<PAGE>
Registration Nos. 33-47859/811-6667
---------------------------------------------------------------------
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. ___6__ /X/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. ___9___ /X/
(Check appropriate box or boxes.)
SAFECO MANAGED BOND 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) 545-5269
-------------------
Name and Address of Agent for Service
-------------------------------------
DAVID F. HILL
SAFECO Plaza
Seattle, Washington 98185
(206) 545-5269
Approximate Date of Proposed Public Offering: Continuous
It is proposed that this filing will become effective
_____ immediately upon filing pursuant to paragraph (b)
__X__ on September 30, 1996 pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)(1)
_____ on _________________ pursuant to paragraph (a)(1)
_____ 75 days after filing pursuant to paragraph (a)(2)
_____ on ________________ pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
/_/ This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
==========================================================================
Registrant has registered 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's Rule 24f-2 Notice was filed on or about February 29,
1996.
==========================================================================
*Effective September 30, 1996, the Registrant's name is changed from
SAFECO Institutional Series Trust to SAFECO Managed Bond Trust.
<PAGE>
SAFECO MANAGED BOND TRUST
Contents of Registration Statement
This registration statement consists of the following papers and
documents:
. Cover Sheet
. Contents of Registration Statement
. Cross Reference Sheets
. No-Load Class of:
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO GNMA Fund
SAFECO High-Yield Bond Fund
SAFECO Managed Bond Fund
--------------------------------------------
PART A - Prospectus
PART B - Statement of Additional Information
. Advisor Class A and Advisor Class B Shares of:
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Income Fund
SAFECO Northwest Fund
SAFECO Balanced Fund
SAFECO International Stock Fund
SAFECO Small Company Stock Fund
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO Managed Bond Fund
SAFECO Money Market Fund
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal Bond Fund
-------------------------------------------
PART A - Prospectus
. Advisor Class A and Advisor Class B Shares of:
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO Managed Bond Fund
SAFECO Money Market Fund
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal Bond Fund
-------------------------------------------
<PAGE>
PART B - Statement of Additional Information
. PART C - Other Information
. Signature Page
. Exhibits
This filing is made to update the Registration Statement of SAFECO Managed
Bond Trust. No changes are hereby made to the Prospectuses and Statements
of Additional Information relating to the No-Load Class of SAFECO Common
Stock Trust, SAFECO Tax-Exempt Bond Trust, SAFECO Taxable Bond Trust and
SAFECO Money Market Trust.
<PAGE>
SAFECO MANAGED BOND TRUST
SAFECO Managed Bond Fund
SAFECO TAXABLE BOND TRUST
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO GNMA Fund
SAFECO High-Yield Bond Fund
No-Load Class
Form N-1A Cross Reference Sheet
Part A
------
<TABLE>
<CAPTION>
Item No. Location in Prospectus
-------- ----------------------
<S> <C> <C>
Item 1. Cover Page Cover Page
Item 2. Synopsis Introduction to the Trusts and the Funds;
Expenses
Item 3. Condensed Financial Information Financial Highlights; Performance Information
Item 4. General Description of Registrant Each Fund's Investment Objective and Policies;
Information about Share Ownership and Companies
that Provide Services to the Trusts
Item 5. Management of the Trust Expenses; Portfolio Managers; Information about
Share Ownership and Companies that Provide
Services to the Trusts
Item 6. Capital Stock and Other Securities Cover Page; Share Price Calculation; Information
About Share Ownership and Companies that Provide
Services to the Trusts; Fund Distributions and
How They Are Taxed
Item 7. Purchase of Securities Being Offered How to Purchase Shares; How to Systematically
Purchase or Redeem Shares; How to Exchange
Shares from One Fund to Another; Telephone
Transactions; Transactions Through Registered
Investment Advisers; Share Price Calculation;
Tax-Deferred Retirement Plans; Account
Statements
<PAGE>
Item No. Location in Prospectus
-------- ----------------------
Item 8. Redemption or Repurchase How to Redeem Shares; How to Systematically
Purchase or Redeem Shares; How to Exchange
Shares from One Fund to Another; Telephone
Transactions; Transactions Through Registered
Investment Advisers; Account Statements; Account
Changes and Signature Requirements
Item 9. Pending Legal Proceedings Not applicable
Part B
------
Item No. Location in Statement
-------- of Additional Information
-------------------------
Item 10. Cover page Cover page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History Not applicable
Item 13. Investment Objectives and Policies Investment Policies of the Managed Bond Fund;
Additional Investment Information; Description
of Commercial Paper and Preferred Stock Ratings
Item 14. Management of the Trust Trustees and Officers
Item 15. Control Persons and Principal Principal Shareholders of Certain Funds
Holders of Securities
Item 16. Investment Advisory and Other Investment Advisory and Other Services
Services
Item 17. Brokerage Allocation and Other Brokerage Practices
Practices
Item 18. Capital Stock and Other Securities Additional Information on Calculation of Net
Asset Value Per Share
Item 19. Purchase, Redemption and Pricing of Additional Information on Calculation of Net
Securities Being Offered Asset Value Per Share; Redemption in Kind
Item 20. Tax Status Additional Tax Information
<PAGE>
Item No. Location in Prospectus
-------- ----------------------
Item 21. Underwriters Investment Advisory and Other Services
Item 22. Calculation of Performance Data Additional Performance Information
Item 23. Financial Statements Financial Statements
</TABLE>
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.
<PAGE>
SAFECO MANAGED BOND TRUST
SAFECO Managed Bond Fund
SAFECO COMMON STOCK TRUST
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Income Fund
SAFECO Northwest Fund
SAFECO Balanced Fund
SAFECO International Stock Fund
SAFECO Small Company Stock Fund
SAFECO TAXABLE BOND TRUST
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO MONEY MARKET TRUST
SAFECO Money Market Fund
SAFECO TAX-EXEMPT BOND TRUST
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal Bond Fund
Advisor Class A and Advisor Class B Shares
Form N-1A Cross Reference Sheet
<TABLE>
<CAPTION>
Part A
------
Location
Item No. in Prospectus
-------- -------------
<S> <C> <C>
Item 1. Cover Page Cover Page
Item 2. Synopsis Introduction to the Trusts and the
Funds; Expenses
Item 3. Condensed Financial Information Financial Highlights; Performance
Information
Item 4. General Description of Registrant Each Fund's Investment Objective and
Policies; Information about Share
Ownership and Companies that Provide
Services to the Trusts
<PAGE>
Part A
------
Location
Item No. in Prospectus
-------- -------------
Item 5. Management of the Trust Expenses; Information About Share
Ownership and Companies that Provide
Services to the Trusts; Portfolio
Managers
Item 6. Capital Stock and Other Securities Cover Page; Share Price Calculation;
Information About Share Ownership and
Companies That Provide Services to the
Trusts; Fund Distributions and How They
Are Taxed; Persons Controlling Certain
Funds
Item 7. Purchase of Securities Being Offered How to Purchase Shares; How to
Systematically Purchase or Redeem
Shares; How to Exchange Shares From One
Fund to Another; Telephone Transactions;
Share Price Calculation; Tax-Deferred
Retirement Plans; Account Statements
Item 8. Redemption or Repurchase How to Redeem Shares; How to
Systematically Purchase or Redeem
Shares; How to Exchange Shares From One
Fund to Another; Telephone Transactions;
Account Statements; Account Changes and
Signature Requirements
Item 9. Pending Legal Proceedings Not applicable
</TABLE>
SAFECO MANAGED BOND TRUST
SAFECO Managed Bond Fund
SAFECO TAXABLE BOND TRUST
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO MONEY MARKET TRUST
SAFECO Money Market Fund
SAFECO TAX-EXEMPT BOND TRUST
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal Bond Fund
<PAGE>
Advisor Class A and Advisor Class B Shares
Form N-1A Cross Reference Sheet
<TABLE>
<CAPTION>
Part B
------
Location in Statement
Item No. of Additional Information
-------- -------------------------
<S> <C> <C>
Item 10. Cover page Cover page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History Not applicable
Item 13. Investment Objectives and Policies Investment Policies; Additional
Investment Information; Description of
Ratings
Item 14. Management of the Trust Trustees and Officers
Item 15. Control Persons and Principal Principal Shareholders of Certain Funds
Holders of Securities
Item 16. Investment Advisory and Other Services Investment Advisory and Other Services
Item 17. Brokerage Allocation and Other Practices Brokerage Practices
Item 18. Capital Stock and Other Securities Additional Information on Calculation of
Net Asset Value Per Share; Conversion of
Advisor Class B Shares
Item 19. Purchase, Redemption and Pricing Additional Information on Calculation of
of Securities Being Offered Net Asset Value Per Share; Redemption in
Kind
Item 20. Tax Status Additional Tax Information
<PAGE>
Item 21. Underwriters Investment Advisory and Other Services
Item 22. Calculation of Performance Data Additional Performance Information
Item 23. Financial Statements Financial Statements
</TABLE>
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.
<PAGE>
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
SAFECO GNMA FUND
SAFECO HIGH-YIELD BOND FUND
SAFECO MANAGED BOND FUND
NO-LOAD CLASS September 30, 1996
__________________________________________________________________________
This Prospectus offers shares of the following mutual funds: the SAFECO
Intermediate-Term U.S. Treasury Fund, the SAFECO GNMA Fund, the SAFECO
High-Yield Bond Fund, which are series of the SAFECO Taxable Bond Trust
("Taxable Bond Trust"). The SAFECO Managed Bond Fund is a series of the
SAFECO Managed Bond Trust ("Managed Bond Trust"). The investment
objectives for each of these Funds appears on page 3.
This Prospectus sets forth the information a prospective investor should
know before investing. Please read and retain this Prospectus for future
reference. A Statement of Additional Information, dated September 30,
1996, and incorporated herein by reference, has been filed with the
Securities and Exchange Commission and is available at no charge upon
request by calling one of the numbers listed on this page. 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 call or write:
Nationwide 1-800-624-5711; Seattle 545-7319
Hearing Impaired
TTY/TDD Service 1-800-438-8718
SAFECO Mutual Funds
No-Load Class Shares
P.O. Box 34890
Seattle, WA. 98124-1890
All telephone calls are tape-recorded for your protection.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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
<PAGE>
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY, AND FUND SHARES ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
SAFECO Intermediate-Term U.S. Treasury Fund ("Intermediate Treasury Fund")
has as its investment objective to provide as high a level of current
income as is consistent with the preservation of capital. During normal
market conditions, the Fund will invest at least 65% of its total assets
in direct obligations of the U.S. Treasury.
SAFECO GNMA Fund ("GNMA Fund") has as its investment objective to provide
as high a level of current interest income as is consistent with the
preservation of capital through the purchase of U.S. Government
securities. During normal market conditions, the Fund will invest at
least 65% of its total assets in Government National Mortgage Association
("GNMA") mortgage-backed securities.
SAFECO High-Yield Bond Fund ("High-Yield Bond Fund") has as its investment
objective to provide a high level of current interest income through the
purchase of high-yield, fixed-income securities. During normal market
conditions, the Fund will invest at least 65% of its total assets in high-
yield, fixed-income securities.
SAFECO Managed Bond Fund ("Managed Bond Fund") has as its investment
objective to provide as high a level of total return as is consistent with
the relative stability of capital through the purchase of investment grade
debt securities.
There is no assurance that a Fund will achieve its investment objective.
2
<PAGE>
TABLE OF CONTENTS
Page
INTRODUCTION TO THE TRUSTS AND THE FUNDS . . . . . . . . . . . . . . 5
EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . 9
EACH FUND'S INVESTMENT OBJECTIVE AND POLICIES . . . . . . . . . . . . 14
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
PORTFOLIO MANAGERS . . . . . . . . . . . . . . . . . . . . . . . . . 31
HOW TO PURCHASE SHARES . . . . . . . . . . . . . . . . . . . . . . . 32
HOW TO REDEEM SHARES . . . . . . . . . . . . . . . . . . . . . . . . 36
HOW TO SYSTEMATICALLY PURCHASE OR REDEEM SHARES . . . . . . . . . . . 38
HOW TO EXCHANGE SHARES FROM ONE FUND TO ANOTHER . . . . . . . . . . . 39
TELEPHONE TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . 42
TRANSACTIONS THROUGH REGISTERED INVESTMENT ADVISERS . . . . . . . . . 43
SHARE PRICE CALCULATION . . . . . . . . . . . . . . . . . . . . . . . 43
INFORMATION ABOUT SHARE OWNERSHIP AND
COMPANIES THAT PROVIDE SERVICES TO THE TRUSTS . . . . . . . . . . . . 44
PERSONS CONTROLLING CERTAIN FUNDS . . . . . . . . . . . . . . . . . . 48
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 48
FUND DISTRIBUTIONS AND HOW THEY ARE TAXED . . . . . . . . . . . . . . 49
TAX-DEFERRED RETIREMENT PLANS . . . . . . . . . . . . . . . . . . . . 51
ACCOUNT STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 53
ACCOUNT CHANGES AND SIGNATURE REQUIREMENTS . . . . . . . . . . . . . 53
DEBT SECURITIES HELD BY THE HIGH-YIELD BOND FUND . . . . . . . . . . 54
DESCRIPTION OF RATINGS . . . . . . . . . . . . . . . . . . . . . . . 55
3
<PAGE>
__________________________________________________
INTRODUCTION TO THE TRUSTS AND THE FUNDS
__________________________________________________
The Taxable Bond Trust is an open-end management investment company that
issues shares representing three diversified mutual funds: the
Intermediate Treasury Fund, the GNMA Fund and the High-Yield Bond Fund
(collectively, the "Taxable Bond Funds").
The Managed Bond Trust is an open-end management investment company that
currently issues shares representing one diversified mutual fund: the
Managed Bond Fund (each Taxable Bond Fund and the Managed Bond Fund, a
"Fund"). Prior to September 30, 1996, the name of the Managed Bond Fund
was the SAFECO Fixed-Income Portfolio and the name of the Managed Bond
Trust was the SAFECO Institutional Series Trust.
The Funds
No-Load Class shares of each Fund are offered through this Prospectus.
The Intermediate Treasury Fund and the Managed Bond Fund also offer other
classes of shares.
The No-Load Class of each Fund:
. Is 100% no-load; there are no initial or contingent
deferred sales charges or Rule 12b-1 fees.
. Offers free exchanges as well as easy access to your
money through telephone redemptions and wire transfers.
. Has a minimum initial investment of $1,000 for regular
accounts and $250 for individual retirement accounts
("IRAs").
Risk Factors
There is, of course, no assurance that a Fund will achieve its investment
objective. See "Each Fund's Investment Objective and Policies" for more
information.
There is a risk that the market value of each Fund's portfolio of
securities may decrease and result in a decrease in the value of a
shareholder's investment. Also, the value of a Fund's portfolio will
normally fluctuate inversely with changes in interest rates. In addition,
the High-Yield Bond Fund is subject to special risks associated with below
investment grade securities, sometimes referred to as "junk" bonds, which
it will purchase to pursue its investment objective. See "Each Fund's
Investment Objective and Policies" for more information.
4
<PAGE>
Investment Adviser
Each Fund is managed by SAFECO Asset Management Company ("SAM"). SAM is
headquartered in Seattle, Washington and managed over $2 billion in mutual
fund assets as of June 30, 1996. SAM has been an adviser to mutual funds
and other investment portfolios since 1973 and its predecessors have been
advisers since 1932. See "Information about Share Ownership and Companies
that Provide Services to the Trusts" for more information.
__________
EXPENSES
__________
A. Shareholder Transaction Expenses for the No-Load Class of
Each Fund
<TABLE>
<CAPTION>
Sales Charge
Sales Charge Imposed on Contingent
Imposed on Reinvested Deferred Redemption Exchange
Purchases Dividends Sales 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.
5
<PAGE>
B. Annual Operating Expenses for the No-Load Class of each
Fund
(as a percentage of average net assets)
<TABLE>
<CAPTION>
Total
Management Rule Other Operating
Fund Fee + 12b-1 Fees + Expenses = Expenses
---- -------------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Intermediate
Treasury .54% None .42% .96%
GNMA .63% None .38% 1.01%
High-Yield Bond .64% None .37% 1.01%
Managed Bond .49% None .67% 1.16%
</TABLE>
The amounts shown are actual expenses paid by shareholders for the fiscal
year ended September 30, 1995 for the Taxable Bond Funds and December 31,
1995 for the Managed Bond Fund. See "Information about Share Ownership and
Companies that Provide Services to the Trusts" for more information.
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>
Intermediate
Treasury $10 $31 $53 $118
GNMA $10 $32 $56 $124
High-Yield Bond $10 $32 $56 $124
6
<PAGE>
Managed Bond $11 $36 $63 $140
</TABLE>
The purpose of the table is to assist you in understanding the various
costs and expenses that an investor in No-Load Class shares of each Fund
would bear, directly or indirectly. THE EXAMPLE SHOULD NOT BE CONSIDERED
A REPRESENTATION OF PAST OR FUTURE EXPENSES. A FUND'S ACTUAL EXPENSES OR
PERFORMANCE MAY BE GREATER OR LESS THAN THOSE SHOWN. THE ASSUMED 5%
ANNUAL RETURN IS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION
REGULATIONS APPLICABLE TO ALL MUTUAL FUNDS, AND IT IS NOT A PREDICTION OF,
NOR DOES IT REPRESENT, PAST OR FUTURE EXPENSES OR THE PERFORMANCE OF ANY
FUND.
________________________________________
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. Except for the six-month periods ended March 31, 1996
(Intermediate Treasury, GNMA and High-Yield) and June 30, 1996 (Managed
Bond), the following selected data for the Intermediate Treasury, GNMA,
High-Yield and Managed Bond Funds are derived from financial statements
that have been audited by Ernst & Young LLP, independent auditors. The
data should be read in conjunction with the financial statements, related
notes and other financial information included in each Trust's annual
report to shareholders and incorporated by reference in each Trust's
Statement of Additional Information. The following selected data for the
six month periods ended March 31, 1996 (Intermediate Treasury, GNMA and
High Yield) and June 30, 1996 (Managed Bond) are derived from unaudited
financial statements and should be read in conjunction with the financial
statements, related notes and financial information included in each
Trust's semi-annual report to shareholders and incorporated by reference
in each Trust's Statement of Additional Information. Each of the Trust's
Statements of Additional Information may be obtained by calling one of the
numbers on the front page of this Prospectus.
7
<PAGE>
<TABLE>
<CAPTION>
(For a Share Outstanding Throughout the Period)
SAFECO Intermediate-Term U.S. Treasury Fund
For the Six For the Year Ended September 30
Month Period
Ended March
31, 1996
(unaudited) 1995 1994 1993 1992 1991
<S> <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
INCOME FROM INVESTMENT OPERATIONS:
Net investment income
0.25 .55 .52 .60 .72 .75
Net realized and unrealized gain (loss) on
investments (0.04) .50 (1.00) .49 .54 .37
------ ------ ------ ------ ------ ------
Total from investment operations 0.21 1.05 (.48) 1.09 1.26 1.12
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.25) (.55) (.52) (.60) (.72) (.75)
Distributions from capital gains -- -- -- (.44) (.05) --
------ ------ ------ ------ ------ ------
Total distributions (0.25) (.55) (.52) (1.04) (.77) (.75)
------ ------ ------ ------ ------ ------
Net asset value at end of period $10.20 $10.24 $9.74 $10.74 $10.69 $10.20
====== ====== ====== ====== ====== ======
Total return 2.03%# 11.07% -4.56% 10.51% 12.78% 11.80%
Net assets at end of period (000's $14,255 $13,774 $13,367 $14,706 $12,205 $9,458
omitted)
Ratio of expenses to average net assets 1.06%## .96% .90% .99% .98% 1.00%
Ratio of net investment income to average
net assets 4.83%## 5.51% 5.08% 5.52% 6.89% 7.45%
Portfolio turnover rate 228.20%## 124.9% 75.46% 104.94% 37.19% 9.51%
# Not annualized.
## Annualized.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
SAFECO Intermediate-Term U.S. Treasury Fund (cont'd)
For the
Period From
September 7, 1988
(Initial Public
Offering) To
September 30,
1990 1989 1988
<S> <C> <C> <C>
Net asset value at beginning of period $9.96 $9.95 $9.93
INCOME FROM INVESTMENT OPERATIONS:
Net investment income
.77 .77 .05
Net realized and unrealized gain (loss) on
investments (.13) (.01) .02
------ ------ ------
Total from investment operations .64 .78 .07
------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income (.77) (.77) (.05)
Distributions from capital gains -- -- --
------ ------ ------
Total distributions (.77) (.77) (.05)
------ ------ ------
Net asset value at end of period $9.83 $9.96 $9.95
====== ====== ======
Total return 6.65% 8.20% .69%#
Net assets at end of period (000's $6,916 $6,249 $5,007
omitted)
Ratio of expenses to average net assets 1.00% .96% 1.06%##
Ratio of net investment income to average
net assets 7.76% 7.82% 7.46%##
Portfolio turnover rate 24.17% 4.36% None
# Not annualized.
## Annualized.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
(For a Share Outstanding Throughout the Period)
SAFECO GNMA Fund
For the Six
Month Period For the Year Ended September 30
Ended March
31, 1996
(unaudited) 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $9.45 $9.05 $10.03 $9.95 $9.68 $9.16 $9.23
INCOME FROM INVESTMENT OPERATIONS:
Net investment income
0.30 .60 .60 .67 .73 .78 .76
Net realized and unrealized gain (loss)
on investments (0.12) .40 (.98) .08 .27 .52 (.07)
------ ------ ------ ------ ------ ------ ------
Total from investment operations 0.18 1.00 (.38) .75 1.00 1.30 .69
------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.30) (.60) (.60) (.67) (.73) (.78) (.76)
------ ------ ------ ------ ------ ------ ------
Net asset value at end of period $9.33 $9.45 $9.05 $10.03 $9.95 $9.68 $9.16
====== ====== ====== ====== ====== ====== ======
Total return 1.88%# 11.49% -3.91% 7.81% 10.75% 14.72% 7.77%
Net assets at end of period (000's
omitted) $43,103 $44,055 $46,176 $62,720 $56,474 $42,207 $28,587
Ratio of expenses to average net assets 1.07%## 1.01% .95% .93% .94% .97% .99%
Ratio of net investment income to
average net assets 6.29%## 6.55% 6.26% 6.71% 7.49% 8.23% 8.28%
Portfolio turnover rate 52.85%## 131.24% 55.12% 70.96% 24.66% 43.80% 90.19%
* Unaudited
# Not annualized.
## Annualized.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
SAFECO GNMA Fund (cont'd)
For the Period
From July 15,
1986 (Initial
Public Offering)
To September 30,
1989 1988 1987 1986
<S> <C> <C> <C> <C>
Net asset value at beginning of period $9.06 $9.13 $10.00 $9.95
INCOME FROM INVESTMENT OPERATIONS:
Net investment income
.81 .87 .82 .18
Net realized and unrealized gain (loss)
on investments .17 (.07) (.87) .05
------ ------ ------ ------
Total from investment operations .98 .80 (.05) .23
------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income (.81) (.87) (.82) (.18)
------ ------ ------ ------
Net asset value at end of period $9.23 $9.06 $9.13 $10.00
====== ====== ====== ======
Total return 11.25% 9.05% -.63% 1.71%#*
Net assets at end of period (000's
omitted) $27,063 $27,724 $20,257 $8,057
Ratio of expenses to average net assets 1.02% 1.06% 1.05% 1.25%##
Ratio of net investment income to
average net assets 8.83% 9.51% 8.59% 8.01%##
Portfolio turnover rate 77.39% 109.53% 100.96% 33.47%##
* Unaudited
# Not annualized.
## Annualized.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
(For a Share Outstanding Throughout the Period)
SAFECO High-Yield Bond Fund
For the Six
Month Period
Ended For the Year Ended September 30
March 31,
1996
(unaudited) 1995 1994 1993 1992
----------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $8.68 $8.55 $9.22 $8.92 $8.35
INCOME FROM INVESTMENT OPERATIONS:
Net investment income
0.39 .79 .82 .91 .83
Net realized and unrealized gain (loss) on
investments 0.02 .13 (.67) .30 .57
------ ------ ------ ------ ------
Total from investment operations 0.41 .92 .15 1.21 1.40
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.39) (.79) (.82) (.91) (.83)
------ ------ ------ ------ ------
Net asset value at end of period $8.70 $8.68 $8.55 $9.22 $8.92
====== ====== ====== ====== ======
Total return 4.82%# 11.43% 1.61% 14.29% 17.52%
Net assets at end of period (000's omitted) $39,568 $39,178 $27,212 $28,291 $19,672
Ratio of expenses to average net assets .99%## 1.01% 1.03% 1.09% 1.05%
Ratio of net investment income to average
net assets 9.08%## 9.28% 9.26% 9.94% 9.66%
Portfolio turnover rate 55.18%## 38.03% 63.02% 50.27% 40.66%
# Not annualized.
## Annualized.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
SAFECO High-Yield Bond Fund (cont'd)
For the Period
From September 7,
1988 (Initial
Public Offering)
To
1991 1990 1989 September 30, 1988
<S> <C> <C> <C> <C>
Net asset value at beginning of period $7.94 $9.33 $9.86 $9.89
INCOME FROM INVESTMENT OPERATIONS:
Net investment income
.93 1.04 1.11 .07
Net realized and unrealized gain (loss) on
investments .41 (1.39) (.53) (.03)
------ ------ ------ ------
Total from investment operations 1.34 (.35) .58 .04
------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income (.93) (1.04) (1.11) (.07)
------ ------ ------ ------
Net asset value at end of period $8.35 $7.94 $9.33 $9.86
====== ====== ====== ======
Total return 18.18% -4.04% 6.10% .37%#
Net assets at end of period (000's omitted) $11,931 $7,786 $9,051 $5,204
Ratio of expenses to average net assets 1.11% 1.15% 1.11% 1.25%##
Ratio of net investment income to average
net assets 11.51% 11.90% 11.52% 10.27%##
Portfolio turnover rate 32.46% 18.46% 12.57% None
# Not annualized.
## Annualized.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
(For a Share Outstanding Throughout the Period)
SAFECO Managed Bond Fund
For the Period From
February 28, 1994
For the Six Month (Initial Public
Period Ended June 30, For the Year Ended Offering) To
1996 (unaudited) December 31, 1995 December 31, 1994
<S> <C> <C> <C>
Net asset value at beginning of period $8.77 $8.15 $8.68
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.20 .44 .27
Net realized and
unrealized gain (loss) (0.42) .94 (.53)
on investments ------ ------ ------
Total from investment operations (0.22) 1.38 (.26)
------ ------ ------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.20) (.44) (.27)
Realized gains on -- (.32) --
investments ------ ------ ------
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%##
# Not annualized.
## Annualized.
</TABLE>
14
<PAGE>
_____________________________________________________
EACH FUND'S INVESTMENT OBJECTIVE AND POLICIES
_____________________________________________________
Each Trust is a Delaware business trust established by a Trust Instrument
dated May 13, 1993.
The investment objective and investment policies for each Fund are
described below. A Trust's Board of Trustees may change a Fund's
objective without a shareholder vote, but no such change will be made
without 30 days' prior written notice to shareholders of that Fund. In
the event a Fund changes its investment objective, the new objective may
not meet the investment needs of every shareholder and may be different
from the objective a shareholder considered appropriate at the time of
initial investment.
Each Fund has adopted a number of investment restrictions. If a Fund
satisfies a percentage limitation at the time of investment, a later
increase or decrease in value, assets or other circumstances will not be
considered in determining whether a Fund complies with the applicable
policy (except to the extent the change may impact a Fund s borrowing
limits). Unless otherwise stated, the investment policies and limitations
described below under each Fund's description and "Common Investment
Practices" may be changed without a shareholder vote.
Intermediate Treasury Fund
The Intermediate Treasury Fund has as its investment objective to provide
as high a level of current income as is consistent with the preservation
of capital. The Intermediate Treasury Fund will seek to maintain a
portfolio of U.S. Treasury obligations with an average dollar weighted
maturity of between three and ten years. Although the average dollar
weighted maturity of the portfolio will fall within a range of three to
ten years, 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. These securities 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 GNMA; (b) securities that are not supported
by the full faith and credit of the U.S. Government but are
15
<PAGE>
supported by the issuer's ability to borrow from the U.S.
Treasury, such as securities issued by the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC"); and (c) securities supported solely by the
creditworthiness of the issuer, such as securities issued by the
Tennessee Valley Authority ("TVA"). While U.S. Government
securities are considered to be of the highest credit quality
available, they are subject to the same market risks as
comparable debt securities.
Corporate debt securities which at the time of purchase are rated
in the top three grades (A or higher) by either Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's Ratings Services,
a division of The McGraw Hill Companies, Inc. ("S&P"), or, if
unrated, determined by SAM to be of comparable quality to such
rated debt securities. In addition to reviewing ratings, SAM
will analyze the quality of rated and unrated corporate bonds for
purchase by the Fund by evaluating various factors that may
include the issuer's capital structure, earnings power and
quality of management. See "Description of Ratings" beginning on
page 55.
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.
GNMA Fund
The investment objective of the GNMA Fund is to provide as high a level of
current interest income as is consistent with the preservation of capital
through the purchase of U.S. Government securities.
To pursue its investment objective, the GNMA Fund:
1. Will invest, during normal market conditions, at least 65% of its
portfolio in mortgage-backed securities issued by GNMA ("GNMA
securities"). The GNMA securities in which the GNMA Fund will
invest represent ownership in a pool of mortgage loans or
securities collateralized by pools of mortgage loans. Each
mortgage loan in the pool is either insured by the Federal
Housing Administration or the Farmers Home Administration or
guaranteed by the Veterans Administration. Once approved by
GNMA, the timely payment of principal and interest by each
mortgage pool is guaranteed by GNMA. The GNMA guarantee
represents a general obligation of the U.S. Treasury.
GNMA securities in which the GNMA Fund may invest include
"modified pass-through" securities or collateralized mortgage
obligations ("CMOs"). Modified pass-through securities "pass
through" to their holders the scheduled monthly interest and
principal payments relating to mortgage loans in the pool. CMOs
16
<PAGE>
are securities collateralized by a portfolio of mortgage loans or
mortgage-backed securities. CMOs are issued with a number of
classes or series which have different maturities and which may
represent interests in some or all of the interest or principal
of the underlying collateral or a combination thereof. One type
of CMO that the GNMA Fund will purchase is interests in real
estate mortgage investment conduits ("REMICs") sponsored by GNMA.
CMO classes may be specially structured in a manner that provides
any of a wide variety of investment characteristics, such as
yield, effective maturity and interest rate sensitivity. As
market conditions change, however, and particularly during
periods of rapid or unanticipated changes in market interest
rates, the attractiveness of the CMO classes and the ability of
the structure to provide the anticipated investment
characteristics may significantly change. Such changes can
result in volatility in the market value, and in some instances
reduced liquidity, of the CMO class.
While the market values of particular securities in which the
GNMA Fund invests may be volatile, or may become volatile under
certain conditions, SAM will seek to manage the Fund so that the
volatility of the Fund's portfolio, taken as a whole, is
consistent with the Fund's investment objective. Unanticipated
interest rate changes and other factors may affect the volatility
of securities held by the Fund and the Fund's ability to fully
meet its investment objective.
2. May invest up to 35% of its total assets in:
Other U.S. Government securities, including (a) securities backed
by the full faith and credit of the U.S. Government, such as U.S.
Treasury bills, notes and bonds; (b) securities issued by U.S.
Government agencies or instrumentalities that are not backed by
the full faith and credit of the U.S. Government but are
supported by the issuer's right to borrow from the U.S. Treasury,
such as securities issued by FNMA and FHLMC; and (c) securities
supported solely by the creditworthiness of the issuer, such as
securities issued by TVA. While U.S. Government securities are
considered to be of the highest credit quality available, they
are subject to the same market risks as comparable debt
securities.
Other collateralized mortgage obligations issued by the U.S.
Government or one of its agencies or instrumentalities (such as
FNMA or FHLMC) or by private issuers which are collateralized by
securities issued by the U.S. Government or one of its agencies
or instrumentalities (such as FNMA or FHLMC). CMOs are
securities collateralized by a portfolio of mortgages or
mortgage-backed securities. The issuer's obligation to make
17
<PAGE>
interest and principal payments on the CMO is secured by the
underlying portfolio of mortgages or mortgage-backed securities.
CMOs are issued with a number of classes or series that have
different maturities and that may represent interests in some or
all of the interest or principal of the underlying collateral or
a combination thereof.
Corporate debt securities which are investment grade. Investment
grade corporate debt securities are rated in one of the four
highest grades assigned by Moody's or S&P or, if unrated,
determined by SAM to be of comparable quality to such rated debt
securities. Moody's deems securities rated in the fourth
category (Baa) to have speculative characteristics. The GNMA
Fund may retain a debt security which is downgraded to below
investment grade after purchase. In the event that, due to a
downgrade of one or more debt securities, an amount in excess of
5% of the Fund's net assets is held in securities rated below
investment grade, SAM will engage in an orderly disposition of
such securities to the extent necessary to ensure that the Fund's
holdings of such securities do not exceed 5% of the Fund's net
assets. For an explanation of ratings, see "Description of
Ratings" on page 55.
High-Yield Bond Fund
The High-Yield Bond Fund has as its investment objective to provide a high
level of current interest income through the purchase of high-yield,
fixed-income securities. The higher yields that the Fund seeks are
usually available from lower-rated or unrated securities sometimes
referred to as "junk bonds." The maturity of the debt obligations held by
the Fund may range from 1 to 30 years. However, it is anticipated that
the majority of debt obligations will have maturities from 5 to 15 years.
To pursue its investment objective, the High-Yield Bond Fund:
1. Will invest, during normal market conditions, at least 65% of its
portfolio in high-yield, fixed-income securities. The High-Yield
Bond Fund may purchase debt and preferred stock issues (including
convertible securities) which are below investment grade, i.e.,
rated lower than the top four grades by S&P or Moody's, or, if
not rated by these agencies, in the opinion of SAM, have credit
characteristics comparable to such rated securities. Up to 25%
of the Fund's total assets may be invested in such unrated
securities. SAM will determine the quality of unrated
obligations by evaluating the issuer's capital structure,
earnings power and quality of management. Unrated securities may
not be as attractive to as many investors as rated securities.
In addition, the Fund may invest up to 5% of its total assets in
securities which are in default. The Fund will purchase
securities which are in default only when, in SAM's opinion, the
potential for high yield outweighs the risk.
18
<PAGE>
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 28.
For a description of debt ratings, see "Description of Ratings"
on page 55. For a breakdown of the debt securities held by the
High-Yield Bond Fund during the fiscal year ended September 30,
1995, see "Debt Securities Held by the High-Yield Bond Fund" on
page 54.
The High-Yield Bond Fund may retain an issue whose rating has
been changed.
2. May invest in fixed-income securities with equity features when
comparable in yield and risk to fixed-income securities without
equity features, but only when acquired as a result of unit
offerings which carry an equity element such as common stock,
rights or other equity securities. The Fund will hold these
common stocks, rights or other equity securities until SAM
determines that, in its opinion, the optimal time for sale of the
equity security has been reached.
3. May invest up to 10% of its total assets in restricted securities
eligible for resale under Rule 144A ("Rule 144A securities"),
provided that SAM has determined that such securities are liquid
under guidelines adopted by the Board of Trustees. Restricted
securities may be sold only in offerings registered under the
Securities Act of 1933 ("1933 Act") or in transactions exempt
from the registration requirements under the 1933 Act. Rule 144A
under the 1933 Act provides an exemption for the resale of
certain restricted securities to qualified institutional buyers.
Investing in Rule 144A securities could have the effect of
increasing the Fund's illiquidity to the extent that qualified
institutional buyers or other buyers are unwilling to purchase
the securities.
4. May invest up to 5% of its total assets in municipal securities
which are rated lower than the top three grades assigned by
Moody's or S&P or are unrated but comparable to such rated
securities if, in the opinion of SAM, the potential for
appreciation is greater than, and yield is comparable to or
19
<PAGE>
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.
Managed Bond Fund
The Managed Bond Fund has as its investment objective to provide as high a
level of total return as is consistent with the relative stability of
capital through the purchase of investment grade debt securities.
In pursuing the Managed Bond Fund's investment objective, SAM will seek to
minimize the effects of interest rate risks while pursuing total return by
adjusting the investment portfolio's average maturity in response to
interest rate changes. In general, the Managed Bond Fund's strategy will
be to hold fixed-income securities with shorter maturities as interest
rates rise and with longer maturities as interest rates fall. The fixed-
income securities held by the Managed Bond Fund will have maturities of 10
years or less from the date of purchase. SAM reserves the right to modify
the Managed Bond Fund's investment strategy in any respect at any time.
To pursue its investment objective, the Managed Bond Fund:
1. Will invest at least 65% of its total assets in bonds, defined as
fixed-income securities.
2. Will invest primarily in investment grade debt securities; i.e.,
securities rated in the top four categories by either S&P or
Moody's or if not rated, securities which, in SAM's opinion, are
comparable in quality to investment grade debt securities. The
Fund will limit investments in such medium grade debt securities
to no more than 10% of its total assets. Unrated securities are
not necessarily of lower quality than rated securities, but may
not be as attractive to investors.
The Fund may retain debt securities which are downgraded to below
investment grade (commonly referred to as "high yield" or "junk"
bonds) after purchase, but no more than 5% of its total assets
will be invested in such securities. In addition to reviewing
20
<PAGE>
ratings, SAM may analyze the quality of rated and unrated debt
securities purchased for the Fund by evaluating the issuer's
capital structure, earnings power, quality of management and
position within its industry. For a description of debt
securities ratings, see "Description of Ratings" on page 55.
3. Will invest at least 50% of its total assets in obligations of or
guaranteed by the U.S. Government, its agencies and
instrumentalities. These obligations include (a) direct
obligations of the U.S. Treasury, such as U.S. Treasury notes,
bills, bonds and stripped securities; (b) securities supported by
the full faith and credit of the U.S. Government but that are not
direct obligations of the U.S. Treasury, such as securities
issued by GNMA; (c) securities that are not supported by the full
faith and credit of the U.S. Government but are supported by the
issuer's ability to borrow from the U.S. Treasury, such as
securities issued by the FNMA and the FHLMC and (d) securities
supported solely by the creditworthiness of the issuer, such as
securities issued by the TVA. While U.S. Government securities
are considered to be of the highest credit quality available,
they are subject to the same market risks as comparable debt
securities.
4. May invest up to 50% of its total assets in corporate debt
securities or Eurodollar bonds. Eurodollar bonds are bonds
issued by either U.S. or foreign issuers that are traded in the
European bond markets and denominated in U.S. dollars. The Fund
will purchase Eurodollar bonds through U.S. securities dealers
and hold such bonds in the United States. The delivery of
Eurodollar bonds to the Fund's custodian in the United States may
cause slight delays in settlement which are not anticipated to
affect the Fund in any material, adverse manner. Eurodollar
bonds issued by foreign issuers are subject to the same risks as
Yankee sector bonds discussed below.
5. May invest in asset-backed securities, which represent interests
in, or are secured by and payable from, pools of assets such as
consumer loans, automobile receivable securities, credit card
receivable securities and installment loan contracts. These
securities may be supported by credit enhancements such as
letters of credit. Payment of interest and principal ultimately
depends upon borrowers paying the underlying loans. There is the
risk that one or more of the underlying borrowers may default and
that recovery on repossessed collateral may be unavailable or
inadequate to support payments on the defaulted asset-backed
securities. In addition, asset-backed securities are subject to
prepayment risks which may reduce the overall return of the
investment.
21
<PAGE>
6. May invest up to 10% of its total assets in Yankee sector debt
securities, which are securities issued and traded in the United
States by foreign issuers. These bonds have investment risks
that are different from those of domestic issuers. Such risks
may include nationalization of the issuer, confiscatory taxation
by the foreign government that would inhibit the ability of the
issuer to make principal and interest payments to the Fund, lack
of comparable publicly available information concerning foreign
issuers, lack of comparable accounting and auditing practices in
foreign countries and, finally, difficulty in enforcing claims
against foreign issuers in the event of default.
Both S&P and Moody's rate Yankee sector debt obligations. If a
debt obligation is unrated, SAM will attempt to analyze a
potential investment in the foreign issuer with respect to
quality and risk on the same basis as the rating services.
Because public information is not always comparable to that
available on domestic issuers, this may not be possible.
Therefore, while SAM will attempt to select investments in
foreign securities on the same basis, and with comparable
quantities and types of information, as its investments in
domestic securities, that may not always be possible.
7. May hold cash as a temporary defensive measure when market
conditions so warrant.
8. May invest up to 5% of its total assets in municipal securities
if, in SAM's opinion, the potential for appreciation is greater
than, and yield is comparable to or greater than, similarly rated
taxable securities.
Common Investment Practices
Each Fund may also follow the investment practices described below:
1. Hold cash or invest temporarily in high quality, short-term
securities issued by an agency or instrumentality of the U.S.
Government, high quality commercial paper, certificates of
deposit, shares of no-load, open-end money market funds or
repurchase agreements. A Fund may purchase these short-term
securities as a cash management technique under those
circumstances where it has cash to manage for a short time
period, for example, after receiving proceeds from the sale of
securities, interest payments or dividend distributions from
portfolio securities or cash from the sale of Fund shares to
investors. Interest earned from these short-term securities will
be taxable to investors as ordinary income when distributed. SAM
will waive its advisory fees for Fund assets invested in money
22
<PAGE>
market funds. 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.
2. Invest for short-term purposes when SAM believes such action to
be desirable and consistent with sound investment practices. Each
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.
3. Purchase or sell securities on a "when-issued" or "delayed-
delivery" basis. Under this procedure, a Fund agrees to acquire
or sell securities that are to be issued and delivered against
payment in the future, normally 30 to 45 days. The price,
however, is fixed at the time of commitment. When a Fund
purchases when-issued or delayed-delivery securities, it will
earmark liquid, high-quality securities in an amount equal in
value to the purchase price of the security. Use of these
techniques may affect a Fund's share price in a manner similar to
the use of leveraging.
Except as noted, the following restrictions are fundamental policies of
each 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 (in the case of the Taxable Bond Funds, 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;
this 5% policy is non-fundamental for the Managed Bond Fund.
Each Fund intends to exercise its borrowing authority primarily
to meet shareholder redemptions under circumstances where
redemptions exceed available cash.
The Taxable Bond Funds have adopted the following additional fundamental
investment restrictions:
1. Each Taxable Bond Fund may invest up to 10% (High-Yield Bond and
Intermediate Treasury Funds) and 5% (GNMA Fund) of its net assets
23
<PAGE>
in illiquid securities, which are securities that cannot be sold
within seven days in the ordinary course of business for
approximately the amount at which they are valued. Due to the
absence of an active trading market, a Fund may experience
difficulty in valuing or disposing of illiquid securities. SAM
determines the liquidity of the securities under guidelines
adopted by the Taxable Bond Trust's Board of Trustees.
2. Each Taxable Bond Fund may invest up to 10% of net assets in
repurchase agreement transactions. Repurchase agreements are
transactions in which a Fund purchases securities from a bank or
recognized securities dealer and simultaneously commits to resell
the securities to the bank or dealer at an agreed-upon date and
price reflecting a market rate of interest unrelated to the
coupon rate or maturity of the purchased securities. Repurchase
agreements carry certain risks not associated with direct
investments in securities, including the risk that a Fund will be
unable to dispose of the security during the term of the
repurchase agreement if the security's market value declines, and
delays and costs to a Fund if the other party to the repurchase
agreement declares bankruptcy.
For more information, see the "Investment Policies" and the "Additional
Investment Information" sections of each Trust's No-Load Class Statement
of Additional Information.
________________
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. The value of a Fund's portfolio will normally fluctuate
inversely with changes in market interest rates. Generally, when market
interest rates rise, the price of the debt securities held by a Fund will
fall, and when market interest rates fall, the price of the debt
securities will rise. Also, there is a risk that the issuer of a bond or
other security held in a Fund's portfolio will fail to make timely
payments of principal and interest to the Fund. Included in investment
grade debt securities are debt securities of medium grade (rated Baa by
Moody's or BBB by S&P) which have speculative characteristics and are more
likely to have a weakened capacity to make principal and interest payments
under changing economic or other conditions than higher grade securities.
The prices of GNMA and other mortgage-backed securities, like conventional
fixed-income securities, are inversely affected by changes in interest
rate levels. Because of the likelihood of increased prepayments of
24
<PAGE>
mortgages in times of declining interest rates, the GNMA securities held
in a Fund's portfolio have less potential for capital appreciation than
comparable fixed-income securities and may in fact decrease in value when
interest rates fall. Further, purchases of GNMA or other mortgage-backed
securities for the GNMA Fund are based on an anticipated prepayment rate.
During periods of rising interest rates, a decrease in the prepayment of
mortgages is likely. This decrease may cause the average dollar weighted
maturity of particular securities held by the GNMA Fund and the GNMA
Fund's portfolio as a whole to increase, thereby increasing the overall
volatility of the Fund's share price during periods of rising interest
rates. To the extent that the other Funds purchase GNMA or other
mortgage-backed securities, they would be similarly affected.
The Managed Bond Fund may invest in stripped securities that are
obligations of the U.S. Treasury. Stripped securities are the separate
income or principal components of a debt security. The risks associated
with stripped securities are similar to those of other debt securities,
although stripped securities may be more volatile than other debt
securities.
Special Risks of the High-Yield Bond Fund
The High-Yield Bond Fund invests primarily in high-yield, fixed-income
securities which are subject to the following risks:
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 ("NAV") value per share of the High-
Yield Bond Fund to be volatile. Lower-quality, fixed-income securities
tend to reflect short-term economic and corporate developments to a
greater extent than higher-quality securities which primarily react to
fluctuations in interest rates. Economic downturns or increases in
interest rates can significantly affect the market for high-yield, fixed-
income securities and the ability of issuers to timely repay principal and
interest, increasing the likelihood of defaults. Lower-quality securities
include debt obligations issued as a part of capital restructurings, such
as corporate takeovers or buyouts. Capital restructurings generally
involve the issuance of additional debt on terms different from any
current outstanding debt. As a result, the issuer of the debt is more
highly leveraged. During an economic downturn or period of rising
interest rates, a highly-leveraged issuer may experience financial
difficulties which adversely affect its ability to make principal and
interest payments, meet projected business goals and obtain additional
financing. In addition, the issuer will depend on its cash flow and may
depend, especially in the context of corporate takeovers, on a sale of its
assets to service debt. Failure to realize projected cash flows or asset
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sales may seriously impair the issuer's ability to service this greater
debt load, which in turn might cause the Fund to lose all or part of its
investment in that security. SAM will seek to minimize these additional
risks through diversification, careful assessment of the issuer's
financial structure, business plan and management team following any
restructuring, and close monitoring of the issuer's progress toward its
financial goals.
ZERO-COUPON AND PAYMENT-IN-KIND SECURITIES
The High-Yield Bond Fund may hold "zero-coupon" and "payment-in-kind"
fixed-income securities. Zero-coupon securities are purchased at a
discount without scheduled interest payments. Payment-in-kind securities
receive interest paid in additional securities rather than cash. The Fund
accrues income on these securities, but does not receive cash interest
payments until maturity or payment date. The Fund intends to distribute
substantially all of its income to its shareholders so that it can be
treated as a regulated investment company under current federal tax law.
As a result, if its cash position is depleted, the Fund may have to sell
securities under disadvantageous circumstances to obtain enough cash to
meet its distribution requirement. However, SAM does not expect non-cash
income to materially affect the Fund's operations. Zero-coupon and
payment-in-kind securities are generally subject to greater price
fluctuations due to changes in interest rates than those fixed-income
securities paying cash interest on a schedule until maturity.
LIQUIDITY AND VALUATION
The liquidity and price of high-yield, fixed-income securities can be
affected by a number of factors, including investor perceptions and
adverse publicity regarding major issuers, underwriters or dealers of
lower-quality corporate obligations. These effects can be particularly
pronounced in a thinly-traded market with few participants and may
adversely impact the High-Yield Bond Fund's ability to dispose of its
securities as well as make valuation of securities more difficult.
Because there tend to be fewer investors in lower-rated, fixed-income
securities, it may be difficult for the Fund to sell these securities at
an optimum time. Consequently, lower-rated securities are subject to more
price changes, fluctuations in yield and risk to principal and income than
higher-rated securities of the same maturity. Judgment plays a greater
role in the valuation of thinly-traded securities.
CREDIT RATINGS
Rating agencies evaluate the likelihood that an issuer will make principal
and interest payments, but ratings may not reflect market value risks
associated with lower-rated, fixed-income securities. Also, rating
agencies may not timely revise ratings to reflect subsequent events
affecting an issuer's ability to pay principal and interest. SAM uses S&P
and Moody's ratings as a preliminary indicator of investment quality. SAM
will periodically research and analyze each issue (whether rated or
unrated) and evaluate such factors as the issuer's interest or dividend
26
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coverage, asset coverage, earnings prospects and managerial strength.
This analysis will help SAM to determine if the issuer has sufficient cash
flow and profits to meet required principal and interest payments and to
monitor the liquidity of the issue. Achievement of a Fund's investment
objective will be more dependent on SAM's credit analysis of bonds rated
below the three highest rating categories than would be the case were the
Fund to invest in higher quality debt securities. This is particularly
true for the High-Yield Bond Fund.
________________________
PORTFOLIO MANAGERS
________________________
Intermediate Treasury Fund and Managed Bond Fund
The portfolio manager for the Intermediate Treasury Fund and the Managed
Bond Fund is Michael C. Knebel, Vice President, SAM. Mr. Knebel has
served as portfolio manager for the Intermediate Treasury Fund since 1995.
He has served as manager or co-manager of the Managed Bond Fund since
1994. He has served as portfolio manager and/or co-portfolio manager for
other SAFECO mutual funds since 1989.
GNMA Fund
The portfolio manager for the GNMA Fund is Paul A. Stevenson, Vice
President, SAM. Mr. Stevenson has served as portfolio manager for the
Fund since 1988. He also serves as portfolio manager for another SAFECO
mutual fund. In addition, he is an Assistant Vice President of the SAFECO
Life Insurance Company.
High-Yield Bond Fund
The portfolio manager for the High-Yield Bond Fund is Kurt Havnaer,
Assistant Vice President, SAM. Mr. Havnaer began serving as portfolio
manager for the Fund in 1995. Since 1991, he has served as a fixed-income
securities analyst for SAM. He attended graduate school from 1990 to
1991.
Each portfolio manager and certain other persons related to SAM and the
Funds are subject to written policies and procedures designed to prevent
abusive personal securities trading. Incorporated within these policies
and procedures are recommendations made by the Investment Company
Institute (the trade group for the mutual fund industry) with respect to
personal securities trading by persons associated with mutual funds.
Those recommendations include preclearance procedures and blackout periods
when certain personnel may not trade in securities that are the same or
related securities being considered for purchase or sale by a Fund.
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<PAGE>
_____________________________
HOW TO PURCHASE SHARES
_____________________________
A completed and signed application must accompany payment for an initial
purchase by mail and in all cases is necessary before a redemption can be
made. Specific applications for retirement accounts must be completed and
signed before any retirement account can be set up. The Funds only accept
funds drawn in U.S. dollars and payable through a U.S. bank. The Funds do
not accept currency. The Funds issue shares in uncertificated form, but
will issue certificates for whole shares without charge upon written
request. You will be required to post a bond to replace missing
certificates. Please note that SAFECO Services may not be able to provide
participant sub-accounting services for all employee benefit or pension
plans that require such services.
The Funds reserve the right to refuse any offer to purchase shares.
INITIAL PURCHASES
Minimum Initial Investment $1,000 (IRA $250).
Minimum initial investments are negotiable for retirement accounts other
than IRAs.
No minimum initial investment is required to establish the Automatic
Investment Method or Payroll Deduction Plan.
By Written Request
Send a check or money order made payable to the No-Load Class of the
applicable Fund and a completed and signed application to the address on
the Prospectus cover.
By Wire
Call toll-free 1-800-624-5711 or, in Seattle, 545-7319 for instructions.
Not available for retirement accounts.
In Person
Visit a SAFECO Investor Center. Investor Centers are located at 1409
Fifth Avenue and 4333 Brooklyn Avenue N.E. in Seattle, Washington, and at
15411 N.E. 51st Street in Redmond, Washington. A representative will be
available to assist you in completing your application.
ADDITIONAL PURCHASES
Minimum Additional Investment $100 (except dividend reinvestments).
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<PAGE>
Minimum additional investments are negotiable for retirement accounts
other than IRAs.
By Written Request
Send a check or money order made payable to the No-Load Class of the
applicable Fund to the address on the Prospectus cover. Please specify
your account number.
By Wire
Instruct your bank to send wires to U.S. Bank of Washington, N.A.,
Seattle, Washington, ABA # 1250-0010-5, Account #0017-086083.
To ensure timely credit to your account, ask your bank to include the
following information in its wire to U.S. Bank of Washington, N.A.:
. SAFECO Fund name and class name
. SAFECO account number
. Name of the registered owner(s) of the SAFECO account
Delays of purchases caused by inadequate wire instructions are not the
responsibility of the Funds or SAFECO Services.
Your bank may charge a fee for wire services.
By Telephone
Call 1-800-624-5711 or, in Seattle, 545-7319. You must have previously
selected this service on your account application or by written request.
Not available to open a new account or for retirement accounts.
Maximum purchase $100,000 per day, minimum purchase $100 per day.
Monies will be transferred from your predesignated bank account to your
existing Fund account. Your bank may charge a fee if monies are wired to
your Fund account. Please allow 15 business days after selecting this
service for it to be available for first use.
Telephone purchases may be unavailable from some bank accounts and non-
bank financial institutions.
Please read "Telephone Transactions" on page 42 for important information.
In Person
Visit a SAFECO Investor Center. Investor Centers are located at 1409
Fifth Avenue and 4333 Brooklyn Avenue N.E. in Seattle, Washington, and at
15411 N.E. 51st Street in Redmond, Washington.
THROUGH REGISTERED SECURITIES DEALERS
29
<PAGE>
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
43 for other 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 43 for more information.
___________________________
HOW TO REDEEM SHARES
___________________________
BY WRITTEN REQUEST
Shares may be redeemed by sending a letter which specifies your account
number, the Fund's name and class name and the number of shares or dollar
amount you wish to redeem. The request should be sent to the address on
the Prospectus cover. The request must be signed by the appropriate
number of owners and in some cases a signature guarantee may be required.
In all cases, SAFECO Services must have a signed and completed application
on file before a redemption can be made. See "Account Changes and
Signature Requirements" on page 53 for more information.
Retirement account shareholders must specify whether or not they elect 10%
federal income tax withholding from a distribution other than an "eligible
rollover distribution."
BY TELEPHONE
Call 1-800-624-5711 or, in Seattle, 545-7319. You must have previously
selected this service on your account application or by written request.
Telephone redemptions are not available for retirement accounts or shares
issued in certificate form. You may request that redemption proceeds be
sent directly to your predesignated bank or mailed to your account address
of record.
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<PAGE>
Please read "Telephone Transactions" on page 42 for important information.
IN PERSON
Shares may be redeemed in person by visiting a SAFECO Investor Center.
Investor Centers are located at 1409 Fifth Avenue and 4333 Brooklyn Avenue
N.E. in Seattle, Washington, and at 15411 N.E. 51st Street in Redmond,
Washington. Funds for shares redeemed in person may be mailed to your
address of record, sent directly to your bank or retrieved directly from
the SAFECO Investor Center once they become available.
THROUGH REGISTERED SECURITIES DEALERS
Requests for redemption of shares by wire or telephone will be accepted
from registered securities dealers under agreement with each Fund's
principal underwriter. The dealer may charge a transaction fee for any
order processed.
THROUGH REGISTERED INVESTMENT ADVISERS
Please read "Transactions Through Registered Investment Advisers" on page
43 for important information.
PLEASE NOTE THE FOLLOWING:
If your shares were purchased by wire, redemption proceeds will be
available immediately. If shares were purchased by means other than wire,
each Fund reserves the right to hold the proceeds of a redemption for up
to 15 business days after investment or until such time as the Fund has
received assurance that your investment will be honored by the bank on
which it was drawn, whichever occurs first.
SAFECO Services charges a $10 fee to wire redemption proceeds. In
addition, some banks may charge a fee to receive wires.
If shares are issued in certificate form, the certificates must accompany
a redemption request and be duly endorsed.
Under some circumstances (e.g., a change in corporate officer or death of
an owner), SAFECO Services may require certified copies of supporting
documents before a redemption will be made.
SHARE REDEMPTION PRICE AND PROCESSING
Your shares will be redeemed at the NAV per share next calculated after
receipt of a request that meets the redemption requirements of the Funds.
The value of the shares you redeem may be more or less than the dollar
amount purchased, depending on the market value of the shares at the time
of redemption. See "Share Price Calculation," on page 43 for more
information.
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<PAGE>
Redemption proceeds will normally be sent on the next business day
following receipt of your redemption request. If your redemption request
is received after the close of trading on the New York Stock Exchange
(normally 1:00 p.m. Pacific time), proceeds will normally be sent on the
second business day following receipt. Each Fund, however, reserves the
right to postpone payment of redemption proceeds for up to seven days if
making immediate payment could adversely affect its portfolio. In
addition, redemptions may be suspended or payment dates postponed if the
New York Stock Exchange is closed, its trading is restricted or the
Securities and Exchange Commission declares an emergency.
Due to the high cost of maintaining small accounts, your account may be
closed upon 60 days' written notice if at the time of any redemption or
exchange the total value falls below $100. Your shares will be redeemed
at the NAV per share calculated on the day your account is closed and the
proceeds will be sent to you.
_____________________________________________________________
HOW TO SYSTEMATICALLY PURCHASE OR REDEEM SHARES
_____________________________________________________________
Call 1-800-426-6730 or 545-5530, in Seattle, for more information.
AUTOMATIC INVESTMENT METHOD (AIM)
AIM enables you to make regular monthly investments by authorizing SAFECO
Services to withdraw a specific amount (minimum of $100 per withdrawal per
Fund) from your bank account and invest the amount in any Fund.
PAYROLL DEDUCTION PLAN
An employer or other entity using group billing may establish a self-
administered payroll deduction plan in any Fund. Payroll deduction
amounts are negotiable.
SYSTEMATIC WITHDRAWAL PLAN
This plan enables you to receive a portion of your investment on a monthly
basis. A Fund automatically redeems shares in your account and sends you
a withdrawal check (minimum amount $50 per Fund) on or about the fifth
business day of every month.
_______________________________________________________________
HOW TO EXCHANGE SHARES FROM ONE FUND TO ANOTHER
_______________________________________________________________
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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 you wish to exchange
out of and into as well as your account number. The request must be
signed by the number of owners designated on your account application and
in some cases a signature guarantee may be required. See "Account Changes
and Signature Requirements" on page 53 for more information.
If the shares you want to exchange are evidenced by certificates, the
certificates must accompany the request and be duly endorsed.
Under some circumstances (e.g., a change in corporate officer or death of
an owner), SAFECO Services may require certified copies of supporting
documents before an exchange can be made.
BY TELEPHONE
Call 1-800-624-5711 or, in Seattle, 545-7319.
Exchanges by telephone must be in amounts of $1,000 or more.
Telephone exchanges are not available for shares issued in certificate
form.
Please read "Telephone Transactions" on page 42 for important information.
THROUGH REGISTERED INVESTMENT ADVISERS
Please read "Transactions Through Registered Investment Advisers" on page
43 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
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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 objective and policies or would otherwise potentially be
adversely affected. Although a Fund will attempt to give you prior notice
whenever it is reasonably able to do so, it may impose the above
restrictions at any time.
The Funds are not intended to serve as vehicles for frequent trading in
response to short-term fluctuations in the market. Due to the disruptive
effect that market-timing investment strategies can have on efficient
portfolio management, the Funds have instituted certain policies to
discourage excessive exchange and simultaneous order transactions.
Exchanges and simultaneous order transactions which, in SAM's judgment,
appear to follow a market-timing strategy are limited to 4 in any 12 month
period per account holder (or account, in a case where one person or
entity exercises investment discretion over more than one account). For
purposes of these limitations a "simultaneous order transaction" is a
transaction where a significant portion of an account's assets are
redeemed from one SAFECO Mutual Fund and shortly thereafter reinvested
into another SAFECO Mutual Fund. In order to protect the shareholders of
the Funds, SAM reserves the right to exercise its discretion in
determining whether a particular transaction qualifies as a simultaneous
order transaction. In addition to the foregoing limitations on exchanges
and simultaneous order transactions, as described above, the Funds reserve
the right to refuse any offer to purchase shares.
_____________________________
TELEPHONE TRANSACTIONS
_____________________________
To purchase, redeem or exchange shares by telephone, call 1-800-624-5711
or, in Seattle, 545-7319 between 5:30 a.m. and 7:00 p.m. Pacific time,
Monday through Friday, except certain holidays. All telephone calls are
tape-recorded for your protection. During times of drastic or unusual
market volatility, it may be difficult for you to exercise the telephone
transaction privileges.
To use the telephone purchase, redemption and exchange privileges, you
must have previously selected these services either on your account
application or by having submitted a request in writing to SAFECO Services
at the address on the Prospectus cover. Purchasing, redeeming or
exchanging shares by telephone allows the Funds and SAFECO Services to
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<PAGE>
accept telephone instructions from an account owner or a person
preauthorized in writing by an account owner.
Each Fund and SAFECO Services reserve the right to refuse any telephone
transaction when a Fund or SAFECO Services, in its sole discretion, is
unable to confirm to its satisfaction that a caller is the account owner
or a person preauthorized by the account owner.
The Funds and SAFECO Services will not be liable for the authenticity of
instructions received by telephone which a Fund or SAFECO Services, in its
discretion, believes to be delivered by an account owner or preauthorized
person, provided that the Fund or SAFECO Services follows reasonable
procedures to identify the caller. The shareholder will bear the risk of
any resulting loss. The Funds and SAFECO Services will employ reasonable
procedures to confirm that instructions communicated by telephone are
genuine. These procedures may include requiring the account owner to
select the telephone privilege in writing prior to first use and to
designate persons authorized to deliver telephone instructions. SAFECO
Services tape-records telephone transactions and may request certain
identifying information from the caller.
The telephone transaction privileges may be suspended, limited, modified
or terminated at any time without prior notice by the Funds or SAFECO
Services. The Funds and SAFECO Services may be liable if they do not
employ reasonable procedures to confirm that telephone transactions are
genuine.
______________________________________________________
TRANSACTIONS THROUGH REGISTERED INVESTMENT ADVISERS
______________________________________________________
SAFECO Services may accept instructions for share transactions and account
information changes from investment advisers who are acting on behalf of
shareholders, provided that the adviser is registered under the Investment
Advisers Act of 1940, has a signed agreement with SAFECO Services and has
an executed power of attorney from the shareholder, in an acceptable form,
on file with SAFECO Services. Advisers may charge a fee to shareholders
for their services. The Trust, the Funds and SAFECO Services have no
control over, or involvement with, the fees charged by advisers for such
services. Advisers are responsible for the prompt forwarding of
instructions on shareholders' accounts to SAFECO Services and are bound by
the terms of this Prospectus. The Trusts, the Funds, SAFECO Services and
their affiliated companies will not be responsible to any shareholder for
any losses, liabilities, costs or expenses associated with any investment
advice or recommendation provided by the adviser to the shareholder or for
accepting and following any instructions from such adviser with respect to
the shareholder's account(s).
______________________________
SHARE PRICE CALCULATION
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______________________________
The NAV per share of the No-Load Class shares of each Fund is computed at
the close of regular trading on the New York Stock Exchange ("NYSE")
(normally 1:00 p.m. Pacific time) each day that the NYSE is open for
trading. NAV is determined separately for each class of shares of each
Fund. The NAV of a Fund is calculated by subtracting a Fund's liabilities
from its assets and dividing the result by the number of outstanding
shares.
The values of each Fund's portfolio securities are stated on the basis of
valuations provided by a pricing service, unless the Board determines such
does not represent fair value. The service uses information with respect
to transactions in securities, quotations from securities dealers, market
transactions in comparable securities and various relationships between
securities to determine values. Other assets for which a representative
value cannot be established are valued at their fair value as determined
in good faith by or under the direction of each Trust's Board of Trustees.
___________________________________________________
INFORMATION ABOUT SHARE OWNERSHIP AND
COMPANIES THAT PROVIDE SERVICES TO THE TRUSTS
___________________________________________________
The Intermediate Treasury Fund, GNMA, and High-Yield Bond Funds are series
of the SAFECO Taxable Bond Trust. The Managed Bond Fund is a series of
the SAFECO Managed Bond Trust. Each Trust is a Delaware business trust
established by a Trust Instrument dated May 13, 1993. Each Trust is
authorized to issue an unlimited number of shares of beneficial interest.
The Boards of Trustees may establish additional series or classes of
shares of the Trusts without the approval of shareholders.
In addition to the No-Load Class of shares, the Intermediate Treasury Fund
and the Managed Bond Fund also offer two other classes of shares through a
separate prospectus to investors who engage the services of an investment
professional: Advisor Class A shares and Advisor Class B shares. Advisor
Class A shares are sold subject to an initial sales charge and Advisor
Class B shares are sold subject to a contingent deferred sales charge.
Advisor Class A and Advisor Class B shares also incur different expenses
than No-Load Class shares. Accordingly, the performance of the three
classes will differ. For more information about Advisor Class A shares
and Advisor Class B shares of the Intermediate Treasury and Managed Bond
Funds, please call 1-800-463-8791.
Each share of a Fund is entitled to participate equally in dividends and
other distributions and the proceeds of any liquidation except that, due
to the differing expenses borne by the three classes of the Intermediate
Treasury and Managed Bond Funds, dividends and liquidation proceeds for
36
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each class of shares of those Funds will likely differ. All shares issued
are fully paid and non-assessable, and shareholders have no preemptive or
other right to subscribe to any additional shares.
The Trusts do not intend to hold annual meetings of shareholders of the
Funds. The Trustees of a Trust will call a special meeting of
shareholders of a Fund only if required under the Investment Company Act
of 1940, in their discretion, or upon the written request of holders of
10% or more of the outstanding shares of that Fund entitled to vote.
Separate votes are taken by each class of shares, a Fund, or a Trust if a
matter affects only that class of shares, a Fund, or a Trust,
respectively.
Under Delaware law, the shareholders of the Funds will not be personally
liable for the obligations of any Fund; a shareholder is entitled to the
same limitation of personal liability extended to shareholders of
corporations. To guard against the risk that Delaware law might not be
applied in other states, each Trust Instrument requires that every written
obligation of a Trust or a Fund contain a statement that such obligation
may be enforced only against the assets of a Trust or Fund and generally
provides for indemnification out of Trust or Fund property of any
shareholder nevertheless held personally liable for Trust or Fund
obligations, respectively.
Because the Trusts use a combined Prospectus, it is possible that a Fund
might become liable for a misstatement about the series of another Trust
contained in the Prospectus. The Boards of Trustees have considered this
factor in approving the use of a single, combined Prospectus.
SAM is the investment adviser for each Fund under an agreement with each
Trust. Under each agreement, SAM is responsible for the overall
management of the Trust's and each Fund's business affairs. SAM provides
investment research, advice, management and supervision to each Trust and
each Fund, and, consistent with each Fund's investment objectives and
policies, SAM determines what securities will be purchased, retained or
sold by each Fund and implements those decisions. Each Fund pays SAM an
annual management fee based on a percentage of that Fund's net assets
ascertained each business day and paid monthly in accordance with the
schedules below. A reduction in the fees paid by a Fund occurs only when
that Fund's net assets reach the dollar amounts of the break points and
applies only to the assets that fall within the specified range:
Intermediate Treasury Fund
Net Assets Annual Fee
$0 - $250,000,000 .55 of 1%
$250,000,001 - $500,000,000 .45 of 1%
$500,000,001 - $750,000,000 .35 of 1%
Over $750,000,000 .25 of 1%
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GNMA and High-Yield Bond Funds
Net Assets Annual Fee
$0 - $250,000,000 .65 of 1%
$250,000,001 - $500,000,000 .55 of 1%
$500,000,001 - $750,000,000 .45 of 1%
Over $750,000,000 .35 of 1%
Managed Bond Fund
Net Assets Annual Fee
$0 - $100,000,000 .50 of 1%
$100,000,001 - $250,000,000 .40 of 1%
Over $250,000,000 .35 of 1%
The distributor for the No-Load Class of each Fund's shares under an
agreement with each Trust is SAFECO Securities, Inc. ("SAFECO
Securities"), a broker-dealer registered under the Securities Exchange Act
of 1934 and a member of the National Association of Securities Dealers,
Inc. SAFECO Securities receives no compensation from the Trusts or the
Funds for its services as distributor of the No-Load Class shares.
The transfer, dividend and distribution disbursement and shareholder
servicing agent for the No-Load Class of each Fund under an agreement with
each Trust is SAFECO Services. SAFECO Services receives a fee from each
Fund for each shareholder account held in that Fund. SAFECO Services may
enter into subcontracts with registered broker-dealers, third party
administrators and other qualified service providers that generally
perform shareholder, administrative, and/or accounting services which
would otherwise be provided by SAFECO Services. Fees incurred by a Fund
for these services will not exceed the transfer agency fee payable to
SAFECO Services. Any distribution expenses associated with these
arrangements will be borne by SAM.
SAM, SAFECO Securities and SAFECO Services are wholly-owned subsidiaries
of SAFECO Corporation (a holding company whose primary subsidiaries are
engaged in the insurance and financial services businesses) and are each
located at SAFECO Plaza, Seattle, Washington 98185.
__________________________________________
PERSONS CONTROLLING CERTAIN FUNDS
__________________________________________
At September 13, 1996, SAFECO Insurance Company of America ("SAFECO
Insurance") controlled the Intermediate Treasury Fund. SAFECO Insurance
is a Washington Corporation and a wholly-owned subsidiary of SAFECO
Corporation, which has its principal place of business at SAFECO Plaza,
Seattle, Washington 98185.
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At September 13, 1996, Crown Packaging Corp. PS & P and Massman
Construction Co. PSRT controlled the Managed Bond Fund. Crown Packaging
Corp. PS & P's address of record is 8514 Eager Road, St. Louis, MO 63144.
Massman Construction Co. PSRT'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. Yield is the annualization on a
360-day basis of a Fund's net income per share over a 30-day period
divided by the Fund's net asset value per share on the last day of the
period. The formula for the yield calculation is defined by regulation.
Consequently, the rate of actual income distributions paid by the Funds
may differ from quoted yield figures. Total return is the total
percentage change in an investment in a class of a Fund, assuming the
reinvestment of dividends and capital gains distributions, over a stated
period of time. Average annual total return is the annual percentage
change in an investment in a class of a Fund, assuming the reinvestment of
dividends and capital gain distributions, over a stated period of time.
Performance quotations are calculated separately for each class of a Fund.
From time to time, a Fund may advertise rankings. Rankings are calculated
by independent companies that monitor mutual fund performance (e.g., CDA
Investment Technologies, Lipper Analytical Services, Inc., and
Morningstar, Inc.), and are reported periodically in national financial
publications such as Barron's, Business Week, Forbes, Investor's Business
Daily, Money Magazine, and The Wall Street Journal. In addition, non-
standardized performance figures may accompany the standardized figures
described above. Non-standardized figures may be calculated in a variety
of ways including, but not necessarily limited to, different time periods
and different initial investment amounts. Each Fund may also compare its
performance to the performance of relevant indices.
Performance information and quoted rankings are indicative only of past
performance and are not intended to represent future investment results.
The yield and share price of each class of a Fund will fluctuate and your
shares, when redeemed, may be worth more or less than you originally paid
for them.
___________________________________________________
FUND DISTRIBUTIONS AND HOW THEY ARE TAXED
___________________________________________________
39
<PAGE>
DIVIDEND AND OTHER DISTRIBUTIONS
Each Fund declares dividends on each business day from its net investment
income (which includes accrued interest, earned discount, and other income
earned on portfolio securities less expenses) and such shares become
entitled to declared dividends on the next business day after shares are
purchased in 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.
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 in the same manner as the distribution election. For
retirement accounts, all dividends and other distributions declared by a
Fund must be invested in additional shares of that Fund.
States generally treat the pass through of interest earned on U.S.
Treasury securities and other direct obligations of the U.S. government as
tax-free income in the calculation of their state income tax. This
treatment may be dependent upon the maintenance of certain minimum
percentages of fund ownership of these securities. The Intermediate
Treasury Fund will invest primarily in these securities, while the GNMA
Fund may occasionally invest a portion of its portfolio in these
securities.
Please remember that if you purchase shares shortly before a Fund pays a
taxable dividend or other distribution, you will pay the full price for
the shares, then receive part of the price back as a taxable distribution.
TAXES
Each Fund intends to continue to qualify for treatment as a regulated
investment company under Subchapter M of the Internal Revenue Code of
1986, as amended. By so qualifying, a Fund will not be subject to federal
income taxes to the extent it distributes its net investment income and
realized capital gains to its shareholders. Each Fund will inform you as
to the amount and nature of dividends and other distributions to your
account. Dividends and other distributions declared in December, but
received by shareholders in January, are taxable to shareholders in the
year in which declared.
40
<PAGE>
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.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting each Fund and its shareholders; see the
Trust's Statement of Additional Information for additional tax
information. There may be other federal, state or local tax consider-
ations 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 non-profit organizations. An account may be
established under one of the following plans which allow you to defer
investment income from federal income tax while you save for retirement.
Many of the SAFECO Funds may be used as investment vehicles for these
plans.
Individual Retirement Accounts (IRAs). IRAs are tax-deferred retirement
accounts for anyone under age 70 1/2 with earned income. The maximum
annual contribution generally is $2,000 per person ($2,250 for you and a
non-working spouse). Under certain circumstances your contribution will
be deductible for income tax purposes. An annual custodial fee will be
charged for any part of a calendar year in which you have an IRA
investment in a Fund.
Simplified Employee Pension IRAs (SEP-IRAs). SEP-IRAs are easily
administered retirement plans for small businesses and self-employed
individuals. Annual contributions of up to $22,500 may be made to SEP-IRA
accounts; the annual contribution limit is subject to change. SEP-IRAs
have the same investment minimums and custodial fees as regular IRAs.
403(b) Plans. 403(b) plans are retirement plans for tax-exempt
organizations and school systems to which employers and employees both may
contribute. Minimum investment amounts are negotiable.
41
<PAGE>
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,
recordkeeping, 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-
2985. For a description of federal income tax withholding on
distributions from these accounts and plans, see "Fund Distributions and
How They Are Taxed - Tax Withholding Information" on page 51.
________________________
ACCOUNT STATEMENTS
________________________
Periodically, you will receive an account statement showing your current
Fund holdings and transactions affecting your account. Confirmation
statements will be sent after each transaction that affects your account
balance. Please review the information on each confirmation statement for
accuracy immediately upon receipt. If you do not notify us within 30 days
of any processing error, SAFECO Services will consider the transactions
listed on the confirmation statement to be correct.
_______________________________________________________
ACCOUNT CHANGES AND SIGNATURE REQUIREMENTS
_______________________________________________________
Changes to your account registration or the services you have selected
must be in writing and signed by the person(s) specified on your account
application as having authority to make these changes. Send written
changes to SAFECO Services at the address on the Prospectus cover.
Certain changes to the Automatic Investment Method and Systematic
Withdrawal Plan can be made by telephone request if you have previously
selected single signature authorization for your account.
You must specify on your account application the number of signatures
required to authorize redemptions and exchanges and to change account
registration or the services selected. Authorizing fewer than all account
owners has important implications. For example, one owner of a joint
tenant account can redeem money or change the account registration to
single ownership without the co-owner's signature. If you do not indicate
otherwise on the application, the signatures of all account owners will be
42
<PAGE>
required to effect a transaction. Your selection of fewer than all
account owner signatures may be revoked by any account owner who writes to
SAFECO Services at the address on the Prospectus cover.
SAFECO Services may require a signature guarantee for a signature that
cannot be verified by comparison to the signature(s) on your account
application. A signature guarantee may be obtained from most financial
institutions, including banks, savings and loans and broker-dealers.
__________________________________________________________
DEBT SECURITIES HELD BY THE HIGH-YIELD BOND FUND
__________________________________________________________
The weighted average ratings of all fixed-income securities, expressed as
a percentage of total investments held by the High-Yield Bond Fund during
the fiscal year ended September 30, 1995, were as follows:
<TABLE>
<CAPTION>
Moody's % S&P %
------- -- --- --
Investment Grade
----------------------------------------------------------------------
<S> <C> <C> <C>
Aaa __ AAA __
Aa __ AA __
A __ A __
Baa 2% BBB 2%
Below Investment Grade
---------------------------------------------------------------
Ba 17% BB 28%
B 69% B 60%
Caa 5% CCC 4%
Ca __ C
D 1%
Not Rated, but Not Rated, but
determined to be determined to be
investment grade __ investment grade __
43
<PAGE>
Not Rated, but Not Rated, but
determined to be below determined to be below
investment grade investment grade
7% 5%
</TABLE>
___________________________
DESCRIPTION OF RATINGS
___________________________
Ratings by Moody's and S&P represent their respective opinions as to the
investment quality of the rated obligations. Investors should realize
these ratings do not constitute a guarantee that the principal and
interest payable under these obligations will be paid when due.
Description of Commercial Paper Ratings
Moody's. Issuers rated Prime-1 have a superior capacity, issuers rated
Prime-2 have a strong capacity and issuers rated Prime-3 have an
acceptable capacity for the repayment of short-term promissory
obligations.
S&P. Commercial Paper issues rated A are the highest quality obligations.
Issues in this category are regarded as having the greatest capacity for
timely payment. For issues designated A-1 the degree of safety regarding
timely payment is very strong. Issuers designated A-2 also have a strong
capacity for timely payment but not as high as A-1 issuers. Issuers
designated A-3 have a satisfactory capacity for timely payment.
Description of Debt Ratings
Excerpts from Moody's description of its ratings:
------------------------------------------------
Investment Grade:
----------------
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
44
<PAGE>
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.
45
<PAGE>
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.
46
<PAGE>
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.
47
<PAGE>
SAFECO Family of Funds
Stability of Principal
SAFECO Money Market Fund
SAFECO Tax-Free Money Market Fund
Bond Income
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO GNMA Fund
SAFECO High-Yield Bond Fund
SAFECO Managed Bond Fund
Tax-Free Bond Income
SAFECO Intermediate-Term Municipal Bond Fund
SAFECO Insured Municipal Bond Fund
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal Bond Fund
High Current Income With Long-Term Growth
SAFECO Income Fund
Long-Term Growth
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Northwest Fund
SAFECO Balanced Fund
SAFECO International Stock Fund
SAFECO Small Company Stock Fund
For more complete information on any SAFECO mutual fund, including
management fees and expenses, call or write for a free Prospectus. Please
read it carefully before you invest or send money.
48
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
TELEPHONE NUMBERS
PROSPECTUS
To request a Prospectus:
September 30, 1996
Nationwide: 1-800-426-6730
Seattle: 545-5530 SAFECO Intermediate-Term U.S.
Treasury Fund
For 24-Hour Price and Performance SAFECO GNMA Fund
Information:
SAFECO High-Yield Bond Fund
Nationwide: 1-800-835-4391 SAFECO Managed Bond Fund
Seattle: 545-5113
No-Load Class
For account information or telephone No dealer, salesperson or other person has been
transactions*: authorized to give any information or to make any
representation, other than those contained in this
Nationwide: 1-800-624-5711 Prospectus, and, if given or made, such other
Seattle: 545-7319 information or representations must not be relied
Hearing Impaired TDD/TTY Service: upon as having been authorized by either Trust, any
1-800-438-8718 Fund, or by SAFECO Securities. This Prospectus does
not constitute an offer to sell or a solicitation of
*All telephone calls are tape- an offer to buy a Trust, a Fund or by SAFECO
recorded for your protection. Securities in any state in which such offer or
solicitation may not lawfully be made.
Mailing Address:
SAFECO MUTUAL FUNDS
No-Load Class Shares
P.O. Box 34890
Seattle, WA 98124-1890
EXPRESS/OVERNIGHT MAIL:
SAFECO Mutual Funds
No-Load Class Shares
4333 Brooklyn Avenue N.E.
Seattle, WA 98105
Distributor:
SAFECO Securities, Inc.
P.O. Box 34890
Seattle, WA 98124-1890
</TABLE>
49
<PAGE>
SAFECO GROWTH FUND
SAFECO EQUITY FUND
SAFECO INCOME FUND
SAFECO NORTHWEST FUND
SAFECO BALANCED FUND
SAFECO INTERNATIONAL STOCK FUND
SAFECO SMALL COMPANY STOCK FUND
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
SAFECO 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 September 30, 1996
_________________________________________________________________________
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 4.
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 September 30, 1996 and incorporated herein by
this reference, have been filed with the Securities and Exchange
Commission and are available at no charge upon request by calling the
telephone number listed on this page. The Statements of Additional
Information contain more information about many of the topics in this
Prospectus as well as information about the trustees and officers of the
Trusts.
For additional assistance, please contact your investment professional, or
call or write:
Nationwide 1-800-463-8791
<PAGE>
SAFECO Mutual Funds
Advisor Class Shares
P.O. Box 34680
Seattle, WA 98124-1680
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.
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 Balanced Fund ("Balanced Fund") has as its investment objective to
seek growth and income consistent with the preservation of capital. To
pursue its objective, the Balanced Fund will invest primarily in equity
and fixed income securities.
SAFECO International Stock Fund ("International Fund") has as its
investment objective to seek maximum long-term total return (capital
appreciation and income) by investing primarily in common stock of
established non-U.S. companies. To pursue its objective, the
International Fund, under normal market conditions, will invest at least
65% of its total assets in the securities of companies domiciled in at
least five countries, not including the United States.
SAFECO Small Company Stock Fund ("Small Company Fund") has as its
investment objective to seek long-term growth of capital through investing
primarily in small-sized companies. To pursue its objective, the Small
Company Fund will invest primarily in companies with total market
capitalization of less than $1 billion.
SAFECO Intermediate-Term U.S. Treasury Fund ("Intermediate Treasury Fund")
has as its investment objective to provide as high a level of current
income as is consistent with the preservation of capital. During normal
market conditions, the Fund will invest at least 65% of its total assets
in direct obligations of the U.S. Treasury.
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.
3
<PAGE>
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.
4
<PAGE>
Table of Contents
Page
INTRODUCTION TO THE TRUSTS AND THE FUNDS . . . . . . . . . . . . . . 8
EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . 15
SUB-ADVISER INFORMATION FOR THE INTERNATIONAL FUND . . . . . . . . . 32
ALTERNATIVE PURCHASE ARRANGEMENT . . . . . . . . . . . . . . . . . . 33
EACH FUND'S INVESTMENT OBJECTIVE AND POLICIES . . . . . . . . . . . . 34
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
PORTFOLIO MANAGERS . . . . . . . . . . . . . . . . . . . . . . . . . 62
HOW TO PURCHASE SHARES . . . . . . . . . . . . . . . . . . . . . . . 65
HOW TO REDEEM SHARES . . . . . . . . . . . . . . . . . . . . . . . . 72
HOW TO SYSTEMATICALLY PURCHASE OR REDEEM SHARES . . . . . . . . . . . 74
HOW TO EXCHANGE SHARES FROM ONE FUND TO ANOTHER . . . . . . . . . . . 75
TELEPHONE TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . 76
SHARE PRICE CALCULATION . . . . . . . . . . . . . . . . . . . . . . . 77
INFORMATION ABOUT SHARE OWNERSHIP AND COMPANIES
THAT PROVIDE SERVICES TO THE TRUSTS . . . . . . . . . . . . . . . . . 79
DISTRIBUTION PLANS . . . . . . . . . . . . . . . . . . . . . . . . . 84
PERSONS CONTROLLING CERTAIN FUNDS . . . . . . . . . . . . . . . . . . 85
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 85
FUND DISTRIBUTIONS AND HOW THEY ARE TAXED . . . . . . . . . . . . . . 86
TAX-DEFERRED RETIREMENT PLANS . . . . . . . . . . . . . . . . . . . . 91
ACCOUNT STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 92
ACCOUNT CHANGES AND SIGNATURE REQUIREMENTS . . . . . . . . . . . . . 92
DESCRIPTION OF STOCKS, BONDS AND CONVERTIBLE SECURITIES . . . . . . . 93
RATINGS SUPPLEMENT . . . . . . . . . . . . . . . . . . . . . . . . . 93
5
<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 and the Small Company Fund (collectively, the "Stock
Funds"). Each Stock Fund is a diversified series of the Common Stock
Trust.
The taxable fixed-income Funds offered are the Intermediate Treasury Fund
and the Managed Bond Fund (collectively, the "Taxable Fixed-Income
Funds"). The Intermediate Treasury Fund and the Managed Bond Fund are
diversified series of the Taxable Bond Trust and the Managed Bond Trust,
respectively. 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:
6
<PAGE>
. Offers easy access to your money through telephone redemptions and wire
transfers.
. Has a minimum initial investment of $1,000 for regular accounts and $250
for individual retirement accounts ("IRAs"). No minimum initial
investment is required to establish the Automatic Investment Method
("AIM") or Payroll Deduction Plan.
Risk Factors
There is, of course, no assurance that a Fund will achieve its investment
objective. See "Each Fund's Investment Objective and Policies" for more
information.
There is a risk that the market value of each Fund's portfolio of
securities may decrease and result in a decrease in the value of a
shareholder's investment. Because the Northwest, California and
Washington Funds concentrate their investments in geographic regions, they
may be subject to special risks. Investors should carefully consider the
investment risks of such geographic concentration before purchasing shares
of those Funds. Because the International Fund invests primarily in
foreign securities, it is subject to various risks in addition to those
associated with U.S. investments. For example, the value of the
International Fund depends in part upon currency values, the political and
regulatory environments, and overall economic factors in the countries in
which the Fund invests. The Small Company Fund invests in small-sized
companies, which involves 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,
Managed Bond Fund, Municipal Bond Fund, California Fund and Washington
Fund will normally fluctuate inversely with changes in market interest
rates. 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 August 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.
___________
7
<PAGE>
EXPENSES
___________
A. Shareholder Transaction Expenses for Class A and Class B of Each Fund
Class A Class B
------- -------
Maximum Sales Charge on 4.50%* NONE
Purchases (As a Percentage
of Offering Price)
Sales Charge on Reinvested NONE NONE
Dividends
Maximum Contingent Deferred NONE* 5.00%**
Sales Charge (CDSC)
Redemption Fees NONE NONE
Exchange Fees NONE NONE
* Except for initial purchases of the Money Market Fund. In addition,
purchases of $1,000,000 or more of Class A shares are not subject to a
front-end sales charge, but a 1% CDSC will apply to redemptions made in
the first year. See "How to Purchase Shares" on page 65 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 65
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 65 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 70 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
----------- ----------- -----------
8
<PAGE>
Advisor Advisor Advisor Advisor Advisor Class Advisor Class
Class A Class B Class A Class B A B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Management Fee .67% .67% .61% .61% .68% .68%
Rule 12b-1 Fees .25% 1.00% .25% 1.00% .25% 1.00%
Other Expenses .31% .31% .23% .23% .18% .18%
-------- -------- -------- -------- -------- --------
Total Operating Expenses 1.23% 1.98% 1.09% 1.84% 1.11% 1.86%
(estimated)
Northwest Fund Balanced Fund International Fund
-------------- ------------- ------------------
Advisor Advisor Advisor Advisor Advisor Class Advisor Class
Class A Class B Class A Class B A B
------- ------- ------- ------- ------- -------
Management Fee .73% .73% .75% .75% 1.10% 1.10%
Rule 12b-1 Fees .25% 1.00% .25% 1.00% .25% 1.00%
Other Expenses .36% .36% .24% .24% .23% .23%
-------- -------- -------- -------- -------- --------
Total Operating Expenses 1.34% 2.09% 1.24% 1.99% 1.58% 2.33%
(estimated)
Small Company Intermediate
Fund Treasury Fund Managed Bond Fund
------------- ------------- -----------------
Advisor Advisor Advisor Advisor Advisor Class Advisor
Class A Class B Class A Class B A Class B
------- ------- ------- ------- ------- -------
Management Fee .85% .85% .54% .54% .49% .49%
Rule 12b-1 Fees .25% 1.00% .25% 1.00% .25% 1.00%
Other Expenses .23% .23% .42% .42% .67% .67%
-------- -------- -------- -------- -------- --------
Total Operating Expenses 1.33% 2.08% 1.21% 1.96% 1.41% 2.16%
(estimated)
Money Market Fund Municipal Bond Fund California Fund
----------------- ------------------- ---------------
Advisor Advisor Advisor Advisor Advisor Class Advisor
Class A Class B Class A Class B A Class B
------- ------- ------- ------- ------- -------
Management Fee .50% .50% .41% .41% .53% .53%
Rule 12b-1 Fees .00%* .00%* .25% 1.00% .25% 1.00%
Other Expenses .28% .28% .13% .13% .15% .15%
------- ------- ------- ------- ------- -------
Total Operating Expenses .78% .78% .79% 1.54% .93% 1.68%
(estimated)
</TABLE>
<TABLE>
<CAPTION>
Washington Fund
---------------
9
<PAGE>
Advisor Class Advisor Class
A B
------- -------
<S> <C> <C>
Management Fee .64% .64%
Rule 12b-1 Fees .25% 1.00%
Other Expenses .43% .43%
-------- --------
Total Operating Expenses
(estimated) 1.32% 2.07%
</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 commenced offering
Class A and Class B shares. Because Class A and Class B shares have not
previously been offered, expenses do not reflect actual Class A or Class B
expenses. The amounts shown for the Growth, Equity, Income, Northwest,
and Intermediate Treasury 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, 1995, restated as
applicable to reflect fees borne by Class A or Class B shares. The
amounts shown for the Money Market, Municipal Bond, California, and
Washington Funds are estimated expenses for the Advisor Classes based on
the actual expenses paid by shareholders of the Funds' other class for the
fiscal year ended March 31, 1996, restated as applicable to reflect fees
borne by Class A or Class B shares. The amounts shown for the Managed
Bond Fund are estimated expenses for the Advisor Classes based on the
actual expenses paid by shareholders of the Fund's other class for the
fiscal year ended December 31, 1995, restated as applicable to reflect
fees borne by Class A or Class B shares. The amounts shown for the
Balanced, International and Small Company Funds are annualized expenses
for Class A or Class B shares based on the maximum management fee and
estimated "other expenses" for the fiscal period ended September 30, 1996.
The management fees paid by the International and Small Company Funds are
higher than the management fees paid by most other investment companies.
See "Information about Share Ownership and Companies that Provide Services
to the Trusts" on page 79 for more information.
Rule 12b-1 fees have the following two components:
Advisor Class A Advisor Class B
--------------- ---------------
Rule 12b-1 service fees 0.25% 0.25%
Rule 12b-1 distribution fees 0.00% 0.75%
Long-term Class A and Class B shareholders may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc.
10
<PAGE>
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 $82 $110 $187
Advisor Class B
Assuming redemption at end of period(2)(3) $70 $92 $127 $193
Assuming no redemption at end of period(3) $20 $62 $107 $193
Equity
Advisor Class A(1) $56 $78 $102 $172
Advisor Class B
Assuming redemption at end of period(2)(3) $69 $88 $120 $178
Assuming no redemption at end of period(3) $19 $58 $100 $178
Income
Advisor Class A(1) $56 $79 $104 $175
Advisor Class B
Assuming redemption at end of period(2)(3) $69 $89 $121 $181
Assuming no redemption at end of period(3) $19 $59 $101 $181
Northwest
Advisor Class A(1) $58 $ 86 $115 $199
Advisor Class B
Assuming redemption at end of period(2)(3) $71 $ 95 $132 $205
Assuming no redemption at end of period(3) $21 $ 65 $112 $205
Balanced
Advisor Class A(1) $57 $ 83
Advisor Class B
Assuming redemption at end of period(2) $70 $ 92
Assuming no redemption at end of period $20 $ 62
International
Advisor Class A(1) $60 $ 93
Advisor Class B
Assuming redemption at end of period(2) $74 $103
Assuming no redemption at end of period $24 $ 73
Small Company
Advisor Class A(1) $58 $ 85
Advisor Class B
Assuming redemption at end of period(2) $71 $ 95
Assuming no redemption at end of period $21 $ 65
Intermediate Treasury
Advisor Class A(1) $57 $ 82 $109 $185
Advisor Class B
Assuming redemption at end of period(2)(3) $70 $ 92 $126 $191
Assuming no redemption at end of period(3) $20 $ 62 $106 $191
11
<PAGE>
Fund 1 Year 3 Years 5 Years 10 Years
---- ------ ------- ------- --------
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.
__________________________
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
12
<PAGE>
the period indicated and do not reflect Rule 12b-1 fees. Except for the
six month (Growth, Equity, Income, Northwest and Intermediate Treasury)
and two month and one day (Balanced, International and Small Company)
periods ended March 31, 1996 and the six month period ended June 30, 1996
(Managed Bond), the following selected data has been derived from
financial statements that have been audited by Ernst & Young LLP,
independent auditors. The data should be read in conjunction with the
financial statements, related notes and other financial information
included in each Trust's Annual Report to shareholders and incorporated by
reference in the applicable Trust's Statement of Additional Information.
The following selected data for the six month (Growth, Equity, Income,
Northwest and Intermediate Treasury) and two month and one day (Balanced,
International and Small Company) periods ended March 31, 1996 and for the
six month period ended June 30, 1996 (Managed Bond) 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 each Trust's Semi-Annual Report to shareholders
and incorporated by reference in the applicable 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.
13
<PAGE>
<TABLE>
<CAPTION>
SAFECO GROWTH FUND
Year Ended September 30
For the Six Month
Period Ended
March 31, 1996
(Unaudited) 1995 1994 1993 1992 1991
---------- ---- ---- ---- ---- ----
<S> <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
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment (loss) income -- .07 (.02) (.02) (.01) .05
Net realized and unrealized 1.50 4.07 .78 5.39 (3.15) 7.77
gain (loss) on investments ---- ---- ---- ---- ------ ----
Total from investment operations 1.50 4.14 .76 5.37 (3.16) 7.82
---- ---- ---- ---- ------ ----
LESS DISTRIBUTIONS
Dividends from net investment income -- (.07) -- -- -- (.05)
Distributions from capital gains (0.17) (5.61) (2.59) (.15) (.81) (.96)
------ ------ ------ ------ ------ ------
Total distributions (0.17) (5.68) (2.59) (.15) (.81) (1.01)
------ ------ ------ ------ ------ ------
Net asset value at end of period $17.16 $15.83 $17.37 $19.20 $13.98 $17.95
====== ====== ====== ====== ====== ======
Total return** 9.58%+ 23.93% 3.88% 38.43% -17.83% 70.22%
Net assets at end of period
(000's omitted) $193,167 $176,483 $156,108 $158,723 $127,897 $155,429
Ratio of expenses to average net assets 0.99%++ .98% .95% .91% .91% .90%
Ratio of net investment income (loss) to
average net assets 0.05%++ .34% -.12% -.10% -.10% .36%
Portfolio turnover rate 137.98%++ 110.44% 71.18% 57.19% 85.38% 49.86%
Avg. Commission rate paid $0.0572 -- -- -- -- --
---------------------
+Not annualized.
++Annualized.
*Unaudited.
**Total return information does not reflect sales loads.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
SAFECO GROWTH FUND (cont'd)
1990 1989 1988 1987 1986
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $17.22 $14.95 $18.13 $15.40 $16.86
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment (loss) income .14 .53 .35 .24 .31
Net realized and unrealized gain (loss) (4.20) 3.17 (.99) 4.31 1.62
on investments ------ ------ ------ ------ ------
Total from investment operations (4.06) 3.70 (.64) 4.55 1.93
------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income (.14) (.53) (.48) (.23) (.42)
Distributions from capital gains (1.88) (.90) (2.06) (1.59) (2.97)
------ ------ ------ ------ ------
Total distributions (2.02) (1.43) (2.54) (1.82) (3.39)
------ ------ ------ ------ ------
Net asset value at end of period $11.14 $17.22 $14.95 $18.13 $15.40
====== ====== ====== ====== ======
Total return** -23.67% 25.23% -1.47% 32.68% 13.29%*
Net assets at end of period
(000's omitted) $59,164 $81,472 $74,324 $82,703 $68,375
Ratio of expenses to average net assets 1.01% .94% .98% .92% .85%
Ratio of net investment ncome (loss) to
average net assets .88% 3.27% 2.37% 1.46% 1.90%
Portfolio turnover rate 90.48% 11.38% 19.31% 23.61% 46.04%
Avg. Commission rate paid -- -- -- -- --
-----------------------
+Not annualized.
++Annualized.
*Unaudited.
**Total return information does not reflect sales loads.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
SAFECO EQUITY FUND
Year Ended September 30
-----------------------
For the Six
Month
Period Ended
March 31, 1996
(Unaudited) 1995 1994 1993 1992 1991 1990
---------- ---- ---- ---- ---- ---- ----
<S> <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
INCOME FROM INVESTMENT OPERATIONS
Net investment income .14 .34 .23 .17 .15 .17 .22
Net realized and unrealized .99 2.59 1.83 3.79 (.09) 2.37 (1.28)
gain (loss) on investments ------ ------ ------ ------ ------ ------ ------
Total from investment operations 1.13 2.93 2.06 3.96 .06 2.54 (1.06)
------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income (.14) (.34) (.23) (.17) (.15) (.17) (.22)
Distributions from capital gains (.32) (1.17) (.48) (.78) (.76) (.42) (.39)
------ ------- ------ ------ ------ ------ ------
Total distributions (.46) (1.51) (.71) (.95) (.91) (.59) (.61)
------ ------ ------ ------ ------ ------ ------
Net asset value at end of period $15.98 $15.31 $13.89 $12.54 $9.53 $10.38 $8.43
====== ====== ====== ====== ====== ====== ======
Total return** 7.50%+ 21.59% 16.51% 41.77% .41% 30.39% -10.73%
Net assets at end of period
(000's omitted) $636,885 $598,582 $412,805 $148,894 $74,383 $71,586 $51,603
Ratio of expenses to average net assets .79%++ .84% .85% .94% .96% .98% .97%
Ratio of net investment
income to average net assets 1.82%++ 2.38% 1.72% 1.50% 1.34% 1.70% 2.19%
Portfolio turnover rate
86.93%++ 56.14% 33.33% 37.74% 39.88% 45.21% 51.01%
Avg. Commission
rate paid $0.0600 -- -- -- -- -- --
-------------------
+Not annualized.
++Annualized.
*Unaudited.
**Total return information does not reflect sales loads.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
SAFECO EQUITY FUND (cont'd)
1989 1988 1987 1986
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value at beginning of period $8.51 $12.23 $11.44 $10.25
INCOME FROM INVESTMENT OPERATIONS
Net investment income .39 .18 .21 .29
Net realized and unrealized gain 2.26 (1.82) 2.83 2.46
(loss) on investments ------ ------ ------ ------
Total from investment operations 2.65 (1.64) 3.04 2.75
------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income (.39) (.23) (.22) (.34)
Distributions from capital gains (.67) (1.85) (2.03) (1.22)
------ ------ ------ ------
Total distributions (1.06) (2.08) (2.25) (1.56)
------ ------ ------ ------
Net asset value at end of period $10.10 $8.51 $12.23 $11.44
====== ====== ====== ======
Total return** 32.12% -9.93% 31.75% 29.61%*
Net assets at end of period
(000's omitted) $53,892 $45,625 $64,668 $46,740
Ratio of expenses to average net assets .96% 1.00% .97% .88%
Ratio of net investment income to
average net assets 4.13% 2.16% 1.92% 2.55%
Portfolio turnover rate 63.62% 88.19% 85.11% 86.39%
Avg. Commission rate paid -- -- -- --
--------------------
+Not annualized.
++Annualized.
*Unaudited.
**Total return information does not reflect sales loads.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
SAFECO INCOME FUND
Year Ended September 30
For the Six Month
Period Ended
March 31, 1996
(Unaudited) 1995 1994 1993 1992 1991
---------- ---- ---- ---- ---- ----
<S> <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
INCOME FROM INVESTMENT OPERATIONS
Net investment income .36 .82 .81 .78 .80 .81
Net realized and unrealized 1.42 2.71 (.30) 1.52 .96 2.53
gain (loss) on investments ------ ------ ------ ------ ------ ------
Total from investment operations 1.78 3.53 .51 2.30 1.76 3.34
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income (.36) (.82) (.81) (.78) (.80) (.83)
Distributions from capital gains (.06) (.85) (.24) ----- (.04) (.05)
------ ------ ------ ------ ------ ------
Total distributions (.42) (1.67) (1.05) (.78) (.84) (.88)
------ ------ ------ ------ ------ ------
Net asset value at end of period $20.47 $19.11 $17.25 $17.79 $16.27 $15.35
====== ====== ====== ====== ====== ======
Total return** 9.37%+ 21.04% 2.98% 14.35% 11.75% 26.43%
Net assets at end of period
(000's omitted) $235,395 $217,870 $190,610 $203,019 $181,582 $181,265
Ratio of expenses to average net assets .85%++ .87% .86% .90% .90% .93%
Ratio of net investment income to
average net assets 3.59%++ 4.55% 4.59% 4.55% 5.06% 5.58%
Portfolio turnover rate 24.82%++ 31.12% 19.30% 20.74% 20.35% 22.25%
Avg. Commission rate paid $0.0600 -- -- -- -- --
</TABLE>
-------------------------
+Not annualized.
++Annualized.
*Unaudited.
**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.
18
<PAGE>
<TABLE>
<CAPTION>
SAFECO INCOME FUND (cont'd)
1990 1989 1988 1987 1986
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $16.44 $14.32 $17.16 $15.52 $12.96
INCOME FROM INVESTMENT OPERATIONS
Net investment income .85 .81 .78 .78 .78
Net realized and unrealized (3.39) 2.12 (1.80) 2.37 3.13
gain (loss) on investments ------ ------ ------ ------ ------
Total from investment operations (2.54) 2.93 (1.02) 3.15 3.91
------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income (.83) (.81) (.98) (.78) (.79)
Distributions from capital gains (.18) -- (.84) (.73)# (.56)
------ ------ ------ ------ ------
Total distributions (1.01) (.81) (1.82) (1.51) (1.35)
------ ------ ------ ------ ------
Net asset value at end of period $12.89 $16.44 $15.52
====== ====== $14.32 $17.16 ======
Total return** -16.06% 21.00% -4.61% 21.41% 31.76%*
Net assets at end of period
(000's omitted) $170,153 $232,812 $231,724 $313,308 $102,254
Ratio of expenses to average net assets .92% .92% .97% .94% .95%
Ratio of net investment income to
average net assets 5.59% 5.28% 5.58% 4.53% 5.08%
Portfolio turnover rate 19.37% 16.38% 34.13% 33.08% 28.90%
Avg. Commission rate paid -- -- -- -- --
</TABLE>
------------------------
+Not annualized.
++Annualized.
*Unaudited.
**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.
19
<PAGE>
<TABLE>
<CAPTION>
SAFECO NORTHWEST FUND
For the Six Month For the Nine
Period Ended Year Ended Year Ended Month Period Ended
March 31, 1996 September 30, September 30, September 30,
(Unaudited) 1995 1994 1993
----------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period $14.41 $12.59 $12.34 $12.59
INCOME FROM INVESTMENT OPERATIONS
Net investment income .01 .04 .04 .02
Net realized and unrealized 1.01 2.35 .59 (.25)
gain (loss) on investments ------ ------ ------ ------
Total from investment operations 1.02 2.39 .63 (.23)
------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income (.01) (.04) (.04) (.02)
Distributions from capital gains (.35) (.53) (.34) --
------ ------ ------ ------
Total distributions (.36) (.57) (.38) (.02)
------ ------ ------ ------
Net asset value at end of period $15.07 $14.41 $12.59 $12.34
====== ====== ====== ======
Total return** 7.33%+ 19.01% 5.19% -1.86%+
Net assets at end of period
(000's omitted) $43,228 $40,140 $36,383 $39,631
Ratio of expenses to average net assets 1.11%++ 1.09% 1.06% 1.11%++
Ratio of net investment income
to average net assets .14%++ .31% .33% .18%++
Portfolio turnover rate 45.32%++ 19.59% 18.46% 14.05%++
Avg. Commission rate paid $0.0583 -- -- --
--------------
**Total return information does not reflect sales loads.
+Not annualized.
++Annualized.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
SAFECO NORTHWEST FUND (cont'd)
For the Period From
February 7, 1991
Year Ended (Initial Public
December 31, Offering) to
1992 December 31, 1991
------------ -----------------
<S> <C> <C>
Net asset value at beginning of period $11.37 $10.06
INCOME FROM INVESTMENT OPERATIONS
Net investment income .06 .13
Net realized and unrealized 1.53 1.44
gain (loss) on investments ------ ------
Total from investment operations 1.59 1.57
------ ------
LESS DISTRIBUTIONS
Dividends from net investment income (.06) (.19)
Distributions from capital gains (.31) (.07)
------ ------
Total distributions (.37) (.26)
------ ------
Net asset value at end of period $12.59 $11.37
====== ======
Total return** 14.08% 14.93%+
Net assets at end of period
(000's omitted) $40,402 $26,434
Ratio of expenses to average net assets 1.11% 1.27%++
Ratio of net investment income to average
net assets .55% 1.14%++
Portfolio turnover rate 33.34% 27.71%++
Avg. Commission rate paid
-- --
**Total return information does not reflect sales loads.
+Not annualized.
++Annualized.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
For the Period from January 31, 1996
(Initial Public Offering) to March 31, 1996
SAFECO SAFECO
SAFECO International Small Company
Balanced Fund Stock Fund Stock Fund
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Net Asset Value at Beginning of Period $10.00 $10.00 $10.00
Income from Investment Operations
Net Investment Income .05 .03 .01
Net Realized and Unrealized Gain (Loss) on Investment
and Foreign Currency Transactions (.03) .01 .48
Total from Investment Operations .02 .04 .49
Less Distributions
Dividends from Net Investment Income (.05) -- --
Distributions from Realized Gains -- -- --
Total Distributions (.05) -- --
Net Asset Value at End of Period $9.97 $10.04 $10.49
Total Return** .17%+ .40%+ 4.90%+
Net Assets at End of Period (000's omitted) $6,353 $6,461 $6,406
Ratio of Expenses to Average Net Assets 1.69%++ 2.53%++ 1.82%++
Ratio of Net Investment Income (Loss) to Average Net
Assets 3.10%++ 1.87%++ .89%++
Portfolio Turnover Rate 351.35%++ 3.97%++ 22.28%++
Average Commission Rate Paid $.0552 $.0250 $.0538
</TABLE>
____________________
** Total return information does not reflect sales loads.
+ Not Annualized.
++ Annualized.
The information listed above is based on a two month operating history and
may not be indicative of longer-term results. More information about the
Funds is contained in their Semi-Annual Report to shareholders which may
be obtained without charge by calling the number on the first page of this
Prospectus.
22
<PAGE>
<TABLE>
<CAPTION>
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
For the Year Ended September 30
For the Six
Month Period
Ended
March 31,
1996
(Unaudited) 1995 1994 1993 1992
---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $10.24 $9.74 $10.74 $10.69 $10.20
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.25 .55 .52 .60 .72
Net realized and unrealized gain (loss) on investments (0.04) .50 (1.00) .49 .54
------ ------ ------ ------ ------
Total from investment operations 0.21 1.05 (.48) 1.09 1.26
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.25) (.55) (.52) (.60) (.72)
Distributions from capital gains -- -- -- (.44) (.05)
------ ------ ------ ------ ------
Total distributions (0.25) (.55) (.52) (1.04) (.77)
------ ------ ------ ------ ------
Net asset value at end of period $10.20 $10.24 $9.74 $10.74 $10.69
====== ====== ====== ====== ======
Total return** 2.03%+ 11.07% -4.56% 10.51% 12.78%
Net assets at end of period (000's omitted) $14,255 $13,774 $13,367 $14,706 $12,205
Ratio of expenses to average net assets 1.06%++ .96% .90% .99% .98%
Ratio of net investment income to average net assets 4.83%++ 5.51% 5.08% 5.52% 6.89%
Portfolio turnover rate 228.20%++ 124.9% 75.46% 104.94% 37.19%
--------------
** Total return information does not reflect sales loads.
+ Not annualized.
++ Annualized.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND (cont'd)
For the Period From
September 7, 1988
(Initial Public
Offering)
1991 1990 1989 To September 30, 1988
---- ---- ---- ---------------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period $9.83 $9.96 $9.95 $9.93
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .75 .77 .77 .05
Net realized and unrealized gain (loss) on investments .37 (.13) (.01) .02
------ ------ ------ ------
Total from investment operations 1.12 .64 .78 .07
------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income (.75) (.77) (.77) (.05)
Distributions from capital gains -- -- -- --
------ ------ ------ ------
Total distributions (.75) (.77) (.77) (.05)
------ ------ ------ ------
Net asset value at end of period $10.20 $9.83 $9.96 $9.95
====== ====== ====== ======
Total return** 11.80% 6.65% 8.20% .69%+
Net assets at end of period (000's omitted) $9,458 $6,916 $6,249 $5,007
Ratio of expenses to average net assets 1.00% 1.00% .96% 1.06%++
Ratio of net investment income to average net assets 7.45% 7.76% 7.82% 7.46%++
Portfolio turnover rate 9.51% 24.17% 4.36% None
-------------------
** Total return information does not reflect sales loads.
+ Not annualized.
++ Annualized.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
SAFECO MANAGED BOND FUND
For the Period From
February 28, 1994
For the Six Month (Initial Public
Period Ended June 30, For the Year Ended Offering) to
1996 (Unaudited) December 31, 1995 December 31, 1994
------------------- ----------------- -----------------
<S> <C> <C> <C>
Net asset value at beginning of period $8.77 $8.15 $8.68
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .20 .44 .27
Net realized and unrealized gain (loss) on investments (0.42) .94 (.53)
------ ------ ------
Total from investment operations (0.22) 1.38 (.26)
------ ------ ------
LESS DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.20) (.44) (.27)
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%++
-----------------
* Total return information does not reflect sales loads.
+ Not annualized.
++ Annualized.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
SAFECO MUNICIPAL BOND FUND
Year Ended March 31
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
<S> <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
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .76 .77 .78 .81 .86 .86
Net realized and unrealized gain (loss) on investments
.33 .12 (.55) .94 .48 .26
------ ------ ------ ------ ------ ------
Total from investment operations 1.09 .89 .23 1.75 1.34 1.12
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income (.76) (.77) (.78) (.81) (.86) (.86)
------ ------ ------ ------ ------ ------
Distributions from realized gains -- (.03) (.31) (.18) (.06) (.04)
------ ------ ------ ------ ------ ------
Total distributions (.76) (.80) (1.09) (.99) (.92) (.90)
------ ------ ------ ------ ------ ------
Net asset value at end of period $13.69 $13.36 $13.27 $14.13 $13.37 $12.95
====== ====== ====== ====== ====== ======
Total return* 8.23% 7.10% 1.30% 13.60% 10.57% 9.13%
Net assets at end of period (000's omitted) $480,643 $472,569 $507,453 $541,515 $427,638 $331,647
Ratio of expenses to average net assets .54% .56% .52% .53% .54% .56%
Ratio of net investment income to average net assets 5.47% 5.96% 5.49% 5.91% 6.37% 6.68%
Portfolio turnover rate 12.60% 29.96% 22.07% 31.66% 25.18% 38.55%
--------------------
* Total return information does not reflect sales loads.
+ Unaudited.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
SAFECO MUNICIPAL BOND FUND (cont'd)
1990 1989 1988 1987
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value at beginning of period $12.92 $12.85 $14.16 $13.74
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .88 .94 .96 .99
Net realized and unrealized gain (loss) on investments
.25 .36 (.91) .63
------ ------ ------ ------
Total from investment operations 1.13 1.30 .05 1.62
------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income (.88) (.94) (.96) (.99)
------ ------ ------ ------
Distributions from realized gains (.44) (.29) (.40) (.21)
------ ------ ------ ------
Total distributions (1.32) (1.23) (1.36) (1.20)
------ ------ ------ ------
Net asset value at end of period $12.73 $12.92 $12.85 $14.16
====== ====== ====== ======
Total return* 9.05% 10.49% .93% 12.49%+
Net assets at end of period (000's omitted) $286,303 $231,911 $183,642 $214,745
Ratio of expenses to average net assets .57% .60% .61% .59%
Ratio of net investment income to average net assets 6.76% 7.23% 7.42% 7.20%
Portfolio turnover rate 65.80% 135.60% 71.91% 23.09%
-------------
* Total return information does not reflect sales loads.
+ Unaudited.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
SAFECO CALIFORNIA TAX-FREE INCOME FUND
Year Ended March 31
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $11.54 $11.51 $12.23 $11.60 $11.24
INCOME FROM INVESTMENT OPERATIONS:
Net investment income
.62 .63 .66 .68 .71
Net realized and unrealized gain (loss) on investments
.40 .13 (.38) .76 .44
------ ------ ------ ------ ------
Total from investment operations 1.02 .76 .28 1.44 1.15
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income (.62) (.63) (.66) (.68) (.71)
------ ------ ------ ------ ------
Distributions from realized gains (.08) (.10) (.34) (.13) (.08)
------ ------ ------ ------ ------
Total distributions (.70) (.73) (1.00) (.81) (.79)
------ ------ ------ ------ ------
Net asset value at end of period $11.86 $11.54 $11.51 $12.23 $11.60
====== ====== ====== ====== ======
Total return* 8.87% 7.01% 1.97% 12.88% 10.43%
Net assets at end of period (000's omitted) $70,546 $64,058 $77,056 $79,872 $71,480
Ratio of expenses to average net assets .68% .70% .68% .66% .67%
Ratio of net investment income to average net assets 5.12% 5.65% 5.31% 5.71% 6.13%
Portfolio turnover rate 16.25% 44.10% 32.58% 23.18% 39.35%
</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.
28
<PAGE>
<TABLE>
<CAPTION>
SAFECO CALIFORNIA TAX-FREE INCOME FUND (cont'd)
1991 1990 1989 1988 1987
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $11.07 $11.02 $10.72 $12.14 $11.68
INCOME FROM INVESTMENT OPERATIONS: .71 .72 .75 .76 .80
Net investment income
Net realized and unrealized gain (loss) on investments .23 .23 .30 (.99) .57
------ ------ ------ ------ ------
Total from investment operations .94 .95 1.05 (.23) 1.37
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income (.71) (.72) (.75) (.76) (.80)
------ ------ ------ ------ ------
Distributions from realized gains (.06) (.18) --- (.43)++ (.11)
------ ------ ------ ------ ------
Total distributions (.77) (.90) (.75) (1.19) (.91)
------ ------ ------ ------ ------
Net asset value at end of period $11.24 $11.07 $11.02 $10.72 $12.14
====== ====== ====== ====== ======
Total return* 8.78% 8.87% 10.09% -1.39% 12.25%+
Net assets at end of period (000's omitted) $57,066 $47,867 $36,930 $28,790 $34,792
Ratio of expenses to average net assets .67% .68% .71% .72% .70%
Ratio of net investment income to average net assets 6.32% 6.42% 6.86% 6.99% 6.71%
Portfolio turnover rate 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.
29
<PAGE>
<TABLE>
<CAPTION>
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
For the Period From
March 18, 1993
Year Ended Year Ended (Initial Public
March 31, March 31, Year Ended Offering) to
1996 1995 March 31, 1994 March 31, 1993
-------- ----------- -------------- ----------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period $10.10 $9.91 $10.27 $10.32
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.50 0.49 0.44 0.02
Net realized and unrealized gain (loss) on investments 0.27 0.19 (0.35) (0.05)
------ ------ ------
Total from investment operations 0.77 0.68 0.09 (0.03)
------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.50) (0.49) (0.44) (0.02)
Distribution from realized gains (0.03) --- (0.01) ---
------ ------ ------ ------
Total distributions (0.53) (0.49) (0.45) (0.02)
------ ------ ------ ------
Net asset value at end of period $10.34 $10.10 $9.91 $10.27
====== ====== ====== ======
Total return* 7.73% 7.13% .68% -31%+
Net assets at end of period (000's omitted) $6,489 $5,953 $2,908 $2,163
Ratio of expenses to average net assets 1.07% 1.09% 1.44% 1.04%++
Ratio of net investment income to average net 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.
30
<PAGE>
<TABLE>
<CAPTION>
SAFECO MONEY MARKET FUND
Year Ended March 31
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
<S> <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
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .05 .04 .02 .03 .05 .07
LESS DISTRIBUTIONS:
Dividends from net investment income (.05) (.04) (.02) (.03) (.05) (.07)
------ ------ ------ ------ ------ ------
Net asset value at end of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
====== ====== ====== ====== ====== ======
Total return* 5.15% 4.20% 2.48% 2.98% 5.04% 7.60%
Net assets at end of period (000's omitted) $165,122 $171,958 $186,312 $144,536 $184,823 $224,065
Ratio of expenses to average net assets .78% .78% .79% .77% .73% .70%
Ratio of net investment income to average net
assets 5.04% 4.21% 2.47% 3.02% 5.05% 7.34%
</TABLE>
-----------
* Total return information does not reflect a CDSC that may apply to
certain shares.
** Unaudited
31
<PAGE>
<TABLE>
<CAPTION>
SAFECO MONEY MARKET FUND (cont'd)
1990 1989 1988 1987
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value at beginning of period $1.00 $1.00 $1.00 $1.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .08 .08 .06 .06
LESS DISTRIBUTIONS:
Dividends from net investment income (.08) (.08) (.06) (.06)
------ ------ ------ ------
Net asset value at end of period $1.00 $1.00 $1.00 $1.00
====== ====== ====== ======
Total return* 8.77% 7.86% 6.56% 5.90%**
Net assets at end of period (000's omitted) $225,974 $177,813 $119,709 $57,998
Ratio of expenses to average net assets .71% .74% .79% .82%
Ratio of net investment income to average net assets 8.45% 7.66% 6.49% 5.71%
---------------
* Total return information does not reflect a CDSC that may apply to certain shares.
** Unaudited
</TABLE>
32
<PAGE>
_______________________________________________________________
SUB-ADVISER INFORMATION FOR THE INTERNATIONAL FUND
_______________________________________________________________
The International Fund's sub-adviser, Bank of Ireland Asset Management
(U.S.) Limited ("BIAM"), has been managing separate accounts for
institutional clients in the United States for six years. BIAM's past
performance in advising these accounts was a key factor in its selection
as the Fund's sub-adviser. The performance illustrated in the table that
follows is based on the return achieved on BIAM's fully discretionary
international equity composite of accounts ("Composite") consisting of 27
accounts totalling approximately $2.6 billion which comprised
approximately 70.2% of BIAM's assets under management as of December 31,
1995. These returns reflect the time-weighted total returns achieved by
the Composite's constituent accounts, weighted by reference to their
sizes. The past performance of the Composite is shown after reduction by
the International Fund's maximum investment management and estimated
administrative expenses (1.33% per year).
<TABLE>
<CAPTION>
For the Periods Ended December 31, 1995
One Two Three Four Five Six
Year Years Years Years Years Years
---- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
BIAM Composite 19.24% 5.26% 16.25% 15.20% 14.49% 11.25%
Morgan Stanley
Europe, Australia
and Far East Index
("EAFE Index") 11.56% 9.80% 17.02% 9.02% 9.71% 3.38%
</TABLE>
The EAFE Index is used for comparison purposes only. The EAFE Index is an
unmanaged index of representative international stocks that has no
management or expense charges. Performance is based on historical
earnings and is not intended to indicate future performance of the
Composite or the International Fund.
33
<PAGE>
Please keep in mind that the International Fund's performance may differ
from the Composite performance. The International Fund's expenses, timing
of purchases and sales of portfolio securities, availability of cash
flows, brokerage commissions and diversification of the portfolio are all
reasons that might cause the performance of the International Fund to vary
from that of the Composite. In addition, the performance of the Composite
does not reflect sales charges imposed on certain purchases or redemptions
of the International Fund's Class A and Class B shares. There are a
number of ways to calculate performance, and it is possible that if a
different method were used the result would have varied. Finally, the
past performance of the Composite is no guarantee of the future results of
the International Fund.
____________________________________________
ALTERNATIVE PURCHASE ARRANGEMENT
____________________________________________
This Prospectus offers two classes of shares for each Fund. For each Fund
except the Money Market Fund, Class A shares are sold at net asset value
plus an initial sales charge of up to 4.5%. Class A shares also pay an
annual Rule 12b-1 service fee of 0.25% of the average daily net assets of
the Class A shares. For each Fund except the Money Market Fund, Class B
shares are sold at net asset value with no initial sales charge, but a
CDSC of up to 5% applies to redemptions made within six years of purchase.
Class B shares also pay an annual Rule 12b-1 service fee of 0.25% of the
average daily net assets of the Class B shares and an annual Rule 12b-1
distribution fee of 0.75% of the average daily net assets of the Class B
shares. Class B shares convert to Class A shares in the first month
following the investor's sixth anniversary from purchase. The maximum
investment amount in Class B shares is $500,000.
Class A and B shares of the Money Market Fund are sold at net asset value,
are not subject to sales charges, and do not currently pay Rule 12b-1
fees. Money Market Fund Class A and Class B shares may be subject to
sales charges if an investor exchanges into Class A or Class B shares of
another Fund. See "Purchasing Advisor Class A Shares" and "Purchasing
Advisor Class B Shares."
For shareholders of each Fund except the Money Market Fund, the
alternative purchase arrangement permits an investor to choose the method
of purchasing shares that is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares, and
other circumstances. Investors should consider whether, during the
anticipated life of their investment in a Fund, the accumulated
distribution and service fees and CDSCs on Class B shares prior to
conversion would be less than the initial sales charge and accumulated
service fee on Class A shares purchased at the same time.
Class A shares will normally be more beneficial than Class B shares to
investors who qualify for reduced initial sales charges or a sales load
34
<PAGE>
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 65.
________________________________________________________
EACH FUND'S INVESTMENT OBJECTIVE AND POLICIES
________________________________________________________
The investment objective and investment policies for each Fund are
described below. A Trust's Board of Trustees may change a Fund's (except
the California Fund's) objective without a shareholder vote, but no such
change will be made without prior written notice to shareholders of that
Fund (60 days' in the case of the Money Market, Municipal Bond and
Washington Funds and 30 days' in the case of the other Funds). The
California Fund has a fundamental investment objective that may not be
changed without a shareholder vote. In the event a Fund changes its
investment objective, the new objective may not meet the investment needs
of every shareholder and may be different from the objective a shareholder
considered appropriate at the time of initial investment.
Each Fund has adopted a number of investment restrictions. If a Fund
satisfies a percentage limitation at the time of investment, a later
increase or decrease in value, assets or other circumstances will not be
considered in determining whether the Fund complies with the applicable
policy (except to the extent the change may impact the Fund's borrowing
limits). Unless otherwise stated, the investment policies and limitations
described below under each Fund's description and "Common Investment
Practices" are non-fundamental and may be changed without a shareholder
vote.
INVESTMENT OBJECTIVES AND POLICIES OF THE STOCK FUNDS
Growth Fund
The Growth Fund has as its investment objective to seek growth of capital
and the increased income that ordinarily follows from such growth. The
35
<PAGE>
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 93.
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
36
<PAGE>
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 59 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 93. For a description
of debt securities ratings, see the "Ratings Supplement" on page 93.
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 59 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
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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 93. For a description
of debt securities ratings, see the "Ratings Supplement" on page 93.
Northwest Fund
The Northwest Fund has as its investment objective to seek long-term
growth of capital through investing primarily in Northwest companies. To
pursue its objective, the Fund will invest at least 65% of its total
assets in securities issued by companies with their principal executive
offices located in Alaska, Idaho, Montana, Oregon or Washington.
To pursue its investment objective, the Northwest Fund:
1. Will ordinarily invest its assets in shares of common stocks and
preferred stocks of companies located in the Northwest selected
primarily for potential long-term appreciation. To determine
those common and preferred stocks which have the potential for
long-term growth, SAM will evaluate the issuer's financial
strength, quality of management and earnings power. The Fund
generally invests a portion of its assets in smaller companies.
See "Risk Factors" for more information about the risks of
investing primarily in companies located in the Northwest.
2. May occasionally invest in securities convertible into common
stock when, in the opinion of SAM, the expected total return of a
convertible security exceeds the expected total return of common
stock eligible for purchase by the Fund. The Fund may purchase
corporate bonds and preferred stock that convert to common stock
either automatically after a specified period of time or at the
option of the issuer. The Fund will purchase those convertible
securities which, in SAM's opinion, have underlying common stock
with potential for long-term growth.
The Fund will purchase convertible securities which are investment grade,
i.e., rated in the top four categories by either S&P or Moody's.
See "Risk Factors" for more information about the risks inherent
in geographic concentration.
For a brief description of common stocks, preferred stocks, convertible
securities, and bonds and other debt securities, see "Description of
Stocks, Bonds and Convertible Securities" on page 93. For a description
of debt securities ratings, see the "Ratings Supplement" on page 93.
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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.
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 93. For a description
of debt securities ratings, see the "Ratings Supplement" on page 93.
International Fund
The investment objective of the International Fund is to seek maximum
long-term total return (capital appreciation and income) by investing
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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.
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
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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 93.
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:
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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 59 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 93. For
a description of debt securities ratings, see the "Ratings Supplement" on
page 93.
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
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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. SAM will waive its advisory fees for any Growth,
Income, Northwest, Balanced, International or Small Company Fund
assets invested in money market funds. With respect to
repurchase agreements, each Stock Fund will invest no more than
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5% of its total assets in repurchase agreements and will not
purchase repurchase agreements that mature in more than seven
days. Counterparties of foreign repurchase agreements may be
less creditworthy than U.S. counterparties.
4. May purchase securities on a "when-issued" or "delayed-delivery"
basis or purchase or sell securities on a "forward commitment"
basis. Under this procedure, a Stock Fund agrees to acquire
securities that are to be issued and delivered against payment in
the future. The price, however, is fixed at the time of
commitment. When a Stock Fund purchases when-issued or delayed-
delivery securities, its custodian bank will maintain in a
temporary holding account cash, U.S. Government securities or
other high-grade debt obligations having a value equal to or
greater than such commitments. On delivery dates for such
transactions, the Fund will meet its obligations from maturities
or sales of the securities held in the temporary holding account
or from then-available cash flow. If a Stock Fund chooses to
dispose of the right to acquire a when-issued or delayed delivery
security prior to its acquisition, it could incur a gain or loss
due to market fluctuations. Use of these techniques may affect a
Fund's share price in a manner similar to leveraging.
5. May invest in American Depositary Receipts ("ADRs"). ADRs are
registered receipts evidencing ownership of an underlying foreign
security. They typically are issued in the United States by a
bank or trust company. In addition to the risks of foreign
investment applicable to the underlying securities, ADRs may also
be subject to the risks that the foreign issuer may not be
obligated to cooperate with the U.S. bank or trust company, or
that such information in the U.S. market may not be current.
ADRs which are structured without sponsorship of the issuer of
the underlying foreign security may also be subject to the risk
that the foreign issuer may not provide financial and other
material information to the U.S. bank or trust company issuer.
The International Fund may utilize European Depositary Receipts
("EDRs"), which are similar instruments. EDRs may be in bearer
form and are designed for use in the European securities markets.
6. May invest up to 10% of its total assets in foreign securities,
except the International Fund, which may invest 100% of its
assets in foreign securities. Foreign securities are subject to
risks in addition to those inherent in investments in domestic
securities. See "Risk Factors" on page 59 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
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least 95% of their taxable income. If a REIT were unable to
qualify for such tax treatment, it would be taxed as a
corporation and the distributions made to its shareholders would
not be deductible by it in computing its taxable income. REITs
are dependent upon the successful operation of properties owned
and the financial condition of lessees and mortgagors. The value
of REIT units fluctuates depending on the underlying value of the
real property and mortgages owned and the amount of cash flow
(net income plus depreciation) generated and paid out. In
addition, REITs typically borrow to increase funds available for
investment. Generally, there is a greater risk associated with
REITs that are highly leveraged.
8. May invest up to 10% of its total assets in restricted
securities, provided that SAM has determined that such securities
are liquid under guidelines adopted by the Common Stock Trust's
Board of Trustees. Restricted securities may be sold only in
offerings registered under the Securities Act of 1933, as amended
("1933 Act"), or in transactions exempt from the registration
requirements under the 1933 Act. Rule 144A under the 1933 Act
provides an exemption for the resale of certain restricted
securities to qualified institutional buyers. Investing in
restricted securities may increase the Stock Funds' illiquidity
to the extent that qualified institutional buyers or other buyers
are unwilling to purchase the securities. As a result, a Stock
Fund may not be able to sell these securities when its investment
adviser or sub-investment adviser deems it advisable to sell, or
may have to sell them at less than fair value. In addition,
market quotations are sometimes less readily available for
restricted securities. Therefore, judgment may at times play a
greater role in valuing these securities than in the case of
unrestricted securities.
9. May invest in securities whose performance and principal amount
at maturity are linked to a specified equity security or
securities index. The value of an indexed security is determined
by reference to a specific equity instrument or statistic. The
performance of indexed securities depends largely on the
performance of the securities or indices to which they are
indexed, but such securities are also subject to credit risks
associated with the issuer of the security. Indexed securities
may also be more volatile than their underlying instruments.
10. May invest up to 5% of its total assets in securities of
unseasoned issuers. Unseasoned issuers are those companies
which, together with any predecessors, have been in operation for
less than three years.
The following restrictions are fundamental policies of the Stock Funds
that cannot be changed without shareholder vote.
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1. Each Fund, with respect to 75% of the value of its total assets,
may not invest more than 5% of its total assets in the securities
of any one issuer (other than U.S. Government securities).
2. 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. Although the average dollar
weighted maturity of the portfolio will fall within a range of three to
ten years, 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. These securities 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
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securities issued by the Government National Mortgage Association
("GNMA"), (b) securities that are not supported by the full faith
and credit of the U.S. Government but are supported by the
issuer's ability to borrow from the U.S. Treasury, such as
securities issued by the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"), and (c) securities supported solely by the
creditworthiness of the issuer, such as securities issued by the
Tennessee Valley Authority ("TVA"). While U.S. Government
securities are considered to be of the highest credit quality
available, they are subject to the same market risks as
comparable debt securities.
Corporate debt securities which at the time of purchase are rated
in the top three grades (A or higher) by either Moody's or S&P,
or, if unrated, determined by SAM to be of comparable quality to
such rated debt securities. In addition to reviewing ratings,
SAM will analyze the quality of rated and unrated corporate bonds
for purchase by the Fund by evaluating various factors that may
include the issuer's capital structure, earnings power and
quality of management. See "Ratings Supplement" beginning on
page 93.
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.
4. May hold cash or invest temporarily in high-quality commercial
paper, certificates of deposit, shares of no-load, open-end money
market funds and high-quality short-term securities issued by an
agency or instrumentality of the U.S. Government. The
Intermediate Treasury 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 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. SAM will waive its advisory
fees for Fund assets invested in money market funds.
5. May invest for short-term purposes when SAM believes such action
to be desirable and consistent with sound investment practices.
The Intermediate Treasury Fund, however, will not engage
primarily in trading for the purpose of short-term profits. The
Intermediate Treasury Fund may dispose of its portfolio
securities whenever SAM deems advisable, without regard to the
length of time the securities have been held.
6. May purchase or sell securities on a "when-issued" or "delayed-
delivery" basis. Under this procedure, the Intermediate Treasury
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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 the
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 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 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. The Fund will not borrow
amounts in excess of 20% of its total assets. 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
redemption under circumstances where redemption requests exceed
available cash.
4. The 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, the 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. The 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 Intermediate Treasury
Fund will be unable to dispose of the security during the term of
the repurchase agreement if the security's market value declines,
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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 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, but no more than 5%
of its total assets will be invested in such securities. 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.
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For a description of debt securities ratings, see the "Ratings
Supplement" on page 93.
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 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
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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. SAM will waive its advisory fees for Managed Bond
Fund assets invested in money market funds. 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.
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9. May hold cash as a temporary defensive measure when market
conditions so warrant.
10. May invest up to 5% of its total assets in municipal securities
if, in SAM's opinion, the potential for appreciation is greater
than, and yield is comparable to or greater than, similarly rated
taxable securities.
11. May invest for short-term purposes when SAM believes such action
to be desirable and consistent with sound investment practices.
The Managed Bond Fund, however, will not engage primarily in
trading for the purpose of short-term profits. The Managed Bond
Fund may dispose of its portfolio securities whenever SAM deems
advisable, without regard to the length of time the securities
have been held.
The following restrictions are fundamental policies of the Managed Bond
Fund which cannot be changed without shareholder vote.
1. The Fund, with respect to 75% of the value of its total assets,
may not invest more than 5% of its total assets in the securities
of any one issuer (other than U.S. Government securities).
2. The Fund, with respect to 100% of the value of its total assets,
may not purchase more than 10% of the outstanding voting
securities of any one issuer (other than U.S. Government
securities).
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
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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 in 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.
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
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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.
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Accordingly, as interest rates fluctuate, the potential
for capital appreciation or depreciation of these
obligations is less than for fixed rate obligations.
Floating and variable rate obligations typically carry
demand features that permit a Fund to tender (sell) them
back to the issuer at par prior to maturity and on short
notice. A Fund's ability to obtain payment from the
issuer at par may be affected by events occurring between
the date the Fund elects to tender the obligation to the
issuer and the date redemption proceeds are payable to
the Fund. Each Tax-Exempt Income Fund will purchase
floating and variable rate obligations only if at the
time of purchase there is a secondary market for such
instruments.
Put bonds, which are municipal bonds that give the holder
the unconditional right to sell the bond back to the
issuer at a specified price and exercise date and put
bonds with demand features. The obligation to purchase
the bond on the exercise date may be supported by a
letter of credit or other arrangement from a bank,
insurance company or other financial institution, the
credit standing of which affects the credit quality of
the bond. A demand feature is a put that entitles the
Fund holding it to repayment of the principal amount of
the underlying security on no more than 30 days' notice
at any time or at specified intervals.
Municipal lease obligations, which are issued by or on
behalf of state or local government authorities to
acquire land, equipment or facilities and may be subject
to annual budget appropriations. These obligations
themselves are not normally backed by the credit of the
municipality or the state but are secured by rent
payments made by the municipality or by the state
pursuant to a lease. If the lease is assigned, the
interest on the obligation may become taxable. The
leases underlying certain municipal lease obligations
provide that lease payments are subject to partial or
full abatement if, because of material damage or
destruction of the lease property, there is substantial
interference with the lessee's use or occupancy of such
property. This "abatement risk" may be reduced by the
existence of insurance covering the leased property, the
maintenance by the lessee of reserve funds or the
provision of credit enhancements such as letters of
credit. Certain municipal lease obligations also contain
"non-appropriation" clauses that provide that the
municipality has no obligation to make lease or
installment purchase payments in future years unless
money is appropriated for such purpose on a yearly basis.
Some municipal lease obligations of this type are insured
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as to timely payment of principal and interest, even in
the event of a failure by the municipality to appropriate
sufficient funds to make payments under the lease.
However, in the case of an uninsured municipal lease
obligation, a Fund's ability to recover under the lease
in the event of a non-appropriation or default will be
limited solely to the repossession of leased property
without recourse to the general credit of the lessee, and
disposition of the property in the event of foreclosure
might prove difficult. If rent is abated because of
damage to the leased property or if the lease is
terminated because monies are not appropriated for the
following year's lease payments, the issuer may default
on the obligation causing a loss to a Fund. Each Tax-
Exempt Income Fund will only invest in municipal lease
obligations that are, in the opinion of SAM, liquid
securities under guidelines adopted by the Tax-Exempt
Bond Trust's Board of Trustees. Generally, municipal
lease obligations will be determined to be liquid if they
have a readily available market after an evaluation of
all relevant factors.
Certificates of participation in municipal lease
obligations ("COPs"), which are certificates issued by
state or local governments that entitle the holder of the
certificate to a proportionate interest in the lease
purchase payments made. Each Tax-Exempt Income Fund will
only invest in COPs that are, in the opinion of SAM,
liquid securities under guidelines adopted by the Tax-
Exempt Bond Trust's Board of Trustees. Generally, COPs
will be determined to be liquid if they have a readily
available market after an evaluation of all relevant
factors.
Participation Interests, which are interests in municipal
bonds and floating and variable rate obligations that are
owned by banks. These interests carry a demand feature
that permits a Fund holding an interest to tender (sell)
it back to the bank. Generally, the bank will accept
tender of the participation interest with same day
notice, but may require up to five days' notice. The
demand feature is usually backed by an irrevocable letter
of credit or guarantee of the bank. The credit rating of
the bank may affect the credit quality of the
participation interest.
Municipal Notes, which are notes generally issued by an
issuer to provide for short-term capital needs and
generally have maturities of one year or less. Each Tax-
Exempt Income Fund may purchase municipal notes as a
medium for its short-term investments. Municipal Notes
include tax anticipation, revenue anticipation and bond
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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. SAM will waive
its advisory fees for assets invested in other investment
companies. 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
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distributed. SAM will waive its advisory fees for Fund assets
invested in money market funds.
The following restrictions are fundamental policies of the Tax-Exempt
Income Funds and cannot be changed without shareholder vote.
1. Each Fund, with respect to 75% of the value of its total assets,
will not invest more than 5% of its total assets in the
securities of any one issuer (other than U.S. Government
securities).
2. Each Fund will not invest 25% or more of its total assets in
municipal obligations and other permitted investments, the
interest on which is payable from revenues on similar types of
projects such as: sports, convention or trade show facilities;
airports; mass transportation; sewage or solid waste disposal
facilities; or air or water pollution control projects.
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
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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 diversifi-
cation, 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 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
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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. The
interest rates on variable rate instruments reset periodically on
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specified dates so as to cause the instruments' market value to
approximate their par value. The interest rates on floating rate
instruments change whenever there is a change in a designated
benchmark rate. Variable and floating rate instruments may have
put features. These instruments may have optional put features.
Puts may also be mandatory, in which case the Fund would be
required to act to keep the instrument.
7. May invest up to 5% of its total assets in restricted securities
eligible for resale under Rule 144A under the 1933 Act ("Rule
144A securities") and commercial paper sold pursuant to Section
4(2) of the 1933 Act ("Section 4(2) paper"), provided that SAM
has determined that such securities are liquid under guidelines
adopted by the Money Market Trust's Board of Trustees.
Restricted securities may be sold only in offerings registered
under the 1933 Act or in transactions exempt from the
registration requirements under the 1933 Act. Rule 144A under
the 1933 Act provides an exemption for the resale of certain
restricted securities to qualified institutional buyers.
Investing in such 144A Securities could have the effect of
increasing the Fund's illiquidity to the extent that qualified
institutional buyers or other buyers are unwilling to purchase
the securities. Section 4(2) of the 1933 Act exempts securities
sold by the issuer in private transactions from the 1933 Act's
registration requirements. Because Section 4(2) paper is a
restricted security, investing in Section 4(2) paper could have
the effect of increasing the Fund's illiquidity to the extent
that buyers are unwilling to purchase the securities.
The following restrictions are fundamental policies of the Money Market
Fund and cannot be changed without shareholder vote. The Money Market
Fund:
1. May invest up to 5% of its assets in the securities of any one
issuer other than U.S. Government securities.
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.
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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
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.
Risk Factors of the Stock Funds
An investment in the Northwest Fund may be subject to different risks than
a mutual fund whose investments are more geographically diverse. Since
the Northwest Fund invests primarily in companies with their principal
executive offices located in the Northwest, the number of issuers whose
securities are eligible for purchase is significantly less than many other
mutual funds. Also, some companies whose securities are held in the
Northwest Fund's portfolio may primarily distribute products or provide
services in a specific locale or in the Northwest region. The long-term
growth of these companies can be significantly affected by business trends
in and the economic health of those areas. Other companies whose
securities are held by the Northwest Fund may have a predominately
national or partially international market for their products or services
and are more likely to be impacted by national or international trends.
As a result, the performance of the Northwest Fund may be influenced by
business trends or economic conditions not only in a specific locale or in
the Northwest region but also on a national or international level,
depending on the companies whose securities are held in its portfolio at
any particular time.
The Equity, Income and Small Company Funds may invest in, and the other
Stock Funds as a result of downgrades may own, below investment grade
bonds. Below investment grade bonds are speculative and involve greater
investment risks than investment grade bonds due to the issuer's reduced
creditworthiness and increased likelihood of default and bankruptcy.
During periods of economic uncertainty or change, the market prices of
below-investment grade bonds may experience increased volatility. Below-
investment grade bonds tend to reflect short-term economic and corporate
developments to a greater extent than higher quality bonds.
Because the International Fund primarily invests, and the other Stock
Funds may invest, in foreign securities, each Stock Fund is subject to
risks in addition to those associated with U.S. investments. Foreign
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investments involve sovereign risk, which includes the possibility of
adverse local political or economic developments, expropriation or
nationalization of assets, imposition of withholding taxes on dividend or
interest payments and currency blockage (which would prevent currency from
being sold). Foreign investments may be affected favorably or unfavorably
by changes in currency rates and exchange control regulations. There is
generally less publicly available information about issuers of foreign
securities as compared to U.S. issuers. Many foreign companies are not
subject to accounting, auditing and financial reporting standards and
requirements comparable to those applicable to U.S. companies. Securities
of some foreign issuers are less liquid and more volatile than securities
of U.S. issuers. Financial markets on which foreign securities trade are
generally subject to less governmental regulation as compared to U.S.
markets. Foreign brokerage commissions and custodian fees are generally
higher than those in the United States.
In addition, the International Fund may purchase and sell put and call
options, futures contracts and forward contracts. Risks inherent in the
use of futures, options and forward contracts include: the risk that
interest rates, security prices and currency markets will not move in the
directions anticipated; imperfect correlation between the price of the
future, option or forward contract and the price of the security, interest
rate or currency being hedged; the risk that potential losses may exceed
the amount invested in the contracts themselves; the possible absence of a
liquid secondary market for any particular instrument at any time; the
possible need to defer closing out certain hedged positions to avoid
adverse tax consequences; and the reduction or elimination of the
opportunity to profit from increases in the value of the security,
interest rate or currency being hedged.
The Growth Fund currently has an aggressive investment approach to seeking
capital appreciation through investing primarily in securities issued by
smaller companies. In addition, the Small Company Fund invests in
companies with small market capitalizations which involve more risks than
investments in larger companies. Such companies may include newly formed
companies which have limited product lines, markets or financial resources
and may lack management depth. The securities of small or newly formed
companies may have limited marketability and may be subject to more abrupt
and erratic movements in price than securities of larger, more established
companies, or equity securities in general. Such volatility in price may
in turn cause the Growth Fund's and Small Company Fund's share prices to
be volatile.
Risk Factors of the Intermediate Treasury, 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
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<PAGE>
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 of 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.
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.
Special Risks of the California Fund
------------------------------------
After suffering through a severe recession, California's economy has been
on a steady recovery since the start of 1994. Nevertheless, the State's
budget problems in recent years have also been caused by the increasing
costs of education, health, welfare and corrections, driven by
California's rapid population growth. These pressures on the State's
General Fund are expected to continue. The State's long-term credit
ratings, reduced in 1992, were lowered again in 1994 and have not been
fully restored. Its ability to provide assistance to its public
authorities and political subdivisions has been impaired. Cutbacks in
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<PAGE>
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.
Special Risks of the Washington Fund
------------------------------------
The State of Washington's economy consists of both export and local
industries. The State's leading export industries are aerospace, forest
products, agriculture and food processing. The State's manufacturing base
includes aircraft manufacture which comprised approximately 25% of total
manufacturing in 1995. The Boeing Company is the State's largest employer
and has a significant impact, in terms of overall production, employment
and labor earnings, on the State's economy. Boeing anticipates increasing
employment in the State by approximately 4,500 jobs by the end of 1996.
The commercial airline industry is cyclical in nature and future job cuts
could have an adverse effect on the Washington economy. Forest products
rank second behind aerospace in value of total production. Although
productivity in the forest products industry has increased steadily in
recent years, declines in production are expected in the future.
Unemployment in the timber industry is anticipated in certain regions;
however the impact is not expected to affect the State's overall economic
performance. Growth in agriculture has been an important factor in the
State's economic growth over the past decade. The State is the home of
many technology firms of which approximately half are computer-related.
Microsoft, the world's largest microcomputer software company, is
headquartered in Redmond, Washington.
State law requires a balanced budget. The Governor has a statutory
responsibility to reduce expenditures across the board to avoid any cash
deficit at the end of a biennium. In addition, state law prohibits state
tax revenue growth from exceeding the growth rate of state personal
income. To date, Washington State tax revenue increases have remained
substantially below the applicable limit. At any given time, there are
numerous lawsuits against the state which could affect its revenues and
expenditures.
_________________________
PORTFOLIO MANAGERS
_________________________
Growth Fund
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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 portfolio manager and securities analyst for First Interstate Bank,
located in Seattle, Washington, and from 1983 to 1987, he was a securities
analyst for SAFECO Corporation.
Northwest Fund
The portfolio manager for the Northwest Fund is Charles R. Driggs, Vice
President, SAM. Mr. Driggs has served as portfolio manager for the Fund
since 1992. From 1984 through 1992, Mr. Driggs was a securities analyst
for SAM specializing in banks, savings and loan institutions and the
insurance industry.
Balanced Fund
The portfolio managers for the Balanced Fund are Rex L. Bentley, Vice
President, SAM, and Michael C. Knebel, Vice President, SAM. Mr. Bentley
was Vice President and Investment Counsel at the investment advisory firm
of Badgley, Phelps and Bell Investment Counsel, Inc., from 1990 to 1995.
He was a securities analyst for SAFECO Corporation from 1975 to 1983.
Mr. Knebel has served as portfolio manager for certain other SAFECO mutual
funds since 1989.
International Fund
The International Fund is managed by a committee of portfolio managers
employed and supervised by the Sub-Adviser, Bank of Ireland Asset
Management (U.S.) Limited, an investment adviser registered with the SEC.
All investment decisions are made by this committee and no single person
is primarily responsible for making recommendations to that committee.
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<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.
Intermediate Treasury and Managed Bond Funds
The portfolio manager for the Intermediate Treasury and Managed Bond Funds
is Michael C. Knebel, Vice President, SAM. Mr. Knebel has served as
portfolio manager or co-manager for the Managed Bond Fund since 1994. He
has served as portfolio manager for the Intermediate Treasury Fund since
1995. Mr. Knebel has served as portfolio manager and/or co-portfolio
manager for other SAFECO mutual funds since 1989.
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. 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.
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.
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______________________________
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 $250). The minimum
additional investment is $100 (except dividend reinvestments). Minimum
initial investments are negotiable for retirement accounts other than
IRAs. No minimum initial investment is required to establish an Automatic
Investment Plan or Payroll Deduction Plan.
Shares of each Fund are available for purchase through investment
professionals who work at broker-dealers, banks and other financial
institutions which have entered into selling agreements with SAFECO
Securities, Inc. ("SAFECO Securities"), the distributor of the Funds.
Orders received by such financial institutions before 1:00 p.m. Pacific
Time on any day the New York Stock Exchange ("NYSE") is open for regular
trading will be effected that day, provided that such order is transmitted
to SAFECO Services, the transfer agent for the Funds, prior to 2:00 p.m.
Pacific Time on such day. Investment professionals will be responsible
for forwarding the investor's order to SAFECO Services so that it will be
received prior to such time.
Broker-dealers, banks and other financial institutions that do not have
selling agreements with SAFECO Securities also may offer to place orders
for the purchase of each Fund's shares. Purchases made through these
investment firms will be effected at the public offering price next
determined after the order is received by SAFECO Services. Such financial
institutions may charge the investor a transaction fee as determined by
the financial institution. The fee will be in addition to the sales
charge payable by the investor with respect to Class A shares, and may be
avoided by purchasing shares through a broker-dealer, bank or other
financial institution that has a selling agreement with SAFECO Securities.
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. Sales persons 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.
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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 77 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
Percentage of Broker
-------------- 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* NONE** NONE**
</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 77 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.
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<PAGE>
From time to time, SAFECO Securities may reallow to broker-dealers, banks
and other financial institutions the full amount of the sales charge on
Class A Shares. In some instances, SAFECO Securities may offer these
reallowances only to those financial institutions that have sold or may
sell significant amounts of Class A shares. These commissions also may be
paid to financial institutions that initiate purchases made pursuant to
sales charge waivers (1) and (8), described below under "Sales Charge
Waivers -- Class A shares." To the extent that SAFECO Securities reallows
90% or more of the sales charge to a financial institution, such financial
institution may be deemed to be an underwriter under the 1933 Act.
Except as stated below, broker-dealers of record will be paid commissions
on sales of Class A shares of $1 million or more based on an investor's
cumulative purchases during the one-year period beginning with the date of
the initial purchase at net asset value. Each subsequent one-year
measuring period for these purposes begins with the first net asset value
purchase following the end of the prior period. Such commissions are paid
at the rate of up to .50% 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 up to 1.00%.
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).
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:
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<PAGE>
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;
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; and
11. Investments made on or before October 31, 1996 with the
redemption proceeds from Class A and Class C shares of any Fund
in the SAFECO Advisor Series Trust.
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
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<PAGE>
without a sales charge in Class A shares of that Fund and/or one or more
of the other Funds. SAFECO Services must receive from the investor or the
investor's broker-dealer, bank or other financial institution within 60
days after the date of the redemption both a written request for
reinvestment and a check not exceeding the amount of the redemption
proceeds. The reinstatement purchase will be effected at the net asset
value per share next determined after such receipt.
Reduced Sales Charge Plans -- Class A Shares
--------------------------------------------
Class A shares of the Funds may be purchased at reduced sales charges
either through the Right of Accumulation or under a Letter of Intent. For
more details on these plans, investors should contact their broker-dealer,
bank or other financial institution or SAFECO Services.
Pursuant to the Right of Accumulation, investors are permitted to purchase
Class A shares of the Funds at the sales charge applicable to the total of
(a) the dollar amount then being purchased plus (b) the dollar amount
equal to the total purchase price of the investor's concurrent purchases
of Class A shares of other SAFECO Mutual Funds plus (c) the dollar amount
equal to the current public offering price of all Class A shares of Funds
already held by the investor. To receive the Right of Accumulation, at
the time of purchase investors must give their broker-dealers, banks or
other financial institutions sufficient information to permit confirmation
of qualification.
In executing a Letter of Intent ("LOI"), an investor should indicate an
aggregate investment amount he or she intends to invest in Class A shares
of Funds in the following thirteen months. The LOI is included as part of
the Account Application. The Class A sales charge applicable to that
aggregate amount then becomes the applicable sales charge on all purchases
of Class A shares made concurrently with the execution of the LOI and in
the thirteen months following that execution. If an investor executes an
LOI within 90 days of a prior purchase of Class A shares, the prior
purchase may be included under the LOI and an appropriate adjustment, if
any, with respect to the sales charges paid by the investor in connection
with the prior purchase will be made, based on the then-current net asset
value(s) of the pertinent Fund(s).
If at the end of the thirteen-month period covered by the LOI, the total
amount of purchases does not equal the amount indicated, the investor will
be required to pay the difference between the sales charges paid at the
reduced rate and the sales charges applicable to the purchases actually
made. Shares having a value equal to 5% of the amount specified in the
LOI will be held in escrow during the thirteen month period (while
remaining registered in the investor's name) and are subject to redemption
to assure any necessary payment to SAFECO Securities of a higher
applicable sales charge.
Purchasing Advisor Class B Shares
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<PAGE>
The public offering price of the Class B shares of each Fund is the next
determined net asset value per share. No initial sales charge is imposed.
However, a CDSC is imposed on certain redemptions of Class B shares.
Because Class B shares are sold without an initial sales charge, the
investor receives Fund shares equal to the full amount of the investment.
The maximum investment amount in Class B shares is $500,000.
Class B shares of a Fund that are redeemed will not be subject to a CDSC
to the extent that the value of such shares represents: (a) reinvestment
of dividends or other distributions or (b) shares redeemed more than six
full years after their purchase. Former Class B shareholders of the
SAFECO Advisor Series Trust who invest in Class B shares of any Fund may
include the length of time of ownership of the former Class B shares for
purposes of calculating any CDSC due upon redemption.
Initial investments in Class B shares of the Money Market Fund are sold
with no initial sales charge and are not subject to a CDSC upon
redemption, provided that the investor has remained invested exclusively
in Class B shares of the Money Market Fund and has not exchanged into
Class B Shares of another Fund in the interim. Money Market Fund Class B
shareholders will become subject to a CDSC calculated in accordance with
the table below if they exchange into Class B shares of another SAFECO
Fund and then redeem those shares. The CDSC will also apply to any Class
B shares of the Money Market Fund subsequently acquired by exchange.
Shareholders who initially purchase Money Market Fund Class B shares do
not receive credit for the time initially invested in the Money Market
Fund for purposes of calculating any CDSC due upon redemption of Class B
shares of another SAFECO Fund.
Redemptions of most other Class B shares will be subject to a CDSC. (See
"Contingent Deferred Sales Charge Waivers.") The amount of any applicable
CDSC will be calculated by multiplying the lesser of the original purchase
price or the net asset value of such shares at the time of redemption by
the applicable percentage shown in the table below. Accordingly, no
charge is imposed on increases in the net asset value above the original
purchase price:
CDSC as a Percentage of the Lesser of Net
Asset Value at Redemption or the Original
Redemption During Purchase Price
----------------- --------------
1st Year Since Purchase 5%
2nd Year Since Purchase 4%
3rd Year Since Purchase 3%
4th Year Since Purchase 3%
5th Year Since Purchase 2%
73
<PAGE>
CDSC as a Percentage of the Lesser of Net
Asset Value at Redemption or the Original
Redemption During Purchase Price
----------------- --------------
6th Year Since Purchase 1%
Thereafter 0%*
* Automatically converts to Class A shares in the first month following
the investor's sixth anniversary from purchase.
In determining whether a CDSC is applicable to a redemption, the
calculation will be made in a manner that results in the lowest possible
rate. It will be assumed that the redemption is made first of amounts
representing shares acquired pursuant to the reinvestment of dividends and
other distributions and then of amounts representing the cost of shares
held for the longest period of time.
For example, assume an investor purchased 100 shares at $10 per share at a
cost of $1,000. Subsequently, the shareholder acquired 15 additional
shares through dividend reinvestment. During the second year after the
purchase, the investor decided to redeem $500 of his or her investment.
Assuming at the time of the redemption a net asset value of $11 per share,
the value of the investor's shares would be $1,265 (115 shares at $11 per
share). The CDSC would not be applied to the value of the reinvested
dividend shares. Therefore, the 15 shares currently valued at $165.00
would be redeemed without a CDSC. The number of shares needed to fund the
remaining $335.00 of the redemption would equal 30.455. Using the lower
of cost or market price to determine the CDSC, the original purchase price
of $10.00 per share would be used. The CDSC calculation would therefore
be 30.455 shares times $10.00 per share at a CDSC rate of 4% (the
applicable rate in the second year after purchase) for a total CDSC of
$12.18.
Except for the time period during which a shareholder is initially
invested in Money Market Fund Class B shares, if a shareholder effects one
or more exchanges among Class B shares of the Funds during the six year
period, the holding periods for the shares so exchanged will be counted
toward the six year period.
For federal income tax purposes, the amount of the CDSC will reduce the
gain or increase the loss, as the case may be, recognized on the
redemption of shares. The amount of any CDSC will be paid to SAFECO
Securities.
Contingent Deferred Sales Charge Waivers
----------------------------------------
The CDSC will be waived in the following circumstances: (a) total or
partial redemptions made within one year following the death or disability
of a shareholder; (b) redemptions made pursuant to any systematic
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<PAGE>
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 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 12% 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:
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<PAGE>
. 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 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
77 for more information.
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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 (minimum of $100 per withdrawal per
Fund) from your bank account and invest the amount in any Fund.
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 71 for more information.
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_______________________________________________________________
HOW TO EXCHANGE SHARES FROM ONE FUND TO ANOTHER
_______________________________________________________________
Shares of one class of a Fund may be exchanged for shares of the same
class of any other Fund, based on their next-determined respective net
asset values, without imposition of any sales charges, provided that the
shareholder account registration remains identical. Class A shares may be
exchanged only for Class A shares of the other Funds listed on the first
page of this Prospectus. Class B shares may be exchanged only for Class B
shares of the other Funds listed on the first page of this Prospectus.
The exchange of Class B shares will not be subject to a contingent
deferred sales charge. For purposes of computing the CDSC, except for the
time period during which a shareholder is initially invested in Class B
shares of the Money Market Fund, the length of time of ownership of Class
B shares will be measured from the date of original purchase and will not
be affected by the exchange. Exchanges are not tax-free and may result in
a shareholder's realizing a gain or loss, as the case may be, for tax
purposes. See "Fund Distributions and How They Are Taxed" on page 86 for
more information. You may purchase shares of a Fund by exchange only if
it is registered for sale in the state where you reside. Before
exchanging into an Advisor class of another Fund, please be familiar with
the Fund's investment objective and policies as described in "Each Fund's
Investment Objective and Policies" beginning on page 34 of this
Prospectus.
Exchanges by Mail
-----------------
Exchange orders should be sent by mail to the investor's broker-dealer,
bank or other financial institution. If a shareholder has an account at
SAFECO Services, exchange orders may be sent to the address set forth on
the cover of this Prospectus.
Exchanges by Telephone
----------------------
A shareholder may give exchange instructions to the shareholder's broker-
dealer, bank or other financial institution or to SAFECO Services by
telephone at the appropriate toll-free number provided on the cover of
this Prospectus. Exchange orders will be accepted by telephone provided
that the exchange involves only uncertificated shares or certificated
shares for which certificates previously have been deposited in the
shareholder's account. See "Telephone Transactions" for more information.
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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 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
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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 NAV of each class, appropriate adjustments will be made to each
Class's NAV to reflect expenses allocated to it.
Portfolio Valuation for the Stock Funds
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---------------------------------------
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.
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Portfolio Valuation for the Fixed-Income Funds
----------------------------------------------
For each of the Fixed-Income Funds except the Money Market Fund,
securities are valued based on consideration of information with respect
to transactions in similar securities, quotations from dealers and various
relationships between securities. The value of each Fixed-Income Fund's
securities are stated on the basis of valuations provided by a pricing
service, unless the Board of Trustees determines that such valuations do
not represent fair value. The service uses information with respect to
transactions in securities, quotations from security dealers, market
transactions in comparable securities, and various relationships between
securities to determine values. Other assets (including securities for
which market quotations are unavailable and restricted securities) are
valued at their fair value as determined in good faith by each Fixed-
Income Fund's respective Trust's Board of Trustees.
Like most money market funds, the Money Market Fund values the securities
it owns on the basis of amortized cost. The Money Market Fund may use
amortized cost valuation as long as the Money Market Trust's Board of
Trustees determines that it fairly reflects market value. Amortized cost
valuation involves valuing a security at its cost and adding or
subtracting, ratably to maturity, any discount or premium, regardless of
the impact of fluctuating interest rates on the market value of the
security. This method minimizes the effect of changes in a security's
market value and helps the Money Market Fund maintain a stable $1.00 share
price.
The NAV of the Class B shares of each Fund will generally be lower than
the NAV of Class A shares of the same Fund because of the higher expenses
borne by the Class B shares. The NAVs of the Advisor Classes of a Fund's
shares also may differ due to differing allocations of class-specific
expenses. The NAVs of the Advisor Classes of each Fund's shares will tend
to converge, however, immediately after the payment of dividends.
Call 1-800-463-8794 for 24-hour price information.
______________________________________________________________
INFORMATION ABOUT SHARE OWNERSHIP AND COMPANIES
THAT PROVIDE SERVICES TO THE TRUSTS
______________________________________________________________
Each Trust is a Delaware business trust established by a Trust Instrument
dated May 13, 1993, and is authorized to issue an unlimited number of
shares of beneficial interest. The Board of Trustees of each Trust may
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<PAGE>
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
ascertained each business day and paid monthly in accordance with the
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<PAGE>
schedules below. A reduction in the fees paid by a Fund occurs only when
that Fund's net assets reach the dollar amounts of the break points and
applies only to the assets that fall within the specified range:
Growth, Equity and Income Funds
Net Assets Annual Fee
$0 - $100,000,00 .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 Fund
Net Assets Annual Fee
$0 - $250,000,000 .75 of 1%
$250,000,001 - $500,000,000 .65 of 1%
Over $500,000,000 .55 of 1%
International Fund
Net Assets Annual Fee
$0 - $250,000,000 1.10 of 1%
$250,000,001 - $500,000,000 1.00 of 1%
Over $500,000,000 .90 of 1%
Small Company Fund
Net Assets Annual Fee
$0 - $250,000,000 .85 of 1%
$250,000,001 - $500,000,000 .75 of 1%
Over $500,000,000 .65 of 1%
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Intermediate Treasury Fund
Net Assets Annual Fee
$0 - $250,000,000 .55 of 1%
$250,000,001 - $500,000,000 .45 of 1%
$500,000,001 - $750,000,000 .35 of 1%
Over $750,000,000 .25 of 1%
Managed Bond Fund
Net Assets Annual Fee
$0 - $100,000,000 .50 of 1%
$100,000,001 - $250,000,000 .40 of 1%
Over $250,000,000 .35 of 1%
Money Market Fund
Net Assets Annual Fee
$0 - $250,000,000 .50 of 1%
$250,000,001 - $500,000,000 .40 of 1%
$500,000,001 - $750,000,000 .30 of 1%
Over $750,000,000 .25 of 1%
Municipal and California Funds
Net Assets Annual Fee
$0 - $100,000,000 .55 of 1%
$100,000,001 - $250,000,000 .45 of 1%
$250,000,001 - $500,000,000 .35 of 1%
Over $500,000,000 .25 of 1%
Washington Fund
Net Assets Annual Fee
$0 - $250,000,000 .65 of 1%
$250,000,001 - $500,000,000 .55 of 1%
$500,000,001 - $750,000,000 .45 of 1%
Over $750,000,000 .35 of 1%
A Trust and each Fund thereof will bear all expenses of their
organization, operations and business not specifically assumed by SAM
under each Fund's management contract. Such expenses may include, among
others, custody and accounting expenses, transfer agency and related
expenses, distribution and shareholder servicing expenses, expenses
related to preparing, printing and delivering prospectuses and shareholder
reports, the expenses of holding shareholders' meetings, legal fees, the
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<PAGE>
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 manages over $3 billion in assets. Because the
Sub-Adviser is doing business from a location within the United States,
investors will be able to effect service of legal process within the
United States upon the Sub-Adviser, facilitating the enforcement of
judgments against the Sub-Adviser under federal securities laws in United
States courts. However, the Sub-Adviser is a foreign organization and
maintains a substantial portion of its assets outside the United States.
Therefore, the ability of investors to enforce judgments against the Sub-
Adviser may be affected by the willingness of foreign courts to enforce
judgments of U.S courts.
Under the agreement, the Sub-Adviser is responsible for providing
investment research and advice used to manage the investment portfolio of
the International Fund. In return, SAM (and not the International Fund)
pays the Sub-Adviser a fee in accordance with the schedule below:
Net Assets Annual Fee
$0 - $50,000,000 .60 of 1%
$50,000,001 - $100,000,000 .50 of 1%
Over $100,000,000 .40 of 1%
The parent company of the Sub-Adviser, Bank of Ireland Asset Management
Limited, is a direct, wholly owned subsidiary of the Bank of Ireland,
which engages in the investment advisory business and is located at 26
Fitzwilliam Street, 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 (and other distribution) 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
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<PAGE>
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.
_______________________
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 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
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<PAGE>
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 66, 97. 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 June 30, 1996, SAM, a wholly owned subsidiary of SAFECO Corporation,
controlled the International and Balanced Funds. At June 30, 1996, SAFECO
Corporation controlled the Small Company Fund. SAFECO Corporation and SAM
have their principal place of business at SAFECO Plaza, Seattle,
Washington 98185.
At June 30, 1996, SAFECO Insurance Company of America ("SAFECO Insurance")
controlled the Intermediate Treasury and Washington Funds. SAFECO
Insurance is a Washington Corporation and a wholly owned subsidiary of
SAFECO Corporation, which has its principal place of business at SAFECO
Plaza, Seattle, Washington 98185.
At September 13, 1996, Crown Packaging Corp. PS & P and Massman
Construction Co. PSRT controlled the Managed Bond Fund. Crown Packaging
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<PAGE>
Corp. PS & P's address of record is 8514 Eager Road, St. Louis, Mo. 63144.
Massman Construction Co. PSRT'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.
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<PAGE>
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.
____________________________________________________
FUND DISTRIBUTIONS AND HOW THEY ARE TAXED
____________________________________________________
Dividends and other Distributions
The Fixed-Income Funds declare dividends on each business day and pay them
on the last business day of each month; the Growth, Equity, Income,
Northwest and Balanced Funds declare and pay dividends on the last
business day of each calendar quarter; and the International and Small
Company Funds declare and pay dividends annually. Those dividends are
declared and paid from net investment income (which includes accrued
dividends and interest, earned discount, and other income earned on
portfolio securities less expenses). Shares of each Fund become entitled
to receive dividends on the next business day after they are purchased for
your account. If you request redemption of all your shares at any time
during a month, you will receive all declared dividends through the date
of redemption, together with the proceeds of the redemption.
Dividends and other distributions paid by a Fund on each class of its
shares are calculated at the same time in the same manner. However,
except for the Money Market Fund, because of the higher Rule 12b-1 service
and distribution fees associated with Class B shares, the dividends paid
by a Fund on its Class B shares will be lower than those paid on its Class
A shares.
Your dividends and other distributions are reinvested in additional shares
of the distributing class 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 in the same manner as the distribution election.
For retirement accounts, all dividends and other distributions declared by
a Fund must be invested in additional shares of that Fund.
All states treat the pass-through of interest earned on U.S. Treasury
securities 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.
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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 69 and "How
to Exchange Shares from One Fund to Another" on page 75 for more
information. In these cases, any gain on the disposition of the original
Class A shares will be increased, or any loss decreased, by the amount of
the sales charge paid when you acquired those shares, and that amount will
increase the basis of the shares subsequently acquired. In addition, if
you purchase shares of a Fund (whether pursuant to the reinstatement
privilege or otherwise) within thirty days before or after redeeming other
shares of that Fund (regardless of class) at a loss, all or part of that
loss will not be deductible and will increase the basis of the newly
purchased shares.
Special Considerations for the Tax-Exempt Income Funds
------------------------------------------------------
Each Tax-Exempt Income Fund intends to continue to qualify for favorable
tax treatment as a "regulated investment company" under the Internal
Revenue 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.
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<PAGE>
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.
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Generally, the tax treatment of capital gains under California law is the
same as under federal law. Capital gains distributions paid by the
California Fund are treated as long-term capital gains under California
law regardless of how long the shares have been held. Redemptions and
exchanges of the California Fund may result in a capital gain or loss for
California income tax purposes.
Under California law, the dividend income from municipal bonds is tax-
exempt to individual shareholders but its tax treatment for corporate
shareholders is unclear. Therefore, the portion of the California Fund's
income dividend attributable to these obligations and paid by it to
corporate shareholders may be taxable. Corporate shareholders may wish to
consult their tax advisers regarding this issue.
Shares of the California Fund will not be subject to the California
property tax.
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
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<PAGE>
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 non-profit organizations. An account may be
established under one of the following plans which allow you to defer
investment income from federal income tax while you save for retirement.
Many of the Funds (other than the Tax-Exempt Income Funds) may be used as
investment vehicles for these plans.
Individual Retirement Accounts (IRAs). IRAs are tax-deferred retirement
accounts for anyone under age 70 1/2 with earned income. The maximum
annual contribution generally is $2,000 per person ($2,250 for you and a
non-working spouse). Under certain circumstances your contribution will
be deductible for income tax purposes. An annual custodial fee will be
charged for any part of a calendar year in which you have an IRA
investment in a Fund.
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,
recordkeeping, 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
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<PAGE>
plans, see "Fund Distributions and How They Are Taxed - Tax Withholding
Information" on page 90.
_________________________
ACCOUNT STATEMENTS
_________________________
Periodically, you will receive an account statement indicating your
current Fund holdings and transactions affecting your account.
Confirmation statements will be sent to you after each transaction that
affects your account balance. Please review the information on each
confirmation statement for accuracy immediately upon receipt. If you do
not notify us within 30 days of any processing error, SAFECO Services will
consider the transactions listed on the confirmation statement to be
correct.
________________________________________________________
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 or change the account registration to
single ownership 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.
____________________________________________________________________
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<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 rate obligations. Investors should realize
these ratings do not constitute a guarantee that the principal and
interest payable under these obligations will be paid when due.
Description of Commercial Paper Ratings
Moody's. Issuers rated Prime-1 have a superior ability for repayment of
senior short-term debt obligations. Issuers rated Prime-2 have a strong
ability for repayment of senior short-term debt obligations. Issuers
rated Prime-3 have an acceptable ability for repayment of senior short-
term debt obligations.
S&P. Issues rated A-1 are the highest category, indicating that the
degree of safety regarding timely payment is strong. Those issues
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<PAGE>
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.
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
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<PAGE>
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.
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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.
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.
The weighted average ratings of all debt securities held by the Income
Fund, expressed as a percentage of total investments held during the
fiscal year ended September 30, 1995, were as follows:
<TABLE>
<CAPTION>
Moody's % S&P %
------- -- ---- --
Investment Grade
<S> <C> <C> <C>
Aaa - AAA -
Aa - AA -
A 3.0 A 1.0
Baa 2.6 BBB 4.6
Below Investment Grade
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<PAGE>
Ba 4.0 BB 4.7
B 4.9 B 3.0
Caa - CCC .6
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 3.7 investment grade 4.3
</TABLE>
The Equity Fund did not hold any convertible debt securities during the
fiscal year ended September 30, 1995.
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SAFECO Family of Funds
Stability of Principal
SAFECO Money Market Fund
Bond Income
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO Managed Bond Fund
Tax-Free Bond Income
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal Bond Fund
High Current Income With Long-Term Growth
SAFECO Income Fund
Long-Term Growth
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Northwest Fund
SAFECO Balanced Fund
SAFECO International Stock Fund
SAFECO Small Company Stock Fund
For more complete information on Advisor Class shares of any SAFECO mutual
fund, including management fees and expenses, please contact your
investment professional.
<TABLE>
<CAPTION>
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<S> <C>
TELEPHONE NUMBERS: PROSPECTUS
Dealer Services September 30, 1996
Nationwide: (800) 528-6501
Seattle: (206) 545-6409 SAFECO Growth Fund
SAFECO Equity Fund
Literature Order: SAFECO Income Fund
Nationwide: (800) 463-8792 SAFECO Northwest Fund
Seattle: (206) 545-6227 SAFECO Balanced Fund
SAFECO International Stock Fund
Shareholder Services/Telephone Exchange: SAFECO Small Company Stock Fund
Monday through Friday, SAFECO Intermediate-Term
6:00 a.m. to 5:00 p.m. Pacific Time U.S. Treasury Fund
Nationwide: (800) 463-8791 SAFECO Managed Bond Fund
Seattle: (206) 545-6283 SAFECO Money Market Fund
SAFECO Municipal Bond Fund
24-Hour Price and Performance Information SAFECO California Tax-Free Income Fund
Nationwide: (800) 463-8794 SAFECO Washington State Municipal
Seattle: (206) 545-6295 Bond Fund
Advisor Class A
Advisor Class B
MAILING ADDRESS:
No dealer, salesperson or other person has been
SAFECO MUTUAL FUNDS authorized to give any information or to make any
Advisor Class Shares representation, other than those contained in this
P.O. Box 34890 Prospectus, and, if given or made, such other
Seattle, WA 98124-1890 information or representations must not be relied
upon as having been authorized by any Trust, any
EXPRESS/OVERNIGHT MAIL: Fund, or by SAFECO Securities. This Prospectus does
SAFECO Mutual Funds - A not constitute an offer to sell or a solicitation of
Advisor Class Shares an offer to buy by any Trust, any Fund, or by SAFECO
4333 Brooklyn Avenue N.E. Securities in any state in which such offer or
Seattle, WA 98105 solicitation may not lawfully be made.
Distributor:
SAFECO Securities, Inc.
P.O. Box 34890
Seattle, WA 98124-1890
</TABLE>
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<PAGE>
SAFECO TAXABLE BOND TRUST:
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
SAFECO GNMA FUND
SAFECO HIGH-YIELD BOND FUND
SAFECO MANAGED BOND TRUST:
SAFECO MANAGED BOND FUND
No-Load Class
Statement of Additional Information
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus for the funds listed above (each a
"Fund"). A copy of the Prospectus may be obtained by writing SAFECO
Mutual Funds, No-Load Class Shares, P.O. Box 34890, Seattle, Washington
98124-1890, or by calling TOLL FREE:
Nationwide
1-800-426-6730
Seattle Area
206-545-5530
Hearing Impaired TDD/TTY Service
1-800-438-8718
The date of the most current Prospectus of the Funds to which this
Statement of Additional Information relates is September 30, 1996.
The date of this Statement of Additional Information is September 30,
1996.
<PAGE>
TABLE OF CONTENTS
Page
----
INVESTMENT POLICIES . . . . . . . . . . . . . . . . . . . . 2
INVESTMENT POLICIES OF THE TAXABLE BOND FUNDS . . . . . . . 2
INVESTMENT POLICIES OF THE MANAGED BOND FUND . . . . . . . . 6
ADDITIONAL INVESTMENT INFORMATION . . . . . . . . . . . . . 10
PRINCIPAL SHAREHOLDERS OF CERTAIN FUNDS . . . . . . . . . . 14
ADDITIONAL TAX INFORMATION . . . . . . . . . . . . . . . . . 14
ADDITIONAL INFORMATION ON CALCULATION OF NET ASSET VALUE
PER SHARE . . . . . . . . . . . . . . . . . . . . . . . . . 15
ADDITIONAL PERFORMANCE INFORMATION . . . . . . . . . . . . . 16
TRUSTEES AND OFFICERS OF THE TRUSTS . . . . . . . . . . . . 21
INVESTMENT ADVISORY AND OTHER SERVICES . . . . . . . . . . . 26
BROKERAGE PRACTICES . . . . . . . . . . . . . . . . . . . . 29
REDEMPTION IN KIND . . . . . . . . . . . . . . . . . . . . . 30
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . 30
DESCRIPTION OF COMMERCIAL PAPER RATINGS . . . . . . . . . . 31
<PAGE>
INVESTMENT POLICIES
SAFECO Intermediate-Term U.S. Treasury Fund ("Intermediate Treasury
Fund"), SAFECO GNMA Fund ("GNMA Fund") and SAFECO High-Yield Bond Fund
("High-Yield Bond Fund") (collectively "Taxable Bond Funds") are series of
SAFECO Taxable Bond Trust ("Taxable Bond Trust"). SAFECO Managed Bond
Fund ("Managed Bond Fund") is the only series of SAFECO Managed Bond Trust
("Managed Bond Trust" and, together with Taxable Bond Trust, the
"Trusts"). The investment policies of the Taxable Bond Funds and the
Managed Bond Fund (each a "Fund") are described in the Prospectus and this
Statement of Additional Information. These policies state the investment
practices that the Funds will follow, in some cases limiting investments
to a certain percentage of assets, as well as those investment activities
that are prohibited. The types of securities that a Fund may purchase are
also disclosed in the Prospectus. Before a Fund purchases a security that
the following policies permit, but that is not currently described in the
Prospectus, the Prospectus will be amended or supplemented to describe the
security. If a policy's percentage limitation is adhered to immediately
after and as a result of the investment, a later increase or decrease in
values, net assets or other circumstances will not be considered in
determining whether a Fund complies with the applicable limitation (except
to the extent the change may impact a Fund's borrowing limit).
Each Fund's fundamental policies may not be changed without the approval
of a "majority of its outstanding voting securities," as defined in the
Investment Company Act of 1940, as amended ("1940 Act"). For purposes of
such approval, the vote of a majority of the outstanding voting securities
of a Fund means the vote, at a meeting of the shareholders of such Fund
duly called, (i) of 67% or more of the voting securities present at such
meeting if the holders of more than 50% of the outstanding voting
securities are present or represented by proxy, or (ii) of more than 50%
of the outstanding voting securities, whichever is less.
Non-fundamental policies may be changed without shareholder approval.
INVESTMENT POLICIES OF THE TAXABLE BOND FUNDS
Fundamental Investment Policies
Each Taxable Bond Fund has adopted the following fundamental investment
policies. Each Taxable Bond Fund will not:
1. Purchase the securities of any issuer (except the U.S. Govern-
ment, its agencies or instrumentalities) if as a result more than
five percent (5%) of the value of its total assets at the time of
purchase would be invested in the securities of such issuer,
except that up to twenty-five percent (25%) of the value of a
Fund's assets (which twenty-five percent (25%) shall not include
securities issued by another investment company) may be invested
without regard to this five percent (5%) limitation.
2
<PAGE>
2. Underwrite any issue of securities, except to the extent that the
purchase of permitted investments directly from the issuer in
accordance with the Fund's investment objective, policies and
restrictions and the subsequent disposition thereof may be deemed
to be underwriting or the later disposition of restricted
securities acquired within the limits imposed on the acquisition
of such securities may be deemed to be an underwriting.
3. Purchase or sell real estate, but this shall not prevent the Fund
from investing in municipal obligations or other permitted
investments secured by real estate or interests therein.
4. Purchase or retain for the Fund's portfolio the securities of any
issuer, if, to the Fund's knowledge, the officers or directors of
the Fund, or its investment adviser, who individually own more
than one-half (1/2) of one percent (1%) of the outstanding
securities of such an issuer, together own more than five percent
(5%) of such outstanding securities.
5. High-Yield Bond and Intermediate Treasury Funds only: Borrow
money, except from a bank or SAFECO Corporation or its affiliates
at an interest rate not greater than that available to the Fund
from commercial banks, for temporary or emergency purposes and
not for investment purposes, and then only in an amount not
exceeding twenty percent (20%) of the value of the Fund's total
assets at the time of such borrowing.
GNMA Fund only: Borrow money, except from a bank or affiliates
of SAFECO Corporation at an interest rate not greater than that
available to the GNMA Fund from commercial banks, for temporary
or emergency purposes and not for investment purposes, and then
only in an amount not exceeding twenty percent (20%) of its total
assets (including borrowings) less liabilities (other than
borrowings) immediately after such borrowing.
Each Fund will not purchase securities if borrowings equal to or
greater than five percent (5%) of the Fund's total assets are
outstanding.
6. Pledge, mortgage or hypothecate its assets, except that to secure
borrowings permitted by subparagraph (5) above, it may pledge
securities having a market value at the time of pledge not
exceeding ten percent (10%) of the cost of the Fund's total
assets.
7. Purchase or sell commodities or commodity contracts, other than
futures contracts, or invest in oil, gas or other mineral
exploration or development programs or in arbitrage transactions.
8. Make short sales of securities or purchase securities on margin,
except for margin deposits in connection with futures contracts
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and such short-term credits as are necessary for the clearance of
transactions.
9. Participate on a joint or a joint-and-several basis in any
trading account in securities, except that the Fund may, for the
purpose of seeking better net results on portfolio transactions
or lower brokerage commission rates, join with other transactions
executed by the investment adviser or the investment adviser's
parent company and any subsidiary thereof.
10. Purchase from or sell portfolio securities to any officer or
director, the Fund's investment adviser, principal underwriter or
any affiliates or subsidiaries thereof; provided, however, that
this prohibition shall not prohibit the Fund from purchasing with
the up to $7,000,000 raised through the sale of up to 700,000
shares of common stock to SAFECO Life Insurance Company,
portfolio securities from subsidiaries of SAFECO Corporation
prior to the effective date of the Fund's initial public
offering.
11. Purchase securities (other than obligations issued or guaranteed
by the United States Government, its agencies or
instrumentalities), if as a result twenty-five percent (25%) or
more of the Fund's total assets would be invested in one industry
(governmental issuers of securities are not considered part of
any one industry).
12. Purchase shares of common stock, other than those issued by other
regulated investment companies (or, with respect to the High-
Yield Bond and Intermediate Treasury Funds only, when the
acquisition of such common stocks, rights or other equity
interests is consistent with the High-Yield Bond and Intermediate
Treasury Funds' investment objectives). Generally, the High-
Yield Bond and Intermediate Treasury Funds will only hold such
equity securities as a result of purchases or unit offerings of
fixed-income securities which include such equity securities or
in connection with an actual or proposed conversion or exchange
of fixed-income securities.
13. Issue or sell any senior security, except that this restriction
shall not be construed to prohibit the Fund from borrowing funds
(i) on a temporary basis as permitted by Section 18(g) of the
1940 Act or (ii) from any bank provided, that immediately after
such borrowing, there is an asset coverage of at least three
hundred percent (300%) for all such borrowings and provided,
further, that in the event that such asset coverage shall at any
time fall below three hundred percent (300%), the Fund shall,
within three (3) days thereafter (not including Sundays and
holidays), or such longer period as the Securities and Exchange
Commission ("SEC") may prescribe by rules and regulations, reduce
the amount of its borrowings to an extent that the asset coverage
of such borrowings shall be at least three hundred percent
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(300%). For purposes of this restriction, the terms "senior
security" and "asset coverage" shall be understood to have the
meaning assigned to those terms in Section 18 of the 1940 Act.
14. Purchase securities of any issuer, if, as a result, more than ten
percent (10%) of any class of securities of such issuer would be
owned by the Fund.
15. With respect to one hundred percent (100%) of the value of its
total assets, purchase more than ten percent (10%) of the
outstanding voting securities of any one issuer (other than U.S.
Government securities).
16. Purchase or otherwise acquire securities which are illiquid or
subject to legal or contractual restrictions on resale, if as a
result more than ten percent (10%) of the Fund's (five percent
(5%) of the GNMA Fund's) total assets would be invested in such
securities.
17. Make loans, except through the purchase of a portion or all of an
issue of debt or money market securities in accordance with its
investment objective, policies and restrictions, or through
investments in qualified repurchase agreements (provided,
however, that a Fund shall not invest more than ten percent (10%)
of its total assets in qualified repurchase agreements maturing
in more than seven (7) days), or through qualified loan
agreements (by making secured loans of its portfolio securities
which amount to not more than five percent (5%) of its total
assets).
Non-Fundamental Investment Policies
In addition to the policies described in the Prospectus, each Taxable Bond
Fund has adopted the following non-fundamental investment policies which
may be changed without shareholder approval:
1. The Fund will not invest more than five percent (5%) of its total
assets in securities of issuers, including their predecessors,
which have been in operation for less than three years.
2. The Fund will not issue long-term debt securities.
3. The Fund will not invest in securities with unlimited liability,
e.g., securities the holder of which may be assessed for amounts
in addition to the subscription or other price paid for the
security.
4. The Fund will not trade in foreign currency, except as may be
necessary to convert the proceeds of the sale of foreign
securities in the Fund's portfolio into U.S. dollars.
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5. The Fund may purchase "when-issued" or "delayed-delivery"
securities or purchase or sell securities on a "forward
commitment" basis.
6. The Fund will not invest in any security issued by a commercial
bank unless (a) the bank has total assets of at least $1 billion,
or the equivalent in other currencies, or, in the case of a
United States bank which does not have assets of at least $1
billion, the aggregate investment made in any one such bank is
limited to $100,000 and the principal sum of each investment is
insured in full by the Federal Deposit Insurance Corporation
("FDIC"), (b) in the case of a U.S. bank, it is a member of the
FDIC and (c) in the case of a foreign bank, the security is, in
the opinion of the Fund's investment adviser, of an investment
quality comparable with other debt securities which may be
purchased by the Fund. These limitations do not prohibit
investment in securities issued by foreign branches of U.S.
banks, provided the U.S. banks meet the foregoing requirements.
7. The Fund shall not engage primarily in trading for short-term
profits, but it may from time to time make investments for short-
term purposes when such action is believed to be desirable and
consistent with sound investment policy, and it may dispose of
securities whenever its investment adviser deems advisable
without regard to the length of time they have been held.
8. The Intermediate Treasury Fund may invest up to five percent (5%)
of its total assets in Yankee Sector debt securities and up to
five percent (5%) of its total assets in Eurodollar bonds.
9. The Intermediate Treasury Fund and High-Yield Bond Fund may each
invest up to five percent (5%) of its total assets in securities
the interest on which, in the opinion of counsel for the issuer,
is exempt from federal income tax. The GNMA Fund may not invest
in such tax-exempt securities.
INVESTMENT POLICIES OF THE MANAGED BOND FUND
Fundamental Investment Policies
The Managed Bond Fund has adopted the following fundamental investment
policies. The Managed Bond Fund will not:
1. Purchase the securities of any issuer (except the U.S.
Government, its agencies or instrumentalities) if as a result
more than five percent (5%) of the value of total assets at the
time of purchase would be invested in the securities of such
issuer, except that up to twenty-five percent (25%) of the value
of the Fund's assets (which twenty-five percent (25%) shall not
include securities issued by another investment company) may be
invested without regard to this five percent (5%) limitation.
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2. Purchase the securities of any issuer (other than obligations of
or guaranteed by the U.S. Government, its agencies and
instrumentalities) if, as a result, more than ten percent (10%)
of any class of securities of such issuer will be held by the
Fund.
3. With respect to one hundred percent (100%) of the value of its
total assets, purchase more than ten percent (10%) of the
outstanding voting securities of any one issuer (other than U.S.
Government securities).
4. Purchase securities, if as a result, twenty-five percent (25%) or
more of the Fund's total assets would be invested in the
securities of issuers having their principal business activities
in any one industry. Securities of foreign banks and foreign
branches of U.S. banks are considered to be one industry. This
limitation does not apply to obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities or to
certificates of deposits or bankers' acceptances issued by
domestic banks.
5. Purchase securities on margin, except for short-term credits
necessary for the clearance of transactions.
6. Make short sales of securities (sales of securities not presently
owned).
7. Make loans, except through the purchase of a portion or all of an
issue of debt securities in accordance with the Fund's investment
objective, policies and restrictions or through investments in
qualified repurchase agreements.
8. Borrow money, except from a bank or SAFECO Corporation or its
affiliates at an interest rate not greater than that available to
the Fund from commercial banks, for temporary or emergency
purposes and not for investment purposes, and then only in an
amount not exceeding twenty percent (20%) of the value of the
Fund's total assets (including borrowings) less liabilities
(other than borrowings) immediately after such borrowing.
9. Underwrite any issue of securities, except to the extent that the
purchase of permitted investments directly from the issuer in
accordance with the Fund's investment objective, policies and
restrictions and the subsequent disposition thereof may be deemed
to be underwriting or the later disposition of restricted
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securities acquired within the limits imposed on the acquisition
of such securities may be deemed to be an underwriting.
10. Purchase or sell real estate or real estate limited partnerships
(unless acquired as a result of the ownership of securities or
instruments) but this shall not prevent the Fund from investing
in permitted investments secured by real estate or interests
therein or in real estate investment trusts.
11. Purchase or sell commodities, commodity contracts or futures
contracts.
12. Participate on a joint or joint-and-several basis in any trading
account in securities, except that the Fund may join with other
transactions executed by the investment adviser or the investment
adviser's parent company and any subsidiary thereof, for the
purpose of seeking better net results on portfolio transactions
or lower brokerage commission rates.
13. Issue or sell any senior security, except as permitted under the
1940 Act.
Non-Fundamental Investment Policies
The Managed Bond Fund has adopted the following non-fundamental investment
policies which may be changed without shareholder approval:
1. The Fund will not issue long-term debt securities.
2. The Fund will not invest in any security for the purpose of
acquiring or exercising control or management of the issuer.
3. The Fund will not invest in oil, gas or other mineral exploration
or development programs or leases.
4. The Fund will not invest in or sell (write) puts, calls, strad-
dles, spreads or any combinations thereof.
5. The Fund will not invest more than five percent (5%) of its total
assets in securities of issuers (including predecessor companies
of the issuer) having a record of less than three years
continuous operation.
6. The Fund will not invest in securities with unlimited liability,
e.g., securities the holder of which may be assessed for amounts
in addition to the subscription or other price paid for the
security.
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7. The Fund will not invest more than ten percent (10%) of its total
assets in qualified repurchase agreements and will not invest in
qualified repurchase agreements maturing in more than seven (7)
days.
8. The Fund will not purchase the securities of any other investment
company, except by purchase in the open market where no
commission or profit to a broker or dealer results from such
purchase other than the customary broker's commissions, or except
as part of a merger, consolidation or acquisition. The Fund
shall not invest more than ten percent (10%) of its total assets
in shares of other investment companies, invest more than five
percent (5%) of its total assets in a single investment company
nor purchase more than three percent (3%) of the outstanding
voting securities of a single investment company.
9. The Fund will not purchase securities if borrowings equal to or
greater than five percent (5%) of the Fund's total assets are
outstanding.
10. The Fund will invest at least sixty-five percent (65%) of its
total assets in fixed income obligations.
11. The Fund will invest at least fifty percent (50%) of its total
assets in obligations of or guaranteed by the U.S. Government,
its agencies and instrumentalities.
12. The Fund may invest up to fifty percent (50%) of its total assets
in corporate debt securities or Eurodollar bonds.
13. The Fund may invest up to ten percent (10%) of its total assets
in Yankee Sector debt obligations.
14. The Fund may purchase securities on a when-issued or delayed-
delivery basis or may purchase or sell securities on a forward
commitment basis.
15. The Fund may temporarily invest its cash in high quality
commercial paper, certificates of deposit, shares of no-load,
open-end money market funds (subject to the percentage
limitations set forth in subparagraph 8 above), repurchase
agreements (subject to the limitations set forth in subparagraph
7 above) or any other short-term instrument the Fund's investment
adviser deems appropriate.
16. The Fund may hold cash as a temporary defensive measure when
market conditions so warrant.
17. The Fund shall not engage primarily in trading for short-term
profits, but it may from time to time make investments for short-
term purposes when such action is believed to be desirable and
consistent with sound investment policy. The Fund may dispose of
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securities whenever it deems advisable without regard to the
length of time they have been held.
18. The Fund may invest up to five percent (5%) of its total assets
in securities the interest on which, in the opinion of counsel
for the issuer, is exempt from federal income tax.
WHILE THE FUND HAS THE AUTHORITY TO INVEST IN THE FOLLOWING TYPES OF
SECURITIES, IT HAS NO PRESENT INTENTION TO DO SO IN THE COMING YEAR.
BEFORE THE FUND PURCHASES ANY OF THESE SECURITIES, THE PROSPECTUS WILL BE
AMENDED BY SUPPLEMENT TO DESCRIBE THE SECURITY.
19. The Fund may invest up to five percent (5%) of its total assets
in shares of real estate investment trusts.
20. The Fund may purchase securities subject to legal or contractual
restrictions on resale or illiquid securities, if no more than
fifteen percent (15%) of the Fund's total assets would be
invested in such securities.
21. The Fund may purchase foreign securities, provided that such
purchase, at the time thereof, would not cause more than ten
percent (10%) of the total assets of the Fund (taken at market
value) to be invested in foreign securities.
22. The Fund will not buy or sell foreign currency, except as may be
necessary to invest the proceeds of the sale of any foreign
securities held by the Fund in U.S. dollars.
ADDITIONAL INVESTMENT INFORMATION
The Funds may make the following investments, among others, although they
may not buy all of the types of securities that are described.
1. REPURCHASE AGREEMENTS. Repurchase agreements are transactions in
which a Fund purchases securities from a bank or recognized
securities dealer and simultaneously commits to resell the
securities to the bank or dealer at an agreed-upon date and price
reflecting a market rate of interest unrelated to the coupon rate
or maturity of the purchased securities. A Fund maintains
custody of the underlying securities prior to their repurchase;
thus, the obligation of the bank or dealer to pay the repurchase
price on the date agreed to is, in effect, secured by such
securities. If the value of these securities is less than the
repurchase price, plus any agreed-upon additional amount, the
other party to the agreement must provide additional collateral
so that at all times the collateral is at least equal to the
repurchase price, plus any agreed-upon additional amount.
Each Fund intends to enter into repurchase agreements only with
banks and dealers in transactions believed by SAM to present
minimum credit risks in accordance with guidelines established by
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its Board of Trustees. SAM will review and monitor the
creditworthiness of those institutions under the general
supervision of the Board of Trustees.
2. WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES. Under this proce-
dure, a Fund agrees to acquire securities (whose terms and
conditions, including price, have been fixed by the issuer) that
are to be issued and delivered against payment in the future.
Delivery of securities so sold normally takes place 30 to 45 days
(settlement date) after the date of the commitment. No interest
is earned by a Fund prior to the settlement date. The value of
securities sold on a when-issued or delayed-delivery basis may
fluctuate before the settlement date and a Fund bears the risk of
such fluctuation from the date of purchase. A Fund may dispose
of its interest in those securities before delivery.
A Fund will commit to purchase such securities only with the
intent of actually acquiring the securities when issued. Assets
which are short-term, high-quality obligations will be earmarked
in anticipation of making payments for securities purchased on a
when-issued basis.
3. YANKEE DEBT SECURITIES AND EURODOLLAR BONDS. Yankee debt
securities are securities issued in the U.S. by foreign issuers.
These bonds involve investment risks that are different from
those of domestic issuers. Such risks may include
nationalization of the issuer, confiscatory taxation by the
foreign government, establishment of controls by the foreign
government that would inhibit the ability of the issuer to make
principal and interest payments to a Fund, lack of comparable
publicly available information concerning foreign issuers, lack
of comparable accounting and auditing practices in foreign
countries and finally, difficulty in enforcing claims against
foreign issuers in the event of default.
SAM will make every effort to analyze potential investments in
foreign issuers on the same basis as the rating services analyze
domestic issuers. Because public information is not always
comparable to that available on domestic issuers, this may not be
possible. Therefore, while SAM will make every effort to select
investment in foreign securities on the same basis relative to
quality and risk as its investments in domestic securities, that
may not always be possible.
Eurodollar bonds are denominated in U.S. dollars. A Fund will
purchase Eurodollar bonds through U.S. securities dealers and
hold such bonds in the United States. The delivery of Eurodollar
bonds to a Fund's custodian in the United States may cause slight
delays in settlement which are not anticipated to affect any Fund
in any material, adverse manner. Eurodollar bonds issued by
foreign issuers are subject to the same risks as Yankee sector
bonds.
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4. MUNICIPAL SECURITIES. Municipal securities include obligations
issued by or on behalf of the states, territories and possessions
of the United States and the District of Columbia and their
political subdivisions, agencies, instrumentalities or
authorities, the interest on which, in the opinion of counsel to
the issuer, is exempt from federal income tax. Generally, when
market interest rates rise, the price of municipal securities
will fall, and when market interest rates fall, the price of
these securities will rise. There is also a risk that the issuer
of a municipal security will fail to make timely payments of
principal and interest to the Fund.
The TAXABLE BOND FUNDS may also purchase the following types of
securities:
1. RESTRICTED SECURITIES AND RULE 144A SECURITIES. Restricted
securities are securities that may be sold only in a public
offering with respect to which a registration statement is in
effect under the 1933 Act or, if they are unregistered, in a
privately negotiated transaction or pursuant to an exemption from
registration. In recognition of the increased size and liquidity
of the institutional markets for unregistered securities and the
importance of institutional investors in the formation of
capital, the SEC has adopted Rule 144A under the 1933 Act, which
is designed to further facilitate efficient trading among
institutional investors by permitting the sale of Rule 144A
securities to qualified institutional buyers without registration
under the 1933 Act. To the extent privately placed securities
held by a Fund qualify under Rule 144A and an institutional
market develops for those securities, the Fund likely will be
able to dispose of the securities without registering them under
the 1933 Act. SAM, acting under guidelines established by the
Taxable Bond Trust's Board of Trustees, may determine that
certain securities qualified for trading under Rule 144A are
liquid.
Where registration is required, a Fund may be obligated to pay
all or part of the registration expenses, and a considerable
period may elapse between the decision to sell and the time the
Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell. To the
extent privately placed securities are illiquid, purchases
thereof will be subject to any limitations on investments in
illiquid securities. Restricted securities for which no market
exists are priced at fair value as determined in accordance with
procedures approved and periodically reviewed by the Taxable Bond
Trust's Board of Trustees.
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2. MORTGAGE-BACKED SECURITIES. Unlike conventional bonds, the
principal with respect to GNMA securities is paid back over the
life of the loan rather than at maturity. Consequently, the GNMA
Fund will receive monthly scheduled payments of both principal
and interest. In addition, the GNMA Fund may receive unscheduled
principal payments representing unscheduled prepayments on the
underlying mortgages. Since the GNMA Fund must reinvest
scheduled and unscheduled principal payments at prevailing
interest rates at the time of such investment and such interest
rates may be higher or lower than the current yield of the GNMA
Fund's portfolio, GNMA securities may not be an effective means
to lock in long-term interest rates. In addition, while prices
of GNMA securities, like conventional bonds, are inversely
affected by changes in interest rate levels, because of the
likelihood of increased prepayments of mortgages in times of
declining interest rates, they have less potential for capital
appreciation than comparable fixed-income securities and may in
fact decrease in value when interest rates fall.
The rate of interest payable on CMO classes may be set at levels
that are either above or below market rates at the time of
issuance, so that the securities will be sold at a substantial
premium to, or at a discount from, par value. If the mortgage
assets underlying a CMO experience greater than anticipated
principal prepayments, an investor may fail to recoup fully its
initial investment even though the security is government issued
or guaranteed.
Some CMO classes are structured to pay interest at rates that are
adjusted in accordance with a formula, such as a multiple or
fraction of the change in a specified interest rate index, so as
to pay at a rate that will be attractive in certain interest rate
environments but not in others. For example, a CMO may be
structured so that its yield moves in the same direction as
market interest rates - i.e., the yield may increase as rates
increase and decrease as rates decrease - but may do so more
rapidly or to a greater degree. Other CMO classes may be
structured to pay floating interest rates that either move in the
same direction or the opposite of short-term interest rates. The
market value of such securities may be more volatile than that of
a fixed rate obligation. Such interest rate formulas may be
combined with other CMO characteristics. The GNMA Fund will not
invest in interest-only or principal-only classes -- such
investments are extremely sensitive to changes in interest rates.
3. ILLIQUID SECURITIES. Illiquid securities are securities that
cannot be sold within seven days in the ordinary course of
business for approximately the amount at which they are valued.
Due to the absence of an active trading market, a Fund may
experience difficulty in valuing or disposing of illiquid
securities. SAM determines the liquidity of the securities under
guidelines adopted by the Trust's Board of Trustees.
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The MANAGED BOND FUND may also purchase the following type of securities:
1. ASSET-BACKED SECURITIES. Asset-backed securities represent
interests in, or are secured by and payable from, pools of assets
such as consumer loans, automobile receivable securities, credit
card receivable securities, and installment loan contracts. The
assets underlying the securities are securitized through the use
of trusts and special purpose corporations. These securities may
be supported by credit enhancements such as letters of credit.
Payment of interest and principal ultimately depends upon
borrowers paying the underlying loans. Repossessed collateral
may be unavailable or inadequate to support payments on defaulted
asset-backed securities. In addition, asset-backed securities
are subject to prepayment risks which may reduce the overall
return of the investment.
Automobile receivable securities represent undivided fractional
interests in a trust whose assets consist of a pool of automobile
retail installment sales contracts and security interests in
vehicles securing the contracts. Payments of principal and
interest on the certificates issued by the automobile receivable
trust are passed through periodically to certificate holders and
are generally guaranteed up to specified amounts by a letter of
credit issued by a financial institution. Certificate holders
may experience delays in payments or losses if the full amounts
due on the underlying installment sales contracts are not
realized by the trust because of factors such as unanticipated
legal or administrative costs of enforcing the contracts, or
depreciation, damage or loss of the vehicles securing the
contracts.
Credit card receivable securities are backed by receivables from
revolving credit card accounts. Certificates issued by credit
card receivable trusts generally are pass-through securities.
Competitive and general economic factors and an accelerated
cardholder payment rate can adversely affect the rate at which
new receivables are credited to an account, potentially
shortening the expected weighted average life of the credit card
receivable security and reducing its yield. Credit card accounts
are unsecured obligations of the cardholder.
2. ZERO COUPON BONDS. Zero coupon bonds do not make interest
payments; instead they are sold at a deep discount from their
face value and are redeemed at face value when they mature.
Because zero coupon bonds do not pay current income, their prices
can be very volatile when interest rates change. In calculating
its dividends, the Managed Bond Fund takes into account as income
a portion of the difference between a zero coupon bond's purchase
price and its face value.
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The Federal Reserve Bank creates STRIPS (Separate Trading of
Registered Interest and Principal of Securities) by separating
the interest and principal components of an outstanding U.S.
Treasury bond and selling them as individual securities.
PRINCIPAL SHAREHOLDERS OF CERTAIN FUNDS
At September 13, 1996, SAFECO Insurance Company of America ("SAFECO
Insurance") owned 500,000 shares of the Intermediate Treasury Fund, which
represented 35.0% of the outstanding shares of the Fund. SAFECO Insurance
is a Washington corporation and a wholly owned subsidiary of SAFECO
Corporation, each of which has its principal place of business at SAFECO
Plaza, Seattle, WA 98185. At September 13, 1996, SAFECO Corporation owned
500,000 shares of High-Yield Bond Fund, which represented 9.3% of the
Fund's outstanding shares. SAFECO Corporation is a Washington corporation
and a holding company whose primary subsidiaries are engaged in the
insurance and related financial services businesses.
At September 13, 1996, the principal shareholders of the Managed Bond Fund
were as follows: Crista Ministries, whose address of record is P.O. Box
330303, Seattle, WA 98133, owned 91,375 shares, which represented 18.4% of
the Fund's outstanding shares. Massman Construction Co. PSRT, whose
address of record is 8901 Stateline, Kansas City, MO 64114, owned 233,262
shares, which represented 47.0% of the Fund's outstanding shares. Crown
Packaging Corp. PS&P, whose address of record is 8514 Eager Road, St.
Louis, MO 63144, owned 155,933 shares, which represented 31.4% of the
Fund's outstanding shares.
Principal shareholders of a Fund may control the outcome of a shareholder
vote.
ADDITIONAL TAX INFORMATION
Each Fund intends to continue to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986 ("Code").
In order to qualify for treatment as a regulated investment company under
the Code, a Fund must distribute to its shareholders for each taxable year
at least 90% of its investment company taxable income (consisting
generally of 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.
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The excess of net long-term capital gains over net short-term capital loss
realized by a Fund on portfolio transactions, when distributed by the
Fund, is subject to long-term capital gains treatment under the Code,
regardless of how long you have held the shares of the Fund.
Distributions of net short-term capital gains realized from portfolio
transactions are treated as ordinary income for federal income tax
purposes. The tax consequences described above apply whether
distributions are taken in cash or in additional shares. Redemptions and
exchanges of shares of a Fund may result in a capital gain or loss for
federal income tax purposes.
If shares of a Fund are sold at a loss after being held for one year or
less, the loss will be treated as long-term, instead of short-term,
capital loss to the extent of any capital gain distributions received on
those shares. Investors also should be aware that if shares are purchased
shortly before the record date for any distribution, the shareholder will
pay full price for the shares and receive some portion of the purchase
price back as a taxable dividend or capital gain distribution.
Each Fund is required to withhold 31% of all taxable dividends, capital
gain distributions and redemption proceeds payable to individuals and
certain other noncorporate shareholders who do not furnish the Fund with a
correct taxpayer identification number. Withholding at that rate also is
required from dividends and those distributions for shareholders who
otherwise are subject to backup withholding.
These are tax requirements that all mutual funds must follow in order to
avoid federal taxation. The Funds may have to limit investment activity
in some types of securities in order to adhere to these requirements.
ADDITIONAL INFORMATION ON CALCULATION OF NET ASSET VALUE PER SHARE
Each Fund determines its net asset value per share ("NAV") by subtracting
its liabilities (including accrued expenses and dividends payable) from
its total assets (the market value of the securities the Fund holds plus
cash and other assets, including interest accrued but not yet received)
and dividing the result by the total number of shares outstanding. The
NAV of the No-Load Class of each Fund is calculated as of the close of
regular trading on the New York Stock Exchange ("Exchange") every day the
Exchange is open for trading. The Exchange is closed on the following
days: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. NAV is
determined separately for each class of shares of each Fund.
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Short-term securities held in a Fund's portfolio having a remaining
maturity of less than 60 days when purchased, and securities originally
purchased with maturities in excess of 60 days but which currently have
maturities of 60 days or less, may be valued at cost adjusted for
amortization of premiums or accrual of discounts or under such other
methods as a Board of Trustees may from time to time deem to be
appropriate. The cost of those securities that had original maturities in
excess of 60 days shall be determined by their fair market value as of the
61st day prior to maturity. All other securities and assets in the
portfolio will be appraised in accordance with those procedures
established by a Board of Trustees in good faith in computing the fair
market value of those assets.
ADDITIONAL PERFORMANCE INFORMATION
Effective September 30, 1996 all of the then-existing shares of each Fund
were redesignated No-Load Class shares, and the Intermediate Treasury and
Managed Bond Funds commenced offering Advisor Class A and Advisor Class B
shares.
The yield and total return calculations set forth below are for the dates
indicated and are not a prediction of future results.
The yields for the No-Load Class of the Taxable Bond Funds for the 30-day
period ended September 30, 1995 were as follows:
Intermediate Treasury Fund 5.41%
GNMA Fund 6.81%
High-Yield Bond Fund 9.35%
The yields for the No-Load Class of the Taxable Bond Funds for the 30-day
period ended March 31, 1996 were as follows:
Intermediate Treasury Fund 4.47%
GNMA Fund 6.39%
High-Yield Bond Fund 8.68%
The yields for the No-Load Class of the Managed Bond Fund for the 30-day
periods ended December 31, 1995 and June 30, 1996 were 4.78% and 5.04%,
respectively.
Yield is computed using the following formula:
a-b 6
Yield = 2[( --- +1) -1]
cd
Where: a = dividends and interest earned during the period
17
<PAGE>
b = expenses accrued for the period (net of
reimbursements)
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends
d = the maximum offering price per share on the last
day of the period
The total returns for the No-Load Class of each Taxable Bond Fund for the
one-year, five-year and since initial public offering periods ended
September 30, 1995 were as follows:
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year 5 Year Public Offering Months Public Offering
------ ------ --------------- ------ ---------------
<S> <C> <C> <C> <C> <C>
Intermediate
Treasury
Fund 11.07% 47.70% 70.45% 84 September 7, 1988
GNMA Fund 11.49% 46.75% 93.95% 110 July 15, 1986
High-Yield Bond
Fund 11.43% 79.73% 82.98% 84 September 7, 1988
</TABLE>
The total returns for the one-year, five-year and since initial public
offering ended March 31, 1996, for the No-Load Class of each Taxable Bond
Fund were as follows:
18
<PAGE>
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year 5 Year Public Offering Months Public Offering
------ ------ --------------- ------ ---------------
<S> <C> <C> <C> <C> <C>
Intermediate
Treasury Fund 9.58% 43.34% 73.91% 90 September 7, 1988
GNMA Fund 8.79% 39.61% 97.59% 116 July 15, 1986
High-Yield Bond Fund 13.03% 77.74% 91.80% 90 September 7, 1988
</TABLE>
The total returns for the No-Load Class of the Managed Bond Fund for the
one-year and since initial public offering periods ended December 31,
1995, were as follows:
<TABLE>
<CAPTION>
One Since Initial # of Date of Initial
Year Public Offering Months Public Offering
---- --------------- ------ ---------------
<S> <C> <C> <C> <C>
Managed
Bond Fund 17.35% 13.82% 22 February 28, 1994
</TABLE>
The total returns for the No-Load Class of the Managed Bond Fund for the
one-year and since initial public offering periods ended June 30, 1996
were as follows:
19
<PAGE>
<TABLE>
<CAPTION>
One Since Initial # of Date of Initial
Year Public Offering Months Public Offering
---- --------------- ------ ---------------
<S> <C> <C> <C> <C>
Managed
Bond Fund 4.49% 10.92% 28 February 28, 1994
</TABLE>
The average annual returns for the No-Load Class of each Taxable Bond Fund
for the one-year, five-year and since initial public offering periods
ended September 30, 1995 were as follows:
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year 5 Year Public Offering Months Public Offering
------ ------ --------------- ------ ---------------
<S> <C> <C> <C> <C> <C>
Intermediate
Treasury Fund 11.07% 8.11% 7.92% 84 September 7, 1988
GNMA Fund 11.49% 7.98% 7.49% 110 July 15, 1986
High-Yield Bond
Fund 11.43% 12.44% 9.01% 84 September 7, 1988
</TABLE>
The average annual returns for the No-Load Class of each Taxable Bond Fund
for the one-year, five-year and since initial public offering periods
ended March 31, 1996 were as follows:
20
<PAGE>
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year 5 Year Public Offering Months Public Offering
------ ------ --------------- ------ ---------------
<S> <C> <C> <C> <C> <C>
Intermediate
Treasury Fund 9.58% 7.47% 7.66% 90 September 7, 1988
GNMA Fund 8.79% 6.90% 7.30% 116 July 15, 1986
High-Yield Bond
Fund 13.03% 12.19% 9.07% 90 September 7, 1988
</TABLE>
The average annual returns for the No-Load Class of the Managed Bond Fund
for the one-year and since initial public offering periods ended
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
One Since Initial # of Date of Initial
Year Public Offering Months Public Offering
---- --------------- ------ ---------------
<S> <C> <C> <C> <C>
Managed
Bond Fund 17.35% 7.32% 22 February 28, 1994
</TABLE>
The average annual returns for the No-Load Class of the Managed Bond Fund
for the one-year and since initial public offering periods ended June 30,
1996 were as follows:
21
<PAGE>
<TABLE>
<CAPTION>
One Since Initial # of Date of Initial
Year Public Offering Months Public Offering
---- --------------- ------ ---------------
<S> <C> <C> <C> <C>
Managed
Bond Fund 4.49% 4.54% 28 February 28, 1994
</TABLE>
Total return is computed using the following formula:
ERV-PT = ------- x 100
P
The average annual total return is computed using the following formula:
n
A = ( (SQUARE ROOT) ERV/P - 1) x 100
Where: T = total return
A = average annual total return
n = number of years
ERV = ending redeemable value of a
hypothetical $1,000
investment at the end of a specified
period of time
P = a hypothetical initial investment of
$1,000
In making the above calculation, all dividends and capital gain
distributions are assumed to be reinvested at the Fund's NAV on the
reinvestment date.
In addition to performance figures, the Funds may advertise their rankings
as calculated by independent rating services which monitor mutual funds'
performance (e.g., CDA Investment Technologies, Lipper Analytical
Services, Inc., Morningstar, Inc. and Wiesenberger Investment Companies
Service). These rankings may be among mutual funds with similar
objectives and/or size or with mutual funds in general. In addition, the
Funds may advertise rankings which are in part based upon subjective
criteria developed by independent rating services to measure relative
performance. Such criteria may include methods to account for levels of
22
<PAGE>
risk and potential tax liability, sales commissions and expense and
turnover ratios. These rating services may also base the measure of
relative performance on time periods deemed by them to be representative
of up and down markets.
The Funds may occasionally reproduce articles or portions of articles
about the Funds written by independent third parties such as financial
writers, financial planners and financial analysts, which have appeared in
financial publications of general circulation or financial newsletters
(including but not limited to BARRONS, BUSINESS WEEK, FABIANS, FORBES,
FORTUNE, INVESTOR'S BUSINESS DAILY, KIPLINGER'S, MORNINGSTAR MUTUAL FUNDS,
MUTUAL FUNDS FORECASTER, MUTUAL FUNDS MAGAZINE, MONEY MAGAZINE, NEWSWEEK,
NO-LOAD FUND INVESTOR, NO-LOAD FUND X, NO-LOAD INVESTOR, PENSIONS &
INVESTMENTS, RUKEYSER'S MUTUAL FUNDS, TELESWITCH, TIME MAGAZINE, U.S. NEWS
AND WORLD REPORT, YOUR MONEY AND THE WALL STREET JOURNAL).
Each Fund may also present in its advertisements and sales literature (i)
a biography or the credentials of its portfolio manager (including but not
limited to educational degrees, professional designations, work
experience, work responsibilities and outside interests), (ii)
descriptions, including quotations attributable to the portfolio manager
of the investment style used to manage a Fund's portfolio, the research
methodologies underlying securities selection and a Fund's investment
objective, (iii) current facts (including but not limited to number of
employees, number of shareholders, business characteristics) about the
Fund's investment adviser (SAM), or any sub investment adviser, the
investment adviser's parent company (SAFECO Corporation) or the parent
company of any sub investment adviser, or the SAFECO Family of Funds, and
(iv) information about particular securities held in a Fund's portfolio.
From time to time, each Fund may discuss its performance in relation to
the performance of relevant indices and/or representative peer groups.
Such discussions may include how a Fund's investment style (including but
not limited to portfolio holdings, asset types, industry/sector weightings
and the purchase and sale of specific securities) contributed to such
performance.
In addition, each Fund may comment on the market and economic outlook in
general, on specific economic events, on how these conditions have
impacted its performance and on how the portfolio manager will or has
addressed such conditions.
Performance information and quoted ratings are indicative only of past
performance and are not intended to represent future investment results.
23
<PAGE>
TRUSTEES AND OFFICERS OF THE TRUSTS
<TABLE>
<CAPTION>
Position(s) Held with Principal Occupation(s)
Name and Address the Trust During Past 5 Years
---------------- --------------------- -----------------------
<S> <C> <C>
Boh A. Dickey* Chairman and Trustee President, Chief Operating Officer of SAFECO
SAFECO Plaza Corporation. Previously, Executive Vice
Seattle, WA 98185 President and Chief Financial Officer. He
(51) has been an executive officer of SAFECO
Corporation subsidiaries since 1982. See
table under "Investment Advisory and Other
Services."
Barbara J. Dingfield Trustee Manager, Corporate Contributions and
Microsoft Corporation Community Programs for Microsoft Corporation,
One Microsoft Way Redmond, Washington, a computer software
Redmond, WA 98052 company; Director and former Executive Vice
(50) President of Wright Runstad & Co., Seattle,
Washington, a real estate development
company; Director of First SAFECO National
Life Insurance Company of New York.
Richard W. Hubbard* Trustee Retired Vice President and Treasurer of the
1270 NW Blakely Ct. Trust and other SAFECO Trusts; retired Senior
Seattle, WA 98177 Vice President and Treasurer of SAFECO
(67) Corporation; former President of SAFECO Asset
Management Company; Director of First SAFECO
National Life Insurance Company of New York.
Richard E. Lundgren Trustee Director of Marketing and Customer Relations,
764 S. 293rd Street Building Materials Distribution, Weyerhaeuser
Federal Way, WA 98032 Company, Tacoma, Washington; Director of
(58) First SAFECO National Life Insurance Company
of New York.
Larry L. Pinnt Trustee Retired Vice President and Chief Financial
1600 Bell Plaza Officer U.S. WEST Communications, Seattle,
Room 1802 Washington; Director of Key Bank of
Seattle, WA 98191 Washington, Seattle, Washington; Director of
(61) University of Washington Medical Center,
Seattle, Washington; Director of Cascade
Natural Gas Corporation, Seattle, Washington;
Director of First SAFECO National Life
Insurance Company of New York.
24
<PAGE>
Position(s) Held with Principal Occupation(s)
Name and Address the Trust During Past 5 Years
---------------- --------------------- -----------------------
John W. Schneider Trustee President of Wallingford Group, Inc.,
1808 N 41st St. Seattle, Washington; former President of
Seattle, WA 98103 Coast Hotels, Inc., Seattle, Washington;
(54) Director of First SAFECO National Life
Insurance Company of New York.
David F. Hill* President President of SAFECO Securities, Inc. and
SAFECO Plaza Trustee SAFECO Services Corporation; Senior Vice
Seattle, WA 98185 President of SAFECO Asset Management
(47) Company. See table under "Investment
Advisory and other Services."
Neal A. Fuller Vice President Controller Vice President, Controller, Assistant
SAFECO Plaza Assistant Secretary Secretary and Treasurer of SAFECO
Seattle, WA 98185 Securities, Inc. and SAFECO Services
(34) 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 Asset Management
SAFECO Plaza Treasurer Company; Vice President and Treasurer of
Seattle, WA 98185 SAFECO Corporation; Vice President of SAFECO
(52) Life Insurance Company; former Senior
Portfolio Manager of SAFECO insurance
companies; former Portfolio Manager for
several SAFECO mutual funds. See table under
"Investment Advisory and Other Services."
</TABLE>
* Trustees who are interested persons as defined by the Investment Company
Act of 1940.
25
<PAGE>
COMPENSATION TABLE FOR CURRENT TRUSTEES
FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1995
(Taxable Bond Trust)
<TABLE>
<CAPTION>
Pension or Total Compensation
Retirement Estimated Annual From Registrant
Aggregate Benefits Accrued Benefits and Fund
Compensation As Part of Fund Upon Complex Paid to
Trustee from Registrant Expenses Retirement Trustees
------- --------------- -------- ---------- --------
<S> <C> <C> <C> <C>
Boh A. Dickey $0 N/A N/A $0
Barbara J. Dingfield $2,360 N/A N/A $22,737
Richard E. Lungren $2,360 N/A N/A $22,737
Larry L. Pinnt $2,360 N/A N/A $22,737
John W. Schneider $2,360 N/A N/A $22,737
Richard W. Hubbard $2,568 N/A N/A $24,150
David F. Hill* $0 N/A N/A $0
</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 six
other registered open-end management companies that have, in the
aggregate, twenty-seven series companies managed by SAM.
The officers of the Trust receive no compensation for their services as
officers, or if applicable, as Trustees.
At June 30, 1996 the Trustees and officers of the Taxable Bond Trust as a
group owned less than 1% of the outstanding shares of each Taxable Bond
Fund.
26
<PAGE>
COMPENSATION TABLE FOR CURRENT TRUSTEES
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1995
(Managed Bond Trust)
<TABLE>
<CAPTION>
Pension or
Retirement Total Compensation
Aggregate Benefits Accrued Estimated Annual From Registrant and
Compensation As Part of Fund Benefits Upon Fund Complex Paid to
Trustee from Registrant Expenses Retirement Trustees
------- --------------- -------- ---------- --------
<S> <C> <C> <C> <C>
Boh A. Dickey $0 N/A N/A $0
Barbara J. Dingfield $852 N/A N/A $23,875
Richard E. Lundgren $852 N/A N/A $23,875
Larry L. Pinnt $852 N/A N/A $23,875
John W. Schneider $852 N/A N/A $23,875
Richard W. Hubbard $960 N/A N/A $26,900
David F. Hill $0 N/A N/A $0
</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 six
other registered open-end management companies that have, in the
aggregate, thirty series companies managed by SAM.
The officers of the Managed Bond Trust received no compensation for their
services as officers or, if applicable, as Trustees.
At September 18, 1996 the Trustees and officers of the Managed Bond Trust
owned none of the outstanding shares of the Managed Bond Fund.
27
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
SAM, SAFECO Securities, Inc. ("SAFECO Securities") and SAFECO Services
Corporation ("SAFECO Services") are wholly-owned subsidiaries of SAFECO
Corporation. SAFECO Securities is the principal underwriter of each Fund
and SAFECO Services is the transfer, dividend and distribution
disbursement and shareholder servicing agent of each Fund.
The following individuals have the following positions and offices with
the Trust, SAM, SAFECO Securities and SAFECO Services:
<TABLE>
<CAPTION>
SAFECO SAFECO
Name Trust SAM Securities Services
----
<S> <C> <C> <C> <C>
B. A. Dickey Chairman Director Director
Trustee Chairman
D. F. Hill President Senior Vice President President
Trustee President Director Director
Director Secretary Secretary
N. A. Fuller Vice President Vice President Vice President Vice President
Controller Controller Controller Controller
Assistant Secretary Assistant Assistant
Secretary Treasurer Secretary Secretary
Treasurer Treasurer
R. L. Spaulding Vice President Vice Chairman Director Director
Treasurer Director
S. C. Bauer President
Director
</TABLE>
Mr. Dickey is President, Chief Operating Officer and a Director of SAFECO
Corporation and Mr. Spaulding is a Treasurer and a Vice President of
SAFECO Corporation. Messrs. Dickey and Spaulding are also Directors of
other SAFECO Corporation subsidiaries.
In connection with the investment advisory contract with each Trust, SAM
furnishes or pays for all facilities and services furnished or performed
for or on behalf of each Trust and each Fund of the Trust, which includes
28
<PAGE>
furnishing office facilities, books, records and personnel to manage each
Trust's and each Fund's affairs and paying certain expenses.
The Trust Instrument of each Trust provides that the Trust will indemnify
its Trustees and its officers against liabilities and expenses reasonably
incurred in connection with litigation in which they may be involved
because of their offices with the Trust, unless it is adjudicated that
they engaged in bad faith, wilful misfeasance, gross negligence, or
reckless disregard of the duties involved in the conduct of their offices.
In the case of settlement, such indemnification will not be provided
unless it has been determined -- by a court or other body approving the
settlement or other disposition, or by a majority of a quorum of Trustees
who are neither interested persons of the Trust nor are parties to the
proceeding, based upon a review of readily available facts (rather than a
trial-type inquiry), or in a written opinion of independent counsel --
that such officers or Trustees have not engaged in wilful misfeasance, bad
faith, gross negligence, or reckless disregard of their duties.
SAM also serves as the investment adviser for other investment companies
in addition to the Funds. Several of these investment companies have
investment objectives similar to those of certain Funds. It is therefore
possible that the same securities will be purchased for both a Fund and
another investment company advised by SAM. When two or more funds advised
by SAM are simultaneously engaged in the purchase or sale of the same
security, the prices and amounts will be allocated in a manner considered
by the officers of the funds involved to be equitable to each fund. In
some cases this system could have a detrimental effect on the price or
value of the security as far as a Fund is concerned. In other cases,
however, the ability of a fund to participate in volume transactions will
produce better executions and prices for the Fund.
For the services and facilities furnished by SAM, each Trust has agreed to
pay an annual fee for each Fund computed on the basis of the average
market value of the net assets of each Fund ascertained each business day
and paid monthly in accordance with the following schedules. The
reduction in fees occurs only at such time as the respective Fund's net
assets reach the dollar amounts of the break points and applies only to
those assets that fall within the specified range:
Intermediate Treasury Fund
For assets up to and
including $250,000,000 .55 of 1%
For assets in excess of $250,000,000
and up to and including $500,000,000 .45 of 1%
For assets in excess of $500,000,000
and up to and including $750,000,000 .35 of 1%
For assets over $750,000,000 .25 of 1%
29
<PAGE>
GNMA and High-Yield Bond Funds
For assets up to and
including $250,000,000 .65 of 1%
For assets in excess of $250,000,000
and up to and including $500,000,000 .55 of 1%
For assets in excess of $500,000,000
and up to and including $750,000,000 .45 of 1%
For assets over $750,000,000 .35 of 1%
Managed Bond Fund
Net Assets Fee
---------- ---
For assets up to and
including $100,000,000 .50 of 1%
For assets in excess of $100,000,000
and up to and including $250,000,000 .40 of 1%
For assets over $250,000,000 .35 of 1%
Each Fund bears all expenses of its operations not specifically assumed by
SAM. SAM has agreed to reimburse each Fund for the amount by which a
Fund's expenses in any full fiscal year (excluding interest expense,
taxes, brokerage expenses, and extraordinary expenses) exceed the limits
prescribed by any state in which the Fund's shares are qualified for sale.
Presently, the most restrictive expense ratio limitation imposed by any
such state is 2.5% of the first $30 million of the Fund's average daily
net assets, 2.0% of the next $70 million of such assets, and 1.5% of the
remaining net assets. For the purpose of determining whether the Fund is
entitled to reimbursement, the expenses of the Fund are calculated on a
monthly basis. If a Fund is entitled to a reimbursement, that month's
advisory fee will be reduced or postponed, with any adjustment made after
the end of the fiscal year.
30
<PAGE>
The following table states the total amount of compensation paid by each
Fund to SAM for the past three fiscal years (or since its initial public
offering in the case of the Managed Bond Fund):
Taxable Bond Funds
Year Ended
<TABLE>
<CAPTION>
September 30, 1995 September 30, 1994 September 30, 1993
<S> <C> <C> <C>
Intermediate Treasury
Fund $ 71,000 $ 77,000 $ 72,000
GNMA Fund $276,000 $352,000 $386,000
High-Yield Bond Fund $206,000 $202,000 $155,000
</TABLE>
Managed Bond Fund
Year or Period Ended
Period from February 28, 1994
(Initial Public Offering) to
Year Ended December 31, 1995 December 31, 1994
---------------------------- -----------------------------
$22,720 $15,869
CUSTODIAN. U.S. Bank of Washington, N.A., 1420 Fifth Avenue, Seattle,
Washington 98101, is the custodian of the securities, cash and other
assets of each Fund under an agreement with the Trusts.
AUDITOR. Ernst & Young LLP, 999 Third Avenue, Suite 3500, Seattle,
Washington 98104 is the independent auditor of each Fund's financial
statements.
SAFECO Services, SAFECO Plaza, Seattle, Washington 98185 is the transfer,
dividend and distribution disbursement and shareholder servicing agent for
the No-Load Class of each Fund under an Agreement with the Trusts. SAFECO
Services provides, or through subcontracts makes provisions for, all
required transfer agent activity, including maintenance of records of the
No-Load Class of each Fund's shareholders, records of transactions
involving the No-Load Class of each Fund's shares, and the compilation,
distribution, or reinvestment of income dividends or capital gains
distributions.
31
<PAGE>
SAFECO Services is paid a fee for these services equal to $32.00 per
shareholder account but not to exceed .30% of each Taxable Bond Fund's or
the Managed Bond Fund's average net assets. The following table shows the
fees paid by each Taxable Bond Fund to SAFECO Services during the past
three fiscal years:
<TABLE>
<CAPTION>
Year Ended*
September 30, 1995 September 30, 1994 September 30, 1993
------------------ ------------------ ------------------
<S> <C> <C> <C>
Intermediate Treasury Fund $33,000 $ 25,000 $ 23,000
GNMA Fund $120,000 $115,000 $117,000
High-Yield Bond Fund $78,000 $ 63,000 $ 47,000
</TABLE>
The following table states the total amount of compensation paid by the
Managed Bond Fund to SAFECO Services for the year ended December 31, 1995
and for the period from February 28, 1994 (initial public offering) to
December 31, 1994:
<TABLE>
<CAPTION>
Period from February 28, 1994
Year Ended (Initial Public Offering) to
December 31, 1995* December 31, 1994 *
<S> <C>
$309 $96
* Tables reflect fees of $3.10 per shareholder transaction payable
pursuant to the prior fee schedule.
SAFECO Securities is the principal underwriter for the No-Load Class of
each Fund and distributes each Fund's No-Load Class shares on a continuous
best efforts basis under an Agreement with the Trusts. SAFECO Securities
is not compensated by the Trusts or the Funds for underwriting,
distribution or other activities in connection with the No-Load shares.
32
<PAGE>
BROKERAGE PRACTICES
SAM places orders for the purchase or sale of each Fund's portfolio
securities. In deciding which broker to use in a given transaction, SAM
uses the following criteria:
(1) Which broker gives the best execution (i.e., which broker is able
to trade the securities in the size and at the price desired and
on a timely basis);
(2) Whether the broker is known as being reputable; and
(3) All other things being equal, which broker has provided useful
research services to SAM.
Such research services as are furnished during the year (e.g., written
reports analyzing economic and financial characteristics of industries and
companies, telephone conversations between brokerage security analysts and
members of SAM's staff and personal visits by such analysts and brokerage
strategists and economists to SAM's office) are used to advise all of its
clients including the Funds, but not all such research services furnished
to SAM are used by it to advise the Funds. SAM does not pay excess
commissions or mark-ups to any broker or dealer for research services or
for any other reason. Purchases and sales of portfolio securities are
transacted with the issuer or with a primary market maker, acting as
principal for the securities on a net basis, with no brokerage commission
being paid by the Funds. Transactions placed through dealers serving as
primary market makers reflect the spread between the bid and the asked
prices. Occasionally, the Funds may make purchases of underwritten issues
at prices that include underwriting fees.
REDEMPTION IN KIND
If the Trusts conclude that cash payment upon redemption to a shareholder
would be prejudicial to the best interest of the other shareholders of a
Fund, a portion of the payment may be made in kind. The Trusts have
elected to be governed by Rule 18f-1 under the Investment Company Act of
1940 pursuant to which each Trust must redeem shares tendered by a
shareholder solely in cash up to the lesser of $250,000 or 1% of the net
asset value of a Fund during any 90-day period. Any shares tendered by
the shareholder in excess of the above-mentioned limit may be redeemed
through distribution of a Fund's assets. Any securities or other property
so distributed in kind shall be valued by the same method as is used in
computing NAV. Distributions in kind will be made in readily-marketable
securities, unless the investor elects otherwise. Investors may incur
brokerage costs in disposing of securities received in such a distribution
in kind.
33
<PAGE>
FINANCIAL STATEMENTS
Taxable Bond Funds
The following financial statements of the Taxable Bond Funds and the
report thereon of Ernst & Young LLP, independent auditors, are
incorporated by reference to the Taxable Bond Trust's Annual Report for
the year ended September 30, 1995.
Portfolio of Investments as of September 30, 1995
Statement of Assets and Liabilities as of September 30, 1995
Statement of Operations for the Year Ended September 30, 1995
Statement of Changes in Net Assets for the Years Ended September
30, 1995 and September 30, 1994
Notes to Financial Statements
The following unaudited financial statements for each Taxable Bond Fund
are incorporated herein by reference to the Taxable Bond Trust's Semi-
Annual Report for the period ended March 31, 1996.
Portfolio of Investments as of March 31, 1996 (unaudited)
Statement of Assets and Liabilities as of March 31, 1996
(unaudited)
Statement of Operations for the Period Ended March 31, 1996
(unaudited)
Statement of Changes in Net Assets for the Period Ended March 31,
1996 (unaudited)
Notes to Financial Statements (unaudited)
The following financial statements of the Managed Bond Fund (formerly
Fixed Income Portfolio) and the report thereon of Ernst & Young LLP,
independent auditors, are incorporated by reference to the Managed Bond
Trust's (formerly Institutional Series Trust) Annual Report for the year
ended December 31, 1995:
Portfolio of Investments as of December 31, 1995
Statement of Assets and Liabilities as of December 31, 1995
Statement of Operations for the Year Ended December 31, 1995
Statement of Changes in Net Assets for the years ended December
31, 1994 and December 31, 1995.
Notes to Financial Statements
The following unaudited financial statements of the Managed Bond Fund
(formerly Fixed Income Portfolio) are incorporated herein by reference to
the Managed Bond Trust's (formerly Institutional Series Trust) Semi-Annual
Report for the period ended June 30, 1996.
34
<PAGE>
Portfolio of Investments as of June 30, 1996 (unaudited)
Statement of Assets and Liabilities as of June 30, 1996
(unaudited)
Statement of Operations for the Period ended June 30, 1996
(unaudited)
Statement of Changes in Net Assets for the Period Ended June 30,
1996 (unaudited)
Notes to Financial Statements (unaudited)
A copy of each Trust's Annual and Semi-Annual Report accompanies this
Statement of Additional Information. Additional copies may be obtained by
calling SAFECO Services at 1-800-426-6730 nationwide or 545-5530 in
Seattle or by writing to the address on the Prospectus cover.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Moody's Investors Services, Inc. ("Moody's")
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations with an original maturity not
exceeding one year.
Prime-1: Issuers (or supporting institutions) rated Prime-1 (P-1) have a
superior ability for repayment of senior short-term debt obligations. P-1
repayment ability will often be evidenced by many of the following
characteristics:
. Leading market positions in well-established industries.
. High rates of return on funds employed.
. Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
. Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
. Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2: Issuers (or supporting institutions) rated Prime-2 (P-2) have a
strong ability for repayment of senior short-term obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Standard & Poor's Rating Group ("S&P")
A: S&P's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no
more than 365 days.
35
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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.
36
<PAGE>
SAFECO TAXABLE BOND TRUST:
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
SAFECO MANAGED BOND TRUST:
SAFECO MANAGED BOND FUND
SAFECO TAX-EXEMPT BOND TRUST:
SAFECO MUNICIPAL BOND FUND
SAFECO CALIFORNIA TAX-FREE INCOME FUND
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
SAFECO MONEY MARKET TRUST:
SAFECO MONEY MARKET FUND
Advisor Class A
Advisor Class B
Statement of Additional Information
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus for the funds listed above (each a
"Fund"). A copy of the Prospectus may be obtained by writing SAFECO
Mutual Funds, Advisor Class Shares, P.O. Box 34890, Seattle, Washington
98124-1890, or by calling TOLL FREE: 1-800-463-8791
The date of the most current Prospectus of the Funds to which this
Statement of Additional Information relates is September 30, 1996.
The date of this Statement of Additional Information is September 30,
1996.
<PAGE>
_________________________________________________________________________
TABLE OF CONTENTS
INVESTMENT POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . 2
INVESTMENT POLICIES OF THE INTERMEDIATE TREASURY FUND . . . . . . . . 3
INVESTMENT POLICIES OF THE MANAGED BOND FUND . . . . . . . . . . . . 6
INVESTMENT POLICIES OF THE TAX-EXEMPT FIXED INCOME FUNDS . . . . . . 10
INVESTMENT POLICIES OF THE MONEY MARKET FUND . . . . . . . . . . . . 15
ADDITIONAL INVESTMENT INFORMATION . . . . . . . . . . . . . . . . . . 18
INVESTMENT RISKS OF CONCENTRATION IN CALIFORNIA AND WASHINGTON ISSUERS 24
PRINCIPAL SHAREHOLDERS OF CERTAIN FUNDS . . . . . . . . . . . . . . . 35
ADDITIONAL TAX INFORMATION . . . . . . . . . . . . . . . . . . . . . 36
CONVERSION OF ADVISOR CLASS B SHARES . . . . . . . . . . . . . . . . 38
ADDITIONAL INFORMATION ON CALCULATION OF
NET ASSET VALUE PER SHARE . . . . . . . . . . . . . . . . . . . . . . 38
ADDITIONAL PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . 39
ADDITIONAL INFORMATION ON DIVIDENDS . . . . . . . . . . . . . . . . . 48
TRUSTEES AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . 48
INVESTMENT ADVISORY AND OTHER SERVICES . . . . . . . . . . . . . . . 54
BROKERAGE PRACTICES . . . . . . . . . . . . . . . . . . . . . . . . . 60
REDEMPTION IN KIND . . . . . . . . . . . . . . . . . . . . . . . . . 61
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . 61
DESCRIPTION OF RATINGS . . . . . . . . . . . . . . . . . . . . . . . 63
<PAGE>
INVESTMENT POLICIES
SAFECO Intermediate-Term Treasury Fund ("Intermediate Treasury Fund") and
SAFECO Managed Bond Fund ("Managed Bond Fund") (collectively the "Taxable
Fixed Income Funds") are series of SAFECO Taxable Bond Trust ("Taxable
Bond Trust") and SAFECO Managed Bond Trust ("Managed Bond Trust"),
respectively.
SAFECO Municipal Bond Fund ("Municipal Bond Fund"), SAFECO California Tax-
Free Income Fund ("California Fund") and SAFECO Washington State Municipal
Bond Fund ("Washington Fund") (collectively, the "Tax-Exempt Fixed Income
Funds") are series of SAFECO Tax-Exempt Bond Trust ("Tax-Exempt Bond
Trust").
SAFECO Money Market Fund ("Money Market Fund") is a series of SAFECO Money
Market Trust ("Money Market Trust").
The investment policies of each Fund are described in the Prospectus and
this Statement of Additional Information. These policies state the
investment practices that the Funds will follow, in some cases limiting
investments to a certain percentage of assets, as well as those investment
activities that are prohibited. The types of securities that a Fund may
purchase are also disclosed in the Prospectus. Before a Fund purchases a
security that the following policies permit, but that is not currently
described in the Prospectus, the Prospectus will be amended or
supplemented to describe the security. If a policy's percentage
limitation is adhered to immediately after and as a result of the
investment, a later increase or decrease in values, net assets or other
circumstances will not be considered in determining whether a Fund
complies with the applicable limitation (except to the extent the change
may impact a Fund's borrowing limit).
Generally, the entity that has the ultimate responsibility for the payment
of interest and principal on a particular security is deemed to be its
issuer for purposes of the Tax-Exempt Fixed Income Funds' investment
policies. The identification of the issuer of a tax-exempt security for
purposes of diversification depends on the terms and conditions of the
security. For example, when the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate
from those of the government creating the subdivision and the security is
backed only by the assets and revenues of the subdivision, such
subdivision would be deemed to be the sole issuer for diversification
purposes. Similarly, in the case of an industrial development bond, if
that bond is backed only by the assets and revenues of the non-
governmental user, then such non-governmental user would be deemed to be
the sole issuer for purposes of diversification. If, however, in either
case, the creating government or some other entity guarantees a security,
such a guarantee would be considered a separate security which must be
valued and included in each Tax-Exempt Fixed Income Fund's five percent
(5%) limitation on investments in one issuer.
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<PAGE>
Each Fund's fundamental policies may not be changed without the approval
of a "majority of its outstanding voting securities," as defined in the
Investment Company Act of 1940, as amended ("1940 Act"). For purposes of
such approval, the vote of a majority of the outstanding voting securities
of a Fund means the vote, at a meeting of the shareholders of such Fund
duly called, (i) of 67% or more of the voting securities present at such
meeting if the holders of more than 50% of the outstanding voting
securities are present or represented by proxy, or (ii) of more than 50%
of the outstanding voting securities, whichever is less.
Non-fundamental policies may be changed without shareholder approval.
INVESTMENT POLICIES OF THE INTERMEDIATE TREASURY FUND
The Intermediate Treasury Fund has adopted the following fundamental
investment policies. The Intermediate Treasury Fund will not:
Fundamental Investment Policies
1. Purchase the securities of any issuer (except the U.S. Govern-
ment, its agencies or instrumentalities) if as a result more than
five percent (5%) of the value of its total assets at the time of
purchase would be invested in the securities of such issuer,
except that up to twenty-five percent (25%) of the value of the
Fund's assets (which twenty-five percent (25%) shall not include
securities issued by another investment company) may be invested
without regard to this five percent (5%) limitation;
2. Underwrite any issue of securities, except to the extent that the
purchase of permitted investments directly from the issuer in
accordance with the Fund's investment objective, policies and
restrictions and the subsequent disposition thereof may be deemed
to be underwriting or the later disposition of restricted
securities acquired within the limits imposed on the acquisition
of such securities may be deemed to be an underwriting;
3. Purchase or sell real estate, but this shall not prevent the Fund
from investing in municipal obligations or other permitted
investments secured by real estate or interests therein;
4. Purchase or retain for the Fund's portfolio the securities of any
issuer, if, to the Fund's knowledge, the officers or directors of
the Fund, or its investment adviser, who individually own more
than one-half (1/2) of one percent (1%) of the outstanding
securities of such an issuer, together own more than five percent
(5%) of such outstanding securities;
5. Borrow money, except from a bank or SAFECO Corporation or its
affiliates at an interest rate not greater than that available to
the Fund from commercial banks, for temporary or emergency
purposes and not for investment purposes, and then only in an
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<PAGE>
amount not exceeding twenty percent (20%) of the value of the
Fund's total assets at the time of such borrowing;
The Fund will not purchase securities if borrowings equal to or
greater than five percent (5%) of the Fund's total assets are
outstanding;
6. Pledge, mortgage or hypothecate its assets, except that to secure
borrowings permitted by subparagraph (5) above, it may pledge
securities having a market value at the time of pledge not
exceeding ten percent (10%) of the cost of the Fund's total
assets;
7. Purchase or sell commodities or commodity contracts, other than
futures contracts, or invest in oil, gas or other mineral
exploration or development programs or in arbitrage transactions;
8. Make short sales of securities or purchase securities on margin,
except for margin deposits in connection with futures contracts
and such short-term credits as are necessary for the clearance of
transactions;
9. Participate on a joint or a joint-and-several basis in any
trading account in securities, except that the Fund may, for the
purpose of seeking better net results on portfolio transactions
or lower brokerage commission rates, join with other transactions
executed by the investment adviser or the investment adviser's
parent company and any subsidiary thereof;
10. Purchase from or sell portfolio securities to any officer or
director, the Fund's investment adviser, principal underwriter or
any affiliates or subsidiaries thereof; provided, however, that
this prohibition shall not prohibit the Fund from purchasing with
the up to $7,000,000 raised through the sale of up to 700,000
shares of common stock to SAFECO Life Insurance Company,
portfolio securities from subsidiaries of SAFECO Corporation
prior to the effective date of the Fund's initial public
offering;
11. Purchase securities (other than obligations issued or guaranteed
by the United States Government, its agencies or
instrumentalities), if as a result twenty-five percent (25%) or
more of the Fund's total assets would be invested in one industry
(governmental issuers of securities are not considered part of
any one industry);
12. Purchase shares of common stock, other than those issued by other
regulated investment companies only, when the acquisition of such
common stocks, rights or other equity interests is consistent
with the Fund's investment objective. Generally, the Fund will
only hold such equity securities as a result of purchases or unit
offerings of fixed-income securities which include such equity
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<PAGE>
securities or in connection with an actual or proposed conversion
or exchange of fixed-income securities;
13. Issue or sell any senior security, except that this restriction
shall not be construed to prohibit the Fund from borrowing funds
(i) on a temporary basis as permitted by Section 18(g) of the
1940 Act or (ii) from any bank provided, that immediately after
such borrowing, there is an asset coverage of at least three
hundred percent (300%) for all such borrowings and provided,
further, that in the event that such asset coverage shall at any
time fall below three hundred percent (300%), the Fund shall,
within three (3) days thereafter (not including Sundays and
holidays), or such longer period as the Securities and Exchange
Commission ("SEC") may prescribe by rules and regulations, reduce
the amount of its borrowings to an extent that the asset coverage
of such borrowings shall be at least three hundred percent
(300%). For purposes of this restriction, the terms "senior
security" and "asset coverage" shall be understood to have the
meaning assigned to those terms in Section 18 of the 1940 Act;
14. Purchase securities of any issuer, if, as a result, more than ten
percent (10%) of any class of securities of such issuer would be
owned by the Fund;
15. With respect to one hundred percent (100%) of the value of its
total assets, purchase more than ten percent (10%) of the
outstanding voting securities of any one issuer (other than U.S.
Government securities);
16. Purchase or otherwise acquire securities which are illiquid or
subject to legal or contractual restrictions on resale, if as a
result more than ten percent (10%) of the Fund's total assets
would be invested in such securities; or
17. Make loans, except through the purchase of a portion or all of an
issue of debt or money market securities in accordance with its
investment objective, policies and restrictions, or through
investments in qualified repurchase agreements (provided,
however, that the Fund shall not invest more than ten percent
(10%) of its total assets in qualified repurchase agreements
maturing in more than seven (7) days), or through qualified loan
agreements (by making secured loans of its portfolio securities
which amount to not more than five percent (5%) of its total
assets).
Non-Fundamental Investment Policies
In addition to the policies described in the Prospectus, the Intermediate
Treasury Fund has adopted the following non-fundamental investment
policies which may be changed without shareholder approval:
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<PAGE>
1. The Fund will not invest more than five percent (5%) of its total
assets in securities of issuers, including their predecessors,
which have been in operation for less than three years.
2. The Fund will not issue long-term debt securities.
3. The Fund will not invest in securities with unlimited liability,
i.e., securities the holder of which may be assessed for amounts
in addition to the subscription or other price paid for the
security.
4. The Fund will not trade in foreign currency, except as may be
necessary to convert the proceeds of the sale of foreign
securities in the Fund's portfolio into U.S. dollars.
5. The Fund may purchase "when-issued" or "delayed-delivery"
securities or purchase or sell securities on a "forward
commitment" basis.
6. The Fund will not invest in any security issued by a commercial
bank unless (a) the bank has total assets of at least $1 billion,
or the equivalent in other currencies, or, in the case of a
United States bank which does not have assets of at least $1
billion, the aggregate investment made in any one such bank is
limited to $100,000 and the principal sum of each investment is
insured in full by the Federal Deposit Insurance Corporation
("FDIC"), (b) in the case of a U.S. bank, it is a member of the
FDIC and (c) in the case of a foreign bank, the security is, in
the opinion of the Fund's investment adviser, of an investment
quality comparable with other debt securities which may be
purchased by the Fund. These limitations do not prohibit
investment in securities issued by foreign branches of U.S.
banks, provided the U.S. banks meet the foregoing requirements.
7. The Fund shall not engage primarily in trading for short-term
profits, but it may from time to time make investments for short-
term purposes when such action is believed to be desirable and
consistent with sound investment policy, and it may dispose of
securities whenever its investment adviser deems advisable
without regard to the length of time they have been held.
8. The Fund may invest up to five percent (5%) of its total assets
in Yankee Sector debt securities and up to five percent (5%) of
its total assets in Eurodollar bonds.
9. The Fund may invest up to five percent (5%) of its total assets
in securities the interest on which, in the opinion of counsel
for the issuer, is exempt from federal income tax.
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<PAGE>
INVESTMENT POLICIES OF THE MANAGED BOND FUND
Fundamental Investment Policies
The Managed Bond Fund has adopted the following fundamental investment
policies. The Managed Bond Fund will not:
1. Purchase the securities of any issuer (except the U.S.
Government, its agencies or instrumentalities) if as a result
more than five percent (5%) of the value of total assets at the
time of purchase would be invested in the securities of such
issuer, except that up to twenty-five percent (25%) of the value
of the Fund's assets (which twenty-five percent (25%) shall not
include securities issued by another investment company) may be
invested without regard to this five percent (5%) limitation;
2. Purchase the securities of any issuer (other than obligations of
or guaranteed by the U.S. Government, its agencies and
instrumentalities) if, as a result, more than ten percent (10%)
of any class of securities of such issuer will be held by the
Fund;
3. With respect to one hundred percent (100%) of the value of its
total assets, purchase more than ten percent (10%) of the
outstanding voting securities of any one issuer (other than U.S.
Government securities);
4. Purchase securities, if as a result, twenty-five percent (25%) or
more of the Fund's total assets would be invested in the
securities of issuers having their principal business activities
in any one industry. Securities of foreign banks and foreign
branches of U.S. banks are considered to be one industry. This
limitation does not apply to obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities or to
certificates of deposit or bankers' acceptances issued by
domestic banks;
5. Purchase securities on margin, except for short-term credits
necessary for the clearance of transactions;
6. Make short sales of securities (sales of securities not presently
owned);
7. Make loans, except through the purchase of a portion or all of an
issue of debt securities in accordance with the Fund's investment
objective, policies and restrictions or through investments in
qualified repurchase agreements;
8. Borrow money, except from a bank or SAFECO Corporation or its
affiliates at an interest rate not greater than that available to
the Fund from commercial banks, for temporary or emergency
purposes and not for investment purposes, and then only in an
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<PAGE>
amount not exceeding twenty percent (20%) of the value of the
Fund's total assets (including borrowings) less liabilities
(other than borrowings) immediately after such borrowing;
9. Underwrite any issue of securities, except to the extent that the
purchase of permitted investments directly from the issuer in
accordance with the Fund's investment objective, policies and
restrictions and the subsequent disposition thereof may be deemed
to be underwriting or the later disposition of restricted
securities acquired within the limits imposed on the acquisition
of such securities may be deemed to be an underwriting;
10. Purchase or sell real estate or real estate limited partnerships
(unless acquired as a result of the ownership of securities or
instruments) but this shall not prevent the Fund from investing
in permitted investments secured by real estate or interests
therein or in real estate investment trusts;
11. Purchase or sell commodities, commodity contracts or futures
contracts;
12. Participate on a joint or joint-and-several basis in any trading
account in securities, except that the Fund may join with other
transactions executed by the investment adviser or the investment
adviser's parent company and any subsidiary thereof, for the
purpose of seeking better net results on portfolio transactions
or lower brokerage commission rates; or
13. Issue or sell any senior security, except as permitted under the
1940 Act.
Non-Fundamental Investment Policies
In addition to the policies described in the Prospectus, the Managed Bond
Fund has adopted the following non-fundamental policies which may be
changed without shareholder approval:
1. The Fund will not issue long-term debt securities.
2. The Fund will not invest in any security for the purpose of
acquiring or exercising control or management of the issuer.
3. The Fund will not invest in oil, gas or other mineral exploration
or development programs or leases.
4. The Fund will not invest in or sell (write) puts, calls, strad-
dles, spreads or any combinations thereof.
5. The Fund will not invest more than five percent (5%) of its total
assets in securities of issuers (including predecessor companies
- 8 -
<PAGE>
of the issuer) having a record of less than three years
continuous operation.
6. The Fund will not invest in securities with unlimited liability,
i.e., securities the holder of which may be assessed for amounts
in addition to the subscription or other price paid for the
security.
7. The Fund will not invest more than ten percent (10%) of its total
assets in qualified repurchase agreements and will not invest in
qualified repurchase agreements maturing in more than seven (7)
days.
8. The Fund will not purchase the securities of any other investment
company, except by purchase in the open market where no
commission or profit to a broker or dealer results from such
purchase other than the customary broker's commissions, or except
as part of a merger, consolidation or acquisition. The Fund
shall not invest more than ten percent (10%) of its total assets
in shares of other investment companies, invest more than five
percent (5%) of its total assets in a single investment company
nor purchase more than three percent (3%) of the outstanding
voting securities of a single investment company.
9. The Fund will not purchase securities if borrowings equal to or
greater than five percent (5%) of the Fund's total assets are
outstanding.
10. The Fund will invest at least sixty-five percent (65%) of its
total assets in fixed income obligations.
11. The Fund will invest at least fifty percent (50%) of its total
assets in obligations of or guaranteed by the U.S. Government,
its agencies and instrumentalities.
12. The Fund may invest up to fifty percent (50%) of its total assets
in corporate debt securities or Eurodollar bonds.
13. The Fund may invest up to ten percent (10%) of its total assets
in Yankee Sector debt obligations.
14. The Fund may purchase securities on a when-issued or delayed-
delivery basis or may purchase or sell securities on a forward
commitment basis.
15. The Fund may temporarily invest its cash in high quality
commercial paper, certificates of deposit, shares of no-load,
open-end money market funds (subject to the percentage
limitations set forth in subparagraph 8 above), repurchase
agreements (subject to the limitations set forth in subparagraph
7 above) or any other short-term instrument the Fund's investment
adviser deems appropriate.
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<PAGE>
16. The Fund may hold cash as a temporary defensive measure when
market conditions so warrant.
17. The Fund shall not engage primarily in trading for short-term
profits, but it may from time to time make investments for short-
term purposes when such action is believed to be desirable and
consistent with sound investment policy. The Fund may dispose of
securities whenever it deems advisable without regard to the
length of time they have been held.
18. The Fund may invest up to five percent (5%) of its total assets
in securities the interest on which, in the opinion of counsel
for the issuer, is exempt from federal income tax.
WHILE THE FUND HAS THE AUTHORITY TO INVEST IN THE FOLLOWING TYPES OF
SECURITIES, IT HAS NO PRESENT INTENTION TO DO SO IN THE COMING YEAR.
BEFORE THE FUND PURCHASES ANY OF THESE SECURITIES, THE PROSPECTUS WILL BE
AMENDED BY SUPPLEMENT TO DESCRIBE THE SECURITY.
19. The Fund may invest up to five percent (5%) of its total assets
in shares of real estate investment trusts.
20. The Fund may purchase securities subject to legal or contractual
restrictions on resale or illiquid securities, if no more than
fifteen percent (15%) of the Fund's total assets would be
invested in such securities.
21. The Fund may purchase foreign securities, provided that such
purchase, at the time thereof, would not cause more than ten
percent (10%) of the total assets of the Fund (taken at market
value) to be invested in foreign securities.
22. The Fund will not buy or sell foreign currency, except as may be
necessary to invest the proceeds of the sale of any foreign
securities held by the Fund in U.S. dollars.
INVESTMENT POLICIES OF THE TAX-EXEMPT FIXED INCOME FUNDS
Fundamental Investment Policies
The WASHINGTON FUND has adopted the following fundamental investment
policies. The Washington Fund will not:
1. Purchase the securities of any issuer (except the U.S.
Government, its agencies or instrumentalities) if as a result
more than five percent (5%) of the value of the Fund's total
assets would be invested in the securities of such issuer, except
that up to twenty-five percent (25%) of the value of the Fund's
total assets (which twenty-five percent (25%) shall not include
securities issued by another investment company) may be invested
without regard to this five percent (5%) limitation;
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<PAGE>
2. Underwrite any issue of securities, except to the extent that the
purchase of municipal obligations or other permitted investments
directly from the issuer in accordance with the Fund's investment
objective, policies and restrictions and the later disposition
thereof may be deemed to be underwriting;
3. Purchase or sell real estate, unless acquired as a result of the
ownership of securities or instruments, but this shall not
prevent the Fund from investing in municipal obligations or other
permitted investments secured by real estate or interests
therein;
4. Borrow money, except from a bank or affiliates of SAFECO
Corporation at an interest rate not greater than that available
to the Fund from commercial banks, for temporary or emergency
purposes and not for investment purposes, and then only in an
amount not exceeding twenty percent (20%) of its total assets
(including borrowings) less liabilities (other than borrowings)
immediately after such borrowing;
5. Make loans, except through the purchase of a portion or all of an
issue of debt securities in accordance with the Fund's investment
objective, policies and restrictions and through investments in
qualified repurchase agreements;
6. Purchase or sell commodities, commodity contracts or futures;
7. Purchase securities, if as a result, twenty-five percent (25%) or
more of the Fund's total assets would be invested in the
securities of issuers having their principal business activities
in any one industry (governmental issuers of special or general
tax-exempt securities are not considered part of any one
industry);
8. Issue or sell any senior security, except as permitted under the
1940 Act;
9. Permit twenty-five percent (25%) or more of the Fund's total
assets to be invested in municipal obligations and other
permitted investments, the interest on which is payable from
revenues on similar types of projects. As a matter of operating
policy, similar types of projects may include sports, convention
or trade show facilities; airports or mass transportation; sewage
or solid waste disposal facilities; or air or water pollution
control projects; or
10. During normal market conditions, invest less than eighty percent
(80%) of the Fund's net assets in obligations the interest on
which, in the opinion of counsel for the issuer of the
obligation, is exempt from federal income tax.
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<PAGE>
The MUNICIPAL BOND and CALIFORNIA FUNDS have adopted the following
fundamental investment policies. The Funds will not:
1. Purchase the securities of any issuer (except the U.S.
Government, its agencies or instrumentalities), if as a result
more than five percent (5%) of the value of a Fund's total assets
would be invested in the securities of such issuer, except that
up to twenty-five percent (25%) of the value of a Fund's assets
(which twenty-five percent (25%) shall not include securities
issued by another investment company) may be invested without
regard to this five percent (5%) limitation;
2. Underwrite any issue of securities, except to the extent that the
purchase of municipal obligations or other permitted investments
directly from the issuer in accordance with a Fund's investment
objective, policies and restrictions and the subsequent
disposition thereof may be deemed to be underwriting;
3. Purchase or sell real estate or real estate limited partnerships,
but this shall not prevent a Fund from investing in municipal
obligations or other permitted investments secured by real estate
or interests therein;
4. Purchase or retain for a Fund's portfolio the securities of any
issuer if, to the Fund's knowledge, the officers or directors of
the Fund, or its investment adviser, who individually own more
than one-half (1/2) of one percent (1%) of the outstanding
securities of such an issuer, together own more than five percent
(5%) of such outstanding securities;
5. Participate on a joint or a joint-and-several basis in any
trading account in securities, except that a Fund may, for the
purpose of seeking better net results on portfolio transactions
or lower brokerage commission rates, join with other transactions
executed by the investment adviser or the investment adviser's
parent company and any subsidiary thereof;
6. Purchase from, or sell portfolio securities to, any officer or
director, the Fund's investment adviser, principal underwriter or
any affiliates or subsidiaries thereof;
7. Borrow money, except from a bank or affiliates of SAFECO
Corporation at an interest rate not greater than that available
to a Fund from commercial banks, for temporary or emergency
purposes and not for investment purposes and then only in an
amount not exceeding twenty percent (20%) of its total assets
(including borrowings) less liabilities (other than borrowings)
immediately after such borrowing;
8. Pledge, mortgage or hypothecate its assets, except that, to
secure borrowings permitted by subparagraph 7 above, a Fund may
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<PAGE>
pledge securities having a market value at the time of pledge not
exceeding ten percent (10%) of the cost of a Fund's total assets;
9. Make loans, except through the purchase of a portion or all of an
issue of debt securities in accordance with a Fund's investment
objective, policies and restrictions and through investments in
qualified repurchase agreements (provided, however, that a Fund
will not invest more than ten percent (10%) of its total assets
in qualified repurchase agreements maturing in more than seven
(7) days);
10. Purchase or sell commodities, commodity contracts or futures or
invest in oil, gas or other mineral exploration or development
programs or leases;
11. Make short sales of securities or purchase securities on margin,
except for such short-term credits as are necessary for the
clearance of transactions, or purchase or sell any put or call
options or combinations thereof;
12. Knowingly purchase or otherwise acquire any securities that are
subject to legal or contractual restrictions on resale or for
which there is no readily available market;
13. Purchase securities (other than obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities), if as
a result, more than twenty-five percent (25%) of a Fund's total
assets would be invested in one industry (governmental issuers of
special or general tax-exempt securities are not considered part
of any one industry);
14. Purchase an industrial development bond, if as a result of such
purchase, more than five percent (5%) of a Fund's total assets
would be invested in industrial revenue bonds where the payment
of principal and interest is the responsibility of a company with
less than three years' operating history;
15. Issue or sell any senior security, except that this restriction
shall not be construed to prohibit a Fund from borrowing funds
(i) on a temporary basis as permitted by Section 18(g) of the
1940 Act, or (ii) from any bank provided, that immediately after
such borrowing, there is an "asset coverage" of at least three
hundred percent (300%) for all such borrowings and provided,
further, that in the event that such "asset coverage" shall at
any time fall below three hundred percent (300%), the Fund shall,
within three (3) days thereafter (not including Sundays and
holidays) or such longer period as the SEC may prescribe by rules
and regulations, reduce the amount of its borrowings to an extent
that the asset coverage of such borrowings shall be at least
three hundred percent (300%) (for purposes of this restriction,
the terms "senior security" and "asset coverage" shall be
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understood to have the meanings assigned to those terms in
Section 18 of the 1940 Act);
16. Permit more than twenty percent (20%) of a Fund's net assets to
be invested, during normal market conditions, in securities the
interest on which is not, in its investment adviser's opinion,
exempt from federal income tax, as long as the Fund has its
investment objective to provide as high a level of current
interest income exempt from federal income tax as is consistent
with the relative stability of capital. As a matter of operating
policy, the Funds' investment adviser may base its opinion on the
opinion of counsel for the issuer of the security;
17. Permit twenty-five percent (25%) or more of a Fund's total assets
to be invested in municipal obligations and other permitted
investments, the interest on which is payable from revenues on
similar types of projects such as sports, convention or trade
show facilities; airports or mass transportation; sewage or solid
waste disposal facilities or air or water pollution control
projects;
18. MUNICIPAL BOND FUND ONLY: Permit twenty-five percent (25%) or
more of the Fund's total assets to be invested in securities
whose issuers are located in the same state; or
19. During normal market conditions, invest less than eighty percent
(80%) of a Fund's net assets in obligations the interest on
which, in the opinion of counsel for the issuer, is exempt from
federal income tax (and, in the case of the California Fund, also
from California state personal income tax).
Non-Fundamental Investment Policies
In addition to the policies described in the Prospectus, the
WASHINGTON, MUNICIPAL BOND and CALIFORNIA FUNDS have adopted the following
non-fundamental policies which may be changed without shareholder
approval:
1. Each Fund may invest in any of the following types of short-term,
tax-exempt obligations: municipal notes of issuers rated, at the
time of purchase, within one of the three highest grades assigned
by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies ("S&P")
or Fitch Investors Services, Inc. ("Fitch"); unrated municipal
notes offered by issuers having outstanding municipal bonds rated
within one of the three highest grades assigned by Moody's, S&P
or Fitch; notes issued by or on behalf of municipal issuers which
are guaranteed by the U.S. Government; tax-exempt commercial
paper assigned one of the two highest grades by Moody's, S&P or
Fitch; certificates of deposit issued by banks with assets of
$1,000,000,000 or more and municipal obligations which have a
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maturity of one year or less from the date of purchase. The
Funds do not currently intend to rely on Fitch Ratings.
2. Each Fund may invest in obligations of the U.S. Government, its
agencies or instrumentalities or in qualified repurchase
agreements, the net interest on which is taxable.
3. Each Fund may invest in municipal notes including tax
anticipation, revenue anticipation and bond anticipation notes
and tax-exempt commercial paper.
4. Each Fund may invest in repurchase agreements for a period longer
than seven days.
5. Each Fund may permit twenty-five percent (25%) or more of its
assets to be invested in industrial development bonds.
6. Each Fund may purchase or sell securities on a "when-issued" or
"delayed-delivery" basis.
In addition, the Washington Fund has adopted the following non-fundamental
policies. The Washington Fund:
1. May not make short sales of securities.
2. May not purchase securities on margin, except that a Fund may
obtain such short-term credits as are necessary for the clearance
of transactions.
3. May not purchase or sell any put or call options or combinations
thereof.
4. May not purchase any security, if as a result, more than fifteen
percent (15%) of its net assets would be invested in illiquid
securities.
5. May not invest in oil, gas or other mineral exploration or
development programs or leases.
6. May not invest in real estate limited partnerships.
7. Will not purchase securities if borrowings equal to or greater
than five percent (5%) of its total assets are outstanding.
INVESTMENT POLICIES OF THE MONEY MARKET FUND
Fundamental Investment Policies
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The Money Market Fund has adopted the following fundamental policies. The
Money Market Fund will not:
1. Purchase securities of any issuer, other than obligations of, or
guaranteed by, the U.S. Government, its agencies or
instrumentalities, if, as a result, more than five percent (5%)
of the value of the Fund's assets would be invested in securities
of such issuer;
2. Purchase more than ten percent (10%) of any class of securities
of any issuer. All issues of debt securities of any issuer are
considered as one class;
3. Concentrate more than twenty-five percent (25%) of the value of
its total assets in any one industry including securities issued
by foreign banks and foreign branches of U.S. banks; provided,
however, that this limitation does not apply to obligations
issued or guaranteed by the U.S. Government, or its agencies or
instrumentalities, or to certificates of deposit or bankers'
acceptances issued by domestic banks;
4. Invest more than five percent (5%) of the Fund's total assets in
securities of issuers that with their predecessors have a record
of less than three years' continuous operation;
5. Invest more than five percent (5%) of the Fund's total assets in
securities restricted as to disposition under the federal
securities laws;
6. Invest more than ten percent (10%) of the Fund's total assets in
time deposits, repurchase agreements maturing in more than seven
days and other non-negotiable instruments;
7. Enter into repurchase agreements if, as a result thereof, more
than ten percent (10%) of the Fund's total assets valued at the
time of the transaction would be subject to repurchase agreements
maturing in more than seven days;
8. Make loans to others, except through the purchase of publicly
distributed debt obligations or repurchase agreements;
9. Borrow money, except from a bank or affiliates of SAFECO
Corporation at an interest rate not greater than that available
to the Fund from commercial banks, for temporary or emergency
purposes and not for investment purposes, and then only in an
amount not exceeding twenty percent (20%) of its total assets
(including borrowings) less liabilities (other than borrowings)
immediately after such borrowing. The Fund will not purchase
securities if borrowings in excess of five percent (5%) of the
Fund's total assets are outstanding;
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<PAGE>
10. Make short sales of securities or purchase securities on margin,
except for such short-term credits as are necessary for the
clearance of transactions, or purchase or sell any put or call
options or combinations thereof;
11. Pledge, mortgage or hypothecate, or in any other manner transfer
as security for indebtedness any security owned by the Fund,
except as may be necessary in connection with permissible
borrowings mentioned in paragraph 9 above, and then such
pledging, mortgaging or hypothecating may not exceed fifteen
percent (15%) of the Fund's total assets, taken at cost;
provided, however, that as a matter of operating policy the Fund
will limit any such pledging, mortgaging or hypothecating to ten
percent (10%) of its net assets, taken at market, in order to
comply with certain state investment restrictions;
12. Purchase or retain securities of any issuer if any of the
officers or directors of the Fund or its investment adviser owns
beneficially more than one-half (1/2) of one percent (1%) of the
securities of such issuer and together own more than five percent
(5%) of the securities of such issuer;
13. Invest in commodities or commodity futures contracts or in real
estate, although the Fund may invest in securities which are
secured by real estate and securities of issuers that invest or
deal in real estate;
14. Invest in interests in oil, gas or other mineral exploration or
development programs, although it may invest in securities of
issuers that invest in or sponsor such programs;
15. Purchase securities of other investment companies;
16. Underwrite securities issued by others except to the extent the
Fund may be deemed to be an underwriter, under the federal
securities laws, in connection with the disposition of portfolio
securities; or
17. Issue or sell any senior security, except that this restriction
shall not be construed to prohibit the Fund from borrowing funds
(i) on a temporary basis as permitted by Section 18(g) of the
1940 Act, or (ii) from any bank provided, that immediately after
such borrowing, there is an asset coverage of at least three
hundred percent (300%) for all such borrowings and provided,
further, that in the event that such asset coverage shall at any
time fall below three hundred percent (300%), the Fund shall,
within three (3) days thereafter (not including Sundays and
holidays), or such longer period as the SEC may prescribe by
rules and regulations, reduce the amount of its borrowings to an
extent that the asset coverage of such borrowings shall be at
least three hundred percent (300%) (for purposes of this
restriction, the terms "senior security" and "asset coverage"
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<PAGE>
shall be understood to have the meaning assigned to those terms
in Section 18 of the 1940 Act).
Non-Fundamental Investment Policies
In addition to the policies described in the Prospectus, the Money Market
Fund has adopted the following non-fundamental policies which may be
changed without shareholder approval:
1. The Fund will not invest in securities with unlimited liability;
e.g., securities the holder of which may be assessed for amounts
in addition to the subscription or other price paid for the
security.
2. The Fund will not buy or sell foreign currency, except as may be
necessary to convert the proceeds of the sale of foreign
securities in the Fund's portfolio into U.S. dollars.
3. The Fund may invest up to five percent (5%) of its total assets
in restricted securities eligible for resale under Rule 144A
("Rule 144A securities") or Section 4(2) of the Securities Act of
1933 ("Section 4(2) securities"), provided that SAFECO Asset
Management Company ("SAM"), the Fund's investment adviser, has
determined that such securities are liquid under guidelines
adopted by the Money Market Trust's Board of Trustees.
ADDITIONAL INVESTMENT INFORMATION
Intermediate Treasury Fund
The Intermediate Treasury Fund may make the following investments, among
others, although it may not buy all of the types of securities that are
described.
1. Restricted Securities and Rule 144A Securities. Restricted
securities are securities that may be sold only in a public
offering with respect to which a registration statement is in
effect under the 1933 Act or, if they are unregistered, in a
privately negotiated transaction or pursuant to an exemption from
registration. In recognition of the increased size and liquidity
of the institutional markets for unregistered securities and the
importance of institutional investors in the formation of
capital, the Securities and Exchange Commission ("SEC") has
adopted Rule 144A under the 1933 Act, which is designed to
further facilitate efficient trading among institutional
investors by permitting the sale of Rule 144A securities to
qualified institutional buyers without registration under the
1933 Act. To the extent privately placed securities held by the
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,
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<PAGE>
acting under guidelines established by the Taxable Bond Trust's
Board of Trustees, may determine that certain securities
qualified for trading under Rule 144A are liquid.
Where registration is required, the Fund may be obligated to pay
all or part of the registration expenses, and a considerable
period may elapse between the decision to sell and the time the
Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell. To the
extent privately placed securities are illiquid, purchases
thereof will be subject to any limitations on investments in
illiquid securities. Restricted securities for which no market
exists are priced at fair value as determined in accordance with
procedures approved and periodically reviewed by the Taxable Bond
Trust's Board of Trustees.
2. Repurchase Agreements. Repurchase agreements are transactions in
which the 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. The Fund maintains
custody of the underlying securities prior to their repurchase;
thus, the obligation of the bank or dealer to pay the repurchase
price on the date agreed to is, in effect, secured by such
securities. If the value of these securities is less than the
repurchase price, plus any agreed-upon additional amount, the
other party to the agreement must provide additional collateral
so that at all times the collateral is at least equal to the
repurchase price, plus any agreed-upon additional amount.
The Fund intends to enter into repurchase agreements only with
banks and dealers in transactions believed by SAM to present
minimum credit risks in accordance with guidelines established by
the Taxable Bond Trust's Board of Trustees. SAM will review and
monitor the creditworthiness of those institutions under the
general supervision of the Board of Trustees.
3. When-Issued or Delayed-Delivery Securities. Under this proce-
dure, the 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 the 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. The Fund may
dispose of its interest in those securities before delivery.
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<PAGE>
The Fund will commit to purchase such securities only with the
intent of actually acquiring the securities when issued. Assets
which are short-term, high-quality obligations will be earmarked
in anticipation of making payments for securities purchased on a
when-issued basis.
4. Yankee Debt Securities and Eurodollar Bonds. Yankee debt
securities are securities issued in the U.S. by foreign issuers.
These bonds involve investment risks that are different from
those of domestic issuers. Such risks may include
nationalization of the issuer, confiscatory taxation by the
foreign government, establishment of controls by the foreign
government that would inhibit the ability of the issuer to make
principal and interest payments to the Fund, lack of comparable
publicly available information concerning foreign issuers, lack
of comparable accounting and auditing practices in foreign
countries and finally, difficulty in enforcing claims against
foreign issuers in the event of default.
SAM will make every effort to analyze potential investments in
foreign issuers on the same basis as the rating services analyze
domestic issuers. Because public information is not always
comparable to that available on domestic issuers, this may not be
possible. Therefore, while SAM will make every effort to select
investment in foreign securities on the same basis relative to
quality and risk as its investments in domestic securities, that
may not always be possible.
Eurodollar bonds are denominated in U.S. dollars. The Fund will
purchase Eurodollar bonds through U.S. securities dealers and
hold such bonds in the U.S. The delivery of Eurodollar bonds to
the Fund's custodian in the U.S. may cause slight delays in
settlement which are not anticipated to affect the Fund in any
material, adverse manner. Eurodollar bonds issued by foreign
issuers are subject to the same risks as Yankee sector bonds.
5. Municipal Securities. Municipal securities include obligations
issued by or on behalf of the states, territories and possessions
of the United States and the District of Columbia and their
political subdivisions, agencies, instrumentalities or
authorities, the interest on which, in the opinion of counsel to
the issuer, is exempt from federal income tax. Generally, when
market interest rates rise, the price of municipal securities
will fall, and when market interest rates fall, the price of
these securities will rise. There is also a risk that the issuer
of a municipal security will fail to make timely payments of
principal and interest to the Fund.
6. Illiquid Securities. Illiquid securities are securities that
cannot be sold within seven days in the ordinary course of
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business for approximately the amount at which they are valued.
Due to the absence of an active trading market, the Fund may
experience difficulty in valuing or disposing of illiquid
securities. SAM determines the liquidity of the securities under
guidelines adopted by the Taxable Bond Trust's Board of Trustees.
Managed Bond Fund
The Managed Bond Fund may make the following investments, among others,
although it may not buy all of the types of securities that are described.
1. Repurchase Agreements. See the description of such securities
under "Additional Investment Information--Intermediate Treasury
Fund" on page 18.
2. When-Issued or Delayed-Delivery Securities. See the description
of such securities under "Additional Investment Information--
Intermediate Treasury Fund" on page 19.
3. Yankee Debt Securities and Eurodollar Bonds. See the description
of such securities under "Additional Investment Information--
Intermediate Treasury Fund" on page 19.
4. Municipal Securities. See the description of such securities
under "Additional Investment Information -- Intermediate Treasury
Fund" on page 20.
5. Asset-backed Securities. Asset-backed securities represent
interests in, or are secured by and payable from, pools of assets
such as consumer loans, automobile receivable securities, credit
card receivable securities, and installment loan contracts. The
assets underlying the securities are securitized through the use
of trusts and special purpose corporations. These securities may
be supported by credit enhancements such as letters of credit.
Payment of interest and principal ultimately depends upon
borrowers paying the underlying loans. Repossessed collateral
may be unavailable or inadequate to support payments on defaulted
asset-backed securities. In addition, asset-backed securities
are subject to prepayment risks which may reduce the overall
return of the investment.
Automobile receivable securities represent undivided fractional
interests in a trust whose assets consist of a pool of automobile
retail installment sales contracts and security interests in
vehicles securing the contracts. Payments of principal and
interest on the certificates issued by the automobile receivable
trust are passed through periodically to certificate holders and
are generally guaranteed up to specified amounts by a letter of
credit issued by a financial institution. Certificate holders
may experience delays in payments or losses if the full amounts
due on the underlying installment sales contracts are not
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<PAGE>
realized by the trust because of factors such as unanticipated
legal or administrative costs of enforcing the contracts, or
depreciation, damage or loss of the vehicles securing the
contracts.
Credit card receivable securities are backed by receivables from
revolving credit card accounts. Certificates issued by credit
card receivable trusts generally are pass-through securities.
Competitive and general economic factors and an accelerated
cardholder payment rate can adversely affect the rate at which
new receivables are credited to an account, potentially
shortening the expected weighted average life of the credit card
receivable security and reducing its yield. Credit card accounts
are unsecured obligations of the cardholder.
6. Zero Coupon Bonds. Zero coupon bonds do not make interest
payments; instead they are sold at a deep discount from their
face value and are redeemed at face value when they mature.
Because zero coupon bonds to not pay current income, their prices
can be very volatile when interest rates change. In calculating
its dividends, the Managed Bond Fund takes into account as income
a portion of the difference between a zero coupon bond's purchase
price and its face value.
The Federal Reserve Bank creates STRIPS (Separate Trading of
Registered Interest and Principal of Securities) by separating
the interest and principal components of an outstanding U.S.
Treasury bond and selling them as individual securities.
Tax-Exempt Fixed Income Funds
The Tax-Exempt Fixed Income Funds may make the following investments,
among others, although they may not buy all of the types of securities
that are described.
1. Repurchase Agreements. See the description of such securities
under "Additional Investment Information--Intermediate Treasury
Fund" on page 18.
2. When-Issued or Delayed-Delivery Securities. Under this proce-
dure, the 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 the 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. The Fund may
dispose of its interest in those securities before delivery.
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<PAGE>
3. Illiquid Securities. See the description of such securities
under "Additional Investment Information--Intermediate Treasury
Fund" on page 20.
Money Market Fund
The Money Market Fund may make the following investments, among others,
although it may not buy all of the types of securities that are described.
1. Quality and Maturity. Pursuant to procedures adopted by the
Money Market Trust's Board of Trustees, the Fund may purchase
only high-quality securities that SAM believes present minimal
credit risks. To be considered high quality, a security must be
rated, or the issuer must have received a rating for a comparable
short-term security, in accordance with applicable rules in one
of the two highest categories for short-term securities by at
least two nationally recognized rating services (or by one, if
only one rating service has rated the security); or, if unrated,
judged to be of equivalent quality by SAM.
High-quality securities are divided into "first tier" and "second
tier" securities. First tier securities are those deemed to be
in the highest rating category (e.g., A-1 by S&P) and second tier
securities are those deemed to be in the second highest rating
category (e.g., A-2 by S&P).
The Fund may not invest more than five percent (5%) of its total
assets in second tier securities. In addition, the Fund may not
invest more than one percent (1%) of its total assets or $1
million (whichever is greater) in the second tier securities of a
single issuer.
The Fund currently intends to limit its investments to securities
with remaining maturities of 397 days or less, and to maintain a
dollar-weighted average maturity of 90 days or less. When
determining the maturity of a security, the Fund may look to an
interest rate reset or demand feature.
A security is considered to be rated if either the security
itself is assigned a rating or the issuer is assigned a rating
for comparable short-term debt obligations. Alternatively, a
security (whether or not rated) with an unconditional demand
feature (as defined in Rule 2a-7 under the 1940 Act) may be
considered to be rated if the demand feature or its issuer has
been assigned a rating. See "Description of Ratings" on page 63
for further explanation of rating categories.
2. Restricted Securities and Rule 144A Securities. See the
description of such securities under "Additional Investment
Information--Intermediate Treasury Fund" on page 18.
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<PAGE>
3. Variable and Floating Rate Instruments. Certain municipal
obligations may carry variable or floating rates of interest.
Variable rate instruments bear interest at rates that are
readjusted at periodic intervals so as to cause the instruments'
market value to approximate their par value. Floating rate
instruments bear interest at rates which vary automatically with
changes in specified market rates or indices, such as the bank
prime rate. The Fund's right to obtain payment at par on a
demand instrument upon demand could be affected by events
occurring between the date the Fund elects to redeem the
instrument and the date redemption proceeds are due which affect
the ability of the issuer to pay the instrument at par value.
4. Term Put Bonds. Term put bonds are variable rate obligations
which have a maturity in excess of one year with the option to
put back (sell back) the bonds on a specified put date. On the
put date, the interest rate of the bond is reset according to
current market conditions and accrues at the reset rate until the
next put date. The Fund may also hold mandatory put bonds.
Mandatory put bonds require the holder to take certain action to
retain the bonds. Put bonds are generally credit-enhanced by
collateral, guaranteed investment contracts, surety bonds, a
letter of credit or insurance which guarantees the payment of
principal and interest.
5. Illiquid Securities. See the description of such securities
under "Additional Investment Information--Intermediate Treasury
Fund" on page 22.
6. Foreign Issuers. Obligations of foreign issuers involve certain
additional risks. These risks may include future unfavorable
political and economic developments, withholding taxes, seizures
of foreign deposits, currency controls, interest limitations, or
other governmental restrictions that might affect payment of
principal or interest. Additionally, there may be less public
information available about foreign banks and their branches.
Foreign issuers may be subject to less governmental regulation
and supervision than U.S. issuers. Foreign issuers also
generally are not bound by uniform accounting, auditing and
financial reporting requirements comparable to those applicable
to U.S. issuers.
7. Securities Issued by Banks and Other Issuers. Investments may be
made in U.S. dollar-denominated time deposits, certificates of
deposit, and bankers' acceptances of U.S. banks and their
branches located outside of the United States, U.S. branches and
agencies of foreign banks and foreign branches of foreign banks.
The Fund may also invest in U.S. dollar-denominated securities
issued or guaranteed by other U.S. or foreign issuers, including
U.S. and foreign corporations or other business organizations,
foreign governments, foreign government agencies or
instrumentalities and U.S. and foreign financial institutions,
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including savings and loan institutions, insurance companies and
mortgage bankers, as well as banks.
The obligations of foreign branches of U.S. banks may be general
obligations of the parent bank in addition to the issuing branch,
or may be limited by the terms of a specific obligation and by
governmental regulation. Payment of interest and principal on
these obligations may also be affected by governmental action in
the country of domicile of the branch (generally referred to as
sovereign risk). In addition, evidence of ownership of portfolio
securities may be held outside of the U.S. and the Fund may be
subject to the risks associated with the holding of such property
overseas. Various provisions of federal law governing the
establishment and operation of U.S. branches do not apply to
foreign branches of U.S. banks.
Obligations of U.S. branches and agencies of foreign banks may be
general obligations of the parent bank in addition to the issuing
branch, or may be limited by the terms of a specific obligation
and by federal and state regulation, as well as by governmental
action in the country in which the foreign bank has its head
office.
INVESTMENT RISKS OF CONCENTRATION IN CALIFORNIA AND WASHINGTON ISSUERS
CALIFORNIA FUND
The following is a condensed and general description of the judicial,
legislative and electoral proceedings affecting the taxing ability and
fiscal condition of the State of California and its various political
subdivisions which have occurred since June 1978. All of these
proceedings affect the continuing ability of California political
subdivisions to meet their debt service obligations. Since during normal
market conditions the Fund plans to invest at least 80% of its net assets
in bonds issued by California and its political subdivisions, the
investment risk of such concentration should be carefully considered. The
description below summarizes discussions contained in official statements
relating to various types of bonds issued by the State of California and
its political subdivisions. A more detailed description can be found in
such official statements. The California Fund has not independently
verified any of the information presented in this section.
The taxing powers of California public agencies are limited by Article
XIII A of the State Constitution, added by an initiative amendment
approved by voters on June 6, 1978, and commonly known as Proposition 13.
Article XIII A limits the maximum ad valorem tax on real property to one
percent of "full cash value" which is defined as "the County Assessor's
valuation of real property as shown on the fiscal year 1975-76 tax bill
under 'full cash value' or, thereafter, the appraised value of real
property when purchased, newly constructed, or a change in ownership has
occurred after the 1975 assessment." The full cash value may be adjusted
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<PAGE>
annually to reflect inflation at a rate not to exceed two percent per
year, or reduction in the consumer price index or comparable local data,
or declining property value caused by damage, destruction, or other
factors.
The tax rate limitation referred to above does not apply to ad valorem
taxes to pay the interest and redemption charges on any indebtedness
approved by the voters before July 1, 1978 or any bonded indebtedness for
the acquisition or improvement of real property approved by two-thirds of
the votes cast by the voters voting on the proposition. Article XIII A
also requires a two-thirds vote of the electors prior to the imposition of
any special taxes and totally precludes the imposition of any new ad
valorem taxes on real property or sales or transaction taxes on the sales
of real property. The validity of Article XIII A has been upheld by both
the California Supreme Court and the United States Supreme Court.
Legislation adopted in 1979 exempts business inventories from taxation.
However, the same legislation provides a formula for reimbursement by
California to cities and counties, special districts and school districts
for the amount of tax revenues lost by reason of such exemption or
adjusted for changes in the population and the cost of living.
Legislation adopted in 1980 provides for state reimbursements to
redevelopment agencies to replace revenues lost due to the exemption of
business inventories from taxation. Such legislation provides for
restoration of business inventory tax revenues through the annual addition
of artificial assessed value, not actually existing in a project area, to
the tax rolls of redevelopment projects. These reimbursements are
adjusted for changes in the population and the cost of living. All such
reimbursements are subject to change or repeal by the Legislature, and
they have been changed since 1980. Furthermore, current law generally
prohibits the pledging of such reimbursement revenues to secure
redevelopment agency bonds.
Redevelopment agencies in California have no power to levy and collect
taxes; hence, any decrease in property taxes or limitations in the amounts
by which property taxes may increase adversely affects such agencies,
which lack the inherent power to correct for such decreases or
limitations.
State and local government agencies in California and the State itself are
subject to annual "appropriation limits" imposed by Article XIII B, an
initiative constitutional amendment approved by the voters on November 6,
1979, which prohibits government agencies and the State from spending
"appropriations subject to limitation" in excess of the appropriations
limit imposed. "Appropriations subject to limitation" are authorizations
to spend "proceeds of taxes", which consist of tax revenues, certain State
subventions and certain other funds, including proceeds from regulatory
licenses, user revenues, certain State subventions and certain other funds
to the extent that such proceeds exceed "the cost reasonably born by such
entity in providing the regulation, product, or service." No limit is
imposed on appropriation of funds which are not "proceeds of taxes", on
debt service or indebtedness existing or authorized by January 1, 1979, or
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subsequently authorized by the voters, or appropriations required to
comply with mandates of courts or the federal government, or user charges
or fees that do not exceed the cost of the service provided, nor on
certain other non-tax funds.
By statute (which has been upheld by the California Court of Appeals), tax
revenues allocated to redevelopment agencies are not "proceeds of taxes"
within the meaning of Article XIII B, and the expenditure of such revenues
is therefore not subject to the limitations under Article XIII B.
The imposition of taxes by local agencies is further limited by the
provisions of an initiative statute ("Proposition 62") approved by the
voters on November 4, 1986. The statute (i) requires that any tax for
general governmental purposes imposed by local government entities be
approved by resolution or ordinance adopted by two-thirds vote of the
governmental entity's legislative body and by a majority vote of the
electorate of the governmental entity, (ii) requires that any special tax
(defined as a tax levied for other than general governmental purposes)
imposed by a local governmental entity be approved by a two-thirds vote of
the voters within that jurisdiction, (iii) restricts the use of revenues
from a special tax to the purposes or for the service for which the
special tax was imposed, (iv) prohibits the imposition of ad valorem taxes
on real property by local governmental entities except as permitted by
Article XIII A, (v) prohibits the imposition of transaction taxes and
sales taxes on the sale of real property by local governmental entities
and (vi) requires that any tax imposed by a local governmental entity on
or after May 1, 1985 be ratified by a majority vote of the electorate
within two years of the adoption of the initiative or be terminated by
November 15, 1988.
Subsequent decisions of California Courts of Appeal held that all or
portions of the provisions of Proposition 62, including those requiring
the submission of general fund tax measures to the electorate, are
unconstitutional. However, on September 28, 1995, in the case of Santa
Clara County Local Transportation Authority v. Guardino, the California
Supreme Court upheld the constitutionality of Proposition 62. As a
result, the annual revenues of any local government or district as shown
in the general fund budget must be reduced in any year to the extent that
they rely on the proceeds of any general tax which has not been approved
by majority vote of the electorate. Senate Bill No. 1590 has been
introduced in the California Legislature in an effort to clarify whether
the general tax voter approval requirement is applicable to any tax that
was imposed or increased by an ordinance or resolution adopted prior to
December 14, 1995. If adopted, Senate Bill No. 1590 will apply the
Guardino decision prospectively only.
An initiative petition called the "Right to Vote on Taxes Act" is expected
to qualify for the November 5, 1996 general election ballot. If this
measure receives the requisite number of signatures for inclusion on the
ballot and if it is approved by majority vote of the electorate, it will
add Articles XIII C and XIII D to the State Constitution. The measure
requires that general tax increases by all local government entities be
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approved by not less than a majority vote and that taxes for special
purposes be approved by a two-thirds vote; provides that existing language
in the California Constitution shall not be construed to limit the
initiative power with respect to reducing or repealing any local tax,
assessment, fee or charge; prescribes procedures applicable to all
assessments and requires that all assessments be approved by property
owners; prohibits property related fees and charges from exceeding costs
of the service being provided; imposes procedural requirements, including
notice and public hearing, prior to imposition of new or increased fees or
charges on property; and requires that, except for fees for sewer, water
and refuse collection, fees be approved by a majority vote of the fee
payers.
Generally, revenues derived from most utility property assessed by the
State Board of Equalization are allocated as follows: (i) each
jurisdiction, including redevelopment project areas, receives up to 102
percent of its prior year State-assessed revenue; and (ii) if countrywide
revenues generated from such utility property are less than the previous
year's revenue or greater than 102 percent of the previous year's
revenues, each jurisdiction shares the burden of the shortfall or benefit
from the excess revenues by a specified formula. This provision applies
to all utility property except railroads whose valuation will continue to
be allocated to individual tax rate areas. In a 1991 Superior Court
ruling, the valuation method used by the State Board to value unitary
utility property was declared illegal and a new method was imposed,
resulting in significantly lower values and therefore significantly
reduced property tax revenues. One of the effects of the decision was to
entitle the principal utility plaintiff to a refund of $9 million. As a
result of this case, the State Board along with certain counties signed a
settlement agreement with several affected utilities providing for an
orderly 10.5% phase-down of tax assessments over fiscal years 1992-93,
1993-94 and 1994-95.
Lease-based financing, typically marketed in the form of certificates of
participation, has been extremely popular in California, since the courts
have long held that properly structured long-term leases do not create
"indebtedness" for purposes of constitutional and statutory debt
limitations. The obligation to pay rent thereunder is nevertheless
enforceable, on an annual basis, so long as the leased property is
available for use and occupancy by the government lessee. The risk of
rent abatement (because of construction delays, damage to structures and
the like) is usually mitigated by funded reserves, casualty insurance and
rental interruption insurance.
Given the turbulent history of California electoral, judicial and legal
proceedings affecting taxation since 1978, it is impossible to predict
what proceedings might occur in the future that would affect the ability
of California and its political subdivisions to service their outstanding
indebtedness. In addition, there are both nuclear and non-nuclear
electric power authorities in California that are financed in whole or in
part by so-called "take or pay" or "hell or high water" contracts. Court
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decisions outside of the State of California have called into question the
enforceability of such contracts.
The State of California recently issued general obligation bonds in March,
1996. The related Official Statement for that bond issue disclosed that
the recent recession has seriously affected State tax revenues, has caused
increased expenditures for health and welfare programs, and has caused a
structural imbalance in the State's budget, with the largest programs
supported by the General Fund -- K-12 schools and community colleges,
health and welfare, and corrections -- growing at rates higher than the
growth rates for the principal revenue sources of the General Fund. As a
result, the State has experienced recurring budget deficits and has had to
use a series of external borrowings to meet its cash needs.
The Governor's budget proposal for 1996-97 released January 10, 1996,
projects General Fund revenues and transfers in the 1995-96 fiscal year of
$45 billion (an increase of approximately $900 million over the projection
contained in the original 1995-96 Budget Act) and expenditures of $44.2
billion (an increase of approximately $800 million over the amount shown
in the original 1995-96 Budget Act). The Governor's Budget for 1996-97
estimates General Fund revenues and transfers of about $45.6 billion,
which would leave a balance of approximately $400 million in the budget
reserve, the Special Fund for Economic Uncertainties, at June 30, 1997.
As a result of the deterioration in the State's budget and cash situation
in fiscal years 1991-92 and 1992-93, rating agencies reduced the State's
credit ratings. Between November 1991 and October 1992 the rating on the
State's general obligation bonds was reduced by Standard & Poor's Ratings
Group from "AAA" to "A+" and by Moody's Investors Service from "Aaa" to
"Aa" and by Fitch Investors Service, Inc. from "AAA" to "AA." On July 15,
1994, based on the State's inability to eliminate its accumulated deficit,
the same three rating agencies further lowered their ratings on the
State's general obligation bonds to "A," "A1" and "A", respectively. More
recently, however, Fitch Investors Service, Inc. raised its rating from
"A" to "A+." It is not possible to predict the future course of the
State's credit ratings.
On December 6, 1994, Orange County, California, together with its pooled
investment funds, filed for protection under Chapter 9 of the federal
Bankruptcy Code, after reports that the funds had suffered significant
market losses in their investments, causing a liquidity crisis for the
funds and the County. More than 200 other public entities, most of which,
but not all, are located in the County, were also depositors in the funds.
As of mid-January, 1995, the County estimated the funds' loss at about
$1.69 billion, or 23% of their initial deposits of approximately $7.5
billion. Many of the entities which deposited moneys in the funds,
including the County, faced interim or extended cash flow difficulties
because of the bankruptcy filing and may be required to reduce programs or
capital projects. Orange County has embarked on a fiscal recovery plan
based on sharp reductions in services and personnel, and rescheduling of
outstanding short-term debt using certain new revenues transferred to
Orange County from other local governments pursuant to special legislation
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approved by the bankruptcy judge on May 15, 1996. The State has no
existing obligation with respect to any outstanding obligations or
securities of Orange County or any of the other participating entities.
The Fund will attempt to achieve geographic diversification by investing
in obligations of issuers that are located in different areas within
California as well as obligations of the State of California itself. In
addition, the Fund will not invest more than 15% of its total assets in
tax allocation bonds issued by California redevelopment agencies. These
are operating policies of the Fund and may be changed without the approval
of the Fund's shareholders.
WASHINGTON FUND
Washington State
A discussion of certain economic, financial and legal matters regarding
the State of Washington follows. During normal market conditions, the
Washington Fund will generally invest at least 80% of its net assets in
bonds issued by Washington and its political subdivisions, municipalities,
agencies, instrumentalities or public authorities. Therefore, the
investment risk of such concentration should be carefully considered. The
information in the discussion is drawn primarily from official statements
relating to securities offerings of the State which are dated prior to the
date of this Statement of Additional Information. This information may be
relevant in evaluating the economic and financial position of the State,
but is not intended to provide all relevant data necessary for a complete
evaluation of the State's economic and financial position. Discussions
regarding the financial health of the State government may not be relevant
to municipal obligations issued by a political subdivision of the State.
Furthermore, general economic conditions discussed may or may not affect
issuers of the obligations of the State. The Washington Fund has not
independently verified any of the information presented in this section.
General Information
According to the U.S. Census Bureau's 1990 Census, Washington State's
population is ranked 18th of the 50 states. During the ten-year time
period from 1980-1990, the State's population increased at an average
annual rate of 1.8%, while the U.S. population grew at an average annual
rate of 1.1%. The State's population increased at an average annual rate
of approximately 2.5% 1990 to 1993, and at an average annual rate of
approximately 1.8% from 1993 to 1995.
The State's largest city, Seattle, is part of an international trade,
manufacturing, high technology and business service corridor which extends
along Puget Sound from Everett to Tacoma. The State's Pacific Coast-Puget
Sound region includes 75% of its population, the major portion of its
industrial activity and the major part of the forests important to its
timber and paper industries. The remainder of the State has agricultural
areas primarily devoted to grain, fruit orchard and dairy operations.
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The State's economy has recently diversified with employment in the trade
and service sectors representing an increasing portion of total employment
relative to the manufacturing sector. The rate of economic growth as
measured by employment in the State was 2.0% in 1992, 1.3% in 1993, 2.3%
in 1994 and 2.1% in 1995.
The State operates on a July 1 to June 30 fiscal year and on a biennial
budget basis. Fiscal controls are exercised during the biennium through
an allotment process which requires each agency to submit a monthly
expenditure plan. The plan must be approved by the Office of Financial
Management, which is the Governor's budget agency. It provides the
authority for agencies to spend funds within statutory maximums specified
in a legislatively adopted budget. State law requires a balanced biennial
budget. Whenever it appears that disbursements will exceed the aggregate
of estimated receipts plus beginning cash surplus, the Governor is
required to reduce allotments, thereby reducing expenditures of
appropriated funds.
As interpreted by the State Supreme Court, Washington's Constitution
prohibits the imposition of net income taxes.
The State's tax revenues are primarily comprised of excise and ad valorem
taxes. By constitutional provision, the aggregate of all regular (unvoted)
tax levies on real and personal property by state and local taxing
districts cannot exceed 1% of the true and fair value of the property.
Excess levies are subject to voter approval. For the fiscal year ending
June 30, 1995, approximately 78.5% of the State's tax revenues came from
general and selective sales and gross receipts taxes, of which the retail
sales tax and its companion use tax represented 46% of total collections.
Business and occupation tax collections represented about 16.6% and the
motor vehicle fuel tax represented approximately 7.0% of total State taxes
for the year. Ad valorem taxes represented 10.8% of State revenues for the
fiscal year 1995.
Expenditures of State revenues are made in accordance with constitutional
and statutory mandates.
State Expenditure Limitations
Initiative 601, which passed by the voters in November 1993, limits
increases in General Fund-State government expenditures to the average
rate of population and inflation growth, and sets forth a series of
guidelines for limiting tax and expenditure increases and stabilizing long
range budget planning.
Provisions of Initiative 601 establish a procedure for computing a fiscal
year growth factor based on a lagged, three-year average of population and
inflation growth. This growth factor is used to determine a state
spending limit for programs and expenditures supported by the State
General Fund. The growth factor is 5.13% for fiscal year 1996 and 4.47%
for fiscal year 1997. The initiative creates two new reserve funds (the
Emergency Reserve Fund and the Education Construction Fund) for depositing
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revenues in excess of the spending limit and abolishes the current Budget
Stabilization Account. Ending balances in the Budget Stabilization
Account were transferred to the State General Fund ($100 million) and the
Pension Reserve Account ($25 million). The initiative also places
restrictions on the addition or transfer of functions to local government
unless there is reimbursement by the State.
The Initiative's requirement for voter approval for new tax measures has
expired. Effective July 1, 1995, taxes can be enacted with a two-thirds
majority of both houses of the State Legislature if resulting General
Fund-State expenditures do not exceed the spending limit. Voter approval
is still required to exceed the spending limit. Thus far, the Initiative
has not had a restrictive impact on the State's budget. However, the
State expects its expenditures to be constrained by the Initiative
beginning in the 1997-99 Biennium.
The State Constitution and enabling statutes authorize the incurrence of
State general obligation debt to the payment of which the State's full
faith and credit and taxing power are pledged. With certain exceptions,
the amount of State general obligation debt which may be incurred is
limited by constitutional and statutory restrictions. These limitations
are imposed by prohibiting the issuance of new debt if the new debt would
cause the maximum annual debt service on all thereafter outstanding
general obligation debt to exceed a specified percentage of the arithmetic
mean of general State revenues for the preceding three years. These
limitations apply to the incurrence of new debt and are not limitations on
the amount of debt service which may be paid by the State in future years.
The State Legislature is obligated to appropriate money for State debt
service requirements. Generally, on or before June 30 of each year, the
State Finance Committee certifies to the State Treasurer the amount
required for payment of bond interest and principal for the coming year.
Some general obligation bond statutes provide that the General Fund will
be reimbursed from discrete revenues which are not considered general
State revenues. Other bonds are limited obligation bonds not payable from
the General Fund. For the 1995-97 Biennium, General Fund-State revenues
are projected to be $17.395 billion, an increase of 4.5% over the 1993-95
Biennium, plus a carry-forward of $559 million. The revenue outlook for
the 1995-97 Biennium is stable and the General Fund is projected to end
the Biennium with a $341 million fund balance.
The State Legislature passed a 1993-95 Biennium Budget on May 6, 1993, and
the Governor signed the budget bill on May 28, 1993. The 1993-95 Biennium
Budget contained $650 million in general tax increases, $163 million in
other revenues, $700 million in program and administrative reductions, and
$622 million in fund shifts (such as to federal funding sources). The
1994 Supplemental Budget passed the State Legislature on March 14, 1994,
and the Governor signed the Supplemental Budget bill on April 6, 1994.
The 1994 Supplemental Budget included $48 million in tax cuts, an $11
million revenue increase from a variety of sources and $168 million in
additional expenditures, many of which represented one time investments.
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The 1995 Supplemental Budget passed the State Legislature on May 1, 1995
and was signed by Governor Lowry on May 9, 1995. The 1995 Supplemental
Budget made adjustments to expenditure authority for State agencies for
the last quarter of the Biennium. These budget adjustments reflected the
most recent enrollment and caseload estimates and addressed significant
unexpected expenses, including extraordinary costs of $47 million incurred
in one of the worst forest fire years since 1970. The 1995 Legislature
also appropriated $110 million from the General Fund to provide school
construction funding in the K-12 system. Overall, the 1995 Supplemental
Budget expenditure adjustments and other 1993-95 appropriation bills in
the 1995 Legislative session increased expenditures by $114.5 million.
During the 1995 legislative session, Governor Lowry vetoed two bills that
would have cut taxes: House Bill 1997, an ongoing property tax bill that
would cost $92 million in the 1995-97 budget period and House bill 1023,
which would roll back business and occupation taxes, along with several
other taxes, by $176.3 million in the 1995-97 Biennium.
For most municipalities in the State, the fiscal year is the calendar year
except that school districts have a September 1 - August 31 fiscal year.
All municipalities must maintain balanced budgets. Depending on the type
of municipality, local revenues are derived from ad valorem taxes, excise
and gross receipts taxes, special assessments, fees, user charges and
State and federal grants.
Municipalities incur debt by the issuance of general obligations or other
borrowings which are payable from taxes, though other revenue sources may
be used. Revenue obligations do not constitute debt under constitutional
and statutory limitations as long as taxes are not pledged or used to pay
debt service. Only non-tax revenue from the operation of a project or
enterprise financed by the revenue obligations (and sometimes special
assessments on property benefitted from the financed improvements) may be
used to pay that debt service. Usually, revenue bonds are secured by a
reserve funded in an amount based on a factor of debt service. Many
municipalities may issue improvement district obligations payable only
from special assessments on benefitted property, but some of those
obligations also may be secured by a special guaranty fund.
Economic Overview
Over the past few years, the State's economic performance has remained
relatively strong compared to the U.S. as a whole. After adjusting for
inflation, growth in personal income in the State increased 3.7% in 1995
over the 1994 level.
The State's economic base includes manufacturing and service industries as
well as agricultural and timber production. During 1990-1995, the State
experienced growth in non-manufacturing industries and a decline in
manufacturing industries. The rate of employment growth, which exceeded
4.5% during the mid-to-late 1980's, has declined since 1991 to an average
rate of 1.4%. The 1996 employment growth rate is expected to be 1.46%.
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Washington's economy consists of both export and local industries. Leading
export industries are aerospace, forest products, agriculture and food
processing. The aerospace, timber and food processing industries together
employ approximately 9% of the State's non-farm workers. However, the non-
manufacturing sector has played an increasingly significant role in
contributing to the State's economy in recent years.
Below is a summary of key industry segments of the State's economy as well
as of selected economic and employment data.
MANUFACTURING. The Boeing Company ("Boeing"), which is the Seattle
Metropolitan Area's largest employer, has several facilities located
throughout the area. Boeing is the world's leading manufacturer of
commercial airliners and as of April 1996 employed approximately 74,000
people state-wide, primarily at several locations in the area. Boeing
anticipates bringing total employment in the State to approximately 78,500
by the end of 1996. While the primary activity of Boeing is the
manufacture of commercial aircraft, Boeing has played leading roles in the
aerospace and military missile programs of the U.S. and has undertaken a
broad program of diversification activities including Boeing Information
and Support Services. In 1995, Boeing had $19.5 billion in sales and net
earnings of $393 million, and a backlog of orders totaling $72.3 billion.
Boeing currently anticipates 1996 sales to be in the $22 billion range.
Boeing recently completed two major expansion projects and is currently
undertaking another. The company recently acquired a 212-acre site in
Renton (King County), which is the site of the former Longacres Race
Track. The site will be used as a location for the development of an
office complex, the first building of which will be a 500,000 square-foot
customer service training center. In Everett (Snohomish County), Boeing
completed construction of a 5.6 million square-foot assembly plant for the
new 777 jetliner. In 1993, Boeing completed a $400 million skin and spar
plant and a composite manufacturing center on 500 acres in Puyallup
(Pierce County).
A total of 206 commercial jet transports were delivered in 1995, compared
with 270 for 1994. Defense and space sales of $5.6 billion were
approximately 10% higher than in 1994. The 10-week strike by the
International Association of Machinist and Aerospace Workers (IAM)
resulted in the delay of approximately 30 commercial jet transport
deliveries during the fourth quarter. During the first quarter of 1996,
deliveries for all models were hampered by the strike. A total of 40
commercial jet transports were delivered, compared with 59 in the first
quarter of 1995.
TECHNOLOGY-RELATED INDUSTRIES. The State ranks fourth among all states in
the percentage of its work force employed by technology-related
industries. It ranks third among the largest software development
centers. The State is the home of approximately 1000 advanced technology
firms of which approximately 50% are computer-related. Microsoft,
headquartered in Redmond, Washington, is the largest microcomputer
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software company in the world. In addition, several biotechnical firms
located in the State have attained international acclaim for their
research and development.
TIMBER. Natural forests cover more than 40% of the State's land area and
forest products rank second behind aerospace in terms of total production.
The primary employer in the timber industry is The Weyerhaeuser Company.
Productivity in the State's forest products industry increased steadily
from 1980 to 1990. However, since 1991, recessionary influences have
resulted in a production decline. A slight decline is anticipated for
1996 and for the next few years, due to federally-imposed limitations on
the harvest of old-growth timber and the inability to maintain the
previous record levels of production increases. Although a continued
decline in employment is anticipated for 1996 in certain regions, the
impact is not expected to affect materially the State's overall economic
performance.
AGRICULTURE AND FOOD PROCESSING. Agriculture and food processing is the
State's most important industry by most measures. Growth in agricultural
products was an integral factor in the State's economic growth in the late
1980s and early 1990s.
FINANCE, INSURANCE AND REAL ESTATE. Employment in finance, insurance and
real estate is estimated to represent 5.2% of the State's wage and salary
employment in 1995. Projections for 1996 show this segment holding steady
at 5.2% of employment.
TRADE. International trade plays an important role in the State's
employment base and one in six jobs is related to this area. During the
past twenty years the State has consistently ranked number one or number
two in international exports per capita. Seattle-Tacoma International
Airport is the focus of the region's air traffic and trade. The State,
particularly the Puget Sound Corridor, is a trade center for the Northwest
and the State of Alaska. A system of public ports, the largest of which
are the Ports of Seattle and Tacoma, handle waterborne trade primarily to
and from the Far East. These two Ports each rank among the top 20 ports
in the world based on volume of containerized cargo shipped.
Approximately 70% of the cargo entering the Ports of Seattle and Tacoma
has an ultimate destination outside the Pacific Northwest. Therefore,
trade levels depend largely on national and world, rather than local,
economic conditions.
Growth in retail sales in the State between 1990 and 1992 was higher than
that in the United States. During 1993 through 1995, the rate of growth
for retail sales was lower for the State than for the United States. The
State is home to a number of specialty retail companies that have reached
national stature, including Nordstrom, Eddie Bauer, Costco and
Recreational Equipment Inc. (REI).
SERVICES/TOURISM. The highest employment growth in the State since 1981
has taken place in the services sector, although rate of growth has shown
small but relatively consistent decline since 1990 from 7% to 4.3%%
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forecast for 1995. Seattle is the location for the Washington State
Convention and Trade Center which opened in June 1988. The State also has
many tourist attractions such as the Olympic and Cascade mountain ranges,
ocean beaches and local wineries.
CONSTRUCTION. Employment in the construction sector in the Puget Sound
area increased 69.2% between 1981 and 1991. The increase in employment in
the late 1980s was due in part to the affordability of housing compared to
other areas of the country. Construction employment growth flattened
between 1991 and 1993, but showed a modest increase in 1994 and leveled
again in 1995. Commercial building, while not increasing at the pace of
the 1980s, remains stable.
FEDERAL, STATE AND LOCAL GOVERNMENT. Employment in the government sector
represents approximately 19% of all wage and salary employment in the
State on a combined basis. Seattle is the regional headquarters for a
number of federal government agencies and the State receives an above-
average share of defense expenditures. Employment in the government
sector has expanded in the State since 1990, but at a declining rate.
State and local government employment has increased at a faster pace than
employment by the federal government, and is projected to add new jobs
through 1996.
Litigation
At any given time, including the present, there are numerous lawsuits
pending against the State of Washington which could affect the State's
revenues and expenditures. However, none of the lawsuits are expected to
have a material adverse impact on either State revenues or expenditures.
PRINCIPAL SHAREHOLDERS OF CERTAIN FUNDS
Intermediate Treasury Fund
At September 13, 1996, SAFECO Insurance Company of America ("SAFECO
Insurance") owned 500,000 shares of the Intermediate Treasury Fund which
represented 35.0% of the outstanding shares of the Fund. SAFECO Insurance
is a Washington Corporation and a wholly-owned subsidiary of SAFECO
Corporation, each of which has its principal place of business at SAFECO
Plaza, Seattle, Washington 98185.
Managed Bond Fund
At September 13, 1996, Principal Shareholders of the Managed Bond Fund
were as follows. Crista Ministries, PO Box 330303, Seattle, WA 98133,
owned 91,375 shares, which represented 18.4% of the Fund's outstanding
shares. Massman Construction Co. PSRT, 8901 Stateline, Kansas City, MO
64114, owned 233,262 shares, which represented 47.0% of the Fund's
outstanding shares. Crown Packaging Corp. PS&P, 8514 Eager Road, St.
Louis, MO 63144, owned 155,933 shares, which represented 31.4% of the
Fund's outstanding shares.
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Washington Fund
At June 30, 1996, SAFECO Insurance owned 502,372 shares, which represents
79.6% of the outstanding shares of the Washington Fund. SAFECO is a
wholly-owned subsidiary of SAFECO Corporation, a Washington corporation,
having its principal place of business at SAFECO Plaza, Seattle Washington
98185.
Principal shareholders of a Fund may control the outcome of a shareholder
vote.
ADDITIONAL TAX INFORMATION
General
Each Fund intends to continue to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986 ("Code").
In order to qualify for treatment as a regulated investment company under
the Code, a Fund must distribute to its shareholders for each taxable year
at least 90% of its investment company taxable income (consisting
generally of taxable net investment income and net short-term capital
gain). Each Fund intends to make sufficient distributions to shareholders
to relieve it from liability for federal excise and income taxes.
Each Fund is treated as a separate corporation for federal income tax
purposes.
The excess of net long-term capital gains over net short-term capital loss
realized by a Fund on portfolio transactions, when distributed by the
Fund, is subject to long-term capital gains treatment under the Code,
regardless of how long you have held the shares of the Fund.
Distributions of net short-term capital gains realized from portfolio
transactions are treated as ordinary income for federal income tax
purposes. The tax consequences described above apply whether
distributions are taken in cash or in additional shares. Redemptions and
exchanges of shares of a Fund may result in a capital gain or loss for
federal income tax purposes.
If shares of a Fund are sold at a loss after being held for one year or
less, the loss will be treated as long-term, instead of short-term,
capital loss to the extent of any capital gain distributions received on
those shares. Investors also should be aware that if shares are purchased
shortly before the record date for any distribution, the shareholder will
pay full price for the shares and receive some portion of the purchase
price back as a taxable dividend or capital gain distribution.
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Each Fund is required to withhold 31% of all taxable dividends, capital
gain distributions and redemption proceeds payable to individuals and
certain other noncorporate shareholders who do not furnish the Fund with a
correct taxpayer identification number. Withholding at that rate also is
required from dividends and those distributions for shareholders who
otherwise are subject to backup withholding.
These are tax requirements that all mutual funds must follow in order to
avoid federal taxation. The Funds may have to limit investment activity
in some types of securities in order to adhere to these requirements.
Special Considerations for the Tax-Exempt Fixed Income Funds
The tax-exempt interest portion of each daily dividend will be based upon
the ratio of a Tax-Exempt Fixed Income Fund's tax-exempt to taxable income
for the entire fiscal year (average annual method). As a result, the
percentage of tax-exempt income for any particular distribution may be
substantially different from the percentage of a Tax-Exempt Fixed Income
Fund's income that was tax-exempt during the period covered by that
distribution. Each Tax-Exempt Fixed Income Fund will advise its
shareholders of this ratio within 60 days after the close of its fiscal
year.
Interest on indebtedness incurred or continued by a shareholder to
purchase or carry shares of a Tax-Exempt Fixed Income Fund is not
deductible. In addition, entities or persons who are "substantial users"
(or related persons) of facilities financed by most "private activity"
bonds should consult their tax advisers before purchasing shares of any of
the Tax-Exempt Fixed Income Funds. "Substantial user" is generally
defined to include a "non-exempt person" who regularly uses in a trade or
business a part of a facility financed from the proceeds of most "private
activity" bonds.
Each Tax-Exempt Fixed Income Fund may invest in municipal bonds that are
purchased, generally not on their original issue, with market discount
(that is, at a price less than the principal amount of the bond or, in the
case of a bond that was issued with original issue discount, at a price
less than the amount of the issue price plus accrued original issue
discount) ("municipal market discount bonds"). Gain on the disposition of
a municipal market discount bond (other than a bond with a fixed maturity
date within one year from its issuance), generally is treated as ordinary
(taxable) income, rather than capital gain, to the extent of the bond's
accrued market discount at the time of disposition. Market discount on
such a bond generally is accrued ratably, on a daily basis, over the
period from the acquisition date to the date of maturity. In lieu of
treating the disposition gain as above, a Tax-Exempt Fixed Income Fund may
elect to include market discount in its gross income currently, for each
taxable year to which it is attributable.
- 38 -
<PAGE>
Each Tax-Exempt Fixed Income Fund will be subject to a nondeductible 4%
excise tax to the extent it fails to distribute by the end of any calendar
year substantially all of its ordinary income for that year and capital
gain net income for the one-year period ending on November 30 of that
year, plus certain other amounts.
No portion of the dividends or other distributions paid by any Tax-Exempt
Fixed Income Fund is eligible for the dividends-received deduction allowed
to corporations.
In the future, proposals may be introduced before Congress for the purpose
of further restricting or even eliminating the federal income tax
exemption for interest on all or certain types of municipal obligations.
If such a proposal were enacted, the availability of municipal obligations
for investment by each Tax-Exempt Fixed Income Fund and the value of each
Tax-Exempt Fixed Income Fund's portfolio would be affected. In such
event, each Tax-Exempt Fixed Income Fund would review its investment
objectives and policies.
CONVERSION OF ADVISOR CLASS B SHARES
Advisor Class B shares of a Fund will automatically convert to Advisor
Class A shares of that Fund, based on the relative net asset values per
share ("NAVs") of the Classes, within the first month following the
investor's sixth anniversary from purchase of such Advisor Class B shares.
For the purpose of calculating the holding period required for conversion
of Advisor Class B shares of each Fund except the Money Market Fund, the
date of purchase shall mean (1) the date on which such Advisor Class B
shares were purchased, or (2) for Advisor Class B shares obtained through
an exchange, or a series of exchanges, the date on which the original
Advisor Class B shares were purchased. For the purpose of calculating the
holding period required for conversion of Advisor Class B shares of the
Money Market Fund, the date of purchase shall mean the date on which those
shares were first exchanged for Advisor Class B shares of any other SAFECO
Fund. Holders of Class B shares of the SAFECO Advisor Series Trust
("Advisor Series Shares") who have converted those shares to Advisor Class
B shares may calculate the holding period from the date of the purchase of
the Advisor Series Shares.
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
- 39 -
<PAGE>
Class B shares converting to Advisor Class A shares bears to the
shareholder's total Advisor Class B shares not acquired through dividends
and other distributions.
ADDITIONAL INFORMATION ON CALCULATION OF
NET ASSET VALUE PER SHARE
Each Fund determines its NAV by subtracting its liabilities (including
accrued expenses and dividends payable) from its total assets (the market
value of the securities the Fund holds plus cash and other assets,
including interest accrued but not yet received) and dividing the result
by the total number of shares outstanding. The NAVs of the Advisor
Classes of each Fund are calculated as of the close of regular trading on
the New York Stock Exchange ("Exchange") every day the Exchange is open
for trading. The Exchange is closed on the following days: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. NAV is determined separately for
each class of shares of each Fund.
Short-term debt securities held in a Fund's portfolio having a remaining
maturity of less than 60 days when purchased and securities originally
purchased with maturities in excess of 60 days, but which currently have
maturities of 60 days or less, may be valued at cost adjusted for
amortization of premiums or accrual of discounts if in the judgment of
each Board of Trustees such methods of valuation are appropriate or under
such other methods as a Board of Trustees may from time to time deem to be
appropriate. The cost of those securities that had original maturities in
excess of 60 days shall be determined by their fair market value as of the
61st day prior to maturity. All other securities and assets in the
portfolio will be appraised in accordance with those procedures
established by each Board of Trustees in good faith in computing the fair
market value of those assets.
The portfolio instruments of the Money Market Fund are valued on the basis
of amortized cost. The valuation of the Money Market Fund's portfolio
securities based upon amortized cost, and the maintenance of the Money
Market Fund's NAV at $1.00, are permitted pursuant to Rule 2a-7 under the
1940 Act. Pursuant to that rule, the Money Market Fund maintains a
dollar-weighted average portfolio maturity of 90 days or less, purchases
only securities having remaining maturities of 397 days or less, and
- 40 -
<PAGE>
invests only in securities determined by SAM, under guidelines adopted by
the Money Market Trust's Board of Trustees, to be of high quality and to
present minimal credit risks. The Board of Trustees has established
procedures designed to stabilize, to the extent reasonably possible, the
Money Market Fund's price-per-share as computed for the purpose of sales
and redemptions at $1.00. These procedures include a review of the Money
Market Fund's portfolio holdings by the Board of Trustees, at such
intervals as the Board deems appropriate, to determine whether the Fund's
NAV, calculated by using available market quotations, deviates from $1.00
per share and, if so, whether such deviation may result in material
dilution or is otherwise unfair to existing shareholders of the Money
Market Fund. In the event the Board determines that such a deviation
exists in the Fund, the Trustees will take such corrective action with
respect to the Money Market Fund as they regard as necessary and
appropriate, including, but not limited to: selling portfolio investments
prior to maturity to realize capital gains or losses or to shorten average
portfolio maturity, withholding dividends or redeeming shares in kind,
establishing the NAV by using available market quotations.
ADDITIONAL PERFORMANCE INFORMATION
Effective September 30, 1996, all of the then-existing shares of each Fund
were redesignated No-Load Class shares and each Fund commenced offering
Advisor Class A and Advisor Class B shares.
Yields for the Intermediate Treasury, Managed Bond, and Tax-Exempt Fixed
Income Funds.
The yield and total return calculations set forth below are for the dates
indicated and are not a prediction of future results. The performance
information that follows is based on the original shares of each Fund.
The performance figures quoted reflect applicable Advisor Class Rule 12b-1
fees.
The yields for the Advisor Classes of the Intermediate Treasury Fund for
the 30-day period ended September 30, 1995 would have been as follows:
</TABLE>
<TABLE>
<CAPTION>
Advisor Class A Advisor Class B
--------------- ---------------
<S> <C> <C>
Intermediate Treasury Fund 4.92% 4.41%
</TABLE>
- 41 -
<PAGE>
The yields for the Advisor Classes of the Intermediate Treasury Fund for
the 30-day period ended March 31, 1996 would have been as follows:
<TABLE>
<CAPTION>
Advisor Class A Advisor Class B
--------------- ---------------
<S> <C> <C>
Intermediate Treasury Fund 4.03% 3.47%
</TABLE>
The yields for the Advisor Classes of the Managed Bond Fund for the 30-day
period ended December 31, 1995 would have been as follows:
<TABLE>
<CAPTION>
Advisor Class A Advisor Class B
--------------- ---------------
<S> <C> <C>
Managed Bond Fund 4.32% 3.78%
</TABLE>
The yields for the Advisor Classes of the Managed Bond Fund for the 30-day
period ended June 30, 1996 would have been as follows:
<TABLE>
<CAPTION>
Advisor Class A Advisor Class B
--------------- ---------------
<S> <C> <C>
Managed Bond Fund 4.78% 4.02%
</TABLE>
The yields and tax-equivalent yields for the 30-day period ending
March 31, 1996 at the maximum federal tax rate of 39.6% for the Advisor
Classes of the Municipal, California, and Washington Funds and at the
- 42 -
<PAGE>
maximum combined federal and California tax rates of 46.2% for the Advisor
Classes of the California Fund, would have been as follows:
<TABLE>
<CAPTION>
Advisor Class A Advisor Class B
--------------- ---------------
Tax-equivalent Tax-equivalent
Yield Yield Yield Yield
----- -------------- ----- -------------
<S> <C> <C> <C> <C>
Municipal Fund 4.59% 7.60% 4.06% 6.72%
California Fund 4.57% 8.49% 4.04% 7.51%
Washington Fund 4.17% 6.90% 3.62% 5.99%
</TABLE>
Yield is computed using the following formula:
ab 6
Yield = 2[( ---- +1) -1]
cd
Where: a = dividends and interest earned
during the period
b = expenses accrued for the
period (net of reimbursements)
c = the average daily number of
shares outstanding during the
period that were entitled to
receive dividends
d = the maximum offering price per
share on the last day of the
period
- 43 -
<PAGE>
Tax-equivalent yield is computed using the following formula:
eg
Tax-equivalent yield = [-----] + [e(1-g)]
(1-f)
Where: e = yield as calculated above
f = tax rate
g = percentage of "yield" which is tax-free
Yield for the Money Market Fund
The yields and effective yields for the Advisor Classes of the Money
Market Fund for the 7-day period ended March 31, 1996 would have been as
follows:
<TABLE>
<CAPTION>
Advisor Class A Advisor Class B
--------------- ---------------
Yield Effective Yield Yield Effective Yield
----- --------------- ----- ---------------
<S> <C> <C> <C> <C>
Money Market Fund 4.60% 4.70% 4.60% 4.70%
</TABLE>
Yield is computed using the following formula:
(x-y) - z 365
Yield = [--------] = Base Period Return x ---
y 7
Where: x = value of one share at the end of a 7-day
period
y = value of one share at the beginning of a 7-day
period ($1.00)
z = capital changes during the 7-day period, if
any
Effective yield is computed using the following formula:
Effective yield = [(Base Period Return + 1) 365/7] -1
- 44 -
<PAGE>
During periods of declining interest rates, the Money Market Fund's yield
based on amortized cost may be higher than the yield based on market
valuations. Under these circumstances, a shareholder in the Money Market
Fund would be able to obtain a somewhat higher yield than would result if
the Money Market Fund utilized market valuations to determine its NAV.
The converse would apply in a period of rising interest rates.
Total Return and Average Annual Total Return for the Intermediate
Treasury, Managed Bond, and Tax-Exempt Fixed Income Funds.
The performance information that follows is based on the original shares
of each Fund, recalculated to reflect the sales charges of the Advisor
Classes. The performance figures quoted do not reflect any applicable
Advisor Class Rule 12b-1 fees, which if reflected would cause the
performance figures to be lower than those indicated.
The total returns for the Advisor Classes of the Intermediate Treasury
Fund for the one-year, five-year and since initial public offering periods
ending September 30, 1995 would have been as follows:
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year 5 Years Public Offering Months Public Offering
------ ------- --------------- ------ ---------------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Intermediate
Treasury Fund 6.07% 6.07% 41.06% 45.70% 62.78% 70.45% 84 September 7, 1988
</TABLE>
- 45 -
<PAGE>
The total returns for the Advisor Classes of the Intermediate Treasury
Fund for the one-year, five-year and since initial public offering periods
ending March 31, 1996 would have been as follows:
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year 5 Years Public Offering Months Public Offering
------ ------- --------------- ------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
Intermediate
Treasury Fund 4.65% 4.58% 36.89% 41.34% 66.08% 73.91% 90 September 7, 1988
</TABLE>
The total returns for the Advisor Classes of the Managed Bond Fund for the
period from February 28, 1994 (initial public offering) through
December 31, 1995, would have been as follows:
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year Public Offering Months Public Offering
------ --------------- ------ ---------------
Advisor Advisor Advisor Advisor
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Managed Bond
Fund 12.07% 12.35% 8.70% 9.82% 22 February 28, 1994
</TABLE>
- 46 -
<PAGE>
The total returns for the Adviser Classes of the Managed Bond Fund for the
period from February 28, 1994 (initial public offering) through June 30,
1996, would have been as follows:
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year Public Offering Months Public Offering
------ --------------- ------ ---------------
Advisor Advisor Advisor Advisor
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Managed Bond
Fund -0.21% -0.51% 5.93% 7.92% 28 February 28, 1994
</TABLE>
The total returns for the Advisor Classes of the Municipal and California
Funds for the one-year, five-year and ten-year periods ending March 31,
1996 would have been as follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Municipal Fund 3.36% 3.23% 40.84% 45.47% 110.25% 120.16%
California
Fund 3.97% 3.87% 41.43% 46.09% 104.10% 113.72%
- 47 -
<PAGE>
The total returns for the Advisor Classes of the Washington Fund for the
one-year period (and since inception) ended March 31, 1996 would have been
as follows:
</TABLE>
<TABLE>
<CAPTION>
Since Initial Effective Date
1 Year (36 Months)
------ ----------------------------
Advisor Advisor Advisor Advisor
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Washington Fund 2.88% 2.73% 10.97% 13.20%
The average annual total returns for the Advisor Classes of the
Intermediate Treasury Fund for the one-year, five-year and since initial
public offering periods ended September 30, 1995 would have been as
follows:
</TABLE>
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year 5 Years Public Offering Months Public Offering
------ ------- --------------- ------ ---------------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Intermediate
Treasury 6.07% 6.07% 7.12% 7.82% 7.21% 7.92% 84 September 7, 1988
</TABLE>
- 48 -
<PAGE>
The average annual total returns for the Advisor Classes of the
Intermediate Treasury Fund for the one-year, five-year and since initial
public offering period ended March 31, 1996 would have been as follows:
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year 5 Years Public Offering Months Public Offering
------ ------- --------------- ------ ---------------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Intermediate
Treasury 4.65% 4.58% 6.48% 7.17% 7.00% 7.66% 90 September 7, 1988
</TABLE>
The average annual total returns for the Advisor Classes of the Managed
Bond Fund for the period from February 28, 1994 (initial public offering)
through December 31, 1995 would have been as follows:
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year Public Offering Months Public Offering
------ --------------- ------ ---------------
Advisor Advisor Advisor Advisor
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Managed Bond
Fund 12.07% 12.35% 4.66% 5.24% 22 February 28, 1994
</TABLE>
- 49 -
<PAGE>
The average annual total returns for the Advisor Classes of the Managed
Bond Fund for the period from February 28, 1994 (initial public offering)
through June 30, 1996 would have been as follows:
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year Public Offering Months Public Offering
------ -------------- ------ ---------------
Advisor Advisor Advisor Advisor
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Managed Bond
Fund -0.21% -0.51% 2.50% 3.32% 28 February 28, 1994
</TABLE>
The average annual total returns for the Advisor Classes of the Municipal
and California Funds for the one-year, five-year and ten-year periods
ending March 31, 1996 would have been as follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Municipal
Fund 3.36% 3.23% 7.09% 7.78% 7.71% 8.21%
California
Fund 3.97% 3.87% 7.18% 7.88% 7.39% 7.89%
</TABLE>
- 50 -
<PAGE>
The average annual total returns for the Advisor Classes of the Washington
Fund for the one-year period (and since inception) ended March 31, 1996
would have been as follows:
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year Public Offering Months Public Offering
------ --------------- ------ ---------------
Advisor Advisor Advisor Advisor
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Washington
Fund 2.88% 2.73% 3.53% 4.22% 36 March 18, 1993
</TABLE>
The total return is computed using the following formula:
ERV-P
T = [ ----- ] x 100
P
Where: T = ending redeemable value of a hypothetical
$1,000 investment at the end of a specified
period of time
P = a hypothetical initial investment of $1,000
The average annual total return is computed using the following formula:
A = (n(SQUARE ROOT) ERV/P - 1) x 100
Where: T = total return
A = average annual total return
n = number of years
ERV = ending redeemable value of a
hypothetical $1,000 investment at the
end of a specified period of time
P = a hypothetical initial investment of
$1,000
- 51 -
<PAGE>
In making the above calculation all dividends and capital gain
distributions are assumed to be reinvested at the Fund's NAV on the rein-
vestment date.
In addition to performance figures, each Fund may advertise its ranking as
calculated by independent rating services which monitor mutual funds'
performance (e.g., CDA Investment Technologies, Lipper Analytical
Services, Inc. and Morningstar, Inc.). These rankings may be among mutual
funds with similar objectives and/or size or with mutual funds in general
and may be based on relative performance during periods deemed by the
rating services to be representative of up and down markets.
The Funds may upon occasion reproduce articles or portions of articles
about the Funds written by independent third parties such as financial
writers, financial planners and financial analysts, and appearing in
financial publications of general circulation or financial newsletters
(including but not limited to BARRONS, BUSINESS WEEK, FABIANS, FORBES,
FORTUNE, INVESTOR'S BUSINESS DAILY, KIPLINGER'S, MONEY MAGAZINE,
MORNINGSTAR MUTUAL FUNDS, MUTUAL FUNDS FORECASTER, MUTUAL FUNDS MAGAZINE,
NO-LOAD FUND INVESTOR, NO-LOAD FUND X, NEWSWEEK, PENSIONS & INVESTMENTS,
RUCKEYSER'S MUTUAL FUNDS, TELESWITCH, TIME MAGAZINE, U.S. NEWS AND WORLD
REPORT, YOUR MONEY AND THE WALL STREET JOURNAL).
Each Fund may also present in its advertisements and sales literature (i)
a biography or the credentials of its portfolio manager (including but not
limited to educational degrees, professional designations, work
experience, work responsibilities and outside interests); (ii) current
facts (including but not limited to number of employees, number of
shareholders, business characteristics) about its investment adviser (SAM)
or any sub investment adviser, the investment adviser's parent company
(SAFECO Corporation) or the parent company of any sub investment adviser
or the SAFECO Family of Funds; (iii) descriptions, including quotations
attributable to the portfolio manager, of the investment style used to
manage a Fund's portfolio, the research methodologies underlying
securities selection and a Fund's investment objective; and (iv)
information about particular securities held in a Fund's portfolio.
From time to time, each Fund may discuss its performance in relation to
the performance of relevant indices and/or representative peer groups.
Such discussions may include how a Fund's investment style (including but
not limited to portfolio holdings, asset types, industry/sector weightings
and the purchase and sale of specific securities) contributed to such
performance.
In addition, each Fund may comment on the market and economic outlook in
general, on specific economic events, on how these conditions have
impacted its performance and on how the portfolio manager will or has
addressed such conditions.
Performance information and quoted ratings are indicative only of past
performance and are not intended to represent future investment results.
- 52 -
<PAGE>
ADDITIONAL INFORMATION ON DIVIDENDS
Because the Money Market Fund intends to hold its portfolio securities to
maturity and expects that most of its portfolio securities will be valued
at their amortized cost, realized gains or losses should not be a signifi-
cant factor in the computation of net income. Should, however, in an
unusual circumstance, the Money Market Fund experience a realized gain or
loss, a shareholder of the Money Market Fund could receive an increased,
reduced, or no dividend for a period of time. In such an event, the Money
Market Trust's Board of Trustees would consider whether to adhere to its
present dividend policy or to revise it in light of the then-prevailing
circumstances.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation(s)
Name and Address with the Trusts During Past 5 Years
---------------- ---------------- -------------------
<S> <C> <C>
Boh A. Dickey* Chairman and Trustee President, Chief
SAFECO Plaza Operating Officer and
Seattle, WA 98185 Director of SAFECO
(51) Corporation.
Previously, Executive
Vice President and
Chief Financial
Officer. He has been an
executive officer of
SAFECO Corporation
subsidiaries since
1982. See table under
"Investment Advisory
and Other Services."
- 53 -
<PAGE>
Position(s) Held Principal Occupation(s)
Name and Address with the Trusts During Past 5 Years
---------------- ---------------- -------------------
Barbara J. Dingfield Trustee Manager, Corporate
Microsoft Corporation Contributions and
One Microsoft Way Community Programs for
Redmond, WA 98052 Microsoft Corporation,
(50) 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.
Richard W. Hubbard* Trustee Retired Vice President
1270 NW Blakely Ct. and Treasurer of the
Seattle, WA 98177 Trust and other SAFECO
(67) Trusts; 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
764 S. 293rd Street and Customer Relations,
Federal Way, WA 98032 Building Materials
(58) Distribution,
Weyerhaeuser Company,
Tacoma, Washington;
Director of First
SAFECO National Life
Insurance Company of
New York.
- 54 -
<PAGE>
Position(s) Held Principal Occupation(s)
Name and Address with the Trusts During Past 5 Years
---------------- ---------------- -------------------
Larry L. Pinnt Trustee Retired Vice President
1600 Bell Plaza and Chief Financial
Room 1802 Officer U.S. WEST
Seattle, WA 98191 Communications,
(61) Seattle, Washington;
Director of Key Bank of
Washington, Seattle,
Washington; Director of
University of
Washington Medical
Center, Seattle,
Washington; Director of
Cascade Natural Gas
Corporation, Seattle,
Washington; Director of
First SAFECO National
Life Insurance Company
of New York.
John W. Schneider Trustee President of
1808 N 41st St. Wallingford Group,
Seattle, WA 98103 Inc., Seattle,
(54) Washington; former
President of Coast
Hotels, Inc., Seattle,
Washington; Director of
First SAFECO National
Life Insurance Company
of New York.
David F. Hill* President President of SAFECO
SAFECO Plaza Trustee Securities, Inc. and
Seattle, WA 98185 SAFECO Services
(47) Corporation; Senior
Vice President of
SAFECO Asset
Management Company.
See table under
"Investment Advisory
and other Services."
- 55 -
<PAGE>
Position(s) Held Principal Occupation(s)
Name and Address with the Trusts During Past 5 Years
---------------- ---------------- -------------------
Neal A. Fuller Vice President Vice President,
SAFECO Plaza Controller Controller, Assistant
Seattle, WA 98185 Assistant Secretary Secretary and Treasurer
(34) of 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
Seattle, WA 98185 Company; Vice
(52) President and Treasurer
of SAFECO Corporation;
Vice President of
SAFECO Life Insurance
Company; former Senior
Fund Manager of SAFECO
insurance companies;
former Fund Manager for
several SAFECO mutual
funds. See table under
"Investment Advisory
and Other Services."
</TABLE>
* Trustees who are interested persons as defined by the 1940 Act.
- 56 -
<PAGE>
COMPENSATION TABLE FOR CURRENT TRUSTEES
(Taxable Bond Trust)
For the Fiscal Year Ended September 30, 1995
<TABLE>
<CAPTION>
Pension or
Retirement Total Compensation
Aggregate Benefits Accrued Estimated Annual From Registrant and
Compensation As Part of Fund Benefits Upon Fund Complex Paid to
Trustee from Registrant Expenses Retirement Trustees
------- --------------- --------- ---------- --------
<S> <C> <C> <C> <C>
Boh A. Dickey $0 N/A N/A $0
Barbara J. Dingfield $2,360 N/A N/A $22,737
Richard E. Lungren $2,360 N/A N/A $22,737
Larry L. Pinnt $2,360 N/A N/A $22,737
John W. Schneider $2,360 N/A N/A $22,737
Richard W. Hubbard $2,568 N/A N/A $24,150
David F. Hill* $0 N/A N/A $0
</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 six
other registered open-end management companies that have, in the
aggregate, twenty-eight series companies managed by SAM.
The officers of the Trust receive no compensation for their services as
officers, or if applicable, as Trustees.
At June 30, 1996, the Trustees and officers of the Taxable Bond Trust as a
group owned less than 1% of the outstanding shares of the Intermediate
Treasury Fund.
- 57 -
<PAGE>
COMPENSATION TABLE FOR CURRENT TRUSTEES
(Managed Bond Trust)
For the Fiscal Year Ended December 31, 1995
<TABLE>
<CAPTION>
Pension or
Retirement Total Compensation
Aggregate Benefits Accrued Estimated From Registrant and
Compensation As Part of Fund Annual Benefits Fund Complex Paid
Trustee from Registrant Expenses Upon Retirement to Trustees
------- --------------- -------- --------------- -----------
<S> <C> <C> <C> <C>
Boh A. Dickey $0 N/A N/A $0
Barbara J. Dingfield $852 N/A N/A $23,875
Richard E. Lundgren $852 N/A N/A $23,875
Larry L. Pinnt $852 N/A N/A $23,875
John W. Schneider $852 N/A N/A $23,875
Richard W. Hubbard $960 N/A N/A $26,900
David F. Hill* $0 N/A N/A $0
</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 six
other registered open-end management companies that have, in the
aggregate, thirty series companies managed by SAM.
The officers of the Trust received no compensation for their services as
officers or, if applicable, as Trustees.
At September 18, 1996, the Trustees and officers of the Managed Bond Trust
owned none of the outstanding shares of the Managed Bond Fund.
- 58 -
<PAGE>
COMPENSATION TABLE FOR CURRENT TRUSTEES
(Money Market Trust)
For the Fiscal Year Ended March 31, 1996
<TABLE>
<CAPTION>
Pension or
Retirement Total Compensation
Aggregate Benefits Accrued Estimated Annual From Registrant and
Compensation As Part of Fund Benefits Fund Complex Paid to
Trustee from Registrant Expenses Upon Retirement Trustees
------- --------------- -------- --------------- --------
<S> <C> <C> <C> <C>
Boh A. Dickey $0 N/A N/A $0
Barbara J. Dingfield $2,095 N/A N/A $24,813
Richard E. Lundgren $2,095 N/A N/A $24,813
Larry L. Pinnt $2,095 N/A N/A $24,813
John W. Schneider $2,095 N/A N/A $24,813
Richard W. Hubbard $2,095 N/A N/A $23,000
David F. Hill* $0 N/A N/A $0
</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 six
other registered open-end, management investment companies that have, in
the aggregate, twenty-nine series companies managed by SAM.
The officers of the Trust receive no compensation for their service as
officers or, if applicable, as Trustees.
At June 30, 1996, the Trustees and officers of the Money Market Trust as a
group owned less than 1% of the outstanding shares of the Money Market
Fund.
- 59 -
<PAGE>
COMPENSATION TABLE FOR CURRENT TRUSTEES
(Tax-Exempt Bond Trust)
For the Fiscal Year Ended March 31, 1996
<TABLE>
<CAPTION>
Pension or
Retirement Total Compensation
Aggregate Benefits Accrued Estimated Annual From Registrant and
Compensation As Part of Fund Benefits Fund Complex Paid to
Trustee from Registrant Expenses Upon Retirement Trustees
------- --------------- -------- --------------- --------
<S> <C> <C> <C> <C>
Boh A. Dickey $0 N/A N/A $0
Barbara J. Dingfield $4,547 N/A N/A $24,813
Richard E. Lundgren $4,547 N/A N/A $24,813
Larry L. Pinnt $4,547 N/A N/A $24,813
John W. Schneider $4,547 N/A N/A $24,813
Richard W. Hubbard $4,547 N/A N/A $23,000
David F. Hill* $0 N/A N/A $0
</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 a Trust are
compensated by that Trust. Each Trustee also serves as trustee for six
other registered open-end, management investment companies that have, in
the aggregate, twenty-six series companies managed by SAM.
The officers of a Trust received no compensation for their services as
officers or, if applicable, trustees.
At June 30, 1996, the Trustees and officers of the Trust as a group owned
less than 1% of the outstanding shares of each Tax-Exempt Fixed Income
Fund.
- 60 -
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
SAFECO Asset Management Company ("SAM"), SAFECO Securities, Inc. ("SAFECO
Securities") and SAFECO Services Corporation ("SAFECO Services") are
wholly-owned subsidiaries of SAFECO Corporation. SAFECO Securities is the
principal underwriter of each Fund and SAFECO Services is the transfer,
dividend and distribution disbursement and shareholder servicing agent of
each Fund.
The following individuals have the following positions and offices with
the Trusts, SAM, SAFECO Securities and SAFECO Services.
<TABLE>
<CAPTION>
SAFECO SAFECO
Name Trusts SAM Securities Services
---- ------ --- ---------- --------
<S> <C> <C> <C> <C>
B. A. Dickey Chairman Director Director
Trustee Chairman
D. F. Hill President Senior President President
Trustee Vice Director Secretary
President Secretary Director
Director
N. A. Fuller Vice President Vice Vice Vice President
Controller President President Controller
Assistant Controller Controller Assistant
Secretary Secretary Assistant Secretary
Treasurer Secretary Treasurer
Treasurer
R.L. Spaulding Vice President Vice Director Director
Treasurer Chairman
Director
S.C. Bauer President
Director
</TABLE>
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.
- 61 -
<PAGE>
In connection with its investment advisory contract with each Trust, SAM
furnishes or pays for all facilities and services furnished or performed
for or on behalf of each Trust and each Fund, that includes furnishing
office facilities, books, records and personnel to manage each Trust's and
each Fund's affairs and paying certain expenses.
The Trust Instrument of each Trust provides that the Trust will indemnify
its Trustees and its officers against liabilities and expenses reasonably
incurred in connection with litigation in which they may be involved
because of their offices with the Trust, unless it is adjudicated that
they engaged in bad faith, wilful misfeasance, gross negligence, or
reckless disregard of the duties involved in the conduct of their offices.
In the case of settlement, such indemnification will not be provided
unless it has been determined -- by a court or other body approving the
settlement or other disposition, or by a majority of disinterested
Trustees, based upon a review of readily available facts, or in a written
opinion of independent counsel -- that such officers or Trustees have not
engaged in wilful misfeasance, bad faith, gross negligence or reckless
disregard of their duties.
SAM also serves as the investment adviser for other investment companies
in addition to the Funds. Several of these investment companies have
investment objectives similar to those of certain Funds. It is therefore
possible that the same securities will be purchased for both a Fund and
another investment company advised by SAM. When two or more funds advised
by SAM are simultaneously engaged in the purchase or sale of the same
security, the prices and amounts will be allocated in a manner considered
by the officers of the funds involved to be equitable to each fund. In
some cases this system could have a detrimental effect on the price or
value of the security as far as a Fund is concerned. In other cases,
however, the ability of a Fund to participate in volume transactions will
produce better executions and prices for the Fund.
For the services and facilities furnished by SAM, each Fund has agreed to
pay an annual fee computed on the basis of the average market value of the
net assets of each Fund ascertained each business day and paid monthly in
accordance with the following schedules. The reduction in fees occurs
only at such time as the respective Fund's net assets reach the dollar
amounts of the break points and applies only to those assets that fall
within the specified range:
<TABLE>
<CAPTION>
Intermediate Treasury Fund
<S> <C>
Net Assets Fee
$0 - $250,000,000 .55 of 1%
$250,000,001 - $500,000,000 .45 of 1%
$500,000,001 - $750,000,000 .35 of 1%
Over $750,000,000 .25 of 1%
- 62 -
<PAGE>
Managed Bond Fund
Net Assets Fee
$0 - $100,000,000 .50 of 1%
$100,000,001 - $250,000,000 .40 of 1%
Over $250,000,000 .35 of 1%
Washington Fund
Net Assets Fee
$0 - $250,000,000 .65 of 1%
$250,000,001 - $500,000,000 .55 of 1%
$500,000,001 - $750,000,000 .45 of 1%
Over $750,000,000 .35 of 1%
Municipal and California Funds
Net Assets Fee
$0 - $100,000,000 .55 of 1%
$100,000,001 - $250,000,000 .45 of 1%
$250,000,001 - $500,000,000 .35 of 1%
Over $500,000,000 .25 of 1%
Money Market Fund
Net Assets Fee
$0 - $250,000,00 .50 of 1%
$250,000,001 - $500,000,000 .40 of 1%
$500,000,001 - $750,000,000 .30 of 1%
Over $750,000,000 .25 of 1%
</TABLE>
Each Fund bears all expenses of its operations not specifically assumed by
SAM. SAM has agreed to reimburse each Fund for the amount by which a
Fund's expenses in any full fiscal year (excluding interest expense,
taxes, brokerage expenses, and extraordinary expenses) exceed the limits
prescribed by any state in which a Fund's shares are qualified for sale.
Presently, the most restrictive expense ratio limitation imposed by any
such state is 2.5% of the first $30 million of a Fund's average daily net
assets, 2.0% of the next $70 million of such assets, and 1.5% of the
remaining net assets. For the purpose of determining whether a Fund is
entitled to reimbursement, the expenses of the Fund are calculated on a
monthly basis. If a Fund is entitled to a reimbursement, that month's
advisory fee will be reduced or postponed, with any adjustment made after
the end of the fiscal year.
The following states the total amounts of compensation paid by each Fund
to SAM for the past three fiscal years or periods (or since its initial
public offering in the case of the Managed Bond Fund):
- 63 -
<PAGE>
<TABLE>
<CAPTION>
Intermediate Treasury Fund
Year Ended
September 30, 1995 September 30, 1994 September 30, 1993
------------------ ------------------ ------------------
<S> <C> <C>
$71,000 $77,000 $ 72,000
</TABLE>
<TABLE>
<CAPTION>
Managed Bond Fund
Year or Period Ended
February 28, 1994
(Initial Public Offering) to
December 31, 1995 December 31, 1994
----------------- ---------------------------
<S> <C>
$22,720 $15,869
</TABLE>
<TABLE>
<CAPTION>
Tax-Exempt Fixed Income Funds
Year Ended
March 31, 1996 March 31, 1995 March 31, 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Municipal Bond Fund $2,020,685 $2,010,754 $2,248,615
California Fund $365,684 $364,000 $455,505
Washington Fund $39,038 $31,475 $18,350
</TABLE>
<TABLE>
- 64 -
<PAGE>
<CAPTION>
Money Market Fund
Year or Period Ended
March 31, 1996 March 31, 1995 March 31, 1994
-------------- -------------- --------------
<S> <C> <C>
$864,914 $840,727 $690,549
</TABLE>
DISTRIBUTION ARRANGEMENTS. SAFECO Securities is the principal underwriter
for each Fund and acts as the distributor of the Advisor Class A and
Advisor Class B shares of each Fund under a Distribution Agreement with
each Trust that requires SAFECO Securities to use its best efforts,
consistent with its other businesses, to sell shares of the Funds. Shares
of the Funds are offered continuously.
Under separate plans of distribution pertaining to the Advisor Class A and
Advisor Class B shares of each Fund adopted by each Trust in the manner
prescribed under Rule 12b-1 under the 1940 Act (each a "Plan"), each
Advisor Class pays fees described in the Prospectus.
Among other things, each Plan provides that (1) SAFECO Securities will
submit to each Trust's Board of Trustees at least quarterly, and the
Trustees will review, reports regarding all amounts expended under the
Plan and the purposes for which such expenditures were made, (2) the Plan
will continue in effect so long as they are approved at least annually and
any material amendment thereto is approved, by each respective Trust's
Board of Trustees, including those Trustees who are not "interested
persons" of each Trust and who have no 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 each Trust shall be committed
to the discretion of each Trustees who are not "interested persons" of
each Trust.
In reporting amounts expended under the Plans to each Trust's Board of
Trustees, SAFECO Securities will allocate expenses attributable to the
sale of each Advisor Class of Fund shares to such Advisor Class based on
the ratio of sales of shares of such Advisor Class to the sales of all
Advisor Classes of shares. Expenses attributable to a specific Advisor
Class will be allocated to that Advisor Class.
- 65 -
<PAGE>
In approving the adoption of each Plan, each Trust's Board of Trustees
determined that the adoption was in the best interests of the Funds'
shareholders.
In the event that a Plan is terminated or not continued with respect to
the Advisor Class A or Advisor Class B shares of any Fund, (i) no fees
would be owed by the Fund to SAFECO Securities with respect to that class,
and (ii) the Fund would not be obligated to pay SAFECO Securities for any
amounts expended under the Plan not previously recovered by SAFECO
Securities.
The Plans comply with rules of the National Association of Securities
Dealers, Inc. which limit the annual asset-based sales charges and service
fees that a mutual fund may impose on a class of shares to .75% and .25%,
respectively, of the average annual net assets attributable to that class.
The rules also limit the aggregate of all front-end, deferred and asset-
based sales charges imposed with respect to a class of shares by a mutual
fund that also charges a service fee to 6.25% of cumulative gross sales of
that class, plus interest at the prime rate plus 1% per annum.
CUSTODIAN. U.S. Bank of Washington, N.A., 1420 Fifth Avenue, Seattle,
Washington 98111, is the custodian of the securities, cash and other
assets of each Fund under an agreement with each Trust.
AUDITOR. Ernst & Young LLP, 999 Third Avenue, Suite 3500, Seattle,
Washington 98104, is the independent auditor of each Fund's financial
statements.
SAFECO Services provides, or through subcontracts makes provision for, all
required transfer agency activity, including maintenance of records of
each Fund's shareholders, records of transactions involving each Fund's
shares, and the compilation, distribution, or reinvestment of income
dividends or capital gains distribution. For the Intermediate Treasury,
Managed Bond and Tax-Exempt Fixed Income Funds, SAFECO Services is paid a
fee for these services equal to $32.00 per shareholder account, but not to
exceed .30% of each Fund's average net assets. For the Money Market Fund,
SAFECO Services is paid a fee of $34.00 per shareholder account, but not
to exceed .30% of each Fund's average net assets. The following tables
shows the fees paid by each Fund to SAFECO Services during the past three
fiscal years.
- 66 -
<PAGE>
<TABLE>
<CAPTION>
Intermediate Treasury Fund
Year Ended*
September 30, 1995 September 30, 1994 September 30, 1993
------------------ ------------------ ------------------
<S> <C> <C>
$33,000 $25,000 $23,000
</TABLE>
<TABLE>
<CAPTION>
Managed Bond Fund
Year or Period Ended*
February 28, 1994
(Initial Public Offering) to
December 31, 1995 December 31, 1994
----------------- ----------------------------
<S> <C>
$309 $96
</TABLE>
<TABLE>
<CAPTION>
Money Market Fund
Year Ended*
March 31, 1996 March 31, 1995 March 31, 1994
-------------- -------------- --------------
<C> <C> <C>
$424,260 $385,495 $308,090
</TABLE>
- 67 -
<PAGE>
<TABLE>
<CAPTION>
Tax-Exempt Fixed Income Funds
Year or Period Ended*
March 31, 1996 March 31, 1995 March 31, 1994
<S> <C> <C> <C>
Municipal Bond Fund $511,005 $531,978 $557,561
California Fund $68,839 $68,840 $66,667
Washington Fund $2,842 $3,219 $2,801
</TABLE>
* Tables reflect fees of $3.10 per shareholder transaction payable
pursuant to the prior fee schedule.
BROKERAGE PRACTICES
SAM places orders for the purchase or sale of each Fund's portfolio
securities based on various factors including:
(1) Which broker gives the best execution (i.e., which broker is able
to trade the securities in the size and at the price desired and
on a timely basis);
(2) Whether the broker is known as being reputable; and,
(3) All other things being equal, which broker has provided useful
research services.
Such research services as are furnished during the year (e.g., written
reports analyzing economic and financial characteristics of industries and
companies, telephone conversations between brokerage security analysts and
members of SAM's staff, and personal visits by such analysts and brokerage
strategists and economists to SAM's office) are used to advise all clients
including the Funds, but not all such research services furnished to SAM
are used by it to advise the Funds. SAM does not pay excess commissions
or mark-ups to any broker or dealer for research services or for any other
reason. Purchases and sales of portfolio securities are transacted with
the issuer or with a primary market maker acting as principal for the
securities on a net basis with no commission being paid by the Funds.
Transactions placed through dealers serving as primary market makers
reflect the spread between the bid and asked prices. Occasionally the
Funds may make purchases of underwritten issues at prices that include
underwriting fees.
- 68 -
<PAGE>
REDEMPTION IN KIND
If a Trust concludes that cash payment upon redemption to a shareholder of
a Fund would be prejudicial to the best interest of other shareholders of
a Fund, a portion of the payment may be made in kind. Each Trust has
elected to be governed by Rule 18f-1 under the 1940 Act, pursuant to which
the Trust must redeem shares tendered by a shareholder of a Fund solely in
cash up to the lesser of $250,000 or 1% of a net asset value of a Fund
during any 90-day period. Any shares tendered by the shareholder in
excess of the above-mentioned limit may be redeemed through distribution
of a Fund's assets. Any securities or other property so distributed in
kind shall be valued by the same method as is used in computing NAV.
Distributions in kind will be made in readily marketable securities,
unless the investor elects otherwise. Investors may incur brokerage costs
in disposing of securities received in such a distribution in kind.
FINANCIAL STATEMENTS
The following financial statements for the Intermediate Treasury Fund and
the report thereon of Ernst & Young LLP, independent auditors, are
incorporated herein by reference to the Taxable Bond Trust's Annual Report
for the year ended September 30, 1995.
Portfolio of Investments as of September 30, 1995
Statement of Assets and Liabilities as of September 30, 1995
Statement of Operations for the Year Ended September 30, 1995
Statement of Changes in Net Assets for the Years Ended September
30, 1995 and September 30, 1994
Notes to Financial Statements
The following unaudited financial statements for the Intermediate Treasury
Fund are incorporated herein by reference to the Taxable Bond Trust's
Semi-Annual Report for the period ending March 31, 1996.
Portfolio of Investments as of March 31, 1996 (unaudited)
Statement of Assets and Liabilities as of March 31, 1996
(unaudited)
Statement of Operations for the Period Ended March 31, 1996
(unaudited)
Statement of Changes in Net Assets for the Period Ended March 31,
1996 (unaudited)
Notes to Financial Statements (unaudited)
The following financial statements for the Managed Bond Fund (formerly
Fixed Income Portfolio) and the report thereon of Ernst & Young LLP,
independent auditors, are incorporated herein by reference to the Managed
Bond Trust's (formerly Institutional Series Trust) Annual Report for the
year ended December 31, 1995:
- 69 -
<PAGE>
Portfolio of Investments as of December 31, 1995
Statement of Assets and Liabilities as of December 31, 1995
Statement of Operations for the Year Ended December 31, 1995
Statement of Changes in Net Assets for the Years Ended December
31, 1995 and December 31, 1994
Notes to Financial Statements
The following unaudited financial statements for the Managed Bond Fund are
incorporated herein by reference to the Managed Bond Trust's Semi-Annual
Report for the period ended June 30, 1996.
Portfolio of Investments as of June 30, 1996 (unaudited)
Statement of Assets and Liabilities as of June 30, 1996
(unaudited)
Statement of Operations for the Period Ended June 30, 1996
(unaudited)
Statement of Changes in Net Assets for the Period Ended June 30,
1996 (unaudited)
Notes to Financial Statements (unaudited)
The following financial statements for the Municipal Bond, California and
Washington Funds and the report thereon of Ernst & Young LLP, independent
auditors, are incorporated herein by reference to the Tax-Exempt Bond
Trust's Annual Report for the year ended March 31, 1996:
Portfolio of Investments as of March 31, 1996
Statement of Assets and Liabilities as of March 31, 1996
Statement of Operations for the Year Ended March 31, 1996
Statement of Changes in Net Assets for the Years Ended March 31,
1996 and March 31, 1995
Notes to Financial Statements
The following financial statements for the Money Market Fund and the
report thereon of Ernst & Young LLP, independent auditors, are
incorporated herein by reference to the Money Market Trust's Annual Report
for the year ended March 31, 1996:
Portfolio of Investments as of March 31, 1996
Statement of Assets and Liabilities as of March 31, 1996
Statement of Operations for the Year Ended March 31, 1996
Statement of Changes in Net Assets for the Years Ended March 31,
1996 and March 31, 1995
Notes to Financial Statements
A copy of each Trusts' Annual Report and the Semi-Annual Report of the
Intermediate Treasury and Managed Bond Funds accompanies this Statement of
Additional Information. Additional copies may be obtained by calling
SAFECO Services at 1-800-463-8791 or by writing to the address on the
Prospectus cover.
- 70 -
<PAGE>
DESCRIPTION OF RATINGS
Ratings by Moody's and S&P represent opinions of those organizations as to
the investment quality of the rated obligations. Investors should realize
these ratings do not constitute a guarantee that the principal and
interest payable under these obligations will be paid when due.
Description of Bond Ratings
Moody's
Investment Grade Descriptions:
-----------------------------
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risk appear
somewhat larger than the Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa -- Bonds which are rated Baa are considered medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Below Investment Grade Descriptions:
-----------------------------------
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection
of interest and principal payments may be very moderate, and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characteristics bonds in this class.
- 71 -
<PAGE>
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest-rated class of bonds. Issues
so rated have extremely poor prospects of ever attaining any real
investment standing.
S&P
Investment Grade Descriptions:
-----------------------------
AAA -- Debt rated "AAA" has the highest rating assigned by S&P's.
Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A -- Debt rated "AA" has a very strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt 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 Descriptions:
-----------------------------------
BB, B, CCC, CC -- Debt rated BB, B, CCC, CC or C is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "C" the highest degree of
speculation. While such debt will likely have some quality and protective
- 72 -
<PAGE>
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB -- Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties
or exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payments. The "BB" rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied "BBB-" rating.
B -- Debt rated "B" has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The "B"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BB" or "BB-" rating.
CCC -- Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial, or economic conditions. It
is not likely to have the capacity to pay interest and repay principal.
The "CCC" rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied "B" or "B-" rating.
C -- The rating "C" is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued.
Cl -- The rating Cl is reserved for income bonds on which no interest is
being paid.
D -- Debt rated D is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes
that such payment will be made during such grace period.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
Description of Commercial Paper Ratings
Moody's
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations with an original maturity not
exceeding one year.
- 73 -
<PAGE>
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.
Description of Ratings for Municipal Notes,
Tax-Exempt Demand Notes and Other Short-Term Obligations
Moody's
Moody's rates municipal notes and other short-term obligations using
Moody's Investment Grade (MIG). A short-term obligation having a demand
feature (a variable-rate demand obligation) will be designated VMIG. This
distinction recognizes differences between short-term credit risk and
long-term credit risk as well as differences between short-term issues
making payments on fixed maturity dates (MIG) and those making payments on
periodic demand (VMIG).
- 74 -
<PAGE>
MIG/VMIG 1: This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
MIG 2/VMIG 2: This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
S&P
Ratings for municipal notes and other short-term obligations are
designated by Standard & Poor's note rating. These ratings reflect
liquidity concerns and market access risks unique to notes. Notes due in
three years or less will likely receive a note rating.
SP-1 Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
Standard & Poor's assigns "dual" ratings to all long-term debt issues that
have as part of their provisions a demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature.
The long-term debt rating symbols are used for bonds to denote the long-
term maturity and the commercial paper rating symbols are used to denote
the put option (for example, "AAA/A-1+"). For the newer "demand notes,"
Standard & Poor's note rating symbols, combined with the commercial paper
symbols, are used (for example, "SP-1+/A-1+").
- 75 -
<PAGE>
SAFECO MANAGED BOND TRUST
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
------- ---------------------------------
(a) Financial Statements:
Financial Highlights for a single No-Load Class share of SAFECO
Managed Bond Fund for the period from February 28, 1994 (Initial
Public Offering) to December 31, 1994, for the fiscal year ended
December 31, 1995 and for the six month period ended June 30,
1996 (unaudited) are included in Part A of this Registration
Statement. Financial Statements for the fiscal year ended
December 31, 1995 and the report thereon of Ernst & Young LLP,
independent auditors, and Financial Statements for the six month
period ended June 30, 1996 (unaudited) are incorporated by
reference into Part B of this Registration Statement and were
filed with the SEC on or about February 29, 1996 and August 31,
1996, respectively, for SAFECO Managed Bond Trust.
Financial Highlights for a single No-Load Class share of (i)
SAFECO Intermediate-Term U.S. Treasury Fund for the period from
September 7, 1988 (Initial Public Offering) to September 30,
1988, and for each of the seven fiscal years ended September 30,
1995 and for the six month period ended March 31, 1996
(unaudited); (ii) SAFECO GNMA Fund for the period from July 15,
1986 (initial public offering) to September 30, 1986, each of
nine fiscal years ended September 30, 1995 and the six month
period ended March 31, 1996 (unaudited); and (iii) SAFECO High-
Yield Bond Fund for the period from September 7, 1988 (initial
public ofering) to September 30, 1988, each of seven fiscal years
ended September 30, 1995 and the six month period ended March 31,
1996 (unaudited), are included in Part A of this Registration
Statement. Financial Statements for each of these Funds for the
fiscal year ended September 30, 1995 and the report thereon of
Ernst & Young LLP, independent auditors, and Financial Statements
for the six month period ended March 31, 1996 (unaudited) are
incorporated by reference into Part B of this Registration
Statement and were filed with the SEC on or about November 30,
1995 and May 30, 1996, respectively, for SAFECO Taxable Bond
Trust.
Financial Highlights for a single No-Load Class share of SAFECO
Money Market Fund for each of the ten fiscal years ended March
31, 1996, are included in Part A of this Registration Statement.
Financial Statements for the fiscal year ended March 31, 1996 and
C-1
<PAGE>
the report thereon of Ernst & Young LLP, independent auditors,
are incorporated by reference into Part B of this Registration
Statement and were filed with the SEC on or about May 30, 1996
for SAFECO Money Market Trust.
Financial Highlights for a single No-Load Class share of (i)
SAFECO Growth Fund, SAFECO Equity Fund and SAFECO Income Fund for
each of the ten fiscal years ended September 30, 1995; (ii)
SAFECO Northwest Fund for the period from February 7, 1991
(Initial Public Offering) to December 31, 1991, the fiscal year
ended December 31, 1992, the nine month period ended September
30, 1993 and the fiscal years ended September 30, 1994 and 1995;
(iii) SAFECO Growth Fund, SAFECO Equity Fund, SAFECO Income Fund
and SAFECO Northwest Fund for the period ended March 31, 1996
(unaudited); and (iv) SAFECO Balanced Fund, SAFECO International
Fund and SAFECO Small Company Fund for the period ended June 30,
1996 (unaudited), are included in Part A of this Registration
Statement.
Financial Highlights for a single No-Load Class share of (i)
SAFECO Municipal Bond Fund, SAFECO California Tax-Free Income
Fund for each of the ten fiscal years ended March 31, 1996; (ii)
SAFECO Washington State Municipal Bond Fund for the period from
March 18, 1993 (Initial Public Offering) to March 31, 1993 and
for each of three fiscal years ended March 31, 1996 are included
in Part A of this Registration Statement. Financial Statements
for each of these Funds for the fiscal year ended March 31, 1996
and the report thereon of Ernst & Young LLP, independent
auditors, are incorporated by reference into Part B of this
Registration Statement and were filed with the SEC on or about
May 30, 1996 for SAFECO Tax-Exempt Bond Trust.
Financial Statements from the Registrant's Annual and Semi-Annual
Reports are filed as Exhibit 12.
(b) Exhibits:
Exhibit
Number Description of Document Page
------- ----------------------- ----
(1) Trust Instrument/Certificate of Trust *
Amendment to Certificate of Trust ( f i l e d
herewith)
(2) Bylaws *
(3) Inapplicable
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<PAGE>
Exhibit
Number Description of Document Page
------- ----------------------- ----
(4) Form of Stock Certificate ( f i l e d
herewith)
(5) Investment Advisory and Management Contract *
(6) Form of Distribution Agreement ****
Form of Selling Dealer Agreement ****
(7) Inapplicable
(8) Custody Agreement with U.S. Bank *
(9) Form of Transfer Agent Agreement ****
(10) Opinion and Consent of Counsel for (filed
No-Load Class, Advisor Class A and herewith)
Advisor Class B
(11) Consent of Independent Auditors ( f i l e d
herewith)
(12) Registrant's Annual Report for the Year Ended +
December 31, 1995 Including Financial Statements
Registrant's Semi-Annual Report for +
the Period Ended June 30, 1996 Including
(Unaudited) Financial Statements
Annual Report for SAFECO Taxable Bond Trust for ++
the Year Ended September 30, 1995 Including
Financial Statements
Semi-Annual Report for SAFECO Taxable ++
Bond Trust for the Period Ended March 31, 1996
Including (Unaudited) Financial Statements
Annual Report for SAFECO Money Market Trust +++
for the Year Ended March 31, 1996 Including
Financial Statements
Annual Report for SAFECO Tax-Exempt Bond Trust +++
for the Year Ended March 31, 1996 Including
Financial Statements
(13) Stock Purchase Agreement *
Additional Share Purchase Agreement *
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<PAGE>
Exhibit
Number Description of Document Page
------- ----------------------- ----
(14) Prototype 401(k)/Profit Sharing Plan **
(15) Rule 12b-1 Plan (Advisor Class A) ****
Rule 12b-1 Plan (Advisor Class B) ****
(16) Calculation of Performance Information- ***
No-Load Class
Calculation of Performance Information- ****
Advisor Class A
Calculation of Performance Information- ****
Advisor Class B
(17) Financial Data Schedule ( f i l e d
herewith)
(18) Rule 18f-3 Plan ****
----------------
* Filed as an exhibit to Post-Effective Amendment No. 3 filed with
the SEC on April 28, 1995.
** Filed as an exhibit to Post-Effective Amendment No. 8 of SAFECO
Common Stock Trust filed with the SEC on November 17, 1995.
*** Filed as an exhibit to Post-Effective Amendment No. 4 filed with
the SEC on April 29, 1996.
**** Filed as an exhibit to Post-Effective Amendment No. 5 filed with
the SEC on July 31, 1996.
+ Registrant's Annual and Semi-Annual (Unaudited) Reports were
filed with the SEC on or about February 29, 1996 and August 31,
1996, respectively.
++ Annual and Semi-Annual (Unaudited) Reports for SAFECO Taxable
Bond Trust were filed with the SEC on or about November 30, 1995
and May 30, 1996, respectively.
+++ Annual Reports for SAFECO Money Market Trust and SAFECO Tax-
Exempt Bond Trust were filed with the SEC on or about May 30,
1996.
Item 25. Persons Controlled By or Under Common Control With Registrant
------- -------------------------------------------------------------
SAFECO Corporation, a Washington corporation, owns 100% of SAFECO Asset
Management Company (SAM), SAFECO Services Corporation (SAFECO Services)
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<PAGE>
and SAFECO Securities, Inc. (SAFECO Securities), each a Washington
corporation. SAM is the investment advisor, SAFECO Services is the
transfer agent and SAFECO Securities is the principal underwriter for each
of the SAFECO Mutual Funds. The SAFECO Mutual Funds consist of seven
Delaware business trusts: SAFECO Common Stock Trust, SAFECO Taxable Bond
Trust, SAFECO Tax-Exempt Bond Trust, SAFECO Advisor Series Trust, SAFECO
Money Market Trust, SAFECO Managed Bond Trust (formerly SAFECO
Institutional Series Trust) and SAFECO Resource Series Trust. The SAFECO
Common Stock Trust consists of seven mutual funds: SAFECO Growth Fund,
SAFECO Equity Fund, SAFECO Income Fund, SAFECO Northwest Fund, SAFECO
International Stock Fund, SAFECO Balanced Fund and SAFECO Small Company
Stock Fund. The SAFECO Taxable Bond Trust consists of three mutual funds:
SAFECO Intermediate-Term U.S. Treasury Fund, SAFECO GNMA Fund and SAFECO
High-Yield Bond Fund. The SAFECO Tax-Exempt Bond Trust consists of five
mutual funds: SAFECO Intermediate-Term Municipal Bond Fund, SAFECO Insured
Municipal Bond Fund, SAFECO Municipal Bond Fund, SAFECO California Tax-
Free Income Fund and SAFECO Washington State Municipal Bond Fund. The
SAFECO Advisor Series Trust consists of eight mutual funds: Advisor Equity
Fund, Advisor Northwest Fund, Advisor Intermediate-Term Treasury Fund,
Advisor GNMA Fund, Advisor U.S. Government Fund, Advisor Municipal Bond
Fund, Advisor Intermediate-Term Municipal Bond Fund and Advisor Washington
Municipal Bond Fund. The SAFECO Money Market Trust consists of two mutual
funds: SAFECO Money Market Fund and SAFECO Tax-Free Money Market Fund.
The SAFECO Managed Bond Trust consists of one mutual fund: Managed Bond
Fund (formerly SAFECO Fixed Income Portfolio). The SAFECO Resource Series
Trust consists of five mutual funds: Equity Portfolio, Growth Portfolio,
Northwest Portfolio, Bond Portfolio and Money Market Portfolio.
SAFECO Corporation, a Washington corporation, owns 100% of the following
Washington corporations: SAFECO Insurance Company of America, General
Insurance Company of America, First National Insurance Company of America,
SAFECO Life Insurance Company of America, SAFECO Assigned Benefits Service
Company, SAFECO Administrative Services, Inc., SAFECO Properties Inc.,
SAFECO Credit Company, Inc., SAFECO Asset Management Company, SAFECO
Securities, Inc., SAFECO Services Corporation, SAFECO Trust Company and
General America Corporation. SAFECO Corporation owns 100% of SAFECO
National Insurance Company, a Missouri corporation, and SAFECO Insurance
Company of Illinois, an Illinois corporation. SAFECO Corporation owns 20%
of Agena, Inc., a Washington corporation. SAFECO Insurance Company of
America owns 100% of SAFECO Surplus Lines Insurance Company, a Washington
corporation, and Market Square Holding, Inc., a Minnesota corporation.
SAFECO Life Insurance Company owns 100% of SAFECO National Life Insurance
Company, a Washington corporation, and First SAFECO National Life
Insurance Company of New York, a New York 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, and Talbot Financial Corporation, a Washington corporation.
F.B. Beattie & Co., Inc. owns 100% of F.B. Beattie Insurance Services,
Inc., a California corporation. General America Corp. of Texas is
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<PAGE>
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 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 September 13, 1996, Registrant had 4 shareholders of record in its No-
Load Class Shares of Managed Bond Fund. As of September 13, 1996, there
were no shareholders of record of Advisor Class A and Advisor Class B
shares of Managed Bond Fund.
Item 27. Indemnification
------- ---------------
Under the Trust Instrument of the Registrant, the Registrant's trustees,
officers, employees and agents are indemnified against certain
liabilities, subject to specified conditions and limitations.
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
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<PAGE>
or she becomes involved as a party or otherwise by virtue of his or her
being, or having been, a trustee, officer, employee or agent and against
amounts paid or incurred by him or her in the settlement thereof. As used
in this paragraph, "claim," "action," "suit" or "proceeding" shall apply
to all claims, actions, suits or proceedings (civil, criminal or other,
including appeals), actual or threatened, and the words "liability" and
"expenses" shall include, without limitation, attorneys' fees, costs,
judgements, amounts paid in settlement, fines, penalties and other
liabilities.
No indemnification will be provided to a trustee, officer, employee or
agent: (i) who shall have been adjudicated by a court or body before which
the proceeding was brought (a) to be liable to the Registrant or its
shareholders by reason of willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of his or her
office, or (b) not to have acted in good faith in the reasonable belief
that his or her action was in the best interest of the Registrant; or
(ii) in the event of settlement, unless there has been a determination
that such trustee, officer, employee or agent did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office; (a) by the court or
other body approving the settlement, (b) by the vote of at least a
majority of a quorum of those trustees who are neither interested persons,
as that term is defined by the Investment Company Act of 1940, of the
Registrant nor are the parties to the proceeding based upon a review of
readily available facts (as opposed to a full trial type inquiry); or (c)
by written opinion of independent legal counsel based upon a review of
readily available facts (as opposed to a full trial type inquiry).
To the maximum extent permitted by applicable law, expenses incurred in
connection with the preparation and presentation of a defense to any
claim, action, suit or proceeding of the character described above may be
paid by the Registrant or applicable Series from time to time prior to
final disposition thereof upon receipt of an undertaking by or on behalf
of such trustee, officer, employee or agent that such amount will be paid
over by him or her to the Registrant or the applicable Series if it is
ultimately determined that he or she is not entitled to indemnification
under the Trust Instrument; provided, however, that either (i) such
trustee, officer, employee or agent shall have provided appropriate
security for such undertaking, (ii) the Registrant is insured against such
losses arising out of such advance payments or (iii) either a majority of
the trustees who are neither interested persons, as that term is defined
by the Investment Company Act of 1940, of the Registrant nor parties to
the proceeding, or independent legal counsel in a written opinion, shall
have determined, based on a review of readily available facts (as opposed
to a full trial type inquiry), that there is reason to believe that such
trustee, officer, employee or agent, will not be disqualified from
indemnification under Registrant's Trust Instrument.
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
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<PAGE>
statutes or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in said Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by
a trustee, officer, employee or agent of the Registrant in the successful
defense of any such action, suit or proceeding) is asserted by such a
trustee, officer, employee or agent in connection with the shares of any
series of the Registrant, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in said Act
and will be governed by the final adjudication of such issue.
Under an agreement with its distributor ("Distribution Agreement"),
Registrant has agreed to indemnify, defend and hold the distributor, the
distributor's several directors, officers and employees, and any person
who controls the distributor within the meaning of Section 15 of the 1933
Act, free and harmless from and against any and all claims, demands,
liabilities and expenses (including the cost of investigating or defending
such claims, demands or liabilities and any counsel fees incurred in
connection therewith) which the distributor, its directors, officers or
employees, or any such controlling person may incur, under the 1933 Act or
under common law or otherwise, arising out of or based upon any alleged
untrue statement of a material fact contained in the Registration
Statement or arising out of or based upon any alleged omission to state a
material fact required to be stated or necessary to make the Registration
Statement not misleading.
In no event shall anything contained in the Distribution Agreement be
construed so as to protect the distributor against any liability to the
Registrant or its shareholders to which the distributor would otherwise be
subject by reason of willful misfeasance, bad faith, or gross negligence
in the performance of its duties, or by reason of its reckless disregard
of its obligations and duties under the Distribution Agreement, and
further provided that the Registrant shall not indemnify the distributor
for conduct set forth in this paragraph.
Under an agreement with its transfer agent, Registrant has agreed to
indemnify and hold the transfer agent harmless against any losses, claims,
damages, liabilities or expenses (including reasonable attorneys' fees and
expenses) resulting from: (1) any claim, demand, action or suit brought by
any person other than the Registrant, including by a shareholder, which
names the transfer agent and/or the Registrant as a party, and is not
based on and does not result from the transfer agent's willful
misfeasance, bad faith or negligence or reckless disregard of duties, and
arises out of or in connection with the transfer agent's performance
hereunder; or (2) any claim, demand, action or suit (except to the extent
contributed to by the transfer agent's willful misfeasance, bad faith or
negligence or reckless disregard of duties) which results from the
negligence of the Registrant, or from the transfer agent acting upon any
instruction(s) reasonably believed by it to have been executed or
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<PAGE>
communicated by any person duly authorized by the Registrant, or as a
result of the transfer agent acting in reliance upon advice reasonably
believed by the transfer agent to have been given by counsel for the
Registrant, or as a result of the transfer agent acting in reliance upon
any instrument or stock certificate reasonably believed by it to have been
genuine and signed, countersigned or executed by the proper person.
Item 28. Business and Other Connections of Investment Adviser
------- ----------------------------------------------------
The investment adviser to Registrant, SAM, serves as an adviser to: (a)
thirty-one series (portfolios) of seven registered investment companies,
including five series of an investment company that serves as an
investment vehicle for variable insurance products and (b) a number of
pension funds not affiliated with SAFECO Corporation or its affiliates.
The directors and officers of SAM serve in similar capacities with SAFECO
Corporation or its affiliates. The information set forth under
"Investment Advisory and Other Services" in the Registrant's Statement of
Additional Information is incorporated by reference.
Item 29. Principal Underwriter
------- ---------------------
(a) SAFECO Securities, Inc., the principal underwriter for
Registrant, also acts as the principal underwriter for each
series of the SAFECO Common Stock Trust, SAFECO Tax-Exempt Bond
Trust, SAFECO Taxable Bond Trust, SAFECO Money Market Trust,
SAFECO Resource Series Trust and SAFECO Advisor Series Trust. In
addition SAFECO Securities 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" of the Registrant's Statement of Additional Information
is incorporated by reference.
Item 30. Location of Accounts and Records
------- --------------------------------
U.S. Bank of Washington, N.A., 1420 Fifth Avenue, Seattle, Washington
98101 maintains physical possession of the accounts, books and documents
of the Registrant relating to its activities as custodian of the
Registrant. SAFECO Asset Management Company, SAFECO Plaza, Seattle,
Washington 98185, maintains physical possession of all other accounts,
books or documents of the Registrant required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder.
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Item 31. Management Services
------- -------------------
Inapplicable.
Item 32. Undertakings
------- ------------
Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all
of the requirements for effectiveness of this Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned thereto duly authorized, in the City of Seattle, and State of
Washington on the 30th day of September, 1996.
SAFECO MANAGED BOND TRUST
By /s/ David F. Hill
------------------------
David F. Hill, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ---- ----
<S> <C> <C>
/s/ David F. Hill++ President 9/30/96
---------------------------- Trustee
David F. Hill Principal Executive Officer
RONALD L. SPAULDING* Vice President and Treasurer 9/30/96
----------------------------
Ronald L. Spaulding
NEAL A. FULLER* Vice President, Controller 9/30/96
---------------------------- and Assistant Secretary
Neal A. Fuller
/s/ Boh A. Dickey++ Chairman and Trustee 9/30/96
----------------------------
Boh A. Dickey
BARBARA J. DINGFIELD* Trustee 9/30/96
----------------------------
Barbara J. Dingfield
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Name Title Date
---- ---- ----
RICHARD W. HUBBARD*++ Trustee 9/30/96
----------------------------
Richard W. Hubbard
RICHARD E. LUNDGREN* Trustee 9/30/96
----------------------------
Richard E. Lundgren
LARRY L. PINNT* 9/30/96
---------------------------- Trustee
Larry L. Pinnt
JOHN W. SCHNEIDER* Trustee 9/30/96
---------------------------
John W. Schneider
</TABLE>
*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.
POWER OF ATTORNEY
SAFECO INSTITUTIONAL SERIES TRUST, a Delaware business trust (the
"Trust"), and each of its undersigned officers and trustees, hereby
nominates, constitutes and appoints Boh A. Dickey and David F. Hill (with
full power to each of them to act alone) its/his/her true and lawful
attorney-in-fact and agent, for it/him/her and on its/his/her behalf and
in its/his/her name, place and stead in any and all capacities, to make,
execute and sign any and all amendments to the Trust's registration
statement on Form N-1A under the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, as well as any and all
registration statements on Form N-4, and to file with the Securities and
Exchange Commission and any other regulatory authority having jurisdiction
over the offer and sale of shares of beneficial interest of the Trust, any
such amendment or registration statement and any and all supplements
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<PAGE>
thereto or to any prospectus or statement of additional information
forming a part of the registration statement, as well as any and all
exhibits and other documents necessary or desirable to the amendment or
supplement process, granting to such attorneys and each of them, full
power and authority to do and perform each and every act requisite and
necessary and/or appropriate as fully and with all intents and purposes as
the Trust itself and the undersigned officers and trustees themselves
might or could do.
IN WITNESS WHEREOF, SAFECO INSTITUTIONAL SERIES TRUST has caused this
power of attorney to be executed in its name by its President and attested
by its Secretary, and the undersigned officers and trustees have each
executed such power of attorney, on this 15th day of January, 1995.
SAFECO INSTITUTIONAL SERIES TRUST*
By: /S/DAVID F. HILL
-------------------------
David F. Hill
President
ATTEST:
/s/NEAL A. FULLER
--------------------
Neal A. Fuller
Assistant Secretary
(Signatures Continue on Next Page)
C-13
<PAGE>
Name Title
---- -----
/S/DAVID F. HILL President
------------------------ Principal Executive Officer
David F. Hill
/S/ RONALD L. SPAULDING Vice President and Treasurer
-------------------------
Ronald L. Spaulding
/S/NEAL A. FULLER Vice President, Controller
------------------------- and Assistant Secretary
Neal A. Fuller
/S/Boh A. Dickey Chairman and Trustee
--------------------------
Boh A. Dickey
/S/BARBARA J. DINGFIELD Trustee
--------------------------
Barbara J. Dingfield
/S/RICHARD W. HUBBARD Trustee
--------------------------
Richard W. Hubbard
/S/RICHARD E. LUNDGREN Trustee
--------------------------
Richard E. Lundgren
/S/LARRY L. PINNT Trustee
---------------------------
Larry L. Pinnt
/S/JOHN W. SCHNEIDER Trustee
---------------------------
John W. Schneider
/s/ L.D. McCLEAN Trustee
---------------------------
L.D. McClean
*Effective September 30, 1996, the name of the Trust was changed from
SAFECO Institutional Series Trust to SAFECO Managed Bond Trust.
C-14
<PAGE>
Registration Nos. 33-47859, 811-6667
=======================================================================
EXHIBITS
to
FORM N-1A
REGISTRATION STATEMENT
POST-EFFECTIVE AMENDMENT NO. 6
Under
The Securities Act of 1933
and
AMENDMENT NO. 9
under
The Investment Company Act of 1940
_______________
SAFECO Managed Bond Trust*
(Exact Name of Registrant as Specified in Charter)
SAFECO Plaza
Seattle, Washington 98185
(Address of Principal Executive Offices)
206-545-5269
(Registrant's Telephone Number, including Area Code)
========================================================
*Effective September 30, 1996, the Registrant's name is changed from
SAFECO Institutional Series Trust to SAFECO Managed Bond Trust.
C-15
<PAGE>
SAFECO MANAGED BOND TRUST
Form N-1A
Post-Effective Amendment No. 6
Exhibit Index
Exhibit
Number Description of Document Page
------- ----------------------- ----
(27.1) Financial Data Schedule (filed
herewith)
(99.1) Amendment to Certificate of Trust (filed
herewith)
(99.4) Form of Stock Certificate (filed
herewith)
(99.10) Opinion and Consent of Counsel for (filed
No-Load Class, Advisor Class A and herewith)
Advisor Class B
(99.11) Consent of Independent Auditors (filed
herewith)
C-16
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000887437
<NAME> SAFECO INSTITUTIONAL SERIES TRUST
<SERIES>
<NUMBER> 1
<NAME> SAFECO IST - FIXED INCOME PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 4,051
<INVESTMENTS-AT-VALUE> 4,051
<RECEIVABLES> 72
<ASSETS-OTHER> 16
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4,139
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 25
<TOTAL-LIABILITIES> 25
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,117
<SHARES-COMMON-STOCK> 493
<SHARES-COMMON-PRIOR> 513
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 4,114
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 124
<OTHER-INCOME> 0
<EXPENSES-NET> 25
<NET-INVESTMENT-INCOME> 99
<REALIZED-GAINS-CURRENT> (3)
<APPREC-INCREASE-CURRENT> (207)
<NET-CHANGE-FROM-OPS> (111)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (99)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1
<NUMBER-OF-SHARES-REDEEMED> (32)
<SHARES-REINVESTED> 11
<NET-CHANGE-IN-ASSETS> (383)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<PAGE>
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 10
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 25
<AVERAGE-NET-ASSETS> 4,262
<PER-SHARE-NAV-BEGIN> 8.77
<PER-SHARE-NII> 0.20
<PER-SHARE-GAIN-APPREC> (0.42)
<PER-SHARE-DIVIDEND> (0.20)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.35
<EXPENSE-RATIO> 1.17
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
<PAGE>
</TABLE>
<PAGE>
AMENDMENT TO
CERTIFICATE OF TRUST
OF
SAFECO INSTITUTIONAL SERIES TRUST
This Amendment to the Certificate of Trust of SAFECO Institutional Series
Trust, a business trust registered under the Investment Company Act of
l940, as amended, filed in accordance with the provisions of the Delaware
Business Trust Act (Del. Code Ann. tit. 12, Section 3801 et seq.) sets
forth the following:
1. The name of the trust is: SAFECO Institutional Series
Trust (the "Trust").
2. Amendment: The name of the Trust is hereby amended to
SAFECO Managed Bond Trust.
3. Effective Date of Amendment: September 30, 1996.
4. Notice is hereby given that the Trust consists of one or
more series. The debts, liabilities, obligations and
expenses incurred, contracted for or otherwise existing
with respect to a particular series of the Trust shall be
enforceable against the assets of such series only and
not against the assets of the Trust generally or any
other series.
This Amendment to the Certificate of Trust is executed this 19th
day of September, 1996, in Seattle, Washington, upon the penalties of
perjury and constitutes the oath or affirmation that the facts stated
above are true to the undersigned trustee's belief or knowledge.
/s/ David F. Hill
--------------------------
David F. Hill, as Trustee
and not individually
<PAGE>
State of Delaware
Office of the Secretary of State
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE,
DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE
CERTIFICATE OF AMENDMENT OF "SAFECO INSTITUTIONAL SERIES TRUST". CHANGING
ITS NAME FROM "SAFECO INSTITUTIONAL SERIES TRUST" TO "SAFECO MANAGED BOND
TRUST", FILED IN THIS OFFICE ON THE TWENTIETH DAY OF SEPTEMBER, A.D. 1996,
AT 10:30 O'CLOCK A.M.
/s/ Edward J. Freel
--------------------
Edward J. Freel,
Secretary of State
2336717 8100 AUTHENTICATION: 8112550
960273028 DATE: 09-20-96
- 2 -
<PAGE>
<PAGE>
[LOGO]
SAFECO(REGISTERED TRADEMARK)
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE
SAFECO
MANAGED BOND FUND
A SERIES OF SAFECO MANAGED BOND TRUST
SEATTLE, WASHINGTON
This is to certify that, [CUSIP 78643J 206]
SEE REVERSE FOR
CERTAIN DEFINITIONS
is the owner of of the fully paid and non-
assessable shares of beneficial interest of the SAFECO Managed Bond Fund,
Class A, a series of the SAFECO Bond Trust, with par value of $.001,
transferable on the books of the Trust in person or by duly authorized
attorney upon surrender of this certificate properly endorsed. This
certificate and the shares represented hereby are received and held
subject to the provisions of the Trust Instrument and the Bylaws of the
trust, as amended. In Witness Whereof, SAFECO MANAGED BOND TRUST has
caused this certificate to be signed by its duly authorized officers.
This certificate is not valid until countersigned by the Transfer Agent.
Dated:
SAFECO MANAGED BOND TRUST
/s/ Neal A. Fuller SAFECO MANAGED BOND TRUST /s/ David F. Hill
Neal A. Fuller, Assistant SecretaryBUSINESS TRUST David F. Hill, President
SEAL
DELAWARE, 1996
<PAGE>
DEFINITIONS
The following abbreviations, when used in the inscription of the face of
this certificate, shall be construed as though they were written out in
full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of ______ Custodian _____
survivorship and not as tenants' under Uniform Gifts to
in common Minors Act____________
(State)
For Value received - hereby sell, assign and transfer unto
________________________________________________________________________
________________________________________________________________________
(NAME AND ADDRESS OF TRANSFEREE SHOULD BE PRINTED OR TYPEWRITTEN)
________________________________________________________________________
________________________________________________________________________
__________________________________________________________ Shares of the
Beneficial Interest represented by the within Certificate and do hereby
irrevocably constitute and appoint ____________________ Attorney to
transfer the said shares on the books of the within named Trust, with full
power of substitution in the premises.
Dated ________________
_______________________ ______________________________
Signature(s) Guaranteed Notice: The signature to this
assignment must correspond with
the name(s) as written upon the
face of the certificate in every
particular without alteration or
enlargement or any change
whatever.
<PAGE>
<PAGE>
KIRKPATRICK & LOCKHART LLP
1251 Avenue of the Americas
New York, New York 10020-1104
Dana L. Platt
(212) 536-3904
September 27, 1996
SAFECO Institutional Series Trust
SAFECO Plaza
Seattle, Washington 98185
Dear Sir or Madam:
You have requested our opinion regarding certain matters in
connection with:
1. The issuance of the No-Load Class shares of beneficial
interest of the Fixed-Income Portfolio ("Portfolio"); and
2. The issuance of the Advisor Class A and Advisor Class B
shares of beneficial interest of SAFECO Institutional
Series Trust ("Trust") in the Portfolio.1
We have, as special counsel, participated in the preparation of
the Trust's organizational documents and in various other matters
concerning the Trust. We have examined copies, either certified or
otherwise proved to be genuine, of the Trust Instrument dated May 13, 1993
("Trust Instrument") and By-Laws of the Trust, the minutes of meetings of
the trustees, and other documents relating to the organization and
operation of the Trust and the Portfolio, and we generally are familiar
with its business. Based on the foregoing, it is our opinion that the
unlimited number of unissued shares of each above-mentioned Class of the
specified Portfolio, which are currently being registered, may be legally
and validly issued from time to time in accordance with the Trust
Instrument and By-Laws of the Trust and subject to compliance with the
Securities Act of 1933, the Investment Company Act of 1940, and applicable
state laws regulating the offer and sale of securities; and when so
issued, such Classes of shares will be legally issued, fully paid, and
nonassessable by the Trust or any Portfolio.
1 We note that effective September 30, 1996, the name of the Trust
has been changed to SAFECO Managed Bond Trust and the name of the
Portfolio has been changed to SAFECO Managed Bond Fund.
<PAGE>
SAFECO Institutional Series Trust
September 27, 1996
Page 2
The Trust is a business trust established pursuant to the
Delaware Business Trust Act ("Delaware Act"). The Delaware Act provides
that a shareholder of the Trust is entitled to the same limitation of
personal liability extended to shareholders of for-profit corporations.
To the extent that the Trust or any of its shareholders become subject to
the jurisdiction of courts in states which do not have statutory or other
authority limiting the liability of business trust shareholders, such
courts might not apply the Delaware Act and could subject Trust
shareholders to liability.
To guard against this risk, the Trust Instrument: (i) requires
that every written obligation of the Trust contain a statement that such
obligation may only be enforced against the assets of the Trust; however,
the omission of such a disclaimer will not operate to create personal
liability for any shareholder; and (ii) provides for indemnification out
of Trust property of any shareholder held personally liable for the
obligations of the Trust. Thus, the risk of a Trust shareholder incurring
financial loss beyond his or her investment because of shareholder
liability is limited to circumstances in which: (i) a court refuses to
apply Delaware law; (ii) no contractual limitation of liability was in
effect; and (iii) the Trust itself would be unable to meet its
obligations.
We hereby consent to the filing of this opinion in connection
with Post-Effective Amendment No. 6 to the Trust's Registration Statement
on Form N-1A (File Nos. 2-25272 and 811-3347) to be filed with the
Securities and Exchange Commission.
Sincerely yours,
KIRKPATRICK & LOCKHART LLP
By:
/s/ Dana L. Platt
-----------------
Dana L. Platt
<PAGE>
<PAGE>
EXHIBIT NO. 99.11
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions
"Financial Highlights", "Investment Advisory and Other Services" and
"Financial Statements" in Post-Effective Amendment No. 6 to the
registration statement (Form N-1A, No. 33-47859) and related Prospectuses
of SAFECO Institutional Series Trust*.
We also consent to the incorporation by reference therein of our
report dated January 26, 1996 with respect to the financial statements of
SAFECO Institutional Series Trust as of and for the year ended December
31, 1995 included in its 1995 Annual Report filed with the Securities and
Exchange Commission.
Seattle, Washington
September 26, 1996
*Effective September 30, 1996, the Trust's name is changed from
SAFECO Institutional Series Trust to SAFECO Managed Bond Trust.
<PAGE>
