<PAGE>
Registration No. 33-47859/811-6667
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. / /
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Post-Effective Amendment No. 11 /X/
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 14 /X/
----------------
(Check appropriate box or boxes.)
SAFECO Managed Bond Trust
-------------------------
(Exact Name of Registrant as Specified in Charter)
10865 Willows Road NE, Redmond, WA 98052
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(Address of Principal Executive Offices) ZIP Code
Registrant's Telephone Number, including
Area Code: 425-376-8212
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Name and Address of Agent for Service
-------------------------------------
DAVID F. HILL
10865 Willows Road NE
Redmond, WA 98052
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 April 30, 1999 pursuant to paragraph (b)
- ----
60 days after filing pursuant to paragraph (a)(1)
- ----
on April 30, 1999 pursuant to paragraph (a)(1)
- ----
75 days after filing pursuant to paragraph (a)(2)
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on pursuant to paragraph (a)(2) of Rule 485
- ---- ---------------
<PAGE>
SAFECO MUTUAL FUNDS
-------------------
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
SAFECO GNMA FUND
SAFECO HIGH-YIELD BOND FUND
SAFECO MANAGED BOND FUND
SAFECO CALIFORNIA TAX-FREE INCOME FUND
SAFECO MUNICIPAL BOND FUND
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
SAFECO INTERMEDIATE-TERM MUNICIPAL BOND FUND
SAFECO INSURED MUNICIPAL BOND FUND
SAFECO MONEY MARKET FUND
SAFECO TAX-FREE MONEY MARKET FUND
PROSPECTUS
-----------------
NO-LOAD CLASS
APRIL 30, 1999
AS WITH ALL MUTUAL FUND SHARES, THE SECURITIES AND EXCHANGE COMMISSION
HAS NOT APPROVED OR DISAPPROVED THE SHARES OFFERED IN THIS PROSPECTUS
OR DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANYONE
WHO TELLS YOU OTHERWISE IS COMMITTING A CRIME.
[LOGO]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
TAXABLE BOND FUNDS
SAFECO Intermediate-Term U.S. Treasury Fund............ 1
SAFECO GNMA Fund....................................... 5
SAFECO High-Yield Bond Fund............................ 10
SAFECO Managed Bond Fund............................... 15
TAX-EXEMPT BOND FUNDS
SAFECO California Tax-Free Income Fund................. 20
SAFECO Municipal Bond Fund............................. 24
SAFECO Washington State Municipal Bond Fund............ 29
SAFECO Intermediate-Term Municipal Bond Fund........... 33
SAFECO Insured Municipal Bond Fund..................... 38
MONEY MARKET FUNDS
SAFECO Money Market Fund............................... 42
SAFECO Tax-Free Money Market Fund...................... 46
Additional Fund Facts.................................... 50
Management............................................... 52
Portfolio Managers....................................... 53
Financial Highlights..................................... 54
Fund Distributions and Tax Considerations................ 66
YOUR INVESTMENT.......................................... 69
How We Calculate the Value of Your Shares.............. 69
How We Value a Fund's Investments...................... 69
Opening and Maintaining Your Account................... 70
Purchasing Your Shares................................. 73
Selling Your Shares.................................... 78
Exchanging Shares from One Fund to Another............. 85
Maintaining Your Account............................... 89
For More Information................................... 92
</TABLE>
-I-
<PAGE>
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
OBJECTIVE
The SAFECO Intermediate-Term U.S. Treasury Fund seeks to provide as high a level
of current income as is consistent with the preservation of capital.
PRINCIPAL INVESTMENT STRATEGIES
The Intermediate-Term U.S. Treasury Fund will invest, during normal market
conditions, at least 65% of its total assets in direct obligations of the U.S.
Treasury, such as U.S. Treasury bills, notes and bonds. The Fund may also invest
in STRIPS that are direct obligations of the U.S. Treasury.
- ----------------------------
"STRIPS" stands for Separate Trading of Registered Interest and Principal of
Securities. These are Treasury securities that have had their coupons and
principal repayments separated into what effectively become zero-coupon Treasury
bonds.
- --------------------------------
The Fund will maintain an average dollar-weighted maturity of between 3 and 10
years; however, individual obligations held by the Fund may have maturities
outside that range.
The Fund may invest up to 35% of its total assets in other U.S. government
securities and corporate debt securities. Other U.S. government securities
include:
- - Securities supported by the full faith and credit of the U.S. government that
are not direct obligations of the U.S. Treasury, such as securities issued by
the Government National Mortgage Association (GNMA).
- - 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).
- - Securities supported solely by the creditworthiness of the issuer, such as
securities issued by the Tennessee Valley Authority (TVA).
Corporate debt securities include bonds that 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, are of comparable quality to securities rated A or higher.
1
<PAGE>
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND, CONTINUED
Since the Fund invests predominantly in intermediate-term U.S. Treasury
securities, trading decisions focus on the maturity of the bonds under
consideration. In a falling interest rate environment the Fund buys longer
maturity bonds. In a rising interest rate environment, the Fund buys shorter
maturity bonds. The Fund may increase its allocation to U.S. government agency
bonds when the yield premium, compared with U.S. Treasuries, is attractive.
After choosing the desired maturity, the Fund attempts to exploit pricing
inefficiencies and purchase the cheapest securities in a maturity range or sell
the more expensive securities in a maturity range. The advisor may also sell
securities to realign the overall maturity of the portfolio or to raise cash to
meet shareholder redemptions.
PRINCIPAL RISK FACTORS
Loss of money is a risk of investing in the Intermediate-Term U.S. Treasury
Fund. The Fund is subject to interest rate risk. Generally, when market interest
rates rise, the price of the Fund's debt securities will fall, and when market
interest rates fall, the price of the Fund's debt securities will rise. Such
changes in price generally will be greater the longer the maturity of the debt
security.
Due to the conservative nature of this Fund, it may be suitable for you if you
want higher current income than a stable-priced money market fund, but with
greater price stability than a longer-term bond fund.
PERFORMANCE
The following bar chart and table provide some indication of the risks of
investing in the Intermediate-Term U.S. Treasury Fund by showing how the Fund's
performance has varied from year to year and how its performance compares over
time to that of the Merrill Lynch Intermediate-Term Treasury Index, a widely
recognized index of intermediate-term Treasury securities. As with all mutual
funds, past performance is not a prediction of future performance.
Total return is a measure of investment performance over a period of time. It
includes dividends and capital gain distributions, as well as share price gain
or loss.
2
<PAGE>
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND, CONTINUED
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
12/31/89 10.31
12/31/90 7.16
12/31/91 13.52
12/31/92 6.57
12/31/93 10.84
12/31/94 -3.61
12/31/95 16.75
12/31/96 0.38
12/31/97 8.29
12/31/98 9.61
</TABLE>
During the 10-year period shown in the bar chart, the highest quarterly return
was 6.22% for the quarter ended September 30, 1998; and the lowest return was
- -3.45% for the quarter ended March 31, 1994.
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
The following table shows how the Fund's No-Load Class performance compares to
the Merrill Lynch Intermediate-Term Treasury Index:
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
<S> <C> <C> <C>
Intermediate-Term U.S. Treasury Fund 9.61% 6.04% 7.83%
Merrill Lynch Intermediate-Term Treasury Index* 8.63% 6.49% 8.33%
</TABLE>
* The Merrill Lynch Intermediate-Term Treasury Index is an unmanaged index
comprised of coupon paying bonds valued at $1 billion or more with
maturities between 1 to 9.9 years. The index does not reflect fees,
brokerage commissions, or other costs of investing. This index is used for
comparison purposes only, and the Fund's holdings do not necessarily mirror
the index. Performance is based on historical earnings and does not
indicate the Fund's future performance.
Returns and principal value vary with market conditions. When sold, shares may
be worth more, or less, than their original value.
3
<PAGE>
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND, CONTINUED
FEES AND EXPENSES
The following paragraphs describe the fees and expenses that you may pay if you
buy and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
No-Load Class shares of the Fund are sold without any initial sales charge
(load) or contingent deferred sales charges. There are no exchange or redemption
fees (except a $10.00 charge for wire redemptions).
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
<TABLE>
<S> <C>
Management Fees 0.55%
12b-1 Fees 0.00%
Other Expenses 0.50%
Total Annual Fund Operating Expenses 1.05%
Fee Waiver** 0.10%
Net Expenses 0.95%
</TABLE>
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets. Expenses may vary during other time periods.
** SAFECO Asset Management Company (SAM) has contractually agreed, from May 1,
1999 through April 30, 2009, to pay the Fund's aggregate operating expenses
which exceed, in any given month, the rate of .40% per annum of the Fund's
average daily net assets ("Expense Limitation"). This arrangement does not
include the Fund's advisory fee, brokerage commissions, taxes, interest or
extraordinary expenses. To the extent that the aggregate amount SAM paid or
assumed in any prior months in a given year (May 1, 1999 through April 30,
2009) exceed the Expense Limitation, SAM may offset such amounts against
the Expense Limitation for the current month.
MANAGEMENT FEES are paid to SAFECO Asset Management Company (SAM) for investment
advisory services including the provision of research, supervision and
assistance in the management of the Fund.
OTHER EXPENSES include custody, accounting and administration expenses; transfer
agency and related expenses; shareholder servicing expenses; expenses related to
preparing, printing and delivering prospectuses and shareholder reports; the
expenses of holding shareholder meetings; legal and audit fees; trustees'
compensation; federal and state registration fees; and extraordinary expenses.
4
<PAGE>
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND, CONTINUED
EXAMPLE
The following example is intended to help you compare the cost of investing in
the Intermediate-Term U.S. Treasury Fund with the cost of investing in other
mutual funds. This example assumes that you invest $10,000 in the Intermediate-
Term U.S. Treasury Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's net operating expenses
remain the same. Although your actual costs may be higher or lower, costs based
on these assumptions would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
No-Load Class $97 $303 $525 $1,166
</TABLE>
SAFECO GNMA FUND
OBJECTIVE
SAFECO GNMA Fund seeks 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.
PRINCIPAL INVESTMENT STRATEGIES
The GNMA Fund, during normal market conditions, will invest at least 65% of its
total assets in mortgage-backed securities issued by the GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION (GNMA). These securities have the following
characteristics:
- ----------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) is a government-owned
corporation that acquires, packages, and resells mortgages and mortgage purchase
commitments in the form of mortgage-backed securities.
- --------------------------------
- - Principal and interest are guaranteed by GNMA. This guarantee represents a
general obligation of the U.S. Treasury.
- - All mortgage loans in the pool are either insured by the Federal Housing
Administration or Farmers Home Administration or are guaranteed by the
Veterans Administration.
5
<PAGE>
SAFECO GNMA FUND, CONTINUED
- - The Fund may purchase both MODIFIED PASS-THROUGH SECURITIES AND COLLATERALIZED
MORTGAGE OBLIGATIONS (CMOs).
While the individual securities in the Fund may rise and fall in value as market
conditions change, the advisor seeks to manage the Fund so that the portfolio as
a whole meets the Fund's investment objective. The Fund may invest up to 35% of
its total assets in other U.S. government securities, including:
- ----------------------------
MODIFIED PASS-THROUGH SECURITIES "pass through" to investors the monthly
interest and principal payments from the mortgage loans in the pool. Although
mortgages are typically issued for 30 years, many homeowners pay off their
mortgages early. As a result, most GNMA certificates have an average life span
of 7-10 years. Because homeowners can pay off their mortgages at any time (by
moving or refinancing), investors in these certificates can not be certain
exactly when they will receive their principal back.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOs) are mortgage-backed securities which
have been grouped into classes to provide a more predictable stream of interest
and principal payments.
- --------------------------------
- - Securities backed by the full faith and credit of the U.S. government, such as
U.S. Treasury bills, notes and bonds.
- - 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).
- - Securities supported solely by the creditworthiness of the issuer, such as
securities issued by the Tennessee Valley Authority (TVA).
- - Other collateralized mortgage obligations (CMOs) issued by the U.S. government
or one of its agencies.
The Fund may also invest in mortgage obligations issued by private issuers that
are collateralized by obligations issued by the U.S. government or one of its
agencies.
The decision to buy or sell securities in the GNMA Fund generally falls into one
or more of the three following categories:
- - First would be a desire to move in or out of various mortgage-backed
securities sectors based upon their relative values, to reduce the allocation
to sectors viewed as overvalued, while increasing the allocation to
undervalued sectors. The advisor's outlook on interest rates, and the likely
effect of a movement in the
6
<PAGE>
SAFECO GNMA FUND, CONTINUED
interest rate market on a homeowner's decision whether or not to refinance
his/ her home mortgage, play a part in the analysis of the relative values of
these sectors.
- - Second, the advisor will generally shorten or lengthen the Fund's average
maturity and duration based upon a long-term interest rate outlook.
- - Third, the advisor may on occasion need to raise cash to meet shareholder
redemptions. On those occasions the advisor will consider the same criteria
used for buy/sell decisions stated above, as well as the ability to get a fair
price for a particular security given then-current market conditions.
- - With each buy/sell decision, the advisor also considers the effect the
transaction may have on the performance of the portfolio as a whole.
PRINCIPAL RISK FACTORS
Loss of money is a risk of investing in the GNMA Fund. The Fund is subject to
interest rate risk. Generally, when market interest rates rise the price of the
Fund's debt securities will fall, and when market interest rates fall the price
of the Fund's debt securities will rise. Such changes in price generally will be
greater the longer the maturity of the debt security. In addition, during
periods of declining interest rates, mortgage holders may be more likely to pay
off their loans early. These prepayment fluctuations may decrease the overall
investment returns in the Fund.
This Fund offers a combination of relative price stability and yield. It may be
suitable for you if you want to earn more income than you can earn with U.S.
Treasury securities, yet still wish to own a portfolio of securities with the
backing of the U.S. government.
PERFORMANCE
The following bar chart and table provide some indication of the risks of
investing in the GNMA Fund by showing how its performance has varied from year
to year and how the Fund's performance compares over time to that of the Merrill
Lynch GNMA Index, a widely recognized index of GNMA securities. As with all
mutual funds, past performance is not a prediction of future performance.
7
<PAGE>
SAFECO GNMA FUND, CONTINUED
Total return is a measure of investment performance over a period of time. It
includes dividends and capital gain distributions, as well as share price gain
or loss.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
12/31/89 12.93
12/31/90 8.71
12/31/91 14.81
12/31/92 6.70
12/31/93 7.08
12/31/94 -4.27
12/31/95 15.48
12/31/96 3.98
12/31/97 8.97
12/31/98 6.84
</TABLE>
During the 10-year period shown in the bar chart, the highest quarterly return
was 6.77% for the quarter ended June 30, 1989; and the lowest return was -3.58%
for the quarter ended March 31, 1994.
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
The following table shows how the Fund's No-Load Class performance compares to
the Merrill Lynch GNMA Index:
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
<S> <C> <C> <C>
GNMA Fund 6.84% 6.00% 7.98%
Merrill Lynch GNMA Index* 7.20% 7.48% 9.42%
</TABLE>
* The Merrill Lynch GNMA Index is an unmanaged index comprised of 132 issues
of government pass- through mortgages with maturities from 15 to 30 years
and par values of $100 million. The index does not reflect fees, brokerage
commissions, or other costs of investing. This index is used for comparison
purposes only, and the Fund's holdings do not necessarily mirror the index.
Performance is based on historical earnings and does not indicate the
Fund's future performance.
8
<PAGE>
SAFECO GNMA FUND, CONTINUED
Returns and principal value vary with market conditions. When sold, shares may
be worth more, or less, than their original value.
FEES AND EXPENSES
The following paragraphs describe the fees and expenses that you may pay if you
buy and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
No-Load Class shares of the Fund are sold without any initial sales charge
(load) or contingent deferred sales charges. There are no exchange or redemption
fees (except a $10.00 charge for wire redemptions).
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
<TABLE>
<S> <C>
Management Fees 0.55%
12b-1 Fees 0.00%
Other Expenses 0.42%
Total Annual Fund Operating Expenses 0.97%
Fee Waiver** 0.02%
Net Expenses 0.95%
</TABLE>
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets. Expenses may vary during other time periods.
** SAFECO Asset Management Company (SAM) has contractually agreed, from May 1,
1999 through April 30, 2009, to pay the Fund's aggregate operating expenses
which exceed, in any given month, the rate of .40% per annum of the Fund's
average daily net assets ("Expense Limitation"). This arrangement does not
include the Fund's advisory fee, brokerage commissions, taxes, interest or
extraordinary expenses. To the extent that the aggregate amount SAM paid or
assumed in any prior months in a given year (May 1, 1999 through April 30,
2009) exceed the Expense Limitation, SAM may offset such amounts against
the Expense Limitation for the current month.
MANAGEMENT FEES are paid to SAFECO Asset Management Company (SAM) for investment
advisory services including the provision of research, supervision and
assistance in the management of the Fund.
OTHER EXPENSES include custody, accounting and administration expenses; transfer
agency and related expenses; shareholder servicing expenses; expenses related to
preparing, printing and delivering prospectuses and shareholder reports; the
expenses of holding shareholder meetings; legal and audit fees; trustees'
compensation; federal and state registration fees; and extraordinary expenses.
9
<PAGE>
SAFECO GNMA FUND, CONTINUED
EXAMPLE
The following example is intended to help you compare the cost of investing in
the GNMA Fund with the cost of investing in other mutual funds. This example
assumes that you invest $10,000 in the GNMA Fund for the time periods indicated
and then redeem all of your shares at the end of those periods. The example also
assumes that your investment has a 5% return each year and that the Fund's net
operating expenses remain the same. Although your actual costs may be higher or
lower, costs based on these assumptions would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
No-Load Class $97 $303 $525 $1,166
</TABLE>
SAFECO HIGH-YIELD BOND FUND
OBJECTIVE
The SAFECO High-Yield Bond Fund seeks to provide a high level of current
interest income through the purchase of high-yield, debt securities.
PRINCIPAL INVESTMENT STRATEGIES
The High-Yield Bond Fund, during normal market conditions, will invest at least
65% of its portfolio in high-yield, DEBT SECURITIES.
The Fund may invest in:
- - Debt securities and PREFERRED STOCKS (including CONVERTIBLE SECURITIES) which
are rated below investment grade.
- - Unrated securities. The Fund may invest up to 25% of its assets in securities
that have not been rated.
---------------------------------------------------------------
DEBT SECURITIES are interest paying instruments issued by corporations or
other issuers.
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.
Preferred stocks generally pay more income and are less volatile than common
stocks.
CONVERTIBLE SECURITIES are debt or preferred stock which may be exchanged for
common stock. Their prices are influenced by changes in interest rates and the
values of the assets into which they may be exchanged.
- ---------------------------------------------------------------------
10
<PAGE>
SAFECO HIGH-YIELD BOND FUND, CONTINUED
- - Restricted securities eligible for resale under RULE 144A, or SECTION 4(2),
provided that the advisor has determined that such securities are liquid under
guidelines adopted by the Fund's Board of Trustees.
High-yield debt securities ("junk bonds") carry greater risks than investment
grade bonds. However, the advisor seeks to reduce risk by understanding the
financial prospects of the companies the Fund invests in and by maintaining a
well-diversified portfolio.
The decision to either buy or sell a security in the Fund is based first upon a
fundamental analysis of the issuer, including the company's creditworthiness,
liquidity, and prospects for growing earnings and cash flow. Next, the advisor
examines alternative bonds with similar credit statistics, and/or related lines
of business. This helps the advisor determine whether the bond in question is a
good value relative to its peers. Finally, the advisor considers the bond's
DURATION, coupon, and call features (the bond's structure).
- --------------------------------------------------------------
RULE 144A SECURITIES are securities which are exempt from registration
requirements. After a minimum two-year waiting period, they can be sold to
qualified institutional investors, such as mutual funds.
SECTION 4(2) SECURITIES are exempt from registration requirements and sold in
private placements to qualified institutional investors such as mutual funds.
DURATION measures the sensitivity of debt securities held by a portfolio to a
change in interest rates. The value of a security with a longer duration will
normally fluctuate to a greater degree than the value of a security with a
shorter duration should interest rates change. For example, if interest rates
were to move 1%, a bond with a 3-year duration would experience approximately a
3% change in its principal value. An identical bond with a 5-year duration would
experience approximately a 5% change in its principal value. Generally, the
stated maturity of a debt security is longer than its projected duration.
- ---------------------------------------------------------------------
The advisor may decide to sell a security if the original evaluation concerning
the issuer's creditworthiness, liquidity or prospects changes, if the value
reaches a specific target, or to raise cash to meet shareholder redemptions.
PRINCIPAL RISK FACTORS
Loss of money is a risk of investing in the High-Yield Bond Fund. The Fund is
subject to interest rate risk. Generally, when market interest rates rise the
price of the Fund's debt securities will fall, and when market interest rates
fall the price of the Fund's debt securities will rise. Such changes in price
generally will be greater the longer the maturity of the debt security.
11
<PAGE>
SAFECO HIGH-YIELD BOND FUND, CONTINUED
The Fund also is subject to greater volatility, reduced liquidity and a higher
risk of repayment default. This Fund may be suitable for you if you can tolerate
greater risk in pursuit of higher total returns.
PERFORMANCE
The following bar chart and table provide some indication of the risks of
investing in the High-Yield Bond Fund by showing how the Fund's performance has
varied from year to year and how its performance compares over time to that of
the Merrill Lynch High-Yield Index, a widely recognized index of high-yield
bonds. As with all mutual funds, past performance is not a prediction of future
performance.
Total return is a measure of investment performance over a period of time. It
includes dividends and capital gain distributions, as well as share price gain
or loss.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
12/31/89 1.98
12/31/90 -3.60
12/31/91 24.29
12/31/92 13.87
12/31/93 16.91
12/31/94 -2.25
12/31/95 15.64
12/31/96 10.39
12/31/97 12.79
12/31/98 4.45
</TABLE>
During the 10-year period shown in the bar chart, the highest quarterly return
was 7.23% for the quarter ended March 31, 1991; and the lowest return was -4.54%
for the quarter ended September 30, 1990.
12
<PAGE>
SAFECO HIGH-YIELD BOND FUND, CONTINUED
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
The following table shows how the Fund's No-Load Class performance compares to
the Merrill Lynch High-Yield Index:
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
<S> <C> <C> <C>
High-Yield Bond Fund 4.45% 8.01% 9.11%
Merrill Lynch High-Yield Index* 2.95% 9.11% 11.18%
</TABLE>
* The Merrill Lynch High-Yield Index is an unmanaged index comprised of
outstanding debt of domestic market issuers rated below investment grade
but not in default. The index does not reflect fees, brokerage commissions,
or other costs of investing. This index is used for comparison purposes
only, and the Fund's holdings do not necessarily mirror the index.
Performance is based on historical earnings and does not indicate the
Fund's future performance.
Returns and principal value vary with market conditions. When sold, shares may
be worth more, or less, than their original value.
FEES AND EXPENSES
The following paragraphs describe the fees and expenses that you may pay if you
buy and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
No-Load Class shares of the Fund are sold without any initial sales charge
(load) or contingent deferred sales charges. There are no exchange or redemption
fees (except a $10.00 charge for wire redemptions).
13
<PAGE>
SAFECO HIGH-YIELD BOND FUND, CONTINUED
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
<TABLE>
<S> <C>
Management Fees 0.65%
12b-1 Fees 0.00%
Other Expenses 0.37%
Total Annual Fund Operating Expenses 1.02%
Fee Waiver** 0.00%
Net Expenses 1.02%
</TABLE>
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets. Expenses may vary during other time periods.
** SAFECO Asset Management Company (SAM) has contractually agreed, from May 1,
1999 through April 30, 2009, to pay the Fund's aggregate operating expenses
which exceed, in any given month, the rate of .40% per annum of the Fund's
average daily net assets ("Expense Limitation"). This arrangement does not
include the Fund's advisory fee, brokerage commissions, taxes, interest or
extraordinary expenses. To the extent that the aggregate amount SAM paid or
assumed in any prior months in a given year (May 1, 1999 through April 30,
2009) exceed the Expense Limitation, SAM may offset such amounts against
the Expense Limitation for the current month.
MANAGEMENT FEES are paid to SAFECO Asset Management Company (SAM) for investment
advisory services including the provision of research, supervision and
assistance in the management of the Fund.
OTHER EXPENSES include custody, accounting and administration expenses; transfer
agency and related expenses; shareholder servicing expenses; expenses related to
preparing, printing and delivering prospectuses and shareholder reports; the
expenses of holding shareholder meetings; legal and audit fees; trustees'
compensation; federal and state registration fees; and extraordinary expenses.
EXAMPLE
The following example is intended to help you compare the cost of investing in
the High-Yield Bond Fund with the cost of investing in other mutual funds. This
example assumes that you invest $10,000 in the High-Yield Bond Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example also assumes that your investment has a 5% return each year
and that the Fund's net operating expenses remain the same. Although your actual
costs may be higher or lower, costs based on these assumptions would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
No-Load Class $104 $325 $563 $1,248
</TABLE>
14
<PAGE>
SAFECO MANAGED BOND FUND
OBJECTIVE
The SAFECO Managed Bond Fund seeks 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.
PRINCIPAL INVESTMENT STRATEGIES
The Managed Bond Fund will invest at least 65% of its total assets in bonds.
- - The Fund will invest primarily in INVESTMENT GRADE DEBT SECURITIES (or unrated
securities which are comparable in quality to investment grade debt
securities).
- - The Fund will invest at least 50% of its total assets in U.S. GOVERNMENT
SECURITIES.
- - The Fund may invest in mortgage-backed or asset-backed securities.
The advisor analyzes each security it considers for purchase in two ways. First,
the advisor looks at the security on a stand-alone basis:
- - Is it priced attractively given its rating and market sector?
- - Does the price and interest rate adequately compensate for any structural
characteristics of the security, such as the right of an investor to require
that the issuer buy the security back at a stated price or the right of an
issuer to buy the security back at the stated price?
- --------------------------------------------------------------
<TABLE>
<S> <C>
BOND RATINGS indicate an issuer's financial strength and ability to meet its
debt obligations. The two main rating services are Moody's and Standard &
Poor's.
INVESTMENT GRADE securities are rated by these services as follows:
MOODY'S S&P
Aaa AAA
Aa AA
A A
Baa BBB
DEBT SECURITES are interest paying instruments issued by corporations or other
issuers.
U.S. GOVERNMENT SECURITIES are securities issued by the U.S. government or its
agencies or instrumentalities, such as the Federal Home Loan Bank or the Federal
Land Bank.
</TABLE>
- ---------------------------------------------------------------------
15
<PAGE>
SAFECO MANAGED BOND FUND, CONTINUED
Next, the advisor looks at how the security fits into the overall portfolio:
- - What effects would a purchase of this security have on overall portfolio
yield, DURATION, and CONVEXITY?
- - How would an investment in this security affect the portfolio's yield curve
exposure, sector weightings and diversification? The advisor may sell
securities when either this relative value analysis shows another sector of
the market is more attractive, the advisor believes another security within
the sector offers a better value, or to raise cash to meet shareholder
redemptions.
- ----------------------------
DURATION measures the sensitivity of debt securities held by a portfolio to a
change in interest rates. The value of a security with a longer duration will
normally fluctuate to a greater degree than the value of a security with a
shorter duration should interest rates change. For example, if interest rates
were to move 1%, a bond with a 3-year duration would experience approximately a
3% change in its principal value. An identical bond with a 5-year duration would
experience approximately a 5% change in its principal value. Generally, the
stated maturity of a debt security is longer than its projected duration.
CONVEXITY measures the sensitivity of a bond's price to changes in interest rate
levels.
- --------------------------------
- - If the rating of a security is downgraded after it has been purchased by the
Fund, the advisor will engage in an orderly disposition of securities to
ensure that no more than 5% of the Fund's assets are invested in
below-investment grade securities.
PRINCIPAL RISK FACTORS
Loss of money is a risk of investing in the Managed Bond Fund. The Fund is
subject to interest rate risk. Generally, when market interest rates rise the
price of the Fund's debt securities will fall, and when market interest rates
fall the price of the Fund's debt securities will rise. Such changes in price
generally will be greater the longer the maturity of the debt security.
In addition, investment in the Fund carries risks associated with the following
types of securities:
- - Mortgage-backed securities. During periods of changing interest rates,
mortgage holders may be more likely to pay off their loans early. These
prepayment fluctuations may decrease the overall investment returns of the
Fund.
16
<PAGE>
SAFECO MANAGED BOND FUND, CONTINUED
- - Asset-backed securities. The underlying borrower(s) may default on the loan
and the recovered collateral may not be sufficient to cover the interest and
principal payments.
This Fund may be suitable for you if you want high current income and stability
of capital.
PERFORMANCE
The following bar chart and table provide some indication of the risks of
investing in the Managed Bond Fund by showing how the Fund's performance has
varied from year to year and how its performance compares over time to that of
the Lehman Brothers Government/Corporate. Index, a widely recognized index. As
with all mutual funds, past performance is not a prediction of future
performance.
Total return is a measure of investment performance over a period of time. It
includes dividends and capital gain distributions, as well as share price gain
or loss.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
12/31/89
12/31/90
12/31/91
12/31/92
12/31/93
12/31/94
12/31/95 17.35
12/31/96 0.02
12/31/97 8.23
12/31/98 8.43
</TABLE>
Since the Fund's inception in 1994, the highest quarterly return was 5.74% for
the quarter ended June 30, 1995; and the lowest return was -3.34% for the
quarter ended March 31, 1994.
17
<PAGE>
SAFECO MANAGED BOND FUND, CONTINUED
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
The following table shows how the Fund's No-Load Class performance compares to
the Lehman Brothers Government/Corporate Index:
<TABLE>
<CAPTION>
FEBRUARY 28, 1994
(INCEPTION) TO
1 YEAR DECEMBER 31, 1998
<S> <C> <C>
Managed Bond Fund 8.43% 6.18%
Lehman Brothers Gov't./Corp. Index* 9.47% 7.73%
</TABLE>
* The Lehman Brothers Gov't/Corp. Index is an unmanaged index comprised of
every major U.S. government and investment-grade corporate bond with more
than a year remaining until maturity. The index does not reflect fees,
brokerage commissions, or other costs of investing. This index is used for
comparison purposes only, and the Fund's holdings do not necessarily mirror
the index. Performance is based on historical earnings and does not
indicate the Fund's future performance.
Returns and principal value vary with market conditions. When sold, shares may
be worth more, or less, than their original value.
FEES AND EXPENSES
The following paragraphs describe the fees and expenses that you may pay if you
buy and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
No-Load Class shares of the Fund are sold without any initial sales charge
(load) or contingent deferred sales charges. There are no exchange or redemption
fees (except a $10.00 charge for wire redemptions).
18
<PAGE>
SAFECO MANAGED BOND FUND, CONTINUED
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
<TABLE>
<S> <C>
Management Fees 0.50%
12b-1 Fees 0.00%
Other Expenses 1.05%
Total Annual Fund Operating Expenses 1.55%
Fee Waiver** 0.65%
Net Expenses 0.90%
</TABLE>
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets. Expenses may vary during other time periods.
** SAFECO Asset Management Company (SAM) has contractually agreed, from May 1,
1999 through April 30, 2009, to pay the Fund's aggregate operating expenses
which exceed, in any given month, the rate of .40% per annum of the Fund's
average daily net assets ("Expense Limitation"). This arrangement does not
include the Fund's advisory fee, brokerage commissions, taxes, interest or
extraordinary expenses. To the extent that the aggregate amount SAM paid or
assumed in any prior months in a given year (May 1, 1999 through April 30,
2009) exceed the Expense Limitation, SAM may offset such amounts against
the Expense Limitation for the current month.
MANAGEMENT FEES are paid to SAFECO Asset Management Company (SAM) for investment
advisory services including the provision of research, supervision and
assistance in the management of the Fund.
OTHER EXPENSES include custody, accounting and administrative expenses; transfer
agency and related expenses; shareholder servicing expenses; expenses related to
preparing, printing and delivering prospectuses and shareholder reports; the
expenses of holding shareholder meetings; legal and audit fees; trustees'
compensation; federal and state registration fees; and extraordinary expenses.
EXAMPLE
The following example is intended to help you compare the cost of investing in
the Managed Bond Fund with the cost of investing in other mutual funds. This
example assumes that you invest $10,000 in the Managed Bond Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example also assumes that your investment has a 5% return each year
and that the Fund's net operating expenses remain the same. Although your actual
costs may be higher or lower, costs based on these assumptions would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
No-Load Class $92 $287 $498 $1,108
</TABLE>
19
<PAGE>
SAFECO CALIFORNIA TAX-FREE INCOME FUND
OBJECTIVE
The SAFECO California Tax-Free Income Fund seeks 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.
This Fund is available to California, Oregon, Nevada and Arizona residents.
PRINCIPAL INVESTMENT STRATEGIES
The California Tax-Free Income Fund invests primarily in INVESTMENT GRADE
MUNICIPAL BONDS issued by the state of California or its political subdivisions,
having average maturities of 15-25 years.
The Fund will invest:
- - At least 80% of its assets in securities whose interest is exempt from federal
income tax, the alternative minimum tax and California personal income tax.
- - At least 65% of its assets in investment grade municipal bonds with a maturity
of more than one year.
- --------------------------------------------------------------
<TABLE>
<S> <C>
BOND RATINGS indicate an issuer's financial strength and ability to meet its
debt obligations. The two main rating services are Moody's and Standard &
Poor's.
INVESTMENT GRADE securities are rated by these services as follows:
MOODY'S S&P
Aaa AAA
Aa AA
A A
Baa BBB
MUNICIPAL BONDS are issued by cities, counties, and states and other government
entities to cover borrowing needs.
</TABLE>
- ---------------------------------------------------------------------
The Fund may invest:
- - Up to 20% of its total assets in unrated municipal bonds, as long as they are
of comparable quality to investment grade securities.
When evaluating a bond for purchase, the advisor takes into consideration, among
other things, yield, maturity, any call features, credit quality (including the
underlying rating of insured bonds), the purpose of the financing, the original
offering price, any state or local tax exemption, and the amount of discount or
premium represented by the price offered. After evaluating these features of a
bond, the advisor compares the bond to the universe of other available bonds,
which may have different features, and will purchase the bond if it appears to
offer the best relative value.
20
<PAGE>
SAFECO CALIFORNIA TAX-FREE INCOME FUND, CONTINUED
In selecting bonds for purchase, the advisor favors long maturity bonds in
essential services that offer a significant degree of protection against issuer
repurchase rights prior to maturity, and good value relative to their peers. The
advisor may sell bonds when they become fully valued, when more attractively
valued bonds become available or to raise cash to meet shareholder redemptions.
In any case, turnover among the Fund's portfolio securities will remain low,
because it often takes years for attractive relative valuations to be recognized
by the municipal market.
PRINCIPAL RISK FACTORS
Loss of money is a risk of investing in the California Tax-Free Income Fund. The
Fund is subject to interest rate risk. Generally, when market interest rates
rise the price of the Fund's debt securities will fall, and when market interest
rates fall the price of the Fund's debt securities will rise. Such changes in
price generally will be greater the longer the maturity of the debt security.
Although securities in the top four rating categories are considered "investment
grade," Moody's considers bonds rated "Baa" to have speculative characteristics.
The Fund may experience greater volatility than a Fund invested in bonds with
shorter average maturities.
Because the Fund concentrates its investments in a single state, there may be
more fluctuation in the value of its securities than with mutual funds whose
portfolios are more geographically diverse.
This Fund may be suitable for you if you wish to earn income that is free from
federal income tax and free from California state personal income tax.
PERFORMANCE
The following bar chart and table provide some indication of the risks of
investing in the California Tax-Free Income Fund by showing how the Fund's
performance has varied from year to year and how its performance compares over
time to that of the Lehman Brothers Long Municipal Bond Index, a widely
recognized index of municipal bonds having long maturities. As with all mutual
funds, past performance is not a prediction of future performance.
Total return is a measure of investment performance over a period of time. It
includes dividends and capital gain distributions, as well as share price gain
or loss.
21
<PAGE>
SAFECO CALIFORNIA TAX-FREE INCOME FUND, CONTINUED
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
12/31/1989 9.91
12/31/1990 6.97
12/31/1991 12.55
12/31/1992 8.00
12/31/1993 13.23
12/31/1994 -9.20
12/31/1995 26.14
12/31/1996 2.53
12/31/1997 11.55
12/31/1998 6.19
</TABLE>
During the 10-year period shown in the bar chart, the highest quarterly return
was 10.59% for the quarter ended March 31, 1995; and the lowest return was
- -6.16% for the quarter ended March 31, 1994.
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
The following table shows how the Fund's No-Load Class performance compares to
the Lehman Brothers Long Municipal Bond Index:
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
<S> <C> <C> <C>
California Tax-Free Income Fund 6.19% 6.83% 8.45%
Lehman Brothers Long Municipal
Bond Index* 6.90% 6.85% 9.16%
</TABLE>
* The Lehman Brothers Long Municipal Bond Index is an unmanaged index
comprised of municipal bonds maturing in 22 or more years. The index is not
limited to California issuers. The index does not reflect fees, brokerage
commissions, or other costs of investing. This index is used for comparison
purposes only, and the Fund's holdings do not necessarily mirror the index.
Performance is based on historical earnings and does not indicate the
Fund's future performance.
Returns and principal value vary with market conditions. When sold, shares may
be worth more, or less, than their original value.
22
<PAGE>
SAFECO CALIFORNIA TAX-FREE INCOME FUND, CONTINUED
FEES AND EXPENSES
The following paragraphs describe the fees and expenses that you may pay if you
buy and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
No-Load Class shares of the Fund are sold without any initial sales charge
(load) or contingent deferred sales charges. There are no exchange or redemption
fees (except a $10.00 charge for wire redemptions).
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
<TABLE>
<S> <C>
Management Fees 0.50%
12b-1 Fees 0.00%
Other Expenses 0.22%
Total Annual Fund Operating Expenses* 0.72%
Fee Waiver** 0.00%
Net Expenses 0.72%
</TABLE>
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets. Expenses may vary during other time periods.
** SAFECO Asset Management Company (SAM) has contractually agreed, from May 1,
1999 through April 30, 2009, to pay the Fund's aggregate operating expenses
which exceed, in any given month, the rate of .40% per annum of the Fund's
average daily net assets ("Expense Limitation"). This arrangement does not
include the Fund's advisory fee, brokerage commissions, taxes, interest or
extraordinary expenses. To the extent that the aggregate amount SAM paid or
assumed in any prior months in a given year (May 1, 1999 through April 30,
2009) exceed the Expense Limitation, SAM may offset such amounts against
the Expense Limitation for the current month.
MANAGEMENT FEES are paid to SAFECO Asset Management Company (SAM) for
investment advisory services including the provision of research, supervision
and assistance in the management of the Fund.
OTHER EXPENSES include custody, accounting and administration expenses;
transfer agency and related expenses; shareholder servicing expenses; expenses
related to preparing, printing and delivering prospectuses and shareholder
reports; the expenses of holding shareholder meetings; legal and audit fees;
trustees' compensation; federal and state registration fees; and extraordinary
expenses.
23
<PAGE>
SAFECO CALIFORNIA TAX-FREE INCOME FUND, CONTINUED
EXAMPLE
The following example is intended to help you compare the cost of investing in
the California Tax-Free Income Fund with the cost of investing in other mutual
funds. This example assumes that you invest $10,000 in the California Tax-Free
Income Fund for the time periods indicated and then redeem all of your shares at
the end of those periods. The example also assumes that your investment has a 5%
return each year and that the Fund's net operating expenses remain the same.
Although your actual costs may be higher or lower, costs based on these
assumptions would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
No-Load Class $74 $230 $401 $894
</TABLE>
SAFECO MUNICIPAL BOND FUND
OBJECTIVE
The SAFECO Municipal Bond Fund seeks to provide as high a level of current
interest income exempt from federal income tax as is consistent with the
relative stability of capital.
PRINCIPAL INVESTMENT STRATEGIES
The Municipal Bond Fund invests primarily in MUNICIPAL BONDS rated INVESTMENT
GRADE or better with average maturities of 15-25 years.
The Fund will invest:
- - At least 80% of its assets in securities whose interest is exempt from federal
income tax and the alternative minimum tax.
- - At least 65% of its assets in investment grade municipal bonds with a maturity
of more than one year.
- --------------------------------------------------------------
<TABLE>
<S> <C>
MUNICIPAL BONDS are issued by cities, counties, and states and other government
entities to cover borrowing needs.
BOND RATINGS indicate an issuer's financial strength and ability to meet its
debt obligations. The two main rating services are Moody's and Standard &
Poor's.
INVESTMENT GRADE securities are rated by these services as follows:
MOODY'S S&P
Aaa AAA
Aa AA
A A
Baa BBB
</TABLE>
- --------------------------------------------------------------
24
<PAGE>
SAFECO MUNICIPAL BOND FUND, CONTINUED
The Fund may invest:
- - Up to 20% of its total assets in unrated municipal bonds, as long as they are
of comparable quality to investment grade securities.
When evaluating a bond for purchase, the advisor takes into consideration, among
other things, yield, maturity, any call features, credit quality (including the
underlying rating of insured bonds), the purpose of the financing, the original
offering price, any state or local tax exemption, and the amount of discount or
premium represented by the price offered. After evaluating these features of a
bond, the advisor compares the bond to the universe of other available bonds,
which may have different features, and will purchase the bond if it appears to
offer the best relative value.
In selecting bonds for purchase, the advisor favors long maturity bonds in
essential services that offer a significant degree of protection against issuer
repurchase rights prior to maturity and good value relative to their peers. In
addition, the advisor considers the relative weighting of the Fund's holdings
among states. The advisor may sell bonds when they become fully valued, when
more attractively valued bonds become available, or to raise cash to meet
shareholder redemptions. In any case, turnover among the Fund's portfolio
securities will remain low, because it often takes years for attractive relative
valuations to be recognized by the municipal market.
PRINCIPAL RISK FACTORS
Loss of money is a risk of investing in the Municipal Bond Fund. The Fund is
subject to interest rate risk. Generally, when market interest rates rise the
price of the Fund's debt securities will fall, and when market interest rates
fall the price of the Fund's debt securities will rise. Also, such changes in
price generally will be greater the longer the maturity of the debt security.
The Fund may experience greater volatility than a Fund invested in bonds with a
shorter average maturity.
This Fund may be suitable for you if you seek high current tax-exempt income and
relative stability of principal.
25
<PAGE>
SAFECO MUNICIPAL BOND FUND, CONTINUED
PERFORMANCE
The following bar chart and table provide some indication of the risks of
investing in the Municipal Bond Fund by showing how its performance has varied
from year to year and how the Municipal Bond Fund's performance compares over
time to that of the Lehman Brothers Long Municipal Bond Index, a widely
recognized index of municipal bonds having long maturities. As with all mutual
funds, past performance is not a prediction of future performance.
Total return is a measure of investment performance over a period of time. It
includes dividends and capital gain distributions, as well as share price gain
or loss.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
12/31/89 10.08
12/31/90 6.65
12/31/91 13.78
12/31/92 8.75
12/31/93 12.66
12/31/94 -8.25
12/31/95 21.48
12/31/96 3.18
12/31/97 10.68
12/31/98 6.35
</TABLE>
During the 10-year period shown in the bar chart, the highest quarterly return
was 8.82% for the quarter ended March 31, 1995; and the lowest return was -6.77%
for the quarter ended March 31, 1994.
26
<PAGE>
SAFECO MUNICIPAL BOND FUND, CONTINUED
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
The following table shows how the Fund's No-Load Class performance compares to
the Lehman Brothers Long Municipal Bond Index:
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
<S> <C> <C> <C>
Municipal Bond Fund 6.35% 6.24% 8.28%
Lehman Brothers Long Municipal
Bond Index* 6.90% 6.85% 9.16%
</TABLE>
* The Lehman Brothers Long Municipal Bond Index is an unmanaged index
comprised of municipal bonds maturing in 22 or more years. The index does
not reflect fees, brokerage commissions or other costs of investing. This
index is used for comparison purposes only, and the Fund's holdings do not
necessarily mirror the index. Performance is based on historical earnings
and does not indicate the Fund's future performance.
Returns and principal value vary with market conditions. When sold, shares may
be worth more, or less, than their original value.
FEES AND EXPENSES
The following paragraphs describe the fees and expenses that you may pay if you
buy and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
No-Load Class shares of the Fund are sold without any initial sales charge
(load) or contingent deferred sales charges. There are no exchange or redemption
fees (except a $10.00 charge for wire redemptions).
27
<PAGE>
SAFECO MUNICIPAL BOND FUND, CONTINUED
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
<TABLE>
<S> <C>
Management Fees 0.47%
12b-1 Fees 0.00%
Other Expenses 0.15%
Total Annual Fund Operating Expenses 0.62%
Fee Waiver** 0.00%
Net Expenses 0.62%
</TABLE>
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets. Expenses may vary during other time periods.
** SAFECO Asset Management Company (SAM) has contractually agreed, from May 1,
1999 through April 30, 2009, to pay the Fund's aggregate operating expenses
which exceed, in any given month, the rate of .40% per annum of the Fund's
average daily net assets ("Expense Limitation"). This arrangement does not
include the Fund's advisory fee, brokerage commissions, taxes, interest or
extraordinary expenses. To the extent that the aggregate amount SAM paid or
assumed in any prior months in a given year (May 1, 1999 through April 30,
2009) exceed the Expense Limitation, SAM may offset such amounts against
the Expense Limitation for the current month.
MANAGEMENT FEES are paid to SAFECO Asset Management Company (SAM) for investment
advisory services including the provision of research, supervision and
assistance in the management of the Fund.
OTHER EXPENSES include custody, accounting and administration expenses; transfer
agency and related expenses; shareholder servicing expenses; expenses related to
preparing, printing and delivering prospectuses and shareholder reports; the
expenses of holding shareholder meetings; legal and audit fees; trustees'
compensation; federal and state registration fees; and extraordinary expenses.
EXAMPLE
The following example is intended to help you compare the cost of investing in
the Municipal Bond Fund with the cost of investing in other mutual funds. This
example assumes that you invest $10,000 in the Municipal Bond Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example also assumes that your investment has a 5% return each year
and that the Fund's net operating expenses remain the same. Although your actual
costs may be higher or lower, costs based on these assumptions would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
No-Load Class $63 $199 $346 $774
</TABLE>
28
<PAGE>
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
OBJECTIVE
The SAFECO Washington State Municipal Bond Fund seeks to provide as high a level
of current interest income exempt from federal income tax as is consistent with
prudent investment risk. This Fund is available to Washington, California and
Arizona residents.
PRINCIPAL INVESTMENT STRATEGIES
The Washington State Municipal Bond Fund invests at least 65% of its total
assets in INVESTMENT GRADE MUNICIPAL BONDS issued by the state of Washington and
its agencies and municipalities, with average maturities of 15-25 years.
The Fund will invest:
- - At least 80% of its assets in securities whose interest is exempt from federal
income tax. The Fund may invest in securities subject to the alternative
minimum tax.
- - At least 65% of its assets in investment grade municipal bonds with maturities
of more than one year.
- - Up to 20% of its total assets in unrated municipal bonds, as long as they are
of comparable quality to investment grade securities.
When evaluating a bond for purchase, the advisor takes into consideration, among
other things, yield, maturity, any call features, credit quality (including the
underlying rating of insured bonds), the purpose of the financing, the original
offering price, any state or local tax exemption and the amount of discount or
premium represented by the price offered. After evaluating these features of a
bond, the advisor compares the bond to the universe of other available bonds,
which may have different features, and will purchase the bond if it appears to
offer the best relative value.
- --------------------------------------------------------------
<TABLE>
<S> <C>
MUNICIPAL BONDS are issued by cities, counties, and states and other government
entities to cover borrowing needs.
BOND RATINGS indicate an issuer's financial strength and ability to meet its
debt obligations. The two main rating services are Moody's and Standard &
Poor's.
INVESTMENT GRADE securities are rated by these services as follows:
MOODY'S S&P
Aaa AAA
Aa AA
A A
Baa BBB
</TABLE>
- ---------------------------------------------------------------------
29
<PAGE>
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND, CONTINUED
The advisor may sell bonds when more attractively valued bonds become available,
when there are opportunities to increase the percentage of bonds in the
portfolio that are protected against issuer repurchase rights, or to raise cash
to meet shareholder redemptions.
PRINCIPAL RISK FACTORS
Loss of money is a risk of investing in the Washington State Municipal Bond
Fund. The Fund is subject to interest rate risk. Generally, when market interest
rates rise the price of the Fund's debt securities will fall, and when market
interest rates fall the price of the Fund's debt securities will rise. Such
changes in price generally will be greater the longer the maturity of the
security. Although securities in the top four rating categories are considered
"investment grade," Moody's considers bonds rated "Baa" to have speculative
characteristics.
Because the Fund concentrates its investments in a single state, there may be
greater fluctuation in the value of its securities than with mutual funds whose
portfolios are more geographically diverse. This Fund is suitable for investors
seeking tax-exempt income from a portfolio of Washington bonds.
PERFORMANCE
The following bar chart and table provide some indication of the risks of
investing in the Washington State Municipal Bond Fund by showing how the Fund's
performance has varied from year to year and how its performance compares over
time to that of the Lehman Brothers Municipal Bond Index, a widely recognized
broad-based dollar weighted index of municipal bonds. As with all mutual funds,
past performance is not a prediction of future performance.
Total return is a measure of investment performance over a period of time. It
includes dividends and capital gain distributions, as well as share price gain
or loss.
30
<PAGE>
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND, CONTINUED
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
12/31/89
12/31/90
12/31/91
12/31/92
12/31/93
12/31/94 -8.65
12/31/95 19.89
12/31/96 3.04
12/31/97 8.94
12/31/98 5.99
</TABLE>
Since the Fund's inception in 1993, the highest quarterly return was 8.58% for
the quarter ended March 31, 1995; and the lowest return was -7.42% for the
quarter ended March 31, 1994.
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
The following table shows how the Fund's No-Load Class performance compares to
the Lehman Brothers Long Municipal Bond Index:
<TABLE>
<CAPTION>
MARCH 18, 1993
(INCEPTION) TO
1 YEAR 5 YEARS DECEMBER 31, 1998
<S> <C> <C> <C>
Washington State Municipal Bond Fund 5.99% 5.44% 6.10%
Lehman Brothers Long Municipal Bond Index* 6.90% 6.85% 7.70%
</TABLE>
* The Lehman Brothers Long Municipal Bond Index is an unmanaged index
comprised of municipal bonds maturing in 22 or more years. The index is not
limited to Washington issuers. The index does not reflect fees, brokerage
commissions or other costs of investing. This index is used for comparison
purposes only, and the Fund's holdings do not necessarily mirror the index.
Performance is based on historical earnings and does not indicate the
Fund's future performance.
31
<PAGE>
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND, CONTINUED
Returns and principal value vary with market conditions. When sold, shares may
be worth more, or less, than their original value.
FEES AND EXPENSES
The following paragraphs describe the fees and expenses that you may pay if you
buy and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
No-Load Class shares of the Fund are sold without any initial sales charge
(load) or contingent deferred sales charges. There are no exchange or redemption
fees (except a $10.00 charge for wire redemptions).
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
<TABLE>
<S> <C>
Management Fees 0.50%
12b-1 Fees 0.00%
Other Expenses 0.48%
Total Annual Fund Operating Expenses 0.98%
Fee Waiver** 0.08%
Net Expenses 0.90%
</TABLE>
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets. Expenses may vary during other time periods.
** SAFECO Asset Management Company (SAM) has contractually agreed, from May 1,
1999 through April 30, 2009, to pay the Fund's aggregate operating expenses
which exceed, in any given month, the rate of .40% per annum of the Fund's
average daily net assets ("Expense Limitation"). This arrangement does not
include the Fund's advisory fee, brokerage commissions, taxes, interest or
extraordinary expenses. To the extent that the aggregate amount SAM paid or
assumed in any prior months in a given year (May 1, 1999 through April 30,
2009) exceed the Expense Limitation, SAM may offset such amounts against
the Expense Limitation for the current month.
MANAGEMENT FEES are paid to SAFECO Asset Management Company (SAM) for investment
advisory services including the provision of research, supervision and
assistance in the management of the Fund.
OTHER EXPENSES include custody, accounting and administration expenses; transfer
agency and related expenses; expenses related to preparing, printing and
delivering prospectuses and shareholder reports; the expenses of holding
shareholder meetings; legal and audit fees; trustees' compensation; federal and
state registration fees; and extraordinary expenses.
32
<PAGE>
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND, CONTINUED
EXAMPLE
The following example is intended to help you compare the cost of investing in
the Washington State Municipal Bond Fund with the cost of investing in other
mutual funds. This example assumes that you invest $10,000 in the Washington
State Municipal Bond Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's net operating expenses
remain the same. Although your actual costs may be higher or lower, costs based
on these assumptions would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
No-Load Class $92 $287 $498 $1,108
</TABLE>
SAFECO INTERMEDIATE-TERM MUNICIPAL BOND FUND
OBJECTIVE
The SAFECO Intermediate-Term Municipal Bond Fund seeks to provide as high a
level of current interest income exempt from federal income tax as is consistent
with prudent investment risk.
PRINCIPAL INVESTMENT STRATEGIES
The Intermediate-Term Municipal Bond Fund is the most conservative of the SAFECO
municipal bond funds. The Fund invests primarily in MUNICIPAL BONDS rated
INVESTMENT GRADE or better. The Fund will maintain an average dollar-weighted
maturity of between 3 and 10 years; however, individual obligations held by the
Fund may have maturities outside that range. It is designed to provide much of
the yield potential of a long-term bond fund but with less fluctuation in share
price.
33
<PAGE>
SAFECO INTERMEDIATE-TERM MUNICIPAL BOND FUND, CONTINUED
The Fund will invest:
- - At least 80% of its assets in securities whose interest is exempt from federal
income tax and the federal alternative minimum tax.
- - At least 65% of its assets in investment grade municipal bonds with maturities
of more than one year.
The Fund may invest:
- - Up to 20% of its total assets in unrated municipal bonds, as long as they are
of comparable quality to investment grade securities.
When evaluating a bond for purchase, the advisor takes into consideration, among
other things, yield, maturity, any call features, credit quality (including the
underlying rating of insured bonds), the purpose of the financing, the original
offering price, any state or local tax exemption and the amount of discount or
premium represented by the price offered. After evaluating these features of a
bond, the advisor compares the bond to the universe of other available bonds,
which may have different features, and will purchase the bond if it appears to
offer the best relative value.
- --------------------------------------------------------------
<TABLE>
<S> <C>
MUNICIPAL BONDS are issued by cities, counties, and states and other government
entities to cover borrowing needs.
BOND RATINGS indicate an issuer's financial strength and ability to meet its
debt obligations. The two main rating services are Moody's and Standard &
Poor's.
INVESTMENT GRADE securities are rated by these services as follows:
MOODY'S S&P
Aaa AAA
Aa AA
A A
Baa BBB
</TABLE>
- ---------------------------------------------------------------------
The advisor may sell bonds when more attractively valued bonds become available,
or in order to raise cash to meet shareholder redemptions.
PRINCIPAL RISK FACTORS
Loss of money is a risk of investing in the Intermediate-Term Municipal Bond
Fund. The Fund is subject to interest rate risk. Generally, when market interest
rates rise the price of the Fund's debt securities will fall, and when market
interest rates fall the price of the Fund's debt securities will rise. Such
changes in price generally will be greater the longer the maturity of the debt
security.
This conservative Fund is suitable for investors seeking federally tax-exempt
income with relative price stability.
34
<PAGE>
SAFECO INTERMEDIATE-TERM MUNICIPAL BOND FUND, CONTINUED
PERFORMANCE
The following bar chart and table provide some indication of the risks of
investing in the Intermediate-Term Municipal Bond Fund by showing how the Fund's
performance has varied from year to year and how its performance compares over
time to that of the Lehman Brothers 7-Year Municipal Bond Index, a widely
recognized index of municipal bonds. As with all mutual funds, past performance
is not a prediction of future performance.
Total return is a measure of investment performance over a period of time. It
includes dividends and capital gain distributions, as well as share price gain
or loss.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
12/31/89
12/31/90
12/31/91
12/31/92
12/31/93
12/31/94 -5.62
12/31/95 15.22
12/31/96 3.75
12/31/97 7.50
12/31/98 5.33
</TABLE>
Since the Fund's inception in 1993, the highest quarterly return was 6.25% for
the quarter ended March 31, 1995; and the lowest return was -4.47% for the
quarter ended March 31, 1994.
35
<PAGE>
SAFECO INTERMEDIATE-TERM MUNICIPAL BOND FUND, CONTINUED
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
The following table shows how the Fund's No-Load Class performance compares to
the Lehman Brothers 7-Year Municipal Bond Index:
<TABLE>
<CAPTION>
MARCH 18, 1993
(INCEPTION) TO
1 YEAR 5 YEARS DECEMBER 31, 1998
<S> <C> <C> <C>
Intermediate-Term
Municipal Bond Fund 5.33% 5.02% 5.62%
Lehman Brothers 7-Year Municipal
Bond Index* 6.22% 5.79% 6.27%
</TABLE>
* The Lehman Brothers 7-Year Municipal Bond Index is an unmanaged index
comprised of municipal bonds maturing in 6 to 8 years. The index does not
reflect fees, brokerage commissions, or other costs of investing. This
index is used for comparison purposes only, and the Fund's holdings do not
necessarily mirror the index. Performance is based on historical earnings
and does not indicate the Fund's future performance.
Returns and principal value vary with market conditions. When sold, shares may
be worth more, or less, than their original value.
FEES AND EXPENSES
The following paragraphs describe the fees and expenses that you may pay if you
buy and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
No-Load Class shares of the Fund are sold without any initial sales charge
(load) or contingent deferred sales charges. There are no exchange or redemption
fees (except a $10.00 charge for wire redemptions).
36
<PAGE>
SAFECO INTERMEDIATE-TERM MUNICIPAL BOND FUND, CONTINUED
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT AREDEDUCTED FROM FUND ASSETS)*
<TABLE>
<S> <C>
Management Fees 0.50%
12b-1 Fees 0.00%
Other Expenses 0.45%
Total Annual Fund Operating Expenses 0.95%
Fee Waiver** 0.05%
Net Expenses 0.90%
</TABLE>
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets. Expenses may vary during other time periods.
** SAFECO Asset Management Company (SAM) has contractually agreed, from May 1,
1999 through April 30, 2009, to pay the Fund's aggregate operating expenses
which exceed, in any given month, the rate of .40% per annum of the Fund's
average daily net assets ("Expense Limitation"). This arrangement does not
include the Fund's advisory fee, brokerage commissions, taxes, interest or
extraordinary expenses. To the extent that the aggregate amount SAM paid or
assumed in any prior months in a given year (May 1, 1999 through April 30,
2009) exceed the Expense Limitation, SAM may offset such amounts against
the Expense Limitation for the current month.
MANAGEMENT FEES are paid to SAFECO Asset Management Company (SAM) for
investment advisory services including the provision of research, supervision
and assistance in the management of the Fund.
OTHER EXPENSES include custody, accounting and administrative expenses;
transfer agency and related expenses; expenses related to preparing, printing
and delivering prospectuses and shareholder reports; the expenses of holding
shareholder meetings; legal and audit fees; trustees' compensation; federal
and state registration fees; and extraordinary expenses.
EXAMPLE
The following example is intended to help you compare the cost of investing in
the Intermediate-Term Municipal Bond Fund with the cost of investing in other
mutual funds. This example assumes that you invest $10,000 in the Intermediate-
Term Municipal Bond Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The example also assumes that your
37
<PAGE>
SAFECO INTERMEDIATE-TERM MUNICIPAL BOND FUND, CONTINUED
investment has a 5% return each year and that the Fund's net operating expenses
remain the same. Although your actual costs may be higher or lower, costs based
on these assumptions would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
No-Load Class $92 $287 $498 $1,108
</TABLE>
SAFECO INSURED MUNICIPAL BOND FUND
OBJECTIVE
The SAFECO Insured Municipal Bond Fund seeks to provide as high a level of
current interest income exempt from federal income tax as is consistent with
prudent investment risk.
PRINCIPAL INVESTMENT STRATEGIES
The Insured Municipal Bond Fund will invest at least 65% of its assets in
MUNICIPAL BONDS that are covered by insurance guaranteeing the timely payment of
both principal and interest. This insurance may be in the form of NEW ISSUE
INSURANCE or SECONDARY MARKET INSURANCE. Any premiums paid by the Fund to
purchase insurance policies will be a Fund expense and may reduce the Fund's
current yield.
In addition, the Fund may invest up to 35% of its total assets in uninsured
municipal bonds.
- --------------------------------------------------------------
MUNICIPAL BONDS are issued by cities, counties, and states and other government
entities to cover borrowing needs.
NEW ISSUE INSURANCE is a policy purchased by an issuer prior to bringing a bond
issue to market in an initial offering. By purchasing the policy, the issuer
obtains a higher credit rating for its bond (usually Aaa by Moody's or AAA by
S&P). Such insurance may increase the purchase price as well as the resale value
of the bond.
SECONDARY MARKET INSURANCE is purchased by an investor after the bonds have been
issued. These policies normally insure specific bonds for the remainder of their
term.
- ---------------------------------------------------------------------
When evaluating a bond for purchase, the advisor takes into consideration, among
other things, yield, maturity, any structural features that permit the issuer to
repurchase the bond at a stated price (a "call"), credit quality (including the
underlying rating of insured bonds), the purpose of the financing, the original
38
<PAGE>
SAFECO INSURED MUNICIPAL BOND FUND, CONTINUED
offering price, any state or local tax exemption and the amount of discount or
premium represented by the price offered. After evaluating these features of a
bond, the advisor compares the bond to the universe of other available bonds,
which may have different features, and will purchase the bond if it appears to
offer the best relative value.
The advisor seeks to stay as fully invested as possible so as to maximize yield.
In selecting bonds, the advisor pays particular attention to protection against
issuer call rights and invests in discount bonds to enhance call protection.
The advisor swaps bonds to improve call protection, to realize losses for the
purpose of offsetting gains, and to increase yield. The advisor will sell bonds
if the Fund needs to raise cash to meet shareholder redemptions.
PRINCIPAL RISK FACTORS
Loss of money is a risk of investing in the Insured Municipal Bond Fund.
Insurance does not guarantee the market value of insured municipal bonds or the
share price of the Fund. The Fund is subject to interest rate risk. Generally,
when market interest rates rise the price of the Fund's debt securities will
fall and when market interest rates fall the price of the Fund's debt securities
will rise. Also, such changes in price generally will be greater the longer the
maturity of the debt security.
This Fund is appropriate for investors seeking federally tax-exempt income from
a portfolio of securities insured for the timely payment of principal and
interest.
PERFORMANCE
The following bar chart and table provide some indication of the risks of
investing in the Insured Municipal Bond Fund by showing how the Fund's
performance has varied from year to year and how its performance compares over
time to that of the Lehman Brothers Insured Municipal Bond Index, a widely
recognized index of insured municipal bonds. As with all mutual funds, past
performance is not a prediction of future performance.
Total return is a measure of investment performance over a period of time. It
includes dividends and capital gain distributions, as well as share price gain
or loss.
39
<PAGE>
SAFECO INSURED MUNICIPAL BOND FUND, CONTINUED
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
12/31/89
12/31/90
12/31/91
12/31/92
12/31/93
12/31/94 -10.43
12/31/95 24.37
12/31/96 2.56
12/31/97 10.70
12/31/98 5.90
</TABLE>
Since the Fund's inception in 1993, the highest quarterly return was 10.13% for
the quarter ended March 31, 1995; and the lowest return was -9.14% for the
quarter ended March 31, 1994.
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
The following table shows how the Fund's No-Load Class performance compares to
Lehman Brothers Insured Municipal Bond Index:
<TABLE>
<CAPTION>
MARCH 18, 1993
(INCEPTION) TO
1 YEAR 5 YEARS DECEMBER 31, 1998
<S> <C> <C> <C>
Insured Municipal Bond Fund 5.90% 6.02% 6.57%
Lehman Brothers Insured Municipal
Bond Index* 7.06% 6.72% 7.59%
</TABLE>
* The Lehman Brothers Insured Municipal Bond Index is an unmanaged index
comprised of insured municipal bonds. The index does not reflect fees,
brokerage commissions, or other costs of investing. This index is used for
comparison purposes only, and the Fund's holdings do not necessarily mirror
the index. Performance is based on historical earnings and does not
indicate the Fund's future performance.
40
<PAGE>
SAFECO INSURED MUNICIPAL BOND FUND, CONTINUED
Returns and principal value vary with market conditions. When sold, shares may
be worth more, or less, than their original value.
FEES AND EXPENSES
The following paragraphs describe the fees and expenses that you may pay if you
buy and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
No-Load Class shares of the Fund are sold without any initial sales charge
(load) or contingent deferred sales charges. There are no exchange or redemption
fees (except a $10.00 charge for wire redemptions).
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
<TABLE>
<S> <C>
Management Fees 0.50%
12b-1 Fees 0.00%
Other Expenses 0.38%
Total Annual Fund Operating Expenses 0.88%
Fee Waiver** 0.00%
Net Expenses 0.88%
</TABLE>
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets. Expenses may vary during other time periods.
** SAFECO Asset Management Company (SAM) has contractually agreed, from May 1,
1999 through April 30, 2009, to pay the Fund's aggregate operating expenses
which exceed, in any given month, the rate of .40% per annum of the Fund's
average daily net assets ("Expense Limitation"). This arrangement does not
include the Fund's advisory fee, brokerage commissions, taxes, interest or
extraordinary expenses. To the extent that the aggregate amount SAM paid or
assumed in any prior months in a given year (May 1, 1999 through April 30,
2009) exceed the Expense Limitation, SAM may offset such amounts against
the Expense Limitation for the current month.
MANAGEMENT FEES are paid to SAFECO Asset Management Company (SAM) for investment
advisory services including the provision of research, supervision and
assistance in the management of the Fund.
OTHER EXPENSES include custody, accounting and administration expenses; transfer
agency and related expenses; shareholder servicing expenses; expenses related to
preparing, printing and delivering prospectuses and shareholder reports; the
expenses of holding shareholder meetings; legal and audit fees; trustees'
compensation; federal and state registration fees; and extraordinary expenses.
41
<PAGE>
SAFECO INSURED MUNICIPAL BOND FUND, CONTINUED
EXAMPLE
The following example is intended to help you compare the cost of investing in
the Insured Municipal Bond Fund with the cost of investing in other mutual
funds. This example assumes that you invest $10,000 in the Insured Municipal
Bond Fund for the time periods indicated and then redeem all of your shares at
the end of those periods. The example also assumes that your investment has a 5%
return each year and that the Fund's net operating expenses remain the same.
Although your actual costs may be higher or lower, costs based on these
assumptions would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
No-Load Class $ 90 $281 $488 $1,084
</TABLE>
SAFECO MONEY MARKET FUND
OBJECTIVE
The SAFECO Money Market Fund seeks 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 13 months or less.
PRINCIPAL INVESTMENT STRATEGIES
The Money Market Fund will purchase only high-quality securities having minimal
credit risk. The Money Market Fund will purchase only securities with remaining
maturities of 397 days or less and the Fund will maintain a dollar-weighted
average portfolio maturity of no more than 90 days.
42
<PAGE>
SAFECO MONEY MARKET FUND, CONTINUED
The Fund may invest in:
- - COMMERCIAL PAPER of both domestic and foreign issues
- - Negotiable and non-negotiable CERTIFICATES OF DEPOSIT, bankers' acceptances
and other short-term obligations of U.S. and foreign banks
- - REPURCHASE AGREEMENTS
- - VARIABLE AND FLOATING RATE INSTRUMENTS
- - U.S. GOVERNMENT SECURITIES
- - Restricted securities eligible for resale under RULE 144A or SECTION 4(2),
provided that the advisor has determined that such securities are liquid under
guidelines adopted by the Fund's Board of Trustees.
- - CORPORATE OBLIGATIONS such as publicly traded bonds and notes.
- - ASSET-BACKED SECURITIES
- - WHEN-ISSUED SECURITIES
- --------------------------------------------------------------
COMMERCIAL PAPER is a short-term unsecured promissory note issued by a financial
institution or large corporation, including funding agreements issued by
insurance companies.
CERTIFICATES OF DEPOSIT are receipts for deposits of funds in a financial
institution. They permit the holder to receive interest plus the deposit at
maturity.
REPURCHASE AGREEMENTS are arrangements in which the fund buys securities at one
price and simultaneously agrees to sell them back at a higher price.
VARIABLE AND FLOATING RATE INSTRUMENTS have interest rates that change
periodically in order to keep their market value at par.
U.S. GOVERNMENT SECURITIES are securities issued by the U.S. government or its
agencies or instrumentalities, such as the Federal Home Loan Bank or the Federal
Land Bank.
RULE 144A SECURITIES are securities which are exempt from registration
requirements. After a minimum two-year waiting period, they can be sold to
qualified institutional investors, such as mutual funds.
SECTION 4(2) SECURITIES are exempt from registration requirements and sold in
private placements to qualified institutional investors such as mutual funds.
CORPORATE OBLIGATIONS are debt instruments issued by a private corporation, as
distinct from ones issued by a government agency or a municipality.
ASSET-BACKED SECURITIES represent interests in pools of consumer loans,
automobile loans, credit card loans and installment loan contracts.
WHEN-ISSUED SECURITIES are securities whose terms and conditions, including
price, are fixed by the issuer, but are to be issued and delivered against
payment in the future - typically 30-45 days after the date of commitment.
- ---------------------------------------------------------------------
When evaluating a security for purchase, the advisor takes into consideration,
among other things, yield, maturity, issuer credit quality and relative value
compared with other alternatives. The advisor may sell a security if the advisor
becomes concerned about the issuer's creditworthiness, if a more attractive
alternative is available, or to raise cash to meet shareholder redemptions.
43
<PAGE>
SAFECO MONEY MARKET FUND, CONTINUED
PRINCIPAL RISK FACTORS
Although the Fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the Fund. The Money Market
Fund's yield will fluctuate with short-term interest rates.
The Fund is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other governmental agency. The Fund may be suitable for you
if you seek maximum safety and stability of principal.
PERFORMANCE
The following bar chart and table provide some indication of the risks of
investing in the Money Market Fund by showing how the Fund's performance has
varied from year to year and showing the Fund's performance over time. As with
all mutual funds, past performance is not a prediction of future performance.
Total return is a measure of investment performance over a period of time. It
includes dividends as well as share price gain or loss.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
12/31/89 9.79
12/31/90 7.98
12/31/91 5.74
12/31/92 3.27
12/31/93 2.50
12/31/94 3.53
12/31/95 5.28
12/31/96 4.75
12/31/97 4.93
12/31/98 5.08
</TABLE>
During the 10-year period shown in the chart, the highest quarterly return was
3.13% for the quarter ended June 30, 1989; and the lowest return was 0.59% for
the quarter ended June 30, 1993.
44
<PAGE>
SAFECO MONEY MARKET FUND, CONTINUED
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
The following table shows past performance for the Fund's No-Load Class:
<TABLE>
<CAPTION>
7-DAY YIELD
(PERIOD ENDED
1 YEAR 5 YEARS 10 YEARS DECEMBER 31, 1998)
<S> <C> <C> <C> <C>
Money Market Fund 5.08% 4.71% 5.26% 4.76%
</TABLE>
For updated yield information, call 800-835-4391.
FEES AND EXPENSES
The following paragraphs describe the fees and expenses that you may pay if you
buy and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
No-Load Class shares of the Fund are sold without any initial sales charge
(load) or contingent deferred sales charges. There are no exchange or redemption
fees (except a $10.00 charge for wire redemptions).
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
<TABLE>
<S> <C>
Management Fees 0.50%
12b-1 Fees 0.00%
Other Expenses 0.40%
Total Annual Fund Operating Expenses 0.90%
Fee Waiver** 0.10%
Net Expenses 0.80%
</TABLE>
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets. Expenses may vary during other time periods.
** SAFECO Asset Management Company (SAM) has contractually agreed, from May 1,
1999 through April 30, 2009, to pay the Fund's aggregate operating expenses
which exceed, in any given month, the rate of .30% per annum of the Fund's
average daily net assets ("Expense Limitation"). This arrangement does not
include the Fund's advisory fee, brokerage commissions, taxes, interest or
extraordinary expenses. To the extent that the aggregate amount SAM paid or
assumed in any prior months in a given year (May 1, 1999 through April 30,
2009) exceed the Expense Limitation, SAM may offset such amounts against
the Expense Limitation for the current month.
45
<PAGE>
SAFECO MONEY MARKET FUND, CONTINUED
MANAGEMENT FEES are paid to SAFECO Asset Management Company (SAM) for investment
advisory services including the provision of research, supervision and
assistance in the management of the Fund.
OTHER EXPENSES include custody, accounting and administration expenses; transfer
agency and related expenses; Shareholder servicing expenses; expenses related to
preparing, printing and delivering prospectuses and shareholder reports; the
expenses of holding shareholder meetings; legal and audit fees; trustees'
compensation; federal and state registration fees; and extraordinary expenses.
EXAMPLE
The following example is intended to help you compare the cost of investing in
the Money Market Fund with the cost of investing in other mutual funds. This
example assumes that you invest $10,000 in the Money Market Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example also assumes that your investment has a 5% return each year
and that the Fund's net operating expenses remain the same. Although your actual
costs may be higher or lower, costs based on these assumptions would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
No-Load Class $82 $255 $444 $990
</TABLE>
SAFECO TAX-FREE MONEY MARKET FUND
OBJECTIVE
The SAFECO Tax-Free Money Market Fund seeks to provide as high a level of
current income exempt from federal income tax as is consistent with a portfolio
of high-quality, short-term municipal obligations selected on the basis of
liquidity and preservation of capital.
PRINCIPAL INVESTMENT STRATEGIES
- - The Fund will purchase only high-quality securities having minimal credit
risk.
- - The Fund will purchase only securities with remaining maturities of 397 days
or less and the Fund will maintain a dollar-weighted average portfolio
maturity of no more than 90 days.
- ----------------------------
MUNICIPAL NOTES are issued by cities, counties, states and other government
entities to cover short term borrowing needs.
- ----------------------------
46
<PAGE>
SAFECO TAX-FREE MONEY MARKET FUND, CONTINUED
- - The Fund may invest in MUNICIPAL NOTES, including bond anticipation notes, tax
anticipation notes, revenue anticipation notes, municipal bonds and municipal
commercial paper.
- - The Fund may invest in floating and variable rate securities, including tender
option bonds and variable rate receipts which typically have interest rates
that change weekly and permit the holder to require the issuer to buy the bond
or receipt back at par plus amortized interest on a stated date.
- - The Fund will invest at least 80% of its assets in securities that pay
interest which is exempt from federal income tax and the federal alternative
minimum tax.
PRINCIPAL RISK FACTORS
Although the Fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money in a money market fund. The Tax-Free Money
Market Fund's yield will fluctuate with short-term interest rates.
The Fund is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other governmental agency. This Fund may be suitable for you
if you seek maximum safety and stability of principal in an investment that pays
federally tax-free income.
PERFORMANCE
The following bar chart and table provide some indication of the risks of
investing in the Tax-Free Money Market Fund by showing how the Fund's
performance has varied from year to year and showing the Fund's performance over
time. As with all mutual funds, past performance is not a prediction of future
performance.
Total return is a measure of investment performance over a period of time. It
includes dividends and capital gain distributions, as well as share price gain
or loss.
47
<PAGE>
SAFECO TAX-FREE MONEY MARKET FUND, CONTINUED
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
12/31/89 6.57
12/31/90 5.64
12/31/91 4.34
12/31/92 2.73
12/31/93 2.02
12/31/94 2.45
12/31/95 3.54
12/31/96 3.07
12/31/97 3.12
12/31/98 3.07
</TABLE>
During the 10-year period shown in the chart, the highest quarterly return was
2.16% for the quarter ended June 30, 1989; and the lowest return was 0.47% for
the quarter ended March 31, 1994.
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
The following table shows past performance for the Fund's No-Load Class:
<TABLE>
<CAPTION>
7-DAY YIELD
(PERIOD ENDED
1 YEAR 5 YEARS 10 YEARS DECEMBER 31, 1998)
<S> <C> <C> <C> <C>
Tax Free Money Market Fund 3.07% 3.05% 3.65% 3.20%
</TABLE>
For updated yield information, call 800-835-4391.
FEES AND EXPENSES
The following paragraphs describe the fees and expenses that you may pay if you
buy and hold shares of the Fund.
48
<PAGE>
SAFECO TAX-FREE MONEY MARKET FUND, CONTINUED
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
No-Load Class shares of the Fund are sold without any initial sales charge
(load) or contingent deferred sales charges. There are no exchange or redemption
fees (except a $10.00 charge for wire redemptions).
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
<TABLE>
<S> <C>
Management Fees 0.44%
12b-1 Fees 0.00%
Other Expenses 0.25%
Total Annual Fund Operating Expenses 0.69%
Fee Waiver** 0.00%
Net Expenses 0.69%
</TABLE>
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets. Expenses may vary during other time periods.
** SAFECO Asset Management Company (SAM) has contractually agreed, from May 1,
1999 through April 30, 2009, to pay the Fund's aggregate operating expenses
which exceed, in any given month, the rate of .30% per annum of the Fund's
average daily net assets ("Expense Limitation"). This arrangement does not
include the Fund's advisory fee, brokerage commissions, taxes, interest or
extraordinary expenses. To the extent that the aggregate amount SAM paid or
assumed in any prior months in a given year (May 1, 1999 through April 30,
2009) exceed the Expense Limitation, SAM may offset such amounts against
the Expense Limitation for the current month.
MANAGEMENT FEES are paid to SAFECO Asset Management Company (SAM) for investment
advisory services including the provision of research, supervision and
assistance in the management of the Fund.
OTHER EXPENSES include custody, accounting and administration expenses; transfer
agency and related expenses; expenses related to preparing, printing and
delivering prospectuses and shareholder reports; the expenses of holding
shareholder meetings; legal fees; trustees' compensation; federal and state
registration fees; and extraordinary expenses.
EXAMPLE
The following example is intended to help you compare the cost of investing in
the Tax-Free Money Market Fund with the cost of investing in other mutual funds.
This example assumes that you invest $10,000 in the Tax-Free Money Market Fund
for the time periods indicated and then redeem all of your shares at the end of
those periods. The example also assumes that your investment has a 5% return
49
<PAGE>
SAFECO TAX-FREE MONEY MARKET FUND, CONTINUED
each year and that the Fund's net operating expenses remain the same. Although
your actual costs may be higher or lower, costs based on these assumptions would
be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
No-Load Class $70 $221 $384 $859
</TABLE>
ADDITIONAL FUND FACTS
INVESTMENT OBJECTIVE CHANGES. In rare circumstances, a Fund may, with approval
from its board of trustees, change its investment objective. If this happens,
the Fund may no longer meet your investment needs. Should the board of trustees
vote to change a Fund's objective, you will be notified in writing at least 30
days prior to the change.
TEMPORARY DEFENSIVE STRATEGIES. From time to time, a Fund may take temporary
defensive positions that are inconsistent with its principal investment policies
in an attempt to respond to adverse market, economic, political or other
conditions. For temporary defensive strategies, a Fund may hold cash or invest
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
taking a temporary defensive position may not achieve its investment objective
in the short run.
UNDERSTANDING HOW A FUND INVESTS ITS ASSETS
This prospectus describes some of the Funds' investment policies and strategies.
The Statement of Additional Information includes additional information
concerning the Funds' additional investment policies and strategies. Percentage
limits placed on particular investments may be exceeded if, after the initial
investment, market movements cause asset values to change.
GENERAL RISKS OF ALL FUNDS
MARKET RISK. All securities transactions involve market risk. The major risk
associated with mutual funds is that the securities in the portfolio may decline
in
50
<PAGE>
ADDITIONAL FUND FACTS, CONTINUED
value, causing your investment to be worth less than when you bought it.
Investing in mutual fund shares is therefore not the same as making a bank
deposit, and your investment is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
INTEREST RATE RISK. All bond funds are subject to interest rate risk. The
principal value of all SAFECO Bond Funds (except the Money Market Funds) will
fluctuate inversely with changes in interest rates. Generally, when market
interest rates rise the price of the Funds' debt securities will fall and when
market interest rates fall the price of the Funds' debt securities will rise.
YEAR 2000 ISSUES. The common practice in computer programming of using two
digits to identify a year has resulted in what is referred to as the "Year 2000
problem." If not corrected, automated systems could misinterpret or fail to
process dates occurring after December 31, 1999. The Funds may be adversely
affected if the computer systems used by their primary service providers do not
properly process date-related information. SAM, the Funds' investment advisor,
SAFECO Services Corporation (SAFECO Services), the Funds' transfer and paying
agent, and SAFECO Securities, Inc. (SAFECO Securities), the Funds' underwriter
and distributor, are taking steps they believe are reasonably designed to
address the Year 2000 problem with respect to the computer systems that each of
them uses, and to obtain satisfactory assurances that each of the Funds' other
major service providers are taking similar steps to correct programming for
systems with which the Funds interact.
In addition, SAM, SAFECO Services and SAFECO Securities are developing
contingency plans intended to assure that they can quickly respond to unexpected
systems failures or can implement alternate solutions. It is not anticipated
that the Funds will incur any charges or that there will be any difficulties in
accurate and timely reporting resulting in the change in year from 1999 to 2000.
However, despite the efforts and plans of the Funds' service providers, computer
systems that are non-compliant could have a material adverse effect on the
Funds' business, operations or financial condition. In addition, securities
prices, and therefore the value of the assets held by the Funds, may also be
adversely affected if the companies or governmental units or agencies whose
securities are held by the
51
<PAGE>
ADDITIONAL FUND FACTS, CONTINUED
Funds do not properly process such date-related information. This risk is
greater for foreign securities because foreign countries are not as far along as
the United States is in addressing the Year 2000 problem.
MANAGEMENT
SAFECO Asset Management Company (SAM) is the investment advisor for each Fund,
providing investment research, advice and supervision in the ongoing management
of the portfolio. Based on each Fund's investment objective and policies, SAM
determines what securities the Fund will purchase, retain or sell and implements
those decisions. Each Fund pays SAM an annual advisory fee based on a percentage
of that Fund's average daily net assets, calculated each business day and paid
monthly. The Funds paid SAM advisory and administrative fees at the following
rates, as a percentage of average daily net assets, for the year ended December
31, 1998:
<TABLE>
<S> <C>
Intermediate-Term U.S. Treasury .55%
GNMA .65%
High-Yield Bond .65%
Managed Bond .50%
California Tax-Free Income .55%
Municipal Bond .42%
Washington State Municipal Bond .65%
Intermediate-Term Municipal Bond .55%
Insured Municipal Bond .65%
Money Market .50%
Tax-Free Money Market .50%
</TABLE>
SAM is a wholly owned subsidiary of SAFECO Corporation, which is located at
SAFECO Plaza, Seattle, WA 98185. SAM is located at Two Union Square, 25th Floor,
Seattle, Washington 98101.
52
<PAGE>
PORTFOLIO MANAGERS
INTERMEDIATE-TERM U.S. TREASURY FUND
The Intermediate-Term U.S. Treasury Fund is managed by Ronald L. Spaulding,
Chairman of the Board of SAM. Mr. Spaulding has been managing the Fund since
1988. He has served in various capacities with SAM and SAFECO Corporation since
1975.
GNMA FUND
The GNMA Fund is managed by Paul A. Stevenson, Vice President of SAM and Vice
President of SAFECO Life Insurance Company. Mr. Stevenson has served as
portfolio manager for the Fund since 1988.
HIGH-YIELD BOND FUND
The High-Yield Bond Fund is managed by Robert Kern, Assistant Vice President of
SAM. Mr. Kern has been managing the Fund since 1996. He has been a securities
analyst for SAM since 1994, and from 1988 to 1994 was employed in the
Controller's Department at SAFECO Corporation.
MANAGED BOND FUND
The Managed Bond Fund is managed by Michael Hughes, Assistant Vice President of
SAM. Mr. Hughes has been managing the Fund since 1997. From 1995 to 1996 he was
Vice President and a portfolio manager for First Interstate Capital Management
Company, and from 1988 to 1995 he was Vice President and portfolio manager for
First Interstate Bank of California.
CALIFORNIA TAX-FREE INCOME FUND
The California Tax-Free Income Fund is managed by Stephen C. Bauer, President
and Director of SAM. Mr. Bauer has been managing the SAFECO California Tax-Free
Income Fund since 1983.
MUNICIPAL BOND FUND
The Municipal Bond Fund is managed by Stephen C. Bauer, President and Director
of SAM. Mr. Bauer has been managing the SAFECO Municipal Bond Fund since 1981.
53
<PAGE>
PORTFOLIO MANAGERS, CONTINUED
WASHINGTON STATE MUNICIPAL BOND FUND
The Washington Municipal Bond Fund is managed by Beverly Denny, Assistant Vice
President of SAM. Ms. Denny has been managing the Fund since 1996. From 1991 to
1993 she was Marketing Director for SAFECO Mutual Funds, and she has been an
investment analyst with SAM since 1993.
INTERMEDIATE-TERM MUNICIPAL BOND FUND
The Intermediate-Term Municipal Bond Fund is managed by Mary Metastasio, Vice
President of SAM. Ms. Metastasio has been managing the Fund since 1996. She has
been the portfolio manager for the SAFECO Tax-Free Money Market Fund since 1987.
INSURED MUNICIPAL BOND FUND
The Insured Municipal Bond Fund is managed by Stephen C. Bauer, President and
Director of SAM. Mr. Bauer has been managing the SAFECO Insured Municipal Bond
Fund since 1992.
MONEY MARKET FUND
The Money Market Fund is managed by Naomi Urata, Assistant Vice President of
SAM. Ms. Urata has managed the Fund since 1994. Ms. Urata has been an investment
analyst for SAFECO Mutual Funds since 1993. From 1990 to 1992 she was Cash
Manager for The Seattle Times.
TAX-FREE MONEY MARKET FUND
The Tax-Free Money Market Fund is managed by Mary Metastasio, Vice President of
SAM. Ms. Metastasio has been managing the Fund since 1987.
FINANCIAL HIGHLIGHTS
The Financial Highlights tables are intended to help you understand the Funds'
financial performance for the past five years (or, if shorter, since
commencement of operations). Certain information reflects financial results for
a single Fund share. The total returns in the tables reflect the rate that an
investor would have earned (or lost) on an investment in a Fund (assuming
reinvestment of all dividends and other distributions). This information has
been audited by Ernst & Young LLP,
54
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
independent auditors, whose report, along with the Funds' financial statements,
are incorporated by reference in the Statement of Additional Information, which
is available upon request.
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
(FOR A NO-LOAD CLASS SHARE
OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
FOR THE THREE-MONTH
YEAR ENDED PERIOD ENDED FOR THE YEAR ENDED
DECEMBER 31 DECEMBER 31 SEPTEMBER 30
1998 1997 1996 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 10.34 $ 10.11 $ 10.10 $ 10.24 $ 9.74 $ 10.74
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.57 0.58 0.16 0.54 0.55 0.52
Net realized and unrealized gain
(loss) on investments 0.40 0.23 0.01 (0.14) 0.50 (1.00)
Total from investment operations 0.97 0.81 0.17 0.40 1.05 (0.48)
LESS DISTRIBUTIONS
Dividends from net investment income (0.57) (0.58) (0.16) (0.54) (0.55) (0.52)
NET ASSET VALUE AT
END OF PERIOD $ 10.74 $ 10.34 $ 10.11 $ 10.10 $ 10.24 $ 9.74
TOTAL RETURN 9.61% 8.29% 1.68%* 4.00% 11.07% (4.56%)
NET ASSETS AT END OF
PERIOD (000'S) $ 25,682 $ 15,698 $14,679 $ 14,668 $ 13,774 $ 13,367
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 0.90% 0.92% 0.85%*** 1.01% 0.96% 0.90%
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 5.38% 5.74% 6.30%** 5.30% 5.51% 5.08%
PORTFOLIO TURNOVER RATE 2.83% 82.36% 125.42%** 294.25% 124.90% 75.46%
</TABLE>
* Not annualized.
** Annualized.
*** Net of reimbursements by advisor. Excluding the reimbursements, the
annualized ratio of expenses to average net assets for the period ended
December 31, 1996, would have been 1.07%.
55
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO GNMA FUND
(FOR A NO-LOAD CLASS SHARE
OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
FOR THE THREE-MONTH
YEAR ENDED PERIOD ENDED FOR THE YEAR ENDED
DECEMBER 31 DECEMBER 31 SEPTEMBER 30
1998 1997 1996 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 9.57 $ 9.36 $ 9.26 $ 9.45 $ 9.05 $ 10.03
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.57 0.60 0.15 0.60 0.60 0.60
Net realized and unrealized gain
(loss) on investments 0.07 0.21 0.10 (0.19) 0.40 (0.98)
Total from investment operations 0.64 0.81 0.25 0.41 1.00 (0.38)
LESS DISTRIBUTIONS
Dividends from net investment income (0.57) (0.60) (0.15) (0.60) (0.60) (0.60)
NET ASSET VALUE AT
END OF PERIOD $ 9.64 $ 9.57 $ 9.36 $ 9.26 $ 9.45 $ 9.05
TOTAL RETURN 6.84% 8.97% 2.71%* 4.48% 11.49% (3.91%)
NET ASSETS AT END OF
PERIOD (000'S) $ 42,145 $ 38,172 $39,543 $ 39,703 $ 44,055 $ 46,176
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 0.94% 0.93% 1.01%** 1.03% 1.01% 0.95%
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 5.90% 6.40% 6.43%** 6.42% 6.55% 6.26%
PORTFOLIO TURNOVER RATE 104.63% 82.70% 51.06%** 47.45% 131.24% 55.12%
</TABLE>
* Not annualized.
** Annualized.
56
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO HIGH-YIELD BOND FUND
(FOR A NO-LOAD CLASS SHARE
OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
FOR THE THREE-MONTH
YEAR ENDED PERIOD ENDED FOR THE YEAR ENDED
DECEMBER 31 DECEMBER 31 SEPTEMBER 30
1998 1997 1996 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 9.13 $ 8.82 $ 8.79 $ 8.68 $ 8.55 $ 9.22
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.74 0.77 0.19 0.78 0.79 0.82
Net realized and unrealized gain
(loss) on investments (0.35) 0.31 0.03 0.11 0.13 (0.67)
Total from investment operations 0.39 1.08 0.22 0.89 0.92 0.15
LESS DISTRIBUTIONS
Dividends from net investment income (0.74) (0.77) (0.19) (0.78) (0.79) (0.82)
NET ASSET VALUE AT
END OF PERIOD $ 8.78 $ 9.13 $ 8.82 $ 8.79 $ 8.68 $ 8.55
TOTAL RETURN 4.45% 12.79% 2.50%* 10.79% 11.43% 1.61%
NET ASSETS AT END OF
PERIOD (000'S) $ 84,041 $ 71,058 $50,298 $ 47,880 $ 39,178 $ 27,212
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 0.92% 0.91% 0.90%** 0.94% 1.01% 1.03%
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 8.26% 8.58% 8.56%** 8.99% 9.28% 9.26%
PORTFOLIO TURNOVER RATE 64.22% 85.06% 35.01%** 92.65% 38.03% 63.02%
</TABLE>
* Not annualized.
** Annualized.
57
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO MANAGED BOND FUND
(FOR A NO-LOAD CLASS SHARE
OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 8.60 $ 8.35 $ 8.77 $ 8.15 $ 9.08
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.42 0.42 0.41 0.44 0.27
Net realized and unrealized
gain (loss) on investments 0.29 0.25 (0.42) 0.94 (0.93)
Total from investment
operations 0.71 0.67 (0.01) 1.38 (0.66)
LESS DISTRIBUTIONS
Dividends from net
investment income (0.42) (0.42) (0.41) (0.44) (0.27)
Distributions from realized gains (0.25) -- -- (0.32) --
Total distributions (0.67) (0.42) (0.41) (0.76) (0.27)
NET ASSET VALUE AT
END OF PERIOD $ 8.64 $ 8.60 $ 8.35 $ 8.77 $ 8.15
TOTAL RETURN 8.43% 8.23% 0.02% 17.35% (3.01%)+
NET ASSETS AT END OF
PERIOD (000'S) $ 7,575 $ 4,627 $ 4,215 $ 4,497 $ 4,627
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 1.16% 1.15% 1.27% 1.16% 1.37%
RATIO OF NET INVESTMENT
INCOME TO AVERAGE NET ASSETS 4.79% 4.98% 4.86% 5.14% 4.47%
PORTFOLIO TURNOVER RATE 132.76% 176.50% 136.29% 78.78% 129.56%
</TABLE>
+ Total return from February 28, 1994 (initial public offering) to December
31, 1994, not annualized.
58
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO CALIFORNIA TAX-FREE INCOME FUND
(FOR A NO-LOAD CLASS SHARE
OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
FOR THE NINE-MONTH FOR THE
YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 MARCH 31
1998 1997 1996 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 12.93 $ 12.22 $ 11.86 $ 11.54 $ 11.51
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.60 0.60 0.47 0.62 0.63
Net realized and unrealized
gain on investments 0.18 0.76 0.39 0.40 0.13
Total from investment
operations 0.78 1.36 0.86 1.02 0.76
LESS DISTRIBUTIONS
Dividends from net
investment income (0.60) (0.60) (0.47) (0.62) (0.63)
Distributions from realized gains (0.37) (0.05) (0.03) (0.08) (0.10)
Total distributions (0.97) (0.65) (0.50) (0.70) (0.73)
NET ASSET VALUE AT
END OF PERIOD $ 12.74 $ 12.93 $ 12.22 $ 11.86 $ 11.54
TOTAL RETURN 6.19% 11.55% 7.42%* 8.87% 7.01%
NET ASSETS AT END OF
PERIOD (000'S) $114,062 $ 88,379 $72,084 $ 70,546 $ 64,058
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 0.68% 0.68% 0.69%** 0.68% 0.70%
RATIO OF NET INVESTMENT
INCOME TO AVERAGE NET ASSETS 4.60% 4.88% 5.21%** 5.12% 5.65%
PORTFOLIO TURNOVER RATE 38.78% 9.83% 10.52%** 16.25% 44.10%
</TABLE>
* Not annualized.
** Annualized.
59
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO MUNICIPAL BOND FUND
(FOR A NO-LOAD CLASS SHARE
OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
FOR THE
FOR THE NINE-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31 FOR THE YEAR ENDED MARCH 31
1998 1997 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 14.52 $ 13.98 $ 13.69 $ 13.36 $ 13.27
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.73 0.75 0.57 0.76 0.77
Net realized and unrealized
gain on investments 0.17 0.70 0.29 0.33 0.12
Total from investment
operations 0.90 1.45 0.86 1.09 0.89
LESS DISTRIBUTIONS
Dividends from net
investment income (0.73) (0.75) (0.57) (0.76) (0.77)
Distributions from realized gains (0.24) (0.16) -- -- (0.03)
Total distributions (0.97) (0.91) (0.57) (0.76) (0.80)
NET ASSET VALUE AT END OF PERIOD $ 14.45 $ 14.52 $ 13.98 $ 13.69 $ 13.36
TOTAL RETURN 6.35% 10.68% 6.42%* 8.23% 7.10%
NET ASSETS AT END OF
PERIOD (000'S) $542,181 $502,946 $480,970 $480,643 $472,569
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 0.51% 0.51% 0.53%** 0.54% 0.56%
RATIO OF NET INVESTMENT
INCOME TO AVERAGE NET ASSETS 5.01% 5.31% 5.53%** 5.47% 5.96%
PORTFOLIO TURNOVER RATE 20.80% 13.52% 6.66%** 12.60% 26.96%
</TABLE>
* Not annualized.
** Annualized.
60
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
(FOR A NO-LOAD CLASS SHARE
OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
FOR THE NINE-MONTH FOR THE
YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 MARCH 31
1998 1997 1996 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 10.95 $ 10.53 $ 10.34 $ 10.10 $ 9.91
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.50 0.50 0.37 0.50 0.49
Net realized and unrealized
gain on investments 0.15 0.42 0.20 0.27 0.19
Total from investment
operations 0.65 0.92 0.57 0.77 0.68
LESS DISTRIBUTIONS
Dividends from net
investment income (0.50) (0.50) (0.37) (0.50) (0.49)
Distributions from realized gains (0.32) -- (0.01) (0.03) --
Total distributions (0.82) (0.50) (0.38) (0.53) (0.49)
NET ASSET VALUE AT
END OF PERIOD $ 10.78 $ 10.95 $ 10.53 $ 10.34 $ 10.10
TOTAL RETURN 5.99% 8.94% 5.61%* 7.73% 7.13%
NET ASSETS AT END OF
PERIOD (000'S) $ 8,167 $ 7,288 $ 6,558 $ 6,489 $ 5,953
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 1.03% 1.02% 1.10%** 1.07% 1.09%
RATIO OF NET INVESTMENT
INCOME TO AVERAGE NET ASSETS 4.50% 4.68% 4.78%** 4.78% 5.06%
PORTFOLIO TURNOVER RATE 33.18% 11.67% 15.96%** 20.86% 9.23%
</TABLE>
* Not annualized.
** Annualized.
61
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO INTERMEDIATE-TERM MUNICIPAL BOND FUND
(FOR A NO-LOAD CLASS SHARE
OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
FOR THE NINE-MONTH FOR THE
YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 MARCH 31
1998 1997 1996 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 10.92 $ 10.61 $ 10.49 $ 10.17 $ 10.13
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.47 0.47 0.35 0.45 0.45
Net realized and unrealized
gain on investments 0.10 0.31 0.12 0.32 0.04
Total from investment
operations 0.57 0.78 0.47 0.77 0.49
LESS DISTRIBUTIONS
Dividends from net
investment income (0.47) (0.47) (0.35) (0.45) (0.45)
NET ASSET VALUE AT
END OF PERIOD $ 11.02 $ 10.92 $ 10.61 $ 10.49 $ 10.17
TOTAL RETURN 5.33% 7.50% 4.53%* 7.63% 4.97%
NET ASSETS AT END OF
PERIOD (000'S) $ 15,487 $ 13,780 $14,172 $ 14,981 $ 13,762
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 0.83% 0.83% 0.89%** 0.84% 0.85%
RATIO OF NET INVESTMENT
INCOME TO AVERAGE NET ASSETS 4.25% 4.37% 4.40%** 4.29% 4.46%
PORTFOLIO TURNOVER RATE 4.29% 10.52% 12.81%** 9.12% 4.27%
</TABLE>
* Not annualized.
** Annualized.
62
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO INSURED MUNICIPAL BOND FUND
(FOR A NO-LOAD CLASS SHARE
OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
FOR THE NINE-MONTH FOR THE
YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 MARCH 31
1998 1997 1996 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 11.36 $ 10.74 $ 10.46 $ 10.05 $ 9.73
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.49 0.50 0.37 0.48 0.48
Net realized and unrealized
gain on investments 0.17 0.62 0.28 0.41 0.32
Total from investment
operations 0.66 1.12 0.65 0.89 0.8
LESS DISTRIBUTIONS
Dividends from net
investment income (0.49) (0.50) (0.37) (0.48) (0.48)
Distributions from realized gains (0.20) -- -- -- --
NET ASSET VALUE AT
END OF PERIOD $ 11.33 $ 11.36 $ 10.74 $ 10.46 $ 10.05
TOTAL RETURN 5.90% 10.70% 6.31%* 8.95% 8.58%
NET ASSETS AT END OF
PERIOD (000'S) $ 24,998 $ 16,516 $13,187 $ 11,758 $ 8,163
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 0.88% 0.92% 1.00%** 0.99% 1.08%
RATIO OF NET INVESTMENT
INCOME TO AVERAGE NET ASSETS 4.29% 4.56% 4.66%** 4.53% 5.11%
PORTFOLIO TURNOVER RATE 27.30% 13.02% 14.86%** 3.71% 14.76%
</TABLE>
* Not annualized.
** Annualized.
63
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO MONEY MARKET FUND
(FOR A NO-LOAD CLASS SHARE
OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
FOR THE YEAR NINE-MONTH
ENDED PERIOD ENDED FOR THE YEAR ENDED
DECEMBER 31 DECEMBER 31 MARCH 31
1998 1997 1996 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.05 0.05 0.03 0.05 0.04
LESS DISTRIBUTIONS
Dividends from net
investment income (0.05) (0.05) (0.03) (0.05) (0.04)
NET ASSET VALUE AT
END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
TOTAL RETURN 5.08% 4.93% 3.54%* 5.15% 4.20%
NET ASSETS AT END OF
PERIOD (000'S) $227,329 $176,623 $161,356 $165,122 $171,958
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 0.79% 0.78% 0.81%** 0.78% 0.78%
RATIO OF NET INVESTMENT
INCOME TO AVERAGE NET ASSETS 4.97% 4.82% 4.66%** 5.04% 4.21%
</TABLE>
* Not annualized.
** Annualized.
64
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO TAX-FREE MONEY MARKET FUND
(FOR A NO-LOAD CLASS SHARE
OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
FOR THE NINE-MONTH
YEAR ENDED PERIOD ENDED FOR THE YEAR ENDED
DECEMBER 31 DECEMBER 31 MARCH 31
1998 1997 1996 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.03 0.03 0.02 0.03 0.03
LESS DISTRIBUTIONS
Dividends from net
investment income (0.03) (0.03) (0.02) (0.03) (0.03)
NET ASSET VALUE AT
END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
TOTAL RETURN 3.07% 3.12% 2.29%* 3.44% 2.84%
NET ASSETS AT END OF
PERIOD (000'S) $ 77,457 $ 75,437 $73,164 $ 79,702 $ 77,320
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 0.63% 0.63% 0.65%** 0.65% 0.64%
RATIO OF NET INVESTMENT
INCOME TO AVERAGE NET ASSETS 3.04% 3.11% 3.03%** 3.40% 2.79%
</TABLE>
* Not annualized
** Annualized
65
<PAGE>
FUND DISTRIBUTIONS AND TAX CONSIDERATIONS
WHEN THE FUNDS PAY DISTRIBUTIONS
Each Fund declares DIVIDENDS each business day and pays them monthly. Your
shares become entitled to dividends on the next business day after you purchase
them. If you request a 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 redemption proceeds. All Funds, except the Money Market and Tax-Free
Money Market Funds, pay CAPITAL GAIN DISTRIBUTIONS and special dividends, if
any, on the last business day of each year.
Dividends and other distributions paid by a Fund on the No-Load Class and each
other Class of its shares are calculated at the same time in the same manner.
HOW DISTRIBUTIONS ARE CREDITED TO YOUR ACCOUNT
We will reinvest your dividends and capital gain distributions at the NAV on the
EX-DISTRIBUTION DATE unless you tell us in writing that you wish to receive your
distributions in cash. Retirement accounts must reinvest all dividends and other
distributions in the distributing Fund.
- --------------------------------------------------------------
DIVIDENDS are distributions of a Fund's net investment income -- including
interest income and earned discounts -- less expenses.
CAPITAL GAIN DISTRIBUTIONS represent net profits made on securities that are
sold for more than they originally cost.
NET ASSET VALUE (NAV) is the market value of one share of a Fund. It is
calculated by adding up the value of all the Fund's assets, subtracting
liabilities and dividing this sum by the total number of shares owned by the
Fund's shareholders.
EX-DISTRIBUTION DATE is the first day that a Fund's NAV is reduced by the amount
of the most recently declared distribution.
- ---------------------------------------------------------------------
HOW DISTRIBUTIONS ARE TAXED
Depending on which Fund you invest in, your dividends may be taxable or wholly
or partially tax-free; other distributions will be fully taxable, regardless of
the Fund that makes them. If distributions are taxable, they must be included in
your taxable income, whether you reinvest the distributions or receive them in
cash. Depending on the nature of the distribution, it may be taxed either as
ordinary income or capital gain. Thus, distributions of a Fund's taxable
dividends and its net short-term capital gains will be taxed to you as ordinary
income, while distributions of a Fund's net long-term capital gains (to the
extent they exceed its net short-term capital losses) will be taxable to you as
long-term capital gain. The tax treatment of capital gain distributions as
short-term or long-term depends on
66
<PAGE>
FUND DISTRIBUTIONS AND TAX CONSIDERATIONS, CONTINUED
how long the Fund held the securities it sold that generated the gain, not on
how long you held your Fund shares. Net long-term capital gain distributions
generally are taxed to you (if you are a non-corporate shareholder) at a maximum
federal tax rate of 20%. We will notify you as to which type of income or gain
you are receiving so you can declare it properly on your tax return.
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. Unless you are subject to backup
withholding, we will not withhold taxes.
Certain dividends and other distributions declared by a Fund in October,
November or December of any year are taxable to its shareholders as though
received on December 31 of that year if paid to them during the following
January. Accordingly, those distributions will be taxed to Fund shareholders for
the taxable year in which that December 31 falls.
Please note that if you purchase shares shortly before a Fund pays a taxable
distribution, you will pay the full price for the shares, then receive part of
the price back as a taxable distribution.
HOW DISPOSITIONS OF SHARES ARE TAXED
When you sell (redeem) shares of a Fund, or exchange Fund shares for shares of
another SAFECO Fund, you will realize a gain or loss, except that you will not
recognize any gain or loss on the sale (redemption) or exchange of shares of the
Money Market Fund or the Tax-Free Money Market Fund so long as it maintains a
stable share price of $1.00.
If you purchase shares of a Fund within 30 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
U.S. TREASURY SECURITIES. States generally treat distributions of interest on
U.S. Treasury securities and other direct obligations of the U.S. government as
tax-free income. However, this treatment may depend on a Fund's owning a certain
67
<PAGE>
FUND DISTRIBUTIONS AND TAX CONSIDERATIONS, CONTINUED
minimum percentage of these securities. The Intermediate-Term U.S. Treasury Fund
will invest primarily in these securities, while the GNMA Fund may occasionally
invest a portion of its portfolio in these securities.
TAX-EXEMPT BOND FUNDS AND THE TAX-FREE MONEY MARKET FUND. Each of these Funds
pays dividends that are exempt from federal income tax. Certain investments may
result in taxable income, however. These include the following:
- - Any portion of dividends representing net capital gains is taxable.
- - Income derived from certain bonds purchased below their issue price is treated
as ordinary income.
- - Only the Washington State Municipal Bond Fund may purchase so-called "private
activity" bonds, possibly generating interest that would constitute a
preference item for purposes of the federal alternative minimum tax.
If you buy shares of a Tax-Exempt Bond Fund and sell them at a loss within six
months, you may deduct only the amount of the loss that exceeds the amount of
dividends from tax-exempt interest that you received during that period.
If you receive Social Security or railroad retirement benefits, you may need to
include tax-free Fund distributions as part of your income when determining any
federal income tax that may be due on those benefits.
CALIFORNIA TAX-FREE INCOME FUND. The California Tax-Free Income Fund (California
Fund) pays dividends that are exempt from California state personal income
taxes. Certain situations, in addition to those above, may result in taxable
income, however. These include the following:
- - Capital gains distributions paid by the California Fund are treated as
long-term capital gains and are taxable as such, regardless of how long the
shares have been held.
- - Redemptions and exchanges of shares of the California Fund may result in a
capital gain or loss for California income tax purposes.
- - The tax exemption on interest income from California municipal bonds applies
only to individual shareholders. Such income is taxable for most corporate
shareholders.
68
<PAGE>
FUND DISTRIBUTIONS AND TAX CONSIDERATIONS, CONTINUED
WASHINGTON STATE MUNICIPAL BOND FUND. Currently the state of Washington has no
state personal income tax. If Washington enacts a personal income tax, there can
be no assurance that the dividends from the Washington State Municipal Bond Fund
would be exempt from that tax.
This section summarizes only some of the important federal income tax
considerations of which you should be aware. For more information, please see
the Statement of Additional Information. Also, there may be other federal, state
or local tax considerations unique to your situation. Consult your tax advisor
for more guidance.
YOUR INVESTMENT
HOW WE CALCULATE THE VALUE OF YOUR SHARES
The price of a Fund's shares is based on its NAV, which is generally calculated
as of the close of regular trading on the New York Stock Exchange (NYSE)
(usually 4:00 Eastern time, 1:00 p.m. Pacific time) every day the NYSE is open.
Your purchase or redemption order will be priced at the next NAV calculated
after your order is accepted by the Fund.
To the extent that a Fund's assets are traded in other markets on days when the
NYSE is closed, the value of those assets may be affected on days when the Fund
is not open for business. In addition, trading in some of the Fund's assets may
not occur on days when the Fund is open for business.
- --------------------------------------------------------------
The NYSE is closed on the weekends and on the following holidays:
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day
- ---------------------------------------------------------------------
HOW WE VALUE A FUND'S INVESTMENTS
We obtain valuations for each Fund's investments from pricing services. Prices
for exchange-traded securities are based on the last reported sale price on the
national exchange on which the securities are primarily traded, unless there are
no transactions, in which case the value is based on the last reported bid
price. Prices
69
<PAGE>
HOW WE VALUE A FUND'S INVESTMENTS, CONTINUED
for non-exchange traded securities are based on similar securities and
quotations from dealers. Investments for which a representative value cannot be
established are priced using a method the Board of Trustees believes reflects
fair value.
Like most money market funds, each Money Market Fund values securities on the
basis of amortized cost. Amortized cost valuation involves valuing a security at
its cost and adding or subtracting any discount or premium (reflective of
maturity), 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 each Money Market Fund maintain a stable $1.00
share price.
OPENING AND MAINTAINING YOUR ACCOUNT
TO OPEN AN ACCOUNT:
- - Complete an account application and send it to SAFECO Mutual Funds with a
check made payable to SAFECO Mutual Funds for your initial investment.
- - If you are investing in a retirement account, complete and sign a retirement
account application (note: you may not buy tax-free funds for a retirement
account).
INVESTING DETAILS
There are several things you must understand before you buy, sell or exchange
shares.
- - We must have received your completed, signed application and payment before we
can conduct any Fund transaction (except when money is wired into an account).
- - We do not accept currency and can accept only funds drawn in U.S. dollars on a
U.S. bank account.
- - Checks should be made payable to SAFECO Mutual Funds. We reserve the right to
refuse all third party checks.
- - Although we do not normally issue shares in certificate form, we will issue
certificates for whole shares free of charge upon your request. If your shares
are issued in certificate form, you must endorse and submit them with any sale
or exchange request.
70
<PAGE>
OPENING AND MAINTAINING YOUR ACCOUNT, CONTINUED
- - SAFECO Services charges a $10 fee to wire redemption proceeds. In addition,
some banks may charge a fee to receive wires.
- - We reserve the right to refuse the purchase of shares.
- - We may require certified copies of supporting documents and a signature
guarantee before we can process some sale and exchange requests (e.g., if we
cannot verify a shareholder's signature or in the event of the death of an
account owner).
- - If you buy shares by any means other than by wire and shortly thereafter sell
or exchange your shares, we may hold the proceeds for up to 15 calendar days
after purchase or until we are sure that your bank will honor the investment,
whichever happens first.
- - In addition to a No-Load Class, some of the Funds offer Class A and Class B
shares that are sold in a separate prospectus and subject to different fees
and expenses.
AUTHORIZING SIGNATURES
On your account application, you will be asked to specify the number of
signatures required to authorize account changes and transactions. Please note
that allowing fewer than all account owners to authorize account changes and
transactions has important implications. For example, one owner of a joint
account could redeem shares without the co-owner's signature. If you select
fewer than all account owner signatures, you can revoke this election by sending
a written request to SAFECO Mutual Funds. Unless you indicate otherwise, we will
require that all account owners sign any account change or transaction
instructions.
TAX-DEFERRED RETIREMENT PLANS AND ACCOUNTS
SAFECO Mutual Funds offers a variety of tax-deferred retirement plans and
accounts for individuals, businesses, and nonprofit organizations. You may
establish an account under one of the following that will allow you to defer
federal income tax on investment income while you save for retirement. Most of
the Funds (other than the Tax-Exempt Bond Funds and the Tax-Free Money Market
Fund) may be used as investment vehicles for these plans and accounts.
71
<PAGE>
OPENING AND MAINTAINING YOUR ACCOUNT, CONTINUED
TRADITIONAL INDIVIDUAL RETIREMENT ACCOUNTS (IRAS)
The maximum annual contribution generally is $2,000 per person. Depending on
your situation, your contribution may be partially or fully tax deductible. You
pay no tax on the earnings until withdrawal. An annual custodial fee may be
charged for any part of a calendar year in which you have an IRA investment in a
Fund.
ROTH IRAS
As with a Traditional IRA, a Roth IRA allows you to annually contribute up to
$2,000 per person. While contributions to a Roth IRA are NOT tax deductible,
earnings are tax-free at withdrawal if you meet certain requirements.
SIMPLIFIED EMPLOYEE PENSION IRAS (SEP-IRAS)
SEP-IRAs are easily administered retirement plans for small businesses and self-
employed individuals. Annual contributions up to the lesser of $24,000 or 15% of
compensation 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 Traditional IRAs.
403(b) PLANS
403(b) plans are retirement plans for tax-exempt organizations and school
systems to which both employers and employees 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. 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. Minimum investment amounts are negotiable.
For information about the above accounts and plans, please call us at
1-800-624-5711.
72
<PAGE>
PURCHASING YOUR SHARES
The price you pay for shares of a Fund is its NAV on the day we receive your
check, money order, wire or telephone purchase instruction in good order.
However, if we receive your investment after the NYSE has closed for the day,
the price you will pay is the Fund's NAV as of the next business day. You may
purchase shares of a SAFECO Fund only if it is qualified for sale in the state
where you live.
---------------------------------------------------------------------
UGMA stands for Uniform Gifts to Minors Act; UTMA stands for Uniform
Transfers to Minors Act. Most states have adopted either the UGMA or UTMA,
which regulates custodial accounts for minors.
- ---------------------------------------------------------------------
73
<PAGE>
PURCHASING YOUR SHARES, CONTINUED
BY MAIL
IF YOU ARE BUYING SHARES FOR THE FIRST TIME:
1. Complete and sign an account application.
2. Send a check made payable to SAFECO Mutual Funds for the appropriate amount:
- - If you are opening an IRA or UGMA/UTMA account, send at least $250.
- - If you are opening an Education IRA, send $500.
- - If you choose the Automatic Investment Method or Payroll Deduction Plan for a
regular account on your application, send nothing.*
- - If none of the above applies, send a check for at least $1,000 made payable to
SAFECO Mutual Funds.
IF YOU ARE BUYING ADDITIONAL SHARES:
- - Our Automatic Investment Method allows you to make regular monthly investments
by authorizing SAFECO to withdraw a specific amount from your bank account and
invest it in the Fund of your choice.
- - The minimum investment per Fund is $100. This applies to all accounts except
UGMA and UTMA accounts, which have a $50 minimum if you opened the account
with an initial investment of at least $250. For more information, call (800)
624-5711.
1. Send a check for the appropriate amount. The Fund may charge you a fee if
your check is returned to us by your bank due to non-sufficient funds or
other reasons.
2. Enclose the investment slip from your statement, if available.
MAIL TO: SAFECO Mutual Funds
No-Load Class
P.O. Box 34890
Seattle, WA 98124-1890
* If you are an employer that uses group billing, you may establish a
self-administered Payroll Deduction Plan in any SAFECO Fund. Payroll deduction
amounts are negotiable. For more information, call (800) 624-5711.
74
<PAGE>
PURCHASING YOUR SHARES, CONTINUED
BY WIRE
IF YOU ARE BUYING SHARES FOR THE FIRST TIME:
1. Call (800) 624-5711 for more information.
IF YOU ARE BUYING ADDITIONAL SHARES:
1. Call the number above and let us know you are wiring money to your account.
2. Have your bank wire at least $100 to the address below.
3. Have your bank include the following information:
- - SAFECO Fund name
- - SAFECO account number
- - Name(s) of the account owner(s).
4. Note that delays caused by inadequate wire instructions are not SAFECO's
responsibility.
5. Understand that your bank may charge a fee for wire services.
HAVE YOUR BANK SEND WIRES TO: U.S. Bank of Washington, N.A.,
Seattle, WA
ABA#1250-0010-5
Account #153 5000 60709
IN PERSON
WHETHER YOU ARE BUYING SHARES FOR THE FIRST TIME OR BUYING ADDITIONAL SHARES:
A representative will help you open your account and complete the transaction.
VISIT A SAFECO INVESTOR CENTER:
1409 Fifth Avenue, Seattle, WA
4333 Brooklyn Avenue NE, Seattle, WA
7528 164th Avenue NE, Suite A116, Redmond, WA
75
<PAGE>
PURCHASING YOUR SHARES, CONTINUED
BY PHONE
This option is not available for new or retirement accounts.
IF YOU ARE BUYING ADDITIONAL SHARES:
1. To become eligible for this service, you must choose it on your initial
application, or send a written request at least 15 days prior to your use.
You must also designate any other authorized users.
2. You may purchase no more than $50,000 per day and no less than $100 per day.
3. Understand that:
- - Money will be transferred from your bank account to your Fund account.
- - Your bank may not allow you to transfer money by phone.
- - Your bank may charge a fee.
- - We record all calls for your protection, and a representative may ask you for
identifying information, such as your Social Security number.
- - Although our representatives employ security measures to prevent unauthorized
account access, we cannot assure you that telephone activity will be
completely secure or free of delays or malfunctions. You must be willing to
assume the risk of any loss.
- - During times of unusual market volatility, you may find it difficult to access
SAFECO Mutual Funds by phone.
- - SAFECO Mutual Funds is not responsible for the negligence or wrongful acts of
third parties.
- - We may suspend, limit, modify, or terminate phone transaction privileges at
any time without prior notice.
- - The Fund may charge you a fee if your bank refuses the transfer from your bank
account due to non-sufficient funds or other reasons.
CALL:
(800) 624-5711 M-F between 5:30 a.m. and 7:00 p.m. Pacific time
to speak to a representative, or
(800) 835-4391 for our 24-hour Automated Service Line
76
<PAGE>
PURCHASING YOUR SHARES, CONTINUED
ON THE INTERNET
This option is not available for new or retirement accounts.
IF YOU ARE BUYING ADDITIONAL SHARES:
1. To become eligible for this service, you must choose it on your initial
application or send a written request at least 15 business days prior to your
use. You must also designate any other authorized users.
2. You may purchase no more than $50,000 per day and no less than $100 per day.
3. Understand that:
- - Money will be transferred from your bank account to your Fund account.
- - Your bank may not allow you to transfer money over the Internet.
- - Your bank may charge a fee.
- - Although our Web site employs security measures to prevent unauthorized
account access, we cannot assure you that Internet activity will be completely
secure or free of delays or malfunctions. You must be willing to assume the
risk of any loss.
- - During times of unusual market volatility, you may find it difficult to access
SAFECO Mutual Funds over the Internet.
- - SAFECO Mutual Funds is not responsible for the negligence or wrongful acts of
third parties.
- - We may suspend, limit, modify, or terminate Internet transaction privileges at
any time without prior notice.
- - The Fund may charge you a fee if your bank refuses the transfer from your bank
account due to non-sufficient funds or other reasons.
VISIT THE SAFECO MUTUAL FUNDS WEB SITE:
www.safecofunds.com
77
<PAGE>
PURCHASING YOUR SHARES, CONTINUED
THROUGH A REGISTERED SECURITIES DEALER,
BANK OR OTHER FINANCIAL INSTITUTION
WHETHER YOU ARE BUYING SHARES FOR THE FIRST TIME OR BUYING ADDITIONAL SHARES:
Understand that:
- - Your securities dealer may charge you a fee or impose more restrictions than
if you purchase the shares directly from SAFECO Mutual Funds. (SAFECO has no
control over or involvement in this fee.)
- - Your securities dealer is responsible for the prompt forwarding of
instructions on your account and is bound by the terms of this prospectus.
- - SAFECO is not responsible for the actions and recommendations of your
securities dealer.
CALL OR VISIT:
Any registered securities dealer, bank or other financial institution who has a
signed selling agreement with SAFECO.
THROUGH A REGISTERED INVESTMENT ADVISOR
WHETHER YOU ARE BUYING SHARES FOR THE FIRST TIME OR BUYING ADDITIONAL SHARES:
Understand that:
- - Your advisor may charge you a fee. (SAFECO has no control over or involvement
in this fee.)
- - Your advisor is responsible for the prompt forwarding of instructions on your
account and is bound by the terms of this prospectus.
- - SAFECO is not responsible for the actions and recommendations of your advisor.
CALL OR VISIT:
Any registered investment advisor meeting the following conditions:
- - Has a signed agreement with SAFECO, and
- - Has a power of attorney on file with SAFECO.
SELLING YOUR SHARES
When you sell shares, we will normally send you a check for the proceeds on the
first business day after we receive your redemption request in good order. If we
receive your request after the NYSE has closed for the day (1:00 p.m. Pacific
time), we will normally send the check two business days later.
78
<PAGE>
SELLING YOUR SHARES, CONTINUED
The price you receive is the NAV on the day we receive your redemption request.
However, if we receive your redemption request after the NYSE has closed for the
day, you will receive the NAV as of the next business day.
In unusual situations we may suspend or delay payment for redemptions. This may
happen if:
- - The NYSE is closed
- - NYSE trading is restricted
- - The Securities and Exchange Commission declares an emergency
- - If you bought shares less than 15 days previous to redemption and SAFECO has
not yet received confirmation that your bank will honor the investment.
Also, if immediate payment could adversely affect a Fund, we may need to delay
payment for up to seven days.
Distributions from retirement accounts are generally subject to federal income
tax withholding. However, under some circumstances, you may elect not to have
taxes withheld, or to have taxes withheld at a rate other than the prescribed
rate.
79
<PAGE>
SELLING YOUR SHARES, CONTINUED
BY MAIL
1. Send a letter specifying:
- - Account number
- - Fund name
- - Redemption amount (number of shares or dollar amount)
2. Have the letter signed by the owner(s) of the account. You must have
specified on your account application the number of signatures required to
authorize the selling of shares.
3. If you are selling shares in a retirement account, let us know the amount, if
any, to withhold for taxes or early withdrawal penalties.
4. A signature guarantee may be required for certain transactions. Please call
for details.
We will mail you a redemption check or you may pick it up from a SAFECO Investor
Center when it is ready. If you wish to have funds transferred directly to your
bank account, you must choose this service on your initial application or send a
written request at least 15 days prior to using it. SAFECO charges a $10 fee to
wire these proceeds, and some banks charge a fee to receive a wire.
If you chose the Systematic Withdrawal Plan, a Fund will automatically sell
shares in your account and send you a monthly withdrawal check. The minimum
withdrawal for this service is $50 per Fund.
For more information call (800) 624-5711.
MAIL TO: SAFECO Mutual Funds
No-Load Class
P.O. Box 34890
Seattle, WA 98124-1890
80
<PAGE>
SELLING YOUR SHARES, CONTINUED
IN PERSON
A SAFECO representative will be there to help you with the sale of your shares.
Please bring picture identification.
We will mail you a redemption check or you may pick it up from a SAFECO Investor
Center when it is ready. If you wish to have funds transferred directly to your
bank account, you must choose this service on your initial application or send a
written request at least 15 days prior to using it. SAFECO charges a $10 fee to
wire these proceeds, and some banks charge a fee to receive a wire.
VISIT A SAFECO INVESTOR CENTER:
1409 Fifth Avenue, Seattle, WA
4333 Brooklyn Avenue NE, Seattle, WA
7528 164th Avenue NE, Suite A116, Redmond, WA
81
<PAGE>
SELLING YOUR SHARES, CONTINUED
BY PHONE
This option is not available for retirement accounts or for shares issued in
certificate form.
Understand that:
- - We record all calls for your protection, and a representative may ask you for
identifying information, such as your Social Securitiy number.
- - Although our representatives employ security measures to prevent unauthorized
account access, we cannot assure you that telephone activity will be
completely secure or free of delays or malfunctions. You must be willing to
assume the risk of any loss.
- - During times of unusual market volatility, you may find it difficult to access
SAFECO by phone.
- - SAFECO is not responsible for the negligence or wrongful acts of third
parties.
- - We may suspend, limit, modify, or terminate phone transaction privileges at
any time without prior notice.
We will mail you a redemption check or you may pick it up from a SAFECO Investor
Center when it is ready. If you wish to have funds transferred directly to your
bank account, you must choose this service on your initial application or send a
written request at least 15 days prior to using it. SAFECO charges a $10 fee to
wire these proceeds, and some banks charge a fee to receive a wire.
CALL:
(800) 624-5711 Monday through Friday between 5:30 a.m. and 7:00 p.m.
Pacific time to speak to a representative, or
(800) 835-4391 for our 24-hour Automated Service Line
82
<PAGE>
SELLING YOUR SHARES, CONTINUED
ON THE INTERNET
This option is not available for retirement accounts or if shares are issued in
certificate form.
Understand that:
- - Although our Web site employs security measures to prevent unauthorized
account access, we cannot assure you that Internet activity will be completely
secure or free of delays or malfunctions. You must be willing to assume the
risk of any loss.
- - During times of unusual market volatility, you may find it difficult to access
SAFECO Mutual Funds over the Internet.
- - SAFECO is not responsible for the negligence or wrongful acts of third
parties.
- - We may suspend, limit, modify, or terminate Internet transaction privileges at
any time without prior notice.
We will transfer the proceeds from your sale to your bank account or mail you a
redemption check, or you may pick it up from a SAFECO Investor Center when it is
ready. If you wish to have funds transferred directly to your bank account, you
must choose this service on your initial application or send a written request
at least 15 days prior to using it. SAFECO charges a $10 fee to wire these
proceeds, and some banks charge a fee to receive a wire.
VISIT THE SAFECO MUTUAL FUNDS WEB SITE:
www.safecofunds.com
83
<PAGE>
SELLING YOUR SHARES, CONTINUED
THROUGH A REGISTERED SECURITIES DEALER,
BANK OR OTHER FINANCIAL INSTITUTION
A securities dealer that has a contract with the Fund distributor may submit
redemption requests for you.
Understand that:
- - Your securities dealer may charge you a fee for this service. (SAFECO has no
control over or involvement in this fee.)
- - Your securities dealer is responsible for the prompt forwarding of
instructions on your account and is bound by the terms of this prospectus.
- - SAFECO is not responsible for the actions and recommendations of your
securities dealer.
CALL OR VISIT:
Any registered securities dealer who has a signed selling agreement with SAFECO.
THROUGH A REGISTERED INVESTMENT ADVISOR
An investment advisor may submit redemption requests for you.
Understand that:
- - Your advisor may charge you a fee. (SAFECO has no control over or involvement
in this fee.)
- - Your advisor is responsible for the prompt forwarding of instructions on your
account and is bound by the terms of this prospectus.
- - SAFECO is not responsible for the actions and recommendations of your advisor.
CALL OR VISIT:
Any registered investment advisor meeting the following conditions:
- - Has a signed agreement with SAFECO, and
- - Has a power of attorney on file with SAFECO.
84
<PAGE>
EXCHANGING SHARES FROM ONE FUND TO ANOTHER
HOW TO MAKE AN EXCHANGE
An exchange is when you sell shares of one Fund and buy shares of another in the
same account with the same owner(s). Here are some things you should know about
exchanges:
- - Under normal circumstances, we will buy shares of the Fund into which you are
exchanging on the same day that we process your order to sell.
- - If immediate payment could adversely affect a Fund, we may need to delay the
purchase of shares in the new Fund for up to seven days.
- - Mutual fund exchanges are taxable events. You may realize a capital gain or
loss when you make an exchange.
- - Always read the prospectus before making an exchange into a Fund that is new
to you.
EXCHANGE LIMITATIONS
Keep in mind that mutual funds are not intended to be used as vehicles for
frequent trading in response to short-term market fluctuations. Market-timing
and similar investment strategies disrupt efficient portfolio management and
increase transaction costs for all shareholders. For this reason, we have
instituted certain policies to discourage excessive exchange or SIMULTANEOUS
ORDER TRANSACTIONS.
You may buy shares of a SAFECO Fund by exchange only if it is qualified for sale
in the state where you live.
- - You may enter no more than four exchanges or simultaneous order transactions
in any 12-month period. However, we reserve the right to refuse exchanges at
any time. In addition, in the case where an exchange could adversely affect
the performance and investment objective of the Fund, we may terminate
privileges without prior notice. Under normal circumstances, we will give you
60 days' notice before terminating your exchange privileges.
- - You may buy shares of a SAFECO Fund by exchange only if it is qualified for
sale in the state where you live.
- --------------------------------------------------------------
SIMULTANEOUS ORDER TRANSACTIONS involve a redemption from one SAFECO Fund and
reinvestment shortly thereafter into another SAFECO Fund. We will use our
discretion in determining when a simultaneous order transaction takes place.
- ---------------------------------------------------------------------
85
<PAGE>
EXCHANGING SHARES FROM ONE FUND TO ANOTHER, CONTINUED
BY MAIL
1. Send a letter specifying:
- - Account number
- - Name of the Fund you wish to exchange out of
- - Name of the Fund you wish to exchange into
- - Amount of the exchange (number of shares or dollar amount)
2. Have the letter signed by the owner(s) of the account. You must have
specified on your account application the number of signatures required to
authorize the exchange of shares.
MAIL TO: SAFECO Mutual Funds
No-Load Class
P.O. Box 34890
Seattle, WA 98124-1890
IN PERSON
A representative will be there to help you with your exchange.
VISIT A SAFECO INVESTOR CENTER:
1409 Fifth Avenue, Seattle, WA
4333 Brooklyn Avenue NE, Seattle, WA
7528 164th Avenue NE, Suite A116, Redmond, WA
86
<PAGE>
EXCHANGING SHARES FROM ONE FUND TO ANOTHER, CONTINUED
BY PHONE
This option is not available for shares issued in certificate form.
1. You must exchange $1,000 or more.
2. To become eligible for this service, you must choose it on your initial
application or we must have received your written request prior to your use.
You must also designate any other authorized users.
3. Understand that:
- - We record all calls for your protection, and a representative may ask you for
identifying information, such as your Social Security number.
- - Although our representatives employ security measures to prevent unauthorized
account access, we cannot assure you that telephone activity will be
completely secure or free of delays or malfunctions. You must be willing to
assume the risk of any loss.
- - During times of unusual market volatility, you may find it difficult to access
SAFECO by phone.
- - SAFECO is not responsible for the negligence or wrongful acts of third
parties.
- - We may suspend, limit, modify, or terminate phone transaction privileges at
any time without prior notice.
CALL:
(800) 624-5711 Monday through Friday between 5:30 a.m. and 7:00 p.m.
Pacific time to speak to a representative, or
(800) 835-4391 for our 24-hour Automated Service Line
87
<PAGE>
EXCHANGING SHARES FROM ONE FUND TO ANOTHER, CONTINUED
ON THE INTERNET
This option is not available for shares issued in certificate form.
1. You must exchange $1,000 or more.
2. You are automatically enrolled in this service unless you decline it on the
initial application.
3. Understand that:
- - Although our Web site employs security measures to prevent unauthorized
account access, we cannot assure you that Internet activity will be completely
secure or free of delays or malfunctions. You must be willing to assume the
risk of any loss.
- - During times of unusual market volatility, you may find it difficult to access
SAFECO Mutual Funds over the Internet.
- - SAFECO is not responsible for the negligence or wrongful acts of third
parties.
- - We may suspend, limit, modify, or terminate Internet transaction privileges at
any time without prior notice.
VISIT THE SAFECO MUTUAL FUNDS WEB SITE:
www.safecofunds.com
THROUGH A REGISTERED SECURITIES DEALER,
BANK OR OTHER FINANCIAL INSTITUTION
A securities dealer that has a contract with the Fund distributor may submit
exchange requests for you.
Understand that:
- - Your securities dealer may charge you a fee for this service. (SAFECO has no
control over or involvement in this fee.)
- - Your securities dealer is responsible for the prompt forwarding of
instructions on your account and is bound by the terms of this prospectus.
- - SAFECO is not responsible for the actions and recommendations of your
securities dealer.
CALL OR VISIT:
Any registered securities dealer.
88
<PAGE>
EXCHANGING SHARES FROM ONE FUND TO ANOTHER, CONTINUED
THROUGH A REGISTERED INVESTMENT ADVISOR
A registered investment advisor may submit exchange requests for you.
Understand that:
- - Your advisor may charge you a fee. (SAFECO has no control over or involvement
in this fee.)
- - Your advisor is responsible for the prompt forwarding of instructions on your
account and is bound by the terms of this prospectus.
- - SAFECO is not responsible for the actions and recommendations of your advisor.
CALL OR VISIT:
Any registered investment advisor meeting the following conditions:
- - Has a signed agreement with SAFECO, and
- - Has a power of attorney on file with us.
REDEMPTION CHECKS -- MONEY MARKET FUNDS ONLY
If you are a shareholder in one of the SAFECO Money Market Funds, we will send
you, upon request and free of charge, redemption checks that allow you to
withdraw funds from your account.
Checks may be made payable to anyone and must be:
- - $500 or more
- - Signed by the authorized account holders
If you write more than one check against insufficient funds, we may close your
account.
MAINTAINING YOUR ACCOUNT
ACCOUNT STATEMENTS
Each quarter you will receive an account statement showing your Fund holdings
and any transactions that have occurred during the statement period. You will
also receive a statement after each transaction that affects your account
balance. Please review the statement for accuracy as soon as you receive it. If
you don't notify us within 30 days, we will assume the transactions listed on
your statement are correct.
89
<PAGE>
MAINTAINING YOUR ACCOUNT, CONTINUED
We will also be sending you semi-annual and annual reports. To reduce the volume
of mail, we will send only one copy of these reports and the prospectus to a
household (same surname, same address) unless you request otherwise.
Certain documents may be delivered to you electronically, at your request.
Maintaining small accounts increases expenses for all shareholders. For this
reason, we may close your account if it falls below $100. If this happens, we
will first give you at least 60 days' notice, then redeem your shares at net
asset value and send the proceeds to you.
We will reinvest into your account any undeliverable and uncashed dividends and
other distribution checks that remain outstanding over six months. This
reinvestment will reflect the NAV next computed after the check is cancelled.
Subsequent distributions may also be reinvested.
ACCOUNT CHANGES
TO CHANGE YOUR ACCOUNT REGISTRATION:
Send a written request to SAFECO Mutual Funds, P.O. Box 34890, Seattle, WA
98124-1890. Make sure the request is signed by the authorized owner(s) of the
account as specified on your account application.
TO MAKE CHANGES TO YOUR AUTOMATIC INVESTMENT METHOD OR SYSTEMATIC
WITHDRAWAL PLAN:
Send your request in writing as indicated above. Or, if you have previously
selected the single signature authorization for your account and have enrolled
in the telephone option service, you may place your request by telephone.
90
<PAGE>
SAFECO FAMILY OF FUNDS
------------------------------------------------
STABILITY OF PRINCIPAL
SAFECO Money Market Fund
SAFECO Tax-Free Money Market Fund
BOND INCOME
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO GNMA Fund
SAFECO High-Yield Bond Fund
SAFECO Managed Bond Fund
TAX-FREE BOND INCOME
SAFECO Intermediate-Term Municipal Bond Fund
SAFECO Insured Municipal Bond Fund
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal Bond Fund
HIGH CURRENT INCOME WITH LONG-TERM GROWTH
SAFECO Income Fund
LONG-TERM GROWTH
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Northwest Fund
SAFECO International Stock Fund
SAFECO Balanced Fund
SAFECO Small Company Stock Fund
SAFECO U.S. Value Fund
91
<PAGE>
FOR MORE INFORMATION
------------------------------------------------
If you would like more information, the following documents are available free
upon request:
ANNUAL/SEMI-ANNUAL REPORTS
Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports. In a Fund's annual report, you will find a
discussion of the market conditions and investment strategies that significantly
affected its performance during the last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the Funds. A current SAI is on
file with the Securities and Exchange Commission, is incorporated herein by
reference and is legally considered part of this prospectus.
For these documents or to discuss your questions about the Funds,
WRITE TO: SAFECO Mutual Funds
No-Load Class Shares
P.O. Box 34890
Seattle, WA 98124-1890
CALL: 1-800-624-5711
Deaf and Hard of Hearing TTY/TDD Service: 1-800-438-8718
VISIT OUR WEB SITE: www.safecofunds.com
E-MAIL: [email protected]
Or contact the SEC:
WRITE TO:SEC Public Reference Room
450 Fifth Street, N.W.
Washington, DC 20549-6009
CALL: 1-800-SEC-0330
VISIT THE SEC'S WEB SITE: http://www.sec.gov
VISIT THE SEC'S PUBLIC REFERENCE ROOM: 450 Fifth Street, N.W., Washington, DC
20549-6009
NOTE: THE SEC MAY CHARGE A FEE FOR DOCUMENTS.
SEC 1940 ACT FILE NUMBERS 811-5574
811-7300
811-3347
811-6667
92
<PAGE>
FOR CLIENT SERVICES OR
TO REQUEST A PROSPECTUS:
1-800-624-5711
FOR 24-HOUR AUTOMATED
PERFORMANCE INFORMATION
AND TRANSACTIONS:
1-800-835-4391
FOR RETIREMENT SERVICES:
1-800-595-2193
*All telephone calls are tape-recorded for your
protection.
WEB SITE: www:safecofunds.com
EMAIL: [email protected]
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
10865 Willows Rd N.E.
Redmond, WA 98052
DISTRIBUTOR:
SAFECO Securities, Inc.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THE PROSPECTUS, OR THAT WE
HAVE REFERRED YOU TO. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THE PROSPECTUS IS NOT AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY SHARES OF THE FUNDS IN ANY STATE UNLESS THE
SHARES ARE QUALIFIED FOR SALE THERE.
[LOGO]
507046
[LOGO]
GMF979 4/99 -REGISTERED TRADEMARK-REGISTERED TRADEMARK OF SAFECO CORPORATION
<PAGE>
THIS PAGE IS NOT PART OF THE PROSPECTUS
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
NO-LOAD CLASS
SAFECO COMMON STOCK TRUST: SAFECO TAXABLE BOND TRUST:
SAFECO GROWTH FUND SAFECO INTERMEDIATE-TERM
SAFECO EQUITY FUND U.S. TREASURY FUND
SAFECO INCOME FUND SAFECO HIGH-YIELD BOND FUND
SAFECO NORTHWEST FUND SAFECO GNMA FUND
SAFECO BALANCED FUND
SAFECO INTERNATIONAL STOCK FUND SAFECO MANAGED BOND TRUST:
SAFECO SMALL COMPANY STOCK FUND SAFECO MANAGED BOND FUND
SAFECO U.S.VALUE FUND
SAFECO TAX-EXEMPT BOND TRUST: SAFECO MONEY MARKET TRUST:
SAFECO INTERMEDIATE-TERM MUNICIPAL SAFECO MONEY MARKET FUND
BOND FUND SAFECO TAX-FREE MONEY MARKET FUND
SAFECO INSURED MUNICIPAL BOND FUND
SAFECO MUNICIPAL BOND FUND
SAFECO CALIFORNIA TAX-FREE INCOME
FUND
SAFECO WASHINGTON STATE MUNICIPAL BOND
FUND
This Statement of Additional Information ("SAI") is not a prospectus itself. It
should be read in conjunction with the No-Load Prospectus dated April 30, 1999
for each Fund listed above (collectively, "Funds"). To receive a copy of the
Funds' Prospectus, write to: SAFECO Mutual Funds, P.O. Box 34890, Seattle,
Washington 98124-1890, or call:
Nationwide Deaf and Hard of Hearing
800-624-5711 TDD/TTY Service
800-438-8718
The date of the most current Prospectus to which this SAI relates is
April 30, 1999.
The date of this SAI is April 30, 1999.
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . .
OVERVIEW OF INVESTMENT POLICIES. . . . . . . . . . . . . . . . . . . . . .
I. Fundamental Investment Policies . . . . . . . . . . . . . . . . . . .
II. Non-Fundamental Investment Policies
ADDITIONAL INVESTMENT INFORMATION. . . . . . . . . . . . . . . . . . . . .
SPECIAL RISKS OF BELOW INVESTMENT GRADE BONDS. . . . . . . . . . . . . . .
SPECIAL RISKS OF FOREIGN INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . .
INVESTMENT RISKS OF CONCENTRATION IN CALIFORNIA AND
WASHINGTON ISSUERS. . . . . . . . . . . . . . . . . . . . . . . . . .
REDEMPTION IN KIND . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INFORMATION ON CALCULATION OF NET ASSET
VALUE PER SHARE . . . . . . . . . . . . . . . . . . . . . . . . . . .
PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . .
INFORMATION ON DIVIDENDS FOR THE
MONEY MARKET FUNDS. . . . . . . . . . . . . . . . . . . . . . . . . .
MANAGEMENT OF THE FUNDS. . . . . . . . . . . . . . . . . . . . . . . . . .
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS OF
CERTAIN FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INVESTMENT ADVISORY AND OTHER SERVICES . . . . . . . . . . . . . . . . . .
BROKERAGE PRACTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . .
TAX INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RETIREMENT PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . .
DESCRIPTION OF RATINGS . . . . . . . . . . . . . . . . . . . . . . . . . .
<PAGE>
GENERAL INFORMATION
Each of the SAFECO Common Stock Trust (the "Common Stock Trust"), the SAFECO
Managed Bond Trust (the "Managed Bond Trust"), the SAFECO Tax-Exempt Bond Trust
(the "Tax-Exempt Bond Trust"), SAFECO Taxable Bond Trust (the "Taxable Bond
Trust"), and the SAFECO Money Market Trust (the "Money Market Trust") was
established as a Delaware business trust under a Declaration of Trust dated
May 13, 1993. All are registered as open-end management investment companies
under the Investment Company Act of 1940, as amended (the "1940 Act").
The Common Stock Trust offers its shares through eight diversified mutual funds:
the SAFECO Growth Fund ("Growth Fund"), SAFECO Equity Fund ("Equity Fund"),
SAFECO Income Fund ("Income Fund"), SAFECO Northwest Fund ("Northwest Fund"),
SAFECO International Stock Fund ("International Fund"), SAFECO Balanced Fund
("Balanced Fund"), SAFECO Small Company Stock Fund ("Small Company Fund"), and
SAFECO U.S. Value Fund ("U.S. Value Fund"). The Taxable Bond Trust offers its
shares through three diversified mutual funds: the SAFECO Intermediate-Term U.S.
Treasury Fund ("Intermediate-Term U.S. Treasury Fund"), the SAFECO GNMA Fund
("GNMA Fund"), and the SAFECO High-Yield Bond Fund ("High-Yield Fund"). The
Managed Bond Trust offers it shares through a single mutual fund, the SAFECO
Managed Bond Fund ("Managed Bond Fund"). The Tax-Exempt Bond Trust offers its
shares through five diversified mutual funds (collectively, the "Tax-Exempt Bond
Funds"): the SAFECO Intermediate-Term Municipal Bond Fund ("Intermediate-Term
Municipal Bond Fund"), the SAFECO Insured Municipal Bond Fund ("Insured
Municipal Bond Fund"), the SAFECO Municipal Bond Fund ("Municipal Fund"), the
SAFECO California Tax-Free Income Fund ("California Tax-Free Income Fund"), and
the SAFECO Washington State Municipal Bond Fund ("Washington Municipal Bond
Fund"). The Money Market Trust offers its shares through two diversified mutual
funds: the SAFECO Money Market Fund ("Money Market Fund"), and the SAFECO
Tax-Free Money Market Fund ("Tax-Free Money Market Fund") (collectively, the
"Money Market Funds").
Four of the Funds offer only No-Load Class Shares. They are: the GNMA Fund,
the Intermediate-Term Municipal Bond Fund, the Insured Municipal Bond Fund, and
the Tax-Free Money Market Fund. All of the other Funds offer multiple classes
of shares. No-Load Class Shares of each Fund are described in this SAI.
OVERVIEW OF INVESTMENT POLICIES
The investment policies of the Funds are described in the Prospectuses and this
SAI. These policies state the investment practices that the Funds will follow,
in some cases limiting investments to a certain percentage of assets, as well as
those investment activities that are prohibited. The types of securities (E.G.,
common stock, U.S. government securities or bonds) the Funds may purchase are
disclosed in the
<PAGE>
Prospectuses and this SAI. The Funds have no intention to purchase securities
that the following policies permit, but which are not currently described in the
Fund's Prospectus or this SAI. If a policy's percentage limitation is adhered
to immediately after and as a result of an 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).
With respect to the investment restrictions of the Tax-Exempt Bond Funds and the
Tax-Free Money Market Fund, the entity that has the ultimate responsibility for
the payment of interest and principal on a particular security generally is
deemed to be its issuer for purposes of such 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.
Each Fund's fundamental policies can only be changed with the approval of a
"majority of its outstanding voting securities," as defined by the 1940 Act.
For purposes of such approval, the vote of a majority of the outstanding voting
securities of a Fund means the vote, at a meeting of the shareholders of such
Fund duly called, of (i) 67% or more of the voting securities present at such
meeting if the holders of more than 50% of the outstanding voting securities are
present or represented by proxy, or (ii) more than 50% of the outstanding voting
securities, whichever is less.
Non-fundamental policies may be changed without shareholder approval.
I. FUNDAMENTAL INVESTMENT POLICIES
The six (6) fundamental investment policies listed below apply to all
Funds:
1. The Fund may not borrow money or issue senior securities, except
as the 1940 Act, any rule or order thereunder, or SEC staff
interpretation thereof, may permit.
2
<PAGE>
2. The Fund may not underwrite the securities of other issuers,
except that the Fund may engage in transactions involving the
acquisition, disposition or resale of its portfolio securities,
under circumstances where it may be considered to be an
underwriter under the Securities Act of 1933.
3. The Fund may not purchase or sell real estate unless acquired as
a result of ownership of securities or other instruments and
provided that this restriction does not prevent the Fund from
investing in issuers which invest, deal, or otherwise engage in
transactions in real estate or interests therein, or investing in
securities that are secured by real estate or interests therein,
or exercising rights under agreements relating to such securities
including the right to enforce security interests and to hold
real estate acquired by reason of such enforcement until that
real estate can be liquidated in an orderly manner.
4. The Fund may not purchase or sell physical commodities, unless
acquired as a result of ownership of securities or other
instruments and provided that this restriction does not prevent
the Fund from engaging in transactions involving futures
contracts and options, forward currency contracts, swap
transactions and other financial contracts or investing in
securities that are secured by physical commodities.
5. The Fund may not make loans, provided that this restriction does
not prevent the Fund from purchasing debt obligations, entering
into repurchase agreements, loaning its assets to broker/dealers
or institutional investors and investing in loans, including
assignments and participation interests.
6. The Fund will not purchase securities of any one issuer if, as a
result, more than 5% of the Fund's total assets would be invested
in securities of that issuer or the Fund would own or hold more
than 10% of the outstanding voting securities of that issuer,
except that up to 25% of the Fund's total assets may be invested
without regard to these limitations, and except that these
limitations do not apply to securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities or to
securities issued by other open-end investment companies.
The fundamental policy below applies to all Funds except the Money
Market Fund and the Tax-Free Money Market Fund:
3
<PAGE>
7. The Fund will not make investments that will result in the
concentration (as that term may be defined in the 1940 Act, any
rule or order thereunder, or SEC staff interpretation thereof) of
its investments in the securities of issuers primarily engaged in
the same industry, provided that this restriction does not limit
the Fund from investing in obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities.
The fundamental policy below applies to the MONEY MARKET FUND:
8. The Fund will not make investments that will result in the
concentration (as that term may be defined in the 1940 Act, any
rule or order thereunder, or SEC staff interpretation thereof) of
its investments in the securities of issuers primarily engaged in
the same industry, provided that this restriction does not limit
the Fund from investing in obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities, or
certain bank instruments issued by domestic banks.
The fundamental policy below applies to the TAX-FREE MONEY MARKET
FUND:
9. The Fund will not make investments that will result in the
concentration (as that term may be defined in the 1940 Act, any
rule or order thereunder, or SEC staff interpretation thereof) of
its investments in the securities of issuers primarily engaged in
the same industry, provided that this restriction does not limit
the Fund from investing in obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities, or
governmental issuers of special or general tax-exempt securities,
or certain bank instruments issued by domestic banks.
The fundamental policy below applies only to the INTERMEDIATE-TERM
MUNICIPAL BOND FUND, INSURED MUNICIPAL BOND FUND, WASHINGTON MUNICIPAL
BOND FUND, MUNICIPAL BOND FUND, CALIFORNIA TAX-FREE INCOME FUND AND
TAX-FREE MONEY MARKET FUND:
10. During normal market conditions, the Fund will not invest less
than 80% of its net assets in obligations the interest on which
is exempt from federal income tax and, in the case of the
California Tax-Free Income Fund, also from California state
personal income tax.
4
<PAGE>
II. NON-FUNDAMENTAL INVESTMENT POLICIES
A. GROWTH FUND
In addition to the policies described in the Growth Fund's Prospectus,
the Growth Fund has adopted the following non-fundamental policies.
These policies may be changed without shareholder approval:
1. The Fund will not mortgage, pledge, or hypothecate any of its
assets, provided that this shall not apply to the transfer of
securities in connection with any permissible borrowing or to
collateral arrangements in connection with permissible
activities.
2. The Fund will not buy or sell foreign exchange, except as
necessary to convert the proceeds of the sale of foreign
portfolio securities into U.S. dollars.
3. The Fund will not purchase securities for which there is no
readily available market or enter into repurchase agreements or
purchase time deposits maturing in more than seven days, or
purchase OTC options or hold assets set aside to cover OTC
options written by the Fund, if immediately after and as a
result, the value of such securities would exceed, in the
aggregate, 15% of the Fund's net assets.
4. The Fund may purchase as temporary investments for its cash
commercial paper, certificates of deposit, no-load, open-end
money market funds, repurchase agreements (subject to the
non-fundamental restriction on illiquid securities) or any other
short-term instrument that SAFECO Asset Management Company
("SAM") deems appropriate.
5. The Fund may invest up to 10% of its total assets in shares of
real estate investment trusts.
6. The Fund will not purchase securities on margin, provided that
the Fund may obtain short-term credits as may be necessary for
the clearance of purchases and sales of securities, and further
provided that the Fund may make margin deposits in connection
with its use of financial options and futures, forward and spot
currency contracts, swap transactions and other financial
contracts or derivative instruments.
7. The Fund will not purchase foreign securities unless (a) such
securities are listed on a national securities exchange, and (b)
such purchase, at the time thereof, would not cause more than 10%
of
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<PAGE>
the total assets of the Fund (taken at market value) to be
invested in foreign securities.
B. EQUITY FUND
In addition to the policies described in the Equity Fund's Prospectus,
the Equity Fund has adopted the following non-fundamental policies.
These policies may be changed without shareholder approval:
1. The Fund will not mortgage, pledge, or hypothecate any of its
assets, provided that this shall not apply to the transfer of
securities in connection with any permissible borrowing or to
collateral arrangements in connection with permissible
activities.
2. The Fund will not purchase foreign securities unless (a) such
securities are listed on a national securities exchange, and (b)
such purchase, at the time thereof, would not cause more than 10%
of the total assets of the Fund (taken at market value) to be
invested in foreign securities.
3. The Fund will not trade in foreign currency, except as may be
necessary to convert the proceeds of the sale of foreign
portfolio securities into U.S. dollars.
4. The Fund may purchase as temporary investments for its cash
commercial paper, certificates of deposit, repurchase agreements
(subject to the non-fundamental restriction on illiquid
securities) or any other short-term instrument SAM deems
appropriate.
5. The Fund may invest up to 10% of its total assets in shares of
real estate investment trusts.
6. The Fund may invest in securities convertible into common stock,
but less than 35% of its total assets will be invested in such
securities.
7. The Fund will not purchase securities on margin, provided that
the Fund may obtain short-term credits as may be necessary for
the clearance of purchases and sales of securities, and further
provided that the Fund may make margin deposits in connection
with its use of financial options and futures, forward and spot
currency contracts,
6
<PAGE>
swap transactions and other financial contracts or derivative
instruments.
C. INCOME FUND
In addition to the policies described in the Income Fund's Prospectus,
the Income Fund has adopted the following non-fundamental policies.
These policies may be changed without shareholder approval:
1. The Fund will not mortgage, pledge, or hypothecate any of its
assets, provided that this shall not apply to the transfer of
securities in connection with any permissible borrowing or to
collateral arrangements in connection with permissible
activities.
2. The Fund will not buy or sell foreign exchange, except as
necessary to convert the proceeds of the sale of foreign
portfolio securities into U.S. dollars.
3. The Fund will invest primarily in common stock and may also
invest in convertible and non-convertible bonds and preferred
stock.
4. The Fund may purchase as temporary investments for its cash
commercial paper, certificates of deposit, no-load, open-end
money market funds, repurchase agreements (subject to the
non-fundamental restriction on illiquid securities) or any other
short-term instrument SAM deems appropriate.
5. The Fund may invest up to 10% of its total assets in shares of
real estate investment trusts.
6. The Fund will not purchase securities on margin, provided that
the Fund may obtain short-term credits as may be necessary for
the clearance of purchases and sales of securities, and further
provided that the Fund may make margin deposits in connection
with its use of financial options and futures, forward and spot
currency contracts, swap transactions and other financial
contracts or derivative instruments.
7. The Fund will not purchase foreign securities unless (a) such
securities are listed on a national securities exchange, and (b)
such purchase, at the time thereof, would not cause
7
<PAGE>
more than 10% of the total assets of the Fund (taken at market
value) to be invested in foreign securities.
D. NORTHWEST FUND
In addition to the policies described in the Northwest Fund's
Prospectus, the Northwest Fund has adopted the following
non-fundamental policies. These policies may be changed without
shareholder approval:
1. The Fund will not buy or sell foreign exchange, except as may be
necessary to invest the proceeds of the sale of foreign
securities in the Fund's portfolio in U.S. dollars.
2. The Fund may invest in shares of common stock selected primarily
for potential appreciation.
3. The Fund may occasionally invest in securities convertible into
common stock when, in the opinion of SAM, the expected total
return of a convertible security exceeds the expected total
return of common stock eligible for purchase by the Fund.
4. The Fund may purchase as temporary investments for its cash
commercial paper, certificates of deposit, shares of no-load,
open-end money market funds, repurchase agreements (subject to
the non-fundamental restriction on illiquid securities) or any
other short-term instrument that SAM deems appropriate.
5. The Fund will not purchase foreign securities unless (a) such
securities are listed on a national securities exchange, and (b)
such purchase, at the time thereof, would not cause more than 10%
of the total assets of the Fund (taken at market value) to be
invested in foreign securities.
6. The Fund will not purchase securities on margin, provided that
the Fund may obtain short-term credits as may be necessary for
the clearance of purchases and sales of securities, and further
provided that the Fund may make margin deposits in connection
with its use of financial options and futures, forward and spot
currency contracts, swap transactions and other financial
contracts or derivative instruments.
8
<PAGE>
7. The Fund will not mortgage, pledge, or hypothecate any of its
assets, provided that this shall not apply to the transfer of
securities in connection with any permissible borrowing or to
collateral arrangements in connection with permissible
activities.
E. BALANCED FUND
In addition to the policies described in the Balanced Fund's
Prospectus, the Balanced Fund has adopted the following
non-fundamental policies. These policies may be changed without
shareholder approval:
1. The Fund will not invest more than 10% of its total assets in
real estate investment trusts, nor will the Fund invest in
interests in real estate investment trusts that are not readily
marketable or interests in real estate limited partnerships not
listed or traded on the Nasdaq Stock Market ("Nasdaq") if, as a
result, the sum of such interests considered illiquid and other
illiquid securities would exceed 15% of the Fund's net assets.
2. The Fund will not purchase securities on margin, provided that
the Fund may obtain short-term credits as may be necessary for
the clearance of purchases and sales of securities, and further
provided that the Fund may make margin deposits in connection
with its use of financial options and futures forward and spot
currency contracts, swap transactions and other financial
contracts or derivative instruments.
3. The Fund may borrow money only from a bank or SAFECO Corporation
or affiliates thereof or by engaging in reverse repurchase
agreements with any party. The Fund will not purchase any
securities while borrowings equal to or greater than 5% of its
total assets are outstanding.
4. The Fund will not purchase securities for which there is no
readily available market or enter into repurchase agreements or
purchase time deposits maturing in more than seven days, or
purchase OTC options or hold assets set aside to cover OTC
options written by the Fund, if immediately after and as a
result, the value of such securities would exceed, in the
aggregate, 15% of the Fund's net assets.
9
<PAGE>
5. The Fund will not make loans to any person, firm or corporation,
but the purchase by the Fund of a portion of an issue of publicly
distributed bonds, debentures or other securities issued by
persons other than the Fund, whether or not the purchase was made
upon the original issue of securities, shall not be considered a
loan within the prohibition of this section.
F. INTERNATIONAL FUND
In addition to the policies described in the International Fund's
Prospectus, the International Fund has adopted the following
non-fundamental policies. These policies may be changed without
shareholder approval:
1. The Fund will not invest more than 10% of its total assets in
real estate investment trusts, nor will the Fund invest in
interests in real estate investment trusts that are not readily
marketable or interests in real estate limited partnerships not
listed or traded on Nasdaq if, as a result, the sum of such
interests considered illiquid and other illiquid securities would
exceed 15% of the Fund's net assets.
2. The Fund will not purchase securities on margin, provided that
the Fund may obtain short-term credits as may be necessary for
the clearance of purchases and sales of securities, and further
provided that the Fund may make margin deposits in connection
with its use of financial options and futures forward and spot
currency contracts, swap transactions and other financial
contracts or derivative instruments.
3. The Fund may borrow money only from a bank or SAFECO Corporation
or affiliates thereof or by engaging in reverse repurchase
agreements with any party. The Fund will not purchase any
securities while borrowings equal to or greater than 5% of its
total assets are outstanding.
4. The Fund will not purchase securities for which there is no
readily available market or enter into repurchase agreements or
purchase time deposits maturing in more than seven days, or
purchase OTC options or hold assets set aside to cover OTC
options written by the Fund, if immediately after and as a
result, the value of such securities would exceed, in the
aggregate, 15% of the Fund's net assets.
10
<PAGE>
5. The Fund will not make loans to any person, firm or corporation,
but the purchase by the Fund of a portion of an issue of publicly
distributed bonds, debentures or other securities issued by
persons other than the Fund, whether or not the purchase was made
upon the original issue of securities, shall not be considered a
loan within the prohibition of this section.
G. SMALL COMPANY FUND
In addition to the policies described in the Small Company Fund's
Prospectus, the Small Company Fund has adopted the following
non-fundamental policies. These policies may be changed without
shareholder approval:
1. The Fund will not invest more than 10% of its total assets in
real estate investment trusts, nor will the Fund invest in
interests in real estate investment trusts that are not readily
marketable or interests in real estate limited partnerships not
listed or traded on Nasdaq if, as a result, the sum of such
interests considered illiquid and other illiquid securities would
exceed 15% of the Fund's net assets.
2. The Fund will not purchase securities on margin, provided that
the Fund may obtain short-term credits as may be necessary for
the clearance of purchases and sales of securities, and further
provided that the Fund may make margin deposits in connection
with its use of financial options and futures forward and spot
currency contracts, swap transactions and other financial
contracts or derivative instruments.
3. The Fund will not purchase securities for which there is no
readily available market or enter into repurchase agreements or
purchase time deposits maturing in more than seven days, or
purchase OTC options or hold assets set aside to cover OTC
options written by the Fund, if immediately after and as a
result, the value of such securities would exceed, in the
aggregate, 15% of the Fund's net assets.
4. The Fund will not make loans to any person, firm or corporation,
but the purchase by the Fund of a portion of an issue of publicly
distributed bonds, debentures or other securities issued by
persons other than the Fund, whether or not the purchase was made
upon the original issue of
11
<PAGE>
securities, shall not be considered a loan within the prohibition
of this section.
H. U.S. VALUE FUND
In addition to the policies described in the U.S. Value Fund's
Prospectus, the U.S. Value Fund has adopted the following
non-fundamental policies. These policies may be changed without
shareholder approval:
1. The Fund will not invest more than 10% of its total assets in
real estate investment trusts, nor will the Fund invest in
interests in real estate investment trusts that are not readily
marketable or interests in real estate limited partnerships not
listed or traded on the Nasdaq Stock Market if, as a result, the
sum of such interests considered illiquid and other illiquid
securities would exceed 15% of the Fund's net assets.
2. The Fund will not purchase securities on margin, provided that
the Fund may obtain short-term credits as may be necessary for
the clearance of purchases and sales of securities, and further
provided that the Fund may make margin deposits in connection
with its use of financial options and futures forward and spot
currency contracts, swap transactions and other financial
contracts or derivative instruments.
3. The Fund may borrow money only from a bank or SAFECO Corporation
or affiliates thereof or by engaging in reverse repurchase
agreements with any party. The Fund will not purchase any
securities while borrowings equal to or greater than 5% of its
total assets are outstanding.
4. The Fund will not purchase securities for which there is no
readily available market or enter into repurchase agreements or
purchase time deposits maturing in more than seven days, or
purchase OTC options or hold assets set aside to cover OTC
options written by the Fund, if immediately after and as a
result, the value of such securities would exceed, in the
aggregate, 15% of the Fund's net assets.
5. The Fund will not make loans to any person, firm or corporation,
but the purchase by the Fund of a portion of an issue of publicly
distributed bonds, debentures or other
12
<PAGE>
securities issued by persons other than the Fund, whether or not
the purchase was made upon the original issue of securities,
shall not be considered a loan within the prohibition of this
section.
I. INTERMEDIATE-TERM U.S. TREASURY
FUND, GNMA FUND, HIGH-YIELD FUND
In addition to the policies described in above-referenced Funds'
Prospectus, the Intermediate-Term U.S. Treasury Fund, GNMA Fund and
High-Yield Fund have adopted the following non-fundamental investment
policies. These policies may be changed without shareholder approval:
1. The Intermediate Term U.S. 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 is exempt from federal income
tax. The GNMA Fund may not invest in such tax-exempt securities.
2. 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.
3. The Fund may purchase "when-issued" or "delayed-delivery"
securities or purchase or sell securities on a "forward
commitment" basis.
4. 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 advisor, 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.
5. The Intermediate Term U.S. Treasury Fund may invest up to five
percent (5%) of its total assets in Yankee Sector debt
13
<PAGE>
securities and up to five percent (5%) of its total assets in
Eurodollar bonds.
6. The Fund will not purchase securities for which there is no
readily available market, or enter into repurchase agreements or
purchase time deposits maturing in more than seven days, or
purchase OTC options or hold assets set aside to cover OTC
options written by the Fund, if immediately after and as a
result, the value of such securities would exceed, in the
aggregate, 15% of the Fund's net assets.
7. The Fund will not mortgage, pledge, or hypothecate any of its
assets, provided that this shall not apply to the transfer of
securities in connection with any permissible borrowing or to
collateral arrangements in connection with permissible
activities.
J. MANAGED BOND FUND
In addition to the policies described in the Managed Bond Fund's
Prospectus, the Managed Bond Fund has adopted the following
non-fundamental investment policies. These policies may be changed
without shareholder approval:
1. The Fund will not purchase securities if borrowings equal to or
greater than five percent (5%) of the Fund's total assets are
outstanding.
2. The Fund will invest at least sixty-five percent (65%) of its
total assets in fixed income obligations.
3. 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.
4. The Fund may invest up to fifty percent (50%) of its total assets
in corporate debt securities or Eurodollar bonds.
5. The Fund may invest up to ten percent (10%) of its total assets
in Yankee Sector debt obligations.
6. The Fund may purchase securities on a when-issued or
delayed-delivery basis or may purchase or sell securities on a
forward commitment basis.
14
<PAGE>
7. The Fund may temporarily invest its cash in high quality
commercial paper, certificates of deposit, shares of no-load,
open-end money market funds, repurchase agreements or any other
short-term instrument the Fund's investment advisor deems
appropriate.
8. The Fund may hold cash as a temporary defensive measure when
market conditions so warrant.
9. The Fund may invest up to five percent (5%) of its total assets
in securities the interest on which is exempt from federal income
tax.
10. The Fund may invest up to five percent (5%) of its total assets
in shares of real estate investment trusts.
11. The Fund will not purchase securities for which there is no
readily available market or enter into repurchase agreements or
purchase time deposits maturing in more than seven days, or
purchase OTC options or hold assets set aside to cover OTC
options written by the Fund, if immediately after and as a
result, the value of such securities would exceed, in the
aggregate, 15% of the Fund's net assets.
12. The Fund will not purchase foreign securities unless (a) such
securities are listed on a national securities exchange, and (b)
such purchase, at the time thereof, would not cause more than 10%
of the total assets of the Fund (taken at market value) to be
invested in foreign securities.
13. 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.
14. The Fund will not purchase securities on margin, provided that
the Fund may obtain short-term credits as may be necessary for
the clearance of purchases and sales of securities, and further
provided that the Fund may make margin deposits in connection
with its use of financial options and futures, forward and spot
currency contracts, swap transactions and other financial
contracts or derivative instruments.
15
<PAGE>
K. INTERMEDIATE-TERM MUNICIPAL BOND FUND, INSURED MUNICIPAL BOND FUND,
MUNICIPAL BOND FUND, CALIFORNIA TAX-FREE INCOME FUND AND WASHINGTON
MUNICIPAL BOND FUND
In addition to the policies described in the above-referenced Funds'
Prospectus, the Tax-Exempt Bond Funds have adopted the following
non-fundamental policies. These policies may be changed without
shareholder approval:
1. Each Fund will not purchase securities for which there is no
readily available market, or enter into repurchase agreements or
purchase time deposits maturing in more than seven days, or
purchase OTC options or hold assets set aside to cover OTC
options written by the Fund, if immediately after and as a
result, the value of such securities would exceed, in the
aggregate, 15% of the Fund's net assets.
2. Each Fund will not permit 25% or more of its 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.
MUNICIPAL BOND FUND AND CALIFORNIA TAX-FREE INCOME FUND:
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, Inc.
("S&P"), or IBCA Fitch Investor Service, 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 that 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
16
<PAGE>
municipal obligations that have a maturity of one year or less
from the date of purchase. The Funds do not currently intend to
rely on Fitch ratings.
2. Each Fund may invest in obligations of the U.S. Government, its
agencies or instrumentalities or in qualified repurchase
agreements, the net interest on which is taxable for federal
income tax purposes.
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 twenty-five percent (25%) or more of its
assets in industrial development bonds.
5. Each Fund may purchase or sell securities on a "when-issued" or
"delayed-delivery" basis.
6. Each Fund will not purchase securities on margin, provided that
the Fund may obtain short-term credits as may be necessary for
the clearance of purchases and sales of securities, and further
provided that the Fund may make margin deposits in connection
with its use of financial options and futures, forward and spot
currency contracts, swap transactions and other financial
contracts or derivative instruments.
7. Each Fund will not mortgage, pledge, or hypothecate any of its
assets, provided that this shall not apply to the transfer of
securities in connection with any permissible borrowing or to
collateral arrangements in connection with permissible
activities.
INTERMEDIATE-TERM MUNICIPAL BOND FUND, INSURED MUNICIPAL BOND FUND AND
WASHINGTON MUNICIPAL BOND FUND:
1. Will not purchase securities if borrowings equal to or greater
than five percent (5%) of its total assets are outstanding.
2. Will not purchase securities on margin, provided that the Fund
may obtain short-term credits as may be necessary for the
clearance of purchases and sales of securities, and further
provided that the Fund may make margin deposits in connection
with its use of financial options and futures
17
<PAGE>
forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments.
INTERMEDIATE-TERM MUNICIPAL BOND FUND, INSURED MUNICIPAL BOND FUND,
AND MUNICIPAL BOND FUND:
1. Will not permit 25% or more of its total assets to be invested in
securities whose issuers are located in the same state.
L. MONEY MARKET FUND
In addition to the policies described in the Money Market Fund's
Prospectus, the Money Market Fund has adopted the three
non-fundamental policies noted below. These policies may be changed
without shareholder approval:
1. The Money Market 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.
2. The Fund will not purchase securities for which there is no
readily available market, or enter into repurchase agreements or
purchase time deposits maturing in more than seven days, or
purchase OTC options or hold assets set aside to cover OTC
options written by the Fund, if immediately after and as a
result, the value of such securities would exceed, in the
aggregate, 10% of the Fund's net assets.
3. The Fund will not mortgage, pledge, or hypothecate any of its
assets, provided that this shall not apply to the transfer of
securities in connection with any permissible borrowing or to
collateral arrangements in connection with permissible
activities.
M. TAX-FREE MONEY MARKET FUND
In addition to the policies described in the Tax-Free Money Market
Fund's Prospectus, the Tax-Free Money Market Fund has adopted the
following non-fundamental policies. These policies may be changed
without shareholder approval:
1. The Fund will not purchase the securities of any issuer, other
than securities issued or guaranteed by the U.S.
18
<PAGE>
Government, its agencies or instrumentalities, if as a result,
more than five percent (5%) of the value of its total assets
would be invested in the securities of such issuer.
Notwithstanding this policy, the Tax-Free Money Market Fund may
invest up to 25% of its total assets in the first tier securities
(as defined below) of a single issuer for up to three business
days after purchase. First tier securities are securities (1)
rated in the highest short-term category by two nationally
recognized statistical rating organizations ("NRSROs"); (2) rated
in the highest short-term rating category by a single NRSRO if
only that NRSRO has assigned the securities a short-term rating;
or (3) unrated, but determined by SAM to be of comparable
quality.
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 purchase shares of no-load, open-end investment
companies that invest in tax-exempt securities with remaining
maturities of thirteen (13) months or less.
4. The Fund reserves the right to hold cash, if necessary, as a
temporary defensive measure or in an emergency situation.
5. The Fund will not mortgage, pledge, or hypothecate any of its
assets, provided that this shall not apply to the transfer of
securities in connection with any permissible borrowing or to
collateral arrangements in connection with permissible
activities.
6. The Fund will not purchase securities for which there is no
readily available market, or enter into repurchase agreements or
purchase time deposits maturing in more than seven days, or
purchase OTC options or hold assets set aside to cover OTC
options written by the Fund, if immediately after and as a
result, the value of such securities would exceed, in the
aggregate, 10% of the Fund's net assets.
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ADDITIONAL INVESTMENT INFORMATION
STOCK FUNDS
The Growth Fund, Equity Fund, Income Fund, Northwest Fund, Balanced Fund,
International Fund, Small Company Fund, and U.S. Value Fund may make the
following investments, among others, although they may not buy all of the types
of securities that are described.
1. COMMON STOCKS AND PREFERRED STOCKS. 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.
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.
2. BONDS AND OTHER DEBT SECURITIES. The Funds may invest in bonds and
other debt securities that are rated investment grade, or unrated bonds
determined by SAM to be of comparable quality to such rated bonds.
Bonds rated in the lowest category of investment grade (Baa by
Moody's and BBB by S&P) and comparable unrated bonds have speculative
characteristics and are more likely to have a weakened capacity to make
principal and interest payments under changing economic conditions or
upon deterioration in the financial condition of the issuer.
Bonds and 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.
3. CONVERTIBLE SECURITIES. Convertible bonds and convertible preferred stock
may be exchanged for a stated number of shares of the issuer's common stock
at a certain price known as the conversion price. The conversion price is
usually greater than the price of the common stock at the time the
convertible security is purchased. Generally, the interest rate of
convertible bonds and the yield of convertible preferred stock will be
lower than the issuer's non-convertible securities. Also, the value of
convertible securities will normally vary with the value of the underlying
common stock and fluctuate inversely with interest rates. However,
convertible securities may show less volatility in value than the issuer's
non-
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convertible securities. A risk associated with convertible bonds and
convertible preferred stock is that the conversion price of the common
stock will not be attained. The Growth Fund and the Income 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 Equity Fund and the U.S. Value 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.
4. WARRANTS. A warrant is an option issued by a corporation that gives the
holder the right to buy a stated number of shares of common stock of the
corporation at a specified price within a designated time period. Warrants
may be purchased and sold separately or attached to stocks or bonds as part
of a unit offering. The term of a warrant may run from two to five years
and in some cases the term may be longer. The exercise price carried by
the warrant is usually well above the prevailing market price of the
underlying common stock at the time the warrant is issued. The holder of a
warrant has no voting rights and receives no dividends. Warrants are
freely transferable and may trade on the major national exchanges.
Warrants may be speculative. Generally, the value of a warrant will
fluctuate by greater percentages than the value of the underlying common
stock. The primary risk associated with a warrant is that the term of the
warrant may expire before the exercise price of the common stock has been
reached. Under these circumstances, a Fund could lose all of its principal
investment in the warrant.
A Fund will invest in a warrant only if the Fund has the authority to hold
the underlying common stock. Additionally, if a warrant is part of a unit
offering, a Fund will purchase the warrant only if it is attached to a
security in which the Fund has authority to invest. In all cases, a Fund
will purchase warrants only after SAM determines that the exercise price
for the underlying common stock is likely to be achieved within the
required time-frame and for which an actively traded market exists. SAM
will make this determination by analyzing the issuer's financial health,
quality of management and any other factors deemed to be relevant.
5. RESTRICTED SECURITIES AND RULE 144A SECURITIES. Restricted securities are
securities that may be sold only in a public offering with respect to which
a registration statement is in effect under the 1933 Act or, if they are
unregistered, pursuant to an exemption from registration. In recognition
of the increased size and liquidity of the institutional markets for
unregistered securities and the importance of institutional investors in
the formation of capital, the SEC adopted Rule 144A, which is designed to
further facilitate efficient trading among institutional investors by
permitting the sale of Rule 144A securities to qualified institutional
buyers. To the extent privately placed securities held by a Fund qualify
under Rule 144A and an institutional market develops for those securities,
the Fund likely will be able to dispose of the securities without
registering them under the 1933 Act. SAM, acting under guidelines
established by the Trust's Board of Trustees, may determine that certain
securities qualified for trading under Rule 144A are liquid.
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Where registration is required, a Fund may be obligated to pay all or part
of the registration expenses, and a considerable period may elapse between
the decision to sell and the time the Fund may be permitted to sell a
security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the Fund might obtain a
less favorable price than prevailed when it decided to sell. To the extent
privately placed securities are illiquid, purchases thereof will be subject
to any limitations on investments in illiquid securities. Restricted
securities for which no market exists are priced at fair value as
determined in accordance with procedures approved and periodically reviewed
by the Trust's Board of Trustees.
6. 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. Repurchase
agreements may be considered loans of money to the seller of the underlying
security, which are collateralized by the securities underlying the
repurchase agreement. A Fund will not enter into a repurchase agreement
unless the agreement is fully collateralized and the Fund will value the
securities underlying the repurchase agreement daily to assure that this
condition is met. If the value of these securities is less than the
repurchase price, plus any agreed-upon additional amount, the other party
to the agreement must provide additional collateral so that at all times
the collateral is at least equal to the repurchase price, plus any
agreed-upon additional amount. Repurchase agreements carry certain risks
not associated with direct investments in securities, including delays and
costs to a Fund if the other party to a repurchase agreement defaults or
becomes bankrupt. Each Fund intends to enter into repurchase agreements
only with banks and dealers in transactions believed by SAM to present
minimal credit risks in accordance with guidelines established by the
Trust's Board of Trustees. SAM will review and monitor the
creditworthiness of those institutions under the Board's general
supervision. Foreign repurchase agreements (Funds that may purchase
foreign securities only) may be less well secured than U.S. repurchase
agreements and may be subject to currency risks. In addition, foreign
counterparties may be less creditworthy than U.S. counterparties.
7. 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
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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.
8. FOREIGN SECURITIES. Foreign securities are subject to risks in addition
to those inherent in investments in domestic securities. A Fund 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.
9. INDEXED SECURITIES. Indexed securities are securities whose prices are
indexed to the prices of other securities, securities indices, currencies,
commodities or other financial indicators. Indexed securities generally
are debt securities whose value at maturity or interest rate is determined
by reference to a specific instrument or statistic. Currency-indexed
securities generally are debt securities whose maturity values or interest
rates are determined by reference to values of one or more specified
foreign currencies. Currency-indexed securities may be positively or
negatively indexed; i.e., their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose
price characteristics are similar to a put on the underlying currency.
Currency- indexed securities may also have prices that depend on the values
of different foreign securities relative to each other.
The performance of an indexed security depends largely on the performance
of the security, currency or other instrument to which they are indexed.
Performance may also be influenced by interest rate changes in the United
States and foreign countries. Indexed securities additionally are subject
to credit risks associated with the issuer of the security. Their values
may decline substantially if the issuer's creditworthiness deteriorates.
Indexed securities may also be more volatile than their underlying
instruments.
10. CASH OR 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 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. In making
temporary investments in commercial paper and certificates of deposit, a
Fund will adhere to the following guidelines:
a) Commercial paper must be rated A-1 or A-2 by S&P or Prime-1 or Prime-2
by Moody's or issued by companies with an unsecured debt issue
currently outstanding rated AA by S&P or Aa by Moody's or higher.
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b) Certificates of deposit ("CDs") must be issued by banks or savings and
loan associations that have total assets of at least $1 billion or, in
the case of a bank or savings and loan association not having total
assets of at least $1 billion, the bank or savings and loan
association is insured by the FDIC. The Growth Fund's investments in
CDs issued by FDIC-insured banks or savings and loans having less than
$1 billion in assets will be limited in amount to the statutory
insurance coverage provided by the FDIC.
11. CONTINGENT VALUE RIGHTS. A contingent value right ("CVR") is a right
issued by a corporation that takes on a pre-established value if the
underlying common stock does not attain a target price by a specified date.
Generally, a CVR's value will be the difference between the target price
and the current market price of the common stock on the target date. If
the common stock does attain the target price by the date, the CVR expires
without value. CVRs may be purchased and sold as part of the underlying
common stock or separately from the stock. CVRs may also be issued to
owners of the underlying common stock as the result of a corporation's
restructuring. The Growth Fund may invest up to 5% of its net assets in
contingent value rights.
12. REAL ESTATE INVESTMENT TRUSTS ("REITS"). REITs purchase real property,
which is then leased, and make mortgage investments. For federal income
tax purposes REITs attempt to qualify for beneficial "modified pass
through" tax treatment by annually distributing at least 95% of their
taxable income. If a REIT were unable to qualify for such beneficial tax
treatment, it would be taxed as a corporation and the distributions made to
its shareholders would not be deductible by it in computing its taxable
income.
REITs are dependent upon the successful operation of the properties owned
and the financial condition of lessees and mortgagors. The value of REIT
units will fluctuate depending on the underlying value of the real property
and mortgages owned and the amount of cash flow (net income plus
depreciation) generated and paid out. In addition, REITs typically borrow
to increase funds available for investment. Generally, there is a greater
risk associated with REITs that are highly leveraged. A Fund may invest
up to 10% of its total assets in shares of REITs.
13. ILLIQUID SECURITIES. The Funds may invest up to 15% of net assets in
illiquid securities. Currently, the Funds do not intend to purchase
illiquid securities, but the market for some securities may become illiquid
following purchase by a Fund. 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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14. WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES. Under this procedure, a Fund
agrees to acquire securities (whose terms and conditions, including price,
have been fixed by the issuer) that are to be issued and delivered against
payment in the future. Delivery of securities so sold normally takes place
30 to 45 days (settlement date) after the date of the commitment. No
interest is earned by a Fund prior to the settlement date. The value of
securities sold on a "when-issued" or "delayed-delivery" basis may
fluctuate before the settlement date and the Fund bears the risk of such
fluctuation from the date of purchase. 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. A Fund may dispose of its
interest in those securities before delivery.
15. SOVEREIGN DEBT OBLIGATIONS. Sovereign debt instruments are issued or
guaranteed by foreign governments or their agencies. Sovereign debt may be
in the form of conventional securities or other types of debt instruments
such as loans or loan participations. Governments or governmental entities
responsible for repayment of the debt may be unable or unwilling to repay
principal and interest when due, and may require renegotiation or
rescheduling of debt payments. Repayment of principal and interest may
depend also upon political and economic factors. The International Fund
may invest in debt securities issued by foreign companies and governments.
The Fund will make such investments primarily for defensive purposes, but
may do so where anticipated interest rate movements, or other factors
affecting the degree of risk inherent in a debt security are expected to
change significantly so as to produce appreciation in the security
consistent with the objective of the Fund.
16. EURODOLLAR BONDS. Eurodollar bonds are bonds issued by either U.S. or
foreign issuers that are traded in the European bond market and are
denominated in U.S. dollars. Eurodollar bonds are subject to the same
risks that pertain to domestic issues, notably credit risk, market risk and
liquidity risk. Additionally, Eurodollar bonds are subject to certain
sovereign risks. One such risk is the possibility that a foreign
government might prevent dollar denominated funds from flowing across its
borders. Other 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. The Income Fund may invest up to 10%
of its total assets in Eurodollar bonds.
17. PASSIVE FOREIGN INVESTMENT COMPANIES ("PFICs"). PFICs are foreign
corporations (and entities classified as such for federal income tax
purposes) organized as vehicles to invest in companies of certain foreign
countries. Investors in a PFIC indirectly bear their proportionate share
of the PFIC's management fees and other expenses. See "Tax Information"
for more information.
18. SHORT SALES AGAINST THE BOX. A Fund may make short sales of securities or
maintain a short position, provided that at all times when a short position
is open the Fund owns an equal amount of such securities or an equal amount
of the securities of the same issuer as the securities sold short (a "short
sale against the box"). Funds engaging in short sales against the box will
incur transaction costs.
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19. COVERED CALL OPTIONS AND PUT AND CALL OPTIONS ON STOCK INDICES. The Funds
may employ certain strategies and techniques utilizing these types of
options to mitigate their exposure to factors that affect security values.
(The International Fund may utilize other types of options as described
below.) 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 a
call option is obligated to sell the underlying securities if the option is
exercised during the specified period of time. A Fund that writes a call
option and wishes to terminate the obligation may effect a "closing
purchase transaction" by buying an option of the same series as the option
previously written. Options on stock indices are similar to options on
stock except that, rather than obtaining the right to take or make delivery
of stock at a specified price, an option on a stock index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the stock index upon which the option is based is greater
than (in the case of a call) or less than (in the case of a put) the strike
price of the option. A Fund will write call options on stocks only if they
are covered, and such options must remain covered so long as the Fund is
obligated as a writer. A Fund, under normal conditions, will not write a
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. A Fund will not
purchase an option if, as a result thereof, its aggregate investment in
options would exceed 5% of its total assets. The International Fund's
investment in options is not limited by this paragraph. See "Options on
equity securities" and "Options on stock indices" below for a discussion of
the International Fund's policies regarding investment in options.
20. OPTIONS ON EQUITY SECURITIES. The International Fund may purchase and
write (i.e., sell) put and call options on equity securities and the other
Funds (except the Equity Fund) may purchase and write (i.e., sell) covered
call options. A call option is a short-term contract pursuant to which the
purchaser or holder, in return for a premium paid, has the right to buy the
equity security underlying the option at a specified exercise price (the
strike price) at any time during the term of the option (for
"American-style" options) or on the option expiration date (for
"European-style" options). The writer of the call option, who received the
premium, has the obligation, upon exercise of the option, to deliver the
underlying equity security against payment of the strike price. A put
option is a similar contract that gives the purchaser or holder, in return
for a premium, the right to sell the underlying equity security at a
specified exercise price (the strike price) during the term of the option.
The writer of the put, who receives the premium, has the obligation to buy
the underlying equity security at the strike price upon exercise by the
holder of the put.
The Funds will write call options on stocks only if they are covered, and
such options must remain covered so long as a Fund is obligated as a
writer. For
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purposes of writing covered call options, the Funds defined "covered"
differently. With respect to the International Fund, a call option is
"covered" if: the Fund has an immediate right to acquire that security: (i)
without additional cash consideration (or for additional cash consideration
held in a segregated account by its custodian), or (ii) upon the Fund's
conversion or exchange of other securities held in its portfolio, or (iii)
the Fund holds on a share-for-share basis a call on the same security as
the call written where the strike price of the call held is equal to or
less than the strike price of the call written, or greater than the strike
price of the call written if the difference is maintained by the Fund in
cash, Treasury bills or other liquid high-grade short-term debt obligations
in a segregated account with its custodian.
With respect to the other Funds, a call option is "covered" only if at the
time the Fund writes the call, the Fund holds in its portfolio on a
share-for-share basis the same security as the call written. A Fund must
maintain such security in its portfolio from the time the Fund writes the
call option until the option is exercised, terminated or expires. The
Funds' use of options on equity securities is subject to certain special
risks including the risk that the market value of the security will move
adversely to the Fund's option position. Additional risks relating to the
International Fund's use of options on equity securities are described
below.
The Funds may effect "closing purchase transactions" and the International
Fund may effect "closing sale transactions." If a Fund, as a writer of an
option, wishes to terminate the obligation, it may effect a closing
purchase transaction by buying an option of the same series as the option
previously written. The International Fund also may liquidate its position
in an option it holds by exercising the option or by effecting a "closing
sale transaction," i.e., selling an option of the same series as the option
previously purchased. A Fund will realize a profit from a closing
transaction if the price of the transaction is less than the premium
received from writing the option or, in the case of the International Fund,
is more than the premium paid to purchase the option. Because increases in
the market price of a call option will generally reflect increases in the
market price of the underlying security, any loss resulting from a closing
purchase transaction with respect to a call option is likely to be offset
in whole or in part by appreciation of the underlying equity security owned
by the Fund. There is no guaranty that closing purchase or closing sale
transactions can be effected.
INTERNATIONAL FUND ONLY: The International Fund will write put options on
stocks only if they are covered, and such options must remain covered so
long as the Fund is obligated as a writer. A put option is "covered" if:
(i) the Fund holds in a segregated account cash, Treasury bills, or other
liquid high-grade short-term debt obligations of a value equal to the
strike price, or (ii) the Fund holds on a share-for-share basis a put on
the same security as the put written, where the strike price of the put
held is equal to or greater than the strike price of the put written,
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or less than the strike price of the put written if the difference is
maintained by the Fund in cash, Treasury bills, or other liquid high-grade
short-term obligations in a segregated account with its custodian.
The International Fund may purchase "protective puts," i.e., put options
acquired for the purpose of protecting a portfolio security from a decline
in market value. In exchange for the premium paid for the put option, the
Fund acquires the right to sell the underlying security at the strike price
of the put regardless of the extent to which the underlying security
declines in value. The loss to the Fund is limited to the premium paid
for, and transaction costs in connection with, the put plus the initial
excess, if any, of the market price of the underlying security over the
strike price. However, if the market price of the security underlying the
put rises, the profit the Fund realizes on the sale of the security will be
reduced by the premium paid for the put option less any amount (net of
transaction costs) for which the put may be sold.
The International Fund does not intend to invest more than 5% of its net
assets at any one time in the purchase of call options on stocks.
The Funds' use of options on equity securities is subject to certain
special risks, in addition to the risk that the market value of the
security will move adversely to the Fund's option position. An option
position may be closed out only on an exchange, board of trade or other
trading facility that provides a secondary market for an option of the same
series. Although the Funds will generally only purchase or, in the case of
the International Fund, write those options for which there appears to be
an active secondary market, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option, or at any
particular time, and for some options no secondary market on an exchange or
otherwise may exist. In such event it might not be possible to effect
closing transactions in particular options. In such a case, the
International Fund would have to exercise its options in order to realize
any profit and would incur brokerage commissions upon the exercise of such
options and upon the subsequent disposition of the underlying securities
acquired through the exercise of call options or upon the purchase of
underlying securities or the exercise of put options. If a Fund as a
covered call option writer is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or it delivers the underlying
security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange can
include any of the following: (i) there may be insufficient trading
interest in certain options; (ii) restrictions imposed by an exchange on
opening transactions or closing transactions or both; (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities; (iv) unusual or
unforeseen circumstances may interrupt
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normal operations on an exchange; (v) the facilities of an exchange or a
clearing corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which
event the secondary market on that exchange (or in the class or series of
options) would cease to exist, although outstanding options on that
exchange that had been issued by a clearing corporation as a result of
trades on that exchange would continue to be exercisable in accordance with
their terms. There is no assurance that higher than anticipated trading
activity or other unforeseen events might not, at times, render certain of
the facilities of any of the clearing corporations inadequate, and thereby
result in the institution by an exchange of special procedures that may
interfere with the timely execution of customers' orders.
21. OPTIONS ON STOCK INDICES. The International Fund may purchase and sell
(i.e., write) put and call options on stock indices. The other Funds
(except the Equity Fund) may purchase put and call options on stock
indices. Options on stock indices are similar to options on stock except
that, rather than obtaining the right to take or make delivery of stock at
a specified price, an option on a stock index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing
level of the stock index upon which the option is based is greater than (in
the case of a call) or less than (in the case of a put) the strike price of
the option. The amount of cash is equal to such difference between the
closing price of the index and the strike price of the option times a
specified multiple (the "multiplier"). If the option is exercised, the
writer is obligated, in return for the premium received, to make delivery
of this amount. Unlike stock options, all settlements are in cash, and
gain or loss depends on price movements in the stock market generally (or
in a particular industry or segment of the market) rather than price
movements in individual stocks.
The International Fund will write call options on stock indices only if
they are covered, and such options remain covered as long as the Fund is
obligated as a writer. When the International Fund writes a call option on
a broadly based stock market index, the Fund will segregate or put into
escrow with its custodian or pledge to a broker as collateral for the
option, cash, Treasury bills or other liquid high-grade short-term debt
obligations, or "qualified securities" (defined below) with a market value
at the time the option is written of not less than 100% of the current
index value times the multiplier times the number of contracts. A
"qualified security" is an equity security that is listed on a national
securities exchange or listed on Nasdaq against which the Fund has not
written a stock call option and that has not been hedged by the Fund by the
sale of stock index futures.
When the International Fund writes a call option on an industry or market
segment index, the Fund will segregate or put into escrow with its
custodian or
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pledge to a broker as collateral for the option, cash, Treasury bills or
other liquid high-grade short-term debt obligations, or at least five
qualified securities, all of which are stocks of issuers in such industry
or market segment, with a market value at the time the option is written of
not less than 100% of the current index value times the multiplier times
the number of contracts. Such stocks will include stocks that represent at
least 50% of the weighting of the industry or market segment index and will
represent at least 50% of the portfolio's holdings in that industry or
market segment. No individual security will represent more than 15% of the
amount so segregated, pledged or escrowed in the case of broadly based
stock market stock options or 25% of such amount in the case of industry or
market segment index options.
If at the close of business on any day the market value of such qualified
securities so segregated, escrowed, or pledged falls below 100% of the
current index value times the multiplier times the number of contracts, the
International Fund will so segregate, escrow, or pledge an amount in cash,
Treasury bills, or other liquid high-grade short-term obligations equal in
value to the difference. In addition, when the International Fund writes a
call on an index that is in-the-money at the time the call is written, the
Fund will segregate with its custodian or pledge to the broker as
collateral, cash or U.S. Government or other liquid high-grade short-term
debt obligations equal in value to the amount by which the call is
in-the-money times the multiplier times the number of contracts. Any
amount segregated pursuant to the foregoing sentence may be applied to the
Fund's obligation to segregate additional amounts in the event that the
market value of the qualified securities falls below 100% of the current
index value times the multiplier times the number of contracts. A call
option is also covered, and the International Fund need not follow the
segregation requirements set forth in this paragraph if the Fund holds a
call on the same index as the call written, where the strike price of the
call held is equal to or less than the strike price of the call written, or
greater than the strike price of the call written if the difference is
maintained by the Fund in cash, Treasury bills or other liquid high-grade
short-term obligations in a segregated account with its custodian.
The International Fund will write put options on stock indices only if they
are covered, and such options must remain covered so long as the Fund is
obligated as a writer. A put option is covered if: (i) the Fund holds in a
segregated account cash, Treasury bills, or other liquid high-grade
short-term debt obligations of a value equal to the strike price times the
multiplier times the number of contracts, or (ii) the Fund holds a put on
the same index as the put written where the strike price of the put held is
equal to or greater than the strike price of the put written, or less than
the strike price of the put written if the difference is maintained by the
Fund in cash, Treasury bills, or other liquid high-grade short-term debt
obligations in a segregated account with its custodian.
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The Funds do not intend to invest more than 5% of their net assets at any
one time in the purchase of puts and calls on stock indices. The Funds may
effect closing sale and the International Fund may effect closing purchase
transactions, as described above in connection with options on equity
securities.
The purchase and sale of options on stock indices will be subject to the
same risks as options on equity securities, described above. In addition,
the distinctive characteristics of options on indices create certain risks
that are not present with stock options. Index prices may be distorted if
trading of certain stocks included in the index is interrupted. Trading in
index options also may be interrupted in certain circumstances, such as if
trading were halted in a substantial number of stocks included in the
index. If this occurred, the Funds would not be able to close out options
that they had purchased or, in the case of the International Fund, written
and, if restrictions on exercise were imposed, a Fund might be unable to
exercise an option it holds, which could result in substantial losses to
the Fund. The Funds generally will select stock indices that include a
number of stocks sufficient to minimize the likelihood of a trading halt in
options on the index.
Although the markets for certain index option contracts have developed
rapidly, the markets for other index options are still relatively illiquid.
The ability of the Funds to establish and close out positions on such
options will be subject to the development and maintenance of a liquid
secondary market. It is not certain that this market will develop in all
index options contracts. The Funds will not purchase or, in the case of
the International Fund, sell any index option contract unless and until
the Funds investment advisor or sub-investment advisor believes the market
for such options has developed sufficiently that the risk in connection
with such transactions is no greater than the risk in connection with
options on stocks.
Price movements in the Funds' equity security portfolios probably will not
correlate precisely with movements in the level of the index and,
therefore, in writing a call on a stock index the International Fund bears
the risk that the price of the securities it holds in its portfolio may not
increase as much as the index. In such event, the International Fund would
bear a loss on the call that is not completely offset by movement in the
price of the Fund's equity securities. It is also possible that the index
may rise when the Fund's securities do not rise in value. If this
occurred, the Fund would experience a loss on the call that is not offset
by an increase in the value of its securities portfolio and might also
experience a loss in its securities portfolio. However, because the value
of a diversified securities portfolio will, over time, tend to move in the
same direction as the market, movements in the value of the Funds'
securities in the opposite direction as the market would be likely to
occur for only a short period or to a small degree.
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When the International Fund has written a call, there is also a risk that
the market may decline between the time the Fund has a call exercised
against it, at a price which is fixed as of the closing level of the index
on the date of exercise, and the time the Fund is able to sell stocks in
its portfolio. As with stock options, the Fund will not learn that an
index option has been exercised until the day following the exercise date
but, unlike a call on stock where the Fund would be able to deliver the
underlying securities in settlement, the Fund may have to sell part of its
stock portfolio in order to make settlement in cash, and the price of such
stocks might decline before they can be sold. This timing risk makes
certain strategies involving more than one option substantially more risky
with options in stock indices than with stock options.
There are also certain special risks involved in purchasing put and call
options on stock indices. If a Fund holds an index option and exercises
it before final determination of the closing index value for that day, it
runs the risk that the level of the underlying index may change before
closing. If such a change causes the exercised option to fall
out-of-the-money, the Fund will be required to pay the difference between
the closing index value and the strike price of the option (times the
applicable multiplier) to the assigned writer. Although the Fund may be
able to minimize the risk by withholding exercise instructions until just
before the daily cutoff time or by selling rather than exercising an option
when the index level is close to the exercise price, it may not be possible
to eliminate this risk entirely because the cutoff times for index options
may be earlier than those fixed for other types of options and may occur
before definitive closing index values are announced.
22. OPTIONS ON DEBT SECURITIES. (INTERNATIONAL FUND ONLY) The Fund may
purchase and write (i.e., sell) put and call options on debt securities.
Options on debt are similar to options on stock, except that the option
holder has the right to take or make delivery of a debt security, rather
than stock.
The Fund will write options only if they are covered, and such options must
remain covered so long as the Fund is obligated as a writer. An option on
debt securities is covered in the same manner as options on equity
securities as described above, except that, in the case of call options on
U.S. Treasury bills, the Fund might own U.S. Treasury bills of a different
series from those underlying the call option, but with a principal amount
and value corresponding to the option contract amount and a maturity date
no later than that of the securities deliverable under the call option.
The principal reason for the Fund to write an option on one or more of its
securities is to realize through the receipt of the premiums paid by the
purchaser of the option a greater current return than would be realized on
the underlying security alone. Calls on debt securities will not be
written when, in the opinion of the Sub-Advisor, interest rates are likely
to decline significantly, because under those circumstances the premium
received by writing the call likely
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would not fully offset the foregone appreciation in the value of the
underlying security.
The Fund may also write straddles (i.e., a combination of a call and a put
written on the same security at the same strike price where the same issue
of the security is considered "cover" for both the put and the call). In
such cases, the Fund will also segregate or deposit for the benefit of the
Fund's broker cash or liquid high-grade debt obligations equivalent to the
amount, if any, by which the put is in-the-money. The Fund's use of
straddles will be limited to 5% of its net assets (meaning that the
securities used for cover or segregated as described above will not exceed
5% of the Fund's net assets at the time the straddle is written). The
writing of a call and a put on the same security at the same strike price
where the call and the put are covered by different securities is not
considered a straddle for purposes of this limit.
The Fund may purchase "protective puts" on debt securities in an effort to
protect the value of a security that they own against a substantial decline
in market value. Protective puts are described above in "Options on
Equities."
The Fund does not intend to invest more than 5% of its net assets at any
one time in the purchase of call options on debt securities.
If the Fund, as a writer of an exchange-traded option, wishes to terminate
the obligation, it may effect a closing purchase or sale transaction in a
manner similar to that discussed above in connection with options on equity
securities. Unlike exchange-traded options, dealer options generally do
not have a continuous liquid market. Consequently, the Fund will generally
be able to realize the value of a dealer option it has purchased only by
exercising it or reselling it to the dealer who issued it. Similarly, when
the Fund writes a dealer option, it generally will be able to close out the
dealer option prior to its expiration only by entering into a closing
purchase transaction with the dealer to which the Fund originally wrote the
dealer option. While the Fund will seek to enter into dealer options only
with counterparties who agree to and who are expected to be able to be
capable of entering into closing transactions with the Fund, there can be
no assurance that the Fund will be able to liquidate a dealer option at a
favorable price at any time prior to expiration. In the event of
insolvency of the other party, the Fund may be unable to liquidate a dealer
option. There is, in general, no guarantee that closing purchase or
closing sale transactions can be effected. The Fund may not invest more
than 15% of its total assets (determined at the time of investment) in
illiquid securities, including debt securities for which there is not an
established market. The staff of the SEC has taken the position that
purchased dealer options and the assets used as "cover" for written dealer
options are illiquid securities. However, pursuant to the terms of certain
no-action letters issued by the staff, the securities used as cover for
written dealer options may be considered liquid provided that the Fund
sells dealer options only to qualified dealers who agree that the Fund
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may repurchase any dealer option its writes for a maximum price to be
calculated by a predetermined formula. In such cases, the dealer option
would be considered illiquid only to the extent that the maximum repurchase
price under the formula exceeds the intrinsic value of the option.
The Fund's purchase and sale of exchange-traded options on debt securities
will be subject to the risks described above in "Options on Equity
Securities."
23. OPTIONS ON FOREIGN CURRENCIES. (INTERNATIONAL FUND ONLY) The Fund may
purchase and write put and call options on foreign currencies traded on
U.S. or foreign securities exchanges or boards of trade for hedging
purposes. Options on foreign currencies are similar to options on stock,
except that the option holder has the right to take or make delivery of a
specified amount of foreign currency, rather than stock.
The Fund may purchase and write options to hedge its securities denominated
in foreign currencies. If there is a decline in the dollar value of a
foreign currency in which the Fund's securities are denominated, the dollar
value of such securities will decline even though their foreign currency
value remains the same. To hedge against the decline of the foreign
currency, the Fund may purchase put options on such foreign currency. If
the value of the foreign currency declines, the gain realized on the put
option would offset, in whole or in part, the adverse effect such decline
would have on the value of the Fund's securities. Alternatively, the Fund
may write a call option on the foreign currency. If the foreign currency
declines, the option would not be exercised and the decline in the value of
the portfolio securities denominated in such foreign currency would be
offset in part by the premium the Fund received for the option.
If, on the other hand, the Sub-Advisor anticipates purchasing a foreign
security and also anticipates a rise in such foreign currency (thereby
increasing the cost of such security), the Fund may purchase call options
on the foreign currency. The purchase of such options could offset, at
least partially, the effects of the adverse movements of the exchange
rates. Alternatively, the Fund could write a put option on the currency
and, if the exchange rates move as anticipated, the option would expire
unexercised.
The Fund's successful use of options on foreign currencies depends upon the
Sub-Advisor's ability to predict the direction of the currency exchange
markets and political conditions, which requires different skills and
techniques than predicting changes in the securities markets generally.
For instance, if the currency being hedged has moved in a favorable
direction, the corresponding appreciation of the Fund's securities
denominated in such currency would be partially offset by the premiums paid
on the options. Furthermore, if the currency exchange rate does not
change, the Fund's net income would be less than if the Fund had not hedged
since there are costs associated with options.
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The use of these options is subject to various additional risks. The
correlation between movements in the price of options and the price of the
currencies being hedged is imperfect. The use of these instruments will
hedge only the currency risks associated with investments in foreign
securities, not their market risks. The Fund's ability to establish and
maintain positions will depend on market liquidity. The ability of the
Fund to close out an option depends upon a liquid secondary market. There
is no assurance that liquid secondary markets will exist for any particular
option at any particular time.
24. STOCK INDEX FUTURES CONTRACTS. (INTERNATIONAL FUND ONLY) The
International Fund may buy and sell for hedging purposes stock index
futures contracts traded on a commodities exchange or board of trade. A
stock index futures contract is an agreement in which the seller of the
contract agrees to deliver to the buyer an amount of cash equal to a
specific dollar amount times the difference between the value of a specific
stock index at the close of the last trading day of the contract and the
price at which the agreement is made. No physical delivery of the
underlying stocks in the index is made. When the futures contract is
entered into, each party deposits with a broker or in a segregated
custodial account approximately 5% of the contract amount, called the
"initial margin." Subsequent payments to and from the broker, called
"variation margin," will be made on a daily basis as the price of the
underlying stock index fluctuates, making the long and short positions in
the futures contracts more or less valuable, a process known as "marking to
the market."
The Fund may sell stock index futures to hedge against a decline in the
value of equity securities it holds. The Fund may also buy stock index
futures to hedge against a rise in the value of equity securities it
intends to acquire. To the extent permitted by federal regulations, the
Fund may also engage in other types of hedging transactions in stock index
futures that are economically appropriate for the reduction of risks
inherent in the ongoing management of the Fund's equity securities.
The Fund's successful use of stock index futures contracts depends upon the
Sub-Advisor's ability to predict the direction of the market and is subject
to various additional risks. The correlation between movement in the price
of the stock index future and the price of the securities being hedged is
imperfect and the risk from imperfect correlation increases as the
composition of the Fund's securities portfolio diverges from the
composition of the relevant index. In addition, the ability of the Fund to
close out a futures position depends on a liquid secondary market. There
is no assurance that liquid secondary markets will exist for any particular
stock index futures contract at any particular time.
Under regulations of the Commodity Futures Trading Commission
("PRIMARILY"), investment companies registered under the 1940 Act are
excluded from regulation as commodity pools or commodity pool operators if
their use of futures is limited
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in certain specified ways. The Fund will use futures in a manner
consistent with the terms of this exclusion. Among other requirements, no
more than 5% of the Fund's assets may be committed as initial margin on
futures contracts.
25. INTEREST RATE FUTURES CONTRACTS. (INTERNATIONAL FUND ONLY) The
International Fund may buy and sell for hedging purposes futures contracts
on interest bearing securities (such as U.S. Treasury bonds, U.S. Treasury
notes, U.S. Treasury bills, and GNMA certificates) or interest rate
indices. Futures contracts on interest bearing securities and interest
rate indices are referred to collectively as "interest rate futures
contracts." The portfolios will engage in transactions in only those
futures contracts that are traded on a commodities exchange or board of
trade.
The Fund may sell an interest rate futures contract to hedge against a
decline in the market value of debt securities it owns. The Fund may
purchase an interest rate futures contract to hedge against an anticipated
increase in the value of debt securities it intends to acquire. The Fund
may also engage in other types of transactions in interest rate futures
contracts that are economically appropriate for the reduction of risks
inherent in the ongoing management of its futures.
The Fund's successful use of interest rate futures contracts depends upon
the Sub-Advisor's ability to predict interest rate movements. Further,
because there are a limited number of types of interest rate futures
contracts, it is likely that the interest rate futures contracts available
to the Fund will not exactly match the debt securities the Fund intends to
hedge or acquire. To compensate for differences in historical volatility
between securities the Fund intends to hedge or acquire and the interest
rate futures contracts available to it, the Fund could purchase or sell
futures contracts with a greater or lesser value than the securities it
wished to hedge or intended to purchase. Interest rate futures contracts
are subject to the same risks regarding closing transactions and the
PRIMARILY limits as described above in "Stock Index Futures Contracts."
26. FOREIGN CURRENCY FUTURES CONTRACTS. (INTERNATIONAL FUND ONLY) The
International Fund may buy and sell for hedging purposes futures contracts
on foreign currencies or groups of foreign currencies such as the European
Currency Unit. A European Currency Unit is a basket of specified amounts
of the currencies of certain member states of the European Economic
Community, a Western European economic cooperative organization including
France, Germany, the Netherlands and the United Kingdom. The Fund will
engage in transactions in only those futures contracts and other options
thereon that are traded on a commodities exchange or a board of trade. See
"Stock Index Futures Contracts" above for a general description of futures
contracts. The Fund intends to engage in transactions involving futures
contracts as a hedge against changes in the value of the currencies in
which they hold investments or in which they expect to pay expenses or pay
for future purchases. The Fund may also engage in such
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transactions when they are economically appropriate for the reduction of
risks inherent in their ongoing management.
The use of these futures contracts is subject to risks similar to those
involved in the use of options on foreign currencies and the use of any
futures contract. The Fund's successful use of foreign currency futures
contracts depends upon the Sub-Advisor's ability to predict the direction
of currency exchange markets and political conditions. In addition, the
correlation between movements in the price of futures contracts and the
price of currencies being hedged is imperfect, and there is no assurance
that liquid markets will exist for any particular futures contract at any
particular time. Those risks are discussed above more fully under "Options
on Foreign Currencies" and "Stock Index Futures Contracts."
27. OPTIONS ON FUTURES CONTRACTS. (INTERNATIONAL FUND ONLY) The Fund may, to
the extent permitted by applicable regulations, enter into certain
transactions involving options on futures contracts. An option on a
futures contract gives the purchaser or holder the right, but not the
obligation, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put) at a
specified price at any time during the option exercise period. The writer
of the option is required upon exercise to assume an offsetting futures
position (a short position if the option is a call and a long position if
the option is a put). Upon exercise of the option, the assumption of
offsetting futures positions by the writer and holder of the option will be
accomplished by delivery of the accumulated balance in the writer's futures
margin account that represents the amount by which the market price of the
futures contract, on exercise, exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract. As an alternative to exercise, the holder or writer of an option
may terminate a position by selling or purchasing an option of the same
series. There is no guarantee that such closing transactions can be
effected. The Fund intends to utilize options on futures contracts for the
same purposes that it intends to use the underlying futures contracts.
Options on futures contracts are subject to risks similar to those
described above with respect to options and futures contracts. There is
also the risk of imperfect correlation between the option and the
underlying futures contract. If there were no liquid secondary market for
a particular option on a futures contract, the Fund might have to exercise
an option it held in order to realize any profit and might continue to be
obligated under an option it had written until the option expired or was
exercised. If the Fund were unable to close out an option it had written
on a futures contract, it would continue to be required to maintain initial
margin and make variation margin payments with respect to the option
position until the option expired or was exercised against the Fund.
The Fund will not purchase a put or call option or option on a futures
contract if, as a result, 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, the aggregate margin
deposits and premiums required on all such instruments would exceed 5% of
its net assets.
28. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. (INTERNATIONAL FUND ONLY)
The Fund may enter into forward foreign currency exchange contracts
("forward
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contracts") in several circumstances. When the Fund enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, or when the Fund anticipates the receipt in a foreign currency of
dividends or interest payments on a security that it holds, the Fund may
desire to "lock-in" the U.S. dollar price of the security or the U.S.
dollar equivalent of such dividend or interest payment, as the case may be.
By entering into a forward contract for a fixed amount of dollars, for the
purchase or sale of the amount of foreign currency involved in the
underlying transactions, the Fund will be able to protect itself against a
possible loss resulting from an adverse change in the relationship between
the U.S. dollar and the subject foreign currency during the period between
the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such
payments are made or received.
Additionally, when the Sub-Advisor believes that the currency of a
particular foreign country may suffer a substantial decline against the
U.S. dollar, the Fund may enter into a forward contract for a fixed amount
of dollars, to sell the amount of foreign currency approximating the value
of some or all of the portfolio securities denominated in such foreign
currency. The precise matching of the forward contract amounts and the
value of the securities involved will not generally be possible since the
future value of securities in foreign currencies will change as a
consequence of market movements in the value of those securities between
the date on which the forward contract is entered into and the date it
matures. The projection of short-term currency market movements is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. The Fund will not enter into forward
contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate the Fund to deliver an amount
of foreign currency in excess of the value of the securities or other
assets denominated in that currency held by the Fund.
Under normal circumstances, consideration of the prospect for currency
parities will be incorporated into the long-term investment decisions made
with regard to overall diversification strategies. However, the
Sub-Advisor believes that it is important to have the flexibility to enter
into forward contracts when it is determined that the best interests of the
Fund will thereby be served. The Fund's custodian will place cash or
liquid, high-grade equity or debt securities into a segregated account of
the portfolio in an amount equal to the value of the Fund's total assets
committed to the consummation of forward foreign currency exchange
contracts. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account on a
daily basis so that the value of the account will equal the amount of the
Fund's commitments with respect to such contracts.
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The Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign
currency or it may retain the security and terminate its contractual
obligation to deliver the foreign currency by purchasing an "offsetting"
contract with the same currency trader obligating it to purchase, on the
same maturity date, the same amount of the foreign currency. However,
there is no assurance that liquid markets will exist for any particular
forward contract at any particular time or that the Fund will be able to
effect a closing or "offsetting" transaction. Forward contracts are
subject to other risks described in "Special Risks of Foreign Investments
and Foreign Currency Transactions."
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract.
Accordingly, it may be necessary for the Fund to purchase additional
foreign currency on the spot market (and bear the expense of such purchase)
if the market value of the security is less than the amount of foreign
currency that the Fund is obligated to deliver and if a decision is made to
sell the security and make delivery of the foreign currency.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to
the extent that there has been movement in forward contract prices. Should
forward contract prices decline during the period between the Fund's
entering into a forward contract for the sale of a foreign currency and the
date it enters into an offsetting contract for the purchase of the foreign
currency, the Fund will realize a gain to the extent that the price of the
currency it has agreed to sell exceeds the price of the currency it has
agreed to purchase. Should forward contract prices increase, the Fund will
suffer a loss to the extent that the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
The Fund's dealing in forward contracts will be limited to the transactions
described above. Of course, the Fund is not required to enter into such
transactions with regard to its foreign currency-denominated securities.
It also should be realized that this method of protecting the value of the
portfolio securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities that are
unrelated to exchange rates. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time they tend to limit any potential gain that might
result should the value of such currency increase.
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend physically to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. The Fund will do so from time to time,
incurring the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for
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conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one
rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer.
29. UNSEASONED ISSUERS. The Funds may invest in securities of unseasoned
issuers. Unseasoned issuers are those companies which, together with
any predecessors, have been in operation for less than three years.
30. INDEXED SECURITIES. The Funds 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 subject to
credit risks associated with the issuer of the security. Indexed
securities may also be more volatile than their underlying instruments.
31. GEOGRAPHICAL AND ISSUER SIZE LIMITATIONS:
NORTHWEST FUND ONLY. 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.
INTERNATIONAL FUND ONLY. Because the International Fund invests primarily
in foreign securities, it is subject to various risks in addition to those
associated with U.S. investment. 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.
SMALL COMPANY FUND ONLY. The Small Company Fund invests in small-sized
companies which involves greater risks than investment in larger, more
established issuers, and such securities can be subject to more abrupt and
erratic movements in price.
INTERMEDIATE-TERM U.S. TREASURY FUND, GNMA FUND,
HIGH-YIELD FUND AND MANAGED BOND FUND
The Intermediate-Term U.S. Treasury Fund, GNMA Fund, High-Yield Fund and Managed
Bond Fund may make the following investments, among others, although they may
not buy all of the types of securities that are described.
1. DIRECT OBLIGATIONS OF THE U.S. TREASURY SUCH AS U.S. TREASURY BILLS, NOTES
AND BONDS. The Intermediate-Term Treasury Fund and the Managed Bond Fund
also invest in stripped securities that are direct obligations of the U.S.
Treasury. Direct obligations of the U.S. Treasury are supported by the
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full faith and credit of the U.S. Government.
2. 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 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.
3. CORPORATE DEBT SECURITIES (INTERMEDIATE-TERM U.S. TREASURY FUND, GNMA FUND
AND MANAGED BOND FUND ONLY). The Funds may invest in 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.
4. REPURCHASE AGREEMENTS. See the description of such securities under
"Additional Investment Information -- Stock Funds". The Managed Bond
Fund will invest no more than 5% of its total assets in repurchase
agreements, and will not purchase repurchase agreements that mature
in more than seven days.
5. WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES. See the description of such
securities under "Additional Investment Information -- Stock Funds".
6. YANKEE DEBT SECURITIES AND EURODOLLAR BONDS. The High-Yield Fund may
invest up to 25% of its total assets in Yankee sector debt securities.
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.
Both S&P and Moody's rate Yankee sector debt obligations. If a debt
obligation is unrated, 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
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investments 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 bonds issued by either U.S. or foreign issuers that
are traded in the European bond markets and denominated in U.S. dollars.
Eurodollar bonds issued by foreign issuers are subject to the same risks as
Yankee sector bonds. Additionally, Eurodollar bonds are subject to certain
sovereign risks. One such risk is the possibility that a foreign
government might prevent dollar-denominated funds from flowing across its
borders.
7. 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. 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 High-Yield Fund and the
Managed Bond Fund may invest up to 5% of its total assets in municipal
securities which are rated lower than the top three grades assigned by
Moody's or S&P or are unrated but comparable to such rated securities if,
in the opinion of SAM, the potential for appreciation is greater than, and
yield is comparable to or greater than, similarly rated taxable securities.
8. SHORT-TERM INVESTING. The Funds may invest for short-term purposes when
SAM believes such action to be desirable and consistent with sound
investment practices. No Fund, however, will engage primarily in trading
for the purpose of short-term profits. A Fund may dispose of its
securities whenever SAM deems advisable, without regard to the length of
time the securities have been held.
9. ILLIQUID SECURITIES (INTERMEDIATE-TERM U.S. TREASURY FUND, GNMA FUND,
HIGH-YIELD FUND ONLY). See the description of such securities under
"Additional Investment Information--Stock Funds."
10. RESTRICTED SECURITIES AND RULE 144A SECURITIES (INTERMEDIATE-TERM U.S.
TREASURY FUND, GNMA FUND, HIGH-YIELD FUND ONLY). See the description of
such securities under "Additional Investment Information--Stock Funds."
11. MORTGAGE-BACKED SECURITIES (GNMA FUND ONLY). The mortgage-backed 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
("primarily"). Modified pass-through securities "pass through" to their
holders the scheduled monthly interest and principal payments relating to
mortgage loans in the pool. primarily are securities collateralized by a
portfolio of mortgage loans or mortgage-backed securities. primarily are
issued with a number of classes or series which have different
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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 may purchase is interests in real estate
mortgage investment conduits ("REMICs") sponsored by GNMA.
Unlike conventional bonds, the principal with respect to mortgage-backed
securities is paid back over the life of the loan rather than at maturity.
Consequently, the Fund will receive monthly scheduled payments of both
principal and interest. In addition, the Fund may receive unscheduled
principal payments representing unscheduled prepayments on the underlying
mortgages. Since the Fund must reinvest scheduled and unscheduled
principal payments at prevailing interest rates and such interest rates may
be higher or lower than the current yield of the Fund's portfolio,
mortgage-backed securities may not be an effective means to lock in
long-term interest rates. In addition, while prices of mortgage-backed
securities, like conventional bonds, are inversely affected by changes in
interest rate levels, because of the likelihood of increased prepayments of
mortgages in times of declining interest rates, they have less potential
for capital appreciation than comparable fixed-income securities and may in
fact decrease in value when interest rates fall.
The rate of interest payable on collateralized mortgage obligation ("CMO")
classes may be set at levels that are either above or below market rates at
the time of issuance, so that the securities will be sold at a substantial
premium to, or at a discount from, par value. There is the risk that the
Fund may fail to recover any premium it pays due to market conditions
and/or mortgage prepayments. The Fund will not invest in interest-only or
principal-only classes -- such investments are extremely sensitive to
changes in interest rates.
Some CMO classes are structured to pay interest at rates that are adjusted
in accordance with a formula, such as a multiple or fraction of the change
in a specified interest rate index, so as to pay at a rate that will be
attractive in certain interest rate environments but not in others. For
example, a CMO may be structured so that its yield moves in the same
direction as market interest rates - i.e., the yield may increase as rates
increase and decrease as rates decrease - but may do so more rapidly or to
a greater degree. Other CMO classes may be structured to pay floating
interest rates that either move in the same direction or the opposite of
short-term interest rates. The market value of such securities may be more
volatile than that of a fixed rate obligation. Such interest rate
formulas may be combined with other CMO characteristics.
12. OTHER COLLATERALIZED MORTGAGE OBLIGATIONS (GNMA FUND ONLY). 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). primarily are securities
collateralized by a portfolio of
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mortgages or mortgage-backed securities. The issuer's obligation to make
interest and principal payments on the CMO is secured by the underlying
portfolio of mortgages or mortgage-backed securities. primarily 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.
13. ASSET-BACKED SECURITIES (GNMA FUND AND MANAGED BOND FUND ONLY).
Asset-backed securities represent interests in, or are secured by and
payable from, pools of assets such as (but not limited to) consumer loans,
automobile receivable securities, credit card receivable securities, and
installment loan contracts. These securities may be pass-through
certificates, which are similar to mortgage-backed securities, or they
may be asset-backed commercial paper, which is issued by a special
purpose entity organized solely to issue the commercial paper and to
purchase interests in the assets. The assets underlying the securities are
securitized through the use of trusts and special purpose corporations.
Like mortgage-backed securities, asset-backed securities are subject to
prepayment risks, which may reduce the overall return on the investment.
Payment of interest and principal ultimately depends upon borrowers
paying the underlying loans. These securities may be supported by credit
enhancements such as letters of credit. The credit quality of these
securities depends upon the quality of the underlying assets and the
level of credit enhancements, such as letters of credit, provided.
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 the repossessed collateral may
be unavailable or inadequate to support payments on the defaulted
securities. 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.
14. ZERO COUPON BONDS. (MANAGED BOND FUND ONLY). Zero coupon bonds are
purchased at a discount without scheduled interest payments. Because zero
coupon bonds do not pay current interest, their prices can be very volatile
when interest rates change. In calculating its dividends, the Managed Bond
Fund accrues as income a portion of the difference between the purchase
price and the face value of each zero coupon bond it holds.
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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.
15. CASH OR 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.
16. HIGH-YIELD, DEBT SECURITIES (HIGH-YIELD FUND ONLY). The High-Yield
Bond Fund may purchase debt and preferred stock issues (including
convertible securities) which are below investment grade, i.e., rated lower
than the top four grades by S&P or Moody's, or, if not rated by these
agencies, in the opinion of SAM, have credit characteristics comparable to
such rated securities. Up to 25% of the Fund's total assets may be invested
in such unrated securities. SAM will determine the quality of unrated
obligations by evaluating the issuer's capital structure, earnings power
and quality of management. Unrated securities may not be as attractive to
as many investors as rated securities. In addition, the Fund may invest up
to 5% of its total assets in securities which are in default. The Fund will
purchase securities which are in default only when, in SAM's opinion, the
potential for high yield outweighs the risk.
While debt 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.
Yields on high-yield, debt securities will fluctuate over time. During
periods of economic uncertainty or change, the market prices of high-yield,
fixed-income securities may experience increased volatility, which may in
turn cause the net asset value per share of the High-Yield Fund to be
volatile. Lower-quality, debt securities tend to reflect short-term
economic and corporate developments to a grater 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, debt securities
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and the ability of issuers to timely repay principal and interest,
increasing the likelihood of defaults. Lower-quality securities include
debt obligations issued as a part of capital restructurings, such as
corporate takeovers or buyouts. Capital restructurings generally involve
the issuance of additional debt on terms different from any current
outstanding debt. As a result, the issuer of the debt is more highly
leveraged. During an economic downturn or period of rising interest rates,
a highly-leveraged issuer may experience financial difficulties which
adversely affect its ability to make principal and interest payments, meet
projected business goals and obtain additional financing. In addition, the
issuer will depend on its cash flow and may depend, especially in the
context of corporate takeovers, on a sale of its assets to service debt.
Failure to realize projected cash flows or asset sales may seriously impair
the issuer's ability to service this greater debt load, which in turn might
cause the Fund to lose all or part of its investment in that security. SAM
will seek to minimize these additional risks through diversification,
careful assessment of the issuer's financial structure, business plan and
management team following any restructuring, and close monitoring of the
issuer's progress toward its financial goals.
17. DEBT SECURITIES WITH EQUITY FEATURES (HIGH-YIELD FUND ONLY). The Fund may
acquire these securities when comparable in yield and risk to debt
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.
18. ZERO COUPON AND PAYMENT (HIGH-YIELD FUND ONLY). The High-Yield Fund may
hold zero coupon and "payment-in-kind" fixed-income securities. Zero
coupon securities are purchased at a discount without scheduled interest
payments. Payment-in-kind securities receive interest paid in additional
securities rather than cash. The Fund accrues income on these securities
but does not receive cash interest payments until maturity or payment date.
The Fund intends to distribute substantially all of its income to its
shareholders so that it can be treated as a regulated investment company
under the federal tax law (see "Tax Information"). 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.
19. LIQUIDITY AND VALUATION (HIGH-YIELD FUND ONLY). The liquidity and price of
high-yield, debt securities can be affected by a number of factors,
including investor perceptions and adverse publicity regarding major
issuers,
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underwriters or dealers of lower-quality corporate obligations. These
effects can be particularly pronounced in a thinly traded market with few
participants and may adversely impact the High-Yield Fund's ability to
dispose of its securities as well as make valuation of securities more
difficult. Because there tend to be fewer investors in lower-rated,
fixed-income securities, it may be difficult for the Fund to sell these
securities at an optimum time. Consequently, lower-rated securities are
subject to more price changes, fluctuations in yield and risk to principal
and income than higher-rated securities of the same maturity. Judgment
plays a greater role in the valuation of thinly-traded securities.
The Managed Bond Fund may retain debt securities which are downgraded
to below investment grade (commonly referred to as "high yield" or
"junk" bonds) after purchase. In the event that due to a downgrade of
one or more debt securities an amount in excess of 5% of the Fund's net
assets is held in securities rated below investment grade, SAM will
engage in an orderly disposition of such securities to the extent
necessary to reduce the Fund's holdings of such securities to no more
than 5% of the Fund's net assets. In addition to reviewing ratings, SAM
may analyze the quality of rated and unrated debt securities purchased
for the Managed Bond Fund by evaluating the issuer's capital structure,
earnings power, quality of management, and position within its industry.
See "Description of Ratings" for a description of debt securities
ratings.
20. CREDIT RATINGS. Rating agencies evaluate the likelihood that an issuer
will make principal and interest payments, but ratings may not reflect
market value risks associated with lower-rated, fixed-income securities.
Also, rating agencies may not timely revise ratings to reflect
subsequent events affecting an issuer's ability to pay principal and
interest. SAM uses S&P and Moody's ratings as a preliminary indicator
of investment quality. SAM will periodically research and analyze each
issue (whether rated or unrated) and evaluate such factors as the
issuer's interest or dividend coverage, asset coverage, earnings
prospects, and managerial strength. This analysis will help SAM to
determine if the issuer has sufficient cash flow and profits to meet
required principal and interest payments and to monitor the liquidity of
the issue. Achievement of a Fund's investment objective will be more
dependent on SAM's credit analysis of bonds rated below the three highest
rating categories than would be the case were the Fund to invest in
higher-quality debt securities. This is particularly true for the
High-Yield Fund.
21. MUNICIPAl SECURITIES (HIGH YIELD FUND ONLY). The Fund may invest in
obligations of, or guaranteed by, the U.S Government, its agencies or
instrumentalities, or in debt 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 market
performance by lower-rated or unrated debt 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 of principal may be substantially reduced with a small
reduction in yield.
INTERMEDIATE-TERM MUNICIPAL BOND FUND, INSURED MUNICIPAL BOND FUND, MUNICIPAL
BOND FUND, CALIFORNIA TAX-FREE INCOME FUND AND WASHINGTON MUNICIPAL BOND FUND
Each Tax-Exempt Bond Fund may make the following investments, among others,
although they may not buy all of the types of securities that are described.
1. MUNICIPAL BONDS.
Each 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 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.
After purchase by a Fund, a municipal bond may be downgraded to below
investment grade or, if unrated, may cease to be comparable to a rated
investment grade security (such below investment grade securities are
commonly referred to as "high yield" or "junk" bonds). Neither event
will require a Fund to dispose of that security, but SAM will take a
downgrade or loss of comparability into account in determining whether
the Fund should continue to hold the security in its portfolio. Each
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 Statement of Additional
Information 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.
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" 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 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 Fund
will not purchase private activity bonds or any other type of revenue
bonds, the interest on which is subject to the alternative minimum tax.
GENERAL OBLIGATION BONDS, which are bonds that provide general purpose
financing for state and local governments and are backed by the taxing
power of the state and local government as the case may be. The taxes or
special assessments that can be levied for the payment of principal and
interest on general obligation bonds may be limited or unlimited as to rate
or amount.
VARIABLE AND FLOATING RATE OBLIGATIONS, which are municipal obligations
that carry variable or floating rates of interest. Variable rate
instruments bear interest at rates that are readjusted at periodic
intervals. Floating rate instruments bear interest at rates that vary
automatically with changes in specified market rates or indexes, such as
the bank prime rate. Accordingly, as interest rates fluctuate, the
potential for capital appreciation or depreciation of these obligations is
less than
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for fixed rate obligations. Floating and variable rate obligations 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. A Fund will purchase
floating and variable rate obligations only if at the time of purchase
there is a secondary market for such instruments. For purposes of
calculating average dollar-weighted maturity, the Intermediate Municipal
Fund will treat variable and floating rate obligations as having a maturity
equal to the period remaining until the date the Fund can next exercise the
demand feature by selling the security back to the issuer.
PUT BONDS, which are municipal bonds that give the holder the unconditional
right to sell the bond back to the issuer at a specified price and exercise
date and PUT BONDS WITH DEMAND FEATURES. The obligation to purchase the
bond on the exercise date may be supported by a letter of credit or other
arrangement from a bank, insurance company or other financial institution,
the credit standing of which affects the credit quality of the bond. A
demand feature is a put that entitles the Fund holding it to repayment of
the principal amount of the underlying security on no more than 30 days'
notice at any time or at specified intervals.
MUNICIPAL LEASE OBLIGATIONS, which are issued by or on behalf of state or
local government authorities to acquire land, equipment or facilities and
may be subject to annual budget appropriations. These obligations
themselves are not normally backed by the credit of the municipality or the
state but are secured by rent payments made by the municipality or by the
state pursuant to a lease. If the lease is assigned, the interest on the
obligation may become taxable. The leases underlying certain municipal
lease obligations provide that lease payments are subject to partial or
full abatement if, because of material damage or destruction of the lease
property, there is substantial interference with the lessee's use or
occupancy of such property. This "abatement risk" may be reduced by the
existence of insurance covering the leased property, the maintenance by the
lessee of reserve funds or the provision of credit enhancements such as
letters of credit. Certain municipal lease obligations also contain
"non-appropriation" clauses that provide that the municipality has no
obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. Some
municipal lease obligations of this type are insured as to timely payment
of principal and interest, even in the event of a failure by the
municipality to appropriate sufficient funds to make payments under the
lease. However, in the case of an uninsured municipal lease obligation, a
Fund's ability to recover under the lease in the event of a
non-appropriation or default will be limited solely to the repossession of
leased property without recourse to the general credit of the lessee, and
disposition of the property in the event of foreclosure might prove
difficult. If rent is abated because of damage to the leased
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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. A Fund will invest in only those
municipal lease obligations that are, in the opinion of SAM, liquid
securities under guidelines adopted by the 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, 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. A Fund will only invest in those COPs that are, in the
opinion of SAM, liquid securities under guidelines adopted by the 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. A Fund may purchase municipal notes as a medium for its short-term
investments, the interest on which will not be subject to federal income
tax when distributed to the Fund's shareholders. Notes include tax
anticipation, revenue anticipation and bond anticipation notes and
tax-exempt commercial paper. A 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.
2. 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
be purchased only 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. A 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.
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3. REPURCHASE AGREEMENTS. See the description of such securities under
"Additional Investment Information -- Stock Funds.
4. WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES. See the description of such
securities under "Additional Investment Information -- Stock Funds.
5. ILLIQUID SECURITIES. See the description of such securities under
"Additional Investment Information -- Stock Funds.
6. CASH OR 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 Fund may purchase these short-term securities as a cash management
technique under those circumstances where it has cash to manage for a short
time period, for example, after receiving proceeds from the sale of
securities, dividend distributions from portfolio securities, or cash from
the sale of Fund shares to investors. Interest earned from these
short-term securities will be taxable to investors as ordinary income when
distributed.
7. SHORT-TERM INVESTMENTS. Each Fund may 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. The portfolio turnover
rate is not expected to exceed 70%.
MONEY MARKET FUNDS
QUALITY AND MATURITY. Pursuant to procedures adopted by the Money Market
Trust's Board of Trustees, the Money Market Fund and Tax-Free Money Market 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, the
security must be judged by SAM to be of equivalent quality.
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 Money Market Fund may not invest more than 5% of its total assets in second
tier securities. In addition, the Money Market Fund may not invest more than 1%
of its total assets or $1 million (whichever is greater) in the second tier
securities of a single issuer.
The Money Market Funds currently intend to limit their 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, a Fund may look to an interest rate reset or demand feature.
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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) may be considered to be
rated if the demand feature or its issuer has been assigned a rating. See
"Description of Ratings" for further explanation of rating categories.
The Money Market 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. 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.
2. VARIABLE AND FLOATING RATE INSTRUMENTS. Issuers of floating or variable
rate notes include, but are not limited to, corporations, partnerships,
special purpose entities, the U.S. government, its agencies and
instrumentalities, and municipalities. The interest rates on variable rate
instruments reset periodically on specified dates so as to cause the
instruments' market value to approximate their par value. The interest
rates on floating rate instruments change whenever there is a change in a
designated benchmark rate. Variable and floating rate instruments may have
optional or mandatory put features. In the case of a mandatory put
feature, the Fund would be required to act to keep the instrument.
3. RESTRICTED SECURITIES AND RULE 144A SECURITIES. The Money Market Fund
may invest up to 5% of its total assets in restricted securities
eligible for resale under Rule 144A under the 1933 Act and commercial
paper sold pursuant to Section 4(2) of the 1933 Act, provided that SAM
had determined that such securities are liquid under guidelines adopted
by the Board of Trustees. See the description of Rule 144A Securities
under "Additional Investment Information -- Stock Funds."
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 decreasing the liquidity of
the Fund's portfolio to the extent that buyers, for a time, become
unwilling to purchase the securities.
4. COMMERCIAL PAPER OBLIGATIONS. Commercial paper is a short-term instrument
issued by corporations, financial institutions, governmental entities and
other entities, and may include funding agreements, and other short-term
debt obligations. 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 U.S. by foreign entities.
While investments in foreign obligations are intended to reduce risk by
providing further diversification, such investments involve sovereign and
other risks, in addition to the credit and market risks normally associated
with domestic securities. These additional risks include the possibility of
adverse political and economic developments (including political
instability) and the potentially adverse effects of unavailability of
public information regarding issuers, reduced governmental supervision of
markets, reduced liquidity of certain financial markets, and the lack of
uniform accounting, auditing, and financial standards or the application of
standards that are different or less stringent than those applied in the
U.S. The Fund will purchase commercial paper issued by foreign entities
only if, in the opinion of SAM, it is of an investment quality comparable
to other obligations that may be purchased by
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the Fund.
5. TAX-EXEMPT COMMERCIAL PAPER (TAX-FREE MONEY MARKET FUND ONLY). These are
short-term securities issued by states, municipalities and their agencies.
Tax-exempt commercial paper may be structured similarly to put bonds with
credit enhancements, long nominal maturities, and mandatory put dates,
which are agreed upon by the buyer and the seller at the time of purchase.
The put date acts as a maturity date for the security, and generally will
be shorter than the maturities of Project Notes (PNs), BANs, RANs or TANs.
There is a limited secondary market for issues of tax-exempt commercial
paper.
6. ILLIQUID SECURITIES. See the description of such securities under
"Additional Investment Information -- Stock Funds.
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 Funds may also invest in U.S.
dollar-denominated securities issued or guaranteed by other U.S. or foreign
issuers, including U.S. and foreign corporations or other business
organizations, foreign governments, foreign government agencies or
instrumentalities, and U.S. and foreign financial institutions, including
savings and loan institutions, insurance companies and mortgage bankers, as
well as banks.
The obligations of foreign branches of U.S. banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by governmental
regulation. Payment of interest and principal on these obligations may
also be affected by governmental action in the country of domicile of the
branch (generally referred to as sovereign risk). In addition, evidence of
ownership of portfolio securities may be held outside of the U.S. and the
Funds 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.
8. WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES. See the description of such
securities under "Additional Investment Information -- Stock Funds.
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9. MORTGAGE-BACKED SECURITIES (MONEY MARKET FUND ONLY). See the description
of such securities under "Additional Investment
Information--Intermediate-Term U.S. Treasury Fund, GNMA Fund, High-Yield
Fund, and Managed Bond Fund."
10. ASSET-BACKED SECURITIES (MONEY MARKET FUND ONLY). See the description of
such securities under "Additional Investment Information--Intermediate-Term
U.S. Treasury Fund, GNMA Fund, High-Yield Fund, and Managed Bond Fund."
11. 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
Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"), and (d) securities supported solely by the
creditworthiness of the issuer, such as securities issued by the Tennessee
Valley Authority ("TVA").
12. CORPORATE OBLIGATIONS SUCH AS PUBLICLY TRADED BONDS, DEBENTURES AND NOTES
(MONEY MARKET FUND ONLY). The 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.
13. YANKEE DEBT SECURITIES AND EURODOLLAR BONDS (MONEY MARKET FUND ONLY). See
the description of such securities under "Additional Investment Information
- Intermediate-Term U.S. Treasury Fund, GNMA Fund, High-Yield Fund and
Managed Bond Fund.
14. MUNICIPAL BONDS (TAX-FREE MONEY MARKET FUND ONLY). Municipal bonds are
issued to raise longer-term capital but, when purchased by the Tax-Free
Money Market Fund, will have thirteen (13) months or less remaining until
maturity or will have a variable or floating rate of interest. These
issues may be either general obligation bonds or revenue bonds, and may
include the following:
BOND ANTICIPATION NOTES (BANs). These notes are usually general
obligations of state and local governmental issuers which are sold to
obtain interim financing for projects that will eventually be funded
through the sale of long-term debt obligations or bonds. The ability of an
issuer to meet the obligations on its BANs is primarily dependent on the
issuer's access to the long-term municipal bond market and the likelihood
that the proceeds of such bond sales will be used to pay the principal and
interest on the BANs.
TAX ANTICIPATION NOTES (TANs). These notes are issued by state and local
governments to finance their current operations. Repayment is generally to
be derived from specific future tax revenues. Tax anticipation notes are
usually
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general obligations of the issuer. A weakness in an issuer's capacity to
raise taxes due to, among other things, a decline in its tax base or a rise
in delinquencies, could adversely affect the issuer's ability to meet its
obligations on outstanding TANs.
REVENUE ANTICIPATION NOTES (RANs). These notes are issued by governments
or governmental bodies with the expectation that future revenues from a
designated source will be used to repay the notes. In general, they also
constitute general obligations of the issuer. A decline in the receipt of
project revenues, such as anticipated revenues from another level of
government, could adversely affect an issuer's ability to meet its
obligations on outstanding RANs. In addition, the possibility that the
revenues would, when received, be used to meet other obligations could
affect the ability of the issuer to pay the principal and interest on RANs.
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.
15. 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.
16. SHARES OF NO-LOAD, OPEN-END INVESTMENT COMPANIES THAT INVEST IN TAX-EXEMPT
SECURITIES WITH REMAINING MATURITIES OF THIRTEEN MONTHS OR LESS (TAX-FREE
MONEY MARKET FUND ONLY). Such shares will be purchased only if SAM
determines that they provide a better combination of yield and liquidity
than a direct investment in short-term, tax-exempt securities.
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SPECIAL RISKS OF BELOW INVESTMENT GRADE BONDS
The Equity, Income, Small Company and U.S. Value Funds may invest in, and the
other Funds as a result of downgrades may own, below investment grade bonds.
Below investment grade bonds are speculative and involve greater investment
risks than investment grade bonds due to the issuer's reduced
creditworthiness and increased likelihood of default and bankruptcy. During
period 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.
Below investment grade bonds (commonly referred to as "high-yield" or "junk"
bonds) have certain additional risks associated with them. Yields on below
investment grade bonds will fluctuate over time. These bonds tend to reflect
short-term economic and corporate developments to a greater extent than higher
quality bonds that primarily react to fluctuations in interest rates. During an
economic downturn or period of rising interest rates, issuers of below
investment grade bonds may experience financial difficulties that adversely
affect their ability to make principal and interest payments, meet projected
business goals and obtain additional financing. In addition, issuers often rely
on cash flow to service debt. Failure to realize projected cash flows may
seriously impair the issuer's ability to service its debt load that in turn
might cause a Fund to lose all or part of its investment in that security. SAM
will seek to minimize these additional risks through diversification, careful
assessment of the issuer's financial structure, business plan and management
team and monitoring of the issuer's progress toward its financial goals.
The liquidity and price of below investment grade bonds can be affected by a
number of factors, including investor perceptions and adverse publicity
regarding major issues, underwriters or dealers of lower-quality corporate
obligations. These effects can be particularly pronounced in a thinly-traded
market with few participants and may adversely impact a Fund's ability to
dispose of the bonds as well as make valuation of the bonds more difficult.
Because there tend to be fewer investors in below investment grade bonds, it may
be difficult for a Fund to sell these securities at an optimum time.
Consequently, these bonds may be subject to more price changes, fluctuations in
yield and risk to principal and income than higher-rated bonds of the same
maturity.
Credit ratings evaluate the likelihood that an issuer will make principal and
interest payments, but may not reflect market value risks associated with
lower-rated bonds. Credit rating agencies may not timely revise ratings to
reflect subsequent events affecting an issuer's ability to pay principal and
interest.
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SPECIAL RISKS OF FOREIGN INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS (INTERNATIONAL FUND ONLY)
FOREIGN SECURITIES
Investing in foreign companies and markets involves certain considerations,
including those set forth below, that are not typically associated with
investing in U.S. securities denominated in U.S. dollars and traded in U.S.
markets. Foreign securities may not be registered under, nor may the issuers
thereof be subject to the reporting requirements of, U.S. securities laws.
Accordingly, there may be less publicly available information about a foreign
company than about a domestic company. Foreign companies are not generally
subject to uniform accounting and auditing and financial reporting standards,
practices and requirements comparable to those applicable to U.S. companies.
Securities of some foreign companies are less liquid and more volatile than
securities of comparable domestic companies.
It is contemplated that most foreign securities will be purchased in
over-the-counter markets or stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located. Fixed commissions on foreign stock exchanges are generally higher than
negotiated commissions on U.S. exchanges. There is generally less governmental
supervision and regulation of foreign stock exchanges, broker-dealers and
issuers than in the United States.
In addition, with respect to some foreign countries, there is the possibility of
expropriation or confiscatory taxation, limitations on the removal of funds or
other assets of a Fund, political or social instability, or diplomatic
developments that could affect U.S. investments in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross domestic product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
Because the International Fund invests primarily in foreign securities, it is
subject to various risks in addition to those associated with U.S. investment.
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.
CURRENCY EXCHANGE RATES
The value of the assets of a Fund as measured in U.S. dollars may be affected
favorably or unfavorably by fluctuations in currency rates and exchange control
regulations (including actions by a foreign government to devalue its currency,
thereby effecting a possibly substantial reduction in the U.S. dollar value of a
Fund's investments in that country). The International Fund is authorized to
employ certain hedging techniques to minimize this risk. However, to the extent
such transactions do not fully protect the
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International Fund against adverse changes in exchange rates, decreases in
the value of the currencies of the countries in which the Fund invests result
in a corresponding decrease in the U.S. dollar value of the Fund's assets
denominated in those currencies. Further, the International Fund may incur
costs in connection with conversions between various currencies. Foreign
exchange dealers (including banks) realize a profit based on the difference
between the prices at which they buy and sell various currencies. Thus, a
dealer or bank normally will offer to sell a foreign currency to the
International Fund at one rate, while offering a lesser rate of exchange
should the Fund desire immediately to resell that currency to the dealer.
Moreover, fluctuations in exchange rates may decrease or eliminate income
available for distribution. For example, if certain realized foreign
currency losses exceed other investment company taxable income (as described
below under "Tax Information") during a taxable year, the International Fund
would not be able to make ordinary dividend distributions, or distributions
made before the losses were realized would be recharacterized for federal
income tax purposes as a return of capital to shareholders, rather than as
ordinary dividends.
HEDGING TRANSACTIONS (INTERNATIONAL FUND ONLY)
Hedging transactions cannot eliminate all risks of loss to the International
Fund and may prevent the Fund from realizing some potential gains. The
projection of short-term foreign currency and market movements is extremely
difficult, and the successful execution of a short-term hedging strategy is
highly uncertain. Among the risks of hedging transactions are: incorrect
prediction of the movement of currency exchange rates and market movements;
imperfect correlation of currency movements in cross-hedges and indirect hedges;
imperfect correlation in the price movements of options, futures contracts and
options on future contracts with the assets on which they are based; lack of
liquid secondary markets and inability to effect closing transactions; costs
associated with effecting such transactions; inadequate disclosure and/or
regulatory controls in certain markets; counterparty default with respect to
transactions not executed on an exchange; trading restrictions imposed by
governments, or securities and commodities exchanges; and governmental actions
affecting the value or liquidity of currencies. Hedging transactions may be
effected in foreign markets or on foreign exchanges and are subject to the same
types of risks that affect foreign securities. See "Special Risks of Foreign
Investments and Foreign Currency Transactions."
Indirect hedges and cross-hedges are more speculative than other hedges because
they are not directly related to the position or transaction being hedged. With
respect to indirect hedges, movements in the proxy currency may not precisely
mirror movements in the currency in which portfolio securities are denominated.
Accordingly, the potential gain or loss on an indirect hedge may be more or less
than if the Fund had directly hedged a currency risk. Similar risks are
associated with cross-hedge transactions. In a cross-hedge, the foreign
currency in which a portfolio security is denominated is hedged against another
foreign currency, rather than the U.S. dollar. Cross-hedges may also create a
greater risk of loss than other hedging transactions because they may involve
hedging a
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currency risk through the U.S. dollar rather than directly to the U.S. dollar or
another currency.
To help reduce certain risks associated with hedging transactions, the Common
Stock Trust's Board of Trustees has adopted the requirement that forward
contracts, options, futures contracts and options on futures contracts be used
on behalf of the Fund as a hedge and not for speculation. In addition to this
requirement, the Board of Trustees has adopted the following percentage
restrictions on the use of options, futures contracts and options on futures
contracts:
(i) The Fund will not write a put or call option if, as a result thereof,
the aggregate value of the assets underlying all such options
(determined as of the date such options are written) would exceed 25%
of the Fund's net assets.
(ii) The Fund will not purchase a put or call option or option on a futures
contract if, as a result thereof, the aggregate premiums paid on all
options or options on futures contracts held by the Fund would exceed
20% of the Fund's net assets.
(iii) The Fund will not enter into any futures contract or option on a
futures contract if, as a result thereof, the aggregate margin
deposits and premiums required on all such instruments would exceed 5%
of the Fund's net assets.
INVESTMENT RISKS OF CONCENTRATION IN CALIFORNIA AND WASHINGTON ISSUERS
CALIFORNIA TAX-FREE INCOME FUND
The following is a condensed and general description of conditions affecting the
taxing ability and fiscal condition of the State of California and its various
political subdivisions and their ability 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 Tax-Free Income Fund has not independently
verified any of the information presented in this section.
THE STATE OF CALIFORNIA. The severe economic recession which occurred
in California between 1990 and 1994 seriously affected State tax revenues,
caused increased expenditures for health and welfare programs, and caused a
structural imbalance in the State's budget, with the largest programs supported
by the General Fund
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- -- 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 experienced recurring budget
deficits and had to use a series of external borrowings to meet its cash needs.
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 S&P from "AAA" to "A+," by
Moody's from "Aaa" to "Aa," and by Fitch IBCA, Inc. from "AAA" to "AA." In
July, 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.
Since the start of 1994, California's economy and the State's
financial condition have steadily improved, with a combination of better than
expected revenues, slowdown in growth of social welfare programs, and continued
spending restraint. The accumulated budget deficit from the recession years was
finally eliminated. Moody's S&P and Fitch IBCA, Inc. currently rate the State's
general obligation bonds Aa3, A-plus and AA-minus, respectively.
In August 1998, the Governor signed the Budget Act for fiscal year
1998-99. The most significant feature of the 1998-99 budget was agreement on a
total of $1.4 billion of tax cuts. The central element is a bill which provides
for a phased-in reduction of the vehicle license fee. Since the vehicle license
fee is currently transferred to cities and counties, the bill provides for the
General Fund to replace the lost revenues. Started on January 1, 1999, the
vehicle license fee has been reduced by 25 percent, at a cost to the General
Fund of approximately $500 million in the 1998-99 Fiscal Year and about $1
billion annually thereafter. Revenues and expenditures for 1998-99 as updated
in the 1990-00 Governor's Budget are $56.3 billion and $58.3 billion,
respectively. That proposed budget projects General Fund revenues and transfers
in 1990-00 of $60.3 billion. This includes anticipated initial payments from a
tobacco litigation settlement of about $560 million, and receipt of one-time
revenue from sale of assets. The Governor also assumes receipt of about $400
million of federal aid for certain health and welfare programs and reimbursement
for costs for incarceration of undocumented felons, above the amount presently
received by California from the federal government. The Governor's Budget
proposes General Fund expenditures of $60.5 billion, giving highest priority to
education.
TAX AND SPENDING LIMITATIONS. 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
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property as shown on the fiscal year 1975-76 tax bill under `full cash value'
or, thereafter, the appraised value of real property when purchased, newly
constructed, or a change in ownership has occurred after the 1975 assessment."
The full cash value may be adjusted annually to reflect inflation at a rate not
to exceed two percent per year, or reduction in the consumer price index or
comparable local data, or declining property value caused by damage,
destruction, or other factors.
The tax rate limitation referred to above does not apply to ad valorem
taxes to pay the interest and redemption charges on any indebtedness approved by
the voters before July 1, 1978 or any bonded indebtedness for the acquisition or
improvement of real property approved by two-thirds of the votes cast by the
voters voting on the proposition.
Article XIII A also requires a two-thirds vote of the electors prior
to the imposition of any special taxes and totally precludes the imposition of
any new ad valorem taxes on real property or sales or transaction taxes on the
sales of real property.
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,
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product, or service." No limit is imposed on appropriation of funds which are
not "proceeds of taxes," on debt service or indebtedness existing or authorized
by January 1, 1979, or subsequently authorized by the voters, or appropriations
required to comply with mandates of courts or the federal government, or user
charges or fees which don't 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 other than charter cities 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 these 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 any of these
local governmental entities 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 these 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 between May 1, 1985 and November 4, 1986 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 December 14, 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 may have to be
reduced in any year to the extent that they rely on the proceeds of any general
tax adopted after May 1, 1985 which has not been approved by majority vote of
the electorate. The GUARDINO decision left unresolved (1) whether its
conclusions apply retroactively to taxes adopted without the necessary voter
approval during the period between the 1986 passage of Proposition 62 and the
1995 GUARDINO decision and (2) what statute of limitations applies to a taxpayer
challenge. These issues have not yet been addressed by the California Supreme
Court, and a number of appeals remain pending.
An initiative constitutional amendment known as Proposition 218 and
also called the "Right to Vote on Taxes Act" was approved by the voters on
November 5,
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1996. This measure added Articles XIII C and XIII D to the State Constitution.
The measure requires that general tax increases by all local government entities
be approved by not less than a majority vote and that taxes for special purposes
be approved by a two-thirds vote; provides that existing language in the
California Constitution shall not be construed to limit the initiative power
with respect to reducing or repealing any local tax, assessment, fee or charge;
prescribes procedures applicable to assessments on real property and requires
that such 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 electorate.
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 which would affect the ability of
California and its political subdivisions to service their outstanding
indebtedness.
LEASE FINANCING. Lease-based financing, typically marketed in the
form of certificates of participation or lease revenue bonds, 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 (including earthquake) insurance
and rental interruption insurance.
In a recent taxpayer suit, RIDER V. CITY OF SAN DIEGO, the California
Supreme Court upheld the validity of traditional financing structures involving
joint powers agencies and reaffirmed the long-established lease exception to the
constitutional debt limit.
LAND-SECURED FINANCING. Local government limited obligations payable
from special taxes or assessments on real property have come to be known as
"dirt bonds". Typically unrated and ultimately secured by a lien on benefitted
property, these obligations are inherently vulnerable to fluctuations in land
values and development risks arising from a number of factors, including
increased governmental and environmental regulations and general economic
conditions.
ELECTRIC UTILITY RESTRUCTURING. Like a number of other states,
California recently enacted legislation relating to the restructuring of the
electric utility industry. The legislation generally provides for increased
competition in the supply of electric power and allows retail customers "direct
access" in choosing their supplier. In addition, the legislation provides for
an immediate rate reduction for small users; creates an independent power
exchange to administer a wholesale power pool; creates an
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independent system operator for the transmission grid; provides customers and
suppliers with nondiscriminating and comparable access to transmission and
distribution services; and allows utilities to recover uneconomic
generation-related costs through a transition charge or severance fee.
The mandatory provisions of the legislation generally apply to
utilities regulated by the California Public Utilities Commission. Since the
State's political subdivisions are not subject to the jurisdiction of the CPUC,
the effect of the legislation on municipally-owned electric utilities is more
limited. As a practical matter, however, it is likely that most
municipally-owned utilities will adopt some form of direct access or pooling
programs in order to remain competitive.
The effects of direct access may vary among municipal utilities and
cannot be specifically ascertained at this time. However, some potential
effects include: (i) loss of customers, particularly large industrial and
commercial customers, (ii) increased costs to remaining customers, (iii)
decreased revenues, (iv) decreases in transfers to the municipality's general
fund, (v) increased difficulties in developing new generating resources, (vi)
increased difficulties and higher costs in system financing, (vii) reductions in
credit ratings, (viii) the need to recover stranded investment in facilities
from the remaining customers and (ix) reductions in environmental and social
programs relating to electric utility services.
YEAR 2000 COMPLIANCE. California and most of its political
subdivisions have adopted strategies and allocated resources to bring their
computer systems into compliance with year 2000-related information technology.
The so-called "Year 2000 Issue" arises because most computer software programs
allocate two digits to the date field for "Year" on the assumption that the
first two digits will be "19". Such programs thus will interpret the year 2000
as the year 1900, the year 2001 as the year 1901, etc. absent reprogramming or
replacement. The Year 2000 Issue affects the hardware and software for computer
information technology systems and the embedded logic of computer chips in
non-information technology systems, such as meters, vehicles, transformers,
switching gear and environmental systems. The Year 2000 Issue could impact both
the ability to enter data into computer programs, the ability of such programs
to correctly process data, and the ability to operate non-information technology
systems.
The State Treasurer's Office reports that as of December 31, 1998, its
systems for bond payments were fully Year 2000 compliant. The State
Controller's Office reported that it had completed the necessary Year 2000
remediation projects for the State fiscal and accounting system by December 31,
1998, consistent with the Governor's Executive Order. The final steps of
testing will be completed during 1999. Both offices are actively working with
the outside entities with whom they interface to ensure they are also compliant.
ORANGE COUNTY BANKRUPTCY. In December 1994, Orange County, together
with its pooled investment funds, filed for protection under Chapter 9 of the
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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. Orange County has
since embarked on a fiscal recovery plan, based on sharp reductions in services
and personnel, and continues to face fiscal constraints in the aftermath of the
bankruptcy.
Since the Orange County bankruptcy, California's general laws
pertaining to the deposit and investment of public moneys have been
significantly revised to limit the use of higher-risk investments and to provide
additional oversight safeguards at the local level.
The Fund will attempt to achieve geographic diversification by
investing in obligations of issuers which 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 MUNICIPAL BOND FUND
A discussion of certain economic, financial and legal matters regarding the
State of Washington follows. During normal market conditions, the Washington
Municipal Bond 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 Municipal Bond Fund has not independently verified any of the
information presented in this section.
GENERAL INFORMATION
According to the United States 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 by 17.8%, while the United
States population increased by 9.8%. The State's population increased at an
average annual rate of approximately 2.5% from 1990 to 1993, and at an average
annual rate of approximately 1.8% from 1993 to 1995. Measured on an April to
April year, the population annual rate of growth was
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approximately 1.6% for each of the years 1995 to 1996 and 1996 to 1997. The
current estimate of the population of the State is approximately 5.6 million.
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 orchards and dairy operations.
In recent years, the State's economy has diversified with employment in the
trade and service sectors representing an increasing portion of total employment
relative to the manufacturing sector.
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, 1997, approximately 76.1%
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 45% of total collections. Business and occupation tax collections
represented about 16.4% and the motor vehicle fuel tax represented approximately
6.4% of total State taxes for the year. Ad valorem taxes represented 11.1% of
State tax revenues for the fiscal year 1997.
Expenditures of State revenues are made in accordance with constitutional and
statutory mandates.
STATE EXPENDITURE LIMITATIONS
Initiative 601, which was passed by the voters in November 1993, limits
increases in General Fund-State government expenditures to the average rate of
population and inflation
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growth, and sets forth a series of guidelines for limiting revenue 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 was 5.13% for fiscal year 1996 and is 4.45% for fiscal year 1997, 4.05%
for fiscal year 1998, and 4.01% for fiscal year 1999. The initiative created
two new reserve funds (the Emergency Reserve Fund and the Education Construction
Fund) for depositing revenues in excess of the spending limit and abolished the
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.
The State Constitution and enabling statutes authorize the incurrence of State
general obligation debt to the payment of which the State's full faith; 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 1997-99
Biennium, General Fund-State revenues are projected to be $19.421 billion, an
increase of 9.8% over the 1995-97 Biennium, plus a carry-forward of $513
million. The revenue outlook for the 1997-99 Biennium is stable and the General
Fund is projected to end the Biennium with a $820 million fund balance.
The operating budget for the 1997-99 Biennium calls for an overall expenditure
level of $19.084 billion for the General Fund-State, an increase of $1.4 billion
or 7.7% over
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the 1995-97 Biennium and within the $19.152 billion expenditure limit imposed
under Initiative 601.
Fifty-eight percent of the General Fund-State budget will go to support public
schools and higher education, representing a $514 million increase in public
school funding and an increase of $137 million in funding for public
universities and colleges.
Social and Health Services funding accounts for approximately 26% of the State
budget, and the criminal justice budget also increased. A 3% across-the-board
salary increase for State employees accounts for $63 million of the increase in
General Fund-State expenditures.
The 1998 Supplemental Budget reduced total General Fund-State expenditures by
$975,000 and passed the State Legislature on March 11, 1998.
In 1997-99 approximately $1.88 billion has been budgeted for new projects.
Approximately $541.5 million is budgeted for higher education facilities. Other
State government functions, such as general government, natural resources,
corrections and environmental programs receive about $1,061 million. The State
also expects to spend about $277.6 million for common school construction.
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 benefited 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 benefited
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 United States as a whole. After adjusting for
inflation, growth in personal income in the State increased 4.6% in 1996 over
the 1995 level and 5.8% in 1997 over the 1996 level.
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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 1980s, has declined since 1991 to an average rate of 1.4%. The 1998
employment growth is expected to be 3.0%.
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 State's largest
employer, has several facilities located primarily in the Puget Sound. Boeing
is the world's leading manufacturer of commercial airliners and as of May 1998
employed approximately 103,500 people State-wide. 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 United States and
has undertaken a broad program of diversification activities including Boeing
Information and Support Services. In 1997, Boeing had $45.8 billion in sales
and a loss of $178 million. Boeing currently anticipates 1998 sales to be in
the $55 billion range. Boeing recently completed two and is currently
undertaking one major expansion project. The company 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 is an approximately 500,000 square-foot customer
service training center that was recently completed. 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).
On December 5, 1996, Boeing acquired the former defense and space units of
Rockwell International. On August 1, 1997, Boeing also completed its merger
with McDonnell Douglas Corporation. The merger will not significantly impact
Boeing employment levels in the State.
In 1996, the Boeing Defense & Space Group won a $1.1 billion contract from the
U.S. Air Force to build the Airborne Laser system and was also one of two
companies selected by the Department of Defense to build two prototype Joint
Strike Fighter airplanes. Boeing also recently announced that it will become an
equity partner and serve as the prime contractor for Teledesic's network of
low-Earth-orbit satellites. The estimated contract value is $9 billion.
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TECHNOLOGY-RELATED INDUSTRIES. The State ranks fourth among all states in the
percentage of its work force employed by technology-related industries. It
ranks third among the largest software development centers. The State is the
home of approximately 1000 advanced technology firms of which approximately 50%
are computer-related. Microsoft, headquartered in Redmond, Washington, is the
largest microcomputer software company in the world. In addition, several
biotechnical firms located in the State have attained international acclaim for
their research and development.
TIMBER. Natural forests cover more than 40% of the State's land area, and
forest products rank second behind aerospace in value of total production. The
largest 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 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 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 5.1% of the State's wage and salary employment
in 1996. Projections for 1997 show this segment declined slightly to 5.0% of
employment.
TRADE. International trade plays an important role in the State's employment
base and one in six jobs is related to this sector. 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; on a combined basis they are the second largest
load center for containerized cargo in the United States. Approximately 70% of
the cargo passing through 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.
RETAIL SALES. Growth in retail sales in the State between 1990 and 1992 was
higher than that in the United States. During 1993 through 1996, 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).
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SERVICES/TOURISM. The highest employment growth in the State since 1981 has
taken place in the services sector, although rate of growth has shown a small
but relatively consistent decline since 1990 from 7% to 4.3% for 1995, and 3.4%
forecast for 1996. 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 relative 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 is expected to have a material
adverse impact on either State revenues or expenditures.
REDEMPTION IN KIND
If a Trust concludes that cash payment upon redemption to a shareholder would be
prejudicial to the best interest of the other shareholders of a Fund, a portion
of the payment may be made in kind. The Trusts have elected to be governed by
Rule 18f-1 under the 1940 Act, pursuant to which each Fund must redeem shares
tendered by a shareholder of the Fund solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the 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 the 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.
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INFORMATION ON CALCULATION OF NET ASSET VALUE PER SHARE
GENERAL
Each Fund (other than the Money Market Funds) 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"), normally 1:00 p.m.
Pacific time every day the Exchange is open for trading. The Exchange is closed
on the following days: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. NAV is determined separately for each class
of shares of each Fund.
Short-term debt securities held by 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 the
applicable Trust's Board of Trustees may from time to time deem to be
appropriate. The cost of those securities that had original maturities in
excess of 60 days shall be determined by their fair market value until the 61st
day prior to maturity. All other securities and assets in the portfolio will be
appraised in accordance with those procedures established by the Board of
Trustees in good faith in computing the fair market value of those assets.
All other securities and assets in the portfolio will be appraised in
accordance with those procedures established by the Board of Trustees in good
faith in computing the fair market value of those assets.
Trading in foreign securities generally will be substantially completed each day
at various times prior to the close of the Exchange. The value of any such
securities are determined as of such times for purposes of computing NAV.
Foreign currency exchange rates are also generally determined prior to the close
of the Exchange. If an extraordinary event occurs after the close of an
exchange on which that security is traded, the security will be valued at fair
value as determined in good faith by the Sub-Advisor under procedures
established by and under general supervision of the Board of Trustees.
Options the International Fund may purchase that are traded on national
securities exchanges are valued at their last sale price as of the close of
option trading on such exchange. Futures contracts the International Fund will
enter into will be marked to market daily, and options thereon are valued at
their last sale price, as of the close of the applicable commodities exchange.
Quotations of foreign securities in a foreign currency are converted into U.S.
dollar equivalents at the current rate obtained by a recognized bank or dealer.
Forward contracts are valued at the current cost of covering or offsetting such
contracts.
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MONEY MARKET FUNDS
The portfolio instruments of each Money Market Fund are valued on the basis of
amortized cost. The valuation of each Money Market Fund's portfolio securities
based upon amortized cost, and the maintenance of each Fund's NAV at $1.00, are
permitted pursuant to Rule 2a-7 under the 1940 Act. Pursuant to that Rule, each
Fund maintains a dollar-weighted average portfolio maturity of 90 days or less,
purchases only securities having remaining maturities of 397 days or less, and
invests only in securities determined by SAM, under guidelines adopted by the
Money Market Trust's Board of Trustees, to be of high quality and to present
minimal credit risks. The Board of Trustees has established procedures designed
to stabilize, to the extent reasonably possible, each 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 each Money Market Fund's portfolio holdings
by the Board of Trustees, at such intervals as the Board deems appropriate, to
determine whether a Fund's NAV per share, calculated by using available market
quotations, deviates from $1.00 per share and, if so, whether such deviation may
result in material dilution or is otherwise unfair to existing shareholders of
that Fund. If the Board determines that such a deviation exists in a Fund, the
Trustees will take such corrective action with respect to the Fund as they
regard as necessary and appropriate, including selling portfolio investments
prior to maturity to realize capital gains or losses or to shorten average
portfolio maturity, not paying dividends (subject to distribution requirements
to maintain status as a regulated investment company for federal tax purposes
(see "Tax Information")), redeeming shares in kind, and determining the NAV by
using available market quotations.
The principal risk associated with the 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 Funds' yields will
fluctuate with general money market interests rates.
PERFORMANCE INFORMATION
GENERAL
Effective September 30, 1996, all of the then-existing shares of each of the
Funds were redesignated No-Load Class shares, and Growth Fund, Equity Fund,
Income Fund, Northwest Fund, Balanced Fund, International Fund, Small Company
Fund, Intermediate-Term U.S. Treasury Fund, Managed Bond Fund, Municipal Bond
Fund, California Tax-Free Income Fund, Washington Municipal Bond Fund and Money
Market Fund commenced offering Advisor Class A and Advisor Class B shares. The
High-Yield Fund and U.S. Value Fund commenced offering Advisor Class A and
Advisor Class B shares on January 31, 1997, and April 30, 1997,
respectively.
PERFORMANCE INFORMATION AND QUOTED RATINGS ARE INDICATIVE ONLY OF PAST
PERFORMANCE AND ARE NOT INTENDED TO REPRESENT FUTURE INVESTMENT RESULTS.
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TOTAL RETURNS AND AVERAGE TOTAL RETURNS
For the following Funds, the total returns, expressed as a percentage, for the
one-, five- and ten-year periods ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
GROWTH FUND 4.37% 138.63% 365.91%
EQUITY FUND 24.93% 167.12% 506.77%
INCOME FUND 6.31% 114.89% 253.55%
INTERMEDIATE-TERM 9.61% 34.08% 112.51%
U.S. TREASURY FUND
GNMA FUND 6.84% 33.84% 115.51%
HIGH-YIELD FUND 4.45% 47.01% 139.15%
MUNICIPAL BOND FUND 6.35% 35.37% 121.56%
CALIFORNIA TAX-FREE 6.19% 39.12% 125.12%
INCOME FUND
</TABLE>
For the following Funds, the total returns, expressed as a percentage, for the
one-year, five-year and since initial public offering periods ended December 31,
1998 were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years+ Since Initial Public Offering
------ -------- -----------------------------
<S> <C> <C> <C>
NORTHWEST FUND 3.50% 84.69% 146.34% (94 months)*
INTERMEDIATE-
TERM MUNICIPAL 5.33% 27.74% 36.93% (69 months)**
BOND FUND
INSURED
MUNICIPAL BOND 5.90% 33.94% 44.18% (69 months)**
FUND
WASHINGTON
MUNICIPAL BOND 5.99% 30.30% 40.57% (69 months)**
FUND
</TABLE>
+ Performance reported for the 5-year period ending December 31, 1998 unless
otherwise noted.
* Inception of Fund February 7, 1991.
** Inception of Fund March 18, 1993.
73
<PAGE>
For the following Funds, the total returns, expressed as a percentage, for the
one-year and since initial public offering periods ended December 31, 1998 were
as follows:
<TABLE>
<CAPTION>
1 Year Since Initial Public Offering
------ ------------------------------
<S> <C> <C>
BALANCED FUND 12.56% 46.26% (35 months)***
INTERNATIONAL FUND 14.26% 36.46% (35 months)***
SMALL COMPANY FUND (21.57)% 20.96% (35 months)***
U.S. VALUE FUND 12.61% 32.31% (20 months)****
MANAGED BOND FUND 8.43% 33.59% (58 months)*****
</TABLE>
*** Inception of Fund January 31, 1996.
**** Inception of Fund April 30, 1997.
***** Inception of Fund February 28, 1994.
For the following Funds, the total returns, expressed in dollars and assuming a
$10,000 initial investment, for the one-, five- and ten-year periods ended
December 31, 1998 were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
GROWTH FUND $10,437 $23,863 $46,591
EQUITY FUND $12,493 $26,712 $60,677
INCOME FUND $10,631 $21,489 $35,355
</TABLE>
For the Northwest Fund, the total returns, expressed in dollars and assuming a
$10,000 initial investment, for the one-year, five-year, and since initial
public offering (94 months) periods ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years Since Initial Public Offering
------ ------- -----------------------------
<S> <C> <C> <C>
NORTHWEST FUND $10,350 $18,469 $24,635 (94 months)*
</TABLE>
* Inception of Fund February 7, 1991.
74
<PAGE>
For the following Funds, the total returns, expressed in dollars and assuming a
$10,000 initial investment, for the one-year and since initial public offering
periods ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
1 Year Since Initial Public Offering
------ -----------------------------
<S> <C> <C>
BALANCED FUND $11,257 $14,625 (35 months)***
INTERNATIONAL FUND $11,426 $13,646 (35 months)***
SMALL COMPANY FUND $ 7,843 $12,096 (35 months)***
U.S. VALUE FUND $11,261 $13,231 (20 months)****
</TABLE>
***Inception of Fund January 31, 1996.
****Inception of Fund April 30, 1997.
75
<PAGE>
For the following Funds, the average annual total returns for the one-, five-
and ten-year periods ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
GROWTH FUND 4.37% 19.00% 16.64%
EQUITY FUND 24.93% 21.71% 19.76%
INCOME FUND 6.31% 16.53% 13.46%
INTERMEDIATE-TERM 9.61% 6.04% 7.83%
U.S. TREASURY FUND
GNMA FUND 6.84% 6.00% 7.98%
HIGH-YIELD FUND 4.45% 8.01% 9.11%
MUNICIPAL BOND FUND 6.35% 6.24% 8.28%
CALIFORNIA TAX-FREE 6.19% 6.83% 8.45%
INCOME FUND
</TABLE>
For the following Funds, the average annual total returns for the one-year,
five-year, and since initial public offering periods ended December 31, 1998
were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years Since Initial Public Offering
------ ------- -----------------------------
<S> <C> <C> <C>
NORTHWEST FUND 3.50% 13.05% 12.20% (94 months)*
INTERMEDIATE-TERM 5.33% 5.02% 5.62% (69 months)**
MUNICIPAL BOND FUND
INSURED MUNICIPAL 5.90% 6.02% 6.57% (69 months)**
BOND FUND
WASHINGTON MUNICIPAL 5.99% 5.44% 6.10% (69 months)**
BOND FUND
</TABLE>
**Inception of Fund February 7, 1991.
***Inception of Fund March 18, 1993
76
<PAGE>
For the following Funds, the average annual total returns for the one-year and
since initial public offering periods ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
1 Year Since Initial Public Offering
------ -----------------------------
<S> <C> <C>
BALANCED FUND 12.56% 13.92% (35 months)**
INTERNATIONAL FUND 14.26% 11.25% (35 months)**
SMALL COMPANY (21.57)% 6.74% (35 months)***
STOCK FUND
U.S. VALUE FUND 12.61% 18.29% (20 months)****
MANAGED BOND FUND 8.43% 6.18% (58 months)*****
</TABLE>
YIELD AND EFFECTIVE YIELD
For the following Funds, the yields for the 30-day period ended December 31,
1998 were as follows:
<TABLE>
<S> <C>
INTERMEDIATE-TERM U.S. TREASURY FUND 4.08%
GNMA FUND 5.74%
HIGH-YIELD FUND 8.36%
MANAGED BOND FUND 4.41%
</TABLE>
For the following Funds, the yield and tax-equivalent yield at the maximum
federal tax rate of 39.6% for the 30-day period ended December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
Yield Tax-Equivalent Yield
----- --------------------
<S> <C> <C>
MUNICIPAL BOND FUND 4.34% 7.19%
INTERMEDIATE-TERM MUNICIPAL 3.37% 5.58%
BOND FUND
INSURED MUNICIPAL BOND FUND 4.07% 6.74%
WASHINGTON MUNICIPAL BOND FUND 4.00% 6.62%
CALIFORNIA TAX-FREE INCOME FUND+ 4.26% 7.77%
</TABLE>
+ Maximum combined federal and California tax rates of 45.2%
For the Money Market Funds, the yield and effective yield for the 7-day period
ended December 31, 1998 were as follows:
77
<PAGE>
<TABLE>
<CAPTION>
Yield Effective Yield
----- ---------------
<S> <C> <C>
MONEY MARKET FUND 4.76% 4.88%
</TABLE>
For the Tax-Free Money Market Fund, the yield and tax-equivalent yield at the
maximum federal tax rate of 39.6% for the 7-day period ended December 31, 1998
were as follows:
<TABLE>
<CAPTION>
Yield Tax-Equivalent Yield
----- --------------------
<S> <C> <C>
TAX-FREE MONEY MARKET FUND 3.20% 5.30%
</TABLE>
CALCULATIONS
The total return, expressed as a percentage, is computed using the following
formula:
ERV-P
T = ----- x 100
P
The total return, expressed in dollars, is computed using the following formula:
n
T = P(1+A)
The average annual total return is computed using the following formula:
n
A = (root ERV/P - 1) x 100
Where: T = total return
A = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical investment of $1,000 at
the end of a specified period of time
P = a hypothetical initial investment of $1,000 or $10,000 (when
total return is expressed in dollars)
In making the above calculation, all dividends and capital gain distributions
are assumed to be reinvested at the respective Fund's NAV on the reinvestment
date, and the maximum sales charge, if any, for each class is applied.
Yield for the Intermediate-Term U.S. Treasury Fund, GNMA Fund, High-Yield Fund,
Managed Bond Fund and Tax-Exempt Bond Funds is computed using the following
formula:
78
<PAGE>
a-b 6
Yield = 2[( --- +1) -1]
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day
of the period
Yield for the Money Market Funds 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
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
During periods of declining interest rates, each 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 either Money Market Fund would be
able to obtain a somewhat higher yield than would result if each Fund utilized
market valuations to determine its NAV. The converse would apply in a period of
rising interest rates.
79
<PAGE>
In addition to performance figures, the Funds may advertise their rankings as
calculated by independent rating services that monitor mutual funds' performance
(E.G., CDA Investment Technologies, Lipper Analytical Services, Inc.,
Morningstar, Inc., and Wiesenberger Investment Companies Service). These
rankings may be among mutual funds with similar objectives and/or size or with
mutual funds in general. In addition, the Funds may advertise rankings which
are in part based upon subjective criteria developed by independent rating
services to measure relative performance. Such criteria may include methods to
account for levels of risk and potential tax liability, sales commissions and
expense and turnover ratios. These rating services may also base the measure of
relative performance on time periods deemed by them to be representative of up
and down markets. The Funds may also describe in their advertisements the
methodology used by rating services to arrive at Fund ratings. In addition, the
Funds may also advertise individual measurements of Fund performance published
by the rating services, including but not limited to a Fund's beta, standard
deviation, and price earnings ratio.
The Funds may occasionally reproduce articles or portions of articles about the
Funds written by independent third parties such as financial writers, financial
planners and financial analysts, which have appeared in financial publications
of general circulation or financial newsletters (including but not limited to
BARRONS, BUSINESS WEEK, FABIANS, FORBES, FORTUNE, INVESTOR'S BUSINESS DAILY,
KIPLINGER'S, MONEY Magazine, MORNINGSTAR MUTUAL FUNDS, MUTUAL FUNDS FORECASTER,
MUTUAL FUNDS Magazine, NEWSWEEK, NO-LOAD FUND INVESTOR, NO-LOAD FUND X, PENSIONS
& INVESTMENTS, RUCKEYSER'S MUTUAL FUNDS, TELESWITCH, TIME Magazine, U.S. NEWS
AND WORLD REPORT, YOUR MONEY AND THE WALL STREET JOURNAL).
Each Fund may 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 advisor (SAM) or any sub-investment
advisor, the investment advisor's parent company (SAFECO Corporation) or the
parent company of any sub-investment advisor, 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.
80
<PAGE>
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. Each Fund also may provide information on how much certain
investments would return over time.
Each Stock Fund may compare its performance against the following unmanaged
indices that (unless otherwise noted in the advertisement) assume reinvestment
of dividends:
AMEX (AMERICAN STOCK EXCHANGE) MAJOR MARKET INDEX - Price weighted
(high-priced issues have more influence than low-priced issues) average of
20 Blue Chip stocks.
DOW JONES INDUSTRIAL AVERAGE - Price weighted average of 30 actively traded
Blue Chip stocks.
NASDAQ PRICE INDEX - Market value weighted (impact of a component's price
change is proportionate to the overall market value of the issue) index of
approximately 3500 over-the-counter stocks traded on the Nasdaq.
S & P 500 COMPOSITE STOCK PRICE INDEX - Market value weighted index of 500
stocks, most of which are listed on the New York Stock Exchange with some
listed on the American Stock Exchange and Nasdaq.
WILSHIRE 5000 EQUITY INDEX - Market value weighted index of approximately
5000 stocks including all stocks on the New York and American Stock
Exchanges.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX - Market value weighted
index of approximately 1200 companies located throughout the world.
RUSSELL 2000 INDEX - The 2000 smallest firms in the Russell 3000 Index
which is composed of the 3000 largest companies in the United States as
measured by capitalization.
Information used in advertisements and materials furnished to present and
prospective investors may include statements or illustrations relating to the
appropriateness of certain types of securities and/or mutual funds to meet
specific financial goals. Such information may address:
- --costs associated with aging parents;
- --funding a college education (including its actual and estimated cost);
- --health care expenses (including actual and projected expenses);
81
<PAGE>
- --long-term disabilities (including the availability of, and coverage provided
by, disability insurance); and
- --retirement (including the availability of social security benefits, the tax
treatment of such benefits and statistics and other information relating to
maintaining a particular standard of living and outliving existing assets).
Such information may also address different methods for saving money and the
results of such methods, as well as the benefits of investing in bond funds.
Information in advertisements and materials furnished to present and prospective
investors may include profiles of different types of investors (i.e., investors
with different goals and assets) and different investment strategies for meeting
specific goals. Such information may provide hypothetical illustrations which
include: results of various investment strategies; performance of an investment
in a Fund over various time periods; and results of diversifying assets among
several investments with varying performance. Information in advertisements and
materials furnished to present and prospective investors may also include
quotations (including editorial comments) and statistics concerning investing in
securities, as well as investing in particular types of securities and the
performance of such securities.
PERFORMANCE INFORMATION AND QUOTED RATINGS ARE INDICATIVE ONLY OF PAST
PERFORMANCE AND ARE NOT INTENDED TO REPRESENT FUTURE INVESTMENT RESULTS.
INFORMATION ON DIVIDENDS FOR THE MONEY MARKET FUNDS
Because each Money Market Fund intends to hold its portfolio securities to
maturity and expects that most of its portfolio securities will be valued at
their amortized cost, realized gains or losses should not be a significant
factor in the computation of net income. If, however, in an unusual
circumstance, either Money Market Fund experiences a realized gain or loss,
shareholders of that 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.
MANAGEMENT OF THE FUNDS
The Boards of Trustee have overall responsibility for the operation of the
Funds. Pursuant to such responsibility, the Board of Trustees has approved
contracts with various organizations to provide among other things, day to day
management services required by each Fund.
82
<PAGE>
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position(s) Held with Principal Occupations(s)
Name, Address and Age the Trusts During Past 5 Years
- --------------------- ---------- -------------------
<S> <C> <C>
Boh A. Dickey* Chairman and Trustee President, Chief Operating
SAFECO Plaza Officer, and Director of SAFECO
Seattle, WA 98185 Corporation. Previously,
(54) Executive Vice President and
Chief Financial Officer. He has
been an executive officer of
SAFECO Corporation subsidiaries
since 1982. See table under
"Investment Advisory and Other
Services."
Barbara J. Dingfield Trustee Director of Community Affairs
Microsoft Corporation for Microsoft Corporation,
One Microsoft Way Redmond, Washington, a computer
Redmond, WA 98052 software company; former
(53) Director and 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; Board Chair of
United Way of King County; Board
of Managers of Swarthmore
College.
David F. Hill* President President of SAFECO Securities,
10865 Willows Road NE Trustee Inc. and SAFECO Services
Redmond, WA 98052 Corporation; Senior Vice
(50) President of SAFECO Asset
Management Company. See table
under "Investment Advisory and
Other Services."
Richard W. Hubbard* Trustee Retired Vice President and
1270 NW Blakely Ct. Treasurer of the Trust and other
Seattle, WA 98177 SAFECO Trusts; retired Senior
(69) Vice President and Treasurer of
SAFECO Corporation; former
President of SAFECO Asset
Management Company; Director of
First SAFECO National Life
Insurance Company of New York;
Member of Diocese of Olympia
Investment Committee.
83
<PAGE>
<CAPTION>
Position(s) Held with Principal Occupations(s)
Name, Address and Age the Trusts During Past 5 Years
- --------------------- ---------- -------------------
<S> <C> <C>
Richard E. Lundgren Trustee Director of Marketing and
764 S. 293rd Street Customer Relations, Building
Federal Way, WA Materials Distribution,
98032 Weyerhaeuser Company, Tacoma,
(61) Washington; Director of First
SAFECO National Life Insurance
Company of New York.
Larry L. Pinnt Trustee Retired Vice President and Chief
1600 Bell Plaza, Financial Officer U.S. WEST
Room 1802 Communications, Seattle,
Seattle, WA 98191 Washington; Chairman of
(64) University of Washington Medical
Center Board, Seattle,
Washington; Director of Cascade
Natural Gas Corporation,
Seattle, Washington; Director of
First SAFECO National Life
Insurance Company of New York;
and a Treasurer of Cancer Care
Alliance, Seattle, Washington.
John W. Schneider Trustee President and sole owner of
1808 N. 41st St. Wallingford Group, Inc.,
Seattle, WA 98103 Seattle, Washington; former
(57) President of Emerald Development
Group, Inc., Seattle,
Washington; Director of First
SAFECO National Life Insurance
Company of New York.
Neal Fuller Vice President Vice President, Controller,
10865 Willows Road NE Controller Assistant Secretary and
Redmond, WA 98052 Assistant Secretary Treasurer of SAFECO Securities,
(36) Inc. and SAFECO Services
Corporation; Vice President,
Controller, Secretary and
Treasurer of SAFECO Asset
Management Company. See table
under "Investment Advisory and
Other Services."
84
<PAGE>
<CAPTION>
Position(s) Held with Principal Occupations(s)
Name, Address and Age the Trusts During Past 5 Years
- --------------------- ---------- -------------------
<S> <C> <C>
Ronald L. Spaulding Vice President Chairman of SAFECO Asset
Two Union Square Treasurer Management Company; Treasurer
Sixth Avenue and and Chief Investment Officer of
Union Street SAFECO Corporation; Vice
Seattle, WA 98101 President of SAFECO Insurance
(55) Companies; Director, Vice
President and Treasurer of First
SAFECO National Life Insurance
Company of New York; former
Senior Portfolio Manager of
SAFECO insurance companies and
Portfolio Manager for SAFECO
mutual funds. See table under
"Investment Advisory and Other
Services."
David H. Longhurst Assistant Controller Assistant Controller of SAFECO
10865 Willows Road NE Securities, Inc., SAFECO
Redmond, WA 98052 Services Corporation and SAFECO
(41) Asset Management Company; former
Accounting Manager of SAFECO
Asset Management Company; former
Senior Manager with Ernst &
Young LLP, an independent
accounting firm.
Stephen D. Collier Assistant Secretary Assistant Secretary of SAFECO
SAFECO Plaza Asset Management Company, SAFECO
4333 Brooklyn Ave., Securities, Inc. and SAFECO
NE Services Corporation. He has
Seattle, WA 98105 been an executive officer of
(46) SAFECO Corporation and
subsidiaries since 1991.
</TABLE>
*Trustees who are interested persons as defined by the 1940 Act.
Each Trustee and officer holds the same position(s) with one other
registered open-end management investment company that has six
series companies managed by SAM.
85
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE FOR CURRENT TRUSTEES
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
PENSION OR TOTAL
RETIREMENT ESTIMATED COMPENSATION
AGGREGATE BENEFITS ANNUAL FROM REGISTRANT
COMPENSATION ACCRUED AS BENEFITS AND FUND
FROM PART OF FUND UPON COMPLEX
TRUSTEE TRUST REGISTRANT EXPENSES RETIREMENT PAID TO TRUSTEES
- ------- ----- ---------- -------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
BOH A. DICKEY Common Stock N/A N/A N/A
Taxable Bond N/A N/A N/A
Tax-Exempt Bond N/A N/A N/A
Managed Bond N/A N/A N/A
Money Market N/A N/A N/A
Total Compensation $0
BARBARA J. Common Stock $11,026 N/A N/A
DINGFIELD Taxable Bond $3,250 N/A N/A
Tax-Exempt Bond $5,832 N/A N/A
Managed Bond $1,033 N/A N/A
Money Market $2,337 N/A N/A
Total Compensation $30,375
DAVID F. HILL Common Stock N/A N/A N/A
Taxable Bond N/A N/A N/A
Tax-Exempt Bond N/A N/A N/A
Managed Bond N/A N/A N/A
Money Market N/A N/A N/A
Total Compensation $0
RICHARD W. Common Stock $10,345 N/A N/A
HUBBARD Taxable Bond $3,050 N/A N/A
Tax-Exempt Bond $5,472 N/A N/A
Managed Bond $969 N/A N/A
Money Market $2,195 N/A N/A
Total Compensation $28,500
RICHARD E. Common Stock $11,026 N/A N/A
LUNDGREN Taxable Bond $3,250 N/A N/A
Tax-Exempt Bond $5,832 N/A N/A
Managed Bond $1,033 N/A N/A
Money Market $2,339 N/A N/A
Total Compensation $30,375
86
<PAGE>
LARRY L. PINNT Common Stock $11,026 N/A N/A
Taxable Bond $3,250 N/A N/A
Tax-Exempt Bond $5,832 N/A N/A
Managed Bond $1,033 N/A N/A
Money Market $2,339 N/A N/A
Total Compensation $30,375
JOHN W. Common Stock $11,026 N/A N/A
SCHNEIDER Taxable Bond $3,250 N/A N/A
Tax-Exempt Bond $5,832 N/A N/A
Managed Bond $1,033 N/A N/A
Money Market $2,339 N/A N/A
Total Compensation $30,375
</TABLE>
At March 31, 1999, the Trustees and officers of each Trust as a group owned
less than 1% of the outstanding shares of each Fund.
Mr. Dickey and Mr. Hill are officers of various SAFECO companies and are not
compensated by the Trusts. Similarly, the officers of the Trusts receive no
compensation for their services as officers.
Currently, there is no pension, retirement, or other plan or any arrangement
pursuant to which Trustees or officers of the Trusts are compensated by the
Trusts.
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS OF CERTAIN FUNDS
At March 31, 1999, SAM controlled the International, Balanced, U.S. Value and
Managed Bond Funds. At March 31, 1999, SAFECO Insurance Company of
America ("SAFECO Insurance") controlled the Intermediate-Term U.S. Treasury Fund
and Washington Municipal Bond Fund. Each of SAM and SAFECO Insurance is a
corporation organized under the laws of the State of Washington.
At March 31, 1999, SAM owned 27.10% of the Balanced Fund's outstanding shares;
35.00% of the International Fund's outstanding shares; 54.81% of the U.S. Value
Fund's outstanding shares; and 46.94% of the Managed Bond Fund's outstanding
shares. At March 31, 1999, SAFECO Insurance owned 22.46% of the
Intermediate-Term U.S. Treasury Fund's outstanding shares and SAFECO Trust
Omnibus Account, whose address of record is P.O. Box 34730, Seattle, WA 98124,
owned 7.10% of the Intermediate Term U.S. Treasury Fund's outstanding shares.
Both SAFECO Insurance and SAFECO Trust Omnibus Account are under the common
control of SAFECO Corporation for a total control of 29.56% of the
Intermediate-Term U.S. Treasury Fund's outstanding shares. At March 31, 1999,
SAFECO Insurance owned 67.95% of the Washington Municipal Bond Fund's
outstanding shares.
87
<PAGE>
At March 31, 1999, Charles Schwab & Co., Inc., whose address of record is 101
Montgomery St., San Francisco, CA 94104, held of record 29.81% of the Growth
Fund's outstanding shares; 27.41% of the Equity Fund's outstanding shares; and
29.15% of the California Tax-Free Income Fund's outstanding shares, which it
held on behalf of its customers who are the beneficial owners of such shares.
No Fund is aware of any Schwab customer that beneficially owned 5% or more of
its outstanding shares.
SAM, SAFECO Insurance and SAFECO Trust Company are Washington corporations and
wholly owned subsidiaries of SAFECO Corporation. SAFECO Corporation is a
Washington corporation and a holding company whose primary subsidiaries are
engaged in the insurance and financial services businesses. SAM has its
principal place of business at 25th Floor, Two Union Square, Seattle, WA 98101.
Each of SAFECO Insurance and SAFECO Corporation has its principal place of
business at SAFECO Plaza, Seattle, WA 98185.
Principal shareholders of a Fund may control the outcome of a shareholder vote.
However, on each proposal or sub-proposal, SAM, SAFECO Insurance Company of
America or other companies under common control with these entities will vote
shares of each Fund that it owns pro rata in accordance with the vote cast by
shareholders of the applicable Fund.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information provided to the Funds or
contained in filings with the SEC regarding the beneficial ownership of shares
of each Fund as of March 31, 1999 by each person who is known by each Fund to
own beneficially, or exercise control or direction over, 5% or more of the
outstanding shares of each Fund.
GROWTH FUND
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
National Financial Services Corp.
for the Exclusive Benefit of Our
Customers
Attn.: Mutual Funds Dept. 5th Fl. 5,992,803 11.07%
200 Liberty St.,
1 World Financial Center
New York, NY 10281-10003
Charles Schwab & Co. Inc.
Exclusive Benefit of Its Customers
Attn: Mutual Fund Department 16,135,578 29.81%
101 Montgomery Street
San Francisco CA 94104-4122
</TABLE>
88
<PAGE>
EQUITY FUND
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
Charles Schwab & Co. Inc.
Exclusive Benefit of Its
Customers
Attn: Mutual Fund Department 25,306,887 27.41%
101 Montgomery Street
San Francisco CA 94104-4122
</TABLE>
INCOME FUND
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
Charles Schwab & Co. Inc.
Exclusive Benefit of Its
Customers
Attn: Mutual Fund Department 1,818,381 11.42%
101 Montgomery Street
San Francisco CA 94104-4122
</TABLE>
NORTHWEST FUND
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
Charles Schwab & Co. Inc.
Exclusive Benefit of Its
Customers
Attn: Mutual Fund Department 211,089 5.72%
101 Montgomery Street
San Francisco CA 94104-4122
SAFECO Insurance Company of
America
SAFECO Plaza 450,000 12.20%
Seattle, WA 98185
</TABLE>
BALANCED FUND
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
Safeco Asset Management Company
Two Union Square 509,268 27.10%
Sixth Avenue and Union Street
Seattle, WA 98101
Safeco Services Corporation
Retirement Account 133,668 7.11%
Safeco T-13
Seattle, WA 98185-0001
</TABLE>
INTERNATIONAL FUND
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
Safeco Asset Management Company
Two Union Square 678,169 35.00%
Sixth Avenue and Union Street
Seattle, WA 98101
89
<PAGE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
Norwest Bank Minnesota, N.A.,
Trustee
SAFECO 401K Savings Plan 414,884 21.41%
510 Marquette, 5th and Marquette
Minneapolis, MN 55479-0001
</TABLE>
SMALL COMPANY FUND
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
National Financial Services Corp.
for the Exclusive Benefit of Our
Customers
200 Liberty Street, 1 World 153,018 4.98%
Financial
Attn.: Mutual Funds Dept. 5th Fl.
New York, NY 10281-1003
Charles Schwab & Co. Inc.
Exclusive Benefit of Its Customers
Attn: Mutual Fund Department 495,743 16.12%
101 Montgomery Street
San Francisco CA 94104-4122
Norwest Bank Minnesota, N.A.,
Trustee
SAFECO 401K Savings Plan 656,239 21.34%
510 Marquette, 5th and Marquette
Minneapolis, MN 55479-0001
</TABLE>
U.S. VALUE FUND
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
Safeco Asset Management Company
Two Union Square
Sixth Avenue and Union Street 500,000 54.81%
Seattle, WA 98101
Charles Schwab & Co. Inc.
Exclusive Benefit of Its Customers
Attn: Mutual Fund Department 78,425 8.60%
101 Montgomery Street
San Francisco CA 94104-4122
</TABLE>
INTERMEDIATE-TERM U.S. TREASURY FUND
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
SAFECO Insurance Company of
America
SAFECO Plaza 500,000 22.46%
Seattle, WA 98185
Safeco Trust Omnibus Account
P.O. Box 34730 157,989 7.10%
Seattle, WA 98124-1730
90
<PAGE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
Charles Schwab & Co. Inc.
Exclusive Benefit of Its Customers
Attn: Mutual Fund Department 201,983 9.07%
101 Montgomery Street
San Francisco CA 94104-4122
</TABLE>
HIGH-YIELD FUND
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
Charles Schwab & Co. Inc.
Exclusive Benefit of Its
Customers
Attn: Mutual Fund Department 2,039,900 20.47%
101 Montgomery Street
San Francisco CA 94104-4122
</TABLE>
MANAGED BOND FUND
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
Safeco Asset Management Company
Two Union Square 452,103 46.94%
Sixth Avenue and Union Street
Seattle, WA 98101
Christa Ministries
William Brown V.P. Finance 106,651 11.07%
P.O. Box 330303
Seattle, WA 98133-9703
</TABLE>
CALIFORNIA TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
Charles Schwab & Co. Inc.
Exclusive Benefit of Its
Customers
Attn: Mutual Fund Department 2,720,441 29.15%
101 Montgomery Street
San Francisco CA 94104-4122
</TABLE>
WASHINGTON MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
SAFECO Insurance Company of
America
SAFECO Plaza 502,372 67.95%
Seattle, WA 98185
William A. Helsell
10653 Culpepper Ct. N.W. 51,436 6.96%
Seattle, WA 98177-5319
</TABLE>
91
<PAGE>
INTERMEDIATE-TERM MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
SAFECO Insurance Company of
America
SAFECO Plaza 397,434 28.47%
Seattle, WA 98185
William A. Helsell
10653 Culpepper Ct. N.W. 91,960 6.59%
Seattle, WA 98177-5319
Charles Schwab & Co., Inc.
Exclusive Benefit of its
Customers
Attn: Mutual Fund Department 71,936 5.15%
101 Montgomery Street
San Francisco, CA 94104-4122
</TABLE>
INSURED MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
SAFECO Insurance Company of
America
SAFECO Plaza 605,644 26.68%
Seattle, WA 98185
Charles Schwab & Co., Inc.
Exclusive Benefit of its
Customers
Attn: Mutual Fund Department 219,240 9.66%
101 Montgomery Street
San Francisco, CA 94104-4122
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
SAM, SAFECO Securities, Inc. ("SAFECO Securities") and SAFECO Services
Corporation ("SAFECO Services") are wholly owned subsidiaries of SAFECO
Corporation. SAFECO Securities is the principal underwriter of each Fund and
SAFECO Services is the transfer, dividend and distribution disbursement and
shareholder servicing agent of each Fund.
SAM has a sub-advisory agreement with Bank of Ireland Asset Management (U.S.)
Limited ("Sub-Advisor"). The Sub-Advisor has its headquarters at 26 Fitzwilliam
Place, Dublin, Ireland, and its U.S. office at 2 Greenwich Plaza, Greenwich,
Connecticut. The Sub-Advisor is a direct, wholly owned subsidiary of Bank of
Ireland Asset Management Limited ("BIAM") (an investment advisory firm) that is
located at 26 Fitzwilliam Place, Dublin, Ireland. The Sub-Advisor is an
indirect, wholly owned subsidiary of Bank of Ireland (a holding company whose
primary subsidiaries are engaged in banking, insurance, securities and related
financial services), which is located at Lower Baggot Street, Dublin, Ireland.
BIAM was established in 1987. Bank of Ireland and its affiliates manages assets
for clients worldwide in excess of $38 billion as of December 31, 1998.
92
<PAGE>
The following individuals have the following positions and offices with the
Trusts, SAM, SAFECO Securities and SAFECO Services:
SAFECO SAFECO
Name Trusts SAM Securities Services
- ---- ------ --- ---------- ---------
B. A. Dickey Chairman Director
Trustee
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 Chairman Director Director
Treasurer Director
S.C. Bauer President
Director
D.H. Longhurst Assistant Assistant Assistant Assistant
Controller Controller Controller Controller
S.D. Collier Assistant Assistant Assistant Assistant
Secretary Secretary Secretary Secretary
Mr. Dickey is President, Chief Operating Officer and a Director of SAFECO
Corporation and Mr. Spaulding is the Treasurer and a Vice President of SAFECO
Corporation. Messrs. Dickey and Spaulding are also Directors of other SAFECO
Corporation subsidiaries.
In connection with its investment advisory contract with each Trust, SAM
furnishes or pays for all facilities and services furnished or performed for or
on behalf of each Trust and each Fund, which includes furnishing office
facilities, books, records and personnel to manage each Trust's and each Fund's
affairs and paying certain expenses.
The Trust Instrument of each Trust provides that each 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 Trusts, unless it is adjudicated that they engaged in bad
faith, willful misfeasance, gross negligence, or reckless disregard of the
duties involved in the conduct of their offices. In the case of
93
<PAGE>
settlement, such indemnification will not be provided unless it has been
determined -- by a court or other body approving the settlement, 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 willful
misfeasance, bad faith, gross negligence, or reckless disregard of their duties.
SAM also serves as the investment advisor for other investment companies in
addition to the Funds. Several of these investment companies have investment
objectives similar to those of certain Funds. It is therefore possible that the
same securities will be purchased for both a Fund and another investment company
advised by SAM. When two or more Funds advised by SAM are simultaneously
engaged in the purchase or sale of the same security, the prices and amounts
will be allocated in a manner considered by the officers of the Funds involved
to be equitable to each Fund. It is expected that the opportunity to
participate in volume transactions will produce better executions and prices for
a Fund, generally. In some cases, the price of a security allocated to one Fund
may be higher or lower than the price of a security allocated to another Fund.
For the services and facilities furnished by SAM, each Fund has agreed to pay an
annual fee computed on the basis of the average market value of the net assets
of each Fund ascertained each business day and paid monthly in accordance with
the following schedules. The reduction in fees occurs only at such time as the
respective Fund's net assets reach the dollar amounts of the break points and
applies only to those assets that fall within the specified range. Each Fund
bears all expenses of its operations not specifically assumed by SAM.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FUND FEE
- --------------------------------------------------------------------------------
Net Assets Annual Fee
- --------------------------------------------------------------------------------
<S> <C> <C>
Growth, Equity, Income, $0 - $250,000,000 .70 of 1%
Balanced and U.S. Value
$250,000,001 - $750,000,000 .65 of 1%
$750,000,001 - $1,250,000,000 .60 of 1%
Over $1,250,000,000 .55 of 1%
- --------------------------------------------------------------------------------
International* $0 - $250,000,000 1.00 of 1%
$250,000,001 - $750,000,000 .90 of 1%
Over $750,000,000 .80 of 1%
94
<PAGE>
- --------------------------------------------------------------------------------
Small Company $0 - $250,000,000 .75 of 1%
$250,000,001 - $750,000,000 .70 of 1%
Over $750,000,001 - .65 of 1%
$1,250,000,000
Over $1,250,000,000 .60 of 1%
- --------------------------------------------------------------------------------
Intermediate-Term U.S. $0 - $250,000,000 .55 of 1%
Treasury and GNMA
$250,000,001 - $750,000,000 .50 of 1%
$750,000,001 - $1,250,000,000 .45 of 1%
Over $1,250,000,000 .40 of 1%
- --------------------------------------------------------------------------------
Intermediate-Term Municipal $0 - $250,000,000 .50 of 1%
Bond, Insured Municipal,
Washington Municipal Bond,
Municipal Bond and California
Tax-Free Income
$250,000,001 - $750,000,000 .45 of 1%
Over $750,000,000 .40 of 1%
- --------------------------------------------------------------------------------
High-Yield $0 - $250,000,000 .65 of 1%
$250,000,001 - $750,000,000 .55 of 1%
Over $750,000,000 .50 of 1%
- --------------------------------------------------------------------------------
Managed Bond $0 - $750,000,000 .50 of 1%
$750,000,001 - $1,250,000,000 .45 of 1%
Over $1,250,000,000 .40 of 1%
95
<PAGE>
- --------------------------------------------------------------------------------
Money Market and Tax-Free $0 - $250,000,000 .50 of 1%
Money Market
$250,000,001 - $750,000,000 .45 of 1%
$750,000,001 - $1,250,000,000 .40 of 1%
Over $1,250,000,000 .35 of 1%
- --------------------------------------------------------------------------------
</TABLE>
* Under the sub-advisory agreement between SAM and the Sub-Advisor, the
Sub-Advisor 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-Advisor a fee in
accordance with the schedule below:
<TABLE>
<CAPTION>
NET ASSETS ANNUAL FEE
<S> <C>
$0 - $50,000,000 .60 of 1%
$50,000,001 - $100,000,000 .50 of 1%
Over $100,000,000 .40 of 1%
</TABLE>
96
<PAGE>
The following table states the total amounts of compensation paid by the
following Funds to SAM for the fiscal years ended December 31, 1998 and 1997,
the period ended December 31, 1996, and the prior fiscal year:
FISCAL YEAR OR PERIOD ENDED
<TABLE>
<CAPTION>
Three Month
December December 31, Period Ended September 30,
31, 1998 1997 December 31, 1996 1996
-------- ---- ----------------- -----
<S> <C> <C> <C> <C>
Growth Fund $6,818,000 $2,120,000 $ 327,000 $1,260,000
Equity Fund $8,912,000 $6,481,000 $1,131,000 $3,752,000
Income Fund $2,747,000 $2,285,000 $ 469,000 $1,597,000
Northwest Fund $ 519,000 $ 416,000 $ 80,000 $ 305,000
Intermediate-
Term U.S. $ 108,000 $ 85,000 $ 21,000 $ 78,000
Treasury Fund
GNMA Fund $ 259,000 $ 246,000 $ 65,000 $ 270,000
High-Yield
Fund $ 507,000 $ 386,000 $ 82,000 $ 255,000
</TABLE>
97
<PAGE>
The following table states the total amounts of compensation paid by the
following Funds to SAM for the fiscal years ended December 31, 1998 and 1997,
the period ended December 31, 1996, and the period from January 31, 1996
(initial public offering) to September 30, 1996:
FISCAL YEAR OR PERIOD ENDED
<TABLE>
<CAPTION>
Period from
January
31, 1996
(Initial
Three Month Public
Period Ended Offering) to
December 31, December 31, December 31, September 30,
1998 1997 1996 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
BALANCED $144,000 $ 87,000 $15,000 $32,000
FUND
INTERNATIONAL
FUND $196,000 $153,000 $28,000 $53,000
SMALL
COMPANY $360,000 $151,000 $27,000 $51,000
FUND
</TABLE>
The total amount of compensation paid by the U.S. Value Fund to SAM for the
fiscal year ended December 31, 1998 and the period from April 30, 1997 (initial
public offering) to December 31, 1997 was $77,916 and $43,000, respectively.
The following table states the total amounts of compensation paid by the Managed
Bond Fund to SAM for the past three years.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
MANAGED
BOND FUND $30,000 $23,000 $21,000
</TABLE>
98
<PAGE>
The following table states the total amounts of compensation paid by the
following Funds to SAM for the fiscal years ended December 31, 1998 and 1997,
the period ended December 31, 1996, and the prior fiscal year:
FISCAL YEAR OR PERIOD ENDED
<TABLE>
<CAPTION>
Nine Month Period
December December Ended
31, 1998 31, 1997 December 31, 1996 March 31, 1996
-------- -------- ----------------- --------------
<S> <C> <C> <C> <C>
MUNICIPAL BOND $2,164,000 $2,041,000 $1,533,000 $2,021,000
FUND
CALIFORNIA $ 587,000 $ 424,000 $ 290,000 $ 366,000
TAX-FREE
INCOME FUND
INTERMEDIATE- $ 80,000 $ 77,000 $ 60,000 $ 78,000
TERM MUNICIPAL
BOND FUND
INSURED $ 135,000 $ 95,000 $ 60,000 $ 57,000
MUNICIPAL BOND
FUND
WASHINGTON
MUNICIPAL BOND $ 53,000 $ 49,000 $ 32,000 $ 39,000
FUND
MONEY MARKET
FUND $1,012,000 $ 865,000 $ 630,000 $ 865,000
TAX-FREE
MONEY MARKET $ 392,000 $ 366,000 $ 284,000 $ 380,000
FUND
</TABLE>
ADMINISTRATION AND ACCOUNTING AGREEMENT. The Administration and Accounting
Agreement between each Fund and SAM is a service contract and not an investment
advisory agreement (the "Agreement"). Under the Agreement, SAM will serve as
each Fund's accounting agent and administrator, performing such functions as:
calculate the net asset value of each Fund's accounting agent and financial
records, prepare the financial statements semiannually, make regulatory filings,
and coordinate contractual relationships and communications between each Fund
and its service providers. Under the Agreement, each Fund will pay SAM an
administrative services fee of 0.05% of the average daily net assets up to the
first $200,000,000 and 0.01% of its net assets thereafter,
99
<PAGE>
and an accounting fee of 0.04% of its average daily net assets up to the first
$200,000,000 and 0.01% of its net assets thereafter.
CUSTODIAN. State Street Bank and Trust Company, 1776 Heritage Drive, North
Quincy, Massachusetts, 02170, is the custodian of the securities, cash and
other assets of each Fund (except the International Fund) under an agreement
with each Trust. Chase Manhattan Bank, N.A. 1211 Avenue of the Americas, New
York, New York, is the custodian of the securities, cash and other assets of the
International Fund. Chase Manhattan Bank, N.A. has entered into sub-custodian
agreements with several foreign banks and clearing agencies, pursuant to which
portfolio securities purchased outside the United States are maintained in the
custody of these entities.
INDEPENDENT AUDITOR. Ernst & Young LLP, 999 Third Avenue, Suite 3500,
Seattle, Washington 98104, is the independent auditor of each Fund's
financial statements.
TRANSFER AGENT. SAFECO Services, SAFECO Plaza, Seattle, Washington 98185, is
the transfer, dividend and distribution disbursement and shareholder servicing
agent for the No-Load Class of each Fund under an agreement with each Trust.
SAFECO Services provides, or through subcontracts makes provision for, all
required transfer agent activity, including maintenance of records of each
Fund's No-Load Class shareholders, records of transactions involving each Fund's
No-Load Class shares, and the compilation, distribution, or reinvestment of
income dividends and capital gain distributions.
SAFECO Services is paid a fee for these services equal to $28.00 per Stock Fund
shareholder account; $32.00 per Bond Fund, Tax-Exempt Bond Fund and Managed Bond
Fund shareholder account; and $34.00 per Money Market Fund shareholder account,
but not to exceed .30% of each Fund's average net assets.
The following table shows the fees paid by the following Funds to SAFECO
Services during the fiscal years ended December 31, 1998 and 1997, the period
ended December 31, 1996 and the prior fiscal year:
FISCAL YEAR OR PERIOD ENDED
<TABLE>
<CAPTION>
Three Month
Period Ended
December 31, December 31, December 31, September 30,
1998 1997 1996 1996*
---- ---- ---- -----
<S> <C> <C> <C> <C>
GROWTH FUND $2,802,000 $517,000 $99,000 $384,000
EQUITY FUND $3,543,000 $2,320,000 $378,000 $1,203,000
INCOME FUND $693,000 $583,000 $123,000 $359,000
NORTHWEST FUND $194,000 $145,000 $32,000 $105,000
100
<PAGE>
<CAPTION>
FISCAL YEAR OR PERIOD ENDED
Three Month
Period Ended
December 31, December 31, December 31, September 30,
1998 1997 1996 1996*
---- ---- ---- -----
<S> <C> <C> <C> <C>
INTERMEDIATE-
TERM U.S. $37,000 $31,000 $6,000 $39,000
TREASURY FUND
GNMA FUND $65,000 $65,000 $17,000 $111,000
HIGH-YIELD
FUND $124,000 $86,000 $17,000 $90,000
</TABLE>
* The fees paid to SAFECO Services reflect fees of $3.10 per shareholder
transaction until July, 1996 when the new fee schedule went into effect.
The following table shows the fees paid by the following Funds to SAFECO
Services during the fiscal years ended December 31, 1998 and 1997, the period
ended December 31, 1996 and the period from January 31, 1996 (initial public
offering) to September 30, 1996:
FISCAL YEAR OR PERIOD ENDED
<TABLE>
<CAPTION>
Period from
January
31, 1996
(Initial
Three Month Public
Period Ended Offering) to
December 31, December 31, December 31, September 30,
1998 1997 1996 1996*
---- ---- ---- -----
<S> <C> <C> <C> <C>
BALANCED
FUND $ 44,000 $23,000 $2,000 $4,000
INTERNATIONAL
FUND $ 52,000 $34,000 $2,000 $9,000
SMALL
COMPANY
FUND $ 122,000 $50,000 $8,000 $13,000
</TABLE>
* The fees paid to SAFECO Services reflect fees of $3.10 per shareholder
transaction until July, 1996 when the new fee schedule went into effect.
The total amount of fees paid by the U.S. Value Fund to SAFECO Services for the
fiscal year ended December 31, 1998 and the period from April 30, 1997 (initial
public offering) to December 31, 1997 were $20,000 and $5,000, respectively.
101
<PAGE>
The following table shows the fees paid by the Managed Bond Fund to SAFECO
Services for the fiscal years ended December 31, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------
December 31, 1998 December 31, 1997 December 31, 1996*
----------------- ----------------- ------------------
<S> <C> <C> <C>
MANAGED BOND
FUND $4,000 $1,000 $15
</TABLE>
* The fees paid to SAFECO Services reflect fees of $3.10 per shareholder
transaction until July, 1996 when the new fee schedule went into effect.
102
<PAGE>
The following table shows the fees paid by the following Funds to SAFECO
Services for the fiscal years ended December 31, 1998 and 1997, the period ended
December 31, 1996 and the prior fiscal year:
FISCAL YEAR OR PERIOD ENDED
<TABLE>
<CAPTION>
Nine Month
Period Ended
December 31, December 31, December 31, March 31,
1998 1997 1996* 1996*
---- ---- ----- -----
<S> <C> <C> <C> <C>
MUNICIPAL BOND $325,000 $327,000 $ 300,000 $511,000
FUND
CALIFORNIA TAX- $ 81,000 $ 60,000 $ 48,000 $ 69,000
FREE INCOME FUND
INTERMEDIATE- $ 11,000 $ 11,000 $ 10,000 $ 17,000
TERM MUNICIPAL
BOND FUND
INSURED $ 16,000 $ 11,000 $ 9,000 $ 9,000
MUNICIPAL BOND
FUND
WASHINGTON $ 3,000 $ 3,000 $ 2,000 $ 3,000
MUNICIPAL BOND
FUND
MONEY MARKET $482,000 $414,000 $ 325,000 $424,000
FUND
TAX-FREE $ 62,000 $ 64,000 $ 54,000 $ 71,000
MONEY MARKET
FUND
</TABLE>
*Figures reflect fees of $3.10 per shareholder transaction until July, 1996 when
the new fee schedule went into effect.
SAFECO Securities is the principal underwriter for the No-Load Class of each
Fund and distributes each Fund's No-Load Class shares on a continuous best
efforts basis under an agreement with each Trust. SAFECO Securities is not
compensated by the Trusts or the Funds for underwriting, distribution or other
activities in connection with No-Load Class shares.
103
<PAGE>
BROKERAGE PRACTICES
Brokers typically charge commissions or mark-ups/mark-downs to effect securities
transactions. The Funds may also purchase securities from underwriters, the
price of which will include a commission or concession paid by the issuer to the
underwriter. The purchase price of securities purchased from dealers serving as
market makers will include the spread between the bid and asked prices.
Brokerage transactions involving securities of companies domiciled in countries
other than the United States will normally be conducted on the principal stock
exchange of those countries. In most international markets, commission rates
are not negotiable and may be higher than the negotiated commission rates
available in the United States. There is generally less government supervision
and regulation of foreign stock exchanges and broker-dealers than in the United
States.
SAM determines the broker/dealers through whom securities transactions for the
Funds are executed. SAM may select a broker/dealer who may receive a commission
for portfolio transactions exceeding the amount another broker/dealer would have
charged for the same transaction if SAM determines that such amount of
commission is reasonable in relation to the value of the brokerage and research
services performed or provided by the broker/dealer, viewed in terms of either
that particular transaction or SAM's overall responsibilities to the client for
whose account such portfolio transaction is executed and other accounts advised
by SAM. Research services include market information, analysis of specific
issues, presentation of special situations and trading opportunities on a timely
basis, advice concerning industries, economic factors and trends, portfolio
strategy and performance of accounts. Research services come in the form of
written reports, telephone conversations between brokerage security analysts and
members of SAM's staff, and personal visits by such analysts and brokerage
strategists and economists to SAM's office.
Research services are used in advising all accounts, including accounts advised
by related persons of SAM, and not all such services are necessarily used by SAM
in connection with the specific account that paid commissions to the
broker/dealer providing such services. SAM does not acquire research services
through the generation of credits with respect to principal transactions or
transactions in financial futures.
The overall reasonableness of broker commissions paid is evaluated periodically.
Such evaluation includes a review of what competing broker/dealers are willing
to charge for similar types of services and what discounts are being granted by
brokerage firms. The evaluation also considers the timeliness and accuracy of
the research received.
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<PAGE>
The following table states the total amount of brokerage expenses for the
following Funds for the fiscal years ended December 31, 1998 and 1997, the
period ended December 31, 1996, and the prior fiscal year:
FISCAL YEAR OR PERIOD ENDED
<TABLE>
<CAPTION>
Three Month
Period Ended
December 31, December 31, December 31, September 30,
1998 1997 1996 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Growth Fund* $2,693,078 $ 817,674 $ 63,500 $ 518,092
Equity Fund $1,204,661 $1,180,261 $ 278,203 $1,224,644
Income Fund $ 344,745 $ 341,428 $ 42,827 $ 286,999
Northwest $ 48,671 $ 63,531 $ 25,566 $ 13,599
</TABLE>
* The increase in brokerage amounts was a result of significant acquisition and
sales activities which are not typical for the Growth Fund on a historical
basis.
The following table states the total amount of brokerage expenses for following
Funds for the fiscal years ended December 31, 1998 and 1997, the period ended
December 31, 1996, and the period from January 31, 1996 (initial public
offering) to September 30, 1996:
FISCAL YEAR OR PERIOD ENDED
<TABLE>
<CAPTION>
Period from
January
31, 1996
(Initial
Three Month Public
Period Ended Offering) to
December 31, December 31, December 31, September 30,
1998 1997 1996 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balanced Fund $16,890 $ 9,913 $1,548 $ 5,911
International $16,320 $16,054 $5,311 $ 22,468
Fund
Small Company $92,111 $24,185 $4,615 $ 16,752
Fund
</TABLE>
The total amount of brokerage expenses for the U.S. Value Fund for the fiscal
year ended December 31, 1998 and the period from April 30, 1997 (initial public
offering) to December 31, 1997 were $14,106 and $10,224, respectively.
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TAX INFORMATION
GENERAL
Each Fund is treated as a separate corporation for federal income tax purposes
and intends to continue to qualify for treatment as a "regulated investment
company" ("RIC") under Subchapter M of the Internal Revenue Code of 1986
("Code"). To qualify for that treatment, a Fund (1) must distribute to its
shareholders for each taxable year at least 90% of the sum of its investment
company taxable income (consisting generally of taxable net investment income,
net short-term capital gain, and net gains from certain foreign currency
transactions, plus its net income excludable from gross income under section
103(a) of the Code ("Distribution Requirement"), (2) must derive at least 90% of
its gross income each taxable year from dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of
securities or foreign currencies, or other income (including gains from options,
futures, or forward contracts) derived with respect to its business of investing
in securities or those currencies ("Income Requirement"), and (3) must satisfy
certain diversification requirements. Each Fund intends to satisfy all such
requirements, including making sufficient distributions to shareholders to
relieve it from liability for federal income tax and the federal excise tax
described below.
If a Fund failed to qualify for treatment as a RIC for any taxable year, (1)
it would be taxed at corporate rates on the full amount of its taxable income
for that year (even if it distributed that income to its shareholders) and (2)
the shareholders would treat all those distributions, including distributions
of net capital gain (the excess of net long-term capital gain over net
short-term capital loss) and distributions that otherwise would be
"exempt-interest dividends," described below, as dividends (that is, ordinary
income) to the extent of the Fund's earnings and profits. In addition, the
Fund could be required to recognize unrealized gains, pay substantial taxes
and interest, and make substantial distributions before requalifying for RIC
treatment.
Dividends paid by a Fund will qualify as "exempt-interest dividends," and thus
will be excludable from its shareholders' gross income for federal income tax
purposes, if the Fund satisfies the requirement that, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
consists of securities the interest on which is excludable from gross income
under section 103(a); each Tax-Exempt Bond Fund and the Tax-Free Money Fund
(collectively "Tax-Exempt Funds") intends to continue to satisfy this
requirement. The aggregate dividends excludable from a Tax-Exempt Fund's
shareholders' gross income may not exceed its net tax-exempt income.
Shareholders' treatment of dividends from a Tax-Exempt Fund under state and
local income tax laws may differ from the treatment thereof under the Code.
Investors should consult their tax advisers concerning this matter.
A Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to the
extent it fails to distribute by the end of any calendar year at least 98% of
its ordinary income and capital gain net income for that year, plus certain
other amounts.
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If shares of a Fund are sold at a loss after being held for six months or less,
the loss will be disallowed to the extent of exempt-interest dividends received
on those shares, and any part of the loss that is not disallowed 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
(other than an exempt-interest dividend), 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 taxable
dividends and those distributions payable to such shareholders who otherwise are
subject to backup withholding.
No portion of the dividends or other distributions paid by any Fund other than a
series of the Common Stock Trust is eligible for the dividends-received
deduction allowed to corporations.
SPECIAL TAX CONSIDERATIONS -- INVESTMENT IN DERIVATIVES (ALL FUNDS)
Purchasing and writing (selling) options involve complex rules that will
determine for income tax purposes the amount, character, and timing of
recognition of the gains and losses a Fund realizes in connection therewith.
Gains from options derived by a Fund with respect to its business of investing
in securities will be treated as qualifying income under the Income Requirement.
When a covered call option written (sold) by a Fund expires, the Fund realizes a
short-term capital gain equal to the amount of the premium it received for
writing the option. When a Fund terminates its obligations under such an option
by entering into a closing transaction, it realizes a short-term capital gain
(or loss), depending on whether the cost of the closing transaction is less (or
more) than the premium it received when it wrote the option. When a covered
call option written by a Fund is exercised, the Fund is treated as having sold
the underlying security, producing long-term or short-term capital gain or loss,
depending on the holding period of the underlying security and whether the sum
of the option price received on the exercise plus the premium received when it
wrote the option is more or less than the basis of the underlying security.
If a Fund has an "appreciated financial position" -- generally, an interest
(including an interest through an option or short sale or, in the case of the
International Fund, a futures or forward contract) with respect to any stock,
debt instrument (other than "straight debt"), or partnership interest the fair
market value of which exceeds its adjusted basis -- and enters into a
"constructive sale" of the same or substantially similar property, the Fund will
be treated as having made an actual sale thereof, with the result that it will
recognize gain at that time. A constructive sale generally consists of a short
sale, an offsetting notional principal contract, or a futures or forward
contract entered into by a Fund or a related person with respect to the same or
substantially similar property. In
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addition, if the appreciated financial position is itself a short sale or such a
contract, acquisition of the underlying property or substantially similar
property will be deemed a constructive sale. The foregoing will not apply,
however, to any transaction during any taxable year that otherwise would be
treated as a constructive sale if the transaction is closed within 30 days after
the end of that year and the Fund holds the appreciated financial position
unhedged for 60 days after that closing (i.e., at no time during that 60-day
period is the Fund's risk of loss regarding that position reduced by reason of
certain specified transactions with respect to substantially similar or related
property, such as having an option to sell, being contractually obligated to
sell, making a short sale, or granting an option to buy substantially identical
stock or securities).
SPECIAL TAX CONSIDERATIONS -- INTERNATIONAL FUND
The use of hedging strategies, such as writing (selling) and purchasing options
and futures contracts and entering into forward currency contracts, involves
complex rules that will determine for income tax purposes the amount, character,
and timing of recognition of the gains and losses the International Fund
realizes in connection therewith. Gain from the disposition of foreign
currencies (except certain gains that may be excluded by future regulations),
and gains from options, futures, and forward currency contracts derived by the
International Fund with respect to its business of investing in securities or
foreign currencies, will be treated as qualifying income under the Income
Requirement.
Certain futures and foreign currency contracts in which the International Fund
may invest may be subject to section 1256 of the Code ("section 1256
contracts"). Any section 1256 contracts held by the International Fund at the
end of each taxable year, other than contracts with respect to which it has made
a "mixed straddle" election, must be "marked-to-market" (that is, treated as
having been sold at that time for their fair market value) for federal income
tax purposes, with the result that unrealized gains or losses will be treated as
though they were realized. Sixty percent of any net gain or loss recognized on
these deemed sales, and 60% of any net realized gain or loss from any actual
sales of section 1256 contracts, will be treated as long-term capital gain or
loss, and the balance will be treated as short-term capital gain or loss.
Section 1256 contracts also may be marked-to-market for purposes of the Excise
Tax. These rules may operate to increase the amount that the International Fund
must distribute to satisfy the Distribution Requirement, which will be taxable
to its shareholders as ordinary income, and to increase the net capital gain it
recognizes, without in either case increasing the cash available to it. The
International Fund may elect to exclude certain transactions from the operation
of section 1256, although doing so may have the effect of increasing the
relative proportion of net short-term capital gain (taxable as ordinary income)
and/or increasing the amount of dividends that it must distribute to meet the
Distribution Requirement and avoid imposition of the Excise Tax.
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Code section 1092 (dealing with straddles) also may affect the taxation of
certain hedging instruments in which the International Fund may invest. That
section defines a "straddle" as offsetting positions with respect to
actively traded personal property; for these purposes, options, futures, and
forward currency contracts are personal property. Under that section, any
loss from the disposition of a position in a straddle generally may be
deducted only to the extent the loss exceeds the unrealized gain on the
offsetting position(s) of the straddle. In addition, these rules may
postpone the recognition of loss that otherwise would be recognized under the
mark-to-market rules discussed above. The regulations under section 1092 also
provide certain "wash sale" rules, which apply to transactions where a
position is sold at a loss and a new offsetting position is acquired within a
prescribed period, and "short sale" rules applicable to straddles. If the
International Fund makes certain elections, the amount, character, and timing
of recognition of gains and losses from the affected straddle positions would
be determined under rules that vary according to the elections made. Because
only a few of the regulations implementing the straddle rules have been
promulgated, the tax consequences to the International Fund of straddle
transactions are not entirely clear.
SPECIAL TAX CONSIDERATIONS -- INVESTMENT IN FOREIGN SECURITIES
The International Fund and any other Fund that invests in foreign securities may
be required to pay income, withholding, or other taxes to a foreign government.
If so, the taxes will reduce the Fund's distributions. Foreign tax withholding
from dividends and interest (if any) is typically set at 10% or 15% if there is
a treaty with the foreign government that addresses this issue. If no such
treaty exists, the foreign tax withholding generally will be 30%. Amounts
withheld for foreign taxes will reduce the amount of dividend distributions to
shareholders.
The International Fund intends to make an election that will allow shareholders
to claim an offsetting credit or deduction on their tax return for their share
of foreign taxes paid by the Fund. Pursuant to this election, which the
International Fund may make if more than 50% of the value of its total assets at
the close of any taxable year consists of securities of foreign corporations,
the Fund would treat foreign income and withholding taxes as dividends paid to
its shareholders and each shareholder (1) would be required to include in gross
income, and treat as paid by the shareholder, the shareholder's proportionate
share of those taxes, (2) would be required to treat that share of those taxes
and of any dividend paid by the Fund that represents income from foreign sources
as the shareholder's own income from those sources, and (3) could either deduct
the foreign taxes deemed paid by the shareholder in computing taxable income or,
alternatively, use the foregoing information in calculating the foreign tax
credit against the shareholder's federal income tax. If the Fund makes this
election, it will report to its shareholders shortly after each taxable year
their respective shares of the foreign taxes it paid and its income from sources
within foreign countries. Individuals who have no more than $300
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($600 for married persons filing jointly) of creditable foreign taxes included
on Forms 1099 and all of whose foreign source income is "qualified passive
income" may elect each year to be exempt from the extremely complicated foreign
tax credit limitation and will be able to claim a foreign tax credit without
having to file the detailed Form 1116 that otherwise is required.
Gains or losses resulting from exchange rate fluctuations between the time a
Fund accrues interest or other receivables, or accrues expenses or other
liabilities, denominated in a foreign currency and the time the Fund actually
collects the receivables or pays the liabilities are treated as ordinary income
or loss. Similarly, gains or losses on forward currency contracts or
dispositions of debt securities denominated in a foreign currency attributable
to fluctuations in the value of the foreign currency between the dates of
acquisition and disposition of the security also are treated as ordinary gain or
loss. These gains, referred to under the Code as "section 988" gains or losses,
increase or decrease the amount of a Fund's investment company taxable income
available to be distributed to its shareholders as ordinary income, rather than
increasing or decreasing the amount of its net capital gain. If a Fund's
distributions exceed its taxable income in any year because of currency-related
losses or otherwise, all or a portion of its dividends may be treated as a
return of capital to its shareholders for tax purposes. To minimize the risk of
a return of capital, a Fund may adjust its dividends to take currency
fluctuations into account, causing the dividends to vary. Any return of capital
will reduce the cost basis of a shareholder's shares, resulting in a higher
capital gain or lower capital loss when the shareholder sells the shares.
PFICs. Certain Funds may invest in the stock of PFICs. A PFIC is a foreign
corporation -- other than a "controlled foreign corporation" (i.e., a foreign
corporation in which, on any day during its taxable year, more than 50% of the
total voting power of all voting stock therein or the total value of all stock
therein is owned, directly, indirectly, or constructively, by "U.S.
shareholders," defined as U.S. persons that individually own, directly,
indirectly, or constructively, at least 10% of that voting power) as to which
the Fund is a U.S. shareholder -- that, in general, meets either of the
following tests: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, if a Fund holds stock of a
PFIC, it will be subject to federal income tax on a portion of any "excess
distribution" received on the stock or of any gain on disposition of the stock
(collectively "PFIC income"), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent it
distributes that income to its shareholders.
If a Fund invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund" ("QEF"), then in lieu of the foregoing tax and interest
obligation, the Fund would be required to include in income each year its PRO
RATA share of the QEF's annual ordinary earnings and net capital gain -- which
the Fund probably would have to distribute to
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satisfy the Distribution Requirement and avoid imposition of the Excise Tax
- --even if the Fund did not receive those earnings and gain from the QEF. In
most instances it will be very difficult, if not impossible, to make this
election because of certain requirements thereof.
Each Fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of the stock over a
Fund's adjusted basis therein as of the end of that year. Pursuant to the
election, a Fund also may deduct (as an ordinary, not capital, loss) the excess,
if any, of its adjusted basis in PFIC stock over the fair market value thereof
as of the taxable year-end, but only to the extent of any net mark-to-market
gains with respect to that stock included in income by the Fund for prior
taxable years under the election (and under regulations proposed in 1992 that
provided a similar election with respect to the stock of certain PFICs). A
Fund's adjusted basis in each PFIC's stock subject to the election would be
adjusted to reflect the amounts of income included and deductions taken
thereunder.
SPECIAL TAX CONSIDERATIONS -- HIGH-YIELD FUND AND MANAGED BOND FUND
The High-Yield and Managed Bond Funds may acquire zero coupon or other
securities issued with original issue discount ("OID"). As a holder of such
securities, each Fund must include in its income the portion of the OID that
accrues on the securities during the taxable year, even if it receives no
corresponding payment on them during the year. Similarly, the High-Yield Fund
must include in its gross income securities it receives as "interest" on
payment-in-kind securities. Because each Fund annually must distribute
substantially all of its investment company taxable income, including any
accrued OID and other non-cash income, to satisfy the Distribution Requirement
and avoid imposition of the Excise Tax, it may be required in a particular year
to distribute as a dividend an amount that is greater than the total amount of
cash it actually receives. Those distributions will be made from a Fund's cash
assets or from the proceeds of sales of portfolio securities, if necessary. A
Fund may realize capital gains or losses from those sales, which would increase
or decrease its investment company taxable income and/or net capital gain.
SPECIAL TAX CONSIDERATIONS -- TAX-EXEMPT FUNDS
Interest on indebtedness incurred or continued by a shareholder to purchase
or carry shares of a Tax-Exempt Bond Fund generally 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 advisors before purchasing shares of any Tax-Exempt Fund. "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 Fund may invest in municipal bonds that are purchased with
"market discount." For these purposes, market discount is the amount by which a
bond's purchase price is exceeded by its stated redemption price at maturity or,
in the case of a bond that was
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issued with OID, the sum of its issue price plus accrued OID ("municipal market
discount bonds"). Market discount less than the product of (1) 0.25% of the
redemption price at maturity times and (2) the number of complete years to
maturity after the taxpayer acquired the bond is disregarded. Market discount
generally is accrued ratably, on a daily basis, over the period from the
acquisition date to the date of maturity. Gain on the disposition of such a
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. In lieu of treating the disposition gain as described above, a
Fund may elect to include market discount in its gross income currently, for
each taxable year to which it is attributable.
In the future, proposals may be introduced before Congress for the purpose of
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 Fund and the value of its portfolio would be affected. In that
event, each Tax-Exempt Fund would review its investment objectives and
policies.
CALIFORNIA STATE AND LOCAL TAX MATTERS
If the California Tax-Free Income Fund maintains at least 50% of the value of
its assets in obligations the interest on which is exempt from California
personal income tax, individual shareholders of the Fund who are subject to
California personal income tax will not be required to include in their
California gross income that portion of their dividends which the Fund clearly
and accurately identifies as directly attributable to interest earned on
obligations, the interest on which is exempt from California personal income
tax. Distributions to such individual shareholders derived from interest on
municipal obligations issued by governmental authorities in states other than
California, net short-term capital gains and other taxable income will be taxed
as dividends for purposes of California personal income taxation. Distributions
to individual shareholders who are subject to California personal income tax
that derive from interest, dividends, net short-term capital gains and other
ordinary income by a Fund that does not maintain at least 50% of the value of
its assets in obligations the interest on which is exempt from California
personal income tax will be taxed in their entirety as dividends for purposes of
California personal income taxation. Each Fund's distributions of net capital
gain for federal income tax purposes will be taxed as long-term capital gains to
individual shareholders of the Fund for purposes of California personal income
taxation. Gain or loss, if any, resulting from an exchange or redemption of
shares will be recognized in the year of the exchange or redemption. Present
California law taxes both long-term and short-term capital gains at the rates
applicable to ordinary income. Interest on indebtedness incurred or continued
by a shareholder in connection with the purchase of shares of the California
Tax-Free Income Fund generally will not be deductible for California personal
income tax purposes. California has an alternative minimum tax similar to the
federal alternative minimum tax. However, the California alternative
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minimum tax does not include interest from private activity bonds as an item of
tax preference.
Generally corporate shareholders of a Fund subject to the California franchise
tax will be required to include any gain on an exchange or redemption of shares
and all distributions of exempt-interest, capital gains and other taxable
income, if any, as income subject to such tax.
A Fund will not be subject to California franchise or corporate income tax on
interest income or net capital gain it distributes to its shareholders.
Shares of a Fund will be exempt from local property taxes in California.
The foregoing is a general, abbreviated summary of certain of the provisions of
the California Revenue and Taxation Code presently in effect as it directly
governs the taxation of shareholders of a Fund. These provisions are subject to
change by legislative or administrative action, and any such change may be
retroactive with respect to Fund transactions. Shareholders are advised to
consult with their tax advisors for more detailed information concerning
California tax matters.
RETIREMENT PLANS
Shares of any Fund (other than a Tax-Exempt Bond Fund) may be purchased as
the underlying investment for an IRA meeting the requirements of sections
408(a), 408A, or 530 of the Code, as well as for qualified retirement plans
described in Code section 401 and custodial accounts complying with Code
section 403(b)(7).
TRADITIONAL IRAS. Certain investors may obtain tax advantages by establishing an
IRA. Specifically, except as noted below, if neither you nor your spouse is an
active participant in a qualified employer or government retirement plan, or if
either you or your spouse is an active participant in such a plan and your
adjusted gross income does not exceed a certain level, each of you may deduct
cash contributions made to an IRA in an amount for each taxable year not
exceeding the lesser of 100% of your earned income or $2,000. Notwithstanding
the foregoing, a married investor who is not an active participant in such a
plan and files a joint income tax return with his or her spouse (and their
combined adjusted gross income does not exceed $150,000) is not affected by the
spouse's active participant status. In addition, if your spouse is not employed
and you file a joint return, you may establish a separate IRA for your spouse
and contribute up to a total of $4,000 to the two IRAs, provided that neither
contribution exceeds $2,000. If your employer's plan qualifies as a SIMPLE (see
below), permits voluntary contributions, and meets certain requirements, you may
make voluntary contributions to that plan that are treated as deductible IRA
contributions.
Even if you are not in one of the categories described in the preceding
paragraph, you may find it advantageous to invest in Fund shares through
nondeductible IRA contributions, up to certain limits, because all dividends and
other distributions on your shares are then not immediately taxable to you or
the IRA; they become taxable only when distributed to you. To avoid penalties,
your interest in an IRA must be distributed, or start to be distributed, to you
not later than the end of the taxable year in which you
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attain age 70 1/2. Distributions made before age 59 1/2, in addition to being
taxable, generally are subject to a penalty equal to 10% of the distribution,
except in the case of death or disability or where the distribution is rolled
over into another qualified plan or certain other situations.
ROTH IRAS. A shareholder whose adjusted gross income (or combined adjusted
gross income with his or her spouse) does not exceed certain levels may
establish and contribute up to $2,000 per tax year to a Roth IRA. In addition,
for a shareholder whose adjusted gross income does not exceed $100,000 (or is
not married filing a separate return), certain distributions from traditional
IRAs may be rolled over to a Roth IRA and any of the shareholder's traditional
IRAs may be converted to a Roth IRA; these rollover distributions and
conversions are, however, subject to federal income tax.
Contributions to a Roth IRA are not deductible; however, earnings accumulate
tax-free in a Roth IRA, and withdrawals of earnings are not subject to federal
income tax if the account has been held for at least five years (or in the case
of earnings attributable to rollover contributions from or conversions of a
traditional IRA, the rollover or conversion occurred more than five years
before the withdrawal) and the account holder has reached age 59 1/2 (or certain
other conditions apply).
EDUCATION IRAS. Although not technically for retirement savings, an Education
IRA provides a vehicle for saving for a child's higher education. An Education
IRA may be established for the benefit of any minor, and any person whose
adjusted gross income does not exceed certain levels may contribute to an
Education IRA, provided that no more than $500 may be contributed for any year
to Education IRAs for the same beneficiary. Contributions are not deductible
and may not be made after the beneficiary reaches age 18; however, earnings
accumulate tax-free, and withdrawals are not subject to tax if used to pay the
qualified higher education expenses of the beneficiary (or a member of his or
her family).
SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES - SIMPLEs. An employer with no more
than 100 employees that does not maintain another retirement plan instead may
establish a SIMPLE either as separate IRAs or as part of a Code section 401(k)
plan. A SIMPLE, which is not subject to the complicated nondiscrimination rules
that generally apply to qualified retirement plans, will allow certain employees
to make elective contributions of up to $6,000 per year and will require the
employer to make either matching contributions up to 3% of each such employee's
salary or a 2% nonelective contribution.
SEP-IRAS. Simplified employee pension plans ("SEPs" or "SEP-IRAs") provide
self-employed individuals (and any eligible employees) with benefits similar to
Keogh plans (i.e., self-employed individual retirement plans) or Code section
401(k) plans, but with fewer administrative requirements and therefore
potentially lower annual administration expenses.
PROFIT-SHARING (INCLUDING SECTION 401(k)) AND MONEY PURCHASE PENSION PLANS.
Corporations and other employers can sponsor these qualified defined
contribution plans
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for their employees. A section 401(k) plan, a type of profit-sharing plan,
additionally permits the eligible participating employees to make pre-tax
salary reduction contributions to the plan (up to certain limits).
CODE SECTION 403(b)(7) CUSTODIAL ACCOUNTS. Employees of public schools and most
other tax-exempt organizations can make pre-tax salary reduction contributions
to these accounts.
WITHHOLDING. Withholding at the rate of 20% is required for federal income tax
purposes on certain distributions (excluding, for example, certain periodic
payments) from the foregoing retirement plans (except IRAs and SEPs), unless the
recipient transfers the distribution directly to an "eligible retirement plan"
(including IRAs and other qualified plans) that accepts those distributions.
Other distributions generally are subject to regular wage withholding or
withholding at the rate of 10% (depending on the type and amount of the
distribution), unless the recipient elects not to have any withholding apply.
Investors should consult their plan administrator or tax adviser for further
information.
FINANCIAL STATEMENTS
The following financial statements of each Trust and the report thereon of Ernst
& Young LLP, independent auditors, are incorporated herein by reference to each
respective Trust's Annual Report for the year ended December 31, 1998.
Portfolio of Investments as of December 31, 1998
Statement of Assets and Liabilities as of December 31, 1998
Statement of Operations for the Year Ended December 31, 1998
Statement of Changes in Net Assets for the Years or Period
Ended December 31, 1998 and December 31, 1997
Notes to Financial Statements
Copies of each Trust's No-Load Annual Report accompany this SAI. Additional
copies may be obtained by calling SAFECO Services at 1-800-426-6730 nationwide
or by writing to the address on the first page of this SAI.
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.
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COMMERCIAL PAPER AND PREFERRED STOCK RATINGS
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations with an original maturity not exceeding one
year.
Prime-1 -- Issuers (or supporting institutions) rated Prime-1 ("P-1") have a
superior ability for repayment of senior short-term debt obligations. P-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2 -- Issuers (or supporting institutions) rated Prime-2 ("P-2") have a
strong ability for repayment of senior short-term obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
S&P
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
PREFERRED STOCK RATINGS
Generally, a preferred stock rating is an assessment of the capacity and
willingness of an issuer to pay preferred stock dividends. A preferred stock
rating differs from a bond
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rating since it is assigned to an equity issue which is different from, and
subordinate to, a debt issue.
MOODY'S
aaa -- An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
aa -- An issue which is rated "aa" is considered a high-grade preferred stock.
This rating indicates that there is a reasonable assurance the earnings and
asset protection will remain relatively well-maintained in the foreseeable
future.
a -- An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classification, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
baa -- An issue which is rated "baa" is considered to be an upper-medium grade
preferred stock, neither highly protected nor poorly secured. Earnings and
asset protection appear adequate at present but may be questionable over any
great length of time.
ba -- An issue which is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
b -- An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa -- An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future
status of payments.
ca -- An issue which is rated "ca" is speculative in a high degree and is likely
to be in arrears on dividends with little likelihood of eventual payments.
c -- This is the lowest rated class of preferred or preference stock. Issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
S&P
AAA -- This is the highest rating that may be assigned by S&P to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred
stock obligations.
117
<PAGE>
AA -- A preferred stock issue rated "AA" also qualifies as a high-quality,
fixed-income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA."
A -- An issue rated "A" is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB - An issue rated "BBB" is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the "A" category.
BB, B, CCC -- Preferred stock rated "BB," "B" and "CCC" are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest. While such issues will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CC -- The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C -- A preferred stock rated "C" is a nonpaying issue.
D -- A preferred stock rated "D" is a nonpaying issue with the issuer in default
on debt instruments.
N.R. -- This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
PLUS (+) OR MINUS (-) To provide more detailed indications of preferred stock
quality, 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.
BOND RATINGS
MOODY'S
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
118
<PAGE>
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 risks appear somewhat larger than in "Aaa"
securities.
A -- Bonds which are rated "A" possess many favorable investment attributes and
are to be considered 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:
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 of this class.
B -- Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated "Ca" represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
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.
119
<PAGE>
S&P
Investment Grade:
AAA -- Debt rated "AAA" has the highest rating assigned by S&P. 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 highest rated issues only in small degree.
A -- Debt 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 rated "BB," "B," "CCC," "CC," and "C" is regarded as
having predominantly speculative characteristics with respect to capacity to
pay interest and repay principal. "BB" indicates the least degree of speculation
and "C" the highest. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
exposures to adverse conditions.
C1 -- The rating "C1" is reserved for income bonds on which no interest is being
paid.
D -- Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
PLUS (+) OR MINUS (-): The ratings may be modified from "AA" to "CCC" by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MUNICIPAL NOTES AND OTHER SHORT-TERM OBLIGATION RATINGS
MOODY'S
Moody's rates municipal notes and other short-term obligations using Moody's
Investment Grade ("MIG").
120
<PAGE>
MIG-1 -- This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG-2-- This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
MIG-3-- This designation denotes favorable quality. All security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
S&P
Ratings for municipal notes and other short-term obligations are designated by
S&P's note rating. S&P's note rating reflects the liquidity concerns and
market-access risk unique to notes. Notes due in three years or less will
likely receive a note rating.
SP-1 -- Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
121
<PAGE>
SAFECO MUTUAL FUNDS
-------------------
SAFECO GROWTH FUND
SAFECO EQUITY FUND
SAFECO INCOME FUND
SAFECO NORTHWEST FUND
SAFECO INTERNATIONAL STOCK FUND
SAFECO BALANCED FUND
SAFECO SMALL COMPANY STOCK FUND
SAFECO U.S. VALUE FUND
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
SAFECO HIGH-YIELD BOND FUND
SAFECO MANAGED BOND FUND
SAFECO CALIFORNIA TAX-FREE INCOME FUND
SAFECO MUNICIPAL BOND FUND
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
SAFECO MONEY MARKET FUND
PROSPECTUS
-----------------
Advisor Class A
Advisor Class B
APRIL 30, 1999
AS WITH ALL MUTUAL FUND SHARES, THE SECURITIES AND EXCHANGE COMMISSION
HAS NOT APPROVED OR DISAPPROVED THE SHARES OFFERED IN THIS PROSPECTUS
OR DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANYONE
WHO TELLS YOU OTHERWISE IS COMMITTING A CRIME.
[LOGO]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SAFECO Growth Fund............................................................. 1
SAFECO Equity Fund............................................................. 5
SAFECO Income Fund............................................................. 9
SAFECO Northwest Fund.......................................................... 13
SAFECO International Stock Fund................................................ 17
SAFECO Balanced Fund........................................................... 21
SAFECO Small Company Stock Fund................................................ 25
SAFECO U.S. Value Fund......................................................... 29
SAFECO Intermediate-Term U.S. Treasury Fund.................................... 33
SAFECO High-Yield Bond Fund.................................................... 37
SAFECO Managed Bond Fund....................................................... 41
SAFECO California Tax-Free Income Fund......................................... 45
SAFECO Municipal Bond Fund..................................................... 49
SAFECO Washington State Municipal Bond Fund.................................... 53
SAFECO Money Market Fund....................................................... 57
Additional Fund Facts.......................................................... 61
Management..................................................................... 62
Portfolio Managers............................................................. 63
Financial Highlights........................................................... 65
Fund Distributions and Tax Considerations...................................... 95
YOUR INVESTMENT................................................................ 98
How We Calculate the Value of Your Shares.................................... 98
How We Value a Fund's Investments............................................ 98
Opening and Maintaining Your Account......................................... 98
Choosing A Class of Shares................................................... 100
Sales Charge Reductions and Waivers.......................................... 104
Purchasing Your Shares....................................................... 107
Selling Your Shares.......................................................... 111
Exchanging Shares from One Fund to Another................................... 113
Maintaining Your Account..................................................... 117
For More Information......................................................... 119
</TABLE>
<PAGE>
SAFECO GROWTH FUND
OBJECTIVE
The SAFECO Growth Fund seeks growth of capital and the increased income that
ordinarily follows from such growth.
PRINCIPAL INVESTMENT STRATEGIES
The Growth Fund ordinarily invests most of its assets in COMMON STOCKS selected
primarily for potential appreciation. When evaluating a stock for purchase, the
advisor considers the following factors:
<TABLE>
<S> <C>
- - The strength of the company's balance sheet COMMON STOCKS represent equity
- - The quality of the management team interests in a corporation.
- - The rate at which the company's earnings Stockholders participate in
are projected to grow in the future earnings if dividends are declared
and have a claim to the assets of a
corporation at dissolution, behind
creditors and preferred stock
owners.
</TABLE>
The advisor seeks undervalued stocks with above-average growth potential.
Although the portfolio may include companies of all sizes, companies meeting the
advisor's criteria for earnings growth are typically small in size and therefore
quite volatile.
In selecting securities to buy, the advisor focuses on stocks that are
attractively priced on a valuation basis. Most of the stocks in which the Fund
invests have earning growth potential, but may be trading at discounts relative
to their industry peers and the overall market.
The advisor may decide to sell stocks if the advisor believes that the company's
growth prospects are no longer good or if the company fails to realize its
growth potential. However, the Fund will keep holdings through periodic
downturns if the advisor believes that the long-term growth prospects for the
company are good. The Fund may sell some or all of its holdings in stocks that
the advisor considers to be overvalued. Stocks may become overvalued as a result
of overly optimistic earnings forecasts or because the market places unrealistic
multiples on projected earnings. The Fund may also sell stocks if the advisor
believes there are more attractive opportunities elsewhere or to raise cash to
meet shareholder redemptions.
PRINCIPAL RISK FACTORS
Loss of money is a risk of investing in the Growth Fund. The value of your
investment in the Fund will go up and down with the prices of the securities in
which the Fund invests. The price of common stocks rises and falls in response
to many factors, including the historical and prospective earnings of the
issuers of the stock, the value of their assets, general economic conditions,
interest rates, investor perceptions and market liquidity.
Many of the stocks in this portfolio are more volatile than the general market.
Growth stocks may be more volatile due to their higher price-to-earnings ratio.
In the event the Fund invests in stocks issued by small companies, it may be
subject to more frequent and more significant price movements. You should be
prepared
1
<PAGE>
SAFECO GROWTH FUND, CONTINUED
to see fluctuations in share price and variable investment returns. Due to the
aggressive nature of the Growth Fund, you should invest in it only if you are
prepared to withstand market fluctuations over a period of several years.
PERFORMANCE
The following bar chart and table provide some indication of the risks of
investing in the Growth Fund by showing how performance has varied from year to
year and how its performance compares over time to that of the Standard & Poor's
500 Composite Stock Price Index (S&P 500 Index), a widely recognized unmanaged
index of stock performance. As with all mutual funds, past performance is not a
prediction of future results.
Effective September 30, 1996, all of the then-existing shares of the Fund were
redesignated No-Load Class shares and the Fund commenced offering Class A and
Class B shares. The performance information in the bar chart that follows
reflects: (1) the actual performance of Class A shares of the Fund for the
period since September 30, 1996; and (2) the performance of the No-Load Class of
shares of the Fund prior to September 30, 1996. The performance prior to
September 30, 1996 does not reflect Rule 12b-1 fees. In addition, the
performance reflected in the bar chart for the entire period shown does not
reflect sales charges. If sales charges and Rule 12b-1 fees were reflected, the
returns would be lower than those shown.
Total return is a measure of investment performance over a period of time. It
includes dividends and capital gain distributions, as well as share price gain
or loss.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
12/31/89 19.19%
12/31/90 -14.96%
12/31/91 62.65%
12/31/92 -3.07%
12/31/93 22.19%
12/31/94 -1.62%
12/31/95 26.10%
12/31/96 22.90%
12/31/97 49.61%
12/31/98 4.47%
</TABLE>
During the 10-year period shown in the bar chart, the highest quarterly return
was 31.27% for the quarter ended March 31, 1991, and the lowest return was
- -29.15% for the quarter ended September 30, 1990.
The performance information in the table that follows reflects: (1) the actual
performance of Class A and Class B shares of the Fund for the period since
September 30, 1996, and (2) the performance of the No-Load Class of shares of
the Fund prior to September 30, 1996. Performance shown for the period prior to
September 30, 1996 does not reflect Rule 12b-1 fees. If Rule 12b-1 fees were
reflected, the returns would be lower than those shown.
2
<PAGE>
SAFECO GROWTH FUND, CONTINUED
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
The following table shows how the Growth Fund's Class A and Class B share
performance compared to the S&P 500 Index:
<TABLE>
<CAPTION>
1 year 5 years 10 years
<S> <C> <C> <C>
SAFECO Growth Fund*
Class A -0.23% 17.88% 16.08%
Class B -1.62% 18.33% 16.41%
S&P 500 Index** 28.58% 24.03% 19.17%
</TABLE>
* As required by Securities and Exchange Commission regulations, the Fund's
returns reflect the imposition of the maximum sales charge for Class A
shares and the deduction of the maximum deferred sales charge for Class B
shares. Without these charges, the Fund's Class A returns would have been
4.47%, 18.97% and 16.62% for 1, 5 and 10 years, respectively; and the Fund's
Class B returns would have been 3.38%, 18.53% and 16.41%, for 1, 5 and 10
years, respectively.
** The S&P 500 Index is an unmanaged index containing common stocks of 500
industrial, transportation, utility and financial companies, regarded as
generally representative of the U.S. stock market. The index reflects the
reinvestment of dividends, if any, and capital gain distributions, if any,
but does not reflect fees, brokerage commissions, or other expenses of
investing. This index is used for comparison purposes only, and the Fund's
holdings do not necessarily mirror the index. Performance is based on
historical earnings and does not indicate the Fund's future results.
Returns and principal value vary with market conditions. When sold, shares may
be worth more or less than their original cost.
FEES AND EXPENSES
The following tables describe the fees and expenses that you may pay if you buy
and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.75%* None
Maximum deferred sales charge (load) (as a percentage of the
lesser of net asset value at redemption or the original
purchase amount) None 5.00%**
Maximum sales charge (load) imposed on reinvested dividends
(as a percentage of offering price) None None
Redemption fee (as a percentage of amount redeemed) None None
Exchange fee 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% deferred sales charge will apply to
redemptions made in the first twelve months except with respect to
participant-directed redemptions from qualified plans.
** The contingent deferred sales charge reduces to zero after six years from
purchase.
3
<PAGE>
SAFECO GROWTH FUND, CONTINUED
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Management Fees 0.64% 0.64%
12b-1 Fees 0.25% 1.00%
Other Expenses 0.27% 0.43%
Total Annual Fund Operating Expenses 1.16% 2.07%
Fee Waiver** 0.00% 0.03%
Net Expenses 1.16% 2.04%
</TABLE>
- ----------------
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets. Expenses may vary during other time periods.
** SAFECO Asset Management Company (SAM) has contractually agreed, from May 1,
1999 through April 30, 2009, to pay the Fund's aggregate operating expenses
which exceed, in any given month, the rate of .40% per annum of the Fund's
average daily net assets ("Expense Limitation"). This arrangement does not
include the Fund's advisory fee, Rule 12b-1 fee, brokerage commissions,
taxes, interest or extraordinary expenses. To the extent that the aggregate
amount SAM paid or assumed in any prior months in a given year (May 1, 1999
through April 30, 2009) exceed the Expense Limitation, SAM may offset such
amounts against the Expense Limitation for the current month.
MANAGEMENT FEES are paid to SAFECO Asset Management Company (SAM) for
investment advisory services including the provision of research,
supervision and assistance in the management of the Fund.
OTHER EXPENSES include custody, accounting and administrative
expenses; transfer agency and related expenses; shareholder servicing
expenses; expenses related to preparing, printing and delivering
prospectuses and shareholder reports; the expenses of holding
shareholder meetings; legal and audit fees, trustees' compensation;
federal and state registration fees; and extraordinary expenses.
EXAMPLE
This example is intended to help you compare the cost of investing in the Growth
Fund with the cost of investing in other mutual funds. It assumes that you
invest $10,000 in the Growth Fund for the time periods indicated. The example
also assumes that your investment has a 5% return each year and that the Fund's
net operating expenses remain the same. Although your actual costs may be higher
or lower, costs based on these assumptions would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years*
----- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Class A $ 686 $ 922 $ 1,177 $ 1,903
Class B
Assuming redemption at end of period $ 707 $ 940 $ 1,298 $ 1,990
Assuming no redemption $ 207 $ 640 $ 1,098 $ 1,990
</TABLE>
- ----------------
* Expenses for Class B shares reflect their conversion to Class A shares after
six years.
4
<PAGE>
SAFECO EQUITY FUND
OBJECTIVE
The SAFECO Equity Fund seeks long-term growth of capital and reasonable current
income.
PRINCIPAL INVESTMENT STRATEGIES
The Equity Fund will invest, during normal market conditions, at least 65% of
its total assets in equity securities (which include COMMON STOCKS and PREFERRED
STOCKS). The Equity Fund typically invests in common stocks of large,
established companies that are proven performers. When selecting stocks for the
Equity Fund, the advisor looks for companies having:
<TABLE>
<S> <C>
- - Consistent earnings growth COMMON STOCKS represent equity
- - Attractive dividend income interests in a corporation.
- - Good value relative to the overall market Stockholders participate in
The Fund buys stocks for which the advisor earnings if dividends are declared
believes the three- to five-year earnings per and have a claim to the assets of a
share outlook is good. The advisor may sell corporation at dissolution, behind
these stocks if prices become expensive creditors and preferred stock
relative to the three-year outlook for owners.
earnings or if earnings prospects deteriorate. PREFERRED STOCKS are equity
The Fund also buys stocks for which there is a securities whose owners have a
specific shorter-term earnings catalyst, such claim on a company's earnings and
as a cost cutting program or company assets before holders of common
restructure. The advisor may decide to sell stock, but after creditors.
these stocks if the earnings catalyst is not Preferred stocks generally pay more
successful or if the stock price reaches a income and are less volatile than
specific target. The advisor may also sell a common stocks.
portion of the Fund's holdings in a company if
the market value of that security holding
becomes too large and exceeds the desired
portfolio weighting or to raise cash to meet
shareholder redemptions.
</TABLE>
PRINCIPAL RISK FACTORS
Loss of money is a risk of investing in the Equity Fund. The value of your
investment in the Fund will go up and down with the prices of the securities in
which the Fund invests. The price of common stocks rises and falls in response
to many factors, including the historical and prospective earnings of the
issuers of the stock, the value of their assets, general economic conditions,
interest rates, investor perceptions and market liquidity. The Equity Fund may
be suitable for you if you seek an attractive total return on your investment
but are uncomfortable with a more aggressive growth fund.
5
<PAGE>
SAFECO EQUITY FUND, CONTINUED
PERFORMANCE
The following bar chart and table provide some indication of the risks of
investing in the Equity Fund by showing how performance has varied from year to
year and how its performance compares over time to that of the S&P 500 Index, a
widely recognized unmanaged index of stock performance. As with all mutual
funds, past performance is not a prediction of future results.
Effective September 30, 1996, all of the then-existing shares of the Fund were
redesignated No-Load Class shares and the Fund commenced offering Class A and
Class B shares. The performance information in the bar chart below reflects: (1)
the actual performance of Class A shares of the Fund for the period since
September 30, 1996; and (2) the performance of the No-Load Class of shares of
the Fund prior to September 30, 1996. The performance prior to September 30,
1996 does not reflect Rule 12b-1 fees. In addition, the performance reflected in
the bar chart for the entire period shown does not reflect sales charges. If
sales charges and Rule 12b-1 fees were reflected, the returns would be lower
than those shown.
Total return is a measure of investment performance over a period of time. It
includes dividends and capital gain distributions, as well as share price gain
or loss.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
12/31/89 35.79%
12/31/90 -8.57%
12/31/91 27.91%
12/31/92 9.26%
12/31/93 30.91%
12/31/94 9.93%
12/31/95 25.26%
12/31/96 25.00%
12/31/97 23.56%
12/31/98 24.77%
</TABLE>
During the 10-year period shown in the bar chart, the highest quarterly return
was 18.72% for the quarter ended December 31, 1998, and the lowest return was
- -16.44% for the quarter ended September 30, 1990.
The performance information in the table that follows reflects: (1) the actual
performance of Class A and Class B shares of the Fund for the period since
September 30, 1996, and (2) the performance of the No-Load Class of shares of
the Fund prior to September 30, 1996. Performance shown for the period prior to
September 30, 1996 does not reflect Rule 12b-1 fees. If Rule 12b-1 fees were
reflected, the returns would be lower than those shown.
6
<PAGE>
SAFECO EQUITY FUND, CONTINUED
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
The following table shows how the Equity Fund's Class A and Class B share
performance compares to the S&P 500 Index:
<TABLE>
<CAPTION>
1 year 5 years 10 years
<S> <C> <C> <C>
SAFECO Equity Fund*
Class A 19.16% 20.44% 19.13%
Class B 18.16% 20.87% 19.43%
S&P 500 Index** 28.58% 24.03% 19.17%
</TABLE>
* As required by Securities and Exchange Commission regulations, the Fund's
returns reflect the imposition of the maximum sales charge for Class A
shares and the deduction of the maximum deferred sales charge for Class B
shares. Without these charges, the Fund's Class A returns would have been
24.77%, 21.55% and 19.68%, for 1, 5 and 10 years, respectively; and the
Fund's Class B returns would have been 23.16%, 21.05% and 19.43%, for 1, 5
and 10 years, respectively.
** The S&P 500 Index is an unmanaged index containing common stocks of 500
industrial, transportation, utility and financial companies, regarded as
generally representative of the U.S. stock market. The index reflects the
reinvestment of dividends, if any, and capital gain distributions, if any,
but does not reflect fees, brokerage commissions, or other expenses of
investing. This index is used for comparison purposes only, and the Fund's
holdings do not necessarily mirror the index. Performance is based on
historical earnings and does not indicate the Fund's future results.
Returns and principal value vary with market conditions. When sold, shares may
be worth more or less than their original cost.
FEES AND EXPENSES
The following tables describe the fees and expenses that you may pay if you buy
and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.75%* None
Maximum deferred sales charge (load) (as a percentage of the
lesser of net asset value at redemption or the original
purchase amount) None 5.00%**
Maximum sales charge (load) imposed on reinvested dividends
(as a percentage of offering price) None None
Redemption fee (as a percentage of amount redeemed) None None
Exchange fee 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% deferred sales charge will apply to
redemptions made in the first twelve months except with respect to
participant-directed redemptions from qualified plans.
** The contingent deferred sales charge reduces to zero after six years from
purchase.
7
<PAGE>
SAFECO EQUITY FUND, CONTINUED
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Management Fees 0.61% 0.61%
12b-1 Fees 0.25% 1.00%
Other Expenses 0.17% 0.48%
Total Annual Fund Operating Expenses 1.03% 2.09%
Fee Waiver** 0.00% 0.08%
Net Expenses 1.03% 2.01%
</TABLE>
- ----------------
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets. Expenses may vary during other time periods.
** SAFECO Asset Management Company (SAM) has contractually agreed, from May 1,
1999 through April 30, 2009, to pay the Fund's aggregate operating expenses
which exceed, in any given month, the rate of .40% per annum of the Fund's
average daily net assets ("Expense Limitation"). This arrangement does not
include the Fund's advisory fee, Rule 12b-1 fee, brokerage commissions,
taxes, interest or extraordinary expenses. To the extent that the aggregate
amount SAM paid or assumed in any prior months in a given year (May 1, 1999
through April 30, 2009) exceed the Expense Limitation, SAM may offset such
amounts against the Expense Limitation for the current month.
MANAGEMENT FEES are paid to SAFECO Asset Management Company (SAM) for
investment advisory services including the provision of research,
supervision and assistance in the management of the Fund.
OTHER EXPENSES include custody, accounting and administrative
expenses; transfer agency and related expenses; shareholder servicing
expenses; expenses related to preparing, printing and delivering
prospectuses and shareholder reports; the expenses of holding
shareholder meetings; legal and audit fees, trustees' compensation;
federal and state registration fees; and extraordinary expenses.
EXAMPLE
This example is intended to help you compare the cost of investing in the Equity
Fund with the cost of investing in other mutual funds. It assumes that you
invest $10,000 in the Equity Fund for the time periods indicated. The example
also assumes that your investment has a 5% return each year and that the Fund's
net operating expenses remain the same. Although your actual costs may be higher
or lower, costs based on these assumptions would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years*
----- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Class A $ 674 $ 884 $ 1,111 $ 1,762
Class B
Assuming redemption at end of period $ 704 $ 930 $ 1,283 $ 1,958
Assuming no redemption $ 204 $ 630 $ 1,083 $ 1,958
</TABLE>
- ----------------
* Expenses for Class B shares reflect their conversion to Class A shares after
six years.
8
<PAGE>
SAFECO INCOME FUND
OBJECTIVE
The SAFECO Income Fund seeks high current income and, when consistent with its
objective, long-term growth of capital.
PRINCIPAL INVESTMENT STRATEGIES
The Income Fund will invest primarily in COMMON STOCKS and also in CONVERTIBLE
CORPORATE BONDS and PREFERRED STOCKS (including corporate bonds and preferred
stocks that convert to common stock either automatically after a specified
period of time or at the option of the issuer).
<TABLE>
<S> <C>
The advisor seeks companies having: COMMON STOCKS represent equity
- - Strong earnings interests in a corporation.
- - A history of dividend growth Stockholders participate in
- - Attractive share prices earnings if dividends are declared
- - Excellent growth potential and have a claim to the assets of a
Less than 35% of the Income Fund's net assets corporation at dissolution, behind
will be invested in convertible corporate creditors and preferred stock
bonds that are rated below investment grade or owners.
comparable unrated bonds (commonly referred to CONVERTIBLE CORPORATE BONDS are
as "junk" or high-yield bonds). corporate debt securities which can
In selecting securities to buy, the advisor be converted or exchanged for
analyzes relative valuation, that is, a common stock. The value of
company's price-to-earnings ratio relative to convertible corporate bonds will
its history, industry, competitors, or normally rise as the value of the
similarly growing companies. underlying stock rises, and falls
as the value of the underlying
stock falls.
PREFERRED STOCKS are equity
securities whose owners have a
claim on a company's earnings and
assets before holders of common
stock, but after creditors.
Preferred stocks generally pay more
income and are less volatile than
common stocks.
</TABLE>
The advisor may decide to sell a security once it meets its valuation target, if
the earnings prospects or other fundamentals of the company deteriorate, or to
raise cash to meet shareholder redemptions.
PRINCIPAL RISK FACTORS
Loss of money is a risk of investing in the Income Fund. The value of your
investment in the Fund will go up and down with the prices of the securities in
which the Fund invests. The price of common stocks rises and falls in response
to many factors, including the historical and prospective earnings of the
issuers of the stock, the value of their assets, general economic conditions,
interest rates, investor perceptions and market liquidity.
There are special risks associated with bonds, including convertible corporate
bonds, that are rated below investment grade. These risks include greater
volatility, sensitivity to interest rate changes, reduced liquidity and a higher
risk of default. The Income Fund may be suitable for you if you want a current
income component to your stock investments.
9
<PAGE>
SAFECO INCOME FUND, CONTINUED
PERFORMANCE
The following bar chart and table provide some indication of the risks of
investing in the Income Fund by showing how performance has varied from year to
year and how its performance compares over time to that of the S&P 500 Index, a
widely recognized unmanaged index of stock performance. As with all mutual
funds, past performance is not a prediction of future results.
Effective September 30, 1996, all of the then-existing shares of the Fund were
redesignated No-Load Class shares and the Fund commenced offering Class A and
Class B shares. The performance information in the bar chart below reflects: (1)
the actual performance of Class A shares of the Fund for the period since
September 30, 1996; and (2) the performance of the No-Load Class of shares of
the Fund prior to September 30, 1996. The performance prior to September 30,
1996 does not reflect Rule 12b-1 fees. In addition, the performance reflected in
the bar chart for the entire period shown does not reflect sales charges. If
sales charges and Rule 12b-1 fees were reflected, the returns would be lower
than those shown.
Total return is a measure of investment performance over a period of time. It
includes dividends and capital gain distributions, as well as share price gain
or loss.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
12/31/89 19.22%
12/31/90 -10.75%
12/31/91 23.25%
12/31/92 11.47%
12/31/93 12.55%
12/31/94 -1.09%
12/31/95 30.36%
12/31/96 23.95%
12/31/97 26.15%
12/31/98 5.38%
</TABLE>
During the 10-year period shown in the bar chart, the highest quarterly return
was 14.35% for the quarter ended December 31, 1998, and the lowest return was
- -17.56% for the quarter ended September 30, 1998.
The performance information in the table that follows reflects: (1) the actual
performance of Class A and Class B shares of the Fund for the period since
September 30, 1996, and (2) the performance of the No-Load Class of shares of
the Fund prior to September 30, 1996. Performance shown for the period prior to
September 30, 1996 does not reflect 12b-1 fees. If Rule 12b-1 fees were
reflected, the returns would be lower than those shown.
10
<PAGE>
SAFECO INCOME FUND, CONTINUED
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
The following table shows how the Income Fund's Class A and Class B share
performance compares to the S&P 500 Index:
<TABLE>
<CAPTION>
1 year 5 years 10 years
<S> <C> <C> <C>
SAFECO Income Fund*
Class A 0.64% 15.20% 12.81%
Class B 0.03% 15.77% 13.20%
S&P 500 Index** 28.58% 24.03% 19.17%
</TABLE>
* As required by Securities and Exchange Commission regulations, the Fund's
returns reflect the imposition of the maximum sales charge for Class A
shares and the deduction of the maximum deferred sales charge for Class B
shares. Without these charges, the Fund's Class A returns would have been
5.38%, 16.27% and 13.33%, for 1, 5 and 10 years, respectively; and the
Fund's Class B returns would have been 5.03%, 15.99% and 13.20%, for 1, 5
and 10 years, respectively.
** The S&P 500 Index is an unmanaged index containing common stocks of 500
industrial, transportation, utility and financial companies, regarded as
generally representative of the U.S. stock market. The index reflects the
reinvestment of dividends, if any, and capital gain distributions, if any,
but does not reflect fees, brokerage commissions, or other expenses of
investing. This index is used for comparison purposes only, and the Fund's
holdings do not necessarily mirror the index. Performance is based on
historical earnings and does not indicate the Fund's future results.
Returns and principal value vary with market conditions. When sold, shares may
be worth more or less than their original cost.
FEES AND EXPENSES
The following tables describe the fees and expenses that you may pay if you buy
and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.75%* None
Maximum deferred sales charge (load) (as a percentage of the
lesser of net asset value at redemption or the original
purchase amount) None 5.00%**
Maximum sales charge (load) imposed on reinvested dividends
(as a percentage of offering price) None None
Redemption fee (as a percentage of amount redeemed) None None
Exchange fee 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% deferred sales charge will apply to
redemptions made in the first twelve months except with respect to
participant-directed redemptions from qualified plans.
** The contingent deferred sales charge reduces to zero after six years from
purchase.
11
<PAGE>
SAFECO INCOME FUND, CONTINUED
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Management Fees 0.68% 0.68%
12b-1 Fees 0.25% 1.00%
Other Expenses 0.52% 0.51%
Total Annual Fund Operating Expenses 1.45% 2.19%
Fee Waiver** 0.12% 0.11%
Net Expenses 1.33% 2.08%
</TABLE>
- ----------------
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets. Expenses may vary during other time periods.
** SAFECO Asset Management Company (SAM) has contractually agreed, from May 1,
1999 through April 30, 2009, to pay the Fund's aggregate operating expenses
which exceed, in any given month, the rate of .40% per annum of the Fund's
average daily net assets ("Expense Limitation"). This arrangement does not
include the Fund's advisory fee, Rule 12b-1 fee, brokerage commissions,
taxes, interest or extraordinary expenses. To the extent that the aggregate
amount SAM paid or assumed in any prior months in a given year (May 1, 1999
through April 30, 2009) exceed the Expense Limitation, SAM may offset such
amounts against the Expense Limitation for the current month.
MANAGEMENT FEES are paid to SAFECO Asset Management Company (SAM) for
investment advisory services including the provision of research,
supervision and assistance in the management of the Fund.
OTHER EXPENSES include custody, accounting and administrative
expenses; transfer agency and related expenses; shareholder servicing
expenses; expenses related to preparing, printing and delivering
prospectuses and shareholder reports; the expenses of holding
shareholder meetings; legal and audit fees, trustees' compensation;
federal and state registration fees; and extraordinary expenses.
EXAMPLE
This example is intended to help you compare the cost of investing in the Income
Fund with the cost of investing in other mutual funds. It assumes that you
invest $10,000 in the Income Fund for the time periods indicated. The example
also assumes that your investment has a 5% return each year and that the Fund's
net operating expenses remain the same. Although your actual costs may be higher
or lower, costs based on these assumptions would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years*
----- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Class A $ 703 $ 972 $ 1,262 $ 2,084
Class B
Assuming redemption at end of period $ 711 $ 952 $ 1,319 $ 2,033
Assuming no redemption $ 211 $ 652 $ 1,119 $ 2,033
</TABLE>
- ----------------
* Expenses for Class B shares reflect their conversion to Class A shares after
six years.
12
<PAGE>
SAFECO NORTHWEST FUND
OBJECTIVE
The SAFECO Northwest Fund seeks long-term growth of capital through investing
primarily in Northwest companies.
PRINCIPAL INVESTMENT STRATEGIES
The Northwest Fund invests at least 65% of its total assets in shares of COMMON
STOCKS and PREFERRED STOCKS of companies located in the Northwest, selected
primarily for potential long-term appreciation.
When selecting stocks, the advisor looks for companies with:
<TABLE>
<S> <C>
- - Principal executive offices in Alaska, COMMON STOCKS represent equity
Idaho, Montana, Oregon or Washington interests in a corporation.
- - Faster earnings growth than their Stockholders participate in
competitors in the U.S. earnings if dividends are declared
- - A share price that represents good value and have a claim to the assets of a
In deciding whether to buy a company's stock, corporation at dissolution, behind
the advisor focuses on stocks that are creditors and preferred stock
attractively priced on a valuation basis -- owners.
preferring companies that have low PREFERRED STOCKS are equity
price-to-earnings valuations when compared to securities whose owners have a
other companies in the same industry. The Fund claim on a company's earnings and
may sell stocks that have reached a specific assets before holders of common
price target or that the advisor considers to stock, but after creditors.
be overvalued compared with other stocks in Preferred stocks generally pay more
the industry. Stocks may become overvalued income and are less volatile than
when earnings forecasts are too optimistic or common stocks.
the market places unrealistic multiples on
projected earnings. The advisor may also sell
a company's stock when the advisor believes
that the growth prospects for the company are
no longer good, if the company fails to
realize its growth potential, if the advisor
believes there are more attractive
opportunities elsewhere, or to raise cash to
meet shareholder redemptions.
</TABLE>
PRINCIPAL RISK FACTORS
Loss of money is a risk of investing in the Northwest Fund. The value of your
investment in the Fund will go up and down with the prices of the securities in
which the Fund invests. The price of common stocks rises and falls in response
to many factors, including the historical and prospective earnings of the
issuers of the stock, the value of their assets, general economic conditions,
interest rates, investor perceptions and market liquidity.
The Northwest Fund carries special risks due to its geographic concentration.
These include a smaller universe of securities to choose from and fluctuations
in the regional economy. Many of the companies whose securities are purchased
for the Northwest Fund are small in size and may therefore be more volatile. The
Northwest Fund may be suitable for you if you seek long-term growth and are
prepared to withstand the risks associated with geographic concentration.
13
<PAGE>
SAFECO NORTHWEST FUND, CONTINUED
PERFORMANCE
The following bar chart and table provide some indication of the risks of
investing in the Northwest Fund by showing how performance has varied from year
to year and how its performance compares over time to that of the S&P 500 Index,
a widely recognized unmanaged index of stock performance. As with all mutual
funds, past performance is not a prediction of future results.
Effective September 30, 1996, all of the then-existing shares of the Fund were
redesignated No-Load Class shares and the Fund commenced offering Class A and
Class B shares. The performance information in the bar chart below reflects: (1)
the actual performance of Class A shares of the Fund for the period since
September 30, 1996; and (2) the performance of the No-Load Class of shares of
the Fund prior to September 30, 1996. The performance prior to September 30,
1996 does not reflect Rule 12b-1 fees. In addition, the performance reflected in
the bar chart for the entire period shown does not reflect sales charges. If
sales charges and Rule 12b-1 fees were reflected, the returns would be lower
than those shown.
Total return is a measure of investment performance over a period of time. It
includes dividends and capital gain distributions, as well as share price gain
or loss.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
12/31/89
12/31/90
12/31/91
12/31/92 14.08%
12/31/93 1.03%
12/31/94 -1.55%
12/31/95 20.17%
12/31/96 14.95%
12/31/97 30.79%
12/31/98 2.87%
</TABLE>
Since the Fund's inception in 1991, the highest quarterly return was 20.88% for
the quarter ended December 31, 1998, and the lowest return was -20.56% for the
quarter ended September 30, 1998.
The performance information in the table that follows reflects: (1) the actual
performance of Class A and Class B shares of the Fund for the period since
September 30, 1996, and (2) the performance of the No-Load Class of shares of
the Fund prior to September 30, 1996. Performance shown for the period prior to
September 30, 1996 does not reflect Rule 12b-1 fees. If Rule 12b-1 fees were
reflected, the returns would be lower than those shown.
14
<PAGE>
SAFECO NORTHWEST FUND, CONTINUED
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
The following table shows how the Northwest Fund's Class A and Class B share
performance compares to the S&P 500 Index:
<TABLE>
<CAPTION>
February 7, 1991
(inception) to
1 year 5 years December 31, 1998
<S> <C> <C> <C>
SAFECO Northwest Fund*
Class A -1.76% 11.81% 11.41%
Class B -2.63% 12.29% 11.87%
S&P 500 Index** 28.58% 24.03% 19.55%
</TABLE>
* As required by Securities and Exchange Commission regulations, the Fund's
returns reflect the imposition of the maximum sales charge for Class A
shares and the deduction of the maximum deferred sales charge for Class B
shares. Without these charges, the Fund's Class A returns would have been
2.87%, 12.84% and 12.06%, for 1 and 5 years and since inception,
respectively; and the Fund's Class B returns would have been 2.37%, 12.54%
and 11.87%, for 1 and 5 years and since inception, respectively.
** The S&P 500 Index is an unmanaged index containing common stocks of 500
industrial, transportation, utility and financial companies, regarded as
generally representative of the U.S. stock market. The index reflects the
reinvestment of dividends, if any, and capital gain distributions, if any,
but does not reflect fees, brokerage commissions, or other expenses of
investing. This index is used for comparison purposes only, and the Fund's
holdings do not necessarily mirror the index. Performance is based on
historical earnings and does not indicate the Fund's future results.
Returns and principal value vary with market conditions. When sold, shares may
be worth more or less than their original cost.
FEES AND EXPENSES
The following tables describe the fees and expenses that you may pay if you buy
and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.75%* None
Maximum deferred sales charge (load) (as a percentage of the
lesser of net asset value at redemption or the original
purchase amount) None 5.00%**
Maximum sales charge (load) imposed on reinvested dividends
(as a percentage of offering price) None None
Redemption fee (as a percentage of amount redeemed) None None
Exchange fee 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% deferred sales charge will apply to
redemptions made in the first twelve months except with respect to
participant-directed redemptions from qualified plans.
** The contingent deferred sales charge reduces to zero after six years from
purchase.
15
<PAGE>
SAFECO NORTHWEST FUND, CONTINUED
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Management Fees 0.70% 0.70%
12b-1 Fees 0.25% 1.00%
Other Expenses 0.80% 0.65%
Total Annual Fund Operating Expenses 1.75% 2.35%
Fee Waiver** 0.40% 0.25%
Net Expenses 1.35% 2.10%
</TABLE>
- ----------------
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets. Expenses may vary during other time periods.
** SAFECO Asset Management Company (SAM) has contractually agreed, from May 1,
1999 through April 30, 2009, to pay the Fund's aggregate operating expenses
which exceed, in any given month, the rate of .40% per annum of the Fund's
average daily net assets ("Expense Limitation"). This arrangement does not
include the Fund's advisory fee, Rule 12b-1 fee, brokerage commissions,
taxes, interest or extraordinary expenses. To the extent that the aggregate
amount SAM paid or assumed in any prior months in a given year (May 1, 1999
through April 30, 2009) exceed the Expense Limitation, SAM may offset such
amounts against the Expense Limitation for the current month.
MANAGEMENT FEES are paid to SAFECO Asset Management Company (SAM) for
investment advisory services including the provision of research,
supervision and assistance in the management of the Fund.
OTHER EXPENSES include custody, accounting and administrative
expenses; transfer agency and related expenses; shareholder servicing
expenses; expenses related to preparing, printing and delivering
prospectuses and shareholder reports; the expenses of holding
shareholder meetings; legal and audit fees, trustees' compensation;
federal and state registration fees; and extraordinary expenses.
EXAMPLE
This example is intended to help you compare the cost of investing in the
Northwest Fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 in the Northwest Fund for the time periods indicated. The
example also assumes that your investment has a 5% return each year and that the
Fund's net operating expenses remain the same. Although your actual costs may be
higher or lower, costs based on these assumptions would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years*
----- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Class A $ 705 $ 978 $ 1,272 $ 2,105
Class B
Assuming redemption at end of period $ 713 $ 958 $ 1,329 $ 2,054
Assuming no redemption $ 213 $ 658 $ 1,129 $ 2,054
</TABLE>
- ----------------
* Expenses for Class B shares reflect their conversion to Class A shares after
six years.
16
<PAGE>
SAFECO INTERNATIONAL STOCK FUND
OBJECTIVE
The SAFECO International Stock Fund seeks maximum long-term total return
(capital appreciation and income) by investing primarily in common stocks of
established non-U.S. companies.
PRINCIPAL INVESTMENT STRATEGIES
The International Stock Fund, under normal market conditions, invests, at least
65% of its total assets in the COMMON STOCK of companies domiciled in at least
five countries, not including the United States. When selecting stocks, Bank of
Ireland Asset Management (U.S.) Limited, the sub-advisor that manages the
International Stock Fund's, focuses on stocks that:
<TABLE>
<S> <C>
- - Appear undervalued COMMON STOCKS represent equity
- - Are liquid and readily traded on interests in a corporation.
established foreign exchanges Stockholders participate in
In an attempt to reduce the risks associated earnings if dividends are declared
with fluctuations in foreign currency values, and have a claim to the assets of a
security prices and interest rates, the corporation at dissolution, behind
International Stock Fund may invest in FUTURES creditors and preferred stock
CONTRACTS and OPTIONS for hedging purposes. owners.
In deciding whether to buy a company's stock, FUTURES CONTRACTS are agreements to
the sub-advisor focuses on stocks that are buy or sell a specific amount of a
attractively priced on a valuation basis -- commodity or financial instrument
preferring companies that have low price- at a particular price on a
to-earnings valuations when compared to their stipulated future date.
historic valuations, to other companies in the OPTIONS are rights to buy or sell
same industry, or to companies with similar property that are granted in
growth records. The sub-advisor may sell a exchange for an agreed-upon sum. If
stock when it reaches a specific price target, the rights are not exercised after
or when the sub-advisor believes the company's a specified period, the options
earnings prospects or other fundamental value expire and the option buyer
indicators have deteriorated, or to raise cash forefeits the money.
to meet shareholder redemptions.
</TABLE>
PRINCIPAL RISK FACTORS
Loss of money is a risk of investing in the International Stock Fund. The value
of your investment in the Fund will go up and down with the prices of the
securities in which the Fund invests. The price of common stocks rises and falls
in response to many factors, including the historical and prospective earnings
of the issuers of the stock, the value of their assets, general economic
conditions, interest rates, investor perceptions and market liquidity.
Overseas investing carries potential risks not associated with domestic
investments. These risks include, but are not limited to: (1) currency exchange
rate fluctuations, (2) political and financial instability, (3) less liquidity
and greater volatility of foreign investments, (4) lack of uniform accounting,
auditing and financial reporting standards, (5) less government regulation and
supervision of foreign stock exchanges, brokers and listed companies, (6)
increased price volatility, (7) delays in transaction settlement in some foreign
markets, and (8) adverse impact of the euro conversion on the business or
financial condition of companies in which the Fund is invested.
17
<PAGE>
SAFECO INTERNATIONAL STOCK FUND, CONTINUED
Investment in futures contracts and options is subject to the risk that the
sub-advisor may take a position opposite to the direction in which the market
actually moves. Also, the price of the future or option contract may not move in
the same direction as the price of the underlying security. In addition, there
may not be a liquid secondary market in which to resell the futures contracts or
options. The International Stock Fund may be suitable for you if you want
exposure to international equity markets.
PERFORMANCE
The following bar chart and table provide some indication of the risks of
investing in the International Stock Fund by showing how performance has varied
from year to year and how its performance compares over time to that of the
Morgan Stanley Capital International Europe, Australasia, Far East (MSCI EAFE)
Index, a recognized unmanaged index of international stock performance. As with
all mutual funds, past performance is not a prediction of future results.
Effective September 30, 1996, all of the then-existing shares of the Fund were
redesignated No-Load Class shares and the Fund commenced offering Class A
shares. The performance information in the bar chart below reflects the actual
performance of Class A shares of the Fund for the period since January 1, 1997.
The performance reflected in the bar chart does not reflect sales charges. If
sales charges were reflected, the returns would be lower than those shown.
Total return is a measure of investment performance over a period of time. It
includes dividends and capital gain distributions, as well as share price gain
or loss.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
12/31/89
12/31/90
12/31/91
12/31/92
12/31/93
12/31/94
12/31/95
12/31/96
12/31/97 4.30%
12/31/98 13.68%
</TABLE>
Since the Fund's inception in 1996, the highest quarterly return was 18.93 for
the quarter ended December 31, 1998, and the lowest return was -17.43 for the
quarter ended September 30, 1998.
The performance information in the table that follows reflects (1) the actual
performance of Class A and Class B shares of the Fund for the period since
September 30, 1996, and (2) the performance of the No-Load Class of shares of
the Fund prior to September 30, 1996. Performance shown for the period prior to
September 30, 1996 does not reflect Rule 12b-1 fees. If Rule 12b-1 fees were
reflected, the returns would be lower than those shown.
18
<PAGE>
SAFECO INTERNATIONAL STOCK FUND, CONTINUED
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
The following table shows how the International Stock Fund's Class A and Class B
share performance compares to the MSCI EAFE Index:
<TABLE>
<CAPTION>
January 31, 1996
(inception) to
1 year December 31, 1998
<S> <C> <C>
International Stock Fund*
Class A 8.56% 9.20%
Class B 7.66% 9.36%
MSCI EAFE Index** 18.23% 7.46%
</TABLE>
* As required by Securities and Exchange Commission regulations, the Fund's
returns reflect the imposition of the maximum sales charge for Class A
shares and the deduction of the maximum deferred sales charge for Class B
shares. Without these charges, the Fund's Class A returns would have been
13.68% and 10.94%, for 1 year and since inception, respectively; and the
Fund's Class B returns would have been 12.66% and 10.22%, for 1 year and
since inception, respectively.
** The MSCI EAFE Index is an unmanaged index comprised of 21 developed equity
markets outside of North America. The index reflects the reinvestment of
dividends, if any, and capital gain distributions, if any, but does not
reflect fees, brokerage commissions, or other expenses of investing. This
index is used for comparison purposes only, and the Fund's holdings do not
necessarily mirror the index. Performance is based on historical earnings
and does not indicate the Fund's future results.
Return and principal value vary with market conditions. When sold, shares may be
worth more or less than their original cost.
FEES AND EXPENSES
The following tables describe the fees and expenses that you may pay if you buy
and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.75%* None
Maximum deferred sales charge (load) (as a percentage of the
lesser of net asset value at redemption or the original
purchase amount) None 5.00%**
Maximum sales charge (load) imposed on reinvested dividends
(as a percentage of offering price) None None
Redemption fee (as a percentage of amount redeemed) None None
Exchange fee 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% deferred sales charge will apply to
redemptions made in the first twelve months except with respect to
participant-directed redemptions from qualified plans.
** The contingent deferred sales charge reduces to zero after six years from
purchase.
19
<PAGE>
SAFECO INTERNATIONAL STOCK FUND, CONTINUED
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Management Fees 1.00% 1.00%
12b-1 Fees 0.25% 1.00%
Other Expenses 0.95% 1.08%
Total Annual Fund Operating Expenses 2.20% 3.08%
Fee Waiver** 0.55% 0.68%
Net Expenses 1.65% 2.40%
</TABLE>
- ----------------
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets. Expenses may vary during other time periods.
** SAFECO Asset Management Company (SAM) has contractually agreed, from May 1,
1999 through April 30, 2009, to pay the Fund's aggregate operating expenses
which exceed, in any given month, the rate of .40% per annum of the Fund's
average daily net assets ("Expense Limitation"). This arrangement does not
include the Fund's advisory fee, Rule 12b-1 fee, brokerage commissions,
taxes, interest or extraordinary expenses. To the extent that the aggregate
amount SAM paid or assumed in any prior months in a given year (May 1, 1999
through April 30, 2009) exceed the Expense Limitation, SAM may offset such
amounts against the Expense Limitation for the current month.
MANAGEMENT FEES are paid to SAFECO Asset Management Company (SAM) for
investment advisory services including the provisions of research,
supervision and assistance in the management of the Fund.
OTHER EXPENSES include custody, accounting and administrative
expenses; transfer agency and related expenses; shareholder servicing
expenses; expenses related to preparing, printing and delivering
prospectuses and shareholder reports; the expenses of holding
shareholder meetings; legal and audit fees, trustees' compensation;
federal and state registration fees; and extraordinary expenses.
EXAMPLE
This example is intended to help you compare the cost of investing in the
International Stock Fund with the cost of investing in other mutual funds. It
assumes that you invest $10,000 in the International Stock Fund for the time
periods indicated. The example also assumes that your investment has a 5% return
each year and that the Fund's net operating expenses remain the same. Although
your actual costs may be higher or lower, costs based on these assumptions would
be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years*
----- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Class A $ 733 $ 1,065 $ 1,420 $ 2,417
Class B
Assuming redemption at end of period $ 743 $ 1,048 $ 1,480 $ 2,368
Assuming no redemption $ 243 $ 748 $ 1,280 $ 2,368
</TABLE>
- ----------------
* Expenses for Class B shares reflect their conversion to Class A shares after
six years.
20
<PAGE>
SAFECO BALANCED FUND
OBJECTIVE
The SAFECO Balanced Fund seeks growth and income consistent with the
preservation of capital.
PRINCIPAL INVESTMENT STRATEGIES
The Balanced Fund will ordinarily invest from 50% to 70% of its total assets in
equity securities, which include COMMON STOCKS and PREFERRED STOCKS (including
convertible bonds and preferred stocks that convert to common stock either
automatically after a specified period of time or at the option of the issuer).
When selecting equity securities, the advisor focuses on companies that:
<TABLE>
<S> <C>
- - Are undervalued, as measured by low COMMON STOCKS represent equity
price-to-earnings ratios and high dividend interests in a corporation.
yields Stockholders participate in
- - Have good long-term potential to increase earnings if dividends are declared
in value and have a claim to the common
In addition, the Balanced Fund will invest at stock of a corporation at
least 25% of its total assets in DEBT dissolution, behind creditors and
SECURITIES. These include U.S. government preferred stock owners.
securities, INVESTMENT-GRADE debt obligations, PREFERRED STOCKS are equity
and certain non-rated debt obligations that securities whose owners have a
the advisor believes meet the standards of claim on a company's earnings and
investment-grade. assets before holders of common
The Balanced Fund may buy investment-grade stock, but after creditors.
CONVERTIBLE SECURITIES if they offer: Preferred stocks generally pay more
- - A higher yield than common stocks income and are less volatile than
- - A potential for capital appreciation common stocks.
DEBT SECURITIES are interest paying
instruments issued by corporations
or other issuers.
BOND RATINGS indicate an issuer's
financial strength and ability to
meet its debt obligations. The two
main rating services are Moody's
and Standard & Poor's.
INVESTMENT-GRADE securities are
rated by these services as follows:
MOODY'S S&P
Aaa AAA
Aa AA
A A
Baa BBB
CONVERTIBLE SECURITIES are debt or
preferred stock which may be
exchanged for common stock. Their
prices are influenced by changes in
interest rates and the values of
the assets into which they may be
exchanged.
</TABLE>
In selecting equity securities (primarily common and preferred stocks) to buy
for the Fund, the advisor focuses on stocks that it believes will have higher
yields, higher return on equity, or greater earnings-per-share and growth rates
over the next three- to five-year period when compared with the S&P 500 Index
average. The advisor may decide to sell securities if it believes that the
company no longer has potential to meet targeted yield, earnings or growth
rates, if the securities reach a specific price target, if the advisor believes
there are more attractive opportunities elsewhere, or to raise cash to meet
shareholder redemptions.
In selecting debt securities (primarily bonds and other interest paying
securities) to buy for the Fund, the advisor considers the issuer's
creditworthiness, the sensitivity of the security to changes in interest rates,
the market sector represented by the security and the level to which that market
sector is already represented in the portfolio. The advisor may decide to sell a
debt security if the advisor is concerned about an issuer's credit risk, if the
security becomes fully valued, if a more attractive alternative is available, or
to raise cash to meet shareholder redemptions.
21
<PAGE>
SAFECO BALANCED FUND, CONTINUED
PRINCIPAL RISK FACTORS
Loss of money is a risk of investing in the Balanced Fund. The value of your
investment in the Fund will go up and down with the prices of the securities in
which the Fund invests. The price of common stocks rises and falls in response
to many factors, including the historical and prospective earnings of the
issuers of the stock, the value of their assets, general economic conditions,
interest rates, investor perceptions and market liquidity.
The price of debt securities will normally move in the opposite direction of
changes in interest rates. That is, generally when market interest rates rise
the price of the Balanced Fund's debt securities will fall, and when market
interest rates fall the price of the Balanced Fund's debt securities will rise.
Also, changes in price generally will be greater the longer the maturity of the
debt security. Although securities in the top four rating categories are
considered "investment grade," Moody's considers bonds rated "Baa" to have
speculative characteristics. Because the portfolio includes both stocks and
bonds, the Balanced Fund may be suitable for you if you are an investor who
wants exposure to equity and debt securities in a single investment.
PERFORMANCE
The following bar chart and table provide some indication of the risks of
investing in the Balanced Fund by showing how performance has varied from year
to year and how its performance compares over time to that of the S&P 500 Index,
a widely recognized unmanaged index of stock performance. As with all mutual
funds, past performance is not a prediction of future results.
Effective September 30, 1996, all of the then-existing shares of the Fund were
redesignated No-Load Class shares and the Fund commenced offering Class A and
Class B shares. The performance information in the bar chart below reflects the
performance of the Class A shares of the Fund for the period since January 1,
1997. The performance reflected in the bar chart does not reflect sales charges.
If sales charges were reflected, the returns would be lower than those shown.
Total return is a measure of investment performance over a period of time. It
includes dividends and capital gain distributions, as well as share price gain
or loss.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
12/31/89
12/31/90
12/31/91
12/31/92
12/31/93
12/31/94
12/31/95
12/31/96
12/31/97 16.29%
12/31/98 12.06%
</TABLE>
22
<PAGE>
SAFECO BALANCED FUND, CONTINUED
Since the Fund's inception in 1996, the highest quarterly return was 9.92% for
the quarter ended December 31, 1998; and the lowest return was -3.91% for the
quarter ended September 30, 1998.
The performance information in the table that follows reflects (1) the actual
performance of Class A and Class B shares of the Fund for the period since
September 30, 1996, and (2) the performance of the No-Load Class of shares of
the Fund prior to September 30, 1996. Performance shown for the period prior to
September 30, 1996 does not reflect Rule 12b-1 fees. If Rule 12b-1 fees were
reflected, the returns would be lower than those shown.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
The following table shows how the Balanced Fund's Class A and Class B share
performance compares to the S&P 500 Index:
<TABLE>
<CAPTION>
January 31, 1996
(inception) to
1 year December 31, 1998
<S> <C> <C>
SAFECO Balanced Fund*
Class A 7.02% 11.84%
Class B 6.30% 12.09%
S&P 500 Index** 28.58% 27.65%
</TABLE>
* As required by Securities and Exchange Commission regulations, the Fund's
returns reflect the imposition of the maximum sales charge for Class A
shares and the deduction of the maximum deferred sales charge for Class B
shares. Without these charges, the Fund's Class A returns would have been
12.06%, and 13.62% for 1 year and since inception, respectively; and the
Fund's Class B returns would have been 11.30%, and 12.91%, for 1 year and
since inception, respectively.
** The S&P 500 Index is an unmanaged index containing common stocks of 500
industrial, transportation, utility and financial companies, regarded as
generally representative of the U.S. stock market. The index reflects the
reinvestment of dividends, if any, and capital gain distributions, if any,
but does not reflect fees, brokerage commissions, or other expenses of
investing. This index is used for comparison purposes only, and the Fund's
holdings do not necessarily mirror the index. Performance is based on
historical earnings and does not indicate the Fund's future results.
Returns and principal value vary with market conditions. When sold, shares may
be worth more or less than their original cost.
FEES AND EXPENSES
The following tables describe the fees and expenses that you may pay if you buy
and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.75%* None
Maximum deferred sales charge (load) (as a percentage of the
lesser of net asset value at redemption or the original
purchase amount) None 5.00%**
Maximum sales charge (load) imposed on reinvested dividends
(as a percentage of offering price) None None
Redemption fee (as a percentage of amount redeemed) None None
Exchange fee 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% deferred sales charge will apply to
redemptions made in the first twelve months except with respect to
participant-directed redemptions from qualified plans.
** The contingent deferred sales charge reduces to zero after six years from
purchase.
23
<PAGE>
SAFECO BALANCED FUND, CONTINUED
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Management Fees 0.70% 0.70%
12b-1 Fees 0.25% 1.00%
Other Expenses 0.82% 0.74%
Total Annual Fund Operating Expenses 1.77% 2.44%
Fee Waiver** 0.42% 0.34%
Net Expenses 1.35% 2.10%
</TABLE>
- ----------------
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets. Expenses may vary during other time periods.
** SAFECO Asset Management Company (SAM) has contractually agreed, from May 1,
1999 through April 30, 2009, to pay the Fund's aggregate operating expenses
which exceed, in any given month, the rate of .40% per annum of the Fund's
average daily net assets ("Expense Limitation"). This arrangement does not
include the Fund's advisory fee, Rule 12b-1 fee, brokerage commissions,
taxes, interest or extraordinary expenses. To the extent that the aggregate
amount SAM paid or assumed in any prior months in a given year (May 1, 1999
through April 30, 2009) exceed the Expense Limitation, SAM may offset such
amounts against the Expense Limitation for the current month.
MANAGEMENT FEES are paid to SAFECO Asset Management Company (SAM) for
investment advisory services including the provision of research,
supervision and assistance in the management of the Fund.
OTHER EXPENSES include custody, accounting and administrative
expenses; transfer agency and related expenses; shareholder servicing
expenses; expenses related to preparing, printing and delivering
prospectuses and shareholder reports; the expenses of holding
shareholder meetings; legal and audit fees, trustees' compensation;
federal and state registration fees; and extraordinary expenses.
EXAMPLE
This example is intended to help you compare the cost of investing in the
Balanced Fund with the cost of investing in other mutual funds. It assumes that
you invest $10,000 in the Balanced Fund for the time periods indicated. The
example also assumes that your investment has a 5% return each year and that the
Fund's net operating expenses remain the same. Although your actual costs may be
higher or lower, costs based on these assumptions would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years*
----- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Class A $ 705 $ 978 $ 1,272 $ 2,105
Class B
Assuming redemption at end of period $ 713 $ 958 $ 1,329 $ 2,064
Assuming no redemption $ 213 $ 658 $ 1,129 $ 2,064
</TABLE>
- ----------------
* Expenses for Class B shares reflect their conversion to Class A shares after
six years.
24
<PAGE>
SAFECO SMALL COMPANY STOCK FUND
OBJECTIVE
The SAFECO Small Company Stock Fund seeks long-term growth of capital through
investing primarily in small-sized companies.
PRINCIPAL INVESTMENT STRATEGIES
<TABLE>
<S> <C>
The Small Company Stock Fund invests at least MARKET CAPITALIZATION is the value
65% of its total assets in common stocks and of a corporation as determined by
preferred stocks of small-sized companies with the market price of its issued and
total MARKET CAPITALIZATION at the time of outstanding common stock. It is
investment of less than $1 billion. calculated by multiplying the
number of outstanding shares by the
current market price of a share.
</TABLE>
When selecting stocks for the Small Company Stock Fund, the advisor looks for
companies having:
- - Long-term appreciation potential based on above-average or improving earnings
growth rates
- - Attractive relative values
- - A policy of reinvesting earnings back into the company rather than paying
dividends to shareholders
Less than 35% of the Small Company Stock Fund's net assets will be invested in
convertible corporate bonds that are rated below investment grade or comparable
unrated bonds (commonly referred to as "junk" or high-yield bonds).
In determining whether to sell stocks, the advisor will consider whether the
companies' growth prospects have deteriorated, whether the companies have
realized their growth potential, or whether their stock prices have reached
specific targets. In addition, the Fund may sell or reduce its holdings in
companies when the advisor believes their stock prices are too high in relation
to their prospects for growth, if a more attractive alternative is available, or
to raise cash to meet shareholder redemptions.
PRINCIPAL RISK FACTORS
Loss of money is a risk of investing in the Small Company Stock Fund. Typically,
the portfolio will be broadly diversified among companies and industries.
However, certain industry sectors may be more highly represented at times than
other sectors as a result of individual stock selection. This may happen if
companies within certain sectors exhibit more of the characteristics sought by
the advisor than companies in other sectors. The value of your investment in the
Fund will go up and down with the prices of the securities in which the Fund
invests. The price of common stocks rises and falls in response to many factors,
including the historical and prospective earnings of the issuers of the stock,
the value of their assets, general economic conditions, interest rates, investor
perceptions and market liquidity. In particular, the value of the Fund's shares
may fall if any of the following occurs:
- - The earnings of the issuers of the stocks held in the Fund's portfolio do not
meet analysts' expectations or are otherwise disappointing.
- - The advisor's judgment about the companies' growth potential or the relative
value of their stocks is incorrect.
- - The stock market declines.
- - Small capitalization stocks or value stocks fall out of favor with the stock
market.
25
<PAGE>
SAFECO SMALL COMPANY STOCK FUND, CONTINUED
- - An event occurs that causes the price of one of the larger holdings in the
Fund's portfolio to decline materially.
Many of the stocks in this portfolio are more volatile than the general market.
You should be prepared to see fluctuations in share price and variable
investment returns. 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. Because
small company stocks can be quite volatile, you should invest in the Small
Company Stock Fund only if you can withstand wide fluctuations in share price.
PERFORMANCE
The following bar chart and table provide some indication of the risks of
investing in the Small Company Stock Fund by showing how performance has varied
from year to year and how its performance compares over time to that of the
Russell 2000 Index, a recognized unmanaged index representative of small cap
stocks. As with all mutual funds, past performance is not a prediction of future
results.
Effective September 30, 1996, all of the then-existing shares of the Fund were
redesignated No-Load Class shares and the Fund commenced offering Class A and
Class B shares. The performance information in the bar chart below reflects the
performance of Class A shares of the Fund for the period since January 1, 1997.
The performance reflected in the bar chart does not reflect sales charges. If
sales charges were reflected, the returns would be lower than those shown.
Total return is a measure of investment performance over a period of time. It
includes dividends and capital gain distributions, as well as share price gain
or loss.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
12/31/89
12/31/90
12/31/91
12/31/92
12/31/93
12/31/94
12/31/95
12/31/96
12/31/97 23.21%
12/31/98 -21.96%
</TABLE>
Since the Fund's inception in 1996, the highest quarterly return was 19.67% for
the quarter ended September 30, 1997, and the lowest return was -33.97% for the
quarter ended September 30, 1998.
The performance information in the table that follows reflects (1) the actual
performance of Class A and Class B shares of the Fund for the period since
September 30, 1996, and (2) the performance of the No-Load Class of shares of
the Fund prior to September 30, 1996. Performance shown for the period prior to
September 30, 1996 does not reflect Rule 12b-1 fees. If Rule 12b-1 fees were
reflected, the returns would be lower than those shown.
26
<PAGE>
SAFECO SMALL COMPANY STOCK FUND, CONTINUED
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
The following table shows how the Small Company Stock Fund's Class A and Class B
share performance compares to the Russell 2000 Index:
<TABLE>
<CAPTION>
January 31, 1996
(inception) to
1 year December 31, 1998
<S> <C> <C>
SAFECO Small Company Stock Fund*
Class A -25.47% 4.84%
Class B -26.54% 4.89%
Russell 2000 Index** -2.24% 12.06%
</TABLE>
* As required by Securities and Exchange Commission regulations, the Fund's
returns reflect the imposition of the maximum sales charge for Class A
shares and the deduction of the maximum deferred sales charge for Class B
shares. Without these charges, the Fund's Class A returns would have been
-21.96%, and 6.51%, for 1 year and since inception, respectively; and the
Fund's Class B returns would have been -22.67%, and 5.82%, for 1 year and
since inception, respectively.
** The Russell 2000 Index is an unmanaged index containing stocks of the 2000
smallest companies within the Russell 3000 Index. The Russell 3000 Index
consists of the 3000 largest U.S. stocks in terms of market capitalization.
The index reflects the reinvestment of dividends, if any, and capital gain
distributions, if any, but does not reflect fees, brokerage commissions, or
other expenses of investing. This index is used for comparison purposes
only, and the Fund's holdings do not necessarily mirror the index.
Performance is based on historical earnings and does not indicate the Fund's
future results.
Returns and principal value vary with market conditions. When sold, shares may
be worth more or less than their original cost.
FEES AND EXPENSES
The following tables describe the fees and expenses that you may pay if you buy
and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.75%* None
Maximum deferred sales charge (load) (as a percentage of the
lesser of net asset value at redemption or the original
purchase amount) None 5.00%**
Maximum sales charge (load) imposed on reinvested dividends
(as a percentage of offering price) None None
Redemption fee (as a percentage of amount redeemed) None None
Exchange fee 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% deferred sales charge will apply to
redemptions made in the first twelve months except with respect to
participant-directed redemptions from qualified plans.
** The contingent deferred sales charge reduces to zero after six years from
purchase.
27
<PAGE>
SAFECO SMALL COMPANY STOCK FUND, CONTINUED
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Management Fees 0.75% 0.75%
12b-1 Fees 0.25% 1.00%
Other Expenses 0.68% 0.91%
Total Annual Fund Operating Expenses 1.68% 2.66%
Fee Waiver** 0.28% 0.51%
Net Expenses 1.40% 2.15%
</TABLE>
- ----------------
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets. Expenses may vary during other time periods.
** SAFECO Asset Management Company (SAM) has contractually agreed, from May 1,
1999 through April 30, 2009, to pay the Fund's aggregate operating expenses
which exceed, in any given month, the rate of .40% per annum of the Fund's
average daily net assets ("Expense Limitation"). This arrangement does not
include the Fund's advisory fee, Rule 12b-1 fee, brokerage commissions,
taxes, interest or extraordinary expenses. To the extent that the aggregate
amount SAM paid or assumed in any prior months in a given year (May 1, 1999
through April 30, 2009) exceed the Expense Limitation, SAM may offset such
amounts against the Expense Limitation for the current month.
MANAGEMENT FEES are paid to SAFECO Asset Management Company (SAM) for
investment advisory services including the provision of research,
supervision and assistance in the management of the Fund.
OTHER EXPENSES include custody, accounting and administrative
expenses; transfer agency and related expenses; shareholder servicing
expenses; expenses related to preparing, printing and delivering
prospectuses and shareholder reports; the expenses of holding
shareholder meetings; legal and audit fees, trustees' compensation;
federal and state registration fees; and extraordinary expenses.
EXAMPLE
This example is intended to help you compare the cost of investing in the Small
Company Stock Fund with the cost of investing in other mutual funds. It assumes
that you invest $10,000 in the Small Company Stock Fund for the time periods
indicated. The example also assumes that your investment has a 5% return each
year and that the Fund's net operating expenses remain the same. Although your
actual costs may be higher or lower, costs based on these assumptions would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years*
----- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Class A $ 709 $ 993 $ 1,297 $ 2,158
Class B
Assuming redemption at end of period $ 718 $ 973 $ 1,354 $ 2,107
Assuming no redemption $ 218 $ 673 $ 1,154 $ 2,107
</TABLE>
- ----------------
* Expenses for Class B shares reflect their conversion to Class A shares after
six years.
28
<PAGE>
SAFECO U.S. VALUE FUND
OBJECTIVE
The SAFECO U.S. Value Fund seeks long-term growth of capital and income by
investing in stocks selected for their attractive relative values.
PRINCIPAL INVESTMENT STRATEGIES
<TABLE>
<S> <C>
The U.S. Value Fund invests at least 65% of FUNDAMENTAL VALUE ANALYSIS of
its assets in common stocks and preferred common stocks emphasizes asset
stocks issued by U.S. companies selected for value more than earnings
potential appreciation. In selecting projections. Its opposite, growth
securities to buy for the U.S. Value Fund, the investing, focuses more on earnings
advisor uses a FUNDAMENTAL VALUE ANALYSIS and growth.
focuses on large, established companies with
low price-to-earnings ratios and above-average
earnings and dividend growth. The U.S. Value
Fund typically diversifies across all major
sectors of the economy.
</TABLE>
The advisor selects from among a universe of large cap stocks that it expects to
have higher yields, higher return on equity, or greater earnings-per-share
growth rates over the next three- to five-year period when compared with the S&P
500 Index average. The advisor may decide to sell securities when it believes
the issuer no longer has the potential to meet targeted yield, return or
earnings rates, if the securities reach a specific price target, if the advisor
believes there are more attractive opportunities elsewhere, or to raise cash to
meet shareholder redemptions.
PRINCIPAL RISK FACTORS
Loss of money is a risk of investing in the U.S. Value Fund. The value of your
investment in the Fund will go up and down with the prices of the securities in
which the Fund invests. The price of common stocks rises and falls in response
to many factors, including the historical and prospective earnings of the
issuers of the stock, the value of their assets, general economic conditions,
interest rates, investor perceptions and market liquidity. Even though the Fund
invests in companies whose securities are believed to be undervalued relative to
their underlying profitability, there can be no assurance that the shares of the
companies selected for the Fund will appreciate in value. In addition, although
an investment in the shares of undervalued companies may provide some protection
from market declines, even the shares of comparatively undervalued companies
typically fall in price during broad market declines.
Many of the stocks in this portfolio are more volatile than the general market.
You should be prepared to see fluctuations in share price and variable
investment returns. The U.S. Value Fund may be suitable for you if you are a
long-term investor with moderate risk tolerance.
PERFORMANCE
The following bar chart and table provide some indication of the risks of
investing in the U.S. Value Fund by showing how performance compares over time
to that of the S&P 500 Index, a widely recognized unmanaged index of stock
performance. As with all mutual funds, past performance is not a prediction of
future results.
29
<PAGE>
SAFECO U.S. VALUE FUND, CONTINUED
The performance information in the bar chart below reflects the actual
performance of Class A shares of the Fund for the period since January 1, 1998,
but does not reflect sales charges. If sales charges fees were reflected, the
returns would be lower than that shown.
Total return is a measure of investment performance over a period of time. It
includes dividends and capital gain distributions, as well as share price gain
or loss.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
12/31/89
12/31/90
12/31/91
12/31/92
12/31/93
12/31/94
12/31/95
12/31/96
12/31/97
12/31/98 11.79%
</TABLE>
Since the Fund's inception in 1997, the highest quarterly return was 15.81% for
the quarter ended December 31, 1998, and the lowest return was -9.86% for the
quarter ended September 30, 1998.
The performance information in the table that follows reflects the actual
performance of Class A and Class B shares of the Fund for the period since April
30, 1997.
30
<PAGE>
SAFECO U.S. VALUE FUND, CONTINUED
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
The following table shows how the U.S. Value Fund's Class A and Class B share
performance compares to the S&P 500 Index:
<TABLE>
<CAPTION>
April 30, 1997
(inception) to
1 year December 31, 1998
<S> <C> <C>
U.S. Value Fund*
Class A 6.76% 14.41%
Class B 6.18% 14.69%
S&P 500 Index** 28.58% 31.27%
</TABLE>
* As required by Securities and Exchange Commission regulations, the Fund's
returns reflect the imposition of the maximum sales charge for Class A
shares and the deduction of the maximum deferred sales charge for Class B
shares. Without these charges, the Fund's Class A returns would have been
11.79% and 17.62% for 1 year and since inception, respectively; and the
Fund's Class B returns would have been 11.18% and 16.87% for 1 year and
since inception, respectively.
** The S&P 500 Index is an unmanaged index containing common stocks of 500
industrial, transportation, utility and financial companies, regarded as
generally representative of the U.S. stock market. The index reflects the
reinvestment of dividends, if any, and capital gain distributions, if any,
but does not reflect fees, brokerage commissions, or other expenses of
investing. This index is used for comparison purposes only, and the Fund's
holdings do not necessarily mirror the index. Performance is based on
historical earnings and does not indicate the Fund's future results.
Returns and principal vary with market conditions. When sold, shares may be
worth more or less than their original costs.
FEES AND EXPENSES
The following tables describe the fees and expenses that you may pay if you buy
and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 5.75%* None
Maximum deferred sales charge (load) (as a percentage of the
lesser of net asset value at redemption or the original
purchase amount) None 5.00%**
Maximum sales charge (load) imposed on reinvested dividends
(as a percentage of offering price) None None
Redemption fee (as a percentage of amount redeemed) None None
Exchange fee 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% deferred sales charge will apply to
redemptions made in the first twelve months except with respect to
participant-directed redemptions from qualified plans.
** The contingent deferred sales charge reduces to zero after six years from
purchase.
31
<PAGE>
SAFECO U.S. VALUE FUND, CONTINUED
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Management Fees 0.70% 0.70%
12b-1 Fees 0.25% 1.00%
Other Expenses 1.24% 1.01%
Total Annual Fund Operating Expenses 2.19% 2.71%
Fee Waiver** 0.84% 0.61%
Net Expenses 1.35% 2.10%
</TABLE>
- ----------------
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets. Expenses may vary during other time periods.
** SAFECO Asset Management Company (SAM) has contractually agreed, from May 1,
1999 through April 30, 2009, to pay the Fund's aggregate operating expenses
which exceed, in any given month, the rate of .40% per annum of the Fund's
average daily net assets ("Expense Limitation"). This arrangement does not
include the Fund's advisory fee, Rule 12b-1 fee, brokerage commissions,
taxes, interest or extraordinary expenses. To the extent that the aggregate
amount SAM paid or assumed in any prior months in a given year (May 1, 1999
through April 30, 2009) exceed the Expense Limitation, SAM may offset such
amounts against the Expense Limitation for the current month.
MANAGEMENT FEES are paid to SAFECO Asset Management Company (SAM) for
investment advisory services including the provision of research,
supervision and assistance in the management of the Fund.
OTHER EXPENSES include custody, accounting and administrative
expenses; transfer agency and related expenses; shareholder servicing
expenses; expenses related to preparing, printing and delivering
prospectuses and shareholder reports; the expenses of holding
shareholder meetings; legal and audit fees, trustees' compensation;
federal and state registration fees; and extraordinary expenses.
EXAMPLE
This example is intended to help you compare the cost of investing in the U.S.
Value Fund with the cost of investing in other mutual funds. It assumes that you
invest $10,000 in the U.S. Value Fund for the time periods indicated. The
example also assumes that your investment has a 5% return each year and that the
Fund's net operating expenses remain the same. Although your actual costs may be
higher or lower, costs based on these assumptions would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years*
----- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Class A $ 705 $ 978 $ 1,272 $ 2,105
Class B
Assuming redemption at end of period $ 713 $ 958 $ 1,329 $ 2,054
Assuming no redemption $ 213 $ 658 $ 1,129 $ 2,054
</TABLE>
- ----------------
* Expenses for Class B shares reflect their conversion to Class A shares after
six years.
32
<PAGE>
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
OBJECTIVE
The SAFECO Intermediate-Term U.S. Treasury Fund seeks to provide as high a level
of current income as is consistent with the preservation of capital.
PRINCIPAL INVESTMENT STRATEGIES
<TABLE>
<S> <C>
The Intermediate-Term U.S. Treasury Fund will "STRIPS" stands for Separate
invest, during normal market conditions, at Trading of Registered Interest and
least 65% of its total assets in direct Principal of Securities. These are
obligations of the U.S. Treasury, such as U.S. Treasury securities that have had
Treasury bills, notes and bonds. The Fund may their coupons and principal
also invest in STRIPS that are direct repayments separated into what
obligations of the U.S. Treasury. effectively become zero-coupon
Treasury bonds.
</TABLE>
The Fund will maintain an average dollar-weighted maturity of between 3 and 10
years; however, individual obligations held by the Fund may have maturities
outside that range.
The Fund may invest up to 35% of its total assets in other U.S. government
securities and corporate debt securities. Other U.S. government securities
include:
- - Securities supported by the full faith and credit of the U.S. government that
are not direct obligations of the U.S. Treasury, such as securities issued by
the Government National Mortgage Association (GNMA).
- - 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).
- - Securities supported solely by the creditworthiness of the issuer, such as
securities issued by the Tennessee Valley Authority (TVA).
Corporate debt securities include bonds that 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, are of comparable quality to securities rated A or higher.
See page 45 for more information about investment grade ratings.
Since the Fund invests predominantly in intermediate-term U.S. Treasury
securities, trading decisions focus on the maturity of the bonds under
consideration. In a falling interest rate environment the Fund buys longer
maturity bonds. In a rising interest rate environment, the Fund buys shorter
maturity bonds. The Fund may increase its allocation to U.S. government agency
bonds when the yield premium, compared with U.S. Treasuries, is attractive.
After choosing the desired maturity, the Fund attempts to exploit pricing
inefficiencies and purchase the cheapest securities in a maturity range or sell
the more expensive securities in a maturity range. The advisor may also sell
securities to realign the overall maturity of the portfolio or to raise cash to
meet shareholder redemptions.
33
<PAGE>
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND, CONTINUED
PRINCIPAL RISK FACTORS
Loss of money is a risk of investing in the Intermediate-Term U.S. Treasury
Fund. The Fund is subject to interest rate risk. Generally, when market interest
rates rise, the price of the Fund's debt securities will fall, and when market
interest rates fall, the price of the Fund's debt securities will rise. Such
changes in price generally will be greater the longer the maturity of the debt
security.
Due to the conservative nature of this Fund, it may be suitable for you if you
want higher current income than a stable-priced money market fund, but with
greater price stability than a longer-term bond fund.
PERFORMANCE
The following bar chart and table provide some indication of the risks of
investing in the Intermediate-Term U.S. Treasury Fund by showing how performance
has varied from year to year and how its performance compares over time to that
of the Merrill Lynch Intermediate-Term Treasury Index, a widely recognized index
of intermediate-term Treasury securities. As with all mutual funds, past
performance is not a prediction of future results.
Effective September 30, 1996, all of the then-existing shares of the Fund were
redesignated No-Load Class shares and the Fund commenced offering Class A and
Class B shares. The performance information in the bar chart below reflects: (1)
the actual performance of Class A shares of the Fund for the period since
September 30, 1996; and (2) the performance of the No-Load Class of shares of
the Fund prior to September 30, 1996. The performance prior to September 30,
1996 does not reflect Rule 12b-1 fees. In addition, the performance reflected in
the bar chart for the entire period shown does not reflect sales charges. If
sales charges and Rule 12b-1 fees were reflected, the returns would be lower
than those shown.
Total return is a measure of investment performance over a period of time. It
includes dividends and capital gain distributions, as well as share price gain
or loss.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
12/31/89 10.31%
12/31/90 7.16%
12/31/91 13.52%
12/31/92 6.57%
12/31/93 10.84%
12/31/94 -3.61%
12/31/95 16.75%
12/31/96 0.33%
12/31/97 8.03%
12/31/98 9.08%
</TABLE>
34
<PAGE>
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND, CONTINUED
During the 10-year period shown in the bar chart, the highest quarterly return
was 6.09% for the quarter ended September 30, 1998; and the lowest return was
- -3.45% for the quarter ended March 31, 1994.
The performance information in the table that follows reflects: (1) the actual
performance of Class A and Class B shares of the Fund for the period since
September 30, 1996, and (2) the performance of the No-Load Class of shares of
the Fund prior to September 30, 1996. Performance shown for the period prior to
September 30, 1996 does not reflect Rule 12b-1 fees. If Rule 12b-1 fees were
reflected, the returns would be lower than those shown.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
The following table shows how the Intermediate-Term U.S. Treasury Fund's Class A
and Class B share performance compares to Merrill Lynch Intermediate-Term
Treasury Index:
<TABLE>
<CAPTION>
1 year 5 years 10 years
<S> <C> <C> <C>
Intermediate-Term U.S. Treasury Fund*
Class A 4.17% 4.90% 7.25%
Class B 3.30% 5.23% 7.58%
Merrill Lynch Intermediate-Term Treasury
Index** 8.63% 6.49% 8.33%
</TABLE>
* As required by Securities and Exchange Commission regulations, the Fund's
returns reflect the imposition of the maximum sales charge for Class A
shares and the deduction of the maximum deferred sales charge for Class B
shares. Without these charges, the Fund's Class A returns would have been
9.08, 5.88 and 7.75, for 1, 5 and 10 years, respectively; and the Fund's
Class B returns would have been 8.30, 5.56 and 7.58, for 1, 5 and 10 years,
respectively.
** The Merrill Lynch Intermediate-Term Treasury Index is an unmanaged index.
The index does not reflect fees, brokerage commissions, or other expenses of
investing. This index is used for comparison purposes only, and the Fund's
holdings do not necessarily mirror the index. Performance is based on
historical earnings and does not indicate the Fund's future results.
Returns and principal value vary with market conditions. When sold, shares may
be worth more, or less, than their original value.
FEES AND EXPENSES
The following tables describe the fees and expenses that you may pay if you buy
and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 4.50%* None
Maximum deferred sales charge (load) (as a percentage of the
lesser of net asset value at redemption or the original
purchase amount) None 5.00%**
Maximum sales charge (load) imposed on reinvested dividends
(as a percentage of offering price) None None
Redemption fee (as a percentage of amount redeemed) None None
Exchange fee 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% deferred sales charge will apply to
redemptions made in the first twelve months except with respect to
participant-directed redemptions from qualified plans.
** The contingent deferred sales charge reduces to zero after six years from
purchase.
35
<PAGE>
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND, CONTINUED
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Management Fees 0.55% 0.55%
12b-1 Fees 0.25% 1.00%
Other Expenses 0.75% 0.60%
Total Annual Fund Operating Expenses 1.55% 2.15%
Fee Waiver** 0.35% 0.20%
Net Expenses 1.20% 1.95%
</TABLE>
- ----------------
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets. Expenses may vary during other time periods.
** SAFECO Asset Management Company (SAM) has contractually agreed, from May 1,
1999 through April 30, 2009, to pay the Fund's aggregate operating expenses
which exceed, in any given month, the rate of .40% per annum of the Fund's
average daily net assets ("Expense Limitation"). This arrangement does not
include the Fund's advisory fee, Rule 12b-1 fee, brokerage commissions,
taxes, interest or extraordinary expenses. To the extent that the aggregate
amount SAM paid or assumed in any prior months in a given year (May 1, 1999
through April 30, 2009) exceed the Expense Limitation, SAM may offset such
amounts against the Expense Limitation for the current month.
MANAGEMENT FEES are paid to SAFECO Asset Management Company (SAM) for
investment advisory services including the provision of research,
supervision and assistance in the management of the Fund.
OTHER EXPENSES include custody, accounting and administration
expenses; transfer agency and related expenses; expenses related to
preparing, printing and delivering prospectuses and shareholder
reports; the expenses of holding shareholder meetings; legal and audit
fees; trustees' compensation; federal and state registration fees; and
extraordinary expenses.
EXAMPLE
The following example is intended to help you compare the cost of investing in
the Intermediate-Term U.S. Treasury Fund with the cost of investing in other
mutual funds. This example assumes that you invest $10,000 in the
Intermediate-Term U.S. Treasury Fund for the time periods indicated. The example
also assumes that your investment has a 5% return each year and that the Fund's
net operating expenses remain the same. Although your actual costs may be higher
or lower, costs based on these assumptions would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years*
----- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Class A $ 567 $ 814 $ 1,080 $ 1,839
Class B
Assuming redemption at end of period $ 698 $ 912 $ 1,252 $ 1,893
Assuming no redemption $ 198 $ 612 $ 1,052 $ 1,893
</TABLE>
- ----------------
* Expenses for Class B shares reflect their conversion to Class A shares after
six years.
36
<PAGE>
SAFECO HIGH-YIELD BOND FUND
OBJECTIVE
The SAFECO High-Yield Bond Fund seeks to provide a high level of current
interest income through the purchase of high-yield, debt SECURITIES.
PRINCIPAL INVESTMENT STRATEGIES
The High-Yield Bond Fund, during normal market conditions, will invest at least
65% of its portfolio in high-yield, DEBT SECURITIES.
<TABLE>
<S> <C>
The Fund may invest in: DEBT SECURITIES are interest paying
- - Debt securities and PREFERRED STOCKS instruments issued by corporations
(including CONVERTIBLE SECURITIES) which or other issuers.
are rated below investment grade. PREFERRED STOCKS are equity
- - Unrated securities. The Fund may invest up securities whose owners have a
to 25% of its assets in securities that claim on a company's earnings and
have not been rated. assets before holders of common
- - Restricted securities eligible for resale stock, but after debt holders.
under RULE 144A or SECTION 4(2), provided Preferred stocks generally pay more
that the advisor has determined that such income and are less volatile than
securities are liquid under guidelines common stocks.
adopted by the Fund's Board of Trustees. CONVERTIBLE SECURITIES are debt or
High-yield debt securities ("junk bonds") preferred stock which may be
carry greater risks than investment grade exchanged for common stock. Their
bonds. However, the advisor seeks to reduce prices are influenced by changes in
risk by understanding the financial prospects interest rates and the values of
of the companies the Fund invests in and by the assets into which they may be
maintaining a well-diversified portfolio. exchanged.
RULE 144A SECURITIES are securities
which are exempt from registration
requirements. After a minimum
two-year waiting period, they can
be sold to qualified institutional
investors, such as mutual funds.
SECTION 4(2) SECURITIES are exempt
from registration requirements and
sold in private placements to
qualified institutional investors,
such as mutual funds.
DURATION measures the sensitivity
of fixed income securities held by
a portfolio to a change in interest
rates. The value of a security with
a longer duration will normally
fluctuate to a greater degree than
the value of a security with a
shorter duration should interest
rates change. For example, if
interest rates were to move 1%, a
bond with a 3-year duration would
experience approximately a 3%
change in its principal value. An
identical bond with a 5-year
duration would experience
approximately a 5% change in its
principal value. Generally, the
stated maturity of a fixed income
security is longer than its
projected duration.
The decision to either buy or sell a security in the Fund is based first upon a
fundamental analysis of the issuer, including the company's creditworthiness,
liquidity, and prospects for growing earnings and cash flow. Next, the advisor
examines alternative bonds with similar credit statistics, and/or related lines of
business. This helps the advisor determine whether the bond in question is a good
value relative to its peers. Finally, the advisor considers the bond's DURATION,
coupon, and call features (the bond's structure).
</TABLE>
The advisor may decide to sell a security if the original evaluation concerning
the issuer's creditworthiness, liquidity or prospects changes, if the value
reaches a specific target, or to raise cash to meet shareholder redemptions.
37
<PAGE>
SAFECO HIGH-YIELD BOND FUND, CONTINUED
PRINCIPAL RISK FACTORS
Loss of money is a risk of investing in the High-Yield Bond Fund. The Fund is
subject to interest rate risk. Generally, when market interest rates rise the
price of the Fund's debt securities will fall, and when market interest rates
fall the price of the Fund's debt securities will rise. Such changes in price
generally will be greater the longer the maturity of the debt security.
The Fund also is subject to greater volatility, reduced liquidity and a higher
risk of repayment default. This Fund may be suitable for you if you can tolerate
greater risk in pursuit of higher total returns.
PERFORMANCE
The following bar chart and table provide some indication of the risks of
investing in the High-Yield Bond Fund by showing how performance has varied from
year to year and how its performance compares over time to that of the Merrill
Lynch High-Yield Index, a widely recognized index of high-yield bonds. As with
all mutual funds, past performance is not a prediction of future results.
Effective January 31, 1997, all of the then-existing shares of the Fund, were
redesignated No-Load Class shares and the Fund commenced offering Class A and
Class B shares. The performance information in the bar chart below reflects: (1)
the actual performance of Class A shares of the Fund for the period since
January 31, 1997; and (2) the performance of the No-Load Class of shares of the
Fund for the period prior to January 31, 1997. The performance prior to January
31, 1997 does not reflect Rule 12b-1 fees. In addition, the performance
reflected in the bar chart for the entire period shown does not reflect sales
charges. If sales charges and Rule 12b-1 fees were reflected, the returns would
be lower than those shown.
Total return is a measure of investment performance over a period of time. It
includes dividends and capital gain distributions, as well as share price gain
or loss.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
12/31/89 1.98%
12/31/90 -3.60%
12/31/91 24.29%
12/31/92 13.87%
12/31/93 16.91%
12/31/94 -2.25%
12/31/95 15.64%
12/31/96 10.39%
12/31/97 12.49%
12/31/98 4.32%
</TABLE>
During the 10-year period shown in the bar chart, the highest quarterly return
was 7.23% for the quarter ended March 31, 1991; and the lowest return was -4.54%
for the quarter ended September 30, 1990.
38
<PAGE>
SAFECO HIGH-YIELD BOND FUND, CONTINUED
The performance information in the table that follows reflects: (1) the actual
performance of Class A and Class B shares of the Fund for the period since
January 31, 1997, and (2) the performance of the No-Load Class of shares of the
Fund prior to January 31, 1997. Performance shown for the period prior to
January 31, 1997 does not reflect Rule 12b-1 fees. If Rule 12b-1 fees were
reflected, the returns would be lower than those shown.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
The following table shows how the High-Yield Bond Fund's Class A and Class B
share performance compares to the Merrill Lynch High-Yield Index:
<TABLE>
<CAPTION>
1 year 5 years 10 years
<S> <C> <C> <C>
High-Yield Bond Fund*
Class A -0.38% 6.94% 8.57%
Class B -1.61% 7.29% 8.90%
Merrill Lynch High-Yield Index** 2.95% 9.11% 11.18%
</TABLE>
* As required by Securities and Exchange Commission regulations, the Fund's
returns reflect the imposition of the maximum sales charge for Class A
shares and the deduction of the maximum deferred sales charge for Class B
shares. Without these charges, the Fund's Class A returns would have been
4.32, 7.92 and 9.07, for 1, 5 and 10 years, respectively; and the Fund's
Class B returns would have been 3.39, 7.59 and 8.90, for 1, 5 and 10 years,
respectively.
** The Merrill Lynch High-Yield Index is an unmanaged index comprised of
outstanding debt of domestic market issuers rated below investment grade but
not in default. The index does not reflect fees, brokerage commissions, or
other costs of investing. This index is used for comparison purposes only,
and the Fund's holdings do not necessarily mirror the index. Performance is
based on historical earnings and does not indicate the Fund's future
results.
Returns and principal value vary with market conditions. When sold, shares may
be worth more, or less, than their original value.
FEES AND EXPENSES
The following tables describe the fees and expenses that you may pay if you buy
and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 4.50%* None
Maximum deferred sales charge (load) (as a percentage of the
lesser of net asset value at redemption or the original
purchase amount) None 5.00%**
Maximum sales charge (load) imposed on reinvested dividends
(as a percentage of offering price) None None
Redemption fee (as a percentage of amount redeemed) None None
Exchange fee 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% deferred sales charge will apply to
redemptions made in the first twelve months except with respect to
participant-directed redemptions from qualified plans.
** The contingent deferred sales charge reduces to zero after six years from
purchase.
39
<PAGE>
SAFECO HIGH-YIELD BOND FUND, CONTINUED
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Management Fees 0.65% 0.65%
12b-1 Fees 0.25% 1.00%
Other Expenses 0.32% 0.49%
Total Annual Fund Operating Expenses 1.22% 2.14%
Fee Waiver* 0.00% 0.09%
Net Expense 1.22% 2.05%
</TABLE>
- ----------------
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets. Expenses may vary during other time periods.
** SAFECO Asset Management Company (SAM) has contractually agreed, from May 1,
1999 through April 30, 2009, to pay the Fund's aggregate operating expenses
which exceed, in any given month, the rate of .40% per annum of the Fund's
average daily net assets ("Expense Limitation"). This arrangement does not
include the Fund's advisory fee, Rule 12b-1 fee, brokerage commissions,
taxes, interest or extraordinary expenses. To the extent that the aggregate
amount SAM paid or assumed in any prior months in a given year (May 1, 1999
through April 30, 2009) exceed the Expense Limitation, SAM may offset such
amounts against the Expense Limitation for the current month.
MANAGEMENT FEES are paid to SAFECO Asset Management Company (SAM) for
investment advisory services including the provision of research,
supervision and assistance in the management of the Fund.
OTHER EXPENSES include custody, accounting and administration
expenses; transfer agency and related expenses; expenses related to
preparing, printing and delivering prospectuses and shareholder
reports; the expenses of holding shareholder meetings; legal and audit
fees; trustees' compensation; federal and state registration fees; and
extraordinary expenses.
EXAMPLE
The following example is intended to help you compare the cost of investing in
the High-Yield Bond Fund with the cost of investing in other mutual funds. This
example assumes that you invest $10,000 in the High-Yield Bond Fund for the time
periods indicated. The example also assumes that your investment has a 5% return
each year and that the Fund's net operating expenses remain the same. Although
your actual costs may be higher or lower, costs based on these assumptions would
be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years*
----- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Class A $ 569 $ 820 $ 1,090 $ 1,861
Class B
Assuming redemption at end of period $ 708 $ 943 $ 1,303 $ 2,000
Assuming no redemption $ 208 $ 643 $ 1,103 $ 2,000
</TABLE>
- ----------------
* Expenses for Class B shares reflect their conversion to Class A shares after
six years.
40
<PAGE>
SAFECO MANAGED BOND FUND
OBJECTIVE
The SAFECO Managed Bond Fund seeks 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.
PRINCIPAL INVESTMENT STRATEGIES
The Managed Bond Fund will invest at least 65% of its total assets in bonds.
- - The Fund will invest primarily in INVESTMENT GRADE DEBT SECURITIES (or
unrated securities which are comparable in quality to investment grade debt
securities).
- - The Fund will invest at least 50% of its total assets in U.S. GOVERNMENT
SECURITIES.
- - The Fund may invest in mortgage-backed or asset-backed securities.
The advisor analyzes each security it considers for purchase in two ways. First,
the advisor looks at the security on a stand-alone basis:
<TABLE>
<S> <C>
- - Is it priced attractively given its rating BOND RATINGS indicate an issuer's
and market sector? financial strength and ability to
- - Do the price and interest rate adequately meet its debt obligations. The two
compensate for any structural main rating services are Moody's
characteristics of the security, such as and Standard & Poor's.
the right of an investor to require that INVESTMENT GRADE securities are
the issuer buy the security back at a rated by these services as follows:
stated price or the right of an issuer to MOODY'S S&P
buy the security back at the stated price? Aaa AAA
Next, the advisor looks at how the security Aa AA
fits into the overall portfolio: A A
- - What effects would a purchase of this Baa BBB
security have on overall portfolio yield, DEBT SECURITIES are interest paying
DURATION, and CONVEXITY? instruments issued by corporations
- - How would an investment in this security or other issuers.
affect the portfolio's yield curve U.S. GOVERNMENT SECURITIES are
exposure, sector weightings and securities issued by the U.S.
diversification? The advisor may sell government or its agencies or
securities when either this relative value instrumentalities, such as the
analysis shows another sector of the market Federal Home Loan Bank or the
is more attractive, the advisor believes Federal Land Bank.
another security within that sector offers DURATION measures the sensitivity
a better value, or to raise cash to meet of fixed income securities held by
shareholder redemptions. a portfolio to a change in interest
- - If the rating of a security is downgraded rates. The value of a security with
after it has been purchased by the Fund, a longer duration will normally
the advisor will engage in an orderly fluctuate to a greater degree than
disposition of securities to ensure that no the value of a security with a
more than 5% of the Fund's assets are shorter duration should interest
invested in below-investment grade rates change. For example, if
securities. interest rates were to move 1%, a
bond with a 3-year duration would
experience approximately a 3%
change in its principal value. An
identical bond with a 5-year
duration would experience
approximately a 5% change in its
principal value. Generally, the
stated maturity of a fixed income
security is longer than its
projected duration.
CONVEXITY measures the sensitivity
of a bond's price to changes in
interest rate levels.
</TABLE>
PRINCIPAL RISK FACTORS
Loss of money is a risk of investing in the Managed Bond Fund. The Fund is
subject to interest rate risk. Generally, when market interest rates rise the
price of the Fund's debt securities will fall, and when market interest rates
fall the price of the Fund's debt securities will rise. Such changes in price
generally will be greater the longer the maturity of the debt security.
41
<PAGE>
SAFECO MANAGED BOND FUND, CONTINUED
In addition, investment in the Fund carries risks associated with the following
types of securities:
- - Mortgage-backed securities. During periods of changing interest rates,
mortgage holders may be more likely to pay off their loans early. These
prepayment fluctuations may decrease the overall investment returns of the
Fund.
- - Asset-backed securities. The underlying borrower(s) may default on the loan
and the recovered collateral may not be sufficient to cover the interest and
principal payments.
The Managed Bond Fund may be suitable for you if you want high current income
and stability of capital.
PERFORMANCE
The following bar chart and table provide some indication of the risks of
investing in the Managed Bond Fund by showing how performance has varied from
year to year and how its performance compares over time to that of the Lehman
Brothers Government/Corporate Index, a widely recognized index. As with all
mutual funds, past performance is not a prediction of future results.
Effective September 30, 1996, all of the then-existing shares of the Fund were
redesignated No-Load Class shares and the Fund commenced offering Class A and
Class B shares. The performance information in the bar chart below reflects (1)
the actual performance of Class A shares of the Fund for the period since
September 30, 1996; and (2) the performance of the No-Load Class of shares of
the Fund for the period prior to September 30, 1996. The performance prior to
September 30, 1996 does not reflect Rule 12b-1 fees. In addition, the
performance reflected in the bar chart for the entire period shown does not
reflect sales charges. If sales charges and Rule 12b-1 fees were reflected, the
returns would be lower than those shown.
Total return is a measure of investment performance over a period of time. It
includes dividends and capital gain distributions, as well as share price gain
or loss.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
12/31/89
12/31/90
12/31/91
12/31/92
12/31/93
12/31/94
12/31/95 17.35%
12/31/96 0.07%
12/31/97 7.78%
12/31/98 7.87%
</TABLE>
Since the Fund's inception in 1994, the highest quarterly return was 5.74% for
the quarter ended June 30, 1995; and the lowest return was -3.34% for the
quarter ended March 31, 1994.
42
<PAGE>
SAFECO MANAGED BOND FUND, CONTINUED
The performance information in the table that follows reflects: (1) the actual
performance of Class A and Class B shares of the Fund for the period since
September 30, 1996, and (2) the performance of the No-Load Class of shares of
the Fund prior to September 30, 1996. Performance shown for the period prior to
September 30, 1996 does not reflect Rule 12b-1 fees. If Rule 12b-1 fees were
reflected, the returns would be lower than those shown.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
The following table shows how the Fund's Class A and Class B share performance
compares to the Lehman Brothers Government/Corporate Index:
<TABLE>
<CAPTION>
February 28, 1994
(inception) to
1 year December 31, 1998
<S> <C> <C>
Managed Bond Fund*
Class A 3.02% 4.98%
Class B 1.67% 5.18%
Lehman Brothers Gov't/Corp. Index** 9.47% 7.73%
</TABLE>
* As required by Securities and Exchange Commission regulations, the Fund's
returns reflect the imposition of the maximum sales charge for Class A
shares and the deduction of the maximum deferred sales charge for Class B
shares. Without these charges, the Fund's Class A returns would have been
7.87 and 5.98, for 1 year and since inception, respectively; and the Fund's
Class B returns would have been 6.67 and 5.52, for 1 year and since
inception, respectively.
** The Lehman Brothers Gov't/Corp. Index is an unmanaged index comprised of
every major U.S. government and investment-grade corporate bond with more
than a year remaining until maturity. The index does not reflect fees,
brokerage commissions, or other costs of investing. This index is used for
comparison purposes only, and the Fund's holdings do not necessarily mirror
the index. Performance is based on historical earnings and does not indicate
the Fund's future results.
Returns and principal value vary with market conditions. When sold, shares may
be worth more, or less, than their original value.
FEES AND EXPENSES
The following tables describe the fees and expenses that you may pay if you buy
and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 4.50%* None
Maximum deferred sales charge (load) (as a percentage of the
lesser of net asset value at redemption or the original
purchase amount) None 5.00%**
Maximum sales charge (load) imposed on reinvested dividends
(as a percentage of offering price) None None
Redemption fee (as a percentage of amount redeemed) None None
Exchange fee 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% deferred sales charge will apply to
redemptions made in the first twelve months except with respect to
participant-directed redemptions from qualified plans.
** The contingent deferred sales charge reduces to zero after six years from
purchase.
43
<PAGE>
SAFECO MANAGED BOND FUND, CONTINUED
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Management Fees 0.50% 0.50%
12b-1 Fees 0.25% 1.00%
Other Expenses 1.50% 1.78%
Total Annual Fund Operating Expenses 2.25% 3.28%
Fee Waiver** 1.10% 1.38%
Net Expenses 1.15% 1.90%
</TABLE>
- ----------------
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets. Expenses may vary during other time periods.
** SAFECO Asset Management Company (SAM) has contractually agreed, from May 1,
1999 through April 30, 2009, to pay the Fund's aggregate operating expenses
which exceed, in any given month, the rate of .40% per annum of the Fund's
average daily net assets ("Expense Limitation"). This arrangement does not
include the Fund's advisory fee, Rule 12b-1 fee, brokerage commissions,
taxes, interest or extraordinary expenses. To the extent that the aggregate
amount SAM paid or assumed in any prior months in a given year (May 1, 1999
through April 30, 2009) exceed the Expense Limitation, SAM may offset such
amounts against the Expense Limitation for the current month.
MANAGEMENT FEES are paid to SAFECO Asset Management Company (SAM) for
investment advisory services including the provision of research,
supervision and assistance in the management of the Fund.
OTHER EXPENSES include custody, accounting and administration
expenses; transfer agency and related expenses; expenses related to
preparing, printing and delivering prospectuses and shareholder
reports; the expenses of holding shareholder meetings; legal and audit
fees; trustees' compensation; federal and state registration fees; and
extraordinary expenses.
EXAMPLE
The following example is intended to help you compare the cost of investing in
the Managed Bond Fund with the cost of investing in other mutual funds. This
example assumes that you invest $10,000 in the Managed Bond Fund for the time
periods indicated. The example also assumes that your investment has a 5% return
each year and that the Fund's net operating expenses remain the same. Although
your actual costs may be higher or lower, costs based on these assumptions would
be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years*
----- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Class A $ 562 $ 799 $ 1,054 $ 1,785
Class B
Assuming redemption at end of period $ 693 $ 897 $ 1,226 $ 1,839
Assuming no redemption $ 193 $ 597 $ 1,026 $ 1,839
</TABLE>
- ----------------
* Expenses for Class B shares reflect their conversion to Class A shares after
six years.
44
<PAGE>
SAFECO CALIFORNIA TAX-FREE INCOME FUND
OBJECTIVE
The SAFECO California Tax-Free Income Fund seeks 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.
This Fund is available to California, Oregon, Nevada and Arizona residents.
PRINCIPAL INVESTMENT STRATEGIES
<TABLE>
<S> <C>
The California Tax-Free Income Fund invests BOND RATINGS indicate an issuer's
primarily in INVESTMENT GRADE MUNICIPAL BONDS financial strength and ability to
issued by the state of California or its meet its debt obligations. The two
political subdivisions, having average main rating services are Moody's
maturities of 15-25 years. and Standard & Poor's.
The Fund will invest: INVESTMENT GRADE securities are
- - At least 80% of its assets in securities rated by these services as follows:
whose interest is exempt from federal MOODY'S S&P
income tax, the alternative minimum tax and Aaa AAA
California personal income tax. Aa AA
- - At least 65% of its assets in investment A A
grade municipal bonds with a maturity of Baa BBB
more than one year. MUNICIPAL BONDS are issued by
cities, counties, states and other
government entities to cover
borrowings needs.
</TABLE>
The Fund may invest:
- - Up to 20% of its total assets in unrated municipal bonds, as long as they are
of comparable quality to investment grade securities.
When evaluating a bond for purchase, the advisor takes into consideration, among
other things, yield, maturity, any call features, credit quality (including the
underlying rating of insured bonds), the purpose of the financing, the original
offering price, any state or local tax exemption, and the amount of discount or
premium represented by the price offered. After evaluating these features of a
bond, the advisor compares the bond to the universe of other available bonds,
which may have different features, and will purchase the bond if it appears to
offer the best relative value.
In selecting bonds for purchase, the advisor favors long maturity bonds in
essential services that offer a significant degree of protection against issuer
repurchase rights prior to maturity, and good value relative to their peers. The
advisor may sell bonds when they become fully valued, when more attractively
valued bonds become available, or to raise cash to meet shareholder redemptions.
In any case, turnover among the Fund's portfolio securities will remain low,
because it often takes years for attractive valuations to be recognized by the
municipal market.
PRINCIPAL RISK FACTORS
Loss of money is a risk of investing in the California Tax-Free Income Fund. The
Fund is subject to interest rate risk. Generally, when market interest rates
rise the price of the Fund's debt securities will fall, and when market interest
rates fall the price of the Fund's debt securities will rise. Such changes in
price generally will
45
<PAGE>
SAFECO CALIFORNIA TAX-FREE INCOME FUND, CONTINUED
be greater the longer the maturity of the debt security. Although securities in
the top four rating categories are considered "investment grade," Moody's
considers bonds rated "Baa" to have speculative characteristics. The Fund may
experience greater volatility than a fund invested in bonds with shorter average
maturities.
Because the Fund concentrates its investments in a single state, there may be
more fluctuation in the value of its securities than with mutual funds whose
portfolios are more geographically diverse.
This Fund may be suitable for you if you wish to earn income that is free from
federal income tax and free from California state personal income tax.
PERFORMANCE
The following bar chart and table provide some indication of the risks of
investing in the California Tax-Free Income Fund by showing how performance has
varied from year to year and how its performance compares over time to that of
the Lehman Brothers Long Municipal Bond Index, a widely recognized index of
municipal bonds having long maturities. As with all mutual funds, past
performance is not a prediction of future results.
Effective September 30, 1996, all of the then-existing shares of the Fund were
redesignated No-Load Class shares and the Fund commenced offering Class A and
Class B shares. The performance information in the bar chart below reflects: (1)
the actual performance of Class A shares of the Fund for the period since
September 30, 1996; and (2) the performance of the No-Load Class of shares of
the Fund for the period prior to September 30, 1996. The performance prior to
September 30, 1996 does not reflect Rule 12b-1 fees. In addition, the
performance reflected in the bar chart for the entire period shown does not
reflect sales charges. If sales charges and Rule 12b-1 fees were reflected, the
returns would be lower than those shown.
Total return is a measure of investment performance over a period of time. It
includes dividends and capital gain distributions, as well as share price gain
or loss.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
12/31/89 9.91%
12/31/90 6.97%
12/31/91 12.55%
12/31/92 8.00%
12/31/93 13.23%
12/31/94 -9.20%
12/31/95 26.14%
12/31/96 2.56%
12/31/97 11.29%
12/31/98 5.73%
</TABLE>
During the 10-year period shown in the bar chart, the highest quarterly return
was 10.59% for the quarter ended March 31, 1995; and the lowest return was
- -6.16% for the quarter ended March 31, 1994.
46
<PAGE>
SAFECO CALIFORNIA TAX-FREE INCOME FUND, CONTINUED
The performance information in the table that follows reflects: (1) the actual
performance of Class A and Class B shares of the Fund for the period since
September 30, 1996, and (2) the performance of the No-Load Class of shares of
the Fund prior to September 30, 1996. Performance shown for the period prior to
September 30, 1996 does not reflect Rule 12b-1 fees. If Rule 12b-1 fees were
reflected, the returns would be lower than those shown.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
The following table shows how the Fund's Class A and Class B share performance
compares to the Lehman Brothers Long Municipal Bond Index:
<TABLE>
<CAPTION>
1 year 5 years 10 years
<S> <C> <C> <C>
California Tax-Free Income Fund*
Class A 0.97% 5.71% 7.88%
Class B -0.02% 6.01% 8.20%
Lehman Brothers Long Municipal Bond
Index** 6.90% 6.85% 9.16%
</TABLE>
* As required by Securities and Exchange Commission regulations, the Fund's
returns reflect the imposition of the maximum sales charge for Class A
shares and the deduction of the maximum deferred sales charge for Class B
shares. Without these charges, the Fund's Class A returns would have been
5.73, 6.69 and 8.38, for 1, 5 and 10 years, respectively; and the Fund's
Class B returns would have been 4.98, 6.32 and 8.20, for 1, 5 and 10 years,
respectively.
** The Lehman Brothers Long Municipal Bond Index is an unmanaged index
comprised of municipal bonds maturing in 22 or more years. The index is not
limited to California issuers. The index does not reflect fees, brokerage
commissions or other costs of investing. This index is used for comparison
purposes only, and the Fund's holdings do not necessarily mirror the index.
Performance is based on historical earnings and does not indicate the Fund's
future results.
Returns and principal value vary with market conditions. When sold, shares may
be worth more, or less, than their original value.
FEES AND EXPENSES
The following tables describe the fees and expenses that you may pay if you buy
and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 4.50%* None
Maximum deferred sales charge (load) (as a percentage of the
lesser of net asset value at redemption or the original
purchase amount) None 5.00%**
Maximum sales charge (load) imposed on reinvested dividends
(as a percentage of offering price) None None
Redemption fee (as a percentage of amount redeemed) None None
Exchange fee 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% deferred sales charge will apply to
redemptions made in the first twelve months except with respect to
participant-directed redemptions from qualified plans.
** The contingent deferred sales charge reduces to zero after six years from
purchase.
47
<PAGE>
SAFECO CALIFORNIA TAX-FREE INCOME FUND, CONTINUED
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Management Fees 0.50% 0.50%
12b-1 Fees 0.25% 1.00%
Other Expenses 0.33% 0.30%
Total Annual Fund Operating Expenses 1.08% 1.80%
Fee Waiver** 0.00% 0.00%
Net Expenses 1.08% 1.80%
</TABLE>
- ----------------
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets. Expenses may vary during other time periods.
** SAFECO Asset Management Company (SAM) has contractually agreed, from May 1,
1999 through April 30, 2009, to pay the Fund's aggregate operating expenses
which exceed, in any given month, the rate of .40% per annum of the Fund's
average daily net assets ("Expense Limitation"). This arrangement does not
include the Fund's advisory fee, Rule 12b-1 fee, brokerage commissions,
taxes, interest or extraordinary expenses. To the extent that the aggregate
amount SAM paid or assumed in any prior months in a given year (May 1, 1999
through April 30, 2009) exceed the Expense Limitation, SAM may offset such
amounts against the Expense Limitation for the current month.
MANAGEMENT FEES are paid to SAFECO Asset Management Company (SAM) for
investment advisory services including the provision of research,
supervision and assistance in the management of the Fund.
OTHER EXPENSES include custody, accounting and administration
expenses; transfer agency and related expenses; expenses related to
preparing, printing and delivering prospectuses and shareholder
reports; the expenses of holding shareholder meetings; legal and audit
fees; trustees' compensation; federal and state registration fees; and
extraordinary expenses.
EXAMPLE
The following example is intended to help you compare the cost of investing in
the California Tax-Free Income Fund with the cost of investing in other mutual
funds. This example assumes that you invest $10,000 in the California Tax-Free
Income Fund for the time periods indicated. The example also assumes that your
investment has a 5% return each year and that the Fund's net operating expenses
remain the same. Although your actual costs may be higher or lower, costs based
on these assumptions would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years*
----- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Class A $ 555 $ 778 $ 1,019 $ 1,708
Class B
Assuming redemption at end of period $ 683 $ 866 $ 1,175 $ 1,730
Assuming no redemption $ 183 $ 566 $ 975 $ 1,730
</TABLE>
- ----------------
* Expenses for Class B shares reflect their conversion to Class A shares after
six years.
48
<PAGE>
SAFECO MUNICIPAL BOND FUND
OBJECTIVE
The SAFECO Municipal Bond Fund seeks to provide as high a level of current
interest income exempt from federal income tax as is consistent with the
relative stability of capital.
PRINCIPAL INVESTMENT STRATEGIES
<TABLE>
<S> <C>
The Municipal Bond Fund invests primarily in MUNICIPAL BONDS are issued by
MUNICIPAL BONDS rated INVESTMENT GRADE or cities, counties, states and other
better with average maturities of 15-25 years. government entities to cover
The Fund will invest: borrowings needs.
- - At least 80% of its assets in securities BOND RATINGS indicate an issuer's
whose interest is exempt from federal financial strength and ability to
income tax and the alternative minimum tax. meet its debt obligations. The two
- - At least 65% of its assets in investment main rating services are Moody's
grade municipal bonds with a maturity of and Standard & Poor's.
more than one year. INVESTMENT GRADE securities are
The Fund may invest: rated by these services as follows:
MOODY'S S&P
Aaa AAA
Aa AA
A A
Baa BBB
</TABLE>
- - Up to 20% of its total assets in unrated municipal bonds, as long as they are
of comparable quality to investment grade securities.
When evaluating a bond for purchase, the advisor takes into consideration, among
other things, yield, maturity, any call features, credit quality (including the
underlying rating of insured bonds), the purpose of the financing, the original
offering price, any state or local tax exemption, and the amount of discount or
premium represented by the price offered. After evaluating these features of a
bond, the advisor compares the bond to the universe of other available bonds,
which may have different features, and will purchase the bond if it appears to
offer the best relative value.
In selecting bonds for purchase, the advisor favors long maturity bonds in
essential services that offer a significant degree of protection against issuer
repurchase rights prior to maturity and good value relative to their peers. In
addition, the advisor considers the relative weightings of the Fund's holdings
among states. The advisor may sell bonds when they become fully valued, when
more attractively valued bonds become available, or to raise cash to meet
shareholder redemptions. In any case, turnover among the Fund's portfolio
securities will remain low, because it often takes years for attractive relative
valuations to be recognized by the municipal market.
PRINCIPAL RISK FACTORS
Loss of money is a risk of investing in the Municipal Bond Fund. The Fund is
subject to interest rate risk. Generally, when market interest rates rise the
price of the Fund's debt securities will fall, and when market interest rates
fall the price of the Fund's debt securities will rise. Such changes in price
generally will be greater the longer the maturity of the debt security. The
Municipal Bond Fund may experience greater volatility than a fund invested in
bonds with a shorter average maturity.
This Fund may be suitable for you if you seek high current tax-exempt income and
relative stability of principal.
49
<PAGE>
SAFECO MUNICIPAL BOND FUND, CONTINUED
PERFORMANCE
The following bar chart and table provide some indication of the risks of
investing in the Municipal Bond Fund by showing the performance has varied from
year to year and how its performance compares over time to that of the Lehman
Brothers Long Municipal Bond Index, a widely recognized index of municipal bonds
having long maturities. As with all mutual funds, past performance is not a
prediction of future results.
Effective September 30, 1996, all of the then-existing shares of the Fund were
redesignated No-Load Class shares and the Fund commenced offering Class A and
Class B shares. The performance information in the bar chart below reflects: (1)
the actual performance of Class A shares of the Fund for the period since
September 30, 1996; and (2) the performance of the No-Load Class of shares of
the Fund prior to September 30, 1996. The performance prior to September 30,
1996 does not reflect Rule 12b-1 fees. In addition, the performance reflected in
the bar chart for the entire period shown does not reflect sales charges. If
sales charges and Rule 12b-1 fees were reflected, the returns would be lower
than those shown.
Total return is a measure of investment performance over a period of time. It
includes dividends and capital gain distributions, as well as share price gain
or loss.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
12/31/89 10.08%
12/31/90 6.65%
12/31/91 13.78%
12/31/92 8.75%
12/31/93 12.66%
12/31/94 -8.25%
12/31/95 21.48%
12/31/96 3.18%
12/31/97 10.17%
12/31/98 5.75%
</TABLE>
During the 10-year period shown in the bar chart, the highest quarterly return
was 8.82% for the quarter ended March 31, 1995; and the lowest return was -6.77%
for the quarter ended March 31, 1994.
The performance information in the table that follows reflects: (1) the actual
performance of Class A and Class B shares of the Fund for the period since
September 30, 1996, and (2) the performance of the No-Load Class of shares of
the Fund prior to September 30, 1996. Performance shown for the period prior to
September 30, 1996 does not reflect Rule 12b-1 fees. If Rule 12b-1 fees were
reflected, the returns would be lower than those shown.
50
<PAGE>
SAFECO MUNICIPAL BOND FUND, CONTINUED
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
The following table shows how the Municipal Bond Fund's Class A and Class B
share performance compares to the Lehman Brothers Long Municipal Bond Index:
<TABLE>
<CAPTION>
1 year 5 years 10 years
<S> <C> <C> <C>
Municipal Bond Fund*
Class A 0.99% 5.05% 7.67%
Class B 0.08% 5.40% 8.01%
Lehman Brothers Long Municipal Bond
Index** 6.90% 6.85% 9.16%
</TABLE>
* As required by Securities and Exchange Commission regulations, the Fund's
returns reflect the imposition of the maximum sales charge for Class A
shares and the deduction of the maximum deferred sales charge for Class B
shares. Without these charges, the Fund's Class A returns would have been
5.75, 6.03 and 8.17, for 1, 5 and 10 years, respectively; and the Fund's
Class B returns would have been 5.08, 5.72 and 8.01, for 1, 5 and 10 years,
respectively.
** The Lehman Brothers Long Municipal Bond Index is an unmanaged index
comprised of municipal bonds maturing in 22 or more years. The index does
not reflect fees, brokerage commissions, or other costs of investing. This
index is used for comparison purposes only, and the Fund's holdings do not
necessarily mirror the index. Performance is based on historical earnings
and does not indicate the Fund's future results.
Returns and principal value vary with market conditions. When sold, shares may
be worth more, or less, than their original value.
FEES AND EXPENSES
The following tables describe the fees and expenses that you may pay if you buy
and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 4.50%* None
Maximum deferred sales charge (load) (as a percentage of the
lesser of net asset value at redemption or the original
purchase amount) None 5.00%**
Maximum sales charge (load) imposed on reinvested dividends
(as a percentage of offering price) None None
Redemption fee (as a percentage of amount redeemed) None None
Exchange fee 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% deferred sales charge will apply to
redemptions made in the first twelve months except with respect to
participant-directed redemptions from qualified plans.
** The contingent deferred sales charge reduces to zero after six years from
purchase.
51
<PAGE>
SAFECO MUNICIPAL BOND FUND, CONTINUED
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Management Fees 0.47% 0.47%
12b-1 Fees 0.25% 1.00%
Other Expenses 0.37% 0.25%
Total Annual Fund Operating Expenses 1.09% 1.72%
Fee Waiver** 0.00% 0.00%
Net Expenses 1.09% 1.72%
</TABLE>
- ----------------
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets. Expenses may vary during other time periods.
** SAFECO Asset Management Company (SAM) has contractually agreed, from May 1,
1999 through April 30, 2009, to pay the Fund's aggregate operating expenses
which exceed, in any given month, the rate of .40% per annum of the Fund's
average daily net assets ("Expense Limitation"). This arrangement does not
include the Fund's advisory fee, Rule 12b-1 fee, brokerage commissions,
taxes, interest or extraordinary expenses. To the extent that the aggregate
amount SAM paid or assumed in any prior months in a given year (May 1, 1999
through April 30, 2009) exceed the Expense Limitation, SAM may offset such
amounts against the Expense Limitation for the current month.
MANAGEMENT FEES are paid to SAFECO Asset Management Company (SAM) for
investment advisory services including the provision of research,
supervision and assistance in the management of the Fund.
OTHER EXPENSES include custody, accounting and administration
expenses; transfer agency and related expenses; expenses related to
preparing, printing and delivering prospectuses and shareholder
reports; the expenses of holding shareholder meetings; legal and audit
fees; trustees' compensation; federal and state registration fees; and
extraordinary expenses.
EXAMPLE
The following example is intended to help you compare the cost of investing in
the Municipal Bond Fund with the cost of investing in other mutual funds. This
example assumes that you invest $10,000 in the Municipal Bond Fund for the time
periods indicated. The example also assumes that your investment has a 5% return
each year and that the Fund's net operating expenses remain the same. Although
your actual costs may be higher or lower, costs based on these assumptions would
be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years*
----- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Class A $ 556 $ 781 $ 1,024 $ 1,719
Class B
Assuming redemption at end of period $ 675 $ 842 $ 1,133 $ 1,641
Assuming no redemption $ 175 $ 542 $ 933 $ 1,641
</TABLE>
- ----------------
* Expenses for Class B shares reflect their conversion to Class A shares after
six years.
52
<PAGE>
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
OBJECTIVE
The SAFECO Washington State Municipal Bond Fund seeks to provide as high a level
of current interest income exempt from federal income tax as is consistent with
prudent investment risk. This Fund is available to Washington, California and
Arizona residents.
PRINCIPAL INVESTMENT STRATEGIES
<TABLE>
<S> <C>
The Washington State Municipal Bond Fund BOND RATINGS indicate an issuer's
invests at least 65% of its total assets in financial strength and ability to
INVESTMENT GRADE MUNICIPAL BONDS issued by the meet its debt obligations. The two
state of Washington and its agencies and main rating services are Moody's
municipalities, with average maturities of and Standard & Poor's.
15-25 years. INVESTMENT GRADE securities are
The Fund will invest: rated by these services as follows:
- - At least 80% of its assets in securities MOODY'S S&P
whose interest is exempt from federal Aaa AAA
income tax. The Fund may invest in Aa AA
securities subject to the alternative A A
minimum tax. Baa BBB
- - At least 65% of its assets in investment MUNICIPAL BONDS are issued by
grade municipal bonds with maturities of cities, counties, states and other
more than one year. government entities to cover
borrowings needs.
</TABLE>
- - Up to 20% of its total assets in unrated municipal bonds, as long as they are
of comparable quality to investment grade securities.
When evaluating a bond for purchase, the advisor takes into consideration, among
other things yield, maturity, any call features, credit quality (including the
underlying rating of insured bonds), the purpose of the financing, the original
offering price, any state or local tax exemption, and the amount of discount or
premium represented by the price offered. After evaluating these features of a
bond, the advisor compares the bond to the universe of other available bonds,
which may have different features, and will purchase the bond if it appears to
offer the best relative value.
The advisor may sell bonds when more attractively valued bonds become available,
when there are opportunities to increase the percentage of bonds in the
portfolio that are protected against issuer repurchase rights, or to raise cash
to meet shareholder redemptions.
PRINCIPAL RISK FACTORS
Loss of money is a risk of investing in the Washington State Municipal Bond
Fund. The Fund is subject to interest rate risk. Generally, when market interest
rates rise the price of the Fund's debt securities will fall, and when market
interest rates fall the price of the Fund's debt securities will rise. Such
changes in price generally will be greater the longer the maturity of the debt
security. Although securities in the top four rating categories are considered
"investment grade," Moody's considers bonds rated "Baa" to have speculative
characteristics.
Because the Fund concentrates its investments in a single state, there may be
greater fluctuation in the value of its securities than with mutual funds whose
portfolios are more geographically diverse.
53
<PAGE>
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND, CONTINUED
This Fund is suitable for investors seeking tax-exempt income from a portfolio
of Washington bonds.
PERFORMANCE
The following bar chart and table provide some indication of the risks of
investing in the Washington State Municipal Bond Fund by showing how performance
has varied from year to year and how its performance compares over time to that
of the Lehman Brothers Long Municipal Bond Index, a widely recognized index of
municipal bonds having long maturities. As with all mutual funds, past
performance is not a prediction of future results.
Effective September 30, 1996, all of the then-existing shares of the Fund were
redesignated No-Load Class shares and the Fund commenced offering Class A and
Class B shares. The performance information in the chart belows reflects: (1)
the actual performance of Class A shares of the Fund for the period since
September 30, 1996; and (2) the performance of the No-Load Class of shares of
the Fund prior to September 30, 1996. The performance prior to September 30,
1996 does not reflect Rule 12b-1 fees. In addition, the performance reflected in
the bar chart for the entire period shown does not reflect sales charges. If
sales charges and Rule 12b-1 fees were reflected, the returns would be lower
than those shown.
Total return is a measure of investment performance over a period of time. It
includes dividends and capital gain distributions, as well as share price gain
or loss.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
12/31/89
12/31/90
12/31/91
12/31/92
12/31/93
12/31/94 -8.65%
12/31/95 19.89%
12/31/96 2.97%
12/31/97 8.64%
12/31/98 5.36%
</TABLE>
Since the Fund's inception in 1993, the highest quarterly return was 8.58% for
the quarter ended March 31, 1995; and the lowest return was -7.42% for the
quarter ended March 31, 1994.
The performance information in the table below reflects: (1) the actual
performance of Class A and Class B shares of the Fund for the period since
September 30, 1996, and (2) the performance of the No-Load Class of shares of
the Fund prior to September 30, 1996. Performance shown for the period prior to
September 30, 1996 does not reflect Rule 12b-1 fees. If Rule 12b-1 fees were
reflected, the returns would be lower than those shown.
54
<PAGE>
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND, CONTINUED
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
The following table shows how the Fund's Class A and Class B share performance
compares to the Lehman Brothers Long Municipal Bond Index:
<TABLE>
<CAPTION>
March 18, 1993
(inception) to
1 year 5 years December 31, 1998
<S> <C> <C> <C>
Washington State Municipal Bond Fund*
Class A 0.62% 4.27% 5.08%
Class B -0.45% 4.57% 5.50%
Lehman Brothers Long Municipal Bond
Index** 6.90% 6.85% 7.70%
</TABLE>
* As required by Securities and Exchange Commission regulations, the Fund's
returns reflect the imposition of the maximum sales charge for Class A
shares and the deduction of the maximum deferred sales charge for Class B
shares. Without these charges, the Fund's Class A returns would have been
5.36, 5.24 and 5.93, for 1 and 5 years and since inception, respectively;
and the Fund's Class B returns would have been 4.55, 4.90 and 5.63, for 1
and 5 years and since inception, respectively.
** The Lehman Brothers Long Municipal Bond Index is an unmanaged index
comprised of municipal bonds maturing in 22 or more years. The index is not
limited to Washington issuers. This index does not reflect fees, brokerage
commissions, or other costs of investing. This index is used for comparison
purposes only, and the Fund's holdings do not necessarily mirror the index.
Performance is based on historical earnings and does not indicate the Fund's
future results.
Returns and principal value vary with market conditions. When sold, shares may
be worth more, or less, than their original value.
FEES AND EXPENSES
The following tables describe the fees and expenses that you may pay if you buy
and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) 4.50%* None
Maximum deferred sales charge (load) (as a percentage of the
lesser of net asset value at redemption or the original
purchase amount) None 5.00%**
Maximum sales charge (load) imposed on reinvested dividends
(as a percentage of offering price) None None
Redemption fee (as a percentage of amount redeemed) None None
Exchange fee 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% deferred sales charge will apply to
redemptions made in the first twelve months except with respect to
participant-directed redemptions from qualified plans.
** The contingent deferred sales charge reduces to zero after six years from
purchase.
55
<PAGE>
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND, CONTINUED
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Management Fees 0.50% 0.50%
12b-1 Fees 0.25% 1.00%
Other Expenses 0.87% 0.84%
Total Annual Fund Operating Expenses 1.62% 2.34%
Fee Waiver** 0.47% 0.44%
Net Expenses 1.15% 1.90%
</TABLE>
- ----------------
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets. Expenses may vary during other time periods.
** SAFECO Asset Management Company (SAM) has contractually agreed, from May 1,
1999 through April 30, 2009, to pay the Fund's aggregate operating expenses
which exceed, in any given month, the rate of .40% per annum of the Fund's
average daily net assets ("Expense Limitation"). This arrangement does not
include the Fund's advisory fee, Rule 12b-1 fee, brokerage commissions,
taxes, interest or extraordinary expenses. To the extent that the aggregate
amount SAM paid or assumed in any prior months in a given year (May 1, 1999
through April 30, 2009) exceed the Expense Limitation, SAM may offset such
amounts against the Expense Limitation for the current month.
MANAGEMENT FEES are paid to SAFECO Asset Management Company (SAM) for
investment advisory services including the provision of research,
supervision and assistance in the management of the Fund.
OTHER EXPENSES include custody, accounting and administration
expenses; transfer agency and related expenses; expenses related to
preparing, printing and delivering prospectuses and shareholder
reports; the expenses of holding shareholder meetings; legal and audit
fees; trustees' compensation; federal and state registration fees; and
extraordinary expenses.
EXAMPLE
The following example is intended to help you compare the cost of investing in
the Washington State Municipal Bond Fund with the cost of investing in other
mutual funds. This example assumes that you invest $10,000 in the Washington
State Municipal Bond Fund for the time periods indicated. The example also
assumes that your investment has a 5% return each year and that the Fund's net
operating expenses remain the same. Although your actual costs may be higher or
lower, costs based on these assumptions would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years*
----- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Class A $ 562 $ 799 $ 1,054 $ 1,785
Class B
Assuming redemption at end of period $ 693 $ 897 $ 1,226 $ 1,839
Assuming no redemption $ 193 $ 597 $ 1,026 $ 1,839
</TABLE>
- ----------------
* Expenses for Class B shares reflect their conversion to Class A shares after
six years.
56
<PAGE>
SAFECO MONEY MARKET FUND
OBJECTIVE
The SAFECO Money Market Fund seeks 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 13 months or less.
PRINCIPAL INVESTMENT STRATEGIES
<TABLE>
<S> <C>
The Money Market Fund will purchase only COMMERCIAL PAPER is a short-term
high-quality securities having minimal credit unsecured promissory note issued by
risk. The Money Market Fund will purchase only a financial institution or large
securities with remaining maturities of 397 corporation, including funding
days or less and the Fund will maintain a agreements issued by insurance
dollar-weighted average portfolio maturity of companies.
no more than 90 days. CERTIFICATES OF DEPOSIT are
The Fund may invest in: receipts for deposits of funds in a
- - COMMERCIAL PAPER of both domestic and financial institution. They permit
foreign issues the holder to receive interest plus
- - Negotiable and non-negotiable CERTIFICATES the deposit at maturity.
OF DEPOSIT, bankers' acceptances and other REPURCHASE AGREEMENTS are
short-term obligations of U.S. and foreign arrangements in which the fund buys
banks securities at one price and
- - REPURCHASE AGREEMENTS simultaneously agrees to sell them
- - VARIABLE AND FLOATING RATE INSTRUMENTS back at a higher price.
- - U.S. GOVERNMENT SECURITIES VARIABLE AND FLOATING RATE
- - Restricted securities eligible for resale INSTRUMENTS have interest rates
under RULE 144A or SECTION 4(2), provided that change periodically in order
that the Fund's advisor has determined that to keep their market value at par.
such securities are liquid under guidelines U.S. GOVERNMENT SECURITIES are
adopted by the Fund's Board of Trustees securities issued by the U.S.
- - CORPORATE OBLIGATIONS such as publicly government or its agencies or
traded bonds and notes instrumentalities, such as the
- - ASSET-BACKED SECURITIES Federal Home Loan Bank or the
- - WHEN-ISSUED SECURITIES Federal Land Bank.
When evaluating a security for purchase the RULE 144A SECURITIES are securities
advisor takes into consideration, among other which are exempt from registration
things, yield, maturity, issuer credit quality requirements. After a minimum
and relative value compared with other two-year waiting period, they can
alternatives. be sold to qualified institutional
The advisor may sell a security if the advisor investors, such as mutual funds.
becomes concerned about the issuer's SECTION 4(2) SECURITIES are exempt
creditworthiness, if a more attractive from registration requirements and
alternative is available, or to raise cash to sold in private placements to
meet shareholder redemptions. qualified institutional investors,
such as mutual funds.
CORPORATE OBLIGATIONS are debt
instruments issued by a private
corporation, as distinct from those
issued by a government agency or a
municipality.
ASSET-BACKED SECURITIES represent
interests in pools of consumer
loans, automobile loans, credit
card loans and installment loan
contracts.
WHEN-ISSUED SECURITIES are
securities whose terms and
conditions, including price, are
fixed by the issuer, but are to be
issued and delivered against
payment in the future -- typically
30-45 days after the date of
commitment.
</TABLE>
57
<PAGE>
SAFECO MONEY MARKET FUND, CONTINUED
PRINCIPAL RISK FACTORS
Although the Money Market Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund. The
Money Market Fund's yield will fluctuate with short-term interest rates.
The Money Market Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. The Money Market Fund
may be suitable for you if you seek maximum safety and stability of principal.
PERFORMANCE
The following bar chart and table provide some indication of the risks of
investing in the Money Market Fund by showing how performance has varied from
year to year and showing the Fund's performance over time. As with all mutual
funds, past performance is not a prediction of future results.
Effective September 30, 1996, all of the then-existing shares of the Fund were
redesignated No-Load Class shares and the Fund commenced offering Class A and
Class B shares. The performance information in the bar chart below reflects: (1)
the actual performance of Class A shares of the Fund for the period since
September 30, 1996; and (2) the performance of the No-Load Class of shares of
the Fund for the period prior to September 30, 1996.
Total return is a measure of investment performance over a period of time. It
includes dividends as well as share price gain or loss.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
12/31/89 9.79%
12/31/90 7.98%
12/31/91 5.74%
12/31/92 3.27%
12/31/93 2.50%
12/31/94 3.53%
12/31/95 5.28%
12/31/96 4.78%
12/31/97 4.97%
12/31/98 4.92%
</TABLE>
During the 10-year period shown in the chart, the highest quarterly return was
3.13% for the quarter ended June 30, 1989; and the lowest return was 0.59% for
the quarter ended June 30, 1993.
58
<PAGE>
SAFECO MONEY MARKET FUND, CONTINUED
The performance information in the table that follows reflects: (1) the actual
performance of Class A and Class B shares of the Fund for the period since
September 30, 1996, and (2) the performance of the No-Load Class of shares of
the Fund prior to September 30, 1996.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
The following table shows past performance for the Fund's Class A and Class B
shares:
<TABLE>
<CAPTION>
7-day Yield
(period ended
1 year 5 years 10 years December 31, 1998)
<S> <C> <C> <C> <C>
Money Market Fund
Class A 4.92% 4.69% 5.25% 4.62%
Class B 4.76% 4.66% 5.24% 4.27%
</TABLE>
For updated yield information, call 1-800-463-8794.
FEES AND EXPENSES
The following tables describe the fees and expenses that you may pay if you buy
and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
Class A Class B
----------- ---------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None* None
Maximum deferred sales charge (load) (as a percentage of the
lesser of net asset value at redemption or the original
purchase amount) None None**
Maximum sales charge (load) imposed on reinvested dividends
(as a percentage of offering price) None None
Redemption fee (as a percentage of amount redeemed) None None
Exchange fee None None
</TABLE>
- ----------------
* Shares of the Money Market Fund do not currently carry any sales load.
** A contingent deferred sales charge may apply if you redeem Money Market Fund
shares that were purchased by exchange from another Fund.
59
<PAGE>
SAFECO MONEY MARKET FUND, CONTINUED
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
The expenses the Money Market Fund currently pays before distributing net
investment income to shareholders are shown below. These expenses are stated as
a percentage of average daily net assets. These expenses may vary during other
time periods.
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
<S> <C> <C>
Management Fees 0.50% 0.50%
12b-1 Fees** 0.00% 0.00%
Other Expenses 0.53% 0.66%
Total Annual Fund Operating Expenses 1.03% 1.16%
Fee Waiver*** 0.23% 0.36%
Net Expenses 0.80% 0.80%
</TABLE>
- ----------------
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets. Expenses may vary during other time periods.
** The Money Market Fund does not currently pay any 12b-1 fees. Shareholders
will be notified in advance by a supplement to the Prospectus in the event
that the Money Market Fund establishes a Rule 12b-1 fee under its Rule 12b-1
Plan.
*** SAFECO Asset Management Company (SAM) has contractually agreed, from May 1,
1999 through April 30, 2009, to pay the Fund's aggregate operating expenses
which exceed, in any given month, the rate of .30% per annum of the Fund's
average daily net assets ("Expense Limitation"). This arrangement does not
include the Fund's advisory fee, brokerage commissions, taxes, interest or
extraordinary expenses. To the extent that the aggregate amount SAM paid or
assumed in any prior months in a given year (May 1, 1999 through April 30,
2009) exceed the Expense Limitation, SAM may offset such amounts against the
Expense Limitation for the current month.
MANAGEMENT FEES are paid to SAFECO Asset Management Company (SAM) for
investment advisory services including the provision of research,
supervision and assistance in the management of the Fund.
OTHER EXPENSES include custody, accounting and administration
expenses; transfer agency and related expenses; expenses related to
preparing, printing and delivering prospectuses and shareholder
reports; the expenses of holding shareholder meetings; legal and audit
fees; trustees' compensation; federal and state registration fees; and
extraordinary expenses.
EXAMPLE
The following example is intended to help you compare the cost of investing in
the Money Market Fund with the cost of investing in other mutual funds. This
example assumes that you invest $10,000 in the Money Market Fund for the time
periods indicated. The example also assumes that your investment has a 5% return
each year and that the Fund's net operating expenses remain the same. Although
your actual costs may be higher or lower, costs based on these assumptions would
be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
----- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Class A $ 82 $ 255 $ 444 $ 990
Class B $ 82 $ 255 $ 444 $ 990
</TABLE>
- ----------------
Shares of the Money Market Fund are not currently subject to any 12b-1 fees.
60
<PAGE>
ADDITIONAL FUND FACTS
INVESTMENT OBJECTIVE CHANGES. In rare circumstances, a Fund may, with approval
from its board of trustees, change its investment objective. If this happens,
the Fund may no longer meet your investment needs. Should the board of trustees
vote to change a Fund's objective, you will be notified in writing at least 30
days prior to the change.
TEMPORARY DEFENSIVE STRATEGIES. From time to time, a Fund may take temporary
defensive positions that are inconsistent with its principal investment
policies, in an attempt to respond to adverse market, economic, political or
other conditions. For temporary defensive strategies, a Fund may hold cash or
invest 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 taking a temporary defensive position may not
achieve its investment objective in the short run.
UNDERSTANDING HOW A FUND INVESTS ITS ASSETS
This prospectus describes some of the Funds' investment policies and strategies.
The Statement of Additional Information includes additional information
concerning the Funds' additional investment policies and strategies. Percentage
limits placed on particular investments may be exceeded if, after the initial
investment, market movements cause asset values to change.
GENERAL RISKS OF ALL FUNDS
MARKET RISK. All securities transactions involve market risk. The major risk
associated with mutual funds is that the securities in the portfolio may decline
in value, causing your investment to be worth less than when you bought it.
Investing in mutual fund shares is therefore not the same as making a bank
deposit, and your investment is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
INTEREST RATE RISK. All bond funds are subject to interest rate risk. The
principal value of all SAFECO Bond Funds (except the Money Market Fund) will
fluctuate inversely with changes in interest rates. Generally, when market
interest rates rise the price of the Funds' debt securities will fall and when
market interest rates fall the price of the Funds' debt securities will rise.
YEAR 2000 ISSUES. The common practice in computer programming of using two
digits to identify a year has resulted in what is referred to as the "Year 2000
problem." If not corrected, automated systems could misinterpret or fail to
process dates occurring after December 31, 1999. The Funds may be adversely
affected if the computer systems used by their primary service providers do not
properly process date-related information. SAM, the Funds' investment advisor,
SAFECO Services Corporation (SAFECO Services), the Funds' transfer and paying
agent, and SAFECO Securities, Inc. (SAFECO Securities), the Funds' underwriter
and distributor, are taking steps they believe are reasonably designed to
address the Year 2000 problem with respect to the computer systems that each of
them uses, and to obtain satisfactory assurances that each of the Funds' other
major service providers are taking similar steps to correct programming for
systems with which the Funds interact.
In addition, SAM, SAFECO Services and SAFECO Securities are developing
contingency plans intended to assure that they can quickly respond to unexpected
systems failures or can implement alternate solutions. It is not anticipated
that the Funds will incur any charges or that there will be any difficulties in
accurate and timely reporting resulting in the change in year from 1999 to 2000.
However, despite the efforts and plans of the Funds' service providers, computer
systems that are non-compliant could have a material adverse effect on the
Funds' business, operations or financial condition. In addition, securities
prices, and therefore the value of the assets held by the Funds, may also be
adversely affected if the companies or governmental units or agencies whose
securities are held by the Funds do not properly process such date-related
information. The risk is greater for foreign securities because foreign
countries are not as far along as the United States is in addressing the Year
2000 problem.
61
<PAGE>
MANAGEMENT
SAFECO Asset Management Company (SAM) is the investment advisor for each Fund,
providing investment research, advice and supervision in the ongoing management
of the portfolio. Based on each Fund's investment objective and policies, SAM
determines what securities the Fund will purchase, retain or sell and implements
those decisions. Each Fund pays SAM an annual advisory fee based on a percentage
of that Fund's average daily net assets, calculated each business day and paid
monthly. The Funds paid SAM advisory and administrative fees at the following
rates, as a percentage of average daily net assets, for the year ended December
31, 1998:
<TABLE>
<S> <C>
Growth .52%
Equity .50%
Income .63%
Northwest .75%
International Stock 1.10%
Balanced .75%
Small Company Stock .85%
U.S. Value .75%
Intermediate-Term U.S. Treasury .55%
High-Yield Bond .65%
Managed Bond .50%
California Tax-Free Income .55%
Municipal Bond .42%
Washington State Municipal Bond .65%
Money Market .50%
</TABLE>
SAM is a wholly owned subsidiary of SAFECO Corporation, which is located at
SAFECO Plaza, Seattle, WA 98185. SAM is located at Two Union Square, 25th Floor,
Seattle, Washington 98101.
The Bank of Ireland Asset Management (U.S.) Limited (the "Sub-Advisor") acts as
an investment sub-advisor to the International Stock Fund. The Sub-Advisor 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. For the year ended December 31, 1998, SAM paid
the Sub-Advisor sub-advisory fees of .60% of the average daily net assets of the
International Stock Fund.
62
<PAGE>
PORTFOLIO MANAGERS
GROWTH FUND
The Growth Fund is managed by Thomas M. Maguire, Vice President of SAM. Mr.
Maguire has served as portfolio manager since 1989.
EQUITY FUND
The Equity Fund is managed by Richard D. Meagley, Vice President of SAM. Mr.
Meagley has been managing the Fund since 1995. For two years before that, he
served as portfolio manager and analyst for Kennedy Associates, Inc., an
investment advisory firm located in Seattle, Washington. From 1991 to 1992, he
was an Assistant Vice President of SAM and portfolio manager of the SAFECO
Northwest Fund.
INCOME FUND
The Income Fund is managed by Thomas E. Rath, Vice President of SAM. Mr. Rath
has served as portfolio manager since 1994. For two years prior to joining SAM,
he 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 of Washington, located in
Seattle, Washington. From 1983 to 1987, he was a securities analyst for SAFECO
Corporation.
NORTHWEST FUND
The Northwest Fund is managed by Bill Whitlow, Vice President of SAM. Mr.
Whitlow began managing the Fund in April 1997. From 1990 to 1997, he was a
principal and director of research for the brokerage firm Pacific Crest
Securities in Seattle, Washington.
INTERNATIONAL STOCK FUND
The International Stock Fund is managed by a committee of portfolio managers at
the Sub-Advisor. All investment decisions are made by this committee and no
single person is primarily responsible for making recommendations to the
committee.
BALANCED FUND
The Balanced Fund is managed by three individuals. The equity portion is
co-managed by Rex L. Bentley, Vice President of SAM and Lynette D. Sagvold,
Assistant Vice President of SAM. Mr. Bentley and Ms. Sagvold have been managing
the Fund since 1996. From 1990 to 1995, Mr. Bentley was Vice President and
Investment Counsel at the investment advisory firm of Badgley, Phelps and Bell
Investment Counsel, Inc. From 1993 to 1995, Ms. Sagvold was a portfolio manager
and analyst for First Interstate Bank of Washington. From 1985 to 1993, she was
a portfolio manager and analyst for Key Trust Company.
The debt security portion is managed by Michael Hughes, Assistant Vice President
of SAM. Mr. Hughes has been managing the debt security portion of the Fund since
1997. From 1995 to 1996, he was Vice President and a portfolio manager for First
Interstate Capital Management Company. From 1988 to 1995, he was Vice President
and a portfolio manager for First Interstate Bank of California.
SMALL COMPANY STOCK FUND
The Small Company Stock Fund is managed by Greg Eisen, Assistant Vice President
of SAM. Mr. Eisen has been managing the Fund since its inception in 1996. From
1992 to 1996, he served as an investment analyst for SAM. From 1986 to 1992, he
was a financial analyst for SAFECO Insurance Companies.
63
<PAGE>
U.S. VALUE FUND
The U.S. Value Fund is co-managed by Rex L. Bentley, Vice President of SAM, and
Lynette D. Sagvold, Assistant Vice President of SAM. Mr. Bentley and Ms. Sagvold
have been managing the U.S. Value Fund since its inception in 1996. From 1990 to
1995, Mr. Bentley was Vice President and Investment Counsel at the investment
advisory firm of Badgley, Phelps and Bell Investment Counsel, Inc. From 1993 to
1995, Ms. Sagvold was a portfolio manager and analyst for First Interstate Bank
of Washington. From 1985 to 1993, she was a portfolio manager and analyst for
Key Trust Company.
INTERMEDIATE-TERM U.S. TREASURY FUND
The Intermediate-Term U.S. Treasury Fund is managed by Ronald L. Spaulding,
Chairman of the Board of SAM. Mr. Spaulding has been managing the Fund since
1988. He has served in various capacities with SAM and SAFECO Corporation since
1975.
HIGH-YIELD BOND FUND
The High-Yield Bond Fund is managed by Robert Kern, Assistant Vice President of
SAM. Mr. Kern has been managing the Fund since 1996. He has been a securities
analyst for SAM since 1994 and from 1988 to 1994 was employed in the
Controller's Department at SAFECO Corporation.
MANAGED BOND FUND
The Managed Bond Fund is managed by Michael Hughes, Assistant Vice President of
SAM. Mr. Hughes has been managing the Fund since 1997. From 1995 to 1996 he was
Vice President and a portfolio manager for First Interstate Capital Management
Company, and from 1988 to 1995 he was Vice President and portfolio manager for
First Interstate Bank of California.
CALIFORNIA TAX-FREE INCOME FUND
The California Tax-Free Income Fund is managed by Stephen C. Bauer, President
and Director of SAM. Mr. Bauer has been managing the SAFECO California Tax-Free
Income Fund since 1983.
MUNICIPAL BOND FUND
The Municipal Bond Fund is managed by Stephen C. Bauer, President and Director
of SAM. Mr. Bauer has been managing the SAFECO Municipal Bond Fund since 1981.
WASHINGTON STATE MUNICIPAL BOND FUND
The Washington Municipal Bond Fund is managed by Beverly Denny, Assistant Vice
President of SAM. Ms. Denny has been managing the Fund since 1996. From 1991 to
1993 she was Marketing Director for SAFECO Mutual Funds, and she has been an
investment analyst with SAM since 1993.
MONEY MARKET FUND
The Money Market Fund is managed by Naomi Urata, Assistant Vice President of
SAM. Ms. Urata has managed the Fund since 1994. Ms. Urata has been an investment
analyst for SAFECO Mutual Funds since 1993. From 1990 to 1992 she was Cash
Manager for The Seattle Times.
64
<PAGE>
FINANCIAL HIGHLIGHTS
The Financial Highlights tables are intended to help you understand the Funds'
financial performance for the past five years (or, if shorter, since
commencement of operations). Certain information reflects financial results for
a single Fund share. The total returns in the tables reflect the rate that an
investor would have earned (or lost) on an investment in a Fund (assuming
reinvestment of all dividends and other distributions). This information has
been audited by Ernst & Young LLP, independent auditors, whose report, along
with the Funds' financial statements, are are incorporated by reference in the
Statement of Additional Information which is available upon request.
SAFECO GROWTH FUND
(FOR A CLASS A SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 22.39 $ 16.97 $ 15.45
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.05) (0.02) (0.02)
Net Realized and Unrealized Gain on
Investments 1.05 8.44 1.77
--------- --------- -----
Total from Investment Operations 1.00 8.42 1.75
LESS DISTRIBUTIONS
Dividends from Net Investment Income -- -- --
Distributions from Realized Gains (0.73) (3.00) (0.23)
--------- --------- -----
Total Distributions (0.73) (3.00) (0.23)
--------- --------- -----
NET ASSET VALUE AT END OF PERIOD $ 22.66 $ 22.39 $ 16.97
--------- --------- -----
--------- --------- -----
TOTAL RETURN+ 4.47% 49.61% 11.35%*
NET ASSETS AT END OF PERIOD (000'S) $33,712 $4,076 $187
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.00% 1.06% 1.12%**
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS (0.40%) (0.33%) (0.58%)**
PORTFOLIO TURNOVER RATE 54.58% 82.57% 82.93%**
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
65
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO GROWTH FUND
(FOR A CLASS B SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 22.19 $ 16.94 $ 15.45
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.15) (0.08) (0.05)
Net Realized and Unrealized Gain on
Investments 0.90 8.33 1.77
--------- --------- -----
Total from Investment Operations 0.75 8.25 1.72
LESS DISTRIBUTIONS
Dividends from Net Investment Income -- -- --
Distributions from Realized Gains (0.73) (3.00) (0.23)
--------- --------- -----
Total Distributions (0.73) (3.00) (0.23)
--------- --------- -----
NET ASSET VALUE AT END OF PERIOD $ 22.21 $ 22.19 $ 16.94
--------- --------- -----
--------- --------- -----
TOTAL RETURN+ 3.38% 48.70% 11.15%*
NET ASSETS AT END OF PERIOD (000'S) $15,569 $1,402 $116
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.91% 1.88% 1.87%**
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS (1.28%) (1.16%) (1.38%)**
PORTFOLIO TURNOVER RATE 54.58% 82.57% 82.93%**
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
66
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO EQUITY FUND
(FOR A CLASS A SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 19.55 $ 16.62 $ 15.85
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.18 0.14 0.04
Net Realized and Unrealized Gain on
Investments 4.65 3.77 1.35
--------- --------- -----
Total from Investment Operations 4.83 3.91 1.39
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.18) (0.14) (0.04)
Distributions from Realized Gains (0.93) (0.84) (0.58)
--------- --------- -----
Total Distributions (1.11) (0.98) (0.62)
--------- --------- -----
NET ASSET VALUE AT END OF PERIOD $ 23.27 $ 19.55 $ 16.62
--------- --------- -----
--------- --------- -----
TOTAL RETURN+ 24.77% 23.56% 8.78%*
NET ASSETS AT END OF PERIOD (000'S) $50,354 $7,247 $2,894
RATIO OF EXPENSES TO AVERAGE NET ASSETS 0.88% 1.24% 0.97%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 0.89% 0.74% 1.38%**
PORTFOLIO TURNOVER RATE 32.94% 34.26% 59.34%**
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
67
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO EQUITY FUND
(FOR A CLASS B SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 19.55 $ 16.60 $ 15.85
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.03) 0.02 0.02
Net Realized and Unrealized Gain on
Investments 4.56 3.79 1.33
--------- --------- -----
Total from Investment Operations 4.53 3.81 1.35
LESS DISTRIBUTIONS
Dividends from Net Investment Income -- (0.02) (0.02)
Distributions from Realized Gains (0.93) (0.84) (0.58)
--------- --------- -----
Total Distributions (0.93) (0.86) (0.60)
--------- --------- -----
NET ASSET VALUE AT END OF PERIOD $ 23.15 $ 19.55 $ 16.60
--------- --------- -----
--------- --------- -----
TOTAL RETURN+ 23.16% 22.93% 8.50%*
NET ASSETS AT END OF PERIOD (000'S) $17,232 $3,565 $355
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.94% 1.81% 1.75%**
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS (0.21%) 0.12% 0.51%**
PORTFOLIO TURNOVER RATE 32.94% 34.26% 59.34%**
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
68
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO INCOME FUND
(FOR A CLASS A SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 24.02 $ 21.15 $ 20.03
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.48 0.51 0.12
Net Realized and Unrealized Gain on
Investments 0.81 4.98 1.65
--------- --------- -----
Total from Investment Operations 1.29 5.49 1.77
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.48) (0.51) (0.12)
Distributions from Realized Gains (1.28) (2.11) (0.53)
--------- --------- -----
Total Distributions (1.76) (2.62) (0.65)
--------- --------- -----
NET ASSET VALUE AT END OF PERIOD $ 23.55 $ 24.02 $ 21.15
--------- --------- -----
--------- --------- -----
TOTAL RETURN+ 5.38% 26.15% 8.85%*
NET ASSETS AT END OF PERIOD (000'S) $2,073 $742 $193
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.34% 1.14% 1.03%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 2.16% 2.50% 2.66%**
PORTFOLIO TURNOVER RATE 46.14% 52.14% 37.84%**
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
69
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO INCOME FUND
(FOR A CLASS B SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 23.95 $ 21.12 $ 20.03
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.30 0.38 0.10
Net Realized and Unrealized Gain on
Investments 0.90 4.94 1.62
--------- --------- -----
Total from Investment Operations 1.20 5.32 1.72
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.30) (0.38) (0.10)
Distributions from Realized Gains (1.28) (2.11) (0.53)
--------- --------- -----
Total Distributions (1.58) (2.49) (0.63)
--------- --------- -----
NET ASSET VALUE AT END OF PERIOD $ 23.57 $ 23.95 $ 21.12
--------- --------- -----
--------- --------- -----
TOTAL RETURN+ 5.03% 25.35% 8.60%*
NET ASSETS AT END OF PERIOD (000'S) $2,176 $798 $112
RATIO OF EXPENSES TO AVERAGE NET ASSETS 2.08% 1.83% 1.79%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 1.45% 1.79% 1.99%**
PORTFOLIO TURNOVER RATE 46.14% 52.14% 37.84%**
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
70
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO NORTHWEST FUND
(FOR A CLASS A SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 17.25 $ 14.06 $ 13.78
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.16) (0.06) (0.01)
Net Realized and Unrealized Gain on
Investments 0.66 4.39 0.29
--------- --------- -----
Total from Investment Operations 0.50 4.33 0.28
LESS DISTRIBUTIONS
Dividends from Net Investment Income -- -- --
Distributions from Realized Gains (0.19) (1.14) --
--------- --------- -----
Total Distributions (0.19) (1.14) --
--------- --------- -----
NET ASSET VALUE AT END OF PERIOD $ 17.56 $ 17.25 $ 14.06
--------- --------- -----
--------- --------- -----
TOTAL RETURN+ 2.87% 30.79% 2.03%*
NET ASSETS AT END OF PERIOD (000'S) $2,208 $1,354 $369
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.70% 1.42% 1.40%**
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS (1.06%) (0.61%) (0.39%)**
PORTFOLIO TURNOVER RATE 50.40% 55.42% 67.32%**
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
71
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO NORTHWEST FUND
(FOR A CLASS B SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 17.09 $ 14.03 $ 13.78
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.23) (0.10) (0.03)
Net Realized and Unrealized Gain on
Investments 0.64 4.30 0.28
--------- --------- -----
Total from Investment Operations 0.41 4.20 0.25
LESS DISTRIBUTIONS
Dividends from Net Investment Income -- -- --
Distributions from Realized Gains (0.19) (1.14) --
--------- --------- -----
Total Distributions (0.19) (1.14) --
--------- --------- -----
NET ASSET VALUE AT END OF PERIOD $ 17.31 $ 17.09 $ 14.03
--------- --------- -----
--------- --------- -----
TOTAL RETURN+ 2.37% 29.93% 1.81%*
NET ASSETS AT END OF PERIOD (000'S) $2,603 $1,204 $232
RATIO OF EXPENSES TO AVERAGE NET ASSETS 2.30% 2.09% 2.18%**
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS (1.66%) (1.30%) (1.19%)**
PORTFOLIO TURNOVER RATE 50.40% 55.42% 67.32%**
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
72
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO INTERNATIONAL STOCK FUND
(FOR A CLASS A SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 11.55 $ 11.29 $ 10.39
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.02) 0.20 --
Net Realized and Unrealized Gain on
Investments and Foreign Currency
Transactions 1.60 0.29 0.95
--------- --------- -----
Total from Investment Operations 1.58 0.49 0.95
LESS DISTRIBUTIONS
Dividends from Net Investment Income -- (0.21) (0.05)
Distributions from Realized Gains -- (0.02) --
--------- --------- -----
Total Distributions -- (0.23) (0.05)
--------- --------- -----
NET ASSET VALUE AT END OF PERIOD $ 13.13 $ 11.55 $ 11.29
--------- --------- -----
--------- --------- -----
TOTAL RETURN+ 13.68% 4.30% 9.19%*
NET ASSETS AT END OF PERIOD (000'S) $629 $295 $154
RATIO OF EXPENSES TO AVERAGE NET
ASSETS++ 2.14% 1.87% 1.41%**
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS (0.47%) 0.26% (0.23%)**
PORTFOLIO TURNOVER RATE 25.62% 22.13% 18.51%**
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
++ Net of reimbursements by advisor. Absent the reimbursements, the ratio of
expenses to average net assets would have been 2.31%, 2.13% and 1.72% for
the year or period ended December 31, 1998, 1997 and 1996, respectively.
73
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO INTERNATIONAL STOCK FUND
(FOR A CLASS B SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 11.53 $ 11.28 $ 10.39
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (0.11) 0.18 --
Net Realized and Unrealized Gain on
Investments and Foreign Currency
Transactions 1.57 0.22 0.93
--------- --------- -----
Total from Investment Operations 1.46 0.40 0.93
LESS DISTRIBUTIONS
Dividends from Net Investment Income -- (0.13) (0.04)
Distributions from Realized Gains -- (0.02) --
--------- --------- -----
Total Distributions -- (0.15) (0.04)
--------- --------- -----
NET ASSET VALUE AT END OF PERIOD $ 12.99 $ 11.53 $ 11.28
--------- --------- -----
--------- --------- -----
TOTAL RETURN+ 12.66% 3.48% 8.96%*
NET ASSETS AT END OF PERIOD (000'S) $777 $331 $112
RATIO OF EXPENSES TO AVERAGE NET
ASSETS++ 3.02% 2.64% 2.17%**
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS (1.33%) 0.51% (1.15%)**
PORTFOLIO TURNOVER RATE 25.62% 22.13% 18.51%**
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
++ Net of reimbursements by advisor. Absent the reimbursements, the ratio of
expenses to average net assets would have been 3.19%, 2.90% and 2.47% for
the year or period ended December 31, 1998, 1997 and 1996, respectively.
74
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO BALANCED FUND
(FOR A CLASS A SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 11.60 $ 10.69 $ 10.38
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.25 0.28 0.09
Net Realized and Unrealized Gain on
Investments 1.14 1.45 0.44
--------- --------- -----
Total from Investment Operations 1.39 1.73 0.53
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.25) (0.28) (0.09)
Distributions from Realized Gains (0.51) (0.54) (0.13)
--------- --------- -----
Total Distributions (0.76) (0.82) (0.22)
--------- --------- -----
NET ASSET VALUE AT END OF PERIOD $ 12.23 $ 11.60 $ 10.69
--------- --------- -----
--------- --------- -----
TOTAL RETURN+ 12.06% 16.29% 5.07%*
NET ASSETS AT END OF PERIOD (000'S) $893 $205 $110
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.67% 1.52% 1.35%++**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 2.23% 2.55% 3.01%**
PORTFOLIO TURNOVER RATE 74.76% 101.22% 36.10%**
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
++ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 1.70%.
75
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO BALANCED FUND
(FOR A CLASS B SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 11.60 $ 10.70 $ 10.38
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.15 0.18 0.06
Net Realized and Unrealized Gain on
Investments 1.15 1.44 0.45
--------- --------- -----
Total from Investment Operations 1.30 1.62 0.51
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.15) (0.18) (0.06)
Distributions from Realized Gains (0.51) (0.54) (0.13)
--------- --------- -----
Total Distributions (0.66) (0.72) (0.19)
--------- --------- -----
NET ASSET VALUE AT END OF PERIOD $ 12.24 $ 11.60 $ 10.70
--------- --------- -----
--------- --------- -----
TOTAL RETURN+ 11.30% 15.21% 4.85%*
NET ASSETS AT END OF PERIOD (000'S) $2,056 $331 $115
RATIO OF EXPENSES TO AVERAGE NET ASSETS 2.34% 2.28% 2.11%++**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 1.55% 1.78% 2.23%**
PORTFOLIO TURNOVER RATE 74.76% 101.22% 36.10%**
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
++ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 2.46%.
76
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO SMALL COMPANY STOCK FUND
(FOR A CLASS A SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 14.21 $ 11.81 $ 11.51
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.08) (0.06) (0.01)
Net Realized and Unrealized Gain
(Loss) on Investments (3.04) 2.80 0.31
--------- --------- -----
Total from Investment Operations (3.12) 2.74 0.30
LESS DISTRIBUTIONS
Dividends from Net Investment Income -- -- --
Distributions from Realized Gains -- (0.34) --
--------- --------- -----
Total Distributions -- (0.34) --
--------- --------- -----
NET ASSET VALUE AT END OF PERIOD $ 11.09 $ 14.21 $ 11.81
--------- --------- -----
--------- --------- -----
TOTAL RETURN+ (21.96%) 23.21% 2.61%*
NET ASSETS AT END OF PERIOD (000'S) $1,220 $271 $135
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.66% 1.52% 1.42%++**
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS (0.99%) (0.60%) (0.50%)**
PORTFOLIO TURNOVER RATE 90.23% 60.81% 73.47%**
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
++ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 1.62%.
77
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO SMALL COMPANY STOCK FUND
(FOR A CLASS B SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 14.07 $ 11.79 $ 11.51
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.15) (0.10) (0.04)
Net Realized and Unrealized Gain
(Loss) on Investments (3.04) 2.72 0.32
--------- --------- -----
Total from Investment Operations (3.19) 2.62 0.28
LESS DISTRIBUTIONS
Dividends from Net Investment Income -- -- --
Distributions from Realized Gains -- (0.34) --
--------- --------- -----
Total Distributions -- (0.34) --
--------- --------- -----
NET ASSET VALUE AT END OF PERIOD $ 10.88 $ 14.07 $ 11.79
--------- --------- -----
--------- --------- -----
TOTAL RETURN+ (22.67%) 22.23% 2.43%*
NET ASSETS AT END OF PERIOD (000'S) $1,034 $396 $103
RATIO OF EXPENSES TO AVERAGE NET ASSETS 2.64% 2.29% 2.18%++**
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS (1.91%) (1.35%) (1.28%)**
PORTFOLIO TURNOVER RATE 90.23% 60.81% 73.47%**
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
++ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 2.41%.
78
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO U.S. VALUE FUND
(FOR A CLASS A SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
FOR THE APRIL 30, 1997
YEAR (COMMENCEMENT OF
ENDED OPERATIONS)
DECEMBER
31 TO DECEMBER 31
----------------------------
1998 1997
<S> <C> <C>
- ------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 11.18 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.05 0.08
Net Realized and Unrealized Gain on
Investments 1.27 1.65
--------- -----
Total from Investment Operations 1.32 1.73
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.05) (0.08)
Distributions from Realized Gains (0.52) (0.47)
--------- -----
Total Distributions (0.57) (0.55)
--------- -----
NET ASSET VALUE AT END OF PERIOD $ 11.93 $ 11.18
--------- -----
--------- -----
TOTAL RETURN+ 11.79% 17.24%*
NET ASSETS AT END OF PERIOD (000'S) $210 $133
RATIO OF EXPENSES TO AVERAGE NET ASSETS 2.07% 1.48%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 0.18% 1.03%**
PORTFOLIO TURNOVER RATE 55.15% 36.37%**
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
79
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO U.S. VALUE FUND
(FOR A CLASS B SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
FOR THE APRIL 30, 1997
YEAR (COMMENCEMENT OF
ENDED OPERATIONS)
DECEMBER
31 TO DECEMBER 31
----------------------------
1998 1997
<S> <C> <C>
- ------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 11.18 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.03) 0.02
Net Realized and Unrealized Gain on
Investments 1.28 1.65
--------- -----
Total from Investment Operations 1.25 1.67
LESS DISTRIBUTIONS
Dividends from Net Investment Income -- (0.02)
Distributions from Realized Gains (0.52) (0.47)
--------- -----
Total Distributions (0.52) (0.49)
--------- -----
NET ASSET VALUE AT END OF PERIOD $ 11.91 $ 11.18
--------- -----
--------- -----
TOTAL RETURN+ 11.18% 16.63%*
NET ASSETS AT END OF PERIOD (000'S) $628 $221
RATIO OF EXPENSES TO AVERAGE NET ASSETS 2.59% 2.29%**
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS (0.35%) 0.20%**
PORTFOLIO TURNOVER RATE 55.15% 36.37%**
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
80
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
(FOR A CLASS A SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 10.35 $ 10.11 $ 10.10
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.52 0.55 0.15
Net Realized and Unrealized Gain on
Investments 0.40 0.24 0.01
--------- --------- -----
Total from Investment Operations 0.92 0.79 0.16
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.52) (0.55) (0.15)
--------- --------- -----
NET ASSET VALUE AT END OF PERIOD $ 10.75 $ 10.35 $ 10.11
--------- --------- -----
--------- --------- -----
TOTAL RETURN+ 9.08% 8.03% 1.63%*
NET ASSETS AT END OF PERIOD (000'S) $833 $365 $704
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.40% 1.32% 1.07%**++
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 4.84% 5.36% 6.07%**
PORTFOLIO TURNOVER RATE 2.83% 82.36% 125.42%**
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
++ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets for the period ended December 31,
1996 would have been 1.30%.
81
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
(FOR A CLASS B SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 10.35 $ 10.12 $ 10.10
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.45 0.48 0.14
Net Realized and Unrealized Gain on
Investments 0.39 0.23 0.02
--------- --------- -----
Total from Investment Operations 0.84 0.71 0.16
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.45) (0.48) (0.14)
--------- --------- -----
NET ASSET VALUE AT END OF PERIOD $ 10.74 $ 10.35 $ 10.12
--------- --------- -----
--------- --------- -----
TOTAL RETURN+ 8.30% 7.27% 1.55%*
NET ASSETS AT END OF PERIOD (000'S) $788 $432 $223
RATIO OF EXPENSES TO AVERAGE NET ASSETS 2.00% 1.87% 1.72%**++
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 4.28% 4.78% 5.35%**
PORTFOLIO TURNOVER RATE 2.83% 82.36% 125.42%**
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
++ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets for the period ended December 31,
1996 would have been 1.95%.
82
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO HIGH-YIELD BOND FUND
(FOR A CLASS A SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
FOR THE
YEAR ELEVEN-MONTH
ENDED PERIOD ENDED
DECEMBER
31 DECEMBER 31++
----------------------------
1998 1997
<S> <C> <C>
- ------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 9.12 $ 8.83
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.72 0.69
Net Realized and Unrealized Gain
(Loss) on Investments (0.34) 0.29
--------- -----
Total from Investment Operations 0.38 0.98
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.72) (0.69)
--------- -----
NET ASSET VALUE AT END OF PERIOD $ 8.78 $ 9.12
--------- -----
--------- -----
TOTAL RETURN+ 4.32% 12.49%*
NET ASSETS AT END OF PERIOD (000'S) $2,964 $259
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.12% 1.10%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 8.11% 7.65%**
PORTFOLIO TURNOVER RATE 64.22% 85.06%**
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
++ For the period from January 31, 1997 (initial issue date of Class A and
Class B shares) through December 31, 1997.
83
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO HIGH-YIELD BOND FUND
(FOR A CLASS B SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
FOR THE
YEAR FOR THE
ENDED YEAR ENDED
DECEMBER
31 DECEMBER 31++
----------------------------
1998 1997
<S> <C> <C>
- ------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 9.12 $ 8.83
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.64 0.63
Net Realized and Unrealized Gain
(Loss) on Investments (0.34) 0.29
--------- -----
Total from Investment Operations 0.30 0.92
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.64) (0.63)
--------- -----
NET ASSET VALUE AT END OF PERIOD $ 8.78 $ 9.12
--------- -----
--------- -----
TOTAL RETURN+ 3.39% 11.77%*
NET ASSETS AT END OF PERIOD (000'S) $1,381 $355
RATIO OF EXPENSES TO AVERAGE NET ASSETS 2.06% 1.81%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 7.15% 6.87%**
PORTFOLIO TURNOVER RATE 64.22% 85.06%**
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
++ For the period from January 31, 1997 (initial issue date of Class A and
Class B shares) through December 31, 1997.
84
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO MANAGED BOND FUND
(FOR A CLASS A SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 8.60 $ 8.35 $ 8.35
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.37 0.39 0.11
Net Realized and Unrealized Gain on
Investments 0.30 0.25 --
--------- --------- -----
Total from Investment Operations 0.67 0.64 0.11
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.37) (0.39) (0.11)
Distributions from Realized Gains (0.25) -- --
--------- --------- -----
Total Distributions (0.62) (0.39) (0.11)
--------- --------- -----
NET ASSET VALUE AT END OF PERIOD $ 8.65 $ 8.60 $ 8.35
--------- --------- -----
--------- --------- -----
TOTAL RETURN+ 7.87% 7.78% 1.34%*
NET ASSETS AT END OF PERIOD (000'S) $295 $146 $140
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.86% 1.45% 1.30%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 4.09% 4.68% 5.22%**
PORTFOLIO TURNOVER RATE 132.76% 176.50% 136.29%**
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
85
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO MANAGED BOND FUND
(FOR A CLASS B SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 8.60 $ 8.35 $ 8.35
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.28 0.32 0.09
Net Realized and Unrealized Gain on
Investments 0.29 0.25 --
--------- --------- -----
Total from Investment Operations 0.57 0.57 0.09
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.28) (0.32) (0.09)
Distributions from Realized Gains (0.25) -- --
--------- --------- -----
Total Distributions (0.53) (0.32) (0.09)
--------- --------- -----
NET ASSET VALUE AT END OF PERIOD $ 8.64 $ 8.60 $ 8.35
--------- --------- -----
--------- --------- -----
TOTAL RETURN+ 6.67% 6.91% 1.15%*
NET ASSETS AT END OF PERIOD (000'S) $523 $120 $100
RATIO OF EXPENSES TO AVERAGE NET ASSETS 2.89% 2.23% 2.07%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 3.07% 3.79% 4.45%**
PORTFOLIO TURNOVER RATE 132.76% 176.50% 136.29%**
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
86
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO CALIFORNIA TAX-FREE INCOME FUND
(FOR A CLASS A SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 12.94 $ 12.23 $ 12.07
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.55 0.58 0.15
Net Realized and Unrealized Gain on
Investments 0.17 0.76 0.19
--------- --------- -----
Total from Investment Operations 0.72 1.34 0.34
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.55) (0.58) (0.15)
Distributions from Realized Gains (0.37) (0.05) (0.03)
--------- --------- -----
Total Distributions (0.92) (0.63) (0.18)
--------- --------- -----
NET ASSET VALUE AT END OF PERIOD $ 12.74 $ 12.94 $ 12.23
--------- --------- -----
--------- --------- -----
TOTAL RETURN+ 5.73% 11.29% 2.83%*
NET ASSETS AT END OF PERIOD (000'S) $678 $460 $122
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.04% 0.91% 0.89%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 4.25% 4.52% 4.84%**
PORTFOLIO TURNOVER RATE 38.78% 9.83% 10.52%**
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
87
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO CALIFORNIA TAX-FREE INCOME FUND
(FOR A CLASS B SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 12.93 $ 12.22 $ 12.07
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.46 0.48 0.12
Net Realized and Unrealized Gain on
Investments 0.17 0.76 0.18
--------- --------- -----
Total from Investment Operations 0.63 1.24 0.30
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.46) (0.48) (0.12)
Distributions from Realized Gains (0.37) (0.05) (0.03)
--------- --------- -----
Total Distributions (0.83) (0.53) (0.15)
--------- --------- -----
NET ASSET VALUE AT END OF PERIOD $ 12.73 $ 12.93 $ 12.22
--------- --------- -----
--------- --------- -----
TOTAL RETURN+ 4.98% 10.46% 2.56%*
NET ASSETS AT END OF PERIOD (000'S) $927 $501 $101
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.76% 1.63% 1.64%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 3.45% 3.71% 4.08%**
PORTFOLIO TURNOVER RATE 38.78% 9.83% 10.52%**
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
88
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO MUNICIPAL BOND FUND
(FOR A CLASS A SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
THREE MONTH
FOR THE YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 14.53 $ 13.99 $ 13.82
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.66 0.68 0.18
Net Realized and Unrealized Gain on
Investments 0.16 0.70 0.17
--------- --------- -----
Total from Investment Operations 0.82 1.38 0.35
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.66) (0.68) (0.18)
Distributions from Realized Gains (0.24) (0.16) --
--------- --------- -----
Total Distributions (0.90) (0.84) (0.18)
--------- --------- -----
NET ASSET VALUE AT END OF PERIOD $ 14.45 $ 14.53 $ 13.99
--------- --------- -----
--------- --------- -----
TOTAL RETURN+ 5.75% 10.17% 2.52%*
NET ASSETS AT END OF PERIOD (000'S) $946 $390 $311
RATIO OF EXPENSES TO AVERAGE NET ASSETS 0.98% 0.95% 0.82%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 4.51% 4.86% 5.04%**
PORTFOLIO TURNOVER RATE 20.80% 13.52% 6.66%**
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
89
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO MUNICIPAL BOND FUND
(FOR A CLASS B SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 14.52 $ 13.98 $ 13.82
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.57 0.60 0.15
Net Realized and Unrealized Gain on
Investments 0.15 0.70 0.16
--------- --------- -----
Total from Investment Operations 0.72 1.30 0.31
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.57) (0.60) (0.15)
Distributions from Realized Gains (0.24) (0.16) --
--------- --------- -----
Total Distributions (0.81) (0.76) (0.15)
--------- --------- -----
NET ASSET VALUE AT END OF PERIOD $ 14.43 $ 14.52 $ 13.98
--------- --------- -----
--------- --------- -----
TOTAL RETURN+ 5.08% 9.56% 2.27%*
NET ASSETS AT END OF PERIOD (000'S) $1,375 $502 $112
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.61% 1.53% 1.50%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 3.89% 4.22% 4.42%**
PORTFOLIO TURNOVER RATE 20.80% 13.52% 6.66%**
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
90
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
(FOR A CLASS A SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 10.95 $ 10.53 $ 10.45
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.42 0.46 0.12
Net Realized and Unrealized Gain on
Investments 0.16 0.42 0.09
--------- --------- -----
Total from Investment Operations 0.58 0.88 0.21
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.42) (0.46) (0.12)
Distributions from Realized Gains (0.32) -- (0.01)
--------- --------- -----
Total Distributions (0.74) (0.46) (0.13)
--------- --------- -----
NET ASSET VALUE AT END OF PERIOD $ 10.79 $ 10.95 $ 10.53
--------- --------- -----
--------- --------- -----
TOTAL RETURN+ 5.36% 8.64% 1.94%*
NET ASSETS AT END OF PERIOD (000'S) $209 $360 $336
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.67% 1.32% 1.31%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 3.88% 4.39% 4.49%**
PORTFOLIO TURNOVER RATE 33.18% 11.67% 15.96%**
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
91
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
(FOR A CLASS B SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 10.97 $ 10.55 $ 10.45
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.34 0.38 0.10
Net Realized and Unrealized Gain on
Investments 0.15 0.42 0.11
--------- --------- -----
Total from Investment Operations 0.49 0.80 0.21
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.34) (0.38) (0.10)
Distributions from Realized Gains (0.32) -- (0.01)
--------- --------- -----
Total Distributions (0.66) (0.38) (0.11)
--------- --------- -----
NET ASSET VALUE AT END OF PERIOD $ 10.80 $ 10.97 $ 10.55
--------- --------- -----
--------- --------- -----
TOTAL RETURN+ 4.55% 7.75% 1.94%*
NET ASSETS AT END OF PERIOD (000'S) $246 $239 $211
RATIO OF EXPENSES TO AVERAGE NET ASSETS 2.39% 2.13% 2.06%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 3.13% 3.58% 3.71%**
PORTFOLIO TURNOVER RATE 33.18% 11.67% 15.96%**
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
92
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO MONEY MARKET FUND
(FOR A CLASS A SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.05 0.05 0.01
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.05) (0.05) (0.01)
--------- --------- -----
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00
--------- --------- -----
--------- --------- -----
TOTAL RETURN 4.92% 4.97% 1.21%*
NET ASSETS AT END OF PERIOD (000'S) $2,186 $537 $295
RATIO OF EXPENSES TO AVERAGE NET ASSETS 0.92% 0.72% 0.55%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 4.87% 4.91% 5.01%**
</TABLE>
* Not annualized.
** Annualized.
93
<PAGE>
FINANCIAL HIGHLIGHTS, CONTINUED
SAFECO MONEY MARKET FUND
(FOR A CLASS B SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.05 0.05 0.01
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.05) (0.05) (0.01)
--------- --------- -----
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00
--------- --------- -----
--------- --------- -----
TOTAL RETURN 4.76% 4.94% 1.21%*
NET ASSETS AT END OF PERIOD (000'S) $670 $414 $106
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.05% 0.78% 0.54%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 4.71% 4.85% 4.96%**
</TABLE>
* Not annualized.
** Annualized.
94
<PAGE>
FUND DISTRIBUTIONS AND TAX CONSIDERATIONS
WHEN THE FUNDS PAY DISTRIBUTIONS
The Equity, Income, Balanced and U.S. Value Funds pay DIVIDENDS on the last
business day of each calendar quarter. The Growth, Northwest, International
Stock and Small Company Stock Funds pay dividends on the last business day of
each calendar year. The Intermediate-Term U.S. Treasury, High-Yield Bond,
Managed Bond, California Tax-Free Income, Municipal Bond, Washington State
Municipal Bond and Money Market Funds declare dividends each business day and
pay them monthly. Your shares become entitled to dividends on the next business
day after you purchase them. If you request a 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 redemption proceeds. All Funds, except the
Money Market Fund, pay CAPITAL GAIN DISTRIBUTIONS and special dividends, if any,
on the last business day of each year.
<TABLE>
<S> <C>
Dividends and other distributions paid by a DIVIDENDS are distributions of a
Fund on each Class of its shares are Fund's net investment income --
calculated at the same time in the same including dividends earned on
manner. However, except for the Money Market stocks and interest income earned
Fund, because of the higher Rule 12b-1 service on bonds -- less expenses.
and distribution fees associated with Class B CAPITAL GAIN DISTRIBUTIONS
shares, the dividends paid by a Fund on its represent net profits made on
Class B shares will be lower than those paid portfolio securities that are sold
on its Class A shares. for more than they originally cost.
NET ASSET VALUE (NAV) is the market
value of one share of a mutual
fund. It is calculated by adding up
the value of all the fund's assets,
subtracting liabilities and
dividing this sum by the total
number of shares owned by the
fund's shareholders.
EX-DISTRIBUTION DATE is the first
day that a Fund's NAV is reduced by
the amount of the most recently
declared distribution.
HOW DISTRIBUTIONS ARE CREDITED TO YOUR ACCOUNT
We will reinvest your dividends and capital gain distributions at the NAV on the
EX-DISTRIBUTION DATE unless you tell us in writing that you wish to receive your
distributions in cash. Retirement accounts must reinvest all dividends and other
distributions in the distributing Fund.
</TABLE>
HOW DISTRIBUTIONS ARE TAXED
Depending on which Fund you invest in, your dividends may be taxable or wholly
or partly tax-free; other distributions will be fully taxable, regardless of the
Fund that makes them. If distributions are taxable, they must be included in
your taxable income, whether you reinvest the distributions or receive them in
cash. Depending on the nature of the distribution, it may be taxed either as
ordinary income or capital gain. Thus, distributions of a Fund's taxable
dividends and its net short-term capital gains will be taxed to you as ordinary
income, while distributions of a Fund's net long-term capital gains (to the
extent they exceed its net short-term capital losses) will be taxable to you as
long-term capital gain. The tax treatment of capital gain distributions as
short-term or long-term depends on how long the Fund held the securities it sold
that generated the gain, not on how long you held your Fund shares. Net
long-term capital gain distributions generally are taxed to you (if you are a
non-corporate shareholder) at a maximum federal tax rate of 20%. We will notify
you as to which type of income or gain you are receiving so you can declare it
properly on your tax return.
95
<PAGE>
FUND DISTRIBUTIONS AND TAX CONSIDERATIONS, CONTINUED
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. Unless you are subject to backup
withholding, we will not withhold taxes.
Certain dividends and other distributions declared by a Fund in October,
November or December of any year are taxable to its shareholders as though
received on December 31 of that year if paid to them during the following
January. Accordingly, those distributions will be taxed to Fund shareholders for
the taxable year in which that December 31 falls.
If the International Stock Fund pays nonrefundable taxes to foreign governments,
those taxes will reduce the Fund's dividends but still will 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 those taxes.
Please note 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.
HOW DISPOSITIONS OF SHARES ARE TAXED
When you sell (redeem) shares of a Fund, or exchange Fund shares for shares of
another SAFECO Fund, you will realize a gain or loss, except that you will not
recognize any gain or loss on the sale (redemption) or exchange of shares of the
Money Market Fund so long as it maintains a stable share price of $1.00.
For federal income tax purposes, the amount of any contingent deferred sales
charge (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.
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 of those shares and subsequently reacquire Class A shares of the same
Fund or acquire Class A shares of another SAFECO Fund without paying a sales
charge due to the exchange privilege or reinstatement privilege. 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 30 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
U.S. TREASURY SECURITIES. States generally treat distributions of interest on
U.S. Treasury securities and other direct obligations of the U.S. government as
tax-free income. However, this treatment may depend on a Fund's owning a certain
minimum percentage of these securities. The Intermediate-Term U.S. Treasury Fund
will invest primarily in these securities.
96
<PAGE>
FUND DISTRIBUTIONS AND TAX CONSIDERATIONS, CONTINUED
TAX-EXEMPT BOND FUNDS. Each of the Tax-Exempt Bond Funds (California Tax-Free
Income Fund, Municipal Bond Fund and Washington State Municipal Bond Fund) pays
dividends that are exempt from federal income tax. Certain investments may
result in taxable income, however. These include the following:
- - Any portion of dividends representing net capital gains is taxable.
- - Income derived from certain bonds purchased below their issue price is
treated as ordinary income.
- - Only the Washington State Municipal Bond Fund may purchase so-called "private
activity" bonds, possibly generating interest that would constitute a
preference item for purposes of the federal alternative minimum tax.
If you buy shares of a Tax-Exempt Bond Fund and sell them at a loss within six
months, you may deduct only the amount of the loss that exceeds the amount of
dividends from tax-exempt interest that you received during that period.
If you receive Social Security or railroad retirement benefits, you may need to
include tax-free Fund distributions as part of your income when determining any
federal income tax that may be due on those benefits.
CALIFORNIA TAX-FREE INCOME FUND. The California Tax-Free Income Fund
(California Fund) pays dividends that are exempt from California State personal
income taxes. Certain situations, in addition to those above, may result in
taxable income, however. These include the following:
- - Capital gains distributions paid by the California Fund are treated as
long-term capital gains and are taxable as such, regardless of how long the
shares have been held.
- - Redemptions and exchanges of shares of the California Fund may result in a
capital gain or loss for California income tax purposes.
- - The tax exemption on interest income from California municipal bonds applies
only to individual shareholders. Such income is taxable for most corporate
shareholders.
WASHINGTON STATE MUNICIPAL BOND FUND. Currently the State of Washington has no
state personal income tax. If Washington enacts a personal income tax, there can
be no assurance that the dividends from the Washington State Municipal Bond Fund
would be exempt from that tax.
This section summarizes only some of the important federal income tax
considerations you should be aware of. For more information, please see the
Statement of Additional Information. Also, there may be other federal, state or
local tax considerations unique to your situation. Consult your tax advisor for
more guidance.
97
<PAGE>
YOUR INVESTMENT
HOW WE CALCULATE THE VALUE OF YOUR SHARES
The price of a Fund's shares is based on its NAV, which is generally calculated
as of the close of regular trading on the New York Stock Exchange (NYSE)
(usually 4:00 p.m. Eastern time, 1:00 p.m. Pacific time) every day the NYSE is
open. Your purchase or redemption order will be priced at the next NAV
calculated after your order is accepted by the Fund.
<TABLE>
<S> <C>
To the extent that a Fund's assets are traded The NYSE is closed on weekends and
in other markets on days when the NYSE is on the following holidays:
closed, the value of those assets may be New Year's Day, Martin Luther King
affected on days when the Fund is not open for Jr. Day, Presidents' Day, Good
business. In addition, trading in some of the Friday, Memorial Day, Independence
Fund's assets may not occur on days when the Day, Labor Day, Thanksgiving Day
Fund is open for business. and Christmas Day.
</TABLE>
HOW WE VALUE A FUND'S INVESTMENTS
We obtain valuations for each Fund's investments from pricing services. Prices
for exchange-traded securities are based on the last reported sale price on the
national exchange on which the securities are primarily traded, unless there are
no transactions, in which case the value is based on the last reported bid
price. Prices for non-exchange traded securities are based on similar securities
and quotations from dealers. Investments for which a representative value cannot
be established are priced using a method the Board of Trustees believes reflects
fair value.
Like most money market funds, the Money Market Fund values securities on the
basis of amortized cost. Amortized cost valuation involves valuing a security at
its cost and adding or subtracting any discount or premium (reflective of
maturity), 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 of the Stock Funds will generally be lower
than the NAV of Class A shares of that Fund because of the higher expenses borne
by the Class B shares. The NAVs of the Class A and Class B shares of the Stock
Funds also may differ due to differing allocations of class-specific expenses.
The NAVs of the Class A and Class B shares of the Funds will tend to converge,
however, immediately after the payment of dividends.
OPENING AND MAINTAINING YOUR ACCOUNT
TO OPEN AN ACCOUNT
- - Complete an account application and send it to SAFECO Mutual Funds with a
check made payable to SAFECO Mutual Funds for your initial investment.
- - If you are investing in a retirement account, complete and sign a retirement
account application (note: you may not buy tax-free funds for a retirement
account).
98
<PAGE>
OPENING AND MAINTAINING YOUR ACCOUNT, CONTINUED
INVESTING DETAILS
There are several things you must understand before you buy, sell or exchange
shares.
- - When placing purchase orders, you should specify whether the order is for
Class A or Class B shares of a Fund, otherwise your purchase order will
automatically be invested in Class A shares.
- - We must have received your completed, signed application and payment before
we can conduct any Fund transaction (except when money is wired into an
account).
- - We do not accept currency and can accept only funds drawn in U.S. dollars on
a U.S. bank account.
- - Checks should be made payable to SAFECO Mutual Funds. We reserve the right to
refuse all third party checks.
- - Although we do not normally issue shares in certificate form, we will issue
certificates for whole shares free of charge upon your request. If your
shares are issued in certificate form, you must endorse and submit them with
any sale or exchange request.
- - SAFECO Services charges a $10 fee to wire redemption proceeds. In addition,
some banks may charge a fee to receive wires.
- - We reserve the right to refuse the purchase of shares.
- - We may require certified copies of supporting documents and a signature
guarantee before we can process some sale and exchange requests (e.g., if we
cannot verify a shareholder's signature or in the event of the death of an
account owner).
- - If you buy shares by any means other than by wire and shortly thereafter sell
or exchange your shares, we may hold the proceeds for up to 15 calendar days
after purchase or until we are sure that your bank will honor the investment,
whichever happens first.
- - In addition to Class A and Class B shares, each Fund offers No-Load Class
shares that are sold in a separate prospectus and subject to different fees
and expenses.
AUTHORIZING SIGNATURES
On your account application, you will be asked to specify the number of
signatures required to authorize account changes and transactions. Please note
that allowing fewer than all account owners to authorize account changes and
transactions has important implications. For example, one owner of a joint
account could redeem shares without the co-owner's signature. If you select
fewer than all account owner signatures, you can revoke this election by sending
a written request to SAFECO Mutual Funds or the financial institution where your
account is maintained. Unless you indicate otherwise, we will require that all
account owners sign any account change or transaction instructions.
99
<PAGE>
CHOOSING A CLASS OF SHARES
This prospectus offers two classes of Fund shares: Class A shares and Class B
shares. Each class has a different combination of sales charges and ongoing
fees, allowing you to choose the one that best meets your needs. You should make
this decision carefully based on:
- the amount you wish to invest
- the different sales charges that apply to each share class
- whether you qualify for any reduction or waiver of sales charges
- the length of time you plan to keep the investment and
- the class expenses
CLASS A SHARES. You may purchase Class A shares of any Fund, except the Money
Market Fund, at the "offering price." For the Stock Funds the offering price is
equal to the Fund's net asset value plus a maximum sales charge of 5.75%, and
for the Bond Funds is equal to the Fund's net asset value plus a maximum sales
charge of 4.50%, imposed at the time of purchase. Class A shares of any Fund,
except the Money Market Fund, are subject to ongoing Rule 12b-1 fees of 0.25% of
their average daily net assets. These fees are lower than the ongoing Rule 12b-1
fees for Class B shares.
Class A 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.
If you choose to invest in Class A shares of any Fund, except the Money Market
Fund, you will pay a sales charge at the time of each purchase. The table below
shows the charges both as a percentage of offering price and as a percentage of
the amount you invest. If you invest more, the sales charge will be lower. You
may qualify for a reduced sales charge or the sales charge may be waived as
described below.
BOND FUNDS**
<TABLE>
<CAPTION>
Sales Charge As Percentage of
Amount of Purchase --------------------------------
at the Public Offering Price Offering Price Net Investment
- -------------------------------------------------- --------------- ---------------
<S> <C> <C>
Less than $50,000 4.50% 4.71%
$50,000 but less than $100,000 4.00% 4.17%
$100,000 but less than $250,000 3.50% 3.63%
$250,000 but less than $500,000 2.50% 2.56%
$500,000 but less than $1,000,000 1.50% 1.52%
$1,000,000 or more 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% contingent deferred sales charge will apply
to redemptions made in the first twelve months, except with respect to
participant-directed redemptions from qualified plans.
** Intermediate-Term U.S. Treasury Fund, High-Yield Bond Fund, Managed Bond
Fund, Municipal Bond Fund, California Tax-Free Income Fund, and Washington
State Municipal Bond Fund.
100
<PAGE>
CHOOSING A CLASS OF SHARES, CONTINUED
STOCK FUNDS**
<TABLE>
<CAPTION>
Sales Charge As Percentage of
Amount of Purchase --------------------------------
at the Public Offering Price Offering Price Net Investment
- -------------------------------------------------- --------------- ---------------
<S> <C> <C>
Less than $50,000 5.75% 6.10%
$50,000 but less than $100,000 4.50% 4.71%
$100,000 but less than $250,000 3.50% 3.63%
$250,000 but less than $500,000 2.50% 2.56%
$500,000 but less than $1,000,000 2.00% 2.04%
$1,000,000 or more 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% contingent deferred sales charge will apply
to redemptions made in the first twelve months, except with respect to
participant-directed redemptions from qualified plans.
** Growth Fund, Equity Fund, Income Fund, Northwest Fund, International Stock
Fund, Balanced Fund, Small Company Stock Fund and U.S. Value Fund.
Subject to certain requirements, the following purchases of Class A shares may
be aggregated for purposes of determining the amount of purchase:
- Individual purchases on behalf of a single purchaser and the purchaser's
spouse and their children under the age of 21 years;
- 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;
- 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; or
- Individual purchases by clients of a registered representative who invest
at or about the same time.
CLASS B SHARES. You may purchase Class B shares of any Fund at net asset value
with no initial sales charge. As a result, the entire amount of your purchase is
invested immediately. However, if you sell the shares within 6 years of
purchase, you will pay a contingent deferred sales charge (CDSC) at the time of
sale of up to 5.00%. Shares you acquire through dividend reinvestment or other
distributions are not subject to a CDSC at the time of sale. Class B shares of
any Fund, except the Money Market Fund, are subject to ongoing Rule 12b-1 fees
of 1.00% of their average daily net assets. This Rule 12b-1 fee is higher than
the ongoing Rule 12b-1 fees for Class A shares. Class B shares are offered for
sale only for purchases of less than $500,000.
Class B shares of the Money Market Fund are sold at net asset value, are not
subject to a contingent deferred sales charge (except for shares of the Money
Market Fund that were purchased by exchange from another Fund), and do not
currently pay Rule 12b-1 fees.
The contingent deferred sales charge imposed on sales of Class B shares is
calculated by multiplying the original purchase cost or the current market value
of the shares being sold, whichever is less, by the percentage shown on the
following chart. The longer you hold the shares, the lower the rate of the
charge.
101
<PAGE>
CHOOSING A CLASS OF SHARES, CONTINUED
The contingent deferred sales charge may be waived as described below. Any
period of time you held Class B shares of the Money Market Fund will not be
counted when determining your contingent deferred sales charge if you sell
shares that were purchased by exchange from the Money Market Fund.
<TABLE>
<CAPTION>
CDSC As a Percentage of the
Lesser of Net Asset Value at
Redemption
Redemption During or the Original Purchase Price
- ------------------------------------------- -------------------------------------
<S> <C>
1st Year Since Purchase 5%
2nd Year Since Purchase 4%
3rd Year Since Purchase 3%
4th Year Since Purchase 3%
5th Year Since Purchase 2%
6th Year Since Purchase 1%
After Six Years 0%
</TABLE>
We will calculate the contingent deferred sales charge applicable to a
redemption in a manner that results in the lowest possible rate. We will assume
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.
Except for the time period during which a shareholder is 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.
CONVERSION OF CLASS B SHARES. If you buy Class B shares and hold them for 6
years, we will automatically convert them to Class A shares without charge. Any
period of time you held Class B shares of the Money Market Fund which were
exchanged for the shares of the Fund being sold will be excluded from the 6-year
period. At this time, we also will convert to Class A shares any Class B shares
that you purchased with reinvested dividends and other distributions on the
shares being distributed. We do this to lower your investment costs.
When we convert your Class B shares, you will receive Class A shares in an
amount equal to the value of your Class B shares. However, because Class A and
Class B shares have different prices, you may receive more or fewer Class A
shares after the conversion. The dollar value will be the same, so you will not
have lost any money as a result of the conversion.
UNDERSTANDING RULE 12b-1 FEES. Each Fund has adopted a plan under Rule l2b-1
that allows it to pay distribution and sales fees for the sale of its shares and
for services provided to shareholders. Because these fees are paid out of the
Fund's assets on an ongoing basis, over time these fees will increase the cost
of your investment and may cost you more than paying other types of sales
charges.
102
<PAGE>
CHOOSING A CLASS OF SHARES, CONTINUED
BROKER REALLOWANCES. 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
below:
BOND FUNDS*
<TABLE>
<CAPTION>
Broker Reallowance As
Amount of Purchase Percentage
at the Public Offering Price of the Offering Investment
- ------------------------------------------------ -----------------------------
<S> <C>
Less than $50,000 4.00%
$50,000 but less than $100,000 3.50%
$100,000 but less than $250,000 3.00%
$250,000 but less than $500,000 2.00%
$500,000 but less than $1,000,000 1.00%
$1,000,000 or more 0
</TABLE>
- ----------------
* Intermediate-Term U.S. Treasury Fund, High-Yield Bond Fund, Managed Bond
Fund, Municipal Bond Fund, California Tax-Free Income Fund and Washington
State Municipal Bond Fund.
STOCK FUNDS*
<TABLE>
<CAPTION>
Broker Reallowance As
Amount of Purchase Percentage
at the Public Offering Price of the Offering Investment
- ------------------------------------------------ -----------------------------
<S> <C>
Less than $50,000 5.00%
$50,000 but less than $100,000 3.75%
$100,000 but less than $250,000 3.00%
$250,000 but less than $500,000 2.00%
$500,000 but less than $1,000,000 1.50%
$1,000,000 or more 0
</TABLE>
- ----------------
* Growth Fund, Equity Fund, Income Fund, Northwest Fund, International Stock
Fund, Balanced Fund, Small Company Stock Fund and U.S. Value Fund.
Except as stated below, broker-dealers of record may be paid commissions on
sales of Class A shares of $1 million or more based on an investor's (or a
related group of investors') cumulative purchases during each successive one
year period beginning on the date of the initial purchase at net asset value and
(ii) sales of Class A shares to qualified benefit plans. A 1% contingent
deferred sales charge will be imposed on redemptions made within the first 12
months, except with respect to participant-directed redemptions from qualified
plans.
Commissions on sales of Class A shares of $1 million or more (except for sales
to certain qualified benefit plans -- see below) may be paid up to a rate of
1.00% of the amount up to $3 million, .50% of the next $47 million and .25%
thereafter.
103
<PAGE>
CHOOSING A CLASS OF SHARES, CONTINUED
Commissions on sales of Class A shares to qualified retirement plans may be paid
as follows:
<TABLE>
<CAPTION>
Number of Plan
Participants
Invested in SAFECO
Funds Amount Sold Commission
- ---------------------- -------------------------- ----------------------------------------
<S> <C> <C>
50-199 under $1 million .50%
$1 million or more 1.00% up to $3 million
.50% of the next $47 million
50-199 .25% thereafter
no minimum 1.00% up to $3 million
.50% of the next $47 million
200 or more .25% thereafter
</TABLE>
SAFECO Securities reserves the right to charge back commissions if plan sales
fail to meet the above criteria.
SALES CHARGE REDUCTIONS AND WAIVERS
We offer a number of ways to reduce or eliminate the initial sales charge on
Class A shares or the contingent deferred sales charge on Class B shares. If you
think you may be eligible, contact SAFECO or your financial advisor for further
information.
REDUCING YOUR CLASS A SALES CHARGE. We offer two programs designed to reduce
your Class A sales charge. You may choose one of these programs to combine
multiple purchases of Class A shares of SAFECO Mutual Funds to take advantage of
the reduced sales charges listed in the schedule above. Please complete the
appropriate section of your account application, contact your financial advisor
or SAFECO if you would like to take advantage of these programs.
- RIGHTS OF ACCUMULATION -- Lets you combine for purposes of calculating
sales charges (a) the dollar amount of your current purchase with (b) the
dollar amount of concurrent purchases of Class A shares of other SAFECO
Mutual Funds, and (c) the dollar amount equal to the current offering
price of all Class A shares of SAFECO Mutual Funds you hold.
- LETTER OF INTENT -- Lets you purchase Class A shares of any SAFECO Mutual
Fund over a 13-month period and receive the same sales charge as if all
shares had been purchased at once.
WAIVER OF CLASS A SHARES SALES CHARGE. Class A shares are sold at net asset
value per share without any sales charges for the following investments:
1. Registered representatives or full-time employees of broker-dealers,
banks and other financial institutions that have entered into selling
agreements with SAFECO Securities, and the children, spouse and parents
of such representatives and employees, and employees of financial
institutions that directly, or through their affiliates, have entered
into selling agreements with SAFECO Securities;
2. Companies exchanging shares with or selling assets to one or more of
the SAFECO Mutual Funds pursuant to a merger, acquisition or exchange
offer;
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SALES CHARGE REDUCTIONS AND WAIVERS, CONTINUED
3. Any of the direct or indirect affiliates of SAFECO Securities;
4. Purchases made through the automatic investment of dividends and other
distributions paid by another SAFECO Mutual 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 SAFECO Mutual Fund shares and subsequently repay such loans
via a purchase of SAFECO Mutual Fund shares;
7. Retirement plan participants who receive distributions from a
tax-qualified employer-sponsored retirement plan which is invested in
SAFECO Mutual Fund shares, the proceeds of which are reinvested in SAFECO
Mutual Fund shares;
8. Accounts as to which a broker-dealer, bank or other financial
institution charges an account management fee, provided the financial
institution has entered into an agreement with SAFECO Securities
regarding such accounts;
9. Current or retired officers, directors, trustees or employees of any
SAFECO Mutual Fund or SAFECO Corporation or its affiliates and the
children, spouse and parents of such persons; and
10. Investments made with redemption proceeds from mutual funds having a
similar investment objective with respect to which the investor paid a
front-end sales charge.
REINSTATEMENT PRIVILEGE. If you paid an initial sales charge and redeem your
Class A shares in a Fund you have a one-time privilege to reinstate your
investment by investing the proceeds of the redemption at net asset value per
share without a sales charge in Class A shares of that Fund and/or one or more
of the other Funds. You or your broker-dealer, bank or other financial
institution must provide SAFECO Services with a written request for reinvestment
and a check not exceeding the amount of the redemption proceeds within 60 days
of the date of the redemption. The reinstatement purchase will be effected at
the net asset value per share next determined after such receipt.
CDSC WAIVERS. The contingent deferred sales charge for Class B shares is
currently waived in the following circumstances:
(a) total or partial redemptions made within one year following the death
or disability of a shareholder;
(b) redemptions made pursuant to any systematic withdrawal plan based on
the shareholder's life expectancy, including substantially equal periodic
payments prior to age 59 1/2 that are described in Internal Revenue Code
("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;
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SALES CHARGE REDUCTIONS AND WAIVERS, CONTINUED
(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 10% of the value of the account annually.
COMMISSIONS ON SALES
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 above under "Waiver of Class A Shares Sales Charge." 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.
TAX-DEFERRED RETIREMENT PLANS AND ACCOUNTS
SAFECO Mutual Funds offers a variety of tax-deferred retirement plans and
accounts for individuals, businesses, and nonprofit organizations. You may
establish an account under one of the following that will allow you to defer
federal income tax on investment income while you save for retirement. Most of
the Funds (other than the Tax-Exempt Bond Funds) may be used as investment
vehicles for these plans and accounts.
TRADITIONAL INDIVIDUAL RETIREMENT ACCOUNTS (IRAS). The maximum annual
contribution generally is $2,000 per person. Depending on your situation, your
contribution may be partially or fully tax deductible. You pay no tax on the
earnings until withdrawal. An annual custodial fee may be charged for any part
of a calendar year in which you have an IRA investment in a Fund.
ROTH IRAS. As with a Traditional IRA, a Roth IRA allows you to annually
contribute up to $2,000 per person. While contributions to a Roth IRA are NOT
tax deductible, earnings are tax free at withdrawal if you meet certain
requirements.
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SALES CHARGE REDUCTIONS AND WAIVERS, CONTINUED
SIMPLIFIED EMPLOYEE PENSION IRAS (SEP-IRAS). SEP-IRAs are easily administered
retirement plans for small businesses and self-employed individuals. Annual
contributions up to the lesser of $24,000 or 15% of compensation 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 Traditional IRAs.
403(b) PLANS. 403(b) plans are retirement plans for tax-exempt organizations
and school systems to which both employers and employees may contribute. Minimum
investment amounts are negotiable.
401(k) PLANS. 401(k) plans allow employers and employees to make tax-advantaged
contributions to a retirement account. SAFECO Services offers a low-cost
administration package that includes a prototype plan, record keeping, testing,
and employee communications. Minimum investment amounts are negotiable.
PROFIT SHARING AND MONEY PURCHASE PENSION PLANS. Each plan allows corporations,
partnerships, and self-employed persons to make annual, tax-deductible
contributions to a retirement account for each person covered by the plan. A
plan may be adopted individually or paired with another plan to maximize
contributions. SAFECO Services offers an administration package for these plans.
Minimum investment amounts are negotiable.
For information about the above accounts and plans, please contact your
investment professional, or call 1-800-528-6501.
PURCHASING YOUR SHARES
The price you pay for shares of a Fund is its NAV on the day we receive your
check, money order, or telephone purchase instruction in good order. However, if
we receive your investment after the NYSE has closed for the day, the price you
will pay is the Fund's NAV as of the next business day. You may purchase shares
of a SAFECO Fund only if it is qualified for sale in the state where you live.
UGMA stands for Uniform Gifts to Minors Act;
UTMA stands for Uniform Transfers to Minors
Act. Most states have adopted either the
UGMA or UTMA, which regulate custodial
accounts for minors.
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<PAGE>
PURCHASING YOUR SHARES, CONTINUED
BY MAIL
IF YOU ARE BUYING SHARES FOR THE FIRST TIME:
1. Complete and sign an account application
2. Send a check made payable to SAFECO Mutual Funds for the appropriate amount:
- - If you are opening an IRA or UGMA/UTMA account, send at least $250.
- - If you choose the Automatic Investment Method or Payroll Deduction Plan for a
regular account on your application, send nothing.*
- - If none of the above applies, send a check for at least $1,000 made payable to
SAFECO Mutual Funds.
IF YOU ARE BUYING ADDITIONAL SHARES:
If your securities dealer maintains an account for you and holds your Fund
shares in its "street name," you must contact the investment professional at
your securities dealer to place an order in your SAFECO Mutual Funds account.
Our Automatic Investment Method allows you to make regular monthly investments
by authorizing SAFECO to withdraw a specific amount from your bank account and
invest it in the Fund of your choice.
The minimum investment per Fund is $100. This applies to all accounts except
UGMA and UTMA accounts, which have a $50 minimum if you opened the account with
an initial investment of at least $250. For more information call 1-(800)
528-6501.
1. Send a check for the appropriate amount. The Fund may charge you a fee if
your check is returned to us by your bank due to non-sufficient funds or other
reasons.
2. Enclose the investment slip from your statement, if available.
MAIL TO: Your securities dealer or other investment professional can assist you
with your investment
SAFECO Mutual Funds
Class A & B Shares
P.O. Box 419241
Kansas City, MO 64141-6214
FOR OVERNIGHT DELIVERY:
SAFECO Mutual Funds
Class A & B Shares
330 W. 9th Street
Kansas City, MO 64105
* If you are an employer that uses group billing, you may establish a
self-administered Payroll Deduction Plan in any SAFECO Fund. Payroll
deduction amounts are negotiable. For more information, call 1-(800)
528-6501.
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<PAGE>
PURCHASING YOUR SHARES, CONTINUED
BY WIRE
IF YOU ARE BUYING SHARES FOR THE FIRST TIME:
1. Call 1-(800) 528-6501 for more information.
IF YOU ARE BUYING ADDITIONAL SHARES:
1. Call the number above and let us know you are wiring money to your account.
2. Have your bank wire at least $100 to the address below.
3. Have your bank include the following information:
- - SAFECO Fund name
- - Specify Class A or B shares
- - SAFECO account number
- - Name(s) of the account owner(s).
4. Note that delays caused by inadequate wire instructions are not SAFECO's
responsibility.
5. Understand that your bank may charge a fee for wire services.
HAVE YOUR BANK SEND WIRES TO:
Investors Fiduciary Trust Company
Kansas City, MO
ABA #101003621 DDA #7560923
FOR FURTHER CREDIT TO:
Account owner name, Fund # and Account #
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<PAGE>
PURCHASING YOUR SHARES, CONTINUED
BY PHONE
This option is not available for new or retirement accounts.
IF YOU ARE BUYING ADDITIONAL SHARES:
1. To become eligible for this service, you must choose it on your initial
application, or send a written request at least 15 days prior to your use. You
must also designate any other authorized users.
2. You may purchase no more than $50,000 per day and no less than $100 per day.
3. Understand that:
- - If your securities dealer maintains an account for you, and holds your Fund
shares in its "street name," you must contact the investment professional at
your securities dealer to place an order in your SAFECO Mutual Funds account.
- - Money will be transferred from your bank account to your fund account.
- - Your bank may not allow you to transfer money by phone.
- - Your bank may charge a fee.
- - We record all calls for your protection, and a representative may ask you for
identifying information, such as your Social Security number.
- - Although our representatives employ security measures to prevent unauthorized
account access, we cannot assure you that telephone activity will be
completely secure or free of delays or malfunctions. You must be willing to
assume the risk of any loss.
- - During times of unusual market volatility, you may find it difficult to access
SAFECO Mutual Funds by phone.
- - SAFECO Mutual Funds is not responsible for the negligence or wrongful acts of
third parties.
- - We may suspend, limit, modify, or terminate phone transaction privileges at
any time without prior notice.
- - We may charge you a fee if your bank refuses the transfer from your bank
account due to non-sufficient funds or other reasons.
CALL:
Call your securities dealer or other investment professional to place an order
for additional shares; or
1-(800) 528-6501 Monday-Friday between 6:30 a.m. and 5:30 p.m. Pacific time to
speak to a SAFECO representative or
1-(800) 463-8794 for our 24-hour Automated Service Line
THROUGH A REGISTERED SECURITIES DEALER, BANK OR OTHER FINANCIAL INSTITUTION
WHETHER YOU ARE BUYING SHARES FOR THE FIRST TIME OR BUYING ADDITIONAL SHARES:
Understand that:
- - Your securities dealer may charge you a fee or impose more restrictions than
if you purchase the shares directly from SAFECO Mutual Funds. (SAFECO has no
control over or involvement in this fee.)
- - Your securities dealer is responsible for the prompt forwarding of
instructions on your account and is bound by the terms of this prospectus.
- - SAFECO is not responsible for the actions and recommendations of your
securities dealer.
CALL OR VISIT:
Any registered securities dealer, bank or other financial institution that has a
signed selling agreement with SAFECO.
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<PAGE>
SELLING YOUR SHARES
When you sell shares, we will normally send you a check for the proceeds on the
first business day after we receive your redemption request in good order. If we
receive your request after the NYSE has closed for the day (1:00 p.m. Pacific
time), we will normally send the check two business days later.
The price you receive is the NAV on the day we receive your redemption request
(subject to any applicable CDSC). However, if we receive your redemption request
after the NYSE has closed for the day, you will receive the NAV as of the next
business day.
In unusual situations we may suspend or delay payment for redemptions. This may
happen if:
- - The NYSE is closed
- - NYSE trading is restricted
- - The Securities and Exchange Commission declares an emergency
- - You bought shares less than 15 days previous to redemption and SAFECO has not
yet received confirmation that your bank will honor the investment
Also, if immediate payment could adversely affect a Fund, we may need to delay
payment for up to seven days.
Distributions from retirement accounts are generally subject to federal income
tax withholding. However, under some circumstances, you may elect not to have
taxes withheld, or to have taxes withheld at a rate other than the prescribed
rate.
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<PAGE>
SELLING YOUR SHARES, CONTINUED
BY MAIL
1. Send a letter specifying:
- - Account number
- - Fund name
- - Redemption amount (number of shares or dollar amount)
2. Have the letter signed by the owner(s) of the account. You must have
specified on your account application the number of signatures required to
authorize the selling of shares.
3. If you are selling shares in a retirement account let us know the amount, if
any, to withhold for taxes or early withdrawal penalties.
4. A signature guarantee may be required for certain transactions. Please call
for details.
We will mail you a redemption check. If you wish to have funds transferred
directly to your bank account, you must choose this service on your initial
application or send a written request at least 15 days prior to using it. SAFECO
charges a $10 fee to wire redemption proceeds, and some banks charge a fee to
receive a wire.
If you choose the Systematic Withdrawal Plan, a Fund will automatically sell
shares in your account and send you a monthly withdrawal check. The minimum
withdrawal for this service is $50 per Fund.
For more information call 1-(800) 528-6501.
MAIL TO: If you purchased your shares through a securities dealer or other
investment professional who maintains an account for you and holds your
shares in its "street name," you must redeem shares through that firm.
IF YOU OWN THE SHARES DIRECTLY:
SAFECO Mutual Funds
Class A & B Shares
P.O. Box 419241
Kansas City, MO 64141-6241
FOR OVERNIGHT DELIVERY:
SAFECO Mutual Funds
Class A & B Shares
330 W. 9th Street
Kansas City, MO 64105
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<PAGE>
SELLING YOUR SHARES, CONTINUED
BY PHONE
This option is not available for retirement accounts or for shares issued in
certificate form.
Understand that:
- - We record all calls for your protection, and a representative may ask you for
identifying information, such as your Social Security number.
- - Although our representatives employ security measures to prevent unauthorized
account access, we cannot assure you that telephone activity will be
completely secure or free of delays or malfunctions. You must be willing to
assume the risk of any loss.
- - During times of unusual market volatility, you may find it difficult to access
SAFECO by phone.
- - SAFECO is not responsible for the negligence or wrongful acts of third
parties.
- - We may suspend, limit, modify, or terminate phone transaction privileges at
any time without prior notice.
We will mail you a redemption check. If you wish to have funds transferred
directly to your bank account, you must choose this service on your initial
application or send a written request at least 15 days prior to using it. SAFECO
charges a $10 fee to wire these proceeds, and some banks charge a fee to receive
a wire.
CALL:
If you purchased your shares through a securities dealer or other investment
professional who maintains and account for you and holds your shares in its
"street name," you must call your securities dealer or other investment
professional for assistance.
IF YOU OWN THE SHARES DIRECTLY CALL:
1-(800) 528-6501 Monday-Friday between 6:30 a.m. and 5:30 p.m. Pacific time for
a SAFECO representative or
1-(800) 463-8794 for our 24-hour Automated Service Line
THROUGH YOUR REGISTERED SECURITIES DEALER
Your securities dealer may submit redemption requests for you.
Understand that:
- - The securities dealer may charge you a fee for this service. (SAFECO has no
control over or involvement in this fee.)
- - Your securities dealer is responsible for the prompt forwarding of
instructions on your account and is bound by the terms of this prospectus.
- - SAFECO is not responsible for the actions and recommendations of your
securities dealer.
CALL OR VISIT:
The registered securities dealer through whom you purchased the shares.
EXCHANGING SHARES FROM ONE FUND TO ANOTHER
An exchange is when you sell shares of one Fund and buy shares of another in the
same account with the same owner(s). 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
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EXCHANGING SHARES FROM ONE FUND TO ANOTHER, CONTINUED
exchange of Class B shares will not be subject to a CDSC. For purposes of
computing the CDSC, except for the time period during which a shareholder is
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.
Here are some things you should know about exchanges:
- - Under normal circumstances, we will buy shares of the Fund into which you are
exchanging on the same day that we process your order to sell.
- - If immediate payment could adversely affect a Fund, we may need to delay the
purchase of shares in the new Fund for up to seven days.
- - Mutual fund exchanges are taxable events. You may realize a capital gain or
loss when you make an exchange.
- - Always read the prospectus before making an exchange into a Fund that is new
to you.
EXCHANGE LIMITATIONS
Keep in mind that mutual funds are not intended to be used as vehicles for
frequent trading in response to short-term market fluctuations. Market-timing
and similar investment strategies disrupt efficient portfolio management and
increase transaction costs for all shareholders. For this reason, we have
instituted certain policies to discourage excessive exchange or SIMULTANEOUS
ORDER TRANSACTIONS.
<TABLE>
<S> <C>
- - You may enter no more than four exchanges SIMULTANEOUS ORDER TRANSACTIONS
or simultaneous order transactions in any involve a redemption from one
12-month period. However, we reserve the SAFECO Fund and reinvestment
right to refuse exchanges or simultaneous shortly thereafter into another
order transactions at any time. In SAFECO Fund. We will use our
addition, in the case where an exchange discretion in determining when a
could adversely affect the performance and simultaneous order transaction
investment objective of the Fund, we may takes place.
terminate privileges without prior notice.
Under normal circumstances, we will give
you 60 days' notice before terminating your
exchange privileges.
</TABLE>
- - You may buy shares of a SAFECO Fund by exchange only if it is qualified for
sale in the state where you live.
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EXCHANGING SHARES FROM ONE FUND TO ANOTHER, CONTINUED
HOW TO MAKE AN EXCHANGE
BY MAIL
[CAPTION]
1. Send a letter specifying:
- - Account number
- - Name of the Fund you wish to exchange out of
- - Name of the Fund you wish to exchange into
- - Amount of the exchange (number of shares or dollar amount)
2. Have the letter signed by the owner(s) of the account. You must have
specified on your account application the number of signatures required to
authorize the exchange of shares.
MAIL TO: If you purchased your shares through a securities dealer or other
investment professional who maintains an account for you and holds your
shares in its "street name," your securities dealer or other investment
professional for assistance or:
IF YOU OWN THE SHARES DIRECTLY WRITE:
SAFECO Mutual Funds
Class A & B Shares
P.O. Box 419241
Kansas City, MO 64141-6241
FOR OVERNIGHT DELIVERY:
SAFECO Mutual Funds
Class A & B Shares
330 W. 9th Street
Kansas City, MO 64105
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<PAGE>
EXCHANGING SHARES FROM ONE FUND TO ANOTHER, CONTINUED
BY PHONE
This option is not available for shares issued in certificate form.
1. You must exchange $1,000 or more.
2. To become eligible for this service, you must choose it on your initial
application or we must have received your written request prior to your use.
You must also designate any other authorized users.
3. Understand that:
- - We record all calls for your protection, and a representative may ask you for
identifying information such as your social security number.
- - Although our representatives employ security measures to prevent unauthorized
account access, we cannot assure you that telephone activity will be
completely secure or free of delays or malfunctions. You must be willing to
assume the risk of any loss.
- - During times of unusual market volatility, you may find it difficult to access
SAFECO by phone.
- - SAFECO is not responsible for the negligence or wrongful acts of third
parties.
- - We may suspend, limit, modify, or terminate phone transaction privileges at
any time without prior notice.
CALL:
If you purchased your shares through a securities dealer or other investment
professional who maintains an account for you and holds your shares in its
"street name," you must call your securities dealer or other investment
professional for assistance or:
IF YOU OWN THE SHARES DIRECTLY CALL:
1-(800) 528-6501 Monday-Friday between 6:30 a.m. and 5:30 p.m. Pacific time for
a representative or
1-(800) 463-8794 for our 24-hour Automated Service Line
THROUGH YOUR REGISTERED SECURITIES DEALER
Your securities dealer may submit exchange requests for you.
Understand that:
- - Your securities dealer may charge you a fee for this service. (SAFECO has no
control over or involvement in this fee.)
- - Your securities dealer is responsible for the prompt forwarding of
instructions on your account and is bound by the terms of this Prospectus.
- - SAFECO is not responsible for the actions and recommendations of your
securities dealer.
CALL OR VISIT:
The registered securities dealer through whom you purchased the shares.
REDEMPTION CHECKS -- MONEY MARKET FUND CLASS A SHARES ONLY
If you are a Class A shareholder in the SAFECO Money Market Fund, we will send
you, upon request and free of charge, redemption checks that allow you to
withdraw funds from your account.
Checks may be made payable to anyone and must be:
- - $500 or more
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EXCHANGING SHARES FROM ONE FUND TO ANOTHER, CONTINUED
- - Signed by the authorized account holders
If you write more than one check against insufficient funds, we may close your
account.
MAINTAINING YOUR ACCOUNT
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.
We will also be sending you semi-annual and annual reports. To reduce the volume
of mail, we will send only one copy of these reports and the prospectus to a
household (same surname, same address) unless you request otherwise.
Certain documents may be delivered to you electronically, at your request.
Maintaining small accounts increases expenses for all shareholders. For this
reason, we may close your account if it falls below $100. If this happens, we
will first give you at least 60 days' notice, then redeem your shares at net
asset value and send the proceeds to you.
We will reinvest into your account any undeliverable and uncashed dividends and
other distribution checks that remain outstanding over six months. This
reinvestment will reflect the NAV next computed after the check is cancelled.
Subsequent distributions may also be reinvested.
ACCOUNT CHANGES
TO CHANGE YOUR ACCOUNT REGISTRATION:
If you purchased your shares through an investment professional who maintains an
investment account for you and holds your shares in "street name" you should
send your account registration changes or other requests to that firm. If shares
are registered directly in your name, you may send a written request to SAFECO
Mutual Funds, Class A & B Shares, P.O. Box 419241, Kansas City, MO 64141-6241.
Make sure the request is signed by the authorized owner(s) specified on your
account application.
TO MAKE CHANGES TO YOUR AUTOMATIC INVESTMENT METHOD OR SYSTEMATIC WITHDRAWAL
PLAN:
Send your request in writing to SAFECO Mutual Funds as indicated above. Or, if
you have previously selected the single signature authorization for your account
and have enrolled in the telephone option service, you may place your request by
telephone.
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<PAGE>
SAFECO FAMILY OF FUNDS
------------------------------------------------
STABILITY OF PRINCIPAL
SAFECO Money Market Fund
BOND INCOME
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO High-Yield Bond Fund
SAFECO Managed Bond Fund
TAX-FREE BOND INCOME
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal Bond Fund
HIGH CURRENT INCOME WITH LONG-TERM GROWTH
SAFECO Income Fund
LONG-TERM GROWTH
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Northwest Fund
SAFECO International Stock Fund
SAFECO Balanced Fund
SAFECO Small Company Stock Fund
SAFECO U.S. Value Fund
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<PAGE>
FOR MORE INFORMATION
If you would like more information, the following documents are available free
upon request:
ANNUAL/SEMI-ANNUAL REPORTS
Additional information about a Fund's investments is available in the Fund's
annual and semi-annual reports. In the Fund's annual report, you will find a
discussion of the market conditions and investment strategies that significantly
affected its performance during the last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the Funds. A current SAI is on
file with the Securities and Exchange Commission, is incorporated herein by
reference and is legally considered part of this prospectus.
For these documents or to discuss your questions about the Funds, contact the
investment professional at your broker-dealer, bank or other financial
institution, or
<TABLE>
<S> <C>
WRITE TO: SAFECO Mutual Funds
Class A & B Shares
P.O. Box 34890
Seattle, WA 98124-1890
CALL: 1-800-528-6501
Deaf and Hard of Hearing
TTY/TDD Service: 1-800-438-8718
Retirement Plans Services
1-800-278-1985
E-MAIL: [email protected]
Or contact the SEC:
WRITE TO: SEC Public Reference Room
450 Fifth Street, N.W.
Washington, DC 20549-6009
CALL: 1-800-SEC-0330
</TABLE>
VISIT THE SEC'S WEB SITE: http://www.sec.gov
VISIT THE SEC'S PUBLIC REFERENCE ROOM: 450 Fifth Street, N.W., Washington, DC
20549-6009
NOTE: THE SEC MAY CHARGE A FEE FOR DOCUMENTS.
SEC 1940 ACT FILE NUMBERS 811-6167
811-5574
811-7300
811-3347
811-6667
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<PAGE>
FOR CLIENT SERVICES OR TO REQUEST A PROSPECTUS
Monday-Friday
6:30 am - 5:30 pm, Pacific Time
1-800-528-6501
TTY/TDD: 1-800-438-8718
Retirement Services: 1-800-278-1985
FOR YIELDS, PRICES AND
PERFORMANCE INFORMATION
24 hours a day, 7 days a week
1-800-463-8794
MAILING ADDRESS
SAFECO Mutual Funds
Class A & B Shares
P.O. Box 419241
Kansas City, MO 64141-6214
EXPRESS/OVERNIGHT MAIL:
SAFECO Mutual Funds
Class A & B Shares
330 W. 9th Street
Kansas City, MO 64105
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN
THE PROSPECTUS, OR THAT WE HAVE REFERRED YOU TO. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THE PROSPECTUS IS NOT
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY SHARES OF THE FUNDS IN ANY STATE UNLESS THE
SHARES ARE QUALIFIED FOR SALE THERE.
[LOGO]
SAFECO SECURITIES, INC. DISTRIBUTOR
EMAIL: [email protected]
GMF 4111 4/99 THIS PAGE IS NOT PART OF THE PROSPECTUS
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
ADVISOR CLASS A
ADVISOR CLASS B
SAFECO COMMON STOCK TRUST: SAFECO TAXABLE BOND TRUST:
SAFECO GROWTH FUND SAFECO INTERMEDIATE-TERM
SAFECO EQUITY FUND U.S. TREASURY FUND
SAFECO INCOME FUND SAFECO HIGH-YIELD BOND FUND
SAFECO NORTHWEST FUND
SAFECO BALANCED FUND SAFECO MANAGED BOND TRUST:
SAFECO INTERNATIONAL STOCK FUND SAFECO MANAGED BOND FUND
SAFECO SMALL COMPANY STOCK FUND
SAFECO U.S.VALUE FUND
SAFECO TAX-EXEMPT BOND TRUST: SAFECO MONEY MARKET TRUST:
SAFECO MUNICIPAL BOND FUND SAFECO MONEY MARKET FUND
SAFECO CALIFORNIA TAX-FREE INCOME FUND
SAFECO WASHINGTON STATE MUNICIPAL BOND
FUND
This Statement of Additional Information ("SAI") is not a prospectus itself. It
should be read in conjunction with the Class A and Class B Shares Prospectus
dated April 30, 1999 for each Fund listed above (collectively, "Funds"). To
receive a copy of the Funds' Prospectus, write to: SAFECO Mutual Funds, Class A
and B Shares, P.O. Box 34890, Seattle, Washington 98124-1890, or call:
Nationwide Deaf and Hard of Hearing
800-528-6501 TDD/TTY Service
800-438-8718
The date of the most current Prospectus to which this SAI relates is April 30,
1999.
The date of this SAI is April 30, 1999.
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . .
OVERVIEW OF INVESTMENT POLICIES. . . . . . . . . . . . . . . . .
I. Fundamental Investment Policies . . . . . . . . . . . . . .
II. Non-Fundamental Investment Policies
ADDITIONAL INVESTMENT INFORMATION. . . . . . . . . . . . . . . .
SPECIAL RISKS OF BELOW INVESTMENT GRADE BONDS. . . . . . . . . .
SPECIAL RISKS OF FOREIGN INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS . . . . . . . . . . . . . . . . . . .
INVESTMENT RISKS OF CONCENTRATION IN CALIFORNIA AND
WASHINGTON ISSUERS. . . . . . . . . . . . . . . . . . . . .
REDEMPTION IN KIND . . . . . . . . . . . . . . . . . . . . . . .
REDUCED SALES CHARGE PLANS . . . . . . . . . . . . . . . . . . .
CONVERSION OF CLASS B SHARES . . . . . . . . . . . . . . . . . .
INFORMATION ON CALCULATION OF NET ASSET
VALUE PER SHARE . . . . . . . . . . . . . . . . . . . . . .
PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . .
INFORMATION ON DIVIDENDS FOR THE
MONEY MARKET FUND . . . . . . . . . . . . . . . . . . . . .
MANAGEMENT OF THE FUNDS. . . . . . . . . . . . . . . . . . . . .
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS OF
CERTAIN FUNDS . . . . . . . . . . . . . . . . . . . . . . .
INVESTMENT ADVISORY AND OTHER SERVICES . . . . . . . . . . . . .
BROKERAGE PRACTICES. . . . . . . . . . . . . . . . . . . . . . .
TAX INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . .
RETIREMENT PLANS . . . . . . . . . . . . . . . . . . . . . . . .
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . .
DESCRIPTION OF RATINGS . . . . . . . . . . . . . . . . . . . . .
<PAGE>
GENERAL INFORMATION
Each of the SAFECO Common Stock Trust (the "Common Stock Trust"), the SAFECO
Managed Bond Trust (the "Managed Bond Trust"), the SAFECO Tax-Exempt Bond Trust
(the "Tax-Exempt Bond Trust"), SAFECO Taxable Bond Trust (the "Taxable Bond
Trust"), and the SAFECO Money Market Trust (the "Money Market Trust") was
established as a Delaware business trust under a Declaration of Trust dated
May 13, 1993. All are registered as open-end management investment companies
under the Investment Company Act of 1940, as amended (the "1940 Act").
The Common Stock Trust offers its shares through eight diversified mutual
funds: the SAFECO Growth Fund ("Growth Fund"), SAFECO Equity Fund ("Equity
Fund"), SAFECO Income Fund ("Income Fund"), SAFECO Northwest Fund ("Northwest
Fund"), SAFECO International Stock Fund ("International Fund"), SAFECO
Balanced Fund ("Balanced Fund"), SAFECO Small Company Stock Fund ("Small
Company Fund"), and SAFECO U.S. Value Fund ("U.S. Value Fund"). The Taxable
Bond Trust offers its shares through three diversified mutual funds: the
SAFECO Intermediate-Term U.S. Treasury Fund ("Intermediate-Term U.S. Treasury
Fund"), the SAFECO GNMA Fund ("GNMA Fund"), and the SAFECO High-Yield Bond
Fund ("High-Yield Fund"). The Managed Bond Trust offers its shares through a
single mutual fund, the SAFECO Managed Bond Fund ("Managed Bond Fund"). The
Tax-Exempt Bond Trust offers its shares through five diversified mutual
funds; the SAFECO Intermediate-Term Municipal Bond Fund, the SAFECO Insured
Municipal Bond Fund, the SAFECO Municipal Bond Fund ("Municipal Bond Fund"),
the SAFECO California Tax-Free Income Fund ("California Tax-Free Income
Fund"), and the SAFECO Washington State Municipal Bond Fund ("Washington
Municipal Bond Fund") (the last three, collectively, the "Tax-Exempt Bond
Funds"). The Money Market Trust offers its shares through two diversified
mutual funds: the SAFECO Money Market Fund ("Money Market Fund"), and the
SAFECO Tax-Free Money Market Fund ("Tax-Free Money Market Fund").
Four of the Funds offer only No-Load Class Shares. They are: the GNMA Fund,
the Intermediate-Term Municipal Bond Fund, the Insured Municipal Bond Fund, and
the Tax-Free Money Market Fund. All of the other Funds offer multiple classes
of shares. Class A and Class B shares of each Fund are described in this SAI.
In general, Class A shares are sold subject to a front-end 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 and pay a higher 12b-1 fee.
OVERVIEW OF INVESTMENT POLICIES
The investment policies of the Funds are described in the Prospectuses and this
SAI. 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
<PAGE>
activities that are prohibited. The types of securities (E.G., common stock,
U.S. government securities or bonds) the Funds may purchase are disclosed in the
Prospectuses and this SAI. The Funds have no intention to purchase securities
that the following policies permit, but which are not currently described in the
Fund's Prospectus or this SAI. If a policy's percentage limitation is adhered
to immediately after and as a result of an 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).
With respect to the investment restrictions of the Tax-Exempt Bond Funds, the
entity that has the ultimate responsibility for the payment of interest and
principal on a particular security generally is deemed to be its issuer for
purposes of such 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.
Each Fund's fundamental policies can only be changed with the approval of a
"majority of its outstanding voting securities," as defined by the 1940 Act.
For purposes of such approval, the vote of a majority of the outstanding voting
securities of a Fund means the vote, at a meeting of the shareholders of such
Fund duly called, of (i) 67% or more of the voting securities present at such
meeting if the holders of more than 50% of the outstanding voting securities are
present or represented by proxy, or (ii) more than 50% of the outstanding voting
securities, whichever is less.
Non-fundamental policies may be changed without shareholder approval.
I. FUNDAMENTAL INVESTMENT POLICIES
The six (6) fundamental investment policies LISTED BELOW apply to all
Funds:
1. The Fund may not borrow money or issue senior securities, except
as the 1940 Act, any rule or order thereunder, or SEC staff
interpretation thereof, may permit.
2
<PAGE>
2. The Fund may not underwrite the securities of other issuers,
except that the Fund may engage in transactions involving the
acquisition, disposition or resale of its portfolio securities,
under circumstances where it may be considered to be an
underwriter under the Securities Act of 1933.
3. The Fund may not purchase or sell real estate unless acquired as
a result of ownership of securities or other instruments and
provided that this restriction does not prevent the Fund from
investing in issuers which invest, deal, or otherwise engage in
transactions in real estate or interests therein, or investing in
securities that are secured by real estate or interests therein,
or exercising rights under agreements relating to such securities
including the right to enforce security interests and to hold
real estate acquired by reason of such enforcement until that
real estate can be liquidated in an orderly manner.
4. The Fund may not purchase or sell physical commodities, unless
acquired as a result of ownership of securities or other
instruments and provided that this restriction does not prevent
the Fund from engaging in transactions involving futures
contracts and options, forward currency contracts, swap
transactions and other financial contracts or investing in
securities that are secured by physical commodities.
5. The Fund may not make loans, provided that this restriction does
not prevent the Fund from purchasing debt obligations, entering
into repurchase agreements, loaning its assets to broker/dealers
or institutional investors and investing in loans, including
assignments and participation interests.
6. The Fund will not purchase securities of any one issuer if, as a
result, more than 5% of the Fund's total assets would be invested
in securities of that issuer or the Fund would own or hold more
than 10% of the outstanding voting securities of that issuer,
except that up to 25% of the Fund's total assets may be invested
without regard to these limitations, and except that these
limitations do not apply to securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities or to
securities issued by other open-end investment companies.
3
<PAGE>
The fundamental policy below applies to all Funds except the MONEY
MARKET FUND:
7. The Fund will not make investments that will result in the
concentration (as that term may be defined in the 1940 Act, any
rule or order thereunder, or SEC staff interpretation thereof) of
its investments in the securities of issuers primarily engaged in
the same industry, provided that this restriction does not limit
the Fund from investing in obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities.
The fundamental policy below applies to the MONEY MARKET FUND:
8. The Fund will not make investments that will result in the
concentration (as that term may be defined in the 1940 Act, any
rule or order thereunder, or SEC staff interpretation thereof) of
its investments in the securities of issuers primarily engaged in
the same industry, provided that this restriction does not limit
the Fund from investing in obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities, or
certain bank instruments issued by domestic banks.
The fundamental policy below applies only to the WASHINGTON MUNICIPAL
BOND FUND, MUNICIPAL BOND FUND and CALIFORNIA TAX-FREE INCOME FUND:
9. During normal market conditions, the Fund will not invest less
than 80% of its net assets in obligations the interest on which
is exempt from federal income tax and, in the case of the
California Tax-Free Income Fund, also from California state
personal income tax.
II. NON-FUNDAMENTAL INVESTMENT POLICIES
A. GROWTH FUND
In addition to the policies described in the Growth Fund's Prospectus,
the Growth Fund has adopted the following non-fundamental policies.
These policies may be changed without shareholder approval:
1. The Fund will not mortgage, pledge, or hypothecate any of its
assets, provided that this shall not apply to the transfer of
securities in connection with any permissible borrowing or to
collateral arrangements in connection with permissible
activities.
4
<PAGE>
2. The Fund will not buy or sell foreign exchange, except as
necessary to convert the proceeds of the sale of foreign
portfolio securities into U.S. dollars.
3. The Fund will not purchase securities for which there is no
readily available market or enter into repurchase agreements or
purchase time deposits maturing in more than seven days, or
purchase OTC options or hold assets set aside to cover OTC
options written by the Fund, if immediately after and as a
result, the value of such securities would exceed, in the
aggregate, 15% of the Fund's net assets.
4. The Fund may purchase as temporary investments for its cash
commercial paper, certificates of deposit, no-load, open-end
money market funds, repurchase agreements (subject to the
non-fundamental restriction on illiquid securities) or any other
short-term instrument that SAFECO Asset Management Company
("SAM") deems appropriate.
5. The Fund may invest up to 10% of its total assets in shares of
real estate investment trusts.
6. The Fund will not purchase securities on margin, provided that
the Fund may obtain short-term credits as may be necessary for
the clearance of purchases and sales of securities, and further
provided that the Fund may make margin deposits in connection
with its use of financial options and futures, forward and spot
currency contracts, swap transactions and other financial
contracts or derivative instruments.
7. The Fund will not purchase foreign securities unless (a) such
securities are listed on a national securities exchange, and (b)
such purchase, at the time thereof, would not cause more than 10%
of the total assets of the Fund (taken at market value) to be
invested in foreign securities.
B. EQUITY FUND
In addition to the policies described in the Equity Fund's
Prospectus, the Equity Fund has adopted the following
non-fundamental policies. These policies may be changed without
shareholder approval:
1. The Fund will not mortgage, pledge, or hypothecate any of
its assets, provided that this shall not apply to the
transfer of securities in connection with any permissible
borrowing
5
<PAGE>
or to collateral arrangements in connection with permissible
activities.
2. The Fund will not purchase foreign securities unless (a)
such securities are listed on a national securities
exchange, and (b) such purchase, at the time thereof, would
not cause more than 10% of the total assets of the Fund
(taken at market value) to be invested in foreign
securities.
3. The Fund will not trade in foreign currency, except as may
be necessary to convert the proceeds of the sale of foreign
portfolio securities into U.S. dollars.
4. The Fund may purchase as temporary investments for its cash
commercial paper, certificates of deposit, repurchase
agreements (subject to the non-fundamental restriction on
illiquid securities) or any other short-term instrument SAM
deems appropriate.
5. The Fund may invest up to 10% of its total assets in shares
of real estate investment trusts.
6. The Fund may invest in securities convertible into common
stock, but less than 35% of its total assets will be
invested in such securities.
7. The Fund will not purchase securities on margin, provided
that the Fund may obtain short-term credits as may be
necessary for the clearance of purchases and sales of
securities, and further provided that the Fund may make
margin deposits in connection with its use of financial
options and futures, forward and spot currency contracts,
swap transactions and other financial contracts or
derivative instruments.
C. INCOME FUND
In addition to the policies described in the Income Fund's
Prospectus, the Income Fund has adopted the following
non-fundamental policies. These policies may be changed without
shareholder approval:
1. The Fund will not mortgage, pledge, or hypothecate any of
its assets, provided that this shall not apply to the
transfer of securities in connection with any permissible
borrowing or to
6
<PAGE>
collateral arrangements in connection with permissible
activities.
2. The Fund will not buy or sell foreign exchange, except as
necessary to convert the proceeds of the sale of foreign
portfolio securities into U.S. dollars.
3. The Fund will invest primarily in common stock and may also
invest in convertible and non-convertible bonds and
preferred stock.
4. The Fund may purchase as temporary investments for its cash
commercial paper, certificates of deposit, no-load, open-end
money market funds, repurchase agreements (subject to the
non-fundamental restriction on illiquid securities) or any
other short-term instrument SAM deems appropriate.
5. The Fund may invest up to 10% of its total assets in shares
of real estate investment trusts.
6. The Fund will not purchase securities on margin, provided
that the Fund may obtain short-term credits as may be
necessary for the clearance of purchases and sales of
securities, and further provided that the Fund may make
margin deposits in connection with its use of financial
options and futures, forward and spot currency contracts,
swap transactions and other financial contracts or
derivative instruments.
7. The Fund will not purchase foreign securities unless (a)
such securities are listed on a national securities
exchange, and (b) such purchase, at the time thereof, would
not cause more than 10% of the total assets of the Fund
(taken at market value) to be invested in foreign
securities.
D. NORTHWEST FUND
In addition to the policies described in the Northwest Fund's
Prospectus, the Northwest Fund has adopted the following
non-fundamental policies. These policies may be changed without
shareholder approval:
1. The Fund will not buy or sell foreign exchange, except as
may be necessary to invest the proceeds of the sale of
foreign securities in the Fund's portfolio in U.S. dollars.
7
<PAGE>
2. The Fund may invest in shares of common stock selected
primarily for potential appreciation.
3. The Fund may occasionally invest in securities convertible
into common stock when, in the opinion of SAM, the expected
total return of a convertible security exceeds the expected
total return of common stock eligible for purchase by the
Fund.
4. The Fund may purchase as temporary investments for its cash
commercial paper, certificates of deposit, shares of
no-load, open-end money market funds repurchase agreements
(subject to the non-fundamental restriction on illiquid
securities) or any other short-term instrument that SAM
deems appropriate.
5. The Fund will not purchase foreign securities unless (a)
such securities are listed on a national securities
exchange, and (b) such purchase, at the time thereof, would
not cause more than 10% of the total assets of the Fund
(taken at market value) to be invested in foreign
securities.
6. The Fund will not purchase securities on margin, provided
that the Fund may obtain short-term credits as may be
necessary for the clearance of purchases and sales of
securities, and further provided that the Fund may make
margin deposits in connection with its use of financial
options and futures, forward and spot currency contracts,
swap transactions and other financial contracts or
derivative instruments.
7. The Fund will not mortgage, pledge, or hypothecate any of
its assets, provided that this shall not apply to the
transfer of securities in connection with any permissible
borrowing or to collateral arrangements in connection with
permissible activities.
E. BALANCED FUND
In addition to the policies described in the Balanced Fund's
Prospectus, the Balanced Fund has adopted the following
non-fundamental policies. These policies may be changed without
shareholder approval:
1. The Fund will not invest more than 10% of its total assets
in real estate investment trusts, nor will the Fund invest
in
8
<PAGE>
interests in real estate investment trusts that are not
readily marketable or interests in real estate limited
partnerships not listed or traded on the Nasdaq Stock Market
("Nasdaq") if, as a result, the sum of such interests
considered illiquid and other illiquid securities would
exceed 15% of the Fund's net assets.
2. The Fund will not purchase securities on margin, provided
that the Fund may obtain short-term credits as may be
necessary for the clearance of purchases and sales of
securities, and further provided that the Fund may make
margin deposits in connection with its use of financial
options and futures forward and spot currency contracts,
swap transactions and other financial contracts or
derivative instruments.
3. The Fund may borrow money only from a bank or SAFECO
Corporation or affiliates thereof or by engaging in reverse
repurchase agreements with any party. The Fund will not
purchase any securities while borrowings equal to or greater
than 5% of its total assets are outstanding.
4. The Fund will not purchase securities for which there is no
readily available market or enter into repurchase agreements
or purchase time deposits maturing in more than seven days,
or purchase OTC options or hold assets set aside to cover
OTC options written by the Fund, if immediately after and as
a result, the value of such securities would exceed, in the
aggregate, 15% of the Fund's net assets.
5. The Fund will not make loans to any person, firm or
corporation, but the purchase by the Fund of a portion of an
issue of publicly distributed bonds, debentures or other
securities issued by persons other than the Fund, whether or
not the purchase was made upon the original issue of
securities, shall not be considered a loan within the
prohibition of this section.
F. INTERNATIONAL FUND
In addition to the policies described in the International Fund's
Prospectus, the International Fund has adopted the following
non-fundamental policies. These policies may be changed without
shareholder approval:
9
<PAGE>
1. The Fund will not invest more than 10% of its total assets
in real estate investment trusts, nor will the Fund invest
in interests in real estate investment trusts that are not
readily marketable or interests in real estate limited
partnerships not listed or traded on Nasdaq if, as a result,
the sum of such interests considered illiquid and other
illiquid securities would exceed 15% of the Fund's net
assets.
2. The Fund will not purchase securities on margin, provided
that the Fund may obtain short-term credits as may be
necessary for the clearance of purchases and sales of
securities, and further provided that the Fund may make
margin deposits in connection with its use of financial
options and futures forward and spot currency contracts,
swap transactions and other financial contracts or
derivative instruments.
3. The Fund may borrow money only from a bank or SAFECO
Corporation or affiliates thereof or by engaging in reverse
repurchase agreements with any party. The Fund will not
purchase any securities while borrowings equal to or greater
than 5% of its total assets are outstanding.
4. The Fund will not purchase securities for which there is no
readily available market or enter into repurchase agreements
or purchase time deposits maturing in more than seven days,
or purchase OTC options or hold assets set aside to cover
OTC options written by the Fund, if immediately after and as
a result, the value of such securities would exceed, in the
aggregate, 15% of the Fund's net assets.
5. The Fund will not make loans to any person, firm or
corporation, but the purchase by the Fund of a portion of an
issue of publicly distributed bonds, debentures or other
securities issued by persons other than the Fund, whether or
not the purchase was made upon the original issue of
securities, shall not be considered a loan within the
prohibition of this section.
G. SMALL COMPANY FUND
In addition to the policies described in the Small Company Fund's
Prospectus, the Small Company Fund has adopted the following
non-fundamental policies. These policies may be changed without
shareholder approval:
10
<PAGE>
1. The Fund will not invest more than 10% of its total assets
in real estate investment trusts, nor will the Fund invest
in interests in real estate investment trusts that are not
readily marketable or interests in real estate limited
partnerships not listed or traded on Nasdaq if, as a result,
the sum of such interests considered illiquid and other
illiquid securities would exceed 15% of the Fund's net
assets.
2. The Fund will not purchase securities on margin, provided
that the Fund may obtain short-term credits as may be
necessary for the clearance of purchases and sales of
securities, and further provided that the Fund may make
margin deposits in connection with its use of financial
options and futures forward and spot currency contracts,
swap transactions and other financial contracts or
derivative instruments.
3. The Fund will not purchase securities for which there is no
readily available market or enter into repurchase agreements
or purchase time deposits maturing in more than seven days,
or purchase OTC options or hold assets set aside to cover
OTC options written by the Fund, if immediately after and as
a result, the value of such securities would exceed, in the
aggregate, 15% of the Fund's net assets.
4. The Fund will not make loans to any person, firm or
corporation, but the purchase by the Fund of a portion of an
issue of publicly distributed bonds, debentures or other
securities issued by persons other than the Fund, whether or
not the purchase was made upon the original issue of
securities, shall not be considered a loan within the
prohibition of this section.
H. U.S. VALUE FUND
In addition to the policies described in the U.S. Value Fund's
Prospectus, the U.S. Value Fund has adopted the following
non-fundamental policies. These policies may be changed without
shareholder approval:
1. The Fund will not invest more than 10% of its total assets
in real estate investment trusts, nor will the Fund invest
in interests in real estate investment trusts that are not
readily marketable or interests in real estate limited
partnerships not listed or traded on the Nasdaq Stock Market
if, as a
11
<PAGE>
result, the sum of such interests considered illiquid and
other illiquid securities would exceed 15% of the Fund's net
assets.
2. The Fund will not purchase securities on margin, provided
that the Fund may obtain short-term credits as may be
necessary for the clearance of purchases and sales of
securities, and further provided that the Fund may make
margin deposits in connection with its use of financial
options and futures forward and spot currency contracts,
swap transactions and other financial contracts or
derivative instruments.
3. The Fund may borrow money only from a bank or SAFECO
Corporation or affiliates thereof or by engaging in reverse
repurchase agreements with any party. The Fund will not
purchase any securities while borrowings equal to or greater
than 5% of its total assets are outstanding.
4. The Fund will not purchase securities for which there is no
readily available market or enter into repurchase agreements
or purchase time deposits maturing in more than seven days,
or purchase OTC options or hold assets set aside to cover
OTC options written by the Fund, if immediately after and as
a result, the value of such securities would exceed, in the
aggregate, 15% of the Fund's net assets.
5. The Fund will not make loans to any person, firm or
corporation, but the purchase by the Fund of a portion of an
issue of publicly distributed bonds, debentures or other
securities issued by persons other than the Fund, whether or
not the purchase was made upon the original issue of
securities, shall not be considered a loan within the
prohibition of this section.
I. INTERMEDIATE-TERM U.S. TREASURY
FUND, HIGH-YIELD FUND
In addition to the policies described in above-referenced Funds'
Prospectus, the Intermediate-Term U.S. Treasury Fund and
High-Yield Fund have adopted the following non-fundamental
investment policies. These policies may be changed without
shareholder approval:
12
<PAGE>
1. The Intermediate Term U.S. 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 is exempt from
federal income tax.
2. 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.
3. The Fund may purchase "when-issued" or "delayed-delivery"
securities or purchase or sell securities on a "forward
commitment" basis.
4. 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.
5. The Intermediate Term U.S. 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.
6. The Fund will not purchase securities for which there is no
readily available market, or enter into repurchase
agreements or purchase time deposits maturing in more than
seven days, or purchase OTC options or hold assets set aside
to cover OTC options written by the Fund, if immediately
after and as a result, the value of such securities would
exceed, in the aggregate, 15% of the Fund's net assets.
7. The Fund will not mortgage, pledge, or hypothecate any of
its assets, provided that this shall not apply to the
transfer of securities in connection with any permissible
borrowing
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or to collateral arrangements in connection with permissible
activities.
J. MANAGED BOND FUND
In addition to the policies described in the Managed Bond Fund's
Prospectus, the Managed Bond Fund has adopted the following
non-fundamental investment policies. These policies may be
changed without shareholder approval:
1. The Fund will not purchase securities if borrowings equal to
or greater than five percent (5%) of the Fund's total assets
are outstanding.
2. The Fund will invest at least sixty-five percent (65%) of
its total assets in fixed income obligations.
3. 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.
4. The Fund may invest up to fifty percent (50%) of its total
assets in corporate debt securities or Eurodollar bonds.
5. The Fund may invest up to ten percent (10%) of its total
assets in Yankee Sector debt obligations.
6. The Fund may purchase securities on a when-issued or
delayed-delivery basis or may purchase or sell securities
on a forward commitment basis.
7. The Fund may temporarily invest its cash in high quality
commercial paper, certificates of deposit, shares of
no-load, open-end money market funds, repurchase agreements
or any other short-term instrument the Fund's investment
adviser deems appropriate.
8. The Fund may hold cash as a temporary defensive measure when
market conditions so warrant.
9. The Fund may invest up to five percent (5%) of its total
assets in securities the interest on which is exempt from
federal income tax.
10. The Fund may invest up to five percent (5%) of its total
assets in shares of real estate investment trusts.
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11. The Fund will not purchase securities for which there is no
readily available market or enter into repurchase agreements
or purchase time deposits maturing in more than seven days,
or purchase OTC options or hold assets set aside to cover
OTC options written by the Fund, if immediately after and as
a result, the value of such securities would exceed, in the
aggregate, 15% of the Fund's net assets.
12. The Fund will not purchase foreign securities unless (a)
such securities are listed on a national securities
exchange, and (b) such purchase, at the time thereof, would
not cause more than 10% of the total assets of the Fund
(taken at market value) to be invested in foreign
securities.
13. 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.
14. The Fund will not purchase securities on margin, provided
that the Fund may obtain short-term credits as may be
necessary for the clearance of purchases and sales of
securities, and further provided that the Fund may make
margin deposits in connection with its use of financial
options and futures, forward and spot currency contracts,
swap transactions and other financial contracts or
derivative instruments.
K. MUNICIPAL BOND FUND, CALIFORNIA TAX-FREE INCOME FUND AND WASHINGTON
MUNICIPAL BOND FUND
In addition to the policies described in above-referenced Funds'
Prospectus, the Tax-Exempt Bond Funds have adopted the following
non-fundamental policies. These policies may be changed without
shareholder approval:
1. Each Fund will not purchase securities for which there is no
readily available market, or enter into repurchase
agreements or purchase time deposits maturing in more than
seven days, or purchase OTC options or hold assets set aside
to cover OTC options written by the Fund, if immediately
after and as a result, the value of such securities would
exceed, in the aggregate, 15% of the Fund's net assets.
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2. Each Fund will not permit 25% or more of its 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.
MUNICIPAL BOND FUND AND CALIFORNIA TAX-FREE INCOME FUND:
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, Inc. ("S&P"), or IBCA
Fitch Investor Service, 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 that 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 that have a maturity of one
year or less from the date of purchase. The Funds do not
currently intend to rely on Fitch ratings.
2. Each Fund may invest in obligations of the U.S. Government,
its agencies or instrumentalities or in qualified repurchase
agreements, the net interest on which is taxable for federal
income tax purposes.
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 twenty-five percent (25%) or more of
its assets in industrial development bonds.
5. Each Fund may purchase or sell securities on a "when-issued"
or "delayed-delivery" basis.
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6. Each Fund will not purchase securities on margin, provided
that the Fund may obtain short-term credits as may be
necessary for the clearance of purchases and sales of
securities, and further provided that the Fund may make
margin deposits in connection with its use of financial
options and futures, forward and spot currency contracts,
swap transactions and other financial contracts or
derivative instruments.
7. Each Fund will not mortgage, pledge, or hypothecate any of
its assets, provided that this shall not apply to the
transfer of securities in connection with any permissible
borrowing or to collateral arrangements in connection with
permissible activities.
WASHINGTON MUNICIPAL BOND FUND:
1. Will not purchase securities if borrowings equal to or
greater than five percent (5%) of its total assets are
outstanding.
2. Will not purchase securities on margin, provided that the
Fund may obtain short-term credits as may be necessary for
the clearance of purchases and sales of securities, and
further provided that the Fund may make margin deposits in
connection with its use of financial options and futures
forward and spot currency contracts, swap transactions and
other financial contracts or derivative instruments.
MUNICIPAL BOND FUND:
1. Will not permit 25% or more of its total assets to be
invested in securities whose issuers are located in the same
state.
L. MONEY MARKET FUND
In addition to the policies described in the Money Market Fund's
Prospectus, the Money Market Fund has adopted the three
non-fundamental policies noted below. These policies may be
changed without shareholder approval:
1. The Money Market 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.
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2. The Fund will not purchase securities for which there is no
readily available market, or enter into repurchase
agreements or purchase time deposits maturing in more than
seven days, or purchase OTC options or hold assets set aside
to cover OTC options written by the Fund, if immediately
after and as a result, the value of such securities would
exceed, in the aggregate, 10% of the Fund's net assets.
3. The Fund will not mortgage, pledge, or hypothecate any of
its assets, provided that this shall not apply to the
transfer of securities in connection with any permissible
borrowing or to collateral arrangements in connection with
permissible activities.
ADDITIONAL INVESTMENT INFORMATION
STOCK FUNDS
The Growth Fund, Equity Fund, Income Fund, Northwest Fund, Balanced Fund,
International Fund, Small Company Fund, and U.S. Value Fund may make the
following investments, among others, although they may not buy all of the types
of securities that are described.
1. COMMON STOCKS AND PREFERRED STOCKS. 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.
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.
2. BONDS AND OTHER DEBT SECURITIES. The Funds may invest in bonds and
other debt securities that are rated investment grade, or unrated bonds
determined by SAM to be of comparable quality to such rated bonds. Bonds
rated in the lowest category of investment grade (Baa by Moody's and BBB
by S&P) and comparable unrated bonds have speculative characteristics and
are more likely to have a weakened capacity to make principal and
interest payments under changing economic conditions or upon
deterioration in the financial condition of the issuer.
Bonds and 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
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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.
3. CONVERTIBLE SECURITIES. Convertible bonds and convertible preferred
stock may be exchanged for a stated number of shares of the issuer's
common stock at a certain price known as the conversion price. The
conversion price is usually greater than the price of the common stock
at the time the convertible security is purchased. Generally, the
interest rate of convertible bonds and the yield of convertible
preferred stock will be lower than the issuer's non-convertible
securities. Also, the value of convertible securities will normally
vary with the value of the underlying common stock and fluctuate
inversely with interest rates. However, convertible securities may show
less volatility in value than the issuer's non-convertible securities.
A risk associated with convertible bonds and convertible preferred stock
is that the conversion price of the common stock will not be attained.
The Growth Fund and the Income 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 Equity
Fund may invest U.S. Value Fund 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.
4. WARRANTS. A warrant is an option issued by a corporation that gives the
holder the right to buy a stated number of shares of common stock of the
corporation at a specified price within a designated time period. Warrants
may be purchased and sold separately or attached to stocks or bonds as part
of a unit offering. The term of a warrant may run from two to five years
and in some cases the term may be longer. The exercise price carried by
the warrant is usually well above the prevailing market price of the
underlying common stock at the time the warrant is issued. The holder of a
warrant has no voting rights and receives no dividends. Warrants are
freely transferable and may trade on the major national exchanges.
Warrants may be speculative. Generally, the value of a warrant will
fluctuate by greater percentages than the value of the underlying common
stock. The primary risk associated with a warrant is that the term of the
warrant may expire before the exercise price of the common stock has been
reached. Under these circumstances, a Fund could lose all of its principal
investment in the warrant.
A Fund will invest in a warrant only if the Fund has the authority to hold
the underlying common stock. Additionally, if a warrant is part of a unit
offering, a Fund will purchase the warrant only if it is attached to a
security in which the Fund has authority to invest. In all cases, a Fund
will purchase warrants only after SAM determines that the exercise price
for the underlying common stock is likely to be achieved within the
required time-frame and for which an actively traded market exists. SAM
will make this determination by analyzing the issuer's financial health,
quality of management and any other factors deemed to be relevant.
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<PAGE>
5. RESTRICTED SECURITIES AND RULE 144A SECURITIES. Restricted securities are
securities that may be sold only in a public offering with respect to which
a registration statement is in effect under the 1933 Act or, if they are
unregistered, pursuant to an exemption from registration. In recognition
of the increased size and liquidity of the institutional markets for
unregistered securities and the importance of institutional investors in
the formation of capital, the SEC adopted Rule 144A, which is designed to
further facilitate efficient trading among institutional investors by
permitting the sale of Rule 144A securities to qualified institutional
buyers. To the extent privately placed securities held by a Fund qualify
under Rule 144A and an institutional market develops for those securities,
the Fund likely will be able to dispose of the securities without
registering them under the 1933 Act. SAM, acting under guidelines
established by the Trust's Board of Trustees, may determine that certain
securities qualified for trading under Rule 144A are liquid.
Where registration is required, a Fund may be obligated to pay all or part
of the registration expenses, and a considerable period may elapse between
the decision to sell and the time the Fund may be permitted to sell a
security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the Fund might obtain a
less favorable price than prevailed when it decided to sell. To the extent
privately placed securities are illiquid, purchases thereof will be subject
to any limitations on investments in illiquid securities. Restricted
securities for which no market exists are priced at fair value as
determined in accordance with procedures approved and periodically reviewed
by the Trust's Board of Trustees.
6. 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. Repurchase
agreements may be considered loans of money to the seller of the underlying
security, which are collateralized by the securities underlying the
repurchase agreement. A Fund will not enter into a repurchase agreement
unless the agreement is fully collateralized and the Fund will value the
securities underlying the repurchase agreement daily to assure that this
condition is met. If the value of these securities is less than the
repurchase price, plus any agreed-upon additional amount, the other party
to the agreement must provide additional collateral so that at all times
the collateral is at least equal to the repurchase price, plus any
agreed-upon additional amount.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including delays and costs to a Fund if the
other party to a repurchase agreement defaults or becomes bankrupt. Each
Fund intends to enter into repurchase agreements only with banks and
dealers in transactions believed by SAM to present minimal credit risks in
accordance with guidelines established
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by the Trust's Board of Trustees. SAM will review and monitor the
creditworthiness of those institutions under the Board's general
supervision. Foreign repurchase agreements (Funds that may purchase
foreign securities only) may be less well secured than U.S. repurchase
agreements and may be subject to currency risks. In addition, foreign
counterparties may be less creditworthy than U.S. counterparties.
7. 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.
8. FOREIGN SECURITIES. Foreign securities are subject to risks in addition
to those inherent in investments in domestic securities. A Fund 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.
9. INDEXED SECURITIES. Indexed securities are securities whose prices are
indexed to the prices of other securities, securities indices, currencies,
commodities or other financial indicators. Indexed securities generally
are debt securities whose value at maturity or interest rate is determined
by reference to a specific instrument or statistic. Currency-indexed
securities generally are debt securities whose maturity values or interest
rates are determined by reference to values of one or more specified
foreign currencies. Currency-indexed securities may be positively or
negatively indexed; I.E., their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose
price characteristics are similar to a put on the underlying currency.
Currency- indexed securities may also have prices that depend on the values
of different foreign securities relative to each other.
The performance of an indexed security depends largely on the performance
of the security, currency or other instrument to which they are indexed.
Performance may also be influenced by interest rate changes in the United
States and foreign countries. Indexed securities additionally are subject
to credit risks associated with the issuer of the security. Their values
may decline substantially if the issuer's creditworthiness deteriorates.
Indexed securities may also be more volatile than their underlying
instruments.
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10. CASH OR 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 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. In making
temporary investments in commercial paper and certificates of deposit, a
Fund will adhere to the following guidelines:
a) Commercial paper must be rated A-1 or A-2 by S&P or Prime-1 or Prime-2
by Moody's or issued by companies with an unsecured debt issue
currently outstanding rated AA by S&P or Aa by Moody's or higher.
b) Certificates of deposit ("CDs") must be issued by banks or savings and
loan associations that have total assets of at least $1 billion or, in
the case of a bank or savings and loan association not having total
assets of at least $1 billion, the bank or savings and loan
association is insured by the FDIC. The Growth Fund's investments in
CDs issued by FDIC-insured banks or savings and loans having less than
$1 billion in assets will be limited in amount to the statutory
insurance coverage provided by the FDIC.
11. CONTINGENT VALUE RIGHTS. A contingent value right ("CVR") is a right
issued by a corporation that takes on a pre-established value if the
underlying common stock does not attain a target price by a specified date.
Generally, a CVR's value will be the difference between the target price
and the current market price of the common stock on the target date. If
the common stock does attain the target price by the date, the CVR expires
without value. CVRs may be purchased and sold as part of the underlying
common stock or separately from the stock. CVRs may also be issued to
owners of the underlying common stock as the result of a corporation's
restructuring. The Growth Fund may invest up to 5 of its net assets in
contingent value rights.
12. REAL ESTATE INVESTMENT TRUSTS ("REITS"). REITs purchase real property,
which is then leased, and make mortgage investments. For federal income
tax purposes REITs attempt to qualify for beneficial "modified pass
through" tax treatment by annually distributing at least 95% of their
taxable income. If a REIT were unable to qualify for such beneficial tax
treatment, it would be taxed as a corporation and the distributions made to
its shareholders would not be deductible by it in computing its taxable
income.
REITs are dependent upon the successful operation of the properties owned
and the financial condition of lessees and mortgagors. The value of REIT
units will fluctuate depending on the underlying value of the real property
and mortgages
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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. A Fund may invest up to 10% of its
total assets in shares of REIT.
13. ILLIQUID SECURITIES. The Funds may invest up to 15% of net assets in
illiquid securities. Currently, the Funds do not intend to purchase
illiquid securities, but the market for some securities may become illiquid
following purchase by a Fund. 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.
14. WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES. Under this procedure, a Fund
agrees to acquire securities (whose terms and conditions, including price,
have been fixed by the issuer) that are to be issued and delivered against
payment in the future. Delivery of securities so sold normally takes place
30 to 45 days (settlement date) after the date of the commitment. No
interest is earned by a Fund prior to the settlement date. The value of
securities sold on a "when-issued" or "delayed-delivery" basis may
fluctuate before the settlement date and the Fund bears the risk of such
fluctuation from the date of purchase. A Fund may dispose of its interest
in those securities before delivery.
15. SOVEREIGN DEBT OBLIGATIONS. Sovereign debt instruments are issued or
guaranteed by foreign governments or their agencies. Sovereign debt may be
in the form of conventional securities or other types of debt instruments
such as loans or loan participations. Governments or governmental entities
responsible for repayment of the debt may be unable or unwilling to
repay principal and interest when due, and may require renegotiation or
rescheduling of debt payments. Repayment of principal and interest may
depend also upon political and economic factors. The International Fund
may invest in debt securities issued by foreign companies and
governments. The Fund will make such investments primarily for defensive
purposes, but may do so where anticipated interest rate movements, or
other factors affecting the degree of risk inherent in a debt security,
are expected to change significantly so as to produce appreciation in
the security consistent with the objective of the Fund.
16. EURODOLLAR BONDS. Eurodollar bonds are bonds issued by either U.S. or
foreign issuers that are traded in the European bond market and are
denominated in U.S. dollars. Eurodollar bonds are subject to the same
risks that pertain to domestic issues, notably credit risk, market risk and
liquidity risk. Additionally, Eurodollar bonds are subject to certain
sovereign risks. One such risk is the possibility that a foreign
government might prevent dollar denominated funds from flowing across its
borders. Other 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. The Income Fund may invest up to 10% of
total assets in Eurodollar bonds.
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17. PASSIVE FOREIGN INVESTMENT COMPANIES ("PFICS"). PFICs are foreign
corporations (and entities classified as such for federal income tax
purposes) organized as vehicles to invest in companies of certain foreign
countries. Investors in a PFIC indirectly bear their proportionate share
of the PFIC's management fees and other expenses. See "Tax Information"
for more information.
18. SHORT SALES AGAINST THE BOX. A Fund may make short sales of securities or
maintain a short position, provided that at all times when a short position
is open the Fund owns an equal amount of such securities or an equal amount
of the securities of the same issuer as the securities sold short (a "short
sale against the box"). Funds engaging in short sales against the box will
incur transaction costs.
19. COVERED CALL OPTIONS AND PUT AND CALL OPTIONS ON STOCK INDICES. The Funds
may employ certain strategies and techniques utilizing these types of
options to mitigate their exposure to factors that affect security values.
(The International Fund may utilize other types of options as described
below.) 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 a
call option is obligated to sell the underlying securities if the option is
exercised during the specified period of time. A Fund that writes a call
option and wishes to terminate the obligation may effect a "closing
purchase transaction" by buying an option of the same series as the option
previously written. Options on stock indices are similar to options on
stock except that, rather than obtaining the right to take or make delivery
of stock at a specified price, an option on a stock index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the stock index upon which the option is based is greater
than (in the case of a call) or less than (in the case of a put) the strike
price of the option. A Fund will write call options on stocks only if they
are covered, and such options must remain covered so long as the Fund is
obligated as a writer. A Fund, under normal conditions, will not write a
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. A Fund will not
purchase an option if, as a result thereof, its aggregate investment in
options would exceed 5% of its total assets. The International Fund's
investment in options is not limited by this paragraph. See "Options on
equity securities" and "Options on stock indices" below for a discussion of
the International Fund's policies regarding investment in options.
20. OPTIONS ON EQUITY SECURITIES. The International Fund may purchase and
write (i.e., sell) put and call options on equity securities and the other
Funds (except the
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Equity Fund) may purchase and write (i.e., sell) covered call options. A
call option is a short-term contract pursuant to which the purchaser or
holder, in return for a premium paid, has the right to buy the equity
security underlying the option at a specified exercise price (the strike
price) at any time during the term of the option (for "American-style"
options) or on the option expiration date (for "European-style" options).
The writer of the call option, who received the premium, has the
obligation, upon exercise of the option, to deliver the underlying equity
security against payment of the strike price. A put option is a similar
contract that gives the purchaser or holder, in return for a premium, the
right to sell the underlying equity security at a specified exercise price
(the strike price) during the term of the option. The writer of the put,
who receives the premium, has the obligation to buy the underlying equity
security at the strike price upon exercise by the holder of the put.
The Funds will write call options on stocks only if they are covered, and
such options must remain covered so long as a Fund is obligated as a
writer. For purposes of writing covered call options, the Funds defined
"covered" differently. With respect to the International Fund, a call
option is "covered" if: the Fund has an immediate right to acquire that
security: (i) without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian), or (ii) upon
the Fund's conversion or exchange of other securities held in its
portfolio, or (iii) the Fund holds on a share-for-share basis a call on the
same security as the call written where the strike price of the call held
is equal to or less than the strike price of the call written, or greater
than the strike price of the call written if the difference is maintained
by the Fund in cash, Treasury bills or other liquid high-grade short-term
debt obligations in a segregated account with its custodian.
With respect to the other Funds, a call option is "covered" only if at the
time the Fund writes the call, the Fund holds in its portfolio on a
share-for-share basis the same security as the call written. A Fund must
maintain such security in its portfolio from the time the Fund writes the
call option until the option is exercised, terminated or expires. The
Funds' use of options on equity securities is subject to certain special
risks including the risk that the market value of the security will move
adversely to the Fund's option position. Additional risks relating to the
International Fund's use of options on equity securities are described
below.
The Funds may effect "closing purchase transactions" and the International
Fund may effect "closing sale transactions." If a Fund, as a writer of an
option, wishes to terminate the obligation, it may effect a closing
purchase transaction by buying an option of the same series as the option
previously written. The International Fund also may liquidate its position
in an option it holds by exercising the option or by effecting a "closing
sale transaction," i.e., selling an option of the same series as the option
previously purchased. A Fund will realize a profit from a
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closing transaction if the price of the transaction is less than the
premium received from writing the option or, in the case of the
International Fund, is more than the premium paid to purchase the option.
Because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security, any loss
resulting from a closing purchase transaction with respect to a call option
is likely to be offset in whole or in part by appreciation of the
underlying equity security owned by the Fund. There is no guaranty that
closing purchase or closing sale transactions can be effected.
INTERNATIONAL FUND ONLY: The International Fund will write put options on
stocks only if they are covered, and such options must remain covered so
long as the Fund is obligated as a writer. A put option is "covered" if:
(i) the Fund holds in a segregated account cash, Treasury bills, or other
liquid high-grade short-term debt obligations of a value equal to the
strike price, or (ii) the Fund holds on a share-for-share basis a put on
the same security as the put written, where the strike price of the put
held is equal to or greater than the strike price of the put written, or
less than the strike price of the put written if the difference is
maintained by the Fund in cash, Treasury bills, or other liquid high-grade
short-term obligations in a segregated account with its custodian.
The International Fund may purchase "protective puts," I.E., put options
acquired for the purpose of protecting a portfolio security from a decline
in market value. In exchange for the premium paid for the put option, the
Fund acquires the right to sell the underlying security at the strike price
of the put regardless of the extent to which the underlying security
declines in value. The loss to the Fund is limited to the premium paid
for, and transaction costs in connection with, the put plus the initial
excess, if any, of the market price of the underlying security over the
strike price. However, if the market price of the security underlying the
put rises, the profit the Fund realizes on the sale of the security will be
reduced by the premium paid for the put option less any amount (net of
transaction costs) for which the put may be sold.
The International Fund does not intend to invest more than 5% of its net
assets at any one time in the purchase of call options on stocks.
The Funds' use of options on equity securities is subject to certain
special risks, in addition to the risk that the market value of the
security will move adversely to the Fund's option position. An option
position may be closed out only on an exchange, board of trade or other
trading facility that provides a secondary market for an option of the same
series. Although the Funds will generally only purchase or, in the case of
the International Fund, write those options for which there appears to be
an active secondary market, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option, or at any
particular time, and for some options no secondary market on an exchange or
otherwise may exist. In such event it might not be possible to effect
closing
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transactions in particular options. In such a case, the International Fund
would have to exercise its options in order to realize any profit and would
incur brokerage commissions upon the exercise of such options and upon the
subsequent disposition of the underlying securities acquired through the
exercise of call options or upon the purchase of underlying securities or
the exercise of put options. If a Fund as a covered call option writer is
unable to effect a closing purchase transaction in a secondary market, it
will not be able to sell the underlying security until the option expires
or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange can
include any of the following: (i) there may be insufficient trading
interest in certain options; (ii) restrictions imposed by an exchange on
opening transactions or closing transactions or both; (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities; (iv) unusual or
unforeseen circumstances may interrupt normal operations on an exchange;
(v) the facilities of an exchange or a clearing corporation may not at all
times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a particular
class or series of options), in which event the secondary market on that
exchange (or in the class or series of options) would cease to exist,
although outstanding options on that exchange that had been issued by a
clearing corporation as a result of trades on that exchange would continue
to be exercisable in accordance with their terms. There is no assurance
that higher than anticipated trading activity or other unforeseen events
might not, at times, render certain of the facilities of any of the
clearing corporations inadequate, and thereby result in the institution by
an exchange of special procedures that may interfere with the timely
execution of customers' orders.
21. OPTIONS ON STOCK INDICES. The International Fund may purchase and sell
(i.e., write) put and call options on stock indices. The other Funds
(except the Equity Fund) may purchase put and call options on stock
indices. Options on stock indices are similar to options on stock except
that, rather than obtaining the right to take or make delivery of stock at
a specified price, an option on a stock index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing
level of the stock index upon which the option is based is greater than (in
the case of a call) or less than (in the case of a put) the strike price of
the option. The amount of cash is equal to such difference between the
closing price of the index and the strike price of the option times a
specified multiple (the "multiplier"). If the option is exercised, the
writer is obligated, in return for the premium received, to make delivery
of this amount. Unlike stock options, all settlements are in cash, and
gain or loss depends on price movements in the stock market generally (or
in a particular industry or segment of the market) rather than price
movements in individual stocks.
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The International Fund will write call options on stock indices only if
they are covered, and such options remain covered as long as the Fund is
obligated as a writer. When the International Fund writes a call option on
a broadly based stock market index, the Fund will segregate or put into
escrow with its custodian or pledge to a broker as collateral for the
option, cash, Treasury bills or other liquid high-grade short-term debt
obligations, or "qualified securities" (defined below) with a market value
at the time the option is written of not less than 100% of the current
index value times the multiplier times the number of contracts. A
"qualified security" is an equity security that is listed on a national
securities exchange or listed on Nasdaq against which the Fund has not
written a stock call option and that has not been hedged by the Fund by the
sale of stock index futures.
When the International Fund writes a call option on an industry or market
segment index, the Fund will segregate or put into escrow with its
custodian or pledge to a broker as collateral for the option, cash,
Treasury bills or other liquid high-grade short-term debt obligations, or
at least five qualified securities, all of which are stocks of issuers in
such industry or market segment, with a market value at the time the option
is written of not less than 100% of the current index value times the
multiplier times the number of contracts. Such stocks will include stocks
that represent at least 50% of the weighting of the industry or market
segment index and will represent at least 50% of the portfolio's holdings
in that industry or market segment. No individual security will represent
more than 15% of the amount so segregated, pledged or escrowed in the case
of broadly based stock market stock options or 25% of such amount in the
case of industry or market segment index options.
If at the close of business on any day the market value of such qualified
securities so segregated, escrowed, or pledged falls below 100% of the
current index value times the multiplier times the number of contracts, the
International Fund will so segregate, escrow, or pledge an amount in cash,
Treasury bills, or other liquid high-grade short-term obligations equal in
value to the difference. In addition, when the International Fund writes a
call on an index that is in-the-money at the time the call is written, the
Fund will segregate with its custodian or pledge to the broker as
collateral, cash or U.S. Government or other liquid high-grade short-term
debt obligations equal in value to the amount by which the call is
in-the-money times the multiplier times the number of contracts. Any
amount segregated pursuant to the foregoing sentence may be applied to the
Fund's obligation to segregate additional amounts in the event that the
market value of the qualified securities falls below 100% of the current
index value times the multiplier times the number of contracts. A call
option is also covered, and the International Fund need not follow the
segregation requirements set forth in this paragraph if the Fund holds a
call on the same index as the call written, where the strike price of the
call held is equal to or less than the strike price of the call written, or
greater than the strike price of the call written if the difference is
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maintained by the Fund in cash, Treasury bills or other liquid high-grade
short-term obligations in a segregated account with its custodian.
The International Fund will write put options on stock indices only if they
are covered, and such options must remain covered so long as the Fund is
obligated as a writer. A put option is covered if: (i) the Fund holds in a
segregated account cash, Treasury bills, or other liquid high-grade
short-term debt obligations of a value equal to the strike price times the
multiplier times the number of contracts, or (ii) the Fund holds a put on
the same index as the put written where the strike price of the put held is
equal to or greater than the strike price of the put written, or less than
the strike price of the put written if the difference is maintained by the
Fund in cash, Treasury bills, or other liquid high-grade short-term debt
obligations in a segregated account with its custodian.
The Funds do not intend to invest more than 5% of their net assets at any
one time in the purchase of puts and calls on stock indices. The Funds may
effect closing sale and the International Fund may effect closing purchase
transactions, as described above in connection with options on equity
securities.
The purchase and sale of options on stock indices will be subject to the
same risks as options on equity securities, described above. In addition,
the distinctive characteristics of options on indices create certain risks
that are not present with stock options. Index prices may be distorted if
trading of certain stocks included in the index is interrupted. Trading in
index options also may be interrupted in certain circumstances, such as if
trading were halted in a substantial number of stocks included in the
index. If this occurred, the Funds would not be able to close out options
that they had purchased or, in the case of the International Fund, written
and, if restrictions on exercise were imposed, a Fund might be unable to
exercise an option it holds, which could result in substantial losses to
the Fund. The Funds generally will select stock indices that include a
number of stocks sufficient to minimize the likelihood of a trading halt in
options on the index.
Although the markets for certain index option contracts have developed
rapidly, the markets for other index options are still relatively illiquid.
The ability of the Funds to establish and close out positions on such
options will be subject to the development and maintenance of a liquid
secondary market. It is not certain that this market will develop in all
index options contracts. The Funds will not purchase or, in the case of
the International Fund, sell any index option contract unless and until
the Funds investment adviser or sub-investment adviser believes the market
for such options has developed sufficiently that the risk in connection
with such transactions is no greater than the risk in connection with
options on stocks.
Price movements in the Funds' equity security portfolios probably will not
correlate precisely with movements in the level of the index and,
therefore, in
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writing a call on a stock index the International Fund bears the risk that
the price of the securities it holds in its portfolio may not increase as
much as the index. In such event, the International Fund would bear a loss
on the call that is not completely offset by movement in the price of the
Fund's equity securities. It is also possible that the index may rise when
the Fund's securities do not rise in value. If this occurred, the Fund
would experience a loss on the call that is not offset by an increase in
the value of its securities portfolio and might also experience a loss in
its securities portfolio. However, because the value of a diversified
securities portfolio will, over time, tend to move in the same direction as
the market, movements in the value of the Funds' securities in the
opposite direction as the market would be likely to occur for only a short
period or to a small degree.
When the International Fund has written a call, there is also a risk that
the market may decline between the time the Fund has a call exercised
against it, at a price which is fixed as of the closing level of the index
on the date of exercise, and the time the Fund is able to sell stocks in
its portfolio. As with stock options, the Fund will not learn that an
index option has been exercised until the day following the exercise date
but, unlike a call on stock where the Fund would be able to deliver the
underlying securities in settlement, the Fund may have to sell part of its
stock portfolio in order to make settlement in cash, and the price of such
stocks might decline before they can be sold. This timing risk makes
certain strategies involving more than one option substantially more risky
with options in stock indices than with stock options.
There are also certain special risks involved in purchasing put and call
options on stock indices. If a Fund holds an index option and exercises
it before final determination of the closing index value for that day, it
runs the risk that the level of the underlying index may change before
closing. If such a change causes the exercised option to fall
out-of-the-money, the Fund will be required to pay the difference between
the closing index value and the strike price of the option (times the
applicable multiplier) to the assigned writer. Although the Fund may be
able to minimize the risk by withholding exercise instructions until just
before the daily cutoff time or by selling rather than exercising an option
when the index level is close to the exercise price, it may not be possible
to eliminate this risk entirely because the cutoff times for index options
may be earlier than those fixed for other types of options and may occur
before definitive closing index values are announced.
22. OPTIONS ON DEBT SECURITIES. (INTERNATIONAL FUND ONLY) The Fund may
purchase and write (i.e., sell) put and call options on debt securities.
Options on debt are similar to options on stock, except that the option
holder has the right to take or make delivery of a debt security, rather
than stock.
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The Fund will write options only if they are covered, and such options must
remain covered so long as the Fund is obligated as a writer. An option on
debt securities is covered in the same manner as options on equity
securities as described above, except that, in the case of call options on
U.S. Treasury bills, the Fund might own U.S. Treasury bills of a different
series from those underlying the call option, but with a principal amount
and value corresponding to the option contract amount and a maturity date
no later than that of the securities deliverable under the call option.
The principal reason for the Fund to write an option on one or more of its
securities is to realize through the receipt of the premiums paid by the
purchaser of the option a greater current return than would be realized on
the underlying security alone. Calls on debt securities will not be
written when, in the opinion of the Sub-Adviser, interest rates are likely
to decline significantly, because under those circumstances the premium
received by writing the call likely would not fully offset the foregone
appreciation in the value of the underlying security.
The Fund may also write straddles (a combination of a call and a put
written on the same security at the same strike price where the same issue
of the security is considered "cover" for both the put and the call). In
such cases, the Fund will also segregate or deposit for the benefit of the
Fund's broker cash or liquid high-grade debt obligations equivalent to the
amount, if any, by which the put is in-the-money. The Fund's use of
straddles will be limited to 5% of its net assets (meaning that the
securities used for cover or segregated as described above will not exceed
5% of the Fund's net assets at the time the straddle is written). The
writing of a call and a put on the same security at the same strike price
where the call and the put are covered by different securities is not
considered a straddle for purposes of this limit.
The Fund may purchase "protective puts" on debt securities in an effort to
protect the value of a security that they own against a substantial decline
in market value. Protective puts are described above in "Options on
Equities."
The Fund does not intend to invest more than 5% of its net assets at any
one time in the purchase of call options on debt securities.
If the Fund, as a writer of an exchange-traded option, wishes to terminate
the obligation, it may effect a closing purchase or sale transaction in a
manner similar to that discussed above in connection with options on equity
securities. Unlike exchange-traded options, dealer options generally do
not have a continuous liquid market. Consequently, the Fund will generally
be able to realize the value of a dealer option it has purchased only by
exercising it or reselling it to the dealer who issued it. Similarly, when
the Fund writes a dealer option, it generally will be able to close out the
dealer option prior to its expiration only by entering into a closing
purchase transaction with the dealer to which the Fund originally wrote the
dealer option. While the Fund will seek to enter into dealer options only
with
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counterparties who agree to and who are expected to be able to be capable
of entering into closing transactions with the Fund, there can be no
assurance that the Fund will be able to liquidate a dealer option at a
favorable price at any time prior to expiration. In the event of
insolvency of the other party, the Fund may be unable to liquidate a dealer
option. There is, in general, no guarantee that closing purchase or
closing sale transactions can be effected. The Fund may not invest more
than 15% of its total assets (determined at the time of investment) in
illiquid securities, including debt securities for which there is not an
established market. The staff of the SEC has taken the position that
purchased dealer options and the assets used as "cover" for written dealer
options are illiquid securities. However, pursuant to the terms of certain
no-action letters issued by the staff, the securities used as cover for
written dealer options may be considered liquid provided that the Fund
sells dealer options only to qualified dealers who agree that the Fund may
repurchase any dealer option its writes for a maximum price to be
calculated by a predetermined formula. In such cases, the dealer option
would be considered illiquid only to the extent that the maximum repurchase
price under the formula exceeds the intrinsic value of the option.
The Fund's purchase and sale of exchange-traded options on debt securities
will be subject to the risks described above in "Options on Equity
Securities."
23. OPTIONS ON FOREIGN CURRENCIES. (INTERNATIONAL FUND ONLY) The Fund may
purchase and write put and call options on foreign currencies traded on
U.S. or foreign securities exchanges or boards of trade for hedging
purposes. Options on foreign currencies are similar to options on stock,
except that the option holder has the right to take or make delivery of a
specified amount of foreign currency, rather than stock.
The Fund may purchase and write options to hedge its securities denominated
in foreign currencies. If there is a decline in the dollar value of a
foreign currency in which the Fund's securities are denominated, the dollar
value of such securities will decline even though their foreign currency
value remains the same. To hedge against the decline of the foreign
currency, the Fund may purchase put options on such foreign currency. If
the value of the foreign currency declines, the gain realized on the put
option would offset, in whole or in part, the adverse effect such decline
would have on the value of the Fund's securities. Alternatively, the Fund
may write a call option on the foreign currency. If the foreign currency
declines, the option would not be exercised and the decline in the value of
the portfolio securities denominated in such foreign currency would be
offset in part by the premium the Fund received for the option.
If, on the other hand, the Sub-Advisor anticipates purchasing a foreign
security and also anticipates a rise in such foreign currency (thereby
increasing the cost of such security), the Fund may purchase call options
on the foreign currency. The purchase of such options could offset, at
least partially, the effects of the adverse
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movements of the exchange rates. Alternatively, the Fund could write a put
option on the currency and, if the exchange rates move as anticipated, the
option would expire unexercised.
The Fund's successful use of options on foreign currencies depends upon the
Sub-Advisor's ability to predict the direction of the currency exchange
markets and political conditions, which requires different skills and
techniques than predicting changes in the securities markets generally.
For instance, if the currency being hedged has moved in a favorable
direction, the corresponding appreciation of the Fund's securities
denominated in such currency would be partially offset by the premiums paid
on the options. Furthermore, if the currency exchange rate does not
change, the Fund's net income would be less than if the Fund had not hedged
since there are costs associated with options.
The use of these options is subject to various additional risks. The
correlation between movements in the price of options and the price of the
currencies being hedged is imperfect. The use of these instruments will
hedge only the currency risks associated with investments in foreign
securities, not their market risks. The Fund's ability to establish and
maintain positions will depend on market liquidity. The ability of the
Fund to close out an option depends upon a liquid secondary market. There
is no assurance that liquid secondary markets will exist for any particular
option at any particular time.
24. STOCK INDEX FUTURES CONTRACTS. (INTERNATIONAL FUND ONLY) The
International Fund may buy and sell for hedging purposes stock index
futures contracts traded on a commodities exchange or board of trade. A
stock index futures contract is an agreement in which the seller of the
contract agrees to deliver to the buyer an amount of cash equal to a
specific dollar amount times the difference between the value of a specific
stock index at the close of the last trading day of the contract and the
price at which the agreement is made. No physical delivery of the
underlying stocks in the index is made. When the futures contract is
entered into, each party deposits with a broker or in a segregated
custodial account approximately 5% of the contract amount, called the
"initial margin." Subsequent payments to and from the broker, called
"variation margin," will be made on a daily basis as the price of the
underlying stock index fluctuates, making the long and short positions in
the futures contracts more or less valuable, a process known as "marking to
the market."
The Fund may sell stock index futures to hedge against a decline in the
value of equity securities it holds. The Fund may also buy stock index
futures to hedge against a rise in the value of equity securities it
intends to acquire. To the extent permitted by federal regulations, the
Fund may also engage in other types of hedging transactions in stock index
futures that are economically appropriate for the reduction of risks
inherent in the ongoing management of the Fund's equity securities.
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<PAGE>
The Fund's successful use of stock index futures contracts depends upon the
Sub-Adviser's ability to predict the direction of the market and is subject
to various additional risks. The correlation between movement in the price
of the stock index future and the price of the securities being hedged is
imperfect and the risk from imperfect correlation increases as the
composition of the Fund's securities portfolio diverges from the
composition of the relevant index. In addition, the ability of the Fund to
close out a futures position depends on a liquid secondary market. There
is no assurance that liquid secondary markets will exist for any particular
stock index futures contract at any particular time.
Under regulations of the Commodity Futures Trading Commission ("CFTC"),
investment companies registered under the 1940 Act are excluded from
regulation as commodity pools or commodity pool operators if their use of
futures is limited in certain specified ways. The Fund will use futures in
a manner consistent with the terms of this exclusion. Among other
requirements, no more than 5% of the Fund's assets may be committed as
initial margin on futures contracts.
25. INTEREST RATE FUTURES CONTRACTS. (INTERNATIONAL FUND ONLY) The
International Fund may buy and sell for hedging purposes futures contracts
on interest bearing securities (such as U.S. Treasury bonds, U.S. Treasury
notes, U.S. Treasury bills, and GNMA certificates) or interest rate
indices. Futures contracts on interest bearing securities and interest
rate indices are referred to collectively as "interest rate futures
contracts." The portfolios will engage in transactions in only those
futures contracts that are traded on a commodities exchange or board of
trade.
The Fund may sell an interest rate futures contract to hedge against a
decline in the market value of debt securities it owns. The Fund may
purchase an interest rate futures contract to hedge against an anticipated
increase in the value of debt securities it intends to acquire. The Fund
may also engage in other types of transactions in interest rate futures
contracts that are economically appropriate for the reduction of risks
inherent in the ongoing management of its futures.
The Fund's successful use of interest rate futures contracts depends upon
the Sub-Adviser's ability to predict interest rate movements. Further,
because there are a limited number of types of interest rate futures
contracts, it is likely that the interest rate futures contracts available
to the Fund will not exactly match the debt securities the Fund intends to
hedge or acquire. To compensate for differences in historical volatility
between securities the Fund intends to hedge or acquire and the interest
rate futures contracts available to it, the Fund could purchase or sell
futures contracts with a greater or lesser value than the securities it
wished to hedge or intended to purchase. Interest rate futures contracts
are subject to the same risks regarding closing transactions and the CFTC
limits as described above in "Stock Index Futures Contracts."
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26. FOREIGN CURRENCY FUTURES CONTRACTS. (INTERNATIONAL FUND ONLY) The
International Fund may buy and sell for hedging purposes futures contracts
on foreign currencies or groups of foreign currencies such as the European
Currency Unit. A European Currency Unit is a basket of specified amounts
of the currencies of certain member states of the European Economic
Community, a Western European economic cooperative organization including
France, Germany, the Netherlands and the United Kingdom. The Fund will
engage in transactions in only those futures contracts and other options
thereon that are traded on a commodities exchange or a board of trade. See
"Stock Index Futures Contracts" above for a general description of futures
contracts. The Fund intends to engage in transactions involving futures
contracts as a hedge against changes in the value of the currencies in
which they hold investments or in which they expect to pay expenses or pay
for future purchases. The Fund may also engage in such transactions when
they are economically appropriate for the reduction of risks inherent in
their ongoing management.
The use of these futures contracts is subject to risks similar to those
involved in the use of options on foreign currencies and the use of any
futures contract. The Fund's successful use of foreign currency futures
contracts depends upon the Sub-Adviser's ability to predict the direction
of currency exchange markets and political conditions. In addition, the
correlation between movements in the price of futures contracts and the
price of currencies being hedged is imperfect, and there is no assurance
that liquid markets will exist for any particular futures contract at any
particular time. Those risks are discussed above more fully under "Options
on Foreign Currencies" and "Stock Index Futures Contracts."
27. OPTIONS ON FUTURES CONTRACTS. (INTERNATIONAL FUND ONLY) The Fund may, to
the extent permitted by applicable regulations, enter into certain
transactions involving options on futures contracts. An option on a
futures contract gives the purchaser or holder the right, but not the
obligation, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put) at a
specified price at any time during the option exercise period. The writer
of the option is required upon exercise to assume an offsetting futures
position (a short position if the option is a call and a long position if
the option is a put). Upon exercise of the option, the assumption of
offsetting futures positions by the writer and holder of the option will be
accomplished by delivery of the accumulated balance in the writer's futures
margin account that represents the amount by which the market price of the
futures contract, on exercise, exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract. As an alternative to exercise, the holder or writer of an option
may terminate a position by selling or purchasing an option of the same
series. There is no guarantee that such closing transactions can be
effected. The Fund intends to utilize options on futures contracts for the
same purposes that it intends to use the underlying futures contracts.
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Options on futures contracts are subject to risks similar to those
described above with respect to options and futures contracts. There is
also the risk of imperfect correlation between the option and the
underlying futures contract. If there were no liquid secondary market for
a particular option on a futures contract, the Fund might have to exercise
an option it held in order to realize any profit and might continue to be
obligated under an option it had written until the option expired or was
exercised. If the Fund were unable to close out an option it had written
on a futures contract, it would continue to be required to maintain initial
margin and make variation margin payments with respect to the option
position until the option expired or was exercised against the Fund.
The Fund will not purchase a put or call option or option on a futures
contract if, as a result, 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, the aggregate
margin deposits and premiums required on all such instruments would
exceed 5% of its net assets.
28. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. (INTERNATIONAL FUND ONLY)
The Fund may enter into forward foreign currency exchange contracts
("forward contracts") in several circumstances. When the Fund enters into
a contract for the purchase or sale of a security denominated in a foreign
currency, or when the Fund anticipates the receipt in a foreign currency of
dividends or interest payments on a security that it holds, the Fund may
desire to "lock-in" the U.S. dollar price of the security or the U.S.
dollar equivalent of such dividend or interest payment, as the case may be.
By entering into a forward contract for a fixed amount of dollars, for the
purchase or sale of the amount of foreign currency involved in the
underlying transactions, the Fund will be able to protect itself against a
possible loss resulting from an adverse change in the relationship between
the U.S. dollar and the subject foreign currency during the period between
the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such
payments are made or received.
Additionally, when the Sub-Advisor believes that the currency of a
particular foreign country may suffer a substantial decline against the
U.S. dollar, the Fund may enter into a forward contract for a fixed amount
of dollars, to sell the amount of foreign currency approximating the value
of some or all of the portfolio securities denominated in such foreign
currency. The precise matching of the forward contract amounts and the
value of the securities involved will not generally be possible since the
future value of securities in foreign currencies will change as a
consequence of market movements in the value of those securities between
the date on which the forward contract is entered into and the date it
matures. The projection of short-term currency market movements is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. The Fund will not enter into forward
contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate the Fund to deliver an amount
of foreign currency in excess of the value of the securities or other
assets denominated in that currency held by the Fund.
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Under normal circumstances, consideration of the prospect for currency
parities will be incorporated into the long-term investment decisions made
with regard to overall diversification strategies. However, the
Sub-Advisor believes that it is important to have the flexibility to enter
into forward contracts when it is determined that the best interests of the
Fund will thereby be served. The Fund's custodian will place cash or
liquid, high-grade equity or debt securities into a segregated account of
the portfolio in an amount equal to the value of the Fund's total assets
committed to the consummation of forward foreign currency exchange
contracts. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account on a
daily basis so that the value of the account will equal the amount of the
Fund's commitments with respect to such contracts.
The Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign
currency or it may retain the security and terminate its contractual
obligation to deliver the foreign currency by purchasing an "offsetting"
contract with the same currency trader obligating it to purchase, on the
same maturity date, the same amount of the foreign currency. However,
there is no assurance that liquid markets will exist for any particular
forward contract at any particular time or that the Fund will be able to
effect a closing or "offsetting" transaction. Forward contracts are
subject to other risks described in "Special Risks of Foreign Investments
and Foreign Currency Transactions."
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract.
Accordingly, it may be necessary for the Fund to purchase additional
foreign currency on the spot market (and bear the expense of such purchase)
if the market value of the security is less than the amount of foreign
currency that the Fund is obligated to deliver and if a decision is made to
sell the security and make delivery of the foreign currency.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to
the extent that there has been movement in forward contract prices. Should
forward contract prices decline during the period between the Fund's
entering into a forward contract for the sale of a foreign currency and the
date it enters into an offsetting contract for the purchase of the foreign
currency, the Fund will realize a gain to the extent that the price of the
currency it has agreed to sell exceeds the price of the currency it has
agreed to purchase. Should forward contract prices increase, the Fund will
suffer a loss to the extent that the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
The Fund's dealing in forward contracts will be limited to the transactions
described above. Of course, the Fund is not required to enter into such
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transactions with regard to its foreign currency-denominated securities.
It also should be realized that this method of protecting the value of the
portfolio securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities that are
unrelated to exchange rates. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time they tend to limit any potential gain that might
result should the value of such currency increase.
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend physically to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. The Fund will do so from time to time,
incurring the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based
on the difference (the "spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Fund at one rate, while offering a lesser rate of
exchange should the Fund desire to resell that currency to the dealer.
29. UNSEASONED ISSUERS. The Funds may invest in securities of unseasoned
issuers. Unseasoned issuers are those companies which, together with any
predecessors, have been in operation for less than three years.
30. INDEXED SECURITIES. The Funds 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 subject to
credit risks associated with the issuer of the security. Indexed
securities may also be more volitile than their underlying instruments.
31. GEOGRAPHICAL AND ISSUER SIZE LIMITATIONS:
NORTHWEST FUND ONLY. Because 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.
INTERNATIONAL FUND ONLY. Because the International Fund invests primarily
in foreign securities, it is subject to various risks in addition to those
associated with U.S. investment. 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.
SMALL COMPANY FUND ONLY. The Small Company Fund invests in small-sized
companies which involves greater risks than investment in larger, more
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established issuers, and such securities can be subject to more abrupt and
erratic movements in price.
INTERMEDIATE-TERM U.S. TREASURY FUND,
HIGH-YIELD FUND AND MANAGED BOND FUND
The Intermediate-Term U.S. Treasury Fund, High-Yield Fund and Managed Bond Fund
may make the following investments, among others, although they may not buy all
of the types of securities that are described.
1. DIRECT OBLIGATIONS OF THE U.S. TREASURY SUCH AS U.S. TREASURY BILLS, NOTES
AND BONDS. The Intermediate-Term Treasury Fund and the Managed Bond Fund
may also invest in stripped securities that are direct obligations of the
U.S. Treasury. Direct obligations of the U.S. Treasury are supported by
the full faith and credit of the U.S. Government.
2. 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 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.
3. CORPORATE DEBT SECURITIES (INTERMEDIATE-TERM U.S. TREASURY FUND AND MANAGED
BOND FUND ONLY). The Funds may invest in 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.
4. REPURCHASE AGREEMENTS. See the description of such securities under
"Additional Investment Information -- Stock Funds." The Managed Bond Fund
will invest no more than 5% of its total assets in repurchase agreements,
and will not purchase repurchase agreements that mature in more than
seven days.
5. WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES. See the description of such
securities under "Additional Investment Information -- Stock Funds."
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6. YANKEE DEBT SECURITIES AND EURODOLLAR BONDS. The High-Yield Fund may
invest up to 25% of its total assets in Yankee Sector debt securities.
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.
Both S&P and Moody's rate Yankee Sector debt obligations. If a debt
obligation is unrated SAM will make every effort to analyze potential
investments in foreign issuers on the same basis as the rating services
analyze domestic issuers. Because public information is not always
comparable to that available on domestic issuers, this may not be
possible. Therefore, while SAM will make every effort to select
investments in foreign securities on the same basis relative to quality
and risk as its investments in domestic securities, that may not always
be possible.
Eurodollar bonds are bonds issued by either U.S. or foreign issuers that
are traded in the European bond markets and denominated in U.S. dollars.
Eurodollar bonds issued by foreign issuers are subject to the same risks as
Yankee sector bonds. Additionally, Eurodollar bonds are subject to certain
sovereign risks. One such risk is the possibility that a foreign
government might prevent dollar-denominated funds from flowing across its
borders.
7. 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. 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 High-Yield Fund and the
Managed Bond Fund may invest up to 5% of its total assets in municipal
securities which are rated lower than the top three grades assigned by
Moody's or S&P or are unrated but comparable to such rated securities if,
in the opinion of SAM, the potential for appreciation is greater than,
and yield is comparable to or greater than, similarly rated taxable
securities.
8. SHORT-TERM INVESTING. The Funds may invest for short-term purposes when
SAM believes such action to be desirable and consistent with sound
investment practices. No Fund, however, will engage primarily in trading
for the purpose of short-term profits. A Fund may dispose of its portfolio
securities whenever SAM deems advisable, without regard to the length of
time the securities have been held.
9. ILLIQUID SECURITIES. (INTERMEDIATE-TERM U.S. TREASURY FUND AND HIGH-YIELD
FUND ONLY). See the description of such securities under "Additional
Investment Information--Stock Funds."
10. RESTRICTED SECURITIES AND RULE 144A SECURITIES. (INTERMEDIATE-TERM U.S.
TREASURY FUND AND HIGH-YIELD FUND ONLY). See the description of such
securities under "Additional Investment Information--Stock Funds."
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11. ASSET-BACKED SECURITIES. (MANAGED BOND FUND ONLY). Asset-backed securities
represent interests in, or are secured by and payable from, pools of
assets such as (but not limited to) consumer loans, automobile
receivable securities, credit card receivable securities, and installment
loan contracts. These securities may be pass-through certificates, which
are similar to mortgage-backed securities, or they may be asset-backed
commercial paper, which is issued by a special purpose entity organized
solely to issue the commercial paper and to purchase interests in the
assets. The assets underlying the securities are securitized through the
use of trusts and special purpose corporations. Like mortgage-backed
securities, asset-backed securities are subject to prepayment risks,
which may reduce the overall return on the investment. Payment of
interest and principal ultimately depends upon borrowers paying due
underlying loans. These securities may be supported by credit
enhancements such as letters of credit. The credit quality of these
securities depends upon the quality of the underlying assets and the
level of credit enhancements, such as letters of credit, provided.
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 the repossessed
collateral may be unavailable or inadequate to support payments on the
defaulted securities. 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.
12. ZERO COUPON BONDS. (MANAGED BOND FUND ONLY). Zero coupon bonds are
purchased at a discount without scheduled interest payments. Because
zero coupon bonds do not pay current interest, their prices can be very
volatile when interest rates change. In calculating its dividends, the
Managed Bond Fund accrues as income a portion of the difference between
the purchase price and face value of each zero coupon bond it holds.
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 bonds and selling them
as individual securities.
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13. CASH OR 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.
14. HIGH-YIELD, DEBT SECURITIES (HIGH-YIELD FUND ONLY). The High-Yield Bond
Fund may purchase debt and preferred stock issues (including convertible
securities) which are below investment grade, i.e., rated lower than the
top four grades by S&P or Moody's, or, if not rated by these agencies,
in the opinion of SAM, have credit characteristics comparable to such
rated securities. Up to 25% of the Fund's total assets may be invested
in such unrated securities. SAM will determine the quality of unrated
obligations by evaluating the issuer's capital structure, earnings power
and quality of management. Unrated securities may not be as attractive
to as many investors as rated securities. In addition, the Fund may
invest up to 5% of its total assets in securities which are in default.
The Fund will purchase securities which are in default only when, in
SAM's opinion, the potential for high yield outweighs the risk.
While debt 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.
Yields on high-yield, debt securities will fluctuate over time. During
periods of economic uncertainty or change, the market prices of
high-yield, fixed-income securities may experience increased volatility,
which may in turn cause the net asset value per share of the High-Yield
Fund to be volatile. Lower-quality, debt securities tend to reflect
short-term economic and corporate developments to a grater 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, debt 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
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highly leveraged. During an economic downturn or period of rising interest
rates, a highly-leveraged issuer may experience financial difficulties
which adversely affect its ability to make principal and interest payments,
meet projected business goals and obtain additional financing. In
addition, the issuer will depend on its cash flow and may depend,
especially in the context of corporate takeovers, on a sale of its assets
to service debt. Failure to realize projected cash flows or asset sales
may seriously impair the issuer's ability to service this greater debt
load, which in turn might cause the Fund to lose all or part of its
investment in that security. SAM will seek to minimize these additional
risks through diversification, careful assessment of the issuer's financial
structure, business plan and management team following any restructuring,
and close monitoring of the issuer's progress toward its financial goals.
15. DEBT SECURITIES WITH EQUITY FEATURES (HIGH-YIELD FUND ONLY). The Fund
may acquire these securities when comparable in yield and risk to debt
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.
16. ZERO COUPON AND PAYMENT - IN - KIND SECURITIES (HIGH-YIELD FUND ONLY). The
High-Yield Fund may hold "zero-coupon" and "payment-in-kind" fixed-income
securities. Zero coupon securities are purchased at a discount without
scheduled interest payments. Payment-in-kind securities receive interest
paid in additional securities rather than cash. The Fund accrues income on
these securities, but does not receive cash interest payments until
maturity or payment date. The Fund intends to distribute substantially all
of its income to its shareholders so that it can be treated as a regulated
investment company under the federal tax law (see "Tax Information"). 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.
17. LIQUIDITY AND VALUATION (HIGH-YIELD FUND ONLY). The liquidity and price
of high-yield, debt securities can be affected by a number of factors,
including investor perceptions and adverse publicity regarding major
issuers, underwriters or dealers of lower-quality corporate obligations.
These effects can be particularly pronounced in a thinly traded market
with few participants and may adversely impact the High-Yield Fund's
ability to dispose of its securities as well as make valuation of
securities more difficult. Because there tend to be fewer investors in
lower-rated, fixed-income securities, it may be difficult for the
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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.
18. CREDIT RATINGS. Rating agencies evaluate the likelihood that an issuer
will make principal and interest payments, but ratings may not reflect
market value risks associated with lower-rated, fixed-income securities.
Also, rating agencies may not timely revise ratings to reflect
subsequent events affecting an issuer's ability to pay principal and
interest. SAM uses S&P and Moody's ratings as a preliminary indicator of
investment quality. SAM will periodically research and analyze each
issue (whether rated or unrated) and evaluate such factors as the
issuer's interest or dividend coverage, asset coverage, earnings
prospects, and managerial strength. This analysis will help SAM to
determine if the issuer has sufficient cash flow and profits to meet
required principal and interest payments and to monitor the liquidity of
the issue. Achievement of a Fund's investment objective will be more
dependent on SAM's credit analysis of bonds rated below the three
highest rating categories than would be the case were the Fund to invest
in higher-quality debt securities. This is particularly true for the
High-Yield Fund.
19. MUNICIPAL SECURITIES (HIGH YIELD FUND ONLY). The Fund may invest in
obligations of, or guaranteed by, the U.S. Government, its agencies or
instrumentalities, or in debt 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 market
performance by lower-rated or unrated debt 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
of principal may be substantially reduced with a small reduction in
yield.
The Managed Bond Fund may retain debt securities which are downgraded to
below investment grade (commonly referred to as "high yield" or "junk" bonds)
after purchase. In the event that due to a downgrade of one or more debt
securities an amount in excess of 5% of the Fund's net assets is held in
securities rated below investment grade, SAM will engage in an orderly
disposition of such securities to the extent necessary to reduce the Fund's
holdings of such securities to no more than 5% of the Fund's net assets. In
addition to reviewing ratings, SAM may analyze the quality of rated and
unrated debt securities purchased for the Managed Bond Fund by evaluating the
issuer's capital structure, earnings power, quality of management, and
position within its industry. "Description of Rating" for a description of
debt securities ratings.
MUNICIPAL BOND FUND, CALIFORNIA TAX-FREE INCOME FUND AND WASHINGTON MUNICIPAL
BOND FUND
Each of the above-referenced Funds may make the following investments, among
others, although they may not buy all of the types of securities that are
described.
1. MUNICIPAL BONDS.
Each 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 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 payment under changing economic conditions or
upon deterioration in the financial condition of the issuer.
After purchase by a Fund, a municipal bond may be downgraded to below
investment grade or, if unrated, may cease to be comparable to a rated
investment grade security (such below investment grade securities are
commonly referred to as "high yield" or "junk" bonds). Neither event
will require a Fund to dispose of that security but SAM will take a
downgrade or loss of comparability into account in determining whether
the Fund should continue to hold the security in its portfolio. Each
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 Statement of Additional
Information 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.
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" 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 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 Fund
will not purchase private activity bonds or any other type of revenue
bonds, the interest on which is subject to the alternative minimum tax.
GENERAL OBLIGATION BONDS, which are bonds that provide general purpose
financing for state and local governments and are backed by the taxing
power of the state and local government as the case may be. The taxes or
special assessments that can be levied for the payment of principal and
interest on general obligation bonds may be limited or unlimited as to rate
or amount.
VARIABLE AND FLOATING RATE OBLIGATIONS, which are municipal obligations
that carry variable or floating rates of interest. Variable rate
instruments bear interest at rates that are readjusted at periodic
intervals. Floating rate instruments bear interest at rates that vary
automatically with changes in specified market rates or indexes, such as
the bank prime rate. Accordingly, as interest rates fluctuate, the
potential for capital appreciation or depreciation of these obligations is
less than for fixed rate obligations. Floating and variable rate
obligations 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. A Fund
will purchase floating and variable rate obligations only if at the time of
purchase there is a secondary market for such instruments. For
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purposes of calculating average dollar-weighted maturity, the Intermediate
Municipal Fund will treat variable and floating rate obligations as having
a maturity equal to the period remaining until the date the Fund can next
exercise the demand feature by selling the security back to the issuer.
PUT BONDS, which are municipal bonds that give the holder the unconditional
right to sell the bond back to the issuer at a specified price and exercise
date and PUT BONDS WITH DEMAND FEATURES. The obligation to purchase the
bond on the exercise date may be supported by a letter of credit or other
arrangement from a bank, insurance company or other financial institution,
the credit standing of which affects the credit quality of the bond. A
demand feature is a put that entitles the Fund holding it to repayment of
the principal amount of the underlying security on no more than 30 days'
notice at any time or at specified intervals.
MUNICIPAL LEASE OBLIGATIONS, which are issued by or on behalf of state or
local government authorities to acquire land, equipment or facilities and
may be subject to annual budget appropriations. These obligations
themselves are not normally backed by the credit of the municipality or the
state but are secured by rent payments made by the municipality or by the
state pursuant to a lease. If the lease is assigned, the interest on the
obligation may become taxable. The leases underlying certain municipal
lease obligations provide that lease payments are subject to partial or
full abatement if, because of material damage or destruction of the lease
property, there is substantial interference with the lessee's use or
occupancy of such property. This "abatement risk" may be reduced by the
existence of insurance covering the leased property, the maintenance by the
lessee of reserve funds or the provision of credit enhancements such as
letters of credit. Certain municipal lease obligations also contain
"non-appropriation" clauses that provide that the municipality has no
obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. Some
municipal lease obligations of this type are insured as to timely payment
of principal and interest, even in the event of a failure by the
municipality to appropriate sufficient funds to make payments under the
lease. However, in the case of an uninsured municipal lease obligation, a
Fund's ability to recover under the lease in the event of a
non-appropriation or default will be limited solely to the repossession of
leased property without recourse to the general credit of the lessee, and
disposition of the property in the event of foreclosure might prove
difficult. If rent is abated because of damage to the leased property or if
the lease is terminated because monies are not appropriated for the
following year's lease payments, the issuer may default on the obligation
causing a loss to a Fund. A Fund will invest in only those municipa lease
obligations that are, in the opinion of SAM, liquid securities under
guidelines adopted by the 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.
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CERTIFICATES OF PARTICIPATION in municipal lease obligations, 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. A Fund will only invest in those COPs that are, in the
opinion of SAM, liquid securities under guidelines adopted by the 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. A Fund may purchase municipal notes as a medium for its short-term
investments, the interest on which will not be subject to federal income
tax when distributed to the Fund's shareholders. Notes include tax
anticipation, revenue anticipation and bond anticipation notes and
tax-exempt commercial paper. A 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.
2. 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
be purchased only 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. A 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.
3. REPURCHASE AGREEMENTS. See the description of such securities under
"Additional Investment Information -- Stock Funds."
4. WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES. See the description of such
securities under "Additional Investment Information -- Stock Funds."
5. ILLIQUID SECURITIES. See the description of such securities under
"Additional Investment Information -- Stock Funds."
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6. CASH OR 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 Fund may purchase these short-term securities as a cash management
technique under those circumstances where it has cash to manage for a short
time period, for example, after receiving proceeds from the sale of
securities, dividend distributions from portfolio securities, or cash from
the sale of Fund shares to investors. Interest earned from these
short-term securities will be taxable to investors as ordinary income when
distributed.
7. SHORT-TERM INVESTMENTS. Each Fund may 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. The portfolio
turnover rate is not expected to exceed 70%.
MONEY MARKET FUND
QUALITY AND MATURITY. Pursuant to procedures adopted by the Money Market
Trust's Board of Trustees, the Money Market 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, the security must be judged by SAM to be of
equivalent quality.
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 Money Market Fund may not invest more than 5% of its total assets in second
tier securities. In addition, the Money Market Fund may not invest more than 1%
of its total assets or $1 million (whichever is greater) in the second tier
securities of a single issuer.
The Money Market Fund currently intends to limit their 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) may be considered to be
rated if the demand feature or its issuer has been assigned a rating. See
"Description of Ratings" for further explanation of rating categories.
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.
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1. RESTRICTED SECURITIES AND RULE 144A SECURITIES. The Money Market Fund
may invest up to 5% of its total assets in restricted securities
eligible for resale and Rule 144A under the 1933 Act and commercial
paper sold pursuant to Section 4(2) of the 1933 Act, provided that SAM
has determined that such securities are liquid under guidelines adopted
by the Fund's Board of Trustees. See the description of Rule 144A
Securities under "Additional Investment Information -- Stock Funds."
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 decreasing the liquidity of
the Fund's portfolio to the extent that buyers, for a time, become
unwilling to purchase the securities.
2. 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.
3. VARIABLE AND FLOATING RATE INSTRUMENTS. Issuers of floating or variable
rate notes include, but are not limited to, corporations, partnerships,
special purpose entities, the U.S. government, its agencies and
instrumentalities, and municipalities. The interest rates on variable rate
instruments reset periodically on specified dates so as to cause the
instruments' market value to approximate their par value. The interest
rates on floating rate instruments change whenever there is a change in a
designated benchmark rate. Variable and floating rate instruments may have
optional or mandatory put features. In the case of a mandatory put
feature, the Fund would be required to act to keep the instrument.
4. COMMERCIAL PAPER OBLIGATIONS. Commercial paper is a short-term instrument
issued by corporations, financial institutions, governmental entities and
other entities, and may include funding agreements, and other short-term
debt obligations. 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 U.S. by foreign entities.
While investments in foreign obligations are intended to reduce risk by
providing further diversification, such investments involve sovereign and
other risks, in addition to the credit and market risks normally associated
with domestic securities. These additional risks include the possibility of
adverse political and economic developments (including political
instability) and the potentially adverse effects of unavailability of
public information regarding issuers, reduced governmental supervision of
markets, reduced liquidity of certain financial markets, and the lack of
uniform accounting, auditing, and financial standards or the application of
standards that are different or less stringent than those applied in the
U.S. The Fund will purchase commercial paper issued by foreign entities
only if, in the opinion of SAM, it is of an investment quality comparable
to other obligations that may be purchased by the Fund.
5. ILLIQUID SECURITIES. See the description of such securities under
"Additional Investment Information -- Stock Funds."
6. 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.
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The Fund may also invest in U.S. dollar-denominated securities issued or
guaranteed by other U.S. or foreign issuers, including U.S. and foreign
corporations or other business organizations, foreign governments, foreign
government agencies or instrumentalities, and U.S. and foreign financial
institutions, including savings and loan institutions, insurance companies
and mortgage bankers, as well as banks.
The obligations of foreign branches of U.S. banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by governmental
regulation. Payment of interest and principal on these obligations may
also be affected by governmental action in the country of domicile of the
branch (generally referred to as sovereign risk). In addition, evidence of
ownership of portfolio securities may be held outside of the U.S. and the
Fund may be subject to the risks associated with the holding of such
property overseas. Various provisions of federal law governing the
establishment and operation of U.S. branches do not apply to foreign
branches of U.S. banks.
Obligations of U.S. branches and agencies of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by federal and state
regulation, as well as by governmental action in the country in which the
foreign bank has its head office.
7. WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES. See the description of such
securities under "Additional Investment Information -- Stock Funds."
8. MORTGAGE-BACKED SECURITIES. See the description of such securities under
"Additional Investment Information--Intermediate-Term U.S. Treasury Fund,
High-Yield Fund, and Managed Bond Fund."
9. ASSET-BACKED SECURITIES. See the description of such securities under
"Additional Investment Information--Intermediate-Term U.S. Treasury Fund,
High-Yield Fund, and Managed Bond Fund."
10. 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
Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"), and (d) securities supported solely by the
creditworthiness of the issuer, such as securities issued by the Tennessee
Valley Authority ("TVA").
11. CORPORATE OBLIGATIONS SUCH AS PUBLICLY TRADED BONDS, DEBENTURES AND NOTES.
The securities are used by issuers to borrow money from investors. The
issuer
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pays the investor a fixed or variable rate of interest, and must repay the
amount borrowed at maturity.
12. 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.
13. EURODOLLAR AND YANKEE BANK OBLIGATIONS. See the description of such
securities under "Additional Investment Information--Intermediate-Term
U.S. Treasury Fund, High-Yield Fund and Managed Bond Fund."
SPECIAL RISKS OF BELOW INVESTMENT GRADE BONDS
The Equity, Income, Small Company and U.S. Value Funds may invest in, and the
other Funds as a result of downgrades may own, below investment grade bonds.
Below investment grade bonds are speculative and involve greater investment
risks than investment grade bonds due to the issuer's reduced creditworthiness
and increased likelihood of default and bankruptcy. During period 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.
Below investment grade bonds (commonly referred to as "high-yield" or "junk"
bonds) have certain additional risks associated with them. Yields on below
investment grade bonds will fluctuate over time. These bonds tend to reflect
short-term economic and corporate developments to a greater extent than higher
quality bonds that primarily react to fluctuations in interest rates. During an
economic downturn or period of rising interest rates, issuers of below
investment grade bonds may experience financial difficulties that adversely
affect their ability to make principal and interest payments, meet projected
business goals and obtain additional financing. In addition, issuers often rely
on cash flow to service debt. Failure to realize projected cash flows may
seriously impair the issuer's ability to service its debt load that in turn
might cause a Fund to lose all or part of its investment in that security. SAM
will seek to minimize these additional risks through diversification, careful
assessment of the issuer's financial structure, business plan and management
team and monitoring of the issuer's progress toward its financial goals.
The liquidity and price of below investment grade bonds can be affected by a
number of factors, including investor perceptions and adverse publicity
regarding major issues, underwriters or dealers of lower-quality corporate
obligations. These effects can be particularly pronounced in a thinly-traded
market with few participants and may adversely impact a Fund's ability to
dispose of the bonds as well as make valuation of the bonds more difficult.
Because there tend to be fewer investors in below investment grade
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bonds, it may be difficult for a Fund to sell these securities at an optimum
time. Consequently, these bonds may be subject to more price changes,
fluctuations in yield and risk to principal and income than higher-rated bonds
of the same maturity.
Credit ratings evaluate the likelihood that an issuer will make principal and
interest payments, but may not reflect market value risks associated with
lower-rated bonds. Credit rating agencies may not timely revise ratings to
reflect subsequent events affecting an issuer's ability to pay principal and
interest.
SPECIAL RISKS OF FOREIGN INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS (INTERNATIONAL FUND ONLY)
FOREIGN SECURITIES
Investing in foreign companies and markets involves certain considerations,
including those set forth below, that are not typically associated with
investing in U.S. securities denominated in U.S. dollars and traded in U.S.
markets. Foreign securities may not be registered under, nor may the issuers
thereof be subject to the reporting requirements of, U.S. securities laws.
Accordingly, there may be less publicly available information about a foreign
company than about a domestic company. Foreign companies are not generally
subject to uniform accounting and auditing and financial reporting standards,
practices and requirements comparable to those applicable to U.S. companies.
Securities of some foreign companies are less liquid and more volatile than
securities of comparable domestic companies.
It is contemplated that most foreign securities will be purchased in
over-the-counter markets or stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located. Fixed commissions on foreign stock exchanges are generally higher than
negotiated commissions on U.S. exchanges. There is generally less governmental
supervision and regulation of foreign stock exchanges, broker-dealers and
issuers than in the United States.
In addition, with respect to some foreign countries, there is the possibility of
expropriation or confiscatory taxation, limitations on the removal of funds or
other assets of a Fund, political or social instability, or diplomatic
developments that could affect U.S. investments in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross domestic product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
Because the International Fund invests primarily in foreign securities, it is
subject to various risks in addition to those associated with U.S. investment.
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.
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CURRENCY EXCHANGE RATES
The value of the assets of a Fund as measured in U.S. dollars may be affected
favorably or unfavorably by fluctuations in currency rates and exchange control
regulations (including actions by a foreign government to devalue its
currency, thereby effecting a possibly substantial reduction in the U.S.
dollar value of a Fund's investments in that country). The International
Fund is authorized to employ certain hedging techniques to minimize this
risk. However, to the extent such transactions do not fully protect the
International Fund against adverse changes in exchange rates, decreases in
the value of the currencies of the countries in which the Fund invests will
result in a corresponding decrease in the U.S. dollar value of the Fund's
assets denominated in those currencies. Further, the International Fund may
incur costs in connection with conversions between various currencies.
Foreign exchange dealers (including banks) realize a profit based on the
difference between the prices at which they buy and sell various currencies.
Thus, a dealer or bank normally will offer to sell a foreign currency to the
International Fund at one rate, while offering a lesser rate of exchange
should the Fund desire immediately to resell that currency to the dealer.
Moreover, fluctuations in exchange rates may decrease or eliminate income
available for distribution. For example, if certain realized foreign
currency losses exceed other investment company taxable income (as described
below under "Tax Information") during a taxable year, the International Fund
would not be able to make ordinary dividend distributions, or distributions
made before the losses were realized would be recharacterized for federal
income tax purposes as a return of capital to shareholders, rather than as
ordinary dividends.
HEDGING TRANSACTIONS (INTERNATIONAL FUND ONLY)
Hedging transactions cannot eliminate all risks of loss to the International
Fund and may prevent the Fund from realizing some potential gains. The
projection of short-term foreign currency and market movements is extremely
difficult, and the successful execution of a short-term hedging strategy is
highly uncertain. Among the risks of hedging transactions are: incorrect
prediction of the movement of currency exchange rates and market movements;
imperfect correlation of currency movements in cross-hedges and indirect hedges;
imperfect correlation in the price movements of options, futures contracts and
options on future contracts with the assets on which they are based; lack of
liquid secondary markets and inability to effect closing transactions; costs
associated with effecting such transactions; inadequate disclosure and/or
regulatory controls in certain markets; counterparty default with respect to
transactions not executed on an exchange; trading restrictions imposed by
governments, or securities and commodities exchanges; and governmental actions
affecting the value or liquidity of currencies. Hedging transactions may be
effected in foreign markets or on foreign exchanges and are subject to the same
types of risks that affect foreign securities. See "Special Risks of Foreign
Investments and Foreign Currency Transactions."
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Indirect hedges and cross-hedges are more speculative than other hedges because
they are not directly related to the position or transaction being hedged. With
respect to indirect hedges, movements in the proxy currency may not precisely
mirror movements in the currency in which portfolio securities are denominated.
Accordingly, the potential gain or loss on an indirect hedge may be more or less
than if the Fund had directly hedged a currency risk. Similar risks are
associated with cross-hedge transactions. In a cross-hedge, the foreign
currency in which a portfolio security is denominated is hedged against another
foreign currency, rather than the U.S. dollar. Cross-hedges may also create a
greater risk of loss than other hedging transactions because they may involve
hedging a currency risk through the U.S. dollar rather than directly to the U.S.
dollar or another currency.
To help reduce certain risks associated with hedging transactions, the Common
Stock Trust's Board of Trustees has adopted the requirement that forward
contracts, options, futures contracts and options on futures contracts be used
on behalf of the Fund as a hedge and not for speculation. In addition to this
requirement, the Board of Trustees has adopted the following percentage
restrictions on the use of options, futures contracts and options on futures
contracts:
(i) The Fund will not write a put or call option if, as a result
thereof, the aggregate value of the assets underlying all such
options (determined as of the date such options are written)
would exceed 25% of the Fund's net assets.
(ii) The Fund will not purchase a put or call option or option on a
futures contract if, as a result thereof, the aggregate premiums
paid on all options or options on futures contracts held by the
Fund would exceed 20% of the Fund's net assets.
(iii) The Fund will not enter into any futures contract or option on a
futures contract if, as a result thereof, the aggregate margin
deposits and premiums required on all such instruments would
exceed 5% of the Fund's net assets.
INVESTMENT RISKS OF CONCENTRATION IN CALIFORNIA AND WASHINGTON ISSUERS
CALIFORNIA TAX-FREE INCOME FUND
The following is a condensed and general description of conditions
affecting the taxing ability and fiscal condition of the State of California and
its various political subdivisions and their ability 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
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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
Tax-Free Income Fund has not independently verified any of the information
presented in this section.
THE STATE OF CALIFORNIA. The severe economic recession which occurred
in California between 1990 and 1994 seriously affected State tax revenues,
caused increased expenditures for health and welfare programs, and 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
experienced recurring budget deficits and had to use a series of external
borrowings to meet its cash needs.
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 S&P from "AAA" to "A+," by
Moody's from "Aaa" to "Aa," and by Fitch IBCA, Inc. from "AAA" to "AA." In
July, 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.
Since the start of 1994, California's economy and the State's
financial condition have steadily improved, with a combination of better than
expected revenues, slowdown in growth of social welfare programs, and continued
spending restraint. The accumulated budget deficit from the recession years was
finally eliminated. Moody's, S&P and Fitch IBCA, Inc. currently rate the
State's general obligation bonds Aa3, A-plus and AA-minus, respectively.
In August 1998, the Governor signed the Budget Act for fiscal year
1998-99. The most significant feature of the 1998-99 budget was agreement on a
total of $1.4 billion of tax cuts. The central element is a bill which provides
for a phased-in reduction of the vehicle license fee. Since the vehicle license
fee is currently transferred to cities and counties, the bill provides for the
General Fund to replace the lost revenues. Started on January 1, 1999, the
vehicle license fee has been reduced by 25 percent, at a cost to the General
Fund of approximately $500 million in the 1998-99 Fiscal Year and about $1
billion annually thereafter. Revenues and expenditures for 1998-99 as updated
in the 1990-00 Governor's Budget are $56.3 billion and $58.3 billion,
respectively. That proposed budget projects General Fund revenues and transfers
in 1990-00 of $60.3 billion. This includes anticipated initial payments from a
tobacco litigation settlement of about $560 million, and receipt of one-time
revenue from sale of assets. The Governor also assumes receipt of about $400
million of federal aid for certain health and welfare programs and reimbursement
for costs for incarceration of undocumented felons, above the amount presently
received by California from the federal government. The
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Governor's Budget proposes General Fund expenditures of $60.5 billion, giving
highest priority to education.
TAX AND SPENDING LIMITATIONS. The taxing powers of California public
agencies are limited by Article XIII A of the State Constitution, added by an
initiative amendment approved by voters on June 6, 1978, and commonly known as
Proposition 13.
Article XIII A limits the maximum ad valorem tax on real property to
one percent of "full cash value" which is defined as "the County Assessor's
valuation of real property as shown on the fiscal year 1975-76 tax bill under
`full cash value' or, thereafter, the appraised value of real property when
purchased, newly constructed, or a change in ownership has occurred after the
1975 assessment." The full cash value may be adjusted annually to reflect
inflation at a rate not to exceed two percent per year, or reduction in the
consumer price index or comparable local data, or declining property value
caused by damage, destruction, or other factors.
The tax rate limitation referred to above does not apply to ad valorem
taxes to pay the interest and redemption charges on any indebtedness approved by
the voters before July 1, 1978 or any bonded indebtedness for the acquisition or
improvement of real property approved by two-thirds of the votes cast by the
voters voting on the proposition.
Article XIII A also requires a two-thirds vote of the electors prior
to the imposition of any special taxes and totally precludes the imposition of
any new ad valorem taxes on real property or sales or transaction taxes on the
sales of real property.
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.
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State and local government agencies in California and the State itself
are subject to annual "appropriation limits" imposed by Article XIII B, an
initiative constitutional amendment approved by the voters on November 6, 1979,
which prohibits government agencies and the State from spending "appropriations
subject to limitation" in excess of the appropriations limit imposed.
"Appropriations subject to limitation" are authorizations to spend "proceeds of
taxes," which consist of tax revenues, certain State subventions and certain
other funds, including proceeds from regulatory licenses, user revenues, certain
State subventions and certain other funds to the extent that such proceeds
exceed "the cost reasonably born by such entity in providing the regulation,
product, or service." No limit is imposed on appropriation of funds which are
not "proceeds of taxes," on debt service or indebtedness existing or authorized
by January 1, 1979, or subsequently authorized by the voters, or appropriations
required to comply with mandates of courts or the federal government, or user
charges or fees which don't 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 other than charter cities 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 these 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 any of these
local governmental entities 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 these 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 between May 1, 1985 and November 4, 1986 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 December 14, 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 may have to be
reduced in any year to the extent that they rely on the proceeds of any general
tax adopted after May 1, 1985 which has not been approved by majority vote
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of the electorate. The GUARDINO decision left unresolved (1) whether its
conclusions apply retroactively to taxes adopted without the necessary voter
approval during the period between the 1986 passage of Proposition 62 and the
1995 GUARDINO decision and (2) what statute of limitations applies to a taxpayer
challenge. These issues have not yet been addressed by the California Supreme
Court, and a number of appeals remain pending.
An initiative constitutional amendment known as Proposition 218 and
also called the "Right to Vote on Taxes Act" was approved by the voters on
November 5, 1996. This measure added Articles XIII C and XIII D to the State
Constitution. The measure requires that general tax increases by all local
government entities be approved by not less than a majority vote and that taxes
for special purposes be approved by a two-thirds vote; provides that existing
language in the California Constitution shall not be construed to limit the
initiative power with respect to reducing or repealing any local tax,
assessment, fee or charge; prescribes procedures applicable to assessments on
real property and requires that such 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 electorate.
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 which would affect the ability of
California and its political subdivisions to service their outstanding
indebtedness.
LEASE FINANCING. Lease-based financing, typically marketed in the
form of certificates of participation or lease revenue bonds, 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 (including earthquake) insurance
and rental interruption insurance.
In a recent taxpayer suit, RIDER v. CITY OF SAN DIEGO, the California
Supreme Court upheld the validity of traditional financing structures involving
joint powers agencies and reaffirmed the long-established lease exception to the
constitutional debt limit.
LAND-SECURED FINANCING. Local government limited obligations payable
from special taxes or assessments on real property have come to be known as
"dirt bonds". Typically unrated and ultimately secured by a lien on benefited
property, these obligations are inherently vulnerable to fluctuations in land
values and development risks
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arising from a number of factors, including increased governmental and
environmental regulations and general economic conditions.
ELECTRIC UTILITY RESTRUCTURING. Like a number of other states,
California recently enacted legislation relating to the restructuring of the
electric utility industry. The legislation generally provides for increased
competition in the supply of electric power and allows retail customers "direct
access" in choosing their supplier. In addition, the legislation provides for
an immediate rate reduction for small users; creates an independent power
exchange to administer a wholesale power pool; creates an independent system
operator for the transmission grid; provides customers and suppliers with
nondiscriminating and comparable access to transmission and distribution
services; and allows utilities to recover uneconomic generation-related costs
through a transition charge or severance fee.
The mandatory provisions of the legislation generally apply to
utilities regulated by the California Public Utilities Commission. Since the
State's political subdivisions are not subject to the jurisdiction of the CPUC,
the effect of the legislation on municipally-owned electric utilities is more
limited. As a practical matter, however, it is likely that most
municipally-owned utilities will adopt some form of direct access or pooling
programs in order to remain competitive.
The effects of direct access may vary among municipal utilities and
cannot be specifically ascertained at this time. However, some potential
effects include: (i) loss of customers, particularly large industrial and
commercial customers, (ii) increased costs to remaining customers, (iii)
decreased revenues, (iv) decreases in transfers to the municipality's general
fund, (v) increased difficulties in developing new generating resources, (vi)
increased difficulties and higher costs in system financing, (vii) reductions in
credit ratings, (viii) the need to recover stranded investment in facilities
from the remaining customers and (ix) reductions in environmental and social
programs relating to electric utility services.
YEAR 2000 COMPLIANCE. California and most of its political
subdivisions have adopted strategies and allocated resources to bring their
computer systems into compliance with year 2000-related information technology.
The so-called "Year 2000 Issue" arises because most computer software programs
allocate two digits to the date field for "Year" on the assumption that the
first two digits will be "19". Such programs thus will interpret the year 2000
as the year 1900, the year 2001 as the year 1901, etc. absent reprogramming or
replacement. The Year 2000 Issue affects the hardware and software for computer
information technology systems and the embedded logic of computer chips in
non-information technology systems, such as meters, vehicles, transformers,
switching gear and environmental systems. The Year 2000 Issue could impact both
the ability to enter data into computer programs, the ability of such programs
to correctly process data, and the ability to operate non-information technology
systems.
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The State Treasurer's Office reports that as of December 31, 1998, its
systems for bond payments were fully Year 2000 compliant. The State
Controller's Office reported that it had completed the necessary Year 2000
remediation projects for the State fiscal and accounting system by December 31,
1998, consistent with the Governor's Executive Order. The final steps of
testing will be completed during 1999. Both offices are actively working with
the outside entities with whom they interface to ensure they are also compliant.
ORANGE COUNTY BANKRUPTCY. In December 1994, Orange County, 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. Orange County has
since embarked on a fiscal recovery plan, based on sharp reductions in services
and personnel, and continues to face fiscal constraints in the aftermath of the
bankruptcy.
Since the Orange County bankruptcy, California's general laws
pertaining to the deposit and investment of public moneys have been
significantly revised to limit the use of higher-risk investments and to provide
additional oversight safeguards at the local level.
The Fund will attempt to achieve geographic diversification by
investing in obligations of issuers which 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 MUNICIPAL BOND FUND
A discussion of certain economic, financial and legal matters regarding the
State of Washington follows. During normal market conditions, the Washington
Municipal Bond 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
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Municipal Bond Fund has not independently verified any of the information
presented in this section.
GENERAL INFORMATION
According to the United States 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 by 17.8% while the United
States population increased by 9.8%. The State's population increased at an
average annual rate of approximately 2.5% from 1990 to 1993, and at an average
annual rate of approximately 1.8% from 1993 to 1995. Measured on an April to
April year, the annual rate of population growth was approximately 1.6% for each
of the years 1995 to 1996 and 1996 to 1997. The current estimate of the
population of the State is approximately 5.6 million.
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 orchards and dairy operations.
In recent years, the State's economy has diversified with employment in the
trade and service sectors representing an increasing portion of total employment
relative to the manufacturing sector.
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, 1997, approximately 76.1%
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 45% of total collections. Business and occupation tax collections
represented about 16.4 % and the motor vehicle fuel tax represented
approximately 6.4% of
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total State taxes for the year. Ad valorem taxes represented 11.1% of State tax
revenues for the fiscal year 1997.
Expenditures of State revenues are made in accordance with constitutional and
statutory mandates.
STATE EXPENDITURE LIMITATIONS
Initiative 601, which was 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 revenue 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 was 5.13% for fiscal year 1996 and is 4.45% for fiscal year 1997, 4.05%
for fiscal year 1998, and 4.01% for fiscal year 1999. The initiative created
two new reserve funds (the Emergency Reserve Fund and the Education Construction
Fund) for depositing revenues in excess of the spending limit and abolished the
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.
The State Constitution and enabling statutes authorize the incurrence of State
general obligation debt to the payment of which the State's full faith, 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
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bonds are limited obligation bonds not payable from the General Fund. For the
1997-99 Biennium, General Fund-State revenues are projected to be $19.421
billion, an increase of 9.8% over the 1995-97 Biennium, plus a carry-forward of
$513 million. The revenue outlook for the 1997-99 Biennium is stable and the
General Fund is projected to end the Biennium with a $820 million fund balance.
The operating budget for the 1997-99 Biennium calls for an overall expenditure
level of $19.084 billion for the General Fund-State, an increase of $1.4 billion
or 7.9% over the 1995-97 Biennium and within the $19.152 billion expenditure
limit imposed under Initiative 601.
Fifty-eight percent of the General Fund-State budget will go to support public
schools and higher education, representing a $514 million increase in public
school funding and an increase of $137 million in funding for public
universities and colleges.
Social and Health Services funding accounts for approximately 26% of the State
budget, and the criminal justice budget also increased. A 3% across-the-board
salary increase for State employees accounts for $63 million of the increase in
General Fund-State expenditures.
The 1998 Supplemental Budget reduced total General Fund-State expenditures by
$975,000 and passed the State Legislature on March 11, 1998. Governor Locke
signed the budget bill on April 3, 1998.
In 1997-99 approximately $1.88 billion has been budgeted for new projects.
Approximately $541.5 million is budgeted for higher education facilities. Other
State government functions, such as general government, natural resources,
corrections and environmental programs receive about $1,061 million. The State
also expects to spend about $277.6 million for common school construction.
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 benefited 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 benefited
property, but some of those obligations also may be secured by a special
guaranty fund.
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ECONOMIC OVERVIEW
Over the past few years, the State's economic performance has remained
relatively strong compared to the United States as a whole. After adjusting for
inflation, growth in personal income in the State increased 4.6% in 1996 over
the 1995 level and 5.8% in 1997 over the 1996 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 1980s, has declined since 1991 to an average rate of 1.4%. The 1998
employment growth is expected to be 3.0%.
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 State's largest
employer, has several facilities located primarily in the Puget Sound area.
Boeing is the world's leading manufacturer of commercial airliners and as of May
1998 employed approximately 103,500 people State-wide. 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 United
States and has undertaken a broad program of diversification activities
including Boeing Information and Support Services. In 1997, Boeing had $45.8
billion in sales and a loss of $178 million. Boeing currently anticipates 1998
sales to be in the $55 billion range. Boeing recently completed two and is
currently undertaking one major expansion project. The company 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 is an approximately 500,000
square-foot customer service training center that was recently completed. 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).
On December 5, 1996, Boeing acquired the former defense and space units of
Rockwell International. On August 1, 1997, Boeing also completed its merger
with McDonnell Douglas Corporation. The merger will not significantly impact
Boeing employment levels in the State.
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In 1996, the Boeing Defense & Space Group won a $1.1 billion contract from the
U.S. Air Force to build the Airborne Laser system and was also one of two
companies selected by the Department of Defense to build two prototype Joint
Strike Fighter airplanes. Boeing also recently announced that it will become an
equity partner and serve as the prime contractor for Teledesic's network of
low-Earth-orbit satellites. The estimated contract value if $9 billion.
TECHNOLOGY-RELATED INDUSTRIES. The State ranks fourth among all states in the
percentage of its work force employed by technology-related industries. It
ranks third among the largest software development centers. The State is the
home of approximately 1000 advanced technology firms of which approximately 50%
are computer-related. Microsoft, headquartered in Redmond, Washington, is the
largest microcomputer software company in the world. In addition, several
biotechnical firms located in the State have attained international acclaim for
their research and development.
TIMBER. Natural forests cover more than 40% of the State's land area, and
forest products rank second behind aerospace in value of total production. The
largest 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 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 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 5.1% of the State's wage and salary employment
in 1996. Projections for 1997 show this segment declined slightly to 5.0% of
employment.
TRADE. International trade plays an important role in the State's employment
base and one in six jobs is related to this sector. 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; on a combined basis they are the second largest
load center for containerized cargo in the United States. Approximately 70% of
the cargo passing through 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.
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RETAIL SALES. Growth in retail sales in the State between 1990 and 1992 was
higher than that in the United States. During 1993 through 1996, 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 a small
but relatively consistent decline since 1990 from 7% to 4.3% for 1995, and 3.4%
forecast for 1996. 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 relative 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 is expected to have a material
adverse impact on either State revenues or expenditures.
REDEMPTION IN KIND
If a Trust concludes that cash payment upon redemption to a shareholder would be
prejudicial to the best interest of the other shareholders of a Fund, a portion
of the payment may be made in kind. The Trusts have elected to be governed by
Rule 18f-1 under the 1940 Act, pursuant to which each Fund must redeem shares
tendered by a shareholder of the Fund solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the 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 the Fund's assets. Any securities or other
property so distributed in kind shall be valued by the same
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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.
SALES CHARGE WAIVERS
We offer a number of ways to reduce or eliminate the initial sales charge
on Class A shares or the CDSC on Class B. If you think you may be eligible,
contact SAFECO or your financial advisor for further information.
WAIVER OF CLASS A SHARES SALES CHARGE. Class A shares are sold at net
asset value per share without any sales charges for the following investments:
1. Registered representatives or full-time employees of broker-dealers,
banks and other financial institutions that have entered into selling
agreements with SAFECO Securities, and the children, spouse and
parents of such representatives and employees, and employees of
financial institutions that directly, or through their affiliates,
have entered into selling agreements with SAFECO Securities;
2. Companies exchanging shares with or selling assets to one or more of
the Funds pursuant to a merger, acquisition or exchange offer;
3. Any of the direct or indirect affiliates of SAFECO Securities;
4. Purchases made through the automatic investment of dividends and
distributions paid by another Fund;
5. Clients of administrators or consultants to tax-qualified employee
benefit plans which have entered into agreements with SAFECO
Securities or any of its affiliates;
6. Retirement plan participants who borrow from their retirement accounts
by redeeming Fund shares and subsequently repay such loans via a
purchase of Fund shares;
7. Retirement plan participants who receive distributions from a
tax-qualified employer-sponsored retirement plan, which is invested in
Fund shares, the proceeds of which are reinvested in Fund shares;
8. Accounts as to which a broker-dealer, bank or other financial
institution charges an account management fee, provided the financial
institution has entered into an agreement with SAFECO Securities
regarding such accounts;
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9. Current or retired officers, directors, trustees or employees of any
SAFECO mutual fund or SAFECO Corporation or its affiliates and the
children, spouse and parents of such persons; and
10. Investments made with redemption proceeds from mutual funds having a
similar investment objective with respect to which the investor paid a
front-end sales charge.
CDSC WAIVERS. The CDSC for Class B shares currently is waived in the
following circumstances:
(a) total or partial redemptions made within one year following the death
or disability of a shareholder;
(b) redemptions made pursuant to any systematic withdrawal plan based on
the shareholder's life expectancy, including substantially equal
periodic payments prior to age 59 1/2 which are described in Code
section 72(t), and required minimum distributions after age 70 1/2,
including those required minimum distributions made in connection with
customer accounts under Section 403(b) of the Code and other
retirement plans;
(c) total or partial redemption resulting from a distribution following
retirement in the case of a tax-qualified employer-sponsored
retirement plan;
(d) when a redemption results from a tax-free return of an excess
contribution pursuant to Section 408(d)(4) or (5) of the Code;
(e) reinvestment in Class B shares of a Fund within 60 days of a prior
redemption;
(f) redemptions pursuant to the Fund's right to liquidate a shareholder's
account involuntarily;
(g) redemptions pursuant to distributions from a tax-qualified
employer-sponsored retirement plan that are invested in Funds and are
permitted to be made without penalty pursuant to the Code; and
(h) redemptions in connection with a Fund's systematic withdrawal plan not
in excess of 10% of the value of the account annually.
SAFECO will calculate the CDSC applicable to a redemption in a manner that
results in the lowest possible rate. SAFECO will assume that the redemption is
made first of amounts representing shares acquired pursuant to the reinvestment
of dividends and other
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distributions and then of amounts representing the cost of shares held for the
longest period of time.
REINSTATEMENT PRIVILEGE. If you paid an initial sales charge and redeem your
Class A shares in a Fund you have a one-time privilege to reinstate your
investment by investing the proceeds of the redemption at net asset value per
share without a sales charge in Class A shares of that Fund and/or one or more
of the other Funds. You or your broker-dealer, bank or other financial
institution must provide SAFECO Services with a written request for reinvestment
and a check not exceeding the amount of the redemption proceeds within 60 days
of the date of the redemption. The reinstatement purchase will be effected at
the net asset value per share next determined after such receipt.
CONVERSION OF CLASS B SHARES
Class B shares of a Fund will automatically convert to Class A shares of that
Fund, based on the relative net asset values per share ("NAVs") of the Classes,
within the first month following the sixth anniversary of the shareholder's
purchase of such Class B shares. For the purpose of calculating the holding
period required for conversion of Class B shares of a Fund except the Money
Market Fund, the date of purchase shall mean (1) the date on which such Class B
shares were purchased or (2) for Class B shares obtained through an exchange, or
a series of exchanges, the date on which the original Class B shares were
purchased. For the purpose of calculating the holding period required for
conversion of Class B shares of the Money Market Fund, the date of purchase
shall mean the date on which those shares were first exchanged for Class B
shares of any other SAFECO Fund. Shareholders who have converted Class B shares
of the SAFECO Advisor Series Trust ("Advisor Series Shares") into Class B shares
of a Fund may calculate the holding period from the date of the purchase of the
Advisor Series Shares. For purposes of conversion to Class A shares, Class B
shares purchased through the reinvestment of dividends and other distributions
paid in respect of Class B shares will be held in a separate sub-account; each
time any Class B shares in the shareholder's regular account (other than those
in the sub-account) convert to Class A shares, a pro rata portion of the Class B
shares in the sub-account will also convert to Class A shares. The portion will
be determined by the ratio that the shareholder's Class B shares converting to
Class A shares bears to the shareholder's total Class B shares not acquired
through dividends and other distributions.
INFORMATION ON CALCULATION OF NET ASSET VALUE PER SHARE
GENERAL
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 NAV of each Fund is calculated as of the close of regular
trading on the New York Stock Exchange
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("Exchange"), normally 1:00 p.m. Pacific time every day the Exchange is open for
trading. The Exchange is closed on the following days: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. NAV is determined
separately for each class of shares of each Fund.
Short-term debt securities held by 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 the
applicable Trust's Board of Trustees may from time to time deem to be
appropriate. The cost of those securities that had original maturities in
excess of 60 days shall be determined by their fair market value until the 61st
day prior to maturity. All other securities and assets in the portfolio will
be appraised in accordance with those procedures established by the Board of
Trustees in good faith in computing the fair market value of those assets.
Trading in foreign securities generally will be substantially completed each day
at various times prior to the close of the Exchange. The value of any such
securities are determined as of such times for purposes of computing NAV.
Foreign currency exchange rates are also generally determined prior to the close
of the Exchange. If an extraordinary event occurs after the close of an
exchange on which that security is traded, the security will be valued at fair
value as determined in good faith by the Sub-Adviser under procedures
established by and under general supervision of the Board of Trustees.
Options the International Fund may purchase that are traded on national
securities exchanges are valued at their last sale price as of the close of
option trading on such exchange. Futures contracts the International Fund will
enter into will be marked to market daily, and options thereon are valued at
their last sale price, as of the close of the applicable commodities exchange.
Quotations of foreign securities in a foreign currency are converted into U.S.
dollar equivalents at the current rate obtained by a recognized bank or dealer.
Forward contracts are valued at the current cost of covering or offsetting such
contracts.
MONEY MARKET FUND
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 Fund's NAV at $1.00, are
permitted pursuant to Rule 2a-7 under the 1940 Act. Pursuant to that Rule, the
Fund maintains a dollar-weighted average portfolio maturity of 90 days or less,
purchases only securities having remaining maturities of 397 days or less, and
invests only in securities determined by SAM, under guidelines adopted by the
Money Market Trust's Board of Trustees, to be of high quality and to present
minimal credit risks. The Board of Trustees has established procedures designed
to stabilize, to the extent reasonably possible, the Money Market Fund's
price-per-share as computed for the purpose of sales and redemptions at $1.00.
These procedures include a review of the Money Market Fund's portfolio holdings
by the Board of Trustees, at such intervals as the Board deems appropriate, to
determine whether
69
<PAGE>
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 Fund. If the
Board determines that such a deviation exists in the Fund, the Trustees will
take such corrective action with respect to the Fund as they regard as necessary
and appropriate, including selling portfolio investments prior to maturity to
realize capital gains or losses or to shorten average portfolio maturity, not
paying dividends (subject to distribution requirements to maintain status as a
regulated investment company for federal tax purposes (see "Tax Information")),
redeeming shares in kind, and determining the NAV by using available market
quotations.
The principal risk associated with the Money Market Fund is that it 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 yields will
fluctuate with general money market interests rates.
PERFORMANCE INFORMATION
GENERAL
Effective September 30, 1996, all of the then-existing shares of each Fund,
except the Value Fund and the High-Yield Bond Fund, were redesignated No-Load
Class shares and each Fund commenced offering Class A and Class B shares. The
High-Yield Bond Fund and the Value Fund commenced offering Class A and Class B
shares on January 31, 1997, and April 30, 1997, respectively. Except with
respect to the High-Yield Bond and Value Funds, the performance information
that follows reflects (1) the actual performance of Class A and Class B shares
of the Funds for the years ended December 31, 1998 and December 31, 1997; (2)
the actual performance of Class A and Class B shares of the Funds for the
period September 30, 1996 to December 31, 1996; and (3) the performance of the
No-Load Class shares of each Fund, restated to reflect the sales charges but
not the Rule 12b-1 fees of Class A and Class B shares, for the periods prior
to September 30, 1996. Performance information for the periods prior to
September 30, 1996, would have been lower if these Rule 12b-1 fees were
reflected. With respect to the High-Yield Bond Fund, the performance
information that follows reflects: (1) the actual performance of Class A and
Class B shares of the Fund for the year ended December 31, 1998 and the period
from January 31, 1997 to December 31, 1997 and (2) the performance of the
No-Load Class shares of the Fund, restated to reflect the sales charge but not
the Rule 12b-1 fees of Class A and Class B shares, for the periods prior to
January 31, 1997. Performance information for the periods prior to January
31, 1997, would have been lower if these Rule 12b-1 fees were reflected. The
performance information for the Value Fund reflects actual performance of the
Class A and Class B shares of the Fund since April 30, 1997 (initial public
offering).
PERFORMANCE INFORMATION AND QUOTED RATINGS ARE INDICATIVE ONLY OF PAST
PERFORMANCE AND ARE NOT INTENDED TO REPRESENT FUTURE INVESTMENT RESULTS.
70
<PAGE>
TOTAL RETURNS AND AVERAGE TOTAL RETURNS (Non-Standard returns not
reflecting sales charges)
For the following Funds, the total returns, expressed as a percentage, for the
one-, five- and ten-year periods ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
GROWTH FUND 4.47% 3.38% 138.30% 133.97% 365.26% 356.81%
EQUITY FUND 24.77% 23.16% 165.37% 159.94% 502.79% 490.47%
INCOME FUND 5.38% 5.03% 112.46% 109.92% 249.56% 245.37%
INTERMEDIATE-TERM 9.08% 8.30% 33.04% 31.06% 110.86% 107.73%
U.S. TREASURY FUND
HIGH-YIELD FUND 4.32% 3.39% 46.42% 44.19% 138.20% 134.57%
MUNICIPAL BOND FUND 5.75% 5.08% 33.99% 32.07% 119.29% 116.15%
CALIFORNIA TAX-FREE 5.73% 4.98% 38.22% 35.86% 123.65% 119.84%
FUND
</TABLE>
For the following Funds, the total returns, expressed as a percentage, for the
one-year, five-year and since initial public offering periods ended December 31,
1998 were as follows:
<TABLE>
<CAPTION>
Since Initial
1 Year 5 Years+ Public Offering
------ ------- ---------------
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NORTHWEST 2.87% 2.37% 82.98% 80.50% 144.06% 140.76% (94 months)*
FUND
WASHINGTON 5.36% 4.55% 29.08% 27.04% 39.25% 37.05% (69 months)**
MUNICIPAL
BOND FUND
</TABLE>
+ Performance reported for the 5-year period ending December 31, 1998 unless
otherwise noted.
* Inception of Fund February 7, 1991.
** Inception of Fund March 18, 1993.
For the following Funds, the total returns, expressed as a percentage, for the
one-year and since initial public offering periods ended December 31, 1998 were
as follows:
<TABLE>
<CAPTION>
Since Initial
1 Year Public Offering
------ ---------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCED FUND 12.06% 11.30% 45.11% 42.50% (35 months)***
INTERNATIONAL 13.68% 12.66% 35.35% 32.80% (35 months)***
FUND
SMALL COMPANY FUND (21.96)% (22.67)% 20.20% 17.95% (35 months)***
71
<PAGE>
U.S. VALUE FUND 11.79% 11.18% 31.06% 29.67% (20 months)****
MANAGED BOND FUND 7.87% 6.67% 32.42% 29.65% (58 months)*****
</TABLE>
*** Inception of Fund January 31, 1996.
**** Inception of Fund April 30, 1997.
***** Inception of Fund February 28, 1994.
For the following Funds, the total returns, expressed in dollars and assuming a
$10,000 initial investment, for the one-, five- and ten-year periods ended
December 31, 1998 were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
GROWTH FUND $10,447 $10,338 $23,830 $23,397 $46,526 $45,680
EQUITY FUND $12,477 $12,316 $26,537 $25,994 $60,280 $59,047
INCOME FUND $10,538 $10,503 $21,246 $20,991 $34,956 $34,538
</TABLE>
For the Northwest Fund, the total returns, expressed in dollars and assuming a
$10,000 initial investment, for the one-year, five-year, and since initial
public offering (94 months) periods ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Since Initial
1 Year 5 Years Public Offering
------ ------- ---------------
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
NORTHWEST FUND $10,287 $10,237 $18,298 $18,050 $24,406 $24,076 (94 months)*
</TABLE>
* Inception of Fund February 7, 1991.
For the following Funds, the total returns, expressed in dollars and assuming a
$10,000 initial investment, for the one-year and since initial public offering
periods ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Since Initial
1 Year Public Offering
------ ---------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCED FUND $11,206 $11,131 $14,511 $14,250 (20 months)***
INTERNATIONAL FUND $11,368 $11,266 $13,535 $13,280 (35 months)***
SMALL COMPANY FUND $ 7,804 $7,733 $12,020 $11,795 (35 months)***
U.S. VALUE FUND $11,179 $11,118 $13,106 $12,967 (20 months)****
</TABLE>
*** Inception of Fund January 31, 1996.
**** Inception of Fund April 30, 1997.
72
<PAGE>
For the following Funds, the average annual total returns for the one-, five-
and ten-year periods ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
GROWTH FUND 4.47% 3.38% 18.97% 18.53% 16.62% 16.41%
EQUITY FUND 24.77% 23.16% 21.55% 21.05% 19.68% 19.43%
INCOME FUND 5.38% 5.03% 16.27% 15.99% 13.33% 13.20%
INTERMEDIATE-TERM 9.08% 8.30% 5.88% 5.56% 7.75% 7.58%
U.S. TREASURY FUND
HIGH-YIELD BOND FUND 4.32% 3.39% 7.92% 7.59% 9.07% 8.90%
MUNICIPAL BOND FUND 5.75% 5.08% 6.03% 5.72% 8.17% 8.01%
CALIFORNIA TAX-FREE 5.73% 4.98% 6.69% 6.32% 8.38% 8.20%
FUND
</TABLE>
For the following Funds, the average annual total returns for the one-year,
five-year, and since initial public offering periods ended December 31, 1998
were as follows:
<TABLE>
<CAPTION>
Since Initial
1 Year 5 Years Public Offering
------ ------- ---------------
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NORTHWEST 2.87% 2.37% 12.84% 12.54% 12.06% 11.87% (94 months)*
FUND
WASHINGTON 5.36% 4.55% 5.24% 4.90% 5.93% 5.63% (69 months)**
MUNICIPAL
BOND FUND
</TABLE>
* Inception of Fund February 7, 1991.
** Inception of Fund March 18, 1993.
For the following Funds, the average annual total returns for the one-year and
since initial public offering periods ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Since Initial
1 Year Public Offering
------ ---------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCED FUND 12.06% 11.30% 13.62% 12.91% (35 months)***
INTERNATIONAL FUND 13.68% 12.66% 10.94% 10.22% (35 months)***
SMALL COMPANY FUND (21.96)% (22.67)% 6.51% 5.82% (35 months)***
U.S. VALUE FUND 11.79% 11.18% 17.62% 16.87% (20 months)****
MANAGED BOND FUND 7.87% 6.67% 5.98% 5.52% (58 months)*****
</TABLE>
** Inception of Fund March 18, 1993.
*** Inception of Fund January 31, 1996.
**** Inception of Fund April 30, 1997.
***** Inception of Fund February 28, 1994.
73
<PAGE>
YIELD AND EFFECTIVE YIELD
For the following Funds, the yields for the 30-day period ended December 31,
1998 were as follows:
<TABLE>
<CAPTION>
Class A Class B
------- -------
<S> <C> <C>
INTERMEDIATE TREASURY FUND 3.22% 2.68%
HIGH-YIELD FUND 7.79% 7.20%
MANAGED BOND FUND 2.92% 2.66%
</TABLE>
For the following Funds, the yield and tax-equivalent yield at the maximum
federal tax rate of 39.6% for the 30-day period ended December 31, 1998 at the
maximum federal tax rate of 39.6% were as follows:
<TABLE>
<CAPTION>
Yield Tax-Equivalent Yield
----- --------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
MUNICIPAL BOND FUND 3.61% 3.16% 5.98% 5.23%
WASHINGTON MUNICIPAL BOND 2.49% 2.04% 4.12% 3.38%
FUND
CALIFORNIA TAX-FREE INCOME 3.49% 3.04% 6.37% 5.55%
FUND*
</TABLE>
* maximum combined federal and California tax rates of 45.2%
For the Money Market Fund, the yield and effective yield at the maximum federal
tax rate of 39.6% for the 7-day period ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Yield Effective Yield
----- ----------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
MONEY MARKET FUND 4.62% 4.27% 4.73% 4.36%
</TABLE>
CALCULATIONS
The total return, expressed as a percentage, is computed using the following
formula:
ERV-P
T = ----- x 100
P
The total return, expressed in dollars, is computed using the following formula:
74
<PAGE>
n
T = P(1+A)
The average annual total return is computed using the following formula:
n
A = (root ERV/P - 1) x 100
Where: T = total return
A = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical investment of $1,000 at
the end of a specified period of time
P = a hypothetical initial investment of $1,000 or $10,000 (when
total return is expressed in dollars)
In making the above calculation, all dividends and capital gain distributions
are assumed to be reinvested at the respective Fund's NAV on the reinvestment
date, and the maximum sales charge, if any, for each class is applied.
Yield for the Intermediate-Term U.S. Treasury Fund, High-Yield Bond Fund,
Managed Bond Fund and Tax-Exempt Bond Funds is computed using the following
formula:
a-b 6
Yield = 2[( --- +1) - 1]
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
75
<PAGE>
TOTAL RETURNS AND AVERAGE TOTAL RETURNS (Standard returns reflecting sales
charges)
For the following funds, the total returns, expressed as a percentage, for the
one-, five- and ten-year periods ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
GROWTH FUND (0.23)% (1.62)% 127.58% 131.97% 344.32% 356.81%
EQUITY FUND 19.16% 18.16% 153.42% 157.94% 475.67% 490.47%
INCOME FUND 0.64% 0.03% 102.90% 107.92% 233.83% 245.37%
INTERMEDIATE-TERM 4.17% 3.30% 27.05% 29.06% 101.37% 107.73%
U.S. TREASURY FUND
HIGH-YIELD FUND (0.38)% (1.61)% 39.03% 42.19% 127.48% 134.57%
MUNICIPAL BOND FUND 0.99% 0.08% 27.96% 30.07% 109.42% 116.15%
CALIFORNIA TAX-FREE 0.47% (0.02)% 32.00% 33.86% 113.59% 119.84%
FUND
</TABLE>
For the following Funds, the total returns, expressed as a percentage, for the
one-year, five-year and since initial public offering periods ended December 31,
1998 were as follows:
<TABLE>
<CAPTION>
Since Initial
1 Year 5 Years+ Public Offering
------ ------- ---------------
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NORTHWEST (1.76)% (2.63)% 74.74% 78.50% 133.07% 140.76% (94 months)*
FUND
WASHINGTON 0.62% (0.45)% 23.27% 25.04% 32.99% 36.05% (69 months)**
MUNICIPAL
BOND FUND
</TABLE>
+ Performance reported for the 5-year period ending December 31, 1998 unless
otherwise noted.
* Inception of Fund February 7, 1991.
** Inception of Fund March 18, 1993.
For the following Funds, the total returns, expressed as a percentage, for the
one-year and since initial public offering periods ended December 31, 1998 were
as follows:
<TABLE>
<CAPTION>
Since Initial
1 Year Public Offering
------ ---------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCED FUND 7.02% 6.30% 38.58% 39.50% (35 months)***
INTERNATIONAL 8.56% 7.66% 29.26% 29.80% (35 months)***
FUND
SMALL COMPANY FUND (25.47)% (26.54)% 14.79% 14.95% (35 months)***
76
<PAGE>
U.S. VALUE FUND 6.76% 6.18% 25.16% 25.67% (20 months)****
MANAGED BOND FUND 3.02% 1.67% 26.46% 27.65% (58 months)*****
</TABLE>
*** Inception of Fund January 31, 1996.
**** Inception of Fund April 30, 1997.
***** Inception of Fund February 28, 1994.
For the following Funds, the total returns, expressed in dollars and assuming a
$10,000 initial investment, for the one-, five- and ten-year periods ended
December 31, 1998 were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
GROWTH FUND $ 9,977 $ 9,838 $22,758 $23,197 $44,432 $45,681
EQUITY FUND $11,916 $11,816 $25,342 $25,794 $57,567 $59,047
INCOME FUND $10,064 $10,003 $20,290 $20,792 $33,383 $34,537
</TABLE>
For the Northwest Fund, the total returns, expressed in dollars and assuming a
$10,000 initial investment, for the one-year, five-year, and since initial
public offering (94 months) periods ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Since Initial
1 Year 5 Years Public Offering
------ ------- ---------------
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
NORTHWEST FUND $ 9,824 $ 9,737 $17,474 $17,850 $23,307 $24,076 (94 months)*
</TABLE>
* Inception of Fund February 7, 1991.
For the following Funds, the total returns, expressed in dollars and assuming a
$10,000 initial investment, for the one-year and since initial public offering
periods ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Since Initial
1 Year Public Offering
------ ---------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCED FUND $10,702 $10,650 $13,857 $13,950 (20 months)***
INTERNATIONAL FUND $10,856 $10,766 $12,926 $12,980 (35 months)***
SMALL COMPANY FUND $ 7,453 $ 7,346 $11,479 $11,495 (35 months)***
U.S. VALUE FUND $10,676 $10,618 $12,516 $12,567 (20 months)****
</TABLE>
*** Inception of Fund January 31, 1996.
**** Inception of Fund April 30, 1997.
77
<PAGE>
For the following Funds, the average annual total returns for the one-, five-
and ten-year periods ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
GROWTH FUND (0.23)% (1.62)% 17.88% 18.33% 16.08% 16.41%
EQUITY FUND 19.16% (1.61)% 20.44% 15.77% 19.13% 19.43%
INCOME FUND 0.64% 0.03% 15.20% 20.87% 12.81% 13.20%
INTERMEDIATE-TERM 0.38% 18.16% 4.90% 5.23% 7.25% 7.58%
U.S. TREASURY FUND
HIGH-YIELD BOND FUND (0.38)% (1.61)% 6.94% 7.29% 8.57% 8.90%
MUNICIPAL BOND FUND 0.99% 0.08% 5.05% 5.90% 7.67% 8.01%
CALIFORNIA TAX-FREE 0.97% (0.02)% 5.71% 6.01% 7.88% 8.20%
FUND
</TABLE>
For the following Funds, the average annual total returns for the one-year,
five-year, and since initial public offering periods ended December 31, 1998
were as follows:
<TABLE>
<CAPTION>
Since Initial
1 Year 5 Years Public Offering
------ ------- ---------------
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NORTHWEST (1.76)% (2.63)% 11.81% 12.29% 11.41% 11.87% (94 months)*
FUND
WASHINGTON 0.62% (0.45)% 4.27% 4.57% 5.08% 5.50% (69 months)**
MUNICIPAL
BOND FUND
</TABLE>
* Inception of Fund February 7, 1991.
** Inception of Fund March 18, 1993.
For the following Funds, the average annual total returns for the one-year and
since initial public offering periods ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Since Initial
1 Year Public Offering
------ ---------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCED FUND 7.02% 6.30% 11.84% 12.09% (35 months)***
INTERNATIONAL FUND 8.56% 7.66% 9.20% 9.36% (35 months)***
SMALL COMPANY FUND (25.47)% (26.54)% 4.84% 4.89% (35 months)***
U.S. VALUE FUND 6.76% 6.18% 14.41% 14.69% (20 months)****
MANAGED BOND FUND 3.02% 1.67% 4.98% 5.18% (58 months)*****
</TABLE>
** Inception of Fund March 18, 1993.
*** Inception of Fund January 31, 1996.
**** Inception of Fund April 30, 1997.
***** Inception of Fund February 28, 1994.
78
<PAGE>
Yield for the Money Market Fund 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
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
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 Fund utilized market
valuations to determine its NAV. The converse would apply in a period of rising
interest rates.
In addition to performance figures, the Funds may advertise their rankings as
calculated by independent rating services that monitor mutual funds' performance
(E.G., CDA Investment Technologies, Lipper Analytical Services, Inc.,
Morningstar, Inc., and Wiesenberger Investment Companies Service). These
rankings may be among mutual funds with similar objectives and/or size or with
mutual funds in general, and may be based on relative performance during periods
deemed by the rating services to be representative of up and down markets. 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
79
<PAGE>
of risk and potential tax liability, sales commissions and expense and turnover
ratios. These rating services may also base the measure of relative performance
on time periods deemed by them to be representative of up and down markets. The
Funds may also describe in their advertisements the methodology used by the
rating services to arrive at Fund ratings. In addition, the Funds may also
advertise individual measurements of Fund performance published by the rating
services, including, but not limited to: a Fund's beta, standard deviations, and
price earnings ratio.
The Funds may occasionally reproduce articles or portions of articles about the
Funds written by independent third parties such as financial writers, financial
planners and financial analysts, which have appeared in financial publications
of general circulation or financial newsletters (including but not limited to
BARRONS, BUSINESS WEEK, FABIANS, FORBES, FORTUNE, INVESTOR'S BUSINESS DAILY,
KIPLINGER'S, MONEY Magazine, MORNINGSTAR MUTUAL FUNDS, MUTUAL FUNDS FORECASTER,
MUTUAL FUNDS Magazine, NEWSWEEK, NO-LOAD FUNDS Magazine, NO-LOAD FUND INVESTOR,
NO-LOAD FUNDS X, PENSIONS & INVESTMENTS, RUKEYSER'S MUTUAL FUNDS, TELESWITCH,
TIME Magazine, U.S. NEWS AND WORLD REPORT, YOUR MONEY AND THE WALL STREET
JOURNAL).
Each Fund may 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 advisor (SAM) or any sub-investment
adviser, the investment advisor's parent company (SAFECO Corporation) or the
parent company of any sub-investment advisor, 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. Each Fund also may provide information on how much certain
investments would return over time.
Each Stock Fund may compare its performance against the following unmanaged
indices that (unless otherwise noted in the advertisement) assume reinvestment
of dividends:
80
<PAGE>
AMEX (AMERICAN STOCK EXCHANGE) MAJOR MARKET INDEX -Price-weighted (high
priced issues have more influence than low-priced issues) average of 20
Blue Chip stocks.
DOW JONES INDUSTRIAL AVERAGE - Price weighted average of 30 actively-traded
Blue Chip stocks.
NASDAQ PRICE INDEX - Market value weighted (impact of a component's price
change is proportionate to the overall market value of the issue) index of
approximately 3500 over-the-counter stocks traded on the Nasdaq.
S & P 500 COMPOSITE STOCK PRICE INDEX - Market value weighted index of 500
stocks, most of which are listed on the New York Stock Exchange with some
listed on the American Stock Exchange and Nasdaq.
WILSHIRE 5000 EQUITY INDEX - Market value weighted index of approximately
5000 stocks including all stocks on the New York and American Exchanges.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX - Market value weighted
index of approximately 1200 companies located throughout the world.
RUSSELL 2000 INDEX - The 2000 smallest firms in the Russell 3000 Index
which is composed of the 3000 largest companies in the United States as
measured by capitalization.
Information used in advertisements and materials furnished to present and
prospective investors may include statements or illustrations relating to the
appropriateness of certain types of securities and/or mutual funds to meet
specific financial goals. Such information may address:
- - costs associated with aging parents;
- - funding a college education (including its actual and estimated cost);
- - health care expenses (including actual and projected expenses);
- - long-term disabilities (including the availability of, and coverage
provided by, disability insurance); and
- - retirement (including the availability of social security benefits, the tax
treatment of such benefits and statistics and other information relating to
maintaining a particular standard of living and outliving existing assets).
Such information may also address different methods for saving money and the
results of such methods, as well as the benefits of investing in bond funds.
81
<PAGE>
Information in advertisements and materials furnished to present and prospective
investors may include profiles of different types of investors (i.e., investors
with different goals and assets) and different investment strategies for meeting
specific goals. Such information may provide hypothetical illustrations which
include: results of various investment strategies; performance of an investment
in a Fund over various time periods; and results of diversifying assets among
several investments with varying performance. Information in advertisements and
materials furnished to present and prospective investors may also include
quotations (including editorial comments) and statistics concerning investing in
securities, as well as investing in particular types of securities and the
performance of such securities.
INFORMATION ON DIVIDENDS FOR THE MONEY MARKET FUND
Because the Money Market Fund intends to hold its portfolio securities to
maturity and expects that most of its portfolio securities will be valued at
their amortized cost, realized gains or losses should not be a significant
factor in the computation of net income. If, however, in an unusual
circumstance, the Money Market Fund experiences a realized gain or loss,
shareholders of that 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.
MANAGEMENT OF THE FUNDS
The Boards of Trustees have overall responsibility for the operation of the
Funds. Pursuant to such responsibility, the Board of Trustees has approved
contracts with various organizations to provide among other things, day to day
management services required by each Fund.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position(s) Held Principal Occupations(s)
Name, Address and Age with the Trusts During Past 5 Years
--------------------- --------------- -------------------
<S> <C> <C>
Boh A. Dickey* Chairman and Trustee President, Chief Operating
SAFECO Plaza Officer, and Director of SAFECO
Seattle, WA 98185 Corporation. Previously,
(54) 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."
82
<PAGE>
<CAPTION>
Position(s) Held Principal Occupations(s)
Name, Address and Age with the Trusts During Past 5 Years
--------------------- --------------- -------------------
<S> <C> <C>
Barbara J. Dingfield Trustee Director of Community Affairs
Microsoft Corporation for Microsoft Corporation,
One Microsoft Way Redmond, Washington, a computer
Redmond, WA 98052 software company; former
(53) Director and 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; Board Chair of
United Way of King County; Board
of Managers of Swarthmore
College.
David F. Hill* President President of SAFECO Securities,
10865 Willows Road NE Trustee Inc. and SAFECO Services
Redmond, WA 98052 Corporation; Senior Vice
(50) President of SAFECO Asset
Management Company. See table
under "Investment Advisory and
Other Services."
Richard W. Hubbard* Trustee Retired Vice President and
1270 NW Blakely Ct. Treasurer of the Trust and other
Seattle, WA 98177 SAFECO Trusts; retired Senior
(69) Vice President and Treasurer of
SAFECO Corporation; former
President of SAFECO Asset
Management Company; Director of
First SAFECO National Life
Insurance Company of New York;
Member of Diocese of Olympia
Investment Committee.
Richard E. Lundgren Trustee Director of Marketing and
764 S. 293rd Street Customer Relations, Building
Federal Way, WA Materials Distribution,
98032 Weyerhaeuser Company, Tacoma,
(61) Washington; Director of First
SAFECO National Life Insurance
Company of New York.
83
<PAGE>
<CAPTION>
Position(s) Held Principal Occupations(s)
Name, Address and Age with the Trusts During Past 5 Years
--------------------- --------------- -------------------
<S> <C> <C>
Larry L. Pinnt Trustee Retired Vice President and Chief
1600 Bell Plaza, Financial Officer U.S. WEST
Room 1802 Communications, Seattle,
Seattle, WA 98191 Washington; Chairman of
(64) University of Washington Medical
Center Board, Seattle,
Washington; Director of Cascade
Natural Gas Corporation,
Seattle, Washington; Director of
First SAFECO National Life
Insurance Company of New York;
and a Treasurer of Cancer Care
Alliance, Seattle, Washington.
John W. Schneider Trustee President and sole owner of
1808 N. 41st St. Wallingford Group, Inc.,
Seattle, WA 98103 Seattle, Washington; former
(57) President of Emerald Development
Group, Inc., Seattle,
Washington; Director of First
SAFECO National Life Insurance
Company of New York.
Neal Fuller Vice President Vice President, Controller,
10865 Willows Road NE Controller Assistant Secretary and
Redmond, WA 98052 Assistant Secretary Treasurer of SAFECO Securities,
(36) Inc. and SAFECO Services
Corporation; Vice President,
Controller, Secretary and
Treasurer of SAFECO Asset
Management Company. See table
under "Investment Advisory and
Other Services."
Ronald L. Spaulding Vice President Chairman of SAFECO Asset
Two Union Square Treasurer Management Company; Treasurer
Sixth Avenue and and Chief Investment Officer of
Union Street SAFECO Corporation; Vice
Seattle, WA 98101 President of SAFECO Insurance
(55) Companies; Director, Vice
President and Treasurer of First
SAFECO National Life Insurance
Company of New York; former
Senior Portfolio Manager of
SAFECO insurance companies and
Portfolio Manager for SAFECO
mutual funds. See table under
"Investment Advisory and Other
Services."
84
<PAGE>
<CAPTION>
Position(s) Held Principal Occupations(s)
Name, Address and Age with the Trusts During Past 5 Years
--------------------- --------------- -------------------
<S> <C> <C>
David H. Longhurst Assistant Controller Assistant Controller of SAFECO
10865 Willows Road NE Securities, Inc., SAFECO
Redmond, WA 98052 Services Corporation and SAFECO
(41) Asset Management Company; former
Accounting Manager of SAFECO
Asset Management Company; former
Senior Manager with Ernst &
Young LLP, an independent
accounting firm.
Stephen D. Collier Assistant Secretary Assistant Secretary of SAFECO
SAFECO Plaza Asset Management Company, SAFECO
4333 Brooklyn Ave., Securities, Inc. and SAFECO
NE Services Corporation. He has
Seattle, WA 98105 been an executive officer of
(46) SAFECO Corporation and
subsidiaries since 1991.
</TABLE>
*Trustees who are interested persons as defined by the 1940 Act.
Each Trustee and officer holds the same position(s) with one other registered
open-end management investment company that has six series managed by SAM.
85
<PAGE>
COMPENSATION TABLE FOR CURRENT TRUSTEES
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement From
Benefits Estimated Registrant
Aggregate Accrued As Annual and Fund
Compensation Part of Benefits Complex
from Fund Upon Paid to
Trustee Trust Registrant Expenses Retirement Trustees
------- ----- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
BOH A. Common Stock N/A N/A N/A
DICKEY Taxable Bond N/A N/A N/A
Tax-Exempt Bond N/A N/A N/A
Managed Bond N/A N/A N/A
Money Market N/A N/A N/A
Total Compensation $0
BARBARA J. Common Stock $11,026 N/A N/A
DINGFIELD Taxable Bond $3,250 N/A N/A
Tax-Exempt Bond $5,832 N/A N/A
Managed Bond $1,033 N/A N/A
Money Market $2,339 N/A N/A
Total Compensation $30,375
DAVID F. Common Stock N/A N/A N/A
HILL Taxable Bond N/A N/A N/A
Tax-Exempt Bond N/A N/A N/A
Managed Bond N/A N/A N/A
Money Market N/A N/A N/A
Total Compensation $0
RICHARD W. Common Stock $10,345 N/A N/A
HUBBARD Taxable Bond $3,050 N/A N/A
Tax-Exempt Bond $5,472 N/A N/A
Managed Bond $969 N/A N/A
Money Market $2,195 N/A N/A
Total Compensation $28,500
RICHARD E. Common Stock $11,026 N/A N/A
LUNDGREN Taxable Bond $3,250 N/A N/A
Tax-Exempt Bond $5,832 N/A N/A
Managed Bond $1,033 N/A N/A
Money Market $2,339 N/A N/A
Total Compensation $30,375
86
<PAGE>
LARRY L. Common Stock $11,026 N/A N/A
PINNT Taxable Bond $3,250 N/A N/A
Tax-Exempt Bond $5,832 N/A N/A
Managed Bond $1,033 N/A N/A
Money Market $2,339 N/A N/A
Total Compensation $30,375
JOHN W. Common Stock $11,026 N/A N/A
SCHNEIDER Taxable Bond $3,250 N/A N/A
Tax-Exempt Bond $5,832 N/A N/A
Managed Bond $1,033 N/A N/A
Money Market $2,339 N/A N/A
Total Compensation $30,375
</TABLE>
At February 1, 1999, the Trustees and officers of each Trust as a group owned
less than 1% of the outstanding shares of each Fund.
Mr. Dickey and Mr. Hill are officers of various SAFECO companies and are not
compensated by the Trusts. Similarly, the officers of the Trusts receive no
compensation for their services as officers.
Currently, there is no pension, retirement, or other plan or any arrangement
pursuant to which Trustees or officers of the Trusts are compensated by the
Trusts.
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS OF CERTAIN FUNDS
At March 31, 1999, SAM controlled the International, Balanced, U.S. Value
and Managed Bond Funds. At March 31, 1999, SAFECO Insurance Company of
America ("SAFECO Insurance") controlled the Intermediate-Term U.S. Treasury
Fund and Washington Municipal Bond Fund. Each of SAM and SAFECO Insurance is
a corporation organized under the laws of the State of Washington.
At March 31, 1999, SAM owned 27.10% of the Balanced Fund's outstanding
shares; 35.00% of the International Fund's outstanding shares; 54.81% of the
U.S. Value Fund's outstanding shares; and 46.94% of the Managed Bond Fund's
outstanding shares. At March 31, 1999, SAFECO Insurance owned 22.46% of the
Intermediate-Term U.S. Treasury Fund's outstanding shares and SAFECO Trust
Omnibus Account, whose address of record is P.O. Box 34730, Seattle, WA
98124, owned 7.10% of the Intermediate Term U.S. Treasury Fund's outstanding
shares. Both SAFECO Insurance and SAFECO Trust Omnibus Account are under the
common control of SAFECO Corporation for a total control of 29.56% of the
Intermediate-Term U.S. Treasury Fund's outstanding shares. At March 31,
1999, SAFECO Insurance owned 67.95% of the Washington Municipal Bond Fund's
outstanding shares.
87
<PAGE>
At March 31, 1999, Charles Schwab & Co., Inc., whose address of record is 101
Montgomery St., San Francisco, CA 94104, held of record 29.81% of the Growth
Fund's outstanding shares; 27.41% of the Equity Fund's outstanding shares;
and 29.15% of the California Tax-Free Income Fund's outstanding shares, which
it held on behalf of its customers who are the beneficial owners of such
shares. No Fund is aware of any Schwab customer that beneficially owned 5% or
more of its outstanding shares.
SAM, SAFECO Insurance and SAFECO Trust Company are Washington corporations
and wholly owned subsidiaries of SAFECO Corporation. SAFECO Corporation is a
Washington corporation and a holding company whose primary subsidiaries are
engaged in the insurance and financial services businesses. SAM has its
principal place of business at 25th Floor, Two Union Square, Seattle, WA
98101. Each of SAFECO Insurance and SAFECO Corporation has its principal
place of business at SAFECO Plaza, Seattle, WA 98185.
Principal shareholders of a Fund may control the outcome of a shareholder
vote. However, on each proposal or sub-proposal, SAM, SAFECO Insurance
Company of America or other companies under common control with these
entities will vote shares of each Fund that it owns pro rata in accordance
with the vote cast by shareholders of the applicable Fund.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information provided to the Funds
or contained in filings with the SEC regarding the beneficial ownership of
shares of each Fund as of March 31, 1999 by each person who is known by each
Fund to own beneficially, or exercise control or direction over, 5% or more
of the outstanding shares of each Fund.
GROWTH FUND
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
National Financial Services Corp.
for the Exclusive Benefit of Our
Customers 5,992,803 11.07%
Attn.: Mutual Funds Dept. 5th Fl.
200 Liberty St., 1 World Financial
Center
New York, NY 10281-10003
Charles Schwab & Co. Inc.
Exclusive Benefit of Its Customers
Attn: Mutual Fund Department 16,135,578 29.81%
101 Montgomery Street
San Francisco CA 94104-4122
88
<PAGE>
EQUITY FUND
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
Charles Schwab & Co. Inc.
Exclusive Benefit of Its Customers 25,306,887 27.41%
Attn: Mutual Fund Department
101 Montgomery Street
San Francisco CA 94104-4122
INCOME FUND
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
Charles Schwab & Co. Inc.
Exclusive Benefit of Its Customers 1,818,381 11.42%
Attn: Mutual Fund Department
101 Montgomery Street
San Francisco CA 94104-4122
NORTHWEST FUND
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
Charles Schwab & Co. Inc.
Exclusive Benefit of Its Customers 211,089 5.72%
Attn: Mutual Fund Department
101 Montgomery Street
San Francisco CA 94104-4122
SAFECO Insurance Company of America
SAFECO Plaza 450,000 12.20%
Seattle, WA 98185
BALANCED FUND
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
Safeco Asset Management Company 509,268 27.10%
Two Union Square
Sixth Avenue and Union Street
Seattle, WA 98101
Safeco Services Corporation
Retirement Account 133,668 7.11%
Safeco T-13
Seattle, WA 98185-0001
INTERNATIONAL FUND
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
Safeco Asset Management Company
Two Union Square
Sixth Avenue and Union Street 678,169 35.00%
Seattle, WA 98101
89
<PAGE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
Norwest Bank Minnesota, N.A.,
Trustee 414,884 21.41%
SAFECO 401K Savings Plan
510 Marquette, 5th and Marquette
Minneapolis, MN 55479-0001
SMALL COMPANY FUND
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
National Financial Services Corp.
for the Exclusive Benefit of Our 153,018 4.98%
Customers
200 Liberty Street, 1 World
Financial
Attn.: Mutual Funds Dept. 5th Fl.
New York, NY 10281-1003
Charles Schwab & Co. Inc.
Exclusive Benefit of Its Customers
Attn: Mutual Fund Department 495,743 16.12%
101 Montgomery Street
San Francisco CA 94104-4122
Norwest Bank Minnesota, N.A.,
Trustee 656,234 21.34%
SAFECO 401K Savings Plan
510 Marquette, 5th and Marquette
Minneapolis, MN 55479-0001
U.S. VALUE FUND
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
Safeco Asset Management Company
Two Union Square
Sixth Avenue and Union Street 500,000 54.81%
Seattle, WA 98101
Charles Schwab & Co. Inc.
Exclusive Benefit of Its Customers
Attn: Mutual Fund Department 78,425 8.60%
101 Montgomery Street
San Francisco CA 94104-4122
INTERMEDIATE-TERM U.S. TREASURY FUND
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
SAFECO Insurance Company of America
SAFECO Plaza 500,000 22.46%
Seattle, WA 98185
Safeco Trust Omnibus Account
P.O. Box 34730 157,989 7.10%
Seattle, WA 98124-1730
90
<PAGE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
Charles Schwab & Co. Inc.
Exclusive Benefit of Its Customers
Attn: Mutual Fund Department 201,983 9.07%
101 Montgomery Street
San Francisco CA 94104-4122
HIGH-YIELD FUND
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
Charles Schwab & Co. Inc.
Exclusive Benefit of Its Customers 2,039,900 20.47%
Attn: Mutual Fund Department
101 Montgomery Street
San Francisco CA 94104-4122
MANAGED BOND FUND
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
Safeco Asset Management Company
Two Union Square 452,103 46.94%
Sixth Avenue and Union Street
Seattle, WA 98101
Christa Ministries
William Brown V.P. Finance 106,631 11.07%
P.O. Box 330303
Seattle, WA 98133-9703
CALIFORNIA TAX-FREE INCOME FUND
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
Charles Schwab & Co. Inc.
Exclusive Benefit of Its Customers
Attn: Mutual Fund Department 2,720,441 29.15%
101 Montgomery Street
San Francisco CA 94104-4122
WASHINGTON MUNICIPAL BOND FUND
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------------------ ---------------- ---------------
<S> <C> <C>
SAFECO Insurance Company of America
SAFECO Plaza 502,372 67.95%
Seattle, WA 98185
William A. Helsell
10653 Culpepper Ct. N.W. 51,436 6.96%
Seattle, WA 98177-5319
</TABLE>
91
<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.
With respect to the International Fund, SAM has a sub-advisory agreement with
Bank of Ireland Asset Management (U.S.) Limited ("Sub-Advisor"). The
Sub-Advisor has its headquarters at 26 Fitzwilliam Place, Dublin, Ireland, and
its U.S. office at 2 Greenwich Plaza, Greenwich, Connecticut. The Sub-Advisor
is a direct, wholly owned subsidiary of Bank of Ireland Asset Management Limited
(an investment advisory firm) that is located at 26 Fitzwilliam Place, Dublin,
Ireland. The Sub-Advisor is an indirect, wholly owned subsidiary of Bank of
Ireland (a holding company whose primary subsidiaries are engaged in banking,
insurance, securities and related financial services), which is located at Lower
Baggot Street, Dublin, Ireland.
The following individuals have the following positions and offices with the
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
Trustee
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 Chairman Director Director
Treasurer Director
S.C. Bauer President
Director
D.H. Longhurst Assistant Assistant Assistant Assistant
Controller Controller Controller Controller
92
<PAGE>
<CAPTION>
SAFECO SAFECO
Name Trusts SAM Securities Services
---- ------ --- ---------- --------
<S> <C> <C> <C> <C>
S.D. Collier Assistant Assistant Assistant Assistant
Secretary Secretary Secretary Secretary
</TABLE>
Mr. Dickey is President, Chief Operating Officer and a Director of SAFECO
Corporation and Mr. Spaulding is the Treasurer and a Vice President of SAFECO
Corporation. Messrs. Dickey and Spaulding are also Directors of other SAFECO
Corporation subsidiaries.
In connection with its investment advisory contract with each Trust, SAM
furnishes or pays for all facilities and services furnished or performed for or
on behalf of each Trust and each Fund, which includes furnishing office
facilities, books, records and personnel to manage each Trust's and each Fund's
affairs and paying certain expenses.
The Trust Instrument of each Trust provides that each 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 Trusts, unless it is adjudicated that they engaged in bad
faith, willful 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, 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 willful misfeasance, bad faith, gross
negligence, or reckless disregard of their duties.
SAM also serves as the investment advisor for other investment companies in
addition to the Funds. Several of these investment companies have investment
objectives similar to those of certain Funds. It is therefore possible that the
same securities will be purchased for both a Fund and another investment company
advised by SAM. When two or more Funds advised by SAM are simultaneously
engaged in the purchase or sale of the same security, the prices and amounts
will be allocated in a manner considered by the officers of the Funds involved
to be equitable to each Fund. It is expected that the opportunity to
participate in volume transactions will produce better executions and prices for
a Fund, generally. In some cases, the price of a security allocated to one Fund
may be higher or lower than the price of a security allocated to another Fund.
For the services and facilities furnished by SAM, each Fund has agreed to pay an
annual fee computed on the basis of the average market value of the net assets
of each Fund ascertained each business day and paid monthly in accordance with
the following schedules. The reduction in fees occurs only at such time as the
respective Fund's net assets reach the dollar amounts of the break points and
applies only to those assets that fall within the specified range. Each Fund
bears all expenses of its operations not specifically assumed by SAM.
93
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FUND FEE
---- ---
- --------------------------------------------------------------------------------
<S> <C> <C>
Growth, Equity, Income, Net Assets Annual Fee
Northwest, Balanced
and U.S. Value $0 - $250,000,000 .70 of 1%
$250,000,001 - $750,000,000 .65 of 1%
$750,000,001 - $1,250,000,000 .60 of 1%
Over $1,250,000,000 .55 of 1%
- --------------------------------------------------------------------------------
International* $0 - $250,000,000 1.00 of 1%
$250,000,001 - $750,000,000 .90 of 1%
Over $750,000,000 .80 of 1%
- --------------------------------------------------------------------------------
Small Company $0 - $250,000,000 .75 of 1%
$250,000,001 - $750,000,000 .70 of 1%
Over $750,000,001 - .65 of 1%
$1,250,000,000
Over $1,250,000,000 .60 of 1%
- --------------------------------------------------------------------------------
Intermediate-Term U.S. $0 - $250,000,000 .55 of 1%
Treasury
$250,000,001 - $750,000,000 .50 of 1%
$750,000,001 - $1,250,000,000 .45 of 1%
Over $1,250,000,000 .40 of 1%
- --------------------------------------------------------------------------------
High Yield $0 - $250,000,000 .65 of 1%
$250,000,001 - $750,000,000 .55 of 1%
Over $750,000,000 .50 of 1%
94
<PAGE>
<CAPTION>
- --------------------------------------------------------------------------------
FUND FEE
---- ---
- --------------------------------------------------------------------------------
<S> <C> <C>
Managed Bond $0 - $750,000,000 .50 of 1%
$750,000,001 - $1,250,000,000 .45 of 1%
Over $1,250,000,000 .40 of 1%
- --------------------------------------------------------------------------------
Municipal Bond, California $0 - $250,000,000 .50 of 1%
Tax-Free Income and
Washington Municipal Bond $250,000,001 - $750,000,000 .45 of 1%
Over $750,000,000 .40 of 1%
- --------------------------------------------------------------------------------
Money Market $0 - $250,000,000 .50 of 1%
$250,000,001 - $750,000,000 .45 of 1%
$750,000,001 - $1,250,000,000 .40 of 1%
Over $1,250,000,000 .35 of 1%
- --------------------------------------------------------------------------------
</TABLE>
* Under the sub-advisory agreement between SAM and the Sub-Advisor, the
Sub-Advisor 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-Advisor a fee in
accordance with the schedule below:
<TABLE>
<CAPTION>
NET ASSETS ANNUAL FEE
<S> <C>
$0 - $50,000,000 .60 of 1%
$50,000,001 - $100,000,000 .50 of 1%
Over $100,000,000 .40 of 1%
</TABLE>
95
<PAGE>
The following table states the total amounts of compensation paid by the
following Funds to SAM for the fiscal years ended December 31, 1998 and 1997,
the period ended December 31, 1996, and the prior fiscal year:
<TABLE>
<CAPTION>
FISCAL YEAR OR PERIOD ENDED
---------------------------
Three Month Period
December 31, December 31, Ended
1998 1997 December 31, 1996 September 30, 1996
-------- ------ ----------------- ------------------
<S> <C> <C> <C> <C>
GROWTH FUND $6,818,000 $2,120,000 $ 327,000 $1,260,000
EQUITY FUND $8,912,000 $6,481,000 $1,131,000 $3,752,000
INCOME FUND $2,747,000 $2,285,000 $ 469,000 $1,597,000
NORTHWEST FUND $ 519,000 $ 416,000 $ 80,000 $ 305,000
INTERMEDIATE-
TERM U.S. $ 109,000 $ 85,000 $ 21,000 $ 78,000
TREASURY FUND
HIGH-YIELD
FUND $ 507,000 $ 386,000 $ 82,000 $ 255,000
</TABLE>
96
<PAGE>
The following table states the total amounts of compensation paid by the
following Funds to SAM for the fiscal years ended December 31, 1998 and 1997,
the period ended December 31, 1996, and the period from January 31, 1996
(initial public offering) to September 30, 1996:
<TABLE>
<CAPTION>
FISCAL YEAR OR PERIOD ENDED
----------------------------
Period from
January 31,
1996
(Initial
Three Month Public
Period Ended Offering) to
December 31, December 31, December 31, September 30,
1998 1997 1996 1996
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
BALANCED FUND $144,000 $ 87,000 $15,000 $32,000
INTERNATIONAL
FUND $196,000 $153,000 $28,000 $53,000
SMALL COMPANY
FUND $360,000 $151,000 $27,000 $51,000
</TABLE>
The total amount of compensation paid by the U.S. Value Fund to SAM for the
fiscal year ended December 31, 1998 and the period from April 30, 1997 (initial
public offering) to December 31, 1997 was $77,916 and $43,000, respectively.
The following table states the total amounts of compensation paid by the Managed
Bond Fund to SAM for the past three years.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
---------------- ----------------- -----------------
<S> <C> <C> <C>
MANAGED
BOND FUND $30,000 $23,000 $21,000
</TABLE>
97
<PAGE>
The following table states the total amounts of compensation paid by the
following Funds to SAM for the fiscal years ended December 31, 1998 and 1997,
the period ended December 31, 1996, and the prior fiscal year:
<TABLE>
<CAPTION>
Fiscal Year or Period Ended
---------------------------
December 31, December 31, Nine Month Period Ended
1998 1997 December 31, 1996 March 31, 1996
-------- -------- ----------------- --------------
<S> <C> <C> <C> <C>
MUNICIPAL BOND $2,164,000 $2,041,000 $1,533,000 $2,021,000
FUND
CALIFORNIA $ 587,000 $ 424,000 $ 290,000 $ 366,000
TAX-FREE
INCOME FUND
WASHINGTON
MUNICIPAL BOND $ 53,000 $ 49,000 $ 32,000 $ 39,000
FUND
MONEY MARKET
FUND $1,012,000 $ 865,000 $ 630,000 $ 865,000
</TABLE>
DISTRIBUTION ARRANGEMENTS. SAFECO Securities is the principal underwriter for
each Fund and distributes the Class A and Class B shares of each Fund under
Distribution Agreements with each Trust that require 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.
Each Trust, on behalf of the Class A and Class B shares 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 Class A and Class B shares of each Fund (the
"Plans"). Pursuant to the Plans, each Class pays SAFECO Securities a quarterly
service fee, at the annual rate of 0.25% of the aggregate average daily net
assets of the 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 Class A and Class B shares 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 Class A and Class B shares 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.
98
<PAGE>
Under the Plans, SAFECO Securities will use the service fees primarily to
compensate persons selling shares of the Funds for the provision of personal
service and/or the maintenance of shareholder accounts. SAFECO Securities will
use the distribution fees under the Class B Plan to offset the commissions it
pays to broker-dealers, banks or other financial institutions for selling each
Fund's Class B shares. In addition, SAFECO Securities will use the distribution
fees under the Class B Plan to offset each Fund's marketing costs attributable
to the Class B shares, such as preparation of sales literature, advertising and
printing and distributing prospectuses and other shareholder materials to
prospective investors. SAFECO Securities also may use the distribution fee to
pay other costs allocated to SAFECO Securities' distribution activities,
including acting as shareholder of record, maintaining account records and other
overhead expenses.
99
<PAGE>
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 into shares of another Fund.
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 it
is approved at least annually and any material amendment thereto is approved, by
each Trust's Board of Trustees, including those Trustees who are not "interested
persons" of the Trusts 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
100
<PAGE>
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 class of that Fund and (4) while the Plan remains in
effect, the selection and nomination of Trustees who are not "interested
persons" of the Trusts shall be committed to the discretion of the Trustees who
are not "interested persons" of the Trusts.
In reporting amounts expended under the Plans to each Trust's Board of Trustees,
SAFECO Securities will allocate expenses attributable to the sale of Class A and
Class B shares to such Class A or Class B based on the ratio of sales of shares
of such class to the sales of all Class A and Class B shares. Expenses
attributable to a specific class will be allocated to that class.
In approving the adoption of each Plan, each Trust's Board of Trustees
determined that the adoption was in the best interests of the Funds'
shareholders.
In the event that a Plan is terminated or not continued with respect to the
Class A or Class B shares of any Fund, (i) no fees would be owed by a Fund to
SAFECO Securities with respect to that class, and (ii) 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.
During the period they are in effect, the Plans and related Agreements obligate
the Class A and Class B shares 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.
For the fiscal year ended December 31, 1998, each Fund paid the following Rule
12b-1 fees:
<TABLE>
<CAPTION>
FUND NAME CLASS A CLASS B
--------- ------- -------
<S> <C> <C>
Growth Fund $44,665 $85,238
Equity Fund $97,233 $98,593
101
<PAGE>
Income Fund $ 3,799 $15,242
Northwest Fund $ 4,677 $21,389
Balanced Fund $ 1,439 $10,371
International Stock Fund $ 1,059 $ 5,736
Small Company Stock Fund $ 2,239 $ 7,610
U.S. Value Fund $ 417 $ 4,403
Municipal Bond Fund $ 1,873 $ 8,276
California Tax-Free Income Fund $ 1,436 $ 7,657
Washington State Municipal Bond Fund $ 576 $ 2,451
Intermediate-Term U.S. Treasury Fund $ 1,345 $ 6,322
High-Yield Bond Fund $ 3,927 $ 7,223
Managed Bond Fund $ 579 $ 2,336
Money Market Fund $ 0 $ 0
</TABLE>
102
<PAGE>
Actual Rule 12b-1 fees by category paid by each Fund with regard to the Class A
shares during the fiscal year ended December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CLASS A GROWTH FUND EQUITY FUND INCOME FUND NORTHWEST
------- ----------- ----------- ----------- FUND
---------
<S> <C> <C> <C> <C>
Advertising $ - $ - $ - $ -
Printing and Mailing - - - -
prospectuses, semi-
annual reports and
annual reports (other
than to current
shareholders)
Seminars - - - -
Compensation to - - - -
Underwriters to partially
offset other marketing
expenses
Compensation to $44,665 $97,233 $ 3,799 $ 4,677
Dealers
Compensation to Sales - - - -
Personnel
</TABLE>
103
<PAGE>
<TABLE>
<CAPTION>
CLASS A BALANCED INTERNATIONAL SMALL U.S. VALUE
------- FUND STOCK FUND COMPANY FUND
-------- ------------- FUND ----------
-------
<S> <C> <C> <C> <C>
Advertising $ $ $ $
Printing and Mailing
prospectuses, semi-
annual reports and
annual reports (other
than to current
shareholders
Seminars
Compensation to
Underwriters to partially
offset other marketing
expenses
Compensation to $ 1,439 $ 1,059 $ 2,239 $ 417
Dealers
Compensation to Sales
Personnel
</TABLE>
104
<PAGE>
<TABLE>
<CAPTION>
CLASS A MUNICIPAL CALIFORNIA WASHINGTON INTERMEDIATE-
------- BOND FUND TAX-FREE STATE TERM U. S.
--------- INCOME FUND MUNICIPAL TREASURY
----------- BOND FUND FUND
--------- -------------
<S> <C> <C> <C> <C>
Advertising $ $ $ $
Printing and Mailing
prospectuses, semi-
annual reports and
annual reports (other
than to current
shareholders
Seminars
Compensation to
Underwriters to partially
offset other marketing
expenses
Compensation to $ 1,873 $ 1,436 $ 576 $ 1,345
Dealers
Compensation to Sales
Personnel
</TABLE>
105
<PAGE>
<TABLE>
<CAPTION>
CLASS A HIGH-YIELD MANAGED MONEY
------- BOND FUND BOND FUND MARKET FUND
---------- --------- -----------
<S> <C> <C> <C>
Advertising $ $ $
Printing and Mailing
prospectuses, semi-
annual reports and
annual reports (other
than to current
shareholders
Seminars
Compensation to
Underwriters to partially
offset other marketing
expenses
Compensation to $ 3,927 $ 579 $ 0
Dealers
Compensation to Sales
Personnel
</TABLE>
106
<PAGE>
Actual Rule 12b-1 fees by category paid by each Fund with regard to the Class B
shares during the year ended December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CLASS B GROWTH FUND EQUITY FUND INCOME FUND NORTHWEST
------- ----------- ----------- ----------- FUND
---------
<S> <C> <C> <C> <C>
Advertising $ $ $ $
Printing and Mailing
prospectuses, semi-
annual reports and
annual reports (other
than to current
shareholders)
Seminars
Compensation to $63,929 $75,945 $11,432 $16,042
Underwriters to partially
offset other marketing
expenses
Compensation to $21,309 $24,648 $ 3,810 $ 5,349
Dealers
Compensation to Sales
Personnel
</TABLE>
107
<PAGE>
<TABLE>
<CAPTION>
CLASS B BALANCED INTERNATIONAL SMALL U.S. VALUE
------- FUND STOCK FUND COMPANY FUND
-------- ------------- STOCK FUND ----------
----------
<S> <C> <C> <C> <C>
Advertising $ $ $ $
Printing and Mailing
prospectuses, semi-annual
reports and annual reports
(other than to current
shareholders)
Seminars
Compensation to Underwriters $ 7,778 $ 4,302 $ 5,708 $ 3,302
to partially offset other
marketing expenses
Compensation to Dealers $ 2,593 $ 1,434 $ 1,902 $ 1,101
Compensation to Sales
Personnel
</TABLE>
108
<PAGE>
<TABLE>
<CAPTION>
CLASS B MUNICIPAL CALIFORNIA WASHINGTON INTERMEDIATE-
------- BOND FUND TAX-FREE STATE TERM U.S.
--------- INCOME FUND MUNICIPAL TREASURY
----------- BOND FUND FUND
--------- ----
<S> <C> <C> <C> <C>
Advertising $ $ $ $
Printing and Mailing
prospectuses, semi-annual
reports and annual reports
(other than to current
shareholders)
Seminars
Compensation to Underwriters $ 6,207 $ 5,743 $ 1,838 $ 4,741
to partially offset other
marketing expenses
Compensation to Dealers $ 2,069 $ 1,914 $ 613 $ 1,581
Compensation to Sales
Personnel
</TABLE>
109
<PAGE>
<TABLE>
<CAPTION>
CLASS B HIGH-YIELD MANAGED MONEY
------- BOND FUND BOND FUND MARKET FUND
--------- --------- -----------
<S> <C> <C> <C>
Advertising $ $ $
Printing and Mailing
prospectuses, semi-annual
reports and annual reports
(other than to current
shareholders)
Seminars
Compensation to Underwriters $ 5,417 $ 1,752 $ 0
to partially offset other
marketing expenses
Compensation to Dealers $ 1,906 $ 584 $ 0
Compensation to Sales
Personnel
</TABLE>
110
<PAGE>
The following chart reflects the total sales charges paid in connection with the
sale of Class A shares of each Fund and the amount retained by SAFECO Securities
during the fiscal years or period ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
FUND NAME SALES AMOUNT SALES AMOUNT SALES AMOUNT
--------- CHARGE RETAINED CHARGE RETAINED CHARGE RETAINED
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Growth Fund $366,000 $79,000 $ 42,000 $ 2,000 $ 0 $ 0
Equity Fund 317,000 48,000 103,000 14,000 0 0
Income Fund 28,000 6,000 9,000 1,000 0 0
Northwest Fund 46,000 7,800 33,000 3,000 0 0
Balanced Fund 17,000 5,000 2,000 0 0 0
International Stock Fund 3,000 1,000 2,000 0 0 0
Small Company Stock Fund 16,000 3,000 1,000 0 0 0
U.S. Value Fund 2,000 0 0 0 0 0
Municipal Bond Fund 1,000 0 0 0 0 0
California Tax-Free Income
Fund 11,000 2,000 0 0 0 0
Washington State Municipal
Bond Fund 0 0 0 0 0 0
Intermediate-Term U.S.
Treasury Fund 9,000 1,000 0 0 0 0
High-Yield Bond Fund
Managed Bond Fund 36,000 9,000 0 0 0 0
Money Market Fund N/A N/A N/A N/A 0 0
</TABLE>
111
<PAGE>
The following chart reflects the contingent deferred sales charges paid by Class
A shareholders on redemptions during the fiscal years or period ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
FUND NAME 1998 1997 1996
--------- ---- ---- ----
<S> <C> <C> <C>
Growth Fund $22,000 $1,000 $ 0
Equity Fund 22,000 3,000 0
Income Fund 1,000 0 0
Northwest Fund 9,000 0 0
Balanced Fund 2,000 0 0
International Stock Fund 0 0 0
Small Company Stock Fund 2,000 0 0
U.S. Value Fund 0 0 N/A
Municipal Bond Fund 1,000 0 0
California Tax-Free Income Fund 1,000 0 0
Washington State Municipal Bond Fund 0 0 0
Intermediate-Term U.S. Treasury Fund 1,000 0 0
High-Yield Bond Fund 0 0 N/A
Managed Bond Fund 0 0 0
Money Market Fund N/A N/A N/A
</TABLE>
112
<PAGE>
The following chart reflects the contingent deferred sales charges paid by Class
B shareholders on redemptions during the fiscal years or period ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
FUND NAME 1998 1997 1996
--------- ---- ---- ----
<S> <C> <C> <C>
Growth Fund $ 0 $ 0 $ 0
Equity Fund 0 0 0
Income Fund 0 0 0
Northwest Fund 0 0 0
Balanced Fund 0 0 0
International Stock Fund 0 0 0
Small Company Stock Fund 0 0 0
U.S. Value Fund 0 0 N/A
Municipal Bond Fund 0 0 0
California Tax-Free Income Fund 0 0 0
Washington State Municipal Bond Fund 0 0 0
Intermediate-Term U.S. Treasury Fund 0 0 0
High-Yield Bond Fund 0 0 N/A
Managed Bond Fund 0 0 0
Money Market Fund N/A N/A N/A
</TABLE>
113
<PAGE>
ADMINISTRATION AND ACCOUNTING AGREEMENT. The Administration and Accounting
Agreement between each Fund and SAM is a service contract and not an investment
advisory agreement (the "Agreement"). Under the Agreement, SAM will serve as
each Fund's accounting agent and administrator, performing such functions as:
calculate the net asset value of each Fund's accounting agent and financial
records, prepare the financial statements semiannually, making regulatory
filings, and coordinate contractual relationships and communications between
each Fund and its service providers. Under the Agreement, each Fund will pay SAM
an administrative services fee of 0.05% of the average daily net assets up to
the first $200,000,000 and 0.01% of its net assets thereafter, and an accounting
fee of 0.04% of its average daily net assets up to the first $200,000,000 and
0.01% of its net assets thereafter.
CUSTODIAN. State Street Bank and Trust Company, 1776 Heritage Drive, North
Quincy, Massachusetts, 02170, is the custodian of the securities, cash and other
assets of each Fund (except the International Fund) under an agreement with each
Trust. Chase Manhattan Bank, N.A. 1211 Avenue of the Americas, New York, New
York, is the custodian of the securities, cash and other assets of the
International Fund. Chase Manhattan Bank, N.A. has entered into sub-custodian
agreements with several foreign banks and clearing agencies, pursuant to which
portfolio securities purchased outside the United States are maintained in the
custody of these entities.
INDEPENDENT AUDITOR. Ernst & Young LLP, 999 Third Avenue, Suite 3500,
Seattle, Washington 98104, is the independent auditor of each Fund's
financial statements.
TRANSFER AGENT. SAFECO Services, SAFECO Plaza, Seattle, Washington 98185, is the
transfer, dividend and distribution disbursement and shareholder servicing agent
for the Class A and Class B shares of each Fund under an agreement with each
Trust. SAFECO Services provides, or through subcontracts makes provision for,
all required transfer agent activity, including maintenance of records of each
Fund's Class A and Class B shareholders, records of transactions involving each
Fund's Class A and Class B shares, and the compilation, distribution, or
reinvestment of income dividends and capital gain distributions.
SAFECO Services is paid a fee for these services equal to $28.00 per Stock Fund
shareholder account; $32.00 per Bond Fund, Tax-Exempt Bond Fund and Managed Bond
Fund shareholder account; and $34.00 per Money Market Fund shareholder account,
but not to exceed .30% of each Fund's average net assets.
The following table shows the fees paid by the following Funds to SAFECO
Services during the fiscal years ended December 31, 1998 and 1997, the period
ended December 31, 1996 and the prior fiscal year:
114
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR OR PERIOD ENDED
---------------------------
Three Month Period
December 31, December 31, Ended September 30,
1998 1997 December 31, 1996 1996
---- ---- ----------------- ----
<S> <C> <C> <C> <C>
GROWTH $ 2,802,000 $ 517,000 $ 99,000 $ 384,000
FUND
EQUITY FUND $ 3,543,000 $ 2,320,000 $ 378,000 $ 1,203,000
INCOME $ 693,000 $ 583,000 $ 123,000 $ 359,000
FUND
NORTHWEST $ 194,000 $ 145,000 $ 32,000 $ 105,000
FUND
INTERMEDIATE $ 37,000 $ 31,000 $ 6,000 $ 39,000
TREASURY
FUND
HIGH-YIELD $ 124,000 $ 86,000 $ 17,000 $ 90,000
FUND
</TABLE>
* The fees paid to SAFECO Services reflect fees of $3.10 per shareholder
transaction until July, 1996 when the new fee schedule went into effect.
The following table shows the fees paid by the following Funds to SAFECO
Services during the fiscal years ended December 31, 1998 and 1997, the period
ended December 31, 1996 and the period from January 31, 1996 (initial public
offering) to September 30, 1996:
<TABLE>
<CAPTION>
FISCAL YEAR OR PERIOD ENDED
---------------------------
Period from
January 31, 1996
Three Month Period (Initial Public
December 31, December 31, Ended Offering) to
1998 1997 December 31, 1996 September 30, 1996
---- ---- ----------------- ------------------
<S> <C> <C> <C> <C>
BALANCED $ 44,000 $ 23,000 $ 2,000 $ 4,000
FUND
INTERNA- $ 52,000 $ 34,000 $ 2,000 $ 9,000
TIONAL
</TABLE>
115
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR OR PERIOD ENDED
---------------------------
Period from
January 31, 1996
Three Month Period (Initial Public
December 31, December 31, Ended Offering) to
1998 1997 December 31, 1996 September 30, 1996
---- ---- ----------------- ------------------
<S> <C> <C> <C> <C>
FUND
SMALL $ 122,000 $ 50,000 $ 8,000 $ 13,000
COMPANY
FUND
</TABLE>
* The fees paid to SAFECO Services reflect fees of $3.10 per shareholder
transaction until July, 1996 when the new fee schedule went into effect.
The total amount of fees paid by the Value Fund to SAFECO Services for the
fiscal year ended December 31, 1998 and the period from April 30, 1997 (initial
public offering) to December 31, 1997 were $20,000 and $5,000, respectively.
The following table shows the fees paid by the Managed Bond Fund to SAFECO
Services for the fiscal years ended December 31, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------
December 31, 1998 December 31, 1997 December 31, 1996*
----------------- ----------------- -----------------
<S> <C> <C> <C>
MANAGED $ 4,000 $ 1,000 $ 15
BOND FUND
</TABLE>
* The fees paid to SAFECO Services reflect fees of $3.10 per shareholder
transaction until July, 1996 when the new fee schedule went into effect.
The following table shows the fees paid by the following Funds to SAFECO
Services for the fiscal years ended December 31, 1998 and 1997, the period ended
December 31, 1996 and the prior fiscal year:
116
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR OR PERIOD ENDED
---------------------------
Nine Month Period
December 31, December 31, Ended
1998 1997 December 31, 1996* March 31, 1996*
---- ---- ----------------- --------------
<S> <C> <C> <C> <C>
MUNICIPAL $ 325,000 $ 327,000 $ 300,000 $ 511,000
BOND FUND
CALIFORNIA $ 81,000 $ 60,000 $ 48,000 $ 69,000
TAX-FREE FUND
WASHINGTON $ 3,000 $ 3,000 $ 2,000 $ 3,000
MUNICIPAL BOND FUND
MONEY $ 482,000 $ 414,000 $ 325,000 $ 424,000
MARKET FUND
</TABLE>
* Figures reflect fees of $3.10 per shareholder transaction until July, 1996
when the new fee schedule went into effect.
BROKERAGE PRACTICES
Brokers typically charge commissions or mark-ups/mark-downs to effect securities
transactions. The Funds may also purchase securities from underwriters, the
price of which will include a commission or concession paid by the issuer to the
underwriter. The purchase price of securities purchased from dealers serving as
market makers will include the spread between the bid and asked prices.
Brokerage transactions involving securities of companies domiciled in countries
other than the United States will normally be conducted on the principal stock
exchange of those countries. In most international markets, commission rates are
not negotiable and may be higher than the negotiated commission rates available
in the United States. There is generally less government supervision and
regulation of foreign stock exchanges and broker-dealers than in the United
States.
SAM determines the broker/dealers through whom securities transactions for the
Funds are executed. SAM may select a broker/dealer who may receive a commission
for portfolio transactions exceeding the amount another broker/dealer would have
charged
117
<PAGE>
for the same transaction if SAM determines that such amount of commission is
reasonable in relation to the value of the brokerage and research services
performed or provided by the broker/dealer, viewed in terms of either that
particular transaction or SAM's overall responsibilities to the client for whose
account such portfolio transaction is executed and other accounts advised by
SAM. Research services include market information, analysis of specific issues,
presentation of special situations and trading opportunities on a timely basis,
advice concerning industries, economic factors and trends, portfolio strategy
and performance of accounts. Research services come in the form of written
reports, telephone conversations between brokerage security analysts and members
of SAM's staff, and personal visits by such analysts and brokerage strategists
and economists to SAM's office.
Research services are used in advising all accounts, including accounts advised
by related persons of SAM, and not all such services are necessarily used by SAM
in connection with the specific account that paid commissions to the
broker/dealer providing such services. SAM does not acquire research services
through the generation of credits with respect to principal transactions or
transactions in financial futures.
The overall reasonableness of broker commissions paid is evaluated periodically.
Such evaluation includes a review of what competing broker/dealers are willing
to charge for similar types of services and what discounts are being granted by
brokerage firms. The evaluation also considers the timeliness and accuracy of
the research received.
118
<PAGE>
The following table states the total amount of brokerage expenses for the
following Funds for the fiscal years ended December 31, 1998 and 1997, the
period ended December 31, 1996, and the prior fiscal year:
FISCAL YEAR OR PERIOD ENDED
<TABLE>
<CAPTION>
Three Month
Period Ended
December 31, December 31, December 31, September 30,
1998 1997 1996 1996
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Growth Fund* $ 2,693,078 $ 817,674 $ 63,500 $ 518,092
Equity Fund $ 1,204,661 $ 1,180,261 $ 278,203 $ 1,224,644
Income Fund $ 344,745 $ 341,428 $ 42,827 $ 286,999
Northwest $ 48,671 $ 63,531 $ 25,566 $ 13,599
</TABLE>
* The increase in brokerage amounts was a result of significant acquisition
and sales activities which are not typical for the Growth Fund on a
historical basis.
The following table states the total amount of brokerage expenses for following
Funds for the fiscal years ended December 31, 1998 and 1997, the period ended
December 31, 1996, and the period from January 31, 1996 (initial public
offering) to September 30, 1996:
FISCAL YEAR OR PERIOD ENDED
<TABLE>
<CAPTION>
Period from
January 31,
Three Month 1996 (Initial
Period Ended Public Offering)
December 31, December 31, December 31, to September 30,
1998 1997 1996 1996
------------ ------------ ------------- ----------------
<S> <C> <C> <C> <C>
Balanced Fund $ 16,890 $ 9,913 $ 1,548 $ 5,911
International Fund $ 16,320 $ 16,054 $ 5,311 $ 22,468
Small Company Fund $ 92,111 $ 24,185 $ 4,615 $ 16,752
</TABLE>
The total amount of brokerage expenses for the U.S. Value Fund for the fiscal
year ended December 31, 1998 and the period from April 30, 1997 (initial public
offering) to December 31, 1997 were $14,106 and $10,224, respectively.
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TAX INFORMATION
GENERAL
Each Fund is treated as a separate corporation for federal income tax purposes
and intends to continue to qualify for treatment as a "regulated investment
company" ("RIC") under Subchapter M of the Internal Revenue Code of 1986
("Code"). To qualify for that treatment, a Fund (1) must distribute to its
shareholders for each taxable year at least 90% of the sum of its investment
company taxable income (consisting generally of taxable net investment income,
net short-term capital gain, and net gains from certain foreign currency
transactions) plus its net income excludable from gross income under section
103(a) of the Code ("Distribution Requirement"), (2) must derive at least 90% of
its gross income each taxable year from dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of
securities or foreign currencies, or other income (including gains from options,
futures, or forward contracts) derived with respect to its business of investing
in securities or those currencies ("Income Requirement"), and (3) must satisfy
certain diversification requirements. Each Fund intends to satisfy all such
requirements, including making sufficient distributions to shareholders to
relieve it from liability for federal income tax and the federal excise tax
described below.
If a Fund failed to qualify for treatment as a RIC for any taxable year, (1) it
would be taxed at corporate rates on the full amount of its taxable income for
that (even if it distributed that income to its shareholders) and (2) the
shareholders would treat all those distributions, including distributions of net
capital gain (the excess of net long-term capital gain over net short-term
capital loss) and distributions that otherwise would be "exempt-interest
dividends," described below, as dividends (that is, ordinary income) to the
extent of the Fund's earnings and profits. In addition, the Fund could be
required to recognize unrealized gains, pay substantial taxes and interest,
and make substantial distributions before requalifying for RIC treatment.
Dividends paid by a Fund will qualify as "exempt-interest dividends," and thus
will be excludable from its shareholders' gross income for federal income tax
purposes, if the Fund satisfies the requirement that, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
consists of securities the interest on which is excludable from gross income
under section 103(a); each Tax-Exempt Bond Fund intends to continue to satisfy
this requirement. The aggregate dividends excludable from a Tax-Exempt Bond
Fund's shareholders' gross income may not exceed its net tax-exempt income.
Shareholders' treatment of dividends from a Tax-Exempt Bond Fund under state and
local income tax laws may differ from the treatment thereof under the Code.
Investors should consult their tax advisers concerning this matter.
A Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to the
extent it fails to distribute by the end of any calendar year at least 98% of
its ordinary income and capital gain net income for that year, plus certain
other amounts.
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If shares of a Fund are sold at a loss after being held for six months or less,
the loss will be disallowed to the extent of exempt-interest dividends received
on those shares, and any part of the loss that is not disallowed 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
(other than an exempt-interest dividend), 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 taxable
dividends and those distributions payable to such shareholders who otherwise are
subject to backup withholding.
No portion of the dividends or other distributions paid by any Fund other than a
series of the Common Stock Trust is eligible for the dividends-received
deduction allowed to corporations.
SPECIAL TAX CONSIDERATIONS -- INVESTMENT IN DERIVATIVES (ALL FUNDS)
Purchasing and writing (selling) options involve complex rules that will
determine for income tax purposes the amount, character, and timing of
recognition of the gains and losses a Fund realizes in connection therewith.
Gains from options derived by a Fund with respect to its business of investing
in securities will be treated as qualifying income under the Income Requirement.
When a covered call option written (sold) by a Fund expires, the Fund realizes a
short-term capital gain equal to the amount of the premium it received for
writing the option. When a Fund terminates its obligations under such an option
by entering into a closing transaction, it realizes a short-term capital gain
(or loss), depending on whether the cost of the closing transaction is less (or
more) than the premium it received when it wrote the option. When a covered
call option written by a Fund is exercised, the Fund is treated as having sold
the underlying security, producing long-term or short-term capital gain or loss,
depending on the holding period of the underlying security and whether the sum
of the option price received on the exercise plus the premium received when it
wrote the option is more or less than the basis of the underlying security.
If a Fund has an "appreciated financial position" -- generally, an interest
(including an interest through an option or short sale or, in the case of the
International Fund, a futures or forward contract) with respect to any stock,
debt instrument (other than "straight debt"), or partnership interest the fair
market value of which exceeds its adjusted basis -- and enters into a
"constructive sale" of the same or substantially similar property, the Fund will
be treated as having made an actual sale thereof, with the result that it will
recognize gain at that time. A constructive sale generally consists of a short
sale, an offsetting notional principal contract, or a futures or forward
contract entered into by a Fund or a related person with respect to the same or
substantially similar property. In
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addition, if the appreciated financial position is itself a short sale or such a
contract, acquisition of the underlying property or substantially similar
property will be deemed a constructive sale. The foregoing will not apply,
however, to any transaction during any taxable year that otherwise would be
treated as a constructive sale if the transaction is closed within 30 days after
the end of that year and the Fund holds the appreciated financial position
unhedged for 60 days after that closing (i.e., at no time during that 60-day
period is the Fund's risk of loss regarding that position reduced by reason of
certain specified transactions with respect to substantially similar or related
property, such as having an option to sell, being contractually obligated to
sell, making a short sale, or granting an option to buy substantially identical
stock or securities).
SPECIAL TAX CONSIDERATIONS -- INTERNATIONAL FUND
The use of hedging strategies, such as writing (selling) and purchasing options
and futures contracts and entering into forward currency contracts, involves
complex rules that will determine for income tax purposes the amount, character,
and timing of recognition of the gains and losses the International Fund
realizes in connection therewith. Gain from the disposition of foreign
currencies (except certain gains that may be excluded by future regulations),
and gains from options, futures, and forward currency contracts derived by the
International Fund with respect to its business of investing in securities or
foreign currencies, will be treated as qualifying income under the Income
Requirement.
Certain futures and foreign currency contracts in which the International Fund
may invest may be subject to section 1256 of the Code ("section 1256
contracts"). Any section 1256 contracts held by the International Fund at the
end of each taxable year, other than contracts with respect to which it has made
a "mixed straddle" election, must be "marked-to-market" (that is, treated as
having been sold at that time for their fair market value) for federal income
tax purposes, with the result that unrealized gains or losses will be treated as
though they were realized. Sixty percent of any net gain or loss recognized on
these deemed sales, and 60% of any net realized gain or loss from any actual
sales of section 1256 contracts, will be treated as long-term capital gain or
loss, and the balance will be treated as short-term capital gain or loss.
Section 1256 contracts also may be marked-to-market for purposes of the Excise
Tax. These rules may operate to increase the amount that the International Fund
must distribute to satisfy the Distribution Requirement, which will be taxable
to its shareholders as ordinary income, and to increase the net capital gain it
recognizes, without in either case increasing the cash available to it. The
International Fund may elect to exclude certain transactions from the operation
of section 1256, although doing so may have the effect of increasing the
relative proportion of net short-term capital gain (taxable as ordinary income)
and/or increasing the amount of dividends that it must distribute to meet the
Distribution Requirement and avoid imposition of the Excise Tax.
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Code section 1092 (dealing with straddles) also may affect the taxation of
certain hedging instruments in which the International Fund may invest. That
section defines a "straddle" as offsetting positions with respect to actively
traded personal property; for these purposes, options, futures, and forward
currency contracts are personal property. Under that section, any loss from
the disposition of a position in a straddle generally may be deducted only to
the extent the loss exceeds the unrealized gain on the offsetting position(s)
of the straddle. In addition, these rules may postpone the recognition of
loss that otherwise would be recognized under the mark-to-market rules
discussed above. The regulations under section 1092 also provide certain
"wash sale" rules, which apply to transactions where a position is sold at a
loss and a new offsetting position is acquired within a prescribed period,
and "short sale" rules applicable to straddles. If the International Fund
makes certain elections, the amount, character, and timing of recognition of
gains and losses from the affected straddle positions would be determined
under rules that vary according to the elections made. Because only a few of
the regulations implementing the straddle rules have been promulgated, the
tax consequences to the International Fund of straddle transactions are not
entirely clear.
SPECIAL TAX CONSIDERATIONS -- INVESTMENT IN FOREIGN SECURITIES
The International Fund and any other Fund that invests in foreign securities may
be required to pay income, withholding, or other taxes to a foreign government.
If so, the taxes will reduce the Fund's distributions. Foreign tax
withholding from dividends and interest (if any) is typically set at 10% or
15% if there is a treaty with the foreign government that addresses this
issue. If no such treaty exists, the foreign tax withholding generally will
be 30%. Amounts withheld for foreign taxes will reduce the amount of dividend
distributions to shareholders.
The International Fund intends to make an election that will allow shareholders
to claim an offsetting credit or deduction on their tax return for their share
of foreign taxes paid by the Fund. Pursuant to this election, which the
International Fund may make if more than 50% of the value of its total assets at
the close of any taxable year consists of securities of foreign corporations,
the Fund would treat foreign income and withholding taxes as dividends paid to
its shareholders and each shareholder (1) would be required to include in gross
income, and treat as paid by the shareholder, the shareholder's proportionate
share of those taxes, (2) would be required to treat that share of those taxes
and of any dividend paid by the Fund that represents income from foreign sources
as the shareholder's own income from those sources, and (3) could either deduct
the foreign taxes deemed paid by the shareholder in computing taxable income or,
alternatively, use the foregoing information in calculating the foreign tax
credit against the shareholder's federal income tax. If the Fund makes this
election, it will report to its shareholders shortly after each taxable year
their respective shares of the foreign taxes it paid and its income from sources
within foreign countries. Individuals who have no more than $300
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($600 for married persons filing jointly) of creditable foreign taxes included
on Forms 1099 and all of whose foreign source income is "qualified passive
income" may elect each year to be exempt from the extremely complicated foreign
tax credit limitation and will be able to claim a foreign tax credit without
having to file the detailed Form 1116 that otherwise is required.
Gains or losses resulting from exchange rate fluctuations between the time a
Fund accrues interest or other receivables, or accrues expenses or other
liabilities, denominated in a foreign currency and the time the Fund actually
collects the receivables or pays the liabilities are treated as ordinary income
or loss. Similarly, gains or losses on forward currency contracts or
dispositions of debt securities denominated in a foreign currency attributable
to fluctuations in the value of the foreign currency between the dates of
acquisition and disposition of the security also are treated as ordinary gain or
loss. These gains, referred to under the Code as "section 988" gains or losses,
increase or decrease the amount of a Fund's investment company taxable income
available to be distributed to its shareholders as ordinary income, rather than
increasing or decreasing the amount of its net capital gain. If a Fund's
distributions exceed its taxable income in any year because of currency-related
losses or otherwise, all or a portion of its dividends may be treated as a
return of capital to its shareholders for tax purposes. To minimize the risk of
a return of capital, a Fund may adjust its dividends to take currency
fluctuations into account, causing the dividends to vary. Any return of capital
will reduce the cost basis of a shareholder's shares, resulting in a higher
capital gain or lower capital loss when the shareholder sells the shares.
PFICs. Certain Funds may invest in the stock of PFICs. A PFIC is a foreign
corporation -- other than a "controlled foreign corporation" (i.e., a foreign
corporation in which, on any day during its taxable year, more than 50% of
the total voting power of all voting stock therein or the total value of all
stock therein is owned, directly, indirectly, or constructively, by "U.S.
shareholders," defined as U.S. persons that individually own, directly,
indirectly, or constructively, at least 10% of that voting power) as to which
the Fund is a U.S. shareholder --that, in general, meets either of the
following tests: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, if a Fund holds stock of a
PFIC, it will be subject to federal income tax on a portion of any "excess
distribution" received on the stock or of any gain on disposition of the
stock (collectively "PFIC income"), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent it
distributes that income to its shareholders.
If a Fund invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund" ("QEF"), then in lieu of the foregoing tax and interest
obligation, the Fund would be required to include in income each year its pro
rata share of the QEF's annual ordinary earnings and net capital gain -- which
the Fund probably would have to distribute to
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satisfy the Distribution Requirement and avoid imposition of the Excise Tax --
even if the Fund did not receive those earnings and gain from the QEF. In most
instances it will be very difficult, if not impossible, to make this election
because of certain requirements thereof.
Each Fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of the stock over a
Fund's adjusted basis therein as of the end of that year. Pursuant to the
election, a Fund also may deduct (as an ordinary, not capital, loss) the
excess, if any, of its adjusted basis in PFIC stock over the fair market
value thereof as of the taxable year-end, but only to the extent of any net
mark-to-market gains with respect to that stock included in income by the
Fund for prior taxable years under the election (and under regulations
proposed in 1992 that provided a similar election with respect to the stock
of certain PFICs). A Fund's adjusted basis in each PFIC's stock subject to
the election would be adjusted to reflect the amounts of income included and
deductions taken thereunder.
SPECIAL TAX CONSIDERATIONS -- HIGH-YIELD FUND AND MANAGED BOND FUND
The High-Yield and Managed Bond Funds may acquire zero coupon or other
securities issued with original issue discount ("OID"). As a holder of such
securities, each Fund must include in its income the portion of the OID that
accrues on the securities during the taxable year, even if it receives no
corresponding payment on them during the year. Similarly, the High-Yield Fund
must include in its gross income securities it receives as "interest" on
payment-in-kind securities. Because each Fund annually must distribute
substantially all of its investment company taxable income, including any
accrued OID and other non-cash income, to satisfy the Distribution Requirement
and avoid imposition of the Excise Tax, it may be required in a particular year
to distribute as a dividend an amount that is greater than the total amount of
cash it actually receives. Those distributions will be made from a Fund's cash
assets or from the proceeds of sales of portfolio securities, if necessary. A
Fund may realize capital gains or losses from those sales, which would increase
or decrease its investment company taxable income and/or net capital gain.
SPECIAL TAX CONSIDERATIONS -- TAX-EXEMPT BOND FUNDS
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of a Tax-Exempt Bond Fund generally 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 advisors before purchasing shares of any Tax-Exempt Bond
Fund. "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 Bond Fund may invest in municipal bonds that are purchased with
"market discount." For these purposes, market discount is the amount by which a
bond's purchase price is exceeded by its stated redemption price at maturity or,
in the case of a
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bond that was issued with OID, the sum of its issue price plus accrued OID
("municipal market discount bonds"). Market discount less than the product of
(1) 0.25% of the redemption price at maturity times and (2) the number of
complete years to maturity after the taxpayer acquired the bond is disregarded.
Market discount generally is accrued ratably, on a daily basis, over the period
from the acquisition date to the date of maturity. Gain on the disposition of
such a 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. In lieu of treating the disposition gain as described above, a
Fund may elect to include market discount in its gross income currently, for
each taxable year to which it is attributable.
In the future, proposals may be introduced before Congress for the purpose of
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 Bond Fund and the value of its portfolio would be affected. In
that event, each Tax-Exempt Bond Fund would review its investment objectives
and policies.
CALIFORNIA STATE AND LOCAL TAX MATTERS
If the California Tax-Free Income Fund maintains at least 50% of the value of
its assets in obligations the interest on which is exempt from California
personal income tax, individual shareholders of the Fund who are subject to
California personal income tax will not be required to include in their
California gross income that portion of their dividends which the Fund clearly
and accurately identifies as directly attributable to interest earned on
obligations, the interest on which is exempt from California personal income
tax. Distributions to such individual shareholders derived from interest on
municipal obligations issued by governmental authorities in states other than
California, net short-term capital gains and other taxable income will be taxed
as dividends for purposes of California personal income taxation. Distributions
to individual shareholders who are subject to California personal income tax
that derive from interest, dividends, net short-term capital gains and other
ordinary income by a Fund that does not maintain at least 50% of the value of
its assets in obligations the interest on which is exempt from California
personal income tax will be taxed in their entirety as dividends for purposes of
California personal income taxation. Each Fund's distributions of net capital
gain for federal income tax purposes will be taxed as long-term capital gains to
individual shareholders of the Fund for purposes of California personal income
taxation. Gain or loss, if any, resulting from an exchange or redemption of
shares will be recognized in the year of the exchange or redemption. Present
California law taxes both long-term and short-term capital gains at the rates
applicable to ordinary income. Interest on indebtedness incurred or continued
by a shareholder in connection with the purchase of shares of the California
Tax-Free Income Fund generally will not be deductible for California personal
income tax purposes. California has an alternative minimum tax similar to the
federal alternative minimum tax. However, the California alternative
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minimum tax does not include interest from private activity bonds as an item of
tax preference.
Generally corporate shareholders of a Fund subject to the California franchise
tax will be required to include any gain on an exchange or redemption of shares
and all distributions of exempt-interest, capital gains and other taxable
income, if any, as income subject to such tax.
A Fund will not be subject to California franchise or corporate income tax on
interest income or net capital gain it distributes to its shareholders.
Shares of a Fund will be exempt from local property taxes in California.
The foregoing is a general, abbreviated summary of certain of the provisions of
the California Revenue and Taxation Code presently in effect as it directly
governs the taxation of shareholders of a Fund. These provisions are subject to
change by legislative or administrative action, and any such change may be
retroactive with respect to Fund transactions. Shareholders are advised to
consult with their tax advisors for more detailed information concerning
California tax matters.
RETIREMENT PLANS
Shares of any Fund (other than a Tax-Exempt Bond Fund) may be purchased as the
underlying investment for an IRA meeting the requirements of sections 408(a),
408A, or 530 of the Code, as well as for qualified retirement plans described
in Code section 401 and custodial accounts complying with Code section
403(b)(7).
TRADITIONAL IRAS. Certain investors may obtain tax advantages by establishing an
IRA. Specifically, except as noted below, if neither you nor your spouse is an
active participant in a qualified employer or government retirement plan, or if
either you or your spouse is an active participant in such a plan and your
adjusted gross income does not exceed a certain level, each of you may deduct
cash contributions made to an IRA in an amount for each taxable year not
exceeding the lesser of 100% of your earned income or $2,000. Notwithstanding
the foregoing, a married investor who is not an active participant in such a
plan and files a joint income tax return with his or her spouse (and their
combined adjusted gross income does not exceed $150,000) is not affected by the
spouse's active participant status. In addition, if your spouse is not employed
and you file a joint return, you may establish a separate IRA for your spouse
and contribute up to a total of $4,000 to the two IRAs, provided that neither
contribution exceeds $2,000. If your employer's plan qualifies as a SIMPLE (see
below), permits voluntary contributions, and meets certain requirements, you may
make voluntary contributions to that plan that are treated as deductible IRA
contributions.
Even if you are not in one of the categories described in the preceding
paragraph, you may find it advantageous to invest in Fund shares through
nondeductible IRA contributions, up to certain limits, because all dividends and
other distributions on your shares are then not immediately taxable to you or
the IRA; they become taxable only when distributed to you. To avoid penalties,
your interest in an IRA must be distributed, or start to be distributed, to you
not later than the end of the taxable year in which you
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attain age 70 1/2. Distributions made before age 59 1/2, in addition to being
taxable, generally are subject to a penalty equal to 10% of the distribution,
except in the case of death or disability or where the distribution is rolled
over into another qualified plan or certain other situations.
ROTH IRAS. A shareholder whose adjusted gross income (or combined adjusted
gross income with his or her spouse) does not exceed certain levels may
establish and contribute up to $2,000 per tax year to a Roth IRA. In addition,
for a shareholder whose adjusted gross income does not exceed $100,000 (or is
not married filing a separate return), certain distributions from traditional
IRAs may be rolled over to a Roth IRA and any of the shareholder's traditional
IRAs may be converted to a Roth IRA; these rollover distributions and
conversions are, however, subject to federal income tax.
Contributions to a Roth IRA are not deductible; however, earnings accumulate
tax-free in a Roth IRA, and withdrawals of earnings are not subject to federal
income tax if the account has been held for at least five years (or in the case
of earnings attributable to rollover contributions from or conversions of a
traditional IRA, the rollover or conversion occurred more than five years
before the withdrawal) and the account holder has reached age 59 1/2 (or certain
other conditions apply).
EDUCATION IRAS. Although not technically for retirement savings, an Education
IRA provides a vehicle for saving for a child's higher education. An Education
IRA may be established for the benefit of any minor, and any person whose
adjusted gross income does not exceed certain levels may contribute to an
Education IRA, provided that no more than $500 may be contributed for any year
to Education IRAs for the same beneficiary. Contributions are not deductible
and may not be made after the beneficiary reaches age 18; however, earnings
accumulate tax-free, and withdrawals are not subject to tax if used to pay the
qualified higher education expenses of the beneficiary (or a member of his or
her family).
SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES - SIMPLE. An employer with no more
than 100 employees that does not maintain another retirement plan instead may
establish a SIMPLE either as separate IRAs or as part of a Code section 401(k)
plan. A SIMPLE, which is not subject to the complicated nondiscrimination rules
that generally apply to qualified retirement plans, will allow certain employees
to make elective contributions of up to $6,000 per year and will require the
employer to make either matching contributions up to 3% of each such employee's
salary or a 2% nonelective contribution.
SEP-IRAS. Simplified employee pension plans ("SEPs" or "SEP-IRAs") provide
self-employed individuals (and any eligible employees) with benefits similar to
Keogh plans (i.e., self-employed individual retirement plans) or Code section
401(k) plans, but with fewer administrative requirements and therefore
potentially lower annual administration expenses.
PROFIT-SHARING (INCLUDING SECTION 401(k)) AND MONEY PURCHASE PENSION PLANS.
Corporations and other employers can sponsor these qualified defined
contribution plans
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for their employees. A section 401(k) plan, a type of profit-sharing plan,
additionally permits the eligible participating employees to make pre-tax
salary reduction contributions to the plan (up to certain limits).
CODE SECTION 403(b)(7) CUSTODIAL ACCOUNTS. Employees of public schools and most
other tax-exempt organizations can make pre-tax salary reduction contributions
to these accounts.
WITHHOLDING. Withholding at the rate of 20% is required for federal income tax
purposes on certain distributions (excluding, for example, certain periodic
payments) from the foregoing retirement plans (except IRAs and SEPs), unless the
recipient transfers the distribution directly to an "eligible retirement plan"
(including IRAs and other qualified plans) that accepts those distributions.
Other distributions generally are subject to regular wage withholding or
withholding at the rate of 10% (depending on the type and amount of the
distribution), unless the recipient elects not to have any withholding apply.
Investors should consult their plan administrator or tax adviser for further
information.
FINANCIAL STATEMENTS
The following financial statements of each Trust and the report thereon of Ernst
& Young LLP, independent auditors, are incorporated herein by reference to each
respective Trust's Annual Report for the year ended December 31, 1998.
Portfolio of Investments as of December 31, 1998
Statement of Assets and Liabilities as of December 31, 1998
Statement of Operations for the Year Ended December 31, 1998
Statement of Changes in Net Assets for the Year or Period Ended
December 31, 1998 and December 31, 1997
Notes to Financial Statements
Copies of each Trust's Class A and Class B Shares Annual Report accompany this
SAI. Additional copies may be obtained by calling SAFECO Services at
1-800-528-6501 nationwide or by writing to the address on the first page of this
SAI.
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.
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COMMERCIAL PAPER AND PREFERRED STOCK RATINGS
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations with an original maturity not exceeding one
year.
Prime-1 -- Issuers (or supporting institutions) rated Prime-1 ("P-1") have a
superior ability for repayment of senior short-term debt obligations. P-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2 -- Issuers (or supporting institutions) rated Prime-2 ("P-2") have a
strong ability for repayment of senior short-term obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
S&P
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
PREFERRED STOCK RATINGS
Generally, a preferred stock rating is an assessment of the capacity and
willingness of an issuer to pay preferred stock dividends. A preferred stock
rating differs from a bond
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rating since it is assigned to an equity issue which is different from, and
subordinate to, a debt issue.
MOODY'S
aaa -- An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
aa -- An issue which is rated "aa" is considered a high-grade preferred stock.
This rating indicates that there is a reasonable assurance the earnings and
asset protection will remain relatively well-maintained in the foreseeable
future.
a -- An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classification, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
baa -- An issue which is rated "baa" is considered to be an upper-medium grade
preferred stock, neither highly protected nor poorly secured. Earnings and
asset protection appear adequate at present but may be questionable over any
great length of time.
ba -- An issue which is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
b -- An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa -- An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future
status of payments.
ca -- An issue which is rated "ca" is speculative in a high degree and is likely
to be in arrears on dividends with little likelihood of eventual payments.
c -- This is the lowest rated class of preferred or preference stock. Issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
S&P
AAA -- This is the highest rating that may be assigned by S&P to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred
stock obligations.
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AA -- A preferred stock issue rated "AA" also qualifies as a high-quality,
fixed-income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA."
A -- An issue rated "A" is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB - An issue rated "BBB" is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the "A" category.
BB, B, CCC -- Preferred stock rated "BB," "B" and "CCC" are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest. While such issues will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CC -- The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C -- A preferred stock rated "C" is a nonpaying issue.
D -- A preferred stock rated "D" is a nonpaying issue with the issuer in default
on debt instruments.
N.R. -- This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
PLUS (+) OR MINUS (-) To provide more detailed indications of preferred stock
quality, 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.
BOND RATINGS
MOODY'S
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
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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 risks appear somewhat larger than in "Aaa"
securities.
A -- Bonds which are rated "A" possess many favorable investment attributes and
are to be considered 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:
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 of this class.
B -- Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated "Ca" represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
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.
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S&P
Investment Grade:
AAA -- Debt rated "AAA" has the highest rating assigned by S&P. 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 highest rated issues only in small degree.
A -- Debt 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 rated "BB," "B," "CCC," "CC," and "C" is regarded as
having predominantly speculative characteristics with respect to capacity to
pay interest and repay principal. "BB" indicates the least degree of speculation
and "C" the highest. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
exposures to adverse conditions.
C1 -- The rating "C1" is reserved for income bonds on which no interest is being
paid.
D -- Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
PLUS (+) OR MINUS (-): The ratings may be modified from "AA" to "CCC" by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MUNICIPAL NOTES AND OTHER SHORT-TERM OBLIGATION RATINGS
MOODY'S
Moody's rates municipal notes and other short-term obligations using Moody's
Investment Grade ("MIG").
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MIG-1 -- This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG-2-- This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
MIG-3-- This designation denotes favorable quality. All security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
S&P
Ratings for municipal notes and other short-term obligations are designated by
S&P's note rating. S&P's note rating reflects the liquidity concerns and
market-access risk unique to notes. Notes due in three years or less will
likely receive a note rating.
SP-1 -- Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
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SAFECO MANAGED BOND TRUST
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
Exhibit
Number Description of Document Page
- ------- ----------------------- ----
(1) Trust Instrument/Certificate of Trust *
Amendment to Certificate of Trust ++
(2) Bylaws *
(3) Instrument Defining Security Rights of Holders +
(4) Form of Amended and Restated Investment
Advisory Contract (filed herewith)
(5) Form of Distribution Agreement **
Form of Selling Dealer Agreement **
(6) Inapplicable
(7) Custody Agreement with State Street ++
Bank & Trust Company
Amendment to Custody Agreement +++
(8) Form of Transfer Agent Agreement **
Form of Administration and Fund Accounting (filed herewith)
Agreement
(9) Opinion of Counsel ***
(10) Consent of Independent Auditors (filed herewith)
(11) Inapplicable
(12) Stock Purchase Agreement *
Additional Share Purchase Agreement *
(13) Rule 12b-1 Plan (Advisor Class A) **
Rule 12b-1 Plan (Advisor Class B) **
<PAGE>
(14) Financial Data Schedule (filed herewith)
(15) 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. 5 filed with the SEC on
July 31, 1996.
*** Filed as an exhibit to Post-Effective Amendment No. 9 filed with the SEC on
or about April 29, 1998.
+ Incorporating by reference the relevant disclosure from Exhibits (1) and
(2).
++ Filed as an exhibit to Post-Effective Amendments No. 7 filed with the SEC
on or about April 30, 1997.
+++ Filed as an exhibit to Post-Effective Amendment No. 8 filed with the SEC on
or about February 26, 1998.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
SAFECO Corporation, a Washington corporation, owns 100% of SAFECO Asset
Management Company (SAM), SAFECO Services Corporation (SAFECO Services) and
SAFECO Securities, Inc. (SAFECO Securities), each a Washington corporation. SAM
is the investment advisor, SAFECO Services is the transfer agent and SAFECO
Securities is the principal underwriter for each of the SAFECO Mutual Funds.
The SAFECO Mutual Funds consist of six Delaware business trusts: SAFECO Common
Stock Trust, SAFECO Taxable Bond Trust, SAFECO Tax-Exempt Bond Trust, SAFECO
Money Market Trust, SAFECO Managed Bond Trust (formerly SAFECO Institutional
Series Trust) and SAFECO Resource Series Trust. The SAFECO Common Stock Trust
consists of eight mutual funds: SAFECO Growth Fund, SAFECO Equity Fund, SAFECO
Income Fund, SAFECO Northwest Fund, SAFECO International Stock Fund, SAFECO
Balanced Fund, SAFECO Small Company Stock Fund and SAFECO U.S. Value Fund. The
SAFECO Taxable Bond Trust consists of three mutual funds: SAFECO
Intermediate-Term U.S. Treasury Fund, SAFECO GNMA Fund and SAFECO High-Yield
Bond Fund. The SAFECO Tax-Exempt Bond Trust consists of five mutual funds:
SAFECO Intermediate-Term Municipal Bond Fund, SAFECO Insured Municipal Bond
Fund, SAFECO Municipal Bond Fund, SAFECO California Tax-Free Income Fund and
SAFECO Washington State Municipal Bond Fund. The SAFECO Money Market 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 Fixed Income Portfolio). The
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SAFECO Resource Series Trust consists of six mutual funds: Equity Portfolio,
Growth Portfolio, Northwest Portfolio, Small Company Stock 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, 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, SAFECO Insurance Company of Illinois, an
Illinois corporation. General Insurance Company of America owns 100% of
SAFECO Insurance Company of Pennsylvania, a Pennsylvania corporation and
SAFECO U.K. Limited, a corporation organized under the laws of the United
Kingdom. SAFECO Insurance Company of America owns 100% of SAFECO Surplus
Lines Insurance Company, a Washington corporation, and SAFECO Management
Corporation, a New York corporation. SAFECO Life Insurance Company owns 100%
of SAFECO National Life Insurance Company and Empire Life Insurance Company,
both Washington corporations, First SAFECO National Life Insurance Company of
New York, a New York corporation. SAFECO Administrative Services, Inc. owns
100% of Employee Benefit Claims of Wisconsin, Inc. and Wisconsin Pension and
Group Services, Inc., each a Wisconsin corporation. General America
Corporation owns 100% of COMAV Managers, Inc., an Illinois corporation, F.B.
Beattie & Co., Inc., a Washington corporation, General America Corp. of
Texas, a Texas corporation, Talbot Financial Corporation, a Washington
corporation, SAFECO Select Insurance Services, Inc., a California
corporation, and R.F. Bailey Holdings Limited, a U.K. corporation. F.B.
Beattie & Co., Inc. owns 100% of F.B. Beattie Insurance Services, Inc., a
California corporation. General America Corp. of Texas is Attorney-in-fact
for SAFECO Lloyds Insurance Company and American States Lloyds Insurance
Company, both Texas corporations. R.F. Bailey Holdings Limited owns 100% of
R.F. Bailey (Underwriting Agencies) Limited, a U.K. corporation. Talbot
Financial Corporation owns 100% of Talbot Agency, Inc., a New Mexico
corporation. Talbot Agency, Inc. owns 100% of SAFECO Investment Services,
Inc., a Washington corporation. SAFECO Properties Inc. owns 100% of the
following, each a Washington corporation: SAFECARE Company, Inc. and Winmar
Company, Inc. SAFECARE Company, Inc. owns 100% of the following, each a
Washington corporation: RIA Development, Inc., S.C. Arkansas, Inc., S.C.
Bellevue/Lynn, S.C. Bellevue, Inc., S.C. Marysville, Inc., SAFECARE Company,
Inc. owns 50% of Lifeguard Ventures, Inc., a California corporation, and S.C.
River Oaks, Inc., a Washington corporation. Winmar Company, Inc. owns 100% of
the following: Kitsap Mall, 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,
SCIT, Inc., a Massachusetts corporation, Winmar Oregon, Inc., an Oregon
corporation, Winmar of Texas, Inc., a Texas 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
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Beach, Inc. and W-P Development, Inc., and 100% of Washington Square, Inc., a
Washington corporation.
SAFECO Corporation, a Washington corporation, owns 100% of American States
Financial Corporation, an Indiana corporation. American States Financial
Corporation owns 100% of American States Insurance Company, an Indiana
corporation. American States Insurance Company owns 100% of the following
Indiana corporations: American Economy Insurance Company, American States
Preferred Insurance Company, American States Life Insurance Company, and City
Insurance Agency, Inc. American States Insurance Company owns 100% of Insurance
Company of Illinois, an Illinois corporation. American Economy Insurance
Company owns 100% of American States Insurance Company of Texas, a Texas
corporation.
All subsidiaries are included in consolidated financial statements. In
addition, SAFECO Life Insurance Company files a separate financial statement, in
connection with its issuance of registered products.
ITEM 25. INDEMNIFICATION
Under the Trust Instrument of the Registrant, the Registrant's trustees,
officers, employees and agents are indemnified against certain liabilities,
subject to specified conditions and limitations.
Under the indemnification provisions in the Registrant's Trust Instrument and
subject to the limitations described in the paragraph below, every person who
is, or has been, a trustee, officer, employee or agent of the Registrant shall
be indemnified by the Registrant or the appropriate Series of the Registrant to
the fullest extent permitted by law against liability and against all expenses
reasonably incurred or paid by him or her in connection with any claim, action,
suit or proceeding in which he or she becomes involved as a party or otherwise
by virtue of his or her being, or having been, a trustee, officer, employee or
agent and against amounts paid or incurred by him or her in the settlement
thereof. As used in this paragraph, "claim," "action," "suit" or "proceeding"
shall apply to all claims, actions, suits or proceedings (civil, criminal or
other, including appeals), actual or threatened, and the words "liability" and
"expenses" shall include, without limitation, attorneys' fees, costs, judgments,
amounts paid in settlement, fines, penalties and other liabilities.
No indemnification will be provided to a trustee, officer, employee or agent:
(i) who shall have been adjudicated by a court or body before which the
proceeding was brought (a) to be liable to the Registrant or its shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office, or (b) not to have
acted in good faith in the reasonable belief that his or her action was in the
best interest of the Registrant; or (ii) in the event of settlement, unless
there has been a determination that such trustee, officer, employee or agent did
not engage in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office; (a) by the
court or other body approving the settlement, (b) by the vote of at least a
majority of a quorum of those trustees who are neither interested persons, as
that term is defined by the
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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 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 administrator and accounting agent ("Administration
and Fund Accounting Agreement"), the agent agrees to indemnify and hold harmless
the Registrant and its officers, trustees and employees, from all taxes,
charges, expenses, assessments, claims and liabilities, including, without
limitation, liabilities arising under the 1940 Act, the 1933 Act, as amended,
the 1934 Act, as amended, the Commodities Act and any state or foreign
securities, Blue Sky laws, and expenses, including, without limitation,
reasonable attorneys' fees and disbursements, arising directly or indirectly
from any action or omission of agent that does not meet the standard of care
under the agreement.
Under an agreement with its investment adviser ("Amended and Restated Investment
Advisory Agreement"), Registrant agrees to pay such non-recurring expenses as
may arise, including the
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costs of actions, suits, or proceedings to which the Registrant or any Series is
a party and the expenses the Registrant or any Series may incur as a result of
its legal obligation to provide indemnification to its trustees, officers, and
agents.
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 ("Transfer Agent Agreement"),
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 under the Transfer
Agent Agreement; or (2) any claim, demand, action or suit (except to the extent
contributed to by the transfer agent's willful misfeasance, bad faith or
negligence or reckless disregard of duties) which results from the negligence of
the Registrant, or from the transfer agent acting upon any instruction(s)
reasonably believed by it to have been executed or communicated by any person
duly authorized by the Registrant, or as a result of the transfer agent acting
in reliance upon advice reasonably believed by the transfer agent to have been
given by counsel for the Registrant, or as a result of the transfer agent acting
in reliance upon any instrument or stock certificate reasonably believed by it
to have been genuine and signed, countersigned or executed by the proper person.
ITEM 26. BUSINESS AND OTHER CONNECTION OF THE INVESTMENT ADVISER
The investment adviser to Registrant, SAM, serves as an adviser to: (a)
twenty-five series (portfolios) of six registered investment companies,
including six series of an investment
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<PAGE>
company that serve 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 27. PRINCIPAL UNDERWRITER
(a) SAFECO Securities, Inc., the principal underwriter for each class of each
series of Registrant, acts also as the principal underwriter for each class of
each series of SAFECO Tax-Exempt Bond Trust, SAFECO Taxable Bond Trust, SAFECO
Money Market Trust, and SAFECO Common Stock Trust. In addition, SAFECO
Securities, Inc. is the principal underwriter for the sale of variable annuity
contracts (SAFECO Resource Variable Account B and SAFECO Separate Account C) and
variable universal life insurance policies (SAFECO Separate Account SL) issued
by SAFECO Life Insurance Company, and variable annuity contracts (SAFECO
Separate Account S) issued by First SAFECO National Life Insurance Company of
New York.
(b) The information set forth under "Investment Advisory and Other Services" in
the Statement of Additional Information is incorporated by reference.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
State Street Bank and Trust Company, 1776 Heritage Drive, North Quincy, MA
02170, 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, Two Union Square, Seattle, Washington 98101, maintains
physical possession of all other accounts, books or documents of the Registrant
required to be maintained by Section 31(a) of the Investment Company Act of 1940
and the rules promulgated thereunder.
ITEM 29. MANAGEMENT SERVICES
Inapplicable.
ITEM 30. UNDERTAKINGS
Inapplicable.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Fund certifies that it meets all of the requirements
for effectiveness of this Registration Statement under Rule 485(b) under the
Securities Act and has duly caused this Registration Statement to be signed on
its behalf by the undersigned, in the City of Seattle, and State of Washington
on the 29th day of April, 1999.
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.
Name Title Date
----- ----- ----
/s/ David F. Hill President and Trustee April 29, 1999
- -------------------- Principal Executive Officer
David F. Hill
RONALD L. SPAULDING* Vice President April 29, 1999
- -------------------- and Treasurer
Ronald L. Spaulding
/s/ Neal A. Fuller Vice President, Controller April 29, 1999
- -------------------- and Assistant Secretary
Neal A. Fuller
/s/ Boh A. Dickey Chairman and Trustee April 29, 1999
- --------------------
Boh A. Dickey
BARBARA J. DINGFIELD* Trustee April 29, 1999
- --------------------
Barbara J. Dingfield
RICHARD W. HUBBARD* Trustee April 29, 1999
- --------------------
Richard W. Hubbard
RICHARD E. LUNDGREN* Trustee April 29 , 1999
- --------------------
Richard E. Lundgren
LARRY L. PINNT* Trustee April 29, 1999
- --------------------
Larry L. Pinnt
JOHN W. SCHNEIDER* Trustee April 29, 1999
- --------------------
John W. Schneider
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*By /s/ David F. Hill
------------------
David F. Hill
Attorney-in-Fact
9
<PAGE>
AMENDED AND RESTATED INVESTMENT
ADVISORY AGREEMENT
THIS AGREEMENT is made and executed this 30th day of April, 1999, between SAFECO
MANAGED BOND TRUST ("Trust"), a Delaware business trust and SAFECO ASSET
MANAGEMENT COMPANY ("Adviser"), a Washington corporation.
WHEREAS, the Trust is registered with the Securities and Exchange
Commission as a series type, open-end, management investment company under the
Investment Company Act of 1940, as amended ("1940 Act"), and has caused its
shares of beneficial interest to be registered for sale to the public under the
Securities Act of 1933 ( "1933 Act"); and
WHEREAS, the Trust intends to offer for public sale distinct series of
shares of beneficial interest ("Series"), each Series corresponding to a
distinct portfolio; and
WHEREAS, the Trust wishes to retain the Adviser to provide investment
advisory services to the Trust and each Series as now exists and as hereafter
may be established which are listed in Exhibit 1 to this Agreement as amended
from time to time; and
WHEREAS, the Adviser is willing to furnish such services on the terms
and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the promises and mutual covenants
hereinafter contained, it is agreed as follows:
1. APPOINTMENT OF ADVISER. The Trust hereby appoints the Adviser as
investment adviser of each Series to administer its affairs, subject to the
supervision of the Trust's Board of Trustees, for the period and on the terms
set-forth in this Agreement. The Adviser hereby accepts such appointment and
agrees to render the services required by this Agreement for the compensation
and upon such other terms and conditions as are set forth in this Agreement. The
Adviser shall for all purposes herein be deemed an independent contractor and,
unless otherwise expressly provided or authorized, shall have no authority to
act for or represent the Trust in any way or otherwise be deemed an agent of the
Trust.
2. DUTIES OF SERIES. Each Series shall at all times keep the Adviser
fully informed with regard to the securities owned by it, its funds available or
to become available for investment, and generally as to the condition of its
affairs. It shall furnish the Adviser with such other documents and information
with regard to its affairs as the Adviser may from time to time reasonably
request.
3. DUTIES OF ADVISER.
(a) GENERAL. The Adviser shall furnish to the Trust space in
the offices of the Adviser or in such other place as may be agreed upon from
time to time and all necessary office
<PAGE>
facilities, equipment and personnel for managing the affairs and investments of
the Trust. Subject to the supervision of the Trust's Board of Trustees, the
Adviser shall regularly provide each Series with investment research and advice
and shall furnish a continuous investment program for each Series' portfolio of
securities consistent with each Series' investment objectives and policies. The
Adviser shall determine from time to time what securities will be purchased,
retained or sold by each Series, and shall implement those decisions, all
subject to the provisions of the Trust's Trust Instrument and Bylaws, the 1940
Act, the applicable rules and regulations of the Securities and Exchange
Commission, and other applicable federal and state law, as well as the
investment objectives and policies of each Series. The Adviser will place orders
pursuant to its investment determinations for each Series either directly with
the issuer or with any broker or dealer. In placing orders with brokers and
dealers the Adviser will attempt to obtain the best net price and the most
favorable execution of its orders. The Adviser shall also provide advice and
recommendations with respect to other aspects of the business and affairs of the
Trust and each Series, and shall perform such other functions relating to the
management and supervision of each Series' investments as may be directed by the
Board of Trustees of the Trust.
(b) REPORTS. The Adviser shall supply the Trust's Board of
Trustees and officers with all statistical information and reports reasonably
requested by them and reasonably available to the Adviser.
4. ALLOCATION OF EXPENSES.
(a) Adviser shall be responsible for the compensation (if any)
paid to officers of the Trust for serving in that capacity and all expenses of
preparing, printing and distributing advertising and sales literature other than
expenses covered by a plan of distribution adopted pursuant to Rule 12b-1 under
the 1940 Act.
(b) The Trust and each Series shall bear all expenses of their
organization, operations and business not specifically assumed or agreed to be
paid by the Adviser as provided in this Agreement. In particular, but without
limiting the generality of the foregoing, the Trust and each Series shall pay:
(1) ADMINISTRATIVE AND ACCOUNTING SERVICES. All expenses
related to the performance of administration and accounting
services on behalf of the Trust and each Series;
(2) CUSTODY SERVICES. All expenses of the transfer, receipt,
safekeeping, servicing and accounting for the cash, securities,
and other property of the Trust and each Series, including all
charges of depositories, custodians, and other agents, if any;
(3) SHAREHOLDER SERVICING. All expenses of maintaining and
servicing shareholder accounts, including all charges of the
transfer, shareholder recordkeeping, dividend disbursing,
redemption, and other agents of the Trust and each Series, if
any;
-2-
<PAGE>
(4) SHAREHOLDER COMMUNICATIONS. All expenses of preparing,
printing, and distributing reports and certain other
communications to shareholders of the Trust and each Series, if
any;
(5) SHAREHOLDER MEETINGS. All expenses incidental to holding
meetings of shareholders of the Trust and each Series, including
the printing of notices and proxy materials and the expenses of
any proxy solicitation;
(6) PROSPECTUSES AND STATEMENTS OF ADDITIONAL INFORMATION. All
expenses of preparing, printing and mailing to shareholders of
annual or more frequent revisions of the Prospectus and Statement
of Additional Information for the Trust and each Series;
(7) COMMUNICATION EQUIPMENT. All charges for equipment or
services used for communication between the Adviser, the Trust or
each Series and the custodian, transfer agent or any other agent
selected by the Trust;
(8) LEGAL AND AUDITING FEES AND EXPENSES. All charges for
services and expenses of the Trust's outside legal counsel and
independent auditors;
(9) TRUSTEES' FEES AND EXPENSES. All compensation of trustees,
other than those affiliated with the Adviser, and all expenses
incurred in connection with their service;
(10) ISSUE AND REDEMPTION OF FUND SHARES. All expenses incurred
in connection with the issue, redemption, and transfer of shares
of the Trust and each Series, including the expense of confirming
all share transactions, and of preparing and transmitting the
Trust's stock certificates, if certificates are issued;
(11) BROKERAGE COMMISSIONS. All brokers, commissions and other
charges incident to the purchase, sale, or lending of portfolio
securities of the Trust and each Series;
(12) TAXES. All taxes or governmental fees payable by or with
respect to the Trust and each Series to federal, state, or other
governmental agencies, domestic or foreign, including stamp or
other transfer taxes;
(13) FEDERAL AND STATE REGISTRATION FEES. Federal and State
registration/qualification fees for the Trust and each Series;
(14) INSURANCE. All costs relating to fidelity bond and any
other insurance coverage for the Trust and each Series; and
-3-
<PAGE>
(15) NON-RECURRING AND EXTRAORDINARY EXPENSES. Such
non-recurring expenses as may arise, including the costs of
actions, suits, or proceedings to which the Trust or any Series
is a party and the expenses the Trust or any Series may incur as
a result of its legal obligation to provide indemnification to
its trustees, officers, and agents.
5. NON-EXCLUSIVE SERVICES. The services of the Adviser to the Trust
and each Series hereunder are not to be deemed exclusive, and the Adviser shall
be free to render similar services to others so long as its services hereunder
are not impaired thereby.
6. COMPENSATION FOR SERVICES.
(a) For the services and facilities to be furnished by the
Adviser, each existing Series shall pay the Adviser an annual fee computed on
the basis of the average net asset value of the Series as ascertained each
business day and paid monthly in accordance with the schedule set forth in
Exhibit 2 to this Agreement. For purposes of computing the annual fee, the net
asset value of the Series shall be equal to the difference between its total
assets and its total liabilities (excluding from such liabilities its capital
stock and surplus) with its assets and its liabilities to be valued in
accordance with the procedures approved by the Trust's Board of Trustees and set
forth in the Trust's Registration Statement.
(b) For the services and facilities to be furnished by the
Adviser, any new Series of the Trust which is issued on a future date will pay
the Adviser a fee according to a Schedule which will be set forth in an amended
Exhibit 2 to this Agreement.
(c) If SAFECO Securities, Inc., receives portfolio brokerage
commissions resulting from transactions in the portfolio of any series
("Commissions"), any advisory fee earned by the Adviser will be reduced by the
amount of such commissions so received by SAFECO Securities, Inc.
(d) The Trust and the Adviser may mutually agree to reduce the
fees payable by any Series if the reduction is in the best long-range interest
of the Trust and the Adviser.
(e) If the Adviser shall serve for less than the whole of any
month, the monthly advisory fee payable by each Series shall be prorated.
7. LIABILITY OF ADVISER. The Adviser assumes no responsibility under
this Agreement other than to render the services called for hereunder, in good
faith, and shall not be responsible for any action of the Trust's Board of
Trustees in following or declining to follow any advice or recommendations of
the Adviser; provided, that nothing in this Agreement shall protect the Adviser
against any liability to the Trust or its shareholders to which it 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 hereunder.
-4-
<PAGE>
8. BOOKS AND RECORDS. The Trust shall cause its books and accounts
to be audited at least once each year by a reputable, independent public
accountant or organization of public accountants who shall render a report to
the Trust.
9. AFFILIATION.
(a) It is understood that trustees, officers, shareholders and
agents of the Trust and each Series are or may be interested in the Adviser (or
any successor thereof) as directors, officers, shareholders or otherwise, and
that the Adviser (or any such successor) is or may be interested in the Trust as
a shareholder or otherwise.
(b) No trustee, officer or employee of the Trust and each Series
shall receive from the Trust any salary or other compensation as such trustee,
officer or employee while he or she is at the same time a director, officer, or
employee of the Adviser or any affiliated company of the Adviser. This Paragraph
shall not apply to trustees or other persons who are not regular members of the
Adviser's or any affiliated company's staff.
10. UNRESTRICTED ACTIVITIES. Nothing in this Agreement shall limit
or restrict the right of any director, officer, or employee of the Adviser who
may also be a trustee, officer, or employee of the Trust or any Series, to
engage in any other business or to devote his or her time and attention in part
to the management or other aspects of any other business, whether of a similar
nature or a dissimilar nature, or limit or restrict the right of the Adviser to
engage in any other business or to render services of any kind, including
investment advisory and management services, to any other corporation, firm,
individual or association.
11. USE OF NAME. In the event this Agreement is terminated by either
party or upon written notice from the Adviser at any time, the Trust hereby
agrees that it will eliminate from its corporate name any reference to the name
of "SAFECO." The Trust shall have the non-exclusive use of the name "SAFECO" in
whole or in part only so long as this Agreement is effective or until such
notice is given. Notwithstanding the foregoing and in the event that this
Agreement is terminated by either party, the Adviser may elect to permit the
Trust to continue to use the name "SAFECO" under such terms and conditions as
the Adviser shall set forth in writing.
12. EFFECTIVENESS DATE/RENEWAL. This Agreement will become effective
with respect to each series on the date first written above or such later date
as indicated on Exhibit 1, provided that it shall have been approved by the
Trust's Board of Trustees and by the shareholders of that Series in accordance
with the requirements of the 1940 Act and, unless sooner terminated as provided
herein, will continue in effect for two years from the above written date.
Thereafter, if not terminated, this Agreement shall continue in effect with
respect to each Series for successive annual periods, provided that such
continuance is specifically approved at least annually (i) by the Trust's Board
of Trustees or (ii) with respect to any Series, by a vote of a majority of the
outstanding voting securities of that Series, provided that in either event the
continuance is also approved by a majority of the Trust's trustees who are
neither interested
-5-
<PAGE>
persons (as defined in the 1940 Act) of the Trust or the Adviser by vote cast at
a meeting called for the purpose of voting on such continuance.
13. AMENDMENT. This Agreement may be amended by the parties only if
the terms of the amendment are approved by either (i) a majority of the Trust's
Board of Trustees or, (ii) with respect to any given Series, by a vote of a
majority of the outstanding voting securities of that Series at a duly called
meeting of the shareholders. In either case, a majority of the trustees who are
neither interested persons of the Trust or the Adviser must approve the
amendment.
14. TERMINATION. This Agreement is terminable with respect to any
Series or in its entirety without penalty by the Trust's Board of Trustees, by
vote of a majority of the outstanding voting securities of each affected Series
(as defined in the 1940 Act), or by the Adviser, on not less than 60 days'
written notice to the other party and will be terminated upon the mutual written
consent of the Adviser and the Trust. This Agreement shall terminate
automatically in the event of its assignment.
15. LIMITATION OF LIABILITY. Adviser is hereby expressly put on
notice of (i) the limitation of shareholder, officer and trustee liability as
set forth in the Trust Instrument of the Trust and (ii) of the provisions in the
Trust Instrument permitting the establishment of separate Series and limiting
the liability of each Series to obligations of that Series. Adviser hereby
agrees that obligations assumed by the Trust pursuant to this Agreement are in
all cases assumed on behalf of a particular series and each such obligation
shall be limited in all cases to that Series and its assets. Adviser agrees that
it shall not seek satisfaction of any such obligation from the shareholders or
any individual shareholder of the Trust nor from the officers or trustees of any
individual officer or trustee of the Trust.
16. DEFINED TERMS. For the purpose of this Agreement, the terms
"vote of a majority of the outstanding voting securities," "assignment," and
"interested persons," shall have the respective meanings specified in the 1940
Act when such terms are used in reference to the Trust and the Series.
17. ENTIRE AGREEMENT/ENFORCEMENT OF RIGHTS. This Agreement embodies
the entire agreement between the Adviser and the Trust with respect to the
services to be provided by the Adviser to the Trust and each Series and
supersedes any prior written or oral agreement between those parties. In the
event that either party should be required to take legal action in order to
enforce its rights under this Agreement, the prevailing party in any such action
or proceeding shall be entitled to recover from the other party costs and
reasonable attorneys, fees,
18. MISCELLANEOUS. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed in counterparts, each of which taken together shall
constitute one and the same instrument. The Adviser understands that the rights
and obligations of each Series under the Trust Instrument are separate and
distinct from those of any and all other Series.
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<PAGE>
19. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Washington and, to the extent it
involves any United States statute, in accordance with the laws of the United
States.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers as of the day and year first above
written.
ATTEST: SAFECO MANAGED BOND TRUST
- ------------------------- ------------------------------------------
Neal A. Fuller David F. Hill
Assistant Secretary President
ATTEST: SAFECO ASSET MANAGEMENT COMPANY
- ------------------------- ------------------------------------------
Neal A. Fuller Stephen C. Bauer
Assistant Secretary President
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<PAGE>
Exhibit 1
LIST OF SERIES
SAFECO MANAGED BOND FUND
-8-
<PAGE>
Exhibit 2
FEES TO BE PAID TO THE ADVISER
<TABLE>
<CAPTION>
FUND NAME NET ASSETS AMOUNT OF
--------- ---------- ANNUAL FEE
----------
<S> <C> <C>
Managed Bond Fund $0-$750,000,000 .50 of 1%
$750,000,001-$1,250,000,000 .45 of 1%
Over $1,250,000,000 .40 of 1%
</TABLE>
-9-
<PAGE>
ADMINISTRATION AND FUND
ACCOUNTING AGREEMENT
This ADMINISTRATION AND FUND ACCOUNTING AGREEMENT ("Agreement") is
made as of April 30, 1999, by and between SAFECO MANAGED BOND TRUST ("Trust"), a
Delaware business Trust, and SAFECO ASSET MANAGEMENT COMPANY ("SAM"), a
Washington corporation.
WHEREAS, the Trust is registered under the Investment Company Act of
1940, as amended ("1940 Act"), as an open-end management investment company; and
WHEREAS, the Trust offers for public sale distinct series of shares of
beneficial interest ("Series"), each Series corresponding to a distinct
portfolio; and
WHEREAS, the Trust desires to retain SAM to act as its administrator
and accounting agent, and SAM is willing to act in such capacities;
NOW, THEREFORE, in consideration of the foregoing and the terms and
conditions hereinafter set forth, the Trust and SAM hereby agree as follows:
1. APPOINTMENT. The Trust hereby appoints SAM to act as the
administrator and accounting agent for each Series for the period and on the
terms and condition set forth in this Agreement. SAM hereby accepts such
appointment and agrees to render the services set forth for the compensation
herein provided.
2. DEFINITIONS. As used in this Agreement and in addition to the
terms defined elsewhere herein, the following terms shall have the meanings
assigned to them in this Section;
(a) "Authorized Person" means any officer of the Trust and any
other person, whether or not any such person is an officer or employee of the
Trust, duly authorized by the Board of Trustees (the "Board"), the President or
any Vice President of the Trust to give Oral and/or Written Instructions on
behalf of the Trust or any Series.
(b) "Commission" means the Securities and Exchange Commission.
(c) "Custodian" means the custodian or custodians employed by
the Trust to maintain custody of the Series' assets.
(d) "Governing Documents" means the Declaration of Trust,
By-Laws and other applicable charter documents of the Trust, all as they may be
amended from time to time.
<PAGE>
(e) "Oral Instructions" means oral instructions actually
received by SAM from an Authorized Person or from a person reasonably believed
by SAM to be an Authorized Person, provided that, any oral instruction shall be
promptly confirmed by written instructions.
(f) "Prospectus" means the current prospectus and statement of
additional information of a Series, taken together.
(g) "Shares" means shares of beneficial interest in of any of
the Series.
(h) "Shareholder" means any owner of Shares.
(i) "Written Instructions" means written instructions delivered
by hand, mail, tested telegram or telex, cable or facsimile sending device
received by SAM and signed by an Authorized Person.
3. COMPLIANCE WITH LAWS, ETC. In performing its responsibilities
hereunder, SAM shall comply with all terms and provisions of the Governing
Documents, the Prospectus and all applicable state and federal laws including,
without limitation, the 1940 Act and the rules and regulations promulgated by
the Commission thereunder.
4. SERVICES. In consideration of the compensation payable hereunder
and subject to the supervision and control of the Trust's Board, SAM shall
provide the following services to the Series:
(a) ACCOUNTING AGENT. As fund accounting agent, SAM shall:
(1) Obtain security market quotes from services approved by
the investment adviser of the Series or, if such quotes are unavailable, then
obtain such prices from the investment adviser of the Series or from such
sources as the investment adviser may direct, and, in either case, calculate the
market value of the Series' investments;
(2) Value the assets of the Series and compute the net
asset value per Share of the Series in the manner specified in the then
currently effective Prospectus;
(3) Calculate the net income of each Series;
(4) Calculate realized gains or losses for each Series from
the sale or disposition of assets, if any;
(5) Maintain the general ledger and other accounts, books
and financial records of the Trust, as required under Section 31(a) of the 1940
Act and the rules promulgated by the Commission thereunder in connection with
the services provided by SAM;
2
<PAGE>
(6) Journalize each Series' investment, capital share and
income and expense activities;
(7) Reconcile cash and investment balances of each Series
with the custodian and provide the Series' investment adviser with the beginning
cash balance available for investment purposes;
(8) Maintain individual ledgers for investment securities;
(9) Maintain historical tax lots for investment securities;
(10) Calculate various asset-based expenses (E.G., advisory
and 12b-1 fees);
(11) Receive and act upon notices, Oral and Written
Instructions, certificates, instruments or other communications from a Series'
shareholder servicing and transfer agent;
(12) Assist in the preparation of financial statements
semiannually normally which will include the following items:
(A) schedule of investments;
(B) statement of assets and liabilities;
(C) statement of operations;
(D) statement of changes in net assets; and
(E) notes to financial statements;
(13) Control all Series disbursements;
(14) Transmit the net asset value and other end-of-day fund
information to NASDAQ and business partners, as appropriate; and
(15) As appropriate, compute yields, expense ratios,
portfolio turnover rate, and other portfolio-related calculations.
(b) ADMINISTRATOR. As administrator, SAM shall:
(1) Prepare monthly security transaction listings;
(2) Supply various normal and customary Series statistical
data as requested on an ongoing basis;
3
<PAGE>
(3) Prepare and file the Series' Federal and state tax
returns;
(4) Prepare and file the Series' Semi-Annual Reports with
the Commission on Form N-SAR;
(5) Prepare and arrange for filing with the Commission the
Series' annual and semi-annual shareholder reports;
(6) Prepare and arrange for filing, if necessary, reports
with the securities commissions of the various states;
(7) Prepare and arrange for filing Post-Effective
Amendments to the Trust's Registration Statement on Form N-1A and other filings
relating to the registration of Shares;
(8) Monitor sales of the Shares and assure that the Series
has properly registered such Shares with the Commission and made any necessary
filings with state authorities;
(9) Monitor the Series' compliance with the investment
restrictions and limitations imposed by the 1940 Act, and applicable regulations
thereunder, the fundamental and non-fundamental investment policies and
limitations set forth in the Prospectus, and the investment restrictions and
limitations necessary for each Series to qualify as a regulated investment
company under Sub-Chapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), or any successor statute;
(10) Review sales literature and file such with regulatory
authorities, as appropriate;
(11) Coordinate contractual relationships and communications
between the Series and its contractual service providers;
(12) Prepare and monitor an expense budget for each Series,
including setting and revising accruals for each category of expenses;
(13) Determine the amount of dividends and other
distributions payable to Shareholders as necessary to maintain the qualification
as a regulated investment company of each Series of the Trust under the Code;
and in accordance with policies set by the Board of Trustees;
(14) Prepare and distribute to appropriate parties notices
announcing the declaration of dividends and other distributions to Shareholders;
4
<PAGE>
(15) Prepare financial and other material for periodic
meetings with the Board;
(16) Prepare, file, and maintain the Series' Governing
Documents and any amendments thereto, as appropriate, (which have already been
prepared and filed), and minutes of meetings of their Boards, Committees, and
Shareholders;
(17) Provide personnel to serve as officers of the Trust if
so elected by the Board;
(18) Provide in-house legal counsel and internal audit
services to the Trust; and
(19) Assist with the design, development, and operation of
the Trust and each Series.
5. COMPENSATION.
(a) For accounting services furnished by SAM, each existing Series
shall pay SAM an annual fee computed on the basis of the average net asset value
of the Series as ascertained each business day and paid monthly in accordance
with the rate schedule set forth on Schedule A.
(b) For administrative services furnished by SAM, each existing
Series shall pay SAM an annual fee computed on the basis of the average net
asset value of the Series as ascertained each business day and paid monthly in
accordance with the rate schedule set forth on Schedule B.
6. RELIANCE BY SAM ON INSTRUCTIONS. Unless otherwise provided in this
Agreement, SAM shall act only upon Oral or Written Instructions. SAM shall be
entitled to rely upon any such Instructions actually received by it under this
Agreement. The Trust agrees that SAM shall incur no liability to the Trust or
any of the Series in acting upon Oral or Written Instructions given to SAM
hereunder, provided that such Instructions reasonably appear to have been
received from an Authorized Person.
7. COOPERATION WITH AGENTS OF THE TRUST. SAM shall cooperate with the
Trust's agents and employees, including, without limitation, its independent
accountants, and shall take all reasonable action in the performance of its
obligations under this Agreement to assure that all necessary information is
made available to such agents to the extent necessary in the performance of
their duties to the Trust.
8. CONFIDENTIALITY. SAM, on behalf of itself and its employees,
agrees to treat confidentially all records and other information relating to the
Trust and the Series except when requested to divulge such information by duly
constituted authorities, provided that notification
5
<PAGE>
and prior approval is obtained from the Trust, which approval shall not be
unreasonably withheld and may not be withheld if SAM, in its judgment, may be
subject to civil or criminal contempt proceedings for failure to comply.
9. STANDARD OF CARE. In the performance of its responsibilities
hereunder, SAM shall exercise care and diligence in the performance of its
duties and act in good faith to ensure the accuracy and completeness of all
services under this Agreement. In performing services hereunder, SAM:
(a) shall be under no duty to take any action on behalf of the
Trust or the Series except as specifically set forth herein or as may be
specifically agreed to by SAM in writing, and in computing the net asset value
per Share of a Series, SAM may rely upon any information furnished to it
including, without limitation, information (1) as to the accrual of liabilities
of a Series and as to liabilities of a Series not appearing on the books of
account kept by SAM, (2) as to the existence, status and proper treatment of
reserves, if any, authorized by a Series, (3) as to the sources of quotations to
be used in computing net asset value, (4) as to the fair value to be assigned to
any securities or other property for which price quotations are not readily
available and (5) as to the sources of information with respect to "corporate
actions" affecting portfolio securities of a Series (information as to
"corporate actions" shall include information as to dividends, distributions,
interest payments, prepayments, stock splits, stock dividends, rights offerings,
conversions, exchanges, recapitalizations, mergers, redemptions, calls, maturity
dates and similar actions, including ex-dividend and record dates and the
amounts and terms thereof);
(b) shall be responsible and liable for all losses, damages and
costs (including reasonable attorneys' fees) incurred by the Trust or any Series
which is due to or caused by SAM's negligence in the performance of its duties
under this Agreement or for SAM's negligent failure to perform such duties as
are specifically assumed by SAM in this Agreement, provided that, to the extent
that duties, obligations and responsibilities are not expressly set forth in
this Agreement, SAM shall not be liable for any act or omission that does not
constitute willful misfeasance, bad faith or negligence on the part of SAM or
reckless disregard by SAM of such duties, obligations and responsibilities; and
(c) without limiting the generality of the foregoing, SAM shall
not, in connection with SAM's duties under this Agreement, be under any duty or
obligation to inquire into and shall not he liable for or in respect of:
(1) the validity or invalidity or authority or lack of
authority of any Oral or Written Instruction, notice or other instrument which
conforms to the applicable requirements of this Agreement, if any, and that SAM
reasonably believes to be genuine; and
(2) delays or errors or loss of data occurring by reason of
circumstances beyond SAM's control including, without limitation, acts of civil
or military authorities, national emergencies, labor difficulties, fire,
mechanical breakdown, denial of
6
<PAGE>
access, earthquake, flood or catastrophe, acts of God, insurrection, war, riots,
or failure of the mails, transportation, communication or power supply.
Notwithstanding any other provisions of this Agreement, the following provisions
shall apply with respect to SAM's computation of a Series' net asset value: SAM
shall be held to the exercise of reasonable care in computing and determining
net asset value as provided in Section 4(a), above, but shall not be held
accountable or liable for any losses, damages or expenses of a Series or any
Shareholder or former Shareholder may incur arising from or based upon errors or
delays in the determination of such net asset value unless such error or delay
was due to SAM's negligence or willful misfeasance. The parties hereto
acknowledge, however, that SAM causing an error or delay in the determination of
net asset value may indicate, but does not in and of itself, constitute
negligence or willful misfeasance. SAM's liability for any such negligence or
willful misfeasance which results in an error in determination of such net asset
value shall be limited to the direct out-of-pocket loss a Series and/or any
Shareholder or former Shareholder shall actually incur.
Without limiting the generality of the foregoing, SAM shall not be
held accountable or liable to a Series, a Shareholder or former Shareholder or
any other person for any delays or losses, damages or expenses any of them may
suffer or incur resulting from (1) SAM's failure to receive timely and suitable
notification concerning quotations, corporate actions or similar matters
relating to or affecting portfolio securities of a Series or (2) any errors in
the computation of a net asset value based upon or arising out of quotations or
information as to corporate actions if received by SAM from a source that SAM
was authorized to rely upon. Nevertheless, SAM will use its best judgment in
determining whether to verify through another source any information that it has
received as to quotations or corporate actions if SAM has reason to believe that
any such information is incorrect.
10. RECEIPT OF ADVICE. If SAM is in doubt as to any action to be
taken or omitted by it, SAM may request, and shall be entitled to rely upon,
directions and advice from the Trust, including Oral or Written Instructions
where appropriate, or from counsel of its own choosing (who may also be counsel
for the Trust or any Series), with respect to any question of law. In case of
conflict between directions, advice or Oral and Written Instructions received by
SAM pursuant to this Section, SAM shall be entitled to rely on and follow the
advice received from counsel, as described above. SAM shall be protected in
taking or omitting to any action in reliance on any directions, advice or Oral
or Written Instructions received pursuant to this Section that SAM in good faith
believes to be consistent with such directions, advice or Oral or Written
Instructions, as the case may be. Notwithstanding the foregoing, nothing in this
Section shall be construed as imposing on SAM any obligation to seek such
directions, advice or Oral or Written Instructions, or to act in accordance with
them when received, unless the same is a condition to SAM's properly taking or
omitting to take such action under the terms of this Agreement.
11. INDEMNIFICATION OF SAM. The Trust agrees to indemnify and hold
harmless SAM and its officers, directors, employees, nominees and
subcontractors, if any, from all taxes, charges, expenses, assessments, claims
and liabilities, including, without limitation, liabilities
7
<PAGE>
arising under the 1940 Act, the Securities Act of 1933, an amended, the
Securities Exchange Act of 1934, as amended, the Commodities Exchange Act and
any state or foreign securities or Blue Sky laws, and expenses, including,
without limitation, reasonable attorneys' fees and disbursements, arising
directly or indirectly from any action or thing that SAM takes or omits to take
or do;
(a) at the request or on the direction of or in reliance upon
the advice of the Trust;
(b) upon Oral or Written Instructions; or
(c) in the performance by SAM of its responsibilities under this
Agreement;
provided that, SAM shall not be indemnified against any liability to the Trust
or the Series, or any expenses incident hereto, arising out of SAM's own willful
misfeasance, bad faith or negligence or reckless disregard of its duties in
connection with the performance of its duties and obligations specifically
described in this Agreement.
12. INDEMNIFICATION OF THE TRUST. SAM agrees to indemnity and hold
harmless the Trust and its officers, trustees and employees, from all taxes,
charges, expenses, assessments, claims and liabilities, including, without
limitation, liabilities arising under the 1940 Act, the Securities Act of 1933,
as amended, the Securities Exchange Act of 1934, as amended, the Commodities Act
and any state or foreign securities, Blue Sky laws, and expenses, including,
without limitation, reasonable attorneys' fees and disbursements, arising
directly or indirectly from any action or omission of SAM that does not meet the
standard of care to which SAM is subject under Section 9, above.
13. LIMITATION OF LIABILITY. SAM is hereby expressly put on notice of
(i) the limitation of Shareholder, officer and trustee liability as set forth in
the Governing Documents of the Trust and (ii) of the provisions in the Governing
Documents permitting the establishment of separate Series and limiting the
liability of each Series to obligations of that Series. SAM hereby agrees that
obligations assumed by the Trust pursuant to this Agreement are in all cases
assumed on behalf of a particular Series and each such obligation shall be
limited in all cases to that Series and its assets. SAM agrees that it shall not
seek satisfaction of any such obligation from the Shareholders or any individual
Shareholder of the Trust nor from the officers or trustees or any individual
officer or trustee of the Trust.
14. TERMINATION. This Agreement is terminable with respect to any
Series or in its entirety without penalty by the Trust's Board of Trustees, by
vote of a majority of the outstanding voting securities of each affected Series
(as defined in the 1940 Act), or by SAM, on not less than 60 days' notice to the
other party and will be terminated upon the mutual written consent of SAM and
the Trust. This Agreement shall terminate automatically in the event of its
assignment.
8
<PAGE>
15. NOTICES. All notices and other communications hereunder,
including Written Instructions, shall be in writing or by confirming telegram,
cable, telex or facsimile sending device. Notices with respect to a party shall
be directed to such address as may from time to time, be designated by that
party to the other.
16. FURTHER ACTIONS. The Trust and SAM agree to perform such further
acts and to execute such further documents as may be necessary or appropriate to
effect the purposes of this Agreement.
17. AMENDMENTS. This Agreement, or any part thereof, may be amended
only by an instrument in writing signed by the Trust and SAM.
18. ENTIRE AGREEMENT/ENFORCEMENT OF RIGHTS. This Agreement embodies
the entire agreement between SAM and the Trust with respect to the services to
be provided by SAM to the Trust and each Series and supersedes any prior written
or oral agreement between those parties with respect to its subject matter. In
the event that either party should be required to take legal action in order to
enforce its rights under this Agreement, the prevailing party in any such action
or proceeding shall be entitled to recover from the other party costs and
reasonable attorneys fees.
19. MISCELLANEOUS. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed in counterparts, each of which taken together shall
constitute one and the same instrument. SAM understands that the rights and
obligations of each Series under the Governing Documents are separate and
distinct from those of any and all other Series.
20. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Washington and, to the extent it
involves any United States statute, in accordance with the laws of the United
States.
IN WITNESS WHEREOF, the Trust and SAM have caused this Agreement to be
executed by their officers designated below as of this day, month and year first
above written.
ATTEST: SAFECO MANAGED BOND TRUST
- ------------------------------ ---------------------------------------------
Neal A. Fuller David F. Hill
Assistant Secretary President
ATTEST: SAFECO ASSET MANAGEMENT COMPANY
- ------------------------------ ---------------------------------------------
Neal A. Fuller Stephen C. Bauer
Assistant Secretary President
9
<PAGE>
SCHEDULE A
ACCOUNTING SERVICES FEES
Each Series shall pay SAM a fee, computed daily and paid monthly, at the
annual rate of 0.04% of the Series' average daily net assets up to the first
$200,000,000 and 0.01% of its assets thereafter.
<PAGE>
SCHEDULE B
ADMINISTRATIVE SERVICES FEES
Each Series shall pay SAM a fee, computed daily and paid monthly, at the
annual rate of 0.05% of the Series' average daily net assets up to the first
$200,000,000 and 0.01% of its assets thereafter.
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights", "Investment Advisory and Other Services" and "Financial Statements"
in Post-Effective Amendment No. 11 to the registration statement (Form N-1A,
No. 33-47859) and related No-Load Class and Advisor Class A and Advisor Class B
Prospectuses of SAFECO Managed Bond Trust.
We also consent to the incorporation by reference therein of our report dated
February 5, 1999 with respect to the financial statements of SAFECO Managed Bond
Trust as of and for the year ended December 31, 1998 included in its 1998 Annual
Report filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Seattle, Washington
April 27, 1999
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