northwest Fund") has as its investment objective to seek
long-term growth of capital through investing primarily in Northwest companies.
To pursue its objective, the Fund will invest at least 65% of its total assets
in securities issued by companies with their principal executive offices located
in Alaska, Idaho, Montana, Oregon or Washington ("Northwest").
SAFECO INTERNATIONAL STOCK FUND ("International Fund") has as its investment
objective to seek maximum long-term total return (capital appreciation and
income) by investing primarily in common stock of established non-U.S.
companies. To pursue its objective, the International Fund, under normal market
conditions, will invest at least 65% of its total assets in the securities of
companies domiciled in at least five countries, not including the United States.
SAFECO BALANCED FUND ("Balanced Fund") has as its investment objective to seek
growth and income consistent with the preservation of capital. To pursue its
objective, the Balanced Fund will invest primarily in equity and fixed income
securities.
SAFECO SMALL COMPANY STOCK FUND ("Small Company Fund") has as its investment
objective to seek long-term growth of capital through investing primarily in
small-sized companies. To pursue its objective, the Small Company Fund will
invest primarily in companies with total market capitalization of less than $1
billion.
SAFECO U.S. VALUE FUND ("Value Fund") has as its investment objective to seek
long-term growth of capital and income. To pursue its objective, the Value
Fund will primarily invest in common stocks selected for potential
appreciation and income using fundamental value analysis.
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND ("Intermediate Treasury Fund") has
as its investment objective to provide as high a level of current income as is
consistent with the preservation of capital. During normal market conditions,
the Fund will invest at least 65% of its total assets in direct obligations of
the U.S. Treasury.
SAFECO HIGH-YIELD BOND FUND ("High-Yield Fund") has as its investment objective
to provide a high level of current interest income through the purchase of
high-yield, fixed-income securities. During normal market conditions, the Fund
will invest at least 65% of its total assets in high-yield, fixed income
securities.
SAFECO MANAGED BOND FUND ("Managed Bond Fund") has as its investment objective
to provide as high a level of total return as is consistent with the relative
stability of capital through the purchase of investment grade debt securities.
SAFECO MUNICIPAL BOND FUND ("Municipal Bond Fund") has as its investment
objective to provide as high a level of current interest income exempt from
federal income tax as is consistent with the relative stability of capital.
SAFECO CALIFORNIA TAX-FREE INCOME FUND ("California Fund") has as its investment
objective to provide as high a level of current interest income exempt from
federal income tax and California state personal income tax as is consistent
with the relative stability of capital.
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND ("Washington Fund") has as its
investment objective to provide as high a level of current interest income
exempt from federal income tax as is consistent with prudent investment risk.
SAFECO MONEY MARKET FUND ("Money Market Fund") has as its investment objective
to seek as high a level of current income as is consistent with the preservation
of capital and liquidity through investment in high-quality money market
instruments maturing in thirteen months or less.
There is no assurance that a Fund will achieve its investment objective.
-- 2 --
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Introduction to the Trusts and the Funds
Expenses
Financial Highlights
Adviser's Institutional Private Account Performance
Alternative Purchase Arrangement
Each Fund's Investment Objective and Policies
Risk Factors
Portfolio Managers
How to Purchase Shares
How to Redeem Shares
How to Systematically Purchase or Redeem Shares
How to Exchange Shares From One Fund to Another
Telephone Transactions
Share Price Calculation
Information About Share Ownership and Companies that Provide Services to the Trusts
Distribution Plans
Persons Controlling Certain Funds
Performance Information
Fund Distributions and How They are Taxed
Tax-Deferred Retirement Plans
Account Statements
Account Changes and Signature Requirements
Description of Stocks, Bonds and Convertible Securities
Ratings Supplement
Debt Securities Holdings
</TABLE>
-- 3 --
<PAGE>
INTRODUCTION TO THE TRUSTS AND THE FUNDS
Each Trust is an open-end management investment company that issues shares
representing one or more series. This Prospectus offers shares of the stock,
taxable fixed-income, tax-exempt income and money market Funds listed below.
The stock Funds offered are the Growth Fund, the Equity Fund, the Income
Fund, the Northwest Fund, the Balanced Fund, the International Fund, the
Small Company Fund, and the Value Fund (collectively, the "Stock Funds").
Each Stock Fund is a diversified series of the Common Stock Trust.
The taxable fixed-income Funds offered are the Intermediate Treasury Fund, the
High-Yield Fund and the Managed Bond Fund (collectively, the "Taxable
Fixed-Income Funds"). The Intermediate Treasury Fund and the High-Yield Fund are
diversified series of the Taxable Bond Trust. The Managed Bond Fund is a
diversified series of the Managed Bond Trust. Prior to September 30, 1996, the
name of the Managed Bond Fund was the SAFECO Fixed-Income Portfolio and the name
of the Managed Bond Trust was the SAFECO Institutional Series Trust.
The tax-exempt income Funds offered are the Municipal Bond Fund, the California
Fund and the Washington Fund (collectively, the "Tax-Exempt Income Funds"). Each
of the Tax-Exempt Income Funds is a diversified series of the Tax-Exempt Bond
Trust.
This Prospectus also offers the Money Market Fund, which is a diversified series
of the Money Market Trust.
THE FUNDS
Each Fund offers multiple classes of shares. The Advisor Classes of shares are
offered to investors who engage the services of an investment professional. For
each Fund (except the Money Market Fund), Class A shares are subject to a
front-end sales charge and pay a Rule 12b-1 fee. Class B shares are not subject
to a front-end sales charge, but may be subject to a contingent deferred sales
charge ("CDSC") and pay a higher Rule 12b-1 fee.
For the Money Market Fund, Class A shares are sold at net asset value with no
front-end sales charge. A front-end sales charge may apply when you exchange
your Class A Money Market Fund shares for Class A shares of other Funds. Money
Market Fund Class B Shares are sold at net asset value and are not subject to a
CDSC upon redemption, provided that the shareholder has remained solely invested
in Money Market Fund Class B shares. A CDSC may apply upon redemption of Money
Market Fund Class B shares that have been exchanged at any time during the
investor's ownership for Class B shares of other Funds. Money Market Fund Class
A and Class B shares do not currently pay Rule 12b-1 fees.
Each Fund:
/ / Offers easy access to your money through telephone redemptions and wire
transfers.
/ / Has a minimum initial investment of $1,000 for regular accounts, $250 for
individual retirement accounts ("IRAs") and accounts established under the
Uniform Gift to Minors Act ("UGMA") or Uniform Transfer to Minors Act
("UTMA"). No minimum initial investment is required to establish the
Automatic Investment Method ("AIM") or Payroll Deduction Plan.
RISK FACTORS
There is, of course, no assurance that a Fund will achieve its investment
objective. See "Each Fund's Investment Objective and Policies" for more
information.
There is a risk that the market value of each Fund's portfolio of securities may
decrease and result in a decrease in the value of a shareholder's investment.
Because the Northwest, California and Washington Funds concentrate their
investments in geographic regions, they may be subject to special
-- 4 --
<PAGE>
INTRODUCTION TO THE TRUSTS AND THE FUNDS (CONTINUED)
risks. Investors should carefully consider the investment risks of such
geographic concentration before purchasing shares of those Funds. Because the
International Fund invests primarily in foreign securities, it is subject to
various risks in addition to those associated with U.S. investments. For
example, the value of the International Fund depends in part upon currency
values, the political and regulatory environments, and overall economic factors
in the countries in which the Fund invests. The Small Company Fund invests in
small-sized companies, which involve greater risks than investments in larger,
more established issuers and their securities can be subject to more abrupt and
erratic movements in price. The value of the Intermediate Treasury Fund,
High-Yield Fund, Managed Bond Fund, Municipal Bond Fund, California Fund and
Washington Fund will normally fluctuate inversely with changes in market
interest rates. The High-Yield Fund is subject to special risks associated with
below investment grade securities, sometimes referred to as "junk bonds," which
it will purchase to pursue its investment objective. The principal risk
associated with money market funds is that they may experience a delay or
failure in principal or interest payments at maturity of one or more of the
portfolio securities. The Money Market Fund's yield will fluctuate with general
money market interest rates. See "Each Fund's Investment Objective and Policies"
and "Risk Factors" for more information.
INVESTMENT ADVISER; SUB-ADVISER OF INTERNATIONAL FUND
Each Fund is managed by SAFECO Asset Management Company ("SAM"). SAM is
headquartered in Seattle, Washington and managed over $2 billion in mutual fund
assets as of December 31, 1996. SAM has been an adviser to mutual funds and
other investment portfolios since 1973, and its predecessors have been advisers
since 1932. The Bank of Ireland Asset Management (U.S.) Limited (the "Sub-
Adviser") acts as a sub-adviser to the International Fund. The Sub-Adviser is a
direct, wholly-owned subsidiary of Bank of Ireland Asset Management Limited (an
investment advisory firm), which is headquartered in Dublin, Ireland, and an
indirect, wholly-owned subsidiary of the Bank of Ireland, which is also
headquartered in Dublin, Ireland. See "Information about Share Ownership and
Companies that Provide Services to the Trusts" for more information.
-- 5 --
<PAGE>
EXPENSES
A. SHAREHOLDER TRANSACTION EXPENSES FOR CLASS A AND CLASS B OF EACH FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
----------- ---------
<S> <C> <C>
Maximum Sales Charge on Purchases 4.50%* NONE
(as a Percentage of Offering Price)
Sales Charge on Reinvested Dividends NONE NONE
Maximum Contingent Deferred Sales Charge (CDSC) NONE* 5.00%**
Redemption Fees NONE NONE
Exchange Fees NONE NONE
</TABLE>
* Except for initial purchases of the Money Market Fund. In addition, purchases
of $1,000,000 or more of Class A shares are not subject to a front-end sales
charge, but a 1% CDSC will apply to redemptions made in the first year. See
"How to Purchase Shares" on page 48 for more information.
** Except for initial purchases of the Money Market Fund. A CDSC may apply to
redemptions from the Money Market Fund that follow exchanges from Class B
shares of another Fund. See "How to Purchase Shares" on page 48 for more
information.
Sales charge waivers and reduced sales charge purchase plans are available for
Class A shares. See "How to Purchase Shares" on page 51 for more information.
The maximum 5% CDSC on Class B shares applies to redemptions during the first
year after purchase, declining to 0% in the first month following the investor's
sixth anniversary from purchase. Class B shares of a Fund convert automatically
into Class A shares of that Fund in the first month following the investor's
sixth anniversary from purchase. Money Market Fund Class B shareholders who
subsequently exchange into Class B of another Fund do not receive credit for the
initial time invested in the Money Market Fund for purposes of calculating any
CDSC due upon redemption or the conversion to Class A Shares. See "Purchasing
Advisor Class B Shares" on page 52 for more information.
SAFECO Services Corporation ("SAFECO Services"), the transfer agent for the
Funds, charges a $10 fee to wire redemption proceeds.
B. ANNUAL OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
GROWTH FUND EQUITY FUND INCOME FUND
----------------- ----------------- -----------------
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>
Management Fee .70% .70% .58% .58% .68% .68%
Rule 12b-1 Fees .25% 1.00% .25% 1.00% .25% 1.00%
Other Expenses .32% .32% .21% .21% .18% .18%
------- ------- ------- ------- ------- -------
Total Operating
Expenses (estimated) 1.27% 2.02% 1.04% 1.79% 1.11% 1.86%
<CAPTION>
INTERNATIONAL
NORTHWEST FUND FUND BALANCED FUND
----------------- ----------------- -----------------
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>
Management Fee .73% .73% 1.10% 1.10% .72% .72%
Rule 12b-1 Fees .25% 1.00% .25% 1.00% .25% 1.00%
Other Expenses .34% .34% 1.26% 1.26% .60% .60%
------- ------- ------- ------- ------- -------
Total Operating
Expenses (estimated) 1.32% 2.07% 2.61% 3.36% 1.57% 2.32%
</TABLE>
-- 6 --
<PAGE>
EXPENSES (CONTINUED)
<TABLE>
<CAPTION>
SMALL COMPANY INTERMEDIATE
FUND VALUE FUND TREASURY FUND HIGH-YIELD FUND
----------------- ----------------- ----------------- -----------------
ADVISOR ADVISOR ADVISOR ADVISOR ADVISOR ADVISOR ADVISOR ADVISOR
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fee .83% .83% .75% .75% .55% .55% .62% .62%
Rule 12b-1 Fees .25% 1.00% .25% 1.00% .25% 1.00% .25% 1.00%
Other Expenses .66% .66% .29% .29% .46% .46% .32% .32%
------- ------- ------- ------- ------- ------- ------- -------
Total Operating
Expenses (estimated) 1.74% 2.49% 1.29% 2.04% 1.26% 2.01% 1.19% 1.94%
<CAPTION>
MANAGED BOND MUNICIPAL BOND
FUND WASHINGTON FUND FUND
----------------- ----------------- -----------------
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>
Management Fee .49% .49% .64% .64% .41% .41%
Rule 12b-1 Fees .25% 1.00% .25% 1.00% .25% 1.00%
Other Expenses .67% .67% .43% .43% .13% .13%
------- ------- ------- ------- ------- -------
Total Operating
Expenses (estimated) 1.41% 2.16% 1.32% 2.07% .79% 1.54%
<CAPTION>
MONEY MARKET
CALIFORNIA FUND FUND
----------------- -----------------
ADVISOR ADVISOR ADVISOR ADVISOR
CLASS A CLASS B CLASS A CLASS B
------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Management Fee .53% .53% .50% .50%
Rule 12b-1 Fees .25% 1.00% .00% .00%
Other Expenses .15% .15% .28% .28%
------- ------- ------- -------
Total Operating
Expenses (estimated) .93% 1.68% .78% .78%
</TABLE>
* The Money Market Fund does not have a Rule 12b-1 fee at this time.
Shareholders will be notified in advance by a supplement to this Prospectus in
the event that the Money Market Fund establishes a Rule 12b-1 fee under its
Rule 12b-1 Plan.
Effective September 30, 1996, all of the then-existing shares of each Fund
were redesignated as No-Load Class shares and each Fund, except the
High-Yield Fund and the Value Fund commenced offering Class A and Class B
shares. The High-Yield Fund commenced offering Class A and Class B shares on
January 31, 1997. The Value Fund commenced offering Class A and Class B
shares as of the date of this prospectus. The amounts shown above for the
Value Fund are estimated expenses based on the Fund's maximum management fee
applicable Rule 12b-1 fees, and "Other Expenses". The amounts shown for the
Growth, Equity, Income, Northwest, Intermediate Treasury and High Yield Funds
are estimated expenses for the Advisor Classes based on the actual expenses
paid by shareholders of the Funds' other class for the fiscal year ended
September 30, 1996, restated as applicable to reflect fees borne by Class A
or Class B shares. The amounts shown for the Money Market, Municipal Bond,
California, and Washington Funds are estimated expenses for the Advisor
Classes based on the actual expenses paid by shareholders of the Funds' other
class for the fiscal year ended March 31, 1996, restated as applicable to
reflect fees borne by Class A or Class B shares. The amounts shown for the
Managed Bond Fund are estimated expenses for the Advisor Classes based on the
actual expenses paid by shareholders of the Fund's other class for the fiscal
year ended December 31, 1995, restated as applicable to reflect fees borne by
Class A or Class B shares. The amounts shown for the Balanced, International
and Small Company Funds are annualized expenses for the Advisor Classes based
on the actual expenses paid by the Fund's other class for the fiscal period
ended September 30, 1996, restated as applicable to reflect fees borne by
Class A or Class B shares. The management fees paid by the International and
Small
-- 7 --
<PAGE>
EXPENSES (CONTINUED)
Company Funds are higher than the management fees paid by most other investment
companies. See "Information about Share Ownership and Companies that Provide
Services to the Trusts" on page 60 for more information.
Rule 12b-1 fees have the following two components:
<TABLE>
<CAPTION>
ADVISOR ADVISOR
CLASS A CLASS B
--------------- ---------------
<S> <C> <C>
Rule 12b-1 service fees 0.25% 0.25%
Rule 12b-1 distribution fees 0.00% 0.75%
</TABLE>
Long-term Class A and Class B shareholders may pay more in sales charges and
12b-1 fees than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc.
C. EXAMPLE OF EXPENSES
You would pay the following expenses on a $1,000 investment assuming a 5% annual
return and redemption at the end of each time period. The example also assumes
that all dividends and other distributions are reinvested and that the
percentage amounts listed in each Fund's "Annual Operating Expenses" above
remain the same in the years shown.
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Growth
Advisor Class A(1) $ 57 $ 83 $ 112 $ 191
Advisor Class B
Assuming redemption at end of period(2)(3) $ 71 $ 93 $ 129 $ 198
Assuming no redemption at end of period(3) $ 21 $ 63 $ 109 $ 198
Equity
Advisor Class A(1) $ 55 $ 77 $ 100 $ 166
Advisor Class B
Assuming redemption at end of period(2)(3) $ 68 $ 86 $ 117 $ 173
Assuming no redemption at end of period(3) $ 18 $ 56 $ 97 $ 173
Income
Advisor Class A(1) $ 56 $ 79 $ 103 $ 174
Advisor Class B
Assuming redemption at end of period(2)(3) $ 69 $ 88 $ 121 $ 180
Assuming no redemption at end of period(3) $ 19 $ 58 $ 101 $ 180
Northwest
Advisor Class A(1) $ 58 $ 85 $ 114 $ 197
Advisor Class B
Assuming redemption at end of period(2)(3) $ 71 $ 95 $ 131 $ 203
Assuming no redemption at end of period(3) $ 21 $ 65 $ 111 $ 203
International
Advisor Class A(1) $ 70 $ 122
Advisor Class B
Assuming redemption at end of period(2) $ 84 $ 133
Assuming no redemption at end of period $ 34 $ 103
Balanced
Advisor Class A(1) $ 60 $ 92
Advisor Class B
Assuming redemption at end of period(2) $ 74 $ 102
Assuming no redemption at end of period $ 24 $ 72
</TABLE>
-- 8 --
<PAGE>
EXPENSES (CONTINUED)
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Small Company
Advisor Class A(1) $ 62 $ 97
Advisor Class B
Assuming redemption at end of period(2) $ 75 $ 108
Assuming no redemption at end of period $ 25 $ 78
Value Fund
Advisor Class A(1) $ 58 $ 84
Advisor Class B
Assuming redemption at end of period (2)(3) $ 71 $ 94
Assuming no redemption at end of period $ 21 $ 64
Intermediate Treasury
Advisor Class A(1) $ 57 $ 83 $ 111 $ 190
Advisor Class B
Assuming redemption at end of period(2)(3) $ 70 $ 93 $ 128 $ 197
Assuming no redemption at end of period(3) $ 20 $ 63 $ 108 $ 197
High-Yield
Advisor Class A(1) $ 57 $ 81 $ 107 $ 183
Advisor Class B
Assuming redemption at end of period(2)(3) $ 70 $ 91 $ 125 $ 189
Assuming no redemption at end of period(3) $ 20 $ 61 $ 105 $ 189
Managed Bond
Advisor Class A(1) $ 59 $ 88 $ 119 $ 206
Advisor Class B
Assuming redemption at end of period(2)(3) $ 72 $ 98 $ 136 $ 213
Assuming no redemption at end of period(3) $ 22 $ 68 $ 116 $ 213
Municipal Bond
Advisor Class A(1) $ 53 $ 69 $ 87 $ 138
Advisor Class B
Assuming redemption at end of period(2)(3) $ 66 $ 79 $ 104 $ 145
Assuming no redemption at end of period(3) $ 16 $ 49 $ 84 $ 145
California
Advisor Class A(1) $ 54 $ 73 $ 94 $ 154
Advisor Class B
Assuming redemption at end of period(2)(3) $ 67 $ 83 $ 111 $ 160
Assuming no redemption at end of period(3) $ 17 $ 53 $ 91 $ 160
Washington
Advisor Class A(1) $ 58 $ 85 $ 114 $ 197
Advisor Class B
Assuming redemption at end of period(2)(3) $ 71 $ 95 $ 131 $ 203
Assuming redemption at end of period(3) $ 21 $ 65 $ 111 $ 203
Money Market(4)
Advisor Class A $ 8 $ 25 $ 43 $ 97
Advisor Class B $ 8 $ 25 $ 43 $ 97
</TABLE>
(1) Includes deduction at the time of purchase of the maximum sales charge.
(2) Includes deduction at the time of redemption of the applicable CDSC.
(3) Ten-year figures assume conversion of Class B shares to Class A shares in
the first month following the investor's sixth anniversary from purchase.
(4) Figures for the Money Market Fund assume that the investor purchased Money
Market Fund Shares as an initial investment and made no subsequent
exchanges.
The purpose of the table is to assist you in understanding the various costs and
expenses that an investor in Class A and Class B shares of each Fund would bear,
directly or indirectly. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES. A FUND'S ACTUAL EXPENSES OR PERFORMANCE MAY BE GREATER
OR LESS THAN THOSE SHOWN. THE ASSUMED 5% ANNUAL RETURN IS REQUIRED BY SECURITIES
AND EXCHANGE COMMISSION REGULATIONS APPLICABLE TO ALL MUTUAL FUNDS AND IT IS NOT
A PREDICTION OF, NOR DOES IT REPRESENT, PAST OR FUTURE EXPENSES OR THE
PERFORMANCE OF ANY FUND.
-- 9 --
<PAGE>
FINANCIAL HIGHLIGHTS
The amounts shown for each Fund in the Financial Highlights tables that follow
are based upon a single No-Load Class share outstanding throughout the period
indicated and do not reflect Rule 12b-1 fees. Except for the six month period
ended June 30, 1996 (Managed Bond Fund) and the six month period ended September
30, 1996 (Municipal, California, Washington and Money Market), the following
selected data has been derived from financial statements that have been audited
by Ernst & Young LLP. The data should be read in conjunction with the financial
statements, related notes and other financial information included in each
Trust's Annual Report to shareholders and incorporated by reference in the
applicable Trust's Statement of Additional Information. The following selected
data for the six month period ended June 30, 1996 (Managed Bond Fund) and the
six month period ended September 30, 1996 (Municipal, California, Washington and
Money Market Funds) has been derived from unaudited financial statements. The
data should be read in conjunction with the financial statements, related notes,
and other financial information included in the Trust's Semi-Annual Report to
shareholders and incorporated by reference in the Trust's Statement of
Additional Information. A copy of each Trust's Statement of Additional
Information may be obtained by calling the number on the front page of this
Prospectus.
SAFECO GROWTH FUND
<TABLE>
<CAPTION>
FOR THE
FISCAL
PERIOD FROM
OCTOBER 1,
1996 T0
DECEMBER 31, YEAR ENDED SEPTEMBER 30
1996 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning
of period -- $15.83 $17.37 $19.20 $13.98 $17.95 $11.14 $17.22 $14.95 $18.13 $ 15.40
INCOME (LOSS) FROM INVESTMENT
OPERATIONS:
Net investment (loss) income -- (.02) .07 (.02) (.02) (.01) .05 .14 .53 .35 .24
Net realized and unrealized
gain (loss) on investments -- 2.24 4.07 .78 5.39 (3.15) 7.77 (4.20) 3.17 (.99) 4.31
-------- -------- -------- -------- -------- -------- -------- -------- ------- ------- -------
Total from investment
operations -- 2.22 4.14 .76 5.37 (3.16) 7.82 (4.06) 3.70 (.64) 4.55
-------- -------- -------- -------- -------- -------- -------- -------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net
investment income -- -- (.07) -- -- -- (.05) (.14) (.53) (.48) (.23)
Distributions from capital
gains -- (2.60) (5.61) (2.59) (.15) (.81) (.96) (1.88) (.90) (2.06) (1.59)
-------- -------- -------- -------- -------- -------- -------- -------- ------- ------- -------
Total distributions -- (2.60) (5.68) (2.59) (.15) (.81) (1.01) (2.02) (1.43) (2.54) (1.82)
-------- -------- -------- -------- -------- -------- -------- -------- ------- ------- -------
Net asset value at end of
period -- $15.45 $15.83 $17.37 $19.20 $13.98 $17.95 $11.14 $17.22 $14.95 $ 18.13
-------- -------- -------- -------- -------- -------- -------- -------- ------- ------- -------
-------- -------- -------- -------- -------- -------- -------- -------- ------- ------- -------
Total return** -- 14.16% 23.93% 3.88% 38.43% -17.83% 70.22% -23.67% 25.23% -1.47% 32.68%
Net assets at end of period
(000's omitted) -- $179,574 $176,483 $156,108 $158,723 $127,897 $155,429 $59,164 $81,472 $74,324 $82,703
Ratio of expenses to average
net assets -- 1.02% .98% .95% .91% .91% .90% 1.01% .94% .98% .92%
Ratio of net investment income
(loss) to average net assets -- (.14%) .34% -.12% -.10% -.10% .36% .88% 3.27% 2.37% 1.46%
Portfolio turnover rate -- 124.79% 110.44% 71.18% 57.19% 85.38% 49.86% 90.48% 11.38% 19.31% 23.61%
Avg. Commission rate paid -- $.0548 -- -- -- -- -- -- -- -- --
</TABLE>
** Total return information does not reflect sales loads.
-- 10 --
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
SAFECO EQUITY FUND
<TABLE>
<CAPTION>
FOR THE
FISCAL
PERIOD FROM
OCTOBER 1,
1996 T0
DECEMBER 31, YEAR ENDED SEPTEMBER 30
1996 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning
of period -- $15.31 $13.89 $12.54 $9.53 $10.38 $8.43 $10.10 $8.51 $12.23 $ 11.44
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income -- .28 .34 .23 .17 .15 .17 .22 .39 .18 .21
Net realized and unrealized
gain (loss) on investments -- 2.42 2.59 1.83 3.79 (.09) 2.37 (1.28) 2.26 (1.82) 2.83
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Total from investment
operations -- 2.70 2.93 2.06 3.96 .06 2.54 (1.06) 2.65 (1.64) 3.04
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
LESS DISTRIBUTIONS:
Dividends from net
investment income -- (.28) (.34) (.23) (.17) (.15) (.17) (.22) (.39) (.23) (.22)
Distributions from capital
gains -- (1.88) (1.17) (.48) (.78) (.76) (.42) (.39) (.67) (1.85) (2.03)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Total distributions -- (2.16) (1.51) (.71) (.95) (.91) (.59) (.61) (1.06) (2.08) (2.25)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Net asset value at end of
period -- $15.85 $15.31 $13.89 $12.54 $9.53 $10.38 $8.43 $10.10 $8.51 $12.23
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Total return** -- 18.04% 21.59% 16.51% 41.77% .41% 30.39% -10.73% 32.12% -9.93% 31.75%
Net assets at end of period
(000's omitted) -- $725,780 $598,582 $412,805 $148,894 $74,383 $71,586 $51,603 $53,892 $45,625 $64,668
Ratio of expenses to average
net assets -- .79% .84% .85% .94% .96% .98% .97% .96% 1.00% .97%
Ratio of net investment income
to average net assets -- 1.74% 2.38% 1.72% 1.50% 1.34% 1.70% 2.19% 4.13% 2.16% 1.92%
Portfolio turnover rate -- 74.07% 56.14% 33.33% 37.74% 39.88% 45.21% 51.01% 63.62% 88.19% 85.11%
Avg. Commission rate paid -- $.0587 -- -- -- -- -- -- -- -- --
</TABLE>
** Total return information does not reflect sales loads.
-- 11 --
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
SAFECO INCOME FUND
<TABLE>
<CAPTION>
FOR THE
FISCAL
PERIOD FROM
OCTOBER 1,
1996 T0
DECEMBER 31 YEAR ENDED SEPTEMBER 30
1996 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period -- $19.11 $17.25 $17.79 $16.27 $15.35 $12.89 $16.44 $14.32 $17.16 $ 15.52
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income -- .73 .82 .81 .78 .80 .81 .85 .81 .78 .78
Net realized and
unrealized gain
(loss) on investments -- 2.84 2.71 (.30) 1.52 .96 2.53 (3.39) 2.12 (1.80) 2.37
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Total from investment
operations -- 3.57 3.53 .51 2.30 1.76 3.34 (2.54) 2.93 (1.02) 3.15
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
LESS DISTRIBUTIONS:
Dividends from net
investment income -- (.73) (.82) (.81) (.78) (.80) (.83) (.83) (.81) (.98) (.78)
Distributions from
capital gains -- (1.92) (.85) (.24) -- (.04) (.05) (.18) -- (.84) (.73)#
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Total distributions -- (2.65) (1.67) (1.05) (.78) (.84) (.88) (1.01) (.81) (1.82) (1.51)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Net asset value at end of
period -- $20.03 $19.11 $17.25 $17.79 $16.27 $15.35 $12.89 $16.44 $14.32 $ 17.16
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Total return** -- 18.98% 21.04% 2.98% 14.35% 11.75% 26.43% -16.06% 21.00% -4.61% 21.41%
Net assets at end of
period (000's omitted) -- $260,023 $217,870 $190,610 $203,019 $181,582 $181,265 $170,153 $232,812 $231,724 $313,308
Ratio of expenses to
average net assets -- .86% .87% .86% .90% .90% .93% .92% .92% .97% .94%
Ratio of net investment
income to average net
assets -- 3.56% 4.55% 4.59% 4.55% 5.06% 5.58% 5.59% 5.28% 5.58% 4.53%
Portfolio turnover rate -- 50.11% 31.12% 19.30% 20.74% 20.35% 22.25% 19.37% 16.38% 34.13% 33.08%
Avg. Commission rate paid -- $.0591 -- -- -- -- -- -- -- -- --
</TABLE>
** Total return information does not reflect sales loads.
# Distributions include $.04 of additional gain arising from investment
transactions of securities acquired in a non-taxable exchange.
-- 12 --
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
SAFECO NORTHWEST FUND
<TABLE>
<CAPTION>
FOR THE
FISCAL FOR THE PERIOD
PERIOD FROM FOR THE NINE FROM FEBRUARY 7,
OCTOBER 1, MONTH PERIOD 1991
1996 TO YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED (INITIAL PUBLIC
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, OFFERING) TO
1996 1996 1995 1994 1993 1992 DECEMBER 31, 1991
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period -- $14.41 $12.59 $12.34 $12.59 $11.37 $10.06
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income -- .02 .04 .04 .02 .06 .13
Net realized and
unrealized gain
(loss) on investments -- 1.32 2.35 .59 (.25) 1.53 1.44
------------- ------------- ------------- ------------- ------------- ------------- ----------------
Total from investment
operations -- 1.34 2.39 .63 (.23) 1.59 1.57
------------- ------------- ------------- ------------- ------------- ------------- ----------------
LESS DISTRIBUTIONS:
Dividends from net
investment income -- (.02) (.04) (.04) (.02) (.06) (.19)
Distributions from
capital gains -- (1.95) (.53) (.34) -- (.31) (.07)
------------- ------------- ------------- ------------- ------------- ------------- ----------------
Total distributions -- (1.97) (.57) (.38) (.02) (.37) (.26)
------------- ------------- ------------- ------------- ------------- ------------- ----------------
Net asset value at
end of period -- $13.78 $14.41 $12.59 $12.34 $12.59 $11.37
------------- ------------- ------------- ------------- ------------- ------------- ----------------
------------- ------------- ------------- ------------- ------------- ------------- ----------------
Total return** -- 9.61% 19.01% 5.19% -1.86%+ 14.08% 14.93%+
Net assets at end of
period (000's omitted) -- $43,128 $40,140 $36,383 $39,631 $40,402 $26,434
Ratio of expenses to
average net assets -- 1.07% 1.09% 1.06% 1.11%++ 1.11% 1.27%++
Ratio of net investment
income to average
net assets -- .11% .31% .33% .18%++ .55% 1.14%++
Portfolio turnover rate -- 35.69% 19.59% 18.46% 14.05%++ 33.34% 27.71%++
Avg. Commission
rate paid -- $.0591 -- -- -- -- --
</TABLE>
** Total return information does not reflect sales loads.
+ Not annualized.
++ Annualized.
-- 13 --
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
SAFECO INTERNATIONAL, BALANCED AND SMALL COMPANY FUNDS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
FOR THE FISCAL PERIOD JANUARY 31, 1996
FROM OCTOBER 1, 1996 (INITIAL PUBLIC OFFERING) TO SEPTEMBER
TO DECEMBER 31, 1996 30, 1996
--------------------------------------- ---------------------------------------
SAFECO SAFECO
SAFECO SAFECO SMALL SAFECO SAFECO SMALL
INTERNATIONAL BALANCED COMPANY INTERNATIONAL BALANCED COMPANY
FUND FUND FUND FUND FUND FUND
--------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value at Beginning of Period -- -- -- $10.00 $10.00 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income -- -- -- .06 .21 (.01)
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency
Transactions -- -- -- .39 .39 2.19
----------- ----------- ---------- ------------- ------------ ----------
Total from Investment Operations -- -- -- .45 .60 2.18
----------- ----------- ---------- ------------- ------------ ----------
LESS DISTRIBUTIONS:
Dividends from Net Investment Income -- -- -- (.06) (.21) --
Distributions from Realized Gains -- -- -- -- (.01) (.67)
----------- ----------- ---------- ------------- ------------ ----------
Total Distributions -- -- -- (.06) (.22) (.67)
----------- ----------- ---------- ------------- ------------ ----------
Net Asset Value at End of Period -- -- -- $10.39 $10.38 $11.51%
----------- ----------- ---------- ------------- ------------ ----------
----------- ----------- ---------- ------------- ------------ ----------
Total Return**+ -- -- -- 4.54%+ 5.99%+ 21.83%+
Net Assets at End of Period (000's omitted) -- -- -- $8,323 $7,632 $12,552
Ratio of Expenses to Average Net Assets++ -- -- -- 2.36%++ 1.32%++ 1.49%++
Ratio of Net Investment Income (Loss)
to Average Net Assets++ -- -- -- .93%++ 3.21%++ (.24%)++
Portfolio Turnover Rate++ -- -- -- 15.73%++ 143.87%++ 91.03%++
Average Commission Rate Paid -- -- -- $.0225 $.0560 $.0510
</TABLE>
** Total return information does not reflect sales loads.
+ Not Annualized.
++ Annualized.
The information listed above is based on an eight month operating history and
may not be indicative of longer-term results. More information about the Funds
is contained in their annual report to shareholders which may be obtained
without charge by calling the number on the first page of this Prospectus.
-- 14 --
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
SEPTEMBER 7,
FOR THE FISCAL 1988
PERIOD FROM (INITIAL
OCTOBER 1, 1996 PUBLIC
TO OFFERING) TO
DECEMBER 31, FOR THE YEAR ENDED SEPTEMBER 30 SEPTEMBER 30,
1996 1996 1995 1994 1993 1992 1991 1990 1989 1988
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of
period -- $10.24 $9.74 $10.74 $10.69 $10.20 $9.83 $9.96 $9.95 $9.93
INCOME FROM INVESTMENT OPERATIONS:
Net investment income -- .54 .55 .52 .60 .72 .75 .77 .77 .05
Net realized and unrealized gain
(loss) on investments -- (.14) .50 (1.00) .49 .54 .37 (.13) (.01) .02
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
Total from investment operations -- .40 1.05 (.48) 1.09 1.26 1.12 .64 .78 .07
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment
income -- (.54) (.55) (.52) (.60) (.72) (.75) (.77) (.77) (.05)
Distributions from capital gains -- -- -- -- (.44) (.05) -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
Total distributions -- (.54) (.55) (.52) (1.04) (.77) (.75) (.77) (.77) (.05)
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
Net asset value at end of period -- $10.10 $10.24 $9.74 $10.74 $10.69 $10.20 $9.83 $9.96 $9.95
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
Total return** -- 4.00% 11.07% -4.56% 10.51% 12.78% 11.80% 6.65% 8.20% .69%+
Net assets at end of period (000's
omitted) -- $14,668 $13,774 $13,367 $14,706 $12,205 $9,458 $6,916 $6,249 $5,007
Ratio of expenses to average net
assets -- 1.01% .96% .90% .99% .98% 1.00% 1.00% .96% 1.06%++
Ratio of net investment income to
average net assets -- 5.30% 5.51% 5.08% 5.52% 6.89% 7.45% 7.76% 7.82% 7.46%++
Portfolio turnover rate -- 294.25% 124.9% 75.46% 104.94% 37.19% 9.51% 24.17% 4.36% None
</TABLE>
** Total return information does not reflect sales loads.
+ Not annualized.
++ Annualized.
-- 15 --
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
SAFECO HIGH-YIELD BOND FUND
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
SEPTEMBER 7,
FOR THE FISCAL 1988
PERIOD FROM (INITIAL
OCTOBER 1, 1996 PUBLIC
TO OFFERING) TO
DECEMBER 31, FOR THE YEAR ENDED SEPTEMBER 30 SEPTEMBER 30,
1996 1996 1995 1994 1993 1992 1991 1990 1989 1988
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of
period -- $8.68 $8.55 $9.22 $8.92 $8.35 $7.94 $9.33 $9.86 $9.89
INCOME FROM INVESTMENT OPERATIONS:
Net investment income -- .78 .79 .82 .91 .83 .93 1.04 1.11 .07
Net realized and unrealized gain
(loss) on investments -- .11 .13 (.67) .30 .57 .41 (1.39) (.53) (.03)
------- ------- ------- ------- ------- ------- ------- -------- ------- -------
Total from investment operations -- .89 .92 .15 1.21 1.40 1.34 (.35) .58 .04
------- ------- ------- ------- ------- ------- ------- -------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment
income -- (.78) (.79) (.82) (.91) (.83) (.93) (1.04) (1.11) (.07)
------- ------- ------- ------- ------- ------- ------- -------- ------- -------
Net asset value at end of period -- $8.79 $8.68 $8.55 $9.22 $8.92 $8.35 $7.94 $9.33 $9.86
------- ------- ------- ------- ------- ------- ------- -------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------- ------- -------
Total return** -- 10.79% 11.43% 1.61% 14.29% 17.52% 18.18% -4.04% 6.10% .37%+
Net assets at end of period (000's
omitted) -- $47,880 $39,178 $27,212 $28,291 $19,672 $11,931 $7,786 $9,051 $5,204
Ratio of expenses to average net
assets -- .94% 1.01% 1.03% 1.09% 1.05% 1.11% 1.15% 1.11% 1.25%++
Ratio of net investment income to
average net assets -- 8.99% 9.28% 9.26% 9.94% 9.66% 11.51% 11.90% 11.52% 10.27%++
Portfolio turnover rate -- 92.65% 38.03% 63.02% 50.27% 40.66% 32.46% 18.46% 12.57% None
</TABLE>
** Total return information does not reflect sales loads
+ Not annualized.
++ Annualized. --
-- 16 --
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
SAFECO MANAGED BOND FUND
<TABLE>
<CAPTION>
FOR THE SIX FOR THE PERIOD FROM
FOR THE MONTH PERIOD FEBRUARY 28, 1994
YEAR ENDED ENDED (INITIAL PUBLIC
DECEMBER 31, JUNE 30, 1996 FOR THE YEAR ENDED OFFERING) TO
1996 (UNAUDITED) DECEMBER 31, 1995 DECEMBER 31, 1994
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value at beginning
of period -- $8.77 $8.15 $8.68
INCOME FROM INVESTMENT OPERATIONS:
Net investment income -- .20 .44 .27
Net realized and unrealized gain
(loss) on investments -- (0.42) .94 (.53)
-------- -------- -------- --------
Total from investment operations -- (0.22) 1.36 (.26)
-------- -------- -------- --------
LESS DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income -- (0.20) (.44) (.27)
Net Realized gains on investments -- -- (.32) --
-------- -------- -------- --------
Total distributions -- (0.20) (.76) (.27)
-------- -------- -------- --------
Net asset value at end of period -- $8.35 $8.77 $8.15
-------- -------- -------- --------
-------- -------- -------- --------
Total return* -- -2.55%+ 17.35% -3.01%+
Net assets at end of period
(000's omitted) -- $4,114 $4,497 $4,627
Ratio of expenses to average
net assets -- 1.17%++ 1.16% 1.28%++
Ratio of net investment income
to average net assets -- 4.64%++ 5.14% 3.88%++
Portfolio turnover rate -- 117.13%++ 78.78% 132.26%++
</TABLE>
* Total return information does not reflect sales loads.
+ Not annualized.
++ Annualized.
-- 17 --
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
SAFECO MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
FOR THE FISCAL
PERIOD FROM
APRIL 1, 1996
TO DECEMBER 31, YEAR ENDED MARCH 31
1996 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value
at beginning
of period -- $13.36 $13.27 $14.13 $13.37 $12.95 $12.73 $12.92 $12.85 $14.16 $13.74
INCOME FROM
INVESTMENT
OPERATIONS:
Net
investment
income -- .76 .77 .78 .81 .86 .86 .88 .94 .96 .99
Net realized
and
unrealized
gain (loss)
on
investments -- .33 .12 (.55) .94 .48 .26 .25 .36 (.91) .63
------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from
investment
operations -- 1.09 .89 .23 1.75 1.34 1.12 1.13 1.30 .05 1.62
------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
LESS
DISTRIBUTIONS:
Dividends
from net
investment
income -- (.76) (.77) (.78) (.81) (.86) (.86) (.88) (.94) (.96) (.99)
Distributions
from
realized
gains -- -- (.03) (.31) (.18) (.06) (.04) (.44) (.29) (.40) (.21)
------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total
distributions -- (.76) (.80) (1.09) (.99) (.92) (.90) (1.32) (1.23) (1.36) (1.20)
------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value
at end of
period -- $13.69 $13.36 $13.27 $14.13 $13.37 $12.95 $12.73 $12.92 $12.85 $14.16
------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total return* -- 8.23% 7.10% 1.30% 13.60% 10.57% 9.13% 9.05% 10.49% .93% 12.49%+
Net assets at
end of period
(000's
omitted) -- $480,643 $472,569 $507,453 $541,515 $427,638 $331,647 $286,303 $231,911 $183,642 $214,745
Ratio of
expenses to
average net
assets -- .54% .56% .52% .53% .54% .56% .57% .60% .61% .59%
Ratio of net
investment
income to
average net
assets -- 5.47% 5.96% 5.49% 5.91% 6.37% 6.68% 6.76% 7.23% 7.42% 7.20%
Portfolio
turnover rate -- 12.60% 26.96% 22.07% 31.66% 25.18% 38.55% 65.80% 135.60% 71.91% 23.09%
</TABLE>
Total return information does not reflect sales loads.
+ Unaudited.
* Not Annualized.
** Annualized.
-- 18 --
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
SAFECO CALIFORNIA TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
FOR THE FISCAL
PERIOD FROM
APRIL 1, 1996
TO DECEMBER 31, YEAR ENDED MARCH 31
1996 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value
at beginning
of period -- $11.54 $11.51 $12.23 $11.60 $11.24 $11.07 $11.02 $10.72 $12.14 $11.68
INCOME FROM
INVESTMENT
OPERATIONS:
Net
investment
income -- .62 .63 .66 .68 .71 .71 .72 .75 .76 .80
Net realized
and
unrealized
gain (loss)
on
investments -- .40 .13 (.38) .76 .44 .23 .23 .30 (.99) .57
------------- ------- ------- ------- ------- ------- ------- ------- ------- ---------- -------
Total from
investment
operations -- 1.02 .76 .28 1.44 1.15 .94 .95 1.05 (.23) 1.37
------------- ------- ------- ------- ------- ------- ------- ------- ------- ---------- -------
LESS
DISTRIBUTIONS:
Dividends
from net
investment
income -- (.62) (.63) (.66) (.68) (.71) (.71) (.72) (.75) (.76) (.80)
Distributions
from
realized
gains -- (.08) (.10) (.34) (.13) (.08) (.06) (.18) -- (.43)++ (.11)
------------- ------- ------- ------- ------- ------- ------- ------- ------- ---------- -------
Total
distributions -- (.70) (.73) (1.00) (.81) (.79) (.77) (.90) (.75) (1.19) (.91)
------------- ------- ------- ------- ------- ------- ------- ------- ------- ---------- -------
Net asset value
at end of
period -- $11.86 $11.54 $11.51 $12.23 $11.60 $11.24 $11.07 $11.02 $10.72 $12.14
------------- ------- ------- ------- ------- ------- ------- ------- ------- ---------- -------
------------- ------- ------- ------- ------- ------- ------- ------- ------- ---------- -------
Total return* -- 8.87% 7.01% 1.97% 12.88% 10.43% 8.78% 8.87% 10.09% -1.39% 12.25%+
Net assets at
end of period
(000's
omitted) -- $70,546 $64,058 $77,056 $79,872 $71,480 $57,066 $47,867 $36,930 $ 28,790 $34,792
Ratio of
expenses to
average net
assets -- .68% .70% .68% .66% .67% .67% .68% .71% .72% .70%
Ratio of net
investment
income to
average net
assets -- 5.12% 5.65% 5.31% 5.71% 6.13% 6.32% 6.42% 6.86% 6.99% 6.71%
Portfolio
turnover rate -- 16.25% 44.10% 32.58% 23.18% 39.35% 22.92% 71.37% 76.95% 66.72% 44.61%
</TABLE>
Total return information does not reflect sales loads.
+ Unaudited.
++ Distribution includes $.05 per share attributable to the December 31, 1987,
capital gain distribution paid in order to avoid any excise tax due under the
Tax Reform Act of 1986.
* Not Annualized.
** Annualized.
-- 19 --
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
FOR THE FISCAL
PERIOD FROM FOR THE PERIOD FROM MARCH
APRIL 1, 1996 18, 1993
TO DECEMBER 31, YEAR ENDED YEAR ENDED YEAR ENDED (INITIAL PUBLIC OFFERING)
1996 MARCH 31, 1996 MARCH 31, 1995 MARCH 31, 1994 TO MARCH 31, 1993
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of
period $ $10.10 $9.91 $10.27 $10.32
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.50 0.49 0.44 0.02
Net realized and unrealized gain
(loss) on investments 0.27 0.19 (0.35) (0.05)
-------- ------- ------ ------- --------
Total from investment operations 0.77 0.68 0.09 (0.03)
-------- ------- ------ ------- --------
LESS DISTRIBUTIONS:
Dividends from net investment
income (0.50) (0.49) (0.44) (0.02)
Distribution from realized gains (0.03) -- (0.01) --
-------- ------- ------ ------- --------
Total distributions (0.53) (0.49) (0.45) (0.02)
-------- ------- ------ ------- --------
Net asset value at end of period $10.34 $10.10 $9.91 $10.27
-------- ------- ------ ------- --------
-------- ------- ------ ------- --------
Total return* 7.73% 7.13% .68% -.31%+
Net assets at end of period (000's
omitted) $6,489 $5,953 $2,908 $2,163
Ratio of expenses to average net
assets 1.07% 1.09% 1.44% 1.04%++
Ratio of net investment income to
average net assets 4.78% 5.06% 4.17% 4.47%++
Portfolio turnover rate 20.86% 9.23% 17.26% None
</TABLE>
Total return information does not reflect sales loads.
+ Not annualized.
++ Annualized.
-- 20 --
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
SAFECO MONEY MARKET FUND
<TABLE>
<CAPTION>
FOR THE FISCAL
PERIOD FROM
APRIL 1, 1996
TO DECEMBER 31, YEAR ENDED MARCH 31
1996 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of
period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
INCOME FROM
INVESTMENT
OPERATIONS:
Net investment
income .02 .05 .04 .02 .03 .05 .07 .08 .08 .06 .06
LESS DISTRIBUTIONS:
Dividends from net
investment
income (.02) (.05) (.04) (.02) (.03) (.05) (.07) (.08) (.08) (.06) (.06)
---------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Net asset value at
end of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
---------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------
---------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Total return+ 2.33%* 5.15% 4.20% 2.48% 2.98% 5.04% 7.60% 8.77% 7.86% 6.56% 5.90%+
Net assets at end of
period (000's
omitted) $167,231 $165,122 $171,958 $186,312 $144,536 $184,823 $224,065 $225,974 $177,813 $119,709 $57,998
Ratio of expenses to
average net assets .83%** .78% .78% .79% .77% .73% .70% .71% .74% .79% .82%
Ratio of net
investment income
to average net
assets 4.63%** 5.04% 4.21% 2.47% 3.02% 5.05% 7.34% 8.45% 7.66% 6.49% 5.71%
</TABLE>
Total return information does not reflect a Contingent Deferred Sales Charge
that may apply to certain shares.
+ Unaudited
* Not Annualized
** Annualized
-- 21 --
<PAGE>
ADVISER'S INSTITUTIONAL PRIVATE ACCOUNT PERFORMANCE
The Value Fund's adviser, SAFECO Asset Management Company ("SAM")has been
managing institutional private accounts ("SAFECO Composite") since 1979. The
SAFECO Composite had investment objectives, policies, strategies and risks
substantially similar to those of the Value Fund. The data is provided to
illustrate the past performance of the Investment Adviser in managing
substantially similar accounts as measured against the S&P 500 Index and does
not represent the performance of the Value Fund. Investors should not
consider this performance data as an indication of future performance of the
Value Fund or of SAM.
CALENDAR YEAR TOTAL RETURN FOR THE PERIODS ENDED DECEMBER 31, 1996
SAFECO S&P 500
YEAR COMPOSITE INDEX(1)
----------------------------------------------------
1987 0.51% 5.17%
1988 19.12% 16.50%
1989 19.72% 31.43%
1990 (4.25%) (3.19%)
1991 28.85% 30.55%
1992 13.16% 7.68%
1993 10.83% 10.00%
1994 3.58% 1.33%
1995 37.24% 37.50%
1996 25.43% 23.25%
- -------------
(1) The S&P 500 Index is an unmanaged index containing common
stocks of 500 industrial, transportation, utility and financial companies,
regarded as generally representative of the U.S. stock market. The Index
reflects the reinvestment of income dividends and capital gain distributions,
if any, but does not reflect fees, brokerage commissions, or other expenses
of investing.
AVERAGE ANNUAL TOTAL RETURN FOR
ONE, FIVE AND TEN YEAR PERIODS ENDING DECEMBER 31, 1996
SAFECO S&P 500
COMPOSITE INDEX
--------- -------
Last One Year 25.43% 23.25%
Last Five Years 17.46% 15.26%
Last Ten Years 14.74% 15.26%
The performance data for the SAFECO Composite shown above was calculated in
accordance with recommended standards of the Association for Investment
Management and Research ("AIMR"), retroactively applied to all time periods.
All returns presented were calculated on a total return basis and reflect the
reinvestment of capital gains, dividends and interest. The gross performance of
the SAFECO Composite is shown after reduction by the Value Fund's maximum
management fee and "other expenses" for the fiscal period ended December 31,
1996 (1.04% per year). The returns also reflect the deduction of brokerage
commissions and transaction costs paid by the institutional private accounts.
Custodial fees, if any, were not included in the calculation. The SAFECO
Composite's returns are asset-weighted using beginning-of-period market
values adjusted for cash flows.
The Value Fund's expenses, timing of purchases and sales of portfolio
securities, availability of cash flows, and brokerage commissions are all
reasons that might cause the performance of the Value Fund to vary from that
of the SAFECO Composite. In addition, the institutional private accounts are
not subject to the diversification requirements, specific tax restrictions
and investment limitations imposed on the Value Fund by the Investment
Company Act or Subchapter M of the Internal Revenue Code. Consequently, the
performance results for the SAFECO Composite could have been adversely
affected if the institutional private accounts included in the composite had
been regulated as investment companies under the federal securities laws.
Furthermore, the performance of the SAFECO Composite does not reflect the
sales changes imposed on certain purchases or redemptions of the Value Fund's
Class A and Class B shares.
The investment results of SAFECO Composite are unaudited and are not intended to
predict or suggest the returns that might be experienced by the Value Fund or
an investor investing in the SAFECO Composite. Investors should also be
aware that the use of a methodology different from that used above to
calculate the SAFECO Composite performance could result in different
performance data.
The S&P 500 Index is used for comparison purposes only. The S&P 500 Index is
an unmanaged index of representative international stocks that has no
management or expense charges. Performance is based on historical earnings
and is not intended to indicate future performance of the SAFECO Composite or
the Value Fund.
- ---------------------------------------------------------------
SUB-ADVISER INFORMATION FOR THE INTERNATIONAL FUND
- ---------------------------------------------------------------
The International Fund's sub-adviser, Bank of Ireland Asset Management (U.S.)
Limited ("BIAM") has been managing separate accounts for institutional
clients in the United States for seven years. BIAM's past performance in
advising these accounts was a key factor in its selection as the Fund's
sub-adviser. The performance illustrated in the table that follows is based
on the return achieved on BIAM's fully discretionary international equity
composite of accounts ("Composite") consisting of 46 accounts totaling
approximately $7 billion which comprised approximately 92.5% of BIAM's assets
under management as of December 31, 1996. These accounts had investment
objectives, policies, strategies and risks substantially similar to those of
the International Fund.
FOR THE PERIODS ENDED DECEMBER 31, 1996
<TABLE>
PERIOD
BEGINNING
JANUARY 31,
1996, ENDING
DECEMBER THREE FOUR
31, 1996 ONE YEAR TWO YEARS YEARS YEARS FIVE YEARS SIX YEARS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
International Fund 14.23% -- -- -- -- -- --
BIAM Composite 17.62% 21.79% 20.08% 9.96% 16.98% 15.81% 14.98%
Morgan Stanley
Europe, Australia and
Far East Index
("EAFE Index") 5.90% 6.36% 8.93% 8.64% 14.26% 8.48% 9.14%
</TABLE>
The gross performance of the Composite is shown after reduction by the
International Fund's weighted average expenses (2.09%) of the two fiscal
periods ending September 30, 1996 and December 31, 1996. The data is provided
to illustrate the past performance of the Investment Adviser in managing
substantially similar accounts as measured against specified market indices
and does not represent the performance of the International Fund. Investors
should not consider this performance data as an indication of future
performance of the International Fund or of BIAM.
All returns presented were calculated on a total return basis and reflect the
reinvestment of capital gains, dividends and interest. The Composite's
returns are asset-weighted using beginning-of-period market values adjusted
for cash flows.
The institutional private accounts are not subject to the diversification
requirements, specific tax restrictions and investment limitations imposed on
the International Fund by the Investment Company Act or Subchapter M of the
Internal Revenue Code. Consequently, the performance results for the BIAM
composite could have been adversely affected if the institutional private
accounts included in the composite had been regulated as investment companies
under the federal securities laws. In addition, the performance of the
Composite does not reflect the sales charges imposed on certain purchases or
redemptions of the International Fund's Class A and Class B shares.
The investment results of BIAM's composite are unaudited and are not intended
to preduct or suggest the returns that might be experienced by the
International Fund or an individual investor investing in such Portfolios.
Investors should also be aware that the use of a methodology different from
that used below to calculated performance could result in different
performance data.
The EAFE Index is used for comparison purposes only. The EAFE Index is an
unmanaged index of representative international stocks that has no management
or expense charges. Performance is based on historical earnings and is not
intended to indicate future performance of the Composite or the International
Fund.
ALTERNATIVE PURCHASE ARRANGEMENT
This Prospectus offers two classes of shares for each Fund. For each Fund except
the Money Market Fund, Class A shares are sold at net asset value plus an
initial sales charge of up to 4.5%. Class A shares also pay an annual Rule 12b-1
service fee of 0.25% of the average daily net assets of the Class A shares. For
each Fund except the Money Market Fund, Class B shares are sold at net asset
value with no initial sales charge, but a CDSC of up to 5% applies to
redemptions made within six years of purchase. Class B shares also pay an annual
Rule 12b-1 service fee of 0.25% of the average daily net assets of the Class B
shares and an annual Rule 12b-1 distribution fee of 0.75% of the average daily
net assets of the Class B shares. Class B shares convert to Class A shares in
the first month following the investor's sixth anniversary from purchase. The
maximum investment amount in Class B shares is $500,000.
Class A and B shares of the Money Market Fund are sold at net asset value, are
not subject to sales charges, and do not currently pay Rule 12b-1 fees. Money
Market Fund Class A and Class B shares may be subject to sales charges if an
investor exchanges into Class A or Class B shares of another Fund. See
"Purchasing Advisor Class A Shares" and "Purchasing Advisor Class B Shares."
For shareholders of each Fund except the Money Market Fund, the alternative
purchase arrangement permits an investor to choose the method of purchasing
shares that is most beneficial given the amount of the purchase, the length of
time the investor expects to hold the shares, and other circumstances. Investors
should consider whether, during the anticipated life of their investment in a
Fund, the accumulated distribution and service fees and CDSCs on Class B shares
prior to conversion would be less than the initial sales charge and accumulated
service fee on Class A shares purchased at the same time.
Class A shares will normally be more beneficial than Class B shares to investors
who qualify for reduced initial sales charges or a sales load waiver on Class A
shares. Class A shares are subject to a service fee (but not a distribution fee)
and, accordingly, pay correspondingly higher dividends per share than Class B
shares. However, because initial sales charges are deducted at the time of
purchase, investors purchasing Class A shares would not have all their funds
invested initially and, therefore, would initially own fewer shares.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time might consider
purchasing Class B shares. The CDSC imposed on the redemption of Class B shares
decreases and is completely eliminated with respect to such shares beginning in
the first month following the investor's sixth anniversary from purchase. Class
B shares automatically convert to Class A shares (which are subject to lower
continuing charges) in the first month following the investor's sixth
anniversary from purchase.
For more information about each Fund's shares, see "How to Purchase Shares"
beginning on page 48.
EACH FUND'S INVESTMENT OBJECTIVE AND POLICIES
The investment objective and investment policies for each Fund are described
below. A Trust's Board of Trustees may change a Fund's (except the California
Fund's) objective without a shareholder vote, but no such change will be made
without prior written notice to shareholders of that Fund (60 days' in the case
of the Money Market, Municipal Bond and Washington Funds and 30 days' in the
case of the other Funds). The California Fund has a fundamental investment
objective that may not be changed without a shareholder vote. In the event a
Fund changes its investment objective, the new objective may not meet the
investment needs of every shareholder and may be different from the objective a
shareholder considered appropriate at the time of initial investment.
-- 22 --
<PAGE>
EACH FUND'S INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
Each Fund has adopted a number of investment restrictions. If a Fund satisfies a
percentage limitation at the time of investment, a later increase or decrease in
value, assets or other circumstances will not be considered in determining
whether the Fund complies with the applicable policy (except to the extent the
change may impact the Fund's borrowing limits). Unless otherwise stated, the
investment policies and limitations described below under each Fund's
description and "Common Investment Practices" are non-fundamental and may be
changed without a shareholder vote.
INVESTMENT OBJECTIVES AND POLICIES OF THE STOCK FUNDS
GROWTH FUND
The Growth Fund has as its investment objective to seek growth of capital and
the increased income that ordinarily follows from such growth. The Growth Fund
ordinarily invests a preponderance of its assets in common stock selected
primarily for potential appreciation. Such investments may cause its share price
to be more volatile than the Equity and Income Funds.
To pursue its investment objective, the Growth Fund:
1. WILL INVEST A PREPONDERANCE OF ITS ASSETS IN COMMON STOCKS SELECTED
PRIMARILY FOR POTENTIAL APPRECIATION. To determine those common stocks which
have the potential for long-term growth, SAM will evaluate the issuer's
financial strength, quality of management and earnings power.
2. MAY INVEST IN SECURITIES CONVERTIBLE INTO COMMON STOCK (INCLUDING CORPORATE
BONDS AND PREFERRED STOCK THAT CONVERT TO COMMON STOCK, EITHER AUTOMATICALLY
AFTER A SPECIFIED PERIOD OF TIME OR AT THE OPTION OF THE ISSUER). The Fund
will purchase convertible securities if such securities offer a higher yield
than an issuer's common stock and provide reasonable potential for capital
appreciation.
3. MAY INVEST UP TO 5% OF NET ASSETS IN CONTINGENT VALUE RIGHTS. A contingent
value right is a right issued by a corporation that takes on a
preestablished value if the underlying common stock does not attain a target
price by a specified date.
For a brief description of common stocks, preferred stocks, convertible
securities, and bonds and other debt securities, see "Description of Stocks,
Bonds and Convertible Securities" on page 70.
EQUITY FUND
The Equity Fund has as its investment objective to seek long-term growth of
capital and reasonable current income. The Equity Fund invests principally in
common stock selected for appreciation and/ or dividend potential and from a
long-range investment standpoint. The Equity Fund does not seek to achieve both
growth and income with every portfolio security investment. Rather, it attempts
to achieve a reasonable balance between growth and income on an overall basis.
To pursue its investment objective, the Equity Fund:
1. WILL INVEST, DURING NORMAL MARKET CONDITIONS, AT LEAST 65% OF ITS TOTAL
ASSETS IN EQUITY SECURITIES (WHICH INCLUDE COMMON STOCKS AND PREFERRED
STOCKS). The Fund will invest principally in common stocks selected by SAM
primarily for appreciation and/or dividend potential and from a long-range
investment standpoint.
2. MAY INVEST IN SECURITIES CONVERTIBLE INTO COMMON STOCK (INCLUDING CORPORATE
BONDS AND PREFERRED STOCK THAT CONVERT TO COMMON STOCK, WHETHER
AUTOMATICALLY AFTER A SPECIFIED PERIOD OF TIME OR AT THE OPTION OF THE
ISSUER), EXCEPT THAT LESS THAN 35% OF ITS NET ASSETS WILL BE INVESTED IN
SUCH SECURITIES. The Equity Fund may invest in convertible corporate bonds
that are rated below investment grade (commonly referred to as "high-yield"
or "junk" bonds) or in comparable,
-- 23 --
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES OF THE STOCK FUNDS (CONTINUED)
unrated bonds, but less than 35% of the Equity Fund's net assets will be
invested in such securities. The Equity Fund will not purchase a bond rated
below Ca by Moody's Investors Service, Inc. ("Moody's") or CC by Standard &
Poor's Ratings Services, a division of The McGraw-Hill Companies ("S&P") or
which is in default on the payment of principal and interest. Bonds rated Ca
or CC are highly speculative and have large uncertainties or major risk
exposures. See "Risk Factors" on page 42 for more information.
For a brief description of common stocks, preferred stocks, convertible
securities, and bonds and other debt securities, see "Description of Stocks,
Bonds and Convertible Securities" on page 70. For a description of debt
securities ratings, see the "Ratings Supplement" on page 70.
INCOME FUND
The Income Fund has as its investment objective to seek high current income and,
when consistent with its objective, the long-term growth of capital. The Fund
currently intends to place greatest emphasis on holding common stock,
convertible corporate bonds and convertible preferred stock. SAM will select
securities primarily for current income, but also with a view toward capital
growth when this can be accomplished without conflicting with the Fund's
investment objective.
To pursue its investment objective, the Income Fund:
1. WILL INVEST PRIMARILY IN COMMON STOCK AND ALSO IN CONVERTIBLE AND
NON-CONVERTIBLE CORPORATE BONDS AND PREFERRED STOCK (INCLUDING CORPORATE
BONDS AND PREFERRED STOCK THAT CONVERT TO COMMON STOCK EITHER AUTOMATICALLY
AFTER A SPECIFIED PERIOD OF TIME OR AT THE OPTION OF THE ISSUER). The Fund
will purchase convertible securities if such securities offer a higher yield
than an issuer's common stock and provide reasonable potential for capital
appreciation. The Income Fund may invest in convertible corporate bonds that
are rated below investment grade (commonly referred to as "high-yield" or
"junk" bonds) or in comparable, unrated bonds, but less than 35% of the
Income Fund's net assets will be invested in such securities. Bonds rated Ca
by Moody's or CC by S&P are highly speculative and have large uncertainties
or major risk exposures. See "Risk Factors" on page 42 for more information.
2. MAY INVEST UP TO 10% OF TOTAL ASSETS IN EURODOLLAR BONDS WHICH ARE ISSUED BY
U.S. ISSUERS. Eurodollar bonds are traded in the European bond market and
are denominated in U.S. dollars. The Fund will purchase Eurodollar bonds
through U.S. securities dealers and hold such bonds in the United States.
The delivery of Eurodollar bonds to the Fund's custodian in the United
States may cause slight delays in settlement which are not anticipated to
affect the Fund in any material, adverse manner.
For a brief description of common stocks, preferred stocks, convertible
securities, and bonds and other debt securities, see "Description of Stocks,
Bonds and Convertible Securities" on page 70. For a description of debt
securities ratings, see the "Ratings Supplement" on page 70.
NORTHWEST FUND
The Northwest Fund has as its investment objective to seek long-term growth of
capital through investing primarily in Northwest companies. To pursue its
objective, the Fund will invest at least 65% of its total assets in securities
issued by companies with their principal executive offices located in Alaska,
Idaho, Montana, Oregon or Washington.
-- 24 --
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES OF THE STOCK FUNDS (CONTINUED)
To pursue its investment objective, the Northwest Fund:
1. WILL ORDINARILY INVEST ITS ASSETS IN SHARES OF COMMON STOCKS AND PREFERRED
STOCKS OF COMPANIES LOCATED IN THE NORTHWEST SELECTED PRIMARILY FOR
POTENTIAL LONG-TERM APPRECIATION. To determine those common and preferred
stocks which have the potential for long-term growth, SAM will evaluate the
issuer's financial strength, quality of management and earnings power. The
Fund generally invests a portion of its assets in smaller companies. See
"Risk Factors" for more information about the risks of investing primarily
in companies located in the Northwest.
2. MAY OCCASIONALLY INVEST IN SECURITIES CONVERTIBLE INTO COMMON STOCK WHEN, IN
THE OPINION OF SAM, THE EXPECTED TOTAL RETURN OF A CONVERTIBLE SECURITY
EXCEEDS THE EXPECTED TOTAL RETURN OF COMMON STOCK ELIGIBLE FOR PURCHASE BY
THE FUND. The Fund may purchase corporate bonds and preferred stock that
convert to common stock either automatically after a specified period of
time or at the option of the issuer. The Fund will purchase those
convertible securities which, in SAM's opinion, have underlying common stock
with potential for long-term growth. The Fund will purchase convertible
securities which are investment grade, I.E., rated in the top four
categories by either S&P or Moody's.
See "Risk Factors" for more information about the risks inherent in geographic
concentration. For a brief description of common stocks, preferred stocks,
convertible securities, and bonds and other debt securities, see "Description of
Stocks, Bonds and Convertible Securities" on page 70. For a description of debt
securities ratings, see the "Ratings Supplement" on page 70.
INTERNATIONAL FUND
The investment objective of the International Fund is to seek maximum long-term
total return (capital appreciation and income) by investing primarily in common
stock of established non-U.S. companies. To pursue its objective, the
International Fund, under normal market conditions, will invest at least 65% of
its total assets in the securities of companies domiciled in at least five
countries, not including the United States.
To pursue its investment objective, the International Fund:
1. WILL INVEST PRIMARILY IN COMMON STOCKS OF NON-U.S. COMPANIES. Common stock
issued by foreign companies is subject to various risks in addition to those
associated with U.S. investments. For example, the value of the common stock
depends in part upon currency values, the political and regulatory
environments, and overall economic factors in the countries in which the
common stock is issued.
2. MAY INVEST IN PREFERRED STOCKS AND CONVERTIBLE SECURITIES ISSUED BY FOREIGN
COMPANIES.
3. MAY INVEST IN DEBT SECURITIES ISSUED BY FOREIGN COMPANIES AND GOVERNMENTS.
The Fund will make such investments primarily for defensive purposes, but
may also do so where anticipated interest rate movements, or other factors
affecting the degree of risk inherent in a fixed income security, are
expected to change significantly so as to produce appreciation in the
security consistent with the objective of the Fund. The Fund may purchase
sovereign debt instruments issued or guaranteed by foreign governments or
their agencies. Sovereign debt may be in the form of conventional securities
or other types of debt instruments such as loans or loan participations.
Governments or governmental entities responsible for repayment of the debt
may be unable or unwilling to repay principal and interest when due, and may
require renegotiation or rescheduling of debt payments. Repayment of
principal and interest may depend also upon political and economic factors.
-- 25 --
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES OF THE STOCK FUNDS (CONTINUED)
4. MAY INVEST IN PASSIVE FOREIGN INVESTMENT COMPANIES ("PFICS"), WHICH INCLUDE
FUNDS OR TRUSTS ORGANIZED AS INVESTMENT VEHICLES TO INVEST IN COMPANIES OF
CERTAIN FOREIGN COUNTRIES. Investors in PFICs bear their proportionate share
of the PFIC's management fees and other expenses. See "Additional Tax
Information" in the Common Stock Trust's Statement of Additional
Information.
5. MAY PURCHASE AND SELL PUT AND CALL OPTIONS ON SECURITIES, FINANCIAL INDICES
AND FOREIGN CURRENCIES, MAY PURCHASE AND SELL THE FOLLOWING NON-LEVERAGED
DERIVATIVE SECURITIES: FUTURES CONTRACTS AND RELATED OPTIONS WITH RESPECT TO
SECURITIES, FINANCIAL INDICES AND FOREIGN CURRENCIES, AND MAY ENTER INTO
FOREIGN CURRENCY TRANSACTIONS SUCH AS FORWARD CONTRACTS. The Fund may employ
certain strategies and techniques utilizing these instruments to mitigate
its exposure to changing currency exchange rates, security prices, interest
rates and other factors that affect security values. There is no guarantee
that these strategies and techniques will work.
An option gives an owner the right to buy or sell securities at a
predetermined exercise price for a given period of time. The writer of an
option is obligated to purchase or sell (depending upon the nature of the
option) the underlying securities if the option is exercised during the
specified period of time. A futures contract is an agreement in which the
seller of the contract agrees to deliver to the buyer an amount of cash
equal to a specific dollar amount times the difference between the value of
a security at the close of the last trading day of the contract and the
price at which the agreement is made. A forward currency contract is an
agreement to purchase or sell a foreign currency at some future time for a
fixed amount of U.S. dollars.
The Fund, under normal conditions, will not sell a put or call option if, as
a result thereof, the aggregate value of the assets underlying all such
options (determined as of the date such options are written) would exceed
25% of the Fund's net assets. The Fund will not purchase a put or call
option or option on a futures contract if, as a result thereof, the
aggregate premiums paid on all options or options on futures contracts held
by the Fund would exceed 20% of its net assets. In addition, the Fund will
not enter into any futures contract or option on a futures contract if, as a
result thereof, the aggregate margin deposits and premiums required on all
such instruments would exceed 5% of its net assets.
See "Risk Factors" for more information about the risks inherent in securities
issued by foreign issuers and in the purchase and sale of options, futures and
forward contracts. For a brief description of common stocks, preferred stocks,
convertible securities, and bonds and other debt securities, see "Description of
Stocks, Bonds and Convertible Securities" on page 70.
BALANCED FUND
The Balanced Fund has as its investment objective to seek growth and income
consistent with the preservation of capital. To pursue its objective, the
Balanced Fund will invest primarily in equity and fixed income securities and
will occasionally alter the mix of its equity and fixed income securities. Such
action will be taken in response to economic conditions and generally in small
increments. The Balanced Fund will not make significant changes in its asset mix
in an attempt to "time the market."
To pursue its investment objective, the Balanced Fund:
1. WILL ORDINARILY INVEST FROM 50% TO 70% OF ITS TOTAL ASSETS IN EQUITY
SECURITIES, WHICH INCLUDE COMMON STOCKS, PREFERRED STOCK AND SECURITIES
CONVERTIBLE INTO COMMON STOCK. The Fund will invest principally in common
stocks selected by SAM primarily for appreciation and/or dividend potential
and from a long-range investment standpoint. The Fund may purchase corporate
bonds and preferred stock that convert to common stock either automatically
after a specified period of time or at the option of the issuer.
-- 26 --
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES OF THE STOCK FUNDS (CONTINUED)
The Fund will purchase those convertible securities which, in SAM's opinion,
have underlying common stock with potential for long-term growth. The Fund
will purchase convertible securities which are investment grade, i.e., rated
in the top four categories by either S&P or Moody's.
2. WILL INVEST AT LEAST 25% OF ITS TOTAL ASSETS IN FIXED-INCOME SENIOR
SECURITIES. The Fund will purchase only those U.S. Government and investment
grade debt obligations or non-rated debt obligations which in SAM's view
contain the credit characteristics of investment grade debt obligations.
Investment grade obligations (rated between Aaa-Baa by Moody's and AAA-BBB
by S&P) are from high to medium quality. Medium quality obligations possess
speculative characteristics and may be more sensitive to economic changes
and changes to the financial condition of issuers.
For a brief description of common stocks, preferred stocks, convertible
securities, and bonds and other debt securities, see "Description of Stocks,
Bonds and Convertible Securities" on page 70. For a description of debt
securities ratings, see the "Ratings Supplement" on page 70.
SMALL COMPANY FUND
The Small Company Fund has as its investment objective to seek long-term growth
of capital through investing primarily in small-sized companies. To pursue its
objective, the Small Company Fund will invest primarily in companies with total
market capitalization of less than $1 billion.
To pursue its investment objective, the Small Company Fund:
1. WILL INVEST AT LEAST 65% OF ITS TOTAL ASSETS IN COMMON STOCK AND PREFERRED
STOCK OF SMALL-SIZED COMPANIES WITH TOTAL MARKET CAPITALIZATION OF LESS THAN
$1 BILLION. Companies whose capitalization falls outside this range after
purchase continue to be considered small-capitalized for purposes of the 65%
policy. The Fund will invest principally in common stocks selected by SAM
primarily for appreciation and/or dividend potential and from a long-range
investment standpoint. In determining those common and preferred stocks
which have the potential for long-term growth, SAM will evaluate the
issuer's financial strength, quality of management and earnings power.
Investments in small or newly formed companies involve greater risks than
investments in larger, more established issuers and their securities can be
subject to more abrupt and erratic movements in price. See "Risk Factors"
for more information about the risks inherent in securities issued by small
companies.
2. MAY INVEST IN SECURITIES CONVERTIBLE INTO COMMON STOCK WHEN, IN SAM'S
OPINION, THE EXPECTED TOTAL RETURN OF A CONVERTIBLE SECURITY EXCEEDS THE
EXPECTED TOTAL RETURN OF COMMON STOCK ELIGIBLE FOR PURCHASE BY THE FUND. The
Fund will purchase convertible securities if such securities offer a higher
yield than an issuer's common stock and provide reasonable potential for
capital appreciation. The Fund may invest in convertible corporate bonds
that are rated below investment grade (commonly referred to as "high-yield"
or "junk" bonds) or in comparable, unrated bonds, but less than 35% of the
Fund's net assets will be invested in such securities. Bonds rated Ca by
Moody's or CC by S&P are highly speculative and have large uncertainties or
major risk exposures. See "Risk Factors" on page 42 for more information.
See "Risk Factors" for more information about the risks inherent in small
company issuers. For a brief description of common stocks, preferred stocks,
convertible securities, and bonds and other debt securities, see "Description of
Stocks, Bonds and Convertible Securities" on page 70. For a description of debt
securities ratings, see the "Ratings Supplement" on page 70.
<PAGE>
VALUE FUND
The Value fund has as its investment objective to seek long-term growth of
capital and income. The Value Fund primarily invests in common stock
selected for potential appreciation and income using fundamental value
analysis:
To pursue its investment objective, the Value Fund:
1. WILL INVEST A PREPONDERANCE OF ITS ASSETS IN COMMON STOCKS SELECTED
PRIMARILY FOR POTENTIAL APPRECIATION. To determine those common stocks
which have the potential for long-term growth, SAM will evaluate the
issuer's financial strength, quality of management and earnings power.
2. MAY INVEST IN SECURITIES CONVERTIBLE INTO COMMON STOCK (INCLUDING
CORPORATE BONDS AND PREFERRED STOCK THAT CONVERT TO COMMON STOCK, EITHER
AUTOMATICALLY AFTER A SPECIFIED PERIOD OF TIME OR AT THE OPTION OF THE
ISSUER). The Fund will purchase convertible securities if such
securities offer a higher yield than an issuer's common stock and
provide reasonable potential for capital appreciation.
For a brief description of common stocks, preferred stocks, convertible
securities, and bonds and other debt securities, see "Description of Stocks,
Bonds and Convertible Securities" on page __.
-- 27 --
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES OF THE STOCK FUNDS (CONTINUED)
COMMON INVESTMENT PRACTICES OF THE STOCK FUNDS
Each of the Stock Funds may also follow the investment practices described
below:
1. MAY INVEST IN BONDS AND OTHER DEBT SECURITIES.
Each Fund may invest in bonds and other debt securities that are rated
investment grade by Moody's or S&P, or unrated bonds determined by SAM to be
of comparable quality to such rated bonds. Bonds rated in the lowest
category of investment grade (Baa by Moody's and BBB by S&P) and comparable
unrated bonds have speculative characteristics and are more likely to have a
weakened capacity to make principal and interest payments under changing
economic conditions or upon deterioration in the financial condition of the
issuer.
After purchase by a Stock Fund, a corporate bond may be downgraded or, if
unrated, may cease to be comparable to a rated security. Neither event will
require a Stock Fund to dispose of that security, but SAM will take a
downgrade or loss of comparability into account in determining whether the
Fund should continue to hold the security in its portfolio. The Equity Fund
will not hold more than 3% of its total assets and the Income Fund will not
hold more than 1% of its total assets in bonds that go into default on the
payment of principal and interest after purchase. In the event that 35% or
more of a Stock Fund's net assets is held in securities rated below
investment grade due to a downgrade of one or more corporate bonds, SAM will
engage in an orderly disposition of such securities to the extent necessary
to ensure that the Fund's holdings of such securities remain below 35% of
the Fund's net assets.
2. MAY INVEST IN WARRANTS. Warrants are options to buy a stated number of
shares of common stock at a specified price any time during the life of the
warrant. Generally, the value of a warrant will fluctuate by greater
percentages than the value of the underlying common stock. The primary risk
associated with a warrant is that the term of the warrant may expire before
the exercise price of the common stock has been reached. Under these
circumstances, a Stock Fund could lose all of its principal investment in
the warrant.
3. MAY HOLD CASH OR INVEST TEMPORARILY IN HIGH QUALITY, SHORT-TERM SECURITIES
ISSUED BY AN AGENCY OR INSTRUMENTALITY OF THE U.S. GOVERNMENT, HIGH QUALITY
COMMERCIAL PAPER, CERTIFICATES OF DEPOSIT, SHARES OF NO-LOAD, OPEN-END MONEY
MARKET FUNDS (EXCEPT THE EQUITY FUND) OR REPURCHASE AGREEMENTS. The Stock
Funds may purchase these short-term securities as a cash management
technique under those circumstances where it has cash to manage for a short
time period, for example, after receiving proceeds from the sale of
securities, dividend distributions from portfolio securities or cash from
the sale of Fund shares to investors. With respect to repurchase agreements,
each Stock Fund will invest no more than 5% of its total assets in
repurchase agreements and will not purchase repurchase agreements that
mature in more than seven days. Counterparties of foreign repurchase
agreements may be less creditworthy than U.S. counterparties.
4. MAY PURCHASE SECURITIES ON A "WHEN-ISSUED" OR "DELAYED-DELIVERY" BASIS OR
PURCHASE OR SELL SECURITIES ON A "FORWARD COMMITMENT" BASIS. Under this
procedure, a Stock Fund agrees to acquire securities that are to be issued
and delivered against payment in the future. The price, however, is fixed at
the time of commitment. When a Stock Fund purchases when-issued or
delayed-delivery securities, its custodian bank will maintain in a temporary
holding account cash, U.S. Government securities or other high-grade debt
obligations having a value equal to or greater than such commitments. On
delivery dates for such transactions, the Fund will meet its obligations
from maturities or sales of the securities held in the temporary holding
account or from then-available cash flow. If a Stock Fund chooses to dispose
of the right to acquire a when-
-- 28 --
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES OF THE STOCK FUNDS (CONTINUED)
issued or delayed delivery security prior to its acquisition, it could incur
a gain or loss due to market fluctuations. Use of these techniques may
affect a Fund's share price in a manner similar to leveraging.
5. MAY INVEST IN AMERICAN DEPOSITARY RECEIPTS ("ADRS"). ADRs are registered
receipts evidencing ownership of an underlying foreign security. They
typically are issued in the United States by a bank or trust company. In
addition to the risks of foreign investment applicable to the underlying
securities, ADRs may also be subject to the risks that the foreign issuer
may not be obligated to cooperate with the U.S. bank or trust company, or
that such information in the U.S. market may not be current. ADRs which are
structured without sponsorship of the issuer of the underlying foreign
security may also be subject to the risk that the foreign issuer may not
provide financial and other material information to the U.S. bank or trust
company issuer. The International Fund may utilize European Depositary
Receipts ("EDRs"), which are similar instruments. EDRs may be in bearer form
and are designed for use in the European securities markets.
6. MAY INVEST UP TO 10% OF ITS TOTAL ASSETS IN FOREIGN SECURITIES, EXCEPT THE
INTERNATIONAL FUND, WHICH MAY INVEST 100% OF ITS ASSETS IN FOREIGN
SECURITIES. FOREIGN SECURITIES ARE SUBJECT TO RISKS IN ADDITION TO THOSE
INHERENT IN INVESTMENTS IN DOMESTIC SECURITIES. See "Risk Factors" on page
42 for more information about the risks associated with investments in
foreign securities.
7. MAY INVEST UP TO 10% OF ITS TOTAL ASSETS IN SHARES OF REAL ESTATE INVESTMENT
TRUSTS ("REITS"). REITs purchase real property, which is then leased, and
make mortgage investments. For federal income tax purposes, REITs attempt to
qualify for beneficial "modified pass-through" tax treatment by annually
distributing at least 95% of their taxable income. If a REIT were unable to
qualify for such tax treatment, it would be taxed as a corporation and the
distributions made to its shareholders would not be deductible by it in
computing its taxable income. REITs are dependent upon the successful
operation of properties owned and the financial condition of lessees and
mortgagors. The value of REIT units fluctuates depending on the underlying
value of the real property and mortgages owned and the amount of cash flow
(net income plus depreciation) generated and paid out. In addition, REITs
typically borrow to increase funds available for investment. Generally,
there is a greater risk associated with REITs that are highly leveraged.
8. MAY INVEST UP TO 10% OF ITS TOTAL ASSETS IN RESTRICTED SECURITIES, PROVIDED
THAT SAM HAS DETERMINED THAT SUCH SECURITIES ARE LIQUID UNDER GUIDELINES
ADOPTED BY THE COMMON STOCK TRUST'S BOARD OF TRUSTEES. Restricted securities
may be sold only in offerings registered under the Securities Act of 1933,
as amended ("1933 Act"), or in transactions exempt from the registration
requirements under the 1933 Act. Rule 144A under the 1933 Act provides an
exemption for the resale of certain restricted securities to qualified
institutional buyers. Investing in restricted securities may increase the
Stock Funds' illiquidity to the extent that qualified institutional buyers
or other buyers are unwilling to purchase the securities. As a result, a
Stock Fund may not be able to sell these securities when its investment
adviser or sub-investment adviser deems it advisable to sell, or may have to
sell them at less than fair value. In addition, market quotations are
sometimes less readily available for restricted securities. Therefore,
judgment may at times play a greater role in valuing these securities than
in the case of unrestricted securities.
9. MAY INVEST IN SECURITIES WHOSE PERFORMANCE AND PRINCIPAL AMOUNT AT MATURITY
ARE LINKED TO A SPECIFIED EQUITY SECURITY OR SECURITIES INDEX. The value of
an indexed security is determined by reference to a specific equity
instrument or statistic. The performance of indexed securities
-- 29 --
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES OF THE STOCK FUNDS (CONTINUED)
depends largely on the performance of the securities or indices to which
they are indexed, but such securities are also subject to credit risks
associated with the issuer of the security. Indexed securities may also be
more volatile than their underlying instruments.
10. MAY INVEST UP TO 5% OF ITS TOTAL ASSETS IN SECURITIES OF UNSEASONED ISSUERS.
Unseasoned issuers are those companies which, together with any
predecessors, have been in operation for less than three years.
The following restrictions are fundamental policies of the Stock Funds that
cannot be changed without shareholder vote.
1. EACH FUND, WITH RESPECT TO 75% OF THE VALUE OF ITS TOTAL ASSETS, MAY NOT
INVEST MORE THAN 5% OF ITS TOTAL ASSETS IN THE SECURITIES OF ANY ONE ISSUER
(OTHER THAN U.S. GOVERNMENT SECURITIES).
2. THE GROWTH, INCOME AND NORTHWEST FUNDS MAY NOT PURCHASE MORE THAN 10% OF ANY
CLASS OF SECURITIES OF ANY ONE ISSUER.
3. EACH FUND, WITH RESPECT TO 100% OF THE VALUE OF ITS TOTAL ASSETS, MAY NOT
PURCHASE MORE THAN 10% OF THE OUTSTANDING VOTING SECURITIES OF ANY ONE
ISSUER (OTHER THAN U.S. GOVERNMENT SECURITIES).
4. EACH STOCK FUND MAY BORROW MONEY ONLY FOR TEMPORARY OR EMERGENCY PURPOSES,
AND THE GROWTH FUND ONLY FOR EXTRAORDINARY OR EMERGENCY PURPOSES, FROM A
BANK OR AFFILIATE OF SAFECO CORPORATION AT AN INTEREST RATE NOT GREATER THAN
THAT AVAILABLE FROM COMMERCIAL BANKS. The Growth, Income and Northwest Funds
will not borrow amounts in excess of 20%, and the Equity, Balanced,
International and Small Company Funds will not borrow amounts in excess of
33%, of total assets. A Stock Fund will not purchase securities if
borrowings equal to or greater than 5% of total assets are outstanding for
that Fund.
For more information, see the "Investment Policies" and "Additional Investment
Information" sections of the Common Stock Trust's Statement of Additional
Information.
INVESTMENT POLICIES OF THE INTERMEDIATE TREASURY FUND
The investment objective of the Intermediate Treasury Fund is to provide as high
a level of current income as is consistent with the preservation of capital. The
Intermediate Treasury Fund will seek to maintain a portfolio of U.S. Treasury
obligations with an average dollar weighted maturity of between three and ten
years; however, individual obligations held by the Intermediate Treasury Fund
may have maturities outside that range.
To pursue its investment objective, the Intermediate Treasury Fund:
1. WILL INVEST, DURING NORMAL MARKET CONDITIONS, AT LEAST 65% OF ITS TOTAL
ASSETS IN DIRECT OBLIGATIONS OF THE U.S. TREASURY SUCH AS U.S. TREASURY
BILLS, NOTES AND BONDS. The Intermediate Treasury Fund may also invest in
stripped securities that are direct obligations of the U.S. Treasury. Direct
obligations of the U.S. Treasury are supported by the full faith and credit
of the U.S. Government.
2. WILL INVEST UP TO 35% OF ITS TOTAL ASSETS IN:
OTHER U.S. GOVERNMENT SECURITIES, including (a) securities supported by the
full faith and credit of the U.S. Government but that are not direct
obligations of the U.S. Treasury, such as securities issued by the
Government National Mortgage Association ("GNMA"), (b) securities that are
not supported by the full faith and credit of the U.S. Government but are
supported by the issuer's ability to borrow from the U.S. Treasury, such as
securities issued by the Federal National
-- 30 --
<PAGE>
INVESTMENT POLICIES OF THE INTERMEDIATE TREASURY FUND (CONTINUED)
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"), and (c) securities supported solely by the creditworthiness of
the issuer, such as securities issued by the Tennessee Valley Authority
("TVA"). While U.S. Government securities are considered to be of the
highest credit quality available, they are subject to the same market risks
as comparable debt securities.
CORPORATE DEBT SECURITIES which at the time of purchase are rated in the top
three grades (A or higher) by either Moody's or S&P, or, if unrated,
determined by SAM to be of comparable quality to such rated debt securities.
In addition to reviewing ratings, SAM will analyze the quality of rated and
unrated corporate bonds for purchase by the Fund by evaluating various
factors that may include the issuer's capital structure, earnings power and
quality of management. See "Ratings Supplement" beginning on page 70.
3. MAY INVEST UP TO 5% OF ITS TOTAL ASSETS IN YANKEE SECTOR DEBT SECURITIES,
EURODOLLAR BONDS AND MUNICIPAL SECURITIES. See the Taxable Bond Trust's
Statement of Additional Information for more information about these
securities.
INVESTMENT POLICIES OF THE HIGH-YIELD FUND
The High-Yield Fund has as its investment objective to provide a high level of
current interest income through the purchase of high-yield, fixed-income
securities. The higher yields that the Fund seeks are usually available from
lower-rated or unrated securities sometimes referred to as "junk bonds." The
maturity of the debt obligations held by the Fund may range from 1 to 30 years.
However, it is anticipated that the majority of debt obligations will have
maturities from 5 to 15 years.
To pursue its investment objective, the High-Yield Fund:
1. WILL INVEST, DURING NORMAL MARKET CONDITIONS, AT LEAST 65% OF ITS PORTFOLIO
IN HIGH-YIELD, FIXED-INCOME SECURITIES. The High-Yield Fund may purchase
debt and preferred stock issues (including convertible securities) which are
below investment grade, i.e., rated lower than the top four grades by S&P or
Moody's, or, if not rated by these agencies, in the opinion of SAM, have
credit characteristics comparable to such rated securities. Up to 25% of the
Fund's total assets may be invested in such unrated securities. SAM will
determine the quality of unrated obligations by evaluating the issuer's
capital structure, earnings power and quality of management. Unrated
securities may not be as attractive to as many investors as rated
securities. In addition, the Fund may invest up to 5% of its total assets in
securities which are in default. The Fund will purchase securities which are
in default only when, in SAM's opinion, the potential for high yield
outweighs the risk.
While fixed-income securities rated lower than investment grade generally
lack characteristics of a desirable investment, they normally offer a
current yield or yield-to-maturity which is significantly higher than the
yield available from securities rated as investment grade. These securities
are speculative and involve greater investment risks due to the issuers'
reduced creditworthiness and increased likelihood of default and bankruptcy.
In addition, these securities are frequently subordinated to senior
securities. For further explanation of the special risks associated with
investing in lower-rated, fixed-income securities, see "Risk Factors" on
page 42.
For a description of debt ratings, see "Description of Debt Ratings" on page
70. For a breakdown of the debt securities held by the High-Yield Fund
during the fiscal year ended September 30, 1996, see "Debt Securities Held
by the High-Yield Fund" on page 72. The High-Yield Fund may retain an issue
whose rating has been changed.
-- 31 --
<PAGE>
INVESTMENT POLICIES OF THE HIGH-YIELD FUND (CONTINUED)
2. MAY INVEST IN FIXED-INCOME SECURITIES WITH EQUITY FEATURES WHEN COMPARABLE
IN YIELD AND RISK TO FIXED-INCOME SECURITIES WITHOUT EQUITY FEATURES, BUT
ONLY WHEN ACQUIRED AS A RESULT OF UNIT OFFERINGS WHICH CARRY AN EQUITY
ELEMENT SUCH AS COMMON STOCK, RIGHTS OR OTHER EQUITY SECURITIES. The Fund
will hold these common stocks, rights or other equity securities until SAM
determines that, in its opinion, the optimal time for sale of the equity
security has been reached.
3. MAY INVEST UP TO 10% OF ITS TOTAL ASSETS IN RESTRICTED SECURITIES ELIGIBLE
FOR RESALE UNDER RULE 144A ("RULE 144A SECURITIES"), PROVIDED THAT SAM HAS
DETERMINED THAT SUCH SECURITIES ARE LIQUID UNDER GUIDELINES ADOPTED BY THE
BOARD OF TRUSTEES. Restricted securities may be sold only in offerings
registered under the Securities Act of 1933 ("1933 Act") or in transactions
exempt from the registration requirements under the 1933 Act. Rule 144A
under the 1933 Act provides an exemption for the resale of certain
restricted securities to qualified institutional buyers. Investing in Rule
144A securities could have the effect of increasing the Fund's illiquidity
to the extent that qualified institutional buyers or other buyers are
unwilling to purchase the securities.
4. MAY INVEST UP TO 5% OF ITS TOTAL ASSETS IN MUNICIPAL SECURITIES WHICH ARE
RATED LOWER THAN THE TOP THREE GRADES ASSIGNED BY MOODY'S OR S&P OR ARE
UNRATED BUT COMPARABLE TO SUCH RATED SECURITIES IF, IN THE OPINION OF SAM,
THE POTENTIAL FOR APPRECIATION IS GREATER THAN, AND YIELD IS COMPARABLE TO
OR GREATER THAN, SIMILARLY-RATED TAXABLE SECURITIES. Investment in medium
and lower quality tax-exempt bonds involves the same risks as investments in
taxable bonds of similar quality.
5. MAY INVEST IN OBLIGATIONS OF, OR GUARANTEED BY, THE U.S. GOVERNMENT, ITS
AGENCIES OR INSTRUMENTALITIES OR IN FIXED-INCOME SECURITIES WHICH ARE RATED
IN THE FOUR HIGHEST GRADES ASSIGNED BY MOODY'S OR S&P DURING MARKET
CONDITIONS WHICH, IN THE OPINION OF SAM, ARE UNFAVORABLE FOR SATISFACTORY
PERFORMANCE BY LOWER-RATED OR UNRATED FIXED-INCOME SECURITIES. The Fund may
invest in higher-rated securities when changing economic conditions or other
factors cause the difference in yield between lower-rated and higher-rated
securities to narrow and SAM believes that the risk of loss to principal may
be substantially reduced with a small reduction in yield.
COMMON INVESTMENT PRACTICES OF THE INTERMEDIATE TREASURY FUND AND THE HIGH-YIELD
FUND
The Intermediate Treasury Fund and High-Yield Fund may also follow the
investment practices described below:
1. MAY HOLD CASH OR INVEST TEMPORARILY IN HIGH-QUALITY COMMERCIAL PAPER,
CERTIFICATES OF DEPOSIT, SHARES OF NO-LOAD, OPEN-END MONEY MARKET FUNDS,
REPURCHASE AGREEMENTS AND HIGH-QUALITY SHORT-TERM SECURITIES ISSUED BY AN
AGENCY OR INSTRUMENTALITY OF THE U.S. GOVERNMENT. Each Fund may purchase
these short-term securities as a cash management technique under those
circumstances where it has cash to manage for a short time period, for
example, after receiving proceeds from the sale of securities, interest
payments, dividend distributions from portfolio securities, or cash from the
sale of Fund shares to investors. Interest earned from these short-term
securities will be taxable to investors as ordinary income when distributed.
2. MAY INVEST FOR SHORT-TERM PURPOSES WHEN SAM BELIEVES SUCH ACTION TO BE
DESIRABLE AND CONSISTENT WITH SOUND INVESTMENT PRACTICES. Neither Fund,
however, will engage primarily in trading for the purpose of short-term
profits. A Fund may dispose of its portfolio securities whenever SAM deems
advisable, without regard to the length of time the securities have been
held.
-- 32 --
<PAGE>
COMMON INVESTMENT PRACTICES OF THE INTERMEDIATE TREASURY FUND AND THE HIGH-YIELD
FUND (CONTINUED)
3. MAY PURCHASE OR SELL SECURITIES ON A "WHEN-ISSUED" OR "DELAYED-DELIVERY"
BASIS. Under this procedure, a Fund agrees to acquire or sell securities
that are to be delivered against payment in the future, normally 30 to 45
days. The price, however, is fixed at the time of commitment. When a Fund
purchases when-issued or delayed-delivery securities, it will earmark
liquid, high-quality securities in an amount equal in value to the purchase
price of the security. Use of these techniques may affect the Fund's share
price in a manner similar to leveraging.
The following restrictions are fundamental policies of the Intermediate Treasury
Fund and High-Yield Fund which cannot be changed without shareholder vote.
1. EACH FUND, WITH RESPECT TO 75% OF THE VALUE OF ITS TOTAL ASSETS, MAY NOT
INVEST MORE THAN 5% OF ITS TOTAL ASSETS IN THE SECURITIES OF ANY ONE ISSUER
(OTHER THAN U.S. GOVERNMENT SECURITIES).
2. EACH FUND, WITH RESPECT TO 100% OF THE VALUE OF ITS TOTAL ASSETS, MAY NOT
PURCHASE MORE THAN 10% OF THE OUTSTANDING VOTING SECURITIES OF ANY ONE
ISSUER (OTHER THAN U.S. GOVERNMENT SECURITIES).
3. EACH FUND MAY BORROW MONEY ONLY FOR TEMPORARY OR EMERGENCY PURPOSES FROM A
BANK OR SAFECO CORPORATION OR AFFILIATES OF SAFECO CORPORATION AT AN
INTEREST RATE NOT GREATER THAN THAT AVAILABLE FROM COMMERCIAL BANKS. A Fund
will not borrow amounts in excess of 20% of its total assets. A Fund will
not purchase securities if outstanding borrowings are equal to or greater
than 5% of its total assets. Each Fund intends to exercise its borrowing
authority primarily to meet shareholder redemptions under circumstances
where redemption requests exceed available cash.
4. EACH FUND MAY INVEST UP TO 10% OF ITS NET ASSETS IN ILLIQUID SECURITIES,
WHICH ARE SECURITIES THAT CANNOT BE SOLD WITHIN SEVEN DAYS IN THE ORDINARY
COURSE OF BUSINESS FOR APPROXIMATELY THE AMOUNT AT WHICH THEY ARE VALUED.
Due to the absence of an active trading market, a Fund may experience
difficulty in valuing or disposing of illiquid securities. SAM determines
the liquidity of the securities under guidelines adopted by the Taxable Bond
Trust's Board of Trustees.
5. EACH FUND MAY INVEST UP TO 10% OF NET ASSETS IN REPURCHASE AGREEMENT
TRANSACTIONS. Repurchase agreements are transactions in which a Fund
purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date and price reflecting a market rate of interest unrelated to
the coupon rate or maturity of the purchased securities. Repurchase
agreements carry certain risks not associated with direct investments in
securities, including the risk that the Fund will be unable to dispose of
the security during the term of the repurchase agreement if the security's
market value declines, and delays and costs to a Fund if the other party to
the repurchase agreement declares bankruptcy.
For more information see the "Investment Policies" and "Additional Investment
Information" sections of the Taxable Bond Trust's Statement of Additional
Information.
INVESTMENT POLICIES OF THE MANAGED BOND FUND
The investment objective of the Managed Bond Fund is to provide as high a level
of total return as is consistent with the relative stability of capital through
purchase of investment grade debt securities.
In pursuing the Managed Bond Fund's investment objective, SAM will seek to
minimize the effects of interest rate risks while pursuing total return by
adjusting the investment portfolio's average maturity in response to interest
rate changes. In general, the Managed Bond Fund's strategy will be to hold
-- 33 --
<PAGE>
INVESTMENT POLICIES OF THE MANAGED BOND FUND (CONTINUED)
fixed-income securities with shorter maturities as interest rates rise and with
longer maturities as interest rates fall. The fixed-income securities held by
the Managed Bond Fund will have maturities of 10 years or less from the date of
purchase. SAM reserves the right to modify the Managed Bond Fund's investment
strategy in any respect at any time.
To pursue its investment objective, the Managed Bond Fund:
1. WILL INVEST AT LEAST 65% OF ITS TOTAL ASSETS IN BONDS, DEFINED AS
FIXED-INCOME SECURITIES.
2. WILL INVEST PRIMARILY IN INVESTMENT GRADE DEBT SECURITIES; I.E., SECURITIES
RATED IN THE TOP FOUR CATEGORIES BY EITHER S&P OR MOODY'S OR IF NOT RATED,
SECURITIES WHICH, IN SAM'S OPINION, ARE COMPARABLE IN QUALITY TO INVESTMENT
GRADE DEBT SECURITIES. Included in investment grade debt securities are
securities of medium grade (rated Baa by Moody's or BBB by S&P) which have
speculative characteristics and are more likely to have a weakened capacity
to make principal and interest payments under changing economic or other
conditions than higher grade securities. The Managed Bond Fund will limit
investments in such medium grade debt securities to no more than 10% of its
total assets. Unrated securities are not necessarily of lower quality than
rated securities, but may not be as attractive to investors.
The Managed Bond Fund may retain debt securities which are downgraded to
below investment grade (commonly referred to as "high yield" or "junk"
bonds) after purchase. In the event that due to a downgrade of one or more
debt securities an amount in excess of 5% of the Fund's net assets is held
in securities rated below investment grade, SAM will engage in an orderly
disposition of such securities to the extent necessary to reduce the Fund's
holdings of such securities to no more than 5% of the Fund's net assets. In
addition to reviewing ratings, SAM may analyze the quality of rated and
unrated debt securities purchased for the Managed Bond Fund by evaluating
the issuer's capital structure, earnings power, quality of management and
position within its industry. For a description of debt securities ratings,
see the "Ratings Supplement" on page 70.
3. WILL INVEST AT LEAST 50% OF ITS TOTAL ASSETS IN OBLIGATIONS OF OR GUARANTEED
BY THE U.S. GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES. These
obligations include (a) direct obligations of the U.S. Treasury, such as
U.S. Treasury notes, bills, bonds and stripped securities; (b) securities
supported by the full faith and credit of the U.S. Government but that are
not direct obligations of the U.S. Treasury, such as securities issued by
the GNMA; (c) securities that are not supported by the full faith and credit
of the U.S. Government but are supported by the issuer's ability to borrow
from the U.S. Treasury, such as securities issued by the FNMA and the FHLMC;
and (d) securities supported solely by the creditworthiness of the issuer,
such as securities issued by the TVA. While U.S. Government securities are
considered to be of the highest credit quality available, they are subject
to the same market risks as comparable debt securities.
4. MAY INVEST UP TO 50% OF ITS TOTAL ASSETS IN CORPORATE DEBT SECURITIES OR
EURODOLLAR BONDS. Eurodollar bonds are bonds issued by either U.S. or
foreign issuers that are traded in the European bond markets and denominated
in U.S. dollars. The Managed Bond Fund will purchase Eurodollar bonds
through U.S. securities dealers and hold such bonds in the United States.
The delivery of Eurodollar bonds to the Managed Bond Fund's custodian in the
United States may cause slight delays in settlement which are not
anticipated to affect the Managed Bond Fund in any material, adverse manner.
Eurodollar bonds issued by foreign issuers are subject to the same risks as
Yankee sector bonds discussed below.
5. MAY INVEST IN ASSET-BACKED SECURITIES, WHICH REPRESENT INTERESTS IN, OR ARE
SECURED BY AND PAYABLE FROM, POOLS OF ASSETS SUCH AS CONSUMER LOANS,
AUTOMOBILE RECEIVABLE SECURITIES, CREDIT CARD RECEIVABLE SECURITIES, AND
INSTALLMENT LOAN CONTRACTS. These securities may be supported by
-- 34 --
<PAGE>
INVESTMENT POLICIES OF THE MANAGED BOND FUND (CONTINUED)
credit enhancements such as letters of credit. Payment of interest and
principal ultimately depends upon borrowers paying the underlying loans.
There is a risk that one or more of the underlying borrowers may default and
that recovery on repossessed collateral may be unavailable or inadequate to
support payments on the defaulted asset-backed securities. In addition,
asset-backed securities are subject to prepayment risks which may reduce the
overall return of the investment.
6. MAY INVEST UP TO 10% OF ITS TOTAL ASSETS IN YANKEE SECTOR DEBT SECURITIES,
WHICH ARE SECURITIES ISSUED AND TRADED IN THE UNITED STATES BY FOREIGN
ISSUERS. These bonds have investment risks that are different from those of
domestic issuers. Such risks may include nationalization of the issuer,
confiscatory taxation by the foreign government that would inhibit the
ability of the issuer to make principal and interest payments to the Managed
Bond Fund, lack of comparable publicly available information concerning
foreign issuers, lack of comparable accounting and auditing practices in
foreign countries and, finally, difficulty in enforcing claims against
foreign issuers in the event of default.
Both S&P and Moody's rate Yankee sector debt obligations. If a debt
obligation is unrated, SAM will attempt to analyze a potential investment in
the foreign issuer with respect to quality and risk on the same basis as the
rating services. Because public information is not always comparable to that
available on domestic issuers, this may not be possible. Therefore, while
SAM will attempt to select investments in foreign securities on the same
basis, and with comparable quantities and types of information, as its
investments in domestic securities, that may not always be possible.
7. MAY PURCHASE OR SELL SECURITIES ON A WHEN-ISSUED OR DELAYED-DELIVERY BASIS.
Under this procedure, the Managed Bond Fund agrees to acquire securities
that are to be issued and delivered against payment in the future, normally
30 to 45 days. The price, however, is fixed at the time of commitment. When
the Managed Bond Fund purchases when-issued or delayed-delivery securities,
it will earmark liquid, high quality securities in an amount equal in value
to the purchase price of the security. Use of these techniques may affect
the Managed Bond Fund's share price in a manner similar to the use of
leveraging.
8. MAY HOLD CASH OR INVEST TEMPORARILY IN HIGH QUALITY, SHORT-TERM SECURITIES
ISSUED BY AN AGENCY OR INSTRUMENTALITY OF THE U.S. GOVERNMENT, HIGH QUALITY
COMMERCIAL PAPER, CERTIFICATES OF DEPOSIT, SHARES OF NO-LOAD, OPEN-END MONEY
MARKET FUNDS OR REPURCHASE AGREEMENTS. The Managed Bond Fund may purchase
these short-term securities as a cash management technique under those
circumstances where it has cash to manage for a short time period, for
example, after receiving proceeds from the sale of securities, interest
payments or dividend distributions from portfolio securities or cash from
the sale of Managed Bond Fund shares to investors. Interest earned from
these short-term securities will be taxable to investors as ordinary income
when distributed. With respect to repurchase agreements, the Managed Bond
Fund will invest no more than 5% of its total assets in repurchase
agreements, and will not purchase repurchase agreements which mature in more
than seven days.
9. MAY HOLD CASH AS A TEMPORARY DEFENSIVE MEASURE WHEN MARKET CONDITIONS SO
WARRANT.
10. MAY INVEST UP TO 5% OF ITS TOTAL ASSETS IN MUNICIPAL SECURITIES IF, IN SAM'S
OPINION, THE POTENTIAL FOR APPRECIATION IS GREATER THAN, AND YIELD IS
COMPARABLE TO OR GREATER THAN, SIMILARLY RATED TAXABLE SECURITIES.
11. MAY INVEST FOR SHORT-TERM PURPOSES WHEN SAM BELIEVES SUCH ACTION TO BE
DESIRABLE AND CONSISTENT WITH SOUND INVESTMENT PRACTICES. The Managed Bond
Fund, however, will not engage
-- 35 --
<PAGE>
primarily in trading for the purpose of short-term profits. The Managed Bond
Fund may dispose of its portfolio securities whenever SAM deems advisable,
without regard to the length of time the securities have been held.
The following restrictions are fundamental policies of the Managed Bond Fund
which cannot be changed without shareholder vote.
1. THE FUND, WITH RESPECT TO 75% OF THE VALUE OF ITS TOTAL ASSETS, MAY NOT
INVEST MORE THAN 5% OF ITS TOTAL ASSETS IN THE SECURITIES OF ANY ONE ISSUER
(OTHER THAN U.S. GOVERNMENT SECURITIES).
2. THE FUND, WITH RESPECT TO 100% OF THE VALUE OF ITS TOTAL ASSETS, MAY NOT
PURCHASE MORE THAN 10% OF THE OUTSTANDING VOTING SECURITIES OF ANY ONE
ISSUER (OTHER THAN U.S. GOVERNMENT SECURITIES).
3. THE FUND MAY BORROW MONEY FOR TEMPORARY OR EMERGENCY PURPOSES ONLY FROM A
BANK OR AFFILIATE OF SAFECO CORPORATION AT AN INTEREST RATE NOT GREATER THAN
THAT AVAILABLE FROM COMMERCIAL BANKS. The Fund will not borrow amounts in
excess of 20% of its total assets. As a non-fundamental policy, the Fund
will not purchase securities if outstanding borrowings are equal to or
greater than 5% of its total assets. The Fund intends to exercise its
borrowing authority primarily to meet shareholder redemptions under
circumstances where redemptions exceed available cash.
For more information, see the "Investment Policies" and "Additional Investment
Information" sections of the Managed Bond Trust's Statement of Additional
Information.
INVESTMENT POLICIES OF THE TAX-EXEMPT INCOME FUNDS
The investment objective of the Municipal Bond Fund is to provide as high a
level of current interest income exempt from federal income tax as is consistent
with the relative stability of capital. The investment objective of the
California Fund is to provide as high a level of current interest income exempt
from federal income tax and California state personal income tax as is
consistent with the relative stability of capital. The investment objective of
the Washington Fund is to provide as high a level of current interest income
exempt from federal income tax as is consistent with prudent investment risk.
To pursue its investment objective, each of the Tax-Exempt Income Funds:
1. WILL, DURING NORMAL MARKET CONDITIONS, INVEST AS A MATTER OF FUNDAMENTAL
POLICY AT LEAST 80% OF ITS NET ASSETS IN SECURITIES THE INTEREST ON WHICH IS
EXEMPT FROM FEDERAL INCOME TAX AND, IN THE CASE OF THE CALIFORNIA FUND,
EXEMPT FROM CALIFORNIA PERSONAL INCOME TAX. The Tax-Exempt Income Funds do
not currently intend to purchase taxable investments, except as a temporary
accommodation or in an emergency situation.
2. WILL INVEST AT LEAST 65% OF ITS TOTAL ASSETS IN MUNICIPAL BONDS (IN THE CASE
OF THE WASHINGTON FUND, ISSUED BY THE STATE OF WASHINGTON OR POLITICAL
SUBDIVISIONS, MUNICIPALITIES, AGENCIES, INSTRUMENTALITIES OR PUBLIC
AUTHORITIES WITHIN THE STATE OF WASHINGTON) HAVING A MATURITY IN EXCESS OF
ONE YEAR THAT AT THE TIME OF ACQUISITION ARE INVESTMENT GRADE; I.E., RATED
IN ONE OF THE FOUR HIGHEST GRADES ASSIGNED BY MOODY'S OR S&P OR, IF UNRATED,
DETERMINED BY SAM TO BE OF COMPARABLE QUALITY. Each Tax-Exempt Income Fund
may invest up to 20% of its total assets in unrated municipal bonds. Unrated
securities are not necessarily lower in quality than rated securities, but
may not be as attractive to as many investors as rated securities. Each
Tax-Exempt Income Fund will invest no more than 33% of its total assets in
municipal bonds rated in the fourth highest grade or in comparable unrated
bonds. Such bonds are of medium grade, have speculative characteristics and
are more likely to have a weakened capacity to make principal and interest
payments under changing economic conditions or upon deterioration in the
financial condition of the issuer.
-- 36 --
<PAGE>
INVESTMENT POLICIES OF THE TAX-EXEMPT INCOME FUNDS (CONTINUED)
In addition to reviewing ratings, SAM will analyze the quality of rated and
unrated municipal bonds for purchase by each Tax-Exempt Income Fund by
evaluating various factors that may include the issuer's or guarantor's
financial resources and liquidity, economic feasibility of revenue bond
project financing and general purpose borrowings, cash flow and ability to
meet anticipated debt service requirements, quality of management,
sensitivity to economic conditions, operating history and any relevant
political or regulatory matters. SAM may also evaluate trends in the
economy, the financial markets or specific geographic areas in determining
whether to purchase a bond. For a description of municipal bond ratings, see
the Tax-Exempt Bond Trust's Statement of Additional Information.
After purchase by a Fund, a municipal bond may be downgraded to below
investment grade or, if unrated, may cease to be comparable to a rated
investment grade security (such below investment grade securities are
commonly referred to as "high-yield" or "junk" bonds). Neither event will
require a Fund to dispose of that security, but SAM will take a downgrade or
loss of comparability into account in determining whether the Fund should
continue to hold the security in its portfolio. Each Tax-Exempt Income Fund
will not hold more than 5% of its net assets in such below investment grade
securities.
The term "municipal bonds" as used in this Prospectus means those
obligations issued by or on behalf of states, territories or possessions of
the United States and the District of Columbia and their political
subdivisions, municipalities, agencies, instrumentalities or public
authorities, the interest on which in the opinion of bond counsel is exempt
from federal income tax and, in the case of the California Fund, exempt from
California personal income tax.
3. MAY INVEST IN ANY OF THE FOLLOWING TYPES OF MUNICIPAL BONDS:
REVENUE BONDS, which are "limited obligation" bonds that provide financing
for specific projects or public facilities. These bonds are backed by
revenues generated by a particular project or facility or by a special tax.
A "resource recovery bond" is a type of revenue bond issued to build waste
facilities or plants. An "industrial development bond" ("IDB") is a type of
revenue bond that is backed by the credit of a private issuer, generally
does not have access to the resources of a municipality for payment and may
involve greater risk. Each Tax-Exempt Income Fund intends to invest
primarily in revenue bonds that may be issued to finance various types of
projects, including but not limited to education, hospitals, housing, waste
and utilities. Each Tax-Exempt Income Fund will not purchase private
activity bonds ("PABs") or any other type of revenue bonds, the interest on
which is a tax preference item for purposes of the alternative minimum tax.
GENERAL OBLIGATION BONDS, which are bonds that provide general purpose
financing for state and local governments and are backed by the taxing power
of the state and local government as the case may be. The taxes or special
assessments that can be levied for the payment of principal and interest on
general obligation bonds may be limited or unlimited as to rate or amount.
VARIABLE AND FLOATING RATE OBLIGATIONS, which are municipal obligations that
carry variable or floating rates of interest. Variable rate instruments bear
interest at rates that are readjusted at periodic intervals. Floating rate
instruments bear interest at rates that vary automatically with changes in
specified market rates or indexes, such as the bank prime rate. Accordingly,
as interest rates fluctuate, the potential for capital appreciation or
depreciation of these obligations is less than for fixed rate obligations.
Floating and variable rate obligations typically carry demand features that
permit a Fund to tender (sell) them back to the issuer at par prior to
maturity and on short notice. A Fund's ability to obtain payment from the
issuer at par may be affected by
-- 37 --
<PAGE>
INVESTMENT POLICIES OF THE TAX-EXEMPT INCOME FUNDS (CONTINUED)
events occurring between the date the Fund elects to tender the obligation
to the issuer and the date redemption proceeds are payable to the Fund. Each
Tax-Exempt Income Fund will purchase floating and variable rate obligations
only if at the time of purchase there is a secondary market for such
instruments.
PUT BONDS, which are municipal bonds that give the holder the unconditional
right to sell the bond back to the issuer at a specified price and exercise
date and PUT BONDS WITH DEMAND FEATURES. The obligation to purchase the bond
on the exercise date may be supported by a letter of credit or other
arrangement from a bank, insurance company or other financial institution,
the credit standing of which affects the credit quality of the bond. A
demand feature is a put that entitles the Fund holding it to repayment of
the principal amount of the underlying security on no more than 30 days'
notice at any time or at specified intervals.
MUNICIPAL LEASE OBLIGATIONS, which are issued by or on behalf of state or
local government authorities to acquire land, equipment or facilities and
may be subject to annual budget appropriations. These obligations themselves
are not normally backed by the credit of the municipality or the state but
are secured by rent payments made by the municipality or by the state
pursuant to a lease. If the lease is assigned, the interest on the
obligation may become taxable. The leases underlying certain municipal lease
obligations provide that lease payments are subject to partial or full
abatement if, because of material damage or destruction of the lease
property, there is substantial interference with the lessee's use or
occupancy of such property. This "abatement risk" may be reduced by the
existence of insurance covering the leased property, the maintenance by the
lessee of reserve funds or the provision of credit enhancements such as
letters of credit. Certain municipal lease obligations also contain
"non-appropriation" clauses that provide that the municipality has no
obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. Some
municipal lease obligations of this type are insured as to timely payment of
principal and interest, even in the event of a failure by the municipality
to appropriate sufficient funds to make payments under the lease. However,
in the case of an uninsured municipal lease obligation, a Fund's ability to
recover under the lease in the event of a non-appropriation or default will
be limited solely to the repossession of leased property without recourse to
the general credit of the lessee, and disposition of the property in the
event of foreclosure might prove difficult. If rent is abated because of
damage to the leased property or if the lease is terminated because monies
are not appropriated for the following year's lease payments, the issuer may
default on the obligation causing a loss to a Fund. Each Tax-Exempt Income
Fund will only invest in municipal lease obligations that are, in the
opinion of SAM, liquid securities under guidelines adopted by the Tax-Exempt
Bond Trust's Board of Trustees. Generally, municipal lease obligations will
be determined to be liquid if they have a readily available market after an
evaluation of all relevant factors.
CERTIFICATES OF PARTICIPATION in municipal lease obligations ("COPs"), which
are certificates issued by state or local governments that entitle the
holder of the certificate to a proportionate interest in the lease purchase
payments made. Each Tax-Exempt Income Fund will only invest in COPs that
are, in the opinion of SAM, liquid securities under guidelines adopted by
the Tax-Exempt Bond Trust's Board of Trustees. Generally, COPs will be
determined to be liquid if they have a readily available market after an
evaluation of all relevant factors.
PARTICIPATION INTERESTS, which are interests in municipal bonds and floating
and variable rate obligations that are owned by banks. These interests carry
a demand feature that permits a Fund holding an interest to tender (sell) it
back to the bank. Generally, the bank will accept tender of
-- 38 --
<PAGE>
INVESTMENT POLICIES OF THE TAX-EXEMPT INCOME FUNDS (CONTINUED)
the participation interest with same day notice, but may require up to five
days' notice. The demand feature is usually backed by an irrevocable letter
of credit or guarantee of the bank. The credit rating of the bank may affect
the credit quality of the participation interest.
MUNICIPAL NOTES, which are notes generally issued by an issuer to provide
for short-term capital needs and generally have maturities of one year or
less. Each Tax-Exempt Income Fund may purchase municipal notes as a medium
for its short-term investments. Municipal Notes include tax anticipation,
revenue anticipation and bond anticipation notes and tax-exempt commercial
paper. Each Tax-Exempt Income Fund will invest only in those municipal notes
that at the time of purchase are rated within one of the three highest
grades by Moody's or S&P or, if unrated by any of these agencies, in the
opinion of SAM, are of comparable quality.
4. MAY INVEST IN SHARES OF NO-LOAD, OPEN-END INVESTMENT COMPANIES THAT INVEST
IN TAX-EXEMPT SECURITIES WITH REMAINING MATURITIES OF ONE YEAR OR LESS. Such
shares will only be purchased as a medium for a Fund's short-term
investments if SAM determines that they provide a better combination of
yield and liquidity than a direct investment in short-term, tax-exempt
securities. Each Tax-Exempt Income Fund will not invest more than 10% of its
total assets in shares issued by other investment companies, will not invest
more than 5% of its total assets in a single investment company, and will
not purchase more than 3% of the outstanding voting securities of a single
investment company.
5. MAY INVEST FOR SHORT-TERM PURPOSES WHEN SAM BELIEVES SUCH ACTION TO BE
DESIRABLE AND CONSISTENT WITH SOUND INVESTMENT PRACTICES. Each Tax-Exempt
Income Fund, however, will not engage primarily in trading for the purpose
of short-term profits. A Fund may dispose of its portfolio securities
whenever SAM deems advisable, without regard to the length of time the
securities have been held. The portfolio turnover rate is not expected to
exceed 70%.
6. MAY PURCHASE OR SELL SECURITIES ON A "WHEN-ISSUED" OR "DELAYED-DELIVERY"
BASIS. Under this procedure, a Tax-Exempt Income Fund agrees to acquire or
sell securities that are to be delivered against payment in the future,
normally 30 to 45 days. The price, however, is fixed at the time of
commitment. When a Fund purchases when-issued or delayed-delivery
securities, it will earmark liquid, high quality securities in an amount
equal in value to the purchase price of the security. Use of this technique
may affect a Fund's share price in a manner similar to leveraging.
7. MAY HOLD CASH OR INVEST TEMPORARILY IN HIGH QUALITY, SHORT-TERM SECURITIES
ISSUED BY AN AGENCY OR INSTRUMENTALITY OF THE U.S. GOVERNMENT, HIGH QUALITY
COMMERCIAL PAPER, CERTIFICATES OF DEPOSIT AND SHARES OF NO-LOAD, OPEN-END
MONEY MARKET FUNDS. A Tax-Exempt Income Fund may purchase these short-term
securities as a cash management technique under those circumstances where it
has cash to manage for a short time period, for example, after receiving
proceeds from the sale of securities, dividend distributions from portfolio
securities, or cash from the sale of Fund shares to investors. Interest
earned from these short-term securities will be taxable to investors as
ordinary income when distributed.
The following restrictions are fundamental policies of the Tax-Exempt Income
Funds and cannot be changed without shareholder vote.
1. EACH FUND, WITH RESPECT TO 75% OF THE VALUE OF ITS TOTAL ASSETS, WILL NOT
INVEST MORE THAN 5% OF ITS TOTAL ASSETS IN THE SECURITIES OF ANY ONE ISSUER
(OTHER THAN U.S. GOVERNMENT SECURITIES).
-- 39 --
<PAGE>
INVESTMENT POLICIES OF THE TAX-EXEMPT INCOME FUNDS (CONTINUED)
2. EACH FUND WILL NOT INVEST 25% OR MORE OF ITS TOTAL ASSETS IN MUNICIPAL
OBLIGATIONS AND OTHER PERMITTED INVESTMENTS, THE INTEREST ON WHICH IS
PAYABLE FROM REVENUES ON SIMILAR TYPES OF PROJECTS SUCH AS: SPORTS,
CONVENTION OR TRADE SHOW FACILITIES; AIRPORTS; MASS TRANSPORTATION; SEWAGE
OR SOLID WASTE DISPOSAL FACILITIES; OR AIR OR WATER POLLUTION CONTROL
PROJECTS.
3. THE MUNICIPAL BOND FUND WILL NOT INVEST 25% OR MORE OF ITS TOTAL ASSETS IN
SECURITIES WHOSE ISSUERS ARE LOCATED IN THE SAME STATE.
4. EACH FUND MAY BORROW MONEY ONLY FOR TEMPORARY OR EMERGENCY PURPOSES FROM A
BANK OR AFFILIATE OF SAFECO CORPORATION AT AN INTEREST RATE NOT GREATER THAN
THAT AVAILABLE FROM COMMERCIAL BANKS. A Tax-Exempt Income Fund will not
borrow amounts in excess of 20% of its total assets. As a non-fundamental
policy of the Washington Fund and a fundamental policy of the California and
Municipal Bond Funds, a Fund will not purchase securities if borrowings
equal to or greater than 5% of its total assets are outstanding. Each
Tax-Exempt Income Fund intends to primarily exercise its borrowing authority
to meet shareholder redemptions under circumstances where redemptions exceed
available cash.
For a further description of each Fund's investment policies and restrictions as
well as an explanation of ratings, see the "Investment Objectives and Policies"
and "Description of Ratings" sections of the Tax-Exempt Bond Trust's Statement
of Additional Information.
INVESTMENT POLICIES OF THE MONEY MARKET FUND
The investment objective of the Money Market Fund is to seek as high a level of
current income as is consistent with the preservation of capital and liquidity
through investment in high quality money market instruments maturing in thirteen
months or less.
To pursue its investment objective, the Money Market Fund:
1. WILL PURCHASE ONLY HIGH QUALITY SECURITIES THAT, IN THE OPINION OF SAM
OPERATING UNDER GUIDELINES ESTABLISHED BY THE MONEY MARKET TRUST'S BOARD OF
TRUSTEES, PRESENT MINIMAL CREDIT RISKS AFTER AN EVALUATION OF THE CREDIT
QUALITY OF AN ISSUER OR OF ANY ENTITY PROVIDING A CREDIT ENHANCEMENT FOR THE
SECURITY. The Fund complies with industry-standard guidelines on the quality
and maturity of its investments, which are designed to help maintain a
stable $1.00 share price. The Fund invests in instruments with remaining
maturities of 397 days or less and maintains a dollar-weighted average
portfolio maturity of not more than 90 days.
MAY INVEST IN COMMERCIAL PAPER OBLIGATIONS. Commercial paper is a short-term
instrument issued by corporations, financial institutions, governmental
entities and other entities. The principal risk associated with commercial
paper is the potential insolvency of the issuer. In addition to commercial
paper obligations of domestic corporations, the Fund may also purchase
dollar-denominated commercial paper issued in the United States by foreign
entities. While investments in foreign securities are intended to reduce
risk by providing further diversification, such investments involve
sovereign and other risks, in addition to the credit and market risks
normally associated with domestic securities. These additional risks include
the possibility of adverse political and economic developments (including
political instability) and the potentially adverse effects of unavailability
of public information regarding issuers, reduced governmental supervision of
financial markets, reduced liquidity of certain financial markets, and the
lack of uniform accounting, auditing, and financial standards or the
application of standards that are different or
-- 40 --
<PAGE>
INVESTMENT POLICIES OF THE MONEY MARKET FUND (CONTINUED)
less stringent than those applied in the United States. The Fund will only
purchase such securities, if, in the opinion of SAM, the security is of an
investment quality comparable to other obligations that may be purchased by
the Fund.
2. MAY INVEST IN NEGOTIABLE AND NON-NEGOTIABLE DEPOSITS, BANKERS' ACCEPTANCES
AND OTHER SHORT-TERM OBLIGATIONS OF U.S. AND FOREIGN BANKS. Companies in the
financial services industry are subject to various risks related to that
industry, such as government regulation, changes in interest rates, and
exposure on loans, including loans to foreign borrowers. The Fund may also
invest in dollar-denominated securities issued by foreign banks (including
foreign branches of U.S. banks) provided that, in the opinion of SAM, the
security is of an investment quality comparable to other obligations which
may be purchased by the Fund. Foreign banks may not be subject to accounting
standards or governmental supervision comparable to U.S. banks,. and there
may be less public information available about their operations. In
addition, foreign securities may be subject to risks relating to the
political and economic conditions of the foreign country involved, which
could affect the payment of principal and interest.
3. MAY INVEST IN U.S. GOVERNMENT SECURITIES. U.S. Government securities include
(a) direct obligations of the U.S. Treasury, (b) securities supported by the
full faith and credit of the U.S. Government but that are not direct
obligations of the U.S. Treasury, (c) securities that are not supported by
the full faith and credit of the U.S. Government but are supported by the
issuer's ability to borrow from the U.S. Treasury such as securities issued
by the FNMA and the FHLMC, and (d) securities supported solely by the
creditworthiness of the issuer such as securities issued by the TVA. While
these securities are considered to be of the highest credit quality
available, they are subject to the same market risks as comparable debt
securities.
4. MAY INVEST IN EURODOLLAR AND YANKEE BANK OBLIGATIONS. Eurodollar bank
obligations are dollar-denominated certificates of deposit and time deposits
issued outside the U.S. capital markets by foreign branches of U.S. banks
and by foreign banks. Yankee bank obligations are dollar-denominated
obligations issued in the United States capital markets by foreign banks.
Eurodollar and Yankee obligations are subject to the same risks that pertain
to domestic issues, notably credit risk, market risk and liquidity risk.
Additionally, Eurodollar (and to a lesser extent, Yankee) obligations are
subject to certain sovereign risks. One such risk is the possibility that a
foreign government might prevent dollar-denominated funds from flowing
across its borders. Other risks include: adverse political and economic
developments in a foreign country; the extent and quality of government
regulation of financial markets and institutions; the imposition of foreign
withholding taxes; and expropriation or nationalization of foreign issuers.
Eurodollar and Yankee obligations will undergo the same credit analysis as
domestic issues in which the Fund invests, and foreign issuers will be
required to meet the same tests of financial strength as the domestic
issuers approved for the Fund.
5. MAY INVEST IN REPURCHASE AGREEMENTS. In a repurchase agreement, the Fund
buys securities at one price and simultaneously agrees to sell them back at
a higher price. Delays or losses could result if the counterparty to the
agreement defaults or becomes insolvent. The Fund will invest no more than
10% of total assets in repurchase agreements and will not purchase
repurchase agreements that mature in more than seven days.
6. MAY INVEST IN VARIABLE AND FLOATING RATE INSTRUMENTS. Issuers of floating or
variable rate notes include, but are not limited to, corporations,
partnerships, the U.S. government, its agencies and instrumentalities, and
municipalities. The interest rates on variable rate instruments reset
periodically on specified dates so as to cause the instruments' market value
to approximate their par value. The interest rates on floating rate
instruments change whenver there is a change in a
-- 41 --
<PAGE>
INVESTMENT POLICIES OF THE MONEY MARKET FUND (CONTINUED)
designated benchmark rate. Variable and floating rate instruments may have
put features. These instruments may have optional put features. Puts may
also be mandatory, in which case the Fund would be required to act to keep
the instrument.
7. MAY INVEST UP TO 5% OF ITS TOTAL ASSETS IN RESTRICTED SECURITIES ELIGIBLE
FOR RESALE UNDER RULE 144A UNDER THE 1933 ACT ("RULE 144A SECURITIES") AND
COMMERCIAL PAPER SOLD PURSUANT TO SECTION 4(2) OF THE 1933 ACT ("SECTION
4(2) PAPER"), PROVIDED THAT SAM HAS DETERMINED THAT SUCH SECURITIES ARE
LIQUID UNDER GUIDELINES ADOPTED BY THE MONEY MARKET TRUST'S BOARD OF
TRUSTEES. Restricted securities may be sold only in offerings registered
under the 1933 Act or in transactions exempt from the registration
requirements under the 1933 Act. Rule 144A under the 1933 Act provides an
exemption for the resale of certain restricted securities to qualified
institutional buyers. Investing in such 144A Securities could have the
effect of increasing the Fund's illiquidity to the extent that qualified
institutional buyers or other buyers are unwilling to purchase the
securities. Section 4(2) of the 1933 Act exempts securities sold by the
issuer in private transactions from the 1933 Act's registration
requirements. Because Section 4(2) paper is a restricted security, investing
in Section 4(2) paper could have the effect of increasing the Fund's
illiquidity to the extent that buyers are unwilling to purchase the
securities.
The following restrictions are fundamental policies of the Money Market Fund and
cannot be changed without shareholder vote. The Money Market Fund:
1. MAY INVEST UP TO 5% OF ITS ASSETS IN THE SECURITIES OF ANY ONE ISSUER OTHER
THAN U.S. GOVERNMENT SECURITIES.
2. MAY INVEST UP TO 25% OF ITS TOTAL ASSETS IN ANY ONE INDUSTRY (INCLUDING
SECURITIES ISSUED BY FOREIGN BANKS AND FOREIGN BRANCHES OF U.S. BANKS),
PROVIDED, HOWEVER, THAT THIS LIMITATION DOES NOT APPLY TO U.S. GOVERNMENT
SECURITIES, OR TO CERTIFICATES OF DEPOSIT OR BANKERS' ACCEPTANCES ISSUED BY
DOMESTIC BANKS.
3. MAY BORROW MONEY FOR TEMPORARY OR EMERGENCY PURPOSES (BUT NOT FOR INVESTMENT
PURPOSES) FROM A BANK OR AFFILIATES OF SAFECO CORPORATION AT AN INTEREST
RATE NOT GREATER THAN THAT AVAILABLE FROM COMMERCIAL BANKS. The Fund will
not borrow amounts in excess of 20% of total assets and will not purchase
securities if borrowings equal to or greater than 5% of total assets are
outstanding. The Fund intends to primarily exercise its borrowing authority
to meet shareholder redemptions under the circumstances where redemptions
exceed available cash.
For more information, see the "Investment Policies" and "Additional Investment
Information" sections of the Money Market Trust's Statement of Additional
Information.
RISK FACTORS
There are market risks in all securities transactions. Various factors may cause
the value of a shareholder's investment in a Fund to fluctuate. The principal
risk factor associated with an investment in a mutual fund is that the market
value of the portfolio securities may decrease, resulting in a decrease in the
value of a shareholder's investment.
RISK FACTORS OF THE STOCK FUNDS
An investment in the Northwest Fund may be subject to different risks than a
mutual fund whose investments are more geographically diverse. Since the
Northwest Fund invests primarily in companies with their principal executive
offices located in the Northwest, the number of issuers whose securities are
eligible for purchase is significantly less than many other mutual funds. Also,
some companies whose securities are held in the Northwest Fund's portfolio may
primarily distribute
-- 42 --
<PAGE>
RISK FACTORS (CONTINUED)
products or provide services in a specific locale or in the Northwest region.
The long-term growth of these companies can be significantly affected by
business trends in and the economic health of those areas. Other companies whose
securities are held by the Northwest Fund may have a predominately national or
partially international market for their products or services and are more
likely to be impacted by national or international trends. As a result, the
performance of the Northwest Fund may be influenced by business trends or
economic conditions not only in a specific locale or in the Northwest region but
also on a national or international level, depending on the companies whose
securities are held in its portfolio at any particular time.
The Equity, Income, Small Company and Value Funds may invest in, and the
other Stock Funds as a result of downgrades may own, below investment grade
bonds. Below investment grade bonds are speculative and involve greater
investment risks than investment grade bonds due to the issuer's reduced
creditworthiness and increased likelihood of default and bankruptcy. During
periods of economic uncertainty or change, the market prices of below
investment grade bonds may experience increased volatility. Below investment
grade bonds tend to reflect short-term economic and corporate developments to
a greater extent than higher quality bonds.
Because the International Fund primarily invests, and the other Stock Funds may
invest, in foreign securities, each Stock Fund is subject to risks in addition
to those associated with U.S. investments. Foreign investments involve sovereign
risk, which includes the possibility of adverse local political or economic
developments, expropriation or nationalization of assets, imposition of
withholding taxes on dividend or interest payments and currency blockage (which
would prevent currency from being sold). Foreign investments may be affected
favorably or unfavorably by changes in currency rates and exchange control
regulations. There is generally less publicly available information about
issuers of foreign securities as compared to U.S. issuers. Many foreign
companies are not subject to accounting, auditing and financial reporting
standards and requirements comparable to those applicable to U.S. companies.
Securities of some foreign issuers are less liquid and more volatile than
securities of U.S. issuers. Financial markets on which foreign securities trade
are generally subject to less governmental regulation as compared to U.S.
markets. Foreign brokerage commissions and custodian fees are generally higher
than those in the United States.
In addition, the International Fund may purchase and sell put and call options,
futures contracts and forward contracts. Risks inherent in the use of futures,
options and forward contracts include: the risk that interest rates, security
prices and currency markets will not move in the directions anticipated;
imperfect correlation between the price of the future, option or forward
contract and the price of the security, interest rate or currency being hedged;
the risk that potential losses may exceed the amount invested in the contracts
themselves; the possible absence of a liquid secondary market for any particular
instrument at any time; the possible need to defer closing out certain hedged
positions to avoid adverse tax consequences; and the reduction or elimination of
the opportunity to profit from increases in the value of the security, interest
rate or currency being hedged.
The Growth Fund currently has an aggressive investment approach to seeking
capital appreciation. The Growth Fund may invest a significant portion of its
assets in securities issued by smaller companies. In addition, the Small Company
Fund invests in companies with small market capitalizations which involve more
risks than investments in larger companies. Such companies may include newly
formed companies which have limited product lines, markets or financial
resources and may lack management depth. The securities of small or newly formed
companies may have limited marketability and may be subject to more abrupt and
erratic movements in price than securities of larger, more established
companies, or equity securities in general. Such volatility in price may in turn
cause the Growth Fund's and Small Company Fund's share prices to be volatile.
-- 43 --
<PAGE>
RISK FACTORS (CONTINUED)
RISK FACTORS OF THE INTERMEDIATE TREASURY, HIGH-YIELD, MANAGED BOND, MUNICIPAL
BOND, CALIFORNIA, WASHINGTON AND MONEY MARKET FUNDS (THE "FIXED-INCOME FUNDS")
The value of each Fixed-Income Fund (except the Money Market Fund) will normally
fluctuate inversely with changes in market interest rates. Generally, when
market interest rates rise, the price of debt securities held by a Fund will
fall, and when market interest rates fall, the price of the debt securities will
rise. Also, there is a risk that the issuer of a bond or other security held in
a Fund's portfolio will fail to make timely payments of principal and interest
to the Fixed-Income Funds. Included in investment grade debt securities are
securities of medium grade (rated Baa by Moody's or BBB by S&P) which have
speculative characteristics and are more likely to have a weakened capacity to
make principal and interest payments under changing economic or other conditions
than higher grade securities.
The Managed Bond Fund may invest in stripped securities that are obligations
issued by the U.S. Treasury. Stripped securities are the separate income or
principal components of a debt security. The risks associated with stripped
securities are similar to those of other debt securities, although stripped
securities may be more volatile than other debt securities.
The Money Market Fund seeks to maintain a stable $1.00 share price. Of course,
there is no guarantee that the Money Market Fund will maintain a stable $1.00
share price. It is possible that a major change in interest rates or a default
on the Money Market Fund's investments could cause its share price (and the
value of your investment) to fall. The Money Market Fund's yield will fluctuate
with general interest rates.
Because the California and Washington Funds each concentrate their investments
in a single state, there is a greater risk of fluctuation in the values of their
portfolio securities than with mutual funds whose investments are more
geographically diverse. Investors should carefully consider the investment risks
of such concentration. The share price of the California and Washington Funds
can be affected by political and economic developments within and by the
financial condition of the respective state, its public authorities and
political subdivisions. See the discussion below and "Investment Risks of
Concentration in California and Washington Issuers" in the Tax-Exempt Bond
Trust's Statement of Additional Information for further information.
SPECIAL RISKS OF THE HIGH-YIELD FUND.
The High-Yield Fund invests primarily in high-yield, fixed-income securities
which are subject to the following risks:
SENSITIVITY TO ECONOMIC AND CORPORATE DEVELOPMENTS
Yields on high-yield, fixed-income securities will fluctuate over time. During
periods of economic uncertainty or change, the market prices of high-yield,
fixed-income securities may experience increased volatility, which may in turn
cause the net asset value ("NAV") per share of the High-Yield Fund to be
volatile. Lower-quality, fixed-income securities tend to reflect short-term
economic and corporate developments to a greater extent than higher-quality
securities which primarily react to fluctuations in interest rates. Economic
downturns or increases in interest rates can significantly affect the market for
high-yield, fixed-income securities and the ability of issuers to timely repay
principal and interest, increasing the likelihood of defaults. Lower-quality
securities include debt obligations issued as a part of capital restructurings,
such as corporate takeovers or buyouts. Capital restructurings generally involve
the issuance of additional debt on terms different from any current outstanding
debt. As a result, the issuer of the debt is more highly leveraged. During an
economic downturn or period of rising interest rates, a highly-leveraged issuer
may experience financial
-- 44 --
<PAGE>
RISK FACTORS (CONTINUED)
difficulties which adversely affect its ability to make principal and interest
payments, meet projected business goals and obtain additional financing. In
addition, the issuer will depend on its cash flow and may depend, especially in
the context of corporate takeovers, on a sale of its assets to service debt.
Failure to realize projected cash flows or asset sales may seriously impair the
issuer's ability to service this greater debt load, which in turn might cause
the Fund to lose all or part of its investment in that security. SAM will seek
to minimize these additional risks through diversification, careful assessment
of the issuer's financial structure, business plan and management team following
any restructuring, and close monitoring of the issuer's progress toward its
financial goals.
ZERO-COUPON AND PAYMENT-IN-KIND SECURITIES
The High-Yield Fund may hold "zero-coupon" and "payment-in-kind" fixed-income
securities. Zero-coupon securities are purchased at a discount without scheduled
interest payments. Payment-in-kind securities receive interest paid in
additional securities rather than cash. The Fund accrues income on these
securities, but does not receive cash interest payments until maturity or
payment date. The Fund intends to distribute substantially all of its income to
its shareholders so that it can be treated as a regulated investment company
under current federal tax law. As a result, if its cash position is depleted,
the Fund may have to sell securities under disadvantageous circumstances to
obtain enough cash to meet its distribution requirement. However, SAM does not
expect non-cash income to materially affect the Fund's operations. Zero-coupon
and payment-in-kind securities are generally subject to greater price
fluctuations due to changes in interest rates than those fixed-income securities
paying cash interest on a schedule until maturity.
LIQUIDITY AND VALUATION
The liquidity and price of high-yield, fixed-income securities can be affected
by a number of factors, including investor perceptions and adverse publicity
regarding major issuers, underwriters or dealers of lower-quality corporate
obligations. These effects can be particularly pronounced in a thinly-traded
market with few participants and may adversely impact the High-Yield Fund's
ability to dispose of its securities as well as make valuation of securities
more difficult. Because there tend to be fewer investors in lower-rated,
fixed-income securities, it may be difficult for the Fund to sell these
securities at an optimum time. Consequently, lower-rated securities are subject
to more price changes, fluctuations in yield and risk to principal and income
than higher-rated securities of the same maturity. Judgment plays a greater role
in the valuation of thinly-traded securities.
CREDIT RATINGS
Rating agencies evaluate the likelihood that an issuer will make principal and
interest payments, but ratings may not reflect market value risks associated
with lower-rated, fixed-income securities. Also, rating agencies may not timely
revise ratings to reflect subsequent events affecting an issuer's ability to pay
principal and interest. SAM uses S&P and Moody's ratings as a preliminary
indicator of investment quality. SAM will periodically research and analyze each
issue (whether rated or unrated) and evaluate such factors as the issuer's
interest or dividend coverage, asset coverage, earnings prospects and managerial
strength. This analysis will help SAM to determine if the issuer has sufficient
cash flow and profits to meet required principal and interest payments and to
monitor the liquidity of the issue. Achievement of a Fund's investment objective
will be more dependent on SAM's credit analysis of bonds rated below the three
highest rating categories than would be the case were the Fund to invest in
higher quality debt securities. This is particularly true for the High-Yield
Fund.
-- 45 --
<PAGE>
RISK FACTORS (CONTINUED)
SPECIAL RISKS OF THE CALIFORNIA AND WASHINGTON FUNDS
The information in the following discussion is drawn primarily from official
statements relating to state securities offerings which are dated prior to the
date of this Prospectus. The California and Washington Funds have not
independently verified any of the information in the discussion below.
CALIFORNIA FUND
After suffering through a severe recession, California's economy has been on a
steady recovery since the start of 1994. Nevertheless, the State's budget
problems in recent years have also been caused by the increasing costs of
education, health, welfare and corrections, driven by California's rapid
population growth. These pressures on the State's General Fund are expected to
continue. The State's long-term credit ratings, reduced in 1992, were lowered
again in 1994 and have not been fully restored. Its ability to provide
assistance to its public authorities and political subdivisions has been
impaired. Cutbacks in state aid adversely affect the financial condition of many
cities, counties and school districts which are already subject to fiscal
constraints and are facing their own reduced tax collections.
In the past, California voters have passed amendments to the California
Constitution and other measures that limit the taxing and spending authority of
California governmental entities. Future voter initiatives could result in
adverse consequences affecting obligations issued by the State. These factors,
among others, could reduce the credit standing of certain issuers of California
obligations.
WASHINGTON FUND
The State of Washington's economy consists of both export and local industries.
The State's leading export industries are aerospace, forest products,
agriculture and food processing. The State's manufacturing base includes
aircraft manufacture which comprised approximately 25% of total manufacturing in
1995. The Boeing Company is the State's largest employer and has a significant
impact, in terms of overall production, employment and labor earnings, on the
State's economy. The commercial airline industry is cyclical in nature and
future job cuts could have an adverse effect on the Washington economy. Forest
products rank second behind aerospace in value of total production. Although
productivity in the forest products industry has increased steadily in recent
years, declines in production are expected in the future. Unemployment in the
timber industry is anticipated in certain regions; however the impact is not
expected to affect the State's overall economic performance. Growth in
agriculture has been an important factor in the State's economic growth over the
past decade. The State is the home of many technology firms of which
approximately half are computer-related. Microsoft, the world's largest
microcomputer software company, is headquartered in Redmond, Washington.
State law requires a balanced budget. The Governor has a statutory
responsibility to reduce expenditures across the board to avoid any cash deficit
at the end of a biennium. In addition, state law prohibits state tax revenue
growth from exceeding the growth rate of state personal income. At any given
time, there are numerous lawsuits against the state which could affect its
revenues and expenditures.
PORTFOLIO MANAGERS
GROWTH FUND
The portfolio manager for the Growth Fund is Thomas M. Maguire, Vice President,
SAM. Mr. Maguire has served as portfolio manager for the Fund since 1989.
-- 46 --
<PAGE>
PORTFOLIO MANAGERS (CONTINUED)
EQUITY FUND
The portfolio manager for the Equity Fund is Richard D. Meagley, Vice President,
SAM. Mr. Meagley began serving as portfolio manager for the Fund in 1995. He is
also the portfolio manager for certain other SAFECO Funds. Prior to these
positions, he served as portfolio manager and analyst from 1992 to 1994 for
Kennedy Associates, Inc., an investment advisory firm located in Seattle,
Washington. He was an Assistant Vice President of SAM and the fund manager of
the SAFECO Northwest Fund from 1991 to 1992.
INCOME FUND
The portfolio manager for the Income Fund is Thomas E. Rath, Assistant Vice
President of SAM. Mr. Rath has been a portfolio manager and securities analyst
for SAFECO Corporation since 1994. From 1992 to 1994, Mr. Rath was a principal
and portfolio manager for Meridian Capital Management, Inc., located in Seattle,
Washington. From 1987 to 1992, he was a portfolio manager and securities analyst
for First Interstate Bank, located in Seattle, Washington, and from 1983 to
1987, he was a securities analyst for SAFECO Corporation.
NORTHWEST FUND
The portfolio manager for the Northwest Fund is Charles R. Driggs, Vice
President, SAM. Mr. Driggs has served as portfolio manager for the Fund since
1992. From 1984 through 1992, Mr. Driggs was a securities analyst for SAM
specializing in banks, savings and loan institutions and the insurance industry.
BALANCED FUND
The equity portion of the Balanced Fund is co-managed by Rex L. Bentley, Vice
President, SAM and Lynette D. Sagvold, Assistant Vice President, SAM, and the
fixed income portion is managed by Michael C. Knebel, Vice President, SAM.
Mr. Bentley was Vice President and Investment Counsel at the investment
advisory firm of Badgley, Phelps and Bell Investment Counsel, Inc., from 1990
to 1995. He was a securities analyst for SAFECO Corporation from 1975 to
1983. Ms. Sagvold was a portfolio manager and analyst for First Investors
Bank from 1993 to 1995 and she was a portfolio manager and analyst for Key
Trust Company from 1985 to 1993. Mr. Knebel has served as portfolio manager
for certain other SAFECO mutual funds since 1989.
INTERNATIONAL FUND
The International Fund is managed by a committee of portfolio managers employed
and supervised by the Sub-Adviser, Bank of Ireland Asset Management (U.S.)
Limited, an investment adviser registered with the SEC. All investment decisions
are made by this committee and no single person is primarily responsible for
making recommendations to that committee.
SMALL COMPANY FUND
The portfolio manager for the Small Company Fund is Greg Eisen, Assistant Vice
President, SAM. Mr. Eisen has served as an investment analyst for SAM since
1992. From 1986 to 1992, Mr. Eisen was engaged by the SAFECO Insurance Companies
as a financial analyst.
VALUE FUND
The Value Fund is co-managed by Rex L. Bentley, Vice President, SAM and
Lynette D. Sagvold, Assistant Vice President, SAM. Mr. Bentley was vice
president and investment counsel at the investment advisory firm of Badgley,
Phelps and Bell Investment Counsel, Inc. from 1990 to 1995. He was a
securities analyst for SAFECO Corporation from 1975 to 1983. Ms. Sagvold was
a portfolio manager and analyst for First Interstate Bank from 1993 to 1995
and she was a portfolio manager and analyst for Key Trust Company from 1985
to 1993.
INTERMEDIATE TREASURY AND MANAGED BOND FUNDS
The portfolio manager for the Intermediate Treasury and Managed Bond Funds is
Michael C. Knebel, Vice President, SAM. Mr. Knebel has served as portfolio
manager or co-manager for the Managed Bond
-- 47 --
<PAGE>
PORTFOLIO MANAGERS (CONTINUED)
Fund since 1994. He has served as portfolio manager for the Intermediate
Treasury Fund since 1995. Mr. Knebel has served as portfolio manager and/or
co-portfolio manager for other SAFECO mutual funds since 1989.
HIGH-YIELD FUND
The portfolio managers for the High-Yield Bond Fund are John Stoeser, Assistant
Vice President, SAM, and Robert Kern, a securities analyst for SAM. Mr. Stoeser
has served as a securities analyst and portfolio manager for SAM since 1992.
From 1989 to 1992 he was an administrative assistant to the President of SAM.
Mr. Kern served as a securities analyst for SAM since 1994. From 1988 to 1994,
Mr. Kern was engaged by the SAFECO Insurance Companies in the Controller's
Department.
MUNICIPAL BOND AND CALIFORNIA FUNDS
The portfolio manager for the Municipal Bond and California Funds is Stephen C.
Bauer, President, SAM. Mr. Bauer has served as portfolio manager for each Fund
since it commenced operations: 1981 for the Municipal Bond Fund and 1983 for the
California Fund. Mr. Bauer is the portfolio manager for certain other SAFECO
municipal bond funds, and also serves as a Director of SAM.
WASHINGTON FUND
The portfolio manager for the Washington Fund is Beverly Denny, Assistant Vice
President, SAM. Ms. Denny was the Marketing Director for the SAFECO mutual funds
from 1991 to 1993, and has been employed as an investment analyst with SAFECO
Asset Management since 1993.
MONEY MARKET FUND
The portfolio manager for the Money Market Fund is Naomi Urata, Assistant Vice
President, SAM. Ms. Urata has been employed as an investment analyst for the
SAFECO mutual funds since 1993. From 1990 to 1992, Ms. Urata served as Cash
Manager for The Seattle Times.
Each portfolio manager and certain other persons related to SAM, the Sub-Adviser
and the Funds are subject to written policies and procedures designed to prevent
abusive personal securities trading. Incorporated within these policies and
procedures are recommendations made by the Investment Company Institute (the
trade group for the mutual fund industry) with respect to personal securities
trading by persons associated with mutual funds. Those recommendations include
preclearance procedures and blackout periods when certain personnel may not
trade in securities that are the same or related securities being considered for
purchase or sale by a Fund.
HOW TO PURCHASE SHARES
When placing purchase orders, investors should specify whether the order is for
Class A or Class B shares of a Fund. All share purchase orders that fail to
specify a class will automatically be invested in Class A shares.
The minimum initial investment is $1,000 (IRA, UGMA and UTMA $250). The minimum
additional investment is $100 for all accounts, except for UGMA or UTMA
Automatic Investment Method ("AIM") accounts opened with an initial investment
of $250 or more. These accounts have a minimum additional investment of only
$50. Minimum additional investments are negotiable for retirement accounts other
than IRAs. Except as noted above in connection with UGMA and UTMA accounts, no
minimum initial investment is required to establish the Automatic Investment
Method or Payroll Deduction Plan.
-- 48 --
<PAGE>
HOW TO PURCHASE SHARES (CONTINUED)
Shares of each Fund are available for purchase through investment professionals
who work at broker-dealers, banks and other financial institutions which have
entered into selling agreements with SAFECO Securities, Inc. ("SAFECO
Securities"), the distributor of the Funds. Orders received by such financial
institutions before 1:00 p.m. Pacific time on any day the New York Stock
Exchange ("NYSE") is open for regular trading will be effected that day,
provided that such order is transmitted to SAFECO Services, the transfer agent
for the Funds, prior to 2:00 p.m. Pacific Time on such day. Investment
professionals will be responsible for forwarding the investor's order to SAFECO
Services so that it will be received prior to such time.
Broker-dealers, banks and other financial institutions that do not have selling
agreements with SAFECO Securities also may offer to place orders for the
purchase of each Fund's shares. Purchases made through these investment firms
will be effected at the public offering price next determined after the order is
received by SAFECO Services. Such financial institutions may charge the investor
a transaction fee as determined by the financial institution. The fee will be in
addition to the sales charge payable by the investor with respect to Class A
shares, and may be avoided by purchasing shares through a broker-dealer, bank or
other financial institution that has a selling agreement with SAFECO Securities.
Broker-dealers, banks, financial institutions and any other person entitled to
receive compensation for selling or servicing each Fund's shares may receive
different levels of compensation with respect to one particular class of Fund
shares over another. Salespersons of broker-dealers, banks and other financial
institutions that sell each Fund's shares are eligible to receive special
compensation, the amount of which varies depending on the amount of shares sold.
THE FUNDS RESERVE THE RIGHT TO REFUSE ANY OFFER TO PURCHASE SHARES OF ANY CLASS.
PURCHASING ADVISOR CLASS A SHARES
The public offering price of Class A shares of each Fund except the Money Market
Fund is the next determined net asset value per share (see "Share Price
Calculation" on page for additional information) plus any sales charge, which
will vary with the size of the purchase as shown in the following schedule:
<TABLE>
<CAPTION>
SALE CHARGE AS BROKER
PERCENTAGE OF REALLOWANCE AS
AMOUNT OF PURCHASE ---------------------- PERCENTAGE OF
AT THE PUBLIC OFFERING NET THE OFFERING
OFFERING PRICE PRICE INVESTMENT PRICE
- ----------------------------------------------------------------- --------- ----------- --------------
<S> <C> <C> <C>
Less than $50,000 4.50% 4.71% 4.00%
$50,000 but less than $100,000 4.00% 4.17% 3.50%
$100,000 but less than $250,000 3.50% 3.63% 3.00%
$250,000 but less than $500,000 2.50% 2.56% 2.00%
$500,000 but less than $1,000,000 1.50% 1.52% 1.00%
$1,000,000 or more NONE* See Below**
</TABLE>
* Purchases of $1,000,000 or more of Class A shares are not subject to a
front-end sales charge, but a 1% CDSC will apply to redemptions made in the
first year.
** See discussion below for a description of the commissions payable on sales of
Class A shares of $1 million or more.
Class A shares of the Money Market Fund are offered at the next determined net
asset value per share (see "Share Price Calculation" on page 57 for additional
information) with no initial sales charge. A sales charge will apply to the
first exchange from Class A shares of the Money Market Fund to Class A shares of
another Fund.
-- 49 --
<PAGE>
HOW TO PURCHASE SHARES (CONTINUED)
From time to time, SAFECO Securities may reallow to broker-dealers, banks and
other financial institutions the full amount of the sales charge on Class A
Shares. In some instances, SAFECO Securities may offer these reallowances only
to those financial institutions that have sold or may sell significant amounts
of Class A shares. These commissions also may be paid to financial institutions
that initiate purchases made pursuant to sales charge waivers (1) and (8),
described below under "Sales Charge Waivers -- Class A shares." To the extent
that SAFECO Securities reallows 90% or more of the sales charge to a financial
institution, such financial institution may be deemed to be an underwriter under
the 1933 Act.
Except as stated below, broker-dealers of record will be paid commissions on
sales of Class A shares of $1 million or more based on an investor's (or a
related group of investors') cumulative purchases during the one-year period
beginning with the date of the initial purchase at net asset value. Each
subsequent one-year measuring period for these purposes begins with the first
net asset value purchase following the end of the prior period. Such commissions
are paid at the rate of up to .50% of the amount under $50 million and .25%
thereafter, except for sales to participant-directed qualified plans (including
a plan sponsored by an employer with 200 or more eligible employees).
Commissions for such plans will be paid at a rate of 1.00% of the amount up to
$2 million, .80% of the next $1 million, .50% of the next $47 million and .25%
thereafter. In addition, SAFECO Securities may pay a commission to a
broker-dealer where clients of a particular registered representative invest, at
or about the same time, collectively $1 million or more in one or more of the
Funds. The commission will be payable in lieu of other commissions that might
otherwise be payable under the terms of this prospectus, and will not be paid
except in connection with a transaction described in the preceding sentence.
The following describes purchases that may be aggregated for purposes of
determining the amount of purchase:
1. Individual purchases on behalf of a single purchaser and the purchaser's
spouse and their children under the age of 21 years. This includes shares
purchased in connection with an employee benefit plan(s) exclusively for the
benefit of such individual(s), such as an IRA, individual plan(s) under
Section 403(b) of the Internal Revenue Code of 1986, as amended ("Code"), or
single-participant Keogh-type plan(s). This also includes purchases made by
a company controlled by such individual(s);
2. Individual purchases by a trustee or other fiduciary purchasing shares for a
single trust estate or a single fiduciary account, including an employee
benefit plan (such as employer-sponsored pension, profit-sharing and stock
bonus plans, including plans under Code Section 401(k), and medical, life
and disability insurance trusts) other than a plan described in (1) above;
or
3. Individual purchases by a trustee or other fiduciary purchasing shares
concurrently for two or more employee benefit plans of a single employer or
of employers affiliated with each other (excluding an employee benefit plan
described in (2) above).
-- 50 --
<PAGE>
HOW TO PURCHASE SHARES (CONTINUED)
SALES CHARGE WAIVERS -- CLASS A SHARES
Class A shares are sold at net asset value per share without imposition of sales
charges for the following investments:
1. Registered representatives or full-time employees of broker-dealers, banks
and other financial institutions that have entered into selling agreements
with SAFECO Securities, and the children, spouse and parents of such
representatives and employees, and employees of financial institutions that
directly, or through their affiliates, have entered into selling agreements
with SAFECO Securities;
2. Companies exchanging shares with or selling assets to one or more of the
Funds pursuant to a merger, acquisition or exchange offer;
3. Any of the direct or indirect affiliates of SAFECO Securities;
4. Purchases made through the automatic investment of dividends and
distributions paid by another Fund;
5. Clients of administrators or consultants to tax-qualified employee benefit
plans which have entered into agreements with SAFECO Securities or any of
its affiliates;
6. Retirement plan participants who borrow from their retirement accounts by
redeeming Fund shares and subsequently repay such loans via a purchase of
Fund shares;
7. Retirement plan participants who receive distributions from a tax-qualified
employer-sponsored retirement plan, which is invested in Fund shares, the
proceeds of which are reinvested in Fund shares;
8. Accounts as to which a broker-dealer, bank or other financial institution
charges an account management fee, provided the financial institution has
entered into an agreement with SAFECO Securities regarding such accounts;
9. Current or retired officers, directors, trustees or employees of any SAFECO
mutual fund or SAFECO Corporation or its affiliates and the children, spouse
and parents of such persons; and
10. Investments made with redemption proceeds from mutual funds having a similar
investment objective with respect to which the investor paid a front-end
sales charge.
REINSTATEMENT PRIVILEGE
Shareholders who paid an initial sales charge and redeem their Class A shares in
a Fund have a one-time privilege to reinstate their investment by investing the
proceeds of the redemption at net asset value per share without a sales charge
in Class A shares of that Fund and/or one or more of the other Funds. SAFECO
Services must receive from the investor or the investor's broker-dealer, bank or
other financial institution within 60 days after the date of the redemption both
a written request for reinvestment and a check not exceeding the amount of the
redemption proceeds. The reinstatement purchase will be effected at the net
asset value per share next determined after such receipt.
REDUCED SALES CHARGE PLANS -- CLASS A SHARES
Class A shares of the Funds may be purchased at reduced sales charges either
through the Right of Accumulation or under a Letter of Intent. For more details
on these plans, investors should contact their broker-dealer, bank or other
financial institution or SAFECO Services.
-- 51 --
<PAGE>
HOW TO PURCHASE SHARES (CONTINUED)
Pursuant to the RIGHT OF ACCUMULATION, investors are permitted to purchase Class
A shares of the Funds at the sales charge applicable to the total of (a) the
dollar amount then being purchased plus (b) the dollar amount equal to the total
purchase price of the investor's concurrent purchases of Class A shares of other
SAFECO Mutual Funds plus (c) the dollar amount equal to the current public
offering price of all Class A shares of Funds already held by the investor. To
receive the Right of Accumulation, at the time of purchase investors must give
their broker-dealers, banks or other financial institutions sufficient
information to permit confirmation of qualification.
In executing a LETTER OF INTENT ("LOI"), an investor should indicate an
aggregate investment amount he or she intends to invest in Class A shares of
Funds in the following thirteen months. The LOI is included as part of the
Account Application. The Class A sales charge applicable to that aggregate
amount then becomes the applicable sales charge on all purchases of Class A
shares made concurrently with the execution of the LOI and in the thirteen
months following that execution. If an investor executes an LOI within 90 days
of a prior purchase of Class A shares, the prior purchase may be included under
the LOI and an appropriate adjustment, if any, with respect to the sales charges
paid by the investor in connection with the prior purchase will be made, based
on the then-current net asset value(s) of the pertinent Fund(s).
If at the end of the thirteen-month period covered by the LOI, the total amount
of purchases does not equal the amount indicated, the investor will be required
to pay the difference between the sales charges paid at the reduced rate and the
sales charges applicable to the purchases actually made. Shares having a value
equal to 5% of the amount specified in the LOI will be held in escrow during the
thirteen month period (while remaining registered in the investor's name) and
are subject to redemption to assure any necessary payment to SAFECO Securities
of a higher applicable sales charge.
PURCHASING ADVISOR CLASS B SHARES
The public offering price of the Class B shares of each Fund is the next
determined net asset value per share. No initial sales charge is imposed.
However, a CDSC is imposed on certain redemptions of Class B shares. Because
Class B shares are sold without an initial sales charge, the investor receives
Fund shares equal to the full amount of the investment. The maximum investment
amount in Class B shares is $500,000.
Class B shares of a Fund that are redeemed will not be subject to a CDSC to the
extent that the value of such shares represents: (a) reinvestment of dividends
or other distributions or (b) shares redeemed more than six full years after
their purchase. Former Class B shareholders of the SAFECO Advisor Series Trust
who invest in Class B shares of any Fund may include the length of time of
ownership of the former Class B shares for purposes of calculating any CDSC due
upon redemption.
Initial investments in Class B shares of the Money Market Fund are sold with no
initial sales charge and are not subject to a CDSC upon redemption, provided
that the investor has remained invested exclusively in Class B shares of the
Money Market Fund and has not exchanged into Class B Shares of another Fund in
the interim. Money Market Fund Class B shareholders will become subject to a
CDSC calculated in accordance with the table below if they exchange into Class B
shares of another SAFECO Fund and then redeem those shares. The CDSC will also
apply to any Class B shares of the Money Market Fund subsequently acquired by
exchange. Shareholders who initially purchase Money Market Fund Class B shares
do not receive credit for the time initially invested in the Money Market Fund
for purposes of calculating any CDSC due upon redemption of Class B shares of
another SAFECO Fund.
Redemptions of most other Class B shares will be subject to a CDSC. (See
"Contingent Deferred Sales Charge Waivers.") The amount of any applicable CDSC
will be calculated by multiplying the lesser of
-- 52 --
<PAGE>
HOW TO PURCHASE SHARES (CONTINUED)
the original purchase price or the net asset value of such shares at the time of
redemption by the applicable percentage shown in the table below. Accordingly,
no charge is imposed on increases in the net asset value above the original
purchase price:
<TABLE>
<CAPTION>
CDSC AS A PERCENTAGE OF THE
LESSER OF NET ASSET VALUE AT REDEMPTION
REDEMPTION DURING OR THE ORIGINAL PURCHASE PRICE
- -------------------------------------------------------- ---------------------------------------
<S> <C>
1st Year Since Purchase 5%
2nd Year Since Purchase 4%
3rd Year Since Purchase 3%
4th Year Since Purchase 3%
5th Year Since Purchase 2%
6th Year Since Purchase 1%
Thereafter 0%*
</TABLE>
* Automatically converts to Class A shares in the first month following the
investor's sixth anniversary from purchase.
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and other distributions and
then of amounts representing the cost of shares held for the longest period of
time.
For example, assume an investor purchased 100 shares at $10 per share at a cost
of $1,000. Subsequently, the shareholder acquired 15 additional shares through
dividend reinvestment. During the second year after the purchase, the investor
decided to redeem $500 of his or her investment. Assuming at the time of the
redemption a net asset value of $11 per share, the value of the investor's
shares would be $1,265 (115 shares at $11 per share). The CDSC would not be
applied to the value of the reinvested dividend shares. Therefore, the 15 shares
currently valued at $165.00 would be redeemed without a CDSC. The number of
shares needed to fund the remaining $335.00 of the redemption would equal
30.455. Using the lower of cost or market price to determine the CDSC, the
original purchase price of $10.00 per share would be used. The CDSC calculation
would therefore be 30.455 shares times $10.00 per share at a CDSC rate of 4%
(the applicable rate in the second year after purchase) for a total CDSC of
$12.18.
Except for the time period during which a shareholder is initially invested in
Money Market Fund Class B shares, if a shareholder effects one or more exchanges
among Class B shares of the Funds during the six year period, the holding
periods for the shares so exchanged will be counted toward the six year period.
For federal income tax purposes, the amount of the CDSC will reduce the gain or
increase the loss, as the case may be, recognized on the redemption of shares.
The amount of any CDSC will be paid to SAFECO Securities.
CONTINGENT DEFERRED SALES CHARGE WAIVERS
The CDSC will be waived in the following circumstances: (a) total or partial
redemptions made within one year following the death or disability of a
shareholder; (b) redemptions made pursuant to any systematic withdrawal plan
based on the shareholder's life expectancy, including substantially equal
periodic payments prior to age 59 1/2 which are described in Code section 72(t),
and required minimum distributions after age 70 1/2, including those required
minimum distributions made in connection with customer accounts under Section
403(b) of the Code and other retirement plans; (c) total or partial redemption
resulting from a distribution following retirement in the case of a tax-
qualified employer-sponsored retirement plan; (d) when a redemption results from
a tax-free return of an excess contribution pursuant to Section 408(d)(4) or (5)
of the Code; (e) reinvestment in Class B
-- 53 --
<PAGE>
HOW TO PURCHASE SHARES (CONTINUED)
shares of a Fund within 60 days of a prior redemption; (f) redemptions pursuant
to the Fund's right to liquidate a shareholder's account involuntarily; (g)
redemptions pursuant to distributions from a tax-qualified employer-sponsored
retirement plan that are invested in Funds and are permitted to be made without
penalty pursuant to the Code; and (h) redemptions in connection with a Fund's
systematic withdrawal plan not in excess of 10% of the value of the account
annually.
CONVERSION OF CLASS B SHARES
A shareholder's Class B shares of a Fund will automatically convert to Class A
shares in the same Fund in the first month following the investor's sixth
anniversary from purchase, together with a pro rata portion of all Class B
shares representing dividends and other distributions paid in additional Class B
shares. Class B shares so converted will no longer be subject to the higher
expenses borne by Class B shares. The conversion will be effected at the
relative net asset values per share of the two classes on the first business day
in the first month following the investor's sixth anniversary from the purchase
of Class B shares. Because the net asset value per share of Class A shares may
be higher than that of Class B shares at the time of conversion, a shareholder
may receive fewer Class A shares than the number of Class B shares converted,
although the dollar value will be the same.
HOW TO REDEEM SHARES
As described below, shares of the Funds may be redeemed at their next-determined
net asset value (subject to any applicable CDSC) and redemption proceeds will be
sent to shareholders within seven days of the receipt of a redemption request.
Shareholders who have purchased shares through broker-dealers, banks or other
financial institutions that sell shares may redeem shares through such firms; if
the shares are held in the "street name" of the broker-dealer, bank or other
financial institution, the redemption must be made through such firm.
Please note the following:
/ / If your shares were purchased by wire, redemption proceeds will be available
immediately. If shares were purchased other than by wire, each Fund reserves
the right to hold the proceeds of your redemption for up to 15 business days
after investment or until such time as the Fund has received assurance that
your investment will be honored by the bank on which it was drawn, whichever
occurs first.
/ / SAFECO Services charges a $10 fee to wire redemption proceeds. In addition,
some banks may charge a fee to receive wires.
/ / If shares are issued in certificate form, the certificates must accompany a
redemption request and be duly endorsed.
/ / Under some circumstances (e.g., a change in corporate officer or death of an
owner), SAFECO Services may require certified copies of supporting documents
before a redemption will be made.
REDEMPTIONS THROUGH BROKER-DEALERS, BANKS AND OTHER FINANCIAL INSTITUTIONS
Shareholders with accounts at broker-dealers, banks and other financial
institutions that sell shares of the Funds may submit redemption requests to
such firms. Broker-dealers, banks or other financial institutions may honor a
redemption request either by repurchasing shares from a redeeming shareholder at
the shares' net asset value per share next computed after the firm receives the
request or by forwarding such requests to SAFECO Services. Redemption proceeds
(less any applicable CDSC) normally will be paid by check. Broker-dealers, banks
and other financial institutions may impose a
-- 54 --
<PAGE>
HOW TO REDEEM SHARES (CONTINUED)
service charge for handling redemption transactions placed through them and may
impose other requirements concerning redemptions. Accordingly, shareholders
should contact the investment professional at their broker-dealer, bank or other
financial institution for details.
Redemption requests may also be transmitted to SAFECO Services by telephone (for
amounts of less than $100,000) or by mail.
SHARE REDEMPTION PRICE AND PROCESSING
Your shares will be redeemed at the net asset value per share (subject to any
applicable CDSC) next calculated after receipt of your request that meets the
redemption requirements of the Funds. Except for the Money Market Fund, the
value of the shares you redeem may be more or less than the dollar amount you
purchased, depending on the market value of the shares at the time of
redemption. See "Share Price Calculation" on page 57 for more information.
Redemption proceeds will normally be sent on the next business day following
receipt of your redemption request. If your redemption request is received after
the close of trading on the NYSE (normally 1:00 p.m. Pacific Time), proceeds
will normally be sent on the second business day following receipt. Each Fund,
however, reserves the right to postpone payment of redemption proceeds for up to
seven days if making immediate payment could adversely affect its portfolio. In
addition, redemptions may be suspended or payment dates postponed if the NYSE is
closed, its trading is restricted or the Securities and Exchange Commission
declares an emergency.
Due to the high cost of maintaining small accounts, your account may be closed
upon 60 days' written notice if at the time of any redemption or exchange the
total value falls below $100. Your shares will be redeemed at the net asset
value per share calculated on the day your account is closed and the proceeds
will be sent to you.
HOW TO SYSTEMATICALLY PURCHASE OR REDEEM SHARES
Call your investment professional or SAFECO Services at 1-800-463-8791 for more
information.
AUTOMATIC INVESTMENT METHOD (AIM)
AIM enables you to make regular monthly investments by authorizing SAFECO
Services to withdraw a specific amount from your bank account and invest the
amount in any Fund. AIM has a minimum of $100 per Fund for all accounts (except
UGMA and UTMA accounts which have a lower $50 minimum for additional
investments, provided that the account was opened with an initial investment of
at least $250).
PAYROLL DEDUCTION PLAN
An employer or other entity using group billing may establish a
self-administered payroll deduction plan in any Fund. Payroll deduction amounts
are negotiable.
SYSTEMATIC WITHDRAWAL PLAN
This plan enables you to receive a portion of your investment on a monthly
basis. A Fund automatically redeems shares in your account and sends you a
withdrawal check (minimum amount $50 per Fund) on or about the fifth business
day of every month. Because Class A shares are subject to sales charges,
shareholders should not concurrently purchase shares with respect to an account
which is utilizing a systematic withdrawal plan. Class B shares may not be
suitable for a systematic withdrawal plan, except in appropriate cases where the
CDSC is being waived. Please see "Contingent Deferred Sales Charge Waivers" on
page 53 for more information.
-- 55 --
<PAGE>
HOW TO EXCHANGE SHARES FROM ONE FUND TO ANOTHER
Shares of one class of a Fund may be exchanged for shares of the same class of
any other Fund, based on their next-determined respective net asset values,
without imposition of any sales charges, provided that the shareholder account
registration remains identical. CLASS A SHARES MAY BE EXCHANGED ONLY FOR CLASS A
SHARES OF THE OTHER FUNDS LISTED ON THE FIRST PAGE OF THIS PROSPECTUS. CLASS B
SHARES MAY BE EXCHANGED ONLY FOR CLASS B SHARES OF THE OTHER FUNDS LISTED ON THE
FIRST PAGE OF THIS PROSPECTUS. The exchange of Class B shares will not be
subject to a contingent deferred sales charge. For purposes of computing the
CDSC, except for the time period during which a shareholder is initially
invested in Class B shares of the Money Market Fund, the length of time of
ownership of Class B shares will be measured from the date of original purchase
and will not be affected by the exchange. Exchanges are not tax-free and may
result in a shareholder's realizing a gain or loss, as the case may be, for tax
purposes. See "Fund Distributions and How They Are Taxed" on page for more
information. You may purchase shares of a Fund by exchange only if it is
registered for sale in the state where you reside. Before exchanging into an
Advisor class of another Fund, please be familiar with the Fund's investment
objective and policies as described in "Each Fund's Investment Objective and
Policies" beginning on page 22 of this Prospectus.
EXCHANGES BY MAIL
Exchange orders should be sent by mail to the investor's broker-dealer, bank or
other financial institution. If a shareholder has an account at SAFECO Services,
exchange orders may be sent to the address set forth on the cover of this
Prospectus.
EXCHANGES BY TELEPHONE
A shareholder may give exchange instructions to the shareholder's broker-dealer,
bank or other financial institution or to SAFECO Services by telephone at the
appropriate toll-free number provided on the cover of this Prospectus. Exchange
orders will be accepted by telephone provided that the exchange involves only
uncertificated shares or certificated shares for which certificates previously
have been deposited in the shareholder's account. See "Telephone Transactions"
for more information.
SHARE EXCHANGE PRICE AND PROCESSING
The shares of the Fund you are exchanging from will be redeemed at the price
next computed after your exchange request is received. Normally the purchase of
the Fund you are exchanging into is executed on the same day. However, each Fund
reserves the right to delay the payment of proceeds and, hence, the purchase in
an exchange for up to seven days if making immediate payment could adversely
affect the portfolio of the Fund whose shares are being redeemed. The exchange
privilege may be modified or terminated with respect to a Fund at anytime, upon
at least 60 days' notice to shareholders.
LIMITATIONS
Each Fund reserves the right to refuse exchange purchases or simultaneous order
transactions by any person or group if, in SAM's judgment, the Fund would not be
able to invest the money effectively in accordance with that Fund's investment
objective and policies or would otherwise potentially be adversely affected.
Although a Fund will attempt to give you prior notice whenever it is reasonably
able to do so, it may impose the above restrictions at any time.
The Funds are not intended to serve as vehicles for frequent trading in response
to short-term fluctuations in the market. Due to the disruptive effect that
market-timing investment strategies can have on efficient portfolio management,
the Funds have instituted certain policies to discourage excessive exchange and
simultaneous order transactions. Exchanges and simultaneous order transactions
which, in SAM's judgment, appear to follow a market-timing strategy are limited
to 4 in
-- 56 --
<PAGE>
HOW TO EXCHANGE SHARES FROM ONE FUND TO ANOTHER (CONTINUED)
any 12 month period per account holder (or account, in a case where one person
or entity exercises investment discretion over more than one account). For
purposes of these limitations a "simultaneous order transaction" is a
transaction where a significant portion of an account's assets are redeemed from
one SAFECO Mutual Fund and shortly thereafter reinvested into another SAFECO
Mutual Fund. In order to protect the shareholders of the Funds, SAM reserves the
right to exercise its discretion in determining whether a particular transaction
qualifies as a simultaneous order transaction. In addition to the foregoing
limitations on exchanges and simultaneous order transactions, as described
above, the Funds reserve the right to refuse any offer to purchase shares.
TELEPHONE TRANSACTIONS
To redeem or exchange shares by telephone, call 1-800-463-8791 between 6:00 a.m.
and 5:00 p.m. Pacific Time, Monday through Friday, except certain holidays. All
telephone calls are tape-recorded for your protection. During times of drastic
or unusual market volatility, it may be difficult for you to exercise the
telephone transaction privileges.
To use the telephone redemption and exchange privileges, you must have
previously selected these services either on your account application or by
having submitted a request in writing to SAFECO Services at the address on the
Prospectus cover. Redeeming or exchanging shares by telephone allows the Funds
and SAFECO Services to accept telephone instructions from an account owner or a
person preauthorized in writing by an account owner.
Each of the Funds and SAFECO Services reserve the right to refuse any telephone
transaction when a Fund or SAFECO Services, in its sole discretion, is unable to
confirm to its satisfaction that a caller is the account owner or a person
preauthorized by the account owner.
The Funds and SAFECO Services will not be liable for the authenticity of
instructions received by telephone that a Fund or SAFECO Services, in its
discretion, believes to be delivered by an account owner or preauthorized
person, provided that the Fund or SAFECO Services follows reasonable procedures
to identify the caller. The shareholder will bear the risk of any resulting
loss. The Funds and SAFECO Services will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. These procedures may
include requiring the account owner to select the telephone privilege in writing
prior to first use and to designate persons authorized to deliver telephone
instructions. SAFECO Services tape-records telephone transactions and may
request certain identifying information from the caller.
The telephone transaction privileges may be suspended, limited, modified or
terminated at any time without prior notice by the Funds or SAFECO Services. The
Funds and SAFECO Services may be liable if they do not employ reasonable
procedures to confirm that telephone transactions are genuine.
SHARE PRICE CALCULATION
The net asset value per share ("NAV") of each class of each Fund is computed at
the close of regular trading on the NYSE (normally 1:00 p.m. Pacific time) each
day that the NYSE is open for trading. NAV is determined separately for each
class of shares of each Fund. The NAV of a Fund is calculated by subtracting a
Fund's liabilities from its assets and dividing the result by the number of
outstanding shares. In calculating the net asset value of each class appropriate
adjustments will be made to each class's NAV to reflect expenses allocated to
it.
-- 57 --
<PAGE>
SHARE PRICE CALCULATION (CONTINUED)
PORTFOLIO VALUATION FOR THE STOCK FUNDS
The Stock Funds generally value their portfolio securities at the last reported
sale price on the national exchange on which the securities are primarily
traded, unless there are no transactions in which case they shall be valued at
the last reported bid price. Securities traded over-the-counter are valued at
the last sale price, unless there is no reported sale price in which case the
last reported bid price will be used. Portfolio securities that trade on a stock
exchange and over-the-counter are valued according to the broadest and most
representative market. Securities not traded on a national exchange are valued
based on consideration of information with respect to transactions in similar
securities, quotations from dealers and various relationships between
securities. Other assets for which market quotations are unavailable are valued
at their fair value pursuant to guidelines approved by the Common Stock Trust's
Board of Trustees.
The International Fund will invest primarily, and other Funds may invest from
time to time, in foreign securities. Trading in foreign securities will
generally be substantially completed each day at various times prior to the
close of the NYSE. The values of any such securities are determined as of such
times for purposes of computing the Funds' net asset value. Foreign currency
exchange rates are also generally determined prior to the close of the NYSE.
Foreign portfolio securities are valued on the basis of quotations from the
primary market in which they trade. The value of foreign securities are
translated from the local currency into U.S. dollars using current exchange
rates. If quotations are not readily available, or if values have been
materially affected by events occurring after the close of a foreign market, the
security will be valued at fair value as determined in good faith by SAM or BIAM
under procedures established by and under general supervision of the Common
Stock Trust's Board of Trustees.
The values of certain of the Stock Funds' portfolio securities are stated on the
basis of valuations provided by a pricing service, unless the Common Stock
Trust's Board of Trustees determines such does not represent fair value. The
service uses information with respect to transactions in securities, quotations
from securities dealers, market transactions in comparable securities and
various relationships between securities to determine values.
INTERNATIONAL FUND
Options that are traded on national securities exchanges are valued at their
last sale price as of the close of option trading on such exchange. Futures
contracts will be marked to market daily, and options thereon are valued at
their last sale price, as of the close of the applicable commodities exchange.
Forward contracts are valued at the current cost of covering or offsetting such
contracts.
PORTFOLIO VALUATION FOR THE FIXED-INCOME FUNDS
For each of the Fixed-Income Funds except the Money Market Fund, securities are
valued based on consideration of information with respect to transactions in
similar securities, quotations from dealers and various relationships between
securities. The value of each Fixed-Income Fund's securities are stated on the
basis of valuations provided by a pricing service, unless the Board of Trustees
determines that such valuations do not represent fair value. The service uses
information with respect to transactions in securities, quotations from security
dealers, market transactions in comparable securities and various relationships
between securities to determine values. Other assets (including securities for
which market quotations are unavailable and restricted securities) are valued at
their fair value as determined in good faith by each Fixed-Income Fund's
respective Trust's Board of Trustees.
Like most money market funds, the Money Market Fund values the securities it
owns on the basis of amortized cost. The Money Market Fund may use amortized
cost valuation as long as the Money
-- 58 --
<PAGE>
SHARE PRICE CALCULATION (CONTINUED)
Market Trust's Board of Trustees determines that it fairly reflects market
value. Amortized cost valuation involves valuing a security at its cost and
adding or subtracting, ratably to maturity, any discount or premium, regardless
of the impact of fluctuating interest rates on the market value of the security.
This method minimizes the effect of changes in a security's market value and
helps the Money Market Fund maintain a stable $1.00 share price.
The NAV of the Class B shares of each Fund will generally be lower than the NAV
of Class A shares of the same Fund because of the higher expenses borne by the
Class B shares. The NAVs of the Advisor Classes of a Fund's shares also may
differ due to differing allocations of class-specific expenses. The NAVs of the
Advisor Classes of each Fund's shares will tend to converge, however,
immediately after the payment of dividends.
Call 1-800-463-8794 for 24-hour price information.
-- 59 --
<PAGE>
INFORMATION ABOUT SHARE OWNERSHIP AND COMPANIES THAT PROVIDE SERVICES TO THE
TRUSTS
Each Trust is a Delaware business trust established by a Trust Instrument dated
May 13, 1993, and is authorized to issue an unlimited number of shares of
beneficial interest. The Board of Trustees of each Trust may establish
additional series or classes of shares of the Trust without approval of
shareholders.
In addition to Class A and Class B shares, each Fund also offers No-Load Class
shares through a separate prospectus to investors who purchase shares directly
from SAFECO Securities. No-Load Class shares are sold without a front-end sales
charge or CDSC and are not subject to Rule 12b-1 fees. Accordingly, the
performance of No-Load Class shares will differ from that of Class A or Class B
shares. For more information about No-Load Class shares of each Fund, please
call 1-800-624-5711.
Each share of a Fund is entitled to participate equally in dividends and other
distributions and the proceeds of any liquidation except that, due to the
differing expenses borne by the three classes, dividends and liquidation
proceeds for each class of shares will likely differ. All shares issued are
fully paid and non-assessable, and shareholders have no preemptive or other
right to subscribe to any additional shares.
The Trusts do not intend to hold annual meetings of shareholders of the Funds.
The Trustees of a Trust will call a special meeting of shareholders of a Fund of
that Trust only if required under the Investment Company Act of 1940 ("1940
Act"), in their discretion, or upon the written request of holders of 10% or
more of the outstanding shares of a Fund or a class entitled to vote. Separate
votes are taken by each class of shares, a Fund, or a Trust if a matter affects
only that class of shares, Fund, or Trust, respectively.
Under Delaware law, the shareholders of the Funds will not be personally liable
for the obligations of any Fund; a shareholder is entitled to the same
limitation of personal liability extended to shareholders of corporations. To
guard against the risk that Delaware law might not be applied in other states,
each Trust Instrument requires that every written obligation of the Trust or a
Fund thereof contain a statement that such obligation may be enforced only
against the assets of that Trust or Fund and generally provides for
indemnification out of property of that Trust or Fund of any shareholder
nevertheless held personally liable for Trust or Fund obligations, respectively.
Because the Trusts use a combined Prospectus, it is possible that a Fund might
become liable for a misstatement about the series of another Trust contained in
this Prospectus. The Boards of Trustees have considered this factor in approving
the use of a single combined Prospectus.
SAM is the investment adviser for each Fund under an agreement with each Trust.
Under each agreement, SAM is responsible for the overall management of each
Trust's and each Fund's business affairs. SAM provides investment research,
advice, management and supervision to each Trust and each Fund, and, consistent
with each Fund's investment objectives and policies, SAM determines what
securities will be purchased, retained or sold by each Fund and implements those
decisions. Each Fund pays SAM an annual management fee based on a percentage of
that Fund's net assets
-- 60 --
<PAGE>
INFORMATION ABOUT SHARE OWNERSHIP AND COMPANIES THAT PROVIDE SERVICES TO THE
TRUSTS (CONTINUED)
ascertained each business day and paid monthly in accordance with the schedules
below. A reduction in the fees paid by a Fund occurs only when that Fund's net
assets reach the dollar amounts of the break points and applies only to the
assets that fall within the specified range:
<TABLE>
<CAPTION>
GROWTH, EQUITY AND INCOME FUNDS
<S> <C>
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%
<CAPTION>
NORTHWEST FUND
<S> <C>
NET ASSETS ANNUAL FEE
$0 -- $250,000,000 .75 of 1%
$250,000,001 -- $500,000,000 .65 of 1%
$500,000,001 -- $750,000,000 .55 of 1%
Over $750,000,000 .45 of 1%
<CAPTION>
BALANCED AND VALUE FUNDS
<S> <C>
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%
<CAPTION>
INTERNATIONAL FUND
<S> <C>
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%
<CAPTION>
SMALL COMPANY FUND
<S> <C>
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%
<CAPTION>
INTERMEDIATE TREASURY FUND
<S> <C>
NET ASSETS ANNUAL FEE
$0 -- $250,000,000 .55 of 1%
$250,000,001 -- $500,000,000 .45 of 1%
$500,000,001 -- $750,000,000 .35 of 1%
Over $750,000,000 .25 of 1%
</TABLE>
-- 61 --
<PAGE>
INFORMATION ABOUT SHARE OWNERSHIP AND COMPANIES THAT PROVIDE SERVICES TO THE
TRUSTS (CONTINUED)
<TABLE>
<CAPTION>
HIGH-YIELD FUND
NET ASSETS ANNUAL FEE
<S> <C>
$0 -- $250,000,000 .65 of 1%
$250,000,001 -- $500,000,000 .55 of 1%
$500,000,001 -- $750,000,000 .45 of 1%
Over $750,000,000 .35 of 1%
<CAPTION>
MANAGED BOND FUND
<S> <C>
NET ASSETS ANNUAL FEE
$0 -- $100,000,000 .50 of 1%
$100,000,001 -- $250,000,000 .40 of 1%
Over $250,000,000 .35 of 1%
<CAPTION>
MONEY MARKET FUND
<S> <C>
NET ASSETS ANNUAL FEE
$0 -- $250,000,000 .50 of 1%
$250,000,001 -- $500,000,000 .40 of 1%
$500,000,001 -- $750,000,000 .30 of 1%
Over $750,000,000 .25 of 1%
<CAPTION>
MUNICIPAL AND CALIFORNIA FUNDS
<S> <C>
NET ASSETS ANNUAL FEE
$0 -- $100,000,000 .55 of 1%
$100,000,001 -- $250,000,000 .45 of 1%
$250,000,001 -- $500,000,000 .35 of 1%
Over $500,000,000 .25 of 1%
<CAPTION>
WASHINGTON FUND
<S> <C>
NET ASSETS ANNUAL FEE
$0 -- $250,000,000 .65 of 1%
$250,000,001 -- $500,000,000 .55 of 1%
$500,000,001 -- $750,000,000 .45 of 1%
Over $750,000,000 .35 of 1%
</TABLE>
A Trust and each Fund thereof will bear all expenses of their organization,
operations and business not specifically assumed by SAM under each Fund's
management contract. Such expenses may include, among others, custody and
accounting expenses, transfer agency and related expenses, distribution and
shareholder servicing expenses, expenses related to preparing, printing and
delivering prospectuses and shareholder reports, the expenses of holding
shareholders' meetings, legal fees, the compensation of non-interested trustees
of the Trusts, brokerage, taxes and extraordinary expenses.
With respect to the International Fund, SAM has a sub-advisory agreement with
the Sub-Adviser. The Sub-Adviser is a direct, wholly owned subsidiary of the
Bank of Ireland Asset Management Limited and is an indirect, wholly owned
subsidiary of Bank of Ireland. The Sub-Adviser has its headquarters
-- 62 --
<PAGE>
INFORMATION ABOUT SHARE OWNERSHIP AND COMPANIES THAT PROVIDE SERVICES TO THE
TRUSTS (CONTINUED)
at 26 Fitzwilliam Place, Dublin, Ireland, and its U.S. office at 2 Greenwich
Plaza, Greenwich, Connecticut. The Sub-Adviser was established in 1987 and
currently manages over $3 billion in assets. Because the Sub-Adviser is doing
business from a location within the United States, investors will be able to
effect service of legal process within the United States upon the Sub-Adviser,
under federal securities laws in United States courts. However, the Sub-Adviser
is a foreign organization and maintains a substantial portion of its assets
outside the United States. Therefore, the ability of investors to enforce
judgments against the Sub-Adviser may be affected by the willingness of foreign
courts to enforce judgments of U.S. courts.
Under the agreement, the Sub-Adviser is responsible for providing investment
research and advice used to manage the investment portfolio of the International
Fund. In return, SAM (and not the International Fund) pays the Sub-Adviser a fee
in accordance with the schedule below:
<TABLE>
<S> <C>
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%
</TABLE>
The parent company of the Sub-Adviser, Bank of Ireland Asset Management Limited,
is a direct, wholly owned subsidiary of the Bank of Ireland, which engages in
the investment advisory business and is located at 26 Fitzwilliam Place, Dublin,
Ireland. The Bank of Ireland is a holding company whose primary subsidiaries are
engaged in banking, insurance, securities and related financial services, and is
located at Lower Baggot Street, Dublin, Ireland.
The distributor of the Advisor Classes of each Fund's shares under an agreement
with each Trust is SAFECO Securities a broker-dealer registered under the
Securities Exchange Act of 1934 and a member of the National Association of
Securities Dealers, Inc.
The transfer, dividend disbursement and shareholder servicing agent for the
Advisor Classes of each Fund under an agreement with each Trust is SAFECO
Services. SAFECO Services receives a fee from each Fund for every shareholder
account held in the Fund. SAFECO Services may enter into subcontracts with
registered broker-dealers, third-party administrators and other qualified
service providers that generally perform shareholder, administrative, and/or
accounting services which would otherwise be provided by SAFECO Services. Fees
incurred by a Fund for these services will not exceed the transfer agency fee
payable to SAFECO Services. Any distribution expenses associated with these
arrangements will be borne by SAM.
SAM, SAFECO Securities and SAFECO Services are wholly owned subsidiaries of
SAFECO Corporation (a holding company whose primary subsidiaries are engaged in
the insurance and financial services businesses) and are each located at SAFECO
Plaza, Seattle, Washington 98185.
As interpreted by courts and administrative agencies, the Glass-Steagall Act and
other applicable laws and regulations limit the ability of a bank or other
depository institution to become an underwriter or distributor of securities.
However, in the opinion of each Trust's management, based on the advice of
counsel, these laws and regulations do not prohibit such depository institutions
from providing services for investment companies. Banks or other depository
institutions may be subject to various state laws regarding such services, and
may be required to register as dealers pursuant to state law.
-- 63 --
<PAGE>
DISTRIBUTION PLANS
Each Trust, on behalf of the Advisor Classes of each Fund, has entered into a
Distribution Agreement (each an "Agreement") with SAFECO Securities. Each Trust
has also adopted a plan pursuant to Rule 12b-1 under the 1940 Act with respect
to each of the Advisor Classes of each Fund (the "Plans"). Pursuant to the
Plans, each Advisor class pays SAFECO Securities a quarterly service fee, at the
annual rate of 0.25% of the aggregate average daily net assets of the Advisor
class. Class B shares also pay SAFECO Securities a quarterly distribution fee at
the annual rate of 0.75% of the aggregate average daily net assets of the Class
B shares. Although the Money Market Trust has adopted Plans with respect to the
Advisor Classes of the Money Market Fund, the Money Market Trust's Board of
Trustees and SAFECO Securities have agreed not to implement the Plans at this
time. Thus, the Advisor Classes of the Money Market Fund do not currently pay
service or distribution fees to SAFECO Securities under the Money Market Fund
Plans. The Money Market Fund Plans will not be implemented unless authorized by
the Money Market Trust's Board of Trustees.
Under the Plans, SAFECO Securities will use the service fees primarily to
compensate persons selling shares of the Funds for the provision of personal
service and/or the maintenance of shareholder accounts. SAFECO Securities will
use the distribution fees under the Class B Plan to offset the commissions it
pays to broker-dealers, banks or other financial institutions for selling each
Fund's Class B shares. In addition, SAFECO Securities will use the distribution
fees under the Class B Plan to offset each Fund's marketing costs attributable
to the Class B shares, such as preparation of sales literature, advertising and
printing and distributing prospectuses and other shareholder materials to
prospective investors. SAFECO Securities also may use the distribution fee to
pay other costs allocated to SAFECO Securities' distribution activities,
including acting as shareholder of record, maintaining account records and other
overhead expenses.
SAFECO Securities will receive the proceeds of the initial sales charges paid
upon the purchase of Class A shares and the CDSCs paid upon applicable
redemptions of Class B shares and may use these proceeds for any of the
distribution expenses described above. The amount of sales charges reallowed to
broker-dealers, banks or other financial institutions who sell Class A shares
will equal the percentage of the amount invested in accordance with the schedule
set forth in "Purchasing Advisor Class A Shares" on page 49. SAFECO Securities,
out of its own resources, will pay a brokerage commission equal to 4.00% of the
amount invested to broker-dealers, banks and other financial institutions who
sell Class B shares. Broker-dealers, banks and other financial institutions who
sell Class B shares of the Money Market Fund will receive the 4.00% brokerage
commission at the time the shareholder exchanges his or her Class B Money Market
Fund shares for Class B shares of another Fund.
During the period they are in effect, the Plans and related Agreements obligate
the Advisor Classes of the Funds to which they relate to pay service and
distribution fees to SAFECO Securities as compensation for its service and
distribution activities, not as reimbursement for specific expenses incurred.
Thus, even if SAFECO Securities' expenses exceed its service or distribution
fees for any class, the class will not be obligated to pay more than those fees
and, if SAFECO Securities' expenses are less than such fees, it will retain its
full fees and realize a profit. Each Fund that has implemented a Rule 12b-1 Plan
will pay the service and distribution fees to SAFECO Securities until either the
applicable Plan or Agreement is terminated or not renewed.
PERSONS CONTROLLING CERTAIN FUNDS
At ____________, 1997, SAM, a wholly owned subsidiary of SAFECO Corporation,
controlled the International and Balanced Funds. At ____________, 1997 SAM
controlled the Value Fund. At ____________, 1997, SAFECO Corporation
controlled the Small Company Fund. SAFECO Corporation and SAM have their
principal place of business at SAFECO Plaza, Seattle, Washington 98185.
-- 64 --
<PAGE>
PERSONS CONTROLLING CERTAIN FUNDS (CONTINUED)
At ____________, 1997, SAFECO Insurance Company of America ("SAFECO Insurance")
controlled the Intermediate Treasury and Washington Funds. SAFECO Insurance is a
Washington Corporation and a wholly owned subsidiary of SAFECO Corporation,
which has its principal place of business at SAFECO Plaza, Seattle, Washington
98185.
At ____________, 1997, Crown Packaging Corp. Profit Sharing & Pension Plan and
Massman Construction Co. Profit Sharing Retirement Trust controlled the Managed
Bond Fund. Crown Packaging Corp. Profit Sharing & Pension Plan's address of
record is 8514 Eager Road, St. Louis, Mo. 63144. Massman Construction Co. Profit
Sharing Retirement Trust's address of record is 8901 Stateline, Kansas City, Mo.
64114.
PERFORMANCE INFORMATION
The yield, total return and average annual total return of each class of a Fund
may be quoted in advertisements. For each Fund except the Money Market Fund,
yield is the annualization on a 360-day basis of a class's net income per share
over a 30-day period divided by the class's net asset value per share on the
last day of the period. The formula for the yield calculation is defined by
regulation. Consequently, the rate of actual income distributions paid by the
Funds may differ from quoted yield figures. Total return is the total percentage
change in an investment in a class of a Fund, assuming the reinvestment of
dividend and capital gain distributions, over a stated period of time. Average
annual total return is the annual percentage change in an investment in a class
of a Fund, assuming the reinvestment of dividends and capital gain
distributions, over a stated period of time. Performance quotations are
calculated separately for each class of a Fund. Standardized returns for Class A
shares reflect deduction of the Fund's maximum initial sales charge at the time
of purchase, and standardized returns for Class B shares reflect deduction of
the applicable CDSC imposed on a redemption of shares held for the period. A
Fund's portfolio turnover rate will vary from year to year. A high portfolio
turnover rate involves correspondingly higher transaction costs in the form of
broker commissions and dealer spreads and other costs that a Fund will bear
directly.
For the Money Market Fund, yield is the annualization on a 365-day basis of the
Fund's net income over a 7-day period. Effective yield is the annualization, on
a 365-day basis, of the Money Market Fund's net income over a 7-day period with
dividends reinvested. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
From time to time, a Fund may advertise rankings. Rankings are calculated by
independent companies that monitor mutual fund performance (e.g., CDA Investment
Technologies, Lipper Analytical Services, Inc., and Morningstar, Inc.) and are
reported periodically in national financial publications such as BARRON'S,
BUSINESS WEEK, FORBES, INVESTOR'S BUSINESS DAILY, MONEY MAGAZINE, and THE WALL
STREET JOURNAL. In addition, non-standardized performance figures may accompany
the standardized figures described above. Non-standardized figures may be
calculated in a variety of ways, including but not necessarily limited to,
different time periods and different initial investment amounts. Each Fund may
also compare its performance to the performance of relevant indices.
Performance information and quoted rankings are indicative only of past
performance and are not intended to represent future investment results. Except
for the Money Market Fund, the yield and share price of each class of a Fund
will fluctuate and your shares, when redeemed, may be worth more or less than
you originally paid for them.
-- 65 --
<PAGE>
FUND DISTRIBUTIONS AND HOW THEY ARE TAXED
DIVIDENDS AND OTHER DISTRIBUTIONS
The Fixed-Income Funds declare dividends on each business day and pay them on
the last business day of each month; the Equity, Income, Balanced and Value
Funds declare and pay dividends on the last business day of each calendar
quarter; and the Growth, Northwest, International, and Small Company Funds
declare and pay dividends annually. Each Fund declares dividends from net
investment income (which includes accrued dividends and interest, earned
discount, and other income earned on portfolio securities less expenses).
Shares of each Fund become entitled to receive dividends on the next business
day after they are purchased for your account. If you request redemption of
all your shares at any time during a month, you will receive all declared
dividends through the date of redemption, together with the proceeds of the
redemption.
Dividends and other distributions paid by a Fund on each class of its shares are
calculated at the same time in the same manner. However, except for the Money
Market Fund, because of the higher Rule 12b-1 service and distribution fees
associated with Class B shares, the dividends paid by a Fund on its Class B
shares will be lower than those paid on its Class A shares.
Your dividends and other distributions are reinvested in additional shares of
the distributing Fund at net asset value per share, generally determined as of
the close of business on the ex-distribution date, unless you elect in writing
to receive dividends and/or other distributions in cash and that election is
provided to SAFECO Services at the address on the Prospectus cover. The election
remains in effect until revoked by written notice to SAFECO Services. For
retirement accounts, all dividends and other distributions declared by a Fund
must be invested in additional shares of that Fund.
States generally treat the pass-through of interest earned on U.S. Treasury
securities and other direct obligations of the U.S. Government as tax-free
income in the calculation of their state income tax. This treatment may be
dependent upon the maintenance of certain percentages of fund ownership in these
securities. The Intermediate Treasury Fund will invest primarily in these
securities while the other Funds may occasionally invest a portion of their
portfolios in these securities.
Please remember that if you purchase shares shortly before a Fund pays a taxable
dividend or other distribution, you will pay the full price for the shares, then
receive part of the price back as a taxable distribution.
TAXES
Each Fund intends to continue to qualify for treatment as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended. By
so qualifying, a Fund will not be subject to federal income taxes to the extent
it distributes its net investment income and realized capital gains to its
shareholders. Each Fund will inform you as to the amount and nature of dividends
and other distributions to your account. Dividends and other distributions
declared in December, but received by shareholders in January, are taxable to
shareholders in the year in which declared.
When you sell (redeem) shares, it may result in a taxable gain or loss. This
depends upon whether you receive more or less than your adjusted basis for the
shares (which normally takes into account any initial sales charge paid on Class
A shares). An exchange of any Fund's shares for shares of another Fund generally
will have similar tax consequences.
Special rules apply when you dispose of Class A shares of a Fund (except the
Money Market Fund) through a redemption or exchange within 60 days after your
purchase thereof and subsequently reacquire Class A shares of the same Fund or
acquire Class A shares of another Fund without paying a sales charge due to the
exchange privilege or reinstatement privilege. See "How to Purchase Shares --
Reinstatement Privilege" on page 51 and "How to Exchange Shares from One Fund to
Another" on page 56 for more information. In these cases, any gain on the
disposition of the original
-- 66 --
<PAGE>
FUND DISTRIBUTIONS AND HOW THEY ARE TAXED (CONTINUED)
Class A shares will be increased, or any loss decreased, by the amount of the
sales charge paid when you acquired those shares, and that amount will increase
the basis of the shares subsequently acquired. In addition, if you purchase
shares of a Fund (whether pursuant to the reinstatement privilege or otherwise)
within thirty days before or after redeeming other shares of that Fund
(regardless of class) at a loss, all or part of that loss will not be deductible
and will increase the basis of the newly purchased shares.
SPECIAL CONSIDERATIONS FOR THE TAX-EXEMPT INCOME FUNDS
TAXES
Each Tax-Exempt Income Fund intends to continue to qualify for favorable tax
treatment as a "regulated investment company" under the Internal Revenue Code
("Code") so as to be able to pay dividends that are exempt from federal personal
income taxes. The portion of dividends representing net short-term capital
gains, however, is not exempt and will be treated as taxable dividends for
federal income tax purposes. In addition, income which is derived from
purchasing certain bonds below their issued price after April 30, 1993, will be
treated as ordinary income for federal income tax purposes.
A portion of a Tax-Exempt Income Fund's assets may from time to time be
temporarily invested in fixed-income obligations, the interest on which when
distributed to the Fund's shareholders will be subject to federal income taxes.
As a matter of non-fundamental investment policy, the Tax-Exempt Income Funds
will not purchase so-called "non-essential or private activity" bonds, the
interest on which would constitute a preference item for shareholders in
determining their alternative minimum tax.
The excess of net long-term capital gains realized by a Tax-Exempt Income Fund
over net short-term capital loss on portfolio transactions does not necessarily
result in exemption under other federal, state or local income taxes.
Shareholders of each Tax-Exempt Income Fund should bear in mind that they may be
subject to other taxes.
If a shareholder buys shares of a Tax-Exempt Income Fund and sells them at a
loss within six months, such loss for federal income tax purposes will be
disallowed to the extent of the tax-exempt interest component of dividends
received during such six-month period.
If a shareholder buys shares of a Tax-Exempt Income Fund and sells them at a
loss within six months, to the extent not disallowed in the previous paragraph
and to the extent of any long-term capital gains distributions, the loss will be
treated as a long-term capital loss for federal income tax purposes.
Individuals who receive Social Security benefits must use the amount of income
dividends received from each of the Tax-Exempt Income Funds in determining the
amount of any federal income tax due on such benefits.
Under the Code, the tax effect on individuals of receiving dividends from any of
the Tax-Exempt Income Funds is substantially different from the tax effect on
other types of shareholders.
CALIFORNIA FUND
The California Fund intends to pay dividends that are exempt from California
state personal income taxes. This would not include taxable interest paid on
temporary investments, if any. Generally, the tax treatment of capital gains
under California law is the same as under federal law. Capital gains
distributions paid by the California Fund are treated as long-term capital gains
under California law regardless of how long the shares have been held.
Redemptions and exchanges of the California Fund may result in a capital gain or
loss for California income tax purposes.
-- 67 --
<PAGE>
FUND DISTRIBUTIONS AND HOW THEY ARE TAXED (CONTINUED)
Under California law, the dividend income from municipal bonds is tax-exempt to
individual shareholders but its tax treatment for corporate shareholders is
unclear. Therefore, the portion of the California Fund's income dividend
attributable to these obligations and paid by it to corporate shareholders may
be taxable. Corporate shareholders may wish to consult their tax advisers
regarding this issue.
Shares of the California Fund will not be subject to the California property
tax.
WASHINGTON FUND
Currently the State of Washington has no state personal income tax. When and if
Washington State enacts a personal income tax, there can be no assurance that
income from the Washington Fund's portfolio securities which is distributed to
shareholders would be exempt from such a tax.
TAX WITHHOLDING INFORMATION
You will be asked to certify on your account application or on a separate form
that the taxpayer identification number you provide is correct and that you are
not subject to, or are exempt from, backup withholding for previous
underreporting to the Internal Revenue Service.
Retirement plan distributions may be subject to federal income tax withholding.
However, you may elect not to have any distributions withheld by checking the
appropriate box on the Redemption Request form or by instructing SAFECO Services
in writing at the address on the Prospectus cover.
If the International Fund pays nonrefundable taxes to foreign governments during
the year, the taxes will reduce the Fund's dividends but still be included in
your taxable income. However, you may be able to claim an offsetting credit or
deduction on your tax return for your share of foreign taxes paid by the Fund.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting each Fund and its shareholders; see the
Trusts' Statements of Additional Information for a further discussion. There may
be other federal, state or local tax considerations applicable to a particular
investor. You therefore are urged to consult your tax adviser.
TAX-DEFERRED RETIREMENT PLANS
SAFECO Services offers a variety of tax-deferred retirement plans for
individuals, businesses and nonprofit organizations. An account may be
established under one of the following plans which allow you to defer investment
income from federal income tax while you save for retirement. Many of the Funds
(other than the Tax-Exempt Income Funds) may be used as investment vehicles for
these plans.
INDIVIDUAL RETIREMENT ACCOUNTS (IRAS). IRAs are tax-deferred retirement
accounts for anyone under age 70 1/2 with earned income. The maximum annual
contribution generally is $2,000 per person ($4,000 for you and a non-working
spouse). Under certain circumstances your contribution will be deductible for
income tax purposes. An annual custodial fee will be charged for any part of a
calendar year in which you have an IRA investment in a Fund.
SIMPLIFIED EMPLOYEE PENSION IRAS (SEP-IRAS). SEP-IRAs are easily administered
retirement plans for small businesses and self-employed individuals. Annual
contributions up to $22,500 may be made to SEP-IRA accounts; the annual
contribution limit is subject to change. SEP-IRAs have the same investment
minimums and custodial fees as regular IRAs.
-- 68 --
<PAGE>
TAX-DEFERRED RETIREMENT PLANS (CONTINUED)
403(b) PLANS. 403(b) plans are retirement plans for tax-exempt organizations
and school systems to which employers and employees both may contribute. Minimum
investment amounts are negotiable.
401(k) PLANS. 401(k) plans allow employers and employees to make tax-advantaged
contributions to a retirement account. SAFECO Services offers a low-cost
administration package that includes a prototype plan, record keeping, testing
and employee communications. Minimum investment amounts are negotiable.
PROFIT SHARING AND MONEY PURCHASE PENSION PLANS. Each plan allows corporations,
partnerships and self-employed persons to make annual, tax-deductible
contributions to a retirement account for each person covered by the plan. A
plan may be adopted individually or paired with another plan to maximize
contributions. SAFECO Services offers an administration package for these plans.
Minimum investment amounts are negotiable.
For information about the above accounts and plans, please contact your
investment professional, or call 1-800-278-1985. For a description of federal
income tax withholding on distributions from these accounts and plans, see "Fund
Distributions and How They Are Taxed -- Tax Withholding Information" on page 66.
ACCOUNT STATEMENTS
Periodically, you will receive an account statement indicating your current Fund
holdings and transactions affecting your account. Confirmation statements will
be sent to you after each transaction that affects your account balance. Please
review the information on each confirmation statement for accuracy immediately
upon receipt. If you do not notify us within 30 days of any processing error,
SAFECO Services will consider the transactions listed on the confirmation
statement to be correct.
ACCOUNT CHANGES AND SIGNATURE REQUIREMENTS
Changes to your account registration or the services you have selected must be
in writing and signed by the number of owners specified on your account
application as having authority to make these changes. Send written changes to
the broker-dealer, bank or other financial institution where your account is
maintained. (Changes made to accounts maintained at SAFECO Services should be
sent to the address on the Prospectus cover.) Certain changes to the Automatic
Investment Method and Systematic Withdrawal Plan can be made by telephone
request if you have previously selected single signature authorization for your
account.
You must specify on your account application the number of signatures required
to authorize redemptions and exchanges and to change account registration or the
services selected. Authorizing fewer than all account owners has important
implications. For example, one owner of a joint tenant account can redeem money
without the co-owner's signature. If you do not indicate otherwise on the
application, the signatures of all account owners will be required to effect a
transaction. Your selection of fewer than all account owner signatures may be
revoked by any account owner who writes to SAFECO Services or the financial
institution where your account is maintained.
The broker-dealer, bank or financial institution where your account is
maintained or SAFECO Services may require a signature guarantee for a signature
that cannot be verified by comparison to the signature(s) on your account
application. A signature guarantee may be obtained from most financial
institutions including banks, savings and loans and broker-dealers.
-- 69 --
<PAGE>
DESCRIPTION OF STOCKS, BONDS AND CONVERTIBLE SECURITIES
COMMON STOCKS represent equity interest in a corporation. Although common stocks
have a history of long-term growth in value, their prices fluctuate based on
changes in a company's financial condition and overall market and economic
conditions. Smaller companies are especially sensitive to these factors.
PREFERRED STOCKS are equity securities whose owners have a claim on a company's
earnings and assets before holders of common stock, but after debt holders. The
risk characteristics of preferred stocks are similar to those of common stocks,
except that preferred stocks are generally subject to less risk than common
stocks.
BONDS AND OTHER DEBT SECURITIES are used by issuers to borrow money from
investors. The issuer pays the investor a fixed or variable rate of interest,
and must repay the amount borrowed at maturity. The value of bonds and other
debt securities will normally vary inversely with interest rates. In general,
bond prices rise when interest rates fall, and bond prices fall when interest
rates rise. Debt securities have varying degrees of quality and varying levels
of sensitivity to changes in interest rates. Long-term bonds are generally more
sensitive to interest rate changes than short-term bonds.
CONVERTIBLE SECURITIES are debt or preferred stock which are convertible into or
exchangeable for common stock. The value of convertible corporate bonds will
normally vary inversely with interest rates and the value of convertible
corporate bonds and convertible preferred stock will normally vary with the
value of the underlying common stock.
RATINGS SUPPLEMENT
Ratings by Moody's and S&P represent their respective opinions as to the
investment quality of the rated obligations. Investors should realize these
ratings do not constitute a guarantee that the principal and interest payable
under these obligations will be paid when due.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
MOODY'S. Issuers rated Prime-1 have a superior ability for repayment of senior
short-term debt obligations. Issuers rated Prime-2 have a strong ability for
repayment of senior short-term debt obligations. Issuers rated Prime-3 have an
acceptable ability for repayment of senior short-term debt obligations.
S&P. Issues rated A-1 are the highest category, indicating that the degree of
safety regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus (+) sign
designation.Issues designated A-2 have a satisfactory capacity for timely
payment, however, the relative degree of safety is not as high as for issues
designated "A-1." Issues designated as A-3 have an adequate capacity for timely
payment.
DESCRIPTION OF DEBT RATINGS
Excerpts from Moody's descriptions of its ratings:
Investment Grade:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the position of such issues.
-- 70 --
<PAGE>
RATINGS SUPPLEMENT (CONTINUED)
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than the Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Below Investment Grade:
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B- -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa have poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Excerpts from S&P's descriptions of its ratings:
Investment Grade:
AAA -- Debt which is rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA -- Debt which is rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
A -- Debt which is rated A has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
-- 71 --
<PAGE>
RATINGS SUPPLEMENT (CONTINUED)
Below Investment Grade:
BB, B, CCC, CC, C -- Debt which is rated BB, B, CCC, CC, or C is predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. "BB" indicates the lowest degree of
speculation and "C" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
C1 -- Debt which is rated C1 is reserved for income bonds on which no interest
is being paid.
D -- Debt rated D is in payment default. Interest payment, or principal payments
are not made on the date due even if the applicable grace period has not
expired, unless S&P believes that such payments will be made during such grace
period.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DEBT SECURITIES HOLDINGS
THE EQUITY FUND DID NOT HOLD ANY CONVERTIBLE DEBT SECURITIES DURING THE FISCAL
YEAR ENDED SEPTEMBER 30, 1996.
INCOME FUND
The weighted average ratings of all debt securities held by the Income Fund,
expressed as a percentage of total investments held during the fiscal year ended
December 31, 1996, were as follows:
<TABLE>
<CAPTION>
MOODY'S % S&P %
--------------------------- --- --------------------------- ---
<S> <C> <C> <C>
INVESTMENT GRADE
Aaa AAA
Aa AA
A A
Baa BBB
BELOW INVESTMENT GRADE
Ba BB
B B
Caa CCC
Ca CC
C C
D
Not Rated, but determined Not Rated, but determined
to be investment grade to be investment grade
Not Rated, but determined Not Rated, but determined
to be below investment to be below investment
grade grade
</TABLE>
-- 72 --
<PAGE>
DEBT SECURITIES HOLDINGS (CONTINUED)
HIGH-YIELD FUND
The weighted average ratings of all fixed-income securities, expressed as a
percentage of total investments held by the High-Yield Bond during the fiscal
year ended December 31, 1996, were as follows:
<TABLE>
<CAPTION>
MOODY'S % S&P %
--------------------------- ---- --------------------------- ----
<S> <C> <C> <C>
INVESTMENT GRADE
Aaa AAA
Aa AA
A A
Baa BBB
BELOW INVESTMENT GRADE
Ba BB
B B
Caa CCC
Ca CC
C C
D
Not Rated, but determined Not Rated, but determined
to be investment grade to be investment grade
Not Rated, but determined Not Rated, but determined
to be below investment to be below investment
grade grade
</TABLE>
-- 73 --
<PAGE>
SAFECO FAMILY OF FUNDS
STABILITY OF PRINCIPAL
SAFECO Money Market Fund
BOND INCOME
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO High-Yield Bond Fund
SAFECO Managed Bond Fund
TAX-FREE BOND INCOME
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal Bond Fund
HIGH CURRENT INCOME WITH LONG-TERM GROWTH
SAFECO Income Fund
LONG-TERM GROWTH
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Northwest Fund
SAFECO International Stock Fund
SAFECO Balanced Fund
SAFECO Small Company Stock Fund
SAFECO U.S. Value Fund
FOR MORE COMPLETE INFORMATION ON ADVISOR CLASS SHARES OF ANY SAFECO MUTUAL FUND,
INCLUDING MANAGEMENT FEES AND EXPENSES, PLEASE CONTACT YOUR INVESTMENT
PROFESSIONAL.
<PAGE>
TELEPHONE NUMBERS:
DEALER SERVICES
Nationwide: (800) 528-6501
Seattle: (206) 545-6409
LITERATURE ORDER:
Nationwide: (800) 463-8792
Seattle: (206) 545-6227
SHAREHOLDER SERVICES/TELEPHONE EXCHANGE:
MONDAY THROUGH FRIDAY,
6:00 A.M. TO 5:00 P.M. PACIFIC TIME
NATIONWIDE: (800) 463-8791
SEATTLE: (206) 545-6283
24-HOUR PRICE AND PERFORMANCE INFORMATION
Nationwide: (800) 463-8794
Seattle: (206) 545-6295
MAILING ADDRESS:
SAFECO MUTUAL FUNDS
Advisor Class Shares
P.O. Box 34890
Seattle, WA 98124-1890
EXPRESS/OVERNIGHT MAIL:
SAFECO Mutual Funds
Advisor Class Shares
4333 Brooklyn Avenue N.E.
Seattle, WA 98105
DISTRIBUTOR:
SAFECO Securities, Inc.
PROSPECTUS
January 31, 1997
SAFECO GROWTH FUND
SAFECO EQUITY FUND
SAFECO INCOME FUND
SAFECO NORTHWEST FUND
SAFECO INTERNATIONAL STOCK FUND
SAFECO BALANCED FUND
SAFECO SMALL COMPANY STOCK FUND
SAFECO U.S. VALUE FUND
SAFECO INTERMEDIATE-TERM
U.S. TREASURY FUND
SAFECO HIGH-YIELD BOND FUND
SAFECO MANAGED BOND FUND
SAFECO MUNICIPAL BOND FUND
SAFECO CALIFORNIA TAX-FREE INCOME FUND
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
SAFECO MONEY MARKET FUND
ADVISOR CLASS A
ADVISOR CLASS B
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY ANY TRUST, ANY FUND, OR BY
SAFECO SECURITIES.THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY ANY TRUST, ANY FUND, OR BY SAFECO SECURITIES
IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION MAY NOT LAWFULLY BE MADE.
GMF 4111 2/96
<PAGE>
SAFECO COMMON STOCK TRUST:
SAFECO GROWTH FUND
SAFECO EQUITY FUND
SAFECO INCOME FUND
SAFECO NORTHWEST FUND
SAFECO BALANCED FUND
SAFECO INTERNATIONAL STOCK FUND
SAFECO SMALL COMPANY STOCK FUND
SAFECO U.S. VALUE FUND
NO-LOAD CLASS
Statement of Additional Information
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus for the Funds. A copy of the Prospectus may
be obtained by writing SAFECO Mutual Funds, P.O. Box 34890, Seattle, Washington
98124-1890, or by calling TOLL FREE:
Nationwide
1-800-426-6730
Seattle Area
206-545-5530
Deaf and Hard of Hearing TDD/TTY Service
1-800-438-8718
The date of the most current Prospectus of the Funds to which this Statement of
Additional Information relates is ____________, 1997.
The date of this Statement of Additional Information is ____________, 1997.
<PAGE>
TABLE OF CONTENTS
OVERVIEW OF INVESTMENT POLICIES . . . . . . . . . . . . . . . . . . . . . .
INVESTMENT POLICIES OF THE GROWTH FUND. . . . . . . . . . . . . . . . . . .
INVESTMENT POLICIES OF THE EQUITY FUND. . . . . . . . . . . . . . . . . . .
INVESTMENT POLICIES OF THE INCOME FUND. . . . . . . . . . . . . . . . . . .
INVESTMENT POLICIES OF THE NORTHWEST FUND . . . . . . . . . . . . . . . . .
INVESTMENT POLICIES OF THE BALANCED FUND. . . . . . . . . . . . . . . . . .
INVESTMENT POLICIES OF THE INTERNATIONAL FUND . . . . . . . . . . . . . . .
INVESTMENT POLICIES OF THE SMALL COMPANY FUND . . . . . . . . . . . . . . .
INVESTMENT POLICIES OF THE U.S. VALUE FUND . . . . . . . . . . . . . . . .
ADDITIONAL INVESTMENT INFORMATION . . . . . . . . . . . . . . . . . . . . .
SPECIAL RISKS OF BELOW INVESTMENT GRADE BONDS . . . . . . . . . . . . . . .
SPECIAL RISKS OF FOREIGN INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . .
PRINCIPAL SHAREHOLDERS OF CERTAIN FUNDS . . . . . . . . . . . . . . . . . .
ADDITIONAL TAX INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . .
ADDITIONAL INFORMATION ON CALCULATION OF NET ASSET VALUE PER
SHARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ADDITIONAL PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . .
TRUSTEES AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . .
INVESTMENT ADVISORY AND OTHER SERVICES. . . . . . . . . . . . . . . . . . .
BROKERAGE PRACTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . .
REDEMPTION IN KIND. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . .
DESCRIPTION OF COMMERCIAL PAPER AND PREFERRED STOCK RATINGS . . . . . . . .
-1-
<PAGE>
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") SAFECO Small Company Stock Fund ("Small Company Fund")
and SAFECO U.S. Value Fund ("Value 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 identify or describe the
security. If a policy's percentage limitation is adhered to immediately
after and as a result of the investment, a later increase or decrease in
values, net assets or other circumstances will not be considered in
determining whether a Fund complies with the applicable limitation (except to
the extent the change may impact a Fund's borrowing limit).
Each Fund's fundamental policies may not be changed without the approval of a
"majority of its outstanding voting securities," as defined 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 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.
-2-
<PAGE>
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.
-3-
<PAGE>
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.
-4-
<PAGE>
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% 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 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
-5-
<PAGE>
than two percent (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.
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 assets would be invested in one
industry (governmental issues of securities are not considered part of any
one industry).
-6-
<PAGE>
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 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 without
shareholder approval:
-7-
<PAGE>
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 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.
-8-
<PAGE>
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 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.
-9-
<PAGE>
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, directors or security holders is an officer or
Trustee of the Income Fund, if or so long as the officers or trustees 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 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.
-10-
<PAGE>
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 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.
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.
-11-
<PAGE>
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.
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).
-12-
<PAGE>
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.
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.
-13-
<PAGE>
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 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.
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.
-14-
<PAGE>
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 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.
-15-
<PAGE>
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;
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;
7. Lend any security or make any loan if, as a result, more than 33 1/3% of
its total assets would be lent to other parties; however, this limit does
not apply to purchases of debt securities or to repurchase agreements; and
8. Purchase or sell real estate, except real estate investment trusts.
-16-
<PAGE>
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 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.
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 more than 10% of its total assets in real
estate investment trusts, nor will the Fund invest in interests in real
estate investment trusts that are not readily marketable or interests in
real estate limited partnerships not listed or traded on the Nasdaq Stock
Market ("Nasdaq") 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
-17-
<PAGE>
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.
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 commodities or commodity
contracts.
-18-
<PAGE>
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 International Fund's total assets would be invested in the securities
of such issuer or the International 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 International 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 International 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
International 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 International
Fund may purchase or sell options or futures contracts and invest in
securities or other instruments backed by physical commodities;
7. Lend any security or make any loan if, as a result, more than 33 1/3% of
its total assets would be lent to other parties; however, this limit does
not apply to purchases of debt securities or to repurchase agreements; and
8. Purchase or sell real estate, except real estate investment trusts.
-19-
<PAGE>
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 without
shareholder approval:
1. The International 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 International 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 International 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 International Fund will not invest in oil, gas or other mineral
exploration, development programs or leases.
5. The International 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 International Fund will not invest more than 10% of its total assets in
real estate investment trusts, nor will the Fund invest in interests in
real estate investment trusts that are not readily marketable or interests
in real estate limited partnerships not listed or traded on Nasdaq 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 International 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 International 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
-20-
<PAGE>
will not purchase any securities while borrowings equal to or greater than
5% of its total assets are outstanding.
9. The International 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 International 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 International 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 International 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 International 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.
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 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;
-21-
<PAGE>
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;
7. Lend any security or make any loan if, as a result, more than 33 1/3% of
its total assets would be lent to other parties; however, this limit does
not apply to purchases of debt securities or to repurchase agreements; and
8. Purchase or sell real estate, except real estate investment trusts.
NON-FUNDAMENTAL INVESTMENT POLICIES
In addition to the policies described in the Prospectus, the Small Company Fund
has adopted the following non-fundamental policies which may be changed 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
-22-
<PAGE>
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 more than 10% of its total assets in
real estate investment trusts, nor will the Fund invest in interests in
real estate investment trusts that are not readily marketable or interests
in real estate limited partnerships not listed or traded on Nasdaq 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.
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 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.
-23-
<PAGE>
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 commodities or commodity
contracts.
INVESTMENT POLICIES OF THE VALUE FUND
FUNDAMENTAL POLICIES
The U.S. Value 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 U.S. Value Fund's total assets would be invested in the
securities of such issuer or the U.S. Value 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 U.S. Value 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 U.S. Value Fund may be deemed
an underwriter under federal securities laws;
4. Issue senior securities, except as permitted under the 1940 Act, the
rules or regulations promulgated thereunder or pursuant to a no-action
letter or an exemptive order issued by the Securities and Exchange
Commission;
5. Purchase the securities of any issuer (except the U.S. Government, its
agencies or instrumentalities) if, as a result, more than 25% of the
U.S. Value 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 U.S. Value
Fund may purchase or sell options or futures contracts and invest
in securities or other instruments backed by physical commodities;
7. Lend any security or make any loan if, as a result, more than 33 1/3% of
its total assets would be lent to other parties; however, this limit
does not apply to purchases of debt securities or to repurchase
agreements; and
8. Purchase or sell real estate, except real estate investment trusts.
NON-FUNDAMENTAL INVESTMENT POLICIES
1. The U.S. Value 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 U.S. Value 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 U.S. Value 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 U.S. Value Fund will not invest in oil, gas or other mineral
exploration, development programs or leases;
5. The U.S. Value Fund will not invest more than 5% of its net assets in
warrants. Warrants acquired by the Fund in units or attached to
securities are not subject to the 5% limit;
6. The U.S. Value Fund will not invest more than 10% of its total assets in
real estate investment trusts, nor will the Fund invest in interests in
real estate investment trusts that are not readily marketable or
interests in real estate limited partnerships not listed or traded on the
Nasdaq Stock Market if, as a result, the sum of such interests considered
illiquid and other illiquid securities would exceed 15% of the Fund's
net assets;
7. The U.S. Value 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 margin;
8. The U.S. Value 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 U.S. Value 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 cannot be sold or disposed of in
the ordinary course of business at approximately the prices at which
they are valued;
10. The U.S. Value 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 U.S. Value 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 U.S. Value Fund may invest in restricted securities eligible for
resale under Rule 144A, provided that SAM has determined that such
securities are liquid under guidelines adopted by the Board of Trustees;
13. The U.S. Value 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 U.S. Value 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; and
15. The U.S. Value Fund will not purchase or sell commodities or commodity
contracts.
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, 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
-24-
<PAGE>
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.
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. 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
-25-
<PAGE>
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 counterparties 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 Services, Inc. ("Moody's") or
issued by companies with an unsecured debt issue currently outstanding
rated AA by S&P or Aa by Moody's or higher.
b) Certificates of deposit ("CDs") must be issued by banks or savings
and loan associations that have total assets of at least $1 billion
or, in the case of a bank or savings and loan association not having
total assets of at least $1 billion, the bank or savings and loan
association is insured by the Federal Deposit Insurance Corporation
("FDIC"). The Growth Fund's investments in CDs issued by
FDIC-insured banks or savings and loans having less than $1 billion
in assets will be limited in amount to the statutory insurance
coverage provided by the FDIC.
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 beneficial 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.
-26-
<PAGE>
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. The Funds do not intend to purchase
illiquid securities, but the market for some securities may become illiquid
following purchase by the Fund. 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.
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-
-27-
<PAGE>
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" for more information.
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: (i) without additional cash consideration (or
for additional cash consideration held in a segregated account by its
custodian), or (ii) upon the Fund's conversion or exchange of other
securities held in its portfolio, or (iii) 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
-28-
<PAGE>
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: (i) 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
(ii) 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 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
-29-
<PAGE>
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 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.
-30-
<PAGE>
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 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: (i) the Fund holds in a segregated
account cash, Treasury bills, or other liquid high-grade
-31-
<PAGE>
short-term debt obligations of a value equal to the strike price times the
multiplier times the number of contracts, or (ii) 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 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
-32-
<PAGE>
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 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
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 options on equity
securities as described above, 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
-33-
<PAGE>
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.
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
-34-
<PAGE>
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 though their 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 their market risks. The Fund's ability to establish and
maintain
-35-
<PAGE>
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 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
-36-
<PAGE>
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 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."
-37-
<PAGE>
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 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
-38-
<PAGE>
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.
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 Sub-
Adviser 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
-39-
<PAGE>
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 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
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
-40-
<PAGE>
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 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 U.S.
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. 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 economies 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
-41-
<PAGE>
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 (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; counterparty 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
-42-
<PAGE>
involve hedging a currency risk through the U.S. dollar rather than directly to
the U.S. dollar or another currency.
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:
(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 ____________, 1997 SAFECO Insurance Company of America ("SAFECO
Insurance") owned 500,000 shares of the Northwest Fund which represented
_____% of the Fund's outstanding shares. At ____________, 1997, SAM owned
500,000 shares of each of the Balanced Fund and International Stock Fund,
which represented ______ of the Balanced and _____% of the International
Fund's outstanding shares. At ____________, 1997, SAFECO Corporation owned
500,000 shares of the Small Company Stock Fund which represented _____% of
the Fund's outstanding shares. At ____________, 1997, SAM owned 500,000
shares of the Value Fund, which represented 100% 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. Principal shareholders
of a Fund may control the outcome of a shareholder vote.
ADDITIONAL TAX INFORMATION
Each Fund is treated as a separate corporation for federal income tax purposes.
Each Fund intends to continue to qualify as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986 ("Code"). In order to
qualify for treatment as a regulated investment company under the Code, a Fund
must distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of taxable net
investment income and net short-term capital gain). Each Fund intends to make
sufficient distributions to shareholders to relieve it from liability for
federal excise and income taxes.
-43-
<PAGE>
The excess of net long-term capital gains over net short-term capital loss
realized by a Fund on portfolio transactions, when distributed by the Fund, is
subject to long-term capital gains treatment under the Code, regardless of how
long you have held the shares of the Fund. Distributions of net short-term
capital gains realized from portfolio transactions are treated as ordinary
income for federal income tax purposes. The tax consequences described above
apply whether distributions are taken in cash or in additional shares.
Redemptions and exchanges of shares of a Fund may result in a capital gain or
loss for federal income tax purposes.
If shares of a Fund are sold at a loss after being held for one year or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for any distribution, the shareholder will pay full price for the
shares and receive some portion of the purchase price back as a taxable dividend
or capital gain distribution.
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 be 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) 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 PFIC's. "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 and any other Fund that invests in foreign securities may
be required to pay withholding or other taxes to a foreign government. If so,
the taxes will reduce the Fund's 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 would generally be 30%.
Amounts withheld for
-44-
<PAGE>
foreign taxes will reduce the amount of dividend distributions to shareholders,
but will be included in shareholders taxable income. However, the Fund intends
to make an election which will allow shareholders to claim an offsetting credit
or deduction on their tax return for their share of foreign taxes paid by the
Fund.
Each Fund is required to withhold 31% of all taxable dividends, capital gain
distributions and redemption proceeds payable to individuals and certain other
noncorporate shareholders who do not furnish the Fund with a correct taxpayer
identification number. Withholding at that rate also is required from dividends
and those distributions for shareholders who otherwise are subject to backup
withholding.
If the International Fund's dividends exceed its taxable income in any year
because of currency-related losses or otherwise, all or a portion of the Fund's
dividends may be treated as a return of capital to shareholders for tax
purposes. To minimize the risk of a return of capital, the Fund may adjust its
dividends to take currency fluctuations into account, causing the dividends to
vary. Any return of capital will reduce the cost basis of your shares resulting
in a higher reported capital gains or a lower reported capital loss when you
sell your shares.
These are tax requirements that all mutual funds must follow in order to avoid
federal taxation. The Funds may have to limit investment activity in some types
of securities in order to adhere to these requirements.
ADDITIONAL INFORMATION ON CALCULATION OF NET ASSET VALUE PER SHARE
Each Fund determines its net asset value per share ("NAV") by subtracting its
liabilities (including accrued expenses and dividends payable) from its total
assets (the market value of the securities the Fund holds plus cash and other
assets, including interest accrued but not yet received) and dividing the result
by the total number of shares outstanding. The NAV of No-Load Class of each
Fund is calculated as of the close of regular trading on the New York Stock
Exchange ("Exchange"), normally 1:00 p.m. Pacific time every day the Exchange is
open for trading. The Exchange is closed on the following days: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. NAV is determined separately for each class
of shares of each Fund.
Short-term debt securities held 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 until the 61st day prior to maturity. All other
securities and assets in the portfolios will be appraised in accordance with
those procedures established by the Board of Trustees in good faith in computing
the fair market value of those assets.
-45-
<PAGE>
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 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 total returns, expressed as a percentage, for the one-, five- and ten-year
periods ended December 31, 1996, for the Growth, Equity and Income Funds were
as follows:
1 Year 5 Years 10 Years
------ ------- --------
Growth Fund % % %
Equity Fund % % %
Income Fund % % %
The total returns, expressed as a percentage, for the one-year, five-year and
since-inception (70 months) periods ended December 31, 1996, for the Northwest
Fund were as follows:
Since Initial Effective Date
1 Year 5 Year (70 Months)
------ ------ ---------------
Northwest Fund % % %
The total returns, expressed as a percentage, for the eleven month period from
inception to December 31, 1996, for the Balanced, International, and Small
Company Funds were as follows:
-46-
<PAGE>
11 Month Period from Inception to
December 31, 1996
Balanced Fund %
International Fund %
Small Company Fund %
The total returns, expressed in dollars and assuming a $10,000 initial
investment, for the one-, five-and ten-year periods ended December 31, 1996,
for the Growth, Equity and Income Funds were as follows:
1 Year 5 Years 10 Years
------ ------- --------
Growth Fund $ $ $
Equity Fund $ $ $
Income Fund $ $ $
The total returns, expressed in dollars and assuming a $10,000 initial
investment, for the one year, five year, and since-inception (70 months) periods
ended December 31, 1996, for the Northwest Fund were as follows:
Since Initial Effective Date
1 Year 5 Year (70 Months)
------ ------ ----------------------------
Northwest Fund $ $ $
The total returns, expressed in dollars and assuming a $10,000 initial
investment, for the eleven month period from inception to December 31, 1996,
for the Balanced, International and Small Company Funds were as follows:
11 Month Period from
Inception to September 30, 1996
-------------------------------
Balanced Fund $
International Fun $
Small Company Fund $
-47-
<PAGE>
The average annual total returns for the one, five and ten year periods ended
December 31, 1996, for the Growth, Equity and Income Funds were as follows:
1 Year 5 Years 10 Years
------ ------- --------
Growth Fund % % %
Equity Fund % % %
Income Fund % % %
The average annual total returns for the one year, five year, and since-
inception (70 months) periods ended December 31, 1996, for the Northwest Fund
were as follows:
Since Initial Effective Date
1 Year 5 Years (70 Months)
------ ------- ----------------------------
Northwest Fund % % %
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:
n
T = P(1+A)
The average annual total return is computed using the following formula:
n
A = (root ERV/P - 1) x 100
Where: T = total return
A = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical 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)
-48-
<PAGE>
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, if any, for each Class is applied.
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 also describe in their advertisements the
methodology used by rating services to arrive at Fund ratings. In addition, the
Funds may also advertise individual measurements of Fund performance published
by the rating services, including but not limited to: a Fund's beta, standard
deviation, and price earnings ratio.
The Funds may occasionally reproduce articles or portions of articles about the
Funds written by independent third parties such as financial writers, financial
planners and financial analysts, which have appeared in financial publications
of general circulation or financial newsletters (including but not limited to
BARRONS, BUSINESS WEEK, FABIANS, FORBES, FORTUNE, INVESTOR'S BUSINESS DAILY,
KIPLINGER'S, MONEY MAGAZINE, MORNINGSTAR MUTUAL FUNDS, MUTUAL FUNDS FORECASTER,
MUTUAL FUNDS MAGAZINE, NEWSWEEK, NO-LOAD FUND INVESTOR, NO-LOAD FUND X, PENSIONS
& INVESTMENTS, RUCKEYSER'S MUTUAL FUNDS, TELESWITCH, TIME MAGAZINE, U.S. NEWS
AND WORLD REPORT, YOUR MONEY AND THE WALL STREET JOURNAL).
Each Fund may 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.
-49-
<PAGE>
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.
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.
-50-
<PAGE>
TRUSTEES AND OFFICERS
Position Held with Principal Occupation
Name and Address the Trust During Past 5 Years
- ---------------- ------------------ --------------------
Boh A. Dickey* Chairman and President, Chief Operating
SAFECO Plaza Trustee Officer and Director of
Seattle, WA 98185 SAFECO Corporation.
(52) Previously, Executive Vice
President and Chief Financial
Officer. He has been an
executive officer of
SAFECO Corporation and its
subsidiaries since 1982.
See table under
"Investment Advisory and
Other Services."
Barbara J. Dingfield Trustee Manager, Corporate
Microsoft Corporation Contributions and Community
One Microsoft Way Programs for Microsoft
Redmond, WA 98052 Corporation, Redmond,
(51) Washington, a computer
software company; Director
and former Executive Vice
President of Wright Runstad &
Co., Seattle, Washington, a
real estate development
company; Director of First
SAFECO National Life
Insurance Company of New
York.
David F. Hill* President President of SAFECO
SAFECO Plaza Trustee Securities Inc. and SAFECO
Seattle, WA 98185 Services Corporation; Senior
(48) Vice President of SAFECO
Asset Management Company. See
table under "Investment
Advisory and Other Services."
Richard W. Hubbard* Trustee Retired Vice President and
1270 NW Blakely Ct. Treasurer of the Trust and
Seattle, WA 98177 other SAFECO Trusts; retired
(67) Senior Vice President and
Treasurer of SAFECO
Corporation; former President
of SAFECO Asset Management
Company; Director of First
SAFECO National Life
Insurance Company of New
York.
-51-
<PAGE>
Position Held with Principal Occupation
Name and Address the Trust During Past 5 Years
- ---------------- ------------------ --------------------
Richard E. Lundgren Trustee Director of Marketing and
764 S. 293rd Street Customer Relations, Building
Federal Way, WA 98032 Materials Distribution,
(59) Weyerhaeuser Company, Tacoma,
Washington; Director of First
SAFECO National Life
Insurance Company of New
York.
Larry L. Pinnt Trustee Retired Vice President and
1600 Bell Plaza Chief Financial Officer of
Room 1802 US WEST Communications,
Seattle, WA 98191 Seattle, Washington;
(62) Director of Key Bank 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
1808 N 41st St. Group, Inc., an international
Seattle, WA 98103 trading and business/real
(55) estate development consulting
firm, Seattle, Washington;
former President of Coast
Hotels, Inc., Seattle,
Washington; Director of First
SAFECO National Life
Insurance Company of New
York.
Neal A. Fuller Vice President Vice President, Controller,
SAFECO Plaza Controller Assistant Secretary and
Seattle, WA 98185 Assistant Secretary Treasurer of SAFECO
(34) Securities, Inc. and SAFECO
Services Corporation; Vice
President, Controller,
Secretary and Treasurer of
SAFECO Asset Management
Company. See table under
"Investment Advisory and
Other Services."
-52-
<PAGE>
Position Held with Principal Occupation
Name and Address the Trust During Past 5 Years
- ---------------- ------------------ --------------------
Ronald L. Spaulding Vice President Vice Chairman of SAFECO
SAFECO Plaza Treasurer Asset Management Company;
Seattle, WA 98185 Vice President and Treasurer
(53) of SAFECO Corporation;
Director and Vice President
of SAFECO Life Insurance
Company; former senior
Portfolio Manager of SAFECO
insurance companies' taxable
bond portfolios; former
Portfolio Manager for several
SAFECO mutual funds. See
Table under "Investment
Advisory and Other Services."
* Trustees who are interested persons as defined by the 1940 Act.
COMPENSATION TABLE FOR CURRENT TRUSTEES
FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement From
Benefits Estimated Registrant and
Aggregate Accrued As Part Annual Fund Complex
Compensation of Fund Benefits Upon Paid
Trustee from Registrant Expenses Retirement to Trustees
- ------- --------------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Boh A. Dickey N/A N/A N/A N/A
Barbara J. Dingfield $7,949 N/A N/A $25,750
David F. Hill N/A N/A N/A N/A
Richard W. Hubbard $7,949 N/A N/A $24,000
Richard E. Lundgren $7,949 N/A N/A $25,750
Larry L. Pinnt $7,949 N/A N/A $25,750
John W. Schneider $7,949 N/A N/A $25,750
</TABLE>
* First elected to the Board of Trustees in August, 1996.
-53-
<PAGE>
Currently, there is no pension, retirement, or other plan or any arrangement
pursuant to which Trustees or officers of the Trust are compensated by the
Trust. Each Trustee also serves as Trustee for five other registered open-end
management investment companies that have, in the aggregate, twenty-three
series companies managed by SAM.
The officers of the Trust receive no compensation for their service as officers
or, if applicable, as Trustees.
At April 2, 1997, 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
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:
SAFECO SAFECO
Name Trust SAM Securities Services
---- ----- --- ---------- --------
B. A. Dickey Chairman Director
Trustee Chairman
D. F. Hill President Senior Vice President President
Trustee President Director Director
Director Secretary Secretary
-54-
<PAGE>
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
D.H. Longhurst Assistant Assistant Assistant
Controller Controller Controller
Mr. Dickey is President, Chief Operating Officer and a Director of SAFECO
Corporation and Mr. Spaulding is a Treasurer and Vice President of SAFECO
Corporation. Messrs. Dickey and Spaulding are also Directors of other SAFECO
Corporation subsidiaries.
In connection with its investment advisory contract with 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 the Trust will indemnify its
Trustees and its officers against liabilities and expenses reasonably incurred
in connection with litigation in which they may be involved because of their
offices with the Trust, unless it is adjudicated that they engaged in bad faith,
wilful misfeasance, gross negligence, or reckless disregard of the duties
involved in the conduct of their offices. In the case of settlement, such
indemnification will not be provided unless it has been determined -- by a court
or other body approving the settlement or other disposition, or by a majority of
disinterested Trustees, based upon a review of readily available facts, or in a
written opinion of independent counsel -- that such officers or Trustees have
not engaged in wilful misfeasance, bad faith, gross negligence, or reckless
disregard of their duties.
SAM also serves as the investment adviser for other investment companies in
addition to the Funds. Several of these investment companies have investment
objectives similar to those of certain Funds. It is therefore possible that the
same securities will be purchased for both a Fund and another investment company
advised by SAM. When two or more funds advised by SAM are simultaneously
engaged in the purchase or sale of the same security, the prices and amounts
will be allocated in a manner considered by the officers of the funds involved
to be equitable to each fund. It is expected that the opportunity to
participate in volume transactions will produce better
-55-
<PAGE>
executions and prices for a Fund generally. In some cases, the price of a
security allocated to one Fund may be higher or lower than the price of a
security allocated to another Fund.
For the services and facilities furnished by SAM, each Fund has agreed to pay an
annual fee computed on the basis of the average market value of the net assets
of each Fund ascertained each business day and paid monthly in accordance with
the following schedules. The reduction in fees occurs only at such time as the
respective Fund's net assets reach the dollar amounts of the break points and
applies only to those assets that fall within the specified range:
GROWTH, EQUITY AND INCOME FUNDS
NET ASSETS ANNUAL FEE
$0 - $100,000,000 .75 of 1%
$100,000,001 - $250,000,000 .65 of 1%
$250,000,001 - $500,000,000 .55 of 1%
Over $500,000,000 .45 of 1%
NORTHWEST FUND
NET ASSETS ANNUAL FEE
$0 - $250,000,000 .75 of 1%
$250,000,001 - $500,000,000 .65 of 1%
$500,000,001 - $750,000,000 .55 of 1%
Over $750,000,000 .45 of 1%
BALANCED AND VALUE FUNDS
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%
-56-
<PAGE>
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%
The following table states the total amounts of compensation paid to SAM for
the past three fiscal years or period for the Growth, Equity, Income, and
Northwest Funds:
Fiscal Year or Period Ended
For the Three
Month Period Ended
December 31, September 30, September 30,
1996 1996 1995
------------------ ------------- -------------
Growth Fund $ $1,260,000 $1,107,000
Equity Fund $ $3,752,000 $3,151,000
Income Fund $ $1,597,000 $1,348,000
Northwest Fund $ $ 305,000 $ 269,000
The total amount of compensation paid to SAM for the Balanced, International,
and Small Company Funds for the period from January 31, 1996 through
December 31, 1996 was $_______, $_______, and $_______, respectively.
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.
-57-
<PAGE>
TRANSFER AGENT. SAFECO Services, SAFECO Plaza, Seattle, Washington 98185 is the
transfer, dividend and distribution disbursement and shareholder servicing agent
for No-Load Class 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 No-Load
Class shareholders, records of transactions involving each Fund's No-Load 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:
Fiscal Year or Period Ended*
For the Three
Month Period Ended
December 31, September 30, September 30,
1996 1996 1995
------------------ ------------ ------------
Growth Fund $ $ 384,000 $ 305,000
Equity Fund $ $1,203,000 $1,018,000
Income Fund $ $ 359,000 $ 298,000
Northwest Fund $ $ 105,000 $ 97,000
* The fees paid to SAFECO Services reflect fees of $3.10 per shareholder
transaction until July, 1996 when the new fee schedule went into effect.
The fees paid by the Balanced, International, and Small Company Funds during
the period from January 31, 1996 through December 31, 1996 were $______
$______, and $______, respectively.
SAFECO Securities is the principal underwriter for No-Load Class of each Fund
and distributes each Fund's No-Load Class shares on a continuous best efforts
basis under an Agreement with the Trust. SAFECO Securities is not compensated
by the Trust or the Funds for underwriting, distribution or other activities in
connection with No-Load Class shares.
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
-58-
<PAGE>
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 to any broker or dealer for
research services or for any other reason. During the fiscal period ended
December 31, 1996, for the Growth, Income, Equity, Northwest, Balanced and
Small Company 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 or period for the Growth, Equity, Income
and Northwest Funds:
Fiscal Year or Period Ended
For the Three
Month Period Ended
December 31, September 30, September 30,
1996 1996 1995
------------------ ------------ ------------
Growth Fund $ $ 518,092 $ 489,983
Equity Fund $ $1,224,644 $1,082,137
Income Fund $ $ 286,999 $ 159,717
Northwest $ $ 13,599 $ 6,536
The total amount of brokerage expenses for the Balanced, International, and
Small Company Funds during the period ended December 31, 1996 was $______,
$______, and $______, respectively.
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. The Trust has elected to be
governed by Rule 18f-1 under the Investment Company Act of 1940, pursuant to
which each Fund must redeem shares tendered by a shareholder of a Fund solely in
cash up to the lesser of $250,000 or 1% of a net asset value of a Fund during
any 90-day period. Any shares tendered by the shareholder in excess of the
above-mentioned limit may be redeemed through distribution of a Fund's assets.
Any securities or other property so distributed in kind shall be valued by the
same method as is used in computing NAV. Distributions in kind will be made in
readily marketable securities, unless the investor elects otherwise. Investors
may incur brokerage costs in disposing of securities received in such a
distribution in kind.
FINANCIAL STATEMENTS
The following financial statements for the Growth, Equity, Income, Northwest,
International, Balanced and Small Company Funds and the report thereon of Ernst
& Young LLP, independent auditors, are incorporated herein by reference to the
Common Stock Trust's Annual Report for the period ended December 31, 1996.
Portfolio of Investments as of December 31, 1996
Statement of Assets and Liabilities as of December 31, 1996
Statement of Operations for the Period Ended December 31, 1996
Statement of Changes in Net Assets for the Period Ended
December 31, 1996 and Year Ended December 31, 1995
Notes to Financial Statements
-59-
<PAGE>
A copy of the Trust's Annual Report accompanies this Statement of Additional
Information. Additional copies may be obtained by calling SAFECO Services at
1-800-426-6730 nationwide or 206-545-5530 in Seattle 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
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations with an original maturity not exceeding one
year.
Prime-1: Issuers (or supporting institutions) rated Prime-1 (P-1) have a
superior ability for repayment of senior short-term debt obligations. P-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2: Issuers (or supporting institutions) rated Prime-2 (P-2) have a strong
ability for repayment of senior short-term obligations. This will normally be
evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
S&P
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
A-1: This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
-60-
<PAGE>
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
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 subordinate to, a debt issue.
EXCERPTS FROM MOODY'S DESCRIPTION OF ITS PREFERRED STOCK RATINGS:
aaa -- An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
aa -- An issue which is rated "aa" is considered a high-grade preferred stock.
This rating indicates that there is a reasonable assurance the earnings and
asset protection will remain relatively well-maintained in the foreseeable
future.
a -- An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classification, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
baa -- An issue which is rated "baa" is considered to be an upper-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 -- An issue which is rated "ba" is 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 -- An issue which is rated "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 -- An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future
status of payments.
ca -- An issue which is rated "ca" is speculative in a high degree and is likely
to be in arrears on dividends with little likelihood of eventual payments.
c -- This is the 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.
-61-
<PAGE>
EXCERPTS FROM S&P'S DESCRIPTION OF ITS PREFERRED STOCK RATINGS:
AAA -- This is the highest rating that may be assigned by S&P's to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred
stock obligations.
AA -- A preferred stock issue rated "AA" also 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 -- An issue rated "A" is 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 -- an issue rated "BBB" is regarded as 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," and "CCC" -- are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
preferred stock obligations. "BB" indicates the lowest degree of speculation
and "CCC" the highest. 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.
C -- A preferred stock rated "C" is a nonpaying issue.
D -- A preferred stock rated "D" is a nonpaying issue with the issuer in default
on debt instruments.
N.R. -- This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
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, 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.
-62-
<PAGE>
SAFECO COMMON STOCK TRUST:
SAFECO GROWTH FUND
SAFECO EQUITY FUND
SAFECO INCOME FUND
SAFECO NORTHWEST FUND
SAFECO INTERNATIONAL STOCK FUND
SAFECO BALANCED FUND
SAFECO SMALL COMPANY STOCK FUND
SAFECO U.S. VALUE 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 ____________, 1997.
The date of this Statement of Additional Information is ____________, 1997.
<PAGE>
________________________________________________________________________________
TABLE OF CONTENTS
OVERVIEW OF INVESTMENT POLICIES...............................................
INVESTMENT POLICIES OF THE GROWTH FUND........................................
INVESTMENT POLICIES OF THE EQUITY FUND........................................
INVESTMENT POLICIES OF THE INCOME FUND........................................
INVESTMENT POLICIES OF THE NORTHWEST FUND.....................................
INVESTMENT POLICIES OF THE BALANCED FUND......................................
INVESTMENT POLICIES OF THE INTERNATIONAL FUND.................................
INVESTMENT POLICIES OF THE SMALL COMPANY FUND.................................
INVESTMENT POLICIES OF THE U.S. VALUE FUND....................................
ADDITIONAL INVESTMENT INFORMATION.............................................
SPECIAL RISKS OF BELOW INVESTMENT GRADE BONDS.................................
SPECIAL RISKS OF FOREIGN INVESTMENTS AND FOREIGN CURRENCY
TRANSACTIONS..................................................................
PRINCIPAL SHAREHOLDERS OF CERTAIN FUNDS.......................................
ADDITIONAL TAX INFORMATION....................................................
CONVERSION OF ADVISOR CLASS B SHARES..........................................
ADDITIONAL INFORMATION ON CALCULATION OF NET ASSET VALUE PER
SHARE.........................................................................
ADDITIONAL PERFORMANCE INFORMATION............................................
TRUSTEES AND OFFICERS.........................................................
INVESTMENT ADVISORY AND OTHER SERVICES........................................
BROKERAGE PRACTICES...........................................................
REDEMPTION IN KIND............................................................
FINANCIAL STATEMENTS..........................................................
DESCRIPTION OF COMMERCIAL PAPER AND PREFERRED STOCK RATINGS...................
<PAGE>
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"), SAFECO Small Company Stock Fund ("Small Company
Fund") and SAFECO U.S. Value Fund ("Value 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 (except to the extent the change may
impact a Fund's borrowing limit).
Each Fund's fundamental policies may not be changed without the approval of a
"majority of its outstanding voting securities," as defined 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 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.
-1-
<PAGE>
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.
-2-
<PAGE>
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.
-3-
<PAGE>
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% 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 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
-4-
<PAGE>
than two percent (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.
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 assets would be invested in one
industry (governmental issues of securities are not considered part of any
one industry).
-5-
<PAGE>
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 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 without
shareholder approval:
-6-
<PAGE>
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 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.
-7-
<PAGE>
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 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.
-8-
<PAGE>
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, directors or security holders is an officer or
Trustee 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 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.
-9-
<PAGE>
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 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.
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.
-10-
<PAGE>
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.
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).
-11-
<PAGE>
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.
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.
-12-
<PAGE>
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 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.
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.
-13-
<PAGE>
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 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.
-14-
<PAGE>
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;
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;
7. Lend any security or make any loan if, as a result, more than 33 1/3% of
its total assets would be lent to other parties; however, this limit does
not apply to purchases of debt securities or to repurchase agreements; and
8. Purchase or sell real estate, except real estate investment trusts.
-15-
<PAGE>
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 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.
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 more than 10% of its total assets in
real estate investment trusts, nor will the Fund invest in interests in
real estate investment trusts that are not readily marketable or interests
in real estate limited partnerships not listed or traded on the Nasdaq
Stock Market ("Nasdaq") 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.
-16-
<PAGE>
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.
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 commodities or commodity
contracts.
-17-
<PAGE>
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 International Fund's total assets would be invested in the securities
of such issuer or the International 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 International 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 International 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
International 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 International
Fund may purchase or sell options or futures contracts and invest in
securities or other instruments backed by physical commodities;
7. Lend any security or make any loan if, as a result, more than 33 1/3% of
its total assets would be lent to other parties; however, this limit does
not apply to purchases of debt securities or to repurchase agreements; and
8. Purchase or sell real estate, except real estate investment trusts.
-18-
<PAGE>
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 without
shareholder approval:
1. The International 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 International 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 International 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 International Fund will not invest in oil, gas or other mineral
exploration, development programs or leases.
5. The International 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 International Fund will not invest more than 10% of its total assets
in real estate investment trusts, nor will the Fund invest in interests in
real estate investment trusts that are not readily marketable or interests
in real estate limited partnerships not listed or traded on Nasdaq 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 International 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 International 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
-19-
<PAGE>
will not purchase any securities while borrowings equal to or greater than 5% of
its total assets are outstanding.
9. The International 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 International 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 International 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 International 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 International 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.
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 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;
-20-
<PAGE>
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;
7. Lend any security or make any loan if, as a result, more than 33 1/3% of
its total assets would be lent to other parties; however, this limit does
not apply to purchases of debt securities or to repurchase agreements; and
8. Purchase or sell real estate, except real estate investment trusts.
NON-FUNDAMENTAL INVESTMENT POLICIES
In addition to the policies described in the Prospectus, the Small Company Fund
has adopted the following non-fundamental policies which may be changed 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
-21-
<PAGE>
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 more than 10% of its total assets
in real estate investment trusts, nor will the Fund invest in interests in
real estate investment trusts that are not readily marketable or interests
in real estate limited partnerships not listed or traded on Nasdaq 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.
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.
-22-
<PAGE>
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 commodities or commodity
contracts.
Fundamental Policies
U.S. Value 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 U.S. Value Fund's total assets would be invested in the
securities of such issuer of the U.S. Value 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 U.S. Value 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 U.S. Value Fund may be deemed
an underwriter under federal securities laws;
4. Issue senior securities, except as permitted under the 1940 Act, the
rules or regulations promulgated thereunder or pursuant to a no-action
letter or an exemptive order issued by the Securities and Exchange
Commission;
5. Purchase the securities of any issuer (except the U.S. Government, its
agencies or instrumentalities) if, as a result, more than 25% of the
U.S. Value 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 U.S. Value
Fund may purchase or sell options or futures contracts and invest in
securities or other instruments backed by physical commodities;
7. Lend any security or make any loan if, as a result, more than 33 1/3% of
its total assets would be lent to other parties; however, this limit
does not apply to purchases of debt securities or to repurchase
agreements; and
8. Purchase or sell real estate, except real estate investment trusts.
NON-FUNDAMENTAL INVESTMENT POLICIES
1. The U.S. Value 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 U.S. Value 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 U.S. Value 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 U.S. Value Fund will not invest in oil, gas or other mineral
exploration, development programs or leases;
5. The U.S. Value Fund will not invest more than 5% of its net assets in
warrants. Warrants acquired by the Fund in units or attached to
securities are not subject to the 5% limit;
6. The U.S. Value Fund will not invest more than 10% of its total assets in
real estate investment trusts, nor will the Fund invest in interests in
real estate investment trusts that are not readily marketable or
interests in real estate limited partnerships not listed or traded on
the Nasdaq Stock Market if, as a result, the sum of such interests
considered illiquid and other illiquid securities would exceed 15% of
the Fund's net assets;
7. The U.S. Value 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 margin;
8. The U.S. Value 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 U.S. Value 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 cannot be sold or disposed of in the
ordinary course of business at approximately the prices at which they
are valued;
10. The U.S. Value 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 U.S. Value 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 U.S. Value Fund may invest in restricted securities eligible for
resale under Rule 144A, provided that SAM has determined that such
securities are liquid under guidelines adopted by the Board of Trustees;
13. The U.S. Value 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 U.S. Value 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; and
15. The U.S. Value Fund will not purchase or sell commodities or commodity
contracts.
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, 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
-23-
<PAGE>
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.
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. 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
-24-
<PAGE>
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 ("CDs") must be issued by banks or
savings and loan associations that have total assets of at
least $1 billion or, in the case of a bank or savings and loan
association not having total assets of at least $1 billion, the
bank or savings and loan association is insured by the Federal
Deposit Insurance Corporation ("FDIC"). The Growth Fund's
investments in CDs issued by FDIC-insured banks or savings and
loans having less than $1 billion in assets will be limited in
to amount the statutory insurance coverage provided by FDIC.
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.
-25-
<PAGE>
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. The Funds do not
intend to purchase illiquid securities, but the market for some
securities may become illiquid following purchase by the Fund. 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.
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
-26-
<PAGE>
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" for more information.
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 (i) without additional cash consideration (or
for additional cash consideration held in a segregated account by its
custodian), or (ii) upon the Fund's conversion or exchange of other
securities held in its portfolio, or (iii) 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.
-27-
<PAGE>
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: (i) 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 (ii) 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 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
-28-
<PAGE>
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 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
-29-
<PAGE>
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 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: (i) 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 (ii) 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,
-30-
<PAGE>
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 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
-31-
<PAGE>
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 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 as described above, 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"
-32-
<PAGE>
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.
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."
-33-
<PAGE>
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 though their 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 their 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
-34-
<PAGE>
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 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
-35-
<PAGE>
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 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
-36-
<PAGE>
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 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
-37-
<PAGE>
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.
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.
-38-
<PAGE>
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 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
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 may
-39-
<PAGE>
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. 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 (including banks) realize a profit
-40-
<PAGE>
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; counterparty 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.
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:
-41-
<PAGE>
(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 April 2, 1997 SAFECO Insurance Company of America ("SAFECO Insurance")
owned 500,000 shares of the Northwest Fund which represented ____% of the
Fund's outstanding shares. At April 2, 1997, SAM owned 500,000 shares of
each of the Balanced Fund and International Fund, which represented ____% of
the Balanced Fund's, and ____% of the International Fund's outstanding
shares. At April 2, 1997, SAFECO Corporation owned 500,000 shares of the
Small Company Fund which represented ____% of the Fund's outstanding shares.
At ____________, 1997, SAM owned 500,000 shares of the Value Fund, which
represented 100% 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. Principal shareholders of a Fund may control the
outcome of a shareholder vote.
ADDITIONAL TAX INFORMATION
Each Fund intends to continue to qualify as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986 ("Code"). In order
to qualify for treatment as a regulated investment company under the Code, a
Fund must distribute to its shareholders for each taxable year at least 90%
of its investment company taxable income (consisting generally of taxable net
investment income and net short-term capital gain). Each Fund intends to
make sufficient distributions to shareholders to relieve it from liability
for federal excise and income taxes.
Each Fund is treated as a separate corporation for federal income tax purposes.
The excess of net long-term capital gains over net short-term capital loss
realized by a Fund on portfolio transactions, when distributed by the Fund, is
subject to long-term capital gains treatment under the Code, regardless of how
long you have held the shares of the Fund. Distributions of net short-term
capital gains realized from portfolio transactions are treated as ordinary
income for federal income tax purposes. The tax consequences described above
apply whether distributions are taken in cash or in additional shares.
Redemptions and exchanges of shares of a Fund may result in a capital gain or
loss for federal income tax purposes.
-42-
<PAGE>
If shares of a Fund are sold at a loss after being held for one year or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for any distribution, the shareholder will pay full price for the
shares and receive some portion of the purchase price back as a taxable
dividend or capital gain distribution.
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 be 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) 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 and any other Fund that invests in foreign securities may
be required to pay withholding or other taxes to a foreign government. If so,
the taxes will reduce the Fund's 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 would generally be 30%.
Amounts withheld for foreign taxes will reduce the amount of dividend
distributions to shareholders, but will be included in shareholders taxable
income. However, the Fund intends to make an election which will allow
shareholders to claim an offsetting credit or deduction on their tax return for
their share of foreign taxes paid by the Fund.
Each Fund is required to withhold 31% of all taxable dividends, capital gain
distributions and redemption proceeds payable to individuals and certain other
noncorporate shareholders who do not furnish the Fund with a correct taxpayer
identification number. Withholding at that rate also is required from dividends
and those distributions for shareholders who otherwise are subject to backup
withholding.
-43-
<PAGE>
If the International Fund's dividends exceed its taxable income in any year
because of currency-related losses or otherwise, all or a portion of the Fund's
dividends may be treated as a return of capital to shareholders for tax
purposes. To minimize the risk of a return of capital, the Fund may adjust its
dividends to take currency fluctuations into account, causing the dividends to
vary. Any return of capital will reduce the cost basis of your shares resulting
in a higher reported capital gains or a lower reported capital loss when you
sell your shares.
These are tax requirements that all mutual funds must follow in order to avoid
federal taxation. The Funds may have to limit investment activity in some types
of securities in order to adhere to these requirements.
CONVERSION OF ADVISOR CLASS B SHARES
Advisor Class B shares of a Fund will automatically convert to Advisor Class A
shares of that Fund, based on the relative net asset values per share ("NAVs")
of the Classes, within the first month following the sixth anniversary of the
shareholder's purchase of such Advisor Class B shares . For the purpose of
calculating the holding period required for conversion of Advisor Class B shares
of each Fund except the Money Market Fund, the date of purchase shall mean
(1) the date on which such Advisor Class B shares were purchased or (2) for
Advisor Class B shares obtained through an exchange, or a series of exchanges,
the date on which the original Advisor Class B shares were purchased. For the
purpose of calculating the holding period required for conversion of Advisor
Class B shares of the Money Market Fund, the date of purchase shall mean the
date on which those shares were first exchanged for Advisor Class B shares of
any other SAFECO Fund. Holders of Class B shares of the SAFECO Advisor Series
Trust ("Advisor Series Shares") who 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
also convert to Advisor Class A shares. The portion will be determined by the
ratio that the shareholder's Advisor Class B shares converting to Advisor Class
A shares bears to the shareholder's total Advisor Class B shares not acquired
through dividends and other distributions.
ADDITIONAL INFORMATION ON CALCULATION OF NET ASSET VALUE PER SHARE
Each Fund determines its NAV by subtracting its liabilities (including accrued
expenses and dividends payable) from its total assets (the market value of the
securities the Fund holds plus cash and other assets, including interest accrued
but not yet received) and dividing the result by the total number of shares
outstanding. The NAVs of the Advisor classes of each Fund are calculated as of
the close of regular trading on the New York Stock Exchange ("Exchange",
normally 1:00 p.m. Pacific Time, every day the Exchange is open for trading.
The Exchange is closed on the following
-44-
<PAGE>
days: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. NAV is determined
separately for each class of shares of each Fund.
Short-term debt securities held 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 until the 61st day prior to maturity. All other
securities and assets in the portfolios will be appraised in accordance with
those procedures established by the Board of Trustees in good faith in computing
the fair market value of those assets.
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 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 December 31, 1996, for the Growth, Equity and Income Funds
would have been as follows:
-45-
<PAGE>
1 Year 5 Years 10 Years
------ ------- --------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
Growth Fund % % % % % %
Equity Fund % % % % % %
Income Fund % % % % % %
The total returns, expressed as a percentage, for the one-year, five year and
since-inception (70 months) periods ended December 31, 1996, for the
Northwest Fund would have been as follows:
1 Year 5 Year Since Initial
------ ------ Effective Date
(67 Months)
--------------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
Northwest Fund % % % % % %
The total returns, expressed as a percentage, for the eleven month period
from inception to December 31, 1996, for the Balanced, International, and
Small Company Funds were as follows:
4 Month Period from
Inception to September 30, 1996
-------------------------------
Balanced Fund %
International Fund %
Small Company Fund %
The total returns, expressed in dollars and assuming a $10,000 initial
investment, for the one-, five-and ten-year periods ended December 31, 1996,
for the Growth, Equity and Income Funds would have been as follows:
1 Year 5 Years 10 Years
------ ------- --------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
Growth Fund $ $ $ $ $ $
Equity Fund $ $ $ $ $ $
Income Fund $ $ $ $ $ $
The total returns, expressed in dollars and assuming a $10,000 initial
investment, for the one year, five year and since-inception (70 months)
periods ended December 31, 1996, for the Northwest Fund would have been as
follows:
-46-
<PAGE>
1 Year 5 Year Since Initial
------ ------ Effective Date
(70 Months)
--------------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
Northwest Fund $ $ $ $ $ $
The total returns, expressed in dollars and assuming a $10,000 initial
investment, for the eleven month period from inception to December 31, 1996
for the Balanced, International and Small Company Funds were as follows:
11 Month Period from Inception
to December 31, 1996
------------------------------
Balanced Fund $
International Fund $
Small Company Fund $
The average annual total returns for the one-, five- and ten-year periods
ended December 31, 1996, for the Growth, Equity and Income Funds would have
been as follows:
1 Year 5 Years 10 Years
------ ------- --------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
Growth Fund % % % % % %
Equity Fund % % % % % %
Income Fund % % % % % %
The average annual total returns for the one year, five year and
since-inception (70 months) periods ended December 31, 1996, for the
Northwest Fund would have been as follows:
1 Year 5 Year Since Initial
------ ------ Effective Date
(70 Months)
--------------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
Northwest Fund % % % % % %
-47-
<PAGE>
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:
n
T = P(1+A)
The average annual total return is computed using the following formula:
A = (nth-root(ERV/P - 1)) x 100
Where: T = total return
A = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical 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, if any, for each Class is applied.
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 also describe in their endorsements the
methodology used by rating services to arrive at Fund ratings. In addition, the
Funds may also advertise individual measurements of Fund performance published
by the rating services, including, but not limited to: a Fund's beta, standard
deviations, and price earnings ratio.
-48-
<PAGE>
The Funds may occasionally reproduce articles or portions of articles about the
Funds written by independent third parties such as financial writers, financial
planners and financial analysts, which have appeared in financial publications
of general circulation or financial newsletters (including but not limited to
BARRONS, BUSINESS WEEK, FABIANS, FORBES, FORTUNE, INVESTOR'S BUSINESS DAILY,
KIPLINGER'S, MONEY MAGAZINE, MORNINGSTAR MUTUAL FUNDS, MUTUAL FUNDS FORECASTER,
MUTUAL FUNDS MAGAZINE, NEWSWEEK, NO-LOAD FUNDS MAGAZINE, NO-LOAD FUNDS X,
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.
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
-49-
<PAGE>
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.
TRUSTEES AND OFFICERS
Position Held with Principal Occupation
Name and Address the Trust During Past 5 Years
- ---------------- ------------------ --------------------
Boh A. Dickey* Chairman and President, Chief Operating
SAFECO Plaza Trustee Officer and Director of
Seattle, WA 98185 SAFECO Corporation.
(52) Previously, Executive Vice
President and Chief
Financial Officer. He has
been an executive officer
of SAFECO Corporation and
its subsidiaries since
1982. See table under
"Investment Advisory and
Other Services."
Barbara J. Dingfield Trustee Manager, Corporate
Microsoft Corporation Contributions and
One Microsoft Way Community Programs for
Redmond, WA 98052 Microsoft Corporation,
(51) Redmond, Washington, a
computer software company;
Director and former
Executive Vice President
of Wright Runstad & Co.,
Seattle, Washington, a
real estate development
company; Director of
First SAFECO National Life
Insurance Company of New
York.
-50-
<PAGE>
David F. Hill* President President of SAFECO
SAFECO Plaza Trustee Securities Inc. and SAFECO
Seattle, WA 98185 Services Corporation;
(48) Senior Vice President of
SAFECO Asset Management
Company. See table under
"Investment Advisory and
Other Services."
Richard W. Hubbard* Trustee Retired Vice President and
1270 NW Blakely Ct. Treasurer of the Trust and
Seattle, WA 98177 other SAFECO Trusts;
(67) retired Senior Vice
President and Treasurer of
SAFECO Corporation; former
President of SAFECO Asset
Management Company;
Director of First SAFECO
National Life Insurance
Company of New York.
Richard E. Lundgren Trustee Director of Marketing and
764 S. 293rd Street Customer Relations,
Federal Way, WA 98032 Building Materials
(59) Distribution, Weyerhaeuser
Company, Tacoma,
Washington; Director of
First SAFECO National Life
Insurance Company of New
York.
Larry L. Pinnt Trustee Retired Vice President and
1600 Bell Plaza Chief Financial Officer of
Room 1802 US WEST Communications,
Seattle, WA 98191 Seattle, Washington;
(62) Director of Key Bank 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.
-51-
<PAGE>
John W. Schneider Trustee President of Wallingford
1808 N 41st St. Group, Inc., an
Seattle, WA 98103 international trading and
(55) business/real estate
development consulting
firm, Seattle, Washington;
former President of Coast
Hotels, Inc., Seattle,
Washington; Director of
First SAFECO National Life
Insurance Company of New
York.
Neal A. Fuller Vice President Vice President,
SAFECO Plaza Controller Controller, Assistant
Seattle, WA 98185 Assistant Secretary Secretary and Treasurer of
(34) SAFECO Securities, Inc.
and SAFECO Services
Corporation; Vice
President, Controller,
Secretary and Treasurer of
SAFECO Asset Management
Company. See table under
"Investment Advisory and
Other Services."
Ronald L. Spaulding Vice President Vice Chairman of SAFECO
SAFECO Plaza Treasurer Asset Management Company;
Seattle, WA 98185 Vice President and
(53) Treasurer of SAFECO
Corporation; Director and
Vice President of SAFECO
Life Insurance Company;
former senior Portfolio
Manager of SAFECO
insurance companies'
taxable bond portfolios;
former Portfolio Manager
for several SAFECO mutual
funds. See Table under
"Investment Advisory and
Other Services."
* Trustees who are interested persons as defined by the 1940 Act.
-52-
<PAGE>
COMPENSATION TABLE FOR CURRENT TRUSTEES
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement From
Benefits Estimated Registrant and
Aggregate Accrued As Part Annual Benefits Fund Complex
Compensation of Fund Upon Paid
Trustee from Registrant Expenses Retirement to Trustees
------- --------------- --------------- --------------- --------------
<C> <S> <S> <S> <S>
Boh A. Dickey N/A N/A N/A N/A
Barbara J. Dingfield $7,949 N/A N/A $25,750
David F. Hill* N/A N/A N/A N/A
Richard W. Hubbard $7,949 N/A N/A $24,000
Richard E. Lundgren $7,949 N/A N/A $25,750
Larry L. Pinnt $7,949 N/A N/A $25,750
John W. Schneider $7,949 N/A N/A $25,750
</TABLE>
* First elected to the Board of Trustees in August, 1996.
Currently, there is no pension, retirement, or other plan or any arrangement
pursuant to which Trustees or officers of the Trust are compensated by the
Trust. Each Trustee also serves as Trustee for five other registered
open-end management investment companies that have, in the aggregate,
twenty-three series companies managed by SAM.
The officers of the Trust receive no compensation for their service as officers
or, if applicable, as Trustees.
At April 2, 1997, 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
-53-
<PAGE>
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 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:
SAFECO SAFECO
Name Trust SAM Securities Services
---- ----- --- ---------- --------
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 Vice President Vice
Controller President Controller President
Assistant Controller Assistant Controller
Secretary Secretary Secretary Assistant
Treasurer Treasurer Secretary
Treasurer
R.L. Spaulding Vice President Vice Chairman Director Director
Treasurer Director
S. C. Bauer President
Director
D.H. Longhurst Assistant Assistant Assistant
Controller Controller Controller
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 the Trust will indemnify its
Trustees and its officers against liabilities and expenses reasonably incurred
in connection with litigation in which they may be involved because of their
offices with the Trust, unless it is adjudicated that they engaged in bad faith,
wilful misfeasance, gross negligence, or reckless disregard of the duties
-54-
<PAGE>
involved in the conduct of their offices. In the case of settlement, such
indemnification will not be provided unless it has been determined -- by a court
or other body approving the settlement or other disposition, or by a majority of
disinterested Trustees, based upon a review of readily available facts, or in a
written opinion of independent counsel -- that such officers or Trustees have
not engaged in wilful misfeasance, bad faith, gross negligence, or reckless
disregard of their duties.
SAM also serves as the investment adviser for other investment companies in
addition to the Funds. Several of these investment companies have investment
objectives similar to those of certain Funds. It is therefore possible that
the same securities will be purchased for both a Fund and another investment
company advised by SAM. When two or more funds advised by SAM are
simultaneously engaged in the purchase or sale of the same security, the
prices and amounts will be allocated in a manner considered by the officers
of the funds involved to be equitable to each fund. It is expected that the
opportunity to participate in volume transactions will produce better
executions and prices for a Fund, generally. In some cases, the price of the
security allocated to one Fund may be higher or lower than the price of a
security allocated to another Fund.
For the services and facilities furnished by SAM, each Fund has agreed to pay an
annual fee computed on the basis of the average market value of the net assets
of each Fund ascertained each business day and paid monthly in accordance with
the following schedules. The reduction in fees occurs only at such time as the
respective Fund's net assets reach the dollar amounts of the break points and
applies only to those assets that fall within the specified range:
GROWTH, EQUITY AND INCOME FUNDS
NET ASSETS ANNUAL FEE
$0 - $100,000,000 .75% of 1%
$100,000,001 - $250,000,000 .65% of 1%
$250,000,001 - $500,000,000 .55% of 1%
Over $500,000,000 .45% of 1%
NORTHWEST FUND
NET ASSETS ANNUAL FEE
$0 - $250,000,000 .75 of 1%
$250,000,001 - $500,000,000 .65 of 1%
$500,000,001 - $750,000,000 .55 of 1%
Over $750,000,000 .45 of 1%
-55-
<PAGE>
BALANCED AND VALUE FUNDS
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%
The following table states the total amounts of compensation paid to SAM for
the past three fiscal years or period for the Growth, Equity, Income and
Northwest Funds:
-56-
<PAGE>
FISCAL YEAR OR PERIOD ENDED
For the Three Month
Period Ended September 30, September 30,
December 31, 1996 1996 1995
------------------- ------------ ------------
Growth Fund $ $1,260,000 $1,107,000
Equity Fund $ $3,752,000 $3,151,000
Income Fund $ $1,597,000 $1,348,000
Northwest Fund $ $ 305,000 $ 269,000
The total amount of compensation paid to SAM for the Balanced, International,
and Small Company Fund for the period from January 31, 1996 through December
31, 1996 was $________, $________, and $________, respectively.
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.
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.
-57-
<PAGE>
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.
TRANSFER AGENT. 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.
-58-
<PAGE>
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
period:
Fiscal Year or Period Ended
For the Three Month
Period Ended September 30, September 30,
December 31, 1996 1996 1995
------------------- ------------ ------------
Growth Fund $ $ 384,000 $ 305,000
Equity Fund $ $1,203,000 $1,018,000
Income Fund $ $ 359,000 $ 298,000
Northwest Fund $ $ 105,000 $ 97,000
- ------------------
The fees paid by the Balanced, International and Small Company Fund
during the period from January 31, 1996 through December 31, 1996 were
$_______, $_______, and $_______, respectively.
The fees paid to SAFECO Services reflect fees of $3.10 per shareholder
transaction until July, 1996 when the new fee schedule went into effect.
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 to any broker or dealer for research services or for
any other reason. During the fiscal period ended December 31, 1996, for the
Growth, Income, Equity and Northwest, Balanced, Small Company, and
International Funds, 100% of each Fund's total brokerage expenses were
commissions paid to brokers providing research services.
-59-
<PAGE>
The following table states the total amount of brokerage expense for each
Fund for the past three fiscal years or period for the Growth, Equity, Income
and Northwest Funds:
Fiscal Year or Period Ended
For the Three Month
Period Ended September 30, September 30,
December 31, 1996 1996 1995
------------------- ------------ ------------
Growth Fund $ $ 518,092 $ 489,983
Equity Fund $ $1,224,694 $1,082,137
Income Fund $ $ 286,999 $ 159,717
Northwest Fund $ $ 13,599 $ 6,536
The total amount of brokerage expenses for the Balanced, International and
Small Company Funds during the period ended December 31, 1996 were $_______,
$_______, and $_______, respectively.
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 18f-1 under the Investment Company Act of 1940, pursuant to
which each Fund must redeem shares tendered by a shareholder of a Fund solely in
cash up to the lesser of $250,000 or 1% of a net asset value of a Fund during
any 90-day period. Any shares tendered by the shareholder in excess of the
above-mentioned limit may be redeemed through distribution of a Fund's assets.
Any securities or other property so distributed in kind shall be valued by the
same method as is used in computing NAV. Distributions in kind will be made in
readily marketable securities, unless the investor elects otherwise. Investors
may incur brokerage costs in disposing of securities received in such a
distribution in kind.
FINANCIAL STATEMENTS
The following financial statements for the Growth, Equity, Income, Northwest,
International, Balanced and Small Company Funds and the report thereon of
Ernst & Young LLP, independent auditors, are incorporated herein by reference
to the Trust's Annual Report for the periods, ended December 31, 1996.
Portfolio of Investments as of December 31, 1996
Statement of Assets and Liabilities as of December 31, 1996
Statement of Operations for the Year Ended December 31, 1996
Statement of Changes in Net Assets for the Years Ended December 31, 1996
and December 31, 1995
Notes to Financial Statements
-60-
<PAGE>
A copy of the Trust's 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
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations with an original maturity not exceeding one
year.
Prime-1: Issuers (or supporting institutions) rated Prime-1 (P-1) have a
superior ability for repayment of senior short-term debt obligations. P-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2: Issuers (or supporting institutions) rated Prime-2 (P-2) have a strong
ability for repayment of senior short-term obligations. This will normally be
evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
S&P
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days.
A-1: This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
-61-
<PAGE>
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 -- An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
aa -- An issue which is rated "aa" is considered a high-grade preferred stock.
This rating indicates that there is a reasonable assurance the earnings and
asset protection will remain relatively well-maintained in the foreseeable
future.
a -- An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classification, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
baa -- An issue which is rated "baa" is considered to be an upper-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 -- An issue which is rated "ba" is 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 -- An issue which is rated "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 -- An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future
status of payments.
ca -- An issue which is rated "ca" is speculative in a high degree and is likely
to be in arrears on dividends with little likelihood of eventual payments.
c -- This is the 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.***
-62-
<PAGE>
EXCERPTS FROM S&P'S DESCRIPTION OF ITS PREFERRED STOCK RATINGS:
AAA -- This is the highest rating that may be assigned by S&P's to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred
stock obligations.
AA -- A preferred stock issue rated "AA" also 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 -- An issue rated "A" is 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 -- an issue rated "BBB" is regarded as 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," AND "CCC" -- are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest. 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.
"C" -- A preferred stock rated "C" is a nonpaying issue.
"D" -- A preferred stock rated "D" is a nonpaying issue with the issuer in
default on debt instruments.
N.R. -- This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
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, 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.
-63-
<PAGE>
SAFECO COMMON STOCK TRUST
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
Financial Highlights for a single No-Load Class share (and a single
Advisor Class A and Advisor Class B Share for the fiscal period
ended December 31, 1996) of SAFECO Growth Fund, SAFECO Equity Fund
and SAFECO Income Fund for (i) the fiscal period ended December 31,
1996, (ii) each of the nine fiscal years in the period ended
September 30, 1996; (iii) Financial Highlights for the SAFECO
Northwest Fund for the period from February 7, 1991 (Initial Public
Offering) to December 31, 1991, the fiscal year ended December 31,
1992, the nine month period ended September 30, 1993 and for each
of the three fiscal years in the period ended September 30, 1996;
and (iv) Financial Highlights for SAFECO Balanced Fund, SAFECO
International Stock Fund and SAFECO Small Company Stock Fund for
the period from January 31, 1996 (Initial Public Offering) to
December 31, 1996. Included in Part A of this Registration
Statement Financial Statements for each of these Funds for the
fiscal period ended December 31, 1996 and the report thereon of
Ernst & Young LLP, independent auditors, are incorporated by
reference into Part B of this Registration Statement and will be
filed with the SEC on or about February 26, 1996 for SAFECO Common
Stock Trust.
Financial Highlights for a single No-Load Class share (and a single
Advisor Class A and Advisor Class B Share for the fiscal period
ended December 31, 1996) of SAFECO Municipal Bond Fund, SAFECO
California Tax-Free Income Fund for (i) the fiscal period ended
December 31, 1996, (ii) for each of the nine fiscal years in the
period ended March 31, 1996 and (iii) SAFECO Washington State
Municipal Bond Fund for the period from March 18, 1993 (Initial
Public Offering) to March 31, 1993 and for each of the three fiscal
years in the period ended March 31, 1996, are included in Part A of
this Registration Statement. Financial Statements for each of these
Funds for the fiscal period ended December 31, 1996 and the report
thereon of Ernst & Young LLP, independent auditors, will be
incorporated by reference into Part B of the Registration Statement
of SAFECO Tax-Exempt Bond Trust and will be filed with the SEC on
or about February 26, 1997 for SAFECO Tax-Exempt Bond Trust.
Financial Highlights for a single No-Load Class share (and a single
Advisor Class A and Advisor Class B Share for the fiscal period
ended December 31, 1996) of SAFECO Money Market Fund for (i) the
fiscal period ended December 31, 1996, (ii) each of the nine fiscal
years in the period ended March 31, 1996, are included in Part A of
this Registration Statement. Financial Statements for the fiscal
period ended December 31, 1996 and the report thereon of Ernst &
Young LLP, independent auditors will be incorporated by reference
into Part B of the Registration Statement of SAFECO Money Market
Trust and will be filed with the SEC on or about February 26, 1997
for SAFECO Money Market Trust.
Financial Highlights for (i) a single No-Load Class share (and a
single Advisor Class A and Advisor Class B Share for the fiscal
period ended December 31, 1996) of SAFECO Intermediate-Term U.S.
Treasury Fund and SAFECO High-Yield Bond Fund for the period from
September 7, 1988 (Initial Public Offering) to September 30, 1988,
(ii) for each of the eight fiscal years in the period ended
September 30, 1996 and (iii) for the fiscal period ended December
31, 1996, are included in Part A of this Registration Statement.
Financial Statements for the fiscal period ended December 31, 1996
and the report thereon of Ernst & Young LLP, independent auditors,
will be incorporated by reference into Part B of the Registration
Statement of SAFECO Taxable Bond Fund and will be filed with the
SEC on or about February 26, 1997 for SAFECO Taxable Bond Trust.
Financial Highlights for a single No-Load Class share (and a single
Advisor Class A and Advisor Class B Share for the fiscal period
ended December 31, 1996) of SAFECO Managed Bond Fund (i) for the
period from February 28, 1994 (Initial Public Offering) to December
31, 1994 and for the fiscal year ended December 31, 1995, and for
the fiscal period ended December 31, 1996 are included in Part A of
this Registration Statement. Financial Statements for the fiscal
period ended December 31, 1996 and the report thereon of Ernst &
Young LLP, independent auditors, will be incorporated by reference
into Part B of
C-1
<PAGE>
the Registration Statement of SAFECO Managed Bond Trust and will be
filed with the SEC on or about February 27, 1997 for SAFECO Managed
Bond Trust.
Financial Statements from the Registrant's Annual Report are filed as
Exhibit 12.
(b) Exhibits:
Exhibit
Number Description Page
- ------- ----------- ----
(27.1-7) Financial Data Schedules(1)
(1) Trust Instrument/Certificate of Trust *
(2) Bylaws *
(3) Inapplicable
(4) Form of Stock Certificate *
(5) Investment Advisory and Management *
Contract
Sub-Investment Advisory Contract
(6) Form of Distribution Agreement **
Form of Selling Dealer Agreement **
(7) Inapplicable
(8) Custody Agreement with U.S. Bank *
Custody Agreement with Chase
Manhattan Bank
Form of Chase Manhattan Bank *
Subcustodian Agreement
(9) Form of Transfer Agent Agreement **
(10) Opinion and Consent of Counsel for
No-Load Class
Opinion and Consent of Counsel for
Advisor Class A and Advisor Class B
(11) Consent of Independent Auditors(1)
(12) Registrant's Annual Report for Year Ended +
December 31, 1996 Including Financial
Statements
(1) To be filed by Post-Effective Amendment
C-2
<PAGE>
Annual Report for SAFECO Tax-Exempt Bond Trust ++
for the Year Ended December 31, 1996 including
Financial Statements
Annual Report for SAFECO Money Market Trust ++
for the Year Ended December 31, 1996 including
Financial Statements
Annual Report for SAFECO Taxable Bond Trust +++
for the Year Ended December 31, 1996
including Financial Statements
Annual Report for SAFECO Managed Bond Trust ++++
for the Year Ended December 31, 1996 including
Financial Statements
(13) Subscription Agreement *
(14) Prototype 401(k)/Profit Sharing Plan *
(15) Rule 12b-1 Plan (Advisor Class A) **
Rule 12b-1 Plan (Adviser Class B)
(16) Calculation of Performance Information- *
No-Load Class
Calculation of Performance Information-
Advisor Class A
Calculation of Performance Information-
Advisor Class B
(17) Inapplicable
(18) Rule 18f-3 Plan **
* Filed as an exhibit to Post-Effective Amendment No. 8 filed with the SEC on
November 17, 1995.
** Filed as an exhibit to Post-Effective Amendment No. 10 filed with the SEC
on July 31, 1996.
*** Filed as an exhibit to Post-Effective Amendment No. 9 filed with the SEC
on January 31, 1996.
+ Registrant's Annual Report will be filed with the SEC on or about
February 26, 1997.
++ SAFECO Tax-Exempt Bond Trust's Annual Report and SAFECO Money Market
Trust's Annual Report will be filed with the SEC on or about
February 26, 1997, respectively.
+++ SAFECO Taxable Bond Trust's Annual Report will be filed with the SEC on or
about February 26, 1997.
++++ SAFECO Managed Bond Trust's Annual Report will be filed with the SEC
on or about February 26, 1997.
C-3
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
SAFECO Corporation, a Washington corporation, owns 100% of SAFECO Asset
Management Company (SAM), SAFECO Services Corporation (SAFECO Services) and
SAFECO Securities, Inc. (SAFECO Securities), each a Washington corporation. SAM
is the investment advisor, SAFECO Services is the transfer agent and SAFECO
Securities is the principal underwriter for each of the SAFECO Mutual Funds.
The SAFECO Mutual Funds consist of seven Delaware business trusts: SAFECO Common
Stock Trust, SAFECO Taxable Bond Trust, SAFECO Tax-Exempt Bond Trust, SAFECO
Money Market Trust, SAFECO Managed Bond Trust (formerly SAFECO Institutional
Series Trust) and SAFECO Resource Series Trust. The SAFECO Common Stock Trust
consists of seven mutual funds: SAFECO Growth Fund, SAFECO Equity Fund, SAFECO
Income Fund, SAFECO Northwest Fund, SAFECO International Stock Fund, SAFECO
Balanced Fund and SAFECO Small Company Stock Fund. The SAFECO Taxable Bond
Trust consists of three mutual funds: SAFECO Intermediate-Term U.S. Treasury
Fund, SAFECO GNMA Fund and SAFECO High-Yield Bond Fund. The SAFECO Tax-Exempt
Bond Trust consists of five mutual funds: SAFECO Intermediate-Term Municipal
Bond Fund, SAFECO Insured Municipal Bond Fund, SAFECO Municipal Bond Fund,
SAFECO California Tax-Free Income Fund and SAFECO Washington State Municipal
Bond Fund. The SAFECO Money Market Fund consists of two mutual funds: SAFECO
Money Market Fund and SAFECO Tax-Free Money Market Fund. The SAFECO Managed
Bond Trust consists of one mutual fund: Managed Bond Fund (formerly Fixed-Income
Portfolio). The SAFECO Resource Series Trust consists of five mutual funds:
Equity Portfolio, Growth Portfolio, Northwest Portfolio, Bond Portfolio and
Money Market Portfolio.
SAFECO Corporation, a Washington Corporation, owns 100% of the following
Washington corporations: SAFECO Insurance Company of America, General Insurance
Company of America, First National Insurance Company of America, SAFECO Life
Insurance Company of America, SAFECO Assigned Benefits Service Company, SAFECO
Administrative Services, Inc., SAFECO Properties Inc., SAFECO Credit Company,
Inc., SAFECO Asset Management Company, SAFECO Securities, Inc., SAFECO Services
Corporation, SAFECO Trust Company and General America Corporation. SAFECO
Corporation owns 100% of SAFECO National Insurance Company, a Missouri
corporation, and SAFECO Insurance Company of Illinois, an Illinois corporation.
SAFECO Corporation owns 20% of Agena, Inc., a Washington corporation. SAFECO
Insurance Company of America owns 100% of SAFECO Surplus Lines Insurance
Company, a Washington corporation, and Market Square Holding, Inc., a Minnesota
corporation. SAFECO Life Insurance Company owns 100% of SAFECO National Life
Insurance Company, a Washington corporation, and First SAFECO National Life
Insurance Company of New York, a New York corporation. SAFECO Administrative
Services, Inc. owns 100% of Employee Benefit Claims of Wisconsin, Inc. and
Wisconsin Pension and Group Services, Inc., each a Wisconsin corporation.
General America Corporation owns 100% of COMAV Managers, Inc., an Illinois
corporation, F.B. Beattie & Co., Inc., a Washington corporation, General America
Corp. of Texas, a Texas corporation, Talbot Financial Corporation, a Washington
corporation and SAFECO Select Insurance Services, Inc., a California
corporation. F.B. Beattie & Co., Inc. owns 100% of F.B. Beattie Insurance
Services, Inc., a California corporation. General America Corp. of Texas is
Attorney-in-fact for SAFECO Lloyds Insurance Company, a Texas corporation.
Talbot Financial Corporation owns 100% of Talbot Agency, Inc., a New Mexico
corporation. Talbot Agency, Inc. owns 100% of PNMR Securities, Inc., a
Washington corporation. SAFECO Properties Inc. owns 100% of the following, each
a Washington corporation: RIA Development, Inc., SAFECARE Company, Inc. and
Winmar Company, Inc. SAFECARE Company, Inc. owns 100% of the following, each a
Washington corporation: S.C. Bellevue, Inc., S.C. Everett, Inc., S.C.
Marysville, Inc., S.C. Simi Valley, Inc. and S.C. Vancouver, Inc. SAFECARE
Company, Inc. owns 50% of Lifeguard Ventures, Inc., a California corporation,
50% of Mission Oaks Hospital, Inc., a California corporation, S.C. River Oaks,
Inc., a Washington corporation, Mississippi Health Services, Inc., a Louisiana
corporation, and Safecare Texas, Inc., a Texas corporation. S.C. Simi Valley,
Inc. owns 100% of Simi Valley Hospital, Inc., a Washington corporation. Winmar
Company, Inc. owns 100% of the following: Barton Street Corp., C-W Properties,
Inc., Gem State Investors, Inc., Kitsap Mall, Inc., WNY Development, Inc.,
Winmar Cascade, Inc., Winmar Metro, Inc., Winmar Northwest, Inc., Winmar
Redmond, Inc. and Winmar of Kitsap, Inc., each a Washington corporation, and
Capitol Court Corp., a Wisconsin corporation, SAFECO Properties of Boise, Inc.,
an Idaho corporation, SCIT, Inc., a Massachusetts corporation, Valley Fair
Shopping Centers, Inc., a Delaware corporation, WDI Golf Club, Inc., a
C-4
<PAGE>
California corporation, Winmar Oregon, Inc., an Oregon corporation, Winmar of
Texas, Inc., a Texas corporation, Winmar of Wisconsin, Inc., a Wisconsin
corporation, and Winmar of the Desert, Inc., a California corporation. Winmar
Oregon, Inc. owns 100% of the following, each an Oregon corporation: North Coast
Management, Inc., Pacific Surfside Corp., Winmar of Jantzen Beach, Inc. and W-P
Development, Inc., and 100% of the following, each a Washington corporation:
Washington Square, Inc. and Winmar Pacific, Inc.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
At January 2, 1997, Registrant had the following number of shareholders:
TITLE OF CLASS NUMBER OF SHAREHOLDERS OF RECORD
SAFECO GROWTH FUND
No-Load Class 13,550
Advisor Class A 22
Advisor Class B 9
SAFECO EQUITY FUND
No-Load Class 56,329
Advisor Class A 825
Advisor Class B 104
SAFECO INCOME FUND
No-Load Class 17,802
Advisor Class A 17
Advisor Class B 6
SAFECO NORTHWEST FUND
No-Load Class 4,626
Advisor Class A 43
Advisor Class B 50
SAFECO BALANCED FUND
No-Load Class 325
Advisor Class A 6
Advisor Class B 7
SAFECO INTERNATIONAL FUND
No-Load Class 800
Advisor Class A 11
Advisor Class B 9
C-5
<PAGE>
TITLE OF CLASS NUMBER OF SHAREHOLDERS OF RECORD
SAFECO SMALL COMPANY STOCK FUND
No-Load Class 1,324
Advisor Class A 8
Advisor Class B 9
ITEM 27. INDEMNIFICATION
Under the Trust Instrument of the Registrant, the Registrant's trustees,
officers, employees and agents are indemnified against certain liabilities,
subject to specified conditions and limitations.
Under the indemnification provisions in the Registrant's Trust Instrument and
subject to the limitations described in the paragraph below, every person who
is, or has been, a trustee, officer, employee or agent of the Registrant shall
be indemnified by the Registrant or the appropriate Series of the Registrant to
the fullest extent permitted by law against liability and against all expenses
reasonably incurred or paid by him or her in connection with any claim, action,
suit or proceeding in which he or she becomes involved as a party or otherwise
by virtue of his or her being, or having been, a trustee, officer, employee or
agent and against amounts paid or incurred by him or her in the settlement
thereof. As used in this paragraph, "claim," "action," "suit" or "proceeding"
shall apply to all claims, actions, suits or proceedings (civil, criminal or
other, including appeals), actual or threatened, and the words, "liability" and
"expenses" shall include, without limitation, attorneys' fees, costs,
judgments, amounts paid in settlement, fines, penalties and other liabilities.
No indemnification will be provided to a trustee, officer, employee or agent:
(i) who shall have been adjudicated by a court or body before which the
proceeding was brought (a) to be liable to the Registrant or its shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office, or (b) not to have
acted in good faith in the reasonable belief that his or her action was in the
best interest of the Registrant; or (ii) in the event of settlement, unless
there has been a determination that such trustee, officer, employee or agent did
not engage in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office; (a) by the
court or other body approving the settlement, (b) by the vote of at least a
majority of a quorum of those trustees who are neither interested persons, as
that term is defined by the Investment Company Act of 1940, of the Registrant
nor are the parties to the proceeding based upon a review of readily available
facts (as opposed to a full trial type inquiry) or (c) by written opinion of
independent legal counsel based upon a review of readily available facts (as
opposed to a full trial type inquiry).
To the maximum extent permitted by applicable law, expenses incurred in
connection with the preparation and presentation of a defense to any claim,
action, suit or proceeding of the character described above may be paid by the
Registrant or applicable Series from time to time prior to final disposition
thereof upon receipt of an undertaking by or on behalf of such trustee, officer,
employee or agent that such amount will be paid over by him or her to the
Registrant or the applicable Series if it is ultimately determined that he or
she is not entitled to indemnification under the Trust Instrument; provided,
however, that either (i) such trustee, officer, employee or agent shall have
provided appropriate security for such undertaking, (ii) the Registrant is
insured against such losses arising out of such advance payments or (iii) either
a majority of the trustees who are neither interested persons, as that term is
defined by the Investment Company Act of 1940, of the Registrant nor parties to
the proceeding, or independent legal counsel in a written opinion, shall have
determined, based on a review of readily available facts (as opposed to full
trial type inquiry), that there is reason to believe that such trustee, officer,
employee or agent, will not be disqualified from indemnification under
Registrant's Trust Instrument.
C-6
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to trustees, officers, employees and agents of the
Registrant pursuant to such provisions of the Trust Instrument or statutes or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in said Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a trustee, officer, employee or
agent of the Registrant in the successful defense of any such action, suit or
proceeding) is asserted by such trustee, officer, employee or agent in
connection with the shares of any series of the Registrant, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in said Act and
will be governed by the final adjudication of such issue.
Under an Agreement with its distributor ("Distribution Agreement"), Registrant
has agreed to indemnify, defend and hold the distributor, the distributor's
several directors, officers and employees, and any person who controls the
distributor within the meaning of Section 15 of the 1933 Act, free and harmless
from and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands or
liabilities and any counsel fees incurred in connection therewith) which the
distributor, its directors, officers or employees, or any such controlling
person may incur, under the 1933 Act or under common law or otherwise, arising
out of or based upon any alleged untrue statement of a material fact contained
in the Registration Statement or arising out of or based upon any alleged
omission to state a material fact required to be stated or necessary to make the
Registration Statement not misleading.
In no event shall anything contained in the Distribution Agreement be construed
so as to protect the distributor against any liability to the Registrant or its
shareholders to which the distributor would otherwise be subject by reason of
willful misfeasance, bad faith, or gross negligence in the performance of its
duties, or by reason of its reckless disregard of its obligations and duties
under the Distribution Agreement, and provided that the Registrant shall not
indemnify the distributor for conduct set forth in this paragraph.
Under an Agreement with its transfer agent, Registrant has agreed to indemnify
and hold the transfer agent harmless against any losses, claims, damages,
liabilities or expenses (including reasonable attorneys' fees and expenses)
resulting from: (1) any claim, demand, action or suit brought by any person
other than the Registrant, including by a shareholder, which names the transfer
agent and/or the Registrant as a party, and is not based on and does not result
from the transfer agent's willful misfeasance, bad faith or negligence or
reckless disregard of duties, and arises out of or in connection with the
transfer agent's performance hereunder; or (2) any claim, demand, action or suit
(except to the extent contributed to by the transfer agent's willful
misfeasance, bad faith or negligence or reckless disregard of duties) which
results from the negligence of the Registrant, or from the transfer agent acting
upon any instruction(s) reasonably believed by it to have been executed or
communicated by any person duly authorized by the Registrant, or as a result of
the transfer agent acting in reliance upon advice reasonably believed by the
transfer agent to have been given by counsel for the Registrant, or as a result
of the transfer agent acting in reliance upon any instrument or stock
certificate reasonably believed by it to have been genuine and signed,
countersigned or executed by the proper person.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER AND SUB-
INVESTMENT ADVISER
The investment adviser to the Registrant, SAM, serves as an adviser to: (a)
thirty-one series (portfolios) of seven registered investment companies,
including five series of an investment company that serves as the investment
vehicle for variable insurance products, and (b) a number of pension funds not
affiliated with SAFECO Corporation or its affiliates. The directors and
officers of SAM serve in similar capacities with SAFECO Corporation or its
affiliates. The sub-investment adviser to the SAFECO International Stock Fund,
Bank of Ireland Asset Management (U.S.) Limited, serves as investment adviser to
other registered open-end investment companies and other advisory clients. The
information set forth under "Investment Advisory and Other Services" in the
Registrant's Statement of Additional Information is incorporated by reference.
C-7
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITER
(a) SAFECO Securities, Inc., the principal underwriter for each class of
each series of Registrant, acts also as the principal underwriter for
each class of each series of SAFECO Tax-Exempt Bond Trust, SAFECO
Taxable Bond Trust, SAFECO Money Market Trust, and SAFECO Managed Bond
Trust. In addition, SAFECO Securities, Inc. is the principal
underwriter for SAFECO Separate Account C, SAFECO Variable Account B
and SAFECO Separate Account SL, all of which are variable insurance
products.
(b) The information set forth under "Investment Advisory and Other
Services" in the Statement of Additional Information is incorporated
by reference.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
U.S. Bank of Washington, N.A., 1420 Fifth Avenue, Seattle, Washington 98101; the
Bank of Ireland Investment Management Limited, 26 Fitzwilliam Street, Dublin,
Ireland; Bank of Ireland Investment Management (U.S.) Limited, 2 Greenwich
Plaza, Greenwich, Connecticut; Chase Manhattan Bank, N.A, 1212 Avenue of the
Americas, New York, New York, and various sub-custodians maintain physical
possession of the accounts, books and documents of Registrant relating to its
activities as custodian of the Registrant. SAFECO Asset Management Company,
SAFECO Plaza, Seattle, Washington 98185, maintains physical possession of all
other accounts, books or documents of the Registrant required to be maintained
by Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder.
ITEM 31. MANAGEMENT SERVICES
Inapplicable.
ITEM 32. UNDERTAKINGS
Registrant, on behalf of the U.S. Value Fund undertakes to file a
post-effective amendment to this Registration Statement, using financial
statements which need not be certified, within four to six months from the
effective date of Registrant's 1933 Act Registration Statement.
Registrant also undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned thereto duly authorized, in the
City of Seattle, and State of Washington as of the 12th day of February, 1997.
SAFECO COMMON STOCK TRUST
By: /s/ David F. Hill
----------------------------------
David F. Hill, President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
Name Title Date
/s/ David F. Hill++ President and Trustee 2/12/97
- ------------------------------ Principal Executive Officer ------
David F. Hill
RONALD L. SPAULDING* Vice President 2/12/97
- ------------------------------ Treasurer ------
Ronald L. Spaulding
NEAL A. FULLER* Vice President 2/12/97
- ------------------------------ Controller ------
Neal A. Fuller Assistant Secretary
/s/ Boh A. Dickey++ Chairman and Trustee 2/12/97
- ------------------------------ ------
Boh A. Dickey
BARBARA J. DINGFIELD* Trustee 2/12/97
- ------------------------------ ------
Barbara J. Dingfield
RICHARD W. HUBBARD*++ Trustee 2/12/97
- ------------------------------ ------
Richard W. Hubbard
RICHARD E. LUNDGREN* Trustee 2/12/97
- ------------------------------ ------
Richard E. Lundgren
LARRY L. PINNT* Trustee 2/12/97
- ------------------------------ ------
Larry L. Pinnt
JOHN W. SCHNEIDER* Trustee 2/12/97
- ------------------------------ ------
John W. Schneider
*By /s/ Boh A. Dickey
------------------------------
Boh A. Dickey
Attorney-in-Fact
*By /s/ David F. Hill
------------------------------
David F. Hill
Attorney-in-Fact
++ Trustees who are interested persons as defined by the 1940 Act.
