<PAGE>
Registration Nos. 33-53532/811-7300
- --------------------------------------------------------------------------------
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. 10 /X/
-------------------- -
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
-
Amendment No. 10 /X/
-------------- -
(Check appropriate box or boxes.)
SAFECO TAX-EXEMPT BOND TRUST
----------------------------------------
(Exact Name of Registrant as Specified in Charter)
SAFECO PLAZA, SEATTLE, WASHINGTON 98185
------------------------------------------------------------
(Address of Principal Executive Offices) ZIP Code
Registrant's Telephone Number, including Area Code:
(206) 545-5180
----------------------
NAME AND ADDRESS OF AGENT FOR SERVICE
DAVID F. HILL
SAFECO Plaza
Seattle, Washington 98185
Approximate Date of Proposed Public Offering: Continuous
It is proposed that this filing will become effective
_____ immediately upon filing pursuant to paragraph (b)
__X__ on April 30, 1997 pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)
_____ on ______________ pursuant to paragraph (a) (1)
_____ 75 days after filing pursuant to paragraph (a) (2)
_____ on __________________ pursuant to paragraph (a) (2) of Rule 485
==========================================================================
Registrant has registered an indefinite number of its shares under the
Securities Act of 1933 by declaration made pursuant to Section 24(f) of the
Investment Company Act of 1940 (Act). Pursuant to Rule 24f-2 under the Act,
Registrant's Rule 24f-2 Notice was filed on or about February 28, 1997.
==========================================================================
<PAGE>
SAFECO TAX-EXEMPT BOND TRUST
Contents of Registration Statement
This registration statement consists of the following papers and documents:
Cover Sheet
Contents of Registration Statement
Cross Reference Sheets
No-Load Class Shares of:
SAFECO Intermediate-Term Municipal Bond Fund
SAFECO Insured Municipal Bond Fund
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
PART A - Prospectus
No-Load Class Shares of:
SAFECO Intermediate-Term Municipal Bond Fund
SAFECO Insured Municipal Bond Fund
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
PART B - Statement of Additional Information
Advisor Class A and Advisor Class B Shares of:
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Income Fund
SAFECO Northwest Fund
SAFECO Balanced Fund
SAFECO International Stock Fund
SAFECO Small Company Stock Fund
SAFECO U.S. Value Fund
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO High-Yield Bond Fund
SAFECO Managed Bond Fund
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal Bond Fund
2
<PAGE>
SAFECO MONEY MARKET FUND
PART A - Prospectus
Advisor Class A and Advisor Class B Shares of:
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO High-Yield Bond Fund
SAFECO Managed Bond Fund
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal Bond Fund
SAFECO MONEY MARKET FUND
PART B - Statement of Additional Information
PART C - Other Information
Signature Page
Exhibits
This filing is made to update the Registration Statement relating
SAFECO Tax-Exempt Bond Trust. No changes are hereby made to the
Prospectus and Statement of Additional Information currently on
file relating to the SAFECO Common Stock Trust, SAFECO Taxable
Bond Trust, SAFECO Money Market Trust or SAFECO Managed Bond Trust.
3
<PAGE>
SAFECO TAX-EXEMPT BOND TRUST
No-Load Class Shares
Registration Statement on Form N-1A
Cross Reference Sheet
PART A
Item No. Location in Prospectus
- -------- ----------------------
Item 1. Cover Page Cover Page
Item 2. Synopsis Introduction to the Trust
and the Funds; Expenses
Item 3. Condensed Financial Information Financial Highlights;
Performance Information
Item 4. General Description of Registrant Each Fund's Investment
Objectives and Policies;
Information about Share
Ownership and Companies
that Provide Services to
the Trust; Risk Factors;
Special Risks of the
California Fund; Special
Risks of the Washington
Fund; Person Controlling
Certain Funds
Item 5. Management of the Trust Information about Share
Ownership and Companies
that Provide Services to
the Trust; Portfolio
Managers; Fund Expenses
Item 6. Capital Stock and Other Securities Cover Page; Fund
Distributions and How
They are Taxed;
Information about Share
Ownership and Companies
that Provide Services to
the Trust; Person
Controlling Certain Funds
4
<PAGE>
Item No. Location in Prospectus
- -------- ----------------------
Item 7. Purchase of Securities Being Offered How to Purchase Shares;
How to Exchange Shares
from One Fund to Another;
How to Systematically
Purchase or Redeem
Shares; Share Price
Calculation; Account
Statements; Telephone
Transactions;
Transactions Through
Registered Investment
Advisers
Item 8. Redemption or Repurchase How to Redeem Shares; How
to Exchange Shares from
One Fund to Another; How
to Systematically
Purchase or Redeem
Shares; Account Changes
and Signature
Requirements; Account
Statements; Telephone
Transactions;
Transactions Through
Registered Investment
Advisers
Item 9. Pending Legal Proceedings Not Applicable
SAFECO Tax-Exempt Bond Trust
No-Load Class Shares
Registration Statement on Form N-1A
Cross-Reference Sheet
PART B
Location in Statement of
Item No. Additional Information
- -------- ------------------------
Item 10. Cover Page Cover Page
Item 11. Table of Contents Cover Page
Item 12. General Information and History Not Applicable
5
<PAGE>
Item 13. Investment Objectives and Policies Investment Objectives and
Policies; Overview of
Investment Policies;
Additional Investment
Information; Investment
Risks of Concentration in
California and Washington
Issuers; Description of
Ratings
Item 14. Management of Trust Trustees and Officers
Item 15. Control Persons and Principal Principal Shareholders
Holders of Securities
Item 16. Investment Advisory and Other Investment Advisory and
Services Other Services
Item 17. Brokerage Allocation and Other Brokerage Practices
Practices
Item 18. Capital Stock and Other Securities Additional Information on
Calculation of Net Asset
Value Per Share
Item 19. Purchase, Redemption and Price of Additional Information on
Securities Being Offered Calculation of Net Asset
Value Per Share;
Redemption in Kind
Item 20. Tax Status Additional Tax
Information
Item 21. Underwriters Investment Advisory and
Other Services
Item 22. Calculation of Performance Data Additional Performance
Information
Item 23. Financial Statements Financial Statements
SAFECO TAX-EXEMPT BOND TRUST
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal Bond Fund
SAFECO COMMON STOCK TRUST
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Income Fund
SAFECO Northwest Fund
SAFECO Balanced Fund
SAFECO International Stock Fund
6
<PAGE>
SAFECO Small Company Stock Fund
SAFECO U.S. Value Fund
SAFECO TAXABLE BOND TRUST
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO High-Yield Bond Fund
SAFECO MANAGED BOND TRUST
SAFECO Managed Bond Fund
SAFECO MONEY MARKET TRUST
SAFECO Money Market Fund
Advisor Class A and Advisor Class B Shares
Form N-1A Cross Reference Sheet
PART A
Location
Item No. In Prospectus
- -------- -------------
Item 1. Cover Page Cover Page
Item 2. Synopsis Introduction to the Trusts and the Funds;
Expenses
Item 3. Condensed Financial Information Financial Highlights;
Performance Information
Item 4. General Description of Registrant Each Fund's Investment
Objective and
Policies; Information
about Share Ownership and
Companies that Provide
Services to the Trusts;
Risk Factors; Persons
Controlling Certain
Funds; Description of
Stocks, Bonds and
Convertible Securities;
Ratings Supplement
Item 5. Management of the Trust Expenses; Information
about Share Ownership and
Companies that Provide
Services to the Trusts;
Portfolio Managers
7
<PAGE>
Item 6. Capital Stock and Other Securities Cover Page; Share Price
Calculation; Information
About Share Ownership and
Companies That Provide
Services to the Trusts;
Fund Distributions and
How They are Taxed;
Persons Controlling
Certain Funds
Item 7. Purchase of Securities Being Offered How to Purchase Shares;
How to Systematically
Purchase or Redeem
Shares; How to Exchange
Shares From One Fund to
Another; Telephone
Transactions; Share
Price Calculation;
Distribution Plans;
Tax-Deferred Retirement
Plans; Account Statements
Item 8. Redemption or Repurchase How to Redeem Shares; How
to Systematically
Purchase or Redeem
Shares; How to Exchange
Shares From One Fund to
Another; Telephone
Transactions; Account
Statements; Account
Changes and Signature
Requirements; Telephone
Transactions
Item 9. Pending Legal Proceedings Not Applicable
8
<PAGE>
SAFECO TAX-EXEMPT BOND TRUST
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal Bond Fund
SAFECO TAXABLE BOND TRUST
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO High-Yield Fund
SAFECO MANAGED BOND TRUST
SAFECO Managed Bond Fund
SAFECO MONEY MARKET TRUST
SAFECO Money Market Fund
Advisor Class A and Advisor Class B Shares
Form N-1A Cross Reference Sheet
PART B
Statement of Location in
Item No. Additional Information
- -------- ----------------------
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History Not Applicable
Item 13. Investment Objectives and Policies Investment Policies;
Investment Policies of
the Tax-Exempt
Fixed-Income Fund;
Additional Investment
Information; Investment
Risks of Concentration in
California and Washington
Issuers; Description of
Ratings
Item 14. Management of the Trust Trustees and Officers
Item 15. Control Persons and Principal Principal Shareholders
of Holders of Securities
Certain Funds
9
<PAGE>
Item 16. Investment Advisory and Investment Advisory and
Other Services Other Services
Item 17. Brokerage Allocation and Other Brokerage Practices
Practices
Item 18. Capital Stock and Other Securities Additional Information on
Calculation of Net Asset Value Per Share;
Conversion of Advisor
Class B Shares
Item 19. Purchase, Redemption and Pricing Additional Information
of Securities Being Offered On Calculation of Net
Asset Value Per Share;
Redemption in Kind
Item 20. Tax Status Additional Tax
Information
Item 21. Underwriters Investment Advisory and
Other Services
Item 22. Calculation of Performance Data Additional Performance
Information
Item 23. Financial Statements Financial Statements
PART C
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of this Registration Statement.
10
<PAGE>
SAFECO INTERMEDIATE-TERM MUNICIPAL BOND FUND
SAFECO INSURED MUNICIPAL BOND FUND
SAFECO MUNICIPAL BOND FUND
SAFECO CALIFORNIA TAX-FREE INCOME FUND
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
NO-LOAD CLASS April 30, 1997
Each Fund described in this Prospectus is a series of the SAFECO Tax-Exempt Bond
Trust ("Trust"), an open-end, management investment company. The investment
objective for each Fund appears on page 3.
This Prospectus sets forth the information a prospective investor should know
before investing. Please read and retain this Prospectus for future reference. A
Statement of Additional Information, dated April 30, 1997, and incorporated
herein by reference, has been filed with the Securities and Exchange Commission
and is available at no charge upon request by calling one of the numbers listed
below. The Statement of Additional Information and other information about the
Funds are also available on the Securities and Exchange Commission website
(http://www.sec.gov). The Statement of Additional Information contains more
information about many topics in this Prospectus as well as information about
the Trustees and officers of the Trust.
For additional assistance, please call or write:
NATIONWIDE 1-800-624-5711; SEATTLE 1-206-545-7319
DEAF AND HARD OF HEARING TTY/TDD SERVICE 1-800-438-8718
SAFECO MUTUAL FUNDS
NO-LOAD CLASS SHARES
P.O. BOX 34890
SEATTLE, WA 98124-1890
ALL TELEPHONE CALLS ARE TAPE-RECORDED
FOR YOUR PROTECTION.
- ---------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- ---------------------------------------------------------
-- 1 --
<PAGE>
THE CALIFORNIA FUND IS OFFERED FOR SALE ONLY TO RESIDENTS IN THE STATES OF
ARIZONA, NEVADA, OREGON AND CALIFORNIA. THE WASHINGTON FUND IS OFFERED FOR SALE
ONLY TO RESIDENTS IN THE STATES OF WASHINGTON, CALIFORNIA AND ARIZONA. THESE
FUNDS ARE NOT PERMITTED TO OFFER OR SELL SHARES TO RESIDENTS OF OTHER STATES.
- ---------------------------------------------------------
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
THE U.S. GOVERNMENT OR ANY BANK, NOR ARE FUND SHARES FEDERALLY INSURED OR
OTHERWISE PROTECTED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY, AND FUND SHARES ARE SUBJECT TO INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
- ---------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY EITHER TRUST, ANY FUND, OR
BY SAFECO SECURITIES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY ANY TRUST, ANY FUND, OR BY SAFECO SECURITIES
IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION MAY NOT LAWFULLY BE MADE.
-- 2 --
<PAGE>
SAFECO INTERMEDIATE-TERM MUNICIPAL BOND FUND ("Intermediate Fund"), SAFECO
INSURED MUNICIPAL BOND FUND ("Insured Fund") (FUND SHARES ARE NOT INSURED -- SEE
"EACH FUND'S INVESTMENT OBJECTIVE AND POLICIES" FOR THE NATURE AND LIMITATIONS
OF INSURANCE) and SAFECO WASHINGTON STATE MUNICIPAL BOND FUND ("Washington
Fund") each has as its investment objective to provide as high a level of
current interest income exempt from federal income tax as is consistent with
prudent investment risk.
SAFECO MUNICIPAL BOND FUND ("Municipal Fund") has as its investment objective to
provide as high a level of current interest income exempt from federal income
tax as is consistent with the relative stability of capital.
SAFECO CALIFORNIA TAX-FREE INCOME FUND ("California Fund") has as its investment
objective to provide as high a level of current interest income exempt from
federal income tax and California State personal income tax as is consistent
with the relative stability of capital.
There is no assurance that a Fund will achieve its investment objective.
-- 3 --
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Introduction to the Trust and the Funds 5
Expenses 7
Financial Highlights 9
Each Fund's Investment Objective and Policies 15
Risk Factors 26
Portfolio Managers 29
How to Purchase Shares 29
How to Redeem Shares 32
How to Systematically Purchase or Redeem Shares 35
How to Exchange Shares From One Fund to Another 36
Telephone Transactions 38
Transactions Through Registered Investment Advisers 39
Share Price Calculation 40
Information about Share Ownership and Companies that Provide
Services to the Trust 40
Person Controlling Certain Funds 44
Performance Information 45
Fund Distributions and How They are Taxed 46
Account Statements 49
Account Changes and Signature Requirements 49
</TABLE>
-- 4 --
<PAGE>
INTRODUCTION TO THE TRUST AND THE FUNDS
The Trust is a series investment company that currently issues shares
representing five diversified mutual funds: the Intermediate Fund, the Insured
Fund, the Municipal Fund, the California Fund and the Washington Fund
(collectively, the "Funds").
THE FUNDS
No-Load Class shares of each Fund are offered through this Prospectus. Each
Fund, except the Intermediate Fund and the Insured Fund, also offers other
classes of shares.
The No-Load Class of each Fund:
/ / Is 100% no-load; there are no initial or contingent deferred sales charges
or Rule 12b-1 fees.
/ /
Offers free exchanges as well as easy access to your money
through telephone redemptions and wire transfers.
/ /
Has a minumum initial investment requirement of $1,000
for regular accounts, $250 for accounts established under the Uniform Gift to
Minors Act ("UGMA") or Uniform Transfer to Minors Act ("UTMA").
RISK FACTORS
There is, of course, no assurance that a Fund will achieve its investment
objective. See "Each Fund's Investment Objective and Policies" for more
information.
There is a risk that the market value of each Fund's portfolio securities may
decrease and result in a decrease in the value of a shareholder's investment.
The value of each Fund's portfolio securities will normally fluctuate inversely
with changes in market interest rates. Because the California Fund and
Washington Fund each concentrates its investments in a single state, these Funds
may be subject to special risks. Investors should carefully consider the
investment risks of such geographic concentration before purchasing shares of
these Funds. See "Each Fund's Investment Objective and
-- 5 --
<PAGE>
INTRODUCTION TO THE TRUST AND THE FUNDS (CONTINUED)
Policies" beginning on page 15 and "Investment Risks of Concentration in
California and Washington Issuers" in the Statement of Additional Information
for further information.
INVESTMENT ADVISER
Each Fund is managed by SAFECO Asset Management Company ("SAM"). SAM is
headquartered in Seattle, Washington and managed over $2.5 billion in mutual
fund assets as of December 31, 1996. SAM has been an adviser to mutual funds and
other investment portfolios since 1973 and its predecessors have been such
advisers since 1932. See "Information about Share Ownership and Companies that
Provide Services to the Trust" for more information.
-- 6 --
<PAGE>
EXPENSES
A. SHAREHOLDER TRANSACTION EXPENSES FOR THE NO-LOAD CLASS OF EACH FUND
<TABLE>
<CAPTION>
SALES CHARGE
SALES CHARGE IMPOSED ON CONTINGENT
IMPOSED ON REINVESTED DEFERRED SALES
PURCHASES DIVIDENDS CHARGE REDEMPTION FEES EXCHANGE FEES
- ------------- ------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
NONE NONE NONE NONE NONE
</TABLE>
SAFECO Services Corporation ("SAFECO Services"), the transfer agent for the
Funds, charges a $10 fee to wire redemption proceeds.
B. ANNUAL OPERATING EXPENSES FOR THE NO-LOAD CLASS OF EACH FUND
(as a percentage of average net assets)
<TABLE>
<CAPTION>
TOTAL
OTHER OPERATING
FUND 12B-1 FEES + MANAGEMENT FEE + EXPENSES = EXPENSES
- ---------------------------- ----------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Intermediate None .56% .33% .89%
Insured None .64% .36% 1.00%
Municipal None .43% .10% .53%
California None .55% .14% .69%
Washington None .64% .46% 1.10%
</TABLE>
The amounts shown are annualized expenses based on the actual expenses paid by
shareholders of each Fund for the nine-month fiscal period ended December 31,
1996. See "Information About Share Ownership and Companies that Provide Services
to the Trust" on page 40 for more information.
-- 7 --
<PAGE>
EXPENSES (CONTINUED)
C. EXAMPLE OF EXPENSES
You would pay the following expenses on a $1,000 investment in No-Load Class
shares assuming 5% annual return. The example also assumes that all dividends
and other distributions are reinvested and that the percentage amounts listed in
"Annual Operating Expenses" above remain the same in the years shown.
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Intermediate $ 9 $ 28 $ 49 $ 110
Insured $ 10 $ 32 $ 55 $ 122
Municipal $ 5 $ 17 $ 30 $ 66
California $ 7 $ 22 $ 38 $ 86
Washington $ 11 $ 35 $ 61 $ 134
</TABLE>
The purpose of the table is to assist you in understanding the various costs and
expenses that an investor in the No-Load Class of each Fund would bear, directly
or indirectly. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. A FUND'S ACTUAL EXPENSES OR PERFORMANCE MAY BE GREATER OR LESS
THAN THOSE SHOWN. THE ASSUMED 5% ANNUAL RETURN IS REQUIRED BY SECURITIES AND
EXCHANGE COMMISSION REGULATIONS APPLICABLE TO ALL MUTUAL FUNDS AND IT IS NOT A
PREDICTION OF, NOR DOES IT REPRESENT, PAST OR FUTURE EXPENSES OR THE PERFORMANCE
OF ANY FUND.
-- 8 --
<PAGE>
FINANCIAL HIGHLIGHTS
The amounts shown for each Fund in the Financial Highlights tables that follow
are based upon a single No-Load Class share outstanding throughout the period
indicated. In 1996, the Trust changed its fiscal year end from March 31 to
December 31. The following selected data for the Funds has been derived from
financial statements that have been audited by Ernst & Young LLP, independent
auditors. The data should be read in conjunction with the financial statements,
related notes and other information included in the Trust's annual report to
shareholders and incorporated by reference in the Trust's Statement of
Additional Information. A copy of the Trust's Statement of Additional
Information may be obtained by calling one of the numbers on the front page of
this Prospectus.
-- 9 --
<PAGE>
FINANCIAL HIGHLIGHTS
(For a No-Load Class Share Outstanding Throughout the Period)
SAFECO INTERMEDIATE-TERM MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
NINE-MONTH MARCH 18, 1993
PERIOD ENDED (INITIAL PUBLIC
DECEMBER 31 FOR THE YEAR ENDED MARCH 31 OFFERING) TO
1996 1996 1995 1994 MARCH 31, 1993
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 10.49 $ 10.17 $ 10.13 $ 10.25 $ 10.27
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.35 0.45 0.45 0.40 0.02
Net realized and unrealized
gain (loss) on
investments 0.12 0.32 0.04 (0.12) (0.02)
------------- --------- --------- --------- ---------------
Total from investment
operations 0.47 0.77 0.49 0.28 (0.00)
------------- --------- --------- --------- ---------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (0.35) (0.45) (0.45) (0.40) (0.02)
------------- --------- --------- --------- ---------------
Net asset value at end of
period $ 10.61 $ 10.49 $ 10.17 $ 10.13 $ 10.25
------------- --------- --------- --------- ---------------
------------- --------- --------- --------- ---------------
Total return 4.53%* 7.63% 4.97% 2.64% (0.04%)*
Net assets at end of period
(000's) $ 14,172 $ 14,981 $ 13,762 $ 10,781 $ 2,345
Ratio of expenses to
average net assets 0.89%** 0.84% 0.85% 0.99% 0.98%**
Ratio of net investment
income to average net
assets 4.40%** 4.29% 4.46% 3.85% 4.25%**
Portfolio turnover rate 12.81%** 9.12% 4.27% 1.49% None
</TABLE>
* Not annualized.
** Annualized.
-- 10 --
<PAGE>
FINANCIAL HIGHLIGHTS
(For a No-Load Class Share Outstanding Throughout the Period)
SAFECO INSURED MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
NINE-MONTH MARCH 18, 1993
PERIOD ENDED (INITIAL PUBLIC
DECEMBER 31 FOR THE YEAR ENDED MARCH 31 OFFERING) TO
1996 1996 1995 1994 MARCH 31, 1993
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 10.46 $ 10.05 $ 9.73 $ 10.26 $ 10.32
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.37 0.48 0.48 0.41 0.02
Net realized and unrealized
gain (loss) on
investments 0.28 0.41 0.32 (0.53) (0.06)
------------- --------- --------- --------- ---------------
Total from investment
operations 0.65 0.89 0.80 (0.12) (0.04)
------------- --------- --------- --------- ---------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (0.37) (0.48) (0.48) (0.41) (0.02)
------------- --------- --------- --------- ---------------
Net asset value at end of
period $ 10.74 $ 10.46 $ 10.05 $ 9.73 $ 10.26
------------- --------- --------- --------- ---------------
------------- --------- --------- --------- ---------------
Total return 6.31%* 8.95% 8.58% (1.40%) (0.43%)*
Net assets at end of period
(000's) $ 13,187 $ 11,758 $ 8,163 $ 3,306 $ 2,106
Ratio of expenses to
average net assets 1.00%** 0.99% 1.08% 1.41% 1.04%**
Ratio of net investment
income to average net
assets 4.66%** 4.53% 5.11% 3.99% 3.88%**
Portfolio turnover rate 14.86%** 3.71% 14.76% 21.19% None
</TABLE>
* Not annualized.
** Annualized.
-- 11 --
<PAGE>
FINANCIAL HIGHLIGHTS
(For a No-Load Class Share Outstanding Throughout the Period)
SAFECO MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
NINE-MONTH
PERIOD
ENDED
DECEMBER 31 FOR THE YEAR ENDED MARCH 31
1996 1996 1995 1994 1993 1992 1991 1990 1989 1988
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning
of period $ 13.69 $ 13.36 $ 13.27 $ 14.13 $ 13.37 $ 12.95 $ 12.73 $ 12.92 $ 12.85 $ 14.16
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.57 0.76 0.77 0.78 0.81 0.86 0.86 0.88 0.94 0.96
Net realized and unrealized
gain (loss) on investments 0.29 0.33 0.12 (0.55) 0.94 0.48 0.26 0.25 0.36 (0.91)
----------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations 0.86 1.09 0.89 0.23 1.75 1.34 1.12 1.13 1.30 0.05
----------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment
income (0.57) (0.76) (0.77) (0.78) (0.81) (0.86) (0.86) (0.88) (0.94) (0.96)
Distributions from realized
gains -- -- (0.03) (0.31) (0.18) (0.06) (0.04) (0.44) (0.29) (0.40)
----------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions (0.57) (0.76) (0.80) (1.09) (0.99) (0.92) (0.90) (1.32) (1.23) (1.36)
----------- ------- ------- ------- ------- ------- ------- ------- ------- -------
----------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value at end of
period $ 13.98 $ 13.69 $ 13.36 $ 13.27 $ 14.13 $ 13.37 $ 12.95 $ 12.73 $ 12.92 $ 12.85
Total return 6.42%* 8.23% 7.10% 1.30% 13.60% 10.57% 9.13% 9.05% 10.49% 0.93%
Net assets at end of
period(000's) $480,970 $480,643 $472,569 $507,453 $541,515 $427,638 $331,647 $286,303 $231,911 $183,642
Ratio of expenses to average
net assets 0.53%** 0.54% 0.56% 0.52% 0.53% 0.54% 0.56% 0.57% 0.60% 0.61%
Ratio of net investment
income to average net
assets 5.53%** 5.47% 5.96% 5.49% 5.91% 6.37% 6.68% 6.76% 7.23% 7.42%
Portfolio turnover rate 6.66%** 12.60% 26.96% 22.07% 31.66% 25.18% 38.55% 65.80% 135.60% 71.91%
</TABLE>
* Not annualized.
** Annualized.
-- 12 --
<PAGE>
FINANCIAL HIGHLIGHTS
(For a No-Load Class Share Outstanding Throughout the Period)
SAFECO CALIFORNIA TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
NINE-MONTH
PERIOD ENDED
DECEMBER 31 FOR THE YEAR ENDED MARCH 31
1996 1996 1995 1994 1993 1992 1991 1990 1989
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 11.86 $ 11.54 $ 11.51 $ 12.23 $ 11.60 $ 11.24 $ 11.07 $ 11.02 $ 10.72
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.47 0.62 0.63 0.66 0.68 0.71 0.71 0.72 0.75
Net realized and
unrealized gain (loss)
on investments 0.39 0.40 0.13 (0.38) 0.76 0.44 0.23 0.23 0.30
------------- --------- --------- --------- --------- --------- --------- --------- ---------
Total from investment
operations 0.86 1.02 0.76 0.28 1.44 1.15 0.94 0.95 1.05
------------- --------- --------- --------- --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net
investment income (0.47) (0.62) (0.63) (0.66) (0.68) (0.71) (0.71) (0.72) (0.75)
Distributions from
realized gains (0.03) (0.08) (0.10) (0.34) (0.13) (0.08) (0.06) (0.18) --
------------- --------- --------- --------- --------- --------- --------- --------- ---------
Total distributions (0.50) (0.70) (0.73) (1.00) (0.81) (0.79) (0.77) (0.90) (0.75)
------------- --------- --------- --------- --------- --------- --------- --------- ---------
Net asset value at end of
period $ 12.22 $ 11.86 $ 11.54 $ 11.51 $ 12.23 $ 11.60 $ 11.24 $ 11.07 $ 11.02
------------- --------- --------- --------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- --------- --------- --------- ---------
Total return 7.42%* 8.87% 7.01% 1.97% 12.88% 10.43% 8.78% 8.87% 10.09%
Net assets at end of
period (000's) $ 72,084 $ 70,546 $ 64,058 $ 77,056 $ 79,872 $ 71,480 $ 57,066 $ 47,867 $ 36,930
Ratio of expenses to
average net assets 0.69%** 0.68% 0.70% 0.68% 0.66% 0.67% 0.67% 0.68% 0.71%
Ratio of expenses to
average net assets to
average net assets 5.21%** 5.12% 5.65% 5.31% 5.71% 6.13% 6.32% 6.42% 6.86%
Portfolio turnover rate 10.52%** 16.25% 44.10% 32.58% 23.18% 39.35% 22.92% 71.37% 76.95%
<CAPTION>
1988
<S> <C>
Net asset value at
beginning of period $ 12.14
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.76
Net realized and
unrealized gain (loss)
on investments (0.99)
---------
Total from investment
operations (0.23)
---------
LESS DISTRIBUTIONS:
Dividends from net
investment income (0.76)
Distributions from
realized gains (0.43)+
---------
Total distributions (1.19)
---------
Net asset value at end of
period $ 10.72
---------
---------
Total return (1.39%)
Net assets at end of
period (000's) $ 28,790
Ratio of expenses to
average net assets 0.72%
Ratio of expenses to
average net assets to
average net assets 6.99%
Portfolio turnover rate 66.72%
</TABLE>
* Not annualized.
** Annualized.
+ Distribution includes $.05 per share attributable to the December 31, 1987
capital gain distribution paid in order to avoid any excise tax due under the
Tax Reform Act of 1986.
-- 13 --
<PAGE>
FINANCIAL HIGHLIGHTS
(For a No-Load Class Share Outstanding Throughout the Period)
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
NINE-MONTH MARCH 18, 1993
PERIOD ENDED (INITIAL PUBLIC
DECEMBER 31 FOR THE YEAR ENDED MARCH 31 OFFERING) TO
1996 1996 1995 1994 MARCH 31, 1993
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning
of period $ 10.34 $ 10.10 $ 9.91 $ 10.27 $ 10.32
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.37 0.50 0.49 0.44 0.02
Net realized and unrealized
gain (loss) on investments 0.20 0.27 0.19 (0.35) (0.05)
------------- --------- --------- --------- ---------------
Total from investment
operations 0.57 0.77 0.68 0.09 (0.03)
------------- --------- --------- --------- ---------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (0.37) (0.50) (0.49) (0.44) (0.02)
Distributions from realized
gains (0.01) (0.03) -- (0.01) --
------------- --------- --------- --------- ---------------
Total distributions (0.38) (0.53) (0.49) (0.45) (0.02)
------------- --------- --------- --------- ---------------
Net asset value at end of
period $ 10.53 $ 10.34 $ 10.10 $ 9.91 $ 10.27
------------- --------- --------- --------- ---------------
------------- --------- --------- --------- ---------------
Total return 5.61%* 7.73% 7.13% 0.68% (0.31%*)
Net assets at end of period
(000's) $ 6,558 $ 6,489 $ 5,953 $ 2,908 $ 2,163
Ratio of expenses to average
net assets 1.10%** 1.07% 1.09% 1.44% 1.04%**
Ratio of net investment
income to average net
assets 4.78%** 4.78% 5.06% 4.17% 4.47%**
Portfolio turnover rate 15.96%** 20.86% 9.23% 17.26% None
</TABLE>
* Not annualized.
** Annualized.
-- 14 --
<PAGE>
EACH FUND'S INVESTMENT OBJECTIVE AND POLICIES
The Trust is a Delaware business trust established by the Trust Instrument dated
May 13, 1993.
The investment objective and investment policies for each Fund are described
below. The Trust's Board of Trustees may change a Fund's objective (except for
the California Fund) without shareholder vote, but no such change will be made
without 60 days' prior written notice to shareholders of that Fund. The
California Fund may not change its investment objective without a shareholder
vote. In the event a Fund changes its investment objective, the new objective
may not meet the investment needs of every shareholder and may be different from
the objective a shareholder considered appropriate at the time of an initial
investment.
Each Fund has adopted a number of investment restrictions. If a Fund follows a
percentage limitation at the time of 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 policy (except to the extent the
change may impact a Fund's borrowing limits). Unless otherwise stated, the
Funds' investment policies and limitations described below and under "Common
Investment Practices" are non-fundamental and may be changed without shareholder
vote.
The investment objective of the INTERMEDIATE, INSURED AND WASHINGTON FUNDS is to
provide as high a level of current interest income exempt from federal income
tax as is consistent with prudent investment risk. The investment objective of
the MUNICIPAL BOND FUND is to provide as high a level of current interest income
exempt from federal income tax as is consistent with the relative stability of
capital. The investment objective of the CALIFORNIA FUND is to provide as high a
level of current interest income exempt from federal income tax and California
State personal income tax as is consistent with the relative stability of
capital.
-- 15 --
<PAGE>
EACH FUND'S INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
To pursue its objective, the INTERMEDIATE FUND will invest primarily in
municipal bonds whose interest is exempt from federal income tax and will
maintain a portfolio having an average weighted maturity of between three and
ten years.
To pursue its objective, the INSURED FUND will invest primarily in bonds insured
by new issue and secondary market insurance policies and on occasion by
portfolio insurance. INSURANCE DOES NOT GUARANTEE THE MARKET VALUE OF INSURED
MUNICIPAL BONDS NOR THE SHARE PRICE OF THE INSURED FUND.
To pursue its objective, the MUNICIPAL FUND will invest primarily in investment
grade municipal bonds whose interest is exempt from federal income tax.
To pursue its objective, the CALIFORNIA FUND will invest primarily in investment
grade municipal bonds whose interest is exempt from both federal and California
personal income taxes.
To pursue its objective, the WASHINGTON FUND will invest primarily in investment
grade municipal bonds whose interest is exempt from federal income tax and that
are issued by the State of Washington or one of its political subdivisions,
municipalities, agencies, instrumentalities or public authorities. The
Washington Fund may not be suitable for every eligible investor. Since the State
of Washington currently has no personal income tax, there are no tax benefits at
the State level to an investor. An investor in the Washington Fund will
generally earn dividend income free from federal income taxes as will an
investor in the Intermediate, Insured, California and Municipal Funds.
To pursue its objective, each Fund:
1. WILL, DURING NORMAL MARKET CONDITIONS, INVEST AS A MATTER
OF FUNDAMENTAL POLICY AT LEAST 80% OF ITS NET ASSETS IN SECURITIES, THE
INTEREST ON WHICH IS EXEMPT FROM FEDERAL INCOME TAX AND, IN THE CASE OF THE
CALIFORNIA FUND, EXEMPT
-- 16 --
<PAGE>
EACH FUND'S INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
FROM CALIFORNIA PERSONAL INCOME TAX. The Funds do not currently intend to
purchase taxable investments, except as a temporary accommodation or in an
emergency situation.
2. WILL INVEST AT LEAST 65% OF ITS TOTAL ASSETS IN MUNICIPAL
BONDS (IN THE CASE OF THE WASHINGTON FUND, ISSUED BY THE STATE OF WASHINGTON
OR POLITICAL SUBDIVISIONS, MUNICIPALITIES, AGENCIES, INSTRUMENTALITIES, OR
PUBLIC AUTHORITIES WITHIN THE STATE OF WASHINGTON) HAVING A MATURITY IN
EXCESS OF ONE YEAR THAT AT THE TIME OF ACQUISITION ARE INVESTMENT GRADE;
I.E., RATED IN ONE OF THE FOUR HIGHEST GRADES ASSIGNED BY MOODY'S INVESTORS
SERVICES, INC. ("MOODY'S") OR STANDARD & POOR'S RATINGS SERVICES, A DIVISION
OF THE MCGRAW-HILL COMPANIES ("S&P") OR, IF UNRATED, DETERMINED BY SAM TO BE
OF COMPARABLE QUALITY. A 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. A Fund will invest no more than 33% of its
total assets in municipal bonds rated in the fourth highest grade or in
comparable unrated bonds. Such bonds are of medium grade, have speculative
characteristics and are more likely to have a weakened capacity to make
principal and interest payments under changing economic conditions or upon
deterioration in the financial condition of the issuer.
In addition to reviewing ratings, SAM will analyze the quality of rated and
unrated municipal bonds for purchase by a Fund by evaluating various factors
that may include the issuer's or guarantor's financial resources and
liquidity, economic feasibility of revenue bond project financing and general
purpose borrowings, cash flow and ability to meet anticipated debt service
requirements, quality of management, sensitivity to economic conditions,
operating history and any relevant political or regulatory matters. SAM may
also evaluate trends in the economy, the financial markets
-- 17 --
<PAGE>
EACH FUND'S INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
or specific geographic areas in determining whether to purchase a bond. For a
description of municipal bond ratings, see the Trust's Statement of
Additional Information.
After purchase by a Fund, a municipal bond may be downgraded to below
investment grade or, if unrated, may cease to be comparable to a rated
investment grade security (such below investment grade securities are
commonly referred to as "high-yield" or "junk" bonds). Neither event will
require a Fund to dispose of that security, but SAM will take a downgrade or
loss of comparability into account in determining whether the Fund should
continue to hold the security in its portfolio. A Fund will not hold more
than 5% of its net assets in such below investment grade securities.
The term "municipal bonds" as used in this Prospectus means those obligations
issued by or on behalf of states, territories or possessions of the United
States and the District of Columbia and their political subdivisions,
municipalities, agencies, instrumentalities or public authorities, the
interest on which in the opinion of bond counsel is exempt from federal
income tax and, in the case of the California Fund, exempt from California
personal income tax.
To pursue its objective, the Insured Fund:
1. WILL INVEST AT LEAST 65% OF ITS TOTAL ASSETS IN MUNICIPAL
BONDS THAT ARE COVERED BY INSURANCE GUARANTEEING THE TIMELY PAYMENT OF BOTH
PRINCIPAL AND INTEREST, AND MAY INVEST UP TO 35% OF ITS TOTAL ASSETS IN
UNINSURED MUNICIPAL BONDS.
INSURANCE DOES NOT GUARANTEE THE MARKET VALUE OF INSURED MUNICIPAL BONDS NOR
THE SHARE PRICE OF THE INSURED FUND.
New issue insurance is a policy purchased by an issuer prior to bringing a bond
issue to market in an initial offering. By
-- 18 --
<PAGE>
EACH FUND'S INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
purchasing the policy, the issuer obtains a higher credit rating for its bond
(usually Aaa by Moody's or AAA by S&P). Such insurance may increase the purchase
price as well as the resale value of the bond. New issue insurance cannot be
canceled by the insurer and remains in force as long as the bond issue is
outstanding.
Secondary market insurance is purchased by an investor after the bonds have been
initially issued. These policies normally insure specific bonds for the
remainder of their term. Like new issue insurance, the insurance cannot be
canceled by the insurer. The Insured Fund may invest in bonds insured under a
secondary market policy purchased by a prior investor or may itself purchase
secondary market insurance for uninsured bonds it has purchased.
Portfolio insurance is a policy purchased by the Insured Fund to guarantee
specific bonds it has purchased for its portfolio for only as long as the bonds
are held by the Fund.
Premiums for new issue insurance are paid in advance by the issuer of the bond.
As a result, the Insured Fund may pay a higher purchase price for a bond covered
by such insurance. Premiums on secondary market and portfolio insurance are paid
directly by the Insured Fund in accordance with applicable policy terms. Any
premiums paid by the Insured Fund to purchase secondary market or portfolio
insurance policies will be an Insured Fund expense. Such an expense may reduce
the Insured Fund's current yield. The Insured Fund will purchase insurance
policies only from insurance companies rated Aaa by Moody's or AAA by S&P.
Generally, an insurer may not withdraw or cancel coverage on insured securities
held by the Insured Fund other than for non-payment of premium by the Fund.
The Insured Fund may retain any defaulted municipal bond covered by portfolio
insurance. The defaulted bond will be valued based on the value of the insurance
coverage. The
-- 19 --
<PAGE>
EACH FUND'S INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
insurance value is normally the difference between the market value of the
defaulted security and the market value of similar non-defaulted securities.
COMMON INVESTMENT PRACTICES OF THE FUNDS
Each of the Funds may also follow the investment practices described below:
1. INVEST IN ANY OF THE FOLLOWING TYPES OF MUNICIPAL BONDS:
/ / REVENUE BONDS, which are "limited obligation" bonds that provide financing
for specific projects or public facilities. These bonds are backed by
revenues generated by a particular project or facility or by a special tax.
A "resource recovery bond" is a type of revenue bond issued to build waste
facilities or plants. An "industrial development bond" 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
-- 20 --
<PAGE>
EACH FUND'S INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
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 weighted maturity, the Intermediate 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
-- 21 --
<PAGE>
EACH FUND'S INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
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
-- 22 --
<PAGE>
EACH FUND'S INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
adopted by the Trust's Board of Trustees. Generally, municipal lease
obligations will be determined to be liquid if they have a readily available
market after an evaluation of all relevant factors.
/ / CERTIFICATES OF PARTICIPATION in municipal lease obligations, which are
certificates issued by state or local governments that entitle the holder of
the certificate to a proportionate interest in the lease purchase payments
made. A Fund will only invest in those COPs that are, in the opinion of SAM,
liquid securities under guidelines adopted by the Trust's Board of Trustees.
Generally, COPs will be determined to be liquid if they have a readily
available market after an evaluation of all relevant factors.
/ / PARTICIPATION INTERESTS, which are interests in municipal bonds and floating
and variable rate obligations that are owned by banks. These interests carry
a demand feature that permits a Fund holding an interest to tender (sell) it
back to the bank. Generally, the bank will accept tender of the
participation interest with same day notice, but may require up to five
days' notice. The demand feature is usually backed by an irrevocable letter
of credit or guarantee of the bank. The credit rating of the bank may affect
the credit quality of the participation interest.
/ / MUNICIPAL NOTES, which are notes generally issued by an issuer to provide
for short-term capital needs and generally have maturities of one year or
less. A Fund may purchase municipal notes as a medium for its short-term
investments, the interest on which will not be subject to federal income tax
when distributed to the Fund's shareholders. Notes include tax anticipation,
revenue anticipation and bond anticipation notes and tax-exempt commercial
paper. A Fund will invest only in those municipal notes that at the time of
purchase are rated within one of the three highest grades by Moody's or S&P
or, if unrated by any of these agencies, in the opinion of SAM, are of
comparable quality.
-- 23 --
<PAGE>
EACH FUND'S INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
2. INVEST IN SHARES OF NO-LOAD, OPEN-END INVESTMENT
COMPANIES THAT INVEST IN TAX-EXEMPT SECURITIES WITH REMAINING MATURITIES OF ONE
YEAR OR LESS. Such shares will be purchased only as a medium for a Fund's
short-term investments if SAM determines that they provide a better
combination of yield and liquidity than a direct investment in short-term,
tax-exempt securities. A Fund will not invest more than 10% of its total
assets in shares issued by other investment companies, will not invest more
than 5% of its total assets in a single investment company, and will not
purchase more than 3% of the outstanding voting securities of a single
investment company.
3. 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 for each Fund is not expected to
exceed 70%.
4. PURCHASE OR SELL SECURITIES ON A "WHEN-ISSUED" OR "DELAYED-
DELIVERY" BASIS. Under this procedure, a Fund agrees to acquire or sell
securities that are to be delivered against payment in the future, normally
30 to 45 days. The price, however, is fixed at the time of commitment. When a
Fund purchases when-issued or delayed-delivery securities, it will earmark
liquid, high-quality securities in an amount equal in value to the purchase
price of the security. Use of this technique may affect a Fund's share price
in a manner similar to leveraging.
5. HOLD CASH OR INVEST TEMPORARILY IN HIGH QUALITY, SHORT-TERM
SECURITIES ISSUED BY AN AGENCY OR INSTRUMENTALITY OF THE U.S. GOVERNMENT,
HIGH-QUALITY COMMERCIAL PAPER, CERTIFICATES OF DEPOSIT AND SHARES OF NO-LOAD,
OPEN-END MONEY MARKET FUNDS. A Fund may purchase these short-term
-- 24 --
<PAGE>
EACH FUND'S INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
securities as a cash management technique under those circumstances where it
has cash to manage for a short time period, for example, after receiving
proceeds from the sale of securities, dividend distributions from portfolio
securities, or cash from the sale of Fund shares to investors. Interest
earned from these short-term securities will be taxable to investors as
ordinary income when distributed.
The following restrictions are fundamental policies and cannot be changed
without shareholder vote.
1. EACH FUND, WITH RESPECT TO 75% OF THE VALUE OF ITS TOTAL
ASSETS, WILL NOT INVEST MORE THAN 5% OF ITS TOTAL ASSETS IN THE SECURITIES OF
ANY ONE ISSUER (OTHER THAN U.S. GOVERNMENT SECURITIES).
2. EACH FUND WILL NOT INVEST 25% OR MORE OF ITS TOTAL ASSETS
IN MUNICIPAL OBLIGATIONS AND OTHER PERMITTED INVESTMENTS THE INTEREST ON
WHICH IS PAYABLE FROM REVENUES ON SIMILAR TYPES OF PROJECTS SUCH AS: SPORTS,
CONVENTION OR TRADE SHOW FACILITIES; AIRPORTS; MASS TRANSPORTATION; SEWAGE OR
SOLID WASTE DISPOSAL FACILITIES; OR AIR OR WATER POLLUTION CONTROL PROJECTS.
3. THE INTERMEDIATE, INSURED AND MUNICIPAL FUNDS WILL NOT
INVEST 25% OR MORE OF THEIR TOTAL ASSETS IN SECURITIES WHOSE ISSUERS ARE
LOCATED IN THE SAME STATE.
4. EACH FUND MAY BORROW MONEY ONLY FOR TEMPORARY OR
EMERGENCY PURPOSES FROM A BANK OR AFFILIATE OF SAFECO CORPORATION AT AN
INTEREST RATE NOT GREATER THAN THAT AVAILABLE FROM COMMERCIAL BANKS. A FUND
WILL NOT BORROW AMOUNTS IN EXCESS OF 20% OF ITS TOTAL ASSETS. As a non-
fundamental policy of the Intermediate, Insured and Washington Funds and a
fundamental policy of the California and Municipal Funds, a Fund will not
purchase securities if borrowings equal to or greater than 5% of its total
assets
-- 25 --
<PAGE>
are outstanding. A Fund intends to primarily exercise its borrowing authority to
meet shareholder redemptions under circumstances where redemptions exceed
available cash.
For a further description of each Fund's investment policies and restrictions as
well as an explanation of ratings, see the "Investment Objectives and Policies"
and "Description of Ratings" sections of the Trust's Statement of Additional
Information.
RISK FACTORS
There are market risks in all securities transactions. Various factors may cause
the value of a shareholder's investment in a Fund to fluctuate. The principal
risk associated with an investment in a mutual fund like any of the Funds is
that the market value of the portfolio securities may decrease, resulting in a
decrease in the value of a shareholder's investment. The value of each Fund's
portfolio will normally fluctuate inversely with changes in market interest
rates. Generally, when market interest rates rise, the price of municipal bonds
will fall, and when market interest rates fall, the price of these bonds will
rise. Also, there is a risk that the issuer of a municipal bond or other
security will fail to make timely payments of principal and interest to the
Funds.
Because the California and Washington Funds each concentrate their investments
in a single state, there is a greater risk of fluctuation in the values of their
portfolio securities than with mutual funds whose investments are more
geographically diverse. Investors should carefully consider the investment risks
of such concentration. The share price of the California and Washington Funds
can be affected by political and economic developments within and by the
financial condition of the respective state, its public authorities and
political subdivisions. See the discussion below and "Investment Risks of
Concentration in California and Washington Issuers" in the Statement of
Additional Information for further information.
The information in the following discussion is drawn primarily from official
statements relating to state securities offerings
-- 26 --
<PAGE>
RISK FACTORS (CONTINUED)
which are dated prior to the date of this Prospectus. The California and
Washington Funds have not independently verified any of the information in the
discussion below.
SPECIAL RISKS OF THE CALIFORNIA FUND
After suffering through a severe recession, California's economy has been on a
steady recovery since the start of 1994. Nevertheless, the State's budget
problems in recent years have also been caused by the increasing costs of
education, health, welfare and corrections, driven by California's rapid
population growth. These pressures on the State's General Fund are expected to
continue. The State's long-term credit ratings, reduced in 1992, were lowered
again in 1994 and have not been fully restored. Its ability to provide
assistance to its public authorities and political subdivisions has been
impaired. Cutbacks in State aid adversely affect the financial condition of many
cities, counties and school districts which are already subject to fiscal
constraints and are facing their own reduced tax collections. In addition, some
municipally-owned electric utilities may be adversely affected by the
restructuring of the electric utility industry now underway in California.
In the past, California voters have passed amendments to the California
Constitution and other measures that limit the taxing and spending authority of
California governmental entities. Future voter initiatives could result in
adverse consequences affecting obligations issued by the State and its political
subdivisions. These factors, among others, could reduce the credit standing of
certain issuers of California obligations. At any given time, there are numerous
lawsuits against the State which could affect its revenues and expenditures.
SPECIAL RISKS OF THE WASHINGTON FUND
The State of Washington's economy consists of both export and local industries.
The State's leading export industries are aerospace, forest products,
agriculture and food processing. The State's manufacturing base includes
aircraft manufacture,
-- 27 --
<PAGE>
RISK FACTORS (CONTINUED)
which comprised approximately 25% of total manufacturing in 1995. The Boeing
Company is the State's largest employer and has a significant impact, in terms
of overall production, employment and labor earnings, on the State's economy.
Boeing anticipates increasing employment in the State by approximately 24,100
jobs by the end of 1997, and by 28,600 by the end of 1999. The commercial
airline industry is cyclical in nature and future job cuts could have an adverse
effect on the Washington economy. Forest products rank second behind aerospace
in value of total production. Although productivity in the forest products
industry has increased steadily in recent years, declines in production are
expected in the future. Unemployment in the timber industry is anticipated in
certain regions; however, the impact is not expected to affect the State's
overall economic performance. Growth in agriculture has been an important factor
in the State's economic growth over the past decade. The State is the home of
many technology firms of which approximately half are computer-related.
Microsoft, the world's largest microcomputer software company, is headquartered
in Redmond, Washington.
State law requires a balanced budget. The Governor has a statutory
responsibility to reduce expenditures across the board to avoid any cash deficit
at the end of a biennium. In addition, State law prohibits State tax revenue
growth from exceeding the growth rate of State personal income. To date,
Washington State tax revenue increases have remained substantially below the
applicable limits. At any given time, there are numerous lawsuits against the
State which could affect its revenues and expenditures.
-- 28 --
<PAGE>
PORTFOLIO MANAGERS
MUNICIPAL FUND, CALIFORNIA FUND AND INSURED FUND
The portfolio manager for the Municipal Fund, California Fund and Insured Fund
is Stephen C. Bauer, President, SAM. Mr. Bauer has served as portfolio manager
for each of these Funds since it commenced operations: 1981 for the Municipal
Fund, 1983 for the California Fund and 1992 for the Insured Fund. Mr. Bauer is
the portfolio manager for certain other SAFECO municipal bond funds, and also
serves as President and Director of SAM.
INTERMEDIATE FUND
The portfolio manager for the Intermediate Fund is Mary Metastasio, Vice
President, SAM. Ms. Metastasio has served in various positions with SAM since
1985, and has been the portfolio manager for another SAFECO mutual fund since
1987.
WASHINGTON FUND
The portfolio manager for the Washington Fund is Beverly Denny. Ms. Denny was
the Marketing Director for the SAFECO Mutual Funds from 1991 to 1993, and has
been employed as an investment analyst with SAM since 1993.
HOW TO PURCHASE SHARES
A completed and signed application must accompany payment for an initial
purchase by mail and in all cases is necessary before a redemption can be made.
The Funds only accept funds drawn in U.S. dollars and payable through a U.S.
bank. The Funds do not accept currency. The Funds issue shares in uncertificated
form, but will issue certificates for whole shares without charge upon written
request. You will be required to post a bond to replace missing certificates.
THE FUNDS RESERVE THE RIGHT TO REFUSE ANY OFFER TO PURCHASE SHARES.
-- 29 --
<PAGE>
HOW TO PURCHASE SHARES (CONTINUED)
INITIAL PURCHASES
MINIMUM INITIAL INVESTMENT $1,000 (UGMA AND UTMA $250).
No minimum initial investment is required to establish the Automatic Investment
Method (except for certain UGMA or UTMA accounts) or Payroll Deduction Plan.
BY WRITTEN REQUEST
Send a check or money order made payable to the No-Load Class of the applicable
Fund and a completed and signed application to the address on the Prospectus
cover.
BY WIRE
Call toll-free 1-800-624-5711 or, in Seattle, 206-545-7319 for instructions.
IN PERSON
Visit a SAFECO Investor Center. Investor Centers are located at 1409 Fifth
Avenue and 4333 Brooklyn Avenue N.E. in Seattle, Washington, and at 15411 N.E.
51st Street in Redmond, Washington. A representative will be available to assist
you in completing your application.
ADDITIONAL PURCHASES
MINIMUM ADDITIONAL INVESTMENT $100 FOR ALL ACCOUNTS, EXCEPT FOR UGMA OR UTMA
AUTOMATIC INVESTMENT METHOD ("AIM") ACCOUNTS OPENED WITH AN INITIAL INVESTMENT
OF $250 OR MORE. THESE ACCOUNTS HAVE A MINIMUM ADDITIONAL INVESTMENT OF ONLY
$50. THERE IS NO MINIMUM INVESTMENT FOR DIVIDEND REINVESTMENTS.
BY WRITTEN REQUEST
Send a check or money order payable to the No-Load Class of the applicable Fund
to the address on the Prospectus cover. Please specify your account number.
-- 30 --
<PAGE>
HOW TO PURCHASE SHARES (CONTINUED)
BY WIRE
Instruct your bank to send wires to U.S. Bank of
Washington, N.A., Seattle, Washington, ABA #1250-0010-5,
Account #0017-086083.
To ensure timely credit to your account, ask your bank to include the following
information in its wire to U.S. Bank of Washington, N.A.:
/ / SAFECO Fund name and class name (No-Load)
/ / SAFECO account number
/ / Name of the registered owner(s) of the SAFECO account
Delays of purchases caused by inadequate wire instructions are not the
responsibility of the Funds or SAFECO Services.
Your bank may charge a fee for wire services.
BY TELEPHONE
Call 1-800-624-5711 or, in Seattle, 1-206-545-7319. You must have previously
selected this service on your account application or by written request. Not
available to open a new account.
Maximum purchase $100,000 per day, minimum purchase $100 per day.
Monies will be transferred from your predesignated bank account to your existing
Fund account. Your bank may charge a fee if monies are wired to your Fund
account. Please allow 15 business days after selecting this service for it to be
available for first use. Telephone purchases may be unavailable from some bank
accounts and non-bank financial institutions. Please read "Telephone
Transactions" on page 38 for important information.
-- 31 --
<PAGE>
IN PERSON
Visit a SAFECO Investor Center. Investor Centers are located at 1409 Fifth
Avenue and 4333 Brooklyn Avenue N.E. in Seattle, Washington, and at 15411 N.E.
51st Street in Redmond, Washington.
THROUGH REGISTERED SECURITIES DEALERS
You may open your account and make additional investments through a registered
securities dealer who is responsible for the prompt forwarding of purchase
orders. A dealer may charge a transaction fee and may place more restrictive
conditions on a purchase than would apply if you purchased your shares directly
from a Fund.
THROUGH REGISTERED INVESTMENT ADVISERS
Please read "Transactions Through Registered Investment Advisers" on page 39 for
important information.
SHARE PURCHASE PRICE
You will buy full and fractional shares at the net asset value ("NAV") next
computed after your check, money order or wire has been received. For telephone
purchase orders, you will receive the price per share calculated on the day
monies are received from your bank account. See "Share Price Calculation" on
page 40 for more information.
HOW TO REDEEM SHARES
BY WRITTEN REQUEST
Shares may be redeemed by sending a letter that specifies your account number,
the Fund's name and applicable class, and the number of shares or dollar amount
you wish to redeem. The request should be sent to the address on the Prospectus
cover. The request must be signed by the appropriate number of owners, and in
some cases a signature guarantee may be required. In all cases, SAFECO Services
must have a signed and completed application on file before a redemption can be
made. See "Account Changes and Signature Requirements" on page 49 for more
information.
-- 32 --
<PAGE>
HOW TO REDEEM SHARES (CONTINUED)
BY TELEPHONE
Call 1-800-624-5711 or, in Seattle, 1-206-545-7319. You must have previously
selected this service on your account application or by written request.
Telephone redemptions are not available for shares issued in certificate form.
You may request that redemption proceeds be sent directly to your predesignated
bank or mailed to your account address of record.
Please read "Telephone Transactions" on page 38 for important information.
IN PERSON
Shares may be redeemed in person by visiting a SAFECO Investor Center. Investor
Centers are located at 1409 Fifth Avenue and 4333 Brooklyn Avenue N.E. in
Seattle, Washington, and at 15411 N.E. 51st Street in Redmond, Washington. Funds
for shares redeemed in person may be mailed to your address of record, sent
directly to your bank or retrieved directly from the SAFECO Investor Center once
they become available.
THROUGH REGISTERED SECURITIES DEALERS
Requests for redemption of shares by wire or telephone will be accepted from
registered securities dealers under agreement with each Fund's principal
underwriter. The dealer may charge a transaction fee for any order processed.
THROUGH REGISTERED INVESTMENT ADVISERS
Please read "Transactions Through Registered Investment Advisers" on page 39 for
important information.
PLEASE NOTE THE FOLLOWING:
If your shares were purchased by wire, redemption proceeds will be available
immediately. If shares were purchased by means other than wire, each Fund
reserves the right to hold the proceeds of your redemption for up to 15 business
days
-- 33 --
<PAGE>
HOW TO REDEEM SHARES (CONTINUED)
after investment or until such time as the Fund has received assurance that your
investment will be honored by the bank on which it was drawn, whichever occurs
first.
SAFECO Services charges a $10 fee to wire redemption proceeds. In addition, some
banks may charge a fee to receive wires.
If shares are issued in certificate form, the certificates must accompany a
redemption request and be duly endorsed.
Under some circumstances (E.G., a change in corporate officer or death of an
owner), SAFECO Services may require certified copies of supporting documents
before a redemption can be made.
SHARE REDEMPTION PRICE AND PROCESSING
Your shares will be redeemed at the NAV per share next calculated after receipt
of your request that meets the redemption requirements of the Funds. The value
of the shares you redeem may be more or less than the dollar amount you
purchased, depending on the market value of the shares at the time of
redemption. See "Share Price Calculation," on page 40 for more information.
Redemption proceeds will normally be sent on the next business day following
receipt of your redemption request. If your redemption request is received after
the close of trading on the New York Stock Exchange ("NYSE") (normally 1:00 p.m.
Pacific time), proceeds will normally be sent on the second business day
following receipt. Each Fund, however, reserves the right to postpone payment of
redemption proceeds for up to seven days if making immediate payment could
adversely affect its portfolio. In addition, redemptions may be suspended or
payment dates postponed if the NYSE is closed, its trading is restricted or the
Securities and Exchange Commission declares an emergency.
Due to the high cost of maintaining small accounts, your account may be closed
upon 60 days' written notice if at the
-- 34 --
<PAGE>
HOW TO REDEEM SHARES (CONTINUED)
time of any redemption or exchange the total value falls below $100. Your shares
will be redeemed at the NAV per share calculated on the day your account is
closed and the proceeds will be sent to you.
HOW TO SYSTEMATICALLY PURCHASE OR REDEEM SHARES
Call 1-800-426-6730 or, in Seattle, 1-206-545-5530, for more information.
AUTOMATIC INVESTMENT METHOD ("AIM")
AIM enables you to make regular monthly investments by authorizing SAFECO
Services to withdraw a specific amount from your bank account and invest the
amount in any Fund. AIM has a minimum of $100 per withdrawal per Fund for all
accounts (except UGMA and UTMA accounts which have a lower $50 minimum for
additional investments, provided that the account was opened with an initial
investment of at least $250).
PAYROLL DEDUCTION PLAN
An employer or other entity using group billing may establish a
self-administered payroll deduction plan in any Fund. Payroll deduction amounts
are negotiable.
SYSTEMATIC WITHDRAWAL PLAN
This plan enables you to receive a portion of your investment on a monthly
basis. A Fund automatically redeems shares in your account and sends you a
withdrawal check (minimum amount $50 per Fund) on or about the fifth business
day of every month.
-- 35 --
<PAGE>
HOW TO EXCHANGE SHARES FROM ONE FUND TO ANOTHER
An exchange is the redemption of shares of one SAFECO Fund and the purchase of
shares of another SAFECO Fund in accounts that are identically registered, I.E.,
have the same registered owners and account number. For income tax purposes,
depending on the cost or other basis of the shares you exchange, you may realize
a capital gain or loss when you make an exchange. You may purchase shares of a
SAFECO Fund by exchange only if it is registered for sale in the state where you
reside. Before exchanging into another SAFECO Fund, please read its current
Prospectus.
BY WRITTEN REQUEST
Shares may be exchanged by writing SAFECO Services at the address on the
Prospectus cover. Please designate the SAFECO Funds and classes you wish to
exchange out of and into as well as your account number. The request must be
signed by the number of owners designated on your account application, and in
some cases a signature guarantee may be required. See "Account Changes and
Signature Requirements" on page 49 for more information.
If the shares you want to exchange are evidenced by certificates, the
certificates must accompany the request and be duly endorsed.
Under some circumstances (E.G., a change in corporate officer or death of an
owner), SAFECO Services may require certified copies of supporting documents
before an exchange can be made.
BY TELEPHONE
Call 1-800-624-5711 or, in Seattle, 1-206-545-7319.
Exchanges by telephone must be in amounts of $1,000 or more.
Telephone exchanges are not available for shares issued in certificate form.
-- 36 --
<PAGE>
HOW TO EXCHANGE SHARES FROM ONE FUND TO ANOTHER (CONTINUED)
Please read "Telephone Transactions" on page 38 for important information.
THROUGH REGISTERED INVESTMENT ADVISERS
Please read "Transactions Through Registered Investment Advisers" on page 39 for
important information.
SHARE EXCHANGE PRICE AND PROCESSING
The shares of the SAFECO Fund you are exchanging from will be redeemed at the
price next computed after your exchange request is received. Normally the
purchase of the SAFECO Fund you are exchanging into is executed on the same day.
However, each Fund reserves the right to delay the payment of proceeds and,
hence, the purchase in an exchange for up to seven days if making immediate
payment could adversely affect the portfolio of the Fund whose shares are being
redeemed. The exchange privilege may be modified or terminated with respect to a
Fund at any time, upon at least 60 days' notice to shareholders.
LIMITATIONS
Each Fund reserves the right to refuse exchange purchases or simultaneous order
transactions by any person or group if, in SAM'S judgment, the Fund would not be
able to invest the money effectively in accordance with that Fund's investment
objective and policies or would otherwise potentially be adversely affected.
Although a Fund will attempt to give you prior notice whenever it is reasonably
able to do so, it may impose the above restrictions at any time.
The Funds are not intended to serve as vehicles for frequent trading in response
to short-term fluctuations in the market. Due to the disruptive effect that
market-timing investment strategies can have on efficient portfolio management,
the Funds have instituted certain policies to discourage excessive exchange and
simultaneous order transactions. Exchange and simultaneous order transactions
which, in SAM's judgment,
-- 37 --
<PAGE>
HOW TO EXCHANGE SHARES FROM ONE FUND TO ANOTHER (CONTINUED)
appear to follow a market-timing strategy, are limited to 4 in any 12 month
period per account holder (or account, in a case where one person or entity
exercises investment discretion over more than one account). For purposes of
these limitations a "simultaneous order transaction" is a transaction where a
significant portion of an account's assets are redeemed from one SAFECO Mutual
Fund and shortly thereafter reinvested into another SAFECO Mutual Fund. In order
to protect the shareholders of the Funds, SAM reserves the right to exercise its
discretion in determining whether a particular transaction qualifies as a
simultaneous order transaction. In addition to the foregoing limitations on
exchanges and simultaneous order transactions, as described above, the Funds
reserve the right to refuse any offer to purchase shares.
TELEPHONE TRANSACTIONS
To purchase, redeem or exchange shares by telephone, call 1-800-624-5711 or, in
Seattle, 1-206-545-7319 between 5:30 a.m. and 7:00 p.m. Pacific time, Monday
through Friday, except certain holidays. All telephone calls are tape-recorded
for your protection. During times of drastic or unusual market volatility, it
may be difficult for you to exercise the telephone transaction privileges.
To use the telephone purchase, redemption and exchange privileges, you must have
previously selected these services either on your account application or by
having submitted a request in writing to SAFECO Services at the address on the
Prospectus cover. Purchasing, redeeming or exchanging shares by telephone allows
the Funds and SAFECO Services to accept telephone instructions from an account
owner or a person preauthorized in writing by an account owner.
Each Fund and SAFECO Services reserve the right to refuse any telephone
transaction when a Fund or SAFECO Services,
-- 38 --
<PAGE>
TELEPHONE TRANSACTIONS (CONTINUED)
in its sole discretion, is unable to confirm to its satisfaction that a caller
is the account owner or a person preauthorized by the account owner.
The Funds and SAFECO Services will not be liable for the authenticity of
instructions received by telephone that a Fund or SAFECO Services, in its
discretion, believes to be delivered by an account owner or preauthorized
person, provided that the Fund or SAFECO Services follows reasonable procedures
to identify the caller. The shareholder will bear the risk of any resulting
loss. The Funds and SAFECO Services will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. These procedures may
include requiring the account owner to select the telephone privilege in writing
prior to first use and to designate persons authorized to deliver telephone
instructions. SAFECO Securities tape-records telephone transactions and may
request certain identifying information from the caller.
The telephone transaction privileges may be suspended, limited, modified or
terminated at any time without prior notice by the Funds or SAFECO Services. The
Funds and SAFECO Services may be liable if they do not employ reasonable
procedures to confirm that telephone transactions are genuine.
TRANSACTIONS THROUGH REGISTERED INVESTMENT ADVISERS
SAFECO Services may accept instructions for share transactions and account
information changes from investment advisers who are acting on behalf of
shareholders, provided that the adviser is registered under the Investment
Advisers Act of 1940, has a signed agreement with SAFECO Services and has an
executed power of attorney from the shareholder, in an acceptable form, on file
with SAFECO Services. Advisers may charge a fee to shareholders for their
services. The Trust, the Funds and SAFECO Services have no control over, or
involvement with, the fees charged by advisers for such services.
-- 39 --
<PAGE>
Advisers are responsible for the prompt forwarding of instructions on
shareholders' accounts to SAFECO Services and are bound by the terms of this
Prospectus. The Trust, the Funds, SAFECO Services and their affiliated companies
will not be responsible to any shareholder for any losses, liabilities, costs or
expenses associated with any investment advice or recommendation provided by the
adviser to the shareholder or for accepting and following any instructions from
such adviser on the shareholder's account(s).
SHARE PRICE CALCULATION
The NAV of the No-Load Class shares of each Fund is computed at the close of
regular trading on the NYSE (normally 1:00 p.m. Pacific time) each day that the
NYSE is open for trading. NAV is determined separately for each class of shares
of each Fund. The NAV of a Fund is calculated by subtracting a Fund's
liabilities from its assets and dividing the result by the number of outstanding
shares.
Securities are valued based on consideration of information with respect to
transactions in similar securities, quotations from dealers and various
relationships between securities. Valuations of a Fund's portfolio securities
calculated in a like manner may be obtained from a pricing service. Investments
for which a representative value cannot be established are valued at their fair
value as determined in good faith by or under the direction of the Trust's Board
of Trustees.
INFORMATION ABOUT SHARE OWNERSHIP AND COMPANIES THAT PROVIDE SERVICES TO THE
TRUST
Each Fund is a series of SAFECO Tax-Exempt Bond Trust, a Delaware business trust
that issues an unlimited number of shares of beneficial interest. The Board of
Trustees may establish additional series or classes of shares of the Trust
without the approval of shareholders.
In addition to the No-Load Class of shares, the Municipal, California and
Washington Funds also offer two other classes of
-- 40 --
<PAGE>
INFORMATION ABOUT SHARE OWNERSHIP AND COMPANIES THAT PROVIDE SERVICES TO THE
TRUST (CONTINUED)
shares through a separate prospectus to investors who engage the services of an
investment professional: Advisor Class A shares and Advisor Class B shares.
Advisor Class A shares are sold subject to an initial sales charge and Advisor
Class B shares are sold subject to a contingent deferred sales charge. Advisor
Class A and Advisor Class B shares also incur different expenses than No-Load
Class shares. Accordingly, the performance of the three classes will differ. For
more information about Advisor Class A shares and Advisor Class B shares of the
Municipal, California, and Washington Funds, please call 1-800-463-8791.
Each share of a Fund is entitled to participate equally in dividends and other
distributions and the proceeds of any liquidation except that, due to the
differing expenses borne by the three classes of the Municipal, California and
Washington Funds, dividends and liquidation proceeds for each class of shares of
those Funds will likely differ. All shares issued are fully paid and
non-assessable, and shareholders have no preemptive or other right to subscribe
to any additional shares.
The Trust does not intend to hold annual meetings of shareholders of the Funds.
The Trustees will call a special meeting of shareholders of a Fund only if
required under the Investment Company Act of 1940 or in their discretion or upon
the written request of holders of 10% or more of the outstanding shares of the
Fund entitled to vote. Separate votes are taken by each class of shares, a Fund,
or the Trust if a matter affects only that class of shares, a Fund, or the
Trust, respectively.
Under Delaware law, the shareholders of the Funds will not be personally liable
for the obligations of any Fund; a shareholder is entitled to the same
limitation of personal liability extended to shareholders of corporations. To
guard against the risk that
-- 41 --
<PAGE>
INFORMATION ABOUT SHARE OWNERSHIP AND COMPANIES THAT PROVIDE SERVICES TO THE
TRUST (CONTINUED)
Delaware law might not be applied in other states, the Trust Instrument requires
that every written obligation of the Trust or a Fund contain a statement that
such obligation may be enforced only against the assets of the Trust or Fund and
generally provides for indemnification out of Trust or Fund property of any
shareholder nevertheless held personally liable for Trust or Fund obligations,
respectively.
Because the Trust may use a combined Prospectus to offer other classes of
shares, it is possible that a Fund might become liable for a misstatement about
the series of another Trust contained in a combined Prospectus. The Board of
Trustees have considered this factor in approving the use of a single, combined
Prospectus.
SAM is the investment adviser for each Fund under an agreement with the Trust.
Under the agreement, SAM is responsible for the overall management of the
Trust's and each Fund's business affairs. SAM provides investment research,
advice, management and supervision to the Trust and each Fund, and, consistent
with each Fund's investment objectives and policies, SAM determines what
securities will be purchased, retained or sold by each Fund and implements those
decisions. Each Fund pays SAM an annual management fee based on a percentage of
that Fund's net assets ascertained each business day and paid monthly in
accordance with the schedules below. A reduction in the fees paid by a Fund
-- 42 --
<PAGE>
INFORMATION ABOUT SHARE OWNERSHIP AND COMPANIES THAT PROVIDE SERVICES TO THE
TRUST (CONTINUED)
occurs only when that Fund's net assets reach the dollar amounts of the break
points and applies only to the assets that fall within the specified range:
<TABLE>
<CAPTION>
INTERMEDIATE FUND
<S> <C>
NET ASSETS ANNUAL FEE
$0 - $250,000,000 .55 of 1%
$250,000,001 - $500,000,000 .45 of 1%
$500,000,001 - $750,000,000 .35 of 1%
Over $750,000,000 .25 of 1%
<CAPTION>
INSURED AND WASHINGTON FUNDS
NET ASSETS ANNUAL FEE
<S> <C>
$0 - $250,000,000 .65 of 1%
$250,000,001 - $500,000,000 .55 of 1%
$500,000,001 - $750,000,000 .45 of 1%
Over $750,000,000 .35 of 1%
<CAPTION>
MUNICIPAL AND CALIFORNIA FUNDS
NET ASSETS ANNUAL FEE
<S> <C>
$0 - $100,000,000 .55 of 1%
$100,000,001 - $250,000,000 .45 of 1%
$250,000,001 - $500,000,000 .35 of 1%
Over $500,000,000 .25 of 1%
</TABLE>
The Trust and each Fund will bear all expenses of their organization, operations
and business not specifically assumed by SAM under each Fund's management
contract. Such expenses may include, among others, custody and accounting
expenses, transfer agency and related expenses, distribution and shareholder
servicing expenses, expenses related to preparing, printing and delivering
prospectuses and shareholder reports, the expenses of holding shareholders'
meetings, legal fees, the compensation of non-interested trustees of the Trusts,
brokerage, taxes and extraordinary expenses.
-- 43 --
<PAGE>
INFORMATION ABOUT SHARE OWNERSHIP AND COMPANIES THAT PROVIDE SERVICES TO THE
TRUST (CONTINUED)
The distributor for the No-Load Class of each Fund's shares under an agreement
with the Trust is SAFECO Securities, Inc. ("SAFECO Securities"), a broker-dealer
registered under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. SAFECO Securities receives no
compensation from the Trust or the Funds for its services as distributor of the
No-Load Class of shares.
The transfer, dividend and distribution disbursement and shareholder servicing
agent for the No-Load Class of each Fund under an agreement with the Trust is
SAFECO Services. SAFECO Services receives a fee from each Fund for every
shareholder account held in the Fund. SAFECO Services may enter into
subcontracts with registered broker-dealers, third party administrators and
other qualified service providers that generally perform shareholder,
administrative, and/or accounting services which would otherwise be provided by
SAFECO Services. Fees incurred by a Fund for these services will not exceed the
transfer agency fee payable to SAFECO Services. Any distribution expenses
associated with these arrangements will be borne by SAM.
SAM, SAFECO Securities and SAFECO Services are wholly-owned subsidiaries of
SAFECO Corporation (a holding company whose primary subsidiaries are engaged in
insurance and related financial services businesses) and are each located at
SAFECO Plaza, Seattle, Washington 98185.
PERSON CONTROLLING CERTAIN FUNDS
At April 2, 1997, SAFECO Insurance Company of America ("SAFECO Insurance"), a
Washington corporation, controlled the Intermediate, Insured and Washington
Funds. SAFECO Insurance is a wholly-owned subsidiary of SAFECO Corporation, a
Washington corporation, having its principal place of business at SAFECO Plaza,
Seattle, Washington 98185.
-- 44 --
<PAGE>
PERFORMANCE INFORMATION
The yield, tax-equivalent yield, total return and average annual total return of
each class of a Fund may be quoted in advertisements. Yield is the annualization
on a 360-day basis of a class' net income per share over a 30-day period divided
by the class' NAV per share on the last day of the period. Tax-equivalent yield
is, given an investor's tax bracket, the taxable yield necessary to equal a
Fund's non-taxable yield on an after-tax basis over the same period of time. The
formula for yield and tax-equivalent yield is defined by regulation.
Consequently, the rate of actual income distributions paid by the Funds may
differ from quoted yield figures. Total return is the total percentage change in
an investment in a class of a Fund, assuming the reinvestment of dividend and
capital gains distributions, over a stated period of time. Average annual total
return is the annual percentage change in an investment in a Fund, assuming the
reinvestment of dividend and capital gain distributions, over a stated period of
time. Performance quotations are calculated separately for each class of a Fund.
A Fund's portfolio turnover rate will vary from year to year. A high portfolio
turnover rate involves correspondingly higher transaction costs in the form of
dealer spreads and other costs that a Fund will bear directly.
From time to time, the Funds may advertise rankings. Rankings are calculated by
independent companies that monitor mutual fund performance (E.G., CDA Investment
Technologies, Lipper Analytical Services, Inc. and Morningstar, Inc.) and are
reported periodically in national financial publications such as BARRON'S,
BUSINESS WEEK, FORBES, INVESTOR'S BUSINESS DAILY, MONEY MAGAZINE, and THE WALL
STREET JOURNAL. In addition, non-standardized performance figures may accompany
the standardized figures described above. Non-standardized figures may be
calculated in a variety of ways, including, but not necessarily limited to,
different time periods and different initial investment amounts. Each Fund may
also compare its performance to the performance of relevant indices.
-- 45 --
<PAGE>
PERFORMANCE INFORMATION (CONTINUED)
Performance information and quoted rankings are indicative only of past
performance and are not intended to represent future investment results. The
yield and share price of each class will fluctuate and your shares, when
redeemed, may be worth more or less than you originally paid for them.
FUND DISTRIBUTIONS AND HOW THEY ARE TAXED
DIVIDEND AND OTHER DISTRIBUTIONS
Each Fund declares an income dividend each business day based on net investment
income, I.E., all of its interest income earned on the securities in its
portfolio less all of its expenses. Income dividends are payable on the last
business day of each month. Your shares become entitled to declared dividends on
the next business day after shares are purchased for your account. If you
request redemption of all your shares at any time during the month, you will
receive all declared income dividends through the date of redemption together
with the proceeds of the redemption.
A shareholder's dividends and other distributions are reinvested in additional
shares of the distributing Fund at the NAV per share generally determined as of
the close of business on the ex-distribution date, unless the shareholder elects
in writing to receive dividends or other distributions in cash and that election
is provided to SAFECO Services at the address on the Prospectus cover. The
election remains in effect until revoked by written notice to SAFECO Services.
Please remember that if you purchase shares shortly before a Fund pays a taxable
dividend or other distribution, you will pay the full price for the shares, then
receive part of the price back as a taxable distribution.
TAXES
Each Fund intends to continue to qualify for treatment as a "regulated
investment company" under Subchapter M of the
-- 46 --
<PAGE>
FUND DISTRIBUTIONS AND HOW THEY ARE TAXED (CONTINUED)
Internal Revenue Code of 1986, as amended ("Code"), so as to be able to pay
dividends that are exempt from federal personal income taxes. The portion of
dividends representing net short-term capital gains, however, is not exempt and
will be treated as taxable dividends for federal income tax purposes. In
addition, income which is derived from purchasing certain bonds below their
issued price after April 30, 1993, will be treated as ordinary income for
federal income tax purposes.
A portion of a Fund's assets may from time to time be temporarily invested in
fixed-income obligations, the interest on which when distributed to the Fund's
shareholders will be subject to federal income taxes. As a matter of
non-fundamental investment policy, the Funds will not purchase so-called
"non-essential or private activity" bonds, the interest on which would
constitute a preference item for shareholders in determining their alternative
minimum tax.
The excess of net long-term capital gains realized by a Fund over net short-term
capital loss on portfolio transactions does not necessarily result in exemption
under other federal, state or local income taxes. Shareholders of each Fund
should bear in mind that they may be subject to other taxes.
If a shareholder buys shares of a Fund and sells them at a loss within six
months, such loss for federal income tax purposes will be disallowed to the
extent of the tax-exempt interest component of dividends received during such
six-month period.
If a shareholder buys shares of a Fund and sells them at a loss within six
months, to the extent not disallowed in the previous paragraph and to the extent
of any long-term capital gains distributions, the loss will be treated as a
long-term capital loss for federal income tax purposes.
-- 47 --
<PAGE>
FUND DISTRIBUTIONS AND HOW THEY ARE TAXED (CONTINUED)
Individuals who receive Social Security benefits must use the amount of income
dividends received from each of the Funds in determining the amount of any
federal income tax due on such benefits.
Under the Code, the tax effect on individuals of receiving dividends from any of
the Funds is substantially different from the tax effect on other types of
shareholders.
CALIFORNIA FUND
The California Fund intends to pay dividends that are exempt from California
State personal income taxes. This would not include taxable interest paid on
temporary investments, if any.
Generally, the tax treatment of capital gains under California law is the same
as under federal law, but such gains are taxed at the same rates as ordinary
income. Capital gains distributions paid by the California Fund are treated as
long-term capital gains under California law regardless of how long the shares
have been held. Redemptions and exchanges of the California Fund may result in a
capital gain or loss for California income tax purposes.
Under California law, the dividend income from California municipal bonds is
exempt from the California personal income tax applicable to individual
shareholders but is fully taxable for purposes of the California franchise tax
applicable to most corporate shareholders.
Shares of the California Fund will not be subject to the California property
tax.
WASHINGTON FUND
Currently the State of Washington has no State personal income tax. Should
Washington State enact a personal income tax, there can be no assurance that
income from the Washington Fund's portfolio securities which is distributed to
shareholders would be exempt from such a tax.
-- 48 --
<PAGE>
FUND DISTRIBUTIONS AND HOW THEY ARE TAXED (CONTINUED)
TAX WITHHOLDING INFORMATION
You will be asked to certify on your account application or on a separate form
that the taxpayer identification number you provide is correct and that you are
not subject to, or are exempt from, backup withholding for previous
underreporting to the Internal Revenue Service.
The foregoing is only a summary of some of the important tax considerations
generally affecting each Fund and its shareholders. See the Trust's Statement of
Additional Information for additional tax information. There may be other
federal, state or local tax considerations applicable to a particular investor.
You therefore are urged to consult your tax adviser.
ACCOUNT STATEMENTS
Periodically, you will receive an account statement showing your current Fund
holdings and transactions affecting your account. Confirmation statements will
be sent to you after each transaction that affects your account balance. Please
review the information on each confirmation statement for accuracy immediately
upon receipt. If you do not notify us within 30 days of any processing error,
SAFECO Services will consider the transactions listed on the confirmation
statement to be correct.
ACCOUNT CHANGES AND SIGNATURE REQUIREMENTS
Changes to your account registration or the services you have selected must be
in writing and signed by the persons specified on your account application as
having authority to make changes. Send written changes to SAFECO Services at the
address on the Prospectus cover. Certain changes to the Automatic Investment
Method and Systematic Withdrawal Plan can be made by telephone if you have
previously selected single signature authorization for your account.
-- 49 --
<PAGE>
ACCOUNT CHANGES AND SIGNATURE REQUIREMENTS (CONTINUED)
You must specify on your account application the number of signatures required
to authorize redemptions and exchanges and to change account registration or the
services selected. Authorizing fewer than all account owners to take such
actions has important implications. For example, one owner of a joint tenant
account could redeem money without the co-owner's signature. If you do not
indicate otherwise on the application, the signatures of all account owners will
be required to effect a transaction. Your selection of fewer than all account
owner signatures may be revoked by any account owner who writes to SAFECO
Services at the address on the Prospectus cover.
SAFECO Services may require a signature guarantee for a signature that cannot be
verified by comparison to the signature(s) on your account application. A
signature guarantee may be obtained from most financial institutions, including
banks, savings and loans and broker-dealers.
-- 50 --
<PAGE>
SAFECO FAMILY OF FUNDS
STABILITY OF PRINCIPAL
SAFECO Money Market Fund
SAFECO Tax-Free Money Market Fund
BOND INCOME
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO GNMA Fund
SAFECO High-Yield Bond Fund
SAFECO Managed Bond Fund
TAX-FREE BOND INCOME
SAFECO Intermediate-Term Municipal Bond Fund
SAFECO Insured Municipal Bond Fund
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal Bond Fund
HIGH CURRENT INCOME WITH LONG-TERM GROWTH
SAFECO Income Fund
LONG-TERM GROWTH
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Northwest Fund
SAFECO Balanced Fund
SAFECO International Fund
SAFECO Small Company Stock Fund
SAFECO U.S. Value Fund
FOR MORE COMPLETE INFORMATION ON ANY SAFECO MUTUAL FUND, INCLUDING MANAGEMENT
FEES AND EXPENSES, CALL OR WRITE FOR A FREE PROSPECTUS. PLEASE READ IT CAREFULLY
BEFORE YOU INVEST OR SEND MONEY.
<PAGE>
TO REQUEST A PROSPECTUS:
Nationwide: 1-800-426-6730
Seattle: 1-206-545-5530
FOR 24-HOUR AUTOMATED
PERFORMANCE INFORMATION
AND TRANSACTIONS:
Nationwide: 1-800-835-4391
Seattle: 1-206-545-5113
FOR SHAREHOLDER SERVICE*:
Nationwide: 1-800-624-5711
Seattle: 1-206-545-7319
Deaf and Hard of Hearing TTY/TDD Service:
1-800-438-8718
*All telephone calls are tape-recorded for your
protection.
INTERNET: http://networth.galt.com/safeco
E-MAIL: [email protected]
MAILING ADDRESS:
SAFECO Mutual Funds
No-Load Class Shares
P.O. Box 34890
Seattle, WA 98124-1890
EXPRESS/OVERNIGHT MAIL:
SAFECO Mutual Funds
No-Load Class Shares
4333 Brooklyn Avenue NE
Seattle, Washington 98105
DISTRIBUTOR:
SAFECO Securities, Inc.
GMF695 4/97
[LOGO]
Printed on Recycled Paper.
-Registered Trademark- Registered trademark of SAFECO Corporation.
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
NOTES
<PAGE>
SAFECO TAX-EXEMPT BOND TRUST:
SAFECO INTERMEDIATE-TERM MUNICIPAL BOND FUND
SAFECO INSURED MUNICIPAL BOND FUND
SAFECO MUNICIPAL BOND FUND
SAFECO CALIFORNIA TAX-FREE INCOME FUND
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
NO-LOAD CLASS
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus for the Funds. A copy of the Prospectus may
be obtained by writing SAFECO Mutual Funds, No-Load Class Shares, P.O. Box
34890, Seattle, Washington 98124-1890, or by calling TOLL FREE:
Nationwide
1-800-426-6730
Seattle
1-206-545-5530
Deaf and Hard of Hearing TDD/TTY Service
1-800-438-8718
The date of the most current Prospectus of the Funds to which this Statement of
Additional Information relates is April 30, 1997.
The date of this Statement of Additional Information is April 30, 1997.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Investment Objectives and Additional Performance Information 17
Policies 2
Trustees and Officers 19
Overview of Investment
Policies 2 Principal Shareholders 22
Additional Investment Information 6 Investment Advisory and
Other Services 22
Investment Risks of Concentration
in California and Washington Brokerage Practices 24
Issuers 7
Redemption in Kind 25
Additional Tax Information 16
Financial Statements 25
Additional Information On
Calculation of Net Asset Value Description of Ratings 25
Per Share 16
<PAGE>
- --------------------------------
INVESTMENT OBJECTIVES AND
POLICIES
- --------------------------------
OVERVIEW OF INVESTMENT POLICIES
SAFECO Intermediate-Term Municipal Bond Fund ("Intermediate Fund"), SAFECO
Insured Municipal Bond Fund ("Insured Fund"), SAFECO Municipal Bond Fund
("Municipal Fund"), SAFECO California Tax-Free Income Fund ("California Fund")
and SAFECO Washington State Municipal Bond Fund ("Washington Fund") (together,
the "Funds") are each a series of the SAFECO Tax-Exempt Bond Trust ("the
Trust"). The investment policies of each Fund are described in the Prospectus
and this Statement of Additional Information. These policies state the
investment practices that the Funds will follow, in some cases limiting
investments to a certain percentage of assets, as well as those investment
activities that are prohibited. The types of securities that a Fund may
purchase are also disclosed in the Prospectus. Before a Fund purchases a
security that the following policies permit, but which is not currently
described in the Prospectus, the Prospectus will be amended or supplemented to
identify or describe the security. If a policy's percentage limitation is
adhered to at the time of the investment, a later increase or decrease in
percentage beyond the specified limit resulting from a change 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 a change may
impact a Fund's borrowing limit).
Generally, the entity that has the ultimate responsibility for the payment of
interest and principal on a particular security is deemed to be its issuer for
purposes of the investment policies. The identification of the issuer of a
tax-exempt security for purposes of diversification depends on the terms and
conditions of the security. For example, when the assets and revenues of an
agency, authority, instrumentality or other political subdivision are separate
from those of the government creating the subdivision and the security is backed
only by the assets and revenues of the subdivision, such subdivision would be
deemed to be the sole issuer for diversification purposes. Similarly, in the
case of an industrial development bond, if that bond is backed only by the
assets and revenues of the non-governmental user, then such non-governmental
user would be deemed to be the sole issuer for purposes of diversification. If,
however, in either case, the creating government or some other entity guarantees
a security, such a guarantee would be considered a separate security which must
be valued and included in the five percent (5%) limitation on investments in one
issuer.
Each Fund's fundamental policies may not be changed without approval of a
"majority of its outstanding voting securities" as defined by the Investment
Company Act of 1940, as amended. 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 investment policies may be changed without shareholder
approval.
FUNDAMENTAL INVESTMENT POLICIES
The Intermediate, Insured and Washington Funds have adopted the following
fundamental policies. Each Fund will NOT:
2
<PAGE>
1. Purchase the securities of any issuer (except the U.S. Government, its
agencies or instrumentalities) if as a result more than five percent (5%)
of the value of a Fund's total assets would be invested in the securities
of such issuer, except that up to twenty-five percent (25%) of the value of
a Fund's total assets (which twenty-five percent (25%) shall not include
securities issued by another investment company) may be invested without
regard to this five percent (5%) limitation;
2. Underwrite any issue of securities, except to the extent that the purchase
of municipal obligations or other permitted investments directly from the
issuer in accordance with a Fund's investment objective, policies and
restrictions and the later disposition thereof may be deemed to be
underwriting;
3. Purchase or sell real estate, unless acquired as a result of the ownership
of securities or instruments, but this shall not prevent a Fund from
investing in municipal obligations or other permitted investments secured
by real estate or interests therein;
4. Borrow money, except from a bank or affiliates of SAFECO Corporation at an
interest rate not greater than that available to a Fund from commercial
banks, for temporary or emergency purposes and not for investment purposes,
and then only in an amount not exceeding twenty percent (20%) of its total
assets (including borrowings) less liabilities (other than borrowings)
immediately after such borrowing;
5. Make loans, except through the purchase of a portion or all of an issue of
debt securities in accordance with a Fund's investment objective, policies
and restrictions and through investments in qualified repurchase
agreements;
6. Purchase or sell commodities, commodity contracts or futures;
7. Purchase securities, if as a result, twenty-five percent (25%) or more of a
Fund's total assets would be invested in the securities of issuers having
their principal business activities in any one industry (governmental
issuers of special or general tax-exempt securities are not considered part
of any one industry);
8. Issue or sell any senior security, except as permitted under the Investment
Company Act of 1940 ("1940 Act");
9. Permit twenty-five percent (25%) or more of a Fund's total assets to be
invested in municipal obligations and other permitted investments, the
interest of which is payable from revenues on similar types of projects.
As a matter of operating policy, similar types of projects may include
sports, convention or trade show facilities; airports or mass
transportation; sewage or solid waste disposal facilities; or air or water
pollution control projects;
10. Permit twenty-five percent (25%) or more of a Fund's total assets to be
invested in securities whose issuers are located in the same state. (NOTE:
THIS FUNDAMENTAL POLICY DOES NOT APPLY TO THE WASHINGTON FUND); or
11. During normal market conditions, invest less than eighty percent (80%) of a
Fund's net assets in obligations whose interest, in the opinion of counsel
for the issuer of the obligation, is exempt from federal income tax.
The Municipal and California Funds have adopted the following fundamental
investment policies. Each Fund will NOT:
1. Purchase the securities of any issuer (except the U.S. Government, its
agencies or instrumentalities), if as a result more than five percent (5%)
of the value of a Fund's total assets would be invested in the securities
of such issuer, except that up to twenty-five percent (25%) of the value of
a Fund's assets (which twenty-five percent (25%) shall not include
3
<PAGE>
securities issued by another investment company) may be invested without
regard to this five percent (5%) limitation;
2. Underwrite any issue of securities, except to the extent that the purchase
of municipal obligations or other permitted investments directly from the
issuer in accordance with a Fund's investment objective, policies and
restrictions and the subsequent disposition thereof may be deemed to be
underwriting;
3. Purchase or sell real estate or real estate limited partnerships, but this
shall not prevent a Fund from investing in municipal obligations or other
permitted investments secured by real estate or interests therein;
4. Purchase or retain for a Fund's portfolio the securities of any issuer if,
to the Fund's knowledge, the officers or directors of the Fund, or its
investment adviser, who individually own more than one-half (1/2) of one
percent (1%) of the outstanding securities of such an issuer, together own
more than five percent (5%) of such outstanding securities;
5. Participate on a joint or a joint-and-several basis in any trading account
in securities, except that a Fund may, for the purpose of seeking better
net results on portfolio transactions or lower brokerage commission rates,
join with other transactions executed by the investment adviser or the
investment adviser's parent company and any subsidiary thereof;
6. Purchase from, or sell portfolio securities to, any officer or director,
the Fund's investment adviser, principal underwriter or any affiliates or
subsidiaries thereof;
7. Borrow money, except from a bank or affiliates of SAFECO Corporation at an
interest rate not greater than that available to a Fund from commercial
banks, for temporary or emergency purposes and not for investment purposes
and then only in an amount not exceeding twenty percent (20%) of its total
assets (including borrowings) less liabilities (other than borrowings)
immediately after such borrowing;
8. Pledge, mortgage or hypothecate its assets, except that, to secure
borrowings permitted by subparagraph 7 above, a Fund may pledge securities
having a market value at the time of pledge not exceeding ten percent (10%)
of the cost of a Fund's total assets;
9. Make loans, except through the purchase of a portion or all of an issue of
debt securities in accordance with a Fund's investment objective, policies
and restrictions and through investments in qualified repurchase agreements
(provided, however, that a Fund will not invest more than ten percent (10%)
of its total assets in qualified repurchase agreements maturing in more
than seven (7) days);
10. Purchase or sell commodities, commodity contracts or futures or invest in
oil, gas or other mineral exploration or development programs or leases;
11. Make short sales of securities or purchase securities on margin, except for
such short-term credits as are necessary for the clearance of transactions,
or purchase or sell any put or call options or combinations thereof;
12. Knowingly purchase or otherwise acquire any securities that are subject to
legal or contractual restrictions on resale or for which there is no
readily available market;
13. Purchase securities (other than obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities), if as a result, more
than twenty-five percent (25%) of a Fund's total assets would be invested
in one industry (governmental issuers of special or general tax-exempt
securities are not considered part of any one industry);
-4-
<PAGE>
14. Purchase an industrial development bond, if as a result of such purchase,
more than five percent (5%) of a Fund's total assets would be invested in
industrial revenue bonds where the payment of principal and interest is the
responsibility of a company with less than three years' operating history;
15. Issue or sell any senior security, except that this restriction shall not
be construed to prohibit a Fund from borrowing funds (i) on a temporary
basis as permitted by Section 18(g) of the 1940 Act, or (ii) from any bank
provided, that immediately after such borrowing, there is an "asset
coverage" of at least three hundred percent (300%) for all such borrowings
and provided, further, that in the event that such "asset coverage" shall
at any time fall below three hundred percent (300%), the Fund shall, within
three (3) days thereafter (not including Sundays and holidays) or such
longer period as the Securities and Exchange Commission may prescribe by
rules and regulations, reduce the amount of its borrowings to an extent
that the asset coverage of such borrowings shall be at least three hundred
percent (300%) (for purposes of this restriction, the terms "senior
security" and "asset coverage" shall be understood to have the meanings
assigned to those terms in Section 18 of the 1940 Act);
16. Permit more than twenty percent (20%) of a Fund's net assets to be
invested, during normal market conditions, in securities whose interest is
not, in its investment adviser's opinion, exempt from federal income tax,
as long as the Fund has its investment objective to provide as high a level
of current interest income exempt from federal income tax as is consistent
with the relative stability of capital. As a matter of operating policy,
the Funds' investment adviser may base its opinion on the opinion of
counsel for the issuer of the security;
17. Permit twenty-five percent (25%) or more of a Fund's total assets to be
invested in municipal obligations and other permitted investments, the
interest of which is payable from revenues on similar types of projects
such as sports, convention or trade show facilities; airports or mass
transportation; sewage or solid waste disposal facilities; or air or water
pollution control projects;
18. MUNICIPAL FUND ONLY: Permit twenty-five percent (25%) or more of a Fund's
total assets to be invested in securities whose issuers are located in the
same state; or
19. During normal market conditions, invest less than eighty percent (80%) of a
Fund's net assets in obligations whose interest, in the opinion of counsel
for the issuer, is exempt from federal income tax (and, in the case of the
California Fund, also from California state personal income tax).
NON-FUNDAMENTAL INVESTMENT POLICIES
Each Fund has adopted the following non-fundamental policies with respect to its
investment activities:
1. Each Fund may invest in any of the following types of short-term,
tax-exempt obligations: municipal notes of issuers rated, at the time of
purchase, within one of the three highest grades assigned by Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Services,
a division of The McGraw-Hill Companies ("S&P") or Fitch Investors
Services, Inc. ("Fitch"); unrated municipal notes offered by issuers having
outstanding municipal bonds rated within one of the three highest grades
assigned by Moody's, S&P or Fitch; notes issued by or on behalf of
municipal issuers which are guaranteed by the U.S. Government; tax-exempt
commercial paper assigned one of the two highest grades by Moody's, S&P or
Fitch; certificates of deposit issued by banks with assets of
$1,000,000,000 or more; and municipal obligations which have a maturity of
one year or less from the date of purchase.
-5-
<PAGE>
2. Each Fund may invest in obligations of the U.S. Government, its agencies or
instrumentalities or in qualified repurchase agreements, the net interest
on which is taxable.
3. Each Fund may invest in municipal notes including tax anticipation, revenue
anticipation and bond anticipation notes and tax-exempt commercial paper.
4. Each Fund may invest in repurchase agreements for a period longer than
seven days.
5. Each Fund may permit twenty-five percent (25%) or more of its assets to be
invested in industrial development bonds.
6. Each Fund may purchase or sell securities on a "when-issued" or
"delayed-delivery" basis.
IN ADDITION, THE INTERMEDIATE, INSURED AND WASHINGTON FUNDS HAVE ADOPTED THE
FOLLOWING NON-FUNDAMENTAL POLICIES. EACH FUND:
1. May not make short sales of securities.
2. May not purchase securities on margin, except that a Fund may obtain such
short-term credits as are necessary for the clearance of transactions.
3. May not purchase or sell any put or call options or combinations thereof.
4. May not purchase any security, if as a result, more than fifteen percent
(15%) of its net assets would be invested in illiquid securities.
5. May not invest in oil, gas or other mineral exploration or development
programs or leases.
6. May not invest in real estate limited partnerships.
7. Each Fund will not purchase securities if borrowings equal to or greater
than five percent (5%) of its total assets are outstanding.
ADDITIONAL INVESTMENT INFORMATION
1. REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
Fund purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date and price reflecting a market rate of interest unrelated
to the coupon rate or maturity of the purchased securities. A Fund
maintains custody of the underlying securities prior to their repurchase;
thus, the obligation of the bank or dealer to pay the repurchase price on
the date agreed to is, in effect, secured by such securities. If the value
of these securities is less than the repurchase price, plus any agreed-upon
additional amount, the other party to the agreement must provide additional
collateral so that at all times the collateral is at least equal to the
repurchase price, plus any agreed-upon additional amount.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible declines in the market value
of the underlying securities and delays and costs to a Fund if the other
party to a repurchase agreement becomes bankrupt. Each Fund intends to
enter into repurchase agreements only with banks and dealers in
transactions believed by SAFECO Asset Management Company ("SAM") to
present minimum 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.
-6-
<PAGE>
2. WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES. Under this procedure, a Fund
agrees to acquire securities (whose terms and conditions, including price,
have been fixed by the issuer) that are to be issued and delivered against
payment in the future. Delivery of securities so sold normally takes place
30 to 45 days (settlement date) after the date of the commitment. No
interest is earned by a Fund prior to the settlement date. The value of
securities sold on a "when-issued" or "delayed-delivery" basis may
fluctuate before the settlement date and the Fund bears the risk of such
fluctuation from the date of purchase. A Fund may dispose of its interest
in those securities before delivery.
3. ILLIQUID SECURITIES. Illiquid securities are securities that cannot be
sold within seven days in the ordinary course of business for approximately
the amount at which they are valued. Due to the absence of an active
trading market, a Fund may experience difficulty in valuing or disposing of
illiquid securities. SAM determines the liquidity of the securities under
guidelines adopted by the Trust's Board of Trustees.
INVESTMENT RISKS OF CONCENTRATION IN CALIFORNIA AND WASHINGTON ISSUERS
CALIFORNIA FUND
The following is a condensed and general description of conditions affecting
the taxing ability and fiscal condition of the State of California and its
various political subdivisions and their ability to meet their debt service
obligations. Since during normal market conditions the Fund plans to invest at
least 80% of its net assets in bonds issued by California and its political
subdivisions, the investment risk of such concentration should be carefully
considered. The description below summarizes discussions contained in official
statements relating to various types of bonds issued by the State of California
and its political subdivisions. A more detailed description can be found in
such official statements. The California Fund has not independently verified
any of the information presented in this section.
THE STATE OF CALIFORNIA
The severe economic recession which occurred in California between 1990 and 1994
seriously affected State tax revenues, caused increased expenditures for health
and welfare programs, and caused a large structural imbalance in the State's
budget, with the largest programs supported by the General Fund -- K-12 schools
and community colleges, health and welfare, and corrections --growing at rates
higher than the growth rates for the principal revenue sources of the General
Fund. As a result, the State experienced recurring budget deficits and had to
use a series of external borrowings to meet its cash needs.
As a result of the deterioration in the State's budget and cash situation in
fiscal years 1991-1992 and 1992-1993, rating agencies reduced the State's credit
ratings. Between November 1991 and October 1992 the rating on the State's
general obligation bonds was reduced by S&P from "AAA" to "A+," by Moody's from
"Aaa" to "Aa," and by Fitch from "AAA" to "AA." In July, 1994, based on the
State's inability to eliminate its accumulated deficit, the same three rating
agencies further lowered their ratings on the State's general obligations bonds
to "A," "A1," and "A," respectively.
Since the start of 1994, California's economy and the State's financial
condition have steadily improved. In 1996, S&P and Fitch raised their
respective ratings to "A+." Nevertheless, the pressures on the General Fund
from the programs described above (education, welfare and corrections) are
expected to continue. In August, the United States Congress enacted legislation
which fundamentally reformed the current welfare system. A preliminary analysis
by the State Legislative Analyst's Office indicates that an overall assessment
of how these changes will affect the State's General Fund will not be known for
some time, and will depend on how quickly and in what manner the State
implements the new federal law.
-7-
<PAGE>
The Governor's Budget proposal for 1997-98, released January 19, 1997, projects
General Fund revenues and transfers in the 1997-98 fiscal year of $50.7 billion
(a 4.6% increase from revised 1996-97 figures) and expenditures of $50.3 billion
(a 3.9% increase from 1996-97). The Governor's Budget projects a balance of
approximately $553 million in the budget reserve, the Special Fund for Economic
Uncertainties, at June 30, 1998.
TAX AND SPENDING LIMITATIONS
The taxing powers of California public agencies are limited by Article XIII A of
the State Constitution, added by an initiative amendment approved by voters on
June 6, 1978, and commonly known as Proposition 13.
Article XIII A limits the maximum ad valorem tax on real property to one percent
of "full cash value," which is defined as "the County Assessor's valuation
of real property as shown on the fiscal year 1975-76 tax bill under full cash
value' or, thereafter, the appraised value of real property when purchased,
newly constructed, or a change in ownership has occurred after the 1975
assessment. " The full cash value may be adjusted annually to reflect
inflation at a rate not to exceed two percent per year, or reduction in the
consumer price index or comparable local data, or declining property value
caused by damage, destruction, or other factors.
The tax rate limitation referred to above does not apply to ad valorem taxes to
pay the interest and redemption charges on any indebtedness approved by the
voters before July 1, 1978 or any bonded indebtedness for the acquisition or
improvement of real property approved by two-thirds of the votes cast by the
voters voting on the proposition.
Article XIII A also requires a two-thirds vote of the electors prior to the
imposition of any special taxes and totally precludes the imposition of any new
ad valorem taxes on real property or sales or transaction taxes on the sales of
real property.
Legislation adopted in 1979 exempts business inventories from taxation.
However, the same legislation provides a formula for reimbursement by California
to cities and counties, special districts and school districts for the amount of
tax revenues lost by reason of such exemption or adjusted for changes in the
population and the cost of living. Legislation adopted in 1980 provides for
State reimbursements to redevelopment agencies to replace revenues lost due to
the exemption of business inventories from taxation. Such legislation provides
for restoration of business inventory tax revenues through the annual addition
of artificial assessed value, not actually existing in a project area, to the
tax rolls of redevelopment projects. These reimbursements are adjusted for
changes in the population and the cost of living. All such reimbursements are
subject to change or repeal by the Legislature, and they have been changed since
1980. Furthermore, current law generally prohibits the pledging of such
reimbursement revenues to secure redevelopment agency bonds.
Redevelopment agencies in California have no power to levy and collect taxes;
hence, any decrease in property taxes or limitations in the amounts by which
property taxes may increase adversely affects such agencies, which lack the
inherent power to correct for such decreases or limitations.
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 limitations" 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
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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 is further limited by the provisions
of an initiative statute ("Proposition 62") approved by the voters on November
4, 1986. The statute (i) requires that any tax for general governmental
purposes imposed by local government entities be approved by resolution or
ordinance adopted by two-thirds vote of the governmental entity's legislative
body and by majority vote of the electorate of the governmental entity, (ii)
requires that any special tax (defined as a tax levied for other than general
governmental purposes) imposed by a local governmental entity be approved by a
two-thirds vote of the voters within that jurisdiction, (iii) restricts the use
of revenues from a special tax to the purposes or for the service for which the
special tax was imposed, (iv) prohibits the imposition of ad valorem taxes on
real property by local governmental entities except as permitted by Article XIII
A, (v) prohibits the imposition of transaction taxes and sales taxes on the sale
of real property by local governmental entities and (vi) requires that any tax
imposed by a local governmental entity 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
September 28, 1995, in the case of SANTA CLARA COUNTY LOCAL TRANSPORTATION
AUTHORITY V. GUARDINO, the California Supreme Court upheld the constitutionality
of Proposition 62. As a result, the annual revenues of any local government or
district as shown in the general fund budget 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. A bill has been introduced in the California Legislature in an
effort to clarify whether the general tax voter approval requirement is
applicable to any tax that was imposed or increased by an ordinance or
resolution adopted prior to December 14, 1995. If adopted, the legislation
will apply the GUARDINO decision prospectively only.
An initiative constitutional amendment known as Proposition 218 and also
called the "Right to Vote on Taxes Act" was approved by 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 all assessments and requires that all
assessments be approved by property owners; prohibits property related fees and
charges from exceeding costs of the service being provided; imposes procedural
requirements, including notice and public hearing, prior to imposition of new or
increased fees or charges on property; and requires that, except for fees for
sewer, water and refuse collection, fees be approved by a majority vote of the
fee payers.
Given the turbulent history of the 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.
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LEASE FINANCING
Lease-based financing, typically marketed in the form of certificates of
participation, has been extremely popular in California, since the courts have
long held that properly structured long-term leases do not create
"indebtedness" for purposes of constitutional and statutory debt limitations.
The obligation to pay rent thereunder is nevertheless enforceable, on an annual
basis, so long as the leased property is available for use and occupancy by the
government lessee. The risk of rent abatement (because of construction delays,
damage to structures and the like) is usually mitigated by funded reserves,
casualty (including earthquake) insurance and rental interruption insurance.
ELECTRICAL UTILITY RESTRUCTURING
Like a number of other states, California recently enacted legislation relating
to the restructuring of the electric utility industry. The legislation
generally provides for increased competition in the supply of electric power and
allows retail customers "direct access" in choosing their supplier. In
addition, the legislation provides for an immediate rate reduction for small
users; creates an independent power exchange to administer a wholesale power
pool; creates an independent system operator for the transmission grid; provides
customers and suppliers with nondiscriminating and comparable access to
transmission and distribution services; and allows utilities to recover
uneconomic generation-related costs through a transition charge or severance
fee.
The mandatory provisions of the legislation generally apply to utilities
regulated by the California Public Utilities Commission. Since the State's
political subdivisions are not subject to the jurisdiction of the CPUC, the
effect of the legislation on municipally-owned electric utilities is more
limited. As a practical matter, however, it is likely that most
municipally-owned utilities will adopt some form of direct access or pooling
programs in order to remain competitive.
The affects 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 has embarked on a
fiscal recovery plan, approved by the bankruptcy judge on May 15, 1996, based on
sharp reductions in services and personnel. The plan also includes
rescheduling of outstanding short term debt using certain new revenues
transferred to Orange County from other local governments pursuant to special
legislation enacted in October, 1995. The special legislation is now being
challenged in court proceedings.
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 that are located in different areas within California as
well as obligations of the State of California itself. In addition, the Fund
will not invest more than 15% of its total assets in tax allocation bonds
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issued by California redevelopment agencies. These are operating policies of
the Fund and may be changed without the approval of the Fund's shareholders.
WASHINGTON FUND
WASHINGTON STATE
A discussion of certain economic, financial and legal matters regarding the
State of Washington follows. During normal market conditions, the Washington
Fund will generally invest at least 80% of its net assets in bonds issued by
Washington and its political subdivisions, municipalities, agencies,
instrumentalities or public authorities. Therefore, the investment risk of such
concentration should be carefully considered. The information in the discussion
is drawn primarily from official statements relating to securities offerings of
the State which are dated prior to the date of this Statement of Additional
Information. This information may be relevant in evaluating the economic and
financial position of the State, but is not intended to provide all relevant
data necessary for a complete evaluation of the State's economic and financial
position. Discussions regarding the financial health of the State government may
not be relevant to municipal obligations issued by a political subdivision of
the State. Furthermore, general economic conditions discussed may or may not
affect issuers of the obligations of the State. The Washington Fund has not
independently verified any of the information presented in this section.
GENERAL INFORMATION
According to the United States Census Bureau's 1990 Census, Washington
State's population is ranked 18th of the 50 states. During the ten-year time
period from 1980-1990, the State's population increased at an average annual
rate of 1.8%, while the United States population grew at an average annual
rate of 1.1%. The State's population increased at an average annual rate of
approximately 2.5% 1990 to 1993, and at an average annual rate of approximately
1.8% from 1993 to 1995. From April 1, 1995 to April 1, 1996, the population
growth was approximately 1.6%. The current estimate of the population of the
State is approximately 5.5 million.
The State's largest city, Seattle, is part of an international trade,
manufacturing, high technology and business service corridor which extends along
Puget Sound from Everett to Tacoma. The State's Pacific Coast-Puget Sound
region includes 75% of its population, the major portion of its industrial
activity and the major part of the forests important to its timber and paper
industries. The remainder of the State has agricultural areas primarily devoted
to grain, fruit orchard and dairy operations.
In recent years, the State's economy has diversified with employment in the
trade and service sectors representing an increasing portion of total employment
relative to the manufacturing sector.
The State operates on a July 1 to June 30 fiscal year and on a biennial budget
basis. Fiscal controls are exercised during the biennium through an allotment
process which requires each agency to submit a monthly expenditure plan. The
plan must be approved by the Office of Financial Management, which is the
Governor's budget agency. It provides the authority for agencies to spend funds
within statutory maximums specified in a legislatively adopted budget. State
law requires a balanced biennial budget. Whenever it appears that disbursements
will exceed the aggregate of estimated receipts plus beginning cash surplus, the
Governor is required to reduce allotments, thereby reducing expenditures of
appropriated funds.
As interpreted by the State Supreme Court, Washington's Constitution prohibits
the imposition of net income taxes.
The State's tax revenues are primarily comprised of excise and ad valorem taxes.
By constitutional provision, the aggregate of all regular (unvoted) tax levies
on real and personal property by State
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and local taxing districts cannot exceed 1% of the true and fair value of the
property. Excess levies are subject to voter approval. For the fiscal year
ending June 30, 1995, approximately 78.5% of the State's tax revenues came from
general and selective sales and gross receipts taxes, of which the retail sales
tax and its companion use tax represented 46% of total collections. Business
and occupation tax collections represented about 16.6% and the motor vehicle
fuel tax represented approximately 7.0% of total State taxes for the year. Ad
valorem taxes represented 10.8% of State revenues for the fiscal year 1995.
Expenditures of State revenues are made in accordance with constitutional and
statutory mandates.
STATE EXPENDITURE LIMITATIONS
Initiative 601, which passed by the voters in November 1993, limits increases in
General Fund-State government expenditures to the average rate of population and
inflation growth, and sets forth a series of guidelines for limiting tax and
expenditure increases and stabilizing long range budget planning.
Provisions of Initiative 601 establish a procedure for computing a fiscal year
growth factor based on a lagged, three-year average of population and inflation
growth. This growth factor is used to determine a State spending limit for
programs and expenditures supported by the State General Fund. The growth
factor was 5.13% for fiscal year 1996 and is 4.47% for fiscal year 1997. The
initiative created two new reserve funds (the Emergency Reserve Fund and the
Education Construction Fund) for depositing revenues in excess of the spending
limit and abolished the current Budget Stabilization Account. Ending
balances in the Budget Stabilization Account were transferred to the State
General Fund ($100 million) and the Pension Reserve Account ($25 million). The
initiative also places restrictions on the addition or transfer of functions to
local government unless there is reimbursement by the State.
The Initiative's requirement for voter approval for new tax measures has
expired. Effective July 1, 1995, taxes can be enacted with a two-thirds
majority of both houses of the State Legislature if resulting General Fund-State
expenditures do not exceed the spending limit. Voter approval is still required
to exceed the spending limit. Thus far, the Initiative has not had a
restrictive impact on the State's budget. However, the State expects its
expenditures to be constrained by the Initiative beginning in the 1997-99
Biennium.
The State Constitution and enabling statutes authorize the incurrence of State
general obligation debt to the payment of which the State's full faith and
credit and taxing power are pledged. With certain exceptions, the amount of
State general obligation debt which may be incurred is limited by constitutional
and statutory restrictions. These limitations are imposed by prohibiting the
issuance of new debt if the new debt would cause the maximum annual debt service
on all thereafter outstanding general obligation debt to exceed a specified
percentage of the arithmetic mean of general State revenues for the preceding
three years. These limitations apply to the incurrence of new debt and are not
limitations on the amount of debt service which may be paid by the State in
future years.
The State Legislature is obligated to appropriate money for State debt service
requirements. Generally, on or before June 30 of each year, the State Finance
Committee certifies to the State Treasurer the amount required for payment of
bond interest and principal for the coming year. Some general obligation bond
statutes provide that the General Fund will be reimbursed from discrete
revenues, which are not considered general State revenues. Other bonds are
limited obligation bonds not payable from the General Fund. For the 1995-97
Biennium, General Fund-State revenues are projected to be $17.647 billion, an
increase of 7.1% over the 1993-95 Biennium, plus a carry-forward of $559
million. The revenue outlook for the 1995-97 Biennium is stable and the General
Fund is projected to end the Biennium with a $624 million fund balance.
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The operating budget for the 1995-97 Biennium calls for an overall expenditure
level of $17.613 billion for the General Fund-State, an increase of $1.3 billion
or 8.0% over the 1993-95 Biennium and within the $17.9 billion expenditure limit
imposed under Initiative 601.
Fifty-eight percent of the General Fund-State budget will go to support public
schools and higher education, representing a $602 million increase in public
school funding and an increase of $22 million in funding for public universities
and colleges.
Social and Health Services funding accounts for approximately 26% of the State
budget, representing increased State expenditures of $574 million, and the
criminal justice budget also increased. A 4% across-the-board salary increase
for State employees is expected to be offset by initiation of efficiency
measures and privatization proposals in the areas of general government, natural
resources and transportation.
The 1996 Supplemental Budget passed the State Legislature on March 7, 1996 and
then Governor Lowry signed the budget bill on March 30, 1996. The overall
General Fund-State supplemental budget resulted in a net increase of only $14
million after the Governor's vetoes. New policy initiatives totaling $125
million were set forth to strengthen child protective services, provide early
intervention to at-risk youth, upgrade security and safety conditions in the
juvenile justice system, continue education reform, and expand access to higher
education through improved technology. The 1996 Legislature also appropriated
$41 million to address emergent and previously unfunded needs. Nine million
in State funds was appropriated to address federal cutbacks in emergency food
assistance programs, job training youth employment programs, and planned
closures in federally-supported fish hatcheries on the Columbia River. These
appropriated increases were offset by a General Fund-State reduction of $174
million to reflect downward adjustments in public school enrollments and social
and health services forecasted caseloads. Approximately $23 million in State
funds and $95 million in federal relief funds were set aside in a special
account to address the devastating damages that resulted from two severe floods.
During the 1996 legislative session, the State Legislature overturned a
veto by then Governor Lowry that will result in a reduction in the business and
occupation tax, and passed a series of new legislation to give sales tax
exemptions for machinery and equipment used by manufacturers for research and
development and other specialized uses. The total of these tax and revenue
reduction measures would decrease General Fund-State revenues by $208 million.
For most municipalities in the State, the fiscal year is the calendar year
except that school districts have a September 1 - August 31 fiscal year. All
municipalities must maintain balanced budgets. Depending on the type of
municipality, local revenues are derived from ad valorem taxes, excise and gross
receipts taxes, special assessments, fees, user charges and State and federal
grants.
Municipalities incur debt by the issuance of general obligations or other
borrowings which are payable from taxes, though other revenue sources may be
used. Revenue obligations do not constitute debt under constitutional and
statutory limitations as long as taxes are not pledged or used to pay debt
service. Only non-tax revenue from the operation of a project or enterprise
financed by the revenue obligations (and sometimes special assessments on
property benefitted from the financed improvements) may be used to pay that debt
service. Usually, revenue bonds are secured by a reserve funded in an amount
based on a factor of debt service. Many municipalities may issue improvement
district obligations payable only from special assessments on benefitted
property, but some of those obligations also may be secured by a special
guaranty fund.
ECONOMIC OVERVIEW
Over the past few years, the State's economic performance has remained
relatively strong compared to the United States as a whole. After adjusting
for inflation, growth in personal income in the State increased 3.7% in 1995
over the 1994 level and an estimated 4.2% in 1996 over the 1995 level.
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The State's economic base includes manufacturing and service industries as well
as agricultural and timber production. During 1990-1995, the State experienced
growth in non-manufacturing industries and a decline in manufacturing
industries. The rate of employment growth, which exceeded 4.5% during the
mid-to-late 1980's, has declined since 1991 to an average rate of 1.4%. The
1996 employment growth is expected to be 2.5%.
Washington's economy consists of both export and local industries. Leading
export industries are aerospace, forest products, agriculture and food
processing. The aerospace, timber and food processing industries together employ
approximately 9% of the State's non-farm workers. However, the non-manufacturing
sector has played an increasingly significant role in contributing to the
State's economy in recent years.
Below is a summary of key industry segments of the State's economy as well as of
selected economic and employment data.
MANUFACTURING. The Boeing Company ("Boeing"), which is the Seattle Metropolitan
Area's largest employer, has several facilities located throughout the area.
Boeing is the world's leading manufacturer of commercial airliners and as of
November 1996 employed approximately 85,214 people State-wide, primarily at
several locations in the area. While the primary activity of Boeing is the
manufacture of commercial aircraft, Boeing has played leading roles in the
aerospace and military missile programs of the United States and has
undertaken a broad program of diversification activities including Boeing
Information and Support Services. In 1995, Boeing had $19.5 billion in sales
and net earnings of $393 million, and a backlog of orders totaling $72.3
billion. Boeing currently anticipates 1996 sales to be in the $22 billion
range.
Boeing recently completed two and is currently undertaking one major expansion
project. The company recently acquired a 212-acre site in Renton (King County),
which is the site of the former Longacres Race Track. The site will be used as
a location for the development of an office complex, the first building of which
is an approximately 500,000 square-foot customer service training center that
was recently completed. In Everett (Snohomish County), Boeing completed
construction of a 5.6 million square-foot assembly plant for the new 777
jetliner. In 1993, Boeing completed a $400 million skin and spar plant and a
composite manufacturing center on 500 acres in Puyallup (Pierce County).
A total of 206 commercial jet transports were delivered in 1995, compared with
270 for 1994. Defense and space sales of $5.6 billion were approximately 10%
higher than in 1994. The 10-week strike by the International Association of
Machinist and Aerospace Workers (IAM) resulted in the delay of approximately 30
commercial jet transport deliveries during the fourth quarter of 1995. During
the first quarter of 1996, deliveries for all models were limited by the
recovery from the strike. A total of 40 commercial jet transports were
delivered, compared with 59 in the first quarter of 1995. In the second quarter
of 1996, deliveries of commercial aircraft, including sales of certain aircraft
previously on operating lease, totaled 62.
TECHNOLOGY-RELATED INDUSTRIES. The State ranks fourth among all states in the
percentage of its work force employed by technology-related industries. It
ranks third among the largest software development centers. The State is the
home of approximately 1000 advanced technology firms of which approximately 50%
are computer-related. Microsoft, headquartered in Redmond, Washington, is the
largest microcomputer software company in the world. In addition, several
biotechnical firms located in the State have attained international acclaim for
their research and development.
TIMBER. Natural forests cover more than 40% of the State's land area and forest
products rank second behind aerospace in terms of total production. The primary
employer in the timber industry is The Weyerhaeuser Company. Productivity in
the State's forest products industry increased steadily from 1980 to 1990.
However, since 1991, recessionary influences have resulted in a production
decline. A slight decline is anticipated for the next few years, due to
federally-imposed limitations on the
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harvest of old-growth timber and the inability to maintain the previous record
levels of production increases. Although a continued decline in employment is
anticipated in certain regions, the impact is not expected to affect
materially the State's overall economic performance.
AGRICULTURE AND FOOD PROCESSING. Agriculture and food processing is the State's
most important industry by most measures. Growth in agricultural products was
an integral factor in the State's economic growth in the late 1980s and early
1990s.
FINANCE, INSURANCE AND REAL ESTATE. Employment in finance, insurance and real
estate is estimated to represent 5.2% of the State's wage and salary employment
in 1995. Projections for 1996 show this segment declined slightly to 5.1% of
employment.
TRADE. International trade plays an important role in the State's employment
base and one in six jobs is related to this sector. During the past twenty
years the State has consistently ranked number one or number two in
international exports per capita. Seattle-Tacoma International Airport is the
focus of the region's air traffic and trade. The State, particularly the Puget
Sound Corridor, is a trade center for the Northwest and the State of Alaska. A
system of public ports, the largest of which are the Ports of Seattle and
Tacoma, handle waterborne trade primarily to and from the Far East. These two
Ports each rank among the top 20 ports in the world based on volume of
containerized cargo shipped; on a combined basis they are the second largest
load center for containerized cargo in the United States. Approximately 70% of
the cargo entering the Ports of Seattle and Tacoma has an ultimate destination
outside the Pacific Northwest. Therefore, trade levels depend largely on
national and world, rather than local, economic conditions.
Growth in retail sales in the State between 1990 and 1992 was higher than that
in the United States. During 1993 through 1995, the rate of growth for retail
sales was lower for the State than for the United States. The State is home to
a number of specialty retail companies that have reached national stature,
including Nordstrom, Eddie Bauer, Costco and Recreational Equipment Inc. (REI).
SERVICES/TOURISM. The highest employment growth in the State since 1981 has
taken place in the services sector, although rate of growth has shown small but
relatively consistent decline since 1990 from 7% to 4.3%forecast for 1995 and
3.4% forecast for 1996. Seattle is the location for the Washington State
Convention and Trade Center which opened in June 1988. The State also has many
tourist attractions such as the Olympic and Cascade mountain ranges, ocean
beaches and local wineries.
CONSTRUCTION. Employment in the construction sector in the Puget Sound area
increased 69.2% between 1981 and 1991. The increase in employment in the late
1980s was due in part to the relative affordability of housing compared to other
areas of the country. Construction employment growth flattened between 1991 and
1993, but showed a modest increase in 1994 and leveled again in 1995.
Commercial building, while not increasing at the pace of the 1980s, remains
stable.
FEDERAL, STATE AND LOCAL GOVERNMENT. Employment in the government sector
represents approximately 19% of all wage and salary employment in the State on a
combined basis. Seattle is the regional headquarters for a number of federal
government agencies and the State receives an above-average share of defense
expenditures. Employment in the government sector has expanded in the State
since 1990, but at a declining rate. State and local government employment has
increased at a faster pace than employment by the federal government, and is
projected to add new jobs through 1996.
LITIGATION
At any given time, including the present, there are numerous lawsuits pending
against the State of Washington which could affect the State's revenues and
expenditures. However, none of the lawsuits are expected to have a material
adverse impact on either State revenues or expenditures.
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ADDITIONAL TAX INFORMATION
The tax-exempt interest portion of each daily dividend will be based upon the
ratio of a Fund's tax-exempt to taxable income for the entire fiscal year
(average annual method). As a result, the percentage of tax-exempt income for
any particular distribution may be substantially different from the percentage
of a Fund's income that was tax-exempt during the period covered by that
distribution. Each Fund will advise its shareholders of this ratio within 60
days after the close of its fiscal year.
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of a Fund is not deductible. In addition, entities or persons who
are "substantial users" (or related persons) of facilities financed by most
"private activity" bonds should consult their tax advisers before purchasing
shares of any of the Funds. "Substantial user" is generally defined to include
a "non-exempt person" who regularly uses in a trade or business a part of a
facility financed from the proceeds of most "private activity" bonds.
Each Fund may invest in municipal bonds that are purchased, generally not on
their original issue, with market discount (that is, at a price less than the
principal amount of the bond or, in the case of a bond that was issued with
original issue discount, at a price less than the amount of the issue price plus
accrued original issue discount) ("municipal market discount bonds"). Gain on
the disposition of a municipal market discount bond (other than a bond with a
fixed maturity date within one year from its issuance), generally is treated as
ordinary (taxable) income, rather than capital gain, to the extent of the bond's
accrued market discount at the time of disposition. Market discount on such a
bond generally is accrued ratably, on a daily basis, over the period from the
acquisition date to the date of maturity. In lieu of treating the disposition
gain as above, a Fund may elect to include market discount in its gross income
currently, for each taxable year to which it is attributable.
Each Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year substantially all of its
ordinary income for that year and capital gain net income for the one-year
period ending on December 31 (by election) of that year, plus certain other
amounts.
No portion of the dividends or other distributions paid by any Fund is eligible
for the dividends-received deduction allowed to corporations.
In the future, proposals may be introduced before Congress for the purpose of
further restricting or even eliminating the federal income tax exemption for
interest on all or certain types of municipal obligations. If such a proposal
were enacted, the availability of municipal obligations for investment by each
Fund and the value of each Fund's portfolio would be affected. In such event,
each Fund would review its investment objectives and policies.
CALIFORNIA STATE AND LOCAL TAX MATTERS
Individual shareholders of each Fund who are subject to California personal
income taxation will not be required to include in their California gross
income that portion of their federally tax-exempt 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, provided that at least 50 percent of the value of the Fund's
total assets consists of obligations the interest on which is exempt from
California personal income taxation. Distributions to individual
shareholders derived from interest on municipal obligations issued by
governmental authorities in states other than California, short-term capital
gains and other taxable income will be taxed as dividends for purposes of
California personal income taxation. Each Fund's long-term capital gains 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 exhange 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 a Fund 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 the 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 distibuted to the 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 advisers for more detailed information
concerning California tax matters.
ADDITIONAL INFORMATION ON CALCULATION OF NET ASSET VALUE PER SHARE
Each Fund determines its net asset value per share ("NAV") by subtracting its
liabilities (including accrued expenses and dividends payable) from its total
assets (the market value of the securities the Fund holds plus cash or 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
shares of each Fund is calculated as of the close of regular trading on the
New York Stock Exchange ("Exchange") every day the Exchange is open for trading
and at such other times or on such other days as there is sufficient trading.
The Exchange is closed on the following days: New Year's Day, President's Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day. NAV is determined separately for each class of shares of each
Fund.
Short-term debt securities held in a Fund's portfolio having a remaining
maturity of less than 60 days when purchased and securities originally purchased
with maturities in excess of 60 days, but which currently have maturities of 60
days or less, may be valued at cost adjusted for amortization of
-16-
<PAGE>
premiums or accrual of discounts if in the judgment of the Board of Trustees
such methods of valuation are appropriate or under such other methods as the
Board of Trustees may from time to time deem to be appropriate. The cost of
those securities that had original maturities in excess of 60 days shall be
determined by their fair market value up 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.
ADDITIONAL PERFORMANCE INFORMATION
The yield and tax-equivalent yield for the 30-day period ending
December 31, 1996 at the maximum federal tax rate of 39.6% for the Municipal,
Intermediate, Insured and Washington Funds are 5.03% and 8.33%; 4.00% and
6.62%; 4.65% and 7.7%; and 4.58% and 7.58%, respectively, and at the
maximum combined federal and California tax rates of 46.2% for the California
Fund, are 4.96% and 9.22%, respectively.
Yield is computed using the following formula:
a-b
Yield = 2[( ---- +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
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
The total returns for the Municipal Fund for the one-year, five-year and
ten-year periods ending December 31, 1996 are 3.18%, 40.90% and 114.70%,
respectively.
The average annual total returns for the Municipal Fund for the one-year,
five-year and ten-year periods ending December 31, 1996 are 3.18%, 7.10% and
7.94%, respectively.
The total returns for the California Fund for the one-year, five-year and ten
year periods ending December 31, 1996 are 2.53%, 43.61% and 109.86%,
respectively.
The average annual total returns for the California Fund for the one-year,
five-year and ten year periods ending December 31, 1996 are 2.53%, 7.51% and
7.69%, respectively.
The total returns for the Intermediate, Insured and Washington Funds for the one
year period ended December 31, 1996 and the period from inception to such date
are 3.75% and 20.93; 2.56% and 22.99%; and 3.04% and 21.74%,
respectively.
-17-
<PAGE>
The average annual total returns for the Intermediate, Insured and Washington
Funds for the one year period ended December 31, 1996 and the period from
inception to such date are 3.75% and 5.14%; 2.56% and 5.61%; and 3.04%
and 5.33%, respectively.
The total return is computed using the following formula:
ERV-P
T = ----- x 100
P
Where: T = total return
ERV = ending redeemable value of a hypothetical $1,000
investment at the end of a specified period of
time
P = a hypothetical initial investment of $1,000
The average annual total return is computed using the following formula:
[A equals (the nth root of ((E multiplied by
R multiplied by V) divided by P) minus 1] times 100
Where: T = total return
A = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
investment at the end of a specified period of
time
P = a hypothetical initial investment of $1,000
In making the above calculation all dividends and capital gain distributions are
assumed to be reinvested at the Fund's NAV on the reinvestment date.
Each Fund may advertise its ranking as calculated by independent rating services
which monitor mutual funds' performance (e.g., CDA Investment Technologies,
Lipper Analytical Services, Inc. and Morningstar, Inc.). These rankings may be
among mutual funds with similar objectives and/or size or with mutual funds in
general and may be based on relative performance during periods deemed by the
rating services to be representative of up and down markets.
The Funds may upon occasion reproduce articles or portions of articles about the
Funds written by independent third parties such as financial writers, financial
planners and financial analysts, and appearing in financial publications of
general circulation or financial newsletters (including but not limited to
BARRONS, BUSINESS WEEK, FORBES, FORTUNE, INVESTOR'S BUSINESS DAILY, KIPLINGER'S,
MONEY MAGAZINE, NEWSWEEK, PENSIONS & INVESTMENTS, TIME MAGAZINE, U.S. NEWS AND
WORLD REPORT and THE WALL STREET JOURNAL).
-18-
<PAGE>
Each Fund may present in its advertisements and sales literature (i) a biography
or the credentials of its portfolio manager (including but not limited to
educational degrees, professional designations, work experience, work
responsibilities and outside interests); (ii) current facts (including but not
limited to number of employees, number of shareholders, business
characteristics) about its investment adviser (SAM) the investment adviser's
parent company (SAFECO Corporation) 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.
Performance information and quoted ratings are indicative only of past
performance and are not intended to represent future investment results.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation(s)
Name, Address and Age With the Trust During Past 5 Years
- --------------------- -------------- --------------------
<S> <C> <C>
Boh A. Dickey* Chairman President, Chief Operating Officer and
SAFECO Plaza and Trustee Director of SAFECO Corporation. He has
Seattle, Washington 98185 been an executive officer of SAFECO
(52) Corporation and its subsidiaries since 1982.
See table under "Investment Advisory and
Other Services."
Barbara J. Dingfield Trustee Manager, Corporate Contributions and
Microsoft Corporation Community Programs for Microsoft
One Microsoft Way Corporation, Redmond, Washington, a
Redmond, Washington 98052 computer software company; Director and
(51) former Executive Vice President, Wright,
Runstad & Co., Seattle, Washington, a real
estate development company; Director of First
SAFECO National Life Insurance Company of
New York.
Richard W. Hubbard* Trustee Retired Vice President and Treasurer of the
1270 NW Blakely Ct. Trust and other SAFECO Trusts; retired Senior
Seattle, Washington 98177 Vice President and Treasurer of SAFECO
(68) Corporation; former President of SAFECO
Asset Management Company.
Richard E. Lundgren Trustee Director of Marketing and Customer
764 S. 293rd Street Relations, Building Materials Distribution,
Federal Way, Washington 98032 Weyerhaeuser Company, Tacoma,
(59) Washington; Director of First SAFECO
National Life Insurance Company of New York.
Larry L. Pinnt Trustee Retired Vice President and Chief Financial
1600 Bell Plaza Officer, U.S. WEST Communications, Seattle,
Room 1802 Washington; Director of Key Bank of
Seattle, Washington 98191 Washington, Seattle, Washington; Director of
(61) University of Washington Medical Center,
Seattle, Washington; Director of Cascade
Natural Gas Corporation, Seattle, Washington;
Director of First SAFECO National Life
Insurance Company of New York.
-19-
<PAGE>
John W. Schneider Trustee President of Wallingford Group, Inc., an
1808 N 41st Street international trading and business/real estate
Seattle, Washington 98103 development consulting firm, Seattle,
(55) Washington; former President of Coast
Hotels, Inc.; Director of First SAFECO
National Life Insurance Company of New
York.
David F. Hill President President of SAFECO Securities, Inc. and
SAFECO Plaza and Trustee SAFECO Services Corporation and Senior
Seattle, Washington 98185 Vice President of SAFECO Asset
(48) Management Company. See table under
"Investment Advisory and Other Services."
Neal A. Fuller Vice President Vice President, Controller, Treasurer and
SAFECO Plaza Controller Assistant Secretary of SAFECO Securities, Inc.
Seattle, Washington Assistant and SAFECO Services Corporation; Vice
98185 Secretary President, Controller, Secretary and Treasurer
(34) of SAFECO Asset Management Company; See
table under "Investment Advisory and Other
Services."
Ronald L. Spaulding Vice President Chairman of SAFECO Asset Management
SAFECO Plaza Treasurer Company; Vice President and Treasurer of
Seattle, Washington 98185 SAFECO Corporation; Vice President of
(53) SAFECO Life Insurance Company; former
Senior Portfolio Manager of SAFECO
Insurance Companies; former Portfolio
Manager for several SAFECO mutual funds.
See table under "Investment Advisory and
Other Services."
</TABLE>
* Trustees who are interested persons as defined by the Investment Company Act
of 1940.
-20-
<PAGE>
COMPENSATION TABLE
FOR THE FISCAL PERIOD ENDED
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits From Registrant
Aggregate Accrued As Part Estimated and Fund
Compensation of Fund Annual Benefits Complex Paid to
Trustee from Registrant Expenses Upon Retirement Trustees
- ------- --------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
Boh A. Dickey N/A N/A N/A N/A
Barbara J.
Dingfield $4,683 N/A N/A $23,750
Richard E.
Lundgren $4,683 N/A N/A $23,750
Larry L. Pinnt $4,683 N/A N/A $23,750
John W.
Schneider $4,683 N/A N/A $23,750
Richard W.
Hubbard $4,683 N/A N/A $22,000
David F. Hill* N/A N/A N/A N/A
</TABLE>
*First elected to the Board of Trustees in August,1996.
For the fiscal year ended March 31, 1996, Barbara J. Dingfield, Richard E.
Lundgren, Larry L. Pinnt, John W. Schneider and Richard W. Hubbard each received
$4,547 aggregate compensation from Registrant and (except for Mr. Hubbard)
$24,813 total compensation from Registrant and Fund complex paid to Trustees;
Mr. Hubbard received $23,000 total compensation from Registrant and Fund complex
paid to Trustees. Mr. Dickey and Mr. Hill are officers of various SAFECO
companies and are not compensated by the Trusts. Similarly, the officers of
the SAFECO Trusts receive no compensation for their service as officers.
Currently, there is no pension, retirement, or other plan or any arrangement
pursuant to which Trustees or officers of the Trust are compensated by the
Trust. Each Trustee also serves as trustee for five other registered
open-end, management investment companies that have, in the aggregate, twenty
series companies managed by SAM.
At April 2, 1997, the Trustees and officers of the Trust as a group owned less
than 1% of the outstanding shares of each Fund.
-21-
<PAGE>
PRINCIPAL SHAREHOLDERS
As of April 2, 1997 SAFECO Insurance Company of America ("SAFECO"), a
Washington corporation, SAFECO Plaza, Seattle, Washington 98185, owned 30%,
45% and 74% of the outstanding shares of the Intermediate, Insured and
Washington Funds, respectively. SAFECO is a wholly-owned subsidiary of SAFECO
Corporation, a Washington corporation, having its principal place of business at
SAFECO Plaza, Seattle, Washington 98185.
INVESTMENT ADVISORY AND OTHER SERVICES
SAM, SAFECO Securities, Inc. ("SAFECO Securities") and SAFECO Services
Corporation ("SAFECO Services") are wholly-owned subsidiaries of SAFECO
Corporation. SAFECO Securities is the principal underwriter of each Fund and
SAFECO Services is the transfer, dividend and distribution disbursement and
shareholder servicing agent of each Fund.
The following individuals have the following positions and offices with the
Trust, SAM, SAFECO Securities and SAFECO Services:
<TABLE>
<CAPTION>
SAFECO SAFECO
Name Trust SAM Securities Services
- ---- ----- --- ---------- --------
<S> <C> <C> <C> <C>
B. A. Dickey Chairman Director Director
Trustee
D. F. Hill President Senior President President
Trustee Vice Director Secretary
President Secretary Director
Director
N.A. Fuller Vice Vice Vice Vice President
President President President Controller
Controller Controller Controller Assistant
Assistant Secretary Assistant Secretary
Secretary Treasurer Secretary Treasurer
Treasurer
R.L. Spaulding Vice President Chairman Director Director
Treasurer Director
S.C. Bauer President
Director
D.H. Longhurst Assistant Assistant Assistant
Controller Controller Controller
</TABLE>
Mr. Dickey is Chief Financial Officer, Executive Vice President and a director
of SAFECO Corporation and Mr. Spaulding is Treasurer and a Vice President of
SAFECO Corporation. Messrs. Dickey and Spaulding are also directors of several
other SAFECO Corporation subsidiaries.
In connection with its investment advisory contract with the Trust, SAM
furnishes or pays for all facilities and services furnished or performed for or
on behalf of the Trust and each Fund, which includes furnishing office
facilities, books, records and personnel to manage the Trust's and each Fund's
affairs and paying certain expenses.
-22-
<PAGE>
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:
NET ASSETS FEE
INTERMEDIATE FUND
$0 - $250,000,000 .55 of 1%
$250,000,001 - $500,000,000 .45 of 1%
$500,000,001 - $750,000,000 .35 of 1%
Over $750,000,000 .25 of 1%
INSURED AND WASHINGTON FUNDS
$0 - $250,000,000 .65 of 1%
$250,000,001 - $500,000,000 .55 of 1%
$500,000,001 - $750,000,000 .45 of 1%
Over $750,000,000 .35 of 1%
MUNICIPAL AND CALIFORNIA FUNDS
$0 - $100,000,000 .55 of 1%
$100,000,001 - $250,000,000 .45 of 1%
$250,000,001 - $500,000,000 .35 of 1%
Over $500,000,000 .25 of 1%
Each Fund bears all expenses of its operations not specifically assumed by SAM.
The following states the total amounts of compensation paid to SAM for the
fiscal period ended December 31, 1996 and the past three fiscal years for each
Fund:
<TABLE>
<CAPTION>
Nine Month Years Ended
Period Ended
December 31, 1996 March 31, 1996 March 31, 1995 March 31, 1994
----------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Municipal Fund $1,533,000 $2,021,000 $2,011,000 $2,249,000
California Fund $ 290,000 $ 366,000 $ 364,000 $ 456,000
Intermediate
Fund $ 60,000 $ 78,000 $ 67,000 $ 37,000
Insured Fund $ 60,000 $ 57,000 $ 38,000 $ 22,000
Washington Fund $ 32,000 $ 39,000 $ 31,000 $ 18,000
</TABLE>
CUSTODIAN. State Street Bank and Trust, 1776 Heritage Drive, North Quincy, MA
02170, is the custodian of the securities, cash and other assets of each Fund
under an agreement with the Trust.
INDEPENDENT AUDITOR. Ernst & Young LLP, 999 Third Avenue, Suite 3500, Seattle,
Washington 98104, is the independent auditor of each Fund's financial
statements.
-23-
<PAGE>
TRANSFER AGENT. SAFECO Services, SAFECO Plaza, Seattle, Washington 98185, is
the transfer, dividend and distributiondisbursement and shareholder servicing
agent for the No-Load Class of each Fund under an agreement with the Trust.
SAFECO Services provides, or through subcontracts makes provision for, all
required transfer agent activity, including maintenance of records of each
Fund's No-Load Class shareholders, records of transactions involving each Fund's
No-Load Class shares, and the compilation, distribution, or reinvestment of
income dividends or capital gains distributions. SAFECO Services is paid a fee
for these services equal to $32.00 per shareholder account, but not to exceed
.30% of each Fund's average net assets. The following table shows the fees paid
by each Fund to SAFECO Services for the fiscal period ended December 31, 1996
and during the past three fiscal years:
<TABLE>
<CAPTION>
Nine Month
Period Ended Years Ended
December 31, 1996* March 31, 1996* March 31, 1995* March 31, 1994*
------------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Municipal Fund $ 300,000 $ 511,000 $ 532,000 $558,000
California Fund $ 48,000 $ 69,000 $ 69,000 $ 67,000
Intermediate Fund $ 10,000 $ 17,000 $ 17,000 $ 11,000
Insured Fund $ 9,000 $ 9,000 $ 5,000 $ 4,000
Washington Fund $ 2,000 $ 3,000 $ 3,000 $ 3,000
</TABLE>
*Figures reflect fees of $3.10 per shareholder transaction until July 1996
when the new fee schedule went into effect.
SAFECO Securities is the principal underwriter for the No-Load Class of each
Fund and distributes each Fund's No-Load Class shares on a continuous best
efforts basis under an agreement with the Trust. SAFECO Securities is not
compensated by the Trust or the Funds for underwriting, distribution or other
activities in connection with the No-Load Class shares.
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 exchanges 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 are used in advising all accounts, including accounts advised
by related persons of SAM,
-24-
<PAGE>
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 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.
REDEMPTION IN KIND
If the Trust concludes that cash payment upon redemption to a shareholder of a
Fund would be prejudicial to the best interest of the other shareholders of a
Fund, a portion of the payment may be made in kind. The Trust has elected to be
governed by Rule 18(f)(1) under the Investment Company Act of 1940, pursuant to
which the Trust must redeem shares tendered by a shareholder of a Fund solely in
cash up to the lesser of $250,000 or 1% of the net asset value of a Fund during
any 90-day period. Any shares tendered by the shareholder in excess of the
above-mentioned limit may be redeemed through distribution of a Fund's assets.
Any securities or other property so distributed in kind shall be valued by the
same method as is used in computing NAV. Distributions in kind will be made in
readily marketable securities, unless the investor elects otherwise. Investors
may incur brokerage costs in disposing of securities received in such a
distribution in kind.
FINANCIAL STATEMENTS
The following financial statements and the report thereon of Ernst & Young LLP,
independent auditors, are incorporated herein by reference to the Trust's Annual
Report for the period ended December 31, 1996:
Portfolio of Investments as of December 31, 1996
Statement of Assets and Liabilities as of December 31, 1996
Statement of Operations for the Period Ended December 31, 1996
Statement of Changes in Net Assets for the Nine-Month Period Ended
December 31, 1996 and the Year Ended March 31, 1996
Notes to Financial Statements
A copy of the Trust's Annual Report accompanies this Statement of Additional
Information. Additional copies may be obtained by calling SAFECO Services at
1-800-426-6730 nationwide or 1-206-545-5530 in Seattle or by writing to the
address on the Prospectus cover.
DESCRIPTION OF RATINGS
Ratings by Moody's and S&P represent opinions of those organizations as to the
investment quality of the rated obligations. Investors should realize these
ratings do not constitute a guarantee that the principal and interest payable
under these obligations will be paid when due.
DESCRIPTION OF BOND RATINGS
MOODY'S
Investment Grade :
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
-25-
<PAGE>
of such issues.
AA -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA -- Bonds which are rated Baa are considered medium-grade obligations(i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Below Investment Grade:
BA -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds of this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA -- Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest-rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
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.
-26-
<PAGE>
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
Below Investment Grade :
BB, B, CCC, CC, C -- Debt rated BB, B, CCC, CC, and C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation
and C the highest. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
exposures to adverse conditions.
C1 -- The rating C1 is reserved for income bonds on which no interest is being
paid.
D -- Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
PLUS (+) OR MINUS (-): The ratings may be modified from AA to CCC by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF RATINGS FOR SHORT-TERM OBLIGATIONS
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 refinancingis likely to be less well established.
Commercial Paper. Issuers rated PRIME-1 have a superior ability and issuers
rated PRIME-2 have a strong ability for repayment of senior short-term
debt obligations.
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.
-27-
<PAGE>
Commercial Paper. Issues rated A-1 are the highest quality obligations and
the degree of safety regarding timely payment is strong. Capacity for timely
payment on issues designated A-2 is satisfactory.
-28-
<PAGE>
PROSPECTUS
- --------------------------------------------------------------------------------
SAFECO GROWTH FUND
SAFECO EQUITY FUND
SAFECO INCOME FUND
SAFECO NORTHWEST FUND
SAFECO INTERNATIONAL STOCK FUND
SAFECO BALANCED FUND
SAFECO SMALL COMPANY STOCK FUND
SAFECO U.S. VALUE FUND
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
SAFECO HIGH-YIELD BOND FUND
SAFECO MANAGED BOND FUND
SAFECO MUNICIPAL BOND FUND
SAFECO CALIFORNIA TAX-FREE INCOME FUND
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
SAFECO MONEY MARKET FUND
Advisor Class A
Advisor Class B April 30, 1997
- --------------------------------------------------------------------------------
Each fund named above ("Fund") is a series of one of the following trusts (each
a "Trust"): the SAFECO Common Stock Trust ("Common Stock Trust"), the SAFECO
Taxable Bond Trust ("Taxable Bond Trust"), the SAFECO Managed Bond Trust
("Managed Bond Trust"), the SAFECO Tax-Exempt Bond Trust ("Tax-Exempt Bond
Trust") or the SAFECO Money Market Trust ("Money Market Trust"). The investment
objective for each Fund appears on page 2.
This Prospectus sets forth the information a prospective investor should know
before investing. PLEASE READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
Statements of Additional Information relating to the Advisor Class A ("Class A")
and Advisor Class B ("Class B") shares (collectively "Advisor Classes"), dated
April 30, 1997 and incorporated herein by this reference, have been filed with
the Securities and Exchange Commission and are available at no charge upon
request by calling the telephone number listed on this page. The Statements of
Additional Information and other information about the Funds are also available
on the Securities and Exchange Commission Website (http://www.sec.gov). The
Statements of Additional Information contain more information about many of the
topics in this Prospectus as well as information about the trustees and officers
of the Trusts.
For additional assistance, please contact your investment professional, or call
or write:
<TABLE>
<S> <C>
NATIONWIDE 1-800-463-8791 SAFECO MUTUAL FUNDS
ADVISOR CLASS SHARES
P.O. BOX 34680
SEATTLE, WA 98124-1868
</TABLE>
All telephone calls are tape-recorded for your protection.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
THE U.S. GOVERNMENT OR ANY BANK, NOR ARE FUND SHARES FEDERALLY INSURED OR
OTHERWISE PROTECTED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY, AND FUND SHARES ARE SUBJECT TO INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. THERE CAN BE NO
ASSURANCE THAT THE SAFECO MONEY MARKET FUND WILL MAINTAIN A STABLE $1.00 SHARE
PRICE.
THE SAFECO CALIFORNIA TAX-FREE INCOME FUND IS OFFERED FOR SALE ONLY TO RESIDENTS
OF THE STATE OF CALIFORNIA. THE SAFECO WASHINGTON STATE MUNICIPAL BOND FUND IS
OFFERED FOR SALE ONLY TO RESIDENTS OF THE STATE OF WASHINGTON. THESE FUNDS ARE
NOT PERMITTED TO OFFER OR SELL SHARES TO RESIDENTS OF OTHER STATES.
- --------------------------------------------------------------------------------
-- 1 --
<PAGE>
SAFECO GROWTH FUND ("Growth Fund") has as its investment objective to seek
growth of capital and the increased income that ordinarily follows from such
growth. The Growth Fund ordinarily invests a preponderance of its assets in
common stock selected primarily for potential appreciation.
SAFECO EQUITY FUND ("Equity Fund") has as its investment objective to seek
long-term growth of capital and reasonable current income. The Equity Fund
invests principally in common stock selected for appreciation and/or dividend
potential and from a long-range investment standpoint.
SAFECO INCOME FUND ("Income Fund") has as its investment objective to seek high
current income and, when consistent with its objective, the long-term growth of
capital. The Income Fund invests primarily in common and preferred stock and in
convertible bonds selected for dividend potential.
SAFECO NORTHWEST FUND ("Northwest Fund") has as its investment objective to seek
long-term growth of capital through investing primarily in Northwest companies.
To pursue its objective, the Fund will invest at least 65% of its total assets
in securities issued by companies with their principal executive offices located
in Alaska, Idaho, Montana, Oregon or Washington ("Northwest").
SAFECO INTERNATIONAL STOCK FUND ("International Fund") has as its investment
objective to seek maximum long-term total return (capital appreciation and
income) by investing primarily in common stock of established non-U.S.
companies. To pursue its objective, the International Fund, under normal market
conditions, will invest at least 65% of its total assets in the securities of
companies domiciled in at least five countries, not including the United States.
SAFECO BALANCED FUND ("Balanced Fund") has as its investment objective to seek
growth and income consistent with the preservation of capital. To pursue its
objective, the Balanced Fund will invest primarily in equity and fixed income
securities.
SAFECO SMALL COMPANY STOCK FUND ("Small Company Fund") has as its investment
objective to seek long-term growth of capital through investing primarily in
small-sized companies. To pursue its objective, the Small Company Fund will
invest primarily in companies with total market capitalization of less than $1
billion.
SAFECO U.S. VALUE FUND ("Value Fund") has as its investment objective to seek
long-term growth of capital and income. To pursue its objective, the Value Fund
will primarily invest in common stocks selected for potential appreciation and
income using fundamental value analysis.
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND ("Intermediate Treasury Fund") has
as its investment objective to provide as high a level of current income as is
consistent with the preservation of capital. During normal market conditions,
the Fund will invest at least 65% of its total assets in direct obligations of
the U.S. Treasury.
SAFECO HIGH-YIELD BOND FUND ("High-Yield Fund") has as its investment objective
to provide a high level of current interest income through the purchase of
high-yield, fixed-income securities. During normal market conditions, the Fund
will invest at least 65% of its total assets in high-yield, fixed income
securities.
SAFECO MANAGED BOND FUND ("Managed Bond Fund") has as its investment objective
to provide as high a level of total return as is consistent with the relative
stability of capital through the purchase of investment grade debt securities.
SAFECO MUNICIPAL BOND FUND ("Municipal Bond Fund") has as its investment
objective to provide as high a level of current interest income exempt from
federal income tax as is consistent with the relative stability of capital.
SAFECO CALIFORNIA TAX-FREE INCOME FUND ("California Fund") has as its investment
objective to provide as high a level of current interest income exempt from
federal income tax and California State personal income tax as is consistent
with the relative stability of capital.
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND ("Washington Fund") has as its
investment objective to provide as high a level of current interest income
exempt from federal income tax as is consistent with prudent investment risk.
SAFECO MONEY MARKET FUND ("Money Market Fund") has as its investment objective
to seek as high a level of current income as is consistent with the preservation
of capital and liquidity through investment in high-quality money market
instruments maturing in thirteen months or less.
There is no assurance that a Fund will achieve its investment objective.
-- 2 --
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Introduction to the Trusts and the Funds 4
Expenses 6
Financial Highlights 10
Adviser's Institutional Private Account Performance 24
Sub-Adviser's Institutional Private Account Performance 25
Alternative Purchase Arrangement 26
Each Fund's Investment Objective and Policies 27
Risk Factors 47
Portfolio Managers 51
How to Purchase Shares 53
How to Redeem Shares 59
How to Systematically Purchase or Redeem Shares 60
How to Exchange Shares From One Fund to Another 61
Telephone Transactions 62
Share Price Calculation 63
Information About Share Ownership and Companies that Provide Services to the Trusts 64
Distribution Plans 68
Persons Controlling Certain Funds 69
Performance Information 69
Fund Distributions and How They are Taxed 70
Tax-Deferred Retirement Plans 72
Account Statements 73
Account Changes and Signature Requirements 73
Description of Stocks, Bonds and Convertible Securities 74
Ratings Supplement 74
Debt Securities Holdings 76
</TABLE>
-- 3 --
<PAGE>
INTRODUCTION TO THE TRUSTS AND THE FUNDS
Each Trust is an open-end management investment company that issues shares
representing one or more series. This Prospectus offers shares of the stock,
taxable fixed-income, tax-exempt income and money market Funds listed below. The
stock Funds offered are the Growth Fund, the Equity Fund, the Income Fund, the
Northwest Fund, the Balanced Fund, the International Fund, the Small Company
Fund, and Value Fund (collectively, the "Stock Funds"). Each Stock Fund is a
diversified series of the Common Stock Trust.
The taxable fixed-income Funds offered are the Intermediate Treasury Fund, the
High-Yield Fund and the Managed Bond Fund (collectively, the "Taxable
Fixed-Income Funds"). The Intermediate Treasury Fund and the High-Yield Fund are
diversified series of the Taxable Bond Trust. The Managed Bond Fund is a
diversified series of the Managed Bond Trust. Prior to September 30, 1996, the
name of the Managed Bond Fund was the SAFECO Fixed-Income Portfolio and the name
of the Managed Bond Trust was the SAFECO Institutional Series Trust.
The tax-exempt income Funds offered are the Municipal Bond Fund, the California
Fund and the Washington Fund (collectively, the "Tax-Exempt Income Funds"). Each
of the Tax-Exempt Income Funds is a diversified series of the Tax-Exempt Bond
Trust.
This Prospectus also offers the Money Market Fund, which is a diversified series
of the Money Market Trust.
THE FUNDS
Each Fund offers multiple classes of shares. The Advisor Classes of shares are
offered to investors who engage the services of an investment professional. For
each Fund (except the Money Market Fund), Class A shares are subject to a
front-end sales charge and pay a Rule 12b-1 fee. Class B shares are not subject
to a front-end sales charge, but may be subject to a contingent deferred sales
charge ("CDSC") and pay a higher Rule 12b-1 fee.
For the Money Market Fund, Class A shares are sold at net asset value with no
front-end sales charge. A front-end sales charge may apply when you exchange
your Class A Money Market Fund shares for Class A shares of other Funds. Money
Market Fund Class B Shares are sold at net asset value and are not subject to a
CDSC upon redemption, provided that the shareholder has remained solely invested
in Money Market Fund Class B shares. A CDSC may apply upon redemption of Money
Market Fund Class B shares that have been exchanged at any time during the
investor's ownership for Class B shares of other Funds. Money Market Fund Class
A and Class B shares do not currently pay Rule 12b-1 fees.
Each Fund:
/ / Offers easy access to your money through telephone redemptions and wire
transfers.
/ / Has a minimum initial investment of $1,000 for regular accounts, $250 for
individual retirement accounts ("IRAs") and accounts established under the
Uniform Gift to Minors Act ("UGMA") or Uniform Transfer to Minors Act
("UTMA"). No minimum initial investment is required to establish the
Automatic Investment Method ("AIM") or Payroll Deduction Plan.
RISK FACTORS
There is, of course, no assurance that a Fund will achieve its investment
objective. See "Each Fund's Investment Objective and Policies" for more
information.
There is a risk that the market value of each Fund's portfolio of securities may
decrease and result in a decrease in the value of a shareholder's investment.
Because the Northwest, California and Washington Funds concentrate their
investments in geographic regions, they may be subject to special
-- 4 --
<PAGE>
INTRODUCTION TO THE TRUSTS AND THE FUNDS (CONTINUED)
risks. Investors should carefully consider the investment risks of such
geographic concentration before purchasing shares of those Funds. Because the
International Fund invests primarily in foreign securities, it is subject to
various risks in addition to those associated with U.S. investments. For
example, the value of the International Fund depends in part upon currency
values, the political and regulatory environments, and overall economic factors
in the countries in which the Fund invests. The Small Company Fund invests in
small-sized companies, which involve greater risks than investments in larger,
more established issuers and their securities can be subject to more abrupt and
erratic movements in price. The value of the Intermediate Treasury Fund,
High-Yield Fund, Managed Bond Fund, Municipal Bond Fund, California Fund and
Washington Fund will normally fluctuate inversely with changes in market
interest rates. The High-Yield Fund is subject to special risks associated with
below investment grade securities, sometimes referred to as "junk bonds," which
it will purchase to pursue its investment objective. The principal risk
associated with money market funds is that they may experience a delay or
failure in principal or interest payments at maturity of one or more of the
portfolio securities. The Money Market Fund's yield will fluctuate with general
money market interest rates. See "Each Fund's Investment Objective and Policies"
and "Risk Factors" for more information.
INVESTMENT ADVISER; SUB-ADVISER OF INTERNATIONAL FUND
Each Fund is managed by SAFECO Asset Management Company ("SAM"). SAM is
headquartered in Seattle, Washington and managed over $2.5 billion in mutual
fund assets as of December 31, 1996. SAM has been an adviser to mutual funds and
other investment portfolios since 1973, and its predecessors have been advisers
since 1932. The Bank of Ireland Asset Management (U.S.) Limited (the
"Sub-Adviser") acts as a sub-adviser to the International Fund. The Sub-Adviser
is a direct, wholly-owned subsidiary of Bank of Ireland Asset Management Limited
(an investment advisory firm), which is headquartered in Dublin, Ireland, and an
indirect, wholly-owned subsidiary of the Bank of Ireland, which is also
headquartered in Dublin, Ireland. See "Information about Share Ownership and
Companies that Provide Services to the Trusts" for more information.
-- 5 --
<PAGE>
EXPENSES
A. SHAREHOLDER TRANSACTION EXPENSES FOR CLASS A AND CLASS B OF EACH FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
----------- ---------
<S> <C> <C>
Maximum Sales Charge on Purchases 4.50%* NONE
(as a Percentage of Offering Price)
Sales Charge on Reinvested Dividends NONE NONE
Maximum Contingent Deferred Sales Charge (CDSC) NONE* 5.00%**
Redemption Fees NONE NONE
Exchange Fees NONE NONE
</TABLE>
* Except for initial purchases of the Money Market Fund. In addition, purchases
of $1,000,000 or more of Class A shares are not subject to a front-end sales
charge, but a 1% CDSC will apply to redemptions made in the first year. See
"How to Purchase Shares" on page 53 for more information.
** Except for initial purchases of the Money Market Fund. A CDSC may apply to
redemptions from the Money Market Fund that follow exchanges from Class B
shares of another Fund. See "How to Purchase Shares" on page 53 for more
information.
Sales charge waivers and reduced sales charge purchase plans are available for
Class A shares. See "How to Purchase Shares" on page 53 for more information.
The maximum 5% CDSC on Class B shares applies to redemptions during the first
year after purchase, declining to 0% in the first month following the investor's
sixth anniversary from purchase. Class B shares of a Fund convert automatically
into Class A shares of that Fund in the first month following the investor's
sixth anniversary from purchase. Money Market Fund Class B shareholders who
subsequently exchange into Class B of another Fund do not receive credit for the
initial time invested in the Money Market Fund for purposes of calculating any
CDSC due upon redemption or the conversion to Class A Shares. See "Purchasing
Advisor Class B Shares" on page 57 for more information.
SAFECO Services Corporation ("SAFECO Services"), the transfer agent for the
Funds, charges a $10 fee to wire redemption proceeds.
B. ANNUAL OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
GROWTH FUND EQUITY FUND INCOME FUND
----------------- ----------------- -----------------
ADVISOR ADVISOR ADVISOR ADVISOR ADVISOR ADVISOR
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Management Fee .71% .71% .56% .56% .67% .67%
Rule 12b-1 Fees .25% 1.00% .25% 1.00% .25% 1.00%
Other Expenses .16% .16% .16% .19% .11% .12%
------- ------- ------- ------- ------- -------
Total Operating
Expenses (estimated) 1.12% 1.87% .97% 1.75% 1.03% 1.79%
<CAPTION>
INTERNATIONAL
NORTHWEST FUND FUND BALANCED FUND
----------------- ----------------- -----------------
ADVISOR ADVISOR ADVISOR ADVISOR ADVISOR ADVISOR
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Management Fee .75% .75% 1.10% 1.10% .73% .73%
Rule 12b-1 Fees .25% 1.00% .25% 1.00% .25% 1.00%
Other Expenses .40% .43% .06% .07% .37% .38%
------- ------- ------- ------- ------- -------
Total Operating Expenses (estimated) 1.40% 2.18% 1.41%* 2.17%* 1.35%** 2.11%**
</TABLE>
-- 6 --
<PAGE>
EXPENSES (CONTINUED)
<TABLE>
<CAPTION>
SMALL COMPANY INTERMEDIATE
FUND VALUE FUND TREASURY FUND
----------------- ----------------- -----------------
ADVISOR ADVISOR ADVISOR ADVISOR ADVISOR ADVISOR
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Management Fee .83% .83% .75% .75% .54% .55%
Rule 12b-1 Fees .25% 1.00% .25% 1.00% .25% 1.00%
Other Expenses .34% .35% .29% .29% .28% .17%
------- ------- ------- ------- ------- -------
Total Operating Expenses (estimated) 1.42%*** 2.18%*** 1.29% 2.04% 1.07%+ 1.72%+
<CAPTION>
MANAGED BOND
HIGH-YIELD FUND FUND WASHINGTON FUND
----------------- ----------------- -----------------
ADVISOR ADVISOR ADVISOR ADVISOR ADVISOR ADVISOR
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Management Fee .64% .64% .49% .49% .64% .65%
Rule 12b-1 Fees .25% 1.00% .25% 1.00% .25% 1.00%
Other Expenses .26% .26% .56% .58% .42% .41%
------- ------- ------- ------- ------- -------
Total Operating Expenses (estimated) 1.15% 1.90% 1.30% 2.07% 1.31% 2.06%
<CAPTION>
MUNICIPAL BOND MONEY MARKET
FUND CALIFORNIA FUND FUND++
----------------- ----------------- -----------------
ADVISOR ADVISOR ADVISOR ADVISOR ADVISOR ADVISOR
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Management Fee .43% .43% .55% .55% .50% .50%
Rule 12b-1 Fees .25% 1.00% .25% 1.00% .00% .00%
Other Expenses .14% .07% .09% .09% .05% .04%
------- ------- ------- ------- ------- -------
Total Operating Expenses (estimated) .82% 1.50% .89% 1.64% .55% .54%
</TABLE>
* Net of reimbursement by SAM. Absent the reimbursements, the total operating
expenses would have been 1.72% and 2.47% for Class A and Class B of the
International Fund, respectively.
** Net of reimbursement by SAM. Absent the reimbursements, the total operating
expenses would have been 1.70% and 2.46% for Class A and Class B of the
Balanced Fund.
*** Net of reimbursement by SAM. Absent the reimbursements, the total operating
expenses would have been 1.62% and 2.41% for Class A and Class B of the
Small Company Fund.
+ Net of reimbursement by SAM. Absent the reimbursements, the total operating
expenses would have been 1.30% and 1.95% for Class A and Class B of the
Intermediate Treasury Fund.
++ The Money Market Fund does not have a Rule 12b-1 fee at this time.
Shareholders will be notified in advance by a supplement to this Prospectus
in the event that the Money Market Fund establishes a Rule 12b-1 fee under
its Rule 12b-1 Plan.
Effective September 30, 1996, all of the then-existing shares of each Fund were
redesignated as No-Load Class shares and each Fund, except the High-Yield Fund
and the Value Fund, commenced offering Advisor Class A and Class B shares. The
High-Yield Fund commenced offering Class A and Class B shares on January 31,
1997. The Value Fund commenced offering Advisor Class A and Class B shares as of
the date of this Prospectus. The amounts shown above for the Value Fund are
estimated expenses based on the Fund's maximum management fee, applicable Rule
12b-1 fees, and "Other Expenses." The amounts shown for the High-Yield Fund are
annualized expenses based on the actual expenses paid by shareholders of the
Fund's other class for the three-month fiscal period ended December 31, 1996,
restated as applicable to reflect fees borne by Class A or Class B shares. The
amounts shown for the Funds other than the Value and High-Yield Funds are
annualized expenses based on the actual expenses paid by the shareholders of the
Funds' Advisor Classes for the fiscal period ended December 31, 1996. The
management fees paid by the International and Small Company Funds are higher
than the management fees paid by most other investment companies. See
"Information about Share Ownership and Companies that Provide Services to the
Trusts" on page 64 for more information.
-- 7 --
<PAGE>
EXPENSES (CONTINUED)
Rule 12b-1 fees have the following two components:
<TABLE>
<CAPTION>
ADVISOR ADVISOR
CLASS A CLASS B
--------------- ---------------
<S> <C> <C>
Rule 12b-1 service fees 0.25% 0.25%
Rule 12b-1 distribution fees 0.00% 0.75%
</TABLE>
Long-term Class A and Class B shareholders may pay more in sales charges and
12b-1 fees than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc.
C. EXAMPLE OF EXPENSES
You would pay the following expenses on a $1,000 investment assuming a 5% annual
return and redemption at the end of each time period. The example also assumes
that all dividends and other distributions are reinvested and that the
percentage amounts listed in each Fund's "Annual Operating Expenses" above
remain the same in the years shown.
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------------- --------- ----- --------- ---------
<S> <C> <C> <C> <C>
Growth
Advisor Class A(1) $ 56 $ 79 $ 104 $ 175
Advisor Class B
Assuming redemption at end of period(2)(3) $ 69 $ 89 $ 111 $ 191
Assuming no redemption at end of period(3) $ 19 $ 59 $ 101 $ 181
Equity
Advisor Class A(1) $ 54 $ 75 $ 96 $ 159
Advisor Class B
Assuming redemption at end of period(2)(3) $ 68 $ 85 $ 105 $ 167
Assuming no redemption at end of period(3) $ 18 $ 55 $ 95 $ 167
Income
Advisor Class A(1) $ 55 $ 76 $ 99 $ 165
Advisor Class B
Assuming redemption at end of period(2)(3) $ 68 $ 86 $ 107 $ 176
Assuming no redemption at end of period(3) $ 18 $ 56 $ 97 $ 176
Northwest
Advisor Class A(1) $ 59 $ 87 $ 118 $ 205
Advisor Class B
Assuming redemption at end of period(2)(3) $ 72 $ 98 $ 127 $ 213
Assuming no redemption at end of period(3) $ 22 $ 68 $ 117 $ 213
International
Advisor Class A(1) $ 59 $ 88 $ 119 $ 206
Advisor Class B
Assuming redemption at end of period(2)(3) $ 72 $ 98 $ 126 $ 213
Assuming no redemption at end of period(3) $ 22 $ 68 $ 116 $ 213
Balanced
Advisor Class A(1) $ 58 $ 86 $ 116 $ 200
Advisor Class B
Assuming redemption at end of period(2)(3) $ 71 $ 96 $ 123 $ 207
Assuming no redemption at end of period(3) $ 21 $ 66 $ 113 $ 207
Small Company
Advisor Class A(1) $ 59 $ 88 $ 119 $ 208
Advisor Class B
Assuming redemption at end of period(2)(3) $ 72 $ 98 $ 127 $ 214
Assuming no redemption at end of period(3) $ 22 $ 68 $ 117 $ 214
</TABLE>
-- 8 --
<PAGE>
EXPENSES (CONTINUED)
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------------- --------- ----- --------- ---------
<S> <C> <C> <C> <C>
Value Fund
Advisor Class A(1) $ 58 $ 84
Advisor Class B
Assuming redemption at end of period(2) $ 71 $ 94
Assuming no redemption at end of period $ 21 $ 64
Intermediate Treasury
Advisor Class A(1) $ 55 $ 78 $ 101 $ 170
Advisor Class B
Assuming redemption at end of period(2)(3) $ 67 $ 93 $ 103 $ 180
Assuming no redemption at end of period(3) $ 17 $ 63 $ 93 $ 180
High-Yield
Advisor Class A(1) $ 56 $ 81 $ 107 $ 183
Advisor Class B
Assuming redemption at end of period(2)(3) $ 69 $ 91 $ 125 $ 189
Assuming no redemption at end of period(3) $ 19 $ 61 $ 105 $ 189
Managed Bond
Advisor Class A(1) $ 58 $ 88 $ 119 $ 206
Advisor Class B
Assuming redemption at end of period(2)(3) $ 71 $ 98 $ 136 $ 208
Assuming no redemption at end of period(3) $ 21 $ 68 $ 111 $ 208
Municipal Bond
Advisor Class A(1) $ 53 $ 70 $ 88 $ 142
Advisor Class B
Assuming redemption at end of period(2)(3) $ 65 $ 77 $ 92 $ 142
Assuming no redemption at end of period(3) $ 15 $ 47 $ 82 $ 142
California
Advisor Class A(1) $ 54 $ 72 $ 92 $ 150
Advisor Class B
Assuming redemption at end of period(2)(3) $ 67 $ 82 $ 99 $ 158
Assuming no redemption at end of period(3) $ 17 $ 52 $ 89 $ 158
Washington
Advisor Class A(1) $ 58 $ 85 $ 114 $ 219
Advisor Class B
Assuming redemption at end of period(2)(3) $ 71 $ 95 $ 121 $ 203
Assuming redemption at end of period(3) $ 21 $ 65 $ 111 $ 203
Money Market(4)
Advisor Class A $ 6 $ 18 $ 31 $ 69
Advisor Class B $ 6 $ 17 $ 31 $ 68
</TABLE>
(1) Includes deduction at the time of purchase of the maximum sales charge.
(2) Includes deduction at the time of redemption of the applicable CDSC.
(3) Ten-year figures assume conversion of Class B shares to Class A shares in
the first month following the investor's sixth anniversary from purchase.
(4) Figures for the Money Market Fund assume that the investor purchased Money
Market Fund shares as an initial investment and made no subsequent
exchanges.
The purpose of the table is to assist you in understanding the various costs and
expenses that an investor in Class A and Class B shares of each Fund would bear,
directly or indirectly. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES. A FUND'S ACTUAL EXPENSES OR PERFORMANCE MAY BE GREATER
OR LESS THAN THOSE SHOWN. THE ASSUMED 5% ANNUAL RETURN IS REQUIRED BY SECURITIES
AND EXCHANGE COMMISSION REGULATIONS APPLICABLE TO ALL MUTUAL FUNDS AND IT IS NOT
A PREDICTION OF, NOR DOES IT REPRESENT, PAST OR FUTURE EXPENSES OR THE
PERFORMANCE OF ANY FUND.
-- 9 --
<PAGE>
FINANCIAL HIGHLIGHTS
The amounts shown for each Fund (except for the High-Yield Bond Fund) in the
Financial Highlights tables that follow are based upon a single No-Load Class
share outstanding through September 30, 1996, and a single Advisor Class A or B
share outstanding from October 1, 1996 through December 31, 1996, and do not
reflect Rule 12b-1 fees. The amounts shown for the High-Yield Bond Fund are
based upon a single No-Load Class share outstanding through December 31, 1996,
and do not reflect Rule 12b-1 fees. In 1996, the Common Stock Trust, Taxable
Bond Trust, Tax-Exempt Bond Trust and Money Market Trust changed their fiscal
year ends to December 31. The following selected data has been derived from
financial statements that have been audited by Ernst & Young LLP. The data
should be read in conjunction with the financial statements, related notes and
other financial information included in each Trust's Annual Report to
shareholders and incorporated by reference in the applicable Trust's Statement
of Additional Information. A copy of each Trust's Statement of Additional
Information may be obtained by calling the number on the front page of this
Prospectus.
SAFECO GROWTH FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------------- -------------
THREE-MONTH THREE-MONTH
PERIOD ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1996 1996
----------------------------
<S> <C> <C>
Net asset value at beginning of period $15.45 $15.45
INCOME (LOSS) FROM INVESTMENT
OPERATIONS:
Net investment (loss) income (0.02) (0.05)
Net realized and unrealized gain
(loss) on investments 1.77 1.77
------------- -------------
Total from investment operations 1.75 1.72
------------- -------------
LESS DISTRIBUTIONS:
Dividends from net investment income -- --
Distributions from capital gains (0.23) (0.23)
------------- -------------
Total distributions (0.23) (0.23)
------------- -------------
Net asset value at end of period $16.97 $16.94
------------- -------------
------------- -------------
Total return+ 11.35%* 11.15%*
Net assets at end of period (000's
omitted) $187 $116
Ratio of expenses to average net assets 1.12%** 1.87%**
Ratio of net investment income (loss) to
average net assets -0.58%** -1.38%**
Portfolio turnover rate 82.93%* 82.93%**
Average Commission rate paid $0.0477 $0.0477
<CAPTION>
YEAR ENDED SEPTEMBER 30
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $15.83 $17.37 $19.20 $13.98 $17.95
INCOME (LOSS) FROM INVESTMENT
OPERATIONS:
Net investment (loss) income (.02) .07 (.02) (.02) (.01)
Net realized and unrealized gain
(loss) on investments 2.24 4.07 .78 5.39 (3.15)
--------- --------- --------- --------- ---------
Total from investment operations 2.22 4.14 .76 5.37 (3.16)
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net investment income -- (.07) -- -- --
Distributions from capital gains (2.60) (5.61) (2.59) (.15) (.81)
--------- --------- --------- --------- ---------
Total distributions (2.60) (5.68) (2.59) (.15) (.81)
--------- --------- --------- --------- ---------
Net asset value at end of period $15.45 $15.83 $17.37 $19.20 $13.98
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Total return+ 14.16% 23.93% 3.88% 38.43% -17.83%
Net assets at end of period (000's
omitted) $179,574 $176,483 $156,108 $158,723 $127,897
Ratio of expenses to average net assets 1.02% .98% .95% .91% .91%
Ratio of net investment income (loss) to
average net assets (.14%) .34% (.12%) (.10%) (.10%)
Portfolio turnover rate 124.79% 110.44% 71.18% 57.19% 85.38%
Average Commission rate paid $.0548 -- -- -- --
<CAPTION>
YEAR ENDED SEPTEMBER 30
1991 1990 1989 1988 1987
Net asset value at beginning of period $11.14 $17.22 $14.95 $18.13 $15.40
INCOME (LOSS) FROM INVESTMENT
OPERATIONS:
Net investment (loss) income .05 .14 .53 .35 .24
Net realized and unrealized gain
(loss) on investments 7.77 (4.20) 3.17 (.99) 4.31
--------- --------- --------- --------- ---------
Total from investment operations 7.82 (4.06) 3.70 (.64) 4.55
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net investment income (.05) (.14) (.53) (.48) (.23)
Distributions from capital gains (.96) (1.88) (.90) (2.06) (1.59)
--------- --------- --------- --------- ---------
Total distributions (1.01) (2.02) (1.43) (2.54) (1.82)
--------- --------- --------- --------- ---------
Net asset value at end of period $17.95 $11.14 $17.22 $14.95 $18.13
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Total return+ 70.22% -23.67% 25.23% -1.47% 32.68%
Net assets at end of period (000's
omitted) $155,429 $59,164 $81,472 $74,324 $82,703
Ratio of expenses to average net assets .90% 1.01% .94% .98% .92%
Ratio of net investment income (loss) to
average net assets .36% .88% 3.27% 2.37% 1.46%
Portfolio turnover rate 49.86% 90.48% 11.38% 19.31% 23.61%
Average Commission rate paid -- -- -- -- --
</TABLE>
* Not annualized.
** Annualized.
+ Total return excludes the effects of sales charges. If sales charges were
included, the total return for Classes A and B would be lower.
-- 10 --
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
SAFECO EQUITY FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------------- -------------
THREE-MONTH THREE-MONTH
PERIOD ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1996 1996
----------------------------
<S> <C> <C>
Net asset value at beginning of
period $15.85 $15.85
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.04 0.02
Net realized and unrealized gain
(loss) on investments 1.35 1.33
------------- -------------
Total from investment operations 1.39 1.35
------------- -------------
LESS DISTRIBUTIONS:
Dividends from net investment
income (0.04) (0.02)
Distributions from capital gains (0.58) (0.58)
------------- -------------
Total distributions (0.62) (0.60)
------------- -------------
Net asset value at end of period $16.62 $16.60
------------- -------------
------------- -------------
Total return+ 8.78%* 8.50%*
Net assets at end of period (000's
omitted) $2,894 $355
Ratio of expenses to average net
assets 0.97%** 1.75%**
Ratio of net investment income to
average net assets 1.38%** 0.51%**
Portfolio turnover rate 59.34%** 59.34%**
Avg. Commission rate paid $0.0571 $0.0571
<CAPTION>
YEAR ENDED SEPTEMBER 30
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of
period $15.31 $13.89 $12.54 $9.53 $10.38
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .28 .34 .23 .17 .15
Net realized and unrealized gain
(loss) on investments 2.42 2.59 1.83 3.79 (.09)
--------- --------- --------- --------- ---------
Total from investment operations 2.70 2.93 2.06 3.96 .06
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net investment
income (.28) (.34) (.23) (.17) (.15)
Distributions from capital gains (1.88) (1.17) (.48) (.78) (.76)
--------- --------- --------- --------- ---------
Total distributions (2.16) (1.51) (.71) (.95) (.91)
--------- --------- --------- --------- ---------
Net asset value at end of period $15.85 $15.31 $13.89 $12.54 $9.53
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Total return+ 18.04% 21.59% 16.51% 41.77% .41%
Net assets at end of period (000's
omitted) $725,780 $598,582 $412,805 $148,894 $74,383
Ratio of expenses to average net
assets .79% .84% .85% .94% .96%
Ratio of net investment income to
average net assets 1.74% 2.38% 1.72% 1.50% 1.34%
Portfolio turnover rate 74.07% 56.14% 33.33% 37.74% 39.88%
Avg. Commission rate paid $.0587 -- -- -- --
<CAPTION>
YEAR ENDED SEPTEMBER 30
1991 1990 1989 1988 1987
Net asset value at beginning of
period $8.43 $10.10 $8.51 $12.23 $11.44
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .17 .22 .39 .18 .21
Net realized and unrealized gain
(loss) on investments 2.37 (1.28) 2.26 (1.82) 2.83
--------- --------- --------- --------- ---------
Total from investment operations 2.54 (1.06) 2.65 (1.64) 3.04
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net investment
income (.17) (.22) (.39) (.23) (.22)
Distributions from capital gains (.42) (.39) (.67) (1.85) (2.03)
--------- --------- --------- --------- ---------
Total distributions (.59) (.61) (1.06) (2.08) (2.25)
--------- --------- --------- --------- ---------
Net asset value at end of period $10.38 $8.43 $10.10 $8.51 $12.23
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Total return+ 30.39% (10.73%) 32.12% (9.93%) 31.75%
Net assets at end of period (000's
omitted) $71,586 $51,603 $53,892 $45,625 $64,668
Ratio of expenses to average net
assets .98% .97% .96% 1.00% .97%
Ratio of net investment income to
average net assets 1.70% 2.19% 4.13% 2.16% 1.92%
Portfolio turnover rate 45.21% 51.01% 63.62% 88.19% 85.11%
Avg. Commission rate paid -- -- -- -- --
</TABLE>
* Not annualized.
** Annualized.
+ Total return excludes the effects of sales charges. If sales charges were
included, the total return for Classes A and B would be lower.
-- 11 --
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
SAFECO INCOME FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------------- -------------
THREE-MONTH THREE-MONTH
PERIOD ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1996 1996
----------------------------
<S> <C> <C>
Net asset value at beginning of period $20.03 $20.03
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.12 0.10
Net realized and unrealized gain
(loss) on investments 1.65 1.62
------------- -------------
Total from investment operations 1.77 1.72
------------- -------------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.12) (0.10)
Distributions from capital gains (0.53) (0.53)
------------- -------------
Total distributions (0.65) (0.63)
------------- -------------
Net asset value at end of period $21.15 $21.12
------------- -------------
------------- -------------
Total return+ 8.85%* 8.60%*
Net assets at end of period (000's
omitted) $193 $112
Ratio of expenses to average net assets 1.03%** 1.79%**
Ratio of net investment income to
average net assets 2.66%** 1.99%**
Portfolio turnover rate 37.84%** 37.84%**
Avg. Commission rate paid $0.0573 $0.0573
<CAPTION>
YEAR ENDED SEPTEMBER 30
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $19.11 $17.25 $17.79 $16.27 $15.35
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .73 .82 .81 .78 .80
Net realized and unrealized gain
(loss) on investments 2.84 2.71 (.30) 1.52 .96
--------- --------- --------- --------- ---------
Total from investment operations 3.57 3.53 .51 2.30 1.76
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net investment income (.73) (.82) (.81) (.78) (.80)
Distributions from capital gains (1.92) (.85) (.24) -- (.04)
--------- --------- --------- --------- ---------
Total distributions (2.65) (1.67) (1.05) (.78) (.84)
--------- --------- --------- --------- ---------
Net asset value at end of period $20.03 $19.11 $17.25 $17.79 $16.27
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Total return+ 18.98% 21.04% 2.98% 14.35% 11.75%
Net assets at end of period (000's
omitted) $260,023 $217,870 $190,610 $203,019 $181,582
Ratio of expenses to average net assets .86% .87% .86% .90% .90%
Ratio of net investment income to
average net assets 3.56% 4.55% 4.59% 4.55% 5.06%
Portfolio turnover rate 50.11% 31.12% 19.30% 20.74% 20.35%
Avg. Commission rate paid $.0591 -- -- -- --
<CAPTION>
YEAR ENDED SEPTEMBER 30
1991 1990 1989 1988 1987
Net asset value at beginning of period $12.89 $16.44 $14.32 $17.16 $15.52
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .81 .85 .81 .78 .78
Net realized and unrealized gain
(loss) on investments 2.53 (3.39) 2.12 (1.80) 2.37
--------- --------- --------- --------- ---------
Total from investment operations 3.34 (2.54) 2.93 (1.02) 3.15
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net investment income (.83) (.83) (.81) (.98) (.78)
Distributions from capital gains (.05) (.18) -- (.84) (.73)#
--------- --------- --------- --------- ---------
Total distributions (.88) (1.01) (.81) (1.82) (1.51)
--------- --------- --------- --------- ---------
Net asset value at end of period $15.35 $12.89 $16.44 $14.32 $17.16
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Total return+ 26.43% -16.06% 21.00% (4.61%) 21.41%
Net assets at end of period (000's
omitted) $181,265 $170,153 $232,812 $231,724 $313,308
Ratio of expenses to average net assets .93% .92% .92% .97% .94%
Ratio of net investment income to
average net assets 5.58% 5.59% 5.28% 5.58% 4.53%
Portfolio turnover rate 22.25% 19.37% 16.38% 34.13% 33.08%
Avg. Commission rate paid -- -- -- -- --
</TABLE>
# Distributions include $.04 of additional gain arising from investment
transactions of securities acquired in a non-taxable exchange.
* Not annualized.
** Annualized.
+ Total return excludes the effects of sales charges. If sales charges were
included, the total return for Classes A and B would be lower.
-- 12 --
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
SAFECO NORTHWEST FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------------- -------------
THREE-MONTH THREE-MONTH
PERIOD ENDED PERIOD ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1996 1996 1995
----------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period $13.78 $13.78 $14.41 $12.59
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (0.01) (0.03) .02 .04
Net realized and unrealized gain
(loss) on investments 0.29 0.28 1.32 2.35
------------- ------------- ------------- -------------
Total from investment operations 0.28 0.25 1.34 2.39
------------- ------------- ------------- -------------
LESS DISTRIBUTIONS:
Dividends from net investment income -- -- (.02) (.04)
Distributions from capital gains -- -- (1.95) (.53)
------------- ------------- ------------- -------------
Total distributions -- -- (1.97) (.57)
------------- ------------- ------------- -------------
Net asset value at end of period $14.06 $14.03 $13.78 $14.41
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Total return+ 2.03%* 1.81%* 9.61% 19.01%
Net assets at end of period (000's
omitted) $369 $232 $43,128 $40,140
Ratio of expenses to average net assets 1.40%** 2.18%** 1.07% 1.09%
Ratio of net investment income to
average net assets -0.39%** -1.19%** .11% .31%
Portfolio turnover rate 67.32%** 67.32%** 35.69% 19.59%
Average Commission rate paid $0.0482 $0.0482 $.0591 --
<CAPTION>
FOR THE PERIOD
FROM FEBRUARY 7,
FOR THE NINE- 1991
MONTH PERIOD (INITIAL PUBLIC
YEAR ENDED ENDED YEAR ENDED OFFERING) TO
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1994 1993 1992 1991
<S> <C> <C> <C> <C>
Net asset value at beginning of period $12.34 $12.59 $11.37 $10.06
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .04 .02 .06 .13
Net realized and unrealized gain
(loss) on investments .59 (.25) 1.53 1.44
------------- ------------- ------------- -------
Total from investment operations .63 (.23) 1.59 1.57
------------- ------------- ------------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income (.04) (.02) (.06) (.19)
Distributions from capital gains (.34) -- (.31) (.07)
------------- ------------- ------------- -------
Total distributions (.38) (.02) (.37) (.26)
------------- ------------- ------------- -------
Net asset value at end of period $12.59 $12.34 $12.59 $11.37
------------- ------------- ------------- -------
------------- ------------- ------------- -------
Total return+ 5.19% (1.86%)* 14.08% 14.93%*
Net assets at end of period (000's
omitted) $36,383 $39,631 $40,402 $26,434
Ratio of expenses to average net assets 1.06% 1.11%** 1.11% 1.27%**
Ratio of net investment income to
average net assets .33% .18%** .55% 1.14%**
Portfolio turnover rate 18.46% 14.05%** 33.34% 27.71%**
Average Commission rate paid -- -- -- --
</TABLE>
* Not annualized.
** Annualized.
+ Total return excludes the effects of sales charges. If sales charges were
included, the total return for Classes A and B would be lower.
-- 13 --
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
SAFECO INTERNATIONAL STOCK FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------------ ------------ FOR THE PERIOD FROM
THREE-MONTH THREE-MONTH JANUARY 31, 1996
PERIOD ENDED PERIOD ENDED (INITIAL PUBLIC
DECEMBER 31, DECEMBER 31, OFFERING) TO
1996 1996 SEPTEMBER 30, 1996
-------------------------------------------------
<S> <C> <C> <C>
Net asset value at beginning of period $10.39 $10.39 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income -- -- .06
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 0.95 0.93 .39
------------ ------------ -------
Total from investment operations 0.95 0.93 .45
------------ ------------ -------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.05) (0.04) (.06)
Distributions from realized gains -- -- --
------------ ------------ -------
Total distributions (0.05) (0.04) (.06)
------------ ------------ -------
Net asset value at end of period $11.29 $11.28 $10.39
------------ ------------ -------
------------ ------------ -------
Total return++ 9.19%* 8.96%* 4.54%*
Net assets at end of period (000's omitted) $154 $112 $8,323
Ratio of expenses to average net assets 1.41%**+ 2.17%**+ 2.36%**+
Ratio of net investment income (loss) to average
net assets (0.23%)** (1.15%)** .93%**
Portfolio turnover rate 18.51%** 18.51%** 15.73%**
Average Commission rate paid 0.0223 0.0223 $.0225
</TABLE>
* Not Annualized.
** Annualized.
+ Net of reimbursements by SAM. Absent the reimbursements, the ratio of
expenses to average net assets would be 1.72% and 2.47% for Class A and Class
B, respectively.
++ Total return excludes the effects of sales charges. If sales charges were
included, the total return for Classes A and B would be lower.
-- 14 --
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
SAFECO BALANCED FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------------ ------------ FOR THE PERIOD FROM
THREE-MONTH THREE-MONTH JANUARY 31, 1996
PERIOD ENDED PERIOD ENDED (INITIAL PUBLIC
DECEMBER 31, DECEMBER 31, OFFERING) TO
1996 1996 SEPTEMBER 30, 1996
--------------------------------------------------
<S> <C> <C> <C>
Net asset value at beginning of period $10.38 $10.38 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.09 0.06 .21
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 0.44 0.45 .39
------------ ------------ --------
Total from investment operations 0.53 0.51 .60
------------ ------------ --------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.09) (0.06) (.21)
Distributions from realized gains (0.13) (0.13) (.01)
------------ ------------ --------
Total distributions (0.22) (0.19) (.22)
------------ ------------ --------
Net asset value at end of period $10.69 $10.70 $10.38
------------ ------------ --------
------------ ------------ --------
Total return++ 5.07%* 4.85%* 5.99%*
Net assets at end of period (000's omitted) $110 $115 $7,632
Ratio of expenses to average net assets 1.35%**+ 2.11%**+ 1.32%**
Ratio of net investment income (loss) to average
net assets 3.01%** 2.23%** 3.21%**
Portfolio turnover rate 36.10%** 36.10%** 143.87%**
Average Commission rate paid 0.0548 0.0548 $.0560
</TABLE>
* Not Annualized.
** Annualized.
+ Net of reimbursements by SAM. Absent the reimbursements, the ratio of
expenses to average net assets would be 1.70% and 2.46% for the Class A and
Class B, respectively.
++ Total return excludes the effects of sales charges. If sales charges were
included, the total return for Classes A and B would be lower.
-- 15 --
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
SMALL COMPANY FUND
<TABLE>
<CAPTION>
CLASS A CLASS B FOR THE PERIOD FROM
------------- ------------- JANUARY 31, 1996
THREE-MONTH THREE-MONTH (INITIAL PUBLIC
PERIOD ENDED PERIOD ENDED OFFERING)
DECEMBER 31, DECEMBER 31, TO SEPTEMBER 30,
1996 1996 1996
--------------------------------------------------
<S> <C> <C> <C>
Net asset value at beginning of period $11.51 $11.51 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (.01) (.04) (.01)
Net realized and unrealized gain (loss) on investments and
foreign currency transactions .31 .32 2.19
------------- ------------- ----------
Total from investment operations .30 .28 2.18
------------- ------------- ----------
LESS DISTRIBUTIONS:
Dividends from net investment income -- -- --
Distributions from realized gains -- -- (.67)
------------- ------------- ----------
Total distributions -- -- (.67)
------------- ------------- ----------
Net asset value at end of period $11.81 $11.79 $11.51
------------- ------------- ----------
------------- ------------- ----------
Total return++ 2.61%* 2.43% * 21.83% *
Net assets at end of period (000's omitted) $135 $103 $12,552
Ratio of expenses to average net assets 1.42% **+ 2.18% **+ 1.49% **
Ratio of net investment income (loss) to average net assets (.50% )** (1.28% )** (.24% )**
Portfolio turnover rate 73.47% ** 73.47% ** 91.03% **
Average Commission rate paid $.0496 $.0496 $.0510
</TABLE>
* Not Annualized.
** Annualized.
+ Net of reimbursements by SAM. Absent the reimbursements, the ratio of
expenses to average net assets would be 1.62% and 2.41% for Class A and Class
B, respectively.
++ Total return excludes the effects of sales charges. If sales charges were
included, the total return for Classes A and B would be lower.
-- 16 --
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------------ ------------
THREE-MONTH THREE-MONTH
PERIOD ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, FOR THE YEAR ENDED SEPTEMBER 30
1996 1996 1996 1995 1994 1993 1992 1991 1990
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of
period $10.10 $10.10 $10.24 $9.74 $10.74 $10.69 $10.20 $9.83 $9.96
INCOME FROM
INVESTMENT
OPERATIONS:
Net investment
income .15 .14 .54 .55 .52 .60 .72 .75 .77
Net realized and
unrealized
gain (loss) on
investments .01 .02 (.14) .50 (1.00) .49 .54 .37 (.13)
------------ ------------ --------- --------- --------- --------- --------- --------- ---------
Total from
investment
operations .16 .16 .40 1.05 (.48) 1.09 1.26 1.12 .64
------------ ------------ --------- --------- --------- --------- --------- --------- ---------
LESS
DISTRIBUTIONS:
Dividends from
net investment
income (.15 ) (.14 ) (.54) (.55) (.52) (.60) (.72) (.75) (.77)
Distributions
from capital
gains -- -- -- -- -- (.44) (.05) -- --
------------ ------------ --------- --------- --------- --------- --------- --------- ---------
Total
distributions (.15 ) (.14 ) (.54) (.55) (.52) (1.04) (.77) (.75) (.77)
------------ ------------ --------- --------- --------- --------- --------- --------- ---------
Net asset value at
end of period $10.11 $10.12 $10.10 $10.24 $9.74 $10.74 $10.69 $10.20 $9.83
------------ ------------ --------- --------- --------- --------- --------- --------- ---------
------------ ------------ --------- --------- --------- --------- --------- --------- ---------
Total return++ 1.63%* 1.55%* 4.00% 11.07% (4.56%) 10.51% 12.78% 11.80% 6.65%
Net assets at end
of period (000's
omitted) $704 $223 $14,668 $13,774 $13,367 $14,706 $12,205 $9,458 $6,916
Ratio of expenses
to average net
assets 1.07**+ 1.72**+ 1.01% .96% .90% .99% .98% 1.00% 1.00%
Ratio of net
investment
income to
average net
assets 6.07%** 5.35%** 5.30% 5.51% 5.08% 5.52% 6.89% 7.45% 7.76%
Portfolio turnover
rate 125.42%** 125.42%** 294.25% 124.9% 75.46% 104.94% 37.19% 9.51% 24.17%
<CAPTION>
FOR THE PERIOD FROM
SEPTEMBER 7, 1988
(INITIAL PUBLIC
OFFERING) TO
1989 SEPTEMBER 30, 1988
<S> <C> <C>
Net asset value at
beginning of
period $9.95 $9.93
INCOME FROM
INVESTMENT
OPERATIONS:
Net investment
income .77 .05
Net realized and
unrealized
gain (loss) on
investments (.01) .02
--------- ------
Total from
investment
operations .78 .07
--------- ------
LESS
DISTRIBUTIONS:
Dividends from
net investment
income (.77) (.05 )
Distributions
from capital
gains -- --
--------- ------
Total
distributions (.77) (.05 )
--------- ------
Net asset value at
end of period $9.96 $9.95
--------- ------
--------- ------
Total return++ 8.20% .69%*
Net assets at end
of period (000's
omitted) $6,249 $5,007
Ratio of expenses
to average net
assets .96% 1.06%**
Ratio of net
investment
income to
average net
assets 7.82% 7.46%**
Portfolio turnover
rate 4.36% None
</TABLE>
* Not annualized.
** Annualized.
+ Net of reimbursement by SAM. Absent the reimbursements, the ratio of expenses
to average net assets would be 1.30% and 1.95% for Class A and Class B,
respectively.
++ Total return excludes the effects of sales charges. If sales charges were
included, the total return for Classes A and B would be lower.
-- 17 --
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
SAFECO HIGH-YIELD BOND FUND
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
SEPTEMBER 7,
THREE-MONTH 1988
PERIOD (INITIAL
ENDED PUBLIC
DECEMBER OFFERING) TO
31, FOR THE YEAR ENDED SEPTEMBER 30 SEPTEMBER 30,
1996 1996 1995 1994 1993 1992 1991 1990 1989 1988
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of
period $8.79 $8.68 $8.55 $9.22 $8.92 $8.35 $7.94 $9.33 $9.86 $9.89
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .19 .78 .79 .82 .91 .83 .93 1.04 1.11 .07
Net realized and unrealized
gain (loss) on investments .03 .11 .13 (.67) .30 .57 .41 (1.39) (.53) (.03)
------- ------- ------- ------- ------- ------- ------- -------- ------- -------------
Total from investment
operations .22 .89 .92 .15 1.21 1.40 1.34 (.35) .58 .04
------- ------- ------- ------- ------- ------- ------- -------- ------- -------------
LESS DISTRIBUTIONS:
Dividends from net investment
income (.19 ) (.78) (.79) (.82) (.91) (.83) (.93) (1.04) (1.11) (.07)
------- ------- ------- ------- ------- ------- ------- -------- ------- -------------
Net asset value at end of
period $8.82 $8.79 $8.68 $8.55 $9.22 $8.92 $8.35 $7.94 $9.33 $9.86
------- ------- ------- ------- ------- ------- ------- -------- ------- -------------
------- ------- ------- ------- ------- ------- ------- -------- ------- -------------
Total return+ 2.50% * 10.79% 11.43% 1.61% 14.29% 17.52% 18.18% (4.04%) 6.10% .37%*
Net assets at end of period
(000's omitted) $50,298 $47,880 $39,178 $27,212 $28,291 $19,672 $11,931 $7,786 $9,051 $5,204
Ratio of expenses to average
net assets .90% ** .94% 1.01% 1.03% 1.09% 1.05% 1.11% 1.15% 1.11% 1.25%**
Ratio of net investment income
to average net assets 8.56% ** 8.99% 9.28% 9.26% 9.94% 9.66% 11.51% 11.90% 11.52% 10.27%**
Portfolio turnover rate 35.01% ** 92.65% 38.03% 63.02% 50.27% 40.66% 32.46% 18.46% 12.57% None
</TABLE>
* Not annualized.
** Annualized.
+ Total return information is for a No-Load Class share outstanding throughout
the period indicated. The High-Yield Bond Fund did not commence offering
Class A and Class B shares until January 31, 1997.
-- 18 --
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
SAFECO MANAGED BOND FUND
<TABLE>
<CAPTION>
CLASS A CLASS B FOR THE PERIOD FROM
----------------- ----------------- FEBRUARY 28, 1994
THREE-MONTH THREE-MONTH FOR THE YEAR (INITIAL PUBLIC
PERIOD ENDED PERIOD ENDED ENDED OFFERING)
DECEMBER 31, 1996 DECEMBER 31, 1996 DECEMBER 31, 1995 TO DECEMBER 31, 1994
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value at beginning of
period $ 8.35 $ 8.35 $ 8.15 $ 8.68
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.11 0.09 .44 .27
Net realized and unrealized gain
(loss) on investments -- -- .94 (.53)
----------------- ----------------- -------- -----------
Total from investment operations 0.11 0.09 1.38 (.26)
----------------- ----------------- -------- -----------
LESS DISTRIBUTIONS TO SHAREHOLDERS
FROM:
Net investment income (0.11) (0.09) (.44) (.27)
Net Realized gains on investments -- -- (.32) --
----------------- ----------------- -------- -----------
Total distributions (0.11) (0.09) (.76) (.27)
----------------- ----------------- -------- -----------
Net asset value at end of period $ 8.35 $ 8.35 $ 8.77 $ 8.15
----------------- ----------------- -------- -----------
----------------- ----------------- -------- -----------
Total return+ 1.34%* 1.15%* 17.35% (3.01%)*
Net assets at end of period (000's
omitted) $ 140 $ 100 $ 4,497 $ 4,627
Ratio of expenses to average net
assets 1.30%** 2.07%** 1.16% 1.28%**
Ratio of net investment income to
average net assets 5.22%** 4.45%** 5.14% 3.88%**
Portfolio turnover rate 136.29%** 136.29%** 78.78% 132.26%**
</TABLE>
* Not annualized.
** Annualized.
+ Total return excludes the effects of sales charges. If sales charges were
included, the total return for Classes A and B would be lower.
-- 19 --
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
SAFECO MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------------ ------------
THREE-MONTH THREE-MONTH
PERIOD ENDED PERIOD ENDED YEAR ENDED MARCH 31
DECEMBER 31, DECEMBER 31,
1996 1996 1996 1995 1994 1993
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of
period $13.82 $13.82 $13.36 $13.27 $14.13 $13.37
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.18 0.15 .76 .77 .78 .81
Net realized and unrealized gain
(loss) investments 0.17 0.16 .33 .12 (.55) .94
------------ ------------ -------- -------- -------- --------
Total from investment operations 0.35 0.31 1.09 .89 .23 1.75
------------ ------------ -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment
income (0.18 ) (0.15 ) (.76) (.77) (.78) (.81)
Distributions from realized gains -- -- -- (.03) (.31) (.18)
------------ ------------ -------- -------- -------- --------
Total distributions (0.18 ) (0.15 ) (.76) (.80) (1.09) (.99)
------------ ------------ -------- -------- -------- --------
Net asset value at end of period $13.99 $13.98 $13.69 $13.36 $13.27 $14.13
------------ ------------ -------- -------- -------- --------
------------ ------------ -------- -------- -------- --------
Total return++ 2.52%* 2.27%* 8.23% 7.10% 1.30% 13.60%
Net assets at end of period (000's
omitted) $311 $112 $480,643 $472,569 $507,453 $541,515
Ratio of expenses to average net
assets 0.82%** 1.50%** .54% .56% .52% .53%
Ratio of net investment income to
average net assets 5.04%** 4.42%** 5.47% 5.96% 5.49% 5.91%
Portfolio turnover rate 6.66%** 6.66%** 12.60% 26.96% 22.07% 31.66%
<CAPTION>
YEAR ENDED MARCH 31
1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of
period $12.95 $12.73 $12.92 $12.85 $14.16 $13.74
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .86 .86 .88 .94 .96 .99
Net realized and unrealized gain
(loss) investments .48 .26 .25 .36 (.91) .63
-------- -------- -------- -------- -------- --------
Total from investment operations 1.34 1.12 1.13 1.30 .05 1.62
-------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment
income (.86) (.86) (.88) (.94) (.96) (.99)
Distributions from realized gains (.06) (.04) (.44) (.29) (.40) (.21)
-------- -------- -------- -------- -------- --------
Total distributions (.92) (.90) (1.32) (1.23) (1.36) (1.20)
-------- -------- -------- -------- -------- --------
Net asset value at end of period $13.37 $12.95 $12.73 $12.92 $12.85 $14.16
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Total return++ 10.57% 9.13% 9.05% 10.49% .93% 12.49%+
Net assets at end of period (000's
omitted) $427,638 $331,647 $286,303 $231,911 $183,642 $214,745
Ratio of expenses to average net
assets .54% .56% .57% .60% .61% .59%
Ratio of net investment income to
average net assets 6.37% 6.68% 6.76% 7.23% 7.42% 7.20%
Portfolio turnover rate 25.18% 38.55% 65.80% 135.60% 71.91% 23.09%
</TABLE>
* Not Annualized.
** Annualized.
+ Unaudited.
++ Total return excludes the effects of sales charges. If sales charges were
included, the total return for Classes A and B would be lower.
-- 20 --
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
SAFECO CALIFORNIA TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
-------- --------
THREE-MONTH THREE-MONTH
PERIOD PERIOD
ENDED ENDED
DECEMBER DECEMBER YEAR ENDED MARCH 31
31, 1996 31, 1996 1996 1995 1994 1993 1992 1991 1990
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of
period $12.07 $12.07 $11.54 $11.51 $12.23 $11.60 $11.24 $11.07 $11.02
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.15 0.12 .62 .63 .66 .68 .71 .71 .72
Net realized and unrealized gain
(loss) investments 0.19 0.18 .40 .13 (.38) .76 .44 .23 .23
-------- -------- ------- ------- ------- ------- ------- ------- -------
Total from investment operations 0.34 0.30 1.02 .76 .28 1.44 1.15 .94 .95
-------- -------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment
income (0.15) (0.12) (.62) (.63) (.66) (.68) (.71) (.71) (.72)
Distributions from realized gains (0.03) (0.03) (.08) (.10) (.34) (.13) (.08) (.06) (.18)
-------- -------- ------- ------- ------- ------- ------- ------- -------
Total distributions (0.18) (0.15) (.70) (.73) (1.00) (.81) (.79) (.77) (.90)
-------- -------- ------- ------- ------- ------- ------- ------- -------
Net asset value at end of period $12.23 $12.22 $11.86 $11.54 $11.51 $12.23 $11.60 $11.24 $11.07
-------- -------- ------- ------- ------- ------- ------- ------- -------
-------- -------- ------- ------- ------- ------- ------- ------- -------
Total return*** 2.83%* 2.56%* 8.87% 7.01% 1.97% 12.88% 10.43% 8.78% 8.87%
Net assets at end of period (000's
omitted) $122 $101 $70,546 $64,058 $77,056 $79,872 $71,480 $57,066 $47,867
Ratio of expenses to average net
assets 0.89%** 1.64%** .68% .70% .68% .66% .67% .67% .68%
Ratio of net investment income to
average net assets 4.84%** 4.08%** 5.12% 5.65% 5.31% 5.71% 6.13% 6.32% 6.42%
Portfolio turnover rate 10.52%** 10.52%** 16.25% 44.10% 32.58% 23.18% 39.35% 22.92% 71.37%
<CAPTION>
1989 1988 1987
<S> <C> <C> <C>
Net asset value at beginning of
period $10.72 $12.14 $11.68
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .75 .76 .80
Net realized and unrealized gain
(loss) investments .30 (.99) .57
------- ---------- --------
Total from investment operations 1.05 (.23) 1.37
------- ---------- --------
LESS DISTRIBUTIONS:
Dividends from net investment
income (.75) (.76) (.80)
Distributions from realized gains -- (.43)++ (.11)
------- ---------- --------
Total distributions (.75) (1.19) (.91)
------- ---------- --------
Net asset value at end of period $11.02 $10.72 $12.14
------- ---------- --------
------- ---------- --------
Total return*** 10.09% (1.39%) 12.25%+
Net assets at end of period (000's
omitted) $36,930 $28,790 $34,792
Ratio of expenses to average net
assets .71% .72% .70%
Ratio of net investment income to
average net assets 6.86% 6.99% 6.71%
Portfolio turnover rate 76.95% 66.72% 44.61%
</TABLE>
* Not Annualized.
** Annualized.
*** Total return excludes the effects of sales charges. If sales charges were
included, the total return for Classes A and B would be lower.
+ Unaudited.
++ Distribution includes $.05 per share attributable to the December 31, 1987,
capital gain distribution paid in order to avoid any excise tax due under the
Tax Reform Act of 1986.
-- 21 --
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------------- -------------
THREE-MONTH THREE-MONTH
PERIOD ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, YEAR ENDED YEAR ENDED YEAR ENDED
1996 1996 MARCH 31, 1996 MARCH 31, 1995 MARCH 31, 1994
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of
period $10.45 $10.45 $10.10 $9.91 $10.27
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.12 0.10 0.50 0.49 0.44
Net realized and unrealized gain
(loss) on investments 0.09 0.11 0.27 0.19 (0.35)
------------- ------------- ------- ------ -------
Total from investment operations 0.21 0.21 0.77 0.68 0.09
------------- ------------- ------- ------ -------
LESS DISTRIBUTIONS:
Dividends from net investment
income (0.12) (0.10) (0.50) (0.49) (0.44)
Distribution from realized gains (0.01) (0.01) (0.03) -- (0.01)
------------- ------------- ------- ------ -------
Total distributions (0.13) (0.11) (0.53) (0.49) (0.45)
------------- ------------- ------- ------ -------
Net asset value at end of period $10.53 $10.55 $10.34 $10.10 $9.91
------------- ------------- ------- ------ -------
------------- ------------- ------- ------ -------
Total return+ 1.94%* 1.94%* 7.73% 7.13% .68%
Net assets at end of period (000's
omitted) $ 336 $ 211 $6,489 $5,953 $2,908
Ratio of expenses to average net
assets 1.31%** 2.06%** 1.07% 1.09% 1.44%
Ratio of net investment income to
average net assets 4.49%** 3.71%** 4.78% 5.06% 4.17%
Portfolio turnover rate 15.96%** 15.96%** 20.86% 9.23% 17.26%
<CAPTION>
FOR THE PERIOD FROM
MARCH 18, 1993
(INITIAL PUBLIC OFFERING)
TO MARCH 31, 1993
<S> <C>
Net asset value at beginning of
period $10.32
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.02
Net realized and unrealized gain
(loss) on investments (0.05)
--------
Total from investment operations (0.03)
--------
LESS DISTRIBUTIONS:
Dividends from net investment
income (0.02)
Distribution from realized gains --
--------
Total distributions (0.02)
--------
Net asset value at end of period $10.27
--------
--------
Total return+ (.31%)*
Net assets at end of period (000's
omitted) $2,163
Ratio of expenses to average net
assets 1.04%**
Ratio of net investment income to
average net assets 4.47%**
Portfolio turnover rate None
</TABLE>
* Not annualized.
** Annualized.
+ Total return excludes the effects of sales charges. If sales charges were
included, the total return for Classes A and B would be lower.
-- 22 --
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
SAFECO MONEY MARKET FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
THREE-MONTH THREE-MONTH
PERIOD PERIOD
ENDED ENDED
DECEMBER DECEMBER
31, 31, YEAR ENDED MARCH 31
1996 1996 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of
period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
INCOME FROM
INVESTMENT
OPERATIONS:
Net investment
income .01 .01 .05 .04 .02 .03 .05 .07 .08 .08 .06 .06
LESS DISTRIBUTIONS:
Dividends from net
investment
income (.01 ) (.01 ) (.05) (.04) (.02) (.03) (.05) (.07) (.08) (.08) (.06) (.06 )
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- --------
Net asset value at
end of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- --------
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- --------
Total return 1.21% * 1.21% * 5.15% 4.20% 2.48% 2.98% 5.04% 7.60% 8.77% 7.86% 6.56% 5.90% +
Net assets at end of
period (000's
omitted) $295 $106 $165,122 $171,958 $186,312 $144,536 $184,823 $224,065 $225,974 $177,813 $119,709 $57,998
Ratio of expenses to
average net assets .55% ** .54% ** .78% .78% .79% .77% .73% .70% .71% .74% .79% .82%
Ratio of net
investment income
to average net
assets 5.01% ** 4.96% ** 5.04% 4.21% 2.47% 3.02% 5.05% 7.34% 8.45% 7.66% 6.49% 5.71%
</TABLE>
* Not Annualized.
** Annualized.
+ Unaudited.
-- 23 --
<PAGE>
ADVISER'S INSTITUTIONAL PRIVATE ACCOUNT PERFORMANCE
The Value Fund's adviser, SAFECO Asset Management Company ("SAM") has been
managing institutional private accounts (the "SAFECO Composite") since 1979. The
SAFECO Composite had investment objectives, policies, strategies and risks
substantially similar to those of the Value Fund. The data below is provided to
illustrate the past performance of SAM in managing substantially similar
accounts as measured against the S&P 500 Index and does not represent the
performance of the Value Fund.
CALENDAR YEAR TOTAL RETURNS
<TABLE>
<CAPTION>
SAFECO SAFECO S&P 500
YEAR COMPOSITE(A) COMPOSITE(B) INDEX*
- ------------------------------------------------------- --------------- --------------- ----------
<S> <C> <C> <C>
1987 0.25% (.50%) 5.17%
1988 18.83% 17.98% 16.50%
1989 19.43% 18.58% 31.43%
1990 (4.50%) (5.22%) (3.19%)
1991 28.55% 27.65% 30.55%
1992 12.98% 12.06% 7.68%
1993 10.58% 9.73% 10.00%
1994 3.31% 2.54% 1.33%
1995 36.74% 35.74% 37.50%
1996 25.07% 24.15% 23.25%
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS FOR ONE, FIVE AND TEN YEAR PERIODS ENDING DECEMBER
31, 1996
<TABLE>
<CAPTION>
SAFECO S&P 500
COMPOSITE INDEX
------------- -----------
<S> <C> <C>
Last One Year 25.43% 23.25%
Last Five Years 17.46% 15.26%
Last Ten Years 14.74% 15.26%
</TABLE>
- ------------------------
* The gross performance of the SAFECO Composite in the tables above is shown
after reduction by the Value Fund's maximum management fee and the
estimated "other expenses" (1.04 per year) and does not reflect the
deduction of 12b-1 fees which would cause the performance figures to be
lower.
** The S&P 500 Index is an unmanaged index containing common stocks of 500
industrial, transportation, utility and financial companies, regarded as
generally representative of the U.S. stock market. The Index reflects the
reinvestment of income dividends and capital gain distributions, if any,
but does not reflect fees, brokerage commissions, or other expenses of
investing.
All returns presented were calculated on a total return basis and reflect the
reinvestment of capital gains, dividends and interest. Custodial fees, if any,
were not included in the SAFECO Composite calculation. The SAFECO Composite's
returns are asset-weighted using beginning-of-period market values adjusted for
cash flows.
The Value Fund's expenses, timing of purchases and sales of portfolio
securities, availability of cash flows, and brokerage commissions may cause the
performance of the Value Fund to vary from that of the SAFECO Composite. In
addition, the institutional private accounts are not subject to the
diversification requirements, specific tax restrictions and investment
limitations imposed on the Value Fund by the Investment Company Act of 1940 and
Subchapter M of the Internal Revenue Code. Consequently, the performance results
for the SAFECO Composite could have been adversely affected if the accounts
included in the composite had been regulated as investment companies under the
federal securities laws.
-- 24 --
<PAGE>
ADVISER'S INSTITUTIONAL PRIVATE ACCOUNT PERFORMANCE (CONTINUED)
The investment results of the SAFECO Composite are unaudited and are not
intended to predict or suggest the returns that might be experienced by the
Value Fund. Investors should also be aware that the use of a methodology
different from that used above to calculate the SAFECO Composite's performance
could result in different performance data.
The S&P 500 Index is used for comparison purposes only. The S&P 500 Index is an
unmanaged index of representative U.S. stocks that has no management or expense
charges. Performance is based on historical earnings and is not intended to
indicate future performance of the Value Fund.
SUB-ADVISER'S INSTITUTIONAL PRIVATE ACCOUNT PERFORMANCE
The International Fund's sub-adviser, Bank of Ireland Asset Management (U.S.)
Limited ("BIAM") has been managing separate accounts for institutional clients
in the United States for seven years. These accounts had investment objectives,
policies, strategies and risks substantially similar to those of the
International Fund. BIAM's past performance in advising these accounts was a key
factor in its selection as the Fund's sub-adviser. The performance set forth in
the tables below is based on the return achieved on BIAM's fully discretionary
international equity composite of accounts (the "BIAM Composite"). The BIAM
Composite data is provided to illustrate the past performance of BIAM in
managing substantially similar accounts as measured against the International
Fund and the EAFE Index, and does not represent the performance of the
International Fund.
CALENDAR YEAR TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
BIAM BIAM EAFE
YEAR COMPOSITE(A) COMPOSITE(B) INDEX*
- ----------------------------------------------------- --------------- --------------- -----------
<S> <C> <C> <C>
1990 (4.65%) 5.37% (23.20%)
1991 10.61% 9.80% 12.50%
1992 11.00% 10.19% (11.85%)
1993 49.49% 39.53% 32.94%
1994 8.04% (8.74%) 8.06%
1995 18.09% 17.25% 11.55%
1996 21.49% 20.62% 6.36%
</TABLE>
AVERAGE ANNUAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERIOD
BEGINNING
JANUARY 31,
1996,
ENDING
DECEMBER 31, ONE FIVE
1996 YEAR YEARS
------------- --------- ---------
<S> <C> <C> <C>
International Fund** -- -- --
Class A 9.01%
Class B 8.91%
BIAM Composite 21.78% 15.80%
EAFE Index 6.36% 8.48%
</TABLE>
- ------------------------------
* The Morgan Stanley Europe, Australia and Far East Index ("EAFE Index") is a
market-weighted aggregate of 20 individual country indices that
collectively represent many of the major markets of the world, excluding
Canada and the United States.
-- 25 --
<PAGE>
SUB-ADVISER'S INSTITUTIONAL PRIVATE ACCOUNT PERFORMANCE (CONTINUED)
** The performance information of the Class A and Class B Shares (the "Advisor
Classes") of the International Fund reflects the actual performance of the
Advisor Classes for the period September 30, 1996 to December 31, 1996 and
the performance of the No-Load Class of each Fund, restated to reflect the
sales charges but not the Rule 12b-1 fees of the Advisor Classes for the
period prior to September 30, 1996. Performance information would have been
lower for the period prior to September 30, 1996 if Rule 12b-1 fees were
reflected. The gross performance of the Composite in the tables above is
shown after reduction by the International Fund's weighted average expenses
excluding 12b-1 fees (2.09%) of the two fiscal periods ending September 30,
1996 and December 31, 1996.
All returns presented were calculated on a total return basis and reflect the
reinvestment of capital gains, dividends and interest. The BIAM Composite's
returns are asset-weighted using beginning-of-period market values adjusted for
cash flows.
The International Fund's expenses, timing of purchases and sales of portfolio
securities, availability of cash flows, and brokerage commissions are all
reasons that might cause the performance of the International Fund to vary from
that of the SAFECO Composite. In addition, the BIAM Composite accounts are not
subject to the diversification requirements, specific tax restrictions and
investment limitations imposed on the International Fund by the Investment
Company Act of 1940 or Subchapter M of the Internal Revenue Code. Consequently,
the performance results for the BIAM Composite could have been adversely
affected if the accounts included in the BIAM Composite had been regulated as
investment companies under the federal securities laws.
The investment results of BIAM's composite are unaudited and are not intended to
predict or suggest the returns that might be experienced by the International
Fund. Investors should also be aware that the use of a methodology different
from that used below to calculate performance could result in different
performance data.
The EAFE Index is used for comparison purposes only. The EAFE Index is an
unmanaged index of representative international stocks that has no management or
expense charges. Performance is based on historical earnings and is not intended
to indicate future performance of the International Fund.
ALTERNATIVE PURCHASE ARRANGEMENT
This Prospectus offers two classes of shares for each Fund. For each Fund except
the Money Market Fund, Class A shares are sold at net asset value plus an
initial sales charge of up to 4.5%. Class A shares also pay an annual Rule 12b-1
service fee of 0.25% of the average daily net assets of the Class A shares. For
each Fund except the Money Market Fund, Class B shares are sold at net asset
value with no initial sales charge, but a CDSC of up to 5% applies to
redemptions made within six years of purchase. Class B shares also pay an annual
Rule 12b-1 service fee of 0.25% of the average daily net assets of the Class B
shares and an annual Rule 12b-1 distribution fee of 0.75% of the average daily
net assets of the Class B shares. Class B shares convert to Class A shares in
the first month following the investor's sixth anniversary from purchase. The
maximum investment amount in Class B shares is $500,000.
Class A and B shares of the Money Market Fund are sold at net asset value, are
not subject to sales charges, and do not currently pay Rule 12b-1 fees. Money
Market Fund Class A and Class B shares may be subject to sales charges if an
investor exchanges into Class A or Class B shares of another Fund. See
"Purchasing Advisor Class A Shares" and "Purchasing Advisor Class B Shares."
For shareholders of each Fund except the Money Market Fund, the alternative
purchase arrangement permits an investor to choose the method of purchasing
shares that is most beneficial given the amount of the purchase, the length of
time the investor expects to hold the shares, and other circumstances. Investors
should consider whether, during the anticipated life of their investment in a
-- 26 --
<PAGE>
ALTERNATIVE PURCHASE ARRANGEMENT (CONTINUED)
Fund, the accumulated distribution and service fees and CDSCs on Class B shares
prior to conversion would be less than the initial sales charge and accumulated
service fee on Class A shares purchased at the same time.
Class A shares will normally be more beneficial than Class B shares to investors
who qualify for reduced initial sales charges or a sales load waiver on Class A
shares. Class A shares are subject to a service fee (but not a distribution fee)
and, accordingly, pay correspondingly higher dividends per share than Class B
shares. However, because initial sales charges are deducted at the time of
purchase, investors purchasing Class A shares would not have all their funds
invested initially and, therefore, would initially own fewer shares.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time might consider
purchasing Class B shares. The CDSC imposed on the redemption of Class B shares
decreases and is completely eliminated with respect to such shares beginning in
the first month following the investor's sixth anniversary from purchase. Class
B shares automatically convert to Class A shares (which are subject to lower
continuing charges) in the first month following the investor's sixth
anniversary from purchase.
For more information about each Fund's shares, see "How to Purchase Shares"
beginning on page 53.
EACH FUND'S INVESTMENT OBJECTIVE AND POLICIES
The investment objective and investment policies for each Fund are described
below. A Trust's Board of Trustees may change a Fund's (except the California
Fund's) objective without a shareholder vote, but no such change will be made
without prior written notice to shareholders of that Fund (60 days' in the case
of the Money Market, Municipal Bond and Washington Funds and 30 days' in the
case of the other Funds). The California Fund has a fundamental investment
objective that may not be changed without a shareholder vote. In the event a
Fund changes its investment objective, the new objective may not meet the
investment needs of every shareholder and may be different from the objective a
shareholder considered appropriate at the time of initial investment. Each Fund
has adopted a number of investment restrictions. If a Fund satisfies a
percentage limitation at the time of investment, a later increase or decrease in
value, assets or other circumstances will not be considered in determining
whether the Fund complies with the applicable policy (except to the extent the
change may impact the Fund's borrowing limits). Unless otherwise stated, the
investment policies and limitations described below under each Fund's
description and "Common Investment Practices" are non-fundamental and may be
changed without a shareholder vote.
INVESTMENT OBJECTIVES AND POLICIES OF THE STOCK FUNDS
GROWTH FUND
The Growth Fund has as its investment objective to seek growth of capital and
the increased income that ordinarily follows from such growth. The Growth Fund
ordinarily invests a preponderance of its assets in common stock selected
primarily for potential appreciation. Such investments may cause its share price
to be more volatile than the Equity and Income Funds.
To pursue its investment objective, the Growth Fund:
1. WILL INVEST A PREPONDERANCE OF ITS ASSETS IN COMMON STOCKS SELECTED
PRIMARILY FOR POTENTIAL APPRECIATION. To determine those common stocks which
have the potential for long-term growth, SAM will evaluate the issuer's
financial strength, quality of management and earnings power.
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INVESTMENT OBJECTIVES AND POLICIES OF THE STOCK FUNDS (CONTINUED)
2. MAY INVEST IN SECURITIES CONVERTIBLE INTO COMMON STOCK (INCLUDING CORPORATE
BONDS AND PREFERRED STOCK THAT CONVERT TO COMMON STOCK, EITHER AUTOMATICALLY
AFTER A SPECIFIED PERIOD OF TIME OR AT THE OPTION OF THE ISSUER). The Fund
will purchase convertible securities if such securities offer a higher yield
than an issuer's common stock and provide reasonable potential for capital
appreciation.
3. MAY INVEST UP TO 5% OF NET ASSETS IN CONTINGENT VALUE RIGHTS. A contingent
value right is a right issued by a corporation that takes on a
preestablished value if the underlying common stock does not attain a target
price by a specified date.
For a brief description of common stocks, preferred stocks, convertible
securities, and bonds and other debt securities, see "Description of Stocks,
Bonds and Convertible Securities" on page 74.
EQUITY FUND
The Equity Fund has as its investment objective to seek long-term growth of
capital and reasonable current income. The Equity Fund invests principally in
common stock selected for appreciation and/ or dividend potential and from a
long-range investment standpoint. The Equity Fund does not seek to achieve both
growth and income with every portfolio security investment. Rather, it attempts
to achieve a reasonable balance between growth and income on an overall basis.
To pursue its investment objective, the Equity Fund:
1. WILL INVEST, DURING NORMAL MARKET CONDITIONS, AT LEAST 65% OF ITS TOTAL
ASSETS IN EQUITY SECURITIES (WHICH INCLUDE COMMON STOCKS AND PREFERRED
STOCKS). The Fund will invest principally in common stocks selected by SAM
primarily for appreciation and/or dividend potential and from a long-range
investment standpoint.
2. MAY INVEST IN SECURITIES CONVERTIBLE INTO COMMON STOCK (INCLUDING CORPORATE
BONDS AND PREFERRED STOCK THAT CONVERT TO COMMON STOCK, WHETHER
AUTOMATICALLY AFTER A SPECIFIED PERIOD OF TIME OR AT THE OPTION OF THE
ISSUER), EXCEPT THAT LESS THAN 35% OF ITS NET ASSETS WILL BE INVESTED IN
SUCH SECURITIES. The Equity Fund may invest in convertible corporate bonds
that are rated below investment grade (commonly referred to as "high-yield"
or "junk" bonds) or in comparable, unrated bonds, but less than 35% of the
Equity Fund's net assets will be invested in such securities. The Equity
Fund will not purchase a bond rated below Ca by Moody's Investors Service,
Inc. ("Moody's") or CC by Standard & Poor's Ratings Services, a division of
The McGraw-Hill Companies ("S&P") or which is in default on the payment of
principal and interest. Bonds rated Ca or CC are highly speculative and have
large uncertainties or major risk exposures. See "Risk Factors" on page 47
for more information.
For a brief description of common stocks, preferred stocks, convertible
securities, and bonds and other debt securities, see "Description of Stocks,
Bonds and Convertible Securities" on page 74. For a description of debt
securities ratings, see the "Ratings Supplement" on page 74.
INCOME FUND
The Income Fund has as its investment objective to seek high current income and,
when consistent with its objective, the long-term growth of capital. The Fund
currently intends to place greatest emphasis on holding common stock,
convertible corporate bonds and convertible preferred stock. SAM will select
securities primarily for current income, but also with a view toward capital
growth when this can be accomplished without conflicting with the Fund's
investment objective.
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<PAGE>
INVESTMENT OBJECTIVES AND POLICIES OF THE STOCK FUNDS (CONTINUED)
To pursue its investment objective, the Income Fund:
1. WILL INVEST PRIMARILY IN COMMON STOCK AND ALSO IN CONVERTIBLE AND
NON-CONVERTIBLE CORPORATE BONDS AND PREFERRED STOCK (INCLUDING CORPORATE
BONDS AND PREFERRED STOCK THAT CONVERT TO COMMON STOCK EITHER AUTOMATICALLY
AFTER A SPECIFIED PERIOD OF TIME OR AT THE OPTION OF THE ISSUER). The Fund
will purchase convertible securities if such securities offer a higher yield
than an issuer's common stock and provide reasonable potential for capital
appreciation. The Income Fund may invest in convertible corporate bonds that
are rated below investment grade (commonly referred to as "high-yield" or
"junk" bonds) or in comparable, unrated bonds, but less than 35% of the
Income Fund's net assets will be invested in such securities. Bonds rated Ca
by Moody's or CC by S&P are highly speculative and have large uncertainties
or major risk exposures. See "Risk Factors" on page 47 for more information.
2. MAY INVEST UP TO 10% OF TOTAL ASSETS IN EURODOLLAR BONDS WHICH ARE ISSUED BY
U.S. ISSUERS. Eurodollar bonds are traded in the European bond market and
are denominated in U.S. dollars. The Fund will purchase Eurodollar bonds
through U.S. securities dealers and hold such bonds in the United States.
The delivery of Eurodollar bonds to the Fund's custodian in the United
States may cause slight delays in settlement which are not anticipated to
affect the Fund in any material, adverse manner.
For a brief description of common stocks, preferred stocks, convertible
securities, and bonds and other debt securities, see "Description of Stocks,
Bonds and Convertible Securities" on page 74. For a description of debt
securities ratings, see the "Ratings Supplement" on page 74.
NORTHWEST FUND
The Northwest Fund has as its investment objective to seek long-term growth of
capital through investing primarily in Northwest companies. To pursue its
objective, the Fund will invest at least 65% of its total assets in securities
issued by companies with their principal executive offices located in Alaska,
Idaho, Montana, Oregon or Washington.
To pursue its investment objective, the Northwest Fund:
1. WILL ORDINARILY INVEST ITS ASSETS IN SHARES OF COMMON STOCKS AND PREFERRED
STOCKS OF COMPANIES LOCATED IN THE NORTHWEST SELECTED PRIMARILY FOR
POTENTIAL LONG-TERM APPRECIATION. To determine those common and preferred
stocks which have the potential for long-term growth, SAM will evaluate the
issuer's financial strength, quality of management and earnings power. The
Fund generally invests a portion of its assets in smaller companies. See
"Risk Factors" for more information about the risks of investing primarily
in companies located in the Northwest.
2. MAY OCCASIONALLY INVEST IN SECURITIES CONVERTIBLE INTO COMMON STOCK WHEN, IN
THE OPINION OF SAM, THE EXPECTED TOTAL RETURN OF A CONVERTIBLE SECURITY
EXCEEDS THE EXPECTED TOTAL RETURN OF COMMON STOCK ELIGIBLE FOR PURCHASE BY
THE FUND. The Fund may purchase corporate bonds and preferred stock that
convert to common stock either automatically after a specified period of
time or at the option of the issuer. The Fund will purchase those
convertible securities which, in SAM's opinion, have underlying common stock
with potential for long-term growth. The Fund will purchase convertible
securities which are investment grade, i.e., rated in the top four
categories by either S&P or Moody's.
See "Risk Factors" for more information about the risks inherent in geographic
concentration. For a brief description of common stocks, preferred stocks,
convertible securities, and bonds and other debt securities, see "Description of
Stocks, Bonds and Convertible Securities" on page 74. For a description of debt
securities ratings, see the "Ratings Supplement" on page 74.
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<PAGE>
INVESTMENT OBJECTIVES AND POLICIES OF THE STOCK FUNDS (CONTINUED)
INTERNATIONAL FUND
The investment objective of the International Fund is to seek maximum long-term
total return (capital appreciation and income) by investing primarily in common
stock of established non-U.S. companies. To pursue its objective, the
International Fund, under normal market conditions, will invest at least 65% of
its total assets in the securities of companies domiciled in at least five
countries, not including the United States.
To pursue its investment objective, the International Fund:
1. WILL INVEST PRIMARILY IN COMMON STOCKS OF NON-U.S. COMPANIES. Common stock
issued by foreign companies is subject to various risks in addition to those
associated with U.S. investments. For example, the value of the common stock
depends in part upon currency values, the political and regulatory
environments, and overall economic factors in the countries in which the
common stock is issued.
2. MAY INVEST IN PREFERRED STOCKS AND CONVERTIBLE SECURITIES ISSUED BY FOREIGN
COMPANIES.
3. MAY INVEST IN DEBT SECURITIES ISSUED BY FOREIGN COMPANIES AND GOVERNMENTS.
The Fund will make such investments primarily for defensive purposes, but
may also do so where anticipated interest rate movements, or other factors
affecting the degree of risk inherent in a fixed income security, are
expected to change significantly so as to produce appreciation in the
security consistent with the objective of the Fund. The Fund may purchase
sovereign debt instruments issued or guaranteed by foreign governments or
their agencies. Sovereign debt may be in the form of conventional securities
or other types of debt instruments such as loans or loan participations.
Governments or governmental entities responsible for repayment of the debt
may be unable or unwilling to repay principal and interest when due, and may
require renegotiation or rescheduling of debt payments. Repayment of
principal and interest may depend also upon political and economic factors.
4. MAY INVEST IN PASSIVE FOREIGN INVESTMENT COMPANIES ("PFICS"), WHICH INCLUDE
FUNDS OR TRUSTS ORGANIZED AS INVESTMENT VEHICLES TO INVEST IN COMPANIES OF
CERTAIN FOREIGN COUNTRIES. Investors in PFICs bear their proportionate share
of the PFIC's management fees and other expenses. See "Additional Tax
Information" in the Common Stock Trust's Statement of Additional
Information.
5. MAY PURCHASE AND SELL PUT AND CALL OPTIONS ON SECURITIES, FINANCIAL INDICES
AND FOREIGN CURRENCIES, MAY PURCHASE AND SELL THE FOLLOWING NON-LEVERAGED
DERIVATIVE SECURITIES: FUTURES CONTRACTS AND RELATED OPTIONS WITH RESPECT TO
SECURITIES, FINANCIAL INDICES AND FOREIGN CURRENCIES, AND MAY ENTER INTO
FOREIGN CURRENCY TRANSACTIONS SUCH AS FORWARD CONTRACTS. The Fund may employ
certain strategies and techniques utilizing these instruments to mitigate
its exposure to changing currency exchange rates, security prices, interest
rates and other factors that affect security values. There is no guarantee
that these strategies and techniques will work.
An option gives an owner the right to buy or sell securities at a predetermined
exercise price for a given period of time. The writer of an option is obligated
to purchase or sell (depending upon the nature of the option) the underlying
securities if the option is exercised during the specified period of time. A
futures contract is an agreement in which the seller of the contract agrees to
deliver to the buyer an amount of cash equal to a specific dollar amount times
the difference between the value of a security at the close of the last trading
day of the contract and the price at which the agreement is made. A forward
currency contract is an agreement to purchase or sell a foreign currency at some
future time for a fixed amount of U.S. dollars.
The Fund, under normal conditions, will not sell a put or call option if, as a
result thereof, the aggregate value of the assets underlying all such options
(determined as of the date such options are
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<PAGE>
INVESTMENT OBJECTIVES AND POLICIES OF THE STOCK FUNDS (CONTINUED)
written) would exceed 25% of the Fund's net assets. The Fund will not purchase a
put or call option or option on a futures contract if, as a result thereof, the
aggregate premiums paid on all options or options on futures contracts held by
the Fund would exceed 20% of its net assets. In addition, the Fund will not
enter into any futures contract or option on a futures contract if, as a result
thereof, the aggregate margin deposits and premiums required on all such
instruments would exceed 5% of its net assets.
See "Risk Factors" for more information about the risks inherent in securities
issued by foreign issuers and in the purchase and sale of options, futures and
forward contracts. For a brief description of common stocks, preferred stocks,
convertible securities, and bonds and other debt securities, see "Description of
Stocks, Bonds and Convertible Securities" on page 74.
BALANCED FUND
The Balanced Fund has as its investment objective to seek growth and income
consistent with the preservation of capital. To pursue its objective, the
Balanced Fund will invest primarily in equity and fixed income securities and
will occasionally alter the mix of its equity and fixed income securities. Such
action will be taken in response to economic conditions and generally in small
increments. The Balanced Fund will not make significant changes in its asset mix
in an attempt to "time the market."
To pursue its investment objective, the Balanced Fund:
1. WILL ORDINARILY INVEST FROM 50% TO 70% OF ITS TOTAL ASSETS IN EQUITY
SECURITIES, WHICH INCLUDE COMMON STOCKS, PREFERRED STOCK AND SECURITIES
CONVERTIBLE INTO COMMON STOCK. The Fund will invest principally in common
stocks selected by SAM primarily for appreciation and/or dividend potential
and from a long-range investment standpoint. The Fund may purchase corporate
bonds and preferred stock that convert to common stock either automatically
after a specified period of time or at the option of the issuer.
The Fund will purchase those convertible securities which, in SAM's opinion,
have underlying common stock with potential for long-term growth. The Fund
will purchase convertible securities which are investment grade, i.e., rated
in the top four categories by either S&P or Moody's.
2. WILL INVEST AT LEAST 25% OF ITS TOTAL ASSETS IN FIXED-INCOME SENIOR
SECURITIES. The Fund will purchase only those U.S. Government and investment
grade debt obligations or non-rated debt obligations which in SAM's view
contain the credit characteristics of investment grade debt obligations.
Investment grade obligations (rated between Aaa-Baa by Moody's and AAA-BBB
by S&P) are from high to medium quality. Medium quality obligations possess
speculative characteristics and may be more sensitive to economic changes
and changes to the financial condition of issuers.
For a brief description of common stocks, preferred stocks, convertible
securities, and bonds and other debt securities, see "Description of Stocks,
Bonds and Convertible Securities" on page 74. For a description of debt
securities ratings, see the "Ratings Supplement" on page 74.
SMALL COMPANY FUND
The Small Company Fund has as its investment objective to seek long-term growth
of capital through investing primarily in small-sized companies. To pursue its
objective, the Small Company Fund will invest primarily in companies with total
market capitalization of less than $1 billion.
To pursue its investment objective, the Small Company Fund:
1. WILL INVEST AT LEAST 65% OF ITS TOTAL ASSETS IN COMMON STOCK AND PREFERRED
STOCK OF SMALL-SIZED COMPANIES WITH TOTAL MARKET CAPITALIZATION OF LESS THAN
$1 BILLION. Companies whose
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<PAGE>
INVESTMENT OBJECTIVES AND POLICIES OF THE STOCK FUNDS (CONTINUED)
capitalization falls outside this range after purchase continue to be
considered small-capitalized for purposes of the 65% policy. The Fund will
invest principally in common stocks selected by SAM primarily for
appreciation and/or dividend potential and from a long-range investment
standpoint. In determining those common and preferred stocks which have the
potential for long-term growth, SAM will evaluate the issuer's financial
strength, quality of management and earnings power. Investments in small or
newly formed companies involve greater risks than investments in larger,
more established issuers and their securities can be subject to more abrupt
and erratic movements in price. See "Risk Factors" for more information
about the risks inherent in securities issued by small companies.
2. MAY INVEST IN SECURITIES CONVERTIBLE INTO COMMON STOCK WHEN, IN SAM'S
OPINION, THE EXPECTED TOTAL RETURN OF A CONVERTIBLE SECURITY EXCEEDS THE
EXPECTED TOTAL RETURN OF COMMON STOCK ELIGIBLE FOR PURCHASE BY THE FUND. The
Fund will purchase convertible securities if such securities offer a higher
yield than an issuer's common stock and provide reasonable potential for
capital appreciation. The Fund may invest in convertible corporate bonds
that are rated below investment grade (commonly referred to as "high-yield"
or "junk" bonds) or in comparable, unrated bonds, but less than 35% of the
Fund's net assets will be invested in such securities. Bonds rated Ca by
Moody's or CC by S&P are highly speculative and have large uncertainties or
major risk exposures. See "Risk Factors" on page 42 for more information.
See "Risk Factors" for more information about the risks inherent in small
company issuers. For a brief description of common stocks, preferred stocks,
convertible securities, and bonds and other debt securities, see "Description of
Stocks, Bonds and Convertible Securities" on page 74. For a description of debt
securities ratings, see the "Ratings Supplement" on page 74.
VALUE FUND
The Value Fund has as its investment objective to seek long-term growth of
capital and income. The Value Fund primarily invests in common stock selected
for potential appreciation and income using fundamental value analysis. The
Value Fund will invest of least 65% of its assets in common stock and preferred
stock issued by U.S. companies.
To pursue its investment objective, the Value Fund:
1. WILL INVEST A PREPONDERANCE OF ITS ASSETS IN COMMON STOCKS SELECTED
PRIMARILY FOR POTENTIAL APPRECIATION. To determine those common stocks which
have the potential for long-term growth, SAM will evaluate the issuer's
financial strength, quality of management and earnings power.
2. MAY INVEST IN SECURITIES CONVERTIBLE INTO COMMON STOCK (INCLUDING CORPORATE
BONDS AND PREFERRED STOCK THAT CONVERT TO COMMON STOCK, EITHER AUTOMATICALLY
AFTER A SPECIFIED PERIOD OF TIME OR AT THE OPTION OF THE ISSUER). The Fund
will purchase convertible securities if such securities offer a higher yield
than an issuer's common stock and provide reasonable potential for capital
appreciation. The 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 Value
Fund's net assets will be invested in such securities. Bonds rated Ca by
Moody's or CC by S&P are highly speculative and have large uncertainties or
major risk exposures.
For a brief description of common stocks, preferred stocks, convertible
securities, and bonds and other debt securities, see "Description of Stocks,
Bonds and Convertible Securities" on page 74. See "Risk Factors" on page 39 for
more information.
-- 32 --
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES OF THE STOCK FUNDS (CONTINUED)
COMMON INVESTMENT PRACTICES OF THE STOCK FUNDS
Each of the Stock Funds may also follow the investment practices described
below:
1. MAY INVEST IN BONDS AND OTHER DEBT SECURITIES.
Each Fund may invest in bonds and other debt securities that are rated
investment grade by Moody's or S&P, or unrated bonds determined by SAM to be
of comparable quality to such rated bonds. Bonds rated in the lowest
category of investment grade (Baa by Moody's and BBB by S&P) and comparable
unrated bonds have speculative characteristics and are more likely to have a
weakened capacity to make principal and interest payments under changing
economic conditions or upon deterioration in the financial condition of the
issuer.
After purchase by a Stock Fund, a corporate bond may be downgraded or, if
unrated, may cease to be comparable to a rated security. Neither event will
require a Stock Fund to dispose of that security, but SAM will take a
downgrade or loss of comparability into account in determining whether the
Fund should continue to hold the security in its portfolio. The Equity Fund
will not hold more than 3% of its total assets and the Income Fund will not
hold more than 1% of its total assets in bonds that go into default on the
payment of principal and interest after purchase. In the event that 35% or
more of a Stock Fund's net assets is held in securities rated below
investment grade due to a downgrade of one or more corporate bonds, SAM will
engage in an orderly disposition of such securities to the extent necessary
to ensure that the Fund's holdings of such securities remain below 35% of
the Fund's net assets.
2. MAY INVEST IN WARRANTS. Warrants are options to buy a stated number of
shares of common stock at a specified price any time during the life of the
warrant. Generally, the value of a warrant will fluctuate by greater
percentages than the value of the underlying common stock. The primary risk
associated with a warrant is that the term of the warrant may expire before
the exercise price of the common stock has been reached. Under these
circumstances, a Stock Fund could lose all of its principal investment in
the warrant.
3. MAY HOLD CASH OR INVEST TEMPORARILY IN HIGH QUALITY, SHORT-TERM SECURITIES
ISSUED BY AN AGENCY OR INSTRUMENTALITY OF THE U.S. GOVERNMENT, HIGH QUALITY
COMMERCIAL PAPER, CERTIFICATES OF DEPOSIT, SHARES OF NO-LOAD, OPEN-END MONEY
MARKET FUNDS (EXCEPT THE EQUITY FUND) OR REPURCHASE AGREEMENTS. The Stock
Funds may purchase these short-term securities as a cash management
technique under those circumstances where it has cash to manage for a short
time period, for example, after receiving proceeds from the sale of
securities, dividend distributions from portfolio securities or cash from
the sale of Fund shares to investors. With respect to repurchase agreements,
each Stock Fund will invest no more than 5% of its total assets in
repurchase agreements and will not purchase repurchase agreements that
mature in more than seven days. Counterparties of foreign repurchase
agreements may be less creditworthy than U.S. counterparties.
4. MAY PURCHASE SECURITIES ON A "WHEN-ISSUED" OR "DELAYED-DELIVERY" BASIS OR
PURCHASE OR SELL SECURITIES ON A "FORWARD COMMITMENT" BASIS. Under this
procedure, a Stock Fund agrees to acquire securities that are to be issued
and delivered against payment in the future. The price, however, is fixed at
the time of commitment. When a Stock Fund purchases when-issued or
delayed-delivery securities, its custodian bank will maintain in a temporary
holding account cash, U.S. Government securities or other high-grade debt
obligations having a value equal to or greater than such commitments. On
delivery dates for such transactions, the Fund will meet its obligations
from maturities or sales of the securities held in the temporary holding
account or
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<PAGE>
INVESTMENT OBJECTIVES AND POLICIES OF THE STOCK FUNDS (CONTINUED)
from then-available cash flow. If a Stock Fund chooses to dispose of the
right to acquire a when-issued or delayed delivery security prior to its
acquisition, it could incur a gain or loss due to market fluctuations. Use
of these techniques may affect a Fund's share price in a manner similar to
leveraging.
5. MAY INVEST IN AMERICAN DEPOSITARY RECEIPTS ("ADRS"). ADRs are registered
receipts evidencing ownership of an underlying foreign security. They
typically are issued in the United States by a bank or trust company. In
addition to the risks of foreign investment applicable to the underlying
securities, ADRs may also be subject to the risks that the foreign issuer
may not be obligated to cooperate with the U.S. bank or trust company, or
that such information in the U.S. market may not be current. ADRs which are
structured without sponsorship of the issuer of the underlying foreign
security may also be subject to the risk that the foreign issuer may not
provide financial and other material information to the U.S. bank or trust
company issuer. The International Fund may utilize European Depositary
Receipts ("EDRs"), which are similar instruments. EDRs may be in bearer form
and are designed for use in the European securities markets.
6. MAY INVEST UP TO 10% OF ITS TOTAL ASSETS IN FOREIGN SECURITIES, EXCEPT THE
INTERNATIONAL FUND, WHICH MAY INVEST 100% OF ITS ASSETS IN FOREIGN
SECURITIES. FOREIGN SECURITIES ARE SUBJECT TO RISKS IN ADDITION TO THOSE
INHERENT IN INVESTMENTS IN DOMESTIC SECURITIES. See "Risk Factors" on page
47 for more information about the risks associated with investments in
foreign securities.
7. MAY INVEST UP TO 10% OF ITS TOTAL ASSETS IN SHARES OF REAL ESTATE INVESTMENT
TRUSTS ("REITS"). REITs purchase real property, which is then leased, and
make mortgage investments. For federal income tax purposes, REITs attempt to
qualify for beneficial "modified pass-through" tax treatment by annually
distributing at least 95% of their taxable income. If a REIT were unable to
qualify for such tax treatment, it would be taxed as a corporation and the
distributions made to its shareholders would not be deductible by it in
computing its taxable income. REITs are dependent upon the successful
operation of properties owned and the financial condition of lessees and
mortgagors. The value of REIT units fluctuates depending on the underlying
value of the real property and mortgages owned and the amount of cash flow
(net income plus depreciation) generated and paid out. In addition, REITs
typically borrow to increase funds available for investment. Generally,
there is a greater risk associated with REITs that are highly leveraged.
8. MAY INVEST UP TO 10% OF ITS TOTAL ASSETS IN RESTRICTED SECURITIES, PROVIDED
THAT SAM HAS DETERMINED THAT SUCH SECURITIES ARE LIQUID UNDER GUIDELINES
ADOPTED BY THE COMMON STOCK TRUST'S BOARD OF TRUSTEES. Restricted securities
may be sold only in offerings registered under the Securities Act of 1933,
as amended ("1933 Act"), or in transactions exempt from the registration
requirements under the 1933 Act. Rule 144A under the 1933 Act provides an
exemption for the resale of certain restricted securities to qualified
institutional buyers. Investing in restricted securities may increase the
Stock Funds' illiquidity to the extent that qualified institutional buyers
or other buyers become, for a time, unwilling to purchase the securities. As
a result, a Stock Fund may not be able to sell these securities when its
investment adviser or sub-investment adviser deems it advisable to sell, or
may have to sell them at less than fair value. In addition, market
quotations are sometimes less readily available for restricted securities.
Therefore, judgment may at times play a greater role in valuing these
securities than in the case of unrestricted securities.
9. MAY INVEST IN SECURITIES WHOSE PERFORMANCE AND PRINCIPAL AMOUNT AT MATURITY
ARE LINKED TO A SPECIFIED EQUITY SECURITY OR SECURITIES INDEX. The value of
an indexed security is determined by reference to a specific equity
instrument or statistic. The performance of indexed securities
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<PAGE>
INVESTMENT OBJECTIVES AND POLICIES OF THE STOCK FUNDS (CONTINUED)
depends largely on the performance of the securities or indices to which
they are indexed, but such securities are also subject to credit risks
associated with the issuer of the security. Indexed securities may also be
more volatile than their underlying instruments.
10. MAY INVEST UP TO 5% OF ITS TOTAL ASSETS IN SECURITIES OF UNSEASONED ISSUERS.
Unseasoned issuers are those companies which, together with any
predecessors, have been in operation for less than three years.
The following restrictions are fundamental policies of the Stock Funds that
cannot be changed without shareholder vote.
1. EACH FUND, WITH RESPECT TO 75% OF THE VALUE OF ITS TOTAL ASSETS, MAY NOT
INVEST MORE THAN 5% OF ITS TOTAL ASSETS IN THE SECURITIES OF ANY ONE ISSUER
(OTHER THAN U.S. GOVERNMENT SECURITIES).
2. THE GROWTH, INCOME AND NORTHWEST FUNDS MAY NOT PURCHASE MORE THAN 10% OF ANY
CLASS OF SECURITIES OF ANY ONE ISSUER.
3. EACH FUND, WITH RESPECT TO 100% OF THE VALUE OF ITS TOTAL ASSETS, MAY NOT
PURCHASE MORE THAN 10% OF THE OUTSTANDING VOTING SECURITIES OF ANY ONE
ISSUER (OTHER THAN U.S. GOVERNMENT SECURITIES).
4. EACH STOCK FUND MAY BORROW MONEY ONLY FOR TEMPORARY OR EMERGENCY PURPOSES,
AND THE GROWTH FUND ONLY FOR EXTRAORDINARY OR EMERGENCY PURPOSES, FROM A
BANK OR AFFILIATE OF SAFECO CORPORATION AT AN INTEREST RATE NOT GREATER THAN
THAT AVAILABLE FROM COMMERCIAL BANKS. The Growth, Income and Northwest Funds
will not borrow amounts in excess of 20%, and the Equity, Balanced,
International, Small Company and Value Funds will not borrow amounts in
excess of 33%, of total assets. A Stock Fund will not purchase securities if
borrowings equal to or greater than 5% of total assets are outstanding for
that Fund.
For more information, see the "Investment Policies" and "Additional Investment
Information" sections of the Common Stock Trust's Statement of Additional
Information.
INVESTMENT POLICIES OF THE INTERMEDIATE TREASURY FUND
The investment objective of the Intermediate Treasury Fund is to provide as high
a level of current income as is consistent with the preservation of capital. The
Intermediate Treasury Fund will seek to maintain a portfolio of U.S. Treasury
obligations with an average dollar weighted maturity of between three and ten
years; however, individual obligations held by the Intermediate Treasury Fund
may have maturities outside that range.
To pursue its investment objective, the Intermediate Treasury Fund:
1. WILL INVEST, DURING NORMAL MARKET CONDITIONS, AT LEAST 65% OF ITS TOTAL
ASSETS IN DIRECT OBLIGATIONS OF THE U.S. TREASURY SUCH AS U.S. TREASURY
BILLS, NOTES AND BONDS. The Intermediate Treasury Fund may also invest in
stripped securities that are direct obligations of the U.S. Treasury. Direct
obligations of the U.S. Treasury are supported by the full faith and credit
of the U.S. Government.
2. WILL INVEST UP TO 35% OF ITS TOTAL ASSETS IN:
OTHER U.S. GOVERNMENT SECURITIES, including (a) securities supported by the
full faith and credit of the U.S. Government but that are not direct
obligations of the U.S. Treasury, such as securities issued by the
Government National Mortgage Association ("GNMA"), (b) securities that are
not supported by the full faith and credit of the U.S. Government but are
supported by the issuer's ability to borrow from the U.S. Treasury, such as
securities issued by the Federal National
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INVESTMENT POLICIES OF THE INTERMEDIATE TREASURY FUND (CONTINUED)
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"), and (c) securities supported solely by the creditworthiness of
the issuer, such as securities issued by the Tennessee Valley Authority
("TVA"). While U.S. Government securities are considered to be of the
highest credit quality available, they are subject to the same market risks
as comparable debt securities.
CORPORATE DEBT SECURITIES which at the time of purchase are rated in the top
three grades (A or higher) by either Moody's or S&P, or, if unrated,
determined by SAM to be of comparable quality to such rated debt securities.
In addition to reviewing ratings, SAM will analyze the quality of rated and
unrated corporate bonds for purchase by the Fund by evaluating various
factors that may include the issuer's capital structure, earnings power and
quality of management. See "Ratings Supplement" beginning on page 74.
3. MAY INVEST UP TO 5% OF ITS TOTAL ASSETS IN YANKEE SECTOR DEBT SECURITIES,
EURODOLLAR BONDS AND MUNICIPAL SECURITIES. See the Taxable Bond Trust's
Statement of Additional Information for more information about these
securities.
INVESTMENT POLICIES OF THE HIGH-YIELD FUND
The High-Yield Fund has as its investment objective to provide a high level of
current interest income through the purchase of high-yield, fixed-income
securities. The higher yields that the Fund seeks are usually available from
lower-rated or unrated securities sometimes referred to as "junk bonds." The
maturity of the debt obligations held by the Fund may range from 1 to 30 years.
However, it is anticipated that the majority of debt obligations will have
maturities from 5 to 15 years.
To pursue its investment objective, the High-Yield Fund:
1. WILL INVEST, DURING NORMAL MARKET CONDITIONS, AT LEAST 65% OF ITS PORTFOLIO
IN HIGH-YIELD, FIXED-INCOME SECURITIES. The High-Yield Fund may purchase
debt and preferred stock issues (including convertible securities) which are
below investment grade, I.E., rated lower than the top four grades by S&P or
Moody's, or, if not rated by these agencies, in the opinion of SAM, have
credit characteristics comparable to such rated securities. Up to 25% of the
Fund's total assets may be invested in such unrated securities. SAM will
determine the quality of unrated obligations by evaluating the issuer's
capital structure, earnings power and quality of management. Unrated
securities may not be as attractive to as many investors as rated
securities. In addition, the Fund may invest up to 5% of its total assets in
securities which are in default. The Fund will purchase securities which are
in default only when, in SAM's opinion, the potential for high yield
outweighs the risk.
While fixed-income securities rated lower than investment grade generally
lack characteristics of a desirable investment, they normally offer a
current yield or yield-to-maturity which is significantly higher than the
yield available from securities rated as investment grade. These securities
are speculative and involve greater investment risks due to the issuers'
reduced creditworthiness and increased likelihood of default and bankruptcy.
In addition, these securities are frequently subordinated to senior
securities. For further explanation of the special risks associated with
investing in lower-rated, fixed-income securities, see "Risk Factors" on
page 47.
For a description of debt ratings, see "Rating Supplement" beginning on page
74. For a breakdown of the debt securities held by the High-Yield Fund
during the fiscal period ended December 31, 1996, see "Debt Securities
Holdings" on page 76. The High-Yield Fund may retain an issue whose rating
has been changed.
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INVESTMENT POLICIES OF THE HIGH-YIELD FUND (CONTINUED)
2. MAY INVEST IN FIXED-INCOME SECURITIES WITH EQUITY FEATURES WHEN COMPARABLE
IN YIELD AND RISK TO FIXED-INCOME SECURITIES WITHOUT EQUITY FEATURES, BUT
ONLY WHEN ACQUIRED AS A RESULT OF UNIT OFFERINGS WHICH CARRY AN EQUITY
ELEMENT SUCH AS COMMON STOCK, RIGHTS OR OTHER EQUITY SECURITIES. The Fund
will hold these common stocks, rights or other equity securities until SAM
determines that, in its opinion, the optimal time for sale of the equity
security has been reached.
3. MAY INVEST IN RESTRICTED SECURITIES ELIGIBLE FOR RESALE UNDER RULE 144A
("RULE 144A SECURITIES"), PROVIDED THAT SAM HAS DETERMINED THAT SUCH
SECURITIES ARE LIQUID UNDER GUIDELINES ADOPTED BY THE BOARD OF TRUSTEES.
Restricted securities may be sold only in offerings registered under the
Securities Act of 1933 ("1933 Act") or in transactions exempt from the
registration requirements under the 1933 Act. Rule 144A under the 1933 Act
provides an exemption for the resale of certain restricted securities to
qualified institutional buyers. Investing in Rule 144A securities could have
the effect of increasing the Fund's illiquidity to the extent that qualified
institutional buyers or other buyers become, for a time, unwilling to
purchase the securities.
4. MAY INVEST UP TO 5% OF ITS TOTAL ASSETS IN MUNICIPAL SECURITIES WHICH ARE
RATED LOWER THAN THE TOP THREE GRADES ASSIGNED BY MOODY'S OR S&P OR ARE
UNRATED BUT COMPARABLE TO SUCH RATED SECURITIES IF, IN THE OPINION OF SAM,
THE POTENTIAL FOR APPRECIATION IS GREATER THAN, AND YIELD IS COMPARABLE TO
OR GREATER THAN, SIMILARLY-RATED TAXABLE SECURITIES. Investment in medium
and lower quality tax-exempt bonds involves the same risks as investments in
taxable bonds of similar quality.
5. MAY INVEST IN OBLIGATIONS OF, OR GUARANTEED BY, THE U.S. GOVERNMENT, ITS
AGENCIES OR INSTRUMENTALITIES OR IN FIXED-INCOME SECURITIES WHICH ARE RATED
IN THE FOUR HIGHEST GRADES ASSIGNED BY MOODY'S OR S&P DURING MARKET
CONDITIONS WHICH, IN THE OPINION OF SAM, ARE UNFAVORABLE FOR SATISFACTORY
PERFORMANCE BY LOWER-RATED OR UNRATED FIXED-INCOME SECURITIES. The Fund may
invest in higher-rated securities when changing economic conditions or other
factors cause the difference in yield between lower-rated and higher-rated
securities to narrow and SAM believes that the risk of loss to principal may
be substantially reduced with a small reduction in yield.
COMMON INVESTMENT PRACTICES OF THE INTERMEDIATE TREASURY FUND AND THE HIGH-YIELD
FUND
The Intermediate Treasury Fund and High-Yield Fund may also follow the
investment practices described below:
1. MAY HOLD CASH OR INVEST TEMPORARILY IN HIGH-QUALITY COMMERCIAL PAPER,
CERTIFICATES OF DEPOSIT, SHARES OF NO-LOAD, OPEN-END MONEY MARKET FUNDS,
REPURCHASE AGREEMENTS AND HIGH-QUALITY SHORT-TERM SECURITIES ISSUED BY AN
AGENCY OR INSTRUMENTALITY OF THE U.S. GOVERNMENT. Each Fund may purchase
these short-term securities as a cash management technique under those
circumstances where it has cash to manage for a short time period, for
example, after receiving proceeds from the sale of securities, interest
payments, dividend distributions from portfolio securities, or cash from the
sale of Fund shares to investors. Interest earned from these short-term
securities will be taxable to investors as ordinary income when distributed.
2. MAY INVEST FOR SHORT-TERM PURPOSES WHEN SAM BELIEVES SUCH ACTION TO BE
DESIRABLE AND CONSISTENT WITH SOUND INVESTMENT PRACTICES. Neither Fund,
however, will engage primarily in trading for the purpose of short-term
profits. A Fund may dispose of its portfolio securities whenever SAM deems
advisable, without regard to the length of time the securities have been
held.
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<PAGE>
COMMON INVESTMENT PRACTICES OF THE INTERMEDIATE TREASURY FUND AND THE HIGH-YIELD
FUND (CONTINUED)
3. MAY PURCHASE OR SELL SECURITIES ON A "WHEN-ISSUED" OR "DELAYED-DELIVERY"
BASIS. Under this procedure, a Fund agrees to acquire or sell securities
that are to be delivered against payment in the future, normally 30 to 45
days. The price, however, is fixed at the time of commitment. When a Fund
purchases when-issued or delayed-delivery securities, it will earmark
liquid, high-quality securities in an amount equal in value to the purchase
price of the security. Use of these techniques may affect the Fund's share
price in a manner similar to leveraging.
The following restrictions are fundamental policies of the Intermediate Treasury
Fund and High-Yield Fund which cannot be changed without shareholder vote.
1. EACH FUND, WITH RESPECT TO 75% OF THE VALUE OF ITS TOTAL ASSETS, MAY NOT
INVEST MORE THAN 5% OF ITS TOTAL ASSETS IN THE SECURITIES OF ANY ONE ISSUER
(OTHER THAN U.S. GOVERNMENT SECURITIES).
2. EACH FUND, WITH RESPECT TO 100% OF THE VALUE OF ITS TOTAL ASSETS, MAY NOT
PURCHASE MORE THAN 10% OF THE OUTSTANDING VOTING SECURITIES OF ANY ONE
ISSUER (OTHER THAN U.S. GOVERNMENT SECURITIES).
3. EACH FUND MAY BORROW MONEY ONLY FOR TEMPORARY OR EMERGENCY PURPOSES FROM A
BANK OR SAFECO CORPORATION OR AFFILIATES OF SAFECO CORPORATION AT AN
INTEREST RATE NOT GREATER THAN THAT AVAILABLE FROM COMMERCIAL BANKS. A Fund
will not borrow amounts in excess of 20% of its total assets. A Fund will
not purchase securities if outstanding borrowings are equal to or greater
than 5% of its total assets. Each Fund intends to exercise its borrowing
authority primarily to meet shareholder redemptions under circumstances
where redemption requests exceed available cash.
4. EACH FUND MAY INVEST UP TO 10% OF ITS NET ASSETS IN ILLIQUID SECURITIES,
WHICH ARE SECURITIES THAT CANNOT BE SOLD WITHIN SEVEN DAYS IN THE ORDINARY
COURSE OF BUSINESS FOR APPROXIMATELY THE AMOUNT AT WHICH THEY ARE VALUED.
Due to the absence of an active trading market, a Fund may experience
difficulty in valuing or disposing of illiquid securities. SAM determines
the liquidity of the securities under guidelines adopted by the Taxable Bond
Trust's Board of Trustees.
5. EACH FUND MAY INVEST UP TO 10% OF NET ASSETS IN REPURCHASE AGREEMENT
TRANSACTIONS. Repurchase agreements are transactions in which a Fund
purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date and price reflecting a market rate of interest unrelated to
the coupon rate or maturity of the purchased securities. Repurchase
agreements carry certain risks not associated with direct investments in
securities, including the risk that the Fund will be unable to dispose of
the security during the term of the repurchase agreement if the security's
market value declines, and delays and costs to a Fund if the other party to
the repurchase agreement declares bankruptcy.
For more information see the "Investment Policies" and "Additional Investment
Information" sections of the Taxable Bond Trust's Statement of Additional
Information.
INVESTMENT POLICIES OF THE MANAGED BOND FUND
The investment objective of the Managed Bond Fund is to provide as high a level
of total return as is consistent with the relative stability of capital through
purchase of investment grade debt securities.
In pursuing the Managed Bond Fund's investment objective, SAM will seek to
minimize the effects of interest rate risks while pursuing total return by
adjusting the investment portfolio's average maturity in response to interest
rate changes. In general, the Managed Bond Fund's strategy will be to hold
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<PAGE>
INVESTMENT POLICIES OF THE MANAGED BOND FUND (CONTINUED)
fixed-income securities with shorter maturities as interest rates rise and with
longer maturities as interest rates fall. The fixed-income securities held by
the Managed Bond Fund will have maturities of 10 years or less from the date of
purchase. SAM reserves the right to modify the Managed Bond Fund's investment
strategy in any respect at any time.
To pursue its investment objective, the Managed Bond Fund:
1. WILL INVEST AT LEAST 65% OF ITS TOTAL ASSETS IN BONDS, DEFINED AS
FIXED-INCOME SECURITIES.
2. WILL INVEST PRIMARILY IN INVESTMENT GRADE DEBT SECURITIES; I.E., SECURITIES
RATED IN THE TOP FOUR CATEGORIES BY EITHER S&P OR MOODY'S OR IF NOT RATED,
SECURITIES WHICH, IN SAM'S OPINION, ARE COMPARABLE IN QUALITY TO INVESTMENT
GRADE DEBT SECURITIES. Included in investment grade debt securities are
securities of medium grade (rated Baa by Moody's or BBB by S&P) which have
speculative characteristics and are more likely to have a weakened capacity
to make principal and interest payments under changing economic or other
conditions than higher grade securities. The Managed Bond Fund will limit
investments in such medium grade debt securities to no more than 10% of its
total assets. Unrated securities are not necessarily of lower quality than
rated securities, but may not be as attractive to investors.
The Managed Bond Fund may retain debt securities which are downgraded to
below investment grade (commonly referred to as "high yield" or "junk"
bonds) after purchase. In the event that due to a downgrade of one or more
debt securities an amount in excess of 5% of the Fund's net assets is held
in securities rated below investment grade, SAM will engage in an orderly
disposition of such securities to the extent necessary to reduce the Fund's
holdings of such securities to no more than 5% of the Fund's net assets. In
addition to reviewing ratings, SAM may analyze the quality of rated and
unrated debt securities purchased for the Managed Bond Fund by evaluating
the issuer's capital structure, earnings power, quality of management and
position within its industry. For a description of debt securities ratings,
see "Ratings Supplement" beginning on page 74.
3. WILL INVEST AT LEAST 50% OF ITS TOTAL ASSETS IN OBLIGATIONS OF OR GUARANTEED
BY THE U.S. GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES. These
obligations include (a) direct obligations of the U.S. Treasury, such as
U.S. Treasury notes, bills, bonds and stripped securities; (b) securities
supported by the full faith and credit of the U.S. Government but that are
not direct obligations of the U.S. Treasury, such as securities issued by
the GNMA; (c) securities that are not supported by the full faith and credit
of the U.S. Government but are supported by the issuer's ability to borrow
from the U.S. Treasury, such as securities issued by the FNMA and the FHLMC;
and (d) securities supported solely by the creditworthiness of the issuer,
such as securities issued by the TVA. While U.S. Government securities are
considered to be of the highest credit quality available, they are subject
to the same market risks as comparable debt securities.
4. MAY INVEST UP TO 50% OF ITS TOTAL ASSETS IN CORPORATE DEBT SECURITIES OR
EURODOLLAR BONDS. Eurodollar bonds are bonds issued by either U.S. or
foreign issuers that are traded in the European bond markets and denominated
in U.S. dollars. The Managed Bond Fund will purchase Eurodollar bonds
through U.S. securities dealers and hold such bonds in the United States.
The delivery of Eurodollar bonds to the Managed Bond Fund's custodian in the
United States may cause slight delays in settlement which are not
anticipated to affect the Managed Bond Fund in any material, adverse manner.
Eurodollar bonds issued by foreign issuers are subject to the same risks as
Yankee sector bonds discussed below.
5. MAY INVEST IN ASSET-BACKED SECURITIES, WHICH REPRESENT INTERESTS IN, OR ARE
SECURED BY AND PAYABLE FROM, POOLS OF ASSETS SUCH AS CONSUMER LOANS,
AUTOMOBILE RECEIVABLE SECURITIES, CREDIT CARD RECEIVABLE SECURITIES, AND
INSTALLMENT LOAN CONTRACTS. These securities may be supported by credit
enhancements such as letters of credit. Payment of interest and principal
ultimately
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<PAGE>
INVESTMENT POLICIES OF THE MANAGED BOND FUND (CONTINUED)
depends upon borrowers paying the underlying loans. There is a risk that one
or more of the underlying borrowers may default and that recovery on
repossessed collateral may be unavailable or inadequate to support payments
on the defaulted asset-backed securities. In addition, asset-backed
securities are subject to prepayment risks which may reduce the overall
return of the investment.
6. MAY INVEST UP TO 10% OF ITS TOTAL ASSETS IN YANKEE SECTOR DEBT SECURITIES,
WHICH ARE SECURITIES ISSUED AND TRADED IN THE UNITED STATES BY FOREIGN
ISSUERS. These bonds have investment risks that are different from those of
domestic issuers. Such risks may include nationalization of the issuer,
confiscatory taxation by the foreign government that would inhibit the
ability of the issuer to make principal and interest payments to the Managed
Bond Fund, lack of comparable publicly available information concerning
foreign issuers, lack of comparable accounting and auditing practices in
foreign countries and, finally, difficulty in enforcing claims against
foreign issuers in the event of default.
Both S&P and Moody's rate Yankee sector debt obligations. If a debt
obligation is unrated, SAM will attempt to analyze a potential investment in
the foreign issuer with respect to quality and risk on the same basis as the
rating services. Because public information is not always comparable to that
available on domestic issuers, this may not be possible. Therefore, while
SAM will attempt to select investments in foreign securities on the same
basis, and with comparable quantities and types of information, as its
investments in domestic securities, that may not always be possible.
7. MAY PURCHASE OR SELL SECURITIES ON A WHEN-ISSUED OR DELAYED-DELIVERY BASIS.
Under this procedure, the Managed Bond Fund agrees to acquire securities
that are to be issued and delivered against payment in the future, normally
30 to 45 days. The price, however, is fixed at the time of commitment. When
the Managed Bond Fund purchases when-issued or delayed-delivery securities,
it will earmark liquid, high quality securities in an amount equal in value
to the purchase price of the security. Use of these techniques may affect
the Managed Bond Fund's share price in a manner similar to the use of
leveraging.
8. MAY HOLD CASH OR INVEST TEMPORARILY IN HIGH QUALITY, SHORT-TERM SECURITIES
ISSUED BY AN AGENCY OR INSTRUMENTALITY OF THE U.S. GOVERNMENT, HIGH QUALITY
COMMERCIAL PAPER, CERTIFICATES OF DEPOSIT, SHARES OF NO-LOAD, OPEN-END MONEY
MARKET FUNDS OR REPURCHASE AGREEMENTS. The Managed Bond Fund may purchase
these short-term securities as a cash management technique under those
circumstances where it has cash to manage for a short time period, for
example, after receiving proceeds from the sale of securities, interest
payments or dividend distributions from portfolio securities or cash from
the sale of Managed Bond Fund shares to investors. Interest earned from
these short-term securities will be taxable to investors as ordinary income
when distributed. With respect to repurchase agreements, the Managed Bond
Fund will invest no more than 5% of its total assets in repurchase
agreements, and will not purchase repurchase agreements which mature in more
than seven days.
9. MAY HOLD CASH AS A TEMPORARY DEFENSIVE MEASURE WHEN MARKET CONDITIONS SO
WARRANT.
10. MAY INVEST UP TO 5% OF ITS TOTAL ASSETS IN MUNICIPAL SECURITIES IF, IN SAM'S
OPINION, THE POTENTIAL FOR APPRECIATION IS GREATER THAN, AND YIELD IS
COMPARABLE TO OR GREATER THAN, SIMILARLY RATED TAXABLE SECURITIES.
11. MAY INVEST FOR SHORT-TERM PURPOSES WHEN SAM BELIEVES SUCH ACTION TO BE
DESIRABLE AND CONSISTENT WITH SOUND INVESTMENT PRACTICES. The Managed Bond
Fund, however, will not engage primarily in trading for the purpose of
short-term profits. The Managed Bond Fund may dispose of its portfolio
securities whenever SAM deems advisable, without regard to the length of
time the securities have been held.
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<PAGE>
INVESTMENT POLICIES OF THE MANAGED BOND FUND (CONTINUED)
The following restrictions are fundamental policies of the Managed Bond Fund
which cannot be changed without shareholder vote.
1. THE FUND, WITH RESPECT TO 75% OF THE VALUE OF ITS TOTAL ASSETS, MAY NOT
INVEST MORE THAN 5% OF ITS TOTAL ASSETS IN THE SECURITIES OF ANY ONE ISSUER
(OTHER THAN U.S. GOVERNMENT SECURITIES).
2. THE FUND, WITH RESPECT TO 100% OF THE VALUE OF ITS TOTAL ASSETS, MAY NOT
PURCHASE MORE THAN 10% OF THE OUTSTANDING VOTING SECURITIES OF ANY ONE
ISSUER (OTHER THAN U.S. GOVERNMENT SECURITIES).
3. THE FUND MAY BORROW MONEY FOR TEMPORARY OR EMERGENCY PURPOSES ONLY FROM A
BANK OR AFFILIATE OF SAFECO CORPORATION AT AN INTEREST RATE NOT GREATER THAN
THAT AVAILABLE FROM COMMERCIAL BANKS. The Fund will not borrow amounts in
excess of 20% of its total assets. As a non-fundamental policy, the Fund
will not purchase securities if outstanding borrowings are equal to or
greater than 5% of its total assets. The Fund intends to exercise its
borrowing authority primarily to meet shareholder redemptions under
circumstances where redemptions exceed available cash.
For more information, see the "Investment Policies" and "Additional Investment
Information" sections of the Managed Bond Trust's Statement of Additional
Information.
INVESTMENT POLICIES OF THE TAX-EXEMPT INCOME FUNDS
The investment objective of the Municipal Bond Fund is to provide as high a
level of current interest income exempt from federal income tax as is consistent
with the relative stability of capital. The investment objective of the
California Fund is to provide as high a level of current interest income exempt
from federal income tax and California State personal income tax as is
consistent with the relative stability of capital. The investment objective of
the Washington Fund is to provide as high a level of current interest income
exempt from federal income tax as is consistent with prudent investment risk.
To pursue its investment objective, each of the Tax-Exempt Income Funds:
1. WILL, DURING NORMAL MARKET CONDITIONS, INVEST AS A MATTER OF FUNDAMENTAL
POLICY AT LEAST 80% OF ITS NET ASSETS IN SECURITIES THE INTEREST ON WHICH IS
EXEMPT FROM FEDERAL INCOME TAX AND, IN THE CASE OF THE CALIFORNIA FUND,
EXEMPT FROM CALIFORNIA PERSONAL INCOME TAX. The Tax-Exempt Income Funds do
not currently intend to purchase taxable investments, except as a temporary
accommodation or in an emergency situation.
2. WILL INVEST AT LEAST 65% OF ITS TOTAL ASSETS IN MUNICIPAL BONDS (IN THE CASE
OF THE WASHINGTON FUND, ISSUED BY THE STATE OF WASHINGTON OR POLITICAL
SUBDIVISIONS, MUNICIPALITIES, AGENCIES, INSTRUMENTALITIES OR PUBLIC
AUTHORITIES WITHIN THE STATE OF WASHINGTON) HAVING A MATURITY IN EXCESS OF
ONE YEAR THAT AT THE TIME OF ACQUISITION ARE INVESTMENT GRADE; I.E., RATED
IN ONE OF THE FOUR HIGHEST GRADES ASSIGNED BY MOODY'S OR S&P OR, IF UNRATED,
DETERMINED BY SAM TO BE OF COMPARABLE QUALITY. Each Tax-Exempt Income Fund
may invest up to 20% of its total assets in unrated municipal bonds. Unrated
securities are not necessarily lower in quality than rated securities, but
may not be as attractive to as many investors as rated securities. Each
Tax-Exempt Income Fund will invest no more than 33% of its total assets in
municipal bonds rated in the fourth highest grade or in comparable unrated
bonds. Such bonds are of medium grade, have speculative characteristics and
are more likely to have a weakened capacity to make principal and interest
payments under changing economic conditions or upon deterioration in the
financial condition of the issuer.
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INVESTMENT POLICIES OF THE TAX-EXEMPT INCOME FUNDS (CONTINUED)
In addition to reviewing ratings, SAM will analyze the quality of rated and
unrated municipal bonds for purchase by each Tax-Exempt Income Fund by
evaluating various factors that may include the issuer's or guarantor's
financial resources and liquidity, economic feasibility of revenue bond
project financing and general purpose borrowings, cash flow and ability to
meet anticipated debt service requirements, quality of management,
sensitivity to economic conditions, operating history and any relevant
political or regulatory matters. SAM may also evaluate trends in the
economy, the financial markets or specific geographic areas in determining
whether to purchase a bond. For a description of municipal bond ratings, see
the Tax-Exempt Bond Trust's Statement of Additional Information.
After purchase by a Fund, a municipal bond may be downgraded to below
investment grade or, if unrated, may cease to be comparable to a rated
investment grade security (such below investment grade securities are
commonly referred to as "high-yield" or "junk" bonds). Neither event will
require a Fund to dispose of that security, but SAM will take a downgrade or
loss of comparability into account in determining whether the Fund should
continue to hold the security in its portfolio. Each Tax-Exempt Income Fund
will not hold more than 5% of its net assets in such below investment grade
securities.
The term "municipal bonds" as used in this Prospectus means those
obligations issued by or on behalf of states, territories or possessions of
the United States and the District of Columbia and their political
subdivisions, municipalities, agencies, instrumentalities or public
authorities, the interest on which in the opinion of bond counsel is exempt
from federal income tax and, in the case of the California Fund, exempt from
California personal income tax.
3. MAY INVEST IN ANY OF THE FOLLOWING TYPES OF MUNICIPAL BONDS:
REVENUE BONDS, which are "limited obligation" bonds that provide financing
for specific projects or public facilities. These bonds are backed by
revenues generated by a particular project or facility or by a special tax.
A "resource recovery bond" is a type of revenue bond issued to build waste
facilities or plants. An "industrial development bond" ("IDB") is a type of
revenue bond that is backed by the credit of a private issuer, generally
does not have access to the resources of a municipality for payment and may
involve greater risk. Each Tax-Exempt Income Fund intends to invest
primarily in revenue bonds that may be issued to finance various types of
projects, including but not limited to education, hospitals, housing, waste
and utilities. Each Tax-Exempt Income Fund will not purchase private
activity bonds ("PABs") or any other type of revenue bonds, the interest on
which is a tax preference item for purposes of the alternative minimum tax.
GENERAL OBLIGATION BONDS, which are bonds that provide general purpose
financing for state and local governments and are backed by the taxing power
of the state and local government as the case may be. The taxes or special
assessments that can be levied for the payment of principal and interest on
general obligation bonds may be limited or unlimited as to rate or amount.
VARIABLE AND FLOATING RATE OBLIGATIONS, which are municipal obligations that
carry variable or floating rates of interest. Variable rate instruments bear
interest at rates that are readjusted at periodic intervals. Floating rate
instruments bear interest at rates that vary automatically with changes in
specified market rates or indexes, such as the bank prime rate. Accordingly,
as interest rates fluctuate, the potential for capital appreciation or
depreciation of these obligations is less than for fixed rate obligations.
Floating and variable rate obligations typically carry demand features that
permit a Fund to tender (sell) them back to the issuer at par prior to
maturity and on short notice. A Fund's ability to obtain payment from the
issuer at par may be affected by
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INVESTMENT POLICIES OF THE TAX-EXEMPT INCOME FUNDS (CONTINUED)
events occurring between the date the Fund elects to tender the obligation
to the issuer and the date redemption proceeds are payable to the Fund. Each
Tax-Exempt Income Fund will purchase floating and variable rate obligations
only if at the time of purchase there is a secondary market for such
instruments.
PUT BONDS, which are municipal bonds that give the holder the unconditional
right to sell the bond back to the issuer at a specified price and exercise
date and PUT BONDS WITH DEMAND FEATURES. The obligation to purchase the bond
on the exercise date may be supported by a letter of credit or other
arrangement from a bank, insurance company or other financial institution,
the credit standing of which affects the credit quality of the bond. A
demand feature is a put that entitles the Fund holding it to repayment of
the principal amount of the underlying security on no more than 30 days'
notice at any time or at specified intervals.
MUNICIPAL LEASE OBLIGATIONS, which are issued by or on behalf of state or
local government authorities to acquire land, equipment or facilities and
may be subject to annual budget appropriations. These obligations themselves
are not normally backed by the credit of the municipality or the state but
are secured by rent payments made by the municipality or by the state
pursuant to a lease. If the lease is assigned, the interest on the
obligation may become taxable. The leases underlying certain municipal lease
obligations provide that lease payments are subject to partial or full
abatement if, because of material damage or destruction of the lease
property, there is substantial interference with the lessee's use or
occupancy of such property. This "abatement risk" may be reduced by the
existence of insurance covering the leased property, the maintenance by the
lessee of reserve funds or the provision of credit enhancements such as
letters of credit. Certain municipal lease obligations also contain
"non-appropriation" clauses that provide that the municipality has no
obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. Some
municipal lease obligations of this type are insured as to timely payment of
principal and interest, even in the event of a failure by the municipality
to appropriate sufficient funds to make payments under the lease. However,
in the case of an uninsured municipal lease obligation, a Fund's ability to
recover under the lease in the event of a non-appropriation or default will
be limited solely to the repossession of leased property without recourse to
the general credit of the lessee, and disposition of the property in the
event of foreclosure might prove difficult. If rent is abated because of
damage to the leased property or if the lease is terminated because monies
are not appropriated for the following year's lease payments, the issuer may
default on the obligation causing a loss to a Fund. Each Tax-Exempt Income
Fund will only invest in municipal lease obligations that are, in the
opinion of SAM, liquid securities under guidelines adopted by the Tax-Exempt
Bond Trust's Board of Trustees. Generally, municipal lease obligations will
be determined to be liquid if they have a readily available market after an
evaluation of all relevant factors.
CERTIFICATES OF PARTICIPATION in municipal lease obligations ("COPs"), which
are certificates issued by state or local governments that entitle the
holder of the certificate to a proportionate interest in the lease purchase
payments made. Each Tax-Exempt Income Fund will only invest in COPs that
are, in the opinion of SAM, liquid securities under guidelines adopted by
the Tax-Exempt Bond Trust's Board of Trustees. Generally, COPs will be
determined to be liquid if they have a readily available market after an
evaluation of all relevant factors.
PARTICIPATION INTERESTS, which are interests in municipal bonds and floating
and variable rate obligations that are owned by banks. These interests carry
a demand feature that permits a Fund holding an interest to tender (sell) it
back to the bank. Generally, the bank will accept tender of
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INVESTMENT POLICIES OF THE TAX-EXEMPT INCOME FUNDS (CONTINUED)
the participation interest with same day notice, but may require up to five
days' notice. The demand feature is usually backed by an irrevocable letter
of credit or guarantee of the bank. The credit rating of the bank may affect
the credit quality of the participation interest.
MUNICIPAL NOTES, which are notes generally issued by an issuer to provide
for short-term capital needs and generally have maturities of one year or
less. Each Tax-Exempt Income Fund may purchase municipal notes as a medium
for its short-term investments. Municipal Notes include tax anticipation,
revenue anticipation and bond anticipation notes and tax-exempt commercial
paper. Each Tax-Exempt Income Fund will invest only in those municipal notes
that at the time of purchase are rated within one of the three highest
grades by Moody's or S&P or, if unrated by any of these agencies, in the
opinion of SAM, are of comparable quality.
4. MAY INVEST IN SHARES OF NO-LOAD, OPEN-END INVESTMENT COMPANIES THAT INVEST
IN TAX-EXEMPT SECURITIES WITH REMAINING MATURITIES OF ONE YEAR OR LESS. Such
shares will only be purchased as a medium for a Fund's short-term
investments if SAM determines that they provide a better combination of
yield and liquidity than a direct investment in short-term, tax-exempt
securities. Each Tax-Exempt Income Fund will not invest more than 10% of its
total assets in shares issued by other investment companies, will not invest
more than 5% of its total assets in a single investment company, and will
not purchase more than 3% of the outstanding voting securities of a single
investment company.
5. MAY INVEST FOR SHORT-TERM PURPOSES WHEN SAM BELIEVES SUCH ACTION TO BE
DESIRABLE AND CONSISTENT WITH SOUND INVESTMENT PRACTICES. Each Tax-Exempt
Income Fund, however, will not engage primarily in trading for the purpose
of short-term profits. A Fund may dispose of its portfolio securities
whenever SAM deems advisable, without regard to the length of time the
securities have been held. The portfolio turnover rate is not expected to
exceed 70%.
6. MAY PURCHASE OR SELL SECURITIES ON A "WHEN-ISSUED" OR "DELAYED-DELIVERY"
BASIS. Under this procedure, a Tax-Exempt Income Fund agrees to acquire or
sell securities that are to be delivered against payment in the future,
normally 30 to 45 days. The price, however, is fixed at the time of
commitment. When a Fund purchases when-issued or delayed-delivery
securities, it will earmark liquid, high quality securities in an amount
equal in value to the purchase price of the security. Use of this technique
may affect a Fund's share price in a manner similar to leveraging.
7. MAY HOLD CASH OR INVEST TEMPORARILY IN HIGH QUALITY, SHORT-TERM SECURITIES
ISSUED BY AN AGENCY OR INSTRUMENTALITY OF THE U.S. GOVERNMENT, HIGH QUALITY
COMMERCIAL PAPER, CERTIFICATES OF DEPOSIT AND SHARES OF NO-LOAD, OPEN-END
MONEY MARKET FUNDS. A Tax-Exempt Income Fund may purchase these short-term
securities as a cash management technique under those circumstances where it
has cash to manage for a short time period, for example, after receiving
proceeds from the sale of securities, dividend distributions from portfolio
securities, or cash from the sale of Fund shares to investors. Interest
earned from these short-term securities will be taxable to investors as
ordinary income when distributed.
The following restrictions are fundamental policies of the Tax-Exempt Income
Funds and cannot be changed without shareholder vote.
1. EACH FUND, WITH RESPECT TO 75% OF THE VALUE OF ITS TOTAL ASSETS, WILL NOT
INVEST MORE THAN 5% OF ITS TOTAL ASSETS IN THE SECURITIES OF ANY ONE ISSUER
(OTHER THAN U.S. GOVERNMENT SECURITIES).
2. EACH FUND WILL NOT INVEST 25% OR MORE OF ITS TOTAL ASSETS IN MUNICIPAL
OBLIGATIONS AND OTHER PERMITTED INVESTMENTS, THE INTEREST ON WHICH IS
PAYABLE FROM REVENUES ON SIMILAR TYPES OF PROJECTS SUCH AS: SPORTS,
CONVENTION OR TRADE SHOW FACILITIES; AIRPORTS; MASS TRANSPORTATION; SEWAGE
OR SOLID WASTE DISPOSAL FACILITIES; OR AIR OR WATER POLLUTION CONTROL
PROJECTS.
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INVESTMENT POLICIES OF THE TAX-EXEMPT INCOME FUNDS (CONTINUED)
3. THE MUNICIPAL BOND FUND WILL NOT INVEST 25% OR MORE OF ITS TOTAL ASSETS IN
SECURITIES WHOSE ISSUERS ARE LOCATED IN THE SAME STATE.
4. EACH FUND MAY BORROW MONEY ONLY FOR TEMPORARY OR EMERGENCY PURPOSES FROM A
BANK OR AFFILIATE OF SAFECO CORPORATION AT AN INTEREST RATE NOT GREATER THAN
THAT AVAILABLE FROM COMMERCIAL BANKS. A TAX-EXEMPT INCOME FUND WILL NOT
BORROW AMOUNTS IN EXCESS OF 20% OF ITS TOTAL ASSETS. As a non-fundamental
policy of the Washington Fund and a fundamental policy of the California and
Municipal Bond Funds, a Fund will not purchase securities if borrowings
equal to or greater than 5% of its total assets are outstanding. Each
Tax-Exempt Income Fund intends to primarily exercise its borrowing authority
to meet shareholder redemptions under circumstances where redemptions exceed
available cash.
For a further description of each Fund's investment policies and restrictions as
well as an explanation of ratings, see the "Investment Policies" and
"Description of Ratings" sections of the Tax-Exempt Bond Trust's Statement of
Additional Information.
INVESTMENT POLICIES OF THE MONEY MARKET FUND
The investment objective of the Money Market Fund is to seek as high a level of
current income as is consistent with the preservation of capital and liquidity
through investment in high quality money market instruments maturing in thirteen
months or less.
To pursue its investment objective, the Money Market Fund:
1. WILL PURCHASE ONLY HIGH QUALITY SECURITIES THAT, IN THE OPINION OF SAM
OPERATING UNDER GUIDELINES ESTABLISHED BY THE MONEY MARKET TRUST'S BOARD OF
TRUSTEES, PRESENT MINIMAL CREDIT RISKS AFTER AN EVALUATION OF THE CREDIT
QUALITY OF AN ISSUER OR OF ANY ENTITY PROVIDING A CREDIT ENHANCEMENT FOR THE
SECURITY. The Fund complies with industry-standard guidelines on the quality
and maturity of its investments, which are designed to help maintain a
stable $1.00 share price. The Fund invests in instruments with remaining
maturities of 397 days or less and maintains a dollar-weighted average
portfolio maturity of not more than 90 days.
2. MAY INVEST IN COMMERCIAL PAPER OBLIGATIONS. Commercial paper is a short-term
instrument issued by corporations, financial institutions, governmental
entities and other entities. The principal risk associated with commercial
paper is the potential insolvency of the issuer. In addition to commercial
paper obligations of domestic corporations, the Fund may also purchase
dollar-denominated commercial paper issued in the United States by foreign
entities. While investments in foreign securities are intended to reduce
risk by providing further diversification, such investments involve
sovereign and other risks, in addition to the credit and market risks
normally associated with domestic securities. These additional risks include
the possibility of adverse political and economic developments (including
political instability) and the potentially adverse effects of unavailability
of public information regarding issuers, reduced governmental supervision of
financial markets, reduced liquidity of certain financial markets, and the
lack of uniform accounting, auditing, and financial standards or the
application of standards that are different or less stringent than those
applied in the United States. The Fund will only purchase such securities,
if, in the opinion of SAM, the security is of an investment quality
comparable to other obligations that may be purchased by the Fund.
3. MAY INVEST IN NEGOTIABLE AND NON-NEGOTIABLE DEPOSITS, BANKERS' ACCEPTANCES
AND OTHER SHORT-TERM OBLIGATIONS OF U.S. BANKS. Companies in the financial
services industry are subject to various risks related to that industry,
such as government regulation, changes in interest rates, and exposure on
loans, including loans to foreign borrowers. The Fund may also invest in
dollar-
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INVESTMENT POLICIES OF THE MONEY MARKET FUND (CONTINUED)
denominated securities issued by foreign banks (including foreign branches
of U.S. banks) provided that, in the opinion of SAM, the security is of an
investment quality comparable to other obligations which may be purchased by
the Fund. Foreign banks may not be subject to accounting standards or
governmental supervision comparable to U.S. banks and there may be less
public information available about their operations. In addition, foreign
securities may be subject to risks relating to the political and economic
conditions of the foreign country involved, which could affect the payment
of principal and interest.
4. MAY INVEST IN U.S. GOVERNMENT SECURITIES. U.S. Government securities include
(a) direct obligations of the U.S. Treasury, (b) securities supported by the
full faith and credit of the U.S. Government but that are not direct
obligations of the U.S. Treasury, (c) securities that are not supported by
the full faith and credit of the U.S. Government but are supported by the
issuer's ability to borrow from the U.S. Treasury such as securities issued
by the FNMA and the FHLMC, and (d) securities supported solely by the
creditworthiness of the issuer such as securities issued by the Tennessee
Valley Authority (the "TVA"). While these securities are considered to be of
the highest credit quality available, they are subject to the same market
risks as comparable debt securities.
5. MAY INVEST IN 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.
6. MAY INVEST IN EURODOLLAR AND YANKEE BANK OBLIGATIONS. Eurodollar bank
obligations are dollar-denominated certificates of deposit and time deposits
issued outside the U.S. capital markets by foreign branches of U.S. banks
and by foreign banks. Yankee bank obligations are dollar-denominated
obligations issued in the United States capital markets by foreign banks.
Eurodollar and Yankee obligations are subject to the same risks that pertain
to domestic issues, notably credit risk, market risk and liquidity risk.
Additionally, Eurodollar (and to a lesser extent, Yankee) obligations are
subject to certain sovereign risks. One such risk is the possibility that a
foreign government might prevent dollar-denominated funds from flowing
across its borders. Other risks include: adverse political and economic
developments in a foreign country; the extent and quality of government
regulation of financial markets and institutions; the imposition of foreign
withholding taxes; and expropriation or nationalization of foreign issuers.
Eurodollar and Yankee obligations will undergo the same credit analysis as
domestic issues in which the Fund invests, and foreign issuers will be
required to meet the same tests of financial strength as the domestic
issuers approved for the Fund.
7. MAY INVEST IN REPURCHASE AGREEMENTS. In a repurchase agreement, the Fund
buys securities at one price and simultaneously agrees to sell them back at
a higher price. Delays or losses could result if the counterparty to the
agreement defaults or becomes insolvent. The Fund will invest no more than
10% of total assets in repurchase agreements and will not purchase
repurchase agreements that mature in more than seven days.
8. MAY INVEST IN VARIABLE AND FLOATING RATE INSTRUMENTS. Issuers of floating or
variable rate notes include, but are not limited to, corporations,
partnerships, the U.S. government, its agencies and instrumentalities, and
municipalities. The interest rates on variable rate instruments reset
periodically on specified dates so as to cause the instruments' market value
to approximate their par value. The interest rates on floating rate
instruments change whenver there is a change in a designated benchmark rate.
Variable and floating rate instruments may have put features. These
instruments may have optional put features. Puts may also be mandatory, in
which case the Fund would be required to act to keep the instrument.
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INVESTMENT POLICIES OF THE MONEY MARKET FUND (CONTINUED)
9. MAY INVEST UP TO 5% OF ITS TOTAL ASSETS IN RESTRICTED SECURITIES ELIGIBLE
FOR RESALE UNDER RULE 144A UNDER THE 1933 ACT ("RULE 144A SECURITIES") AND
COMMERCIAL PAPER SOLD PURSUANT TO SECTION 4(2) OF THE 1933 ACT ("SECTION
4(2) PAPER"), PROVIDED THAT SAM HAS DETERMINED THAT SUCH SECURITIES ARE
LIQUID UNDER GUIDELINES ADOPTED BY THE MONEY MARKET TRUST'S BOARD OF
TRUSTEES. Restricted securities may be sold only in offerings registered
under the 1933 Act or in transactions exempt from the registration
requirements under the 1933 Act. Rule 144A under the 1933 Act provides an
exemption for the resale of certain restricted securities to qualified
institutional buyers. Investing in such 144A Securities could have the
effect of increasing the Fund's illiquidity to the extent that qualified
institutional buyers or other buyers become, for a time, unwilling to
purchase the securities. Section 4(2) of the 1933 Act exempts securities
sold by the issuer in private transactions from the 1933 Act's registration
requirements. Because Section 4(2) paper is a restricted security, investing
in Section 4(2) paper could have the effect of increasing the Fund's
illiquidity to the extent that buyers are unwilling to purchase the
securities.
The following restrictions are fundamental policies of the Money Market Fund and
cannot be changed without shareholder vote. The Money Market Fund:
1. MAY INVEST UP TO 5% OF ITS ASSETS IN THE SECURITIES OF ANY ONE ISSUER OTHER
THAN U.S. GOVERNMENT SECURITIES.
2. MAY INVEST UP TO 25% OF ITS TOTAL ASSETS IN ANY ONE INDUSTRY (INCLUDING
SECURITIES ISSUED BY FOREIGN BANKS AND FOREIGN BRANCHES OF U.S. BANKS),
PROVIDED, HOWEVER, THAT THIS LIMITATION DOES NOT APPLY TO U.S. GOVERNMENT
SECURITIES, OR TO CERTIFICATES OF DEPOSIT OR BANKERS' ACCEPTANCES ISSUED BY
DOMESTIC BANKS.
3. MAY BORROW MONEY FOR TEMPORARY OR EMERGENCY PURPOSES (BUT NOT FOR INVESTMENT
PURPOSES) FROM A BANK OR AFFILIATES OF SAFECO CORPORATION AT AN INTEREST
RATE NOT GREATER THAN THAT AVAILABLE FROM COMMERCIAL BANKS. The Fund will
not borrow amounts in excess of 20% of total assets and will not purchase
securities if borrowings equal to or greater than 5% of total assets are
outstanding. The Fund intends to primarily exercise its borrowing authority
to meet shareholder redemptions under the circumstances where redemptions
exceed available cash.
For more information, see the "Investment Policies" and "Additional Investment
Information" sections of the Money Market Trust's Statement of Additional
Information.
RISK FACTORS
There are market risks in all securities transactions. Various factors may cause
the value of a shareholder's investment in a Fund to fluctuate. The principal
risk factor associated with an investment in a mutual fund is that the market
value of the portfolio securities may decrease, resulting in a decrease in the
value of a shareholder's investment.
RISK FACTORS OF THE STOCK FUNDS
An investment in the Northwest Fund may be subject to different risks than a
mutual fund whose investments are more geographically diverse. Since the
Northwest Fund invests primarily in companies with their principal executive
offices located in the Northwest, the number of issuers whose securities are
eligible for purchase is significantly less than many other mutual funds. Also,
some companies whose securities are held in the Northwest Fund's portfolio may
primarily distribute 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
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RISK FACTORS (CONTINUED)
impacted by national or international trends. As a result, the performance of
the Northwest Fund may be influenced by business trends or economic conditions
not only in a specific locale or in the Northwest region but also on a national
or international level, depending on the companies whose securities are held in
its portfolio at any particular time.
The Equity, Income, Small Company and Value Funds may invest in, and the other
Stock Funds as a result of downgrades may own, below investment grade bonds.
Below investment grade bonds are speculative and involve greater investment
risks than investment grade bonds due to the issuer's reduced creditworthiness
and increased likelihood of default and bankruptcy. During periods of economic
uncertainty or change, the market prices of below investment grade bonds may
experience increased volatility. Below investment grade bonds tend to reflect
short-term economic and corporate developments to a greater extent than higher
quality bonds.
Because the International Fund primarily invests, and the other Stock Funds may
invest, in foreign securities, each Stock Fund is subject to risks in addition
to those associated with U.S. investments. Foreign investments involve sovereign
risk, which includes the possibility of adverse local political or economic
developments, expropriation or nationalization of assets, imposition of
withholding taxes on dividend or interest payments and currency blockage (which
would prevent currency from being sold). Foreign investments may be affected
favorably or unfavorably by changes in currency rates and exchange control
regulations. There is generally less publicly available information about
issuers of foreign securities as compared to U.S. issuers. Many foreign
companies are not subject to accounting, auditing and financial reporting
standards and requirements comparable to those applicable to U.S. companies.
Securities of some foreign issuers are less liquid and more volatile than
securities of U.S. issuers. Financial markets on which foreign securities trade
are generally subject to less governmental regulation as compared to U.S.
markets. Foreign brokerage commissions and custodian fees are generally higher
than those in the United States.
In addition, the International Fund may purchase and sell put and call options,
futures contracts and forward contracts. Risks inherent in the use of futures,
options and forward contracts include: the risk that interest rates, security
prices and currency markets will not move in the directions anticipated;
imperfect correlation between the price of the future, option or forward
contract and the price of the security, interest rate or currency being hedged;
the risk that potential losses may exceed the amount invested in the contracts
themselves; the possible absence of a liquid secondary market for any particular
instrument at any time; the possible need to defer closing out certain hedged
positions to avoid adverse tax consequences; and the reduction or elimination of
the opportunity to profit from increases in the value of the security, interest
rate or currency being hedged.
The Growth Fund currently has an aggressive investment approach to seeking
capital appreciation. The Growth Fund may invest a significant portion of its
assets in securities issued by smaller companies. In addition, the Small Company
Fund invests in companies with small market capitalizations which involve more
risks than investments in larger companies. Such companies may include newly
formed companies which have limited product lines, markets or financial
resources and may lack management depth. The securities of small or newly formed
companies may have limited marketability and may be subject to more abrupt and
erratic movements in price than securities of larger, more established
companies, or equity securities in general. Such volatility in price may in turn
cause the Growth Fund's and Small Company Fund's share prices to be volatile.
RISK FACTORS OF THE INTERMEDIATE TREASURY, HIGH-YIELD, MANAGED BOND, MUNICIPAL
BOND, CALIFORNIA, WASHINGTON AND MONEY MARKET FUNDS (THE "FIXED-INCOME FUNDS")
The value of each Fixed-Income Fund (except the Money Market Fund) will normally
fluctuate inversely with changes in market interest rates. Generally, when
market interest rates rise, the price
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RISK FACTORS (CONTINUED)
of debt securities held by a Fund will fall, and when market interest rates
fall, the price of the debt securities will rise. Also, there is a risk that the
issuer of a bond or other security held in a Fund's portfolio will fail to make
timely payments of principal and interest to the Fixed-Income Funds. Included in
investment grade debt securities are securities of medium grade (rated Baa by
Moody's or BBB by S&P) which have speculative characteristics and are more
likely to have a weakened capacity to make principal and interest payments under
changing economic or other conditions than higher grade securities.
The Managed Bond Fund may invest in stripped securities that are obligations
issued by the U.S. Treasury. Stripped securities are the separate income or
principal components of a debt security. The risks associated with stripped
securities are similar to those of other debt securities, although stripped
securities may be more volatile than other debt securities.
The Money Market Fund seeks to maintain a stable $1.00 share price. Of course,
there is no guarantee that the Money Market Fund will maintain a stable $1.00
share price. It is possible that a major change in interest rates or a default
on the Money Market Fund's investments could cause its share price (and the
value of your investment) to fall. The Money Market Fund's yield will fluctuate
with general interest rates.
Because the California and Washington Funds each concentrate their investments
in a single state, there is a greater risk of fluctuation in the values of their
portfolio securities than with mutual funds whose investments are more
geographically diverse. Investors should carefully consider the investment risks
of such concentration. The share price of the California and Washington Funds
can be affected by political and economic developments within and by the
financial condition of the respective state, its public authorities and
political subdivisions. See the discussion below and "Investment Risks of
Concentration in California and Washington Issuers" in the Tax-Exempt Bond
Trust's Statement of Additional Information for further information.
SPECIAL RISKS OF THE HIGH-YIELD FUND
The High-Yield Fund invests primarily in high-yield, fixed-income securities
which are subject to the following risks:
SENSITIVITY TO ECONOMIC AND CORPORATE DEVELOPMENTS
Yields on high-yield, fixed-income securities will fluctuate over time. During
periods of economic uncertainty or change, the market prices of high-yield,
fixed-income securities may experience increased volatility, which may in turn
cause the net asset value ("NAV") per share of the High-Yield Fund to be
volatile. Lower-quality, fixed-income securities tend to reflect short-term
economic and corporate developments to a greater extent than higher-quality
securities which primarily react to fluctuations in interest rates. Economic
downturns or increases in interest rates can significantly affect the market for
high-yield, fixed-income securities and the ability of issuers to timely repay
principal and interest, increasing the likelihood of defaults. Lower-quality
securities include debt obligations issued as a part of capital restructurings,
such as corporate takeovers or buyouts. Capital restructurings generally involve
the issuance of additional debt on terms different from any current outstanding
debt. As a result, the issuer of the debt is more highly leveraged. During an
economic downturn or period of rising interest rates, a highly-leveraged issuer
may experience financial 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
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RISK FACTORS (CONTINUED)
security. SAM will seek to minimize these additional risks through
diversification, careful assessment of the issuer's financial structure,
business plan and management team following any restructuring, and close
monitoring of the issuer's progress toward its financial goals.
ZERO-COUPON AND PAYMENT-IN-KIND SECURITIES
The High-Yield Fund may hold "zero-coupon" and "payment-in-kind" fixed-income
securities. Zero-coupon securities are purchased at a discount without scheduled
interest payments. Payment-in-kind securities receive interest paid in
additional securities rather than cash. The Fund accrues income on these
securities, but does not receive cash interest payments until maturity or
payment date. The Fund intends to distribute substantially all of its income to
its shareholders so that it can be treated as a regulated investment company
under current federal tax law. As a result, if its cash position is depleted,
the Fund may have to sell securities under disadvantageous circumstances to
obtain enough cash to meet its distribution requirement. However, SAM does not
expect non-cash income to materially affect the Fund's operations. Zero-coupon
and payment-in-kind securities are generally subject to greater price
fluctuations due to changes in interest rates than those fixed-income securities
paying cash interest on a schedule until maturity.
LIQUIDITY AND VALUATION
The liquidity and price of high-yield, fixed-income securities can be affected
by a number of factors, including investor perceptions and adverse publicity
regarding major issuers, underwriters or dealers of lower-quality corporate
obligations. These effects can be particularly pronounced in a thinly-traded
market with few participants and may adversely impact the High-Yield Fund's
ability to dispose of its securities as well as make valuation of securities
more difficult. Because there tend to be fewer investors in lower-rated,
fixed-income securities, it may be difficult for the Fund to sell these
securities at an optimum time. Consequently, lower-rated securities are subject
to more price changes, fluctuations in yield and risk to principal and income
than higher-rated securities of the same maturity. Judgment plays a greater role
in the valuation of thinly-traded securities.
CREDIT RATINGS
Rating agencies evaluate the likelihood that an issuer will make principal and
interest payments, but ratings may not reflect market value risks associated
with lower-rated, fixed-income securities. Also, rating agencies may not timely
revise ratings to reflect subsequent events affecting an issuer's ability to pay
principal and interest. SAM uses S&P and Moody's ratings as a preliminary
indicator of investment quality. SAM will periodically research and analyze each
issue (whether rated or unrated) and evaluate such factors as the issuer's
interest or dividend coverage, asset coverage, earnings prospects and managerial
strength. This analysis will help SAM to determine if the issuer has sufficient
cash flow and profits to meet required principal and interest payments and to
monitor the liquidity of the issue. Achievement of a Fund's investment objective
will be more dependent on SAM's credit analysis of bonds rated below the three
highest rating categories than would be the case were the Fund to invest in
higher quality debt securities. This is particularly true for the High-Yield
Fund.
SPECIAL RISKS OF THE CALIFORNIA AND WASHINGTON FUNDS
The information in the following discussion is drawn primarily from official
statements relating to state securities offerings which are dated prior to the
date of this Prospectus. The California and Washington Funds have not
independently verified any of the information in the discussion below.
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RISK FACTORS (CONTINUED)
CALIFORNIA FUND
After suffering through a severe recession, California's economy has been on a
steady recovery since the start of 1994. Nevertheless, the State's budget
problems in recent years have also been caused by the increasing costs of
education, health, welfare and corrections, driven by California's rapid
population growth. These pressures on the State's General Fund are expected to
continue. The State's long-term credit ratings, reduced in 1992, were lowered
again in 1994 and have not been fully restored. Its ability to provide
assistance to its public authorities and political subdivisions has been
impaired. Cutbacks in state aid adversely affect the financial condition of many
cities, counties and school districts which are already subject to fiscal
constraints and are facing their own reduced tax collections. In addition, some
municipally-owned electric utilities may be adversely affected by the
restructuring of the electric utility industry now underway in California.
In the past, California voters have passed amendments to the California
Constitution and other measures that limit the taxing and spending authority of
California governmental entities. Future voter initiatives could result in
adverse consequences affecting obligations issued by the State and its political
subdivisions. These factors, among others, could reduce the credit standing of
certain issuers of California obligations. At any given time there are numerous
lawsuits against the State which could affect its revenues and expenditures.
WASHINGTON FUND
The State of Washington's economy consists of both export and local industries.
The State's leading export industries are aerospace, forest products,
agriculture and food processing. The State's manufacturing base includes
aircraft manufacture, which comprised approximately 25% of total manufacturing
in 1995. The Boeing Company is the State's largest employer and has a
significant impact, in terms of overall production, employment and labor
earnings, on the State's economy. Boeing anticipates increasing employment in
the State by approximately 24,100 jobs by the end of 1997, and by 28,600 by the
end of 1999. The commercial airline industry is cyclical in nature and future
job cuts could have an adverse effect on the Washington economy. Forest products
rank second behind aerospace in value of total production. Although productivity
in the forest products industry has increased steadily in recent years, declines
in production are expected in the future. Unemployment in the timber industry is
anticipated in certain regions; however the impact is not expected to affect the
State's overall economic performance. Growth in agriculture has been an
important factor in the State's economic growth over the past decade. The State
is the home of many technology firms of which approximately half are
computer-related. Microsoft, the world's largest microcomputer software company,
is headquartered in Redmond, Washington.
State law requires a balanced budget. The Governor has a statutory
responsibility to reduce expenditures across the board to avoid any cash deficit
at the end of a biennium. In addition, State law prohibits State tax revenue
growth from exceeding the growth rate of State personal income. To date,
Washington State tax revenue increases have remained substantially below the
applicable limits. At any given time, there are numerous lawsuits against the
State which could affect its revenues and expenditures.
PORTFOLIO MANAGERS
GROWTH FUND
The portfolio manager for the Growth Fund is Thomas M. Maguire, Vice President,
SAM. Mr. Maguire has served as portfolio manager for the Fund since 1989.
-- 51 --
<PAGE>
PORTFOLIO MANAGERS (CONTINUED)
EQUITY FUND
The portfolio manager for the Equity Fund is Richard D. Meagley, Vice President,
SAM. Mr. Meagley began serving as portfolio manager for the Fund in 1995. He is
also the portfolio manager for certain other SAFECO Funds. Prior to these
positions, he served as portfolio manager and analyst from 1992 to 1994 for
Kennedy Associates, Inc., an investment advisory firm located in Seattle,
Washington. He was an Assistant Vice President of SAM and the fund manager of
the SAFECO Northwest Fund from 1991 to 1992.
INCOME FUND
The portfolio manager for the Income Fund is Thomas E. Rath, Assistant Vice
President of SAM. Mr. Rath has been a portfolio manager and securities analyst
for SAFECO Corporation since 1994. From 1992 to 1994, Mr. Rath was a principal
and portfolio manager for Meridian Capital Management, Inc., located in Seattle,
Washington. From 1987 to 1992, he was a portfolio manager and securities analyst
for First Interstate Bank, located in Seattle, Washington.
NORTHWEST FUND
The portfolio manager for the Northwest Fund is Bill Whitlow. Mr. Whitlow began
serving as portfolio manager for the Fund in April 1997. From 1990 to April
1997, he was a principal and Manager of Pacific Northwest Research for the
brokerage firm of Pacific Crest Securities, located in Seattle, Washington.
BALANCED FUND
The equity portion of the Balanced Fund is co-managed by Rex L. Bentley, Vice
President, SAM and Lynette D. Sagvold, Assistant Vice President, SAM, and the
fixed income portion is managed by Michael C. Knebel, Vice President, SAM. Mr.
Bentley was Vice President and Investment Counsel at the investment advisory
firm of Badgley, Phelps and Bell Investment Counsel, Inc., from 1990 to 1995.
Ms. Sagvold was a portfolio manager and analyst for First Investors Bank from
1993 to 1995 and she was a portfolio manager and analyst for Key Trust Company
from 1985 to 1993. Mr. Knebel has served as portfolio manager for certain other
SAFECO mutual funds since 1989.
INTERNATIONAL FUND
The International Fund is managed by a committee of portfolio managers employed
and supervised by the Sub-Adviser, Bank of Ireland Asset Management (U.S.)
Limited, an investment adviser registered with the SEC. All investment decisions
are made by this committee and no single person is primarily responsible for
making recommendations to that committee.
SMALL COMPANY FUND
The portfolio manager for the Small Company Fund is Greg Eisen, Assistant Vice
President, SAM. Mr. Eisen has served as an investment analyst for SAM since
1992. From 1986 to 1992, Mr. Eisen was engaged by the SAFECO Insurance Companies
as a financial analyst.
VALUE FUND
The Value Fund is co-managed by Rex L. Bentley, Vice President, SAM and Lynette
D. Sagvold, Assistant Vice President, SAM. Mr. Bentley was vice president and
investment counsel at the investment advisory firm of Badgley, Phelps and Bell
Investment Counsel, Inc. from 1990 to 1995. Ms. Sagvold was a portfolio manager
and analyst for First Interstate Bank from 1993 to 1995 and she was a portfolio
manager and analyst for Key Trust Company from 1985 to 1993.
-- 52 --
<PAGE>
PORTFOLIO MANAGERS (CONTINUED)
INTERMEDIATE TREASURY AND MANAGED BOND FUNDS
The portfolio manager for the Intermediate Treasury and Managed Bond Funds is
Michael C. Knebel, Vice President, SAM. Mr. Knebel has served as portfolio
manager or co-manager for the Managed Bond Fund since 1994. He has served as
portfolio manager for the Intermediate Treasury Fund since 1995. Mr. Knebel has
served as portfolio manager and/or portfolio co-manager for other SAFECO mutual
funds since 1989.
HIGH-YIELD FUND
The portfolio managers for the High-Yield Bond Fund are John Stoeser, Assistant
Vice President, SAM, and Robert Kern, a securities analyst for SAM. Mr. Stoeser
has served as a securities analyst and portfolio manager for SAM since 1992.
From 1989 to 1992 he was an administrative assistant to the President of SAM.
Mr. Kern served as a securities analyst for SAM since 1994. From 1988 to 1994,
Mr. Kern was engaged by the SAFECO Insurance Companies in the Controller's
Department.
MUNICIPAL BOND AND CALIFORNIA FUNDS
The portfolio manager for the Municipal Bond and California Funds is Stephen C.
Bauer, President, SAM. Mr. Bauer has served as portfolio manager for each Fund
since it commenced operations: 1981 for the Municipal Bond Fund and 1983 for the
California Fund. Mr. Bauer is the portfolio manager for certain other SAFECO
municipal bond funds, and also serves as a Director of SAM.
WASHINGTON FUND
The portfolio manager for the Washington Fund is Beverly Denny, Assistant Vice
President, SAM. Ms. Denny was the Marketing Director for the SAFECO mutual funds
from 1991 to 1993, and has been employed as an investment analyst with SAM since
1993.
MONEY MARKET FUND
The portfolio manager for the Money Market Fund is Naomi Urata, Assistant Vice
President, SAM. Ms. Urata has been employed as an investment analyst for the
SAFECO mutual funds since 1993. From 1990 to 1992, Ms. Urata served as Cash
Manager for The Seattle Times.
Each portfolio manager and certain other persons related to SAM, the Sub-Adviser
and the Funds are subject to written policies and procedures designed to prevent
abusive personal securities trading. Incorporated within these policies and
procedures are recommendations made by the Investment Company Institute (the
trade group for the mutual fund industry) with respect to personal securities
trading by persons associated with mutual funds. Those recommendations include
preclearance procedures and blackout periods when certain personnel may not
trade in securities that are the same or related securities being considered for
purchase or sale by a Fund.
HOW TO PURCHASE SHARES
When placing purchase orders, investors should specify whether the order is for
Class A or Class B shares of a Fund. All share purchase orders that fail to
specify a class will automatically be invested in Class A shares.
The minimum initial investment is $1,000 (IRA, UGMA and UTMA $250). The minimum
additional investment is $100 for all accounts, except for UGMA or UTMA
Automatic Investment Method ("AIM") accounts opened with an initial investment
of $250 or more. These accounts have a minimum additional investment of only
$50. Minimum additional investments are negotiable for retirement accounts other
than IRAs. Except as noted above in connection with UGMA and UTMA accounts, no
minimum initial investment is required to establish the Automatic Investment
Method or Payroll Deduction Plan.
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<PAGE>
HOW TO PURCHASE SHARES (CONTINUED)
Shares of each Fund are available for purchase through investment professionals
who work at broker-dealers, banks and other financial institutions which have
entered into selling agreements with SAFECO Securities, Inc. ("SAFECO
Securities"), the distributor of the Funds. Orders received by such financial
institutions before 1:00 p.m. Pacific Time on any day the New York Stock
Exchange ("NYSE") is open for regular trading will be effected that day,
provided that such order is transmitted to SAFECO Services, the transfer agent
for the Funds, prior to 2:00 p.m. Pacific Time on such day. Investment
professionals will be responsible for forwarding the investor's order to SAFECO
Services so that it will be received prior to such time.
Broker-dealers, banks and other financial institutions that do not have selling
agreements with SAFECO Securities also may offer to place orders for the
purchase of each Fund's shares. Purchases made through these investment firms
will be effected at the public offering price next determined after the order is
received by SAFECO Services. Such financial institutions may charge the investor
a transaction fee as determined by the financial institution. The fee will be in
addition to the sales charge payable by the investor with respect to Class A
shares, and may be avoided by purchasing shares through a broker-dealer, bank or
other financial institution that has a selling agreement with SAFECO Securities.
Broker-dealers, banks, financial institutions and any other person entitled to
receive compensation for selling or servicing each Fund's shares may receive
different levels of compensation with respect to one particular class of Fund
shares over another. Salespersons of broker-dealers, banks and other financial
institutions that sell each Fund's shares are eligible to receive special
compensation, the amount of which varies depending on the amount of shares sold.
The Funds only accept funds drawn in U.S. dollars and payable through a U.S.
Bank. The Funds do not accept currency. The Funds issue shares in uncertificated
form, but will issue certificates for whole shares without charge upon written
request. You will be required to post a bond to replace missing certificates.
THE FUNDS RESERVE THE RIGHT TO REFUSE ANY OFFER TO PURCHASE SHARES OF ANY CLASS.
PURCHASING ADVISOR CLASS A SHARES
The public offering price of Class A shares of each Fund except the Money Market
Fund is the next determined net asset value per share (see "Share Price
Calculation" on page 63 for additional information) plus any sales charge, which
will vary with the size of the purchase as shown in the following schedule:
<TABLE>
<CAPTION>
SALE CHARGE AS BROKER
PERCENTAGE OF REALLOWANCE AS
AMOUNT OF PURCHASE ---------------------- PERCENTAGE OF
AT THE PUBLIC OFFERING NET THE OFFERING
OFFERING PRICE PRICE INVESTMENT PRICE
- ----------------------------------------------------------------- --------- ----------- --------------
<S> <C> <C> <C>
Less than $50,000 4.50% 4.71% 4.00%
$50,000 but less than $100,000 4.00% 4.17% 3.50%
$100,000 but less than $250,000 3.50% 3.63% 3.00%
$250,000 but less than $500,000 2.50% 2.56% 2.00%
$500,000 but less than $1,000,000 1.50% 1.52% 1.00%
$1,000,000 or more NONE* See Below**
</TABLE>
* Purchases of $1,000,000 or more of Class A shares are not subject to a
front-end sales charge, but a 1% CDSC will apply to redemptions made in the
first year.
** See discussion below for a description of the commissions payable on sales of
Class A shares of $1 million or more.
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<PAGE>
HOW TO PURCHASE SHARES (CONTINUED)
Class A shares of the Money Market Fund are offered at the next determined net
asset value per share (see "Share Price Calculation" on page 63 for additional
information) with no initial sales charge. A sales charge will apply to the
first exchange from Class A shares of the Money Market Fund to Class A shares of
another Fund.
From time to time, SAFECO Securities may reallow to broker-dealers, banks and
other financial institutions the full amount of the sales charge on Class A
Shares. In some instances, SAFECO Securities may offer these reallowances only
to those financial institutions that have sold or may sell significant amounts
of Class A shares. These commissions also may be paid to financial institutions
that initiate purchases made pursuant to sales charge waivers (1) and (8),
described below under "Sales Charge Waivers -- Class A shares." To the extent
that SAFECO Securities reallows 90% or more of the sales charge to a financial
institution, such financial institution may be deemed to be an underwriter under
the 1933 Act.
Except as stated below, broker-dealers of record will be paid commissions on
sales of Class A shares of $1 million or more based on an investor's (or a
related group of investors') cumulative purchases during the one-year period
beginning with the date of the initial purchase at net asset value. Each
subsequent one-year measuring period for these purposes begins with the first
net asset value purchase following the end of the prior period. Such commissions
are paid at the rate of up to .50% of the amount under $50 million and .25%
thereafter, except for sales to participant-directed qualified plans (including
a plan sponsored by an employer with 200 or more eligible employees).
Commissions for such plans will be paid at a rate of 1.00% of the amount up to
$2 million, .80% of the next $1 million, .50% of the next $47 million and .25%
thereafter. In addition, SAFECO Securities may pay a commission to a
broker-dealer where clients of a particular registered representative invest, at
or about the same time, collectively $1 million or more in one or more of the
Funds. The commission will be payable in lieu of other commissions that might
otherwise be payable under the terms of this prospectus, and will not be paid
except in connection with a transaction described in the preceding sentence.
The following describes purchases that may be aggregated for purposes of
determining the amount of purchase:
1. Individual purchases on behalf of a single purchaser and the purchaser's
spouse and their children under the age of 21 years. This includes shares
purchased in connection with an employee benefit plan(s) exclusively for the
benefit of such individual(s), such as an IRA, individual plan(s) under
Section 403(b) of the Internal Revenue Code of 1986, as amended ("Code"), or
single-participant Keogh-type plan(s). This also includes purchases made by
a company controlled by such individual(s);
2. Individual purchases by a trustee or other fiduciary purchasing shares for a
single trust estate or a single fiduciary account, including an employee
benefit plan (such as employer-sponsored pension, profit-sharing and stock
bonus plans, including plans under Code Section 401(k), and medical, life
and disability insurance trusts) other than a plan described in (1) above;
or
3. Individual purchases by a trustee or other fiduciary purchasing shares
concurrently for two or more employee benefit plans of a single employer or
of employers affiliated with each other (excluding an employee benefit plan
described in (2) above).
SALES CHARGE WAIVERS -- CLASS A SHARES
Class A shares are sold at net asset value per share without imposition of sales
charges for the following investments:
1. Registered representatives or full-time employees of broker-dealers, banks
and other financial institutions that have entered into selling agreements
with SAFECO Securities, and the children,
-- 55 --
<PAGE>
HOW TO PURCHASE SHARES (CONTINUED)
spouse and parents of such representatives and employees, and employees of
financial institutions that directly, or through their affiliates, have
entered into selling agreements with SAFECO Securities;
2. Companies exchanging shares with or selling assets to one or more of the
Funds pursuant to a merger, acquisition or exchange offer;
3. Any of the direct or indirect affiliates of SAFECO Securities;
4. Purchases made through the automatic investment of dividends and
distributions paid by another Fund;
5. Clients of administrators or consultants to tax-qualified employee benefit
plans which have entered into agreements with SAFECO Securities or any of
its affiliates;
6. Retirement plan participants who borrow from their retirement accounts by
redeeming Fund shares and subsequently repay such loans via a purchase of
Fund shares;
7. Retirement plan participants who receive distributions from a tax-qualified
employer-sponsored retirement plan, which is invested in Fund shares, the
proceeds of which are reinvested in Fund shares;
8. Accounts as to which a broker-dealer, bank or other financial institution
charges an account management fee, provided the financial institution has
entered into an agreement with SAFECO Securities regarding such accounts;
9. Current or retired officers, directors, trustees or employees of any SAFECO
mutual fund or SAFECO Corporation or its affiliates and the children, spouse
and parents of such persons; and
10. Investments made with redemption proceeds from mutual funds having a similar
investment objective with respect to which the investor paid a front-end
sales charge.
REINSTATEMENT PRIVILEGE
Shareholders who paid an initial sales charge and redeem their Class A shares in
a Fund have a one-time privilege to reinstate their investment by investing the
proceeds of the redemption at net asset value per share without a sales charge
in Class A shares of that Fund and/or one or more of the other Funds. SAFECO
Services must receive from the investor or the investor's broker-dealer, bank or
other financial institution within 60 days after the date of the redemption both
a written request for reinvestment and a check not exceeding the amount of the
redemption proceeds. The reinstatement purchase will be effected at the net
asset value per share next determined after such receipt.
REDUCED SALES CHARGE PLANS -- CLASS A SHARES
Class A shares of the Funds may be purchased at reduced sales charges either
through the Right of Accumulation or under a Letter of Intent. For more details
on these plans, investors should contact their broker-dealer, bank or other
financial institution or SAFECO Services.
Pursuant to the RIGHT OF ACCUMULATION, investors are permitted to purchase Class
A shares of the Funds at the sales charge applicable to the total of (a) the
dollar amount then being purchased plus (b) the dollar amount equal to the total
purchase price of the investor's concurrent purchases of Class A shares of other
SAFECO Mutual Funds plus (c) the dollar amount equal to the current public
offering price of all Class A shares of Funds already held by the investor. To
receive the Right of Accumulation, at the time of purchase investors must give
their broker-dealers, banks or other financial institutions sufficient
information to permit confirmation of qualification.
-- 56 --
<PAGE>
HOW TO PURCHASE SHARES (CONTINUED)
In executing a LETTER OF INTENT ("LOI"), an investor should indicate an
aggregate investment amount he or she intends to invest in Class A shares of
Funds in the following thirteen months. The LOI is included as part of the
Account Application. The Class A sales charge applicable to that aggregate
amount then becomes the applicable sales charge on all purchases of Class A
shares made concurrently with the execution of the LOI and in the thirteen
months following that execution. If an investor executes an LOI within 90 days
of a prior purchase of Class A shares, the prior purchase may be included under
the LOI and an appropriate adjustment, if any, with respect to the sales charges
paid by the investor in connection with the prior purchase will be made, based
on the then-current net asset value(s) of the pertinent Fund(s).
If at the end of the thirteen-month period covered by the LOI, the total amount
of purchases does not equal the amount indicated, the investor will be required
to pay the difference between the sales charges paid at the reduced rate and the
sales charges applicable to the purchases actually made. Shares having a value
equal to 5% of the amount specified in the LOI will be held in escrow during the
thirteen month period (while remaining registered in the investor's name) and
are subject to redemption to assure any necessary payment to SAFECO Securities
of a higher applicable sales charge.
PURCHASING ADVISOR CLASS B SHARES
The public offering price of the Class B shares of each Fund is the next
determined net asset value per share. No initial sales charge is imposed.
However, a CDSC is imposed on certain redemptions of Class B shares. Because
Class B shares are sold without an initial sales charge, the investor receives
Fund shares equal to the full amount of the investment. The maximum investment
amount in Class B shares is $500,000.
Class B shares of a Fund that are redeemed will not be subject to a CDSC to the
extent that the value of such shares represents: (a) reinvestment of dividends
or other distributions or (b) shares redeemed more than six full years after
their purchase. Former Class B shareholders of the SAFECO Advisor Series Trust
who invest in Class B shares of any Fund may include the length of time of
ownership of the former Class B shares for purposes of calculating any CDSC due
upon redemption.
Initial investments in Class B shares of the Money Market Fund are sold with no
initial sales charge and are not subject to a CDSC upon redemption, provided
that the investor has remained invested exclusively in Class B shares of the
Money Market Fund and has not exchanged into Class B Shares of another Fund in
the interim. Money Market Fund Class B shareholders will become subject to a
CDSC calculated in accordance with the table below if they exchange into Class B
shares of another SAFECO Fund and then redeem those shares. The CDSC will also
apply to any Class B shares of the Money Market Fund subsequently acquired by
exchange. Shareholders who initially purchase Money Market Fund Class B shares
do not receive credit for the time initially invested in the Money Market Fund
for purposes of calculating any CDSC due upon redemption of Class B shares of
another SAFECO Fund.
Redemptions of most other Class B shares will be subject to a CDSC. (See
"Contingent Deferred Sales Charge Waivers.") The amount of any applicable CDSC
will be calculated by multiplying the lesser of
-- 57 --
<PAGE>
HOW TO PURCHASE SHARES (CONTINUED)
the original purchase price or the net asset value of such shares at the time of
redemption by the applicable percentage shown in the table below. Accordingly,
no charge is imposed on increases in the net asset value above the original
purchase price:
<TABLE>
<CAPTION>
CDSC AS A PERCENTAGE OF THE
LESSER OF NET ASSET VALUE AT REDEMPTION
REDEMPTION DURING OR THE ORIGINAL PURCHASE PRICE
- -------------------------------------------------------- ---------------------------------------
<S> <C>
1st Year Since Purchase 5%
2nd Year Since Purchase 4%
3rd Year Since Purchase 3%
4th Year Since Purchase 3%
5th Year Since Purchase 2%
6th Year Since Purchase 1%
Thereafter 0%*
</TABLE>
* Automatically converts to Class A shares in the first month following the
investor's sixth anniversary from purchase.
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and other distributions and
then of amounts representing the cost of shares held for the longest period of
time.
For example, assume an investor purchased 100 shares at $10 per share at a cost
of $1,000. Subsequently, the shareholder acquired 15 additional shares through
dividend reinvestment. During the second year after the purchase, the investor
decided to redeem $500 of his or her investment. Assuming at the time of the
redemption a net asset value of $11 per share, the value of the investor's
shares would be $1,265 (115 shares at $11 per share). The CDSC would not be
applied to the value of the reinvested dividend shares. Therefore, the 15 shares
currently valued at $165.00 would be redeemed without a CDSC. The number of
shares needed to fund the remaining $335.00 of the redemption would equal
30.455. Using the lower of cost or market price to determine the CDSC, the
original purchase price of $10.00 per share would be used. The CDSC calculation
would therefore be 30.455 shares times $10.00 per share at a CDSC rate of 4%
(the applicable rate in the second year after purchase) for a total CDSC of
$12.18.
Except for the time period during which a shareholder is initially invested in
Money Market Fund Class B shares, if a shareholder effects one or more exchanges
among Class B shares of the Funds during the six year period, the holding
periods for the shares so exchanged will be counted toward the six year period.
For federal income tax purposes, the amount of the CDSC will reduce the gain or
increase the loss, as the case may be, recognized on the redemption of shares.
The amount of any CDSC will be paid to SAFECO Securities.
CONTINGENT DEFERRED SALES CHARGE WAIVERS
The CDSC will be waived in the following circumstances: (a) total or partial
redemptions made within one year following the death or disability of a
shareholder; (b) redemptions made pursuant to any systematic withdrawal plan
based on the shareholder's life expectancy, including substantially equal
periodic payments prior to age 59 1/2 which are described in Code section 72(t),
and required minimum distributions after age 70 1/2, including those required
minimum distributions made in connection with customer accounts under Section
403(b) of the Code and other retirement plans; (c) total or partial redemption
resulting from a distribution following retirement in the case of a tax-
qualified employer-sponsored retirement plan; (d) when a redemption results from
a tax-free return of an excess contribution pursuant to Section 408(d)(4) or (5)
of the Code; (e) reinvestment in Class B
-- 58 --
<PAGE>
HOW TO PURCHASE SHARES (CONTINUED)
shares of a Fund within 60 days of a prior redemption; (f) redemptions pursuant
to the Fund's right to liquidate a shareholder's account involuntarily; (g)
redemptions pursuant to distributions from a tax-qualified employer-sponsored
retirement plan that are invested in Funds and are permitted to be made without
penalty pursuant to the Code; and (h) redemptions in connection with a Fund's
systematic withdrawal plan not in excess of 10% of the value of the account
annually.
CONVERSION OF CLASS B SHARES
A shareholder's Class B shares of a Fund will automatically convert to Class A
shares in the same Fund in the first month following the investor's sixth
anniversary from purchase, together with a pro rata portion of all Class B
shares representing dividends and other distributions paid in additional Class B
shares. Class B shares so converted will no longer be subject to the higher
expenses borne by Class B shares. The conversion will be effected at the
relative net asset values per share of the two classes on the first business day
in the first month following the investor's sixth anniversary from the purchase
of Class B shares. Because the net asset value per share of Class A shares may
be higher than that of Class B shares at the time of conversion, a shareholder
may receive fewer Class A shares than the number of Class B shares converted,
although the dollar value will be the same.
HOW TO REDEEM SHARES
As described below, shares of the Funds may be redeemed at their next-determined
net asset value (subject to any applicable CDSC) and redemption proceeds will be
sent to shareholders within seven days of the receipt of a redemption request.
Shareholders who have purchased shares through broker-dealers, banks or other
financial institutions that sell shares may redeem shares through such firms; if
the shares are held in the "street name" of the broker-dealer, bank or other
financial institution, the redemption must be made through such firm.
Please note the following:
/ / If your shares were purchased by wire, redemption proceeds will be available
immediately. If shares were purchased other than by wire, each Fund reserves
the right to hold the proceeds of your redemption for up to 15 business days
after investment or until such time as the Fund has received assurance that
your investment will be honored by the bank on which it was drawn, whichever
occurs first.
/ / SAFECO Services charges a $10 fee to wire redemption proceeds. In addition,
some banks may charge a fee to receive wires.
/ / If shares are issued in certificate form, the certificates must accompany a
redemption request and be duly endorsed.
/ / Under some circumstances (e.g., a change in corporate officer or death of an
owner), SAFECO Services may require certified copies of supporting documents
before a redemption will be made.
REDEMPTIONS THROUGH BROKER-DEALERS, BANKS AND OTHER FINANCIAL INSTITUTIONS
Shareholders with accounts at broker-dealers, banks and other financial
institutions that sell shares of the Funds may submit redemption requests to
such firms. Broker-dealers, banks or other financial institutions may honor a
redemption request either by repurchasing shares from a redeeming shareholder at
the shares' net asset value per share next computed after the firm receives the
request or by forwarding such requests to SAFECO Services. Redemption proceeds
(less any applicable CDSC) normally will be paid by check. Broker-dealers, banks
and other financial institutions may impose a
-- 59 --
<PAGE>
HOW TO REDEEM SHARES (CONTINUED)
service charge for handling redemption transactions placed through them and may
impose other requirements concerning redemptions. Accordingly, shareholders
should contact the investment professional at their broker-dealer, bank or other
financial institution for details.
Redemption requests may also be transmitted to SAFECO Services by telephone (for
amounts of less than $100,000), by mail or by redemption check. SAFECO Services
will send to you, free of charge, redemption checks (drafts) payable through
U.S. Bank of Washington, N.A. Redemption checks are not available to IRA
shareholders or for shares issued in certificate form. Redemption checks may be
made payable to any person or entity and must contain the proper number of
signatures. Redemption checks must be for $500 or more. Neither the Funds nor
SAFECO Services will be liable for payment of postdated redemption checks. See
"Account Changes and Signature Requirements" on page 73, for futher information.
SHARE REDEMPTION PRICE AND PROCESSING
Your shares will be redeemed at the net asset value per share (subject to any
applicable CDSC) next calculated after receipt of your request that meets the
redemption requirements of the Funds. Except for the Money Market Fund, the
value of the shares you redeem may be more or less than the dollar amount you
purchased, depending on the market value of the shares at the time of
redemption. See "Share Price Calculation" on page 63 for more information.
Redemption proceeds will normally be sent on the next business day following
receipt of your redemption request. If your redemption request is received after
the close of trading on the NYSE (normally 1:00 p.m. Pacific Time), proceeds
will normally be sent on the second business day following receipt. Each Fund,
however, reserves the right to postpone payment of redemption proceeds for up to
seven days if making immediate payment could adversely affect its portfolio. In
addition, redemptions may be suspended or payment dates postponed if the NYSE is
closed, its trading is restricted or the Securities and Exchange Commission
declares an emergency.
Due to the high cost of maintaining small accounts, your account may be closed
upon 60 days' written notice if at the time of any redemption or exchange the
total value falls below $100. Your shares will be redeemed at the net asset
value per share calculated on the day your account is closed and the proceeds
will be sent to you.
HOW TO SYSTEMATICALLY PURCHASE OR REDEEM SHARES
Call your investment professional or SAFECO Services at 1-800-463-8791 for more
information.
AUTOMATIC INVESTMENT METHOD (AIM)
AIM enables you to make regular monthly investments by authorizing SAFECO
Services to withdraw a specific amount from your bank account and invest the
amount in any Fund. AIM has a minimum of $100 per Fund for all accounts (except
UGMA and UTMA accounts which have a lower $50 minimum for additional
investments, provided that the account was opened with an initial investment of
at least $250).
PAYROLL DEDUCTION PLAN
An employer or other entity using group billing may establish a
self-administered payroll deduction plan in any Fund. Payroll deduction amounts
are negotiable.
SYSTEMATIC WITHDRAWAL PLAN
This plan enables you to receive a portion of your investment on a monthly
basis. A Fund automatically redeems shares in your account and sends you a
withdrawal check (minimum amount
-- 60 --
<PAGE>
HOW TO SYSTEMATICALLY PURCHASE OR REDEEM SHARES (CONTINUED)
$50 per Fund) on or about the fifth business day of every month. Because Class A
shares are subject to sales charges, shareholders should not concurrently
purchase shares with respect to an account which is utilizing a systematic
withdrawal plan. Class B shares may not be suitable for a systematic withdrawal
plan, except in appropriate cases where the CDSC is being waived. Please see
"Contingent Deferred Sales Charge Waivers" on page 58 for more information.
HOW TO EXCHANGE SHARES FROM ONE FUND TO ANOTHER
Shares of one class of a Fund may be exchanged for shares of the same class of
any other Fund, based on their next-determined respective net asset values,
without imposition of any sales charges, provided that the shareholder account
registration remains identical. CLASS A SHARES MAY BE EXCHANGED ONLY FOR CLASS A
SHARES OF THE OTHER FUNDS LISTED ON THE FIRST PAGE OF THIS PROSPECTUS. CLASS B
SHARES MAY BE EXCHANGED ONLY FOR CLASS B SHARES OF THE OTHER FUNDS LISTED ON THE
FIRST PAGE OF THIS PROSPECTUS. The exchange of Class B shares will not be
subject to a contingent deferred sales charge. For purposes of computing the
CDSC, except for the time period during which a shareholder is initially
invested in Class B shares of the Money Market Fund, the length of time of
ownership of Class B shares will be measured from the date of original purchase
and will not be affected by the exchange. Exchanges are not tax-free and may
result in a shareholder's realizing a gain or loss, as the case may be, for tax
purposes. See "Fund Distributions and How They Are Taxed" on page 70 for more
information. You may purchase shares of a Fund by exchange only if it is
registered for sale in the state where you reside. Before exchanging into an
Advisor class of another Fund, please be familiar with the Fund's investment
objective and policies as described in "Each Fund's Investment Objective and
Policies" beginning on page 27 of this Prospectus.
EXCHANGES BY MAIL
Exchange orders should be sent by mail to the investor's broker-dealer, bank or
other financial institution. If a shareholder has an account at SAFECO Services,
exchange orders may be sent to the address set forth on the cover of this
Prospectus.
EXCHANGES BY TELEPHONE
A shareholder may give exchange instructions to the shareholder's broker-dealer,
bank or other financial institution or to SAFECO Services by telephone at the
appropriate toll-free number provided on the cover of this Prospectus. Exchange
orders will be accepted by telephone provided that the exchange involves only
uncertificated shares or certificated shares for which certificates previously
have been deposited in the shareholder's account. See "Telephone Transactions"
for more information.
SHARE EXCHANGE PRICE AND PROCESSING
The shares of the Fund you are exchanging from will be redeemed at the price
next computed after your exchange request is received. Normally the purchase of
the Fund you are exchanging into is executed on the same day. However, each Fund
reserves the right to delay the payment of proceeds and, hence, the purchase in
an exchange for up to seven days if making immediate payment could adversely
affect the portfolio of the Fund whose shares are being redeemed. The exchange
privilege may be modified or terminated with respect to a Fund at anytime, upon
at least 60 days' notice to shareholders.
LIMITATIONS
Each Fund reserves the right to refuse exchange purchases or simultaneous order
transactions by any person or group if, in SAM's judgment, the Fund would not be
able to invest the money effectively in
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<PAGE>
HOW TO EXCHANGE SHARES FROM ONE FUND TO ANOTHER (CONTINUED)
accordance with that Fund's investment objective and policies or would otherwise
potentially be adversely affected. Although a Fund will attempt to give you
prior notice whenever it is reasonably able to do so, it may impose the above
restrictions at any time.
The Funds are not intended to serve as vehicles for frequent trading in response
to short-term fluctuations in the market. Due to the disruptive effect that
market-timing investment strategies can have on efficient portfolio management,
the Funds have instituted certain policies to discourage excessive exchange and
simultaneous order transactions. Exchanges and simultaneous order transactions
which, in SAM's judgment, appear to follow a market-timing strategy are limited
to 4 in any 12 month period per account holder (or account, in a case where one
person or entity exercises investment discretion over more than one account).
For purposes of these limitations a "simultaneous order transaction" is a
transaction where a significant portion of an account's assets are redeemed from
one SAFECO Mutual Fund and shortly thereafter reinvested into another SAFECO
Mutual Fund. In order to protect the shareholders of the Funds, SAM reserves the
right to exercise its discretion in determining whether a particular transaction
qualifies as a simultaneous order transaction. In addition to the foregoing
limitations on exchanges and simultaneous order transactions, as described
above, the Funds reserve the right to refuse any offer to purchase shares.
TELEPHONE TRANSACTIONS
To redeem or exchange shares by telephone, call 1-800-463-8791 between 6:00 a.m.
and 5:00 p.m. Pacific Time, Monday through Friday, except certain holidays. All
telephone calls are tape-recorded for your protection. During times of drastic
or unusual market volatility, it may be difficult for you to exercise the
telephone transaction privileges.
To use the telephone redemption and exchange privileges, you must have
previously selected these services either on your account application or by
having submitted a request in writing to SAFECO Services at the address on the
Prospectus cover. Redeeming or exchanging shares by telephone allows the Funds
and SAFECO Services to accept telephone instructions from an account owner or a
person preauthorized in writing by an account owner.
Each of the Funds and SAFECO Services reserve the right to refuse any telephone
transaction when a Fund or SAFECO Services, in its sole discretion, is unable to
confirm to its satisfaction that a caller is the account owner or a person
preauthorized by the account owner.
The Funds and SAFECO Services will not be liable for the authenticity of
instructions received by telephone that a Fund or SAFECO Services, in its
discretion, believes to be delivered by an account owner or preauthorized
person, provided that the Fund or SAFECO Services follows reasonable procedures
to identify the caller. The shareholder will bear the risk of any resulting
loss. The Funds and SAFECO Services will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. These procedures may
include requiring the account owner to select the telephone privilege in writing
prior to first use and to designate persons authorized to deliver telephone
instructions. SAFECO Services tape-records telephone transactions and may
request certain identifying information from the caller.
The telephone transaction privileges may be suspended, limited, modified or
terminated at any time without prior notice by the Funds or SAFECO Services. The
Funds and SAFECO Services may be liable if they do not employ reasonable
procedures to confirm that telephone transactions are genuine.
-- 62 --
<PAGE>
SHARE PRICE CALCULATION
The net asset value per share ("NAV") of each class of each Fund is computed at
the close of regular trading on the NYSE (normally 1:00 p.m. Pacific time) each
day that the NYSE is open for trading. NAV is determined separately for each
class of shares of each Fund. The NAV of a Fund is calculated by subtracting a
Fund's liabilities from its assets and dividing the result by the number of
outstanding shares. In calculating the net asset value of each class appropriate
adjustments will be made to each class's NAV to reflect expenses allocated to
it.
PORTFOLIO VALUATION FOR THE STOCK FUNDS
The Stock Funds generally value their portfolio securities at the last reported
sale price on the national exchange on which the securities are primarily
traded, unless there are no transactions in which case they shall be valued at
the last reported bid price. Securities traded over-the-counter are valued at
the last sale price, unless there is no reported sale price in which case the
last reported bid price will be used. Portfolio securities that trade on a stock
exchange and over-the-counter are valued according to the broadest and most
representative market. Securities not traded on a national exchange are valued
based on consideration of information with respect to transactions in similar
securities, quotations from dealers and various relationships between
securities. Valuations of portfolio securities calculated in a like manner may
be obtained from a pricing service. Investments for which a representative value
cannot be established are valued at their fair value as determined in good faith
by or under the direction of the Common Stock Trust's Board of Trustees.
The International Fund will invest primarily, and other Funds may invest from
time to time, in foreign securities. Trading in foreign securities will
generally be substantially completed each day at various times prior to the
close of the NYSE. The values of any such securities are determined as of such
times for purposes of computing the Funds' net asset value. Foreign currency
exchange rates are also generally determined prior to the close of the NYSE.
Foreign portfolio securities are valued on the basis of quotations from the
primary market in which they trade. The value of foreign securities are
translated from the local currency into U.S. dollars using current exchange
rates. If quotations are not readily available, or if values have been
materially affected by events occurring after the close of a foreign market, the
security will be valued at fair value as determined in good faith by SAM or BIAM
under procedures established by and under general supervision of the Common
Stock Trust's Board of Trustees.
INTERNATIONAL FUND
Options that are traded on national securities exchanges are valued at their
last sale price as of the close of option trading on such exchange. Futures
contracts will be marked to market daily, and options thereon are valued at
their last sale price, as of the close of the applicable commodities exchange.
Forward contracts are valued at the current cost of covering or offsetting such
contracts.
PORTFOLIO VALUATION FOR THE FIXED-INCOME FUNDS
For each of the Fixed-Income Funds except the Money Market Fund, securities are
valued based on consideration of information with respect to transactions in
similar securities, quotations from dealers and various relationships between
securities. Valuations of a Fixed-Income Fund's portfolio securities calculated
in a like manner may be obtained from a pricing service. Investments for which a
representative value cannot be established are valued at their fair value as
determined in good faith by or under the direction of each Fixed-Income Fund's
respective Trust's Board of Trustees.
Like most money market funds, the Money Market Fund values the securities it
owns on the basis of amortized cost. The Money Market Fund may use amortized
cost valuation as long as the Money Market Trust's Board of Trustees determines
that it fairly reflects market value. Amortized cost valuation involves valuing
a security at its cost and adding or subtracting, ratably to maturity, any
-- 63 --
<PAGE>
SHARE PRICE CALCULATION (CONTINUED)
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the security. This method minimizes the effect of changes in
a security's market value and helps the Money Market Fund maintain a stable
$1.00 share price.
The NAV of the Class B shares of each Fund will generally be lower than the NAV
of Class A shares of the same Fund because of the higher expenses borne by the
Class B shares. The NAVs of the Advisor Classes of a Fund's shares also may
differ due to differing allocations of class-specific expenses. The NAVs of the
Advisor Classes of each Fund's shares will tend to converge, however,
immediately after the payment of dividends.
Call 1-800-463-8794 for 24-hour price information.
INFORMATION ABOUT SHARE OWNERSHIP AND COMPANIES THAT PROVIDE SERVICES TO THE
TRUSTS
Each Trust is a Delaware business trust established by a Trust Instrument dated
May 13, 1993, and is authorized to issue an unlimited number of shares of
beneficial interest. The Board of Trustees of each Trust may establish
additional series or classes of shares of the Trust without approval of
shareholders.
In addition to Class A and Class B shares, each Fund also offers No-Load Class
shares through a separate prospectus to investors who purchase shares directly
from SAFECO Securities. No-Load Class shares are sold without a front-end sales
charge or CDSC and are not subject to Rule 12b-1 fees. Accordingly, the
performance of No-Load Class shares will differ from that of Class A or Class B
shares. For more information about No-Load Class shares of each Fund, please
call 1-800-624-5711.
Each share of a Fund is entitled to participate equally in dividends and other
distributions and the proceeds of any liquidation except that, due to the
differing expenses borne by the three classes, dividends and liquidation
proceeds for each class of shares will likely differ. All shares issued are
fully paid and non-assessable, and shareholders have no preemptive or other
right to subscribe to any additional shares.
The Trusts do not intend to hold annual meetings of shareholders of the Funds.
The Trustees of a Trust will call a special meeting of shareholders of a Fund of
that Trust only if required under the Investment Company Act of 1940 ("1940
Act"), in their discretion, or upon the written request of holders of 10% or
more of the outstanding shares of a Fund or a class entitled to vote. Separate
votes are taken by each class of shares, a Fund, or a Trust if a matter affects
only that class of shares, Fund, or Trust, respectively.
Under Delaware law, the shareholders of the Funds will not be personally liable
for the obligations of any Fund; a shareholder is entitled to the same
limitation of personal liability extended to shareholders of corporations. To
guard against the risk that Delaware law might not be applied in other states,
each Trust Instrument requires that every written obligation of the Trust or a
Fund thereof contain a statement that such obligation may be enforced only
against the assets of that Trust or Fund and generally provides for
indemnification out of property of that Trust or Fund of any shareholder
nevertheless held personally liable for Trust or Fund obligations, respectively.
Because the Trusts use a combined Prospectus, it is possible that a Fund might
become liable for a misstatement about the series of another Trust contained in
this Prospectus. The Boards of Trustees have considered this factor in approving
the use of a single combined Prospectus.
SAM is the investment adviser for each Fund under an agreement with each Trust.
Under each agreement, SAM is responsible for the overall management of each
Trust's and each Fund's business
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<PAGE>
INFORMATION ABOUT SHARE OWNERSHIP AND COMPANIES THAT PROVIDE SERVICES TO THE
TRUSTS (CONTINUED)
affairs. SAM provides investment research, advice, management and supervision to
each Trust and each Fund, and, consistent with each Fund's investment objectives
and policies, SAM determines what securities will be purchased, retained or sold
by each Fund and implements those decisions. Each Fund pays SAM an annual
management fee based on a percentage of that Fund's net assets ascertained each
business day and paid monthly in accordance with the schedules below. A
reduction in the fees paid by a Fund occurs only when that Fund's net assets
reach the dollar amounts of the break points and applies only to the assets that
fall within the specified range:
<TABLE>
<CAPTION>
GROWTH, EQUITY AND INCOME FUNDS
<S> <C>
NET ASSETS ANNUAL FEE
$0 -- $100,000,000 .75 of 1%
$100,000,001 -- $250,000,000 .65 of 1%
$250,000,001 -- $500,000,000 .55 of 1%
Over $500,000,000 .45 of 1%
<CAPTION>
NORTHWEST FUND
<S> <C>
NET ASSETS ANNUAL FEE
$0 -- $250,000,000 .75 of 1%
$250,000,001 -- $500,000,000 .65 of 1%
$500,000,001 -- $750,000,000 .55 of 1%
Over $750,000,000 .45 of 1%
<CAPTION>
BALANCED AND VALUE FUNDS
<S> <C>
NET ASSETS ANNUAL FEE
$0 -- $250,000,000 .75 of 1%
$250,000,001 -- $500,000,000 .65 of 1%
Over $500,000,000 .55 of 1%
<CAPTION>
INTERNATIONAL FUND
<S> <C>
NET ASSETS ANNUAL FEE
$0 -- $250,000,000 1.10 of 1%
$250,000,001 -- $500,000,000 1.00 of 1%
Over $500,000,000 .90 of 1%
<CAPTION>
SMALL COMPANY FUND
<S> <C>
NET ASSETS ANNUAL FEE
$0 -- $250,000,000 .85 of 1%
$250,000,001 -- $500,000,000 .75 of 1%
Over $500,000,000 .65 of 1%
</TABLE>
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<PAGE>
INFORMATION ABOUT SHARE OWNERSHIP AND COMPANIES THAT PROVIDE SERVICES TO THE
TRUSTS (CONTINUED)
<TABLE>
<CAPTION>
INTERMEDIATE TREASURY FUND
NET ASSETS ANNUAL FEE
<S> <C>
$0 -- $250,000,000 .55 of 1%
$250,000,001 -- $500,000,000 .45 of 1%
$500,000,001 -- $750,000,000 .35 of 1%
Over $750,000,000 .25 of 1%
<CAPTION>
HIGH-YIELD FUND
<S> <C>
NET ASSETS ANNUAL FEE
$0 -- $250,000,000 .65 of 1%
$250,000,001 -- $500,000,000 .55 of 1%
$500,000,001 -- $750,000,000 .45 of 1%
Over $750,000,000 .35 of 1%
<CAPTION>
MANAGED BOND FUND
<S> <C>
NET ASSETS ANNUAL FEE
$0 -- $100,000,000 .50 of 1%
$100,000,001 -- $250,000,000 .40 of 1%
Over $250,000,000 .35 of 1%
<CAPTION>
MONEY MARKET FUND
<S> <C>
NET ASSETS ANNUAL FEE
$0 -- $250,000,000 .50 of 1%
$250,000,001 -- $500,000,000 .40 of 1%
$500,000,001 -- $750,000,000 .30 of 1%
Over $750,000,000 .25 of 1%
<CAPTION>
MUNICIPAL AND CALIFORNIA FUNDS
<S> <C>
NET ASSETS ANNUAL FEE
$0 -- $100,000,000 .55 of 1%
$100,000,001 -- $250,000,000 .45 of 1%
$250,000,001 -- $500,000,000 .35 of 1%
Over $500,000,000 .25 of 1%
<CAPTION>
WASHINGTON FUND
<S> <C>
NET ASSETS ANNUAL FEE
$0 -- $250,000,000 .65 of 1%
$250,000,001 -- $500,000,000 .55 of 1%
$500,000,001 -- $750,000,000 .45 of 1%
Over $750,000,000 .35 of 1%
</TABLE>
A Trust and each Fund thereof will bear all expenses of their organization,
operations and business not specifically assumed by SAM under each Fund's
management contract. Such expenses may
-- 66 --
<PAGE>
INFORMATION ABOUT SHARE OWNERSHIP AND COMPANIES THAT PROVIDE SERVICES TO THE
TRUSTS (CONTINUED)
include, among others, custody and accounting expenses, transfer agency and
related expenses, distribution and shareholder servicing expenses, expenses
related to preparing, printing and delivering prospectuses and shareholder
reports, the expenses of holding shareholders' meetings, legal fees, the
compensation of non-interested trustees of the Trusts, brokerage, taxes and
extraordinary expenses.
With respect to the International Fund, SAM has a sub-advisory agreement with
the Sub-Adviser. The Sub-Adviser is a direct, wholly owned subsidiary of the
Bank of Ireland Asset Management Limited and is an indirect, wholly owned
subsidiary of Bank of Ireland. The Sub-Adviser has its headquarters at 26
Fitzwilliam Place, Dublin, Ireland, and its U.S. office at 2 Greenwich Plaza,
Greenwich, Connecticut. The Sub-Adviser was established in 1987 and currently
manages over $3 billion in assets. Because the Sub-Adviser is doing business
from a location within the United States, investors will be able to effect
service of legal process within the United States upon the Sub-Adviser, under
federal securities laws in United States courts. However, the Sub-Adviser is a
foreign organization and maintains a substantial portion of its assets outside
the United States. Therefore, the ability of investors to enforce judgments
against the Sub-Adviser may be affected by the willingness of foreign courts to
enforce judgments of U.S. courts.
Under the agreement, the Sub-Adviser is responsible for providing investment
research and advice used to manage the investment portfolio of the International
Fund. In return, SAM (and not the International Fund) pays the Sub-Adviser a fee
in accordance with the schedule below:
<TABLE>
<S> <C>
NET ASSETS ANNUAL FEE
$0 -- $50,000,000 .60 of 1%
$50,000,001 -- $100,000,000 .50 of 1%
Over $100,000,000 .40 of 1%
</TABLE>
The parent company of the Sub-Adviser, Bank of Ireland Asset Management Limited,
is a direct, wholly owned subsidiary of the Bank of Ireland, which engages in
the investment advisory business and is located at 26 Fitzwilliam Place, Dublin,
Ireland. The Bank of Ireland is a holding company whose primary subsidiaries are
engaged in banking, insurance, securities and related financial services, and is
located at Lower Baggot Street, Dublin, Ireland.
The distributor of the Advisor Classes of each Fund's shares under an agreement
with each Trust is SAFECO Securities a broker-dealer registered under the
Securities Exchange Act of 1934 and a member of the National Association of
Securities Dealers, Inc.
The transfer, dividend disbursement and shareholder servicing agent for the
Advisor Classes of each Fund under an agreement with each Trust is SAFECO
Services. SAFECO Services receives a fee from each Fund for every shareholder
account held in the Fund. SAFECO Services may enter into subcontracts with
registered broker-dealers, third-party administrators and other qualified
service providers that generally perform shareholder, administrative, and/or
accounting services which would otherwise be provided by SAFECO Services. Fees
incurred by a Fund for these services will not exceed the transfer agency fee
payable to SAFECO Services. Any distribution expenses associated with these
arrangements will be borne by SAM.
SAM, SAFECO Securities and SAFECO Services are wholly owned subsidiaries of
SAFECO Corporation (a holding company whose primary subsidiaries are engaged in
the insurance and financial services businesses) and are each located at SAFECO
Plaza, Seattle, Washington 98185.
As interpreted by courts and administrative agencies, the Glass-Steagall Act and
other applicable laws and regulations limit the ability of a bank or other
depository institution to become an underwriter or distributor of securities.
However, in the opinion of each Trust's management, based on the advice of
-- 67 --
<PAGE>
INFORMATION ABOUT SHARE OWNERSHIP AND COMPANIES THAT PROVIDE SERVICES TO THE
TRUSTS (CONTINUED)
counsel, these laws and regulations do not prohibit such depository institutions
from providing services for investment companies. Banks or other depository
institutions may be subject to various state laws regarding such services, and
may be required to register as dealers pursuant to state law.
DISTRIBUTION PLANS
Each Trust, on behalf of the Advisor Classes of each Fund, has entered into a
Distribution Agreement (each an "Agreement") with SAFECO Securities. Each Trust
has also adopted a plan pursuant to Rule 12b-1 under the 1940 Act with respect
to each of the Advisor Classes of each Fund (the "Plans"). Pursuant to the
Plans, each Advisor class pays SAFECO Securities a quarterly service fee, at the
annual rate of 0.25% of the aggregate average daily net assets of the Advisor
class. Class B shares also pay SAFECO Securities a quarterly distribution fee at
the annual rate of 0.75% of the aggregate average daily net assets of the Class
B shares. Although the Money Market Trust has adopted Plans with respect to the
Advisor Classes of the Money Market Fund, the Money Market Trust's Board of
Trustees and SAFECO Securities have agreed not to implement the Plans at this
time. Thus, the Advisor Classes of the Money Market Fund do not currently pay
service or distribution fees to SAFECO Securities under the Money Market Fund
Plans. The Money Market Fund Plans will not be implemented unless authorized by
the Money Market Trust's Board of Trustees.
Under the Plans, SAFECO Securities will use the service fees primarily to
compensate persons selling shares of the Funds for the provision of personal
service and/or the maintenance of shareholder accounts. SAFECO Securities will
use the distribution fees under the Class B Plan to offset the commissions it
pays to broker-dealers, banks or other financial institutions for selling each
Fund's Class B shares. In addition, SAFECO Securities will use the distribution
fees under the Class B Plan to offset each Fund's marketing costs attributable
to the Class B shares, such as preparation of sales literature, advertising and
printing and distributing prospectuses and other shareholder materials to
prospective investors. SAFECO Securities also may use the distribution fee to
pay other costs allocated to SAFECO Securities' distribution activities,
including acting as shareholder of record, maintaining account records and other
overhead expenses.
SAFECO Securities will receive the proceeds of the initial sales charges paid
upon the purchase of Class A shares and the CDSCs paid upon applicable
redemptions of Class B shares and may use these proceeds for any of the
distribution expenses described above. The amount of sales charges reallowed to
broker-dealers, banks or other financial institutions who sell Class A shares
will equal the percentage of the amount invested in accordance with the schedule
set forth in "Purchasing Advisor Class A Shares" on page 54. SAFECO Securities,
out of its own resources, will pay a brokerage commission equal to 4.00% of the
amount invested to broker-dealers, banks and other financial institutions who
sell Class B shares. Broker-dealers, banks and other financial institutions who
sell Class B shares of the Money Market Fund will receive the 4.00% brokerage
commission at the time the shareholder exchanges his or her Class B Money Market
Fund shares for Class B shares of another Fund.
During the period they are in effect, the Plans and related Agreements obligate
the Advisor Classes of the Funds to which they relate to pay service and
distribution fees to SAFECO Securities as compensation for its service and
distribution activities, not as reimbursement for specific expenses incurred.
Thus, even if SAFECO Securities' expenses exceed its service or distribution
fees for any class, the class will not be obligated to pay more than those fees
and, if SAFECO Securities' expenses are less than such fees, it will retain its
full fees and realize a profit. Each Fund that has implemented a Rule 12b-1 Plan
will pay the service and distribution fees to SAFECO Securities until either the
applicable Plan or Agreement is terminated or not renewed.
-- 68 --
<PAGE>
PERSONS CONTROLLING CERTAIN FUNDS
At April 2, 1997, SAM, a wholly owned subsidiary of SAFECO Corporation,
controlled the International and Balanced Funds. At April 4, 1997 SAM controlled
the Value Fund. At April 2, 1997, SAFECO Corporation controlled the Small
Company Fund. SAFECO Corporation and SAM have their principal place of business
at SAFECO Plaza, Seattle, Washington 98185.
At April 4, 1997, SAFECO Insurance Company of America ("SAFECO Insurance")
controlled the Intermediate Treasury and Washington Funds. SAFECO Insurance is a
Washington Corporation and a wholly owned subsidiary of SAFECO Corporation,
which has its principal place of business at SAFECO Plaza, Seattle, Washington
98185.
At April 4, 1997, Crown Packaging Corp. Profit Sharing & Pension Plan and
Massman Construction Co. Profit Sharing Retirement Trust controlled the Managed
Bond Fund. Crown Packaging Corp. Profit Sharing & Pension Plan's address of
record is 8514 Eager Road, St. Louis, Mo. 63144. Massman Construction Co. Profit
Sharing Retirement Trust's address of record is 8901 Stateline, Kansas City, Mo.
64114.
PERFORMANCE INFORMATION
The yield, total return and average annual total return of each class of a Fund
may be quoted in advertisements. For each Fund except the Money Market Fund,
yield is the annualization on a 360-day basis of a class' net income per share
over a 30-day period divided by the class' net asset value per share on the last
day of the period. The formula for the yield calculation is defined by
regulation. Consequently, the rate of actual income distributions paid by the
Funds may differ from quoted yield figures. Total return is the total percentage
change in an investment in a class of a Fund, assuming the reinvestment of
dividend and capital gain distributions, over a stated period of time. Average
annual total return is the annual percentage change in an investment in a class
of a Fund, assuming the reinvestment of dividends and capital gain
distributions, over a stated period of time. Performance quotations are
calculated separately for each class of a Fund. Standardized returns for Class A
shares reflect deduction of the Fund's maximum initial sales charge at the time
of purchase, and standardized returns for Class B shares reflect deduction of
the applicable CDSC imposed on a redemption of shares held for the period. SAM
currently anticipates that the U.S. Value Fund's portfolio turnover will not
exceed 100%. A Fund's portfolio turnover rate will vary from year to year. A
higher portfolio turnover rate involves correspondingly higher transaction costs
in the form of broker commissions and dealer spreads and other costs that a Fund
will bear directly.
For the Money Market Fund, yield is the annualization on a 365-day basis of the
Fund's net income over a 7-day period. Effective yield is the annualization, on
a 365-day basis, of the Money Market Fund's net income over a 7-day period with
dividends reinvested. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
From time to time, a Fund may advertise rankings. Rankings are calculated by
independent companies that monitor mutual fund performance (E.G., CDA Investment
Technologies, Lipper Analytical Services, Inc., and Morningstar, Inc.) and are
reported periodically in national financial publications such as BARRON'S,
BUSINESS WEEK, FORBES, INVESTOR'S BUSINESS DAILY, MONEY MAGAZINE, and THE WALL
STREET JOURNAL. In addition, non-standardized performance figures may accompany
the standardized figures described above. Non-standardized figures may be
calculated in a variety of ways, including but not necessarily limited to,
different time periods and different initial investment amounts. Each Fund may
also compare its performance to the performance of relevant indices.
Performance information and quoted rankings are indicative only of past
performance and are not intended to represent future investment results. Except
for the Money Market Fund, the yield and share price of each class of a Fund
will fluctuate and your shares, when redeemed, may be worth more or less than
you originally paid for them.
-- 69 --
<PAGE>
FUND DISTRIBUTIONS AND HOW THEY ARE TAXED
DIVIDENDS AND OTHER DISTRIBUTIONS
The Fixed-Income Funds declare dividends on each business day and pay them on
the last business day of each month; the Equity, Income, Balanced and Value
Funds declare and pay dividends on the last business day of each calendar
quarter; and the Growth, Northwest, International, and Small Company Funds
declare and pay dividends annually. Each Fund declares dividends from net
investment income (which includes accrued dividends and interest, earned
discount, and other income earned on portfolio securities less expenses). Shares
of each Fund become entitled to receive dividends on the next business day after
they are purchased for your account. If you request redemption of all your
shares at any time during a month, you will receive all declared dividends
through the date of redemption, together with the proceeds of the redemption.
Dividends and other distributions paid by a Fund on each class of its shares are
calculated at the same time in the same manner. However, except for the Money
Market Fund, because of the higher Rule 12b-1 service and distribution fees
associated with Class B shares, the dividends paid by a Fund on its Class B
shares will be lower than those paid on its Class A shares.
Your dividends and other distributions are reinvested in additional shares of
the distributing Fund at net asset value per share, generally determined as of
the close of business on the ex-distribution date, unless you elect in writing
to receive dividends and/or other distributions in cash and that election is
provided to SAFECO Services at the address on the Prospectus cover. The election
remains in effect until revoked by written notice to SAFECO Services. For
retirement accounts, all dividends and other distributions declared by a Fund
must be invested in additional shares of that Fund.
States generally treat the pass-through of interest earned on U.S. Treasury
securities and other direct obligations of the U.S. Government as tax-free
income in the calculation of their state income tax. This treatment may be
dependent upon the maintenance of certain percentages of fund ownership in these
securities. The Intermediate Treasury Fund will invest primarily in these
securities while the other Funds may occasionally invest a portion of their
portfolios in these securities.
Please remember that if you purchase shares shortly before a Fund pays a taxable
dividend or other distribution, you will pay the full price for the shares, then
receive part of the price back as a taxable distribution.
TAXES
Each Fund intends to continue to qualify for treatment as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended. By
so qualifying, a Fund will not be subject to federal income taxes to the extent
it distributes its net investment income and realized capital gains to its
shareholders. Each Fund will inform you as to the amount and nature of dividends
and other distributions to your account. Dividends and other distributions
declared in December, but received by shareholders in January, are taxable to
shareholders in the year in which declared.
When you sell (redeem) shares, it may result in a taxable gain or loss. This
depends upon whether you receive more or less than your adjusted basis for the
shares (which normally takes into account any initial sales charge paid on Class
A shares). An exchange of any Fund's shares for shares of another Fund generally
will have similar tax consequences.
Special rules apply when you dispose of Class A shares of a Fund (except the
Money Market Fund) through a redemption or exchange within 60 days after your
purchase thereof and subsequently reacquire Class A shares of the same Fund or
acquire Class A shares of another Fund without paying a sales charge due to the
exchange privilege or reinstatement privilege. See "How to Purchase Shares --
Reinstatement Privilege" on page 56 and "How to Exchange Shares from One Fund to
Another" on page 61 for more information. In these cases, any gain on the
disposition of the original
-- 70 --
<PAGE>
FUND DISTRIBUTIONS AND HOW THEY ARE TAXED (CONTINUED)
Class A shares will be increased, or any loss decreased, by the amount of the
sales charge paid when you acquired those shares, and that amount will increase
the basis of the shares subsequently acquired. In addition, if you purchase
shares of a Fund (whether pursuant to the reinstatement privilege or otherwise)
within thirty days before or after redeeming other shares of that Fund
(regardless of class) at a loss, all or part of that loss will not be deductible
and will increase the basis of the newly purchased shares.
SPECIAL CONSIDERATIONS FOR THE TAX-EXEMPT INCOME FUNDS
TAXES
Each Tax-Exempt Income Fund intends to continue to qualify for favorable tax
treatment as a "regulated investment company" under the Internal Revenue Code
("Code") so as to be able to pay dividends that are exempt from federal personal
income taxes. The portion of dividends representing net short-term capital
gains, however, is not exempt and will be treated as taxable dividends for
federal income tax purposes. In addition, income which is derived from
purchasing certain bonds below their issued price after April 30, 1993, will be
treated as ordinary income for federal income tax purposes.
A portion of a Tax-Exempt Income Fund's assets may from time to time be
temporarily invested in fixed-income obligations, the interest on which when
distributed to the Fund's shareholders will be subject to federal income taxes.
As a matter of non-fundamental investment policy, the Tax-Exempt Income Funds
will not purchase so-called "non-essential or private activity" bonds, the
interest on which would constitute a preference item for shareholders in
determining their alternative minimum tax.
The excess of net long-term capital gains realized by a Tax-Exempt Income Fund
over net short-term capital loss on portfolio transactions does not necessarily
result in exemption under other federal, state or local income taxes.
Shareholders of each Tax-Exempt Income Fund should bear in mind that they may be
subject to other taxes.
If a shareholder buys shares of a Tax-Exempt Income Fund and sells them at a
loss within six months, such loss for federal income tax purposes will be
disallowed to the extent of the tax-exempt interest component of dividends
received during such six-month period.
If a shareholder buys shares of a Tax-Exempt Income Fund and sells them at a
loss within six months, to the extent not disallowed in the previous paragraph
and to the extent of any long-term capital gains distributions, the loss will be
treated as a long-term capital loss for federal income tax purposes.
Individuals who receive Social Security benefits must use the amount of income
dividends received from each of the Tax-Exempt Income Funds in determining the
amount of any federal income tax due on such benefits.
Under the Code, the tax effect on individuals of receiving dividends from any of
the Tax-Exempt Income Funds is substantially different from the tax effect on
other types of shareholders.
CALIFORNIA FUND
The California Fund intends to pay dividends that are exempt from California
State personal income taxes. This would not include taxable interest paid on
temporary investments, if any. Generally, the tax treatment of capital gains
under California law is the same as under federal law, but such gains are taxed
at the same rates as ordinary income. Capital gains distributions paid by the
California Fund are treated as long-term capital gains under California law
regardless of how long the shares have been held. Redemptions and exchanges of
the California Fund may result in a capital gain or loss for California income
tax purposes.
-- 71 --
<PAGE>
FUND DISTRIBUTIONS AND HOW THEY ARE TAXED (CONTINUED)
Under California law, the dividend income from California municipal bonds is
exempt from the Calfornia personal income tax applicable to individual
shareholders but is fully taxable for purposes of the California franchise tax
applicable to most corporate shareholders.
Shares of the California Fund will not be subject to the California property
tax.
WASHINGTON FUND
Currently the State of Washington has no state personal income tax. Should
Washington State enact a personal income tax, there can be no assurance that
income from the Washington Fund's portfolio securities which is distributed to
shareholders would be exempt from such a tax.
TAX WITHHOLDING INFORMATION
You will be asked to certify on your account application or on a separate form
that the taxpayer identification number you provide is correct and that you are
not subject to, or are exempt from, backup withholding for previous
underreporting to the Internal Revenue Service.
Retirement plan distributions may be subject to federal income tax withholding.
However, you may elect not to have any distributions withheld by checking the
appropriate box on the Redemption Request form or by instructing SAFECO Services
in writing at the address on the Prospectus cover.
If the International Fund pays nonrefundable taxes to foreign governments during
the year, the taxes will reduce the Fund's dividends but still be included in
your taxable income. However, you may be able to claim an offsetting credit or
deduction on your tax return for your share of foreign taxes paid by the Fund.
The foregoing is only a summary of some of the important tax considerations
generally affecting each Fund and its shareholders; see the Trusts' Statements
of Additional Information for a further discussion. There may be other federal,
state or local tax considerations applicable to a particular investor. You
therefore are urged to consult your tax adviser.
TAX-DEFERRED RETIREMENT PLANS
SAFECO Services offers a variety of tax-deferred retirement plans for
individuals, businesses and nonprofit organizations. An account may be
established under one of the following plans which allow you to defer investment
income from federal income tax while you save for retirement. Many of the Funds
(other than the Tax-Exempt Income Funds) may be used as investment vehicles for
these plans.
INDIVIDUAL RETIREMENT ACCOUNTS (IRAS). IRAs are tax-deferred retirement
accounts for anyone under age 70 1/2 with earned income. The maximum annual
contribution generally is $2,000 per person ($4,000 for you and a non-working
spouse). Under certain circumstances your contribution will be deductible for
income tax purposes. An annual custodial fee will be charged for any part of a
calendar year in which you have an IRA investment in a Fund.
SIMPLIFIED EMPLOYEE PENSION IRAS (SEP-IRAS). SEP-IRAs are easily administered
retirement plans for small businesses and self-employed individuals. Annual
contributions up to $22,500 may be made to SEP-IRA accounts; the annual
contribution limit is subject to change. SEP-IRAs have the same investment
minimums and custodial fees as regular IRAs.
403(b) PLANS. 403(b) plans are retirement plans for tax-exempt organizations
and school systems to which employers and employees both may contribute. Minimum
investment amounts are negotiable.
-- 72 --
<PAGE>
TAX-DEFERRED RETIREMENT PLANS (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.
For information about the above accounts and plans, please contact your
investment professional, or call 1-800-278-1985. For a description of federal
income tax withholding on distributions from these accounts and plans, see "Fund
Distributions and How They Are Taxed -- Tax Withholding Information" on page 72.
ACCOUNT STATEMENTS
Periodically, you will receive an account statement indicating your current Fund
holdings and transactions affecting your account. Confirmation statements will
be sent to you after each transaction that affects your account balance. Please
review the information on each confirmation statement for accuracy immediately
upon receipt. If you do not notify us within 30 days of any processing error,
SAFECO Services will consider the transactions listed on the confirmation
statement to be correct.
ACCOUNT CHANGES AND SIGNATURE REQUIREMENTS
Changes to your account registration or the services you have selected must be
in writing and signed by the number of owners specified on your account
application as having authority to make these changes. Send written changes to
the broker-dealer, bank or other financial institution where your account is
maintained. (Changes made to accounts maintained at SAFECO Services should be
sent to the address on the Prospectus cover.) Certain changes to the Automatic
Investment Method and Systematic Withdrawal Plan can be made by telephone
request if you have previously selected single signature authorization for your
account.
You must specify on your account application the number of signatures required
to authorize redemptions and exchanges and to change account registration or the
services selected. Authorizing fewer than all account owners has important
implications. For example, one owner of a joint tenant account can redeem money
without the co-owner's signature. If you do not indicate otherwise on the
application, the signatures of all account owners will be required to effect a
transaction. Your selection of fewer than all account owner signatures may be
revoked by any account owner who writes to SAFECO Services or the financial
institution where your account is maintained.
The broker-dealer, bank or financial institution where your account is
maintained or SAFECO Services may require a signature guarantee for a signature
that cannot be verified by comparison to the signature(s) on your account
application. A signature guarantee may be obtained from most financial
institutions including banks, savings and loans and broker-dealers.
-- 73 --
<PAGE>
DESCRIPTION OF STOCKS, BONDS AND CONVERTIBLE SECURITIES
COMMON STOCKS represent equity interest in a corporation. Although common stocks
have a history of long-term growth in value, their prices fluctuate based on
changes in a company's financial condition and overall market and economic
conditions. Smaller companies are especially sensitive to these factors.
PREFERRED STOCKS are equity securities whose owners have a claim on a company's
earnings and assets before holders of common stock, but after debt holders. The
risk characteristics of preferred stocks are similar to those of common stocks,
except that preferred stocks are generally subject to less risk than common
stocks.
BONDS AND OTHER DEBT SECURITIES are used by issuers to borrow money from
investors. The issuer pays the investor a fixed or variable rate of interest,
and must repay the amount borrowed at maturity. The value of bonds and other
debt securities will normally vary inversely with interest rates. In general,
bond prices rise when interest rates fall, and bond prices fall when interest
rates rise. Debt securities have varying degrees of quality and varying levels
of sensitivity to changes in interest rates. Long-term bonds are generally more
sensitive to interest rate changes than short-term bonds.
CONVERTIBLE SECURITIES are debt or preferred stock which are convertible into or
exchangeable for common stock. The value of convertible corporate bonds will
normally vary inversely with interest rates and the value of convertible
corporate bonds and convertible preferred stock will normally vary with the
value of the underlying common stock.
RATINGS SUPPLEMENT
Ratings by Moody's and S&P represent their respective opinions as to the
investment quality of the rated obligations. Investors should realize these
ratings do not constitute a guarantee that the principal and interest payable
under these obligations will be paid when due.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
MOODY'S. Issuers rated Prime-1 have a superior ability for repayment of senior
short-term debt obligations. Issuers rated Prime-2 have a strong ability for
repayment of senior short-term debt obligations. Issuers rated Prime-3 have an
acceptable ability for repayment of senior short-term debt obligations.
S&P. Issues rated A-1 are the highest category, indicating that the degree of
safety regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus (+) sign
designation.Issues designated A-2 have a satisfactory capacity for timely
payment, however, the relative degree of safety is not as high as for issues
designated "A-1." Issues designated as A-3 have an adequate capacity for timely
payment.
DESCRIPTION OF DEBT RATINGS
Excerpts from Moody's descriptions of its ratings:
Investment Grade:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
-- 74 --
<PAGE>
RATINGS SUPPLEMENT (CONTINUED)
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than the Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Below Investment Grade:
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B- -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa have poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Excerpts from S&P's descriptions of its ratings:
Investment Grade:
AAA -- Debt which is rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA -- Debt which is rated AA has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in small degree.
A -- Debt which is rated A has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
-- 75 --
<PAGE>
RATINGS SUPPLEMENT (CONTINUED)
Below Investment Grade:
BB, B, CCC, CC, C -- Debt which is 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 from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DEBT SECURITIES HOLDINGS
THE EQUITY FUND DID NOT HOLD ANY CONVERTIBLE DEBT SECURITIES DURING THE FISCAL
YEAR ENDED DECEMBER 31, 1996.
INCOME FUND
The weighted average ratings of all debt securities held by the Income Fund,
expressed as a percentage of total investments held during the fiscal period
ended December 31, 1996, were as follows:
<TABLE>
<CAPTION>
MOODY'S % S&P %
- -------------------------------------- --------- -------------------------------------- ---------
<S> <C> <C> <C>
INVESTMENT GRADE
Aaa 0% AAA 0%
Aa 0% AA 0%
A 5% A 3%
Baa 1% BBB 3%
BELOW INVESTMENT GRADE
Ba 5% BB 2%
B 3% B 3%
Caa 0% CCC 0%
Ca 0% CC 0%
C 0% C 0%
D 0%
Not Rated, but determined to be Not Rated, but determined to be
investment grade 0% investment grade 0%
Not Rated, but determined to be below Not Rated, but determined to be below
investment grade 0% investment grade 3%
</TABLE>
-- 76 --
<PAGE>
DEBT SECURITIES HOLDINGS (CONTINUED)
HIGH-YIELD FUND
The weighted average ratings of all fixed-income securities, expressed as a
percentage of total investments held by the High-Yield Bond during the fiscal
period ended December 31, 1996, were as follows:
<TABLE>
<CAPTION>
MOODY'S % S&P %
- -------------------------------------- --------- -------------------------------------- ---------
<S> <C> <C> <C>
INVESTMENT GRADE
Aaa 0% AAA 0%
Aa 0% AA 0%
A 0% A 0%
Baa 0% BBB 0%
BELOW INVESTMENT GRADE
Ba 20% BB 28%
B 72% B 64%
Caa 1% CCC 1%
Ca 0% CC 0%
C 0% C 0%
D 0%
Not Rated, but determined to be Not Rated, but determined to be
investment grade 1% investment grade 1%
Not Rated, but determined to be below Not Rated, but determined to be below
investment grade 0% investment grade 0%
</TABLE>
-- 77 --
<PAGE>
SAFECO FAMILY OF FUNDS
STABILITY OF PRINCIPAL
SAFECO Money Market Fund
BOND INCOME
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO High-Yield Bond Fund
SAFECO Managed Bond Fund
TAX-FREE BOND INCOME
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal Bond Fund
HIGH CURRENT INCOME WITH LONG-TERM GROWTH
SAFECO Income Fund
LONG-TERM GROWTH
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Northwest Fund
SAFECO International Stock Fund
SAFECO Balanced Fund
SAFECO Small Company Stock Fund
SAFECO U.S. Value Fund
FOR MORE COMPLETE INFORMATION ON ADVISOR CLASS SHARES OF ANY SAFECO MUTUAL FUND,
INCLUDING MANAGEMENT FEES AND EXPENSES, PLEASE CONTACT YOUR INVESTMENT
PROFESSIONAL.
<PAGE>
TELEPHONE NUMBERS:
DEALER SERVICES
Nationwide: (800) 528-6501
Seattle: (206) 545-6409
LITERATURE ORDER:
Nationwide: (800) 463-8792
Seattle: (206) 545-6227
SHAREHOLDER SERVICES/TELEPHONE EXCHANGE:
MONDAY THROUGH FRIDAY,
6:00 A.M. TO 5:00 P.M. PACIFIC TIME
NATIONWIDE: (800) 463-8791
SEATTLE: (206) 545-6283
24-HOUR PRICE AND PERFORMANCE INFORMATION
Nationwide: (800) 463-8794
Seattle: (206) 545-6295
MAILING ADDRESS:
SAFECO MUTUAL FUNDS
Advisor Class Shares
P.O. Box 34890
Seattle, WA 98124-1890
EXPRESS/OVERNIGHT MAIL:
SAFECO Mutual Funds
Advisor Class Shares
4333 Brooklyn Avenue N.E.
Seattle, WA 98105
DISTRIBUTOR:
SAFECO Securities, Inc.
PROSPECTUS
April 30, 1997
SAFECO GROWTH FUND
SAFECO EQUITY FUND
SAFECO INCOME FUND
SAFECO NORTHWEST FUND
SAFECO INTERNATIONAL STOCK FUND
SAFECO BALANCED FUND
SAFECO SMALL COMPANY STOCK FUND
SAFECO U.S. VALUE FUND
SAFECO INTERMEDIATE-TERM
U.S. TREASURY FUND
SAFECO HIGH-YIELD BOND FUND
SAFECO MANAGED BOND FUND
SAFECO MUNICIPAL BOND FUND
SAFECO CALIFORNIA TAX-FREE INCOME FUND
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
SAFECO MONEY MARKET FUND
ADVISOR CLASS A
ADVISOR CLASS B
GMF 4111 4/97
[LOGO]
Printed on Recycled Paper.
-Registered Trademark- Registered trademark of SAFECO Corporation
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY ANY TRUST, ANY FUND, OR BY
SAFECO SECURITIES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY ANY TRUST, ANY FUND, OR BY SAFECO SECURITIES
IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION MAY NOT LAWFULLY BE MADE.
<PAGE>
SAFECO TAXABLE BOND TRUST:
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
SAFECO HIGH-YIELD BOND FUND
SAFECO MANAGED BOND TRUST:
SAFECO MANAGED BOND FUND
SAFECO TAX-EXEMPT BOND TRUST:
SAFECO MUNICIPAL BOND FUND
SAFECO CALIFORNIA TAX-FREE INCOME FUND
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
SAFECO MONEY MARKET TRUST:
SAFECO MONEY MARKET FUND
ADVISOR CLASS A
ADVISOR CLASS B
Statement of Additional Information
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus for the funds listed above (each a "Fund"). A
copy of the Prospectus may be obtained by writing SAFECO Mutual Funds, Advisor
Class Shares, P.O. Box 34890, Seattle, Washington 98124-1890, or by calling TOLL
FREE: 1-800-463-8791
The date of the most current Prospectus of the Funds to which this Statement of
Additional Information relates is April 30, 1997.
The date of this Statement of Additional Information is April 30, 1997.
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
INVESTMENT POLICIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
INVESTMENT POLICIES OF THE TAXABLE BOND FUNDS . . . . . . . . . . . . . . 3
INVESTMENT POLICIES OF THE MANAGED BOND FUND . . . . . . . . . . . . . . . 6
INVESTMENT POLICIES OF THE TAX-EXEMPT FIXED INCOME FUNDS . . . . . . . . . 10
INVESTMENT POLICIES OF THE MONEY MARKET FUND . . . . . . . . . . . . . . . 15
ADDITIONAL INVESTMENT INFORMATION. . . . . . . . . . . . . . . . . . . . . 17
INVESTMENT RISKS OF CONCENTRATION IN CALIFORNIA AND WASHINGTON ISSUERS . . 24
PRINCIPAL SHAREHOLDERS OF CERTAIN FUNDS. . . . . . . . . . . . . . . . . . 33
ADDITIONAL TAX INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 33
CONVERSION OF ADVISOR CLASS B SHARES . . . . . . . . . . . . . . . . . . . 35
ADDITIONAL INFORMATION ON CALCULATION OF NET ASSET VALUE PER SHARE . . . . 36
ADDITIONAL PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . 37
ADDITIONAL INFORMATION ON DIVIDENDS. . . . . . . . . . . . . . . . . . . . 44
TRUSTEES AND OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . 45
INVESTMENT ADVISORY AND OTHER SERVICES . . . . . . . . . . . . . . . . . . 51
BROKERAGE PRACTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
REDEMPTION IN KIND . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
DESCRIPTION OF RATINGS . . . . . . . . . . . . . . . . . . . . . . . . . . 60
<PAGE>
INVESTMENT POLICIES
SAFECO Intermediate-Term U.S. Treasury Fund ("Intermediate Treasury Fund") and
SAFECO High-Yield Bond Fund ("High-Yield Bond Fund") are series of the SAFECO
Taxable Bond Trust (collectively the "Taxable Bond Funds"). The SAFECO Managed
Bond Fund ("Managed Bond Fund") is a series of SAFECO Managed Bond Trust
("Managed Bond Trust"); (Taxable Bond Funds and Managed Bond Fund, collectively
the "Taxable Fixed Income Funds").
SAFECO Municipal Bond Fund ("Municipal Bond Fund"), SAFECO California Tax-Free
Income Fund ("California Fund") and SAFECO Washington State Municipal Bond Fund
("Washington Fund") (collectively, the "Tax-Exempt Fixed Income Funds") are
series of SAFECO Tax-Exempt Bond Trust ("Tax-Exempt Bond Trust").
SAFECO Money Market Fund ("Money Market Fund") is a series of SAFECO Money
Market Trust ("Money Market Trust").
The investment policies of each Fund are described in the Prospectus and this
Statement of Additional Information. These policies state the investment
practices that the Funds will follow, in some cases limiting investments to a
certain percentage of assets, as well as those investment activities that are
prohibited. The types of securities that a Fund may purchase are also
disclosed in the Prospectus. Before a Fund purchases a security that the
following policies permit, but that is not currently described in the
Prospectus, the Prospectus will be amended or supplemented to identify or
describe the security. If a policy's percentage limitation is adhered to at
the time of investment, a later increase or decrease in values, net assets or
other circumstances will not be considered in determining whether a Fund
complies with the applicable limitation (except to the extent the change may
impact a Fund's borrowing limit).
Generally, the entity that has the ultimate responsibility for the payment of
interest and principal on a particular security is deemed to be its issuer for
purposes of the Tax-Exempt Fixed Income Funds' investment policies. The
identification of the issuer of a tax-exempt security for purposes of
diversification depends on the terms and conditions of the security. For
example, when the assets and revenues of an agency, authority, instrumentality
or other political subdivision are separate from those of the government
creating the subdivision and the security is backed only by the assets and
revenues of the subdivision, such subdivision would be deemed to be the sole
issuer for diversification purposes. Similarly, in the case of an industrial
development bond, if that bond is backed only by the assets and revenues of the
non-governmental user, then such non-governmental user would be deemed to be the
sole issuer for purposes of diversification. If, however, in either case, the
creating government or some other entity guarantees a security, such a guarantee
would be considered a separate security which must be valued and included in
each Tax-Exempt Fixed Income Fund's five percent (5%) limitation on investments
in one issuer.
Each Fund's fundamental policies may not be changed without the approval of a
"majority of its outstanding voting securities," as defined in the Investment
Company Act of 1940, as amended
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("1940 Act"). For purposes of such approval, the vote of a majority of the
outstanding voting securities of a Fund means the vote, at a meeting of the
shareholders of such Fund duly called, (i) of 67% or more of the voting
securities present at such meeting if the holders of more than 50% of the
outstanding voting securities are present or represented by proxy, or (ii) of
more than 50% of the outstanding voting securities, whichever is less.
Non-fundamental policies may be changed without shareholder approval.
INVESTMENT POLICIES OF THE TAXABLE BOND FUNDS
FUNDAMENTAL INVESTMENT POLICIES
Each Taxable Bond Fund has adopted the following fundamental investment
policies. Each Taxable Bond Fund will NOT:
1. Purchase the securities of any issuer (except the U.S. Government, its
agencies or instrumentalities) if as a result more than five percent (5%)
of the value of its total assets at the time of purchase would be invested
in the securities of such issuer, except that up to twenty-five percent
(25%) of the value of a Fund's assets (which twenty-five percent (25%)
shall not include securities issued by another investment company) may be
invested without regard to this five percent (5%) limitation;
2. Underwrite any issue of securities, except to the extent that the purchase
of permitted investments directly from the issuer in accordance with the
Fund's investment objective, policies and restrictions and the subsequent
disposition thereof may be deemed to be underwriting or the later
disposition of restricted securities acquired within the limits imposed on
the acquisition of such securities may be deemed to be an underwriting;
3. Purchase or sell real estate, but this shall not prevent the Fund from
investing in municipal obligations or other permitted investments secured
by real estate or interests therein;
4. Purchase or retain for the Fund's portfolio the securities of any issuer,
if, to the Fund's knowledge, the officers or directors of the Fund, or its
investment adviser, who individually own more than one-half ( 1/2) of one
percent (1%) of the outstanding securities of such an issuer, together own
more than five percent (5%) of such outstanding securities;
5. Borrow money, except from a bank or SAFECO Corporation or its affiliates at
an interest rate not greater than that available to the Fund from
commercial banks, for temporary or emergency purposes and not for
investment purposes, and then only in an amount not exceeding twenty
percent (20%) of the value of the Fund's total assets at the time of such
borrowing;
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Each Fund will not purchase securities if borrowings equal to or greater
than five percent (5%) of the Fund's total assets are outstanding;
6. Pledge, mortgage or hypothecate its assets, except that to secure
borrowings permitted by subparagraph (5) above, it may pledge securities
having a market value at the time of pledge not exceeding ten percent (10%)
of the cost of the Fund's total assets;
7. Purchase or sell commodities or commodity contracts, other than futures
contracts, or invest in oil, gas or other mineral exploration or
development programs or in arbitrage transactions;
8. Make short sales of securities or purchase securities on margin, except for
margin deposits in connection with futures contracts and such short-term
credits as are necessary for the clearance of transactions;
9. Participate on a joint or a joint-and-several basis in any trading account
in securities, except that the Fund may, for the purpose of seeking better
net results on portfolio transactions or lower brokerage commission rates,
join with other transactions executed by the investment adviser or the
investment adviser's parent company and any subsidiary thereof;
10. Purchase from or sell portfolio securities to any officer or director, the
Fund's investment adviser, principal underwriter or any affiliates or
subsidiaries thereof; provided, however, that this prohibition shall not
prohibit the Fund from purchasing with the up to $7,000,000 raised through
the sale of up to 700,000 shares of common stock to SAFECO Life Insurance
Company, portfolio securities from subsidiaries of SAFECO Corporation prior
to the effective date of the Fund's initial public offering;
11. Purchase securities (other than obligations issued or guaranteed by the
United States Government, its agencies or instrumentalities), if as a
result twenty-five percent (25%) or more of the Fund's total assets would
be invested in one industry (governmental issuers of securities are not
considered part of any one industry);
12. Purchase shares of common stock, other than those issued by other regulated
investment companies only, when the acquisition of such common stocks,
rights or other equity interests is consistent with the Fund's investment
objective. Generally, each Fund will only hold such equity securities as a
result of purchases or unit offerings of fixed-income securities which
include such equity securities or in connection with an actual or proposed
conversion or exchange of fixed-income securities;
13. Issue or sell any senior security, except that this restriction shall not
be construed to prohibit the Fund from borrowing funds (i) on a temporary
basis as permitted by Section 18(g) of the 1940 Act or (ii) from any bank
provided, that immediately after such
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borrowing, there is an asset coverage of at least three hundred percent
(300%) for all such borrowings and provided, further, that in the event
that such asset coverage shall at any time fall below three hundred
percent (300%), the Fund shall, within three (3) days thereafter (not
including Sundays and holidays), or such longer period as the Securities
and Exchange Commission ("SEC") may prescribe by rules and regulations,
reduce the amount of its borrowings to an extent that the asset coverage
of such borrowings shall be at least three hundred percent (300%). For
purposes of this restriction, the terms "senior security" and "asset
coverage" shall be understood to have the meaning assigned to those
terms in Section 18 of the 1940 Act;
14. Purchase securities of any issuer, if, as a result, more than ten percent
(10%) of any class of securities of such issuer would be owned by the Fund;
15. With respect to one hundred percent (100%) of the value of its total
assets, purchase more than ten percent (10%) of the outstanding voting
securities of any one issuer (other than U.S. Government securities);
16. Purchase or otherwise acquire securities which are illiquid or subject to
legal or contractual restrictions on resale, if as a result more than ten
percent (10%) of the Fund's total assets would be invested in such
securities, except that in the case of the High-Yield Fund the purchase
of Rule 144A Securities deemed to be liquid pursuant to guidelines
adopted by the Board of Trustees of the High-Yield Fund shall not be
limited by this restriction; or
17. Make loans, except through the purchase of a portion or all of an issue of
debt or money market securities in accordance with its investment
objective, policies and restrictions, or through investments in qualified
repurchase agreements (provided, however, that the Fund shall not invest
more than ten percent (10%) of its total assets in qualified repurchase
agreements maturing in more than seven (7) days), or through qualified loan
agreements (by making secured loans of its portfolio securities which
amount to not more than five percent (5%) of its total assets).
NON-FUNDAMENTAL INVESTMENT POLICIES
In addition to the policies described in the Prospectus, each Taxable Bond Fund
has adopted the following non-fundamental investment policies which may be
changed without shareholder approval:
1. The Fund will not invest more than five percent (5%) of its total assets in
securities of issuers, including their predecessors, which have been in
operation for less than three years.
2. The Fund will not issue long-term debt securities.
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3. The Fund will not invest in securities with unlimited liability, I.E.,
securities the holder of which may be assessed for amounts in addition to
the subscription or other price paid for the security.
4. The Fund will not trade in foreign currency, except as may be necessary to
convert the proceeds of the sale of foreign securities in the Fund's
portfolio into U.S. dollars.
5. The Fund may purchase "when-issued" or "delayed-delivery" securities or
purchase or sell securities on a "forward commitment" basis.
6. The Fund will not invest in any security issued by a commercial bank unless
(a) the bank has total assets of at least $1 billion, or the equivalent in
other currencies, or, in the case of a United States bank which does not
have assets of at least $1 billion, the aggregate investment made in any
one such bank is limited to $100,000 and the principal sum of each
investment is insured in full by the Federal Deposit Insurance Corporation
("FDIC"), (b) in the case of a U.S. bank, it is a member of the FDIC and
(c) in the case of a foreign bank, the security is, in the opinion of the
Fund's investment adviser, of an investment quality comparable with other
debt securities which may be purchased by the Fund. These limitations do
not prohibit investment in securities issued by foreign branches of U.S.
banks, provided the U.S. banks meet the foregoing requirements.
7. The Fund shall not engage primarily in trading for short-term profits, but
it may from time to time make investments for short-term purposes when such
action is believed to be desirable and consistent with sound investment
policy, and it may dispose of securities whenever its investment adviser
deems advisable without regard to the length of time they have been held.
8. The Intermediate Treasury Fund may invest up to five percent (5%) of its
total assets in Yankee Sector debt securities and up to five percent (5%)
of its total assets in Eurodollar bonds.
9. The Fund may invest up to five percent (5%) of its total assets in
securities the interest on which, in the opinion of counsel for the issuer,
is exempt from federal income tax.
INVESTMENT POLICIES OF THE MANAGED BOND FUND
FUNDAMENTAL INVESTMENT POLICIES
The Managed Bond Fund has adopted the following fundamental investment policies.
The Managed Bond Fund will NOT:
1. Purchase the securities of any issuer (except the U.S. Government, its
agencies or instrumentalities) if as a result more than five percent (5%)
of the value of total assets at
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the time of purchase would be invested in the securities of such issuer,
except that up to twenty-five percent (25%) of the value of the Fund's
assets (which twenty-five percent (25%) shall not include securities issued
by another investment company) may be invested without regard to this five
percent (5%) limitation;
2. Purchase the securities of any issuer (other than obligations of or
guaranteed by the U.S. Government, its agencies and instrumentalities) if,
as a result, more than ten percent (10%) of any class of securities of such
issuer will be held by the Fund;
3. With respect to one hundred percent (100%) of the value of its total
assets, purchase more than ten percent (10%) of the outstanding voting
securities of any one issuer (other than U.S. Government securities);
4. Purchase securities, if as a result, twenty-five percent (25%) or more of
the Fund's total assets would be invested in the securities of issuers
having their principal business activities in any one industry. Securities
of foreign banks and foreign branches of U.S. banks are considered to be
one industry. This limitation does not apply to obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or to
certificates of deposit or bankers' acceptances issued by domestic banks;
5. Purchase securities on margin, except for short-term credits necessary for
the clearance of transactions;
6. Make short sales of securities (sales of securities not presently owned);
7. Make loans, except through the purchase of a portion or all of an issue of
debt securities in accordance with the Fund's investment objective,
policies and restrictions or through investments in qualified repurchase
agreements;
8. Borrow money, except from a bank or SAFECO Corporation or its affiliates at
an interest rate not greater than that available to the Fund from
commercial banks, for temporary or emergency purposes and not for
investment purposes, and then only in an amount not exceeding twenty
percent (20%) of the value of the Fund's total assets (including
borrowings) less liabilities (other than borrowings) immediately after such
borrowing;
9. Underwrite any issue of securities, except to the extent that the purchase
of permitted investments directly from the issuer in accordance with the
Fund's investment objective, policies and restrictions and the subsequent
disposition thereof may be deemed to be underwriting or the later
disposition of restricted securities acquired within the limits imposed on
the acquisition of such securities may be deemed to be an underwriting;
10. Purchase or sell real estate or real estate limited partnerships (unless
acquired as a result of the ownership of securities or instruments) but
this shall not prevent the Fund from
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investing in permitted investments secured by real estate or interests
therein or in real estate investment trusts;
11. Purchase or sell commodities, commodity contracts or futures contracts;
12. Participate on a joint or joint-and-several basis in any trading account in
securities, except that the Fund may join with other transactions executed
by the investment adviser or the investment adviser's parent company and
any subsidiary thereof, for the purpose of seeking better net results on
portfolio transactions or lower brokerage commission rates; or
13. Issue or sell any senior security, except as permitted under the 1940 Act.
NON-FUNDAMENTAL INVESTMENT POLICIES
In addition to the policies described in the Prospectus, the Managed Bond Fund
has adopted the following non-fundamental policies which may be changed without
shareholder approval:
1. The Fund will not issue long-term debt securities.
2. The Fund will not invest in any security for the purpose of acquiring or
exercising control or management of the issuer.
3. The Fund will not invest in oil, gas or other mineral exploration or
development programs or leases.
4. The Fund will not invest in or sell (write) puts, calls, straddles, spreads
or any combinations thereof.
5. The Fund will not invest more than five percent (5%) of its total assets in
securities of issuers (including predecessor companies of the issuer)
having a record of less than three years continuous operation.
6. The Fund will not invest in securities with unlimited liability, I.E.,
securities the holder of which may be assessed for amounts in addition to
the subscription or other price paid for the security.
7. The Fund will not invest more than ten percent (10%) of its total assets in
qualified repurchase agreements and will not invest in qualified repurchase
agreements maturing in more than seven (7) days.
8. The Fund will not purchase the securities of any other investment company,
except by purchase in the open market where no commission or profit to a
broker or dealer results
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<PAGE>
from such purchase other than the customary broker's commissions, or except
as part of a merger, consolidation or acquisition. The Fund shall not
invest more than ten percent (10%) of its total assets in shares of other
investment companies, invest more than five percent (5%) of its total
assets in a single investment company nor purchase more than three percent
(3%) of the outstanding voting securities of a single investment company.
9. The Fund will not purchase securities if borrowings equal to or greater
than five percent (5%) of the Fund's total assets are outstanding.
10. The Fund will invest at least sixty-five percent (65%) of its total assets
in fixed income obligations.
11. The Fund will invest at least fifty percent (50%) of its total assets in
obligations of or guaranteed by the U.S. Government, its agencies and
instrumentalities.
12. The Fund may invest up to fifty percent (50%) of its total assets in
corporate debt securities or Eurodollar bonds.
13. The Fund may invest up to ten percent (10%) of its total assets in Yankee
Sector debt obligations.
14. The Fund may purchase securities on a when-issued or delayed-delivery basis
or may purchase or sell securities on a forward commitment basis.
15. The Fund may temporarily invest its cash in high quality commercial paper,
certificates of deposit, shares of no-load, open-end money market funds
(subject to the percentage limitations set forth in subparagraph 8 above),
repurchase agreements (subject to the limitations set forth in subparagraph
7 above) or any other short-term instrument the Fund's investment adviser
deems appropriate.
16. The Fund may hold cash as a temporary defensive measure when market
conditions so warrant.
17. The Fund shall not engage primarily in trading for short-term profits, but
it may from time to time make investments for short-term purposes when such
action is believed to be desirable and consistent with sound investment
policy. The Fund may dispose of securities whenever it deems advisable
without regard to the length of time they have been held.
18. The Fund may invest up to five percent (5%) of its total assets in
securities the interest on which, in the opinion of counsel for the issuer,
is exempt from federal income tax.
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<PAGE>
WHILE THE FUND HAS THE AUTHORITY TO INVEST IN THE FOLLOWING TYPES OF SECURITIES,
IT HAS NO PRESENT INTENTION TO DO SO IN THE COMING YEAR. BEFORE THE FUND
PURCHASES ANY OF THESE SECURITIES, THE PROSPECTUS WILL BE AMENDED BY SUPPLEMENT
TO IDENTIFY OR DESCRIBE THE SECURITY.
19. The Fund may invest up to five percent (5%) of its total assets in shares
of real estate investment trusts.
20. The Fund may purchase securities subject to legal or contractual
restrictions on resale or illiquid securities, if no more than fifteen
percent (15%) of the Fund's total assets would be invested in such
securities.
21. The Fund may purchase foreign securities, provided that such purchase, at
the time thereof, would not cause more than ten percent (10%) of the total
assets of the Fund (taken at market value) to be invested in foreign
securities.
22. The Fund will not buy or sell foreign currency, except as may be necessary
to invest the proceeds of the sale of any foreign securities held by the
Fund in U.S. dollars.
INVESTMENT POLICIES OF THE TAX-EXEMPT FIXED INCOME FUNDS
FUNDAMENTAL INVESTMENT POLICIES
The WASHINGTON FUND has adopted the following fundamental investment policies.
The Washington Fund will NOT:
1. Purchase the securities of any issuer (except the U.S. Government, its
agencies or instrumentalities) if as a result more than five percent (5%)
of the value of the Fund's total assets would be invested in the securities
of such issuer, except that up to twenty-five percent (25%) of the value of
the Fund's total assets (which twenty-five percent (25%) shall not include
securities issued by another investment company) may be invested without
regard to this five percent (5%) limitation;
2. Underwrite any issue of securities, except to the extent that the purchase
of municipal obligations or other permitted investments directly from the
issuer in accordance with the Fund's investment objective, policies and
restrictions and the later disposition thereof may be deemed to be
underwriting;
3. Purchase or sell real estate, unless acquired as a result of the ownership
of securities or instruments, but this shall not prevent the Fund from
investing in municipal obligations or other permitted investments secured
by real estate or interests therein;
4. Borrow money, except from a bank or affiliates of SAFECO Corporation at an
interest rate not greater than that available to the Fund from commercial
banks, for temporary or
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emergency purposes and not for investment purposes, and then only in an
amount not exceeding twenty percent (20%) of its total assets (including
borrowings) less liabilities (other than borrowings) immediately after such
borrowing;
5. Make loans, except through the purchase of a portion or all of an issue of
debt securities in accordance with the Fund's investment objective,
policies and restrictions and through investments in qualified repurchase
agreements;
6. Purchase or sell commodities, commodity contracts or futures;
7. Purchase securities, if as a result, twenty-five percent (25%) or more of
the Fund's total assets would be invested in the securities of issuers
having their principal business activities in any one industry
(governmental issuers of special or general tax-exempt securities are not
considered part of any one industry);
8. Issue or sell any senior security, except as permitted under the 1940 Act;
9. Permit twenty-five percent (25%) or more of the Fund's total assets to be
invested in municipal obligations and other permitted investments, the
interest on which is payable from revenues on similar types of projects. As
a matter of operating policy, similar types of projects may include sports,
convention or trade show facilities; airports or mass transportation;
sewage or solid waste disposal facilities; or air or water pollution
control projects; or
10. During normal market conditions, invest less than eighty percent (80%) of
the Fund's net assets in obligations the interest on which, in the opinion
of counsel for the issuer of the obligation, is exempt from federal income
tax.
The MUNICIPAL BOND and CALIFORNIA FUNDS have adopted the following fundamental
investment policies. The Funds will NOT:
1. Purchase the securities of any issuer (except the U.S. Government, its
agencies or instrumentalities), if as a result more than five percent (5%)
of the value of a Fund's total assets would be invested in the securities
of such issuer, except that up to twenty-five percent (25%) of the value of
a Fund's assets (which twenty-five percent (25%) shall not include
securities issued by another investment company) may be invested without
regard to this five percent (5%) limitation;
2. Underwrite any issue of securities, except to the extent that the purchase
of municipal obligations or other permitted investments directly from the
issuer in accordance with a Fund's investment objective, policies and
restrictions and the subsequent disposition thereof may be deemed to be
underwriting;
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<PAGE>
3. Purchase or sell real estate or real estate limited partnerships, but this
shall not prevent a Fund from investing in municipal obligations or other
permitted investments secured by real estate or interests therein;
4. Purchase or retain for a Fund's portfolio the securities of any issuer if,
to the Fund's knowledge, the officers or directors of the Fund, or its
investment adviser, who individually own more than one-half (1/2) of one
percent (1%) of the outstanding securities of such an issuer, together own
more than five percent (5%) of such outstanding securities;
5. Participate on a joint or a joint-and-several basis in any trading account
in securities, except that a Fund may, for the purpose of seeking better
net results on portfolio transactions or lower brokerage commission rates,
join with other transactions executed by the investment adviser or the
investment adviser's parent company and any subsidiary thereof;
6. Purchase from, or sell portfolio securities to, any officer or director,
the Fund's investment adviser, principal underwriter or any affiliates or
subsidiaries thereof;
7. Borrow money, except from a bank or affiliates of SAFECO Corporation at an
interest rate not greater than that available to a Fund from commercial
banks, for temporary or emergency purposes and not for investment purposes
and then only in an amount not exceeding twenty percent (20%) of its total
assets (including borrowings) less liabilities (other than borrowings)
immediately after such borrowing;
8. Pledge, mortgage or hypothecate its assets, except that, to secure
borrowings permitted by subparagraph 7 above, a Fund may pledge securities
having a market value at the time of pledge not exceeding ten percent (10%)
of the cost of a Fund's total assets;
9. Make loans, except through the purchase of a portion or all of an issue of
debt securities in accordance with a Fund's investment objective, policies
and restrictions and through investments in qualified repurchase agreements
(provided, however, that a Fund will not invest more than ten percent (10%)
of its total assets in qualified repurchase agreements maturing in more
than seven (7) days);
10. Purchase or sell commodities, commodity contracts or futures or invest in
oil, gas or other mineral exploration or development programs or leases;
11. Make short sales of securities or purchase securities on margin, except for
such short-term credits as are necessary for the clearance of transactions,
or purchase or sell any put or call options or combinations thereof;
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<PAGE>
12. Knowingly purchase or otherwise acquire any securities that are subject to
legal or contractual restrictions on resale or for which there is no
readily available market;
13. Purchase securities (other than obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities), if as a result, more
than twenty-five percent (25%) of a Fund's total assets would be invested
in one industry (governmental issuers of special or general tax-exempt
securities are not considered part of any one industry);
14. Purchase an industrial development bond, if as a result of such purchase,
more than five percent (5%) of a Fund's total assets would be invested in
industrial revenue bonds where the payment of principal and interest is the
responsibility of a company with less than three years' operating history;
15. Issue or sell any senior security, except that this restriction shall not
be construed to prohibit a Fund from borrowing funds (i) on a temporary
basis as permitted by Section 18(g) of the 1940 Act, or (ii) from any bank
provided, that immediately after such borrowing, there is an "asset
coverage" of at least three hundred percent (300%) for all such borrowings
and provided, further, that in the event that such "asset coverage" shall
at any time fall below three hundred percent (300%), the Fund shall, within
three (3) days thereafter (not including Sundays and holidays) or such
longer period as the SEC may prescribe by rules and regulations, reduce the
amount of its borrowings to an extent that the asset coverage of such
borrowings shall be at least three hundred percent (300%) (for purposes of
this restriction, the terms "senior security" and "asset coverage" shall be
understood to have the meanings assigned to those terms in Section 18 of
the 1940 Act);
16. Permit more than twenty percent (20%) of a Fund's net assets to be
invested, during normal market conditions, in securities the interest on
which is not, in its investment adviser's opinion, exempt from federal
income tax, as long as the Fund has its investment objective to provide as
high a level of current interest income exempt from federal income tax as
is consistent with the relative stability of capital. As a matter of
operating policy, the Funds' investment adviser may base its opinion on the
opinion of counsel for the issuer of the security;
17. Permit twenty-five percent (25%) or more of a Fund's total assets to be
invested in municipal obligations and other permitted investments, the
interest on which is payable from revenues on similar types of projects
such as sports, convention or trade show facilities; airports or mass
transportation; sewage or solid waste disposal facilities or air or water
pollution control projects;
18. MUNICIPAL BOND FUND ONLY: Permit twenty-five percent (25%) or more of the
Fund's total assets to be invested in securities whose issuers are located
in the same state; or
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19. During normal market conditions, invest less than eighty percent (80%) of a
Fund's net assets in obligations the interest on which, in the opinion of
counsel for the issuer, is exempt from federal income tax (and, in the case
of the California Fund, also from California state personal income tax).
NON-FUNDAMENTAL INVESTMENT POLICIES
In addition to the policies described in the Prospectus, the WASHINGTON,
MUNICIPAL BOND and CALIFORNIA FUNDS have adopted the following non-fundamental
policies which may be changed without shareholder approval:
1. Each Fund may invest in any of the following types of short-term, tax-
exempt obligations: municipal notes of issuers rated, at the time of
purchase, within one of the three highest grades assigned by Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies ("S&P") or Fitch Investors Services,
Inc. ("Fitch"); unrated municipal notes offered by issuers having
outstanding municipal bonds rated within one of the three highest grades
assigned by Moody's, S&P or Fitch; notes issued by or on behalf of
municipal issuers which are guaranteed by the U.S. Government; tax-exempt
commercial paper assigned one of the two highest grades by Moody's, S&P or
Fitch; certificates of deposit issued by banks with assets of
$1,000,000,000 or more and municipal obligations which have a maturity of
one year or less from the date of purchase. The Funds do not currently
intend to rely on Fitch Ratings.
2. Each Fund may invest in obligations of the U.S. Government, its agencies or
instrumentalities or in qualified repurchase agreements, the net interest
on which is taxable.
3. Each Fund may invest in municipal notes including tax anticipation, revenue
anticipation and bond anticipation notes and tax-exempt commercial paper.
4. Each Fund may invest in repurchase agreements for a period longer than
seven days.
5. Each Fund may permit twenty-five percent (25%) or more of its assets to be
invested in industrial development bonds.
6. Each Fund may purchase or sell securities on a "when-issued" or "delayed-
delivery" basis.
In addition, the WASHINGTON FUND has adopted the following non-fundamental
policies. The Washington Fund:
1. May not make short sales of securities.
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2. May not purchase securities on margin, except that a Fund may obtain such
short-term credits as are necessary for the clearance of transactions.
3. May not purchase or sell any put or call options or combinations thereof.
4. May not purchase any security, if as a result, more than fifteen percent
(15%) of its net assets would be invested in illiquid securities.
5. May not invest in oil, gas or other mineral exploration or development
programs or leases.
6. May not invest in real estate limited partnerships.
7. Will not purchase securities if borrowings equal to or greater than five
percent (5%) of its total assets are outstanding.
INVESTMENT POLICIES OF THE MONEY MARKET FUND
FUNDAMENTAL INVESTMENT POLICIES
The Money Market Fund has adopted the following fundamental policies. The Money
Market Fund will NOT:
1. Purchase securities of any issuer, other than obligations of, or guaranteed
by, the U.S. Government, its agencies or instrumentalities, if, as a
result, more than five percent (5%) of the value of the Fund's assets would
be invested in securities of such issuer;
2. Purchase more than ten percent (10%) of any class of securities of any
issuer. All issues of debt securities of any issuer are considered as one
class;
3. Concentrate more than twenty-five percent (25%) of the value of its total
assets in any one industry including securities issued by foreign banks and
foreign branches of U.S. banks; provided, however, that this limitation
does not apply to obligations issued or guaranteed by the U.S. Government,
or its agencies or instrumentalities, or to certificates of deposit or
bankers' acceptances issued by domestic banks;
4. Invest more than five percent (5%) of the Fund's total assets in securities
of issuers that with their predecessors have a record of less than three
years' continuous operation;
5. Invest more than five percent (5%) of the Fund's total assets in securities
restricted as to disposition under the federal securities laws;
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6. Invest more than ten percent (10%) of the Fund's total assets in time
deposits, repurchase agreements maturing in more than seven days and other
non-negotiable instruments;
7. Enter into repurchase agreements if, as a result thereof, more than ten
percent (10%) of the Fund's total assets valued at the time of the
transaction would be subject to repurchase agreements maturing in more than
seven days;
8. Make loans to others, except through the purchase of publicly distributed
debt obligations or repurchase agreements;
9. Borrow money, except from a bank or affiliates of SAFECO Corporation at an
interest rate not greater than that available to the Fund from commercial
banks, for temporary or emergency purposes and not for investment purposes,
and then only in an amount not exceeding twenty percent (20%) of its total
assets (including borrowings) less liabilities (other than borrowings)
immediately after such borrowing. The Fund will not purchase securities if
borrowings in excess of five percent (5%) of the Fund's total assets are
outstanding;
10. Make short sales of securities or purchase securities on margin, except for
such short-term credits as are necessary for the clearance of transactions,
or purchase or sell any put or call options or combinations thereof;
11. Pledge, mortgage or hypothecate, or in any other manner transfer as
security for indebtedness any security owned by the Fund, except as may be
necessary in connection with permissible borrowings mentioned in paragraph
9 above, and then such pledging, mortgaging or hypothecating may not exceed
fifteen percent (15%) of the Fund's total assets, taken at cost; provided,
however, that as a matter of operating policy the Fund will limit any such
pledging, mortgaging or hypothecating to ten percent (10%) of its net
assets, taken at market, in order to comply with certain state investment
restrictions;
12. Purchase or retain securities of any issuer if any of the officers or
directors of the Fund or its investment adviser owns beneficially more than
one-half (1/2) of one percent (1%) of the securities of such issuer and
together own more than five percent (5%) of the securities of such issuer;
13. Invest in commodities or commodity futures contracts or in real estate,
although the Fund may invest in securities which are secured by real estate
and securities of issuers that invest or deal in real estate;
14. Invest in interests in oil, gas or other mineral exploration or development
programs, although it may invest in securities of issuers that invest in or
sponsor such programs;
15. Purchase securities of other investment companies;
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16. Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in
connection with the disposition of portfolio securities; or
17. Issue or sell any senior security, except that this restriction shall not
be construed to prohibit the Fund from borrowing funds (i) on a temporary
basis as permitted by Section 18(g) of the 1940 Act, or (ii) from any bank
provided, that immediately after such borrowing, there is an asset coverage
of at least three hundred percent (300%) for all such borrowings and
provided, further, that in the event that such asset coverage shall at any
time fall below three hundred percent (300%), the Fund shall, within three
(3) days thereafter (not including Sundays and holidays), or such longer
period as the SEC may prescribe by rules and regulations, reduce the amount
of its borrowings to an extent that the asset coverage of such borrowings
shall be at least three hundred percent (300%) (for purposes of this
restriction, the terms "senior security" and "asset coverage" shall be
understood to have the meaning assigned to those terms in Section 18 of the
1940 Act).
NON-FUNDAMENTAL INVESTMENT POLICIES
In addition to the policies described in the Prospectus, the Money Market Fund
has adopted the following non-fundamental policies which may be changed without
shareholder approval:
1. The Fund will not invest in securities with unlimited liability; i.e.,
securities the holder of which may be assessed for amounts in addition to
the subscription or other price paid for the security.
2. The Fund will not buy or sell foreign currency, except as may be necessary
to convert the proceeds of the sale of foreign securities in the Fund's
portfolio into U.S. dollars.
3. The Fund may invest up to five percent (5%) of its total assets in
restricted securities eligible for resale under Rule 144A ("Rule 144A
securities") or Section 4(2) of the Securities Act of 1933 ("Section 4(2)
securities"), provided that SAFECO Asset Management Company ("SAM"), the
Fund's investment adviser, has determined that such securities are liquid
under guidelines adopted by the Money Market Trust's Board of Trustees.
ADDITIONAL INVESTMENT INFORMATION
TAXABLE BOND FUNDS
The Taxable Bond Funds may make the following investments, among others,
although the Funds may not buy all of the types of securities that are
described.
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1. RESTRICTED SECURITIES AND RULE 144A SECURITIES. Restricted securities
are securities that may be sold only in a public offering with respect
to which a registration statement is in effect under the 1933 Act or, if
they are unregistered, pursuant to an exemption from registration. In
recognition of the increased size and liquidity of the institutional
markets for unregistered securities and the importance of institutional
investors in the formation of capital, the Securities and Exchange
Commission ("SEC") has adopted Rule 144A under the 1933 Act, which is
designed to further facilitate efficient trading among institutional
investors by permitting the sale of Rule 144A securities to qualified
institutional buyers without registration under the 1933 Act. To the
extent privately placed securities held by a Fund qualify under Rule
144A and an institutional market develops for those securities, the Fund
likely will be able to dispose of the securities without registering
them under the 1933 Act. SAM, acting under guidelines established by
the Taxable Bond Trust's Board of Trustees, may determine that certain
securities qualified for trading under Rule 144A are liquid.
Where registration is required, a Fund may be obligated to pay all or part
of the registration expenses, and a considerable period may elapse between
the decision to sell and the time the Fund may be permitted to sell a
security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the Fund might obtain a
less favorable price than prevailed when it decided to sell. To the extent
privately placed securities are illiquid, purchases thereof will be subject
to any limitations on investments in illiquid securities. Restricted
securities for which no market exists are priced at fair value as
determined in accordance with procedures approved and periodically reviewed
by the Taxable Bond Trust's Board of Trustees.
2. REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
Fund purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed upon date and price reflecting a market rate of interest unrelated
to the coupon rate or maturity of the purchased securities. A Fund
maintains custody of the underlying securities prior to their repurchase;
thus, the obligation of the bank or dealer to pay the repurchase price on
the date agreed to is, in effect, secured by such securities. If the value
of these securities is less than the repurchase price, plus any agreed-upon
additional amount, the other party to the agreement must provide additional
collateral so that at all times the collateral is at least equal to the
repurchase price, plus any agreed-upon additional amount.
Each Fund intends to enter into repurchase agreements only with banks and
dealers in transactions believed by SAM to present minimum credit risks in
accordance with guidelines established by the Taxable Bond Trust's Board of
Trustees. SAM will review and monitor the creditworthiness of those
institutions under the general supervision of the Board of Trustees.
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3. 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 a Fund bears the risk of such fluctuation
from the date of purchase. A Fund may dispose of its interest in those
securities before delivery.
A Fund will commit to purchase such securities only with the intent of
actually acquiring the securities when issued. Assets which are short-
term, high-quality obligations will be earmarked in anticipation of making
payments for securities purchased on a when-issued basis.
4. YANKEE DEBT SECURITIES AND EURODOLLAR BONDS. Yankee debt securities are
securities issued in the U.S. by foreign issuers. These bonds involve
investment risks that are different from those of domestic issuers. Such
risks may include nationalization of the issuer, confiscatory taxation by
the foreign government, establishment of controls by the foreign government
that would inhibit the ability of the issuer to make principal and interest
payments to a Fund, lack of comparable publicly available information
concerning foreign issuers, lack of comparable accounting and auditing
practices in foreign countries and finally, difficulty in enforcing claims
against foreign issuers in the event of default.
SAM will make every effort to analyze potential investments in foreign
issuers on the same basis as the rating services analyze domestic issuers.
Because public information is not always comparable to that available on
domestic issuers, this may not be possible. Therefore, while SAM will make
every effort to select investment in foreign securities on the same basis
relative to quality and risk as its investments in domestic securities,
that may not always be possible.
Eurodollar bonds are denominated in U.S. dollars. A Fund will purchase
Eurodollar bonds through U.S. securities dealers and hold such bonds in the
U.S. The delivery of Eurodollar bonds to a Fund's custodian in the U.S.
may cause slight delays in settlement which are not anticipated to affect
any Fund in any material, adverse manner. Eurodollar bonds issued by
foreign issuers are subject to the same risks as Yankee sector bonds.
5. MUNICIPAL SECURITIES. Municipal securities include obligations issued by
or on behalf of the states, territories and possessions of the United
States and the District of Columbia and their political subdivisions,
agencies, instrumentalities or authorities, the interest on which, in the
opinion of counsel to the issuer, is exempt from federal income tax.
Generally, when market interest rates rise, the price of municipal
securities will fall, and when market interest rates fall, the price of
these securities will rise. There is also a risk that the issuer of a
municipal security will fail to make timely payments of principal and
interest to the Fund.
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6. ILLIQUID SECURITIES. Illiquid securities are securities that cannot be
sold within seven days in the ordinary course of business for approximately
the amount at which they are valued. Due to the absence of an active
trading market, a Fund may experience difficulty in valuing or disposing
of illiquid securities. SAM determines the liquidity of the securities
under guidelines adopted by the Taxable Bond Trust's Board of Trustees.
MANAGED BOND FUND
The Managed Bond Fund may make the following investments, among others, although
it may not buy all of the types of securities that are described.
1. REPURCHASE AGREEMENTS. See the description of such securities under
"Additional Investment Information-- Taxable Bond Funds" on page 17.
2. WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES. See the description of such
securities under "Additional Investment Information-- Taxable Bond Funds"
on page 17.
3. YANKEE DEBT SECURITIES AND EURODOLLAR BONDS. See the description of such
securities under "Additional Investment Information-- Taxable Bond Funds"
on page 17.
4. MUNICIPAL SECURITIES. See the description of such securities under
"Additional Investment Information-- Taxable Bond Funds" on page 17.
5. ASSET-BACKED SECURITIES. Asset-backed securities represent interests in,
or are secured by and payable from, pools of assets such as consumer loans,
automobile receivable securities, credit card receivable securities, and
installment loan contracts. The assets underlying the securities are
securitized through the use of trusts and special purpose corporations.
These securities may be supported by credit enhancements such as letters of
credit. Payment of interest and principal ultimately depends upon
borrowers paying the underlying loans. Repossessed collateral may be
unavailable or inadequate to support payments on defaulted asset-backed
securities. In addition, asset-backed securities are subject to prepayment
risks which may reduce the overall return of the investment.
Automobile receivable securities represent undivided fractional interests
in a trust whose assets consist of a pool of automobile retail installment
sales contracts and security interests in vehicles securing the contracts.
Payments of principal and interest on the certificates issued by the
automobile receivable trust are passed through periodically to certificate
holders and are generally guaranteed up to specified amounts by a letter of
credit issued by a financial institution. Certificate holders may
experience delays in payments or losses if the full amounts due on the
underlying installment sales contracts are not 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.
6. ZERO COUPON BONDS. Zero coupon bonds do not make interest payments;
instead they are sold at a deep discount from their face value and are
redeemed at face value when they mature. Because zero coupon bonds do not
pay current income, their prices can be very volatile when interest rates
change. In calculating its dividends, the Managed Bond Fund takes into
account as income a portion of the difference between a zero coupon bond's
purchase price and its face value.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and
principal components of an outstanding U.S. Treasury bond and selling them
as individual securities.
TAX-EXEMPT FIXED INCOME FUNDS
The Tax-Exempt Fixed Income Funds may make the following investments, among
others, although they may not buy all of the types of securities that are
described.
1. REPURCHASE AGREEMENTS. See the description of such securities under
"Additional Investment Information-- Taxable Bond Funds" on page 17.
2. WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES. See the description of such
securities under "Additional Investment Information--Taxable Bond Funds" on
page 17.
3. ILLIQUID SECURITIES. See the description of such securities under
"Additional Investment Information-- Taxable Bond Funds" on page 17.
MONEY MARKET FUND
The Money Market Fund may make the following investments, among others, although
it may not buy all of the types of securities that are described.
1. QUALITY AND MATURITY. Pursuant to procedures adopted by the Money Market
Trust's Board of Trustees, the Fund may purchase only high-quality
securities that SAM believes present minimal credit risks. To be
considered high quality, a security must be rated, or the issuer must have
received a rating for a comparable short-term security, in accordance with
applicable rules in one of the two highest categories for short-term
securities by at least two
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nationally recognized rating services (or by one, if only one rating
service has rated the security); or, if unrated, judged to be of equivalent
quality by SAM.
High-quality securities are divided into "first tier" and "second tier"
securities. First tier securities are those deemed to be in the highest
rating category (e.g., A-1 by S&P) and second tier securities are those
deemed to be in the second highest rating category (e.g., A-2 by S&P).
The Fund may not invest more than five percent (5%) of its total assets in
second tier securities. In addition, the Fund may not invest more than one
percent (1%) of its total assets or $1 million (whichever is greater) in
the second tier securities of a single issuer.
The Fund currently intends to limit its investments to securities with
remaining maturities of 397 days or less, and to maintain a dollar-weighted
average maturity of 90 days or less. When determining the maturity of a
security, the Fund may look to an interest rate reset or demand feature.
A security is considered to be rated if either the security itself is
assigned a rating or the issuer is assigned a rating for comparable short-
term debt obligations. Alternatively, a security (whether or not rated)
with an unconditional demand feature (as defined in Rule 2a-7 under the
1940 Act) may be considered to be rated if the demand feature or its issuer
has been assigned a rating. See "Description of Ratings" on page 62 for
further explanation of rating categories.
2. RESTRICTED SECURITIES AND RULE 144A SECURITIES. See the description of
such securities under "Additional Investment Information-- Taxable Bond
Funds" on page 17.
3. VARIABLE AND FLOATING RATE INSTRUMENTS. Certain municipal obligations may
carry variable or floating rates of interest. Variable rate instruments
bear interest at rates that are readjusted at periodic intervals so as to
cause the instruments' market value to approximate their par value.
Floating rate instruments bear interest at rates which vary automatically
with changes in specified market rates or indices, such as the bank prime
rate. The Fund's right to obtain payment at par on a demand instrument
upon demand could be affected by events occurring between the date the Fund
elects to redeem the instrument and the date redemption proceeds are due
which affect the ability of the issuer to pay the instrument at par value.
4. TERM PUT BONDS. Term put bonds are variable rate obligations which have a
maturity in excess of one year with the option to put back (sell back) the
bonds on a specified put date. On the put date, the interest rate of the
bond is reset according to current market conditions and accrues at the
reset rate until the next put date. The Fund may also hold mandatory put
bonds. Mandatory put bonds require the holder to take certain action to
retain the bonds. Put bonds are generally credit-enhanced by collateral,
guaranteed investment contracts,
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surety bonds, a letter of credit or insurance which guarantees the payment
of principal and interest.
5. ILLIQUID SECURITIES. See the description of such securities under
"Additional Investment Information-- Taxable Bond Funds" beginning on
page 17.
6. FOREIGN ISSUERS. Obligations of foreign issuers involve certain additional
risks. These risks may include future unfavorable political and economic
developments, withholding taxes, seizures of foreign deposits, currency
controls, interest limitations, or other governmental restrictions that
might affect payment of principal or interest. Additionally, there may be
less public information available about foreign banks and their branches.
Foreign issuers may be subject to less governmental regulation and
supervision than U.S. issuers. Foreign issuers also generally are not
bound by uniform accounting, auditing and financial reporting requirements
comparable to those applicable to U.S. issuers.
7. SECURITIES ISSUED BY BANKS AND OTHER ISSUERS. Investments may be made in
U.S. dollar-denominated time deposits, certificates of deposit, and
bankers' acceptances of U.S. banks and their branches located outside of
the United States, U.S. branches and agencies of foreign banks and foreign
branches of foreign banks. The Fund may also invest in U.S. dollar-
denominated securities issued or guaranteed by other U.S. or foreign
issuers, including U.S. and foreign corporations or other business
organizations, foreign governments, foreign government agencies or
instrumentalities and U.S. and foreign financial institutions, including
savings and loan institutions, insurance companies and mortgage bankers, as
well as banks.
The obligations of foreign branches of U.S. banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by governmental
regulation. Payment of interest and principal on these obligations may
also be affected by governmental action in the country of domicile of the
branch (generally referred to as sovereign risk). In addition, evidence of
ownership of portfolio securities may be held outside of the U.S. and the
Fund may be subject to the risks associated with the holding of such
property overseas. Various provisions of federal law governing the
establishment and operation of U.S. branches do not apply to foreign
branches of U.S. banks.
Obligations of U.S. branches and agencies of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by federal and state
regulation, as well as by governmental action in the country in which the
foreign bank has its head office.
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INVESTMENT RISKS OF CONCENTRATION IN CALIFORNIA AND WASHINGTON ISSUERS
CALIFORNIA FUND
The following is a condensed and general description of conditions affecting
the taxing ability and fiscal condition of the State of California and its
various political subdivisions and their ability to meet their debt service
obligations. Since during normal market conditions the Fund plans to invest at
least 80% of its net assets in bonds issued by California and its political
subdivisions, the investment risk of such concentration should be carefully
considered. The description below summarizes discussions contained in official
statements relating to various types of bonds issued by the State of California
and its political subdivisions. A more detailed description can be found in
such official statements. The California Fund has not independently verified
any of the information presented in this section.
THE STATE OF CALIFORNIA
The severe economic recession which occurred in California between 1990 and 1994
seriously affected State tax revenues, caused increased expenditures for health
and welfare programs, and caused a large structural imbalance in the State's
budget, with the largest programs supported by the General Fund -- K-12 schools
and community colleges, health and welfare, and corrections --growing at rates
higher than the growth rates for the principal revenue sources of the General
Fund. As a result, the State experienced recurring budget deficits and had to
use a series of external borrowings to meet its cash needs.
As a result of the deterioration in the State's budget and cash situation in
fiscal years 1991-1992 and 1992-1993, rating agencies reduced the State's credit
ratings. Between November 1991 and October 1992 the rating on the State's
general obligation bonds was reduced by S&P from "AAA" to "A+," by Moody's from
"Aaa" to "Aa," and by Fitch from "AAA" to "AA." In July, 1994, based on the
State's inability to eliminate its accumulated deficit, the same three rating
agencies further lowered their ratings on the State's general obligations bonds
to "A," "A1," and "A," respectively.
Since the start of 1994, California's economy and the State's financial
condition have steadily improved. In 1996, S&P and Fitch raised their
respective ratings to "A+." Nevertheless, the pressures on the General Fund
from the programs described above (education, welfare and corrections) are
expected to continue. In August, the United States Congress enacted legislation
which fundamentally reformed the current welfare system. A preliminary analysis
by the State Legislative Analyst's Office indicates that an overall assessment
of how these changes will affect the State's General Fund will not be known for
some time, and will depend on how quickly and in what manner the State
implements the new federal law.
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The Governor's Budget proposal for 1997-98, released January 19, 1997, projects
General Fund revenues and transfers in the 1997-98 fiscal year of $50.7 billion
(a 4.6% increase from revised 1996-97 figures) and expenditures of $50.3 billion
(a 3.9% increase from 1996-97). The Governor's Budget projects a balance of
approximately $553 million in the budget reserve, the Special Fund for Economic
Uncertainties, at June 30, 1998.
TAX AND SPENDING LIMITATIONS
The taxing powers of California public agencies are limited by Article XIII A of
the State Constitution, added by an initiative amendment approved by voters on
June 6, 1978, and commonly known as Proposition 13.
Article XIII A limits the maximum ad valorem tax on real property to one percent
of "full cash value," which is defined as "the County Assessor's valuation
of real property as shown on the fiscal year 1975-76 tax bill under full cash
value' or, thereafter, the appraised value of real property when purchased,
newly constructed, or a change in ownership has occurred after the 1975
assessment. " The full cash value may be adjusted annually to reflect
inflation at a rate not to exceed two percent per year, or reduction in the
consumer price index or comparable local data, or declining property value
caused by damage, destruction, or other factors.
The tax rate limitation referred to above does not apply to ad valorem taxes to
pay the interest and redemption charges on any indebtedness approved by the
voters before July 1, 1978 or any bonded indebtedness for the acquisition or
improvement of real property approved by two-thirds of the votes cast by the
voters voting on the proposition.
Article XIII A also requires a two-thirds vote of the electors prior to the
imposition of any special taxes and totally precludes the imposition of any new
ad valorem taxes on real property or sales or transaction taxes on the sales of
real property.
Legislation adopted in 1979 exempts business inventories from taxation.
However, the same legislation provides a formula for reimbursement by California
to cities and counties, special districts and school districts for the amount of
tax revenues lost by reason of such exemption or adjusted for changes in the
population and the cost of living. Legislation adopted in 1980 provides for
State reimbursements to redevelopment agencies to replace revenues lost due to
the exemption of business inventories from taxation. Such legislation provides
for restoration of business inventory tax revenues through the annual addition
of artificial assessed value, not actually existing in a project area, to the
tax rolls of redevelopment projects. These reimbursements are adjusted for
changes in the population and the cost of living. All such reimbursements are
subject to change or repeal by the Legislature, and they have been changed since
1980. Furthermore, current law generally prohibits the pledging of such
reimbursement revenues to secure redevelopment agency bonds.
Redevelopment agencies in California have no power to levy and collect taxes;
hence, any decrease in property taxes or limitations in the amounts by which
property taxes may increase adversely affects such agencies, which lack the
inherent power to correct for such decreases or limitations.
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 limitations" 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
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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 is further limited by the provisions
of an initiative statute ("Proposition 62") approved by the voters on November
4, 1986. The statute (i) requires that any tax for general governmental
purposes imposed by local government entities be approved by resolution or
ordinance adopted by two-thirds vote of the governmental entity's legislative
body and by majority vote of the electorate of the governmental entity, (ii)
requires that any special tax (defined as a tax levied for other than general
governmental purposes) imposed by a local governmental entity be approved by a
two-thirds vote of the voters within that jurisdiction, (iii) restricts the use
of revenues from a special tax to the purposes or for the service for which the
special tax was imposed, (iv) prohibits the imposition of ad valorem taxes on
real property by local governmental entities except as permitted by Article XIII
A, (v) prohibits the imposition of transaction taxes and sales taxes on the sale
of real property by local governmental entities and (vi) requires that any tax
imposed by a local governmental entity 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
September 28, 1995, in the case of SANTA CLARA COUNTY LOCAL TRANSPORTATION
AUTHORITY V. GUARDINO, the California Supreme Court upheld the constitutionality
of Proposition 62. As a result, the annual revenues of any local government or
district as shown in the general fund budget 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. A bill has been introduced in the California Legislature in an
effort to clarify whether the general tax voter approval requirement is
applicable to any tax that was imposed or increased by an ordinance or
resolution adopted prior to December 14, 1995. If adopted, the legislation
will apply the GUARDINO decision prospectively only.
An initiative constitutional amendment known as Proposition 218 and also
called the "Right to Vote on Taxes Act" was approved by 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 all assessments and requires that all
assessments be approved by property owners; prohibits property related fees and
charges from exceeding costs of the service being provided; imposes procedural
requirements, including notice and public hearing, prior to imposition of new or
increased fees or charges on property; and requires that, except for fees for
sewer, water and refuse collection, fees be approved by a majority vote of the
fee payers.
Given the turbulent history of the 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.
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LEASE FINANCING
Lease-based financing, typically marketed in the form of certificates of
participation, has been extremely popular in California, since the courts have
long held that properly structured long-term leases do not create
"indebtedness" for purposes of constitutional and statutory debt limitations.
The obligation to pay rent thereunder is nevertheless enforceable, on an annual
basis, so long as the leased property is available for use and occupancy by the
government lessee. The risk of rent abatement (because of construction delays,
damage to structures and the like) is usually mitigated by funded reserves,
casualty (including earthquake) insurance and rental interruption insurance.
ELECTRICAL UTILITY RESTRUCTURING
Like a number of other states, California recently enacted legislation relating
to the restructuring of the electric utility industry. The legislation
generally provides for increased competition in the supply of electric power and
allows retail customers "direct access" in choosing their supplier. In
addition, the legislation provides for an immediate rate reduction for small
users; creates an independent power exchange to administer a wholesale power
pool; creates an independent system operator for the transmission grid; provides
customers and suppliers with nondiscriminating and comparable access to
transmission and distribution services; and allows utilities to recover
uneconomic generation-related costs through a transition charge or severance
fee.
The mandatory provisions of the legislation generally apply to utilities
regulated by the California Public Utilities Commission. Since the State's
political subdivisions are not subject to the jurisdiction of the CPUC, the
effect of the legislation on municipally-owned electric utilities is more
limited. As a practical matter, however, it is likely that most
municipally-owned utilities will adopt some form of direct access or pooling
programs in order to remain competitive.
The affects 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 has embarked on a
fiscal recovery plan, approved by the bankruptcy judge on May 15, 1996, based on
sharp reductions in services and personnel. The plan also includes
rescheduling of outstanding short term debt using certain new revenues
transferred to Orange County from other local governments pursuant to special
legislation enacted in October, 1995. The special legislation is now being
challenged in court proceedings.
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 that are located in different areas within California as
well as obligations of the State of California itself. In addition, the Fund
will not invest more than 15% of its total assets in tax allocation bonds
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issued by California redevelopment agencies. These are operating policies of
the Fund and may be changed without the approval of the Fund's shareholders.
WASHINGTON FUND
WASHINGTON STATE
A discussion of certain economic, financial and legal matters regarding the
State of Washington follows. During normal market conditions, the Washington
Fund will generally invest at least 80% of its net assets in bonds issued by
Washington and its political subdivisions, municipalities, agencies,
instrumentalities or public authorities. Therefore, the investment risk of such
concentration should be carefully considered. The information in the discussion
is drawn primarily from official statements relating to securities offerings of
the State which are dated prior to the date of this Statement of Additional
Information. This information may be relevant in evaluating the economic and
financial position of the State, but is not intended to provide all relevant
data necessary for a complete evaluation of the State's economic and financial
position. Discussions regarding the financial health of the State government may
not be relevant to municipal obligations issued by a political subdivision of
the State. Furthermore, general economic conditions discussed may or may not
affect issuers of the obligations of the State. The Washington Fund has not
independently verified any of the information presented in this section.
GENERAL INFORMATION
According to the United States Census Bureau's 1990 Census, Washington
State's population is ranked 18th of the 50 states. During the ten-year time
period from 1980-1990, the State's population increased at an average annual
rate of 1.8%, while the United States population grew at an average annual
rate of 1.1%. The State's population increased at an average annual rate of
approximately 2.5% 1990 to 1993, and at an average annual rate of approximately
1.8% from 1993 to 1995. From April 1, 1995 to April 1, 1996, the population
growth was approximately 1.6%. The current estimate of the population of the
State is approximately 5.5 million.
The State's largest city, Seattle, is part of an international trade,
manufacturing, high technology and business service corridor which extends along
Puget Sound from Everett to Tacoma. The State's Pacific Coast-Puget Sound
region includes 75% of its population, the major portion of its industrial
activity and the major part of the forests important to its timber and paper
industries. The remainder of the State has agricultural areas primarily devoted
to grain, fruit orchard and dairy operations.
In recent years, the State's economy has diversified with employment in the
trade and service sectors representing an increasing portion of total employment
relative to the manufacturing sector.
The State operates on a July 1 to June 30 fiscal year and on a biennial budget
basis. Fiscal controls are exercised during the biennium through an allotment
process which requires each agency to submit a monthly expenditure plan. The
plan must be approved by the Office of Financial Management, which is the
Governor's budget agency. It provides the authority for agencies to spend funds
within statutory maximums specified in a legislatively adopted budget. State
law requires a balanced biennial budget. Whenever it appears that disbursements
will exceed the aggregate of estimated receipts plus beginning cash surplus, the
Governor is required to reduce allotments, thereby reducing expenditures of
appropriated funds.
As interpreted by the State Supreme Court, Washington's Constitution prohibits
the imposition of net income taxes.
The State's tax revenues are primarily comprised of excise and ad valorem taxes.
By constitutional provision, the aggregate of all regular (unvoted) tax levies
on real and personal property by State
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and local taxing districts cannot exceed 1% of the true and fair value of the
property. Excess levies are subject to voter approval. For the fiscal year
ending June 30, 1995, approximately 78.5% of the State's tax revenues came from
general and selective sales and gross receipts taxes, of which the retail sales
tax and its companion use tax represented 46% of total collections. Business
and occupation tax collections represented about 16.6% and the motor vehicle
fuel tax represented approximately 7.0% of total State taxes for the year. Ad
valorem taxes represented 10.8% of State revenues for the fiscal year 1995.
Expenditures of State revenues are made in accordance with constitutional and
statutory mandates.
STATE EXPENDITURE LIMITATIONS
Initiative 601, which passed by the voters in November 1993, limits increases in
General Fund-State government expenditures to the average rate of population and
inflation growth, and sets forth a series of guidelines for limiting tax and
expenditure increases and stabilizing long range budget planning.
Provisions of Initiative 601 establish a procedure for computing a fiscal year
growth factor based on a lagged, three-year average of population and inflation
growth. This growth factor is used to determine a State spending limit for
programs and expenditures supported by the State General Fund. The growth
factor was 5.13% for fiscal year 1996 and is 4.47% for fiscal year 1997. The
initiative created two new reserve funds (the Emergency Reserve Fund and the
Education Construction Fund) for depositing revenues in excess of the spending
limit and abolished the current Budget Stabilization Account. Ending
balances in the Budget Stabilization Account were transferred to the State
General Fund ($100 million) and the Pension Reserve Account ($25 million). The
initiative also places restrictions on the addition or transfer of functions to
local government unless there is reimbursement by the State.
The Initiative's requirement for voter approval for new tax measures has
expired. Effective July 1, 1995, taxes can be enacted with a two-thirds
majority of both houses of the State Legislature if resulting General Fund-State
expenditures do not exceed the spending limit. Voter approval is still required
to exceed the spending limit. Thus far, the Initiative has not had a
restrictive impact on the State's budget. However, the State expects its
expenditures to be constrained by the Initiative beginning in the 1997-99
Biennium.
The State Constitution and enabling statutes authorize the incurrence of State
general obligation debt to the payment of which the State's full faith and
credit and taxing power are pledged. With certain exceptions, the amount of
State general obligation debt which may be incurred is limited by constitutional
and statutory restrictions. These limitations are imposed by prohibiting the
issuance of new debt if the new debt would cause the maximum annual debt service
on all thereafter outstanding general obligation debt to exceed a specified
percentage of the arithmetic mean of general State revenues for the preceding
three years. These limitations apply to the incurrence of new debt and are not
limitations on the amount of debt service which may be paid by the State in
future years.
The State Legislature is obligated to appropriate money for State debt service
requirements. Generally, on or before June 30 of each year, the State Finance
Committee certifies to the State Treasurer the amount required for payment of
bond interest and principal for the coming year. Some general obligation bond
statutes provide that the General Fund will be reimbursed from discrete
revenues, which are not considered general State revenues. Other bonds are
limited obligation bonds not payable from the General Fund. For the 1995-97
Biennium, General Fund-State revenues are projected to be $17.647 billion, an
increase of 7.1% over the 1993-95 Biennium, plus a carry-forward of $559
million. The revenue outlook for the 1995-97 Biennium is stable and the General
Fund is projected to end the Biennium with a $624 million fund balance.
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The operating budget for the 1995-97 Biennium calls for an overall expenditure
level of $17.613 billion for the General Fund-State, an increase of $1.3 billion
or 8.0% over the 1993-95 Biennium and within the $17.9 billion expenditure limit
imposed under Initiative 601.
Fifty-eight percent of the General Fund-State budget will go to support public
schools and higher education, representing a $602 million increase in public
school funding and an increase of $22 million in funding for public universities
and colleges.
Social and Health Services funding accounts for approximately 26% of the State
budget, representing increased State expenditures of $574 million, and the
criminal justice budget also increased. A 4% across-the-board salary increase
for State employees is expected to be offset by initiation of efficiency
measures and privatization proposals in the areas of general government, natural
resources and transportation.
The 1996 Supplemental Budget passed the State Legislature on March 7, 1996 and
then Governor Lowry signed the budget bill on March 30, 1996. The overall
General Fund-State supplemental budget resulted in a net increase of only $14
million after the Governor's vetoes. New policy initiatives totaling $125
million were set forth to strengthen child protective services, provide early
intervention to at-risk youth, upgrade security and safety conditions in the
juvenile justice system, continue education reform, and expand access to higher
education through improved technology. The 1996 Legislature also appropriated
$41 million to address emergent and previously unfunded needs. Nine million
in State funds was appropriated to address federal cutbacks in emergency food
assistance programs, job training youth employment programs, and planned
closures in federally-supported fish hatcheries on the Columbia River. These
appropriated increases were offset by a General Fund-State reduction of $174
million to reflect downward adjustments in public school enrollments and social
and health services forecasted caseloads. Approximately $23 million in State
funds and $95 million in federal relief funds were set aside in a special
account to address the devastating damages that resulted from two severe floods.
During the 1996 legislative session, the State Legislature overturned a
veto by then Governor Lowry that will result in a reduction in the business and
occupation tax, and passed a series of new legislation to give sales tax
exemptions for machinery and equipment used by manufacturers for research and
development and other specialized uses. The total of these tax and revenue
reduction measures would decrease General Fund-State revenues by $208 million.
For most municipalities in the State, the fiscal year is the calendar year
except that school districts have a September 1 - August 31 fiscal year. All
municipalities must maintain balanced budgets. Depending on the type of
municipality, local revenues are derived from ad valorem taxes, excise and gross
receipts taxes, special assessments, fees, user charges and State and federal
grants.
Municipalities incur debt by the issuance of general obligations or other
borrowings which are payable from taxes, though other revenue sources may be
used. Revenue obligations do not constitute debt under constitutional and
statutory limitations as long as taxes are not pledged or used to pay debt
service. Only non-tax revenue from the operation of a project or enterprise
financed by the revenue obligations (and sometimes special assessments on
property benefitted from the financed improvements) may be used to pay that debt
service. Usually, revenue bonds are secured by a reserve funded in an amount
based on a factor of debt service. Many municipalities may issue improvement
district obligations payable only from special assessments on benefitted
property, but some of those obligations also may be secured by a special
guaranty fund.
ECONOMIC OVERVIEW
Over the past few years, the State's economic performance has remained
relatively strong compared to the United States as a whole. After adjusting
for inflation, growth in personal income in the State increased 3.7% in 1995
over the 1994 level and an estimated 4.2% in 1996 over the 1995 level.
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The State's economic base includes manufacturing and service industries as well
as agricultural and timber production. During 1990-1995, the State experienced
growth in non-manufacturing industries and a decline in manufacturing
industries. The rate of employment growth, which exceeded 4.5% during the
mid-to-late 1980's, has declined since 1991 to an average rate of 1.4%. The
1996 employment growth is expected to be 2.5%.
Washington's economy consists of both export and local industries. Leading
export industries are aerospace, forest products, agriculture and food
processing. The aerospace, timber and food processing industries together employ
approximately 9% of the State's non-farm workers. However, the non-manufacturing
sector has played an increasingly significant role in contributing to the
State's economy in recent years.
Below is a summary of key industry segments of the State's economy as well as of
selected economic and employment data.
MANUFACTURING. The Boeing Company ("Boeing"), which is the Seattle Metropolitan
Area's largest employer, has several facilities located throughout the area.
Boeing is the world's leading manufacturer of commercial airliners and as of
November 1996 employed approximately 85,214 people State-wide, primarily at
several locations in the area. While the primary activity of Boeing is the
manufacture of commercial aircraft, Boeing has played leading roles in the
aerospace and military missile programs of the United States and has
undertaken a broad program of diversification activities including Boeing
Information and Support Services. In 1995, Boeing had $19.5 billion in sales
and net earnings of $393 million, and a backlog of orders totaling $72.3
billion. Boeing currently anticipates 1996 sales to be in the $22 billion
range.
Boeing recently completed two and is currently undertaking one major expansion
project. The company recently acquired a 212-acre site in Renton (King County),
which is the site of the former Longacres Race Track. The site will be used as
a location for the development of an office complex, the first building of which
is an approximately 500,000 square-foot customer service training center that
was recently completed. In Everett (Snohomish County), Boeing completed
construction of a 5.6 million square-foot assembly plant for the new 777
jetliner. In 1993, Boeing completed a $400 million skin and spar plant and a
composite manufacturing center on 500 acres in Puyallup (Pierce County).
A total of 206 commercial jet transports were delivered in 1995, compared with
270 for 1994. Defense and space sales of $5.6 billion were approximately 10%
higher than in 1994. The 10-week strike by the International Association of
Machinist and Aerospace Workers (IAM) resulted in the delay of approximately 30
commercial jet transport deliveries during the fourth quarter of 1995. During
the first quarter of 1996, deliveries for all models were limited by the
recovery from the strike. A total of 40 commercial jet transports were
delivered, compared with 59 in the first quarter of 1995. In the second quarter
of 1996, deliveries of commercial aircraft, including sales of certain aircraft
previously on operating lease, totaled 62.
TECHNOLOGY-RELATED INDUSTRIES. The State ranks fourth among all states in the
percentage of its work force employed by technology-related industries. It
ranks third among the largest software development centers. The State is the
home of approximately 1000 advanced technology firms of which approximately 50%
are computer-related. Microsoft, headquartered in Redmond, Washington, is the
largest microcomputer software company in the world. In addition, several
biotechnical firms located in the State have attained international acclaim for
their research and development.
TIMBER. Natural forests cover more than 40% of the State's land area and forest
products rank second behind aerospace in terms of total production. The primary
employer in the timber industry is The Weyerhaeuser Company. Productivity in
the State's forest products industry increased steadily from 1980 to 1990.
However, since 1991, recessionary influences have resulted in a production
decline. A slight decline is anticipated for the next few years, due to
federally-imposed limitations on the
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harvest of old-growth timber and the inability to maintain the previous record
levels of production increases. Although a continued decline in employment is
anticipated in certain regions, the impact is not expected to affect
materially the State's overall economic performance.
AGRICULTURE AND FOOD PROCESSING. Agriculture and food processing is the State's
most important industry by most measures. Growth in agricultural products was
an integral factor in the State's economic growth in the late 1980s and early
1990s.
FINANCE, INSURANCE AND REAL ESTATE. Employment in finance, insurance and real
estate is estimated to represent 5.2% of the State's wage and salary employment
in 1995. Projections for 1996 show this segment declined slightly to 5.1% of
employment.
TRADE. International trade plays an important role in the State's employment
base and one in six jobs is related to this sector. During the past twenty
years the State has consistently ranked number one or number two in
international exports per capita. Seattle-Tacoma International Airport is the
focus of the region's air traffic and trade. The State, particularly the Puget
Sound Corridor, is a trade center for the Northwest and the State of Alaska. A
system of public ports, the largest of which are the Ports of Seattle and
Tacoma, handle waterborne trade primarily to and from the Far East. These two
Ports each rank among the top 20 ports in the world based on volume of
containerized cargo shipped; on a combined basis they are the second largest
load center for containerized cargo in the United States. Approximately 70% of
the cargo entering the Ports of Seattle and Tacoma has an ultimate destination
outside the Pacific Northwest. Therefore, trade levels depend largely on
national and world, rather than local, economic conditions.
Growth in retail sales in the State between 1990 and 1992 was higher than that
in the United States. During 1993 through 1995, the rate of growth for retail
sales was lower for the State than for the United States. The State is home to
a number of specialty retail companies that have reached national stature,
including Nordstrom, Eddie Bauer, Costco and Recreational Equipment Inc. (REI).
SERVICES/TOURISM. The highest employment growth in the State since 1981 has
taken place in the services sector, although rate of growth has shown small but
relatively consistent decline since 1990 from 7% to 4.3%forecast for 1995 and
3.4% forecast for 1996. Seattle is the location for the Washington State
Convention and Trade Center which opened in June 1988. The State also has many
tourist attractions such as the Olympic and Cascade mountain ranges, ocean
beaches and local wineries.
CONSTRUCTION. Employment in the construction sector in the Puget Sound area
increased 69.2% between 1981 and 1991. The increase in employment in the late
1980s was due in part to the relative affordability of housing compared to other
areas of the country. Construction employment growth flattened between 1991 and
1993, but showed a modest increase in 1994 and leveled again in 1995.
Commercial building, while not increasing at the pace of the 1980s, remains
stable.
FEDERAL, STATE AND LOCAL GOVERNMENT. Employment in the government sector
represents approximately 19% of all wage and salary employment in the State on a
combined basis. Seattle is the regional headquarters for a number of federal
government agencies and the State receives an above-average share of defense
expenditures. Employment in the government sector has expanded in the State
since 1990, but at a declining rate. State and local government employment has
increased at a faster pace than employment by the federal government, and is
projected to add new jobs through 1996.
LITIGATION
At any given time, including the present, there are numerous lawsuits pending
against the State of Washington which could affect the State's revenues and
expenditures. However, none of the lawsuits are expected to have a material
adverse impact on either State revenues or expenditures.
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PRINCIPAL SHAREHOLDERS OF CERTAIN FUNDS
INTERMEDIATE TREASURY FUND
At April 2, 1997, SAFECO Insurance Company of America ("SAFECO Insurance")
owned 500,000 shares of the Intermediate Treasury Fund which represented 33%
of the outstanding shares of the Fund. SAFECO Insurance is a Washington
Corporation and a wholly-owned subsidiary of SAFECO Corporation, each of
which has its principal place of business at SAFECO Plaza, Seattle,
Washington 98185. At April 2, 1997, SAFECO Corporation owned 500,000 shares
of the High-Yield Bond Fund, which represented 9% of the outstanding shares
of the Fund. SAFECO Corporation is a Washington corporation and a holding
company whose primary subsidiaries are engaged in the insurance and related
financial service businesses. At April 2, 1997, Charles Schwab & Co. Inc.,
101 Montgomery St., San Francisco, CA 94104, owned 891,057 shares of the
High-Yield Bond Fund, which represented 16% of the Fund's outstanding shares.
MANAGED BOND FUND
At April 2, 1997, Principal Shareholders of the Managed Bond Fund were as
follows. Crista Ministries, PO Box 330303, Seattle, WA 98133, owned 94,132
shares, which represented 17% of the Fund's outstanding shares. Massman
Construction Co. Profit Sharing and Pension Plan, 8901 Stateline, Kansas
City, MO 64114, owned 240,303 shares, which represented 45% of the Fund's
outstanding shares. Crown Packaging Corp. Profit Sharing Retirement Trust,
8514 Eager Road, St. Louis, MO 63144, owned 160,640 shares, which
represented 30% of the Fund's outstanding shares.
WASHINGTON FUND
At April 2, 1997, SAFECO Insurance owned 500,000 shares, which represents 73%
of the outstanding shares of the Washington Fund. SAFECO is a wholly-owned
subsidiary of SAFECO Corporation, a Washington corporation, having its
principal place of business at SAFECO Plaza, Seattle Washington 98185.
Principal shareholders of a Fund may control the outcome of a shareholder vote.
ADDITIONAL TAX INFORMATION
GENERAL
Each Fund intends to continue to qualify as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986 ("Code"). In order to
qualify for treatment as a regulated investment company under the Code, a Fund
must distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of taxable net
investment income and net short-term capital gain). Each Fund intends to make
sufficient distributions to shareholders to relieve it from liability for
federal excise and income taxes.
Each Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year substantially all of its
ordinary income for that year and capital gain net income for the one-year
period ending on December 31 (by election) of that year, plus certain other
amounts.
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Each Fund is treated as a separate corporation for federal income tax purposes.
The excess of net long-term capital gains over net short-term capital loss
realized by a Fund on portfolio transactions, when distributed by the Fund, is
subject to long-term capital gains treatment under the Code, regardless of how
long you have held the shares of the Fund. Distributions of net short-term
capital gains realized from portfolio transactions are treated as ordinary
income for federal income tax purposes. The tax consequences described above
apply whether distributions are taken in cash or in additional shares.
Redemptions and exchanges of shares of a Fund may result in a capital gain or
loss for federal income tax purposes.
If shares of a Fund are sold at a loss after being held for one year or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any capital gain distributions received on those shares. Investors
also should be aware that if shares are purchased shortly before the record date
for any distribution, the shareholder will pay full price for the shares and
receive some portion of the purchase price back as a taxable dividend or capital
gain distribution.
Each Fund is required to withhold 31% of all taxable dividends, capital gain
distributions and redemption proceeds payable to individuals and certain other
noncorporate shareholders who do not furnish the Fund with a correct taxpayer
identification number. Withholding at that rate also is required from dividends
and those distributions for shareholders who otherwise are subject to backup
withholding.
These are tax requirements that all mutual funds must follow in order to avoid
federal taxation. The Funds may have to limit investment activity in some types
of securities in order to adhere to these requirements.
SPECIAL CONSIDERATIONS FOR THE TAX-EXEMPT FIXED INCOME FUNDS
The tax-exempt interest portion of each daily dividend will be based upon the
ratio of a Tax-Exempt Fixed Income Fund's tax-exempt to taxable income for the
entire fiscal year (average annual method). As a result, the percentage of tax-
exempt income for any particular distribution may be substantially different
from the percentage of a Tax-Exempt Fixed Income Fund's income that was tax-
exempt during the period covered by that distribution. Each Tax-Exempt Fixed
Income Fund will advise its shareholders of this ratio within 60 days after the
close of its fiscal year.
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of a Tax-Exempt Fixed Income Fund is not deductible. In addition,
entities or persons who are "substantial users" (or related persons) of
facilities financed by most "private activity" bonds should consult their tax
advisers before purchasing shares of any of the Tax-Exempt Fixed Income Funds.
"Substantial user" is generally defined to include a "non-exempt person" who
regularly uses in a trade or business a part of a facility financed from the
proceeds of most "private activity" bonds.
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Each Tax-Exempt Fixed Income Fund may invest in municipal bonds that are
purchased, generally not on their original issue, with market discount (that is,
at a price less than the principal amount of the bond or, in the case of a bond
that was issued with original issue discount, at a price less than the amount of
the issue price plus accrued original issue discount) ("municipal market
discount bonds"). Gain on the disposition of a municipal market discount bond
(other than a bond with a fixed maturity date within one year from its
issuance), generally is treated as ordinary (taxable) income, rather than
capital gain, to the extent of the bond's accrued market discount at the time of
disposition. Market discount on such a bond generally is accrued ratably, on a
daily basis, over the period from the acquisition date to the date of maturity.
In lieu of treating the disposition gain as above, a Tax-Exempt Fixed Income
Fund may elect to include market discount in its gross income currently, for
each taxable year to which it is attributable.
No portion of the dividends or other distributions paid by any Tax-Exempt Fixed
Income Fund is eligible for the dividends-received deduction allowed to
corporations.
In the future, proposals may be introduced before Congress for the purpose of
further restricting or even eliminating the federal income tax exemption for
interest on all or certain types of municipal obligations. If such a proposal
were enacted, the availability of municipal obligations for investment by each
Tax-Exempt Fixed Income Fund and the value of each Tax-Exempt Fixed Income
Fund's portfolio would be affected. In such event, each Tax-Exempt Fixed Income
Fund would review its investment objectives and policies.
CALIFORNIA STATE AND LOCAL TAX MATTERS
Individual shareholders of each Fund who are subject to California personal
income taxation will not be required to include in their California gross
income that portion of their federally tax-exempt 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, provided that at least 50 percent of the value of the Fund's
total assets consists of obligations the interest on which is exempt from
California personal income taxation. Distributions to individual
shareholders derived from interest on municipal obligations issued by
governmental authorities in states other than California, short-term capital
gains and other taxable income will be taxed as dividends for purposes of
California personal income taxation. Each Fund's long-term capital gains 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 a
Fund 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 the 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 distributed to the 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 advisers for more detailed information
concerning California tax matters.
CONVERSION OF ADVISOR CLASS B SHARES
Advisor Class B shares of a Fund will automatically convert to Advisor Class A
shares of that Fund, based on the relative net asset values per share ("NAVs")
of the Classes, within the first month following the investor's sixth
anniversary from purchase of such Advisor Class B shares. For the purpose of
calculating the holding period required for conversion of Advisor Class B shares
of each Fund except the Money Market Fund, the date of purchase shall mean (1)
the date on which such Advisor Class B shares were purchased, or (2) for Advisor
Class B shares obtained through an exchange, or a series of exchanges, the date
on which the original Advisor Class B shares were purchased. For the purpose of
calculating the holding period required for conversion of Advisor Class B shares
of the Money Market Fund, the date of purchase shall mean the date on which
those shares were first exchanged for Advisor Class B shares of any other SAFECO
Fund. Holders of Class B shares of the SAFECO Advisor Series Trust ("Advisor
Series Shares") who have converted those shares to Advisor Class B shares may
calculate the holding period from the date of the purchase of the Advisor Series
Shares.
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For purposes of conversion to Advisor Class A shares, Advisor Class B shares
purchased through the reinvestment of dividends and other distributions paid in
respect of Advisor Class B shares will be held in a separate sub-account; each
time any Advisor Class B shares in the shareholder's regular account (other than
those in the sub-account) convert to Advisor Class A shares, a pro rata portion
of the Advisor Class B shares in the sub-account will also convert to Advisor
Class A shares. The portion will be determined by the ratio that the
shareholder's Advisor Class B shares converting to Advisor Class A shares bears
to the shareholder's total Advisor Class B shares not acquired through dividends
and other distributions.
ADDITIONAL INFORMATION ON CALCULATION OF NET ASSET VALUE PER SHARE
Each Fund determines its NAV by subtracting its liabilities (including accrued
expenses and dividends payable) from its total assets (the market value of the
securities the Fund holds plus cash and other assets, including interest accrued
but not yet received) and dividing the result by the total number of shares
outstanding. The NAVs of the Advisor Classes of each Fund are calculated as of
the close of regular trading on the New York Stock Exchange ("Exchange") every
day the Exchange is open for trading. The Exchange is closed on the following
days: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. NAV is determined
separately for each class of shares of each Fund.
Short-term debt securities held in a Fund's portfolio having a remaining
maturity of less than 60 days when purchased and securities originally purchased
with maturities in excess of 60 days, but which currently have maturities of 60
days or less, may be valued at cost adjusted for amortization of premiums or
accrual of discounts if in the judgment of each Board of Trustees such methods
of valuation are appropriate or under such other methods as a Board of Trustees
may from time to time deem to be appropriate. The cost of those securities that
had original maturities in excess of 60 days shall be determined by their fair
market value up 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 each Board of Trustees in good faith in computing the fair market
value of those assets.
The portfolio instruments of the Money Market Fund are valued on the basis of
amortized cost. The valuation of the Money Market Fund's portfolio securities
based upon amortized cost, and the maintenance of the Money Market Fund's NAV at
$1.00, are permitted pursuant to Rule 2a-7 under the 1940 Act. Pursuant to that
rule, the Money Market Fund maintains a dollar-weighted average portfolio
maturity of 90 days or less, purchases only securities having remaining
maturities of 397 days or less, and invests only in securities determined by
SAM, under guidelines adopted by the Money Market Trust's Board of Trustees, to
be of high quality and to present minimal credit risks. The Board of Trustees
has established procedures designed to stabilize, to the extent reasonably
possible, the Money Market Fund's price-per-share as computed for the purpose of
sales and redemptions at $1.00. These procedures include a review
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<PAGE>
of the Money Market Fund's portfolio holdings by the Board of Trustees, at such
intervals as the Board deems appropriate, to determine whether the Fund's NAV,
calculated by using available market quotations, deviates from $1.00 per share
and, if so, whether such deviation may result in material dilution or is
otherwise unfair to existing shareholders of the Money Market Fund. In the
event the Board determines that such a deviation exists in the Fund, the
Trustees will take such corrective action with respect to the Money Market Fund
as they regard as necessary and appropriate, including, but not limited to:
selling portfolio investments prior to maturity to realize capital gains or
losses or to shorten average portfolio maturity, withholding dividends or
redeeming shares in kind, establishing the NAV by using available market
quotations.
ADDITIONAL PERFORMANCE INFORMATION
Effective September 30, 1996, all of the then-existing shares of each Fund were
redesignated No-Load Class shares and each Fund, except the High-Yield Bond
Fund, commenced offering Advisor Class A and Advisor Class B shares. Advisor
Class A and Advisor Class B shares of the High-Yield Bond Fund were first
offered on or about January 31, 1997.
The yield and total return calculations set forth below are for the dates
indicated and are not a prediction of future results.
YIELDS FOR THE INTERMEDIATE TREASURY, MANAGED BOND, AND TAX-EXEMPT FIXED
INCOME FUNDS
The yields for the Advisor Classes of the Intermediate Treasury Fund for the
30-day period ended December 31, 1996 were as follows:
Advisor Class A Advisor Class B
--------------- ---------------
Intermediate Treasury Fund 4.67% 4.28%
The yields for the Advisor Classes of the Managed Bond Fund for the 30-day
period ended December 31, 1996 were as follows:
Advisor Class A Advisor Class B
--------------- ---------------
Managed Bond Fund 4.91% 4.40%
YIELDS FOR THE HIGH-YIELD BOND FUND
The performance information that follows has been derived from performance
information for the High-Yield Bond Fund's No-Load Class shares, restated to
reflect the sales charges and Rule 12b-1 fees of the Advisors Classes. The
yields for the Advisor Classes of the High-Yield Bond Fund for the 30-day
period ended December 31, 1996 would have been as follows:
Advisor Class A Advisor Class B
--------------- ---------------
High-Yield Bond Fund 8.12% 7.86%
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<PAGE>
The yields and tax-equivalent yields for the 30-day period ended December 31,
1996 at the maximum federal tax rate of 39.6% for the Advisor Classes of the
Municipal, California, and Washington Funds and at the maximum combined
federal and California tax rates of 45.2% for the Advisor Classes of the
California Fund, were as follows:
Advisor Class A Advisor Class B
--------------- ---------------
Tax-equivalent Tax-equivalent
Yield Yield Yield Yield
----- -------------- ----- --------------
Municipal Fund 4.42% 7.32% 4.06% 6.72%
California Fund 4.56% 8.32% 4.03% 7.35%
Washington Fund 4.17% 6.90% 3.58% 5.93%
Yield is computed using the following formula:
a-b 6
Yield = 2[( ---- +1) -1]
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
-38-
<PAGE>
Tax-equivalent yield is computed using the following formula:
eg
Tax-equivalent yield = [-----] + [e(1-g)]
(1-f)
Where: e = yield as calculated above
f = tax rate
g = percentage of "yield" which is tax-free
YIELD FOR THE MONEY MARKET FUND
The yields and effective yields for the Advisor Classes of the Money Market Fund
for the 7-day period ended December 31, 1996 were as follows:
Advisor Class A Advisor Class B
--------------- ---------------
Yield Effective Yield Yield Effective Yield
----- --------------- ----- ---------------
Money Market Fund 4.93% 5.05% 4.94% 5.06%
Yield is computed using the following formula:
(x-y) - z 365
Yield =[--------] = Base Period Return x -----
y 7
Where: x = value of one share at the end of a 7-day period
y = value of one share at the beginning of a 7-day period
($1.00)
z = capital changes during the 7-day period, if any
Effective yield is computed using the following formula:
Effective yield = [(Base Period Return + 1) 365/7] -1
-39-
<PAGE>
During periods of declining interest rates, the Money Market Fund's yield based
on amortized cost may be higher than the yield based on market valuations. Under
these circumstances, a shareholder in the Money Market Fund would be able to
obtain a somewhat higher yield than would result if the Money Market Fund
utilized market valuations to determine its NAV. The converse would apply in a
period of rising interest rates.
TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FOR THE INTERMEDIATE TREASURY,
MANAGED BOND, AND TAX-EXEMPT FIXED INCOME FUNDS
The performance information that follows reflects (1) the actual performance
of the Advisor Classes for the period September 30, 1996 to December 31,
1996; and (2) the performance of the No-Load Class of each Fund, restated to
reflect the sales charges but not the Rule 12b-1 fees of the Advisor Classes
for the period prior to September 30, 1996. Performance information for the
period prior to September 30, 1996 would have been lower if Rule 12b-1 fees
were reflected.
The total returns for the Advisor Classes of the Intermediate Treasury Fund
for the one-year, five-year, and since initial public offering periods ended
December 31, 1996 would have been as follows:
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year 5 Years Public Offering Months Public Offering
------ ------- ---------------- ------ ----------------------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Intermediate
Treasury Fund (4.19%) (4.75%) 27.35% 31.26% 72.04% 80.02% 99 September 7, 1988
</TABLE>
The total returns for the Advisor Classes of the Managed Bond Fund for the
one-year and since initial public offering periods ended December 31, 1996 would
have been as follows:
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year Public Offering Months Public Offering
------ --------------- ------ ---------------
Advisor Advisor Advisor Advisor
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Managed Bond
Fund (4.43%) (5.11%) (8.77%) (10.69%) 34 February 28, 1994
</TABLE>
-40-
<PAGE>
The total returns for the Advisor Classes of the Municipal and California Funds
for the one-year, five-year and ten-year periods ended December 31, 1996 would
have been as follows:
1 Year 5 Years 10 Years
------ ------- --------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
Municipal Fund (1.47%) (2.07%) 34.55% 38.56% 105.03% 114.18%
California Fund (2.05%) (2.71%) 37.18% 41.26% 100.47% 109.36%
The total returns for the Advisor Classes of the Washington Fund for the
one-year and since initial public offering periods ended December 31, 1996
would have been as follows:
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year Public Offering Months Public Offering
------ ------------------------ ------ ----------------------
Advisor Advisor Advisor Advisor
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Washington Fund (1.67%) (2.04%) 17.37% 19.84% 45 March 18, 1993
</TABLE>
The average annual total returns for the Advisor Classes of the Intermediate
Treasury Fund for the one-year, five-year and since initial public offering
periods ended December 31, 1996 would have been as follows:
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year 5 Years Public Offering Months Public Offering
------ ------- --------------- ------ ----------------------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Intermediate
Treasury Fund (4.19%) (4.75%) 4.95% 5.59% 6.80% 7.39% 99 September 7, 1988
</TABLE>
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<PAGE>
The average annual total returns for the Advisor Classes of the Managed Bond
Fund for the one-year and since initial public offering periods ended
December 31, 1996 would have been as follows:
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year Public Offering Months Public Offering
------ --------------- ------ ---------------------
Advisor Advisor Advisor Advisor
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>n <C> <C>
Managed Bond
Fund (4.43%) (5.11%) 3.01% 3.65% 34 February 28, 1994
</TABLE>
The average annual total returns for the Advisor Classes of the Municipal and
California Funds for the one-year, five-year and ten-year periods ended
December 31, 1996 would have been as follows:
1 Year 5 Years 10 Years
------ ------- --------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
Municipal Fund (1.47%) (2.07%) 6.12% 6.74% 7.44% 7.91%
California Fund (2.05%) (2.71%) 6.53% 7.15% 7.20% 7.67%
-42-
<PAGE>
The average annual total returns for the Advisor Classes of the Washington
Fund for the one-year and since initial public offering periods ended
December 31, 1996 would have been as follows:
Since Initial # of Date of Initial
1 Year Public Offering Months Public Offering
------ --------------- ------ ---------------
Advisor Advisor Advisor Advisor
Class A Class B Class A Class B
------- ------- ------- -------
Washington
Fund (1.67%) (2.04%) 4.36% 4.95% 45 March 18, 1993
TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FOR THE HIGH-YIELD BOND FUND
The performance information that follows has been derived from performance
information for the High-Yield Bond Fund's No-Load Class shares; restated to
reflect the sales charges but not the Rule 12b-1 fees of the Advisor Classes.
Performance information would have been lower if Rule 12b-1 fees were reflected.
The total returns for the Advisor Classes of the High-Yield Bond Fund for the
one-year, five-year and since initial public offering periods ended December
31, 1996 would have been as follows:
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year 5 Years Public Offering Months Public Offering
------ ------- --------------- ------ ----------------------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High-Yield
Bond Fund 5.42% 5.39% 58.64% 64.12% 98.43% 107.78% 99 September 7, 1988
</TABLE>
The average annual total returns for the Advisor Classes of the High-Yield
Bond Fund for the one-year, five-year and since initial public offering
periods ended December 31, 1996 would have been as follows:
<TABLE>
<CAPTION>
Since Initial # of Date of Initial
1 Year 5 Years Public Offering Months Public Offering
------ ------- --------------- ------ ----------------------
Advisor Advisor Advisor Advisor Advisor Advisor
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High-Yield
Bond Fund 5.42% 5.39% 9.67% 10.42% 8.66% 9.27% 99 September 7, 1988
</TABLE>
The total return is computed using the following formula:
ERV-P
T = [ ----- ] x 100
P
The average annual total return is computed using the following formula:
A = (nth-root (ERV/P) - 1) x 100
Where: T = total return
A = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
investment at the end of a specified period of time
P = a hypothetical initial investment of $1,000
In making the above calculation all dividends and capital gain distributions are
assumed to be reinvested at the Fund's NAV on the reinvestment date.
In addition to performance figures, each Fund may advertise its ranking as
calculated by independent rating services which monitor mutual funds'
performance (E.G., CDA Investment Technologies, Lipper Analytical Services, Inc.
and Morningstar, Inc.). These rankings may be
-43-
<PAGE>
among mutual funds with similar objectives and/or size or with mutual funds in
general and may be based on relative performance during periods deemed by the
rating services to be representative of up and down markets. The Funds may 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.
The Funds may upon occasion reproduce articles or portions of articles about the
Funds written by independent third parties such as financial writers, financial
planners and financial analysts, and appearing in financial publications of
general circulation or financial newsletters (including but not limited to
BARRONS, BUSINESS WEEK, FABIANS, FORBES, FORTUNE, INVESTOR'S BUSINESS DAILY,
KIPLINGER'S, MONEY MAGAZINE, MORNINGSTAR MUTUAL FUNDS, MUTUAL FUNDS FORECASTER,
MUTUAL FUNDS MAGAZINE, NO-LOAD FUND INVESTOR, NO-LOAD FUND X, NEWSWEEK, PENSIONS
& INVESTMENTS, RUCKEYSER'S MUTUAL FUNDS, TELESWITCH, TIME MAGAZINE, U.S. NEWS
AND WORLD REPORT, YOUR MONEY and THE WALL STREET JOURNAL).
Each Fund may also present in its advertisements and sales literature (i) a
biography or the credentials of its portfolio manager (including but not limited
to educational degrees, professional designations, work experience, work
responsibilities and outside interests); (ii) current facts (including but not
limited to number of employees, number of shareholders, business
characteristics) about its investment adviser (SAM) or any sub investment
adviser, the investment adviser's parent company (SAFECO Corporation) or the
parent company of any sub investment adviser or the SAFECO Family of Funds;
(iii) descriptions, including quotations attributable to the portfolio manager,
of the investment style used to manage a Fund's portfolio, the research
methodologies underlying securities selection and a Fund's investment objective;
and (iv) information about particular securities held in a Fund's portfolio.
From time to time, each Fund may discuss its performance in relation to the
performance of relevant indices and/or representative peer groups. Such
discussions may include how a Fund's investment style (including but not limited
to portfolio holdings, asset types, industry/sector weightings and the purchase
and sale of specific securities) contributed to such performance.
In addition, each Fund may comment on the market and economic outlook in
general, on specific economic events, on how these conditions have impacted its
performance and on how the portfolio manager will or has addressed such
conditions.
Performance information and quoted ratings are indicative only of past
performance and are not intended to represent future investment results.
ADDITIONAL INFORMATION ON DIVIDENDS
Because the Money Market Fund intends to hold its portfolio securities to
maturity and expects that most of its portfolio securities will be valued at
their amortized cost, realized gains or losses should not be a significant
factor in the computation of net income. Should, however, in an unusual
circumstance, the Money Market Fund experience a realized gain or loss, a
shareholder
-44-
<PAGE>
of the Money Market Fund could receive an increased, reduced, or no dividend for
a period of time. In such an event, the Money Market Trust's Board of Trustees
would consider whether to adhere to its present dividend policy or to revise it
in light of the then-prevailing circumstances.
TRUSTEES AND OFFICERS
Position(s) Held Principal Occupation(s)
Name and Address with the Trusts During Past 5 Years
---------------- ---------------- -----------------------
Boh A. Dickey* Chairman and Trustee President, Chief Operating Officer
SAFECO Plaza and Director of SAFECO Corporation.
Seattle, WA 98185 Previously, Executive Vice
(52) President and Chief Financial
Officer. He has been an executive
officer of SAFECO Corporation
subsidiaries since 1982. See table
under "Investment Advisory and
Other Services."
Barbara J. Dingfield Trustee Manager, Corporate Contributions
Microsoft Corporation and Community Programs for
One Microsoft Way Microsoft Corporation, Redmond,
Redmond, WA 98052 Washington, a computer software
(51) company; Director and former
Executive Vice President of Wright
Runstad & Co., Seattle, Washington,
a real estate development company;
Director of First SAFECO National
Life Insurance Company of New York.
Richard W. Hubbard* Trustee Retired Vice President and
1270 NW Blakely Ct. Treasurer of the Trust and other
Seattle, WA 98177 SAFECO Trusts; retired Senior Vice
(68) President and Treasurer of SAFECO
Corporation; former President of
SAFECO Asset Management Company;
Director of First SAFECO National
Life Insurance Company of New York.
Richard E. Lundgren Trustee Director of Marketing and Customer
764 S. 293rd Street Relations, Building Materials
Federal Way, WA 98032 Distribution, Weyerhaeuser Company,
(59) Tacoma, Washington; Director of
First SAFECO National Life
Insurance Company of New York.
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<PAGE>
Position(s) Held Principal Occupation(s)
Name and Address with the Trusts During Past 5 Years
---------------- ---------------- -----------------------
Larry L. Pinnt Trustee Retired Vice President and Chief
1600 Bell Plaza Financial Officer U.S. WEST
Room 1802 Communications, Seattle,
Seattle, WA 98191 Washington; Director of Key Bank
(62) of Washington, Seattle, Washington;
Director of University of
Washington Medical Center, Seattle,
Washington; Director of Cascade
Natural Gas Corporation, Seattle,
Washington; Director of First
SAFECO National Life Insurance
Company of New York.
John W. Schneider Trustee President of Wallingford Group,
1808 N 41st St. Inc., Seattle, Washington; former
Seattle, WA 98103 President of Coast Hotels, Inc.,
(55) Seattle, Washington; Director of
First SAFECO National Life
Insurance Company of New York.
David F. Hill* President President of SAFECO Securities,
SAFECO Plaza Trustee Inc. and SAFECO Services
Seattle, WA 98185 Corporation; Senior Vice President
(48) of SAFECO Asset Management
Company. See table under
"Investment Advisory and other
Services."
Neal A. Fuller Vice President Vice President, Controller,
SAFECO Plaza Controller Assistant Secretary and Treasurer
Seattle, WA 98185 Assistant Secretary of SAFECO Securities, Inc. and
(34) SAFECO Services Corporation; Vice
President, Controller, Secretary
and Treasurer of SAFECO Asset
Management Company. See table under
"Investment Advisory and Other
Services."
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<PAGE>
Position(s) Held Principal Occupation(s)
Name and Address with the Trusts During Past 5 Years
---------------- ---------------- -----------------------
Ronald L. Spaulding Vice President Chairman of SAFECO Asset
SAFECO Plaza Treasurer Management Company; Vice President
Seattle, WA 98185 and Treasurer of SAFECO
(53) Corporation; Vice President of
SAFECO Life Insurance Company;
former Senior Fund Manager of
SAFECO insurance companies; former
Fund Manager for several SAFECO
mutual funds. See table under
"Investment Advisory and Other
Services."
* Trustees who are interested persons as defined by the 1940 Act.
-47-
<PAGE>
COMPENSATION TABLE FOR CURRENT TRUSTEES
(Taxable Bond Trust)
For the Fiscal Period Ended December 31, 1996
Pension or Total
Retirement Compensation
Benefits From Registrant
Aggregate Accrued As Estimated and Fund
Compensation Part of Fund Annual Benefits Complex Paid to
Trustee from Registrant Expenses Upon Retirement Trustees
- ------- --------------- -------- --------------- --------
Boh A. Dickey N/A N/A N/A N/A
Barbara J.
Dingfield $204 N/A N/A $2,188
Richard E.
Lundgren $204 N/A N/A $2,188
Larry L. Pinnt $204 N/A N/A $2,188
John W.
Schneider $204 N/A N/A $2,188
Richard W.
Hubbard $204 N/A N/A $1,750
David F. Hill* N/A N/A N/A N/A
* First elected to the Board of Trustees in August, 1996.
For the fiscal year ended September 30, 1996, Barbara J. Dingfield, Richard
E. Lundgren, Larry L. Pinnt, John W. Schneider and Richard W. Hubbard each
received $2,458 aggregate compensation from Registrant and $28,478 total
compensation from Registrant and fund complex paid to Trustees. Mr. Dickey
and Mr. Hill are officers of various SAFECO companies and are not compensated
by the Trusts. Similarly, the officers of the SAFECO Trusts receive no
compensation for their service as officers.
Currently, there is no pension, retirement, or other plan or any arrangement
pursuant to which Trustees or officers of the Trust are compensated by the
Trust. Each Trustee also serves as Trustee for five other registered
open-end management companies that have, in the aggregate, twenty-two series
companies managed by SAM.
At April 2, 1997, the Trustees and officers of the Taxable Bond Trust as a
group owned less than 1% of the outstanding shares of each of the Taxable
Bond Funds.
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<PAGE>
COMPENSATION TABLE FOR CURRENT TRUSTEES
(Managed Bond Trust)
For the Fiscal Year Ended December 31, 1996
Pension or Total
Retirement Compensation
Benefits From Registrant
Aggregate Accrued As Estimated and Fund
Compensation Part of Fund Annual Benefits Complex Paid to
Trustee from Registrant Expenses Upon Retirement Trustees
- ------- --------------- -------- --------------- --------
Boh A. Dickey N/A N/A N/A N/A
Barbara J.
Dingfield $684 N/A N/A $24,750
Richard E.
Lundgren $684 N/A N/A $24,750
Larry L. Pinnt $684 N/A N/A $24,750
John W.
Schneider $684 N/A N/A $24,750
Richard W.
Hubbard $684 N/A N/A $23,000
David F. Hill* N/A N/A N/A N/A
* First elected to the Board of Trustees in August, 1996.
Mr. Dickey and Mr. Hill are officers of various SAFECO companies and are not
compensated by the Trusts. Similarly, the officers of the SAFECO Trusts
receive no compensation for their service as officers.
Currently, there is no pension, retirement, or other plan or any arrangement
pursuant to which Trustees or officers of the Trust are compensated by the
Trust. Each Trustee also serves as Trustee for five other registered open-end
management companies that have, in the aggregate, twenty-four series companies
managed by SAM.
At April 2, 1997, the Trustees and officers of the Managed Bond Trust owned
none or less than 1% depending on what each says of the outstanding shares of
the Managed Bond Fund
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<PAGE>
COMPENSATION TABLE FOR CURRENT TRUSTEES
(Money Market Trust)
For the Fiscal Period Ended December 31, 1996
Pension or Total
Retirement Compensation
Benefits From Registrant
Aggregate Accrued As Estimated and Fund
Compensation Part of Fund Annual Benefits Complex Paid to
Trustee from Registrant Expenses Upon Retirement Trustees
- ------- --------------- -------- --------------- --------
Boh A. Dickey N/A N/A N/A N/A
Barbara J.
Dingfield $1,777 N/A N/A $21,563
Richard E.
Lundgren $1,777 N/A N/A $21,563
Larry L. Pinnt $1,777 N/A N/A $21,563
John W.
Schneider $1,777 N/A N/A $21,563
Richard W.
Hubbard $1,777 N/A N/A $20,250
David F. Hill* N/A N/A N/A N/A
* First elected to the Board of Trustees in August, 1996.
For the fiscal year ended March 31, 1996, Barbara J. Dingfield, Richard E.
Lundgren, Larry L. Pinnt, John W. Schneider and Richard W. Hubbard each
received $2,095 aggregate compension from Registrant and (except for Mr.
Hubbard) $24,813 total compensation from Registrant and fund complex paid to
Trustees. Mr. Hubbard received $23,000 total compensation from Registrant
and fund complex paid to Trustees. Mr. Dickey and Mr. Hill are officers of
various SAFECO companies and are not compensated by the Trusts. Similarly,
the officers of the SAFECO Trusts receive no compensation for their service
as officers.
Currently, there is no pension, retirement, or other plan or any arrangement
pursuant to which Trustees or officers of the Trust are compensated by the
Trust. Each Trustee also serves as trustee for five other registered
open-end, management investment companies that have, in the aggregate,
twenty-three series companies managed by SAM.
At April 2, 1997, the Trustees and officers of the Money Market Trust as a
group owned less than 1% of the outstanding shares of the Money Market Fund.
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<PAGE>
COMPENSATION TABLE FOR CURRENT TRUSTEES
(Tax-Exempt Bond Trust)
For the Fiscal Period Ended December 31, 1996
Pension or Total
Retirement Compensation
Benefits From Registrant
Aggregate Accrued As Estimated and Fund
Compensation Part of Fund Annual Benefits Complex Paid to
Trustee from Registrant Expenses Upon Retirement Trustees
- ------- --------------- -------- --------------- --------
Boh A. Dickey N/A N/A N/A N/A
Barbara J.
Dingfield $4,326 N/A N/A $21,563
Richard E.
Lundgren $4,326 N/A N/A $21,563
Larry L. Pinnt $4,326 N/A N/A $21,563
John W.
Schneider $4,326 N/A N/A $21,563
Richard W.
Hubbard $4,326 N/A N/A $20,250
David F. Hill* N/A N/A N/A N/A
* First elected to the Board of Trustees in August, 1996.
For the fiscal year ended March 31, 1996, Barbara J. Dingfield, Richard E.
Lundgren, Larry L. Pinnt, John W. Schneider and Richard W. Hubbard each
received $4,547 aggregate compension from Registrant and (except for Mr.
Hubbard) $24,813 total compensation from Registrant and fund complex paid to
Trustees. Mr. Hubbard received $23,000 total compensation from Registrant
and fund complex paid to Trustees. Mr. Dickey and Mr. Hill are officers of
various SAFECO companies and are not compensated by the Trusts. Similarly,
the officers of the SAFECO Trusts receive no compensation for their service
as officers.
Currently, there is no pension, retirement, or other plan or any arrangement
pursuant to which Trustees or officers of a Trust are compensated by that
Trust. Each Trustee also serves as trustee for five other registered
open-end, management investment companies that have, in the aggregate,
twenty series companies managed by SAM.
At April 2, 1997, the Trustees and officers of the Trust as a group owned
less than 1% of the outstanding shares of each Tax-Exempt Fixed Income Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
SAFECO Asset Management Company ("SAM"), SAFECO Securities, Inc. ("SAFECO
Securities") and SAFECO Services Corporation ("SAFECO Services") are wholly-
owned subsidiaries of SAFECO Corporation. SAFECO Securities is the principal
underwriter of each Fund and SAFECO Services is the transfer, dividend and
distribution disbursement and shareholder servicing agent of each Fund.
The following individuals have the following positions and offices with the
Trusts, SAM, SAFECO Securities and SAFECO Services.
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<PAGE>
SAFECO SAFECO
Name Trusts SAM Securities Securities
- ---- ------ --- ---------- ----------
B. A. Dickey Chairman Director Director
Trustee
D. F. Hill President Senior President President
Trustee Vice Director Secretary
President Secretary Director
Director
N. A. Fuller Vice President Vice Vice Vice President
Controller President President Controller
Assistant Controller Controller Assistant
Secretary Secretary Assistant Secretary
Treasurer Secretary Treasurer
Treasurer
R.L. Spaulding Vice President Chairman Director Director
Treasurer Director
S.C. Bauer President
Director
D.H. Longhurst Assistant Assistant Assistant
Controller Controller Controller
Mr. Dickey is President, Chief Operating Officer and a Director of SAFECO
Corporation and Mr. Spaulding is a Treasurer and Vice President of SAFECO
Corporation. Messrs. Dickey and Spaulding are also Directors of other SAFECO
Corporation subsidiaries.
In connection with its investment advisory contract with 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 the Trust will indemnify its
Trustees and its officers against liabilities and expenses reasonably incurred
in connection with litigation in which they may be involved because of their
offices with the Trust, unless it is adjudicated that they engaged in bad faith,
wilful misfeasance, gross negligence, or reckless disregard of the duties
involved in the conduct of their offices. In the case of settlement, such
indemnification will not be provided unless it has been determined -- by a court
or other body approving the settlement or other disposition, or by a majority of
disinterested Trustees, based upon a review of readily available facts, or in a
written opinion of independent counsel -- that such officers or Trustees have
not engaged in wilful misfeasance, bad faith, gross negligence or reckless
disregard of their duties.
SAM also serves as the investment adviser for other investment companies in
addition to the Funds. Several of these investment companies have investment
objectives similar to those of certain Funds. It is therefore possible that the
same securities will be purchased for both a Fund and another investment company
advised by SAM. When two or more funds advised by SAM
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<PAGE>
are simultaneously engaged in the purchase or sale of the same security, the
prices and amounts will be allocated in a manner considered by the officers
of the funds involved to be equitable to each fund. In some cases this
system could have a detrimental effect on the price or value of the security
as far as a Fund is concerned. 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:
INTERMEDIATE TREASURY FUND
NET ASSETS FEE
$0 - $250,000,000 .55 of 1%
$250,000,001 - $500,000,000 .45 of 1%
$500,000,001 - $750,000,000 .35 of 1%
Over $750,000,000 .25 of 1%
HIGH-YIELD BOND FUND
NET ASSETS FEE
$0 - $250,000,000 .65 of 1%
$250,000,001 - $500,000,000 .55 of 1%
$500,000,001 - $750,000,000 .45 of 1%
Over $750,000,000 .35 of 1%
MANAGED BOND FUND
NET ASSETS FEE
$0 - $100,000,000 .50 of 1%
$100,000,001 - $250,000,000 .40 of 1%
Over $250,000,000 .35 of 1%
WASHINGTON FUND
NET ASSETS FEE
$0 - $250,000,000 .65 of 1%
$250,000,001 - $500,000,000 .55 of 1%
$500,000,001 - $750,000,000 .45 of 1%
Over $750,000,000 .35 of 1%
-53-
<PAGE>
MUNICIPAL AND CALIFORNIA FUNDS
NET ASSETS FEE
$0 - $100,000,000 .55 of 1%
$100,000,001 - $250,000,000 .45 of 1%
$250,000,001 - $500,000,000 .35 of 1%
Over $500,000,000 .25 of 1%
MONEY MARKET FUND
NET ASSETS FEE
$0 - $250,000,00 .50 of 1%
$250,000,001 - $500,000,000 .40 of 1%
$500,000,001 - $750,000,000 .30 of 1%
Over $750,000,000 .25 of 1%
The following states the total amounts of compensation paid by each Fund to
SAM for the fiscal period ended December 31, 1996, and the past three fiscal
years (or since its initial public offering in the case of the Managed Bond
Fund):
<TABLE>
<CAPTION>
TAXABLE BOND FUNDS
Year or Period Ended
Three Month
Period Ended
December 31, September 30, September 30, September 30, 1994
1996 1996 1995
------------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
Intermediate
Treasury Fund $21,000 $ 78,000 $ 71,000 $ 77,000
High-Yield Bond
Fund $82,000 $255,000 $206,000 $202,000
</TABLE>
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<PAGE>
MANAGED BOND FUND
Year or Period Ended
February 28, 1994
(Initial Public Offering) to
December 31, 1996 December 31, 1995 December 31, 1994
- ----------------- ----------------- ----------------------------
$21,000 $23,000 $16,000
TAX-EXEMPT FIXED INCOME FUNDS
Year or Period Ended
<TABLE>
<CAPTION>
9 Month Period Ended
December 31, 1996 March 31, 1996 March 31, 1995 March 31, 1994
-------------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Municipal Bond Fund $1,533,000 $2,020,685 $2,010,754 $2,248,615
California Fund $290,000 $365,684 $364,000 $455,505
Washington Fund $32,000 $39,038 $31,475 $18,350
</TABLE>
MONEY MARKET FUND
Year or Period Ended
9 Month Period Ended
December 31, 1996 March 31, 1996 March 31, 1995 March 31, 1994
-------------------- -------------- -------------- --------------
$630,000 $864,914 $840,727 $690,549
DISTRIBUTION ARRANGEMENTS. SAFECO Securities is the principal underwriter for
each Fund and acts as the distributor of the Advisor Class A and Advisor Class B
shares of each Fund under a Distribution Agreement with each Trust that requires
SAFECO Securities to use its best efforts, consistent with its other businesses,
to sell shares of the Funds. Shares of the Funds are offered continuously.
Under separate plans of distribution pertaining to the Advisor Class A and
Advisor Class B shares of each Fund adopted by each Trust in the manner
prescribed under Rule 12b-1 under the 1940 Act (each a "Plan"), each Advisor
Class pays fees described in the Prospectus.
Among other things, each Plan provides that (1) SAFECO Securities will submit to
each Trust's Board of Trustees at least quarterly, and the Trustees will review,
reports regarding all amounts expended under the Plan and the purposes for which
such expenditures were made, (2) the Plan will continue in effect so long as it
is approved at least annually and any material amendment thereto is approved, by
each respective Trust's Board of Trustees, including those Trustees who are not
"interested persons" of each Trust, acting in person at the meeting called for
that purpose, (3) payments by a Fund under the Plan shall not be materially
increased
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<PAGE>
without the affirmative vote of the holders of a majority of the outstanding
voting securities of the relevant Advisor Class of that Fund and (4) while the
Plan remains in effect, the selection and nomination of Trustees who are not
"interested persons" of each Trust shall be committed to the discretion of each
of the Trustees who are not "interested persons" of each Trust.
In reporting amounts expended under the Plans to each Trust's Board of Trustees,
SAFECO Securities will allocate expenses attributable to the sale of each
Advisor Class of Fund shares to such Advisor Class based on the ratio of sales
of shares of such Advisor Class to the sales of all Advisor Classes of shares.
Expenses attributable to a specific Advisor Class will be allocated to that
Advisor Class.
In approving the adoption of each Plan, each Trust's Board of Trustees
determined that the adoption was in the best interests of the Funds'
shareholders.
In the event that a Plan is terminated or not continued with respect to the
Advisor Class A or Advisor Class B shares of any Fund, (i) no fees would be owed
by the Fund to SAFECO Securities with respect to that class, and (ii) the Fund
would not be obligated to pay SAFECO Securities for any amounts expended under
the Plan not previously recovered by SAFECO Securities.
The Plans comply with rules of the National Association of Securities Dealers,
Inc. which limit the annual asset-based sales charges and service fees that a
mutual fund may impose on a class of shares to .75% and .25%, respectively, of
the average annual net assets attributable to that class. The rules also limit
the aggregate of all front-end, deferred and asset-based sales charges imposed
with respect to a class of shares by a mutual fund that also charges a service
fee to 6.25% of cumulative gross sales of that class, plus interest at the prime
rate plus 1% per annum.
CUSTODIAN. State Street Bank and Trust Company, 1776 Heritage Drive, North
Quincy, MA 02170, is the custodian of the securities, cash and other assets of
each Fund under an agreement with each Trust.
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 Advisor Classes of each fund under an agreement with the Trusts.
SAFECO Services provides, or through subcontracts makes provision for, all
required transfer agency activity, including maintenance of records of each
Fund's Advisor Class A and Advisor Class B shareholders, records of transactions
involving each Fund's Advisor Class B shares, and the compilation, distribution,
or reinvestment of income dividends or capital gains distribution. For the
Intermediate Treasury, Managed Bond and Tax-Exempt Fixed Income Funds, SAFECO
Services is paid a fee for these services equal to $32.00 per shareholder
account, but not to exceed .30% of each Fund's average net assets. For the
Money Market Fund, SAFECO Services is paid a fee of $34.00 per shareholder
account, but not to exceed .30% of each Fund's average net assets. The
following tables shows the fees paid by each Fund to SAFECO Services during the
fiscal year or period ended December 31, 1996 and the past three fiscal years.
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<PAGE>
TAXABLE BOND FUNDS
Year or Period Ended*
<TABLE>
<CAPTION>
3 Month Period Ended September 30, September 30, September 30, 1994
December 31, 1996 1996 1995
-------------------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
Intermediate
Treasury Fund $ 0 $39,000 $33,000 $25,000
High-Yield Bond Fund $17,000 $90,000 $78,000 $63,000
</TABLE>
MANAGED BOND FUND
Year or Period Ended*
<TABLE>
<CAPTION>
February 28, 1994
(Initial Public Offering) to
December 31, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- ----------------------------
<S> <C> <C>
$199 $309 $96
</TABLE>
MONEY MARKET FUND
Year or Period Ended*
<TABLE>
<CAPTION>
9 Month Period Ended
December 31, 1996 March 31, 1996 March 31, 1995 March 31, 1994
-------------------- -------------- -------------- --------------
<S> <C> <C> <C>
$325,000 $424,260 $385,495 $308,090
</TABLE>
TAX-EXEMPT FIXED INCOME FUNDS
Year or Period Ended*
<TABLE>
<CAPTION>
9 Month Period Ended
December 31, 1996 March 31, 1996 March 31, 1995 March 31, 1994
-------------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Municipal Bond Fund $300,000 $511,005 $531,978 $557,561
California Fund $48,000 $68,839 $68,840 $66,667
Washington Fund $2,000 $2,842 $3,219 $2,801
</TABLE>
* Figures reflect fees of $3.10 per shareholder transaction until July, 1996
when the new fee schedule went into effect.
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<PAGE>
BROKERAGE PRACTICES
Brokers typically charge commissions or mark-ups/mark-downs to affect
securities transactions. The Fund 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. 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 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 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.
REDEMPTION IN KIND
If a Trust concludes that cash payment upon redemption to a shareholder of a
Fund would be prejudicial to the best interest of other shareholders of a Fund,
a portion of the payment may be made in kind. Each Trust has elected to be
governed by Rule 18f-1 under the 1940 Act, pursuant to which the Trust must
redeem shares tendered by a shareholder of a Fund solely in cash up to the
lesser of $250,000 or 1% of a net asset value of a Fund during any 90-day
period. Any shares tendered by the shareholder in excess of the above-mentioned
limit may be redeemed through distribution of a Fund's assets. Any securities
or other property so distributed in kind shall be valued by the same method as
is used in computing NAV. Distributions in kind will be made in readily
marketable securities, unless the investor elects otherwise. Investors may
incur brokerage costs in disposing of securities received in such a distribution
in kind.
FINANCIAL STATEMENTS
The following financial statements for the Intermediate Treasury and High-Yield
Bond Funds and the report thereon of Ernst & Young LLP, independent auditors,
are incorporated herein by reference to the Taxable Bond Trust's Annual Report
for the period ended December 31, 1996.
Portfolio of Investments as of December 31, 1996
Statement of Assets and Liabilities as of December 31, 1996
Statement of Operations for the Periods Ended December 31, 1996 and
September 30, 1996
Statement of Changes in Net Assets for the Three-Month Period Ended
December 31, 1996 and for the Years ended September 30, 1996 and
September 30, 1995
Notes to Financial Statements
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<PAGE>
The following financial statements for the Managed Bond Fund (formerly Fixed
Income Portfolio) and the report thereon of Ernst & Young LLP, independent
auditors, are incorporated herein by reference to the Managed Bond Trust's
(formerly Institutional Series Trust) Annual Report for the year ended
December 31, 1996:
Portfolio of Investments as of December 31, 1996
Statement of Assets and Liabilities as of December 31, 1996
Statement of Operations for the Year Ended December 31, 1996
Statement of Changes in Net Assets for the Years Ended December 31, 1996
and December 31, 1995
Notes to Financial Statements
The following financial statements for the Municipal Bond, California and
Washington Funds and the report thereon of Ernst & Young LLP, independent
auditors, are incorporated herein by reference to the Tax-Exempt Bond Trust's
Annual Report for the period ended December 31, 1996:
Portfolio of Investments as of December 31, 1996
Statement of Assets and Liabilities as of December 31, 1996
Statement of Operations for the Period Ended December 31, 1996
Statement of Changes in Net Assets for the Nine-Month Period Ended
December 31, 1996 and for the Year ended March 31, 1996
Notes to Financial Statements
The following financial statements for the Money Market Fund and the report
thereon of Ernst & Young LLP, independent auditors, are incorporated herein by
reference to the Money Market Trust's Annual Report for the period ended
December 31, 1996:
Portfolio of Investments as of December 31, 1996
Statement of Assets and Liabilities as of December 31, 1996
Statement of Operations for the Period Ended December 31, 1996
Statement of Changes in Net Assets for the Nine-Month Period Ended
December 31, 1996 and for the Year ended March 31, 1996
Notes to Financial Statements
A copy of each Trusts' Annual Report accompanies this Statement of Additional
Information. Additional copies may be obtained by calling SAFECO Services at
1-800-463-8791 or by writing to the address on the Prospectus cover.
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<PAGE>
DESCRIPTION OF RATINGS
Ratings by Moody's and S&P represent opinions of those organizations as to the
investment quality of the rated obligations. Investors should realize these
ratings do not constitute a guarantee that the principal and interest payable
under these obligations will be paid when due.
DESCRIPTION OF BOND RATINGS
MOODY'S
INVESTMENT GRADE DESCRIPTIONS:
Aaa -- Bonds which are rated Aaa are judged to be of the best-quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BELOW INVESTMENT GRADE DESCRIPTIONS:
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa 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.
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<PAGE>
C -- Bonds which are rated C are the lowest-rated class of bonds. Issues so
rated have extremely poor prospects of ever attaining any real investment
standing.
S&P
INVESTMENT GRADE DESCRIPTIONS:
AAA -- Debt rated "AAA" has the highest rating assigned by S&P's. Capacity to
pay interest and repay principal is extremely strong.
AA -- Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small degree.
A -- Debt rated "A" has a very strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB -- Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas, it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BELOW INVESTMENT GRADE DESCRIPTIONS:
BB, B, CCC, CC, 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.
BB -- Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B -- Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
CCC -- Debt rated "CCC" has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The "CCC" rating category
is also used for debt subordinated to senior debt that
is assigned an actual or implied "B" or "B-" rating.
CC -- The rating "CC" typically is applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
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C -- The rating "C" is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The "C" rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
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 payment
will be made during such grace period. The "D" rating also will be used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-): Ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
MOODY'S
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations with an original maturity not exceeding one
year.
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 debt 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.
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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.
DESCRIPTION OF RATINGS FOR MUNICIPAL NOTES,
TAX-EXEMPT DEMAND NOTES AND OTHER SHORT-TERM OBLIGATIONS
MOODY'S
Moody's rates municipal notes and other short-term obligations using Moody's
Investment Grade (MIG). A short-term obligation having a demand feature (a
variable-rate demand obligation) will be designated VMIG. This distinction
recognizes differences between short-term credit risk and long-term credit risk
as well as differences between short-term issues making payments on fixed
maturity dates (MIG) and those making payments on periodic demand (VMIG).
MIG/VMIG 1: This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broadbased access to the market for refinancing.
MIG 2/VMIG 2: This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG/VMIG 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
Standard & Poor's note rating. These ratings reflect liquidity concerns and
market access risks unique to notes. Notes due in three years or less will
likely receive a note rating.
SP-1 Very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
Standard & Poor's assigns "dual" ratings to all long-term debt issues that have
as part of their provisions a demand or double feature.
The first rating addresses the likelihood of repayment of principal and interest
as due, and the second rating addresses only the demand feature. The long-term
debt rating symbols are used for bonds to denote the long-term maturity and the
commercial paper rating symbols are used to denote the put option (for example,
"AAA/A-1+"). For the newer "demand notes," Standard & Poor's note rating
symbols, combined with the commercial paper symbols, are used (for example, "SP-
1+/A-1+").
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SAFECO TAX-EXEMPT BOND TRUST
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
PART A
None
PART B
The following financial statements for each series of the Registrant and the
report thereon of Ernst & Young LLP, independent auditors, are incorporated by
reference into Part B of this Registration Statement ^:
Portfolio of Investments as of December 31, 1996
Statement of Assets and Liabilities as of December 31, 1996
Statement of Operations for the Period Ended December 31, 1996
Statement of Changes in Net Assets for the Nine Month Period Ended
December 31, 1996 and for the Year Ended March 31, 1996
Notes to Financial Statements
The following financial statements for the Intermediate-Term U.S. Treasury, GNMA
and High-Yield Bond Funds and the report thereon of Ernst & Young LLP,
independent auditors, are incorporated by reference into Part B of this
Registration Statement:
Portfolio of Investments as of December 31, 1996
Statement of Assets and Liabilities as of December 31, 1996
Statement of Operations for the Periods Ended December 31, 1996 and
September 30, 1996
Statement of Changes in Net Assets for the Three-Month Period Ended
December 31, 1996 and the Years ended September 30, 1996 and September
30, 1995
Notes to Financial Statements
The following financial statements for the Managed Bond Fund and the report
thereon by Ernst & Young, LLP, independent auditors, are incorporated by
reference into Part B of this Registration Statement:
Portfolio of Investments as of December 31, 1996
Statement of Assets and Liabilities as of December 31, 1996
Statement of Operations for the Year ended December 31, 1996
<PAGE>
Statement of Changes in Net Assets for the Years Ended December 31, 1996
and December 31, 1996
Notes to Financial Statements
The following financial statements for the Money Market and Tax-Free Money
Market Funds and the report thereon of Ernst & Young, LLP, independent
auditors, are incorporated by reference into Part B of this Registration
Statement:
Portfolio of Investments as of December 31, 1996
Statement of Assets and Liabilities as of December 31, 1996
Statement of Operations for the Period Ended December 31, 1996
Statement of Changes in Net Assets for the Nine-Month Period Ended
December 31, 1996 and for the Year Ended March 31, 1996
Notes to Financial Statements
(b) Exhibits:
Exhibit
Number Description of Document Page
- ------ ----------------------- ----
(27.1-11) Financial Data Schedules
(1) Trust Instrument/Certificate of Trust *
(2) Bylaws *
(3) Inapplicable
(4) Form of Stock Certificate *
(5) Investment Advisory and Management Contract *
(6) Form of Distribution Agreement
Form of Selling Dealer Agreement ***
(7) Inapplicable
(99.8) Custody Agreement with State Street Bank and Trust
Company
(9) Form of Transfer Agent Agreement ***
(10) Opinion and Consent of Counsel for *
No-Load Class
Opinion and Consent of Counsel for ***
Advisor Class A and Advisor Class B
(99.11) Consent of Independent Auditors
C-2
<PAGE>
(12) Registrant's Annual Report for the Period Ended +
December 31, 1996 Including Financial Statements
Annual Reports for SAFECO Taxable Bond Trust and +
SAFECO Managed Bond Trust for the Period
Ended December 31, 1996 Including Financial Statements
Annual Report for SAFECO Money Market Trust for +
the Period Ended December 31, 1996 Including
Financial Statements
(13) Subscription Agreement *
(14) Prototype 401(k)/Profit Sharing Plan **
(15) Rule 12b-1 Plan (Advisor Class A) ***
Rule 12b-1 Plan (Advisor Class B)
(16) Calculation of Performance Information- *
No-Load Class
Calculation of Performance Information- ***
Advisor Class A
Calculation of Performance Information- ***
Advisor Class B
(17) See Exhibit 27.1-11
(18) Rule 18f-3 Plan ***
* Filed as an exhibit to Post-Effective Amendment No. 4 filed with the SEC on
May 30, 1995.
** Filed as an exhibit to Post-Effective Amendment No. 8 of the SAFECO Common
Stock Trust filed with the SEC on November 17, 1995.
*** Filed as an exhibit to Post-Effective Amendment No. 8 of the SAFECO Tax-
Exempt Bond Trust filed with the SEC on August 1, 1996
+ Annual Reports for the Advisor Classes and the No-Load Class of the
Registrant, SAFECO Taxable Bond Trust and SAFECO Managed Bond Trust and
SAFECO Money Market Trust were filed with the SEC on or about
February 26, 1997. ^
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
SAFECO Corporation, a Washington corporation, owns 100% of SAFECO Asset
Management Company (SAM), SAFECO Services Corporation (SAFECO Services) and
C-3
<PAGE>
SAFECO Securities, Inc. (SAFECO Securities), each a Washington corporation. SAM
is the investment advisor, SAFECO Services is the transfer agent and SAFECO
Securities is the principal underwriter for each of the SAFECO Mutual Funds.
The SAFECO Mutual Funds consist of six Delaware business trusts: SAFECO Common
Stock Trust, SAFECO Taxable Bond Trust, SAFECO Tax-Exempt Bond Trust, SAFECO
Money Market Trust, SAFECO Managed Bond Trust (formerly SAFECO Institutional
Series Trust) and SAFECO Resource Series Trust. The SAFECO Common Stock Trust
consists of eight mutual funds: SAFECO Growth Fund, SAFECO Equity Fund, SAFECO
Income Fund, SAFECO Northwest Fund, SAFECO International Stock Fund, SAFECO
Balanced Fund ^, SAFECO Small Company Stock Fund and SAFECO U.S. Value Fund.
The SAFECO Taxable Bond Trust consists of three mutual funds: SAFECO
Intermediate-Term U.S. Treasury Fund, SAFECO GNMA Fund and SAFECO High-Yield
Bond Fund. The SAFECO Tax-Exempt Bond Trust consists of five mutual funds:
SAFECO Intermediate-Term Municipal Bond Fund, SAFECO Insured Municipal Bond
Fund, SAFECO Municipal Bond Fund, SAFECO California Tax-Free Income Fund and
SAFECO Washington State Municipal Bond Fund. The SAFECO Money Market Trust
consists of two mutual funds: SAFECO Money Market Fund and SAFECO Tax-Free Money
Market Fund. The SAFECO Managed Bond Trust consists of one mutual fund: Managed
Bond Fund (formerly SAFECO Fixed Income Portfolio). The SAFECO Resource Series
Trust consists of six mutual funds: Equity Portfolio, Growth Portfolio,
Northwest Portfolio, Bond Portfolio, Small Company Stock Portfolio and Money
Market Portfolio.
SAFECO Corporation, a Washington corporation, owns 100% of the following
Washington corporations: SAFECO Insurance Company of America, General Insurance
Company of America, First National Insurance Company of America, SAFECO Life
Insurance Company of America, SAFECO Assigned Benefits Service Company, SAFECO
Administrative Services, Inc., SAFECO Properties Inc., SAFECO Credit Company,
Inc., SAFECO Asset Management Company, SAFECO Securities, Inc., SAFECO Services
Corporation, SAFECO Trust Company and General America Corporation. SAFECO
Corporation owns 100% of SAFECO National Insurance Company, a Missouri
corporation, and SAFECO Insurance Company of Illinois, an Illinois corporation.
SAFECO Corporation owns 20% of Agena, Inc., a Washington corporation. SAFECO
Insurance Company of America owns 100% of SAFECO Surplus Lines Insurance
Company, a Washington corporation, and Market Square Holding, Inc., a Minnesota
corporation. SAFECO Life Insurance Company owns 100% of SAFECO National Life
Insurance Company, a Washington corporation, and First SAFECO National Life
Insurance Company of New York, a New York corporation. SAFECO Administrative
Services, Inc. owns 100% of Employee Benefit Claims of Wisconsin, Inc. and
Wisconsin Pension and Group Services, Inc., each a Wisconsin corporation.
General America Corporation owns 100% of COMAV Managers, Inc., an Illinois
corporation, F.B. Beattie & Co., Inc., a Washington corporation, General America
Corp. of Texas, a Texas corporation, Talbot Financial Corporation, a Washington
corporation and SAFECO Select Insurance Services, Inc., a California
Corporation. F.B. Beattie & Co., Inc. owns 100% of F.B. Beattie Insurance
Services, Inc., a California corporation. General America Corp. of Texas is
Attorney-in-fact for SAFECO Lloyds Insurance Company, a Texas corporation.
Talbot Financial Corporation owns 100% of Talbot Agency, Inc., a New Mexico
corporation. Talbot Agency, Inc. owns 100% of PNMR Securities, Inc., a
Washington corporation. SAFECO Properties Inc. owns 100% of the following, each
a Washington corporation: RIA Development, Inc., SAFECARE Company, Inc. and
Winmar Company, Inc. SAFECARE Company, Inc.
C-4
<PAGE>
owns 100% of the following, each a Washington corporation: S.C. Bellevue, Inc.,
S.C. Everett, Inc., S.C. Marysville, Inc., S.C. Simi Valley, Inc. and S.C.
Vancouver, Inc. SAFECARE Company, Inc. owns 50% of Lifeguard Ventures, Inc., a
California corporation, 50% of Mission Oaks Hospital, Inc., a California
corporation, S.C. River Oaks, Inc., a Washington corporation, Mississippi Health
Services, Inc. a Louisiana corporation, and Safecare Texas, Inc., a Texas
corporation. S.C. Simi Valley, Inc. owns 100% of Simi Valley Hospital, Inc., a
Washington corporation. Winmar Company, Inc. owns 100% of the following: Barton
Street Corp., C-W Properties, Inc., Gem State Investors, Inc., Kitsap Mall,
Inc., WNY Development, Inc., Winmar Cascade, Inc., Winmar Metro, Inc., Winmar
Northwest, Inc., Winmar Redmond, Inc. and Winmar of Kitsap, Inc., each a
Washington corporation, and Capitol Court Corp., a Wisconsin corporation, SAFECO
Properties of Boise, Inc., an Idaho corporation, SCIT, Inc., a Massachusetts
corporation, Valley Fair Shopping Centers, Inc., a Delaware corporation, WDI
Golf Club, Inc., a California corporation, Winmar Oregon, Inc., an Oregon
corporation, Winmar of Texas, Inc., a Texas corporation, Winmar of Wisconsin,
Inc., a Wisconsin corporation, and Winmar of the Desert, Inc., a California
corporation. Winmar Oregon, Inc. owns 100% of the following, each an Oregon
corporation: North Coast Management, Inc., Pacific Surfside Corp., Winmar of
Jantzen Beach, Inc. and W-P Development, Inc., and 100% of the following, each a
Washington corporation: Washington Square, Inc. and Winmar Pacific, Inc.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
At April 2, 1997 Registrant had the following shareholders of record in its
No-Load, Advisor Class A and Advisor Class B shares:
Title of Class Number of Shareholders
of Record
SAFECO MUNICIPAL BOND FUND
No-Load Class 10,182
Advisor Class A 21
Advisor Class B 3
SAFECO CALIFORNIA TAX-FREE INCOME FUND
No-Load Class 1,543
Advisor Class A 2
Advisor Class B 1
SAFECO WASHINGTON MUNICIPAL BOND FUND
No-Load Class 68
Advisor Class A 6
C-5
<PAGE>
Title of Class Number of Shareholders
of Record
Advisor Class B 7
SAFECO INTERMEDIATE-TERM MUNICIPAL BOND FUND
No-Load Class 326
SAFECO INSURED MUNICIPAL BOND FUND
No-Load Class 326
ITEM 27. INDEMNIFICATION
Under the Trust Instrument of the Registrant, the Registrant's trustees,
officers, employees and agents are indemnified against certain liabilities,
subject to specified conditions and limitations.
Under the indemnification provisions in the Registrant's Trust Instrument and
subject to the limitations described in the paragraph below, every person who
is, or has been, a trustee, officer, employee or agent of the Registrant shall
be indemnified by the Registrant or the appropriate Series of the Registrant to
the fullest extent permitted by law against liability and against all expenses
reasonably incurred or paid by him or her in connection with any claim, action,
suit or proceeding in which he or she becomes involved as a party or otherwise
by virtue of his or her being, or having been, a trustee, officer, employee or
agent and against amounts paid or incurred by him or her in the settlement
thereof. As used in this paragraph, "claim," "action," "suit" or "proceeding"
shall apply to all claims, actions, suits or proceedings (civil, criminal or
other, including appeals), actual or threatened, and the words "liability" and
"expenses" shall include, without limitation, attorneys' fees, costs,
judgements, amounts paid in settlement, fines, penalties and other liabilities.
No indemnification will be provided to a trustee, officer, employee or agent:
(i) who shall have been adjudicated by a court or body before which the
proceeding was brought (a) to be liable to the Registrant or its shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office, or (b) not to have
acted in good faith in the reasonable belief that his or her action was in the
best interest of the Registrant; or (ii) in the event of settlement, unless
there has been a determination that such trustee, officer, employee or agent did
not engage in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office; (a) by the
court or other body approving the settlement, (b) by the vote of at least a
majority of a quorum of those trustees who are neither interested persons, as
that term is defined by the Investment Company Act of 1940, of the Registrant
nor are the parties to the proceeding based upon a review of readily available
facts (as opposed to a full trial type inquiry);
C-6
<PAGE>
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 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.
C-7
<PAGE>
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"), 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 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The investment adviser to the Registrant, SAFECO Asset Management Company,
serves as an adviser to: (a) twenty-five series (portfolios) of six registered
investment companies, including six series of an investment company that serves
as an investment vehicle for variable insurance products and (b) a number of
pension funds not affiliated with SAFECO Corporation or its affiliates. The
directors and officers of SAM serve in similar capacities with SAFECO
Corporation or its affiliates. The information set forth under "Investment
Advisory and Other Services" in the Statement of Additional Information is
incorporated by reference.
ITEM 29. PRINCIPAL UNDERWRITER
(a) SAFECO Securities, Inc., the principal underwriter for each class of each
series of Registrant, also acts as the principal underwriter for each class
of each series of the SAFECO Common Stock Trust, SAFECO Taxable Bond Trust,
SAFECO Money Market Trust, SAFECO Managed Bond Trust. SAFECO Resource
Series Trust and SAFECO Advisor Series Trust. In addition, SAFECO
Securities Inc. is the principal underwriter for SAFECO Separate Account C,
SAFECO Variable Account B and SAFECO Separate Account SL, all of which are
variable insurance products.
C-8
<PAGE>
(b) The information set forth under "Investment Advisory and Other Services" in
the Statement of Additional Information is incorporated by reference.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
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, SAFECO Plaza, Seattle, Washington, 98185, maintains
physical possession of all other accounts, books or documents of the Registrant
required to be maintained by Section 31(a) of the Investment Company Act of 1940
and the rules promulgated thereunder.
ITEM 31. MANAGEMENT SERVICES
Inapplicable.
ITEM 32. UNDERTAKINGS
Registrant undertakes to furnish each person to whom a prospectus is delivered
with a copy of the Registrant's latest annual report to shareholders, upon
request and without charge.
C-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned thereto duly authorized,
in the City of Seattle and State of Washington on the 29th day of ^
April, 1997.
SAFECO TAX-EXEMPT BOND TRUST
By /s/David F. Hill
---------------------------------
David F. Hill, President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
Name Title Date
---- ----- ----
/s/David F. Hill President and Trustee 4/29/97
- --------------------------- Principal Executive Officer -------
David F. Hill
RONALD L. SPAULDING* Vice President 4/29/97
- --------------------------- Treasurer -------
Ronald L. Spaulding
NEAL A FULLER* Vice President, Controller 4/29/97
- --------------------------- and Assistant Secretary -------
Neal A. Fuller
/s/Boh A. Dickey Chairman and Trustee 4/29/97
- --------------------------- -------
Boh A. Dickey
BARBARA J. DINGFIELD* Trustee 4/29/97
- --------------------------- -------
Barbara J. Dingfield
RICHARD W. HUBBARD*++ Trustee 4/29/97
- --------------------------- -------
Richard W. Hubbard
RICHARD E. LUNDGREN* Trustee 4/29/97
- --------------------------- -------
Richard E. Lundgren
LARRY L. PINNT* Trustee 4/29/97
- --------------------------- -------
Larry L. Pinnt
JOHN W. SCHNEIDER* Trustee 4/29/97
- --------------------------- -------
John W. Schneider
*By: /s/Boh A. Dickey
------------------------------
Boh A. Dickey
*By: /s/David F. Hill
------------------------------
David F. Hill
Attorney-in-Fact
++ Trustees who are interested persons as defined by the 1940 Act.
<PAGE>
SAFECO TAX-EXEMPT BOND TRUST
Form N-1A
Post-Effective Amendment No. 10 ^
Exhibit Index
Exhibit
Number Description of Document Page
- ------- ----------------------- ----
(27.1-11) Financial Data Schedules
(99.8) Custody Agreement with State Street Bank and Trust
Company
(99.11) Consent of Independent Auditors
(99.12) Registrant's Annual Report*
*Registrant's Annual Report was Filed with the SEC on or about February 26,
1997.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE TAX-EXEMPT BOND TRUST AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000893565
<NAME> SAFECO TAX EXEMPT BOND TRUST
<SERIES>
<NUMBER> 1
<NAME> SAFECO MUNICIPAL BOND FUND CLASS 1
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 429,268
<INVESTMENTS-AT-VALUE> 479,642
<RECEIVABLES> 8,940
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 488,582
<PAYABLE-FOR-SECURITIES> 5,152
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,037
<TOTAL-LIABILITIES> 7,189
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 432,304
<SHARES-COMMON-STOCK> 34,432
<SHARES-COMMON-PRIOR> 35,106
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,285)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 50,374
<NET-ASSETS> 481,393
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 21,820
<OTHER-INCOME> 0
<EXPENSES-NET> 1,917
<NET-INVESTMENT-INCOME> 19,903
<REALIZED-GAINS-CURRENT> 2,341
<APPREC-INCREASE-CURRENT> 7,844
<NET-CHANGE-FROM-OPS> 30,088
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (19,903)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,689
<NUMBER-OF-SHARES-REDEEMED> (6,271)
<SHARES-REINVESTED> 908
<NET-CHANGE-IN-ASSETS> 750
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (3,626)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,533
<INTEREST-EXPENSE> 6
<GROSS-EXPENSE> 1,917
<AVERAGE-NET-ASSETS> 479,953
<PER-SHARE-NAV-BEGIN> 13.69
<PER-SHARE-NII> 0.57
<PER-SHARE-GAIN-APPREC> 0.29
<PER-SHARE-DIVIDEND> (0.57)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.98
<EXPENSE-RATIO> 0.53
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE TAX-EXEMPT BOND TRUST AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000893565
<NAME> SAFECO TAX EXEMPT BOND TRUST
<SERIES>
<NUMBER> 2
<NAME> SAFECO MUNICIPAL BOND FUND CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 429,268
<INVESTMENTS-AT-VALUE> 479,642
<RECEIVABLES> 8,900
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 488,582
<PAYABLE-FOR-SECURITIES> 5,152
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,037
<TOTAL-LIABILITIES> 7,189
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 432,304
<SHARES-COMMON-STOCK> 34,432
<SHARES-COMMON-PRIOR> 35,106
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,285)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 50,374
<NET-ASSETS> 481,393
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 21,820
<OTHER-INCOME> 0
<EXPENSES-NET> 1,197
<NET-INVESTMENT-INCOME> 19,903
<REALIZED-GAINS-CURRENT> 2,341
<APPREC-INCREASE-CURRENT> 7,844
<NET-CHANGE-FROM-OPS> 30,088
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (19,903)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,689
<NUMBER-OF-SHARES-REDEEMED> (6,271)
<SHARES-REINVESTED> 908
<NET-CHANGE-IN-ASSETS> 750
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (3,626)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,533
<INTEREST-EXPENSE> 6
<GROSS-EXPENSE> 1,917
<AVERAGE-NET-ASSETS> 479,953
<PER-SHARE-NAV-BEGIN> 13.82
<PER-SHARE-NII> 0.18
<PER-SHARE-GAIN-APPREC> 0.17
<PER-SHARE-DIVIDEND> (0.18)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.99
<EXPENSE-RATIO> 0.82
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE TAX-EXEMPT BOND TRUST AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000893565
<NAME> SAFECO TAX EXEMPT BOND TRUST
<SERIES>
<NUMBER> 3
<NAME> SAFECO MUNICIPAL BOND FUND CLASS B
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 429,268
<INVESTMENTS-AT-VALUE> 479,642
<RECEIVABLES> 8,940
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 488,582
<PAYABLE-FOR-SECURITIES> 5,152
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,037
<TOTAL-LIABILITIES> 7,189
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 432,304
<SHARES-COMMON-STOCK> 34,432
<SHARES-COMMON-PRIOR> 35,106
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,285)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 50,374
<NET-ASSETS> 481,393
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 21,820
<OTHER-INCOME> 0
<EXPENSES-NET> 1,917
<NET-INVESTMENT-INCOME> 19,903
<REALIZED-GAINS-CURRENT> 2,341
<APPREC-INCREASE-CURRENT> 7,844
<NET-CHANGE-FROM-OPS> 30,088
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (19,903)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,689
<NUMBER-OF-SHARES-REDEEMED> (6,271)
<SHARES-REINVESTED> 908
<NET-CHANGE-IN-ASSETS> 750
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (3,626)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,533
<INTEREST-EXPENSE> 6
<GROSS-EXPENSE> 1,917
<AVERAGE-NET-ASSETS> 479,953
<PER-SHARE-NAV-BEGIN> 13.82
<PER-SHARE-NII> 0.15
<PER-SHARE-GAIN-APPREC> 0.16
<PER-SHARE-DIVIDEND> (0.15)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.98
<EXPENSE-RATIO> 1.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE TAX-EXEMPT BOND TRUST AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000893565
<NAME> SAFECO TAX EXEMPT BOND TRUST
<SERIES>
<NUMBER> 4
<NAME> SAFECO CALIFORNIA TAX FREE INCOME FUND CLASS 1
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 65,281
<INVESTMENTS-AT-VALUE> 71,400
<RECEIVABLES> 1,286
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 72,686
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 379
<TOTAL-LIABILITIES> 379
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 66,188
<SHARES-COMMON-STOCK> 5,915
<SHARES-COMMON-PRIOR> 5,948
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,119
<NET-ASSETS> 72,307
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,132
<OTHER-INCOME> 0
<EXPENSES-NET> 366
<NET-INVESTMENT-INCOME> 2,766
<REALIZED-GAINS-CURRENT> 197
<APPREC-INCREASE-CURRENT> 2,196
<NET-CHANGE-FROM-OPS> 5,159
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,766)
<DISTRIBUTIONS-OF-GAINS> (200)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,648
<NUMBER-OF-SHARES-REDEEMED> (1,849)
<SHARES-REINVESTED> 168
<NET-CHANGE-IN-ASSETS> 1,761
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 3
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 290
<INTEREST-EXPENSE> 1
<GROSS-EXPENSE> 366
<AVERAGE-NET-ASSETS> 70,819
<PER-SHARE-NAV-BEGIN> 11.86
<PER-SHARE-NII> 0.47
<PER-SHARE-GAIN-APPREC> 0.39
<PER-SHARE-DIVIDEND> (0.47)
<PER-SHARE-DISTRIBUTIONS> (0.03)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.22
<EXPENSE-RATIO> 0.69
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE TAX-EXEMPT BOND TRUST AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000893565
<NAME> SAFECO TAX EXEMPT BOND TRUST
<SERIES>
<NUMBER> 5
<NAME> SAFECO CALIFORNIA TAX FREE INCOME FUND CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 65,281
<INVESTMENTS-AT-VALUE> 71,400
<RECEIVABLES> 1,286
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 72,686
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 379
<TOTAL-LIABILITIES> 379
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 66,188
<SHARES-COMMON-STOCK> 5,915
<SHARES-COMMON-PRIOR> 5,948
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,119
<NET-ASSETS> 72,307
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,132
<OTHER-INCOME> 0
<EXPENSES-NET> 366
<NET-INVESTMENT-INCOME> 2,766
<REALIZED-GAINS-CURRENT> 197
<APPREC-INCREASE-CURRENT> 2,196
<NET-CHANGE-FROM-OPS> 5,159
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,766)
<DISTRIBUTIONS-OF-GAINS> (200)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,648
<NUMBER-OF-SHARES-REDEEMED> (1,849)
<SHARES-REINVESTED> 168
<NET-CHANGE-IN-ASSETS> 1,761
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 3
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 290
<INTEREST-EXPENSE> 1
<GROSS-EXPENSE> 366
<AVERAGE-NET-ASSETS> 70,819
<PER-SHARE-NAV-BEGIN> 12.07
<PER-SHARE-NII> 0.15
<PER-SHARE-GAIN-APPREC> 0.19
<PER-SHARE-DIVIDEND> (0.15)
<PER-SHARE-DISTRIBUTIONS> (0.03)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.23
<EXPENSE-RATIO> 0.89
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE TAX-EXEMPT BOND TRUST AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000893565
<NAME> SAFECO TAX EXEMPT BOND TRUST
<SERIES>
<NUMBER> 6
<NAME> SAFECO CALIFORNIA TAX FREE INCOME FUND CLASS B
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 65,281
<INVESTMENTS-AT-VALUE> 71,400
<RECEIVABLES> 1,286
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 72,686
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 379
<TOTAL-LIABILITIES> 379
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 66,188
<SHARES-COMMON-STOCK> 5,915
<SHARES-COMMON-PRIOR> 5,948
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,119
<NET-ASSETS> 72,307
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,132
<OTHER-INCOME> 0
<EXPENSES-NET> 366
<NET-INVESTMENT-INCOME> 2,766
<REALIZED-GAINS-CURRENT> 197
<APPREC-INCREASE-CURRENT> 2,196
<NET-CHANGE-FROM-OPS> 5,159
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,766)
<DISTRIBUTIONS-OF-GAINS> (200)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,648
<NUMBER-OF-SHARES-REDEEMED> (1,849)
<SHARES-REINVESTED> 168
<NET-CHANGE-IN-ASSETS> 1,761
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 3
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 290
<INTEREST-EXPENSE> 1
<GROSS-EXPENSE> 366
<AVERAGE-NET-ASSETS> 70,819
<PER-SHARE-NAV-BEGIN> 12.07
<PER-SHARE-NII> 0.12
<PER-SHARE-GAIN-APPREC> 0.18
<PER-SHARE-DIVIDEND> (0.12)
<PER-SHARE-DISTRIBUTIONS> (0.03)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.22
<EXPENSE-RATIO> 1.64
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE TAX-EXEMPT BOND TRUST AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000893565
<NAME> SAFECO TAX EXEMPT BOND TRUST
<SERIES>
<NUMBER> 7
<NAME> SAFECO INTERMEDIATE TERM MUNICIPAL BOND FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 13,614
<INVESTMENTS-AT-VALUE> 13,998
<RECEIVABLES> 214
<ASSETS-OTHER> 8
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 14,220
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 48
<TOTAL-LIABILITIES> 48
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 13,809
<SHARES-COMMON-STOCK> 1,336
<SHARES-COMMON-PRIOR> 1,428
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (21)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 384
<NET-ASSETS> 14,172
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 568
<OTHER-INCOME> 0
<EXPENSES-NET> 95
<NET-INVESTMENT-INCOME> 473
<REALIZED-GAINS-CURRENT> (7)
<APPREC-INCREASE-CURRENT> 162
<NET-CHANGE-FROM-OPS> 628
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (473)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 176
<NUMBER-OF-SHARES-REDEEMED> (293)
<SHARES-REINVESTED> 25
<NET-CHANGE-IN-ASSETS> (809)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (15)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 60
<INTEREST-EXPENSE> 1
<GROSS-EXPENSE> 95
<AVERAGE-NET-ASSETS> 14,334
<PER-SHARE-NAV-BEGIN> 10.49
<PER-SHARE-NII> 0.35
<PER-SHARE-GAIN-APPREC> 0.12
<PER-SHARE-DIVIDEND> (0.35)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.61
<EXPENSE-RATIO> 0.89
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE TAX-EXEMPT BOND TRUST AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000893565
<NAME> SAFECO TAX EXEMPT BOND TRUST
<SERIES>
<NUMBER> 8
<NAME> SAFECO INSURED MUNICIPAL BOND FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 13,445
<INVESTMENTS-AT-VALUE> 14,176
<RECEIVABLES> 222
<ASSETS-OTHER> 5
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 14,403
<PAYABLE-FOR-SECURITIES> 601
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 615
<TOTAL-LIABILITIES> 1,216
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12,530
<SHARES-COMMON-STOCK> 1,227
<SHARES-COMMON-PRIOR> 1,124
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (74)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 731
<NET-ASSETS> 13,187
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 526
<OTHER-INCOME> 0
<EXPENSES-NET> 92
<NET-INVESTMENT-INCOME> 434
<REALIZED-GAINS-CURRENT> (19)
<APPREC-INCREASE-CURRENT> 386
<NET-CHANGE-FROM-OPS> 801
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (434)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 458
<NUMBER-OF-SHARES-REDEEMED> (368)
<SHARES-REINVESTED> 13
<NET-CHANGE-IN-ASSETS> 1,429
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (55)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 60
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 92
<AVERAGE-NET-ASSETS> 12,396
<PER-SHARE-NAV-BEGIN> 10.46
<PER-SHARE-NII> 0.37
<PER-SHARE-GAIN-APPREC> 0.28
<PER-SHARE-DIVIDEND> (0.37)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.74
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE TAX-EXEMPT BOND TRUST AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000893565
<NAME> SAFECO TAX EXEMPT BOND TRUST
<SERIES>
<NUMBER> 9
<NAME> SAFECO WASHINGTON STATE MUNICIPAL BOND FUND CLASS 1
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 6,750
<INVESTMENTS-AT-VALUE> 7,038
<RECEIVABLES> 108
<ASSETS-OTHER> 2
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7,148
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 43
<TOTAL-LIABILITIES> 43
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,817
<SHARES-COMMON-STOCK> 675
<SHARES-COMMON-PRIOR> 628
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 288
<NET-ASSETS> 7,105
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 294
<OTHER-INCOME> 0
<EXPENSES-NET> 56
<NET-INVESTMENT-INCOME> 238
<REALIZED-GAINS-CURRENT> 4
<APPREC-INCREASE-CURRENT> 125
<NET-CHANGE-FROM-OPS> 367
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (238)
<DISTRIBUTIONS-OF-GAINS> (4)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 78
<NUMBER-OF-SHARES-REDEEMED> (35)
<SHARES-REINVESTED> 4
<NET-CHANGE-IN-ASSETS> 616
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 32
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 56
<AVERAGE-NET-ASSETS> 6,669
<PER-SHARE-NAV-BEGIN> 10.34
<PER-SHARE-NII> 0.37
<PER-SHARE-GAIN-APPREC> 0.20
<PER-SHARE-DIVIDEND> (0.37)
<PER-SHARE-DISTRIBUTIONS> (0.01)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.53
<EXPENSE-RATIO> 1.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE TAX-EXEMPT BOND TRUST AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000893565
<NAME> SAFECO TAX EXEMPT BOND TRUST
<SERIES>
<NUMBER> 10
<NAME> SAFECO WASHINGTON STATE MUNICIPAL BOND FUND CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 6,750
<INVESTMENTS-AT-VALUE> 7,038
<RECEIVABLES> 108
<ASSETS-OTHER> 2
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7,148
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 43
<TOTAL-LIABILITIES> 43
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,817
<SHARES-COMMON-STOCK> 675
<SHARES-COMMON-PRIOR> 628
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 288
<NET-ASSETS> 7,105
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 294
<OTHER-INCOME> 0
<EXPENSES-NET> 56
<NET-INVESTMENT-INCOME> 238
<REALIZED-GAINS-CURRENT> 4
<APPREC-INCREASE-CURRENT> 125
<NET-CHANGE-FROM-OPS> 367
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (238)
<DISTRIBUTIONS-OF-GAINS> (4)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 78
<NUMBER-OF-SHARES-REDEEMED> (35)
<SHARES-REINVESTED> 4
<NET-CHANGE-IN-ASSETS> 616
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 32
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 56
<AVERAGE-NET-ASSETS> 6,669
<PER-SHARE-NAV-BEGIN> 10.45
<PER-SHARE-NII> 0.12
<PER-SHARE-GAIN-APPREC> 0.09
<PER-SHARE-DIVIDEND> (0.12)
<PER-SHARE-DISTRIBUTIONS> (0.01)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.53
<EXPENSE-RATIO> 1.31
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE TAX-EXEMPT BOND TRUST AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000893565
<NAME> SAFECO TAX EXEMPT BOND TRUST
<SERIES>
<NUMBER> 11
<NAME> SAFECO WASHINGTON STATE MUNICIPAL BOND FUND CLASS B
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
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</TABLE>
<PAGE>
CUSTODIAN CONTRACT
Between
SAFECO TAX-EXEMPT BOND TRUST
and
STATE STREET BANK AND TRUST COMPANY
Trust/Series
<PAGE>
TABLE OF CONTENTS
Page
----
1. Employment of Custodian and Property to be Held By
It.......................................................................1
2. Duties of the Custodian with Respect to Property
of the Trust Held by the Custodian ......................................2
2.1 Holding Securities.................................................2
2.2 Delivery of Securities.............................................2
2.3 Registration of Securities.........................................3
2.4 Bank Accounts......................................................4
2.5 Payments for Shares................................................4
2.6 Collection of Income...............................................4
2.7 Payment of Trust Monies............................................4
2.8 Liability for Payment in Advance of
Receipt of Securities Purchased....................................5
2.9 Payments for Repurchases or Redemptions
of Shares of the Trust.............................................6
2.10 Appointment of Agents..............................................6
2.11 Deposit of Trust Assets in Securities System.......................6
2.12 Trust Assets Held in the Custodian's Direct
Paper System.......................................................7
2.13 Ownership Certificates for Tax Purposes............................8
2.14 Proxies............................................................8
2.15 Communications Relating to Portfolio
Securities.........................................................8
2.16 Proper Instructions................................................9
2.17 Actions Permitted Without Express Authority........................9
2.18 Evidence of Authority..............................................9
3. Duties of Custodian With Respect to the Books of
Account and Calculation of Net Asset Value and
Net Income..............................................................10
4. Records.................................................................10
5. Reports to Trust by Independent Public Accountants......................10
6. Compensation of Custodian...............................................10
7. Responsibility of Custodian..............................................10
<PAGE>
8. Effective Period, Termination and Amendment.............................11
9. Successor Custodian.....................................................12
10. Interpretive and Additional Provisions..................................12
11. Additional Funds........................................................13
12. Massachusetts Law to Apply..............................................13
13. Custodian Representation................................................13
14. Limitation of Liability.................................................13
15. Miscellaneous...........................................................13
16. Shareholder Communications..............................................14
<PAGE>
CUSTODIAN CONTRACT
This Contract between SAFECO Tax-Exempt Bond Trust , a business trust
organized and existing under the laws of Delaware, having its principal place of
business at SAFECO Plaza, Seattle, Washington 98185 hereinafter called the
"Trust", and State Street Bank and Trust Company, a Massachusetts trust company,
having its principal place of business at 225 Franklin Street, Boston,
Massachusetts, 02110, hereinafter called the "Custodian",
WITNESSETH:
WHEREAS, the Trust is authorized to issue shares in separate series, with
each such series representing interests in a separate portfolio of securities
and other assets; and
WHEREAS, the Trust currently offers shares in five series, the
Intermediate-Term Municipal Bond Fund, Insured Municipal Bond Fund, Municipal
Bond Fund, California Tax-Free Income Fund and Washington State Municipal Bond
Fund (such series together with all other series subsequently established by the
Trust and made subject to this Contract in accordance with paragraph 11, being
herein referred to as the "Portfolio(s)");
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. EMPLOYMENT OF CUSTODIAN AND PROPERTY TO BE HELD BY IT
The Trust hereby employs the Custodian as the custodian of the assets of
the Portfolios of the Trust pursuant to the provisions of the Trust Instrument
of the Trust and the Trust's Bylaws. The Trust on behalf of the Portfolio(s)
agrees to deliver to the Custodian all securities and cash of the Portfolios,
and all payments of income, payments of principal or capital distributions
received by it with respect to all securities owned by the Portfolio(s) from
time to time, and the cash consideration received by it for such new or treasury
shares of capital stock of the Trust representing interests in the Portfolios,
("Shares") as may be issued or sold from time to time. The Custodian shall not
be responsible for any property of a Portfolio held or received by the Portfolio
and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Section
2.16), the Custodian shall on behalf of the applicable Portfolio(s) from time to
time employ one or more sub-custodians, but only in accordance with an
applicable vote by the Board of Trustees of the Trust on behalf of the
applicable Portfolio(s). The Custodian covenants with the Trust that each
agreement whereby the Custodian employs any such sub-custodian shall provide
that the sub-custodian will be liable to the Custodian for losses and
liabilities caused by the negligence or willful misconduct of the sub-custodian.
The Trust, on behalf of the Portfolio(s), agrees that, so long as the Custodian
has complied with its obligation set forth in the preceding sentence, the
Custodian shall have no more or less responsibility or liability to the Trust on
account of any actions or omissions of any sub-custodian so employed by it on
behalf of the Trust than any such sub-custodian has to the Custodian.
<PAGE>
2. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE TRUST HELD BY THE
CUSTODIAN
2.1 HOLDING SECURITIES. The Custodian shall hold and physically segregate for
the account of each Portfolio all non-cash property, including all
securities owned by such Portfolio, other than (a) securities which are
maintained pursuant to Section 2.11 in a clearing agency which acts as a
securities depository or in a book-entry system authorized by the U.S.
Department of the Treasury, collectively referred to herein as
"Securities System" and (b) commercial paper of an issuer for which State
Street Bank and Trust Company acts as issuing and paying agent ("Direct
Paper") which is deposited and/or maintained in the Direct Paper System
of the Custodian pursuant to Section 2.12.
2.2 DELIVERY OF SECURITIES. The Custodian shall release and deliver
securities owned by a Portfolio held by the Custodian or in a Securities
System account of the Custodian or in the Custodian's Direct Paper book
entry system account ("Direct Paper System Account") only upon receipt of
Proper Instructions from the Trust on behalf of the applicable Portfolio,
which may be continuing instructions when deemed appropriate by the
parties, and only in the following cases:
1) Upon sale of such securities for the account of the Portfolio and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Portfolio;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.11 hereof;
4) To the depository agent in connection with tender or other similar
offers for securities of the Portfolio;
5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the
Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of
the Portfolio or into the name of any nominee or nominees of the
Custodian or into the name or nominee name of any agent appointed
pursuant to Section 2.10 or into the name or nominee name of any
sub-custodian appointed pursuant to Article 1; or for exchange for a
different number of bonds, certificates or other evidence
representing the same aggregate face amount or number of units;
PROVIDED that, in any such case, the new securities are to be
delivered to the Custodian;
7) Upon the sale of such securities for the account of the Portfolio, to
the broker or its clearing agent, against a receipt, for examination
in accordance with "street
2
<PAGE>
delivery" custom; provided that in any such case, the Custodian shall
have no responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for such
securities except as may arise from the Custodian's own negligence or
willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of
the securities of the issuer of such securities, or pursuant to
provisions for conversion contained in such securities, or pursuant
to any deposit agreement; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar
securities or the surrender of interim receipts or temporary
securities for definitive securities; provided that, in any such
case, the new securities and cash, if any, are to be delivered to the
Custodian;
10) Upon receipt of instructions from the transfer agent ("Transfer
Agent") for the Trust, for delivery to such Transfer Agent or to the
holders of Shares in connection with distributions in kind, as may be
described from time to time in the currently effective prospectus and
statement of additional information of the Trust, related to the
Portfolio ("Prospectus"), in satisfaction of requests by holders of
Shares for repurchase or redemption; and
11) For any other proper Trust purpose, BUT ONLY upon receipt of, in
addition to Proper Instructions from the Trust on behalf of the
applicable Portfolio, a certified copy of a resolution of the Board
of Trustees signed by an officer of the Trust and certified by the
Secretary or an Assistant Secretary, specifying the securities of the
Portfolio to be delivered, setting forth the purpose for which such
delivery is to be made, declaring such purpose to be a proper Trust
purpose, and naming the person or persons to whom delivery of such
securities shall be made.
2.3 REGISTRATION OF SECURITIES. Securities held by the Custodian (other than
bearer securities) shall be registered in the name of the Portfolio or in
the name of any nominee of the Trust on behalf of the Portfolio or of any
nominee of the Custodian which nominee shall be assigned exclusively to
the Portfolio. All securities accepted by the Custodian on behalf of the
Portfolio under the terms of this Contract shall be in "street name" or
other good delivery form. If, however, the Trust directs the Custodian to
maintain securities in "street name", the Custodian shall utilize its best
efforts only to timely collect income due the Trust on such securities and
to notify the Trust on a best efforts basis only of relevant corporate
actions including, without limitation, pendency of calls, maturities,
tender or exchange offers.
2.4 BANK ACCOUNTS. The Custodian shall open and maintain a separate bank
account or accounts in the name of each Portfolio of the Trust, subject
only order by the Custodian acting pursuant to the terms of this Contract,
and shall hold in such account or accounts,
3
<PAGE>
subject to the provisions hereof, all cash received by it from or for the
account of the Portfolio, other than cash maintained by the Portfolio in a
bank account established and used in accordance with Rule 17f-3 under the
Investment Company Act of 1940. Trusts held by the Custodian for a
Portfolio may be deposited by it to its credit as Custodian in the Banking
Department of the Custodian or in such other banks or trust companies as
it may in its discretion deem necessary or desirable; PROVIDED, however,
that every such bank or trust company shall be qualified to act as a
custodian under the Investment Company Act of 1940 and that each such bank
or trust company and the funds to be deposited with each such bank or
trust company shall on behalf of each applicable Portfolio be approved by
vote of a majority of the Board of Trustees of the Trust. Such funds
shall be deposited by the Custodian in its capacity as Custodian and shall
be withdrawable by the Custodian only in that capacity.
2.5 PAYMENTS FOR SHARES. The Custodian shall receive from the distributor for
the Shares or from the Transfer Agent of the Trust and deposit into the
account of the appropriate Portfolio such payments as are received for
Shares of that Portfolio issued or sold from time to time by the Trust.
The Custodian will provide timely notification to the Trust on behalf of
each such Portfolio and the Transfer Agent of any receipt by it of
payments for Shares of such Portfolio.
2.6 COLLECTION OF INCOME. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments
with respect to registered securities held hereunder to which each
Portfolio shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and
other payments with respect to bearer securities if, on the date of
payment by the issuer, such securities are held by the Custodian or its
agent thereof and shall credit such income, as collected, to such
Portfolio's custodian account. Without limiting the generality of the
foregoing, the Custodian shall detach and present for payment all coupons
and other income items requiring presentation as and when they become due
and shall collect interest when due on securities held hereunder.
2.7 PAYMENT OF TRUST MONIES. Upon receipt of Proper Instructions from the
Trust on behalf of the applicable Portfolio, which may be continuing
instructions when deemed appropriate by the parties, the Custodian shall
pay out monies of a Portfolio in the following cases only:
1) Upon the purchase of securities, options, futures contracts or
options on futures contracts for the account of the Portfolio but
only (a) against the delivery of such securities or evidence of title
to such options, futures contracts or options on futures contracts to
the Custodian (or any bank, banking firm or trust company doing
business in the United States or abroad which is qualified under the
Investment Company Act of 1940, as amended, to act as a custodian and
has been designated by the Custodian as its agent for this purpose)
registered in the name of the Portfolio or in the name of a nominee
of the Custodian referred to in Section 2.3 hereof or in proper form
for transfer; (b) in the case of a purchase effected through a
Securities System, in accordance with the conditions set forth in
Section 2.11 hereof; (c) in the
4
<PAGE>
case of a purchase involving the Direct Paper System, in accordance
with the conditions set forth in Section 2.12; (d) in the case of
repurchase agreements entered into between the Trust on behalf of the
Portfolio and the Custodian, or another bank, or a broker-dealer
which is a member of NASD, (i) against delivery of the securities
either in certificate form or through an entry crediting the
Custodian's account at the Federal Reserve Bank with such securities
or (ii) against delivery of the receipt evidencing purchase by the
Portfolio of securities owned by the Custodian along with written
evidence of the agreement by the Custodian to repurchase such
securities from the Portfolio or (e) for transfer to a time deposit
account of the Trust in any bank, whether domestic or foreign; such
transfer may be effected prior to receipt of a confirmation from a
broker and/or the applicable bank pursuant to Proper Instructions
from the Trust as defined in Section 2.16;
2) In connection with conversion, exchange or surrender of securities
owned by the Portfolio as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued by the Portfolio as
set forth in Section 2.9 hereof;
4) For the payment of any expense or liability incurred by the
Portfolio, including but not limited to the following payments for
the account of the Portfolio: interest, taxes, management,
accounting, transfer agent and legal fees, and operating expenses of
the Trust whether or not such expenses are to be in whole or part
capitalized or treated as deferred expenses;
5) For the payment of any dividends or capital gain distributions on
Shares of the Portfolio declared pursuant to the governing documents
of the Trust;
6) For any other proper purpose, BUT ONLY upon receipt of, in addition
to Proper Instructions from the Trust on behalf of the Portfolio, a
certified copy of a resolution of the Board of Trustees of the Trust
signed by an officer of the Trust and certified by its Secretary or
an Assistant Secretary, specifying the amount of such payment,
setting forth the purpose for which such payment is to be made,
declaring such purpose to be a proper purpose, and naming the person
or persons to whom such payment is to be made.
2.8 LIABILITY FOR PAYMENT IN ADVANCE OF RECEIPT OF SECURITIES PURCHASED.
Except as specifically stated otherwise in this Contract, in any and every
case where payment for purchase of securities for the account of a
Portfolio is made by the Custodian in advance of receipt of the securities
purchased in the absence of specific written instructions from the Trust
on behalf of such Portfolio to so pay in advance, the Custodian shall be
absolutely liable to the Trust for such securities to the same extent as
if the securities had been received by the Custodian.
5
<PAGE>
2.9 PAYMENTS FOR REPURCHASES OR REDEMPTIONS OF SHARES OF THE TRUST. From such
funds as may be available for the purpose but subject to the limitations
of the Trust Instrument and Trust's Bylaws and any applicable votes of the
Board of Trustees of the Trust pursuant thereto, the Custodian shall, upon
receipt of instructions from the Transfer Agent, make funds available for
payment to holders of Shares who have delivered to the Transfer Agent a
request for redemption or repurchase of their Shares.
2.10 APPOINTMENT OF AGENTS. The Custodian may with the approval of an officer
of the Trust appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of
1940, as amended, to act as a custodian, as its agent to carry out such of
the provisions of this Article 2 as the Custodian may from time to time
direct; PROVIDED, however, that the appointment of any agent shall not
relieve the Custodian of its responsibilities or liabilities hereunder.
Neither the Custodian nor the subcustodian shall be entitled to
reimbursement by the Trust or any Portfolios for any fees or expenses of
any agent.
2.11 DEPOSIT OF TRUST ASSETS IN SECURITIES SYSTEMS. The Custodian may deposit
and/or maintain securities owned by a Portfolio in a clearing agency
registered with the Securities and Exchange Commission under Section 17A
of the Securities Exchange Act of 1934, which acts as a securities
depository, or in the book-entry system authorized by the U.S. Department
of the Treasury and certain federal agencies, collectively referred to
herein as "Securities System" in accordance with applicable Federal
Reserve Board and Securities and Exchange Commission rules and
regulations, if any, and subject to the following provisions:
1) The Custodian may keep securities of the Portfolio in a Securities
System provided that such securities are represented in an account
("Account") of the Custodian in the Securities System which shall not
include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
2) The records of the Custodian with respect to securities of the
Portfolio which are maintained in a Securities System shall identify
by book-entry those securities belonging to the Portfolio;
3) The Custodian shall pay for securities purchased for the account of
the Portfolio upon (i) receipt of advice from the Securities System
that such securities have been transferred to the Account, and (ii)
the making of an entry on the records of the Custodian to reflect
such payment and transfer for the account of the Portfolio. The
Custodian shall transfer securities sold for the account of the
Portfolio upon (i) receipt of advice from the Securities System that
payment for such securities has been transferred to the Account, and
(ii) the making of an entry on the records of the Custodian to
reflect such transfer and payment for the account of the Portfolio.
Copies of all advices from the Securities System of transfers of
securities for the account of the Portfolio shall identify the
Portfolio, be maintained for the Portfolio by the Custodian and be
provided to the Trust at its request. Upon request, the
6
<PAGE>
Custodian shall furnish the Trust on behalf of the Portfolio
confirmation of each transfer to or from the account of the Portfolio
in the form of a written advice or notice and shall furnish to the
Trust on behalf of the Portfolio copies of daily transaction sheets
reflecting each day's transactions in the Securities System for the
account of the Portfolio.
4) The Custodian shall provide the Trust for the Portfolio with any
report obtained by the Custodian on the Securities System's
accounting system, internal accounting control and procedures for
safeguarding securities deposited in the Securities System;
5) The Custodian shall have received from the Trust on behalf of the
Portfolio the initial or annual certificate, as the case may be,
required by Article 8 hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Trust for the benefit of the
Portfolio for any loss or damage to the Portfolio resulting from use
of the Securities System by reason of any negligence, misfeasance or
misconduct of the Custodian or any of its agents or of any of its or
their employees or from failure of the Custodian or any such agent to
enforce effectively such rights as it may have against the Securities
System; at the election of the Trust, it shall be entitled to be
subrogated to the rights of the Custodian with respect to any claim
against the Securities System or any other person which the Custodian
may have as a consequence of any such loss or damage if and to the
extent that the Portfolio has not been made whole for any such loss
or damage.
2.12 TRUST ASSETS HELD IN THE CUSTODIAN'S DIRECT PAPER SYSTEM. The Custodian
may deposit and/or maintain securities owned by a Portfolio in the Direct
Paper System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper System will
be effected in the absence of Proper Instructions from the Trust on
behalf of the Portfolio;
2) The Custodian may keep securities of the Portfolio in the Direct
Paper System only if such securities are represented in an account
("Account") of the Custodian in the Direct Paper System which shall
not include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
3) The records of the Custodian with respect to securities of the
Portfolio which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Portfolio;
4) The Custodian shall pay for securities purchased for the account of
the Portfolio upon the making of an entry on the records of the
Custodian to reflect such payment and transfer of securities to the
account of the Portfolio. The Custodian shall transfer securities
sold for the account of the Portfolio upon the making of an entry
7
<PAGE>
on the records of the Custodian to reflect such transfer and receipt
of payment for the account of the Portfolio;
5) The Custodian shall furnish the Trust on behalf of the Portfolio
confirmation of each transfer to or from the account of the
Portfolio, in the form of a written advice or notice, of Direct Paper
on the next business day following such transfer and shall furnish to
the Trust on behalf of the Portfolio copies of daily transaction
sheets reflecting each day's transaction in the Securities System for
the account of the Portfolio;
6) The Custodian shall provide the Trust on behalf of the Portfolio with
any report on its system of internal accounting control as the Trust
may reasonably request from time to time.
2.13 OWNERSHIP CERTIFICATES FOR TAX PURPOSES. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state
tax purposes in connection with receipt of income or other payments with
respect to securities of each Portfolio held by it and in connection with
transfers of securities.
2.14 PROXIES. The Custodian shall, with respect to the securities held
hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of
the Portfolio or a nominee of the Portfolio, all proxies, without
indication of the manner in which such proxies are to be voted, and shall
promptly deliver to the Portfolio such proxies, all proxy soliciting
materials and all notices relating to such securities.
2.15 COMMUNICATIONS RELATING TO PORTFOLIO SECURITIES. Subject to the
provisions of Section 2.3, the Custodian shall transmit promptly to the
Trust for each Portfolio all written information (including, without
limitation, pendency of calls and maturities of securities and expirations
of rights in connection therewith and notices of exercise of call and put
options written by the Trust on behalf of the Portfolio and the maturity
of futures contracts purchased or sold by the Portfolio) received by the
Custodian from issuers of the securities being held for the Portfolio.
With respect to tender or exchange offers, the Custodian shall transmit
promptly to the Portfolio all written information received by the
Custodian from issuers of the securities whose tender or exchange is
sought and from the party (or his agents) making the tender or exchange
offer. If the Portfolio desires to take action with respect to any tender
offer, exchange offer or any other similar transaction, the Portfolio
shall notify the Custodian at least three business days prior to the date
on which the Custodian is to take such action.
2.16 PROPER INSTRUCTIONS. Proper Instructions as used throughout this Article
2 means a writing signed by two persons as the Board of Trustees shall
have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral
instructions will be considered Proper Instructions if the Custodian
reasonably believes
8
<PAGE>
them to have been given by a person authorized to give such instructions
with respect to the transaction involved. The Trust shall cause all oral
instructions to be confirmed in writing. The Custodian shall confirm all
oral instructions with an officer of the Trust if written instructions are
not received within a week after the instructions are given. Upon receipt
of a certificate of the Secretary or an Assistant Secretary as to the
authorization by the Board of Trustees of the Trust accompanied by a
detailed description of procedures approved by the Board of Trustees,
Proper Instructions may include communications effected directly between
electro-mechanical or electronic devices provided that the Board of
Trustees and the Custodian are satisfied that such procedures afford
adequate safeguards for the Portfolios' assets.
2.17 ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY. The Custodian may in its
discretion, without express authority from the Trust on behalf of each
applicable Portfolio:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this
Contract, PROVIDED that all such payments shall be approved by an
officer of the Trust on behalf of the Portfolio;
2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection, in the name of the Portfolio, checks, drafts
and other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection
with the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Portfolio except as
otherwise directed by the Board of Trustees of the Trust.
2.18 EVIDENCE OF AUTHORITY. The Custodian shall be protected in acting upon
any instructions, notice, request, consent, certificate or other
instrument or paper believed by it to be genuine and to have been properly
executed by or on behalf of the Trust. The Custodian may receive and
accept a certified copy of a vote of the Board of Trustees of the Trust as
conclusive evidence (a) of the authority of any person to act in
accordance with such vote or (b) of any determination or of any action by
the Board of Trustees pursuant to the Trust Bylaws as described in such
vote, and such vote may be considered as in full force and effect until
receipt by the Custodian of written notice to the contrary.
3. DUTIES OF CUSTODIAN WITH RESPECT TO THE BOOKS OF ACCOUNT AND CALCULATION
OF NET ASSET VALUE AND NET INCOME
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board of Trustees of the Trust to keep the
books of account of each Portfolio and/or compute the net asset value per share
of the outstanding shares of each Portfolio.
4. RECORDS
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The Custodian shall with respect to each Portfolio create and maintain all
records relating to its activities and obligations under this Contract in such
manner as will meet the obligations of the Trust under the Investment Company
Act of 1940, with particular attention to Section 31 thereof and Rules 31a-1 and
31a-2 thereunder. All such records shall be the property of the Trust and shall
at all times during the regular business hours of the Custodian be open for
inspection by duly authorized officers, employees or agents of the Trust and
employees and agents of the Securities and Exchange Commission. The Custodian
shall, at the Trust's request, supply the Trust with a tabulation of securities
owned by each Portfolio and held by the Custodian and shall, when requested to
do so by the Trust and for such compensation as shall be agreed upon between the
Trust and the Custodian, include certificate numbers in such tabulations.
5. REPORTS TO TRUST BY INDEPENDENT PUBLIC ACCOUNTANTS
The Custodian shall provide the Trust, on behalf of each of the Portfolios
at such times as the Trust may reasonably require, with reports by independent
public accountants on the accounting system, internal accounting control and
procedures for safeguarding securities, futures contracts and options on futures
contracts, including securities deposited and/or maintained in a Securities
System, relating to the services provided by the Custodian under this Contract;
such reports, shall be of sufficient scope and in sufficient detail, as may
reasonably be required by the Trust to provide reasonable assurance that any
material inadequacies would be disclosed by such examination, and, if there are
no such inadequacies, the reports shall so state.
6. COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Trust on behalf of each applicable Portfolio and the Custodian.
7. RESPONSIBILITY OF CUSTODIAN
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties.
The Custodian shall be held to the exercise of reasonable care in carrying out
the provisions of this Contract, but shall be kept indemnified by and shall be
without liability to the Trust for any action taken or omitted by it in good
faith without negligence, misfeasance, or misconduct of the Custodian or any of
its subcustodians or agents, or any of the Custodian's or any agent's employees
in the performance of the Custodian's duties under this agreement. It shall be
entitled to rely on and may act upon advice of counsel (who may be counsel for
the Trust) on all matters, and shall be without liability for any action
reasonably taken or omitted in good faith pursuant to such advice.
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If the Trust on behalf of a Portfolio requires the Custodian to take any
action with respect to securities, which action involves the payment of money or
which action may, in the opinion of the Custodian, result in the Custodian or
its nominee assigned to the Trust or the Portfolio being liable for the payment
of money or incurring liability of some other form, the Trust on behalf of the
Portfolio, as a prerequisite to requiring the Custodian to take such action,
shall agree to indemnify the Custodian in an amount and form satisfactory to it.
If the Trust requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not limited
to securities settlements, foreign exchange contracts and assumed settlement)
for the benefit of a Portfolio, any property at any time held for the account of
the applicable Portfolio shall be security therefor and should the Trust fail to
repay the Custodian promptly, the Custodian shall be entitled to utilize
available cash and to dispose of such Portfolio's assets to the extent necessary
to obtain reimbursement.
8. EFFECTIVE PERIOD, TERMINATION AND AMENDMENT
This Contract shall become effective as of its execution, shall continue
in full force and effect until terminated as hereinafter provided, may be
amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; PROVIDED,
however that the Custodian shall not with respect to a Portfolio act under
Section 2.11 hereof in the absence of receipt of an initial certificate of the
Secretary or an Assistant Secretary that the Board of Trustees of the Trust has
approved the initial use of a particular Securities System by such Portfolio, as
required by Rule 17f-4 under the Investment Company Act of 1940, as amended and
that the Custodian shall not with respect to a Portfolio act under Section 2.12
hereof in the absence of receipt of an initial certificate of the Secretary or
an Assistant Secretary that the Board of Trustees has approved the initial use
of the Direct Paper System by such Portfolio; PROVIDED FURTHER, however, that
the Trust shall not amend or terminate this Contract in contravention of any
applicable federal or state regulations, or any provision of the Trust Bylaws,
and further provided, that the Trust on behalf of one or more of the Portfolios
may at any time by action of its Board of Trustees (i) substitute another bank
or trust company for the Custodian by giving notice as described above to the
Custodian, or (ii) immediately terminate this Contract in the event of the
appointment of a conservator or receiver for the Custodian by the Comptroller of
the Currency or upon the happening of a like event at the direction of an
appropriate regulatory agency or court of competent jurisdiction.
Upon termination of the Contract, the Trust on behalf of each applicable
Portfolio shall pay to the Custodian such compensation as may be due as of the
date of such termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements.
9. SUCCESSOR CUSTODIAN
If a successor custodian for the Trust, of one or more of the Portfolios
shall be appointed by the Board of Trustees of the Trust, the Custodian shall,
upon termination, deliver to such successor custodian at the office of the
Custodian, duly endorsed and in the form for transfer, all cash,
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securities and any earned income associated with those securities (as received)
of each applicable Portfolio then held by it hereunder and shall transfer to an
account of the successor custodian all of the securities of each such Portfolio
held in a Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board of Trustees
of the Trust, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Trustees shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian on behalf of each applicable Portfolio and all
instruments held by the Custodian relative thereto and all other property held
by it under this Contract on behalf of each applicable Portfolio and to transfer
to an account of such successor custodian all of the securities of each such
Portfolio held in any Securities System. Thereafter, such bank or trust company
shall be the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Trust to procure the certified copy of the vote referred to or of
the Board of Trustees to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
10. INTERPRETIVE AND ADDITIONAL PROVISIONS
In connection with the operation of this Contract, the Custodian and the
Trust on behalf of each of the Portfolios, may from time to time agree on such
provisions interpretive of or in addition to the provisions of this Contract as
may in their joint opinion be consistent with the general tenor of this
Contract. Any such interpretive or additional provisions shall be in a writing
signed by both parties and shall be annexed hereto, PROVIDED that no such
interpretive or additional provisions shall contravene any applicable federal or
state regulations or any provision of the Trust Instrument or the Trust's
Bylaws. No interpretive or additional provisions made as provided in the
preceding sentence shall be deemed to be an amendment of this Contract.
11. ADDITIONAL FUNDS
In the event that the Trust establishes one or more series of Shares in
addition to the Intermediate-Term Municipal Bond Fund, Insured Municipal Bond
Fund, Municipal Bond Fund, California Tax-Free Income Fund and Washington State
Municipal Bond Fund with respect to which it desires to have the Custodian
render services as custodian under the terms hereof, it shall
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so notify the Custodian in writing, and if the Custodian agrees in writing to
provide such services, such series of Shares shall become a Portfolio hereunder.
12. MASSACHUSETTS LAW TO APPLY
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
13. CUSTODIAN REPRESENTATION
The Custodian represents that it does meet, and will continue to meet at
all times that this Contract is in effect, the requirements of the rules and
regulations promulgated pursuant to Section 17(f) of the Investment Company Act
of 1940, as amended.
14. LIMITATION OF LIABILITY
The Custodian is hereby expressly put on notice of (i) the limitation of
shareholder, officer and trustee liability as set forth in the Trust Instrument
of the Trust and (ii) of the provisions in the Trust Instrument permitting the
establishment of separate Series and limiting the liability of each Series to
obligations of that Series. The Custodian hereby agrees that obligations
assumed by the Trust pursuant to this Contract are in all cases assumed on
behalf of a particular Series and each such obligation shall be limited in all
cases to that Series and its assets. The Custodian agrees that it shall not
seek satisfaction of any such obligation from the shareholders or any individual
shareholder of the Trust nor from the officers or trustees or any individual
officer or trustee of the Trust.
15. MISCELLANEOUS
This Agreement shall be binding on and shall inure to the benefit of the
parties hereto and their respective successors and assigns; provided, however,
that this Agreement shall not be assignable by the Trust without the written the
written consent of the Custodian or by the Custodian without the written consent
of the Trust. The captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect. This Agreement may be executed
in counterparts, each of which taken together shall constitute one and the same
instrument.
16. SHAREHOLDER COMMUNICATIONS
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Trust to indicate whether it authorizes the
Custodian to provide the Trust's name, address, and share position to requesting
companies whose stock the Trust own. If the Trust tells the Custodian "no", the
Custodian will not provide this information to requesting companies.
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If the Trust tells the Custodian "yes" or do not check either "yes" or "no"
below, the Custodian is required by the rule to treat the Trust as consenting to
disclosure of this information for all securities owned by the Trust or any
funds or accounts established by the Trust. For the Trust's
protection, the Rule prohibits the requesting company from using the Trust's
name and address for any purpose other than corporate communications. Please
indicate below whether the Trust consents or objects by checking one of the
alternatives below.
YES [ ] The Custodian is authorized to release the Trust's name,
address, and share positions.
NO [X] The Custodian is not authorized to release the Trust's name,
address, and share positions.
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IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the 31st day of March , 1997.
ATTEST SAFECO TAX-EXEMPT BOND TRUST
/s/ David F. Longhurst By /s/ Neal A. Fuller
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ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ Francine S. Hayes By /s/ Ronald E. Logue
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Executive Vice President
<PAGE>
EXHIBIT NO. 99.11
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights", "Investment Advisory and Other Services" and "Financial Statements"
in Post-Effective Amendment No. 10 to the Registration Statement (Form N-1A,
No. 33-53532) and related Advisor Class A and Advisor Class B Prospectuses of
SAFECO Tax-Exempt Bond Trust.
We also consent to the incorporation by reference therein of our report dated
January 31, 1997 with respect to the financial statements of SAFECO Tax-Exempt
Bond Trust as of and for the year ended December 31, 1996 included in the 1996
Annual Report filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
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Seattle, Washington
April 29, 1997
