<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. [_]
-----------------------------------
Post-Effective Amendment No. 12 [X]
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 15 [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
----------------------------------------
(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)
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X on April 29, 2000 pursuant to paragraph (b)
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60 days after filing pursuant to paragraph (a)(1)
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on 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
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<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 Intermediate-Term Municipal Bond Fund
SAFECO Insured Municipal Bond Fund
SAFECO Money Market Fund
SAFECO Tax-Free Money Market Fund
Prospectus
No-Load Class
May 1, 2000
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 OF SAFECO]
<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.............................................. 11
SAFECO Managed Bond Fund................................................. 15
TAX-EXEMPT BOND FUNDS
SAFECO California Tax-Free Income Fund................................... 20
SAFECO Municipal Bond Fund............................................... 25
SAFECO Intermediate-Term Municipal Bond Fund............................. 29
SAFECO Insured Municipal Bond Fund....................................... 34
MONEY MARKET FUNDS
SAFECO Money Market Fund................................................. 38
SAFECO Tax-Free Money Market Fund........................................ 42
Additional Fund Facts...................................................... 46
Management................................................................. 47
Portfolio Managers......................................................... 47
Financial Highlights....................................................... 49
Fund Distributions and Tax Considerations.................................. 60
YOUR INVESTMENT............................................................ 63
How We Calculate the Value of Your Shares................................ 63
How We Value a Fund's Investments........................................ 63
Opening and Maintaining Your Account..................................... 64
Purchasing Your Shares................................................... 67
Selling Your Shares...................................................... 73
Exchanging Shares from One Fund to Another............................... 78
Maintaining Your Account................................................. 82
For More Information..................................................... 85
</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. The
Federal Reserve Bank creates STRIPS
by separating the coupon (interest)
and principal components of a U.S.
Treasury bond and selling them as
individual securities.
Because the Fund is an "intermediate-term" fund, it will maintain an average
dollar-weighted maturity of between 3 and 10 years for the portfolio as a
whole. However, the maturities of individual securities the Fund holds may be
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), the Federal Home Loan Bank (FHLB) 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 in which the Fund may invest include bonds that are:
. Rated in the top three grades (A or higher) by either Moody's, S&P or Fitch.
. 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 they have a more favorable yield premium than do U.S. Treasuries.
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.
The prices of STRIPs can be more volatile than other Treasury securities when
market interest rates change.
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 average annual returns for
the one, five and ten year periods compare to 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.
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
SAFECO Intermediate-Term
U.S. Treasury Fund
Chart
<TABLE>
<CAPTION>
Year Percent
Ended Return
- -------- -------
<S> <C>
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%
12/31/99 -1.98%
</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, 1999
The following table shows how the Fund's No-Load Class average annual returns
compare 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 -1.98% 6.40% 6.56%
- ---------------------------------------------------------------
Merrill Lynch Intermediate-Term
Treasury Index* 0.55% 6.98% 7.12%
</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.
Investment returns and principal value vary with market conditions. Your shares
may be worth more or less than their original value when you sell them.
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 $20 charge for wire redemptions). A $12 annual "small
account" fee will be charged for accounts with balances under $1,000 in the
Fund at year end.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees 0.55%
12b-1 Fees NONE
Other Expenses 0.55%
Total Annual Fund Operating Expenses 1.10%
Fee Waiver* 0.15%
Net Expenses 0.95%
</TABLE>
* Adjusted to reflect the effect of the fee waiver on a calendar year basis,
stated as a percentage of the Fund's average daily net assets. 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 management 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 $526 $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:
. 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.
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.
5
<PAGE>
SAFECO GNMA Fund, continued
. The Fund may purchase both modified pass-through securities and
collateralized mortgage obligations (CMOs).
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.
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:
. 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 Fund's
investment in sectors viewed as overvalued, while increasing the Fund's
investment in undervalued sectors. The advisor's outlook on interest rates,
and the likely effect of a movement in the interest rate market on a
homeowner's decision whether or not to refinance his/her home mortgage, play
a part in the advisor's analysis of the relative values of these sectors.
6
<PAGE>
SAFECO GNMA Fund, continued
. Second, the advisor will generally shorten or lengthen the Fund's average
maturity and duration based upon the advisor's 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.
There are special risks associated with CMOs. The market value of CMOs that pay
interest at floating rates, or are subject to interest rate adjustments, may be
more volatile than fixed-rate obligations. CMOs are subject to prepayment risk
(because mortgage borrowers are more likely to refinance or prepay the
underlying obligations in times of declining interest rates) and repayment
default (because principal and interest payments ultimately depend upon the
underlying mortgage borrowers repaying their mortgage loans). If the underlying
borrowers default, the remaining or repossessed collateral for the CMOs may not
be adequate to support payments on the securities.
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.
7
<PAGE>
SAFECO GNMA Fund, continued
Performance
The following bar chart and table provide some indication of the risks of
investing in the GNMA Fund by showing how the Fund's performance has varied
from year to year and how its average annual returns for the one, five and ten
year periods compare to 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 results.
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.
SAFECO GNMA Fund Chart
<TABLE>
<CAPTION>
Year Percent
Ended Return
- -------- -------
<S> <C>
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%
12/31/99 0.16%
</TABLE>
During the 10-year period shown in the bar chart, the highest quarterly return
was 5.02% for the quarter ended September 30, 1991; and the lowest return was -
3.58% for the quarter ended March 31, 1994.
8
<PAGE>
SAFECO GNMA Fund, continued
Average Annual Total Returns
as of December 31, 1999
The following table shows how the Fund's No-Load Class average annual returns
compare to the Merrill Lynch GNMA Index:
<TABLE>
<CAPTION>
1 year 5 years 10 years
<S> <C> <C> <C>
GNMA Fund 0.16% 6.97% 6.69%
- ----------------------------------------------------
Merrill Lynch GNMA Index* 1.91% 8.15% 8.07%
</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.
Investment returns and principal value vary with market conditions. Your shares
may be worth more or less than their original value when you sell them.
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 $20 charge for wire redemptions). A $12 annual "small
account" fee will be charged for accounts with balances under $1,000 in the
Fund at year end.
9
<PAGE>
SAFECO GNMA Fund, continued
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees* 0.55%
12b-1 Fees NONE
Other Expenses 0.40%
Total Annual Fund Operating Expenses 0.95%
Fee Waiver** 0.00%
Net Expenses 0.95%
</TABLE>
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets.
** 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 management 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 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 $526 $1,166
</TABLE>
10
<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. The Fund may invest
in:
. Debt securities and 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.
. 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.
Debt securities are interest paying
instruments issued by corporations or
other issuers.
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.
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.
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 interest rate sensitivity, coupon, and call features (the
bond's structure).
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.
11
<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.
Because the Fund invests predominantly in high-yield debt securities, the Fund
is subject to greater volatility, reduced liquidity and a higher risk of
repayment default than a fund holding predominantly investment grade
securities. High-yield debt securities involve greater investment risks due to
the issuers' reduced creditworthiness, which may indicate the issuer has a
reduced ability to make debt repayments and may make it more difficult for the
issuer to withstand economic downturns or to obtain additional financing. 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 average annual returns for the one, five
and ten year periods compare to 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.
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.
12
<PAGE>
SAFECO High-Yield Bond Fund, continued
SAFECO High-Yield Bond
Fund Chart
<TABLE>
<CAPTION>
Year Percent
Ended Return
- -------- -------
<S> <C>
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%
12/31/99 3.74%
</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.
Average Annual Total Returns
as of December 31, 1999
The following table shows how the Fund's No-Load Class average annual returns
compare to the Merrill Lynch High-Yield Index:
<TABLE>
<CAPTION>
1 year 5 years 10 years
<S> <C> <C> <C>
High-Yield Bond Fund 3.74% 9.30% 9.30%
- ----------------------------------------------------------
Merrill Lynch High-Yield Index* 2.51% 9.89% 11.34%
</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.
Investment returns and principal value vary with market conditions. Your shares
may be worth more or less than their original value when you sell them.
13
<PAGE>
SAFECO High-Yield Bond 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 $20 charge for wire redemptions). A $12 annual "small
account" fee will be charged for accounts with balances under $1,000 in the
Fund at year end.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees* 0.65%
12b-1 Fees NONE
Other Expenses 0.40%
Total Annual Fund Operating Expenses 1.05%
Fee Waiver** 0.00%
Net Expenses 1.05%
</TABLE>
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets.
** 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 management 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.
14
<PAGE>
SAFECO High-Yield Bond Fund, continued
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 $107 $334 $579 $1,283
</TABLE>
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.
Bond ratings indicate an issuer's
financial strength and ability to
meet its debt obligations. The
advisor may use rating services
provided by Moody's, S&P or Fitch.
Investment grade securities are
rated by these services as follows:
<TABLE>
<CAPTION>
Moody's S&P Fitch
------- --- -----
<S> <C> <C>
Aaa AAA AAA
Aa AA AA
A A A
Baa BBB BBB
</TABLE>
Debt securities 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.
15
<PAGE>
SAFECO Managed Bond Fund, continued
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?
Next, the advisor looks at how the security fits into the Fund's overall
investment portfolio:
. Overall, what effects would a purchase of this security have on the
portfolio's yield and its sensitivity to interest rate changes?
. How would an investment in this security affect the portfolio's yield curve
exposure, the allocation among various market sectors, 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 same sector offers a better value, or to raise
cash to meet shareholder redemptions.
Yield curve is a graphical
depiction of yields of like
securities from the shortest
maturity to the longest maturity.
. 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.
Although securities in the top four rating categories are considered
"investment grade," Moody's considers bonds rated "Baa" to have speculative
characteristics. These lower-quality securities may be subject to greater risk
of repayment default, particularly
16
<PAGE>
SAFECO Managed Bond Fund, continued
during economic downturns and periods of rising interest rates. In addition,
investment in the Fund carries risks associated with the following types of
securities:
. Mortgage-backed securities. 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 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.
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 average annual return for the one and five
year periods, and since the date of the Fund's inception, compare to the Lehman
Brothers Government/ Corporate Index, a widely recognized index of government
and corporate bonds. As with all mutual funds, past performance is not a
prediction of future results.
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.
SAFECO Managed Bond Fund
Chart
<TABLE>
<CAPTION>
Year Percent
Ended Return
- -------- -------
<S> <C>
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%
12/31/99 -3.82%
</TABLE>
17
<PAGE>
SAFECO Managed Bond Fund, continued
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 -3.27% for the
quarter ended March 31, 1996.
Average Annual Total Returns
as of December 31, 1999
The following table shows how the Fund's No-Load Class average total returns
compare to the Lehman Brothers Government/Corporate Index:
<TABLE>
<CAPTION>
February 28, 1994
(inception) to
1 year 5 year December 31, 1999
<S> <C> <C> <C>
Managed Bond Fund -3.82% 5.79% 4.39%
- ----------------------------------------------------------------------
Lehman Brothers Gov't./Corp. Index* -2.15% 7.61% 5.96%
</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.
Investment returns and principal value vary with market conditions. Your shares
may be worth more or less than their original value when you sell them.
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 $20 charge for wire redemptions). A $12 annual "small
account" fee will be charged for accounts with balances under $1,000 in the
Fund at year end.
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 NONE
Other Expenses 0.91%
Total Annual Fund Operating Expenses 1.41%
Fee Waiver* 0.51%
Net Expenses 0.90%
</TABLE>
* Adjusted to reflect the effect of the fee waiver on a calendar year basis,
stated as a percentage of the Fund's average daily net assets. 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 management 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 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.
Bond ratings indicate an issuer's
financial strength and ability to
meet its debt obligations. The
advisor may use rating services
provided by Moody's, S&P or Fitch.
Investment grade securities are
rated by these services as follows:
<TABLE>
<CAPTION>
Moody's S&P Fitch
------- --- -----
<S> <C> <C>
Aaa AAA AAA
Aa AA AA
A A A
Baa BBB BBB
</TABLE>
Municipal bonds are issued by
cities, counties, and states and
other government entities to cover
borrowing needs.
The Fund will invest:
. At least 80% of its assets in securities whose interest is exempt from
federal income tax and California personal income tax, and will not invest
in securities whose interest is subject to the alternative minimum tax.
. At least 65% of its assets in investment grade municipal bonds with a
maturity 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, structural features that give the issuer a
right to buy the bond back at a stated price (a "call") or give the Fund a
right to require the issuer to buy the bond back at a stated price (a "put"),
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 off or premium on the stated principal
amount of the bond represented by the price offered. After evaluating these
features of a bond, the advisor compares the bond to the universe of other
available
20
<PAGE>
SAFECO California Tax-Free Income Fund, continued
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 relative valuations to
be recognized by the municipal securities 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. These lower-quality securities may be subject to greater risk
of repayment default, particularly during economic downturns and periods of
rising interest rates. Money to repay limited obligations and revenue bonds,
which provide financing for a specific project or public facility, may be
limited to the revenues generated by those projects or facilities, or to
special tax revenues. There are greater risks of repayment default for these
securities because repayment may depend on the credit of private entity, and
the general revenues of the public issuer will not be available for repayment.
Because the Fund concentrates its investments in a single state, there may be
more fluctuation in the value of its securities than is the case for mutual
funds whose portfolios are more geographically diverse. In addition, the Fund
may experience greater volatility than a fund invested in bonds with shorter
average maturities.
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.
21
<PAGE>
SAFECO California Tax-Free Income Fund, continued
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 average annual returns for
the one, five and ten year periods compare to 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.
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.
SAFECO California Tax-Free
Income Fund Chart
<TABLE>
<CAPTION>
Year Percent
Ended Return
- -------- -------
<S> <C>
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 2.53%
12/31/97 11.55%
12/31/98 6.19%
12/31/99 -9.18%
</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.
22
<PAGE>
SAFECO California Tax-Free Income Fund, continued
Average Annual Total Returns
as of December 31, 1999
The following table shows how the Fund's No-Load Class average annual returns
compare 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 -9.18% 6.83% 6.40%
- ---------------------------------------------------------------------
Lehman Brothers Long Municipal Bond Index* -6.67% 7.41% 7.19%
</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.
Investment returns and principal value vary with market conditions. Your shares
may be worth more or less than their original value when you sell them.
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 $20 charge for wire redemptions). A $12 annual "small
account" fee will be charged for accounts with balances under $1,000 in the
Fund at year end.
23
<PAGE>
SAFECO California Tax-Free Income Fund, continued
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees* 0.50%
12b-1 Fees NONE
Other Expenses 0.23%
Total Annual Fund Operating Expenses 0.73%
Fee Waiver** 0.00%
Net Expenses 0.73%
</TABLE>
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets.
** 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 management 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 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 $75 $233 $406 $906
</TABLE>
24
<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
The Municipal Bond Fund invests primarily in municipal bonds rated investment
grade or better with average maturities of 15-25 years.
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
advisor may use rating services
provided by Moody's, S&P or Fitch.
Investment grade securities are
rated by these services as follows:
<TABLE>
<CAPTION>
Moody's S&P Fitch
------- --- -----
<S> <C> <C>
Aaa AAA AAA
Aa AA AA
A A A
Baa BBB BBB
</TABLE>
The Fund will invest:
. At least 80% of its assets in securities whose interest is exempt from
federal income tax, and will not invest in securities whose interest is
subject to the alternative minimum tax.
. At least 65% of its assets in investment grade municipal bonds with a
maturity 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, structural features that give the issuer a
right to buy the bond back at a stated price (a "call") or give the Fund a
right to require the issuer to buy the bond back at a stated price (a "put"),
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 off or premium on the stated principal
amount of the bond 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.
25
<PAGE>
SAFECO Municipal Bond 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. 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 securities 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.
Although securities in the top four rating categories are considered
"investment grade," Moody's considers bonds rated "Baa" to have speculative
characteristics. These lower-quality securities may be subject to greater risk
of repayment default, particularly during economic downturns and periods of
rising interest rates. Money to repay limited obligations and revenue bonds,
which provide financing for a specific project or public facility, may be
limited to the revenues generated by those projects or facilities, or to
special tax revenues. There are greater risks of repayment default for these
securities because repayment may depend on the credit of a private entity, and
the general revenues of the public issuer will not be available for repayment.
In addition, 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.
Performance
The following bar chart and table provide some indication of the risks of
investing in the Municipal Bond Fund by showing how the Fund's performance has
varied from year to year and how its average annual returns for the one, five
and ten year periods compare to the Lehman Brothers Long Municipal Bond Index,
a widely recognized
26
<PAGE>
SAFECO Municipal Bond Fund, continued
index of municipal bonds having long maturities. As with all mutual funds, past
performance is not a prediction of future results.
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.
SAFECO Municipal Bond
Fund Chart
<TABLE>
<CAPTION>
Year Percent
Ended Return
- -------- -------
<S> <C>
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%
12/31/99 -6.18%
</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.
Average Annual Total Returns
as of December 31, 1999
The following table shows how the Fund's No-Load Class average annual returns
compare to the Lehman Brothers Long Municipal Bond Index:
<TABLE>
<CAPTION>
1 year 5 years 10 years
<S> <C> <C> <C>
Municipal Bond Fund -6.18% 6.72% 6.56%
- ---------------------------------------------------------------------
Lehman Brothers Long Municipal Bond Index* -6.67% 7.41% 7.19%
</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.
27
<PAGE>
SAFECO Municipal Bond Fund, continued
Investment returns and principal value vary with market conditions. Your shares
may be worth more or less than their original value when you sell them.
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 $20 charge for wire redemptions). A $12 annual "small
account" fee will be charged for accounts with balances under $1,000 in the
Fund at year end.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees 0.45%
12b-1 Fees NONE
Other Expenses 0.15%
Total Annual Fund Operating Expenses 0.60%
Fee Waiver* 0.00%
Net Expenses 0.60%
</TABLE>
* 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 management 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.
28
<PAGE>
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 $61 $192 $335 $750
</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. Because the Fund is an "intermediate-term"
fund, it will maintain an average dollar-weighted maturity of between 3 and 10
years for the portfolio as a whole. However, individual securities 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.
SAFECO Municipal Bond Fund, continued
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
advisor may use rating services
provided by Moody's, S&P or Fitch.
Investment grade securities are
rated by these services as follows:
<TABLE>
<CAPTION>
Moody's S&P Fitch
------- --- -----
<S> <C> <C>
Aaa AAA AAA
Aa AA AA
A A A
Baa BBB BBB
</TABLE>
29
<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 will not invest in securities whose interest is
subject to the 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, structural features that give the issuer a
right to buy the bond back at a stated price (a "call") or give the Fund a
right to require the issuer to buy the bond back at a stated price (a "put"),
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 off or premium on the stated principal
amount of the bond 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, 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.
Although securities in the top four rating categories are considered
"investment grade," Moody's considers bonds rated "Baa" to have speculative
characteristics. These lower-quality securities may be subject to greater risk
of repayment default, particularly during economic downturns and periods of
rising interest rates. Money to repay limited
30
<PAGE>
SAFECO Intermediate-Term Municipal Bond Fund, continued
obligations and revenue bonds, which provide financing for a specific project
or public facility, may be limited to the revenues generated by those projects
or facilities, or to special tax revenues. There are greater risks of repayment
default for these securities because repayment may depend on the credit of a
private entity, and the general revenues of the public issuer will not be
available for repayment.
This conservative Fund is suitable for investors seeking federally tax-exempt
income with relative price stability.
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 average annual
returns for the one and five year periods, and since the date of the Fund's
inception, compare to 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 results.
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.
SAFECO Intermediate-Term
Municipal Bond Fund Chart
<TABLE>
<CAPTION>
Year Percent
Ended Return
- -------- -------
<S> <C>
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%
12/31/99 -0.84%
</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.
31
<PAGE>
SAFECO Intermediate-Term Municipal Bond Fund, continued
Average Annual Total Returns
as of December 31, 1999
The following table shows how the Fund's No-Load Class average annual returns
compare to the Lehman Brothers 7-Year Municipal Bond Index:
<TABLE>
<CAPTION>
March 18, 1993
(inception) to
1 year 5 years December 31, 1999
<S> <C> <C> <C>
Intermediate-Term
Municipal Bond Fund -0.84% 6.06% 4.61%
- ----------------------------------------------------------
Lehman Brothers 7-Year
Municipal Bond Index* -0.14% 6.36% 5.29%
</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.
Investment returns and principal value vary with market conditions. Your shares
may be worth more or less than their original value when you sell them.
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 $20 charge for wire redemptions). A $12 annual "small
account" fee will be charged for accounts with balances under $1,000 in the
Fund at year end.
32
<PAGE>
SAFECO Intermediate-Term Municipal Bond Fund, continued
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees* 0.50%
12b-1 Fees NONE
Other Expenses 0.41%
Total Annual Fund Operating Expenses 0.91%
Fee Waiver** 0.01%
Net Expenses 0.90%
</TABLE>
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets.
** Adjusted to reflect the effect of the fee waiver on a calendar year basis,
stated as a percentage of the Fund's average daily net assets. 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 management 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 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
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>
33
<PAGE>
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.
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 or Fitch). 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.
The Fund may invest up to 35% of its total assets in uninsured municipal bonds.
The Fund will invest at least 80% of its assets in securities whose interest is
exempt from federal income tax, and will not invest in securities whose
interest is subject to the alternative minimum tax.
When evaluating a bond for purchase, the advisor takes into consideration,
among other things, yield, maturity, structural features that give the issuer a
right to buy the bond back at a stated price (a "call") or give the Fund a
right to require the issuer to buy the bond back at a stated price (a "put"),
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 off or premium on the stated principal
amount of the bond 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.
34
<PAGE>
SAFECO Insured Municipal Bond Fund, continued
The advisor seeks to keep the Fund as fully invested as possible, to maximize
yield. In selecting bonds, the advisor pays particular attention to protection
against issuer call rights and invests in discount bonds to enhance protection
against issuer calls.
The advisor may swap bonds to improve call protection, to realize losses for
the purpose of offsetting gains, or 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.
There can be no assurance that the companies issuing insurance covering the
bonds purchased by the Fund will be able to meet their obligations, especially
in an environment of wide-spread issuer defaults.
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 average annual returns for
the one and five year periods, and since the date of the Fund's inception,
compare to 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 results.
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.
35
<PAGE>
SAFECO Insured Municipal Bond Fund, continued
SAFECO Insured Municipal
Bond Fund Chart
<TABLE>
<CAPTION>
Year Percent
Ended Return
- -------- -------
<S> <C>
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%
12/31/99 -7.99%
</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, 1999
The following table shows how the Fund's No-Load Class average annual returns
compare to the Lehman Brothers Insured Municipal Bond Index:
<TABLE>
<CAPTION>
March 18, 1993
(inception) to
1 year 5 years December 31, 1999
<S> <C> <C> <C>
Insured Municipal Bond Fund -7.99% 6.59% 4.25%
- --------------------------------------------------------------------------
Lehman Brothers Insured Municipal Bond
Index* -7.51% 7.13% 5.21%
</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.
Investment returns and principal value vary with market conditions. Your shares
may be worth more or less than their original value when you sell them.
36
<PAGE>
SAFECO Insured Municipal Bond 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 $20 charge for wire redemptions). A $12 annual "small
account" fee will be charged for accounts with balances under $1,000 in the
Fund at year end.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees* 0.50%
12b-1 Fees NONE
Other Expenses 0.36%
Total Annual Fund Operating Expenses 0.86%
Fee Waiver* 0.00%
Net Expenses 0.86%
</TABLE>
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets.
** 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 management 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.
37
<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 $88 $274 $477 $1,061
</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 Fund will purchase only securities with remaining maturities
of 397 days or less and will maintain a dollar-weighted average portfolio
maturity of no more than 90 days.
The Fund may invest in:
. Commercial paper of both domestic and foreign issuers
. Negotiable and non-negotiable certificates of deposit, bankers' acceptances
and other short-term obligations of U.S. and foreign banks
. Repurchase agreements
Commercial paper is a short-term
unsecured promissory note issued by
a financial institution or large
corporation, and may include
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.
38
<PAGE>
SAFECO Money Market Fund, continued
. 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 and delayed delivery securities
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 and delayed delivery
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 to 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.
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.
An investment in the Fund is not a bank deposit, and 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 safety and
stability of principal.
39
<PAGE>
SAFECO Money Market Fund, continued
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 its average annual returns for the one,
five and ten year periods. As with all mutual funds, past performance is not a
prediction of future results.
Total return is a measure of investment performance over a period of time. It
includes dividends as well as share price gain or loss.
SAFECO Money Market
Fund Chart
<TABLE>
<CAPTION>
Year Percent
Ended Return
- -------- -------
<S> <C>
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%
12/31/99 4.65%
</TABLE>
During the 10-year period shown in the chart, the highest quarterly return was
1.96% for the quarter ended March 31, 1990; and the lowest return was 0.59% for
the quarter ended June 30, 1993.
Average Annual Total Returns and 7-Day Yield
as of December 31, 1999
The following table shows average annual returns for the Fund's No-Load Class:
<TABLE>
<CAPTION>
7-day yield
(period ended
1 year 5 years 10 years December 31, 1999)
<S> <C> <C> <C> <C>
Money Market Fund 4.65% 4.94% 4.76% 5.35%
</TABLE>
For updated yield information, call 800-835-4391.
40
<PAGE>
SAFECO Money Market 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 $20 charge for wire redemptions). A $12 annual "small
account" fee will be charged for accounts with balances under $1,000 in the
Fund at year end.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees 0.50%
12b-1 Fees NONE
Other Expenses 0.45%
Total Annual Fund Operating Expenses 0.95%
Fee Waiver* 0.15%
Net Expenses 0.80%
</TABLE>
* Adjusted to reflect the effect of the fee waiver on a calendar year basis,
stated as a percentage of the Fund's average daily net assets. 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 management 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 Money Market Fund, continued
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.
. The Fund may invest in municipal notes, including bond anticipation notes,
tax anticipation notes, revenue anticipation notes, municipal bonds and
municipal commercial paper.
Municipal notes are issued by
cities, counties, states and other
government entities to cover short
term borrowing needs.
. 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.
42
<PAGE>
SAFECO Tax-Free Money Market Fund, continued
. 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.
An investment in the Fund is not a bank deposit, and 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 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 its average annual returns
for the one, five and ten year periods. As with all mutual funds, past
performance is not a prediction of future results.
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.
SAFECO Tax-Free Money
Market Fund Chart
<TABLE>
<CAPTION>
Year Percent
Ended Return
- -------- -------
<S> <C>
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%
12/31/99 2.77%
</TABLE>
43
<PAGE>
SAFECO Tax-Free Money Market Fund, continued
During the 10-year period shown in the chart, the highest quarterly return was
1.45% for the quarter ended December 31, 1990; and the lowest return was 0.47%
for the quarter ended March 31, 1994.
Average Annual Total Returns and 7-Day Yield
as of December 31, 1999
The following table shows average annual returns for the Fund's No-Load Class:
<TABLE>
<CAPTION>
7-day yield
(period ended
1 year 5 years 10 years December 31, 1999)
<S> <C> <C> <C> <C>
Tax Free Money Market Fund 2.77% 3.11% 3.27% 3.80%
</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 $20 charge for wire redemptions). A $12 annual "small
account" fee will be charged for accounts with balances under $1,000 in the
Fund at year end.
44
<PAGE>
SAFECO Tax-Free Money Market Fund, continued
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees* 0.50%
12b-1 Fees NONE
Other Expenses 0.24%
Total Annual Fund Operating Expenses 0.74%
Fee Waiver** 0.00%
Net Expenses 0.74%
</TABLE>
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets.
** Adjusted to reflect the effect of the fee waiver on a calendar year basis,
stated as a percentage of the Fund's average daily net assets. 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 management 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 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 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 $76 $237 $411 $918
</TABLE>
45
<PAGE>
Additional Fund Facts
This prospectus describes some of the Funds' investment policies and
strategies. The Funds' Statement of Additional Information includes additional
information concerning the Funds' additional investment policies and
strategies. A Fund may exceed percentage limits that apply to particular
investments if, after the Fund's investment, market movements cause asset
values to change.
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.
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.
46
<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, 1999:
<TABLE>
<S> <C>
Intermediate-Term U.S. Treasury .55%
GNMA .58%
High-Yield Bond .59%
Managed Bond .50%
California Tax-Free Income .51%
Municipal Bond .45%
Intermediate-Term Municipal Bond .51%
Insured Municipal Bond .55%
Money Market .50%
Tax-Free Money Market .46%
</TABLE>
SAM is a wholly owned subsidiary of SAFECO Corporation, which is located at
SAFECO Plaza, Seattle, Washington 98185. SAM is located at Two Union Square,
25th Floor, Seattle, Washington 98101.
Portfolio Managers
Intermediate-Term U.S. Treasury Fund
The Intermediate-Term U.S. Treasury Fund is managed by Naomi Urata, Vice
President of SAM. Ms. Urata began managing the Fund in 1999. She is a co-
manager of the SAFECO Money Market Fund, and was that Fund's portfolio manager
from 1994 to early 2000.
GNMA Fund
The GNMA Fund is co-managed by Paul A. Stevenson and Joe Christensen.
Mr. Stevenson has managed the Fund since 1988, and is a Vice President of SAM
and
47
<PAGE>
Portfolio Managers, continued
Vice President of SAFECO Life Insurance Company. Mr. Christensen began managing
the Fund in 2000. From October 1997 to May 2000 Mr. Christensen managed a
portfolio of securities for the SAFECO insurance companies. Prior to that time
he was a portfolio manager and Vice President of Wells Fargo/First Interstate
Bank.
High-Yield Bond Fund
The High-Yield Bond Fund is managed by Robert Kern, Assistant Vice President of
SAM. Mr. Kern has managed the Fund since 1996. He has been a securities analyst
for SAM since 1994.
Managed Bond Fund
The Managed Bond Fund is managed by Michael Hughes, Assistant Vice President of
SAM. Mr. Hughes has managed the Fund since 1997. From 1995 to 1996 he was Vice
President and a portfolio manager for First Interstate Capital Management
Company.
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 managed the SAFECO California Tax-Free
Income Fund since 1983, and is the portfolio manager for other SAFECO Funds.
Municipal Bond Fund
The Municipal Bond Fund is managed by Stephen C. Bauer, President and Director
of SAM. Mr. Bauer has managed the SAFECO Municipal Bond Fund since 1981, and is
the portfolio manager for other SAFECO Funds.
Intermediate-Term Municipal Bond Fund
The Intermediate-Term Municipal Bond Fund is managed by Mary Metastasio, Vice
President of SAM. Ms. Metastasio has managed the Fund since 1996, and 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 Beverly Denny, Assistant Vice
President of SAM. Ms. Denny began managing the Fund in 2000. Previously, she
was the portfolio manager for the SAFECO Washington State Municipal Bond Fund.
48
<PAGE>
Portfolio Managers, continued
Money Market Fund
The Money Market Fund is co-managed by Naomi Urata, Vice President of SAM, and
Lesley Fox. Ms. Urata has managed the Fund since 1994 and has managed the
SAFECO Intermediate-Term U.S. Treasury Fund since 1999. Ms. Fox began co-
managing the Fund in 2000. From 1994 to 2000 Ms. Fox was a senior investment
officer for King County, Washington.
Tax-Free Money Market Fund
The Tax-Free Money Market Fund is managed by Mary Metastasio, Vice President of
SAM. Ms. Metastasio has managed the Fund since 1987.
Financial Highlights
The Financial Highlights tables which follow 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 incorporated by
reference in the Statement of Additional Information, which is available upon
request.
49
<PAGE>
Financial Highlights, continued
SAFECO Intermediate-Term U.S. Treasury Fund (For a No-Load Class Share
Outstanding Throughout the Period)
<TABLE>
<CAPTION>
Three-Month For the Year
For the Year Ended Period Ended Ended
December 31 December 31 September 30
1999 1998 1997 1996 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 10.74 $ 10.34 $ 10.11 $ 10.10 $ 10.24 $ 9.74
Income from investment
operations
Net investment income 0.54 0.57 0.58 0.16 0.54 0.55
Net realized and
unrealized gain (loss)
on investments (0.75) 0.40 0.23 0.01 (0.14) 0.50
- --------------------------------------------------------------------------------------
Total from investment
operations (0.21) 0.97 0.81 0.17 0.40 1.05
Less distributions
Dividends from net
investment income (0.54) (0.57) (0.58) (0.16) (0.54) (0.55)
- --------------------------------------------------------------------------------------
Net asset value at
end of period $ 9.99 $ 10.74 $ 10.34 $ 10.11 $ 10.10 $ 10.24
- --------------------------------------------------------------------------------------
Total return (1.98%) 9.61% 8.29% 1.68%* 4.00% 11.07%
Net assets at end of
period (000's) $19,092 $24,061 $15,698 $14,679 $14,668 $13,774
Ratio of expenses to
average net assets 0.93%+ 0.90% 0.92% 0.85%+ 1.01% 0.96%
Ratio of net investment
income to average net
assets 5.22% 5.38% 5.74% 6.30%** 5.30% 5.51%
Portfolio turnover rate 13.93% 2.83% 82.36% 125.42%** 294.25% 124.90%
</TABLE>
* Not annualized.
** Annualized.
+ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 1.10% and 1.07% for
the year or period ended December 31, 1999 and 1996.
50
<PAGE>
Financial Highlights, continued
SAFECO GNMA Fund (For a No-Load Class Share Outstanding Throughout the Period)
<TABLE>
<CAPTION>
Three-Month For the Year
For the Year Ended Period Ended Ended
December 31 December 31 September 30
1999 1998 1997 1996 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 9.64 $ 9.57 $ 9.36 $ 9.26 $ 9.45 $ 9.05
Income from investment
operations
Net investment income 0.55 0.57 0.60 0.15 0.60 0.60
Net realized and
unrealized gain (loss)
on investments (0.54) 0.07 0.21 0.10 (0.19) 0.40
- --------------------------------------------------------------------------------------
Total from investment
operations 0.01 0.64 0.81 0.25 0.41 1.00
Less distributions
Dividends from net
investment income (0.55) (0.57) (0.60) (0.15) (0.60) (0.60)
- --------------------------------------------------------------------------------------
Net asset value at
end of period $ 9.10 $ 9.64 $ 9.57 $ 9.36 $ 9.26 $ 9.45
- --------------------------------------------------------------------------------------
Total return 0.16% 6.84% 8.97% 2.71%* 4.48% 11.49%
Net assets at end of
period (000's) $39,449 $42,145 $38,172 $39,543 $39,703 $44,055
Ratio of expenses to
average net assets 0.94%+ 0.94% 0.93% 1.01%** 1.03% 1.01%
Ratio of net investment
income to average net
assets 5.92% 5.90% 6.40% 6.43%** 6.42% 6.55%
Portfolio turnover rate 132.51% 104.63% 82.70% 51.06%** 47.45% 131.24%
</TABLE>
* Not annualized.
** Annualized.
+ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 0.98% for the year
ended December 31, 1999.
51
<PAGE>
Financial Highlights, continued
SAFECO High-Yield Bond Fund (For a No-Load Class Share Outstanding Throughout
the Period)
<TABLE>
<CAPTION>
Three-Month For the Year
For the Year Ended Period Ended Ended
December 31 December 31 September 30
1999 1998 1997 1996 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 8.78 $ 9.13 $ 8.82 $ 8.79 $ 8.68 $ 8.55
Income from investment
operations
Net investment income 0.71 0.74 0.77 0.19 0.78 0.79
Net realized and
unrealized gain (loss)
on investments (0.40) (0.35) 0.31 0.03 0.11 0.13
- --------------------------------------------------------------------------------------
Total from investment
operations 0.31 0.39 1.08 0.22 0.89 0.92
Less distributions
Dividends from net
investment income (0.71) (0.74) (0.77) (0.19) (0.78) (0.79)
- --------------------------------------------------------------------------------------
Net asset value at
end of period $ 8.38 $ 8.78 $ 9.13 $ 8.82 $ 8.79 $ 8.68
- --------------------------------------------------------------------------------------
Total return 3.74% 4.45% 12.79% 2.50%* 10.79% 11.43%
Net assets at end of
period (000's) $73,004 $79,696 $71,058 $50,298 $47,880 $39,178
Ratio of expenses to
average net assets 0.95%+ 0.92% 0.91% 0.90%** 0.94% 1.01%
Ratio of net investment
income to average net
assets 8.31% 8.26% 8.58% 8.56%** 8.99% 9.28%
Portfolio turnover rate 70.65% 64.22% 85.06% 35.01%** 92.65% 38.03%
</TABLE>
* Not annualized.
** Annualized.
+ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 0.99% for the year
ended December 31, 1999.
52
<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
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 8.64 $ 8.60 $ 8.35 $ 8.77 $ 8.15
Income from
investment operations
Net investment
income 0.41 0.42 0.42 0.41 0.44
Net realized and
unrealized gain (loss)
on investments (0.74) 0.29 0.25 (0.42) 0.94
- -------------------------------------------------------------------
Total from investment
operations (0.33) 0.71 0.67 (0.01) 1.38
Less distributions
Dividends from net
investment income (0.41) (0.42) (0.42) (0.41) (0.44)
Distributions from
realized gains -- (0.25) -- -- (0.32)
- -------------------------------------------------------------------
Total distributions (0.41) (0.67) (0.42) (0.41) (0.76)
- -------------------------------------------------------------------
Net asset value at
end of period $ 7.90 $ 8.64 $ 8.60 $ 8.35 $ 8.77
- -------------------------------------------------------------------
Total return (3.82)% 8.43% 8.23% 0.02% 17.35%
Net assets at end of
period (000's) $6,781 $6,757 $4,627 $4,215 $4,497
Ratio of expenses to
average net assets 0.94%+ 1.16% 1.15% 1.27% 1.16%
Ratio of net investment
income to average
net assets 5.10% 4.79% 4.98% 4.86% 5.14%
Portfolio turnover rate 146.87% 132.76% 176.50% 136.29% 78.78%
</TABLE>
+ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 1.41% for the year
ended December 31, 1999.
53
<PAGE>
Financial Highlights, continued
SAFECO California Tax-Free Income Fund (For a No-Load Class Share Outstanding
Throughout the Period)
<TABLE>
<CAPTION>
Three-Month For the Year
For the Year Ended Period Ended Ended
December 31 December 31 March 31
1999 1998 1997 1996 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 12.74 $ 12.93 $ 12.22 $ 11.86 $ 11.54 $ 11.51
Income from investment
operations
Net investment income 0.56 0.60 0.60 0.47 0.62 0.63
Net realized and
unrealized gain (loss)
on investments (1.70) 0.18 0.76 0.39 0.40 0.13
- ---------------------------------------------------------------------------------------
Total from investment
operations (1.14) 0.78 1.36 0.86 1.02 0.76
Less distributions
Dividends from net
investment income (0.56) (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 (0.56) (0.97) (0.65) (0.50) (0.70) (0.73)
- ---------------------------------------------------------------------------------------
Net asset value at
end of period $ 11.04 $ 12.74 $ 12.93 $ 12.22 $ 11.86 $ 11.54
- ---------------------------------------------------------------------------------------
Total return (9.18%) 6.19% 11.55% 7.42%* 8.87% 7.01%
Net assets at end of
period (000's) $85,782 $112,457 $88,379 $72,084 $70,546 $64,058
Ratio of expenses to
average net assets 0.74% 0.68% 0.68% 0.69%** 0.68% 0.70%
Ratio of net investment
income to average net
assets 4.66% 4.60% 4.88% 5.21%** 5.12% 5.65%
Portfolio turnover rate 24.66% 38.78% 9.83% 10.52%** 16.25% 44.10%
</TABLE>
* Not annualized.
54
<PAGE>
Financial Highlights, continued
SAFECO Municipal Bond Fund (For a No-Load Class Share Outstanding Throughout
the Period)
<TABLE>
<CAPTION>
Nine-Month For the Year
For the Year Ended Period Ended Ended
December 31 December 31 March 31
1999 1998 1997 1996 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 14.45 $ 14.52 $ 13.98 $ 13.69 $ 13.36 $ 13.27
Income from investment
operations
Net investment income 0.69 0.73 0.75 0.57 0.76 0.77
Net realized and
unrealized gain (loss)
on investments (1.56) 0.17 0.70 0.29 0.33 0.12
- -------------------------------------------------------------------------------------------
Total from investment
operations (0.87) 0.90 1.45 0.86 1.09 0.89
Less distributions
Dividends from net
investment income (0.69) (0.73) (0.75) (0.57) (0.76) (0.77)
Distributions from
realized gains -- (0.24) (0.16) -- -- (0.03)
- -------------------------------------------------------------------------------------------
Total distributions (0.69) (0.97) (0.91) (0.57) (0.76) (0.80)
- -------------------------------------------------------------------------------------------
Net asset value at
end of period $ 12.89 $ 14.45 $ 14.52 $ 13.98 $ 13.69 $ 13.36
- -------------------------------------------------------------------------------------------
Total return (6.18%) 6.35% 10.68% 6.42%* 8.23% 7.10%
Net assets at end of
period (000's) $470,267 $539,860 $502,946 $480,970 $480,643 $472,569
Ratio of expenses to
average net assets 0.60% 0.51% 0.51% 0.53%** 0.54% 0.56%
Ratio of net investment
income to average net
assets 5.04% 5.01% 5.31% 5.53%** 5.47% 5.96%
Portfolio turnover rate 16.84% 20.80% 13.52% 6.66%** 12.60% 26.96%
</TABLE>
* Not annualized.
** Annualized.
55
<PAGE>
Financial Highlights, continued
SAFECO Intermediate-Term Municipal Bond Fund (For a No-Load Class Share
Outstanding Throughout the Period)
<TABLE>
<CAPTION>
Nine-Month For the Year
For the Year Ended Period Ended Ended
December 31 December 31 March 31
1999 1998 1997 1996 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 11.02 $ 10.92 $ 10.61 $ 10.49 $ 10.17 $ 10.13
Income from investment
operations
Net investment income 0.45 0.47 0.47 0.35 0.45 0.45
Net realized and
unrealized gain (loss)
on investments (0.54) 0.10 0.31 0.12 0.32 0.04
- --------------------------------------------------------------------------------------
Total from investment
operations (0.09) 0.57 0.78 0.47 0.77 0.49
Less distributions
Dividends from net
investment income (0.45) (0.47) (0.47) (0.35) (0.45) (0.45)
Distributions from
realized gains (0.02) -- -- -- -- --
- --------------------------------------------------------------------------------------
Net asset value at
end of period $ 10.46 $ 11.02 $ 10.92 $ 10.61 $ 10.49 $ 10.17
- --------------------------------------------------------------------------------------
Total return (0.84%) 5.33% 7.50% 4.53%* 7.63% 4.97%
Net assets at end of
period (000's) $14,607 $15,487 $13,780 $14,172 $14,981 $13,762
Ratio of expenses to
average net assets 0.86%+ 0.83% 0.83% 0.89%** 0.84% 0.85%
Ratio of net investment
income to average net
assets 4.18% 4.25% 4.37% 4.40%** 4.29% 4.46%
Portfolio turnover rate 10.51% 4.29% 10.52% 12.81%** 9.12% 4.27%
</TABLE>
* Not annualized.
** Annualized.
+ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 0.92% for the year
ended December 31, 1999.
56
<PAGE>
Financial Highlights, continued
SAFECO Insured Municipal Bond Fund (For a No-Load Class Share Outstanding
Throughout the Period)
<TABLE>
<CAPTION>
Nine-Month For the Year
For the Year Ended Period Ended Ended
December 31 December 31 March 31
1999 1998 1997 1996 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 11.33 $ 11.36 $ 10.74 $ 10.46 $ 10.05 $ 9.73
Income from investment
operations
Net investment income 0.48 0.49 0.50 0.37 0.48 0.48
Net realized and
unrealized gain (loss)
on investments (1.36) 0.17 0.62 0.28 0.41 0.32
- -------------------------------------------------------------------------------------
Total from investment
operations (0.88) 0.66 1.12 0.65 0.89 0.80
Less distributions
Dividends from net
investment income (0.48) (0.49) (0.50) (0.37) (0.48) (0.48)
Distributions from
realized gains -- (0.20) -- -- -- --
- -------------------------------------------------------------------------------------
Net asset value at
end of period $ 9.97 $ 11.33 $ 11.36 $ 10.74 $ 10.46 $10.05
- -------------------------------------------------------------------------------------
Total return (7.99%) 5.90% 10.70% 6.31%* 8.95% 8.58%
Net assets at end of
period (000's) $22,364 $24,998 $16,516 $13,187 $11,758 $8,163
Ratio of expenses to
average net assets 0.88%+ 0.88% 0.92% 1.00%** 0.99% 1.08%
Ratio of net investment
income to average net
assets 4.45% 4.29% 4.56% 4.66%** 4.53% 5.11%
Portfolio turnover rate 32.78% 27.30% 13.02% 14.86%** 3.71% 14.76%
</TABLE>
* Not annualized.
** Annualized.
+ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 0.91% for the year
ended December 31, 1999.
57
<PAGE>
Financial Highlights, continued
SAFECO Money Market Fund (For a No-Load Class Share Outstanding Throughout the
Period)
<TABLE>
<CAPTION>
Nine-Month For the Year
For the Year Ended Period Ended Ended
December 31 December 31 March 31
1999 1998 1997 1996 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from investment
operations
Net investment income 0.05 0.05 0.05 0.03 0.05 0.04
- -------------------------------------------------------------------------------------------
Less distributions
Dividends from net
investment income (0.05) (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 $ 1.00
- -------------------------------------------------------------------------------------------
Total return 4.65% 5.08% 4.93% 3.54%* 5.15% 4.20%
Net assets at end of
period (000's) $240,459 $227,329 $176,623 $161,356 $165,122 $171,958
Ratio of expenses to
average net assets 0.81%+ 0.79% 0.78% 0.81%** 0.78% 0.78%
Ratio of net investment
income to average net
assets 4.55% 4.97% 4.82% 4.66%** 5.04% 4.21%
</TABLE>
* Not annualized.
** Annualized.
+ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 0.95% for the year
ended December 31, 1999.
58
<PAGE>
Financial Highlights, continued
Safeco Tax-Free Money Market Fund (For a No-Load Class Share Outstanding
Throughout the Period)
<TABLE>
<CAPTION>
Nine-Month For the Year
For the Year Ended Period Ended Ended
December 31 December 31 March 31
1999 1998 1997 1996 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from investment
operations
Net investment income 0.03 0.03 0.03 0.02 0.03 0.03
Less distributions
Dividends from net
investment income (0.03) (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 $ 1.00
- --------------------------------------------------------------------------------------
Total return 2.77% 3.07% 3.12% 2.29%* 3.44% 2.84%
Net assets at end of
period (000's) $77,323 $77,457 $75,437 $73,164 $79,702 $77,320
Ratio of expenses to
average net assets 0.66%+ 0.63% 0.63% 0.65%** 0.65% 0.64%
Ratio of net investment
income to average net
assets 2.72% 3.04% 3.11% 3.03%** 3.40% 2.79%
</TABLE>
* Not annualized
** Annualized
+ Net of fee waiver by advisor. Absent the waiver, the annualized ratio of
expenses to average net assets would have been 0.70% for the year ended
December 31, 1999.
59
<PAGE>
Fund Distributions and Tax Considerations
When The Funds Pay Distributions
Each Fund declares dividends, if any, 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, in December.
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.
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 unless the account
owner is over age 59 1/2.
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 how long the Fund held the
securities it sold that generated the gain, not on how long you held your Fund
shares. Currently, net long-term capital gain distributions generally are
taxed to you (if you
60
<PAGE>
Fund Distributions and Tax Considerations, continued
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 even 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
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 may realize a capital 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.
In addition, distributions from tax deferred 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
specified rate.
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
may not be deductible and may 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
61
<PAGE>
Fund Distributions and Tax Considerations, continued
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 (at a
discount) is treated as ordinary income. These bonds are typically purchased
in carrying out the Tax-Exempt Bond Funds' call protection strategy.
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.
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.
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<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 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.
The NYSE is closed on weekends and on the following holidays: New Year's Day,
Martin Luther King, Jr. Day, President's Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
You may purchase or redeem Fund shares through various third-party
intermediaries, including banks, brokers and investment advisors. Where
authorized by the Fund or its transfer agent, those orders will be priced at
the NAV next computed after receipt by the intermediary. If you buy or redeem
Fund shares through an intermediary, consult that firm to determine whether
your purchase or redemption order will be priced upon its receipt of the order,
or at the time the order is received by the Fund. The intermediary may charge a
fee for its services.
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.
How We Value a Fund's Investments
We obtain market value information for each Fund's investments from pricing
services. Values 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. Values for non-exchange traded securities are
based on similar securities and quotations from dealers. Investments for which
a market price cannot be established are priced using a method the Funds'
Boards of Trustees believe 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.
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<PAGE>
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 should 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, credit card convenience checks or money orders,
and can accept only checks or wires 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.
. You will be charged a $12 service fee for every check or Electronic Funds
Transfer returned unpaid.
. 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. This physical delivery requirement may delay
your redemption or exchange of shares, because you will not be able to
request a share redemption or exchange over the telephone or using our
Internet Service.
. SAFECO Services charges a $20 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 (e.g., death
certificates and court orders) and a signature guarantee before we can
process certain transactions and requests. Signature guarantees are required
for all written redemption requests of $250,000 or more. Signature
guarantees help ensure that you have in fact authorized a transaction or
change to your account. You can obtain a signature guarantee for a nominal
fee from most banks, brokerage firms and other financial institutions. A
notary public stamp or seal cannot substitute for a signature guarantee.
64
<PAGE>
Opening and Maintaining Your Account, continued
. If you buy shares by any means other than by wire and shortly thereafter
sell 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, Class B and
Class C shares that are sold in a separate prospectus and are subject to
different fees and expenses. The Funds' separate share classes have different
expenses; as a result their investment performances will vary.
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 instruction 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 offer 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.
Individual Retirement Accounts (IRAs)
Currently, individuals can generally contribute up to $2,000 to an IRA for each
year. An annual custodial fee of $5 per Fund, up to a maximum of $10, may be
charged for any part of a calendar year in which you have an IRA investment in
a Fund. The custodial fee is waived for retirement accounts with balances over
$10,000. Minimum investment amounts are $1,000 for a Traditional IRA or a Roth
IRA, and $500 for an Education IRA.
65
<PAGE>
Opening and Maintaining Your Account, continued
. Traditional IRA
Depending on your income and other considerations, your contribution to a
Traditional IRA may be partially or fully tax deductible. You pay no tax on
your IRA account earnings until withdrawal.
. Roth IRA
Although contributions to a Roth IRA are not tax deductible, earnings on your
Roth IRA account are tax-free at withdrawal, if you meet certain requirements.
. Education IRA
An Education IRA is a vehicle for saving for a child's higher education. No
more than $500 can be contributed for any year to an Education IRA for the same
beneficiary. Contributions to an Education IRA are not tax deductible, but
earnings on the IRA account are tax-free and withdrawals are not taxable if
used to pay qualified educational expenses. Education IRA accounts are not
charged the custodial fee described above.
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 $25,000
(for the year 2000) 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 certain 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.
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<PAGE>
Opening and Maintaining Your Account, continued
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. An
annual custodial fee of $10 per Fund may be charged for any part of a calendar
year in which such a retirement account is invested in the Fund.
For information about the above accounts and plans, please call us at 1-800-
624-5711.
Purchasing Your Shares
The price you pay for shares of a Fund is its net asset value, or " NAV," on
the day we receive your check, wire or telephone purchase instruction in good
order. Certain brokers and other third party intermediaries are authorized to
accept purchase orders on the Funds' behalf. We and our authorized
intermediaries reserve the right not to accept customer orders that are
incomplete or otherwise not in good order, and the intermediaries reserve the
right to accept certain institutional customer orders conditioned on the
understanding that the orders may later be rejected if they cannot be
transmitted to us or processed in a timely manner. 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.
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<PAGE>
Purchasing Your Shares, continued
By Mail
If you are opening an account and 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 $1,000
per Fund.
. If you are opening an Education IRA, send $500 per Fund.
. If you choose the Automatic Investment Method or Payroll Deduction
Plan, send at least $1,000 per Fund.*
. If none of the above applies, send a check for at least $2,500 per
Fund 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 amount per Fund is $100.* For more
information, call (800) 624-5711.
1. Send a check for the appropriate amount. The Fund may charge you a
$12 service 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
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 us at (800) 624-5711.
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<PAGE>
Purchasing Your Shares, continued
By Wire
If you are buying shares for the first time:
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 wire 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:
Visit the SAFECO Investor Center at 4333 Brooklyn Avenue NE, Seattle,
Washington 98105. A representative will help you open your account and
complete the transaction.
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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 and no less than $100 in share
value 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 to transfer money.
. 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.
So long as we follow reasonable security procedures, 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 $12 service fee if your bank refuses the transfer
from your bank account due to non-sufficient funds or other reasons.
- --------------------------------------------------------------------------------
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
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<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 and no less than $100 in share
value 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 to transfer money.
. 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.
So long as we follow reasonable security procedures, 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.
. We may charge you a $12 service 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 at www.safecofunds.com
71
<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.
. The Funds' transfer agent may pay securities dealers and other
financial intermediaries a servicing fee for providing certain
administrative services to retirement plan and other institutional
omnibus accounts, and the Funds' advisor may pay a portion of such
fees from the advisor's own resources.
- --------------------------------------------------------------------------------
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.
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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.
If we receive your redemption request after the NYSE has closed for the day,
you will receive the NAV as of the next stock market close. Certain brokers and
other third party intermediaries are authorized to accept redemption orders on
the Funds' behalf.
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 prior to redemption and SAFECO has
not yet received confirmation that your bank will honor your check or other
transfer
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.
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 the
SAFECO Investor Center when it is ready. If you wish to transfer money
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 $20 fee to wire redemption 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
P.O. Box 34890
Seattle, WA 98124-1890
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<PAGE>
Selling Your Shares, continued
In Person
Visit the SAFECO Investor Center at 4333 Brooklyn Avenue NE, Seattle,
Washington 98105. 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 the
SAFECO Investor Center when it is ready. If you wish to transfer money
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 $20 fee to wire redemption proceeds, and some
banks charge a fee to receive a wire.
By Phone
This option is not available for shares issued in certificate form, and
is not available for IRA accounts unless you are age 59-1/2 or older.
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.
So long as we follow reasonable security procedures, 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 the
SAFECO Investor Center when it is ready. If you wish to transfer money
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 $20 fee to wire redemption 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 (not available for
IRA accounts)
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<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.
So long as we follow reasonable security procedures, 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 the SAFECO
Investor Center when it is ready. If you wish to transfer money 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 $20 fee to wire redemption proceeds, and some banks
charge a fee to receive a wire.
- --------------------------------------------------------------------------------
Visit the SAFECO Mutual Funds Web Site at www.safecofunds.com
76
<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.
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<PAGE>
Exchanging Shares From One Fund to Another
An exchange is when you sell shares of one Fund and buy shares of another Fund
in the same account with the same account 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 redemption of shares 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.
Simultaneous order transactions
involve a redemption from one
SAFECO Fund and reinvestment
immediately or shortly thereafter
into another SAFECO Fund. We will
use our discretion in determining
when a simultaneous order
transaction takes place.
. You may enter no more than four exchanges or simultaneous order
transactions per calendar year. However, we reserve the right to refuse
exchanges or simultaneous order transactions 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 exchange privileges without prior
notice. Under normal circumstances, we will give you 60 days' notice before
terminating your exchange privileges. These limitations will not affect your
ability to redeem your shares from any of the Funds, but may prevent you from
purchasing the shares of another Fund with your redemption proceeds.
. 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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<PAGE>
Exchanging Shares From One Fund to Another, continued
How to Make an Exchange
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
P.O. Box 34890
Seattle, WA 98124-1890
In Person
Visit the SAFECO Investor Center at 4333 Brooklyn Avenue NE, Seattle,
Washington 98105. A representative will be there to help you with your
exchange.
79
<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.
So long as we follow reasonable security procedures, 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 telephone 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
80
<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 in share value.
2. You are automatically enrolled in this service unless you decline it
on your 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.
So long as we follow reasonable security procedures, 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 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 at 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:
. The dealer may charge you a fee. (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.
81
<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 all of 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. Redemption checks are not available for IRA
accounts.
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, other than investments made using our Automatic Investment Method.
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.
82
<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 and servicing 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. In
addition, accounts with balances under $1,000 in a Fund will be charged a $12
"small account" fee. The small account fee will automatically be deducted from
your account. The valuation of accounts and the fee deduction are expected to
take place during the last five business days of December. We will waive the
fee if combined SAFECO Mutual Fund balances for the same shareholder tax ID
number exceed $10,000.
We will reinvest into your account any dividends and distribution checks that
are returned to us as "undeliverable" that remain outstanding over six months
after the issue date. 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:
Call (800) 624-5711 to request a change of registration form. Make sure the
form is signed by the authorized owner(s) of the account as specified on your
account application. We may require certified copies of supporting documents
(e.g., death certificates and court orders) and a signature guarantee before we
can process the request.
To make changes to your Automatic Investment Method or Systematic Withdrawal
Plan:
Send your request in writing to SAFECO Mutual Funds, P.O. Box 34890, Seattle,
WA 98124-1890. 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.
83
<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
High Current Income with Long-Term Growth
SAFECO Dividend Income Fund
Long-Term Growth
SAFECO Growth Opportunities Fund
SAFECO Equity Fund
SAFECO Northwest Fund
SAFECO International Stock Fund
SAFECO Balanced Fund
SAFECO Small Company Value Fund
SAFECO U.S. Value Fund
84
<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 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 copies of these documents or for other information about the Funds:
Write to: SAFECO Mutual Funds
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: [Note: The SEC may charge a fee to copy documents]
Write to: SEC Public Reference Section
Washington, DC 20549-0102
E-Mail: [email protected]
Visit the SEC Web site: http://www.sec.gov
Visit the SEC: SEC Public Reference Room
450 Fifth Street, N.W.
Washington, DC
Information on the operation of the SEC's Public Reference Room is available by
calling the SEC at 1-202-942-8090
SEC 1940 Act File Numbers 811-5574
811-7300
811-3347
811-6667
85
<PAGE>
- -------------------------- --------------------------
SAFECO Mutual Funds
SAFECO Growth Opportunities Fund
SAFECO Equity Fund
SAFECO Dividend Income Fund
SAFECO Northwest Fund
SAFECO International Stock Fund
SAFECO High-Yield Bond Fund
SAFECO Money Market Fund
Prospectus
Advisor Class A
Advisor Class B
Advisor Class C
- --------------------------------------------------------------------------------
SAFECO Balanced Fund
SAFECO Small Company Value Fund
SAFECO U.S. Value Fund
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO GNMA Fund
SAFECO Managed Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Municipal Bond Fund
Prospectus
Advisor Class A
Advisor Class B
May 1, 2000
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 OF SAFECO CORPORATION]
<PAGE>
Table of Contents
<TABLE>
<S> <C>
STOCK FUNDS
SAFECO Growth Opportunities Fund*........................................ 1
SAFECO Equity Fund....................................................... 5
SAFECO Dividend Income Fund**............................................ 9
SAFECO Northwest Fund.................................................... 14
SAFECO International Stock Fund.......................................... 19
SAFECO Balanced Fund..................................................... 23
SAFECO Small Company Value Fund***....................................... 28
SAFECO U.S. Value Fund................................................... 32
TAXABLE BOND FUNDS
SAFECO Intermediate-Term U.S. Treasury Fund.............................. 35
SAFECO GNMA Fund......................................................... 39
SAFECO High-Yield Bond Fund.............................................. 44
SAFECO Managed Bond Fund................................................. 48
TAX-EXEMPT BOND FUNDS
SAFECO California Tax-Free Income Fund................................... 52
SAFECO Municipal Bond Fund............................................... 57
MONEY MARKET FUND
SAFECO Money Market Fund................................................. 61
Additional Fund Facts...................................................... 65
Management................................................................. 66
Portfolio Managers......................................................... 66
Financial Highlights....................................................... 69
Fund Distributions and Tax Considerations.................................. 97
YOUR INVESTMENT............................................................ 100
How We Calculate the Value of Your Shares................................ 100
How We Value a Fund's Investments........................................ 100
Opening and Maintaining Your Account..................................... 101
Choosing a Class of Shares............................................... 103
Sales Charge Reductions and Waivers...................................... 108
Purchasing Your Shares................................................... 110
Selling Your Shares...................................................... 114
Exchanging Shares from One Fund to Another............................... 117
Maintaining Your Account................................................. 120
For More Information..................................................... 123
</TABLE>
* formerly the SAFECO Growth Fund
** formerly the SAFECO Income Fund
*** formerly the SAFECO Small Company Stock Fund
<PAGE>
SAFECO Growth Opportunities Fund
Objective
The SAFECO Growth Opportunities Fund seeks growth of capital and the increased
income that ordinarily follows from such growth.
Principal Investment Strategies
The Growth Opportunities Fund ordinarily invests most of its assets in common
stocks selected primarily for potential growth in value at a reasonable price.
When evaluating a stock for purchase, the advisor considers the following
factors:
Common stocks represent equity
interests in a corporation.
Stockholders participate in
earnings if dividends are
declared and have a claim to the
assets of a corporation at
dissolution, behind creditors
and preferred stock owners.
. The strength of the company's balance sheet
. The quality of the management team
. The rate at which the company's earnings are projected to grow in the future
The advisor seeks undervalued stocks with above-average growth potential.
Although the portfolio may include companies of all sizes, many of the
companies meeting the advisor's criteria for earnings growth are 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 earnings 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 it 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 other companies present more attractive investment opportunities, or
to raise cash to meet shareholder redemptions.
Principal Risk Factors
Loss of money is a risk of investing in the Growth Opportunities 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.
Because the Fund may invest in stocks issued by small companies, it may be
subject to more frequent and more significant price movements. You should be
prepared to see fluctuations in share price and variable investment returns.
Due to the aggressive nature of the Growth Opportunities Fund, you should
invest in it only if you are prepared to withstand market fluctuations over a
period of several years.
1
<PAGE>
SAFECO Growth Opportunities Fund, continued
Performance
The following bar chart and table provide some indication of the risks of
investing in the Growth Opportunities Fund by showing how the Fund's
performance has varied from year to year and how its average annual returns for
the one, five and ten year periods compare to the Standard & Poor's 500 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 began offering Class A and Class
B shares. Effective May 1, 2000, the Fund's name was changed from SAFECO Growth
Fund to SAFECO Growth Opportunities Fund and the Fund began offering Class C
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, which 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.
SAFECO Growth Opportunities
Fund Chart
<TABLE>
<CAPTION>
Year Percent
Ended Return
- -------- -------
<S> <C>
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%
12/31/99 2.43%
</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.
With respect to Class A and Class B shares, which were first offered September
30, 1996, 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, restated to reflect the
imposition of the maximum sales charge for Class A and the deduction of the
maximum deferred sales charge for Class B shares. With respect to Class C
shares, which were not offered until May 1, 2000, the performance information
in the table that follows reflects: (1) the performance of Class B shares of
the Fund for the period since September 30, 1996, restated to reflect the
deduction of the maximum deferred sales charge for Class C
2
<PAGE>
SAFECO Growth Opportunities Fund, continued
shares; and (2) the performance of the No-Load Class of shares of the Fund
prior to September 30, 1996, restated to reflect the deduction of the maximum
deferred sales charge for Class C shares. Performance shown for the period
prior to September 30, 1996 does not reflect annual Rule 12b-1 fees (.25% for
Class A shares and 1.00% for Class B and C shares). If Rule 12b-1 fees were
reflected, the returns would be lower than those shown.
Average Annual Total Returns as of December 31, 1999
The following table shows how the average annual returns for the Growth
Opportunities Fund's Class A, Class B and Class C shares compare to the S&P 500
Index:
<TABLE>
<CAPTION>
1 year 5 years 10 years
<S> <C> <C> <C>
SAFECO Growth Opportunities Fund*
Class A -3.45% 18.52% 14.19%
Class B -3.38% 19.10% 14.56%
Class C 0.62% 19.30% 14.56%
- ------------------------------------------------------------
S&P 500 Index** 21.04% 28.54% 18.19%
</TABLE>
* As required by Securities and Exchange Commission regulations, the Fund's
returns shown above reflect the imposition of the maximum sales charge for
Class A shares and the deduction of the maximum deferred sales charge for
Class B and Class C shares. If you purchased Class A shares prior to 1999,
or did not redeem Class B shares during that year, the Fund's Class A
returns shown without the maximum initial sales charge would have been
2.43%, 19.93%, and 14.86% for 1, 5 and 10 years, respectively; and the
Fund's Class B returns shown without the maximum deferred sales charge
would have been 1.62%, 19.30% and 14.56%, for 1, 5 and 10 years,
respectively. Class C shares of the Fund were not offered until May 1,
2000. The Fund's Class C returns shown without the maximum deferred sales
charge would have been 1.62%, 19.30% and 14.56%, 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.
Investment returns and principal value vary with market conditions. Your shares
may be worth more or less than their original cost when you sell them.
3
<PAGE>
SAFECO Growth Opportunities Fund, continued
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 Class C
------- ------- -------
<S> <C> <C> <C>
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price) 5.75%* 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 5.00%** 1.00%***
Maximum sales charge (load) imposed on reinvested
dividends (as a percentage of offering price) None None None
Redemption fee (as a percentage of amount
redeemed) None None None
Exchange fee None None None
Maximum annual account fee (for accounts under
$1,000) $ 12 $ 12 $ 12
</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 on Class B shares reduces to zero
after six years from purchase, and the Class B shares convert to Class A
shares at that time.
*** The contingent deferred sales charge on Class C shares applies only to
redemptions made in the first twelve months after purchase.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<CAPTION>
Class A Class B Class C*
------- ------- --------
<S> <C> <C> <C>
Management Fees 0.60% 0.60% 0.60%
12b-1 Fees 0.25% 1.00% 1.00%
Other Expenses 0.49% 0.64% 0.64%
Total Annual Fund Operating Expenses 1.34% 2.24% 2.24%
Fee Waiver** 0.09% 0.24% 0.24%
Net Expenses 1.25% 2.00% 2.00%
</TABLE>
- --------
* Class C shares of the Fund were not offered until May 1, 2000. Annual
operating expenses for Class C shares are estimated using actual expenses
for Class B shares of the Fund during calendar year 1999.
** Adjusted to reflect the effect of the fee waiver on a calendar year basis,
stated as a percentage of the Fund's average daily net assets. 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 management 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.
4
<PAGE>
SAFECO Growth Opportunities Fund, continued
Example
This example is intended to help you compare the cost of investing in the
Growth Opportunities Fund with the cost of investing in other mutual funds. It
assumes that you invest $10,000 in the Growth Opportunities 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 $695 $949 $1,222 $1,999
Class B
Assuming redemption at end of period $703 $927 $1,278 $2,327
Assuming no redemption $203 $627 $1,078 $2,327
Class C
Assuming redemption within 12 months $303 $627 $1,078 $2,327
Assuming no redemption $203 $627 $1,078 $2,327
</TABLE>
- --------
* Expenses for Class B shares reflect their conversion to Class A shares
after six years.
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. The Equity Fund invests primarily in
common stocks of large, established companies that are proven performers. When
selecting stocks for the Equity Fund, the advisor looks for companies having:
Common stocks represent equity
interests in a corporation.
Stockholders participate in
earnings if dividends are
declared and have a claim to the
assets of a corporation at
dissolution, behind creditors
and preferred stock owners.
. Predictable earnings growth
. Good value relative to earnings prospects
The Fund buys stocks for which the advisor believes the three- to five-year
earnings per share outlook is good. The advisor may sell these stocks if prices
become expensive relative to the three-year outlook for earnings or if earnings
prospects deteriorate. The Fund may also buy stocks for which the advisor
foresees a specific short-term earnings catalyst, such as a cost cutting
program or company restructure. The advisor may decide to sell these stocks if
the earnings catalyst is not successful or if the stock price reaches a
specific target. The advisor may also sell a portion of the Fund's holdings in
a company if the market value of that security holding becomes too large and
exceeds the proportion of the overall portfolio the advisor wants to invest in
the stock, or to raise cash to meet shareholder redemptions.
5
<PAGE>
SAFECO Equity Fund, continued
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.
Performance
The following bar chart and table provide some indication of the risks of
investing in the Equity Fund by showing how the Fund's performance has varied
from year to year and how its average annual returns for the one, five and ten
year periods compare to the Standard & Poor's 500 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 began offering Class A and Class
B shares. The Fund began offering Class C shares effective May 1, 2000. 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, which 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.
SAFECO Equity Fund Chart
<TABLE>
<CAPTION>
Year Percent
Ended Return
- -------- -------
<S> <C>
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%
12/31/99 9.13%
</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 December 30, 1990.
6
<PAGE>
SAFECO Equity Fund, continued
With respect to Class A and Class B shares, which were first offered September
30, 1996, 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, restated to reflect the
imposition of the maximum sales charge for Class A and the deduction of the
maximum deferred sales charge for Class B shares. With respect to Class C
shares, which were not offered until May 1, 2000, the performance information
in the table that follows reflects: (1) the performance of Class B shares of
the Fund for the period since September 30, 1996, restated to reflect the
deduction of the maximum deferred sales charge for Class C shares; and (2) the
performance of the No-Load Class of shares of the Fund prior to September 30,
1996, restated to reflect the deduction of the maximum deferred sales charge
for Class C shares. Performance shown for the period prior to September 30,
1996 does not reflect annual Rule 12b-1 fees (.25% for Class A shares and 1.00%
for Class B and C shares). If Rule 12b-1 fees were reflected, the returns would
be lower than those shown.
Average Annual Total Returns as of December 31, 1999
The following table shows how the average annual returns for the Equity Fund's
Class A, Class B and Class C shares compare to the S&P 500 Index:
<TABLE>
<CAPTION>
1 year 5 years 10 years
<S> <C> <C> <C>
SAFECO Equity Fund*
Class A 2.86% 19.95% 16.40%
Class B 3.18% 20.47% 16.75%
Class C 7.18% 20.66% 16.75%
- ----------------------------------------------
S&P 500 Index** 21.04% 28.54% 18.19%
</TABLE>
* As required by Securities and Exchange Commission regulations, the Fund's
returns shown above reflect the imposition of the maximum sales charge for
Class A shares and the deduction of the maximum deferred sales charge for
Class B and Class C shares. If you purchased Class A shares prior to 1999,
or did not redeem Class B shares during that year, the Fund's Class A
returns shown without the maximum initial sales charge would have been
9.13%, 21.38%, and 17.09% for 1, 5 and 10 years, respectively; and the
Fund's Class B returns shown without the maximum deferred sales charge
would have been 8.18%, 20.66% and 16.75%, for 1, 5 and 10 years,
respectively. Class C shares of the Fund were not available until May 1,
2000. The Fund's Class C returns shown without the deferred sales charge
would have been 8.18%, 20.66% and 16.75%, 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.
Investment returns and principal value vary with market conditions. Your shares
may be worth more or less than their original cost when you sell them.
7
<PAGE>
SAFECO Equity Fund, continued
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 Class C
------- ------- -------
<S> <C> <C> <C>
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price) 5.75%* 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 5.00%** 1.00%***
Maximum sales charge (load) imposed on reinvested
dividends (as a percentage of offering price) None None None
Redemption fee (as a percentage of amount
redeemed) None None None
Exchange fee None None None
Maximum annual account fee (for accounts under
$1,000) $ 12 $ 12 $ 12
</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 on Class B shares reduces to zero
after six years from purchase, and the Class B shares convert to Class A
shares at that time.
*** The contingent deferred sales charge on Class C shares applies only to
redemptions made in the first twelve months after purchase.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<CAPTION>
Class A Class B Class C*
------- ------- --------
<S> <C> <C> <C>
Management Fees 0.56% 0.56% 0.56%
12b-1 Fees 0.25% 1.00% 1.00%
Other Expenses 0.31% 0.49% 0.49%
Total Annual Fund Operating Expenses 1.12% 2.05% 2.05%
Fee Waiver** 0.0% 0.09% 0.09%
Net Expenses 1.12% 1.96% 1.96%
</TABLE>
- --------
* Class C shares of the Fund were not offered until May 1, 2000. Annual
operating expenses for Class C shares are estimated using actual expenses
for Class B shares of the Fund during calendar year 1999.
** 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 management 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.
8
<PAGE>
SAFECO Equity Fund, continued
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 $683 $911 $1,156 $1,860
Class B
Assuming redemption at end of period $699 $915 $1,257 $2,285
Assuming no redemption $199 $615 $1,057 $2,285
Class C
Assuming redemption within 12 months $299 $615 $1,057 $2,285
Assuming no redemption $199 $615 $1,057 $2,285
</TABLE>
- --------
* Expenses for Class B shares reflect their conversion to Class A shares after
six years.
SAFECO Dividend Income Fund
Objective
The SAFECO Dividend Income Fund seeks high current income and, when consistent
with its objective, long-term growth of capital.
Principal Investment Strategies
The Dividend Income Fund will invest, during normal market conditions, at least
65% of its total assets in dividend-paying securities, primarily common stocks.
The Fund may invest 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).
Common stocks represent equity
interests in a corporation.
Stockholders participate in
earnings if dividends are
declared and have a claim to the
assets of a corporation at
dissolution, behind creditors
and preferred stock owners.
Convertible corporate bonds are
corporate debt securities which
can be converted or exchanged
for common stock. Their prices
are influenced by changes in
interest rates and the value of
the assets into which they may
be converted or exchanged.
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.
The advisor generally seeks companies having:
. Strong earnings
. A history of dividend growth
. Attractive share prices
. Excellent growth potential
Less than 35% of the Dividend Income 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).
9
<PAGE>
SAFECO Dividend Income Fund, continued
In selecting securities to buy, the advisor analyzes various valuation
measures, such as the ratio of a company's price to earnings, price to revenues
and price to cash flow, compared to its historical ratios, industry
comparisons, the ratio for the company's competitors and companies with similar
growth rates.
The advisor may decide to sell a security once it meets the advisor's price
target, if the company's earnings prospects or other fundamental value
indicators deteriorate, or to raise cash to meet shareholder redemptions.
Principal Risk Factors
Loss of money is a risk of investing in the Dividend 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 price
volatility, sensitivity to interest rate changes, reduced liquidity and a
higher risk of repayment default than is the case for investment-grade
securities. Issuers of such bonds may have a reduced ability to overcome short-
term economic downturns or adverse corporate developments than more
creditworthy issuers. As a result, financial difficulties may have a more
pronounced effect on their ability to repay debts. The Dividend Income Fund may
be suitable for you if you want a current income component to your stock
investments.
Performance
The following bar chart and table provide some indication of the risks of
investing in the Dividend Income Fund by showing how the Fund's performance has
varied from year to year and how its average annual returns for the one, five
and ten year periods compare to the Standard & Poor's 500 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 began offering Class A and Class
B shares. Effective May 1, 2000, the Fund's name was changed from SAFECO Income
Fund to SAFECO Dividend Income Fund and the Fund began offering Class C 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, which 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.
10
<PAGE>
SAFECO Dividend Income Fund, continued
SAFECO Dividend Income
Fund Chart
<TABLE>
<CAPTION>
Year Percent
Ended Return
- -------- -------
<S> <C>
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%
12/31/99 1.01%
</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.
With respect to Class A and Class B shares, which were first offered September
30, 1996, 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, restated to reflect the
imposition of the maximum sales charge for Class A and the deduction of the
maximum deferred sales charge for Class B shares. With respect to Class C
shares, which were not offered until May 1, 2000, the performance information
in the table that follows reflects: (1) the performance of Class B shares of
the Fund for the period since September 30, 1996, restated to reflect the
deduction of the maximum deferred sales charge for Class C shares; and (2) the
performance of the No-Load Class of shares of the Fund prior to September 30,
1996, restated to reflect the deduction of the maximum deferred sales charge
for Class C shares. Performance shown for the period prior to September 30,
1996 does not reflect annual Rule 12b-1 fees (.25% for Class A shares and 1.00%
for Class B and C shares). If Rule 12b-1 fees were reflected, the returns would
be lower than those shown.
11
<PAGE>
SAFECO Dividend Income Fund, continued
Average Annual Total Returns as of December 31, 1999
The following table shows how the average annual returns for the Dividend
Income Fund's Class A, Class B and Class C shares compare to the S&P 500 Index:
<TABLE>
<CAPTION>
1 year 5 years 10 years
<S> <C> <C> <C>
SAFECO Dividend Income Fund*
Class A -4.81% 15.38% 10.81%
Class B -4.60% 16.07% 11.24%
Class C -0.77% 16.28% 11.24%
- -------------------------------------------------------
S&P 500 Index** 21.04% 28.54% 18.19%
</TABLE>
* As required by Securities and Exchange Commission regulations, the Fund's
returns shown above reflect the imposition of the maximum sales charge for
Class A shares and the deduction of the maximum deferred sales charge for
Class B and Class C shares. If you purchased Class A shares prior to 1999,
or did not redeem Class B shares during that year, the Fund's Class A
returns shown without the maximum initial sales charge would have been
1.01%, 16.76%, and 11.47% for 1, 5 and 10 years, respectively; and the
Fund's Class B returns shown without the maximum deferred sales charge
would have been 0.18%, 16.28% and 11.24%, for 1, 5 and 10 years,
respectively. Class C shares of the Fund were not available until May 1,
2000. The Fund's Class C returns shown without the deferred sales charge
would have been 0.18%, 16.28% and 11.24%, 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.
Investment returns and principal value vary with market conditions. Your shares
may be worth more or less than their original cost when you sell them.
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 Class C
------- ------- -------
<S> <C> <C> <C>
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price) 5.75%* 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 5.00%** 1.00%***
Maximum sales charge (load) imposed on reinvested
dividends (as a percentage of offering price) None None None
Redemption fee (as a percentage of amount
redeemed) None None None
Exchange fee None None None
Maximum annual account fee (for accounts under
$1,000) $ 12 $ 12 $ 12
</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 on Class B shares reduces to zero
after six years from purchase, and the Class B shares convert to Class A
shares at that time.
*** The contingent deferred sales charge on Class C shares applies only to
redemptions made in the first twelve months after purchase.
12
<PAGE>
SAFECO Dividend Income Fund, continued
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<CAPTION>
Class A Class B Class C*
------- ------- --------
<S> <C> <C> <C>
Management Fees 0.67% 0.67% 0.67%
12b-1 Fees 0.25% 1.00% 1.00%
Other Expenses 0.55% 0.55% 0.55%
Total Annual Fund Operating Expenses 1.47% 2.22% 2.22%
Fee Waiver** 0.15% 0.15% 0.15%
Net Expenses 1.32% 2.07% 2.07%
</TABLE>
- --------
* Class C shares of the Fund were not offered until May 1, 2000. Annual
operating expenses for Class C shares are estimated using actual expenses
for Class B shares of the Fund during calendar year 1999.
** 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 management 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
Dividend Income Fund with the cost of investing in other mutual funds. It
assumes that you invest $10,000 in the Dividend 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 $702 $969 $1,257 $2,074
Class B
Assuming redemption at end of period $710 $949 $1,314 $2,400
Assuming no redemption $210 $649 $1,114 $2,400
Class C
Assuming redemption within 12 months $310 $649 $1,114 $2,400
Assuming no redemption $210 $649 $1,114 $2,400
</TABLE>
- --------
* Expenses for Class B shares reflect their conversion to Class A shares
after six years.
13
<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 of companies located in the Northwest, selected primarily for potential
long-term appreciation.
When selecting stocks, the advisor looks for companies with:
. Principal executive offices in Alaska, Idaho, Montana, Oregon or Washington
. Faster earnings growth than their competitors
. A share price that represents good value.
The Fund may invest a larger percentage of its assets in technology companies
than do other regional funds or more general multi-cap funds, because technology
is a clear driver of the Washington state economy. The Fund's technology
holdings may include telecommunications, medical technology and computer-related
companies.
Common stocks represent equity
interests in a corporation.
Stockholders participate in
earnings if dividends are
declared and have a claim to the
assets of a corporation at
dissolution, behind creditors
and preferred stock owners.
Index futures give the Fund the
right to receive an amount of
cash if the closing level of the
stock index upon which the
contract is based is greater
than (in the case of a call) or
less than (in the case of a put)
the strike price at a
predetermined exercise price for
a given period of time.
The Fund may invest in index futures as a cash management technique.
In deciding whether to buy a company's stock, the advisor focuses on stocks
that are attractively priced on a valuation basis-- preferring companies that
have low price-to-earnings ratios when compared to other companies in the same
industry. The Fund may sell stocks that have reached a specific price target or
that the advisor considers to be overvalued compared with other stocks in the
industry. Stocks may become overvalued when earnings forecasts are too
optimistic or 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.
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.
14
<PAGE>
SAFECO Northwest Fund, continued
Investment in futures is subject to the risk that the advisor may take a
position opposite to the direction in which the market or index actually moves.
Also, the price of the futures contract may not move in the same direction as
the price of the underlying security. There may not be a liquid secondary
market in which to resell futures contracts if the advisor wants to close out a
futures position before the contract expires.
The value of the Fund's shares may be particularly vulnerable to factors
affecting the telecommunications and technology industries, such as substantial
governmental regulation and the need for governmental approvals, dependency on
consumer and business acceptance as new technologies evolve, and large and
rapid price movements resulting from, among other things, fierce competition in
these industries. Additional factors affecting the technology industry and the
value of your shares include rapid obsolescence of products and services, short
product cycles and aggressive pricing. Many technology companies are small and
are at an early stage of development and, therefore, may be subject to risks
such as those arising out of limited product lines, markets and financial and
managerial resources.
The Fund's investment in start-up companies and its participation in initial
public offerings (IPOs) contributed to the Fund's performance in 1999. Future
results may be different if the Fund is not able to participate in "hot" IPOs
(stocks which trade at high premiums immediately after the public offering
compared to the initial public offering price).
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 average annual returns for the one and five year periods,
and since the date of the Fund's inception, compare to the Standard & Poor's
500 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 began offering Class A and Class
B shares. The Fund began offering Class C shares effective May 1, 2000. 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, which 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.
15
<PAGE>
SAFECO Northwest Fund, continued
SAFECO Northwest Fund Chart
<TABLE>
<CAPTION>
Year Percent
Ended Return
- -------- -------
<S> <C>
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%
12/31/99 53.90%
</TABLE>
Since the Fund's inception in 1991, the highest quarterly return was 34.99% for
the quarter ended December 31, 1999, and the lowest return was -20.56% for the
quarter ended September 30, 1998.
With respect to Class A and Class B shares, which were first offered September
30, 1996, 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, restated to reflect the
imposition of the maximum sales charge for Class A and the deduction of the
maximum deferred sales charge for Class B shares. With respect to Class C
shares, which were not offered until May 1, 2000, the performance information
in the table that follows reflects: (1) the performance of Class B shares of
the Fund for the period since September 30, 1996, restated to reflect the
deduction of the maximum deferred sales charge for Class C shares; and (2) the
performance of the No-Load Class of shares of the Fund prior to September 30,
1996, restated to reflect the deduction of the maximum deferred sales charge
for Class C shares. Performance shown for the period prior to September 30,
1996 does not reflect annual Rule 12b-1 fees (.25% for Class A shares and 1.00%
for Class B and C shares). If Rule 12b-1 fees were reflected, the returns would
be lower than those shown.
16
<PAGE>
SAFECO Northwest Fund, continued
Average Annual Total Returns as of December 31, 1999
The following table shows how the average annual returns for the Northwest
Fund's Class A, Class B and Class C shares compare to the S&P 500 Index:
<TABLE>
<CAPTION>
February 7, 1991
(inception) to
1 year 5 years December 31, 1999
<S> <C> <C> <C>
SAFECO Northwest Fund*
Class A 45.06% 21.94% 15.35%
Class B 47.57% 22.67% 15.83%
Class C 51.57% 22.84% 15.83%
- ----------------------------------------------------------
S&P 500 Index** 21.04% 28.54% 20.03%
</TABLE>
* As required by Securities and Exchange Commission regulations, the Fund's
returns shown above reflect the imposition of the maximum sales charge for
Class A shares and the deduction of the maximum deferred sales charge for
Class B and Class C shares. If you purchased Class A shares prior to 1999,
or did not redeem Class B shares during that year, the Fund's Class A
returns shown without the maximum initial sales charge would have been
53.90%, 23.39%, and 16.12% for 1, 5, and since inception, respectively;
and the Fund's Class B returns shown without the maximum deferred sales
charge would have been 52.57%, 22.84% and 15.83%, for 1, 5, and since
inception, respectively. Class C shares of the Fund were not available
until May 1, 2000. The Fund's Class C returns shown without the deferred
sales charge would have been 52.57%, 22.84% and 15.83%, for 1, 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.
Investment returns and principal value vary with market conditions. Your shares
may be worth more or less than their original cost when you sell them.
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 Class C
------- ------- -------
<S> <C> <C> <C>
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price) 5.75%* 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 5.00%** 1.00%***
Maximum sales charge (load) imposed on reinvested
dividends (as a percentage of offering price) None None None
Redemption fee (as a percentage of amount
redeemed) None None None
Exchange fee None None None
Maximum annual account fee (for accounts under
$1,000) $ 12 $ 12 $ 12
</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 on Class B shares reduces to zero
after six years from purchase, and the Class B shares convert to Class A
shares at that time.
*** The contingent deferred sales charge on Class C shares applies only to
redemptions made in the first twelve months after purchase.
17
<PAGE>
SAFECO Northwest Fund, continued
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<CAPTION>
Class A Class B Class C*
------- ------- --------
<S> <C> <C> <C>
Management Fees** 0.70% 0.70% 0.70%
12b-1 Fees 0.25% 1.00% 1.00%
Other Expenses 0.60% 0.61% 0.61%
Total Annual Fund Operating Expenses 1.55% 2.31% 2.31%
Fee Waiver*** 0.20% 0.21% 0.21%
Net Expenses 1.35% 2.10% 2.10%
</TABLE>
- --------
* Class C shares of the Fund were not offered until May 1, 2000. Annual
operating expenses for Class C shares are estimated using actual expenses
for Class B shares of the Fund during calendar year 1999.
** Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets.
*** Adjusted to reflect the effect of the fee waiver on a calendar year basis,
stated as a percentage of the Fund's average daily net assets. 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 management 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 $2,431
Assuming no redemption $213 $658 $1,129 $2,431
Class C
Assuming redemption within 12 months $313 $658 $1,129 $2,431
Assuming no redemption $213 $658 $1,129 $2,431
</TABLE>
- --------
* Expenses for Class B shares reflect their conversion to Class A shares
after six years.
18
<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 countries
other than the United States. When selecting stocks, Bank of Ireland Asset
Management (U.S.) Limited, the sub-advisor that manages the International Stock
Fund, focuses on stocks that:
. Appear undervalued
. Are liquid and readily traded on established foreign exchanges
In an attempt to reduce the risks associated with fluctuations in foreign
currency values, security prices and interest rates, the International Stock
Fund may invest in futures contracts and forward contracts for hedging
purposes.
Common stocks represent equity
interests in a corporation.
Stockholders participate in
earnings if dividends are
declared and have a claim to the
assets of a corporation at
dissolution, behind creditors
and preferred stock owners.
Futures contracts are agreements
to buy or sell a specific amount
of a commodity or financial
investment at a particular price
on a stated future date.
Forward contracts, such as
forward foreign currency
exchange contracts, are
agreements to buy or sell
foreign currency at a particular
price on a stated future date.
The contracts enable the Fund to
"lock in" the U.S. dollar price
of a security position or
anticipated dividend or interest
payment.
In deciding whether to buy a company's stock, the sub-advisor focuses on stocks
that are attractively priced on a valuation basis -- preferring companies that
have low price-to-earnings ratios when compared to their historic ratios, to
other companies in the same industry, or to companies with similar growth
records. The sub-advisor may sell a stock when it reaches a specific price
target, when the sub-advisor believes the company's earnings prospects or other
fundamental value indicators have deteriorated, or to raise cash to meet
shareholder redemptions.
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
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,
and (7) delays in transaction settlement in some foreign markets.
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
19
<PAGE>
SAFECO International Stock Fund, continued
the same direction as the price of the underlying security. There may not be a
liquid secondary market in which to resell futures contracts and options if the
sub-advisor wants to close out a futures position before the contract expires.
Losses from the use of a futures contract could exceed the Fund's initial
investment in the contract. 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 the Fund's performance
has varied from year to year and how its average annual returns for one year
and since the date of the Fund's inception compare to 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 began offering Class A and Class
B shares. The Fund began offering Class C shares effective May 1, 2000. The
performance information in the bar chart below reflects the actual performance
of Class A shares of the Fund. 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.
SAFECO International Stock
Fund Chart
<TABLE>
<CAPTION>
Year Percent
Ended Return
- -------- -------
<S> <C>
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%
12/31/99 28.64%
</TABLE>
Since the Fund's inception in 1996, the highest quarterly return was 19.70% for
the quarter ended December 31, 1999, and the lowest return was -17.43% for the
quarter ended September 30, 1998.
With respect to Class A and Class B shares, which were first offered September
30, 1996, 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, restated to reflect the
imposition of the maximum sales charge for Class A and the deduction of the
maximum deferred sales charge for Class B shares. With respect to Class C
shares, which were not offered until May 1, 2000, the
20
<PAGE>
SAFECO International Stock Fund, continued
performance information in the table that follows reflects: (1) the performance
of Class B shares of the Fund for the period since September 30, 1996, restated
to reflect the deduction of the maximum deferred sales charge for Class C
shares; and (2) the performance of the No-Load Class of shares of the Fund
prior to September 30, 1996, restated to reflect the deduction of the maximum
deferred sales charge for Class C shares. Performance shown for the period
prior to September 30, 1996 does not reflect annual Rule 12b-1 fees (.25% for
Class A shares and 1.00% for Class B and C shares). If Rule 12b-1 fees were
reflected, the returns would be lower than those shown.
Average Annual Total Returns as of December 31, 1999
The following table shows how the average annual returns for the International
Stock Fund's Class A, Class B and Class C shares compare to the MSCI EAFE
Index:
<TABLE>
<CAPTION>
January 31, 1996
(inception) to
1 year December 31, 1999
<S> <C> <C>
International Stock Fund*
Class A 21.25% 13.48%
Class B 22.48% 13.86%
Class C 26.48% 14.38%
- -----------------------------------------------------
MSCI EAFE Index** 25.27% 11.75%
</TABLE>
* As required by Securities and Exchange Commission regulations, the Fund's
returns shown above reflect the imposition of the maximum sales charge for
Class A shares and the deduction of the maximum deferred sales charge for
Class B and Class C shares. If you purchased Class A shares prior to 1999,
or did not redeem Class B shares during that year, the Fund's Class A
returns shown without the maximum initial sales charge would have been
28.64%, and 15.20% for 1 year, and since inception, respectively; and the
Fund's Class B returns shown without the maximum deferred sales charge
would have been 27.48%, and 14.38%, for 1 year, and since inception,
respectively. Class C shares of the Fund were not available until May 1,
2000. The Fund's Class C returns shown without the deferred sales charge
would have been 27.48%, and 14.38%, 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.
Investment returns and principal value vary with market conditions. Your shares
may be worth more or less than their original cost when you sell them.
21
<PAGE>
SAFECO International Stock Fund, continued
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 Class C
------- ------- -------
<S> <C> <C> <C>
Maximum sales charge (load) imposed on purchases
(as a percentage of
offering price) 5.75%* 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 5.00%** 1.00%***
Maximum sales charge (load) imposed on reinvested
dividends (as a percentage of offering price) None None None
Redemption fee (as a percentage of amount
redeemed) None None None
Exchange fee None None None
Maximum annual account fee (for accounts under
$1,000) $ 12 $ 12 $ 12
</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 on Class B shares reduces to zero
after six years from purchase, and the Class B shares will convert to
Class A shares at that time.
*** The contingent deferred sales charge on Class C shares applies only to
redemptions made in the first twelve months after purchase.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<CAPTION>
Class A Class B Class C*
------- ------- --------
<S> <C> <C> <C>
Management Fees** 1.00% 1.00% 1.00%
12b-1 Fees 0.25% 1.00% 1.00%
Other Expenses 0.83% 0.99% 0.99%
Total Annual Fund Operating Expenses 2.08% 2.99% 2.99%
Fee Waiver*** 0.43% 0.59% 0.59%
Net Expenses 1.65% 2.40% 2.40%
</TABLE>
- --------
* Class C shares of the Fund were not offered until May 1, 2000. Annual
operating expenses for Class C shares are estimated using actual expenses
for Class B shares of the Fund during calendar year 1999.
** Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets.
*** Adjusted to reflect the effect of the fee waiver on a calendar year basis,
stated as a percentage of the Fund's average daily net assets. 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 management 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.
22
<PAGE>
SAFECO International Stock Fund, continued
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 $1,049 $1,480 $2,736
Assuming no redemption $243 $ 748 $1,280 $2,736
Class C
Assuming redemption within 12 months $343 $ 748 $1,280 $2,736
Assuming no redemption $243 $ 748 $1,280 $2,736
</TABLE>
- --------
* Expenses for Class B shares reflect their conversion to Class A shares after
six years.
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
common stocks and at least 25% of its total assets in debt securities.
When selecting stocks, the advisor focuses on companies that it believes:
. Are undervalued, as measured by low price-to-earnings ratios and high
relative dividend yields
. Have good long-term potential to increase in value
Common stocks represent equity
interests in a corporation.
Stockholders participate in
earnings if dividends are
declared and have a claim to the
assets of a corporation at
dissolution, behind creditors
and preferred stock owners.
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 advisor may use
rating services provided by
Moody's, S&P, and Fitch.
Investment-grade securities are
rated by these services as
follows:
<TABLE>
<CAPTION>
Moody's S&P Fitch
------- --- -----
<S> <C> <C>
Aaa AAA AAA
Aa AA AA
A A A
Baa BBB BBB
</TABLE>
In particular, 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 Standard &
Poor's 500 Index
23
<PAGE>
SAFECO Balanced Fund, continued
(S&P 500 Index) average. The advisor may decide to sell securities if the
advisor believes that the issuer no longer has the 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.
When selecting debt securities, the advisor may invest in U.S. government
securities, investment-grade debt obligations, and certain non-rated debt
obligations that the advisor believes are of investment-grade quality. 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 it 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.
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 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, 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
to be "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 the Fund's performance has varied
from year to year and how its average annual returns for one year and since the
date of the Fund's inception compare to the S&P 500 Index, a widely recognized
unmanaged index of stock performance, and with a composite index of which 60%
represents the performance of S&P 500 Index and 40% represents the performance
of the Lehman Brothers Government/Corporate Index, an unmanaged index of
governmental and investment-grade corporate bond performance. The equity and
debt security blend of the composite index reflects the approximate asset mix
of the Balanced Fund. 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 began offering Class A and Class
B shares. The Fund does not offer Class C shares. The performance information
in the bar chart below reflects the performance of the Class A shares of the
Fund. 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.
24
<PAGE>
SAFECO Balanced Fund, continued
SAFECO Balanced Fund Chart
<TABLE>
<CAPTION>
Year Percent
Ended Return
- -------- -------
<S> <C>
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%
12/31/99 0.75%
</TABLE>
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 -6.59% for the
quarter ended September 30, 1999.
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, restated to reflect the imposition of the
maximum sales charge for Class A and the deduction of the maximum deferred
sales charge for Class B shares. Performance shown for the period prior to
September 30, 1996 does not reflect annual Rule 12b-1 fees (.25% for Class A
shares and 1.00% for Class B shares). If Rule 12b-1 fees were reflected, the
returns would be lower than those shown.
25
<PAGE>
SAFECO Balanced Fund, continued
Average Annual Total Returns as of December 31, 1999
The following table shows how the average annual returns for the Balanced
Fund's Class A and Class B shares compare to the S&P 500 Index and the
composite S&P/Lehman Brothers Index:
<TABLE>
<CAPTION>
January 31, 1996
(inception) to
1 year December 31, 1999
<S> <C> <C>
SAFECO Balanced Fund*
Class A -5.07% 8.53%
Class B -4.84% 8.86%
- ------------------------------------------------------------------
S&P 500 Index** 21.04% 26.25%
- ------------------------------------------------------------------
Composite S&P/Lehman Brothers Index*** 11.77% 17.49%
</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. If you purchased your Class A shares prior to 1999, or did not
redeem your Class B shares during that year, the Fund's Class A returns
shown without the maximum initial sales charge would have been 0.75%, and
10.18% for 1 year, and since inception, respectively; and the Fund's Class
B returns shown without the maximum deferred sales charge would have been
-0.01%, and 9.46%, 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.
*** The composite S&P/Lehman Brothers Index is a combination of two widely
known indices in proportion to the approximate asset mix of the Balanced
Fund. 60% of the index consists of the performance of the S&P 500 Index,
which represents the equity portion of the Fund, and 40% of the index
consists of the Lehman Brothers Gov't/Corp. Index, which represents the
fixed income portion. 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 is used for comparison purposes only, and the Fund's holdings do not
necessarily mirror the index.
Investment returns and principal value vary with market conditions. Your shares
may be worth more or less than their original cost when you sell them.
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
Maximum annual account fee (for accounts under $1,000) $ 12 $ 12
</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 on Class B shares reduces to zero
after six years from purchase, and the Class B shares convert to Class A
shares at that time.
26
<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 0.72% 0.75%
Total Annual Fund Operating Expenses 1.67% 2.45%
Fee Waiver** 0.32% 0.35%
Net Expenses 1.35% 2.10%
</TABLE>
- --------
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets.
** Adjusted to reflect the effect of the fee waiver on a calendar year basis,
stated as a percentage of the Fund's average daily net assets. 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 management 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 $2,431
Assuming no redemption $213 $658 $1,129 $2,431
</TABLE>
- --------
* Expenses for Class B shares reflect their conversion to Class A shares
after six years.
27
<PAGE>
SAFECO Small Company Value Fund
Objective
The SAFECO Small Company Value Fund seeks long-term growth of capital through
investing primarily in small-sized companies.
Principal Investment Strategies
The Small Company Value Fund invests at least 65% of its total assets in common
stocks and preferred stocks of small-sized companies with total market
capitalization at the time of investment of less than $1.5 billion.
Market capitalization is the
value of a corporation as
determined by the market price
of its issued and outstanding
common stock. It is calculated
by multiplying the number of
outstanding shares by the
current market price of a share.
When selecting stocks for the Small Company Value 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
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 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.
The value of small company stocks may be more volatile than are those of larger
or well-established companies.
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. You should be prepared
to see fluctuations in share price and variable investment returns. Because
small company stocks can be quite volatile, you should invest in the Small
Company Value Fund only if you can withstand wide fluctuations in share price.
The Fund's investment in start-up companies and its participation in initial
public offerings (IPOs) contributed to the Fund's performance in 1999. Future
results may be different if the Fund is not able to participate in "hot" IPOs
(stocks which trade at high premiums immediately after the public offering
compared to the initial public offering price).
28
<PAGE>
SAFECO Small Company Value Fund, continued
Performance
The following bar chart and table provide some indication of the risks of
investing in the Small Company Value Fund by showing how the Fund's performance
has varied from year to year and how its average annual returns for one year
and since the date of the Fund's inception compare to 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 began offering Class A and Class
B shares. Effective May 1, 2000, the Fund's name was changed from SAFECO Small
Company Stock Fund to SAFECO Small Company Value Fund. The Fund does not offer
Class C shares. The performance information in the bar chart below reflects the
performance of Class A shares of the Fund. 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.
SAFECO Small Company Value
Fund Chart
<TABLE>
<CAPTION>
Year Percent
Ended Return
- -------- -------
<S> <C>
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%
12/31/99 13.17%
</TABLE>
Since the Fund's inception in 1996, the highest quarterly return was 27.15% for
the quarter ended December 31, 1999, 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, restated to reflect the imposition of the
maximum sales charge for Class A and the deduction of the maximum deferred
sales charge for Class B shares. Performance shown for the period prior to
September 30, 1996 does not reflect annual Rule 12b-1 fees (.25% for Class A
shares and 1.00% for Class B shares). If Rule 12b-1 fees were reflected, the
returns would be lower than those shown.
29
<PAGE>
SAFECO Small Company Value Fund, continued
Average Annual Total Returns as of December 31, 1999
The following table shows how the average annual returns for the Small Company
Value Fund's Class A and Class B shares compare to the Russell 2000 Index:
<TABLE>
<CAPTION>
January 31, 1996
(inception) to
1 year December 31, 1999
<S> <C> <C>
SAFECO Small Company Value Fund*
Class A 6.63% 6.55%
Class B 7.32% 6.82%
- ------------------------------------------------------------
Russell 2000 Index** 21.39% 14.37%
</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. If you purchased your Class A shares prior to 1999, or did not
redeem your Class B shares during that year, the Fund's Class A returns
shown without the maximum initial sales charge would have been 13.17%, and
8.17% for 1 year, and since inception, respectively; and the Fund's Class B
returns shown without the maximum deferred sales charge would have been
12.32% and 7.44%, 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.
Investment returns and principal value vary with market conditions. Your shares
may be worth more or less than their original cost when you sell them.
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
Maximum annual account fee (for accounts under $1,000) $ 12 $ 12
</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 on Class B shares reduces to zero
after six years from purchase, and the Class B shares will convert to Class
A shares at that time.
30
<PAGE>
SAFECO Small Company 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* 0.75% 0.75%
12b-1 Fees 0.25% 1.00%
Other Expenses 0.94% 0.97%
Total Annual Fund Operating Expenses 1.94% 2.72%
Fee Waiver** 0.54% 0.57%
Net Expenses 1.40% 2.15%
</TABLE>
- --------
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets.
** Adjusted to reflect the effect of the fee waiver on a calendar year basis,
stated as a percentage of the Fund's average daily net assets. 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 management 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 Value Fund with the cost of investing in other mutual funds. It assumes
that you invest $10,000 in the Small Company 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 $709 $993 $1,297 $2,158
Class B
Assuming redemption at end of period $718 $973 $1,354 $2,483
Assuming no redemption $218 $673 $1,154 $2,483
</TABLE>
- --------
* Expenses for Class B shares reflect their conversion to Class A shares
after six years.
31
<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
The U.S. Value Fund invests at least 65% of its assets in common stocks issued
by U.S. companies selected for potential appreciation. In selecting securities
to buy for the U.S. Value Fund, the advisor uses a fundamental value analysis
and 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.
Fundamental value analysis of
common stocks emphasizes asset
value more than earnings
projections. Its opposite,
growth investing, focuses more
on earnings growth.
The advisor selects from among a universe of large capitalization 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 Standard & Poor's 500 Index (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 the advisor believes are undervalued
relative to their underlying profitability, the shares of the companies in
which the Fund invests may not appreciate in value. In particular, the value of
Fund shares may decline if the value stocks in which it invests fall out of
favor with investors. In addition, although an investment in the shares of
undervalued companies may provide some protection from stock market declines,
even the shares of comparatively undervalued companies typically fall in price
during broad market declines.
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 the Fund's performance and how its
average annual returns for one year and since the date of the Fund's inception
compare to 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.
The performance information in the bar chart below reflects the actual
performance of Class A shares of the Fund, but does not reflect sales charges.
If sales charges were reflected, the returns would be lower than those shown.
32
<PAGE>
SAFECO U.S. Value 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.
SAFECO U.S. Value
Fund Chart
<TABLE>
<CAPTION>
Year Percent
Ended Return
- -------- -------
<S> <C>
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%
12/31/99 4.74%
</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 -10.25% for the
quarter ended September 30, 1999.
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, restated to reflect the imposition of the maximum sales charge
for Class A and the deduction of the maximum deferred sales charge for Class B
shares. The Fund does not offer Class C shares.
Average Annual Total Returns as of December 31, 1999
The following table shows how the average annual returns for the U.S. Value
Fund's Class A and Class B shares compare to the S&P 500 Index:
<TABLE>
<CAPTION>
April 30, 1997
(inception) to
1 year December 31, 1999
<S> <C> <C>
U.S. Value Fund*
Class A -1.30% 10.12%
Class B -1.07% 10.87%
- --------------------------------------------
S&P 500 Index** 21.04% 27.35%
</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. If you purchased your Class A shares prior to 1999, or did not
redeem your Class B shares during that year, the Fund's Class A returns
shown without the maximum initial sales charge would have been 4.74%, and
12.59% for 1 year, and since inception, respectively; and the Fund's Class
B returns shown without the maximum deferred sales charge would have been
3.92%, and 11.81%, 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.
33
<PAGE>
SAFECO U.S. Value Fund, continued
Investment returns and principal value vary with market conditions. Your shares
may be worth more or less than their original cost when you sell them.
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
Maximum annual account fee (for accounts under $1,000) $ 12 $ 12
</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 on Class B shares reduces to zero
after six years from purchase, and the Class B shares will convert to
Class A shares at that time.
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 1.06% 1.02%
Total Annual Fund Operating Expenses 2.01% 2.72%
Fee Waiver** 0.66% 0.62%
Net Expenses 1.35% 2.10%
</TABLE>
- --------
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets.
** Adjusted to reflect the effect of the fee waiver on a calendar year basis,
stated as a percentage of the Fund's average daily net assets. 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 management 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.
34
<PAGE>
SAFECO U.S. Value Fund, continued
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 $2,431
Assuming no redemption $213 $658 $1,129 $2,431
</TABLE>
- --------
* Expenses for Class B shares reflect their conversion to Class A shares after
six years.
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. The
Federal Reserve Bank creates
STRIPS by separating the coupon
(interest) and principal
components of a U.S. Treasury
bond and selling them as
individual securities.
Because the Fund is an "intermediate-term" fund, it will maintain an average
dollar-weighted maturity of between 3 and 10 years for the portfolio as a
whole. However, the maturities of individual securities the Fund holds may be
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), the Federal Home Loan Bank (FHLB) 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).
35
<PAGE>
SAFECO Intermediate-Term U.S. Treasury Fund, continued
Corporate debt securities in which the Fund may invest include bonds that are:
. Rated in the top three grades (A or higher) by either Moody's, S&P or Fitch.
. If unrated, are of comparable quality to securities rated A or higher.
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 they have a more favorable yield premium than do U.S. Treasuries.
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.
The prices of STRIPS can be more volatile than other Treasury securities when
market interest rates change.
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 average annual returns for
the one, five and ten year periods compare to 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 began offering Class A and Class
B shares. The Fund does not offer Class C 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, which 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.
36
<PAGE>
SAFECO Intermediate-Term U.S. Treasury Fund, continued
SAFECO Intermediate-Term
U.S. Treasury Fund Chart
<TABLE>
<CAPTION>
Year Percent
Ended Return
- -------- -------
<S> <C>
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%
12/31/99 -2.26%
</TABLE>
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, restated to reflect the imposition of the
maximum sales charge for Class A and the deduction of the maximum deferred
sales charge for Class B shares. Performance shown for the period prior to
September 30, 1996 does not reflect annual Rule 12b-1 fees (.25% for Class A
shares and 1.00% for Class B shares). If Rule 12b-1 fees were reflected, the
returns would be lower than those shown.
Average Annual Total Returns as of December 31, 1999
The following table shows how the average annual returns for the Intermediate-
Term U.S. Treasury Fund's Class A and Class B shares compare 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*
Class A -6.68% 5.21% 5.96%
Class B -7.62% 5.38% 6.21%
- ---------------------------------------------------------------------------
Merrill Lynch Intermediate-Term Treasury Index** 0.55% 6.98% 7.12%
</TABLE>
* As required by Securities and Exchange Commission regulations, the Fund's
returns shown above 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. If you purchased your Class A shares prior to 1999, or did
not redeem your Class B shares during that year, the Fund's Class A returns
shown without the maximum initial sales charge would have been -2.26%,
6.17%, and 6.45% for 1, 5 and 10 years, respectively; and the Fund's Class
B returns shown without the maximum deferred sales charge would have been
-2.97%, 5.70% and 6.21%, for 1, 5 and 10 years, respectively.
** 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 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.
Investment returns and principal value vary with market conditions. Your shares
may be worth more or less than their original cost when you sell them.
37
<PAGE>
SAFECO Intermediate-Term U.S. Treasury Fund, continued
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
Maximum annual account fee (for accounts under $1,000) $ 12 $ 12
</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 on Class B shares reduces to zero
after six years from purchase, and the Class B shares will convert to
Class A shares at that time.
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 0.69% 0.72%
Total Annual Fund Operating Expenses 1.49% 2.27%
Fee Waiver* 0.29% 0.32%
Net Expenses 1.20% 1.95%
</TABLE>
- --------
* Adjusted to reflect the effect of the fee waiver on a calendar year basis,
stated as a percentage of the Fund's average daily net assets. 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 management 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.
38
<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. 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 $2,275
Assuming no redemption $198 $612 $1,052 $2,275
</TABLE>
- --------
* Expenses for Class B shares reflect their conversion to Class A shares after
six years.
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.
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.
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.
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:
. 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.
. The Fund may purchase both modified pass-through securities and
collateralized mortgage obligations (CMOs).
39
<PAGE>
SAFECO GNMA Fund, continued
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:
. 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 Fund's
investment in sectors viewed as overvalued, while increasing the Fund's
investment in undervalued sectors. The advisor's outlook on interest rates,
and the likely effect of a movement in the interest rate market on a
homeowner's decision whether or not to refinance his/her home mortgage, play
a part in the advisor's 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 the advisor's 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.
40
<PAGE>
SAFECO GNMA Fund, continued
There are special risks associated with CMOs. The market value of CMOs that pay
interest at floating rates, or are subject to interest rate adjustments, may be
more volatile than fixed-rate obligations. CMOs are subject to prepayment risk
(because mortgage borrowers are more likely to refinance or prepay the
underlying obligations in times of declining interest rates) and repayment
default (because principal and interest payments ultimately depend upon the
underlying mortgage borrowers repaying their mortgage loans. If the underlying
borrowers default, the remaining or repossessed collateral for the CMOs may not
be adequate to support payments on the securities.
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 the Fund's performance has varied
from year to year and how its average annual returns for the one, five and ten
year periods compare to 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 results.
Effective September 30, 1996, all of the then-existing shares of the Fund were
redesignated No-Load Class shares. The Fund began offering Class A and Class B
shares May 1, 2000. The Fund does not offer Class C shares. The performance
information in the bar chart below reflects the performance of the No-Load
Class of shares for the Fund. The performance reflected in the bar chart does
not reflect Rule 12b-1 fees or sales charges. If Rule 12b-1 fees and 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.
SAFECO GNMA Fund Chart
<TABLE>
<CAPTION>
Year Percent
Ended Return
- -------- -------
<S> <C>
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%
12/31/99 0.16%
</TABLE>
During the 10-year period shown in the bar chart, the highest quarterly return
was 5.02% for the quarter ended September 30, 1991; and the lowest return was
- -3.58% for the quarter ended March 31, 1994.
41
<PAGE>
SAFECO GNMA Fund, continued
The performance information in the table that follows reflects the performance
of the No-Load Class of shares of the Fund, restated to reflect the imposition
of the maximum sales charge for Class A and the deduction of the maximum
deferred sales charge for Class B shares. Performance shown does not reflect
annual Rule 12b-1 fees (.25% for Class A shares and 1.00% for Class B shares).
If Rule 12b-1 fees were reflected, the returns would be lower than those shown.
Average Annual Total Returns as of December 31, 1999
The following table shows how the average annual returns for the GNMA Fund's
Class A and Class B shares compares to the Merrill Lynch GNMA Index:
<TABLE>
<CAPTION>
1 year 5 years 10 years
<S> <C> <C> <C>
GNMA Fund
Class A -4.31% 5.98% 6.20%
Class B -4.56% 6.66% 6.69%
- ---------------------------------------------------
Merill Lynch GNMA Index* 1.91% 8.15% 8.07%
</TABLE>
* Class A and Class B shares of the Fund were not offered until May 1, 2000.
As required by Securities and Exchange Commission regulations, the Fund's
returns shown above 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. Assuming Class A shares were purchased prior to 1999, or
Class B shares were not redeemed during 1999, the Fund's Class A returns
shown without the maximum initial sales charge would have been 0.16%, 6.97%
and 6.69%, for 1, 5 and 10 years, respectively; and the Fund's Class B
returns shown without the maximum deferred sales charge would have been
0.16%, 6.97% and 6.69%, for 1, 5 and 10 years, respectively.
** 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.
Investment returns and principal value vary with market conditions. Your shares
may be worth more or less than their original value when you sell them.
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
Maximum annual account fee (for accounts under $1,000) $ 12 $ 12
</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 on Class B shares reduces to zero
after six years from purchase, and the Class B shares convert to Class A
shares at that time.
42
<PAGE>
SAFECO GNMA 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 0.40% 0.40%
Total Annual Fund Operating Expenses 1.20% 1.95%
Fee Waiver*** 0.00% 0.00%
Net Expense 1.20% 1.95%
</TABLE>
- --------
* Class A and Class B shares of the Fund were not offered until May 1, 2000.
Annual operating expenses for Class A and Class B shares are estimated.
** Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets.
*** Adjusted to reflect the effect of the fee waiver on a calendar year basis,
stated as a percentage of the Fund's average daily net assets. 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 management 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 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>
Class A $567 $814 $1,080 $1,839
Class B
Assuming redemption at end of period $698 $912 $1,252 $2,275
Assuming no redemption $198 $612 $1,052 $2,275
</TABLE>
- --------
* Expenses for Class B shares reflect their conversion to Class A shares after
six years.
43
<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. The Fund may invest in:
. Debt securities and 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.
. 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.
Debt securities are interest
paying instruments issued by
corporations or other issuers.
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.
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.
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
interest rate sensitivity, coupon, and call features (the bond's structure).
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.
Because the Fund invests predominantly in high-yield debt securities, the Fund
is subject to greater volatility, reduced liquidity and a higher risk of
repayment default than a fund holding predominantly investment grade
securities. High-yield debt securities involve greater investment risks due to
the issuers' reduced creditworthiness, which may indicate the issuer has a
reduced ability to make debt repayments and may make it more difficult for the
issuer to
44
<PAGE>
SAFECO High-Yield Bond Fund, continued
withstand economic downturns or to obtain additional financing. 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 average annual returns for the one, five
and ten year periods compare to 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 September 30, 1996, all of the then-existing shares of the Fund, were
redesignated No-Load Class shares. The Fund began offering Class A and Class B
shares effective January 31, 1997. The Fund began offering Class C shares
effective May 1, 2000. 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, which 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.
SAFECO High-Yield Bond
Fund Chart
<TABLE>
<CAPTION>
Year Percent
Ended Return
- -------- -------
<S> <C>
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%
12/31/99 3.52%
</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.
With respect to Class A and Class B shares, which were first offered September
30, 1996, 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, restated to reflect the imposition of
the maximum sales charge for Class A and the deduction of the maximum deferred
sales charge for Class B shares. With respect to Class C shares, which were not
offered until May 1, 2000, the performance information in the table that
follows reflects: (1) the performance of Class B shares of the Fund for the
period since January 31, 1997, restated to reflect the deduction of the maximum
deferred sales charge for Class C shares; and (2) the performance of the No-
Load Class of shares of the Fund prior to January 31, 1997, restated to
45
<PAGE>
SAFECO High-Yield Bond Fund, continued
reflect the deduction of the maximum deferred sales charge for Class C shares.
Performance shown for the period prior to January 31, 1997 does not reflect
annual Rule 12b-1 fees (.25% for Class A shares and 1.00% for Class B and C
shares). If Rule 12b-1 fees were reflected, the returns would be lower than
those shown.
Average Annual Total Returns as of December 31, 1999
The following table shows how the average annual returns for the High-Yield
Bond Fund's Class A, Class B and Class C shares compare 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 -1.10% 8.17% 8.73%
Class B -2.04% 8.38% 8.98%
Class C 1.77% 8.67% 8.98%
- -----------------------------------------------------------
Merrill Lynch High-Yield Index** 2.51% 9.89% 11.34%
</TABLE>
* As required by Securities and Exchange Commission regulations, the Fund's
returns shown above reflect the imposition of the maximum sales charge for
Class A shares and the deduction of the maximum deferred sales charge for
Class B and Class C shares. If you purchased Class A shares prior to 1999,
or did not redeem Class B shares during that year, the Fund's Class A
returns shown without the maximum initial sales charge would have been
3.52%, 9.17%, and 9.23% for 1, 5 and 10 years, respectively; and the
Fund's Class B returns shown without the maximum deferred sales charge
would have been 2.73%, 8.67% and 8.98%, for 1, 5 and 10 years,
respectively. Class C shares of the Fund were not available until May 1,
2000. The Fund's Class C returns shown without the maximum sales charge
would have been 2.73%, 8.67% and 8.98%, 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.
Investment returns and principal value vary with market conditions. Your shares
may be worth more or less than their original cost when you sell them.
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 Class C
------- ------- -------
<S> <C> <C> <C>
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price) 4.50%* 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 5.00%** 1.00%***
Maximum sales charge (load) imposed on reinvested
dividends (as a percentage of offering price) None None None
Redemption fee (as a percentage of amount
redeemed) None None None
Exchange fee None None None
Maximum annual account fee (for accounts under
$1,000) $ 12 $ 12 $ 12
</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 on Class B shares reduces to zero
after six years from purchase, and the Class B shares convert to Class A
shares at that time.
*** The contingent deferred sales charge on Class C shares applies only to
redemptions made in the first twelve months after purchase.
46
<PAGE>
SAFECO High-Yield Bond Fund, continued
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<CAPTION>
Class A Class B Class C*
------- ------- --------
<S> <C> <C> <C>
Management Fees** 0.65% 0.65% 0.65%
12b-1 Fees 0.25% 1.00% 1.00%
Other Expenses 0.51% 0.60% 0.60%
Total Annual Fund Operating Expenses 1.41% 2.25% 2.25%
Fee Waiver*** 0.11% 0.20% 0.20%
Net Expenses 1.30% 2.05% 2.05%
</TABLE>
- --------
* Class C shares of the Fund were not offered until May 1, 2000. Annual
operating expenses for Class C shares are estimated using actual expenses
for Class B shares of the Fund during calendar year 1999.
** Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets.
*** Adjusted to reflect the effect of the fee waiver on a calendar year basis,
stated as a percentage of the Fund's average daily net assets. 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 management 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
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 $576 $844 $1,131 $1,947
Class B
Assuming redemption at end of period $708 $943 $1,303 $2,379
Assuming no redemption $208 $643 $1,103 $2,379
Class C
Assuming redemption within 12 months $308 $643 $1,103 $2,379
Assuming no redemption $208 $643 $1,103 $2,379
</TABLE>
- --------
* Expenses for Class B shares reflect their conversion to Class A shares after
six years.
47
<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?
Bond ratings indicate an
issuer's financial strength and
ability to meet its debt
obligations. The advisor may use
rating services provided by
Moody's, S&P, and Fitch.
Investment grade securities are
rated by these services as
follows:
<TABLE>
<CAPTION>
Moody's S&P Fitch
------- --- -----
<S> <C> <C>
Aaa AAA AAA
Aa AA AA
A A A
Baa BBB BBB
</TABLE>
Debt securities 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.
Yield curve is a graphical
depiction of yields of like
securities from the shortest
maturity to the longest
maturity.
Next, the advisor looks at how the security fits into the Fund's overall
investment portfolio:
. Overall, what effects would a purchase of this security have on the
portfolio's yield, and its sensitivity to interest rate changes?
. How would an investment in this security affect the portfolio's yield curve
exposure, the allocation among various market sectors, 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 same sector offers a better value, or to raise
cash to meet shareholder redemptions.
. 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.
48
<PAGE>
SAFECO Managed Bond Fund, continued
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.
Although securities in the top four rating categories are considered
"investment grade," Moody's considers bonds rated "Baa" to have speculative
characteristics. These lower-quality securities may be subject to greater risk
of repayment default, particularly during economic downturns and periods of
rising interest rates. In addition, investment in the Fund carries risks
associated with the following types of securities:
. Mortgage-backed securities. 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 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.
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 average annual returns for the one and
five year periods and since the date of the Fund's inception compare to the
Lehman Brothers Government/ Corporate Index, a widely recognized index of
government and corporate bonds. 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 began offering Class A and Class
B shares. The Fund does not offer Class C 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, which 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.
49
<PAGE>
SAFECO Managed Bond Fund, continued
SAFECO Managed Bond
Fund Chart
<TABLE>
<CAPTION>
Year Percent
Ended Return
- -------- -------
<S> <C>
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%
12/31/99 -4.24%
</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 -3.27% for the
quarter ended March 31, 1996.
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, restated to reflect the imposition of the
maximum sales charge for Class A and the deduction of the maximum deferred
sales charge for Class B shares. Performance shown for the period prior to
September 30, 1996 does not reflect annual Rule 12b-1 fees (.25% for Class A
shares and 1.00% for Class B shares). If Rule 12b-1 fees were reflected, the
returns would be lower than those shown.
Average Annual Total Returns as of December 31, 1999
The following table shows how the average annual returns for the Fund's Class A
and Class B shares compare to the Lehman Brothers Government/Corporate Index:
<TABLE>
<CAPTION>
February 28, 1994
(inception) to
1 year 5 years December 31, 1999
<S> <C> <C> <C>
Managed Bond Fund*
Class A -8.57% 4.55% 3.33%
Class B -9.55% 4.58% 3.50%
- -----------------------------------------------------------------------
Lehman Brothers Gov't/Corp. Index** -2.15% 7.61% 5.96%
</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. If you purchased your Class A shares prior to 1999, or did not
redeem your Class B shares during that year, the Fund's Class A returns
shown without the maximum initial sales charge would have been -4.24%,
5.51%, and 4.15%, for 1, 5 years, and since inception respectively; and the
Fund's Class B returns shown without the maximum deferred sales charge
would have been -4.98%, 4.90% and 3.64%, for 1, 5 years, 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.
50
<PAGE>
SAFECO Managed Bond Fund, continued
Investment returns and principal value vary with market conditions. Your shares
may be worth more or less than their original value when you sell them.
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
Maximum annual account fee (for accounts under $1,000) $ 12 $ 12
</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 on Class B shares reduces to zero
after six years from purchase, and the Class B shares convert to Class A
shares at that time.
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 1.12% 1.11%
Total Annual Fund Operating Expenses 1.87% 2.61%
Fee Waiver* 0.72% 0.71%
Net Expenses 1.15% 1.90%
</TABLE>
- --------
* Adjusted to reflect the effect of the fee waiver on a calendar year basis,
stated as a percentage of the Fund's average daily net assets. 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 management 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.
51
<PAGE>
SAFECO Managed Bond Fund, continued
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 $2,222
Assuming no redemption $193 $597 $1,026 $2,222
</TABLE>
- --------
* Expenses for Class B shares reflect their conversion to Class A shares after
six years.
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.
Bond ratings indicate an
issuer's financial strength and
ability to meet its debt
obligations. The advisor may use
rating services provided by
Moody's, S&P or Fitch.
Investment grade securities are
rated by these services as
follows:
<TABLE>
<CAPTION>
Moody's S&P Fitch
------- --- -----
<S> <C> <C>
Aaa AAA AAA
Aa AA AA
A A A
Baa BBB BBB
</TABLE>
Municipal bonds are issued by
cities, counties, and states and
other government entities to
cover borrowing needs.
The Fund will invest:
. At least 80% of its assets in securities whose interest is exempt from
federal income tax and California personal income tax, and will not invest
in securities whose interest is subject to the alternative minimum tax.
. At least 65% of its assets in investment grade municipal bonds with a
maturity 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, structural features that give the issuer a
right to buy the bond back at a stated price (a "call") or give the Fund a
52
<PAGE>
SAFECO California Tax-Free Income Fund, continued
right to require the issuer to buy the bond back at a stated price (a "put"),
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 off or premium on the stated principal
amount of the bond 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 relative valuations to
be recognized by the municipal securities 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. These lower-quality securities may be subject to greater risk
of repayment default, particularly during economic downturns and periods of
rising interest rates. Money to repay limited obligations and revenue bonds,
which provide financing for a specific project or public facility, may be
limited to the revenues generated by those projects or facilities, or to
special tax revenues. There are greater risks of repayment default for these
securities because repayment may depend on the credit of a private entity, and
the general revenues of the public issuer will not be available for repayment.
Because the Fund concentrates its investments in a single state, there may be
more fluctuation in the value of its securities than is the case for mutual
funds whose portfolios are more geographically diverse. In addition, the Fund
may experience greater volatility than a fund invested in bonds with shorter
average maturities.
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 average annual returns for
the one, five and ten year periods compare to 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 began offering Class A and Class
B shares. The Fund does not offer Class C shares. The performance
53
<PAGE>
SAFECO California Tax-Free Income Fund, continued
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, which 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.
SAFECO California Tax-Free
Income Fund Chart
<TABLE>
<CAPTION>
Year Percent
Ended Return
- -------- -------
<S> <C>
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%
12/31/99 -9.41%
</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.
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, restated to reflect the imposition of the
maximum sales charge for Class A and the deduction of the maximum deferred
sales charge for Class B shares. Performance shown for the period prior to
September 30, 1996 does not reflect annual Rule 12b-1 fees (.25% for Class A
shares and 1.00% for Class B shares). If Rule 12b-1 fees were reflected, the
returns would be lower than those shown.
54
<PAGE>
SAFECO California Tax-Free Income Fund, continued
Average Annual Total Returns as of December 31, 1999
The following table shows how the average annual returns for the Fund's Class A
and Class B shares compare 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 -13.48% 5.66% 5.82%
Class B -14.41% 5.80% 6.05%
- -----------------------------------------------------------------------
Lehman Brothers Long Municipal Bond Index** -6.67% 7.41% 7.19%
</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. If you purchased your Class A shares prior to 1999, or did not
redeem your Class B shares during that year, the Fund's Class A returns
shown without the maximum initial sales charge would have been -9.41%,
6.64%, and 6.31% for 1, 5 and 10 years, respectively; and the Fund's Class
B returns shown without the maximum deferred sales charge would have been
-10.07%, 6.12% and 6.05%, 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.
Investment returns and principal value vary with market conditions. Your shares
may be worth more or less than their original value when you sell them.
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
Maximum annual account fee (for accounts under $1,000) $ 12 $ 12
</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 on Class B shares reduces to zero
after six years from purchase, and the Class B shares convert to Class A
shares at that time.
55
<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 0.31% 0.29%
Total Annual Fund Operating Expenses 1.06% 1.79%
Fee Waiver** 0.00% 0.00%
Net Expenses 1.06% 1.79%
</TABLE>
- --------
* Restated to reflect current expenses stated as a percentage of the Fund's
average daily net assets.
** 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 management 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
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 $553 $772 $1,008 $1,686
Class B
Assuming redemption at end of period $682 $863 $1,170 $2,105
Assuming no redemption $182 $563 $ 970 $2,105
</TABLE>
- --------
* Expenses for Class B shares reflect their conversion to Class A shares after
six years.
56
<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
The Municipal Bond Fund invests primarily in municipal bonds rated investment
grade or better with average maturities of 15-25 years.
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 advisor may use
rating services provided by
Moody's, S&P or Fitch.
Investment grade securities are
rated by these services as
follows:
<TABLE>
<CAPTION>
Moody's S&P Fitch
------- --- -----
<S> <C> <C>
Aaa AAA AAA
Aa AA AA
A A A
Baa BBB BBB
</TABLE>
The Fund will invest:
. At least 80% of its assets in securities whose interest is exempt from
federal income tax, and will not invest in securities whose interest is
subject to the alternative minimum tax.
. At least 65% of its assets in investment grade municipal bonds with a
maturity 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, structural features that give the issuer a
right to buy the bond back at a stated price (a "call") or give the Fund a
right to require the issuer to buy the bond back at a stated price (a "put"),
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 off or premium on the stated principal
amount of the bond 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 securities 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.
57
<PAGE>
SAFECO Municipal Bond Fund, continued
Although securities in the top four rating categories are considered
"investment grade," Moody's considers bonds rated "Baa" to have speculative
characteristics. These lower-quality securities may be subject to greater risk
of repayment default, particularly during economic downturns and periods of
rising interest rates. Money to repay limited obligations and revenue bonds,
which provide financing for a specific project or public facility, may be
limited to the revenues generated by those projects or facilities, or to
special tax revenues. There are greater risks of repayment default for these
securities because repayment may depend on the credit of a private entity, and
the general revenues of the public issuer will not be available for repayment.
In addition, 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.
Performance
The following bar chart and table provide some indication of the risks of
investing in the Municipal Bond Fund by showing the Fund's performance has
varied from year to year and how its average annual returns for the one, five
and ten year periods compare to 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 began offering Class A and Class
B shares. The Fund does not offer Class C 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, which 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.
SAFECO Municipal Bond
Fund Chart
<TABLE>
<CAPTION>
Year Percent
Ended Return
- -------- -------
<S> <C>
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%
12/31/99 -6.47%
</TABLE>
58
<PAGE>
SAFECO Municipal Bond Fund, continued
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, restated to reflect the imposition of the
maximum sales charge on Class A and the deduction of the maximum deferred sales
charge on Class B shares. Performance shown for the period prior to September
30, 1996 does not reflect annual Rule 12b-1 fees (.25% for Class A shares and
1.00% for Class B shares). If Rule 12b-1 fees were reflected, the returns would
be lower than those shown.
Average Annual Total Returns as of December 31, 1999
The following table shows how the average annual returns for the Municipal Bond
Fund's Class A and Class B shares compare 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 -10.68% 5.45% 5.93%
Class B -11.61% 5.66% 6.19%
- -----------------------------------------------------------------------
Lehman Brothers Long Municipal Bond Index** -6.67% 7.41% 7.19%
</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. If you purchased your Class A shares prior to 1999, or did not
redeem your Class B shares during that year, the Fund's Class A returns
shown without the maximum initial sales charge would have been -6.47%,
6.43%, and 6.42% for 1, 5 and 10 years, respectively; and the Fund's Class
B returns shown without the maximum deferred sales charge would have been
-7.14%, 5.97% and 6.19%, 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.
Investment returns and principal value vary with market conditions. Your shares
may be worth more or less than their original value when you sell them.
59
<PAGE>
SAFECO Municipal Bond Fund, continued
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
Maximum annual account fee (for accounts under $1,000) $ 12 $ 12
</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 on Class B shares reduces to zero
after six years from purchase, and the Class B shares convert to Class A
shares at that time.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<CAPTION>
Class A Class B
------- -------
<S> <C> <C>
Management Fees 0.45% 0.45%
12b-1 Fees 0.25% 1.00%
Other Expenses 0.28% 0.25%
Total Annual Fund Operating Expenses 0.98% 1.70%
Fee Waiver* 0.00% 0.00%
Net Expenses 0.98% 1.70%
</TABLE>
- --------
* 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 management 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; 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.
60
<PAGE>
SAFECO Municipal Bond Fund, continued
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 $545 $748 $ 967 $1,597
Class B
Assuming redemption at end of period $673 $836 $1,123 $2,009
Assuming no redemption $173 $536 $ 923 $2,009
</TABLE>
- --------
* Expenses for Class B shares reflect their conversion to Class A shares after
six years.
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 Fund will purchase only securities with remaining maturities
of 397 days or less and will maintain a dollar-weighted average portfolio
maturity of no more than 90 days.
The Fund may invest in:
. Commercial paper of both domestic and foreign issuers
. 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
Commercial paper is a short-term
unsecured promissory note issued
by a financial institution or
large corporation, and may
include 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.
61
<PAGE>
SAFECO Money Market 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
. Corporate obligations such as publicly traded bonds and notes
. Asset-backed securities
. When-issued and delayed delivery securities
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 and delayed delivery
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 to 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.
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.
An investment in the Fund is not a bank deposit, and 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 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 average annual returns for the
one, five and ten year periods. 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 began offering Class A and Class
B shares. The Fund began offering Class C shares effective May 1, 2000. 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.
62
<PAGE>
SAFECO Money Market Fund, continued
SAFECO Money Market
Fund Chart
<TABLE>
<CAPTION>
Year Percent
Ended Return
- -------- -------
<S> <C>
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%
12/31/99 4.64%
</TABLE>
During the 10-year period shown in the chart, the highest quarterly return was
1.96% for the quarter ended March 31, 1990, and the lowest return was 0.59% for
the quarter ended June 30, 1993.
With respect to Class A and Class B shares, which were first offered September
30, 1996, 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. With respect to Class C shares,
which were not offered until May 1, 2000, the performance information in the
table that follows reflects: (1) the performance of 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 and 7-Day Yield as of December 31, 1999
The following table shows average annual returns for the Fund's Class A, Class
B and Class C shares:
<TABLE>
<CAPTION>
7-day Yield
(period ended
1 year 5 years 10 years December 31, 1999)
<S> <C> <C> <C> <C>
Money Market Fund
Class A 4.64% 4.92% 4.75% 5.51%
Class B 4.65% 4.88% 4.73% 5.36%
Class C* 4.65% 4.88% 4.73% 5.36%
</TABLE>
* Class C shares of the Fund were not available until May 1, 2000.
For updated yield information, call 1-800-463-8794.
63
<PAGE>
SAFECO Money Market Fund, continued
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 Class C
------- ------- -------
<S> <C> <C> <C>
Maximum sales charge (load) imposed on purchases (as
a percentage of offering price) None* 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** None***
Maximum sales charge (load) imposed on reinvested
dividends (as a percentage of offering price) None None None
Redemption fee (as a percentage of amount redeemed) None None None
Exchange fee None None None
Maximum annual account fee (for accounts under
$1,000) $ 12 $ 12 $ 12
</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.
*** A 1.00% contingent deferred sales charge may apply if you redeem within
the first twelve months of the initial purchase Money Market Fund shares
that were purchased by exchange from another Fund.
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 Class C*
------- ------- --------
<S> <C> <C> <C>
Management Fees 0.50% 0.50% 0.50%
12b-1 Fees** None None None
Other Expenses 0.50% 0.58% 0.58%
Total Annual Fund Operating Expenses 1.00% 1.08% 1.08%
Fee Waiver*** 0.20% 0.28% 0.28%
Net Expenses 0.80% 0.80% 0.80%
</TABLE>
- --------
* Class C shares of the Fund were not offered until May 1, 2000. Annual
operating expenses for Class C shares are estimated using actual expenses
for Class B shares of the Fund during calendar year 1999.
** The 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 Fund establishes a Rule 12b-1 fee under its Rule 12b-1 Plan.
*** Adjusted to reflect the effect of the fee waiver on a calendar year basis,
stated as a percentage of the Fund's average daily net assets. 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 management 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.
64
<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 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 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
Class C $82 $255 $444 $990
</TABLE>
- --------
* Shares of the Money Market Fund are not currently subject to any 12b-1 fees.
Additional Fund Facts
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. A Fund may exceed percentage limits placed on particular
investments if, after the Fund's investment, market movements cause asset
values to change.
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.
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.
65
<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, 1999:
<TABLE>
<S> <C>
Growth Opportunities 0.60%
Equity 0.56%
Dividend Income 0.67%
Northwest 0.71%
International Stock 1.03%
Balanced 0.71%
Small Company Value 0.78%
U.S. Value 0.71%
Intermediate-Term U.S. Treasury 0.55%
GNMA 0.58%
High-Yield Bond 0.59%
Managed Bond 0.50%
California Tax-Free Income 0.51%
Municipal Bond 0.45%
Money Market 0.50%
</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's
headquarters office is located at 26 Fitzwilliam Place, Dublin, Ireland, and
its U.S. office is located 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), 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, 1999, SAM paid the Sub-Advisor sub-advisory fees of .60% of the
average daily net assets of the International Stock Fund.
Portfolio Managers
Growth Opportunities Fund
The Growth Opportunities 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 managed the Fund since 1995.
66
<PAGE>
Portfolio Managers, continued
Dividend Income Fund
The Dividend Income Fund is managed by Thomas E. Rath, Vice President of SAM.
Mr. Rath has managed the Fund since 1994.
Northwest Fund
The Northwest Fund is managed by Bill Whitlow, Vice President of SAM. Mr.
Whitlow has managed the Fund since 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 co-managed
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.
The debt security portion is managed by Michael Hughes, Assistant Vice
President of SAM. Mr. Hughes has co-managed the Fund since 1997. From 1995 to
1996, he was Vice President and a portfolio manager for First Interstate
Capital Management Company.
Small Company Value Fund
The Small Company Value Fund is managed by Greg Eisen, Assistant Vice President
of SAM. Mr. Eisen has managed the Fund since its inception in 1996. From 1992
to 1996, he served as an investment analyst for SAM.
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 managed 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.
Intermediate-Term U.S. Treasury Fund
The Intermediate-Term U.S. Treasury Fund is managed by Naomi Urata, Vice
President of SAM. Ms. Urata began managing the Fund in 1999. She is a co-
manager of the SAFECO Money Market Fund, and was that Fund's portfolio manager
from 1994 to early 2000.
67
<PAGE>
Portfolio Managers, continued
GNMA Fund
The GNMA Fund is co-managed by Paul Stevenson and Joe Christensen. Mr.
Stevenson has managed the Fund since 1988, and is a Vice President of SAM and
Vice President of SAFECO Life Insurance Company. Mr. Christensen began managing
the Fund in 2000. From October 1997 to May 2000 Mr. Christensen managed a
portfolio of securities for the SAFECO insurance companies. Prior to that time
he was a portfolio manager and Vice President of Wells Fargo/First Interstate
Bank.
High-Yield Bond Fund
The High-Yield Bond Fund is managed by Robert Kern, Assistant Vice President of
SAM. Mr. Kern has managed the Fund since 1996. He has been a securities analyst
for SAM since 1994.
Managed Bond Fund
The Managed Bond Fund is managed by Michael Hughes, Assistant Vice President of
SAM. Mr. Hughes has managed the Fund since 1997. From 1995 to 1996 he was Vice
President and a portfolio manager for First Interstate Capital Management
Company.
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 managed 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 managed the SAFECO Municipal Bond Fund since 1981, and is
the portfolio manager for other SAFECO Funds.
Money Market Fund
The Money Market Fund is co-managed by Naomi Urata, Vice President of SAM, and
Lesley Fox. Ms. Urata has managed the Fund since 1994 and has managed the
SAFECO Intermediate-Term U.S. Treasury Fund since 1999. Ms. Fox began co-
managing the Fund in 2000. From 1994 to 2000 Ms. Fox was a senior investment
officer for King County, Washington.
68
<PAGE>
Financial Highlights
The Financial Highlights tables which follow 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 incorporated by
reference in the Statement of Additional Information which is available upon
request.
SAFECO Growth Opportunities Fund
(For a Class A Share Outstanding
Throughout the Period)
<TABLE>
<CAPTION>
Three-Month
Period Ended
For the Year Ended December 31 December 31
-------------------------------------------
1999 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 22.66 $ 22.39 $ 16.97 $15.45
Income from Investment
Operations
Net Investment Income
(loss) (0.19) (0.05) (0.02) (0.02)
Net Realized and
Unrealized Gain
on Investments 0.74 1.05 8.44 1.77
---------- ---------- --------- ------
Total from Investment
Operations 0.55 1.00 8.42 1.75
Less Distributions
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 $ 23.21 $ 22.66 $ 22.39 $16.97
========== ========== ========= ======
Total Return+ 2.43% 4.47% 49.61% 11.35%*
Dividends from Net
Investment Income -- -- -- --
Net Assets at End of
Period (000's) $ 27,597 $ 33,712 $ 4,076 $ 187
Ratio of Expenses to
Average Net Assets 1.23%++ 1.00% 1.06% 1.12%**
Ratio of Net Investment
Income (loss) to
Average Net Assets (0.80%) (0.40%) (0.33%) (0.58%)**
Portfolio Turnover Rate 38.32% 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.
++ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 1.34% for the year
ended December 31, 1999.
69
<PAGE>
Financial Highlights, continued
SAFECO Growth Opportunities Fund
(For a Class B Share Outstanding
Throughout the Period)
<TABLE>
<CAPTION>
Three-Month
Period Ended
For the Year Ended December 31 December 31
-------------------------------------------
1999 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $22.21 $22.19 $16.94 $15.45
Income from Investment
Operations
Net Investment Income
(Loss) (0.35) (0.15) (0.08) (0.05)
Net Realized and
Unrealized Gain
on Investments 0.71 0.90 8.33 1.77
---------- ---------- --------- ------
Total from Investment
Operations 0.36 0.75 8.25 1.72
Less Distributions
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 $22.57 $22.21 $22.19 $16.94
========== ========== ========= ======
Total Return+ 1.62% 3.38% 48.70% 11.15%*
Dividends from Net
Investment Income -- -- -- --
Net Assets at End of
Period (000's) $ 14,637 $15,569 $1,402 $116
Ratio of Expenses to
Average Net Assets 2.03%++ 1.91% 1.88% 1.87%**
Ratio of Net Investment
Income (Loss) to
Average Net Asset (1.59%) (1.28%) (1.16%) (1.38%)**
Portfolio Turnover Rate 38.32% 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.
++ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 2.24% for the year
ended December 31, 1999.
70
<PAGE>
Financial Highlights, continued
SAFECO Equity Fund
(For a Class A Share Outstanding
Throughout the Period)
<TABLE>
<CAPTION>
Three-Month
Period Ended
For the Year Ended December 31 December 31
--------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value at Beginning
of Period $23.27 $19.55 $16.62 $15.85
Income from Investment
Operations
Net Investment Income 0.11 0.18 0.14 0.04
Net Realized and Unrealized
Gain on Investments 2.02 4.65 3.77 1.35
---------- ---------- --------- ------
Total from Investment
Operations 2.13 4.83 3.91 1.39
Less Distributions
Dividends from Net
Investment Income (0.11) (0.18) (0.14) (0.04)
Distributions from Realized
Gains (1.23) (0.93) (0.84) (0.58)
---------- ---------- --------- ------
Total Distributions (1.34) (1.11) (0.98) (0.62)
---------- ---------- --------- ------
Net Asset Value at End of
Period $24.06 $23.27 $19.55 $16.62
========== ========== ========= ======
Total Return+ 9.13% 24.77% 23.56% 8.78%*
Net Assets at End of Period
(000's) $ 61,625 $50,354 $7,247 $2,894
Ratio of Expenses to Average
Net Assets 1.12% 0.88% 1.24% 0.97%**
Ratio of Net Investment
Income to
Average Net Assets 0.44% 0.89% 0.74% 1.38%**
Portfolio Turnover Rate 33.66% 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.
71
<PAGE>
Financial Highlights, continued
SAFECO Equity Fund
(For a Class B Share Outstanding
Throughout the Period)
<TABLE>
<CAPTION>
Three-Month
Period Ended
For the Year Ended December 31 December 31
---------------------------------------------
1999 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value at Beginning
of Period $ 23.15 $ 19.55 $ 16.60 $15.85
Income from Investment
Operations
Net Investment Income
(Loss) (0.07) (0.03) 0.02 0.02
Net Realized and Unrealized
Gain on Investments 1.98 4.56 3.79 1.33
---------- ---------- --------- ------
Total from Investment
Operations 1.91 4.53 3.81 1.35
Less Distributions
Distributions from Realized
Gains (1.23) (0.93) (0.84) (0.58)
---------- ---------- --------- ------
Total Distributions (1.23) (0.93) (0.86) (0.60)
---------- ---------- --------- ------
Net Asset Value at End of
Period $ 23.83 $ 23.15 $ 19.55 $16.60
========== ========== ========= ======
Total Return+ 8.18% 23.16% 22.93% 8.50%*
Dividends from Net
Investment Income -- -- (0.02) (0.02)
Net Assets at End of Period
(000's) $ 28,260 $ 17,232 $ 3,565 $ 355
Ratio of Expenses to Average
Net Assets 1.95%++ 1.94% 1.81% 1.75%**
Ratio of Net Investment
Income (Loss) to Average
Net Assets (0.41%) (0.21%) 0.12% 0.51%**
Portfolio Turnover Rate 33.66% 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.
++ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 2.05% for the year
ended December 31, 1999.
72
<PAGE>
Financial Highlights, continued
SAFECO Dividend Income Fund
(For a Class A Share Outstanding
Throughout the Period)
<TABLE>
<CAPTION>
Three-Month
Period Ended
For the Year Ended December 31 December 31
-------------------------------------------
1999 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 23.55 $ 24.02 $ 21.15 $20.03
Income from Investment
Operations
Net Investment Income 0.42 0.48 0.51 0.12
Net Realized and
Unrealized Gain (Loss)
on Investments (0.20) 0.81 4.98 1.65
---------- ---------- ---------- ------
Total from Investment
Operations 0.22 1.29 5.49 1.77
Less Distributions
Distributions from
Realized Gains (0.83) (1.28) (2.11) (0.53)
---------- ---------- ---------- ------
Total Distributions (1.25) (1.76) (2.62) (0.65)
---------- ---------- ---------- ------
Net Asset Value at End of
Period $ 22.52 $ 23.55 $ 24.02 $21.15
========== ========== ========== ======
Total Return+ 1.01% 5.38% 26.15% 8.85%*
Dividends from Net
Investment Income (0.42) (0.48) (0.51) (0.12)
Net Assets at End of
Period (000's) $ 2,046 $ 2,073 $ 742 $ 193
Ratio of Expenses to
Average Net Assets 1.31%++ 1.34% 1.14% 1.03%**
Ratio of Net Investment
Income to
Average Net Assets 1.84% 2.16% 2.50% 2.66%**
Portfolio Turnover Rate 42.25% 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.
++ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 1.47% for the year
ended December 31, 1999.
73
<PAGE>
Financial Highlights, continued
SAFECO Dividend Income Fund
(For a Class B Share Outstanding
Throughout the Period)
<TABLE>
<CAPTION>
Three-Month
Period Ended
For the Year Ended December 31 December 31
-------------------------------------------
1999 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 23.57 $ 23.95 $ 21.12 $20.03
Income from Investment
Operations
Net Investment Income 0.25 0.30 0.38 0.10
Net Realized and
Unrealized Gain (Loss)
on Investments (0.21) 0.90 4.94 1.62
---------- ---------- ---------- ------
Total from Investment
Operations 0.04 1.20 5.32 1.72
Less Distributions
Dividends from Net
Investment Income (0.25) (0.30) (0.38) (0.10)
Distributions from
Realized Gains (0.83) (1.28) (2.11) (0.53)
---------- ---------- ---------- ------
Total Distributions (1.08) (1.58) (2.49) (0.63)
---------- ---------- ---------- ------
Net Asset Value at End of
Period $ 22.53 $ 23.57 $ 23.95 $21.12
========== ========== ========== ======
Total Return+ 0.18% 5.03% 25.35% 8.60%*
Net Assets at End of
Period (000's) $ 2,365 $ 2,176 $ 798 $ 112
Ratio of Expenses to
Average Net Assets 2.06%++ 2.08% 1.83% 1.79%**
Ratio of Net Investment
Income to
Average Net Assets 1.09% 1.45% 1.79% 1.99%**
Portfolio Turnover Rate 42.25% 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.
++ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 2.22% for the year
ended December 31, 1999.
74
<PAGE>
Financial Highlights, continued
SAFECO Northwest Fund
(For a Class A Share Outstanding
Throughout the Period)
<TABLE>
<CAPTION>
Three-Month
Period Ended
For the Year Ended December 31 December 31
--------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $17.56 $17.25 $14.06 $13.78
Income from Investment
Operations
Net Investment Income
(Loss) (0.12) (0.16) (0.06) (0.01)
Net Realized and
Unrealized Gain
on Investments 9.58 0.66 4.39 0.29
---------- ---------- ---------- ------
Total from Investment
Operations 9.46 0.50 4.33 0.28
Less Distributions
Distributions from
Realized Gains (2.01) (0.19) (1.14) --
---------- ---------- ---------- ------
Total Distributions (2.01) (0.19) (1.14) --
---------- ---------- ---------- ------
Net Asset Value at End of
Period $25.01 $17.56 $17.25 $14.06
========== ========== ========== ======
Total Return+ 53.90% 2.87% 30.79% 2.03%*
Dividends from Net
Investment Income -- -- -- --
Net Assets at End of
Period (000's) $ 4,774 $2,208 $1,354 $369
Ratio of Expenses to
Average Net Assets 1.36%++ 1.70% 1.42% 1.40%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (0.81%) (1.06%) (0.61%) (0.39%)**
Portfolio Turnover Rate 48.52% 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.
++ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 1.56% for the year
ended December 31, 1999.
75
<PAGE>
Financial Highlights, continued
SAFECO Northwest Fund
(For a Class B Share Outstanding
Throughout the Period)
<TABLE>
<CAPTION>
Three-Month
Period Ended
For the Year Ended December 31 December 31
--------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 17.31 $ 17.09 $ 14.03 $13.78
Income from Investment
Operations
Net Investment Income
(Loss) (0.25) (0.23) (0.10) (0.03)
Net Realized and
Unrealized Gain
on Investments 9.41 0.64 4.30 0.28
---------- ---------- ---------- ------
Total from Investment
Operations 9.16 0.41 4.20 0.25
Less Distributions
Distributions from
Realized Gains (2.01) (0.19) (1.14) --
---------- ---------- ---------- ------
Total Distributions (2.01) (0.19) (1.14) --
---------- ---------- ---------- ------
Net Asset Value at End of
Period $ 24.46 $ 17.31 $ 17.09 $14.03
========== ========== ========== ======
Total Return+ 52.57% 2.37% 29.93% 1.81%*
Dividends from Net
Investment Income -- -- -- --
Net Assets at End of
Period (000's) $ 4,842 $ 2,603 $ 1,204 $ 232
Ratio of Expenses to
Average Net Assets 2.12%++ 2.30% 2.09% 2.18%**
Ratio of Net Investment
Income (Loss) to Average
Net Assets (1.56%) (1.66%) (1.30%) (1.19%)**
Portfolio Turnover Rate 48.52% 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.
++ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 2.32% for the year
ended December 31, 1999.
76
<PAGE>
Financial Highlights, continued
SAFECO International Stock Fund
(For a Class A Share Outstanding
Throughout the Period)
<TABLE>
<CAPTION>
Three-Month
Period Ended
For the Year Ended December 31 December 31
-------------------------------------------
1999 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 13.13 $ 11.55 $ 11.29 $10.39
Income from Investment
Operations
Net Investment Income
(Loss) (0.01) (0.04) 0.20 --
Net Realized and
Unrealized Gain
on Investments and
Foreign Currency
Transactions 3.77 1.62 0.29 0.95
---------- ---------- ---------- ------
Total from Investment
Operations 3.76 1.58 0.49 0.95
Less Distributions
Distributions from
Realized Gains -- -- (0.02) --
---------- ---------- ---------- ------
Total Distributions -- -- (0.23) (0.05)
---------- ---------- ---------- ------
Net Asset Value at End of
Period $ 16.89 $ 13.13 $ 11.55 $11.29
========== ========== ========== ======
Total Return+ 28.64% 13.68% 4.30% 9.19%*
Dividends from Net
Investment Income -- -- (0.21) (0.05)
Net Assets at End of
Period (000's) $ 1,215 $ 629 $ 295 $ 154
Ratio of Expenses to
Average Net Assets++ 1.73% 2.14% 1.87% 1.41%**
Ratio of Net Investment
Income (Loss) to Average
Net Assets (0.06%) (0.47%) 0.26% (0.23%)**
Portfolio Turnover Rate 23.56% 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 2.11%, 2.31%, 2.13% and
1.72% for the year or period ended December 31, 1999, 1998, 1997 and 1996,
respectively.
77
<PAGE>
Financial Highlights, continued
SAFECO International Stock Fund
(For a Class B Share Outstanding
Throughout the Period)
<TABLE>
<CAPTION>
Three-Month
Period Ended
For the Year Ended December 31 December 31
-------------------------------------------
1999 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 12.99 $ 11.53 $ 11.28 $10.39
Income from Investment
Operations
Net Investment Income
(Loss) (0.10) (0.11) 0.18 --
Net Realized and
Unrealized Gain
on Investments and
Foreign Currency
Transactions 3.67 1.57 0.22 0.93
---------- ---------- ---------- ------
Total from Investment
Operations 3.57 1.46 0.40 0.93
Less Distributions
Distributions from
Realized Gains -- -- (0.02) --
---------- ---------- ---------- ------
Total Distributions -- -- (0.15) (0.04)
---------- ---------- ---------- ------
Net Asset Value at End of
Period $ 16.56 $ 12.99 $ 11.53 $11.28
========== ========== ========== ======
Total Return+ 27.48% 12.66% 3.48% 8.96%*
Dividends from Net
Investment Income -- -- (0.13) (0.04)
Net Assets at End of
Period (000's) $ 1,392 $ 777 $ 331 $ 112
Ratio of Expenses to
Average Net Assets++ 2.51% 3.02% 2.64% 2.17%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (0.84%) (1.33%) 0.51% (1.15%)**
Portfolio Turnover Rate 23.56% 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 3.02%, 3.19%, 2.90% and
2.47% for the year or period ended December 31, 1999, 1998, 1997 and 1996,
respectively.
78
<PAGE>
Financial Highlights, continued
SAFECO Balanced Fund
(For a Class A Share Outstanding
Throughout the Period)
<TABLE>
<CAPTION>
Three-Month
Period Ended
For the Year Ended December 31 December 31
-------------------------------------------
1999 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $12.23 $11.60 $10.69 $10.38
Income from Investment
Operations
Net Investment Income 0.22 0.25 0.28 0.09
Net Realized and
Unrealized Gain (Loss)
on Investments (0.13) 1.14 1.45 0.44
--------- --------- ---------- ------
Total from Investment
Operations 0.09 1.39 1.73 0.53
Less Distributions
Distributions from
Realized Gains (0.23) (0.51) (0.54) (0.13)
--------- --------- ---------- ------
Total Distributions (0.45) (0.76) (0.82) (0.22)
--------- --------- ---------- ------
Net Asset Value at End of
Period $11.87 $12.23 $11.60 $10.69
========= ========= ========== ======
Total Return+ 0.75% 12.06% 16.29% 5.07%*
Dividends from Net
Investment Income (0.22) (0.25) (0.28) (0.09)
Net Assets at End of
Period (000's) $2,573 $893 $205 $110
Ratio of Expenses to
Average Net Assets 1.36%++ 1.67% 1.52% 1.35%++**
Ratio of Net Investment
Income to
Average Net Assets 2.16% 2.23% 2.55% 3.01%**
Portfolio Turnover Rate 94.73% 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 1.68% and 1.70% for
the year or period ended December 31, 1999 and 1996, respectively.
79
<PAGE>
Financial Highlights, continued
SAFECO Balanced Fund
(For a Class B Share Outstanding
Throughout The Period)
<TABLE>
<CAPTION>
Three-Month
Period Ended
For the Year Ended December 31 December 31
-------------------------------------------
1999 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 12.24 $ 11.60 $ 10.70 $10.38
Income from Investment
Operations
Net Investment Income 0.18 0.15 0.18 0.06
Net Realized and
Unrealized Gain (Loss)
on Investments (0.18) 1.15 1.44 0.45
--------- --------- ---------- ------
Total from Investment
Operations 0.0 1.30 1.62 0.51
Less Distributions
Distributions from
Realized Gains (0.23) (0.51) (0.54) (0.13)
--------- --------- ---------- ------
Total Distributions (0.41) (0.66) (0.72) (0.19)
--------- --------- ---------- ------
Net Asset Value at End of
Period $ 11.83 $ 12.24 $ 11.60 $10.70
========= ========= ========== ======
Total Return+ (0.01%) 11.30% 15.21% 4.85%*
Dividends from Net
Investment Income (0.18) (0.15) (0.18) (0.06)
Net Assets at End of
Period (000's) $2,553 $2,056 $331 $115
Ratio of Expenses to
Average Net Assets 2.14%++ 2.34% 2.28% 1.52%++**
Ratio of Net Investment
Income to
Average Net Assets 1.43% 1.55% 1.78% 2.23%**
Portfolio Turnover Rate 94.73% 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% for both the
year and period ended December 31, 1999 and 1996, respectively.
80
<PAGE>
Financial Highlights, continued
SAFECO Small Company Value Fund
(For a Class A Share Outstanding
Throughout the Period)
<TABLE>
<CAPTION>
Three-Month
Period Ended
For the Year Ended December 31 December 31
------------------------------------------
1999 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 11.09 $ 14.21 $ 11.81 $11.51
Income from Investment
Operations
Net Investment Income
(Loss) (0.09) (0.08) (0.06) (0.01)
Net Realized and
Unrealized Gain (Loss)
on Investments 1.55 (3.04) 2.80 0.31
---------- ---------- --------- ------
Total from Investment
Operations 1.46 (3.12) 2.74 0.30
Less Distributions
Distributions from
Realized Gains -- -- (0.34) --
---------- ---------- --------- ------
Total Distributions -- -- (0.34) --
---------- ---------- --------- ------
Net Asset Value at End
of Period $ 12.55 $ 11.09 $ 14.21 $11.81
========== ========== ========= ======
Total Return+ 13.17% (21.96%) 23.21% 2.61%*
Dividends from Net
Investment Income -- -- -- --
Net Assets at End of
Period (000's) $1,067 $1,220 $271 $135
Ratio of Expenses to
Average Net Assets 1.47%++ 1.66% 1.52% 1.42%++**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (0.79%) (0.99%) (0.60%) (0.50%)**
Portfolio Turnover Rate 116.58% 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 1.97% and 1.62% for
the year or period ended December 31, 1999 and 1996, respectively.
81
<PAGE>
Financial Highlights, continued
SAFECO Small Company Value Fund
(For a Class B Share Outstanding
Throughout the Period)
<TABLE>
<CAPTION>
Three-Month
Period Ended
For the Year Ended December 31 December 31
-------------------------------------------
1999 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 10.88 $ 14.07 $ 11.79 $11.51
Income from Investment
Operations
Net Investment Income
(Loss) (0.16) (0.15) (0.10) (0.04)
Net Realized and
Unrealized Gain (Loss)
on Investments 1.50 (3.04) 2.72 0.32
---------- ----------- --------- ------
Total from Investment
Operations 1.34 (3.19) 2.62 0.28
Less Distributions
Distributions from
Realized Gains -- -- (0.34) --
---------- ----------- --------- ------
Total Distributions -- -- (0.34) --
---------- ----------- --------- ------
Net Asset Value at End
of Period $ 12.22 $ 10.88 $ 14.07 $11.79
========== =========== ========= ======
Total Return+ 12.32% (22.67%) 22.23% 2.43%*
Dividends from Net
Investment Income -- -- -- --
Net Assets at End of
Period (000's) $1,274 $1,034 $396 $103
Ratio of Expenses to
Average Net Assets 2.21%++ 2.64% 2.29% 2.18%++**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (1.55%) (1.91%) (1.35%) (1.28%)**
Portfolio Turnover Rate 116.58% 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 2.75% and 2.41% for
the year or period ended December 31, 1999 and 1996, respectively.
82
<PAGE>
Financial Highlights, continued
SAFECO U.S. Value Fund
(For a Class A Share Outstanding
Throughout the Period)
<TABLE>
<CAPTION>
April 30, 1997
(Commencement of
Operations)
For the Year Ended December 31 to December 31
---------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 11.93 $ 11.18 $10.00
Income from Investment
Operations
Net Investment Income 0.03 0.05 0.08
Net Realized and
Unrealized Gain
on Investments 0.54 1.27 1.65
--------------- --------------- ------
Total from Investment
Operations 0.57 1.32 1.73
Less Distributions
Dividends from Net
Investment Income (0.06) (0.05) (0.08)
Distributions from
Realized Gains (0.50) (0.52) (0.47)
--------------- --------------- ------
Total Distributions (0.56) (0.57) (0.55)
--------------- --------------- ------
Net Asset Value at End
of Period $ 11.94 $ 11.93 $11.18
=============== =============== ======
Total Return+ 4.74% 11.79% 17.24%*
Net Assets at End of
Period (000's) $331 $210 $133
Ratio of Expenses to
Average Net Assets 1.40%++ 2.07% 1.48%**
Ratio of Net Investment
Income to
Average Net Assets 0.66% 0.18% 1.03%**
Portfolio Turnover Rate 52.15% 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.
++ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 2.02% for the year
ended December 31, 1999.
83
<PAGE>
Financial Highlights, continued
SAFECO U.S. Value Fund
(For a Class B Share Outstanding
Throughout the Period)
<TABLE>
<CAPTION>
April 30, 1997
(Commencement of
Operations)
For the Year Ended December 31 to December 31
---------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 11.91 $ 11.18 $10.00
Income from Investment
Operations
Net Investment Income
(Loss) (0.01) (0.03) 0.02
Net Realized and
Unrealized Gain
on Investments 0.48 1.28 1.65
--------------- --------------- ------
Total from Investment
Operations 0.47 1.25 1.67
Less Distributions
Distributions from
Realized Gains (0.50) (0.52) (0.47)
--------------- --------------- ------
Total Distributions (0.50) (0.52) (0.49)
--------------- --------------- ------
Net Asset Value at End
of Period $ 11.88 $ 11.91 $11.18
=============== =============== ======
Total Return+ 3.92% 11.18% 16.63%*
Dividends from Net
Investment Income -- -- (0.02)
Net Assets at End of
Period (000's) $ 747 $ 628 $ 221
Ratio of Expenses to
Average Net Assets 2.18%++ 2.59% 2.29%**
Ratio of Net Investment
Income (Loss) to
Average Net Assets (0.10%) (0.35%) 0.20%**
Portfolio Turnover Rate 52.15% 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.
++ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 2.73% for the year
ended December 31, 1999.
84
<PAGE>
Financial Highlights, continued
SAFECO Intermediate-Term U.S. Treasury Fund
(For a Class A Share Outstanding
Throughout the Period)
<TABLE>
<CAPTION>
Three-Month
Period Ended
For the Year Ended December 31 December 31
-------------------------------------------
1999 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 10.75 $ 10.35 $ 10.11 $ 10.10
Income from Investment
Operations
Net Investment Income 0.51 0.52 0.55 0.15
Net Realized and
Unrealized Gain (Loss)
on Investments (0.75) 0.40 0.24 0.01
---------- ---------- ---------- -------
Total from Investment
Operations (0.24) 0.92 0.79 0.16
Less Distributions
Dividends from Net
Investment Income (0.51) (0.52) (0.55) (0.15)
---------- ---------- ---------- -------
Net Asset Value at End
of Period $ 10.00 $ 10.75 $ 10.35 $ 10.11
========== ========== ========== =======
Total Return+ (2.26%) 9.08% 8.03% 1.63%*
Net Assets at End of
Period (000's) $ 958 $ 833 $ 365 $ 704
Ratio of Expenses to
Average Net Assets 1.21%++ 1.40% 1.32% 1.07%**++
Ratio of Net Investment
Income to
Average Net Assets 4.97% 4.84% 5.36% 6.07%**
Portfolio Turnover Rate 13.93% 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 would have been 1.49% and 1.30% for
the year or period ended December 31, 1999 and 1996, respectively.
85
<PAGE>
Financial Highlights, continued
SAFECO Intermediate-Term U.S. Treasury Fund
(For a Class B Share Outstanding
Throughout The Period)
<TABLE>
<CAPTION>
Three-Month
Period Ended
For the Year Ended December 31 December 31
-------------------------------------------
1999 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 10.74 $ 10.35 $ 10.12 $ 10.10
Income from Investment
Operations
Net Investment Income 0.43 0.45 0.48 0.14
Net Realized and
Unrealized Gain (Loss)
on Investments (0.75) 0.39 0.23 0.02
---------- ---------- ---------- -------
Total from Investment
Operations (0.32) 0.84 0.71 0.16
Less Distributions
Dividends from Net
Investment Income (0.43) (0.45) (0.48) (0.14)
---------- ---------- ---------- -------
Net Asset Value at End
of Period $ 9.99 $ 10.74 $ 10.35 $ 10.12
========== ========== ========== =======
Total Return+ (2.97%) 8.30% 7.27% 1.55%*
Net Assets at End of
Period (000's) $ 786 $ 788 $ 432 $ 223
Ratio of Expenses to
Average Net Assets 1.96%++ 2.00% 1.87% 1.72%**++
Ratio of Net Investment
Income to
Average Net Assets 4.20% 4.28% 4.78% 5.35%**
Portfolio Turnover Rate 13.93% 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 would have been 2.27% and 1.95% for
the year or period ended December 31, 1999 and 1996, respectively.
86
<PAGE>
Financial Highlights, continued
SAFECO High-Yield Bond Fund
(For a Class A Share Outstanding
Throughout the Period)
<TABLE>
<CAPTION>
Eleven-Month
Period Ended
For the Year Ended December 31 December 31++
---------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 8.78 $ 9.12 $ 8.83
Income from Investment
Operations
Net Investment Income 0.69 0.72 0.69
Net Realized and
Unrealized Gain (Loss)
on Investments (0.40) (0.34) 0.29
--------------- --------------- ------
Total from Investment
Operations 0.29 0.38 0.98
Less Distributions
Dividends from Net
Investment Income (0.69) (0.72) (0.69)
--------------- --------------- ------
Net Asset Value at End of
Period $ 8.38 $ 8.78 $ 9.12
=============== =============== ======
Total Return+ 3.52% 4.32% 12.49%*
Net Assets at End of
Period (000's) $ 1,583 $ 2,964 $ 259
Ratio of Expenses to
Average Net Assets 1.18%+++ 1.12% 1.10%**
Ratio of Net Investment
Income to
Average Net Assets 8.01% 8.11% 7.65%**
Portfolio Turnover Rate 70.65% 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.
+++ Net of reimbursements by advisor. Absent the reimbursements, the
annualized ratio of expenses to average net assets would have been 1.35%
for the year ended December 31, 1999.
87
<PAGE>
Financial Highlights, continued
SAFECO High-Yield Bond Fund
(For a Class B Share Outstanding
Throughout the Period)
<TABLE>
<CAPTION>
Eleven-Month
Period Ended
For the Year Ended December 31 December 31++
---------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 8.78 $ 9.12 $ 8.83
Income from Investment
Operations
Net Investment Income 0.63 0.64 0.63
Net Realized and
Unrealized Gain (Loss)
on Investments (0.40) (0.34) 0.29
--------------- --------------- ------
Total from Investment
Operations 0.23 0.30 0.92
Less Distributions
Dividends from Net
Investment Income (0.63) (0.64) (0.63)
--------------- --------------- ------
Net Asset Value at End of
Period $ 8.38 $ 8.78 $ 9.12
=============== =============== ======
Total Return+ 2.73% 3.39% 11.77%*
Net Assets at End of
Period (000's) $ 1,599 $ 1,381 $ 355
Ratio of Expenses to
Average Net Assets 1.97%+++ 2.06% 1.81%**
Ratio of Net Investment
Income to
Average Net Assets 7.34% 7.15% 6.87%**
Portfolio Turnover Rate 70.65% 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.
+++ Net of reimbursements by advisor. Absent the reimbursements, the
annualized ratio of expenses to average net assets would have been 2.19%
for the year ended December 31, 1999.
88
<PAGE>
Financial Highlights, continued
SAFECO Managed Bond Fund
(For a Class A Share Outstanding
Throughout the Period)
<TABLE>
<CAPTION>
Three-Month
Period Ended
For the Year Ended December 31 December 31
-------------------------------------------
1999 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 8.65 $ 8.60 $ 8.35 $ 8.35
Income from Investment
Operations
Net Investment Income 0.39 0.37 0.39 0.11
Net Realized and
Unrealized Gain (Loss)
on Investments (0.75) 0.30 0.25 --
---------- ---------- ---------- -------
Total from Investment
Operations (0.36) 0.67 0.64 0.11
Less Distributions
Distributions from
Realized Gains -- (0.25) -- --
---------- ---------- ---------- -------
Total Distributions (0.39) (0.62) (0.39) (0.11)
---------- ---------- ---------- -------
Net Asset Value at End of
Period $ 7.90 $ 8.65 $ 8.60 $ 8.35
========== ========== ========== =======
Total Return+ (4.24%) 7.87% 7.78% 1.34%*
Dividends from Net
Investment Income (0.39) (0.37) (0.39) (0.11)
Net Assets at End of
Period (000's) $ 573 $ 295 $ 146 $ 140
Ratio of Expenses to
Average Net Assets 1.21%++ 1.86% 1.45% 1.30%**
Ratio of Net Investment
Income to
Average Net Assets 4.79% 4.09% 4.68% 5.22%**
Portfolio Turnover Rate 146.87% 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.
++ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 1.87% for the year
ended December 31, 1999.
89
<PAGE>
Financial Highlights, continued
SAFECO Managed Bond Fund
(For a Class B Share Outstanding
Throughout the Period)
<TABLE>
<CAPTION>
Three-Month
Period Ended
For the Year Ended December 31 December 31
-------------------------------------------
1999 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 8.64 $ 8.60 $ 8.35 $ 8.35
Income from Investment
Operations
Net Investment Income 0.32 0.28 0.32 0.09
Net Realized and
Unrealized Gain (Loss)
on Investments (0.75) 0.29 0.25 --
---------- ---------- ---------- -------
Total from Investment
Operations (0.43) 0.57 0.57 0.09
Less Distributions
Distributions from
Realized Gains -- (0.25) -- --
---------- ---------- ---------- -------
Total Distributions (0.32) (0.53) (0.32) (0.09)
---------- ---------- ---------- -------
Net Asset Value at End of
Period $ 7.89 $ 8.64 $ 8.60 $ 8.35
========== ========== ========== =======
Total Return+ (4.98%) 6.67% 6.91% 1.15%*
Dividends from Net
Investment Income (0.32) (0.28) (0.32) (0.09)
Net Assets at End of
Period (000's) $ 924 $ 523 $ 120 $ 100
Ratio of Expenses to
Average Net Assets 1.94%++ 2.89% 2.23% 2.07%**
Ratio of Net Investment
Income to
Average Net Assets 4.02% 3.07% 3.79% 4.45%**
Portfolio Turnover Rate 146.87% 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.
++ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 2.61% for the year
ended December 31, 1999.
90
<PAGE>
Financial Highlights, continued
SAFECO California Tax-Free Income Fund
(For a Class A Share Outstanding
Throughout the Period)
<TABLE>
<CAPTION>
Three-Month
Period Ended
For the Year Ended December 31 December 31
------------------------------------------
1999 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 12.74 $ 12.94 $ 12.23 $12.07
Income from Investment
Operations
Net Investment Income 0.52 0.55 0.58 0.15
Net Realized and
Unrealized Gain (Loss)
on Investments (1.69) 0.17 0.76 0.19
---------- ---------- ---------- ------
Total from Investment
Operations (1.17) 0.72 1.34 0.34
Less Distributions
Dividends from Net
Investment Income (0.52) (0.55) (0.58) (0.15)
Distributions from
Realized Gains -- (0.37) (0.05) (0.03)
---------- ---------- ---------- ------
Total Distributions (0.52) (0.92) (0.63) (0.18)
---------- ---------- ---------- ------
Net Asset Value at End of
Period $ 11.05 $ 12.74 $ 12.94 $12.23
========== ========== ========== ======
Total Return+ (9.41%) 5.73% 11.29% 2.83%*
Net Assets at End of
Period (000's) $ 740 $ 678 $ 460 $ 122
Ratio of Expenses to
Average Net Assets 1.07% 1.04% 0.91% 0.89%**
Ratio of Net Investment
Income to
Average Net Assets 4.36% 4.25% 4.52% 4.84%**
Portfolio Turnover Rate 24.66% 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.
91
<PAGE>
Financial Highlights, continued
SAFECO California Tax-Free Income Fund
(For a Class B Share Outstanding
Throughout the Period)
<TABLE>
<CAPTION>
Three-Month
Period Ended
For the Year Ended December 31 December 31
--------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value at Beginning
of Period $ 12.73 $ 12.93 $ 12.22 $12.07
Income from Investment
Operations
Net Investment Income 0.43 0.46 0.48 0.12
Net Realized and Unrealized
Gain (Loss) on Investments (1.69) 0.17 0.76 0.18
---------- ---------- --------- ------
Total from Investment
Operations (1.26) 0.63 1.24 0.30
Less Distributions
Dividends from Net
Investment Income (0.43) (0.46) (0.48) (0.12)
Distributions from Realized
Gains -- (0.37) (0.05) (0.03)
---------- ---------- --------- ------
Total Distributions (0.43) (0.83) (0.53) (0.15)
---------- ---------- --------- ------
Net Asset Value at End of
Period $ 11.04 $ 12.73 $ 12.93 $12.22
========== ========== ========= ======
Total Return+ (10.07%) 4.98% 10.46% 2.56%*
Net Assets at End of Period
(000's) $799 $927 $501 $101
Ratio of Expenses to Average
Net Assets 1.80% 1.76% 1.63% 1.64%**
Ratio of Net Investment
Income to
Average Net Assets 3.63% 3.45% 3.71% 4.08%**
Portfolio Turnover Rate 24.66% 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.
92
<PAGE>
Financial Highlights, continued
SAFECO Municipal Bond Fund
(For a Class A Share Outstanding
Throughout the Period)
<TABLE>
<CAPTION>
Three-Month
Period Ended
For the Year Ended December 31 December 31
------------------------------------------
1999 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 14.45 $ 14.53 $ 13.99 $13.82
Income from Investment
Operations
Net Investment Income 0.64 0.66 0.68 0.18
Net Realized and
Unrealized Gain (Loss)
on Investments (1.55) 0.16 0.70 0.17
---------- ---------- ---------- ------
Total from Investment
Operations (0.91) 0.82 1.38 0.35
Less Distributions
Dividends from Net
Investment Income (0.64) (0.66) (0.68) (0.18)
Distributions from
Realized Gains -- (0.24) (0.16) --
---------- ---------- ---------- ------
Total Distributions (0.64) (0.90) (0.84) (0.18)
---------- ---------- ---------- ------
Net Asset Value at End of
Period $ 12.90 $ 14.45 $ 14.53 $13.99
========== ========== ========== ======
Total Return+ (6.47%) 5.75% 10.17% 2.52%*
Net Assets at End of
Period (000's) $929 $946 $390 $311
Ratio of Expenses to
Average Net Assets 0.98% 0.98% 0.95% 0.82%**
Ratio of Net Investment
Income to
Average Net Assets 4.66% 4.51% 4.86% 5.04%**
Portfolio Turnover Rate 16.84% 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.
93
<PAGE>
Financial Highlights, continued
SAFECO Municipal Bond Fund
(For a Class B Share Outstanding
Throughout the Period)
<TABLE>
<CAPTION>
Three-Month
Period Ended
For the Year Ended December 31 December 31
---------------------------------------------
1999 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value at Beginning
of Period $14.43 $14.52 $13.98 $13.82
Income from Investment Oper-
ations
Net Investment Income 0.54 0.57 0.60 0.15
Net Realized and Unrealized
Gain (Loss)
on Investments (1.55) 0.15 0.70 0.16
---------- ---------- ---------- ------
Total from Investment
Operations (1.01) 0.72 1.30 0.31
Less Distributions
Dividends from Net
Investment Income (0.54) (0.57) (0.60) (0.15)
Distributions from Realized
Gains -- (0.24) (0.16) --
---------- ---------- ---------- ------
Total Distributions (0.54) (0.81) (0.76) (0.15)
---------- ---------- ---------- ------
Net Asset Value at End of
Period $12.88 $14.43 $14.52 $13.98
========== ========== ========== ======
Total Return+ (7.14%) 5.08% 9.56% 2.27%*
Net Assets at End of Period
(000's) $1,322 $1,375 $502 $112
Ratio of Expenses to Average
Net Assets 1.70% 1.61% 1.53% 1.50%**
Ratio of Net Investment
Income to
Average Net Assets 3.94% 3.89% 4.22% 4.42%**
Portfolio Turnover Rate 16.84% 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.
94
<PAGE>
Financial Highlights, continued
SAFECO Money Market Fund
(For a Class A Share Outstanding
Throughout the Period)
<TABLE>
<CAPTION>
Three-Month
Period Ended
For the Year Ended December 31 December 31
--------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value at Beginning
of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from Investment
Operations
Net Investment Income 0.05 0.05 0.05 0.01
Less Distributions
Dividends from Net
Investment Income (0.05) (0.05) (0.05) (0.01)
---------- ---------- --------- ------
Net Asset Value at End of
Period $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========= ======
Total Return 4.64% 4.92% 4.97% 1.21%*
Net Assets at End of Period
(000's) $3,554 $2,186 $537 $295
Ratio of Expenses to Average
Net Assets 0.80%+ 0.92% 0.72% 0.55%**
Ratio of Net Investment
Income to
Average Net Assets 4.60% 4.87% 4.91% 5.01%**
</TABLE>
* Not annualized.
** Annualized.
+ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 1.0% for the year
ended December 31, 1999.
95
<PAGE>
Financial Highlights, continued
SAFECO Money Market Fund
(For a Class B Share Outstanding
Throughout The Period)
<TABLE>
<CAPTION>
Three-Month
Period Ended
For the Year Ended December 31 December 31
--------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 1.00 $ 1.00 $ 1.00 $1.00
Income from Investment
Operations
Net Investment Income 0.05 0.05 0.05 0.01
Less Distributions
Dividends from Net
Investment Income (0.05) (0.05) (0.05) (0.01)
---------- ---------- ---------- -----
Net Asset Value at End of
Period $ 1.00 $ 1.00 $ 1.00 $1.00
========== ========== ========== =====
Total Return 4.65% 4.76% 4.94% 1.21%*
Net Assets at End of Period
(000's) $ 979 $ 670 $ 414 $ 106
Ratio of Expenses to
Average Net Assets 0.82%+ 1.05% 0.78% 0.54%**
Ratio of Net Investment
Income to
Average Net Assets 4.56% 4.71% 4.85% 4.96%**
</TABLE>
* Not annualized.
** Annualized.
+ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 1.08% for the year
ended December 31, 1999.
96
<PAGE>
Fund Distributions and Tax Considerations
When The Funds Pay Distributions
The Equity, Dividend Income, Balanced and U.S. Value Funds declare and pay
dividends, if any, during the last month of each calendar quarter. The Growth
Opportunities, Northwest, International Stock and Small Company Value Funds
declare and pay dividends, if any, in December. The Intermediate-Term U.S.
Treasury, GNMA, High-Yield Bond, Managed Bond, California Tax-Free Income,
Municipal Bond and Money Market Funds declare dividends, if any, 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 in any of the Bond Funds or the Money Market Fund 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, in December.
Dividends are distributions of a
Fund's net investment income --
including dividends earned on
stocks and interest income
earned on bonds -- less
expenses.
Capital gain distributions
represent net profits made on
portfolio securities that are
sold for more than they
originally cost.
Dividends and other distributions paid by a Fund on each Class of its shares
are calculated at the same time in the same manner. However, except for the
Money Market Fund, because of the higher Rule 12b-1 service and distribution
fees associated with Class B and Class C shares, the dividends paid by a Fund
on its Class B and Class C shares will be lower than those paid on its Class A
shares.
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 unless the account owner is over
age 59 1/2.
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 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.
Currently, 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.
97
<PAGE>
Fund Distributions and Tax Considerations, continued
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 even 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 may realize a capital 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 may not be deductible and may increase the basis
of the newly purchased shares.
In addition, distributions from tax deferred 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
specified rate.
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, while the GNMA Fund
may occasionally invest a portion of its portfolio in these securities.
98
<PAGE>
Fund Distributions and Tax Considerations, continued
Tax-Exempt Bond Funds. The California Tax-Free Income Fund and the Municipal
Bond Fund each pay 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. These bonds are typically purchased in carrying
out the Tax-Exempt Bond Funds' call protection strategy.
If you buy shares of the California Tax-Free Income Fund or the Municipal 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.
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.
99
<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.
The NYSE is closed on 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.
You may purchase or redeem shares through various third-party intermediaries,
including banks, brokers and investment advisors. Where authorized by the Fund
or its transfer agent, those orders will be priced at the NAV next computed
after receipt by the intermediary. If you buy or redeem Fund shares through an
intermediary, consult that firm to determine whether your purchase or
redemption order will be priced upon its receipt of the order, or at the time
the order is received by the Fund. The intermediary may charge a fee for its
services.
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.
How We Value a Fund's Investments
We obtain market value information for each Fund's investments from pricing
services. Values 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. Values for non-exchange traded securities are
based on similar securities and quotations from dealers. Investments for which
a market price cannot be established are priced using a method the Funds'
Boards of Trustees believe 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 Class B and Class C 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 and Class C shares. The NAVs of the three Classes
of shares of the Stock Funds also may differ due to differing allocations of
class-specific expenses. The NAVs of the three Classes will tend to converge,
however, immediately after the payment of dividends.
100
<PAGE>
Opening and Maintaining Your Account
To open an account
. Class A, B and C shares are sold through brokers, registered investment
advisors, banks and other financial institutions which have entered into
selling agreements with the Funds' distributor. To open an account, consult
your financial advisor. A sales representative will help you complete an
account application and/or make your initial investment with the SAFECO
Mutual Funds.
. If you are investing for 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 should understand before you buy, sell or exchange
shares.
. When placing purchase orders, you should specify whether the order is for
Class A, Class B or Class C shares of a Fund, otherwise your purchase order
will automatically be invested in Class A shares.
. Unless your financial advisor maintains your account and holds your Fund
shares in its "street name" in an omnibus account with the SAFECO Mutual
Funds, we must have received a completed, signed account application and
your investment funds before we can conduct any transaction (except when
money is wired into an account).
. We do not accept currency, credit card convenience checks or money orders,
and can accept only checks or wires 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.
. You will be charged a $12 service fee for every check or Electronic Funds
Transfer returned unpaid.
. 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. This physical delivery requirement may delay
your redemption or exchange of shares, because you will not be able to
request a share redemption or exchange over the telephone.
. SAFECO Services charges a $20 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 (e.g., death
certificates and court orders) and a signature guarantee before we can
process certain transactions and requests. Signature guarantees are required
for all written redemption requests of $250,000 or more. Signature
guarantees help ensure that you have in fact authorized a transaction or
change to your account. You can obtain a signature guarantee for a nominal
fee form most banks, brokerage firms and other financial institutions. A
notary stamp or seal cannot substitute for a signature guarantee.
. If you buy shares by any means other than by wire and shortly thereafter
sell 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, Class B and Class C shares, each Fund offers No-Load
Class shares that are sold in a separate prospectus and subject to different
fees and expenses. The Funds' separate share classes have different
expenses; as a result their investment performances will vary.
101
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Opening and Maintaining Your Account, continued
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 the broker, investment advisor or financial
institution where your account is maintained, or to SAFECO Mutual Funds if your
account is held directly with us. 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 offer 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.
Individual Retirement Accounts (IRAs). Currently, individuals can generally
contribute up to $2,000 to an IRA for each year. An annual custodial fee of $5
per Fund, up to a maximum of $10, may be charged for any part of a calendar
year in which you have an IRA investment in a Fund. The custodial fee is waived
for retirement accounts with balances over $10,000. Minimum investment amounts
are $1,000 for a Traditional IRA or a Roth IRA, and $500 for an Education IRA.
. Traditional IRA. Depending on your income and other considerations,
your contribution to a Traditional IRA may be partially or fully tax
deductible. You pay no tax on your IRA account earnings until
withdrawal.
. Roth IRA. Although contributions to a Roth IRA are not tax deductible,
earnings on your Roth IRA account are tax-free at withdrawal, if you
meet certain requirements.
. Education IRA. An Education IRA is a vehicle for saving for a child's
higher education. No more than $500 can be contributed for any year to
an Education IRA for the same beneficiary. Contributions to an
Education IRA are not tax deductible, but earnings on the IRA account
are tax-free and withdrawals are not taxable if used to pay qualified
educational expenses. Education IRA accounts are not charged the
custodial fee described above.
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 $25,500 (for the year 2000) 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 certain tax-exempt
organizations and school systems to which both employers and employees may
contribute. Minimum investment amounts are negotiable.
102
<PAGE>
Opening and Maintaining Your Account, continued
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. An annual custodial fee of
$10 per Fund may be charged for any part of a calendar year in which such a
retirement account is invested in the Fund.
For information about the above accounts and plans, please contact your
investment professional, or call 1-800-528-6501.
Choosing a Class of Shares
This prospectus offers three classes of Fund shares (Class A, Class B and Class
C shares) of the Growth Opportunities Fund, Equity Fund, Dividend Income Fund,
Northwest Fund, International Stock Fund, High-Yield Bond Fund and Money Market
Fund; and offers two classes of Fund shares (Class A shares and Class B shares)
of the Balanced Fund, Small Company Value Fund, U.S. Value Fund, Intermediate-
Term U.S. Treasury Fund, GNMA Fund, Managed Bond Fund, California Tax-Free
Income Fund and Municipal Bond Fund. 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 Class A 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 and Class C 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.
103
<PAGE>
Choosing a Class of Shares, continued
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>
- --------
* Intermediate-Term U.S. Treasury Fund, GNMA Fund, High-Yield Bond Fund,
Managed Bond Fund, Municipal Bond Fund and California Tax-Free Income Fund.
** 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.
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>
- --------
* Growth Opportunities Fund, Equity Fund, Dividend Income Fund, Northwest
Fund, International Stock Fund, Balanced Fund, Small Company Value Fund and
U.S. Value Fund.
** 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.
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.
104
<PAGE>
Choosing a Class of Shares, continued
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%. We calculate the CDSC by multiplying the lesser of the net
asset value of the Class B shares at the time of purchase or the net asset
value at the time of sale by the percentage shown in the chart below. The
longer you hold the shares, the lower the rate of the charge. Shares you
acquire through dividend reinvestment or other distributions are not subject to
a CDSC at the time of sale. Class B shares of a Fund, except the Money Market
Fund, are also subject to an annual Rule 12b-1 fee of 1.00% of its average
daily net assets. This Rule 12b-1 fee is the same as the Rule 12b-1 fee for
Class C shares, and 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 may be waived as described on pages 109-
110. 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 you are invested in Money Market Fund
Class B shares, if you effect 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,
because the ongoing Rule 12b-1 fees for Class A shares are lower than those for
Class B shares.
105
<PAGE>
Choosing a Class of Shares, continued
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.
Class C Shares. Class C shares are offered for sale only for purchases of less
than $1,000,000. You may purchase Class C shares of any of the Growth
Opportunities, Equity, Dividend Income, Northwest, International Stock, High-
Yield Bond or Money Market Funds 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 Class C shares within 12 months of your
purchase, you will pay a 1.00% contingent deferred sales charge (CDSC) at the
time of sale.
We calculate the CDSC by multiplying 1.00% by the lesser of the net asset value
of the Class C shares at the time of purchase or the net asset value at the
time of sale. Shares you acquire through dividend reinvestment or other
distributions are not subject to a CDSC at the time of sale.
Class C shares of a Fund, except the Money Market Fund, are also subject to an
annual Rule 12b-1 fee of 1.00% of its average daily net assets. This Rule 12b-1
fee is higher than the ongoing Rule 12b-1 fee for Class A shares.
Class C shares do not convert to another class of shares. This means that you
will pay the Rule 12b-1 fee for as long as you own your shares.
Class C shares of the Money Market Fund are sold at net asset value, are not
subject to a CDSC (except for shares of the Money Market Fund that were
purchased by exchange from another Fund), and do not currently pay any
Rule 12b-1 fees.
The contingent deferred sales charge may be waived as described on pages 109-
110. Any period of time you held Class C 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.
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.
106
<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>
Amount of Purchase Broker Reallowance as 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, GNMA Fund, High-Yield Bond Fund,
Managed Bond Fund, Municipal Bond Fund, and California Tax-Free Income Fund.
+ 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.
Stock Funds**
<TABLE>
<CAPTION>
Amount of Purchase Broker Reallowance as 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 Opportunities Fund, Equity Fund, Dividend Income Fund, Northwest
Fund, International Stock Fund, Balanced Fund, Small Company Value Fund and
U.S. Value Fund.
+ 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.
Except as stated below, broker-dealers of record may be paid commissions on (i)
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.
107
<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%
50-199 $1 million or more 1.00% up to $3 million
.50% of the next $47 million
.25% thereafter
200 or more no minimum 1.00% up to $3 million
.50% of the next $47 million
.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 and Class C
shares. If you think you may be eligible for a sales charge reduction or
waiver, 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;
3. Any of the direct or indirect affiliates of SAFECO Securities;
108
<PAGE>
Sales Charge Reductions and Waivers, continued
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 charges for Class B and Class C
shares are 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 that are described in Internal
Revenue Code ("Code") Section 72(t), and required minimum
distributions after age 70, 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;
109
<PAGE>
Sales Charge Reductions and Waivers, continued
(e) reinvestment in Class B or Class C shares of a Fund, as applicable,
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. In addition, SAFECO Securities may, at its expense, pay
additional commissions or promotional incentives to dealers that sell shares of
the Funds. Such additional commissions or incentives may be offered only to
dealers which satisfy certain sales volume/growth criteria, or which meet other
criteria SAFECO Securities establishes from time to time.
Purchasing Your Shares
The price you pay for shares of a Fund is its net asset value, or "NAV" on the
day we receive your check, wire or telephone purchase instruction in good
order. Certain brokers and other third party intermediaries are authorized to
accept purchase orders on the Funds' behalf. We and our authorized
intermediaries reserve the right not to accept customer orders that are
incomplete or otherwise not in good order, and the intermediaries reserve the
right to accept certain institutional customer orders conditioned on the
understanding that the orders may later by rejected if they cannot be
transmitted to us or processed in a timely manner. If we receive your
investment after the New York Stock Exchange 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.
110
<PAGE>
Purchasing Your Shares, continued
By Mail
If you are opening an account and buying shares for the first time:
1. Your financial advisor can help you open an investment account and
complete any necessary application.
2. Minimum initial investment amounts are:
. If you are opening an IRA or UGMA/UTMA account, the minimum investment
amount per Fund is $1,000 ($500 for an Education IRA).
. If you set up an Automatic Investment Method or Payroll Deduction Plan,
the minimum investment amount per Fund is $1,000.*
. If neither of the above applies, the minimum investment amount per Fund
is $2,500.
If you are buying additional shares:
Your securities dealer or other financial advisor can assist you with
subsequent investments. If your securities dealer or advisor maintains an
account for you and holds your Fund shares in its "street name," you must
contact your investment representative there to purchase additional shares
of the SAFECO Mutual Funds.
1. 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.
2. For additional purchases, the minimum investment amount per Fund is
$100. For more information call 1-(800) 528-6501.
3. The Funds may charge you a $12 service fee if your check is returned to
us by your bank due to non-sufficient funds or other reasons.
4. Enclose the investment slip from your account statement, if available.
- --------------------------------------------------------------------------------
Our mailing address is:
SAFECO Mutual Funds
c/o NFDS
P.O. Box 219241
Kansas City, MO 64121-9241
For overnight delivery:
SAFECO Mutual Funds
c/o NFDS
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.
111
<PAGE>
Purchasing Your Shares, continued
By Wire
If you are buying shares for the first time:
1. Your financial advisor can help you open an investment account and
complete any necessary application.
2. Minimum investments are:
. If you are opening an IRA or UGMA/UTMA account, the minimum investment
amount per Fund is $1,000 ($500 for an Education IRA).
. If you set up an Automatic Investment Method or Payroll Deduction Plan,
the minimum investment amount per Fund is $1,000.*
. If neither of the above applies, the minimum investment is $2,500.
3. Call 1-(800) 528-6501 for more information about wiring investment
proceeds for a new account.
If you are buying additional shares:
Your securities dealer or other financial advisor can assist you with
subsequent investments in the SAFECO Mutual Funds. If your securities dealer
or advisor maintains an account for you and holds your Fund shares in its
"street name," you must contact your investment representative there to
purchase additional shares of the SAFECO Mutual Funds.
1. The minimum investment amount per Fund is $100.
2. Call 1-(800) 528-6501 to let us know money is being wired to the
account.
3. Our wire address is:
Investors Fiduciary Trust Company
Kansas City, MO
ABA #101003621 DDA #7560923
For further credit to: Account owner name, Fund # and Account #
Wire instructions should include the following information:
. SAFECO Fund name
. Specify Class A, B or C 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.
* 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.
112
<PAGE>
Purchasing Your Shares, continued
By Phone
This option is not available for new or retirement accounts.
If you are buying additional shares:
1. 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.
2. If your account is held directly with the SAFECO Mutual Funds, to be
eligible to invest by phone, you must choose this service on your
initial account application, or send a written request to us at least 15
days prior to your use. You must also designate any other authorized
users.
3. You may purchase no more than $50,000 per day and no less than $100 in
share value per day if you are investing by phone.
4. Understand that:
. Money will be transferred from your bank account to your SAFECO Mutual
Funds account to fund your investment.
. Your bank may not allow you to transfer money by phone, or may charge a
fee for transfers.
. 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. So long as
we follow reasonable security procedures, 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 $12 service 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
113
<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.
. The Funds' transfer agent may pay securities dealers and other financial
intermediaries a servicing fee for providing certain administrative
services to retirement plan and other institutional omnibus accounts, and
the Funds' advisor may pay a portion of such fees from the advisor's own
resources.
- --------------------------------------------------------------------------------
Call or visit:
Any registered securities dealer, bank or other financial institution that
has a signed selling agreement 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.
The price you receive is the NAV on the day we receive your redemption request
(subject to any applicable CDSC). 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. Certain brokers and other third-party intermediaries are
authorized to accept redemption orders on the Funds' behalf.
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 prior 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.
114
<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.
4. A signature guarantee may be required for certain transactions. (See
"OPENING AND MAINTAINING YOUR ACCOUNT --Investing Details" above.)
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 $20 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 your shares through that
firm.
If you own the shares directly:
SAFECO Mutual Funds
c/o NFDS
P.O. Box 219241
Kansas City, MO 64121-9241
For overnight delivery:
SAFECO Mutual Funds
c/o NFDS
330 W. 9th Street
Kansas City, MO 64105
115
<PAGE>
Selling Your Shares, continued
By Phone
This option is not available for shares issued in certificate form, and is
not available for IRA accounts unless you are age 59 1/2 or older.
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. So long as
we follow reasonable security procedures, 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 $20 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
to speak to a SAFECO representative or
1-(800) 463-8794 for our 24-hour Automated Service Line (not available for
IRA accounts)
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.
116
<PAGE>
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. Class C shares may be exchanged only for Class C shares of the
other Funds listed on the first page of this prospectus that offer Class C
shares. The exchange of Class B shares or Class C 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 or Class C shares (as the
case may be) of the Money Market Fund, the length of time of ownership of such
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
redemption of shares 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.
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.
. You may enter no more than four exchanges or simultaneous order transactions
per calendar year. However, we reserve the right to refuse exchanges or
simultaneous order transactions 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. These limitations will not affect your ability to
redeem your shares from any of the Funds, but may prevent you from
purchasing the shares of another Fund with your redemption proceeds.
. You may buy shares of a SAFECO Fund by exchange only if it is qualified for
sale in the state where you live.
117
<PAGE>
Exchanging Shares from One Fund to Another, continued
How to Make an Exchange
By Mail
1. 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 direct your exchange request to
your securities dealer or other investment professional for assistance
2. If you own the shares directly write:
SAFECO Mutual Funds
c/o NFDS
P.O. Box 219241
Kansas City, MO 64121-9241
For overnight delivery:
SAFECO Mutual Funds
c/o NFDS
330 W. 9th Street
Kansas City, MO 64105
3. Your letter should specify:
. 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)
4. 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.
118
<PAGE>
Exchanging Shares from One Fund to Another, continued
By Phone
This option is not available for shares issued in certificate form.
1. 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 exchange shares.
2. If your account is held directly with the SAFECO Mutual Funds, to be
eligible to conduct phone exchanges and other transactions, you must
choose this service on your initial account application, or send a
written request to us at least 15 days prior to your use. You must also
designate any other authorized users.
3. You must exchange $1,000 or more in share value in any single
transaction.
4. 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. So long as
we follow reasonable security procedures, 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.
Our telephone number is:
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
119
<PAGE>
Exchanging Shares from One Fund to Another, continued
Through Your Registered Securities Dealer
Call or visit:
The registered securities dealer through whom you purchased the shares.
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.
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. Redemption checks are not available for IRA
accounts.
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
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,
other than investment made using our Automatic Investment Method. 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 and servicing 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. In
addition, accounts with balances under $1,000 in a Fund will be charged a $12
"small account" fee. The small account fee will automatically be deducted from
your account. The
120
<PAGE>
Maintaining Your Account, continued
valuation of accounts and the fee deduction are expected to take place during
the last five business days of December. We will waive the fee if combined
SAFECO Mutual Fund balances for the same shareholder tax ID number exceed
$10,000.
We will reinvest into your account any dividends and other distribution checks
that are returned to us as "undeliverable" and 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, call (800) 624-5711 to request a
change of registration form. Make sure the form is signed by the authorized
owner(s) specified on your account application. We may require certified copies
of supporting documents (e.g., death certificates and court orders) and a
signature guarantee before we can process the request.
To make changes to your Automatic Investment Method or Systematic Withdrawal
Plan:
Send your request in writing to SAFECO Mutual Funds, c/o NFDS, P.O. Box 219241
Kansas City, MO 64121-9241. 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.
121
<PAGE>
SAFECO Family of Funds
Stability of Principal
SAFECO 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 Municipal Bond Fund
SAFECO California Tax-Free Income Fund
High Current Income with Long-Term Growth
SAFECO Dividend Income Fund
Long-Term Growth
SAFECO Growth Opportunities Fund
SAFECO Equity Fund
SAFECO Northwest Fund
SAFECO International Stock Fund
SAFECO Balanced Fund
SAFECO Small Company Value Fund
SAFECO U.S. Value Fund
122
<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 copies of these documents or for other information about the Funds,
contact the investment professional at your broker-dealer, bank or other
financial institution, or
Write to: SAFECO Mutual Funds
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
E-Mail: [email protected]
Or contact the SEC [note: the SEC may charge a fee to copy documents]:
Write to: SEC Public Reference Section
Washington, DC 20549-0102
E-Mail: [email protected]
Visit the SEC web site: http://www.sec.gov
Visit the SEC: Public Reference Room
450 Fifth Street, N.W.
Washington, DC 20549-6009
Information on the operation of the SEC's Public Reference Room is available
by calling the SEC at 1-202-942-8090
SEC 1940 Act File Numbers 811-6167
811-5574
811-7300
811-3347
811-6667
123
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
NO-LOAD CLASS
SAFECO COMMON STOCK TRUST: SAFECO TAXABLE BOND TRUST:
SAFECO GROWTH OPPORTUNITIES FUND SAFECO INTERMEDIATE-TERM
SAFECO EQUITY FUND U.S. TREASURY FUND
SAFECO DIVIDEND 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 VALUE FUND SAFECO MANAGED BOND FUND
SAFECO U. S. VALUE FUND
SAFECO TAX-EXEMPT BOND TRUST: SAFECO MONEY MARKET TRUST:
SAFECO INTERMEDIATE-TERM MUNICPAL SAFECO MONEY MARKET FUND
BOND FUND SAFECO TAX-FREE MONEY MARKET
SAFECO INSURED MUNICIPAL BOND FUND FUND
SAFECO MUNICIPAL BOND FUND
SAFECO CALIFORNIA TAX-FREE INCOME
FUND
This Statement of Additional Information ("SAI") is not a prospectus itself. It
should be read in conjunction with the No-Load Prospectus dated May 1, 2000 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
800-438-8718 TDD/TTY Service
800-624-5711
The date of the most current Prospectus to which this SAI relates is May 1,
2000.
The date of this SAI is May 1, 2000.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION...................................................................... 1
CHARACTERISTICS OF THE TRUSTS' SHARES.................................................... 1
OVERVIEW OF INVESTMENT POLICIES.......................................................... 2
I. Fundamental Investment Policies..................................................... 2
II. Non-Fundamental Investment Policies ................................................ 4
ADDITIONAL INVESTMENT INFORMATION........................................................ 7
SPECIAL INVESTMENT RISKS................................................................. 41
BELOW INVESTMENT GRADE BONDS........................................................ 41
FOREIGN SECURITIES.................................................................. 42
CURRENCY EXCHANGE RATES............................................................. 43
HEDGING TRANSACTIONS................................................................ 43
GEOGRAPHIC AND ISSUER SIZE LIMITATIONS.............................................. 44
LENDING OF PORTFOLIO SECURITIES.......................................................... 49
REDEMPTION IN KIND....................................................................... 49
INFORMATION ON CALCULATION OF NET ASSET
VALUE PER SHARE..................................................................... 50
PERFORMANCE INFORMATION.................................................................. 51
INFORMATION ON DIVIDENDS FOR THE
MONEY MARKET FUND................................................................... 65
MANAGEMENT OF THE FUNDS.................................................................. 65
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS OF
CERTAIN FUNDS....................................................................... 70
INVESTMENT ADVISORY AND OTHER SERVICES................................................... 75
BROKERAGE PRACTICES...................................................................... 87
TAX INFORMATION.......................................................................... 88
RETIREMENT PLANS......................................................................... 95
FINANCIAL STATEMENTS..................................................................... 97
DESCRIPTION OF RATINGS................................................................... 98
</TABLE>
<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"), the 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 series funds:
The SAFECO Growth Opportunities Fund ("Growth Opportunities Fund"), formerly
known as the SAFECO Growth Fund, SAFECO Equity Fund ("Equity Fund"), SAFECO
Dividend Income Fund ("Dividend Income Fund"), formerly known as the SAFECO
Income Fund, SAFECO Northwest Fund ("Northwest Fund"), SAFECO International
Stock Fund ("International Fund"), SAFECO Balanced Fund ("Balanced Fund"),
SAFECO Small Company Value Fund ("Small Company Fund"), formerly known as the
SAFECO Small Company Stock Fund, and SAFECO U.S. Value Fund ("U.S. Value Fund").
The Taxable Bond Trust offers its shares through three diversified series 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 diversified series
fund: The SAFECO Managed Bond Fund ("Managed Bond Fund").
The Tax-Exempt Bond Trust offers its shares through four diversified series
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"), and
the SAFECO California Tax-Free Income Fund ("California Tax-Free Income Fund")
(collectively, the "Tax-Exempt Bond Funds").
The Money Market Trust offers its shares through two diversified series 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").
Characteristics of the Trusts' Shares
Three of the Funds offer only No-Load Class Shares. They are: 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.
Restrictions on Retaining or Disposing of Shares
There are no restrictions on the right of shareholders to retain or dispose of
the Trusts' shares, except in the event that a Trust or any of its Funds is
terminated in the future as a result of reorganization or liquidation and
distribution of assets.
Shareholder Obligations and Liabilities
Under Delaware law, the shareholders of the Trusts will not be personally liable
for the obligations of a Trust or any Fund of the Trust. A shareholder is
entitled to the same limitation of personal liability extended to shareholders
of corporations. To guard against the risk that Delaware law might not be
applied in other states, the Trust Instrument for each Trust requires that every
written obligation of the Trust or a Fund of the Trust contain a statement that
such obligation may only be enforced against the assets of the Trust or the Fund
of the Trust and generally provides for indemnification out of the Trust's or
the Fund's property of any shareholder nevertheless held personally liable for
the Trust's or a Fund's obligations, respectively.
Dividend Rights
Shareholders of a Fund are entitled to receive any dividends or other
distributions declared for that Fund. With respect to distributions, no shares
have priority or preference over any other shares of the same Fund.
Distributions will be made from the assets of a Fund, and will be paid ratably
to all shareholders of the Fund according to the number of shares of such Fund
held by shareholders on the record date.
Voting Rights
Shareholders are entitled to vote on any matter that (i) concerns an amendment
to the Trust Instrument of any of the Trusts that would affect the voting rights
of shareholders, (ii) requires a shareholder vote under the Investment Company
Act of 1940 (the "1940 Act") or any other applicable law, (iii) is submitted to
them by the Trustees in their discretion. The 1940 Act requires a shareholder
vote in certain circumstances, including to elect Trustees if the number of
Trustees that have been elected by shareholders falls below a majority, to make
a material change to a Trust's investment advisory agreement, and to change any
fundamental policy of a Trust. On any matter submitted to a vote of
shareholders, all shares of the Funds of the Trust then issued and outstanding
and entitled to vote shall be voted in the aggregate and not by Fund except for
matters concerning only a Fund. The holders of each share of a Fund of a Trust
shall be entitled to one vote for each full share and a fractional vote for each
fractional share. Shares of one Fund of any of the Trusts may not bear the same
economic relationship to the Trust as shares of another Fund of the same Trust.
Voting rights are non-cumulative and cannot be modified without a majority vote
of shareholders.
Liquidation Rights
In the event of liquidation, shareholders will be entitled to receive a pro rata
share of the net assets of the applicable Fund of the applicable Trust.
Preemptive Rights
Shareholders have no preemptive rights.
Conversion Rights
Shareholders have no conversion rights.
Redemption Provisions
The provisions for redemption by shareholders are set forth in the current
prospectuses relating to the applicable Fund and share class and elsewhere in
this Statement.
Sinking Fund Provisions
The Trusts have no sinking fund provisions.
Calls or Assessments
The shares are fully paid and non-assessable.
1
<PAGE>
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 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 the 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 investment policies can be changed only 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 fundamental investment policies listed below apply to all of the 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. 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.
2
<PAGE>
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 Funds:
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 only to the Money Market Fund:
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.
3
<PAGE>
The fundamental policy below applies only to the Tax-Free Money Market Fund:
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, Municipal Bond Fund, California Tax-Free
Income Fund and Tax-Free Money Market Fund:
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
-----------------------------------
In addition to the policies described in the Funds' Prospectuses. The following
six non-fundamental policies have been adopted by all Funds covered by this SAI
except as noted.
1. Foreign Currency: [All Funds except International Fund] The Fund will not
----------------
buy or sell foreign currency, except as necessary to convert the proceeds
of the sale of foreign portfolio securities into U.S. dollars.
2. Foreign Securities: [All Funds except International Fund] The Fund may
------------------
invest up to 20% of its total assets in foreign securities which are listed
on a national exchange, including investments in American Depository
Receipts.
3. Temporary Investments: 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 restrictions
on the Fund's investment in illiquid securities), and other short-term
investments.
4. Illiquid Securities: If immediately after and as a result of such action
-------------------
the value of the following securities, in the aggregate, would exceed 15%
of the Fund's net assets [10% in the case of the Money Market Funds], the
Fund will not (i) purchase securities for which there is no readily
available market, (ii) purchase time deposits maturing in more than seven
days, (iii) purchase over-the-counter ("OTC") options or hold assets set
aside to cover OTC options written by the Fund, (iv) enter into repurchase
agreements maturing in more than seven days, or (v) invest in interests in
real estate investment trusts which are not readily marketable or interests
in real estate limited partnerships which are not listed or traded on the
NASDAQ Stock Market.
4
<PAGE>
5. Purchasing Securities on Margin: The Fund will not purchase securities on
-------------------------------
margin. However, the Fund may (i) obtain short-term credits as necessary to
clear its purchases and sales of securities, and (ii) 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.
6. Leverage: The Fund may borrow money (i) from banks, (ii) from SAFECO
--------
Corporation or its affiliated companies, or (iii) by engaging in reverse
repurchase agreements. The Fund will not purchase securities while
borrowings equal to 5% or more of its total assets are outstanding,
although the Fund may complete purchase transactions to which it committed
prior to reaching the 5% threshold.
In addition to the common non-fundamental policies described above, the
following non-fundamental policies apply to each of the Funds of the named Trust
except as noted:
SAFECO Common Stock Trust
Real Estate Investment Trusts: The Fund may invest up to 10% of its total
- -----------------------------
assets in shares of real estate investment trusts.
Convertible Securities: [Growth Opportunities Fund, Equity Fund, Northwest Fund,
- ----------------------
Small Company Fund and U.S. Value Fund only] The Fund may invest in securities
convertible into common stock, but less than 35% of its total assets will be
invested in such securities.
SAFECO Managed Bond Trust
Temporary Defensive Measures: The Fund may hold cash as a temporary defensive
- ----------------------------
measure when market conditions so warrant.
When-Issued Securities: The Fund may purchase "when-issued" or "delayed-
- ----------------------
delivery" securities, and may purchase or sell securities on a "forward
commitment" basis.
SAFECO Taxable Bond Trust
Temporary Defensive Measures: The Fund may hold cash as a temporary defensive
- ----------------------------
measure when market conditions so warrant.
When-Issued Securities: The Fund may purchase "when-issued" or "delayed-
- ----------------------
delivery" securities, and may purchase or sell securities on a "forward
commitment" basis.
SAFECO Tax-Exempt Bond Trust
Temporary Defensive Measures: The Fund may hold cash as a temporary defensive
- ----------------------------
measure when market conditions so warrant.
5
<PAGE>
When-Issued Securities: The Fund may purchase "when-issued" or "delayed-
- ----------------------
delivery" securities, and may purchase or sell securities on a "forward
commitment" basis.
Municipal Project Concentration: The Fund will limit its investment in municipal
- -------------------------------
obligations the interest on which is payable from the revenues of similar types
of projects to less than 25% of the Fund's total assets. 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 and water pollution control projects.
Short-Term Tax-Exempt Obligations: The 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 a
nationally recognized statistical rating organization ("NRSRO"); unrated
municipal notes offered by issuers having outstanding municipal bonds rated
within one of the three highest grades assigned by an NRSRO; 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 an NRSRO;
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.
U.S. Government Obligations: The 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.
Municipal Notes: The Fund may invest in municipal notes, including tax
- ---------------
anticipation, revenue anticipation and bond anticipation notes and tax-exempt
commercial paper.
Single State Concentration: [All Tax-Exempt Bond Funds except the California
- --------------------------
Tax-Free Income Fund] The Fund will limit its investment in securities whose
issuers are located in the same state to less than 25% of the Fund's total
assets.
SAFECO Money Market Trust
Temporary Defensive Measures: The Fund may hold cash as a temporary defensive
- ----------------------------
measure when market conditions so warrant.
When-Issued Securities: The Fund may purchase "when-issued" or "delayed-
- ----------------------
delivery" securities, and may purchase or sell securities on a "forward
commitment" basis.
Municipal Project Concentration: The Fund will limit its investment in municipal
- -------------------------------
obligations the interest on which is payable from the revenues of similar types
of projects to less than 25% of the Fund's total assets. 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 and water pollution control projects.
6
<PAGE>
Single State Concentration: The Fund will limit its investment in securities
- --------------------------
whose issuers are located in the same state to less than 25% of the Fund's total
assets.
Short-Term Tax-Exempt Obligations: [Tax-Free Money Market Fund ONLY] The 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 a nationally recognized statistical rating
organization ("NRSRO"); unrated municipal notes offered by issuers having
outstanding municipal bonds rated within one of the three highest grades
assigned by an NRSRO; 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 an NRSRO; 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.
Single Issuer Concentration: The Fund may invest up to 25% of its total assets
- ---------------------------
in the "first tier securities" 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.
ADDITIONAL INVESTMENT INFORMATION
- ---------------------------------
STOCK FUNDS
The Growth Opportunities Fund, Equity Fund, Dividend Income Fund, Northwest
Fund, Balanced Fund, International Fund, Small Company Fund, and U.S. Value Fund
(the "Stock Funds") 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 Fitch) 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.
7
<PAGE>
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-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 Opportunities Fund and the Dividend
Income Fund may 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-
8
<PAGE>
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 Funds 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
9
<PAGE>
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 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. (SEE "SPECIAL
INVESTMENT RISKS - Foreign Securities" below, for additional information.)
Each of the Funds other than the International Fund may invest up to 20% of
its total assets in foreign securities. The International Fund 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 it is 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
<PAGE>
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 they have
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 Opportunities 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 stated 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.
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.
11
<PAGE>
13. 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. 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.
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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. 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.
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. See also "Options on
equity securities" and "Options on stock indices" below.
19. Options on Equity Securities. The Funds may purchase put options on equity
securities and 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
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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
Funds' use of options on equity securities are described below.
The Funds do not intend to invest more than 5% of their net assets at any
one time in the purchase of call options on stocks.
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.
20. Put Options: The Funds
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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 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 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 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
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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 Funds may purchase put options and may
purchase and sell 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 Funds 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 a 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 a Fund writes a call option on an industry or market segment index,
the Fund will segregate or put into escrow with its custodian or pledge to
a broker as collateral for the option, cash, Treasury bills or other liquid
high-grade short-term debt obligations, or at least five qualified
securities, all of which are stocks of issuers in such industry or market
segment, with a market value at the time the option is written of not less
than 100% of the current index value times the multiplier times the number
of contracts. Such stocks will include stocks that represent at least 50%
of the weighting of the industry or market segment index and will represent
at least 50% of the portfolio's holdings in that industry or market
segment. No individual security will represent more than 15% of the amount
so segregated, pledged or escrowed in the case of broadly based stock
market stock options or 25% of such amount in the case of industry or
market segment index options.
If at the close of business on any day the market value of such qualified
securities so segregated, escrowed, or pledged falls below 100% of the
current index value times the multiplier times the number of contracts, the
Fund will so segregate, escrow, or pledge an amount in cash, Treasury
bills, or other liquid high-grade short-term obligations equal in
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<PAGE>
value to the difference. In addition, when a Fund writes a call on an index
that is in-the-money at the time the call is written, the Fund will
segregate with its custodian or pledge to the broker as collateral, cash or
U.S. Government or other liquid high-grade short-term debt obligations
equal in value to the amount by which the call is in-the-money times the
multiplier times the number of contracts. Any amount segregated pursuant to
the foregoing sentence may be applied to the Fund's obligation to segregate
additional amounts in the event that the market value of the qualified
securities falls below 100% of the current index value times the multiplier
times the number of contracts. A call option is also covered, and the Fund
need not follow the segregation requirements set forth in this paragraph if
the Fund holds a call on the same index as the call written, where the
strike price of the call held is equal to or less than the strike price of
the call written, or greater than the strike price of the call written if
the difference is maintained by the Fund in cash, Treasury bills or other
liquid high-grade short-term obligations in a segregated account with its
custodian.
The 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
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<PAGE>
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 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 a 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 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 a 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
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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 Fund's Sub-Advisor, interest rates are
likely to decline significantly, because under those circumstances the
premium received by writing the call likely would not fully offset the
foregone appreciation in the value of the underlying security.
The Fund may also write straddles (i.e., a combination of a call and a put
written on the same security at the same strike price where the same issue
of the security is considered "cover" for both the put and the call). In
such cases, the Fund will also segregate or deposit for the benefit of the
Fund's broker cash or liquid high-grade debt obligations equivalent to the
amount, if any, by which the put is in-the-money. The Fund's use of
straddles will be limited to 5% of its net assets (meaning that the
securities used for cover or segregated as described above will not exceed
5% of the Fund's net assets at the time the straddle is written). The
writing of a call and a put on the same security at the same strike price
where the call and the put are covered by different securities is not
considered a straddle for purposes of this limit.
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
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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 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 Fund's 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.
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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. The Funds 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."
A Fund may sell stock index futures to hedge against a decline in the value
of equity securities it holds. A 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 Funds 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 Funds' equity securities.
A Fund's successful use of stock index futures contracts depends upon the
Advisor or 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
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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 Funds 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 CFTC
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
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<PAGE>
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-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. The Funds 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 Funds intend to utilize
options on futures contracts for the same purposes that they intend 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, a 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 Funds 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
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the Fund would exceed 20% of its net assets. In addition, a 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 the Fund's 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.
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
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a daily basis so that the value of the account will equal the amount of the
Fund's commitments with respect to such contracts.
The Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign
currency or it may retain the security and terminate its contractual
obligation to deliver the foreign currency by purchasing an "offsetting"
contract with the same currency trader obligating it to purchase, on the
same maturity date, the same amount of the foreign currency. However,
there is no assurance that liquid markets will exist for any particular
forward contract at any particular time or that the Fund will be able to
effect a closing or "offsetting" transaction. Forward contracts are
subject to other risks described in "Special Risks of Foreign Investments
and Foreign Currency Transactions."
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract.
Accordingly, it may be necessary for the Fund to purchase additional
foreign currency on the spot market (and bear the expense of such purchase)
if the market value of the security is less than the amount of foreign
currency that the Fund is obligated to deliver and if a decision is made to
sell the security and make delivery of the foreign currency.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to
the extent that there has been movement in forward contract prices. Should
forward contract prices decline during the period between the Fund's
entering into a forward contract for the sale of a foreign currency and the
date it enters into an offsetting contract for the purchase of the foreign
currency, the Fund will realize a gain to the extent that the price of the
currency it has agreed to sell exceeds the price of the currency it has
agreed to purchase. Should forward contract prices increase, the Fund will
suffer a loss to the extent that the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
The Fund's dealing in forward contracts will be limited to the transactions
described above. Of course, the Fund is not required to enter into such
transactions with regard to its foreign currency-denominated securities. It
also should be realized that this method of protecting the value of the
portfolio securities against a decline in the value of a 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
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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.
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 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 the
Government National Mortgage Association ("GNMA"); (b) securities that are
not supported by the full faith and credit of the U.S. government but are
supported by the issuer's ability to borrow from the U.S. Treasury, such as
securities issued by the Federal National Mortgage Association ("FNMA"),
the Federal Home Loan Bank ("FHLB") 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"),
Standard & Poor's Ratings Services, a division of The McGraw Hill
Companies, Inc. ("S&P") or Fitch IBCA, Inc. ("Fitch"), or,
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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
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. 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. See the description of such securities under
"Additional Investment Information--Stock Funds."
8. 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."
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<PAGE>
9. Mortgage-Backed Securities. The mortgage-backed securities in which the
Funds may 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 include "modified
pass-through" securities or collateralized mortgage obligations ("CMOs").
Modified pass-through securities "pass through" to their holders the
scheduled monthly interest and principal payments relating to mortgage
loans in the pool. CMOs are securities collateralized by a portfolio of
mortgage loans or mortgage-backed securities. CMOs are issued with a number
of classes or series which have different maturities and which may
represent interests in some or all of the interest or principal of the
underlying collateral or a combination thereof. The Funds may purchase CMOs
that are 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
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may be more volatile than that of a fixed rate obligation. Such interest
rate formulas may be combined with other CMO characteristics.
10. Other Collateralized Mortgage Obligations. Obligations issued by the U.S.
government or one of its agencies or instrumentalities (such as FNMA or
FHLMC) or by private issuers which are collateralized by securities issued
by the U.S. government or one of its agencies or instrumentalities (such as
FNMA or FHLMC). CMOs are securities collateralized by a portfolio of
mortgages or mortgage-backed securities. The issuer's obligation to make
interest and principal payments on the CMO is secured by the underlying
portfolio of mortgages or mortgage-backed securities. CMOs are issued with
a number of classes or series that have different maturities and that may
represent interests in some or all of the interest or principal of the
underlying collateral or a combination thereof.
11. Asset-Backed Securities. 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.
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Credit card receivable securities are backed by receivables from revolving
credit card accounts. Certificates issued by credit card receivable trusts
generally are pass-through securities. Competitive and general economic
factors and an accelerated cardholder payment rate can adversely affect the
rate at which new receivables are credited to an account, potentially
shortening the expected weighted average life of the credit card receivable
security and reducing its yield. Credit card accounts are unsecured
obligations of the cardholder.
12. Zero Coupon Bonds. 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.
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.
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, Moody's or Fitch, 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'
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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 greater extent than higher-quality
securities which primarily react to fluctuations in interest rates.
Economic downturns or increases in interest rates can significantly affect
the market for high-yield, 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 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. Payment-in Kind (High-Yield Fund Only). The High-Yield Fund may hold
"payment-in-kind" fixed-income securities. 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. Payment-
in-kind securities are generally subject to greater price
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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 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.
18. Municipal Securities (High-Yield and Managed Bond Funds 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, S&P or Fitch 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.
19. 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, Moody's and Fitch 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
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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.
INTERMEDIATE-TERM MUNICIPAL BOND FUND, INSURED MUNICIPAL BOND FUND, MUNICIPAL
BOND FUND, AND CALIFORNIA TAX-FREE INCOME 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
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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 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
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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 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 ("COP") 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
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they provide a better combination of yield and liquidity than a direct
investment in short-term, tax-exempt securities.
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.
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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.
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. Other Floating and Variable Rate Securities. Securities collateralized by a
portfolio of municipal bonds which are divided into classes. The Fund will
purchase only classes of such securities which provide for floating rates
and which can be put back to a liquidity provider (generally at par) on a
fixed date.
4. Restricted Securities and Rule 144A Securities. The Money Market Fund may
invest 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.
5. 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
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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. A 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.
6. 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.
7. Illiquid Securities. See the description of such securities under
"Additional Investment Information -- Stock Funds.
8. 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.
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9. When-Issued or Delayed-Delivery Securities. See the description of such
securities under "Additional Investment Information -- Stock Funds."
10. 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."
11. 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."
12. 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"), the Federal Home Loan Bank
("FHLB") 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").
13. 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.
14. 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.
15. 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
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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 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.
16. 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.
17. 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 INVESTMENT RISKS
- ------------------------
BELOW INVESTMENT GRADE BONDS:
The Dividend Income, Small Company and High-Yield Funds may invest in, and the
other Funds as a result of downgrades may own, below investment grade bonds.
Below investment grade bonds are speculative and involve greater investment
risks than investment grade bonds due to the issuer's reduced creditworthiness
and increased likelihood of default and bankruptcy. During periods of economic
uncertainty or change, the market prices of below investment grade bonds may
experience increased volatility. Below investment grade bonds tend to reflect
short-term economic and corporate developments to a greater extent than higher
quality bonds.
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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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 (International Fund):
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 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:
Hedging transactions cannot eliminate all risks of loss to the Funds and may
prevent a Fund from realizing some potential gains. The projection of short-
term foreign currency (International Fund) and foreign 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
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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 Funds to hedge investment risk and not for speculation. In
addition, the Boards of Trustees have adopted the following percentage
restrictions on the use of options, futures contracts and options on futures
contracts:
(i) A 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) A 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) A 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.
GEOGRAPHICAL AND ISSUER SIZE LIMITATIONS:
Northwest Fund. 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. 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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Small Company Fund. 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.
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 California Tax-Free Income Fund ("California Fund") plans to invest at least
80% of its net assets in bonds issued by California and its political
subdivisions, the investment risk of such concentration should be carefully
considered. The description below summarizes discussions contained in official
statements relating to various types of bonds issued by the State of California
and its political subdivisions. A more detailed description can be found in
such official statements. The California Fund has not independently verified
any of the information presented in this section.
The State of California. California's economy and the State's financial
condition improved markedly during the fiscal years starting in 1995-96,
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 previous four recession years was finally
eliminated. Moody's Investors Service, Standard & Poor's and Fitch IBCA,
Inc. currently rate the State's general obligation bonds Aa3, AA-minus and
AA-minus, respectively.
The May 1999 Revision to the 1999-00 Governor's Budget reported that
stronger than expected economic conditions in the State for the latter part
of 1998 and into 1999 would produce total 1998-99 General Fund revenues of
about $57.9 billion, almost $1.0 billion above the 1998 Budget estimates.
The final 1999-00 Budget projects General Fund revenues and transfers of
$63.0 billion and proposes General Fund expenditures of $63.7 billion.
California generates about 70 percent of its revenues from a state personal
income tax and a sales tax, and spends more than half of all revenues on
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.
45
<PAGE>
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, 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
46
<PAGE>
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. Two subsequent
appellate decisions reached conflicting answers to these questions and a
number of appeals in other cases remain pending. Until the California
Supreme Court speaks, these issues are likely to remain unresolved.
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
47
<PAGE>
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 the 1998 decision in 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
has 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
provided for an immediate rate reduction for small users; created an
independent power exchange to administer a wholesale power pool; created 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
48
<PAGE>
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.
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 thereafter embarked on a three-year fiscal recovery plan,
based on sharp reductions in services and personnel, ongoing debt reduction
and a long-term pay-as-you-go capital improvement plan. As a result, in
September 1999 Moody's Investors Service assigned the County an issuer
credit rating of Aa3 and restored the ratings on its pension debt to the
level enjoyed before the bankruptcy filing. In January of this year,
Standard & Poor's upgraded the County's pension debt to A-minus from BB and
for the first time assigned an A rating to the County's overall credit.
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.
LENDING OF PORTFOLIO SECURITIES
- -------------------------------
The Funds may lend securities to qualified institutional investors, typically
broker-dealers, banks or other financial institutions, who need to borrow
securities in order to complete certain transactions, such as covering short
sales, avoiding failures to deliver securities or completing arbitrage
operations. Securities lending allows a Fund to retain ownership of the
securities loaned and, at the same time, earn additional income. Any gain or
loss in the market price of the loaned securities that might occur during the
term of the loan will be for the account of the Fund. Securities will be loaned
only to parties that SAM deems creditworthy and in good standing, and the terms
and the structure of such loans will be consistent with the 1940 Act and the
rules and regulations or interpretations of the SEC thereunder. Among other
things, these provisions limit the amount of securities a Fund may lend to
33-1/3rd of the Fund's total assets, and require (i) that the borrower provide
the Fund with collateral in the form of cash, an irrevocable letter of credit or
securities issued or guaranteed by the U.S. government having a value at least
equal to the value of the securities loaned, (ii) that the borrower add to such
collateral whenever the price of the loaned securities rises, (iii) that the
loan must be subject to termination by the Fund at any time, and (iv) that the
Fund must receive reasonable interest on the loan (which may include the Fund's
investing any cash collateral in interest-bearing short-term investments).
Investing cash collateral subjects the collateral investment, as well as the
loaned securities, to market appreciation or depreciation. If the borrower
defaults on its obligation to return the securities loaned because of insolvency
or other reasons, a Fund could experience delays and costs in recovering the
loaned securities or foreclosing on the collateral. If a Fund is not able to
recover the loaned securities, it may sell the collateral and purchase a
replacement investment in the market.
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
49
<PAGE>
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.
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.
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 are determined by their fair market value until the 61st day
prior to maturity. All other securities and assets in the portfolio are
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 that are traded on national securities exchanges are valued at their
last sale price as of the close of option trading on such exchange. Futures
contracts will be marked to market daily, and options thereon are valued at
their last sale price, as of the close of the applicable commodities exchange.
50
<PAGE>
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 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 Opportunities Fund,
Equity Fund, Dividend 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, 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,
51
<PAGE>
respectively. Effective May 1, 2000, the GNMA Fund commenced offering Advisor
Class A and Advisor Class B shares, and the Growth Opportunities Fund, Equity
Fund, Dividend Income Fund, Northwest Fund, International Fund, High-Yield Fund
and Money Market Fund commenced offering Advisor Class C shares.
Performance Information and Quoted Ratings are Indicative Only of Past
Performance and are Not Intended to Represent Future Investment Results.
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, 1999 were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Growth Opportunities Fund 2.64% 148.98% 301.23%
Equity Fund 9.37% 165.75% 388.71%
Dividend Income Fund 1.17% 119.80% 200.02%
Intermediate-Term U.S. -1.98% 36.35% 88.84%
Treasury Fund
GNMA Fund 0.16% 40.03% 91.14%
High-Yield Fund 3.74% 56.03% 143.28%
</TABLE>
52
<PAGE>
<TABLE>
<S> <C> <C> <C>
Municipal Bond Fund -6.18% 38.42% 88.83%
California Tax-Free Income -9.18% 39.14% 86.02%
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,
1999 were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years Since Initial Public Offering
----- ------- -----------------------------
<S> <C> <C> <C>
Northwest Fund 54.25% 189.37% 282.26% (106 months)*
Intermediate-Term -0.84% 34.21% 35.78% (81 months)**
Municipal Bond Fund
Insured Municipal -7.99% 37.59% 32.66% (81 months)**
Bond Fund
Managed Bond Fund -3.82% 32.48% 28.50% (70 months)***
</TABLE>
* Inception of Fund February 7, 1991
** Inception of Fund March 18, 1993
*** Inception of Fund February 28, 1994
For the following Funds, the total returns, expressed as a percentage, for the
one-year and since initial public offering periods ended December 31, 1999 were
as follows:
53
<PAGE>
<TABLE>
<CAPTION>
1 Year Since Initial Public Offering
------ -----------------------------
<S> <C> <C>
Balanced Fund 1.05% 47.79% (47 months)****
International 29.00% 76.03% (47 months)****
Fund
Small Company Fund 14.07% 37.97% (47 months)****
U.S. Value Fund 5.15% 39.12% (32 months)*****
</TABLE>
**** Inception of Fund January 31, 1996.
***** Inception of Fund April 30, 1997.
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, 1999 were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Growth Opportunities Fund $10,264 $214,898 $40,123
Equity Fund $10,937 $ 26,575 $48,871
</TABLE>
54
<PAGE>
<TABLE>
<S> <C> <C> <C>
Dividend Income Fund $10,117 $ 21,980 $30,002
Intermediate-Term $ 9,802 $ 13,635 $18,884
U.S. Treasury Fund
GNMA Fund $10,016 $ 14,003 $19,114
High-Yield Fund $10,374 $ 15,603 $24,328
Municipal Bond Fund $ 9,382 $ 13,842 $18,883
California Tax-Free $ 9,082 $ 13,914 $18,602
Income Fund
</TABLE>
For the following Funds, the total returns, expressed in dollars and assuming a
$10,000 initial investment, for the one-year, five-year, and since initial
public offering periods ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years Since Initial Public Offering
------ ------- -----------------------------
<S> <C> <C> <C>
Northwest Fund $15,422 $28,937 $38,220 (106 months)*
Intermediate- $ 9,618 $13,248 $22,850 (81 months)**
Term Municipal
Bond Fund
Insured $ 9,201 $13,759 $13,266 (81 months)**
Municipal Bond
Fund
Managed Bond Fund $ 9,618 $13,248 $12,850 (70 months)***
</TABLE>
* Inception of Fund February 7, 1991
** Inception of Fund March 18, 1993
*** Inception of Fund February 28, 1994
55
<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, 1999 were as follows:
<TABLE>
<CAPTION>
1 Year Since Initial Public Offering
------ -----------------------------
<S> <C> <C>
Balanced Fund $10,105 $14,775 (47 months) ****
International Fund $12,900 $17,603 (47 months) ****
Small Company Fund $11,407 $13,797 (47 months) ****
U.S. Value Fund $10,515 $13,912 (32 months) *****
</TABLE>
**** Inception of Fund January 31, 1996.
***** Inception of Fund April 30, 1997.
For the following Funds, the average annual total returns for the one-, five-and
ten-year periods ended December 31, 1999 were as follows:
56
<PAGE>
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Growth Opportunities Fund 2.64% 20.01% 14.91%
Equity Fund 9.37% 21.59% 17.19%
Dividend Income Fund 1.17% 17.06% 11.61%
Intermediate-Term U.S. -1.98% 6.40% 6.56%
Treasury Fund
GNMA Fund 0.16% 6.97% 6.69%
High-Yield Bond Fund 3.74% 9.30% 9.30%
Municipal Bond Fund -6.18% 6.72% 6.56%
California Tax-Free Income -9.18% 6.83% 6.40%
Fund
</TABLE>
57
<PAGE>
For the following Funds, the average annual total returns for the one-year,
five-year, and since initial public offering periods ended December 31, 1999
were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years Since Initial Public Offering
------ ------- -----------------------------
<S> <C> <C> <C>
Northwest Fund 54.25% 23.68% 16.27 (106 months)*
Intermediate- Term -0.84% 6.06% 4.61% (81 months)**
Municipal Bond Fund
Insured Municipal -7.99% 6.59% 4.25% (81 months)**
Bond Fund
Managed Bond Fund -3.82% 5.79% 4.39% (70 months)***
</TABLE>
* Inception of Fund February 7, 1991
** Inception of Fund March 18, 1993
*** Inception of Fund February 28, 1994
For the following Funds, the average annual total returns for the one-year and
since initial public offering periods ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
1 Year Since Initial Public Offering
------ -----------------------------
<S> <C> <C>
Balanced Fund 1.05% 10.48% (47 months)****
</TABLE>
58
<PAGE>
<TABLE>
<S> <C> <C>
International Fund 29.00% 15.53% (47 months)****
Small Company Fund 14.07% 8.56% (47 months)****
U.S. Value Fund 5.15% 13.16% (32 months)*****
</TABLE>
**** Inception of Fund January 31, 1996
***** Inception of Fund April 30, 1997
YIELD AND EFFECTIVE YIELD
For the following Funds, the yields for the 30-day period ended December 31,
1999 were as follows:
<TABLE>
<S> <C>
Intermediate-Term U.S. Treasury Fund 5.42%
GNMA Fund 6.39%
High-Yield Fund 9.47%
Managed Bond Fund 5.91%
</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, 1999 were as
follows:
<TABLE>
<CAPTION>
Yield Tax-Equivalent Yield
----- --------------------
<S> <C> <C>
Municipal Bond Fund 5.26% 8.71%
</TABLE>
59
<PAGE>
<TABLE>
<S> <C> <C>
Intermediate-Term Municipal Bond 4.03% 6.67%
Fund
Insured Municipal Bond Fund 4.93% 8.16%
California Tax-Free Income Fund+ 5.42% 9.89%
</TABLE>
+Maximum combined federal and California tax rates of 45.2%
For the Money Market Fund, the yield and effective yield for the 7-day period
ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
Yield Effective Yield
----- ---------------
<S> <C> <C>
Money Market Fund 5.35% 5.49%
</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, 1999
were as follows:
<TABLE>
<CAPTION>
Yield Effective Yield
----- ---------------
<S> <C> <C>
Tax-Free Money Market Fund 3.80% 3.87%
</TABLE>
CALCULATIONS
The total return, expressed as a percentage, is computed using the following
formula:
ERV-P
T = ----- x 100
P
60
<PAGE>
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:
Yield = 2[ (/a-b/ +1)/6/ - 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 Fund is computed using the following formula:
(x-y)-z 365
Yield = [ ------- ] = Base Period Return x ---
y 7
61
<PAGE>
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.
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.
62
<PAGE>
The Funds may occasionally reproduce articles or portions of articles about the
Funds written by independent third parties such as financial writers, financial
planners and financial analysts, which have appeared in financial publications
of general circulation or financial newsletters (including but not limited to
BARRONS, BLOOMBERG Magazine, 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, SMART MONEY,
TELESWITCH, TIME Magazine, U.S. NEWS AND WORLD REPORT, YOUR MONEY, THE WALL
STREET JOURNAL and WORTH).
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.
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.
63
<PAGE>
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);
. 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.
64
<PAGE>
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 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 with the Principal Occupations(s)
Name, Address and Age Trusts During Past 5 Years
--------------------- ------ -------------------
<S> <C> <C>
Boh A. Dickey* Chairman and Trustee President, Chief Operating Officer, and
SAFECO Plaza Director of SAFECO Corporation. Previously,
Seattle, WA 98185 Executive Vice President and Chief Financial
(55) 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 Consultant. From 1994 to 1999 she was the
3246 Cascadia Avenue S. Director of Community Affairs for Microsoft
Seattle, WA 98144 Corporation, Redmond, Washington, a computer
(54) software company. Director of First SAFECO
National Life Insurance Company of New York;
Board Chair of United Way of King County;
member of the Board of Managers of Swarthmore
College.
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
Position(s) Held with the Principal Occupations(s)
Name, Address and Age Trusts During Past 5 Years
--------------------- ------ -------------------
<S> <C> <C>
David F. Hill* President President of SAFECO Mutual Funds, SAFECO
10865 Willows Road NE Trustee Securities, Inc. and SAFECO Services
Redmond, WA 98052 Corporation; Senior Vice President of SAFECO
(51) Asset Management Company. See table under
"Investment Advisory and Other Services."
Richard W. Hubbard* Trustee Retired Vice President and Treasurer of the
1270 NW Blakely Ct. Trust and other SAFECO Trusts; retired Senior
Seattle, WA 98177 Vice President and Treasurer of SAFECO
(71) 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 Customer Relations,
764 S. 293rd Street Building Materials Distribution, Weyerhaeuser
Federal Way, WA 98032 Company, Tacoma, Washington; Director of First
(62) SAFECO National Life Insurance Company of New
York.
Larry L. Pinnt Trustee Retired Vice President and Chief Financial
1600 Bell Plaza, Officer U.S. WEST Communications, Seattle,
Room 1802 Washington; Chairman of University of
Seattle, WA 98191 Washington Medical Center Board, Seattle,
(65) Washington; Director of Cascade Natural Gas
Corporation, Seattle, Washington; Director of
First SAFECO National Life Insurance Company of
New York; and Treasurer of Cancer Care
Alliance (a non-profit organization), Seattle,
Washington.
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
Position(s) Held with the Principal Occupations(s)
Name, Address and Age Trusts During Past 5 Years
--------------------- ------ -------------------
<S> <C> <C>
John W. Schneider Trustee President and sole owner of Wallingford Group,
1808 N. 41st St. Inc., Seattle, Washington, a company consulting
Seattle, WA 98103 on the acquisition/disposition and development
(58) of real estate; former President of Emerald
Development Group, Inc., Seattle, Washington
(a real estate development company); Director of
First SAFECO National Life Insurance Company of
New York.
Neal Fuller Vice President Vice President, Controller, Assistant Secretary
10865 Willows Road NE Controller and Treasurer of SAFECO Securities, Inc. and
Redmond, WA 98052 Assistant Secretary SAFECO Services Corporation; Vice President,
(37) 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 Management Company;
Two Union Square Treasurer Treasurer and Chief Investment Officer of
601 Union Street SAFECO Corporation; Vice President of SAFECO
Seattle, WA 98101 Insurance Companies; Director, Vice President
(56) 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 Securities,
10865 Willows Road NE Inc., SAFECO Services Corporation and SAFECO
Redmond, WA 98052 Asset Management Company; former Accounting
(42) Manager of SAFECO Asset Management Company;
former Senior Manager with Ernst & Young LLP,
an independent accounting firm.
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
Position(s) Held with the Principal Occupations(s)
Name, Address and Age Trusts During Past 5 Years
--------------------- ------ -------------------
<S> <C> <C>
Stephen D. Collier Assistant Secretary Director of Taxation and Assistant Vice
SAFECO Plaza President of SAFECO Corporation; Assistant
4333 Brooklyn Ave., NE Secretary of SAFECO Asset Management Company,
Seattle, WA 98105 SAFECO Securities, Inc. and SAFECO Services
(47) Corporation. He has been an executive officer
of 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 funds managed by SAM.
COMPENSATION TABLE FOR CURRENT TRUSTEES
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Pension or
----------
Retirement Total Compensation
---------- ------------------
Aggregate Benefits Accrued Estimated Annual From Registrant and
--------- ---------------- ---------------- -------------------
Compensation from As Part of Fund Benefits Upon Fund 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 $12,170 N/A N/A
Dingfield Taxable Bond $ 4,003 N/A N/A
Tax-Exempt Bond $ 6,860 N/A N/A
Managed Bond $ 1,317 N/A N/A
Money Market $ 2,786 N/A N/A
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
Pension or
----------
Retirement Total Compensation
---------- ------------------
Aggregate Benefits Accrued Estimated Annual From Registrant and
--------- ---------------- ---------------- -------------------
Compensation from As Part of Fund Benefits Upon Fund Complex
------------------ --------------- ------------- ------------
Trustee Trust Registrant Expenses Retirement Paid to Trustees
- ------- ---- ---------- -------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Total Compensation $35,500
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 $11,313 N/A N/A
Hubbard Taxable Bond $ 3,721 N/A N/A
Tax-Exempt Bond $ 6,377 N/A N/A
Managed Bond $ 1,224 N/A N/A
Money Market $ 2,590 N/A N/A
Total Compensation $33,000
Richard E. Common Stock $12,170 N/A N/A
Lundgren Taxable Bond $ 4,003 N/A N/A
Tax-Exempt Bond $ 6,860 N/A N/A
Managed Bond $ 1,317 N/A N/A
Money Market $ 2,786 N/A N/A
Total Compensation $35,500
Larry L. Pinnt Common Stock $12,170 N/A N/A
Taxable Bond $ 4,003 N/A N/A
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
Pension or
----------
Retirement Total Compensation
---------- ------------------
Aggregate Benefits Accrued Estimated Annual From Registrant and
--------- ---------------- ---------------- -------------------
Compensation from As Part of Fund Benefits Upon Fund Complex
------------------ --------------- ------------- ------------
Trustee Trust Registrant Expenses Retirement Paid to Trustees
- ------- ---- ---------- -------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Tax-Exempt Bond $ 6,860 N/A N/A
Managed Bond $ 1,317 N/A N/A
Money Market $ 2,786 N/A N/A
Total Compensation $35,500
John W. Common Stock $12,170 N/A N/A
Schneider Taxable Bond $ 4,003 N/A N/A
Tax-Exempt Bond $ 6,860 N/A N/A
Managed Bond $ 1,317 N/A N/A
Money Market $ 2,786 N/A N/A
Total Compensation $35,000
</TABLE>
At March 31, 2000, 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, 2000, SAM controlled the International, Balanced, U.S. Value and
Managed Bond Funds. At March 31, 2000, SAFECO Insurance Company of America
("SAFECO Insurance") controlled the Intermediate-Term U.S. Treasury Fund. Each
of SAM and SAFECO Insurance is a corporation organized under the laws of the
State of Washington.
70
<PAGE>
At March 31, 2000, SAM owned 30.20% of the Balanced Fund's outstanding shares;
26.70% of the International Fund's outstanding shares; 57.30% of the U.S. Value
Fund's outstanding shares; and 45.60% of the Managed Bond Fund's outstanding
shares. At March 31, 2000, SAFECO Insurance owned 25.50% 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 8.12% 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 33.62% of the Intermediate-Term U.S.
Treasury Fund's 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, 601 Union Street,
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, 2000 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 Opportunities Fund
<TABLE>
<CAPTION>
Name of Beneficial Owner Number of Shares Percent of Fund
- ------------------------ ---------------- ---------------
<S> <C> <C>
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
Name of Beneficial Owner Number of Shares Percent of Fund
- ------------------------ ---------------- ---------------
<S> <C> <C>
National Financial Services Corp. 3,126.771.178 9.44%
for the Exclusive Benefit of Our
Customers
Attn.: Mutual Funds Dept. 5th Fl.
200 Liberty St., 1 World Financial Center
New York, NY 10281-1000
Charles Schwab & Co. Inc. 7,761,159.616 23.43%
Exclusive Benefit of Its Customers
Attn: Mutual Fund Department
101 Montgomery Street
San Francisco CA 94104-4122
Equity Fund
Name of Beneficial Owner Number of Shares Percent of Fund
- ------------------------ ---------------- ---------------
Charles Schwab & Co. Inc. 19,378,423.551 24.11%
Exclusive Benefit of Its Customers
Attn: Mutual Fund Department
101 Montgomery Street
San Francisco CA 94104-4122
Dividend Income Fund
Name of Beneficial Owner Number of Shares Percent of Fund
- ------------------------ ---------------- ---------------
Charles Schwab & Co. Inc. 937,367.347 7.59%
Exclusive Benefit of Its Customers
Attn: Mutual Fund Department
101 Montgomery Street
San Francisco CA 94104-4122
Northwest Fund
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
Name of Beneficial Owner Number of Shares Percent of Fund
- ------------------------ ---------------- ---------------
<S> <C> <C>
SAFECO Insurance Company of America 450,000.00 8.13%
SAFECO Plaza
Seattle, WA 98185
Balanced Fund
Name of Beneficial Owner Number of Shares Percent of Fund
- ------------------------ ---------------- ---------------
SAFECO Asset Management Company 519,267.822 30.22%
Two Union Square
Sixth Avenue and Union Street
Seattle, WA 98101
International Fund
Name of Beneficial Owner Number of Shares Percent of Fund
- ------------------------ ---------------- ---------------
SAFECO Asset Management Company 688,168.197 26.68%
Two Union Square
Sixth Avenue and Union Street
Seattle, WA 98101
Norwest Bank Minnesota, N.A., Trustee 824,250.304 31.95%
SAFECO 401K Savings Plan
510 Marquette, 5th and Marquette
Minneapolis, MN 55479-0001
Small Company Fund
Name of Beneficial Owner Number of Shares Percent of Fund
- ------------------------ ---------------- ---------------
Norwest Bank Minnesota, N.A., Trustee 882,056.321 37.38%
SAFECO 401K Savings Plan
510 Marquette, 5th and Marquette
Minneapolis, MN 55479-0001
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
U.S. Value Fund
Name of Beneficial Owner Number of Shares Percent of Fund
- ------------------------ ---------------- ---------------
<S> <C> <C>
SAFECO Asset Management Company 500,000 57.25%
Two Union Square
Sixth Avenue and Union Street
Seattle, WA 98101
Charles Schwab & Co. Inc. 49,167.570 5.63%
Exclusive Benefit of Its Customers
Attn: Mutual Fund Department
101 Montgomery Street
San Francisco CA 94104-4122
Intermediate-Term U.S. Treasury Fund
Name of Beneficial Owner Number of Shares Percent of Fund
- ------------------------ ---------------- ---------------
SAFECO Insurance Company of America 500,000 25.54%
SAFECO Plaza
Seattle, WA 98185
SAFECO Trust Omnibus Account 158,993.463 8.12%
P.O. Box 34730
Seattle, WA 98124-1730
High-Yield Fund
Name of Beneficial Owner Number of Shares Percent of Fund
- ------------------------ ---------------- ---------------
Charles Schwab & Co. Inc. 1,475,368.113 18.45%
Exclusive Benefit of Its Customers
Attn: Mutual Fund Department
101 Montgomery Street
San Francisco CA 94104-4122
Managed Bond Fund
Name of Beneficial Owner Number of Shares Percent of Fund
- ------------------------ ---------------- ---------------
SAFECO Asset Management Company 452,102.943 45.59%
Two Union Square
Sixth Avenue and Union Street
Seattle, WA 98101
Christa Ministries 112,507.321 11.34%
William Brown V.P. Finance
P.O. Box 330303
Seattle, WA 98133-9703
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
California Tax-Free Income Fund
Name of Beneficial Owner Number of Shares Percent of Fund
- ------------------------ ---------------- ---------------
<S> <C> <C>
Charles Schwab & Co. Inc. 1,779,278.550 22.79%
Exclusive Benefit of Its Customers
Attn: Mutual Fund Department
101 Montgomery Street
San Francisco CA 94104-4122
Intermediate-Term Municipal Bond Fund
Name of Beneficial Owner Number of Shares Percent of Fund
- ------------------------ ---------------- ---------------
SAFECO Insurance Company of America 397,434 29.42%
SAFECO Plaza
Seattle, WA 98185
William A. Helsell 117,103 8.67%
10653 Culpepper Ct. N.W.
Seattle, WA 98177-5319
Charles Schwab & Co., Inc. 82,293 6.09%
Exclusive Benefit of its Customers
Attn: Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
Insured Municipal Bond Fund
Name of Beneficial Owner Number of Shares Percent of Fund
- ------------------------ ---------------- ---------------
SAFECO Insurance Company of America 605,644 29.51%
SAFECO Plaza
Seattle, WA 98185
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
- --------------------------------------
SAFECO Asset Management Company ("SAM"), SAFECO Securities, Inc. ("SAFECO
Securities") and SAFECO Services Corporation ("SAFECO Services") are wholly
owned subsidiaries of SAFECO Corporation. SAM is the investment advisor for each
Fund, 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.
Code of Ethics. Section 17(j) of the Investment Company Act of 1940 (the "Act")
- --------------
generally prohibits the principal underwriter of a mutual fund, and any person
affiliated with a mutual fund company, its investment advisor or principal
underwriter, from engaging in any fraudulent
75
<PAGE>
conduct in connection with the person's purchase or sale of securities held or
to be acquired by the fund. Each of the Trusts and their investment advisor and
principal underwriter have adopted a joint Code of Ethics ("Code") under Rule
17j-1 of the Act, relating to the personal investment activities of SAFECO
Mutual Funds personnel. In addition, the investment sub-advisor to the
International Fund has adopted a Code of Conduct relating to the personal
investment activities of its personnel.
A copy of each Trust's Code is publicly filed with the Securities and Exchange
Commission ("SEC") as an exhibit to the Trust's registration statement, and a
copy of the sub-advisor's Code of Conduct is publicly filed with the SEC as an
exhibit to the SAFECO Common Stock Trust's registration statement, and copies of
each are available from the SEC. The Codes can be reviewed and copied at the
SEC's Public Reference Room in Washington D.C., are available on the EDGAR
database on the SEC's Internet site at http://www.sec.gov., or may be obtained
-------------------
from the SEC (after paying a copying fee) by electonic request at the following
email address: [email protected], or by writing to the SEC at SEC Public
------------------
Reference Section, Washington, D.C. 20549-0102. For information on the
operation of the SEC's Public Reference Room, call the SEC at
1-202-942-8090.
The Code generally permits fund personnel to invest in securities for their own
accounts, but regulate such investments by (i) individuals whose job functions
involve either making or participating in securities transactions, or making or
participating in recommendations concerning securities purchases or sales, and
(ii) those employees who in the course of their job functions are able to obtain
information regarding a Fund's purchases or sales of securities ("access
persons"). The Code (1) requires access persons to preclear all securities
trades, other than transactions involving open-end mutual fund shares and the
securities of certain government issuer, (2) prohibits access persons from
purchasing or selling any security they know is being purchased or sold, or
considered for purchase or sale, by any series fund of the Trusts, and (3)
requires access persons to comply with certain annual and quarterly reporting
requirements relating to their securities holdings and transactions during the
period.
In addition, the Code broadly bars all fund personnel from (1) engaging in
personal trading when in possession of information concerning Fund trading
decisions, (2) participating in any transaction involving a conflict of interest
giving rise to a pecuniary interest in a transaction to which any investment
client is a party, or in transactions which would create any personal benefit,
(3) accepting gifts or favors from any person who seeks to do business with the
Trusts or any of their series Funds, or with SAM or SAFECO Securities. These
prohibitions are not restricted to the group of Fund "access persons".
The sub-advisor's Code of Ethics generally permits employees to invest in
securities for their own accounts, but employees are not permitted to make such
investments until first seeking the written approval of the firm's designated
Compliance Officer. Such approval will generally not be granted (1) where the
firm intends to purchase or sell the same security for a client account within
seven days of the intended personal transaction, (2) where there is a pending
order in the same security for any client, or (3) where the employee would
profit from "short-term dealing" (purchase and sale within 60 days of one
another) in the security. The Code of Ethics prohibits
76
<PAGE>
the sub-advisor's employees from participating in intial public offerings, and
requires employees to disclose any ownership interest in a privately-held
company in any investment in the same company is being considered for a client.
In addition, the Code of Ethics requires the sub-advisor's employees to
disclose their securities holdings within 10 days after they become employed at
the firm, to report all securities holdings to the Compliance Officer on an
annual basis, and to conduct all transactions through an associated broker.
Investment Advisory Services. 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 ("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 manage assets
for clients worldwide in excess of $39 billion as of December 31, 1999.
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 Secretary Assistant Secretary Assistant Secretary
Treasurer Treasurer Treasurer
R.L. Spaulding Vice President Chairman Director Director
Treasurer Director
S.C. Bauer President
Director
D.H. Longhurst Assistant Controller Assistant Controller Assistant Controller Assistant Controller
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
SAFECO SAFECO
Name Trusts SAM Securities Services
- ---- ------ --- ----------- --------
<S> <C> <C> <C> <C>
S.D. Collier Assistant Secretary Assistant Secretary Assistant Secretary Assistant 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 certain 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.
-------------------------------------------------------------
FUND FEE
---- ---
78
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
FUND FEE
---- ---
- ----------------------------------------------------------------------------------
<S> <C> <C>
Net Assets Annual Fee
Growth Opportunities, $ 0 - $250,000,000 .70 of 1%
Equity, Dividend $ 250,000,001 - $750,000,000 .65 of 1%
Income, Northwest, $ 750,000,001 - $1,250,000,000 .60 of 1%
Balanced and U.S. Value 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%
$ 750,000,001 - $1,250,000,000 .65 of 1%
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%
- ----------------------------------------------------------------------------------
Municipal Bond, Insured $ 0 - $250,000,000 .50 of 1%
Municipal Bond, $ 250,001 - $750,000,000 .45 of 1%
Intermediate-Term Over $750,000,000 .40 of 1%
Municipal Bond and
California Tax-Free
Income
- ----------------------------------------------------------------------------------
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%
- ----------------------------------------------------------------------------------
Money Market and $ 0 - $250,000,000 .50 of 1%
Tax-Free 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 .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
79
<PAGE>
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:
Net Assets Annual Fee
$0 - $50,000,000 .60 of 1%
$50,000,001 - $100,000,000 .50 of 1%
Over $100,000,000 .40 of 1%
The following table states the total amounts of compensation paid by the
following Funds to SAM for the fiscal years ended December 31, 1999, 1998 and
1997:
Fiscal Year Ended
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998 December 31, 1997
------------------ ------------------ --------------------
<S> <C> <C> <C>
Growth Opportunities Fund $ 6,137,000 $6,818,000 $2,120,000
Equity Fund $12,814,000 $8,913,000 $6,481,000
Dividend Income Fund $ 2,300,000 $2,747,000 $2,285,000
Northwest Fund $ 534,000 $ 519,000 $ 416,000
Intermediate-Term U.S. Treasury
Fund $ 123,000 $ 109,000 $ 85,000
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998 December 31, 1997
------------------ ------------------ --------------------
<S> <C> <C> <C>
GNMA Fund $ 247,000 $ 259,000 $ 246,000
High-Yield Fund $ 482,000 $ 507,000 $ 386,000
Balanced Fund $ 166,000 $ 144,000 $ 87,000
International Fund $ 301,000 $ 196,000 $ 153,000
Small Company Fund $ 239,000 $ 360,000 $ 151,000
U.S. Value Fund $ 80,000 $ 78,000 $ 43,000*
Managed Bond Fund $ 40,000 $ 30,000 $ 23,000
Municipal Bond Fund $ 2,359,000 $2,164,000 2,041,000
California Tax-Free Income Fund $ 553,000 $ 587,000 $ 424,000
Intermediate-Term Municipal Bond $ 76,000 $ 80,000 $ 77,000
Fund
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998 December 31, 1997
------------------ ------------------ --------------------
<S> <C> <C> <C>
Insured Municipal Bond Fund $ 127,000 $ 135,000 $ 95,000
Money Market Fund $ 1,166,000 $1,013,000 $ 865,000
Tax-Free Money Market Fund $ 393,000 $ 392,000 $ 366,000
</TABLE>
* The total amount of compensation paid by the U.S. Value Fund to SAM for the
period from April 30, 1997 (initial public offering) to December 31, 1997
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, 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.
The following table shows the fees paid by the following Funds to SAM during the
fiscal period ended December 31, 1999:
82
<PAGE>
<TABLE>
<CAPTION>
From Date of Agreement (May 1,
1999) to
December 31, 1999
-----------------
<S> <C>
Growth Opportunities Fund $219,103
Equity Fund $409,044
Dividend Income Fund $138,992
Northwest Fund $ 47,778
Intermediate-Term U.S. Treasury Fund $ 13,312
GNMA Fund $ 25,516
High-Yield Fund $ 47,887
Balanced Fund $ 14,324
International Fund $ 18,906
Small Company Fund $ 17,233
U.S. Value Fund $ 6,916
Managed Bond Fund $ 4,941
Municipal Bond Fund $164,108
California Tax-Free Income Fund $ 63,063
Intermediate-Term Municipal Bond Fund $ 8,936
Insured Municipal Bond Fund $ 13,539
Money Market Fund $126,764
Tax-Free Money Market Fund $ 47,939
</TABLE>
83
<PAGE>
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, but not to exceed .40% of each such Fund's average net
assets; $32.00 per Bond Fund, Tax-Exempt Bond Fund and Managed Bond Fund
shareholder account, but not to exceed .40% of each such Fund's average net
assets; and $34.00 per Money Market Fund shareholder account, but not to exceed
.30% of each such 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, 1999, 1998 and 1997:
FISCAL YEAR OR PERIOD ENDED
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
December 31, 1999 December 31, 1998 December 31, 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Opportunities $3,113,000 $2,802,000 $ 517,000
Fund
- ------------------------------------------------------------------------------------------------
Equity Fund $4,329,000 $3,543,000 $2,320,000
- ------------------------------------------------------------------------------------------------
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
December 31, 1999 December 31, 1998 December 31, 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend Income Fund $ 716,000 $ 693,000 $ 583,000
- ------------------------------------------------------------------------------------------------
Northwest Fund $ 216,000 $ 194,000 $ 145,000
- ------------------------------------------------------------------------------------------------
Intermediate-Term U.S. $ 56,000 $ 37,000 $ 31,000
Treasury Fund
- ------------------------------------------------------------------------------------------------
GNMA Fund $ 82,000 $ 65,000 $ 65,000
- ------------------------------------------------------------------------------------------------
High-Yield Fund $ 167,000 $ 124,000 $ 86,000
- ------------------------------------------------------------------------------------------------
Balanced Fund $ 68,000 $ 44,000 $ 23,000
- ------------------------------------------------------------------------------------------------
International Fund $ 83,000 $ 52,000 $ 34,000
- ------------------------------------------------------------------------------------------------
Small Company Fund $ 92,000 $ 122,000 $ 50,000
- ------------------------------------------------------------------------------------------------
U.S. Value Fund $ 26,000 $ 20,000 $ 5,000*
- ------------------------------------------------------------------------------------------------
Managed Bond Fund $ 15,000 $ 4,000 $ 1,000
- ------------------------------------------------------------------------------------------------
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
December 31, 1999 December 31, 1998 December 31, 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Municipal Bond Fund $ 318,000 $ 325,000 $ 327,000
- ------------------------------------------------------------------------------------------------
California Tax-Free $ 87,000 $ 81,000 $ 60,000
Income Fund
- ------------------------------------------------------------------------------------------------
Intermediate-Term $ 11,000 $ 11,000 $ 11,000
Municipal Bond Fund
- ------------------------------------------------------------------------------------------------
Insured Municipal Bond $ 20,000 $ 16,000 $ 11,000
Fund
- ------------------------------------------------------------------------------------------------
Money Market Fund $ 693,000 $ 482,000 $ 414,000
- ------------------------------------------------------------------------------------------------
Tax-Free Money Market $ 58,000 $ 62,000 $ 64,000
Fund
- ------------------------------------------------------------------------------------------------
</TABLE>
* The total amount of fees paid by the U.S. Value Fund to SAFECO Services for
the period from April 30, 1997 (initial public offering) to December 31, 1997
SAFECO Securities, SAFECO Plaza, Seattle, Washington 98185, 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.
86
<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.
The following table states the total amount of brokerage expenses for the
following Funds for the fiscal years ended December 31, 1999, 1998 and 1997:
FISCAL YEAR OR PERIOD ENDED
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- ----------------
<S> <C> <C>
</TABLE>
87
<PAGE>
<TABLE>
<S> <C> <C> <C>
Growth Opportunities Fund $1,533,124 $2,693,078* $ 817,674
Equity Fund $1,453,472 $1,204,661 $1,180,261
Dividend Income Fund $ 412,995 $ 344,745 $ 341,428
Northwest Fund $ 83,496 $ 48,671 $ 63,531
Balanced Fund $ 19,261 $ 16,890 $ 9,913
International Fund $ 35,020 $ 16,320 $ 16,054
Small Company Fund $ 125,626 $ 92,111 $ 24,185**
U.S. Value Fund $ 14,187 $ 14,106 $ 10,224***
</TABLE>
* The increase in brokerage amounts was a result of significant acquisition and
sales activities due to growth of Fund assets, which activities are not typical
for the Growth Opportunities Fund on a historical basis.
** Lower brokerage amounts during the first full calendar year of the Fund's
existence reflect its smaller size and lower levels of acquisition and sales
activities than are expected to be typical for a Fund.
*** The total amount of brokerage expenses for the U.S. Value Fund for the
period from April 30, 1997 (initial public offering) to December 31, 1997.
TAX INFORMATION
- ---------------
88
<PAGE>
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.
All or part of the 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.
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
89
<PAGE>
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 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
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
90
<PAGE>
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 -- HEDGING
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 Funds realize 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 Funds may invest may
be subject to section 1256 of the Code ("section 1256 contracts"). Any section
1256 contracts held by the Funds 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 Funds must distribute to satisfy the Distribution Requirement,
which will be taxable to shareholders as ordinary income, and to increase the
net capital gain the Fund recognizes, without in either case increasing the cash
available to it. The Funds 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 a Fund must distribute to
meet the Distribution Requirement and avoid imposition of the Excise Tax.
Code section 1092 (dealing with straddles) also may affect the taxation of
certain hedging instruments in which the Funds 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 a
91
<PAGE>
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 Funds 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 ($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
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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 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
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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 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
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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.
The 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 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
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Shares of any Fund (other than any 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
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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 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
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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 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, 1999.
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Portfolio of Investments as of December 31, 1999
Statement of Assets and Liabilities as of December 31, 1999
Statement of Operations for the Year Ended December 31, 1999
Statement of Changes in Net Assets for the Years or Period
Ended December 31, 1999 and December 31, 1998
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, S&P and Fitch 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.
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
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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 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.
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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.
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.
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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 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.
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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.
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.
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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.
FITCH
Investment Grade:
AAA - AAA ratings denote the lowest expectation of credit risk. They are
assigned only in case of exceptionally strong capacity for timely payment of
financial commitments.
AA - AA ratings denote a very low expectation of credit risk. They indicate
very strong capacity for timely payment of financial commitments.
A - A ratings denote a low expectation of credit risk. The capacity for timely
payment of financial commitments is considered strong. This capacity may,
however, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
BBB - BBB ratings indicate that there is currently a low expectation of credit
risk. The capacity for timely payment of financial commitments is considered
adequate, but adverse changes in circumstances and in economic conditions are
more likely to impair this capacity. This is the lowest investment-grade
category.
Below Investment Grade:
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded as having
speculative characteristics and a possibility of credit risk, ranging from a
possibility of credit risk at BB, to a significant credit risk at B, to a high
default risk at CCC, CC and C.
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").
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.
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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.
FITCH
F1 - Indicates the best capacity for timely payment of financial commitments.
F2 - A satisfactory capacity for timely payment of financial commitments, but
the margin of safety is not as great as in the case of the higher ratings.
F3 - The capacity for timely payment of financial commitments is adequate;
however, near-term adverse changes could result in a reduction to non-investment
grade.
B - Minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
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STATEMENT OF ADDITIONAL INFORMATION
ADVISOR CLASS A
ADVISOR CLASS B
ADVISOR CLASS C*
SAFECO COMMON STOCK TRUST: SAFECO TAXABLE BOND TRUST:
SAFECO GROWTH OPPORTUNITIES SAFECO INTERMEDIATE-TERM
FUND* U.S. TREASURY FUND
SAFECO EQUITY FUND* SAFECO HIGH-YIELD BOND FUND*
SAFECO DIVIDEND INCOME FUND* SAFECO GNMA FUND
SAFECO NORTHWEST FUND*
SAFECO BALANCED FUND SAFECO MANAGED BOND TRUST:
SAFECO INTERNATIONAL STOCK SAFECO MANAGED BOND FUND
FUND*
SAFECO SMALL COMPANY VALUE SAFECO MONEY MARKET TRUST:
FUND SAFECO MONEY MARKET FUND*
SAFECO U.S.VALUE FUND
SAFECO TAX-EXEMPT BOND
TRUST:
SAFECO MUNICIPAL BOND FUND
SAFECO CALIFORNIA TAX-FREE
INCOME FUND
This Statement of Additional Information ("SAI") is not a prospectus itself. It
should be read in conjunction with the Class A, Class B and Class C Shares
Prospectus dated May 1, 2000 for each Fund listed above (collectively, "Funds").
To receive a copy of the Funds' Prospectus, write to: SAFECO Mutual Funds, Class
A, B and C 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 May 1,
2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION.......................................... 1
CHARACTERISTICS OF THE TRUSTS' SHARES........................ 1
OVERVIEW OF INVESTMENT POLICIES.............................. 2
I. Fundamental Investment Policies.......................... 2
II. Non-Fundamental Investment Policies...................... 4
ADDITIONAL INVESTMENT INFORMATION............................ 6
SPECIAL INVESTMENT RISKS..................................... 36
BELOW INVESTMENT GRADE BONDS............................ 36
FOREIGN SECURITIES...................................... 37
CURRENCY EXCHANGE RATES................................. 38
HEDGING TRANSACTIONS.................................... 38
GEOGRAPHIC AND ISSUER SIZE LIMITATIONS.................. 39
LENDING OF PORTFOLIO SECURITIES.............................. 44
REDEMPTION IN KIND........................................... 44
SALES CHARGE WAIVER.......................................... 44
CONVERSION OF CLASS B SHARES................................. 46
INFORMATION ON CALCULATION OF NET ASSET
VALUE PER SHARE.............................................. 47
PERFORMANCE INFORMATION...................................... 48
INFORMATION ON DIVIDENDS FOR THE
MONEY MARKET FUND....................................... 62
MANAGEMENT OF THE FUNDS...................................... 63
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS OF
CERTAIN FUNDS................................................ 67
INVESTMENT ADVISORY AND OTHER SERVICES....................... 72
BROKERAGE PRACTICES.......................................... 87
TAX INFORMATION.............................................. 89
RETIREMENT PLANS............................................. 95
FINANCIAL STATEMENTS......................................... 97
DESCRIPTION OF RATINGS....................................... 97
</TABLE>
<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"), the 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 series funds:
The SAFECO Growth Opportunities Fund ("Growth Opportunities Fund"), formerly
known as the SAFECO Growth Fund, SAFECO Equity Fund ("Equity Fund"), SAFECO
Dividend Income Fund ("Dividend Income Fund"), formerly known as the SAFECO
Income Fund, SAFECO Northwest Fund ("Northwest Fund"), SAFECO International
Stock Fund ("International Fund"), SAFECO Balanced Fund ("Balanced Fund"),
SAFECO Small Company Value Fund ("Small Company Fund"), formerly known as the
SAFECO Small Company Stock Fund, and SAFECO U.S. Value Fund ("U.S. Value Fund").
The Taxable Bond Trust offers its shares through three diversified series 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 diversified series
fund: The SAFECO Managed Bond Fund ("Managed Bond Fund").
The Tax-Exempt Bond Trust offers its shares through four diversified series
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 Bond Fund"),
and the SAFECO California Tax-Free Income Fund ("California Tax-Free Income
Fund") (collectively, the "Tax-Exempt Bond Funds").
The Money Market Trust offers its shares through two diversified series 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").
Characteristics of the Trusts' Shares
Three of the Funds offer only No-Load Class Shares. They are: 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.
Advisor Class A, Advisor Class B and Advisor Class C shares of the Funds 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 if
the shares are sold within six years of their purchase and pay a higher 12b-1
fee than Class A shares. Class B shares held for six years automatically convert
to Class A shares. Class C shares are not subject to a front-end sales charge,
but may be subject to a contingent deferred sales charge if the shares are sold
within 12 months after their purchase, and pay a higher 12b-1 fee than Class A
shares. Unlike Class B shares, Class C shares will not convert to any other
share class.
Restrictions on Retaining or Disposing of Shares
There are no restrictions on the right of shareholders to retain or dispose of
the Trusts' shares, except in the event that a Trust or any of its Funds is
terminated in the future as a result of reorganization or liquidation and
distribution of assets.
Shareholder Obligations and Liabilities
Under Delaware law, the shareholders of the Trusts will not be personally liable
for the obligations of a Trust or any Fund of the Trust. A shareholder is
entitled to the same limitation of personal liability extended to shareholders
of corporations. To guard against the risk that Delaware law might not be
applied in other states, the Trust Instrument for each Trust requires that every
written obligation of the Trust or a Fund of the Trust contain a statement that
such obligation may only be enforced against the assets of the Trust or the Fund
of the Trust and generally provides for indemnification out of the Trust's or
the Fund's property of any shareholder nevertheless held personally liable for
the Trust's or a Fund's obligations, respectively.
Dividend Rights
Shareholders of a Fund are entitled to receive any dividends or other
distributions declared for that Fund. With respect to distributions, no shares
have priority or preference over any other shares of the same Fund.
Distributions will be made from the assets of a Fund, and will be paid ratably
to all shareholders of the Fund according to the number of shares of such Fund
held by shareholders on the record date.
Voting Rights
Shareholders are entitled to vote on any matter that (i) concerns an amendment
to the Trust Instrument of any of the Trusts that would affect the voting rights
of shareholders, (ii) requires a shareholder vote under the Investment Company
Act of 1940 (the "1940 Act") or any other applicable law, (iii) is submitted to
them by the Trustees in their discretion. The 1940 Act requires a shareholder
vote in certain circumstances, including to elect Trustees if the number of
Trustees that have been elected by shareholders falls below a majority, to make
a material change to a Trust's investment advisory agreement, and to change any
fundamental policy of a Trust. On any matter submitted to a vote of
shareholders, all shares of the Funds of the Trust then issued and outstanding
and entitled to vote shall be voted in the aggregate and not by Fund except for
matters concerning only a Fund. Similarly, all shares of the Fund then issued
and outstanding and entitled to vote shall be voted in the aggregate and not by
Class except for matters concerning only a Class. The holders of each share of a
Fund of a Trust shall be entitled to one vote for each full share and a
fractional vote for each fractional share. Shares of one Fund of any of the
Trusts may not bear the same economic relationship to the Trust as shares of
another Fund of the same Trust. Voting rights are non-cumulative and cannot be
modified without a majority vote of shareholders.
Liquidation Rights
In the event of liquidation, shareholders will be entitled to receive a pro rata
share of the net assets of the applicable Fund of the applicable Trust.
Preemptive Rights
Shareholders have no preemptive rights.
Conversion Rights
Shareholders have no conversion rights.
Redemption Provisions
The provisions for redemption by shareholders are set forth in the current
prospectuses relating to the applicable Fund and share class and elsewhere in
this Statement.
Sinking Fund Provisions
The Trusts have no sinking fund provisions.
Calls or Assessments
The shares are fully paid and non-assessable.
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<PAGE>
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 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 the 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 investment policies can be changed only 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 fundamental investment policies listed below apply to all of the 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. 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
2
<PAGE>
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:
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 only to the Money Market Fund:
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 Municipal Bond Fund and the
California Tax-Free Income Fund:
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.
3
<PAGE>
II. NON-FUNDAMENTAL INVESTMENT POLICIES
-----------------------------------
In addition to the policies described in the Funds' Prospectuses. The following
six non-fundamental policies have been adopted by all Funds covered by this SAI
except as noted.
1. Foreign Currency: [All Funds except International Fund] The Fund will not
----------------
buy or sell foreign currency, except as necessary to convert the proceeds
of the sale of foreign portfolio securities into U.S. dollars.
2. Foreign Securities: [All Funds except International Fund] The Fund
------------------
may invest up to 20% of its total assets in foreign securities which are
listed on a national exchange, including investments in American Depository
Receipts.
3. Temporary Investments: 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 restrictions
on the Fund's investment in illiquid securities), and other short-term
investments.
4. Illiquid Securities: If immediately after and as a result of such
-------------------
action the value of the following securities, in the aggregate, would
exceed 15% of the Fund's net assets [10% in the case of the Money Market
Fund], the Fund will not (i) purchase securities for which there is no
readily available market, (ii) purchase time deposits maturing in more than
seven days, (iii) purchase over-the-counter ("OTC") options or hold assets
set aside to cover OTC options written by the Fund, (iv) enter into
repurchase agreements maturing in more than seven days, or (v) invest in
interests in real estate investment trusts which are not readily marketable
or interests in real estate limited partnerships which are not listed or
traded on the NASDAQ Stock Market.
5. Purchasing Securities on Margin: The Fund will not purchase securities on
-------------------------------
margin. However, the Fund may (i) obtain short-term credits as necessary to
clear its purchases and sales of securities, and (ii) 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.
6. Leverage: The Fund may borrow money (i) from banks, (ii) from SAFECO
--------
Corporation or its affiliated companies, or (iii) by engaging in reverse
repurchase agreements. The Fund will not purchase securities while
borrowings equal to 5% or more of its total assets are outstanding,
although the Fund may complete purchase transactions to which it committed
prior to reaching the 5% threshold.
In addition to the common non-fundamental policies described above, the
following non-fundamental policies apply to each of the Funds of the named Trust
except as noted:
SAFECO Common Stock Trust
Real Estate Investment Trusts: The Fund may invest up to 10% of its total
- -----------------------------
assets in shares of real estate investment trusts.
4
<PAGE>
Convertible Securities: [Growth Opportunities Fund, Equity Fund, Northwest Fund,
- ----------------------
Small Company Fund and U.S. Value Fund only] The Fund may invest in securities
convertible into common stock, but less than 35% of its total assets will be
invested in such securities.
SAFECO Managed Bond Trust
Temporary Defensive Measures: The Fund may hold cash as a temporary defensive
- ----------------------------
measure when market conditions so warrant.
When-Issued Securities: The Fund may purchase "when-issued" or "delayed-
- ----------------------
delivery" securities, and may purchase or sell securities on a "forward
commitment" basis.
SAFECO Taxable Bond Trust
Temporary Defensive Measures: The Fund may hold cash as a temporary defensive
- ----------------------------
measure when market conditions so warrant.
When-Issued Securities: The Fund may purchase "when-issued" or "delayed-
- ----------------------
delivery" securities, and may purchase or sell securities on a "forward
commitment" basis.
SAFECO Tax-Exempt Bond Trust
Temporary Defensive Measures: The Fund may hold cash as a temporary defensive
- ----------------------------
measure when market conditions so warrant.
When-Issued Securities: The Fund may purchase "when-issued" or "delayed-
- ----------------------
delivery" securities, and may purchase or sell securities on a "forward
commitment" basis.
Municipal Project Concentration: The Fund will limit its investment in municipal
- -------------------------------
obligations the interest on which is payable from the revenues of similar types
of projects to less than 25% of the Fund's total assets. 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 and water pollution control projects.
Short-Term Tax-Exempt Obligations: The 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 a
nationally recognized statistical rating organization ("NRSRO"); unrated
municipal notes offered by issuers having outstanding municipal bonds rated
within one of the three highest grades assigned by an NRSRO; 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 an NRSRO;
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.
5
<PAGE>
U.S. Government Obligations: The 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.
Municipal Notes: The Fund may invest in municipal notes, including tax
- ---------------
anticipation, revenue anticipation and bond anticipation notes and tax-exempt
commercial paper.
Single State Concentration: [All Tax-Exempt Bond Funds except the California
- --------------------------
Tax-Free Income Fund] The Fund will limit its investment in securities whose
issuers are located in the same state to less than 25% of the Fund's total
assets.
SAFECO Money Market Trust
Temporary Defensive Measures: The Fund may hold cash as a temporary defensive
- ----------------------------
measure when market conditions so warrant.
When-Issued Securities: The Fund may purchase "when-issued" or "delayed-
- ----------------------
delivery" securities, and may purchase or sell securities on a "forward
commitment" basis.
Municipal Project Concentration: The Fund will limit its investment in municipal
- -------------------------------
obligations the interest on which is payable from the revenues of similar types
of projects to less than 25% of the Fund's total assets. 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 and water pollution control projects.
Single State Concentration: The Fund will limit its investment in securities
- --------------------------
whose issuers are located in the same state to less than 25% of the Fund's total
assets.
Single Issuer Concentration: The Fund may invest up to 25% of its total assets
- ---------------------------
in the "first tier securities" 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.
ADDITIONAL INVESTMENT INFORMATION
- ---------------------------------
STOCK FUNDS
The Growth Opportunities Fund, Equity Fund, Dividend Income Fund, Northwest
Fund, Balanced Fund, International Fund, Small Company Fund, and U.S. Value Fund
(the "Stock Funds") 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
6
<PAGE>
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 Fitch) 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-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 Opportunities Fund and the Dividend
Income Fund may 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
7
<PAGE>
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 Funds 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.
8
<PAGE>
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 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. (SEE "SPECIAL
INVESTMENT RISKS - Foreign Securities" below, for additional information.)
Each of the Funds other than the International Fund may invest up to 20% of
its total assets in foreign securities. The International Fund 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 it is 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 they have
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 Opportunities 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 stated 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.
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. 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
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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. 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.
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. 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.
There is no guarantee that these strategies and
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<PAGE>
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. See also "Options on equity securities" and "Options on stock
indices" below.
19. Options on Equity Securities. The Funds may purchase put options on equity
securities and 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
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of the security will move adversely to the Fund's option position.
Additional risks relating to the Funds' use of options on equity securities
are described below.
The Funds do not intend to invest more than 5% of their net assets at any
one time in the purchase of call options on stocks.
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.
Put Options: The Funds 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 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 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 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.
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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.
20. Options on Stock Indices. The Funds may purchase put options and may
purchase and sell 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 Funds 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 a 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 a 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
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<PAGE>
and will represent at least 50% of the portfolio's holdings in that
industry or market segment. No individual security will represent more than
15% of the amount so segregated, pledged or escrowed in the case of broadly
based stock market stock options or 25% of such amount in the case of
industry or market segment index options.
If at the close of business on any day the market value of such qualified
securities so segregated, escrowed, or pledged falls below 100% of the
current index value times the multiplier times the number of contracts, the
Fund will so segregate, escrow, or pledge an amount in cash, Treasury
bills, or other liquid high-grade short-term obligations equal in value to
the difference. In addition, when a Fund writes a call on an index that is
in-the-money at the time the call is written, the Fund will segregate with
its custodian or pledge to the broker as collateral, cash or U.S.
Government or other liquid high-grade short-term debt obligations equal in
value to the amount by which the call is in-the-money times the multiplier
times the number of contracts. Any amount segregated pursuant to the
foregoing sentence may be applied to the Fund's obligation to segregate
additional amounts in the event that the market value of the qualified
securities falls below 100% of the current index value times the multiplier
times the number of contracts. A call option is also covered, and the Fund
need not follow the segregation requirements set forth in this paragraph if
the Fund holds a call on the same index as the call written, where the
strike price of the call held is equal to or less than the strike price of
the call written, or greater than the strike price of the call written if
the difference is maintained by the Fund in cash, Treasury bills or other
liquid high-grade short-term obligations in a segregated account with its
custodian.
The 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 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.
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<PAGE>
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 a 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 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 a 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.
21. 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
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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 Fund's Sub-Advisor, interest rates are likely to decline significantly,
because under those circumstances the premium received by writing the call
likely would not fully offset the foregone appreciation in the value of the
underlying security.
The Fund may also write straddles (i.e., a combination of a call and a put
written on the same security at the same strike price where the same issue
of the security is considered "cover" for both the put and the call). In
such cases, the Fund will also segregate or deposit for the benefit of the
Fund's broker cash or liquid high-grade debt obligations equivalent to the
amount, if any, by which the put is in-the-money. The Fund's use of
straddles will be limited to 5% of its net assets (meaning that the
securities used for cover or segregated as described above will not exceed
5% of the Fund's net assets at the time the straddle is written). The
writing of a call and a put on the same security at the same strike price
where the call and the put are covered by different securities is not
considered a straddle for purposes of this limit.
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 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
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<PAGE>
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."
22. 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 Fund's 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.
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.
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23. Stock Index Futures Contracts. The Funds 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."
A Fund may sell stock index futures to hedge against a decline in the value
of equity securities it holds. A 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 Funds 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 Funds' equity securities.
A Fund's successful use of stock index futures contracts depends upon the
Advisor or 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 ("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 Funds 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.
24. 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
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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 CFTC
limits as described above in "Stock Index Futures Contracts."
25. 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-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."
26. Options on Futures Contracts. The Funds 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
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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 Funds intend to utilize options on futures contracts for the
same purposes that they intend 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, a 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 Funds 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, a 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 the Fund's
net assets.
27. 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
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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.
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
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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.
28. 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.
29. 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.
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 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 the
Government National Mortgage Association ("GNMA"); (b) securities that are
not supported by the full faith and credit of the U.S. government but are
supported by the issuer's ability to borrow from the U.S. Treasury, such as
securities issued by the Federal National Mortgage Association ("FNMA"),
the Federal Home Loan Bank ("FHLB") and the Federal Home Loan Mortgage
Corporation ("FHLMC"); and (c) securities
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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"),
Standard & Poor's Ratings Services, a division of The McGraw Hill
Companies, Inc. ("S&P") or Fitch IBCA, Inc. ("Fitch"), 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
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. 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
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dispose of its securities whenever SAM deems advisable, without regard to
the length of time the securities have been held. See the description of
such securities under "Additional Investment Information--Stock Funds."
8. 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."
9. Mortgage-Backed Securities. The mortgage-backed securities in which the
Funds may 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 include "modified
pass-through" securities or collateralized mortgage obligations ("CMOs").
Modified pass-through securities "pass through" to their holders the
scheduled monthly interest and principal payments relating to mortgage
loans in the pool. CMOs are securities collateralized by a portfolio of
mortgage loans or mortgage-backed securities. CMOs are issued with a number
of classes or series which have different maturities and which may
represent interests in some or all of the interest or principal of the
underlying collateral or a combination thereof. The Funds may purchase CMOs
that are 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
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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.
10. Other Collateralized Mortgage Obligations. Obligations issued by the U.S.
government or one of its agencies or instrumentalities (such as FNMA or
FHLMC) or by private issuers which are collateralized by securities issued
by the U.S. government or one of its agencies or instrumentalities (such as
FNMA or FHLMC). CMOs are securities collateralized by a portfolio of
mortgages or mortgage-backed securities. The issuer's obligation to make
interest and principal payments on the CMO is secured by the underlying
portfolio of mortgages or mortgage-backed securities. CMOs are issued with
a number of classes or series that have different maturities and that may
represent interests in some or all of the interest or principal of the
underlying collateral or a combination thereof.
11. Asset-Backed Securities. 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
26
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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. 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.
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.
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, Moody's or Fitch, 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
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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 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. Payment-in Kind (High-Yield Fund Only). The High-Yield Fund may hold
"payment-in-kind" fixed-income securities. 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. 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 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
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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.
18. Municipal Securities (High-Yield and Managed Bond Funds 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, S&P or Fitch 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.
19. 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, Moody's and Fitch 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.
MUNICIPAL BOND FUND AND CALIFORNIA TAX-FREE INCOME 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
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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 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
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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 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 ("COP") 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.
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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.
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%.
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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 its investments to securities
with remaining maturities of 397 days or less, and to maintain a dollar-weighted
average maturity of 90 days or less. When determining the maturity of a
security, the Fund may look to an interest rate reset or demand feature.
A security is considered to be rated if either the security itself is assigned a
rating or the issuer is assigned a rating for comparable short-term debt
obligations. Alternatively, a security (whether or not rated) with an
unconditional demand feature (as defined in Rule 2a-7) 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.
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. Other Floating and Variable Rate Securities. Securities collateralized by a
portfolio of municipal bonds which are divided into classes. The Fund will
purchase only classes of such
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securities which provide for floating rates and which can be put back to a
liquidity provider (generally at par) on a fixed date.
4. Restricted Securities and Rule 144A Securities. The Money Market Fund may
invest 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.
5. 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. A 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. 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
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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.
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,
GNMA 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,
GNMA 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"), the Federal Home Loan Bank
("FHLB") 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 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. Yankee Debt Securities and Eurodollar Bonds. 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.
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SPECIAL INVESTMENT RISKS
- ------------------------
BELOW INVESTMENT GRADE BONDS:
The Dividend Income, Small Company and High-Yield 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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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 (International Fund):
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 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:
Hedging transactions cannot eliminate all risks of loss to the Funds and may
prevent a Fund from realizing some potential gains. The projection of short-
term foreign currency (International Fund) and foreign 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
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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 Funds to hedge investment risk and not for speculation. In
addition, the Boards of Trustees have adopted the following percentage
restrictions on the use of options, futures contracts and options on futures
contracts:
(i) A 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) A 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) A 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.
GEOGRAPHICAL AND ISSUER SIZE LIMITATIONS:
Northwest Fund. 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. 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. 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.
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
39
<PAGE>
market conditions the California Tax-Free Income Fund ("California Fund") plans
to invest at least 80% of its net assets in bonds issued by California and its
political subdivisions, the investment risk of such concentration should be
carefully considered. The description below summarizes discussions contained in
official statements relating to various types of bonds issued by the State of
California and its political subdivisions. A more detailed description can be
found in such official statements. The California Fund has not independently
verified any of the information presented in this section.
The State of California. California's economy and the State's financial
condition improved markedly during the fiscal years starting in 1995-96,
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 previous four recession years was finally
eliminated. Moody's Investors Service, Standard & Poor's and Fitch IBCA,
Inc. currently rate the State's general obligation bonds Aa3, AA-minus and
AA-minus, respectively.
The May 1999 Revision to the 1999-00 Governor's Budget reported that
stronger than expected economic conditions in the State for the latter part
of 1998 and into 1999 would produce total 1998-99 General Fund revenues of
about $57.9 billion, almost $1.0 billion above the 1998 Budget estimates.
The final 1999-00 Budget projects General Fund revenues and transfers of
$63.0 billion and proposes General Fund expenditures of $63.7 billion.
California generates about 70 percent of its revenues from a state personal
income tax and a sales tax, and spends more than half of all revenues on
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
40
<PAGE>
districts and school districts for the amount of tax revenues lost by
reason of such exemption or adjusted for changes in the population and the
cost of living. Legislation adopted in 1980 provides for state
reimbursements to redevelopment agencies to replace revenues lost due to
the exemption of business inventories from taxation. Such legislation
provides for restoration of business inventory tax revenues through the
annual addition of artificial assessed value, not actually existing in a
project area, to the tax rolls of redevelopment projects. These
reimbursements are adjusted for changes in the population and the cost of
living. All such reimbursements are subject to change or repeal by the
Legislature, and they have been changed since 1980. Furthermore, current
law generally prohibits the pledging of such reimbursement revenues to
secure redevelopment agency bonds.
Redevelopment agencies in California have no power to levy and collect
taxes; hence, any decrease in property taxes or limitations in the amounts
by which property taxes may increase adversely affects such agencies, which
lack the inherent power to correct for such decreases or limitations.
State and local government agencies in California and the State itself are
subject to annual "appropriation limits" imposed by Article XIII B, an
initiative constitutional amendment approved by the voters on November 6,
1979, which prohibits government agencies and the State from spending
"appropriations subject to limitation" in excess of the appropriations
limit imposed. "Appropriations subject to limitation" are authorizations
to spend "proceeds of taxes," which consist of tax revenues, certain State
subventions and certain other funds, including proceeds from regulatory
licenses, user revenues, certain State subventions and certain other funds
to the extent that such proceeds exceed "the cost reasonably born by such
entity in providing the regulation, product, or service." No limit is
imposed on appropriation of funds which are not "proceeds of taxes," on
debt service or indebtedness existing or authorized by January 1, 1979, or
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
41
<PAGE>
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. Two subsequent appellate decisions reached conflicting answers
to these questions and a number of appeals in other cases remain pending.
Until the California Supreme Court speaks, these issues are likely to
remain unresolved.
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.
42
<PAGE>
In the 1998 decision in 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
has 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
provided for an immediate rate reduction for small users; created an
independent power exchange to administer a wholesale power pool; created 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.
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 thereafter embarked on a three-year fiscal recovery plan,
based on sharp reductions in services and personnel, ongoing debt reduction
and a long-term pay-as-you-go capital improvement plan. As a result, in
September 1999 Moody's Investors Service assigned the County an issuer
credit rating of Aa3 and restored the ratings on its pension debt
43
<PAGE>
to the level enjoyed before the bankruptcy filing. In January of this year,
Standard & Poor's upgraded the County's pension debt to A-minus from BB and
for the first time assigned an A rating to the County's overall credit.
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.
LENDING OF PORTFOLIO SECURITIES
- -------------------------------
The Funds may lend securities to qualified institutional investors, typically
broker-dealers, banks or other financial institutions, who need to borrow
securities in order to complete certain transactions, such as covering short
sales, avoiding failures to deliver securities or completing arbitrage
operations. Securities lending allows a Fund to retain ownership of the
securities loaned and, at the same time, earn additional income. Any gain or
loss in the market price of the loaned securities that might occur during the
term of the loan will be for the account of the Fund. Securities will be loaned
only to parties that SAM deems creditworthy and in good standing, and the terms
and the structure of such loans will be consistent with the 1940 Act and the
rules and regulations or interpretations of the SEC thereunder. Among other
things, these provisions limit the amount of securities a Fund may lend to 33-
1/3rd of the Fund's total assets, and require (i) that the borrower provide the
Fund with collateral in the form of cash, an irrevocable letter of credit or
securities issued or guaranteed by the U.S. government having a value at least
equal to the value of the securities loaned, (ii) that the borrower add to such
collateral whenever the price of the loaned securities rises, (iii) that the
loan must be subject to termination by the Fund at any time, and (iv) that the
Fund must receive reasonable interest on the loan (which may include the Fund's
investing any cash collateral in interest-bearing short-term investments).
Investing cash collateral subjects the collateral investment, as well as the
loaned securities, to market appreciation or depreciation. If the borrower
defaults on its obligation to return the securities loaned because of insolvency
or other reasons, a Fund could experience delays and costs in recovering the
loaned securities or foreclosing on the collateral. If a Fund is not able to
recover the loaned securities, it may sell the collateral and purchase a
replacement investment in the market.
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 l8f-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.
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 and Class C shares. 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;
44
<PAGE>
3. Any of the direct or indirect affiliates of SAFECO Securities;
4. Purchases made through the automatic investment of dividends and
distributions paid by another Fund;
5. Clients of administrators or consultants to tax-qualified employee benefit
plans which have entered into agreements with SAFECO Securities or any of
its affiliates;
6. Retirement plan participants who borrow from their retirement accounts by
redeeming Fund shares and subsequently repay such loans via a purchase of
Fund shares;
7. Retirement plan participants who receive distributions from a tax-qualified
employer- sponsored retirement plan, which is invested in Fund shares, the
proceeds of which are reinvested in Fund shares;
8. Accounts as to which a broker-dealer, bank or other financial institution
charges an account management fee, provided the financial institution has
entered into an agreement with SAFECO Securities regarding such accounts;
9. Current or retired officers, directors, trustees or employees of any SAFECO
mutual fund or SAFECO Corporation or its affiliates and the children,
spouse and parents of such persons; and
10. Investments made with redemption proceeds from mutual funds having a
similar investment objective with respect to which the investor paid a
front-end sales charge.
CDSC Waivers. The CDSC for Class B and Class C 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 or Class C shares of a Fund, as applicable, within
60 days of a prior redemption;
45
<PAGE>
(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 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.
46
<PAGE>
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 (" Exchange"), normally 1:00 p.m. Pacific
time every day the Exchange is open for trading.
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-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.
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
47
<PAGE>
established procedures designed to stabilize, to the extent reasonably possible,
the Money Market Fund's price-per-share as computed for the purpose of sales and
redemptions at $1.00.
These procedures include a review of the Money Market Fund's portfolio holdings
by the Board of Trustees, at such intervals as the Board deems appropriate, to
determine whether the Fund's NAV, calculated by using available market
quotations, deviates from $1.00 per share and, if so, whether such deviation may
result in material dilution or is otherwise unfair to existing shareholders of
the 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 interest 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. Effective May 1,
2000 the GNMA Fund commenced offering Class A and Class B shares, and the
following Funds commenced offering Class C shares: Growth Opportunities Fund,
Equity Fund, Dividend Income Fund, Northwest Fund, International Fund, High-
Yield Fund and Money Market Fund.
With respect to the Growth Opportunities, Equity, Dividend Income, Northwest,
International Stock, and Money Market Funds, the performance information that
follows for Class C shares reflects (1) the actual performance of Class B shares
of such Funds for the years ended December 31, 1999, December 31, 1998 and
December 31, 1997; and performance of the No-Load Class shares of such Funds,
restated to reflect the sales charges but not the Rule 12b-1 fees of Class C
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
l2b-1 fees were reflected.
Except with respect to the High-Yield Bond, Value and GNMA Funds, the
performance information with respect to Class A and Class B shares that follows
reflects (1) the actual performance of Class A and Class B shares of the Funds
for the years ended December 31, 1999, 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 l2b-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 l2b-1 fees were reflected.
48
<PAGE>
For the High-Yield Bond Fund, the performance information with respect to Class
A and B shares that follows reflects: (1) the actual performance of Class A and
Class B shares of the Fund for the years ended December 31, 1999 and 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 l2b-1 fees of Class A and Class B shares, for the periods prior to
January 31, 1997; and the performance information with respect to Class C shares
that follows reflects (1) the actual performance of Class B shares of such Fund
for the years ended December 31, 1999 and December 31, 1998 and for the period
from January 31, 1997 to December 31, 1997; and performance of the No-Load Class
shares of such Funds, restated to reflect the sales charges but not the Rule
12b-1 fees of Class C 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 l2b-1 fees were reflected.
For the Value Fund, the performance information that follows reflects actual
performance of the Class A and Class B shares of the Fund since April 30, 1997
(initial public offering).
For the GNMA Fund, the performance information that follows reflects 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.
Performance information for the GNMA Fund would have been lower if these Rule
12b-1 fees were reflected.
Performance information and quoted ratings are indicative only of past
performance and are not intended to represent future investment results.
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, 1999 were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
---------- ---------- ----------
Class A Class B Class C Class A Class B Class C Class A Class B Class C
---------- ---------- --------- ---------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Growth 2.43% 1.62% 1.62% 148.11% 141.68% 141.68% 299.82% 289.47% 289.47%
Opportunities
Fund
Equity Fund 9.13% 8.18% 8.18% 163.43% 155.79% 155.79% 384.45% 370.40% 370.40%
Dividend Income 1.01% 0.18% 0.18% 116.98% 112.62% 112.62% 196.17% 190.23% 190.23%
Fund
Intermediate-Term -2.26% -2.97% - 34.90% 31.93% - 86.84% 82.72% -
U.S. Treasury
Fund
GNMA Fund 0.16% 0.16% - 34.28% 34.28% - 92.70% 92.70% -
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
Class A Class B Class C Class A Class B Class C Class A Class B Class C
------- ------- ------- ------- ------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High-Yield Bond 3.52% 2.73% 2.73% 55.07% 51.54% 51.54% 141.80% 136.29% 136.29%
Fund
Municipal Bond -6.47% -7.14% - 36.58% 33.66% - 86.32% 82.33% -
Fund
California -9.41% -10.07% - 37.89% 34.56% - 84.35% 79.88% -
Tax-Free
</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
31,1999 were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years Since Initial
------ -------
Public Offering
------ --------
Class A Class B Class C Class A Class B Class C Class A Class B Class C
--------- --------- ------- -------- -------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Northwest Fund 53.90% 52.57% 52.57% 186.03% 179.73% 179.73% 277.84% 269.53% 269.53% (106
months)*
Managed Bond -4.24% -4.98% - 30.74% 27.01% - 26.81% 23.19% - (70
Fund months)**
</TABLE>
* Inception of Fund February 7, 1991
** Inception of Fund February 28, 1994
For the following Funds, the total returns, expressed as a percentage, for the
one-year and since initial public offering periods ended December 31, 1999 were
as follows:
<TABLE>
<CAPTION>
1 Year Since Initial
---------- Public Offering
--------- ---------
Class A Class B Class C Class A Class B Class C
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balanced Fund 0.75% -0.01% - 46.19% 42.48% - (47 months)***
International Fund 28.64% 27.48% 27.48% 74.11% 69.30% 69.30% (47 months)***
Small Company Fund 13.17% 12.32% - 37.97% 36.03% - (47 months)***
U.S. Value Fund 4.74% 3.92% - 37.27% 34.75% - (32 months)****
</TABLE>
*** Inception of Fund January 31, 1996.
**** Inception of Fund April 30, 1997.
50
<PAGE>
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, 1999 were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------- ------- --------
Class A Class B Class C Class A Class B Class C Class A Class B Class C
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Growth Opportunities Fund $10,243 $10,162 $10,162 $24,811 $24,168 $24,168 $39,982 $38,947 $38,947
Equity Fund $10,913 $10,823 $10,823 $26,343 $25,591 $25,591 $48,445 $47,061 $47,061
Dividend Income Fund $10,101 $10,018 $10,018 $21,698 $21,262 $21,262 $29,617 $29,023 $29,023
Intermediate-Term U.S. Treasury Fund $ 9,774 $ 9,703 - $13,490 $13,193 - $18,684 $18,272 -
GNMA Fund $10,016 $10,016 - $14,003 $14,003 - $19,114 $19,114 -
High-Yield Bond Fund $10,352 $10,273 $10,273 $15,507 $15,154 $15,154 $24,180 $23,629 $23,629
Municipal Bond Fund $ 9,353 $ 9,286 - $13,658 $13,366 - $18,632 $18,233 -
California Tax-Free $ 9,059 $ 8,993 - $13,789 $13,456 - $18,435 $17,988 -
</TABLE>
For the following Funds, the total returns, expressed in dollars and assuming a
$10,000 initial investment, for the one-year, five-year, and since initial
public offering periods to December 31, 1999 were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years Since Initial
------- ------- Public Offering
------ --------
Class A Class B Class C Class A Class B Class C Class A Class B Class C
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Northwest Fund $15,390 $15,294 $15,294 $28,603 $28,041 $28,041 $37,784 $37,043 $37,043 (106 months)*
Managed Bond Fund $ 9,576 $ 9,502 - $13,074 $12,701 - $12,681 $12,319 - (70 months)**
</TABLE>
* Inception of Fund February 7, 1991
** Inception of Fund February 28, 1994
51
<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, 1999 were as follows:
<TABLE>
<CAPTION>
1 Year Since Initial
------- Public Offering
------------ ----------------
Class A Class B Class C Class A Class B Class C
------- ------- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balanced Fund $10,075 $ 9,999 - $14,619 $14,248 - (47 months)***
International Fund $12,864 $12,748 $12,748 $17,411 $16,930 $16,930 (47 months)***
Small Company Fund $11,317 $11,232 - $13,603 $13,248 - (47 months)***
U.S. Value Fund $10,474 $10,395 - $13,727 $13,478 - (32 months)****
</TABLE>
*** Inception of Fund January 31, 1996
**** Inception of Fund April 30, 1997
For the following Funds, the average annual total returns for the one-, five-and
ten-year periods, or inception of the Fund to the period ended December 31, 1999
were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
----------- ----------- ----------
Class A Class B Class C Class A Class B Class C Class A Class B Class C
----------- ----------- --------- ----------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Growth Opportunities 2.43% 1.62% 1.62% 19.93% 19.30% 19.30% 14.86% 14.56% 14.56%
Fund
Equity Fund 9.13% 8.18% 8.18% 21.38% 20.66% 20.66% 17.09% 16.75% 16.75%
Dividend Income Fund 1.01% 0.18% 0.18% 16.76% 16.28% 16.28% 11.47% 11.24% 11.24%
Intermediate-Term U.S. -2.26% -2.97% - 6.17% 5.70% - 6.45% 6.21% -
Treasury Fund
GNMA Fund 0.16% 0.16% - 6.97% 6.97% - 6.69% 6.69% -
High-Yield Bond Fund 3.52% 2.73% 2.73% 9.17% 8.67% 8.67% 9.23% 8.98% 8.98%
Municipal Bond Fund -6.47% -7.14% - 6.43% 5.97% - 6.42% 6.19% -
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
----------- ----------- ----------
Class A Class B Class C Class A Class B Class C Class A Class B Class C
----------- ----------- --------- ----------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
California Tax-Free -9.41% -10.07% - 6.64% 6.12% - 6.31% 6.05% -
</TABLE>
For the following Funds, the average total returns for the one-year, five-year,
and since initial public offering periods ended December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
1 Year 5 Years Since Initial
---------- ---------- Public Offering
---------- -------------------
Class A Class B Class C Class A Class B Class C Class A Class B Class C
---------- --------- -------- ---------- --------- -------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Northwest Fund 53.90% 52.57% 52.57% 23.39% 22.84% 22.84% 16.12% 15.83% 15.83% (106
months)*
Managed Bond -4.24% -4.98% - 5.51% 4.90% - 4.15% 3.64% - (70
Fund months)**
</TABLE>
* Inception of Fund February 7, 1991
** Inception of Fund February 28, 1994
For the following Funds, the average annual total returns for the one-year and
since initial public offering periods ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
1 Year Since Initial
-------- Public Offering
------------- -----------------
Class A Class B Class C Class A Class B Class C
-------- -------- ------- ------------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balanced Fund 0.75% -0.01% - 10.18% 9.46% - (47 months)***
International Fund 28.64% 27.48% 27.48% 15.20% 14.38% 14.33% (47 months)***
Small Company Fund 13.17% 12.32% - 8.17% 7.44% - (47 months)***
U.S. Value Fund 4.74% 3.92% - 12.59% 11.81% - (32 months)****
</TABLE>
*** Inception of Fund January 31, 1996.
**** Inception of Fund April 30, 1997.
53
<PAGE>
YIELD AND EFFECTIVE YIELD
For the following Funds, the yields for the 30-day period ended December 31,
1999 were as follows:
<TABLE>
<CAPTION>
Class A Class B Class C
------- ------- -------
<S> <C> <C> <C>
Intermediate Treasury Fund 4.69% 4.29% -
GNMA Fund 6.39% 6.39% -
High-Yield Fund 7.98% 7.48% 7.48%
Managed Bond Fund 5.56% 5.18% -
</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, 1999 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 4.45% 3.92% 7.37% 6.49%
California Tax-Free Income 4.62% 4.09% 8.43% 7.46%
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, 1999 were as follows:
<TABLE>
<CAPTION>
Yield Tax-Equivalent Yield
----- --------------------
Class A Class B Class C Class A Class B Class C
------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Money Market Fund 5.51% 5.36% 5.36% 9.12% 8.87% 8.87%
</TABLE>
CALCULATIONS
The total return, expressed as a percentage, is computed using the following
formula:
T = ERV-P X 100
---------
P
The total return, expressed in dollars, is computed using the following formula:
T = P(l +A)/n/
The average annual total return is computed using the following formula:
n
54
<PAGE>
A=(root ERV/P - 1)/n/ 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:
Yield = 2[ (/a-b/ +1)/6/ - 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 rice per share on the last day of the period
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, 1999 were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
----------- ---------- ----------
Class A Class B Class C Class A Class B Class C Class A Class B Class C
----------- ----------- --------- ---------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Growth Opportunities -3.45% -3.38% 0.62% 133.85% 139.68% 141.68% 276.91% 289.47% 289.47%
Fund
Equity Fund 2.86% 3.18% 7.18% 148.36% 153.79% 155.75% 356.57% 370.40% 370.40%
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
----------- ---------- ----------
Class A Class B Class C Class A Class B Class C Class A Class B Class C
----------- ----------- --------- ---------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dividend Income Fund -4.81% -4.60% -0.77% 104.59% 110.62% 112.62% 179.11% 190.23% 190.23%
Intermediate-Term U.S. -6.68% -7.62% - 28.89% 29.93% - 78.47% 82.72% -
Treasury Fund
GNMA Fund -4.31% -4.56% - 33.70% 38.03% - 82.57% 91.14% -
High-Yield Bond Fund -1.10% -2.04% 1.77% 48.07% 49.54% 51.54% 130.91% 136.29% 136.29%
Municipal Bond Fund -10.68% -11.61% - 30.41% 31.66% - 77.95% 82.33% -
California Tax-Free -13.48% -14.41% - 31.67% 32.56% - 76.06% 79.88% -
</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
31,1999 were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years Since Initial
----------- ---------- Public Offering
---------- --------------------
Class A Class B Class C Class A Class B Class C Class A Class B Class C
----------- ---------- -------- ---------- ---------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Northwest Fund 45.06% 47.57% 51.57% 169.57% 177.73% 179.70% 256.12% 269.53% 269.53% (106
months)*
Managed Bond -8.57% -9.55% - 24.91% 25.07% - 21.09% 22.28% - (70
Fund months)**
</TABLE>
* Inception of Fund February 7, 1991
** Inception of Fund February 28, 1994
For the following Funds, the total returns, expressed as a percentage, for the
one-year and since initial public offering periods ended December 31, 1999 were
as follows:
<TABLE>
<CAPTION>
1 Year Since Initial
--------- Public Offering
-----------------
Class A Class B Class C Class A Class B Class C
--------- --------- ------- ------------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balanced Fund -5.07% -4.84% - 37.79% 39.48% - (47 months)***
International Fund 21.25% 22.48% 26.48% 64.10% 66.30% 69.30% (47 months)***
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
1 Year Since Initial
--------- Public Offering
-----------------
Class A Class B Class C Class A Class B Class C
--------- --------- ------- ------------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Small Company Fund 6.63% 7.32% - 28.21% 29.48% - (47 months)***
U.S. Value Fund -1.30% -1.07% - 29.38% 31.75% - (32 months)****
</TABLE>
*** Inception of Fund January 31, 1996.
**** Inception of Fund April 30, 1997.
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, 1999 were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
--------- --------- ---------
Class A Class B Class C Class A Class B Class C Class A Class B Class C
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Growth Opportunities $ 9,655 $ 9,662 $10,062 $23,385 $23,668 $24,068 $37,691 $38,447 $38,847
Fund
Equity Fund $10,286 $10,323 $10,723 $24,836 $25,091 $25,491 $45,657 $46,561 $46,961
Dividend Income Fund $ 9,519 $ 9,540 $ 9,923 $20,449 $20,762 $21,162 $27,911 $28,523 $28,923
Intermediate-Term U.S. $ 9,332 $ 9,238 - $12,889 $12,693 - $17,847 $17,774 -
Treasury Fund
GNMA Fund $ 9,569 $ 9,516 - $13,370 $13,503 - $18,257 $18,614 -
High-Yield Bond Fund $ 9,890 $ 9,796 $10,177 $14,807 $14,654 $15,054 $23,091 $23,158 $23,535
Municipal Bond Fund $ 8,932 $ 8,839 - $13,041 $12,866 - $17,795 $17,737 -
California Tax-Free $ 8,652 $ 8,559 - $13,167 $12,956 - $17,606 $17,498 -
</TABLE>
For the following Funds, the total returns, expressed in dollars and assuming a
$10,000 initial investment, for the one-year, five-year, and since initial
public offering periods ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years Since Initial
--------- --------- Public Offering
--------- ------------------
<S> <C> <C> <C>
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
Class A Class B Class C Class A Class B Class C Class A Class B Class C
--------- -------- -------- --------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Northwest Fund $14,506 $14,794 $15,194 $26,957 $27,541 $27,941 $35,612 $36,593 $36,943 (106
months)*
Managed Bond $ 9,143 $ 9,045 - $12,491 $12,216 - $12,109 $11,864 - (70
Fund months)**
</TABLE>
* Inception of Fund February 7, 1991
** 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-year and since initial public offering
period ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
1 Year Since Initial
------- Public Offering
----------------
Class A Class B Class C Class A Class B Class C
------- ------- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balanced Fund $ 9,493 $ 9,516 - $13,779 $13,748 - (47 months)***
International Fund $12,125 $12,248 $12,648 $16,410 $16,430 $16,830 (47 months)***
Small Company Fund $10,663 $10,732 - $12,821 $12,748 - (47 months)***
U.S. Value Fund $ 9,870 $ 9,896 - $12,938 $12,978 - (32 months)****
</TABLE>
*** Inception of Fund January 31, 1996.
**** Inception of Fund April 30, 1997.
For the following funds, the average annual total returns for the one-, five-and
ten-year periods ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
----------- ---------- ----------
Class A Class B Class C Class A Class B Class C Class A Class B Class C
----------- ----------- --------- ---------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Growth Opportunities -3.45% -3.38% 0.62% 18.52% 19.10% 19.30% 14.19% 14.56% 14.56%
Fund
Equity Fund 2.86% 3.18% 7.18% 19.95% 20.47% 20.66% 16.40% 16.75% 16.75%
Dividend Income Fund -4.81% -4.60% -0.77% 15.38% 16.07% 16.28% 10.81% 11.24% 11.24%
Intermediate-Term U.S. -6.68% -7.62% - 5.21% 5.38% - 5.96% 6.21% -
Treasury Fund
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
----------- ---------- ----------
Class A Class B Class C Class A Class B Class C Class A Class B Class C
----------- ----------- --------- ---------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GNMA Fund -4.31% -4.56% - 5.98% 6.66% - 6.20% 6.69% -
High-Yield Bond Fund -1.10% -2.04% 1.77% 8.17% 8.38% 8.67% 8.73% 8.98% 8.98%
Municipal Bond Fund -10.68% -11.61% - 5.45% 5.66% - 5.93% 6.19% -
California Tax-Free -13.48% -14.41% - 5.66% 5.80% - 5.82% 6.05% -
</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, 1999
were as follows:
<TABLE>
<CAPTION>
1 Year 5 Years Since Initial
--------- -------- Public Offering
---------- -----------------
Class A Class B Class C Class A Class B Class C Class A Class B Class C
--------- --------- ------- -------- -------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Northwest Fund 45.06% 47.57% 51.57% 21.94% 22.67% 22.84% 15.35% 15.83% 15.83% (106
months)*
Managed Bond -8.57% -9.55% - 4.55% 4.58% - 3.33% 3.50% - (70
Fund months)**
</TABLE>
* Inception of Fund February 7, 1991
** Inception of Fund February 28, 1994
For the following Funds, the average annual total returns for the one-year and
since initial public offering periods ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
1 Year Since Initial
-------- Public Offering
------------- -----------------
Class A Class B Class C Class A Class B Class C
-------- -------- ------- ------------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balanced Fund -5.07% -4.84% - 8.53% 8.86% - (47 months)***
International Fund 21.25% 22.48% 26.48% 13.48% 13.86% 14.38% (47 months)***
Small Company Fund 6.63% 7.32% - 6.55% 6.82% - (47 months)***
U.S. Value Fund -1.30% -1.07% - 10.12% 10.87% - (32 months)****
</TABLE>
59
<PAGE>
*** Inception of Fund January 31, 1996.
**** Inception of Fund April 30, 1997.
Yield for the Money Market Fund is computed using the following formula:
Yield = [(x-y)-z] = Based Period Return x 365
-------- ---
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:
Tax-equivalent yield = [e.g.] + [(e(1-g)]
------
(1-f)
Where: e = yield as calculated above
f = tax rate
g = percentage of yield which is tax fee
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 of risk
and potential tax liability, sales commissions and expense and turnover ratios.
These rating
60
<PAGE>
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 earning 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, BLOOMBERG Magazine, BUSINESS WEEK, FABIANS, FORBES, FORTUNE,
INVESTORS'S BUSINESS DAILY, KIPLINGERS'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, SMART MONEY, TELESWITCH, TIME Magazine, U.S. NEWS AND
WORLD REPORT, YOUR MONEY, THE WALL STREET JOURNAL and WORTH).
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 of 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:
AMEX (AMERICAN STOCK EXCHANGE) MAJOR MARKET INDEX-Price- weighted (high
prices 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.
61
<PAGE>
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 statement 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.
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
62
<PAGE>
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 Boards of Trustees have 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
Name, Address and Age with the Trusts Principal Occupation(s) During Past 5 Years
- --------------------- ---------------- -------------------------------------------
<S> <C> <C>
Boh A. Dickey* Chairman and Trustee President, Chief Operating Officer, and
SAFECO Plaza Director of SAFECO Corporation. Previously,
Seattle, WA 98185 Executive Vice President and Chief Financial
(55) 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 Consultant. From 1994 to 1999 she was the
3246 Cascadia Ave. S. Director of Community Affairs for Microsoft
Seattle, WA 98144 Corporation, Redmond, Washington, a computer
(54) software company. Director of First SAFECO
National Life Insurance Company of New York;
Board Chair of United Way of King County;
member of the Board of Managers of Swarthmore
College.
David F. Hill* President President of SAFECO Mutual Funds, SAFECO
10865 Willows Road NE Trustee Securities, Inc. and SAFECO Services
Redmond, WA 98052 Corporation; Senior Vice President of SAFECO
(51) Asset Management Company. See table under
"Investment Advisory and Other Services."
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
Position(s) Held
Name, Address and Age with the Trusts Principal Occupation(s) During Past 5 Years
- --------------------- ---------------- -------------------------------------------
<S> <C> <C>
Richard W. Hubbard* Trustee Retired Vice President and Treasurer of the
1270 NW Blakely Ct. Trust and other SAFECO Trusts; retired Senior
Seattle, WA 98177 Vice President and Treasurer of SAFECO
(71) 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 Customer Relations,
764 S. 293/rd/ Street Building Materials Distribution, Weyerhaeuser
Federal Way, WA 98032 Company, Tacoma, Washington; Director of
(62) First SAFECO National Life Insurance Company
of New York.
Larry L. Pinnt Trustee Retired Vice President and Chief Financial
1600 Bell Plaza Officer of U.S. West Communications, Seattle,
Room 1802 Washington; Chairman of University of Washington
Seattle, WA 98191 Medical Center Board, Seattle, Washington;
(65) Director of Cascade Natural Gas Corporation,
Seattle, Washington; Director of First SAFECO
National Life Insurance Company of New York;
and Treasurer of Cancer Care Alliance (non-
profit organization), Seattle, Washington.
John W. Schneider Trustee President and sole owner of Wallingford
1808 N. 41/st/ St. Group, Inc., Seattle, Washington, a company
Seattle, WA 98103 consulting on the acquisition/disposition and
(58) development of real estate; former President
of Emerald Development Group, Inc. (a real
estate development company), Seattle,
Washington; Director of First SAFECO National
Life Insurance Company of New York.
Neal Fuller Controller Vice President, Controller, Assistant
10865 Willows Road NE Assistant Secretary Secretary and Treasurer of SAFECO Securities,
Redmond, WA 98052 Inc. and SAFECO Services Corporation; Vice
(37) President, Controller, Secretary and
Treasurer of SAFECO Asset Management Company.
See table under "Investment Advisory and
Other Services."
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
Position(s) Held
Name, Address and Age with the Trusts Principal Occupation(s) During Past 5 Years
- --------------------- ---------------- -------------------------------------------
<S> <C> <C>
Ronald L. Spaulding Vice President Chairman of SAFECO Asset Management Company;
Two Union Square Treasurer Treasurer and Chief Investment Officer of
601 Union Street SAFECO Corporation; Vice President of SAFECO
25/th/ Floor Insurance Companies; Director, Vice President
Seattle, WA 98101 and Treasurer of First SAFECO National Life
(56) 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 Securities,
10865 Willows Rd NE Inc., SAFECO Services Corporation and SAFECO
Redmond, WA 98052 Asset Management Company; former Accounting
(42) Manager of SAFECO Asset Management Company;
former Senior Manager with Ernst & Young LLP,
an independent accounting firm.
Stephen D. Collier Assistant Secretary Director of Taxation and Assistant Vice
SAFECO Plaza President of SAFECO Corporation; Assistant
4333 Brooklyn Ave NE Secretary of SAFECO Asset Management Company,
Seattle, WA 98185 SAFECO Securities, Inc. and SAFECO Services
(47) Corporation. He has been an executive
officer of 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.
65
<PAGE>
Compensation Table For Current Trustees
For The Fiscal Year Ended December 31, 1999
<TABLE>
<CAPTION>
Pension or Total Compensation
Aggregate Retirement Benefits Estimated Annual From Registrant and
Compensation from Accrued As Part of Benefits Upon and Complex Paid to
Trustee Trust Registrant Fund Expenses Retirement 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. Dingfield Common Stock $12,170 N/A N/A
Taxable Bond $ 4,003 N/A N/A
Tax-Exempt Bond $ 6,860 N/A N/A
Managed Bond $ 1,317 N/A N/A
Money Market $ 2,786 N/A N/A
Total Compensation $35,500
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. Hubbard Common Stock $11,313 N/A N/A
Taxable Bond $ 3,721 N/A N/A
Tax-Exempt Bond $ 6,377 N/A N/A
Managed Bond $ 1,224 N/A N/A
Money Market $ 2,590 N/A N/A
Total Compensation
$33,000
Richard E. Lundgren Common Stock $12,170 N/A N/A
Taxable Bond $ 4,003 N/A N/A
Tax-Exempt Bond $ 6,860 N/A N/A
Managed Bond $ 1,317 N/A N/A
Money Market $ 2,786 N/A N/A
Total Compensation
$35,500
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
Pension or Total Compensation
Aggregate Retirement Benefits Estimated Annual From Registrant and
Compensation from Accrued As Part of Benefits Upon and Complex Paid to
Trustee Trust Registrant Fund Expenses Retirement Trustees
- ------- ----- ----------------- ------------------ ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Larry L. Pinnt Common Stock $12,170 N/A N/A
Taxable Bond $ 4,003 N/A N/A
Tax-Exempt Bond $ 6,860 N/A N/A
Managed Bond $ 1,317 N/A N/A
Money Market $ 2,786 N/A N/A
Total Compensation
$35,500
John W. Schneider Common Stock $12,170 N/A N/A
Taxable Bond $ 4,003 N/A N/A
Tax-Exempt Bond $ 6,860 N/A N/A
Managed Bond $ 1,317 N/A N/A
Money Market $ 2,786 N/A N/A
Total Compensation $35,000
</TABLE>
At February 1, 2000, 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.
Under policies adopted by the Trusts, the initial sales charge on Class A shares
of the Trusts' series funds are waived for current and retired officers,
directors, trustees and employees of any of the Trusts, or of SAFECO Corporation
or its affiliates. Amounts collected from initial sales charges are used to
compensate brokers and their sales representatives for their sales efforts -
including time spent educating their clients about the SAFECO Mutual Funds and
advising them as to the Funds appropriate to meet their investment goals - an
incentive to sell shares of the Funds to their clients for whom such Funds would
be appropriate investments. These services and incentives are not believed to be
necessary with respect to sales to the trustees and officers of the Trusts or to
other SAFECO affiliates.
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS OF CERTAIN FUNDS
- -----------------------------------------------------------
At March 31, 2000, SAM controlled the International, Balanced, U.S. Value and
Managed Bond Funds. At March 31, 2000, SAFECO Insurance Company of America
("SAFECO Insurance") controlled the Intermediate-Term U.S. Treasury Fund. Each
of SAM and SAFECO Insurance is a corporation organized under the laws of the
State of Washington.
At March 31, 2000, SAM owned 30.20% of the Balanced Fund's outstanding shares;
26.70% of the International Fund's outstanding shares; 57.50% of the U.S. Value
Fund's outstanding shares; and 45.60% of the Managed Bond Fund's outstanding
shares. At March 31, 2000, SAFECO Insurance owned 25.50% 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 8.12% 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 33.62% of the Intermediate-Term U.S. Treasury
Fund's outstanding shares.
67
<PAGE>
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, 2000 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 Opportunities Fund
<TABLE>
<CAPTION>
Name of Beneficial Owner Number of Shares Percent of Fund
------------------------ ---------------- ---------------
<S> <C> <C>
National Financial Services Corp. 3,126,771.178 9.44%
for the Exclusive Benefit of Our
Customers
Attn.: Mutual Funds Dept. 5th Fl.
200 Liberty St., 1 World Financial Center
New York, NY 10281-10003
Charles Schwab & Co. Inc. 7,761,159.616 23.43%
Exclusive Benefit of Its Customers
Attn: Mutual Fund Department
101 Montgomery Street
San Francisco CA 94104-4122
</TABLE>
68
<PAGE>
Equity Fund
<TABLE>
<CAPTION>
Name of Beneficial Owner Number of Shares Percent of Fund
------------------------ ---------------- ---------------
<S> <C> <C>
Charles Schwab & Co. Inc. 19,378,423.551 24.11%
Exclusive Benefit of Its Customers
Attn: Mutual Fund Department
101 Montgomery Street
San Francisco CA 94104-4122
Dividend Income Fund
Name of Beneficial Owner Number of Shares Percent of Fund
------------------------ ---------------- ---------------
Charles Schwab & Co. Inc. 937,367.347 7.59%
Exclusive Benefit of Its Customers
Attn: Mutual Fund Department
101 Montgomery Street
San Francisco CA 94104-4122
Northwest Fund
Name of Beneficial Owner Number of Shares Percent of Fund
------------------------ ---------------- ---------------
SAFECO Insurance Company of America 450,000.000 8.13%
SAFECO Plaza
Seattle, WA 98185
Balanced Fund
Name of Beneficial Owner Number of Shares Percent of Fund
------------------------ ---------------- ---------------
SAFECO Asset Management Company 519,267.822 30.22%
Two Union Square
Sixth Avenue and Union Street
Seattle, WA 98101
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
International Fund
Name of Beneficial Owner Number of Shares Percent of Fund
------------------------ ---------------- ---------------
SAFECO Asset Management Company 688,168.197 26.68%
Two Union Square
Sixth Avenue and Union Street
Seattle, WA 98101
Norwest Bank Minnesota, N.A., Trustee 824,250.304 31.95%
SAFECO 401K Savings Plan
510 Marquette, 5th and Marquette
Minneapolis, MN 55479-0001
Small Company Fund
Name of Beneficial Owner Number of Shares Percent of Fund
------------------------ ---------------- ---------------
Norwest Bank Minnesota, N.A., Trustee 882,056.321 37.38%
SAFECO 401K Savings Plan
510 Marquette, 5th and Marquette
Minneapolis, MN 55479-0001
U.S. Value Fund
Name of Beneficial Owner Number of Shares Percent of Fund
------------------------ ---------------- ---------------
SAFECO Asset Management Company 500,000 57.25%
Two Union Square
Sixth Avenue and Union Street
Seattle, WA 98101
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
Name of Beneficial Owner Number of Shares Percent of Fund
----------------------- ---------------- ---------------
<S> <C> <C>
Charles Schwab & Co. Inc. 49,167.570 5.63%
Exclusive Benefit of Its Customers
Attn: Mutual Fund Department
101 Montgomery Street
San Francisco CA 94104-4122
Intermediate-Term U.S. Treasury Fund
Name of Beneficial Owner Number of Shares Percent of Fund
------------------------ ---------------- ---------------
SAFECO Insurance Company of America 500,000 25.54%
SAFECO Plaza
Seattle, WA 98185
SAFECO Trust Omnibus Account 158,993.463 8.12%
P.O. Box 34730
Seattle, WA 98124-1730
High-Yield Fund
Name of Beneficial Owner Number of Shares Percent of Fund
------------------------ ---------------- ---------------
Charles Schwab & Co. Inc. 1,475,368.113 18.45%
Exclusive Benefit of Its Customers
Attn: Mutual Fund Department
101 Montgomery Street
San Francisco CA 94104-4122
Managed Bond Fund
Name of Beneficial Owner Number of Shares Percent of Fund
------------------------ ---------------- ---------------
SAFECO Asset Management Company 452,102.943 45.59%
Two Union Square
Sixth Avenue and Union Street
Seattle, WA 98101
Christa Ministries 112,507.321 11.34%
William Brown V.P. Finance
P.O. Box 330303
Seattle, WA 98133-9703
</TABLE>
71
<PAGE>
California Tax-Free Income Fund
<TABLE>
<CAPTION>
Name of Beneficial Owner Number of Shares Percent of Fund
------------------------ ---------------- ---------------
<S> <C> <C>
Charles Schwab & Co. Inc. 1,779,278.550 22.79%
Exclusive Benefit of Its Customers
Attn: Mutual Fund Department
101 Montgomery Street
San Francisco CA 94104-4122
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
- --------------------------------------
SAFECO Asset Management Company ("SAM"), SAFECO Securities, Inc. ("SAFECO
Securities") and SAFECO Services Corporation ("SAFECO Services") are wholly
owned subsidiaries of SAFECO Corporation. SAM is the investment advisor for each
Fund, 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.
Code of Ethics. Section 17(j) of the Investment Company Act of 1940 (the "Act")
- --------------
generally prohibits the principal underwriter of a mutual fund, and any person
affiliated with a mutual fund company, its investment advisor or principal
underwriter, from engaging in any fraudulent conduct in connection with the
person's purchase or sale of securities held or to be acquired by the fund.
Each of the Trusts and their investment advisor and principal underwriter have
adopted a joint Code of Ethics ("Code") under Rule 17j-1 of the Act, relating to
the personal investment activities of SAFECO Mutual Funds personnel. In
addition, the investment sub-advisor to the International Fund has adopted a
Code of Ethics relating to the personal investment activities of its
personnel.
A copy of each Trust's Code is publicly filed with the Securities and Exchange
Commission ("SEC") as an exhibit to the Trust's registration statement, and a
copy of the sub-advisor's Code of Ethics is publicly filed with the SEC as an
exhibit to the SAFECO Common Stock Trust's registration statement, and copies of
each are available from the SEC. The Codes can be reviewed and copied at the
SEC's Public Reference Room in Washington D.C., are available on the EDGAR
database on the SEC's Internet site at http://www.sec.gov., or may be obtained
-------------------
from the SEC (after paying a copying fee) by electronic request at the following
email address: [email protected], or by writing to the SEC at SEC Public
------------------
Reference Section, Washington, D.C. 20549-0102. For information on the
operation of the SEC's Public Reference Room, call the SEC at
1-202-942-8090.
The Code generally permits fund personnel to invest in securities for their own
accounts, but regulate such investments by (i) individuals whose job functions
involve either making or participating in securities transactions, or making or
participating in recommendations concerning securities purchases or sales, and
(ii) those employees who in the course of their job functions are able to obtain
information regarding a Fund's purchases or sales of securities ("access
persons"). The Code (1) requires access persons to preclear all securities
trades, other than transactions involving open-end mutual fund shares and the
securities of certain government issuer, (2) prohibits access persons from
purchasing or selling any security they know is being purchased or sold, or
considered for purchase or sale, by any series fund of the Trusts, and (3)
requires access persons to comply with certain annual and quarterly reporting
requirements relating to their securities holdings and transactions during the
period.
72
<PAGE>
In addition, the Code broadly bars all fund personnel from (1) engaging in
personal trading when in possession of information concerning Fund trading
decisions, (2) participating in any transaction involving a conflict of interest
giving rise to a pecuniary interest in a transaction to which any investment
client is a party, or in transactions which would create any personal benefit,
(3) accepting gifts or favors from any person who seeks to do business with the
Trusts or any of their series Funds, or with SAM or SAFECO Securities. These
prohibitions are not restricted to the group of Fund "access persons".
The sub-advisor's Code of Ethics generally permits employees to invest in
securities for their own accounts, but employees are not permitted to make such
investments until first seeking the written approval of the firm's designated
Compliance Officer. Such approval will generally not be granted (1) where the
firm intends to purchase or sell the same security for a client account within
seven days of the intended personal transaction, (2) where there is a pending
order in the same security for any client, or (3) where the employee would
profit from "short-term dealing" (purchase and sale within 60 days of one
another) in the security. The Code of Ethics prohibits the sub-advisor's
employees from participating in initial public offerings, and requires employees
to disclose any ownership interest in a privately-held company in any investment
in the same company is being considered for a client. In addition, the Code of
Ethics requires the sub-advisor's employees to disclose their securities
holdings within 10 days after they become employed at the firm, to report all
securities holdings to the Compliance Officer on an annual basis, and to conduct
all transactions through an associated broker.
Investment Advisory Services. 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. Bank of
Ireland and its affiliates manage assets for clients worldwide in excess of $39
billion as of December 31, 1999.
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 Director
Treasurer
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
SAFECO SAFECO
Name Trusts SAM Securities Services
- ---- ------ --- ---------- --------
<S> <C> <C> <C> <C>
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
</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.
74
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
FUND FEE
- -------------------------------------------------------------------------------
<S> <C> <C>
Net Assets Annual Fee
Growth Opportunities, $0 - $250,000,000 .70 of 1%
Equity, Dividend $250,000,001 - $750,000,000 .65 of 1%
Income, Northwest, $750,000,001 - $1,250,000,000 .60 of 1%
Balanced and U.S. Value 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%
$750,000,001 - $1,250,000,000 .65 of 1%
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%
- -------------------------------------------------------------------------------
Municipal Bond and $0 - $250,000,000 .50 of 1%
California Tax-Free $250,001 - $750,000,000 .45 of 1%
Income 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%
- -------------------------------------------------------------------------------
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 .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
75
<PAGE>
return, SAM (and not the International Fund) pays the Sub-Advisor a fee in
accordance with the schedule below:
Net Assets Annual Fee
$0 - $50,000,000 .60 of 1%
$50,000,001 - $100,000,000 .50 of 1%
Over $ 100,000,000 .40 of 1%
The following table states the total amounts of compensation paid by the
following Funds to SAM for the fiscal years ended December 31, 1999, 1998 and
1997:
<TABLE>
Fiscal Year or Period Ended
---------------------------
December December December
31, 1999 31, 1998 31, 1997
-------- -------- --------
<S> <C> <C> <C>
Growth Opportunities Fund $ 6,137,000 $6,818,000 $2,120,000
Equity Fund $12,814,000 $8,913,000 $6,481,000
Dividend Income Fund $ 2,300,000 $2,747,000 $2,285,000
Northwest Fund $ 534,000 $ 519,000 $ 416,000
Intermediate-Term U.S.
Treasury Fund $ 123,000 $ 109,000 $ 85,000
GNMA Fund $ 247,000 $ 259,000 $ 246,000
High-Yield Fund Fund $ 482,000 $ 507,000 $ 386,000
Balanced Fund $ 166,000 $ 144,000 $ 87,000
International Fund $ 301,000 $ 196,000 $ 153,000
Small Company Fund $ 239,000 $ 360,000 $ 151,000
U.S. Value Fund $ 80,000 $ 78,000 $ 43,000*
Managed Bond Fund $ 40,000 $ 30,000 $ 23,000
Municipal Bond Fund $ 2,359,000 $2,164,000 $2,041,000
</TABLE>
76
<PAGE>
California Tax-Free Income $ 553,000 $ 587,000 $ 424,000
Fund
Money Market Fund $ 1,166,000 $ 1,013,000 $ 865,000
* Represents fees paid from April 30, 1997 (inception of fund) to December 31,
1997.
Distribution Arrangements. SAFECO Securities, SAFECO Plaza, Seattle, Washington
98185 is the principal underwriter for each Fund and distributes the Class A,
Class B and Class C 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, Class B and, if applicable, Class C shares
(Common Stock Trust, Taxable Bond Trust and Money Market Trusts only) 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.
Each of the Common Stock Trust, Taxable Bond Trust and Money Market Trusts have
also adopted a plan pursuant to Rule 12b-1 under the 1940 Act with respect to
the Class C shares of certain Funds. The Rule 12b-1 plans with respect to the
Class A, Class B and Class C shares are referred to, collectively, as 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 and C 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 and Class C shares, respectively. Although the Money
Market Trust has adopted Plans with respect to the Class A, Class B and Class C
shares of the Money Market Fund, the Money Market Trust's Board of Trustees and
SAFECO Securities have agreed not to implement such Plans at this time. Thus,
the Class A, Class B and Class C 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.
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 and Class C Plans to offset the
commissions it pays to broker-dealers, banks or other financial institutions for
selling each Fund's Class B and Class C shares. In addition, SAFECO Securities
will use the distribution fees under the Class B and Class C Plans to offset
each Fund's marketing costs attributable to the Class B and Class C shares,
respectively, such as preparation of sales literature, advertising and printing
and distributing prospectuses and other shareholder materials to prospective
investors. SAFECO Securities also may use the distribution fee to pay other
costs allocated to SAFECO Securities' distribution activities, including acting
as shareholder of record, maintaining account records and other overhead
expenses. SAFECO Securities, 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, and equal to 1.00% of the
amount invested to broker-dealers, banks and other financial institutions who
sell Class C 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, and broker-dealers, banks and other financial institutions who sell
Class C shares of the Money Market Fund will receive the 1.00% brokerage
commission, at the time
77
<PAGE>
the shareholder exchanges his or her Money Market Fund Class B or Class C
shares, as the case may be, 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 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 addition to the commissions and concessions described in the prospectus,
SAFECO Securities may, at its expense, pay additional commissions or promotional
incentives to dealers that sell shares of the Funds. Such additional
commissions or incentives may be offered only to dealers which satisfy certain
sales volume/growth criteria, or which meet other criteria SAFECO Securities
establishes from time to time. In connection with such a marketing
relationship, SAFECO Securities has agreed to pay WM Financial Services, Inc.
additional compensation in the amount of .25% on new sales, other than sales of
those Class A Shares which are sold at net asset value and shares of the Money
Market Fund for which only .10% in additional compensation will be paid.
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,
Class B and Class C shares to such Class A, Class B or Class C based on the
ratio of sales of shares of such class to the sales of all Class A, Class B and
Class C 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, Class B or Class C 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, Class B and Class C shares of the Funds to which they relate to pay
service and distribution fees to SAFECO
78
<PAGE>
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-l 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, 1999, each Fund paid the following Rule
12b-1 fees:
<TABLE>
<CAPTION>
Fund Name Class A Class B
--------- -------- --------
<S> <C> <C>
Growth Opportunities Fund* $ 71,241 $143,447
Equity Fund* 147,696 242,180
Dividend Income Fund* 5,636 23,231
Northwest Fund* 6,920 32,473
Balanced Fund 3,742 24,666
International Stock Fund* 2,224 10,190
Small Company Value Fund 2,356 10,557
U.S. Value Fund 680 7,160
Municipal Bond Fund 2,466 14,460
California Tax-Free Income Fund 2,176 9,201
Intermediate-Term U.S. Treasury Fund 2,233 8,581
GNMA Fund* N/A N/A
High-Yield Bond Fund* 5,499 18,104
Managed Bond Fund 1,006 7,965
Money Market Fund* 0 0
</TABLE>
* Class A and B shares of the GNMA Fund, and Class C shares of the Growth
Opportunities Fund, Equity Fund, Dividend Income Fund, Northwest Fund,
International Stock Fund, High-Yield Bond Fund and Money Market Fund, were not
offered until May 1, 2000.
Actual Rule l2b-1 fees by category paid by each Fund with regard to the Class A
shares during the fiscal year ended December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Class A Growth Opportunities Fund Equity Fund Dividend Income Fund Northwest Fund
- ------------------------- ------------------------- ----------- -------------------- --------------
<S> <C> <C> <C> <C>
Advertising $ 8 $ 8 $8 $8
Printing and Mailing
prospectuses, semi-
annual reports and
annual reports (other
than to current
shareholders) $ 9 $ 9 $9 $9
Seminars --- --- --- ---
Compensation to
Underwriters to
partially offset other
marketing expenses --- --- --- --
</TABLE>
79
<PAGE>
<TABLE>
<CAPTION>
Class A Growth Opportunities Fund Equity Fund Dividend Income Fund Northwest Fund
- ------------------------- ------------------------- ----------- -------------------- --------------
<S> <C> <C> <C> <C>
Compensation to Dealers
$71 $148 $5 $7
Compensation to Sales
Personnel
</TABLE>
<TABLE>
<CAPTION>
Class A Balanced Fund International Stock Fund Small Company Fund U.S Value Fund
- ------- ------------- ------------------------ ------------------ --------------
<S> <C> <C> <C> <C>
Advertising $8 $8 $8 $8
Printing and Mailing
prospectuses, semi-
annual reports and
annual reports (other
than to current
shareholders) $9 $9 $9 $9
Seminars --- --- --- ---
Compensation to
Underwriters to
partially offset other
marketing expenses --- --- --- ---
Compensation to Dealers
$4 $2 $2 0
Compensation to Sales
Personnel --- --- --- ---
</TABLE>
<TABLE>
<CAPTION>
California Tax-Free Intermediate-Term U.S.
Class A Municipal Bond Fund Income Fund Treasury Fund High-Yield Bond Fund
- ------- ------------------- -------------------------- -------------------------- --------------------
<S> <C> <C> <C> <C>
Advertising $7 $7 $7 $7
Printing and Mailing
prospectuses, semi-
annual reports and
annual reports (other
than to current
shareholders) $9 $9 $9 $9
Seminars --- --- --- ---
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
California Tax-Free Intermediate-Term
Class A Municipal Bond Fund Income Fund U.S. Treasury Fund High-Yield Bond Fund
- ------- ------------------- ------------------ ------------------ --------------------
<S> <C> <C> <C> <C>
Compensation to
Underwriters to
partially offset other
marketing expenses
--- --- --- ---
Compensation to Dealers $2 $2 $2 $5
Compensation to Sales
Personnel --- --- --- ---
</TABLE>
<TABLE>
<CAPTION>
Class A GNMA Fund* Managed Bond Fund Money Market Fund
- ------- ---------- ----------------- ---------------
<S> <C> <C> <C>
Advertising N/A $7 $7
Printing and Mailing N/A $9 $9
prospectuses,
semi-annual reports and
annual reports (other
than to current
shareholders)
Seminars N/A --- ---
Compensation to N/A --- ---
Underwriters to
partially offset other
marketing expenses
Compensation to Dealers N/A $1 0
Compensation to Sales N/A --- ---
Personnel
</TABLE>
* Class A and B shares of the GNMA Fund were not offered until May 1, 2000.
Actual Rule 12b-1 fees by category paid by each Fund with regard to the Class
B shares during the year ended December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Class B Growth Opportunities Fund Equity Fund Dividend Income Fund Northwest Fund
- ------- ------------------------- ----------- -------------------- --------------
<S> <C> <C> <C> <C>
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
Class B Growth Opportunities Fund Equity Fund Dividend Income Fund Northwest Fund
- ------- ------------------------- ----------- -------------------- --------------
<S> <C> <C> <C> <C>
Advertising $ 8 $ 8 $ 8 $ 8
Printing and Mailing
prospectuses, semi-annual
reports and annual reports
(other than to semi-annual
current shareholders) $ 9 $ 9 $ 9 $ 9
Seminars --- --- --- ---
Compensation to Underwriters to
partially offset other marketing
expenses --- --- --- ---
Compensation to Dealers $ 36 $ 60 $ 6 $ 8
Compensation to Sales
Personnel $140 $325 $26 $18
</TABLE>
<TABLE>
<CAPTION>
International Small Company U.S. Value
Class B Balanced Fund Stock Fund Fund Fund
- ------- ------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Advertising $ 8 $ 8 $ 8 $ 8
Printing and Mailing prospectuses,
semi-annual reports and annual
reports (other than to current
shareholders) $ 9 $ 9 $ 9 $ 9
Seminars --- --- --- ---
Compensation to Underwriters to
partially offset other marketing
expenses --- --- --- ---
Compensation to Dealers $ 6 $ 2 $ 3 $ 2
Compensation to Sales Personnel $32 $14 $16 $ 7
</TABLE>
<TABLE>
<CAPTION>
Intermediate
California Tax- Term U.S. High-Yield
Class B Municipal Bond Fund Free Income Fund Treasury Fund Bond Fund
- ------- ------------------- ---------------- ------------- ----------
<S> <C> <C> <C> <C>
Advertising $7 $7 $ 7 $ 7
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
Intermediate
California Tax- Term U.S. High-Yield
Class B Municipal Bond Fund Free Income Fund Treasury Fund Bond Fund
- ------- ------------------- ---------------- ------------- ----------
<S> <C> <C> <C> <C>
Printing and Mailing prospectuses,
semi-annual reports and annual
reports (other than to current
shareholders) $ 8 $ 8 $ 8 $ 8
Seminars --- --- --- ---
Compensation to Underwriters to
partially offset other marketing
expenses --- --- --- ---
Compensation to Dealers $ 3 $ 2 $ 2 $ 4
Compensation to Sales
Personnel $ 8 $ 7 $15 $22
</TABLE>
<TABLE>
<CAPTION>
Class B GNMA Fund* Managed Bond Fund Money Market Fund
- ------- ---------- ----------------- -----------------
<S> <C> <C> <C>
Advertising N/A $ 7 $7
Printing and Mailing prospectuses, N/A $ 8 $8
semi-annual reports and annual
reports (other than to current
shareholders)
Seminars N/A --- ---
Compensation to Underwriters to N/A --- ---
partially offset other marketing
expenses
Compensation to Dealers N/A $ 2 0
Compensation to Sales N/A $20 0
Personnel
</TABLE>
* Class A and B shares of the GNMA Fund were not offered until May 1, 2000.
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 ended December 31, 1999 December 31, 1998 and December
31, 1997.
83
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Sales Amount Sales Amount Sales Amount
----- ------- ----- ------ ----- ------
Fund Name Charge Retained Charge Retained Charge Retained
- --------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Growth Opportunities
Fund $ 150,00 $11,000 $366,000 $79,000 $ 42,000 $ 2,000
Equity Fund 267,000 33,000 317,000 48,000 103,000 14,000
Dividend Income Fund 22,000 3,000 28,000 6,000 9,000 1,000
Northwest Fund 37,000 5,000 46,000 7,800 33,000 3,000
Balanced Fund 37,000 3,000 17,000 5,000 2,000 0
International Stock Fund 9,000 1,000 3,000 1,000 2,000 0
Small Company Value 10,000 1,000 16,000 3,000 1,000 0
Fund
U.S. Value Fund 5,000 1,000 2,000 0 0 0
Municipal Bond Fund 4,000 0 1,000 0 0 0
California Tax-Free 10,000 1,000 11,000 2,000 0 0
Income Fund
Intermediate-Term U.S. 6,000 1,000 9,000 1,000 0 0
Treasury Fund
GNMA Fund N/A N/A N/A N/A N/A N/A
High-Yield Bond Fund 23,000 3,000 36,000 9,000 0 0
Managed Bond Fund 6,000 1,000 0 0 0 0
Money Market Fund N/A N/A N/A N/A N/A N/A
</TABLE>
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, 1999, 1998, and 1997:
<TABLE>
<CAPTION>
Fund Name 1999 1998 1997
--------- ---- ---- ----
<S> <C> <C> <C>
Growth Opportunities Fund $72,000 $22,000 $1,000
Equity Fund 81,000 22,000 3,000
Dividend Income Fund 5,000 1,000 0
Northwest Fund 4,000 9,000 0
Balanced Fund 17,000 2,000 0
International Stock Fund 2,000 0 0
Small Company Value Fund 2,000 2,000 0
U.S. Value Fund 2,000 0 0
Municipal Bond Fund 1,000 1,000 0
California Tax-Free Income Fund 1,000 1,000 0
Intermediate-Term U.S. Treasury Fund 4,000 1,000 0
GNMA Fund N/A N/A N/A
High-Yield Bond Fund 5,000 0 0
Managed Bond Fund 1,000 0 0
Money Market Fund N/A N/A N/A
</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, making regulatory
filings,
84
<PAGE>
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.
The following table shows the fees paid by the following Funds to SAM during the
fiscal period ended December 31, 1999.
<TABLE>
<CAPTION>
From Date of Agreement
(May 1, 1999) to
December 31, 1999
-----------------
<S> <C>
Growth Opportunities Fund $219,103
Equity Fund $408,044
Dividend Income Fund $138,992
Northwest Fund $ 47,778
Intermediate-Term U.S. Treasury Fund $ 13,312
GNMA Fund $ 25,516
High-Yield Fund $ 47,887
Balanced Fund $ 14,324
International Fund $ 18,906
Small Company Fund $ 17,233
U.S. Value Fund $ 6,916
Managed Bond Fund $ 4,941
Municipal Bond Fund $164,108
California Tax-Free Income Fund $ 63,063
Money Market Fund $126,764
</TABLE>
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
85
<PAGE>
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, Class B and Class C 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, Class B and Class C shareholders, records of transactions
involving each Fund's Class A, Class B and Class C 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, but not to exceed .40% of each such Fund's average net
assets; $32.00 per Bond Fund, Tax-Exempt Bond Fund and Managed Bond Fund
shareholder account, but not to exceed .40% of each such Fund's average net
assets; and $34.00 per Money Market Fund shareholder account, but not to exceed
.30% of each such 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, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------
December 31, December 31, December 31,
------------ ------------ -------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Growth Opportunities
Fund $3,113,000 $2,802,000 $ 517,000
Equity Fund $4,329,000 $3,543,000 $2,320,000
Dividend Income
Fund $ 716,000 $ 693,000 $ 583,000
Northwest $ 216,000 $ 194,000 $ 145,000
Fund
Intermediate- $ 56,000 $ 37,000 $ 31,000
Term U.S.
Treasury Fund
GNMA Fund $ 82,000 $ 65,000 $ 65,000
</TABLE>
86
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
High-Yield $ 167,000 $ 124,000 $ 86,000
Fund
Balanced $ 68,000 $ 44,000 $ 23,000
Fund
International $ 83,000 $ 52,000 $ 34,000
Fund
Small Company $ 92,000 $ 122,000 $ 50,000
Fund
U.S. Value Fund $ 26,000 $ 20,000 $ 5,000*
Managed
Bond Fund $ 15,000 $ 4,000 $ 1,000
Municipal
Bond Fund $ 318,000 $ 325,000 $ 327,000
California Tax- $ 87,000 $ 81,000 $ 60,000
Free Income Fund
Money Market $ 693,000 $ 482,000 $ 414,000
Fund
</TABLE>
* The total amount of fees paid from April 30, 1997 (initial public offering)
to December 31, 1997.
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
87
<PAGE>
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.
The following table states the total amount of brokerage expenses for the
following Funds for the fiscal years ended December 31, 1999, December 31, 1998
and December 31, 1997:
<TABLE>
<CAPTION>
Fiscal Year Ended
December 31,
------------------------------
1999 1998 1997
------------------------------- ----
<S> <C> <C> <C>
Growth Opportunities $1,533,124 $2,693,078* $ 817,674
Fund
Equity Fund $1,453,472 $1,204,661 $1,180,261
Dividend Income $ 412,995 $ 344,745 $ 341,428
Fund
Northwest $ 83,496 $ 48,671 $ 63,531
Fund
Balanced $ 19,261 $ 16,890 $ 9,913
Fund
International $ 35,020 $ 16,320 $ 16,054
Fund
Small $ 125,626 $ 92,111 $ 24,185**
Company Fund
U.S. Value Fund $ 14,187 $ 14,106 $ 10,224***
</TABLE>
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* The increase in brokerage amounts was a result of significant acquisition and
sales activities due to growth of Fund assets, which activities are not typical
for the Growth Opportunities Fund on a historical basis.
** Lower brokerage amounts during the first full calendar year of the Fund's
existence reflect its smaller size and lower levels of acquisition and sales
activities than are expected to be typical for the Fund.
*** The total amount of brokerage expenses for the period from April 30, 1997
(initial public offering) to December 31, 1997.
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.
All or part of the 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.
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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.
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,
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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 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 - - HEDGING
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 Funds realize 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 Funds 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 a 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 a 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 Funds 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
a Fund must distribute to meet the Distribution Requirement and avoid imposition
of the Excise Tax.
Code section 1092 (dealing with straddles) also may affect the taxation of
certain hedging instruments in which the Funds 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
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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 a 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 Funds 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 ($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
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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: (l) 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 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,
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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 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
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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 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 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
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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 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.
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PROFIT-SHARING (INCLUDING SECTION 401(k)) AND MONEY PURCHASE PENSION PLANS.
Corporations and other employers can sponsor these qualified defined
contribution plans 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, 1999.
Portfolio of Investments as of December 31, 1999
Statement of Assets and Liabilities as of December 31, 1999
Statement of Operations for the Year Ended December 31, 1999
Statement of Changes in Net Assets for the Year Ended December 31, 1999
and December 31, 1998
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 l-800-528-
6501 nationwide or by writing to the address on the first page of this SAI.
DESCRIPTION OF RATINGS
- ----------------------
Ratings by Moody's, S&P and Fitch 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 rating since it is assigned to an equity issue which
is different from, and subordinate to, a debt issue.
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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.
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.
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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 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
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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.
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.
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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.
FITCH
Investment Grade:
AAA - AAA ratings denote the lowest expectation of credit risk. They are
assigned only in case of exceptionally strong capacity for timely payment of
financial commitments.
AA - AA ratings denote a very low expectation of credit risk. They indicate
very strong capacity for timely payment of financial commitments.
A - A ratings denote a low expectation of credit risk. The capacity for timely
payment of financial commitments is considered strong. This capacity may,
however, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
BBB - BBB ratings indicate that there is currently a low expectation of credit
risk. The capacity for timely payment of financial commitments is considered
adequate, but adverse changes in circumstances and in economic conditions are
more likely to impair this capacity. This is the lowest investment-grade
category.
Below Investment Grade:
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded as having
speculative characteristics and a possibility of credit risk, ranging from a
possibility of credit risk at BB, to a significant credit risk at B, to a high
default risk at CCC, CC and C.
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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").
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.
FITCH
F1 - Indicates the best capacity for timely payment of financial commitments.
F2 - A satisfactory capacity for timely payment of financial commitments, but
the margin of safety is not as great as in the case of the higher ratings.
F3 - The capacity for timely payment of financial commitments is adequate;
however, near-term adverse changes could result in a reduction to non-investment
grade.
B - Minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
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SAFECO MANAGED BOND TRUST
PART C
OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23. Exhibits
- ------- --------
Exhibit
Number Description of Document Page
- ------- ----------------------- ----
<S> <C> <C>
(1) Certificate of Trust *
Amended and Restated Trust Instrument (filed herewith)
(2) Bylaws (filed herewith)
(3) Instrument Defining Security Rights of Holders +
(4) Form of Amended and Restated Investment
Advisory Contract ++++
(5) Form of Distribution Agreement **
Form of Selling Dealer Agreement (filed herewith)
(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 ++++
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) **
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
(14) Financial Data Schedule not applicable
(15) Rule 18f-3 Plan **
(16) Code of Ethics (filed herewith)
</TABLE>
* 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.
++++ Filed as an exhibit to Post Effective Amendment No. 10 filed with the SEC
on April 30, 1999.
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 Opportunities Fund (formerly
SAFECO Growth Fund), SAFECO Equity Fund, SAFECO Dividend Income Fund (formerly
SAFECO Income Fund), SAFECO Northwest Fund, SAFECO International Stock Fund,
SAFECO Balanced Fund, SAFECO Small Company Value Fund (formerly 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
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GNMA Fund and SAFECO High-Yield Bond Fund. The SAFECO Tax-Exempt Bond Trust
consists of four mutual funds: SAFECO Intermediate-Term Municipal Bond Fund,
SAFECO Insured Municipal Bond Fund, SAFECO Municipal Bond Fund, and SAFECO
California Tax-Free Income 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 SAFECO Resource Series Trust consists of
six mutual funds: Equity Portfolio, Growth Opportunities Portfolio (formerly
Growth Portfolio), Northwest Portfolio, Small Company Value Portfolio (formerly
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,
SAFECO U.K. Limited, a corporation organized under the laws of the United
Kingdom, and American States Insurance Company, American States Preferred
Insurance Company, American Economy Insurance Company, each an Indiana
corporation. General Insurance Company of America owns 100% of SAFECO Insurance
Company of Pennsylvania, a Pennsylvania corporation. 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, a
Washington corporation, First SAFECO National Life Insurance Company of New
York, a New York corporation, American States Life Insurance Company, an Indiana
corporation, and D.W. Van Dyke & Co., Inc., a Delaware corporation. SAFECO Life
Insurance Company owns 15% of Medical Risk Managers, Inc., a Delaware
corporation. SAFECO Insurance Company of Illinois 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. 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
SAFECO Investment Services, Inc., F.B. Beattie & Co., Inc. and Talbot Financial
Corporation, each a Washington corporation, General America Corp. of Texas, a
Texas 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. SAFECO
Properties Inc. owns 100% of the
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<PAGE>
following Washington corporations: SAFECARE Company, Inc. and Winmar Company,
Inc. SAFECARE Company, Inc. owns 100% of the following, each a Washington
corporation: S.C. Bellevue, Inc., and S.C. Marysville, Inc. Winmar Company, Inc.
owns 100% of the following: Winmar Metro, 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 Beach, Inc. and W-P Development, Inc.
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 Investment Company Act of 1940, of the Registrant
nor are the parties to the proceeding based
4
<PAGE>
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 costs of actions, suits, or proceedings to which the
Registrant or any Series is a party and the
5
<PAGE>
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 Advisor
- ------- -------------------------------------------------------
The investment advisor to Registrant, SAM, serves as an advisor to: (a) twenty-
four series (portfolios) of six registered investment companies, including six
series of an investment company that serve as an investment vehicle for variable
insurance products and (b) a number of
6
<PAGE>
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.
7
<PAGE>
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 27th day of April, 2000.
SAFECO MANAGED BOND TRUST
By: /s/ David F. Hill
------------------
David F. Hill, President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ David F. Hill President and Trustee April 27, 2000
- ----------------------------- Principal Executive Officer
David F. Hill
RONALD L. SPAULDING* Vice President and Treasurer April 27, 2000
- -----------------------------
Ronald L. Spaulding
/s/ Neal A. Fuller Vice President, Controller and April 27, 2000
- ----------------------------- Assistant Secretary
Neal A. Fuller
/s/ Boh A. Dickey Chairman and Trustee April 27, 2000
- -----------------------------
Boh A. Dickey
BARBARA J. DINGFIELD* Trustee April 27, 2000
- -----------------------------
Barbara J. Dingfield
RICHARD W. HUBBARD* Trustee April 27, 2000
- -----------------------------
Richard W. Hubbard
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
RICHARD E. LUNDGREN* Trustee April 27, 2000
- -----------------------------
Richard E. Lundgren
LARRY L. PINNT* Trustee April 27, 2000
- -----------------------------
Larry L. Pinnt
JOHN W. SCHNEIDER* Trustee April 27, 2000
- -----------------------------
John W. Schneider
</TABLE>
*By /s/ David F. Hill
-----------------
David F. Hill, Attorney-in-Fact
9
<PAGE>
Exhibit 99.1(B)
SAFECO MANAGED BOND TRUST
TRUST INSTRUMENT
(As Amended and Restated January 18, 2000)
This TRUST INSTRUMENT is made on May 13, 1993, as amended and restated on
January 18, 2000, by the Trustees, to establish a business trust for the
investment and reinvestment of funds contributed to the Trust by investors. The
Trustees declare that all money and property contributed to the Trust shall be
held and managed in trust pursuant to this Trust Instrument. The name of the
Trust created by this Trust Instrument is SAFECO Managed Bond Trust.
ARTICLE I
---------
DEFINITIONS
-----------
Unless otherwise provided or required by the context:
(a) "Bylaws" means the Bylaws of the Trust adopted by the Trustees, as
amended from time to time;
(b) "Class" means the class of Shares of a Series established pursuant to
Article IV;
(c) "Commission," "Interested Person," and "Principal Underwriter" have
the meanings provided in the 1940 Act; provided, however, that any officer or
director, or former officer or director, of SAFECO Corporation or any of its
subsidiaries shall be considered an "Interested Person" with respect to the
Trust;
(d) "Covered Person" means a person so defined in Article IX, Section 2;
(e) "Delaware Act" means Chapter 38 of Title 12 of the Delaware Code
entitled "Treatment of Delaware Business Trusts," as amended from time to time;
(f) "Majority Shareholder Vote" means "the vote of a majority of the
outstanding voting securities" as defined in the 1940 Act;
(g) "Net Asset Value" means the net asset value of each Series of the
Trust, determined as provided in Article V, Section 3;
(h) "Outstanding Shares" means Shares shown on the books of the Trust or
its transfer agent as then issued and outstanding, but does not include Shares
which have been repurchased by the Trust;
<PAGE>
(i) "Series" means a series of Shares established pursuant to Article IV;
(j) "Shareholder" means a record owner of Outstanding Shares;
(k) "Shares" means the equal proportionate transferable units of interest
into which the beneficial interest of each Series or Class is divided from time
to time (including whole Shares and fractions of Shares);
(l) "Trust" means SAFECO Managed Bond Trust established hereby, and
reference to the Trust, when applicable to one or more Series, refers to that
Series;
(m) "Trustees" means the persons who have signed this Trust Instrument, so
long as they shall continue in office in accordance with the terms hereof, and
all other persons who may from time to time be duly qualified and serving as
Trustees in accordance with Article II, in all cases in their capacities as
Trustees hereunder;
(n) "Trust Property" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the Trust or any Series
or the Trustees on behalf of the Trust or any Series;
(o) The "1940 Act" means the Investment Company Act of 1940, as amended
from time to time.
ARTICLE II
----------
TRUSTEES
--------
Section 1. Management of the Trust. The business and affairs of the Trust
shall be managed by or under the direction of the Trustees, and they shall have
all powers necessary or desirable to carry out that responsibility. The Trustees
may execute all instruments and take all action they deem necessary or desirable
to promote the interests of the Trust. Any determination made by the Trustees in
good faith as to what is in the interests of the Trust shall be conclusive. The
Trustees, in their capacity as such, shall not be expected to devote their
entire time to the business and affairs of the Trust.
Section 2. Initial Trustees; Number, Election and Qualification of Trustees.
The initial Trustees shall be the persons initially signing this Trust
Instrument. The number of Trustees (other than the initial Trustees) shall be
fixed from time to time by a majority of the Trustees; provided, that there
shall be at least two (2) Trustees. The Shareholders shall elect the Trustees
(other than the initial Trustees) on such dates as the Trustees may fix from
time to time.
- 2 -
<PAGE>
Section 3. Term of Office. Each Trustee shall hold office for life, or until
he or she reaches seventy-two (72) years of age, or until his or her successor
is elected, or the Trust terminates; except that (a) any Trustee may resign by
delivering to the Board of Trustees or to any Trust officer a written
resignation effective upon such delivery or a later date specified therein; (b)
any Trustee may be removed with or without cause at any time by a written
instrument signed by at least two-thirds of the other Trustees, specifying the
effective date of removal; (c) any Trustee who has become physically or mentally
incapacitated or is otherwise unable to serve, may be retired by a written
instrument signed by a majority of the other Trustees, specifying the effective
date of retirement; and (d) any Trustee may be removed at any meeting of the
Shareholders by a vote of at least two-thirds of the Outstanding Shares.
Section 4. Vacancies; Appointment of Trustees. Whenever a vacancy shall exist
in the Board of Trustees, regardless of the reason for such vacancy, the
remaining Trustees shall appoint any person as they determine in their sole
discretion to fill that vacancy, subject to Sections 10 and 16(a) of the 1940
Act. Such appointment shall be made by a written instrument signed by a majority
of the Trustees or by a resolution of the Trustees, duly adopted and recorded in
the records of the Trust, specifying the effective date of the appointment. The
Trustees may appoint a new Trustee as provided above in anticipation of a
vacancy expected to occur because of the retirement, resignation, or removal of
a Trustee, or an increase in number of Trustees, provided that such appointment
shall become effective only at or after the expected vacancy occurs. As soon as
any such Trustee has accepted his appointment in writing, the trust estate shall
vest in the new Trustee, together with the continuing Trustees, without any
further act or conveyance, and he shall be deemed a Trustee hereunder.
Section 5. Chairman. The Trustees shall appoint one of their number to be
Chairman of the Board of Trustees. The Chairman shall preside at all meetings
of the Trustees and the Shareholders and shall perform such other powers and
duties as may from time to time be assigned by the Board of Trustees or
prescribed by the Bylaws.
Section 6. Action by the Trustees. The Trustees shall act by majority vote
at a meeting duly called (including at a telephonic meeting, unless the 1940 Act
requires that a particular action be taken only at a meeting of Trustees in
person) at which a quorum is present or by written consent of a majority of
Trustees (or such greater number as may be required by applicable law) without a
meeting. A majority of the Trustees shall constitute a quorum at any meeting.
Meetings of the Trustees may be called orally or in writing by the President of
the Trust, the Secretary of the Trust, the Chairman of the Board of Trustees, or
by any two other Trustees. Notice of the time, date and place of all Trustees
meetings shall be given to each Trustee in person or by telephone, telegram,
facsimile or other electronic mechanism sent to his or her home or business
address at least twenty-four hours in advance of the meeting or by written
notice mailed to his or her home or business address at least seventy-two hours
in advance of the meeting. Oral notice is deemed to be given upon
communication. Written notice is deemed to be given, if mailed, when deposited
in the United States mail, postage pre-paid, or if sent by telegram, facsimile
or other electronic transmission, when dispatched, to the address, telephone
number or other number of the Trustee as
- 3 -
<PAGE>
it appears on the records of the Trust. Notice need not be given to any Trustee
who attends the meeting without objecting to the lack of notice or who signs a
waiver of notice either before or after the meeting. Subject to the requirements
of the 1940 Act, the Trustees by majority vote may delegate to any Trustee or
Trustees authority to approve particular matters or take particular actions on
behalf of the Trust. Any written consent or waiver may be provided and delivered
to the Trust by facsimile or other similar electronic mechanism.
Section 7. Ownership of Trust Property. The Trust Property of the Trust and
of each Series shall be held separate and apart from any assets now or hereafter
held in any capacity other than as Trustee hereunder by the Trustees or any
successor Trustees. All of the Trust Property and legal title thereto shall at
all times be considered as vested in the Trustees on behalf of the Trust,
except that the Trustees may cause legal title to any Trust Property to be held
by or in the name of the Trust, or in the name of any person as nominee. No
Shareholder shall be deemed to have a severable ownership in any individual
asset of the Trust or of any Series or any right of partition or possession
thereof, but each Shareholder shall have, as provided in Article IV, a
proportionate undivided beneficial interest in the Trust or Series represented
by Shares.
Section 8. Effect of Trustees Not Serving. The death, resignation, retirement,
removal, incapacity, or inability or refusal to serve of the Trustees, or any
one of them, shall not operate to annul the Trust or to revoke any existing
agency created pursuant to the terms of this Trust Instrument.
Section 9. Trustees, etc. as Shareholders. Subject to any restrictions in
the Bylaws, any Trustee, officer, agent or independent contractor of the Trust
may acquire, own and dispose of Shares to the same extent as any other
Shareholder; the Trustees may issue and sell Shares to and buy Shares from any
such person or any firm or company in which such person is interested, subject
only to any general limitations herein.
ARTICLE III
-----------
POWERS OF THE TRUSTEES
----------------------
Section 1. Powers. The Trustees in all instances shall act as principals,
free of the control of the Shareholders. The Trustees shall have full power and
authority to take or refrain from taking any action and to execute any contracts
and instruments that they may consider necessary or desirable in the management
of the Trust. The Trustees shall not in any way be bound or limited by current
or future laws or customs applicable to trust investments, but shall have full
power and authority to make any investments which they, in their discretion,
deem proper to accomplish the purposes of the Trust. The Trustees may exercise
all of their powers without recourse to any court or other authority. Subject
to any applicable limitation herein or in the Bylaws or resolutions of the
Trust, the Trustees shall have power and authority, without limitation:
- 4 -
<PAGE>
(a) To invest and reinvest cash and other property, and to hold cash or
other property uninvested, without in any event being bound or limited by any
current or future law or custom concerning investments by trustees, and to sell,
exchange, lend, pledge, mortgage, hypothecate, write options on and lease any or
all of the Trust Property; to invest in obligations and securities of any kind,
and without regard to whether they may mature before the possible termination of
the Trust; and without limitation to invest all or any part of its cash and
other property in securities issued by a registered investment company or series
thereof, subject to the provisions of the 1940 Act;
(b) To operate as and carry on the business of a registered investment
company, and exercise all the powers necessary and proper to conduct such a
business;
(c) To adopt Bylaws not inconsistent with this Trust Instrument providing
for the conduct of the business of the Trust and to amend and repeal them to the
extent such right is not reserved to the Shareholders;
(d) To elect and remove such officers and appoint and terminate such
agents as they deem appropriate;
(e) To employ as custodian of any assets of the Trust, subject to any
provisions herein or in the Bylaws, one or more banks, trust companies or
companies that are members of a national securities exchange, or other entities
permitted by the Commission to serve as such;
(f) To retain one or more transfer agents and Shareholder servicing
agents, or both;
(g) To provide for the distribution of Shares either through a Principal
Underwriter as provided herein or by the Trust itself, or both, or pursuant to a
distribution plan of any kind;
(h) To set record dates in the manner provided for herein or in the
Bylaws;
(i) To delegate such authority as they consider desirable to any officers
of the Trust and to any agent, independent contractor, manager, investment
adviser, custodian or underwriter;
(j) To sell or exchange any or all of the assets of the Trust, subject to
Article X, Section 4;
(k) To vote or give assent, or exercise any rights of ownership, with
respect to other securities or property; and to execute and deliver powers of
attorney delegating such power to other persons;
(l) To exercise powers and rights of subscription or otherwise which in
any manner arise out of ownership of securities;
- 5 -
<PAGE>
(m) To hold any security or other property (i) in a form not indicating
any trust, whether in bearer, book entry, unregistered or other negotiable form,
or (ii) either in the Trust's or Trustees' own name or in the name of a
custodian or a nominee or nominees, subject to safeguards according to the usual
practice of business trusts or investment companies;
(n) To establish separate and distinct Series with separately defined
investment objectives and policies and distinct investment purposes, and with
separate Shares representing beneficial interests in such Series, and to
establish separate Classes, all in accordance with the provisions of Article IV;
(o) To the full extent permitted by Section 3804 of the Delaware Act, to
allocate assets, liabilities and expenses of the Trust to a particular Series
and liabilities and expenses to a particular Class or to apportion the same
between or among two or more Series or Classes, provided that any liabilities or
expenses incurred by a particular Series or Class shall be payable solely out of
the assets belonging to that Series or Class as provided for in Article IV,
Section 4;
(p) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or concern whose securities are held
by the Trust; to consent to any contract, lease, mortgage, purchase, or sale of
property by such corporation or concern; and to pay calls or subscriptions with
respect to any security held in the Trust;
(q) To compromise, arbitrate, or otherwise adjust claims in favor of or
against the Trust or any matter in controversy including, but not limited to,
claims for taxes;
(r) To make distributions of income and of capital gains to Shareholders
in the manner hereinafter provided for;
(s) To borrow money;
(t) To establish, from time to time, a minimum total investment for
Shareholders, and to require the redemption of the Shares of any Shareholders
whose investment is less than such minimum upon giving notice to such
Shareholder;
(u) To establish committees for such purposes, with such membership, and
with such responsibilities as the Trustees may consider proper, including a
committee consisting of fewer than all of the Trustees then in office, which may
act for and bind the Trustees and the Trust with respect to the institution,
prosecution, dismissal, settlement, review or investigation of any legal action,
suit or proceeding, pending or threatened;
(v) To issue, sell, repurchase, redeem, cancel, retire, acquire, hold,
resell, reissue, dispose of and otherwise deal in Shares; to establish terms and
conditions regarding the
- 6 -
<PAGE>
issuance, sale, repurchase, redemption, cancellation, retirement, acquisition,
holding, resale, reissuance, disposition of or dealing in Shares; and, subject
to Articles IV and V, to apply to any such repurchase, redemption, retirement,
cancellation or acquisition of Shares any funds or property of the Trust or of
the particular Series with respect to which such Shares are issued; and
(w) To carry on any other business in connection with or incidental to any
of the foregoing powers, to do everything necessary or desirable to accomplish
any purpose or to further any of the foregoing powers, and to take every other
action incidental to the foregoing business or purposes, objects or powers.
The clauses above shall be construed as objects and powers, and the
enumeration of specific powers shall not limit in any way the general powers of
the Trustees. Any action by one or more of the Trustees in their capacity as
such hereunder shall be deemed an action on behalf of the Trust or the
applicable Series, and not an action in an individual capacity. No one dealing
with the Trustees shall be under any obligation to make any inquiry concerning
the authority of the Trustees, or to see to the application of any payments made
or property transferred to the Trustees or upon their order. In construing this
Trust Instrument, the presumption shall be in favor of a grant of power to the
Trustees.
Section 2. Certain Transactions. Except as prohibited by applicable law, the
Trustees may, on behalf of the Trust, buy any securities from or sell any
securities to, or lend any assets of the Trust to, any Trustee or officer of the
Trust or any firm of which any such Trustee or officer is a member acting as
principal, or have any such dealings with any investment adviser, administrator,
distributor or transfer agent for the Trust or with any Interested Person of
such person. The Trust may employ any such person or entity in which such
person is an Interested Person, as broker, legal counsel, registrar, investment
adviser, administrator, distributor, transfer agent, dividend disbursing agent,
custodian or in any other capacity upon customary terms.
ARTICLE IV
----------
SERIES; CLASSES; SHARES
-----------------------
Section 1. Establishment of Series or Class. The Trust shall consist of one
or more Series. The Trustees hereby establish the Series listed in Exhibit A
attached hereto and made a part hereof. Each additional Series shall be
established by the adoption of a resolution of the Trustees. The Trustees may
designate the relative rights and preferences of the Shares of each Series. The
Trustees may divide the Shares of any Series into Classes. In such case each
Class of a Series shall represent interests in the assets of that Series and
have identical voting, dividend, liquidation and other rights and the same terms
and conditions, except that expenses allocated to a Class may be borne solely by
such Class as determined by the Trustees and a
- 7 -
<PAGE>
Class may have exclusive voting rights with respect to matters affecting only
that Class. The Trust shall maintain separate and distinct records for each
Series and hold and account for the assets thereof separately from the other
assets of the Trust or of any other Series. A Series may issue any number of
Shares and need not issue Shares. Each Share of a Series shall represent an
equal beneficial interest in the net assets of such Series. Each holder of
Shares of a Series shall be entitled to receive his or her pro rata share of all
distributions made with respect to such Series. Upon redemption of his or her
Shares, such Shareholder shall be paid solely out of the funds and property of
such Series. The Trustees may change the name of any Series or Class without
Shareholder approval.
Section 2. Shares. The beneficial interest in the Trust shall be divided
into Shares of one or more separate and distinct Series or Classes established
by the Trustees. The number of Shares of each Series and Class is unlimited and
each Share shall have a par value of $0.001 per Share. All Shares issued
hereunder shall be fully paid and nonassessable. Shareholders shall have no
preemptive or other right to subscribe to any additional Shares or other
securities issued by the Trust. The Trustees shall have full power and
authority, in their sole discretion and without obtaining Shareholder approval:
to issue original or additional Shares or fractional Shares at such times and on
such terms and conditions as they deem appropriate; to issue Shares which have
been repurchased by the Trust; to establish and to change in any manner Shares
of any Series or Classes with such preferences, terms of conversion, voting
powers, rights and privileges as the Trustees may determine (but the Trustees
may not change Outstanding Shares in a manner materially adverse to the
Shareholders of such Shares); to divide or combine the Shares of any Series or
Classes into a greater or lesser number; to classify or reclassify any unissued
Shares of any Series or Classes into one or more Series or Classes of Shares; to
abolish any one or more Series or Classes of Shares; to issue Shares to acquire
other assets (including assets subject to, and in connection with, the
assumption of liabilities) and businesses; and to take such other action with
respect to the Shares as the Trustees may deem desirable. Shares which have
been repurchased by the Trust and have not been reissued shall not confer any
voting rights on the Trustees and shall not be entitled to any dividends or
other distributions declared with respect to the Shares.
Section 3. Investment in the Trust. The Trustees shall accept investments in
any Series from such persons and on such terms as they may from time to time
authorize. At the Trustees' discretion, such investments, subject to applicable
law, may be in the form of cash or securities in which that Series is authorized
to invest, valued as provided in Article V, Section 3. Investments in a Series
shall be credited to each Shareholder's account in the form of full or
fractional Shares at the Net Asset Value per Share next determined after the
investment is received or accepted in good form as may be determined by the
Trustees; provided, however, that the Trustees may, in their sole discretion (a)
impose a sales charge upon investments in any Series or Class or (b) determine
the Net Asset Value per Share of the initial capital contribution. The Trustees
shall have the right to refuse to accept investments in any Series at any time
without any cause or reason therefor whatsoever.
- 8 -
<PAGE>
Section 4. Assets and Liabilities of Series. All consideration received by
the Trust for the issue or sale of Shares of a particular Series, together with
all assets in which such consideration is invested or reinvested, all income,
earnings, profits, and proceeds thereof (including any proceeds derived from the
sale, exchange or liquidation of such assets, and any funds or payments derived
from any reinvestment of such proceeds in whatever form the same may be), shall
be held and accounted for separately from the other assets of the Trust and
every other Series and are referred to as "assets belonging to" that Series.
The assets belonging to a Series shall belong only to that Series for all
purposes, and to no other Series, subject only to the rights of creditors of
that Series. Any assets, income, earnings, profits, and proceeds thereof,
funds, or payments which are not readily identifiable as belonging to any
particular Series shall be allocated by the Trustees between and among one or
more Series as the Trustees deem fair and equitable. Each such allocation shall
be conclusive and binding upon the Shareholders of all Series for all purposes,
and such assets, earnings, income, profits or funds, or payments and proceeds
thereof shall be referred to as assets belonging to that Series. The assets
belonging to a Series shall be so recorded upon the books of the Trust, and
shall be held by the Trustees in trust for the benefit of the Shareholders of
that Series. The assets belonging to a Series shall be charged with the
liabilities of that Series and all expenses, costs, charges and reserves
attributable to that Series, except that liabilities and expenses allocated
solely to a particular Class shall be borne by that Class. Any general
liabilities, expenses, costs, charges or reserves of the Trust which are not
readily identifiable as belonging to any particular Series or Class shall be
allocated and charged by the Trustees between or among any one or more of the
Series or Classes in such manner as the Trustees deem fair and equitable. Each
such allocation shall be conclusive and binding upon the Shareholders of all
Series or Classes for all purposes.
Without limiting the foregoing, but subject to the right of the Trustees to
allocate general liabilities, expenses, costs, charges or reserves as herein
provided, the debts, liabilities, obligations and expenses incurred, contracted
for or otherwise existing with respect to a particular Series shall be
enforceable against the assets of such Series only, and not against the assets
of the Trust generally or of any other Series. Notice of this contractual
limitation on liabilities among Series may, in the Trustees' discretion, be set
forth in the certificate of trust of the Trust (whether originally or by
amendment) as filed or to be filed in the Office of the Secretary of State of
the State of Delaware pursuant to the Delaware Act, and upon the giving of such
notice in the certificate of trust, the statutory provisions of Section 3804 of
the Delaware Act relating to limitations on liabilities among Series (and the
statutory effect under Section 3804 of setting forth such notice in the
certificate of trust) shall become applicable to the Trust and each Series. Any
person extending credit to, contracting with or having any claim against any
Series may look only to the assets of that Series to satisfy or enforce any
debt, with respect to that Series. No Shareholder or former Shareholder of any
Series shall have a claim on or any right to any assets allocated or belonging
to any other Series.
Section 5. Ownership and Transfer of Shares. The Trust shall maintain a
register containing the names and addresses of the Shareholders of each Series
and Class thereof, the
- 9 -
<PAGE>
number of Shares of each Series and Class held by such Shareholders, and a
record of all Share transfers. The register shall be conclusive as to the
identity of Shareholders of record and the number of Shares held by them from
time to time. The Trustees, in their sole discretion, may authorize the issuance
of certificates representing Shares and adopt rules governing their use. The
Trustees may make rules governing the transfer of Shares, whether or not
represented by certificates.
Section 6. Status of Shares; Limitation of Shareholder Liability. Shares
shall be deemed to be personal property giving Shareholders only the rights
provided in this Trust Instrument. Every Shareholder, by virtue of having
acquired a Share, shall be held expressly to have assented to and agreed to be
bound by the terms of this Trust Instrument and to have become a party hereto.
No Shareholder shall be personally liable for the debts, liabilities,
obligations and expenses incurred by, contracted for, or otherwise existing with
respect to, the Trust or any Series. Neither the Trust nor the Trustees shall
have any power to bind any Shareholder personally or to demand payment from any
Shareholder for anything, other than as agreed by the Shareholder. Shareholders
shall have the same limitation of personal liability as is extended to
shareholders of a private corporation for profit incorporated in the State of
Delaware. Every written obligation of the Trust or any Series shall contain a
statement to the effect that such obligation may only be enforced against the
assets of the Trust or such Series; however, the omission of such statement
shall not operate to bind or create personal liability for any Shareholder or
Trustee.
ARTICLE V
---------
DISTRIBUTIONS AND REDEMPTIONS
-----------------------------
Section 1. Distributions. The Trustees may declare and pay dividends and
other distributions, including dividends on Shares of a particular Series and
other distributions from the assets belonging to that Series. The amount and
payment of dividends or distributions and their form, whether they are in cash,
Shares or other Trust Property, shall be determined by the Trustees. Dividends
and other distributions may be paid pursuant to a standing resolution adopted
once or more often as the Trustees determine. All dividends and other
distributions on Shares of a particular Series shall be distributed pro rata to
the Shareholders of that Series in proportion to the number of Shares of that
Series they held on the record date established for such payment, except that
such dividends and distributions shall appropriately reflect expenses allocated
to a particular Class of such Series. The Trustees may adopt and offer to
Shareholders such dividend reinvestment plans, cash dividend payout plans or
similar plans as the Trustees deem appropriate.
Section 2. Redemptions. Each Shareholder of a Series or Class shall have the
right at such times as may be permitted by the Trustees to require the Series to
redeem all or any part of his or her Shares at a redemption price per Share
equal to the Net Asset Value per Share at
- 10 -
<PAGE>
such time as the Trustees shall have prescribed by resolution. In the absence of
such resolution, the redemption price per Share shall be the Net Asset Value
next determined after receipt by the Series of a request for redemption in
proper form less such charges as are determined by the Trustees and described in
the Trust's Registration Statement for that Series or Class under the Securities
Act of 1933. The Trustees may specify conditions, prices, and places of
redemption, and may specify binding requirements for the proper form or forms of
requests for redemption. Payment of the redemption price may be wholly or partly
in securities or other assets at the value of such securities or assets used in
such determination of Net Asset Value, or may be in cash. Upon redemption,
Shares may be reissued from time to time. The Trustees may require Shareholders
to redeem Shares for any reason under terms set by the Trustees, including the
failure of a Shareholder to supply a personal identification number if required
to do so, or to have the minimum investment required, or to pay when due for the
purchase of Shares issued to him. To the extent permitted by law, the Trustees
may retain the proceeds of any redemption of Shares required by them for payment
of amounts due and owing by a Shareholder to the Trust or any Series or Class.
Notwithstanding the foregoing, the Trustees may postpone payment of the
redemption price and may suspend the right of the Shareholders to require any
Series or Class to redeem Shares during any period of time when and to the
extent permissible under the 1940 Act.
Section 3. Determination of Net Asset Value. The Trustees shall cause the Net
Asset Value of Shares of each Series or Class to be determined from time to time
in a manner consistent with applicable laws and regulations. The Trustees may
delegate the power and duty to determine Net Asset Value per Share to one or
more Trustees or officers of the Trust or to an investment adviser, custodian,
depository or other agent appointed for such purpose. The Net Asset Value of
Shares shall be determined separately for each Series or Class at such times as
may be prescribed by the Trustees or, in the absence of action by the Trustees,
as of the close of trading on the New York Stock Exchange on each day for all or
part of which such Exchange is open for unrestricted trading.
Section 4. Suspension of Right of Redemption. If, as referred to in Section
2 of this Article, the Trustees postpone payment of the redemption price and
suspend the right of Shareholders to redeem their Shares, such suspension shall
take effect at the time the Trustees shall specify, but not later than the close
of business on the business day next following the declaration of suspension.
Thereafter Shareholders shall have no right of redemption or payment until the
Trustees declare the end of the suspension. If the right of redemption is
suspended, a Shareholder may either withdraw his or her request for redemption
or receive payment based on the Net Asset Value per Share next determined after
the suspension terminates.
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<PAGE>
ARTICLE VI
----------
SHAREHOLDERS' VOTING POWERS AND MEETINGS
----------------------------------------
Section 1. Voting Powers. The Shareholders shall have power to vote only with
respect to (a) the election of Trustees as provided in Section 2 of this
Article; (b) the removal of Trustees as provided in Article II, Section 3(d);
(c) any investment advisory or management contract as provided in Article VII,
Section 1; (d) any termination of the Trust as provided in Article X, Section 4;
(e) the amendment of this Trust Instrument to the extent and as provided in
Article X, Section 8; and (f) such additional matters relating to the Trust as
may be required or authorized by law, this Trust Instrument, or the Bylaws or
any registration of the Trust with the Commission or any State, or as the
Trustees may consider desirable.
On any matter submitted to a vote of the Shareholders, all Shares shall be
voted by individual Series or Class, except (a) when required by the 1940 Act,
Shares shall be voted in the aggregate and not by individual Series or Class,
and (b) when the Trustees have determined that the matter affects the interests
of more than one Series or Class, then the Shareholders of all such Series or
Classes shall be entitled to vote thereon. Each whole Share shall be entitled
to one vote as to any matter on which it is entitled to vote, and each
fractional Share shall be entitled to a proportionate fractional vote. There
shall be no cumulative voting in the election of Trustees. Shares may be voted
in person or by proxy or in any manner provided for in the Bylaws. The Bylaws
may provide that proxies may be given by any electronic or telecommunications
device or in any other manner, but if a proposal by anyone other than the
officers or Trustees is submitted to a vote of the Shareholders of any Series or
Class, or if there is a proxy contest or proxy solicitation or proposal in
opposition to any proposal by the officers or Trustees, Shares may be voted only
in person or by written proxy. Until Shares of a Series are issued, as to that
Series the Trustees may exercise all rights of Shareholders and may take any
action required or permitted to be taken by Shareholders by law, this Trust
Instrument or the Bylaws.
Section 2. Meetings of Shareholders. The first Shareholders' meeting shall be
held to elect Trustees at such time and place as the Trustees designate. There
shall be no annual Shareholders' meetings except as required by law or set forth
in the Bylaws. Special meetings of the Shareholders of any Series or Class may
be called by the Trustees and shall be called by the Trustees upon the written
request of Shareholders owning at least ten percent of the Outstanding Shares of
such Series or Class entitled to vote. Special meetings of Shareholders shall be
held, notice of such meetings shall be delivered and waiver of notice shall
occur according to the provisions of the Trust's Bylaws. Any action that may be
taken at a meeting of Shareholders may be taken without a meeting according to
the procedures set forth in the Trust's Bylaws.
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<PAGE>
Section 3. Quorum; Required Vote. One-third of the Outstanding Shares of each
Series or Class, or one-third of the Outstanding Shares of the Trust, entitled
to vote in person or by proxy shall be a quorum for the transaction of business
at a Shareholders' meeting with respect to such Series or Class, or with respect
to the entire Trust, respectively. Any lesser number shall be sufficient for
adjournments. Any adjourned session of a Shareholders' meeting may be held
within a reasonable time without further notice. Except when a larger vote is
required by law, this Trust Instrument or the Bylaws, a majority of the
Outstanding Shares voted in person or by proxy shall decide any matters to be
voted upon with respect to the entire Trust and a plurality of such Outstanding
Shares shall elect a Trustee; provided, that if this Trust Instrument or
applicable law permits or requires that Shares be voted on any matter by
individual Series or Classes, then a majority of the Outstanding Shares of that
Series or Class (or, if required by law, a Majority Shareholder Vote of that
Series or Class) voted in person or by proxy voted on the matter shall decide
that matter insofar as that Series or Class is concerned. Shareholders may act
as to the Trust or any Series or Class by the written consent of a majority (or
such greater amount as may be required by applicable law) of the Outstanding
Shares of the Trust or of such Series or Class, as the case may be.
ARTICLE VII
-----------
CONTRACTS WITH SERVICE PROVIDERS
--------------------------------
Section 1. Investment Adviser. Subject to a Majority Shareholder Vote, the
Trustees may enter into one or more investment advisory contracts on behalf of
the Trust or any Series, providing for investment advisory services, statistical
and research facilities and services, and other facilities and services to be
furnished to the Trust or Series on terms and conditions acceptable to the
Trustees. Any such contract may provide for the investment adviser to effect
purchases, sales or exchanges of portfolio securities or other Trust Property on
behalf of the Trustees or may authorize any officer or agent of the Trust to
effect such purchases, sales or exchanges pursuant to recommendations of the
investment adviser. The Trustees may authorize the investment adviser to employ
one or more sub-advisers.
Section 2. Principal Underwriter. The Trustees may enter into contracts on
behalf of the Trust or any Series or Class, providing for the distribution and
sale of Shares by the other party, either directly or as sales agent, on terms
and conditions acceptable to the Trustees. The Trustees may adopt a plan or
plans of distribution with respect to Shares of any Series or Class and enter
into any related agreements, whereby the Series or Class finances directly or
indirectly any activity that is primarily intended to result in sales of its
Shares, subject to the requirements of Section 12 of the 1940 Act, Rule 12b-1
thereunder, and other applicable rules and regulations.
Section 3. Transfer Agency, Shareholder Services, and Administration
Agreements. The Trustees, on behalf of the Trust or any Series or Class, may
enter into transfer agency
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<PAGE>
agreements, Shareholder service agreements, and administration and management
agreements with any party or parties on terms and conditions acceptable to the
Trustees.
Section 4. Custodian. The Trustees shall at all times place and maintain the
cash, securities and other assets of the Trust and of each Series with a
custodian meeting the requirements of Section 17(f) of the 1940 Act and the
rules thereunder or such other entities permitted by Commission order. The
Trustees, on behalf of the Trust or any Series, may enter into an agreement with
a custodian on terms and conditions acceptable to the Trustees, providing for
the custodian, among other things, to (a) hold the securities owned by the Trust
or any Series and deliver the same upon written order or oral order confirmed in
writing, (b) to receive and receipt for any moneys due to the Trust or any
Series and deposit the same in its own banking department or elsewhere, (c) to
disburse such funds upon orders or vouchers, and (d) to employ one or more sub-
custodians.
Section 5. Parties to Contracts with Service Providers. The Trustees may enter
into any contract referred to in this Article with any entity, although one or
more of the Trustees or officers of the Trust may be an officer, director,
trustee, partner, shareholder, or member of such entity, and no such contract
shall be invalidated or rendered void or voidable because of such relationship.
No person having such a relationship shall be disqualified from voting on or
executing a contract in his or her capacity as Trustee and/or Shareholder, or be
liable merely by reason of such relationship for any loss or expense to the
Trust with respect to such a contract or accountable for any profit realized
directly or indirectly therefrom; provided, that the contract was reasonable and
fair and not inconsistent with this Trust Instrument or the Bylaws.
Any contract referred to in Sections 1 and 2 of this Article shall be
consistent with and subject to the applicable requirements of Section 15 of the
1940 Act and the rules and orders thereunder with respect to its continuance in
effect, its termination, and the method of authorization and approval of such
contract or renewal. No amendment to a contract referred to in Section 1 of
this Article shall be effective unless assented to in a manner consistent with
the requirements of Section 15 of the 1940 Act, and the rules and orders
thereunder.
ARTICLE VIII
------------
EXPENSES OF THE TRUST AND SERIES
--------------------------------
Subject to Article IV, Section 4, the Trust or a particular Series shall
pay, or shall reimburse the Trustees from the Trust estate or the assets
belonging to the particular Series, for the expenses and disbursements of its
organization, operations and business (unless a third party has agreed to bear
such expenses and disbursements). Such expenses and disbursements may include,
but are not limited to, the following: fees, expenses and charges of certain
third parties which may include the Trust's investment advisers, distributors,
transfer agents, custodian, independent auditors, legal counsel and
administrators; expenses of the organization of the Trust or a particular
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<PAGE>
Series; expenses of the issue, redemption and transfer of Shares; brokers'
commissions and other charges; expenses of custody and accounting services;
expenses of maintaining and servicing Shareholder accounts; expenses of bonding
and insurance; all taxes or governmental fees; costs of membership in trade
associations; all charges and expenses for equipment or services used for
communication between the Trust or any Series and any third party providing
services to the Trust or any Series; fees and expenses of Trustees' meetings,
including the compensation of Trustees who are not Interested Persons of the
Trust; Commission registration fees and related expenses; state or foreign
securities laws registration fees and related expenses; expenses of Shareholder
meetings, including the printing and distribution of proxy materials and any
other costs associated with a proxy solicitation; costs of preparing, printing
and distributing Shareholder communications such as prospectuses, statements of
additional information, and financial reports; and non-recurring expenses which
may arise, including the costs of actions, suit or proceedings to which the
Trust or a Series (or a Trustee or officer of the Trust acting as such) is a
party, and the expenses the Trust or Series may incur as a result of its
obligation to provide indemnification to its Trustees, Officers, employees or
agents. The Trustees shall have a lien on the assets belonging to the
appropriate Series, or in the case of an expense allocable to more than one
Series, on the assets of each such Series, prior to any rights or interests of
the Shareholders thereto, for the reimbursement to them of such expenses,
disbursements, losses and liabilities.
ARTICLE IX
----------
LIMITATION OF LIABILITY AND INDEMNIFICATION
-------------------------------------------
Section 1. Limitation of Liability. All persons contracting with or having any
claim against the Trust or a particular Series shall look only to the assets of
the Trust or such Series for payment under such contract or claim; and neither
the Trustees nor any of the Trust's officers, employees or agents, whether past,
present or future, shall be personally liable therefor. Every written instrument
or obligation on behalf of the Trust or any Series shall contain a statement to
the foregoing effect, but the absence of such statement shall not operate to
make any Trustee or officer of the Trust liable thereunder. Provided they have
exercised reasonable care and have acted under the reasonable belief that their
actions are in the best interest of the Trust, the Trustees and officers of the
Trust shall not be responsible or liable for any act or omission or for neglect
or wrongdoing of them or any officer, agent, employee, investment adviser or
independent contractor of the Trust, but nothing contained in this Trust
Instrument or in the Delaware Act shall protect any Trustee or officer of the
Trust against liability to the Trust or to Shareholders to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office.
Section 2. Indemnification. (a) Subject to the exceptions and limitations
contained in subsection (b) below:
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<PAGE>
(i) every person who is, or has been, a Trustee or an officer,
employee or agent of the Trust ("Covered Person") shall be indemnified by
the Trust or the appropriate Series 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 Covered Person and against amounts paid or
incurred by him or her in the settlement thereof;
(ii) as used herein, the words "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.
(b) No indemnification shall be provided hereunder to a Covered Person:
(i) who shall have been adjudicated by a court or body before which
the proceeding was brought (A) to be liable to the Trust 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 Trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Covered Person 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 of the
Trust nor are 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).
(c) The rights of indemnification herein provided may be insured against
by policies maintained by the Trust, shall be severable, shall not be exclusive
of or affect any other rights to which any Covered Person may now or hereafter
be entitled, and shall inure to the benefit of the heirs, executors and
administrators of a Covered Person.
(d) To the maximum extent permitted by applicable law, expenses in
connection with the preparation and presentation of a defense to any claim,
action, suit or proceeding of the character described in subsection (a) of this
Section may be paid by the Trust or applicable Series from time to time prior to
final disposition thereof upon receipt of an undertaking by or on behalf of such
Covered Person that such amount will be paid over by him or her to the Trust or
applicable Series
- 16 -
<PAGE>
if it is ultimately determined that he or she is not entitled to indemnification
under this Section; provided, however, that either (i) such Covered Person shall
have provided appropriate security for such undertaking, (ii) the Trust is
insured against losses arising out of any such advance payments or (iii) either
a majority of the Trustees who are neither Interested Persons of the Trust nor
parties to the proceeding, or independent legal counsel in a written opinion,
shall have determined, based upon a review of readily available facts (as
opposed to a full trial-type inquiry) that there is reason to believe that such
Covered Person will not be disqualified from indemnification under this Section.
(e) Any repeal or modification of this Article IX by the Shareholders of
the Trust, or adoption or modification of any other provision of the Trust
Instrument or Bylaws inconsistent with this Article, shall be prospective only,
to the extent that such repeal or modification would, if applied
retrospectively, adversely affect any limitation on the liability of any Covered
Person or indemnification available to any Covered Person with respect to any
act or omission which occurred prior to such repeal, modification or adoption.
Section 3. Indemnification of Shareholders. If any Shareholder or former
Shareholder of any Series shall be held personally liable solely by reason of
his or her being or having been a Shareholder and not because of his or her acts
or omissions or for some other reason, the Shareholder or former Shareholder (or
his or her heirs, executors, administrators or other legal representatives or in
the case of any entity, its general successor) shall be entitled out of the
assets belonging to the applicable Series to be held harmless from and
indemnified against all loss and expense arising from such liability. The
Trust, on behalf of the affected Series, shall, upon request by such
Shareholder, assume the defense of any claim made against such Shareholder for
any act or obligation of the Series and satisfy any judgment thereon from the
assets of the Series.
ARTICLE X
---------
MISCELLANEOUS
-------------
Section 1. Trust Not a Partnership. This Trust Instrument creates a trust and
not a partnership. No Trustee shall have any power to bind personally either the
Trust's officers or any Shareholder.
Section 2. Trustee Action; Expert Advice; No Bond or Surety. The exercise by
the Trustees of their powers and discretion hereunder in good faith and with
reasonable care under the circumstances then prevailing shall be binding upon
everyone interested. Subject to the provisions of Article IX, the Trustees
shall not be liable for errors of judgment or mistakes of fact or law. The
Trustees may take advice of counsel or other experts with respect to the meaning
and operation of this Trust Instrument, and subject to the provisions of Article
IX, shall not be liable for any act or omission in accordance with such advice
or for failing to follow such advice. The Trustees shall not be required to
give any bond as such, nor any surety if a bond is obtained.
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<PAGE>
Section 3. Record Dates. The Trustees may fix in advance a date up to seventy
(70) days before the date of any Shareholders' meeting, or the date for the
payment of any dividends or other distributions, or the date for the allotment
of rights, or the date when any change or conversion or exchange of Shares shall
go into effect as a record date for the determination of the Shareholders
entitled to notice of, and to vote at, any such meeting, or entitled to receive
payment of such dividend or other distribution, or to receive any such allotment
of rights, or to exercise such rights in respect of any such change, conversion
or exchange of Shares. Record dates for adjourned Shareholders' meetings shall
be set according to the Trust's Bylaws.
Section 4. Termination of the Trust. (a) This Trust shall have perpetual
existence. Subject to a Majority Shareholder Vote of the Trust or of each
Series to be affected, the Trustees may
(i) sell and convey all or substantially all of the assets of the
Trust or any affected Series to another Series or to another entity which
is an open-end investment company as defined in the 1940 Act, or is a
series thereof, for adequate consideration, which may include the
assumption of all outstanding obligations, taxes and other liabilities,
accrued or contingent, of the Trust or any affected Series, and which may
include shares of or interests in such Series, entity, or series thereof;
or
(ii) at any time sell and convert into money all or substantially all
of the assets of the Trust or any affected Series.
Upon making reasonable provision for the payment of all known liabilities of the
Trust or any affected Series in either (i) or (ii), by such assumption or
otherwise, the Trustees shall distribute the remaining proceeds or assets (as
the case may be) ratably among the Shareholders of the Trust or any affected
Series; however, the payment to any particular Class of such Series may be
reduced by any fees, expenses or charges allocated to that Class.
(b) The Trustees may take any of the actions specified in subsection (a)
(i) and (ii) above without obtaining a Majority Shareholder Vote of the Trust or
any Series if a majority of the Trustees determines that the continuation of the
Trust or Series is not in the best interests of the Trust, such Series, or their
respective Shareholders as a result of factors or events adversely affecting the
ability of the Trust or such Series to conduct its business and operations in an
economically viable manner. Such factors and events may include the inability of
the Trust or a Series to maintain its assets at an appropriate size, changes in
laws or regulations governing the Trust or the Series or affecting assets of the
type in which the Trust or Series invests, or economic developments or trends
having a significant adverse impact on the business or operations of the Trust
or such Series.
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<PAGE>
(c) Upon completion of the distribution of the remaining proceeds or
assets pursuant to subsection (a), the Trust or affected Series shall terminate
and the Trustees and the Trust shall be discharged of any and all further
liabilities and duties hereunder with respect thereto and the right, title and
interest of all parties therein shall be canceled and discharged. Upon
termination of the Trust, following completion of winding up of its business,
the Trustees shall cause a certificate of cancellation of the Trust's
certificate of trust to be filed in accordance with the Delaware Act, which
certificate of cancellation may be signed by any one Trustee.
Section 5. Reorganization. Notwithstanding anything else herein, to change the
Trust's form of organization the Trustees may, without Shareholder approval, (a)
cause the Trust to merge or consolidate with or into one or more entities, if
the surviving or resulting entity is the Trust or another open-end management
investment company under the 1940 Act, or a series thereof, that will succeed to
or assume the Trust's registration under the 1940 Act, or (b) cause the Trust to
incorporate under the laws of Delaware. Any agreement of merger or consolidation
or certificate of merger may be signed by a majority of Trustees and facsimile
signatures conveyed by electronic or telecommunication means shall be valid.
Pursuant to and in accordance with the provisions of Section 3815(f) of the
Delaware Act, an agreement of merger or consolidation approved by the Trustees
in accordance with this Section 5 may effect any amendment to the Trust
Instrument or effect the adoption of a new trust instrument of the Trust if it
is the surviving or resulting trust in the merger or consolidation.
Section 6. Trust Instrument. The original or a copy of this Trust Instrument
and of each amendment hereto or Trust Instrument supplemental shall be kept at
the office of the Trust where it may be inspected by any Shareholder. Anyone
dealing with the Trust may rely on a certificate by a Trustee or an officer of
the Trust as to the authenticity of the Trust Instrument or any such amendments
or supplements and as to any matters in connection with the Trust. The
masculine gender herein shall include the feminine and neuter genders. Headings
herein are for convenience only and shall not affect the construction of this
Trust Instrument. This Trust Instrument may be executed in any number of
counterparts, each of which shall be deemed an original.
Section 7. Applicable Law. This Trust Instrument and the Trust created
hereunder are governed by and construed and administered according to the
Delaware Act and the applicable laws of the State of Delaware; provided,
however, that there shall not be applicable to the Trust, the Trustees or this
Trust Instrument (a) the provisions of Section 3540 of Title 12 of the Delaware
Code, or (b) any provisions of the laws (statutory or common) of the State of
Delaware (other than the Delaware Act) pertaining to trusts which relate to or
regulate (i) the filing with any court or governmental body or agency of trustee
accounts or schedules of trustee fees and charges, (ii) affirmative requirements
to post bonds for trustees, officers, agents or employees of a trust, (iii) the
necessity for obtaining court or other governmental approval concerning the
acquisition, holding or disposition of real or personal property, (iv) fees or
other sums payable to trustees, officers, agents or employees of a trust, (v)
the allocation of receipts and expenditures to income or principal, (vi)
restrictions or limitations on the permissible nature, amount or concentration
of
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<PAGE>
trust investments or requirements relating to the titling, storage or other
manner of holding of trust assets, or (vii) the establishment of fiduciary or
other standards of responsibilities or limitations on the acts or powers of
trustees, which are inconsistent with the limitations or liabilities or
authorities and powers of the Trustees set forth or referenced in this Trust
Instrument. The Trust shall be of the type commonly called a Delaware business
trust, and, without limiting the provisions hereof, the Trust may exercise all
powers which are ordinarily exercised by such a trust under Delaware law. The
Trust specifically reserves the right to exercise any of the powers or
privileges afforded to trusts or actions that may be engaged in by trusts under
the Delaware Act, and the absence of a specific reference herein to any such
power, privilege or action shall not imply that the Trust may not exercise such
power or privilege or take such actions.
Section 8. Amendments. The Trustees may, without any Shareholder vote, amend
or otherwise supplement this Trust Instrument by making an amendment, a Trust
Instrument supplemental hereto or an amended and restated trust instrument;
provided, that Shareholders shall have the right to vote on any amendment (a)
which would affect the voting rights of Shareholders granted in Article VI,
Section 1, (b) to this Section 8, (c) required to be approved by Shareholders by
law or by the Trust's registration statement(s) filed with the Commission, and
(d) submitted to them by the Trustees in their discretion. Any amendment
submitted to Shareholders which the Trustees determine would affect the
Shareholders of any Series shall be authorized by vote of the Shareholders of
such Series and no vote shall be required of Shareholders of a Series not
affected. Notwithstanding anything else herein, any amendment to Article IX
which would have the effect of reducing the indemnification and other rights
provided thereby to Trustees, officers, employees, and agents of the Trust or to
Shareholders or former Shareholders, and any repeal or amendment of this
sentence shall each require the affirmative vote of the holders of two-thirds of
the Outstanding Shares of the Trust entitled to vote thereon.
Section 9. Fiscal Year. The fiscal year of the Trust shall end on a specified
date as set forth in the Bylaws. The Trustees may change the fiscal year of the
Trust without Shareholder approval.
Section 10. Severability. The provisions of this Trust Instrument are
severable. If the Trustees determine, with the advice of counsel, that any
provision hereof conflicts with the 1940 Act, the regulated investment company
provisions of the Internal Revenue Code or with other applicable laws and
regulations, the conflicting provision shall be deemed never to have constituted
a part of this Trust Instrument; provided, however, that such determination
shall not affect any of the remaining provisions of this Trust Instrument or
render invalid or improper any action taken or omitted prior to such
determination. If any provision hereof shall be held invalid or unenforceable
in any jurisdiction, such invalidity or unenforceability shall attach only to
such provision only in such jurisdiction and shall not affect any other
provision of this Trust Instrument.
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<PAGE>
IN WITNESS WHEREOF, the undersigned, being the initial Trustees, have
executed this Trust Instrument as of the date first above written.
/s/ Boh A. Dickey
-----------------------------
Boh A. Dickey, as
Trustee and not individually
/s/ David F. Hill
-----------------------------
David F. Hill, as
Trustee and not individually
Address: SAFECO Plaza
Seattle, Washington 98185
STATE OF WASHINGTON ss
COUNTY OF KING
Before me this 18th day of January, 2000, personally appeared the above-
named Boh A. Dickey, and David F. Hill, known to me to be the persons who
executed the foregoing instrument and who acknowledged that they executed the
same.
/s/ Karri J. Harrington
------------------------
Notary Public
My Commission expires June 27, 2001
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<PAGE>
EXHIBIT A
SAFECO Managed Bond Fund
No-Load Class
Advisor Class A
Advisor Class B
As of April 30, 1997
- 22 -
<PAGE>
Exhibit 99.2
BYLAWS
------
(As amended October 13, 1999)
SAFECO MANAGED BOND TRUST
------------------------
(A DELAWARE BUSINESS TRUST)
These Bylaws of SAFECO MANAGED BOND TRUST (the "Trust"), a Delaware
business trust, are subject to the Trust Instrument of the Trust dated May 13,
1993, as from time to time amended, supplemented or restated (the "Trust
Instrument"). Capitalized terms used herein have the same meanings as in the
Trust Instrument.
ARTICLE I
---------
PRINCIPAL OFFICE AND SEAL
--------------------------
Section 1. Principal Office. The principal office of the Trust shall be
located in Seattle, Washington, or such other location as the Board of Trustees
may from time to time determine. The Trust may establish and maintain other
offices and places of business as the Board of Trustees may from time to time
determine.
Section 2. Seal. The seal of the Trust shall consist of a flat-faced circular
die with the words "SAFECO Managed Bond Trust", and with the words "Trust Seal,
1996" in the center, and with the word "Delaware" also being shown on the face
of the seal. Any Trustee or officer of the Trust shall have authority to affix
the seal to any document requiring the same.
ARTICLE II
----------
MEETINGS OF BOARD OF TRUSTEES
-----------------------------
Section 1. Meetings. Meetings of the Board of Trustees may be held at such
places and such times as the Trustees may from time to time determine as
provided in Article II, Section 7, of the Trust Instrument.
Section 2. Action Without a Meeting. Actions may be taken by the Board of
Trustees without a meeting or by a telephone meeting, as provided in Article II,
Section 7, of the Trust Instrument.
Section 3. Compensation of Trustees. No compensation for services as a Trustee
shall be paid to any Trustee who is at the time an employee of an investment
advisor of the Trust or any Series or Class thereof or of any entity affiliated
with the investment advisor. A Trustee who is not an employee of such
investment advisor or any of its affiliates may receive such compensation from
the Trust for his or her services and reimbursement for his or her expenses as
may be fixed from time to time by the Board of Trustees.
<PAGE>
ARTICLE III
-----------
BOARD COMMITTEES
----------------
Section 1. Establishment. The Board of Trustees may designate one or more
committees and shall determine the number of members of each such committee and
its powers. Each committee member shall hold office at the pleasure of the
Board of Trustees. The Board of Trustees may abolish any such committee at any
time in its sole discretion. Any committee to which the Board of Trustees
delegates any of its powers shall maintain records of its meetings and shall
report its actions to the Board of Trustees. The Board of Trustees shall have
the power to rescind any action of any committee, but no such recision shall
have retroactive effect. The Board of Trustees shall have the power at any time
to fill vacancies in the committees. The Board of Trustees may delegate to any
committee any of its powers, except the power to declare a dividend or
distribution on Shares, authorize the issuance of Shares, recommend to
Shareholders any action requiring Shareholders' approval, amend these Bylaws,
approve any merger or Share exchange, approve or terminate any contract with an
investment advisor or Principal Underwriter, or to take any other action
required by applicable law to be taken by the Board.
Section 2. Notice, Waiver, Consent, Quorum and Proceedings. In the absence of
a provision in these Bylaws or an appropriate resolution of the Trustees, each
committee may adopt such rules and regulations governing notice of its meetings
and waiver and consent to thereof, quorum and manner of acting as it shall deem
proper and desirable. In the event any member of any committee is absent from
any meeting, the members present at the meeting, whether or not they constitute
a quorum, may appoint another Trustee to act in the place of such absent member.
Section 3. Audit Committee.
(a) Organization. There shall be a committee of the Board of Trustees to
be known as the Audit Committee. The Audit Committee shall be composed entirely
of Trustees who are independent of the management of the Trust, the investment
advisor to the Trust, its affiliates or parent company (the "Fund Companies")
and are free of any relationship to the Fund Companies that, in the opinion of
the Board of Trustees, would interfere with the Trustees' exercise of
independent judgment as committee members. No former officer or director of
SAFECO Corporation or its affiliates shall be considered an "independent"
trustee. The Audit Committee shall consist of not less than three members
appointed by the Board of Trustees. All Audit Committee members will be
financially literate.
(b) Purpose. The Audit Committee shall provide assistance to the Board of
Trustees in fulfilling its responsibility to the shareholders relating to Trust
accounting, reporting practices of the Trust, and the quality and integrity of
the financial reports of the Trust. In so doing, it is the responsibility of
the audit committee to maintain free and open means of communication between the
Trustees, the independent auditors, the internal auditors and the management of
the Fund Companies.
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(c) Responsibilities. The Audit Committee will:
(1) Provide an open avenue of communication between the Trustees, the
independent auditors and the management of the Fund Companies.
(2) Meet three times per year or more frequently as circumstances
require. Prepare minutes for each meeting. The Committee may ask members of
management or others to attend meetings and provide pertinent information
as necessary. Committee members may rely upon the information provided to
them by experts and management, as appropriate.
(3) Review annually and update as appropriate the Committee's charter
annually. The extent to which the Committee satisfied its responsibilities
during the prior year in compliance with the charter will be disclosed in
the proxy statement or annual report, prospectus, or the statement of
additional information if required by law or regulation.
(4) Review and recommend to the Trustees the independent auditors to
be selected to audit the financial statements of the Trust.
The independent auditors are ultimately accountable to the Board
of Trustees and the audit committee as representatives of shareholders, and
the board and the Audit Committee have ultimate authority and
responsibility to select, evaluate and, where appropriate, replace the
independent auditors.
Further, review and recommend to the Trustees the compensation
for the services provided to the Trust by the independent auditors.
(5) Meet with the independent auditors and management of the Trust to
review the scope of the proposed audit for the current year and the audit
procedures to be utilized, and at the conclusion thereof review such audit.
(6) Discuss management letters received from the independent auditors
in connection with audits.
(7) Review with the independent auditors, the Fund Companies'
internal auditor, and financial and accounting personnel, the adequacy and
effectiveness of the accounting and financial controls of the Trust, and
elicit any recommendations for the improvement of such internal control
procedures for particular areas where new or more detailed controls or
procedures are desirable.
(8) Review the internal audit function of the Fund Companies
including the independence and authority of their reporting obligations,
the proposed audit plans for the coming year and the coordination of such
plans with the independent auditors.
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(9) Receive prior to each meeting at which they will be discussed, a
summary of findings from completed internal audits and progress report on
the proposed internal audit plan, with explanations for any deviations from
the original plan.
(10) Review the financial statements contained in the annual report to
shareholders with management and the independent auditors to determine that
the independent auditors are satisfied with the disclosure and content of
the financial statements to be presented to the shareholders. Any changes
in accounting principles should be reviewed.
(11) Meet with the internal and independent auditors without members
of management present. Among the items to be discussed in these meetings
are the independent auditors' evaluation of the Fund Companies' financial,
accounting, and auditing personnel, and the cooperation that the
independent auditors received during the course of the audit. Meet in
separate executive sessions with management.
(12) Review the scope of and fees for consulting services provided by
the independent auditors.
(13) Obtain from the independent auditors a formal written statement-
delineating relationships between the auditors and the Fund Companies.
Actively engage in a dialogue with the independent auditors regarding
matters that might reasonably be expected to affect their independence and
effectiveness.
(14) If required by law or regulation, cause a letter from the
Committee to be included in the Trust's annual shareholder report that
discloses whether or not the Committee has reviewed the audited financial
statements with management and the independent auditors, whether it has met
privately to discuss information obtained from management and the
independent auditor and whether or not it believes the Trust's financial
statements are fairly presented in accordance with Generally Accepted
Accounting Principles.
(15) Review periodically with counsel to the Fund Companies legal and
regulatory matters that may have a material impact on the Fund Companies'
financial statements, compliance policies and programs.
(16) Review any interested party conflict-of-interest situation
brought to its attention by management, internal auditors or the
independent auditors.
(17) Report on each meeting of the Audit Committee to the Board of
Trustees.
(d) Rules of Procedure. The Audit Committee shall adopt its own rules and
keep minutes of all of its meetings.
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(e) Quorum. A quorum of the Audit Committee shall consist of at least two
members of the Committee.
(f) Action Without Meeting. Subject to the requirements of the 1940 Act,
any action that may be or is required to be taken at a meeting of the Audit
Committee may be conducted by telephone or taken without a meeting if a consent
in writing setting forth the action so taken shall be signed by all members of
the Audit Committee. Such consent shall have the same effect as a unanimous
vote.
Section 4. Pricing Committee.
(a) Membership. The Board of Trustees may annually appoint a Pricing
Committee comprised of two or more trustees or officers of SAFECO Asset
Management Company.
(b) Responsibilities and Duties. The purpose of the Pricing Committee
shall be to value, on behalf of the Board of Trustees between regularly
scheduled trustees' meetings, any security held by or to be purchased for the
Trust or any Series which cannot be otherwise valued under the Trust's
guidelines for valuation of portfolio securities, e.g., an unrestricted security
for which market quotes are not readily available or a restricted security
("Security").
(c) Rules of Procedure. In determining the fair value of a Security, the
Pricing Committee shall consider such factors and follow such procedures as may
be established under guidelines approved by the Trust's Board of Trustees. The
guidelines shall be periodically reviewed and approved by the Board as
frequently as the Board shall deem appropriate, but in no event less than
annually. Minutes shall be kept of each meeting of the Pricing Committee. At the
next regularly scheduled Board of Trustees' meeting following the Pricing
Committee's determination of a fair value for a Security, the Board of Trustees
shall ratify the Pricing Committee's action.
(d) Vote Required. The members of the Pricing Committee must unanimously
approve a fair value for the Security.
(e) Action Without Meeting. Any action that may be or is required to be
taken at a meeting of the Pricing Committee may be conducted by telephone or may
be taken without a meeting, if a consent in writing setting forth the action so
taken shall be signed by all members of the Pricing Committee. Such consent
shall have the same effect as a unanimous vote.
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Section 5. Nominating and Compensation Committee
(a) Membership. The Nominating and Compensation Committee will be
composed entirely of trustees who are not "interested persons," as that term is
defined under the Investment Company Act of 1940 (the "1940 Act"), with respect
to the Trust ("independent trustees"). The Board will appoint a member of the
Committee to serve as the Chair.
(b) Responsibilities and Duties. The Nominating and Compensation
Committee shall be responsible to evaluate and nominate candidates for selection
as independent trustees of the Trust, and to review and make recommendations
concerning trustee compensation. In carrying out these responsibilities, the
Nominating and Compensation Committee will
(i) With the advice of the Board of Trustees, the Committee will
determine when it may be appropriate to nominate candidates for election as
independent trustees. In addition, the Committee will periodically review
the make-up and background of Board members, to determine whether it may be
appropriate to add individuals with different backgrounds or skill sets
from those already on the Board.
(ii) In evaluating candidates, the Committee will consider both the
letter and the spirit of the 1940 Act. The Committee will consider
candidates' qualifications for Board membership and their independence from
the Trust's manager and other principal service providers, including the
effect of any relationships beyond those delineated in the 1940 Act that
might impair trustee independence, such as social relationships with the
manager or the Trust's other principal service providers, or any conflict
that may result from service as a director in a competing fund complex or
competing industry.
(iii) The Committee may establish such procedures as the Committee
members deem appropriate to assist them in their evaluation of the
candidates.
(iv) The Committee will periodically review trustee compensation, and
will recommend any appropriate changes to the full Board of Trustees.
(c) Rules of Procedure. The Nominating and Compensation Committee shall
adopt its own rules and keep minutes of all of its meetings.
(d) Quorum. A quorum of the Nominating and Compensation Committee shall
consist of at least two members of the Committee.
(e) Action Without Meeting. Subject to the requirements of the 1940 Act,
any action that may be or is required to be taken at a meeting of the Nominating
and Compensation Committee may be conducted by telephone or taken without a
meeting if a consent in writing setting forth the action so taken shall be
signed by all members of the Nominating and Compensation Committee. Such consent
shall have the same effect as a unanimous vote.
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Section 6. Compensation of Committee Members. Each committee member who is not
an Interested Person of the Trust may receive such compensation from the Trust
for his or her services and reimbursement for his or her expenses as may be
fixed from time to time by the Trustees.
ARTICLE IV
----------
OFFICERS
--------
Section 1. General. The officers of the Trust shall be a President, a
Treasurer, a Secretary, and may include one or more Vice Presidents, Assistant
Treasurers or Assistant Secretaries, and such other officers as the Board of
Trustees may from time to time elect. The Board of Trustees may appoint any
other officers or agents and prescribe their respective rights, terms of office,
authorities and duties.
Section 2. Election, Tenure and Qualifications of Officers. The officers of
the Trust shall be elected annually by the Trustees. Each officer elected by the
Board of Trustees shall hold office until his or her successor shall have been
elected and qualified or his or her earlier resignation. Any person may hold
one or more offices of the Trust, except no one person may serve concurrently as
President and Secretary. A person who holds more than one office in the Trust
may not act in more than one capacity to execute, acknowledge, or verify an
instrument required by law to be executed, acknowledged, or verified by more
than one officer. No officer need be a Trustee or a Shareholder of the Trust.
Section 3. Vacancies and Newly Created Offices. Whenever a vacancy shall occur
in any office, regardless of the reason for such vacancy, or if any new office
shall be created, such vacancies or newly created offices may be filled by the
Trustees at any meeting.
Section 4. Removal and Resignation. The Board of Trustees may remove any
officer or agent from office, with or without cause, by the vote of a majority
of the Trustees. Any officer may resign from office at any time by delivering a
written resignation to the Trustees, the President, the Secretary, or any
Assistant Secretary. Unless otherwise specified therein, such resignation shall
take effect upon delivery.
Section 5. Chairman. The Chairman shall have the powers and responsibilities
set forth in Article II, section 6 of the Trust Instrument and shall exercise
and perform such other powers and duties as may from time to time be assigned by
the Board of Trustees or prescribed by these Bylaws.
Section 6. President. The President shall be the chief executive officer of
the Trust. Subject to the direction of the Trustees, the President shall have
general charge, supervision and control over the business affairs of the Trust
and shall be responsible for the management thereof. In the absence of the
Chairman, or if no Chairman of the Board of Trustees has been elected, the
President shall preside at all Shareholders' and Board of Trustees' meetings and
shall in general exercise the powers and perform the duties of the Chairman.
Except as the Board of Trustees may otherwise order, the President shall have
the power to grant, issue, execute or sign such powers of attorney, proxies,
agreements or other documents as may be deemed advisable or necessary. The
President
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also shall have the power to employ attorneys, accountants and other advisors
and agents for the Trust. The President shall exercise such other powers and
perform such other duties as the Board of Trustees may from time to time assign
to the President.
Section 7. Vice President. If the Board of Trustees elects one or more Vice
President(s), the Vice-President(s) shall have such powers and perform such
duties as may from time to time be assigned to them by the Board of Trustees or
the President. At the request or in the absence or disability of the President,
the Vice President (or, if there are two or more Vice Presidents, then the
senior of the Vice Presidents present and able to act) may perform all the
duties of the President and, when so acting, shall have all the powers of the
President. The Board of Trustees may designate one (1) or more of the Vice
Presidents as an Executive Vice President or with such other designation or
title as the Board of Trustees deem appropriate for his or her position or
duties.
Section 8. Treasurer and Assistant Treasurers. The Treasurer shall be the
principal financial officer of the Trust and shall have general charge of the
finances and books of the Trust. The Treasurer shall be responsible for
delivering all funds and securities of the Trust to its custodian. The
Treasurer shall make annual reports to the Board of Trustees regarding the
business and financial condition of the Trust as soon as possible after the
close of the Trust's fiscal year. The Treasurer also shall furnish such other
reports concerning the business and financial condition of the Trust as the
Board of Trustees may from time to time require. The Treasurer shall perform
all acts incidental to the office of Treasurer, subject to the supervision of
the Board of Trustees, and shall perform such additional duties as the Board may
from time to time designate.
Any Assistant Treasurer may perform such duties of the Treasurer as the
Board of Trustees or the Treasurer may assign, and, in the absence of the
Treasurer, may perform all the duties of the Treasurer.
Section 9. Secretary and Assistant Secretaries. The Secretary shall record all
votes and proceedings of the meetings of Trustees and Shareholders in books to
be kept for that purpose. The Secretary shall be responsible for the giving and
serving of all notices of the Trust. The Secretary shall have custody of any
seal of the Trust. The Secretary shall be responsible for the records of the
Trust, including the Share register and such other books and papers as the
Trustees may direct and such books, reports, certificates and other documents
required by law. All of such records and documents shall at all reasonable
times be kept open by the Secretary for inspection by any Trustee. The
Secretary shall perform all acts incidental to the office of Secretary, subject
to the supervision of the Trustees, and shall perform such additional duties as
the Trustees may from time to time designate.
Any Assistant Secretary may perform such duties of the Secretary as the
Trustees or the Secretary may assign, and, in the absence of the Secretary, may
perform all the duties of the Secretary.
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ARTICLE V
---------
MEETINGS OF SHAREHOLDERS
------------------------
Section 1. Annual Meetings. There shall be no annual Shareholders' meetings.
Section 2. Special Meetings. Special meetings of Shareholders of the Trust or
of any Series or Class shall be called by the Chairman, President or Secretary
whenever ordered by the Trustees, and shall be held at such time and place as
may be stated in the notice of the meeting.
Special meetings of the Shareholders of the Trust or of any Series or Class
shall also be called by the Chairman, President or Secretary upon the written
request of Shareholders owning at least ten percent of the Outstanding Shares of
the Trust or such Series or Class entitled to vote at such meeting, provided
that (1) such request shall state the purposes of such meeting and the matters
proposed to be acted on, and (2) the Shareholders requesting such meeting shall
have paid to the Trust the reasonably estimated cost of preparing and mailing
the notice thereof, which the Secretary shall determine and specify to such
Shareholders. No special meeting shall be called upon the request of
Shareholders of the Trust or of any Series or Class to consider any matter which
is substantially the same as a matter voted upon at any special meeting of the
Shareholders held during the preceding twelve months, unless requested by the
holders of a majority of all Outstanding Shares of the Trust or the Series or
Class entitled to be voted at such meeting.
If the Chairman, President or Secretary fails for more than thirty days to
call a special meeting when required to do so, the Trustees or the Shareholders
requesting such a meeting may, in the name of the Chairman, President or
Secretary, call the meeting by giving the required notice. If the meeting is a
meeting of Shareholders of any Series or Class, but not a meeting of all
Shareholders of the Trust, then only a special meeting of Shareholders of such
Series or Class shall be called and only Shareholders of such Series or Class
shall be entitled to notice of and to vote at such meeting.
Section 3. Notice of Meetings; Waiver. The Chairman, President or Secretary
shall cause written notice of the place, date and time, and the purpose or
purposes for which the meeting is called. Notice shall be given at least ten
days before the date of the meeting. The written notice of any meeting may be
delivered or mailed, postage prepaid, to each Shareholder entitled to vote at
such meeting. If mailed, notice shall be deemed to be given when deposited in
the United States mail directed to the Shareholder at his or her address as it
appears on the records of the Trust. Notice of any Shareholders' meeting need
not be given to any Shareholder who is present at such meeting in person or by
proxy if a written waiver of notice, executed before or after such meeting, is
filed with the record of such meeting. Any irregularities in the notice of any
meeting or the nonreceipt of any such notice by any of the Shareholders shall
not invalidate any action otherwise properly taken at any such meeting.
Section 4. Adjourned Meetings. One or more adjournments of any Shareholders'
meetings may be taken by reason of failure of a quorum to attend a meeting or
for any other reason. Notice of adjournment of a Shareholders' meeting to
another time or place need not be given, if such time and place are announced at
the meeting at which the adjournment is taken, or reasonable notice is given
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to persons present at the meeting, and the adjourned meeting is held within a
reasonable time after the date set for the original meeting. At the adjourned
meeting the Trust may transact any business which might have been transacted at
the original meeting. If after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to
Shareholders of record entitled to vote at such meeting.
Section 5. Validity of Proxies. Subject to the provisions of the Trust
Instrument, Shareholders entitled to vote may vote either in person or by proxy,
provided that either (1) a written instrument authorizing such proxy to act has
been signed and dated by the Shareholder or by his or her duly authorized
attorney, or (2) the Trustees adopt by resolution an electronic, telephonic,
computerized or other alternative to execution of a written instrument
authorizing the proxy to act, but if a proposal by anyone other than the
officers or Trustees is submitted to a vote of the Shareholders of the Trust or
of any Series or Class, or if there is a proxy contest or proxy solicitation or
proposal in opposition to any proposal by the officers or Trustees, Shares may
be voted only in person or by written proxy. Unless the proxy provides
otherwise, it shall not be valid for more than eleven months before the date of
the meeting. All proxies shall be delivered to the Secretary or other person
responsible for recording the proceedings before being voted. A proxy with
respect to Shares held in the name of two or more persons shall be valid if
executed by one of them unless at or prior to exercise of such proxy the Trust
receives a specific written notice to the contrary from any one of them. Unless
otherwise specifically limited by their terms, proxies shall entitle the
Shareholder to vote at any adjournment of a Shareholders' meeting. A proxy
purporting to be executed by or on behalf of a Shareholder shall be deemed valid
unless challenged at or prior to its exercise, and the burden of proving
invalidity shall rest on the challenger. At every meeting of Shareholders,
unless the voting is conducted by inspectors, all questions concerning the
qualifications of voters, the validity of proxies, and the acceptance or
rejection of votes, shall be decided by the chairman of the meeting. Subject to
the provisions of the Delaware Business Trust Act, the Trust Instrument or these
Bylaws, all matters concerning the giving, voting or validity of proxies shall
be governed by the General Corporation Law of the State of Delaware relating to
proxies, and judicial interpretations thereunder, as if the Trust were a
Delaware corporation and the Shareholders were shareholders of a Delaware
corporation.
Section 6. Quorum; Required Vote. The quorum and required vote for any
Shareholders' meeting shall be as specified in Article VI, section 3 of the
Trust Instrument.
Section 7. Record Date. The Board of Trustees may fix in advance a date up to
seventy (70) days before the date of any Shareholders' meeting as a record date
for the determination of the Shareholders entitled to notice of, and to vote at,
any such meeting. The Shareholders of record entitled to vote at a
Shareholders' meeting shall be deemed the Shareholders of record at any meeting
reconvened after one or more adjournments, unless the Board of Trustees has
fixed a new record date. If the Shareholders' meeting is adjourned for more
than one hundred twenty (120) days after the original date, the Board of
Trustees shall establish a new record date.
Section 8. Place of Meeting. All special meetings of Shareholders shall be
held at the principal place of business of the Trust or at such other place as
the Board of Trustees may from time to time designate.
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Section 9. Action Without a Meeting. Any action to be taken by Shareholders
may be taken without a meeting if a majority (or such other amount as may be
required by law) of the Outstanding Shares entitled to vote on the matter
consent to the action in writing and such written consents are filed with the
records of the Shareholders' meetings. Such written consent shall be treated
for all purposes as a vote at a meeting of the Shareholders held at the
principal place of business of the Trust.
ARTICLE VI
----------
SHARES OF BENEFICIAL INTEREST
-----------------------------
Section 1. Share Certificates. In lieu of issuing certificates representing
Shares, the Board of Trustees or the transfer agent or Shareholder servicing
agent may keep accounts upon the books of the Trust for record holders of such
Shares. The record holders shall be deemed, for all purposes, to be holders of
certificates for such Shares as if they accepted such certificates and shall be
held to have expressly consented to the terms thereof.
If the Board of Trustees authorizes the issuance of certificates pursuant
to Article V, section 5 of the Trust Instrument, then such certificates shall be
in the form prescribed from time to time by the Board and shall be signed by the
President or a Vice President and by the Treasurer, Assistant Treasurer,
Secretary or Assistant Secretary of the Trust. Such signatures may be facsimile
if the certificate is signed by a transfer agent or Shareholder servicing agent
or by a registrar, other than a Trustee, officer or employee of the Trust. If
any officer who has signed any such certificate or whose facsimile signature has
been placed thereon shall have ceased to be such an officer before the
certificate is issued, then such certificate may be issued by the Trust with the
same effect as if he or she were such an officer at the date of issue. The
issuance of a certificate to one or more Shareholders shall not require the
issuance of certificates to all Shareholders. The Board of Trustees may at any
time discontinue the issuance of certificates and may, by written notice to each
Shareholder, require the surrender of certificates to the Trust for
cancellation. Such surrender and cancellation shall not affect the ownership of
Shares in the Trust.
Section 2. Transfer of Shares. The Shares of the Trust shall be transferable
only by a transfer recorded on the books of the Trust by the Shareholder of
record in person or by his or her duly authorized attorney or legal
representative. The Shares of the Trust may be freely transferred, and the
Board of Trustees may, from time to time, adopt rules and regulations regarding
the method of transfer of such Shares. Shares shall not be transferred on the
books of the Trust until all requirements of the Board, including the proper
tender of any outstanding certificates, if any, have been satisfied. The Trust
shall be entitled to treat the holder of record of any Share or Shares as the
absolute owner for all purposes, and shall not be bound to recognize any legal,
equitable or other claim or interest in such Share or Shares on the part of any
other person except as otherwise expressly provided by law.
Section 3. Lost, Stolen or Destroyed Certificates. If any Share certificate
should become lost, stolen or destroyed, a duplicate Share certificate may be
issued in place thereof, upon such terms and conditions as the Board of Trustees
may prescribe, including, but not limited to, requiring the
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owner of the lost, stolen or destroyed certificate to give the Trust a bond or
other indemnity, in such form and in such amount as the Board of Trustees may
direct and with such surety or sureties as may be satisfactory to the Board
sufficient to indemnify the Trust against any claim that may be made against it
on account of the alleged loss, theft or destruction of any such certificate or
the issuance of such new certificate.
ARTICLE VII
-----------
CUSTODY OF SECURITIES
---------------------
Section 1. Employment of a Custodian. The Trust shall at all times place and
maintain all cash, securities and other assets of the Trust and of each Series
in the custody of a custodian meeting the requirements set forth in Article VII,
section 4 of the Trust Instrument ("Custodian"). The Custodian shall be
appointed from time to time by the Board of Trustees, who shall determine its
remuneration.
Section 2. Termination of Custodian Agreement. Upon termination of any
Custodian Agreement or the inability of the Custodian to continue to serve as
custodian, in either case with respect to the Trust or any Series, the Board of
Trustees shall (a) use its best efforts to obtain a successor Custodian; and (b)
require that the cash, securities and other assets owned by the Trust or any
Series be delivered directly to the successor Custodian.
Section 3. Other Arrangements. The Trust may make such other arrangements for
the custody of its assets (including deposit arrangements) as may be required by
any applicable law, rule or regulation.
ARTICLE VIII
------------
FISCAL YEAR AND ACCOUNTANT
--------------------------
Section 1. Fiscal Year. The fiscal year of the Trust shall, unless otherwise
ordered by the Board of Trustees, be twelve calendar months ending on the 31st
day of December.
Section 2. Accountant. The Trust shall employ independent certified public
accountants as its Accountant to examine the accounts of the Trust and to sign
and certify financial statements filed by the Trust. The Accountant shall be
appointed in accordance with the requirements of Section 32(a) of the 1940 Act
and the rules thereunder. The Accountant's certificates and reports shall be
addressed both to the Board of Trustees and to the Shareholders.
ARTICLE IX
----------
AMENDMENTS
----------
Section 1. General. Except as provided in Section 2 of this Article, all
Bylaws of the Trust shall be subject to amendment, alteration or repeal, and new
Bylaws may be made by the affirmative vote of
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a majority of either: (1) the Outstanding Shares of the Trust entitled to vote
at any meeting; or (2) the Trustees.
Section 2. By Shareholders Only. After the issue of any Shares of the Trust,
no amendment, alteration or repeal of this Article shall be made except by the
affirmative vote of the holders of either: (a) more than two-thirds of the
Trust's Outstanding Shares present at a meeting at which the holders of more
than fifty percent of the Outstanding Shares are present in person or by proxy,
or (b) more than fifty percent of the Trust's Outstanding Shares.
ARTICLE X
---------
NET ASSET VALUE
---------------
Section 1. Determination of Net Asset Value. The term "Net Asset Value" of
any Series or Class shall mean that amount by which the assets belonging to that
Series or Class exceed its liabilities, all as determined by or under the
direction of the Board of Trustees. Such value per Share shall be determined
separately for each Series or Class and shall be determined on such days and at
such times as the Board of Trustees may determine. Such determination shall be
made with respect to securities for which market quotations are readily
available, at the market value of such securities; and with respect to other
securities and assets, at the fair value as determined in good faith by the
Board of Trustees, provided, however, that the Board, without Shareholder
approval, may alter the method of appraising portfolio securities insofar as
permitted under the 1940 Act and the rules, regulations and interpretations
thereof promulgated or issued by the Commission or insofar as permitted by any
order of the Commission applicable to a Series or Class. The Board of Trustees
may delegate any of its powers and duties under this Section 1 with respect to
appraisal of assets and liabilities. At any time the Board of Trustees may
cause the Net Asset Value per Share last determined to be determined again in a
similar manner and may fix the time when such redetermined values shall become
effective.
ARTICLE XI
----------
INVESTMENTS
-----------
Section 1. Investment Objectives, Policies and Restrictions. The Trust and/or
each Series shall adhere to the fundamental and non-fundamental investment
objectives, policies and restrictions applicable to the Trust and/or each Series
included in the Trust's current effective registration statement as filed with
the Commission. If a percentage limitation is adhered to at the time of an
investment, a later increase or decrease in the percentage resulting from a
change in the value of the assets of a Series shall not be a violation of such
investment restrictions.
Section 2. Amendment of Investment Objectives, Policies and Restrictions. Any
investment objectives, policies and restrictions of the Trust or any Series
which are deemed to be fundamental may not be changed without the approval of
the holders of a majority of the Outstanding Shares of the Trust or of the
Series affected which shall mean the lesser of (i) 67% of the Shares represented
at a meeting at which more than 50% of the Outstanding Shares are present or
represented by proxy
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or (ii) more than 50% of the Outstanding Shares. Any investment objectives,
policies or restrictions deemed non-fundamental may be changed by vote of the
Board of Trustees.
ARTICLE XII
-----------
MISCELLANEOUS
-------------
Section 1. Inspection of Books. The Board of Trustees shall from time to time
determine whether and to what extent, and at what times and places, and under
what conditions the accounts and books of the Trust or any Series or Class shall
be open to the inspection of Shareholders. No Shareholder shall have any right
to inspect any account or book or document of the Trust except as conferred by
law or otherwise by the Board of Trustees or by resolution of Shareholders.
Section 2. Severability. The provisions of these Bylaws are severable. If the
Board of Trustees determine, with the advice of counsel, that any provision
hereof conflicts with the 1940 Act, the regulated investment company provisions
of the Internal Revenue Code or with other applicable laws and regulations, the
conflicting provision shall be deemed never to have constituted a part of these
Bylaws; provided, however, that such determination shall not affect any of the
remaining provisions of these Bylaws or render invalid or improper any action
taken or omitted prior to such determination. If any provision hereof shall be
held invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall attach only to such provision only in such jurisdiction
and shall not affect any other provision of these Bylaws.
Section 3. Headings. Headings are placed in these Bylaws for convenience of
reference only and in case of any conflict, the text of these Bylaws rather than
the headings shall control.
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Exhibit 99.5(B)
SELLING AGREEMENT
This Selling Agreement ("Agreement") is entered into by and between SAFECO
Securities, Inc. ("Distributor") and the undersigned broker-dealer ("Broker-
Dealer") effective as of the date written below.
WHEREAS, Distributor is a broker-dealer registered with the Securities and
Exchange Commission ("SEC") and the National Association of Securities Dealers,
Inc. ("NASD") and is the general distributor and principal underwriter of the
Advisor Class A, Advisor Class B and Advisor Class C Shares ("Load Shares") and
the No-Load Class Shares ("No-Load Shares," and together with the Load Shares,
"Shares") of the SAFECO mutual funds ("Funds") listed in Exhibit A (which
Exhibit A may be amended from time to time by Distributor with notice to Broker-
Dealer);
WHEREAS, Distributor agrees to sell to Broker-Dealer Load Shares that are
purchased by Distributor from the Funds for resale on a best efforts basis by
Broker-Dealer as principal, and Broker-Dealer agrees to tender Load Shares
directly to the Funds or their agent for redemption or repurchase;
WHEREAS, Broker-Dealer is also an investment adviser registered with the SEC
and/or the various states in which it is required to be registered; and
WHEREAS, Broker-Dealer offers its clients, members or customers ("Customers") an
asset allocation program, and Distributor and Broker-Dealer desire that No-Load
Shares of the Funds be offered to Customers through such asset allocation
program;
THEREFORE Distributor and Broker-Dealer agree as follows:
A. LOAD SHARES
1. Distribution of Load Shares. Broker-Dealer shall offer and sell Load
Shares at the public offering price next determined after the order is received,
in accordance with the terms of the then current Trust prospectus and statement
of additional information for Load Shares ("Load Prospectus").
2. Compensation.
(a) Distributor shall provide Broker-Dealer with appropriate compensation
for selling the Load Shares, in accordance with the then current schedule of
dealer compensation which will be available from Distributor upon request and be
set forth in the Load Prospectus. Broker-Dealer will not be entitled to any
concession on the purchase of a Fund's Load Shares through the reinvestment of
any distributions made by such Fund. Such reinvestments will be made at
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net asset value per share. Purchases of Load Shares made under a cumulative
purchase privilege shall be considered an individual transaction for the purpose
of determining the concession from the public offering price to which Broker-
Dealer is entitled.
(b) Where a Fund has adopted a plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940 (a "Plan"), Distributor may elect from time to
time to make payments to Broker-Dealer as provided under such Plan (in addition
to the compensation, if any, provided for in paragraph 2(a) of this Agreement)
for providing distribution and other related services. Such payments shall be
made in the amount set forth in the schedule of distribution payments and
service payments issued by, and available upon request from, Distributor.
Broker-Dealer will not be paid such fees until Distributor has received the
service and distribution fees described in the Load Prospectus for the period in
which Broker-Dealer provides the distribution and other related services.
Broker-Dealer agrees to provide to Distributor at least annually or as required
by the Trust's Board of Trustees a description of the services provided by
Broker-Dealer pursuant to this paragraph.
(c) Upon notice to Broker-Dealer, Distributor or any Fund may from time to
time change, amend or discontinue any discount, concession, distribution payment
or service payment schedule issued by Distributor from time to time and may
issue a new or replacement schedule. Broker-Dealer shall have no vested interest
in any type, amount or rate of discount, concession, distribution or service
payment. Broker-Dealer shall have no claim against Distributor or any Fund by
virtue of any change or diminution in the rate or amount of, or discontinuance
of, discount, concession, distribution or service payment in connection with the
sale of any Load Shares.
3. Redemptions-Repurchases.
(a) Load Shares presented to Distributor for redemption will be redeemed
at the net asset value of such Load Shares in accordance with the Load
Prospectus; provided that redemptions of Load Shares subject to the imposition
of a contingent deferred sales charge ("CDSC Shares") will be redeemed at the
net asset value of such CDSC Shares, less any applicable contingent deferred
sales charge, as set forth in the Load Prospectus.
(b) Repurchases of Load Shares will be made at the net asset value of such
Load Shares; provided that repurchases of CDSC Shares will be made at the net
asset value of such CDSC Shares, less any applicable contingent deferred sales
charges, as set forth in the Load Prospectus.
(c) Broker-Dealer shall be responsible for determining, in accordance with
the Load Prospectus, whether, and the extent to which, a contingent deferred
sales charge is applicable to a redemption of Load Shares from a customer
account; and Broker-Dealer agrees to present immediately to Distributor any
contingent deferred sales charge to which such redemption was subject. If
Broker-Dealer holds Load Shares subject to a contingent deferred sales charge,
it shall
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have the capability to track and account for such charges; and Distributor
reserves the right, at its discretion, to verify that capability through
inspection of Broker-Dealer's tracking and accounting system or otherwise.
4. Orders.
(a) Distributor will treat all orders as not entitled to any reduced sales
charge beyond that accorded to the amount of the purchase order as determined by
the schedule set forth in the Load Prospectus, unless Broker-Dealer advises
Distributor otherwise in writing when placing the order.
(b) All orders are subject to acceptance and rejection by the Distributor.
Distributor reserves the right in its discretion to suspend sales or to withdraw
the offering of Load Shares of any Fund or classes thereof, in whole or in part,
or to make a limited offering of such Load Shares.
(c) Distributor shall not accept from Broker-Dealer any conditional orders
for Load Shares. Delivery of share certificates, if any, for Load Shares
purchased shall be made by the Funds only against receipt of the purchase price.
If payment for Load Shares purchased is not received within seven days, or any
lesser period as may be required by law, the sale may be canceled forthwith
without any responsibility or liability on Distributor's or the applicable
Fund's part (in which case Broker-Dealer will be responsible for any loss,
including loss of profit, suffered by the Fund resulting from Broker-Dealer's
failure to make payment as aforesaid), or, at Distributor's option, Distributor
may sell the Load Shares ordered back to the Fund (in which case Distributor may
hold Broker-Dealer responsible for any loss including loss of profit suffered by
Distributor resulting from Broker-Dealer's failure to make payment as
aforesaid).
(d) If Broker-Dealer uses telephonic, telex, telegraphic or facsimile
means to transmit orders, exchanges or redemptions on behalf of customers for
Load Shares, Broker-Dealer hereby agrees to indemnify Distributor, the Funds,
SAFECO Asset Management Company ("SAM"), SAFECO Services Corporation ("Transfer
Agent"), and all directors, trustees, officers, and employees of each, for any
loss, injury, damage, expense or liability as a result of Distributor's actions
based on such telephonic, telex, telegraphic or facsimile orders, exchanges or
redemption requests if an order, exchange or redemption request placed by
Broker-Dealer was erroneous or not authentic and Distributor, in good faith acts
on such request, or if Distributor has refused to execute such request for any
reason.
(e) Broker-Dealer shall not withhold placing customers' orders for any
Load Shares so as to profit as a result of such withholding. Broker-Dealer shall
not purchase any Load Shares except for the purpose of covering purchase orders
already received by Broker-Dealer. Broker-Dealer shall not purchase any Load
Shares from Distributor other than for bona fide investment or for the purpose
of covering purchase orders already received. Neither Distributor nor Broker-
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Dealer shall, as principal, purchase Load Shares from a record holder at a price
lower than the bid price (net asset value per share less any applicable
contingent deferred sales charge) next quoted by or for the issuing Fund.
5. Offering Prices. Upon request, Distributor will furnish Broker-Dealer with
public offering prices for the Load Shares in accordance with the Load
Prospectus; and Broker-Dealer agrees to quote such prices subject to
confirmation by Distributor on any Load Shares offered by Broker-Dealer for
sale.
6. Status. In all sales of Load Shares to the public, Broker-Dealer shall act
in the capacity of independent contractor as a dealer for Broker-Dealer's own
account and in no transaction shall Broker-Dealer have any authority to act or
hold itself out as agent for Distributor, the Trust or any Fund. Nothing in this
Agreement including the use of the words "discount," "concession" or "payment"
shall cause Broker-Dealer to be a partner, employee or agent of the Distributor
or give Broker-Dealer any authority to act for Distributor, the Trust or any
Fund. Neither Distributor, the Trust or any Fund nor any affiliates, directors,
officers, employees or agents of each shall be liable for any obligation, act or
omission of Broker-Dealer, its directors, officers, registered representatives,
employees or agents. Broker-Dealer is solely responsible for training and
supervising its Associated Persons as defined in the Securities Exchange Act of
1934. Broker-Dealer and its Associated Persons shall be responsible to determine
the suitability of the Funds, and any class thereof, as an investment for its
customers.
7. Refunds. If, within seven business days after confirmation by Distributor
of Broker-Dealer's original purchase order for Load Shares, such Load Shares are
repurchased by the issuing Fund or by Distributor for the account of such Fund
or are tendered for redemption by the customer, (i) Broker-Dealer shall
forthwith refund to Distributor the full discount retained by, or concession
paid to, Broker-Dealer on the original sale pursuant to paragraph 2(a) of this
Agreement and any distribution payments and service payments relating thereto
made to Broker-Dealer pursuant to paragraph 2(b) of this Agreement and (ii)
Distributor shall, as applicable, forthwith pay to such Fund Distributor's share
of the sales charge on the original sale by Distributor, and shall also pay such
Fund the refund received under clause (i). Broker-Dealer shall refund to the
Fund immediately upon receipt the amount of any dividends or distributions paid
to Broker-Dealer as nominee for Broker-Dealer's customers with respect to
redeemed or repurchased Load Shares to the extent that the proceeds of such
redemption or repurchase may include the dividends or distributions payable on
such Load Shares. In the case of certificated Load Shares, Broker-Dealer shall
be notified by Distributor of such repurchase or redemption within ten days of
the date on which a properly executed Share certificate and stock power together
with appropriate supporting papers is delivered to Distributor or to such Fund;
and in the case of uncertificated Load Shares, Broker-Dealer shall be notified
by Distributor of such repurchase or redemption within ten days of such
repurchase or redemption.
8. Representations. By signing this Agreement, Broker-Dealer represents and
warrants that it (i) is a registered broker-dealer under the Securities Exchange
Act of 1934, as amended;
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(ii) is qualified to act as a broker-dealer in each jurisdiction and state in
which it will offer Load Shares; (iii) is a member in good standing of the NASD;
and (iv) will maintain such registrations, qualifications and memberships
throughout the term of this Agreement. The termination of Broker-Dealer's
membership with the NASD will immediately and automatically terminate this
Agreement. Broker-Dealer shall comply with all applicable federal laws, the laws
of each jurisdiction and state in which it will offer Load Shares and the rules,
regulations and requirements of the NASD, the U.S. Department of Treasury's
Office of Foreign Assets Control, or any other regulatory or self-regulatory
organization now or hereafter in existence whose rules and regulations govern
the offer and sale of Shares.
B. NO-LOAD SHARES
1. Asset Allocation Program. Broker-Dealer may, in connection with its asset
allocation program, sell No-Load Shares of any Funds identified in Exhibit A
hereto to Customers participating in Broker-Dealer's asset allocation program.
2. Determination of Net Asset Value. Broker-Dealer shall offer and sell No-
Load Shares at the net asset value next determined after the order is received,
in accordance with the terms of the then current Trust prospectus and statement
of additional information for No-Load Shares ("No-Load Prospectus").
3. Redemptions-Repurchases.
(a) No-Load Shares presented to Distributor for redemption will be
redeemed at the net asset value of such No-Load Shares in accordance with the
No-Load Prospectus.
(b) Repurchases of No-Load Shares will be made at the net asset value of
such No-Load Shares.
4. Orders.
(a) All orders are subject to acceptance and rejection by the Distributor.
Distributor reserves the right in its discretion to suspend sales or to withdraw
the offering of No-Load Shares of any Fund, in whole or in part, or to make a
limited offering of such No-Load Shares.
(b) Distributor shall not accept from Broker-Dealer any conditional orders
for No-Load Shares. Delivery of share certificates, if any, for No-Load Shares
purchased shall be made by the Funds only against receipt of the purchase price.
If payment for No-Load Shares purchased is not received within seven days, or
any lesser period as may be required by law, the sale may be canceled forthwith
without any responsibility or liability on Distributor's or the applicable
Fund's part (in which case Broker-Dealer will be responsible for any loss,
including loss of profit, suffered by the Fund resulting from Broker-Dealer's
failure to make payment as aforesaid), or, at Distributor's option, Distributor
may sell the No-Load Shares ordered back to
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the Fund (in which case Distributor may hold Broker-Dealer responsible for any
loss including loss of profit suffered by Distributor resulting from Broker-
Dealer's failure to make payment as aforesaid).
(c) If Broker-Dealer uses telephonic, telex, telegraphic or facsimile
means to transmit orders, exchanges or redemptions on behalf of customers for
No-Load Shares, Broker-Dealer hereby agrees to indemnify Distributor, the Funds,
SAM, the Transfer Agent and all directors, trustees, officers, and employees of
each, for any loss, injury, damage, expense or liability as a result of
Distributor's actions based on such telephonic, telex, telegraphic or facsimile
orders, exchanges or redemption requests if an order, exchange or redemption
request placed by Broker-Dealer was erroneous or not authentic and Distributor,
in good faith acts on such request, or if Distributor has refused to execute
such request for any reason.
(d) Broker-Dealer shall not withhold placing customers' orders for any No-
Load Shares so as to profit as a result of such withholding. Broker-Dealer shall
not purchase any No-Load Shares except for the purpose of covering purchase
orders already received by Broker-Dealer. Broker-Dealer shall not purchase any
No-Load Shares from Distributor other than for bona fide investment or for the
purpose of covering purchase orders already received. Neither Distributor nor
Broker-Dealer shall, as principal, purchase No-Load Shares from a record holder
at a price lower than the net asset value next quoted by or for the issuing
Fund.
5. Status. Broker-Dealer shall act in the capacity of independent contractor
and in no transaction shall Broker-Dealer have any authority to act or hold
itself out as agent for Distributor, the Trusts or any Fund. Nothing in this
Agreement shall cause Broker-Dealer to be a partner, employee or agent of the
Distributor or give Broker-Dealer any authority to act for Distributor, the
Trusts or any Fund. Neither Distributor, the Trusts or any Fund or any
affiliates, directors, officers, employees or agents of each shall be liable for
any obligation, act or omission of Broker-Dealer, its directors, officers,
associated persons, employees or agents. As an investment adviser to its
Customers, Broker-Dealer shall make investment recommendations for its Customers
based solely on the best interests of its Customers. Broker-Dealer and its
associated persons shall be responsible to determine the suitability of the
Funds and the No-Load Shares as an investment for its Customers.
6. Representations.
(a) Broker-Dealer represents and warrants that it shall comply with all
requirements applicable to it by reason of all applicable laws, including
federal and state securities laws, the Rules and Regulations of the SEC,
including, without limitation, all applicable requirements of the 1933 Act.
Broker-Dealer further represents and warrants that it shall maintain all records
required by applicable law or otherwise reasonably requested by the Trusts
relating to the services provided by it pursuant to the terms of this Agreement.
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(b) Broker-Dealer represents and warrants that it is an investment adviser
registered with the SEC under the Investment Advisers Act of 1940 and/or
registered as an investment adviser with the various states as required.
C. GENERAL
1. Activities.
(a) No person is authorized to make any representations concerning the
Shares of the Funds and classes thereof for public use except those contained in
the Load or No-Load Prospectus, as applicable, and other printed sales
literature authorized and issued by Distributor or the Funds' investment
manager, SAM. Broker-Dealer shall not use any sales literature, supplemental
sales literature or advertising material (including material disseminated
through radio, television or other electronic media) of any kind without prior
written approval of Distributor, unless it has been furnished by Distributor for
such purposes. Broker-Dealer agrees to indemnify Distributor, the Funds, SAM and
Transfer Agent, and all directors, trustees, officers, employees and "control
persons" within the meaning of the securities laws ("Control Persons") of each
of them, for any loss, injury, damage, expense or liability arising from or
based upon any alleged or untrue statements or representations made by Broker-
Dealer, other than statements contained in the Load or No-Load Prospectus(es),
as applicable, or authorized printed sales literature. Distributor agrees to
indemnify Broker-Dealer, and all directors, trustees, officers, employees,
affiliates and Control Persons of each of them, for any loss, injury, damage,
expense or liability arising from or based upon the Distributor's failure to
fulfill its obligations hereunder, and any alleged untrue or misleading
statements or omissions contained in the Load or No-Load Prospectus(es), as
applicable, for the Funds or authorized printed sales literature supplied to the
Broker-Dealer by the Distributor or any of its affiliates.
(b) Distributor shall furnish Broker-Dealer, without charge and upon
request, reasonable quantities of the Load or No-Load Prospectuses, periodic
shareholder reports and sales literature authorized by Distributor for public
use. Broker-Dealer shall not distribute or make available to investors any
printed information furnished by Distributor which is marked "FOR DEALER USE
ONLY" or which otherwise indicates that it is confidential or not intended to be
distributed to investors.
(c) Broker-Dealer agrees to distribute the Load or No-Load Prospectuses,
as appropriate, and shareholder reports to customers in compliance with
applicable regulatory requirements, except to the extent that Distributor or its
affiliates expressly undertake, in writing, to do so on Broker-Dealer's behalf.
In connection with sales and offers to sell Shares, Broker-Dealer will furnish
each person to whom any such sale or offer is made with a copy of the Load or
No-Load Prospectus, as appropriate, for the issuing Fund prior to or
concurrently with the receipt of any order. Broker-Dealer shall not be required
to furnish a copy of the Funds' statement(s) of additional information, unless
applicable state law so requires.
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(d) Broker-Dealer shall not offer or sell Shares in any state where the
Shares are not qualified for sale under the state's blue sky laws or other
regulations.
(e) Broker-Dealer and its Associated Persons shall be responsible to
determine the suitability of the Funds, and any class thereof, as an investment
for its customers.
2. Multiple Classes. Broker-Dealer agrees in connection with any Fund that
offers multiple classes of Shares to comply with any policies regarding the sale
of classes of Shares as provided to Broker-Dealer from time to time by the
Distributor.
3. Indemnification.
(a) Broker-Dealer shall indemnify and hold harmless the Trust, Distributor
and its affiliates, directors, officers, employees, agents and Control Persons
of each in the event that Broker-Dealer, its directors, officers, employees,
registered representatives or agents violate any law, rule or regulation, or any
provision of this Agreement, which results in losses, claims, damages,
liabilities or expenses (including reasonable attorneys' fees and expenses) to
the Trusts or any Fund, Distributor and its affiliates, directors, officers,
employees, agents or Control Persons. Broker-Dealer shall also indemnify and
hold harmless the Trusts and Funds, Distributor and its affiliates, directors,
officers, employees, agents and Control persons against all losses, claims,
damages, liabilities or expenses (including reasonable attorneys' fees and
expenses) resulting from (i) the willful, reckless or negligent violation of any
law, regulation, contract or any other arrangement by Broker-Dealer, its
directors, officers, employees, registered representatives or agents or (ii) any
allegation arising out of or in connection with any offers or sales of Shares by
Broker-Dealer, its registered representatives, other employees or agents.
(b) Distributor shall indemnify and hold harmless the Trust and the
Broker-Dealer, and the affiliates, directors, officers, employees, agents and
Control Persons of each in the event that Distributor, its directors, officers,
employees, registered representatives or agents violate any law, rule or
regulation, or any provision of this Agreement, which results in losses, claims,
damages, liabilities or expenses (including reasonable attorneys' fees and
expenses) to the Trusts or any Fund, Broker-Dealer and its affiliates, directors
officers, employees, agents or Control Persons. Distributor shall also indemnify
and hold harmless the Trust, Broker-Dealer and its affiliates, directors,
officers, employees, agents and Control persons against all losses, claims,
damages, liabilities or expenses (including reasonable attorneys' fees and
expenses) resulting from (i) the willful, reckless or negligent violation of any
law, regulation, contract or any other arrangement by Distributor, its
directors, officers, employees, registered representatives or agents or (ii) any
allegation arising out of or in connection with any offers or sales of Shares by
Distributor, its registered representatives, other employees or agents.
(c) In consideration of Distributor and Transfer Agent (the transfer
agent, dividend and distribution disbursement agent and shareholder services
agent for the Funds) liquidating, exchanging, or transferring unissued Shares of
the Funds for customers of the Broker-Dealer
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without the use of original or underlying documentation supporting such
instructions (e.g., a signed stock power or signature guarantee), Broker-Dealer
hereby agrees to indemnify Distributor, Transfer Agent and each respective Fund
against any losses (including reasonable attorneys' fees and expenses) that may
arise from such liquidation, exchange or transfer of unissued Shares upon
Broker-Dealer's direction. This indemnification shall apply only to the
liquidation, exchange or transfer of unissued Shares in shareholder and house
accounts executed as wire orders transmitted via the National Securities
Clearing Corporations Fund/SERV system. Broker-Dealer represents and warrants to
Distributor, Transfer Agent and the Funds that all such transactions shall be
properly authorized by Broker-Dealer's customers.
The indemnification in this Section C.3(c) shall not apply to any losses
(including reasonable attorneys' fees and expenses) caused by a failure of
Distributor, Transfer Agent or a Fund to comply with any of the Broker-Dealer's
instructions governing any of the above transactions, or any negligent act or
omission of Distributor, Transfer Agent or a Fund, or any of their directors,
trustees, officers, employees or agents. All transactions shall be settled upon
Broker-Dealers confirmation through NSCC transmission to the Transfer Agent.
Distributor, Transfer Agent or Broker-Dealer may revoke the indemnity contained
in this Section11(c) upon prior written notice to each of the other parties
hereto, and in the case of such revocation, this indemnity agreement shall
remain effective as to trades made prior to such revocation.
4. Enforcement of Rights. Any controversy or claim arising out of or relating
to this Agreement or the validity, interpretation or breach thereof, which is
not settled by agreement among the parties, shall be settled exclusively by
arbitration in Seattle, Washington, in accordance with the rules then in effect
for the NASD and/or the American Arbitration Association. The arbitrators may
allocate attorneys' fees and arbitration costs between the parties. Judgment
upon the award rendered in any such arbitration may be enforced in any court
having jurisdiction.
5. Termination. Either party hereto may cancel this Agreement upon fifteen
(15) days' written notice to the other party. Upon termination of this
Agreement, all authorizations, rights and obligations hereunder shall cease
except:
(i) the provisions with respect to status of Broker-Dealer set forth in
Sections A(6) and B(5);
(ii) the obligation to settle accounts set forth in Section A(7);
(iii) the provisions with respect to representations made by the Broker-
Dealer in Section A(8) and B(6);
(iv) the provisions with respect to indemnification set forth in Section
C(3); and
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(v) the provisions with respect to enforcement of rights set forth in
Section C(4).
6. Communications. All communications to Distributor should be sent to SAFECO
Securities, Inc., SAFECO Plaza, Seattle, WA 98185. Any notices to Broker-Dealer
shall be duly given if mailed, faxed or telegraphed to Broker-Dealer at the
address specified below.
7. Governing Law. This Agreement shall be binding upon receipt by the
Distributor in Seattle, Washington, of a counterpart hereof duly accepted and
signed by Broker-Dealer, and shall be construed in accordance with the laws of
the State of Washington.
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8. Non-Exclusivity. The Distributor may enter into other similar agreements
with any other person or persons without Broker-Dealer's consent.
9. Entire Agreement. This Agreement shall constitute the entire agreement
between the parties with respect to the matters addressed.
10. Counterparts. This Agreement may be signed in counterparts, each of which
shall be deemed to be an original, and all such counterparts together shall
constitute one and the same document.
SAFECO SECURITIES, INC.
By:
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Neal A. Fuller
Vice President
Accepted:
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Address:
By:
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Signature
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Name and Title
--------------------------------------
Contact Person
--------------------------------------
Date
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EXHIBIT A
SAFECO COMMON STOCK TRUST:
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Income Fund
SAFECO Northwest Fund
SAFECO Balanced Fund **
SAFECO International Stock Fund
SAFECO Small Company Stock Fund **
SAFECO U.S. Value Fund **
SAFECO TAXABLE BOND TRUST:
SAFECO Intermediate-Term U.S. Treasury Fund **
SAFECO GNMA Fund **
SAFECO High-Yield Bond Fund
SAFECO TAX-EXEMPT BOND TRUST:
SAFECO Municipal Bond Fund **
SAFECO California Tax-Free Income Fund **
SAFECO Intermediate-Term Municipal Bond Fund *
SAFECO Insured Municipal Bond Fund *
SAFECO MONEY MARKET TRUST:
SAFECO Money Market Fund
SAFECO Tax-Free Money Market Fund *
SAFECO MANAGED BOND TRUST:
SAFECO Managed Bond Fund **
* No-Load Shares Only
** No-Load, Class A and Class B Shares Only
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EXHIBIT 99.10
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" in the Prospectus and "Investment Advisory and Other Services", and
"Financial Statements" in the Statement of Additional Information and to the use
of our report dated February 4, 2000, which is incorporated by reference in this
Post-Effective Amendment Number 12 to the Registration Statement (Form N-1A No.
33-47859) of the No-Load Class, and Advisor Class A and Advisor Class B SAFECO
Managed Bond Trust.
/s/ Ernst & Young LLP
Seattle, Washington
April 25, 2000
<PAGE>
Exhibit 99.16
CODE OF ETHICS
PURPOSE
This document is the Code of Ethics adopted by SAFECO Common Stock Trust, SAFECO
Taxable Bond Trust, SAFECO Tax-Exempt Bond Trust, SAFECO Money Market Trust,
SAFECO Resource Series Trust and SAFECO Managed Bond Trust (collectively, the
"Trusts"), SAFECO Asset Management Company (the "Investment Adviser") and SAFECO
Securities, Inc. (the "Underwriter"), pursuant to the provisions of Rule 17j-1
under the Investment Company Act of 1940.
Rule 17j-1 requires that each registered investment company and its investment
adviser and principal underwriter adopt a written code of ethics designed to
prevent access persons (as that term is defined in the Rule) from engaging in
certain types of conduct prohibited under the Rule. The Rule also requires that
investment companies and their investment advisers and underwriters use
reasonable diligence to put procedures into place that are reasonably designed
to prevent and detect violations of the code.
This Code of Ethics states the prohibitions that are applicable to and the
reporting requirements for persons who are associated with the Trusts, the
Investment Adviser and the Underwriter ("Covered Persons"). This Code expressly
prohibits those individuals from engaging in any fraudulent, deceptive or
manipulative activity in connection with the direct or indirect purchase or sale
of a security.
This Code is based on the principle that personnel within the SAFECO enterprise
whose functions relate to the investment management of the Trusts or the
Investment Adviser's operations owe a special fiduciary duty to, among others,
the Investment Adviser's clients, including the shareholders of the Trusts.
This duty includes the obligation to conduct their personal securities
transactions in a manner that does not (1) interfere with portfolio transactions
of any client of the Investment Adviser, including any series fund of any Trust,
or (2) otherwise take unfair advantage of their relationship to the Investment
Adviser's clients. These individuals also have a duty at all times to place the
interests of the Investment Adviser's clients -- including the Trusts'
shareholders - first, and to conduct all personal securities transactions in a
manner consistent with this Code and in such a manner as to avoid any actual or
potential conflict or abuse of a position of trust and responsibility.
Individuals having access to investment recommendations and trading decisions
affecting the Trusts and the Investment Adviser's clients are held to a higher
standard and must adhere to these general principles as well as comply with the
Code's specific provisions.
The personal investment activity of persons associated with the Trusts, the
Investment Adviser or the Underwriter will be monitored in an effort to identify
patterns or instances of possible Code violations. This Code of Ethics,
effective December 1, 1999, supersedes all prior Codes of Ethics adopted by the
above entities and remains in effect until further notice.
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1. DEFINITIONS
"Access Person" means:
(a) Any officer or Trustee of any Trust;
(b) Any director, officer or employee of the Investment Adviser, including
but not limited to any person meeting the definition of "Portfolio
Manager" or "Investment Professional" in this Code of Ethics;
(c) Any director or officer of the Underwriter;
(d) Any person employed by SAFECO Corporation or any of its subsidiaries
who, in connection with his or her regular functions or duties, (i)
makes or participates in decisions to purchase or sell Securities by
or on behalf of any Client, (ii) makes or participates in
recommendations with respect to such decisions, or (iii) obtains or
has access to non-public information regarding decisions or
recommendations to purchase or sell Securities by or on behalf of any
Client;
(e) Any natural person in a control relationship to any Client or the
Investment Adviser who obtains information concerning (i) any decision
to purchase or sell a Security by or on behalf of any Client, or (ii)
recommendations made to any Client with regard to such a purchase or
sale;
(f) Any spouse or minor child of persons identified in subsections (a)
through (e) above.
"Beneficial Ownership" has the same meaning as that set forth in Section 16
of the Securities Exchange Act of 1934 and the rules and regulations
thereunder.
A Security is "being considered" for purchase or sale when a Portfolio
Manager for a Client account intends to engage in a transaction in that
Security on behalf of the Client.
"Chief Investment Officer" means the person employed in the Investment
department of SAFECO Corporation holding such title, or any other person
designated by the person holding such title.
"Client" means any investment management client of the Investment Adviser
which is not wholly-owned, directly or indirectly, by SAFECO Corporation,
including but not limited to the Trusts and their series Funds, and the
third-party, trust and institutional accounts managed by the Investment
Adviser.
"Control" has the same meaning as that set forth in Section 2(a)(9) of the
Investment Company Act of 1940.
"Covered Person" means any Access Person, any employee of the SAFECO Mutual
Funds department, and any employee or registered representative of the
Underwriter.
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"Fund" means any series of shares of beneficial interest of any Trust
registered for sale under the Securities Act of 1933.
"General Counsel" means the person employed by SAFECO Corporation holding
such title, or any other similarly disinterested person so designated by
the person holding such title.
"Independent Trustee" means any Trustee who is an Access Person solely by
reason of being a Trustee.
"Investment Adviser" means SAFECO Asset Management Company and the
Investment department of SAFECO Corporation.
"Investment Professional" means any Portfolio Manager and any research
analyst or trader employed by the Investment Adviser who provides
information and advice to a Portfolio Manager, or who helps execute a
Portfolio Manager's securities trading decisions.
"Person" means a natural person or a company.
"Portfolio Manager" means any person whose assigned duty is to manage any
account managed by the Investment Adviser and who is vested with the power
to make investment decisions on behalf of such account on a regular basis.
"Related Security" means any security convertible into the Security
referred to in the applicable Code or Ethics section, any future or option
on the Security, and any derivative security the value of which is linked
to the Security.
"Security" has the same meaning as that set forth in Section 2(a)(36) of
the Investment Company Act of 1940, except that it does not include (i) any
security issued or guaranteed as to principal or interest by the U. S.
Government or any security issued by an agency, authority or
instrumentality of the U. S. Government, (ii) any money market instrument
including bankers' acceptances, certificates of deposit and commercial
paper, or (iii) any security issued by a registered open-end investment
company.
"Trust" means any investment company registered under the Investment
Company Act of 1940 for which the Investment Adviser acts as investment
adviser.
"Trustee" means any member of the Board of Trustees of any Trust.
"Underwriter" means SAFECO Securities, Inc.
2. GENERAL RESTRICTIONS ON PERSONAL SECURITIES TRADES
2.1 Personal Securities Trades. No Covered Person shall purchase or sell,
directly or indirectly, any Security in which he or she has, or by
reason of such transaction acquires, any direct or indirect beneficial
ownership;
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(a) Which the Covered Person knows or should have known at the time
of such purchase or sale is a Security or Related Security being
considered by the Investment Adviser for purchase or sale for a
Client account;
(b) Which the Covered Person knows or should have known at the time
of such purchase or sale is a Security or Related Security that
the Investment Adviser is purchasing or selling for a Client
account, or that is subject to a pending buy or sell order;
(c) Which is being offered in an initial public offering;
(d) Whose purchase or sale would constitute a breach of either the
Covered Person's or the Investment Adviser's fiduciary duty to
any Client; or
(e) Whose purchase or sale would be inconsistent with any applicable
law.
2.2 Exemptions. The prohibitions of 2.1(a) and (b) shall not apply to:
(a) Purchases or sales effected for any account over which a Covered
Person has no direct or indirect influence or control;
(b) Purchases or sales that are non-volitional on the part of the
Covered Person, including but not limited to purchases pursuant
to an automatic dividend reinvestment plan; or
(c) Purchases effected upon the exercise of rights issued by an
issuer pro rata to all holders of a class of its Securities to
the extent such rights were acquired from such issuer, and sales
of rights so acquired.
For the purposes of this Code, with respect to any Covered Person who
is not an Access Person, and to any Independent Trustee (or any
spouse, minor child or relative of an Independent Trustee), the
"should have known" standard implies no duty of inquiry, does not
presume there should have been any deduction or extrapolation from
discussions or memoranda dealing with tactics to be employed meeting
the Trusts' investment objectives, or that any knowledge is to be
imputed because of prior knowledge of the Trusts' portfolio holdings,
market considerations, or the Trusts' investment policies, objectives
and restrictions.
In addition, the prohibition of 2.1(c) shall not apply to an
Independent Trustee (or to any spouse, minor child or relative of an
Independent Trustee) except with respect to a Security which the
Trustee (or his/her spouse, minor child or relative) knows or should
have known that the Investment Adviser is purchasing or considering
purchasing for a Fund.
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2.3 Personal Securities Trades by Investment Professionals and Portfolio
Managers
2.3.1 No Investment Professional may profit from the:
(a) Purchase of a Security followed by the sale of the same or
a Related Security within 60 calendar days of the
purchase; or
(b) Sale of a Security followed by the purchase of the same or
a Related Security within 60 calendar days of the sale.
2.3.2 An Investment Professional may acquire a Security in a private
placement only if:
(a) Prior authorization to purchase the Security being
privately placed is obtained from the Chief Investment
Officer and such approval is based on a determination that
the investment opportunity should not be reserved for a
Client, the opportunity is not being offered to the
Investment Professional because of his or her position
with the Investment Adviser or any Client, and any other
relevant factors; and
(b) The Investment Professional plays no role with respect to
any Client's subsequent consideration of any security
issued by the issuer of the private placement, unless
immediately before playing such role, the Investment
Professional discloses to the Portfolio Manager for that
Client's account and to the Chief Investment Officer that
the Investment Professional is authorized to purchase, or
has purchased, a Security privately placed by the issuer.
2.3.3 No Portfolio Manager may purchase or sell a Security for his or
her own account within seven calendar days before and after a
trade in the same Security made by the Investment Adviser for
any Client account managed by the Portfolio Manager.
3. PRECLEARANCE FOR PERSONAL SECURITIES TRADES
3.1 Preclearance Procedure. No Access Person may purchase or sell any
Security, directly or indirectly, except in transactions exempt under
Section 2.2 of this Code, or in transactions determined by the Chief
Investment Officer or the General Counsel to be exempt by virtue of
the facts and circumstances surrounding the transaction(s), without:
(a) Obtaining preclearance from the Chief Investment Officer; and
(b) Providing the following information to the Chief Investment
Officer in advance of the trade:
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. Name of the Access Person making the preclearance request
. Date
. Issuer of the Securities, the class and the number of shares
involved.
3.2 Effective Period. Preclearance granted pursuant to paragraph
3.1 remains valid for a period of five business days.
3.3 Independent Trustees. Independent Trustees, and their spouses, minor
children or relatives, are subject to the preclearance requirements of
this Section 3 only if the Independent Trustee knew at the time of the
transaction, or in the ordinary course of fulfilling his or her
official duties as a Trustee should have known, that during the 15 day
period immediately preceding or following the date of the transaction
such Security was purchased or sold or was being considered by the
Investment Adviser for purchase or sale for a Client account.
4. PROHIBITED ACTS
4.1 Pecuniary Interest in Transaction Involving a Client. No Covered
Person shall have any personal pecuniary interest in any transaction
to which any Client is a party without:
(a) Filing a written statement with the Chief Investment Officer
containing full and complete disclosure of the pecuniary
interest; and
(b) Obtaining approval in writing from the Chief Investment Officer.
Copies of the written statement and approval will be provided to the
Trustees at their next regular quarterly meeting.
4.2 Transaction Creating Personal Benefit. No Covered Person shall cause
or attempt to cause any Client to purchase, sell or hold any Security
in a manner calculated to create any personal benefit to the Covered
Person. A Covered Person who participates in any research or
investment decision concerning a Security must disclose to the Chief
Investment Officer any personal or beneficial interest the Covered
Person has in such Security or a Related Security, or in the issuer
thereof, where the investment decision could result in a material
benefit to the Covered Person. The Chief Investment Officer shall
determine whether or not to restrict the Covered Person from pursuing
the research or recommendation.
4.3 Acceptance of Gifts and Favors. No Covered Person shall (from any
person who does, has done or has expressed a desire to do business
with the Investment Adviser, the Underwriter, a Trust or any Fund)
accept any:
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(a) Fee, brokerage or loan (other than a loan in connection with a
margin account established in the ordinary course of business
with a broker-dealer), or their equivalent;
(b) Gift or favor, unless the gift or favor is of de minimis value
and the Covered Person promptly discloses the receipt of the same
to the Covered Person's immediate supervisor; or
(c) Invitation to a meal or other activity for which reimbursement by
the Covered Person is not expected, unless the Covered Person
promptly discloses such activity to the Covered Person's
immediate supervisor, and the Covered Person's participation in
the activity furthers a proper business purpose of the Investment
Adviser, the Underwriter, a Trust or any Fund.
4.4 Service on Board of Directors. No Investment Professional may serve
on the board of directors of any publicly-traded company unless such
service has been authorized by the Chairman of the Board of Trustees
based upon a determination that the board service would be consistent
with the interests of the Trusts and their shareholders.
4.5 Purchase of Private Placement in Which Access Person Has Invested.
The Investment Adviser may not purchase for a Client account a
Security or Related Security issued by the same issuer of a Security
for which an Investment Professional obtained authorization to
purchase pursuant to paragraph 2.3.2, without independent review and
approval of such investment by the Chief Investment Officer.
5. REPORTING REQUIREMENTS
5.1 Securities Transactions and Holdings. Access Persons shall report in
writing to the Chief Investment Officer:
(a) Any acquisition or disposition of a direct or indirect beneficial
ownership in any Security, not later than 10 days after the end
of the calendar quarter in which the transaction occurred; and
(b) All Securities holdings, within 10 days of commencement of
employment in any position for which the person becomes
classified as an "Acess Person" and quarterly thereafter.
The report required by paragraph 5.1 shall include the:
. Name of the Access Person making the report,
. Date of any transaction involving the listed securities,
. Issuer, title and number of shares held, and number involved in any
transaction,
. Principal amount of each Security held, and number involved in any
transaction,
. Nature of any transaction (e.g., purchase or sale),
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. Price at which the transaction was effected, and
. Name of the broker-dealer or bank with or through whom the
transaction was effected.
5.2 Brokerage Accounts. Every Access Person who opens an account at a
broker-dealer shall provide immediate written notice thereof to the
Chief Investment Officer. The Underwriter will direct each broker-
dealer at which an Access Person maintains an account to provide the
Chief Investment Officer on a timely basis a duplicate copy of each
confirmation and each periodic account statement issued to such Access
Person.
5.3 Other Reports. Each transaction on behalf of a Fund in a Security
which has been issued by a party, an affiliate of a party, or a plan
sponsor of a party to an investment advisory or management contract
with the Investment Adviser shall be:
(a) Examined by an officer of the Trusts to determine the fairness of
the transaction to the Fund; and
(b) Reported by an officer of the Trusts to the Trustees at their
next regular quarterly meeting.
5.4 Independent Trustees Not Subject to Reporting Requirements.
Independent Trustees and their spouses, minor children or relatives
are subject to the reporting provisions of this Section 5 only with
respect to any transaction which the Independent Trustee knew at the
time of the transaction, or in the ordinary course of fulfilling his
or her official duties as a Trustee should have known, that during the
15 day period immediately preceding or following the date of the
transaction such Security was purchased or sold or was being
considered by the Investment Adviser for purchase or sale for a Client
account.
6. VIOLATIONS OF THE CODE
6.1 Sanctions
(a) A Covered Person who violates this Code may be subject to
appropriate sanctions, including a letter of censure, suspension
or termination of employment, referral to the Securities and
Exchange Commission or other regulatory authorities for civil
action, or referral to the appropriate authorities for criminal
action.
(b) A Portfolio Manager must forfeit any profits realized on trades
prohibited by Section 2.3.3 of this Code.
(c) An Investment Professional must forfeit any profits realized on
trades prohibited by Section 2.3.1 of this Code.
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6.2 Reports to the Board of Trustees
(a) The General Counsel shall report to the Trustees at each regular
quarterly meeting any Security transaction by or on behalf of an
Access Person during any 15-day period before or after a Fund
traded in such Security.
(b) The Trustees shall be informed, on a timely basis, of significant
remedial action taken against any Covered Person in response to a
violation of this Code. Significant remedial action includes
suspension or termination of employment, demotion, or any other
action that has a material financial impact upon the Covered
Person.
6.3 Record-Keeping
(a) A permanent record of any violation of this Code and of any
action taken as a result of such violation shall be made and kept
in accordance with rules and regulations established by the
Securities and Exchange Commission.
(b) Information supplied on any report required by Section 5 of this
Code shall be reviewed for compliance with this Code and other
applicable standards of conduct. All such information shall be
available for inspection by the Chairman, Vice Chairman and
President of the Investment Adviser and by any party to whom any
such officer refers any investigation, the Covered Person's
designated supervisor, the Securities and Exchange Commission,
and any self-regulatory organization of which the Investment
Adviser or the Underwriter is a member, for at least six years
following the end of the fiscal year in which each report is
made.
6.4 Violation Not Automatically Deemed Unlawful. Violation of any
provision of this Code shall not be considered an unlawful act
prohibited by any law. The legality of any such act may be determined
only by the courts or other legislatively authorized bodies in
accordance with applicable law.
7. EDUCATION
7.1 Delivery of Code at Time of Employment or Transfer. Each newly hired
or designated Covered Person will be given a copy of this Code at the
time of his or her employment, transfer or promotion to such position
and will be required to certify within 30 days of the time of his or
her employment, transfer or promotion to such position that he or she
has read and understands the Code. The Chief Investment Officer will
review the Code with each newly hired or designated Portfolio Manager
and Investment Professional at the time of his or her employment, or
transfer or promotion to such position.
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7.2 Annual Certification. Each Covered Person is required to certify
annually that he or she has read this Code, understands and recognizes
that he or she is subject to the policies and procedures set forth in
this Code, and has complied with its requirements, including the
reporting of all personal Securities trades required to be disclosed
or reported.
7.3 Independent Trustees Not Subject to Certification Requirements.
Independent Trustees and their spouses, minor children and relatives
are not subject to the certification provisions of paragraphs 7.1 or
7.2 of this Section.
8. BOARD OF TRUSTEES REVIEW
8.1 Annual Review. The Trustees will annually review this Code of Ethics
to determine whether any changes are appropriate in light of
particular violations or changing circumstances generally.
8.2 Annual Report by Investment Adviser. The Investment Adviser will
provide the Trustees with an annual report that:
(a) Summarizes existing procedures concerning personal investing and
changes in the procedures made during the past year;
(b) Identifies any violations requiring significant remedial action
during the past year; and
(c) Identifies any recommended changes in existing restrictions or
procedures based upon the Trusts' experience under this Code,
evolving industry practices, or developments in applicable laws
and regulations.
9. AMENDMENTS
This Code may be amended at any time by resolution of the Trustees, and the
boards of directors of the Investment Adviser and the Underwriter.
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