<PAGE> 1
STOCK FUNDS
GROWTH FUND
EQUITY FUND
INCOME FUND
NORTHWEST FUND
BALANCED FUND
INTERNATIONAL STOCK FUND
SMALL COMPANY STOCK FUND
TAX-FREE INCOME FUNDS
MUNICIPAL BOND FUND
CALIFORNIA TAX-FREE INCOME FUND
WASHINGTON STATE MUNICIPAL BOND FUND
BOND FUNDS
INTERMEDIATE-TERM U.S. TREASURY FUND
MANAGED BOND FUND
MONEY MARKET FUND
MONEY MARKET FUND
DECEMBER 31, 1996
ADVISOR SHARES
ANNUAL
REPORT
[SAFECO(R) MUTUAL FUNDS LOGO]
<PAGE> 2
LETTER FROM THE PRESIDENT
December 31, 1996
[Picture of David F. Hill]
DEAR SHAREHOLDER:
We entered 1996 with rather modest expectations for the equity markets and
look what happened. The S&P 500 gained 22.94% on the heels of its astonishing
37.50% growth in 1995.
The good news is, investors who had the conviction to stay invested in
common stocks were amply rewarded. For the second straight year, we're glad to
have been "in" the market, rather than "out".
The bad news is that such market conditions can cause amnesia -- amnesia
when it comes to the volatile nature of the stock market (the S&P 500 delivered
1.32% in 1994), and forgetfulness regarding the diversification that bonds and
money market funds provide.
The neglected cousins of 1996 were the bond markets. Bonds struggled
through the year -- despite the fact inflation remained at bay -- reversing
directions and ultimately delivering lackluster total returns. The broader
market as measured by Lehman Brothers Government/Corporate Index returned 2.90%
for the year.
Three elements seem to be props for the stock market. Inflation has
remained in control, corporate earnings have continued to grow and there has
been a fundamental shift in the way individuals invest. Investors are
increasingly recognizing the superior long-term potential of stocks. At the same
time they are taking control of more of their retirement savings.
While the shift from traditional company-controlled pensions to
employee-directed plans such as 401(k)s seems irreversible, it doesn't seem
possible for the stock market to sustain its present level of growth.
Still, we believe common stocks offer the potential for superior long-term
returns as they have over the past 70 years. At the same time, we remind you of
the historical level of stock market returns. Over the last 20 years, the S&P
500 has averaged 14%, not 23% or 38% as reflected in the performance of the past
two years.
All in all, our 1997 outlook is that the financial markets will do "okay".
We anticipate bonds will return their current interest rate,
<PAGE> 3
and be without big gains or losses. But then, people should buy bonds for that
stream of interest anyway.
Stocks will have a more difficult time, especially if corporate earnings
fail to meet expectations. Nonetheless, there are always opportunities for stock
pickers. And that's what we do best.
/s/ David F. Hill
- -------------------------------
David F. Hill, President
TABLE OF CONTENTS
<TABLE>
<S> <C>
SAFECO Growth Fund .................................................... 10
SAFECO Equity Fund .................................................... 15
SAFECO Income Fund .................................................... 20
SAFECO Northwest Fund ................................................. 26
SAFECO Balanced Fund .................................................. 30
SAFECO International Stock Fund ....................................... 36
SAFECO Small Company Stock Fund ....................................... 43
SAFECO Municipal Bond Fund ............................................ 48
SAFECO California Tax-Free Fund ....................................... 56
SAFECO Washington Municipal Fund ...................................... 60
SAFECO Intermediate Treasury Fund ..................................... 64
SAFECO Managed Bond Fund .............................................. 64
SAFECO Money Market Fund .............................................. 68
Financial Statements .................................................. 72
Notes to Financial Statements ......................................... 89
</TABLE>
- 1 -
<PAGE> 4
PERFORMANCE INFORMATION
December 31, 1996
Class A and Class B Shares
SAFECO GROWTH FUND - SAFECO EQUITY FUND - SAFECO INCOME FUND
ILLUSTRATION OF A $10,000 INVESTMENT
[Graph]
<TABLE>
<CAPTION>
SAFECO SAFECO SAFECO SAFECO SAFECO SAFECO
EQUITY EQUITY GROWTH GROWTH INCOME INCOME S&P
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B INDEX
$44,538 $46,517 $37,145 $38,827 $28,095 $29,350 $41,482
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
12/31/86 9550 10000 9550 10000 9550 10000 10000
- --------------------------------------------------------------------------------------------------------------------------------
10754 11261 9550 10000 10346 10833 11347
10754 11261 10696 11200 10346 10833 11795
11489 12030 11528 12071 10687 11190 12136
11288 11820 11347 11882 10484 10978 12028
11288 11820 11347 11882 10484 10978 12132
11561 12106 11382 11918 10497 10991 12745
12478 13066 11752 12306 11126 11650 13391
12478 13066 12309 12888 11126 11650 13891
12843 13449 12741 13341 11462 12003 13586
9140 9570 9799 10260 9025 9451 10660
9140 9570 9799 10260 9025 9451 9782
12/31/87 9091 9520 10219 10701 8980 9403 10526
9091 9520 10219 10701 8980 9403 10969
9860 10325 10380 10869 9534 9983 11480
10609 11109 11282 11813 9878 10343 11125
10609 11109 11382 11918 9878 10343 11249
10455 10947 11228 11757 9986 10457 11347
10928 11443 11918 12480 10463 10956 11868
10863 11375 11887 12448 10485 10979 11823
10681 11185 11686 12237 10310 10795 11421
11184 11711 12263 12841 10606 11106 11907
11184 11711 12263 12841 10606 11106 12238
11382 11918 12279 12858 10769 11276 12063
12/31/88 11391 11927 12478 13066 10685 11188 12274
11391 11927 12478 13066 10685 11188 13173
12163 12737 12826 13431 11165 11691 12845
12178 12752 13150 13770 11213 11742 13144
12178 12752 13150 13770 11213 11742 13826
12926 13536 13685 14330 11639 12188 14386
13403 14034 13988 14647 12003 12568 14304
13403 14034 13988 14647 12003 12568 15596
14596 15284 14611 15299 12727 13327 15901
14777 15474 15357 16081 12834 13439 15836
14807 15504 14778 15474 12350 12932 15469
14909 15611 14733 15427 12490 13079 15784
12/31/89 15468 16197 14872 15573 12738 13338 16163
14184 14852 13431 14063 12094 12664 15079
14317 14991 13798 14448 12150 12722 15273
14848 15548 14630 15320 12242 12819 15678
14418 15098 14693 15385 11783 12338 15286
- --------------------------------------------------------------------------------------------------------------------------------
15811 16556 16198 16962 12403 12987 16776
- --------------------------------------------------------------------------------------------------------------------------------
15786 16530 15651 16388 12353 12935 16662
15503 16234 15956 16707 12133 12704 16609
13867 14520 13204 13826 11234 11763 15107
13191 13813 11723 12275 10772 11280 14372
- --------------------------------------------------------------------------------------------------------------------------------
12910 13518 10934 11449 10513 11009 14310
- --------------------------------------------------------------------------------------------------------------------------------
13614 14255 11744 12297 11157 11682 15234
12/31/90 14143 14809 12647 13243 11368 11904 15659
14868 15568 13910 14566 11810 12367 16342
15751 16493 15827 16573 12490 13079 17511
- --------------------------------------------------------------------------------------------------------------------------------
16195 16959 16601 17383 12680 13278 17934
- --------------------------------------------------------------------------------------------------------------------------------
16528 17306 17401 18221 12818 13422 17977
17192 18002 18550 19424 13205 13827 18754
16088 16846 17444 18266 12873 13479 17895
17167 17976 19076 19975 13239 13863 18729
17436 18258 19835 20769 13640 14283 19173
17200 18010 19955 20895 13619 14261 18853
17482 18305 20555 21524 13761 14410 19105
16388 17160 18821 19708 13194 13815 18335
12/31/91 18090 18942 20570 21539 14012 14672 20433
19166 20069 22075 23115 14119 14785 20053
19491 20409 21918 22950 14164 14832 20314
18614 19491 20289 21245 14028 14689 19917
18768 19563 19031 19927 14437 15118 20503
18597 19473 18559 19433 14574 15261 20604
17255 18068 17132 17939 14627 15316 20297
17959 18805 17851 18692 15171 15885 21127
17220 18032 16840 17688 15060 15770 20694
17270 18084 16396 17169 15220 15937 20938
18104 18957 17088 17893 14940 15644 21010
19300 20209 19246 20153 15323 16045 21723
12/31/92 19765 20697 19938 20878 15619 16355 21990
20420 21382 20771 21750 15960 16712 22173
20438 21401 19387 20300 16262 17029 22475
21536 22551 20149 21099 16813 17606 22949
21044 22036 18906 19797 16584 17365 22395
22777 23850 19879 20816 16804 17596 22992
22870 23947 20501 21467 16891 17687 23059
22558 23621 20431 21393 16804 17596 22966
- --------------------------------------------------------------------------------------------------------------------------------
23822 24944 21744 22769 17356 18173 23836
- --------------------------------------------------------------------------------------------------------------------------------
24484 25638 22698 23767 17404 18224 23653
25128 26313 23277 24374 17707 18542 24142
25265 26456 22296 23346 17492 18316 23913
12/31/93 25875 27094 24362 25510 17579 18407 24202
27426 28718 25674 26884 18153 19008 25025
26738 27998 24447 25599 17747 18583 24347
25712 26923 23221 24315 17128 17935 23288
26539 27790 23840 24963 17328 18145 23586
27308 28594 24059 25192 17338 18155 23970
26324 27565 22273 23323 17084 17889 23383
26997 28270 22771 23844 17611 18441 24150
28640 29990 24192 25332 18168 19024 25138
28527 29872 23579 24690 17922 18766 24524
29061 30431 23918 25045 17891 18734 25074
28486 29786 23267 24363 17257 18070 24161
12/31/94 28445 29786 23967 25096 17387 18206 24519
28653 30003 23598 24710 17828 18668 25154
29402 30787 24896 26069 18385 19252 26132
29641 31038 24800 25969 18907 19798 26903
30436 31870 24923 26097 19311 20221 27694
31210 32680 25920 27141 19875 20811 28818
31984 33491 27489 28784 20120 21068 29487
- --------------------------------------------------------------------------------------------------------------------------------
32489 34020 28460 29801 20905 21890 30463
- --------------------------------------------------------------------------------------------------------------------------------
33394 34967 28364 29701 21056 22048 30539
34685 36320 29221 30598 21693 22716 31828
34255 35869 29092 30463 21455 22466 31713
35365 37032 29387 30772 22204 23251 33102
12/31/95 35630 37309 30223 31648 22665 23733 33741
36583 38307 31343 32820 23390 24492 34889
36909 38648 32518 34050 23448 24552 35213
37287 39044 32022 33531 23726 24844 35551
38081 39875 33384 34957 23819 24941 36075
38967 10804 34802 36442 24607 25766 37003
39688 41559 33291 34859 24915 26089 37145
38166 39964 30007 31420 24213 25354 35504
38564 40381 31798 33296 24669 25832 36254
40942 42871 33360 34932 25810 27026 38293
42259 44196 34072 35655 26751 27998 39348
- --------------------------------------------------------------------------------------------------------------------------------
45436 47496 35390 37012 28168 29455 42320
- --------------------------------------------------------------------------------------------------------------------------------
12/31/96 44538 46517 37145 38827 28095 29350 41482
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The performance graphs compare a hypothetical $10,000 investment in Class A
and Class B of each Fund to a hypothetical investment in a relevant market
index. Fund performance is derived from the Fund's original class of shares and
reflects the maximum 4.5% sales charge for Class A shares, and the maximum
contingent deferred sales charge (5% in the first year, decreasing to 0% after
six years) for Class B shares. Fund performance has not been restated to reflect
Rule 12b-1 fees prior to September 30, 1996 (initial public offering date of
Class A and Class B shares). Such fees will affect subsequent performance. The
revelant market indexes are as follows:
- Standard & Poor's 500 Index (S&P 500) -- an index measuring the
performance of 500 large-cap U.S. stocks
- Northwest 50(TM) Index -- an index measuring the performance of 50
companies doing business in the Pacific Northwest
The indexes are unmanaged and assume reinvestment of all dividends, and,
unlike the Funds, do not reflect the payment of investment advisory fees and
other expenses associated with an investment in the Funds. Fund total return
assumes the reinvestment of all dividends and capital gain distributions.
Returns are historical and not predictive of future performance.
2
<PAGE> 5
SAFECO NORTHWEST FUND
ILLUSTRATION OF A $10,000 INVESTMENT
[Graph]
INVESTMENT VALUE AS OF DECEMBER 31, 1996
SAFECO Northwest Class A: $17,198
SAFECO Northwest Class B: $17,876
Northwest 50(TM) Index: $21,348
<TABLE>
<CAPTION>
NORTHWEST NORTHWEST NORTHWEST
CLASS A CLASS B 50(TM) INDEX
<S> <C> <C> <C>
2/28/91 9547 10000 10000
9761 10224 10409
10046 10523 10666
10389 10882 11305
9782 10246 10552
10364 10856 11063
10794 11307 11510
10530 11029 11292
10424 10919 11285
9782 10247 10836
12/31/91 10972 11493 12133
11445 11988 12767
11812 12373 12958
11552 12101 12545
11147 11676 11973
11263 11797 11865
10907 11425 11450
11159 11688 11567
10859 11374 11250
11311 11848 11693
11689 12244 12156
12183 12761 12701
12/31/92 12517 13111 12725
12567 13163 12821
11950 12518 12420
12418 13007 12932
11911 12476 12641
12169 12747 12953
12055 12627 12675
11955 12526 12220
12293 12877 12721
12284 12868 12434
12444 13034 12881
12493 13086 13158
12/31/93 12646 13246 13334
12869 13480 13737
13194 13821 13941
12636 13235 13449
12605 13203 13409
12798 13406 13611
12471 13063 13198
12654 13255 13300
13224 13851 14068
12922 13535 13530
12798 13406 13449
12480 13073 13209
12/31/94 12449 13040 13281
12604 13202 13224
12922 13535 13668
13353 13987 14102
13528 14170 14526
13734 14386 14528
14411 15095 15409
15162 15882 15993
15296 16022 16299
15378 16108 16897
15197 15918 16507
15165 15884 16753
12/31/95 14961 15671 16957
15103 15820 17518
15563 16302 17921
16505 17289 17826
16954 17759 18898
17239 18057 19204
16880 17681 19123
16080 16843 18188
16595 17383 19088
16856 17656 19583
16427 17194 19446
17149 17937 20852
12/31/96 17198 17876 21348
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
WITH SALES CHARGE WITHOUT SALES CHARGE
----------------------------- -----------------------------
10 YEAR OR 10 YEAR OR
1 YEAR 5 YEAR INCEPTION 1 YEAR 5 YEAR INCEPTION
------ ------ ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
SAFECO Growth Fund
Class A 17.37% 11.52% 14.02% 22.90% 12.55% 14.55%
Class B 17.69% 12.26% 14.53% 22.69% 12.51% 14.53%
- -----------------------------------------------------------------------------------
SAFECO Equity Fund
Class A 19.37% 18.65% 16.11% 25.00% 19.75% 16.65%
Class B 19.68% 19.49% 16.62% 24.68% 19.68% 16.62%
- -----------------------------------------------------------------------------------
SAFECO Income Fund
Class A 18.38% 13.87% 10.88% 23.95% 14.93% 11.39%
Class B 18.67% 14.64% 11.37% 23.67% 14.87% 11.37%
- -----------------------------------------------------------------------------------
SAFECO Northwest Fund
Class A 9.78% 8.40% 9.74%+ 14.95% 9.40% 10.62%+
Class B 9.71% 9.08% 10.47%+ 14.71% 9.36% 10.58%+
- -----------------------------------------------------------------------------------
</TABLE>
+ Northwest Fund performance from 2/28/91 (inception date was February 7, 1991).
-3-
<PAGE> 6
PERFORMANCE INFORMATION
December 31, 1996
Class A and Class B Shares
SAFECO BALANCED FUND
ILLUSTRATION OF A $10,000 INVESTMENT
[Graph]
<TABLE>
<CAPTION>
INVESTMENT VALUE AS OF DECEMBER 31, 1996
----------------------------------------
SAFECO Balanced Fund S&P 60%/Gov
Class A: Class B: Corp 40%
$10,635 $10,612 $11,207
------- ------- -------
<C> <C> <C> <C>
1/31/96 9550 10000 10000
9502 9950 9971
3/31/96 9566 10017 9995
9624 10077 10056
9758 10218 10204
6/30/96 9879 10345 10282
9657 10112 10019
9782 10243 10136
9/30/96 10122 10599 10550
10326 10803 10823
10765 11252 11393
12/31/96 10635 10612 11207
</TABLE>
SAFECO INTERNATIONAL STOCK FUND
ILLUSTRATION OF A $10,000 INVESTMENT
[Graph]
INVESTMENT VALUE AS OF DEC. 31, 1996
SAFECO International Stock Fund Class A: $10,901
SAFECO International Stock Fund Class B: $10,891
MSCI EAFE(TM): $10,590
<TABLE>
<CAPTION>
Class A Class B MSCI EAFE(TM)
<S> <C> <C> <C>
1/31/96 9550 10000 10000
9493 9940 10036
3/31/96 9588 10040 10252
9827 10290 10553
9789 10250 10361
6/30/96 9779 10240 10422
9397 9840 10120
9779 10240 10145
9/30/96 9984 10454 10417
10099 10565 10313
10733 11229 10725
12/31/96 10901 10891 10590
</TABLE>
SAFECO SMALL COMPANY STOCK FUND
ILLUSTRATION OF A $10,000 INVESTMENT
[Graph]
INVESTMENT VALUE AS OF DEC. 31, 1996
SAFECO Small Company Stock Fund Class A: $11,938
SAFECO Small Company Stock Fund Class B: $11,979
Russell 2000: $11,662
<TABLE>
<CAPTION>
Class A Class B Russell 2000
<S> <C> <C> <C>
1/31/96 9550 10000 10000
9693 10150 10312
3/31/96 10018 10490 10522
11030 11550 11084
11794 12350 11521
6/30/96 11489 12030 11048
10715 11220 10083
11374 11910 10668
9/30/96 11635 12183 11085
11615 12151 10914
11473 12003 11364
12/31/96 11938 11979 11662
</TABLE>
-4-
<PAGE> 7
TOTAL RETURNS
<TABLE>
<CAPTION>
WITH SALES CHARGE WITHOUT SALES CHARGE
-------------------- --------------------
JANUARY 31, 1996 JANUARY 31, 1996
(INCEPTION DATE) (INCEPTION DATE)
TO DECEMBER 31, 1996 TO DECEMBER 31, 1996
-------------------- --------------------
<S> <C> <C>
SAFECO Balanced Fund
Class A 6.35% 11.36%
Class B 6.12% 11.12%
- -----------------------------------------------------------------------------
SAFECO International Stock Fund
Class A 9.01% 14.15%
Class B 8.91% 13.91%
- -----------------------------------------------------------------------------
SAFECO Small Company Stock Fund
Class A 19.38% 25.01%
Class B 19.79% 24.79%
- -----------------------------------------------------------------------------
</TABLE>
The performance graphs compare a hypothetical $10,000 investment in Class A
and Class B of each Fund to a hypothetical investment in a relevant market
index. Fund performance is derived from the Fund's original class of shares and
reflects the maximum 4.5% sales charge for Class A shares, and the maximum
contingent deferred sales charge (5% in the first year, decreasing to 0% after
six years) for Class B shares. Fund performance has not been restated to reflect
Rule 12b-1 fees prior to September 30, 1996 (initial public offering date of
Class A and Class B shares). Such fees will affect subsequent performance. The
relevant market indexes are as follows:
- Standard & Poor's 500 (60%) and Lehman Brothers Government/Corporate
(40%) -- a blended index weighted 60% to a broad-based stock index and
40% to a bond index
- Morgan Stanley Capital International European, Australia and Far East
Index (MSCI EAFE) -- a widely accepted international index
- Russell 2000 -- an index measuring the performance of 2000 small
company stocks
The indexes are unmanaged and assume reinvestment of all dividends, and,
unlike the Funds, do not reflect the payment of investment advisory fees and
other expenses associated with an investment in the Funds. Fund total return
assumes the reinvestment of all dividends and capital gain distributions.
Returns are historical and not predictive of future performance.
-5-
<PAGE> 8
PERFORMANCE INFORMATION
DECEMBER 31, 1996
CLASS A AND CLASS B SHARES
SAFECO MUNICIPAL BOND FUND
Illustration of a $10,000 Investment
INVESTMENT VALUE AS OF DECEMBER 31, 1996
SAFECO MUNICIPAL BOND FUND CLASS A: $20,503
SAFECO MUNICIPAL BOND FUND CLASS B: $21,418
LEHMAN BROTHERS LONG MUNICIPAL BOND INDEX $22,935
<TABLE>
<CAPTION>
CLASS A CLASS B LEHMAN BROS.
<S> <C> <C> <C>
12/31/86 9550 10000 10000
9858 10322 10336
9896 10362 10365
9844 10308 10212
9217 9651 9639
9193 9627 9533
9427 9872 9837
9508 9956 9928
9531 9980 9972
9110 9539 9565
9132 9562 9564
9401 9844 9870
12/87 9566 10017 9998
10019 10491 10397
10134 10611 10520
9935 10404 10369
10010 10481 10451
9981 10451 10462
10183 10663 10666
10236 10718 10737
10288 10773 10780
10518 11014 11024
10808 11317 11275
10681 11184 11154
12/88 10894 11407 11348
11145 11670 11615
10978 11495 11452
10978 11495 11462
11235 11765 11798
11445 11986 12071
11590 12136 12255
11709 12261 12417
11606 12153 12228
11596 12142 12191
11709 12261 12352
11919 12481 12614
12/89 11992 12557 12708
11852 12411 12579
11989 12554 12721
11972 12536 12734
11788 12343 12578
12161 12734 12934
12274 12852 13061
12509 13098 13291
12183 12757 12975
12160 12733 12955
12392 12976 13229
12736 13337 13564
12/90 12789 13392 13624
12992 13604 13807
13048 13663 13904
13064 13680 13937
13283 13909 14153
13417 14049 14319
13371 14001 14292
13584 14224 14513
13790 14440 14722
14011 14671 14935
14160 14828 15092
14115 14780 15110
12/91 14552 15238 15470
14426 15106 15461
14463 15145 15485
14445 15126 15524
14581 15269 15672
14828 15526 15901
15148 15862 16209
15731 16472 16803
15409 16135 16578
15439 16166 16651
15102 15814 16373
15564 16298 16834
12/92 15826 16571 17053
15979 16732 17214
16670 17456 18014
16409 17182 17797
16634 17418 18040
16730 17518 18190
17073 17877 18532
17007 17809 18550
17459 18282 19025
17655 18487 19290
17703 18537 19326
17479 18303 19092
12/93 17829 18669 19585
18045 18896 19816
17511 18337 19160
16622 17405 18016
16637 17421 18155
16838 17631 18368
16651 17436 18147
17035 17837 18614
17047 17850 18653
16626 17409 18220
16270 17037 17661
15936 16687 17194
12/94 16358 17129 17805
16960 17759 18588
17673 18506 19345
17802 18651 19578
17775 18612 19568
18602 19478 20401
18204 19061 20025
18291 19153 20128
18527 19400 20412
18665 19544 20572
19056 19954 21070
19584 20506 21613
12/95 19872 20808 21950
19937 20876 22044
19717 20646 21775
19266 20174 21377
19121 20022 21291
19153 20055 21302
19435 20351 21630
19673 20600 21848
19603 20527 21816
20000 20942 22315
20231 21171 22588
20692 21627 23073
12/31/96 20503 21418 22935
</TABLE>
SAFECO CALIFORNIA TAX-FREE INCOME FUND
Illustration of a $10,000 Investment
INVESTMENT VALUE AS OF DECEMBER 31, 1996
SAFECO CALIFORNIA TAX-FREE INCOME FUND CLASS A: $20,047
SAFECO CALIFORNIA TAX-FREE INCOME FUND CLASS B: $20,936
LEHMAN BROTHERS LONG MUNICIPAL BOND INDEX $22,935
<TABLE>
<CAPTION>
Class A Class B Lehman Bros.
<S> <C> <C> <C>
12/31/86 9550 10000 10000
9800 10262 10336
9856 10321 10365
9799 10261 10212
9070 9497 9639
8927 9348 9533
9220 9655 9837
9290 9728 9928
9302 9740 9972
8797 9212 9565
8783 9197 9564
9144 9574 9870
12/87 9350 9791 9998
9810 10272 10397
9955 10424 10520
9663 10118 10369
9717 10175 10451
9631 10085 10462
9879 10344 10666
9906 10373 10737
9950 10419 10780
10184 10663 11024
10486 10980 11275
10328 10814 11154
12/88 10546 11043 11348
10799 11308 11615
10544 11145 11452
10638 11139 11462
10885 11398 11798
11107 11630 12071
11226 11755 12255
11355 11890 12417
11217 11745 12228
11213 11741 12191
11322 11855 12352
11524 12067 12614
12/89 11591 12138 12708
11463 12003 12579
11603 12150 12721
11582 12127 12734
11405 11943 12578
11755 12309 12934
11867 12427 13061
12093 12663 13291
11892 12348 12975
11775 12330 12955
12072 12641 13229
12355 12937 13564
12/90 12399 12984 13624
12588 13181 13807
12627 13221 13904
12598 13192 13937
12794 13397 14153
12918 13527 14319
12856 13461 14292
13053 13668 14513
13233 13857 14722
13474 14109 14935
13619 14261 15092
13543 14181 15110
12/91 13956 14614 15470
13908 14563 15461
13911 14567 15485
13913 14568 15524
14014 14675 15672
14226 14896 15901
14505 15189 16209
14996 15702 16803
14708 15401 16578
14814 15512 16651
14402 15081 16373
14875 15576 16834
12/92 15072 15782 17053
15229 15946 17214
15919 16669 18014
15705 16445 17797
15935 16686 18040
16001 16754 18190
16299 17067 18532
16278 17045 18550
16736 17524 19025
16939 17737 19290
16939 17737 19326
16676 17462 19092
12/93 17066 17870 19585
17320 18136 19816
16865 17660 19160
16014 16769 18016
15956 16708 18155
16105 16864 18368
15951 16702 18147
16321 17090 18614
16316 17084 18653
15901 16651 18220
15517 16248 17661
15230 15948 17194
12/94 15496 16226 17805
16207 16971 18588
16999 17800 19345
17137 17944 19578
17060 17864 19568
18023 18872 20401
17472 18295 20025
17550 18377 20128
17826 18666 20412
17964 18810 20572
18442 19311 21070
19119 20020 21613
12/95 19546 20467 21950
19476 20394 22044
19228 20134 21775
18657 19536 21377
18491 19362 21291
18508 19380 21302
18871 19760 21630
19087 19986 21848
19040 19937 21816
19496 20414 22315
19736 20653 22588
20268 21180 23073
12/31/96 20047 20936 22935
</TABLE>
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
Illustration of a $10,000 Investment
INVESTMENT VALUE AS OF DECEMBER 31, 1996
SAFECO WASHINGTON STATE MUNI BOND FUND CLASS A: $11,737
SAFECO WASHINGTON STATE MUNI BOND FUND CLASS B: $11,984
LEHMAN BROTHERS LONG MUNICIPAL BOND INDEX $12,887
<TABLE>
<CAPTION>
Class A Class B Lehman Bros.
<S> <C> <C> <C>
3/31/93 9571 10017 10000
9711 10163 10137
9751 10206 10221
9986 10452 10413
9955 10419 10423
10226 10703 10690
10345 10827 10839
10363 10847 10859
10200 10676 10728
12/31/93 10408 10893 11005
10569 11062 11135
10207 10684 10766
9636 10086 10123
9681 10133 10201
9819 10276 10321
9650 10100 10197
9894 10355 10459
9858 10318 10481
9619 10068 10238
9362 9799 9923
9144 9570 9661
12/31/94 9508 9951 10004
9896 10357 10444
10270 10749 10870
10324 10805 11000
10293 10773 10995
10709 11208 11463
10514 11005 11252
10579 11072 11310
10715 11215 11469
10791 11294 11559
11025 11539 11839
11280 11806 12144
12/31/95 11399 11931 12333
11446 11980 12386
11340 11869 12235
11121 11640 12011
11061 11577 11963
11083 11600 11969
11211 11734 12154
11325 11853 12276
11292 11819 12258
11513 12050 12539
11611 12145 12692
11819 12367 12965
12/31/96 11737 11984 12887
</TABLE>
-6-
<PAGE> 9
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
WITH SALES CHARGE WITHOUT SALES CHARGE
----------------- --------------------
5 YEAR OR 5 YEAR OR
1 YEAR INCEPTION 10 YEAR 1 YEAR INCEPTION 10 YEAR
------ --------- ------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
SAFECO Municipal
Bond Fund
Class A (1.47)% 6.12% 7.44% 3.18% 7.10% 7.94%
Class B (2.07)% 6.74% 7.91% 2.93% 7.05% 7.91%
- -------------------------------------------------------------------------------------------
SAFECO California
Tax-Free Income Fund
Class A (2.05)% 6.53% 7.20% 2.56% 7.51% 7.70%
Class B (2.71)% 7.15% 7.67% 2.29% 7.46% 7.67%
- -------------------------------------------------------------------------------------------
SAFECO Washington State
Municipal Bond Fund
Class A (1.67)% 4.30%++ N/A 2.97% 5.59%++ N/A
Class B (2.04)% 4.90%++ N/A 2.96% 5.59%++ N/A
- -------------------------------------------------------------------------------------------
</TABLE>
++ Washington Fund performance from 3/31/93 (inception date was March 18, 1993).
The performance graphs compare a hypothetical $10,000 investment in
Class A and Class B of each Fund to a hypothetical investment in a relevant
market index. Fund performance is derived from the Fund's original class of
Share's and reflects the maximum 4.5% sales charge for Class A shares, and the
maximum contingent deferred sales charge (5% in the first year, decreasing to 0%
after six years) for Class B Shares. Fund performance has not been restated to
reflect Rule 12b-1 fees prior to September 30, 1996 (initial public offering
date of Class A and Class B shares). Such fees will affect subsequent
performance. The relevant market index is as follows:
- Lehman Brothers Long Municipal Bond -- a widely accepted index of bonds
with maturities of 22 years and greater.
The index is unmanaged and, unlike the Funds, does not reflect the
payment of investment advisory fees and other expenses associated with an
investment in the Funds. Fund total return assumes the reinvestment of all
interest and capital gain distributions. Returns are historical and not
predictive of future performance.
-7-
<PAGE> 10
PERFORMANCE INFORMATION
December 31, 1996
CLASS A AND CLASS B SHARES
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
ILLUSTRATION OF A $10,000 INVESTMENT
INVESTMENT VALUE AS OF DEC. 31, 1996
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND CLASS A: $17,204
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND CLASS B: $18,002
MERRILL LYNCH INTERMEDIATE-TERM TREASURY INDEX: $19,135
<TABLE>
<CAPTION>
CLASS A CLASS B MERRILL LYNCH
<S> <C> <C> <C>
9/30/88 9550 10000 10000
9679 10135 10136
9603 10055 10048
Dec-88 9614 10067 10057
9671 10127 10156
9622 10076 10114
9639 10093 10164
9809 10271 10351
9981 10452 10569
10208 10689 10839
10387 10877 11060
10291 10776 10906
10333 10820 10961
10507 11002 11186
10584 11082 11295
Dec-89 10606 11105 11324
10543 11039 11259
10596 11095 11288
10589 11088 11310
10562 11060 11270
10763 11270 11509
10872 11384 11658
11018 11537 11826
10978 11496 11774
11021 11540 11882
11109 11632 12047
11224 11753 12227
Dec-90 11365 11900 12400
11416 11953 12526
11505 12047 12591
11586 12132 12660
11715 12267 12791
11776 12331 12864
11791 12346 12877
11938 12500 13016
12139 12711 13259
12321 12902 13485
12454 13041 13637
12582 13175 13797
Dec-91 12901 13509 14134
12754 13355 13991
12770 13371 14044
12723 13323 13987
12820 13425 14115
13005 13617 14316
13208 13830 14524
13537 14175 14793
13643 14286 14964
13896 14551 15171
13642 14284 14985
13557 14196 14918
Dec-92 13748 14396 15115
14102 14767 15397
14414 15093 15628
14472 15154 15686
14576 15263 15810
14528 15212 15763
14880 15581 15990
14903 15605 16022
15271 15990 16267
15357 16080 16337
15390 16116 16366
15144 15858 16287
Dec-93 15238 15956 16351
15436 16164 16514
15028 15736 16279
14712 15405 16051
14608 15296 15942
14613 15302 15959
14586 15273 15970
14780 15476 16168
14817 15515 16219
14656 15346 16088
14661 15352 16092
14631 15321 16012
Dec-94 14688 15380 16072
14856 15556 16339
15078 15789 16652
15155 15870 16743
15342 16065 16935
15928 16679 17419
16035 16790 17533
15910 16660 17545
16100 16858 17689
16278 17045 17808
16526 17304 18008
16862 17656 18232
Dec-95 17148 17956 18418
17204 18014 18576
16784 17575 18368
16608 17391 18280
16574 17355 18222
16571 17351 18212
16691 17477 18390
16743 17532 18447
16741 17530 18467
16929 17726 18701
17134 17930 19006
17351 18165 19240
12/31/96 17204 18002 19135
</TABLE>
SAFECO MANAGED BOND FUND
ILLUSTRATION OF A $10,000 INVESTMENT
SAFECO MANAGED BOND FUND CLASS A: $10,877
SAFECO MANAGED BOND FUND CLASS B: $11,069
LEHMAN BROTHERS GOVT/CORPORATE INDEX: $11,925
<TABLE>
<CAPTION>
CLASS A CLASS B LEHMAN BROS.
<S> <C> <C> <C>
2/28/94 9550 10000 10000
9231 9666 9755
9223 9657 9674
9231 9666 9657
9218 9653 9634
9318 9757 9827
9340 9780 9831
9266 9703 9683
9272 9709 9672
9245 9680 9655
12/31/94 9263 9699 9718
9386 9828 9905
9541 9991 10135
9587 10038 10203
9709 10167 10344
10059 10533 10778
10137 10615 10864
10067 10541 10822
10193 10674 10960
10305 10791 11072
10469 10962 11235
10675 11178 11420
12/31/95 10870 11382 11588
10887 11400 11660
10627 11127 11412
10514 11010 11317
10509 11004 11239
10514 11009 11219
10593 11092 11370
10626 11127 11396
10646 11148 11369
10734 11239 11571
10843 11347 11841
10965 11467 12058
12/31/96 10877 11069 11925
</TABLE>
-8-
<PAGE> 11
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
WITH SALES CHARGE WITHOUT SALES CHARGE
---------------------------- ----------------------------
5 YEAR OR 5 YEAR OR
1 YEAR INCEPTION 10 YEAR 1 YEAR INCEPTION 10 YEAR
------ --------- ------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
SAFECO Intermediate-Term
U.S. Treasury Fund
Class A (4.19)% 4.95% 6.80%+++ 0.33% 5.93% 7.40%+++
Class B (4.75)% 5.59% 7.39%+++ 0.25% 5.91% 7.39%+++
- ---------------------------------------------------------------------------------------
SAFECO Managed Bond Fund
Class A (4.43)% 3.01%+ N/A 0.07% 4.70%+ N/A
Class B (5.11)% 3.65%+ N/A (0.12)% 4.63%+ N/A
</TABLE>
+ Managed Bond Fund performance from 2/28/94 (inception date of the
fund).
+++ Intermediate-Term U.S. Treasury Fund performance from 9/30/88
(inception date was September, 7, 1988).
The performance graphs compare a hypothetical $10,000 investment in
Class A and Class B of each Fund to a hypothetical investment in a relevant
market index. Fund performance is derived from the Fund's original class of
shares and reflects the maximum 4.5% sales charge for Class A shares, and the
maximum contingent deferred sales charge (5% in the first year, decreasing to 0%
after six years) for Class B shares. Fund performance has not been restated to
reflect Rule 12b-1 fees prior to September 30, 1996 (initial public offering
date of Class A and Class B shares). Such fees will affect subsequent
performance. The relevant market indexes are as follows:
- Merrill Lynch Intermediate-Term Treasury Index -- a widely accepted
index measuring the performance of U.S. Treasury securities with
maturities of one to ten years.
- Lehman Brothers Government/Corporate Index -- a widely accepted index
measuring the blended return of U.S. Government securities and
corporate bonds.
The indexes are unmanaged and, unlike the Funds, do not reflect the
payment of investment advisory fees and other expenses associated with an
investment in the Funds. Fund total return assumes the reinvestment of all
interest and capital gain distributions. Returns are historical and not
predictive of future performance.
-9-
<PAGE> 12
REPORT FROM THE FUND MANAGER
SAFECO GROWTH FUND
December 31, 1996
For the year ended December 31, 1996 SAFECO Growth Fund returned
22.90% for the Advisor Class A shares and 22.69% for the Advisor Class B shares,
not including the effects of sales charges. Meanwhile, the average growth fund
returned 19.24%, according to Lipper Analytical Services, and the unmanaged S&P
500 returned 22.94%.
It has been two great years for big companies as evidenced by terrific
back-to-back gains in the S&P Index. But, the more exciting news is that SAFECO
Growth Fund, with its portfolio of non-S&P companies, kept right up with the
index and surpassed its peer group.
This is exciting because while the S&P stocks appear high priced,
smaller company valuations--including many stocks held by Growth Fund--remain
quite reasonable.
Our performance is attributable to one thing, stock selection. Over the
past year, we were able to increase holdings in companies with great earnings
growth potential at good valuations and benefit by them--AMRION, a vitamin
supplement company; DAMARK INTERNATIONAL, a catalog retailer; ULTRAK, closed
circuit television and PHILIP MORRIS.
[Photo of Thomas M. Maguire]
And while the companies in our portfolio may seem widely diverse, they
actually have common characteristics--good earnings, good valuations, and good
fundamentals.
Drugs & hospital supply companies remain our largest industry group at
18% of net assets. People will use medical products and services regardless of
what the economy is doing. And, in most cases, their use will increase as the
population ages. In fact, aging and increasing pressure to cut medical costs is
growing the market for LIFELINE SYSTEMS in-home monitoring.
-10-
<PAGE> 13
HIGHLIGHTS
SAFECO
GROWTH FUND
As of December 31, 1996
Net Asset Capitalization Weightings
As a Percent of Net Assets
as of December 31, 1996
[Pie Chart]
1. Large: 16% ($4 Bil. and above.)
2. Medium: 1% ($1 Bil. - $4 Bil.)
3. Small: 82% (Less than $1 Bil.)
4. Cash and Other: 1%
Top Five Industries
As a Percent of Net Assets
as of December 31, 1996
[Bar Chart]
Drugs & Hospital Supplies: 18%
Computer Systems: 16%
Building Materials: 10%
Food & Tobacco: 8%
Retail=Specialty: 7%
Another one of our healthcare stocks, PENEDERM, an emerging
pharmaceutical company, posted gains with its first drug approval.
My other activity in healthcare was to eliminate our stake in HEALTH
SYSTEMS INTERNATIONAL, and to expand our position in UNITED DENTAL CARE, a
dental HMO.
Seagate, a producer of high-end disk drives with a great balance sheet
and cash flow, performed magnificently. We sold a portion of our position to
lock in those gains. Taken together Seagate, MICROS SYSTEMS (the leading
point-of-sale company serving the hospitality industry) and small holdings in
OPTIMAL ROBOTICS CORP. and COMPUTER HORIZONS bring our holdings in computer
systems to 16% of net assets.
As I stated earlier, I see the S&P as highly priced in comparison to
smaller company averages. However, the Growth Fund is predominantly invested in
fundamentally sound companies with
(Continued on next page)
-11-
<PAGE> 14
HIGHLIGHTS (Continued)
SAFECO GROWTH FUND
As of December 31, 1996
<TABLE>
<CAPTION>
PERCENT OF
TOP TEN HOLDINGS NET ASSETS
- ------------------------------------------------------------
<S> <C>
Seagate Technology, Inc. ...................... 8.4%
(Magnetic Disk Manufacturer)
Philip Morris Cos., Inc. ...................... 7.5%
(Food, Beverage & Tobacco Company)
MICROS Systems, Inc. .......................... 6.2%
(Electronic Cash Register Manufacturer)
American Buildings Co. ........................ 5.2%
(Construction Products Company)
Penederm, Inc. ................................ 4.6%
(Drug Delivery System)
Lifeline Systems, Inc. ........................ 4.5%
(Medical Instruments)
First Financial Caribbean Corp.(ADR) .......... 3.5%
(Mortgage Bank)
Damark International, Inc. .................... 3.2%
(Retail Marketer)
Harold's Stores, Inc. ......................... 2.8%
(Specialty Retailer)
Datascope Corp. ............................... 2.7%
(Medical Equipment Manufacturer)
<CAPTION>
TOP FIVE PURCHASES
(Oct. to Dec.) COST (000's)
- ---------------------------------------------------------
<S> <C>
Alternative Resources Corp. ................. $4,503
Damark International, Inc. .................. 4,343
United Dental Care, Inc. .................... 3,978
Youth Services International, Inc. .......... 2,515
Amrion, Inc. ................................ 1,974
TOP FIVE SALES
(Oct. to Dec.) PROCEEDS (000's)
- -------------------------------------------------------------
Canandaigua Wine Co., Inc. ................. $4,675
*Health Systems International, Inc. ........ 4,490
Ultrak, Inc. ............................... 4,032
*Family Golf Centers, Inc. ................. 3,922
Credit Acceptance Corp. .................... 3,122
</TABLE>
*Security sold, no longer in portfolio.
REPORT FROM THE GROWTH FUND MANAGER
(Continued)
excellent prospects at very reasonable valuations. I think the result of our
"stock picking" is that the fund is in good shape no matter which sector 1997
favors; and is in even better shape should small companies return to favor.
/s/ Thomas M. Maguire
- ---------------------
Thomas M. Maguire
Growth Fund Manager
After completing his M.B.A. at the University of Washington, Thomas Maguire
joined the company as an equity analyst in 1981 and today is a Vice President.
From 1984 to 1989, he co-managed the SAFECO Equity Fund.
-12-
<PAGE> 15
PORTFOLIO OF INVESTMENTS
SAFECO GROWTH FUND
As of December 31, 1996
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMOUNT VALUE (000'S)
- --------------------------------------------------------
<S> <C>
COMMON STOCKS - 98.5%
BEVERAGES - 2.4%
166,829 * Canandaigua
Wine Co., Inc. ............ $ 4,755
BUILDING MATERIALS - 9.7%
118,600 * ABT Building
Products Corp. ............ 2,965
428,800*+ American Buildings Co. .... 10,238
35,300 * Diamond Home Services, Inc. 971
147,000 * Fibreboard Corp. .......... 4,961
CHEMICALS - 1.2%
80,200 AT Plastics, Inc. ......... 792
196,400 * Melamine Chemicals, Inc. .. 1,620
COMMERCIAL SERVICES - 1.6%
201,625 * Youth Services
International, Inc. ....... 3,075
COMPUTER SERVICES - 3.3%
269,100 * Alternative Resources Corp. 4,676
95,100 LCS Industries, Inc. ...... 1,379
32,500 * ONTRACK Data
International, Inc. ....... 488
COMPUTER SOFTWARE - 1.4%
159,300 * Phoenix International
Ltd., Inc. ................ 2,748
COMPUTER SYSTEMS - 16.1%
60,400 * Computer Horizons Corp. ... 2,325
393,914 * MICROS Systems, Inc. ...... 12,113
128,000 * Optimal Robotics Corp. .... 608
417,968 * Seagate Technology, Inc. .. 16,510
CONSUMER PRODUCTS & SUPPLIERS - 0.4%
221,000 * Celebrity, Inc. ........... 787
DRUGS & HOSPITAL SUPPLIES - 17.7%
168,300 * Andrx Corp. ............... 2,714
70,000 * Anesta Corp. .............. 1,347
80,000 * Autonomous
Technologies Corp. ........ 320
264,200 * Datascope Corp. ........... 5,284
255,000 * Ethical Holdings, plc (ADR) 1,482
503,550*+ Lifeline Systems, Inc. .... 8,812
197,400 Medex, Inc. ............... 4,590
723,600*+ Penederm, Inc. ............ 8,955
31,300 * ResMed, Inc. .............. 689
44,600 * Zonagen, Inc. ............. 418
ELECTRONICS - 3.1%
105,060 * Intermagnetics
General Corp. ............. 1,261
91,900 * JPM Co. ................... 1,608
102,625 * Ultrak, Inc. .............. 3,130
FINANCIAL SERVICES - 6.1%
32,416 Cole Taylor Financial
Group, Inc. ............... 859
100,600 * Credit Acceptance Corp. ... 2,364
210,100 * First Enterprise Financial
Group, Inc. ............... 1,970
247,600 First Financial Caribbean
Corp. (ADR)................ 6,871
FOOD & TOBACCO - 7.5%
130,000 Philip Morris Cos., Inc. .. 14,641
HEALTH CARE - 3.0%
22,600 * Amrion, Inc. .............. 511
32,500 * MedQuist, Inc. ............ 804
152,000 * United Dental Care, Inc. .. 4,617
HOMEBUILDING - 0.5%
42,500 * American Homestar Corp. ... 967
HOSPITAL MANAGEMENT - 0.1%
98,000 * Laboratory Specialists of
America, Inc. ............. 294
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-13-
<PAGE> 16
PORTFOLIO OF INVESTMENTS (Continued)
SAFECO Growth Fund
As of December 31, 1996
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMOUNT VALUE (000'S)
- --------------------------------------------------------
<S> <C>
HOUSEHOLD PRODUCTS - 2.2%
325,200 * Lifetime Hoan Corp. ......... $3,821
150,000 * Media Arts Group, Inc. ...... 384
LEISURE TIME - 0.0%
80,000 * Laser Storm, Inc. ........... 80
MANUFACTURING - 2.3%
75,600 * Industrial Training Corp. ... 425
325,500 * Maverick Tube Corp. ......... 4,150
OFFICE EQUIPMENT & SUPPLIES - 1.1%
244,500*+ Open Plan Systems, Inc. ..... 2,139
POLLUTION CONTROL - 2.0%
156,000 * Tetra Technologies, Inc. .... 3,939
RESTAURANTS - 2.9%
617,900 * NPC International, Inc. ..... 5,098
92,400 * New York Bagel Enterprises .. 566
RETAIL - 6.0%
659,300*+ Damark International, Inc. .. 6,263
379,423*+ Harold's Stores, Inc. ....... 5,454
RETAIL - SPECIALTY - 7.3%
82,600 Aaron Rents, Inc. ........... 981
500,000*+ American Coin
Merchandising, Inc. ......... 2,500
8,500 * Funco, Inc. ................. 71
147,200 * Garden Botanika, Inc. ....... 1,766
163,000 * Garden Ridge Corp. .......... 1,406
362,200*+ Rent-Way, Inc. .............. 3,486
76,600 * The Dress Barn, Inc. ........ 1,149
67,500 * Video Update, Inc. (Class A). 266
300,400 * West Coast
Entertainment Corp. ......... 2,629
TELECOMMUNICATIONS - 0.6%
183,400 * ACI Telecentrics, Inc. ...... 1,123
-------
TOTAL COMMON STOCKS ..................... 193,215
-------
WARRANTS - 0.0%
LEISURE TIME - 0.0%
80,000 * Laser Storm, Inc. ........... 25
-------
TOTAL WARRANTS .......................... 25
-------
TEMPORARY INVESTMENTS - 1.0%
INVESTMENT COMPANIES:
$1,903,185 Short-Term Investments Co.
(Prime Portfolio)........................ 1,903
-------
TOTAL TEMPORARY INVESTMENTS.............. 1,903
-------
TOTAL INVESTMENTS - 99.5% .............. 195,143
Other Assets, less Liabilities .......... 920
-------
NET ASSETS .............................. $196,063
=======
</TABLE>
* Non-income producing security.
+ Affiliated issuer as defined by the Investment Company Act of 1940 (the
Fund's investment advisor controls 5% or more of the outstanding voting
shares of the company).
SEE NOTES TO FINANCIAL STATEMENTS
-14-
<PAGE> 17
REPORT FROM THE FUND MANAGER
SAFECO EQUITY FUND
December 31, 1996
It was another great year for SAFECO Equity investors. The Advisor
Class A shares returned 25.00% and the Advisor Class B shares returned 24.68%,
not including sales charges, for the 12 months ended December 31. The S&P
returned 22.94%, and the average growth and income fund returned 20.78%
according to Lipper Analytical Services.
The Fund's success was due to staying our course -- that is, focusing
on well-run companies with long-term growth records at good prices and
disciplined selling. The 1996 stock market favored both the type of stocks we
favor and the industries in which we were most heavily invested. Our choices in
technology, our overweighting in financials (especially CHASE MANHATTAN), and
our subsequent underweighting in utilities and oils, enabled us to outperform
both our peers and the S&P.
Setting buy targets and keeping companies in my sights was especially
fruitful in the technology arena. We bought ORACLE (database software) when it
came into our range and it took off so strongly, I've taken some profits.
SEAGATE (high-end disc drives) was another big purchase and gainer. Positions we
had established earlier in INTEL (computer processor chips) and MICROSOFT
(software) have also performed well.
[Photo of Rich Meagley]
Equipment manufacturers MOTOROLA, HEWLETT PACKARD and EDS complete the
list of our technology holdings. Combined, our computer hardware and software
stocks now account for 8.4% of net assets and every name we own is well known.
As I set a buy price, so I set a sell price, and sell when a stock
rises to it. Such was the case with WARNER LAMBERT. I took profits there and
moved into BRISTOL-MYERS. I think Bristol can grow faster than its price
currently reflects. It has a new CFO with ambitious cost cutting plans, new
drugs coming to market and an expanding sales force.
I bought SMITHKLINE after its price fell on a "turn-down" by the Food
and Drug administration. SmithKline has lots of drugs pending approval, and an
improving over-the-counter business.
Frankly, I'm currently concerned about corporate earnings
(Continued on next page.)
-15-
<PAGE> 18
HIGHLIGHTS
SAFECO
EQUITY FUND
As of December 31, 1996
Net Asset Capitalization Weightings
As a Percent of Net Assets
as of December 31, 1996
[Pie Chart]
1. Large: 88% ($4 Bil. and above.)
2. Medium: 8% ($1 Bil. - $4 Bil.)
3. Small: 0% (Less than $1 Bil.)
4. Cash and Other Assets: 4%
Top Five Industries
As a Percent of Net Assets
as of December 31, 1996
[Bar Chart]
Petroleum & Petroleum Services: 9%
Drugs & Hospital Supplies: 8%
Electrical Equipment & Electronics: 8%
Banking & Finance: 7%
Financial Services: 6%
REPORT FROM THE
EQUITY FUND MANAGER
(Continued)
matching expectations. Hence, companies with cost-cutting ability and a decent
dividend are particularly attractive to me. Those qualities can support return,
especially in times when missed earnings are likely to drag down share prices.
For those reasons I added to our oil stocks and I eliminated CENTURY TELEPHONE,
swapping it for BELL ATLANTIC which has a much better yield and, pending the
merger with NYNEX, savings potential.
Merger-inspired cost-cutting continues at KIMBERLY-CLARK and Chase Manhattan. In
fact, things are proceeding so well at Chase, I bought more, making it our
largest holding.
I sold CITICORP when it hit our target. And I lightened our insurance holdings
from five companies to two in favor of other financials with higher growth
potential. One is credit card provider ADVANTA CORP.
BLOCKBUSTER'S lackluster performance returned its parent, VIACOM, to our price
range and I bought more of it. I like its new management and its international
growth potential.
Of late, no industries have been distinctly attractive, and so our purchases
have been widely distributed. The most recent additions to
-16-
<PAGE> 19
the portfolio include ELECTRONIC DATA SYSTEMS, ALLIED SIGNAL, PACIFICCARE,
JOHNSON and JOHNSON, TEXACO and AMERICAN STORES.
The fact the market seems precariously high, has not caused me to alter my
strategy. I'm still striving for consistency, discipline and execution.
Equity Fund's portfolio is about 90 percent large capitalization companies (over
$4 billion). This is no surprise. The type of company I'm looking for --
well-run companies with long-term, proven growth records -- tend to grow into
large companies.
While I won't speculate on the market, I will predict with absolute confidence
that my investment style will remain the same. And, my personal belief is that
performance will follow.
/s/ Rich Meagley
- --------------------
Richard Meagley,
Equity Fund Manager
Rich Meagley joined SAFECO in 1983. After advancing from analyst to Northwest
Fund Manager, he left the company. He re-joined in January 1995 as Equity Fund
Manager. He holds an M.B.A. from the University of Washington, and is a
Chartered Financial Analyst.
HIGHLIGHTS (Continued)
SAFECO EQUITY FUND
As of December 31, 1996
<TABLE>
<CAPTION>
PERCENT OF
TOP TEN HOLDINGS NET ASSETS
- ------------------------------------------------------
<S> <C>
Chase Manhattan Corp. ................... 5.1%
(Bank)
Mobil Corp. ............................. 2.6%
(Oil/Gas Exploration & Production)
Viacom, Inc. ............................ 2.5%
(Entertainment & Communication)
AMP, Inc. ............................... 2.5%
(Electrical Equipment Manufacturer)
Exxon Corp. ............................. 2.3%
(Oil/Gas Exploration & Production)
Bell Atlantic Corp. ..................... 2.3%
(Telephone Company)
Philip Morris Cos., Inc. ................ 2.2%
(Food, Beverage & Tobacco Company)
NationsBank Corp. ....................... 2.2%
(Bank)
Bristol-Myers Squibb Co. ................ 2.2%
(Pharmaceuticals)
AT&T Corp. .............................. 2.2%
(Telephone Company)
<CAPTION>
TOP FIVE PURCHASES
(Oct. to Dec.) COST (000'S)
- ------------------------------------------------------
<S> <C>
PacifiCare Health Systems, Inc. ......... $18,859
Electronic Data Systems Corp. ........... 18,461
American Stores Co. ..................... 18,122
Texaco, Inc. ............................ 17,412
Johnson & Johnson ....................... 12,794
<CAPTION>
TOP FIVE SALES
(Oct. to Dec.) PROCEEDS (000'S)
- ------------------------------------------------------
<S> <C>
*Union Pacific Corp. .................... $12,052
*Century Telephone Enterprise Co. ....... 9,633
Seagate Technology, Inc. ................ 8,675
Intel Corp. ............................. 7,380
SmithKline Beecham. plc (ADR) ........... 6,899
- ------------------------------------------------------
</TABLE>
*Security sold, no longer in portfolio.
-17-
<PAGE> 20
PORTFOLIO OF INVESTMENTS
SAFECO EQUITY FUND
As of December 31, 1996
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMOUNT VALUE (000's)
- -----------------------------------------------------------
<S> <C>
COMMON STOCKS - 96.1%
AUTOS & AUTO PARTS - 2.2%
590,000 Echlin, Inc. ................... $18,659
BANKING & FINANCE - 7.3%
485,400 Chase Manhattan Corp. .......... 43,322
195,000 NationsBank Corp. .............. 19,061
BEVERAGES - 2.1%
615,000 PepsiCo, Inc. .................. 17,989
BROADCAST MEDIA - 4.1%
600,000 * Viacom, Inc. (Class B) ......... 20,925
205,000 Walt Disney Co. ................ 14,273
CHEMICALS - 1.9%
175,000 Du Pont (E.I.) de
Nemours & Co. .................. 16,516
COMPUTER SOFTWARE - 4.8%
400,000 Electronic Data
Systems Corp. ................. 17,300
165,000 * Microsoft Corp. ............... 13,633
250,000 * Oracle Corp. .................. 10,437
COMPUTER SYSTEMS - 3.6%
305,000 Hewlett-Packard Co. ........... 15,326
380,000 * Seagate Technology, Inc. ...... 15,010
DRUGS & HOSPITAL SUPPLIES - 8.2%
315,000 American Home
Products Corp. ................ 18,467
175,000 Bristol-Myers Squibb Co. ...... 19,031
210,000 Schering-Plough Corp. ......... 13,597
275,000 SmithKlineBeecham,
plc (ADR) ..................... 18,700
ELECTRIC UTILITY - 2.0%
760,000 Houston Industries, Inc. ...... 17,195
ELECTRICAL EQUIPMENT & ELECTRONICS - 7.6%
545,000 AMP, Inc. ..................... 20,914
175,000 General Electric Co. .......... 17,303
100,000 Intel Corp. ................... 13,094
220,000 Motorola, Inc. ................ 13,502
FINANCIAL SERVICES - 6.2%
430,000 Advanta Corp. (Class B) ....... 17,576
160,000 Federal Home Loan
Mortgage Corp. ................ 17,620
475,000 Federal National
Mortgage Association .......... 17,694
FOOD & TOBACCO - 4.2%
320,000 ConAgra, Inc. ................. 15,920
170,000 Philip Morris Cos., Inc. ...... 19,146
HEALTHCARE - 1.5%
250,000 Johnson & Johnson ............. 12,437
HOSPITAL MANAGEMENT - 2.2%
221,300 * PacifiCare Health Systems,
Inc. (Class B) ................ 18,866
HOUSEHOLD PRODUCTS - 3.9%
170,000 Colgate-Palmolive Co. ......... 15,682
185,000 Kimberly-Clark Corp. .......... 17,621
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-18-
<PAGE> 21
PORTFOLIO OF INVESTMENTS (Continued)
SAFECO EQUITY FUND
As of December 31, 1996
<TABLE>
SHARES OR
PRINCIPAL AMOUNT VALUE (000'S)
- ----------------------------------------------------------
<S> <C>
INSURANCE - 3.8%
130,000 American International
Group, Inc. ..................... $14,073
275,000 ITT Hartford Group, Inc. ........ 18,563
MANUFACTURING - 2.0%
250,000 AlliedSignal, Inc. .............. 16,750
14,000 Dover Corp. ..................... 704
PAPER & FOREST PRODUCTS - 1.8%
216,500 Willamette Industries, Inc. ..... 15,074
PETROLEUM & PETROLEUM SERVICES - 8.6%
200,000 Exxon Corp. ..................... 19,600
180,000 Mobil Corp. ..................... 22,005
87,000 Royal Dutch Petroleum
Co. (ADR) ....................... 14,855
175,000 Texaco, Inc...................... 17,172
POLLUTION CONTROL - 1.9%
625,000 Browning-Ferris
Industries, Inc. ................. 16,406
RETAIL - 3.8%
347,500 May Department
Stores Co. ....................... 16,246
725,000 Wal-Mart Stores, Inc. ............ 16,584
RETAIL - GROCERS - 4.2%
476,000 Albertson's, Inc. ................ 16,958
450,000 American Stores Co. .............. 18,394
TELECOMMUNICATIONS - 2.2%
435,000 AT&T Corp. ....................... $ 18,923
TRANSPORTATION - 1.8%
175,000 Burlington Northern
Santa Fe ......................... 15,116
UTILITIES - TELEPHONE - 4.2%
300,000 Bell Atlantic Corp. .............. 19,425
360,000 GTE Corp. ........................ 16,380
-------
TOTAL COMMON STOCKS ............................ 820,044
-------
TEMPORARY INVESTMENTS - 4.7%
U.S. AGENCY NOTES:
$39,855,000 Federal Home
Loan Mortgage Corp.
5.70%, due 1/02/97 ................ 39,849
------
TOTAL TEMPORARY INVESTMENTS .................... 39,849
------
TOTAL INVESTMENTS - 100.8% ..................... 859,893
Liabilities, less Other Assets ................. (6,813)
------
NET ASSETS ..................................... $853,080
========
</TABLE>
- ----------------------------------------------------------
*Non-income producing security.
SEE NOTES TO FINANCIAL STATEMENTS
-19-
<PAGE> 22
REPORT FROM THE FUND MANAGER
SAFECO INCOME FUND
December 31, 1996
1996 was a great year for SAFECO Income Fund. Your fund returned 23.95%
for the Advisor Class A shares and 23.67% for the Advisor Class B shares, not
including the effects of sales charges, surpassing the S&P which returned 22.94%
and the equity-income peer group which returned, on average, 18.83% according to
Lipper Analytical Services.
It was a year in which companies with predictable earnings growth did
well, as they typically do in slow-growth, low-inflation economies such as the
one we're experiencing. In general, our success was due to recognizing the
environment we're investing in and investing appropriately. Specific picks that
enabled us to beat the S&P and peer group included HEWLETT PACKARD, GE, PHILIP
MORRIS, AMERICAN BANKERS INSURANCE, ITT HARTFORD, ALTERA and SEAGATE.
While large, stable, dividend-paying companies continue to predominate
the Income Fund, I have tailored the portfolio for more capital appreciation
potential. I have also maintained a fairly high level of convertible securities
(28% of assets at year end) to preserve yield and down market protection.
To enhance return potential, I've added some smaller positions in
technology stocks. That's made SAFECO Income unique among equity-income funds.
While most of our peers eschew technology stocks (which are volatile and hard to
understand) we have 11% of net assets invested in computer services and systems.
Such stocks currently represent 11.5% of the S&P Index and post average annual
revenue and earnings growth rates ranging from 15% to 35%. It's my view that a
manager can't afford not to invest here.
[Photo of Thomas Rath]
Choosing these technology stocks, I look for the same qualities I look
for in any stock -- consistent growth and reasonable prices. I follow key trends
in the industry and invest only in companies that drive or move in concert with
them. These companies are typically the dominant players in growing markets.
Examples of these include: Seagate (high-end disk-drives), MICROS
SYSTEMS, (point-of-sale technology), 3-COM (local area networks), Altera and
XILINX (programmable logic devices).
-20-
<PAGE> 23
HIGHLIGHTS
SAFECO
INCOME FUND
As of December 31, 1996
NET ASSET CAPITALIZATION WEIGHTINGS
AS A PERCENT OF NET ASSETS
AS OF DECEMBER 31, 1996
[Pie Chart]
1. Large: 53% ($4Bil. and above)
2. Medium: 5% ($1Bil. - $4Bil)
3. Small: 11% (Less than $1Bil)
4. Preferred Stocks: 16%
5. Corporate Bonds: 12%
6. Cash and Other Assets: 3%
TOP FIVE INDUSTRIES
AS A PERCENT OF NET ASSETS
AS OF DECEMBER 31, 1996
[Bar chart]
Petroleum & Petroleum Services: 8%
Banking & Finance: 7%
Food & Tobacco: 7%
Financial Services: 6%
Computer Services: 6%
We actually no longer own Altera. I sold the position after it surpassed our
target price and added to the Xilinx convertible.
Convertibles, with their high yields and lower volatility, are a less
treacherous way to invest in technology than stocks. In fact, the calling of
three securities that converted into Seagate Technology stock, created gains for
the portfolio. Seagate dominates the growing digital storage market.
Another substantial convertible position is FIRST FINANCIAL MANAGEMENT.
It pays a 5% yield and is convertible into FIRST DATA CORP., a company with
majority market share in the fast growing industry of credit card processing.
I have reduced the banks and added non-bank financials such as FEDERAL
NATIONAL MORTGAGE and MEDALLION FINANCIAL. I've been especially pleased with the
contributions ITT Hartford and American Bankers Insurance Group have made to the
portfolio.
I added a position in LANDAUER, a maker of radiation detection
equipment. While Landauer is not an exciting name, it carries a high yield, has
a history of increasing dividends and is the leader in its market.
My approach is to find stocks of companies that can grow
(Continued on next page)
-21-
<PAGE> 24
REPORT FROM THE
INCOME FUND MANAGER
(continued)
earnings at a faster pace than the broader market and that are trading at
reasonable prices. The companies I like tend to have high market shares, strong
balance sheets, good levels of cash flow and dividends, and are the dominant
players in growing industries.
The stock market has had two great years back-to-back, and given
current stock prices relative to earnings, I don't expect a third. I anticipate
a slowing of returns for 1997. The deciding factors will be corporate earnings
and the level of interest rates.
Regardless of the market environment, in SAFECO Income you have a
diversified portfolio positioned for total return -- both income and capital
appreciation. Your Fund is structured to advance with the market while
delivering above the average current income -- income that can help hold up
returns should the market falter.
/s/ Thomas Rath
- ------------------------
Thomas Rath
Income Fund Manager
In addition to being an equity and convertible securities portfolio manager at
SAFECO, Rath has been an analyst and portfolio manager at First Interstate Bank
and a principal at Meridian Capital Management. He holds an MBA from the
University of Washington and is a Chartered Financial Analyst.
HIGHLIGHTS (Continued)
SAFECO INCOME FUND
As of December 31, 1996
<TABLE>
<CAPTION>
PERCENT OF
TOP TEN HOLDINGS NET ASSETS
- --------------------------------------------------------
<S> <C>
Philip Morris Cos., Inc. ................ 5.0%
(Food, Beverage & Tobacco Company)
Seagate Technology, Inc. ................ 3.4%
(Magnetic Disk Manufacturer)
GTE Corp............ .................... 3.1%
(Telephone Company)
American Home Products Corp. ............ 2.8%
(Pharmaceuticals)
Texaco, Inc......... .................... 2.7%
(Oil Company)
First Financial Management
5.00%, due 12/15/99. .................. 2.7%
(Information Processor)
Landauer, Inc...... ..................... 2.3%
(Pollution Control)
ITT Hartford Group, Inc. ................ 2.3%
(Insurance Company)
GATX Corp. $3.875 Cumulative
Convertible........ ................... 2.2%
(Railway & Terminal Operator)
Chase Manhattan Corp. ................... 2.2%
(Bank)
TOP FIVE PURCHASES
(Oct. to Dec.) COST (000'S)
- --------------------------------------------------------
Salomon, Inc 6.25% Exchangeable ......... $4,605
J.C. Penney Co., Inc. ................... 3,566
Xilinx, Inc. 5.25%, due 11/1/02 (144A) .. 2,953
Electronic Data Systems Corp. ........... 2,775
Nuevo Energy Co. $2.875 Cvt. ............ 2,257
TOP FIVE SALES
(Oct. to Dec.) PROCEEDS (000'S)
- --------------------------------------------------------
Seagate Technology, Inc. ................ $6,093
*Altera Corp. 5.75%,
due 6/15/02 (144A) .................... 3,953
Sturm Ruger & Co., Inc. ................. 2,652
Cooper Industries, Inc. 7.05%,
due 1/01/15............................ 2,651
*Price/Costco, Inc. 6.75%, due 3/1/01 ... 2,621
</TABLE>
- --------------------------------------------------------
*Security sold, no longer in portfolio.
-22-
<PAGE> 25
PORTFOLIO OF INVESTMENTS
SAFECO Income Fund
As of December 31, 1996
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMOUNT VALUE (000'S)
- ------------------------------------------------------
<S> <C>
COMMON STOCKS - 68.8%
BANKING & FINANCE - 7.3%
35,000 Boatmen's Bancshares, Inc. ..... $2,257
70,000 Chase Manhattan Corp. .......... 6,247
46,100 Norwest Corp. .................. 2,005
105,000 US Bancorp ..................... 4,718
136,642 Washington Mutual
Savings Bank ................... 5,918
COMMERCIAL SERVICES - 1.5%
139,000 American List Corp. ............ 4,222
COMPUTER SERVICES - 1.2%
110,000 * Keane, Inc. .................... 3,493
COMPUTER SOFTWARE - 0.9%
60,000 Electronic Data
Systems Corp. .................. 2,595
COMPUTER SYSTEMS - 5.5%
50,000 Hewlett-Packard Co. ............ 2,512
114,000 * MICROS Systems, Inc. ........... 3,505
250,219 * Seagate Technology, Inc. ....... 9,884
CONGLOMERATES - 1.9%
65,000 Minnesota Mining &
Manufacturing Co. .............. 5,387
COSMETICS - 0.8%
54,600 International Flavors &
Fragrances, Inc. ............... 2,457
DRUGS & HOSPITAL SUPPLIES - 3.6%
140,000 American Home
Products Corp. ................. 8,207
30,000 Merck and Co., Inc. ............ 2,377
ELECTRIC UTILITY - 3.4%
220,000 Houston Industries, Inc. ....... 4,978
125,000 NIPSCO Industries, Inc. ........ 4,953
ELECTRICAL EQUIPMENT & ELECTRONICS - 3.8%
155,000 AMP, Inc. ...................... 5,948
50,000 General Electric Co. ........... 4,944
FINANCIAL SERVICES - 4.1%
140,000 Federal National
Mortgage Association ........... $5,215
100,000 H&R Block, Inc. ................ 2,900
250,000 Medallion Financial Corp. ...... 3,813
FOOD & TOBACCO - 6.6%
90,000 ConAgra, Inc. .................. 4,478
130,000 Philip Morris Cos., Inc. ....... 14,641
HOUSEHOLD PRODUCTS - 3.8%
60,000 Colgate-Palmolive Co. .......... 5,535
57,500 Kimberly-Clark Corp. ........... 5,477
INSURANCE - 2.3%
100,000 ITT Hartford Group, Inc. ....... 6,750
LEISURE TIME - 0.6%
85,000 Sturm, Ruger & Co., Inc. ....... 1,647
PETROLEUM & PETROLEUM SERVICES - 6.7%
50,000 Exxon Corp. .................... 4,900
20,000 Mobil Corp. .................... 2,445
25,000 Royal Dutch
Petroleum Co. (ADR) ............ 4,269
80,000 Texaco, Inc. ................... 7,850
POLLUTION CONTROL - 2.3%
275,900 Landauer, Inc. ................. 6,760
REAL ESTATE INVESTMENT TRUSTS - 1.7%
148,600 Omega Healthcare
Investors, Inc. ............... 4,941
RETAIL - 4.4%
115,000 J.C. Penney Co., Inc........... 5,606
90,000 May Department Stores Co....... 4,208
62,039 Sears, Roebuck & Co............ 2,862
RETAIL - GROCERS - 1.0%
70,000 American Stores Co............. 2,861
TELECOMMUNICATIONS - 1.2%
80,000 AT&T Corp...................... 3,480
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-23-
<PAGE> 26
PORTFOLIO OF INVESTMENTS (Continued)
SAFECO Income Fund
As of December 31, 1996
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMOUNT VALUE (000'S)
- ------------------------------------------------------
<S> <C>
UTILITIES - GAS - 1.1%
135,000 Northwest Natural Gas Co. ... $3,240
UTILITIES - TELEPHONE - 3.1%
200,000 GTE Corp. ................... 9,100
-------
TOTAL COMMON STOCKS ................... 199,585
-------
PREFERRED STOCKS - 16.2%
COMPUTER SERVICES - 2.0%
115,000 # Vanstar Financing Trust
6.75% Convertible (144A) .... 5,951
CONTAINERS - 1.8%
100,000 Crown Cork & Seal
4.50% Convertible ........... 5,200
FINANCIAL SERVICES - 2.1%
150,000 Advanta Corp.
Class B Series
95 SAILS .................... 6,075
FOOD & TOBACCO - 0.7%
300,000 RJR Nabisco Holdings Corp.
$0.835 Convertible .......... 2,025
INSURANCE - 1.1%
52,000 American Bankers Insurance
Series B Convertible ........ 3,107
OIL & GAS - 0.8%
44,800 Nuevo Energy Co.
$2.875 Convertible ........... 2,403
PAPER & FOREST PRODUCTS - 1.0%
55,000 James River Corp. of Virginia
$3.375 Cumulative Convertible
Exchangeable ................. 2,826
POLLUTION CONTROL - 1.6%
160,000 Browning Ferris Industries, Inc.
7.25% "ACES".................. 4,560
TRANSPORTATION - 3.5%
110,000 GATX Corp. $3.875 Cumulative
Convertible .................. $6,421
37,000 Interpool, Inc.
5.75% Convertible ............ 3,774
Utilities - Telephone - 1.6%
80,400 Salomon, Inc. 6.25%
Exchangeable Convertible
to Cincinnati Bell, Inc. ..... 4,844
------
TOTAL PREFERRED STOCKS ................. 47,186
------
CORPORATE BONDS - 11.7%
CONVERTIBLE SUBORDINATED DEBENTURES:
COMPUTER SERVICES - 2.7%
$4,500,000 First Financial Management
5.00%, due 12/15/99
Convertible to First Data
Corp...................... 7,757
DRUGS & HOSPITAL SUPPLIES - 0.9%
2,400,000 Bindley Western
Industries, Inc.
6.50%, due 10/01/02 ...... 2,556
ELECTRICAL EQUIPMENT - 0.9%
2,500,000 Cooper Industries, Inc.
7.05%, due 1/01/15 ....... 2,625
ELECTRONICS - 1.8%
5,250,000 # Xilinx, Inc.
5.25%, due 11/01/02
(144A) ................... 5,198
PAPER & FOREST PRODUCTS - 0.7%
2,115,000 Repap Enterprises, Inc.
8.50%, due 8/01/97
(EuroDollar) ............. 2,041
PETROLEUM & PETROLEUM SERVICES - 1.3%
2,500,000 Pennzoil Co.
6.50%, due 1/15/03 ....... 3,856
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-24-
<PAGE> 27
PORTFOLIO OF INVESTMENTS (Continued)
SAFECO Income Fund
As of December 31, 1996
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMOUNT VALUE (000'S)
- ------------------------------------------------------
<S> <C>
PUBLISHING - 1.1%
$3,000,000 Thomas Nelson, Inc.
5.75%, due 11/30/99 ...... $3,023
RETAIL - 0.8%
2,500,000 Home Depot, Inc.
3.25%, due 10/01/01 ........ 2,434
TELECOMMUNICATION EQUIPMENT - 1.0%
1,300,000 # 3Com Corp. 10.25%,
due 11/01/01 (144A) ........ 2,884
TRANSPORTATION - 0.5%
1,605,000 Alaska Air Group, Inc.
6.875%, due 6/15/14 ....... 1,521
----------
TOTAL CORPORATE BONDS ................ 33,895
----------
TEMPORARY INVESTMENTS - 3.3%
INVESTMENT COMPANIES: ................ $9,717,004
$9,717,004 Short-Term Investments Co.
(Prime Portfolio) ......... $ 9,717
----------
TOTAL TEMPORARY INVESTMENTS .......... 9,717
----------
TOTAL INVESTMENTS - 100.0% ........... 290,383
Liabilities, less Other Assets ....... (110)
----------
NET ASSETS ........................... $290,273
===========
</TABLE>
* Non-income producing security.
# Securities are exempt from registration and restricted as to resale only to
dealers, or through a dealer to an "accredited investor" or a "qualified
institutional buyer". At December 31, 1996, such securities are Vanstar
Financing Trust (144A) at 6.75%, acquired 9/27/96, Xilinx, Inc. (144A) at
5.25%, acquired 4/01/96, due 11/01/02 and 3Com Corp. (144A) at 10.25%,
acquired 7/23/96, due 11/01/01. The total cost of such securities is
$12,925,875 and total value is 4.8% of Net Assets.
SEE NOTES TO FINANCIAL STATEMENTS
-25-
<PAGE> 28
REPORT FROM THE FUND MANAGER
SAFECO NORTHWEST FUND
December 31, 1996
The SAFECO Northwest Fund returned 14.95% for the Advisor Class A
shares and 14.71% for the Advisor Class B shares, not including the effects of
sales charges, for the year ended December 31, 1996 compared to 25.89% for the
Northwest 50(TM) Index. The portfolio's heavy weighting in very small companies
held the Fund's performance below its peer funds and benchmark index.
1996 proved to be a year in which larger company stocks outperformed.
By October we were realigning the Fund toward larger stocks. We fully eliminated
11 small company positions and cut two more by half. We added eight new, larger
cap names, among them STARBUCKS, SEQUENT COMPUTER (high-performance computer
systems), PRECISION CASTPARTS (Boeing supplier); AMP (computer connectors); and
INTEL (computer chips).
The shift in investments was in the area of market capitalization, not
industry sector as I still expect banks and financials to outperform. 23% of net
assets remain invested in these sectors. The Portfolio currently has 49% of net
assets invested in companies over $1 billion.
[Photo of Carles R. Driggs]
We anticipate employment in the Northwest will be well above the U.S.
average as Boeing adds 5,000 jobs in 1997 (on top of 13,000 in 1996) and
Microsoft's Redmond Campus grows from 9,000 to 11,000 employees. Furthermore, we
expect personal income gains in the Northwest should approach 7%, versus 5.3%
for the United States. After all, Boeing pays an average salary of $49,000 and
Microsoft $59,000.
Economic growth (GDP) should average 3.3% for the West over the next
three years and 2.0% for the U.S.
-26-
<PAGE> 29
This regional strength bodes particularly well for the companies in our
portfolio that provide goods and services locally.
All in all, the Northwest is a fine place to invest. And we're stocked
up on the regions premiere companies.
/s/ Charles R. Driggs
- ----------------------
Charles R. Driggs,
Northwest Fund Manager
Charles Driggs has 27 years in securities analysis in the Northwest. He joined
SAFECO in 1984 as a utility and financial services expert and took the helm of
SAFECO Northwest Fund in November 1992. Driggs holds a Bachelor of Science in
Investments from Portland State University in Oregon.
HIGHLIGHTS
SAFECO
NORTHWEST FUND
As of December 31, 1996
Net Asset Capitalization Weightings
As a Percent of Net Assets
as of December 31, 1996
[Pie Chart]
1. Large: 34% ($4Bil. and above)
2. Medium: 15% ($1Bil. - $4Bil)
3. Small: 47% (Less than $1Bil)
4. Cash and Other Assets: 4%
Top Five Industries
As a Percent of Net Assets
as of December 31, 1996
[Bar Chart]
Savings & Loans/Savings Banks: 12%
Banking: 11%
Electrical Equipment & Electronics: 11%
Retail: 8%
Computer Software: 8%
-27-
<PAGE> 30
HIGHLIGHTS (Continued)
SAFECO NORTHWEST FUND
As of December 31, 1996
<TABLE>
<CAPTION>
TOP TEN HOLDINGS NET ASSETS
- ---------------- ----------
<S> <C>
Microsoft Corp. ......................... 6.9%
(Personal Computer Software)
US Bancorp .............................. 5.6%
(Bank)
Boeing Co. .............................. 5.4%
(Aerospace)
Schnitzer Steel Industries, Inc. ........ 4.7%
(Steel Manufacturing)
Washington Mutual Savings Bank .......... 4.5%
(Savings & Loan)
Price/Costco, Inc. ...................... 3.9%
(Wholesale Membership Warehouse)
Sterling Financial Corp. ................ 3.4%
(Savings & Loan Holding Co.)
Albertson's, Inc. ....................... 2.8%
(Retail Grocer)
Intel Corp. ............................. 2.7%
(Microcomputer Components
Manufacturer)
NIKE, Inc. .............................. 2.7%
(Athletic & Leisure Footware & Apparel)
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE PURCHASES
(Oct. to Dec.) COST (000'S)
- -------------- ------------
<S> <C>
Intel Corp. .................... ... $1,123
AMP, Inc. ...................... ... 1,037
Precision Castparts Corp. ...... ... 977
Starbucks Corp. ................ ... 931
Houston Industries, Inc. ....... ... 858
TOP FIVE SALES
(Oct. to Dec.) PROCEEDS (000'S)
- -------------- ----------------
*Rochester Gas & Electric Corp. .... $1,091
Lattice Semiconductor Corp. ........ 904
*Wholesome & Hearty Foods, Inc. .... 885
Washington Mutual Savings Bank ..... 769
*BMC West Corp. .................... 747
</TABLE>
*Security sold, no longer in portfolio.
PORTFOLIO OF INVESTMENTS
SAFECO
NORTHWEST FUND
As of December 31 ,1996
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMOUNT VALUE (000'S)
- --------------------------------------------------------
<S> <C>
COMMON STOCKS - 96.0%
AEROSPACE - 7.7%
22,100 Boeing Co...................... $2,351
21,000 Precision Castparts Corp....... 1,042
AIR TRANSPORT - 1.6%
30,000 Airborne Freight Corp.......... 701
APPAREL MANUFACTURING - 2.7%
20,000 NIKE, Inc...................... 1,195
AUTOS - 2.0%
54,000 * Monaco Coach Corp.............. 878
BANKING - 10.9%
26,620 * Cascade Bancorp................ 559
72,300 Northrim Bank.................. 678
15,800 Security Bank Holding Co....... 134
55,000 US Bancorp..................... 2,472
51,975 West Coast Bancorp, Inc........ 942
BEVERAGES - 1.3%
58,200 * Redhook Ale Brewery, Inc....... 560
BUILDING MATERIALS - 2.1%
40,000 TJ International, Inc........... 930
CHEMICALS - 1.7%
253,200 * Consep, Inc..................... 760
COMMERCIAL SERVICES - 1.0%
29,000 * Barrett Business
Services, Inc.................. 442
COMPUTER SOFTWARE - 8.0%
28,300 * Analogy, Inc................... 127
27,500 * Mentor Graphics Corp........... 268
36,600 * Microsoft Corp................. 3,024
10,000 * ThrustMaster, Inc.............. 76
COMPUTER SYSTEMS - 0.9%
21,000 * Sequent Computer
Systems, Inc................... 373
ELECTRIC UTILITY - 3.8%
40,000 Houston Industries, Inc........ 905
12,000 LG&E Energy Corp............... 294
12,000 Public Service Company of
Colorado....................... 467
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-28-
<PAGE> 31
PORTFOLIO OF INVESTMENTS (Continued)
SAFECO NORTHWEST FUND
As of December 31, 1996
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMOUNT VALUE (000's)
- ---------------------------------------------------------------
<S> <C>
ELECTRICAL EQUIPMENT & ELECTRONICS - 11.1%
29,000 AMP, Inc. ............................... $1,113
76,600 * Flir Systems, Inc. ...................... 1,053
9,200 Intel Corp. ............................. 1,205
23,000 * Lattice Semiconductor Corp. ............. 1,058
77,000 * Pacific Aerospace & Electronics, Inc. ... 226
21,700 * Praegitzer Industries, Inc. ............. 222
HEALTH CARE - 2.5%
29,200 * Assisted Living Concepts, Inc. .......... 445
49,000 * Emeritus Corp. .......................... 662
METALS - 5.5%
23,100 Oregon Steel Mills, Inc. ................ 387
80,000 Schnitzer Steel Industries, Inc. ........ 2,050
PAPER & FOREST PRODUCTS - 2.0%
48,500 Longview Fibre Co. ...................... 891
POLLUTION CONTROL - 0.3%
88,000 * R-B Rubber Products, Inc. ............... 148
RETAIL - GROCERS - 3.6%
35,000 Albertson's, Inc. ....................... 1,247
66,000 * Carr-Gottstein Foods Co. ................ 248
2,284 * Quality Food Centers, Inc. .............. 77
RETAIL - 8.4%
60,000 * Hollywood Entertainment Corp. ........... 1,110
24,600 Nordstrom, Inc. ......................... 872
68,000 * Price/Costco, Inc. ...................... 1,709
RETAIL - SPECIALTY - 3.5%
138,450 * Egghead, Inc. ........................... 727
28,000 * Starbucks Corp. ......................... 801
SAVINGS & LOANS / SAVINGS BANKS - 11.9%
33,000 Interwest Savings Bank$ ................. 1,064
24,000 Security Bancorp......................... 708
106,000 * Sterling Financial Corp. ................ 1,497
45,200 Washington Mutual Savings Bank........... 1,958
TRANSPORTATION - 2.3%
37,200 Expeditors International
of Washington, Inc. ..................... 856
14,000 Greenbrier Cos., Inc. ................... 145
UTILITIES - GAS - 1.2%
30,400 Cascade Natural Gas Corp. ............... 517
-------
TOTAL COMMON STOCKS.................................... 42,174
-------
WARRANTS - 0.1%
ELECTRICAL EQUIPMENT & ELECTRONICS - 0.1%
77,000 * Pacific Aerospace &
Electronics, Inc. ....................... 48
-------
TOTAL WARRANTS......................................... 48
-------
TEMPORARY INVESTMENTS - 2.6%
INVESTMENT COMPANIES:
$1,129,106 Short-Term Investments Co.
(Prime Portfolio).......................... 1,129
-------
TOTAL TEMPORARY INVESTMENTS............................ 1,129
-------
TOTAL INVESTMENTS - 98.7%.............................. 43,351
Other Assets, less Liabilities......................... 595
-------
NET ASSETS............................................. $43,946
=======
</TABLE>
- ------------------------------------------------------------------
* Non-income producing security.
SEE NOTES TO FINANCIAL STATEMENTS
-29-
<PAGE> 32
REPORT FROM THE FUND MANAGERS
SAFECO BALANCED FUND
December 31, 1996
Since the Balanced Fund's inception, January 31, 1996 through December 31,
1996, the Advisor Class A shares have returned 11.36% and the Advisor Class B
shares have returned 11.12%, not including the effects of sales charges. This is
slightly lower than 12.07%, the return on a 60/40 mix of the S&P 500 and the
Lehman Brothers Government Corporate Bond Index.
Within the asset classes, our stocks performed better than the market as
measured by the S&P stock index while our bonds returned somewhat less than the
Lehman Government Corporate Bond Index.
At year end, our asset allocation was 56% stocks and 41% bonds. We remain
fully invested, with cash at just 3.7% of net assets. Although in hindsight, a
higher equity allocation would have been better in 1996, with the stock market
setting new all time highs and bonds having a difficult year, we are comfortable
with our asset mix at this time. Of course, we have the flexibility to increase
the equity exposure to a maximum of 70%, anytime we feel it's appropriate.
[Photo of Rex Bentley]
[Photo of Michael C. Knebel]
In the first half of 1996, economic activity grew faster than expected
which led to higher interest rates driven by concerns about inflation and a
potential tightening by the Federal Reserve Board. By the end of the year, as
evidence mounted that the economy was slowing, inflation concerns abated and
interest rates declined. Still, interest rates ended the year higher than they
began. Although bonds declined in price, coupon payments more than offset the
lower prices giving bonds a positive return for the year.
Throughout the year, the stock market performed exceptionally well. The
fourth
-30-
<PAGE> 33
quarter was the year's strongest with the S&P 500 rising 8.33%. This brought the
total return for the S&P for all 1996 to 22.94%, and 18.90% for the eleven
months since the inception of the SAFECO Balanced Fund.
The best performing stocks had three characteristics in common. First,
bigger was definitely better. Large capitalization stocks outperformed small
companies. Second, companies with the best earnings gains for 1996 also had the
best share price appreciation. Third, the most profitable companies as measured
by return on equity were among the strongest performers.
Our equity strategy focuses on finding undervalued securities within the
large capitalization universe of stocks. At year end, the stocks in the
portfolio had a price earnings ratio of 15 times the 1997 expected earnings
compared to the S&P price earnings ratio of 17.2 times. The dividend yield on
the stock portion of the portfolio was 2.5%
(Continued on next page.)
HIGHLIGHTS
SAFECO
BALANCED FUND
As of December 31, 1996
NET ASSET CAPITALIZATION WEIGHTINGS
AS A PERCENT OF NET ASSETS
AS OF DECEMBER 31, 1996
[Pie Chart]
1 Large: 47% ($4 Bil. and above)
2 Medium: 7% ($1 Bil.-$4 Bil.)
3 Small: 2% (Less than $1 Bil.)
4 Corporate Bonds: 12%
5 U.S. Government Securities: 29%
6 Cash and Other Assets: 3%
TOP FIVE INDUSTRIES
AS A PERCENT OF NET ASSETS
AS OF DECEMBER 31, 1996
[Bar Chart]
Drugs & Hospital Supplies: 5%
Electrical Equipment & Electronics: 5%
Petroleum & Petroleum Services: 3%
Banking & Finance: 3%
Electric Utility: 3%
-31-
<PAGE> 34
HIGHLIGHTS (Continued)
SAFECO BALANCED FUND
As of December 31, 1996
<TABLE>
<CAPTION>
PERCENT OF
TOP TEN STOCK HOLDINGS NET ASSETS
- ---------------------- -----------
<S> <C>
SmithKline Beecham, plc (ADR) ......................................... 1.8%
(Pharmaceuticals)
Mobil Corp. ........................................................... 1.7%
(Oil/Gas Exploration & Production)
NationsBank Corp. ..................................................... 1.6%
(Bank)
Albertson's, Inc. ..................................................... 1.6%
(Retail Grocer)
ITT Hartford Group, Inc. .............................................. 1.6%
(Insurance Company)
AMP, Inc. ............................................................. 1.6%
(Electrical Equipment Manufacturer)
American Home Products Corp. .......................................... 1.5%
(Pharmaceuticals)
General Electric Co. .................................................. 1.5%
(Manufacturing & Communication)
Atlantic Richfield Co. ................................................ 1.4%
(Oil Company)
Bell Atlantic Corp. ................................................... 1.3%
(Telephone Company)
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE PURCHASES
(Common Stock)
(Oct. To Dec.) COST (000'S)
- ------------------ ------------
<S> <C>
Albertson's, Inc. ..................................................... $134
Electronic Data Systems Corp. ......................................... 95
Advanta Corp. ......................................................... 70
International Flavors & Fragrances, Inc. .............................. 70
Raytheon Co. .......................................................... 65
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SALES
(Common Stock)
(Oct. to Dec.) PROCEEDS (000'S)
- -------------- ----------------
<S> <C>
*MBNA Corp. ........................................................... $106
*American General Corp. ............................................... 71
*American Stores Co. .................................................. 68
*J.P. Morgan & Co. .................................................... 56
*AlliedSignal, Inc. ................................................... 52
</TABLE>
- --------------------------------------------------------------------------------
*Security sold, no longer in portfolio
REPORT FROM THE
BALANCED FUND
MANAGERS (Continued)
compared to the market yield of 2.1%.
At this time consensus estimates call for the stocks we own to produce
better earnings growth than the broad market, 11% versus 7%. We share that
belief: We think our stocks have better potential than the market, and they sell
at lower valuations.
Within the equity portion of the portfolio, we recently reduced the
weighting in the financial services sector. We had over-weighted here, but cut
back as these stocks have done very well. Over the past two years, they have
risen on average 44.5% per year while the S&P 500 advanced 30.2% per year. We
remain overweighted in capital goods and conglomerates where we find attractive
valuations.
We bought ALBERTSON'S, BELL ATLANTIC, ELECTRONIC DATA SYSTEMS and RAYTHEON
after fairly sharp price declines. Stocks sold include AMERICA GENERAL CORP.,
MBNA CORP. and JP MORGAN, all of which had appreciated substantially.
-32-
<PAGE> 35
In the fixed income portion of the portfolio, we continue to emphasize
high-quality, intermediate bonds. Roughly two-thirds of the bonds are U.S.
Treasury obligations, with government agency and corporate debt making up the
rest. As rates declined in the fourth quarter of the year, we increased the
duration (sensitivity to interest rate changes) of the bond portion of the
portfolio from just under 2.1 to around 3.9. This compares to an index duration
of approximately 5.1.
Looking ahead to 1997, we expect current economic trends to continue with
Gross Domestic product (GDP) growing at 2.25% - 2.50% and inflation increasing a
moderate 3%. This scenario should be attractive for financial assets as economic
growth will be fast enough to create jobs and enable companies to increase
earnings, but not so fast as to escalate inflation. There is some concern that
the weak economies of Europe and Japan could dampen the U.S. Economic growth.
Although we are optimistic about the outlook for stocks and bonds, we do not
anticipate that 1997 equity returns by the S&P 500 will match the 37.50% in 1995
or the 22.94% in 1996.
/s/ REX BENTLEY
- ----------------------------
Rex L. Bentley, Stocks
/s/ MICHAEL C. KNEBEL
- ----------------------------
Michael C. Knebel, Bonds
Rex Bentley, an MBA from Brigham Young University and Chartered Financial
Analyst, has more than 20 years of investment experience.
Michael Knebel oversees SAFECO Corporation's entire taxable bond operation. He
has 13 years investment experience, an MBA from the University of Minnesota and
is a Chartered Financial Analyst.
-33-
<PAGE> 36
PORTFOLIO OF INVESTMENTS
SAFECO BALANCED FUND
As of December 31, 1996
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMOUNT VALUE (000's)
- --------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS - 55.8%
AIR TRANSPORT - 0.6%
2,200 Airborne Freight Corp. ................... $ 51
AUTOS & AUTO PARTS - 1.0%
2,600 Echlin, Inc. ............................. 82
BANKING & FINANCE - 2.9%
1,200 Chase Manhattan Corp. .................... 107
1,400 NationsBank Corp. ........................ 137
BEVERAGES - 1.3%
3,700 PepsiCo, Inc. ............................ 108
BEVERAGES - Alcoholic - 0.8%
1,800 Anheuser-Busch Companies, Inc. ........... 72
BUILDING MATERIALS - 1.1%
1,300 Armstrong World Industries, Inc. ......... 90
CHEMICALS - 1.9%
800 DuPont (E.I.) De Nemours & Co. ........... 75
2,300 Nalco Chemical Co. ....................... 83
COMPUTER SOFTWARE - 1.0%
2,000 Electronic Data Systems Corp. ............ 87
COMPUTER SYSTEMS - 2.1%
2,000 Hewlett-Packard Co. ...................... 101
2,000 * Seagate Technology, Inc. ................. 79
COSMETICS - 1.8%
1,400 Avon Products, Inc. ...................... 80
1,600 International Flavors & Fragrances, Inc. . 72
DRUGS & HOSPITAL SUPPLIES - 5.3%
2,200 American Home Products Corp. ............. 129
700 Bristol-Myers Squibb Co. ................. 76
1,500 Schering-Plough Corp. .................... 97
2,200 SmithKline Beecham, plc (ADR) ............ 150
ELECTRIC UTILITY - 2.5%
4,700 Houston Industries, Inc. ................. 106
2,600 NIPSO Industries, Inc. ................... 103
ELECTRICAL EQUIPMENT & ELECTRONICS - 4.8%
3,500 AMP, Inc. ................................ 134
1,300 General Electric Co. ..................... 129
1,200 Motorola, Inc. ........................... 74
1,400 Raytheon Co. ............................. 67
FINANCIAL SERVICES - 1.6%
1,800 Advanta Corp. ............................ 74
1,700 Federal National Mortgage Association..... 63
FOOD - 1.0%
1,100 CPC International, Inc. .................. 85
FOOD & TOBACCO - 2.2%
1,800 ConAgra, Inc. ............................ 89
900 Philip Morris Cos., Inc. ................. 101
HOUSEHOLD PRODUCTS - 2.2%
1,000 Colgate-Palmolive Co. .................... 92
1,000 Kimberly-Clark Corp. ..................... 95
INDUSTRIAL PRODUCTS & SUPPLIES - 1.2%
2,200 Corning, Inc. ............................ 102
INSURANCE - 1.6%
2,000 ITT Hartford Group, Inc. ................. 135
MACHINERY DIVERSIFIED - 0.9%
1,800 Briggs & Stratton Corp. .................. 79
MANUFACTURING - 1.6%
2,400 Crane Co. ................................ 70
1,000 Harsco Corp. ............................. 69
METALS - 0.5%
700 Aluminum Co. of America .................. 45
OIL & GAS - 1.6%
1,000 Amoco Corp. .............................. 81
102 El Paso Natural Gas Co. .................. 5
1,100 Tenneco, Inc. ............................ 50
PETROLEUM & PETROLEUM SERVICES - 3.1%
900 Atlantic Richfield Co. ................... 119
1,200 Mobil Corp. .............................. 147
PHARMACEUTICALS - 1.0%
1,500 Abbott Laboratories ...................... 76
POLLUTION CONTROL - 1.1%
3,500 Browning-Ferris Industries, Inc. ......... 92
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-34-
<PAGE> 37
PORTFOLIO OF INVESTMENTS (Continued)
SAFECO BALANCED FUND
As of December 31, 1996
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMOUNT VALUE (000's)
- --------------------------------------------------------------------------------
<S> <C>
RETAIL - 2.2%
2,100 J.C. Penney Co., Inc.$ ................... 102
1,900 May Department Stores Co. ................ 89
RETAIL - GROCERS - 1.6%
3,800 Albertson's, Inc. ........................ 135
TELECOMMUNICATIONS - 1.3%
2,500 AT&T Corp. ............................... 109
TEXTILES - 0.7%
1,300 Springs Industries, Inc. (Class A)........ 56
TRANSPORTATION - 0.9%
1,300 Union Pacific Corp. ...................... 78
UTILITIES - TELEPHONE - 2.4%
1,700 Bell Atlantic Corp. ...................... 110
2,100 GTE Corp. ................................ 96
------
TOTAL COMMON STOCKS .................................. 4,733
------
CORPORATE BONDS - 12.0%
AUTOS - 1.2%
$100,000 General Motors Acceptance Corp.
6.625%, due 10/01/02 ................... 99
BANKING & FINANCE - 3.6%
100,000 Associates Corp. of North America
6.625%, due 5/15/01 .................... 100
100,000 BankAmerica Corp.
9.50%, due 4/01/01 ..................... 111
100,000 Norwest Corp. (MTN)
6.25%, due 3/15/01 ..................... 99
ELECTRIC UTILITY - 1.1%
100,000 Southern California Edison Co.
5.875%, due 1/15/01 .................... 97
ENTERTAINMENT - 1.2%
$100,000 Walt Disney Co.
6.375%, due 3/30/01 .................... 100
FINANCE - AUTO - 1.2%
100,000 Ford Motor Credit Note
6.25%, due 8/11/00 ..................... 99
FINANCE - CONSUMER - 1.3%
100,000 Household Financial Corp.
9.00%, due 9/28/01 ..................... 109
FINANCE - MISC - 2.4%
100,000 Associates Corp. of North America
7.02%, due 5/15/01 ..................... 102
100,000 International Lease Finance Corp.
6.20%, due 5/01/00 ..................... 99
------
TOTAL CORPORATE BONDS ................................ 1,015
------
U.S. GOVERNMENT SECURITIES - 29.1%
U.S TREASURY NOTES - 28.8%
290,000 7.50%, due 2/15/05 ....................... 310
245,000 7.25%, due 8/15/04 ....................... 258
1,565,000 6.375%, due 9/30/01 ...................... 1,574
300,000 6.00%, due 10/15/99 ...................... 300
U.S TREASURY PRINCIPAL STRIPS - 0.3%
50,000 0.00%, due 8/15/05 ....................... 29
------
TOTAL U.S GOVERNMENT SECURITIES ...................... 2,471
------
TEMPORARY INVESTMENTS - 3.7%
INVESTMENT COMPANIES:
313,399 Short-Term Investments Co.
(Prime Portfolio) ...................... 313
------
TOTAL TEMPORARY INVESTMENTS .......................... 313
------
TOTAL INVESTMENTS - 100.6% ........................... 8,532
Liabilities, less Other Assets ....................... (45)
------
NET ASSETS ........................................... $8,487
======
</TABLE>
- -------------------------------------------------------------------
* Non-income producing security.
SEE NOTES TO FINANCIAL STATEMENTS
-35-
<PAGE> 38
REPORT FROM THE FUND MANAGER
SAFECO INTERNATIONAL STOCK FUND
December 31, 1996
For the eleven months from inception on January 31 to December 31, the
SAFECO International Stock Fund returned 14.15% for the Advisor Class A shares
and 13.91% for the Advisor Class B shares, not including the effects of sales
charges. The Morgan Stanley EAFE index returned 5.90% for the same period.
For the fourth quarter, the International Fund returned 9.19% for the
Advisor Class A shares and 8.96% for the Advisor Class B shares, while the EAFE
Index returned 1.67% and the average international fund returned 3.85%,
according to Lipper.
The Fund's strong outperformance for the period came from the solid
positive gains achieved in virtually all themes (strategic investment
opportunities). Among the better performing themes were Telecommunications,
Positive Banking Environment, Personal Savings Products, Healthcare,
Restructuring Opportunities and Leisure Activities. The only disappointments
were those directed at opportunities in the developing markets in the Pacific
Basin.
The limited hedging program, which remains in place, protected the Fund
against the impact of the strengthening U.S. dollar throughout the period and
our limited investments in Japan further contributed to the Fund outperforming
the index.
1996 as a whole was a year of strength in international equity markets with
only two markets within the EAFE Index producing negative returns either in
local currency or U.S. dollar terms -- Japan and Singapore. However, given the
large weighting of the Japanese market in the index -- 38% at year end -- its
sizable underperformance tolled heavily on the overall EAFE return for the year.
In the U.K., strong returns in the second half of the year more than made
up for a relatively poor first half. The continued strong earnings
announcements, the improving domestic economy and the rise in U.S. stock values
all helped to drive the market to an all-time high by year end. The local
currency return was greatly enhanced by the particularly strong rise in Sterling
against the
-36-
<PAGE> 39
U.S. dollar over the year -- an exception to the general strengthening of the
dollar against most other international currencies.
In continental Europe, the four largest markets, Germany, France,
Netherlands and Switzerland, all performed strongly with returns in excess of
20% in local currency terms. While conversion of these returns into U.S. dollar
terms was impacted to different degrees by the strength of the dollar, the
largest of the currency movements was for the Swiss franc which weakened by
almost 15% over the year. Among the smaller European markets, Spain and Sweden
also produced very strong returns while Italy, although still in positive
territory, was among the poorest performing. These performances were achieved
despite the general sluggishness of the respective economies and were
attributable to particularly strong gains achieved by individual stocks and
sectors.
In the Far East, returns were mixed with Malaysia, Hong Kong, Indonesia and
the Philippines well
(Continued on next page.)
HIGHLIGHTS
SAFECO
INTERNATIONAL STOCK FUND
As of December 31, 1996
<TABLE>
<CAPTION>
PERCENT OF
TOP FIVE INDUSTRIES NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
Banking & Finance ............. 19%
Pharmaceuticals ............... 10%
Publishing .................... 6%
Holding Co. Diversified ....... 6%
Tobacco ....................... 6%
</TABLE>
Top Five Countries
As a Percent of Net Assets
as of December 31, 1996
- --------------------------------------------------------------------------------
[Bar Chart]
United Kingdom: 31%
Netherlands: 10%
Switzerland: 9%
Australia: 8%
Singapore: 8%
-37-
<PAGE> 40
HIGHLIGHTS (Continued)
SAFECO INTERNATIONAL
STOCK FUND
As of December 31, 1996
<TABLE>
<CAPTION>
PERCENT OF
TOP TEN HOLDINGS NET ASSETS
- -----------------------------------------------------------------------------------
<S> <C>
Novartis AG ............................................................ 4.0%
(Pharmaceuticals)
National Australia Bank, Ltd. .......................................... 3.0%
(Banking & Finance)
B.A.T. Industries, plc ................................................. 2.6%
(Tobacco)
ABN Amro Holdings NV ................................................... 2.3%
(Banking & Finance)
Singapore Press Holdings, Ltd. ......................................... 2.2%
(Publishing)
Siebe, plc ............................................................. 2.2%
(Industrial & Electronic Equipment)
Zeneca Group, plc ...................................................... 2.2%
(Pharmaceuticals)
Development Bank of Singapore, Ltd. .................................... 2.1%
(Banking & Finance)
Canon, Inc. ............................................................ 2.1%
(Office Equipment)
Elsevier NV ............................................................ 2.1%
(Publishing)
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE PURCHASES
(OCT. TO DEC.) COST (000'S)
- -----------------------------------------------------------------------------------
<S> <C>
Glaxo Wellcome, plc .................................................... $145
Ciba-Geigy AG .......................................................... 117
Zeneca Group, plc ...................................................... 89
Granada Group, plc ..................................................... 70
Royal PTT Nederland NV ................................................. 69
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SALES
(OCT. TO DEC.) PROCEEDS (000'S)
- --------------------------------------------------------------------------------------
<S> <C>
*General Accident, plc ................................................. $133
Repsol SA .............................................................. 60
*Philips Electronics NV ................................................ 49
*ENI SpA ............................................................... 46
*AssiDoman AB .......................................................... 41
</TABLE>
- --------------------------------------------------------------------------------
*Security sold, no longer in portfolio
REPORT FROM THE
INTERNATIONAL
STOCK FUND MANAGER
(Continued)
into positive territory. Singapore was modestly negative while Japan and
Thailand were the major losers.
The Japanese market continued to cause concern for both domestic and
international investors and the poor local currency return was further
exacerbated for U.S. investors by the sharp decline of the yen against the
dollar.
Thailand was beset by civil unrest in the second half of the year and a
less than satisfactory outcome to the December election did little to restore
confidence to the market.
Hong Kong proved, once again, to be one of the better performers but
concerns remain over a greatly overheated real estate sector and the nature of
the business environment after the Chinese takeover on July 1, 1997.
Indonesian political uncertainty earlier in the year subsided and the
market recovered strongly in the latter stages. Modest performance in Australia
was enhanced by the additional gains from the
-38-
<PAGE> 41
strengthening Australian dollar against its U.S. counterpart.
The strength of the international equity markets in 1996 was achieved in a
period of stable or falling interest rates, low inflation and strong earnings
growth. Much of the same factors remain in place as we enter the new year.
In continental Europe, much of the focus will be on the decisions and
impact surrounding the European Monetary Unit (EMU), which is to be established
in 1999. Tight fiscal constraints will be required of the countries gaining
admission which may lead to an extended period of low growth, particularly in
Germany. While the outlook for earnings growth in the U.K. remains positive, the
upcoming general election and the possibility of an interest rate rise,
triggered by a robust domestic economy, may influence the market.
In the Pacific Rim, Japan continues to have problems, and while there is
some evidence of a recovery, economic fundamentals and domestic investor
confidence remain in tatters. Hong Kong is due to change to Chinese control on
July 1 and the impact of this unique event will be watched eagerly. Many of the
other economies continue to experience strong growth and the respective markets
should reflect this. However, these markets will be susceptible to developments
in other global markets.
While returns in the coming year are unlikely to match those of the period
just ended, we remain satisfied with the structure of the portfolio from a
fundamental, value-oriented prospective. We will continue with a fully invested
posture, with the major emphasis on holdings in the U.K., the core continental
European markets and the Pacific Basin, sans Japan.
Bank of Ireland
Asset Management (U.S.) Limited
- ------------------------------------
The Bank of Ireland Asset Management (BIAM) investment committee is comprised of
senior analysts and economists and headed by the company's chief financial
officer. BIAM has managed international equities since 1966 and began managing
U.S. funds in 1989.
-39-
<PAGE> 42
PORTFOLIO OF INVESTMENTS
SAFECO INTERNATIONAL STOCK FUND
As of December 31, 1996
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMOUNT VALUE (000's)
- --------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS - 94.4%
AUSTRALIA - 7.5%
13,500 Broken Hill
Proprietary Co., Ltd. ................... $192
(Metals & Mining)
29,000 National Australia Bank, Ltd. ........... 342
(Banking & Finance)
35,100 News Corp., Ltd. ........................ 186
(Television & Publishing)
22,100 WMC, Ltd. ............................... 140
(Metals & Mining)
FINLAND - 0.7%
3,750 Kymmene Oy Corp. ........................ 78
(Paper & Forest Products)
FRANCE - 1.5%
900 Elf Aquitaine ........................... 81
(Oil & Gas)
1,630 Michelin "B" ............................ 87
(Tire & Rubber)
GERMANY - 5.4%
4,800 Hoechst AG .............................. 225
(Chemicals)
507 Mannesmann AG ........................... 218
(Machinery & Engineering)
1,990 Siemens AG .............................. 93
(Electrical Equipment & Electronics)
1,465 VEBA AG ................................. 84
(Utilities - Electric)
HONG KONG - 1.3%
6,600 HSBC Holdings, plc ...................... 141
(Banking & Finance)
INDONESIA - 4.5%
33,000 PT Gudang Garam ......................... 142
(Tobacco)
38,000 PT Hanjaya Mandala
Sampoerna ............................... $203
(Tobacco)
12,000 PT Hero Supermarket ..................... 9
(Retail - Grocery)
33,000 PT Indocement Tunggal
Perkasa (Building Materials) ............ 50
33,000 PT Mayora Indah ......................... 14
(Food-Processing)
56,500 PT Telekomunikasi Indonesia ............. 97
(Telecommunications)
IRELAND - 1.6%
8,680 Allied Irish Bank, plc .................. 57
(Banking & Finance)
42,900 Smurfit (Jefferson) Group ............... 125
(Paper Products)
ITALY - 1.0%
25,960 Stet-Societa Finanz Telefon ............. 117
(Telecommunications)
JAPAN - 2.1%
11,000 Canon, Inc. ............................. 242
(Office Equipment)
MALAYSIA - 4.9%
30,000 DCB Holdings Berhad ..................... 103
(Banking & Finance)
16,000 Hume Industries Berhad .................. 101
(Building Materials)
45,000 Sime Darby Berhad ....................... 177
(Conglomerates)
19,000 United Engineers, Ltd. .................. 171
(Construction)
MEXICO - 0.8%
42,000 Grupo Financiero Series B ............... 88
(Banking & Finance)
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-40-
<PAGE> 43
PORTFOLIO OF INVESTMENTS (Continued)
SAFECO INTERNATIONAL STOCK FUND
As of December 31, 1996
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMOUNT VALUE (000's)
- --------------------------------------------------------------------------------
<S> <C>
NETHERLANDS - 10.3%
4,137 ABN Amro Holdings NV .................... $266
(Banking & Finance)
840 DSM NV .................................. 82
(Chemicals)
14,150 Elsevier NV ............................. 237
(Publishing)
5,832 Internationale Nederlanden
Groep NV ................................ 208
(Banking & Finance)
920 Nutricia Vereenigde
Bedrijven NV ............................ 138
(Food-Processing)
655 Royal Dutch Petroleum Co. ............... 114
(Oil & Gas)
3,560 Royal PTT Nederland NV .................. 134
(Commercial Services)
PHILIPPINES - 0.7%
19,000 San Miguel Corp. (Class B) .............. 84
(Wine & Spirits, Food)
SINGAPORE - 7.5%
23,000 City Developments, Ltd. ................. 207
(Real Estate)
18,000 Development Bank of
Singapore, Ltd. ......................... 243
(Banking & Finance)
14,800 Fraser & Neave, Ltd. .................... 152
(Beverages)
12,950 Singapore Press Holdings, Ltd. .......... 255
(Publishing)
SPAIN - 2.0%
1,510 Banco Santander SA ...................... 96
(Banking & Finance)
7,530 Iberdrola SA ............................ 106
(Utilities - Electric)
600 Repsol SA ............................... 23
(Oil & Gas)
SWEDEN - 0.9%
2,000 Pharmacia & Upjohn, Inc. ................ $ 81
(Pharmaceuticals)
1,650 Stora Kopparbergs ....................... 23
(Paper & Forest Products)
SWITZERLAND - 8.8%
243 Alusuisse-Lonza Holding AG .............. 192
(Holding Co. - Diversified)
404 Novartis AG ............................. 459
(Pharmaceuticals)
21 Roche Holding AG ........................ 162
(Pharmaceuticals)
182 Schweizerische Rueckversicherungs-
Gesellschaft ............................ 193
(Insurance)
THAILAND - 2.0%
15,000 Bangkok Bank Public Co., Ltd. ........... 145
(Banking & Finance)
14,000 Thai Farmers Bank
Public Co., Ltd. ........................ 87
(Banking & Finance)
UNITED KINGDOM - 30.9%
36,230 B.A.T. Industries, plc .................. 297
(Tobacco)
26,400 BTR, plc ................................ 127
(Holding Co. - Diversified)
12,150 Barclays, plc ........................... 206
(Banking & Finance)
9,850 Cable & Wireless, plc .................. 81
(Telecommunications)
19,030 Cadbury Schweppes, plc .................. 159
(Beverages)
10,500 Chubb Security, plc ..................... 58
(Electronic Security Systems)
8,195 EMI Group, plc .......................... 192
(Leisure)
16,950 General Electric Co., plc ............... 110
(Electronics)
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-41-
<PAGE> 44
PORTFOLIO OF INVESTMENTS (Continued)
SAFECO INTERNATIONAL STOCK FUND
As of December 31, 1996
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMOUNT VALUE (000's)
- --------------------------------------------------------------------------------
<S> <C>
UNITED KINGDOM (Continued)
8,650 Glaxo Wellcome, plc ................... $ 139
(Pharmaceuticals)
15,600 Granada Group, plc .................... 228
(Leisure)
13,850 Grand Metropolitan, plc ............... 108
(Wine & Spirits, Food)
21,070 Ladbroke Group, plc ................... 82
(Hotels & Property Management)
27,240 Lloyds Bank, plc ...................... 199
(Banking & Finance)
8,470 Medeva, plc ........................... 37
(Pharmaceuticals)
12,250 Premier Farnell, plc .................. 156
(Electronics)
18,020 Prudential Corp., plc ................. 150
(Insurance)
18,210 Safeway, plc .......................... 125
(Retail - Grocery)
20,290 Scottish Power, plc ................... 121
(Utilities - Electric)
10,300 Shell Transport &
Trading Co., plc ...................... 176
(Oil & Gas)
13,850 Siebe, plc ............................ 254
(Industrial & Electronic
Equipment)
18,700 TI Group, plc ......................... 184
(Manufacturing)
21,910 Vodafone Group, plc ................... 91
(Telecommunications)
8,875 Zeneca Group, plc ..................... 248
(Pharmaceuticals)
-------
TOTAL COMMON STOCKS ............................... 10,778
-------
PREFERRED STOCKS - 0.2%
AUSTRALIA - 0.2%
6000 News Corp., Ltd. ...................... 27
(Television & Publishing)
-------
TOTAL PREFERRED STOCKS ............................ 27
-------
WARRANTS - 0.0%
THAILAND - 0.0%
1,125 Thai Farmers Bank
Public Co., Ltd. ...................... $ 1
(Banking & Finance) -------
TOTAL WARRANTS .................................... 1
-------
TOTAL INVESTMENTS - 94.6% ......................... 10,806
Domestic Cash ..................................... 446
Foreign Cash ...................................... 127
Other Assets, Less Liabilities .................... 44
-------
NET ASSETS ........................................ $11,423
=======
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY DIVERSIFICATION NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
Banking & Finance ........................ 19.1%
Pharmaceuticals .......................... 9.9
Publishing ............................... 6.2
Holding Company - Diversified ............ 5.8
Tobacco .................................. 5.6
Telecommunications ....................... 4.6
Leisure Time ............................. 4.4
Petroleum & Petroleum Services ........... 4.2
Machinery - Diversified .................. 4.1
Electrical Equipment & Electronics ....... 3.1
Food ..................................... 3.0
Insurance ................................ 3.0
Metals ................................... 2.9
Beverages ................................ 2.7
Chemicals ................................ 2.7
Office Equipment & Supplies .............. 2.1
Manufacturing ............................ 2.1
Electric Utility ......................... 2.0
Paper & Forest Products .................. 2.0
Real Estate .............................. 1.8
Building Materials ....................... 1.3
Retail - Grocers ......................... 1.2
Tire & Rubber ............................ 0.8
----
94.6%
====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-42-
<PAGE> 45
REPORT FROM THE FUND MANAGER
SAFECO SMALL COMPANY STOCK FUND
December 31, 1996
For the eleven months from its inception, January 31, 1996, to December 31,
1996, the SAFECO Small Company Stock Fund returned 25.01% for the Advisor Class
A shares and 24.79% for the Advisor Class B shares, not including the effects of
sales charges, significantly outperforming the Russell 2000 Index, which earned
16.62% for the same period and the S&P 500, which returned 18.90%. For the
quarter ended December 31, 1996, the Fund earned a return of 2.61% for the
Advisor Class A shares and 2.43% for the Advisor Class B shares, while the small
company peer group returned 2.48% according to Lipper Analytical Services.
The Fund's performance was enhanced by large gains in some significantly
weighted stocks in the portfolio. Financial services, small banks, commercial
services, technology and gaming issues contributed to the Fund's performance.
And, it is a remarkable success as large, not small, companies were the clear
winners in 1996. Witness the disparate returns of the Russell 2000 (a measure of
small companies) and the S&P 500.
[PHOTO OF GREG EISEN]
Some of our latest purchases include: AIRBORNE FREIGHT CORP., CUSTOM
CHROME, SODAK GAMING, STAGE STORES, and ZURN INDUSTRIES.
Airborne is a well known name, providing express delivery of small packages
for primarily business customers. We purchased this stock when it traded down to
a low valuation.
Custom Chrome makes parts for the Harley Davidson line of motorcycles.
Harley has undergone a surge in popularity among riders willing to pay premium
prices for the ride of their dreams.
Sodak Gaming supplies slot machine equipment to tribal casinos all over the
USA, and is expanding distribution into Brazil. I sold this stock earlier this
year, but repurchased when the price fell significantly as business prospects
still look good.
(Continued on next page.)
-43-
<PAGE> 46
HIGHLIGHTS
SAFECO
SMALL COMPANY STOCK FUND
As of December 31, 1996
NET ASSET CAPITALIZATION WEIGHTINGS
AS A PERCENT OF NET ASSETS
AS OF DECEMBER 31, 1996
Pie Chart Showing:
1. Large-Cap: 0% (over $4 bil.)
2. Mid-Cap: 0% ($1 bil.-$4 bil.)
3. Small Cap (under $1 bil.)
a. Large: 2% (over $750 mil.)
b. Medium: 36% ($250 mil. - $750 mil.)
c. Small: 57% (Less than $250 mil.)
4. Cash and Other Assets: 5%
TOP FIVE INDUSTRIES
AS A PERCENT OF NET ASSETS
AS OF DECEMBER 31, 1996
Bar Chart Showing:
Financial Services: 13%
Banks: 10%
Building Materials: 7%
Commercial Services: 7%
Manufacturing: 6%
REPORT FROM THE
SMALL COMPANY STOCK FUND
MANAGER (Continued)
Stage Stores is a retailer selling department store quality merchandise in
small towns in the center of the country where there is less direct competition
and lower costs of operations.
Zurn Industries is a leading plumbing products company.
We sold SAN JOSE NATIONAL BANK when it achieved our price target and added
two new banks to our portfolio. COLUMBIA BANKING SYSTEM is a community bank
based in Tacoma, Washington which is run by some experienced managers who have
come from other, larger banking companies. FIRST UNITED BANCORP is a community
bank based in Palm Beach County, Florida that is consolidating smaller community
banks and building a multi-county franchise in Palm Beach and the counties to
the north.
As I stated earlier, large capitalization stocks outperformed small cap
stocks, making 1996 the third consecutive year of
-44-
<PAGE> 47
underperformance by the small capitalization category. Going into 1997, I think
small capitalization stocks are attractively priced compared to large
capitalization. Earnings growth is expected to slow in the large cap universe,
and this could highlight the superior earnings growth rates of small cap stocks.
The Fund will remain essentially fully invested across the broad range of
market sectors, in stocks that present the opportunity to provide better than
average returns.
/s/GREG EISEN
- -------------------------
Greg Eisen,
Small Company Stock
Fund Manager
- ---------------------
Greg Eisen joined SAFECO in 1986. He holds a BA from Rutgers University and is a
certified public accountant and a Chartered Financial Analyst.
HIGHLIGHTS (Continued)
SAFECO SMALL
COMPANY STOCK FUND
As of December 31, 1996
<TABLE>
<CAPTION>
PERCENT
TOP TEN HOLDINGS NET ASSETS
- -----------------------------------------------------------------------------------
<S> <C>
Lancer Corp. ........................................................ 4.0%
(Beverage Equipment Manufacturer)
Penederm, Inc. ...................................................... 3.7%
(Drug Delivery System)
American List Corp. ................................................. 3.3%
(Commercial Services)
Lifetime Hoan Corp. ................................................. 3.3%
(Household Products)
York Group, Inc. .................................................... 3.2%
(Casket Manufacturer)
Cole National Corp. (Class A) ....................................... 3.0%
(Specialty Retailer)
Tracor, Inc. ........................................................ 3.0%
(Aerospace Electronics)
Vallen Corp. ........................................................ 2.8%
(Safety Products)
Jayhawk Acceptance Corp. ............................................ 2.8%
(Financial Services)
Stage Stores, Inc. .................................................. 2.7%
(Retail Store)
</TABLE>
<TABLE>
<CAPTION>
Top Five PURCHASES
(Oct. to Dec.) COST (000'S)
- -----------------------------------------------------------------------------------
<S> <C>
Stage Stores, Inc. ........................................ $376
Zurn Industries, Inc. ..................................... 325
1st United Bancorp ........................................ 283
American Buildings Co. .................................... 263
Columbia Banking System, Inc. ............................. 248
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SALES
(Oct. to Dec.) PROCEEDS (000'S)
- --------------------------------------------------------------------------------------
<S> <C>
*Cotelligent Group, Inc. ..................................... $325
*Monro Muffler Brake, Inc. ................................... 238
*Genesee & Wyoming, Inc. ..................................... 204
*Inference Corp. ............................................. 174
*Stimsonite Corp. ............................................ 156
</TABLE>
- --------------------
*Security sold, no longer in portfolio
-45-
<PAGE> 48
PORTFOLIO OF INVESTMENTS
SAFECO Small Company Stock Fund
As of December 31, 1996
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMOUNT VALUE (000's)
- --------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS - 95.3%
AIR TRANSPORT - 3.2%
9,000 Airborne Freight Corp. ...................... 210
7,000 Air Express
International Corp. ......................... 226
BANKS - DOMESTIC - 10.2%
25,000 1st United Bancorp .......................... 325
16,000 * Columbia Banking
System, Inc. ............................... 260
20,000 * Hanmi Bank
(Los Angeles, CA) ........................... 240
10,500 * Imperial Bancorp ............................ 252
20,000 UnionBancorp, Inc. .......................... 290
BUILDING MATERIALS - 7.4%
12,000 * American Buildings Co. ...................... 286
10,800 * Fibreboard Corp. ............................ 365
13,000 Zurn Industries, Inc. ....................... 340
COMMERCIAL SERVICES - 6.5%
14,400 American List Corp. ......................... 437
22,000 York Group, Inc. ............................ 429
COMPUTER SOFTWARE - 2.1%
10,000 * SPSS, Inc. .................................. 279
COMPUTER SYSTEMS - 5.8%
8,500 * MICROS Systems, Inc. ........................ 261
35,000 * Optimal Robotics Corp. ...................... 166
45,500 * PC Service Source, Inc. ..................... 353
DRUGS & HOSPITAL SUPPLIES - 3.7%
40,000 * Penederm, Inc. .............................. 495
ELECTRONICS - 3.0%
19,100 * Tracor, Inc. ................................ 406
ENTERTAINMENT - 1.5%
50,000 * Q-Zar, Inc. ................................. 206
FINANCIAL * 12.6%
37,500 * First Enterprise
Financial Group, Inc. ....................... 352
8,600 First Financial Caribbean
Corp. ....................................... 239
32,900 * Jayhawk Acceptance Corp. .................... 370
24,675 Litchfield Financial Corp. .................. 364
7,000 * Ocwen Financial Corp. ....................... 187
14,500 * Rockford Industries, Inc. ................... 181
FOOD - 4.5%
11,600 * JP Foodservice, Inc. ........................ 323
20,000 Tasty Baking Co. ............................ 275
HOTELS - MOTELS - 0.2%
2,500 * U.S. Franchise Systems, Inc.
(Class A)$ 25
HOUSEHOLD PRODUCTS - 5.2%
14,500 * Guest Supply, Inc. .......................... 256
37,100 * Lifetime Hoan Corp. ......................... 436
LEISURE TIME - 3.8%
14,000 * Custom Chrome, Inc. ......................... 282
15,000 * Sodak Gaming, Inc. .......................... 231
MANUFACTURING - 6.1%
14,200 * ABC Rail Products Corp. ..................... 282
26,000 * Lancer Corp. ................................ 530
METALS - 0.4%
30,000 * Republic Engineered Steels, Inc. ............ 56
MISCELLANEOUS - 2.8%
22,500 * Vallen Corp. ................................ 374
OIL SERVICES - 1.8%
5,000 * Trico Marine Services, Inc. ................. 240
PETROLEUM & PETROLEUM SERVICES - 4.8%
30,000 * Harcor Energy, Inc. ......................... 146
8,000 * Seitel, Inc. ................................ 320
6,000 * Swift Energy Co. ............................ 179
RETAIL - DEPARTMENT STORES - 2.7%
20,000 * Stage Stores, Inc. .......................... 365
RETAIL - SPECIALTY - 3.0%
15,500 * Cole National Corp. (Class A) ............... 407
TRANSPORTATION - 2.4%
6,600 GATX Corp. .................................. 320
UTILITIES * Gas - 1.6%
9,000 Northwest Natural Gas Co. ................... 216
-------
TOTAL COMMON STOCKS ..................................... 12,782
-------
TEMPORARY INVESTMENTS - 5.9%
INVESTMENT COMPANIES:
$673,838 Short-Term Investments Co.
(Prime Portfolio) ............................ 674
117,006 Short-Term Investments Co.
(Treasury Portfolio) ......................... 117
-------
TOTAL TEMPORARY INVESTMENTS ............................. 791
-------
TOTAL INVESTMENTS - 101.2% .............................. 13,573
Liabilities, less Other Assets .......................... (166)
-------
NET ASSETS .............................................. $13,407
=======
</TABLE>
- -----------------------------------
* Non-income producing security.
SEE NOTES TO FINANCIAL STATEMENTS
-46-
<PAGE> 49
OVERVIEW OF
SAFECO TAX-EXEMPT BOND FUNDS
December 31, 1996
After a summer of watchful waiting, investors decided that inflation was
still under control. The Federal Reserve decided to leave interest rates
unchanged and the bond markets breathed a sigh of relief.
And in this market, municipal bonds outperformed treasury bonds. Over the
12 months ending December 31, 1996 the Bond Buyer 40 Index, an index based on
the average yield of 40 municipal bonds went from 5.56% to 5.72% the course of
the year; reaching a high of 6.22% in June and a low of 5.47% in February.
The 30-year Treasury bond yield went from 5.95% to 6.64%.
Although Municipal bonds prices declined about two and one-half points
over 1996, Treasury prices dropped nine points.
The main reason for muni's outperformance was low supply and the
elimination from the political scene of the "flat tax" advocates.
Flat-tax proposals -- which would reduce, or eliminate, the value of
tax-exemption -- caused municipal bonds to become grossly undervalued compared
to treasury bonds. As flat-tax schemes were dismissed, the muni market regained
its normal relationship with taxable bonds. Tax-exempts went from yielding 95%
of similar-length, taxable Treasury bonds to yielding 85% of Treasuries.
[PICTURE OF STEPHEN C. BAUER]
STEPHEN C. BAUER
The second factor holding up muni values was low supply in a market with a
strong demand. Individuals and insurance companies have been big buyers of
municipal bonds. Almost every new issue priced has been snapped up by cash-laden
investors. That, combined with bonds reaching maturity or being called, made
1996 the second consecutive year in which the outstanding volume of tax-exempts
declined.
Should renewed inflation fears prompt the Federal Reserve to raise
interest rates, I doubt the reaction will be either severe or long lasting. Any
increase causing a decline in bond prices will more likely be seen as a buying
opportunity, as investors are confident the Fed will ensure a low inflation
environment.
(Continued on next page.)
-47-
<PAGE> 50
REPORT FROM THE
TAX-EXEMPT BOND FUNDS
MANAGER (Continued)
Although 1996 paled in comparison to 1995's largess, there were positives.
Additionally, I think 1997 could bring substantial improvements. Modest economic
growth and the Fed's commitment to restrain inflation is good news for bond
investors.
/s/ Stephen C. Bauer
Stephen C. Bauer
President,
SAFECO Asset Management
REPORT FROM THE FUND MANAGER
SAFECO
MUNICIPAL
BOND FUND
As of December 31, 1996
The SAFECO Municipal Bond Fund returned 3.18% for the Advisor Class A
shares and 2.93% for the Advisor Class B shares, not including sales charges,
for the year ended December 31, while the average municipal bond fund returned
3.30% according to Lipper Analytical Services. The Lehman Brothers Long
Municipal Bond Index posted 4.49% for the same period.
It's nearly impossible for a bond fund to beat a bond index because the
index has no expenses, no cash and no call features. The difference in
performance of the Fund and its peer group can be attributed to our deep
discount bonds which performed poorly when rates were rising.
In the last year, transactions in the Municipal Bond Fund were to sell
prerefunded bonds and reinvest in longer, higher-yielding issues, and to improve
call protection by buying discount bonds.
A prerefunded bond is a bond for which funds have been set aside to prepay
it at the first date at which it can be called. This advance refunding
effectively shortens a bond's life to seven or eight years, making it an
intermediate-term bond. While these bonds are very
-48-
<PAGE> 51
stable in price and an excellent source of liquidity in any market, significant
yield pickups can be achieved by selling pre-re's and reinvesting in long-term
bonds.
I sold prerefunded bonds with yields around 4.4% and reinvested the money
in longer bonds yielding about 6.1%. Although substantial capital gains occurred
with the sales, they were offset by tax losses left over from 1994.
My second emphasis has been to improve call protection by buying discount
bonds. Discount bonds are priced below their par (face value) because their
yields are below current rates. As yields fall lower, par bonds are often called
in and refinanced at the new, lower rates. Their call feature inhibits the
ability of par bonds to appreciate. Meanwhile, discount bonds with their lower
coupons can appreciate a long way before the market undercuts their yields and
causes them to be called.
/s/ Stephen C. Bauer,
Stephen C. Bauer,
Municipal Bond Fund Manager
Steve Bauer joined SAFECO in 1971 as a fixed-income analyst. He became a fund
manager with the inception of the SAFECO Municipal Bond Fund in 1981, and is
President of SAFECO Asset Management. Bauer holds a B.S. in microbiology and an
M.B.A. from the University of Washington.
HIGHLIGHTS
SAFECO
MUNICIPAL
BOND FUND
As of December 31, 1996
S&P Credit Ratings
As a Percent of Net Assets
as of December 31, 1996
Pie Chart Showing:
1. AAA: 38%
2. AA: 20%
3. A: 26%
4. BBB: 7%
5. B: 1%
6. Not Rated: 7%
7. Cash & Other: 1%
Top Five Type of Bonds
As a Percent of Net Assets
as of December 31, 1996
Bar Graph Showing:
Escrow Secured-U.S. Treasury (Prerefunded): 15%
Electric Utilities-Combination: 15%
Hospital: 8%
Utilities-Sewer: 6%
Lease Rental: 5%
-49-
<PAGE> 52
HIGHLIGHTS (Continued)
SAFECO MUNICIPAL
BOND FUND
As of December 31, 1996
<TABLE>
<CAPTION>
PERCENT OF
TOP FIVE HOLDINGS NET ASSETS
- -------------------------------------------------------------------------------
<S> <C>
San Joaquin Hills (CA) Transportation
Corridor Agency ...................................................... 4.5%
Illinois Educational Facilities Authority .............................. 3.5%
Austin Combined Utility System ......................................... 3.3%
Alaska Housing Finance Corp. ........................................... 3.2%
East Chicago (IN) Elementary School
Building Corp. ....................................................... 2.6%
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF
TOP FIVE STATES NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
California .............................................................. 21%
Washington .............................................................. 11%
Illinois ................................................................ 10%
Texas ................................................................... 7%
South Carolina .......................................................... 6%
</TABLE>
PORTFOLIO OF INVESTMENTS
SAFECO MUNICIPAL
BOND FUND
As of December 31, 1996
PRINCIPAL AMOUNT (000's) VALUE (000's)
- --------------------------------------------------------------------------------
BONDS - 99.4%
ALABAMA - 0.5%
$ 1,310 Board of Trustees Alabama
Agriculture and Mechanical
University Revenue
5.50%, due 11/01/20 [MBIA]* ................. $ 1,293
1,000 Citronelle Industrial
Development Board
Pollution Control Revenue
8.00%, due 12/01/12 ......................... 1,107
ALASKA - 3.3%
Alaska Housing Finance Corp.
Veterans Mortgage Program
765 6.50%, due 6/01/31 .......................... 775
17,000 5.00%, due 12/01/18 ......................... 15,169
ARIZONA - 2.6%
Phoenix Civic Improvement Corp.
Wastewater System Lease Revenue
4,220 5.00%, due 7/01/18 [MBIA] ................... 3,931
9,800 4.75%, due 7/01/23 .......................... 8,380
CALIFORNIA - 21.3%
1,500 Foothill/Eastern Transportation
Corridor Agency
Toll Road Revenue
5.00%, due 1/01/ ............................ 351,294
2,500 Los Angeles County Certificates
of Participation
(Disney Parking Project)
5.50%, due 9/01/21 .......................... 2,358
13,000 Los Angeles Department of
Water and Power
Electric Plant Revenue
5.25%, due 11/15/26 ......................... 11,955
Los Angeles Wastewater
System Revenue
1,280 4.70%, due 11/01/17 [FGIC] .................. 1,128
5,000 4.70%, due 11/01/19 [FGIC] .................. 4,360
-50-
<PAGE> 53
PORTFOLIO OF INVESTMENTS (Continued)
SAFECO MUNICIPAL BOND FUND
As of December 31, 1996
PRINCIPAL AMOUNT (000'S) VALUE (000'S)
- --------------------------------------------------------------------------------
CALIFORNIA (CONTINUED)
$ 2,200 Metropolitan Water District
of Southern California
Waterworks Revenue
5.75%, due 3/01/14 .......................... $ 2,221
5,250 Northern California Power Agency
Geothermal Project Revenue
5.00%, due 7/01/09 .......................... 5,089
Pittsburg Redevelopment Agency
Los Medanos Community
Development Project
Tax Allocation
11,995 5.80%, due 8/01/34 [AMBAC] .................. 12,103
6,400 4.625%, due 8/01/21 [AMBAC] ................. 5,488
1,000 Redding Joint Powers Financing
Solid Waste and Corporation
Yard Revenue
5.00%, due 1/01/23 .......................... 863
8,750 Sacramento County Sanitation District
Finance Authority
4.75%, due 12/01/23 ......................... 7,484
5,000 Sacramento Municipal Utility District
Electric Revenue
6.00%, due 2/01/15 .......................... 5,001
3,600 San Francisco Airport Commission
Sewer Revenue
6.00%, due 5/01/25 [FGIC] ................... 3,722
1,700 San Francisco Redevelopment
Financing Authority
Tax Allocation Revenue
4.75%, due 8/01/18 [FGIC] ................... 1,499
8,010 San Joaquin County Public
Facilities Financing Corp.
Certificates of Participation
Capital Facilities Project
4.75%, due 11/15/19 [MBIA] .................. 7,025
25,000 San Joaquin Hills
Transportation Corridor Agency
Senior Lien Toll Road Revenue
5.00%, due 1/01/33 .......................... 21,657
Southern California Public
Power Authority
Power Project Revenue
(Multiple Projects)
$ 4,085 # 5.50%, due 7/01/20
(Prerefunded 7/01/00 @ 100) ................. $ 4,262
3,165 5.50%, due 7/01/20 .......................... 3,064
2,200 Southern California Public
Power Authority
Power Project Revenue
(Palo Verde Project)
5.00%, due 7/01/17 .......................... 2,000
COLORADO - 0.3%
1,000 Colorado Housing Finance Authority
Multi-Family Mortgage Revenue
8.30%, due 10/01/23 ......................... 1,108
290 Colorado Housing Finance Authority
Single Family Residential
Housing Revenue
8.75%, due 9/01/17 .......................... 302
DELAWARE - 0.8%
4,500 Delaware River and Bay
Authority Revenue
4.75%, due 1/01/24 [MBIA] ................... 3,954
FLORIDA - 1.9%
Florida Board of Education
General Obligation
1,000 5.00%, due 6/01/12 .......................... 955
3,000 5.00%, due 6/01/24 .......................... 2,695
2,750 Mid-Bay Bridge
Authority Revenue
6.10%, due 10/01/22 ......................... 2,768
3,000 Orlando Utility Commission
Water and Electric Revenue
5.00%, due 10/01/23 ......................... 2,694
SEE NOTES TO FINANCIAL STATEMENTS
-51-
<PAGE> 54
PORTFOLIO OF INVESTMENTS (Continued)
SAFECO MUNICIPAL BOND FUND
As of December 31, 1996
PRINCIPAL AMOUNT (000'S) VALUE (000'S)
- --------------------------------------------------------------------------------
GEORGIA - 3.1%
$ 6,750 Atlanta Water and Sewerage Revenue
4.50%, due 1/01/18 .......................... $ 5,758
4,000 Cobb County Kennestone Hospital
Authority Revenue
5.00%, due 4/01/24 [MBIA] ................... 3,625
5,000 Municipal Electric Authority
Project One Special Obligation
Fourth Crossover Series
6.50%, due 1/01/20 .......................... 5,489
ILLINOIS - 10.2%
7,000 Chicago Wastewater
Transmission Revenue
5.125%, due 1/01/20 [FGIC] .................. 6,379
5,500 Illinois Dedicated Tax Revenue
(Civic Center)
7.00%, due 12/15/10 [AMBAC] ................. 6,052
17,500 Illinois Educational Facilities Authority
Adjustable Demand Revenue
(University of Chicago)
5.70%, due 12/01/25 ......................... 17,064
5,000 Metropolitan Pier and Exposition
Authority McCormick Place
Convention Complex
Hospitality Facilities Revenue
7.00%, due 7/01/26 .......................... 5,551
8,360 Regional Transportation Authority
6.75%, due 6/01/25 [FGIC] ................... 9,569
4,770 University of Illinois
Auxiliary Facilities System Revenue
5.75%, due 4/01/22 .......................... 4,701
INDIANA - 5.5%
200 Beech Grove Economic Development
Revenue (Westvaco Corp.)
8.75%, due 7/01/10 .......................... 204
11,000 # East Chicago Elementary School
Building Corp.First Mortgage
7.00%, due 1/15/16
(Prerefunded 1/15/03 @ 102) ................. 12,488
$ 7,715 Hammond Multi-School Building Corp.
First Mortgage Revenue
6.20%, due 7/10/15 .......................... $ 8,062
6,450 Indianapolis Gas Utility System Revenue
4.00%, due 6/01/11 [FGIC] ................... 5,695
IOWA - 0.2%
880 Iowa Housing Finance Authority
Multiple Family Housing Revenue
10.00%, due 4/01/23 ......................... 884
KENTUCKY - 1.9%
8,805 # Kentucky Local Correctional Facilities
Construction Authority
Multi-County Revenue
7.00%, due 11/01/14
(Prerefunded 11/01/97 @ 102) ................ 9,222
MARYLAND - 1.9%
5,125 Baltimore Project and Revenue
(Water Projects)
5.00%, due 7/01/24 .......................... 4,798
5,000 Maryland Health and Higher
Educational Facilities Authority Revenue
(University of Maryland
Medical System)
4.75%, due 7/01/23 [FGIC] ................... 4,306
MASSACHUSETTS - 2.5%
Massachusetts Water
Resources Authority
General Revenue
5,140 6.20%, due 7/01/38 .......................... 5,153
4,500 6.00%, due 4/01/20 .......................... 4,513
2,500 4.75%, due 12/01/23 ......................... 2,141
MICHIGAN - 1.4%
5,250 Detroit Water Supply System Revenue
4.75%, due 7/01/19 [FGIC] ................... 4,604
2,000 University of Michigan Hospital Revenue
6.375%, due 12/01/24 ........................ 2,050
SEE NOTES TO FINANCIAL STATEMENTS
-52-
<PAGE> 55
PORTFOLIO OF INVESTMENTS (Continued)
SAFECO MUNICIPAL BOND FUND
As of December 31, 1996
PRINCIPAL AMOUNT (000'S) VALUE (000'S)
- --------------------------------------------------------------------------------
NEW JERSEY - 0.4%
$ 1,640 # New Jersey Turnpike
Authority Revenue
10.375%, due 1/01/03
(Escrowed to Maturity) ...................... $ 1,972
NEW MEXICO - 0.5%
2,500 Farmington Collateralized
Pollution Control Revenue
(Tucson Gas and Electric Co.)
6.10%, due 1/01/08 .......................... 2,469
NEW YORK - 5.7%
New York City Municipal Water
Finance Authority
Water and Sewer System Revenue
$ 2,205 6.00%, due 6/15/19 [FGIC] ................... 2,214
2,100 5.00%, due 6/15/17 [FGIC] ................... 1,943
New York Dormitory Authority
State University
Educational Facilities Revenue
4,400 7.50%, due 5/15/11 .......................... 5,160
5,250 7.50%, due 5/15/13 .......................... 6,329
6,500 5.25%, due 5/15/15 .......................... 6,085
1,500 5.00%, due 7/01/15 .......................... 1,417
4,000 # New York Local Government
Assistance Corp.
7.00%, due 4/01/21
(Prerefunded 4/01/01 @ 100) ................. 4,404
NORTH CAROLINA - 2.3%
11,000 North Carolina Eastern Municipal
Power Agency
Power System Revenue
6.00%, due 1/01/22 .......................... 10,888
OKLAHOMA - 1.3%
5,590 McGee Creek Authority
Water Revenue
6.00%, due 1/01/23 [MBIA] ................... 6,039
PENNSYLVANIA - 4.0%
$ 5,000 Centre County University Area
Joint Authority
Sewer Revenue
4.75%, due 11/01/20 [MBIA] .................. $ 4,379
6,000 # Pennsylvania Intergovernmental
Cooperative Authority
Special Tax Revenue
(City of Philadelphia)
6.80%, due 6/15/22
(Prerefunded 6/15/02 @ 100) ................. 6,658
7,415 # Philadelphia Water and
Sewer Revenue
7.00%, due 8/01/18
(Prerefunded 8/01/01 @100) .................. 8,194
PUERTO RICO - 1.9%
10,000 Puerto Rico Highway and
Transportation Authority
Highway Revenue
5.00%, due 7/01/36 .......................... 8,948
SOUTH CAROLINA - 6.2%
10,250 Charleston County Hospital
Facility Revenue
5.00%, due 10/01/22 [MBIA] .................. 9,248
1,135 Charleston County Pollution Control
Facilities Revenue
5.90%, due 8/01/03 .......................... 1,136
4,000 Charleston Waterworks and
Sewer System Revenue
5.00%, due 1/01/16 .......................... 3,735
5,500 Pickens County and Richland
County Hospital Revenue
5.75%, due 8/01/21 [AMBAC] .................. 5,493
South Carolina Public
Service Authority
Power Supply Revenue
1,395 5.70%, due 7/01/08 .......................... 1,395
10,000 5.125%, due 1/01/32 ......................... 8,953
SEE NOTES TO FINANCIAL STATEMENTS
-53-
<PAGE> 56
PORTFOLIO OF INVESTMENTS (Continued)
SAFECO MUNICIPAL BOND FUND
As of December 31, 1996
PRINCIPAL AMOUNT (000'S) VALUE (000'S)
- --------------------------------------------------------------------------------
TEXAS - 6.7%
$10,000 Austin Combined Utility
System Revenue
12.50%, due 11/15/07 [MBIA] ................. $16,099
4,350 Austin Water, Sewer and
Electric Revenue
14.00%, due 11/15/01 ........................ 5,574
1,600 # Coastal Industrial Water Authority
Water Revenue
5.50%, due 12/15/09
(Escrowed to Maturity) ...................... 1,611
2,260 Texas Municipal Power
Agency Revenue
5.50%, due 9/01/13 [FGIC] ................... 2,260
7,500 Waco Texas Health Facilities
Development Corp.
Hospital Revenue
5.00%, due 11/01/25 ......................... 6,751
UTAH - 1.1%
Intermountain Power Agency
Special Obligation
First Crossover Series
1,900 6.00%, due 7/01/23 .......................... 1,903
2,750 5.00%, due 7/01/16 .......................... 2,489
1,000 # Salt Lake City Hospital Revenue
(IHC Hospitals)
5.00%, due 6/01/15
(Escrowed to Maturity) ...................... 967
VIRGINIA - 0.2%
1,155 # Richmond Metropolitan
Expressway Authority Revenue
5.60%, due 1/15/13
(Escrowed to Maturity) ...................... 1,169
WASHINGTON - 10.9%
7,255 Douglas County Public Utility District #1
Wells Hydroelectric Revenue
8.75%, due 9/01/18 .......................... 9,429
$ 2,500 Everett School District #2
Snohomish County Unlimited Tax
General Obligation
6.20%, due 12/01/12 [MBIA] $ 2,673
2,200 King County Housing Authority
Pooled Housing Refunding Revenue
6.80%, due 3/01/26 .......................... 2,298
1,650 King County Limited Tax
General Obligation
(Various Purpose)
4.75%, due 1/01/19 .......................... 1,449
2,255 King County Public Hospital District #1
Hospital Facilities Revenue
(Valley Medical Center)
5.50%, due 9/01/17 [AMBAC] .................. 2,163
4,800 Lewis County Public Utility District #1
Cowlitz Falls Hydroelectric
Project Revenue
6.00%, due 10/01/24 ......................... 4,811
4,000 Port of Seattle Revenue
6.00%, due 12/01/14 ......................... 4,030
3,000 Washington Health Care Facilities
Authority Revenue
(Fred Hutchinson Cancer
Research Center)
7.375%, due 1/01/18 ......................... 3,232
6,350 Washington Health Care Facilities
Authority Revenue
(Yakima Valley Memorial
Hospital Association)
7.25%, due 1/01/21 .......................... 7,084
8,500 Washington Public Power
Supply System
Nuclear Project #1 Revenue
6.00%, due 7/01/17 .......................... 8,505
4,000 Washington Public Power
Supply System
Nuclear Project #2 Revenue
6.30%, due 7/01/12 .......................... 4,309
SEE NOTES TO FINANCIAL STATEMENTS
-54-
<PAGE> 57
PORTFOLIO OF INVESTMENTS (Continued)
SAFECO MUNICIPAL BOND FUND
As of December 31, 1996
PRINCIPAL AMOUNT (000'S) VALUE (000'S)
- --------------------------------------------------------------------------------
WASHINGTON (CONTINUED)
$ 2,610 Washington Public Power
Supply System
Nuclear Project #3 Revenue
5.50%, due 7/01/18 .......................... $ 2,463
WEST VIRGINIA - 0.6%
3,025 West Virginia Housing
Development Fund
Single Family Mortgage Revenue
6.125%, due 7/01/13 ......................... 3,046
WISCONSIN - 0.2%
1,000 Wisconsin Health and Education
Facilities Authority Revenue
6.00%, due 10/01/12 [MBIA] .................. 1,011
--------
TOTAL BONDS ..................................................... 478,397
========
TEMPORARY INVESTMENTS - 0.2%
INVESTMENT COMPANIES:
$ 1,245 Federated Tax-Exempt Money
Market Fund, Inc. ........................... $ 1,245
--------
TOTAL TEMPORARY
INVESTMENTS ..................................................... 1,245
--------
TOTAL INVESTMENTS - 99.6% ....................................... 479,642
Other Assets, less Liabilities .................................. 1,751
--------
NET ASSETS ...................................................... $481,393
========
* The provider of the guarantee of timely payment of both principal and interest
is identified in the brackets at the end of each bond description. The
guarantors applicable to this portfolio and the percentage of total bonds they
guarantee at the period end are as follows:
Municipal Bond Investors Assurance
Corp. [MBIA] .................................................. 12.4%
Financial Guaranty Insurance Corp. [FGIC] ....................... 10.0
AMBAC Indemnity Corp. [AMBAC] ................................... 6.5
----
28.9%
====
#Prerefunded bonds are collateralized by securities (generally U.S. Treasury
securities) held in an irrevocable trust in an amount sufficient to pay interest
and principal.
SEE NOTES TO FINANCIAL STATEMENTS
-55-
<PAGE> 58
REPORT FROM THE FUND MANAGER
SAFECO CALIFORNIA TAX-FREE
INCOME FUND
December 31, 1996
The SAFECO California Tax-Free Income Fund returned 2.56% for the Advisor
Class A shares and 2.29% for the Advisor Class B shares, not including sales
charges, for the year ended December 31, while the average California municipal
bond fund returned 3.65%, according to Lipper Analytical Services. Meanwhile the
Lehman Brothers Long Municipal Bond Index posted 4.49% for the one-year period.
The performance differential is due to our preference for discount bonds.
When rates rise, as they did in 1996 discount bonds are hardest hit. However,
when rates are falling and prices are rising, the outperformance of discount
bonds compensates for their downside.
Like the SAFECO Municipal Bond Fund, the California Fund reduced its
percentage in pre refunded bonds, and improved call protection and appreciation
potential performance by selling par bonds and buying discounts.
The Foothill/Eastern Toll Road bonds continue to be among the best
performers the Fund owns. These bonds and the San Joaquin Toll Road bonds have
outperformed the market because the two construction projects are proceeding
ahead of schedule and under budget. Once they have a history of toll
collections, they may be upgraded by the rating agencies, which would further
enhance their value.
One new name added to the Fund was Eldorado Public Agency Financing
Authority, which is responsible for water and wastewater treatment in the
Placerville area.
/s/ Stephen C. Bauer
Stephen C. Bauer
California Tax-Free Income Fund
Fund Manager
Stephen Bauer joined SAFECO in 1971 as a fixed-income analyst. He became a fund
manager with the inception of the SAFECO Municipal Bond Fund in 1981, and is
President of SAFECO Asset Management. Bauer holds a B.S. in microbiology and an
M.B.A. from the University of Washington.
-56-
<PAGE> 59
PORTFOLIO OF INVESTMENTS
SAFECO
CALIFORNIA TAX-
FREE INCOME FUND
As of December 31, 1996
PRINCIPAL VALUE
AMOUNT (000'S) (000'S)
- --------------------------------------------------------------------------------
BONDS - 96.7%
$ 2,250 California Department
of Water Resources
Central Valley Project
Water System Revenue
5.25%, due 12/01/24
[FGIC]* ..................................... $ 2,142
2,250 California Health Facilities
Financing Authority Insured
Health Facility Revenue
(Catholic Healthcare West)
4.75%, due 7/01/19 [MBIA] ................... 1,963
2,750 California Statewide
Communities Development
Authority Certificates of
Participation (The Trustees
of the J. Paul Getty Trust)
5.00%, due 10/01/23 ......................... 2,519
3,715 California Statewide
Communities Development
Authority Certificates of
Participation (Childrens
Hospital of Los Angeles)
4.75%, due 6/01/21 [MBIA] ................... 3,222
20 Concord Redevelopment
Agency Tax Allocation
Central Concord
Redevelopment Project
8.00%, due 7/01/18 [BIG] .................... 21
3,750 Culver City Redevelopment
Financing Authority Tax
Allocation Revenue
4.60%, due 11/01/20
[AMBAC] ..................................... 3,211
3,150 East Bay Regional Park
District California General Obligation
5.75%, due 9/01/17 .......................... 3,165
HIGHLIGHTS
SAFECO
CALIFORNIA TAX-FREE INCOME FUND
As of December 31, 1996
S&P Credit Ratings
As a Percent of Net Assets
as of December 31, 1996
[PIE CHART]
<TABLE>
<CAPTION>
PERCENT OF
TOP FIVE TYPE OF BONDS NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
Local General Obligation -
Limited Tax ........................................................... 14%
Electric Utilities - Combination ........................................ 11%
Toll Road ............................................................... 11%
Hospital ................................................................ 11%
Utilities - Sewer ....................................................... 11%
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF
TOP FIVE HOLDINGS NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
San Joaquin Hills Transportation
Corridor Agency ...................................................... 6.0%
Los Angeles County Sanitation District
Financing Authority .................................................. 5.8%
Pittsburg Redevelopment Agency ......................................... 5.3%
Foothill/Eastern Transportation
Corridor Agency ...................................................... 5.0%
San Jose Redevelopment Agency .......................................... 4.7%
</TABLE>
-57-
<PAGE> 60
PORTFOLIO OF INVESTMENTS (Continued)
SAFECO CALIFORNIA TAX-FREE INCOME FUND
As of December 31, 1996
PRINCIPAL VALUE
AMOUNT (000'S) (000'S)
- --------------------------------------------------------------------------------
$ 2,000 Eldorado Public Agency
Financing Authority
5.50%, due 2/15/21 [FGIC] ................... $ 1,966
4,195 Foothill/Eastern
Transportation Corridor
Agency Toll Road Revenue
5.00%, due 1/01/35 .......................... 3,620
670 Inglewood Insured
Hospital Revenue
(Daniel Freeman Hospital)
6.75%, due 5/01/13 .......................... 715
Los Angeles Convention
and Exhibition Center
Authority Certificates
of Participation
1,200 # 9.00%, due 12/01/20
(Prerefunded 12/01/05
@ 100) ...................................... 1,583
1,300 5.125%, due 8/15/21 [MBIA] .................. 1,208
4,500 Los Angeles County
Sanitation District Financing
Authority Revenue
(Capital Projects)
5.25%, due 10/01/19 ......................... 4,222
3,800 Los Angeles Department
of Water and Power
Waterworks Revenue
4.75%, due 11/15/19 ......................... 3,337
2,000 Los Angeles Wastewater
System Revenue
4.70%, due 11/01/17 [FGIC] .................. 1,762
2,500 Northern California
Power Agency
Geothermal Project Revenue
5.00%, due 7/01/09 .......................... 2,423
$ 2,350 Palomar Pomerado Health
System California Insured
Revenue Service
4.75%, due 11/01/23 [MBIA] .................. $ 2,025
4,435 Pittsburg Redevelopment
Agency Los Medanos
Community Development
Project Tax Allocation
4.625%, due 8/01/21 ......................... 3,803
Pleasanton Joint Powers
Financing Authority
Reassessment Revenue
1,670 6.20%, due 9/02/17 .......................... 1,692
1,890 6.15%, due 9/02/12 .......................... 1,947
3,900 Redding Joint Powers
Financing Authority
Solid Waste and Corporation
Yard Revenue
5.00%, due 1/01/23 .......................... 3,367
2,000 Riverside County
Certificates of Participation
(Capital Projects)
6.125%, due 11/01/21 ........................ 2,040
3,000 Sacramento Municipal Utility
District Electric Revenue
4.75%, due 9/01/21 [MBIA] ................... 2,621
1,750 San Diego Public Facilities
Financing Authority
Sewer Revenue
5.25%, due 5/15/20 .......................... 1,632
5,000 San Joaquin Hills
Transportation Corridor
Agency Senior Lien Toll
Road Revenue
5.00%, due 1/01/33 .......................... 4,331
SEE NOTES TO FINANCIAL STATEMENTS
-58-
<PAGE> 61
PORTFOLIO OF INVESTMENTS (Continued)
SAFECO CALIFORNIA TAX-FREE INCOME FUND
As of December 31, 1996
PRINCIPAL VALUE
AMOUNT (000'S) (000'S)
- --------------------------------------------------------------------------------
$ 4,000 San Jose
Redevelopment Agency
4.75%, due 8/01/22 .......................... $ 3,378
Southern California Public
Power Authority
Power Project Revenue
(Multiple Projects)
2,665 # 5.50%, due 7/01/20
(Prerefunded 7/01/00 @ 100).................. 2,780
1,335 5.50%, due 7/01/20 .......................... 1,292
1,000 Southern California Public
Power Authority
Power Project Revenue
(Transportation Project)
4.75%, due 7/01/23 .......................... 870
970 Stanislaus Waste-to-Energy
Financing Agency
Solid Waste Facility Revenue
7.625%, due 1/01/10 ......................... 1,046
-------
TOTAL BONDS ..................................................... 69,903
-------
TEMPORARY INVESTMENTS - 2.0%
INVESTMENT COMPANIES:
1,497 SEI Tax Exempt Trust
Institutional Tax Free
Portfolio ................................... 1,497
-------
TOTAL TEMPORARY INVESTMENTS ..................................... 1,497
-------
TOTAL INVESTMENTS - 98.8% ....................................... 71,400
Other Assets, less Liabilities .................................. 907
-------
NET ASSETS ...................................................... $72,307
=======
* The provider of the guarantee of timely payment of both principal and
interest is identified in the brackets at the end of each bond
description. The guarantors applicable to this portfolio and the
percentage of total bonds they guarantee at the period end are as follows:
<TABLE>
<S> <C>
Municipal Bond Investors
Assurance Corp. [MBIA] ....................................... 15.3%
Financial Guaranty Insured Corp. [FGIC] ....................... 8.1
AMBAC Indemnity Corp. [AMBAC] ................................. 4.4
----
27.8%
====
</TABLE>
# Prerefunded bonds are collateralized by securities (generally U.S.
Treasury securities) held in an irrevocable trust in an amount sufficient
to pay interest and principal.
SEE NOTES TO FINANCIAL STATEMENTS
-59-
<PAGE> 62
REPORT FROM THE FUND MANAGER
SAFECO WASHINGTON STATE
MUNICIPAL BOND FUND
December 31, 1996
The 12-month return for the SAFECO Washington State Municipal Bond Fund
was 2.97% for the Advisor Class A shares and 2.96% for the Advisor Class B
shares, not including sales charges, while the average return for Washington
funds was 3.75% according to Lipper, and the Lehman Brothers Long Municipal Bond
Index returned 4.49%.
The Fund's investment strategy of buying and holding long-term bonds makes
for greater volatility in both up and down markets. There's greater price
appreciation in "bull markets" when interest rates are falling, and further
declines when rates increase as they did in 1996, thus causing the Fund's
underperformance.
Our strategy, and subsequently this Fund, is appropriate for long-term
investors who can withstand share price volatility in pursuit of the higher
long-term gains provided by longer-term bonds.
Purchases for the Washington State Municipal Bond Fund included Seattle
Drainage and Wastewater Revenue bond maturing in 2020 at a yield of 5.80% and
Seattle Water Metro maturing in 2020 with a yield of 5.75%.
[PICTURE OF BEVERLY R. DENNY]
BEVERLY DENNY
Attractive prices allowed us to add to our holdings in University of
Washington Housing, Grant PUD and Snohomish PUD.
Sales included Centralia Water Revenue, Tacoma Limited G.O., and Tumwater
G.O. The shorter average maturities on these bonds -- around the year 2011 --
made them good candidates for sale as we were able to swap them for longer bonds
with better call protection and an average maturity around 2021.
I will continue to try to extend maturities, call protection and yield
during 1997.
/s/ Beverly R. Denny
Beverly R. Denny,
Washington State Municipal
Bond Fund Manager
Beverly Denny came to SAFECO from T. Rowe Price in 1991. She holds an MBA from
the University of Virginia and a B.S. in finance/economics from Babson College.
-60-
<PAGE> 63
PORTFOLIO OF INVESTMENTS
SAFECO
WASHINGTON STATE
MUNICIPAL BOND
FUND
As of December 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT (000's) VALUE (000's)
- ---------------------------------------------------------------
<S> <C> <C>
BONDS - 98.2%
$200 Chelan County Public Utility
District #1
Columbia River Rock
Hydroelectric System Revenue
6.375%, due 6/01/29 .................... $202
315 Grant County Public Utility
District #2
Wanapum Hydroelectric Revenue
6.375%, due 1/01/23 .................... 319
100 Kent Limited Tax
General Obligation
5.75%, due 12/01/26 [MBIA] * ........... 100
300 King County Housing Authority
Pooled Housing Refunding Revenue
6.80%, due 3/01/26 ..................... 313
250 King County Limited Tax General
Obligation (Various Purposes)
4.75%, due 1/01/19 ..................... 220
200 King County Public Hospital
District #1
Hospital Facilities Revenue
(Valley Medical Center)
5.50%, due 9/01/17 [AMBAC] ............. 192
100 King County School District #415
(Kent)
Unlimited Tax General Obligation
6.45%, due 12/01/12 .................... 107
200 Kitsap County School District #401
(Central Kitsap)
Unlimited Tax General Obligation
5.50%, due 12/01/11 .................... 201
100 Kitsap County, Sewer Revenue
5.75%, due 7/01/16 [MBIA] .............. 101
250 Klickitat County Public Hospital
District # 1
Unlimited Tax General Obligation
5.75%, due 10/01/27 [FGIC] ............. 248
</TABLE>
HIGHLIGHTS
SAFECO
WASHINGTON STATE
MUNICIPAL BOND
FUND
As of December 31, 1996
S&P Credit Ratings
As a Percent of Net Assets
as of December 31, 1996
[TAKEN FROM PIE CHART]
1. AAA: 48%
2. AA: 20%
3. A: 20%
4. Not Rated: 10%
5. Cash & Other: 2%
<TABLE>
<CAPTION>
PERCENT OF
TOP FIVE TYPES OF BONDS NET ASSETS
<S> <C>
Local G.O. - Limited Tax ................................................ 14%
Hospital ................................................................ 12%
Utilities - Water ....................................................... 9%
Local G.O. - Unlimited Tax .............................................. 9%
Electric Utility - Hydro ................................................ 9%
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF
TOP FIVE HOLDINGS NET ASSETS
<S> <C>
Snohomish County Public Utility
District #1 .......................................................... 4.7%
University of Washington Housing
and Dining System Revenue ............................................ 4.5%
Everett School District #2
Unlimited Tax G.O. .................................................. 4.5%
Grant County Public
Utility District #2 .................................................. 4.5%
King County Housing Authority .......................................... 4.4%
</TABLE>
-61-
<PAGE> 64
PORTFOLIO OF INVESTMENTS (Continued)
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
As of December 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT (000's) VALUE (000's)
- ---------------------------------------------------------------
<S> <C> <C>
$100 Lewis County Public Utility
District #1
Cowlitz Falls Hydroelectric Project
Revenue
6.00%, due 10/01/24 .................... $100
95 Pike Place Market Preservation
and Development Authority
Special Obligation Revenue
6.60%, due 12/01/21 .................... 103
100 Port of Seattle Revenue
6.00%, due 12/01/14 .................... 101
300 Renton Water and Sewer
Improvement Revenue
5.375%, due 4/01/13 .................... 290
250 Seattle Drainage and
Wastewater Utility
Improvement Revenue
5.75%, due 12/01/22 .................... 250
200 Seattle Metro Sewer Revenue
6.30%, due 1/01/33 [MBIA] .............. 212
200 Seattle Water Metro Municipality
5.65%, due 1/01/20 ..................... 198
200 Seattle Water System Revenue
5.25%, due 12/01/23 .................... 188
350 Snohomish County Public Utility
District #1
Generation System Revenue
5.50%, due 1/01/20 [FGIC] .............. 335
300 Snohomish County Unlimited Tax
General Obligation
Everett School District #2
6.20%, due 12/01/12 [MBIA] ............. 321
250 Spokane Regional Solid Waste
Management System Revenue
6.25%, due 12/01/11 [AMBAC] ............ 268
250 Tacoma Water System Revenue
5.50%, due 12/01/13 .................... 250
200 Tukwila Limited Tax General
Obligation 5.90%, due 1/01/14 .......... 206
350 University of Washington Housing
and Dining System Revenue
5.00%, due 12/01/21 [MBIA] ............. 322
100 Washington Certificates of
Participation
(State Office Building Project)
6.00%, due 4/01/12 ..................... 101
200 Washington Health Care
Facilities Authority Revenue
(Franciscan Health System
St. Joseph Hospital and
Health Care Center, Tacoma)
5.625%, due 1/01/13 [MBIA] ............. 199
150 Washington Health Care
Facilities Authority Revenue
(Grays Harbor Medical Center)
5.90%, due 7/01/23 [AG] ................ 150
200 Washington Health Care
Facilities Authority Revenue
(Northwest Hospital, Seattle)
5.75%, due 11/15/23 [AMBAC] ............ 198
100 Washington Health Care
Facilities Authority Revenue
(Swedish Hospital Medical Center)
6.30%, due 11/15/22 [AMBAC] ............ 105
250 Washington Higher Education
Facilities Authority Revenue
and Refunding Revenue
(Pacific Lutheran University
Project) 5.70%, due 11/01/26 [CL] ...... 244
120 Washington Public Power
Supply System
Nuclear Project #2 Revenue
5.50%, due 7/01/18 ..................... 113
250 Washington State Housing
Finance Commission
Revenue (Horizon House Project)
6.125%, due 7/01/27 [AG] ............... 255
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-62-
<PAGE> 65
PORTFOLIO OF INVESTMENTS (Continued)
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
As of December 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT (000's) VALUE (000'S)
- ---------------------------------------------------------------------
<S> <C> <C>
$250 Whatcom County Limited Tax
General Obligation
5.75%, due 12/01/12 [FSA] .............. $ 254
200 Yakima-Tieton Irrigation
District Revenue
6.20%, due 6/01/19 [FSA] ............... 211
------
TOTAL BONDS ........................................... 6,977
------
TEMPORARY INVESTMENTS - 0.9%
INVESTMENT COMPANIES:
61 Federated Tax-Exempt
Money Market Fund, Inc. ................ 61
------
TOTAL TEMPORARY INVESTMENTS ........................... 61
------
TOTAL INVESTMENTS - 99.1% ............................. 7,038
Other Assets, less Liabilities ........................ 67
------
NET ASSETS ............................................ $7,105
======
</TABLE>
* The provider of the guarantee of timely payment of both principal and
interest is identified in the brackets at the end of each bond
description. The guarantors applicable to this portfolio and the
percentage of total bonds they guarantee at period end are as follows:
<TABLE>
<S> <C>
Municipal Bond Investors
Assurance Corp. [MBIA] .................................... 17.8%
AMBAC Indemnity Corp. [AMBAC] ............................... 10.8
Financial Guaranty Insurance
Corp. [FGIC] .............................................. 8.3
Financial Security
Assurance, Inc. [FSA] ..................................... 6.6
Asset Guaranty [AG] ......................................... 5.8
Connie Lee [CL] ............................................. 3.5
----
52.8%
====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-63-
<PAGE> 66
REPORT FROM THE FUND MANAGER
SAFECO Intermediate-Term
U.S. Treasury Fund
SAFECO Managed Bond Fund
December 31, 1996
Both the Intermediate-Term U.S. Treasury and Managed Bond Funds are
actively managed using a trend-following strategy: that is, we invest in concert
with interest rate trends. We reduce the Funds' average maturities as rates
rise, and increase them as rates fall. In general under this strategy, returns
at first lag, and then surpass the market as a new trend unfolds.
A market which changes course frequently, however, wreaks havoc on funds
which employ trend-following strategies. In other words, our strategy sustained
a recurrent case of whiplash in '96. The Funds suffered at the hands of a
capricious market in which rates oscillated furiously only to end the year
markedly higher.
We began 1996 with a long average maturity in response to 1995's bull
market. When rates rose rapidly and unexpectedly in the early part of this year,
the performance of both Funds lagged. In the second and third quarters, we
recouped our losses by maintaining shorter average maturities as rates continued
climbing.
[PICTURE OF MICHAEL C. KNEBEL]
MICHAEL C. KNEBEL
Ironically, this same defensive posture caused us to lag in the fourth
quarter as rates began to fall. The good news/bad news is that as rates reverted
upward yet again, rising in December and into early 1997, our defensive strategy
is finally paying off.
Looking ahead to 1997, we expect this market volatility to continue and
the investment environment to remain challenging. Renewed economic strength will
likely rekindle inflation fears which, in turn, may prompt speculation that the
Federal Reserve will raise short-term interest rates. We think any talk of Fed
tightening is still premature.
While we've yet to see evidence the economy is overheating, we wouldn't be
surprised to see rates move higher anyway, as the bond market responds bearishly
to a more bullish outlook for the economy. We will seek to increase the Funds'
yields while maintaining their conservative
-64-
<PAGE> 67
risk profiles. And that should better insulate both the Managed Bond Fund and
the Intermediate-Term U.S. Treasury Fund from the effects of gyrating interest
rates.
THE SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND returned 0.33% for the
Advisor Class A shares and 0.25% for the Advisor Class B shares, not including
sales charges, for the period ended December 31, 1996. On average,
intermediate-term Treasury funds, as measured by Lipper Analytical Services, had
a 12-month return of 2.10%. The sector, as measured by the Merrill Lynch
Intermediate Treasury Index (which includes no operating expenses or transaction
costs), returned 3.89% for the year.
THE SAFECO MANAGED BOND FUND returned 0.07% for the Advisor Class A shares
and -0.12% for the Advisor Class B shares, not including sales charges, for the
year ended December 31, 1996. The sector as a whole, as measured by the Lehman
Brothers Government/ Corporate Index (and without accounting for operating
expenses or transaction costs), returned 2.90% for the year.
We have gradually reduced the allocation to corporate bonds to about 25%
of net assets as the difference in yield narrowed, diminishing the
attractiveness of
(Continued on next page.)
HIGHLIGHTS
SAFECO
MANAGED
BOND FUND
As of December 31, 1996
S&P Credit Rating Distribution
As a Percent of Net Assets
as of December 31, 1996
[TAKEN FROM PIE CHART]
1. AAA: 72%
2. AA: 11%
3. A: 14%
4. Cash and Other Assets, Less Liability: 3%
Bonds by Type
As a Percent of Net Assets
as of December 31, 1996
[TAKEN FROM BAR GRAPH]
US Treasury Securities: 70%
Utilities: 13%
Banking & Finance: 9%
Canadian Provinces, U.S. Funds: 2%
Asset Backed Securities: 2%
Cash, Temporary Investments and Other: 4%
-65-
<PAGE> 68
REPORT FROM THE
INTERMEDIATE-TERM
U.S. TREASURY FUND
AND MANAGED BOND FUND
MANAGER (Continued)
the corporate sector. We also increased the Managed Bond Fund's duration
(sensitivity to interest rates) to just under four years -- it was two years at
September 30, 1996. Still, Managed Bond Fund's duration remains considerably
shorter than the general market's duration.
/s/ Michael C. Knebel
Michael Knebel
Fund Manager
Intermediate-Term
U.S. Treasury Fund
Managed Bond Fund
Mike Knebel has managed bond portfolios for SAFECO since 1989. Before that he
managed municipal bond and money market funds for Lutheran Brotherhood. He
earned his M.B.A. in Finance at the University of Minnesota, and he is a
Chartered Financial Analyst.
PORTFOLIO OF INVESTMENTS
SAFECO
INTERMEDIATE-TERM
U.S. TREASURY FUND
As of December 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT (000's) VALUE (000's)
- ------------------------------------------
U.S. GOVERNMENT SECURITIES - 98.4%
U.S. TREASURY NOTES - 86.6%
<S> <C>
$2,450 7.75%, due 2/15/01 ..... $ 2,589
1,300 7.50%, due 11/15/01 .... 1,369
2,505 7.25%, due 8/15/04 ..... 2,637
6,110 6.875%, due 3/31/00 .... 6,247
670 6.00%, due 10/15/99 .... 670
U.S. TREASURY PRINCIPAL STRIPS
- 11.8% 2,160, 0.00%,
due 8/15/99 .................. 1,849
-------
TOTAL U.S. GOVERNMENT SECURITIES 15,361
-------
TEMPORARY INVESTMENTS - 0.2%
INVESTMENT COMPANIES:
33 Short-Term Investments Co.
(Prime Portfolio) ...... 33
-------
TOTAL TEMPORARY INVESTMENTS .... 33
-------
TOTAL INVESTMENTS - 98.6% ...... 15,394
Other Assets, less Liabilities . 212
-------
NET ASSETS ..................... $15,606
=======
</TABLE>
-66-
<PAGE> 69
PORTFOLIO OF INVESTMENTS
SAFECO MANAGED BOND FUND
As of December 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT (000's) VALUE (000's)
- -----------------------------------------------------------
<S> <C>
ASSET BACKED SECURITIES - 1.9%
FINANCIAL - 1.9%
$84 Chevy Chase Auto ABS
Series 1996-1, Class A
6.60%, due 12/15/02 ............... $ 84
-------
TOTAL ASSET BACK SECURITIES ................. 84
-------
CORPORATE BONDS - 24.7%
BANKING & FINANCE - 9.1%
100 Associates Corp. of North America
8.80%, due 8/01/98 ................ 104
100 International Lease Finance Corp.
6.625%, due 4/01/99 ............... 101
100 Norwest Financial, Inc.
6.25%, due 3/15/99 ................ 100
100 Transamerica Finance Corp.
6.80%, due 3/15/99 ................ 101
CANADIAN PROVINCES, U.S. FUNDS - 2.4%
100 Manitoba (Province)
9.50%, due 9/15/98 ................ 105
UTILITIES - 13.2%
100 Central Power & Light Co.
7.50%, due 5/01/99 ................ 102
100 Consolidated Natural Gas Co.
5.875%, due 10/01/98 .............. 100
185 GTE California, Inc.
6.25%, due 1/15/98 ................ 186
100 Nova Gas Transmission
7.25%, due 7/06/99 ................ 102
100 Virginia Electric & Power Co.
7.25%, due 3/01/97 ................ 100
-------
TOTAL CORPORATE BONDS ....................... 1,101
-------
U.S. GOVERNMENT SECURITIES - 70.0%
U.S. TREASURY NOTES - 64.2%
370 7.75%, due 12/31/99 ............... 387
320 7.50%, due 2/15/05 ................ 342
1,245 7.25%, due 8/15/04 ................ 1,311
350 6.50%, due 5/31/01 ................ 354
465 6.375%, due 8/15/02 ............... 468
U.S. TREASURY PRINCIPAL STRIPS - 5.8%
300 0.00%, due 8/15/99 ................ 257
-------
TOTAL U.S. GOVERNMENT SECURITIES ............ 3,119
-------
TEMPORARY INVESTMENTS - 1.6%
INVESTMENT COMPANIES:
69 Short-Term Investments Co.
(Prime Portfolio) ................. 69
-------
TOTAL TEMPORARY INVESTMENTS ................. 69
-------
TOTAL INVESTMENTS - 98.2% ................... 4,373
-------
Other Assets, less Liabilities .............. 82
-------
NET ASSETS .................................. $ 4,455
=======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-67-
<PAGE> 70
REPORT FROM THE FUND MANAGER
SAFECO MONEY MARKET FUND
December 31, 1996
In the 12 months ended December 31, 1996, the SAFECO Money Market Fund
returned 4.78% for both the Advisor Class A and B shares. On December 31, 1996,
the Fund's seven-day yield was 4.93% for the Advisor Class A shares and 4.94%
for the Advisor Class B shares while the average money fund seven-day yield, as
reported by IBC/Donoghue, was 4.82%. The Consumer Price Index, a broad inflation
measure, rose 3.30% for the 12 months ending December 31, 1996.
In the last quarter, 90-day commercial paper rates initially fell from
5.49% to 5.40% in November, then rose to 5.63% by December 31, 1996. The average
maturity of the Fund rose from 35 days in October to 45 days when it became
questionable whether the Federal Reserve would raise rates as anticipated. At
year end, the seven-day weighted average maturity was 36 days.
I invested in U.S. agency securities, commercial paper issued by top tier
corporations and bank certificates of deposit and notes. All of the securities
had less than 13 months to maturity. Four securities have a rate that floats
monthly so investors can benefit from higher yields if short-term rates continue
to rise. I reduced lower-yielding overnight investments from about $35 million
or 20% of total assets in the third quarter to $4.4 million or 2.8% of total
assets at year end.
[PICTURE OF NAOMI URATA]
NAOMI URATA
I added XEROX CORPORATION and SMITH BARNEY to our approved securities
list. Both of these companies are rated in the top tier category.
I believe that the Federal Reserve will hold rates steady for the next few
months. After that, there is no consensus on their next move. The economic data
is mixed, but recently, the market has responded negatively to signs of strength
in the housing and
-68-
<PAGE> 71
manufacturing sectors, which has caused rates to rise. I will maintain an
average maturity that is not highly sensitive to interest rate changes based on
that uncertainty.
/s/ Naomi Urata
Naomi Urata,
Money Market
Fund Manager
Naomi Urata joined SAFECO in 1993 as a fixed-income analyst and began managing
the SAFECO Money Market Fund in August 1994. She holds a Masters in Management
from Yale University and is a Chartered Financial Analyst.
HIGHLIGHTS
SAFECO
MONEY MARKET
FUND
As of December 31, 1996
Top Five Categories
[BAR CHART]
<TABLE>
<S> <C>
Floating Rate Notes: 19%
Financial Services -- Brokerage: 15%
Asset Backed: 12%
Finance -- Diversified & Business: 12%
Finance -- Auto: 12%
</TABLE>
7-Day Weighted Average Maturity: 36 Days
<TABLE>
<CAPTION>
Average Annual Return
- ------------------------
<S> <C>
Class A 4.78%
Class B 4.78%
</TABLE>
<TABLE>
<CAPTION>
Portfolio Credit Quality
- ------------------------
<S> <C>
Highest Rated(1) 100%
Split Rated(2) 0%
Not Rated(3) 0%
---
100%
===
</TABLE>
(1) Rated highest quality by at least two nationally recognized rating
organizations or, when rated by only one organization, received its
highest rating
(2) Rated highest by one organization and second highest by another
(3) Although unrated, comparable in credit quality to securities in the
highest or split-rated categories, in the opinion of SAFECO Asset
Management Company, the Fund's investment advisor.
-69-
<PAGE> 72
PORTFOLIO OF INVESTMENTS
SAFECO MONEY MARKET FUND
As of December 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT (000's) VALUE (000's)
- ----------------------------------------------------------
<S> <C>
COMMERCIAL PAPER - 78.4%
ASSET BACKED - 12.3%
Apreco, Inc.
$4,000 5.48%, due 2/18/97 ................ $3,971
4,000 5.30%, due 2/14/97 ................ 3,974
4,000 Ciesco L.P
5.28%, due 1/17/97 ................ 3,991
4,000 Corporate Asset Funding Co.
5.30%, due 1/08/97 ................ 3,996
4,000 # Receivables Capital Corp. 4(2)
5.62%, due 1/23/97 ................ 3,986
BANKING & FINANCE - 2.5%
4,000 Associates Corp. of
North America
5.28%, due 3/04/97 ................ 3,964
BANKS - FOREIGN - 9.8%
4,000 Cheltenham & Gloucester
Building Society
5.26%, due 3/24/97 ................ 3,952
4,000 National Australia Funding
(DE), Inc.
5.45%, due 1/13/97 ................ 3,993
Westpac Capital Corp.
4,000 5.32%, due 1/30/97 ................ 3,983
4,000 5.32%, due 2/06/97 ................ 3,979
CONGLOMERATES - 2.4%
4,000 B.A.T. Capital Corp.
5.43%, due 2/19/97 ................ 3,970
FINANCE - AUTO - 12.3%
Ford Motor Credit Co.
4,000 5.39%, due 1/28/97 ................ 3,984
4,000 5.31%, due 1/14/97 ................ 3,992
General Motors
Acceptance Corp.
4,000 5.36%, due 2/04/97 ................ 3,980
4,000 5.32%, due 2/20/97 ................ 3,971
4,000 New Center Asset Trust
5.30%, due 5/08/97 ................ 3,925
FINANCE - CONSUMER - 4.9%
Household Finance Corp.
4,000 5.32%, due 1/09/97 ................ 3,995
4,000 5.31%, due 1/10/97 ................ 3,995
FINANCE - DIVERSIFIED & BUSINESS - 12.3%
General Electric Capital Corp.
4,000 5.32%, due 1/15/97 ................ 3,992
4,000 5.30%, due 1/22/97 ................ 3,988
Heller Financial, Inc.
4,000 5.55%, due 1/07/97 ................ 3,996
4,000 5.40%, due 2/11/97 ................ 3,975
4,000 Transamerica Finance Corp.
5.30%, due 1/27/97 ................ 3,985
FINANCIAL SERVICES - BROKERAGE - 14.7%
CS First Boston Group, Inc.
3,950 5.32%, due 1/29/97 ................ 3,934
4,000 5.31%, due 2/27/97 ................ 3,966
Merrill Lynch & Co., Inc.
4,000 5.31%, due 1/31/97 ................ 3,982
4,000 5.30%, due 5/01/97 ................ 3,929
Smith Barney Inc. CP
3,950 5.31%, due 1/02/97 ................ 3,949
4,000 5.30%, due 1/16/97 ................ 3,991
INSURANCE NON-AFFILIATED MULTI-LINE - 2.5%
4,000 Prudential Funding Corp.
5.30%, due 2/13/97 ................ 3,975
METALS - 2.3%
3,728 BHP Finance (USA), Inc.
5.33%, due 1/24/97 ................ 3,715
MISCELLANEOUS - 2.4%
4,000 Tasmanian Public Finance Corp.
5.34%, due 4/17/97 ................ 3,937
--------
TOTAL COMMERCIAL PAPER 126,915
--------
U.S. GOVERNMENT AND
AGENCY SECURITIES - 2.8%
FEDERAL HOME LOAN MORTGAGE ASSOCIATION
DISCOUNT NOTES - 2.8%
4,470 5.70%, due 1/02/97 ................ 4,469
--------
TOTAL U.S. GOVERNMENT AND
AGENCY SECURITIES ........................... 4,469
--------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-70-
<PAGE> 73
PORTFOLIO OF INVESTMENTS (Continued)
SAFECO MONEY MARKET FUND
As of December 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT (000's) VALUE (000's)
- ----------------------------------------------------------
<S> <C>
FLOATING RATE NOTES* - 19.5%
$8,500 Dean Witter, Discover
5.57%, due 8/08/97 $ 8,500
8,000 First Bank FSB Fargo ND BN
5.53%, due 8/29/97 7,999
7,000 Key Bank of Wa. BN
5.51%, due 12/10/97 6,997
8,000 MBNA America Bank BN
5.64%, due 6/17/97 8,000
--------
TOTAL FLOATING RATE NOTES 31,496
--------
TOTAL INVESTMENTS - 100.7% $162,880
Liabilities, Less Other Assets (1,123)
--------
NET ASSETS .................................. $161,757
========
</TABLE>
# Securities are exempt from registration and restricted as to resale only
to dealers, or through a dealer to an "accredited investor" or a
"qualified institutional buyer". At December 31, 1996, such security is
Receivables Capital Corp. 4(2) at 5.62%, acquired 12/18/96, due 1/23/97.
The total value of this security is $3,986,262 or 2.5% of net assets.
* Securities have variable rates which change periodically based on
specified market rates or indices. Rates shown are those in effect on
December 31, 1996.
SEE NOTES TO FINANCIAL STATEMENTS
-71-
<PAGE> 74
STATEMENTS OF ASSETS AND LIABILITIES
As of December 31, 1996
<TABLE>
<CAPTION>
SAFECO SAFECO SAFECO
GROWTH EQUITY INCOME
(In Thousands, Except Per-Share Amounts) FUND FUND FUND
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investment at Cost $155,983 $707,316 $226,221
======== ======== ========
Investments at Value
Unaffiliated Issuers 147,296 859,893 290,383
Affiliated Issuers 47,847 -- --
-------- -------- --------
Total Investments at Value 195,143 859,893 290,383
Cash -- 5 --
Receivables
Investment Securities Sold -- 4,857 --
Trust Shares Sold 1,246 4,115 647
Dividends and Interest 164 1,317 1,031
Forward Currency Contracts Closed -- -- --
Forward Currency Contracts Open, Net -- -- --
Deferred Organization Expense -- -- --
-------- -------- --------
Total Assets 196,553 870,187 292,061
LIABILITIES
Payables
Investment Securities Purchased -- 13,395 509
Trust Shares Redeemed 187 1,038 113
Dividends 126 1,906 930
Investment Advisory Fees 116 410 169
Notes Payable -- 170 --
Organization Expense -- -- --
Other 61 188 67
-------- -------- --------
Total Liabilities 490 17,107 1,788
-------- -------- --------
Net Assets $196,063 $853,080 $290,273
======== ======== ========
No-Load Class:
Net Assets $195,760 $849,831 $289,968
Trust Shares Outstanding 11,534 51,183 13,726
-------- -------- --------
Net Asset Value, Offering Price, and
Redemption Price Per Share $ 16.97 $ 16.60 $ 21.13
======== ======== ========
Class A:
Net Assets $ 187 $ 2,894 $ 193
Trust Shares Outstanding 11 174 9
-------- -------- --------
Net Asset Value and
Redemption Price Per Share $ 16.97 $ 16.62 $ 21.15
======== ======== ========
Maximum Offering Price Per Share
(Net Asset Value Plus Sales Charge of 4.5%) $ 17.77 $ 17.40 $ 22.15
======== ======== ========
Class B:
Net Assets $ 116 $ 355 $ 112
Trust Shares Outstanding 7 22 5
-------- -------- --------
Net Asset Value and
Offering Price Per Share* $ 16.94 $ 16.60 $ 21.12
======== ======== ========
</TABLE>
*Redemption price per share is the net asset value less any applicable
contingent deferred sales charge.
SEE NOTES TO FINANCIAL STATEMENTS
-72-
<PAGE> 75
STATEMENTS OF ASSETS AND LIABILITIES (Continued)
As of December 31, 1996
<TABLE>
<CAPTION>
SAFECO SAFECO SAFECO SAFECO
Northwest Balanced International Small Company
(In Thousands, Except Per-Share Amounts) Fund Fund Stock Fund Stock Fund
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investment at Cost $31,242 $8,031 $ 9,641 $12,050
======= ====== ======= =======
Investments at Value
Unaffiliated Issuers 43,351 8,532 10,806 13,573
Affiliated Issuers -- -- -- --
------- ------ ------- -------
Total Investments at Value 43,351 8,532 10,806 13,573
Cash -- -- 573 --
Receivables
Investment Securities Sold 609 -- -- --
Trust Shares Sold 21 7 51 121
Dividends and Interest 43 72 26 5
Forward Currency Contracts Closed -- -- 53 --
Forward Currency Contracts Open, Net -- -- 2 --
Deferred Organization Expense -- 16 16 16
------- ------ ------- -------
Total Assets 44,024 8,627 11,527 13,715
LIABILITIES
Payables
Investment Securities Purchased -- -- 9 --
Trust Shares Redeemed 24 -- 19 276
Dividends -- 115 34 --
Investment Advisory Fees 28 6 11 10
Notes Payable -- -- -- --
Organization Expense -- 16 16 16
Other 26 3 15 6
------- ------ ------- -------
Total Liabilities 78 140 104 308
------- ------ ------- -------
Net Assets $43,946 $8,487 $11,423 $13,407
======= ====== ======= =======
No-Load Class:
Net Assets $43,345 $8,262 $11,157 $13,169
Trust Shares Outstanding 3,081 772 988 1,115
------- ------ ------- -------
Net Asset Value, Offering Price, and
Redemption Price Per Share $ 14.07 $10.70 $ 11.29 $ 11.81
======= ====== ======= =======
Class A:
Net Assets $ 369 $ 110 $ 154 $ 135
Trust Shares Outstanding 26 10 14 11
------- ------ ------- -------
Net Asset Value and
Redemption Price Per Share $ 14.06 $10.69 $ 11.29 $ 11.81
======= ====== ======= =======
Maximum Offering Price Per Share
(Net Asset Value Plus Sales Charge of 4.5%) $ 14.72 $11.19 $ 11.82 $ 12.37
======= ====== ======= =======
Class B:
Net Assets $ 232 $ 115 $ 112 $ 103
Trust Shares Outstanding 17 11 10 9
------- ------ ------- -------
Net Asset Value and
Offering Price Per Share* $ 14.03 $10.70 $ 11.28 $ 11.79
======= ====== ======= =======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-73-
<PAGE> 76
STATEMENTS OF ASSETS AND LIABILITIES (Continued)
As of December 31, 1996
<TABLE>
<CAPTION>
SAFECO SAFECO
(In Thousands, Except INTERMEDIATE-TERM MANAGED
Per-Share Amounts) U.S TREASURY FUND BOND FUND
- -----------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investment at Cost $15,390 $4,376
======= ======
Investments at Value
Unaffiliated Issuers 15,394 4,373
------- ------
Affiliated Issuers -- --
------- ------
Total Investments at Value 15,394 4,373
Cash -- 14
Receivables
Investment Securities Sold -- --
Trust Shares Sold 16 --
Dividends and Interest 269 83
Forward Currency Contracts Closed -- --
Forward Currency Contracts Open, Net -- --
Deferred Organization Expense -- 13
------- ------
Total Assets 15,679 4,483
LIABILITIES
Payables
Investment Securities Purchased -- --
Trust Shares Redeemed 17 --
Dividends 43 1
Investment Advisory Fees 8 2
Notes Payable -- --
Organization Expense -- 13
Other 5 12
------- ------
Total Liabilities 73 28
------- ------
Net Assets $15,606 $4,455
======= ======
No-Load Class:
Net Assets $14,679 $4,215
Trust Shares Outstanding 1,452 505
------- ------
Net Asset Value, Offering Price, and
Redemption Price Per Share $ 10.11 $ 8.35
======= ======
Class A:
Net Assets $ 704 $ 140
Trust Shares Outstanding 70 17
------- ------
Net Asset Value and
Redemption Price Per Share $ 10.11 $ 8.35
======= ======
Maximum Offering Price Per Share
(Net Asset Value Plus Sales Charge of 4.5%) $ 10.59 $ 8.74
======= ======
Class B:
Net Assets $ 223 $ 100
Trust Shares Outstanding 22 12
------- ------
Net Asset Value and
Offering Price Per Share* $ 10.12 $ 8.35
======= ======
</TABLE>
** Redemption price per share is the net asset value less any applicable
contingent deferred sales charge.
** Also represents offering price per share.
SEE NOTES TO FINANCIAL STATEMENTS
-74-
<PAGE> 77
STATEMENTS OF ASSETS AND LIABILITIES (Continued)
As of December 31, 1996
<TABLE>
<CAPTION>
SAFECO SAFECO SAFECO SAFECO
(in thousands, except MUNICIPAL CALIFORNIA TAX-FREE WASHINGTON STATE MONEY MARKET
per-share amounts) BOND FUND INCOME FUND MUNICIPAL BOND FUND FUND
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investment at Cost $429,268 $65,281 $6,750 $162,880
======== ======= ====== ========
Investments at Value
Unaffiliated Issuers 479,642 71,400 7,038 162,880
Affiliated Issuers -- -- -- --
-------- ------- ------ --------
Total Investments at Value 479,642 71,400 7,038 162,880
Cash -- -- -- 1
Receivables
Investment Securities Sold -- -- -- --
Trust Shares Sold 168 2 -- 2,030
Dividends and Interest 8,772 1,284 108 74
Forward Currency Contracts Closed -- -- -- --
Forward Currency Contracts Open, Net -- -- -- --
Deferred Organization Expense -- -- 2 --
-------- ------- ------ --------
Total Assets 488,582 72,686 7,148 164,985
LIABILITIES
Payables
Investment Securities Purchased 5,152 -- -- --
Trust Shares Redeemed 975 186 -- 2,533
Dividends 822 140 26 27
Investment Advisory Fees 179 35 4 71
Notes Payable -- -- -- 540
Organization Expense -- -- 2 --
Other 61 18 11 57
-------- ------- ------ --------
Total Liabilities 7,189 379 43 3,228
-------- ------- ------ --------
Net Assets $481,393 $72,307 $7,105 $161,757
======== ======= ====== ========
No-Load Class:
Net Assets $480,970 $72,084 $6,558 $161,356
Trust Shares Outstanding 34,402 5,897 623 161,356
-------- ------- ------ --------
Net Asset Value, Offering Price, and
Redemption Price Per Share $ 13.98 $ 12.22 $10.53 $ 1.00
======== ======= ====== ========
Class A:
Net Assets $ 311 $ 122 $ 336 $ 295
Trust Shares Outstanding 22 10 32 295
-------- ------- ------ --------
Net Asset Value and
Redemption Price Per Share $ 13.99 $ 12.23 $10.53 $ 1.00 **
======== ======= ====== ========
Maximum Offering Price Per Share
(Net Asset Value Plus Sales Charge of 4.5%) $ 14.65 $ 12.81 $11.03
======== ======= ======
Class B:
Net Assets $ 112 $ 101 $ 211 $ 106
Trust Shares Outstanding 8 8 20 106
-------- ------- ------ --------
Net Asset Value and
Offering Price Per Share* $ 13.98 $ 12.22 $10.55 $ 1.00
======== ======= ====== ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-75-
<PAGE> 78
STATEMENTS OF OPERATIONS
For the Period Ended December 31, 1996
<TABLE>
<CAPTION>
SAFECO SAFECO SAFECO
GROWTH EQUITY INCOME
(In Thousands) FUND * FUND * FUND *
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends (Net of Foreign Taxes Withheld
of $3 in the International Fund) $ 204 $ 3,921 $ 2,155
Interest 20 674 501
------- ------- -------
Total Investment Income 224 4,595 2,656
EXPENSES
Investment Advisory Fees 327 1,131 469
Transfer Agent Fees 99 378 123
Shareholder Service Fees (Note 1) -- 1 --
Distribution Fees - Class B (Note 1) -- 1 --
Legal and Auditing Fees 15 25 17
Custodian Fees 6 6 3
Reports to Shareholders 8 35 10
Trustees' Fees 1 6 2
Loan Interest 4 -- --
Amortization of Organization Expenses -- -- --
------- ------- -------
Total Expenses Before Reimbursement 460 1,583 624
Expense Reimbursement -- -- --
Total Expenses After Reimbursement 460 1,583 624
------- ------- -------
NET INVESTMENT INCOME (LOSS) (236) 3,012 2,032
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
Net Realized Gain (Loss) from:
Investments in Unaffiliated Issuers 2,653 28,862 7,031
Investments in Affiliated Issuers 237 -- --
Foreign Currency Transactions -- -- --
------- ------- -------
Total Net Realized Gain (Loss) 2,890 28,862 7,031
Net Change in Unrealized Appreciation
(Depreciation) on:
Investments 17,540 33,741 14,121
Foreign Currency Related Transactions -- -- --
------- ------- -------
NET GAIN ON INVESTMENTS AND FOREIGN CURRENCY 20,430 62,603 21,152
------- ------- -------
Net Change in Net Assets
Resulting from Operations $20,194 $65,615 $23,184
======= ======= =======
</TABLE>
* For the three-month period ended December 31, 1996.
SEE NOTES TO FINANCIAL STATEMENTS
-76-
<PAGE> 79
STATEMENTS OF OPERATIONS (Continued)
For the Period Ended December 31, 1996
<TABLE>
<CAPTION>
SAFECO SAFECO SAFECO SAFECO
NORTHWEST BALANCED INTERNATIONAL SMALL COMPANY
(in thousands) FUND * FUND * STOCK FUND * STOCK FUND *
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends (Net of Foreign Taxes Withheld
of $3 in the International Fund) $ 88 $ 30 $ 24 $ 21
Interest 12 61 6 8
------- ---- ---- -----
Total Investment Income 100 91 30 29
EXPENSES
Investment Advisory Fees 80 15 28 27
Transfer Agent Fees 32 2 5 8
Shareholder Service Fees (Note 1) -- -- -- --
Distribution Fees - Class B (Note 1) -- -- -- --
Legal and Auditing Fees 12 9 11 9
Custodian Fees 3 3 (3) 3
Reports to Shareholders 3 1 1 1
Trustees' Fees 1 -- -- --
Loan Interest 3 -- -- --
Amortization of Organization Expenses -- 1 1 1
------- ---- ---- -----
Total Expenses Before Reimbursement 134 31 43 49
Expense Reimbursement -- (6) (8) (6)
------- ---- ---- -----
Total Expenses After Reimbursement 134 25 35 43
------- ---- ---- -----
NET INVESTMENT INCOME (LOSS) (34) 66 (5) (14)
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
Net Realized Gain (Loss) from:
Investments in Unaffiliated Issuers (2,374) 99 19 (278)
Investments in Affiliated Issuers -- -- -- --
Foreign Currency Transactions -- -- 68 --
------- ---- ---- -----
Total Net Realized Gain (Loss) (2,374) 99 87 (278)
Net Change in Unrealized Appreciation
(Depreciation) on:
Investments 3,280 243 855 643
Foreign Currency Related Transactions -- -- (2) --
------- ---- ---- -----
NET GAIN ON INVESTMENTS AND FOREIGN CURRENCY 906 342 940 365
------- ---- ---- -----
Net Change in Net Assets
Resulting from Operations $ 872 $408 $935 $ 351
======= ==== ==== =====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-77-
<PAGE> 80
STATEMENTS OF OPERATIONS (Continued)
For the Period Ended December 31, 1996
<TABLE>
<CAPTION>
SAFECO SAFECO
INTERMEDIATE-TERM MANAGED
(In Thousands) U.S. TREASURY FUND * BOND FUND **
- ----------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Dividends (Net of Foreign Taxes Withheld
of $3 in the International Fund) -- --
Interest $ 275 $ 263
----- -----
Total Investment Income 275 263
EXPENSES
Investment Advisory Fees 21 21
Transfer Agent Fees 6 --
Shareholder Service Fees (Note 1) -- --
Distribution Fees - Class B (Note 1) -- --
Legal and Auditing Fees 12 13
Custodian Fees 1 5
Reports to Shareholders 1 6
Trustees' Fees -- 4
Loan Interest -- --
Amortization of Organization Expenses -- 6
----- -----
Total Expenses Before Reimbursement 41 55
Expense Reimbursement (8) --
----- -----
Total Expenses After Reimbursement 33 55
----- -----
NET INVESTMENT INCOME (LOSS) 242 208
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
Net Realized Gain (Loss) from:
Investment in Unaffiliated Issuers (125) 2
Investments in Affiliated Issuers -- --
Foreign Currency Transactions -- --
----- -----
Total Net Realized Gain (Loss) (125) 2
Net Change in Unrealized Appreciation
(Depreciation) on:
Investments 144 (210)
Foreign Currency Related Transactions -- --
----- -----
NET GAIN ON INVESTMENTS AND FOREIGN CURRENCY 19 (208)
----- -----
Net Change in Net Assets
Resulting from Operations $ 261 $ 0
===== =====
</TABLE>
* For the three-month period ended December 31, 1996.
** For the year ended December 31, 1996.
*** For the nine-month period ended December 31, 1996.
SEE NOTES TO FINANCIAL STATEMENTS
-78-
<PAGE> 81
STATEMENTS OF OPERATIONS (Continued)
for the Period Ended December 31, 1996
<TABLE>
<CAPTION>
SAFECO
SAFECO SAFECO WASHINGTON SAFECO
MUNICIPAL CALIFORNIA TAX-FREE STATE MUNICIPAL MONEY MARKET
(in thousands) BOND FUND *** INCOME FUND *** BOND FUND *** FUND ***
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends (Net of Foreign Taxes Withheld
of $3 in the International Fund) -- -- -- --
Interest $21,820 $3,132 $294 $6,815
------- ------ ---- ------
Total Investment Income 21,820 3,132 294 6,815
EXPENSES
Investment Advisory Fees 1,533 290 32 630
Transfer Agent Fees 300 48 2 325
Shareholder Service Fees (Note 1) -- -- -- --
Distribution Fees - Class B (Note 1) -- -- -- --
Legal and Auditing Fees 24 13 12 18
Custodian Fees 9 5 5 17
Reports to Shareholders 36 6 1 25
Trustees' Fees 9 3 3 5
Loan Interest 6 1 -- --
Amortization of Organization Expenses -- -- 1 --
------- ------ ---- ------
Total Expenses Before Reimbursement 1,917 366 56 1,020
Expense Reimbursement -- -- -- --
------- ------ ---- ------
Total Expenses After Reimbursement 1,917 366 56 1,020
------- ------ ---- ------
19,903 2,766 238 5,795
NET INVESTMENT INCOME (LOSS)
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
Net Realized Gain (Loss) from:
Investment in Unaffiliated Issuers 2,341 197 4 --
Investments in Affiliated Issuers -- -- -- --
Foreign Currency Transactions -- -- -- --
------- ------ ---- ------
Total Net Realized Gain (Loss) 2,341 197 4 --
Net Change in Unrealized Appreciation
(Depreciation) on:
Investments 7,844 2,196 125 --
Foreign Currency Related Transactions -- -- -- --
------- ------ ---- ------
NET GAIN ON INVESTMENTS AND FOREIGN CURRENCY 10,185 2,393 129 --
------- ------ ---- ------
Net Change in Net Assets
Resulting from Operations $30,088 $5,159 $367 $5,795
======= ====== ==== ======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-79-
<PAGE> 82
STATEMENTS OF OPERATIONS
For the Period Ended September 30, 1996
<TABLE>
<CAPTION>
SAFECO SAFECO SAFECO SAFECO
GROWTH EQUITY INCOME NORTHWEST
(In Thousands) FUND * FUND * FUND * FUND *
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends (Net of Foreign Taxes
Withheld of $20 in the
International Fund) $ 1,398 $ 14,463 $ 7,818 $ 431
Interest 191 1,829 2,574 64
------- -------- ------- -------
Total Investment Income 1,589 16,292 10,392 495
EXPENSES
Investment Advisory Fees 1,260 3,752 1,597 305
Transfer Agent Fees 384 1,203 359 105
Legal and Auditing Fees 18 31 19 14
Custodian Fees 26 27 15 10
Reports to Shareholders 24 86 30 7
Trustees' Fees 6 10 7 5
Loan Interest 123 -- -- --
Amortization of
Organization Expenses -- -- -- 2
------- -------- ------- -------
Total Expenses 1,841 5,109 2,027 448
------- -------- ------- -------
NET INVESTMENT INCOME (LOSS) (252) 11,183 8,365 47
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY
Net Realized Gain (Loss) from:
Investments in
Unaffiliated Issuers 29,417 77,448 22,848 5,695
Investments in Affiliated
Issuers (2,655) -- -- --
Foreign Currency
Transactions -- -- -- --
------- -------- ------- -------
Total Net Realized
Gain (Loss) 26,762 77,448 22,848 5,695
Net Change in Unrealized
Appreciation (Depreciation) on:
Investments (1,973) 18,119 9,944 (1,961)
Foreign Currency
Related Transactions -- -- -- --
------- -------- ------- -------
NET GAIN ON INVESTMENTS
AND FOREIGN CURRENCY (NOTE 1) 24,789 95,567 32,792 3,734
------- -------- ------- -------
Net Change in Net Assets
Resulting from Operations $24,537 $106,750 $41,157 $ 3,781
======= ======== ======= =======
</TABLE>
* For the year ended September 30, 1996.
** For the period from January 31, 1996 (commencement of operations) to
September 30, 1996.
SEE NOTES TO FINANCIAL STATEMENTS
80
<PAGE> 83
STATEMENTS OF OPERATIONS (Continued)
For the Period Ended September 30, 1996
<TABLE>
<CAPTION>
SAFECO SAFECO SAFECO SAFECO
BALANCED INTERNATIONAL SMALL COMPANY INTERMEDIATE-TERM
FUND ** STOCK FUND ** STOCK FUND ** U.S. TREASURY FUND *
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends (Net of Foreign Taxes
Withheld of $20 in the
International Fund) $ 72 $143 $ 36 --
Interest 134 15 41 $ 902
---- ---- ------ -----
Total Investment Income 206 158 77 902
EXPENSES
Investment Advisory Fees 32 53 51 78
Transfer Agent Fees 4 9 13 39
Legal and Auditing Fees 10 12 10 13
Custodian Fees 9 34 12 5
Reports to Shareholders -- -- -- 4
Trustees' Fees 2 2 2 5
Loan Interest -- -- 1 --
Amortization of
Organization Expenses 3 3 3 --
---- ---- ------ -----
Total Expenses 60 113 92 144
---- ---- ------ -----
NET INVESTMENT INCOME (LOSS) 146 45 (15) 758
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY
Net Realized Gain (Loss) from:
Investments in
Unaffiliated Issuers 5 (17) 723 290
Investments in Affiliated
Issuers -- -- -- --
Foreign Currency
Transactions -- 6 -- --
---- ---- ------ -----
Total Net Realized
Gain (Loss) 5 (11) 723 290
Net Change in Unrealized
Appreciation (Depreciation) on:
Investments 258 310 880 (496)
Foreign Currency
Related Transactions -- 4 -- --
---- ---- ------ -----
NET GAIN ON INVESTMENTS
AND FOREIGN CURRENCY (NOTE 1) 263 303 1,603 (206)
---- ---- ------ -----
Net Change in Net Assets
Resulting from Operations $409 $348 $1,588 $ 552
==== ==== ====== =====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-81-
<PAGE> 84
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SAFECO GROWTH FUND
---------------------------------------
THREE-MONTH
PERIOD ENDED
DECEMBER 31 YEAR ENDED SEPTEMBER 30
(In Thousands) 1996 1996 1995
- ------------------------------------------------------- -----------------------
OPERATIONS
<S> <C> <C> <C>
Net Investment Income (Loss) $ (236) $ (252) $ 552
Net Realized Gain (Loss) from
Investments and Foreign
Currency Transactions 2,890 26,762 46,016
Net Change in Unrealized
Appreciation (Depreciation) 17,540 (1,973) (10,634)
-------- -------- -------
Net Change in Net Assets
Resulting from Operations 20,194 24,537 35,934
NET EQUALIZATION CREDITS (DEBITS) -- -- 2
DIVIDENDS TO SHAREHOLDERS FROM
Net Investment Income - No-Load Class -- (45) (557)
- Class A -- -- --
- Class B -- -- --
Net Realized Gain on Investments -No-Load Class (2,644) (26,481) (46,001)
-Class A (3) -- --
-Class B (2) -- --
-------- -------- -------
Total (2,649) (26,526) (46,558)
NET TRUST SHARE TRANSACTIONS
No-Load Class (1,336) 5,080 30,997
Class A 74 100 --
Class B 6 100 --
-------- -------- -------
Total (1,256) 5,280 30,997
-------- -------- -------
TOTAL CHANGE IN NET ASSETS 16,289 3,291 20,375
NET ASSETS AT BEGINNING OF PERIOD 179,774 176,483 156,108
-------- -------- -------
NET ASSETS AT END OF PERIOD $196,063 $179,774 $176,483
======== ======== =======
OTHER INFORMATION
INCREASE (DECREASE) IN FUND
SHARES AND AMOUNTS
SHARES:
Sales 1,572 22,451 26,526
Reinvestments 148 1,627 2,736
Redemptions (1,807) (23,589) (27,099)
-------- -------- -------
NET CHANGE (87) 489 2,163
======== ======== =======
AMOUNTS:
Sales $ 25,444 $372,215 $490,890
Reinvestments 2,522 25,225 43,424
Redemptions (29,222) (392,160) (503,317)
-------- -------- --------
NET CHANGE $ (1,256) $ 5,280 $30,997
======== ======== ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-82-
<PAGE> 85
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
<TABLE>
<CAPTION>
SAFECO EQUITY FUND SAFECO INCOME FUND
--------------------------------- ----------------------------------
THREE-MONTH THREE-MONTH
PERIOD ENDED PERIOD ENDED
DECEMBER 31 YEAR ENDED SEPTEMBER 30 DECEMBER 31
(In Thousands) 1996 1996 1995 1996 1996 1995
- ----------------------------------------------------------------- ----------------------- -------------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net Investment Income (Loss) $ 3,012 $11,183 $ 12,311 $ 2,032 $ 8,365 $ 8,954
Net Realized Gain (Loss) from
Investments and Foreign
Currency Transactions 28,862 77,448 42,516 7,031 22,848 9,277
Net Change in Unrealized
Appreciation (Depreciation) 33,741 18,119 52,564 14,121 9,944 20,170
-------- ------- -------- -------- ------- --------
Net Change in Net Assets
Resulting from Operations 65,615 106,750 107,391 23,184 41,157 38,401
NET EQUALIZATION CREDITS (DEBITS) -- -- 73 -- -- (39)
DIVIDENDS TO SHAREHOLDERS FROM
Net Investment Income - No-Load Class (3,006) (11,189) (12,378) (2,028) (8,374) (8,912)
- Class A (7) -- -- (1) -- --
- Class B -- -- -- (1) -- --
Net Realized Gain on Investments -No-Load Class (28,684) (77,500) (42,473) (7,033) (22,837) (9,283)
-Class A (98) -- -- (5) -- --
-Class B (12) -- -- (3) -- --
-------- ------- -------- -------- ------- --------
Total (31,807) (88,689) (54,851) (9,071) (31,211) (18,195)
NET TRUST SHARE TRANSACTIONS
No-Load Class 90,300 109,137 133,164 15,846 32,207 7,093
Class A 2,742 100 -- 85 100 --
Class B 250 100 -- 6 100 --
-------- ------- -------- -------- ------- --------
Total 93,292 109,337 133,164 15,937 32,407 7,093
-------- ------- -------- -------- ------- --------
TOTAL CHANGE IN NET ASSETS 127,100 127,398 185,777 30,050 42,353 27,260
NET ASSETS AT BEGINNING OF PERIOD 725,980 598,582 412,805 260,223 217,870 190,610
-------- ------- -------- -------- ------- --------
NET ASSETS AT END OF PERIOD $853,080 $725,980 $598,582 $290,273 $260,223 $217,870
======== ======== ======== ======== ======== ========
OTHER INFORMATION
INCREASE (DECREASE) IN FUND
SHARES AND AMOUNTS
SHARES:
Sales 6,132 17,984 29,460 869 2,864 1,662
Reinvestments 1,800 5,249 3,370 385 1,374 833
Redemptions (2,347) (16,536) (23,460) (503) (2,649) (2,145)
-------- ------- -------- -------- ------- --------
NET CHANGE 5,585 6,697 9,370 751 1,589 350
======== ======= ======== ======== ======= ========
AMOUNTS:
Sales $102,959 $289,961 $419,705 $ 18,394 $58,320 $ 30,024
Reinvestments 29,886 82,876 50,729 8,140 27,638 15,463
Redemptions (39,553) (263,500) (337,270) (10,597) (53,551) (38,394)
-------- ------- -------- -------- ------- --------
NET CHANGE $ 93,292 $109,337 $133,164 $ 15,937 $32,407 $ 7,093
======== ======== ======== ======== ======= ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-83-
<PAGE> 86
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
<TABLE>
<CAPTION>
SAFECO NORTHWEST FUND
-----------------------------------------
THREE-MONTH
PERIOD ENDED
DECEMBER 31 YEAR ENDED SEPTEMBER 30
(In Thousands) 1996 1996 1995
- --------------------------------------------------------------- -----------------------
<S> <C> <C> <C>
OPERATIONS
Net Investment Income (Loss) $ (34) $ 47 $ 112
Net Realized Gain (Loss) from
Investments and Foreign
Currency Transactions (2,374) 5,695 1,432
Net Change in Unrealized
Appreciation (Depreciation) 3,280 (1,961) 4,956
-------- -------- --------
Net Change in Net Assets
Resulting from Operations 872 3,781 6,500
NET EQUALIZATION CREDITS (DEBITS) -- -- (1)
DIVIDENDS TO SHAREHOLDERS FROM
Net Investment Income-No-Load Class -- (48) (110)
-Class A -- -- --
-Class B -- -- --
Net Realized Gain on Investments-No-Load Class -- (5,695) (1,432)
-Class A -- -- --
-Class B -- -- --
-------- -------- --------
Total -- (5,743) (1,542)
NET TRUST SHARE TRANSACTIONS
No-Load Class (632) 4,950 (1,200)
Class A 254 100 --
Class B 124 100 --
-------- -------- --------
Total (254) 5,150 (1,200)
-------- -------- --------
TOTAL CHANGE IN NET ASSETS 618 3,188 3,757
NET ASSETS AT BEGINNING OF PERIOD 43,328 40,140 36,383
-------- -------- --------
NET ASSETS AT END OF PERIOD $ 43,946 $ 43,328 $ 40,140
======== ======== ========
OTHER INFORMATION
INCREASE (DECREASE) IN FUND SHARES AND AMOUNTS
SHARES:
Sales 196 1,209 832
Reinvestments -- 323 84
Redemptions (215) (1,175) (1,019)
-------- -------- --------
NET CHANGE (19) 357 (103)
======== ======== ========
AMOUNTS:
Sales $ 2,692 $ 17,755 $ 11,348
Reinvestments -- 4,438 1,202
Redemptions (2,946) (17,043) (13,750)
-------- -------- --------
NET CHANGE $ (254) $ 5,150 $ (1,200)
======== ======== ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-84-
<PAGE> 87
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
<TABLE>
<CAPTION>
SAFECO INTERNATIONAL SAFECO SMALL COMPANY
SAFECO BALANCED FUND STOCK FUND STOCK FUND
------------------------- ----------------------- ------------------------
JANUARY 31,
1996 THREE- JANUARY 31, THREE- JANUARY 31,
(COMMENCEMENT MONTH 1996 MONTH 1996
OF PERIOD (COMMENCEMENT PERIOD (COMMENCEMENT OF
THREE-MONTH OPERATIONS) ENDED OF ENDED OPERATIONS)TO
PERIOD ENDED TO DECEMBER OPERATIONS) TO DECEMBER SEPTEMBER
DECEMBER 31 SEPTEMBER 30, 31 SEPTEMBER 30, 31, 30,
(In Thousands) 1996 1996 1996 1996 1996 1996
- ------------------------------------------------------------ ------- -------- -------- -------- --------
OPERATIONS
<S> <C> <C> <C> <C> <C> <C>
Net Investment Income (Loss) $ 66 $ 146 $ (5) $ 45 $ (14) $ (15)
Net Realized Gain (Loss) from
Investments and Foreign
Currency Transactions 99 5 87 (11) (278) 723
Net Change in Unrealized
Appreciation (Depreciation) 243 258 853 314 643 880
------- ------- -------- -------- -------- --------
Net Change in Net Assets
Resulting from Operations 408 409 935 348 351 1,588
NET EQUALIZATION CREDITS (DEBITS) -- -- -- -- -- --
DIVIDENDS TO SHAREHOLDERS FROM
Net Investment Income-No-Load Class (64) (146) (62) (51) -- --
-Class A (1) -- (1) -- -- --
-Class B (1) -- -- -- -- --
Net Realized Gain on Investments-No-Load Class (97) (5) -- -- -- (708)
-Class A (1) -- -- -- -- --
-Class B (1) -- -- -- -- --
------- ------- -------- -------- -------- --------
Total (165) (151) (63) (51) -- (708)
NET TRUST SHARE TRANSACTIONS
No-Load Class 393 7,374 1,981 8,026 272 11,672
Class A 7 100 43 100 31 100
Class B 12 100 4 100 1 100
------- ------- -------- -------- -------- --------
Total 412 7,574 2,028 8,226 304 11,872
------- ------- -------- -------- -------- --------
TOTAL CHANGE IN NET ASSETS 655 7,832 2,900 8,523 655 12,752
NET ASSETS AT BEGINNING OF PERIOD 7,832 -- 8,523 -- 12,752 --
------- ------- -------- -------- -------- --------
NET ASSETS AT END OF PERIOD $ 8,487 $ 7,832 $ 11,423 $ 8,523 $ 13,407 $ 12,752
======= ======= ======== ======== ======== ========
OTHER INFORMATION
INCREASE (DECREASE) IN FUND SHARES AND AMOUNTS
SHARES:
Sales 43 785 219 1,042 254 1,625
Reinvestments 5 3 3 2 (1) 32
Redemptions (9) (34) (30) (224) (226) (549)
------- ------- -------- -------- -------- --------
NET CHANGE 39 754 192 820 27 1,108
======= ======= ======== ======== ======== ========
AMOUNTS:
Sales $ 459 $ 7,893 $ 2,323 $ 10,466 $ 2,918 $ 17,916
Reinvestments 50 31 29 18 (7) 373
Redemptions (97) (350) (324) (2,258) (2,607) (6,417)
------- ------- -------- -------- -------- --------
NET CHANGE $ 412 $ 7,574 $ 2,028 $ 8,226 $ 304 $ 11,872
======= ======= ======== ======== ======== ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-85-
<PAGE> 88
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
<TABLE>
<CAPTION>
SAFECO INTERMEDIATE-
TERM U.S. TREASURY FUND
---------------------------------------
THREE-MONTH
PERIOD ENDED
DECEMBER 31 YEAR ENDED SEPT. 30
(IN THOUSANDS) 1996 1996 1995
- ----------------------------------------------------------------- -----------------------
<S> <C> <C> <C>
OPERATIONS
Net Investment Income (Loss) $ 242 $ 758 $ 720
Net Realized Gain (Loss) from
Investments and Foreign
Currency Transactions (125) 290 7
Net Change in Unrealized
Appreciation (Depreciation) 144 (496) 638
-------- -------- --------
Net Change in Net Assets
Resulting from Operations 261 552 1,365
NET EQUALIZATION CREDITS (DEBITS) -- -- --
DIVIDENDS TO SHAREHOLDERS FROM
Net Investment Income - No-Load Class (232) (758) (720)
Class A (8) -- --
Class B (2) -- --
Net Realized Gain on Investments - No Load Class -- -- --
Class A -- -- --
Class B -- -- --
-------- -------- --------
Total (242) (758) (720)
NET TRUST SHARE TRANSACTIONS
No-Load Class 189 900 (238)
Class A 607 100 --
Class B 123 100 --
-------- -------- --------
Total 919 1,100 (238)
-------- -------- --------
TOTAL CHANGE IN NET ASSETS 938 894 407
NET ASSETS AT BEGINNING OF PERIOD 14,668 13,774 13,367
-------- -------- --------
NET ASSETS AT END OF PERIOD $ 15,606 $ 14,668 $ 13,774
======== ======== ========
OTHER INFORMATION
INCREASE (DECREASE) IN FUND SHARES AND AMOUNTS
SHARES:
Sales 149 1,516 431
Reinvestments 12 35 37
Redemptions (70) (1,444) (495)
-------- -------- --------
NET CHANGE 91 107 (27)
======== ======== ========
AMOUNTS:
Sales $ 1,515 $ 18,860 $ 4,265
Reinvestments 117 358 374
Redemptions (713) (18,118) (4,877)
-------- -------- --------
NET CHANGE $ 919 $ 1,100 $ (238)
======== ======== ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-86-
<PAGE> 89
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
<TABLE>
<CAPTION>
SAFECO CALIFORNIA
SAFECO MANAGED BOND FUND SAFECO MUNICIPAL BOND FUND TAX-FREE INCOME FUND
-------------------------- ------------------------ ------------------------
NINE-MONTH NINE-MONTH
YEAR ENDED YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 MARCH 31 DECEMBER 31 MARCH 31
(IN THOUSANDS) 1996 1995 1996 1996 1996 1996
- ----------------------------------------------- ----------- ------------- ------------ ----------- ------------ ----------
OPERATIONS
<S> <C> <C> <C> <C> <C> <C>
Net Investment Income (Loss) $ 208 $ 238 $ 19,903 $ 26,736 $ 2,766 $ 3,520
Net Realized Gain (Loss) from
Investments and Foreign
Currency Transactions 2 167 2,341 2,608 197 704
Net Change in Unrealized
Appreciation (Depreciation) (210) 331 7,844 11,135 2,196 1,516
------- ------- --------- --------- ------- --------
Net Change in Net Assets
Resulting from Operations -- 736 30,088 40,479 5,159 5,740
NET EQUALIZATION CREDITS (DEBITS) -- -- -- -- -- --
DIVIDENDS TO SHAREHOLDERS FROM
Net Investment Income - No-Load Class (206) (238) (19,899) (26,736) (2,764) (3,520)
Class A (1) -- (3) -- (1) --
Class B (1) -- (1) -- (1) --
Net Realized Gain on Investments - No Load Class (2) (156) -- -- (200) (449)
Class A -- -- -- -- -- --
Class B -- -- -- -- -- --
------- ------- --------- --------- ------- --------
Total (210) (394) (19,903) (26,736) (2,966) (3,969)
NET TRUST SHARE TRANSACTIONS
No-Load Class (72) (472) (9,855) (5,669) (652) 4,717
Class A 140 -- 309 -- 120 --
Class B 100 -- 111 -- 100 --
------- ------- --------- --------- -------- --------
Total 168 (472) (9,435) (5,669) (432) 4,717
------- ------- --------- --------- -------- --------
TOTAL CHANGE IN NET ASSETS (42) (130) 750 8,074 1,761 6,488
NET ASSETS AT BEGINNING OF PERIOD 4,497 4,627 480,643 472,569 70,546 64,058
------- ------- --------- --------- -------- --------
NET ASSETS AT END OF PERIOD $ 4,455 $ 4,497 $ 481,393 $ 480,643 $ 72,307 $ 70,546
======= ======= ========= ========= ======== ========
OTHER INFORMATION
INCREASE (DECREASE) IN FUND SHARES AND AMOUNTS
SHARES:
Sales 30 -- 4,689 27,285 1,648 2,471
Reinvestments 24 44 908 1,214 168 223
Redemptions (33) (99) (6,271) (28,766) (1,849) (2,299)
------- ------- --------- --------- -------- --------
NET CHANGE 21 (55) (674) (267) (33) 395
======= ======= ========= ========= ======== ========
AMOUNTS:
Sales $ 246 $ -- $ 63,875 $ 377,063 $ 19,516 $ 29,742
Reinvestments 201 383 12,498 16,744 2,025 2,678
Redemptions (279) (855) (85,808) (399,476) (21,973) (27,703)
------- ------- --------- --------- -------- --------
NET CHANGE $ 168 $ (472) $ (9,435) $ (5,669) $ (432) $ 4,717
======= ======= ========= ========= ======== ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-87-
<PAGE> 90
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
<TABLE>
<CAPTION>
SAFECO WASHINGTON
STATE MUNICIPAL BOND FUND SAFECO MONEY MARKET FUND
---------------------------- ----------------------------------
NINE-MONTH NINE-MONTH
PERIOD ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31 MARCH 31 DECEMBER 31, MARCH 31,
1996 1996 1996 1996
- ------------------------------------------------------ ----------- ------------ -------------
<S> <C> <C> <C> <C>
OPERATIONS
Net Investment Income (Loss) $ 238 $ 293 $ 5,795 $ 8,735
Net Realized Gain (Loss) from
Investments and Foreign
Currency Transactions 4 28 -- --
Net Change in Unrealized
Appreciation (Depreciation) 125 124 -- --
------- ------- --------- -----------
Net Change in Net Assets
Resulting from Operations 367 445 5,795 8,735
NET EQUALIZATION CREDITS (DEBITS) -- -- -- --
DIVIDENDS TO SHAREHOLDERS FROM
Net Investment Income
- No-Load Class (234) (293) (5,792) (8,735)
- Class A (3) -- (2) --
- Class B (1) -- (1) --
Net Realized Gain on Investments
- No-Load Class (4) (20) -- --
- Class A -- -- -- --
- Class B -- -- -- --
------- ------- --------- -----------
Total (242) (313) (5,795) (8,735)
NET TRUST SHARE TRANSACTIONS
No-Load Class (52) 404 (3,766) (6,836)
Class A 334 -- 295 --
Class B 209 -- 106 --
------- ------- --------- -----------
Total 491 404 (3,365) (6,836)
------- ------- --------- -----------
TOTAL CHANGE IN NET ASSETS 616 536 (3,365) (6,836)
NET ASSETS AT BEGINNING OF PERIOD 6,489 5,953 165,122 171,958
------- ------- --------- -----------
NET ASSETS AT END OF PERIOD $ 7,105 $ 6,489 $ 161,757 $ 165,122
======= ======= ========= ===========
OTHER INFORMATION
INCREASE (DECREASE) IN FUND
SHARES AND AMOUNTS
SHARES:
Sales 78 50 293,668 1,017,443
Reinvestments 4 3 5,293 7,446
Redemptions (35) (15) (302,326) (1,031,725)
------- ------- --------- -----------
NET CHANGE 47 38 (3,365) (6,836)
======= ======= ========= ===========
AMOUNTS:
Sales $ 813 $ 528 $ 293,668 $ 1,017,443
Reinvestments 38 31 5,293 7,446
Redemptions (360) (155) (302,326) (1,031,725)
------- ------- --------- -----------
NET CHANGE $ 491 $ 404 $ (3,365) $ (6,836)
======= ======= ========= ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-88-
<PAGE> 91
NOTES TO FINANCIAL STATEMENTS
1. GENERAL
These financial statements report on 13 of the SAFECO Mutual Funds.
Each Fund is a series of one of the following trusts (each a "Trust") listed
below. Each Trust is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company:
SAFECO COMMON STOCK TRUST
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Income Fund
SAFECO Northwest Fund
SAFECO Balanced Fund
SAFECO International Stock Fund
SAFECO Small Company Stock Fund
SAFECO TAXABLE BOND TRUST
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO 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
The Tax-Exempt Bond Trust and the Money Market Trust recently changed
their fiscal year end from March 31, to December 31. The Common Stock Trust and
Taxable Bond Trust recently changed their fiscal year end from September 30, to
December 31.
(Continued on next page)
-89-
<PAGE> 92
NOTES TO FINANCIAL STATEMENTS (Continued)
Effective September 30, each of the Funds began issuing two additional
classes of shares -- Class A and Class B shares (collectively, "Advisor
Classes"). These classes of shares are sold by financial advisors to
shareholders and have associated service and distribution charges. Each class of
shares represents an interest in the net assets of the fund.
In connection with issuing the Advisor Classes, the Funds adopted a
Plan of Distribution (the "Plan"). Under the Plan, each Advisor Class (with the
exception of the Money Market Fund Advisor Classes) pays the distributor, SAFECO
Securities Inc., for servicing its shares at the annual rate of .25% of the
average daily net assets of the Advisor Class. Class B shares also pay the
distributor a distribution fee at the annual rate of .75% of the average daily
net assets of the Class B shares.
Under the Plans, the distributor uses the service fees primarily to
compensate persons selling Advisor Class shares for providing ongoing services
and the maintenance of shareholder accounts. The distributor uses the
distribution fees primarily to offset the commissions it pays to financial
advisors for selling Class B shares.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies
consistently followed by the Funds in the preparation of their financial
statements. The policies are in conformity with generally accepted accounting
principles, which permits management to make certain estimates and assumptions
at the date of the financial statements.
SECURITY VALUATION. Investments in equity securities are valued at the
last reported sales price, unless there are no transactions in which case they
are valued at the last reported bid price. Bonds are stated on the basis of
valuations provided by a pricing service, which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining value. When valuations are not readily available, securities are
valued at fair value as determined in good faith
-90-
<PAGE> 93
NOTES TO FINANCIAL STATEMENTS (Continued)
by the board of trustees. Temporary investments are valued at amortized cost
which approximates market.
SECURITY TRANSACTIONS. Security transactions are recorded on the trade
date. The cost of the portfolios is the same for financial statement and federal
income tax purposes. Realized gains and losses from security transactions are
determined using the identified cost basis.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS. Securities purchased on a
when-issued or delayed basis for the Taxable Bond Trust, Managed Bond Trust and
Tax-Exempt Bond Trust may be settled a month or more after the trade date. The
securities purchased are carried in the portfolio at market and are subject to
market fluctuation during this period. These securities begin earning interest
on the settlement date. As commitments to purchase when-issued securities become
fixed, the Funds segregate liquid assets in an amount equal to the total
obligation.
INCOME RECOGNITION. Dividend income less foreign taxes withheld (if
any) for the Common Stock Trust is recorded on the ex-dividend date or upon
receipt of ex-dividend notification in the case of certain foreign securities.
Bond premiums and original issue discounts are amortized to either call or
maturity dates for the Taxable Bond Trust, Managed Bond Trust, Tax-Exempt Bond
Trust and Money Market Trust. Market discount on bonds purchased after April 30,
1993 is recorded as taxable income at disposition for the Tax-Exempt Bond Trust.
Interest is accrued on bonds and temporary investments and bonds daily.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. For the Growth, Northwest,
International and Small Company Funds, net investment income is declared as a
dividend to shareholders as of the last business day (ex-dividend date) of
December. For the Equity, Income and Balanced Funds, net investment income (if
any) is distributed as of the last business day of March, June, September and
December. Net investment income for the Taxable Bond Trust, Managed Bond Trust,
Tax-Exempt Bond Trust and Money Market Trust is declared as a dividend to
shareholders as of the close of each business day and payment is made as of the
last business day of each month. Net realized gains on investments, if any, are
normally distributed to shareholders at the end of December.
(Continued on next page.)
-91-
<PAGE> 94
NOTES TO FINANCIAL STATEMENTS (Continued)
EQUALIZATION. Prior to September 30, 1995, the Funds followed the
accounting practice known as equalization by which a portion of the proceeds
from sales and cost of redemption's of Trust shares equivalent, on a per-share
basis, to the amount of distributable net investment income on the date of the
transaction was credited or charged to undistributed income. As a result,
undistributed net investment income per share was unaffected by sales or
redemptions of a Fund's shares.
FEDERAL INCOME AND EXCISE TAXES. Each Fund intends to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies by distributing substantially all taxable income to their shareholders
in a manner which results in no tax to the Funds. Therefore, no federal income
or excise tax provision is required. In addition, the Tax-Exempt Bond Trust
intends to satisfy conditions which will enable them to pay dividends which, for
shareholders, are exempt from Federal income taxes. Any portion of dividends
representing realized net short-term capital gains, however, is not exempt and
is treated as taxable dividends for Federal income tax purposes. In addition,
income which is derived from amortization on bonds purchased below their issued
price after April 30, 1993, is treated as ordinary income for Federal income tax
purposes.
FOREIGN CURRENCY TRANSLATION. The accounting records of the
International Fund are maintained in U.S. dollars. All assets and liabilities
initially expressed in foreign currencies are converted into U.S. dollars at
prevailing exchange rates. Purchases and sales of investment securities, and
dividend and interest income, are translated at the rates of exchange prevailing
on the respective dates of such transactions. The International Fund does not
isolate that portion of the results of operations resulting from changes in
foreign exchange rates on investments from the fluctuations arising from changes
in market prices of securities held. Such fluctuations are included with the net
realized and unrealized gain or loss from investments. Reported net realized
gains or losses from foreign currency transactions arise from gains or losses
realized between the trade and settlement dates on securities transactions, the
difference between the amounts of dividends, interest, and foreign withholding
-92-
<PAGE> 95
NOTES TO FINANCIAL STATEMENTS (Continued)
taxes recorded on the International Fund's books and the U.S. dollar equivalent
of the amounts actually received or paid. Net unrealized foreign exchange gains
and losses arise from changes in the value of assets and liabilities other than
investments in securities, resulting from changes in the exchange rate.
FOREIGN EXCHANGE CONTRACTS. The International Fund may enter into
foreign currency exchange contracts as a way of managing foreign exchange rate
risk. The International Fund may enter into these contracts for the purchase or
sale of a specific foreign currency at a fixed price on a future date as a hedge
or cross-hedge against either specific transactions or portfolio positions. The
objective of the International Fund's foreign currency hedging transactions is
to reduce the risk that the U.S. dollar value of the International Fund's
foreign currency denominated securities will decline in value due to changes in
foreign currency exchange rates. All foreign currency exchange contracts are
"marked-to-market" daily at the applicable translation rates resulting in
unrealized gains or losses. Realized and unrealized gains or losses on foreign
currency contracts are recorded on settlement date of the foreign currency
exchange contract and are included in the Statements of Assets and Liabilities
and the Statement of Operations. Risks may arise upon entering into these
contracts from the potential inability of counterparties to meet the terms of
their contracts and from unanticipated movements in the value of a foreign
currency relative to the U.S. dollar.
-93-
<PAGE> 96
NOTES TO FINANCIAL STATEMENTS (Continued)
3. INVESTMENT TRANSACTIONS
<TABLE>
<CAPTION>
SAFECO SAFECO SAFECO SAFECO
GROWTH EQUITY INCOME NORTHWEST
(In Thousands) FUND* FUND* FUND* FUND*
- ------------------------------------------------------------------------------------------------
PURCHASES FOR THE PERIOD ENDED
DECEMBER 31, 1996
<S> <C> <C> <C> <C>
(excluding short-term securities) $38,232 $166,782 $26,515 $7,191
======== ======== ======== ========
SALES FOR THE PERIOD ENDED
DECEMBER 31, 1996
(excluding short-term securities) $44,824 $113,153 $25,614 $11,211
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SAFECO
SAFECO SAFECO SAFECO SMALL INTERMEDIATE-
BALANCED INTERNATIONAL COMPANY TERM U.S.
(In Thousands) FUND* STOCK FUND* STOCK FUND* TREASURY FUND*
- ------------------------------------------------------------------------------------------------
PURCHASES FOR THE PERIOD ENDED
DECEMBER 31, 1996
<S> <C> <C> <C> <C>
(excluding short-term securities) $2,644+ $2,213 $3,021 $10,335
======= ======= ======= =======
SALES FOR THE PERIOD ENDED
DECEMBER 31, 1996
(excluding short-term securities) $643 $441 $2,229 $3,938
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SAFECO SAFECO
SAFECO SAFECO CALIFORNIA WASHINGTON
MANAGED MUNICIPAL TAX-FREE STATE MUNICIPAL
(In Thousands) BOND FUND** BOND FUND*** INCOME FUND*** BOND FUND***
- ----------------------------------------------------------------------------------------------------------
PURCHASES FOR THE PERIOD ENDED
DECEMBER 31, 1996
<S> <C> <C> <C> <C>
(excluding short-term securities) $4,527+ $23,639 $7,521 $1,417
======= ======= ======= =======
SALES FOR THE PERIOD ENDED
DECEMBER 31, 1996
(excluding short-term securities) $4,508++ $38,046 $5,409 $775
====== ======= ====== ====
- ----------------------------------------------------------------------------------------------------------
</TABLE>
* For the three-month period ended December 31, 1996.
** For the year ended December 31, 1996.
*** For the nine-month period ended December 31, 1996.
+ Purchases include $1,908, $10,335 and $4,427 of U.S. Government
obligations for Balanced Fund, Intermediate-Term U.S. Treasury, and
Managed Bond Funds, respectively.
++ Sales include $3,938 and $3,941 of U.S. Government obligations for
Intermediate-Term U.S. Treasury and Managed Bond Funds, respectively.
-94-
<PAGE> 97
NOTES TO FINANCIAL STATEMENTS (Continued)
4. COMPONENTS OF NET ASSETS
At December 31, 1996, the components of net assets were as follows:
<TABLE>
<CAPTION>
SAFECO SAFECO SAFECO SAFECO
GROWTH EQUITY INCOME NORTHWEST
(In Thousands) FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggregate Gross Unrealized Appreciation
on Investments and Forward Contracts
in Which There Is an Excess of Value
Over Identified Cost $50,407 $165,556 $67,427 $14,710
Aggregate Gross Unrealized Depreciation
on Investments and Forward Contracts
in Which There Is an Excess of
Identified Cost Over Value (11,247) (12,979) (3,265) (2,601)
--------- --------- --------- ---------
Net Unrealized
Appreciation (Depreciation) 39,160 152,577 64,162 12,109
Accumulated Net Realized (Loss)
on Investment Transactions* -- -- -- (2,374)
Paid in Capital (Par Value $.001,
Unlimited Shares Authorized) 156,903 700,503 226,111 34,211
--------- --------- --------- ---------
NET ASSETS AT DECEMBER 31, 1996 $196,063 $853,080 $290,273 $43,946
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
SAFECO
SAFECO SAFECO SAFECO INTERMEDIATE-
BALANCED INTERNATIONAL SMALL COMPANY TERM U.S.
(In Thousands) FUND STOCK FUND STOCK FUND TREASURY FUND
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggregate Gross Unrealized Appreciation
on Investments and Forward Contracts
in Which There Is an Excess of Value
Over Identified Cost $590 $1,430 $2,165 $83
Aggregate Gross Unrealized Depreciation
on Investments and Forward Contracts
in Which There Is an Excess of
Identified Cost Over Value (89) (263) (642) (79)
-------- -------- -------- --------
Net Unrealized
Appreciation (Depreciation) 501 1,167 1,523 4
Accumulated Net Realized (Loss)
on Investment Transactions* -- -- (278) (196)
Paid in Capital (Par Value $.001,
Unlimited Shares Authorized) 7,986 10,256 12,162 15,798
-------- -------- -------- --------
NET ASSETS AT DECEMBER 31, 1996 $8,487 $11,423 $13,407 $15,606
======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------
</TABLE>
* See table on next page
-95-
<PAGE> 98
NOTES TO FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
SAFECO SAFECO
SAFECO SAFECO CALIFORNIA WASHINGTON
MANAGED MUNICIPAL TAX-FREE STATE MUNICIPAL
(In Thousands) BOND FUND BOND FUND INCOME FUND BOND FUND
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggregate Gross Unrealized
Appreciation on Investments
and Forward Contracts in
Which There Is an Excess of
Value Over Identified Cost $ 20 $ 50,426 $ 6,228 $ 301
Aggregate Gross Unrealized
Depreciation on Investments
and Forward Contracts in
Which There Is an Excess of
Identified Cost Over Value (23) (52) (109) (13)
--------- --------- --------- ---------
Net Unrealized
Appreciation (Depreciation) (3) 50,374 6,119 288
Accumulated Net Realized (Loss)
on Investment Transactions* -- (1,285) -- --
Paid in Capital (Par Value $.001,
Unlimited Shares Authorized) 4,458 432,304 66,188 6,817
--------- --------- --------- ---------
NET ASSETS AT DECEMBER 31, 1996 $ 4,455 $ 481,393 $ 72,307 $ 7,105
========= ========= ========= =========
- ----------------------------------------------------------------------------------------------------
</TABLE>
* The above accumulated net realized losses on investment transactions
represent capital loss carryforwards for Federal income tax purposes,
which expire as follows:
<TABLE>
<CAPTION>
Amounts Expiration Dates
------- ----------------
<S> <C> <C>
Northwest Fund $(2,374) 2005
Small Company Stock Fund (278) 2005
Intermediate-Term U.S. Treasury Fund (196) 2001
Municipal Bond Fund (1,285) 2003
</TABLE>
-96-
<PAGE> 99
NOTES TO FINANCIAL STATEMENTS (Continued)
5. INVESTMENT ADVISORY FEES AND OTHER
TRANSACTIONS WITH AFFILIATES
Investment Advisory Fees. SAFECO Asset Management Company receives investment
advisory fees from the Funds. These fees are based on a percentage of each day's
net assets, which, on an annual basis, are as follows:
<TABLE>
<S> <C>
EQUITY, INCOME AND GROWTH FUNDS:
First $100 million .75%
Next $150 million .65
Next $250 million .55
Over $500 million .45
BALANCED FUND:
First $250 million .75%
Next $250 million .65
Over $500 million .55
SMALL COMPANY STOCK FUND:
First $250 million .85%
Next $250 million .75
Over $500 million .65
MANAGED BOND FUND:
First $100 million .50%
Next $150 million .40
Over $250 million .35
MONEY MARKET FUND:
First $250 million .50%
Next $250 million .40
Over $250 million .30
Over $750 million .25
NORTHWEST FUND:
First $250 million .75%
Next $250 million .65
Next $250 million .55
Over $750 million .45
INTERNATIONAL STOCK FUND:
First $250 million 1.10%
Next $250 million 1.00
Over $500 million .90
INTERMEDIATE-TERM U.S.
TREASURY FUND:
First $250 million .55%
Next $250 million .45
Next $250 million .35
Over $750 million .25
MUNICIPAL AND CALIFORNIA FUNDS:
First $100 million .55%
Next $150 million .45
Next $250 million .35
Over $500 million .25
WASHINGTON STATE
MUNICIPAL BOND FUND:
First $250 million .65%
Next $250 million .55
Next $250 million .45
Over $750 million .35
</TABLE>
-97-
<PAGE> 100
NOTES TO FINANCIAL STATEMENTS (Continued)
SAFECO Asset Management Company pays sub-advisory fees to Bank of Ireland Asset
Management Company for providing investment research and advice to the
International Fund.
TRANSFER AGENT FEES. SAFECO Services Corporation receives transfer
agent fees.
NOTES PAYABLE AND INTEREST EXPENSE. The Funds may borrow money for
temporary purposes from SAFECO Corporation or its affiliates. Interest rates
equivalent to commercial bank interest rates are charged on loans over $100,000.
No interest is charged on loans under $100,000. At December 31, 1996, the Equity
and Money Market Funds each had a 5.98% note payable of $170,000 and $540,000,
respectively, to SAFECO Life Insurance Company of America. These notes were
repaid January 2, 1997.
AFFILIATE OWNERSHIP. At December 31, 1996, SAFECO Insurance Company of
America, owned 500,000 shares (16% of outstanding shares) of the Northwest Fund,
500,000 shares (34%) of the Intermediate-Term U.S. Treasury Fund and 502,372
shares (81%) of the Washington Municipal Bond Fund. SAFECO Asset Management
Company owned 500,000 shares (51%) of the International Fund and 500,000 shares
(65%) of the Balanced Fund. SAFECO Corporation owned 500,000 shares (45%) of the
Small Company Fund.
DEFERRED ORGANIZATION EXPENSE. Costs related to the organization of the
Balanced, International, Small Company, Managed Bond and Washington Municipal
Bond Funds have been deferred and are being amortized to operations over a
period of sixty months. These costs were advanced by the affiliates and are
being reimbursed by the Fund over the same time period.
EXPENSE REIMBURSEMENT. During the period ended December 31, 1996,
SAFECO Asset Management Company voluntarily reimbursed certain expenses of the
Balanced, International, Small Company, and Intermediate-Term U.S. Treasury
Funds.
-98-
<PAGE> 101
NOTES TO FINANCIAL STATEMENTS (Continued)
6. INVESTMENTS IN AFFILIATES
Each of the companies listed below is an affiliate of the Growth Fund
because the Fund owned at least 5% of the company's voting securities during the
three-month ended December 31, 1996.
(In Thousands)
<TABLE>
<CAPTION>
SHARES AT SHARES AT MARKET VALUE
BEGINNING END DECEMBER 31
SECURITY OF PERIOD ADDITIONS REDUCTIONS OF PERIOD DIVIDENDS 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
American Building Co. 355 74 -- 429 -- $10,238
American Coin
Merchandising, Inc. 500 -- -- 500 -- 2,500
Damark International, Inc. 206 453 -- 659 -- 6,263
* First Enterprise Financial
Group, Inc. 282 -- (72) 210 -- --
Harold's Stores, Inc. 371 8 -- 379 -- 5,454
Lifeline Systems, Inc. 504 -- -- 504 -- 8,812
* MICROS Systems, Inc. 415 -- (21) 394 -- --
Open Plan Systems, Inc. 236 8 -- 244 -- 2,139
Penederm, Inc. 694 30 -- 724 -- 8,955
Rent -Way, Inc. 213 149 -- 362 -- 3,486
-------
$47,847
=======
- --------------------------------------------------------------------------------------------------------------
</TABLE>
* Company was not an affiliate at the end of the period.
-99-
<PAGE> 102
NOTES TO FINANCIAL STATEMENTS (Continued)
7. COMMITMENTS
At December 31, 1996, the International Fund had open forward foreign
currency exchange contracts obligating it to receive or deliver the following
foreign currencies (in thousands):
<TABLE>
<CAPTION>
U.S. DOLLAR UNREALIZED
CURRENCY IN EXCHANGE SETTLEMENT VALUE AS OF APPRECIATION
TO BE DELIVERED FOR DATE DECEMBER 31,1996 (DEPRECIATION)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
408 Dutch Guilder $239 1/16/97 $235 $4
465 Dutch Guilder $267 3/5/97 269 (3)
510 Dutch Guilder $296 3/17/97 296 1
-----
$2
=====
- -----------------------------------------------------------------------------------
</TABLE>
8. NET INVESTMENT LOSS
The Growth Fund had a net investment loss of $236,000. This amount was
netted against realized short-term capital gains to reduce the short-term
capital gain distributions paid on December 31, 1996. The Northwest Fund and
Small Company Stock Fund had net investment losses of $34,000 and $14,000,
respectively. These amounts were recorded as a reduction of paid-in capital.
-100-
<PAGE> 103
NOTES TO FINANCIAL STATEMENTS (Continued)
9. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO GROWTH FUND
<TABLE>
<CAPTION>
NO-LOAD CLASS
--------------------------------------------------------------------------------------
THREE-MONTH
PERIOD ENDED
DECEMBER 31 FOR THE YEAR ENDED SEPTEMBER 30
1996 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
Net Asset Value at
<S> <C> <C> <C> <C> <C> <C>
Beginning of Period $ 15.45 $ 15.83 $ 17.37 $ 19.20 $ 13.98 $ 17.95
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.02) (0.02) 0.07 (0.02) (0.02) (0.01)
Net Realized and Unrealized
Gain (Loss) on Investments 1.77 2.24 4.07 0.78 5.39 (3.15)
Total from
Investment Operations 1.75 2.22 4.14 0.76 5.37 (3.16)
--------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from
Net Investment Income -- -- (0.07) -- -- --
Distributions from
Realized Gains (0.23) (2.60) (5.61) (2.59) (0.15) (0.81)
--------- -------- -------- -------- -------- --------
Total Distributions (0.23) (2.60) (5.68) (2.59) (0.15) (0.81)
--------- -------- -------- -------- -------- --------
Net Asset Value at End of Period $ 16.97 $ 15.45 $ 15.83 $ 17.37 $ 19.20 $ 13.98
========= ======== ======== ======== ======== ========
TOTAL RETURN 11.35%* 14.16% 23.93% 3.88% 38.43% -17.83%
NET ASSETS AT
END OF PERIOD (000'S) $195,760 $179,574 $176,483 $156,108 $158,723 $127,897
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 0.99%** 1.02% 0.98% 0.95% 0.91% 0.91%
RATIO OF NET INVESTMENT INCOME (LOSS)
TO AVERAGE NET ASSETS -0.51%** -0.14% 0.34% -0.12% -0.10% -0.10%
PORTFOLIO TURNOVER RATE 82.93%** 124.79% 110.44% 71.18% 57.19% 85.38%
AVERAGE COMMISSION RATE PAID $ 0.0477 $ 0.0548 -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
-101-
<PAGE> 104
NOTES TO FINANCIAL STATEMENTS (Continued)
9. FINANCIAL HIGHLIGHTS (Continued)
(For a Share Outstanding Throughout the Period)
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 FROM
INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.02) (0.05)
Net Realized and Unrealized
Gain on Investments 1.77 1.77
---------- ----------
Total from
Investment Operations 1.75 1.72
LESS DISTRIBUTIONS
Dividends from
Net Investment Income -- -- -- --
Distributions from
Realized 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) $ 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
- -----------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
+ Total return excludes the effects of sales charges. If sales charges
were included, the total return would be lower.
-102-
<PAGE> 105
NOTES TO FINANCIAL STATEMENTS (Continued)
9. FINANCIAL HIGHLIGHTS (Continued)
(For a Share Outstanding Throughout the Period)
SAFECO EQUITY FUND
<TABLE>
<CAPTION>
NO-LOAD CLASS
------------------------------------------------------------------------------------------
THREE-MONTH
PERIOD ENDED
DECEMBER 31 FOR THE YEAR ENDED SEPTEMBER 30
------------ ---------------------------------------------------------------------
1996 1996 1995 1994 1993 1992
- -------------------------------------------------- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 15.85 $ 15.31 $ 13.89 $ 12.54 $ 9.53 $ 10.38
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.06 0.28 0.34 0.23 0.17 0.15
Net Realized and Unrealized
Gain (Loss) on Investments 1.33 2.42 2.59 1.83 3.79 (0.09)
----------- --------- --------- --------- --------- -----------
Total from
Investment Operations 1.39 2.70 2.93 2.06 3.96 0.06
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.06) (0.28) (0.34) (0.23) (0.17) (0.15)
Distributions from
Realized Gains (0.58) (1.88) (1.17) (0.48) (0.78) (0.76)
----------- --------- --------- --------- --------- -----------
Total Distributions (0.64) (2.16) (1.51) (0.71) (0.95) (0.91)
----------- --------- --------- --------- --------- -----------
Net Asset Value at End of Period $ 16.60 $ 15.85 $ 15.31 $ 13.89 $ 12.54 $ 9.53
=========== ========= ========= ========= ========= ===========
Total Return 8.79%* 18.04% 21.59% 16.51% 41.77% 0.41%
Net Assets at
End of Period (000's) $ 849,831 $ 725,780 $ 598,582 $ 412,805 $ 148,894 $ 74,383
Ratio of Expenses to
Average Net Assets 0.78%** 0.79% 0.84% 0.85% 0.94% 0.96%
Ratio of Net Investment Income (Loss)
to Average Net Assets 1.48%** 1.74% 2.38% 1.72% 1.50% 1.34%
Portfolio Turnover Rate 59.34%** 74.07% 56.14% 33.33% 37.74% 39.88%
Average Commission Rate Paid $ 0.0571 $ 0.0587 -- -- -- --
</TABLE>
* Not annualized.
** Annualized.
-103-
<PAGE> 106
NOTES TO FINANCIAL STATEMENTS (Continued)
9. FINANCIAL HIGHLIGHTS (Continued)
(For a Share Outstanding Throughout the Period)
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 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
Realized 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) $ 2,894 $ 355
RATIO OF EXPENSES TO
AVERAGE NET ASSETS** 0.97% 1.75%
RATIO OF NET INVESTMENT INCOME (LOSS)
TO AVERAGE NET ASSETS** 1.38% 0.51%
PORTFOLIO TURNOVER RATE** 59.34% 59.34%
AVERAGE COMMISSION RATE PAID $ 0.0571 $ 0.0571
- ----------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
+ Total return excludes the effects of sales charges. If sales charges
were included, the total return would be lower.
-104-
<PAGE> 107
NOTES TO FINANCIAL STATEMENTS (Continued)
9. FINANCIAL HIGHLIGHTS (Continued)
(For a Share Outstanding Throughout the Period)
SAFECO INCOME FUND
<TABLE>
<CAPTION>
NO-LOAD CLASS
---------------------------------------------------------------------------------------
THREE-MONTH
PERIOD ENDED
DECEMBER 31 FOR THE YEAR ENDED SEPTEMBER 30
------------ --------------------------------------------------------------------
1996 1996 1995 1994 1993 1992
- -------------------------------------------------- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 20.03 $ 19.11 $ 17.25 $ 17.79 $ 16.27 $ 15.35
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.15 0.73 0.82 0.81 0.78 0.80
Net Realized and Unrealized
Gain (Loss) on Investments 1.63 2.84 2.71 (0.30) 1.52 0.96
---------- ---------- ---------- ---------- ------------ -------------
Total from
Investment Operations 1.78 3.57 3.53 0.51 2.30 1.76
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.15) (0.73) (0.82) (0.81) (0.78) (0.80)
Distributions from
Realized Gains (0.53) (1.92) (0.85) (0.24) -- (0.04)
---------- ---------- ---------- ---------- ----------- -------------
Total Distributions (0.68) (2.65) (1.67) (1.05) (0.78) (0.84)
---------- ---------- ---------- ---------- ----------- -------------
Net Asset Value at End of Period $ 21.13 $ 20.03 $ 19.11 $ 17.25 $ 17.79 $ 16.27
========== ========== ========== ========== =========== =============
Total Return 8.89%* 18.98% 21.04% 2.98% 14.35% 11.75%
NET ASSETS AT
END OF PERIOD (000'S) $ 289,968 $ 260,023 $ 217,870 $ 190,610 $ 203,019 $ 181,582
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 0.89%** 0.86% 0.87% 0.86% 0.90% 0.90%
RATIO OF NET INVESTMENT INCOME (LOSS)
TO AVERAGE NET ASSETS 2.89%** 3.56% 4.55% 4.59% 4.55% 5.06%
PORTFOLIO TURNOVER RATE 37.84%** 50.11% 31.12% 19.30% 20.74% 20.35%
AVERAGE COMMISSION RATE PAID $ 0.0573 $ 0.0591 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
-105-
<PAGE> 108
NOTES TO FINANCIAL STATEMENTS (Continued)
9. FINANCIAL HIGHLIGHTS (Continued)
(For a Share Outstanding Throughout the Period)
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
Realized 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) $ 193 $ 112
RATIO OF EXPENSES TO
AVERAGE NET ASSETS** 1.03% 1.79%
RATIO OF NET INVESTMENT INCOME (LOSS)
TO AVERAGE NET ASSETS** 2.66% 1.99%
PORTFOLIO TURNOVER RATE** 37.84% 37.84%
AVERAGE COMMISSION RATE PAID $ 0.0573 $ 0.0573
- ------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
+ Total return excludes the effects of sales charges. If sales charges
were included, the total return would be lower.
-106-
<PAGE> 109
NOTES TO FINANCIAL STATEMENTS (Continued)
9. FINANCIAL HIGHLIGHTS (Continued)
(For a Share Outstanding Throughout the Period)
SAFECO NORTHWEST FUND
<TABLE>
<CAPTION>
NO-LOAD CLASS
-----------------------------------------------------------------------------------------------
THREE-MONTH NINE-MONTH FOR THE
PERIOD ENDED FOR THE YEAR PERIOD ENDED YEAR ENDED
DECEMBER 31 ENDED SEPTEMBER 30 SEPTEMBER 30 DECEMBER 31
------------ ----------------------------------------- ------------ -----------
1996 1996 1995 1994 1993 1992
- --------------------------------------- ----------------------------------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 13.78 $ 14.41 $ 12.59 $ 12.34 $ 12.59 $ 11.37
INCOME FROM
INVESTMENT OPERATIONS
Net Investment
Income (Loss) (0.01) 0.02 0.04 0.04 0.02 0.06
Net Realized and
Unrealized Gain (Loss)
on Investments 0.30 1.32 2.35 0.59 (0.25) 1.53
--------- --------- --------- --------- --------- ---------
Total from Investment
Operations 0.29 1.34 2.39 0.63 (0.23) 1.59
LESS DISTRIBUTIONS
Dividends from
Net Investment Income -- (0.02) (0.04) (0.04) (0.02) (0.06)
Distributions from
Realized Gains -- (1.95) (0.53) (0.34) -- (0.31)
--------- --------- --------- --------- --------- ---------
Total Distributions -- (1.97) (0.57) (0.38) (0.02) (0.37)
--------- --------- --------- --------- --------- ---------
Net Asset Value at
End of Period $ 14.07 $ 13.78 $ 14.41 $ 12.59 $ 12.34 $ 12.59
========= ========= ========= ========= ========= =========
Total Return 2.10%* 9.61% 19.01% 5.19% -1.86%* 14.08%
NET ASSETS AT
END OF PERIOD (000'S) $ 43,345 $ 43,128 $ 40,140 $ 36,383 $ 39,631 $ 40,402
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 1.25%** 1.07% 1.09% 1.06% 1.11%** 1.11%
RATIO OF NET INVESTMENT
INCOME (LOSS) TO
AVERAGE NET ASSETS -0.31%** 0.11% 0.31% 0.33% 0.18%** 0.55%
PORTFOLIO TURNOVER RATE 67.32%** 35.69% 19.59% 18.46% 14.05%** 33.34%
AVERAGE COMMISSION
RATE PAID $ 0.0482 $ 0.0591 -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
-107-
<PAGE> 110
NOTES TO FINANCIAL STATEMENTS (Continued)
9. FINANCIAL HIGHLIGHTS (Continued)
(For a Share Outstanding Throughout the Period)
SAFECO NORTHWEST 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 $ 13.78 $ 13.78
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.01) (0.03)
Net Realized and Unrealized
Gain on Investments 0.29 0.28
---------- ----------
Total From
Investment Operations 0.28 0.25
LESS DISTRIBUTIONS
Dividends from
Net Investment Income -- --
Distributions from
Realized Gains -- --
---------- ----------
Total Distributions -- --
---------- ----------
Net Asset Value at
End of Period $ 14.06 $ 14.03
========== ==========
Total Return+ 2.03%* 1.81%*
NET ASSETS AT
END OF PERIOD (000'S) $ 369 $ 232
RATIO OF EXPENSES TO
AVERAGE NET ASSETS** 1.40% 2.18%
RATIO OF NET INVESTMENT INCOME (LOSS)
TO AVERAGE NET ASSETS** - 0.39 - 1.19
PORTFOLIO TURNOVER RATE** 67.32% 67.32%
AVERAGE COMMISSION RATE PAID $ 0.0482 $ 0.0482
- --------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
+ Total return excludes the effects of sales charges. If sales charges
were included, the total return would be lower.
-108-
<PAGE> 111
NOTES TO FINANCIAL STATEMENTS (Continued)
9. FINANCIAL HIGHLIGHTS (Continued)
(For a Share Outstanding Throughout the Period)
SAFECO BALANCED FUND
<TABLE>
<CAPTION>
NO LOAD CLASS CLASS A CLASS B
---------------------------------------------------------------
JANUARY 31, 1996
THREE-MONTH (COMMENCEMENT THREE-MONTH THREE-MONTH
PERIOD ENDED OF OPERATIONS) PERIOD ENDED PERIOD ENDED
DECEMBER 31 TO SEPTEMBER 30 DECEMBER 31 DECEMBER 31
----------- -------------- ------------ ------------
1996 1996 1996 1996
- ------------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 10.38 $ 10.00 $ 10.38 $ 10.38
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.08 0.21 0.09 0.06
Net Realized and Unrealized
Gain (Loss) on Investments 0.45 0.39 0.44 0.45
--------- --------- --------- ---------
Total from Investment Operations 0.53 0.60 0.53 0.51
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.08) (0.21) (0.09) (0.06)
Distributions from
Realized Gains (0.13) (0.01) (0.13) (0.13)
--------- --------- --------- ---------
Total Distributions+ (0.21) (0.22) (0.22) (0.19)
--------- --------- --------- ---------
Net Asset Value at End of Period $ 10.70 $ 10.38 $ 10.69 $ 10.70
========= ========= ========= =========
Total Return 5.11%* 5.99%* 5.07%* 4.85%*
NET ASSETS AT
END OF PERIOD (000'S) $ 8,262 $ 7,632 $ 610 $ 115
RATIO OF EXPENSES TO
AVERAGE NET ASSETS** 1.16%++ 1.32% 1.35%++ 2.11%++
RATIO OF NET INVESTMENT
INCOME (LOSS) TO AVERAGE
NET ASSETS** 3.19% 3.21% 3.01% 2.23%
PORTFOLIO TURNOVER RATE** 36.10% 143.87% 36.10% 36.10%
AVERAGE COMMISSION RATE PAID $ 0.0548 $ 0.0560 $ 0.0548 $ 0.0548
- ---------------------------------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included,
the total return would be lower.
++ Net of reimbursement by advisor. Absent the reimbursements, the ratio
of expenses to average net assets would be 1.52%, 1.70%, and 2.46% for
the No Load Class, Class A, and Class B, respectively.
-109-
<PAGE> 112
NOTES TO FINANCIAL STATEMENTS (Continued)
9. FINANCIAL HIGHLIGHTS (Continued)
(For a Share Outstanding Throughout the Period)
SAFECO INTERNATIONAL STOCK FUND
<TABLE>
<CAPTION>
NO LOAD CLASS CLASS A CLASS B
---------------------------------------------------------------
JANUARY 31, 1996
THREE-MONTH (COMMENCEMENT THREE-MONTH THREE-MONTH
PERIOD ENDED OF OPERATIONS) PERIOD ENDED PERIOD ENDED
DECEMBER 31 TO SEPTEMBER 30 DECEMBER 31 DECEMBER 31
----------- -------------- ------------ ------------
1996 1996 1996 1996
- ------------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value At
Beginning Of Period $ 10.39 $ 10.00 $ 10.39 $ 10.39
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income -- 0.06 -- --
Net Realized and Unrealized
Gain on Investments and
Foreign Currency Transactions 0.96 0.39 0.95 0.93
------------ ------------ ------------ ----------
Total from Investment Operations 0.96 0.45 0.95 0.93
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.06) (0.06) (0.05) (0.04)
Distributions from
Realized Gains -- -- -- --
------------ ------------ ------------ ----------
Total Distributions+ (0.06) (0.06) (0.05) (0.04)
------------ ------------ ------------ ----------
Net Asset Value at End of Period $ 11.29 $ 10.39 $ 11.29 $ 11.28
============ ============ ============ ==========
Total Return+ 9.27%* 4.54%* 9.19%* 8.96%*
NET ASSETS AT
END OF PERIOD (000'S) $ 11,157 $ 8,323 $ 154 $ 112
RATIO OF EXPENSES TO
AVERAGE NET ASSETS** 1.37%++ 2.36% 1.41%++ 2.17%+++
RATIO OF NET INVESTMENT INCOME
(LOSS) TO AVERAGE NET ASSETS** -0.19% 0.93% -0.23% -1.15%
PORTFOLIO TURNOVER RATE** 18.51%
15.73% 18.51% 18.51%
AVERAGE COMMISSION RATE PAID $ 0.0223 $ 0.0225 $ 0.0223 $ 0.0223
- ----------------------------------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included,
the total return would be lower.
++ Net of reimbursement by advisor. Absent the reimbursements, the ratio
of expenses to average net assets would be 1.68%, 1.72%, 2.47% for the
No Load Class, Class A, and Class B, respectively.
-110-
<PAGE> 113
NOTES TO FINANCIAL STATEMENTS (Continued)
9. FINANCIAL HIGHLIGHTS (Continued)
(For a Share Outstanding Throughout the Period)
SAFECO SMALL COMPANY STOCK FUND
<TABLE>
<CAPTION>
NO LOAD CLASS CLASS A CLASS B
---------------------------------------------------------------
JANUARY 31, 1996
THREE-MONTH (COMMENCEMENT THREE-MONTH THREE-MONTH
PERIOD ENDED OF OPERATIONS) PERIOD ENDED PERIOD ENDED
DECEMBER 31 TO SEPTEMBER 30 DECEMBER 31 DECEMBER 31
----------- -------------- ------------ ------------
1996 1996 1996 1996
- ------------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 11.51 $ 10.00 $ 11.51 $ 11.51
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.01) (0.01) (0.01) (0.04)
Net Realized and Unrealized
Gain (Loss) on Investments 0.31 2.19 0.31 0.32
------------ ------------ ------------ ------------
Total from Investment Operations 0.30 2.18 0.30 0.28
LESS DISTRIBUTIONS
Dividends from
Net Investment Income -- -- -- --
Distributions from
Realized Gains -- (0.67) -- --
------------ ------------ ------------ ------------
Total Distributions -- (0.67) -- --
------------ ------------ ------------ ------------
Net Asset Value at End of Period $ 11.81 $ 11.51 $ 11.81 $ 11.79
============ ============ ============ ============
Total Return+ 2.61%* 21.83%* 2.61%* 2.43%*
NET ASSETS AT
END OF PERIOD (000'S) $ 13,169 $ 12,552 $ 135 $ 103
RATIO OF EXPENSES TO
AVERAGE NET ASSETS** 1.35%++ 1.49% 1.42%++ 2.18%++
RATIO OF NET INVESTMENT INCOME
(LOSS) TO AVERAGE NET ASSETS** - 0.44 - 0.24 - 0.50 - 1.28
PORTFOLIO TURNOVER RATE** 73.47% 91.03% 73.47% 73.47%
AVERAGE COMMISSION RATE PAID $ 0.0496 $ 0.0510 $ 0.0496 $ 0.0496
- -------------------------------------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included,
the total return would be lower.
++ Net of reimbursement by advisor. Absent the reimbursements, the ratio
of expenses to average net assets would be 1.58%, 1.62%, and 2.41% for
the No Load Class, Class A, and Class B, respectively.
-111-
<PAGE> 114
NOTES TO FINANCIAL STATEMENTS (Continued)
9. FINANCIAL HIGHLIGHTS (Continued)
(For a Share Outstanding Throughout the Period)
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
<TABLE>
<CAPTION>
NO-LOAD CLASS
---------------------------------------------------------------------------------------
THREE-MONTH
PERIOD ENDED
DECEMBER 31 YEAR ENDED SEPTEMBER 30
---------------------------------------------------------------------------------------
1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 10.10 $ 10.24 $ 9.74 $ 10.74 $ 10.69 $ 10.20
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.16 0.54 0.55 0.52 0.60 0.72
Net Realized and Unrealized
Gain (Loss) on Investments 0.01 (0.14) 0.50 (1.00) 0.49 0.54
---------- ---------- ---------- ---------- ---------- ----------
Total from
Investment Operations 0.17 0.40 1.05 (0.48) 1.09 1.26
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.16) (0.54) (0.55) (0.52) (0.60) (0.72)
Distributions from
Realized Gains -- -- -- -- (0.44) (0.05)
---------- ---------- ---------- ---------- ---------- ----------
Total Distributions (0.16) (0.54) (0.55) (0.52) (1.04) (0.77)
---------- ---------- ---------- ---------- ---------- ----------
Net Asset Value at End of Period $ 10.11 $ 10.10 $ 10.24 $ 9.74 $ 10.74 $ 10.69
========== ========== ========== ========== ========== ==========
Total Return 1.68%* 4.00% 11.07% - 4.56 10.51% 12.78%
NET ASSETS AT
END OF PERIOD (000'S) $ 14,679 $ 14,668 $ 13,774 $ 13,367 $ 14,706 $ 12,205
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 0.85%+** 1.01% 0.96% 0.90% 0.99% 0.98%
RATIO OF NET INVESTMENT INCOME
TO AVERAGE NET ASSETS 6.30%** 5.30% 5.51% 5.08% 5.52% 6.89%
PORTFOLIO TURNOVER RATE 125.42%** 294.25% 124.90% 75.46% 104.94% 37.19%
</TABLE>
- --------------------------------
* Not annualized.
** Annualized.
+ Net of reimbursements by advisor. Absent the reimbursements, the ratio of
expenses to average net assets would be 1.07%.
-112-
<PAGE> 115
NOTES TO FINANCIAL STATEMENTS (Continued)
9. FINANCIAL HIGHLIGHTS (Continued)
(For a Share Outstanding Throughout the Period)
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
------------ -------------
1996 1996
------------ -------------
<S> <C> <C>
Net Asset Value at
Beginning of Period $ 10.10 $ 10.10
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.15 0.14
Net Realized and Unrealized
Gain (Loss) on Investments 0.01 0.02
---------- ----------
Total from Investment Operations 0.16 0.16
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.15) (0.14)
---------- ----------
Distributions from Realized Gains
Total Distributions (0.15) (0.14)
---------- ----------
Net Asset Value at End of Period $ 10.11 $ 10.12
========== ==========
Total Return+ 1.63%* 1.55%*
NET ASSETS AT END OF PERIOD (000'S) $ 704 $ 223
RATIO OF EXPENSES TO AVERAGE NET ASSETS** 1.07%++ 1.72%++
RATIO OF NET INVESTMENT INCOME (LOSS)
TO AVERAGE NET ASSETS** 6.07% 5.35%
PORTFOLIO TURNOVER RATE** 125.42% 125.42%
- ----------------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
+ Total return excludes the effects of sales charges. If sales charges were
included, the total return would be lower.
++ Net of reimbursements by advisor. Absent the reimbursements, the ratio of
expenses to average net assets would be 1.30% and 1.95% for Class A and
Class B, respectively.
-113-
<PAGE> 116
NOTES TO FINANCIAL STATEMENTS (Continued)
9. FINANCIAL HIGHLIGHTS (Continued)
(For a Share Outstanding Throughout the Period)
SAFECO MANAGED BOND FUND
<TABLE>
<CAPTION>
NO-LOAD CLASS
------------------------------------------------------------------------------------
JUNE 25, 1992
(COMMENCEMENT OF
OPERATIONS) TO
FOR THE YEAR ENDED DECEMBER 31 DECEMBER 31, 1992
--------------------------------------------------------------- -----------------
1996 1995 1994 1993+ 1992+
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 8.77 $ 8.15 $ 9.08 $ 9.57 $ 10.00
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.41 0.44 0.27 (0.62) (0.50)
Net Realized and Unrealized
Gain (Loss) on Investments (0.42) 0.94 (0.93) 0.15 0.07
--------- --------- --------- --------- ---------
Total from Investment
Operations (0.01) 1.38 (0.66) (0.47) (0.43)
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.41) (0.44) (0.27) -- --
Distributions from
Realized Gains -- (0.32) -- (0.02) --
--------- --------- --------- --------- ---------
Total Distributions (0.41) (0.76) (0.27) (0.02) --
--------- --------- --------- --------- ---------
Net Asset Value at End of Period $ 8.35 $ 8.77 $ 8.15 $ 9.08 $ 9.57
========= ========= ========= ========= =========
Total Return 0.02% 17.35% -3.01%# N/A N/A
NET ASSETS AT
END OF PERIOD (000'S) $ 4,215 $ 4,497 $ 4,627 $ 91 $ 96
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 1.27% 1.16% 1.37% 11.75% 13.35%**
RATIO OF NET INVESTMENT INCOME (LOSS)
TO AVERAGE NET ASSETS 4.86% 5.14% 4.47% -6.75% -9.80%**
PORTFOLIO TURNOVER RATE 136.29% 78.78% 129.56% NONE NONE
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Financial highlights prior to 1994 relate only to the performance of the
initial seed investment of SAFECO Asset Management Company. Trust shares
were not yet available to the public.
# Total return from February 28, 1994 (initial public offering) to December
31, 1994; not annualized.
** Annualized.
-114-
<PAGE> 117
NOTES TO FINANCIAL STATEMENTS (Continued)
9. FINANCIAL HIGHLIGHTS (Continued)
(For a Share Outstanding Throughout the Period)
SAFECO MANAGED BOND 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 $ 8.35 $ 8.35
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.11 0.09
Net Realized and Unrealized
Gain on Investments -- --
--------- ----------
Total from Investment Operations 0.11 0.09
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.11) (0.09)
Distributions from Realized Gains -- --
--------- ----------
Total Distributions (0.11) (0.09)
--------- ----------
Net Asset Value at End of Period $ 8.35 $ 8.35
========= ==========
Total Return+ 1.34%* 1.15%*
NET ASSETS AT END OF PERIOD (000'S) $ 140 $ 100
RATIO OF EXPENSES TO AVERAGE NET ASSETS** 1.30% 2.07%
RATIO OF NET INVESTMENT INCOME (LOSS)
TO AVERAGE NET ASSETS** 5.22% 4.45%
PORTFOLIO TURNOVER RATE** 136.29% 136.29%
- -----------------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
+ Total return excludes the effects of sales charges. If sales charges were
included, the total return would be lower.
-115-
<PAGE> 118
NOTES TO FINANCIAL STATEMENTS (Continued)
9. FINANCIAL HIGHLIGHTS (Continued)
(For a Share Outstanding Throughout the Period)
SAFECO MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
NO-LOAD CLASS
-------------------------------------------------------------------------------
NINE-MONTH
PERIOD
ENDED
DECEMBER 31 FOR THE YEAR ENDED MARCH 31
----------- -----------------------------------------------------------
1996 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 13.69 $ 13.36 $ 13.27 $ 14.13 $ 13.37
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.57 0.76 0.77 0.78 0.81
Net Realized and Unrealized
Gain (Loss) on Investments 0.29 0.33 0.12 (0.55) 0.94
-------- -------- -------- -------- --------
Total from Investment Operations 0.86 1.09 0.89 0.23 1.75
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.57) (0.76) (0.77) (0.78) (0.81)
Distributions from
Realized Gains -- -- (0.03) (0.31) (0.18)
-------- -------- -------- -------- --------
Total Distributions (0.57) (0.76) (0.80) (1.09) (0.99)
-------- -------- -------- -------- --------
Net Asset Value at End of Period $ 13.98 $ 13.69 $ 13.36 $ 13.27 $ 14.13
======== ======== ======== ======== ========
Total Return 6.42%* 8.23% 7.10% 1.30% 13.60%
NET ASSETS AT
END OF PERIOD (000'S) $480,970 $480,643 $472,569 $507,453 $541,515
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 0.53%** 0.54% 0.56% 0.52% 0.53%
RATIO OF NET INVESTMENT INCOME
TO AVERAGE NET ASSETS 5.53%** 5.47% 5.96% 5.49% 5.91%
PORTFOLIO TURNOVER RATE 6.66%** 12.60% 26.96% 22.07% 31.66%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
-116-
<PAGE> 119
NOTES TO FINANCIAL STATEMENTS (Continued)
9. FINANCIAL HIGHLIGHTS (Continued)
(For a Share Outstanding Throughout the Period)
SAFECO MUNICIPAL BOND 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 $ 13.82 $ 13.82
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.18 0.15
Net Realized and Unrealized
Gain on Investments 0.17 0.16
--------- ----------
Total from Investment Operations 0.35 0.31
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.18) (0.15)
Distributions from Realized Gains -- --
Total Distributions (0.18) (0.15)
--------- ----------
Net Asset Value at End of Period $ 13.99 $ 13.98
========== ==========
Total Return+ 2.52%* 2.27%*
NET ASSETS AT END OF PERIOD (000'S) $ 311 $ 112
RATIO OF EXPENSES TO AVERAGE NET ASSETS** 0.82% 1.50%
RATIO OF NET INVESTMENT INCOME (LOSS)
TO AVERAGE NET ASSETS** 5.04% 4.42%
PORTFOLIO TURNOVER RATE** 6.66% 6.66%
- ----------------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
+ Total return excludes the effects of sales charges. If sales charges were
included, the total return would be lower.
-117-
<PAGE> 120
NOTES TO FINANCIAL STATEMENTS (Continued)
9. FINANCIAL HIGHLIGHTS (Continued)
(For a Share Outstanding Throughout the Period)
SAFECO CALIFORNIA TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
NO-LOAD CLASS
----------------------------------------------------------------------------------------
NINE-MONTH
PERIOD ENDED
DECEMBER 31 FOR THE YEAR ENDED MARCH 31
- ---------------------------------------------------- -------------------------------------------------------------------
1996 1996 1995 1994 1993
---------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 11.86 $ 11.54 $ 11.51 $ 12.23 $ 11.60
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.47 0.62 0.63 0.66 0.68
Net Realized and Unrealized
Gain (Loss) on Investments 0.39 0.40 0.13 (0.38) 0.76
---------- ---------- ---------- ------- ---------
Total from Investment Operations 0.86 1.02 0.76 0.28 1.44
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.47) (0.62) (0.63) (0.66) (0.68)
Distributions from
Realized Gains (0.03) (0.08) (0.10) (0.34) (0.13)
---------- ---------- ---------- ------- ---------
Total Distributions (0.50) (0.70) (0.73) (1.00) (0.81)
---------- ---------- ---------- ------- ---------
Net Asset Value at End of Period $ 12.22 $ 11.86 $ 11.54 $ 11.51 $ 12.23
========== ========== ========== ========== ==========
Total Return 7.42%* 8.87% 7.01% 1.97% 12.88%
NET ASSETS AT
END OF PERIOD (000'S) $ 72,084 $ 70,546 $ 64,058 $ 77,056 $ 79,872
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 0.69%** 0.68% 0.70% 0.68% 0.66%
RATIO OF NET INVESTMENT INCOME
TO AVERAGE NET ASSETS 5.21%** 5.12% 5.65% 5.31% 5.71%
PORTFOLIO TURNOVER RATE 10.52%** 16.25% 44.10% 32.58% 23.18%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
-118-
<PAGE> 121
NOTES TO FINANCIAL STATEMENTS (Continued)
9. FINANCIAL HIGHLIGHTS (Continued)
(For a Share Outstanding Throughout the Period)
SAFECO CALIFORNIA TAX-FREE 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 $12.07 $12.07
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.15 0.12
Net Realized and Unrealized
Gain on Investments 0.19 0.18
------ ------
Total from Investment Operations 0.34 0.30
LESS DISTRIBUTIONS
Dividends from Net Investment Income . (0.15) (0.12)
Distributions from Realized Gains (0.03) (0.03)
------ ------
Total Distributions (0.18) (0.15)
------ ------
Net Asset Value at End of Period $12.23 $12.22
====== ======
Total Return+ 2.83%* 2.56%*
NET ASSETS AT END OF PERIOD (000'S) $ 122 $ 101
RATIO OF EXPENSES TO AVERAGE NET ASSETS** 0.89% 1.64%
RATIO OF NET INVESTMENT INCOME (LOSS)
TO AVERAGE NET ASSETS** 4.84% 4.08%
PORTFOLIO TURNOVER RATE** 10.52% 10.52%
- ----------------------------------------------------------------------------------
</TABLE>
* Not annualized
** Annualized.
+ Total return excludes the effects of sales charges. If sales charges were
included, the total return would be lower.
-119-
<PAGE> 122
NOTES TO FINANCIAL STATEMENTS (Continued)
9. FINANCIAL HIGHLIGHTS (Continued)
(For a Share Outstanding Throughout the Period)
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
NO-LOAD CLASS
--------------------------------------------------------------------
NOVEMBER 5, 1992
NINE-MONTH (COMMENCEMENT OF
PERIOD ENDED OPERATIONS) TO
DECEMBER 31 FOR THE YEAR ENDED MARCH 31 MARCH 31
------------ -------------------------------- ----------------
1996 1996 1995 1994 1993
- ------------------------------------------------------- ----------------------------- ----------------
<S> <C> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $10.34 $10.10 $ 9.91 $10.27 $10.00
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.37 0.50 0.49 0.44 0.09
Net Realized and Unrealized
Gain (Loss) on Investments 0.20 0.27 0.19 (0.35) 0.27
------ ------ ------ ------ ------
Total from Investment
Operations 0.57 0.77 0.68 0.09 0.36
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.37) (0.50) (0.49) (0.44) (0.09)
Distributions from
Realized Gains (0.01) (0.03) -- (0.01) --
------ ------ ------ ------ ------
Total Distributions (0.38) (0.53) (0.49) (0.45) (0.09)
------ ------ ------ ------ ------
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% 2.00%**
RATIO OF NET INVESTMENT INCOME
TO AVERAGE NET ASSETS 4.78%** 4.78% 5.06% 4.17% 2.22%**
PORTFOLIO TURNOVER RATE 15.96%** 20.86% 9.23% 17.26% NONE
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
*** Total return from March 18, 1993, (initial public offering) to March 31,
1993, not annualized.
-120-
<PAGE> 123
NOTES TO FINANCIAL STATEMENTS (Continued)
9. FINANCIAL HIGHLIGHTS (Continued)
(For a Share Outstanding Throughout the Period)
SAFECO WASHINGTON STATE MUNICIPAL BOND 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 $10.45 $10.45
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.12 0.10
Net Realized and Unrealized
Gain on Investments 0.09 0.11
------ ------
Total from Investment Operations 0.21 0.21
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.12) (0.10)
Distributions from Realized Gains (0.01) (0.01)
------ ------
Total Distributions (0.13) (0.11)
------ ------
Net Asset Value at End of Period $10.53 $10.55
====== ======
Total Return+ 1.94%* 1.94%*
NET ASSETS AT END OF PERIOD (000'S) $ 336 $ 211
RATIO OF EXPENSES TO AVERAGE NET ASSETS** 1.31% 2.06%
RATIO OF NET INVESTMENT INCOME (LOSS)
TO AVERAGE NET ASSETS** 4.49% 3.71%
PORTFOLIO TURNOVER RATE** 15.96% 15.96%
- ---------------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
+ Total return excludes the effects of sales charges. If sales charges were
included, the total return would be lower.
-121-
<PAGE> 124
NOTES TO FINANCIAL STATEMENTS (Continued)
9. FINANCIAL HIGHLIGHTS (Continued)
(For a Share Outstanding Throughout the Period)
SAFECO MONEY MARKET FUND
<TABLE>
<CAPTION>
No-Load Class
--------------------------------------------------------------------
Nine-Month
Period Ended
December 31 For the Year Ended March 31
1996 1996 1995 1994 1993
- ----------------------------------------------- -------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM
Investment Operations
Net Investment Income 0.03 0.05 0.04 0.02 0.03
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.03) (0.05) (0.04) (0.02) (0.03)
-------- -------- -------- -------- --------
Net Asset Value at End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Return 3.54%* 5.15% 4.20% 2.48% 2.98%
NET ASSETS AT
END OF PERIOD (000's) $161,356 $165,122 $171,958 $186,312 $144,536
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 0.81%** 0.78% 0.78% 0.79% 0.77%
RATIO OF NET INVESTMENT INCOME
TO AVERAGE NET ASSETS 4.66%** 5.04% 4.21% 2.47% 3.02%
- --------------------------------------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
-122-
<PAGE> 125
NOTES TO FINANCIAL STATEMENTS (Continued)
9. FINANCIAL HIGHLIGHTS (Continued)
(For a Share Outstanding Throughout the Period)
SAFECO MONEY MARKET 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 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.01 0.01
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.01) (0.01)
-------- --------
Net Asset Value at End of Period $ 1.00 $ 1.00
======== ========
Total Return* 1.21% 1.21%
NET ASSETS AT END OF PERIOD (000'S) $ 295 $ 106
RATIO OF EXPENSES TO AVERAGE NET ASSETS** 0.55% 0.54%
RATIO OF NET INVESTMENT INCOME (LOSS)
TO AVERAGE NET ASSETS** 5.01% 4.96%
- --------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
-123-
<PAGE> 126
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF THE SAFECO COMMON STOCK TRUST,
SAFECO TAXABLE BOND TRUST, SAFECO MANAGED BOND TRUST, SAFECO TAX-EXEMPT BOND
TRUST, AND SAFECO MONEY MARKET TRUST
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments in securities, of certain Funds of the
SAFECO Common Stock Trust (comprising, respectively, the SAFECO Growth Fund,
SAFECO Equity Fund, SAFECO Income Fund, SAFECO Northwest Fund, SAFECO
International Stock Fund, SAFECO Balanced Fund, and SAFECO Small Company Stock
Fund), the SAFECO Taxable Bond Trust (comprising the SAFECO Intermediate-Term
U.S. Treasury Fund), the SAFECO Managed Bond Trust (comprising the SAFECO
Managed Bond Fund), the SAFECO Tax-Exempt Bond Trust (comprising, respectively,
the SAFECO Municipal Bond Fund, SAFECO California Tax-Free Income Fund, and
SAFECO Washington State Municipal Bond Fund), and the SAFECO Money Market Trust
(comprising the SAFECO Money Market Fund) as of December 31, 1996, and the
related statements of operations, the statements of changes in net assets, and
the financial highlights for each of the periods indicated therein. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1996, by correspondence with the custodians
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
-124-
<PAGE> 127
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS (Continued)
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
each of the respective Funds of the SAFECO Common Stock Trust, the SAFECO
Taxable Bond Trust, the SAFECO Managed Bond Trust, the SAFECO Tax-Exempt Bond
Trust, and the SAFECO Money Market Trust as listed above at December 31, 1996,
the results of their operations, the changes in their net assets, and financial
highlights for each of the periods indicated therein, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Seattle, Washington
January 31, 1997
-125-
<PAGE> 128
SAFECO MUTUAL FUNDS
BOARD OF TRUSTEES:
Boh A. Dickey, Chairman
Barbara J. Dingfield
David F. Hill
Richard W. Hubbard
Richard E. Lundgren
Larry L. Pinnt
John W. Schneider
OFFICERS:
David F. Hill, President
Ronald L. Spaulding
Vice President and Treasurer
Neal A. Fuller
Vice President and Controller
INVESTMENT ADVISOR:
SAFECO Asset
Management Company
DISTRIBUTOR:
SAFECO Securities, Inc.
TRANSFER AGENT:
SAFECO Services Corporation
CUSTODIAN:
U.S. Bank of Washington, N.A.
Chase Manhattan Bank
(International Stock Fund only)
FOR SHAREHOLDER SERVICE:
Monday-Friday,
5:30am - 7:00pm Pacific Time
NATIONWIDE: 1-800-463-8791
SEATTLE: 545-6283
DEAF AND HARD OF HEARING
TTY/TDD: 1-800-438-8718
FOR YIELDS, PRICES AND
PERFORMANCE INFORMATION:
24 hours a day, 7 days a week
NATIONWIDE: 1-800-463-8794
SEATTLE: 545-6295
MAILING ADDRESS:
SAFECO Mutual Funds
Advisor Class Shares
P.O. Box 34890
Seattle, WA 98124-1890
INTERNET:
www.safeco.com
E-mail: [email protected]
GMF 4068 2/97 [LOGO] Printed on Recycled Paper.
This report must be preceded or accompanied by a current prospectus.
(R) Registered trademark of SAFECO Corporation.
